<PAGE> 1
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
Quarterly Report Under Section 13 or 15 (d)
of the Securities Exchange Act of 1934
For Quarter Ended September 30, 1996
--------------------------------------------------------------
Commission file number #0-16510
- --------------------------------------------------------------------------------
PORTSMOUTH BANK SHARES, INC.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
New Hampshire 02-0417778
- ------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization Identification No.)
333 State Street, Portsmouth, New Hampshire 03801
- ------------------------------------------- ----------
(Address of principal executive officers) (Zip Code)
(603) 436-6630
--------------
(Registrant's telephone number, including area code)
NOT APPLICABLE
--------------
(Former name, former address and former fiscal
year, if changed since last report.)
Indicate by check mark whether the registrant (1) has filed all the reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES X . NO .
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the last practicable date.
Common Stock, $.10 Par Value -- 5,739,602 shares as of September 30, 1996
- -------------------------------------------------------------------------
<PAGE> 2
FORM 10Q QUARTERLY REPORT -- TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION Page
- ------ ---------------------
Item 1. Financial Statements
Consolidated Balance Sheets - September 30, 1996
and December 31, 1995 3
Consolidated Statements of Income - Three
and nine months ended September 30, 1996 and 1995 4
Consolidated Statements of Changes in
Stockholders' Equity - September 30, 1996
and December 31, 1995 5
Consolidated Statements of Cash Flows - Nine
months ended September 30, 1996 and 1995 6
Notes to Consolidated Financial Statements -
September 30, 1996 8
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 10
PART II - OTHER INFORMATION
- ---------------------------
Item 1. Legal Proceedings 18
Item 2. Changes in Securities 18
Item 3. Defaults Upon Senior Securities 18
Item 4. Submission of Matters to a Vote 18
Item 5. Other Information 18
Item 6. Exhibits and Reports on Form 8-K 18
SIGNATURES 19
- ----------
<PAGE> 3
Part I - Financial Information
Portsmouth Bank Shares, Inc. and Subsidiary
<TABLE>
Consolidated Balance Sheets
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------
Sept. 30, Dec. 31,
1996 1995
--------- --------
(Unaudited)
ASSETS (In thousands)
<S> <C> <C>
Cash and due from banks $ 4,863 $ 5,466
Interest-bearing deposits with
the Federal Home Loan Bank 47,617 55,458
Investment securities:
Held-to-maturity (market value $24,544 at Sept. 30, 24,626 20,115
1996 and $19,963 at December 31, 1995)
Available-for-sale (at market) 95,156 103,318
Loans (Note 2) 91,318 77,852
Less: Unearned income (684) (674)
Allowance for loan losses (Note 3) (688) (727)
-------- --------
Net loans 89,946 76,451
Premises and equipment 901 895
Other real estate owned (Note 4) 99 668
Other assets 5,446 4,900
-------- --------
TOTAL ASSETS $268,654 $267,271
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Non-interest bearing $ 4,264 $ 2,802
Interest bearing 193,807 192,767
-------- --------
Total deposits 198,071 195,569
Other liabilities 3,649 3,927
-------- --------
TOTAL LIABILITIES 201,720 199,496
SHAREHOLDERS' EQUITY:
Preferred stock, par value $.10 per share-
authorized but unissued 15,000,000 shares
Common stock, par value $.10 per share-
authorized 25,000,000 shares;
issued 6,494,452 shares in 1996 & 6,362,748 in 1995
outstanding shares - 5,739,602 in 1996 &
5,622,898 in 1995 649 636
Paid-in capital 33,411 31,646
Retained earnings 37,775 37,696
Net unrealized holding gain on AFS securities 1,073 3,578
-------- --------
72,908 73,556
Less: Cost of Treasury Stock: 1996-754,850 shares
1995-739,850 shares (5,974) (5,781)
-------- --------
Total Shareholders' Equity 66,934 67,775
-------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $268,654 $267,271
======== ========
Book value per share $ 11.66 *$ 11.82
======== ========
<FN>
(see notes to consolidated financial statements)
* Adjusted for a 2% stock dividend issued March 15, 1996
</TABLE>
3
<PAGE> 4
Portsmouth Bank Shares, Inc. and Subsidiary
<TABLE>
Consolidated Statements of Income
<CAPTION>
- -------------------------------------------------------------------------------------------------------------
Three Months Ended Nine Months Ended
September 30 (Unaudited)
(In thousands)
1996 1995 1996 1995
------ ------ ------ ------
<S> <C> <C> <C> <C>
Interest and dividend income:
Interest and fees on loans $1,826 $1,695 $5,387 $5,061
Interest on investment securities:
Taxable 1,570 2,074 4,898 6,674
Tax exempt 51 48 197 154
Other interest 843 560 2,326 1,105
Dividends on marketable equity securities 310 307 825 925
------ ------ ------ ------
Total interest and dividend income 4,600 4,684 13,633 13,919
Interest expense 2,026 1,965 6,054 5,402
------ ------ ------ ------
Net interest and dividend income 2,574 2,719 7,579 8,517
Provision for loan losses 0 0 0 0
------ ------ ------ ------
Net interest and dividend income
after provision for loan losses 2,574 2,719 7,579 8,517
------ ------ ------ ------
Other income:
Service charges on deposit accounts 69 63 206 195
Investment securities gains 264 1 1,009 188
Gain (Loss) on sale of OREO 0 0 (28) (7)
Other 16 4 36 17
------ ------ ------ ------
349 68 1,223 393
------ ------ ------ ------
Other expense:
Salaries and employee benefits 508 534 1,511 1,615
Occupancy expense 88 101 285 300
Other 235 171 824 919
------ ------ ------ ------
831 806 2,620 2,834
------ ------ ------ ------
Income before income taxes 2,092 1,981 6,182 6,076
Income taxes 638 591 1,832 1,793
------ ------ ------ ------
Net income: $1,454 $1,390 $4,350 $4,283
====== ====== ====== ======
Earnings per share $ 0.25 *$ 0.24 $ 0.75 *$ 0.74
Dividends declared 0.15 * 0.13 0.45 * 0.38
====== ====== ====== ======
<FN>
(see notes to consolidated financial statements)
*Adjusted for a 2% stock dividend issued March 15, 1996
</TABLE>
4
<PAGE> 5
Portsmouth Bank Shares, Inc. and Subsidiary
<TABLE>
Consolidated Statements of Changes in Stockholders' Equity
September 30, 1996
(In thousands)
(Unaudited)
<CAPTION>
Net
Unrealized
Unearned Holding
Common Paid-in Retained Treasury Comp Gain (Loss)
Stock Capital Earnings Stock ESOP AFS Secur
------- ------- -------- -------- -------- -----------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1994 ...................... $624 $30,346 $37,302 $(4,932) $(74) $ (550)
Net income ...................................... 6,041
Payment of principal on Employee Stock Ownership
Plan loan ...................................... 74
Issuance of common stock ........................ 1 64
Purchase of treasury stock ...................... (849)
Dividends declared ($.78 per share) ............. (4,394)
Stock dividend declared ......................... 11 1,236 (1,253)
Change in net unrealized holding gain
(loss) on AFS securities ....................... 4,128
---- ------- ------- ------- ---- -------
Balance, December 31, 1995 ...................... 636 31,646 37,696 (5,781) 0 3,578
Net income ...................................... 4,350
Issuance of common stock ........................ 2 96
Purchase of treasury stock ...................... (193)
Dividends declared ($.30 per share) ............. (2,584)
Stock dividend declared ......................... 11 1,669 (1,687)
Change in net unrealized holding gain
(loss) on AFS securities ....................... (2,505)
---- ------- ------- ------- ---- -------
Balance, September 30, 1996 ..................... $649 $33,411 $37,775 $(5,974) $ 0 $ 1,073
==== ======= ======= ======= ==== =======
</TABLE>
5
<PAGE> 6
Portsmouth Bank Shares, Inc. and Subsidiary
<TABLE>
Consolidated Statements of Cash Flows
For the Nine Months Ended September 30,
<CAPTION>
1996 1995
-------- --------
(Unaudited)
(In thousands)
<S> <C> <C>
Cash flows from operating activities:
Net income $ 4,350 $ 4,283
Adjustments to reconcile net income to net
cash provided by operating activities:
Increase in cash surrender value (98) (158)
Depreciation and amortization 44 69
Increase (decrease) in taxes payable 5 174
Decrease (increase) in interest receivable (165) 491
Increase in interest payable 6 5
(Decrease) increase in accrued expenses 27 (38)
Increase in prepaid expenses (3) (26)
Amortization of securities, net of accretion 440 559
Net gain on sales of securities available-for-sale (1,009) (188)
Change in unearned income 10 (39)
Deferred compensation (66) (68)
Provision for loan loss 0 0
Writedown of other real estate owned 7 0
Loss on sales of other real estate owned, net 28 7
-------- --------
Net cash provided by operating activities $ 3,576 $ 5,071
-------- --------
Cash flows from investing activities:
Proceeds received from sales of other
real estate owned 25 4
Purchases of securities available-for-sale (20,907) (2,486)
Purchases of securities held-to-maturity (24,604) (14,115)
Sales of securities available-for-sale 7,968 2,367
Maturities of securities available-for-sale 17,600 19,200
Maturities of securities held-to-maturity 20,070 21,340
Recoveries of loans previously charged off 0 1
Net (increase) decrease in loans (12,996) 3,276
Capital expenditures (50) (22)
Increase in other liabilities 1,104 57
Increase in other assets (46) (142)
-------- --------
Net cash provided by (used in) investing
activities (11,836) 29,480
-------- --------
</TABLE>
6
<PAGE> 7
Portsmouth Bank Shares, Inc. and Subsidiary
<TABLE>
Consolidated Statements of Cash Flows
For the Nine Months Ended September 30,
(Continued)
<CAPTION>
1996 1995
------- --------
(Unaudited)
(In thousands)
<S> <C> <C>
Cash flows from financing activities:
Proceeds from sale of common stock 98 53
Purchase of treasury stock (193) (849)
Net increase (decrease) in demand deposits,
NOW, money market and savings accounts 949 (14,745)
Net increase in time deposits 1,553 15,463
Dividends paid (2,584) (2,144)
Fractional shares paid in cash (7) (6)
------- --------
Net cash provided by (used in)
financing activities (184) (2,228)
------- --------
Net increase (decrease) in cash and cash
equivalents (8,444) 32,323
Cash and cash equivalents at beginning of
period 60,924 13,320
------- --------
Cash and cash equivalents at end of period $52,480 $ 45,643
======= ========
Supplemental disclosures:
Loans transferred to other real estate owned $ 167 $ 42
Origination of loans for sales of other real
owned 800 255
Interest paid 6,048 5,397
Income taxes paid 1,827 1,619
</TABLE>
7
<PAGE> 8
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Note 1 - BASIS OF PRESENTATION:
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information, the instruction to form 10Q and Article 10 of Regulation
S-X. Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for a complete annual
financial statement presentation.
In the opinion of management, the accompanying financial statements
contain all adjustments necessary to present fairly the financial position of
Portsmouth Bank Shares, Inc. and subsidiary as of September 30, 1996 and
December 31, 1995 and the results of its operations for the nine months ended
September 30, 1996 and 1995. All adjustments are of a normal recurring nature.
Results of operations for the nine months ended September 30, 1996 are not
necessarily indicative of the results to be expected for the entire year.
<TABLE>
Note 2 - LOANS BY CATEGORIES (in thousands):
<CAPTION>
September 30, December 31,
1996 1995
------------- ------------
<S> <C> <C>
Real estate - mortgage $75,648 $70,716
Real estate - construction 747 693
Commercial 8,324 423
Installment loans to individuals 6,599 6,020
------- -------
$91,318 $77,852
======= =======
</TABLE>
<TABLE>
Note 3 - ALLOWANCE FOR LOAN LOSSES - Changes in the allowance for loan losses
were as follows (in thousands):
<CAPTION>
September 30,
1996
-------------
<S> <C>
Balance at January 1 $727
Provision for loan losses 0
Loans charged off 40
Loan recoveries 1
----
Balance at September 30 $688
====
</TABLE>
8
<PAGE> 9
Note 4 - OTHER REAL ESTATE OWNED:
Real estate acquired by the Bank as a result of foreclosure or
insubstance foreclosure amounted to $99,000 on two properties, at September 30,
1996.
Other real estate owned includes properties acquired through
foreclosure and properties classified as in-substance foreclosures in accordance
with Financial Accounting Standards Board Statement No. 15, "Accounting by
Debtors and Creditors for Troubled Debt Restructuring". These properties are
carried at the lower of cost or estimated fair value. Any write-down from book
value to estimated fair value required at the time of foreclosure or
classification as in-substance foreclosure is charged to the allowance for loan
losses. Expenses incurred in connection with maintaining these assets,
subsequent write-downs and gains or losses recognized upon sale are included in
other expense.
NONACCRUAL, PAST DUE, AND RESTRUCTURED LOANS
<TABLE>
The following schedule summarizes Portsmouth's nonaccrual, past due, and
restructured loans.
<CAPTION>
September 30, December 31,
1996 1995
------------- ------------
<S> <C> <C>
Nonaccrual Loans:
Commercial $155 $264
Residential 208 219
---- ----
Total $363 $483
Accruing loans past
due 90 days or more 319 143
Restructured loans 0 0
</TABLE>
Management's policy is to, on a monthly basis, review loans that are 90
days past due to determine the future collectibility of both principal and
interest. When income is determined to be uncollectible, the loan is put on a
nonaccrual status.
As of September 30, 1996 there were no potential problem loans which
management reasonably expects will materially impact future operating results,
liquidity or capital resources, or represent material credits which causes
management to have serious doubts as to the ability of the borrower to comply
with the loan repayment terms. There were no loan concentrations exceeding 10%
of total loans.
9
<PAGE> 10
ITEM 2.
- -------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
GENERAL
- -------
This financial review of Portsmouth Bank Shares, Inc. is intended to
broaden the understanding of the Company's financial condition and operating
results. This section should be read in conjunction with the Company's
consolidated financial statements, related notes and supplementary financial
data.
As a financial services organization, Portsmouth Bank Shares, Inc.
should be reviewed in terms of the trends in its cash flows and changes in
financial condition, as well as the yields on earning assets compared with the
cost of interest-bearing liabilities.
The results of operations are largely dependent upon net interest
income, which is the sum of interest and fees on loans and income on investments
less interest expense paid on deposits. Interest income is a function of the
average balance of loans and investments outstanding during the period and the
rates earned. Interest expense is a function of the average balance of deposits
outstanding during the period and the rates paid during the period on such
deposits. Net income is also affected by the level of non-interest income and
expenses.
FINANCIAL CONDITION
- -------------------
At September 30, 1996, the Company's total assets were $268,654,000
compared to $267,271,000 at December 31, 1995. Net loans increased $13,400,000
funded partially by early calls of investment securities.
Deposits were $198,071,000 at September 30, 1996, compared to
$195,569,000 at December 31, 1995. Competitive interest rates and first-class
service to the customer has increased our market share.
The Bank's liquidity position remains strong. The primary sources of
liquidity are in addition to the deposits at the Federal Home Loan Bank,
investments in U.S. Treasury securities of $40,641,000 on September 30, 1996.
Shareholders equity totaled $66,934,000 at September 30, 1996 or 24.9%
of total assets, compared to $67,775,000 or 25.4% of total assets, December 31,
1995. The adjustment for net unrealized holding gain on AFS securities at
September 30, 1996 resulted in a decrease of $2,505,000 in that component of
shareholders equity. Management is not aware of any trends, events or
uncertainties that will have or that are reasonably likely to have a material
effect on the company's liquidity, capital resources or results of operations.
RESULTS OF OPERATIONS:
- ----------------------
COMPARISON OF NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
- -----------------------------------------------------------
The Company earned $4,350,000 of $.75 per share for the nine months
ended September 30, 1996 compared to $4,283,000 or $.74 per share for the 1995
comparable period, after adjustment for a two percent stock dividend issued in
March 15, 1996.
Net interest income totaled $7,579,000 for the current period compared
to $8,517,000 for the 1995 nine month period, a decrease of $938,000. The reason
for this decline can be seen from both the asset and liability side of the
average balance sheet. On the asset side, interest-bearing deposits with other
banks increased $34.6 million due to maturities and
10
<PAGE> 11
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
- --------------------------------------------------------------------------
OPERATIONS.
- -----------
(CONTINUED)
early calls of taxable investment securities. However, a decline in short-term
interest rates drove down the yield on interest-bearing deposits with other
banks to 5.24%, a decrease of 75 basis points compared to the 1995 period.
Partially offsetting this dramatic decline in short-term interest rates, loan
yields held at 8.72% with an increase in outstanding balances of $5.0 million
over the prior nine months. On the liability side, time certificates of deposit
increased $7.4 million as depositors sought refuge from lower short-term
interest rates. The rates paid on these deposits climbed 49 basis points to
5.38% as the competition for time deposits increased. The decline in short-term
rates did not change the rates paid on day-of deposit accounts, however, their
collective balances declined as depositors sought higher yields. The net
interest rate spread declined 66 basis points to 3.03% from 3.69% for the nine
month comparable period.
There was no loan loss provision for the nine months ended September
30, 1996 or 1995. The zero provision for both 1996 and 1995 reflects managements
judgement of the adequacy of the loan loss reserve and current market
conditions. Management is not aware of any trends or uncertainties which would
materially impact results of future operations.
Other income amounted to $1,223,000 for the 1996 period compared to
$343,000 for the 1995 nine months, an increase of $830,000. Investment
securities gains accounted for $821,000 of this increase. Callable securities as
well as selective profit-taking comprised these gains. Increases in service
charges on deposit accounts and other income totaled $30,000, partially offset
by a $21,000 increase in loss on sale of other real estate owned. Other expense
totaled $2,620,000, a decrease of $214,000 when compared to the 1995 period of
$2,834,000. Salaries and employee benefits decreased $104,000, occupany expense
$15,000 and general and administrative expense $95,000.
COMPARISON OF THREE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
- ------------------------------------------------------------
The company had net income of $1,454,000 or $.25 per share, for the
three months ended September 30, 1996. For the 1995 period, net income amounted
to $1,390,000 or $.24 per share, after adjustment for a two percent stock
dividend issued March 15, 1996.
Net interest income, the difference between the amount of interest
earned on interest earning assets and amounts paid on interest bearing
liabilities amounted to $2,574,000 for the quarter ended September 30, 1996
compared to $2,719,000 for the 1995 comparable quarter, a decrease of $145,000.
The decline in net interest income is directly attributable to a
decrease in short-term interest rates. Average interest-bearing deposits with
other banks suffered a decline in yield of 72 basis points to 5.27% while
average balances increased $26.6 million from $37.4 million at September 30,
1995. However, there are positive signs in the average balance sheet that bode
well for the future. Total interest earning assets increased $4.3 million while
total interest-bearing liabilities rose only $2.3 million, increasing the net
earning balance by $2.0 million. Total loans increased $7.1 million and the
corresponding yield stood at 8.70%. Time certificates of deposit amounted to
$102.5 million at September 30, 1996, up $3.0 million, however, the rate paid
leveled off at 5.39%, a 1 basis point decrease over the 5.40% paid in the
comparable quarter. The net interest rate spread amounted to 4.02% for the
current quarter, a modest decrease of 30 basis points from September 30, 1995.
There was no provision for loan losses in the current quarter nor for
the quarter ended September 30, 1995. The zero provision for 1996 reflects
management's judgment of the adequacy of the loan loss reserve and current
market conditions. Management is not aware of
11
<PAGE> 12
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
- --------------------------------------------------------------------------
OPERATIONS.
- -----------
(CONTINUED)
any trends or uncertainties which would materially impact results of future
operations.
Other income rose $281,000 to $349,000 at September 30, 1996.
Investment securities gains increased $263,000, other income $12,000 and service
charges on deposits $6,000. Other expense totaled $831,000 for the current
period, an increase of $25,000. General and administrative expenses were up
$64,000, partially offset by a decrease in salaries and employee benefits of
$26,000 and occupancy expense of $13,000.
12
<PAGE> 13
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
- --------------------------------------------------------------------------
OPERATIONS.
- -----------
(CONTINUED)
<TABLE>
The following average balance sheets present for the periods indicated
the total dollar amount of interest income from earning assets and the resultant
yields as well as the interest paid on interest-bearing liabilities, expressed
both in dollars and rates:
<CAPTION>
Nine Months Ended September 30,
----------------------------------------------------------------------------
1996 1995
--------------------------------- -------------------------------------
Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate
------- -------- ------ ------- -------- ------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans.................... $ 82,380 $ 5,387 8.72% $ 77,366 $ 5,061 8.72%
Interest-bearing
deposits with other
banks.................. 59,142 2,326 5.24% 24,591 1,105 5.99%
Taxable investment
securities............. 106,175 5,723 7.19% 144,446 7,599 7.01%
Tax-exempt investment
securities............. 6,816 197 3.85% 4,323 154 4.75%
-------- ------- -------- -------
Total interest-earning
assets................... 254,513 13,633 7.14% 250,726 13,919 7.40%
Non-interest-earning
assets................... 9,232 9,566
-------- --------
Total.................. $263,745 $260,292
======== ========
Interest-bearing
liabilities:
Regular savings........ $ 46,571 945 2.71% $ 50,967 1,030 2.69%
NOW accounts........... 23,751 290 1.63% 21,460 277 1.72%
Money market
accounts............. 23,945 563 3.14% 27,057 621 3.06%
Time certificates of
deposit.............. 102,066 4,120 5.38% 94,693 3,474 4.89%
Other interest expense 0 136 0 0
------- ------- ------ -------
Total interest-bearing
liabilities.......... 196,333 6,054 4.11% 194,177 5,402 3.71%
Non-interest-bearing
liabilities.............. 2,109 851
Net worth.................. 65,303 65,264
-------- --------
Total.................. $263,745 $260,292
======== ------- ---- ======== ------- ----
Net interest income/
interest rate spread..... $ 7,579 3.03% $ 8,517 3.69%
======= ==== ======= ====
Net earning balance/net
yield on interest-earning
assets................... $ 58,180 3.97% $ 56,549 4.53%
</TABLE>
- -----------------------
13
<PAGE> 14
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
- --------------------------------------------------------------------------
OPERATIONS.
- -----------
(CONTINUED)
<TABLE>
The following average balance sheets present for the periods indicated
the total dollar amount of interest income from earning assets and the resultant
yields as well as the interest paid on interest-bearing liabilities, expressed
both in dollars and rates:
<CAPTION>
Nine Months Ended September 30,
----------------------------------------------------------------------------
1996 1995
--------------------------------- -------------------------------------
Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate
------- -------- ------ ------- -------- ------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans.................... $ 83,992 $1,826 8.70% $ 76,941 $1,695 8.81%
Interest-bearing
deposits with other
banks.................. 63,996 843 5.27% 37,425 560 5.99%
Taxable investment
securities............. 103,021 1,880 7.30% 133,550 2,381 7.13%
Tax-exempt investment
securities............. 5,263 51 3.88% 4,071 48 4.72%
-------- ------ -------- ------
Total interest-earning
assets................... 256,272 4,600 7.18% 251,987 4,684 7.44%
Non-interest-earning
assets................... 9,235 9,944
-------- --------
Total.................. $265,507 $261,931
======== ========
Interest-bearing
liabilities:
Regular savings........ $ 46,658 318 2.73% $ 49,192 335 2.72%
NOW accounts........... 24,892 98 1.57% 21,638 92 1.70%
Money market
accounts............. 23,627 187 3.17% 25,056 196 3.13%
Time certificates of
deposit.............. 102,529 1,381 5.39% 99,477 1,342 5.40%
Other interest expense. 0 42 0 0
------- ----- ------ -----
Total interest-bearing
liabilities.......... 197,706 2,026 4.10% 195,363 1,965 4.02%
Non-interest-bearing
liabilities.............. 3,167 1,319
Net worth.................. 64,634 65,249
-------- --------
Total.................. $265,507 $261,931
======== ------ ---- ======== ------ ----
Net interest income/
interest rate spread..... $2,574 3.08% $2,719 3.41%
====== ==== ====== ====
Net earning balance/net
yield on interest-earning
assets................... $ 58,566 4.02% $ 56,624
4.32%
</TABLE>
- -----------------------
14
<PAGE> 15
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
- --------------------------------------------------------------------------
OPERATIONS.
- -----------
(CONTINUED)
LIQUIDITY AND INTEREST RATE SENSITIVITY MANAGEMENT
The Company, on a monthly basis, manages its liquidity position as part
of its strategy to better meet the cash requirements for both its banking
activities and to be prepared to satisfy the needs of its customers. Management
seeks to assure adequate liquidity by maintaining an appropriate match of the
maturities of interest bearing assets and liabilities.
Interest rate sensitivity management seeks to avoid fluctuating net
interest margins and to achieve consistent growth of net interest income through
periods of changing interest rates. To accomplish rate sensitivity management
requires maintaining an appropriate balance between interest sensitive assets
and liabilities. At September 30, 1996, the Company's one year interest rate
sensitivity cumulative gap position is asset sensitive 18.6%, as a percent of
total earning assets.
<TABLE>
The following table depicts the Company's interest rate sensitivity at September 30, 1996.
<CAPTION>
Sensitivity Period
-------------------------------------------------------------------------------
Beyond
0-3 mos. 6 mos. 1 year 1-3 years 3 years Total
-------- -------- -------- --------- ------- --------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest earning assets:
Loans ............................. $ 9,279 $ 14,767 $ 9,764 $ 8,003 $48,820 $ 90,633
Investments ....................... 84,215 7,504 15,047 14,009 44,976 165,751
------- -------- ------- -------- ------- --------
Total ........................... $93,494 $ 22,271 $24,811 $ 22,012 $93,796 $256,384
======= ======== ======= ======== ======= ========
Interest-bearing liabilities:
Deposits .......................... $27,172 $ 34,289 $31,404 $ 39,797 $65,409 $198,071
======= ======== ======= ======== ======= ========
Period sensitivity gap ................ $66,322 $(12,018) $(6,593) $(17,785) $28,387 $ 58,313
Cumulative sensitivity gap ............ $66,322 $ 54,304 $47,711 $ 29,926 $58,313 $ 58,313
Cumulative sensitivity gap as
a percent of earning assets........ 25.9% 21.2% 18.6% 11.7% 22.7%
</TABLE>
All categories of interest earning assets and that portion of
interest-bearing liabilities classed as certificates of deposits ($103,348) are
scheduled based on each items individual contracted maturity or the next
interest rate repricing date. The remaining interest-bearing deposits are spread
through the various sensitivity periods based on assumptions by management of
activity relating to new and run-off of account balances.
15
<PAGE> 16
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
- --------------------------------------------------------------------------
OPERATIONS.
- -----------
(CONTINUED)
Capital Requirements
--------------------
The FDIC and the Federal Reserve Board have adopted minimum capital
ratios and guidelines for banks and bank holding companies (on a consolidated
basis) to provide a framework for assessing the adequacy of capital.
Under its leverage capital adequacy guidelines, the FDIC requires that
insured state banks, such as this Bank, maintain a ratio of Tier 1 or core
capital to assets of not less than 3% for banks rated composite 1 under the
FDIC's CAMEL rating system and who are not experiencing or anticipating any
significant growth. For all other banks, the minimum core capital leverage ratio
is 4%. The FDIC may impose higher ratios for banks on a case-by-case basis.
Banks that fail to meet these minimum leverage capital levels will not, absent
unusual circumstances, receive FDIC approval of applications to establish new
branches or other transactions requiring approval.
The FDIC has adopted so-called "risk based capital" guidelines for
insured state non-member banks. These risk based guidelines generally require
the Company and the Bank to maintain a consolidated ratio of Tier 1 capital to
risk-weighted assets, as defined, of at least 4%, and a consolidated ratio of
total capital (as the sum of Tier 1 and Tier 2 capital, as defined below) to
risk-weighted assets of at least 8%. Banks which are not rated composite 1 or 2
will generally be required to maintain higher risk-based capital ratios
determined by the FDIC on a case-by-case basis.
TIER 1 or core capital consists of common stock, surplus, undivided
profits, disclosed capital reserves that represent a segregation of undivided
profits, foreign currency translation adjustments and minority interests in
consolidated subsidiaries less all intangible assets other than certain mortgage
servicing rights.
TIER 2 or supplementary capital consists of allowance for loan and
lease losses (up to certain maximums), perpetual preferred stock, long-term
(minimum 20 year maturity) preferred stock, intermediate-term (minimum 5-year
maturity) preferred stock, hybrid capital instruments (including mandatory
convertible securities) and term subordinated debt.
<TABLE>
Capital Ratios
--------------
<CAPTION>
Minimum
Regulatory Portsmouth
Capital Bank Shares, Inc.
Level 9/30/96 12/31/95
---------- ------- --------
<S> <C> <C> <C>
Leveraged Capital 4.0% 25.2% 25.6%
Total Capital (sum of Tier 1 and 8.0% 52.7% 64.6%
Tier 2 capital) to Risk Weighted
Assets
</TABLE>
16
<PAGE> 17
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
- --------------------------------------------------------------------------
OPERATIONS.
- -----------
(CONTINUED)
Restrictions on the Payment of Dividends or Distribution
--------------------------------------------------------
The New Hampshire Business Corporation Act (the "Business Corporation
Act") permits Portsmouth to pay dividends on its capital stock only from its
unreserved and unrestricted earned surplus or from its net profits for the
current fiscal year and the preceding fiscal year taken as a single period.
The Bank is not subject to the Business Corporation Act, but the
payment of a cash dividend or distribution may be restricted if the effect
thereof would cause the net worth of the Bank to be reduced below either the
amount required for the distribution and liquidation account or in the event
that net worth requirements under New Hampshire or federal laws or regulations
limit such dividends or distributions. In addition, the Bank is required under
New Hampshire law to maintain a reserve of not less than 3% of the amount of its
deposits in cash or in specified kinds of short-term investments, for the
security of its depositors. The Bank has consistently complied with this
requirement. Furthermore, the Federal Deposit Insurance Act prohibits the Bank
from paying dividends on its capital stock if it is in default in the payment of
any assessment to the FDIC.
The Company is not under any regulatory restrictions regarding retained
earnings available for distribution. At September 30, 1996 all of the retained
earnings, $35.7 million, could be distributed in accordance with Rule 4-08 (e)
(1) of Regulation S-X.
Earnings appropriated to bad debt reserves for losses and deducted for
federal income tax purposes are not available for dividends or distributions
without the prior payment of taxes at the current income tax rates on an amount
greater than the amount appropriated to bad debt reserves.
17
<PAGE> 18
PART II - OTHER INFORMATION
---------------------------
Item 1. Legal Proceedings:
- ------- ------------------
Not Applicable
Item 2. Changes in Securities:
- ------- ----------------------
Not Applicable
Item 3. Defaults Upon Senior Securities:
- ------- --------------------------------
Not Applicable
Item 4. Submission of Matters to a Vote of Securities Holders:
- ------- ------------------------------------------------------
Not Applicable
Item 5. Other Information:
- ------- ------------------
Not Applicable
Item 6. Exhibits and Reports on Form 8-K:
- ------- ---------------------------------
a) Not Applicable
b) Not Applicable
18
<PAGE> 19
SIGNATURE
---------
Pursuant to the requirements of Section 13 or 15 (d) of the Securities
Exchange Act of 1934, Portsmouth Bank Shares, Inc., the registrant has duly
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
PORTSMOUTH BANK SHARES, INC.
Date: November 8, 1996 By: /s/ Harry R. Hart
--------------------- -------------------------------
Harry R. Hart, President
and Chief Executive Officer
(Principal Financial Officer)
19
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<EXCHANGE-RATE> 1
<CASH> 4,863
<INT-BEARING-DEPOSITS> 47,617
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 95,156
<INVESTMENTS-CARRYING> 24,626
<INVESTMENTS-MARKET> 24,544
<LOANS> 90,634
<ALLOWANCE> 688
<TOTAL-ASSETS> 89,946
<DEPOSITS> 198,071
<SHORT-TERM> 0
<LIABILITIES-OTHER> 3,649
<LONG-TERM> 0
<COMMON> 66,934
0
0
<OTHER-SE> 0
<TOTAL-LIABILITIES-AND-EQUITY> 268,654
<INTEREST-LOAN> 5,387
<INTEREST-INVEST> 5,920
<INTEREST-OTHER> 2,326
<INTEREST-TOTAL> 13,633
<INTEREST-DEPOSIT> 5,918
<INTEREST-EXPENSE> 136
<INTEREST-INCOME-NET> 7,579
<LOAN-LOSSES> 0
<SECURITIES-GAINS> 1,009
<EXPENSE-OTHER> 2,620
<INCOME-PRETAX> 6,182
<INCOME-PRE-EXTRAORDINARY> 4,350
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,350
<EPS-PRIMARY> .75
<EPS-DILUTED> .75
<YIELD-ACTUAL> 3.95
<LOANS-NON> 363
<LOANS-PAST> 319
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 727
<CHARGE-OFFS> 40
<RECOVERIES> 1
<ALLOWANCE-CLOSE> 688
<ALLOWANCE-DOMESTIC> 688
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
