<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 June 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 -- 5,736,913 shares as of June 30, 1996
- --------------------------------------------------------------------
<PAGE> 2
FORM 10-Q QUARTERLY REPORT -- TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
- ------ --------------------- Page
Item 1. Financial Statements
Consolidated Balance Sheets - June 30, 1996
and December 31, 1995 3
Consolidated Statements of Income - Three
and six months ended June 30, 1996 and 1995 4
Consolidated Statements of Changes in
Stockholders' Equity - June 30, 1996
and December 31, 1995 5
Consolidated Statements of Cash Flows - Six
months ended June 30, 1996 and 1995 6
Notes to Consolidated Financial Statements -
June 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 17
Item 2. Changes in Securities 17
Item 3. Defaults Upon Senior Securities 17
Item 4. Submission of Matters to a Vote 17
Item 5. Other Information 17
Item 6. Exhibits and Reports on Form 8-K 17
SIGNATURES 18
- ----------
<PAGE> 3
<TABLE>
Part I - Financial Information
Portsmouth Bank Shares, Inc. and Subsidiary
Consolidated Balance Sheets
- --------------------------------------------------------------------------------
<CAPTION>
June 30, Dec. 31,
1996 1995
-------- --------
(Unaudited)
(In thousands)
<S> <C> <C>
ASSETS
Cash and due from banks $ 6,005 $ 5,466
Interest-bearing deposits with
the Federal Home Loan Bank 55,344 55,458
Investment securities:
Held-to-maturity (market value $22,692 at June 30, 22,838 20,115
1996 and $19,963 at December 31, 1995)
Available-for-sale (at market) 91,640 103,318
Loans (Note 2) 86,549 77,852
Less: Unearned income (675) (674)
Allowance for loan losses (Note 3) (687) (727)
-------- --------
Net loans 85,187 76,451
Premises and equipment 897 895
Other real estate owned (Note 4) 118 668
Other assets 4,848 4,900
-------- --------
TOTAL ASSETS $266,877 $267,271
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Non-interest bearing $ 5,344 $ 2,802
Interest bearing 192,131 192,767
-------- --------
Total deposits 197,475 195,569
Other liabilities 2,639 3,927
-------- --------
TOTAL LIABILITIES 200,114 199,496
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 in 1996 & 1995;
issued 6,476,763 shares in 1996 & 6,357,112
in 1995 outstanding shares- 5,736,913 in 1996 &
5,624,762 in 1995 648 636
Paid-in capital 33,324 31,646
Retained earnings 37,184 37,696
Net unrealized holding gain on AFS securities 1,388 3,578
-------- --------
72,544 73,556
Less: Cost of Treasury Stock: 1996-739,850 shares
1995-739,850 shares (5,781) (5,781)
-------- --------
Total Shareholders' Equity 66,763 67,775
-------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $266,877 $267,271
======== ========
Book value per share $ 11.64 *$ 11.82
======== ========
<FN>
(see notes to consolidated financial statements)
* Adjusted for a 2% stock dividend issued March 15, 1996
</TABLE>
3
<PAGE> 4
<TABLE>
Portsmouth Bank Shares, Inc. and Subsidiary
Consolidated Statements of Income
- ----------------------------------------------------------------------------------------
<CAPTION>
Three Months Ended Six Months Ended
June 30 (Unaudited)
(In thousands)
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Interest and dividend income:
Interest and fees on loans $1,838 $1,691 $3,561 $3,366
Interest on investment securities:
Taxable 1,635 2,280 3,328 4,600
Tax exempt 120 72 146 106
Other interest 705 297 1,483 545
Dividends on marketable equity securities 236 295 515 618
------ ------ ------ ------
Total interest and dividend income 4,534 4,635 9,033 9,235
------ ------ ------ ------
Interest expense 2,020 1,837 4,028 3,437
------ ------ ------ ------
Net interest and dividend income 2,514 2,798 5,005 5,798
Provision for loan losses 0 0 0 0
------ ------ ------ ------
Net interest and dividend income
after provision for loan losses 2,514 2,798 5,005 5,798
------ ------ ------ ------
Other income:
Service charges on deposit accounts 71 67 137 132
Investment securities gains 257 187 745 187
Gain (Loss) on sale of OREO (4) 0 (28) (7)
Other 16 4 20 13
------ ------ ------ ------
340 258 874 325
------ ------ ------ ------
Other expense:
Salaries and employee benefits 515 541 1,003 1,081
Occupancy expense 80 96 197 199
Other 273 367 589 748
------ ------ ------ ------
868 1,004 1,789 2,028
------ ------ ------ ------
Income before income taxes 1,986 2,052 4,090 4,095
Income taxes 551 606 1,194 1,202
------ ------ ------ ------
Net income: $1,435 $1,446 $2,896 $2,893
====== ====== ====== ======
Earnings per share $ 0.25 *$ 0.25 $ 0.50 *$ 0.50
Dividends declared 0.15 * 0.13 0.30 * 0.25
====== ====== ====== ======
<FN>
(see notes to consolidated financial statements)
*Adjusted for a 2% stock dividend issued March 15, 1996
</TABLE>
4
<PAGE> 5
<TABLE>
Portsmouth Bank Shares, Inc. and Subsidiary
Consolidated Statements of Changes in Stockholders' Equity
June 30, 1996
(In thousands)
(Unaudited)
<CAPTION>
Net
Unrealized
Unearned Holding
Common Paid-in Retained Treasury Comp Gain (Loss)
Stock Capital Earnings Stock ESOP AFS Securities
----- ------- -------- ----- ---- --------------
<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 ($.78 per share) . (4,394)
Stock dividend declared ............. 11 1,236 (1,253)
Change in net unrealized holding gain
(loss) on AFS securities ........... 4,128
---- ------- ------- ------- ---- ------
Balance, December 31, 1995 .......... 636 31,646 37,696 (5,781) 0 3,578
Net income .......................... 2,896
Issuance of common stock ............ 1 9
Dividends declared ($.30 per share) . (1,721)
Stock dividend declared ............. 11 1,669 (1,687)
Change in net unrealized holding gain
(loss) on AFS securities ........... (2,190)
---- ------- ------- ------- ---- ------
Balance, June 30, 1996 .............. $648 $33,324 $37,184 (5,781) $ 0 $1,388
==== ======= ======= ======= ==== ======
</TABLE>
5
<PAGE> 6
<TABLE>
Portsmouth Bank Shares, Inc. and Subsidiary
Consolidated Statements of Cash Flows
For the Six Months Ended June 30,
<CAPTION>
1996 1995
---- ----
(Unaudited)
(In thousands)
<S> <C> <C>
Cash flows from operating activities:
Net income $ 2,896 $ 2,893
Adjustments to reconcile net income to net
cash provided by operating activities:
Increase in cash surrender value (68) (87)
Depreciation and amortization 28 46
Increase (decrease) in taxes payable 12 801
Decrease in interest receivable 291 545
Increase in interest payable 4 3
Decrease in accrued expenses (11) (70)
Increase in prepaid expenses (13) (18)
Amortization of securities, net of accretion 358 423
Net gain on sales of securities available-
for-sale (745) (187)
Change in unearned income 1 (30)
Deferred compensation (41) (46)
Provision for loan loss 0 0
Loss on sales of other real estate owned 28 7
-------- -------
Net cash provided by operating activities $ 2,740 $ 4,280
-------- -------
Cash flows from investing activities:
Proceeds received from sales of other
real estate owned 16 0
Purchases of securities available-for-sale (14,647) (2,124)
Purchases of securities held-to-maturity (19,304) (6,821)
Sales of securities available-for-sale 7,643 2,062
Maturities of securities available-for-sale 15,500 12,600
Maturities of securities held-to-maturity 16,570 11,375
Recoveries of loans previously charged off 0 1
Net (increase) decrease in loans (8,231) 3,121
Capital expenditures (30) (20)
Decrease in other liabilities (20) (876)
Decrease in other assets 0 26
-------- -------
Net cash provided by (used in) investing
activities (2,503) 19,344
-------- -------
</TABLE>
6
<PAGE> 7
<TABLE>
Portsmouth Bank Shares, Inc. and Subsidiary
Consolidated Statements of Cash Flows
For the Six Months Ended June 30,
(Continued)
<CAPTION>
1996 1995
---- ----
(Unaudited)
(In thousands)
<S> <C> <C>
Cash flows from financing activities:
Proceeds from sale of common stock 10 38
Purchase of treasury stock 0 (761)
Net increase (decrease) in demand deposits,
NOW, money market and savings accounts 1,690 (15,702)
Net increase in time deposits 216 13,308
Dividends paid (1,721) (1,414)
Fractional shares paid in cash (7) (5)
-------- --------
Net cash provided by (used in)
financing activities 188 (4,536)
-------- --------
Net increase (decrease) in cash and cash
equivalents 425 19,088
Cash and cash equivalents at beginning of
period 60,924 13,320
------- --------
Cash and cash equivalents at end of period $61,349 $ 32,408
======= ========
Supplemental disclosures:
Loans transferred to other real estate owned $ 167 $ 0
Origination of loans for sales of other real
owned 723 226
Interest paid 4,024 3,434
Income taxes paid 1,182 401
</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 June 30, 1996 and December 31,
1995 and the results of its operations for the six months ended June 30, 1996
and 1995. All adjustments are of a normal recurring nature. Results of
operations for the six months ended June 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>
June 30, December 31,
1996 1995
-------- ------------
<S> <C> <C>
Real estate - mortgage $74,261 $70,716
Real estate - construction 548 693
Commercial 5,533 423
Installment loans to individuals 6,207 6,020
------- -------
$86,549 $77,852
======= =======
</TABLE>
<TABLE>
Note 3 - ALLOWANCE FOR LOAN LOSSES - Changes in the allowance for loan losses
were as follows (in thousands):
<CAPTION>
June 30,
1996
--------
<S> <C>
Balance at January 1 $727
Provision for loan losses 0
Loans charged off 40
Loan recoveries 0
----
Balance at June 30 $687
====
</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 $118,000 on two properties, at June 30, 1996. The
properties are being actively marketed and the Bank anticipates their sale
during 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>
June 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 79 44
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 June 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 June 30, 1996, the Company's total assets were $266,877,000 compared to
$267,271,000 at December 31, 1995. Net loans increased $8,700,000 while
investment securities decreased $9,000,000 of which $11,700,000 were available
for sale, partially offset by an increase of $2,700,000 in held to maturity
securities.
Deposits were $197,475,000 at June 30, 1996, compared to $195,569,000 at
December 31, 1995. The increase of $1,906,000 in deposits is comprised of
$1,624,00 in daily deposit accounts and $282,000 in certificate accounts.
The Bank's liquidity position remains strong. The primary sources of
liquidity are in addition to the deposits at the Federal Home Loan Bank of
$55,344,000 and investments in U.S. Treasury securities of $40,724,000 on June
30, 1996.
Shareholders equity amounted to $66,763,000 at June 30, 1996 or 25.0% 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 June
30, 1996 resulted in a decrease of $2,190,000 in 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 SIX MONTHS ENDED JUNE 30, 1996 AND 1995
- -----------------------------------------------------
The Company earned $2,896,000 of $.50 per share for the six months ended
June 30, 1996 compared to $2,893,000 or $.50 per share for the 1995 comparable
period, after adjustment for a two percent stock dividend paid in March 15,
1996.
Net interest income totaled $5,005,000 for the current period compared to
$5,798,000 for the 1995 six month period. The decrease in net interest income of
$793,000 is due primarily to an increase in the cost of interest-bearing
liabilities and, to a lesser extent,
10
<PAGE> 11
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS. (CONTINUED)
the decline in short-term rates earned on interest-bearing assets. Total
interest-bearing liabilities increased $2,000,000, however, time certificates of
deposit increased $9,500,000, of which $7,500,000 was transferred from day of
deposit accounts. In addition, the average rate paid on time certificates of
deposit increased 76 basis points to 5.38% as depositors sought higher yields by
extending maturities. Total interest-earning assets did increase $3,500,000 but
the maturities and/or calls of taxable investment securities channeled into
interest-bearing deposits with other banks adversely affected interest income.
These deposits earned an average rate of 5.09% in 1996 compared to 6.00% in the
comparable 1995 period. The interest rate spread for the six months of 1996
amounted to 3.00%, a decrease of 83 basis points compared to the 1995 period.
There was no loan loss provision for the six months ended June 30, 1996 or
1995. The zero provision for 1996 and 1995 reflects management's judgment 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 $874,000 for June 30, 1996, an increase of
$549,000 over the 1995 comparable period. This increase is primarily the result
of investment securities gains realized during the current period of $745,000.
Other expense decreased $239,000 compared to the 1995 total of $2,028,000. This
decrease comprises a reduction in general and administrative expense of $159,000
and all other operating expenses of $80,000.
COMPARISON OF THREE MONTHS ENDED JUNE 30, 1996 AND 1995
- -------------------------------------------------------
Net income for the current quarter totaled $1,435,000 or $.25 per share
compared to $1,446,000 or $.25 per share for the 1995 comparable quarter.
Net interest income amounted to $2,514,000 for the June 1996 quarter
compared to $2,798,000 for the June 1995 quarter, a decrease of $284,000 or
10.2%. The increased cost of interest-bearing liabilities, both in terms of
dollars and rate, coupled with the decline in short-term interest rates earned
on interest-earning assets, continues to strain interest rate margins. The
balance of taxable investment securities is starting to stabilize, and the yield
has increased to 7.32% compared to 7.01% in the prior period. Loan balances are
increasing, which has boosted interest income from $1,691,000 to $1,838,000 at
June 30, 1996. The interest rate spread amounted to 3.04% compared to 3.62% in
1995, a decrease of 58 basis points.
There was no provision for loan losses in the current quarter nor for the
quarter ended June 30, 1996. 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 any trends or uncertainties which would materially
impact results of future operations.
Other income increased $82,000 in the current quarter to $340,000.
Investment securities gains account for $70,000 of this increase, and other
income $12,000. Other expense totaled $868,000 at June 30, 1996, a decrease of
$136,000 compared to June 30, 1995. General and administrative expenses declined
$94,000 as a result of tighter cost controls, and all other operating expenses
declined $42,000.
11
<PAGE> 12
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>
Six Months Ended June 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.................... $ 81,514 $3,561 8.74% $ 77,579 $3,366 8.68%
Interest-bearing
deposits with other
banks.................. 58,236 1,483 5.09% 18,176 545 6.00%
Taxable investment
securities............. 106,276 3,843 7.23% 149,890 5,218 6.96%
Tax-exempt investment
securities............. 7,602 146 3.84% 4,465 106 4.75%
-------- ------ -------- ------
Total interest-earning
assets................... 253,628 9,033 7.12% 250,110 9,235 7.38%
Non-interest-earning
assets................... 9,194 9,402
-------- --------
Total.................. $262,822 $259,512
======== ========
Interest-bearing
liabilities:
Regular savings........ $ 46,519 627 2.70% $ 51,861 695 2.68%
NOW accounts........... 23,152 192 1.66% 21,378 185 1.73%
Money market
accounts............. 24,117 376 3.12% 28,064 425 3.03%
Time certificates of
deposit.............. 101,828 2,739 5.38% 92,294 2,132 4.62%
Other interest expense 0 94 0 0
------- ------ ------ ------
Total interest-bearing
liabilities.......... 195,616 4,028 4.12% 193,597 3,437 3.55%
Non-interest-bearing
liabilities.............. 2,663 1,453
Net worth.................. 64,543 64,462
-------- --------
Total.................. $262,822 $259,512
======== ------ ---- ======== ------ ----
Net interest income/
interest rate spread..... $5,005 3.00% $5,798 3.83%
====== ==== ====== ====
Net earning balance/net
yield on interest-earning
assets................... $58,012 3.95% $56,513
4.64%
- -----------------------
</TABLE>
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>
Quarter Ended June 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.................... $ 84,683 $1,838 8.68% $ 77,444 $1,691 8.73%
Interest-bearing
deposits with other
banks.................. 55,479 705 5.08% 19,421 297 6.12%
Taxable investment
securities............. 102,212 1,871 7.32% 146,954 2,575 7.01%
Tax-exempt investment
securities............. 12,584 120 3.81% 5,710 72 5.04%
-------- ------ -------- ------
Total interest-earning
assets................... 254,958 4,534 7.11% 249,529 4,635 7.43%
Non-interest-earning
assets................... 8,968 9,579
-------- --------
Total.................. $263,926 $259,108
======== ========
Interest-bearing
liabilities:
Regular savings........ $ 46,676 316 2.71% $ 50,080 337 2.69%
NOW accounts........... 24,033 97 1.61% 21,132 91 1.72%
Money market
accounts............. 25,275 184 2.91% 26,611 208 3.13%
Time certificates of
deposit.............. 102,241 1,376 5.38% 95,164 1,201 5.05%
Other interest expense. 0 47 0 0
------- ------ -------- ------
Total interest-bearing
liabilities.......... 198,225 2,020 4.08% 192,987 1,837 3.81%
Non-interest-bearing
liabilities.............. 2,394 1,453
Net worth.................. 63,307 64,668
-------- --------
Total.................. $263,926 $259,108
======== ------ ---- ======== ------ ----
Net interest income/
interest rate spread..... $2,514 3.04% $2,798 3.62%
====== ==== ====== ====
Net earning balance/net
yield on interest-earning
assets................... $56,733 3.94% $56,542
4.49%
- -----------------------
</TABLE>
13
<PAGE> 14
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 June 30, 1996, the Company's one year interest rate
sensitivity cumulative gap position is asset sensitive 18.2%, as a percent of
total earning assets.
<TABLE>
The following table depicts the Company's interest rate sensitivity at June 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.................. $15,078 $ 8,459 $ 6,329 $ 9,283 $46,725 $ 85,874
Investments............ 76,342 18,805 14,676 14,014 43,723 167,560
------- ------- ------- ------- ------- --------
Total................ $91,420 $27,264 $21,005 $23,297 $90,448 $253,434
======= ======= ======= ======= ======= ========
Interest-bearing liabilities:
Deposits................ $28,261 $25,037 $40,388 $39,925 $63,864 $197,475
======= ======= ======= ======= ======= ========
Period sensitivity gap...... $63,159 $2,227 ($19,383) ($16,628) $26,584 $55,959
Cumulative sensitivity gap... $63,159 $65,386 $46,003 $29,375 $55,959 $55,959
Cumulative sensitivity gap as
a percent of earning
assets................... 24.9% 25.8% 18.2% 11.6% 22.1%
</TABLE>
All categories of interest earning assets and that portion of
interest-bearing liabilities classed as certificates of deposits ($102,115) 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.
14
<PAGE> 15
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.
<TABLE>
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.
<CAPTION>
Capital Ratios
--------------
Minimum
Regulatory Portsmouth
Capital Bank Shares, Inc.
Level 6/30/96 12/31/95
----- ------- --------
<S> <C> <C> <C>
Leveraged Capital 4.0% 25.3% 24.5%
Total Capital (sum of Tier 1 and 8.0% 59.4% 64.6%
Tier 2 capital) to Risk Weighted
Assets
</TABLE>
15
<PAGE> 16
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 June 30, 1996 all of the retained
earnings, $35.7 million, could be distributed in accordance with Rule 4-08 (e)
(1) of Regulations 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.
16
<PAGE> 17
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
17
<PAGE> 18
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: August 12, 1996 By: /s/ Harry R. Hart
------------------------ ------------------------
Harry R. Hart, President
and Chief Executive Officer
(Principal Financial Officer)
18
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-30-1996
<EXCHANGE-RATE> 1
<CASH> 6,005
<INT-BEARING-DEPOSITS> 55,344
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 91,640
<INVESTMENTS-CARRYING> 22,838
<INVESTMENTS-MARKET> 22,692
<LOANS> 85,874
<ALLOWANCE> 687
<TOTAL-ASSETS> 266,877
<DEPOSITS> 197,475
<SHORT-TERM> 0
<LIABILITIES-OTHER> 2,649
<LONG-TERM> 0
<COMMON> 66,763
0
0
<OTHER-SE> 0
<TOTAL-LIABILITIES-AND-EQUITY> 266,877
<INTEREST-LOAN> 3,561
<INTEREST-INVEST> 3,989
<INTEREST-OTHER> 1,483
<INTEREST-TOTAL> 9,033
<INTEREST-DEPOSIT> 94
<INTEREST-EXPENSE> 4,028
<INTEREST-INCOME-NET> 5,005
<LOAN-LOSSES> 0
<SECURITIES-GAINS> 745
<EXPENSE-OTHER> 1,789
<INCOME-PRETAX> 4,090
<INCOME-PRE-EXTRAORDINARY> 2,896
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,896
<EPS-PRIMARY> .50
<EPS-DILUTED> .50
<YIELD-ACTUAL> 3.95
<LOANS-NON> 363
<LOANS-PAST> 79
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 727
<CHARGE-OFFS> 40
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 687
<ALLOWANCE-DOMESTIC> 687
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
