<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, 1997
-------------------------------------------------------------
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 -- 5,907,242 SHARES AS OF JUNE 30, 1997
- --------------------------------------------------------------------
<PAGE> 2
FORM 10Q QUARTERLY REPORT -- TABLE OF CONTENTS
<TABLE>
<CAPTION>
PART I - FINANCIAL INFORMATION Page
- ------ ----------------------
<S> <C> <C>
Item 1. Financial Statements
Consolidated Balance Sheets - June 30, 1997
and December 31, 1996 3
Consolidated Statements of Income -
Three and six months ended
June 30, 1997 and 1996 4
Consolidated Statements of Changes in
Stockholders' Equity - June 30, 1997
and December 31, 1996 5
Consolidated Statements of Cash Flows - Six
months ended June 30, 1997 and 1996 6
Notes to Consolidated Financial Statements -
June 30, 1997 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
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</TABLE>
<PAGE> 3
Part I - Financial Information
Portsmouth Bank Shares, Inc. and Subsidiary
Consolidated Balance Sheets
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
June 30, Dec. 31,
1997 1996
---- ----
(Unaudited)
ASSETS (In thousands)
<S> <C> <C>
Cash and due from banks $ 7,161 $ 6,149
Interest-bearing deposits with
the Federal Home Loan Bank 39,858 53,983
Investment securities:
Held-to-maturity (market value $29,271 at June 30, 29,302 12,013
1997 and $11,984 at December 31, 1996)
Available-for-sale (at market) 87,201 93,291
Loans (Note 2) 90,711 101,416
Less: Unearned income (662) (687)
Allowance for loan losses (Note 3) (687) (687)
-------- --------
Net loans 89,362 100,042
Premises and equipment 887 886
Other real estate owned (Note 4) 96 100
Other assets 5,586 5,105
-------- --------
TOTAL ASSETS $259,453 $271,569
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Non-interest bearing $ 4,425 $ 4,378
Interest bearing 185,444 193,770
-------- --------
Total deposits 189,869 198,148
Other liabilities 2,293 7,344
-------- --------
TOTAL LIABILITIES 192,162 205,492
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 6,657,184 shares in 1997 & 6,692,092 in 1996
outstanding shares - 5,872,334 in 1997 &
5,711,421 in 1996 669 650
Paid-in capital 35,577 33,423
Retained earnings 36,598 37,097
Net unrealized holding gain on AFS securities 811 1,271
-------- --------
73,655 72,441
Less: Cost of Treasury Stock: 1997-784,850 shares
1996-784,850 shares (6,364) (6,364)
-------- --------
Total Shareholders' Equity 67,291 66,077
-------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $259,453 $271,569
======== ========
Book value per share $ 11.39 *$ 11.34
======== ========
</TABLE>
(see notes to consolidated financial statements)
* Adjusted for a 2% stock dividend issued March 15, 1997
3
<PAGE> 4
Portsmouth Bank Shares, Inc. and Subsidiary
Consolidated Statements of Income
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30 (Unaudited)
(In thousands)
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Interest and dividend income:
Interest and fees on loans $1,886 $1,838 $3,828 $3,561
Interest on investment securities:
Taxable 1,834 1,635 3,347 3,328
Tax exempt 36 120 40 146
Other interest 564 705 1,385 1,483
Dividends on marketable equity securities 306 236 606 515
------ ------ ------ ------
Total interest and dividend income 4,626 4,534 9,206 9,033
------ ------ ------ ------
Interest expense 2,026 2,020 4,021 4,028
------ ------ ------ ------
Net interest and dividend income 2,600 2,514 5,185 5,005
Provision for loan losses 0 0 0 0
------ ------ ------ ------
Net interest and dividend income
after provision for loan losses 2,600 2,514 5,185 5,005
------ ------ ------ ------
Other income:
Service charges on deposit accounts 73 71 142 137
Investment securities gains 171 257 337 745
Gain (Loss) on sale of OREO 0 (4) 0 (28)
Other 23 16 30 20
------ ------ ------ ------
267 340 509 874
------ ------ ------ ------
Other expense:
Salaries and employee benefits 531 515 1,082 1,003
Occupancy expense 80 80 166 197
Other 204 273 455 589
------ ------ ------ ------
815 868 1,703 1,789
------ ------ ------ ------
Income before income taxes 2,052 1,986 3,991 4,090
Income taxes 524 551 955 1,194
------ ------ ------ ------
Net income: $1,528 $1,435 $3,036 $2,896
====== ====== ====== ======
Earnings per share $ 0.26 *$ 0.25 $ 0.52 *$ 0.50
Dividends declared 0.15 0.15 0.30 0.30
====== ====== ====== ======
</TABLE>
(see notes to consolidated financial statements)
*Adjusted for a 2% stock dividend issued March 15, 1997
4
<PAGE> 5
Portsmouth Bank Shares, Inc. and Subsidiary
Consolidated Statements of Changes in Stockholders' Equity
June 30, 1997
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Net
Unrealized
Holding
Common Paid-in Retained Treasury Gain (Loss)
Stock Capital Earnings Stock AFS Secur
------ ------- -------- -------- -----------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1995 $636 $31,646 $37,696 $(5,781) $ 3,578
Net income 5,957
Issuance of common stock 3 108
Purchase of treasury stock (583)
Dividends declared ($.85 per share) (4,869)
Stock dividend declared 11 1,669 (1,687)
Change in net unrealized holding gain
on AFS securities (2,307)
---- ------- ------- ------- -------
Balance, December 31, 1996 650 33,423 37,097 (6,364) 1,271
Net income 3,036
Issuance of common stock 8 403
Dividends declared ($.30 per share) (1,765)
Stock dividend declared 11 1,751 (1,770)
Change in net unrealized holding gain
on AFS securities (460)
---- ------- ------- ------- -------
Balance, June 30, 1997 $669 $35,577 $36,598 $(6,364) $ 811
==== ======= ======= ======= =======
</TABLE>
5
<PAGE> 6
Portsmouth Bank Shares, Inc. and Subsidiary
Consolidated Statements of Cash Flows
For the Six Months Ended June 30,
<TABLE>
<CAPTION>
1997 1996
---- ----
(Unaudited)
(In thousands)
<S> <C> <C>
Cash flows from operating activities:
Net income $ 3,036 $ 2,896
Adjustments to reconcile net income to net
cash provided by operating activities:
Increase in cash surrender value (67) (68)
Depreciation and amortization 17 28
Increase (decrease) in taxes payable (132) 12
(Increase) decrease in interest receivable (298) 291
Increase in interest payable 4 4
Decrease in accrued expenses (28) (11)
Increase in prepaid expenses (18) (13)
Decrease in other liabilities 322 (20)
Decrease in other assets (565) 0
Amortization of securities, net of accretion 188 358
Net gain on sales of securities available-
for-sale (337) (745)
Change in unearned income (25) 1
Deferred compensation (20) (41)
Provision for loan losses 0 0
Loss on sales of other real estate owned 0 28
-------- --------
Net cash provided by operating activities $ 2,077 $ 2,720
-------- --------
Cash flows from investing activities:
Proceeds received from sales of other
real estate owned 0 16
Purchases of securities available-for-sale (17,481) (14,647)
Purchases of securities held-to-maturity (26,280) (19,304)
Sales of securities available-for-sale 6,020 7,643
-------- --------
Maturities of securities available-for-sale 12,500 15,500
Maturities of securities held-to-maturity 9,000 16,570
Recoveries of loans previously charged off 1 0
Net (increase) decrease in loans 10,708 (8,231)
Capital expenditures (18) (30)
-------- --------
Net cash provided by (used in) investing
activities (5,550) (2,483)
-------- --------
</TABLE>
6
<PAGE> 7
Portsmouth Bank Shares, Inc. and Subsidiary
Consolidated Statements of Cash Flows
For the Three Months Ended June 30,
(Continued)
<TABLE>
<CAPTION>
1997 1996
---- ----
(Unaudited)
(In thousands)
<S> <C> <C>
Cash flows from financing activities:
Proceeds from sale of common stock 411 10
Net increase (decrease) in NOW
and savings accounts (4,582) 1,690
Net increase (decrease) in time deposits (3,696) 216
Dividends paid (1,765) (1,721)
Fractional shares paid in cash (8) (7)
-------- --------
Net cash provided by (used in)
financing activities (9,640) 188
-------- --------
Net increase (decrease) in cash and cash
equivalents (13,113) 425
Cash and cash equivalents at beginning of
period 60,132 60,924
-------- --------
Cash and cash equivalents at end of period $ 47,019 $ 61,349
======== ========
Supplemental disclosures:
Loans transferred to other real estate owned $ 0 $ 167
Origination of loans for sales of other real
owned 0 723
Interest paid 4,017 4,024
Income taxes paid 1,087 1,182
</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, 1997 and December 31, 1996 and
the results of its operations for the six months ended June 30, 1997 and 1996.
All adjustments are of a normal recurring nature. Results of operations for the
six months ended June 30, 1997 are not necessarily indicative of the results to
be expected for the entire year.
Note 2 - LOANS BY CATEGORIES (in thousands):
<TABLE>
<CAPTION>
June 30, December 31,
1997 1996
--------- -------------
<S> <C> <C>
Real estate - mortgage $82,293 $ 80,500
Real estate - construction 1,482 1,276
Commercial 545 13,462
Installment loans to individuals 6,391 6,178
------- --------
$90,711 $101,416
======= ========
</TABLE>
Note 3 - ALLOWANCE FOR LOAN LOSSES - Changes in the allowance for loan losses
were as follows (in thousands):
<TABLE>
<CAPTION>
June 30,
1997
----------
<S> <C>
Balance at January 1 $687
Provision for loan losses 0
Loans charged off 1
Loan recoveries 1
----
Balance at June 30, 1997 $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 $96,000 on two properties, at June 30, 1997.
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
The following schedule summarizes Portsmouth's nonaccrual, past due, and
restructured loans.
<TABLE>
<CAPTION>
June 30, December 31,
1997 1996
-------- ------------
<S> <C> <C>
Nonaccrual Loans:
Commercial $155 $155
Residential 287 421
Other 13 0
---- ----
Total $455 $576
Accruing loans past
due 90 days or more 743 347
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, 1997 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, 1997, the Company's total assets were $259,453,000 compared to
$271,569,000 at December 31, 1996, a decrease of $12,116,000. Changes in earning
assets are as follows: Net loans decreased $10,600,000, however, commercial
paper totaling $12,000,000 matured in January of 1997, resulting in an actual
net increase of $1,400,000. Interest-bearing deposits with the Federal Home Loan
Bank decreased $14,000,000, partially offset by an increase in investment
securities of $11,200,000.
Deposits stood at $189,869,0000 at June 30, 1997 compared to $198,148,000
at December 31, 1996, a decrease of $8,279,000 as depositors sought higher
yields from non-banking entities. Day of deposit accounts decreased $4,636,000
and certificates of deposit $3,643,000.
The Bank's liquidity position remains strong. The primary sources of
liquidity are the deposits at the Federal Home Loan Bank of $39,858,000 and
investments in U.S. Treasury securities of $39,101,000 on June 30, 1997.
Shareholders equity amounted to $67,291,000 at June 30, 1997 or 25.0% of
total assets, compared to $66,177,000 or 25.4% of total assets, December 31,
1996. The adjustment for net unrealized holding gain on AFS securities at June
30, 1997 resulted in an increase of $460,000 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, 1997 AND 1996
The Company earned $3,036,000 or $.52 per share for the six months ended
June 30, 1997 compared to $2,896,000 or $.50 per share for the 1996 comparable
period, after adjustment for a two percent stock dividend paid in March 15,
1997.
10
<PAGE> 11
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS. (CONTINUED)
Net interest income totaled $5,185,000 for the current period compared to
$5,005,000 for the 1996 six month period, an increase of $180,000. This increase
is due to a higher yield on average earning assets while the rate paid on
average interest-bearing liabilities remained constant. The yield on average
taxable investment securities increased 26 basis points to 7.49% primarily from
purchases of callable government agency paper. The reduction in the yield on
average loans is due in part to the purchase of commercial paper at short-term
money market rates. The interest rate spread for the six months of 1997 amounted
to 3.17%, an increase of 17 basis points over the 1996 comparable period.
There was no loan loss provision for the six months ended June 30, 1997 or
1996. The zero provision for 1997 and 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 amounted to $509,000 for June 30, 1997, a decrease of $365,000
over the 1996 comparable period. This decrease is primarily the result of a
reduction in investment securities gains realized during the current period of
$408,000, partially offset by a non-recurring loss on the sale of OREO of
$28,000. Other expense decreased $83,000 compared to the 1996 total of
$1,787,000.
COMPARISON OF THREE MONTHS ENDED JUNE 30, 1997 AND 1996
Net income for the current quarter totaled $1,528,000 or $.26 per share
compared to $1,435,000 or $.25 per share for the 1996 comparable quarter.
Net interest income amounted to $2,600,000 for the June 1997 quarter
compared to $2,514,000 for the June 1996 quarter, an increase of $86,000. This
increase is due primarily to the improved yield on average taxable investment
securities as well as the increase in the average balance. The increase in
average loans is due in part to purchases of commercial paper which yield
short-term money market rates thereby causing the average yield on loans to
decrease. Total average interest-bearing liabilities declined $6,495,000 which
offset the increase in the average rate paid of 15 basis points. The decline in
average balance on interest-bearing deposits reflects the depositors desire for
a higher yield, particularly in day of deposit accounts.
There was no provision for loan losses in the current quarter nor for the
quarter ended June 30, 1996. The zero provision for 1997 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 decreased $73,000 in the current quarter to $267,000. The
decline in investment securities gains of $86,000 accounted for this decline
partially offset by other increases of $13,000. Other expense totaled $815,000
at June 30, 1997, a decrease of $53,000 or 6.1% compared to June 30, 1996.
11
<PAGE> 12
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS. (CONTINUED)
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:
<TABLE>
<CAPTION>
Six Months Ended June 30,
--------------------------------------------------------------------------
1997 1996
---------------------------------- -----------------------------------
Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate
------- -------- ---- ------- -------- ----
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans ................... $ 91,220 $3,828 8.39% $ 81,514 $3,561 8.74%
Interest-bearing
deposits with other
banks ................. 52,680 1,385 5.26% 58,236 1,483 5.09%
Taxable investment
securities ............ 105,580 3,953 7.49% 106,276 3,843 7.23%
Tax-exempt investment
securities ............ 2,124 40 3.77% 7,602 146 3.84%
-------- ------ -------- ------
Total interest-earning
assets .................. 251,604 9,206 7.32% 253,628 9,033 7.12%
Non-interest-earning
assets .................. 10,344 9,194
-------- --------
Total ................. $261,948 $262,822
======== ========
Interest-bearing
liabilities:
Regular savings ....... $ 44,343 594 2.68% $ 46,519 627 2.70%
NOW accounts .......... 23,991 192 1.60% 23,152 192 1.66%
Money market
accounts ............ 23,155 361 3.12% 24,117 376 3.12%
Time certificates of
deposit ............. 102,614 2,754 5.37% 101,828 2,739 5.38%
Other interest expense 0 120 0 94
-------- ----- -------- ------
Total interest-bearing
liabilities ......... 194,103 4,021 4.14% 195,616 4,028 4.12%
Non-interest-bearing
liabilities ............. 2,509 2,663
Net worth ................. 65,336 64,543
-------- --------
Total ................. $261,948 $262,822
======== ------ ---- ======== ------ ----
Net interest income/
interest rate spread .... $5,185 3.17% $5,005 3.00%
====== ==== ====== ====
Net earning balance/net
yield on interest-earning
assets .................. $ 57,501 4.12% $ 58,012 3.95%
</TABLE>
- -----------------------
12
<PAGE> 13
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS. (CONTINUED)
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:
<TABLE>
<CAPTION>
Quarter Ended June 30,
---------------------------------------------------------------------------------------
1997 1996
--------------------------------------- -----------------------------------------
Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate
------- -------- ------ ------- -------- ------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans ...................... $ 91,468 $1,886 8.25% $ 84,683 $1,838 8.68%
Interest-bearing
deposits with other
banks .................... 40,705 564 5.54% 55,479 705 5.08%
Taxable investment
securities ............... 113,111 2,140 7.57% 102,212 1,871 7.32%
Tax-exempt investment
securities ............... 3,835 36 3.75% 12,584 120 3.81%
-------- ------ ----- -------- -----
Total interest-earning
assets ..................... 249,119 4,626 7.43% 254,958 4,534 7.11%
Non-interest-earning
assets ..................... 10,563 8,968
-------- --------
Total .................... $259,682 $263,926
======== ========
Interest-bearing
liabilities:
Regular savings .......... $ 43,566 294 2.70% $ 46,676 316 2.71%
NOW accounts ............. 23,966 96 1.60% 24,033 97 1.61%
Money market
accounts ............... 22,747 178 3.13% 25,275 184 2.91%
Time certificates of
deposit ................ 101,451 1,384 5.46% 102,241 1,376 5.38%
Other interest expense ... 0 74 0 47
-------- ------ -------- ------
Total interest-bearing
liabilities ............ 191,730 2,026 4.23% 198,225 2,020 4.08%
Non-interest-bearing
liabilities ................ 2,355 2,394
Net worth .................... 65,597 63,307
-------- --------
Total .................... $259,682 $263,926
======== ------ ----- ======== ------ -----
Net interest income/
interest rate spread ....... $2,600 3.20% $2,514 3.04%
====== ===== ====== =====
Net earning balance/net
yield on interest-earning
assets ..................... $ 57,389 4.17% $ 56,733 3.94%
</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, 1997, the Company's one year interest rate
sensitivity cumulative gap position is asset sensitive 19.0%, as a percent of
total earning assets.
The following table depicts the Company's interest rate sensitivity at June 30,
1997.
<TABLE>
<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....................... $11,038 $10,114 $ 8,003 $ 7,925 $53,631 $ 90,711
Investments................. 82,857 11,808 4,497 12,989 42,887 155,038
------- ------- -------- -------- ------- --------
Total..................... $93,895 $21,922 $ 12,500 $ 20,914 $96,518 $245,749
======= ======= ======== ======== ======= ========
Interest-bearing liabilities:
Deposits.................... $13,809 $24,957 $ 42,982 $ 49,907 $58,214 $189,869
======= ======= ======== ======== ======= ========
Period sensitivity gap.......... $80,086 $(3,035) $(30,482) $(28,993) $38,304 $ 55,880
Cumulative sensitivity gap...... $80,086 $77,051 $ 46,569 $ 17,576 $55,880 $ 55,880
Cumulative sensitivity gap as
a percent of earning
assets...................... 32.6% 31.4% 19.0% 7.2% 22.7%
</TABLE>
All categories of interest earning assets and that portion of
interest-bearing liabilities classed as certificates of deposits ($101,185) 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.
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>
<CAPTION>
CAPITAL RATIOS
MINIMUM
REGULATORY PORTSMOUTH
CAPITAL BANK SHARES, INC.
LEVEL 12/31/96 6/30/97
---------- -------- -------
<S> <C> <C> <C>
Leveraged Capital 4.0% 24.0% 25.7%
Total Capital (sum of Tier 1 and 8.0% 58.6% 59.0%
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, 1997 all of the retained
earnings, $36.6 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.
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.
/s/ Harry R. Hart
Date: AUGUST 11, 1997 By: _____________________________
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-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<EXCHANGE-RATE> 1
<CASH> 7,161
<INT-BEARING-DEPOSITS> 39,858
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 87,201
<INVESTMENTS-CARRYING> 29,302
<INVESTMENTS-MARKET> 29,271
<LOANS> 90,049
<ALLOWANCE> 687
<TOTAL-ASSETS> 259,453
<DEPOSITS> 189,869
<SHORT-TERM> 0
<LIABILITIES-OTHER> 2,293
<LONG-TERM> 0
0
0
<COMMON> 67,291
<OTHER-SE> 0
<TOTAL-LIABILITIES-AND-EQUITY> 259,453
<INTEREST-LOAN> 3,828
<INTEREST-INVEST> 3,993
<INTEREST-OTHER> 1,385
<INTEREST-TOTAL> 9,206
<INTEREST-DEPOSIT> 3,901
<INTEREST-EXPENSE> 120
<INTEREST-INCOME-NET> 5,185
<LOAN-LOSSES> 0
<SECURITIES-GAINS> 337
<EXPENSE-OTHER> 1,703
<INCOME-PRETAX> 3,991
<INCOME-PRE-EXTRAORDINARY> 3,036
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,036
<EPS-PRIMARY> 0.52
<EPS-DILUTED> 0.52
<YIELD-ACTUAL> 4.12
<LOANS-NON> 455
<LOANS-PAST> 743
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 687
<CHARGE-OFFS> 1
<RECOVERIES> 1
<ALLOWANCE-CLOSE> 687
<ALLOWANCE-DOMESTIC> 687
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
