<PAGE>
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------
Form 10-KSB
(Mark One)
/X/ ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
-
1934 (FEE REQUIRED)
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1995.
/_/ TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 (NO FEE REQUIRED)
For the transition period from _______________ to _______________
COMMISSION FILE NUMBER: 0-17099
HOME PORT BANCORP, INC.
------------------------
(Name of small business issuer in its charter)
Delaware 04-3016821
- ------------------------------- --------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
104 Pleasant Street, Nantucket,
Massachusetts 02554
- ------------------------------- --------------------------------------
(Address of principal executive (Zip Code)
offices)
Issuer's telephone number: (508) 228-0580
--------------------------------------
Securities registered under Section 12(b) of the Exchange Act: None
Securities registered pursuant to Section 12(g) of the Exchange Act:
Common Stock par value $.01 per share
-------------------------------------
(Title of Class)
Check whether the issuer (1) filed all reports to be filed by Section 13 or
15(d) of the Exchange Act during the past 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___
-
Check if there is no disclosure of delinquent filers in response to Item 405
of Regulation S-B contained in this form, and no disclosure will be contained,
to the best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB[X]
State the issuer's revenues for the most recent fiscal year. $14,086,000
The aggregate market value of the voting stock held by non-affiliates of the
registrant, based on the closing sales price of the registrant's common stock as
quoted on the National Association of Securities Dealers, Inc. Automated
Quotation National Market System on March 20, 1996 which was $ 12.25 per share,
was $18,182,405.50.
As of March 20, 1996, there were outstanding 1,841,890 shares of the
registrant's Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE
1. Portions of Annual Report to Stockholders for the Fiscal Year Ended December
31, 1995. (Parts I and II)
2. Portions of Proxy Statement for the 1996 Annual Meeting of Stockholders.
(Part III)
3. Certain Exhibits to the registrant's Form S-1 Registration Statement (No. 33-
21794) are incorporated by reference in response to Part III, Item 13.
Transitional Small Business Disclosure Format (check one) __ Yes X No
-----
1
<PAGE>
PART I
------
ITEM 1. DESCRIPTION OF BUSINESS
BACKGROUND
----------
THE COMPANY. Home Port Bancorp, Inc. (the "Company") was incorporated under
the laws of the State of Delaware on November 12, 1987 for the purpose of
becoming a holding company. On August 30, 1988, the Company acquired all of the
common stock of Nantucket Savings Bank (the "Bank" or "Nantucket Bank")
following the Bank's conversion from a Massachusetts chartered mutual to a
Massachusetts chartered stock savings bank. The Company is currently a one bank
holding company registered under the Federal Bank Holding Company Act. As of
December 31, 1995, the assets of the Company on an unconsolidated basis
consisted of the capital stock of the Bank and interest bearing deposits in
banks.
The Company's executive offices are located at 104 Pleasant Street, Nantucket,
Massachusetts 02554. Its telephone number is (508) 228-0580.
THE BANK. The Bank is a Massachusetts chartered savings bank which was
organized in 1834. The Bank conducts its business through two full-service
offices and one automated teller facility, all of which are located on the
island of Nantucket, Massachusetts. The Bank's deposits are insured by the Bank
Insurance Fund of the Federal Deposit Insurance Company ("FDIC") up to $100,000
per account and the Depositors Insurance Fund, a private deposit insuring
company, for deposits in excess of $100,000. The Bank is subject to competition
from other financial institutions. The Bank is subject to the regulations of,
and periodic examinations by, the FDIC and the Massachusetts Division of Banks.
The Company is subject to the regulations of, and periodic examinations by, the
Federal Reserve Bank, the Commissioner of Banks of the Commonwealth of
Massachusetts (the "Commissioner") and the FDIC.
The Bank provides a full range of banking services to individual and corporate
customers on the island of Nantucket. The Bank's primary services consist of
attracting deposits from consumers and businesses on Nantucket and originating
loans on Nantucket real estate, including both residential and commercial
properties. The Bank also grants commercial business loans and consumer loans.
The Bank routinely sells loans in the secondary market, normally retaining the
servicing rights. The Bank invests a portion of its funds in money market
instruments, federal government and agency securities and corporate bonds. The
Bank utilizes the Federal Home Loan Bank of Boston ("FHLB") as an additional
source of funds.
During 1993 and 1994 the Bank emphasized planned growth, utilizing borrowings
from the Federal Home Loan Bank. The funds obtained were primarily invested in
adjustable rate residential mortgage loans, with lesser amounts invested in
commercial loans and securities. During 1995 the Bank's overall rate of growth
decreased due to a decrease in borrowings, although the core businesses of loans
and deposits grew by 9.2% and 9.6%, respectively, during the year. Securities
decreased by 12.6% in 1995. The Bank's current strategy is to continue the
growth in its core lending and deposit businesses and not increase borrowings.
The Bank has an asset/liability management program, the objective of which is to
manage liquidity and interest rate risk so as to maximize net interest income
and return on capital in a changing interest rate environment. The Bank's
Asset/Liability Committee ("ALCO") primarily utilizes "GAP" analysis to measure
risk. GAP is the difference between assets and liabilities subject to rate
change over specific time periods. There are limitations to GAP analysis,
however, as rates on different assets and liabilities may not move to the same
extent in any given time period and competition may affect the ability of the
Bank to change rates on a particular deposit or loan product At December 31,
1995, the Bank's one year asset/liability GAP position was a negative $14.4
million or 8.58% of total assets. This compares to a negative GAP of $9.0
million or 5.55% of total assets when measured against the same repricing period
at December 31, 1994. These amounts do not reflect any prepayment of fixed rate
loans or mortgage backed securities prior to maturity. Any prepayments will
decrease the negative GAP position. The Bank's goal is to minimize volatility
in net interest income.
2
<PAGE>
THE NEW ENGLAND REAL ESTATE MARKET. The New England real estate market has
improved during 1994 and 1995, after experiencing a severe downturn during the
early 1990's. The Nantucket real estate market has also improved during the
past two years with high levels of new construction and increases in sales of
existing properties. The Bank's real estate loan originations totaled $59.2
million and $60.6 million in 1995 and 1994, respectively, compared to $46.5
million in 1993 and $21.8 million in 1992. In 1995 Nantucket Bank was the
leader in residential real estate mortgages recorded at the registry of deeds in
Nantucket. At December 31, 1995, the Bank had no non-performing assets compared
to $433,000 at December 31, 1994. No provisions for loan losses were made in
1994 or 1995. The Bank's total loan loss reserves increased by $95,000 in 1995
due to net recoveries of previous years' charge-offs.
Although the real estate market in the Bank's market area has improved during
the past two years the Bank has not substantially changed its lending practices
or policies. Maximum individual loan amounts are generally limited to
$500,000.
Future deterioration in the New England and national economies could result in
additional loan delinquencies for the Bank. Additional loan delinquencies could
require the Bank to make additional provisions for loan losses and could result
in reduced interest income, which would have a negative effect on the Company's
results of operations.
HOME PORT BANCORP, INC. AND SUBSIDIARY
3
<PAGE>
AVERAGE CONSOLIDATED BALANCE SHEETS
(dollars in thousands, except per share data)
Calculations are based on daily average balances.
December 31,
--------------------------------
1995 1994 1993
--------- --------- ---------
Assets
Cash and due from banks $ 4,708 $ 3,908 $ 3,740
Federal funds sold and interest bearing
deposits in banks 1,939 3,426 1,598
------- -------- --------
Total cash and cash equivalents 6,647 7,334 5,338
Securities 28,907 35,255 29,674
FHLB stock 2,200 1,475 -
Loans
Residential real estate loans 83,800 72,682 44,699
Commercial loans 36,703 33,539 29,256
Consumer loans 5,429 5,210 5,446
------- -------- --------
Total loans 125,932 111,431 79,401
Less: Allowance for loan losses (2,203) (2,154) (2,210)
------- -------- --------
Net loans 123,729 109,277 77,191
Other assets 3,564 2,379 3,391
Total assets $165,047 $155,720 $115,594
======== ======== ========
Liabilities and Stockholders' Equity
Deposits
Regular savings and 90 day notice $ 14,661 $ 12,865 $ 10,656
NOW accounts 22,225 19,815 15,520
Money market deposit accounts 17,648 19,045 15,312
-------- -------- --------
Total transaction accounts 54,534 51,725 41,488
Demand 6,034 6,150 4,673
Time 47,007 43,612 40,549
-------- -------- --------
Total deposits 107,575 101,487 86,710
Borrowed funds 35,853 29,810 3,397
Other liabilities 2,406 2,506 1,752
-------- -------- --------
Total liabilities 145,834 133,803 91,859
-------- -------- --------
Stockholders' equity
Preferred stock $.01 par value
2,000,000 shares authorized,
none issued - - -
Common stock $.01 par value 10,000,000
shares authorized, 2,325,494 shares
issued 23 22 22
Additional paid-in capital 17,473 17,432 16,907
Retained earnings 6,115 8,862 8,525
Unrealized gain (loss) on securities
available for sale, net of taxes (1) (2) -
Less: Treasury stock, at cost (483,604
shares) (4,397) (4,397) (1,719)
-------- -------- --------
Total stockholders' equity 19,213 21,917 23,735
-------- -------- --------
Total liabilities and
stockholders' equity $165,047 $155,720 $115,594
======== ======== ========
LENDING ACTIVITIES
------------------
4
<PAGE>
GENERAL. The Company's banking activities are conducted through its
subsidiary, Nantucket Bank. The Bank's lending activities are conducted solely
in Nantucket. The Bank grants single family and multi-family residential loans,
commercial loans and a variety of consumer loans. In addition, the Bank grants
loans for construction of residential homes, multi-family properties, commercial
real estate properties and for land development. Most loans granted by the Bank
are collateralized by real estate.
Real estate loan originations, including both commercial and residential
properties, were $59.2 million in 1995 as compared to $60.6 million in 1994 and
$46.5 million in 1993. Lower interest rates, greater confidence in the economy
and stabilized prices contributed to the increased loan originations in 1994 and
1995. Nantucket has experienced an increase in construction during this period
which has contributed to increases in the Bank's portfolio of commercial and
residential construction loans. At December 31, 1995, total construction loans,
before deducting unadvanced funds, totaled $39.6 million, an increase of $13.6
million, or 51.7%, from $26.0 million at the end of the prior year.
ANALYSIS OF LOAN PORTFOLIO. The following table sets forth information
concerning the loan portfolio, including loans held for sale, at the dates
indicated.
<TABLE>
<CAPTION>
At December 31,
(dollars in thousands) 1995 1994 1993
--------------------- ------------------- --------------------
Amount Percent Amount Percent Amount Percent
-------- --------- ---------- -------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Mortgage loans:
Residential $ 76,127 58.95% $ 70,057 59.26% $49,532 56.21%
Residential construction 34,021 26.34% 24,956 21.11% 9,601 10.89%
Commercial 28,660 22.19% 27,404 23.17% 24,956 28.32%
Commercial construction 5,547 4.29% 1,124 0.95% - 0.00%
-------- --------- --------- -------- --------- ---------
Total principal balances 144,355 111.77% 123,541 104.49% 84,089 95.42%
Less due to borrowers on
incomplete loans:
Residential (21,948) (16.99%) (13,463) (11.39%) (2,215) (2.51%)
Commercial (4,304) (3.33%) (214) (0.18%) - (0.00%)
Less deferred loan origination fees (427) (0.33%) (443) (0.37%) (461) (0.52%)
-------- --------- --------- -------- --------- ---------
Total mortgage loans 117,676 91.12% 109,421 92.55% 81,413 92.39%
Other loans
Consumer 1,204 0.93% 600 0.51% 570 0.65%
Education - 0.00% - 0.00% 138 0.16%
Second mortgage 2,145 1.66% 2,027 1.71% 1,983 2.25%
Home equity 1,834 1.42% 1,399 1.18% 1,243 1.41%
Commercial 7,195 5.57% 6,048 5.12% 3,996 4.53%
Passbook and stock secured 1,342 1.04% 884 0.75% 876 0.99%
-------- --------- -------- --------- --------- ---------
Total other loans 13,720 10.62% 10,958 9.27% 8,806 9.99%
Less: Allowance for possible loan
losses (2,249) (1.74%) (2,154) (1.82%) (2,093) (2.38%)
-------- --------- --------- --------- --------- ---------
Loans, net $129,147 100.00% $118,225 100.00% $88,126 100.00%
======== ========= ========= ======== ======== ========
</TABLE>
The following table shows, as of December 31, 1995, information concerning the
Bank's construction loans, commercial mortgage, commercial business and
construction loans. All of these loans have adjustable rates of
5
<PAGE>
interest except for those with remaining maturities in excess of 5 years.
(dollars in thousands)
<TABLE>
<CAPTION>
One year or After One But Within Over Five
Less Five Years Years Total
--------------- ---------------------- ----------- -------------
<S> <C> <C> <C> <C>
Residential construction $ 34,021 $ - $ - $ 34,021
Commercial mortgage 26,258 2,030 372 28,660
Commercial construction 5,446 101 - 5,547
Commercial business 7,195 - - 7,195
--------------- ---------------------- ----------- -------------
$ 72,920 $ 2,131 $ 372 $ 75,423
=============== ====================== =========== =============
</TABLE>
RESIDENTIAL REAL ESTATE LENDING. The Bank makes conventional mortgage loans
to single family residential properties with original loan-to-value ratios up to
80% of the appraised value of the property securing the loan. These residential
properties serve as the primary or secondary homes of the borrowers. The Bank
also originates loans on one to four family dwellings and loans for the
construction of residential housing for owner occupying borrowers, also with
original loan-to-value ratios up to 80% of the property's appraised value.
Residential mortgage loans made by the Bank have traditionally been long-term
loans made for periods of up to 30 years at either fixed or adjustable rates of
interest. It has generally been the Bank's policy, since 1987, to sell
virtually all of its longer term (greater than 10 years) fixed rate loans and a
portion of its adjustable rate loans. A portion of adjustable rate loans are
retained in portfolio. The ALCO reviews this policy from time to time as part
of the Bank's overall asset/liability management program. During 1994
approximately $10 million of fixed rate loans were retained in portfolio. The
amount of fixed rate loans retained in portfolio in 1995 was not significant.
The Bank currently sells loans to the Federal Home Loan Mortgage Company
("FHLMC") and other financial institutions, while retaining the servicing
rights. At December 31, 1995 the Bank was servicing $64.3 million of loans for
others
Under a program that has been in existence since 1993, the Bank offers loans
on one to four family primary dwellings for first time home buyers with original
loan to value ratios up to 90%. These loans are made for periods up to 30 years
for existing dwellings and up to 31 years for the construction of a primary
dwelling. Residential construction loans require monthly interest payments
during construction and begin to amortize after the construction phase has been
completed, at which time they automatically convert into permanent mortgage
loans.
All long-term fixed rate loans are originated using underwriting standards and
standard documentation allowing their sale to FHLMC. The Bank also has a
program, begun in 1993, offering jumbo fixed rate mortgages. These loans are
originated using underwriting standards and documentation allowing their sale to
the Residential Funding Company ("RFC").
The Bank originates adjustable rate residential mortgage loans which have
various rate adjustment features including, in some cases, limitations on the
amount of the adjustment of 2.0% per adjustment and 6.0% over the life of the
loan, and on the periods within which the adjustments may be made. Currently,
the Bank offers residential mortgage loans with a one year adjustment period.
The Bank also offers loans on which the rate is fixed for an initial three or
five year period, after which the rate adjusts on an annual basis. Rate
adjustments on residential mortgage loans are tied to the weekly average yield
on U.S. Treasury securities adjusted to constant maturities of one year.
Despite the benefits of adjustable rate mortgage loans to the Bank's
asset/liability management program, they do pose potential additional risks,
primarily because as interest rates rise, the underlying payments by the
borrowers rise, increasing the potential for default, while at the same time the
marketability of the underlying property may be adversely affected by higher
interest rates. The history of the one year Treasury bill index, as of the last
business day of each year for the last three years, shows that this index has
fluctuated from 3.55% in 1993 to 7.22% in 1994 and 5.21% in 1995.
6
<PAGE>
The Bank may at times offer adjustable rate mortgage loans with an initial
discount, as is customary in the marketplace. This pricing decision is based on
management's decision to remain competitive while at the same time assuring
prudent underwriting guidelines. In this respect, the Bank underwrites loans as
if fully indexed, or within maximum limitations established in secondary market
guidelines, with a view toward minimizing potential losses resulting from
increased costs to the borrowers.
Construction loans on residential properties are made to individuals for the
construction of their primary or secondary homes. Construction loans are made
for up to 80% of the appraised value of the property upon completion.
Construction loan funds are periodically disbursed as pre-specified stages of
construction are attained. Residential construction loans, which are typically
made for a period of 30 years, require monthly interest payments during
construction and begin to amortize after the construction phase has been
completed, at which time they automatically convert into permanent mortgage
loans.
COMMERCIAL REAL ESTATE LENDING. The Bank originates permanent and
construction loans on commercial real estate. These loans consist of mortgages
primarily on investment properties and properties utilized by retail and small
service businesses such as restaurants, guest houses and various retail
properties. Due to the factors noted in "The Bank" above there has been a high
level of construction on Nantucket. During 1995 most of the increase in the
Bank's commercial real estate lending was for construction lending. Commercial
construction loans, before deducting unadvanced funds, totaled $5.5 million at
December 31, 1995 compared to $1.1 million at December 31, 1994, an increase of
$4.4 million, or almost 400%. After deducting unadvanced funds these loans
totaled $1.2 million at December 31, 1995 compared to $910,000 at the end of the
prior year. Since 1990 the Bank has limited it's lending for speculative real
estate ventures. Most of the commercial construction loans granted during 1995
were made to existing businesses for expansion or improvement of their operating
facilities. The Bank's policy is to limit the combined total of commercial real
estate and commercial business loans to 45% of the total loan portfolio. At
December 31, 1995 these loans totaled 28.1% of the Bank's loan portfolio as
compared to 28.5% at the end of 1994..
During 1995, most commercial real estate loans were granted for up to 75% of
the appraised value of the property and few individual commercial business loans
were granted over $500,000. Most of these loans were for terms from 6 months to
20 years at interest rates adjustable annually at the Bank's sole discretion, or
to a specific spread over the Bank's base rate, or other rate indicators such as
the prime rate published in the Wall Street Journal. This policy has enabled
the Bank to adjust the interest rate yield on the commercial real estate
portfolio to compensate for changes in costs of funds, credit risk and balance
relationships maintained by the borrowers. The periodic adjustable rate feature
of this portfolio can enhance the Bank's liquidity by sale of these loans to
participants when deemed advisable. Protection of the Bank's interest in the
real estate collateral is covered by use of title, fire, casualty and flood
insurance in applicable amounts.
Commercial real estate lending may entail significant additional risks
compared to residential mortgage lending. Loan size typically may be larger.
Payment experience on such loans can be more easily influenced by adverse
conditions in the real estate market or in the economy generally. Construction
financing involves a higher degree of risk of loss than long term financing on
improved occupied real estate. Property values at completion of construction or
development can be influenced by underestimation of the construction costs that
are actually expended in order to complete the project. Thus the Bank may be
required to advance funds beyond the original commitment in order to finish the
development. If projected cash flows or values of the property prove to be
inaccurate because of unprojected additional cost or slow unit sales, the
project may have a value which is insufficient to assure full repayment.
Construction loans on commercial properties are extended primarily to
unincorporated small business borrowers or to their companies, partnerships,
trusts or other business entities formed to hold title to the business property.
Such loans are made for periods up to 21 years with interest only during the
construction period of usually nine months, and regular amortization thereafter.
Funds are disbursed as prespecified stages of construction are completed.
7
<PAGE>
COMMERCIAL BUSINESS LOANS. The Bank continues to offer a wide variety of
commercial loan services, including short and long term business loans, lines of
credit and letters of credit. The principal market for these loans is small to
medium size businesses in the Bank's primary market area.
Most commercial business loans are written generally for terms of 30 to 180
days or under one year as a line of credit. Longer term commercial business
loans are granted up to five years and are subject to daily or monthly rate
adjustments based on the Bank's base rate. These interest rate sensitive loans
allow the Bank to maintain an interest rate spread over its cost of funds. The
Bank's "base rate" is adjusted (as necessary) to reflect the cost of funds based
on local or national money market conditions. The interest rate paid by
individual customers over the base rate is determined by the lenders and Bank
management after consideration of the degree of credit risk, term of the loan,
the borrower's overall relationships, the size of the loan and other pertinent
criteria. These loans may be advanced on an unsecured basis or may be secured
by real estate, inventory or other business assets. Loans to commercial
businesses may entail significant additional risks compared to residential
mortgage lending. These loans are subject to changes in the local and regional
economy as well as changes in particular industries and lines of business.
Analyzing the unique factors and risks affecting each business requires
expertise and experience which is different from that needed for loans secured
by real estate.
Commercial business loans are becoming an increasingly important product to
include in tailoring financial packages for the needs of local small businesses.
An aggressive calling program for commercial borrowers has developed new
customer relationships through use of this product for equipment purchases and
other intermediate term needs. Frequently, the arrangement involves both
business services and consumer products, particularly residential real estate
loans. Commercial business loans represented 5.57% of the total loan portfolio
at December 31, 1995 compared to 5.12% of the loan portfolio at December 31,
1994. No commercial business loans were charged off in 1995 compared to $25,000
in 1994 and $187,000 in 1993.
CONSUMER LOANS. The Bank originates a wide variety of consumer loans,
including second mortgage loans, home equity loans, automobile loans, secured
and unsecured personal loans and boat loans. These loans are made at both fixed
and adjustable rates of interest. They vary in terms depending on the type of
the loan. Second mortgage loans have terms of up to 15 years, and provide for
annual interest rate adjustments, while other consumer loans have shorter terms
and/or fixed rates of interest.
At December 31, 1995, second mortgages and home equity loans accounted for 61%
of the Bank's consumer loan portfolio. The Bank's overall consumer loan
portfolio increased $1.6 million, or 32.9%, to $6.5 million at December 31, 1995
from $4.9 million at December 31, 1994.
LOAN SOLICITATION AND PROCESSING. Loan originations come from a number of
sources. Most real estate loans are attributable to walk-in customers, existing
customers, real estate brokers and referrals from builders. Consumer loans
result from walk-in customers and depositors. The Bank obtains commercial
business loans through officer calls, existing customers and business
relationships and referrals.
Each loan originated by the Bank is underwritten by personnel of the Bank,
with individual lending officers, a committee of loan officers and the Bank's
Executive Committee having the authority to approve loans up to various limits.
Applications are received in each of the offices of the Bank. Independent
appraisers are used to appraise the property intended to secure real estate
loans. The Bank's underwriting criteria are designed to minimize the risks of
each loan. There are detailed guidelines concerning the types of loans that may
be made, the nature of the collateral required, the information that must be
obtained concerning the loan applicant and follow-up inspections of collateral
after the loan is made.
ALLOWANCE FOR POSSIBLE LOAN LOSSES. The Bank maintains an allowance for
possible loan losses. The allowance is increased by provisions charged to
operations based on amounts considered necessary to meet reasonably foreseeable
losses. Realized losses, net of recoveries, are charged to the allowance.
Management considers many factors when establishing the allowance for possible
loan losses, including such factors as the size and risk characteristic of the
loans in the Bank's portfolio, charge-off experience, loan delinquency trends,
the value of collateral securing loans in the portfolio, future loss potential,
concentration of credit and present and
8
<PAGE>
prospective economic and market conditions. Management presents its analysis
and recommends the amount of loan loss reserves to be maintained to the Board of
Directors each month for its review and approval. No such provisions have been
required during fiscal 1995, 1994 or 1993. Loan loss reserves at December 31,
1995 were 1.72% of total loans. There were no non-performing loans at December
31, 1995. The allowance for loan losses at December 31,1995 was $2.2 million,
representing a net increase of $95,000 from December 31, 1994 due to net
recoveries. During 1994 the Bank had net recoveries of $61,000 and in 1993 had
net charge-offs of ($143,000). The ratio of these net recoveries and charge-offs
to average loans outstanding during the period was .08% in 1995, .06% in 1994
and (.19%) in 1993. The Bank believes its current level of loan loss reserves to
be adequate. Any unforeseen future economic problems, however, may lead to
additional delinquencies which may require additional provisions for possible
loan losses.
For additional information see Note 4 of Notes to Consolidated Financial
Statements in the 1995 Annual Report to Stockholders
INCOME FROM LENDING ACTIVITIES. Interest rates charged by the Bank on its
loans are primarily determined by competitive loan rates offered in its lending
area. These rates generally reflect prevailing interest rates, the availability
of funds to lend, the demand for loans and the Bank's strategic plans and
goals.
In addition to interest earned on loans, the Bank receives loan origination
fees for originating real estate loans. Loan origination fees are a percentage
of the principal amount of the loan and are charged to the borrower for the
creation of the loan. Currently, the Bank generally charges fees of up to 1% on
permanent residential mortgage loans (2% is charged on certain residential
loans), 1/2% to 1% on residential construction loans and 1% to 1 1/2% on
commercial real estate loans. For accounting purposes, the Bank defers loan
origination fees net of direct underwriting costs and amortizes the balance over
the life of the loans. On loans written at a discounted initial rate, net
origination fees are amortized over the period of discount. At December 31,
1995, the Bank had $427,000 in deferred loan origination fees.
For information regarding the accounting for loan origination fees and costs,
see Note 1 to Notes to Consolidated Financial Statements in the 1995 Annual
Report to Stockholders.
The Bank also receives other fees and charges relating to loans, which include
loan application fees, late payment charges and fees collected in connection
with loan modifications. These fees and charges do not constitute a material
source of income for the Bank.
INVESTMENT ACTIVITIES
---------------------
Interest income from short-term investments (consisting of federal funds sold
and interest bearing deposits in banks) and investment securities provides an
additional significant source of income for the Bank. The Bank's securities
portfolio consists mainly of United States Government and agency obligations,
short-term corporate bonds, notes and debentures and state and municipal
obligations and a portfolio of approximately $8.7 million of mortgage backed
securities. From time to time the Bank may invest in equity securities of
various corporations and other issuers. It is the Bank's current policy to
limit to 7.5% of its investment portfolio the amount invested in equity
securities and to avoid concentration of equity investments in any one industry.
At December 31, 1995, the securities portfolio, excluding FHLB stock and short
term investments, totaled $26.0 million, representing 15.6% of the Company's
total assets at that date, compared to $29.8 million, or 18.4% of assets at
December 31, 1994. The securities portfolio is classified into available for
sale and held to maturity categories in accordance with the requirements of SFAS
No. 115 "Accounting for Certain Investments in Debt and Equity Securities." At
December 31, 1995 approximately 30% of the securities portfolio has been
classified as available for sale. For additional information, see Notes 2 and 3
of Notes to Consolidated Financial Statements in the 1995 Annual Report to
Stockholders.
The Company's primary objective with respect to its securities portfolio is
the generation of maximum earnings, consistent with prudent consideration for
risk, maturity, liquidity and overall diversification. The Bank's President and
Chief Financial Officer are generally charged with executing the Bank's
investment policy on a daily basis.
9
<PAGE>
They have discretion generally to buy and sell securities within the guidelines
of the current plan. All transactions outside of the scope of the current plan
must be discussed with and approved by the Bank's Executive Committee. All funds
not needed to meet the daily investment requirements are invested in either
federal funds or money market instruments. All transactions are ratified by the
Bank's Board of Directors. At December 31, 1995 all of the Company's securities
are held by the Bank.
The amortized cost, market values and weighted average yields of the following
securities portfolios by maturity (excluding FHLB stock, federal funds sold and
interest bearing deposits) were as follows.
<TABLE>
<CAPTION>
(dollars in thousands) December 31, 1995
----------------------------------------------
Weighted
Amortized Market Average
Cost Value Yield
--------- ---------- ---------
<S> <C> <C> <C>
SECURITIES AVAILABLE FOR SALE
U.S. Government and agency obligations,
maturing
Within 1 year $ 1,106 $ 1,113 6.86%
After 1 year but within 5 years 3,545 3,533 5.69%
After 5 years but within 10 years 250 249 6.31%
State and municipal obligations,
maturing
After 1 year but within 5 years 807 807 3.80%
Other bonds and notes, maturing
After 1 year but within 5 years 1,861 1,880 6.20%
Marketable equity securities 112 113 5.90%
--------- ----------
Total securities available for sale 7,681 $ 7,695 5.81%
========= ========== =========
SECURITIES HELD TO MATURITY
U.S. Government and agency obligations,
maturing
Within 1 year $ 488 $ 499 8.00%
After 1 year but within 5 years 2,789 2,768 5.32%
After 5 years but within 10 years 251 254 8.10%
State and municipal obligations,
maturing
Within 1 year 131 131 3.10%
After 1 year but within 5 years 576 571 3.46%
Other bonds and notes, maturing
After 1 year but within 5 years 980 977 4.68%
After 1 year but within 5 years 4,316 4,308 5.67%
After 5 years but within 10 years 100 101 7.80%
Mortgage backed securities, maturing
After 1 year but within 5 years 6,791 6,636 6.37%
After 5 years but within 10 years 1,726 1,663 5.50%
After 10 years 182 181 6.00%
--------- ----------
Total securities held to maturity $18,330 $18,089 5.86%
========= ========== =========
<CAPTION>
(dollars in thousands) December 31, 1994
----------------------------------------------
Weighted
Amortized Market Average
Cost Value Yield
--------- ---------- ---------
<S> <C> <C> <C>
SECURITIES AVAILABLE FOR SALE
U.S. Government and agency obligations,
maturing
After 1 year but within 5 years $ 1,470 $ 1,420 5.17%
Other bonds and notes, maturing
</TABLE>
10
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
After 10 years 101 100 7.80%
Marketable equity securities 112 99 7.90%
--------- ---------- ---------
Total securities available for sale $ 1,683 $ 1,619 5.51%
========= ========= ========
SECURITIES HELD TO MATURITY
U.S. Government and agency obligations,
maturing
Within 1 year $ 801 $ 790 2.87%
After 1 year but within 5 years 4,755 4,553 5.01%
After 5 years but within 10 years 3,112 2,910 6.60%
State and municipal obligations,
maturing
Within 1 year 616 612 2.97%
After 1 year but within 5 years 863 827 3.50%
Other bonds and notes, maturing
Within 1 year 717 716 5.91%
After 1 year but within 5 years 5,804 5,596 5.36%
After 5 years but within 10 years 1,091 1,049 5.86%
After 10 years 190 186 7.01%
Mortgage backed securities, maturing
After 1 year but within 5 years 793 727 6.50%
After 5 years but within 10 years 9,207 8,350 6.00%
After 10 years 203 189 6.00%
--------- ---------
Total securities held to maturity $28,152 $26,505 5.47%
========= ========= =========
</TABLE>
SOURCES OF FUNDS
- ----------------------------------------
GENERAL. Savings accounts and other types of deposits have historically
constituted the primary source of funds for the Bank's lending and investment
activities, as well as for other general business purposes. In addition to
deposits, the Bank derives funds from FHLB borrowings, scheduled loan
repayments, loan prepayments and loan sales. The availability of funds is
influenced by general interest rates and other market conditions. Scheduled
loan repayments are a relatively stable source of funds while deposit inflows
and outflows and loan prepayments vary widely and are influenced by prevailing
interest rates and money market conditions. Dividends from the Bank represent
the only source of liquidity for the Company.
DEPOSITS. The Bank offers a broad selection of deposit instruments to the
general public, including NOW accounts, high yield NOW accounts, regular savings
accounts, money market deposit accounts, fixed and variable rate time accounts,
IRA and Keogh retirement accounts, commercial checking accounts and 90 day
special notice accounts. On occasion, the Bank acquires brokered deposits. At
December 31, 1995, the Bank's brokered deposits totaled $4.8 million or 4.2% of
its total deposits. The Bank generally does not accept new money from brokers,
allowing only rollovers or replacement at the time of maturity. If necessary,
the Bank expects that it would replace these deposits through normal deposit
growth and available borrowings. The Bank does not use premiums to attract
deposits, although from time to time it will offer specially designated products
in order to attract deposits with longer maturities.
The Bank's management determines the interest rates offered on deposit
accounts based on economic conditions, U.S. Government treasury rates,
competition, the maturity of the Bank's assets and liabilities, liquidity needs,
the volatility of the existing deposits and the overall objectives of the Bank
regarding the growth of deposits.
The table below shows the composition of the Bank's deposits as of the dates
indicated. Interest rates have been annualized to reflect average rates paid
during the year. The annualized average rate on total deposits reflects only
interest bearing deposits.
<TABLE>
<CAPTION>
At December 31,
-----------------------------------------------------------------------------------------------
1995 1994 1993
------------------------------- ------------------------------- ----------------------------
<S> <C> <C>
</TABLE>
11
<PAGE>
<TABLE>
<CAPTION>
(dollars in thousands)
Annualized Annualized Annualized
% of Average % of Average % of Average
Amount Deposits Rate Amount Deposits Rate Amount Deposits Rate
-------- --------- ----------- ------- --------- ----------- -------- --------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Demand $ 7,352 6.43% 0.00% $ 7,166 6.87% 0.00% $ 4,467 4.83% 0.00%
-------- --------- --------- -------- --------- ----------- -------- --------- -----------
Savings accounts
Regular, 90 day notice and
advance payments 13,305 11.63% 2.82% 12,626 12.09% 2.62% 11,834 12.79% 2.62%
NOW 25,212 22.05% 1.35% 20,070 19.23% 1.39% 16,592 17.92% 1.92%
Money market 17,985 15.73% 3.23% 19,696 18.87% 2.70% 16,814 18.17% 2.99%
-------- --------- ----------- ------- --------- ----------- -------- --------- -----------
Total savings accounts 56,502 49.41% 2.29% 52,392 50.19% 2.17% 45,240 48.88% 2.53%
Time deposits 50,503 44.16% 5.32% 44,828 42.94% 4.25% 42,854 46.29% 3.71%
-------- --------- ----------- ------- --------- ----------- -------- --------- -----------
Total deposits $114,357 100.00% 3.72% $104,386 100.00% 3.13% $92,561 100.00% 3.39%
======== ========= =========== ======== ========== ========== ========= ========= ===========
</TABLE>
The following tables show the weighted average rate and maturity information
for the Bank's certificates of deposit as of December 31, 1995.
Certificates of deposit with balances under $100,000:
<TABLE>
<CAPTION>
Deposits Maturing During the Period Ended
-------------------------------------------------------------------------------
(dollars in thousands) 3/31/96 6/30/96 12/31/96 12/31/97 12/31/98 12/31/00 Total
----------- --------- ---------- ---------- ---------- ---------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Certificate of deposit $ 10,009 $ 5,221 $ 4,609 $ 7,455 $ 1,777 $ 886 $29,957
Weighted average rates 4.83% 5.23% 5.48% 5.97% 5.89% 6.32% 5.39%
Certificates of deposit with balances
over $100,000:
Deposits Maturing During the Period Ended
-------------------------------------------------------------------------------
(dollars in thousands) 3/31/96 6/30/96 12/31/96 12/31/97 12/31/98 12/31/00 Total
----------- --------- ---------- ---------- ---------- ---------- -------
Certificate of deposit $ 9,285 $ 4,839 $ 4,508 $ 1,243 $ 310 $ 361 $20,546
Weighted average rates 4.63% 4.90% 5.60% 6.20% 5.92% 6.61% 5.06%
</TABLE>
BORROWINGS. The Bank is a member of the FHLB. This membership enables the
Bank to borrow from the FHLB, which helps address the inherent problem on
Nantucket Island of a deposit base which is unable to fund loan demand. The
Bank generally structures these borrowings, in conjunction with its deposits, to
match the average expected life of the loans which it retains in portfolio or
the securities portfolio. FHLB advances totaled $32.8 million at year end 1995
versus $33.1 million at year end 1994. The maximum borrowings during 1995 and
1994 were $44.0 million and $34.2 million, respectively.
See Note 7 to Notes to the Consolidated Financial Statements in the 1995
Annual Report to Stockholders.
SUBSIDIARIES OF THE BANK
------------------------
The Bank has one subsidiary, N.B. Securities, Inc., which has been classified
as a securities corporation under the laws of the Commonwealth of Massachusetts
to take advantage of the tax benefits available to such corporations.
DIVIDEND POLICY
---------------
The Company's Board of Directors meets quarterly to discuss the payment of
dividends. Many factors such as earnings, the economy, quality of assets, loan
loss reserves and capital are reviewed. After due consideration, the
12
<PAGE>
Board may vote to pay either the same dividend as the previous quarter,
or to increase, decrease or omit the dividend.
INTEREST SENSITIVITY ANALYSIS
-----------------------------
Due to the possible extreme volatility of interest rates, managing interest
rate risk is important in determining the profitability of the Bank. Interest
rate risk arises when an asset matures or when its rate of interest changes in a
time frame that is different from that of the underlying liability. The
difference between assets subject to rate change over the same period is called
interest rate sensitivity GAP. The Bank's objective in its Asset/Liability
management program is to manage liquidity and interest rate risk so as to
maximize net interest income and return on capital in a changing interest rate
environment. The Bank's Asset/Liability Committee ("ALCO") primarily utilizes
"GAP" analysis to measure risk. GAP is the difference between assets and
liabilities subject to rate change over specific time periods. A GAP is
considered positive when the amount of interest rate sensitive assets exceeds
the amount of interest rate sensitive liabilities. A GAP is considered negative
when interest rate sensitive liabilities exceed interest rate sensitive assets.
During a year of falling interest rates a negative one-year GAP position would
tend to increase income because there are more liabilities than assets adjusting
down in rate during the year, accordingly, the decrease in the cost of
liabilities exceeds the decrease in the yield on assets. Conversely, in a
period of rising rates a negative GAP would tend to decrease income. Companies
in a positive GAP position would face the opposite situation. There are
limitations to GAP analysis, however, as rates on different assets and
liabilities may not move to the same extent in any given time period.
Competition may affect the ability of the Bank to change rates on a particular
deposit or loan
The following table displays the distribution of the Company's interest-
earning assets and interest-bearing liabilities maturing or repricing over
various time periods. The amounts of asset or liability in each time period was
determined by the contractual terms of the asset or liability. The table does
not reflect prepayment of fixed rate loans or mortgage backed securities prior
to maturity. The Bank's experience indicates that mortgage loans remain
outstanding for significantly shorter periods than the stated term because of
prepayments in connection with the refinancing or sale of the property. Based
upon experience, prepayments will tend to be slower during periods of rising
interest rates and accelerate as rates fall. Any prepayments of loans would
decrease the negative one year GAP position. Loans held for sale are included
based on their contractual maturity/repricing date. Second mortgages and equity
lines of credit are included as adjustable rate mortgage loans. Core deposit
accounts are included in the zero to six month repricing category based on their
contractual terms although these accounts have not been as sensitive to changes
in market interest rates over the past several years.
<TABLE>
<CAPTION>
(dollars in thousands) 0-6 6-12 1-2 2-3 3-5 5-10 Over 10
Months Months Years Years Years Years Years Total
----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest Sensitive Assets
Adjustable rate mortgage loans $ 58,465 $ 26,159 $ 7,545 $ 1,839 $ 9,440 $ 1,765 $ - $105,213
Fixed rate mortgage loans 865 939 5 2 188 3,655 10,788 16,442
Commercial and all other loans 7,654 470 540 483 584 10 - 9,741
----------------------------------------------------------------------------------------
Total loans 66,984 27,568 8,090 2,324 10,212 5,430 10,788 131,396
Securities and short term investments 2,362 2,205 6,371 4,961 9,353 2,227 282 27,761
----------------------------------------------------------------------------------------
Total $ 69,346 $ 29,773 $ 14,461 $ 7,285 $19,565 $ 7,657 $11,070 $159,157
----------------------------------------------------------------------------------------
</TABLE>
13
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest Sensitive Liabilities
Transaction Deposits $ 56,502 $ - $ - $ - $ - $ - $ - $ 56,502
Time Deposits 29,354 9,117 8,698 2,087 1,247 - - 50,503
Borrowings 16,500 2,000 5,400 4,384 4,553 - - 32,837
----------------------------------------------------------------------------------------
Total $102,356 $ 11,117 $ 14,098 $ 6,471 $ 5,800 - - $139,842
----------------------------------------------------------------------------------------
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C>
Excess (deficiency) of interest
sensitive assets over interest
sensitive liabilities ("GAP") $(33,010) $ 18,656 $ 363 $ 814 $13,765 $ 7,657 $11,070
Cumulative GAP $(33,010) $(14,354) $(13,991) $(13,177) $ 588 $ 8,245 $19,315
Cumulative interest sensitive assets as
a percent of cumulative interest
sensitive liabilities 67.75% 87.35% 89.03% 90.17% 100.42% 105.90% 113.81%
=============================================================================
Cumulative excess (deficiency) of
interest sensitive assets over
interest sensitive liabilities
as a percent of total assets (19.73%) (8.58%) (8.36%) (7.88%) 0.35% 4.93% 11.55%
=============================================================================
</TABLE>
Management of the Bank considers regular savings accounts, although subject to
immediate withdrawal, to have significantly longer effective maturities. Had
these accounts been subject to repricing in more than 10 years, the effect of
that change on excess (deficiency) of interest sensitive assets over interest
sensitive liabilities ("GAP"), cumulative GAP, cumulative interest sensitive
assets as a percentage of cumulative interest sensitive liabilities and
cumulative excess (deficiency) of interest sensitive assets over interest
sensitive liabilities as a percentage of total assets would have been as
follows:
<TABLE>
0-6 6-12 1-2 2-3 3-5 5-10 Over 10
Months Months Years Years Years Years Years
------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Excess (deficiency) of interest
sensitive assets over interest
sensitive liabilities ("GAP") $(19,912) $18,656 $ 363 $ 814 $13,765 $ 7,657 $(2,028)
Cumulative GAP $(19,912) $(1,256) $ (893) $ (79) $13,686 $21,343 $19,315
Cumulat ive interest sensitive assets as
a percent of cumulative interest
sensitive liabilities 77.69% 98.75% 99.22% 99.93% 110.80% 116.84% 113.81%
========================================================================
Cumulative excess (deficiency) of
interest sensitive assets over
interest sensitive liabilities
as a percent of total assets (11.90%) (0.75%) (0.53%) (0.05%) 8.18% 12.76% 11.55%
========================================================================
</TABLE>
SUPERVISION, REGULATION AND OPERATING POWERS
--------------------------------------------
GENERAL. The Company and the Bank are extensively regulated under federal and
state law. To the extent that the following information describes statutory or
regulatory provisions, it is qualified in its entirety by reference to the
particular statutory and regulatory provisions. Any change in applicable law or
regulation may have a material effect on the business and prospects of the Bank
and the Company. In addition, the Company, as a Delaware Corporation, is
subject to regulation by the Secretary of the State of Delaware and the rights
of its stockholders are governed by the General Corporation Law of the State of
Delaware.
THE COMPANY
14
<PAGE>
FEDERAL BANK HOLDING COMPANY ACT REGULATION. On August 30, 1988, the Company,
pursuant to approval received from the Board of Governors of the Federal Reserve
Board System ("FRB"), became a registered bank holding company. As a result,
its activities are subject to certain limitations, which are described below,
and transactions between the Bank and the Company or its other affiliates are
also subject to certain restrictions.
Under the Bank Holding Company Act, a bank holding company must obtain FRB
approval before it acquires direct or indirect ownership or control of any
voting shares of any bank if, after such acquisition, it will own or control
directly or indirectly more than 5% of the voting stock of such bank, unless it
already owns a majority of the voting stock of such bank. FRB approval must
also be obtained before a bank holding company acquires all or substantially all
of the assets of a bank or merges or consolidates with another bank holding
company. Any acquisition, directly or indirectly, by a bank holding company or
its subsidiaries of any voting shares of, or interest in, or all or
substantially all, of the assets of any bank located outside of the state in
which the operations of the bank holding company's banking subsidiaries are
principally conducted, may not be approved by the FRB unless the laws of the
state in which the bank to be acquired is located specifically, authorizes such
an acquisition.
The Bank Holding Company Act and regulations adopted thereunder limit the
activities of a bank holding company and its subsidiaries to the business of
banking or of managing or controlling banks, and to such other activities as the
FRB may determine to be so closely related to banking as to be a proper incident
thereto. The activities of the Company and its non-bank subsidiaries are
subject to these legal and regulatory limitations under the Bank Holding Company
Act and the FRB's regulations thereunder.
In addition to the statutory and regulatory restrictions on the non-bank
activities of the Company, the FRB has taken the position that it has the
authority, under its general supervisory authority over bank holding companies
and their subsidiaries, to prevent activities of a bank holding company's
subsidiaries that the FRB regards as unsafe or unsound, or to require a bank
holding company to maintain a higher level of capital to support such
activities. In this connection, the FRB has expressed serious reservations
about applications by bank holding companies to acquire savings banks that are
engaged directly or through subsidiaries in real estate development activities.
As a result of the FRB's concern with respect to such activities, the Company
was required to make the following commitments to the FRB in order to gain
approval of its application to acquire the Bank:
(1) The Company will maintain a minimum consolidated ratio of tangible
primary capital (calculated pursuant to the FRB's former capital adequacy
guidelines) to total assets of 7% after deducting from both capital and assets
the total amount of investments by the Bank in real estate development projects;
(2) The Bank will maintain a minimum ratio of tangible primary capital to
total assets of 5.5% after deducting for real estate investments as in
commitment (1); and
(3) The Company will comply with the final results of any rule-making
proceedings of the FRB regarding real estate investments by bank holding
companies within a reasonable period of time after those results are announced.
These above commitments remain in effect. The Company and the Bank were in
compliance with these requirements as of December 31, 1995 with a minimum ratio
of tangible primary capital to total assets of 10.99% after deducting for real
estate investments as described in commitment (1), above, which were zero at
December 31, 1995.
The affiliate transaction restrictions contained in Sections 23A and 23B of
the Federal Reserve Act apply to transactions between the Bank and the Company
or the Bank's other affiliates. Generally, Sections 23A and 23B (i) limit the
extent to which a bank or its subsidiaries may engage in certain covered
transactions with an affiliate to an amount equal to ten percent of such bank's
capital and surplus, and contain an aggregate limit on all such transactions
with all affiliates to an amount equal to twenty percent of such capital and
surplus, (ii) impose specific collateral requirements with respect to extensions
of credit to affiliates and (iii) require that all such transactions be on terms
substantially the same, or at least as favorable to the bank or subsidiary, as
those provided to a non-affiliate. A bank holding company and its subsidiaries,
as well as any company under common control with a bank, are considered
"affiliates" of the bank under Sections 23A and 23B. Subsidiaries of a bank are
excluded from the
15
<PAGE>
definition of "affiliate," and a bank under common control of a bank
holding company is exempted from the percentage-of-capital limitations
imposed by Section 23A. The term "covered transaction" includes the extension
of loans, purchase of assets, issuance of guarantees and similar types of
transactions. The restrictions imposed by Sections 23A and 23B do not have a
significant effect on the operations of the Company or the Bank.
The FRB has adopted risk-based capital guidelines which apply to all U.S. bank
holding companies with consolidated assets of $150 million or more and to bank
holding companies with consolidated assets of less than $150 million that (i)
are engaged in non-bank activity involving significant leverage or (ii) have a
significant amount of debt held by the general public. The FRB's risk-based
capital guidelines require all covered U.S. bank holding companies to maintain a
minimum risk-based capital ratio of 8.0% (of which at least 4.0% must be "Tier 1
capital" which consists of common stockholder's equity and non-cumulative
perpetual preferred stock). The resulting capital ratios represent equity and
non-equity capital as a percentage of total risk-weighted assets and off-balance
sheet items. The Company is in compliance with these risk-based capital
guidelines.
In addition, the FRB has adopted leverage capital requirements for bank
holding companies, which apply to all U.S. bank holding companies with
consolidated assets of $150 million or more and to bank holding companies with
consolidated assets of less than $150 million that (i) are engaged in non-bank
activity involving significant leverage or (ii) have a significant amount of
debt held by the general public. The FRB's leverage capital guidelines require
covered bank holding companies to maintain a minimum leverage ratio of 3.0%. FRB
guidelines state that only the strongest bank holding companies with composite
examination ratios of one under the rating system used by the federal bank
regulators would be permitted to operate at or near such minimum level of
capital. All other bank holding companies will be expected to maintain an
additional cushion of at least 1% to 2% above the minimum ratio, depending on
the assessment of an individual organization's capital adequacy by the FRB. Any
bank or bank holding company experiencing or anticipating significant growth
would be expected to maintain capital well above the minimum levels. The Bank
is in compliance with these Tier 1 leverage capital guidelines.
In addition, FRB policy requires that a bank holding company should serve as a
source of financial strength to its subsidiary banks by standing ready to use
available resources to provide adequate capital funds to those banks during
periods of financial stress or adversity. This policy could, under certain
circumstances, impair the ability of the Company to pay dividends on it's Common
Stock.
As a bank holding company, the Company is required to give the FRB prior
written notice of any purchase or redemption of its outstanding equity
securities if the gross consideration for the purchase or redemption, when
combined with the net consideration paid for all such purchases or redemptions
during the preceding 12 months, is equal to 10% or more of the Company's
consolidated net worth. The FRB may disapprove such a purchase or redemption if
it determines that the proposal would violate any law, regulation, FRB order,
directive, or any condition imposed by, or written agreement with, the FRB.
MASSACHUSETTS BANK HOLDING COMPANY REGULATION. The Company will not be a bank
holding company under Massachusetts law until it controls two or more banks.
However, the activities of the Company are limited by the Commissioner of Banks
("Commissioner") to activities which would be proper activities for a bank
holding company registered under the Federal Bank Holding Company Act, provided
that the Company may conduct through the Bank or its subsidiaries those
activities permitted by Massachusetts law for savings banks and their
subsidiaries.
In addition, the acquisition by the Company of 25% or more of the voting
stock, or the power to elect a majority of the directors, of another savings
bank, co-operative bank, savings and loan association or commercial bank would
subject the Company to regulation as a bank holding company under applicable
Massachusetts law and would require the approval of the Massachusetts Board of
Bank Incorporation.
STATE CORPORATE LAWS. The Company was incorporated in 1987 as a Corporation
under the laws of the State of Delaware. Thus, the Company is subject to
regulation by the Secretary of State of Delaware and the rights of its
stockholders are governed by the General Corporation Law of the State of
Delaware.
16
<PAGE>
THE BANK
MASSACHUSETTS BANKING LAWS AND SUPERVISION. Massachusetts chartered savings
banks such as the Bank are regulated and supervised by the Commissioner. The
Commissioner is required to examine each state-chartered bank at least once
every two years. The approval of the Commissioner is required to establish or
close branches, merge with other banks, form a bank holding company and
undertake many other activities.
Any Massachusetts bank that does not operate in accordance with the
regulations, policies and directives of the Commissioner may be subject to
sanctions for non-compliance. The Commissioner may under certain circumstances
suspend or remove trustees, directors or officers who have violated the law,
conducted the bank's business in a manner which is unsafe, unsound or contrary
to the depositors' interests, or been negligent in the performance of their
duties.
DEPOSIT INSURANCE. The Bank's deposit accounts are insured by the Bank
Insurance Fund of the FDIC to a maximum of $100,000 per separately insured
account, and deposits in excess of that amount in each separately insured
account are insured by the Depositors Insurance Fund.
Pursuant to section 7 of the Federal Deposit Insurance Act (12 USC 1817), as
amended, the FDIC has incorporated a risk based deposit insurance assessment
which was effective as of January 1, 1993. Under this risk based system, the
assessment rate for an insured depository depends on the assessment risk
determined by the institutions capital level and supervisory evaluations.
Institutions are assigned to one of three capital groups - well capitalized,
adequately capitalized or undercapitalized. The Bank has been notified that its
FDIC deposit insurance premium, for the first six months of 1996, will be
assessed at an annual amount of $2,000. The FDIC, in its sole discretion, may
adjust the reserves of the insurance fund, if necessary. The FDIC issues
regulations, conducts periodic examinations, requires the filing of reports and
generally supervises the operations of its insured banks. The approval of the
FDIC is required prior to the establishment or relocation of any branch office,
and the prior approval of the FDIC will be required for mergers and
consolidations.
Any FDIC-insured bank which does not operate in accordance with FDIC
regulations, policies and directives may be sanctioned for non-compliance.
Proceedings may be instituted against any FDIC-insured bank or any director or
trustee, officer or employee of such bank who engaged in unsafe or unsound
practices, including the violation of applicable laws and regulations. The FDIC
has the authority to terminate insurance of accounts pursuant to the procedures
established for that purpose or impose civil money penalties.
The FDIC has adopted leverage ratio rules that require a minimum leverage
ratio of 3.0% "Tier 1 capital" (as defined in the risk-based capital guidelines)
to total assets. Although setting a minimum 3.0% leverage ratio, the FDIC's
regulations state that only the strongest state non-member banks, with a
composite examination rating of 1 under the rating system used by the federal
bank regulators, would be permitted to operate at or near such minimum level of
capital. All other banks will be expected to maintain an additional cushion of
at least 1% to 2% above the minimum ratio, depending on the assessment of an
individual organization's capital adequacy by the FDIC. Any bank experiencing
or anticipating significant growth would be expected to maintain capital well
above the minimum levels. The Bank's leverage ratio was 10.51% at December 31,
1995.
The FDIC has also adopted risk-based capital rules which require the Bank to
have and maintain a ratio of qualifying total capital to weighted risk assets of
at least 8.0%, of which at least 4.0% must be Tier I capital. Tier 1 capital is
defined as the sum of common stockholders' equity and non-cumulative perpetual
preferred stock (including any related surplus) and minority interests in
consolidated subsidiaries, less all intangible assets other than mortgage
servicing rights and minus identified losses and investments in certain
securities subsidiaries and certain mortgage banking subsidiaries. Assets and
off-balance sheet items are assigned to five risk categories each with
appropriate weights. The resulting capital ratios represent equity and non-
equity capital as a percentage of total risk-weighted assets and off-balance
sheet items. The new risk-based capital rules are designed to make regulatory
capital requirements more sensitive to differences in risk profiles among banks
and bank holding
17
<PAGE>
companies, to account for off-balance sheet exposure and to minimize
disincentives for holding liquid assets. Set forth below are the Bank's
risk-based and Tier 1 capital ratios at December 31, 1995.
<TABLE>
<CAPTION>
Amount Percent
------- -------
<S> <C> <C>
Risk-based capital $18,937 18.36%
Risk-based capital 8,254 8.00%
requirement ------- -------
Excess $10,683 10.36%
======= =======
Tier 1 capital $17,636 17.09%
Tier 1 capital 4,127 4.00%
requirement ------- -------
Excess $13,509 13.09%
======= =======
</TABLE>
All Massachusetts chartered savings banks are required to be members of the
Depositors Insurance Fund ("DIF"). The DIF maintains a private deposit
insurance fund which insures all deposits in member banks which are not covered
by federal insurance, which, in the case of the Bank, are its deposits in excess
of $100,000 per insured account. In 1994 and 1995, The Bank's premium for this
insurance was assessed at an annual rate of 1/50 of 1% of insured deposits
during 1994 and 1995.
FEDERAL RESERVE BOARD REGULATIONS. Under FRB regulations, the Bank currently
must establish reserves equal to 3.0% of the first $47.9 million of transaction
accounts, and 10.0% of the remainder. At December 31, 1995, the reserve
requirement on non-personal time deposits with original maturities of less than
18 months was set at 0%. These reserve requirements are subject to certain
exemptions set forth in the FRB regulations. At December 31, 1995 the Bank met
applicable FRB reserve requirements.
OTHER BANKING LEGISLATION
FEDERAL DEPOSIT INSURANCE CORPORATION IMPROVEMENT ACT OF 1991 ("FDICIA").
FDICIA resulted in extensive changes to the federal banking laws. The primary
purpose of the law is to authorize additional borrowing by the FDIC in order to
provide funds for the resolution of failing financial institutions. FDICIA
institutes certain changes to the supervisory process and contains various
provisions that may affect the operations of banks such as the Bank. Certain of
these changes are discussed below.
STANDARDS FOR SAFETY AND SOUNDNESS. FDICIA requires the federal bank
regulatory agencies to prescribe, by regulation, standards for all insured
depository institutions and depository institution holding companies relating
to: (i) internal controls, information systems and audit systems; (ii) loan
documentation; (iii) credit underwriting; (iv) interest rate risk exposure; (v)
asset growth; and (vi) compensation, fees and benefits. The compensation
standards would prohibit employment contracts, compensation or benefit
arrangements, stock option plans, fee arrangements or other compensatory
arrangements that would provide excessive compensation, fees or benefits or
could lead to material financial loss. In addition, the federal bank regulatory
agencies are required by FDICIA to prescribe by regulation standards specifying:
(i) maximum classified assets to capital ratios; (ii) minimum earnings
sufficient to absorb losses without impairing capital; and (iii) to the extent
feasible, a minimum ratio of market value to book value for publicly traded
shares of depository institutions and depository institution holding companies.
DEPOSIT INSURANCE, INVESTMENT AND OTHER REFORMS. FDICIA amends the Federal
Deposit Insurance Act to prohibit insured depository institutions that are not
well-capitalized from accepting brokered deposit unless a waiver has been
obtained from the FDIC. Deposit brokers will be required to register with the
FDIC. Under FDICIA the FDIC established a risk-based assessment system for
deposit insurance. FDICIA also authorized the FDIC to privately reinsure up to
10% of its risk of loss with respect to an institution and base its assessment
on the cost of such reinsurance. The federal bank regulatory agencies are
required to adopt uniform regulations for real estate mortgage and construction
loans. The federal bank regulatory agencies are required to review risk-based
capital standards every two years to ensure that they adequately address
interest rate risk, concentration of credit risk and risks from non-traditional
activities.
18
<PAGE>
FDICIA also imposes numerous limitations on the activities and investments of
state charted banks, including savings banks. In general, after December 31,
1992, a state chartered bank may not engage as principal, either directly or
through a subsidiary, in any activity, with certain limited exceptions, that is
not permissible for a national bank, unless the FDIC finds that the activity
poses no significant risk to the insurance fund and the state chartered bank is
in compliance with applicable capital requirements. FDICIA generally prohibits
state chartered banks from engaging in insurance underwriting except to the
extent that such activity is permissible for a national bank. However, the
ability of state-chartered savings banks located in Massachusetts to sell
savings bank life insurance is not impaired by FDICIA. State chartered banks
are also prohibited from acquiring or retaining any equity investments of a
type that is not permissible for a national bank, with the exception of equity
investments in majority-owned subsidiaries and with certain other limited
exceptions.
The law requires the divestiture of any non-permissible equity investment as
quickly as can be prudently done, and in any event prior to December 19, 1996.
CONSUMER PROTECTION PROVISIONS. FDICIA seeks to encourage enforcement of
existing consumer protection laws and enacts new consumer-oriented provisions
including a requirement of notice to regulators and customers for any proposed
branch closing and provisions intended to encourage the offering of "lifeline"
banking accounts and lending in distressed communities. FDICIA also requires
depository institutions to make additional disclosures to depositors with
respect to the rate of interest and the terms of their deposit accounts.
FEDERAL AND STATE TAXATION
--------------------------
FEDERAL TAXATION. The Company and the Bank file consolidated federal income
tax returns, which would have the effect of eliminating intercompany
distributions, including dividends, in the computation of consolidated taxable
income. Any income of the Company and its other subsidiaries would not be
subject to the bad debt deduction allowed the Bank, whether or not consolidated
tax returns are filed. The Bank, however, must reduce its taxable income for
purposes of computing its bad debt reserve deduction under the percentage of
taxable income method by its allocated share of loss attributable to the
activities of the non-thrift members of the consolidated group if those members'
activities are functionally related to the activities of the Bank.
Savings institutions such as the Bank are subject to the provisions of the
Internal Revenue Code (the "Code") in the same general manner as other
companies. However, institutions such as the Bank which meet certain
definitional tests and other conditions prescribed by the Code may benefit from
certain favorable provisions regarding their deductions from taxable income for
annual additions to their bad debt reserve. For purposes of the bad debt
reserve deduction, loans are separated into "qualifying real properly loans,"
which generally are loans secured by real property, and "nonqualifying real
property loans," which are all other loans. The bad debt reserve deduction with
respect to nonqualifying loans must be based on actual loss experience. The
amount of the bad debt reserve deduction with respect to qualifying real
property loans may be based upon actual loss experience (the "experience
method") or a percentage of taxable income determined without regard to such
deduction (the "percentage of taxable income method").
Under the percentage of taxable income method, the bad debt reserve deduction
of qualifying real property loans is computed as 8% of taxable income. For
years after 1986, an 8% percentage bad debt deduction may be taken as long as
not less than 60% of the total dollar amount of the assets of an institution
falls within certain qualifying asset categories. If the percentage of assets
in the designated categories falls below 60%, the institution could be required
to recapture, generally over a period of up to four years, its existing bad debt
reserve, although net operating loss carryforwards could be used to offset such
recapture. As of December 31, 1995, the Bank satisfied the 60% asset test, and
was eligible to take the percentage bad debt deduction.
The bad debt deduction under the percentage of taxable income method is
limited to the extent that (i) the amount accumulated in reserves for qualifying
real estate loans does not exceed 6% of such loans outstanding at the end of the
taxable year and (ii) the amount, when added to the bad debt reserve for losses
on nonqualifying loans, equals the amount by which 12% of total deposits or
withdrawable accounts of depositors at year-end exceeds the sum of surplus,
undivided profits and reserves at the beginning of the year.
19
<PAGE>
Current and accumulated earnings and profits of the Bank (apart from amounts
appropriated to the bad debt reserve), to the extent otherwise available,
generally may be distributed as cash dividends without any federal income tax
being imposed on the Bank because of any such distribution. However, if income
appropriated to the bad debt reserve and deducted for federal income tax
purposes is used or deemed to be used to pay cash dividends or other
distributions to stockholders, including distributions on redemption,
dissolution or liquidation, the Bank generally would be taxed at then current
corporate tax rates on approximately 151% of the amount that would be deemed
removed from such reserves by the Bank because of any such distribution. As of
December 31, 1995, the Bank had a total reserve for loan losses of approximately
$2.9 million for which federal income taxes have not been provided.
For further information on the Bank's federal income taxes, see Note 8 of
Notes to Consolidated Financial Statements in the 1995 Annual Report to
Stockholders.
STATE TAXATION. Savings banks in Massachusetts are currently taxed at the
rate of 12.13% on their state taxable income. State taxable income includes
income from all sources, without exclusion, for the taxable year, less
deductions, but not the credits, allowable under the provisions of the Code, as
amended and in effect for the taxable year. No deductions, however, are allowed
for dividends received. In addition, carryforwards and carrybacks of net
operating losses are not allowed.
The Bank's Massachusetts tax returns for the last five years have not been
audited.
COMPETITION
-----------
The Bank faces strong competition in attracting deposits. Its most direct
competition for deposits has historically come from other savings banks, savings
and loan associations, cooperative banks, credit unions and commercial banks
located on Nantucket Island and in southeastern Massachusetts. The Bank also
competes for deposits with money market mutual funds and corporate and
government securities. Since the elimination of federal interest rate controls
on deposits, the Bank has faced increasing competition from other financial
institutions for deposits.
The Bank competes for deposits principally by offering depositors a wide
variety of deposit programs, automated teller machines, tax deferred retirement
programs and other miscellaneous services. It does not rely upon any single
individual, group or entity for a material portion of its deposits.
Competition for real estate loans comes primarily from mortgage banking
companies, savings banks, savings and loans associations, commercial banks and
other institutional lenders. The Bank competes for loan origination primarily
based on the interest rates and loan fees that it charges and the efficiency and
quality services that it provides. The competition for loans varies depending
on factors which include, among others, the general availability of lendable
funds and credit, general and local economic conditions, current interest rate
levels, conditions in the mortgage market and other factors which are not
readily predictable.
In addition to competing with other savings banks and financial services
organizations based in Massachusetts, the Bank has and is expected to face
increased competition from major commercial banks headquartered outside of
Massachusetts as a result of the interstate banking laws which currently permit
banks nationwide to enter the Bank's market area and compete with it for
deposits and loan originations.
EMPLOYEES
---------
As of December 31, 1995 the Company and Bank had 40 full-time and two part
time employees. None of these employees is represented by a collective
bargaining agreement. The Company believes its employee relations are good.
20
<PAGE>
ITEM 2. DESCRIPTION OF PROPERTY
The Bank owns four properties and leases one property. The four properties
consist of the Bank's main office, one branch office, an undeveloped parcel of
land and one automated teller facility. The Bank's main office is located at
104 Pleasant Street on Nantucket, and was acquired on June 30, 1979. This 8,500
square foot facility had a net book value of $346,000 at December 31, 1995,
including the book value of the land on which the facility is located.
The Bank's branch office, located at 2 Orange Street, Nantucket is a 3,200
square foot facility which the Bank acquired in 1921, and had a net book value
of $6,000 at December 31, 1995, including the book value of the land on which
the facility is located.
On August 30, 1995 the Bank purchased a three quarter acre parcel of land
located on Amelia Drive, Nantucket for $240,000. Should the bank sell this
property within two years of the purchase date the Bank is committed to pay an
additional $60,000 for this land. The future use of this land has not been
determined.
Effective April 1, 1994, the Bank entered into a lease agreement with the Town
of Nantucket's Airport Commission to lease 16 square feet of space at the main
terminal building on Nantucket Island for an automated teller machine facility.
The one year lease of this space, at an annual rent of $6,000, expires on March
31, 1996.
At December 31, 1995, the net book value of the Bank's furnishings and
equipment was $651,000 and the aggregate net book value of the Bank's land,
buildings, furnishings, and equipment was $1.2 million. The Bank believes that
the fair market value of its properties is significantly in excess of the book
value of these properties.
For further information, see Note 5 of Notes to Consolidated Financial
Statements in the 1995 Annual Report to Stockholders.
ITEM 3. LEGAL PROCEEDINGS
From time to time, the Bank is involved in legal proceedings incidental to its
business. None of these actions individually or in the aggregate is believed to
be material to the financial condition of the Bank.
21
<PAGE>
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable.
22
<PAGE>
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The information contained in the section captioned "Stock Market Data" in the
1995 Annual Report to Stockholders is incorporated herein by reference. For
information regarding the Company's dividend policy see also
"Item 1 -- Business -- Dividend Policy."
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
The information contained in the section captioned "Management's Discussion
and Analysis" in the 1995 Annual Report to Stockholders is incorporated herein
by reference.
ITEM 7. FINANCIAL STATEMENTS
The financial statements contained in the 1995 Annual Report to Stockholders
are incorporated herein by reference.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
23
<PAGE>
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) EXCHANGE ACT
ITEM 10. EXECUTIVE COMPENSATION
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by Items 9, 10, 11 and 12 is incorporated herein by
reference to the Company's definitive proxy statement for the annual meeting of
stockholders to be held on May 13, 1996 which will be filed with the Securities
and Exchange Commission pursuant to Regulation 14A on or before April 18, 1996.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) Documents Filed as Part of Form 10-KSB
1. Exhibits
(3) Certificate of Incorporation and Bylaws of Home Port Bancorp, Inc.
Incorporated herein by reference to exhibit B and C to the Company's
Registration on Form S-1 (No.33-21794) (the "Registration
Statement")
(10.1.1) Home Port Bancorp, Inc. 1988 Stock Option Plan. Incorporated
herein by reference to Exhibit D to the Company's Form 10-K for Year
Ended December 31, 1988, as filed with the Securities and Exchange
Commission ("SEC") on March 31, 1989.
(10.1.2) Employment Agreement between Nantucket Bank and William P.
Hourihan, Jr. Incorporated herein by reference to the Registration
Statement.
(10.1.3) Employment Agreement between Nantucket Bank and Daniel P. Neath.
Incorporated herein by reference to the Registration Statement.
(10.1.4) Supplemental Retirement Agreement between Nantucket Bank and
Daniel P. Neath. Incorporated herein by reference to the Company's
Form 10-K for the Year Ended December 31, 1989, as filed with the
SEC on April 13, 1990.
(13) 1995 Annual Report to Stockholders for the Fiscal Year Ended
December 31, 1995.
(21) Subsidiaries of the Registrant.
(b) No reports on Form 8-K were filed by the Registrant during the quarter ended
December 31, 1995.
24
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant had
duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
HOME PORT BANCORP, INC.
Date: March 28, 1996 By: /s/ Karl L. Meyer
-------------------------------------
Karl L. Meyer
President and Chief Executive Officer
(Duly Authorized Representative)
In accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
Signatures Date
- ---------- ----
/s/ Karl L. Meyer
- -------------------------------------- March 28, 1996
Karl L. Meyer
Chairman of the Board,
President and Chief Executive Officer
/s/ John M. Sweeney
- -------------------------------------- March 28, 1996
John M. Sweeney
Treasurer & Chief Financial Officer
(Principal Financial and Accounting
Officer)
/s/ William P. Hourihan
- -------------------------------------- March 28, 1996
William P. Hourihan, Jr.
Director
/s/ Charles F. DiGiovanna
- -------------------------------------- March 28, 1996
Charles F. DiGiovanna
Director
/s/ Charles H. Jones
- -------------------------------------- March 28, 1996
Charles H. Jones
Director
Signatures (Continued) Date
- ---------------------- ----
25
<PAGE>
/s/ Daniel D. McCarthy
- -------------------------------------- March 28, 1996
Daniel D. McCarthy
Director
/s/ Robert J. McKay
- -------------------------------------- March 28, 1996
Robert J. McKay
Director
/s/ Philip W. Read
- -------------------------------------- March 28, 1996
Philip W. Read
Director
26
<PAGE>
INDEX TO EXHIBITS
EXHIBIT SEQUENTIALLY
- -------- NUMBERED
PAGE
(3) Certificate of Incorporation and Bylaws N/A
of Home Port Bancorp, Inc.-
Incorporated by reference to Exhibit B
and C to the Company's Registration
Statement on Form S-1 (No. 33-21794)
(the "Registration Statement").
(10.1.1) Home Port Bancorp, Inc. 1988 Stock N/A
Option plan. Incorporated by reference
to Exhibit D to the Company's Form 10-K
for the Year Ended December 31, 1988,
as filed with the Securities and
Exchange Commission on March 31, 1989.
(10.1.2) Employment Agreement between Nantucket N/A
Bank and William P. Hourihan, Jr.
Incorporated herein by reference to the
Registration Statement.
(10.1.3) Employment Agreement between Nantucket N/A
Bank and Daniel P Neath. Incorporated
herein by reference to the Registration
Statement.
(10.1.4) Supplemental Retirement Agreement N/A
between Nantucket Bank and Daniel P.
Neath. Incorporated herein by
reference to the Company's Form 10-K
for the year ended December 31, 1989,
as filed with the Securities and
Exchange Commission on April 13, 1990.
(13) Annual Report to Stockholders for the
Fiscal Year Ended December 31, 1995.
(21) Subsidiaries of the Registrant.
27
<PAGE>
EXHIBIT (13)
TABLE OF CONTENTS
<TABLE>
<S> <C>
PAGE
----
Financial Highlights .......................................................................1
Message to Stockholders .......................................................................2
Management's Discussion and Analysis .......................................................................3
Consolidated Financial Statements .......................................................................11
Notes to Consolidated Financial .......................................................................15
Statements .......................................................................31
Independent Auditors' Report .......................................................................32
Directors and Officers ......................................................................33
Stockholders Information
</TABLE>
HOME PORT BANCORP, INC.
Home Port Bancorp, Inc. (the "Company") is a single bank holding company
governed by the Federal Reserve Bank incorporated in the state of Delaware which
owns all of the outstanding common stock of Nantucket Bank (the "Bank"). The
Bank, organized in 1834, is a Massachusetts chartered savings bank serving the
island of Nantucket. The primary business of the Bank is to acquire deposits
and use these funds to originate residential and commercial mortgage loans and
commercial, business and consumer loans. The Bank's deposits are fully insured
by the Federal Deposit Insurance Corporation ("FDIC") up to $100,000, and the
Depositors Insurance Fund for amounts in excess of $100,000. The Bank is a
member of the Federal Home Loan Bank system.
<PAGE>
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS HOME PORT BANCORP, INC. AND SUBSIDIARIES
- ---------------------------------------------------------------------------------------------
For the years ended or at December 31,
1995 1994 1993 1992 1991
-------- --------- --------- -------- --------
<S> <C> <C> <C> <C> <C>
AT YEAR END
Total assets $167,272 $162,324 $134,498 $106,071 $105,575
Loans, net of allowance for possible 129,147 118,225 88,126 69,930 65,412
loan losses
Other Real Estate Owned - 45 883 1,003 4,652
Securities 26,025 29,771 36,412 29,368 29,061
Deposits 114,357 104,386 92,561 81,763 82,050
Borrowed funds 32,837 33,107 18,880 145 149
Stockholders' equity 18,379 18,524 21,932 22,988 22,584
FOR THE YEAR
Total interest and dividend income $ 13,242 $ 10,796 $ 8,164 $ 8,719 $ 10,105
-------- --------- --------- -------- --------
Total interest expense 5,987 4,607 3,039 3,547 5,120
Net interest and dividend income 7,255 6,189 5,125 5,172 4,985
Provision for possible loan losses - - - 110 1,850
Commissions, fees and other income 846 674 607 677 712
Net gain (loss) from sales of mortgage
loans
and securities (2) (115) 190 44 45
Net gain (loss) on other real estate (9) 262 34 (488) (974)
owned
Non-interest expense 3,585 3,520 3,006 4,146 3,256
-------- --------- --------- -------- --------
Income (loss) before taxes and 4,505 3,490 2,950 1,149 (338)
cumulative effect of change in
accounting principle
Provision (benefit) for income taxes 1,749 1,381 1,251 758 (75)
Cumulative effect of change in
accounting
for income taxes - - 455 - -
-------- --------- --------- -------- --------
Net income (loss) $ 2,756 $ 2,109 $ 2,154 $ 391 ($263)
======== ========= ========= ======== ========
PER SHARE DATA
Earnings (loss) per common share before
cumulative effect of change in
accounting $ 1.50 $ 1.15 $ 0.85 $ 0.20 ($0.13)
Earnings per common share for the
cumulative
effect of a change in accounting
principle - - 0.23 - -
Earnings (loss) per common share $ 1.50 $ 1.15 $ 1.08 $ 0.20 ($0.13)
======== ========= ========= ======== ========
Dividends declared per share $ 1.60 $ 3.10 $ 0.51 $ 0.09 $ 0.12
======== ========= ========= ======== ========
Stockholders equity per share $ 9.98 $ 10.06 $ 12.23 $ 11.58 $ 11.58
======== ========= ========= ======== ========
SELECTED RATIOS
Return on average assets (a) 1.67% 1.35% 1.47% 0.37% (0.25%)
Interest rate spread 3.97% 3.44% 3.84% 4.26% 3.96%
Net interest margin 4.56% 4.08% 4.63% 5.18% 5.15%
Equity to asset ratio 10.99% 11.41% 16.30% 21.67% 21.39%
Return on average equity (a) 14.34% 9.71% 7.19% 1.70% (1.16%)
Dividend payout ratio 274.02% 52.40% 46.00% 45.00% -
</TABLE>
(a) Does not include cumulative effect of change in accounting principle
<PAGE>
MESSAGE TO STOCKHOLDERS HOME PORT BANCORP, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
Your Company reported record net income of $2.8 million and earnings per
common share of $1.50 for the year 1995, a 30% increase over 1994. For the year
the net interest margin increased by 48 basis points to 4.56% and return on
equity ("ROE") climbed to 14.34%, one and one-half times the return achieved one
year earlier.
This strong financial performance is particularly note worthy in view of the
sizable special dividends of $3.50 per share together with ordinary dividends of
$.60 per share paid in 1995 Stockholders are reminded that $2.10 per share of
the total 1995 cash dividends of $4.10 per share represents a return of capital
(reported as non-taxable dividends) for federal income tax purposes.
The above special dividends and prior year share repurchases complete a
balance sheet re-engineering program started at the onset of 1993 to improve
stockholders ROE. The year end equity to asset ratio was 10.99 percent, or
approximately one-half of 21.67 percent ratio at December 1992. Your Company
and Nantucket Bank remain well capitalized and given the high quality of the
loan portfolio (no non-performing assets and no other real estate owned at year
end 1995) the Bank can still be considered one of the safest institutions in New
England.
The year 1996 will be a challenging one for management. Given the overall
interest rate picture, the Bank's net interest margin will probably come under
increasing pressure. Maintaining historical growth rates in deposits (nearly 10
percent last year) will become more difficult to achieve. Loan originations
should remain strong permitting the loan portfolio to increase commensurate with
deposit growth and the Bank's non-interest expense ratio will be maintained at
its current low level. Overall ROE should continue to improve, showing the
cumulative effect of the financial strategies adopted three years ago and the
full effect of the 1995 dividend payments.
The Board of Directors, management and staff of Nantucket Bank, Home Port's
only operating subsidiary, should be proud of their accomplishments in restoring
the Bank to its present strong financial condition. I am particularly pleased
and gratified with the level of financial services made available to the
Nantucket community, the willing and active participation of Bank directors and
employees in community activities and the institution's broad support of local
charitable causes which benefit many island residents.
Sincerely,
Karl L. Meyer
Chairman of the Board, President and CEO
2
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
HOME PORT BANCORP, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
RESULTS OF OPERATIONS
Home Port Bancorp, Inc. ("the Company") reported net income of $2.8 million in
1995 compared with net income of $2.1 million in 1994 and $2.2 million in 1993.
Net income per share was $1.50 in 1995 compared to $1.15 in 1994 and $1.08 in
1993. At December 31, 1995 the Company had no non-performing assets. During
1995, 1994 and 1993 no provisions for loan losses were made by the Company due
to low levels of non- performing assets and net recoveries of previous charge-
offs. The 1993 results included $455,000 of income ($.23 per share) from the
cumulative effect of a change in accounting principle resulting from the
adoption of Statement of Financial Accounting Standard ("SFAS") No. 109
"Accounting for Income Taxes." The difference in earnings per share between
1994 and 1993, with relatively the same income in each year, is due to the
difference in average shares outstanding during these years.
NET INTEREST INCOME
Net interest and dividend income increased by $1.1 million, or 17.2%, to $7.3
million in 1995 compared to $6.2 million in 1994. During 1994 net interest and
dividend income increased by $1.1 million, or 20.8%, from $5.1 million in 1993.
The Company's net interest margin improved to 4.56% during 1995 compared to
4.08% in 1994. The net interest margin was 4.63% in 1993.
This increase in net interest income in 1995 compared to 1994 is primarily due
to a favorable interest rate environment. The increase in 1994 compared to 1993
is due to increases in the average volume of interest earning assets and
liabilities, offset by a small reduction in the net interest margin. The tables
on the following page provide additional details on these increases and
decreases.
During 1995 the average yield of the Bank's loan portfolio increased by 116
basis points to 9.02% from 7.86% for 1994. This increase reflects the rise in
interest rates during 1994 which affected the loan portfolio on a lagged basis.
The average yield on loans decreased in 1994 by 39 basis points to 7.86% from
8.25% in 1993. This decrease is due to the downward trend in rates in 1993 and
the increase in residential loans in the portfolio. Residential mortgages
generally have less risk than commercial mortgages but also have a lower yield.
At December 31, 1995 residential mortgage loans represented 68.1% of the loan
portfolio.
The average yield on securities increased by 63 basis points during 1995 to
5.71% from 5.08% for 1994, also reflecting the rise in market interest rates on
a lagged basis. The yield on securities was 5.14% in 1993. The securities
portfolio is not actively traded by the Company. Securities classified as "held
to maturity" represented 70% of total securities at year end 1995 and 94% at
year end 1994.
The Company's average cost of funds increased to 4.36% in 1995 compared to
3.68% in 1994 and 3.53% in 1993. The cost of deposits was 3.64% in 1995
compared to 3.32% in 1994 and 3.51% in 1993. Deposit rates have not been
volatile over these periods. The cost of Federal Home Loan Bank ("FHLB")
borrowings increased to 6.40% in 1995 compared to 4.82% in 1994 and 4.23% in
1993. The increase in the cost of borrowings in 1995 is due to the relatively
high short term rates in effect during much of 1995 and several higher cost
borrowings made during 1994. The Company did not begin to utilize FHLB
borrowings to any significant extent until 1994.
The following table sets forth certain information relating to the Bank's
interest earning assets, interest bearing liabilities and net interest income.
Short term investments are included in securities and FHLB stock. Loans include
loans held for sale. Non-accrual loans are included in average loan balances.
Deposits exclude non-interest bearing demand accounts.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
3
<PAGE>
<TABLE>
<CAPTION>
FINANCIAL CONDITION AND RESULTS OF OPERATIONS HOME PORT BANCORP, INC. AND SUBSIDIARIES
- ------------------------------------------------------------------------------------------------------------------------
Year Ended December 31,
----------------------------------------------------------------------------------------
(dollars in thousands ) 1995 1994 1993
--------------------------- ----------------------------- ----------------------------
Average Yield/ Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate Balance Interest Rate
--------------------------- ----------------------------- ----------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest earning assets:
Residential loans $ 83,800 $ 6,991 8.34% $ 72,682 $ 5,330 7.33% $ 44,699 $3,312 7.41%
Commercial loans 36,703 3,782 10.30% 33,539 2,967 8.85% 29,256 2,751 9.40%
Consumer loans 5,429 583 10.74% 5,210 460 8.83% 5,446 490 9.00%
--------------------------- ----------------------------- ----------------------------
Total loans 125,932 11,356 9.02% 111,431 8,757 7.86% 79,401 6,553 8.25%
Securities and FHLB stock 33,046 1,886 5.71% 40,156 2,039 5.08% 31,372 1,611 5.14%
--------------------------- ----------------------------- ----------------------------
Total interest earning assets $158,978 $13,242 8.33% $151,587 $10,796 7.12% $110,773 $8,164 7.37%
--------------------------- ----------------------------- ----------------------------
Interest bear ing liabilities:
Deposits $101,541 $ 3,692 3.64% $ 95,336 $ 3,169 3.32% $ 83,008 $2,913 3.51%
Borrowed funds 35,853 2,295 6.40% 29,810 1,438 4.82% 2,981 126 4.23%
--------------------------- ----------------------------- ----------------------------
Total interest bearing liabilities $137,394 $ 5,987 4.36% $125,146 $ 4,607 3.68% $ 85,989 $3,039 3.53%
--------------------------- ----------------------------- ----------------------------
Net interest and dividend income $ 7,255 $ 6,189 $5,125
======= ======= ======
Interest rate spread (1) 3.97% 3.44% 3.84%
===== ===== =====
Net interest margin (2) 4.56% 4.08% 4.63%
===== ===== =====
</TABLE>
(1) Interest rate spread represents the difference between the average rate
earned on interest earning assets and the average rate paid on interest bearing
liabilities.
(2) Net interest margin represents net interest income divided by average
earning assets.
RATE/VOLUME ANALYSIS
The effect on net interest income as a result of changes in interest rates and
in the amount of earning assets and interest bearing liabilities is shown in the
following table. Information is provided on changes attributable to (1) changes
in volume (changes in average balance multiplied by prior period yield), (2)
changes in rate (changes in yield multiplied by prior period average balance)
and (3) the combined effect of changes in interest rates and volume (changes in
yield multiplied by changes in average balance).
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------------------------------------------------
(in thousands) 1995 vs. 1994 1994 vs. 1993
--------------------------------------------------------------------------------
Changes Due to Increase (Decrease) Changes Due to Increase (Decrease)
--------------------------------------------------------------------------------
Rate/ Rate/
Total Volume Rate Volume Total Volume Rate Volume
-------- ------- ------ ------ -------- -------- ------ -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest income:
Residential loans $1,661 $ 815 $ 734 $112 $2,018 $2,074 $ (36) $ (20)
Commercial loans 815 280 486 49 216 403 (161) (26)
Consumer loans 123 19 100 4 (30) (21) (9) -
-------- ------- ------ ------ -------- -------- ------ -------
Total loans 2,599 1,114 1,320 165 2,204 2,456 (206) (46)
Securities and FHLB stock (153) (361) 253 (45) 428 451 (19) (4)
-------- ------- ------ ------ -------- -------- ------ -------
Total 2,446 753 1,573 120 2,632 2,907 (225) (50)
-------- ------- ------ ------ -------- -------- ------ -------
Interest expense:
Deposits 523 206 305 12 256 433 (158) (19)
Borrowed funds 857 291 471 95 1,312 1,135 18 159
-------- ------- ------ ------ -------- -------- ------ -------
Total 1,380 497 776 107 1,568 1,568 (140) 140
-------- ------- ------ ------ -------- -------- ------ -------
Net in terest and dividend income $1,066 $ 256 $ 797 $ 13 $1,064 $1,339 $ (85) $(190)
======== ======= ====== ====== ======== ======== ====== =======
</TABLE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
4
<PAGE>
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
HOME PORT BANCORP, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
NON-INTEREST INCOME
Non-interest income consists of service charges and fees on deposit accounts,
fees for servicing mortgage loans and net gains or losses from the sale of
mortgage loans and securities. Non-interest income increased by $285,000 to
$844,000 in 1995 from $559,000 in 1994. In 1993 non-interest income totaled
$797,000.
Approximately one-third of the 1995 increase was due to a reduction in net
losses from the sale of securities from $126,000 in 1994 to $26,000 in 1995. The
decline in interest rates in 1995 caused the market value of the securities
portfolio to increase, thereby limiting losses. Fees on deposit accounts
increased by $25,000, or 9.0%, due to the increase in deposits. Loan servicing
fees increased $91,000, or 65.9%, due to increases in the servicing portfolio.
Other fees and income increased by $56,000, or 21.7%, due primarily to increases
in fees from the sale of non-insured alternative investment products.
The decrease in non-interest income from $797,000 in 1993 to $559,000 in 1994
was due to a reduction of $152,000 in net gains on securities, due to the rising
interest rate environment in 1994, and a reduction of $153,000 in net gains from
the sale of mortgage loans.
In 1995, the Bank sold $27.7 million of mortgage loans for a net gain of
$24,000 compared to sales of $13.1 million and gains of $11,000 in 1994. In
1993 mortgage loan sales were $11.7 million with net gains of $164,000. In 1994
and 1995 interest rate movement limited the gains realized on the sale of
mortgage loans, despite a higher volume of sales. In 1993 the sharp reduction
in interest rates allowed for the higher level of gains.
NON-INTEREST EXPENSE
In 1995, non-interest expense increased to $3.6 million from $3.3 million in
1994. A significant part of this increase was due to losses from the sale of
Other Real Estate Owned ("OREO") and increased OREO expenses. In 1995 net
losses of $9,000 were recognized on OREO compared to net gains of $262,000 in
1994. Operating expenses for OREO, included in other expense, amounted to
$14,000 in 1995 compared to income of $1,000 in 1994. At December 31, 1995 the
Bank had no OREO assets. Salaries and employee benefits increased to $2.0
million in 1995 from $1.7 million in 1994 due to an increase in performance-
based bonus pay, additions to staff and normal annual increases. Partially
offsetting these increases was a reduction in deposit insurance expense from
$234,000 in 1994 to $159,000 in 1995 as a result of a decrease in the FDIC Bank
Insurance Fund assessments. The Bank has been notified that its FDIC deposit
insurance premium, for the first six months of 1996, will be assessed at an
annual amount of $2,000.
In 1994 non-interest expense increased to $3.3 million from $3.0 million in
1993. Salaries and employee benefits increased $230,000 due to staff additions
from the Bank's 50% growth rate in 1993 and 1994. The Bank also increased its
marketing, contributions and general public relations expenses by $68,000 in
1994. Partially offsetting these expenses was an increase in non-recurring
gains on OREO from $34,000 in 1993 to $262,000 in 1994 and a reduction in OREO
operating expenses from $56,000 in 1993 to income of $1,000 in 1994.
INCOME TAXES
The Company and its subsidiaries, on a consolidated basis, are subject to
Federal income tax. The Company is also subject to a Delaware franchise tax and
a Massachusetts tax as a security corporation. The Bank and its subsidiary are
subject to a Massachusetts income tax. See note 8 in the Notes to Consolidated
Financial Statements for detailed analysis of income taxes.
The effective tax rates in 1995 and 1994 were impacted by reductions in the
tax valuation allowance caused by increased earnings. The adoption of SFAS No.
109 in 1993 generated a benefit of $455,000 as the cumulative effect of this
change in accounting principle. The effective tax rate in 1993 was at a normal
level of 42%, including the impact of state income taxes.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
5
<PAGE>
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
HOME PORT BANCORP, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
ASSET LIABILITY MANAGEMENT
The Bank's objective in its Asset /Liability management program is to manage
liquidity and interest rate risk, so as to maximize net interest income and
return on capital in a changing interest rate environment. The Bank's
Asset/Liability Committee ("ALCO") primarily utilizes "GAP" analysis to measure
risk. GAP is the difference between assets and liabilities subject to rate
change over specific time periods. A GAP is considered positive when the amount
of interest rate sensitive assets exceeds the amount of interest rate sensitive
liabilities. A GAP is considered negative when interest rate sensitive
liabilities exceed interest rate sensitive assets. During a year of falling
interest rates a negative one-year GAP position would tend to increase income
because there are more liabilities than assets adjusting down in rate during the
year, accordingly, the decrease in the cost of liabilities exceeds the decrease
in the yield on assets. Conversely, in a period of rising rates a negative GAP
would tend to decrease income. Companies in a positive GAP position would face
the opposite situation. There are limitations to GAP analysis, however, as
rates on different assets and liabilities may not move to the same extent in any
given time period. Competition may affect the ability of the Bank to change
rates on a particular deposit or loan product.
As economic conditions change the ALCO adjusts the balance sheet in order to
manage interest rate risk. A primary goal of the ALCO has been to minimize
volatility in net interest income. At December 31, 1995, the Company's one year
GAP position, utilizing the assumptions detailed below, was a negative $14.4
million or 8.58% of total assets. This compares to a negative one year GAP
position of $9.0 million or 5.55% of total assets at December 31, 1994 and a
negative $4.0 million or 3.00% of total assets at December 31, 1993.
INTEREST SENSITIVITY ANALYSIS
The following table displays the distribution of the Company's interest-
earning assets and interest-bearing liabilities maturing or repricing over
various time periods. The amounts of asset or liability in each time period was
determined by the contractual terms of the asset or liability. The table does
not reflect prepayment of fixed rate loans or mortgage backed securities prior
to maturity. Based upon experience, prepayments will tend to be slower during
periods of rising interest rates and accelerate as rates fall. Any prepayments
of loans would decrease the negative one year GAP position. Loans held for sale
are included based on their contractual maturity/repricing date. Securities
include short term investments. Core deposit accounts are included in the zero
to six month repricing category based on their contractual terms although these
accounts have not been as sensitive to changes in market interest rates over the
past several years.
<TABLE>
<CAPTION>
Period to Maturity or Repricing from December 31, 1995
-----------------------------------------------------------------------------------
(dollars in thousands) 0-6 6-12 1-2 2-3 Over 3
Months Months Years Years Years Total
-----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Interest sensitive assets
Loans $ 66,984 $ 27,568 $ 8,090 $ 2,324 $26,430 $131,396
Securities 2,362 2,205 6,371 4,961 11,862 27,761
-----------------------------------------------------------------------------------
Total $ 69,346 $ 29,773 $ 14,461 $ 7,285 $38,292 $159,157
-----------------------------------------------------------------------------------
Interest sensitive liabilities
Transaction deposits $ 56,502 $ - $ - $ - $ - $ 56,502
Time deposits 29,354 9,117 8,698 2,087 1,247 50,503
Borrowings 16,500 2,000 5,400 4,384 4,553 32,837
-----------------------------------------------------------------------------------
Total $102,356 $ 11,117 $ 14,098 $ 6,471 $ 5,800 $139,842
-----------------------------------------------------------------------------------
Excess (deficiency) of interest
sensitive assets over
interest sensitive liabilities ("GAP") $(33,010) $ 18,656 $ 363 $ 814 $32,492
Cumulative GAP $(33,010) $(14,354) $(13,991) $(13,177) $19,315
Cumulative rate sensitive assets as a
percent of cumulative rate
sensitive liabilities 67.75% 87.35% 89.03% 90.17% 113.81%
======================================================================
Cumulative excess (deficiency) of rate
sensitive assets over rate
sensitive liabilities as a
percentage of total assets (19.73%) (8.5%) (8.36%) (7.88%) 11.55%
======================================================================
</TABLE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
HOME PORT BANCORP, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
6
<PAGE>
BALANCE SHEET ANALYSIS
During 1995 the Company's total assets increased by $5.0 million, or 3.0%, to
$167.3 million from $162.3 million at December 31, 1994. During 1994 total
assets increased by $27.8 million, or 20.7%, from $134.5 million at December 31,
1993. The following paragraphs discuss the significant changes in the major
balance sheet categories during these periods.
LOANS
Loans, net of the allowance for possible losses and including loans held for
sale, increased by $10.9 million, or 9.2%, in 1995 to $129.1 million from $118.2
million the previous year. Loans increased by $30.1 million, or 34.2%, during
1994 from $88.1 million at December 31, 1993. At December 31, 1995 the loan
portfolio represented 77.2% of total assets compared to 72.9% at December 31,
1994 and 65.5% at December 31, 1993. These increases reflect management's
intention to add to its loan portfolio together with the strengthening local
economy and the Bank's marketing efforts. The majority of the loan portfolio,
86.6% at December 31, 1995, consists of adjustable rate loans.
Real estate loan originations, including both commercial and residential
properties, were $59.2 million in 1995 compared to $60.6 million in 1994 and
$46.5 million in 1993. Originations remained strong in 1995 due to a continuing
high level of new construction on Nantucket, a favorable interest rate
environment and a strong marketing effort by the Bank. The increased level of
construction is evidenced in the Bank's portfolio of residential and commercial
construction loans which, before deducting unadvanced funds, increased by 51.7%
in 1995 to $39.6 million from $26.0 million in the prior year. Construction
loans outstanding were $9.6 million at December 31, 1993. Residential
construction loans consist of loans to individuals for the construction of their
primary or secondary homes. Commercial construction loans generally consist of
loans to existing businesses for expansion or improvement of their operating
facilities. Commercial real estate loans outstanding increased by 24.8% in 1995
to $34.0 million compared to $27.4 million in 1994 and $25.0 million in 1993.
The increase is due to an increased level of business activity due to the
favorable economic conditions as well as the Bank's efforts to increase this
business.
Real estate loans sold in the secondary market totaled $27.7 million in 1995
compared to $13.1 million during 1994 and $11.7 million during 1993. Currently,
the Bank's policy is to sell virtually all of its longer-term (greater than 10
years) fixed-rate loans and a portion of its adjustable rate loans. A portion
of adjustable rate loans are retained. The ALCO reviews this policy from time
to time as part of the Bank's overall asset/liability management strategy.
At December 31, 1995, the Bank had $8.6 million of loans held for sale in the
secondary market, compared to $8.0 million at year end 1994 and $6.3 million at
the close of 1993. These loans are carried at the lower of cost or market value
which is based upon an estimation of outstanding investor commitments or, in the
absence of such commitments, current investor yield requirements. At December
31, 1995, the market value was greater than the book value of these loans,
therefore, there was no provision for unrealized loss. However, changes in
interest rates may affect the market value of loans held for sale and may impact
future earnings.
SECURITIES
Total securities decreased by $3.8 million, or 12.6%, at December 31, 1995 to
$26.0 million from $29.8 million in the prior year. During 1994 securities
decreased by $6.6 million, or 18.2%, from $36.4 million at December 31, 1993.
These reductions in the securities portfolio reflect the Company's emphasis on
increasing the loan portfolio. Prior to 1994 the Company had increased the
securities portfolio as part of an overall strategy to leverage capital
resources. The securities portfolio is not actively traded by the Company; the
majority of the portfolio (70% at December 31, 1995) is classified as held to
maturity. At December 31, 1995 total securities represented 15.6% of total
assets at December 31, 1995 compared to 18.4% for 1994 and 27.1% for 1993.
DEPOSITS
Total deposits increased $10.0 million, or 9.6%, in 1995 to $114.4 million
from $104.4 million at December 31, 1994. During 1994 deposits increased by
$11.8 million, or 12.8%, from $92.6 million at December 31, 1993. Transaction
deposits (demand, checking, savings and money market) accounted for 43% of the
1995 increase and
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
HOME PORT BANCORP, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
7
<PAGE>
83% of the 1994 increase. These increases represent the continuing efforts of
the Bank to attract additional activity from existing account relationships as
well as an ongoing marketing program to obtain new depositors.
The Bank supplements its retail deposit base with funds obtained through
national brokerage networks, primarily to compensate for some of the seasonal
outflow of deposits. Fully insured brokered deposits totaled $4.8 million or
4.2% of total deposits at December 31, 1995 compared to $5.1 million, or 4.9% of
total deposits the previous year.
BORROWED FUNDS
Borrowed funds totaled $32.8 million at December 31, 1995, $33.1 million at
December 31, 1994 and $18.9 million at December 31, 1993. These borrowings
consist of FHLB advances with maturities ranging from 3 months to 5 years.
Borrowings have been used to fund the increases in loans during 1994 and 1995 as
well as to meet short term and seasonal liquidity demands. The Bank's goal has
been and continues to be to minimize the need for borrowings by increasing
deposits, however, there is no assurance that this can be accomplished.
NON-PERFORMING ASSETS
At December 31, 1995, the Bank had no non-performing loans compared to
$433,000 at December 31, 1994 and $247,000 at December 31, 1993.
The following table presents information with respect to the Bank's non-
performing assets at indicated dates. In addition, at December 31, 1995 the
Bank had no loans which were considered "impaired" within the meaning of SFAS
No. 114 and 118. At December 31, 1994 and 1993, the Bank had loans totaling
$96,000 in each of these years that were "troubled debt restructurings" within
the meaning of SFAS No. 15.
<TABLE>
<CAPTION>
At December 31,
------------------------------------
(dollars in thousands) 1995 1994 1993
------------------------------------
<S> <C> <C> <C>
Loans accounted for on a
non-accrual basis:
Real estate:
Residential $ - $ - $ -
Commercial - 357 -
Commercial business - - -
Consumer - - -
------------------------------------
Total $ - $ 357 $ -
------------------------------------
Accruing loans which are contractually past due 90 days or more:
Real estate:
Residential $ - $ 76 $ 247
Commercial - - -
Commercial business - - -
Consumer - - -
------------------------------------
Total $ - $ 76 $ 247
------------------------------------
Total of non-accrual and 90 days past due loans $ - $ 433 $ 247
====================================
Percentage of total loans - % 0.36% 0.27%
====================================
Other real estate owned $ - $ 45 $ 883
====================================
</TABLE>
After the end of 1995 management identified $796,000 of additional loans that,
while currently performing, may pose potential problems due to some doubts about
the ability of the borrowers to comply with all of their present loan repayment
terms. The resolution of these loans is not yet known.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
HOME PORT BANCORP, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
8
<PAGE>
Accrual of interest on loans is discontinued either when doubt exists as to
the timely collection of interest or principal, or when a loan becomes
contractually past due by 90 days with respect to interest or principal and the
collateral value is not sufficient to ensure the payment in full of principal
and interest. When a loan is placed on nonaccrual status, all interest
previously accrued but not collected is charged against current period income.
When collection procedures do not bring the loan to a performing status, the
Bank generally institutes action to foreclose upon the property or to acquire
the property by deed in lieu of foreclosure.
PROVISION FOR POSSIBLE LOAN LOSSES
Loan loss reserves are established in accordance with generally accepted
accounting principles. Management considers many factors when establishing the
Company's allowance for possible loan losses, including such factors as the size
and risk characteristic of the loans in the Bank's portfolio, charge-off
experience, loan delinquency trends, the value of collateral securing loans in
the portfolio, future loss potential, concentration of credit and present and
prospective economic and market conditions. Management presents its analysis
and recommends the amount of loan loss reserves to be maintained to the Board of
Directors each month for its review and approval. No such provisions have been
required during fiscal 1995, 1994 or 1993. The allowance for loan losses at
December 31, 1995 was $2.2 million, representing a net increase of $95,000 from
December 31, 1994. Loan loss reserves at December 31, 1995 were 1.72% of total
loans. There were no non-performing loans at December 31, 1995. The Bank
believes its current level of loan loss reserves to be adequate. Any unforeseen
future economic problems, however, may lead to additional delinquencies which
may require additional provisions for possible loan losses. The Bank was last
examined by the Federal Deposit Insurance Corporation ("FDIC") on December 31,
1994.
CAPITAL
Stockholders' equity totaled $18.4 million or 10.99% of assets on December 31,
1995 compared to $18.5 million or 11.41% at December 31, 1994 and $21.9 million
or 16.30% at December 31, 1993. The Company raised additional capital in 1988
with the intention of possibly acquiring an additional banking subsidiary,
however, as the Company has no current intention to make any such acquisition,
it has sought to utilize this capital to increase the return to its investors.
Over the past three years, to the extent practicable, the Bank has leveraged
this capital through investments in a mix of mortgage loans and securities.
Also, the Company has returned some capital to shareholders in the form of
special dividends. Special dividends declared totaled $1.8 million in 1995 and
$4.6 million in 1994. In addition to these special dividends, regular quarterly
dividends of $1.1 million were declared in both 1995 and 1994. Operating
earnings of $2.8 million in 1995 and $2.1 million in 1994 were added to capital.
Stock options exercised added $253,000 to capital in 1994.
The Bank is an FDIC insured institution subject to the FDIC regulatory capital
requirements. The FDIC regulations require all FDIC insured institutions to
maintain minimum levels of Tier 1 capital. Highly rated banks (i.e., those with
a composite rating of 1 under the CAMEL rating system) are required to maintain
Tier 1 capital of at least 3% of their total assets. All other banks are
required to have Tier 1 capital of 4% to 5%. The FDIC has authority to impose
higher requirements for individual banks. At December 31, 1995, the Bank's
capital ratios were in excess of these capital requirements.
The Company, as a bank holding company, is also subject to regulatory capital
requirements, including the Tier 1 capital levels described above. At December
31, 1995 the Company's capital ratios were in excess of these capital
requirements.
LIQUIDITY
Liquidity is the measure of a company's ability to generate sufficient cash
flow to meet present and future funding obligations. Dividends from the Bank
represent the only source of liquidity for the Parent Company. The Bank's
sources of liquidity are customer deposits, amortization and prepayments on
loans, advances from the Federal Home Loan Bank, sale of loans in the secondary
market and maturities and sales of securities. As a member of the Depositors
Insurance Fund ("DIF") the Bank also has a right to borrow from the DIF for
short term cash needs by pledging certain assets, although it has never
exercised this right. The Bank's liquidity management program is designed to
assure that sufficient funds are available to meet its current and future needs.
The Bank believes that it has sufficient resources to meet its funding
commitments.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
HOME PORT BANCORP, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
Firm commitments to grant loans at December 31, 1995 totaled $6.8 million,
unused lines of credit equaled $9.3 million, the unadvanced portion of
construction loans equaled $26.2 million and stand-by letters of credit
9
<PAGE>
outstanding aggregated $54,000. The Bank believes that it has adequate sources
of liquidity to fund such commitments.
IMPACT OF INFLATION
The consolidated financial statements and related consolidated financial data
presented herein have been prepared in accordance with generally accepted
accounting principles which require the measurement of financial position and
operating results in terms of historical dollars without considering the changes
in the relative purchasing power of money over time due to inflation. The
primary impact of inflation on operations of the Company is reflected in
increased costs. Unlike most industrial companies, virtually all the assets and
liabilities of a financial institution are monetary in nature. As a result,
interest rates have a more significant impact on a financial institution's
performance than the effects of general levels of inflation. Interest rates do
not necessarily move in the same direction or in the same magnitude as the price
of goods and services.
RECENT ACCOUNTING DEVELOPMENTS
ACCOUNTING FOR MORTGAGE SERVICING RIGHTS
In May 1994 the Financial Accounting Standards Board issued SFAS No. 122,
"Accounting for Mortgage Servicing Rights," which amends SFAS No. 65,
"Accounting for Certain Mortgage Banking Activities." The Statement is
effective for fiscal years beginning after December 15, 1995; however early
adoption is permitted. The Statement requires that a mortgage banking
enterprise recognize as separate assets rights to service mortgage loans for
others, regardless of how those servicing rights are acquired. Additionally,
the Statement requires that the capitalized mortgage servicing rights be
assessed for impairment based on the fair value of those rights, and that
impairment be recognized through a valuation allowance. The Bank adopted this
Statement on January 1, 1996. The impact of adoption of this Statement was
immaterial.
10
<PAGE>
CONSOLIDATED BALANCE SHEET (In Thousands, Except Per Share Data)
HOME PORT BANCORP, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
December 31,
1995 1994
---------------------
<S> <C> <C>
Assets
Cash and due from banks $ 4,886 $ 4,554
Interest bearing deposits in banks 1,750 49
Federal funds s old - 4,910
---------------------
Total cash and cash equivalents 6,636 9,513
Securities held to maturity (market value $18,089 and 18,330 28,152
$26,505) (note 2)
Securities available for sale (amortized cost of $7,681 7,695 1,619
and $1,683) (note 3)
Loans, net of allowance for possible loan lo sses of 120,540 110,205
$2,249 and $2,154 (notes 4 and 7)
Loans held for sale 8,607 8,020
Other real esta te owned - 45
Land, buildings and equipment, net (note 5) 1,244 920
Accrued income receivabl e 1,104 825
Net deferred tax asset (note 8) 85 647
Stock in FHLB-Boston, at cost (note 7) 2,321 1,714
Prepaid expenses and other assets 710 664
---------------------
Total assets $167,272 $162,324
=====================
Liabilities and Stockholders' Equity
Liabilities :
Deposits (note 6) $114,357 $104,386
Borrowed funds (note 7) 32,837 33,107
Accrued expenses 1,106 1,461
Dividend payable ( note 14) - 4,605
Other liabilities 593 241
---------------------
Total liabilities 148,893 143,800
---------------------
Commitments and contingencies (notes 10, 11, and 1 4)
Stockholders' equity (notes 8, 13 and 14)
Preferred stock, $.01 par value, 2,000,000 shares
authorized, none issued - -
Common stock, $.01 par value, 10,0 00,000 shares
authorized, 2,325,494 shares issued 23 23
Additional paid-in capital 17,473 17,473
Retained earnings (note 13) 5,271 5,462
Unrealized gain (loss) on securities available for
sale, net of taxes (note 3) 9 (37)
Less: Treasury stock, at cost (483,604 shares) (4,397) (4,397)
---------------------
Total stockholders' equity 18,379 18,524
---------------------
Total liabilities and stockholders' equity $167,272 $162,324
=====================
</TABLE>
See accompanying notes to consolidated financial statements.
11
<PAGE>
CONSOLIDATED STATEMENTS OF EARNINGS (In Thousands, Except Per Share Data)
HOME PORT BANCORP, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
Years Ended December 31,
1995 1994 1993
------------------------------------------
<S> <C> <C> <C>
Interest and dividend income:
Interest on loans $11,356 $ 8,757 $6,553
Interest on securities 1,614 1,745 1,552
Dividends 171 141 14
Federal funds sold 101 153 45
------------------------------------------
Total interest and dividend income 13,242 10,796 8,164
------------------------------------------
Interest expense:
Interest on depositors' accounts (note 6) 3,692 3,169 2,913
Interest on borrowed funds (note 7) 2,295 1,438 126
------------------------------------------
Total interest expense 5,987 4,607 3,039
------------------------------------------
Net interest and dividend income 7,255 6,189 5,125
Provision for possible loan losses (note 4) - - -
------------------------------------------
Net interest and dividend income after
provision for possible loan losses 7,255 6,189 5,125
------------------------------------------
Non-interest income:
Deposit servicing fees 303 278 267
Loan servicing fees (note 4) 229 138 146
Other fees and income 314 258 194
Net gain from sales of mortgage loans 24 11 164
Net gain (loss) from securities and other assets (note 3) (26) (126) 26
------------------------------------------
Total non-interest income 844 559 797
------------------------------------------
Non-interest expense:
Salaries and employee benefits (note 9) 1,978 1,710 1,480
Building and equipment expenses 380 361 301
Loss (gain) on other real estate owned 9 (262) (34)
Deposit insurance fees 159 234 249
Professional fees 251 249 117
Other 817 966 859
------------------------------------------
Total non-interest expense 3,594 3,258 2,972
Income before income taxes and cumulative
effect of a change in accounting principle 4,505 3,490 2,950
Provision for income taxes (note 8) 1,749 1,381 1,251
------------------------------------------
Income before cumulative effect of a change in accounting principle 2,756 2,109 1,699
Cumu lative effect of a change in accounting principle (note 1) - - 455
------------------------------------------
Net income $2,756 $2,109 $ 2,154
==========================================
Earnings per common share before cumu lative
effect of a change in accounting principle $1.50 $1.15 $0.85
Earnings per common share for the cumulative
effect of a change in accounting principle $0.00 $0.00 $0.23
------------------------------------------
Earnings per comm on share $1.50 $1.15 $1.08
==========================================
Weighted number of common shares outstanding 1,842 1,836 1,989
==========================================
</TABLE>
See accompanying notes to consolidated financial statements
12
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CHANGES
IN STOCKHOLDERS' EQUITY (In Thousands, Except Per Share Data) HOME PORT BANCORP, INC. AND SUBSIDIARIES
- ---------------------------------------------------------------------------------------------------------------------------------
Net
Unrealized
Gain (loss) on
Additional Securities Total
Common Paid-in Retained ESOP Treasury Available Stockholders'
Stock Capital Earnings Obligation Stock For Sale Equity
------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1992 $22 $16,561 $ 7,903 $(145) $(1,353) $ - $22,988
Net unrealized gain on se curities
available for sale at December 31, 1993 - - - - - 24 24
Cash dividends pa id at $.51 per share - - (995) - - (995)
Payoff ESOP debt guarantee - - - 145 - - 145
Common stock acquired (266,904 shares) - - - - (3,044) - (3,044)
Stock options exercised (75,000 shares)
inclusive o f tax effect - 660 - - - - 660
Net income - - 2,154 - - - 2,154
------------------------------------------------------------------------------------
Balance at December 31, 1993 22 17,221 9,062 - (4,397) 24 21,932
Change in unreal ized loss on securities
available for sale - - - - - (61) (61)
Special dividend declared at $2.50 per share - - (4,605) - - - (4,605)
Cash dividends paid at $.60 per share - - (1,104) - - - (1,104)
Stock options exercised (48,278 sh ares)
inclusive of tax effect 1 252 - - - - 253
Net income - - 2,109 - - - 2,109
------------------------------------------------------------------------------------
Balance at December 31, 1994 23 17,473 5,462 - (4,397) (37) 18,524
Changes in unrealized los s on securities
available for sale - - - - - 46 46
Cash dividends paid at $.60 per share - - (1,105) - - - (1,105)
Special dividen d paid at $1.00 per share - - (1,842) - - - (1,842)
Net income - - 2,756 - - - 2,756
------------------------------------------------------------------------------------
Balance at December 31, 1995 $23 $17,473 $ 5,271 $ - $(4,397) $ 9 $18,379
====================================================================================
</TABLE>
See accompanying notes to consolidated financial statements
13
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS (In Thousands) HOME PORT BANCORP, INC. AND SUBSIDIARIES
Years Ended December 31,
1995 1994 1993
-------------------------------------------------
<S> <C> <C> <C>
Net cash flows from operating activities:
Net income $ 2,756 $ 2,109 $ 2,154
Adjustments to reconcile net income to net cash
provided by operating activities:
Net (increase) decrease in accrued income receivable (279) 49 (31)
Net increase (decrease) in accrued expenses (355) 592 (61)
Net amortization of securities premiums 49 365 449
(Gain) Loss from other real estate owned 9 (262) (34)
Net (increase) decrease in loans held for sale (563) (1,742) 3,661
Amortization of deferred loan origination fees (318) (334) (290)
Amortization of deferred premiums on loans sold - 170 95
Depreciation of building and equipment 182 145 118
Net (increase) decrease in prepaid expenses and other assets (67) (322) 112
Net increase (decrease) in other liabilities 352 (15) 11
Net loss on writedown of fixed asset - - 31
Deferred income taxes 530 (24) (541)
Net loss (gain) on securities and other assets 26 126 (26)
Net (gain) on sale of mortgage loans (24) (11) (164)
-------------------------------------------------
Net cash provided by operating activities 2,298 846 5,484
-------------------------------------------------
Cash flows from investing activities
Purchases of securities held to maturity (1,214) (7,909) (29,616)
Purchases of securities available for sale (3,758) (2,145) -
Proceeds from sales of securities available for sale 1,949 3,760 7,501
Proceeds from maturities of securities 5,290 10,164 14,043
Principal payments on mortgage-backed securities 1,503 2,178 643
Net increase in loans (10,367) (28,012) (22,382)
Purchases of land, buildings and equipment (506) (404) (101)
Proceeds from the sales of other real estate owned 386 1,100 1,171
Purchase of Federal Home Loan Bank stock (607) (964) (750)
-------------------------------------------------
Net cash used in investing activities (7,324) (22,232) (29,491)
-------------------------------------------------
Cash flows from financing activities:
Proceeds from stock options exercised - 253 660
Net increase in deposits 9,971 11,825 10,798
Amortization of Employee Stock Ownership - debt guarantee - - 145
Federal Home Bank advances 5,900 17,166 10,500
Federal Home Loan Bank repayments (3,670) (8,500) -
Net (decrease) increase in short term borrowings (2,500) 5,561 8,235
Payments to acquire treasury stock - - (3,044)
Cash dividends paid (7,552) (1,104) (995)
-------------------------------------------------
Net cash provided by financing activities 2,149 25,201 26,299
-------------------------------------------------
Net (decrease) increase in cash and cash equivalents (2,877) 3,815 2,292
Cash and cash equivalents at beginning of year 9,513 5,698 3,406
-------------------------------------------------
Cash and cash equivalents at end of year $ 6,636 $ 9,513 $ 5,698
=================================================
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest $ 5,968 $ 4,497 $ 2,978
Income taxes 1,587 846 1,285
Loans foreclosed and in-substance foreclosures
transferred to other real estate owned 350 45 987
Securities transferred from held to maturity to available for sale 4,189 - -
Dividends declared 2,947 4,605 -
Non-cash gains on sales of loans - - 52
</TABLE>
See accompanying notes t o consolidated financial statements
14
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
HOME PORT BANCORP, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) BUSINESS
Home Port Bancorp, Inc. (the "Company") provides a full range of banking
services to individual and corporate customers through its subsidiary, Nantucket
Bank (the "Bank"), a state chartered savings bank located on the island of
Nantucket, Massachusetts. The Bank is subject to competition from other
financial institutions. The Bank is subject to the regulations of, and periodic
examinations by, the Federal Deposit Insurance Corporation ("FDIC") and the
Massachusetts Division of Banks. The Company is subject to the regulations of,
and periodic examinations by, the Federal Reserve Bank. The Bank's deposits are
insured by the Bank Insurance Fund of the FDIC up to $100,000 per account and
the Depositors Insurance Fund for deposits in excess of $100,000.
(b) BASIS OF FINANCIAL STATEMENT PRESENTATION
The accompanying consolidated financial statements include the accounts of
Home Port Bancorp, Inc. and its wholly owned subsidiaries Nantucket Bank and
N.B. Securities, Inc. All significant intercompany balances and transactions
have been eliminated in consolidation.
The financial statements have been prepared in conformity with generally
accepted accounting principles. In preparing the financial statements,
management is required to make estimates and assumptions that affect the
reported amounts of assets and liabilities as of the date of the balance sheet
and revenues and expenses for the period. Actual results could differ from
those estimates.
Material estimates that are particularly susceptible to change relate to the
determination of the allowance for loan losses and the valuation allowance for
the deferred tax asset.
(c) STATEMENT OF CASH FLOWS
Cash and cash equivalents are defined to include cash and due from banks,
interest bearing deposits in banks and Federal funds sold. Short term
borrowings are defined as borrowings having an original maturity of three months
or less.
(d) SECURITIES
Securities that the Company has the positive intent and ability to hold to
maturity are classified as securities held to maturity and are carried at
amortized cost.
Securities that are held for indefinite periods of time and not intended to be
held to maturity and marketable equity securities are classified as available
for sale and are recorded at aggregate market value with the net unrealized gain
or loss reported as a separate component of stockholders' equity.
Interest and dividend income, including amortization of premiums and accretion
of discounts, for both available for sale and held to maturity securities is
accrued and included in interest income. Premiums and discounts are amortized
and accreted on a straight-line basis to maturity, the result of which
approximates the level-yield method, and are included in interest income. The
specific identification method is used to determine realized gains and losses on
securities available for sale.
When a security suffers a loss in value which is considered other than
temporary, such loss is recognized by a charge to earnings.
(e) LOANS
Loans are reported at the principal balance outstanding, net of deferred loan
origination fees. Loans are placed on non-accrual status and are considered
non-performing either when doubt exists as to the full and timely collection of
interest or principal or when a loan becomes contractually past due 90 days with
respect to interest or principal and the collateral value is not sufficient to
insure the payment in full of principal and interest. When a loan is placed on
non-accrual status all interest previously accrued but not collected is reversed
against current period interest income. Interest accruals are resumed on such
loans only when they are brought current with respect to interest and principal
and when, in the judgment of management, the loans are estimated to be fully
collectible as to both principal and interest.
15
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
HOME PORT BANCORP, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
Effective January 1,1995 the Company adopted SFAS No.114 "Accounting by
Creditors for Impairment of a Loan" and SFAS No. 118, "Accounting by Creditors
for Impairment of a Loan - Income Recognition and Disclosure." These statements
require changes in both the disclosure and impairment measurement of certain
loans. Adoption of these statements had no material impact on the Company's
financial position or results of operations. At December 31, 1995 the Company
had no impaired loans as defined under SFAS No. 114 and 118.
Impaired loans are commercial, commercial real estate, and individually
significant mortgage and consumer loans for which it is probable that the
Company will not be able to collect all amounts due according to the contractual
terms of the loan agreement. The definition of "impaired loans" is not the same
as the definition of "non-accrual loans," although the two categories overlap.
Non-accrual loans include impaired loans and are those on which the accrual of
interest is discontinued when the collectability of principal or interest is
uncertain or payments of principal or interest have become contractually past
due 90 days and the collateral value is not sufficient to insure payment in
full. The Company may choose to place a loan on non-accrual status due to
payment delinquency or uncertainty of collectability, while not classifying the
loan as impaired, if (i) it is probable that the Company will collect all
amounts due in accordance with the contractual terms of the loan or (ii) the
loan is not a commercial, commercial real estate or an individually significant
mortgage or consumer loan. Factors considered by management in determining
impairment include payment status and collateral value. The amount of
impairment for these types of impaired loans is determined by the difference
between the present value of the expected future cash flows related to the loan,
using the original contractual interest rate, and its recorded value, or, as a
practical expedient in the case of collateralized loans, the difference between
the fair value of the collateral and the recorded amount of the loans. When
foreclosure is probable, impairment is measured based on the fair value of the
collateral. Mortgage and consumer loans which are not individually significant
are measured for impairment collectively. Loans that experience insignificant
payment delays and insignificant shortfalls in payment amounts generally are not
classified as impaired. Management determines the significance of payment
delays and payment shortfalls on a case-by-case basis, taking into consideration
all of the circumstances surrounding the loan and the borrower, including the
length of the delay, the reasons for the delay, the borrower's prior payment
record, and the amount of the shortfall in relation to the principal and
interest owed.
Restructured accruing loans entered into prior to the adoption of these
statements are not required to be reported as impaired unless such loans are not
performing in accordance with the restructured terms at adoption of SFAS No.
114. Loan restructurings entered into after adoption of SFAS No. 114 are
reported as impaired loans, and impairment is measured as described above using
the loan's pre-modification rate of interest.
SFAS No. 114 also changes the criteria for classification of a loan as an in-
substance foreclosure. Beginning January 1, 1995, loans are classified as in-
substance foreclosure when the Company is in possession of the collateral.
Loan origination fees, net of certain direct loan origination costs, are
considered adjustments of interest rate yield and amortized into interest income
over the loan term by use of the interest method. When loans are sold in the
secondary market, the remaining balance of the amount deferred is included in
gain (loss) on sale of loans.
(f) LOANS HELD FOR SALE
Loans intended for sale in the secondary market are carried at the lower of
aggregate net loan balance or estimated market value. Market value is estimated
based upon outstanding investor commitments or, in the absence of such
commitments, based on current investor yield requirements. Net unrealized
losses are provided for in a valuation allowance by charges to operations.
Gains and losses on loan sales are determined using the specific
identification method. Interest income on loans held for sale is accrued
currently and classified as interest income on loans.
(g) ALLOWANCE FOR POSSIBLE LOAN LOSSES
Possible losses on loans are provided for under the allowance method of
accounting. The allowance is increased by provisions charged to operations
based on amounts considered necessary to meet reasonably foreseeable losses.
Realized losses, net of recoveries, are charged directly to the allowance.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
HOME PORT BANCORP, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
16
<PAGE>
The adequacy of the allowance is determined by management's evaluation of the
risk of the loan loss based on an assessment of the types of loans in the
portfolio, delinquencies and other factors. While management uses current
information in establishing the allowance, future adjustments to the allowance
may be necessary if economic conditions differ substantially from the
assumptions used in making the evaluation. In addition, various regulatory
agencies, as an integral part of their examination process, periodically review
the Bank's allowance for loan losses. Such agencies may require the Bank to
recognize additions to the allowance based on judgments different from those of
management.
(h) OTHER REAL ESTATE OWNED
After foreclosure, foreclosed assets are presumed to be held for sale and are
recorded at the lower of the carrying value of the loan or the fair value of the
asset acquired minus estimated costs to sell. If the fair value of the asset
minus the estimated cost to sell is less than the carrying value, the deficiency
is recognized as a valuation allowance. Subsequent increases in fair value
minus selling costs reduce the valuation allowance but not below zero.
Increases or decreases in the valuation allowance are charged or credited to
gain/loss on other real estate owned. Costs relating to holding the property
are charged to expense. Gains upon disposition are reflected in the statements
of operations as realized. Realized losses are charged to the valuation
allowance.
(i) LAND, BUILDING, AND EQUIPMENT
Land is stated at cost. Building and equipment are stated at cost, less
allowances for depreciation computed on the straight-line method over the
estimated useful lives of the respective assets. The cost of maintenance and
repairs is charged to income as incurred.
(j) INCOME TAXES
The Bank recognizes income taxes under the asset and liability method. Under
this method, deferred tax assets and liabilities are established for the
temporary differences between the accounting basis and the tax basis of the
Bank's assets and liabilities at enacted tax rates expected to be in effect when
the amounts related to such temporary differences are realized or settled. The
Bank's deferred tax asset is reviewed and adjustments to such assets are
recognized as deferred income tax expense or benefit based upon management's
judgment relating to the realizability of such asset. Effective January 1, 1993
the Bank adopted SFAS No. 109, "Accounting for Income Taxes" and began using the
asset and liability method. The cumulative effect of adopting this new method
of accounting was a one time credit to earnings of $455,000.
(k) PENSION PLAN
The Bank accounts for pension benefits using the net periodic pension cost
method, which recognizes the compensation cost of an employee's pension benefit
over that employee's approximate service period.
(l) EARNINGS PER SHARE
Earnings per common share are based upon the average number of common shares
outstanding.
(m) RECLASSIFICATION
Certain amounts in the 1994 and 1993 financial statements have been
reclassified to conform to the 1995 presentation without effect on stockholders'
equity or net income.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
HOME PORT BANCORP, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
(2) SECURITIES HELD TO MATURITY
17
<PAGE>
(in thousands)
Securities held to maturity are summarized by book value, contractual
maturity, and approximate market values as follows:
<TABLE>
<CAPTION>
December 31,
-------------------------------------------
1995 1994
-------------------------------------------
Book Market Book Market
Value Value Value Value
------------------- ------------------
<S> <C> <C> <C> <C>
United States Government and agency
obligations:
Maturing within one year $ 488 $ 499 $ 801 $ 790
Maturing after one year but within five years 2,789 2,768 4,755 4,553
Maturing after five years but within ten years 251 254 3,112 2,910
------------------- ------------------
Total 3,528 3.521 8,668 8,253
------------------- ------------------
Mortgage-backed securities:
Maturing after one year but within five years
FNMA 5,655 5,516 793 727
FHLMC 1,136 1,120 - -
Maturing after five years but within ten years
FNMA 1,726 1,663 7,763 7,012
FHLMC - - 1,444 1,338
Maturing after ten years
GNMA 182 181 203 189
------------------- ------------------
8,699 8,480 10,203 9,266
------------------- ------------------
State and Municipal obligations:
Maturing within one year 131 131 616 612
Maturing after one year but within five years 576 571 863 827
------------------- ------------------
Total 707 702 1,479 1,439
------------------- ------------------
Other bonds and notes:
Maturing within one year 980 977 717 716
Maturing after one year but within five years 4,316 4,308 5,804 5,596
Maturing after five years but within ten years 100 101 1,091 1,049
Maturing after ten years - - 190 186
------------------- ------------------
Total bonds 396 5,386 7,802 7,547
------------------- ------------------
Total securities held to maturity $18,330 $18,089 $28,152 $26,505
=================== ==================
</TABLE>
The gross unrealized gains (losses) on investment securities held to maturity at
December 31, 1995 and 1994 are as follows:
<TABLE>
<CAPTION>
December 31,
-------------------------------------------------------
1995 1994
------------------------- --------------------------
Unrealized Unrealized Unrealized Unrealized
Gains Losses Gains Losses
------------------------- -------------------------
<S> <C> <C> <C> <C>
United States Government and agency obligations $15 $ (22) $27 $ (442)
Mortgage-backed securities - (219) - (937)
State and municipal obligations - (5) - (40)
Other bonds, notes and debentures 11 (21) - (255)
--------------------- --------------------
Total $26 $(267) $27 $(1,674)
===================== ====================
</TABLE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
HOME PORT BANCORP, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
(3) SECURITIES AVAILABLE FOR SALE
(in thousands)
18
<PAGE>
Securities available for sale are summarized by book value, contractual
maturity and approximate market values as follows:
<TABLE>
<CAPTION>
December 31,
-------------------------------------------
1995 1994
-------------------------------------------
Amortized Market Amortized Market
Cost Value Cost Value
-------------------------------------------
<S> <C> <C> <C> <C>
United States government and agency obligations:
Maturing within one year $1,106 $1,113 $ - $ -
Maturing after one year but within five years 3,545 3,533 1,470 1,420
Maturing after five years but within ten years 250 249 - -
-------------------------------------------
Total 4,901 4,895 1,470 1,420
-------------------------------------------
State and municipal obligations
Maturing after one year but within five years 807 807 - -
-------------------------------------------
Other bonds and notes:
Maturing after one year but within five years 1,861 1,880 - -
Maturing after ten years - - 101 100
-------------------------------------------
Total 1,861 1,880 101 100
-------------------------------------------
Marketable equity securities 112 113 112 99
-------------------------------------------
$7,681 $7,695 $1,683 $1,619
===========================================
</TABLE>
The gross unrealized gains (losses) on investment securities available for sale
at December 31, 1995 and 1994 are as follows:
<TABLE>
<CAPTION>
December 31,
------------------------------------------------------
1995 1994
----------------------- -----------------------
Unrealized Unrealized Unrealized Unrealized
Gain Loss Gain Loss
----------------------- -----------------------
<S> <C> <C> <C> <C>
United States Government and agency obligations $ 14 $(20) $ - $ (50)
Other bonds, notes and debentures 22 (3) - (1)
Marketable equity securities 2 (1) - (13)
--------- --------- --------- ---------
Total $38 $(24) $ - $ (64)
======================= =======================
</TABLE>
Realized gains and losses on securities, and other assets, are as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------------------------------------------------------------
1995 1994 1993
------------------------ ------------------------- ---------------------
Realized Realized Realized Realized Realized Realized
Gains Losses Gains Losses Gains Losses
------------------------ ------------------------- ---------------------
<S> <C> <C> <C> <C> <C> <C>
U. S. government and agency $ - $(12) $11 $ (68) $ - $ (2)
obligations
Mortgage backed securities - - - - 1 -
Other bonds and notes 8 (1) 5 (74) 23 (1)
Marketable equity securities - - - - 5 -
Other assets - (21) - - - -
------------------------ ------------------------- ---------------------
Total $ 8 $(34) $16 $(142) $29 $ (3)
======================== ========================= =====================
</TABLE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
HOME PORT BANCORP, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
(4) LOANS, NET
(in thousands)
The composition of the balances of loans is as follows:
19
<PAGE>
<TABLE>
<CAPTION>
December 31,
-------------------------
1995 1994
-------------------------
<S> <C> <C>
Mortgage loans:
Residential
Fixed $ 15,888 $ 14,737
Adjustable 51,632 47,300
Residential construction 34,021 24,956
Commercial 28,660 27,404
Commercial construction 5,547 1,124
-------------------------
Total principal balances 135,748 115,521
-------------------------
Less:
Due to borrowers on uncompleted loans
Residential (21,948) (13,463)
Commercial (4,304) (214)
Deferred loan origination fees (427) (443)
-------------------------
Total mortgage loans 109,069 101,401
-------------------------
Other loans:
Commercial 7,195 6,048
Second mortgage 2,145 2,027
Home equity 1,834 1,399
Passbook and stock secured 1,342 884
Consumer 1,204 600
-------------------------
Total other loans 13,720 10,958
Less: Allowance for possible loan losses (2,249) (2,154)
Loans, net $120,540 $110,205
=========================
</TABLE>
The Bank's lending activities are conducted solely in Nantucket. The Bank
grants single family and multi-family residential loans, commercial loans and a
variety of consumer loans. In addition, the Bank grants loans for construction
of residential homes, multi-family properties, commercial real estate properties
and for land development. Most loans granted by the Bank are collateralized by
real estate. The ability and willingness of the single family residential and
consumer borrowers to honor their repayment commitments is generally dependent
on the level of overall economic activity within the borrowers' geographic area
and real estate values. The ability and willingness of commercial real estate,
commercial and construction loan borrowers to honor their repayment commitments
is generally dependent on the health of the real estate economic sector in the
borrower's geographic areas and the general economy.
In the ordinary course of business, the Bank makes loans to directors and
executive officers, including their immediate families and companies with which
they are affiliated. Such loans which are substantially on the same terms
including interest rate and collateral as those prevailing at the time of
origination for comparable transactions with other borrowers, did not involve
more than the normal risk of collectibility or present other unfavorable
features and amounted to $826 and $1,128 at December 31, 1995 and 1994,
respectively.
Set forth below is an analysis of such loans made to Directors and Officers
of the Bank as well as their related business entities who were indebted to the
Bank at any time during the years ended December 31, 1995 and 1994:
<TABLE>
<CAPTION>
1995 1994
-----------------
<S> <C> <C>
Balance at beginning of year $1,128 $ 878
Additions 199 281
Deductions (501) (31)
=================
Balance at end of year $ 826 $1,128
=================
</TABLE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
HOME PORT BANCORP, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
Loans serviced for other investors amounted to $64,295, $50,505 and $48,318 at
December 31, 1995, 1994 and 1993, respectively. Service fees earned on these
loans amounted to approximately $229, $138 and $146, respectively.
20
<PAGE>
Non-performing loans are summarized as follows:
<TABLE>
<CAPTION>
December 31,
----------------------------
1995 1994 1993
----------------------------
<S> <C> <C> <C>
Loans accounted for on a non-accrual $ - $ 357 $ -
basis
Accruing loans 90 days past due - 76 247
Restructured loans - 96 96
</TABLE>
The following table presents information regarding interest income on non-
accrual, restructured and past due loans:
<TABLE>
<CAPTION>
Years Ended December 31,
-----------------------------
1995 1994 1993
-----------------------------
<S> <C> <C> <C>
Additional interest income that would have been recorded if
all non-accrual loans were current $ - $ 11 $ 19
Interest income recognized on non-accrual and past due loans - - 15
Aggregate overdue interest on all loans - 87 87
</TABLE>
A summary of the transactions in the allowance for possible loan losses
is as follows:(in thousands)
<TABLE>
<CAPTION>
Years Ended December 31,
1995 1994 1993
---------------------------------------
<S> <C> <C> <C>
Balance at beginning of period $2,154 $2,093 $2,236
Provisions - - -
Recoveries 115 102 274
Realized losses charged to (20) (41) (417)
allowance
---------------------------------------
Balance at end of period $2,249 $2,154 $2,093
=======================================
Allocated as follows:
Residential mortgage loans $532 $ 812 $ 450
Commercial real estate loans 1,145 550 1,088
Commercial loans 156 226 247
All other loans 281 43 308
Unallocated 135 523 -
---------------------------------------
Total $2,249 $2,154 $2,093
=======================================
Realized losses charged to the allowance by type are as follows
Residential mortgage loans $ - $ - $ 22
Commercial real estate loans 7 5 112
Commercial loans - 25 187
All other loans 13 11 96
---------------------------------------
Total $ 20 $ 41 $ 417
=======================================
</TABLE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
HOME PORT BANCORP, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
(5) LAND, BUILDING AND EQUIPMENT, NET
(in thousands)
A summary of land, building, and equipment is as follows:
December 31,
--------------------
21
<PAGE>
1995 1994
------- ------
Land $ 304 $ 63
Buildings 571 571
Furniture and equipment 1,421 1,157
------- ------
2,296 1,791
Less: Accumulated depreciation (1,052) (871)
------- ------
$ 1,244 $ 920
======= ======
(6) DEPOSITS
(dollars in thousands)
A summary of deposit balances, by type, is as follows:
<TABLE>
<CAPTION>
December 31,
---------------------------------------------------
Weighted Weighted
Average Average
1995 Rate 1994 Rate
--------------------- ---------------------
<S> <C> <C> <C> <C>
Demand (non-interest bearing) $ 7,352 0.00% $ 7,166 0.00%
Savings:
NOW 25,212 1.35% 20,070 1.39%
Regular and 90-day notice accounts 13,098 2.83% 12,384 2.63%
Money market deposit accounts 17,985 3.23% 19,696 2.70%
Advance payments from mortgagors 207 0.65% 242 0.65%
-------- -------- -------- -----
Total savings 56,502 2.29% 52,392 2.17%
-------- -------- -------- -----
Time certificates of deposit 50,503 5.32% 44,828 4.25%
-------- -------- -------- -----
Total deposits $114,357 3.72% $104,386 3.13%
======== ======== ======== =====
</TABLE>
Included in time certificates are brokered certificates of deposit, amounting
to $4.8 million and $5.1 million at December 31, 1995 and 1994, respectively.
Certificates of deposit by contractual maturity date at December 31, 1995 are
summarized as follows:
<TABLE>
<CAPTION>
Under Over
$100,000 $100,000 Total
---------- ------------ ----------
<S> <C> <C> <C>
Within one year $ 19,839 $ 18,632 $38,471
From one to three years 9,232 1,553 10,785
From three to five years 886 361 1,247
---------- ------------ ----------
Total $ 29,957 $ 20,546 $50,503
========== ============ ==========
</TABLE>
Interest on savings deposits classified by type is as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------------------
1995 1994 1993
---------- ------------ ----------
<S> <C> <C> <C>
Regular, NOW, 90 day notice and advanced $ 691 $ 649 $ 594
payments from mortgagors
Money market deposits 572 591 458
Time certificates of deposit 2,429 1,929 1,861
---------- ------------ ----------
Total $ 3,692 $ 3,169 $ 2,913
========== ============ ==========
</TABLE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
HOME PORT BANCORP, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
(7) BORROWED FUNDS
(dollars in thousands)
Other borrowed funds are as follows:
<TABLE>
<CAPTION>
December 31,
--------------------------------
1995 1994
-------------- ------------
<S> <C> <C>
</TABLE>
22
<PAGE>
<TABLE>
<CAPTION>
Weighted Weighted
Average Average
Amount Rate Amount Rate
-------------------------------------- -------------------
<S> <C> <C> <C> <C>
Secured advances from Federal Home Loan Bank of Boston
Due within one year $ 18,500 6.29% $13,500 6.07%
Due from one to three years 9,784 6.13% 11,124 6.24%
Due from three to five years 4,553 6.87% 8,483 5.70%
-------------------------------------- -------------------
Total borrowings $ 32,837 6.32% $33,107 6.03%
====================================== ===================
</TABLE>
Advances from the Federal Home Loan Bank of Boston ("FHLB") are secured by a
blanket lien on residential and commercial mortgage loans and FHLB stock. As a
member of the FHLB, the Bank is required to invest in $100 par value stock of
the FHLB in the amount of 1% of its outstanding home loans or 1/20th of its
outstanding advances from the FHLB, whichever is higher. As and when such stock
is redeemed, the Bank would receive from the FHLB an amount equal to the par
value of the stock.
(8) INCOME TAXES
(dollars in thousands)
Total income tax expense was allocated as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------------
1995 1994 1993
-------------------------------
<S> <C> <C> <C>
Current tax expense:
Federal $ 914 $ 977 $ 937
State 305 428 290
1,219 1,405 1,227
-------------------------------
Deferred tax expense(benefit)
Federal 428 (1) (36)
State 170 67 2
Change in valuation allowance (68) (90) 58
-------------------------------
530 (24) 24
-------------------------------
Total income tax expense (benefit) $1,749 $1,381 $1,251
===============================
</TABLE>
The effective Federal income tax rates differ from the statutory rates as
indicated below:
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------------
1995 1994 1993
-------------------------------
<S> <C> <C> <C>
Statutory rate 34% 34% 34%
Increase (decrease) resulting from:
State income taxes (net of Federal tax
benefit) 7 9 6
Change in valuation allowance (2) (3) 2
-------------------------------
39% 40% 42%
===============================
</TABLE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
HOME PORT BANCORP, INC. AND SUBSIDIARIES
The Company and its subsidiaries on a consolidated basis are subject to Federal
income tax. Its bank subsidiary is also subject to a Massachusetts income tax at
a rate of 12.13%. The Company has been classified a securities corporation
under the provisions of the General Laws of Massachusetts, Chapter 63, Section
38B(b). As a securities corporation, the state tax for the parent company is
computed at .33% of gross receipts. Tax expense has been increased to reflect
the adjustment to the deferred tax asset for the tax impact of the Massachusetts
tax rate reduction enacted as part of the Bank Tax Reform Law signed by the
Governor of Massachusetts on July 27, 1995.
23
<PAGE>
The tax effect of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at December 31,
1995 and 1994 are presented below:
<TABLE>
<CAPTION>
December 31,
---------------
1995 1994
---------------
<S> <C> <C>
Deferred Tax assets
Deferred compensation expense $ 212 $ 220
Allowance for loan losses 188 245
Accr ued retirement expenses 96 92
Capital loss carry forward 65 119
Accrued bonus 25 17
Deferred loan origination fees - 187
Un realized loss on investment securities available for sale - 27
---------------
Total gross deferred tax asset 586 907
Less: valuation allowance (119) (187)
---------------
467 720
Deferred tax liabilities
Deferred loan origination fees 271 -
Depreciation of buildings and equipment 106 6
Unrealized ga in on investment securities available for sale 5 -
Other - 67
---------------
Total gross deferred tax liabilities 382 73
---------------
Net deferred tax asset $ 85 $ 647
===============
</TABLE>
Realization of the Company's deferred tax asset is supported by its tax
history. Management believes the existing net deductible temporary differences
that give rise to the net deferred income tax asset will reverse in periods the
Company generates net taxable income.
At December 31, 1995, the total reserve for loan losses for Federal income
tax purposes amounted to approximately $2.9 million. If this amount, or any
portion thereof, is used for purposes other than to absorb the losses for which
established, the amount so used must be included in gross income for Federal tax
purposes in the fiscal year in which used. Because the Company does not intend
to use the reserve for other than bad debts losses, deferred taxes of
approximately $1.2 million have not been provided.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
HOME PORT BANCORP, INC. AND SUBSIDIARIES
(9) EMPLOYEE BENEFITS
(dollars in thousands)
PENSION PLAN
The Company has a trusteed, noncontributory plan covering employees who meet
specific age and employment requirements, which is administered by the Savings
Bank Employee Retirement Association ("SBERA"). The plan provides for benefits
to be paid to eligible employees at retirement, based primarily upon their years
of service with
24
<PAGE>
the Bank and compensation levels near retirement. The Company's policy is to
make the maximum tax deductible contributions to the plan. Pension expense for
the reporting periods was $115 in 1995, $125 in 1994 and $96 in 1993.
The plan's funded status as of October 31 (the Plan's year end) was as
follows:
<TABLE>
<CAPTION>
1995 1994
-------- -------
<S> <C> <C>
Plan assets at fair value (invested primarily in US
Government obligations
and marketable equity securities) $ 975 $ 719
-------- -------
Actuarial present value of benefit obligations:
Vested benefits 746 554
Non-vested benefits 6 5
-------- -------
Accumulated benefit obligation 752 559
Effect of proj ected future salary increases 569 427
-------- -------
Projected benefit obligation for past service 1,321 986
-------- -------
Plan assets below pr ojected benefit obligations (346) (267)
Unrecognized net loss 116 42
-------- -------
Accrued pension cost included in accrued expe nses $ (230) $(225)
======== =======
</TABLE>
The components of net pension expense are as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
-----------------------------------
1995 1994 1993
------- -------- -------
<S> <C> <C> <C>
Service costs earned during the period $ 83 $ 85 $ 77
Interest cost on projected benefit obligation 79 102 72
Actual return on plan assets (135) (57) (56)
Net amortization and deferral 79 (13) 1
Administrative and other costs 9 8 2
------- -------- -------
Pension expense $ 115 $ 125 $ 96
======= ======== =======
</TABLE>
Significant assumptions used to develop the net periodic pension cost were as
follows:
<TABLE>
<CAPTION>
Years Ended December 31,
-----------------------------------
1995 1994 1993
------- -------- -------
<S> <C> <C> <C>
Discount rate 7.00% 8.00% 7.00%
Expected long-term rate of return on assets 8.00% 7.00% 7.00%
Rate of increase in compensation levels 6.00% 6.00% 6.00%
</TABLE>
DEFERRED COMPENSATION AGREEMENTS
The Company has entered into deferred compensation agreements with an officer
and a former officer, and has purchased life insurance policies to cover the
unfunded liability of the deferred compensation agreements. The expense related
to these agreements was $ - in 1995, $7 in 1994 and $7 in 1993.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
HOME PORT BANCORP, INC. AND SUBSIDIARIES
(10) COMMITMENTS AND FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
(in thousands)
The Bank is party to financial instruments with off-balance sheet risk in the
normal course of business to meet the financing needs of its customers and to
reduce its exposure to fluctuations in interest rates. These financial
instruments include commitments to originate and sell loans and standby letters
of credit. The instruments involve, to varying degrees, elements of credit risk
and interest rate risk in excess of the amount recognized in the
25
<PAGE>
consolidated balance sheets. The contract or notional amounts of those
instruments reflect the extent of involvement the Bank has in particular classes
of financial instruments.
The Bank's exposure to credit loss in the event of non-performance by the
other party to the financial instrument for loan commitments, unused lines of
credit, standby letters of credit and recourse agreements is represented by the
contractual amount of those instruments. The Bank uses the same credit policies
in making commitments and conditional obligations as it does for on-balance
sheet instruments. For commitments to sell loans the contract or notional
amounts do not represent exposure to credit loss. The Bank controls credit risk
on commitments to sell through credit approval, limits and monitoring
procedures.
Financial instruments whose contract amounts represent credit risk are as
follows:
<TABLE>
<CAPTION>
Contract or Notional Amount
---------------------------
December 31,
1995 1994
---------------------------
<S> <C> <C>
Commitments to originate mortgage and $ 6,834 $ 8,183
commercial loans
Unused lines of credit 9,340 1,425
Standby letters of credit 54 97
Unadvanced portions of construction 26,252 13,464
loans
</TABLE>
Commitments to originate loans and unused lines of credit are agreements to
lend to a customer provided there is no violation of any condition established
in the contract. Commitments generally have fixed expiration dates or other
termination clauses and may require payment for a fee. Since many commitments
expire without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. The Bank evaluates each customer's
creditworthiness on a case-by-case basis. The amount of collateral obtained, if
deemed necessary by the Bank upon extension of credit, is based upon
management's credit evaluation of the borrower.
Stand-by letters of credit are conditional commitments issued by the Bank to
guarantee the performance by a customer to a third party. The credit risk in
issuing letters of credit is essentially the same as involved in extending loan
facilities to customers.
(11) PENDING LEGAL MATTERS
The Company is party to certain litigation in the ordinary course of
business. Management is of the opinion that the aggregate liability, if any,
resulting from such litigation will not have a material adverse impact on
financial condition or results of operations.
(12) FAIR VALUE OF FINANCIAL INSTRUMENTS
(in thousands)
The fair value of a financial instrument is defined as the amount at which
the instrument could be exchanged in a current transaction between willing
parties, other than in a forced liquidation or sale.
Quoted market prices are used to establish fair value when they are available
for a particular financial instrument. In cases where quoted market prices are
not available, fair values are based on estimates using present value or other
valuation techniques. Those techniques include assumptions which are highly
subjective, including the timing and amount of future cash flows, risk
characteristics, economic conditions and discount rate. Changes in assumptions
could significantly affect the estimates, accordingly, the results may not be
precise.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) HOME PORT
BANCORP, INC. AND SUBSIDIARIES
Financial instrument fair value estimates, methods and assumptions are set forth
below:
CASH AND SHORT TERM INVESTMENTS
The carrying amounts reported in the statements of financial condition
approximate the fair value of those assets.
SECURITIES
Fair values for securities, including mortgage backed securities, are based
on quoted market prices.
LOANS
26
<PAGE>
The fair value of loans was estimated for groups of similar loans based on
the type of loan, interest rate characteristics, credit risk and maturity. The
fair value of performing residential and commercial mortgage loans, including
both fixed and variable rate loans, was determined using discounted cash flow
techniques with year end interest rates, incorporating estimated prepayment
factors.
ACCRUED INTEREST RECEIVABLE
The carrying amount of accrued interest receivable approximates its fair
value.
DEPOSITS
The fair value of demand deposits, NOW and savings accounts and money market
deposits are, by definition, equal to the amount payable on demand at the
reporting date (i.e. their carrying value amounts). The fair value of fixed
rate certificates of deposit are estimated using a discounted cash flow
calculation that applies year end interest rates at which similar certificates
were issued to a schedule of expected maturities of the outstanding certificates
of deposit.
BORROWED FUNDS
The fair value of borrowed funds is estimated using a discounted cash flow
analysis, based on the Company's current incremental borrowing rate for similar
types of borrowing arrangements.
OFF-BALANCE SHEET FINANCIAL INSTRUMENTS
The fair value of commitments to originate loans, unadvanced portions of
construction loans, unused lines of credit and standby letters of credit is not
considered material.
The carrying amounts and fair values of the Company's financial instruments
consisted of the following at December 31, 1995:
<TABLE>
<CAPTION>
Carrying Fair
Amount Value
------------------
<S> <C> <C>
Cash and short term investments $ 6,636 $ 6,636
Securities :
Available for sale 7,695 7,695
Held to maturity 18,330 18,089
Loans, net of allowance for possible 129,147 129,272
loan losses
Accrued income receivable 1,104 1,104
Deposits:
Regular savings 13,098 13,098
NOW 25,212 25,212
Money market 17,985 17,985
Demand 7,352 7,352
Certificates of Deposit 50,503 50,656
Borrowed Funds 32,837 33,177
</TABLE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
HOME PORT BANCORP, INC. AND SUBSIDIARIES
(13) CAPITAL REQUIREMENTS
Current Federal Deposit Insurance Corporation ("FDIC") regulations regarding
capital requirements of FDIC-insured institutions require banks to maintain a
leverage capital ratio of 4% to 5% and qualifying total capital to risk-weighted
assets of a least 8% of which at least 4% must be Tier 1 capital. Assets and
off-balance sheet items are assigned to four risk categories, each with
appropriate weights. The resulting capital ratio represents equity as a
percentage of risk-weighted assets and off-balance sheet items. The risk-based
capital rules are designed to make regulatory capital more sensitive to
differences in risk profiles among banks and bank holding companies, to account
for off-balance-sheet exposure and to minimize disincentives for holding liquid
assets.
At December 31, 1994 and 1995, the Bank's capital ratios were in excess of
these capital requirements.
27
<PAGE>
(14) DIVIDEND PAYABLE
On October 27, 1994 the Board of Directors of the Company declared a special
dividend of $2.50 to be payable on January 6, 1995 to stockholders of record as
of December 29, 1994. Dividends are payable when and if declared by the Board
of Directors in it's discretion.
The Bank may not declare or pay a cash dividend if the effect thereof would
be to reduce stockholders' equity below the regulatory required minimum.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
HOME PORT BANCORP, INC. AND SUBSIDIARY
(15) PARENT COMPANY FINANCIAL STATEMENTS
(dollars in thousands, except per share information)
The investment in Nantucket Bank by Home Port Bancorp, Inc. is presented
below on the equity method of accounting. The separate financial statements of
Home Port Bancorp, Inc. are as follows:
<TABLE>
<CAPTION>
Balance Sheets December 31,
------------------------- ------------------------
1995 1994
--------- ----------
<S> <C> <C> <C>
ASSETS
Cash and due from banks $ 763 $ 847
Federal funds sold - 3,705
Investment securities held to maturity - 1,674
Investment securities available for sale - 573
Investment in Nantucket Bank 17,645 15,685
</TABLE>
28
<PAGE>
<TABLE>
<S> <C> <C> <C>
Due from Nantucket Bank - 617
Income taxes receivable - 9
Other assets 25 38
--------- ----------
Total assets $18,433 $23,148
========= ==========
LIABILITIES
Dividend payable $ - $ 4,605
Due to Nantucket bank 15 -
Other liabilities 39 19
--------- ----------
Total liabilities 54 4,624
STOCKHOLDERS' EQUITY
Preferred stock, $.01 par value, 2,000,000 shares authorized, none issued - -
Common stock, $.01 par value, 10,000,000 shares authorized, 2,325,494
shares issued 23 23
Additional paid-in capital 17,473 17,473
Retained earnings 5,271 5,462
Unrealized gain (loss) on securities available for sale, net of taxes 9 (37)
Less: Treasury stock, at cost (483,604 shares) (4,397) (4,397)
Total stockholders' equity 18,379 18,524
--------- ----------
Total liabilities and stockholders' equity $18,433 $23,148
========= ==========
</TABLE>
<TABLE>
<CAPTION>
Statements of Operations Years Ended December 31,
------------------------ -----------------------------------
1995 1994 1993
------ ------- -------
<S> <C> <C> <C>
Income:
Dividends from Nantucket Bank $1,000 $ - $ -
Interest on investment securities 108 410 723
------- -------
Total income 1,108 410 723
Expenses:
Interest expense - - 1
Loss (gain) on securities 19 137 (14)
Operating expenses 336 550 323
------ ------- -------
Total expenses 355 687 310
------ ------- -------
Income (loss) before income taxes and equity in undistributed net
income of Nantucket Bank 753 (277) 413
Income tax benefit (84) (78) 137
------ ------- -------
Income (loss) before equity in undistributed net income of Nantucket Bank 837 (199) 276
Equity in undistributed net income of Nantucket Bank 1,919 2,308 1,878
------ ------- -------
Net income $2,756 $ 2,109 $ 2,154
====== ======= =======
</TABLE>
29
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
HOME PORT BANCORP, INC. AND SUBSIDIARIES
The parent company only statements of stockholders' equity are identical to
the consolidated statements of stockholders' equity and, therefore, are not
presented here.
<TABLE>
<CAPTION>
Statements of Cash Flows Years Ended December 31,
------------------------ ----------------------------------
1995 1994 1993
------- ------- -------
<S> <C> <C> <C>
Net cash flow from operating activities:
Net income (loss) $ 2,756 $ 2,109 $ 2,154
Adjustments to reconcile net income to net cash
provided by operating activities:
Equity in undistributed net income of Nantucket Bank (1,919) (2,308) (1,878)
Net increase (decrease) in accrued expenses and other liabilities 20 3 (321)
Net amortization (accretion) on securities (7) 53 127
Net (increase) decrease in prepaid expenses and other assets 13 294 230
Net (increase) decrease in refundable income taxes 9 13 (54)
Net (gain) loss on sales of securities 5 137 (14)
Other, net 12 - -
------- ------- -------
Net cash provided by operating activities 889 301 244
------- ------- -------
Net cash flows from investing activities:
Capital infusion to Nantucket Bank - (967) (2,502)
Purchases of investments and securities available for sale - (1,152) (5,175)
Proceeds from sale of securities available for sale 2,242 4,717 3,925
Proceeds from maturities of investments - 2,727 7,332
Net increase (decrease) in due to / from Nantucket Bank 632 (357) (385)
------- ------- -------
Net cash provided by investing activities 2,874 4,968 3,195
------- ------- -------
Net cash flows from financing activities:
Net increase (decrease) in borrowed funds - - (145)
Payoff of Employee Stock Ownership - debt guarantee
Proceeds from stock options exercised - 253 660
Payments to acquire treasury stock - - (3,044)
Cash dividends paid (7,552) (1,104) (995)
------- ------- -------
Net cash used for financing activities (7,552) (851) (3,379)
------- ------- -------
Net increase (decrease) in cash and cash equivalents (3,789) 4,418 60
Cash and cash equivalents at beginning of year 4,552 134 74
------- ------- -------
Cash and cash equivalents at end of year $ 763 $ 4,552 $ 134
======= ======= =======
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest $ - $ - $ 1
Income taxes $ 159 $ 630 $ 1,285
Cash received during the year for:
Dividends from
Nantucket Bank $ 1,000 $ - $ -
</TABLE>
30
<PAGE>
INDEPENDENT AUDITORS' REPORT
HOME PORT BANCORP, INC. AND SUBSIDIARIES
The Board of Directors and Stockholders
Home Port Bancorp, Inc.:
We have audited the accompanying consolidated balance sheets of Home Port
Bancorp, Inc. and subsidiaries as of December 31, 1995 and 1994, and the related
consolidated statements of earnings, changes in stockholders' equity, and cash
flows for each of the years in the three-year period ended December 31, 1995.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statement based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit also includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Home Port
Bancorp, Inc. and subsidiaries at December 31, 1995 and 1994, and the results of
their operations and their cash flows for each of the years in the three-year
period ended December 31, 1995 in conformity with generally accepted accounting
principles.
As discussed in note 1 to the financial statements, the Company changed its
method of accounting for income taxes effective January 1, 1993.
Boston, Massachusetts
February 1, 1996
31
<PAGE>
DIRECTORS AND OFFICERS
HOME PORT BANCORP, INC. AND SUBSIDIARIES
DIRECTORS
---------
Charles F. DiGiovanna
President of Continental Plastic Containers, Inc.
William P. Hourihan, Jr.
Vice President of Home Port Bancorp, Inc. and President of Nantucket Bank
Charles H. Jones, Jr.
General Partner of Edge Partners, L.P.
*Daniel D. McCarthy
Investment Banker
First Long Island Investors
Robert J. McKay
Management Consultant
Robert J. McKay Associates
*Karl L. Meyer
Chairman of the Board , President and CEO of Home Port Bancorp, Inc.
*Philip W. Read
President of Jared Coffin House, Inc. and Chairman of the Board
Nantucket Bank
OFFICERS
--------
Karl L. Meyer
Chairman of the Board, President and CEO
William P. Hourihan, Jr.
Vice President
Daniel P. Neath
Vice President
Robert J. McKay
Secretary
John M Sweeney
Treasurer & Chief Financial Officer
* Members of Executive Committee
32
<PAGE>
STOCKHOLDER'S INFORMATION
HOME PORT BANCORP, INC. AND SUBSIDIARIES
LEGAL COUNSEL
Gadsby and Hannah
125 Summer Street
Boston, MA 02110
INDEPENDENT AUDITORS
KPMG Peat Marwick LLP
99 High Street
Boston, MA 02110
TRANSFER AGENT AND REGISTRAR
Registrar and Transfer Company
10 Commerce Drive
Cranford, NJ 07016
Our transfer agent is responsible for our stockholder records, issuance of stock
certificates and distribution of the IRS Form 1099. Your requests concerning
these matters are most efficiently answered by corresponding directly with
Registrar and Transfer Company.
STOCKHOLDER RELATIONS
John M. Sweeney
Treasurer & CFO
Home Port Bancorp, Inc.
PO Box 988
104 Pleasant Street
Nantucket, MA 02554
(508) 228-0580
ANNUAL MEETING
The Annual Meeting of the Stockholders will be held at 10:00 a.m. on Monday, May
13, 1996 at the Wauwinet Inn, Wauwinet Road, Nantucket, MA 02554.
FORM 10-KSB
Copies of the Corporation's 1995 10-KSB annual report, as filed with the
Securities Exchange Commission, may be obtained at no charge by writing to John
M. Sweeney, Treasurer & CFO, Home Port Bancorp, Inc., PO Box 988, 104 Pleasant
Street, Nantucket, MA 02554.
STOCK MARKET DATA
Home Port Bancorp, Inc.'s common stock has been traded in the over-the-counter
market since its issuance in August 1988. Trading information has been reported
on the National Association of Securities Dealers, Inc. National Market System
under the symbol of HPBC and listed in most newspapers alphabetically
abbreviated. As of March 20, 1996, there were 416 stockholders of record and
1,841,890 outstanding shares of common stock. This does not reflect the number
of persons or entities who hold their stock in nominee or "street" name.
The range of high and low sale prices and dividends declared for the common
stock by quarter appears in the following table.
<TABLE>
<CAPTION>
Dividends
High Low Declared
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1995 4th quarter 12 1/2 10 1/4 $1.15
3rd quarter 12 3/4 10 $0.15
2nd quarter 11 10 $0.15
1st quarter 11 1/2 10 $0.15
1994 4th quarter 14 10 $2.65
3rd quarter 12 1/4 11 $0.15
2nd quarter 11 1/2 10 3/4 $0.15
1st quarter 11 3/4 10 3/4 $0.15
(Source: National Association of
Securities Dealers, Inc.)
</TABLE>
Note: The prices do not include mark-up, mark-down or commission.
33
<PAGE>
EXHIBIT (21)
SUBSIDIARIES OF THE REGISTRANT
Percentage State of
Subsidiaries (1) Owned Incorporation
- -----------------------------------------------------------------------
Nantucket Bank 100% Massachusetts
N.B. Securities, Inc. (2) 100% Massachusetts
(1) The operations of the subsidiaries are included in the consolidated
financial statements contained in the Annual Report to Stockholders
attached hereto as an exhibit.
(2) This subsidiary is wholly-owned by Nantucket Bank.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> DEC-31-1995
<CASH> 4,886
<INT-BEARING-DEPOSITS> 1,750
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 7,695
<INVESTMENTS-CARRYING> 18,330
<INVESTMENTS-MARKET> 18,089
<LOANS> 120,540
<ALLOWANCE> 2,249
<TOTAL-ASSETS> 167,272
<DEPOSITS> 114,357
<SHORT-TERM> 32,837
<LIABILITIES-OTHER> 1,699
<LONG-TERM> 0
0
0
<COMMON> 17,496
<OTHER-SE> 883
<TOTAL-LIABILITIES-AND-EQUITY> 167,272
<INTEREST-LOAN> 11,356
<INTEREST-INVEST> 1,886
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 13,242
<INTEREST-DEPOSIT> 3,692
<INTEREST-EXPENSE> 2,295
<INTEREST-INCOME-NET> 7,255
<LOAN-LOSSES> 0
<SECURITIES-GAINS> (26)
<EXPENSE-OTHER> 3,594
<INCOME-PRETAX> 4,505
<INCOME-PRE-EXTRAORDINARY> 4,505
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,756
<EPS-PRIMARY> 1.50
<EPS-DILUTED> 1.50
<YIELD-ACTUAL> 4.56
<LOANS-NON> 0
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 796
<ALLOWANCE-OPEN> 2,154
<CHARGE-OFFS> 20
<RECOVERIES> 115
<ALLOWANCE-CLOSE> 2,249
<ALLOWANCE-DOMESTIC> 2,114
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 135
</TABLE>
