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, 1996.
[ ] 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
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
104 Pleasant Street, Nantucket, Massachusetts 02554
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(Address of principal executive offices) (Zip Code)
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]
<PAGE>
State the issuer's revenues for the most recent fiscal year: $15,324,000.
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 7, 1997 which was $ 19.25
per share, was $28,718,902.
As of March 7, 1997, 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, 1996. (Parts I and II)
2. Portions of Proxy Statement for the 1997 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 [ ]
<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 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, 1996, 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 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 Federal Deposit Insurance Corporation ("FDIC").
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 FDIC up to $100 thousand per account and the Depositors
Insurance Fund, a private deposit insuring company, for deposits in excess of
$100 thousand. 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 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.
In 1996 and 1995 the Bank has emphasized planned growth in its core lending
and deposit businesses, taking advantage of a good local and regional economic
environment and a strong real estate market on Nantucket. Loans and deposits
grew by 17.1% and 18.1%, respectively, in 1996 compared to 9.2% and 9.6% in
1995.
The growth in the Bank's loan portfolio during this period has been
primarily in adjustable rate residential mortgages, with lesser increases in
commercial mortgages and commercial business loans. The Bank intends to continue
to emphasize planned growth in its lending businesses. 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
<PAGE>
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,
1996, the Bank's one year asset/liability GAP position, utilizing the
assumptions detailed below, was a negative $32.0 million or 16.6% of total
assets. This compares to a negative GAP of $14.4 million or 8.6% of total assets
when measured against the same repricing period at December 31, 1995. These
amounts do not reflect any prepayment of mortgage 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.
The Massachusetts and Nantucket Real Estate Markets. Both the Massachusetts
and Nantucket real estate markets have improved over the past several years,
after experiencing a severe downturn during the early 1990's. In Nantucket, both
the number of real estate sales and the total dollar volume of sales increased
by approximately 12% in 1996 compared to 1995. In Massachusetts as a whole, the
number of real estate sales increased approximately 11% and the dollar volume
increased approximately 16% over this period. Over the past five years the
dollar volume of Nantucket real estate sales has increased by approximately 77%.
In Nantucket in 1996 there were 41 recorded sales of properties exceeding $1
million, compared to 19 in 1995. The median price of residential real estate
sales (valued at under $1 million) was $233 thousand in Nantucket in 1996
compared to $136 thousand for Massachusetts. This median Nantucket residential
real estate sales price has increased 24% since 1994 compared to a 5% increase
in for Massachusetts as a whole. The number of foreclosures recorded at the
registry of deeds in Nantucket had declined from 43 in 1993 to 5 in 1996.
The Bank's real estate loan originations totaled $85.1 million, $59.2
million and $60.6 million, respectively, in 1996, 1995 and 1994. During these
three years Nantucket Bank has been the leader in residential real estate
mortgages recorded at the registry of deeds in Nantucket.
A deterioration in the local or national economies could have a negative
impact on the Nantucket real estate market. A downturn in the Nantucket real
estate market could result in an increase in loan delinquencies for the Bank
which could have a negative effect on the Company's results of operations due to
the possibility of additional loan loss provisions and reduced interest income.
<PAGE>
<TABLE>
<CAPTION>
Home Port Bancorp, Inc. and Subsidiary
Average Consolidated Balance Sheets
(dollars in thousands, except per share data)
Calculations are based on daily average balances.
December 31,
------------------------
1996 1995
--------- ---------
<S> <C> <C>
Assets
Cash and due from banks .................................................. $ 5,047 $ 4,708
Federal funds sold and interest bearing deposits in banks ................ 1,336 1,939
--------- ---------
Total cash and cash equivalents ....................................... 6,383 6,647
Securities ............................................................... 23,724 28,907
FHLB Stock ............................................................... 2,321 2,200
Loans
Residential real estate loans ......................................... 94,932 83,800
Commercial loans ...................................................... 42,562 36,703
Consumer loans ........................................................ 6,304 5,429
--------- ---------
Total loans ...................................................... 143.798 125,932
Less: Allowance for loan losses .......................................... (2,310) (2,203)
--------- ---------
Net loans ........................................................ 141,488 123,729
Other assets ............................................................. 2,551 3,564
--------- ---------
Total assets .................................................. $ 176,467 $ 165,047
========= =========
<PAGE>
<CAPTION>
Home Port Bancorp, Inc. and Subsidiary
Average Consolidated Balance Sheets (continued)
(dollars in thousands, except per share data)
Calculations are based on daily average balances.
December 31,
------------------------
1996 1995
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<S> <C> <C>
Liabilities and Stockholders' Equity
Deposits
Regular savings and 90 day notice ..................................... $ 13,691 $ 14,661
NOW accounts .......................................................... 25,200 22,225
Money market deposit accounts ......................................... 20,890 17,648
--------- ---------
Total transaction accounts ....................................... 59,781 54,534
Demand ................................................................... 8,972 6,034
Time ..................................................................... 52,942 47,007
--------- ---------
Total deposits .................................................. 121,695 107,575
Borrowed funds ........................................................ 33,877 35,853
Other liabilities ..................................................... 1,733 2,406
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Total liabilities ............................................. 157,305 145,834
--------- ---------
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 ..................................................... 6,090 6,115
Unrealized loss on securities available for sale, net of taxes ....... (27) (1)
Less: Treasury stock, at cost (483,604 shares) (4,397) (4,397)
--------- ---------
Total stockholders' equity .................................... 19,162 19,213
--------- ---------
Total liabilities and stockholders' equity .................... $ 176,467 $ 165,047
========= =========
</TABLE>
Lending Activities
General. The Company's banking activities are conducted solely in Nantucket
through its subsidiary, Nantucket Bank. 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.
<PAGE>
Real estate loan originations, including both commercial and residential
properties, were $85.1 million in 1996 as compared to $59.2 million in 1995 and
$60.6 million in 1994. Favorable interest rates, continuing high levels of
construction on Nantucket, and strong Bank marketing efforts have had a positive
impact on the level of loan originations. The construction growth is evident in
the Bank's portfolio of residential and commercial construction loans which,
before deducting unadvanced funds, totaled $27.1 million in 1996, an increase of
34.6% from $20.1 million in the prior year. 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 18.3% in 1996 to $33.9
million compared to $28.7 million in 1995.
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) 1996 1995
-------------------- --------------------
Amount Percent Amount Percent
------ ------- ------ -------
<S> <C> <C> <C> <C>
Mortgage loans:
Residential ........................... $ 88,589 58.55% $ 76,127 58.95%
Residential construction .............. 21,100 13.95% 17,649 13.66%
Commercial ............................ 33,891 22.40% 28,660 22.19%
Commercial construction ............... 5,960 3.94% 2,456 1.90%
--------- ------ --------- ------
Total principal balances ........... 149,540 98.84% 124,892 96.70%
Less due to borrowers on incomplete loans:
Residential ........................... (6,743) (4.46%) (5,576) (4.31%)
Commercial ............................ (3,342) (2.21%) (1.213) (0.94%)
Less deferred loan origination fees ...... (517) (0.34%) (427) (0.33%)
--------- ------ --------- ------
Total mortgage loans ............... 138,938 91.83% 117,676 91.12%
Other loans
Consumer .............................. 1,695 1.12% 1,204 0.93%
Second mortgage ....................... 1,987 1.32% 2,145 1.66%
Home equity ........................... 1,542 1.02% 1,834 1.42%
Commercial ............................ 8,534 5.64% 7,195 5.57%
Passbook and stock secured ............ 960 0.63% 1,342 1.04%
--------- ------ --------- ------
Total other loans .................. 14,718 9.73% 13,720 10.62%
Less: Allowance for loan losses .......... (2,365) (1.56%) (2,249) (1.74%)
========= ====== ========= ======
Loans, net ............................... $ 151,291 100.00% $ 129,147 100.00%
========= ====== ========= ======
</TABLE>
<PAGE>
The following table shows, as of December 31, 1996, information concerning the
Bank's construction loans, commercial mortgage, commercial business and
construction loans. All of these loans have adjustable rates of interest except
for those with remaining maturities in excess of 5 years. Construction loans are
presented net of unadvanced funds.
<TABLE>
<CAPTION>
Period to Maturity or Repricing from December 31, 1996
----------------------------------------------------------
(in thousands) After One
One year or But Within Over Five
Less Five Years Years Total
---- ---------- ----- -----
<S> <C> <C> <C> <C>
Residential construction $21,100 $ - $ - $21,100
Commercial mortgage 27,528 5,835 528 33,891
Commercial construction 5,960 - - 5,960
Commercial business 8,534 - 8,534
======= ====== ===== =======
$63,122 $5,835 $ 528 $69,485
======= ====== ===== =======
</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. The ALCO reviews this policy from time to
time as part of the Bank's overall asset/liability management program. 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, 1996 the Bank was servicing $70.7 million of loans for others compared to
$64.3 million at year end 1995.
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").
<PAGE>
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. Generally,
the Bank's residential mortgage loans adjust annually, but the Bank also offers
loans on which the rate adjusts after remaining fixed for an initial three or
five year period. 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 7.22% in 1994 to 5.21% in 1995 and 5.47% in 1996.
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. Continued strong commercial development on Nantucket contributed to
an increase of 22.1% in commercial real estate loans outstanding to $36.5
million from $29.9 million in 1995. The majority of this increase is
attributable to regular commercial mortgages which increased 18.3%, or $5.2
million, and account for 93% of the commercial real estate portfolio. Commercial
construction loans, before deducting unadvanced funds, more than doubled to $6.0
million at December 31, 1996 compared to $2.5 million at December 31, 1995.
Since 1990 the Bank has limited it's lending for speculative real estate
ventures. Most of the commercial construction loans granted during 1995 and
1996, 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, 1996 these loans totaled 29.3% of the Bank's loan
portfolio as compared to 28.1% at the end of 1995.
<PAGE>
During 1996, most commercial real estate loans were granted for up to 75%
of the appraised value of the property. 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. 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 unprotected 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.
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.
<PAGE>
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 5.64% of the total loan portfolio
at December 31, 1996 compared to 5.57% of the loan portfolio at December 31,
1995.
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, 1996, second mortgages and home equity loans accounted for
57% of the Bank's consumer loan portfolio. The Bank's overall consumer loan
portfolio decreased $341 thousand, or 5.2%, to $6.2 million at December 31, 1996
from $6.5 million at December 31, 1995.
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 Loan Losses. The Bank maintains an allowance for 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. The Bank regularly evaluates the
adequacy of the allowance for loan losses. Key criteria considered include known
and inherent risks in the portfolio, past loan loss experience and loan
delinquency trends, adverse situations that may affect the borrower's ability to
repay, the estimated value of collateral securing loans in the portfolio and
current economic conditions. During 1996 the Bank recorded a provision for loan
losses of $75 thousand. This represents the first loan loss provision recorded
since 1992, a period during which the Bank's loan portfolio more than doubled to
$153.7 million and the proportion of residential first mortgage loans increased
from 44% to 67% of the portfolio. The Bank considers residential first mortgage
loans to have less risk than commercial mortgages, second mortgages and business
<PAGE>
loans. Management believes that it is prudent to provide additional reserves
considering the growth in the loan portfolio. At December 31, 1996 the allowance
for loan losses was $2.4 million, or 1.54% of total loans compared to $2.2
million, or 1.71% of total loans, at December 31, 1995. Non-performing loans at
December 31, 1996 were $443 thousand. 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 loan losses.
For additional information, see Note 4 of Notes to Consolidated Financial
Statements in the 1996 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,
1996, the Bank had $517 thousand 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 1996
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 $7.5 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 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, 1996, the securities portfolio, excluding FHLB stock and short term
investments, totaled $22.7 million, representing 12.0% of the Company's total
assets at that date, compared to $26.0 million, or 15.6% of assets at December
31, 1995. 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, 1996 approximately 35% 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 1996 Annual Report to Stockholders.
<PAGE>
The Company's primary objective with respect to its securities portfolio is
the generation of income, 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. 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,
1996 all of the Company's securities are held by the Bank.
The 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.
At December 31, 1996:
(dollars in thousands)
<TABLE>
<CAPTION>
Weighted
Market Average
Securities Available for Sale Cost Value Yield
------- ------- ----
<S> <C> <C> <C>
U.S. Government and agency obligations, maturing
After 1 year but within 5 years ............. $ 5,200 $ 5,168 6.35%
After 5 years but within 10 years ........... 500 495 6.66%
State and municipal obligations, maturing
Within 1 year ............................... 504 510 5.40%
After 1 year but within 5 years ............. 294 294 4.78%
Other bonds and notes, maturing
Within 1 year ............................... 1,244 1,253 6.02%
After 1 year but within 5 years ............. 250 248 5.63%
Marketable equity securities ................... 112 114 5.90%
------- -------
Total securities available for sale ...... $ 8,104 $ 8,082 6.09%
======= ======= ====
Securities Held to Maturity
U.S. Government and agency obligations, maturing
Within 1 year ............................... $ 341 $ 341 6.00%
After 1 year but within 5 years ............. 2,000 1,985 5.37%
State and municipal obligations, maturing
Within 1 year ............................... 381 381 5.27%
After 1 year but within 5 years ............. 184 183 5.75%
Other bonds and notes, maturing
Within 1 year ............................... 3,409 3,409 6.76%
After 1 year but within 5 years ............. 862 854 6.74%
Mortgage backed securities, maturing
After 1 year but within 5 years ............. 7,333 7,222 6.18%
After 10 years .............................. 153 151 7.00%
------- -------
Total securities held to maturity ........ $14,663 $14,526 6.21%
======= ======= ====
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
At December 31, 1995:
(dollars in thousands)
Weighted
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
Within 1 year ............................... 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%
======= ======= ====
</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 market conditions. Dividends from the Bank represent the only
source of liquidity for the Company.
<PAGE>
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, 1996, the Bank's brokered deposits totaled $3.3 million or 2.4% 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.
<TABLE>
<CAPTION>
At December 31,
--------------------------------------------------------------------------------------------------------
1996 1995 1994
-------------------------------- --------------------------------- --------------------------------
(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 $ 9,955 7.37% - % $ 7,352 6.43% - % $ 7,166 6.87% - %
-------- ------ ---- -------- ------ ----- -------- ------ ----
Savings accounts:
Regular, 90 day notice
and advance payments 13,910 10.30% 2.78% 13,305 11.63% 2.82% 12,626 12.09% 2.62%
NOW 31,223 23.12% 1.32% 25,212 22.05% 1.35% 20,070 19.23% 1.39%
Money market 22,672 16.78% 3.23% 17,985 15.73% 3.23% 19,696 18.87% 2.70%
------- ------ ---- -------- ----- ---- ------- ------- ----
Total savings accounts 67,805 50.20% 2.25% 56,502 49.41% 2.29% 52,392 50.19% 2.17%
Time deposits 57,322 42.43% 5.12% 50,503 44.16% 5.32% 44,828 42.94% 4.25%
======== ====== ==== ======== ====== ==== ======== ====== ====
Total deposits $135,082 100.00% 3.30% $114,357 100.00% 3.48% $104,386 100.00% 3.13%
======== ====== ==== ======== ====== ==== ======== ====== ====
</TABLE>
<PAGE>
The following tables show the weighted average rate and maturity
information for the Bank's certificates of deposit as of December 31, 1996.
Certificates of deposit with balances under $100,000:
<TABLE>
<CAPTION>
Deposits Maturing During the Period Ended
--------------------------------------------------------------------------------------------
(dollars in thousands) 3/31/97 6/30/97 12/31/97 12/31/98 12/31/99 12/31/01 Total
---------- --------- ---------- ----------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Certificate of deposit $9,348 $6,682 $7,624 $4,414 $2,103 $ 776 $30,947
Weighted average rates 4.73% 5.47% 5.71% 5.78% 5.93% 5.80% 5.39%
</TABLE>
Certificates of deposit with balances over $100,000:
<TABLE>
<CAPTION>
Deposits Maturing During the Period Ended
--------------------------------------------------------------------------------------------
(dollars in thousands) 3/31/97 6/30/97 12/31/97 12/31/98 12/31/99 12/31/01 Total
---------- --------- ---------- ----------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Certificate of deposit $16,073 $3,382 $5,374 $ 700 $ 235 $ 611 $26,375
Weighted average rates 4.13% 5.47% 5.52% 5.93% 5.81% 6.70% 4.67%
</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 $32.3 million at year end 1996
versus $32.8 million at year end 1995. The maximum borrowings during 1996 and
1995 were $41.5 million and $44.0 million, respectively.
For additional information, see Note 7 to Notes to the Consolidated
Financial Statements in the 1996 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,
allowance for loan loss and capital are reviewed. After due consideration, the
Board may vote to pay either the same dividend as the previous quarter, or to
increase, decrease or omit the dividend.
<PAGE>
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 product.
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 amount 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; securities available for sale are
reflected at their amortized cost basis. Core deposit accounts are included in
the zero to six month repricing category based on their contractual terms
although, over the past several years, these accounts have not been as sensitive
to changes in market interest rates.
<PAGE>
The distribution of the Company's interest-earning assets and interest-bearing
liabilities maturing or repricing over various time periods is as follows:
<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>
Interest Sensitive Assets
Adjustable rate mortgage loans $32,832 $44,970 $ 13,370 $ 9,116 $ 21,735 $ 1,874 $ - $123,897
Fixed rate mortgage loans 261 - - 20 209 6,174 11,906 18,570
Commercial and all other loans 6,419 3,299 208 511 698 54 - 11,189
Total loans 39,512 48,269 13,578 9,647 22,642 8,102 11,906 153,656
------- ------- -------- -------- -------- -------- -------- --------
Securities and short term
investments 9,124 5,154 3,448 1,232 8,193 250 - 27,401
Total $48,636 $53,423 $ 17,026 $ 10,879 $ 30,835 $ 8,352 $ 11,906 $181,057
------- ------- -------- -------- -------- -------- -------- --------
Interest Sensitive Liabilities
Transaction Deposits $67,805 $ - $ - $ - $ - $ - $ - $ 67,805
Time Deposits 35,485 12,998 5,114 2,338 1,387 - - 57,322
Borrowings 9,000 8,400 6,080 2,601 6,254 - - 32,335
------- ------- -------- -------- -------- -------- -------- --------
Total $112,290 $21,398 $ 11,194 $ 4,939 $ 7,641 - - $157,462
------- ------- -------- -------- -------- -------- -------- --------
Excess (deficiency) of interest
sensitive assets over interest
sensitive liabilities ("GAP") $(63,654) $ 32,025 $ 5,832 $ 5,940 $ 23,194 $ 8,352 $ 11,906
Cumulative GAP $(63,654) $(31,629) $(25,797) $(19,857) $ 3,337 $ 11,689 $ 23,595
Cumulative interest sensitive assets
as a percent of cumulative interest
sensitive liabilities 43.31% 76.34% 82.19% 86.75% 102.12% 107.42% 114.98%
===== ===== ===== ===== ====== ====== ======
Cumulative excess (deficiency) of
interest sensitive assets over
interest sensitive liabilities
as a percent of total assets (33.51%) (16.65%) (13.58%) (10.45%) 1.76% 6.15% 12.42%
====== ====== ====== ======= ==== ==== =====
</TABLE>
<PAGE>
Management of the Bank considers regular savings and now accounts, although
subject to immediate withdrawal, to have significantly longer effective
maturities. Had half of 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>
<CAPTION>
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") $(41,153) $ 32,025 $ 5,832 $5,940 $23,194 $ 8,352 $ (10,595)
Cumulative GAP $(41,153) $ (9,128) $ (3,296) $2,644 $25,838 $ 34,190 $ 23,595
Cumulative interest sensitive assets
as
a percent of cumulative interest
sensitive liabilities 54.17% 91.79% 97.31% 102.08% 119.14% 125.33% 114.98%
===== ===== ===== ====== ====== ====== ======
Cumulative excess (deficiency) of
interest sensitive assets over
interest sensitive liabilities
as a percent of total assets (21.67%) (4.81%) (1.74%) 1.39% 13.60% 18.00% 12.42%
====== ===== ===== ==== ===== ===== =====
</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
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
<PAGE>
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, 1996 with a minimum ratio
of tangible primary capital to total assets of 10.58% after deducting for real
estate investments as described in commitment (1), above, which were zero at
December 31, 1996.
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
<PAGE>
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 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 Company
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 its 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.
<PAGE>
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.
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 thousand 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 1997, will be
assessed at an annual amount of $17 thousand. 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.
<PAGE>
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 (CAMEL), 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
11.15% at December 31, 1996.
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 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, 1996.
<TABLE>
<CAPTION>
To Be Well Capitalized
For Capital Adequacy Under Prompt Corrective
(dollars in thousands) Actual Purposes Action Provisions
------------------ ------------------- -----------------------
Amount Ratio Amount Ratio Amount Ratio
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1996:
Total Capital
(to Risk Weighted Assets) $20,725 17.99% $9,218 8.0% $11,522 10.0%
Tier I Capital
(to Risk Weighted Assets) $19,273 16.73% $4,609 4.0% $6,913 6.0%
Total Capital
(to Average Assets) $20,725 11.15% $7,436 4.0% $9,295 5.0%
</TABLE>
<PAGE>
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 thousand per insured account. In 1995 and 1996, the Bank's premium for
this insurance was assessed at an annual rate of 1/50 of 1% of insured deposits.
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, 1996, 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, 1996 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.
<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.
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 has the effect of eliminating intercompany distributions,
including dividends, in the computation of consolidated taxable income.
The Tax Reform Act of 1996 repealed the special bad debt provisions that
were afforded thrift institutions. As a result of this change, the Bank is
required to recapture its excess of its tax reserves as of December 31, 1995
over the balance of these reserves as of December 31, 1987 (the "base year"
reserves). The recapture will be approximately $1.7 million. There should be no
charge to earnings for the recapture because the amount has been accrued for as
a component of the deferred tax liability.
The base year reserves of approximately $2.9 million remain subject to
recapture to the extent that cash dividends to the shareholders are made in an
amount in excess of the Bank's current and accumulated profits. Additionally,
distributions as redemptions, dissolutions or liquidation will be deemed to be
distributions out of the base year reserve. In either event, the Bank will be
taxed at the then current rates on approximately 150% of the amount that is
deemed to be distributed from the reserve. No deferred taxes have been provided
on the base year reserves as of December 31, 1996.
Tax deductions for bad debts will now be calculated on the basis of actual
experience.
For further information, see Note 8 of Notes to Consolidated Financial
Statements in the 1996 Annual Report to Stockholders.
<PAGE>
State Taxation. Savings banks in Massachusetts are currently taxed at the
rate of 11.72% 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 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, 1996 the Company and Bank had 44 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.
Item 2. DESCRIPTION OF PROPERTY
The Bank owns three properties and leases one property. The three
properties owned consist of the Bank's main office, one branch office and an
undeveloped parcel of land. The Bank leases 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 $328 thousand at December 31, 1996, including the book value of the
land on which the facility is located.
<PAGE>
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 thousand at December 31, 1996, 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 thousand. Should the bank sell this
property within two years of the purchase date the Bank is committed to pay an
additional $60 thousand 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 thousand,
expires on March 31, 1997.
At December 31, 1996, the net book value of the Bank's furnishings and
equipment was $831. 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 1996 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.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable.
PART II
Item 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The information contained in the section captioned "Stock Market Data" in
the 1996 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 1996 Annual Report to Stockholders is incorporated herein
by reference.
Item 7. FINANCIAL STATEMENTS
The financial statements contained in the 1996 Annual Report to
Stockholders are incorporated herein by reference.
Item 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
<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 16, 1997 which will be filed with the
Securities and Exchange Commission pursuant to Regulation 14A on or before April
14, 1997.
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) 1996 Annual Report to Stockholders for the Fiscal Year
Ended December 31, 1996.
(21) Subsidiaries of the Registrant.
(b) No reports on Form 8-K were filed by the Registrant during the quarter ended
December 31, 1996.
<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 21, 1997 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 21, 1997
- -----------------
Karl L. Meyer
Chairman of the Board,
President and Chief Executive Officer
/s/ John M. Sweeney March 21, 1997
- -------------------
John M. Sweeney
Treasurer & Chief Financial Officer
(Principal Financial and
Accounting Officer)
/s/ William P. Hourihan, Jr. March 21, 1997
- ---------------------------
William P. Hourihan, Jr.
Director
/s/ Charles F. DiGiovanna March 21, 1997
- -------------------------
Charles F. DiGiovanna
Director
/s/ Charles H. Jones, Jr. March 21, 1997
- -------------------------
Charles H. Jones, Jr.
Director
<PAGE>
Signatures (Continued) Date
- ---------------------- ----
/s/ Daniel D. McCarthy March 21, 1997
- ----------------------
Daniel D. McCarthy
Director
/s/ Robert J. McKay March 21, 1997
- -------------------
Robert J. McKay
Director
/s/ Philip W. Read March 21, 1997
- ------------------
Philip W. Read
Director
<PAGE>
INDEX TO EXHIBITS
EXHIBIT
-------
(3) Certificate of Incorporation and Bylaws 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 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 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 Securities and Exchange Commission
on April 13, 1990.
(13) Annual Report to Stockholders for the Fiscal Year Ended
December 31, 1996.
(21) Subsidiaries of the Registrant.
TABLE OF CONTENTS
Financial Highlights
Message to Stockholders
Management's Discussion and Analysis
Consolidated Financial Statements
Notes to Consolidated Financial Statements
Independent Auditors' Report
Directors and Officers
Stockholders Information
<PAGE>
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
(Dollars in thousands, except per share data)
1996 1995 1994 1993 1992
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
At December 31,
Total assets ...................................... $ 189,931 $ 167,272 $ 162,324 $ 134,498 $ 106,071
Loans, net of allowance for loan losses ........... 151,291 129,147 118,225 88,126 69,930
Other real estate owned ........................... 61 - 45 883 1,003
Securities and FHLB stock ......................... 25,066 28,346 31,485 37,162 29,368
Deposits .......................................... 135,082 114,357 104,386 92,561 81,763
Borrowed funds .................................... 32,335 32,837 33,107 18,880 145
Stockholders' equity .............................. 20,103 18,379 18,524 21,932 22,988
For the Year Ended December 31,
Total interest income ............................. $ 14,450 $ 13,242 $ 10,796 $ 8,164 $ 8,719
Total interest expense ............................ 6,289 5,987 4,607 3,039 3,547
--------- --------- --------- --------- ---------
Net interest income ............................... 8,161 7,255 6,189 5,125 5,172
Provision for loan losses ......................... 75 - - - 110
--------- --------- --------- --------- ---------
Net interest income after provision for loan losses 8,086 7,255 6,189 5,125 5,062
Deposit and loan servicing fees and other income .. 879 846 674 607 677
Net gain (loss) from sales of mortgage loans
and securities ................................. (5) (2) (115) 190 44
Net gain (loss) on other real estate owned ........ - (9) 262 34 (488)
Non-interest expense .............................. 3,994 3,585 3,520 3,006 4,146
--------- --------- --------- --------- ---------
Income before taxes and cumulative effect
of change in accounting principle .............. 4,966 4,505 3,490 2,950 1,149
Provision for income taxes ........................ 1,931 1,749 1,381 1,251 758
Cumulative effect of change in accounting
for income taxes ............................... - - - 455 -
--------- --------- --------- --------- ---------
Net income ....................................... $ 3,035 $ 2,756 $ 2,109 $ 2,154 $ 391
========= ========= ========= ========= =========
Per share data
Earnings per common share before cumulative
effect of change in accounting .................. $ 1.65 $ 1.50 $ 1.15 $ 0.85 $ 0.20
Earnings per common share for the cumulative
effect of a change in accounting principle ...... - - - 0.23 -
--------- --------- --------- --------- ---------
Earnings per common share ......................... $ 1.65 $ 1.50 $ 1.15 $ 1.08 $ 0.20
========= ========= ========= ========= =========
Dividends declared per share ...................... $ 0.70 $ 1.60 $ 3.10 $ 0.51 $ 0.09
========= ========= ========= ========= =========
Stockholders' equity per share .................... $ 10.91 $ 9.98 $ 10.06 $ 12.23 $ 11.58
========= ========= ========= ========= =========
<PAGE>
<CAPTION>
1996 1995 1994 1993 1992
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Selected ratios
Return on average assets (a) ...................... 1.72% 1.67% 1.35% 1.47% 0.37%
Interest rate spread .............................. 4.15% 3.97% 3.44% 3.84% 4.26%
Net interest margin ............................... 4.77% 4.56% 4.08% 4.63% 5.18%
Equity to asset ratio ............................. 10.58% 10.99% 11.41% 16.30% 21.67%
Return on average equity (a) ...................... 15.84% 14.34% 9.71% 7.19% 1.70%
Dividend payout ratio ............................. 42.47% 274.02% 52.40% 46.00% 45.00%
(a) Does not include cumulative effect of change in accounting principle
</TABLE>
<PAGE>
Message to Stockholders Home Port Bancorp, Inc. and Subsidiaries
The national economy continued its expanision during 1996. Wall Street and
equity investors enjoyed record highs in the stock market. These are the main
ingredients for a strong Nantucket economy, an economy dominated by tourism and
real estate. In this context, it is understandable that your company reported
record income of $3.0 million for the year 1996, a 10% increae over the prior
year's income. Return on stockholder's equity increased to 15.8% in 1996
compared to 14.3% a year earlier, the sixth consecutive year this primary
measure of performance has increased. Total assets increased by 14% and loans by
17%, reflecting a more efficient allocation of bank resouces.
At the end of 1995, managment expected the net interest margin would come under
incresing pressure. During the year, all loan category yields decreased and the
cost of deposits increased. However, the Bank was able to record a 21 basis
points increase in net interest margin by allocating a larger percentage of
assets to the higher earning loan categories and taking advantage of lower cost
borrowings.
Your Company is committed to its objective of achieving a superior rate of
return while prudently managing risk. Keefe, Bruyette & Woods, Inc., specialists
in banking, publishes its quarterly Bank Review for 44 New England banking
companies. Home Port Bancorp, Inc. has placed first in KBW's Relative
Fundamental Ranking, a composite measure of eight key fundamental performance
ratios, for seven consecutive quarters. I wish to take this opportunity to
recognize the exemplary efforts by the managment of Nantucket Bank in
maintaining a safe, sound and profitable institution.
During 1996, the Bank recorded a provision for loan losses of $75 thousand, the
first since 1992. During the intervening period the loan portfolio more than
doubled to $154 million. Again, referring to KBW's Quarterly Bank Review, at
year end 1996, the 44 bank medium ratios for non-performing assets, reserve
coverage and loan loss reserve were 1.52%, 139% and 1.57% respectively.
Comparable numbers for your Company were .27%, 534% and 1.54% respectively.
While the Bank compares very favorably against its peers, management believes it
prudent to provide additional reserves at this time.
On Nantucket, both the number of sales and the median price of residential
properties have increased by over 20% in the past two years. Management is well
aware of the cyclical nature of this market and remains diligent in protecting
shareholders from adverse changes in real estate values. For the coming year, we
will continue to seek to improve the quality of the loan portfolio, focus on
growth in our core lending and deposit business and maintain an efficient level
of non-interest expenses.
Currently, your Company is paying a $.20 per share quarterly dividend. The Bank
remains well capitalized with a year-end 10.58% equity to asset ratio.
Management believes earnings will remain sufficient to fund future growth while
maintaining the dividend rate and capitalization.
Sincerely,
Karl L. Meyer
Chairman of the Board, President and CEO
<PAGE>
Management's Discussion and Analysis of Home Port Bancorp, Inc. and
Financial Condition and Results of Operations Subsidiaries
Results of Operations
Home Port Bancorp, Inc. ("the Company") reported net income of $3.0 million
in 1996, an increase of 10.1% over 1995. In 1995, net income totaled $2.8
million, a 30.7% increase over the $2.1 million net income in 1994. Net income
per share was $1.65 in 1996 compared to $1.50 in 1995 and $1.15 in 1994. These
increases in earnings are primarily attributable to growth in the Company's
loans and deposits and an increase in the net interest margin.
Net Interest Income
Net interest income increased by $906 thousand, or 12.5%, to $8.2 million
in 1996 compared to $7.3 million in 1995. In 1995 net interest income increased
by $1.1 million, or 17.2%, from $6.2 million in 1994. The Company's net interest
margin improved to 4.77% during 1996 compared to 4.56% in 1995 and 4.08% in
1994.
This increase in net interest income in 1996 compared to 1995 was due to
increases in the average balances of loans and deposits. The increase in 1995
compared to 1994 was due to both a favorable interest rate environment and
increases in average balances. The tables on the following page provide
additional details on these increases and decreases.
During 1996 the average yield of the Bank's loan portfolio decreased by 7
basis points to 8.95% from 9.02% in 1995. In 1995 the average yield on loans
increased by 116 basis points to 9.02% from 7.86% in 1994. This increase
reflects the rise in market interest rates during 1994 which affected the loan
portfolio on a lagged basis.
The average yield on securities increased by 9 basis points to 5.80% in
1996 from 5.71% in 1995. The yield on securities was 5.08% in 1994. The Bank
does not actively trade the securities portfolio. Securities classified as "held
to maturity" represented 64% of total securities at year end 1996 and 70% at
year end 1995.
The average cost of funds decreased to 4.29% in 1996 compared to 4.36% in
1995. In 1994 the average cost of funds was 3.68%. The cost of deposits was
3.74% in 1996 compared to 3.64% in 1995 and 3.32% in 1994. Deposit rates,
particularly for core savings, NOW and money market accounts, have not been
volatile over these years. The cost of Federal Home Loan Bank ("FHLB")
borrowings decreased 29 basis points to 6.11% in 1996 from 6.40% in 1995. The
higher cost of borrowings in 1995 was due to the relatively high short term
rates in effect during much of 1995 and several higher cost borrowings made
during 1994. The cost of borrowings was 4.82% in 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 and non-accrual loans. Deposits exclude non-interest bearing
demand accounts.
<PAGE>
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------------------------------------------------------------
(dollars in thousands) 1996 1995 1994
----------------------------- ---------------------------- -----------------------------
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 $ 94,931 $ 7,849 8.27% $ 83,800 $ 6,991 8.34% $ 72,682 $ 5,330 7.33%
Commercial loans 42,562 4,373 10.27% 36,703 3,782 10.30% 33,539 2,967 8.85%
Consumer loans 6,304 641 10.17% 5,429 583 10.74% 5,210 460 8.83%
--------- ------- ----- --------- ------- ----- --------- ------- ----
Total loans 143,797 12,863 8.95% 125,932 11,356 9.02% 111,431 8,757 7.86%
Securities and FHLB stock 27,380 1,587 5.80% 33,046 1,886 5.71% 40,156 2,039 5.08%
--------- ------- ----- --------- ------- ----- --------- ------- ----
Total interest earning assets $171,177 $14,450 8.44% $158,978 $13,242 8.33% $151,587 $10,796 7.12%
--------- ------- ----- --------- ------- ----- --------- ------- ----
Interest bearing liabilities:
Deposits $112,723 $ 4,219 3.74% $101,541 $ 3,692 3.64% $ 95,336 $ 3,169 3.32%
Borrowed funds 33,877 2,070 6.11% 35,853 2,295 6.40% 29,810 1,438 4.82%
--------- ------- ----- --------- ------- ----- --------- ------- ----
Total interest bearing
liabilities $146,600 $ 6,289 4.29% $137,394 $ 5,987 4.36% $125,146 $ 4,607 3.68%
--------- ------- ----- --------- ------- ----- --------- ------- ----
Net interest income $ 8,161 $ 7,255 $ 6,189
======= ======= =======
Interest rate spread (1) 4.15% 3.97% 3.44%
==== ==== ====
Net interest margin (2) 4.77% 4.56% 4.08%
==== ==== ====
(1) Represents the difference between the average rate earned on interest
earning assets and average rate paid on interest bearing liabilities.
(2) Represents net interest income divided by average earning assets.
</TABLE>
<PAGE>
Rate/Volume Analysis
The effect on net interest income as a result of changes in average
interest rates and balances is shown in the following table.
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------------------------------------------------------------
(in thousands) 1996 vs. 1995 1995 vs. 1994
---------------------------------------------- ---------------------------------------------
Changes Due to Increase (Decrease) Changes Due to Increase (Decrease)
---------------------------------------------- ---------------------------------------------
Average Average
Average Average Rate/ Average Average Rate/
Balance (1) Rate (2) Volume (3) Total Balance (1) Rate (2) Volume (3) Total
---------------------------------------------- ---------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest income:
Residential loans $ 928 $ (59) $(11) $ 858 $ 815 $ 734 $112 $1,661
Commercial loans 603 (11) (1) 591 280 486 49 815
Consumer loans 94 (31) (5) 58 19 100 4 123
------ ----- ---- ------ ------ ------ ---- ------
Total loans 1,625 (101) (17) 1,507 1,114 1,320 165 2,599
Securities and FHLB stock (324) 30 (5) (299) (361) 253 (45) (153)
------ ----- ---- ------ ------ ------ ---- ------
Total interest income 1,301 (71) (22) 1,208 753 1,573 120 2,446
------ ----- ---- ------ ------ ------ ---- ------
Interest expense:
Deposits 407 102 18 527 206 305 12 523
Borrowed funds (126) (104) 5 (225) 291 471 95 857
------ ----- ---- ------ ------ ------ ---- ------
Total interest expense 281 (2) 23 302 497 776 107 1,380
------ ----- ---- ------ ------ ------ ---- ------
Net interest income $1,020 $ (69) $(45) $ 906 $ 256 $ 797 $ 13 $1,066
====== ===== ==== ====== ====== ====== ==== ======
(1) Represents the changes in average balance multiplied by prior period yield.
(2) Represents the changes in yield multiplied by prior period average balance.
(3) Represents the changes in yield multiplied by changes in average balance.
</TABLE>
<PAGE>
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 available for sale.
In 1996 non-interest income increased $30 thousand, or 3.6%, to $874
thousand compared to $844 thousand in 1995. Deposit servicing fees increased by
$45 thousand, or 14.9%, due to increases in deposits. Loan servicing fees
increased by $53 thousand, or 23.1%, due to an increase in the loan servicing
portfolio. Other fees decreased by $65 thousand due to a decrease in early
withdrawal penalties on term deposits and a decrease in fees from the sale of
non-insured alternative investment products.
In 1995 non-interest income increased $285 thousand, or 51.0%, compared to
$559 thousand in 1994. Deposit servicing fees increased by $25 thousand, or
9.0%, due to increases in deposits. Loan servicing fees increased $91 thousand
or 65.9%, due to an increase in the servicing portfolio. Other fees and income
increased by $56 thousand, or 21.7%, primarily due to increases in fees from the
sale of non-insured alternative investment products and early withdrawal
penalties on term deposits. Net losses from the sale of securities were reduced
to $26 thousand in 1995 from $126 thousand in 1994.
Non-Interest Expense
In 1996 non-interest expense increased 11.1% to $4.0 million from $3.6
million in 1995. Salaries and employee benefits increased to $2.3 million from
$2.0 million due to additional staffing and a general wage increase for hourly
staff. Building and equipment expenses increased to $481 thousand from $380
thousand due to increased depreciation charges resulting from office renovations
and purchases of computer equipment. Partially offsetting these increases was a
reduction in deposit insurance expense to $9 thousand from $159 thousand as a
result of a decrease in the FDIC Bank Insurance Fund assessments.
In 1995 non-interest expense increased 10.3% to $3.6 million from $3.3
million in 1994. Salaries and employee benefits increased to $2.0 million from
$1.7 million due to an increase in performance-based pay and additions to staff.
Other Real Estate Owned ("OREO") net losses totaling $9 thousand were recognized
in 1995 compared to net gains of $262 thousand in 1994. Partially offsetting
these items was a reduction in deposit insurance expense to $159 thousand from
$234 thousand as a result of a decrease in FDIC assessments.
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.
The effective tax rates in 1996, 1995 and 1994 were impacted by reductions
in the tax valuation allowance caused by increased earnings. For further
information see note 8 in the Notes to Consolidated Financial Statements.
<PAGE>
Asset/Liability Management
The Bank's objective in its asset/liability management program is to
manage liquidity and interest rate risk 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,
accordingly, the decrease in the cost of liabilities exceeds the decrease and
Subsidiaries [GRAPHIC OMITTED] 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, 1996, the Company's one year
GAP position, utilizing the assumptions detailed below, was a negative $32.0
million or 16.6% of total assets. This compares to a negative one year GAP
position of $14.4 million or 8.6% of total assets at December 31, 1995 and a
negative $9.0 million or 5.6% of total assets at December 31, 1994.
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 amount 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; securities available for sale are
reflected at their amortized cost basis. Core deposit accounts are included in
the zero to six month repricing category based on their contractual terms
although, over the past several years, these accounts have not been as sensitive
to changes in market interest rates.
<PAGE>
<TABLE>
<CAPTION>
Period to Maturity or Repricing from December 31, 1996
---------------------------------------------------------------------------
(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 $ 39,512 $ 48,269 $ 13,578 $ 9,647 $42,650 $153,656
Securities and federal funds 9,124 5,154 3,448 1,232 8,443 27,401
--------- --------- --------- --------- ------- --------
Total $ 48,636 $ 53,423 $ 17,026 $ 10,879 $51,093 $181,057
--------- --------- --------- --------- ------- --------
Interest sensitive liabilities
Transaction deposits $ 67,805 $ - $ - $ - $ - $ 67,805
Time deposits 35,485 12,998 5,114 2,338 1,387 57,322
Borrowings 9,000 8,400 6,080 2,601 6,254 32,335
--------- --------- --------- --------- ------- --------
Total $ 112,290 $ 21,398 $ 11,194 $ 4,939 $ 7,641 $157,462
--------- --------- --------- --------- ------- --------
Excess (deficiency) of interest sensitive assets
over interest sensitive liabilities ("GAP") $(63,654) $ 32,025 $ 5,832 $ 5,940 $43,452
Cumulative GAP $(63,654) $ (31,629) $ (25,797) $ (19,857) $23,595
Cumulative rate sensitive assets as a percent of
cumulative rate sensitive liabilities 43.31% 76.34% 82.19% 86.75% 114.98%
===== ===== ===== ===== ======
Cumulative excess (deficiency) of rate
sensitive assets over rate sensitive
liabilities as a percentage of total assets (33.51%) (16.65%) (13.58%) (10.45%) 12.42%
====== ====== ====== ====== =====
</TABLE>
Balance Sheet Analysis
During 1996 the Company's total assets increased by $22.7 million, or
13.5%, to $189.9 million from $167.3 million at December 31, 1995. During 1995
total assets increased by $5.0 million, or 3.0%, from $162.3 million at December
31, 1994. The following paragraphs discuss the significant changes in the major
balance sheet categories during these years.
Loans
Loans, net of the allowance for losses and including loans held for sale,
increased by $22.1 million, or 17.1%, in 1996 to $151.3 million from $129.1
million the previous year. Loans increased by $10.9 million, or 9.2%, during
1995 from $118.2 million at December 31, 1994. At December 31, 1996 the loan
portfolio represented 79.7% of total assets compared to 77.2% at December 31,
1995 and 72.9% at December 31, 1994. These increases reflect management's
intention to add to its loan portfolio together with the strengthening local
economy and the Bank's marketing efforts.
<PAGE>
Real estate loan originations, including both commercial and residential
properties, were $85.1 million in 1996 compared to $59.2 million in 1995 and
$60.6 million in 1994. Originations remained strong in 1996 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 34.6%
in 1996 to $27.1 million from $20.1 million in the prior year. 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 18.3% in 1996
to $33.9 million compared to $28.7 million in 1995. This 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 $25.8 million in
1996 compared to $27.7 million during 1995. Currently, the Bank's policy is to
sell substantially all of its longer-term (greater than 10 years) fixed-rate
loans and a portion of its adjustable rate loans. The Bank generally retains a
small percentage of the principal balance of adjustable rate loans that are
sold. The ALCO reviews this policy from time to time as part of overall
asset/liability management strategy.
At December 31, 1996, the Bank had $8.9 million of loans held for sale in
the secondary market, compared to $8.6 million at year end 1995. 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, 1996 and 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 $3.3 million, or 12.6%, at December 31, 1996
to $22.7 million from $26.0 million in the prior year. During 1995 securities
decreased by $3.8 million, or 12.6%, from $29.8 million at December 31, 1994.
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 (64% at December 31, 1996) is classified as held to
maturity. At December 31, 1996 total securities represented 12.0% of total
assets compared to 15.6% for 1995 and 18.4% for 1994.
Deposits
Total deposits increased $20.7 million, or 18.1%, in 1996 to $135.1 million
from $114.4 million at December 31, 1995. During 1995 deposits increased by
$10.0 million, or 9.6%, from $104.4 million at December 31, 1994. Transaction
deposits (demand, checking, savings and money market) accounted for 67% of the
1996 increase and 43% of the 1995 increase. These increases reflect the strong
real estate market and economic conditions in Nantucket during the past two
years as well as the continuing efforts of the Bank to attract both new
depositors and additional activity from existing account relationships.
<PAGE>
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 $3.3 million or
2.4% of total deposits at December 31, 1996 and $4.8 million, or 4.2% of total
deposits, at December 31, 1995.
Borrowed Funds
Borrowed funds consist of FHLB advances with maturities ranging from 3
months to 5 years. These borrowings totaled $32.3 million at December 31, 1996
and $32.8 million at December 31, 1995. Borrowings have been used to fund loan
demand and to meet short term and seasonal liquidity demands. A priority of the
Bank is to minimize the need for borrowings by increasing deposits, however,
there is no assurance that this can be accomplished.
Non-Performing Assets
The following table presents information regarding non-performing assets at
the dates indicated:
<TABLE>
<CAPTION>
(dollars in thousands) December 31,
----------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Non-accrual loans:
Commercial real estate ......................... $ -- $ -- $ 357
Commercial business ............................ 10 -- --
------ ---- ------
Total non-accrual loans ..................... 10 -- 357
Accruing loans which are contractually
past due 90 days or more:
Residential real estate ........................ 433 -- 76
------ ---- ------
Total non-performing loans .................. 443 -- 433
Other real estate owned ............................. 61 -- 45
------ ---- ------
Total non-performing assets ................. $ 504 $ -- $ 478
====== ===== ======
Non-performing assets as a percentage of total assets 0.27% - % 0.29%
====== ====== ======
Allowance for loan losses ........................... $2,365 $2,249 $2,154
Allowance for loan losses to:
Non-performing loans .......................... 534% - % 497%
Total loans .................................. 1.54% 1.71% 1.79%
</TABLE>
At December 31, 1996 and 1995 the Bank had no loans which were considered
"impaired" within the meaning of Statement of Financial Accounting Standards
("SFAS") No. 114 and 118. At December 31, 1994, the Bank had loans totaling $96
thousand that were "troubled debt restructurings" within the meaning of SFAS No.
15.
<PAGE>
At the end of 1996 management identified $1.2 million 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.
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 non-accrual status, all interest
previously accrued but not collected is charged against current year 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 Loan Losses
Loan loss reserves are established in accordance with generally accepted
accounting principles and based upon a systematic and detailed analysis of all
loans. The Bank regularly evaluates the adequacy of the allowance for loan
losses. Key criteria considered include known and inherent risks in the
portfolio, past loan loss experience and loan delinquency trends, adverse
situations that may affect the borrower's ability to repay, the estimated value
of collateral securing loans in the portfolio and current economic conditions.
During 1996 the Bank recorded a provision for loan losses of $75 thousand. This
represents the first loan loss provision recorded since 1992, a period during
which the Bank's loan portfolio more than doubled to $153.7 million and the
proportion of residential first mortgage loans increased from 44% to 67% of the
portfolio. The Bank considers residential first mortgage loans to have less risk
than commercial mortgages, second mortgages and business loans. Management
believes that it is prudent to provide additional reserves considering the
growth in the loan portfolio. At December 31, 1996 the allowance for loan losses
was $2.4 million, or 1.54% of total loans compared to $2.2 million, or 1.71% of
total 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
loan losses. The Bank was last examined by the Massachusetts Division of Banks
as of March 31, 1996.
Capital
Stockholders' equity totaled $20.1 million, or 10.58%, of assets on
December 31, 1996 compared to $18.4 million, or 10.99% of assets, at December
31, 1995 and $18.5 million, or 11.41% of assets, at December 31, 1994. 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 four years, to
the extent practicable, the Bank has leveraged this capital through investments
in a mix of mortgage loans and securities. The Company also 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 $1.3 million and $1.1
million were declared in 1996 and 1995, respectively. Net earnings of $3.0
million in 1996 and $2.8 million in 1995 were added to capital.
<PAGE>
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, 1996, 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, 1996 the Company's capital ratios were in excess of these capital
requirements.
For further information, see Note 13 in the Notes to Consolidated Financial
Statements.
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.
Firm commitments to grant loans at December 31, 1996 totaled $8.2 million,
unused lines of credit equaled $8.3 million, the unadvanced portion of
construction loans equaled $10.1 million and stand-by letters of credit
outstanding aggregated $446 thousand. 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.
<PAGE>
Recent Accounting Developments
In June 1996, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 125, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities". This Statement is effective for transfers and
servicing of financial assets and extinguishments of liabilities occurring after
December 31, 1996, and is to be applied prospectively. However, SFAS No. 127,
"Deferral of the Effective Date of Certain Provisions of SFAS No. 125," requires
the deferral of implementation as it relates to repurchase agreements,
dollar-rolls, securities lending and similar transactions until years beginning
after December 31, 1997. Earlier or retrospective applications of this Statement
is not permitted. SFAS No. 125 provides accounting and reporting standards for
transfers and servicing of financial assets and extinguishments of liabilities.
Those standards are based on an approach that focuses on control, whereby after
a transfer of financial assets, an entity recognizes the financial and servicing
assets it controls and the liabilities it has incurred, derecognizes financial
assets when control has been surrendered, and derecognizes liabilities when
extinguished. This Statement provides consistent standards for distinguishing
transfers of financial assets that are sales from transfers that are secured
borrowings. The adoption of this pronouncement is not expected to have a
material impact on the Company's financial position or results of operations.
<TABLE>
<CAPTION>
Consolidated Balance Sheet (Dollars In Thousands, Except Per Share Data)
December 31,
-----------------------
1996 1995
--------- ---------
<S> <C> <C>
Assets
Cash and due from banks ........................................................ $ 5,073 $ 4,886
Interest bearing deposits in banks ............................................. 46 1,750
Federal funds sold ............................................................. 4,700 --
--------- ---------
Total cash and cash equivalents ........................................ 9,819 6,636
Securities held to maturity (market value $14,526 and $18,089) (note 2) ........ 14,663 18,330
Securities available for sale (cost of $8,104 and $7,681) (note 3) ............. 8,082 7,695
Loans, net of allowance for loan losses of $2,365 and $2,249 (notes 4 and 7) ... 142,425 120,540
Loans held for sale ............................................................ 8,866 8,607
Other real estate owned ........................................................ 61 --
Land, buildings and equipment, net (note 5) .................................... 1,422 1,244
Accrued income receivable ...................................................... 1,093 1,104
Net deferred tax asset (note 8) ................................................ 347 85
Stock in FHLB of Boston, at cost (note 7) ...................................... 2,321 2,321
Prepaid expenses and other assets .............................................. 832 710
--------- ---------
Total assets ........................................................... $ 189,931 $ 167,272
========= =========
Liabilities and Stockholders' Equity
Liabilities:
Deposits (note 6) ............................................................ $ 135,082 $ 114,357
Borrowed funds (note 7) ...................................................... 32,335 32,837
Accrued expenses (note 9) .................................................... 1,346 1,106
Other liabilities ............................................................ 1,065 593
--------- ---------
Total liabilities ...................................................... 169,828 148,893
--------- ---------
<PAGE>
<CAPTION>
Consolidated Balance Sheet (In Thousands, Except Per Share Data) (continued)
December 31,
-----------------------
1996 1995
--------- ---------
<S> <C> <C>
Commitments and contingencies (notes 10 and 11)
Stockholders' equity (notes 8, 13 and 14)
Preferred stock, $.01 par value, 2,000,000 shares authorized, none issued
- -
Common stock, $.01 par value, 10,000,000 shares authorized, 2,325,494
shares issued ............................................................. 23 23
Additional paid-in capital ................................................... 17,473 17,473
Retained earnings (note 13) .................................................. 7,017 5,271
Unrealized gain (loss) on securities available for sale, net of taxes (note 3) (13) 9
Less: Treasury stock, at cost (483,604 shares) ............................... (4,397) (4,397)
--------- ---------
Total stockholders' equity ............................................. 20,103 18,379
========= =========
Total liabilities and stockholders' equity ............................. $ 189,931 $ 167,272
========= =========
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Consolidated Statements of Earnings (In Thousands, Except Per Share Data)
Years Ended December 31,
----------------------------------
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Interest income:
Interest on loans (note 4) .............................. $ 12,863 $ 11,356 $ 8,757
Interest on securities .................................. 1,343 1,614 1,745
Dividends ............................................... 168 171 141
Interest on federal funds sold .......................... 76 101 153
-------- -------- --------
Total interest income ............................ 14,450 13,242 10,796
-------- -------- --------
Interest expense:
Interest on depositors' accounts (note 6) ............... 4,219 3,692 3,169
Interest on borrowed funds (note 7) ..................... 2,070 2,295 1,438
-------- -------- --------
Total interest expense ........................... 6,289 5,987 4,607
-------- -------- --------
Net interest income .......................................... 8,161 7,255 6,189
-------- -------- --------
Provision for loan losses (note 4) ........................... 75 -- --
-------- -------- --------
Net interest income after provision for loan losses .......... 8,086 7,255 6,189
-------- -------- --------
Non-interest income:
Deposit servicing fees .................................. 348 303 278
Loan servicing fees (note 4) ............................ 282 229 138
Other fees and income ................................... 249 314 258
Net gain (loss) from sale of mortgage loans ............. (6) 24 11
Net gain (loss) from securities and other assets (note 3) 1 (26) (126)
-------- -------- --------
Total non-interest income ........................ 874 844 559
-------- -------- --------
Non-interest expense:
Salaries and employee benefits (note 9) ................. 2,326 1,978 1,710
Building and equipment expenses ......................... 481 380 361
Professional fees ....................................... 281 251 249
Deposit insurance fees .................................. 9 159 234
Loss (gain) on other real estate owned .................. -- 9 (262)
Other ................................................... 897 817 966
-------- -------- --------
Total non-interest expense ....................... 3,994 3,594 3,258
-------- -------- --------
Income before income taxes ................................... 4,966 4,505 3,490
Provision for income taxes (note 8) .......................... 1,931 1,749 1,381
-------- -------- --------
Net income ................................................... $ 3,035 $ 2,756 $ 2,109
======== ======== ========
Earnings per common share .................................... $ 1.65 $ 1.50 $ 1.15
======== ======== ========
Weighted number of common shares outstanding ................. 1,842 1,842 1,836
======== ======== ========
See accompanying notes to consolidated financial statements
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Consolidated Statements of Changes
in Stockholders' Equity (In Thousands, Except Per Share Data)
Net
Unrealized
Gain (loss) on
Additional Securities Total
Common Paid-in Retained Treasury Available Stockholders'
Stock Capital Earnings Stock For Sale Equity
----- ------- -------- ----- -------- ------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1993 ...................... $ 22 $ 17,221 $ 9,062 $ (4,397) $ 24 $ 21,932
Change in unrealized gain (loss) on
securities available for sale, net of ........ -- -- -- -- (61) (61)
taxes (note 3)
Special dividend declared at $2.50 per share ...... -- -- (4,605) -- -- (4,605)
Cash dividends paid at $0.60 per share ............ -- -- (1,104) -- -- (1,104)
Stock options exercised (48,278 shares),
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
Change in unrealized gain (loss) on
securities available for sale, net of ........ -- -- -- -- 46 46
taxes (note 3)
Special dividend paid at $1.00 per share .......... -- -- (1,842) -- -- (1,842)
Cash dividends paid at $.60 per share ............. -- -- (1,105) -- -- (1,105)
Net income ........................................ -- -- 2,756 -- -- 2,756
------ -------- -------- -------- -------- --------
Balance at December 31, 1995 ...................... 23 17,473 5,271 (4,397) 9 18,379
Change in unrealized gain (loss) on
securities available for sale, net of ........ -- -- -- -- (22) (22)
taxes (note 3)
Cash dividends paid at $.70 per share ............. -- -- (1,289) -- -- (1,289)
Net income ........................................ -- -- 3,035 -- -- 3,035
------ -------- -------- -------- -------- --------
Balance at December 31, 1996 ...................... $ 23 $ 17,473 $ 7,017 $ (4,397) $ (13) $ 20,103
====== ======== ======== ======== ======== ========
See accompanying notes to consolidated financial statements
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Consolidated Statements of Cash Flows (In Thousands)
Years Ended December 31,
----------------------------------
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Net cash flows from operating activities:
Net income ....................................................... $ 3,035 $ 2,756 $ 2,109
Adjustments to reconcile net income to net cash
provided by operating activities:
Net (increase) decrease in accrued income receivable ......... 11 (279) 49
Net increase (decrease) in accrued expenses .................. 240 (355) 592
Net amortization of securities premiums ...................... 92 49 365
(Gain) loss from other real estate owned ..................... -- 9 (262)
Net increase in loans held for sale .......................... (265) (563) (1,742)
Amortization of deferred loan origination fees ............... (274) (318) (334)
Amortization of deferred premiums on loans sold .............. -- -- 170
Depreciation of building and equipment ....................... 217 182 145
Net increase in prepaid expenses and other assets ............ (122) (67) (322)
Net increase (decrease) in other liabilities ................. 472 352 (15)
Deferred income tax expense (benefit) ........................ (247) 530 (24)
Net loss (gain) on securities and other assets ............... (1) 26 126
Net (gain) loss on sale of mortgage loans .................... 6 (24) (11)
Provision for loan losses .................................... 75 -- --
-------- -------- --------
Net cash provided by operating activities ............................. 3,239 2,298 846
-------- -------- --------
Cash flows from investing activities
Purchases of securities held to maturity ......................... -- (1,214) (7,909)
Purchases of securities available for sale ....................... (4,746) (3,758) (2,145)
Proceeds from sales of securities available for sale ............. 250 1,949 3,760
Proceeds from maturities/calls of securities ..................... 6,480 5,290 10,164
Principal payments on mortgage-backed securities ................. 1,168 1,503 2,178
Net increase in loans ............................................ (21,747) (10,367) (28,012)
Purchases of land, buildings and equipment ....................... (395) (506) (404)
Proceeds from the sales of other real estate owned ............... -- 386 1,100
Purchase of Federal Home Loan Bank stock ......................... -- (607) (964)
-------- -------- --------
Net cash used for investing activities ................................ (18,990) (7,324) (22,232)
-------- -------- --------
Cash flows from financing activities:
Proceeds from stock options exercised ............................ -- -- 253
Net increase in deposits ......................................... 20,725 9,971 11,825
Federal Home Bank advances ....................................... 13,000 5,900 17,166
Federal Home Loan Bank repayments ................................ (13,502) (3,670) (8,500)
Net (decrease) increase in short term borrowings ................. -- (2,500) 5,561
Cash dividends paid .............................................. (1,289) (7,552) (1,104)
-------- -------- --------
Net cash provided by financing activities ............................. 18,934 2,149 25,201
-------- -------- --------
Net (decrease) increase in cash and cash equivalents .................. 3,183 (2,877) 3,815
Cash and cash equivalents at beginning of year ........................ 6,636 9,513 5,698
-------- -------- --------
Cash and cash equivalents at end of year .............................. $ 9,819 $ 6,636 $ 9,513
======== ======== ========
<PAGE>
<CAPTION>
Consolidated Statements of Cash Flows (In Thousands)(continued)
Years Ended December 31,
----------------------------------
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Supplemental disclosures of cash flow information:
Cash paid during the year
for:
Interest ..................................................... $ 6,289 $ 5,968 $ 4,497
Income taxes ................................................. 1,960 1,587 846
Loans foreclosed and transferred to other real estate owned ...... 61 350 45
Securities transferred from held to maturity to available for sale -- 4,189 --
Dividends declared ............................................... 1,289 2,947 5,709
See accompanying notes to consolidated financial statements
</TABLE>
<PAGE>
(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., its wholly owned subsidiary Nantucket Bank, and N.B.
Securities, Inc., which is wholly owned by Nantucket Bank. 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 income and expenses for the year. 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 reported 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 reported at aggregate market value with the unrealized holding
gain or loss, net of tax, reported as a net amount in 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.
<PAGE>
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 receivable that management has the intent and ability to hold for the
foreseeable future or until maturity or pay-off are reported at their
outstanding principal balance, adjusted for any charge-offs, the allowance for
loan losses and deferred fees or costs on originated loans.
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 interest accrual is discontinued
all unpaid accrued interest is reversed. Interest accruals are resumed on such
loans 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. Interest income on non-accrual
loans is recorded on a cash basis.
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, 1996 and 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 collectibility 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 collectibility, 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
<PAGE>
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. Interest
income on impaired loans is accounted for in the same manner as non-accrual
loans.
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.
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
Mortgage loans intended for sale in the secondary market are carried at the
lower of aggregate net loan balance or 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 Loan Losses
The allowance for loan losses is increased by provisions charged to
operations and decreased by realized losses, net of recoveries. Management's
periodic evaluation of the adequacy of the allowance for loan losses is based on
known and inherent risks in the portfolio, past loan loss experience and loan
delinquency trends, adverse situations that may affect the borrower's ability to
repay, the estimated value of collateral securing loans in the portfolio and
current economic conditions.
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.
<PAGE>
(h) Other Real Estate Owned
Real estate assets acquired through, or in lieu of, loan foreclosure are
presumed to be held for sale and are initially 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.
(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 1995 and 1994 financial statements have been
reclassified to conform to the 1996 presentation without effect on stockholders'
equity or net income.
<PAGE>
(2) Securities Held to Maturity
(in thousands)
The amortized cost, contractual maturity and market value of securities held to
maturity are as follows:
<TABLE>
<CAPTION>
December 31,
-----------------------------------------------------
1996 1995
----------------------- ----------------------
Amortized Market Amortized Market
Cost Value Cost Value
---- ----- ---- -----
<S> <C> <C> <C> <C>
United States Government and agency obligations:
Maturing within one year ..................... $ 341 $ 341 $ 488 $ 499
Maturing after one year but within five years 2,000 1,985 2,789 2,768
Maturing after five years but within ten years -- -- 251 254
------- ------- ------- -------
2,341 2,326 3,528 3,521
------- ------- ------- -------
Mortgage-backed securities:
Maturing after one year but within five years
FNMA .................................... 6,299 6,189 5,655 5,516
FHLMC ................................... 1,034 1,033 1,136 1,120
Maturing after five years but within ten years
FNMA ................................ -- -- 1,726 1,663
Maturing after ten years
GNMA .................................... 153 151 182 181
------- ------- ------- -------
7,486 7,373 8,699 8,480
------- ------- ------- -------
State and Municipal obligations:
Maturing within one year ..................... 381 381 131 131
Maturing after one year but within five years 184 183 576 571
------- ------- ------- -------
565 564 707 702
------- ------- ------- -------
Other bonds and notes:
Maturing within one year ..................... 3,409 3,409 980 977
Maturing after one year but within five years 862 854 4,316 4,308
Maturing after five years but within ten years -- -- 100 101
------- ------- ------- -------
4,271 4,263 5,396 5,386
------- ------- ------- -------
Total securities held to maturity ................... $14,663 $14,526 $18,330 $18,089
======= ======= ======= =======
</TABLE>
Included in United States Government and agency obligations at December 31, 1996
are securities with an amortized cost of $1.0 million which can be called at a
date or dates prior to their contractual maturity.
<PAGE>
The gross unrealized gains (losses) on securities held to maturity are as
follows:
<TABLE>
<CAPTION>
December 31,
-------------------------------------------------
1996 1995
------------------------ -----------------------
Unrealized Unrealized Unrealized Unrealized
Gains Losses Gains Losses
----- ------ ----- ------
<S> <C> <C> <C> <C>
United States Government and agency obligations $-- $ (15) $ 15 $ (22)
Mortgage-backed securities .................... 5 (118) -- (219)
State and municipal obligations ............... -- (1) -- (5)
Other bonds and notes ......................... 3 (11) 11 (21)
--- ----- ----- -----
Total .................................. $ 8 $(145) $ 26 $(267)
=== ===== ===== =====
</TABLE>
<PAGE>
(3) Securities Available for Sale
(in thousands)
The cost, contractual maturity and market value of securities available for
sale are as follows:
<TABLE>
<CAPTION>
December 31,
------------------------------------------------
1996 1995
--------------------- --------------------
Market 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 5,200 5,168 3,545 3,533
Maturing after five years but within ten years 500 495 250 249
------ ------ ------ ------
5,700 5,663 4,901 4,895
------ ------ ------ ------
State and Municipal obligations:
Maturing within one year ..................... 504 510 -- --
Maturing after one year but within five years 294 294 807 807
------ ------ ------ ------
798 804 807 807
------ ------ ------ ------
Other bonds and notes:
Maturing within one year ..................... 1,244 1,253 -- --
Maturing after one year but within five years 250 248 1,861 1,880
------ ------ ------ ------
1,494 1,501 1,861 1,880
------ ------ ------ ------
Marketable equity securities ................... 112 114 112 113
------ ------ ------ ------
$8,104 $8,082 $7,681 $7,695
====== ====== ====== ======
</TABLE>
<PAGE>
Included in United States Government and agency obligations at December 31, 1996
are securities with a cost of $4.0 million which can be called at a date or
dates prior to their contractual maturity.
The gross unrealized gains (losses) on securities available for sale are as
follows:
<TABLE>
<CAPTION>
December 31,
-------------------------------------------------
1996 1995
----------------------- -----------------------
Unrealized Unrealized Unrealized Unrealized
Gain Loss Gain Loss
---- ---- ---- ----
<S> <C> <C> <C> <C>
United States Government and agency obligations $ 17 $(54) $ 14 $(20)
State and municipal obligations ............... 6 -- -- --
Other bonds and notes ......................... 9 (2) 22 (3)
Marketable equity securities .................. 2 -- 2 (1)
---- ---- ---- ----
Total .................................. $ 34 $(56) $ 38 $(24)
==== ==== ==== ====
</TABLE>
Realized gains and losses on securities and other assets, are as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------------------------------------
1996 1995 1994
----------------------- ------------------------ -------------------
Realized Realized Realized Realized Realized Realized
Gains Losses Gains Losses Gains Losses
----------------------- ------------------------ -------------------
<S> <C> <C> <C> <C> <C> <C>
U. S. Government and agency obligations $1 $ - $ - $(12) $11 $ (68)
Other bonds and notes - - 8 (1) 5 (74)
Other assets - - - (21) - -
-- --- --- ---- --- -----
Total $1 $ - $8 $(34) $16 $(142)
== == == ==== === =====
</TABLE>
<PAGE>
(4) Loans, Net
(in thousands)
Loans are summarized as follows:
<TABLE>
<CAPTION>
December 31,
----------------------------
1996 1995
--------- ---------
<S> <C> <C>
Mortgage loans:
Residential
Fixed ............................... $ 18,407 $ 15,888
Adjustable .......................... 61,316 51,632
Residential construction ................ 21,100 17,649
Commercial .............................. 33,891 28,660
Commercial construction ................. 5,960 2,456
--------- ---------
Total principal balances .......... 140,674 116,285
--------- ---------
Due to borrowers on uncompleted loans:
Residential ......................... (6,743) (5,576)
Commercial .......................... (3,342) (1,213)
Deferred loan origination fees .......... (517) (427)
--------- ---------
Total mortgage loans ........ 130,072 109,069
--------- ---------
Other loans:
Commercial .............................. 8,534 7,195
Second mortgage ......................... 1,987 2,145
Home equity ............................. 1,542 1,834
Passbook and stock secured .............. 960 1,342
Consumer ................................ 1,695 1,204
--------- ---------
Total other loans ................. 14,718 13,720
Less: Allowance for loan losses ........ (2,365) (2,249)
========= =========
Loans, net ........................ $ 142,425 $ 120,540
========= =========
</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 impacted by
the level of overall economic activity within the borrower's 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 impacted by the health of the real estate economic sector in the
borrower's geographic areas and the general economy.
<PAGE>
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 $1,468 and $826 at December 31, 1996 and 1995,
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, 1996 and 1995:
<TABLE>
<CAPTION>
1996 1995
------- --------
<S> <C> <C>
Balance at beginning of year ............... $ 826 $ 1,128
Additions ............................... 971 199
Deductions .............................. (329) (501)
------- -------
Balance at end of year ..................... $ 826 $ 1,468
======= =======
</TABLE>
Loans serviced for other investors amounted to $70,712, $64,295 and $50,505
at December 31, 1996, 1995 and 1994, respectively. Service fees earned on these
loans amounted to $282, $229 and $138, respectively, in 1996, 1995 and 1994.
Non-performing loans are summarized as follows:
<TABLE>
<CAPTION>
December 31,
--------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Loans accounted for on a non-accrual basis ..... $ 10 $ -- $357
Accruing loans 90 days past due ................ 433 -- 76
Restructured loans ............................. -- -- 96
</TABLE>
<PAGE>
The reduction in interest income associated with non-performing loans was
not significant.
Transactions in the allowance for loan losses are summarized as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------------
1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
Balance at beginning of year .................................. $ 2,249 $ 2,154 $ 2,093
Provision for loan losses .............................. 75 -- --
Recoveries on loans previously charged off ............. 179 115 102
Realized losses charged to allowance ................... (138) (20) (41)
------- ------- -------
Balance at end of year ........................................ $ 2,365 $ 2,249 $ 2,154
======= ======= =======
Allocated as follows:
Residential mortgage loans ............................. $ 524 $ 532 $ 812
Commercial real estate loans ........................... 1,222 1,145 550
Commercial loans ....................................... 184 156 226
All other loans ........................................ 225 281 43
Unallocated ............................................ 210 135 523
------- ------- -------
Total ............................................. $ 2,365 $ 2,249 $ 2,154
======= ======= =======
Realized losses charged to the allowance by type are as follows
Residential mortgage loans ............................. $ 19 $ -- $ --
Commercial real estate loans ........................... -- 7 5
Commercial loans ....................................... 31 -- 25
All other loans ........................................ 88 13 11
------- ------- -------
Total ............................................. $ 138 $ 20 $ 41
======= ======= =======
</TABLE>
(5) Land, Building and Equipment, Net
(in thousands)
Land, building, and equipment are summarized as follows:
<TABLE>
<CAPTION>
December 31,
-------------------------
1996 1995
------- -------
<S> <C> <C>
Land ......................................... $ 304 $ 304
Buildings .................................... 571 571
Furniture and equipment ...................... 1,816 1,421
------- -------
2,691 2,296
Less: Accumulated depreciation .............. (1,269) (1,052)
------ -------
$ 1,422 $ 1,244
======= =======
</TABLE>
<PAGE>
(6) Deposits
(dollars in thousands)
Deposit accounts are summarized as follows:
<TABLE>
<CAPTION>
December 31,
-----------------------------------------------
Weighted Weighted
Average Average
1996 Rate 1995 Rate
---------------------- -----------------------
<S> <C> <C> <C> <C>
Demand (non-interest bearing) ......... $ 9,955 --% $ 7,352 --%
Savings:
NOW .............................. 31,223 1.32% 25,212 1.35%
Regular and 90-day notice accounts 13,779 2.78% 13,098 2.83%
Money market deposit accounts .... 22,672 3.23% 17,985 3.23%
Advance payments from mortgagors . 131 0.65% 207 0.65%
-------- ---- -------- ----
Total savings ................ 67,805 2.25% 56,502 2.29%
-------- ---- -------- ----
Time certificates of deposit .......... 57,322 5.12% 50,503 5.32%
-------- ---- -------- ----
Total deposits ............... $135,082 3.30% $114,357 3.48%
======== ==== ======== ====
</TABLE>
Included in time certificates are brokered certificates of deposit,
amounting to $3.3 million and $4.8 million at December 31, 1996 and 1995,
respectively.
Certificates of deposit are summarized by contractual maturity date at
December 31, 1996 as follows:
<TABLE>
<CAPTION>
Under Over
$100,000 $100,000 Total
------- ------- -------
<S> <C> <C> <C>
Within one year ...................... $23,654 $24,829 $48,483
From one to three years .............. 6,517 935 7,452
From three to five years ............. 776 611 1,387
------- ------- -------
Total ............................ $30,947 $26,375 $57,322
======= ======= =======
</TABLE>
<PAGE>
Interest on deposits, classified by type, is as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------
1996 1995 1994
------ ------ ------
<S> <C> <C> <C>
Regular, NOW, 90 day notice and advance
payments from mortgagors .................. $ 703 $ 691 $ 649
Money market deposits ......................... 698 572 591
Time certificates of deposit .................. 2,818 2,429 1,929
------ ------ ------
Total ..................................... $4,219 $3,692 $3,169
====== ====== ======
</TABLE>
(7) Borrowed Funds
(dollars in thousands)
Borrowed funds are summarized as follows:
<TABLE>
<CAPTION>
December 31,
----------------------------------------------
1996 1995
-----------------------------------------------
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 ............................. $17,400 5.80% $18,500 6.29%
Due from one to three years ..................... 8,681 5.99% 9,784 6.13%
Due from three to five years .................... 6,254 6.70% 4,553 6.87%
------- ---- ------- ----
Total borrowings ............................ $32,335 6.05% $32,837 6.32%
======= ==== ======= ====
</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.
<PAGE>
(8) Income Taxes
(dollars in thousands)
Total income tax expense was allocated as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------------
1996 1995 1994
------- ------- --------
<S> <C> <C> <C>
Current tax expense:
Federal ........................... $ 1,567 $ 914 $ 977
State ............................. 612 305 428
------- ------- -------
2,179 1,219 1,405
------- ------- -------
Deferred tax expense(benefit)
Federal ........................... (139) 428 (1)
State ............................. (55) 170 67
Change in valuation allowance ..... (54) (68) (90)
------- ------- -------
(248) 530 (24)
------- ------- -------
Total income tax expense ...... $ 1,931 $ 1,749 $ 1,381
======= ======= =======
</TABLE>
The effective Federal income tax rates differ from the statutory rates as
indicated below:
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Statutory rate ...................................... 34% 34% 34%
Increase (decrease) resulting from:
State income taxes (net of Federal tax benefit) .. 7 7 9
Change in valuation allowance and other .......... (2) (2) (3)
--- --- ---
39% 39% 40%
=== === ===
</TABLE>
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 11.72%. The Company has been classified as 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 0.33% 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.
<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,
1996 and 1995 are presented below:
<TABLE>
<CAPTION>
December 31,
-----------------
1996 1995
----- -----
<S> <C> <C>
Deferred tax assets
Deferred compensation expense ....................... $ 211 $ 212
Allowance for loan losses ........................... 354 188
Accrued retirement expenses ......................... 106 96
Capital loss carry forward .......................... 65 65
Accrued bonus ....................................... 46 25
Unrealized loss on securities available for sale .... 9 --
----- -----
Total gross deferred tax asset .................. 791 586
Less: valuation allowance ........................... (65) (119)
----- -----
726 467
Deferred tax liabilities
Deferred loan origination fees ...................... 271 271
Depreciation of buildings and equipment ............. 108 106
Unrealized gain on securities available for sale .... -- 5
----- -----
Total gross deferred tax liabilities ............ 379 382
----- -----
Net deferred tax asset ........... $ 347 $ 85
===== =====
</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.
In August 1996, the provisions repealing the current thrift bad debt rules
were passed by Congress as part of "The Small Business Job Protection Act of
1996." The new rules eliminate the 8% of taxable income method for deducting
additions to the tax bad debt reserves for all thrifts for tax years beginning
after December 31, 1995. These rules also require that all thrift institutions
recapture all or a portion of their bad debt reserves added since the base year
(last taxable year beginning before January 1, 1988). The Bank has previously
recorded a deferred tax liability equal to the bad debt recapture and as such,
the new rules will have no effect on net income or federal income tax expense.
The unrecaptured base year reserves will not be subject to recapture as
long as the institution continues to carry on the business of banking. In
addition, the balance of the pre-1988 bad debt reserves continue to be subject
to provisions of present law that require recapture in the case of certain
excess distributions to shareholders. The tax effect of pre-1988 bad debt
reserves subject to recapture in the case of certain excess distributions is
approximately $1.0 million.
<PAGE>
(9) Employee Benefits
(dollars in thousands)
Pension Plan
The Bank provides pension benefits for it's employees through membership in
the Savings Bank Employee Retirement Association, a noncontributory, defined
benefit plan. Bank employees become eligible after attaining age 21 and one year
of service. The Plan provides for benefits to be paid to eligible employees at
retirement based primarily upon their years of service with the Bank and
compensation levels near retirement. The Company's policy is to make the maximum
tax deductible contributions to the plan.
The following table sets forth the Plan's funded status and amounts
recognized in the Company's consolidated financial statements for the plan years
ended October 31, 1996 and 1995:
<TABLE>
<CAPTION>
1996 1995
------- -------
<S> <C> <C>
Accumulated benefit obligation .................................... $ 860 $ 752
Additional benefits related to future compensation levels ......... 489 569
------- -------
Projected benefit obligation for service rendered to date ......... 1,349 1,321
Plan assets at fair value, invested primarily in bonds and equities 1,186 975
------- -------
Plan assets below projected benefit obligations ................... $ (163) $ (346)
======= =======
</TABLE>
Assumptions used in determining the actuarial present value of the projected
benefit obligation were as follows:
<TABLE>
<CAPTION>
1996 1995
----- -----
<S> <C> <C>
Discount rate ........................................ 7.50% 7.00%
Rate of increase in compensation levels .............. 6.00% 6.00%
Certain changes in the items shown are not recognized as they occur, but are
amortized systematically over subsequent periods. Unrecognized amounts to be
amortized and the amounts included in the consolidated balance sheets are shown
below:
1996 1995
----- ------
<S> <C> <C>
Unrecognized transaction asset ......................... $ 24 $ 26
Unrecognized net (gain) loss ........................... 68 (142)
Accrued pension cost ................................... (255) (230)
----- -----
Plan assets below projected benefit obligations ........ $(163) $(346)
===== =====
</TABLE>
<PAGE>
The assumptions used and the components of net pension expense for the Plan
for the years ended December 31 include the following:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Assumptions Used:
Discount rate ................................. 7.50% 7.00% 8.00%
Expected long-term rate of return on assets ... 8.00% 8.00% 7.00%
Rate of increase in compensation levels ....... 6.00% 6.00% 6.00%
Net Pension Expense Includes the Following
Expense (Income) Component:
Service cost benefits earned during the period $ 109 $ 83 $ 85
Interest cost on projected benefit obligation . 92 79 102
Actual return on Plan assets .................. (147) (135) (57)
Net amortization and deferral ................. 73 79 (13)
----- ----- -----
Pension expense ............................. $ 127 $ 106 $ 117
===== ===== =====
</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 $55 in 1996.
(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 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 and standby letters of credit 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.
<PAGE>
Financial instruments whose contract amounts represent credit risk are as
follows:
<TABLE>
<CAPTION>
Contract or Notional Amount
---------------------------
December 31,
---------------------------
1996 1995
----- -------
<S> <C> <C>
Commitments to originate mortgage and commercial loans ... $ 8,184 $ 6,834
Unused lines of credit ................................... 8,287 9,340
Standby letters of credit ................................ 446 54
Unadvanced portions of construction loans ................ 10,085 6,789
</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.
<PAGE>
Financial instrument fair value estimates, methods and assumptions are set
forth below:
Cash and cash equivalents
The carrying amount of cash and cash equivalents approximates its fair
value.
Securities
Fair values for securities, including mortgage backed securities, are based
on quoted market prices.
Federal Home Loan Bank stock
The carrying amount of stock in the Federal Home Loan Bank of Boston
approximates its fair value.
Loans
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 Income Receivable
The carrying amount of accrued income receivable approximates its fair
value.
Deposits
The fair value of demand deposits, NOW and savings accounts, advance
payments from mortgagors 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.
<PAGE>
The carrying amounts and fair values of the Company's financial
instruments consisted of the following at December 31,
1996 and 1995:
<TABLE>
<CAPTION>
1996 1995
-------------------- -------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
------ ----- ------ -----
<S> <C> <C> <C> <C>
Cash and cash equivalents ............. $ 9,819 $ 9,819 $ 6,636 $ 6,636
Securities :
Available for sale ................ 8,082 8,082 7,695 7,695
Held to maturity .................. 14,663 14,526 18,330 18,089
Loans, net of allowance for loan losses 151,291 150,597 129,147 129,272
Federal Home Loan Bank stock .......... 2,321 2,321 2,321 2,321
Accrued income receivable ............. 1,093 1,093 1,104 1,104
Deposits:
Demand ............................ 9,955 9,955 7,352 7,352
NOW ............................... 31,223 31,223 25,212 25,212
Regular savings ................... 13,779 13,779 13,098 13,098
Advance payments from mortgagors .. 131 131 207 207
Money market ...................... 22,672 22,672 17,985 17,985
Certificates of Deposit ........... 57,322 57,412 50,503 50,656
Borrowed Funds ........................ 32,335 32,451 32,837 33,177
</TABLE>
(13) Capital Requirements
(dollars in thousands)
The Bank is subject to Federal Deposit Insurance Corporation ("FDIC")
regulations regarding capital requirements. Failure to meet minimum capital
requirements can initiate certain mandatory (and possibly discretionary) actions
by regulators that, if undertaken, could have a direct material effect on the
Company's financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Bank must meet specific
capital guidelines that involve quantitative measures of the Bank's assets,
liabilities, and certain off-balance-sheet items as calculated under regulatory
accounting practices. The Bank's capital amounts and classifications are also
subject to qualitative judgments by the regulators about components, risk
weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios (set forth in the table
below) of total and Tier I capital (as defined in the regulations) to risk
weighted assets (as defined), and of Tier I capital (as defined) to average
assets (as defined). Management believes, as of December 31, 1996, that the Bank
meets all capital adequacy requirements to which it is subject.
As of December 31, 1996, the most recent notification from the FDIC
categorized the Bank as well capitalized under the framework for prompt
corrective action. To be categorized as well capitalized, the Bank must maintain
minimum total risk-based, Tier I risk-based, and Tier I leverage ratios as set
forth in the table. There are no conditions or events since that notification
that management believes would cause a change in the Bank's categorization.
<PAGE>
The Bank's actual capital amounts and ratios are presented in the following
table.
<TABLE>
<CAPTION>
To Be Well Capitalized
For Capital Adequacy Under Prompt Corrective
Actual Purposes: Action Provisions:
------------------ ------------------- -----------------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1996:
Total Capital
(to Risk Weighted Assets) $20,725 17.99% $ 9,218 8.0% $11,522 10.0%
Tier I Capital
(to Risk Weighted Assets) $19,273 16.73% $ 4,609 4.0% $ 6,913 6.0%
Total Capital
(to Average Assets) ..... $20,725 11.15% $ 7,436 4.0% $ 9,295 5.0%
</TABLE>
(14) 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,
-----------------------
1996 1995
-------- --------
<S> <C> <C>
Assets
Cash and due from banks ................................................. $ 69 $ 763
Investment in Nantucket Bank ............................................ 19,260 17,645
Due from Nantucket Bank ................................................. 621 --
Income taxes receivable ................................................. 146 --
Other assets ............................................................ 19 25
-------- --------
Total assets ................................................... $ 20,115 $ 18,433
======== ========
Liabilities
Due to Nantucket bank ................................................... $ -- $ 15
Other liabilities ....................................................... 12 39
-------- --------
Total liabilities .............................................. 12 54
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 ....................................................... 7,017 5,271
Unrealized gain (loss) on securities available for sale, net of taxes ... (13) 9
Less: Treasury stock, at cost (483,604 shares)........................... (4,397) (4,397)
Total stockholders' equity ..................................... 20,103 18,379
-------- --------
Total liabilities and stockholders' equity ..................... $ 20,115 $ 18,433
======== ========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Statements of Earnings Years Ended December 31,
-----------------------------------
1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
Income:
Dividends from Nantucket Bank ....................................... $ 1,600 $ 1,000 $ --
Interest on cash equivalents and securities ......................... 17 108 410
------- ------- -------
Total income ................................................... 1,617 1,108 410
Expenses:
Loss on securities .................................................. -- 19 137
Operating expenses .................................................. 353 336 550
------- ------- -------
Total expenses ................................................. 353 355 687
------- ------- -------
Income (loss) before income taxes and equity in undistributed net
income of Nantucket Bank ............................................ 1,264 753 (277)
Income tax benefit ...................................................... (134) (84) (78)
------- ------- -------
Income (loss) before equity in undistributed net income of Nantucket Bank 1,398 837 (199)
Equity in undistributed net income of Nantucket Bank .................... 1,637 1,919 2,308
------- ------- -------
Net income ..................................................... $ 3,035 $ 2,756 $ 2,109
======= ======= =======
</TABLE>
<PAGE>
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,
------------------------------------
1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
Net cash flow from operating activities:
Net income ........................................................... $ 3,035 $ 2,756 $ 2,109
Adjustments to reconcile net income to net cash provided by operating
activities:
Equity in undistributed net income of Nantucket Bank ............ (1,637) (1,919) (2,308)
Net increase (decrease) in accrued expenses and other liabilities (27) 20 3
Net amortization (accretion) on securities ...................... -- (7) 53
Net decrease in prepaid expenses and other assets ............... 6 13 294
Net (increase) decrease in refundable income taxes .............. (146) 9 13
Net loss on sales of securities ................................. -- 5 137
Other, net ...................................................... -- 12 --
------- ------- -------
Net cash provided by operating activities ................................ 1,231 889 301
------- ------- -------
Net cash flows from (used in) investing activities:
Capital infusion to Nantucket Bank ................................... -- -- (967)
Purchases of investments and securities available for sale ........... -- -- (1,152)
Proceeds from sale of securities available for sale .................. -- 2,242 4,717
Proceeds from maturities of investments .............................. -- -- 2,727
Net increase (decrease) in due to / from Nantucket Bank .............. (636) 632 (357)
------- ------- -------
Net cash provided by (used in) investing activities ...................... (636) 2,874 4,968
------- ------- -------
Net cash flows from financing activities:
Proceeds from stock options exercised ................................ -- -- 253
Cash dividends paid .................................................. (1,289) (7,552) (1,104)
------- ------- -------
Net cash used for financing activities ................................... (1,289) (7,552) (851)
------- ------- -------
Net increase (decrease) in cash and cash equivalents ..................... (694) (3,789) 4,418
Cash and cash equivalents at beginning of year ........................... 763 4,552 134
------- ------- -------
Cash and cash equivalents at end of year ................................. $ 69 $ 763 $ 4,552
======= ======= =======
Supplemental disclosure of cash flow information:
Cash paid during the year for income taxes: .......................... $ -- $ 159 $ 630
</TABLE>
<PAGE>
Independent Auditors' Report
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, 1996 and 1995, 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, 1996.
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, 1996 and 1995, and the results of
their operations and their cash flows for each of the years in the three-year
period ended December 31, 1996 in conformity with generally accepted accounting
principles.
/s/ KPMG Peat Marwick LLP
- -------------------------
KPMG Peat Marwick LLP
Boston, Massachusetts
February 4, 1997
<PAGE>
Directors and Officers Home Port Bancorp, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
Home Port Bancorp, Inc.
Directors
---------
Karl L. Meyer *
Chairman of the Board, President and CEO
of Home Port Bancorp, Inc.
Charles F. DiGiovanna
President of Continental Plastic, 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
Philip W. Read *
President of Jared Coffin House, Inc. and
Chairman of the Board Nantucket Bank
Home Port Bancorp, Inc.
Officers
--------
Karl L. Meyer
Chairman of the Board, President and CEO
William P. Hourihan, Jr.
Vice President
Robert J. McKay
Secretary
Daniel P. Neath
Vice President
John M. Sweeney
Treasurer & Chief Financial Officer
* Members of Executive Committee
<PAGE>
Nantucket Bank
Directors
---------
Philip W. Read
President of Jared Coffin House, Inc.
Chairman of the Board of Nantucket Bank
John S. Conway
Legislative Liaison for the House of Representatives
of the Commonwealth of Massachusetts
Arthur L. Desrocher
Chairman of the Board of Selectman of the Town of
Nantucket
John P. Dooley, CPA
Sheila O'Brien Egan
President of Swain's Travel, Inc.
Ralph L. Hardy
Ralph L. Hardy, Electrical Contractor
Lucile W. Hays
Former business owner and Director and Past
President of the Nantucket Boys and Girls Club
William P. Hourihan, Jr.
President of Nantucket Bank
Malcolm F. Soverino
Port Agent - Steamship Authority (Retired)
Secretary and Clerk of Nantucket Bank
J. Barry Thurston
Owner, Barry Thurston's Inc.
Alvin S. Topham
President of Topham Management Services, Inc.
<PAGE>
Stockholder's information
Legal Counsel
Gadsby and Hannah
225 Franklin 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 Friday, May
16, 1997 at the Wauwinet Inn, Wauwinet Road, Nantucket, MA 02554.
Form 10-KSB
Copies of the Company's 1996 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 is traded on the Nasdaq National Market
tier of The Nasdaq Stock Market under the symbol of HPBC and is listed in most
newspapers alphabetically abbreviated. As of March 7, 1997, there were 413
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.
<PAGE>
The range of high and low sale prices and dividends declared for the common
stock by quarter are as follows:
<TABLE>
<CAPTION>
Dividends
Period High Low Declared
------ ---- --- --------
<S> <C> <C> <C> <C>
1996 4th quarter 17 1/4 15 1/2 $0.20
3rd quarter 16 13 1/2 $0.20
2nd quarter 14 3/4 12 1/2 $0.15
1st quarter 16 11 3/4 $0.15
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
</TABLE>
(Source: National Association of Securities Dealers, Inc.)
Note: The prices do not include mark-up, mark-down or commission.
EXHIBIT (21)
SUBSIDIARIES OF THE REGISTRANT
State of
Subsidiaries Percentage (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>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 5,073
<INT-BEARING-DEPOSITS> 46
<FED-FUNDS-SOLD> 4,700
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 8,082
<INVESTMENTS-CARRYING> 14,663
<INVESTMENTS-MARKET> 14,526
<LOANS> 144,790
<ALLOWANCE> 2,365
<TOTAL-ASSETS> 189,931
<DEPOSITS> 135,082
<SHORT-TERM> 32,335
<LIABILITIES-OTHER> 2,411
<LONG-TERM> 0
0
0
<COMMON> 23
<OTHER-SE> 20,080
<TOTAL-LIABILITIES-AND-EQUITY> 189,931
<INTEREST-LOAN> 12,863
<INTEREST-INVEST> 1,587
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 14,450
<INTEREST-DEPOSIT> 4,219
<INTEREST-EXPENSE> 6,289
<INTEREST-INCOME-NET> 8,161
<LOAN-LOSSES> 75
<SECURITIES-GAINS> 1
<EXPENSE-OTHER> 3,994
<INCOME-PRETAX> 4,966
<INCOME-PRE-EXTRAORDINARY> 4,966
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,035
<EPS-PRIMARY> 1.65
<EPS-DILUTED> 1.65
<YIELD-ACTUAL> 4.77
<LOANS-NON> 10
<LOANS-PAST> 433
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 1,200
<ALLOWANCE-OPEN> 2,249
<CHARGE-OFFS> 138
<RECOVERIES> 179
<ALLOWANCE-CLOSE> 2,365
<ALLOWANCE-DOMESTIC> 2,365
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
