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 (NO FEE REQUIRED)
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997.
[ ] 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: $16,958,000.
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 6, 1998 which was $ 26.00
per share, is $39,033,566.
As of March 6, 1998, there were outstanding 1,841,890 shares of the
registrant's Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE
1. Portions of the Annual Report to Stockholders for the Fiscal Year Ended
December 31, 1997. (Parts I and II)
2. Portions of the Proxy Statement for the 1998 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>
Preliminary Note in Regard to Forward-looking Statements. This annual
report on Form 10-KSB contains forward-looking statements. For this purpose, any
statements contained herein that are not statements of historical fact may be
deemed to be forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933, as amended. Without limiting the foregoing, the words
"believes," "anticipates," "plans," "expects" and similar expressions are
intended to identify forward-looking statements. There are a number of important
factors that could cause the registrant's actual results to differ materially
from those contemplated by such forward-looking statements. These factors
include, without limitation, those set forth below under the caption "Certain
Factors That May Affect Future Results." These and other risks are also detailed
from time to time in the registrants filings with the Securities and Exchange
Commission.
Certain Factors That May Affect Future Results. The following important
factors, among others, could cause actual results to differ materially from
those contemplated by forward-looking statements made in this annual report on
Form 10-KSB or presented elsewhere by management from time to time. Defined
terms used elsewhere in this annual report have the same meanings herein as
therein. A number of uncertainties exist that could affect the Company's future
operating results, including, without limitation, the Bank's continued ability
to originate quality loans, fluctuation of interest rates, real estate market
conditions in the Bank's lending area, general and local economic conditions,
the Bank's continued ability to attract and retain deposits, new accounting
pronouncements, and changing regulatory requirements.
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 savings bank 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, 1997, 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 Bank. The Bank is a Massachusetts chartered savings bank, 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 $100,000 per account and the Depositors Insurance Fund, a private
deposit insuring company, for deposits in excess of $100,000. The Bank is
subject to competition from other financial institutions. The Bank is subject to
the regulations of, and periodic examinations by, the FDIC and the Massachusetts
Division of Banks.
The 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
<PAGE>
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 1997 and 1996 the Bank has emphasized planned growth in its core lending
and deposit businesses, taking advantage of a very good local and regional
economic environment and a strong real estate market on Nantucket. Average loans
and deposits grew by 13.7% and 9.4%, respectively, in 1997 compared to 14.2% and
11.0% in 1996.
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's earnings are
largely dependent on its net interest income, which is the difference between
the yield on its interest-earning assets and the cost of its interest-bearing
liabilities. The Bank seeks to reduce its exposure to changes in interest rates,
or market risk, through active monitoring and management of its interest rate
exposure. For additional information, refer to the "Asset/Liability Management
and Market Risk" section of "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
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. Of particular note
is the increase in the median price of real estate in Nantucket. During 1997,
median price of Nantucket residential real estate sales, for transfers under $1
million, was $280,000, an increase of 23.9% from the $226,000 median price in
1996. Since 1993 the median price of real estate sold has increased by 60%. In
1997 there were 56 recorded sales of properties exceeding $1 million, compared
to 41 in 1996. These increases helped to drive a 24% increase in the total
dollar volume of all Nantucket real estate sales in 1997 compared to 1996,
despite a 5% decrease in the total number of properties sold.
For Massachusetts as a whole, in 1997 the number of real estate sales
increased approximately 6% and the dollar volume increased approximately 12%
compared to 1996.
The Bank's real estate loan originations totaled $81.7 million, $85.1
million and $59.2 million, respectively, in 1997, 1996 and 1995. During these
three years Nantucket Bank has been the leader in residential real estate
mortgages recorded at the Registry of Deeds in Nantucket.
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,
---------------------------------------
1997 1996 1995
--------- ---------- ---------
<S> <C> <C> <C>
Assets
Cash and due from banks $ 5,329 $ 5,047 $ 4,708
Federal funds sold and interest bearing deposits in banks 1,176 1,336 1,939
--------- --------- ---------
Total cash and cash equivalents 6,505 6,383 6,647
Securities 22,821 23,724 28,907
FHLB Stock 2,396 2,321 2,200
Loans
Residential real estate loans 109,592 94,932 83,800
Commercial real estate and business loans 47,950 42,562 36,703
Consumer loans 6,026 6,304 5,429
--------- --------- ---------
Total loans 163,568 143.798 125,932
Less: Allowance for loan losses (2,525) (2,310) (2,203)
--------- --------- ---------
Net loans 161,043 141,488 123,729
Other assets 3,383 2,551 3,564
========= ========= =========
Total assets $ 196,148 $ 176,467 $ 165,047
========= ========= =========
Liabilities and Stockholders' Equity
Deposits
Regular savings and 90 day notice $ 14,245 $ 13,691 $ 14,661
NOW accounts 27,907 25,200 22,225
Money market deposit accounts 24,575 20,890 17,648
--------- --------- ---------
Total savings accounts 66,727 59,781 54,534
Demand 11,005 8,972 6,034
Time 56,564 52,942 47,007
--------- --------- ---------
Total deposits 134,296 121,695 107,575
Borrowed funds 38,969 33,877 35,853
Other liabilities 1,977 1,733 2,406
--------- --------- ---------
Total liabilities 175,242 157,305 145,834
--------- --------- ---------
</TABLE>
<PAGE>
<TABLE>
<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,
---------------------------------------
1997 1996 1995
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<S> <C> <C> <C>
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 23
Additional paid-in capital 17,473 17,473 17,473
Retained earnings 7,821 6,090 6,115
Unrealized loss on securities available for sale, net of taxes (14) (27) (1)
Less: Treasury stock, at cost (483,604 shares) (4,397) (4,397) (4,397)
--------- --------- ---------
Total stockholders' equity 20,906 19,162 19,213
--------- --------- ---------
Total liabilities and stockholders' equity $ 196,148 $ 176,467 $ 165,047
========= ========= =========
</TABLE>
<PAGE>
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.
The following paragraphs contain an analysis of the significant loan categories.
Loan portfolio. The following tables set forth information concerning the
loan portfolio, (including loans held for sale), non-performing loans and the
allowance for possible loan losses.
The loan portfolio consists of the following:
<TABLE>
<CAPTION>
December 31,
--------------------------------------------------------------------------------------------
(dollars in thousands) 1997 1996 1995 1994 1993
--------------------------------------------------------------------------------------------
Amount % Amount % Amount % Amount % Amount %
------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Mortgage loans:
Residential $105,506 60% $88,589 59% $76,127 59% $70,057 59% $49,532 56%
Residential construction 21,827 12% 21,100 14% 17,649 14% 24,957 21% 9,601 11%
Commercial 36,188 21% 33,891 22% 28,660 22% 27,404 23% 24,956 28%
Commercial construction 4,535 3% 5,960 4% 2,456 4% 910 1% - -
------------------------------------------------------------------------------------------
Total principal baLances 168,056 96% 149,540 99% 124,892 99% 123,328 104% 84,089 95%
Less due borrowers on
incomplete loans:
Residential (4,719) (3%) (6,743) (5%) (5,576) (5%) (13,463) (11%) (2,215) (3%)
Commercial (1,845) (1%) (3,342) (2%) (1,213) (3%) (1) - (0) -
Less deferred loan
origination fees (474) - (517) - (427) - (443) - (461) -
------------------------------------------------------------------------------------------
Total mortgage loans 161,018 92% 138,938 92% 117,676 91% 109,421 93% 81,413 92%
Other loans
Consumer 1,564 1% 1,695 1% 1,204 1% 600 1% 708 1%
Second mortgage 1,712 1% 1,987 1% 2,145 2% 2,027 1% 1,983 2%
Home equity 1,975 1% 1,542 1% 1,834 1% 1,399 1% 1,243 1%
Commercial 10,425 6% 8,534 6% 7,195 6% 6,048 5% 3,996 5%
Passbook & stock secured 817 - 960 1% 1,342 1% 884 1% 876 1%
------------------------------------------------------------------------------------------
Total other loans 16,493 9% 14,718 10% 13,720 11% 10,958 9% 8,806 10%
Less allowance for loan loss (2,609) (1%) (2,365) (2%) (2,249) (2%) (2,154) (2%) (2,093) (2%)
------------------------------------------------------------------------------------------
Loans, net $174,902 100% $151,291 100% $129,147 100% $118,225 100% $88,126 100%
==========================================================================================
</TABLE>
<PAGE>
Non-performing loans are summarized as follows:
<TABLE>
<CAPTION>
December 31,
------------------------------------------------------------
1997 1996 1995 1994 1993
------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Loans accounted for on a non-accrual basis $ - $ 10 $ - $ 357 $ -
Accruing loans 90 days or more past due 10 433 - 76 247
Restructured loans - - - 96 96
</TABLE>
Transactions in the allowance for loan losses are summarized as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------------------------------------------
1997 1996 1995 1994 1993
--------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at beginning of year $2,365 $2,249 $2,154 $2,093 $2,236
Provision for loan losses 150 75 - - -
Recoveries on loans previously charged off 204 179 115 102 274
Realized losses charged to allowance (110) (138) (20) (41) (417)
==============================================================
Balance at end of year $2,609 $2,365 $2,249 $2,154 $2,093
==============================================================
End of year balance allocated as follows:
Residential mortgage loans $ 544 $ 524 $ 532 $ 456 $ 450
Commercial mortgage loans 1,320 1,222 1,145 1,114 1,088
Commercial loans 160 184 156 254 247
All other loans 225 225 281 330 308
Unallocated 360 210 135 - -
==============================================================
Total $2,609 $2,365 $2,249 $2,154 $2,093
==============================================================
Realized losses charged to the allowance are as follows
Residential mortgage loans $ - $19 $ - $ - $22
Commercial mortgage loans - - 7 5 112
Commercial loans 91 31 - 25 187
All other loans 19 88 13 11 96
==============================================================
Total $110 $138 $20 $41 $417
==============================================================
</TABLE>
<PAGE>
The following table shows, as of December 31, 1997, information concerning the
Bank's construction loans, commercial mortgage, commercial business, and
construction loans. All of the loans included in the "after one year but within
five year" and "over five year" categories have adjustable rates of interest
except for $1.6 million of commercial mortgages. Construction loans are
presented net of unadvanced funds.
<TABLE>
<CAPTION>
Period to Maturity or Repricing from December 31, 1997
---------------------------------------------------------
(in thousands) After One
One year or But Within Over Five
Less Five Years Years Total
----------- ---------- -------- -------
<S> <C> <C> <C> <C>
Residential construction $17,108 $ - $ - $17,108
Commercial mortgage 20,602 14,869 717 36,188
Commercial construction 2,690 - 2,690
-
Commercial business 10,425 - 10,425
-
======== ======= ==== =======
$50,825 $14,869 $717 $66,411
======== ======= ==== =======
</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 mortgages, including residential construction loans and loans
held for sale, increased by $19.7 million, or 19.2%, to $122.6 million at
December 31, 1997 from $102.9 million at December 31, 1996. This represents the
majority (82%) of the increase in total loans in 1997 and reflects the
residential character of our market area. Most of the residential loan portfolio
continues to be in variable rate loans, although customers have been choosing
variable-rate products with initial fixed rate periods of 3 and 5 years.
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 Bank's Asset/Liability
Committee("ALCO"), which is comprised of the Bank's senior management and
certain other officers, 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, 1997 the
Bank was servicing $65.1 million of loans for others compared to $70.7 million
at year end 1996.
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
<PAGE>
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.
Most 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. The underwriting
standards for jumbo loans are similar to those used for non-jumbo mortgages. The
Bank sells a portion of its jumbo mortgages.
The Bank originates adjustable rate residential mortgage loans that 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. The Bank's
residential mortgage loans generally adjust annually. These adjustable rate
loans may feature an initial period, generally three or five years, during which
the interest rate is fixed. Rate adjustments on residential mortgage loans are
generally 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 5.21% in 1995 to 5.47% in 1996
and 5.53% in 1997.
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 retailers.
Permanent commercial real estate loans outstanding increased by $2.3 million, or
6.8%, to $36.2 million at December 31, 1997 from $33.9 million in 1996. During
1996, commercial real estate loans increased $5.2 million, or 18.3%, from $28.7
million at the end of 1995. These increases are attributed to an increased level
of business activity due to favorable economic conditions and the Bank's efforts
to increase commercial business partially offset by, in 1997, an increase in
competition for these types of loans. Commercial construction loans, before
deducting unadvanced funds, decreased by $1.4 million to $4.5million at December
31, 1997 compared to $5.9 million in 1996. During 1996 commercial construction
<PAGE>
loans increased by $3.5 million from $2.5 million in 1995. The Bank lends for
speculative real estate construction activities on a very limited basis. At
December 31, 1997 such loans accounted for $3.1 million, or 1.7%, ot the total
loan protfolio. The Bank's current policy is to limit the combined total of
commercial real estate loans to 30% of the total loan portfolio. At December 31,
1997 these loans totaled 22.9% of the Bank's loan portfolio as compared to 25.9%
at the end of 1996.
During 1997, 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 from one up to three years 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 economy or in the real estate market. 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 construction costs. The Bank
may be required to advance funds beyond the original commitment in order to
finish the development. If projected cash flows or value of the property proves
to be inaccurate because of unanticipated construction costs or lower than
expected sales volume, 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 (usually nine to twelve months), and regular amortization
thereafter. Funds are disbursed as prespecified stages of construction are
completed.
Commercial Business Loans. The Bank offers 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. Commercial business loans
increased 22.2% to $10.4 million at December 31, 1997 from $8.5 million in the
prior year. This increase is attributed to an increased level of business
activity due to favorable economic conditions and the Bank's efforts to increase
its commercial business.
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 or the prime rate as published in the
Wall Street Journal. 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
<PAGE>
national money market conditions. The interest rate paid by individual customers
over the base rate is determined by the lenders and Bank management after
consideration of the degree of credit risk, term of the loan, the borrower's
overall relationships, the size of the loan and other pertinent criteria. These
loans may be advanced on an unsecured basis or may be secured by real estate,
inventory or other business assets. Loans to commercial businesses may entail
significant additional risks compared to residential mortgage lending. These
loans are subject to changes in the local and regional economy as well as
changes in particular industries and lines of business. Analyzing the unique
factors and risks affecting each business requires expertise and experience
which is different from that needed for loans secured by real estate.
Commercial business loans are becoming an increasingly important product to
include in tailoring financial packages for the needs of local small businesses.
A 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.
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, 1997, second mortgages and home equity loans accounted for
61% of the Bank's consumer loan portfolio. The Bank's overall consumer loan
portfolio decreased slightly to $6.1 million at December 31, 1997 from $6.2
million at December 31, 1996.
Loan Solicitation and Processing. Loan originations come from a number of
sources. Most real estate loans are attributable to referrals from existing
customers, real estate brokers and builders as well as walk-in customers and
depositors. Commercial business loan originations are generally obtained through
officer calls, existing customers and business relationships and referrals.
Consumer loans generally result from existing depositors.
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. 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. The Bank's lending activities are conducted solely on the
island of Nantucket, Massachusetts.
<PAGE>
During 1997 the Bank recorded provision for loan losses of $150,000
compared to $75,000 in 1996 and none in 1995. The Bank also recorded net
recoveries of $94,000 in 1997, $41,000 in 1996 and $95,000 in 1995. The loan
loss provisions made over the past two years are a result of the growth in the
Bank's loan portfolio. At December 31, 1997 the allowance for loan losses was
$2.6 million, or 1.47% of total loans compared to $2.4 million, or 1.54% of
total loans, at December 31, 1996. 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. Non-performing loans at December 31, 1997 were $10,000.
For additional information, see Note 4 of Notes to Consolidated Financial
Statements in the 1997 Annual Report to Stockholders.
Income from Lending Activities. Interest rates charged by the Bank on its
loans are determined by market interest rates, the Bank's strategic plans and
goals, the availability of funds to lend, the demand for loans and competitive
loan rates offered in its lending area.
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, 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, 1997, the Bank had $474,000 in deferred loan
origination fees.
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 securities held to maturity and
available for sale provides an additional significant source of income for the
Bank. The Bank's securities portfolio consists mainly of United States
Government and agency obligations, short-term corporate bonds, notes and
debentures and state and municipal obligations and a portfolio of approximately
$8.2 million of mortgage backed securities, collateralized mortgage obligations
and real estate mortgage investment conduits ("REMICS"). From time to time the
Bank may invest in mutual funds or 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, 1997, the securities
portfolio, excluding FHLB stock and short term investments, totaled $22.9
million, representing 11.0% of the Company's total assets at that date, compared
to $22.7 million, or 12.0% of assets at December 31, 1996. The securities
portfolio is classified into available for sale and held to maturity categories
<PAGE>
in accordance with the requirements of SFAS No. 115 "Accounting for Certain
Investments in Debt and Equity Securities." At December 31, 1997 approximately
27% 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 1997 Annual Report to Stockholders.
The Company's primary objective with respect to its securities portfolio is
to provide liquidity and income, consistent with prudent consideration for risk,
maturity 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.
<PAGE>
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.
<TABLE>
<CAPTION>
Weighted
At December 31, 1997: Market Average
Cost Value Yield
---- ----- -----
(dollars in thousands)
<S> <C> <C> <C>
Securities Available for Sale
U.S. Government and agency obligations, maturing
Within 1 year $ 750 $ 748 5.99%
After 1 year but within 5 years 3,698 3,709 6.39%
After 5 years but within 10 years 250 248 6.31%
Real estate mortgage inv. conduits (REMIC), maturing
After 1 year but within 5 years 966 968 6.77%
State and municipal obligations, maturing
Within 1 year 151 151 4.75%
After 1 year but within 5 years 141 142 4.80%
Other bonds and notes, maturing
Within 1 year 250 249 5.63%
Marketable equity securities 12 16 N/A
------- -------
Total securities available for sale $ 6,218 $ 6,231 6.29%
======= ======= ====
Securities Held to Maturity
U.S. Government and agency obligations, maturing
Within 1 year $ 2,248 $ 2,243 5.35%
After 1 year but within 5 years 2,000 2,010 6.78%
After 5 year but within 10 years 1,000 1,000 6.46%
State and municipal obligations, maturing
Within 1 year 180 180 5.75%
After 1 year but within 5 years 638 642 5.35%
After 5 year but within 10 years 1,314 1,326 4.67%
Other bonds and notes, maturing
Within 1 year 854 849 6.72%
After 1 year but within 5 years 1,227 1,246 7.43%
Mortgage backed securities, maturing
After 1 year but within 5 years 6,549 6,503 6.20%
After 10 years 651 656 6.98%
------- -------
Total securities held to maturity $16,661 $16,655 6.16%
======= ======= ====
At December 31, 1996:
Securities Available for Sale
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 N/A
------- -------
Total securities available for sale $ 8,104 $ 8,082 6.09%
======= ======= ====
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Weighted
At December 31, 1996 (continued): Market Average
Cost Value Yield
(dollars in thousands)
<S> <C> <C> <C>
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%
======= ======= ====
At December 31, 1995:
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 N/A
------- -------
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>
<PAGE>
Sources of Funds
General. Savings accounts, checking 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 obtains funds from FHLB borrowings, scheduled
loan repayments, loan prepayments and loan sales. 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
general and local economic conditions. Dividends from the Bank represent the
only source of liquidity for the Company.
Deposits. The Bank offers a broad selection of deposit instruments to the
general public, including NOW accounts, high yield NOW accounts, regular savings
accounts, money market deposit accounts, fixed and variable rate time accounts,
IRA and Keogh retirement accounts, commercial checking accounts and 90 day
special notice accounts. On occasion, the Bank acquires brokered deposits. At
December 31, 1997 brokered deposits totaled $2.5 million, or 1.8% of total
deposits, compared to $3.3 million, or 2.4% of total deposits, at December 31,
1996. During 1996 and 1997, the Bank has not attempted to increase the level of
brokered deposits. 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 the Bank's strategic plans and goals, U.S. Government treasury
rates, borrowing rates, competition, liquidity needs and the expected volatility
of existing 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,
----------------------------------------------------------------------------------------------------
1997 1996 1995
-------------------------------- -------------------------------- ----------------------------------
(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 $ 11,226 7.88% - % $ 9,955 7.37% - % $ 7,352 6.43% - %
-------------------------------- -------------------------------- ----------------------------------
Savings accounts:
Regular, 90 day notice
And advance 15,326 10.76% 2.76% 13,910 10.30% 2.78% 13,305 11.63% 2.82%
payments
NOW 28,072 19.71% 1.28% 31,223 23.12% 1.32% 25,212 22.05% 1.35%
Money market 26,766 18.79% 3.68% 22,672 16.78% 3.23% 17,985 15.73% 3.23%
-------------------------------- -------------------------------- ----------------------------------
Total savings 70,164 49.26% 2.51% 67,805 50.20% 2.25% 56,502 49.41% 2.29%
accounts
Time deposits 61,046 42.86% 5.24% 57,322 42.43% 5.12% 50,503 44.16% 5.32%
================================ ================================ ==================================
Total deposits $142,436 100.00% 3.75% $135,082 100.00% 3.30% $114,357 100.00% 3.48%
================================ ================================ ==================================
</TABLE>
<PAGE>
The following tables show the weighted average rate and maturity
information for the Bank's certificates of deposit as of December 31, 1997.
Certificates of deposit with balances under $100,000:
<TABLE>
<CAPTION>
Deposits Maturing During the Period Ended
--------------------------------------------------------------------------------------------
(dollars in thousands) 3/31/98 6/30/98 12/31/98 12/31/99 12/31/00 12/31/02 Total
---------- --------- ---------- ----------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Certificate of deposit $7,547 $5,984 $6,676 $7,045 $1,518 $ 976 $29,746
Weighted average rates 4.51% 5.30% 5.67% 5.89% 6.02% 6.02% 5.38%
</TABLE>
Certificates of deposit with balances over $100,000:
<TABLE>
<CAPTION>
Deposits Maturing During the Period Ended
--------------------------------------------------------------------------------------------
(dollars in thousands) 3/31/98 6/30/98 12/31/98 12/31/99 12/31/00 12/31/02 Total
---------- --------- ---------- ----------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Certificate of deposit $14,417 $7,404 $6,187 $2,473 $ 695 $ 124 $31,300
Weighted average rates 4.59% 5.54% 5.68% 5.85% 6.71% 6.25% 5.18%
</TABLE>
Borrowings. The Bank is a member of the FHLB of Boston. 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 $41.7 million,
$32.3 million and $32.8 million at December 31, 1997, 1996 and 1995,
respectively. The maximum borrowings during 1997, 1996 and 1995 were $49.8
million, $41.5 million and $44.0 million, respectively.
For additional information, see Note 7 of Notes to the Consolidated
Financial Statements in the 1997 Annual Report to Stockholders.
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 projected capital needs 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.
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.
<PAGE>
Supervision, Regulation and Operating Powers
General. The Company and the Bank are extensively regulated under federal
and state law. 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.
Federal Bank Holding Company Act Regulation. On August 30, 1988, the
Company, pursuant to approval received from the Board of Governors of the
Federal Reserve Board System ("FRB"), became a registered bank holding company.
As a result, its activities are subject to certain limitations, which are
described below, and transactions between the Bank and the Company or its other
affiliates are also subject to certain restrictions.
Under the Bank Holding Company Act, a bank holding company must obtain FRB
approval before it acquires direct or indirect ownership or control of any
voting shares of any bank if, after such acquisition, it will own or control
directly or indirectly more than 5% of the voting stock of such bank, unless it
already owns a majority of the voting stock of such bank. FRB approval must also
be obtained before a bank holding company acquires all or substantially all of
the assets of a bank or merges or consolidates with another bank holding
company. Any acquisition, directly or indirectly, by a bank holding company or
its subsidiaries of any voting shares of, or interest in, or all or
substantially all, of the assets of any bank located outside of the state in
which the operations of the bank holding company's banking subsidiaries are
principally conducted, may not be approved by the FRB unless the laws of the
state in which the bank to be acquired is located specifically, authorizes such
an acquisition.
The Bank Holding Company Act and regulations adopted thereunder limit the
activities of a bank holding company and its subsidiaries to the business of
banking or of managing or controlling banks, and to such other activities as the
FRB may determine to be so closely related to banking as to be a proper incident
thereto. The activities of the Company and its non-bank subsidiaries are subject
to these legal and regulatory limitations under the Bank Holding Company Act and
the FRB's regulations thereunder.
In addition to the statutory and regulatory restrictions on the non-bank
activities of the Company, the FRB has taken the position that it has the
authority, under its general supervisory authority over bank holding companies
and their subsidiaries, to prevent activities of a bank holding company's
subsidiaries that the FRB regards as unsafe or unsound, or to require a bank
holding company to maintain a higher level of capital to support such
activities. In this connection, the FRB has expressed serious reservations about
applications by bank holding companies to acquire savings banks that are engaged
directly or through subsidiaries in real estate development activities.
As a 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 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. Massachusetts statutes and regulations govern
among other things, investment powers, lending powers, deposit activities,
maintenance of surplus and reserve accounts, the distribution of earnings, the
payment of dividends, issuance of capital stock, branching, acquisitions,
mergers, and consolidations.
Any Massachusetts bank that does not operate in accordance with the
regulations, policies and directives of the Commissioner may be subject to
sanctions for non-compliance. The Commissioner may under certain circumstances
suspend or remove trustees, directors or officers who have violated the law,
conducted the bank's business in a manner which is unsafe, unsound or contrary
to the depositors' interests, or been negligent in the performance of their
duties.
Deposit Insurance. The Bank's deposit accounts are insured by the Bank
Insurance Fund of the FDIC to a maximum of $100,000 per separately insured
account, and deposits in excess of that amount in each separately insured
account are insured by the Depositors Insurance Fund.
Pursuant to section 7 of the Federal Deposit Insurance Act (12 USC 1817),
as amended, the FDIC has incorporated a risk based deposit insurance assessment.
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.
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.
All Massachusetts chartered savings banks are required to be members of the
Depositors Insurance Fund ("DIF"). The DIF maintains a private deposit insurance
fund which insures all deposits in member banks which are not covered by federal
insurance, which, in the case of the Bank, are its deposits in excess of
$100,000 per insured account. In 1996 and 1997, the Bank's premium for this
insurance was assessed at an annual rate of 1/50 of 1% of insured deposits.
Competition
The Bank faces strong competition from other banks, mortgage banking
companies and other financial service providers, many of which have
substantially greater resources than the Bank.
The Bank's most direct competition for deposits primarily comes from other
banks located on Nantucket Island and in southeastern Massachusetts, credit
unions, mutual funds and government securities. The Bank competes for deposits
principally by offering depositors convenient branch hours and locations,
efficient and attentive service, a wide variety of deposit programs, automated
teller machines and competitive interest rates. It does not rely upon any single
individual, group or entity for a material portion of its deposits.
<PAGE>
Competition for real estate loans comes primarily from other banks,
mortgage banking companies and other institutional lenders. The Bank competes
for loan origination primarily based on the efficiency and quality of service
that it provides as well as the interest rates and loan fees that it charges.
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, 1997 the Company and Bank had 48 full-time and three
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 $311,000 at December 31, 1997, including the book value of the land on
which the facility is located.
The Bank's branch office, located at 2 Orange Street, Nantucket is a 3,200
square foot facility which the Bank acquired in 1921, and had a net book value
of $6,000 at December 31, 1997, including the book value of the land on which
the facility is located.
On August 30, 1995 the Bank purchased a three-quarter acre parcel of land
located on Amelia Drive, Nantucket for $240,000. 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 $8,000 expires
on March 31, 1998.
At December 31, 1997, the net book value of the Bank's furnishings,
equipment and autos was $892,000. 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 1997 Annual Report to Stockholders.
<PAGE>
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
None.
PART II
Item 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The information contained in the section captioned "Stock Market Data" in
the 1997 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 1997 Annual Report to Stockholders is incorporated herein
by reference.
Item 7. FINANCIAL STATEMENTS
The financial statements contained in the 1997 Annual Report to
Stockholders are incorporated herein by reference.
Item 8.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
None.
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 15, 1998 which will be filed with the
Securities and Exchange Commission pursuant to Regulation 14A on or before April
14, 1998.
<PAGE>
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) 1997 Annual Report to Stockholders for the Fiscal Year Ended
December 31, 1997.
(21) Subsidiaries of the Registrant.
(b) No reports on Form 8-K were filed by the Registrant during the quarter ended
December 31, 1997.
<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 25, 1998 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 25, 1998
- -----------------
Karl L. Meyer
Chairman of the Board,
President and Chief Executive Officer
/s/ John M. Sweeney March 25, 1998
- -------------------
John M. Sweeney
Treasurer & Chief Financial Officer
(Principal Financial and
Accounting Officer)
/s/ William P. Hourihan, Jr. March 25, 1998
- ---------------------------
William P. Hourihan, Jr.
Director
/s/ Charles F. DiGiovanna March 25, 1998
- -------------------------
Charles F. DiGiovanna
Director
/s/ Charles H. Jones, Jr. March 25, 1998
- ------------------------
Charles H. Jones, Jr.
Director
<PAGE>
Signatures (Continued) Date
- ---------------------- ----
/s/ Daniel D. McCarthy March 25, 1998
- ----------------------
Daniel D. McCarthy
Director
/s/ Robert J. McKay March 25, 1998
- -------------------
Robert J. McKay
Director
/s/ Philip W. Read March 25, 1998
- ------------------
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 N/A 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. N/A 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, 1997.
(21) Subsidiaries of the Registrant.
TABLE OF CONTENTS
Page
Financial Highlights................................................ 1
Message to Stockholders............................................. 2
Management's Discussion and Analysis................................ 3
Consolidated Financial Statements................................... 13
Notes to Consolidated Financial Statements.......................... 17
Independent Auditors' Report........................................ 33
Directors and Officers.............................................. 34
Stockholders Information............................................ 35
Home Port Bancorp, Inc.
Home Port Bancorp, Inc. (the "Company") is a single bank holding company
regulated 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 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>
Financial Highlights Home Port Bancorp, Inc. and Subsidiaries
<TABLE>
<CAPTION>
(Dollars in thousands, except per share data)
1997 1996 1995 1994 1993
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
At December 31,
Total assets ...................................... $ 208,815 $ 189,931 $ 167,272 $ 162,324 $ 134,498
Loans, net of allowance for loan losses ........... 174,902 151,291 129,147 118,225 88,126
Securities and FHLB stock ......................... 25,334 25,066 28,346 31,485 37,162
Deposits .......................................... 142,436 135,082 114,357 104,386 92,561
Borrowed funds .................................... 41,742 32,335 32,837 33,107 18,880
Stockholders' equity .............................. 21,948 20,103 18,379 18,524 21,932
For the Year Ended December 31,
Total interest income ............................. $ 15,951 $ 14,450 $ 13,242 $ 10,796 $ 8,164
Total interest expense ............................ 7,014 6,289 5,987 4,607 3,039
--------- --------- --------- --------- ---------
Net interest income ............................... 8,937 8,161 7,255 6,189 5,125
Provision for loan losses ......................... 150 75 --- --- ---
--------- --------- --------- --------- ---------
Net interest income after provision for loan losses 8,787 8,086 7,255 6,189 5,125
Deposit and loan servicing fees and other income .. 898 879 846 674 607
Net gain (loss) from sales of mortgage loans
and securities ................................. 109 (5) (2) (115) 190
Non-interest expense .............................. 4,336 3,994 3,594 3,258 2,972
--------- --------- --------- --------- ---------
Income before taxes and cumulative effect
of change in accounting principle .............. 5,458 4,966 4,505 3,490 2,950
Provision for income taxes ........................ 2,161 1,931 1,749 1,381 1,251
Cumulative effect of change in accounting
for income taxes ............................... --- --- --- --- 455
--------- --------- --------- --------- ---------
Net income ....................................... $ 3,297 $ 3,035 $ 2,756 $ 2,109 $ 2,154
========= ========= ========= ========= =========
Per share data
Earnings per common share before cumulative
effect of change in accounting .................. $ 1.79 $ 1.65 $ 1.50 $ 1.15 $ 0.85
Earnings per common share for the cumulative
effect of a change in accounting principle ...... --- --- --- --- 0.23
--------- --------- --------- --------- ---------
Earnings per common share ......................... $ 1.79 $ 1.65 $ 1.50 $ 1.15 $ 1.08
========= ========= ========= ========= =========
Dividends declared per share ...................... $ 0.80 $ 0.70 $ 1.60 $ 3.10 $ 0.51
========= ========= ========= ========= =========
Stockholders' equity per share .................... $ 11.92 $ 10.91 $ 9.98 $ 10.06 $ 12.23
========= ========= ========= ========= =========
Selected ratios
Return on average assets (a) ...................... 1.68% 1.72% 1.67% 1.35% 1.47%
Interest rate spread .............................. 4.08% 4.15% 3.97% 3.44% 3.84%
Net interest margin ............................... 4.70% 4.77% 4.56% 4.08% 4.63%
Equity to asset ratio ............................. 10.51% 10.58% 10.99% 11.41% 16.30%
Return on average equity (a) ...................... 15.77% 15.84% 14.34% 9.71% 7.19%
Dividend payout ratio ............................. 44.68% 42.47% 274.02% 52.40% 46.00%
</TABLE>
(a) Does not include cumulative effect of change in accounting principle
<PAGE>
Message to Stockholders Home Port Bancorp, Inc. and Subsidiaries
1997 was another good year for your company. Meaningful operating ratios such as
return on equity, interest rate spread and margin and efficiency remain
essentially unchanged from prior year's measures. Net income increased by 9% due
to an increase in footings (average loans increased by 14% and average deposits
by 10%).
Today, Home Port enjoys the unique combination of superior interest rate
spreads, high quality loan portfolio and low operating expenses. The primary
performance measure, Return on Investment, was 15.8%, a superior yield
considering the Company's 10.5% equity to asset ratio.
Home Port's results have not gone unnoticed. U.S. Banker ranked your company the
number two community bank in the U.S. and we continue to hold our first place
ranking in Keefe, Bruyette & Woods, Inc. New England Quarterly Bank Review, a
ranking held since the first quarter 1995. Aided by a strong market, the share
price increased from a high of $17.25 in 1996 to $25.00 in 1997.
Home Port has performed well over the past five years. Total assets increased by
nearly 15% annually, loans by 20% annually and net income from a 1992 loss of
$300 thousand to 1997 net income of $3.3 million. During this period,
stockholders' equity actually decreased from $23.0 million to $22.0 million due
to dividends totaling $6.71 per share. Home Port is considered to be well
capitalized and the Board of Directors is committed to maintain this condition
when considering future dividends.
1998 presents Home Port with some challenges. Foremost is maintaining a high
quality loan portfolio, particularly in view of the fast-paced Nantucket real
estate market. As of year end 1997, the Bank held no real estate owned and
non-performing loans totaled a mere $10 thousand. Interest rate spread will
continue to come under pressure and the Bank's increasing exposure to interest
rate changes warrants close attention. Note, the portion of the loan portfolio
subjectd to repricing within one year has decreased from a high of 96% in 1993
to 47% at year-end 1997.
The increase in assets and resultant increase in personnel has caused the Bank
to grow out of its facilities. In 1998 additions will be made to the Pleasant
Street office and the operations department will be relocated to another
off-site facility.
For 163 years Nantucket Bank has competed with another independent institution,
the Pacific National Bank, in providing banking services to the residents of
Nantucket. Recently, Bank Boston acquired Pacific National Bank. Undoubtedly,
competition will increase. Nantucket Bank remains under complete local
management and remains committed to provide the Nantucket community with a full
range of financial services to meet Island banking needs.
Sincerely,
/s/Karl L. Meyer
- ----------------
Karl L. Meyer
Chairman of the Board,
President and CEO
2
<PAGE>
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Home Port Bancorp, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
Results of Operations
Home Port Bancorp, Inc. ("the Company") reported net income of $3.3 million
in 1997, an increase of 8.6% over 1996. In 1996, net income totaled $3.0
million, a 10.1% increase over the $2.8 million net income in 1995. Net income
per share was $1.79 in 1997 compared to $1.65 in 1996 and $1.50 in 1995. These
increases in income were primarily the result of higher net interest income
together with increased efficiency and are reviewed in detail in the following
paragraphs.
Net Interest Income
Net interest income increased by $776 thousand, or 9.5%, to $8.9 million in
1997 compared to $8.2 million in 1996. In 1996 net interest income increased by
$906 thousand, or 12.5%, from $7.3 million in 1995.
The increase in net interest income in 1997 compared to 1996 was due to
increases in the average balances of loans and deposits offset by a 7 basis
point decrease in the net interest margin to 4.70% from 4.77%. The increase in
net interest income in 1996 compared to 1995 was also due to increases in the
average balances of loans and deposits enhanced by a 21 basis point increase in
the net interest margin. The tables on the following page provide additional
details of net interest income.
During 1997 the average yield of the Bank's loan portfolio decreased by 13
basis points to 8.82% from 8.95% in 1996. In 1996 the average yield on loans
decreased by 7 basis points to 8.95% from 9.02% in 1995. An increase in the
percentage of residential loans in the portfolio together with the effect of the
decrease in short-term interest rates (prime rate and one year Treasury rates)
in 1996 contributed to the decrease in yield in 1997.
The average yield on securities decreased to 5.76% in 1997 from 5.80% in
1996. The yield on securities was 5.71% in 1995. The Bank does not actively
trade the securities portfolio. Securities classified as "held to maturity"
represented 73% of total securities at year end 1997 and 64% at year end 1996.
The average cost of funds increased to 4.32% in 1997 compared to 4.29% in
1996. In 1995 the average cost of funds was 4.36%. The cost of deposits was
3.73% in 1997 compared to 3.74% in 1996 and 3.64% in 1995. 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 increased 10 basis points to 6.21% in 1997 from 6.11% in 1996. The
higher cost of borrowings in 1997 was primarily due to an increase in
longer-term borrowings (borrowings having terms over 1 year). Longer-term
borrowings were made in 1997 in order to reduce the interest rate risk
associated with an increase in the initial fixed rate periods on new variable
rate mortgage loans (see "Loans"). The cost of borrowings was 6.40% in 1995,
reflecting higher borrowing rates in that year.
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.
3
<PAGE>
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Home Port Bancorp, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------------------------------------------------------------
(dollars in thousands) 1997 1996 1995
----------------------------- ---------------------------- -----------------------------
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 $109,592 $ 8,896 8.12% $ 94,931 $ 7,849 8.27% $ 83,800 $ 6,991 8.34%
Commercial loans 47,950 4,930 10.28% 42,562 4,373 10.27% 36,703 3,782 10.30%
Consumer loans 6,026 599 9.94% 6,304 641 10.17% 5,429 583 10.74%
-------- ------- ----- -------- ------- ----- --------- ------- -----
Total loans 163,568 14,425 8.82% 143,797 12,863 8.95% 125,932 11,356 9.02%
Securities and FHLB stock 26,393 1,526 5.78% 27,380 1,587 5.80% 33,046 1,886 5.71%
-------- ------- ----- -------- ------- ----- --------- ------- -----
Total interest earning assets $189,961 $15,951 8.40% $171,177 $14,450 8.44% $158,978 $13,242 8.33%
-------- ------- ----- -------- ------- ----- --------- ------- -----
Interest bearing liabilities:
Deposits $123,291 $ 4,594 3.73% $112,723 $ 4,219 3.74% $101,541 $ 3,692 3.64%
Borrowed funds 38,969 2,420 6.21% 33,877 2,070 6.11% 35,853 2,295 6.40%
-------- ------- ----- -------- ------- ----- --------- ------- -----
Total interest bearing
liabilities $162,260 $7,014 4.32% $146,600 $ 6,289 4.29% $137,394 $ 5,987 4.36%
-------- ------- ----- -------- ------- ----- --------- ------- -----
Net interest income $ 8,937 $ 8,161 $ 7,255
======= ======= =======
Interest rate spread (1) 4.08% 4.15% 3.97%
==== ==== ====
Net interest margin (2) 4.70% 4.77% 4.56%
==== ==== ====
</TABLE>
(1) Represents the difference between 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.
<PAGE>
Rate/Volume Analysis
The effect on net interest income as a result of changes in average
interest rates and balances follows:
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------------------------------------------------------
(in thousands) 1997 vs. 1996 1996 vs. 1995
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 Rate (2) Volume (3) Total
----------- -------- ---------- ----- ------- -------- ---------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest income:
Residential loans $1,212 $(142) $(23) $1,047 $928 $(59) $(11) $858
Commercial loans 553 4 - 557 603 (11) (1) 591
Consumer loans (28) (14) - (42) 94 (31) (5) 58
------ ----- ---- ------ ------ ----- ---- ------
Total loans 1,737 (152) (23) 1,562 1,625 (101) (17) 1,507
Securities and FHLB stock (57) (5) 1 (61) (324) 30 (5) (299)
------ ----- ---- ------ ------ ----- ---- ------
Total interest income 1,680 (157) (22) 1,501 1,301 (71) (22) 1,208
------ ----- ---- ------ ------ ----- ---- ------
Interest expense:
Deposits 395 (11) (9) 375 407 102 18 527
Borrowed funds 311 34 5 350 (126) (104) 5 (225)
------ ----- ---- ------ ------ ----- ---- ------
Total interest expense 706 23 (4) 725 281 (2) 23 302
------ ----- ---- ------ ------ ----- ---- ------
Net interest income $974 $(180) $(18) $776 $1,020 $(69) $(45) $906
====== ===== ==== ====== ====== ===== ==== ======
</TABLE>
(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.
4
<PAGE>
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Home Port Bancorp, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
Non-Interest Income
Non-interest income consists of service charges and fees on deposit
accounts, fees for servicing mortgage loans and net gains or losses from the
sale of mortgage loans and securities available for sale.
In 1997 non-interest income increased $133 thousand, or 15.2%, to $1.0
million compared to $874 thousand in 1996. Deposit servicing fees increased by
$77 thousand, or 22.1%, due to increases in both fee charges and deposits. Loan
servicing fees decreased by $24 thousand, or 8.5%, due to a decrease in the loan
servicing portfolio. Gains from sale of mortgage loans increased $93 thousand
due to the adoption in 1997 of SFAS No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities". Other fees
decreased by $34 thousand due to a reduction in charges for checks and a
decrease in ATM fees. These decreases were partially offset by increases in safe
deposit box, wire transfer and merchant credit card processing fees.
In 1996 non-interest income increased $30 thousand, or 3.6%, 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 $53 thousand
or 23.1%, due to an increase in the servicing portfolio. Other fees and income
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.
Non-Interest Expense
In 1997 non-interest expense increased 8.6% to $4.3 million from $4.0
million in 1996. The ratio of non-interest expense to average assets decreased
to 2.21% in 1997 from 2.26% in 1996. The efficiency ratio, which measures the
level of non-interest expense needed to produce each dollar of income, improved
to 43.6% from 44.2%. In 1997 salaries and employee benefits increased to $2.6
million from $2.3 million due to wage increases, increases in staff and staff
training to service the business growth. Building and equipment expenses
increased to $503 thousand from $481 thousand due to increased depreciation
charges.
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.
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 is subject to a
Massachusetts income tax. The Bank's subsidiary is subject to Massachusetts tax
as a security corporation.
<PAGE>
The effective tax rates in 1997, 1996 and 1995 were impacted by reductions
in the tax valuation allowance caused by increased earnings, utilization of
capital loss carryforwards and the status of the Bank's subsidiary as a
Massachusetts security corporation. For further information see note 8 in the
Notes to Consolidated Financial Statements.
Asset/Liability Management and Market Risk
The Bank's earnings are largely dependent on its net interest income,
which is the difference between the yield on its interest-earning assets and the
cost of its interest-bearing liabilities. The Bank seeks to reduce its exposure
to changes in interest rates, or market risk, through active monitoring and
management of its interest rate exposure.
Market risk is the risk of loss from changes in market prices and rates.
The Bank's market risk arises primarily from interest rate risk inherent in its
lending and deposit taking activities.
5
<PAGE>
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Home Port Bancorp, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
The Bank's primary objective in managing interest rate risk is to minimize
the adverse impact of changes in interest rates on the Bank's net interest
income and capital, while adjusting the Bank's asset/liability structure to
obtain the maximum yield-cost spread on that structure. The Bank relies on its
asset/liability structure to control interest rate risk. However, a sudden and
substantial change in interest rates may adversely impact the Bank's earnings to
the extent that the interest rates borne by assets and liabilities do not change
at the same speed, to the same extent, or on the same basis. The Bank's
Asset/Liability Committee ("ALCO"), which is comprised of senior management and
certain other officers, is primarily responsible for managing interest rate
risk.
A method used by ALCO to measure the interest rate risk exposure of the
Bank is the interest rate sensitivity "GAP", which is the difference between
assets and liabilities subject to rate change over specific time periods. There
are limitations to GAP analysis, however, as rates on different assets and
liabilities may not move to the same extent in any given time period.
Competition may affect the ability of the Bank to change rates on a particular
deposit or loan product.
The following table displays the estimated distribution of the principal
amounts of the Company's interest-earning assets and interest-bearing
liabilities maturing or repricing over various time periods. The amounts of
assets and liabilities reported in each time period were determined by the
contractual terms of the asset or liability, adjusted for projected repayments
and prepayments of principal, where applicable. The prepayments are estimated
based on the Bank's experience. The actual maturity or repricing period could
differ substantially from these estimates if future prepayments differ from the
Bank's historical experience. Loans held for sale are included in this analysis
based on their contractual maturity/repricing date. Securities and short-term
investments include held-to-maturity, available for sale, interest-bearing
deposits in banks and federal funds sold. Available for sale securities are
included at their 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, 1997
----------------------------------------------------------------
(dollars in thousands) Under 1 1-2 2-3 Over 3
Year Years Years Years Total
--------- --------- -------- ------- --------
<S> <C> <C> <C> <C> <C>
Interest sensitive assets
Loans $ 87,020 $ 29,185 $ 14,088 $47,218 $177,511
Securities and short-term investments 6,403 3,377 4,127 9,013 22,920
--------- --------- -------- ------- --------
Total $ 93,423 $ 32,562 18,215 56,231 $200,431
--------- --------- -------- ------- --------
Interest sensitive liabilities
Transaction deposits $ 70,164 $ -- $ -- $ -- $ 70,164
Time deposits 48,215 9,520 2,211 1,100 61,046
Borrowings 16,494 12,571 6,154 6,523 41,742
--------- --------- -------- ------- --------
Total $ 134,873 $ 22,091 8,365 7,623 $172,952
--------- --------- -------- ------- --------
Excess (deficiency) of interest sensitive assets over
Interest sensitive liabilities ("GAP") $ (41,450) $ 10,471 $ 9,850 $48,608
Cumulative GAP $ (41,450) $ (30,979) $(21,129) $27,479
Cumulative rate sensitive assets as a percent of
Cumulative rate sensitive liabilities 69.27% 80.26% 87.22% 115.89%
========= ========= ======== =======
Cumulative excess (deficiency) of rate sensitive
Assets over rate sensitive liabilities as a
percentage Of total assets (19.85%) (14.83%) (10.12%) 13.16%
========= ========= ======== =======
</TABLE>
6
<PAGE>
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Home Port Bancorp, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
The following table shows the Bank's financial instruments that are
sensitive to changes in interest rates, categorized by expected maturity, at
December 31, 1997. Market risk sensitive instruments are generally defined as on
and off balance sheet derivatives and other financial instruments. The Bank has
not entered into any interest rate exchange agreements or other off-balance
sheet derivitives.
<TABLE>
<CAPTION>
Expected maturity at December 31, 1997
--------------------------------------------------------------------------------------------
Total Fair
1998 1999 2000 2001 2002 Thereafter Balance Value
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-sensitive assets:
One to four family - ARM's $ 17,895 $ 9,450 $ 7,444 $ 7,008 $ 5,899 $ 52,219 $ 99,915 $100,278
Average interest rate 6.45% 7.84% 7.73% 7.89% 7.86% 7.83%
One to four family - fixed rate 5,172 2,950 2,514 2,158 1,788 7,879 22,461 22,542
Average interest rate 7.46% 7.42% 7.46% 7.42% 7.43% 7.40%
Other real estate ARM's 1,877 6,962 4,362 3,597 3,238 16,722 36,758 36,890
Average interest rate 6.45% 7.84% 7.73% 7.89% 7.86% 7.83%
Other real estate Fixed 321 641 747 6 6 163 1,884 1,892
Average interest rate 10.50% 10.50% 9.00% 7.64% 7.64% 7.64%
Other loans 14,737 629 290 297 451 89 16,493 16,553
Average interest rate 8.84% 10.13% 12.58% 9.79% 10.08% 9.53%
Securities & short-term investments 6,403 3,377 4,127 2,276 3,126 3,611 22,920 22,927
Average interest rate 5.84% 6.08% 6.14% 6.75% 6.95% 5.89%
-------- -------- -------- -------- -------- -------- -------- --------
Total interest-sensitive assets $ 46,405 $ 24,009 $ 19,484 $ 15,342 $ 14,508 $ 80,683 $200,431 $201,082
-------- -------- -------- -------- -------- -------- -------- --------
Interest-sensitive liabilities:
NOW deposits $ 28,072 $ -- $ -- $ -- $ -- $ -- $ 28,072 $ 28,072
Average interest rate 1.28%
Savings deposits 15,326 -- -- -- -- -- 15,326 15,326
Average interest rate 2.75%
Money market deposits 26,766 -- -- -- -- -- 26,766 26,766
Average interest rate 3.68%
Time deposits 48,215 9,520 2,211 592 508 -- 61,046 61,167
Average interest rate 5.10% 5.88% 6.24% 5.80% 6.26%
Borrowed funds 16,494 12,571 6,154 6,523 -- -- 41,742 41,904
Average interest rate 6.22% 6.17% 6.73% 6.21%
-------- -------- -------- -------- -------- -------- -------- --------
Total interest-sensitive liabilities $134,873 $ 22,091 $ 8,365 $ 7,115 508 $ -- $172,952 $173,235
-------- -------- -------- -------- -------- -------- -------- --------
</TABLE>
Expected maturities are contracted maturities adjusted for prepayments of
principal. The Bank uses certain assumptions to estimate their fair values and
expected maturities. For interest sensitive assets expected maturities are based
upon contractual maturity, projected repayments, and prepayments of principal.
The prepayment experience reflected herein is based on market consensus. Other
real estate loans include commercial mortgages and other loans include
commercial and consumer loans.
<PAGE>
Balance Sheet Analysis
During 1997 the Company's total assets increased by $18.9 million, or 9.9%,
to $208.8 million from $189.9 million at December 31, 1996. During 1996 total
assets increased by $22.7 million, or 13.5%, from $167.3 million at December 31,
1995. 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 $23.6 million, or 15.6%, in 1997 to $174.9 million from $151.3
million the previous year. During 1996 loans increased by $22.1 million, or
17.1%, from $129.1 million at December 31, 1995. The loan portfolio represented
83.7% of total assets at December 31, 1997 compared to 79.7% and 77.2% at
December 31, 1996 and 1995, respectively. These increases reflect management's
intention, during this period, to maintain the loan portfolio between 75% and
85% of total assets.
7
<PAGE>
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Home Port Bancorp, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
Real estate loan originations, including both commercial and residential
properties, were $81.7 million in 1997 compared to $85.1 million in 1996 and
$59.2 million in 1995. Loan originations remained strong in 1997 due to a
continuing strong real estate market on Nantucket, a favorable interest rate
environment and the Bank's marketing efforts.
Residential mortgages, including residential construction loans and loans
held for sale, increased by $19.8 million, or 19.2%, to $122.6 million at
December 31, 1997 from $102.8 million at December 31, 1996. This represents the
majority (82%) of the increase in total loans in 1997 and reflects the
residential character of the Bank's market area. Most of the residential loan
portfolio continues to be in variable rate loans, although customers have been
choosing variable-rate products with initial fixed rate periods of 3 and 5
years. Commercial real estate loans outstanding increased by $2.3 million, or
6.8%, to $36.2 million compared to $33.9 million in 1996. This increase is due
to an increased level of business activity due to the favorable economic
conditions and the Bank's efforts to increase commercial business, offset by an
increase in competition for these types of loans.
Real estate loans sold in the secondary market totaled $18.5 million in
1997 compared to $25.8 million during 1996. 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, 1997, the Bank had $11.2 million of loans held for sale in
the secondary market, compared to $8.9 million at year end 1996. 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, 1997 and 1996, 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 increased by $147 thousand, or 1.0%, at December 31, 1997
to $22.9 million from $22.7 million in the prior year. During 1996 securities
decreased by $3.3 million, or 12.6%, from $26.0 million at December 31, 1995.
The Company does not actively trade the securities portfolio; the majority of
the portfolio (73% at December 31, 1997) is classified as held to maturity. At
December 31, 1997 total securities represented 11.0% of total assets compared to
12.0% for 1996 and 15.6% for 1995.
<PAGE>
Deposits
Total deposits increased $7.4 million, or 5.4%, in 1997 to $142.4 million
from $135.1 million at December 31, 1996. During 1996 deposits increased by
$20.7 million, or 18.1%, from $114.4 million at December 31, 1995. Deposit
growth was proportionally split between transaction accounts (demand, checking,
savings and money market) and time certificates of deposit. Average deposits
increased 10.4% in 1997 to $134.3 million from $121.7 million at December 31,
1996. These increases reflect the strong 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.
Occasionally, 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
$2.4 million or 1.7% of total deposits at December 31, 1997 and $3.3 million, or
2.4% of total deposits, at December 31, 1996.
8
<PAGE>
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Home Port Bancorp, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
Borrowed Funds
Borrowed funds consist of FHLB advances with maturities ranging from 3
months to 5 years. These borrowings totaled $41.7 million at December 31, 1997
and $32.3 million at December 31, 1996. Borrowings have been used to fund loan
demand, to meet short term and seasonal liquidity demands and to utilize capital
resources. The Bank's goals include minimizing the need for borrowings by
increasing core 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,
1997 1996 1995
------ ------ -----
<S> <C> <C> <C>
Non-accrual loans:
Commercial real estate $ -- $ -- $ --
Commercial business -- 10 --
------ ------ -----
Total non-accrual loans -- 10 --
Accruing loans which are contractually past due 90 days or more:
Residential real estate 10 433 --
------ ------ -----
Total non-performing loans 10 443 --
Other real estate owned -- 61 --
------ ------ -----
Total non-performing assets $ 10 $ 504 $ --
====== ====== =====
Non-performing assets as a percentage of total assets --% 0.27% --%
====== ====== =====
Allowance for loan losses $2,609 $2,365 $2,249
Allowance for loan losses to:
Non-performing loans NM * 534% - %
Total loans 1.47% 1.54% 1.71%
* NM = not meaningful
</TABLE>
At December 31, 1997 and 1996 the Bank had no loans which were considered
"impaired" within the meaning of Statement of Financial Accounting Standards
("SFAS") No. 114 and 118.
At the end of 1997 management identified $700 thousand 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.
<PAGE>
Accrual of interest on loans is discontinued either when doubt exists as to
the timely collection of interest or principal or when a loan becomes
contractually past due by 90 days with respect to interest or principal, and the
collateral value is not sufficient to ensure the payment in full of principal
and interest. When a loan is placed on 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.
The Bank's lending activities are conducted solely on the island of Nantucket,
Massachusetts.
9
<PAGE>
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Home Port Bancorp, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
During 1997 the Bank recorded a provision for loan losses of $150 thousand
compared to $75 thousand in 1996 and none in 1995. The Bank also recorded net
recoveries of $94 thousand in 1997, $41 thousand in 1996 and $95 thousand in
1995. The loan loss provisions made over the past two years are a result of the
growth in the Bank's loan portfolio. At December 31, 1997 the allowance for loan
losses was $2.6 million, or 1.47% of total loans compared to $2.4 million, or
1.54% of total loans, at December 31, 1996. 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 $21.9 million, or 10.51%, of assets on
December 31, 1997 compared to $20.1 million, or 10.58% of assets, at December
31, 1996 and $18.4 million, or 10.99% of assets, at December 31, 1995. 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 feasible, 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. In addition to these special dividends,
regular quarterly dividends of $1.5 million and $1.3 million and $1.1 million
were declared in 1997, 1996 and 1995, respectively. Net earnings of $3.3 million
in 1997, $3.0 million in 1996 and $2.8 million in 1995 were added to capital.
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, 1997, 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, 1997 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.
<PAGE>
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, 1997 totaled $9.4 million,
unused lines of credit equaled $9.2 million, the unadvanced portion of
construction loans equaled $6.6 million and stand-by letters of credit
outstanding aggregated $487 thousand. The Bank believes that it has adequate
sources of liquidity to fund such commitments.
10
<PAGE>
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Home Port Bancorp, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
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. Virtually all the Company's assets and liabilities are monetary
in nature and, as a result, interest rates have a more significant impact on the
results of operations than the effects of general levels of inflation. Interest
rates do not necessarily move in the same direction or in the same magnitude as
the price of goods and services.
Recent Accounting Developments
In February 1997, the FASB issued SFAS No. 129, "Disclosure of Information
about Capital Structure", which is in effect for 1997 financial statements. The
Company's disclosures currently comply with the provisions of this statement.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income". SFAS No. 130 establishes standards for reporting and displaying
comprehensive income, which is defined as all changes to equity except
investments by and distributions to shareholders. Net income is a component of
comprehensive income, with all other components referred to in the aggregate as
other comprehensive income. This statement is effective for 1998 financial
statements. This statement is not expected to have a material effect on the
Company's financial statements.
Also in June 1997, the FASB issued SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information", which establishes standards
for reporting information about operating segments. An operating segment is
defined as a component of a business for which separate financial information is
available that is evaluated regularly by the chief operating decision maker in
deciding how to allocate resources and evaluate performance. This statement
requires a company to disclose certain income statement and balance sheet
information by operating segment, as well as provide a reconciliation of
operating segment information to the company's consolidated balances. This
statement is effective for 1998 financial statement. The Company has one
operating segment.
<PAGE>
Impact of the Year 2000 Issue
The Bank has completed its initial assessment of issues connected with the
ability of its computer systems to properly recognize dates beyond December 31,
1999 (commonly referred to as the "Year 2000 issue"). The Bank relies on a
third-party data processing vendor for critical data warehousing and on-line
transaction processing. Other, less critical, systems are supported by purchased
applications software. The Bank is also in the process of assessing the impact
of the Year 2000 issue on its major borrowing customers.
The Bank is continually evaluating vendor plans and monitoring project
milestones. The Bank expects to test its key on-line transaction processing
system in mid-1998 and to complete testing on other applications not later than
December 31, 1998. There can be no guarantee that the systems of other companies
on which the Bank's systems rely will be timely remediated. Therefore, the Bank
could possibly be negatively impacted to the extent other entities not
affiliated with the Bank are unsuccessful in properly addressing this issue.
11
<PAGE>
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Home Port Bancorp, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
The costs of the Year 2000 project incurred to date have been minimal. The Bank
has, however, accelerated purchases of personal computer (PC) hardware so that,
by March 31, 1998, all PCs utilized by the Bank will fully support Year
2000-compliant software. The total cost of these hardware purchases is
approximately $75,000. The total remaining cost of the Year 2000 project is not
expected to be material. The costs of the project and the date on which the Bank
plans to complete Year 2000 testing are based on management's best estimates,
which were derived utilizing numerous assumptions of future events including the
continued availability of certain resources, third party modification plans and
other factors. However, there can be no guarantee that these estimates will be
achieved and actual results could differ materially from those plans. Specific
factors that might cause such material differences include, but are not limited
to, the availability and cost of personnel trained in this area, the ability to
locate and correct all relevant computer codes, and similar uncertainties.
12
<PAGE>
Consolidated Balance Sheets (Dollars in Thousands, Except Per Share Data)
Home Port Bancorp, Inc. and Subsidiaries
<TABLE>
<CAPTION>
December 31,
------------------------
1997 1996
--------- ---------
<S> <C> <C>
Assets
Cash and due from banks $ 5,065 $ 5,073
Interest bearing deposits in banks 41 46
Federal funds sold -- 4,700
--------- ---------
Total cash and cash equivalents 5,106 9,819
Securities held to maturity (market value $16,655 and $14,526) (note 2) 16,661 14,663
Securities available for sale (cost of $6,218 and $8,104) (note 3) 6,231 8,082
Loans, net of allowance for loan losses of $2,609 and $2,365 (notes 4 and 7) 163,733 142,425
Loans held for sale 11,169 8,866
Land, buildings and equipment, net (note 5) 1,451 1,422
Accrued income receivable 1,040 1,093
Net deferred tax asset (note 8) 111 347
Stock in FHLB of Boston, at cost (note 7) 2,442 2,321
Prepaid expenses and other assets 871 893
--------- ---------
Total assets $ 208,815 $ 189,931
========= =========
Liabilities and Stockholders' Equity
Liabilities:
Deposits (note 6) $ 142,436 $ 135,082
Borrowed funds (note 7) 41,742 32,335
Accrued expenses (note 9) 1,384 1,346
Other liabilities 1,305 1,065
--------- ---------
Total liabilities 186,867 169,828
--------- ---------
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 8,841 7,017
Unrealized gain (loss) on securities available for sale, net of taxes (note 3) 8 (13)
Less: Treasury stock, at cost (483,604 shares) (4,397) (4,397)
--------- ---------
Total stockholders' equity 21,948 20,103
--------- ---------
Total liabilities and stockholders' equity $ 208,815 $ 189,931
========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
13
<PAGE>
Consolidated Statements of Earnings (In Thousands, Except Per Share Data)
Home Port Bancorp, Inc. and Subsidiaries
<TABLE>
<CAPTION>
Years Ended December 31,
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Interest income:
Interest on loans (note 4) $ 14,425 $ 12,863 $ 11,356
Interest on securities 1,300 1,343 1,614
Dividends 169 168 171
Interest on federal funds sold 57 76 101
-------- -------- --------
Total interest income 15,951 14,450 13,242
-------- -------- --------
Interest expense:
Interest on depositors' accounts (note 6) 4,594 4,219 3,692
Interest on borrowed funds (note 7) 2,420 2,070 2,295
-------- -------- --------
Total interest expense 7,014 6,289 5,987
-------- -------- --------
Net interest income 8,937 8,161 7,255
Provision for loan losses (note 4) 150 75 --
-------- -------- --------
Net interest income after provision for loan losses 8,787 8,086 7,255
-------- -------- --------
Non-interest income:
Deposit servicing fees 425 348 303
Loan servicing fees (note 4) 258 282 229
Other fees and income 215 249 314
Net gain (loss) from sale of mortgage loans 87 (6) 24
Net gain (loss) from securities and other assets (note 3) 22 1 (26)
-------- -------- --------
Total non-interest income 1,007 874 844
-------- -------- --------
Non-interest expense:
Salaries and employee benefits (note 9) 2,551 2,326 1,978
Building and equipment expenses 503 481 380
Professional fees 227 281 251
Deposit insurance fees 43 9 159
Other 1,012 897 826
-------- -------- --------
Total non-interest expense 4,336 3,994 3,594
-------- -------- --------
Income before income taxes 5,458 4,966 4,505
Provision for income taxes (note 8) 2,161 1,931 1,749
-------- -------- --------
Net income $ 3,297 $ 3,035 $ 2,756
======== ======== ========
Earnings per common share $ 1.79 $ 1.65 $ 1.50
======== ======== ========
Weighted number of common shares outstanding 1,842 1,842 1,842
======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements
14
<PAGE>
Consolidated Statements of Changes in Stockholders' Equity
(In Thousands, Except Per Share Data)
Home Port Bancorp, Inc. and Subsidiaries
<TABLE>
<CAPTION>
Unrealized
Gain (Loss) on
Additional Securities Total
Common Paid-in Retained Treasury Available Stockholders'
Stock Capital Earnings Stock For Sale, Net Equity
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
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 .... -- -- -- -- 46 46
Special dividend declared at $1.00 per share -- -- (1,842) -- -- (1,842)
Cash dividends paid at $0.60 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 .... -- -- -- -- (22) (22)
Cash dividends paid at $0.70 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
Change in unrealized gain (loss) on
securities available for sale, net .... -- -- -- -- 21 21
Cash dividends paid at $0.80 per share ..... -- -- (1,473) -- -- (1,473)
Net income ................................. -- -- 3,297 -- -- 3,297
-------- -------- -------- -------- -------- --------
Balance at December 31, 1997 ............... $ 23 $ 17,473 $ 8,841 $ (4,397) $ 8 $ 21,948
======== ======== ======== ======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements
15
<PAGE>
Consolidated Statements of Cash Flows (In Thousands)
Home Port Bancorp, Inc. and Subsidiaries
<TABLE>
<CAPTION>
Years Ended December 31,
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Net cash flows from operating activities:
Net income $ 3,297 $ 3,035 $ 2,756
Adjustments to reconcile net income to net cash
provided by operating activities:
Net decrease (increase) in accrued income receivable 53 11 (279)
Net increase (decrease) in accrued expenses 52 240 (355)
Net amortization of securities premiums 57 92 49
Net increase in loans held for sale (2,224) (265) (563)
Amortization of deferred loan origination fees (256) (274) (318)
Amortization of deferred premiums on loans sold 8 -- --
Depreciation of building and equipment 247 217 182
Net increase in prepaid expenses and other assets (48) (122) (67)
Net increase in other liabilities 240 472 361
Deferred income tax expense (benefit) 208 (247) 530
Net (gain) loss on securities and other assets (23) (1) 26
Net (gain) loss on sale of mortgage loans (87) 6 (24)
Provision for loan losses 150 75 --
-------- -------- --------
Net cash provided by operating activities 1,674 3,239 2,298
-------- -------- --------
Cash flows from investing activities
Purchases of securities held to maturity (8,379) -- (1,214)
Purchases of securities available for sale (3,977) (4,746) (3,758)
Proceeds from sales of securities available for sale 2,280 250 1,949
Proceeds from maturities/calls of securities 8,707 6,480 5,290
Principal payments on mortgage-backed securities 1,232 1,168 1,503
Net increase in loans (21,202) (21,747) (10,367)
Capital expenditures (276) (395) (506)
Proceeds from the sales of other real estate owned 61 -- 386
Purchase of Federal Home Loan Bank of Boston stock (121) -- (607)
-------- -------- --------
Net cash used for investing activities (21,675) (18,990) (7,324)
-------- -------- --------
Cash flows from financing activities:
Net increase in deposits 7,354 20,725 9,971
Federal Home Bank advances 22,000 13,000 5,900
Federal Home Loan Bank repayments (14,970) (13,502) (3,670)
Net (decrease) increase in short term borrowings 2,377 -- (2,500)
Cash dividends paid (1,473) (1,289) (7,552)
-------- -------- --------
Net cash provided by financing activities 15,288 18,934 2,149
-------- -------- --------
Net (decrease) increase in cash and cash equivalents (4,713) 3,183 (2,877)
Cash and cash equivalents at beginning of year 9,819 6,636 9,513
-------- -------- --------
Cash and cash equivalents at end of year $ 5,106 $ 9,819 $ 6,636
======== ======== ========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest $ 6,983 $ 6,289 $ 5,968
Income taxes 2,052 1,960 1,587
Loans foreclosed and transferred to other real estate owned -- 61 350
Securities transferred from held to maturity to available for sale -- -- 4,189
Dividends declared 1,473 1,289 2,947
</TABLE>
See accompanying notes to consolidated financial statements
16
<PAGE>
Notes to Consolidated Financial Statements
Home Port Bancorp, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
(1) Summary of Significant Accounting Policies
(a) Business
Home Port Bancorp, Inc. (the "Company") is a one-bank holding company which
holds all of the issued and outstanding shares of common stock of Nantucket Bank
(the "Bank"), a state chartered savings bank located on the island of Nantucket,
Massachusetts. The Bank provides a full range of banking services to individual
and corporate customers in Nantucket and 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 estimate that is particularly susceptible to change relates to the
determination of the allowance for loan losses.
(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 unrealized gains or
losses excluded from earnings and reported as a separate component of
stockholders' equity, net of income taxes.
<PAGE>
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.
If a security suffers a loss in value which is considered other than
temporary, the cost basis of the security is written down to fair value 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
17
<PAGE>
Notes to Consolidated Financial Statements
Home Port Bancorp, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
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.
The Bank accounts for impaired loans, except loans accounted for at fair
value or at the lower cost or fair value, at the present value of the expected
future cash flows discounted at the loan's effective interest rate or the fair
value of the collateral if the loan is collateral dependent. Impaired loans
include commercial, commercial real estate and individually significant mortgage
or consumer loans for which it is probable the Bank will not collect all amounts
due according to the terms of the loan agreement. Impairment on troubled debt
restructurings is measured using the premodification rate of interest.
Loan origination fees, net of certain direct loan origination costs, are
considered yield adjustments 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 available for future credit losses
inherent in the portfolio. The allowance is increased by provisions charged to
operations and recoveries of prior losses, and decreased by realized losses.
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 currently available 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 loan
charge-off. 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.
18
<PAGE>
Notes to Consolidated Financial Statements
Home Port Bancorp, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
(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. There are no dilutive securities.
(m) Reclassification
Certain amounts in the 1996 and 1995 financial statements have been
reclassified to conform to the 1997 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,
-------------------------------------------
1997 1996
------------------- -------------------
Market Market
Cost Value Cost Value
------- ------- ------- -------
<S> <C> <C> <C> <C>
United States Government and agency obligations:
Maturing within one year $ 2,248 $ 2,243 $ 341 $ 341
Maturing after one year but within five years 2,000 2,010 2,000 1,985
Maturing after five years but within ten years 1,000 1,000 -- --
------- ------- ------- -------
5,248 5,253 2,341 2,326
------- ------- ------- -------
Mortgage-backed securities:
Maturing after one year but within five years
FNMA 5,568 5,523 6,299 6,189
FHLMC 981 980 1,034 1,033
Maturing after ten years
FHLMC 522 527 -- --
GNMA 129 129 153 151
------- ------- ------- -------
7,200 7,159 7,486 7,373
------- ------- ------- -------
State and Municipal obligations:
Maturing within one year 180 180 381 381
Maturing after one year but within five years 638 642 184 183
Maturing after five years but within ten years 1,314 1,326 -- --
------- ------- ------- -------
2,132 2,148 565 564
------- ------- ------- -------
Other bonds and notes:
Maturing within one year 854 849 3,409 3,409
Maturing after one year but within five years 1,227 1,246 862 854
------- ------- ------- -------
2,081 2,095 4,271 4,263
------- ------- ------- -------
Total securities held to maturity $16,661 $16,655 $14,663 $14,526
======= ======= ======= =======
</TABLE>
Included in United States Government and agency obligations at December 31, 1997
are securities with an amortized cost of $3.3 million which can be called at a
date or dates prior to their contractual maturity.
19
<PAGE>
Notes to Consolidated Financial Statements
Home Port Bancorp, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
The gross unrealized gains (losses) on securities held to maturity are as
follows:
<TABLE>
<CAPTION>
December 31,
----------------------------------------------------------
1997 1996
Unrealized Unrealized Unrealized Unrealized
Gains Losses Gains Losses
----- ------ ----- ------
<S> <C> <C> <C> <C>
United States Government and agency obligations $ 10 $ (5) $ - $ (15)
Mortgage-backed securities 13 (54) 5 (118)
State and municipal obligations 16 - - (1)
Other bonds and notes 18 (4) 3 (11)
---- ----- ---- -----
Total $ 57 $ (63) $ 8 $ (145)
</TABLE>
Investment securities with an amortized cost of $750 thousand and fair value of
$748 thousand at December 31, 1997 were pledged as collateral for depositors and
certain borrowings.
<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,
---------------------------------------
1997 1996
------------------ -----------------
Market Market
Cost Value Cost Value
------ ------ ------ ------
<S> <C> <C> <C> <C>
United States Government and agency obligations:
Maturing within one year $ 750 $ 748 $ -- $ --
Maturing after one year but within five years 3,698 3,709 5,200 5,168
Maturing after five years but within ten years 250 248 500 495
------ ------ ------ ------
4,698 4,705 5,700 5,663
------ ------ ------ ------
Real Estate Mortgage Investment Conduits (REMICs)
Maturing after one year but within five years
FNMA 966 968 -- --
------ ------ ------ ------
966 968 -- --
------ ------ ------ ------
State and Municipal obligations:
Maturing within one year 151 151 504 510
Maturing after one year but within five years 141 142 294 294
------ ------ ------ ------
292 293 798 804
------ ------ ------ ------
Other bonds and notes:
Maturing within one year 250 249 1,244 1,253
Maturing after one year but within five years -- -- 250 248
------ ------ ------ ------
250 249 1,494 1,501
------ ------ ------ ------
Marketable equity securities 12 16 112 114
------ ------ ------ ------
$6,218 $6,231 $8,104 $8,082
====== ====== ====== ======
</TABLE>
Included in United States Government and agency obligations at December 31, 1997
are securities with a cost of $3.5 million, which can be called at a date or
dates prior to their contractual maturity.
20
<PAGE>
Notes to Consolidated Financial Statements
Home Port Bancorp, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
The gross unrealized gains (losses) on securities available for sale are as
follows:
<TABLE>
<CAPTION>
December 31,
-----------------------------------------------------
1997 1996
------------------------ ------------------------
Unrealized Unrealized Unrealized Unrealized
Gains Losses Gains Losses
----- ------ ----- ------
<S> <C> <C> <C> <C>
United States Government and agency obligations $21 $(14) $17 $(54)
REMICs 4 (2) - -
State and municipal obligations 1 - 6 -
Other bonds and notes - (1) 9 (2)
Marketable equity securities 4 - 2 -
--- ---- --- ----
Total $30 $(17) $34 $(56)
=== ==== === ====
</TABLE>
Realized gains and losses on securities and other assets, are as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------------------------------------
1997 1996 1995
-------------------- -------------------- -------------------
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 $ - $(14) $1 $ - $ - $(12)
Other bonds and notes 4 - - - 8 (1)
Marketable equity securities 41 - - - - -
Other assets - (9) - - - (21)
--- ---- -- --- -- ----
Total $45 $(23) $1 $- $8 $(34)
=== ==== == = == ====
</TABLE>
<PAGE>
(4) Loans, Net
(in thousands)
Loans are summarized as follows:
<TABLE>
<CAPTION>
December 31,
-------------------------
1997 1996
--------- ---------
<S> <C> <C>
Mortgage loans:
Residential
Fixed 22,345 $ 18,407
Adjustable 71,992 61,316
Residential construction 21,827 21,100
Commercial 36,188 33,891
Commercial construction 4,535 5,960
--------- ---------
Total principal balances 156,887 140,674
Due to borrowers on uncompleted loans:
Residential (4,719) (6,743)
Commercial (1,845) (3,342)
Deferred loan origination fees (474) (517)
--------- ---------
Total mortgage loans 149,849 130,072
--------- ---------
Other loans:
Commercial 10,425 8,534
Second mortgage 1,712 1,987
Home equity 1,975 1,542
Passbook and stock secured 817 960
Consumer 1,564 1,695
--------- ---------
Total other loans 16,493 14,718
--------- ---------
Less: Allowance for loan losses (2,609) (2,365)
--------- ---------
Loans, net $ 163,733 $ 142,425
========= =========
</TABLE>
21
<PAGE>
Notes to Consolidated Financial Statements
Home Port Bancorp, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
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.
Loans serviced for other investors amounted to $65.1 million, $70.7 million
and $64.3 million at December 31, 1997, 1996 and 1995, respectively. Service
fees earned on these loans amounted to $258, $282 and $229, respectively, in
1997, 1996 and 1995.
Non-performing loans are summarized as follows:
<TABLE>
<CAPTION>
December 31,
---------------------------------
1997 1996 1995
---------------------------------
<S> <C> <C> <C>
Loans accounted for on a non-accrual basis $ - $ 10 $ -
Accruing loans 90 days or more past due 10 433 -
Restructured loans - - -
</TABLE>
The reduction in interest income associated with non-performing loans was
not significant.
<PAGE>
Transactions in the allowance for loan losses are summarized as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
-----------------------------------
1997 1996 1995
-----------------------------------
<S> <C> <C> <C>
Balance at beginning of year $ 2,365 $ 2,249 $ 2,154
Provision for loan losses 150 75 --
Recoveries on loans previously charged off 204 179 115
Realized losses charged to allowance (110) (138) (20)
------- ------- -------
Balance at end of year $ 2,609 $ 2,365 $ 2,249
======= ======= =======
Allocated as follows:
Residential mortgage loans $ 544 $ 524 $ 532
Commercial mortgage loans 1,320 1,222 1,145
Commercial loans 160 184 156
All other loans 225 225 281
Unallocated 360 210 135
------- ------- -------
Total $ 2,609 $ 2,365 $ 2,249
======= ======= =======
Realized losses charged to the allowance by type are as follows
Residential mortgage loans $ -- $ 19 $ --
Commercial mortgage loans -- -- 7
Commercial loans 91 31 --
All other loans 19 88 13
------- ------- -------
Total $ 110 $ 138 $ 20
======= ======= =======
</TABLE>
22
<PAGE>
Notes to Consolidated Financial Statements
Home Port Bancorp, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
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.
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, 1997 and 1996:
<TABLE>
<CAPTION>
1997 1996
------ ------
<S> <C> <C>
Balance at beginning of year $1,468 $ 826
Additions 1,245 971
Deductions (549) (329)
------ ------
Balance at end of year $2,164 $1,468
====== ======
</TABLE>
(5) Land, Building and Equipment, Net (in thousands)
Land, building, and equipment are summarized as follows:
<TABLE>
<CAPTION>
December 31,
----------------------
1997 1996
-------- --------
<S> <C> <C>
Land $ 304 $ 304
Buildings 571 571
Furniture and equipment 1,778 1,816
-------- --------
2,653 2,691
Less: Accumulated depreciation (1,202) (1,269)
-------- --------
$ 1,451 $ 1,422
======== ========
</TABLE>
<PAGE>
Notes to Consolidated Financial Statements
Home Port Bancorp, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
(6) Deposits
(dollars in thousands)
Deposits are summarized as follows:
<TABLE>
<CAPTION>
December 31,
----------------------------------------------------
1997 1996
------------------------- ----------------------
Weighted Weighted
Average Average
Amount Rate Amount Rate
-------- ----- -------- -----
<S> <C> <C> <C> <C>
Demand (non-interest bearing) $ 11,226 - % $ 9,955 - %
Savings:
NOW 28,072 1.28% 31,223 1.32%
Regular and 90-day notice accounts 15,090 2.76% 13,779 2.78%
Money market deposit accounts 26,766 3.68% 22,672 3.23%
Advance payments from mortgagors 236 1.00% 131 .65%
-------- ----- -------- -----
Total savings 70,164 2.51% 67,805 2.25%
-------- ----- -------- -----
Time certificates of deposit 61,046 5.24% 57,322 5.12%
-------- ----- -------- -----
Total deposits $142,436 3.75% $135,082 3.30%
======== ==== ======== ====
</TABLE>
Included in time certificates are brokered certificates of deposit, amounting to
$2.5 million and $3.3 million at December 31, 1997 and 1996, respectively.
23
<PAGE>
Notes to Consolidated Financial Statements
Home Port Bancorp, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
Certificates of deposit are summarized by contractual maturity date at
December 31, 1997 as follows:
<TABLE>
<CAPTION>
Under Over
$100,000 $100,000 Total
-------- -------- -----
<S> <C> <C> <C>
Within one year $20,207 $28,008 $48,215
From one to three years 8,563 3,168 11,731
From three to five years 976 124 1,100
------- ------- -------
Total $29,746 $31,300 $61,046
======= ======= =======
</TABLE>
Interest on deposits, classified by type, is as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------
1997 1996 1995
------ ------ ------
<S> <C> <C> <C>
Regular, NOW, 90 day notice and advance payments from mortgagors $ 739 $ 703 $ 691
Money market deposits 891 698 572
Time certificates of deposit 2,964 2,818 2,429
------ ------ ------
Total $4,594 $4,219 $3,692
====== ====== ======
</TABLE>
(7) Borrowed Funds
(dollars in thousands)
Borrowed funds are summarized as follows:
<TABLE>
<CAPTION>
December 31,
------------------------------------------------
1997 1996
--------------------- ----------------------
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 $16,494 6.22% $17,400 5.80%
Due from one to three years 18,725 6.35% 8,681 5.99%
Due from three to five years 6,523 6.21% 6,254 6.70%
------- ---- ------- ----
Total borrowings $41,742 6.28% $32,335 6.05%
======= ==== ======= ====
</TABLE>
<PAGE>
Borrowings from the Federal Home Loan Bank of Boston ("FHLB") are secured
by the Bank's stock in the FHLB of Boston and a blanket lien on certain
"qualified collateral" defined principally as 90% of the market value of U.S.
Government and federal agency obligations and 75% of the carrying value of
certain residential mortgage loans. Unused borrowings with the FHLB at December
31, 1997 were $52.7 million.
As a member of the FHLB, the Bank is required to invest in the common stock
of the FHLB in the amount of one percent of its outstanding loans secured by
residential housing, or three tenths of one percent of total assets, or five
percent of its outstanding advances from the FHLB, whichever is highest. As and
when such stock is redeemed, the Bank would receive from the FHLB an amount
equal to the par value of the stock. As of December 31, 1997 the Bank's FHLB
stock holdings were $2.4 million. The Bank's investment in FHLB stock is
recorded at cost.
24
<PAGE>
Notes to Consolidated Financial Statements
Home Port Bancorp, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
(8) Income Taxes
(dollars in thousands)
Total income tax expense was allocated as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
---------------------------------
1997 1996 1995
<S> <C> <C> <C>
Current tax expense: Federal $ 1,432 $ 1,567 $ 914
State 507 612 305
-------- -------- ------
1,939 2,179 1,219
-------- -------- ------
Deferred tax expense (benefit)
Federal 189 (139) 428
State 63 (55) 170
Change in valuation allowance (30) (54) (68)
-------- -------- ------
222 (248) 530
-------- -------- ------
Total income tax expense $ 2,161 $ 1,931 $1,749
======== ======== ======
</TABLE>
The effective Federal income tax rates differ from the statutory rates as
indicated below:
<TABLE>
<CAPTION>
Years Ended December 31,
-----------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Statutory rate 34% 34% 34%
Increase (decrease) resulting from:
State income taxes (net of Federal tax benefit) 7 7 7
Change in valuation allowance and other (1) (2) (2)
-- -- --
Effective rate 40% 39% 39%
== == ==
</TABLE>
<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,
1997 and 1996 are presented below:
<TABLE>
<CAPTION>
December 31,
-----------------
1997 1996
----- -----
<S> <C> <C>
Deferred tax assets
Deferred compensation expense $ 205 $ 211
Allowance for loan losses 539 354
Accrued retirement expenses 109 106
Capital loss carry forward 35 65
Accrued bonus 46 46
Unrealized loss on securities available for sale -- 9
----- -----
Total gross deferred tax asset 934 791
Less: valuation allowance (35) (65)
----- -----
899 726
Deferred tax liabilities
Deferred loan origination fees 649 271
Deferred premium on loans 25 --
Depreciation of buildings and equipment 109 108
Unrealized gain on securities available for sale 5 --
----- -----
Total gross deferred tax liabilities 788 379
----- -----
Net deferred tax asset $ 111 $ 347
===== =====
</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.
25
<PAGE>
Notes to Consolidated Financial Statements
Home Port Bancorp, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
The Company and its subsidiaries on a consolidated basis are subject to
Federal income tax. The Bank is subject to a Massachusetts income tax at a rate
of 11.32%. The Bank's subsidiary is an investment company that has been
classified a securities corporation under the provisions of the General Laws of
Massachusetts and, as such, is subject to state tax at a rate of 1.32% of gross
receipts. The Company is a bank holding company that has been classified as a
securities corporation under the provisions of the General Laws of Massachusetts
and, as such, is subject to a state tax at a rate of 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.
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.
(9) Employee Benefits
(dollars in thousands)
Pension Plan
The Bank provides pension benefits for its 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.
<PAGE>
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, 1997 and 1996:
<TABLE>
<CAPTION>
1997 1996
---------- --------
<S> <C> <C>
Accumulated benefit obligation $ 1,024 $ 860
Additional benefits related to future compensation levels 633 489
---------- --------
Projected benefit obligation for service rendered to date 1,657 1,349
Plan assets at fair value, invested primarily in bonds and equities 1,454 1,186
---------- --------
Plan assets below projected benefit obligations $ (203) $ (163)
========== ========
</TABLE>
Assumptions used in determining the actuarial present value of the projected
benefit obligation were as follows:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Discount rate 7.25% 7.50%
Rate of increase in compensation levels 6.00% 6.00%
</TABLE>
26
<PAGE>
Notes to Consolidated Financial Statements
Home Port Bancorp, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
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:
<TABLE>
<CAPTION>
1997 1996
------ ------
<S> <C> <C>
Unrecognized transaction asset $ 23 $ 24
Unrecognized net loss 35 68
Accrued pension cost (261) (255)
------ ------
Plan assets below projected benefit obligations $ (203) $ (163)
====== ======
</TABLE>
The assumptions used and the components of net pension expense for the Plan
for the years ended October 31 include the following:
<TABLE>
<CAPTION>
1997 1996 1995
----- ------ -----
<S> <C> <C> <C>
Assumptions Used:
Discount rate 7.25% 7.50% 7.00%
Expected long-term rate of return on assets 8.00% 8.00% 8.00%
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 $ 83 $ 109 $ 83
Interest cost on projected benefit obligation 101 92 79
Actual return on Plan assets (179) (147) (135)
Net amortization and deferral 80 73 79
----- ------ -----
Pension expense $ 85 $ 127 $ 106
===== ====== =====
</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 $48 thousand in 1997 and $55 thousand in 1996.
<PAGE>
(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.
27
<PAGE>
Notes to Consolidated Financial Statements
Home Port Bancorp, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
Financial instruments whose contract amounts represent credit risk are as
follows:
<TABLE>
<CAPTION>
Contract or Notional Amount
---------------------------
December 31,
---------------------------
1997 1996
--------- --------
<S> <C> <C>
Commitments to originate mortgage and commercial loans $ 9,369 $ 8,184
Unused lines of credit 9,231 8,287
Standby letters of credit 487 446
Unadvanced portions of construction loans 6,567 10,085
</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.
28
<PAGE>
Notes to Consolidated Financial Statements
Home Port Bancorp, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
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.
The carrying amounts and fair values of the Company's financial instruments
consisted of the following at December 31, 1997 and 1996:
<TABLE>
<CAPTION>
1997 1996
--------------------------------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Cash and cash equivalents $ 5,106 $ 5,106 $ 9,819 $ 9,819
Securities:
Available for sale 6,231 6,231 8,082 8,082
Held to maturity 16,661 16,655 14,663 14,526
Loans, net of allowance for loan losses 174,902 175,546 151,291 150,597
Federal Home Loan Bank stock 2,442 2,442 2,321 2,321
Accrued income receivable 1,040 1,040 1,093 1,093
Deposits:
Demand 11,226 11,226 9,955 9,955
NOW 28,072 28,072 31,223 31,223
Regular savings 15,090 15,090 13,779 13,779
Advance payments from mortgagors 236 236 131 131
Money market 26,766 26,766 22,672 22,672
Certificates of Deposit 61,046 61,167 57,322 57,412
Borrowed Funds 41,742 41,904 32,335 32,451
</TABLE>
<PAGE>
(13) Capital Requirements
(dollars in thousands)
The Company and the Bank are subject to various regulatory capital
requirements administered by the federal banking agencies. Failure to meet
minimum capital requirements can initiate certain mandatory, and possibly
additional 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 Company and 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
Company's and the Bank's capital amounts and classifications are also subject to
qualitative judgments by the regulators about components, risk weightings, and
other factors.
29
<PAGE>
Notes to Consolidated Financial Statements
Home Port Bancorp, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
Quantitative measures established by regulation to ensure capital adequacy
require the Company and 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,
1997, that the Company and the Bank meet all capital adequacy requirements to
which they are subject.
As of December 31, 1997, the most recent notification from the FDIC
categorized the Bank as well capitalized under the regulatory 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.
The Company's and 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
------ ----- ------ ----- ------ -----
(at least) (at least)
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1997:
Total Capital (to Risk Weighted
Assets)
Bank $21,606 17.8% $10,168 8.0% $12,710 10.0%
Company $23,536 18.6% $10,130 8.0% $12,663 10.0%
Tier I Capital (to Risk Weighted Assets)
Bank $21,005 16.5% $5,084 4.0% $7,626 6.0%
Company $21,940 17.3% $5,065 4.0% $7,598 6.0%
Total Capital (to Average Assets)
Bank $22,606 10.9% $8,266 4.0% $10,332 5.0%
Company $23,536 11.4% $8,285 4.0% $10,357 5.0%
As of December 31, 1996:
Total Capital (to Risk Weighted Assets)
Bank $20,725 18.0% $9,218 8.0% $11,522 10.0%
Company $21,569 18.7% $9,231 8.0% $11,539 10.0%
Tier I Capital (to Risk Weighted Assets)
Bank $19,273 16.7% $4,609 4.0% $6,913 6.0%
Company $20,116 17.4% $4,609 4.0% $6,923 6.0%
Total Capital (to Average Assets)
Bank $20,725 11.1% $7,436 4.0% $9,295 5.0%
Company $21,569 11.6% $7,436 4.0% $9,295 5.0%
</TABLE>
30
<PAGE>
Notes to Consolidated Financial Statements
Home Port Bancorp, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
(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,
-------------- ------------
1997 1996
------- -------
<S> <C> <C>
Assets
Cash and due from banks $ 158 $ 69
Investment in Nantucket Bank 21,013 19,260
Due from Nantucket Bank 794 621
Income taxes receivable - 146
Other assets 22 19
------- -------
Total assets $21,987 $20,115
======= =======
Liabilities
Due to Nantucket bank $ - $ -
Other liabilities 39 12
------- -------
Total liabilities 39 12
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 8,841 7,017
Unrealized gain (loss) on securities available for sale, net of taxes 8 (13)
Less: Treasury stock, at cost (483,604 shares) (4,397) (4,397)
------- -------
Total stockholders' equity 21,948 20,103
------- -------
Total liabilities and stockholders' equity $21,987 $20,115
======= =======
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Statements of Earnings Years Ended December 31,
---------------------- ------------------------
1997 1996 1995
------ ------ ------
<S> <C> <C> <C>
Income:
Dividends from Nantucket Bank $1,800 $1,600 $1,000
Interest on cash equivalents and securities 13 17 108
------ ------ ------
Total income 1,813 1,617 1,108
Expenses:
Loss on securities - - 19
Operating expenses 389 353 336
------ ------ ------
Total expenses 389 353 355
------ ------ ------
Income before income taxes and equity in undistributed net
Income of Nantucket Bank 1,424 1,264 753
Income tax benefit (142) (134) (84)
------ ------ ------
Income before equity in undistributed net income of Nantucket Bank 1,566 1,398 837
Equity in undistributed net income of Nantucket Bank 1,731 1,637 1,919
------ ------ ------
Net income $3,297 $3,035 $2,756
====== ====== ======
</TABLE>
31
<PAGE>
Notes to Consolidated Financial Statements
Home Port Bancorp, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
The parent company only statements of changes in stockholders' equity are
identical to the consolidated statements of changes in stockholders' equity and,
therefore, are not presented here.
<TABLE>
<CAPTION>
Statements of Cash Flows Years Ended December 31,
------------------------ ------------------------
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
Net cash flow from operating activities:
Net income $ 3,297 $ 3,035 $ 2,756
Adjustments to reconcile net income to net cash provided by
operating activities:
Equity in undistributed net income of Nantucket Bank (1,731) (1,637) (1,919)
Net increase (decrease) in accrued expenses and other liabilities 27 (27) 20
Net accretion on securities -- -- (7)
Net (increase) decrease in prepaid expenses and other assets (4) 6 13
Net decrease (increase) in refundable income taxes 146 (146) 9
Net loss on sales of securities -- -- 5
Other, net -- -- 12
------- ------- -------
Net cash provided by operating activities 1,735 1,231 889
------- ------- -------
Net cash flows from (used in) investing activities:
Proceeds from sale of securities available for sale -- -- 2,242
Net (increase) decrease in due from Nantucket Bank (173) (636) 632
------- ------- -------
Net cash (used in) provided by investing activities (173) (636) 2,874
------- ------- -------
Net cash flows from financing activities:
Cash dividends paid (1,473) (1,289) (7,552)
------- ------- -------
Net cash used for financing activities (1,473) (1,289) (7,552)
------- ------- -------
Net increase (decrease) in cash and cash equivalents 89 (694) (3,789)
Cash and cash equivalents at beginning of year 69 763 4,552
------- ------- -------
Cash and cash equivalents at end of year $ 158 $ 69 $ 763
======= ======= =======
Supplemental disclosure of cash flow information:
Cash paid during the year for income taxes: $ 1 $ -- $ 159
</TABLE>
32
<PAGE>
Independent Auditors' Report Home Port Bancorp, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
The Board of Directors and Stockholders
Home Port Bancorp, Inc.:
We have audited the accompanying consolidated balance sheets of Home Port
Bancorp, Inc. and subsidiaries as of December 31, 1997 and 1996, 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, 1997.
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, 1997 and 1996, and the results of
their operations and their cash flows for each of the years in the three-year
period ended December 31, 1997 in conformity with generally accepted accounting
principles.
/s/ KPMG Peat Marwick LLP
- -------------------------
KPMG Peat Marwick LLP
Boston, Massachusetts
February 5, 1998
<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.
Senior Vice President of Home Port Bancorp, Inc.
and President of Nantucket Bank
Charles H. Jones, Jr.
Managing 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.
Senior 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 (deceased)
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.
Marsha Kotalac
Owner, Nantucket Sports Locker
H. Flint Ranney
Owner, Denby Real Estate, Inc.
<PAGE>
Nantucket Bank
Officers
William P. Hourihan, Jr.
President and Chief Executive Officer
Daniel P. Neath
Senior Vice President and Chief Operations Officer
Johm M. Sweeney
Senior Vice President & Chief Financial Officer
Levin L. (Quint) Waters
Senior Vice President and Senior Lending Officer
Julie L. Bell
Vice President
Donald G. Mitchell
Vice President
Rebecca M. Bartlett
Controller
Noreen Humphrey
Branch Manager
Neil Marttila
Branch and Commercial Loan Officer
Zona Tanner-Butler
Operations and Compliance Officer
<PAGE>
Stockholder's Information Home Port Bancorp, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
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
15, 1998 at the Great Hall, Nantucket Atheneum,, Lower India Street, Nantucket,
MA 02554.
<PAGE>
Form 10-KSB
Copies of the Company's 1997 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 6, 1998, there were ___
stockholders of record and 1,841,890 outstanding shares of common stock. This
does not reflect the number of persons or entities who hold their stock in
nominee or "street" name.
The range of high and low sale prices and dividends declared for the common
stock by quarter are as follows:
Dividends
Period High Low Declared
------ ---- --- --------
1997 4th quarter 25 22 $0.20
3rd quarter 24 19 1/4 $0.20
2nd quarter 21 1/4 16 1/2 $0.20
1st quarter 19 1/4 16 1/8 $0.20
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
(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
Percentage State of
Subsidiaries (1) Owned Incorporation
---------------- ----- -------------
Nantucket Bank 100% Massachusetts
N.B. Securities, Inc. (2) 100% Massachusetts
(1) The operations of the subsidiaries are included in the
consolidated financial statements contained in the Annual Report
to Stockholders attached hereto as Exhibit 13.
(2) Wholly-owned by Nantucket Bank.
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 5,065
<INT-BEARING-DEPOSITS> 41
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 6,231
<INVESTMENTS-CARRYING> 16,661
<INVESTMENTS-MARKET> 16,655
<LOANS> 166,342
<ALLOWANCE> 2,609
<TOTAL-ASSETS> 208,815
<DEPOSITS> 142,436
<SHORT-TERM> 41,742
<LIABILITIES-OTHER> 2,689
<LONG-TERM> 0
0
0
<COMMON> 23
<OTHER-SE> 21,925
<TOTAL-LIABILITIES-AND-EQUITY> 208,815
<INTEREST-LOAN> 14,425
<INTEREST-INVEST> 1,526
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 15,951
<INTEREST-DEPOSIT> 4,594
<INTEREST-EXPENSE> 7,014
<INTEREST-INCOME-NET> 8,937
<LOAN-LOSSES> 150
<SECURITIES-GAINS> 22
<EXPENSE-OTHER> 4,336
<INCOME-PRETAX> 5,458
<INCOME-PRE-EXTRAORDINARY> 5,458
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,297
<EPS-PRIMARY> 1.79
<EPS-DILUTED> 1.79
<YIELD-ACTUAL> 4.70
<LOANS-NON> 0
<LOANS-PAST> 10
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 700
<ALLOWANCE-OPEN> 2,365
<CHARGE-OFFS> 110
<RECOVERIES> 204
<ALLOWANCE-CLOSE> 2,609
<ALLOWANCE-DOMESTIC> 2,609
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
