SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark one)
[ X ] Quarterly report pursuant to Section 13 or 15 (d) of the Securities
Exchange Act of 1934 for the quarterly period ended June 30, 1998 or
[ ] Transition report pursuant to Section 13 or 15 (d) of the
Securities Exchange Act of 1934 for the transition period from to .
Commission file number 0-17099
HOME PORT BANCORP, INC.
- --------------------------------------------------------------------------------
(EXACT NAME OF SMALL BUSINESS ISSUER AS SPECIFIED IN ITS CHARTER)
Delaware 04-3016821
- --------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
104 Pleasant Street
Nantucket, Massachusetts 02554
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(Address of principal executive office) (Zip Code)
(508) 228-0580
- --------------------------------------------------------------------------------
(Issuer's telephone number, including area code)
Not applicable.
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since last
report)
Check whether the issuer: (1) filed all reports required 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 [ ]
The number of shares outstanding of each of the registrant's classes of common
stock as of June 30, 1997:
Common Stock $.01 par value 1,841,890
(Title of Class) (Shares Outstanding)
Transitional Small Business Disclosure Format (check one)
Yes [ ] No [ X ]
<PAGE>
Home Port Bancorp, Inc.
INDEX
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
Consolidated Balance Sheets at June 30, 1998 and
December 31, 1998
Consolidated Statements of Earnings for the three months and
six months ended June 30, 1998 and 1997.
Consolidated Statements of Changes in Stockholders' Equity
for the six months ended June 30, 1998
Consolidated Statements of Cash Flows for the six months
ended June 30, 1998 and 1997
Notes to Consolidated Financial Statements
Item 2 - Management's Discussion and Analysis of Financial Condition
and Results of Operation
Item 3 - Quantitative and Qualitative Disclosures About Market Risk
PART II - OTHER INFORMATION
Signatures
<PAGE>
<TABLE>
<CAPTION>
Home Port Bancorp, Inc.
Consolidated Balance Sheet
(In Thousands, Except Share Data) June 30, December 31,
1998 1997
--------- ---------
(unaudited)
Assets
<S> <C> <C>
Cash and due from banks .................................................. $ 8,088 $ 5,065
Interest bearing deposits in banks ....................................... 54 41
Federal funds sold ....................................................... 3,925 -
--------- ---------
Total cash and cash equivalents ....................................... 12,067 5,106
Securities held to maturity (market value $16,579 and $16,655) ........... 16,568 16,661
Securities available for sale (amortized cost of $6,361 and $6,218) ...... 6,396 6,231
Loans, net of allowance for loan losses of $3,053 and $2,609 (note 3) .... 202,782 163,733
Loans held for sale ...................................................... 15,584 11,169
Stock in FHLB-Boston, at cost ............................................ 3,237 2,442
Land, buildings and equipment, net ....................................... 1,453 1,451
Accrued income receivable ................................................ 1,300 1,040
Net deferred tax asset ................................................... 111 111
Prepaid expenses and other assets ........................................ 958 871
--------- ---------
Total assets .......................................................... $ 260,456 $ 208,815
========= =========
Liabilities and Stockholders' Equity
Liabilities:
Deposits (Note 4) ........................................................ $ 172,080 $ 142,436
Borrowed funds ........................................................... 63,761 41,742
Accrued expenses ......................................................... 1,789 1,384
Other liabilities ........................................................ 137 1,305
--------- ---------
Total liabilities ..................................................... 237,767 186,867
--------- ---------
Commitments and contingencies (notes 3 and 5)
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 ........................................................ 9,569 8,841
Accumulated other comprehensive income, net:
Unrealized gain on securities available for sale, net of taxes (note 2) 21 8
Less: Treasury stock, at cost (483,604 shares) ........................... (4,397) (4,397)
--------- ---------
Total stockholders' equity ............................................ 22,689 21,948
--------- ---------
Total liabilities and stockholders' equity ............................ $ 260,456 $ 208,815
========= =========
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
<PAGE>
<TABLE>
<CAPTION>
Home Port Bancorp, Inc.
Consolidated Statements of Earnings (Unaudited)
(In Thousands, Except Per Share Data) Three Month Ended Six Month Ended
June 30, June 30,
-------------------- ---------------------
1998 1997 1998 1997
-------- ------- -------- --------
<S> <C> <C> <C> <C>
Interest income:
Interest on loans ................................... $ 4,370 $ 3,600 $ 8,283 $ 7,018
Interest on securities .............................. 328 334 657 656
Dividends ........................................... 50 41 92 78
Federal funds sold and interest bearing deposits .... 5 4 11 16
------- ------- ------- -------
Total interest income ............................ 4,753 3,979 9,043 7,768
------- ------- ------- -------
Interest expense:
Interest on deposits ................................ 1,317 1,099 2,564 2,193
Interest on borrowed funds .......................... 917 681 1,648 1,233
------- ------- ------- -------
Total interest expense ........................... 2,234 1,780 4,212 3,426
------- ------- ------- -------
Net interest income .................................... 2,519 2,199 4,831 4,342
Provision for loan losses .............................. 37 37 75 75
------- ------- ------- -------
Net interest income after provision for loan losses 2,482 2,162 4,756 4,267
Non interest income:
Deposit servicing fees .............................. 124 108 221 199
Loan servicing fees ................................. 57 65 116 131
Other fees and income ............................... 94 39 151 87
Net gain from sale of mortgage loans ................ 11 27 41 41
Net loss from securities ............................ (2) (13) (5) (9)
------- ------- ------- -------
Total non interest income ........................ 284 226 524 449
------- ------- ------- -------
Non interest expense:
Salaries and employee benefits ...................... 732 606 1,377 1,211
Building and equipment expenses ..................... 159 114 298 239
Deposit insurance fees .............................. 13 11 28 21
Professional fees ................................... 171 54 290 120
Loss (recovery) on "check-kiting" (Note 7) ......... (100) -- 460 --
Other ............................................... 343 256 588 490
------- ------- -------
Total non interest expense ....................... 1,318 1,041 3,041 2,081
------- ------- ------- -------
Income before income taxes ............................. 1,448 1,347 2,239 2,635
Provision for income taxes ............................. 469 527 775 1,033
======= ======= ======= =======
Net Income ............................................. $ 979 $ 820 $ 1,464 $ 1,602
======= ======= ======= =======
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Home Port Bancorp, Inc.
Consolidated Statements of Earnings (Unaudited)
(In Thousands, Except Per Share Data) Three Month Ended Six Month Ended
June 30, June 30,
-------------------- ---------------------
1998 1997 1998 1997
-------- ------- -------- --------
<S> <C> <C> <C> <C>
Earnings per common share - basic ...................... $ 0.53 $ 0.45 $ 0.79 $ 0.87
======= ======= ======= =======
Earnings per common share - diluted .................... $ 0.53 $ 0.45 $ 0.79 $ 0.87
======= ======= ======= =======
Weighted number of common shares outstanding - basic ... 1,842 1,842 1,842 1,842
Weighted number of common shares outstanding -diluted .. 1,842 1,842 1,842 1,842
</TABLE>
See accompanying notes to unaudited consolidated financial statements
<PAGE>
<TABLE>
<CAPTION>
Home Port Bancorp, Inc.
Consolidated Statements of Changes in Stockholders' Equity (Unaudited)
(In Thousands, Except Per Share Data)
Accumulated
Additional Other Total
Common Paid-in Retained Treasury Comprehensive Stockholders
Stock Capital Earnings Stock Income Equity
----- ------- -------- ----- ------ ------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1996 ......... $ 23 $ 17,473 $ 7,017 $ (4,397) $ (13) $ 20,103
Net income ........................... -- -- 3,297 -- -- 3,297
Other comprehensive income, net
Change in unrealized gain on
securities available for sale ... -- -- -- -- 21 21
--------
Comprehensive income ............ 3,318
Cash dividends paid at
$.80 per share ................... -- -- (1,473) -- -- (1,473)
-------- -------- -------- -------- -------- --------
Balance at December 31, 1997 ......... $ 23 $ 17,473 $ 8,841 $ (4,397) $ 8 $ 21,948
Net income ........................... -- -- 1,464 -- -- 1,464
Other comprehensive income, net
Change in unrealized gain on
securities available for sale.... -- -- -- -- 13 13
--------
Comprehensive income ............ 1,477
Cash dividends paid at
$.40 per share ................... -- -- (736) -- -- (736)
-------- -------- -------- -------- -------- --------
Balance at June 30, 1998 ............. $ 23 $ 17,473 $ 9,569 $ (4,397) $ 21 $ 22,689
======== ======== ======== ======== ======== ========
</TABLE>
See accompanying notes to unaudited consolidated financial statements
<PAGE>
<TABLE>
<CAPTION>
Home Port Bancorp, Inc.
Consolidated Statements of Cash Flows (Unaudited)
(In Thousands) Six Months Ended
June 30,
----------------------
1998 1997
-------- --------
<S> <C> <C>
Net cash flows from operating activities:
Net income .............................................. $ 1,464 $ 1,602
Adjustments to reconcile net income to net cash (used in)
provided by operating activities:
Provision for loan losses ........................... 75 75
Depreciation of building and equipment .............. 141 118
Net gain on sale of mortgage loans .................. (41) (41)
Net loss on securities .............................. 5 9
Net amortization of securities premiums ............. 10 34
Amortization of deferred loan origination fees ...... (94) (121)
Amortization of deferred premiums on loans sold ..... 24 (34)
Net increase in accrued income receivable ........... (260) (69)
Net increase (decrease) in accrued expenses ......... 405 (302)
Net (increase) decrease in loans held for sale ...... (4,398) 2,006
Net increase in prepaid expenses and other assets ... (87) (109)
Net decrease in other liabilities ................... (1,168) (388)
Net (increase) decrease in deferred income taxes .... (9) (9)
-------- --------
Net cash (used in) provided by operating activities ......... (3,933) 2,771
-------- --------
Cash flows from investing activities
Purchases of securities held to maturity ................ (4,146) (3,398)
Purchases of securities available for sale .............. (2,875) (2,002)
Proceeds from sales of securities available for sale .... 950 1.239
Proceeds from maturities/calls of securities ............ 5,030 3,722
Principal payments on mortgage-backed securities ........ 976 563
Net increase in loans ................................... (39,030) (12,218)
Purchases of land, buildings and equipment .............. (143) (140)
Proceeds from the sales of other real estate owned ...... -- 61
Purchase of Federal Home Loan Bank stock ................ (795) (120)
-------- --------
Net cash used in investing activities ....................... (40,033) (12,293)
-------- --------
Cash flows from financing activities:
Net increase (decrease) in deposits ..................... 29,644 (3,945)
Federal Home Bank advances .............................. 11,000 11,500
Federal Home Loan Bank repayments ....................... (5,000) (7,205)
Net increase in short term borrowings ................... 16,019 8,280
Cash dividends paid ..................................... (736) (737)
-------- --------
Net cash provided by financing activities ................... 50,927 7,893
-------- --------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Home Port Bancorp, Inc.
Consolidated Statements of Cash Flows (Unaudited)
(continued)
(In Thousands) Six Months Ended
June 30,
----------------------
1998 1997
-------- --------
<S> <C> <C>
Net increase (decrease) in cash and cash equivalents ....... 6,961 (1,629)
Cash and cash equivalents at beginning of period ............ 5,106 9,819
-------- --------
Cash and cash equivalents at end of period .................. $ 12,067 $ 8,190
======== ========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest ............................................ 4,129 3,374
Income taxes ........................................ 429 1,410
</TABLE>
See accompanying notes to unaudited consolidated financial statements
<PAGE>
Home Port Bancorp, Inc. and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
1. Consolidated Financial Statements
The accompanying consolidated financial statements should be read in conjunction
with the consolidated financial statements of the Company as of and for the year
ended December 31, 1997. These financial statements include the accounts of Home
Port Bancorp, Inc. ("The Company"), its wholly owned subsidiary, Nantucket Bank
("the Bank") and the Bank's wholly-owned subsidiaries N.B. Securities, Inc.
("Securities") and N Realty Corp. ("Realty"). Realty, which was incorporated in
1998, is 99 percent owned by the Bank and is a Massachusetts business
corporation which intends to elect to be taxed as a real estate investment trust
for federal and Massachusetts tax purposes. Realty holds mortgage loans which
were previously originated by the Bank.
In the opinion of management, the unaudited consolidated financial statements
presented herein reflect all adjustments (consisting only of normal recurring
adjustments) necessary for a fair presentation. Interim results are not
necessarily indicative of results to be expected for the entire year.
2. New Accounting Pronouncements
Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting
Comprehensive Income," is effective for the Company's financial statements
beginning in 1998. 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. The Company's disclosure currently
complies with the provisions of this statement. The following table shows the
components of other comprehensive income for the year ended December 31, 1997
and the six months ended June 30, 1998.
<TABLE>
<CAPTION>
Six Months Year
Ended Ended
June 30, December 31,
1998 1997
------ ------
<S> <C> <C>
Net Income ............................................. $1,464 $3,297
Other comprehensive income, net of tax
Unrealized gains on securities:
Unrealized holding gains arising during the period .... 6 13
Add: reclassification adjustment for losses
included in net income, net of tax .............. 7 8
------ ------
Net .................................................... 13 21
------ ------
Comprehensive Income ................................... $1,477 $3,318
====== ======
</TABLE>
<PAGE>
Home Port Bancorp, Inc. and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
In June 1998, the Financial Accounting Standards Board (FASB) issued Financial
Accounting Standard No. 133, "Accounting for Derivative Instruments and Hedging
Activities". This statement establishes accounting and reporting standards for
derivative instruments, including certain derivative instruments embedded in
other contracts, (collectively referred to as derivatives) and for hedging
activities. It requires that an entity recognize all derivatives as either
assets or liabilities in balance sheet and measure those instruments at fair
market value. Under this statement, an entity that elects to apply hedge
accounting is required to establish at the inception of the hedge the method it
will use for assessing the effectiveness of the hedging derivative and the
measurement approach for determining the ineffective aspect of the hedge. This
Statement is effective for all fiscal quarters of fiscal years beginning after
June 15, 1999. This statement is not expected to have a material effect on the
Company's consolidated financial statements.
3. Loans, Net (in thousands)
The composition of the balances of loans is as follows:
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
--------- ----------
<S> <C> <C>
Mortgage loans:
Residential
Fixed .............................. $ 29,833 $ 22,345
Adjustable ......................... 87,515 71,992
Residential construction ................ 34,461 21,827
Commercial .............................. 39,517 36,188
Commercial construction ................. 7,077 4,535
--------- ---------
Total principal balances ......... 198,403 156,887
Less:
Due borrowers on uncompleted loans
Residential ........................ (10,819) (4,719)
Commercial ........................ (2,679) (1,845)
Deferred loan origination fees .......... (636) (474)
--------- ---------
Total mortgage loans ............... 184,269 149,849
Other loans:
Commercial business ..................... 15,732 10,425
Second mortgage ........................ 1,608 1,712
Home equity ............................ 1,887 1,975
Passbook and stock secured ............. 718 817
Consumer ............................... 1,621 1,564
--------- ---------
Total other loans ................. 21,566 16,493
Less: Allowance for loan losses .............. (3,053) (2,609)
========= =========
Loans, net ........................ $ 202,782 $ 163,733
========= =========
</TABLE>
<PAGE>
Home Port Bancorp, Inc. and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
The Federal Home Loan Bank has a blanket lien covering residential mortgage
loans as collateral for the Bank's borrowing from the FHLB.
A summary of the transactions in the allowance for loan losses is as follows:
<TABLE>
<CAPTION>
Six Months Ended
June 30,
-----------------------
1998 1997
-------- --------
<S> <C> <C>
Balance at beginning of period ................... $ 2,609 $ 2,365
Provisions ................................ 75 75
Recoveries ................................ 382 121
Realized losses charged to allowance ...... (13) (6)
------- -------
Balance at end of period ......................... $ 3,053 $ 2,555
======= =======
</TABLE>
Non-performing loans are summarized as follows:
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
---- ----
<S> <C> <C>
Loans accounted for on a non-accrual basis ....... $ $
--- ---
Accruing loans 90 days past due .................. 673 10
Impaired loans ................................... - -
--- ---
</TABLE>
4. Deposits (in thousands)
A summary of deposit balances, by type, is as follows:
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
-------- --------
<S> <C> <C>
Demand (non-interest bearing) .................. $ 18,331 $ 11,226
Savings:
NOW ....................................... 40,953 28,072
Regular and 90-day notice accounts ........ 16,587 15,090
Money market deposit accounts ............. 31,515 26,766
Advance payments from mortgagors .......... 233 236
-------- --------
Total savings ......................... 89,288 70,164
-------- --------
Time certificates of deposit ................... 64,461 61,046
-------- --------
Total deposits ........................ $172,080 $142,436
======== ========
</TABLE>
<PAGE>
Home Port Bancorp, Inc. and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
5. Commitments
In the normal course of business, there are outstanding commitments that are not
reflected in the balance sheet. Firm commitments to originate mortgage and
commercial loans were $11.8 million at June 30, 1998.
On June 6, 1998 the Bank entered into a lease for 1,500 square feet of
additional office space. This space was needed as a result of the growth the
Bank has experienced in recent years. The term of the lease is for five (5)
years, with the Bank having an option to renew the lease for one additional five
(5) year period. The lease provides for annual rent of $36,000 for the first
year and $37,500 for the remainder of the initial lease term.
The Company replaced the Consulting Agreement ("Agreement") with the Chairman of
the Board of Directors ("Chairman"), who also holds the titles of President and
Chief Executive Officer with a new agreement effective May 1, 1998. The terms of
the Agreement stipulate that the Chairman shall provide consulting services to
the Company in his capacity as President, Chief Executive Officer and Chairman
of the Board of Directors for a three year term commencing May 1, 1998 and
ending on April 30, 2001. The term shall automatically be extended for a
one-year period beyond the then effective expiration date on May 1 of each year
commencing on May 1, 1999 unless the Company notifies the Chairman of its
intention not to continue the Agreement. The Chairman shall receive an annual
consulting fee of $120,000, an annual reimbursement of $12,000 for office
expenses and direct reimbursement of all other reasonable business expenses.
This Agreement may be terminated by the Board of Directors at any time for
cause. Should certain events constituting a change in control occur, the Company
shall pay the Chairman a lump sum payment consisting of the aggregate amount
payable under the Agreement had he continued to provide services for the
remainder of the term of the Agreement.
6. Stock Option Plan
Effective May 1, 1998 the Company's Board of Directors adopted the Home Port
Bancorp, Inc. Directors Restricted Stock Option Plan ("Plan"). The Plan
authorizes the grant of non-qualified stock options to "Participants", who are
defined as Directors of the Company who are not employees or paid consultants.
The Plan is administered by the Company's Compensation Committee, which must
include at least two members of the Company's Board of Directors. A total of
25,000 shares of the Company's Common Stock ("Common Stock") have been reserved
for issuance under the Plan. Options are granted pursuant to a formula. The
formula provides that each incumbent member of the Company's Board of Directors
be offered a grant of options to purchase up to 5,000 shares of Common Stock,
20% of which vest upon grant, with the remainder vesting ratably over the next
four years. Options are to be granted at fair market value, calculated by
averaging the bid and ask price of the Common Stock over the twenty trading days
prior to the date of the grant. Options granted expire ten years from the date
of grant. In the event of a change of control, as defined in the Plan, all
options granted under the Plan shall immediately become fully vested.
<PAGE>
Home Port Bancorp, Inc. and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
As of June 30, 1998, options to purchase 25,000 shares of Common Stock were
outstanding, of which 5,000 shares were vested. No shares are currently
available for future grant under this Plan. Stock option plan activity is
summarized in the following table:
<TABLE>
<CAPTION>
Weighted
Shares Under Option Average
Option Prices Exercise Price
------ ------ --------------
<S> <C> <C> <C>
Balance December 31, 1997 .......... -- -- --
Granted ......................... 25,000 $26.474 $26.474
Exercised ....................... -- -- --
Cancelled ....................... -- -- --
====== ======= =======
Balance June 30, 1998 ............ 25,000 $26.474 $26.474
====== ======= =======
</TABLE>
The Financial Accounting Standards board issued Statement of Financial
Accounting Standards No. 123, Accounting for Stock-Based Compensation ("SFAS
123"). The Statement encourages companies to adopt a new accounting method based
on the estimated fair value of employee stock options and other stock awards
under which compensation cost is measured at the grant date based on the value
of the award and is recognized over the service period. The Company applies APB
Opinion No. 25 in accounting for stock options and, accordingly, no compensation
expense has been recognized in the financial statements.
7. Loss (Recovery) on "Check-Kiting"
In March 1998 the Company announced that an investigation by Nantucket Bank
management revealed an apparent "check-kiting" scheme by one of its customers,
whereby checks drawn on Nantucket Bank were timed to be covered by checks drawn
on another bank while checks drawn on that other bank were covered by checks
drawn on Nantucket Bank. The consequences of the described "check-kiting" caused
an overdraft of $518,000. A charge of $560,000, which included estimated legal
and other collection expenses, was recognized in the first quarter of 1998. On
July 3, 1998 Nantucket Bank entered into a settlement agreement with the
customer. Pursuant to the terms of this settlement agreement, the Bank received
funds of $100,000, which has been recognized as a recovery in the second quarter
of 1998. In addition, the Bank also received a second mortgage on two properties
owned by the customer and a promissory note of $447,200. Under the terms of the
promissory note the customer is required to make monthly payments beginning May
1, 1999 and continuing through October 1, 2018. Proceeds from both the
promissory note and second mortgages will be recognized on a cash basis.
<PAGE>
Home Port Bancorp, Inc. and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
8. Earnings per share
The Company has adopted the provisions of SFAS No. 128, "Earnings Per Share."
This statement establishes standards for computing and presenting earnings per
share (EPS) and applies to entities with publicly held common stock. This
statement replaces the presentation of primary EPS with a presentation of basic
EPS. It also requires dual presentation of basic and diluted EPS on the face of
the income statement for all entities with complex capital structures and
requires a reconciliation of the numerators and denominators of the basic and
diluted EPS computations. This statement also requires a restatement of all
prior-period EPS data presented. At June 30, 1998 there is no difference between
the Company's computation of basic and diluted earnings per share because the
effect of stock options issued and unexercised is anti-dilutive. At December 31,
1997 the Company did not have a complex capital structure.
<PAGE>
Home Port Bancorp, Inc. and Subsidiaries
Management's Discussion and Analysis of Financial Condition
and Results of Operations
Unaudited Interim Information for June 30, 1998
Preliminary Note in Regard to Forward-looking Statements. This quarterly report
on Form 10-QSB 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 registrant's 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 quarterly report
on Form 10-QSB or presented elsewhere by management from time to time. Defined
terms used elsewhere in this quarterly 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, fluctuating interest rates, real estate market
conditions on Nantucket, general and local economic conditions, the Bank's
continued ability to attract and retain deposits, new accounting pronouncements,
and changing regulatory requirements.
Consolidated Balance Sheet
The Company's total assets grew by $51.6 million, or 24.7% during the first six
months of 1998 to $260.5 million at June 30, 1998 from $208.8 million at
December 31, 1997. For the comparable six month period in 1997, total assets
increased by $8.8 million, or 4.6%, to $198.7 million from $189.9 million. Major
balance sheet categories are discussed in detail below.
Net loans outstanding (including loans held for sale) were $218.4 million at
June 30, 1998, an increase of $43.5 million, or 24.8%, from $174.9 million at
December 31, 1997. For the comparable period in 1997, loans increased $10.3
million to $161.6 million from $151.3 million. Loan sales totaled $13.7 million
during the first six months of 1998 as compared to $10.5 million for the
corresponding 1997 period. Mortgage loan originations totaled $80.4 million
during the 1998 period compared to $34.8 million in the comparable 1997 period.
This increase in loan originations is attributed to strong real estate sales
activity on Nantucket and an increase in refinancing activity due to lower
interest rates. The Bank's lending activities are conducted solely on Nantucket.
Total deposits increased by $29.6 million, or 20.8%, to $172.1 million at June
30, 1998 from $142.4 million at December 31, 1997. For the six months ending
June 30, 1997, deposits increased $3.9 million, or 2.9%. The increase in
deposits in 1998 is attributed to a very strong Nantucket economy and the Bank's
marketing efforts. Substantially all of the Bank's deposits are from
Nantucket-related individuals, businesses and government entities. Brokered
deposits, which decreased from $2.5 million at December 31, 1997 to $1.8 million
at June 30, 1998, constitute a minor funding source.
<PAGE>
Home Port Bancorp, Inc. and Subsidiaries
Management's Discussion and Analysis of Financial Condition
and Results of Operations
Unaudited Interim Information for June 30, 1998
Borrowed funds, consisting of Federal Home Loan Bank advances, totaled $63.8
million at June 30, 1998, an increase of $22.0 million from the December 31,
1997 total of $41.7 million. These borrowings were used to fund loan growth.
Total stockholders' equity increased by $.8 million to $22.7 million at June 30,
1998 from $21.9 million at December 31, 1997. This increase reflects net income
of $1.5 million less cash dividends declared of $.7 million.
For the quarter ended June 30, 1998, the Company reported net income of $979
thousand or $0.53 per basic and diluted share compared to net income of $820
thousand or $0.45 per basic and diluted share for the quarter ended June 30,
1997. For the six months ended June 30, 1998 net income totaled $1,464 million,
or $0.79 per basic and diluted share, compared to $1.6 million, or $0.87 per
basic and diluted share, for the comparable 1997 period.
Net income was affected by non-recurring charges, which primarily consist of the
previously announced check-kiting loss. This loss reduced first quarter net
income by approximately $350 thousand, on an after-tax basis. Second quarter net
income was increased by approximately $65 thousand, on an after-tax basis, as a
result of a partial recovery of this loss. For additional information on this
matter see Note 7 of Notes to Unaudited Consolidated Financial Statements at
June 30, 1998.
Excluding this non-recurring item, net income was $911 thousand, or $0.50 per
share for the quarter ended June 30, 1998 and $1.8 million, or $.96 per share
for the six months ended June 30, 1998. These amounts represent an increase of
11.2% and 10.2%, respectively, over the comparable 1997 periods.
Net Interest Income
Net interest and dividend income increased $320 thousand or 14.6% in the second
quarter of 1998 as compared to the same period in the prior year. For the six
months ending June 30, 1998, net interest income increased by $489 thousand, or
11.3%, as compared to the prior year. On a fully tax-equivalent basis these
increase were $313 thousand and $508 thousand, respectively for the quarter and
year-to-date periods. The increase in net interest income was due to an increase
in the average volume of loans and deposits offset by a reduction in the
interest rate spread. Additional information on average balances, interest and
yields is included in the following two tables:
<PAGE>
Home Port Bancorp, Inc. and Subsidiaries
Management's Discussion and Analysis of Financial Condition
and Results of Operations
Unaudited Interim Information for June 30, 1998
<TABLE>
<CAPTION>
(in thousands) Six Months Ended June 30, 1998 Six Months Ended June 30, 1997
------------------------------------ -----------------------------------
Average Interest Yield/ Average Interest Yield/
Balance (1) (2) Rate Balance (1) (2) Rate
------------------------------------ -----------------------------------
<S> <C> <C> <C> <C> <C> <C>
Interest earning assets:
Residential loans ............ $139,153 $ 5,282 7.59% $104,200 $ 4,284 8.22%
Commercial loans ............. 55,617 2,718 9.77% 47,990 2,442 10.18%
Consumer loans ............... 5,662 283 9.99% 5,913 292 9.89%
-------- -------- ---- -------- -------- -----
Total loans ...................... 200,432 8,283 8.26% 158,102 7,018 8.88%
Securities and FHLB Stock .... 26,395 789 5.98% 25,985 762 5.87%
-------- -------- ---- -------- -------- -----
Total interest earning assets .... 226,827 9,072 8.00% 184,087 7,780 8.45%
-------- -------- ---- -------- -------- -----
Interest bearing liabilities:
Deposits ..................... 139,569 2,565 3.70% 117,218 2,196 3.78%
Borrowed funds ............... 54,437 1,648 6.11% 40,668 1,233 6.11%
-------- -------- ---- -------- -------- -----
Total interest bearing liabilities 194,006 4,213 4.38% 157,886 3,429 4.38%
-------- -------- ---- -------- -------- -----
Net interest income $4,859 $4,351
======== ========
Interest rate spread 3.62% 4.07%
==== =====
Net interest margin 4.28% 4.73%
==== =====
</TABLE>
(1) Included in the average balance amounts are the corresponding components of
the assets held for sale, available for sale and held to maturity. The
yield is calculated using interest income divided by the average balance of
the amortized historical cost.
(2) Tax-equivalent adjustment has been included in the calculations to reflect
this income as if it had been fully taxable. The tax-equivalent adjustment
is based upon the applicable federal and state income tax rates. The FTE
adjustment included in interest income was $28 thousand in 1998 and $9
thousand in 1997.
<PAGE>
Home Port Bancorp, Inc. and Subsidiaries
Management's Discussion and Analysis of Financial Condition
and Results of Operations
Unaudited Interim Information for June 30, 1998
The effect on net interest income as a result of changes in average interest
rates and balances follows:
<TABLE>
<CAPTION>
(in thousands) Six Months Ended June 30, 1998 vs. 1997
--------------------------------------------------
Changes Due to Increase
(Decrease)
--------------------------------------------------
Average
Average Average Rate/
Total Balance (1) Rate (2) Volume (3)
------- ------- ------- -------
<S> <C> <C> <C> <C>
Interest earning assets:
Residential loans ............ $ 998 $ 1,437 $ (328) $ (111)
Commercial loans ............. 276 388 (98) (14)
Consumer loans ............... (9) (11) 3 (1)
------- ------- ------- -------
Total loans ...................... 1,265 1,814 (423) (126)
Securities and FHLB Stock .... 27 12 14 1
------- ------- ------- -------
Total interest earning assets .... 1,292 1,826 (409) (125)
------- ------- ------- -------
Interest bearing liabilities:
Deposits ..................... 369 423 (47) (7)
Borrowed funds ............... 415 421 - (6)
------- ------- ------- -------
Total interest bearing liabilities 784 844 (47) (13)
======= ======= ======= =======
Net interest income .............. $ 508 $ 982 $ (362) $ (112)
======= ======= ======= =======
</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.
Non-interest income
Non-interest income increased to $284 thousand in the second quarter of 1998
from $226 thousand in the second quarter of 1997. For the six months ended June
30, 1998 non-interest income increased to $524 thousand from $449 thousand in
the comparable 1997 period. These increases were primarily due to increases in
deposit service fees as a result of increases in deposits and merchant credit
card processing fees.
<PAGE>
Home Port Bancorp, Inc. and Subsidiaries
Management's Discussion and Analysis of Financial Condition
and Results of Operations
Unaudited Interim Information for June 30, 1998
Non-interest expense
Non-interest expense, excluding the effect of the "check-kiting" situation,
increased by $376 thousand, or 36.1%, to $1.4 million in the second quarter of
1998 from $1.0 million in the comparable 1997 period. For the six months ended
June 30, 1998 non-interest expense, excluding the "check-kiting", increased by
$500 thousand, or 24.0%, to $2.6 million from $2.1 million in 1997. A
substantial part of these increases is attributable to non-recurring tax
planning expenses incurred in 1998. These non-recurring costs amounted to $103
thousand and $170 thousand, respectively, in the in the three and six months
ended June 30, 1998 and are included in professional fees and salaries and
benefits expense. Salaries and benefits increased as a result of both increases
in staffing levels and increases in wages. The Company's efficiency ratio,
excluding the effect of the "check-kite" and non-recurring tax planning
expenses, was 45.0% for the six months ended June 30, 1998, compared to 43.7%
comparable 1997 period.
Return on Equity
Return on average equity decreased to an annualized rate of 13.23% for the six
months ended June 30, 1998 from 15.45% for the same period in 1997. This
decrease is primarily the result of the previously described check-kiting loss.
Provision for Loan Losses
The allowance for loan losses at June 30, 1998 was $3.1 million or 1.38% of
total loans compared to $2.6 million, or 1.47% of total loans, at December 31,
1997. During the six months ending June 30, 1998 the loan loss reserve increased
by $444 thousand due to recoveries of $382 thousand and a loan loss provision of
$75 thousand, offset by charge-offs of $13 thousand. The Bank believes its
current level of loan loss reserves to be adequate. Any unforeseen future
economic problems, however, could lead to the Bank experiencing additional
delinquencies that may require additional provisions for loan losses.
Non-performing Loans and Other Real Estate Owned
The Bank's non-performing loans totaled $673 thousand at June 30, 1998, all
which were accruing loans with payments past due ninety or more days.
Non-performing loans at December 31, 1997 totaled $10 thousand of past due
accruing loans. None of these loans were to affiliated persons. At both June 30,
1998 and December 31, 1997 the Bank had no other real estate owned. The Bank had
no loans which were considered "impaired" within the meaning of Statement of
Financial Accounting Standards ("SFAS") No. 114 and 118 at either June 30, 1998
or December 31, 1997.
At June 30, 1998 management has identified $901 thousand of 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. The Bank believes that
its allowance for loan losses is adequate to absorb any losses that may result
from these loans.
<PAGE>
Home Port Bancorp, Inc. and Subsidiaries
Management's Discussion and Analysis of Financial Condition
and Results of Operations
Unaudited Interim Information for June 30, 1998
Income Taxes
The Company's effective income tax rate for the quarter ended June 30, 1998 was
32.4% compared to 39.1% for the quarter ended June 30, 1997. For the six months
ended June 30, 1998 the effective tax rate was 34.6% compared to 39.2% in the
comparable 1997 period. The lower effective tax rate in 1998 is reflective of
the proportion of income earned by certain non-bank subsidiaries that is taxed,
for state tax purposes, at lower rates. In 1998 more income was generated
through non-bank subsidiaries as compared to 1997.
Liquidity and Capital Resources
Substantially all of the Company's funds are generated through its banking
subsidiary, Nantucket Bank. The Bank's sources are customer deposits,
amortization and payoffs of loans, advances from the Federal Home Loan Bank of
Boston, sale of loans in the secondary market, maturities and sales of
securities and positive cash flows generated from operations. As a member of the
Depositors' Insurance Fund, the Bank also has a right to borrow from the
Depositors Insurance Fund 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
daily needs.
The Bank believes its capital resources, including deposits, scheduled loan
repayments, revenue generated from the sales of loans and securities, unused
borrowing capacity at the Federal Home Loan Bank of Boston, and revenue from
other sources will be adequate to meet its funding commitments.
At June 30, 1998 and December 31, 1997 the Company's and the Bank's capital
ratios were in excess of regulatory requirements.
Year 2000 Update
The Company has completed its assessment of Year 2000 issues and developed a
plan, budget and testing strategy for mission-critical systems.
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 continually
evaluating mission-critical vendor plans and monitoring project milestones. The
Bank plans to begin testing its key transaction processing system in the third
quarter of 1998 and to complete testing on most other applications not later
than December 31, 1998. Currently, there is one vendor for which testing will
not commence until the first quarter of 1999. There can be no guarantee that the
systems of other companies, or third party vendors on which the Company's
systems rely, will be remedied on a timely basis. Therefore, the Company could
possibly be negatively impacted to the extent other entities not affiliated with
the Company are unsuccessful in properly addressing their respective Year 2000
compliance responsibilities. 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.
<PAGE>
Home Port Bancorp, Inc. and Subsidiaries
Management's Discussion and Analysis of Financial Condition
and Results of Operations
Unaudited Interim Information for June 30, 1998
The Company will continue to utilize both internal and external resources to
update, or replace, develop and test all software information systems for Year
2000 modifications. Included in other non-interest expenses for the six-month
period ending June 30, 1998 are charges totaling $30,000, consisting of
personnel costs, consulting fees and depreciation on computer hardware, incurred
in order for the Company's computer systems to properly function properly in the
year 2000. The total remaining cost of the Year 2000 project is estimated at
$60,000; however, it is not anticipated that material incremental costs will be
incurred in any single period. The Company expects that the majority of the
costs yet to be incurred will be to replace or update existing hardware and
software, which will be capitalized and amortized in accordance with the
Company's existing accounting policy. In most instances, upgrades to computer
hardware and software are being made to improve the capacity and performance of
the systems as well as to achieve Year 2000 compliance. Maintenance and
modification costs will be expensed as incurred.
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.
The Bank has also assessed the impact of the Year 2000 issue on its major
borrowing customers. Borrowers that could experience a significant disruption in
their business due to a Year 2000 failure have been identified. Management is in
the process of obtaining specific information as to the readiness of these
borrowers for Year 2000. Management will complete this assessment process by
September 30, 1998.
Home Port Bancorp, Inc. and Subsidiaries
Quantitative and Qualitative Disclosures about Market Risk
The response is incorporated herein by reference from the discussion under the
sub-caption "Asset/Liability Management and Market Risk" of the caption
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" on pages 5-7 of the Company's 1997 Annual Report.
There has not been a significant change in market risk since the fiscal year
ended December 31, 1997.
<PAGE>
Home Port Bancorp, Inc. and Subsidiaries
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The Company and its subsidiaries are not involved in any
pending legal proceedings other than those involved in the
ordinary course of their businesses. Management believes that
the resolution of these matters will not materially affect
their businesses or the consolidated financial condition of
the Company and its subsidiary.
Item 2. Changes in Securities.
Not applicable.
Item 3. Defaults Upon Senior Securities.
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
a. The annual meeting of shareholders was held on May 15,
1998.
b. Set forth below is a brief description of each matter voted
upon at the meeting, including the number of votes cast for,
against, or withheld, as well as the number abstentions and
including a separate tabulation with respect to each nominee
fort office:
(i) Election of directors:
Charles Jones: 1,736,235 votes for, 7,200 votes withheld.
Daniel D. McCarthy: 1,735,859 votes for, 7,576 votes withheld.
Robert McKay: 1,736,235 votes for, 7,200 votes withheld.
(ii) Ratification of KPMG Peat Marwick LLP as independent
auditors for fiscal year 1998: 1,715,484 votes for, 25,201
votes against, 2,750 abstentions
Item 5. Other Information.
A cash dividend of $.20 per common share was declared on April
29, 1998. The dividend was paid on May 28, 1998 to
shareholders of record as of May 14, 1998.
Declaration of dividends by the Board of Directors depends on
a number of factors, including capital requirements,
regulatory limitations, the Company's operating results and
financial condition and general economic conditions.
Item 6. Exhibits and Reports on Form 8-K.
a. Exhibits -
10.1.5 - Consulting Agreement between Home Port Bancorp,
Inc. and Karl L. Meyer dated May 1, 1998.
10.1.6 - Home Port Directors Restricted Stock Option
Plan dated May 1, 1998.
b. Reports on Form 8-K - No reports on Form 8-K were
filed during the quarter ended June 30, 1998.
<PAGE>
Home Port Bancorp, Inc. and Subsidiaries
Signatures
In accordance with the requirements of the Securities Exchange Act, the
Registrant caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
Home Port Bancorp, Inc.
-----------------------
(Registrant)
Date: August 11, 1998 By: /s/ William P. Hourihan, Jr.
----------------------------
William P. Hourihan, Vice President
Date: August 11, 1998 By: /s/ John M. Sweeney
-------------------
John M. Sweeney, Treasurer
(chief financial & accounting officer)
CONSULTING AGREEMENT
This CONSULTING AGREEMENT dated as of May 1, 1998 by and between HOME PORT
BANCORP, INC., a Delaware corporation with principal offices at 104 Pleasant
Street, Nantucket, Massachusetts 02554 (the "Company") and KARL L. MEYER an
individual having an office at 60 Arch Street, Greenwich, Connecticut 06830
("Consultant").
WHEREAS, Consultant has heretofore provided services to the Company as
President, Chief Executive Officer and Chairman of the Board of Directors; and
WHEREAS, commencing in the year 1992 when Consultant initiated his term as
President and Chief Executive Officer and Chairman of the Company has in each
year achieved substantial growth and a return on equity that has averaged more
than fifteen (15) percent per year, and
WHEREAS, the Company wishes to continue to retain the services of
Consultant upon the terms, conditions and provisions of this Agreement; and
WHEREAS, Consultant desires to continue to provide services to the Company
in accordance with the terms, conditions and provisions of this Agreement;
NOW, THEREFORE, in consideration of the mutual covenants set forth herein,
and other good and valuable consideration, the receipt of which is hereby
acknowledged, the Company and Consultant hereby agree as follows:
1. Chairman, President and Chief Executive Officer. Consultant hereby
agrees to provide consulting services to the Company in the capacity of
President, Chief Executive Officer and Chairman of the Board of Directors. The
services to be performed by Consultant hereunder shall be substantially similar
in substance and manner of performance as performed by Consultant as Chairman of
the Board and President of Home Port during the three years preceding the date
of this Agreement. Nothing herein shall prohibit Consultant from engaging in
other business activities provided that such activities do not materially
interfere with the discharge of his duties hereunder.
2. Term. The initial term of employment under this Agreement shall be for
the three year period commencing May 1, 1998, and ending on April 30, 2001. The
initial term shall automatically be extended for a one-year period beyond the
then effective expiration date on May 1 of each year ("Annual Anniversary Date")
commencing on May 1, 1999 unless the Company shall give written notice to
Consultant more than ninety (90) days prior to an Annual Anniversary Date of its
intention not to continue this Agreement. Any such written notice shall not
effect any prior extensions of the term hereunder.
<PAGE>
3. Compensation. Consultant shall receive a consulting fee of $120,000 per
annum, payable no less often than monthly, in arrears.
4. Expenses. The Company shall reimburse the Consultant for expenses
incurred in the performance of his duties hereunder, including:
(a) office expenses of $1,000 per month to be paid monthly, in advance,
on the first day of each month; and
(b) all other reasonable business expenses within twenty (20) days of
receipt by the Company from Consultant of appropriate itemization of such
expenses.
5. Termination
(a) Termination for Cause. The Company, by majority vote of the Board
of Directors (excluding Consultant), may terminate Consultant's services
hereunder at any time for Cause, upon written notice specifying the reasons.
Consultant shall not be entitled to compensation additional to that due up to
the effective date of such termination. As used herein, the term "Cause" shall
mean:
(i) the commission by Consultant of any act of embezzlement, fraud,
larceny, theft, or other willful misconduct or gross negligence
in connection with the performance of Consultant's duties, which
adversely affects the affairs of the Company; or
(ii) Consultant's conviction of a felony, or conviction of a
misdemeanor involving moral turpitude; or
(iii) a material breach of the terms of this Agreement which continues
for fifteen (15) days after the Company has given written notice
to Consultant specifying in reasonable detail the material
breach.
(b) Resignation. Consultant may at any time during the term of this
Agreement, including any automatic renewal hereof, resign, effective thirty (30)
days after providing written notice to the Company of his intention to resign.
Excepting only the resignation of Consultant following a Change of Control as
specified under Section 5 (e), Consultant shall not be entitled to any
compensation additional to that due up to the effective date of such
resignation. Consultant agrees to continue to perform his duties hereunder, and
otherwise assist the Company in an orderly transition, during such thirty (30)
day period.
(c) Death or Disability. This Agreement shall terminate upon the death
of Consultant. The Company may terminate Consultant's services hereunder at such
time during the term of this Agreement Consultant shall become disabled and is
unable to perform services hereunder, with reasonable accommodation, for a
continuous period of six (6) months. The determination of Consultant's
disability for purposes of this Section 5(c)
<PAGE>
shall be made by a qualified physician acceptable to both parties.
(d) Additional Compensation. In the event of termination of this
Agreement due to the death or disability of Consultant, as provided in Section
5(c) above, the Company, within (60) days of such termination shall pay to
Consultant or Consultant's legal representative in a lump sum, an amount equal
to twelve (12) months compensation at the monthly rate of compensation in effect
at the time of such termination plus reimbursement for expenses incurred by
Consultant through the date of such termination.
(e) Change in Control. In the event that Consultant elects to resign
within two years of a Change in Control, the Company shall pay Consultant a lump
sum payment consisting of the aggregate amount payable to Consultant had he
continued to provide services under this Agreement for the remainder of the term
and at the rate of compensation in effect on the date of his resignation under
this Section 5(e). A "Change in Control" shall have occurred upon the occurrence
of any of the following events:
(i) failure, at any annual or special meeting of the Company's
shareholders following an "election contest" subject to Rule
14a-11 (as promulgated under the Securities Exchange Act of
1934), of any of the persons nominated by the Company to win
election to the Board; or
(ii) consummation of a "tender offer" (within the meaning of Rule
14d-2 as promulgated under the Securities Exchange Act of 1934)
for stock of the Company; or
(iii) the Company or any subsidiary thereof is merged or consolidated
or reorganized into or with another corporation or other legal
person, and as a result of such merger, consolidation or
reorganization, less than a majority of the combined voting power
of the then-outstanding securities of such surviving, resulting
or reorganized corporation or person immediately after such
transaction, is held in the aggregate by the holders of
securities entitled to vote generally in the election of
directors of the Company immediately prior to such transaction;
or
(iv) the acquisition by any "person" (as such term is used in sections
13(d) and 14(d) of the Securities Exchange Act of 1934), other
than the Company, directly or indirectly, of "beneficial
ownership" (as such term is defined in Rule 13d-3 as promulgated
under the Securities Exchange Act of 1934) or the right which,
through the passage of time, would permit the holder to acquire
"beneficial ownership" of securities representing 20% or more of
the total number of votes that may be cast for the election of
directors of the Company.
<PAGE>
(v) the failure of the shareholders of the Company to elect Consultant
as a member of its board of directors or the failure of the Company's
board of directors to nominate and appoint Consultant as Chairman of
the Board of Directors, President, and Chief Executive Officer of the
Company excepting only if such failure is due to the refusal by
Consultant to serve as a member of the Board of Directors of the
Company or as Chairman of the Board or President.
6. Independent Contractor. Consultant acknowledges that, for all
purposes, he will be acting as an independent contractor and not as an employee.
7. Board of Directors. The Company shall use its best efforts to elect
Consultant to the Board of Directors during the term hereof. The Board of
Directors of the Company has reviewed and approved the terms of this Agreement.
8. Assignment. This Agreement and the rights and obligations of the
parties hereto shall bind and inure to the benefit of their respective heirs,
successors and representatives, and shall also bind and inure to the benefit of
any successor of the Company by reorganization, merger or consolidation, or any
assignee of a majority or more of the business of the Company.
9. Costs of Enforcement. In the event any dispute shall arise between
the Employee and the Corporation as to the terms or interpretation of this
Agreement, including this Paragraph 9, whether instituted by formal legal
proceedings or otherwise, including any action taken by Employee to enforce the
terms of this Paragraph 9 or in defending against any action taken by the
Corporation, the Corporation shall reimburse Employee for all costs and
expenses, including reasonable attorneys' fees, arising from such dispute,
proceedings or actions, notwithstanding the ultimate outcome therof, except if
it is finally adjudicated that Consultant willfully and materially breached the
terms hereof, in which case Consultant shall repay the Company any amounts so
advanced. Such reimbursement shall be paid within ten (10) days of Employee
furnishing to the Corporation written evidence, which may be in the form, among
other things, of a cancelled check or receipt, of any costs or expenses incurred
by Employee. Any such request for reimbursement by Employee shall be made no
more frequently than at thirty (30) day intervals.
10. Notices. Any notice required or permitted to be given hereunder
shall be by certified mail, return requested, and effective when received. It
shall be sufficient if said notice is personally delivered or sent by telefax to
the recipient at the address set forth in this Agreement or at such other
address as a party may be notice specify to the other.
11. Modification and Amendments. This Agreement, and any extensions
hereof may be modified or amended only by a writing signed by the parties
hereto.
12. Entire Agreement. This Agreement constitutes the entire agreement
between the parties and incorporates all prior understandings, oral or written.
13. Waivers. No waiver of any provision or entitlement contained in
this Agreemenet shall be effective unless in writing signed by the parties
hereto. A waiver by either party of any particular provision of this Agreement
shall not constitute a waiver of any other provision.
14. Governing Law. This Agreement shall be construed under the laws of
the Commonwealth of Massachusetts.
15. Counterparts. This Agreement may be executed in several
counterparts, each of which shall be deemed to be an original, but all of which
shall be deemed to be one and the same instrument.
IN WITNESS WHEREOF, the parties hereteo have executed this Agreement as
a sealed instrument as of the day and year first above written.
HOME PORT BANCORP, INC.;
By: /s/ Charles F. DiGiovanna
-------------------------
Name: Charles F. DiGiovanna
Title: Chairman Compensation Committee
CONSULTANT
/s/ Karl L. Meyer
-----------------
Karl L. Meyer
HOME PORT BANCORP, INC.
DIRECTORS RESTRICTED STOCK OPTION PLAN
Section 1. Purposes of the Plan.
The purposes of this Restricted Stock Option Plan (the "Plan") are to:
(i) assist Home Port Bancorp, Inc. (the "Home Port") in its efforts to attract
and retain directors who are not employees or paid consultants under a written
consulting agreement of Home Port or its affiliates ("Participants") with the
experience and ability necessary to provide value to Home Port as members of the
Board of Directors, and (ii) associate more closely the interests of the
Participants with those of Home Port's stockholders.
Capitalized terms used herein not otherwise defined shall have the
meanings acribed thereto in Section 7, below.
Section 2. Shares of Stock Subject to the Plan.
The number of shares of Common Stock that may be the subject of awards
under this Plan shall not exceed an aggregate of 25,000. Shares to be delivered
under this Plan may be either authorized but unissued shares of Common Stock or
treasury shares. Any shares subject to a Stock Option hereunder which for any
reason terminate, are canceled or otherwise expire unexercised, and any shares
reacquired by Home Port due to: (i) restrictions imposed on the shares; (ii)
payment made hereunder in stock of equivalent value rather than in cash; and/or
(ii) any other reason, shall at such time, no longer be included in calculating
the aggregate number of shares which have been the subject of Stock Options
issued hereunder, and such number of shares then eligible for awards under this
Plan does not exceed 25,000, and second, that the number of shares then eligible
for further awards shall not be increased in any way that would cause this Plan
or any Stock Option to fail to comply with Section 16 of the Securities Exchange
Act of 1934, as amended (the "1934 Act").
Section 3. Administration.
(a) The Committee. This Plan shall be administered by the Compensation
Committee designated by the Board of Directors of Home Port (the "Committee"). A
majority of the Committee shall constitute a quorum and the acts of a majority
of the members present at any meeting at which a quorum is present shall be
deemed the action of the Committee.
<PAGE>
No person shall be eligible to be a member of the Committee if that
person's membership would prevent the Plan from complying with Section 16 of the
1934 Act. The Committee shall consist of at least two members of the Board of
Directors, and,if grants of options hereunder are made outside of the Formula
(defined in subparagraph (b) of this Section 3), no member of the Committee
(while a member thereof) shall be eligible to participate in the Plan, nor may
any person be appointed to the Committee unless he or she was not eligible to
participate in this Plan or any other plan of Home Port at any time within the
one-year period immediately prior to such appointment as provided in Rule 16b-3
promulgated under the 1934 Act.
(b) Formula for Awards. Each incumbent member of Home Port Board of
Directors who is a Participant shall be offered a grant of options to purchase
up to 5,000 shares of Common Stock, 20% of which shall vest upon grant, and 20%
of which shall vest upon each of the first, second, third and fourth
anniversaries of the grant therof, at an exercise price equal to the average of
the bid and asked prices of the Common Stock for the twenty days of trading
immediately preceding the date of such grant. In the event of and immediately
upon the occurrence of a Change of Control of Home Port, all options granted
under the Plan shall become fully vested.
(c) Authority and Discretion of the Committee. Subject to the express
provisions of this Plan and provided that all actions shall be consistent with
the purposes of this Plan, the Committee shall: (i) establish the terms and
conditions upon which Stock Options may be exercised and/or transferred,
including the exercise of Stock Options in connection with other awards made; or
compensation paid, to each Participant; (ii) make or alter any restrictions and
conditions upon Stock Options and the Stock received upon exercise thereof,
including, but not limited to, providing for limitations on each Participant's
right to retain any Common Stock owned by each Participants upon termination of
his or her role as a director of Home Port; (iii) determine whether any
conditions related to the exercise of Stock Options have been met; and (iv)
adopt such other rules and regulations, and establish, define and/or interpret
such rules and regulations as well as any other terms and conditions, and make
all determinations (which may bo on a case-by-case basis) the Committee deems
necessary or desirable for the administration of this Plan.
Section 4. Terms of Stock Options.
(a) Agreements. Every grant of a Stock Option shall be evidenced by a
written agreement between Home Port and the Participant awarded the Stock
Option. This agreement shall be in such form, and contain such terms and
conditions (not inconsistent with this Plan) as the Committee may determine. The
agreement shall include the following (or similar) statement. "This stock option
is not intended to be an Incentive Stock Option, as that term is described in
Section 422 of the Internal Revenue Code of 1986, as amended."
(b) Term. Stock Options shall be for such periods as may be determined
by the Committee. In no event may a Stock Option be exercisable (notwithstanding
provisions, if any, for exercise in installments) subsequent to ten years after
the date of teh grant.
<PAGE>
(c) Purchase Price. The purchase price of shares purchased pursuant to
the exercise of any Stock Option shall be paid by the Participant or other
person permitted to exercise the Stock Option in full upon exercise.
(d) Restrictions. At the discretion of the Committee, the Common Stock
issued pursuant to the Stock Options granted hereunder may be subject to
restrictions on vesting or transferability.
(e) Withholding of Taxes. Pursuant to applicable federal, state, local
or foreign laws, Home Port may be required to collect income or other taxes upon
the grant of a Stock Option to, or the exercise of a Stock Option by, a holder.
Home Port may require, as a condition to the exercise of a Stock Option, or
demand, at such other time as it may consider appropriate, that the Participant
pay Home Port the amount of any taxes which Home Port may determine is required
to be withheld or collected, and the Participant shall comply with such
requirement or demand. Home Port shall have the discretion to withhold shares to
be received upon exercise of a Stock Option in lieu of collecting payment for
taxes.
(f) Securities Law Compliance. Upon exercise (or partial exercise) of a
Stock Option, the Participant or other holder of the Stock Option shall make
such representations and furnish such information as may, in the opinion of
counsel for Home Port, be appropriate to permit Home Port to issue or transfer
Stock in compliance with the provisions of applicable federal or state
securiteis laws. Home Port, in its discretion, may postpone the issuance and
delivery of shares upon any exercise of a Stock Option until completion of
registration or other qualification of such shares under any federal or state
laws, or stock exchange listing, as Home Port may consider appropriate. Home
Port is not obligated to register or qualify the shares of Common Stock to be
issued upon exercise of a Stock Option under federal or state securities laws
(or to register or qualify them at any time thereafter), and it may refuse to
issue such shares if, in its sole discretion, registration is required and
obtaining an exemption from registration is not practical or available. Home
Port may require that prior to the issuance or transfer of Stock upon exercise
of a Stock Option, the Participant enter into a written agreement to comply with
any restrictions on subsequent disposition that Home Port deems necessary or
advisable under any applicable federal and state securities laws. Certificates
of Common Stock issued hereunder may bear a legend reflecting such restrictions.
(g) Right to Stock Option. Neither this Plan nor any aciton taken
hereunder shall be construed as giving any person any right to be retained in
the employ of Home Port. Nothing contained hereunder shall be construed as
giving any parent, subsidiary, or other affiliate, shall be laible for any act,
omission, interpretation, construction or determination made in good faith in
connection with their responsibilitiess with respect to this Plan, and Home Port
hereby agrees to indemnify the
<PAGE>
members of the Board of Directors, the members of the Committee, and
the employees of Home Port and subsidiaries in respect of any claim, loss,
damage, or expense (including reasonable counsel fees) arising from any such
act, ommission, interpretation, construction or determination to the full extent
permitted by law.
Section 5. Amendment and Termination; Adjustments Upon Changes in Stock.
The Board of Directors of Home Port may at any time, and from time to
time, amend, suspend or terminate this Plan in whole or in part; provided,
however, that neither the Board of Directors nor the Committee may amend or
modify the definition of Participants, materially increase the benefits accruing
to Participants, increase the number of shares of Common Stock reserved for
purposes of this Plan, extend the term of this Plan, materially modify the
requirements to be a Partipant in this Plan, or otherwise modify this Plan in
any way or manner requiring the approval of the Stockholders under the Internal
Revenue Code of 1986, or rules and regulations thereunder, under Section 16 of
the 1934 Act, or rules and regulations thereunder, or applicable rules of the
stock exchange or automated system upon which Home Port's securities are traded
(an "Exchange Rule"), without Stockholder Approval, and compliance with any
applicable law, rules, or regulations. Except as provided herein, no amendment,
suspension or termination of this Plan may affect the rights of a Participant to
whom a Stock Option has been granted, without such Participant's consent. If
there shall be any change of the Common Stock or any Stock Option granted under
this Plan resulting from a merger, consolidation, reorganization,
recapitalization, stock dividend, stock split or other change of the corporate
structure of Home Port, appropriate adjustments may be made by the Committee (or
if Home Port is not the surviving corporation in any such transaction, the Board
of Directors of the surviving corporation, or its designee) of the aggregate
number and kind of shares subject to this Plan, and the number and kind of
shares and the price per share subject to outstanding options. In connection
with the foregoing, the Committee (or, as provided in this Section 5, the Board
of Directors of the surviving corporation or its designee) may issue new Stock
Options in exchange for outstanding Stock Options.
Section 6. Effective Date and Term of the Plan.
The effective date of this Plan shall be deemed to be May 1, 1998 (the
"Effective Date") and awards under this Plan may be made for a period of ten
years commencing on the Effective Date. The period during which a Stock Option
may be exercised may extend beyond that time as provided herein.
<PAGE>
Section 7. Definitions.
"Change of Control" shall mean the occurrence of any of the following
events:
(i) failure, at any annual or special meeting of Home Port's
shareholders following an "election contest" subject to Rule 14a-11 (as
promulgated under the Securities Exchange Act of 1934), of any of the persons
nominated by Home Port to win election to the Board of Directors; or
(ii) consummation of a "tender offer" (within the meaning of Rule 14d-2
as promulgated under the Securities Exchange Act of 1934) for stock of Home
Port; or
(iii) Home Port or any subsidiary thereof is merged or consolidated or
reorganized into or with another corporation or other legal person, and as a
result of such merger, consolidation or reorganization, less than a majority of
the combined voting power of the then-oustanding securities of such surviving,
resulting or reorganized corporation or persom immediately after such
transaction, is held in the aggregate by the holders of securities entitled to
vote generally in the election of directors of Home Port immediately prior to
such transaction; or
(iv) the acquisition by any "person" (as such term is used in sections
13(d) and 14(d) of the Securities Exchange Act of 1934), other than Home Port,
directly or indirectly, of "beneficial ownership" (as such term is defined in
Ruel 13d-3 as promulgated under the Securities Exchange Act of 1934) or the
right which, through the passage of time, would permit the holder to acquire
"beneficial ownership" of securities representing 20% or more of the total
number of votes that may be cast for the election of directors of Home Port.
"Common Stock" is the $.01 par value Common Stock of Home Port.
"Section 16 of the 1934 Act" means Section 16 of the Securities
Exchange Act of 1934, as amended, or any similar or successor statute, and any
rules, regulations, or policies adopted or applied thereunder.
"Stock Options" are rights granted pursuant to this Plan to purchase
shares of Common Stock at a fixed price.
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