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 September 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
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(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
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(Issuer's telephone number, including area code)
Not applicable.
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(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 September 30, 1998 and December
31, 1997.
Consolidated Statements of Earnings for the three months and nine
months ended September 30, 1998 and 1997.
Consolidated Statements of Changes in Stockholders' Equity for
the nine months ended September 30, 1998
Consolidated Statements of Cash Flows for the nine months ended
September 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) September 30, December 31,
1998 1997
(unaudited)
--------- ---------
<S> <C> <C>
Assets
Cash and due from banks .................................................. $ 4,708 $ 5,065
Interest bearing deposits in banks ....................................... 1,961 41
Federal funds sold ....................................................... 9,540 --
--------- ---------
Total cash and cash equivalents ....................................... 16,209 5,106
Securities held to maturity (market value $16,473 and $16,655) ........... 16,282 16,661
Securities available for sale (amortized cost of $7,868 and $6,218) ...... 7,979 6,231
Loans, net of allowance for loan losses of $3,099 and $2,609 (note 3) .... 199,537 163,733
Loans held for sale ...................................................... 16,654 11,169
Stock in FHLB-Boston, at cost ............................................ 3,276 2,442
Land, buildings and equipment, net ....................................... 1,614 1,451
Accrued income receivable ................................................ 1,223 1,040
Net deferred tax asset ................................................... 111 111
Prepaid expenses and other assets ........................................ 945 871
--------- ---------
Total assets .......................................................... $ 263,830 $ 208,815
========= =========
Liabilities and Stockholders' Equity
Liabilities:
Deposits (Note 4) ........................................................ $ 199,977 $ 142,436
Borrowed funds ........................................................... 37,430 41,742
Accrued expenses ......................................................... 2,561 1,384
Other liabilities ........................................................ 449 1,305
--------- ---------
Total liabilities ..................................................... 240,417 186,867
--------- ---------
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 ........................................................ 10,248 8,841
Accumulated other comprehensive income, net:
Unrealized gain on securities available for sale, net of taxes (note 2) 66 8
Less: Treasury stock, at cost (483,604 shares) ........................... (4,397) (4,397)
--------- ---------
Total stockholders' equity ............................................ 23,413 21,948
--------- ---------
Total liabilities and stockholders' equity ............................ $ 263,830 $ 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 Nine Month Ended
September 30, September 30,
-------------------- -------------------
1998 1997 1998 1997
------- ------- ------- -------
<S> <C> <C> <C> <C>
Interest income:
Interest on loans ................................... $ 4,580 $ 3,641 $12,863 $10,660
Interest on securities .............................. 312 312 969 968
Dividends ........................................... 52 42 144 119
Federal funds sold and interest bearing deposits .... 61 20 72 36
------- ------- ------- -------
Total interest income ............................ 5,005 4,015 14,048 11,783
------- ------- ------- -------
Interest expense:
Interest on deposits ................................ 1,437 1,164 4,000 3,356
Interest on borrowed funds .......................... 711 603 2,360 1,836
------- ------- ------- -------
Total interest expense ........................... 2,148 1,767 6,360 5,192
------- ------- ------- -------
Net interest income .................................... 2,857 2,248 7,688 6,591
Provision for loan losses .............................. 38 38 113 113
------- ------- ------- -------
Net interest income after provision for loan losses 2,819 2,210 7,575 6,478
Non interest income:
Deposit servicing fees .............................. 119 115 340 313
Loan servicing fees ................................. 58 64 174 195
Other fees and income ............................... 78 81 229 168
Net gain from sale of mortgage loans ................ 63 12 104 53
Net loss from securities ............................ -- -- (5) (9)
------- ------- ------- -------
Total non interest income ........................ 318 272 842 720
------- ------- ------- -------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Home Port Bancorp, Inc.
Consolidated Statements of Earnings (Unaudited)
(continued)
(In Thousands, Except Per Share Data) Three Month Ended Nine Month Ended
September 30, September 30,
-------------------- -------------------
1998 1997 1998 1997
------- ------- ------- -------
<S> <C> <C> <C> <C>
Non interest expense:
Salaries and employee benefits ...................... 821 667 2,198 1,897
Building and equipment expenses ..................... 163 130 461 369
Deposit insurance fees .............................. 13 11 41 32
Professional fees ................................... 160 50 450 169
Loss on "check-kiting", net of recovery (Note 7) ... -- -- 460 --
Other ............................................... 370 271 958 742
------- ------- ------- -------
Total non interest expense ....................... 1,527 1,129 4,568 3,209
------- ------- ------- -------
Income before income taxes ............................. 1,610 1,353 3,849 3,989
Provision for income taxes ............................. 562 531 1,337 1,565
======= ======= ======= =======
Net Income ............................................. $ 1,048 $ 822 $ 2,512 $ 2,424
======= ======= ======= =======
Earnings per common share - basic ...................... $ 0.57 $ 0.45 $ 1.36 $ 1.32
======= ======= ======= =======
Earnings per common share - diluted .................... $ 0.57 $ 0.45 $ 1.36 $ 1.32
======= ======= ======= =======
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)
Accumulate
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 ..................... -- -- 2,512 -- -- 2,512
Other comprehensive income, net
Change in unrealized gain
on securities available for sale -- -- -- -- 58 58
--------
Comprehensive income ...... 2,570
Cash dividends paid at
$.60 per share ............. -- -- (1,105) -- -- (1,105)
Balance at September 30, 1998 .. $ 23 $ 17,473 $ 10,248 $ (4,397) $ 66 $ 23,413
======== ======== ======== ======== ======== ========
</TABLE>
See accompanying notes to unaudited consolidated financial statements
<PAGE>
<TABLE>
<CAPTION>
Home Port Bancorp, Inc.
Consolidated Statements of Cash Flows (Unaudited)
(In Thousands) Nine Months Ended
September 30,
----------------------
1998 1997
-------- --------
<S> <C> <C>
Net cash flows from operating activities:
Net income ....................................................... $ 2,512 $ 2,424
Adjustments to reconcile net income to net cash (used in) provided
by operating activities:
Provision for loan losses .................................... 113 113
Depreciation of building and equipment ....................... 218 180
Net gain on sale of mortgage loans ........................... (104) (53)
Net loss on securities ....................................... 5 9
Net amortization of securities premiums ...................... 23 62
Amortization of deferred loan origination fees ............... (172) (172)
Amortization of deferred premiums on loans sold .............. 24 4
Net increase in accrued income receivable .................... (183) (19)
Net increase (decrease) in accrued expenses .................. 1,177 74
Net (increase) decrease in loans held for sale ............... (5,405) (1,963)
Net increase in prepaid expenses and other assets ............ (74) (38)
Net decrease in other liabilities ............................ (856) (681)
Net (increase) decrease in deferred income taxes ............. (40) (19)
-------- --------
Net cash (used in) provided by operating activities .................. (2,762) (79)
-------- --------
Cash flows from investing activities
Purchases of securities held to maturity ......................... (6,446) (4,998)
Purchases of securities available for sale ....................... (5,325) (2,984)
Proceeds from sales of securities available for sale ............. 950 1,239
Proceeds from maturities/calls of securities ..................... 7,930 6,242
Principal payments on mortgage-backed securities ................. 1,591 907
Net increase in loans ............................................ (35,745) (13,879)
Purchases of land, buildings and equipment ....................... (381) (190)
Proceeds from the sales of other real estate owned ............... -- 61
Purchase of Federal Home Loan Bank stock ......................... (834) (121)
-------- --------
Net cash used in investing activities ................................ (38,260) (13,723)
-------- --------
Cash flows from financing activities:
Net increase (decrease) in deposits .............................. 57,541 7,805
Federal Home Bank advances ....................................... 13,000 16,500
Federal Home Loan Bank repayments ................................ (7,795) (12,605)
Net increase in short term borrowings ............................ (9,516) (1,359)
Cash dividends paid .............................................. (1,105) (1,106)
-------- --------
Net cash provided by financing activities ............................ 52,125 9,235
-------- --------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Home Port Bancorp, Inc.
Consolidated Statements of Cash Flows (Unaudited)
(continued)
(In Thousands) Nine Months Ended
September 30,
----------------------
1998 1997
-------- --------
<S> <C> <C>
Net increase (decrease) in cash and cash equivalents ................ 11,103 (4,567)
Cash and cash equivalents at beginning of period ..................... 5,106 9,819
-------- --------
Cash and cash equivalents at end of period ........................... $ 16,209 $ 5,252
======== ========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest ..................................................... $ 6,370 $ 5,170
Income taxes ................................................. 505 1,610
</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 nine months ended September 30, 1998.
<TABLE>
<CAPTION>
Nine Months Year
Ended Ended
Sept. 30, December 31,
1998 1997
------ ------
<S> <C> <C>
Net Income ........................................ $2,512 $3,297
Other comprehensive income, net of tax
Unrealized gains on securities:
Unrealized holding gains arising during the period 51 13
Add: reclassification adjustment for losses
included in net income, net of tax ......... 7 8
------ ------
Net ............................................... 58 21
------ ------
Comprehensive Income .............................. $2,570 $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 an entity to 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>
September 30, December 31,
1998 1997
--------- ----------
<S> <C> <C>
Mortgage loans:
Residential
Fixed ........................ $ 22,690 $ 22,345
Adjustable ................... 89,050 71,992
Residential construction .......... 52,891 21,827
Commercial ........................ 40,135 36,188
Commercial construction ........... 8,277 4,535
--------- ---------
Total principal balances ... 213,043 156,887
Less:
Due borrowers on uncompleted loans
Residential .................. (23,604) (4,719)
Commercial .................. (2,551) (1,845)
Deferred loan origination fees .... (666) (474)
--------- ---------
Total mortgage loans ......... 186,222 149,849
Other loans:
Commercial business ............... 10,585 10,425
Second mortgage .................. 1,848 1,712
Home equity ...................... 1,560 1,975
Passbook and stock secured ....... 677 817
Consumer ......................... 1,744 1,564
--------- ---------
Total other loans ........... 16,414 16,493
Less: Allowance for loan losses ........ (3,099) (2,609)
========= =========
Loans, net .................. $ 199,537 $ 163,733
========= =========
</TABLE>
The Federal Home Loan Bank has a blanket lien covering residential mortgage
loans as collateral for the Bank's borrowing from the FHLB.
<PAGE>
Home Port Bancorp, Inc. and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
A summary of the transactions in the allowance for loan losses is as follows:
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
-----------------------
1998 1997
------- --------
<S> <C> <C>
Balance at beginning of period ................... $ 2,609 $ 2,365
Provisions ................................ 113 113
Recoveries ................................ 393 163
Realized losses charged to allowance ...... (16) (22)
------- -------
Balance at end of period ......................... $ 3,099 $ 2,619
======= =======
</TABLE>
Non-performing loans are summarized as follows:
<TABLE>
<CAPTION>
Sept. 30, December 31,
1998 1997
--------- -----------
<S> <C> <C>
Loans accounted for on a non-accrual basis ........... $ -- $ --
Accruing loans 90 days past due ...................... 278 10
Impaired loans ....................................... -- --
</TABLE>
4. Deposits (in thousands)
A summary of deposit balances, by type, is as follows:
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
-------- --------
<S> <C> <C>
Demand (non-interest bearing) .................. $ 20,524 $ 11,226
Savings:
NOW ....................................... 50,428 28,072
Regular and 90-day notice accounts ........ 19,163 15,090
Money market deposit accounts ............. 41,454 26,766
Advance payments from mortgagors .......... 257 236
-------- --------
Total savings ........................ 111,302 70,164
-------- --------
Time certificates of deposit ................... 68,151 61,046
-------- --------
Total deposits ........................ $199,977 $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 $13.5 million at September 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 non-employee 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 (the Board is currently reviewinlg the provisions which relate to
events which will permit exercise of the options.) 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 September 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 September 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 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 was 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. No
additional proceeds were received in the third quarter of 1998.
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
<PAGE>
Home Port Bancorp, Inc. and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
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 September 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 September 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 $55 million, or 26.3% during the first nine
months of 1998 to $263.8 million at September 30, 1998 from $208.8 million at
December 31, 1997. For the comparable nine month period in 1997, total assets
increased by $11.1 million, or 5.8%, to $201 million from $189.9 million. Major
balance sheet categories are discussed in detail below.
Net loans outstanding (including loans held for sale) were $216.2 million at
September 30, 1998, an increase of $41.3 million, or 23.6%, from $174.9 million
at December 31, 1997. For the comparable period in 1997, loans increased $15.9
million, or 10.5%, to $167.2 million from $151.3 million. Loan sales totaled
$28.8 million during the first nine months of 1998 as compared to $10.5 million
for the corresponding 1997 period. Mortgage loan originations totaled $114.4
million during the 1998 period and $52.1 million in the comparable 1997 period.
The increase in loan originations in 1998 is attributed to strong real estate
sales activity on Nantucket, an increase in refinancing activity due to lower
interest rates and the Bank's marketing efforts. The Bank's lending activities
are conducted solely on Nantucket.
Total deposits increased by $57.5 million, or 40.4%, to $200.0 million at
September 30, 1998 from $142.4 million at December 31, 1997. For the nine months
ending September 30, 1997, deposits increased $7.8 million, or 5.8%, to $142.9
million. The increase in deposits in 1998 is attributed to the 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, a minor funding source, decreased to $1.3 million
at September 30, 1998 from $2.6 million a year earlier.
<PAGE>
Home Port Bancorp, Inc. and Subsidiaries
Management's Discussion and Analysis of Financial Condition
and Results of Operations
Unaudited Interim Information for September 30, 1998
Borrowed funds, consisting of Federal Home Loan Bank advances, totaled $37.4
million at September 30, 1998, a decrease of $4.3 million from the December 31,
1997 total of $41.7 million.
Total stockholders' equity increased by $1.5 million to $23.4 million at
September 30, 1998 from $21.9 million at December 31, 1997. This increase
reflects net income of $2.5 million less cash dividends declared of $1.1
million.
Results of Operations
For the quarter ended September 30, 1998, the Company reported net income of
$1.0 million or $0.57 per basic and diluted share compared to net income of $822
thousand or $0.45 per basic and diluted share for the quarter ended September
30, 1997. For the nine months ended September 30, 1998 net income totaled $2,512
million, or $1.36 per basic and diluted share, compared to $2.4 million, or
$1.32 per basic and diluted share, for the comparable 1997 period.
Net income in 1998 has been affected by non-recurring charges, which primarily
consist of the previously announced check-kiting loss. The Company has also
incurred certain non-recurring expenses in conjunction with the formation of
it's subsidiary N. Realty Corp., which intends to elect to be taxed as a real
estate investment trust for federal and Massachusetts tax purposes. These
non-recurring charges have reduced net income for the three and nine month
periods ending September 30, 1998 by $80 thousand and $450 thousand,
respectively, on an after-tax basis.
Net Interest Income
Net interest income increased $609 thousand, or 27.6%, in the third quarter of
1998 as compared to the prior year quarter. For the nine months ending September
30, 1998, net interest income increased by $1.1 million, or 16.9%, as compared
to the prior year. On a fully tax-equivalent basis this increase was $1.2
million for the year-to-date periods. The increase in net interest income is 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 September 30, 1998
<TABLE>
<CAPTION>
(in thousands) Nine Months Ended Sept. 30, 1998 Nine Months Ended Sept. 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 $146,754 $8,290 7.53% $106,528 $6,554 8.19%
Commercial loans 56,527 4,143 9.77% 47,976 3,660 10.17%
Consumer loans 5,789 430 9.90% 5,993 446 9.92%
-------- ------ ---- -------- ------ ----
Total loans 209,070 12,863 8.20% 160,497 10,660 8.84%
Securities and FHLB Stock 26,561 1,246 6.25% 26,050 1,151 5.89%
-------- ------ ---- -------- ------ ----
Total interest earning assets 235,631 14,109 7.98% 186,547 11,811 8.43%
-------- ------ ---- -------- ------ ----
Interest bearing liabilities:
Deposits 150,472 4,000 3.55% 119,084 3,356 3.77%
Borrowed funds 51,737 2,360 6.10% 39,835 1,836 6.16%
-------- ------ ---- -------- ------ ----
Total interest bearing liabilities 202,209 6,370 4.21% 158,919 5,192 4.38%
-------- ------ ---- -------- ------ ----
Net interest income $7,749 $6,619
====== ======
Interest rate spread 3.77% 4.06%
====== ====
Net interest margin 4.38% 4.70%
===== ====
</TABLE>
(1) 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 $61 thousand in 1998 and $28
thousand in 1997.
(2) Average balances include the assets held for sale, available for sale and
held to maturity.
<PAGE>
Home Port Bancorp, Inc. and Subsidiaries
Management's Discussion and Analysis of Financial Condition
and Results of Operations
Unaudited Interim Information for September 30, 1998
The effect on net interest income as a result of changes in average interest
rates and balances follows:
<TABLE>
<CAPTION>
(in thousands) Nine Months Ended September 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 ............ $ 1,736 $ 2,474 $ (535) $ (203)
Commercial loans ............. 483 652 (144) (25)
Consumer loans ............... (16) (15) (1) --
------- ------- ------- -------
Total loans ...................... 2,203 3,111 (680) (228)
Securities FHLB Stock ........ 95 23 670 2
------- ------- ------- -------
Total interest earning assets .... 2,298 3,134 (610) (226)
------- ------- ------- -------
Interest bearing liabilities:
Deposits ..................... 644 887 (196) (47)
Borrowed funds ............... 524 550 (18) (8)
------- ------- ------- -------
Total interest bearing liabilities 1,168 1,437 (214) (55)
======= ======= ======= =======
Net interest income .............. $ 1,130 $ 1,697 $ (396) $ (171)
======= ======= ======= =======
</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 $318 thousand in the third quarter of 1998 from
$272 thousand in the comparable 1997 quarter. For the nine months ended
September 30, 1998 non-interest income increased to $842 thousand from $720
thousand in the comparable 1997 period. These increases were due to increases in
deposit service fees as a result of increases in deposits, increases in merchant
credit card processing fees as a result of additional volume and an increase in
gains from the sale of loans resulting from a favorable interest rate
environment.
<PAGE>
Home Port Bancorp, Inc. and Subsidiaries
Management's Discussion and Analysis of Financial Condition
and Results of Operations
Unaudited Interim Information for September 30, 1998
Non-interest expense
Non-interest expense increased by $398 thousand, or 35.2%, to $1.5 million in
the third quarter of 1998 from $1.1 million in the comparable 1997 period. For
the nine months ended September 30, 1998 non-interest expense, excluding the
effect of the "check-kiting" situation, increased by $899 thousand, or 28.0%, to
$4.1 million from $3.2 million in 1997. Approximately one-third of both the
quarter and year-to-date increases are due to non-recurring costs incurred in
conjunction with the formation of N. Realty Corp. The remaining increases are
due to staffing and other costs to service the additional loan and deposit
business in 1998.
Return on Equity
Return on average equity decreased to an annualized rate of 14.95% for the nine
months ended September 30, 1998 from 15.64% for the same period in 1997. This
decrease is the result of the previously described non-recurring expenses.
Provision for Loan Losses
The allowance for loan losses at September 30, 1998 was $3.1 million or 1.41% of
total loans compared to $2.6 million, or 1.47% of total loans, at December 31,
1997. During the nine months ending September 30, 1998 the loan loss reserve
increased by $490 thousand due to recoveries of $393 thousand and a loan loss
provision of $113 thousand, offset by charge-offs of $16 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 $278 thousand at September 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
September 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 September 30, 1998 management has identified $891 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.
Income Taxes
The Company's effective income tax rate for the quarter ended September 30, 1998
was 34.9% compared to 39.2% for the quarter ended September 30, 1997. For the
nine months ended September 30, 1998 the effective tax rate was 34.7% compared
<PAGE>
Home Port Bancorp, Inc. and Subsidiaries
Management's Discussion and Analysis of Financial Condition
and Results of Operations
Unaudited Interim Information for September 30, 1998
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 September 30, 1998 and December 31, 1997 the Company's and the Bank's capital
ratios were in excess of regulatory requirements.
Year 2000 Update
This report has been issued under the guidelines of the "Year 2000
Information and Readiness Disclosure Act of 1998" ("Act") and should be viewed
within the guidelines of the Act regarding the Year 2000 problem in general and
the Bank's efforts to address the Year 2000 problem.
The Company and the Bank are subject to the regulations of the Federal Reserve
Bank, the Federal Deposit Insurance Corporation (FDIC) and the Federal Financial
Institutions Examination Council. These agencies have issued Year 2000 (Y2K)
Guidelines that establish minimum standards for safety and soundness and
describe certain essential steps that each supervised financial institution must
take to become Year 2000 ready. The Guidelines require a bank to:
ensure the involvement of the Board of Directors and management in the
institution's Year 2000 efforts,
adopt a written project plan,
renovate its mission-critical systems,
complete tests of the renovated mission-critical systems by specific
deadlines,
plan for contingencies, and
manage customer risk.
<PAGE>
Home Port Bancorp, Inc. and Subsidiaries
Management's Discussion and Analysis of Financial Condition
and Results of Operations
Unaudited Interim Information for September 30, 1998
The following paragraphs describe the Company's current status as regards the
Y2K issue. Both the Company's and the Bank's Year 2000 efforts are contained in
the Bank's Y2K Project Plan (Plan). The Plan addresses both information
technology (IT) and non-information technology (non-IT) systems. Substantially
all of the software used by the Bank is provided by outside vendors.
Mission-critical on-line transaction processing and data warehousing services
are provided by a data processing vendor. Other, less critical, systems are
supported by purchased applications software. The Bank has and will continue to
utilize both internal and external resources to complete its Y2K remediation
efforts.
State of readiness:
The Bank's Plan includes an assessment of its computer hardware and software
systems and vendor supplied systems. The Plan divides the process of achieving
Year 2000 compliance into five phases: Awareness, Assessment, Renovation,
Validation and Implementation. The Bank is continually evaluating
mission-critical vendor plans and monitoring project milestones for all systems.
For IT systems, the Bank has substantially completed the Awareness, Assessment
and Renovation phases. The Bank continues to work closely with the vendor (NCR
Corporation) that supplies it's mission-critical data warehousing and on-line
transaction processing system. The Bank is currently in the process of testing
this key system to validate its Year 2000 readiness. Other IT systems are in
either the validation phase or the implementation phase. The Bank expects to
test all but one of it's IT systems in the 4th quarter of 1998. The Bank will
continue testing throughout 1999 to ensure that systems remain Year 2000
compliant.
The Bank is also addressing the Year 2000 readiness of embedded microcontrollers
in non-IT systems. The Bank accelerated the installation of a new Year
2000-compliant telephone and voice-mail system during the third quarter of 1998
due in part to Year 2000 concerns. Other non-IT systems that contain embedded
microcontrollers are mostly in the validation process. One system is in the
assessment phase.
Costs to address Year 2000 issues:
Included in other non-interest expenses for the nine-month period ending
September 30, 1998 are charges totaling approximately $30 thousand, consisting
of personnel costs, consulting fees and depreciation expense, incurred in order
for the Bank's computer systems to properly function properly in the year 2000.
The total remaining cost of the Year 2000 project is estimated at approximately
$60 thousand. It is not anticipated that material incremental costs will be
incurred in any single period. 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. 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.
<PAGE>
Home Port Bancorp, Inc. and Subsidiaries
Management's Discussion and Analysis of Financial Condition
and Results of Operations
Unaudited Interim Information for September 30, 1998
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.
Risks of Year 2000 issues:
While the Bank is working closely with its significant third party vendors,
there can be no guarantee that the systems of these vendors, or other companies,
on which the Bank's systems rely, will be fully Year 2000 complaint. Therefore,
the Bank could possibly be negatively impacted to the extent other entities not
affiliated with the Bank 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.
Contingency planning:
The Bank has drafted a contingency and business resumption plan that outlines
the procedures that are to be followed in the event that any mission critical
systems fail after January 1, 2000. The Bank's contingency plans include the
possibility that the Bank would not be able to process customer transactions
through its internal on-line system for a period of time - which management
believes would not be excessive - following December 31, 1999 and for an
inability to furnish customer statements on a timely basis in January 2000. The
inability to process transactions on-line would have a limited impact on the
operations of the Bank because, historically, transaction volumes are lower
during the winter months. The inability to furnish account statements would have
a negative impact on the Bank's reputation, but in light of the growing public
awareness of the Year 2000 crisis, management does not believe that the impact
would be material.
The Year 2000 Committee (Committee) of the Bank continues to review areas of
concern including the Bank's reliance on third-party vendors who supply the Bank
with critical applications. These crucial third parties include utility
companies (Nantucket Electric and BellAtlantic), Automated Teller Networks
(Express24/NYCE), the Federal Funds Transfer System (FedWire) and the Federal
Home Loan Bank of Boston (FHLBB). The Bank's daily interaction with each of
these third parties is crucial to many of the Bank's functions and the loss -
even for a short period of time - of any or all could materially impact the
Bank's short term profitability.
During the 4th quarter of 1998, the Committee will work to finalize the Bank's
contingency plans. Testing of the plans is expected to begin during the 1st
quarter of 1999 and will continue through the end of the year. The Committee
continues to review updates from the various regulatory and utility providers
and will evaluate changes to the contingency plan that may include provisions
for the expanded cash management and short-term lending arrangements between the
Bank and the FHLBB and additional cash availability at the branch level to meet
the emergency needs of the Bank's customers.
<PAGE>
Home Port Bancorp, Inc. and Subsidiaries
Management's Discussion and Analysis of Financial Condition
and Results of Operations
Unaudited Interim Information for September 30, 1998
Impact on major deposit and loan customers:
The Bank has assessed the impact of the Year 2000 issue on its major loan and
deposit customers. Certain borrowers and depositors that could potentially
experience a significant disruption in their business due to a Year 2000 failure
have been identified. The risks to the Bank as a result of Year 2000 failures of
these customers is being assessed on a customer-by-customer basis. No credit
losses have been incurred by the Bank to date as a result of the Year 2000
issue. The potential impact on depositors has been considered in the Bank's
liquidity plan for 1999 and 2000.
<PAGE>
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
None
Item 5. Other Information.
A cash dividend of $.20 per common share was declared on July
27, 1998. The dividend was paid on August 27, 1998 to
shareholders of record as of August 13, 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 - None
b. Reports on Form 8-K - No reports on Form 8-K were filed
during the quarter ended September 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: November 12, 1998 By: /s/ William P. Hourihan, Jr.
---------------------------
William P. Hourihan, Vice President
Date: November 12, 1998 By: /s/ John M. Sweeney
-------------------
John M. Sweeney, Treasurer
(chief financial & accounting officer)
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
<CASH> 4,708
<INT-BEARING-DEPOSITS> 1,961
<FED-FUNDS-SOLD> 9,540
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 7,979
<INVESTMENTS-CARRYING> 16,282
<INVESTMENTS-MARKET> 16,473
<LOANS> 202,636
<ALLOWANCE> 3,099
<TOTAL-ASSETS> 263,830
<DEPOSITS> 199,977
<SHORT-TERM> 0
<LIABILITIES-OTHER> 3,010
<LONG-TERM> 37,430
0
0
<COMMON> 23
<OTHER-SE> 23,390
<TOTAL-LIABILITIES-AND-EQUITY> 263,830
<INTEREST-LOAN> 12,863
<INTEREST-INVEST> 1,185
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 14,048
<INTEREST-DEPOSIT> 4,000
<INTEREST-EXPENSE> 6,360
<INTEREST-INCOME-NET> 7,688
<LOAN-LOSSES> 113
<SECURITIES-GAINS> (5)
<EXPENSE-OTHER> 4,568
<INCOME-PRETAX> 3,849
<INCOME-PRE-EXTRAORDINARY> 3,849
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,512
<EPS-PRIMARY> 1.36
<EPS-DILUTED> 1.36
<YIELD-ACTUAL> 4.38
<LOANS-NON> 0
<LOANS-PAST> 278
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 891
<ALLOWANCE-OPEN> 2,609
<CHARGE-OFFS> 16
<RECOVERIES> 393
<ALLOWANCE-CLOSE> 3,099
<ALLOWANCE-DOMESTIC> 3,099
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
