SECURITIES AND EXCHANGE COMMISSION
----------------------------------
Washington, D.C. 20549
FORM 10-Q
(Mark one)
X Quarterly report pursuant to Section 13 or 15 (d) of the Securities
---- Exchange Act of 1934 for the quarterly period ended March 31, 1999 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.
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(EXACT NAME OF SMALL BUSINESS ISSUER AS SPECIFIED IN ITS CHARTER)
Delaware 04-3016821
- ------------------------------------------------ ----------------
(State or other jurisdiction of incorporation or (I.R.S. Employer
organization) Identification Number)
104 Pleasant Street
Nantucket, Massachusetts 02554
- --------------------------------------- ------------
(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 .
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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)
<PAGE>
Home Port Bancorp, Inc.
<TABLE>
<CAPTION>
INDEX
PART I - FINANCIAL INFORMATION Page No.
--------
<S> <C>
Item 1 - Financial Statements
Consolidated Balance Sheets at March 31, 1999 and December 31, 1998. 3
Consolidated Statements of Earnings for the three months ended March 31,
1999 and 1998. 4
Consolidated Statements of Changes in Stockholders' Equity for the three
months ended March 31, 1999 and for the year ended December 31, 1998 5
Consolidated Statements of Cash Flows for the three months 6
ended March 31, 1999 and 1998
Notes to Consolidated Financial Statements 7-8
Item 2 - Management's Discussion and Analysis of Financial Condition 9-15
and Results of Operation
Item 3 - Quantitative and Qualitative Disclosures About Market Risk 16
PART II - OTHER INFORMATION 17
Signatures 18
</TABLE>
2
<PAGE>
Home Port Bancorp, Inc.
Consolidated Balance Sheet
<TABLE>
<CAPTION>
(In Thousands, Except Share Data) March 31, December 31,
1999 1998
(unaudited)
---------------------------------
Assets
<S> <C> <C>
Cash and due from banks $ 9,213 $ 12,070
Interest bearing deposits in banks 55 54
---------------------------------
Total cash and cash equivalents 9,268 12,124
Securities held to maturity (market value $16,275 and $18,050) 16,190 17,904
Securities available for sale (amortized cost of $8,675 and $7,969) 8,644 7,993
Loans, net of allowance for loan losses of $3,280 and $3,145 (note 3) 225,706 213,899
Loans held for sale 18,591 16,005
Stock in Federal Home Loan Bank of Boston, at cost 3,820 3,276
Land, buildings and equipment, net 1,798 1,721
Accrued income receivable 1,352 1,340
Net deferred tax asset 455 421
Prepaid expenses and other assets 961 887
---------------------------------
Total assets $286,785 $275,570
=================================
Liabilities and Stockholders' Equity
Liabilities:
Deposits (Note 4) $182,270 $188,668
Borrowed funds 77,185 58,921
Accrued expenses 2,227 3,132
Other liabilities 352 817
---------------------------------
Total liabilities 262,034 251,538
---------------------------------
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 11,671 10,918
Accumulated other comprehensive income, net:
Unrealized gain on securities available for sale, net of taxes (note 2) (19) 15
Less: Treasury stock, at cost (483,604 shares) (4,397) (4,397)
---------------------------------
Total stockholders' equity 24,751 24,032
---------------------------------
Total liabilities and stockholders' equity $286,785 $275,570
=================================
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
3
<PAGE>
Home Port Bancorp, Inc.
Consolidated Statements of Earnings (Unaudited)
<TABLE>
<CAPTION>
(In Thousands, Except Per Share Data) Three Month Ended
March 31,
-------------------------
1999 1998
-------------------------
<S> <C> <C>
Interest income:
Interest on loans $4,784 $3,913
Interest on securities 350 329
Dividends 55 42
Interest on federal funds sold and interest bearing deposits 2 6
-------------------------
Total interest income 5,191 4,290
-------------------------
Interest expense:
Interest on deposits 1,425 1,247
Interest on borrowed funds 908 731
-------------------------
Total interest expense 2,333 1,978
-------------------------
Net interest income 2,858 2,312
Provision for loan losses 50 37
-------------------------
Net interest income after provision for loan losses 2,808 2,275
Non interest income:
Deposit servicing fees 113 97
Loan servicing fees 69 59
Other fees and income 69 56
Net gain from sale of mortgage loans 129 30
Net loss from securities (2)
-
-------------------------
Total non interest income 380 240
-------------------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
(In Thousands, Except Per Share Data) Three Month Ended
March 31,
-------------------------
1999 1998
-------------------------
<S> <C> <C>
Non interest expense:
Salaries and employee benefits 817 658
Building and equipment expenses 180 139
Deposit insurance fees 15 15
Professional fees 121 120
Loss on check-kiting - 560
Other 334 232
-------------------------
Total non interest expense 1,467 1,724
-------------------------
Income before income taxes 1,721 791
Provision for income taxes 599 306
=========================
Net Income $1,122 $485
=========================
Earnings per common share - basic and diluted $0.61 $0.26
===========================
Weighted number of common shares outstanding - basic and diluted 1,842 1,842
</TABLE>
See accompanying notes to unaudited consolidated financial statements
4
<PAGE>
Home Port Bancorp, Inc.
Consolidated Statements of Changes in Stockholders' Equity (Unaudited)
<TABLE>
<CAPTION>
(In Thousands, Except Per Share Data)
Accumulated
Additional Other Total
Common Paid-in Retained Treasury Comprehensive Stockholders
Stock Capital Earnings Stock Income, net Equity
-------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1997 $23 $17,473 $8,841 $(4,397) $(13) $20,103
Net income - - 3,551 - - 3,551
Other comprehensive income, net
Change in unrealized gain on
securities available for sale - - - - 7 7
----------------
Comprehensive income 3,558
Cash dividends paid at
$.80 per share - - (1,474) - - (1,474)
-------------------------------------------------------------------------------
Balance at December 31, 1998 23 17,473 10,918 (4,397) 15 24,032
Net income - - 1,122 - - 1,122
Other comprehensive income, net
Change in unrealized gain on
securities available for sale - - - - (34) (34)
----------------
Comprehensive income 1,088
Cash dividends paid at
$.20 per share - - (369) - - (369)
-------------------------------------------------------------------------------
Balance at March 31, 1999 $23 $17,473 $11,671 $(4,397) $(19) $24,751
===============================================================================
</TABLE>
See accompanying notes to unaudited consolidated financial statements
5
<PAGE>
Home Port Bancorp, Inc.
Consolidated Statements of Cash Flows (Unaudited)
<TABLE>
<CAPTION>
(In Thousands) Three Months Ended
March 31,
--------------------------------
1999 1998
--------------------------------
<S> <C> <C>
Net cash flows from operating activities:
Net income $1,122 $485
Adjustments to reconcile net income to net cash provided by (used in) operating
activities:
Provision for loan losses 50 37
Depreciation of building and equipment 94 73
Net gain on sale of mortgage loans (129) (30)
Net loss on securities - 2
Net (accretion) amortization of securities (discounts) premiums (5) 6
Amortization of deferred loan origination fees (75) (45)
Amortization of deferred premiums on loans sold 16 4
Net (increase) decrease in accrued income receivable (12) (133)
Net increase (decrease) in accrued expenses (905) 53
Net (increase) decrease in loans held for sale (2,473) (3,665)
Net (increase) decrease in prepaid expenses and other assets (142) (18)
Net increase (decrease) in other liabilities (465) (493)
Net (increase) decrease in deferred income taxes 55 (2)
--------------------------------
Net cash provided by (used in) operating activities (2,869) (3,726)
--------------------------------
Cash flows from investing activities
Purchases of securities held to maturity (2,298)
-
Purchases of securities available for sale (2,133) (2,376)
Proceeds from sales of securities available for sale - 500
Proceeds from maturities/calls of securities 2,370 2,780
Principal payments on mortgage-backed securities 776 460
Net increase in loans (11,782) (10,996)
Purchases of land, buildings and equipment (171) (72)
Purchase of Federal Home Loan Bank stock (544) (515)
--------------------------------
Net cash provided by (used in) investing activities (11,484) (12,517)
--------------------------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
(In Thousands) Three Months Ended
March 31,
--------------------------------
1999 1998
--------------------------------
<S> <C> <C>
Cash flows from financing activities:
Net increase (decrease) in deposits (6,398) 4,984
Federal Home Bank advances 14,000 5,500
Federal Home Loan Bank repayments (1,305) (2,000)
Net increase in short term borrowings 5,569 8,730
Cash dividends paid (369) (369)
--------------------------------
Net cash provided by (used in) financing activities 11,497 16,847
--------------------------------
Net increase (decrease) in cash and cash equivalents (2,856) 604
Cash and cash equivalents at beginning of period 12,124 5,106
--------------------------------
Cash and cash equivalents at end of period $9,268 $5,710
================================
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $2,855 $1,919
Income taxes 1,855 178
</TABLE>
See accompanying notes to unaudited consolidated financial statements
6
<PAGE>
Home Port Bancorp, Inc. and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
Unaudited Interim Information for March 31, 1999
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, 1998. 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").
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. Comprehensive Income
The following table shows the components of other comprehensive income.
<TABLE>
<CAPTION>
Three Months Ended
March 31,
---------------------------------
1999 1998
--------------- ----------------
<S> <C> <C>
Net income $1,122 $485
Other comprehensive income, net of tax
Unrealized gains on securities:
Unrealized holding gains (losses)arising during the period (34) 2
Add: reclassification adjustment for losses
included in net income, net of tax 0
-
--------------- ----------------
(34) 2
--------------- ----------------
Comprehensive Income $1,088 $487
=============== ================
</TABLE>
<PAGE>
3. Loans, Net (in thousands)
The composition of the balances of loans is as follows:
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
--------------- ----------------
<S> <C> <C>
Mortgage loans:
Residential $121,607 $120,744
Residential construction 50,017 44,609
Commercial 45,883 42,439
Commercial construction 8,592 8,142
--------------- ----------------
Total principal balances 226,099 215,934
Less: Due borrowers on uncompleted loans
Residential (13,074) (12,134)
Commercial (2,935) (2,379)
Deferred loan origination fees (738) (734)
--------------- ----------------
Total mortgage loans 209,352 200,684
Other loans:
Commercial business 14,112 10,791
Second mortgage 1,578 1,731
Home equity 1,742 1,521
Passbook and stock secured 631 592
Consumer 1,571 1,725
--------------- ----------------
Total other loans 19,634 16,360
Less: Allowance for loan losses (3,280) (3,145)
=============== ================
Loans, net $225,706 $213,899
=============== ================
</TABLE>
7
<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>
Three Months Ended
March 31,
---------------------------------
1999 1998
---------------------------------
<S> <C> <C>
Balance at beginning of period $3,145 $2,609
Provisions 50 37
Recoveries 95 226
Realized losses charged to allowance (10) (13)
---------------------------------
Balance at end of period $3,280 $3,145
=================================
</TABLE>
Non-performing loans are summarized as follows:
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
---------------------------------
<S> <C> <C>
Loans accounted for on a non-accrual basis $ - $ -
Accruing loans 90 days past due 206 268
Impaired loans - -
</TABLE>
4. Deposits (in thousands)
<PAGE>
A summary of deposit balances, by type, is as follows:
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
---------------------------------
<S> <C> <C>
Demand (non-interest bearing) $13,695 $18,437
Savings:
NOW 42,949 43,062
Regular and 90-day notice accounts 18,191 19,168
Money market deposit accounts 40,085 38,377
Advance payments from mortgagors 153 231
---------------------------------
Total savings 101,378 100,838
---------------------------------
Time certificates of deposit 67,197 69,393
---------------------------------
Total deposits $182,270 $188,668
=================================
</TABLE>
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 $14.8 million at March 31, 1999.
8
<PAGE>
Home Port Bancorp, Inc. and Subsidiaries
Management's Discussion and Analysis of Financial Condition and Results of
Operations Unaudited Interim Information for March 31, 1999
Preliminary Note in Regard to Forward-looking Statements. This quarterly report
on Form 10-Q 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-Q 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,
Year 2000 compliance and changing regulatory requirements.
Consolidated Balance Sheet
Total assets of Home Port Bancorp, Inc. (the "Company") grew during the first
quarter of 1999, increasing $11.2 million, or 4.1%, to $286.8 million at March
31, 1999 from $275.6 million at December 31, 1998. For the comparable period in
1998, total assets increased $16.9 million, or $8.1%. Major balance sheet
categories are discussed in detail below.
Net loans outstanding (including loans held for sale) were $244.3 million at
March 31, 1999, an increase of $14.4 million, or 6.2%, from $229.9 million at
December 31, 1998. For the comparable period in 1998, loans increased $14.7
million, or 8.4%, to $189.6 million from $174.9 million. Loan sales increased to
$17.8 million during the first quarter of 1999 as compared to $6.9 million for
the corresponding 1998 period. Mortgage loan originations totaled $45.5 million
during the first quarter of 1999 compared to $32.0 million in the prior year
quarter. The increase in loan originations is attributed to strong real estate
sales activity on Nantucket and the Bank's emphasis on customer service and
marketing efforts. The Bank's lending activities are conducted solely on
Nantucket.
<PAGE>
Total deposits decreased by $6.4 million, or 3.4%, to $182.3 million at March
31, 1999 from $188.7 million at December 31, 1998. During the first quarter of
1998, deposits increased by $5.0 million, or 3.5%. The Bank normally experiences
a seasonal decrease in deposits during the first quarter. The increase in
deposits during the first quarter of 1998 was an unusual occurrence.
Substantially all of the Bank's deposits are from Nantucket-related individuals,
businesses and government entities. Brokered deposits, a minor funding source,
totaled $.8 million at March 31, 1999, or less than one-half of one percent of
total deposits.
Borrowed funds, consisting of Federal Home Loan Bank advances, totaled $77.2
million at March 31, 1999, an increase of $18.3 million from the December 31,
1998 total of $58.9 million. These borrowings are used to fund loan growth and
seasonal deposit outflows. Total non-deposit funding sources
9
<PAGE>
(borrowings and brokered deposits) represented 27% of total assets at March 31,
1999 compared to 25% at March 31, 1998.
Home Port Bancorp, Inc. and Subsidiaries
Management's Discussion and Analysis of Financial Condition and Results of
Operations Unaudited Interim Information for March 31, 1999
Total stockholders' equity increased by $.7 million to $24.8 million at March
31, 1999 from $24.0 million at December 31, 1998. This increase reflects net
income of $1.1 million less cash dividends declared of $.4 million.
Results of Operations
For the quarter ended March 31, 1999, the Company reported net income of $1.1
million or $0.61 per share compared to net income of $485 thousand or $0.26 per
share for the quarter ended March 31, 1998. Prior year earnings were impacted by
a charge of $560 thousand ($343 thousand after-tax) due to a loss resulting from
a check-kiting scheme. Excluding this item, net income increased by $294
thousand, or 35%, in the first quarter of 1999 as compared to 1998. The increase
in earnings is attributable to the significant increases in loans and deposits
experienced by Nantucket Bank over the past year. The following paragraphs
describe the results of operations in more detail.
<PAGE>
Net Interest Income
Net interest income, before provision for loan losses, increased $546 thousand,
or 23.6%, compared to the prior year. Calculated on a fully tax-equivalent
basis, the increase was $563 thousand. This increase was primarily the result of
an increase in the average volume of loans and deposits offset by a small
reduction in the interest rate spread. Additional information on average
balances, interest and yields is provided in the following two tables:
<TABLE>
<CAPTION>
(in thousands) Three Months Ended March 30, 1999 Three Months Ended Mar. 30, 1998
----------------------------------------- ----------------------------------------
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 $176,378 $3,184 7.22% $127,852 $2,494 7.80%
Commercial loans 63,412 1,462 9.22% 51,291 1,279 9.97%
Consumer loans 5,495 138 10.05% 5,616 140 9.97%
----------------------------------------- ----------------------------------------
Total loans 245,285 4,784 7.80% 184,759 3,913 8.47%
Securities and FHLB Stock 28,914 436 6.03% 26,468 389 5.88%
----------------------------------------- ----------------------------------------
Total interest earning assets $274,199 $5,220 7.61% $211,227 $4,302 8.15%
----------------------------------------- ----------------------------------------
Interest bearing liabilities:
Deposits $169,697 $1,425 3.37% $135,582 $1,247 3.69%
Borrowed funds 65,662 908 5.55% 47,830 731 6.13%
----------------------------------------- ----------------------------------------
Total interest bearing liabilities $235,359 $2,333 3.98% $183,412 $1,978 4.34%
----------------------------------------- ----------------------------------------
Net interest income $2,887 $2,324
============== ============
Interest rate spread 3.63% 3.81%
============ ============
Net interest margin 4.21% 4.40%
============ ============
</TABLE>
(1) Average balances include the assets held for sale, available for sale and
held to maturity.
10
<PAGE>
(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 $29 thousand in 1999 and $12
thousand in 1998.
Home Port Bancorp, Inc. and Subsidiaries
Management's Discussion and Analysis of Financial Condition and Results of
Operations Unaudited Interim Information for March 31, 1999
The effect on net interest income as a result of changes in average interest
rates and balances follows:
<TABLE>
<CAPTION>
(in thousands) Three Months Ended March 31, 1999 vs. 1998
----------------------------------------------------------------
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 $680 $946 ($185) ($71)
Commercial loans 183 302 (96) (23)
Consumer loans (2) (3) 1 -
----------------------------------------------------------------
Total loans 871 1,245 (280) (94)
Securities and FHLB Stock 47 36 10 1
----------------------------------------------------------------
Total interest earning assets $918 $1,281 (270) (93)
----------------------------------------------------------------
Interest bearing liabilities:
Deposits $178 $315 ($108) $(29)
Borrowed funds 177 273 (69) (27)
----------------------------------------------------------------
Total interest bearing liabilities $355 $588 ($177) ($56)
================================================================
Net interest income $563 $693 ($93) ($37)
================================================================
</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.
<PAGE>
Non-interest income
Non-interest income increased to $380 thousand in the first quarter of 1999 from
$240 thousand in the first quarter of 1998. This increase was primarily due to
an increase in net gains from the sale of loans to $129 thousand in 1999 from
$30 thousand in 1998. This increase in gains was due to an increase in the
amount of loans sold from $6.9 million to $17.8 million.
Non-interest expense
Non-interest expense, excluding the loss resulting from the "check-kiting"
situation, increased by $303 thousand, or 26.0%, to $1.5 million in the first
quarter of 1999 from $1.1 million in the comparable 1998 period. This increase
is due to the costs associated with additional office space leased during the
second quarter of 1998 and additional staffing to service the increased loan and
deposit business. The Company's efficiency ratio was 45.3% for the quarter ended
March 31, 1999 versus 45.6% in comparable 1998 period, excluding the
check-kiting charge.
11
<PAGE>
Return on Equity
Return on average equity increased to an annualized rate of 18.5% for the three
months ended March 31, 1999 from 8.78% for the same period in 1998. This
increase is the result the increase in earnings described above and was impacted
by the non-recurring check-kite loss in the 1998.
12
<PAGE>
Home Port Bancorp, Inc. and Subsidiaries
Management's Discussion and Analysis of Financial Condition and Results of
Operations Unaudited Interim Information for March 31, 1999
Provision for Loan Losses
The allowance for loan losses at March 31, 1999 was $3.3 million or 1.33% of
total loans compared to $3.1 million, or 1.35% of total loans, at December 31,
1998. During the three months ending March 31, 1999 the loan loss reserve
increased by $135 thousand due to recoveries of $95 thousand and a loan loss
provision of $50 thousand, offset by charge-offs of $10 thousand. The loan loss
provision was increased to $50 thousand for the first quarter of 1999 from $37
thousand per quarter during 1998. This increase is the result of the growth in
the Bank's loan portfolio. 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 $206 thousand at March 31, 1999, all
which were accruing loans with payments past due ninety or more days.
Non-performing loans at December 31, 1998 totaled $268 thousand of past due
accruing loans. None of these loans were to affiliated persons. At both March
31, 1999 and December 31, 1998 the Bank had no other real estate owned. The Bank
had no loans which were considered impaired at either March 31, 1999 or December
31, 1998.
At March 31, 1999 management has identified $940 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 March 31, 1999 was
34.8% compared to 38.7% for the quarter ended March 31, 1998. The lower
effective tax rate in 1999 is reflective of the proportion of income earned by
certain non-bank subsidiaries that is taxed, for state tax purposes, at lower
rates. In 1999 more income was generated through non-bank subsidiaries as
compared to 1998.
<PAGE>
Liquidity and Capital Resources
All of the Company's funds are generated through its 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 March 31, 1999 and December 31, 1998 the Company's and the Bank's capital
ratios were in excess of regulatory requirements.
13
<PAGE>
Home Port Bancorp, Inc. and Subsidiaries
Management's Discussion and Analysis of Financial Condition and Results
of Operations Unaudited Interim Information for March 31, 1999
Recent Accounting Pronouncements
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.
<PAGE>
Year 2000 Readiness
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:
o ensure the involvement of the Board of Directors and management in the
institution's Year 2000 efforts,
o adopt a written project plan,
o renovate its mission-critical systems,
o complete tests of the renovated mission-critical systems by specific
deadlines,
o plan for contingencies, and
o manage customer risk.
The following paragraphs describe the Company's current status as regards to 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 was developed along the five phase
project management process outlined in the Federal Financial Institutions
Examination Council (FFIEC) Year 2000 statement of May 5, 1997
14
<PAGE>
which consisted of: Awareness, Assessment, Renovation, Validation and
Implementation. The Bank is continually evaluating mission-critical vendor plans
and monitoring project milestones for all systems.
Home Port Bancorp, Inc. and Subsidiaries
Management's Discussion and Analysis of Financial Condition and Results
of Operations Unaudited Interim Information for March 31, 1999
For IT systems, the Bank has 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 has performed tests of this system to determine its
Y2K compliance and has not uncovered any Y2K-related failures. The Bank is
currently planning to implement certain changes to this system in the second
quarter of 1999. These changes are being implemented for reasons unrelated to
Y2K compliance. The Bank is planning to arrange for testing of these changes to
ensure the system is compliant with Year 2000 requirements. There is no
assurance, however, that the Bank will be able to arrange this testing. In the
event that the Bank is unable to arrange direct tests of this system, which it
considers to be preferable, it will review the results of tests of this system
performed by other banks.
Other mission-critical IT systems have been validated and implemented. The Bank
will continue testing throughout 1999 as systems changes are made to ensure that
systems remain Year 2000 compliant.
The Bank has also addressed the Year 2000 readiness of embedded microcontrollers
in non-IT systems. Such embedded microcontrollers have been evaluated by an
outside expert and, where necessary, replaced with Y2K compliant versions.
Costs to address Year 2000 issues:
Included in other non-interest expenses for the three months ended March 31,
1999 are charges totaling approximately $35 thousand, consisting of 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 $40 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, replace, develop and test all software information systems
for Year 2000 modifications. In most instances, upgrades to computer hardware
and software have been 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 vast majority of internal costs relate to the payroll cost for staff
assigned to the Y2K project team and Bank personnel assigned to testing the
changes resulting from Y2k efforts. These costs are not being separately tracked
and are not included in the costs cited in the preceding paragraph.
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. Actual results could vary significantly from such estimates once
detailed testing is completed. If the resolution plan is unsuccessful, it may
have a material, adverse effect on the Company's future operating results and
financial condition
<PAGE>
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
15
<PAGE>
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.
Home Port Bancorp, Inc. and Subsidiaries
Management's Discussion and Analysis of Financial Condition and Results
of Operations Unaudited Interim Information for March 31, 1999
Contingency planning:
The Bank is in the process of detailing and refining its Year 2000 Contingency
Plan (Plan) that outlines the procedures to be followed in the event that any
mission critical systems fail after January 1, 2000. This Plan incorporates
certain elements of the Bank's Disaster Recovery Plan. The Plan is scheduled to
be completed by June 30, 1999 in accordance with the recently issued Interagency
Regulatory Statement on Contingency Planning. The Plan includes 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. A
delay in mailing 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.
The contingency plan is expected to be revised and updated throughout 1999 in
response to ongoing Year 2000 developments. Testing of the contingency plan and
training of employees for potential contingencies will continue throughout 1999.
The Company has entered into a forward commitment with the Federal Home Loan
Bank of Boston to obtain funding of $15 million during the period immediately
before and after December 31, 1999. The purpose of this forward commitment is to
ensure the Bank's liquidity in view of the uncertainties surrounding the Year
2000 issue.
<PAGE>
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 potential impact on depositors has been considered in
the Bank's liquidity plan for 1999 and 2000.
An overall assessment of the Y2K readiness of the Bank's commercial loan
customers was completed in 1998, with an overall assessment of low. The Bank
will continue to monitor its larger commercial loan relationships through its
loan review process and direct contact with individual customers. Also, the
Bank's policy is to include a Y2K analysis on new and renewed credits as part of
the underwriting decision process. No credit losses have been incurred by the
Bank to date as a result of the Year 2000 issue.
16
<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 8-9 of the Company's 1998 Annual Report.
There has not been a significant change in market risk since the fiscal year
ended December 31, 1998.
17
<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
February 2, 1999. The dividend was paid on February 26, 1999
to shareholders of record as of February 12, 1999.
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 March 31, 1999.
18
<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: May 7, 1999 By: /s/ William P. Hourihan, Jr.
------------------------------------------------
William P. Hourihan, Vice President
Date: May 7, 1999 By: /s/ John M. Sweeney
------------------------------------------------
John M. Sweeney, Treasurer
(chief financial & accounting officer)
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