U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
(Mark One)
[ X ] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 (NO FEE REQUIRED) FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998.
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 (NO FEE REQUIRED) For the transition period from to
COMMISSION FILE NUMBER: 0-17099
HOME PORT BANCORP, INC.
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(Name of small business issuer in its charter)
Delaware 04-3016821
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
104 Pleasant Street, Nantucket, Massachusetts 02554
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(Address of principal executive offices) (Zip Code)
Issuer's telephone number: (508) 228-0580
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Securities registered under Section 12(b) of the Exchange Act: None
Securities registered pursuant to Section 12(g) of the Exchange Act:
Common Stock par value $.01 per share
(Title of Class)
Check whether the issuer (1) filed all reports to be filed by Section 13 or
15(d) of the Exchange Act during the past 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been subject
to such filing requirements for the past 90 days. Yes [ X ] No [ ]
Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B contained in this form, and no disclosure will be
contained, to the best of the registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K [ ]
State the issuer's revenues for the most recent fiscal year: $20,241,000.
The aggregate market value of the voting stock held by non-affiliates of
the registrant, based on the closing sales price of the registrant's common
stock as quoted on the National Association of Securities Dealers, Inc.
Automated Quotation National Market System on March 5, 1999 which was $ 23.75
per share, is $34,946,439.
As of March 5, 1999, there were outstanding 1,841,890 shares of the
registrant's Common Stock.
<PAGE>
DOCUMENTS INCORPORATED BY REFERENCE
1. Information required by Part II (Items 5, 6, 7 and 8) of this Form is
incorporated by reference herein from the Annual Report to Stockholders for
the year ended December 31, 1998 (the "Annual Report").
2. Information required by Part III (Items 10, 11 and 12) of this Form is
incorporated by reference herein from the definitive proxy statement (the
"Proxy Statement") relating to the 1999 Annual Meeting of Stockholders.
3. Certain Exhibits to the registrant's Form S-1 Registration Statement (No.
33-21794) are incorporated by reference in response to Part III, Item 13.
<PAGE>
Preliminary Note in Regard to Forward-looking Statements. This annual
report on Form 10-K 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 annual report on
Form 10-K or presented elsewhere by management from time to time. Defined terms
used elsewhere in this annual report have the same meanings herein as therein. A
number of uncertainties exist that could affect the Company's future operating
results, including, without limitation, the Bank's continued ability to
originate quality loans, fluctuation of interest rates, real estate market
conditions in the Bank's lending area, general and local economic conditions,
Year 2000 issues, the Bank's continued ability to attract and retain deposits,
new accounting pronouncements, and changing regulatory requirements.
Part I
Item 1. DESCRIPTION OF BUSINESS
General
The Company. Home Port Bancorp, Inc. (the "Company") was incorporated under
the laws of the State of Delaware on November 12, 1987 for the purpose of
becoming a holding company. On August 30, 1988, the Company acquired all of the
common stock of Nantucket Bank (the "Bank" or "Nantucket Bank") following the
Bank's conversion from a Massachusetts chartered mutual savings bank to a
Massachusetts chartered stock savings bank. The Company is currently a single
bank holding company registered under the Federal Bank Holding Company Act. As
of December 31, 1998, the assets of the Company on an unconsolidated basis
consisted principally of the capital stock of the Bank. The Company is subject
to the regulations of, and periodic examinations by, the Federal Reserve Bank,
the Commissioner of Banks of the Commonwealth of Massachusetts (the
"Commissioner") and the Federal Deposit Insurance Corporation ("FDIC"). The
Company's banking activities are conducted solely in Nantucket through its
subsidiary, Nantucket Bank.
The Bank. The Bank is a Massachusetts chartered savings bank, organized in
1834. The Bank conducts its business through two full-service offices and one
automated teller facility, all of which are located on the island of Nantucket,
Massachusetts. The Bank's deposits are insured by the Bank Insurance Fund of the
FDIC up to $100,000 per account and the Depositors Insurance Fund, a private
deposit insuring company, for deposits in excess of $100,000. The Bank is
subject to competition from other financial institutions. The Bank is subject to
the regulations of, and periodic examinations by, the FDIC and the Massachusetts
Division of Banks.
<PAGE>
The Bank provides a full range of banking services to individual and
corporate customers on the island of Nantucket. The Bank's primary services
consist of attracting deposits from consumers and businesses on Nantucket and
originating loans on Nantucket real estate, including both residential and
commercial properties. Due to the seasonal tourist-related economy on Nantucket,
the Bank's deposits generally peak during the summer months. The Bank's real
estate lending business is generally not impacted by the seasonal economy. The
Bank also grants commercial business loans and consumer loans. Commercial
business loans normally peak in the spring, as merchants borrow to finance
inventory and other purchases in advance of the tourist season. The Bank
routinely sells loans in the secondary market, normally retaining the servicing
rights. The Bank invests a portion of its funds in money market instruments,
federal government and agency securities and corporate bonds. The Bank utilizes
the Federal Home Loan Bank of Boston ("FHLB") as an additional source of funds.
The Nantucket Real Estate Market. The Nantucket real estate market has
improved substantially over the past several years, after experiencing a severe
downturn during the early 1990's. Total real estate sales on Nantucket totaled
$401 million in 1998, a sizable increase from the $318 million recorded in 1997.
During 1998, median price of a home on Nantucket was $450,000, an increase of
13% from the $400,000 median price in 1997. Since 1995 the median home price on
Nantucket sold has increased by 55%. In 1998 there were 66 recorded sales of
properties exceeding $1 million, compared to 52 in 1997.
Deterioration in the local or national economies could have a negative
impact on the Nantucket real estate market. A downturn in the Nantucket real
estate market could result in an increase in loan delinquencies for the Bank,
which could have a negative effect on the Company's results of operations due to
the possibility of additional loan loss provisions and reduced interest income.
Lending Activities
Residential Real Estate Lending. The Bank makes conventional mortgage loans
to single family residential properties with original loan-to-value ratios up to
80% of the appraised value of the property securing the loan. These residential
properties serve as the primary or secondary homes of the borrowers. The Bank
also originates loans on one to four family dwellings and loans for the
construction of residential housing for owner occupying borrowers, also with
original loan-to-value ratios up to 80% of the property's appraised value.
Residential mortgage loans made by the Bank have traditionally been
long-term loans made for periods of up to 30 years at either fixed or adjustable
rates of interest. It has generally been the Bank's policy to sell most of its
longer term (greater than 10 years) fixed rate loans and a portion of its
adjustable rate loans, while retaining the servicing rights. The Bank's
Asset/Liability Committee ("ALCO"), which is comprised of the Bank's senior
management and certain other officers, reviews this policy from time to time as
part of the Bank's overall asset/liability management program.
The majority of long-term fixed rate loans are originated using
underwriting standards and standard documentation allowing their sale to FHLMC.
The Bank also offers jumbo fixed and variable rate mortgages. The underwriting
standards for jumbo loans are similar to those used for non-jumbo mortgages. The
Bank sells a portion of its jumbo mortgages.
<PAGE>
The majority of the Bank's loan originations are adjustable rate
residential mortgage loans. The interest rate on these loans may either adjust
on an annual basis, or feature an initial period, generally three to ten years,
during which the interest rate is fixed. Generally, interest rates adjust on an
annual basis after any initial fixed rate term. During 1999, most adjustable
rate loan originations featured an initial fixed rate term. Adjustable rate
loans may have limitations on the amount of the adjustment of 2.0% per
adjustment and 6.0% over the life of the loan, and on the periods within which
the adjustments may be made. Rate adjustments on residential mortgage loans are
generally tied to the weekly average yield on U.S. Treasury securities adjusted
to constant maturities of one year. Despite the benefits of adjustable rate
mortgage loans to the Bank's asset/liability management program, they do pose
potential additional risks, primarily because as interest rates rise, the
underlying payments by the borrowers rise, increasing the potential for default,
while at the same time the marketability of the underlying property may be
adversely affected by higher interest rates. The history of the one year
Treasury bill index, as of the last business day of each year for the last three
years, shows that this index has fluctuated from 5.47% in 1996 to 5.53% in 1997
and 4.52% in 1998.
The Bank may at times offer adjustable rate mortgage loans with an initial
discount, as is customary in the marketplace. This pricing decision is based on
management's decision to remain competitive while at the same time assuring
prudent underwriting guidelines. In this respect, the Bank underwrites loans as
if fully indexed, or within maximum limitations established in secondary market
guidelines, with a view toward minimizing potential losses resulting from
increased costs to the borrowers.
Construction loans on residential properties are made to individuals for
the construction of their primary or secondary homes. Construction loans are
made for up to 80% of the appraised value of the property upon completion.
Construction loan funds are periodically disbursed as pre-specified stages of
construction are attained. Residential construction loans, which are typically
made for a period of 30 years, require monthly interest payments during
construction and begin to amortize after the construction phase has been
completed, at which time they automatically convert into permanent mortgage
loans.
Under a program that has been in existence since 1993, the Bank offers
loans on one to four family primary dwellings for first time home buyers with
original loan to value ratios up to 90%. These loans are made for periods up to
30 years for existing dwellings and up to 31 years for the construction of a
primary dwelling.
Commercial Real Estate Lending. The Bank originates permanent and
construction loans on commercial real estate. These loans mainly consist of
mortgages primarily on investment properties and properties utilized by retail
and small service businesses such as restaurants, guest houses and various
retailers. The Bank lends for speculative real estate construction activities on
a limited basis and closely monitors these loans. At December 31, 1998, such
loans accounted for $6.4 million, or 2.9%, of the total loan portfolio
(excluding loans held for sale).
<PAGE>
The Bank's current policy limits commercial real estate loans (including
both permanent and construction) to 30% of the total loan portfolio. At December
31, 1998 commercial real estate loans totaled 20.6% of the Bank's loan portfolio
(including loans held for sale) as compared to 21.8% at the end of 1997.
During 1997 and 1998 most commercial real estate loans were granted for up
to 75% of the appraised value of the property. Most of these loans were for
terms from 6 months to 20 years at interest rates adjustable from one to three
year periods at the Bank's sole discretion, or to a specific spread over the
prime rate published in the Wall Street Journal. This policy has enabled the
Bank to adjust the interest rate yield on the commercial real estate portfolio
to compensate for changes in costs of funds, credit risk and balance
relationships maintained by the borrowers. The periodic adjustable rate feature
of this portfolio can enhance the Bank's liquidity by sale of these loans to
participants when deemed advisable. Protection of the Bank's interest in the
real estate collateral is covered by use of title, fire, casualty and flood
insurance in applicable amounts.
Commercial real estate lending may entail significant additional risks
compared to residential mortgage lending. Loan size typically may be larger.
Payment experience on such loans can be more easily influenced by adverse
conditions in the economy or in the real estate market. Construction financing
involves a higher degree of risk of loss than long term financing on improved
occupied real estate. Property values at completion of construction or
development can be influenced by underestimation of construction costs. The Bank
may be required to advance funds beyond the original commitment in order to
finish the development. If projected cash flows or value of the property proves
to be inaccurate because of unanticipated construction costs or lower than
expected sales volume, the project may have a value that is insufficient to
assure full repayment.
Construction loans on commercial properties are extended to individuals,
unincorporated small business borrowers or to their companies, partnerships,
trusts or other business entities formed to hold title to the business property.
Such loans are made for periods up to 21 years with interest only during the
construction period (usually nine to twelve months) and regular amortization
thereafter. Funds are disbursed as prespecified stages of construction are
completed.
Commercial Business Loans. The Bank offers a wide variety of commercial
loan services, including short and long-term business loans, lines of credit and
letters of credit. The principal market for these loans is small to medium size
businesses in Nantucket. Most commercial business loans are written generally
for terms of 30 to 180 days or under one year as a line of credit. Longer-term
commercial business loans are granted up to five years and are subject to daily
or monthly rate adjustments based on the prime rate as published in the Wall
Street Journal. These interest rate sensitive loans allow the Bank to maintain
an interest rate spread over its cost of funds. The interest rate paid by
individual customers over the base rate is determined by the lenders and Bank
management after consideration of the degree of credit risk, term of the loan,
the borrower's overall relationships, the size of the loan and other pertinent
criteria. These loans may be advanced on an unsecured basis or may be secured by
real estate, inventory or other business assets. Loans to commercial businesses
may entail significant additional risks compared to residential mortgage
lending. These loans are subject to changes in the local and regional economy as
well as changes in particular industries and lines of business. Analyzing the
unique factors and risks affecting each business requires expertise and
experience which is different from that needed for loans secured by real estate.
Frequently, the arrangement involves both business services and consumer
products, particularly residential real estate loans.
<PAGE>
Consumer Lending. The Bank offers a variety of consumer loans, including
second mortgage loans, home equity loans, automobile loans, secured and
unsecured personal loans and boat loans. These loans are made at both fixed and
adjustable rates of interest. They vary in terms depending on the type of the
loan. Second mortgage loans have terms of up to 15 years, and provide for annual
interest rate adjustments, while other consumer loans have shorter terms and/or
fixed rates of interest.
Loan Solicitation and Processing. Loan originations come from a number of
sources. Most real estate loans are attributable to referrals from existing
customers, real estate brokers and builders as well as walk-in customers and
depositors. Commercial business loan originations are generally obtained through
officer calls, existing customers and business relationships and referrals.
Consumer loans generally result from existing depositors.
Each loan originated by the Bank is underwritten by personnel of the Bank,
with individual lending officers, a committee of loan officers and the Bank's
Executive Committee having the authority to approve loans up to various limits.
Independent appraisers are used to appraise the property intended to secure real
estate loans. The Bank's underwriting criteria are designed to minimize the
risks of each loan. There are detailed guidelines concerning the types of loans
that may be made, the nature of the collateral required, the information that
must be obtained concerning the loan applicant and follow-up inspections of
collateral after the loan is made.
Income from Lending Activities. Interest rates charged by the Bank on its
loans are determined by market interest rates, the Bank's strategic plans and
goals, the availability of funds to lend, the demand for loans and competitive
loan rates offered in its lending area.
In addition to interest earned on loans, the Bank receives loan origination
fees for originating real estate loans. Loan origination fees are a percentage
of the principal amount of the loan and are charged to the borrower for the
creation of the loan. Currently, the Bank generally charges fees of up to 1% on
permanent residential mortgage loans (2% is charged on certain residential
loans), 1/2% to 1% on residential construction loans and 1% to 1 1/2% on
commercial real estate loans. For accounting purposes, the Bank defers loan
origination fees net of direct underwriting costs and amortizes the balance over
the life of the loans. On loans written at a discounted initial rate, net
origination fees are amortized over the period of discount. The Bank also
receives other fees and charges relating to loans, which include loan
application fees, late payment charges and fees collected in connection with
loan modifications. These fees and charges do not constitute a material source
of income for the Bank.
Investment Activities
Interest income from short-term investments (consisting of federal funds
sold and interest bearing deposits in banks) and securities held to maturity and
available for sale provides an additional significant source of income for the
Bank. The Bank's securities portfolio consists mainly of United States
Government and agency obligations, short-term corporate bonds, notes and
debentures and state and municipal obligations and a portfolio of approximately
$8.2 million of mortgage backed securities, collateralized mortgage obligations
and real estate mortgage investment conduits ("REMICS"). From time to time the
Bank may invest in mutual funds or equity securities of various corporations and
other issuers. It is the Bank's current policy to limit to 5% of its investment
portfolio the amount invested in equity securities and to avoid concentration of
equity investments in any one industry.
<PAGE>
The Company's primary objective with respect to its securities portfolio is
to provide liquidity and income, consistent with prudent consideration for risk,
maturity and overall diversification. The Bank's President and Chief Financial
Officer are generally charged with executing the Bank's investment policy on a
daily basis. They have discretion generally to buy and sell securities within
the guidelines of the current plan. All transactions outside of the scope of the
current plan must be discussed with and approved by the Bank's Executive
Committee. All funds not needed to meet the daily investment requirements are
invested in either federal funds or money market instruments. All transactions
are ratified by the Bank's Board of Directors.
Sources of Funds
General. Savings accounts, checking accounts and other types of deposits
have historically constituted the primary source of funds for the Bank. In
addition to deposits, the Bank obtains funds from FHLB borrowings, scheduled
loan repayments, loan prepayments and loan sales. Scheduled loan repayments are
a relatively stable source of funds while deposit inflows and outflows and loan
prepayments vary widely and are influenced by prevailing interest rates and
general and local economic conditions. Dividends from the Bank represent the
only source of liquidity for the Company.
Deposits. The Bank offers a broad selection of deposit instruments to the
general public, including NOW accounts, regular savings accounts, money market
checking accounts, fixed and variable rate time accounts, IRA and Keogh
retirement accounts and commercial checking accounts. In the past the bank has
utilized brokered deposits, however, at December 31, 1998 brokered deposits
totaled less that 1% of total deposits. The Bank's management determines the
interest rates offered on deposit accounts based on the Bank's strategic plans
and goals, U.S. Government treasury rates, borrowing rates, competition,
liquidity needs and the expected volatility of existing deposits.
Borrowings. The Bank is a member of the FHLB of Boston. This membership
enables the Bank to borrow from the FHLB, which helps address the inherent
problem on Nantucket Island of a deposit base which is unable to fund loan
demand. The Bank also utilizes borrowings to reduce interest rate risk.
Dividend Policy
The Company's Board of Directors meets quarterly to discuss the payment of
dividends. Many factors such as earnings, the economy, quality of assets,
allowance for loan loss and projected capital needs are reviewed. After due
consideration, the Board may vote to pay either the same dividend as the
previous quarter, or to increase, decrease or omit the dividend.
Subsidiaries of the Bank
The Bank has two subsidiaries, N.B. Securities, Inc., which has been
classified as a securities corporation under the laws of the Commonwealth of
Massachusetts to take advantage of the tax benefits available to such
corporations and N. realty Corp., which intends to elect to be taxed as a real
estate investment trust.
Supervision, Regulation and Operating Powers
General. The Company and the Bank are extensively regulated under federal
and state law. The Company, as a Delaware corporation, is subject to regulation
by the Secretary of the State of Delaware and the rights of its stockholders are
governed by the General Corporation Law of the State of Delaware.
<PAGE>
Federal Bank Holding Company Act Regulation. On August 30, 1988, the
Company, pursuant to approval received from the Board of Governors of the
Federal Reserve Board System ("FRB"), became a registered bank holding company.
As a result, its activities are subject to certain limitations, which are
described below, and transactions between the Bank and the Company or its other
affiliates are also subject to certain restrictions.
Under the Bank Holding Company Act, a bank holding company must obtain FRB
approval before it acquires direct or indirect ownership or control of any
voting shares of any bank if, after such acquisition, it will own or control
directly or indirectly more than 5% of the voting stock of such bank, unless it
already owns a majority of the voting stock of such bank. FRB approval must also
be obtained before a bank holding company acquires all or substantially all of
the assets of a bank or merges or consolidates with another bank holding
company. Any acquisition, directly or indirectly, by a bank holding company or
its subsidiaries of any voting shares of, or interest in, or all or
substantially all, of the assets of any bank located outside of the state in
which the operations of the bank holding company's banking subsidiaries are
principally conducted, may not be approved by the FRB unless the laws of the
state in which the bank to be acquired is located specifically, authorizes such
an acquisition.
The Bank Holding Company Act and regulations adopted thereunder limit the
activities of a bank holding company and its subsidiaries to the business of
banking or of managing or controlling banks, and to such other activities as the
FRB may determine to be so closely related to banking as to be a proper incident
thereto. The activities of the Company and its non-bank subsidiaries are subject
to these legal and regulatory limitations under the Bank Holding Company Act and
the FRB's regulations thereunder.
In addition to the statutory and regulatory restrictions on the non-bank
activities of the Company, the FRB has taken the position that it has the
authority, under its general supervisory authority over bank holding companies
and their subsidiaries, to prevent activities of a bank holding company's
subsidiaries that the FRB regards as unsafe or unsound, or to require a bank
holding company to maintain a higher level of capital to support such
activities. In this connection, the FRB has expressed serious reservations about
applications by bank holding companies to acquire savings banks that are engaged
directly or through subsidiaries in real estate development activities.
As a bank holding company, the Company is required to give the FRB prior
written notice of any purchase or redemption of its outstanding equity
securities if the gross consideration for the purchase or redemption, when
combined with the net consideration paid for all such purchases or redemptions
during the preceding 12 months, is equal to 10% or more of the Company's
consolidated net worth. The FRB may disapprove such a purchase or redemption if
it determines that the proposal would violate any law, regulation, FRB order,
directive, or any condition imposed by, or written agreement with, the FRB.
Massachusetts Banking Laws and Supervision. Massachusetts chartered savings
banks such as the Bank are regulated and supervised by the Commissioner. The
Commissioner is required to examine each state-chartered bank at least once
every two years. The approval of the Commissioner is required to establish or
close branches, merge with other banks, form a bank holding company and
undertake many other activities. Massachusetts statutes and regulations govern
among other things, investment powers, lending powers, deposit activities,
maintenance of surplus and reserve accounts, the distribution of earnings, the
payment of dividends, issuance of capital stock, branching, acquisitions,
mergers, and consolidations.
<PAGE>
Any Massachusetts bank that does not operate in accordance with the
regulations, policies and directives of the Commissioner may be subject to
sanctions for non-compliance. The Commissioner may under certain circumstances
suspend or remove trustees, directors or officers who have violated the law,
conducted the bank's business in a manner which is unsafe, unsound or contrary
to the depositors' interests, or been negligent in the performance of their
duties.
Deposit Insurance. The Bank's deposit accounts are insured by the Bank
Insurance Fund of the FDIC to a maximum of $100,000 per separately insured
account, and deposits in excess of that amount in each separately insured
account are insured by the Depositors Insurance Fund.
Pursuant to section 7 of the Federal Deposit Insurance Act (12 USC 1817),
as amended, the FDIC has incorporated a risk based deposit insurance assessment.
Under this risk based system, the assessment rate for an insured depository
depends on the assessment risk determined by the institutions capital level and
supervisory evaluations. Institutions are assigned to one of three capital
groups - well capitalized, adequately capitalized or undercapitalized.
Any FDIC-insured bank which does not operate in accordance with FDIC
regulations, policies and directives may be sanctioned for non-compliance.
Proceedings may be instituted against any FDIC-insured bank or any director or
trustee, officer or employee of such bank who engaged in unsafe or unsound
practices, including the violation of applicable laws and regulations. The FDIC
has the authority to terminate insurance of accounts pursuant to the procedures
established for that purpose or impose civil money penalties.
All Massachusetts chartered savings banks are required to be members of the
Depositors Insurance Fund ("DIF"). The DIF maintains a private deposit insurance
fund which insures all deposits in member banks which are not covered by federal
insurance, which, in the case of the Bank, are its deposits in excess of
$100,000 per insured account. In 1998 and 1997, the Bank's premium for this
insurance was assessed at an annual rate of 1/50 of 1% of insured deposits.
Competition
The Bank faces strong competition from other banks, mortgage banking
companies and other financial service providers, many of which have
substantially greater resources than the Bank.
The Bank's most direct competition for deposits primarily comes from other
banks located on Nantucket Island and in southeastern Massachusetts, credit
unions, mutual funds and government securities. The Bank competes for deposits
principally by offering depositors convenient branch hours and locations,
efficient and attentive service, a wide variety of deposit programs, automated
teller machines and competitive interest rates. It does not rely upon any single
individual, group or entity for a material portion of its deposits.
Competition for real estate loans comes primarily from other banks,
mortgage banking companies and other institutional lenders. The Bank competes
for loan origination primarily based on the efficiency and quality of service
that it provides as well as the interest rates and loan fees that it charges.
The competition for loans varies depending on factors which include, among
others, the general availability of lendable funds and credit, general and local
economic conditions, current interest rate levels, conditions in the mortgage
market and other factors which are not readily predictable.
<PAGE>
In addition to competing with other savings banks and financial services
organizations based in Massachusetts, the Bank has and is expected to face
increased competition from major commercial banks headquartered outside of
Massachusetts as a result of the interstate banking laws which currently permit
banks nationwide to enter the Bank's market area and compete with it for
deposits and loan originations.
Employees
As of December 31, 1998 the Company and Bank had 55 full-time-equivalent
employees. None of these employees is represented by a collective bargaining
agreement. The Company believes its employee relations are good.
Guide 3 Statistical Disclosures
The following tables contain additional consolidated statistical data about the
Company and the Bank.
I. Distribution of Assets, Liabilities and Shareholders' Equity; Interest
Rates and Interest Differential.
A. The following table presents average consolidated balance sheets for each
of the three years ending December 31, 1998. Loans held for sale are
included in residential real estate loans.
<PAGE>
<TABLE>
<CAPTION>
Home Port Bancorp, Inc. and Subsidiary
Average Consolidated Balance Sheets
(dollars in thousands, except per share data)
December 31,
---------------------------------------
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Assets
Cash and due from banks ................................................ $ 7,281 $ 5,329 $ 5,047
Federal funds sold and interest bearing deposits in banks .............. 1,647 1,176 1,336
--------- --------- ---------
Total cash and cash equivalents ..................................... 8,928 6,505 6,383
Securities available for sale and held to maturity ..................... 23,701 22,821 23,724
FHLB Stock ............................................................. 3,069 2,396 2,321
Loans
Residential real estate loans ....................................... 151,622 109,592 94,932
Commercial real estate and business loans ........................... 57,303 47,950 42,562
Consumer loans ...................................................... 5,801 6,026 6,304
--------- --------- ---------
Total loans .................................................... 214,726 163,568 143.798
Less: Allowance for loan losses ........................................ (3,001) (2,525) (2,310)
--------- --------- ---------
Net loans ...................................................... 211,726 161,043 141,488
Other assets ........................................................... 3,455 3,383 2,551
========= ========= =========
Total assets ................................................ $ 250,878 $ 196,148 $ 176,467
========= ========= =========
Liabilities and Stockholders' Equity
Deposits
Regular savings and 90 day notice ................................... $ 17,715 $ 14,245 $ 13,691
NOW accounts ........................................................ 39,832 27,907 25,200
Money market deposit accounts ....................................... 33,444 24,575 20,890
--------- --------- ---------
Total savings accounts ......................................... 90,991 66,727 59,781
Demand ................................................................. 19,331 11,005 8,972
Time ................................................................... 64,871 56,564 52,942
--------- --------- ---------
Total deposits ................................................ 175,193 134,296 121,695
Borrowed funds ......................................................... 49,026 38,969 33,877
Other liabilities ...................................................... 3,946 1,977 1,733
--------- --------- ---------
Total liabilities ........................................... 228,165 175,242 157,305
Stockholders' equity
Preferred stock $.01 par value 2,000,000 shares
authorized, none issued .......................................... -- -- --
Common stock $.01 par value 10,000,000 shares
authorized; 2,325,494 shares issued .............................. 23 23 23
Additional paid-in capital .......................................... 17,473 17,473 17,473
Retained earnings ................................................... 9,588 7,821 6,090
Unrealized gain (loss) on securities available for sale, net of taxes 26 (14) (27)
Less: Treasury stock, at cost (483,604 shares)....................... (4,397) (4,397) (4,397)
--------- --------- ---------
Total stockholders' equity .................................. 22,713 20,906 19,162
--------- --------- ---------
Total liabilities and stockholders' equity .................. $ 250,878 $ 196,148 $ 176,467
========= ========= =========
</TABLE>
<PAGE>
B. An analysis of net interest earnings, including the average amount of
interest-bearing assets and liabilities outstanding during the period, interest
earned or paid, average yields and costs, and net yield on interest-earning
assets is presented under the caption "Net Interest Income" of "Management's
Discussion and Analysis of Financial Condition and Results of Operations" in the
1998 Annual Report.
Interest income is reported on a fully taxable-equivalent basis. Tax-exempt
income is converted to a fully taxable equivalent basis by assuming a 34%
marginal federal income tax rate adjusted for applicable state income taxes net
of the related federal tax benefit. Interest on nonaccrual loans is included in
the analysis of net interest earnings to the extent that such interest income
has been recognized in the Consolidated Statements of Earnings.
C. An analysis of rate/volume changes in interest income and interest expense is
presented under the caption "Net Interest Income" of "Management's Discussion
and Analysis of Financial Condition and Results of Operations" in the 1998
Annual Report.
II. Securities Available for Sale and Securities Held to Maturity
A. The carrying amounts of securities is presented in the "Notes to
Consolidated Financial Statements" in the 1998 Annual Report.
B. Maturities of debt securities are presented in the "Notes to Consolidated
Financial Statements" in the 1998 Annual Report. Mortgage-backed securities
are included based on their weighted average maturities, adjusted for
anticipated prepayments. Yields on tax exempt obligations are not computed
on a tax equivalent basis.
<PAGE>
III. Loan portfolio
A. The following table sets forth the composition of the loan portfolio for
each of the past five years. Loans held for sale are included in
residential mortgage loans.
<TABLE>
<CAPTION>
December 31,
-----------------------------------------------------------------------------------------
(dollars in thousands) 1998 1997 1996 1995 1994
---------------- -------------- --------------- --------------- --------------
Amount % Amount % Amount % Amount % Amount %
-------- --- -------- --- -------- --- -------- --- -------- ---
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Mortgage loans:
Residential $136,749 59% $105,506 60% $88,589 59% $76,127 59% $70,057 59%
Residential construction 44,609 19% 21,827 12% 21,100 14% 17,649 14% 24,957 21%
Commercial 42,439 18% 36,188 21% 33,891 22% 28,660 22% 27,404 23%
Commercial construction 8,142 4% 4,535 3% 5,960 4% 2,456 4% 910 1%
-------- --- -------- --- -------- --- -------- --- -------- ---
Total principal balances 231,939 100% 168,056 96% 149,540 99% 124,892 99% 123,328 104%
Less due borrowers on
Incomplete loans:
Residential (12,137) (5%) (4,719) (3%) (6,743) (5%) (5,576) (5%) (13,463) (11%)
Commercial (2,379) (1%) (1,845) (1%) (3,342) (2%) (1,213) (3%) (1) -
Less deferred loan
origination fees (734) - (474) - (517) - (427) - (443) -
-------- --- -------- --- -------- --- -------- --- -------- ---
Total mortgage loans 216,689 94% 161,018 92% 138,938 92% 117,676 91% 109,421 93%
Other loans
Consumer 1,725 1% 1,564 1% 1,695 1% 1,204 1% 600 1%
Second mortgage 1,731 1% 1,712 1% 1,987 1% 2,145 2% 2,027 1%
Home equity 1,521 1% 1,975 1% 1,542 1% 1,834 1% 1,399 1%
Commercial 10,791 4% 10,425 6% 8,534 6% 7,195 6% 6,048 5%
Passbook & stock secured 592 - 817 960 1% 1,342 1% 884 1%
-------- --- -------- --- -------- --- -------- --- -------- ---
Total other loans 16,360 7% 16,493 9% 14,718 10% 13,720 11% 10,958 9%
Less allowance for loan loss (3,145) (1%) (2,609) (1%) (2,365) (2%) (2,249) (2%) (2,154) (2%)
-------- --- -------- --- -------- --- -------- --- -------- ---
Loans, net $229,904 100% $174,902 100% $151,291 100% $129,147 100% $118,225 100%
======== === ======== === ======== === ======== === ======== ===
</TABLE>
<PAGE>
B. An analysis of the maturity and interest rate sensitivity of Real Estate
Construction and Commercial business loans as of December 31, 1998 follows:
<TABLE>
<CAPTION>
Period to Maturity or Repricing from December 31, 1998
-------------------------------------------------------
(in thousands) After One
One year or But Within Over Five
Less Five Years Years Total
------- ------- ------- -------
<S> <C> <C> <C> <C>
Real estate construction $32,166 $ 4,380 $ -- $36,547
Commercial business .... 7,074 2,737 980 10,791
------- ------- ------- -------
$39,230 $ 7,127 $ 980 $47,338
======= ======= ======= =======
</TABLE>
Real estate construction includes residential and commercial construction loans,
which are presented net of unadvanced funds. All of the loans included in the
"after one year but within five year" and "over five year" categories have
adjustable rates of interest.
C. Risk Elements. Reference is made to the captions "Non-performing Assets and
Provision for Loan Losses" included in "Management's Discussion and Analysis of
Financial Condition and Results of Operations" in the 1998 Annual Report.
1. Non-performing loans are summarized as follows:
<TABLE>
<CAPTION>
December 31,
-----------------------------------------------------------
1998 1997 1996 1995 1994
------ ------ ----- ------ -----
<S> <C> <C> <C> <C> <C>
Loans accounted for on a non-accrual basis $ - $ - $ 10 $ - $357
Accruing loans 90 days or more past due 268 10 433 - 76
Restructured loans - - - - 96
------ ------ ----- ------ ----
$ 268 $ 10 $ 443 $ - $529
====== ====== ===== ===== ====
</TABLE>
2. Potential Problem Loans. Potential problem loans consist of certain accruing
loans that were less than 90 days past due at December 31, 1998, but were
identified by management of the Bank as potential problem loans. Such loans are
characterized either by weaknesses in the financial condition of borrowers or by
collateral deficiencies. Based on historical experience, the credit quality of
some of these loans may improve as a result of collection efforts, while the
credit quality of other loans may deteriorate, resulting in some amount of
losses. These loans are not included in the analysis of nonaccrual, past due and
restructured loans in Section III.C.1 above. At December 31, 1998, potential
problem loans amounted to $623,000. The Bank's loan policy provides guidelines
for the review of such loans in order to facilitate collection.
Depending on future events, these potential problem loans, and others not
currently identified, could be classified as nonperforming in the future.
<PAGE>
3. Foreign Outstandings. None
4. Loan Concentrations. The Company has no concentration of loans that exceed
10% of its total loans except as disclosed by types of loan in Section
III.A.
D. Other Interest-Bearing Assets: None
<PAGE>
III. Summary of Loan Loss Experience
A. An analysis of loss experience follows:
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------------------------------------
1998 1997 1996 1995 1994
--------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at beginning of year $2,609 $2,365 $2,249 $2,154 $2,093
Charge-offs:
Residential mortgage loans - - 19 - -
Commercial mortgage loans - - - 7 5
Commercial loans 11 91 31 - 25
All other loans 12 19 88 13 11
--------------------------------------------------------
23 110 138 20 41
Recoveries:
Residential mortgage loans 116 37 40 76 36
Commercial mortgage loans 62 98 36 13 12
Commercial loans 223 67 99 24 46
All other loans 8 2 4 2 8
--------------------------------------------------------
409 204 179 115 102
Net recoveries 386 94 39 95 61
Additions charged to operations 150 150 75 - -
========================================================
Balance at end of year $3,145 $2,609 $2,365 $2,249 $2,154
========================================================
</TABLE>
The factors influencing management's judgment in determining the amount of the
additions to the loan loss allowance charged to operating expense are detailed
in caption "Provision for Loan Losses" included in "Management's Discussion and
Analysis of Financial Condition and Results of Operations" in the 1998 Annual
Report.
B. The allocation of the allowance for loan losses, and percent of each loan
category to total loans (excluding loans held for sale) is as follows:
<TABLE>
<CAPTION>
End of year balance allocated as follows: 1998 1997 1996 1995 1994
--------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Residential mortgage loans $1,300 $ 914 $ 851 $ 532 $ 456
% of these loans to all loans 70.3% 66.8% 64.7% 64.6% 65.1%
Commercial mortgage loans 886 645 623 1,145 1,114
% of these loans to all loans 22.1% 23.3% 25.1% 24.3% 25.1%
Commercial loans 260 229 192 156 254
% of these loans to all loans 5.0% 6.3% 5.9% 5.9% 5.4%
All other loans 106 113 114 281 330
% of these loans to all loans 2.6% 3.6% 4.3% 5.2% 4.4%
Unallocated 593 708 585 135 -
========================================================
Total $3,145 $2,609 $2,365 $2,249 $2,154
========================================================
100% 100% 100% 100% 100%
========================================================
</TABLE>
<PAGE>
V. Deposits
A. Average deposit balances outstanding and the average rates paid thereon are
presented in the following table:
<TABLE>
<CAPTION>
At December 31,
----------------------------------------------------------------------------------------------------
1998 1997 1996
-------------------------------- -------------------------------- ----------------------------------
(dollars in thousands)
Average % of Average Average % of Average Average % of Average
Balance Deposits Rate Balance Deposits Rate Balance Deposits Rate
-------------------------------- -------------------------------- ----------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Demand $19,331 11.03% - % $11,005 8.19% - % $8,972 7.37% - %
------------------------------ -------------------------------- ----------------------------------
Savings accounts:
Regular savings 17,715 10.11% 2.53% 14,245 10.61% 2.69% 13.691 11.25% 2.66%
NOW 39,832 22.74% 1.22% 27,907 20.78% 1.28% 25,200 20.71% 1.28%
Money market 33,444 19.09% 3.74% 24,575 18.30% 3.63% 20.890 17.17% 3.42%
------------------------------ -------------------------------- ----------------------------------
Total savings 90,991 51.94% 2.40% 66,727 49.69% 2.44% 59,781 49.12% 2.34%
accounts
Time deposits 64,871 37.03% 5.13% 56,564 42.12% 5.24% 52,942 43.50% 5.32%
============================== ================================ ==================================
Total deposits $175,193 100.00% 3.14% $142,436 100.00% 3.42% $135,082 100.00% 3.14%
============================== ================================ ==================================
</TABLE>
B. Not Applicable
C. Not Applicable
D. The maturity schedule of time deposits in amounts of $100,000 or more at
December 31, 1998 was as follows:
<TABLE>
<CAPTION>
Time Remaining Until Maturity
--------------------------------------------------------------
(dollars in thousands) 3 Months Over 3 Over 6 Over 12 Total
or Less Months to Months Months
6 Months to 12
Months
---------- ----------- ---------- ---------- --------
<S> <C> <C> <C> <C> <C>
Certificate of deposit $20,070 $9,899 $6,798 $2,680 $39,447
</TABLE>
E. Not Applicable
VI. Return on Equity and Assets
Information on the Company's return on equity, return on assets, dividend payout
ratio and equity to assets ratio is presented in "Financial Highlights" in the
1998 Annual Report.
VII. Short Term Borrowings. Not Applicable
<PAGE>
Item 2. DESCRIPTION OF PROPERTY
The Bank owns three properties and leases two properties. The three
properties owned consist of the Bank's main office, one branch office and an
undeveloped parcel of land. The Bank leases 1,500 square feet of office space
and one automated teller facility.
The Bank's main office is located at 104 Pleasant Street on Nantucket, and
was acquired on June 30, 1979. This 8,500 square foot facility had a net book
value of $320,000 at December 31, 1998, including the book value of the land on
which the facility is located.
The Bank's branch office, located at 2 Orange Street, Nantucket is a 3,200
square foot facility which the Bank acquired in 1921, and had a net book value
of $31,000 at December 31, 1998, including the book value of the land on which
the facility is located.
On August 30, 1995 the Bank purchased a three-quarter acre parcel of land
located on Amelia Drive, Nantucket for $240,000. The future use of this land has
not been determined.
The Bank leases 16 square feet of space at the main terminal building on
Nantucket Island for an automated teller machine facility. The lease expires on
March 31, 1999.
During 1998, the Bank entered into a non-cancelable operating lease for
office space that expires in 2003. This lease contains five one-year renewal
options that may be exercised by the Bank.
At December 31, 1998, the net book value of the Bank's furnishings,
equipment and autos was $1.7 million. The Bank believes that the fair market
value of its properties is significantly in excess of the book value of these
properties.
For further information, see Note 4 of Notes to Consolidated Financial
Statements in the 1998 Annual Report to Stockholders.
Item 3. LEGAL PROCEEDINGS
From time to time, the Bank is involved in legal proceedings incidental to
its business. None of these actions individually or in the aggregate is believed
to be material to the financial condition of the Bank.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of the year ended December 31, 1998.
<PAGE>
PART II
Item 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The information contained in the section captioned "Stock Market Data" in
the 1998 Annual Report to Stockholders is incorporated herein by reference. For
information regarding the Company's dividend policy see also "Item 1 -- Business
- -- Dividend Policy."
Item 6. SELECTED FINANCIAL DATA
The information contained in the section captioned "Financial Highlights"
in the 1998 Annual Report to Stockholders is incorporated herein by reference.
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
The information contained in the section captioned "Management's Discussion
and Analysis" in the 1998 Annual Report to Stockholders is incorporated herein
by reference.
Item 7A. QUANTITATIVE AND QUALITATIVE DOSCLOSURES ABOUT MARKET RISK
The information contained in the sub-section of "Management's Discussion
and Analysis" captioned "Asset/Liability Management and Market Risk" in the 1998
Annual Report to Stockholders is incorporated herein by reference.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements contained in the 1998 Annual Report to Stockholders are
incorporated herein by reference. Summaries of consolidated operating results on
a quarterly basis for the years ended December 31 follow:
<PAGE>
<TABLE>
<CAPTION>
1998 Quarters
(In thousands, except per share amounts)
First Second Third Fourth
<S> <C> <C> <C> <C>
Interest income .................... $4,290 $4,753 $5,005 $5,049
Interest expense ................... 1,978 2,234 2,148 2,130
------ ------ ------ ------
Net interest and dividend income ... 2,312 2,519 2,857 2,919
Provision for loan losses .......... 37 38 38 37
Non-interest income ................ 240 284 318 302
Non-interest expense ............... 1,724 1,317 1,527 1,590
------ ------ ------ ------
Income before income tax expense ... 791 1,448 1,610 1,594
Provision for income taxes ......... 306 469 562 555
====== ====== ====== ======
Net income ......................... $ 485 $ 979 $1,048 $1,039
====== ====== ====== ======
Earnings per common share - basic .. $ 0.26 $ 0.53 $ 0.57 $ 0.56
Earnings per common share - diluted $ 0.26 $ 0.53 $ 0.57 $ 0.56
Dividends declared per share ....... $ 0.20 $ 0.20 $ 0.20 $ 0.20
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
1997 Quarters
(In thousands, except per share amounts)
First Second Third Fourth
<S> <C> <C> <C> <C>
Interest income .................... $3,788 $3,980 $4,015 $4,168
Interest expense ................... 1,644 1,782 1,767 1,821
------ ------ ------ ------
Net interest and dividend income ... 2,144 2,198 2,248 2,347
Provision for loan losses .......... 37 38 38 37
Non-interest income ................ 223 226 272 286
Non-interest expense ............... 1,041 1,041 1,129 1,125
------ ------ ------ ------
Income before income tax expense ... 1,289 1,345 1,353 1,471
Provision for income taxes ......... 507 527 531 596
====== ====== ====== ======
Net income ......................... $ 782 $ 818 $ 822 $ 875
====== ====== ====== ======
Earnings per common share - basic .. $ 0.42 $ 0.44 $ 0.45 $ 0.48
Earnings per common share - diluted $ 0.42 $ 0.44 $ 0.45 $ 0.48
Dividends declared per share ....... $ 0.20 $ 0.20 $ 0.20 $ 0.20
</TABLE>
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
<PAGE>
Part III
Item 10. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) EXCHANGE ACT
Item 11. EXECUTIVE COMPENSATION
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by Items 10, 11, 12 and 13 is incorporated herein
by reference to the Company's definitive proxy statement for the annual meeting
of stockholders to be held on May 17, 1999 which will be filed with the
Securities and Exchange Commission pursuant to Regulation 14A on or before April
14, 1999.
Item 14. EXHIBITS AND REPORTS ON FORM 8 - K
(a) Documents Filed as Part of Form 10-KSB
1. Exhibits
(3) Certificate of Incorporation and Bylaws of Home Port
Bancorp, Inc. Incorporated herein by reference to exhibit
B and C to the Company's Registration on Form S-1
(No.33-21794) (the "Registration Statement")
(10.1.2) Employment Agreement between Nantucket Bank and William P.
Hourihan, Jr. Incorporated herein by reference to the
Registration Statement.
(10.1.3) Employment Agreement between Nantucket Bank and Daniel P.
Neath. Incorporated herein by reference to the
Registration Statement.
(10.1.4) Supplemental Retirement Agreement between Nantucket Bank
and Daniel P. Neath. Incorporated herein by reference to
the Company's Form 10-K for the Year Ended December 31,
1989, as filed with the SEC on April 13, 1990.
(10.1.5) Consulting Agreement between Home Port Bancorp, Inc. and
Karl L. Meyer dated May 1, 1998. Incorporated herein by
reference to the Company's Form 10-QSB for the quarterly
period ended June 30, 1998 as filed with the SEC on August
13, 1998.
(10.1.6) Home Port Directors Restricted Stock Option Plan dated May
1, 1998. Incorporated herein by reference to the Company's
Form 10-QSB for the quarterly period ended June 30, 1998
as filed with the SEC on August 13, 1998.
(14) 1998 Annual Report to Stockholders for the Fiscal Year
Ended December 31, 1998.
(21) Subsidiaries of the Registrant.
(b) No reports on Form 8-K were filed by the Registrant during the quarter ended
December 31, 1998.
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
had duly caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
HOME PORT BANCORP, INC.
Date: March 15, 1999 By: /s/ Karl L. Meyer
-----------------
Karl L. Meyer
President and Chief Executive Officer
(Duly Authorized Representative)
In accordance with the Exchange Act, this report has been signed below by
the following persons on behalf of the registrant and in the capacities and on
the dates indicated.
Signatures Date
- ---------- ----
/s/ Karl L. Meyer March 15, 1999
- -----------------
Karl L. Meyer
Chairman of the Board,
President and Chief Executive Officer
/s/ John M. Sweeney March 15, 1999
- -------------------
John M. Sweeney
Treasurer & Chief Financial Officer (Principal
Financial and Accounting Officer)
/s/ William P. Hourihan, Jr. March 15, 1999
- ----------------------------
William P. Hourihan, Jr.
Director
/s/ Charles F. DiGiovanna March 15, 1999
- -------------------------
Charles F. DiGiovanna
Director
/s/ Charles H. Jones, Jr. March 15, 1999
- -------------------------
Charles H. Jones, Jr.
Director
<PAGE>
Signatures (Continued) Date
- ---------------------- ----
/s/ Robert J. McKay March 15, 1999
- -------------------
Robert J. McKay
Director
/s/ Philip W. Read March 15, 1999
- ------------------
Philip W. Read
Director
/s/ Robert A. Trevisani, Esq. March 15, 1999
- ------------------------------
Robert A. Trevisani, Esq.
Director
<PAGE>
INDEX TO EXHIBITS
EXHIBIT
(3) Certificate of Incorporation and Bylaws of Home Port Bancorp,
Inc.- Incorporated by reference to Exhibit B and C to the
Company's Registration Statement on Form S-1 (No. 33-21794) (the
"Registration Statement").
(10.1.2) Employment Agreement between Nantucket Bank and William P.
Hourihan, Jr. Incorporated herein by reference to the
Registration Statement.
(10.1.3) Employment Agreement between Nantucket Bank and Daniel P Neath.
Incorporated herein by reference to the Registration Statement.
(10.1.4) Supplemental Retirement Agreement between Nantucket Bank and
Daniel P. Neath. N/A Incorporated herein by reference to the
Company's Form 10-K for the year ended December 31, 1989, as
filed with the Securities and Exchange Commission on April 13,
1990.
(10.1.5) Consulting Agreement between Home Port Bancorp, Inc. and Karl L.
Meyer dated N/A May 1, 1998. Incorporated herein by reference to
the Company's Form 10-QSB for the quarterly period ended June
30, 1998 as filed with the SEC on August 13, 1998.
(10.1.6) Home Port Directors Restricted Stock Option Plan dated May 1,
1998. N/A Incorporated herein by reference to the Company's Form
10-QSB for the quarterly period ended June 30, 1998 as filed
with the SEC on August 13, 1998.
(14) Annual Report to Stockholders for the Fiscal Year Ended December
31, 1998.
(21) Subsidiaries of the Registrant.
TABLE OF CONTENTS
Financial Highlights
Message to Stockholders
Management's Discussion and Analysis of Financial Condition and Results of
Operations
Consolidated Financial Statements
Notes to Consolidated Financial Statements
Independent Auditors' Report
Directors and Officers
Stockholders Information
Home Port Bancorp, Inc.
Home Port Bancorp, Inc. (the "Company") is a single bank holding company
incorporated in the state of Delaware which owns all of theissued and
outstanding common stock of Nantucket Bank (the "Bank") and is regulated by the
Federal Reserve Bank. The Bank, organized in 1834, is a Massachusetts chartered
savings bank serving the island of Nantucket. The primary business of the Bank
is to acquire deposits and originate residential and commercial mortgage loans
and commercial, business and consumer loans. The Bank's deposits are fully
insured by the Federal Deposit Insurance Corporation ("FDIC") up to $100,000 per
account, and the Depositors Insurance Fund for amounts in excess of $100,000.
The Bank is a member of the Federal Home Loan Bank system.
<PAGE>
Financial Highlights Home Port Bancorp, Inc. and Subsidiaries
<TABLE>
<CAPTION>
(Dollars in thousands, except per share data)
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
December 31,
Total assets $275,570 $208,815 $189,931 $167,272 $162,324
Loans, net of allowance for loan losses 213,899 163,733 142,425 120,540 110,205
Securities and FHLB stock 29,173 25,334 25,066 28,346 31,485
Deposits 188,668 142,436 135,082 114,357 104,386
Borrowed funds 58,921 41,742 32,335 32,837 33,107
At Stockholders' equity 24,032 21,948 20,103 18,379 18,524
For the Years Ended December 31,
Total interest income $19,097 $15,951 $14,450 $13,242 $10,796
Total interest expense 8,490 7,014 6,289 5,987 4,607
Net interest income 10,607 8,937 8,161 7,255 6,189
Provision for loan losses 150 150 75 - -
-------- -------- -------- -------- --------
Net interest income after provision for loan losses 10,457 8,787 8,086 7,255 6,189
Deposit and loan servicing fees and other income 962 898 879 846 674
Net gain (loss) from sales of mortgage loans
and securities 182 109 (5) (2) (115)
Non-interest expense 6,158 4,336 3,994 3,594 3,258
-------- -------- -------- -------- --------
Income before taxes 5,443 5,458 4,966 4,505 3,490
Provision for income taxes 1,892 2,161 1,931 1,749 1,381
======== ======== ======== ======== ========
Net income $3,551 $3,297 $3,035 $2,756 $2,109
======== ======== ======== ======== ========
Per share data
Earnings per common share - basic $1.93 $1.79 $1.65 $1.50 $1.15
======== ======== ======== ======== ========
Earnings per common share - diluted $1.93 $1.79 $1.65 $1.50 $1.15
======== ======== ======== ======== ========
Dividends declared per share $0.80 $0.80 $0.70 $1.60 $3.10
======== ======== ======== ======== ========
Stockholders' equity per share $13.05 $11.92 $10.91 $9.98 $10.06
======== ======== ======== ======== ========
Selected ratios
Return on average assets 1.42% 1.68% 1.72% 1.67% 1.35%
Interest rate spread (tax equivalent) 3.75% 4.08% 4.18% 4.00% 3.44%
Net interest margin (tax equivalent) 4.40% 4.72% 4.80% 4.59% 4.08%
Equity to asset ratio 8.72% 10.51% 10.58% 10.99% 11.41%
Return on average equity 15.63% 15.77% 15.84% 14.34% 9.71%
Dividend payout ratio 41.51% 44.68% 42.47% 274.02% 52.40%
</TABLE>
<PAGE>
Message to Stockholders Home Port Bancorp, Inc. and Subsidiaries
Your company posted record earnings, loan originations and deposit levels
in 1998. Net income increased by 8% to $3.6 million from $3.3 million earned in
1997. Annual earnings per common share increased from $1.79 to $1.93 for the
year 1998. Average loans and deposits increased by 29% over levels attained in
the preceding year and 1998 year end balances stood at $213.9 million and $188.7
million, respectively. Return on average equity has been maintained at just
below 16% for the past three years. The increase in assets out paced the
increase in retained earnings and the Bank's year-end equity to asset ratio
slipped from 10.5% in 1997 to 8.7% 1n 1998. Asset growth will be limited in 1999
and it is expected this ratio will increase.
Two significant one time events reduced income for the year. First, the
Bank suffered a check kiting loss amounting to $414,000 on a pre-tax basis.
Second, the Bank incurred $511,000 in organizational and legal expenses in
forming a real estate investment trust. These were partially offset by a
reduction in the over all tax rate from 40% to 35%. Without these two
significant events, 1998 earnings would have increased by 23% over 1997 reported
net income.
Interest spreads continue to narrow as a consequence of the industry-wide
decline in interest rates. Our net interest rate spread declined by 34 basis
points from 4.09 % recorded the year earlier, while the net interest rate margin
declined 28 basis points to 4.40%. This was not unexpected, however, and both
measures still will exceed industry averages. Management believes the
compression in the net interest margin will continue into 1999.
During 1998 real estate sales totaled $424 million on Nantucket. The median
sales price of a home has increased by 13% annually over the past six years and
the number of sales in 1998 were 19% above the 1997 level. Total year-end Bank
assets increased to $276 million, a 32% gain over comparative 1997 assets.
The increased volume of activity severely taxed both personnel and
facilities. The Bank is committed to providing its customers with easily
accessible facilities and efficient and courteous service. During 1998 the
Bank's operations department was moved to new expanded facilities adjacent to
the Pleasant Street office. A new telephone system was recently installed to
provide easy direct dial service to all Bank personnel. Teller and customer
service software will be upgraded to provide quicker access to customer
information and speed transaction processing time.
Additions to the Pleasant Street office are underway and modifications to
its lobby will make banking a more pleasant experience for our customers. The
bank acquired a site on the corner of Old South Road and Amelia Drive in 1995.
Plans to erect a branch bank at this location prior to the 2000 summer season
are under active consideration.
The current Board of Directors has managed Home Port since 1992. Daniel D.
McCarthy has been a vital member of this team. In March of this year he will
reach the Company's mandatory retirement age and must retire from the Board.
Your company has benefited from his counsel over these past years. We thank him
for his many contributions and wish him well in his future endeavors.
<PAGE>
Today, the Bank provides full-time employment to over fifty island
residents in meeting the needs of our customers. We appreciate and are grateful
for the continuing trust and support of the community. We will continue to
provide Nantucket with a full spectrum of banking products while maintaining a
high level of personalized service, one of the acknowledged hallmarks of island
businesses. Sincerely,
/s/ Karl L. Meyer
- -----------------
Karl L. Meyer
Chairman of the Board, President and CEO
2
<PAGE>
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Home Port Bancorp, Inc. and Subsidiaries
Results of Operations
Home Port Bancorp, Inc. ("the Company") reported net income of $3.6 million
in 1998, an increase of $.3 million, or 7.7%, over 1997 net income of $3.3
million. In 1997, net income increased by $.3 million, or 8.6% over 1996. Net
income per basic and diluted share was $1.93 in 1998 compared to $1.79 in 1997
and $1.65 in 1996. These increases in income were primarily the result of higher
growth in loans and deposits which resulted in higher levels of net interest
income. Significant items affecting these periods are reviewed in detail in the
following paragraphs.
Net Interest Income
Net interest income increased by $1.7 million, or 18.7%, to $10.6 million
in 1998 from $8.9 million in 1997. In 1997 net interest income increased by $776
thousand, or 9.5%, from $8.2 million in 1996.
The increase in net interest income in 1998 compared to 1997 was due to
increases in the average loan balances and interest-bearing deposits of 31.3%
and 26.4%, respectively, offset by a 32 basis point decrease in the net interest
margin (calculated on a tax-equivalent basis) to 4.40% from 4.72%. The increase
in net interest income in 1997 compared to 1996 was due to increases in the
average balances of loans and deposits offset by an 8 basis point decrease in
the tax-equivalent net interest margin. The tables on the following page provide
additional details of net interest income.
During 1998 the average yield of the Bank's loan portfolio decreased by 67
basis points to 8.15% from 8.82% in 1997. In 1997 the average yield on loans
decreased by 13 basis points to 8.82% from 8.95% in 1996. In both 1997 and 1998,
this decrease in yield was due to an increase in the percentage of residential
loans in the portfolio together with the effect of the decrease in market
interest rates.
The average yield on securities, adjusted to reflect tax-exempt securities
on a fully tax-equivalent basis, remained level at 5.89% in both 1998 and 1997.
The yield on securities was 5.98% in 1996. The Bank does not actively trade the
securities portfolio. Securities classified as "held to maturity" represented
69% of total securities at year end 1998 and 73% at year end 1997.
The average cost of funds was 4.14% in 1998 compared to 4.32% in 1997 and
4.29% in 1996. In 1998 the average cost of deposits decreased by 20 basis points
to 3.53% from 3.73% in 1997. In 1996 the average cost of deposits was 3.74%. The
lower average cost of deposits in 1998 was due to an increase in transaction
accounts (NOW and demand deposits), which typically bear a lower interest rate
than do certificates of deposit, and a general decline in market interest rates.
The cost of Federal Home Loan Bank ("FHLB") borrowings decreased 13 basis points
to 6.08% in 1998 from 6.21% in 1997 as a result of the decline in market rates.
The cost of borrowings was 6.11% in 1996.
The following table sets forth certain information relating to the Bank's
interest earning assets, interest bearing liabilities and net interest income,
calculated on a tax-equivalent basis. Short term investments are included in
securities and FHLB stock. Loans include loans held for sale and non-accrual
loans. Deposits exclude non-interest bearing demand accounts.
3
<PAGE>
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------------------------------------------------------------------------------
(dollars in thousands) 1998 1997 1996
-------------------------------- ------------------------------- -------------------------------
Average Yield/ Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate Balance Interest Rate
-------- ------- ----- ---------- ------- ----- --------- ------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest earning assets:
Residential loans $151,622 $11,330 7.47% $ 109,592 $ 8,896 8.12% $ 94,931 $ 7,849 8.27%
Commercial loans 57,303 5,603 9.78% 47,950 4,930 10.28% 42,562 4,373 10.27%
Consumer loans 5,801 576 9.93% 6,026 599 9.94% 6,304 641 10.17%
-------- ------- ----- ---------- ------- ----- --------- ------- -----
Total loans 214,726 17,509 8.15% 163,568 14,425 8.82% 143,797 12,863 8.95%
Securities and FHLB stock(1) 28,417 1,675 5.89% 26,393 1,554 5.89% 27,380 1,641 5.98%
-------- ------- ----- ---------- ------- ----- --------- ------- -----
Total interest earning assets $243,143 $19,184 7.89% $189,961 $15,979 8.41% $171,177 $14,504 8.47%
-------- ------- ----- ---------- ------- ----- --------- ------- -----
Interest bearing liabilities:
Deposits $155,862 5,509 3.53% $123,291 $ 4,594 3.73% $112,723 $ 4,219 3.74%
Borrowed funds 49,026 2,981 6.08% 38,969 2,420 6.21% 33,877 2,070 6.11%
-------- ------- ----- ---------- ------- ----- --------- ------- -----
Total interest bearing liabilities $204,888 $8,490 4.14% $162,260 $ 7,014 4.32% $146,600 $ 6,289 4.29%
-------- ------- ----- ---------- ------- ----- --------- ------- -----
Net interest income $10,694 $ 8,965 $ 8,215
======= ======= =======
Interest rate spread (2) 3.75% 4.09% 4.18%
===== ===== =====
Net interest margin (3) 4.40% 4.72% 4.80%
===== ===== =====
</TABLE>
(1) Securities income includes tax-equivalent adjustment of $87, $28 and $54 in
1998, 1997 and 1996, respectively.
(2) Represents the difference between average rate earned on interest earning
assets and average rate paid on interest bearing liabilities.
(3) Represents net interest income divided by average earning assets.
<PAGE>
Rate/Volume Analysis
The effect on net interest income as a result of changes in average
interest rates and balances follows:
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------------------------------------------------------------
(in thousands) 1998 vs. 1997 1997 vs. 1996
---------------------------------------------- ---------------------------------------------
Changes Due to Increase (Decrease) Changes Due to Increase (Decrease)
------------------------------------------- --------------------------------------------
Average Average
Average Average Rate/ Average Average Rate/
Balance (1) Rate (2) Volume (3) Total Balance (1) Rate (2) Volume (3) Total
----------- -------- ---------- ----- ----------- -------- ---------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest income:
Residential loans $3,413 $(712) $(267) $2,434 $1,212 $(142) $(23) $1,047
Commercial loans 962 (240) (49) 673 553 4 557
-
Consumer loans (22) (1) - (23) (28) (14) (42)
------ ----- ----- ------ ------ ----- ---- ------
-
Total loans 4,353 (953) (316) 3,084 1,737 (152) (23) 1,562
Securities and FHLB stock 119 - 2 121 (59) (27) (1) (87)
------ ----- ----- ------ ------ ----- ---- ------
Total interest income $4,472 $(953) $(314) $3,205 1,678 (179) (24) 1,475
------ ----- ----- ------ ------ ----- ---- ------
Interest expense:
Deposits $1,215 $(247) $(53) $915 395 (11) (9) 375
Borrowed funds 625 (51) (13) 561 311 34 5 350
------ ----- ----- ------ ------ ----- ---- ------
Total interest expense 1,840 (298) (66) 1,476 706 23 (4) 725
------ ----- ----- ------ ------ ----- ---- ------
Net interest income $2,632 $(655) $(248) $1,729 $972 $(202) $(20) $750
====== ===== ===== ====== ==== ===== ==== ====
</TABLE>
(1) Represents the changes in average balance multiplied by prior period yield.
(2) Represents the changes in yield multiplied by prior period average balance.
(3) Represents the changes in yield multiplied by changes in average balance.
4
<PAGE>
Non-Interest Income
Non-interest income consists of service charges and fees on deposit
accounts, fees for servicing mortgage loans and net gains or losses from the
sale of mortgage loans and securities available for sale.
In 1998 non-interest income increased $137 thousand, or 13.6%, to $1.1
million compared to $1.0 million in 1997. Deposit servicing fees increased by
$30 thousand, or 7.06%, due to increases in deposits. Loan servicing fees
decreased by $22 thousand or 8.5%, due to a decrease in the average balance of
loans serviced for others and a decrease in the average servicing fee. Other
fees and income increased by $56 thousand, or 26.0%, due to an increase in
income from automated teller machines and an increase in fees from the sale of
non-insured alternative investment products. Gains from the sale of mortgage
loans increased by $43 thousand, or 49.4%, due to an increase in loan sales and
a falling interest rate environment.
In 1997 non-interest income increased $133 thousand, or 15.2%, to $1.0
million compared to $874 thousand in 1996. Deposit servicing fees increased by
$77 thousand, or 22.1%, due to increases in both fee charges and deposits. Loan
servicing fees decreased by $24 thousand, or 8.5%, due to a decrease in the loan
servicing portfolio. Other fees decreased by $34 thousand due to a reduction in
charges for checks and a decrease in ATM fees. These decreases were partially
offset by increases in safe deposit box, wire transfer and merchant credit card
processing fees. Gains from sale of mortgage loans increased $93 thousand due to
the recognition of servicing assets on loans originated and sold.
Non-Interest Expense
In 1998 non-interest expense increased 42.0% to $6.2 million from $4.3 million
in 1997. In 1998, non-interest expense was impacted by a loss of $414 thousand
due to a "check-kiting" scheme. In this scheme, a customer of Nantucket Bank
drew checks on the Bank that were timed so that they would be covered by checks
drawn on another bank. At the same time the checks drawn on the other bank were
covered by checks drawn on Nantucket Bank. For additional information see Note 9
in "Notes to Consolidated Financial Statements." Excluding the effect of the
"check-kiting" situation, non-interest expense increased by $1.4 million, or
32.4%, to $5.7 million from $4.3 million in 1997. Approximately one-third of
this increase was due to non-recurring costs incurred in conjunction with the
formation of N. Realty Corp. The remaining increases are due to staffing,
computer processing, postage and other costs to service the additional loan and
deposit business in 1998.
In 1997 non-interest expense increased 8.6% to $4.3 million from $4.0
million in 1996. The ratio of non-interest expense to average assets decreased
to 2.21% in 1997 from 2.26% in 1996. The efficiency ratio, which measures the
level of non-interest expense needed to produce each dollar of income, improved
to 43.6% from 44.2%. In 1997 salaries and employee benefits increased to $2.6
million from $2.3 million due to wage increases, increases in staff and staff
training to service the business growth. Building and equipment expenses
increased to $503 thousand from $481 thousand due to increased depreciation
charges.
<PAGE>
Income Taxes
The Company and its subsidiaries, on a consolidated basis, are subject to
Federal income tax. The Company is also subject to a Delaware franchise tax and
a Massachusetts tax as a security corporation. The Bank is subject to a
Massachusetts income tax. The Bank's subsidiary is subject to Massachusetts tax
as a security corporation.
The effective tax rate in 1998 was 34.8%, compared to 39.6% in 1997 and 38.9% in
1996. 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. The effective tax rates in 1997 and 1996 were
impacted by reductions in the tax valuation allowance caused by increased
earnings, utilization of capital loss carryforwards and the status of one of the
Bank's subsidiaries as a Massachusetts security corporation. For further
information see Note 7 in the Notes to Consolidated Financial Statements.
Asset/Liability Management and Market Risk
The Bank's earnings are largely dependent on its net interest income, which is
the difference between the yield on its interest-earning assets and the cost of
its interest-bearing liabilities. The Bank seeks to reduce its
5
<PAGE>
exposure to changes in interest rates, or market risk, through active monitoring
and management of its interest rate exposure.
Market risk is the risk of loss from changes in market prices and rates.
The Bank's market risk arises primarily from interest rate risk inherent in its
lending and deposit taking activities.
The Bank's primary objective in managing interest rate risk is to minimize
the adverse impact of changes in interest rates on the Bank's net interest
income and capital, while adjusting the Bank's asset/liability structure to
obtain the maximum yield-cost spread on that structure. The Bank relies on its
asset/liability structure to control interest rate risk. However, a sudden and
substantial change in interest rates may adversely impact the Bank's earnings to
the extent that the interest rates borne by assets and liabilities do not change
at the same speed, to the same extent, or on the same basis. The Bank's
Asset/Liability Committee ("ALCO"), which is comprised of senior management and
certain other officers, is primarily responsible for managing interest rate
risk.
A method used by ALCO to measure the interest rate risk exposure of the
Bank is the interest rate sensitivity "GAP", which is the difference between
assets and liabilities subject to rate change over specific time periods. There
are limitations to GAP analysis, however, as rates on different assets and
liabilities may not move to the same extent in any given time period.
Competition may affect the ability of the Bank to change rates on a particular
deposit or loan product.
The following table displays the estimated distribution of the principal
amounts of the Company's interest-earning assets and interest-bearing
liabilities maturing or repricing over various time periods at December 31, 1998
and 1997. The amounts of assets and liabilities reported in each time period
were determined by the contractual terms of the asset or liability, adjusted for
projected repayments and prepayments of principal, where applicable. The
prepayments are estimated based on the Bank's experience. The actual maturity or
repricing period could differ substantially from these estimates if future
prepayments differ from the Bank's historical experience. Loans held for sale
are included in this analysis based on their contractual maturity/repricing
date. Loans are presented net of the undisbursed portion of construction loans
and deferred loan origination fees. Securities and short-term investments
include held-to-maturity, available for sale, interest-bearing deposits in banks
and federal funds sold. Available for sale securities are included at their cost
basis. Core deposit accounts (NOW, regular savings and money market deposits)
are included in the under one year repricing category based on their contractual
terms although, over the past several years, these accounts have not been as
sensitive to changes in market interest rates.
<PAGE>
<TABLE>
<CAPTION>
Period to Maturity or Repricing from December 31, 1998
------------------------------------------------------------------------------
(dollars in thousands) Under 1 1-2 2-3 3-5 Over 5
Year Years Years Years Years Total
------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Interest sensitive assets
Loans $ 78,645 $25,467 $16,033 $85,485 $27,419 $233,049
Securities and short-term investments 2,865 4,378 1,631 6,851 10,190 25,915
------------------------------------------------------------------------------
Total $ 81,510 $29,845 $17,664 $92,336 $37,609 $258,964
------------------------------------------------------------------------------
Interest sensitive liabilities
Core deposits $100,838 $ - $ - $ - $ - 100,838
Time deposits 61,168 5,265 2,030 930 - 69,393
Borrowings 33,356 7,925 7,140 6,500 4,000 58,921
------------------------------------------------------------------------------
Total $195,362 $13,190 $ 9,170 $ 7,430 $ 4,000 229,152
------------------------------------------------------------------------------
Excess (deficiency) of interest sensitive assets
over
Interest sensitive liabilities ("GAP") $(113,852) $16,655 $ 8,494 $84,906 $33,609
Cumulative GAP (113,852) (97,197) (88,703) (3,797) 29,812
Cumulative rate sensitive assets as a percent of
Cumulative rate sensitive liabilities 41.72% 53.39% 59.26% 98.31% 113.01%
=================================================================
Cumulative excess (deficiency) of rate
sensitive
Assets over rate sensitive liabilities as a
percentage
of total assets (41.32%) (35.27%) (32.19%) (1.38%) 10.82%
=================================================================
</TABLE>
6
<PAGE>
<TABLE>
<CAPTION>
Period to Maturity or Repricing from December 31, 1997
---------------------------------------------------------------------------
(dollars in thousands) Under 1 1-2 2-3 3-5 Over 5
Year Years Years Years Years Total
--------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Interest sensitive assets
Loans $ 87,020 $ 29,185 $14,088 $30,111 $17,107 $177,511
Securities and short-term investments 6,403 3,377 4,127 5,402 3,611 22,920
---------------------------------------------------------------------------
Total $ 93,423 $ 32,562 18,215 35,513 20,718 $200,431
---------------------------------------------------------------------------
Interest sensitive liabilities
Transaction deposits $ 70,164 $ - $ - $ - $ - $ 70,164
Time deposits 48,215 9,520 2,211 1,100 - 61,046
Borrowings 16,494 12,571 6,154 6,523 - 41,742
---------------------------------------------------------------------------
Total $ 134,873 $ 22,091 8,365 7,623 $ - $172,952
---------------------------------------------------------------------------
Excess (deficiency) of interest sensitive assets
over
Interest sensitive liabilities ("GAP") $ (41,450) $ 10,471 $ 9,850 $27,890 $20,718
Cumulative GAP (41,450) (30,979) (21,129) 6,761 27,479
Cumulative rate sensitive assets as a percent of
Cumulative rate sensitive liabilities 69.27% 80.26% 87.22% 103.91% 115.89%
==============================================================
Cumulative excess (deficiency) of rate
sensitive
Assets over rate sensitive liabilities as a
percentage of total assets (19.85%) (14.83%) (10.12%) 3.24% 13.16%
==============================================================
</TABLE>
The following tables show the Bank's financial instruments that are
sensitive to changes in interest rates, categorized by expected maturity, at
December 31, 1998 and December 31, 1997. Market risk sensitive instruments are
generally defined as on and off balance sheet derivatives and other financial
instruments. The Bank has not entered into any interest rate exchange agreements
or other off-balance sheet derivitives.
<PAGE>
<TABLE>
<CAPTION>
Expected maturity at December 31, 1998
--------------------------------------------------------------------------------------
Total Fair
1999 2000 2001 2002 2003 Thereafter Balance Value
--------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-sensitive assets:
Residential mortgage (adjustable) $ 28,601 $10,364 $8,711 $8,412 $6,659 $59,390 $122,137 $122,464
Average interest rate 6.74% 7.27% 7.38% 7.41% 7.36% 7.38%
Residential mortgage (fixed) 2,199 6,892 5,976 5,011 4,040 22,416 46,534 46,644
Average interest rate 7.62% 7.26% 7.30% 7.27% 7.24% 7.23%
Commercial mortgage (adjustable) 8,558 11,745 5,752 4,660 4,575 12,728 48,018 48,010
Average interest rate 9.16% 9.33% 9.24% 9.22% 9.22% 9.22%
Other loans 8,220 1,486 1,058 767 867 3,962 16,360 16,256
Average interest rate 9.23% 8.23% 11.15% 10.48% 10.34% 8.22%
Securities & short-term 2,865 4,378 1,631 2,129 4,722 10,190 25,915 26,080
investments
Average interest rate 5.10% 6.34% 5.84% 6.51% 5.90% 5.68%
---------------------------------------------------------------------------------------
Total interest-sensitive assets $ 50,443 $34,865 $23,128 $20,979 $20,863 $108,686 $258,964 $263,380
---------------------------------------------------------------------------------------
Interest-sensitive liabilities:
NOW deposits $ 43,062 $ - $ - $ - $ - $ - $ 43,062 $ 43,062
Average interest rate 1.19%
Savings deposits 19,399 - - - - - 19,399 19,399
Average interest rate 2.48%
Money market deposits 38,377 - - - - - 38,377 38,377
Average interest rate 3.71%
Time deposits 61,168 5,265 2,030 640 290 - 69,393 69,615
Average interest rate 4.86% 5.73% 5.58% 6.25% 5.27%
Borrowed funds 33,356 7,925 7,140 - 6,500 4,000 58,921 59,097
Average interest rate 5.48% 6.33% 6.09% - 5.48% 5.21%
----------------------------------------------------------------------------------------
Total interest-sensitive liabilities $195,362 $13,190 $9,170 $640 $6,790 $4,000 $229,152 $229,550
----------------------------------------------------------------------------------------
</TABLE>
7
<PAGE>
<TABLE>
<CAPTION>
Expected maturity at December 31, 1997
---------------------------------------------------------------------------------------
Total Fair
1998 1999 2000 2001 2002 Thereafter Balance Value
---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-sensitive assets:
Residential mortgage (adjustable) $ 17,895 $ 9,450 $ 7,444 $ 7,008 $ 5,899 $52,219 $99,915 $100,278
Average interest rate 6.45% 7.84% 7.73% 7.89% 7.86% 7.83%
Residential mortgage (fixed)
5,172 2,950 2,514 2,158 1,788 7,879 22,461 22,542
Average interest rate 7.46% 7.42% 7.46% 7.42% 7.43% 7.40%
Commercial mortgage (adjustable)
1,877 6,962 4,362 3,597 3,238 16,722 36,758 36,890
Average interest rate 9.42% 7.84% 7.73% 7.89% 7.86% 7.83%
Commercial mortgage (fixed)
321 641 747 6 6 163 1,884 1,892
Average interest rate 10.50% 10.50% 9.00% 7.64% 7.64% 7.64%
Other loans
14,737 629 290 297 451 89 16,493 16,553
Average interest rate 8.84% 10.13% 12.58% 9.79% 10.08% 9.53%
Securities & short-term
investments 6,403 3,377 4,127 2,276 3,126 3,611 22,920 22,927
Average interest rate 5.84% 6.08% 6.14% 6.75% 6.95% 5.89%
---------------------------------------------------------------------------------------
Total interest-sensitive assets $ 46,405 $24,009 $19,484 $15,342 $14,508 $80,683 $200,431 $201,082
---------------------------------------------------------------------------------------
Interest-sensitive liabilities:
NOW deposits $ 28,072 $ - $ - $ - $ - $ - $ 28,072 $ 28,072
Average interest rate 1.28%
Savings deposits
15,326 - - - - - 15,326 15,326
Average interest rate 2.75%
Money market deposits
26,766 - - - - - 26,766 26,766
Average interest rate 3.68%
Time deposits
48,215 9,520 2,211 592 508 - 61,046 61,167
Average interest rate 5.10% 5.88% 6.24% 5.80% 6.26%
Borrowed funds
16,494 12,571 6,154 6,523 - - 41,742 41,904
Average interest rate 6.22% 6.17% 6.73% 6.21%
---------------------------------------------------------------------------------------
Total interest-sensitive
liabilities $134,873 $22,091 $ 8,365 $ 7,115 $ 508 $ - $172,952 $173,235
---------------------------------------------------------------------------------------
</TABLE>
Expected maturities are contractual maturities adjusted for prepayments of
principal. The Bank uses certain assumptions to estimate their fair values and
expected maturities. For interest sensitive assets expected maturities are based
upon contractual maturity, projected repayments, and prepayments of principal.
The prepayment experience reflected herein is based on market consensus. Other
real estate loans include commercial mortgages and other loans include
commercial and consumer loans.
<PAGE>
Balance Sheet Analysis
During 1998 the Company's total assets increased by $66.8 million, or
32.0%, to $275.6 million from $208.8 million at December 31, 1997 due to an
increase in the bank's core lending and deposit business. During 1997 the
Company's total assets increased by $18.9 million, or 9.9%, to $208.8 million
from $189.9 million at December 31, 1996. The following paragraphs discuss the
significant changes in the major balance sheet categories during these years.
Loans
Loans, net of the allowance for loan losses and excluding loans held for
sale, increased by $50.2 million, or 30.6% at December 31, 1998 to $213.9
million from $163.7 million at December 31, 1997. During 1997, loans increased
$21.3 million, or 15.0%, from $142.4 million the previous year. The loan
portfolio represented 77.6% of total assets at December 31, 1998 compared to
78.4% at December 31, 1997 and 75.0% at December 31, 1996.
Real estate loan originations, including both commercial and residential
properties, were $153.7 million in 1998 compared to $81.7 million in 1997 and
$85.1 million in 1996. The significant increase in 1998 was due to a combination
of a record level of real estate sales in Nantucket, falling interest rates and
the Bank's marketing efforts.
During 1998, permanent residential mortgages (excluding loans held for
sale) increased by $26.2 million, or 27.9%, to $120.2 million at December 31,
1998 from $94.0 million at December 31, 1997. In 1997, these loans
8
<PAGE>
increased by $14.6 million, or 18.5%, from $79.3 million at December 31, 1996.
Residential construction loans increased by $15.4 million, or 89.8%, at December
31, 1998 to $32.4 million from $17.1 million a year earlier and $14.4 million at
the end of 1996. At December 31, 1998 residential permanent and construction
loans comprise 76.12% of total mortgage loans compared to 74.1% and 72.0% at
December 31, 1997 and 1996, respectively. The proportion of residential loans
reflects the residential character of the Bank's market area.
During 1998, commercial mortgage loans outstanding increased by $6.2
million, or 17.2%, to $42.3 million as compared to $36.1 million and $33.8
million at December 31, 1997 and 1996, respectively. Commercial construction
loans increased to $5.8 million at December 31, 1998 compared to $2.7 million
and $2.6 million at December 31, 1997 and 1996, respectively. These increases
are the result of favorable business and economic conditions in Nantucket over
the past several years, offset by an increase in competition for these types of
loans.
Real estate loans sold in the secondary market totaled $39.3 million in
1998 compared to $18.5 million in 1997 and $28.5 million in 1996. Currently, the
Bank's policy is to sell substantially all of its longer-term (greater than 10
years) fixed-rate loans and a portion of its adjustable rate loans. The Bank
generally retains a small percentage of the principal balance of adjustable rate
loans that are sold. The ALCO reviews this policy from time to time as part of
management's overall asset/liability management strategy.
At December 31, 1998, the Bank had $16.0 million of loans held for sale in
the secondary market, compared to $11.2 million at year-end 1997. These loans
are carried at the lower of cost or market value which is based upon an
estimation of outstanding investor commitments or, in the absence of such
commitments, current investor yield requirements. At December 31, 1998 and 1997,
the market value was greater than the book value of these loans, therefore,
there was no provision for unrealized loss. However, changes in interest rates
may affect the market value of loans held for sale and could impact future
earnings.
Securities
Total securities increased by $3.0 million, or 13.1%, at December 31, 1998
to $25.9 million from $22.9 million in the prior year. During 1997 securities
increased by $147 thousand, or 1.0%, from $22.7 million at December 31, 1996.
The Company does not actively trade the securities portfolio; the majority of
the portfolio (69% at December 31, 1998) is classified as held to maturity. At
December 31, 1998 total securities represented 9.4% of total assets compared to
11.0% for 1997 and 12.0% for 1996.
Deposits
Total deposits increased $46.2 million, or 32.5%, in 1998 to $188.7 million
from $142.4 million at December 31, 1997. In 1997 total deposits increased $7.4
million, or 5.4%, from $135.1 million at December 31, 1996. The Bank experienced
strong deposit growth in 1998 due to a strong local economy together with the
Bank's marketing efforts. Approximately one-half of the increase in deposits
from December 31, 1997 to 1998 was in NOW and demand deposit accounts. Deposit
growth in 1997, as compared to 1996, was due to increases in money market
checking accounts and time certificates of deposit.
<PAGE>
Over the past several years the Bank has reduced it's reliance on funds
obtained through national brokerage networks. These funds had been obtained
primarily to compensate for some of the seasonal outflow of deposits; however,
the Bank now utilizes borrowings from the FHLB to meet seasonal liquidity needs.
At December 31, 1998 fully insured brokered deposits totaled $.9 million, or
less than one-half of 1% of total deposits, compared to $2.4 million, or 1.7% of
total deposits, at December 31, 1997.
Borrowed Funds
Borrowed funds consist of FHLB advances with final maturities ranging from
3 months to 10 years. These borrowings totaled $58.9 million at December 31,
1998 and $41.7 million at December 31, 1997. Borrowings have been used to fund
loan demand, to meet short term and seasonal liquidity demands, to reduce
interest rate risk and to utilize capital resources. The Bank's goals include
minimizing the need for borrowings by increasing core deposits, however, there
is no assurance that this can be accomplished.
9
<PAGE>
Non-Performing Assets
The following table presents information regarding non-performing assets at
the dates indicated:
<TABLE>
<CAPTION>
(dollars in thousands) December 31,
-----------------------------------
1998 1997 1996
-----------------------------------
<S> <C> <C> <C>
Non-accrual loans:
Commercial real estate $ - $ - $ -
Commercial business - 10
-----------------------------------
Total non-accrual loans - - 10
Accruing loans which are contractually past due 90 days or more:
Residential real estate 268 10 433
-----------------------------------
Total non-performing loans 268 10 443
Other real estate owned - - 61
-----------------------------------
Total non-performing assets $268 $10 $504
===================================
Non-performing assets as a percentage of total assets 0.01% - % 0.27%
===================================
Allowance for loan losses $3,145 $2,609 $2,365
Allowance for loan losses to:
Non-performing loans NM * NM * 534%
Total loans 1.37% 1.47% 1.54%
</TABLE>
* NM = not meaningful
At December 31, 1998 and 1997 the Bank had no loans which were considered
impaired.
At the end of 1998 management identified $623 thousand of additional loans
that, while currently performing, may pose potential problems due to some doubts
about the ability of the borrowers to comply with all of their present loan
repayment terms. The resolution of these loans is not yet known.
Accrual of interest on loans is discontinued either when doubt exists as to
the timely collection of interest or principal or when a loan becomes
contractually past due by 90 days with respect to interest or principal, and the
collateral value is not sufficient to ensure the payment in full of principal
and interest. When a loan is placed on non-accrual status, all interest
previously accrued but not collected is charged against current year income.
When collection procedures do not bring the loan to a performing status, the
Bank generally institutes action to foreclose upon the property or to acquire
the property by deed in lieu of foreclosure.
<PAGE>
Provision for Loan Losses
Loan loss reserves are established in accordance with generally accepted
accounting principles and based upon a systematic and detailed review of the
loan portfolio. The Bank regularly evaluates the adequacy of the allowance for
loan losses. Key criteria considered include the size and characteristics of the
portfolio, credit and collateral quality, past loan loss experience and loan
delinquency trends, adverse situations that may affect the borrower's ability to
repay, and current economic conditions. The Bank's lending activities are
conducted solely on the island of Nantucket, Massachusetts. The determination of
the adequacy of the allowance is necessarily judgmental and involves significant
assumptions of future actions and conditions. There are inherent uncertainties
surrounding these assumptions.
Management believes that an allocation of the allowance is not necessarily
indicative of the specific amount of future charge-offs or the specific loan
categories in which these charge-offs may ultimately occur. The unallocated
component of the allowance for loan losses represents management's evaluation of
the loan portfolio, including its size and complexity, with consideration given
to the Bank's market area and industry concentrations. Also, management realizes
that there are estimable losses that have been incurred within the portfolio
that have not yet been specifically identified.
During 1998 and 1997 the Bank recorded a provision for loan losses of $150
thousand compared to $75 thousand in 1996. The Bank also recorded net recoveries
of $386 thousand in 1998, $94 thousand in 1997 and $41 thousand in 1996. The
loan loss provisions made over the past two years are a result of the growth in
the Bank's loan portfolio. At December 31, 1998 the allowance for loan losses
was $3.1 million, or 1.37% of total loans compared to $2.6 million, or 1.47% of
total loans, at December 31, 1997. The Bank believes its current level of loan
loss reserves to be adequate. Any unforeseen future economic problems, however,
may lead to additional delinquencies which may require additional provisions for
loan losses. The Bank was last examined by the FDIC as of December 31, 1997.
10
<PAGE>
Capital
Stockholders' equity totaled $24.0 million, or 8.7%, of assets on December
31, 1998 compared to $21.9 million, or 10.51% of assets, at December 31, 1997
and $20.1 million, or 10.58% of assets, at December 31, 1996. The decrease in
the capital ratio in 1998 is the result of the increases in deposits and loans
during the year. Regular quarterly dividends of $1.5 million, $1.5 million and
$1.3 million were declared in 1998, 1997 and 1996, respectively. Net earnings of
$3.6 million in 1998, $3.3million in 1997 and $3.0 million in 1996 were added to
capital.
On September 29, 1998 the Company announced a share repurchase program whereby
it may purchase up to 5% (92,100 shares) of its currently outstanding common
stock. The shares are to be purchased in the open market from time to time or in
directly negotiated purchases. This repurchase program remains in effect until
March 31, 1999. The timing and price of any share purchases will be affected by
the availability of shares at prices the Company considers attractive and market
conditions. As of December 31, 1998 the Company has not repurchased any shares
under this program.
The Bank is an FDIC insured institution subject to the FDIC regulatory
capital requirements. FDIC regulations require all FDIC insured institutions to
maintain minimum levels of Tier 1 capital. Highly rated banks (i.e., those with
a composite rating of 1 under the CAMEL rating system) are required to maintain
Tier 1 capital of at least 3% of their total assets. All other banks are
required to have Tier 1 capital of 4% to 5%. The FDIC has authority to impose
higher requirements for individual banks. At December 31, 1998, the Bank's
capital ratios were in excess of these capital requirements.
The Company, as a bank holding company, is also subject to regulatory
capital requirements, including the Tier 1 capital levels described above. At
December 31, 1998 the Company's capital ratios were in excess of these capital
requirements.
For further information, see Note 11 in the Notes to Consolidated Financial
Statements.
Liquidity
Liquidity is the measure of a company's ability to generate sufficient cash
flow to meet present and future funding obligations. Dividends from the Bank
represent the only source of liquidity for the Parent Company. The Bank's
sources of liquidity are customer deposits, amortization and prepayments on
loans, advances from the Federal Home Loan Bank, sale of loans in the secondary
market and maturities and sales of securities. As a member of the Depositors
Insurance Fund ("DIF") the Bank also has a right to borrow from the DIF for
short term cash needs by pledging certain assets, although it has never
exercised this right. The Bank's liquidity management program is designed to
assure that sufficient funds are available to meet its current and future needs.
The Bank believes that it has sufficient resources to meet its funding
commitments.
Firm commitments to grant loans at December 31, 1998 totaled $21.6 million,
unused lines of credit equaled $12.5 million, the unadvanced portion of
construction loans equaled $14.5 million and stand-by letters of credit
outstanding aggregated $.3 million. The Bank believes that it has adequate
sources of liquidity to fund such commitments.
<PAGE>
Recent Accounting Developments
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 the 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.
11
<PAGE>
Year 2000 Readiness
This update has been written 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.
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 which include:
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 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 is currently in the process of completing its analysis of the
test results. The Bank is currently planning to implement certain changes to
this system early 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.
<PAGE>
Other mission-critical IT systems are in either the validation phase or the
implementation phase. The Bank will continue testing throughout 1999 as systems
changes are made 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.
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.
12
<PAGE>
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.
Costs to address Year 2000 issues:
Included in other non-interest expenses for the year ended December 31, 1998 are
charges totaling approximately $45 thousand, consisting of consulting fees and
depreciation expense, incurred to make the Bank's computer systems year 2000
compliant. The total remaining cost of the Year 2000 project is estimated at
approximately $70 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 tracked
separately.
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, that were derived based
on various 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.
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 not to be able 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 that supply the
Bank with critical applications. These crucial third parties include utility
<PAGE>
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 FHLB 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.
13
<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 compliant. 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.
14
<PAGE>
<TABLE>
<CAPTION>
Consolidated Balance Sheets (Dollars in Thousands,
Except Share and Per Share Data)
Home Port Bancorp, Inc. and Subsidiaries
December 31,
1998 1997
--------- ---------
<S> <C> <C>
Assets
Cash and due from banks .................................................... $ 12,070 $ 5,065
Interest bearing deposits in banks ......................................... 54 41
--------- ---------
Total cash and cash equivalents .................................... 12,124 5,106
Securities held to maturity (market value of $18,050 and $16,655) (note 2) . 17,904 16,661
Securities available for sale (cost of $7,969 and $6,218) (note 2) ......... 7,993 6,231
Loans, net of allowance for loan losses of $3,145 and $2,609 (notes 3 and 6) 213,899 163,733
Loans held for sale ........................................................ 16,005 11,169
Land, buildings and equipment, net (note 4) ................................ 1,721 1,451
Accrued income receivable .................................................. 1,340 1,040
Net deferred tax asset (note 7) ............................................ 421 111
Stock in FHLB of Boston, at cost (note 6) .................................. 3,276 2,442
Prepaid expenses and other assets .......................................... 887 871
--------- ---------
Total assets ....................................................... $ 275,570 $ 208,815
========= =========
Liabilities and Stockholders' Equity
Liabilities:
Deposits (note 5) ........................................................ $ 188,668 $ 142,436
Borrowed funds (note 6) .................................................. 58,921 41,742
Accrued expenses (note 8) ................................................ 3,132 1,384
Other liabilities ........................................................ 817 1,305
--------- ---------
Total liabilities .................................................. 251,538 186,867
--------- ---------
Commitments and contingencies (notes 4, 10 and 12)
Stockholders' equity (notes 7, 11 and 14)
Preferred stock, $.01 par value, 2,000,000 shares authorized, none issued - -
Common stock, $.01 par value, 10,000,000 shares authorized, 2,325,494
shares issued ......................................................... 23 23
Additional paid-in capital ............................................... 17,473 17,473
Retained earnings ........................................................ 10,918 8,841
Accumulated other comprehensive income, net:
Unrealized gain on securities available for sale, net of taxes (note 2) 15 8
Less: Treasury stock, at cost (483,604 shares) ........................... (4,397) (4,397)
--------- ---------
Total stockholders' equity ......................................... 24,032 21,948
========= =========
Total liabilities and stockholders' equity ......................... $ 275,570 $ 208,815
========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
15
<PAGE>
<TABLE>
<CAPTION>
Consolidated Statements of Earnings (In Thousands,
Except Per Share Data) Home Port Bancorp, Inc. and Subsidiaries
Years Ended December 31,
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Interest income:
Interest on loans (note 3) ................................ $ 17,509 $ 14,425 $ 12,863
Interest on securities .................................... 1,298 1,300 1,343
Dividends ................................................. 197 169 168
Interest on federal funds sold ............................ 93 57 76
-------- -------- --------
Total interest income ............................. 19,097 15,951 14,450
-------- -------- --------
Interest expense:
Interest on depositors' accounts (note 5) ................. 5,509 4,594 4,219
Interest on borrowed funds (note 6) ....................... 2,981 2,420 2,070
-------- -------- --------
Total interest expense ............................. 8,490 7,014 6,289
-------- -------- --------
Net interest income ............................................ 10,607 8,937 8,161
Provision for loan losses (note 3) ............................. 150 150 75
-------- -------- --------
Net interest income after provision for loan losses ............ 10,457 8,787 8,086
-------- -------- --------
Non-interest income:
Deposit servicing fees .................................... 455 425 348
Loan servicing fees (note 3) .............................. 236 258 282
Other fees and income ..................................... 271 215 249
Net gain (loss) from sale of mortgage loans (note 3)....... 130 87 (6)
Net gain from sale of securities (note 2) ................. 52 22 1
-------- -------- --------
Total non-interest income .......................... 1,144 1,007 874
-------- -------- --------
Non-interest expense:
Salaries and employee benefits (note 8) ................... 2,998 2,551 2,326
Building and equipment expenses (note 7)................... 659 503 481
Loss on check kiting (note 9) ............................. 414 - -
Professional fees ......................................... 702 227 281
Deposit insurance fees .................................... 54 43 9
Other ..................................................... 1,331 1,012 897
-------- -------- --------
Total non-interest expense ......................... 6,158 4,336 3,994
-------- -------- --------
Income before income taxes ..................................... 5,443 5,458 4,966
Provision for income taxes (note 7) ............................ 1,892 2,161 1,931
-------- -------- --------
Net income ..................................................... $ 3,551 $ 3,297 $ 3,035
======== ======== ========
Earnings per common share - basic and diluted .................. $ 1.93 $ 1.79 $ 1.65
======== ======== ========
Weighted number of common shares outstanding - basic and diluted 1,842 1,842 1,842
======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements
16
<PAGE>
<TABLE>
<CAPTION>
Consolidated Statements of Cash Flows (In Thousands)
Home Port Bancorp, Inc. and Subsidiaries
Years Ended December 31,
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income ................................................ $ 3,551 $ 3,297 $ 3,035
Adjustments to reconcile net income to net cash
Provided by (used in) operating activities:
Provision for loan losses ............................. 150 150 75
Depreciation of building and equipment ................ 312 247 217
Net (gain) loss on sale of mortgage loans ............. (130) (87) 6
Net gain on sale of securities and other assets ....... (52) (23) (1)
Net amortization of securities premiums ............... 31 57 92
Amortization of deferred loan origination fees ........ (260) (256) (274)
Amortization of deferred premiums on loans sold ....... 69 8 --
Net decrease (increase) in accrued income receivable .. (300) 53 11
Net increase in loans held for sale ................... (4,775) (2,224) (265)
Net increase in prepaid expenses and other assets ..... (16) (48) (122)
Net increase (decrease) in other liabilities .......... (488) 240 472
Net increase in accrued expenses ...................... 1,748 52 240
Net (increase) decrease in deferred income taxes ...... (315) 208 (247)
-------- -------- --------
Net cash provided by (used in) operating activities ........... (475) 1,674 3,239
-------- -------- --------
Cash flows from investing activities
Purchases of securities held to maturity .................. (9,150) (8,379) --
Purchases of securities available for sale ................ (7,751) (3,977) (4,746)
Proceeds from sales of securities available for sale ...... 2,257 2,280 250
Proceeds from maturities/calls of securities .............. 9,430 8,707 6,480
Principal payments on mortgage-backed securities .......... 2,242 1,232 1,168
Net increase in loans ..................................... (50,056) (21,202) (21,747)
Purchases of land, buildings and equipment ................ (582) (276) (395)
Proceeds from sales of other real estate owned ............ -- 61 --
Purchase of Federal Home Loan Bank of Boston stock ........ (834) (121) --
-------- -------- --------
Net cash used for investing activities ........................ (54,444) (21,675) (18,990)
-------- -------- --------
Cash flows from financing activities:
Net increase in deposits .................................. 46,232 7,354 20,725
Federal Home Bank advances ................................ 20,000 22,000 13,000
Federal Home Loan Bank repayments ......................... (12,152) (14,970) (13,502)
Net increase in short term borrowings ..................... 9,331 2,377 --
Cash dividends paid ....................................... (1,474) (1,473) (1,289)
-------- -------- --------
Net cash provided by financing activities .................... 61,937 15,288 18,934
-------- -------- --------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Net increase (decrease) in cash and cash equivalents ........... 7,018 (4,713) 3,183
Cash and cash equivalents at beginning of year ................. 5,106 9,819 6,636
-------- -------- --------
Cash and cash equivalents at end of year ...................... $ 12,124 $ 5,106 $ 9,819
======== ======== ========
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest .............................................. $ 8,474 $ 6,983 $ 6,289
Income taxes .......................................... 536 2,052 1,960
Non-cash disclosures:
Loans foreclosed and transferred to other real estate owned -- -- 61
Dividends declared ........................................ 1,474 1,473 1,289
</TABLE>
See accompanying notes to consolidated financial statements
17
<PAGE>
<TABLE>
<CAPTION>
Consolidated Statements of changes in Stockholders' Equity
Home Port Bancorp, Inc. and Subsidiaries
(In Thousands, Except Per Share Data)
Accumulated
Additional Other Total
Common Paid-in Retained Treasury Comprehensive Stockholders
Stock Capital Earnings Stock Income Equity
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1995 ..... $ 23 $ 17,473 $ 5,271 $ (4,397) $ 9 $ 18,379
Net income ....................... 3,035 3,035
Other comprehensive income, net
of tax
Change in unrealized gain on
securities available for sale .... - - - - (22) (22)
--------
Comprehensive income ......... 3,013
--------
Cash dividends paid at
$.70 per share ............... (1,289) (1,289)
-------- -------- -------- -------- -------- --------
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
of tax
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 ....................... - - 3,551 - - 3,551
Other comprehensive income, net
of tax
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
========
</TABLE>
See accompanying notes to consolidated financial statements
18
<PAGE>
Notes to Consolidated Financial Statements
Home Port Bancorp, Inc. and Subsidiaries
(1) Summary of Significant Accounting Policies
(a) Business
Home Port Bancorp, Inc. (the "Company") is a one-bank holding company which
holds all of the issued and outstanding shares of common stock of Nantucket Bank
(the "Bank"), a state chartered savings bank located on the island of Nantucket,
Massachusetts. The Bank provides a full range of banking services to individual
and corporate customers in Nantucket and is subject to competition from other
providers of financial services. The Bank is subject to the regulations of, and
periodic examinations by, the Federal Deposit Insurance Corporation ("FDIC") and
the Massachusetts Division of Banks. The Company is subject to the regulations
of, and periodic examinations by, the Federal Reserve Bank. The Bank's deposits
are insured by the Bank Insurance Fund of the FDIC up to $100,000 per account
and the Depositors Insurance Fund for deposits in excess of $100,000.
(b) Basis of Financial Statement Presentation
The accompanying consolidated financial statements include the accounts of
Home Port Bancorp, Inc., its wholly owned subsidiary Nantucket Bank, and N.
Realty Corp. and N.B. Securities, Inc., which are wholly owned by Nantucket
Bank. The Company has one reportable operating segment. All significant
intercompany balances and transactions have been eliminated in consolidation.
The financial statements have been prepared in conformity with generally
accepted accounting principles. In preparing the financial statements,
management is required to make estimates and assumptions that affect the
reported amounts of assets and liabilities as of the date of the balance sheet
and income and expenses for the year. Actual results could differ from those
estimates.
Material estimates that are particularly susceptible to change relate to
the determination of the allowance for loan losses.
(c) Statements of Cash Flows
Cash and cash equivalents are defined to include cash and due from banks,
interest-bearing deposits in banks and federal funds sold. Short-term borrowings
are defined as borrowings having an original maturity of three months or less.
(d) Securities
Securities that the Company has the positive intent and ability to hold to
maturity are classified as securities held to maturity and are reported at
amortized cost.
Securities that are held for indefinite periods of time and not intended to
be held to maturity and marketable equity securities are classified as available
for sale and are reported at aggregate market value with unrealized gains or
losses excluded from earnings and reported as a separate component of
stockholders' equity, net of income taxes.
Interest and dividend income, including amortization of premiums and
accretion of discounts, for both available for sale and held to maturity
securities is accrued and included in interest income. Premiums and discounts
are amortized and accreted on a method which approximates the level-yield
method, and are included in interest income. The specific identification method
is used to determine realized gains and losses on securities available for sale.
<PAGE>
If a security suffers a loss in value that is considered other than
temporary, the cost basis of the security is written down to fair value by a
charge to earnings.
(e) Loans
Loans receivable that management has the intent and ability to hold for the
foreseeable future or until maturity or pay-off are reported at their
outstanding principal balance, adjusted for any charge-offs, the allowance for
loan losses and deferred fees or costs on originated loans.
Loans are placed on non-accrual status and are considered non-performing
either when doubt exists as to the full and timely collection of interest or
principal or when a loan becomes contractually past due 90 days with respect to
interest or principal and the collateral value is not sufficient to ensure
payment in full of principal and interest. When interest accrual is discontinued
all unpaid accrued interest is reversed. Interest accruals are resumed on such
loans when they are brought current with respect to interest and principal and
when, in the
19
<PAGE>
judgment of management, the loans are considered to be fully collectible as to
both principal and interest. Interest income on non-accrual loans is recorded on
a cash basis.
The Bank accounts for impaired loans, except for loans accounted for at
fair value or at the lower of cost or fair value, at the present value of the
expected future cash flows discounted at the loan's effective interest rate or
the fair value of the collateral if the loan is collateral dependent. Impaired
loans include commercial, commercial real estate and individually significant
mortgage or consumer loans for which it is probable the Bank will not collect
all amounts due according to the terms of the loan agreement. Impairment on
troubled debt restructurings is measured using the premodification rate of
interest.
Loan origination fees, net of certain direct loan origination costs, are
considered yield adjustments and amortized into interest income over the loan
term by use of the interest method. When loans are sold in the secondary market,
the remaining balance of the amount deferred is included in gain (loss) on sale
of loans.
(f) Loans Held for Sale
Mortgage loans intended for sale in the secondary market are carried at the
lower of aggregate net loan balance or market value. Market value is estimated
based upon outstanding investor commitments or, in the absence of such
commitments, based on current investor yield requirements. Net unrealized losses
are provided for in a valuation allowance by charges to operations.
Gains and losses on loan sales are determined using the specific
identification method. Interest income on loans held for sale is accrued
currently and classified as interest income on loans.
(g) Allowance for Loan Losses
The allowance for loan losses represents the amount available for credit
losses inherent in the portfolio. The allowance is increased by provisions
charged to operations and recoveries of prior losses, and decreased by amounts
deemed uncollectible. Management's evaluation of the adequacy of the allowance
for loan losses is based on an ongoing review of its portfolio. This review
considers such factors as the size and characteristics of the porfolio, past
loan loss experience and loan delinquency trends, adverse situations that may
affect the borrower's ability to repay, credit and collateral quality and
current economic conditions.
While management uses current available information in establishing the
allowance, future adjustments to the allowance may be necessary if economic
conditions differ substantially from the assumptions used in making the
evaluation. In addition, various regulatory agencies, as an integral part of
their examination process, periodically review the Bank's allowance for loan
losses. Such agencies may require the Bank to recognize additions to the
allowance based on judgments different from those of management.
(h) Land, Building, and Equipment
Land is stated at cost. Building and equipment are stated at cost, less
allowances for depreciation computed on the straight-line method over the
estimated useful lives of the respective assets. The cost of maintenance and
repairs is charged to income as incurred.
<PAGE>
(i) Income Taxes
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the temporary differences
between the accounting basis and the tax basis of the Bank's assets and
liabilities at enacted tax rates expected to be in effect when the amounts
related to such temporary differences are realized or settled. The Bank's
deferred tax asset is reviewed and adjustments to such assets are recognized as
deferred income tax expense or benefit based upon management's judgment relating
to the realizability of such asset.
(j) Employee Benefit Plans
The Company accounts for pension benefits using the net periodic pension
cost method, which recognizes the compensation cost of an employee's pension
benefit over that employee's approximate service period.
On January 1, 1998, the Company adopted Statement of Financial Accounting
Standards "SFAS" No. 132 "Employers' Disclosures about Pension and Other
Postretirement Benefits." SFAS No. 132 revises employers' disclosures about
pension and other postretirement benefit plans. SFAS No. 132 does not change the
method of accounting for such plans.
20
<PAGE>
(k) Stock Option Plan
The Financial Accounting Standards Board has issued SFAS No. 123,
Accounting for Stock-Based Compensation. The Statement encourages,
but does not require, 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 has elected to
adopt the disclosure requirements of SFAS No. 123 but to apply APB Opinion No.
25 in accounting for stock options. Accordingly, no compensation expense has
been recognized in these consolidated financial statements.
(l) Earnings per Share
SFAS No. 128 requires dual presentation of basic and diluted EPS on the
face of the income statement for all entities with complex capital structures as
well as a reconciliation of the numerators and denominators of the basic and
diluted EPS computations. The only reconciling difference between the Company's
computation of basic and diluted earnings per share is the dilutive effect of
stock options issued and unexercised (see Note 11 for stock options). At
December 31, 1998 there were no dilutive stock options. At December 31, 1997 the
Company did not have a complex capital structure.
(m) Comprehensve Income
On January 1, 1998 the Company adopted SFAS No. 130, "Reporting
Comprehensive Income." SFAS No. 130 establishes standards for reporting and
presentation of comprehensive income and its components in a full set of
financial statements. Comprehensive income consists of net income and net
unrealized gains (losses) on securities and is presented in the consolidated
statements of stockholder's equity. The Statement requires only additional
disclosures in the consolidated financial statements; it does not affect the
Company's financial position or results of operations. Prior year financial
statements have been reclassified to conform to the requirements of SFAS No.
130. The following table shows the components of other comprehensive income (in
thousands for the years ended December 31, 1998, 1997 and 1996.
<TABLE>
<CAPTION>
1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
Net Income ................................................. $ 3,551 $ 3,297 $ 3,035
Other comprehensive income, net of tax
Unrealized gains on securities:
Unrealized holding gains (losses) arising during the year . 41 34 (23)
Add: reclassification adjustment for gains ................
included in net income, net of taxes of $18, $9 and $- (34) (13) (1)
------- ------- -------
7 21 (22)
------- ------- -------
Comprehensive Income ...................................... $ 3,558 $ 3,318 $ 3,013
======= ======= =======
</TABLE>
21
<PAGE>
(2) Securities
(in thousands)
The amortized cost, gross unrealized holding gains, gross unrealized holding
losses and fair value for available-for-sale and held-to-maturity securities by
major security type and class of security at December 31, 1998 and 1997, are as
follows:
<TABLE>
<CAPTION>
Gross Gross
At December 31, 1998 Amortized Holding Unrealized Unrealized
Cost Gains Losses Fair Value
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Available for sale:
U.S. Treasury and agency obligations $ 5,726 $ 19 $ (7) $ 5,738
Mortgage-backed securities ......... 814 2 -- 816
State and Municipal obligations .... 791 5 (3) 793
Other bonds and notes: ............. 626 3 -- 629
Marketable equity securities ....... 12 5 -- 17
-------- -------- -------- --------
$ 7,969 $ 34 $ (10) $ 7,993
======== ======== ======== ========
Held to maturity:
U.S. Treasury and agency obligations $ 6,494 $ 33 $ -- $ 6,527
Mortgage-backed securities ......... 6,010 13 (16) 6,007
State and municipal obligations .... 4,180 87 -- 4,267
Other bonds and notes .............. 1,220 29 -- 1,249
-------- -------- -------- --------
$ 17,904 $ 162 $ (16) $ 18,050
======== ======== ======== ========
<CAPTION>
Gross Gross
At December 31, 1997 Amortized Holding Unrealized Unrealized
Cost Gains Losses Fair Value
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Available for sale:
U.S. Treasury and agency obligations $ 4,698 $ 21 $ (14) $ 4,705
Mortgage-backed securities ......... 966 4 (2) 968
State and Municipal obligations .... 292 1 -- 293
Other bonds and notes: ............. 250 -- (1) 249
Marketable equity securities ....... 12 4 -- 16
-------- -------- -------- --------
$ 6,218 $ 30 $ (17) $ 6,231
======== ======== ======== ========
Held to maturity:
U.S. Treasury and agency obligations $ 5,248 $ 10 $ (5) $ 5,253
10
Mortgage-backed securities ......... 7,200 13 (54) 7,159
State and municipal obligations .... 2,132 16 -- 2,148
--------
Other bonds and notes .............. 2,081 18 (4) 2,095
-------- -------- -------- --------
$ 16,661 $ 57 $ (63) $ 16,655
======== ======== ======== ========
</TABLE>
<PAGE>
At December 31, 1998, U.S. Treasury and agency obligations at December 31, 1998
include securities with an amortized cost of $10.5 million that can be called at
a date or dates prior to their contractual maturity.
At December 31, 1998, securities with an amortized cost and fair value of $5.4
million were pledged as collateral for depositors and certain borrowings.
Maturities of debt securities classified as available-for-sale and
held-to-maturity were as follows at December 31, 1998 (maturities of
mortgage-backed securities have been presented based upon estimated cash flows,
assuming no change in the current rate environment):
22
<PAGE>
Available-for-sale:
Maturing within one year $ 368
Maturing after one year but within five years 4,124
Maturing after five years but within ten years 3,465
-------
$ 7,957
=======
Held-to-maturity:
Maturing within one year $ 2,442
Maturing after one year but within five years 8,736
Maturing after five years but within ten years 6,726
-------
$17,904
=======
Proceeds from sales of securities available for sale were 2.3 million, $2.3
million and $.3 million for the years ended December 31, 1998, 1997, 1996,
respectively. Realized gains and losses on securities available-for-sale are as
follows:
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------------------------------------------------
1998 1997 1996
----------------------- ------------------------ ---------------------
Realized Realized Realized Realized Realized Realized
Gains Losses Gains Losses Gains Losses
----- ------ ----- ------ ----- ------
<S> <C> <C> <C> <C> <C> <C>
U. S. Government and agency obligations $ 1 $ (5) $-- $(14) $ 1 $--
Other bonds and notes ................. -- -- 4 -- -- --
Marketable equity securities .......... 56 -- 41 -- -- --
Other assets .......................... -- -- -- (9) -- --
---- ---- ---- ---- ---- ---
Total ................................. $ 57 $ (5) $ 45 $(23) $ 1 $--
==== ==== ==== ==== ==== ===
</TABLE>
<PAGE>
(3) Loans, Net
Loans are summarized as follows:
<TABLE>
<CAPTION>
(in thousands) December 31,
------------------------
1998 1997
--------- ---------
<S> <C> <C>
Mortgage loans:
Residential ............................... $ 120,744 $ 94,337
Residential construction .................. 44,609 21,827
Commercial ................................ 42,439 36,188
Commercial construction ................... 8,142 4,535
--------- ---------
Total principal balances ............ 215,934 156,887
Due to borrowers on uncompleted loans:
Residential ........................... (12,137) (4,719)
Commercial ............................ (2,379) (1,845)
Deferred loan origination fees ............ (734) (474)
--------- ---------
Total mortgage loans .......... 200,684 149,849
--------- ---------
Other loans:
Commercial ................................ 10,791 10,425
Second mortgage ........................... 1,731 1,712
Home equity ............................... 1,521 1,975
Passbook and stock secured ................ 592 817
Consumer .................................. 1,725 1,564
--------- ---------
Total other loans ................... 16,360 16,493
--------- ---------
Less: Allowance for loan losses .......... (3,145) (2,609)
========= =========
Loans, net .......................... $ 213,899 $ 163,733
========= =========
</TABLE>
The Bank's lending activities are conducted solely in Nantucket. The Bank grants
single family and multi-family residential loans, commercial loans and a variety
of consumer loans. In addition, the Bank grants loans for construction of
residential homes, multi-family properties, commercial real estate properties
and for land development. Most loans granted by the Bank are collateralized by
real estate. The ability and willingness of single family residential and
consumer borrowers to honor their repayment commitments is generally impacted by
the level of overall economic activity within the borrower's geographic area and
real estate values. The ability and
23
<PAGE>
willingness of commercial real estate, commercial and construction loan
borrowers to honor their repayment commitments is generally impacted by the
health of the real estate economic sector in the borrower's geographic areas and
the general economy.
Loans serviced for other investors amounted to $67.7 million, $65.1 million
and $70.7 million at December 31, 1998, 1997 and 1996, respectively. Service
fees earned on these loans amounted to $236,000, $258,000 and $282,000,
respectively, in 1998, 1997 and 1996.
Non-performing loans are summarized as follows:
(in thousands) December 31,
------------------------
1998 1997 1996
---- ---- ----
Loans accounted for on a non-accrual basis ....... $-- $-- $ 10
Accruing loans 90 days or more past due .......... 268 10 433
Restructured loans ............................... -- -- --
---- ---- ----
Total ............................................ $268 $ 10 $443
==== ==== ====
The reduction in interest income associated with non-performing loans was
not significant. At December 31, 1998, 1997, and 1996 the Company had no loans
which were considered impaired.
Transactions in the allowance for loan losses are summarized as follows:
(in thousands)
<TABLE>
<CAPTION>
Years Ended December 31,
---------------------------------
1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
Balance at beginning of year .................................. $ 2,609 $ 2,365 $ 2,249
Provision for loan losses .............................. 150 150 75
Recoveries on loans previously charged off ............. 409 204 179
Realized losses charged to allowance ................... (23) (110) (138)
------- ------- -------
Balance at end of year ........................................ $ 3,145 $ 2,609 $ 2,365
======= ======= =======
Allocated as follows:
Residential mortgage loans ............................. $ 1,300 $ 914 $ 851
Commercial mortgage loans .............................. 886 645 623
Commercial loans ....................................... 260 229 192
All other loans ........................................ 106 113 114
Unallocated ............................................ 593 708 585
------- ------- -------
Total .................................................. $ 3,145 $ 2,609 $ 2,365
======= ======= =======
Realized losses charged to the allowance by type are as follows
Residential mortgage loans ............................. $ -- $ -- $ 19
Commercial loans ....................................... 11 91 31
All other loans ........................................ 12 19 88
------- ------- -------
Total .................................................. $ 23 $ 110 $ 138
======= ======= =======
</TABLE>
<PAGE>
In the ordinary course of business, the Bank makes loans to directors and
executive officers, including their immediate families and companies (related
party loans) with which they are affiliated. Such loans, which are substantially
on the same terms, including interest rate and collateral, as those prevailing
at the time of origination for comparable transactions with other borrowers, did
not involve more than the normal risk of collectibility or present other
unfavorable features.
Set forth below is an analysis of such related party loans during the years
ended December 31, 1998 and 1997:
(in thousands) 1998 1997
------- --------
Balance at beginning of year ............... $ 2,164 $ 1,468
Additions ............................... 676 1,245
Deductions .............................. (263) (549)
------- -------
Balance at end of year ..................... $ 2,577 $ 2,164
======= =======
24
<PAGE>
(4) Land, Building and Equipment, Net
Land, building, and equipment are summarized as follows:
(in thousands) December 31,
------------------------
1998 1997
------- -------
Land ......................................... $ 304 $ 304
Buildings .................................... 571 571
Furniture and equipment ...................... 2,240 1,778
------- -------
3,115 2,653
Less: accumulated depreciation .............. (1,394) (1,202)
------- -------
$ 1,721 $ 1,451
======= =======
During 1998, the Bank entered into a non-cancelable operating lease for office
space that expires in 2003. This lease contains five one-year renewal options
that may be exercised by the Bank. The terms of the lease require the Bank to
pay all executory costs such as utilities, maintenance and insurance. Rental
expense for this lease amounted to $20,000 in 1998. Future minimum payments
under this lease are $37,000 annually for 1999 through 2002 and $16,000 in 2003.
(5) Deposits
(dollars in thousands)
Deposit balances and weighted average interest rates as of December 31 are as
follows:
<TABLE>
<CAPTION>
1998 1997
---------------------- ------------------------
Weighted Weighted
Average Average
Amount Rate Amount Rate
-------- ---- -------- ----
<S> <C> <C> <C> <C>
Demand (non-interest bearing) ......... $ 18,437 --% $ 11,226 --%
Savings:
NOW .............................. 43,062 1.19% 28,072 1.28%
Regular and 90-day notice accounts 19,168 2.48% 15,090 2.76%
Money market deposit accounts .... 38,377 3.71% 26,766 3.68%
Advance payments from mortgagors . 231 1.00% 236 1.00%
-------- ---- -------- ----
Total savings ................ 100,838 2.39% 70,164 2.51%
-------- ---- -------- ----
Total deposits ............... $188,668 3.10% $142,436 3.48%
======== ==== ======== ====
</TABLE>
<PAGE>
Certificates of deposit are summarized by contractual maturity date at
December 31, 1998 as follows:
Under Over
$100,000 $100,000 Total
------- ------- -------
Within one year $24,401 $36,767 $61,168
From one to three years 4,847 2,448 7,295
From three to five years 698 232 930
------- ------- -------
Total $29,946 $39,447 $69,393
======= ======= =======
Interest on deposits, classified by type, is as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------
1998 1997 1996
------ ------ ------
<S> <C> <C> <C>
Regular, NOW, 90 day notice and advance payments from mortgagors $ 934 $ 739 $ 703
Money market deposits 1,250 891 698
Time certificates of deposit 3,325 2,964 2,818
------ ------ ------
Total $5,509 $4,594 $4,219
====== ====== ======
</TABLE>
25
<PAGE>
(6) Borrowed Funds
(dollars in thousands)
Borrowed funds are summarized by contractual maturity as follows:
<TABLE>
<CAPTION>
December 31,
-------------------------------------------------
1998 1997
--------------------- -------------------
Weighted Weighted
Average Average
Amount Rate Amount Rate
------ ----- ------- ------
<S> <C> <C> <C> <C>
Secured advances from Federal Home Loan Bank of Boston
Due within one year ............................. $33,356 5.48% $16,494 6.22%
Due from one to three years ..................... 15,065 6.22% 18,725 6.35%
Due from three to five years .................... 6,500 5.48% 6,523 6.21%
Due from five to ten years ...................... 4,000 5.21% -- --
------- ---- ------- ----
Total borrowings ............................ $58,921 5.65% $41,742 6.28%
======= ==== ======= ====
</TABLE>
Borrowings from the Federal Home Loan Bank of Boston ("FHLB") are secured
by the Bank's stock in the FHLB of Boston and a blanket lien on certain
"qualified collateral" defined principally as 90% of the market value of U.S.
Treasury and federal agency obligations and 75% of the carrying value of certain
residential mortgage loans. Unused borrowings with the FHLB at December 31, 1998
were $45 million. Advances totaling $6.0 million can be called at a date or
dates prior to their contractual maturity.
As a member of the FHLB, the Bank is required to invest in the common stock
of the FHLB in the amount of one percent of its outstanding loans secured by
residential housing, or three tenths of one percent of total assets, or five
percent of its outstanding advances from the FHLB, whichever is highest. As and
when such stock is redeemed, the Bank would receive from the FHLB an amount
equal to the par value of the stock. As of December 31, 1998 the Bank's FHLB
stock holdings were $3.3 million. The Bank's investment in FHLB stock is
recorded at cost.
<PAGE>
(7) Income Taxes
(dollars in thousands)
Total income tax expense was allocated as follows:
Years Ended December 31,
-------------------------------
1998 1997 1996
------ ------ --------
Current tax expense: Federal $2,101 $1,432 $ 1,567
State 105 507 612
------ ------ --------
2,206 1,939 2,179
------ ------ --------
Deferred tax expense (benefit)
Federal (264) 189 (139)
State (15) 63 (55)
Change in valuation allowance (35) (30) (54)
------ ------ --------
(314) 222 (248)
------ ------ --------
Total income tax expense $1,892 $2,161 $1,931
====== ====== ======
The effective Federal income tax rates differ from the statutory rates as
indicated below:
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Statutory Federal income tax rate 34% 34% 34%
Increase (decrease) resulting from:
State income taxes (net of Federal tax benefit) 1 7 7
Change in valuation allowance and other - (1) (2)
--- --- --
Effective Federal income tax rate 35% 40% 39%
=== === ==
</TABLE>
26
<PAGE>
The tax effect of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at December 31,
1998 and 1997 are presented below:
<TABLE>
<CAPTION>
December 31,
-----------------
1998 1997
------ ------
<S> <C> <C>
Deferred tax assets
Deferred compensation expense .................. $ 206 $ 205
Allowance for loan losses ...................... 664 539
Accrued retirement expenses .................... 129 109
Capital loss carry forward ..................... 2 35
Accrued bonus .................................. 58 46
Depreciation of buildings and equipment ........ 11 --
Other .......................................... 25 --
------ ------
Total gross deferred tax asset ............. 1,095 934
Less: valuation allowance ...................... -- (35)
------ ------
1,095 899
Deferred tax liabilities
Deferred loan origination fees ................. 642 649
Deferred premium on loans ...................... 23 25
Depreciation of buildings and equipment ........ -- 109
Unrealized gain on securities available for sale 9 5
------ ------
Total gross deferred tax liabilities ....... 674 788
====== ======
Net deferred tax asset ..................... $ 421 $ 111
====== ======
</TABLE>
Realization of the Company's deferred tax asset is supported by its tax
history. Management believes the existing net deductible temporary differences
that give rise to the net deferred income tax asset will reverse in periods the
Company generates net taxable income.
The Company and its subsidiaries on a consolidated basis are subject to
Federal income tax. The Bank is subject to Massachusetts income tax at a rate of
10.91%. One of the Bank's subsidiaries, N.B. Securities, Inc. is an investment
company that has been classified as a securities corporation under the
provisions of the General Laws of Massachusetts and, as such, is subject to
state tax at a rate of 1.32% of gross receipts. The Bank's other subsidiary, N.
Realty Corp., intends to elect to be taxed as a real estate investment trust.
The Company is a bank holding company that has been classified as a securities
corporation under the provisions of the General Laws of Massachusetts and, as
such, is subject to a state tax at a rate of 0.33% of gross receipts.
In August 1996, the provisions repealing the current thrift bad debt rules
were passed by Congress as part of "The Small Business Job Protection Act of
1996." The new rules eliminate the 8% of taxable income method for deducting
additions to the tax bad debt reserves for all thrifts for tax years beginning
after December 31, 1995. These rules also require that all thrift institutions
recapture all or a portion of their bad debt reserves added since the base year
(last taxable year beginning before January 1, 1988). The Bank has previously
recorded a deferred tax liability equal to the bad debt recapture and as such,
the rules will have no effect on net income or federal income tax expense.
<PAGE>
The unrecaptured base year reserves will not be subject to recapture as
long as the institution continues to carry on the business of banking. In
addition, the balance of the pre-1988 bad debt reserves continue to be subject
to provisions of present law that require recapture in the case of certain
excess distributions to shareholders. The tax effect of pre-1988 bad debt
reserves subject to recapture in the case of certain excess distributions is
approximately $1.2 million.
(8) Employee Benefit Plans
Pension Plan
The Bank provides pension benefits for its employees through membership in
the Savings Bank Employee Retirement Association, a noncontributory, defined
benefit plan. Bank employees become eligible to participate in the plan after
attaining age 21 and completing one year of service. The Plan provides for
benefits to be paid to eligible employees at retirement based
27
<PAGE>
primarily upon their years of service with the Bank and compensation levels
near retirement. The Bank makes annual contributions to the Plan equal to the
maximum amount that can be deducted for income tax purposes.
The following tables set forth information on the Plans benefit
obligations, assets and funded status for the plan years ended October 31, 1998
and 1997 and assumptions and net periodic benefit cost for the plan years ended
October 31, 1998, 1997 and 1996:
<TABLE>
<CAPTION>
(dollars in thousands) 1998 1997
------- -------
<S> <C> <C>
Change in benefit obligations:
Benefit obligation at beginning of year ............ $ 1,657 $ 1,349
Service cost ....................................... 134 83
Interest cost ...................................... 120 101
Actuarial loss (gain) .............................. (174) 155
Benefits paid ...................................... (162) (31)
------- -------
Benefit obligation at end of year .................. $ 1,575 $ 1,657
------- -------
Change in plan assets:
Fair value of plan assets at beginning of year ..... $ 1,454 $ 1,187
Actuarial return on plan assets .................... 114 220
Employer contribution .............................. 91 78
Benefits paid ...................................... (162) (31)
------- -------
Fair value of plan assets at end of year ........... $ 1,497 $ 1,454
------- -------
Funded status ...................................... $ (78) $ (203)
Transition (asset) liability ....................... (22) (23)
Unrecognized net actuarial gain .................... (205) (35)
------- -------
Accrued benefit cost ............................... $ (305) $ (261)
------- -------
</TABLE>
Weighted average assumptions as of October 31:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Discount rate .............................. 6.75% 7.25% 7.50%
Expected return on plan assets ............. 8.00% 8.00% 8.00%
Rate of compensation increase .............. 5.50% 6.00% 6.00%
</TABLE>
<PAGE>
Components of net periodic benefit cost:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Service cost ............................... $ 134 $ 82 $ 109
Interest cost .............................. 120 101 92
Expected return on Plan assets ............ (116) (95) (147)
Recognized net actuarial gain
(loss) and other ......................... (3) (3) 73
----- ----- -----
Pension expense .......................... $ 135 $ 85 $ 127
===== ===== =====
</TABLE>
Deferred Compensation Agreements
The Company has entered into deferred compensation agreements with an
officer and a former officer, and has purchased life insurance policies to cover
the unfunded liability of the deferred compensation agreements. The expense
related to these agreements was $70,000 in 1998 and $48,000 in 1997.
(9) 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
28
<PAGE>
be covered by checks drawn on another bank while checks drawn on that other bank
were covered by checks drawn on Nantucket Bank. The "check-kiting" caused an
overdraft of $518,000. A charge of $560,000, included estimated legal and other
collection expenses, was recognized in the first quarter of 1998. Later in 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 were 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 $447,000. Under the terms of the promissory note the
customer is required to make monthly payments beginning May 1, 1999. These
payments begin at $1,000 per month for 18 months, increase to $1,500 per month
through 2008 and continue through October 1, 2018. Proceeds from both the
promissory note and the second mortgages will be recognized on a cash basis.
During the fourth quarter of 1998 the Bank recognized an additional recovery of
$46,000.
(10) Commitments and Financial Instruments with Off-Balance Sheet Risk
The Bank is party to financial instruments with off-balance sheet risk in
the normal course of business to meet the financing needs of its customers and
to reduce its exposure to fluctuations in interest rates. These financial
instruments include commitments to originate and sell loans and standby letters
of credit. The instruments involve, to varying degrees, elements of credit risk
and interest rate risk in excess of the amounts recognized in the consolidated
balance sheets. The contract or notional amounts of those instruments reflect
the extent of involvement the Bank has in particular classes of financial
instruments.
The Bank's exposure to credit loss in the event of non-performance by the
other party to the financial instrument for loan commitments, unused lines of
credit and standby letters of credit is represented by the contractual amount of
those instruments. The Bank uses the same credit policies in making commitments
and conditional obligations as it does for on-balance sheet instruments. For
commitments to sell loans the contract or notional amounts do not represent
exposure to credit loss. The Bank controls credit risk on commitments to sell
through credit approval, borrowing limits and monitoring procedures.
Financial instruments whose contract amounts represent credit risk are as
follows:
<TABLE>
<CAPTION>
(in thousands) Contract or Notional Amount
---------------------------
December 31,
---------------------------
1998 1997
------- -------
<S> <C> <C>
Commitments to originate mortgage and commercial loans . $21,649 $ 9,369
Unused lines of credit ................................. 12,543 9,231
Standby letters of credit .............................. 331 487
Unadvanced portions of construction loans .............. 14,516 6,567
</TABLE>
<PAGE>
Commitments to originate loans and unused lines of credit are agreements to
lend to a customer provided there is no violation of any condition established
in the contract. Commitments generally have fixed expiration dates or other
termination clauses and may require payment for a fee. Since many commitments
expire without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. The Bank evaluates each customer's
creditworthiness on a case-by-case basis. The amount of collateral obtained, if
deemed necessary by the Bank upon extension of credit, is based upon
management's credit evaluation of the borrower.
Stand-by letters of credit are conditional commitments issued by the Bank
to guarantee the performance by a customer to a third party. The credit risk in
issuing letters of credit is essentially the same as that involved in extending
loan facilities to customers. On May 1, 1998 the Company entered into a new
Consulting Agreement ("Agreement") with the Chairman of the Board of Directors
("Chairman"), who also holds the titles of President and Chief Executive
Officer. 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 Chairman shall receive an annual
consulting fee of $120,000 and an annual reimbursement of $12,000 for office
expenses. 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 Board of Directors may
29
<PAGE>
terminate this Agreement 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.
(11) Stockholders' Equity
Capital requirements
The Company and the Bank are subject to various regulatory capital
requirements administered by the federal banking agencies. Failure to meet
minimum capital requirements can initiate certain mandatory, and possibly
additional discretionary, actions by regulators that, if undertaken, could have
a direct material effect on the Company's consolidated financial statements.
Under capital adequacy guidelines and the regulatory framework for prompt
corrective action, the Company and the Bank must meet specific capital
guidelines that involve quantitative measures of the Bank's assets, liabilities,
and certain off-balance-sheet items as calculated under regulatory accounting
practices. The Company's and the Bank's capital amounts and classifications are
also subject to qualitative judgments by the regulators about components, risk
weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Company and the Bank to maintain minimum amounts and ratios (set
forth in the table below) of total and Tier I capital (as defined in the
regulations) to risk weighted assets (as defined), and of Tier I capital (as
defined) to average assets (as defined). Management believes, as of December 31,
1998, that the Company and the Bank meet all capital adequacy requirements to
which they are subject.
As of December 31, 1998, the most recent notification from the FDIC
categorized the Bank as well capitalized under the regulatory framework for
prompt corrective action. To be categorized as well capitalized, the Bank must
maintain minimum total risk-based, Tier I risk-based, and Tier I leverage ratios
as set forth in the table. There are no conditions or events since that
notification that management believes would cause a change in the Bank's
categorization.
<PAGE>
The Company's and the Bank's actual capital amounts and ratios are
presented in the following table.
<TABLE>
<CAPTION>
(dollars in thousands) To Be Well Capitalized
Under Prompt
For Capital Adequacy Corrective Action
Actual Purposes Provisions
-------------------- ---------------------- ----------------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
As of December 31, 1998: (at least) (at least)
<S> <C> <C> <C> <C> <C> <C>
Total Capital (to Risk Weighted
Assets)
Bank $25,060 15.4% $13,023 8.0% $16,279 10.0%
Company $26,069 16.0% $11,167 8.0% $13,959 10.0%
Tier I Capital (to Risk Weighted Assets)
Bank $23,011 14.1% $6,511 4.0% $9,767 6.0%
Company $24,017 14.7% $5,583 4.0% $8,375 6.0%
Total Capital (to Average Assets)
Bank $25,060 9.4% $10,614 4.0% $13,268 5.0%
Company $26,069 9.9% $10,573 4.0% $13,216 5.0%
As of December 31, 1997:
Total Capital (to Risk Weighted Assets)
Bank $22,606 17.8% $10,168 8.0% $12,710 10.0%
Company $23,536 18.6% $10,130 8.0% $12,663 10.0%
Tier I Capital (to Risk Weighted Assets)
Bank $21,005 16.5% $5,084 4.0% $7,626 6.0%
Company $21,940 17.3% $5,065 4.0% $7,598 6.0%
Total Capital (to Average Assets)
Bank $22,606 10.9% $8,266 4.0% $10,332 5.0%
Company $23,536 11.4% $8,285 4.0% $10,357 5.0%
</TABLE>
30
<PAGE>
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", defined
as Directors of the Company, who are not also 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 expire ten years from the date of grant.
Options granted under the Plan may not be exercised prior to May 1, 2000 without
the written assent of the Company. In the event of a change of control, as
defined in the Plan, all options granted under the Plan shall immediately become
fully vested.
As of December 31, 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 Weighted Avg.
Shares Under Option Average Remaining
Option Prices Exercise Price Contractual Life
------ ------ -------------- ----------------
Balance December 31, 1997 --- --- ---
<S> <C> <C> <C> <C>
Granted 25,000 $26.474 $26.474
Exercised --- --- ---
Cancelled --- --- ---
----- ------ ------
Balance December 31, 1998 25,000 $26.474 $26.474 9.4 Years
====== ======= -------
Options exercisable at year-end 5,000
======
Weighted average fair value of options
granted during the year. $ 4.41
</TABLE>
The Company applies APB Opinion No. 25 and related interpretations in accounting
for its plan. Had compensation cost for the plan been determined consistent with
FASB Statement No. 123, net income and earnings per share for 1998 would have
been reduced to the pro forma amounts indicated below:
Net income (in thousands)
As reported $3,551
Pro forma $3,541
Earnings per share
As reported $ 1.93
Pro forma $ 1.92
<PAGE>
The fair value of the 1998 option grant is estimated on the date of grant using
the Black-Scholes option-pricing model with the following assumptions: dividend
yield of 3.0% percent, weighted-average risk-free interest rate of 5.72%
percent, expected life of 4 years and expected volatility of 20% percent. The
effects of applying SFAS 123 on the pro forma net income may not be
representative of the effects on pro forma net income for future years.
31
<PAGE>
(12) Pending Legal Matters
The Company is party to certain litigation in the ordinary course of
business. Management is of the opinion that the aggregate liability, if any,
resulting from such litigation would not have a material adverse impact on the
financial condition or results of operations.
(13) Fair Value of Financial Instruments (in thousands)
The fair value of a financial instrument is defined as the amount at which
the instrument could be exchanged in a current transaction between willing
parties, other than in a forced liquidation or sale.
Quoted market prices are used to establish fair value when they are
available for a particular financial instrument. In cases where quoted market
prices are not available, fair values are based on estimates using present value
or other valuation techniques. Those techniques include assumptions which are
highly subjective, including the timing and amount of future cash flows, risk
characteristics, economic conditions and discount rates. Changes in assumptions
could significantly affect the estimates; accordingly, the results may not be
precise.
Financial instrument fair value estimates, methods and assumptions are set
forth below:
Cash and cash equivalents The carrying amount of cash and cash equivalents
approximates their fair value.
Securities
Fair values for securities, including mortgage-backed securities, are based
on quoted market prices.
Federal Home Loan Bank stock
The carrying amount of stock in the Federal Home Loan Bank of Boston
approximates its fair value.
Loans
The fair value of loans was estimated for groups of similar loans based on
the type of loan, interest rate characteristics, credit risk and maturity. The
fair value of performing residential and commercial mortgage loans, including
both fixed and variable rate loans, was determined using discounted cash flow
techniques with year-end interest rates, incorporating estimated prepayment
factors.
Accrued Income Receivable
The carrying amount of accrued income receivable approximates its fair
value.
Deposits
The fair value of demand deposits, NOW and savings accounts, advance
payments from mortgagors and money market deposits are, by definition, equal to
the amount payable on demand at the reporting date (i.e. their carrying value
amounts). The fair values of fixed rate certificates of deposit are estimated
using a discounted cash flow calculation that applies year end interest rates at
which similar certificates were issued to a schedule of expected maturities of
the outstanding certificates of deposit.
<PAGE>
Borrowed funds
The fair value of borrowed funds is estimated using a discounted cash flow
analysis, based on the Company's current incremental borrowing rate for similar
types of borrowing arrangements.
Off-balance sheet financial instruments
The fair value of commitments to originate loans, unadvanced portions of
construction loans, unused lines of credit and standby letters of credit is not
considered material.
32
<PAGE>
The carrying amounts and fair values of the Company's financial instruments
consisted of the following at December 31, 1998 and 1997:
<TABLE>
<CAPTION>
1998 1997
----------------------- ------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
------- ------- -------- --------
<S> <C> <C> <C> <C>
Cash and cash equivalents $12,124 $12,124 $ 5,106 $ 5,106
Securities :
Available for sale 7,993 7,993 6,231 6,231
Held to maturity 17,904 18,050 16,661 16,655
Loans held for sale 16,005 16,658 11,169 11,209
Loans, net of allowance for loan losses 213,899 213,571 163,733 164,337
Federal Home Loan Bank stock 3,276 3,276 2,442 2,442
Accrued income receivable 1,340 1,340 1,040 1,040
Deposits:
Demand 18,437 18,437 11,226 11,226
NOW 43,062 43,062 28,072 28,072
Savings 19,168 19,168 15,090 15,090
Advance payments from mortgagors 231 231 236 236
Money market checking 38,377 38,377 26,766 26,766
Certificates of Deposit 69,393 69,615 61,046 61,167
Borrowed Funds 58,921 59,097 41,742 41,904
</TABLE>
33
<PAGE>
(14) Parent Company Financial Statements (dollars in thousands, except per share
information)
The investment in Nantucket Bank by Home Port Bancorp, Inc. is presented below
on the equity method of accounting. The separate financial statements of Home
Port Bancorp, Inc. are as follows:
<TABLE>
<CAPTION>
Balance Sheets December 31,
---------------------
1998 1997
-------- --------
<S> <C> <C>
Assets
Cash and due from banks ................................................. $ 279 $ 158
Investment in Nantucket Bank ............................................ 23,026 21,013
Due from Nantucket Bank ................................................. 606 794
Income taxes receivable ................................................. 150 --
Other assets ............................................................ 20 22
-------- --------
Total assets ...................................................... $ 24,081 $ 21,987
======== ========
Liabilities
Other liabilities ...................................................... $ 49 $ 39
-------- --------
Total liabilities ................................................. 49 39
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 ....................................................... 10,918 8,841
Unrealized gain on securities available for sale, net of taxes .......... 15 8
Less: Treasury stock, at cost(483,604 shares ............................ (4,397) (4,397)
-------- --------
Total stockholders' equity ........................................ 24,032 21,948
-------- --------
Total liabilities and stockholders' equity ........................ $ 24,081 $ 21,987
======== ========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Statements of Earnings Years Ended December 31,
---------------------------------
1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
Income:
Dividends from Nantucket Bank ................................ $ 1,850 $ 1,800 $ 1,600
Interest on cash equivalents and securities .................. 14 13 17
------- ------- -------
Total income ............................................ 1,864 1,813 1,617
Expenses:
Operating expenses ........................................... 475 389 353
------- ------- -------
Total expenses .......................................... 475 389 353
------- ------- -------
Income before income taxes and equity in undistributed net
Income of Nantucket Bank ..................................... 1,389 1,424 1,264
Income tax benefit ............................................... (156) (142) (134)
------- ------- -------
Income before equity in undistributed net income of Nantucket Bank 1,545 1,566 1,398
Equity in undistributed net income of Nantucket Bank ............. 2,006 1,731 1,637
------- ------- -------
Net income .............................................. $ 3,551 $ 3,297 $ 3,035
======= ======= =======
</TABLE>
The parent company only statements of changes in stockholders' equity are
identical to the consolidated statements of changes in stockholders' equity and,
therefore, are not presented here.
34
<PAGE>
<TABLE>
<CAPTION>
Statements of Cash Flows Years Ended December 31,
--------------------------------
1998 1997 1996
------- ------ ------
<S> <C> <C> <C>
Net cash flow from operating activities:
Net income ........................................................... $ 3,551 $ 3,297 $ 3,035
Adjustments to reconcile net income to net cash provided by operating
activities:
Equity in undistributed net income of Nantucket Bank ............ (2,006) (1,731) (1,637)
Net increase (decrease) in accrued expenses and other liabilities 10 27 (27)
Net (increase) decrease in prepaid expenses and other assets .... 2 (4) 6
Net decrease (increase) in refundable income taxes .............. (150) 146 (146)
Other, net ...................................................... -- --
------- ------- -------
Net cash provided by operating activities ................................ 1,407 1,735 1,231
------- ------- -------
Net cash flows from (used in) investing activities:
Net (increase) decrease in due from Nantucket Bank ................... 188 (173) (636)
------- ------- -------
Net cash (used in) provided by investing activities ...................... 188 (173) (636)
------- ------- -------
Net cash flows from financing activities:
Cash dividends paid .................................................. (1,474) (1,473) (1,289)
------- ------- -------
Net cash used for financing activities ................................... (1,474) (1,473) (1,289)
------- ------- -------
Net increase (decrease) in cash and cash equivalents ..................... 121 89 (694)
Cash and cash equivalents at beginning of year ........................... 158 69 763
------- ------- -------
Cash and cash equivalents at end of year ................................. $ 279 $ 158 $ 69
======= ======= =======
Supplemental disclosure of cash flow information:
Cash paid during the year for income taxes: ............................ $ -- $ 1 $ --
</TABLE>
35
<PAGE>
Independent Auditors' Report Home Port Bancorp, Inc. and Subsidiaries
The Board of Directors and Stockholders
Home Port Bancorp, Inc.:
We have audited the accompanying consolidated balance sheets of Home Port
Bancorp, Inc. and subsidiaries as of December 31, 1998 and 1997, and the related
consolidated statements of earnings, changes in stockholders' equity, and cash
flows for each of the years in the three-year period ended December 31, 1998.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Home Port
Bancorp, Inc. and subsidiaries at December 31, 1998 and 1997, and the results of
their operations and their cash flows for each of the years in the three-year
period ended December 31, 1998, in conformity with generally accepted accounting
principles.
/s/ KPMG Peat Marwick LLP
- -------------------------
KPMG Peat Marwick LLP
Boston, Massachusetts
February 2, 1999
36
<PAGE>
Directors and Officers Home Port Bancorp, Inc. and Subsidiaries
Home Port Bancorp, Inc.
Directors
Karl L. Meyer *
Chairman of the Board, President and CEO
of Home Port Bancorp, Inc.
Charles F. DiGiovanna
Private Investor
William P. Hourihan, Jr.
Vice President of Home Port Bancorp, Inc.
and President of Nantucket Bank
Charles H. Jones, Jr.
General Partner of Edge Partners, L.P.
Daniel D. McCarthy *
Investment Banker
First Long Island Investors
Robert J. McKay
Management Consultant
Robert J. McKay Associates
Philip W. Read *
President of Jared Coffin House, Inc. and
Chairman of the Board of Nantucket Bank
Robert A. Trevisani, Esq.
Partner, Gadsby & Hannah LLP
* Members of Executive Committee
* Elected on Feb. 3, 1999 to replace Daniel D.
McCarthy, who resigned as of March 1, 1999
Nantucket Bank
Officers
William P. Hourihan, Jr.
President & CEO
John M. Sweeney
Senior Vice President & CFO
Levin L. (Quint) Waters, III
Senior Vice President & Senior Loan Officer
Daniel P. Neath
Senior Vice President
Julie L. Bell
Vice President
Neil E. Marttila
Vice President
Zona Tanner-Butler
Vice President
Rebecca M. Bartlett
Human Resources Officer
Lisa Killen
Mortgage Officer
<PAGE>
Nantucket Bank
Directors
Philip W. Read
President of Jared Coffin House, Inc.
Chairman of the Board of Nantucket Bank
John W. Bartlett
Vice President & Owner of Bartlett's Ocean View Farm,
Inc.
Arthur L. Desrocher
Chairman of the Board of Selectmen of the Town of
Nantucket
John P. Dooley, CPA
Sheila O'Brien Egan
President of Swain's Travel, Inc.
Ralph L. Hardy
Ralph L. Hardy, Electrical Contractor
Lucile W. Hays
Former business owner and Director and Past
President of the Nantucket Boys and Girls Club
William P. Hourihan, Jr.
President of Nantucket Bank
Stephen Lindsay
Owner, Stephen Lindsay Custom Builders
J. Barry Thurston
Owner, Barry Thurston's Inc.
Marsha Kotalac
Owner, Nantucket Sports Locker
H. Flint Ranney
Owner, Denby Real Estate, Inc.
Home Port Bancorp, Inc.
Officers
Karl L. Meyer
Chairman of the Board, President and CEO
William P. Hourihan, Jr.
Vice President
Robert J. McKay
Secretary
John M. Sweeney
Treasurer & Chief Financial Officer
37
<PAGE>
Stockholder's information Home Port Bancorp, Inc. and Subsidiaries
Legal Counsel
Gadsby & Hannah LLP
225 Franklin Street
Boston, MA 02110
Independent Auditors
KPMG Peat Marwick LLP
99 High Street
Boston, MA 02110
Transfer Agent and Registrar
Registrar and Transfer Company
10 Commerce Drive
Cranford, NJ 07016
Our transfer agent is responsible for our stockholder records, issuance of stock
certificates and distribution of the IRS Form 1099. Your requests concerning
these matters are most efficiently answered by corresponding directly with
Registrar and Transfer Company.
Stockholder Relations
John M. Sweeney
Treasurer & CFO
Home Port Bancorp, Inc.
PO Box 988
104 Pleasant Street
Nantucket, MA 02554
(508) 228-0580
Annual Meeting
The Annual Meeting of the Stockholders will be held at 10:00 a.m. on Monday, May
17, 1999 at the Harbor House, South Beach Street, Nantucket, MA 02554.
<PAGE>
Form 10-K
Copies of the Company's 1998 10-K annual report, as filed with the Securities
Exchange Commission, may be obtained at no charge by writing to John M. Sweeney,
Treasurer & CFO, Home Port Bancorp, Inc., PO Box 988, 104 Pleasant Street,
Nantucket, MA 02554.
Stock Market Data
Home Port Bancorp, Inc.'s common stock is traded on the Nasdaq National Market
tier of The Nasdaq Stock Market under the symbol of HPBC and is listed in most
newspapers alphabetically abbreviated. As of March 5, 1999, there were
approximately 1,974 stockholders of record and 1,841,890 outstanding shares of
common stock.
The range of high and low sale prices and dividends declared for the common
stock by quarter are as follows:
Dividends
Period High Low Declared
- ----------------------------------------------------------
1998 4th quarter 25 19 1/8 $0.20
3rd quarter 27 19 1/8 $0.20
2nd quarter 28 23 3/8 $0.20
1st quarter 28 3/4 21 1/2 $0.20
1997 4th quarter 25 22 $0.20
3rd quarter 24 19 1/4 $0.20
2nd quarter 21 1/4 16 1/2 $0.20
1st quarter 19 1/4 16 1/8 $0.20
(Source: National Association of Securities Dealers, Inc.)
Note: The prices do not include mark-up, mark-down or commission.
38
EXHIBIT (21)
SUBSIDIARIES OF THE REGISTRANT
Percentage State of
Subsidiaries (1) Owned Incorporation
---------------- ----- -------------
Nantucket Bank 100% Massachusetts
N. Realty Corp. (2) 100% Massachusetts
N. Realty Holding Corp. (2) 100% Massachusetts
N.B. Securities, Inc. (3) 100% Massachusetts
(1) The operations of the subsidiaries are included in the consolidated
financial statements contained in the Annual Report to Stockholders
attached hereto as Exhibit 13.
(2) Common Stock wholly-owned by Nantucket Bank.
(3) Wholly-owned by Nantucket Bank.
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 12,070
<INT-BEARING-DEPOSITS> 54
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 7,993
<INVESTMENTS-CARRYING> 17,904
<INVESTMENTS-MARKET> 18,050
<LOANS> 217,044
<ALLOWANCE> 3,145
<TOTAL-ASSETS> 275,570
<DEPOSITS> 188,668
<SHORT-TERM> 58,921
<LIABILITIES-OTHER> 3,949
<LONG-TERM> 0
0
0
<COMMON> 23
<OTHER-SE> 24,009
<TOTAL-LIABILITIES-AND-EQUITY> 275,570
<INTEREST-LOAN> 17,509
<INTEREST-INVEST> 1,495
<INTEREST-OTHER> 93
<INTEREST-TOTAL> 19,097
<INTEREST-DEPOSIT> 5,509
<INTEREST-EXPENSE> 8,490
<INTEREST-INCOME-NET> 10,607
<LOAN-LOSSES> 150
<SECURITIES-GAINS> 52
<EXPENSE-OTHER> 6,158
<INCOME-PRETAX> 5,443
<INCOME-PRE-EXTRAORDINARY> 5,443
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,551
<EPS-PRIMARY> 1.93
<EPS-DILUTED> 1.93
<YIELD-ACTUAL> 4.40
<LOANS-NON> 0
<LOANS-PAST> 268
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 623
<ALLOWANCE-OPEN> 2,609
<CHARGE-OFFS> 23
<RECOVERIES> 409
<ALLOWANCE-CLOSE> 3,145
<ALLOWANCE-DOMESTIC> 3,145
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
