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, 1999.
[ ] 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
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
104 Pleasant Street, Nantucket, Massachusetts 02554
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(Address of principal executive offices) (Zip Code)
Issuer's telephone number: (508) 228-0580
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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
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(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: $23,532,000.
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 10, 2000 which was $22.00
per share, is $40,521,580.
As of March 10, 2000, 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, 1999 (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 2000 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,
the Bank's continued ability to attract and retain deposits, new accounting
pronouncements, and changing regulatory requirements.
Part I
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Item 1. DESCRIPTION OF BUSINESS
General
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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, 1999, 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 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 been
very strong in recent years. Total real estate sales on Nantucket totaled $470
million in 1999, $401 million in 1998 and $318 million in 1997. During 1999, the
median price of a home on Nantucket was $600,000 compared to $450,000 in 1998
and $400,000 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
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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 from 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 5.53% in 1997 to 4.52% in 1998 and 5.85% in 1999.
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 on investment properties and properties utilized by retail and small
service businesses such as restaurants, guest houses and retailers. The Bank
lends for speculative real estate construction activities on a limited basis and
closely monitors these loans. At December 31, 1999, such loans accounted for
$3.2 million, or 1.2%, of the total loan portfolio (excluding loans held for
sale).
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, 1999 commercial real estate loans totaled 20.4% of the Bank's loan portfolio
(including loans held for sale) as compared to 20.6% at the end of 1998.
<PAGE>
During 1998 and 1999 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
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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 of United States Government and
agency obligations, short-term corporate bonds, notes and debentures and state
and municipal obligations and 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
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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 and 1999 brokered
deposits totaled less than 1/2 of 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
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The Company's Board of Directors reviews the payment of dividends on a
quarterly basis. 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
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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 has elected to be taxed as a real estate
investment trust.
<PAGE>
Supervision, Regulation and Operating Powers
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General. The Company and the Bank are extensively regulated under federal
and state law. The Company, as a Delaware corporation, is subject to regulation
by the Secretary of the State of Delaware and the rights of its stockholders are
governed by the General Corporation Law of the State of Delaware.
Federal Bank Holding Company Act Regulation. On August 30, 1988, the
Company became a registered bank holding company after receiving approval from
the Board of Governors of the Federal Reserve Board System ("FRB"). As a result,
its activities are subject to certain limitations, which are described below,
and transactions between the Bank and the Company or its other affiliates are
also subject to certain restrictions.
Under the Bank Holding Company Act, a bank holding company must obtain FRB
approval before it acquires direct or indirect ownership or control of any
voting shares of any bank if, after such acquisition, it will own or control
directly or indirectly more than 5% of the voting stock of such bank, unless it
already owns a majority of the voting stock of such bank. FRB approval must also
be obtained before a bank holding company acquires all or substantially all of
the assets of a bank or merges or consolidates with another bank holding
company. Any acquisition, directly or indirectly, by a bank holding company or
its subsidiaries of any voting shares of, or interest in, or all or
substantially all, of the assets of any bank located outside of the state in
which the operations of the bank holding company's banking subsidiaries are
principally conducted, may not be approved by the FRB unless the laws of the
state in which the bank to be acquired is located specifically, authorizes such
an acquisition.
The Bank Holding Company Act and regulations adopted thereunder limit the
activities of a bank holding company and its subsidiaries to the business of
banking or of managing or controlling banks, and to such other activities as the
FRB may determine to be so closely related to banking as to be a proper incident
thereto. The activities of the Company and its non-bank subsidiaries are subject
to these legal and regulatory limitations under the Bank Holding Company Act and
the FRB's regulations thereunder.
In addition to the statutory and regulatory restrictions on the non-bank
activities of the Company, the FRB has taken the position that it has the
authority, under its general supervisory authority over bank holding companies
and their subsidiaries, to prevent activities of a bank holding company's
subsidiaries that the FRB regards as unsafe or unsound, or to require a bank
holding company to maintain a higher level of capital to support such
activities. In this connection, the FRB has expressed serious reservations about
applications by bank holding companies to acquire savings banks that are engaged
directly or through subsidiaries in real estate development activities.
As a bank holding company, the Company is required to give the FRB prior
written notice of any purchase or redemption of its outstanding equity
securities if the gross consideration for the purchase or redemption, when
combined with the net consideration paid for all such purchases or redemptions
during the preceding 12 months, is equal to 10% or more of the Company's
consolidated net worth. The FRB may disapprove such a purchase or redemption if
it determines that the proposal would violate any law, regulation, FRB order,
directive, or any condition imposed by, or written agreement with, the FRB.
<PAGE>
Financial Modernization
Effective March 11, 2000, pursuant to authority granted under the
Gramm-Leach-Bliley Act ("GLB Act"), a bank holding company may elect to become a
financial holding company ("FHC") which may affiliate with securities firms and
insurance companies and engage in other activities that are financial in nature.
The GLB Act defines "financial in nature" to include securities underwriting,
dealing and market making; sponsoring mutual funds and investment companies;
insurance underwriting and agency; merchant banking activities; and activities
that the Federal Reserve has determined to be closely related to banking. Under
the GLB act, a bank holding company may become a FHC by filing a declaration
with the FRB if each of its subsidiary banks is well capitalized under the
FDICIA prompt corrective action provisions, is well managed, and has at least a
satisfactory rating under the Community Reinvestment Act of 1977 ("CRA"). No
prior regulatory approval will be required for a FHC to acquire a company, other
than a bank or savings association, engaged in activities permitted under the
GLB Act. Most of the provisions of the GLB Act require the applicable regulators
to adopt regulations in order to implement these provisions. The GLB Act does
not significantly alter the regulatory environment under which the Company and
the Bank currently operate, as described above.
Because the legislation is so very new and the changes are radical, the Company
cannot yet determine how it will be affected by the GLB Act. The Company has
not, at this time, made any decision with respect to whether it will elect to
become a FHC under the GLB Act.
<PAGE>
Massachusetts Banking Laws and Supervision. Massachusetts chartered savings
banks such as the Bank are regulated and supervised by the Commissioner. The
Commissioner is required to examine each state-chartered bank at least once
every two years. The approval of the Commissioner is required to establish or
close branches, merge with other banks, form a bank holding company and
undertake many other activities. Massachusetts statutes and regulations govern
among other things, investment powers, lending powers, deposit activities,
maintenance of surplus and reserve accounts, the distribution of earnings, the
payment of dividends, issuance of capital stock, branching, acquisitions,
mergers, and consolidations.
Any Massachusetts bank that does not operate in accordance with the
regulations, policies and directives of the Commissioner may be subject to
sanctions for non-compliance. The Commissioner may under certain circumstances
suspend or remove trustees, directors or officers who have violated the law,
conducted the bank's business in a manner which is unsafe, unsound or contrary
to the depositors' interests, or been negligent in the performance of their
duties.
Deposit Insurance. The Bank's deposit accounts are insured by the Bank
Insurance Fund of the FDIC to a maximum of $100,000 per separately insured
account, and deposits in excess of that amount in each separately insured
account are insured by the Depositors Insurance Fund.
Pursuant to section 7 of the Federal Deposit Insurance Act (12 USC 1817),
as amended, the FDIC has incorporated a risk based deposit insurance assessment.
Under this risk based system, the assessment rate for an insured depository
depends on the assessment risk determined by the institutions capital level and
supervisory evaluations. Institutions are assigned to one of three capital
groups - well capitalized, adequately capitalized or undercapitalized.
Any FDIC-insured bank which does not operate in accordance with FDIC
regulations, policies and directives may be sanctioned for non-compliance.
Proceedings may be instituted against any FDIC-insured bank or any director or
trustee, officer or employee of such bank who engaged in unsafe or unsound
practices, including the violation of applicable laws and regulations. The FDIC
has the authority to terminate insurance of accounts pursuant to the procedures
established for that purpose or impose civil money penalties.
All Massachusetts chartered savings banks are required to be members of the
Depositors Insurance Fund ("DIF"). The DIF maintains a private deposit insurance
fund which insures all deposits in member banks which are not covered by federal
insurance, which, in the case of the Bank, are its deposits in excess of
$100,000 per insured account. In 1999 and 1998, the Bank's premium for this
insurance was assessed at an annual rate of 1/50 of 1% of insured deposits.
Competition
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The Bank faces strong competition from other banks, mortgage banking
companies and other financial service providers, many of which have
substantially greater resources than the Bank.
The Bank's most direct competition for deposits primarily comes from other
banks located on Nantucket Island and in southeastern Massachusetts, credit
unions, mutual funds and government securities. The Bank competes for deposits
principally by offering depositors convenient branch hours and locations,
efficient and attentive service, a wide variety of deposit programs, automated
teller machines and competitive interest rates. It does not rely upon any single
individual, group or entity for a material portion of its deposits.
<PAGE>
Competition for real estate loans comes primarily from other banks,
mortgage banking companies and other institutional lenders. The Bank competes
for loan origination primarily based on the efficiency and quality of service
that it provides as well as the interest rates and loan fees that it charges.
The competition for loans varies depending on factors which include, among
others, the general availability of lendable funds and credit, general and local
economic conditions, current interest rate levels, conditions in the mortgage
market and other factors which are not readily predictable.
In addition to competing with other savings banks and financial services
organizations based in Massachusetts, the Bank has and is expected to face
increased competition from major commercial banks headquartered outside of
Massachusetts as a result of the interstate banking laws which currently permit
banks nationwide to enter the Bank's market area and compete with it for
deposits and loan originations.
Employees
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As of December 31, 1999, the Company and Bank had 68 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
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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, 1999. 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,
---------------------------------------
1999 1998 1997
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<S> <C> <C> <C>
Assets
Cash and due from banks ................................................. $ 10,712 $ 7,281 $ 5,329
Federal funds sold and interest bearing deposits in banks ............... 1,146 1,647 1,176
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Total cash and cash equivalents ..................................... 11,858 8,928 6,505
Securities available for sale and held to maturity ...................... 28,069 23,701 22,821
FHLB Stock .............................................................. 4,212 3,069 2,396
Loans
Residential real estate loans ....................................... 184,215 151,622 109,592
Commercial real estate and business loans ........................... 64,405 57,303 47,950
Consumer loans ...................................................... 5,918 5,801 6,026
--------- --------- ---------
Total loans ..................................................... 254,538 214,726 163,568
Less: Allowance for loan losses ......................................... (3,613) (3,001) (2,525)
--------- --------- ---------
Net loans ....................................................... 250,925 211,726 161,043
Other assets ............................................................ 5,558 3,455 3,383
--------- --------- ---------
Total assets ................................................ $ 300,622 $ 250,878 $ 196,148
========= ========= =========
Liabilities and Stockholders' Equity
Deposits
Regular savings and 90 day notice ................................... $ 19,938 $ 17,715 $ 14,245
NOW accounts ........................................................ 50,676 39,832 27,907
Money market deposit accounts ....................................... 42,342 33,444 24,575
--------- --------- ---------
Total savings accounts ......................................... 112,956 90,991 66,727
Demand .................................................................. 19,914 19,331 11,005
Time .................................................................... 72,732 64,871 56,564
--------- --------- ---------
Total deposits ................................................. 205,602 175,193 134,296
Borrowed funds .......................................................... 65,747 49,026 38,969
Other liabilities ....................................................... 4,179 3,946 1,977
--------- --------- ---------
Total liabilities ........................................... 275,528 228,165 175,242
--------- --------- ---------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Stockholders' equity
Preferred stock $.01 par value 2,000,000 shares
authorized, none issued .......................................... -- -- --
Common stock $.01 par value 10,000,000 shares
authorized; 2,325,494 shares issued .............................. 23 23 23
Additional paid-in capital .......................................... 17,473 17,473 17,473
Retained earnings ................................................... 12,073 9,588 7,821
Unrealized gain (loss) on securities available for sale, net of taxes (78) 26 (14)
Less: Treasury stock, at cost (483,604 shares)....................... (4,397) (4,397) (4,397)
--------- --------- ---------
Total stockholders' equity .................................. 25,094 22,713 20,906
--------- --------- ---------
Total liabilities and stockholders' equity .................. $ 300,622 $ 250,878 $ 196,148
========= ========= =========
</TABLE>
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
1999 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 1999
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 1999 Annual Report.
B. Maturities of debt securities are presented in the "Notes to Consolidated
Financial Statements" in the 1999 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) 1999 1998 1997 1996 1995
Amount % Amount % Amount % Amount % Amount %
------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Mortgage loans:
Residential $161,343 62% $136,749 59% $105,506 60% $88,589 59% $76,127 59%
Residential construction 44,533 17% 44,609 19% 21,827 12% 21,100 14% 17,649 14%
Commercial 50,459 19% 42,439 18% 36,188 21% 33,891 22% 28,660 22%
Commercial construction 4,135 2% 8,142 4% 4,535 3% 5,960 4% 2,456 4%
-------- --- -------- --- -------- --- ------- --- ------- ---
Total principal balances 260,470 100% 231,939 100% 168,056 96% 149,540 99% 124,892 99%
Less due borrowers on
Incomplete loans:
Residential (10,237) (4%) (12,137) (5%) (4,719) (3%) (6,743) (5%) (5,576) (5%)
Commercial (1,167) (1%) (2,379) (1%) (1,845) (1%) (3,342) (2%) (1,213) (3%)
Less deferred loan
origination fees (781) - (734) - (474) - (517) - (427) -
-------- --- -------- --- -------- --- ------- --- ------- ---
Total mortgage loans 248,285 95% 216,689 94% 161,018 92% 138,938 92% 117,676 91%
Other loans
Consumer 1,564 1% 1,725 1% 1,564 1% 1,695 1% 1,204 1%
Second mortgage 1,430 1% 1,731 1% 1,712 1% 1,987 1% 2,145 2%
Home equity 2,977 1% 1,521 1% 1,975 1% 1,542 1% 1,834 1%
Commercial 11,966 4% 10,791 4% 10,425 6% 8,534 6% 7,195 6%
Passbook & stock secured 970 - 592 - 817 - 960 1% 1,342 1%
-------- --- -------- --- -------- --- ------- --- ------- ---
Total other loans 18,907 7% 16,360 7% 16,493 9% 14,718 10% 13,720 11%
Less allowance for loan loss (3,956) (2%) (3,145) (1%) (2,609) (1%) (2,365) (2%) (2,249) (2%)
-------- --- -------- --- -------- --- ------- --- ------- ---
Loans, net $263,236 100% $229,904 100% $174,902 100% $151,291 100% $129,147 100%
======== === ======== === ======== === ======== === ======== ===
</TABLE>
<PAGE>
B. An analysis of the maturity and interest rate sensitivity of Real Estate
Construction and Commercial business loans as of December 31, 1999 follows:
<TABLE>
<CAPTION>
Period to Maturity or Repricing from December 31, 1999
------------------------------------------------------
(in thousands) After One
One year or But Within Over Five
Less Five Years Years Total
------- ------- ------- -------
<S> <C> <C> <C> <C>
Real estate construction ....... $ 7,672 $14,099 $15,493 $37,264
Commercial business ............ 5,662 4,628 1,676 11,966
------- ------- ------- -------
$13,334 $18,727 $17,169 $49,230
======= ======= ======= =======
</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 1999
Annual Report.
1. Non-performing loans are summarized as follows:
<TABLE>
<CAPTION>
December 31,
-----------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Loans accounted for on a non-accrual basis $-- $-- $-- $ 10 $--
Accruing loans 90 days or more past due .. 71 268 10 433 --
Restructured loans ....................... -- -- -- -- --
---- ---- ---- ---- ---
Total non-performing loans ............... $ 71 $268 $ 10 $443 $--
==== ==== ==== ==== ===
</TABLE>
2. Potential Problem Loans. Potential problem loans consist of certain accruing
loans that were less than 90 days past due at December 31, 1999, 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, 1999, potential
problem loans amounted to $598,000. The Bank's loan policy provides guidelines
for the review of such loans in order to facilitate collection.
<PAGE>
Depending on future events, these potential problem loans, and others not
currently identified, could be classified as nonperforming in the future.
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
III. Summary of Loan Loss Experience
A. An analysis of loss experience follows:
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Balance at beginning of year .... $3,145 $2,609 $2,365 $2,249 $2,154
Charge-offs:
Residential mortgage loans -- -- -- 19 --
Commercial mortgage loans 11 -- -- -- 7
Commercial loans ......... 22 11 91 31 --
All other loans .......... 1 12 19 88 13
------ ------ ------ ------ ------
34 23 110 138 20
Recoveries:
Residential mortgage loans -- 116 37 40 76
Commercial mortgage loans 377 62 98 36 13
Commercial loans ......... 224 223 67 99 24
All other loans .......... 44 8 2 4 2
------ ------ ------ ------ ------
645 409 204 179 115
Net recoveries .................. 611 386 94 39 95
Additions charged to operations . 200 150 150 75 --
------ ------ ------ ------ ------
Balance at end of year .......... $3,956 $3,145 $2,609 $2,365 $2,249
====== ====== ====== ====== ======
</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 1999 Annual
Report.
<PAGE>
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: 1999 1998 1997 1996 1995
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Residential mortgage loans ..... $1,485 $1,300 $ 914 $ 851 $ 532
% of these loans to all loans 73.0% 70.3% 66.8% 64.7% 64.6%
Commercial mortgage loans ...... 952 886 645 623 1,145
% of these loans to all loans 19.9% 22.1% 23.3% 25.1% 24.3%
Commercial loans ............... 267 260 229 192 156
% of these loans to all loans 4.5% 5.0% 6.3% 5.9% 5.9%
All other loans ................ 130 106 113 114 281
% of these loans to all loans 2.6% 2.6% 3.6% 4.3% 5.2%
Unallocated .................... 1,122 593 708 585 135
------ ------ ------ ------ ------
Total .......................... $3,956 $3,145 $2,609 $2,365 $2,249
====== ====== ====== ====== ======
100% 100% 100% 100% 100%
====== ====== ====== ====== ======
</TABLE>
V. Deposits
A. Average deposit balances outstanding and the average rates paid thereon are
presented in the following table:
<TABLE>
<CAPTION>
At December 31,
------------------------------------------------------------------------------------------------
1999 1998 1997
----------------------------- ---------------------------- -----------------------------
(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 $19,914 9.69% - % $19,331 11.03% - % $11,005 8.19% - %
-------- ------ ---- -------- ------ ---- -------- ------ ----
Savings accounts:
Regular savings 19,938 9.70% 2.24% 17,715 10.11% 2.53% 14,245 10.61% 2.69%
NOW 50,676 24.65% .95% 39,832 22.74% 1.22% 27,907 20.78% 1.28%
Money market 42,342 20.59% 3.66% 33,444 19.09% 3.74% 24,575 18.30% 3.63%
-------- ------ ---- -------- ------ ---- -------- ------ ----
Total savings 112,956 54.94% 2.18% 90,991 51.94% 2.40% 66,727 49.69% 2.44%
accounts
Time deposits 72,732 35.37% 4.75% 64,871 37.03% 5.13% 56,564 42.12% 5.24%
-------- ------ ---- -------- ------ ---- -------- ------ ----
Total deposits $205,602 100.00% 3.19% $175,193 100.00% 3.14% $142,436 100.00% 3.42%
======== ====== ==== ======== ====== ==== ======== ====== ====
</TABLE>
<PAGE>
B. Not Applicable
C. Not Applicable
D. The maturity schedule of time deposits in amounts of $100,000 or more at
December 31, 1999 was as follows:
<TABLE>
<CAPTION>
Time Remaining Until Maturity
----------------------------------------------------------------
(dollars in thousands) Over 3
Months Over 6
3 Months to 6 Months to Over 12
or Less Months 12 Months Months Total
---------- ---------- ----------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Certificate of deposit $27,770 $7,383 $7,396 $5,796 $48,345
</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
1999 Annual Report.
VII. Short Term Borrowings. Not Applicable
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 3,300 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 $1.1 million at December 31, 1999, 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, 1999, 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 bank is in the process of
constructing a branch office on this land. At December 31, 1999 the Bank had
entered into a contract for construction of the branch in the amount of
$800,000.
The Bank believes that its properties are in good condition for their
intended use and the fair market value of its properties is significantly in
excess of the book value of these properties.
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, 2000.
<PAGE>
During 1998, the Bank entered into a non-cancelable operating lease for
1,500 square feet of office space at 9 Bayberry Court that expires in 2003. In
July 1999, the Bank amended the current lease to add 1,816 square feet in which
the term shall commence between January 1 and March 1, 2000 and will also expire
in 2003. This lease contains five one-year renewal options that may be exercised
by the Bank.
At December 31, 1999, the net book value of the Bank's furnishings,
equipment and autos was $1.4 million.
For further information, see Note 4 of Notes to Consolidated Financial
Statements in the 1999 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, 1999.
<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 1999 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 1999 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 1999 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 1999
Annual Report to Stockholders is incorporated herein by reference.
Item 8. Financial Statements AND SUPPLEMENTARY DATA
The financial statements contained in the 1999 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>
1999 Quarters
(In thousands, except per share amounts)
First Second Third Fourth
------ ------ ------ ------
<S> <C> <C> <C> <C>
Interest income .................... $5,191 $5,517 $5,501 $5,743
Interest expense ................... 2,333 2,454 2,252 2,482
------ ------ ------ ------
Net interest and dividend income ... 2,858 3,063 3,249 3,261
Provision for loan losses .......... 50 50 50 50
Non-interest income ................ 380 416 452 333
Non-interest expense ............... 1,467 1,506 1,568 1,531
------ ------ ------ ------
Income before income tax expense ... 1,721 1,923 2,083 2,013
Provision for income taxes ......... 599 674 722 679
------ ------ ------ ------
Net income ......................... $1,122 $1,249 $1,361 $1,334
====== ====== ====== ======
Earnings per common share - basic .. $ 0.61 $ 0.68 $ 0.74 $ 0.72
Earnings per common share - diluted $ 0.61 $ 0.68 $ 0.74 $ 0.72
Dividends declared per share ....... $ 0.20 $ 0.20 $ 0.20 $ 0.25
</TABLE>
<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>
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 12, 2000 which will be filed with the
Securities and Exchange Commission pursuant to Regulation 14A on or before April
12, 2000.
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.
(13) 1999 Annual Report to Stockholders for the Fiscal Year
Ended December 31, 1999.
(21) Subsidiaries of the Registrant.
(b) No reports on Form 8-K were filed by the Registrant during the quarter ended
December 31, 1999.
<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 20, 2000 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 20, 2000
- -----------------
Karl L. Meyer
Chairman of the Board,
President and Chief Executive Officer
/s/ John M. Sweeney March 20, 2000
- -------------------
John M. Sweeney
Treasurer & Chief Financial Officer
(Principal Financial and
Accounting Officer)
/s/ William P. Hourihan, Jr. March 20, 2000
- ----------------------------
William P. Hourihan, Jr.
Director
/s/ Charles F. DiGiovanna March 20, 2000
- -------------------------
Charles F. DiGiovanna
Director
/s/ Charles H. Jones, Jr. March 20, 2000
- -------------------------
Charles H. Jones, Jr.
Director
<PAGE>
Signatures (Continued) Date
- ---------------------- ----
/s/ Robert J. McKay March 20, 2000
- -------------------
Robert J. McKay
Director
/s/ Philip W. Read March 20, 2000
- ------------------
Philip W. Read
Director
/s/ Robert A. Trevisani, Esq. March 20, 2000
- ------------------------------
Robert A. Trevisani, Esq.
Director
<PAGE>
<TABLE>
<CAPTION>
INDEX TO EXHIBITS
Sequentially
EXHIBIT Numbered
Page
<S> <C> <C>
(3) Certificate of Incorporation and Bylaws of Home Port Bancorp, Inc.- N/A
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. N/A
Incorporated herein by reference to the Registration Statement.
(10.1.3) Employment Agreement between Nantucket Bank and Daniel P Neath. Incorporated N/A
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.
(13) Annual Report to Stockholders for the Fiscal Year Ended December 31, 1999.
(21) Subsidiaries of the Registrant.
</TABLE>
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 the 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, and the
Depositors Insurance Fund for amounts in excess of $100,000. The Bank is a
member of the Federal Home Loan Bank system.
1
<PAGE>
<TABLE>
<CAPTION>
(Dollars in thousands, except per share data) 1999 1998 1997 1996 1995
At December 31, --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Total assets .............................................. $ 319,260 $ 275,570 $ 208,815 $ 189,931 $ 167,272
Loans, net of allowance for loan losses ................... 258,302 213,899 163,733 142,425 120,540
Securities and FHLB stock ................................. 36,817 29,173 25,334 25,066 28,346
Deposits 218,197 .......................................... 188,668 142,436 135,082 114,357
Borrowed funds ............................................ 71,417 58,921 41,742 32,335 32,837
StockholdersO equity ...................................... 27,309 24,032 21,948 20,103 18,379
For the Years Ended December 31,
Total interest income ..................................... $ 21,952 $ 19,097 $ 15,951 $ 14,450 $ 13,242
Total interest expense .................................... 9,521 8,490 7,014 6,289 5,987
--------- --------- --------- --------- ---------
Net interest income ....................................... 12,431 10,607 8,937 8,161 7,255
Provision for loan losses ................................. 200 150 150 75 N
--------- --------- --------- --------- ---------
Net interest income after provision for loan losses ....... 12,231 10,457 8,787 8,086 7,255
Deposit and loan servicing fees and other income .......... 1,321 962 898 879 846
Net gain (loss) from sales of mortgage loans and securities 259 182 109 (5) (2)
Non-interest expense ...................................... 6,073 6,158 4,336 3,994 3,594
--------- --------- --------- --------- ---------
Income before taxes ....................................... 7,738 5,443 5,458 4,966 4,505
Provision for income taxes ................................ 2,673 1,892 2,161 1,931 1,749
--------- --------- --------- --------- ---------
Net income ................................................ $ 5,065 $ 3,551 $ 3,297 $ 3,035 $ 2,756
========= ========= ========= ========= =========
Per share data
Earnings per common share - basic and diluted ............. $ 2.75 $ 1.93 $ 1.79 $ 1.65 $ 1.50
--------- --------- --------- --------- ---------
Dividends declared per share .............................. $ 0.85 $ 0.80 $ 0.80 $ 0.70 $ 1.60
--------- --------- --------- --------- ---------
Stockholders' equity per share ............................ $ 14.83 $ 13.05 $ 11.92 $ 10.91 $ 9.98
--------- --------- --------- --------- ---------
Selected ratios
Return on average assets .................................. 1.68% 1.42% 1.68% 1.72% 1.67%
Interest rate spread (tax equivalent) ..................... 3.86% 3.75% 4.08% 4.18% 4.00%
Net interest margin (tax equivalent) ...................... 4.36% 4.40% 4.72% 4.80% 4.59%
Equity to asset ratio ..................................... 8.55% 8.72% 10.51% 10.58% 10.99%
Return on average equity .................................. 19.73% 15.63% 15.77% 15.84% 14.34%
Dividend payout ratio ..................................... 30.90% 41.51% 44.68% 42.47% 274.02%
</TABLE>
2
<PAGE>
1999 marks the tenth consecutive year of improving operating earnings.
Home Port Bancorp, Inc. posted record earnings of $5.1 million in this year, a
42.6 percent increase over 1998 net income of $3.6 million.
Return on Equity (ROE) the company's primary measure of performance,
increased to 19.7 percent from 15.6 percent in 1998. Our 1999 ROE places Home
Port in the top 10% of all banks and thrift institutions nationwide. Home Port's
equity to asset ratio edged down from 8.72 percent in 1998 to 8.55 percent, well
within the typical leverage ratios for banks.
As a consequence of the increased earnings and after consideration of
other factors, the company increased its quarterly dividends from $.20 to $.25
per share beginning with the third quarter of 1999.
Financial stocks have under performed the S&P 500 index over the last
three years. During 1999 bank stocks were particularly hard hit with various
bank price indices showing declines for the year, despite improved earnings.
Home Port's 1999 trading range of $21.125 to $27.00 was within the 1998 price
range of $19.125 to $28.75. The 1999 year end closing share price of $26.25 was
7.14 percent higher that its comparative price a year earlier.
Investors in financial institutions remain concerned over the
possibility of interest rate increases and their possible negative impact on
loan quality. During 1999, the Federal Reserve Bank increased the federal funds
rate three times by 25 basis points and again in February 2000. The current rate
is 5.75 percent and the Fed is expected to move two or three more times during
the first half of 2000. The link between interest rates and bank earnings has
been lessened, however in the current environment, investors remain cautious.
Also, liquidity appears to be a high priority. Small market
capitalization banks such as Home Port, with fundamentals at least equal to
those of larger cap banks, have discounted Price/Earning (P/E) ratios. Your
company with a three-year average annualized ROE of 17.0 percent and annual
earnings growth of 18.6 percent receives a P/E ratio of only about ten. Small
cap financial stocks have not participated in the price improvement in early
2000 as measured by the Russell 2000 index.
Over the past three years Nantucket Bank, your company's only operating
subsidiary, has increased its loans by 22.0 percent annually and deposits by
17.3 percent annually. During this period, 28 percent of the loan origination
was sold to other financial institutions, with the bank retaining $279 million.
The Bank increased its borrowings from the Federal Home Loan bank of Boston from
$32.3 million at year end 1996 to $71.4 million at the end of 1999 to fund its
loan growth. Deposits have not kept pace with the strong loan demands requiring
loan sales in order to maintain an acceptable equity to asset ratio. The demand
for mortgage financing for second homes on Nantucket cannot be satisfied by
local depositors.
The decline in the Interest Rate Spread from 4.09 percent in 1997 to
3.75 percent in 1998 was reversed in 1999, with the spread increasing slightly
to 3.86 percent.
Home Port has been favored with long term strong national as well as
local Nantucket economies. Increased banking activity demanded improvement to
the Bank's facilities. The additions and modifications to the Pleasant Street
office mentioned in last year's message have been completed and the new branch
<PAGE>
office on the corner of Old South Road and Amelia Drive outside the congested in
town business area, has been started with an expected opening in May of this
year. Customers will find this location convenient for their banking needs. The
bank has a special commitment to provide fast, efficient and cost effective
service to its customers.
We believe the additions to facilities, upgrades of systems and
well-chosen additions to the staff demonstrate our commitment to provide
Nantucket with a full range of banking services, second to none.
/s/Karl L. Meyer
- ----------------
Karl L. Meyer
Chairman of the Board, President and CEO
3
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
Results of Operations
Home Port Bancorp, Inc. ("the Company") reported net income of $5.1 million in
1999, an increase of $1.5 million, or 42.6%, over 1998 net income of $3.6
million. In 1998, net income increased by $.3 million, or 7.7% over 1997. Net
income per basic and diluted share was $2.75 in 1999 compared to $1.93 in 1998
and $1.79 in 1997. Significant items affecting these periods are reviewed in
detail in the following paragraphs.
Net Interest Income
Net interest income increased by $1.8 million, $1.7 million and $.7 million in
1999, 1998 and 1997, respectively. On a percentage basis these increases were
17.2%, 18.7% and 9.5%, respectively.
During 1999 and 1998 Nantucket Bank (the "Bank") experienced
significant increases in the average balances of loans (18.5% and 31.2% in 1999
and 1998, respectively) and interest-bearing deposits (18.8% and 26.4% in 1999
and 1998, respectively). These increases are responsible for the increases in
net interest income during the past two years. During 1999 the net interest
margin (calculated on a tax-equivalent basis) decreased slightly (4 basis
points) compared to 1998. In 1998 the margin decreased by 32 basis points
compared to 1997. The tables on the following page provide additional details of
net interest income.
[Graphic - bar chart]
During 1999 the average yield of the Bank's loan portfolio decreased by
29 basis points to 7.86% from 8.15% in 1998. In 1998 the average yield on loans
decreased by 67 basis points from 8.82% in 1997. These decreases were due to an
increase in the percentage of lower-yielding residential loans in the portfolio
together with the effect of generally decreasing market interest rates. The
average yield on securities, adjusted to reflect tax-exempt securities on a
fully tax-equivalent basis, was 6.14% in 1999 compared to 5.89% in 1998 and
1997. The Bank does not actively trade the securities portfolio. Securities
classified as "held to maturity" represented 48% of total securities at year end
1999 compared to 69% at year end 1998. Available-for-sale securities were
increased in late 1999 to enhance liquidity in the event of any "Year 2000"
disruptions.
The average cost of funds was 3.80% in 1999 compared to 4.14% in 1998
and 4.32% in 1997. In 1999 the average cost of deposits decreased by 34 basis
points to 3.19% from 3.53% in 1998. In 1997 the average cost of deposits was
3.73%. The lower average cost of deposits in 1999 and 1998 was due to an
increase in NOW checking accounts, which typically bear a lower interest rate
than do certificates of deposit and money market checking accounts. The cost of
Federal Home Loan Bank ("FHLB") borrowings decreased 58 basis points to 5.50% in
1999 from 6.08% in 1998 as a result of the decline in market rates during 1997
and 1998. The cost of borrowings was 6.21% in 1997. 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.
<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 1999 non-interest income increased $436 thousand, or 38.1%, to $1.6
million compared to $1.1 million in 1998. Deposit servicing fees increased by
$31 thousand, or 6.8%, due to increases in deposits. Loan servicing fees
increased by $83 thousand or 35.2%, due to an increase in the average balance of
loans serviced for others. Other fees and income increased by $245 thousand, or
90.4%, 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 $129 thousand, or 99.2%, due
to an increase in loan sales and a falling interest rate environment.
In 1998 non-interest income increased $137 thousand, or 13.6%, to $1.1
million compared to $1.0 million in
4
<PAGE>
<TABLE>
<CAPTION>
Years Ended December 31,
- ------------------------------------------------------------------------------------------------------------------------------------
(dollars in thousands) 1999 1998 1997
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 $184,215 $13,477 7.32% $151,622 $11,330 7.47% $109,592 $8,896 8.12%
Commercial loans 64,406 5,973 9.27% 57,303 5,603 9.78% 47,950 4,930 10.28%
Consumer loans 5,918 569 9.61% 5,801 576 9.93% 6,026 599 9.94%
-------- ------- ---- -------- ------- ---- -------- ------ ----
Total loans 254,539 20,019 7.86% 214,726 17,509 8.15% 163,568 14,425 8.82%
Securities and FHLB stock (1) 33,427 2,053 6.14% 28,417 1,675 5.89% 26,393 1,554 5.89%
-------- ------- ---- -------- ------- ---- -------- ------ ----
Total interest earning assets $287,966 $22,072 7.66% $243,143 $19,814 7.89% $189,961 $15,979 8.41%
-------- ------- ---- -------- ------- ---- -------- ------ ----
Interest bearing liabilities:
Deposits $185,105 $ 5,908 3.19% $155,862 5,509 3.53% $123,291 $ 4,594 3.73%
Borrowed funds 65,747 3,613 5.50% 49,026 2,981 6.08% 38,969 2,420 6.21%
Total interest bearing liabilities $250,852 $ 9,521 3.80% $204,888 $ 8,490 4.14% $162,260 $ 7,014 4.32%
Net interest income $ 12,551 $ 10,694 $ 8,965
-------- -------- --------
Interest rate spread (2) 3.86% 3.75% 4.09%
==== ==== ====
Net interest margin (3) 4.36% 4.40% 4.72%
==== ==== ====
</TABLE>
(1) Securities income includes tax-equivalent adjustment of $120, $87 and $28 in
1999, 1998 and 1997, 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. Rate/Volume Analysis The
effect on net interest income as a result of changes in average interest rates
and balances follows:
<PAGE>
Rate/Volume Analysis
The effect on net interest as a result of changes in average interest
rates and balances follows:
<TABLE>
<CAPTION>
Years Ended December 31,
-----------------------------------------------------------------------------------------------
(in thousands) 1999 vs. 1998 1998 vs. 1997
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 $ 2,435 $ (227) $ (62) $ 2,147 $ 3,413 $ (712) $ (267) $2,434
Commercial loans 695 (292) (33) 371 962 (240) (49) 673
Consumer loans 12 (19) N (7) (22) (1) -- (23)
Total loans 3,142 (538) (95) 2,511 4,353 (953) (316) 3,084
Securities and FHLB stock 295 71 12 378 119 -- 2 121
Total interest income $ 3,437 $ (467) $ (83) $ 2,889 $ 4,472 $ (953) $ (314) $ 3,205
Interest expense:
Deposits $1,032 $ (530) $ (103) $ 399 $ 1,215 $ (247) $ (53) $ 915
Borrowed funds 1,017 (284) (101) 632 625 (51) (13) 561
Total interest expense $ 2,049 $ (814) $ (204) $ 1,031 $ 1,840 $ (298) $ (66) $ 1,476
Net interest income $ 1,388 $ (347) $ (121) $ 1,858 $ 2,632 (655) (248) $ 1,729
</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.
5
<PAGE>
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.
Non-Interest Expense
In 1999 non-interest expense decreased 1.4% to $6.1 million from $6.2 million in
1998. In 1998, non-interest expense was impacted by a net charge of $414
thousand due to a "check-kiting" scheme. In 1999 partial restitution of $35
thousand was received. For additional information see Note 9 in "Notes to
Consolidated Financial Statements." Also in 1998 the Company incurred
organizational and legal expenses of $511 thousand in conjunction with the
formation of N. Realty Corp. (a subsidiary which has elected to be taxed for
state tax purposes as a real estate investment trust). Excluding the effect of
both of these non-recurring costs (the "check-kiting" situation and the
formation of N. Realty Corp.) non-interest expense increased by $875 thousand,
or 16.7%. This increase was due to staffing, computer processing, postage and
other costs to service the additional loan and deposit business in 1999.
In 1998 non-interest expense increased 42.0% to $6.2 million from $4.3
million in 1997. Excluding the effect of the non-recurring "check-kiting" and N.
Realty Corp. costs, non-interest expense increased by $897 thousand, or 20.6%
from $4.3 million in 1997. The remaining increases are due to staffing, computer
processing, postage and other costs to service the additional loan and deposit
business in 1998.
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 1999 was 34.5% compared to 34.8% in 1998 and
39.6% in 1997. The lower effective tax rates in 1999 and 1998 are reflective of
the proportion of income earned by certain non-bank subsidiaries that are taxed,
for state tax purposes, at lower rates. In 1999 and 1998 more income was
generated through non-bank subsidiaries as compared to 1997. For further
information see Note 7 in the Notes to Consolidated Financial Statements.
Asset/Liability Management and Market Risk
Market risk is the risk of loss from changes in market prices and rates. The
Bank's market risk arises primarily from the interest rate risk inherent in its
lending and deposit taking activities. Managing interest rate risk is
fundamental to banking.
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. It is the Bank's objective to minimize
the adverse impact of changes in interest rates on the Bank's net interest
income, to the degree prudently possible. However, because the Bank's assets and
liabilities are predominately interest bearing, it will always be exposed to
interest rate risk.
<PAGE>
The Bank's interest rate risk management is the responsibility of the
Asset/Liability Committee ("ALCO"). ALCO establishes policies, which are
approved by the Board of Directors, that monitor and coordinate the Bank's
sources, uses and pricing of funds. The primary tool used by ALCO in managing
interest rate risk is income simulation modeling. Income simulation modeling
measures changes in net interest income by projecting the future composition of
the Bank's balance sheet and applying different interest rate scenarios.
Management incorporates numerous estimates and assumptions into the simulation
model, including the nature and timing of interest rate levels, including yield
curve shape, loan and security prepayments, reinvestment of cash flows and loan
and deposit growth rates.
ALCO manages net interest income based on it's "most likely" interest
rate scenario, and it also utilizes "Rate shocks" to quantify the exposure of
net interest income to large, sustained rate changes. These rate shocks assume
an immediate and sustained change in interest rates across the entire yield
curve. Two rate shock scenarios are
6
<PAGE>
currently utilized: an increase in market interest rates of 300 basis points
(bp) and a decrease of 200 bp. Over the first 24 months following the shock, net
interest income would decline by 9.03% in the 300 bp increase scenario and by
3.17% in the 200 bp decrease scenario. The projected results under these rate
shocks should not be relied upon as indicative of expected operating results.
Although the estimates and assumptions used are based on current market and
economic conditions, actual results will differ from these estimates. Such an
immediate and sustained change in interest rates is highly unlikely and is not a
scenario that would warrant current action by management. These projections do
not incorporate any actions that ALCO may take in responding to or anticipating
changes in interest rates. Customer preferences, competitive offerings and
regulatory changes will impact future results.
The following table presents interest rate sensitive assets and
liabilities categorized by expected maturity and weighted average rate. Expected
maturities are contracted maturities, adjusted for prepayments of principal
where applicable. The market risk analysis excludes repricing features on all
interest sensitive assets and liabilities. The Bank uses certain assumptions to
estimate expected maturities and fair values. Non-certificate deposits do not
have contractual maturities and, hence, are presented in the one-year category.
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. 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 derivatives.
7
<PAGE>
<TABLE>
<CAPTION>
Expected maturity at December 31, 1999
---------------------------------------------------------------------------------
Total Fair
2000 2001 2002 2003 2004 Thereafter Balance Value
---- ---- ---- ---- ---- ---------- ------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-sensitive assets:
Residential mortgage (adjustable) $2,596 $ 300 $ 358 $ 49 $ 52 $136,003 $139,358 $138,074
Average interest rate 6.65% 8.03% 7.43% 8.75% 8.25% 7.20%
Residential mortgage (fixed) 883 559 8 66 497 48,748 50,761 49,768
Average interest rate 8.72% 7.89% 11.00% 7.54% 6.89% 7.17%
Commercial mortgage (adjustable) 4,549 2,624 424 174 20 45,441 53.232 52,673
Average interest rate 8.94% 8.95% 8.99% 9.18% 8.50% 8.70%
Other loans 7,276 2,372 1,205 800 1,384 5,870 18,907 18,411
Average interest rate 9.51% 8.90% 11.51% 10.73% 9.61% 9.28%
Securities & short-term investments 9,391 1,349 2,034 4,566 5,286 11,576 34,202 33,477
Average interest rate 5.87% 5.91% 6.41% 5.24% 6.02% 5.92%
Total interest-sensitive assets $24,695 $7,204 $4,029 $5,655 $7,239 $247,638 $296,460 $292,403
Interest-sensitive liabilities:
NOW deposits $49,409 $ -- $ -- $ -- $ -- $ -- $ 49,409 $ 49,409
Average interest rate .088% -- -- -- -- --
Savings deposits 19,899 -- -- -- -- -- 19,899 19,899
Average interest rate 2.24% -- -- -- -- --
Money market deposits 47,994 -- -- -- -- -- 47,994 47,994
Average interest rate 3.86% -- -- -- -- --
Time deposits 64,949 9,762 2,180 299 2,136 54 79,380 78,842
Average interest rate 4.52% 5.34% 5.64% 5.26% 6.13% 5.60%
Borrowed funds 40,184 9,733 6,000 8,500 1,000 6,000 71,417 70,690
Average interest rate 5.65% 5.94% 5.70% 5.43% 5.30% 5.55%
Total interest-sensitive liabilities $222,435 $19,495 $8,180 $8,799 $3,136 $ 6,054 $268,099 $266,834
</TABLE>
8
<PAGE>
<TABLE>
<CAPTION>
Expected maturity at December 31, 1998
----------------------------------------------------------------------------------------
Total Fair
2000 2001 2002 2003 2004 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 investments 2,865 4,378 1,631 2,129 4,722 10,190 25,915 26,080
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>
Balance Sheet Analysis
During 1999 the Company's total assets increased by $43.7 million, or 15.9%, to
$319.3 million from $275.6 million at December 31, 1998 due to an increase in
the Bank's core lending and deposit business. These core business increases also
caused a $66.8 million, or 32.0%, increase in the Company's assets in 1998. 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 $44.4 million, or 20.8% at December 31, 1999 to $258.3 million from
$213.9 million at December 31, 1998. During 1998, loans increased $50.2 million,
or 30.6%, from $163.7 million the previous year. The loan portfolio represented
80.9% of total assets at December 31, 1999 compared to 77.6% at December 31,
1998 and 78.4% at December 31, 1997. Real estate loan originations, including
<PAGE>
both commercial and residential properties, were $152.8 million in 1999 compared
to $153.7 million in 1998 and $81.7 million in 1997. The significant increases
in 1999 and 1998 were due to a combination of a record level of real estate
sales in Nantucket, low interest rates and the Bank's marketing efforts. During
1999, permanent residential mortgages (excluding loans held for sale) increased
by $35.6 million, or 29.6%, to $155.8 million at December 31, 1999 from $120.2
million at December 31, 1998. In 1998, these loans increased by $26.2 million,
or 27.9%, from $94.0 million at December 31, 1997. Residential construction
loans increased by $1.8 million to $34.3 million at December 31, 1999 from $32.5
million a year earlier, and $17.1 at December 31,1997. At December 31, 1999
residential permanent and construction loans comprise 78.1% of total mortgage
loans compared to 76.1% and 74.1% at December 31, 1998 and 1997, respectively.
The proportion of residential loans reflects the residential character of the
Bank's market area.
During 1999, commercial mortgage loans outstanding increased by $8.0
million, or 19.0%, to $50.3 million as compared to $42.3 million and $36.1
million at December 31, 1998 and 1997, respectively. Commercial construction
loans decreased to $3.0 million at December 31, 1999 compared to $5.8 million
and $2.7 million at December 31, 1998 and 1997, respectively. The increases in
commercial mortgage loans are the
9
<PAGE>
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 $51.5 million in 1999
compared to $39.3 million in 1998 and $18.5 million in 1997. Currently, the
Bank's policy is to sell a majority of its longer-term (greater than 10 years)
fixed-rate loans and a portion of its adjustable rate loans. The Bank generally
retains a small percentage of the principal balance of adjustable rate loans
that are sold. The ALCO reviews this policy from time to time as part of overall
asset/liability management strategy.
At December 31, 1999, the Bank had $5.0 million of loans held for sale
in the secondary market, compared to $16.0 million at year-end 1998. 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, 1999 and 1998,
the market value was greater than the book value of these loans, therefore,
there was no provision for unrealized loss. However, changes in interest rates
may affect the market value of loans held for sale and may impact future
earnings.
Securities
Total securities increased by $6.4 million, or 24.9%, at December 31, 1999 to
$32.3 million from $25.9 million in the prior year and $22.9 million at December
31, 1997. Approximately $5 million of the 1999 increase was the result of
additional liquid securities purchased because of the "Year 2000" concerns. The
Company does not actively trade the securities portfolio; a significant portion
of the portfolio (48% at December 31, 1999) is classified as held to maturity.
At December 31, 1999 total securities represented 10.1% of total assets compared
to 9.4% for 1998 and 11.0% for 1997.
Deposits
Total deposits increased $29.5 million, or 15.7%, in 1999 to $218.2 million from
$188.7 million at December 31, 1998. In 1998 total deposits increased $46.2
million, or 32.5%, from $142.4 million at December 31, 1997. The Bank
experienced strong deposit growth in 1999 and 1998 due to a strong local economy
together with the Bank's marketing efforts. During 1999, the increase in
deposits was split between NOW/demand checking, money market checking and
certificates of deposit. During 1998 approximately one-half of the increase in
deposits was in NOW/demand deposit checking accounts.
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, 1999 and 1998 fully insured brokered deposits totaled less than
one-half of 1% of total deposits.
10
<PAGE>
Borrowed Funds
Borrowed funds consist of FHLB advances with final maturities ranging from 3
months to 10 years. These borrowings totaled $71.4 million at December 31, 1999
and $58.9 million at December 31, 1998. 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.
Non-Performing Assets
The following table presents information regarding non-performing assets at the
dates indicated:
<TABLE>
<CAPTION>
December 31,
(dollars in thousands) 1999 1998 1997
------ ------ ------
<S> <C> <C> <C>
Non-accrual loans: $ -- $ -- $ --
Accruing loans which are
contractually past due 90 days or more:
Residential real estate 71 268 10
------ ------ ------
Total non-performing loans 71 268 10
Other real estate owned -- -- --
Total non-performing assets $ 71 $ 268 $ 10
------ ------ ------
Non-performing assets as a percentage of total assets --% 0.10% --%
------ ------ ------
Allowance for loan losses $3,956 $3,145 $2,609
Allowance for loan losses to
Non-performing loans NM * NM * NM *
Total loans 1.50% 1.37% 1.47%
</TABLE>
* NM = not meaningful
11
<PAGE>
At December 31, 1999 and 1998 the Bank had no loans which were
considered impaired.
At the end of 1999 management identified $598 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.
Provision for Loan Losses
Loan loss reserves are established in accordance with generally accepted
accounting principles and based upon a systematic and detailed analysis of all
loans. The Bank regularly evaluates the adequacy of the allowance for loan
losses. Key criteria considered include known and inherent risks in the
portfolio, past loan loss experience and loan delinquency trends, adverse
situations that may affect the borrower's ability to repay, the estimated value
of collateral securing loans in the portfolio and current economic conditions.
The Bank's lending activities are conducted solely on the island of Nantucket,
Massachusetts. During 1999 the Bank recorded a provision for loan losses of $200
thousand, compared to $150 thousand in 1998 and 1997. The Bank also recorded net
recoveries of $611 thousand in 1999, $386 thousand in 1998 and $94 thousand in
1997. 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, 1999 the allowance for loan
losses was $4.0 million, or 1.50% of total loans compared to $3.1 million, or
1.37% of total loans, at December 31, 1998. 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 Division of Banks
of the Commonwealth of Massachusetts as of June 30, 1999.
Capital
Stockholders' equity totaled $27.3 million, or 8.6%, of assets on December 31,
1999 compared to $24.0 million, or 8.7% of assets, at December 31, 1998 and
$21.9 million, or 10.51% of assets, at December 31, 1997. The decrease in the
capital ratio between 1997 and 1998 was the result of the 32% growth in total
assets during this year. Regular quarterly dividends of $1.6 million, $1.5
million $1.5 million were declared in 1999, 1998 and 1997, respectively. Net
earnings of $5.1 million in 1999, $3.6 million in 1998 and $3.3 million in 1997
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 remained in
effect through March 31, 1999. The Company did not repurchase any shares under
this program.
<PAGE>
The Bank is an FDIC insured institution subject to the FDIC regulatory
capital requirements. The FDIC regulations require all FDIC insured institutions
to maintain minimum levels of Tier 1 capital. Highly rated banks (i.e., those
with a composite rating of 1 under the CAMEL rating system) are required to
maintain Tier 1 capital of at least 3% of their total assets. All other banks
are required to have Tier 1 capital of 4% to 5%. The FDIC has authority to
impose higher requirements for individual banks. At December 31, 1999, 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, 1999 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
12
<PAGE>
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, 1999 totaled $11.9
million, unused lines of credit equaled $13.4 million, the unadvanced portion of
construction loans equaled $11.4 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.
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 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. In June 1999 the
FASB issued Statement No. 137 which defers the effective date of Statement No.
133. Statement No. 133 is now effective for all fiscal quarters of all fiscal
years beginning after June 15, 2000. This statement is not expected to have a
material effect on the Company's consolidated financial statements.
Year 2000
The statements in the following section include "Year 2000" readiness
disclosure" within the meaning of the Year 2000 information and Readinesss
Disclosure Act.
During 1999, the Compapy completed a detailed assessment of all its information
technology (IT) and non-information technology (non-IT) systems with respect to
the century date change (the transition from the year 1999 to 2000) with special
emphasis on mission-critical systems. IT and non-IT hardware and software were
inventorized and those not Year 2000 ready were identified remediated and
tested. While the Company's assessment of Year 2000 issues is ongoing and
subject to on-going regulatory mandated verification and review through March
31, 2000, the Company has not yet experienced any effects from Year 2000 issues.
The Company and the Bank incurred Year 2000-related charges of approximately $55
thousand and $45 thousand, respectively, in 1999 and 1998. These charges
principally consist of consulting fees and depreciation expense incurred in
order for the Bank's computer systems to properly function properly in the year
2000. These amounts do not include internal costs 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.
There can be no guarantee that the systems of other companies, or outside
vendors, on which the Company's systems rely, have been fully remedied.
Therefore, the Company could possibly experience a negative impact to the extent
other entities not affiliated with the Company are not Year 2000 compliant.
<PAGE>
The risk management program includes emergency backup and recovery procedures to
be followed in the event of failure of a business-critical system. These
procedures were expanded to include specific procedures for potential Year 2000
issues, and contingency plans to protect against Year 2000-related
interruptions. These plans include backup procedures and identification of
alternative suppliers.
13
<PAGE>
<TABLE>
<CAPTION>
(dollars in thousands, except share and per share data) December 31,
1999 1998
--------- ---------
<S> <C> <C>
Assets
Cash and due from banks $ 11,894 $ 12,070
Federal Funds sold 1,440 --
Interest bearing deposits in banks 76 54
Total cash and cash equivalents 13,410 12,124
Securities held to maturity (market value $15,220 and $18,050) (note 2) 15,599 17,904
Securities available for sale (cost of $17,087 and $7,969) (note 2) 16,741 7,993
Loans, net of allowance for loan losses of $3,956 and $3,145 (notes 3 and 6) 258,302 213,899
Loans held for sale 4,934 16,005
Land, buildings and equipment, net (note 4) 2,364 1,721
Accrued income receivable 1,577 1,340
Net deferred tax asset (note 7) 742 421
Stock in FHLB of Boston, at cost (note 6) 4,477 3,276
Prepaid expenses and other assets 1,114 887
--------- ---------
Total assets $ 319,260 $ 275,570
========= =========
Liabilities and Stockholders' Equity
Liabilities:
Deposits (note 5) $ 218,197 $ 188,668
Borrowed funds (note 6) 71,417 58,921
Accrued expenses (note 8) 1,868 3,132
Other liabilities 469 817
--------- ---------
Total liabilities 291,951 251,538
--------- ---------
Commitments and contingencies (notes 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 14,418 10,918
Accumulated other comprehensive (loss) income, net:
Unrealized (loss) gain on securities available for sale,
net of taxes (note 2) (208) 15
Less: Treasury stock, at cost (483,604 shares) (4,397) (4,397)
--------- ---------
Total stockholders' equity 27,309 24,032
--------- ---------
Total liabilities and stockholders' equity $ 319,260 $ 275,570
========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
14
<PAGE>
<TABLE>
<CAPTION>
(in thousands, except per share data) Years Ended December 31
1999 1998 1997
------- ------- --------
<S> <C> <C> <C>
Interest income:
Interest on loans (note 3) $20,019 $17,509 $ 14,425
Interest on securities 1,601 1,298 1,300
Dividends 283 197 169
Interest on federal funds sold 49 93 57
------- ------- --------
Total interest income 21,952 19,097 15,951
------- ------- --------
Interest expense:
Interest on depositors' accounts (note 5) 5,908 5,509 4,594
Interest on borrowed funds (note 6) 3,613 2,981 2,420
------- ------- --------
Total interest expense 9,521 8,490 7,014
------- ------- --------
Net interest income 12,431 10,607 8,937
Provision for loan losses (note 3) 200 150 150
------- ------- --------
Net interest income after provision for loan losses 12,231 10,457 8,787
------- ------- --------
Non-interest income:
Deposit servicing fees 486 455 425
Loan servicing fees (note 3) 319 236 258
Other fees and income 516 271 215
Net gain from sale of mortgage loans 259 130 87
Net gain from sale of securities (note 2) -- 52 22
------- ------- --------
Total non-interest income 1,580 1,144 1,007
------- ------- --------
Non-interest expense:
Salaries and employee benefits (note 8) 3,412 2,998 2,551
Building and equipment expenses 764 659 503
(Recovery) loss on check kiting (note 9) (35) 414 --
Professional fees 63 702 227
Deposit insurance fees 416 54 43
Other 1,453 1,331 1,012
------- ------- --------
Total non-interest expense 6,073 6,158 4,336
------- ------- --------
Income before income taxes 7,738 5,443 5,458
Provision for income taxes (note 7) 2,673 1,892 2,161
------- ------- --------
Net income $ 5,065 $ 3,551 $ 3,297
======== ======== ========
Earnings per common share - basic and diluted $2.75 $ 1.93 $ 1.79
======== ======== ========
Weighted number of common shares
outstanding - basic and diluted 1,842 1,842 1,842
======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements
15
<PAGE>
<TABLE>
<CAPTION>
(in thousands) Years Ended December 31,
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 5,065 $ 3,551 $ 3,297
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Provision for loan losses 200 150 150
Depreciation of building and equipment 379 312 247
Net gain on sale of mortgage loans (259) (130) (87)
Net gain on sale of securities and other assets -- (52) (23)
Net amortization of securities premiums 4 31 57
Amortization of deferred loan origination fees (288) (260) (256)
Amortization of deferred premiums on loans sold 53 69 8
Net decrease (increase) in accrued income receivable (237) (300) 53
Net decrease (increas) in loans held for sale 11,277 (4,775) (2,224)
Net increase in prepaid expenses and other assets (227) (16) (48)
Net increase (decrease) in other liabilities (348) (488) 240
Net (decrease) increase in accrued expenses (1,264) 1,748 52
Net (increase) decrease in deferred income taxes (174) (315) 208
-------- -------- --------
Net cash (used in) provided by operating activities 14,181 (475) 1,674
Cash flows from investing activities:
Purchases of securities held to maturity (2,912) (9,150) (8,379)
Purchases of securities available for sale (11,102) (3,977)
Proceeds from sales of securities available for sale -- 2,257 2,280
Proceeds from maturities/calls of securities 4,530 9,430 8,707
Principal payments on mortgage-backed securities 2,667 2,242 1,232
Net increase in loans (44,315 (50,056) (21,202)
Purchases of land, buildings and equipment (1,022) (582) (276)
Proceeds from sales of other real estate owned -- -- 61
Purchase of Federal Home Loan Bank of Boston stock (1,201) (834) (121)
-------- -------- --------
Net cash used for investing activities (53,355) (54,444) (21,675)
-------- -------- --------
Cash flows from financing activities:
Net increase in deposits 29,529 46,232 7,354
Federal Home Bank advances 41,500 20,000 22,000
Federal Home Loan Bank repayments (27,300) (12,152) (14,970)
Net increase(decrease) in short term borrowings (1,704) 9,331 2,377
Cash dividends paid (1,565) (1,473)
-------- -------- --------
Net cash provided by financing activities 40,460 61,937 15,288
-------- -------- --------
Net increase (decrease) in cash and cash equivalents 1,286 7,018 (4,713)
Cash and cash equivalents at beginning of year 12,124 5,106 9,819
-------- -------- --------
Cash and cash equivalents at end of year $ 13,410 $ 12,124 $ 5,106
======== ======== ========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest $ 9,550 $ 8,474 $ 6,983
Income taxes 4,429 536 2,052
Dividends declared 1,565 1,474 1,473
</TABLE>
See accompanying notes to consolidated financial statements
16
<PAGE>
<TABLE>
<CAPTION>
(in thousands, except per share data) Accumulated
Additional Other Total
Common Paid-in Retained Treasury Comprehensive Stockholders'
Stock Capital Earnings Stock (Loss)Income, Net Equity
----- ------- -------- ----- ------ ------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1996 $ 23 $ 17,473 $ 7,017 $(4,397) $(13) $ 20,103
Net income -- -- 3,297 -- -- 3,297
-------- -------- -------- ------- ---- --------
Other comprehensive income, net 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
Net income 5,065 5,065
Other comprehensive loss, net of tax
Change in unrealized gain on securities
available for sale -- -- -- -- (223) (223)
Comprehensive income -- -- 4,842
Cash dividends paid at $.85 per share (1,565) -- -- (1,565)
-------- -------- -------- ------- ---- --------
Balance at December 31, 1999 $ 23 $ 17,473 $ 14,418 $(4,397) $(208) $ 27,309
======== ======== ======== ======= ===== ========
</TABLE>
See accompanying notes to consolidated financial statements
17
<PAGE>
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
(1) Summary of Significant Accounting Policies
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.
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 estimate that is particularly susceptible to change relates to
the determination of the allowance for loan losses.
Statement of Cash Flows
Cash and cash equivalents are defined to include cash and due from banks,
interest-bearing deposits in banks and federal funds sold. Short-term borrowings
are defined as borrowings having an original maturity of three months or less.
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
<PAGE>
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.
If a security suffers a loss in value which is considered other than
temporary, the cost basis of the security is written down to fair value by a
charge to earnings.
Loans
Loans receivable that management has the intent and ability to hold for the
foreseeable future or until maturity or pay-off are reported at their
outstanding principal balance, adjusted for any charge-offs, the allowance for
loan losses and deferred fees or costs on originated loans. Loans are placed on
non-accrual status and are considered non-performing either when doubt exists as
to the full and timely collection of interest or principal or when a loan
becomes contractually past due 90 days with respect to interest or principal and
the collateral value is not sufficient to insure the payment in full of
principal and interest. When interest accrual is discontinued all unpaid accrued
interest is reversed. Interest accruals are resumed on such loans when they are
brought current with respect to interest and principal and when, in the judgment
of management, the loans are estimated to be fully collectible as to both
principal and interest. Interest income on non-accrual loans is recorded on a
cash basis.
The Bank accounts for impaired loans, except loans accounted for at
fair value or at the lower cost or fair value, at the present value of the
expected future cash flows discounted at the loan's effective interest rate or
the fair value of the collateral if the loan is collateral
18
<PAGE>
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.
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.
Allowance for Loan Losses
The allowance for loan losses is available for future credit losses
inherent in the portfolio. The allowance is increased by provisions charged to
operations and recoveries of prior losses, and decreased by realized losses.
Management's periodic evaluation of the adequacy of the allowance for loan
losses is based on known and inherent risks in the portfolio, past loan loss
experience and loan delinquency trends, adverse situations that may affect the
borrower's ability to repay, the estimated value of collateral securing loans in
the portfolio and current economic conditions.
While management uses 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.
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.
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.
<PAGE>
Employee Benefit Plans
The Bank accounts for pension benefits using the net periodic pension cost
method, which recognizes the compensation cost of an employee's pension benefit
over that employee's approximate service period.
Stock Option Plan
The Financial Accounting Standards Board has issued Statement of Financial
Accounting Standards No. 123, Accounting for Stock-Based Compensation ("SFAS
123"). 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 the financial statements.
Earnings per Share
Earnings per share requires dual presentation of basic and diluted EPS
on the face of the income statement for all entities with complex capital
structures and requires a reconciliation of the numerators and denominators of
the
19
<PAGE>
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, 1999 and 1998 there were no dilutive stock options.
Comprehensive Income
Comprehensive income is defined as all changes to equity except investments by,
and distrubutions to, shareholders. Net income is a component of comprehensive
income, with all other components referred to in the aggregate as other
comprehensive income. The following table shows the components of other
comprehensive income for the years ended December 31, 1999, 1998 and 1997.
<TABLE>
<CAPTION>
December 31,
(dollars in thousands) 1999 1998 1997
------ ------ ------
<S> <C> <C> <C>
Net Income $5,065 $3,551 $3,297
Other comprehensive (loss) income, net of tax:
Unrealized gains on securities:
Unrealized holding gains (losses) arising during the year (223) 41 34
Less: reclassification adjustment for gains
included in net income, net of taxes of and $ -- , $18 and $9 -- (34) (13)
(223) 7 21
------ ------ ------
Comprehensive Income $4,842 $3,558 $3,318
====== ====== ======
</TABLE>
20
<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, 1999 and 1998, are as
follows:
<TABLE>
<CAPTION>
Gross Gross
Unrealized Unrealized
At December 31, 1999 Amortize Holding Holding
Cost Gains Losses Fair Value
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Available for sale:
U.S. Treasury and agency obligations $ 14,400 $ 3 ($ 288) $ 14,115
Mortgage-backed securities 556 1 (5) 552
State and municipal obligations 960 -- (45) 915
Other bonds and notes: 1,126 -- (20) 1,106
Marketable equity securities 45 8 -- 53
-------- -------- -------- --------
$ 17,087 $ 12 ($ 358) $16741
======== ======== ======== ======
Held to maturity:
U.S. Treasury and agency obligations $ 5,351 $ -- ($ 186) $ 5,165
Mortgage-backed securities 4,690 -- (103) 4,587
State and municipal obligations 4,335 -- (90) 4,245
Other bonds and notes 1,223 -- -- 1,223
-------- -------- -------- --------
$ 15,599 $ -- ($ 379) $ 15,220
======== ==== ======== ========
At December 31, 1998
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
======== ======== ======== ========
</TABLE>
21
<PAGE>
At December 31, 1999 and 1998 U.S. Treasury and agency obligations include
securities with an amortized cost of $14.8 million and $10.5 million,
respectively, that can be called at a date or dates prior to their contractual
maturity. At December 31, 1999, securities with an amortized cost and fair value
of $3.8 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, 1999 (maturities of
mortgage-backed securities have been presented based upon estimated cash flows,
assuming no change in the current rate environment):
<TABLE>
<CAPTION>
<S> <C>
Available for sale:
Maturing within one year $ 5,720
Maturing after one year but within five years 7,287
Maturing after five years but within ten years 4,080
-------
$17,087
=======
Held to maturity:
Maturing within one year $ 2,416
Maturing after one year but within five years 8,867
Maturing after five years but within ten years 4,316
-------
$15,599
=======
<CAPTION>
Years Ended December 31,
1999 1998 1997
Realized Realized Realized Realized Realized Realized
Gains Losses Gains Losses Gains Losses
----- ------ ----- ------ ----- ------
<S> <C> <C> <C> <C> <C> <C>
U. S. Treasury and agency obligations $-- $-- $ 1 $ (5) $ -- $(14)
Other bonds and notes -- -- -- -- 4 --
Marketable equity securities -- -- 56 -- 41 --
Other assets -- -- -- -- -- (9)
Total $-- $-- $ 57 $ (5) $ 45 $(23)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
(in thousands) December 31,
1999 1998
--------- ---------
<S> <C> <C>
Mortgage loans:
Residential $156,409 $120,744
Residential construction 44,533 44,609
Commercial 50,459 42,439
Commercial construction 4,135 8,142
--------- ---------
Total principal balances 255,536 215,934
Due to borrowers on uncompleted loans:
Residential (10,237) (12,137)
Commercial (1,167) (2,379)
Deferred loan origination fees (781) (734)
--------- ---------
Total mortgage loans 243,351 200,684
--------- ---------
Other loans:
Commercial 11,966 10,791
Second mortgage 1,430 1,731
Home equity 2,977 1,521
Passbook and stock secured 970 592
Consumer 1,564 1,725
--------- ---------
Total other loans 18,907 16,360
--------- ---------
Total mortgages and other loans: 262,258 217,044
Less: Allowance for loan losses (3,956) (3,145)
--------- ---------
Loans, net $ 258,302 $ 213,899
========= =========
</TABLE>
22
<PAGE>
The Bank's lending activities are conducted solely in Nantucket. The
Bank grants single family and multi-family residential loans, commercial loans
and a variety of consumer loans. In addition, the Bank grants loans for
construction of residential homes, multi-family properties, commercial real
estate properties and for land development. Most loans granted by the Bank are
collateralized by real estate. The ability and willingness of the single family
residential and consumer borrowers to honor their repayment commitments is
generally impacted by the level of overall economic activity within the
borrower's geographic area and real estate values. The ability and willingness
of commercial real estate, commercial and construction loan borrowers to honor
their repayment commitments is generally impacted by the health of the real
estate economic sector in the borrower's geographic areas and the general
economy. Loans serviced for other investors amounted to $100.9 million, $67.7
million and $67.1 million at December 31, 1999, 1998 and 1997, respectively.
Service fees earned on these loans amounted to $319,000, $236,000 and $258,000,
respectively, in 1999, 1998 and 1997.
Non-performing loans are summarized as follows:
<TABLE>
<CAPTION>
(in thousands) Years Ended December 31,
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Loans accounted for on a non-accrual basis $ -- $ -- $ --
Accruing loans 90 days or more past due 71 268 10
Restructured loans -- -- --
----- ----- -----
Total $ 71 $ 268 $ 10
===== ===== =====
</TABLE>
The reduction in interest income associated with non-performing loans was not
significant.
Transactions in the allowance for loan losses are summarized as follows:
<TABLE>
<CAPTION>
(in thousands) Years Ended December 31,
1999 1998 1997
------- ------- -------
<S> <C> <C> <C>
Balance at beginning of year $ 3,145 $ 2,609 $ 2,365
Provision for loan loss 200 150 150
Recoveries on loans previously charges off 645 409 204
Realized losses charged to allowance (34) (23) (110)
------- ------- -------
Balance at end of year $ 3,956 $ 3,145 $ 2,609
======= ======= =======
Allocated as follows:
Residential mortgage loans $1,485 $ 1,300 $ 914
Commercial mortgage loans 952 886 645
Commercial loans 267 260 229
All other loans 130 106 113
Unallocated 1,122 593 708
------- ------- -------
Total $ 3,956 $ 3,145 $ 2,609
======= ======= =======
</TABLE>
<PAGE>
Realized losses charged to the allowance by type are as follows
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Residential mortgage loans $ 11 $ -- $ --
Commercial loans 22 11 91
All other loans 1 12 19
---- ---- ----
Total $ 34 $ 23 $110
==== ==== ====
</TABLE>
23
<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, 1999 and 1998:
(in thousands) 1999 1998
------- -------
Balance at beginning of year $ 2,577 $ 2,164
Additions 1,139 676
Deductions (1,452) (263)
------- -------
Balance at end of year $ 2,264 $ 2,577
======= =======
(4) Land, Building and Equipment, Net
Land, building, and equipment are summarized as follows:
(in thousands) December 31,
1999 1998
------ ------
Land $ 304 $ 304
Buildings 1,143 571
Furniture and equipment 2,688 2,240
4,135 3,115
Less: Accumulated depreciation (1,771) (1,394)
$2,364 $1,721
The Bank has 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 $37,000 in 1999 and $20,000 in 1998. Future
minimum payments under this lease are $84,000 annually for 2000 through 2002 and
$36,000 in 2003.
<PAGE>
(5) Deposits (dollars in thousands)
Deposits balances and weighted average interest rates as of December 31 are as
follows:
<TABLE>
<CAPTION>
1999 1998
------------------------- -----------------------
Weighted Weighted
Average Average
Amount Rate Amount Rate
------ ---- ------ ----
<S> <C> <C>
Demand (non-interest bearing) $ 21,515 -- % $ 18,437 -- %
Savings:
NOW 49,409 0.88% 43,062 1.19%
Regular and 90-day notice accounts 19,635 2.24% 19,168 2.48%
Money market deposit accounts 47,994 3.86% 38,377 3.71%
Advance payments from mortgagors 264 1.00% 231 1.00%
Total savings 117,302 2.33 100,838 2.39%
-------- ---- -------- ----
Time certificates of deposit 79,380 4.82% 69,393 4.95%
-------- ---- -------- ----
Total deposits $218,197 3.00% $188,668 3.10%
======== ==== ======== ====
</TABLE>
24
<PAGE>
Certificates of deposit are summarized by contractual maturity date at December
31, 1999 as follows:
Under Over
$100,000 $100,000 Total
-------- -------- -----
Within one year $21,607 $42,549 $64,156
From one to three years 8,985 3,932 12,917
From three to five years 443 1,864 2,307
------- ------- -------
Total $31,035 $48,345 $79,380
======= ======= =======
Interest on deposits, classified by type, is as follows:
Years Ended December 31,
1999 1998 1997
------ ------ ------
Regular, NOW, 90 day notice and
advance payments from mortgagors $ 928 $ 934 $ 739
Money market deposits 1,526 1,250 891
Time certificates of deposit 3,454 3,325 2,964
------ ------ ------
Total $5,908 $5,509 $4,594
====== ====== ======
(6) Borrowed Funds (dollars in thousands)
Borrowed funds are summarized by contractual maturity as follows:
1999 1998
Weighted Weighted
Average Average
Amount Rate Amount Rate
------ ---- ------ ----
Secured advances from
Federal Home Loan Bank of Boston:
Due within one year $40,184 5.65% $33,356 5.48%
Due from one to three years 15,733 5.85% 15,065 6.22%
Due from three to five years 9,500 5.42% 6,500 5.48%
Due from five to ten years 6,000 5.55% 4,000 5.21%
Total borrowings ------- ---- ------- ----
$71,417 5.65% $58,921 5.65%
======= ==== ======= ====
Borrowings from the Federal Home Loan Bank of Boston ("FHLB") are
secured by the Bank's stock in the FHLB of Boston and a blanket lien on certain
"qualified collateral" defined principally as 90% of the market value of U.S.
Government and federal agency obligations and 75% of the carrying value of
certain residential mortgage loans. Unused borrowings with the FHLB at December
31, 1999 were $69.0 million. At December 31, 1999 advances totaling $9 million
can be called at a date or dates prior to their contractual maturity.
<PAGE>
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, 1999 the Bank's FHLB
stock holdings were $4.8 million. The Bank's investment in FHLB stock is
recorded at cost.
25
<PAGE>
(7) Income Taxes (dollars in thousands)
Total income tax expense was allocated as follows:
(dollars in thousands) 1999 1998 1997
------- ------- -------
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Current tax expense:
Federal $ 2,723 $ 2,101 $ 1,432
State 124 105 507
------- ------- -------
2,847 2,206 1,939
------- ------- -------
Deferred tax expense (benefit)
Federal (110) (264) 189
State (64) (15) 63
Change in valuation allowance -- (35) (30)
(174) (314) 222
------- ------- -------
Total income tax expense $ 2,673 $ 1,892 $ 2,161
======= ======= =======
</TABLE>
The tax effect of temporary differences that give rise to significant portions
of the deferred tax assets and deferred tax liabilities at December 31, 1999 and
1998 are presented below:
<TABLE>
<CAPTION>
December 31,
(dollars in thousands) 1999 1998
------ ------
<S> <C> <C>
Deferred tax assets:
Allowance for loan losses $ 788 $ 664
Deferred compensation expense 234 205
Accrued retirement expenses 138 129
Accrued bonus 61 58
Depreciation of buildings and equipment 27 11
Unrealized loss on securities available for sale 138 --
Other 2 27
------ ------
Total gross deferred tax asset 1,388 1,095
Deferred tax liabilities:
Deferred loan origination fees 614 642
Deferred premium on loans 32 23
Unrealized gain on securities available for sale -- 9
------ ------
Total gross deferred tax liabilities 646 674
------ ------
Net deferred tax asset $ 742 $ 421
====== ======
</TABLE>
<PAGE>
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 a Massachusetts income tax at a rate
of 10.50%. One of the Bank's subsidiaries, N.B. Securities, 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.
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.
27
<PAGE>
(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 after attaining age 21 and one year of
service. The Plan provides for benefits to be paid to eligible employees at
retirement based primarily upon their years of service with the Bank and
compensation levels near retirement. The 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 Plan benefit
obligations, plan assets and funded status for the plan years ended October 31,
1999 and 1998 and assumptions and periodic benefit cost for the plan years ended
October 31, 1999, 1998 and 1997:
<TABLE>
<CAPTION>
(dollars in thousands) 1999 1998
------- -------
<S> <C> <C>
Change in benefit obligations:
Benefit obligation at beginning of year $ 1,575 $ 1,657
Service cost 111 134
Interest cost 106 120
Actuarial gain (82) (174)
Benefits paid (81) (162)
------- -------
Benefit obligation at end of year $ 1,629 $ 1,575
------- -------
Change in plan assets:
Fair value of plan assets at beginning of year $ 1,497 $ 1,454
Actual return of plan assets 284 114
Employer contribution 80 91
Benefits paid (81) (162)
------- -------
Fair value of plan assets at end of year $ 1,780 $ 1,497
------- -------
Funded status $ 151 $ (78)
Transition asset (20) (22)
Unrecognized net actuarial gain (445) (205)
------- -------
Accrued benefit cost $ (314) ($ 305)
------- -------
<CAPTION>
Weighted average assumptions as of October 31: 1999 1998 1997
------- ------- -------
<S> <C> <C> <C>
Discount rate 7.75% 6.75% 7.25%
Expected return on plan assets 8.00% 8.00% 8.00%
Rate of compensation increase 5.50% 5.50% 6.00%
------- ------- -------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Components of net periodic benefit cost:: 1999 1998 1997
------- ------- -------
Service cost $ 111 $ 134 $ 82
Interest cost 107 120 101
Expected return on plan assets (120) (116) (95)
Recognized net actuarial gain and other (10) (3) (3)
------- ------- -------
Pension expense $ 88 $ 135 $ 85
======= ======= =======
</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 $18,000 in 1999 and $70,000 in 1998.
28
<PAGE>
(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 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" scheme caused an overdraft of
$518,000 and resulted in a charge of $560,000, which included estimated legal
and other collection expenses. Later in 1998 Nantucket Bank entered into a
settlement agreement with the customer pursuant to which the Bank received a
promissory note of $447,000, partially secured by a second mortgage on property
owned by the customer. The Bank received cash recoveries of $ 35,000 in 1999 and
$146,000 in 1998. Under the terms of the promissory note the customer is
required to make monthly payments beginning May 1, 1999 and continuing through
October 1, 2018. Proceeds from the promissory note will be recognized on a cash
basis.
(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 amount recognized in the consolidated
balance sheets. The contract or notional amounts of those instruments reflect
the extent of involvement the Bank has in particular classes of financial
instruments.
The Bank's exposure to credit loss in the event of non-performance by
the other party to the financial instrument for loan commitments, unused lines
of credit and standby letters of credit is represented by the contractual amount
of those instruments. The Bank uses the same credit policies in making
commitments and conditional obligations as it does for on-balance sheet
instruments. For commitments to sell loans the contract or notional amounts do
not represent exposure to credit loss. The Bank controls credit risk on
commitments to sell through credit approval, limits and monitoring procedures.
Financial instruments whose contract amounts represent credit risk are
as follows:
<TABLE>
<CAPTION>
Contract or Notional Amount
December 31,
(in thousands) 1999 1998
------- -------
<S> <C> <C>
Commitments to originate mortgage
and commercial loans $11,888 $21,649
Unused lines of credit 13,412 12,543
Standby letters of credit 261 331
Unadvanced portions of
construction loans 11,404 14,516
</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 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 terminate this Agreement at any time for cause.
Should certain events constituting a change in control
29
<PAGE>
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 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,
1999, that the Company and the Bank meet all capital adequacy requirements to
which they are subject.
As of December 31, 1999, 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>
To Be Well Capitalized
Under Prompt
For Capital Adequacy Corrective Action
(dollars in thousands) Actual Purposes Provisions
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
As of December 31, 1999 (at least) (at least)
<S> <C> <C> <C> <C> <C> <C>
Total Capital (to Risk Weighted Assets)
Bank $28,588 15.6% $14,648 8.0% $18,310 10.0%
Company $29,826 16.3% $14,648 8.0% $18,310 10.0%
Tier I Capital (to Risk Weighted Assets)
Bank $26,279 14.4% $ 7,324 4.0% $10,986 6.0%
Company $27,309 14.9% $ 7,324 4.0% $10,986 6.0%
Total Capital (to Average Assets)
Bank $28,588 9.4% $12,130 4.0% $15,163 5.0%
Company $29,826 9.9% $12,025 4.0% $15,031 5.0%
<CAPTION>
As of December 31, 1998
<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%
</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", who are
defined as Directors of the Company, but who are not employees or paid
consultants. The Plan is administered by the Company's Compensation Committee,
which must include at least two non-employee members of the Company's Board of
Directors. A total of 50,000 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.
Stock option plan activity is summarized in the following tables:
<TABLE>
<CAPTION>
Weighted
Shares Under Average
Option Exercise Price
<S> <C> <C>
Balance December 31, 1997 -- --
Granted 25,000 $ 26.47
Exercised -- --
Cancelled -- --
------ ---------
Balance December 31, 1998 25,000 $ 26.47
Granted 5,000 $ 22.00
Exercised -- --
Cancelled -- --
Balance December 31, 1999 30,000 $ 25.76
====== =========
<CAPTION>
At or for the year ending December 31, 1999 1998
------ ------
<S> <C> <C>
Weighted average fair value of options granted $4.41 $3.65
Options exercisable at year-end 14,000 5,000
Weighted average remaining contractual life (in years) 8.6 9.4
</TABLE>
<PAGE>
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
1999 and 1998 would have been reduced to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
<S> <C> <C>
Net income (in thousands)
As reported $ 5,065 $ 3,551
Pro forma $ 5,049 $ 3,541
Earnings per share
As reported $ 2.75 $ 1.93
Pro forma $ 2.74 $ 1.92
</TABLE>
The fair value of the 1999 and 1998 option grants were estimated on the
date of grant using the Black-Scholes option-pricing model with the following
assumptions: dividend yield of 3.0%, weighted-average risk-free interest rate of
5.42% in 1999 and 5.72% in 1998, expected volatility of 28% and expected life of
4 years. 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 from time to time in the ordinary
course of business. Management is of the opinion that the aggregate liability,
if any, resulting from such litigation will not have a material adverse impact
on financial condition or results of operations.
(13) Fair Value of Financial Instruments (dollars in thousands)
The fair value of a financial instrument is defined as the amount at which the
instrument could be exchanged in a current transaction between willing parties,
other than in a forced liquidation or sale.
Quoted market prices are used to establish fair value when they are
available for a particular financial instrument. In cases where quoted market
prices are not available, fair values are based on estimates using present value
or other valuation techniques. Those techniques include assumptions which are
highly subjective, including the timing and amount of future cash flows, risk
characteristics, economic conditions and discount rate. Changes in assumptions
could significantly affect the estimates; accordingly, the results may not be
precise.
Financial instrument fair value estimates, methods and assumptions are
set forth below:
Cash and cash equivalents
The carrying amount of cash and cash equivalents approximates its fair value.
Securities
Fair values for securities, including mortgage-backed securities, are based on
quoted market prices.
Federal Home Loan Bank stock
The carrying amount of stock in the Federal Home Loan Bank of Boston
approximates its fair value.
Loans
The fair value of loans was estimated for groups of similar loans based on the
type of loan, interest rate characteristics, credit risk and maturity. The fair
value of performing residential and commercial mortgage loans, including both
fixed and variable rate loans, was determined using discounted cash flow
techniques with year-end interest rates, incorporating estimated prepayment
factors.
Accrued Income Receivable
The carrying amount of accrued income receivable approximates its fair value.
Deposits
The fair value of demand deposits, NOW and savings accounts, advance payments
from mortgagors and money market deposits are, by definition, equal to the
amount payable on demand at the reporting date (i.e. their carrying value
amounts). The fair value of fixed rate certificates of deposit are estimated
using a discounted cash flow calculation that applies year end interest rates at
which similar certificates were issued to a schedule of expected maturities of
the outstanding certificates of deposit.
<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.
32
<PAGE>
Off-balance sheet financial instruments
The fair value of commitments to originate loans, unadvanced portions of
construction loans, unused lines of credit and standby letters of credit is not
considered material.
The carrying amounts and fair values of the Company's financial
instruments consisted of the following at December 31, 1999 and 1998:
<TABLE>
<CAPTION>
1999 1998
Carrying Fair Carrying Fair
(in thousands) Amount Value Amount Value
-------- ------- ------- --------
<S> <C> <C> <C> <C>
Cash and cash equivalents $ 13,410 $13,410 $12,124 $ 12,124
Securities:
Available for sale 16,741 16,741 7,993 7,993
Held to maturity 15,599 15,220 17,904 18,050
Loans held for sale 4,934 4,941 16,005 16,658
Loans, net of allowance for loan losses 258,302 254.970 213,899 213,571
Federal Home Loan Bank stock 4,477 4,477 3,276 3,276
Accrued income receivable 1,577 1,577 1,340 1,340
Deposits:
Demand 21,515 21,515 18,437 18,437
NOW 49,409 49,409 43,062 43,062
Savings 19,635 19,635 19,168 19,168
Advance payments from mortgagors 264 264 231 231
Money market checking 47,994 47,994 38,377 38,377
Certificates of deposit 79,380 78,842 69,393 69,615
Borrowed funds 71,417 70,832 58,921 59,097
</TABLE>
<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,
(dollars in thousands, except per share information) 1999 1998
<S> <C> <C>
Assets
Cash and due from banks $ 1,203 $ 279
Investment in Nantucket Bank 26,070 23,026
Due from Nantucket Bank 33 606
Income taxes receivable -- 150
Other assets 3 20
-------- -------
Total assets $ 27,309 $24,081
======== =======
Liabilities
Other liabilities $ -- $ 49
-------- -------
Total liabilities -- 49
StockholdersO 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 14,418 10,918
Unrealized gain on securities available for sale, net of taxes (208) 15
Less: Treasury stoc, at cost (483,604 shares) (4,397) (4,397)
-------- -------
Total stockholders' equity 27,309 24,032
-------- -------
Total liabilities and stockholders' equity $ 27,309 $ 24,081
======== ========
</TABLE>
33
<PAGE>
<TABLE>
<CAPTION>
Statements of Earnings Years Ended December 31,
1999 1998 1997
(in thousands) ------- ------- -------
<S> <C> <C> <C>
Income:
Dividends from Nantucket Bank $ 2,100 $ 1,850 $ 1,800
Interest on cash equivalents and securities 36 14 13
------- ------- -------
Total income 2,136 1,864 1,813
------- ------- -------
Expenses:
Operating expenses 502 475 389
------- ------- -------
Total expenses 502 475 389
------- ------- -------
Income before income taxes and equity in undistributed net
Income of Nantucket Bank 1,634 1,389 1,424
Income tax benefit (163) (156) (142)
------- ------- -------
Income before equity in undistributed
net income of Nantucket Bank 1,797 1,545 1,566
Equity in undistributed net income of Nantucket Bank 3,269 2,006 1,731
------- ------- -------
Net income $ 5,065 $ 3,551 $ 3,297
======= ======= =======
</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.
<PAGE>
<TABLE>
<CAPTION>
Statements of Cash Flows Years Ended December 31,
1999 1998 1997
(in thousands) ------- ------- -------
<S> <C> <C> <C>
Net cash flow from operating activities:
Net income $ 5,065 $ 3,551 $ 3,297
Adjustments to reconcile net income to net cash
provided by operating activities:
Equity in undistributed net income of Nantucket Bank (3,268) (2,006) (1,731)
Net increase (decrease) in accrued expenses
and other liabilities (49) 10 27
Net (increase) decrease in prepaid expenses and other assets 168 2 (4)
Net decrease (increase) in refundable income taxes -- (150) 146
------- ------- -------
Net cash provided by operating activities 1,916 1,407 1,735
------- ------- -------
Net cash flows from (used in) investing activities:
Net (increase) decrease in due from Nantucket Bank 573 188 (173)
------- ------- -------
Net cash (used in) provided by investing activities 573 188 (173)
------- ------- -------
Net cash flows from financing activities:
Cash dividends paid (1,565) (1,473)
------- ------- -------
Net cash used for financing activities (1,565) (1,474) (1,473)
------- ------- -------
Net increase in cash and cash equivalents 924 121 89
Cash and cash equivalents at beginning of year 279 158 69
------- ------- -------
Cash and cash equivalents at end of year $ 1,203 $ 279 $ 158
------- ------- -------
Supplemental disclosure of cash flow information:
Cash paid during the year for income taxes: $ 7 $ -- $ 1
</TABLE>
34
<PAGE>
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, 1999 and 1998, and the related
consolidated statements of earnings, stockholders' equity, and cash flows for
each of the years in the three-year period ended December 31, 1999. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statement based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit also includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Home Port
Bancorp, Inc. and subsidiaries at December 31, 1999 and 1998, and the results of
their operations and their cash flows for each of the years in the three-year
period ended December 31, 1999 in conformity with generally accepted accounting
principles.
/s/KPMG LLP
- -----------
KPMG LLP
Boston, Massachusetts
January 21, 2000
35
<PAGE>
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,
Sr. Vice President of Home Port Bancorp, Inc.
and President of Nantucket Bank
Charles H. Jones, Jr.
General Partner of Edge Partners, LP
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
Home Port Bancorp, Inc. Officers
Karl L. Meyer
Chairman of the Board, President and CEO
William P. Hourihan, Jr.
Sr. Vice President
Robert J. McKay
Secretary
John M. Sweeney
Treasurer & Chief Financial Officer
* Members of Executive Committee
36
<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 and Owner of BartlettOs 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
Marsha Kotalac
Owner, Nantucket Sports Locker
Stephen Lindsay
Owner, Stephen Lindsay Custom Builders
H. Flint Ranney
Owner, Denby Real Estate, Inc.
J. Barry Thurston
Owner, Barry ThurstonOs Inc.
Nantucket Bank Officers
William P. Hourihan, Jr.
President and Chief Executive Officer
John M. Sweeney
Senior Vice President and Chief Financial Officer
Levin L. (Quint) Waters
Senior Vice President and Senior Loan Officer
Daniel P. Neath, Senior Vice President
Julie L. Bell, Vice President
<PAGE>
Neil Marttila, Vice President
Bruce T. Miller, Vice President & Controller
Zona Tanner-Butler, Vice President
Rebecca M. Bartlett, Human Resources Officer
Lisa Killen, Loan Officer
37
<PAGE>
Legal Counsel
Gadsby & Hannah LLP
225 Franklin Street
Boston, MA 02110
Independent Auditors
KPMG 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.
104 Pleasant Street, PO Box 988
Nantucket, MA 02554
Annual Meeting
The Annual Meeting of the Stockholders will be held at 10:00 a.m. on Friday, May
12, 2000 at the Harbor House, South Beach Street, Nantucket, MA 02554.
Form 10-K
Copies of the Company's 1999 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 10, 2000, there were
approximately 1,568 stockholders 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:
<PAGE>
Dividends
Period High Low Declared
1999 4th quarter 27 24 1/4 $0.25
3rd quarter 26 3/4 24 $0.20
2nd quarter 26 21 1/8 $0.20
1st quarter 25 1/2 22 3/8 $0.20
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
(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.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 14.
(2) Common Stock wholly-owned by Nantucket Bank.
(3) Wholly-owned by Nantucket Bank.
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> DEC-31-1999
<CASH> 11,894
<INT-BEARING-DEPOSITS> 76
<FED-FUNDS-SOLD> 1,440
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 16,741
<INVESTMENTS-CARRYING> 15,599
<INVESTMENTS-MARKET> 15,220
<LOANS> 258,302
<ALLOWANCE> 3,956
<TOTAL-ASSETS> 319,260
<DEPOSITS> 218,197
<SHORT-TERM> 71,417
<LIABILITIES-OTHER> 2,337
<LONG-TERM> 0
0
0
<COMMON> 23
<OTHER-SE> 27,286
<TOTAL-LIABILITIES-AND-EQUITY> 319,260
<INTEREST-LOAN> 20,019
<INTEREST-INVEST> 1,884
<INTEREST-OTHER> 49
<INTEREST-TOTAL> 21,952
<INTEREST-DEPOSIT> 5,908
<INTEREST-EXPENSE> 9,521
<INTEREST-INCOME-NET> 12,431
<LOAN-LOSSES> 200
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 6,073
<INCOME-PRETAX> 7,738
<INCOME-PRE-EXTRAORDINARY> 7,738
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,065
<EPS-BASIC> 2.75
<EPS-DILUTED> 2.75
<YIELD-ACTUAL> 4.36
<LOANS-NON> 0
<LOANS-PAST> 71
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 598
<ALLOWANCE-OPEN> 3,145
<CHARGE-OFFS> 34
<RECOVERIES> 645
<ALLOWANCE-CLOSE> 3,956
<ALLOWANCE-DOMESTIC> 3,956
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
