SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
_____________________
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
---------- ----------
Commission file number 000-29343
Port Financial Corp.
(Exact name of registrant as specified in its charter)
Massachusetts 04-1145480
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1380 Soldiers Field Road, Brighton, Massachusetts 02135
(Address of principal executive offices)
(Zip Code)
(617) 779-8300
(Registrant's telephone number including area code)
N/A
----------------------------------------------------
(Former name, former address and former fiscal year,
if changed from last Report)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding twelve 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 .
----- -----
Indicate the number of shares outstanding of each of the issuer's
classes of common stock as of the latest practicable date.
Outstanding at
Class August 9, 2001
--------------------- ----------------------------------
Common Stock,
Par value $.01 7,719,553
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
------------------------------
Item 1. Financial Statements of Port Financial Corp.
Consolidated Balance Sheets (Unaudited) - June 30, 2001 and
December 31, 2000
Consolidated Statements of Operations (Unaudited) - Three months
ended June 30, 2001 and June 30, 2000
Consolidated Statements of Operations (Unaudited) - Six months
ended June 30, 2001 and June 30, 2000
Consolidated Statements of Changes in Stockholders' Equity
(Unaudited) Six months ended June 30, 2001 and June 30, 2000
Consolidated Statements of Cash Flows (Unaudited) - Six months
ended June 30, 2001 and June 30, 2000
Notes to Unaudited Consolidated Financial Statements
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Item 3. Quantitative and Qualitative Disclosures about Market Risk
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
Item 2. Changes in Securities and Use of Proceeds
Item 3. Defaults upon Senior Securities
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Other Information
Item 6. Reports on Form 8-K
Signatures
1
Part I - FINANCIAL INFORMATION
Item 1. Financial Statements
Port Financial Corp.
Consolidated Balance Sheets
(Unaudited)
June 30, December 31,
2001 2000
-------- ------------
(In Thousands)
ASSETS
Cash and due from banks $ 14,639 $ 11,819
Federal funds sold 14,745 36,680
Other interest bearing cash equivalents 14,434 21,768
------------------------
Total cash and cash equivalents 43,818 70,267
Certificates of deposit 2,165 104
Investment securities held to maturity, at amortized cost
(Fair value was $15,071 and $22,443) 14,944 22,332
Investment securities available for sale, at fair value 196,892 181,196
Loans held for sale 4,500 823
Loans, net 687,546 687,382
Federal Home Loan Bank Stock, at cost 5,727 4,951
Savings Bank Life Insurance Stock, at cost 1,934 1,934
Banking premises and equipment, net 23,565 23,649
Accrued interest receivable 5,414 6,131
Other assets 5,731 5,900
------------------------
Total assets $992,236 $1,004,669
========================
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits $796,400 $ 806,021
Federal Home Loan Bank advances 47,890 35,801
Mortgagors' escrow payments 3,531 3,801
Accrued expenses and other liabilities 7,243 6,993
------------------------
Total liabilities 855,064 852,616
------------------------
Commitments and Contingencies (Note 2)
Stockholders' Equity:
Preferred stock, $ .01 par value -
Authorized - 5,000,000 shares
Issued and outstanding - no shares - -
Common stock, $ .01 par value -
Authorized - 30,000,000 shares
Issued and outstanding - 7,719,553 shares at June 30, 2001
And 7,725,553 at December 31, 2000 77 77
Additional paid-in capital 76,250 76,281
2
Port Financial Corp.
Consolidated Balance Sheets-(Continued)
(Unaudited)
June 30, December 31,
2001 2000
-------- ------------
(In Thousands)
Treasury stock, at cost - 1,022,314 shares at June 30, 2001 (19,741) -
Unearned compensation - Recognition and retention plan (3,782) (4,304)
Unearned compensation - ESOP (7,151) (7,277)
Retained earnings 86,120 82,750
Accumulated other comprehensive income 5,399 4,526
------------------------
Total stockholders' equity 137,172 152,053
------------------------
Total liabilities and stockholders' equity $992,236 $1,004,669
========================
See the accompanying notes to unaudited consolidated financial statements.
3
Port Financial Corp.
Consolidated Statements of Operations
(Dollars in Thousands Except Per Share Amounts)
(Unaudited)
Three Months Ended
June 30,
-------------------------
2001 2000
---------- ----------
Interest and dividend income:
Interest on loans $ 12,990 $ 11,907
Interest and dividends on investment securities 3,077 2,685
Interest on other cash equivalents 517 445
Interest on certificates of deposit 33 20
-------------------------
Total interest and dividend income 16,617 15,057
-------------------------
Interest expense:
Interest on deposits 7,642 6,851
Interest on borrowed funds 659 488
-------------------------
Total interest expense 8,301 7,339
-------------------------
Net interest income 8,316 7,718
Provision for possible loan losses 200 250
Noninterest income:
Customer service fees 312 254
Gain on sale of loans, net 180 51
Loan servicing fee income 108 127
Other income 540 299
-------------------------
Total noninterest income 1,140 731
-------------------------
Noninterest expense:
Compensation and employee benefits 3,585 2,995
Occupancy and equipment expense 801 942
Data processing service fees 513 395
Marketing and investor relations 289 230
Other noninterest expense 844 874
-------------------------
Total noninterest expenses 6,032 5,436
-------------------------
Income before provision for income taxes 3,224 2,763
Provision for income taxes 1,105 967
-------------------------
Net income $ 2,119 $ 1,796
=========================
Earnings per share:
Basic $ 0.34 $ 0.25
Diluted $ 0.33 $ 0.25
Weighted average shares outstanding:
Basic 6,265,482 7,145,719
Diluted 6,375,279 7,145,719
See the accompanying notes to unaudited consolidated financial statements
4
Port Financial Corp.
Consolidated Statements of Operations
(Dollars in Thousands Except Per Share Amounts)
(Unaudited)
Six Months Ended
June 30,
-----------------------------
2001 2000
---------- --------------
Interest and dividend income:
Interest on loans $ 26,530 $ 23,047
Interest and dividends on investment securities 6,179 4,950
Interest on other cash equivalents 1,358 651
Interest on certificates of deposit 65 107
-----------------------------
Total interest and dividend income 34,132 28,755
-----------------------------
Interest expense:
Interest on deposits 16,720 13,383
Interest on borrowed funds 1,234 1,156
-----------------------------
Total interest expense 17,954 14,539
-----------------------------
Net interest income 16,178 14,216
Provision for possible loan losses 400 416
Noninterest income:
Customer service fees 604 480
Gain on sale of loans, net 333 74
Loan servicing fee income 224 257
Other income 1,380 306
-----------------------------
Total noninterest income 2,541 1,117
-----------------------------
Noninterest expense:
Compensation and employee benefits 7,051 5,737
Occupancy and equipment expense 1,676 1,694
Data processing service fees 1,013 775
Marketing and investor relations 564 522
Other noninterest expense 1,886 1,637
-----------------------------
Total noninterest expenses 12,190 10,365
-----------------------------
Income before provision for income taxes 6,129 4,552
Provision for income taxes 2,110 1,629
-----------------------------
Net income $ 4,019 $ 2,923
=============================
Earnings per share:
Basic $ 0.62 Not meaningful
Diluted $ 0.61 Not meaningful
Weighted average shares outstanding:
Basic 6,461,612 -
Diluted 6,560,682 -
See the accompanying notes to unaudited consolidated financial statements
5
Port Financial Corp.
Consolidated Statement of Changes in Stockholders' Equity
For The Period Ending June 30, 2001
(In Thousands)
(Unaudited)
Accumulated
Additional Other Unearned
Common Paid-In Retained Comprehensive Compensation Treasury Comprehensive
Stock Capital Earnings Income ESOP/RRP Stock Total Income
Balance at December 31, 2000 $77 $76,281 $82,750 $4,526 $(11,581) $ - $152,053 $ -
Net income - - 4,019 - - - 4,019 4,019
Change in unrealized gain
on securities Available
for sale, net of taxes - - - 868 - - 868 868
Change in fair market value
of swap Agreement, net of
taxes 5 5 5
Purchase of treasury stock - - - - - (19,741) (19,741) -
Net forfeiture of RRP awards (82) 82 - -
Amortization of unearned
compensation 51 - - 566 - 617 -
Cash dividend - $.05 per share - - (649) - - - (649) -
----------------------------------------------------------------------------------------
Balance at June 30, 2001 $77 $76,250 $86,120 $5,399 $(10,933) $(19,741) $137,172 $4,892
========================================================================================
6
Port Financial Corp.
Consolidated Statements of Cash Flows
(In Thousands)
(Unaudited)
Six Months Ended
June 30,
2001 2000
---- ----
Cash flows from operating activities:
Net income $ 4,019 $ 2,923
Adjustments to reconcile net income to net cash provided
by operating activities:
Provision for possible loan losses 400 416
Depreciation and amortization 952 535
Amortization of premiums on investment securities, net 65 83
Gain on loan sales, net (333) (74)
(Increase) decrease in cash surrender value of life insurance policies (99) 88
Proceeds from sale of loans 28,082 7,254
Loans originated for sale (31,426) (8,281)
Gain on sale of branch deposits (529) -
Amortization of unearned compensation 617 57
Decrease (increase) in other assets 268 170
Decrease (increase) in accrued interest receivable 717 (1,057)
Decrease in deferred loan fees 51 (209)
Decrease in accrued expenses and other liabilities 250 595
---------------------
Net cash provided by operating activities 3,034 2,500
---------------------
Cash flows from investing activities:
Proceeds from maturities and principal repayments of
Securities available for sale 44,284 10,537
Purchases of securities available for sale (58,656) (19,161)
Proceeds from maturities and principal repayments of
held to maturity securities 7,388 298
Purchases of securities held to maturity - (24,969)
Proceeds from maturities of certificates of deposit - 5,228
Purchase of certificates of deposit (2,061) (79)
Purchase of FHLB stock (776) (499)
Purchase of premises and equipment (868) (11,048)
Net decrease (increase) in loans (628) (57,450)
Recoveries of loans previously charged-off 26 65
---------------------
Net cash used in investing activities (11,291) (97,078)
---------------------
7
Port Financial Corp.
Consolidated Statements of Cash Flows (Continued)
(In Thousands)
(Unaudited)
Six Months Ended
June 30,
2001 2000
---- ----
Cash flows from financing activities:
Decrease in term deposits (4,345) (14,459)
Decrease in term deposits due to sale of branch deposits (5,958) -
Increase in demand deposits, NOW accounts and
Savings accounts 10,845 77,650
Decrease in demand deposits, NOW accounts and
Savings accounts due to sale of branch deposits (10,163) -
Increase (decrease) in mortgagors' escrow payments (270) 61
Increase (decrease) to borrowings 12,089 (29,689)
Net proceeds on stock offering - 71,850
Cash dividends (649) -
ESOP purchase - (4,727)
Treasury stock purchase (19,741) -
---------------------
Net cash provided by financing activities (18,192) 100,686
---------------------
Net increase in cash and cash equivalents (26,449) 6,108
Cash and cash equivalents, beginning of year 70,267 19,429
---------------------
Cash and cash equivalents, end of period $ 43,818 $ 25,537
=====================
Supplemental disclosures of cash flows information:
Cash paid for interest $ 18,315 $ 14,614
=====================
Cash paid for income taxes $ 2,292 $ 1,165
=====================
See the accompanying notes to unaudited consolidated financial statements.
8
Port Financial Corp.
Notes to Unaudited Consolidated Financial Statements
1) Basis of Presentation
The unaudited consolidated financial statements of Port Financial Corp.
("Port" or the "Company") include the accounts of the Company and its two
wholly owned subsidiaries, Cambridgeport Bank (the "Bank") and Brighton
Investment Corporation. Brighton Investment Corporation invests in
marketable securities. Cambridgeport Bank is a Massachusetts-chartered
savings bank with its headquarters located in Cambridge, Massachusetts.
The Bank has four wholly owned subsidiaries, Temple Investment Corporation,
River Investment Corporation, Cambridgeport Insurance Services, Inc. and
Prospect Real Estate Investment Corp. Temple Investment Corporation and
River Investment Corporation both invest in securities. Cambridgeport
Insurance Services, Inc. was established in April 2000 and intends to
provide insurance. Prospect Real Estate Investment Corp. was established
in April 2001 and holds certain mortgage loans originated by the Bank. In
addition, the Bank is the sole member of Temple Realty LLC, which owns the
Company's administrative center.
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting
principles for complete financial statements. The preparation of financial
statements in conformity with generally accepted accounting principles
requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosures of contingent
assets and liabilities at the date of the financial statements and the
reported amounts of revenue and expenses during the reporting period.
Actual results could differ from those estimates. In the opinion of
management, the unaudited consolidated financial statements presented
herein reflect all adjustments (consisting only of normal adjustments)
necessary for a fair presentation. Interim results are not necessarily
indicative of results to be expected for the entire year.
The Company believes that the disclosures are adequate to make the
information presented not misleading. However, results for the periods
presented are not necessarily indicative of the results to be expected for
the entire 2001 fiscal year.
2) Commitments and Contingencies
At June 30, 2001, the Company had outstanding commitments to originate
loans amounting to approximately $17.1 million, and unadvanced funds on
construction loans and lines of credit amounting to approximately $800,000
and $169.8 million, respectively.
3) Earnings Per Share
Basic earnings per share represents income available to holders of common
stock divided by the weighted-average number of common shares outstanding
during the period. In calculating basic earnings per share, the number of
shares of common stock outstanding is reduced by the number of shares held
by Port's
9
Employee Stock Ownership Plan (the "ESOP") and its 2000 Recognition and
Retention Plan (the "RRP") that have not been allocated or are not
committed for release to participants' individual accounts. Diluted
earnings per share reflects additional common shares that would have been
outstanding if dilutive potential common shares had been issued, as well as
any adjustment to income that would result from the assumed conversion.
Potential common shares that may be issued by the Company relate solely to
outstanding stock options and unearned RRP shares and are determined using
the treasury stock method.
Earnings per share is not presented for the six month period ended June 30,
2000 because the earnings per share calculation for the period prior to
April 11, 2000 (the date of conversion to a stock company) is not
meaningful. Prior to April 11, 2000, the Company was a mutual holding
company and no stock was outstanding.
4) Quincy Branch
On February 23, 2001, the Bank sold approximately $16.1 million of deposits
that were related to its branch located in the Roche Bros. Supermarket in
Quincy, Massachusetts to South Shore Savings Bank. The Bank closed the
Quincy Branch on April 5, 2001 upon the termination of its lease. The
deposit sale generated a pre-tax gain of $529,000.
5) Stock Repurchases
On February 22, 2001 the Company announced a repurchase program to acquire
372,141 shares of its common stock. The Company completed these repurchases
on May 15, 2001. On June 6, 2001 the Company announced another repurchase
program to acquire 352,460 shares of its common stock. This program was
completed on June 8, 2001. The cost of these shares totaled $14.3 million,
or an average of $19.72 per share. In addition, during the quarter ended
March 31, 2001, the Company completed the purchase of the 297,713 shares
authorized related to the RRP. The cost of these shares totaled $5.4
million, or an average of $18.32 per share.
10
6) Loans
The loan portfolio consisted of the following (in thousands):
June December 31,
2001 2000
---- ----
(Unaudited)
Real estate loans-
Residential $347,930 $353,518
Commercial 235,741 241,325
Home equity lines of credit 87,649 82,885
Construction 18,338 11,458
-------------------------
Total real estate loans 689,658 689,186
Commercial 1,644 1,083
Consumer 4,707 5,172
-------------------------
Total loans 696,009 695,441
Less-Allowance for possible loan losses 8,463 8,059
-------------------------
Total loans, net $687,546 $687,382
=========================
7) Deposits
A summary of deposit balances, by type, is as follows (in thousands):
June December 31,
2001 2000
---- ----
(Unaudited)
Demand deposit accounts $ 46,826 $ 46,138
NOW accounts 88,604 69,101
Regular savings accounts 53,510 51,864
Money market accounts 309,142 330,297
-------------------------
Total noncertificate accounts 498,082 497,400
-------------------------
Term certificates-
Term certificates less than $100,000 236,238 250,662
Term certificates of $100,000 and over 62,080 57,959
-------------------------
Total term certificate accounts 298,318 308,621
-------------------------
Total deposits $796,400 $806,021
=========================
11
8) Business Segments
SFAS No. 131, Disclosure About Segments of an Enterprise and Related
Information, establishes standards for reporting segments of a business
enterprise. Operating segments are components of an enterprise, which are
evaluated regularly by the chief operating decision maker in deciding how
to allocate resources and in assessing performance. The Company's chief
operating decision maker is the Chairman and Chief Executive Officer. The
adoption of SFAS No. 131 did not have a material effect on the Company's
primary financial statements, but did result in the disclosure of segment
information contained herein. The Company has identified its reportable
operating business segment as community banking based on products and
services provided to the customer. The Company's community banking
business segments consist of commercial banking and retail banking. The
community banking business segment derives its revenues from a wide range
of banking services, including lending activities, acceptance of demand,
saving and time deposits, mortgage lending and sales and servicing income
from investors. Nonreportable operating segments of the Company's
operations that do not have similar characteristics to the community
banking operations and do not meet the quantitative thresholds requiring
disclosure are included in the Other category in the disclosure of business
segments below. These nonreportable segments include Parent Company
financial information. Consolidation adjustments are included in the
consolidation adjustments category. The consolidation adjustments reflect
certain eliminations of cash and Parent Company investments in
subsidiaries.
The accounting policies used in the disclosure of business segments are the
same as those described in the summary of significant accounting policies.
Reportable segments and reconciliation to consolidated financial
information is as follows:
Community Consolidation
Banking Other Adjustments Consolidated
--------- ----- ------------- ------------
(Unaudited)
June 30, 2001: (In Thousands)
--------------
Investment securities available
For sale and held to maturity $178,818 $ 44,472 $ (11,454) $211,836
Loans, net 687,546 7,206 (7,206) 687,546
Total assets 953,423 148,502 (109,689) 992,236
Total deposits (1) 796,400 - - 796,400
Total liabilities 862,525 2,362 (9,823) 855,064
Total interest and dividend income 32,484 10,672 (9,024) 34,132
Total interest expense 18,235 7 (288) 17,954
Net interest income 14,249 10,665 (8,736) 16,178
Provision for possible loan losses 400 - - 400
Total noninterest income 2,541 - - 2,541
Total noninterest expense 11,585 605 - 12,190
Net income 3,156 9,599 (8,736) 4,019
12
Community Consolidation
Banking Other Adjustments Consolidated
--------- ----- ------------- ------------
(Unaudited)
June 30, 2000: (In Thousands)
--------------
Investment securities available
For sale and held to maturity $128,957 $ 41,469 $ (5,666) $164,760
Loans, net 634,146 - - 634,146
Total assets 830,257 156,538 (119,853) 866,942
Total deposits (1) 703,115 - (18,544) 684,571
Total liabilities 740,814 2,110 (25,155) 717,769
Total interest and dividend income 27,442 1,313 - 28,755
Total interest expense 14,539 - - 14,539
Net interest income 12,903 1,313 - 14,216
Provision for possible loan losses 416 - - 416
Total noninterest income 1,117 - - 1,117
Total noninterest expense 10,207 158 - 10,365
Net income 2,156 767 - 2,923
Includes mortgagors' escrow payments
9) New Pronouncements
The Company adopted SFAS No. 133 "Accounting for Derivative Instruments and
Hedging Activities" as amended, on January 1, 2001. This new statement
requires that every derivative instrument be recorded on the balance sheet
as either an asset or liability measured at its fair value. The Company's
derivative instruments are certain loan commitments which are intended for
sale and their related forward sales contracts. Adoption of this statement
had no effect on income or comprehensive income.
During the six months ended June 30, 2000 the Company entered into an
interest rate swap agreement with a notional value of $20 million. The
Company utilizes interest rate swaps to manage the risk associated with
interest rate changes. Under the terms of the swap agreement, the Company
receives payments based on the weekly average rate on three month U.S.
Treasury bills in exchange for payments based on a fixed rate. The swap has
a maturity of 2 years and is not callable. The swap had no material effect
on income during the second quarter of 2001.
13
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
-----------------------------------
Forward Looking Statements
This Quarterly Report on Form 10-Q contains certain statements that may be
considered forward-looking statements within the meaning of Section 27A of
the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended. Port Financial Corp.'s (the "Company)
actual results could differ materially from those projected in the forward-
looking statements. Important factors that might cause such a difference
include: changes in national or regional economic conditions; changes in
loan default and charge-off rates; reductions in deposit levels
necessitating increased borrowing to fund loans and investments; changes in
interest rates; changes in the size and the nature of the Company's
competition; and changes in the assumptions used in making such forward-
looking statements.
The following discussion and analysis should be read in conjunction with
the unaudited consolidated financial statements and related notes included
in this report.
General
Port Financial Corp. is a Massachusetts-chartered stock holding company,
which owns all of the capital stock of Cambridgeport Bank (the "Bank"). The
Company converted from a Massachusetts-chartered mutual holding company,
formerly known as Cambridgeport Mutual Holding Company, to a Massachusetts-
chartered stock holding company and changed its name to Port Financial
Corp. and sold 7,442,818 shares of its common stock to the Company's
eligible depositors, management and employees and to the Company's Employee
Stock Ownership Plan ("ESOP"). Net proceeds of the stock offering were
$71.8 million. The conversion and stock offering was completed on April
11, 2000.
The Company's principal business is its investment in the Bank, a
Massachusetts stock savings bank, chartered in 1853. The Bank is a
community-oriented Bank providing retail and business customers with value-
driven products and services to meet customer needs. It provides a wide
variety of deposit products, investment management services, residential
mortgage loans, commercial real estate loans, commercial loans and consumer
loans to its customers in the cities and towns around Cambridge,
Massachusetts. Over the past five years, the Bank has more than doubled
its branch network and has added a TeleBanking Center. The Bank has
strategically located its branch offices in cities and towns with a strong
base for real estate lending and deposit growth and where community bank
competition has been reduced by a consolidating banking industry. In June
2000, the Company initiated a marketing campaign, Real Banking, as part of
its strategy to build profitable relationships with consumers and
businesses impacted by large bank mergers. The Real Banking program
offered promotional rates on a money market account, a short-term
certificate of deposit, and a home equity credit line to consumers who
maintained their primary checking account at the Bank. Largely as a result
of this program, total deposits grew $133.0 million, net of the Quincy
deposit sale.
The Bank's revenues are derived principally from interest on loans and
investment securities. The Bank's primary sources of funds are deposits,
scheduled amortization and prepayments of loan principal and mortgage-
backed securities, maturities and calls of investment securities, and funds
provided by operations. The Bank also uses borrowings from the Federal Home
Loan Bank as a source of funds for loans, investments and other assets. The
largest component of the Bank's expenses is the interest it pays on
deposits.
14
Comparison of Financial Condition at June 30, 2001 and December 31, 2000
Total assets decreased by $12.8 million from $1.005 billion at December 31,
2000 to $992.2 million at June 30, 2001. Cash, cash equivalents and
investment securities declined by $16.1 million, largely as a result of the
Quincy branch deposit sale. The net loan balance of $687.5 million at June
30 was essentially unchanged from the December 31 balance of $687.4
million. The balances of residential mortgage and commercial real estate
loans each declined by $5.6 million as some customers took advantage of the
lower interest rate environment to refinance their loans into fixed rate
obligations. The Bank does not generally hold fixed rate loans in its loan
portfolio. Home equity credit lines, which the Bank has featured in its
marketing programs designed to attract new customers, increased by $4.8
million from the December 31, 2000 level of $82.9 million. Construction
loans outstanding rose $6.8 million to $18.3 million at June 30 from $11.5
million at December 31, reflecting borrowing activity under credit lines
provided by the Bank to fund certain commercial real estate projects in the
Bank's market area. Upon completion of those projects, the loans will be
converted into commercial mortgage loans.
Non-performing assets totaled $557,000 and $134,000 at June 30, 2001 and
December 31, 2000, respectively. Included in the June 30 total was a
residential mortgage loan of $303,000 on which the Bank continued to accrue
interest although the scheduled payments were more than 90 days past due.
The collateral property was in the process of being sold at the time. The
sale was completed after June 30 and the loan was repaid in full, including
past due interest and penalty charges.
The allowance for possible loan losses was $8.5 million at June 30, 2001,
or 1.22% of total loans. This compares to $8.1 million and 1.16% at
December 31, 2000. The Company believes that the current allowance for
loan losses accurately reflects the level of risk in the loan portfolio.
Although there has been no significant increase in payment delinquencies or
non-performing assets, the Company believes that the addition to the
allowance is prudent, given changes in the general economic environment.
Deposits at June 30, 2001 totaled $796.4 million, a decrease of $9.6
million from $806.0 million at December 31, 2000. Net of the Quincy Branch
deposit transaction, total deposits at June 30 were $6.5 million above the
December 31 balance. This increase consisted of $20.2 million in checking
accounts and $1.6 million in savings accounts, partially offset by a
reduction of $21.1 million in money market accounts and $10.3 million in
time deposits. During the second quarter of 2001, the Bank reduced the
promotional rate on the Real Savings money market account from 6.25% at
March 31 to 3.75% at June 30. Also during the second quarter, the Bank
introduced the Premier Checking account, with a marketing program designed
to attract new checking account customers. This program was the primary
reason for the growth in NOW account and demand deposit account balances.
The decline in stockholders equity to $137.2 million at June 30, 2001 from
$152.1 million at December 31, 2000 reflects the cost of share repurchases
mentioned previously, partially offset by a $3.4 million increase in
retained earnings and a $873,000 increase in unrealized gains on investment
securities held for sale.
Book value per share was $21.38 as of June 30, 2001 and $20.43 as of
December 31, 2000. In calculating book value per share, the number of
shares of common stock outstanding is reduced by unearned RRP shares and
treasury stock. There were 6,414,504 and 7,442,818 shares of common stock
outstanding as of June 30, 2001 and December 31, 2000 respectively, for
purposes of calculating the Company's book value per share.
15
Comparison of Operating Results for the Three Months Ended June 30, 2001
and 2000
Net income for the quarter ended June 30, 2001 was $2.1 million, or $.33
per diluted share, compared to $1.8 million, or $.25 per diluted share for
the comparable prior year period.
Interest Income
Interest income increased $1.6 million, or 10.7%, to $16.6 million. This
increase resulted primarily from 14.0% growth in the average balance of
interest-earning assets to $929.2 million in the second quarter of 2001.
The yield on average interest-earning assets declined 23 basis points in
the 2001 period compared with the prior year, reflecting the lower interest
rate environment this year.
Interest expense
Total interest expense for the three months ended June 30, 2001 was $8.3
million, an increase of $962,000 over the same period in 2000. Interest
expense on deposit accounts was up $791,000 as a result of significantly
higher average balances of interest-bearing deposits which were $118.0
million higher in the 2001 quarter than in the second quarter of 2000. The
average cost of deposits was 4.17% in the 2001 period, a reduction of 29
basis points from 4.46% in the comparable 2000 quarter. The decline in
deposit rates reflects the general reduction in market rates, especially
since the beginning of 2001.
Borrowing expense of $659,000 compared with $488,000 in the second quarter
of 2000. During the second quarter of 2000, the Company capitalized
$215,000 of interest payments related to the financing of its
administration center building. If the capitalized amount had been
recorded as an expense, total borrowing expense would have been $703,000 in
the 2000 period.
Net interest income
Net interest income increased 7.8%, or $598,000, in the second quarter of
2001 as compared to the same period last year. The net interest margin was
3.59%, down from 3.81% in the 2000 quarter. The interest rate spread was
2.88% in the quarter ended June 30, 2001, compared with 2.92% during the
same period last year.
Provision for Possible Loan Losses
The Company recorded a provision for loan losses of $200,000 for the
quarter ended June 30, 2001 and $250,000 in the same quarter of 2000. The
lower provision reflects the slower growth in portfolio loan balances in
the 2001 period. Although there has been no significant increase in payment
delinquencies or non-performing assets, the Company believes that the
addition to the allowance for loan losses is prudent, given changes in the
general economic environment.
Non-Interest Income
Non-interest income of $1.1 million in the second quarter of 2001
represents a 56.0% increase compared to $731,000 in the second quarter of
2000. Customer service fees of $312,000 were up $58,000 over the 2000
quarter, largely due to the increased number of checking accounts and fees
derived from activity in those accounts. Loan sale gains of $180,000
represents an increase of $129,000 from the 2000 period. These gains are
generated from the sale of fixed rate residential mortgages. As mentioned
above, the lower interest rate environment that prevailed in the second
quarter of 2001 produced higher volumes of fixed rate mortgage
applications.
Other non-interest income was $540,000 in the quarter ended June 30, 2001,
up from $299,000 during the 2000 period, which included a $70,000 gain on
sale of fixed assets.
16
Fees generated from sales of investment products represented the largest
portion of this increase, rising from $35,000 in the 2000 period to
$258,000 in the second quarter of this year.
Non-Interest Expense
Non-interest expense increased $596,000 to $6.0 million for the second
quarter of 2001, compared to $5.4 million in the 2000 period. Compensation
and benefits expenses were $3.6 million in the second quarter of 2001, an
increase of $590,000 over the same period last year. The cost of stock
benefit plans, which were not in place during the 2000 period, represented
$282,000 of the increase. The other significant component was commission
expense for mortgage and investment sales associates. This expense was up
$170,000 from the second quarter of 2000.
Occupancy and equipment expense of $801,000 represents a decrease of
$141,000 from the prior year period. During the 2001 period the Company
received $260,000 of rental income from tenants at its administrative
center building and its main office building in Cambridge, as well as
sublease revenue at the location formerly occupied by its mortgage
division, which relocated to the administrative center in June, 2000.
During the 2000 period, there was no rental income.
Data processing expense of $513,000, an increase of $118,000 from the 2000
period was the result of the significantly higher level of customer deposit
account activity in 2001, and costs of providing internet banking services,
which were introduced during the second quarter of 2000.
The annualized expense ratio, the ratio of non-interest expense to average
assets, was 2.48% for the three months ended June 30, 2001, compared to
2.57% in the 2000 period.
Provision for Income Taxes
The Company's effective tax rate for the June 30, 2001 quarter was 34.3% as
compared to 35.0% for the 2000 period. The impact of state taxation has
been reduced as a result of activity in the Bank's and the Company's
security corporations, and the Bank's real estate investment trust.
Comparison of Operating Results for Six Months Ended June 30, 2001 and June
30, 2000
Net income rose $1.1 million to $4.0 million for the six months ended June
30, 2001. This equates to $.61 per diluted share. This compared to $2.9
million for the first half of 2000. Earnings per share figures are not
presented for the 2000 period because the Company was not public for the
entire period. The 2001 results include a $312,000 after-tax gain from the
sale of Quincy branch deposits.
Interest Income
Interest income was $34.1 million, representing a $5.4 million increase
over the 2000 results. Growth in the average balance of interest-earning
assets totaling $150.6 million, was the primary reason for the growth of
interest income. Earnings on loans rose $3.5 million, a result of an
additional $86.5 million in the average balance of the loan portfolio.
This included $37.8 million in commercial real estate loans, which averaged
$254.1 million in the first half of 2001. The Company's strategy includes
expansion of its commercial real estate lending, without compromising its
underwriting standards. Loan growth also included $30.2 million in
residential mortgages, which averaged $317.5 million in the first six
months of
17
this year, and $19.2 million in home equity and other consumer real estate
loans, which averaged $115.8 million during the first half of 2001.
Investment income increased by $1.9 million, primarily the result of higher
average investment portfolio balances. Short term investments and
investment securities averaged $240.2 million, $64.1 million higher than
the 2000 period. Proceeds from the issuance of stock were not received
until April, 2000, so average investment portfolio balances were lower in
the first half of last year. The overall investment yield in the 2001
period was 6.34%, a decrease of 15 basis points from the first half of
2000, largely due to a 200 basis point drop in yield on short term
investments. This reflects the actions taken by the monetary authorities
to reduce rates beginning in January of this year.
Interest Expense
Total interest expense for the six months ended June 30, 2001 was $17.9
million, an increase of $3.4 million over the same period in 2000. This
was due primarily to higher average balances of interest bearing deposits,
which averaged $741.9 million this year, an increase of $131.0 million over
last year's average balance of $610.9 million. Within the deposit
category, money market average balances increased 71% to $318.5 million
from $186.2 million in the 2000 period. The Real Banking marketing
campaign, featuring the Real Savings money market account, was the
principal reason for this increase. The campaign also focused on
attracting new checking account customers, a major factor in the $25.2
million increase in average checking balances.
The cost of average interest bearing liabilities rose 20 basis points to
4.63%. Rates on time deposits increased during the second half of 2000 due
to competitive pressures. Most time deposits opened during the second half
of 2000 remained on the Company's books in the first half of 2001.
Net interest income
The $2.0 million increase in net interest income was also affected by the
stock offering proceeds, which were used to fund loan and investment
portfolio growth. The $142.8 million average balance of shareholders
equity during the first half of this year was $33.7 million higher than the
comparable period last year. The net interest margin was 3.49%, down 16
basis points from 3.65% in the 2000 period. The interest rate spread was
2.68% in the 2001 period, compared with 2.91% last year.
Provision for Possible Loan Losses
The provision for loan losses of $400,000 in the first half of 2001
represents a decrease of $16,000 over the 2000 period, and reflects the
slower growth in the loan portfolio.
Non-Interest Income
Non-interest income totaled $2.5 million in the first half of 2001, up from
$1.1 million a year earlier. The 2001 period included a $529,000 pre-tax
gain from the sale of Quincy branch deposits. Loan sale gains of $333,000
were $259,000 higher than the 2000 period, as a result of the lower
interest rate environment during the first half of 2000 that produced a
higher level of fixed rate loan activity. The Bank generally sells all
fixed rate mortgages, servicing released, into the secondary market, and
generates gains on these sales.
Customer service fees rose $124,000, a result of the increased number of
transaction accounts opened during the Real Banking marketing promotion.
Other non-interest income, net of the Quincy gain, rose $545,000. Fees
generated from the sale of investment services was the main component of
the increase in this category.
18
Non-Interest Expense
Non-interest expense increased $1.8 million, or 17.3%, to $12.2 million for
the 2001 period. The $1.3 million increase in compensation and benefit
costs, which were 22.9% above the first half of 2000, includes $645,000 of
stock benefit plan expenses in this year's first half above last year. The
remaining increase in compensation and benefits includes the effects of
higher commissions on mortgage and investment product sales, and the
effects of annual wage adjustments.
Data processing fees increased by $238,000, from $775,000 in the 2000
period to $1.0 million in the first six months of 2001 due to higher
transaction account activity and the costs related to the Bank's
internet banking service, which was introduced in April, 2000. The
increase in other non-interest expense, which was up $249,000 over last
year, includes $96,000 of professional services costs related to the
formation of Prospect Real Estate Investment Trust, as well as higher legal
and other professional expenses incurred as a public company.
The annualized expense ratios for the six month periods were 2.51% in 2001
and 2.54% in 2000.
Provision for Income Taxes
The Company's effective tax rate for the six months ended June 30, 2001 was
34.43% compared to 35.79% for the same 2000 period. The impact of state
taxation has been reduced as a result of activity in the Bank's and
Company's security corporations and the Bank's real estate investment
trust.
19
Port Financial Corp.
Average Balance Sheet
For the Six Months Ending June 30, 2001 and 2000
(Unaudited)
2001 2000
---- ----
Average Average
Average Yield/ Average Yield/
Balance Interest Cost Balance Interest Cost
-------------------------------------------------------------------------
(Dollars in thousands)
Assets:
Interest earning assets:
Short term investments(1) $ 54,289 $ 1,358 5.04% $ 18,519 $ 651 7.07%
Certificates of deposit 2,075 64 6.22% 2,994 107 7.19%
Investment securities(2) 183,857 6,179 6.74% 154,612 4,950 6.41%
Loans(3) 694,002 26,531 7.65% 607,510 23,047 7.59%
-------------------------------------------------------------------------
Total interest earning assets 934,223 34,132 7.31% 783,635 28,755 7.34%
------------------- -------------------
Allowance for possible loan losses (8,223) (7,267)
Total noninterest earning assets 53,752 42,612
-------- --------
Total assets 979,753 818,980
======== ========
Liabilities and Equity:
Interest bearing liabilities:
NOW accounts 69,140 380 1.11% 48,112 324 1.35%
Savings accounts 52,214 455 1.76% 54,463 542 2.00%
Money market deposit accounts 318,485 7,109 4.50% 186,164 4.388 4.74%
Certificate of deposit accounts 302,024 8,776 5.86% 322,137 8,129 5.07%
-------------------------------------------------------------------------
Total interest bearing deposits 741,863 16,720 4.54% 610,876 13,383 4.41%
Borrowed funds 39,858 1,234 6.16% 48,794 1,156 4.69%
-------------------------------------------------------------------------
Total interest bearing liabilities 781,721 17,954 4.63% 659,670 14,539 4.43%
------ ------
Noninterest bearing deposits 47,464 43,263
Other noninterest bearing liabilities 7,773 6,988
-------- --------
Total noninterest bearing liabilities 55,237 50,251
Total liabilities 836,958 709,921
Stockholders' equity/retained
earnings 142,795 109,059
-------- --------
Total liabilities and stockholders'
Equity/retained earnings $979,753 $818,980
======== ========
Net interest income $16,178 $14,216
======= =======
Net Interest rate spread (4) 2.68% 2.91%
Net interest margin (5) 3.49% 3.65%
Ratio of average interest-earning assets
to average interest-bearing liabilities 119.45 118.77
Short term investments includes federal funds sold.
All investments securities that are considered available for sale are
carried at market value, while securities that are held to maturity
are held at cost
Loans are net of deferred loan origination costs (fees).
Net interest rate spread represents the difference between the
weighted average yield on interest earning assets and the weighted
average cost of interest bearing liabilities.
Net interest margin represents net interest income as a percentage of
average interest earning assets.
20
Port Financial Corp.
Rate/Volume Analysis
Six Months Ending June 30, 2001
Increase/(Decrease)
(Unaudited)
-------------------------------
Due to
------
Volume Rate Net
------------------ -------
(In thousands)
Interest earning assets:
Short term investments $ 830 $ (123) $ 707
Certificates of deposit (30) (13) (43)
Investment securities 964 265 1,229
Loans 3,301 183 3,484
-------------------------------
Total interest earning assets 5,065 312 5,377
-------------------------------
Interest bearing liabilities:
NOW accounts 94 (38) 56
Savings accounts (22) (65) (87)
Money market deposit accounts 2,930 (209) 2,721
Certificate of deposit accounts (433) 1,080 647
Borrowed funds (110) 188 78
-------------------------------
Total interest bearing liabilities 2,459 956 3,415
-------------------------------
Change in net interest income $2,606 $ (644) $1,962
===============================
Liquidity and Capital Resources
The term "liquidity" refers to the Company's ability to generate adequate
amounts of cash to fund loan originations, loan purchases, withdrawals of
deposits and operating expenses. The Company's primary sources of
liquidity are deposits, scheduled amortization and prepayments of loan
principal and mortgage backed securities, maturities and calls of
investment securities and funds provided by operations. The Bank also can
borrow funds from the Federal Home Loan Bank based on eligible collateral
of loans and securities. The Bank's maximum borrowing capacity from the
Federal Home Loan Bank at June 30, 2001 was approximately $298.8 million,
net of borrowings that were currently outstanding. In addition, the Bank
can enter into reverse repurchase agreements with approved broker-dealers.
Reverse repurchase agreements are agreements that allow the Bank to borrow
money, using securities as collateral.
Liquidity management is both a daily and long term function of business
management. The measure of a Company's liquidity is its ability to meet
its cash commitments at all times with available cash or by conversion of
other assets to cash at a reasonable price. Loan repayments and maturing
investment securities are a relatively predictable source of funds.
However, deposit flows, calls of investment securities and prepayments of
loans and mortgage-backed securities are strongly influenced by interest
rates, general and local economic conditions and competition in the
marketplace. These factors reduce the predictability of the timing of
these sources of funds. Management believes that the Company has
sufficient liquidity to meet its current operating needs.
At June 30, 2001, the Company exceeded each of the applicable regulatory
capital requirements. The Company's leverage Tier 1 capital was $131.8
million, or 22.4% of risk-weighted assets, and 13.5% of
21
average assets. The Company had a risk-based total capital of $141.8
million and a risk-based capital ratio of 24.1%.
See the "Consolidated Statements of Cash Flows" in the Unaudited
Consolidated Financial Statements included in this Form 10-Q for the
sources and uses of cash flows for operating and financing activities for
the six months ended June 30, 2001 and June 30, 2000.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Quantitative and qualitative information about market risk is presented in
the Securities and Exchange Commission Form 10-K filed by the Company for
the year ended December 31, 2000.
The table below provides quantitative information on market risk as of June
30, 2001. It sets forth the estimated changes in net interest income that
would result from a 200 basis point change in interest rates over the
applicable twelve-month period.
As of June 30, 2001
------------------------------------------
(Dollars in thousands)
Changes in
Interest Rates Net Interest
(Basis Points) Income % Change
-------------- ------------ --------
200 34,037 -4.60%
0 35,679 -
-200 36,303 1.75%
During the six months ended June 30, 2000 the Company entered into an
interest rate swap agreement with a notional value of $20 million. The
Company utilizes interest rate swaps to manage the risk associated with
interest rate changes. Under the terms of the swap agreement, the Company
receives payments based on the weekly average rate on three month U.S.
Treasury bills in exchange for payments based on a fixed rate. The swap has
a maturity of 2 years and is not callable. This swap is intended to reduce
the impact on net interest income from a rise in interest rates. The swap
had no material effect on income during the second quarter of 2001.
Part II - OTHER INFORMATION
-----------------
Item 1. Legal Proceedings
None
Item 2. Changes in Securities and Use of Proceeds
None
22
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
The Company held its annual meeting of shareholders on May 2, 2001
(the "Meeting"). All of the proposals submitted to the shareholders at the
Meeting were approved. The proposals submitted to shareholders and the
tabulation of votes for each proposal is as follows:
1. Election of four candidates to the board of directors.
The number of votes cast with respect to this matter was as follows:
Nominee For Withheld
------- --- --------
Samuel C. Fleming 6,525,705 35,555
Robert D. Happ 6,525,605 35,655
Jane L. Lundquist 6,526,105 35,155
Sandra J.Sucher 6,524,375 36,885
2. Approval of Article IX of the Port Financial Corp. 2000 Stock Option
Plan, allowing for, among other things, acceleration of vesting upon
retirement or change in control.
The number of votes cast with respect to this matter was as follows:
For Against Abstain
--- ------- -------
4,931,979 200,020 208,078
3. Approval of Article X of the Port Financial Corp. 2000 Recognition
and Retention Plan, allowing for, among other things, acceleration of
vesting upon retirement or change in control.
The number of votes cast with respect to this matter was as follows:
For Against Abstain
--- ------- -------
5,053,138 255,416 31,623
There were no broker held non-voted shares represented at the Meeting
with respect to these proposals.
Item 5. Other Information
None
Item 6. Reports on Form 8-K
None
23
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
Port Financial Corp.
------------------------------------
(Registrant)
By: /s/ James B. Keegan
--------------------------------
James B. Keegan
Chairman and Chief Executive
Officer
By: /s/ Charles Jeffrey
--------------------------------
Charles Jeffrey
Senior Vice President and
Chief Financial Officer
August 9, 2001
24