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 September 30, 2000
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) 661-4900
(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 November 9, 2000
----------------------------------
Common Stock,
Par value $.01 7,442,818
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
------------------------------
Item 1. Financial Statements of Port Financial Corp.
Consolidated Balance Sheets (Unaudited) - September 30, 2000
and December 31, 1999
Consolidated Statements of Income (Unaudited) - Three and Nine
months ended September 30, 2000 and September 30, 1999
Consolidated Statements of Changes in Stockholders' Equity
(Unaudited) Nine months ended September 30, 2000
and September 30, 1999
Consolidated Statements of Cash Flows (Unaudited) - Nine months
ended September 30, 2000 and September 30, 1999
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. Exhibits and Reports on Form 8-K
Signatures
Exhibit 27 - Financial Data Schedule
Part I - FINANCIAL INFORMATION
Item 1. Financial Statements
Port Financial Corp.
Consolidated Balance Sheets
(Unaudited)
September 30, December 31,
2000 1999
-----------------------------
ASSETS (In Thousands)
Cash and due from Banks $ 11,724 $ 16,594
Federal funds sold 2,085 -
Other cash equivalents 26,059 2,835
------------------------
Total cash and cash equivalents 39,868 19,429
Certificates of deposit 100 5,149
Investment securities held to maturity 24,494 -
Investment securities available for sale at fair value 174,416 131,647
Loans held for sale 2,553 -
Loans, net 664,163 577,029
Federal Home Loan Bank Stock, at cost 4,951 4,452
Savings Bank Life Insurance Stock, at cost 1,934 1,934
Banking premises and equipment, net 23,588 11,782
Accrued interest receivable 6,569 4,054
Other assets 6,609 7,265
------------------------
Total assets $949,245 $762,741
========================
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits $762,382 $618,288
Federal Home Loan Bank advances 26,005 55,891
Mortgagors' escrow payments 4,005 3,031
Accrued expenses and other liabilities 7,647 6,401
------------------------
Total liabilities 800,039 683,611
------------------------
Stockholders' Equity:
Preferred stock ($ .01 par value;
5,000,000 shares authorized; no shares
Issued and outstanding) - -
Common stock ( $ .01 par value;
30,000,000 shares authorized;
Shares issued and outstanding:
7,442,818 at September 30, 2000) 74 -
Additional paid-in capital 71,766 -
Unearned compensation - ESOP
(585,501 shares held by the ESOP
at September 30, 2000) (7,396) -
Retained earnings 81,824 77,221
Accumulated other comprehensive income 2,938 1,909
------------------------
Total stockholders' equity 149,206 79,130
------------------------
Total liabilities and stockholders' equity $949,245 $762,741
========================
See the accompanying notes to unaudited consolidated financial statements.
Port Financial Corp.
Consolidated Statements of Operations
(Dollars in Thousands Except Per Share Amounts
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------------------------
2000 1999 2000 1999
-------------------------------------------
Interest and dividend income:
Interest on loans $ 12,937 $ 9,997 $35,984 $29,887
Interest and dividends on investment securities 3,002 2,041 7,952 6,322
Interest on other cash equivalents 315 191 966 593
Interest on certificates of deposit 2 92 109 295
-------------------------------------------
Total interest and dividend income 16,256 12,321 45,011 37,097
-------------------------------------------
Interest expense:
Interest on deposits 8,254 5,807 21,636 17,361
Interest on borrowed funds 340 503 1,496 1,583
-------------------------------------------
Total interest expense 8,594 6,310 23,132 18,944
-------------------------------------------
Net interest income 7,662 6,011 21,879 18,153
Provision for possible loan losses 250 290 666 562
-------------------------------------------
Net interest income after provision for
possible loan losses 7,412 5,721 21,213 17,591
-------------------------------------------
Noninterest income:
Customer service fees 269 213 749 622
Gain on sale of loans, net 86 120 159 539
Loan servicing fee income 120 62 378 309
Other income 261 402 567 674
-------------------------------------------
Total noninterest income 736 797 1,853 2,144
-------------------------------------------
Noninterest expense:
Compensation and employee benefits (A) 3,106 2,961 8,809 7,654
Occupancy and equipment expense 864 782 2,558 2,438
Data processing service fees 332 365 1,107 1,072
Marketing 233 338 755 783
Other noninterest expense 1,058 876 2,730 2,355
-------------------------------------------
Total noninterest expenses 5,593 5,322 15,959 14,302
-------------------------------------------
Income before provision for income taxes 2,555 1,196 7,107 5,433
Provision for income taxes 875 297 2,504 1,826
-------------------------------------------
Net income $ 1,680 $ 899 $ 4,603 $ 3,607
===========================================
Earnings per share:
Basic (C) $ 0.24 (B) (B) (B)
Diluted $ 0.24 (B) (B) (B)
Weighted average shares outstanding:
Basic 6,920,296 (B) (B) (B)
Diluted 6,920,296 (B) (B) (B)
See the accompanying notes to unaudited consolidated financial statements.
(A) At September 30, 2000, Port Financial Corp.'s Employee Stock Ownership
Plan (the "ESOP") held unallocated shares with an aggregate cost of
$7,395,859 and a market value of $10,392,643. For the nine month and three
month periods ended September 30, 2000, $137,230 and $77,841 was charged to
compensation and employee benefit expense respectively, based on a
commitment to release 9,924 shares to employees.
Earnings Per Share
(B) Earnings per share is not presented for the nine month period ended
September 30, 2000 and for the 1999 periods 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.
(C) Basic earnings per share is computed by dividing net income by the
weighted average number of shares of common stock outstanding during the
periods presented. ESOP shares committed to be released are considered
outstanding while unallocated ESOP shares are not considered outstanding.
Port Financial Corp.
Consolidated Statements of Changes in Stockholders' Equity
For The Periods Ending September 30, 2000 and 1999
(Unaudited)
(In Thousands)
Additional Other ESOP
Common Paid-In Retained Comprehensive Unearned
Stock Capital Earnings Income Compensation Total
----------------------------------------------------------------------------
Balance at December 31, 1998 $ - $ - $72,447 $3,641 $ - $ 76,088
Net income - - 3,607 - - 3,607
Change in unrealized gain on securities
available for sale, net of taxes - - - (1,117) - (1,117)
---------------------------------------------------------------------------
Balance at September 30, 1999 $ - $ - $76,054 $2,524 $ - $ 78,578
===========================================================================
Balance at December 31, 1999 $ - $ - $77,221 $1,909 $ - $ 79,130
Net income - - 4,603 - - 4,603
Issuance of stock less offering costs 74 71,746 - - - 71,820
Change in unrealized gain on securities
available for sale, net of taxes - - - 1,029 - 1,029
ESOP unearned compensation:
acquisition of shares (7,514) (7,514)
release of shares - 20 - - 118 138
---------------------------------------------------------------------------
Balance at September 30, 2000 $74 $71,766 $81,824 $2,938 $(7,396) $149,206
===========================================================================
Port Financial Corp.
Consolidated Statements of Cash Flows
(In Thousands)
(Unaudited)
Nine Months Ended
September 30,
-------------------
2000 1999
---- ----
Cash flows from operating activities:
Net income $ 4,603 $ 3,607
Adjustments to reconcile net income to net cash provided
by operating activities-
Provision for possible loan losses 666 562
Depreciation and amortization 960 947
Amortization of premiums on investment securities, net 131 115
Gain on loan sales, net (159) (539)
(Increase) decrease in cash surrender value of life insurance policies 39 (63)
Proceeds from sale of loans 14,031 40,467
Loans originated for sale (16,425) (36,472)
Decrease in other assets 617 196
(Increase) in accrued interest receivable (2,515) (679)
(Decrease) in deferred loan fees (318) (86)
Increase (decrease) in accrued expenses and other liabilities 1,246 (1,365)
-----------------------
Net cash provided by operating activities 2,876 6,690
-----------------------
Cash flows from investing activities
Proceeds from sales, maturities and principal repayments of
Securities available-for-sale 13,383 37,418
Purchases of securities available-for-sale (54,680) (28,402)
Proceeds from sales, maturities and principal repayments of
held to maturity securities 479 -
Purchases of held to maturity securities (24,969) -
Proceeds from maturities of certificates of deposit 5,228 1,106
Purchase of certificates of deposit (179) (268)
Purchase of FHLB stock (499) (573)
Purchase of premises and equipment (12,766) (3,410)
Loan originations, net (88,016) (44,875)
Recoveries of loans previously charged-off 94 113
-----------------------
Net cash used in investing activities (161,925) (38,891)
-----------------------
Cash flows from financing activities:
Increase (decrease) in certificates of deposits (1,094) 14,775
Increase in demand deposits, NOW accounts and saving accounts 145,188 12,671
Increase in mortgagor's escrow payments 974 616
Additions to borrowings - 14,365
Repayment of borrowings (29,886) -
Gross proceeds on stock offering 74,428 -
Stock offering costs (2,608) -
ESOP (7,514) -
-----------------------
Net cash provided by financing activities 179,488 42,427
-----------------------
Net increase in cash and cash equivalents 20,439 10,226
Cash and cash equivalents, beginning of year 19,429 10,047
-----------------------
Cash and cash equivalents, end of period $ 39,868 $ 20,273
=======================
Supplemental disclosures of cash flows information:
Cash paid for interest $ 23,067 $ 18,873
=======================
Cash paid for income taxes $ 2,455 $ 2,117
=======================
See the accompanying notes to unaudited consolidated financial statements.
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 engages in the
investment of securities. Cambridgeport Bank is a Massachusetts-chartered
savings bank with its headquarters located in Cambridge, Massachusetts.
The Bank has two wholly owned subsidiaries, Temple Investment Corporation
and River Investment Corporation. Temple Investment Corporation and River
Investment Corporation both invest in securities. In addition,
Cambridgeport Bank is the sole member of Temple Realty LLC, which was
formed to own the land and the building of the Company's new administrative
center.
The unaudited consolidated financial statements of Port presented herein,
should be read in conjunction with the consolidated financial statements of
Cambridgeport Mutual Holding Company as of and for the year ended December
31, 1999, and the notes thereto. 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 2000 fiscal year.
2) Arlington Branch
During the second quarter ended June 30, 2000, the Bank received regulatory
approval to open a branch office in Arlington, Massachusetts a town
adjacent to Cambridge. The Bank entered into a lease of a branch bank
building formerly occupied by a major Boston-based bank, and commenced
operations on August 9, 2000.
3) Defined Benefit Plan Termination
On September 19, 2000, the Board of Directors of the Bank voted to amend
its employee benefit programs to provide for the cessation of pension
benefit accruals effective January 1, 2001 in conjunction with its
termination of the Defined Benefit Pension Plan ("Plan") effective January
1, 2001. Final Plan termination is subject to a valuation of the plan
including a determination of the benefit obligations as of January 1, 2001
and IRS and PBGC approvals. It is currently anticipated that the Bank will
record an after-tax net gain upon settlement and distribution of the Plan
assets during the first half of 2001. On an on-going basis, a portion of
the cost of providing the Plan will be reallocated to enhance 401(k)
benefits for employees.
SUBSEQUENT EVENTS
1) Quincy Branch
On October 4, 2000, the Bank entered into a Purchase and Assumption
Agreement with South Shore Savings Bank (the "Agreement"). Under the terms
of the Agreement, the Bank will sell to South Shore the deposits that are
related to its branch located in a Roche Bros. Supermarket in Quincy,
Massachusetts. The Bank has filed an application with the Commissioner of
Banks to close its Quincy Branch, effective April 9, 2001. The Bank has
also notified the FDIC of its intention to the close this branch. The Bank
expects to complete the sale of deposits to South Shore during the first
quarter of 2001.
2) Stock Repurchase Programs
On October 18, 2000, the Board of Directors authorized the Company, subject
to the approval of the Commissioner of Banks, to repurchase up to 297,712
shares in the open market in order to meet the anticipated needs of stock
awards issued in connection with the Port Financial Corp. 2000 Recognition
and Retention Plan. On October 18, 2000, the Board of Directors, subject to
the approval of the Commissioner of Banks, authorized the Company to
repurchase up to an additional 372,140 shares on the open market. The Board
of Directors delegated to the discretion of senior management the authority
to determine the timing of the repurchase programs' commencement. As of
November 6, 2000, the Company is awaiting approval of these programs from
the Commissioner of Banks.
3) Loans
The loan portfolio consisted of the following (in thousands):
September 30, December 31,
2000 1999
------------- ------------
(Unaudited)
Real estate loans-
Residential $353,441 $297,709
Commercial 223,448 212,833
Home equity lines of credit 75,593 62,458
Construction 12,333 3,716
------------------------
Total real estate loans 664,815 576,716
Commercial 1,693 1,348
Consumer 5,466 6,046
------------------------
Total loans 671,974 584,110
Less-Allowance for possible loan losses 7,811 7,081
------------------------
Total loans, net $664,163 $577,029
========================
4) Deposits
A summary of deposit balances, by type, is as follows (in thousands):
September 30, December 31,
2000 1999
------------- ------------
(Unaudited)
Demand deposit accounts $ 44,743 $ 29,777
NOW accounts 65,520 44,429
Regular savings accounts 52,633 53,346
Money market accounts 272,148 162,304
------------------------
Total noncertificate accounts 435,044 289,856
------------------------
Term certificates-
Term certificates less than $100,000 266,921 267,327
Term certificates of $100,000 and over 60,417 61,105
------------------------
Total term certificate accounts 327,338 328,432
------------------------
Total deposits $762,382 $618,288
========================
5) Business Segments:
Reportable segments and reconciliation to consolidated financial
information is as follows:
Community Consolidation
Banking Other Adjustments Consolidated
------- ----- ----------- ------------
(Unaudited)
(In Thousands)
September 30, 2000:
- -------------------
Investment securities available
for sale and held to maturity $162,225 $ 47,078 $ (10,393) $198,910
Loans, net 666,716 7.514 (7,514) 666,716
Total assets 900,191 160,312 (111,258) 949,245
Total deposits (1) 766,387 - - 766,387
Total liabilities 807,672 1,960 (9,593) 800,039
Total interest and dividend income 42,930 2,329 (248) 45,011
Total interest expense 23,380 - (248) 23,132
Net interest income 19,550 2,329 - 21,879
Provision for possible loan losses 666 - - 666
Total noninterest income 1,853 - - 1,853
Total noninterest expense 15,560 399 - 15,959
Net income 3,316 1,287 - 4,603
September 30, 1999:
- -------------------
Investment securities available
for sale and held to maturity $121,549 $ 24,041 $ - $145,590
Loans, net 537,761 - - 537,761
Total assets 693,695 80,305 (52,187) 721,813
Total deposits (1) 596,137 - - 596,137
Total liabilities 643,196 1,727 (1,688) 643,235
Total interest and dividend income 35,931 1,166 - 37,097
Total interest expense 18,944 - - 18,944
Net interest income 16,987 1,166 - 18,153
Provision for possible loan losses 562 - - 562
Total noninterest income 2,144 - - 2,144
Total noninterest expense 14,268 34 - 14,302
Net income 2,843 764 - 3,607
<FN>
(1) Includes mortgagors' escrow payments
</FN>
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"). As
part of its conversion, the Company converted from a Massachusetts-
chartered mutual holding company, 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, which is a
Massachusetts-chartered 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, 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 from four full
service offices to eleven full service offices and one 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. The Bank's branch expansion has increased its customer base and
allowed the Bank to increase its profitability by shifting its mix of
assets more towards higher yielding loans relative to investment
securities.
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 that it pays on
deposits.
Comparison of Financial Condition at September 30, 2000 and December 31,
1999
Total assets increased by $186.5 million from $762.7 million at December
31, 1999 to $949.2 million at September 30, 2000. This included $87.1
million of net loan growth, $67.3 million of investment securities, and
$20.4 million of cash and cash equivalents. The growth in assets was
funded by an increase in deposits and proceeds from the stock offering,
both of which are discussed below.
The loan growth occurred in all segments of the real estate portfolio:
residential mortgages, home equity loans, commercial real estate loans and
construction loans. Residential mortgages rose $55.7 million, reflecting
the favorable economic conditions during the period as well as a trend in
the market towards more adjustable rate mortgages, which the Bank retains
in its portfolio. Outstanding balances of home equity credit lines
increased $13.1 million during the nine-month period ended September 30,
2000. The Bank continues to promote its Home Equity Credit Line product
through advertising, direct mail and in-branch promotions. Loans secured
by commercial real estate rose $10.6 million, and commercial construction
loans rose $8.6 million during the period. The local market continues to
experience strong demand for commercial space, which has resulted in
financing opportunities for the Bank.
Total non-performing assets were $93,000 and $128,000 at September 30, 2000
and December 31, 1999, respectively. The allowance for loan losses was $7.8
million at September 30, 2000, or 1.17% of total loans. At December 31,
1999, the allowance for loan losses was $7.1 million, representing 1.21% of
total loans.
The increase in cash, cash equivalents and investments securities of $87.7
million results from the deployment of the capital raised in the stock
offering.
The growth in premises and equipment of $11.8 million reflects the
Company's investment in its new administrative center building. Building
construction was completed during the third quarter.
Deposits at September 30, 2000 totaled $762.4 million, an increase of
$144.1 million, or 23.3%, compared with $618.3 million at December 31,
1999. The increase in deposits during the first nine months of 2000
resulted primarily from the implementation of the Company's strategy to
build deposits by attracting core deposits from new customers in its market
area. During this period there was an unusually high level of demand for
community banking services by customers affected by the mergers among
several large banks. As part of its strategy, the Company actively
marketed its Treasury Index and REAL Savings money market accounts to these
disenfranchised customers. As a result of these marketing promotions,
money market account balances have increased $109.8 million, or 67.7%,
since December 31, 1999, while checking deposits have risen $36.1 million,
or 48.6% during the same period.
Time deposit balances ended the period at $327.3 million, down $1.1 million
from December 31, 1999. This reduction reflects movement of customer funds
from time deposits into other account types, as well as the intense
competition for time deposits among area financial institutions.
At September 30, 2000, borrowings from the Federal Home Loan Bank declined
by $29.9 million, to $26.0 million, as compared to $55.9 million at
December 31, 1999. The Bank repaid maturing borrowings with the proceeds
of the stock offering and growth in deposits.
The increase in stockholders' equity of $70.1 million to $149.2 million at
September 30, 2000 from $79.2 million at December 31, 1999 resulted from
the net proceeds of the stock offering, totaling $71.8 million, and net
income of $4.6 million for the nine-month period. These increases were
partially offset by $7.4 million of stock purchases for the Company's
Employee Stock Ownership Plan ("ESOP").
Comparison of Operating Results for the Three Months Ended September 30,
2000 and 1999
Net income was $1.7 million for the quarter ended September 30, 2000 or
$.24 per share, compared to $899,000 for the comparable prior year period.
The 2000 results include increases of $1.7 million in net interest income
and $271,000 in non-interest expense, and a decrease of $61,000 in non-
interest income.
Interest Income
Interest income increased $3.9 million, or 31.9%, to $16.3 million. This
increase resulted primarily from growth in the average balance of interest-
earning assets of $172.0 million, or 25.4%. Also, the yield on average
interest-earning assets rose by 37 basis points in the 2000 period. The
higher yield reflects a general rise in interest rates that occurred in the
latter half of 1999 and the first six months of 2000. The principal area
of growth in average asset balances was the loan portfolio, where average
balances were $648.6 million in the 2000 period, an increase of $122.7
million from the same period in 1999. The average yield on loans during
the quarter ended September 30, 2000 was 7.88%, compared with 7.51% in the
1999 period.
The average balance of investments was $201.8 million in the quarter ended
September 30, 2000 compared with $152.4 million in the same 1999 period.
This reflects the deployment of net proceeds from the stock offering and
the growth in deposits during the third quarter of 2000. The overall yield
in the 2000 quarter was 6.59%, up 58 basis points from the comparable 1999
quarter, reflecting the higher interest rate environment this year.
Interest expense
Total interest expense for the three months ended September 30, 2000 was
$8.6 million, an increase of $2.3 million, or 36.2% over the same period in
1999. This increase was due to higher average balances of interest bearing
deposits, which averaged $676.9 million in the quarter ended September 30,
2000 an increase of $117.3 million, or 21.0%, over last year's third
quarter average balance of $559.6. The bulk of this deposit increase was
in money market accounts, where average balances were $103.5 million higher
this period than in the third quarter of 1999.
The cost of interest bearing deposits rose 73 basis points to 4.85%, which
reflects increases in the cost of money market accounts and certificates of
deposit. Money market account costs rose to 5.44% in the recent quarter,
from 3.89% in the 1999 period. The promotion of the high-rate REAL Savings
money market account is the main reason behind the rise in money market
account costs. Certificate costs rose to 5.54% from 4.91% in 1999,
reflecting the higher rate environment in 2000.
As discussed above, the Bank borrowed $14.5 million from the Federal Home
Loan Bank in June 1999, to fund construction and acquisition of its new
administration center building. During the third quarter of 2000, $100,000
of interest paid on this loan was capitalized as part of the cost of the
building.
Net interest income
Net interest income increased 27.5% or $1.7 million in the third quarter of
2000 as compared to the same period last year. The net interest margin was
3.55%, up 6 basis points from 3.49% in the third quarter of 1999. The
interest rate spread was 2.72% in the quarter ended September 30, 2000,
compared with 3.0% last year.
Provision for Possible Loan Losses
The Company recorded a provision for loan losses of $250,000 for the
quarter ended September 30, 2000 and $290,000 in the same quarter of 1999.
At September 30, 2000 the allowance for possible loan losses stood at $7.8
million, or 1.17% of total loans, compared with $7.3 million, or 1.34% of
total loans, at September 30, 1999.
Non-Interest Income
Non-interest income totaled $736,000 in the third quarter of 2000 as
compared to $797,000 in the third quarter of 1999, a decrease of $61,000 or
7.7%. Customer service fees of $269,000 were up $56,000, or 26.3%, over
the 1999 quarter. This is largely the result of checking account fees.
The Bank has seen an increase in the number of new checking accounts, the
result of the Company's strategy to attract new checking account customers
who have been affected by the large bank merger activity in the region.
Loan sale gains of $86,000 represents a decline of $34,000 from the 1999
period. Loan sale gains are generated from the sale of fixed rate
residential mortgages. The low interest rate environment that prevailed in
the third quarter of 1999 produced a high level of fixed rate mortgage
applications, which in turn resulted in loan sale gains. As interest rates
rose, the number of fixed rate mortgage applications declined in late 1999
and 2000, which has reduced the opportunity for loan sale gains.
Other non-interest income was $261,000 in quarter ended September 30, 2000,
down $141,000 from the 1999 period, which included a $263,000 increase in
cash surrender value of life insurance policies. The third quarter of 2000
included a $49,000 increase in the cash surrender value of those policies.
Non-Interest Expense
Non-interest expense increased $271,000, or 5.1%, to $5.6 million for the
third quarter of 2000, compared to $5.3 million in the 1999 period.
Compensation and benefits expenses were $3.1 million in the third quarter
of 2000, an increase of $145,000, or 4.9%, over the same period last year.
This reflects the costs of attracting and retaining employees in a
competitive employment market, additional staff required to support the
Bank's growth as well as expenses of the Company's new public company
benefit plans. One-time charges in both periods include $278,000
associated with staff reorganization and elimination of several positions
in the 2000 period, and compensation expense of $578,000 resulting from the
curtailment of a pension plan in 1999.
Occupancy and equipment expense rose $82,000, or 10.5%, in the third
quarter of 2000 from the prior year period. This increase is related to
lease expense for the Bank's new branch in Arlington, Massachusetts, which
opened in August, and investment in the new administrative building. Lease
commencement for a major tenant in the new building occurred on October 1,
2000. Marketing expenses declined $105,000 from the third quarter of 1999,
primarily as a result of timing of marketing campaigns. Other non-interest
expense of $1.1 million in the 2000 quarter, an increase of $182,000 over
the same period in 1999, reflects increased professional service expenses.
The use of professional services was primarily attributable to costs
associated with being a public company, including the October 18, 2000
special meeting of shareholders.
The annualized expense ratio, the ratio of non-interest expense to average
assets, was 2.47% for the three months ended September 30, 2000, as
compared to 2.99% for the 1999 period.
Provision for Income Taxes
The Company's effective tax rate for the September 30, 2000 quarter was
34.2% as compared to 24.8% for the same 1999 quarter. The lower effective
tax rate for the three months ended September 1999 was due to the increase
in nontaxable cash surrender value of life insurance policies.
Comparison of Operating Results for the Nine-Month Periods Ended September
30, 2000 and 1999
Net income was $4.6 million for the nine month period ended September 30,
2000 compared to $3.6 million for the same period in 1999. The 2000
results include an increase of $3.7 million in net interest income, a
decrease of $291,000 in non-interest income, and increases of $104,000 in
provision expense and $1.7 million in non-interest expense.
Interest Income
Interest income was $45.0 million for the nine month period ended September
30, 2000, representing a $7.9 million increase, or 21.3%, over the 1999
results. Growth in the average balance of interest-earning assets totaling
$124.7 million, or 18.4%, is the primary reason for the higher level of
interest income. The yield on earning assets also rose by 23 basis points,
reflecting the higher rate environment prevailing in the first nine months
of 2000. The principal area of earning asset growth was the loan portfolio,
with an average balance of $616.5 million in the first nine months of 2000,
representing an increase of $99.1 million, or 19.1%, over the average loan
balance of $517.4 million in the 1999 period. Residential mortgages and
other consumer real estate loans made up most of this growth, which
reflects strong regional economic conditions and the Company's strategy to
originate and hold adjustable rate mortgages in the portfolio. Commercial
real estate average balances also rose, as a result of the Company's
strategy to expand commercial real estate lending.
Cash equivalents and investment securities averaged $184.7 million in the
first nine months of 2000, $25.6 million higher than the 1999 period. Most
of the portfolio growth occurred after the stock offering, which provided
funding for the purchase of investment securities. The overall yield in
the 2000 period was 6.51%, an increase of 47 basis points from the first
nine months of 1999, reflecting the higher interest rate environment this
year.
Interest Expense
Interest expense for the nine months ended September 30, 2000 was $23.1
million, an increase of $4.2 million, or 22.1%, over the same period in
1999. As explained above, deposits have grown significantly during the
2000 period with balances of interest bearing deposits averaging $633.0
million. This amount reflects an increase of $78.9 million, or 14.2%, over
last year's average balance of $554.1 million. The average cost of
interest bearing deposits rose 38 basis points to 4.57%. Most of this
increase is attributable to an increase of 121 basis points in the average
cost of Money Market accounts. This category includes the promotional REAL
Savings money market account, which has a yield of 6.25% guaranteed through
March 31, 2001. REAL Savings money market account balances were $117.5
million at September 30, 2000.
Borrowings averaged $41.3 million for the first nine months of September
30, 2000, an increase of $4.4 million over the 1999 period. The $14.5
million Federal Home Loan Bank advance, used to finance the construction of
the administrative center building, was outstanding for four out of the
nine months of the 1999 period, but was fully outstanding in the 2000
period. During the first nine months of 2000, $467,000 of interest paid on
this loan was capitalized as part of the cost of the building.
Net interest income
Net interest income of $21.9 million was $3.7 million higher than the in
the same1999 period. The net interest margin was 3.62%, up 5 basis points
from 3.57% in 1999, while the interest rate spread was 2.84% in the 2000
period, compared with 2.90% last year.
Provision for Possible Loan Losses
The provision for loan losses of $666,000 in the first nine months of 2000
represents an increase of $104,000 over the 1999 period, and reflects
growth in the loan portfolio.
Non-Interest Income
Non-interest income totaled $1.9 million in the first nine months of 2000,
down from $2.1 million a year earlier. The major factor in the decrease
was a decline in loan sale gains totaling $380,000 from the 1999 period.
The low interest rate environment that prevailed during the first nine
months of 1999 produced a high 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. As interest rates
have risen, fixed rate mortgage production, and loan sales, have declined.
Customer service fees, primarily fees related to consumer transaction
accounts, increased to $749,000 in the first nine months of 2000 from
$622,000 in the same 1999 period. The volume of new checking accounts, as
well as ATM and debit card activity, are the major reasons for the rise in
customer service fees.
Non-Interest Expense
Non-interest expense increased $1.7 million, or 11.6%, to $16.0 million for
the nine month period ended September 30, 2000. Compensation and employee
benefit costs rose $1.2 million, 15.1% above the first nine months of 1999,
reflecting the additional staff for new business initiatives, annual wage
adjustments, and the cost of new stock-based benefit plans.
The annualized expense ratio for the nine-month periods were 2.52% in 2000
and 2.72% in 1999.
Provision for Income Taxes
The Company's effective tax rate for the September 30, 2000 period was
35.23% compared to 33.61% for the 1999 period. The effective tax rate for
the nine months ended September 30, 1999 was due to an increase in
nontaxable cash surrender value of life insurance policies.
Port Financial Corp.
Average Balance Sheet
For the Nine Months Ending September 30, 2000 and 1999
(Unaudited)
2000 1999
------------------------------ -----------------------------
Average Average
Average Yield/ Average Yield/
Balance Interest Cost Balance Interest Cost
---------------------------------------------------------------
(Dollars in thousands)
Assets:
Interest earning assets:
Short term investments(1) $ 18,894 $ 966 6.83% $ 13,411 $ 593 5.91%
Certificates of deposit 2,022 109 7.20% 5,525 295 7.14%
Investment securities(2) 163,814 7,952 6.48% 140,208 6,322 6.04%
Loans(3) 616,495 35,984 7.69% 517,428 29,887 7.52%
-------------------- --------------------
Total interest earning assets 801,225 45,011 7.42% 676,572 37,097 7.19%
------- -------
Total noninterest earning assets 45,303 25,629
-------- --------
Total assets $846,528 $702,201
Liabilities and Equity:
Interest bearing liabilities:
NOW accounts $ 51,385 $ 503 1.31% $ 39,618 $ 417 1.41%
Savings accounts 54,277 809 1.99% 54,025 845 2.09%
Money market deposit accounts 205,921 7,736 5.02% 138,831 3,955 3.81%
Certificate of deposit accounts 321,445 12,588 5.23% 321,610 12,144 5.05%
-------------------- --------------------
Total interest bearing deposits 633,028 21,636 4.57% 554,084 17,361 4.19%
Borrowed funds 41,281 1,496 4.76% 36,883 1,583 5.66%
-------------------- --------------------
Total interest bearing liabilities 674,309 23,132 4.58% 590,967 18,944 4.29%
Noninterest bearing deposits 42,818 29,097
Other noninterest bearing liabilities 7,523 5,883
-------- --------
Total noninterest bearing liabilities 50,341 34,980
Total liabilities 724,650 625,947
Total retained earnings 121,878 76,254
-------- --------
Total liabilities and retained earnings $846,528 $702,201
======== ========
Net interest income $21,879 $18,153
======= =======
Net Interest rate spread (4) 2.84% 2.90%
Net interest margin (5) 3.62% 3.62% 3.57%
Ratio of average interest-earning assets
to average interest-bearing liabilities 119.89 115.18
<FN>
(1) Short term investments includes federal funds sold.
(2) All investments securities are considered available for sale and
carried at market value.
(3) Loans are net of deferred loan origination costs(fees), allowance for
possible loan losses and unadvanced funds.
(4) 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.
(5) Net interest margin represents net interest income as a percentage of
average interest earning assets.
</FN>
Port Financial Corp.
Rate/Volume Analysis
Nine Months Ending September 30, 2000
Increase/(Decrease)
Due to
-----------------
Volume Rate Net
----------------------------
(In thousands)
Interest earning assets:
Short term investments $ 270 $ 103 $ 373
Certificates of deposit (188) 2 (186)
Investment securities 1,171 459 1,630
Loans 5,452 645 6,097
------------------------------
Total interest earning assets 6,705 1,209 7,914
------------------------------
Interest bearing liabilities:
NOW accounts 113 (27) 86
Savings accounts 4 (40) (36)
Money market deposit accounts 2,282 1,499 3,781
Certificate of deposit accounts (6) 450 444
Borrowed funds 261 (348) (87)
------------------------------
Total interest bearing liabilities 2,654 1,534 4,188
------------------------------
Change in net interest income $4,051 $ (325) $3,726
==============================
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 September 30, 2000 was approximately $303
million, net of borrowings that were already 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.
At September 30, 2000, the Company exceeded each of the applicable
regulatory capital requirements. The Company's leverage Tier 1 capital was
$146.3 million, or 25.4% of risk-weighted assets, and 16.2% of average
assets. The Company had a risk-based total capital of $155.9 million and a
risk-based capital ratio of 27.1%.
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 nine months ended September 30, 2000 and September 30, 1999.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
In Management's opinion, there has been no material change in market risk
since disclosed in Item 7A of the Company's Annual Report on Form 10-K for
the year ended December 31, 1999.
Part II - OTHER INFORMATION
-----------------
Item 1. Legal Proceedings
None
Item 2. Defaults Upon Senior Securities
None
Item 3. Submission of Matters to a Vote of Security Holders
None
Item 4. Other Information
None
Item 5. Exhibits and Reports on Form 8-K
(a) Exhibit 10.1 - Form of Employment Agreement for Charles
Jeffrey
Exhibit 27.1 - Financial Data Schedule (Filed in
electronic format only)
(b) Reports on Form 8-K
None
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its benine
months 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
November 9, 2000