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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
450 Fifth Street, N.W.
Washington, D.C. 20549
FORM 10-K
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 [FEE REQUIRED] For the Fiscal Year Ended December
31, 1997
OR
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 [NO FEE REQUIRED]
For the transition period from _______________ to _____________________
Commission File Number 0-22641
PEOPLES BANCORP, INC.
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(Exact name of registrant as specified in its charter)
United States 22-3516910
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
134 Franklin Corner Road, Lawrenceville, New Jersey 08648-0950
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(Address of Principal Executive Offices) Zip Code
(609) 844-3100
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(Registrant's telephone number)
Securities Registered Pursuant to Section 12(b) of the Act: None
<TABLE>
<CAPTION>
<S> <C>
Securities Registered Pursuant to Section 12(g) of the Act: Common Stock, par value $.10 per share
--------------------------------------
(Title of Class)
</TABLE>
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
requirements for the past 90 days. YES _X_ NO ___
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X].
As of February 28, 1997, there were issued and outstanding 9,046,444
shares of the Registrant's Common Stock, including 5,796,000 shares held by
Peoples Bancorp, MHC. The aggregate market value of the voting stock held by
nonaffiliates of the Registrant, computed by reference to the closing sales
price of the Registrant's stock, as reported on the Nasdaq National Market on
March 20, 1998, was approximately $125.4 million.
DOCUMENTS INCORPORATED BY REFERENCE
None
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PART I
ITEM 1. BUSINESS
The Mid-Tier Holding Company
Peoples Bancorp, Inc. (the "Mid-Tier Holding Company") was formed to
become the stock holding company of the Trenton Savings Bank (the "Bank") in the
two-tier reorganization (the "Two-Tier Reorganization") of the Bank and Peoples
Bancorp, MHC (the "Mutual Holding Company"), which was completed in July 1997.
In the Two-Tier Reorganization, all of the outstanding shares of the Bank's
common stock ("Bank Common Stock"), including shares held by the Peoples
Bancorp, MHC (the "Mutual Holding Company") and stockholders other than the
Mutual Holding Company (the "Minority Stockholders"), were converted into shares
of common stock of the Mid-Tier Holding Company ("Mid-Tier Common Stock"), and
the Bank became the wholly-owned subsidiary of the Mid-Tier Holding Company. As
of December 31, 1997, the Mid-Tier Holding Company's only material asset
consisted of 100% of the outstanding shares of common stock of the Bank.
References herein to the operations of the Bank subsequent to the date of the
Two-Tier Reorganization also refer to the consolidated operations of the
Mid-Tier Holding Company, unless otherwise indicated by the context.
The Mutual Holding Company and the Conversion of the Mutual Holding Company to
the Stock Form of Organization
The Mutual Holding Company is a federal mutual holding company that was
organized on August 3, 1995 in connection with the mutual holding company
reorganization of the Bank's mutual savings bank predecessor. The Mutual Holding
Company has no material assets other than Mid-Tier Common Stock.
On September 24, 1997, the Board of Directors of the Mutual Holding
Company unanimously adopted the Plan of Conversion and Reorganization (the "Plan
of Conversion"), pursuant to which the Mutual Holding Company will convert from
a federally chartered mutual holding company to a Delaware chartered stock
corporation (the "Conversion"). As part of the Conversion each of the issued and
outstanding shares of Mid-Tier Common Stock held by Minority Stockholders
("Minority Shares") shall automatically, without further action by the holder
thereof, be converted into and become a right to receive shares of common stock
(the "Common Stock") of Peoples Bancorp, Inc., a Delaware corporation (the
"Company"). The number of shares that Minority Stockholders will receive for
each share of Mid-Tier Common Stock (the "Exchange Ratio") will be between
2.4580 shares and 3.8243 shares--the exact number will not be know until the
completion of the Conversion. As part of the Conversion, the Company will sell
between 15.3 million and 23.8 million shares of Common Stock for a subscription
price of $10.00 per share in a subscription and community offering (the
"Offering"). The Conversion is expected to be completed in April 1998.
The following diagrams outline (i) the current organization structure
of the Mutual Holding Company, the Mid-Tier Holding Company, and the Bank and
its subsidiaries and (ii) the organizational structure of the Company and the
Bank and its subsidiaries following the Conversion.
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Current organizational structure:
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Mutual Holding Company Minority Stockholders
------------------------------- --------------------------
64.1% 35.9%
-----------------------------------
Mid-Tier
Holding Company
-----------------------------------
100%
-----------------------------------
Bank
-----------------------------------
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Manchester Trust Bank TSBusiness Finance
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Organizational structure following the Conversion:
-----------------------------------
Public Stockholders
-----------------------------------
100%
-----------------------------------
Company
-----------------------------------
100%
-----------------------------------
Bank
-----------------------------------
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Manchester Trust Bank TSBusiness Finance
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The Bank
Chartered by the New Jersey State Legislature on March 7, 1844, the
Trenton Savings Fund Society was founded to promote thrift in the area of
Trenton, New Jersey. It adopted the name "Trenton Savings Bank" in early 1990.
Throughout its history, the Bank has been engaged in lending funds to home
buyers, consumers, and businesses within its local community. The Bank has
maintained a commitment to conservative lending practices, community service and
control of operating expenses, resulting in a strong capital position.
Management believes that this philosophy enabled the Bank to survive the Civil
War, the Great Depression, two World Wars, two stock market crashes
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and the 1980s crisis in the banking and thrift industries. At December 31, 1997,
the Bank had $640.4 million of total assets, $493.4 million of total deposits,
and $110.0 million of total stockholders' equity.
The Bank conducts its business from a corporate center located in
Lawrenceville, New Jersey, 14 branch offices located in Mercer, Burlington and
Ocean Counties, New Jersey, and a trust services subsidiary with an office in
Ocean County, New Jersey. On January 1, 1995, the Bank completed a charter
change from a New Jersey chartered mutual savings bank to a federally chartered
mutual savings bank, permitting expansion of branch offices into adjacent market
areas in Pennsylvania, and the OTS has recently approved, and the Bank intends
to establish, a branch office in Bucks County, Pennsylvania. In the
Reorganization on August 3, 1995, the Bank's mutual predecessor reorganized from
a federally chartered mutual savings bank into the Mutual Holding Company and
concurrently formed the Bank, which succeeded to the name and operations of the
Bank's mutual predecessor. At the time of the Reorganization, the Bank conducted
a stock offering (the "Minority Stock Offering") in which it raised $29.6
million of net proceeds.
The Bank has traditionally operated as a community-oriented savings
institution providing mortgage loans and other traditional financial services to
its local community. The Bank is primarily engaged in attracting deposits from
the general public through its offices and using those funds to originate loans
secured by one-to-four family residences primarily located in Mercer and
Burlington Counties where the Bank's offices are located, as well as in
neighboring Bucks County, Pennsylvania. In recent years the Bank has
substantially increased its portfolio of mortgage loans secured by multi-family
and commercial real estate, commercial business loans, consumer loans and home
equity and property improvement loans. The Bank also has a securities portfolio
consisting of U.S. Treasury and federal government agency obligations, corporate
and municipal bonds and mortgage-backed securities issued by federal agencies.
The Bank's executive offices are located at 134 Franklin Corner Road,
Lawrenceville, New Jersey, and its telephone number at that location is (609)
844-3100.
Market Area
The Bank conducts business through its 14 branch offices located in the
central New Jersey counties of Mercer, Burlington and Ocean, and a trust
services subsidiary located in Ocean County, New Jersey. The Bank's market area
for loans includes neighboring Bucks County, Pennsylvania which borders to the
west of Mercer County, New Jersey. Lawrenceville, New Jersey, where the Bank is
headquartered, is located in Mercer County which had a population of
approximately 326,000 according to the 1990 Census. Population is forecasted to
be 368,000 by 1999. Ocean County, which is located along the central New Jersey
shore, is among the fastest growing population areas in New Jersey. Ocean
County's population is comprised of a significant number of retired residents.
The Bank's market area is both urban and suburban. Trenton, which is in
Mercer County, is the capital of the State of New Jersey. The two largest
employers in Mercer County are the State of New Jersey and Princeton University.
Other large employers in the Bank's market area include Lockheed Martin,
Princeton Medical Center, Bristol-Myers Squibb, N.J. Manufacturers, Helene Fuld
Medical and Educational Testing Services.
The economy in the Bank's market area has remained relatively stable in
recent years. The unemployment rates in Mercer and Burlington Counties were 5.7%
and 5.2%, respectively during 1996.
Lending Activities
Loan Portfolio Composition. The principal components of the Bank's loan
portfolio are mortgage loans secured by one- to four-family residential real
estate and, to a lesser extent, commercial and multi-family residential real
estate. In addition, the Bank's loan portfolio includes non-mortgage loans which
include home equity loans, commercial business loans, and other consumer loans.
At December 31, 1997, the Bank's total loans receivable totaled $400.0 million,
of which $242.4 million, or 60.7%, were one- to four-family residential real
estate mortgage loans, $39.8 million, or 9.9%, were commercial and multifamily
residential real estate loans, $34.7 million, or 8.6%, were home
3
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equity loans, $62.6 million, or 15.7%, were commercial business loans, and $20.5
million, or 5.1%, were other consumer loans.
As a federally chartered savings bank, the Bank has general authority
to originate and purchase loans secured by real estate located throughout the
United States. Notwithstanding this nationwide lending authority, the mortgage
loans of the Bank are primarily secured by properties located in Mercer,
Burlington and Ocean Counties, New Jersey, and Bucks County, Pennsylvania.
4
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Loan Portfolio Composition. The following table sets forth information
regarding the composition of the Bank's loan portfolio by type of loan at the
dates indicated.
<TABLE>
<CAPTION>
At December 31,
------------------------------------------------------------------------------------
1997 1996 1995 1994
---- ---- ---- ----
Amount Percent Amount Percent Amount Percent Amount Percent
-------- ------- -------- ------- -------- ------- -------- -------
(In Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Mortgage loans:
One- to four-family
real estate.................. $242,449 60.7% $239,470 62.5% $227,717 74.0% $228,133 78.3%
Commercial real estate
and multi-family............. 39,760 9.9 53,415 14.0 27,827 9.0 23,833 8.2
-------- ----- -------- ----- -------- ----- -------- -----
Total mortgage loans...... 282,209 70.6 292,885 76.5 255,544 83.0 251,966 86.5
Non-mortgage loans:
Home equity loans (1)......... 34,657 8.6 28,138 7.3 21,833 7.1 22,043 7.6
Commercial business loans..... 62,622 15.7 34,486 9.0 11,573 3.8 8,998 3.1
Other consumer loans (2)...... 20,513 5.1 27,478 7.2 18,783 6.1 8,256 2.8
-------- ------ -------- ----- -------- ----- -------- -----
Total non-mortgage loans.... 117,792 29.4 90,102 23.5 52,189 17.0 39,297 13.5
Total loans............. 400,001 100.0% 382,987 100.0% 307,733 100.0% 291,263 100.0%
===== ===== ===== =====
Net deferred costs (fees)..... (154) 226 104 (117)
Premiums (discounts).......... 16 (24) 23 --
Allowance for possible
loan losses.................. (3,415) (2,901) (1,767) (1,642)
-------- -------- -------- --------
Net loans................... $396,448 $380,288 $306,093 $289,504
======== ======== ======== ========
<PAGE>
At December 31,
-------------------
1993
----
Amount Percent
-------- -------
(In Thousands)
<S> <C> <C>
Mortgage loans:
One- to four-family
real estate.................. $206,585 80.2%
Commercial real estate
and multi-family............. 18,972 7.4
-------- -----
Total mortgage loans...... 225,557 87.6
Non-mortgage loans:
Home equity loans (1)......... 19,117 7.4
Commercial business loans..... 7,300 2.9
Other consumer loans (2)...... 5,513 2.1
-------- ------
Total non-mortgage loans.... 31,930 12.4
Total loans............. 257,487 100.0%
=====
Net deferred costs (fees)..... 360
Premiums (discounts).......... --
Allowance for possible
loan losses.................. 1,471
--------
Net loans................... $255,656
========
</TABLE>
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(1) Includes home equity credit lines and second mortgages.
(2) Includes student loans, installment loans and auto loans.
5
<PAGE>
Contractual Principal Repayments and Interest Rates. The following
table sets forth the maturity of the Bank's loan portfolio at December 31, 1997.
Demand loans, loans having no stated schedule of repayments and no stated
maturity, and overdrafts are reported as due in one year or less.
<TABLE>
<CAPTION>
Due Within Due 1-3 Due 3-5 Due 5-10 Due 10+
One Year Years Years Years Years Total
---------- ------- ------- -------- ------- -----
(Dollars In Thousands)
<S> <C> <C> <C> <C> <C> <C>
Total mortgage loans........................ $15,636 $15,656 $45,485 $73,149 $132,283 $282,209
Total non-mortgage loans.................... 51,417 13,281 26,128 11,027 15,939 117,792
------- ------- ------- ------- -------- --------
Total loans................................. $67,053 $28,937 $71,613 $84,176 $148,222 $400,001
======= ======= ======= ======= ======== ========
</TABLE>
Fixed- and Adjustable-Rate Loan Schedule. The following table sets
forth the dollar amount of total loans due after one year from December 31, 1997
which have fixed interest rates or which have floating or adjustable interest
rates.
Fixed Adjustable
Rates Rates Total
----- ---------- -----
(Dollars In Thousands)
Mortgage loans................... $ 99,538 $ 167,035 $ 266,573
Non-mortgage loans............... 51,230 15,145 66,375
----------- --------- ----------
Total loans...................... $ 150,768 $ 182,180 $ 332,948
=========== ========= ==========
Scheduled contractual amortization of loans does not reflect the
anticipated actual term of the Bank's loan portfolio. The average life of loans
is substantially less than their contractual terms because of prepayments and
due on sale clauses, which give the Bank the right to declare a conventional
loan immediately due and payable in the event, among other things, that borrower
sells the real property subject to the mortgage.
Loan Originations and Underwriting. The lending activities of the Bank
are subject to written, non-discriminatory, underwriting standards and the loan
origination procedures established by the Bank's Board of Directors. Loan
originations are obtained by a variety of sources, including referrals from real
estate brokers, developers, builders, existing customers, newspaper, radio,
periodical advertising and walk-in customers. Loan applications are taken by
lending personnel, and the loan department supervises the obtainment of credit
reports, appraisals and other documentation involved with a loan. Property
valuations are performed by one of a list of licensed independent certified
appraisers approved annually by the Board of Directors. The Bank generally
requires title insurance on all first mortgage loans secured by real estate.
Hazard insurance is also required on all secured property and flood insurance is
required if the property is within a designated flood plain.
The Bank's loan approval process assesses the borrower's ability to
repay the loan and the adequacy of the value of the property that will secure
the loan. A loan application file is first reviewed by a loan officer of the
Bank and then is submitted for approval to an officer with specific delegated
authority from the Board of Directors to approve that type of loan up to a
certain amount. The legal lending limit of the Bank at December 31, 1997 was
$16.5 million. In March of 1996, the Board of Directors approved an increase in
the internal lending limit to one borrower to $5.0 million from $2.5 million,
and an increase in the maximum non-commercial mortgage loan limit to $1.0
million from $500,000. In general, the maximum home equity loan the Bank will
make is $100,000 and the maximum installment (automobile) loan the Bank will
make is $50,000. The Bank can exceed these limitations on a case-by-case basis
and intends to reevaluate the limitations after the completion of the
Conversion.
6
<PAGE>
The following table shows loans originated, purchased, loan reductions
and the net change in the Bank's loan portfolio during the years indicated.
<TABLE>
<CAPTION>
Years Ended December 31,
1997 1996 1995
----------- ----------- --------
(Dollars In Thousands)
<S> <C> <C> <C>
Loans receivable at beginning of period......................... $ 382,987 $ 307,733 $ 291,263
Originations:
Residential.................................................. 24,801 42,318 23,363
Commercial real estate and multifamily....................... 15,144 4,142 8,811
Commercial business loans.................................... 40,553 14,474 5,307
Home equity.................................................. 11,808 11,578 6,662
Other........................................................ 11,089 16,787 16,375
--------- ---------- ----------
Total originations.............................................. 103,395 89,299 60,518
Purchased residential mortgage loans............................ -- 1,534 5,038
Loans acquired.................................................. -- 48,229 --
Transfer of mortgage loans to foreclosed real estate............ (352) (682) --
Repossession of assets in lieu of loans......................... (22) (41) (34)
Net charge offs................................................. (1,160) (52) (25)
Repayments...................................................... (84,847) (63,033) (49,027)
--------- ---------- ----------
Net loan activity............................................... 17,014 75,254 16,470
--------- ---------- ----------
Total loans receivable at end of period..................... $ 400,001 $ 382,987 $ 307,733
========= ========== ==========
</TABLE>
One- to Four-Family Real Estate Loans. The primary lending activity of
the Bank is the origination of loans secured by first mortgage liens on one- to
four-family residences. At December 31, 1997, $242.4 million, or 60.7%, of the
Bank's total loan portfolio consisted of one- to four-family real estate loans.
The loan-to-value ratio, maturity and other provisions of loans made by
the Bank generally have reflected the policy of making less than the maximum
loan permissible under regulations in accordance with sound practices, market
conditions and underwriting standards established by the Bank. The Bank's
lending policies on one- to four-family owner occupied real estate loans
generally limit the maximum loan-to-value ratio to 80% of the lesser of the
appraised value or purchase price of the property and 75% of the appraised value
or purchase price on condominiums.
As of December 31, 1997, the Bank offered 30-year fixed and adjustable
rate mortgage loans on one- to four-family residences. The Bank began to
originate 30-year fixed-rate mortgage loans in early 1996. All residential
mortgage loans are amortized on a monthly basis with principal and interest due
each month. These loans include "due on sale" clauses, which are provisions
giving the Bank the right to declare a loan immediately due and payable in the
event the borrower sells or otherwise disposes of the real property subject to
the mortgage. The Bank enforces due on sale clauses to the extent permitted
under applicable laws. Substantially all of the Bank's residential mortgage loan
portfolio consists of conventional loans.
The Bank offers adjustable rate one- to four-family real estate loans,
originated directly, which are fully amortizing loans with contractual
maturities of up to 30 years. These loans have interest rates which are
scheduled to adjust in accordance with designated indices. Initial rates are
fixed for one, three, five or seven years before adjusting annually. The Bank
currently offers its adjustable rate mortgage loans with a 2% cap on the rate
adjustment per year and a 6% rate adjustment cap over the life of the loan. The
Bank's underwriting standards for one year adjustable rate mortgages requires
that it assess a potential borrower's ability to make principal and interest
payments based on the initial note rate or the current index rate, whichever is
greater at the time of application. Adjustable rate mortgages with initial
payment periods greater than one year utilize the initial note rate. The Bank's
adjustable rate mortgage loans are not convertible by their terms into fixed
rate loans, do not contain prepayment penalties and do not produce negative
7
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amortization. The Bank's loans are frequently underwritten according to criteria
which do not conform to those established by Fannie Mae or Freddie Mac. Although
this may prohibit the sale of loans in the secondary market to these entities,
management still considers the Bank's portfolio very salable to other investors,
and may consider selling loans in the secondary market in the future. However,
the Bank has historically originated loans for its own portfolio.
Commercial and Multi-family Residential Real Estate Mortgage Loans. At
December 31, 1997, $39.8 million, or 9.9%, of the Bank's total loan portfolio
consisted of loans secured by multi-family and commercial real estate. The
Bank's multi-family and commercial mortgage loans include primarily loans
secured by apartment buildings, small office buildings and small retail
establishments. Substantially all of the Bank's multi-family and commercial
mortgage loans are secured by properties located in the Bank's primary market
area. Management believes that multi-family and commercial mortgage loans will
continue to be an integral component of the Bank's loan portfolio. Originations
of multi-family and commercial mortgage loans amounted to $15.1 million, $4.1
million and $8.8 million, or 14.6%, 4.6% and 4.6% of total loan originations
during fiscal 1997, 1996 and 1995, respectively.
The Bank originates both fixed and adjustable rate multi-family and
commercial mortgage loans. The Bank currently offers multi-family and commercial
mortgage loans with terms generally up to ten years amortizing over no more than
a 20-year period, with no more than five years at a fixed rate of interest.
Pursuant to the Bank's underwriting standards, it offers multi-family and
commercial mortgage loans with loan-to-value ratios generally up to 70% of the
lower of the purchase price or an independent appraisal. Those standards also
generally require that the cash flow from the collateral, after consideration of
expense and vacancy assumptions, be at least 120% of the debt service.
The Bank requires appraisals of substantially all properties securing
multi-family and commercial real estate loans. All appraisals are performed by
an independent licensed appraiser from a list of appraisers approved by the
Bank. In originating multi-family and commercial mortgage loans, the Bank
considers the value of the property, the credit history of the borrower, cash
flow of the project, location of the real estate and the quality of management
involved with the property. Multi-family and commercial mortgage loans to
corporations are generally guaranteed by the principals.
The Bank may also require an environmental audit on such loans.
Multi-family and commercial mortgage lending is generally considered to
involve a higher degree of credit risk than one- to four-family residential
lending. Such lending typically involves large loan balances concentrated in a
single borrower or groups of related borrowers. In addition, the payment
experience on loans secured by income-producing properties is typically
dependent on the successful operation of the related real estate project and
thus may be subject to a greater extent to adverse conditions in the real estate
market or in the economy generally.
The Bank also offers construction loans on commercial real estate
properties. Construction financing is generally considered to involve a higher
degree of credit risk than long-term financing on improved, owner-occupied real
estate because of the uncertainties of construction, including the possibility
of costs exceeding the initial estimates. Construction lending is generally
limited to the Bank's primary lending area. Construction loans are structured to
be converted to permanent loans at the end of the construction phase, which
typically is no more than nine months. Construction loans have terms which
generally match the non-construction loans then offered by the Bank except that
during the construction phase the borrower only pays interest on the loan.
Home Equity Loans. The Bank offers home equity fixed rate, home equity
credit line and FHA Title I property improvement loans. The home equity
portfolio amounted to $34.7 million, or 8.6%, of the total loan portfolio as of
December 31, 1997. Of this amount, $25.1 million were in the form of home equity
fixed rate loans; $8.2 million were in the form of home equity credit lines; and
$1.2 million were in the form of second mortgages. FHA Title I property
improvement loans amounted to $200,000.
The home equity fixed rate loan is available on any owner-occupied one-
to four-family home, townhouse, or condominium in the Bank's lending area. It is
a fixed-rate mortgage which is based on the equity in the home, and is generally
secured by a first or second mortgage on the residence. Loan amounts generally
range from $5,000 to
8
<PAGE>
$100,000 (up to 75% of the appraised value of the home less any outstanding
senior mortgage/lien). The current maximum term is 180 months.
The home equity credit line is available on any owner-occupied one- to
four-family home, townhouse, or condominium in the Bank's lending area. It is a
variable rate mortgage which is based on the equity in the home, and is
generally secured by a first or second mortgage on the residence. Loan amounts
generally range from $5,000 to $100,000 (up to 75% of the appraised value of the
home less any outstanding senior mortgage/lien).
The FHA Title I property improvement loan is a fixed-rate installment
loan available on any owner-occupied one- to four-family home in the Bank's
lending area. Under the Title I program, the Bank makes loans from their own
funds to eligible borrowers to finance property improvements, and the U.S.
Department of Housing and Urban Development ("HUD") insures the Bank against
loss if the borrower(s) defaults. Title I loans are not government loans or
grants, and are not low interest-rate loans. HUD does not lend money or regulate
interest rates. Currently, the maximum loan amount is $25,000, and the maximum
term is 180 months. Any loan amount over $7,500 is secured by a mortgage on the
property. The Bank conducts an on-site inspection on any property improvement
loan where the principal obligation is $7,500 or more, and where the borrower(s)
fails to submit a completion certificate.
The second mortgage portfolio consists of purchased notes secured by
second mortgages on real estate located throughout New Jersey. The purchases
occurred between 1983 and 1991; however, the consumer lender is still servicing
the portfolio, pursuant to the original agreement. The portfolio is 100%
guaranteed by the consumer lender.
Other Consumer Loans. Subject to the restrictions contained in federal
laws and regulations, the Bank also is authorized to make loans for a wide
variety of personal or consumer purposes. As of December 31, 1997, $20.5
million, or 5.1%, of the Bank's total loan portfolio, consisted of consumer
loans (this figure does not include home equity fixed-rate, home equity credit
line, FHA Title I home improvement loans and second mortgage loans). The primary
component of the Bank's consumer loan portfolio was $16.5 million of indirect
and direct automobile loans which are no longer being originated and are being
allowed to mature. The servicer of these loans established dealer agreements,
application processing and credit underwriting, documentation and legal support,
loan billing and accounting, customer service, full collection support, and
management reporting. The servicer made preliminary underwriting decisions and
made recommendations according to the Bank's underwriting criteria and the final
credit decision was made by the Bank.
Automobile loans generally involve more credit risk than mortgage loans
because of the type and nature of the collateral. In addition, consumer lending
collections are dependent on the borrower's continuing financial stability, and
thus are more likely to be adversely affected by job loss, divorce, illness, and
personal bankruptcy. In many cases, any repossessed collateral resulting from a
defaulted consumer loan will not provide an adequate source of repayment of the
outstanding loan balance because of depreciation and improper repair and
maintenance of the underlying security.
The Bank also has collateral loans secured by deposits, which as of
December 31, 1997 amounted to $1.0 million. The collateral deposit loans are
originated through the branches. The minimum loan amount is $1,000, and the
maximum loan-to-value is 90% of the principal deposit balance. The loan is
priced at 3% over the savings instrument rate. Deposit loans are payable on
demand. However, payment of interest is due quarterly and payment to the loan
principal can be made at any time provided the quarterly interest has been paid.
The Bank also has personal loans (secured and unsecured) and overdraft
protection accounts, which as of December 31, 1997 totaled $300,000.
Commercial Business Loans. Commercial business loans are generally
provided to various types of closely held businesses located principally in the
Bank's primary market area. The Bank's commercial business loans may be
structured as short-term self-liquidating time notes, revolving credits, and
term loans. Time notes generally have terms of less than one year to accommodate
seasonal fluctuations in the borrower's business cycle. Commercial business term
loans generally have terms of seven years or less and interest rates which float
in accordance with the prime rate, although the Bank also originates commercial
business loans with fixed rates of interest. The Bank's commercial loans
generally are secured by equipment, machinery or other corporate assets
including real estate and receivables but may
9
<PAGE>
be unsecured. The Bank generally obtains personal guarantees from the principals
of the borrower with respect to all commercial business loans.
The Bank, through its subsidiary, TSBusiness Finance Corporation
("TSBF"), provides secured lines of credit for businesses where conventional
financing is unavailable or inadequate. TSBF's borrowing relationships include
companies involved in manufacturing, wholesaling, distribution and service
companies. Credit accommodations range from $500,000 to $5,000,000 for
businesses in New Jersey and the greater Delaware Valley.
Commercial business loans generally are deemed to entail significantly
greater credit risk than that which is involved with residential real estate
lending. The repayment of commercial business loans typically is dependent on
the successful operations and income of the borrower. Such risks can be
significantly affected by economic conditions. In addition, commercial business
lending generally requires substantially greater oversight efforts compared to
residential real estate lending.
As of December 31, 1997, the Bank had $62.6 million, or 15.7%, of the
total loan portfolio secured by commercial business loans outstanding.
Loan Origination and Other Fees. In addition to interest earned on
loans, the Bank generally receives loan origination fees or "points" for
originating loans. Loan points are a percentage of the principal amount of the
mortgage loan and are charged to the borrower in connection with the origination
of the loan. In accordance with SFAS No. 91, which deals with the accounting for
non-refundable fees and costs associated with originating or acquiring loans,
the Bank's loan origination fees and certain related direct loan origination
costs are offset, and the resulting net amount is deferred and amortized as an
adjustment to the yield of such loans over their contractual life.
Trust Services
The Bank recently began providing trust services through its
wholly-owned subsidiary, Manchester Trust. Manchester Trust currently offers
trust services through its main office in Manchester Township, a fully-staffed
branch office in the Bank's corporate headquarters in Lawrenceville, New Jersey
and a mini branch in Tinton Falls, New Jersey. Manchester Trust provides a full
line of trust and investment services, including living trusts, investment
advisory and investment management accounts, estate settlement services, 401(k)
and other retirement plan services and estate planning. As of December 31, 1997,
Manchester Trust managed funds totaling more than $166.8 million.
Asset Quality
Delinquent Loans. The following table sets forth information regarding
number and total balance of loans delinquent 30 days to 59 days, 60 days to 89
days and 90 days or more as of December 31, 1997.
<TABLE>
<CAPTION>
Commercial
Mortgage Business Consumer Total
----------------- ----------------- ----------------- -----------------
Number Amount Number Amount Number Amount Number Amount
------ ------ ------ ------ ------ ------ ------ ------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Loans delinquent for:
30-59 days..................... 6 $ 354 52 $2,353 75 $ 524 133 $3,231
60-89 days..................... 12 723 42 702 8 57 62 1,482
90 days and over............... 36 2,591 94 2,907 16 60 146 5,558
---- ------ ---- ------ ----- ------- ---- ------
Total delinquent loans....... 54 $3,668 188 $5,962 99 $ 641 341 $10,271
==== ====== ==== ====== ===== ======= ==== =======
</TABLE>
Non-Performing Assets. The loan portfolio is reviewed on a regular
basis by management and, in addition, the commercial business loan portfolio is
reviewed periodically by an independent loan review consulting firm. The loans
are placed on a non-accrual status when, in the opinion of management, there is
reasonable probability of loss or principal or the collection of additional
interest is deemed insufficient to warrant further accrual. Generally, the
Bank's loans are placed on a non-accrual status when a default of principal or
interest has existed for a period of 90 days except when, in the opinion of
management, the collection of the principal or interest is reasonably
anticipated or adequate
10
<PAGE>
collateral exists. In addition, the Bank places any loan on non-accrual if any
part of it is classified as doubtful or loss or if any part has been charged to
the allowance for loan losses. When a loan is placed on non-accruing status,
total interest accrued and unpaid to date is reversed.
Real estate owned consists of property acquired through formal
foreclosures and acquired by deed in lieu of foreclosure, and is recorded at the
lower of cost or fair value. Write-downs from cost to fair value which are
required at the time of foreclosure are charged to the allowance for loan
losses. After transfer, the property is carried at the lower of cost or fair
value as determined by an independent appraisal, less estimated selling
expenses. Adjustments to the carrying value of such properties that result from
subsequent declines in value are charged to operations in the period in which
the declines occur. At December 31, 1997, the Bank had two properties classified
as real estate owned.
As part of the acquisition of BCB on October 1, 1996, the Bank acquired
BCB's loan portfolio. BCB's underwriting standards and related risk
characteristics of the loan portfolio differed from those of the Bank. The
addition of this portfolio has increased the Bank's non-performing loan
portfolio and negatively affected certain coverage ratios. However, management
believes that the Bank's overall asset quality remains strong. The Bank
continually reviews the quality of the loan portfolio and engages an outside
consultant to perform routine reviews of the portfolio on a quarterly basis.
Management believes that any further negative effects of the BCB merger on
non-performing loans will be in the ordinary course of business, and will be
consistent with the operation of a normal commercial loan portfolio. Management
believes that the allowance for loan losses is adequate based on historical
experience, the volume and type of lending conducted by the Bank, the amount of
non-performing loans, general economic conditions and other factors relating to
the Bank's loan portfolio. However, there can be no assurance that actual losses
will not exceed estimated amounts.
The following table sets forth information as of December 31, 1997,
1996, 1995, 1994 and 1993 concerning non-performing assets in dollar amounts
and as a percentage of the Bank's net loans and total assets.
<TABLE>
<CAPTION>
At December 31,
------------------------------------------------------------
1997 1996 1995 1994 1993
---------- ---------- ---------- ---------- -------
(Dollars In Thousands)
<S> <C> <C> <C> <C> <C>
Accruing loans 90 days or more delinquent ......... $ 1,151 $ 753 $ 10 $ 448 $ --
Non-accruing loans 90 days or
more delinquent
Mortgage....................................... 2,591 1,756 1,008 994 549
Non-mortgage................................... 1,816 1,195 114 31 --
Troubled debt restructured loans................... 48 206 1,052 1,044 998
--------- --------- -------- ------ ------
Total non-performing loans......................... 5,606 3,410 2,184 2,517 1,547
Foreclosed assets.................................. 306 253 34 77 --
--------- --------- -------- ------ ------
Total non-performing assets........................ $ 5,912 $ 4,163 $ 2,218 $2,594 $1,547
========= ========= ======== ====== ======
Total non-performing loans as a percentage
of net loans..................................... 1.41% 1.03% 0.71% 0.87% 0.61%
========= ========== ======== ====== ======
Total non-performing assets as a percentage
of total assets.................................. 0.92% 0.69% 0.43% 0.59% 0.36%
========= ========== ======== ====== ======
</TABLE>
Classified Assets. Federal regulations require that each insured
savings institution classify its assets on a regular basis. There are three
classifications for problem assets: "substandard," "doubtful" and "loss."
Substandard assets have one or more defined weaknesses and are characterized by
the distinct possibility that the insured institution will sustain some loss if
the deficiencies are not corrected. Doubtful assets have the weaknesses of
substandard assets with the additional characteristic that the weaknesses make
collection or liquidation in full on the basis of currently existing facts,
conditions and values questionable, and there is a high possibility of some
loss. An asset classified loss is considered uncollectible and of such little
value that continuance as an asset of the institution is not warranted. Another
category designated "special mention," although not a "classification," also
must be established and maintained for assets which do not currently expose an
insured institution to a sufficient degree of risk to warrant classification as
substandard, doubtful or loss. Assets classified as substandard or doubtful
require the institution to establish general allowances for loan losses. If an
asset or portion thereof is classified loss, the insured institution must either
establish specific loan losses in the amount of 100% of the portion of the asset
classified loss, or charge-off such amount. General loss
11
<PAGE>
allowances established to cover possible losses related to assets classified
substandard or doubtful may be included in determining an institution's
regulatory capital, while specific valuation allowances for loan losses do not
qualify as regulatory capital. Federal examiners may disagree with an insured
institution's classifications and amounts reserved and have the authority to
require a savings institution to classify additional assets, or to change the
classification of existing classified assets, and, if appropriate, to establish
additional reserves. At December 31, 1997, the Bank had $2.1 million of loans
criticized as special mention, $6.6 million classified as substandard and
$600,000 classified as doubtful and none as loss. As of December 31, 1997, total
nonperforming assets, which includes repossessed assets, amounted to $5.9
million or .92% of total assets.
Allowance for Loan Losses. It is management's policy to maintain an
allowance for estimated loan losses based upon an assessment (1) in the case of
residential loans, management's review of delinquent loans, loans in foreclosure
and market conditions, (2) in the case of commercial business loans and
commercial mortgage loans, when a significant decline in value can be identified
and (3) in the case of consumer loans, based on the assessment of risks inherent
in the loan portfolio. Although management uses available information to make
such determinations, future adjustments to allowances may be necessary based on
economic and market conditions and as a result of future examinations by
regulatory authorities, and net earnings could be significantly affected, if
circumstances differ substantially from the assumptions used in making the
initial determinations. At December 31, 1997, the Bank's allowance for loan
losses, which includes a general valuation allowance, amounted to $3.4 million
compared to $2.9 million at December 31, 1996.
The following table sets forth an analysis of the Bank's allowance for
loan losses during the years indicated.
<TABLE>
<CAPTION>
At or for the Year Ended December 31,
----------------------------------------------------------------------
1997 1996 1995 1994 1993
---------- ---------- ---------- ---------- --------
(Dollars In Thousands)
<S> <C> <C> <C> <C> <C>
Total loans outstanding................. $ 400,001 $ 382,987 $ 307,733 $ 291,263 $ 257,487
========== ========= ========== ========== ==========
Average loans outstanding............... $ 391,821 $ 337,780 $ 297,043 $ 282,068 $ 231,375
========== ========= ========== ========== ==========
Balance at beginning of period.......... $ 2,901 $ 1,767 $ 1,642 $ 1,471 $ 634
Charge-offs:
Mortgage loans........................ (80) (67) -- -- --
Consumer loans........................ (166) (34) (32) (23) --
Commercial business loans............. (1,071) (9) -- -- (43)
Recoveries.............................. 157 58 7 14 --
---------- --------- ---------- ---------- ----------
Net charge-offs......................... (1,160) (52) (25) (9) (43)
Provision for loan losses............... 1,674 -- 150 180 880
---------- --------- ---------- ---------- ----------
Acquired allowance...................... -- 1,186 -- -- --
---------- --------- ---------- ---------- ==========
Balance at end of period................ $ 3,415 $ 2,901 $ 1,767 $ 1,642 $ 1,471
========== ========= ========== ========== ==========
Allowance for loan losses as a percentage
of total loans outstanding............ 0.85% 0.76% 0.57% 0.56% 0.57%
========== ========= ========== ========== ==========
Net charge-offs as a percentage of average
loans outstanding..................... 0.30% 0.02% 0.01% 0.00% 0.02%
========== ========= ========== ========== ==========
Allowance for loan losses to
non-performing loans.................. 60.92% 74.19% 80.91% 65.24% 80.65%
========== ========= ========== ========== ==========
</TABLE>
12
<PAGE>
The following table sets forth the allocation of allowance for loan
losses by loan category for the years indicated.
<TABLE>
<CAPTION>
At December 31,
--------------------------------------------------------------------
1997 1996 1995
--------------------- -------------------- ---------------------
% of % of % of
Total Total Total
Amount Loans (1) Amount Loans (1) Amount Loans (1)
-------- --------- -------- --------- -------- ---------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Balance at end of year applicable to:
Mortgage loans............................ $ 1,050 70.6% $ 906 76.5% $ 591 83.0%
Consumer loans.......................... 815 13.7 877 14.5 610 13.2
Commercial business loans............... 1,358 15.7 813 9.0 116 3.8
Unallocated............................. 192 -- 305 -- 450 --
-------- ------ -------- ----- -------- ------
Total allowance for loan losses......... $ 3,415 100.0% $ 2,901 100.0% $ 1,767 100.0%
======== ====== ======== ===== ======== ======
</TABLE>
- ------------------------------------
(1) Represents percentage of loans in each category to total loans.
<TABLE>
<CAPTION>
At December 31
--------------------------------------------------------
1994 1993
--------------------------- -------------------------
% of % of
Total Total
Amount Loans (1) Amount Loans (1)
---------- ----------- --------- ---------
<S> <C> <C> <C> <C>
Balance at end of year applicable to:
Mortgage loans................................ $ 593 86.5% $ 519 87.6%
Consumer loans................................ 453 10.4 369 9.5
Commercial business loans..................... 90 3.1 73 2.9
Unallocated................................... 506 -- 510 --
------- ------ ------ -------
Total allowance for loan losses............... $ 1,642 100.0% $1,471 100.0%
======= ====== ====== =======
</TABLE>
- ------------------------------------
(1) Represents percentage of loans in each category to total loans.
Investment Activities
Federally chartered savings institutions have authority to invest in
various types of liquid assets, including United States Treasury obligations,
securities of various federal agencies and of state and municipal governments,
certificates of deposit at federally insured banks and savings institutions,
certain bankers' acceptances and federal funds. Subject to various restrictions,
federally chartered savings institutions may also invest a portion of their
assets in commercial paper, corporate debt securities and mutual funds, the
assets of which conform to the investments that federally chartered savings
institutions are otherwise authorized to make directly. In addition, the Bank
has certain additional investment authority under OTS regulations as a result of
certain grandfathered powers permitted under the terms of the approval of its
conversion from state to federal charter.
13
<PAGE>
The following table sets forth certain information relating to the
Bank's investment securities and mortgage-backed securities held to maturity and
securities available for sale at the dates indicated.
<TABLE>
<CAPTION>
At December 31,
---------------------------------------------------------------
1997 1996 1995
---------------------------------------------------------------
Amortized Market Amortized Market Amortized Market
Cost Value Cost Value Cost Value
--------- ------ --------- ------ ---------- ------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Investments and mortgage-backed
securities held to maturity:
United States government and agency obligations. 11,250 11,217 17,042 16,907 24,934 24,928
Obligations of state and political subdivisions. 1,594 1,712 3,400 3,497 1,055 1,156
Federal Home Loan Bank stock.................... 3,386 3,386 3,089 3,089 2,864 2,864
Mortgage-backed securities...................... 35,098 35,338 48,618 48,587 54,316 55,032
Corporate bonds................................. 13,013 13,039 17,493 17,521 10,955 11,041
--------- --------- --------- --------- --------- --------
Total securities held to maturity including.....
Federal Home Loan Bank stock................. 64,341 64,692 89,642 89,601 94,124 95,021
--------- --------- --------- --------- --------- --------
Investments and mortgage backed securities
available for sale: (1)
United States treasury securities............... 43,930 44,058 65,336 65,507 -- --
United States government and agency obligations. 49,402 49,923 9,924 9,767 75,955 76,653
Equity securities............................... 10 10 894 3,201 2,536 7,123
Mortgage-backed securities...................... 14,903 15,098
Corporate bonds................................. 28,284 28,249 9,151 9,172 -- --
--------- --------- --------- -------------------- --------
Total securities available for sale........... 136,529 137,338 85,305 87,647 78,491 83,776
--------- --------- --------- --------- --------- --------
Total investments............................... $ 200,870 $ 202,030 $174,947 $177,248 $172,615 $178,797
========= ========= ========= ========= ========= ========
</TABLE>
- --------------------------
(1) The Bank adopted FASB No. 115 "Accounting for Investments" as of
January 1, 1994 and transferred certain securities held to maturity to
available for sale. See the notes to the consolidated financial
statements.
As of December 31, 1997, the Bank's investment securities held to
maturity portfolio had a carrying value of $64.3 million, of which $50.0 million
were securities issued by U.S. Agencies and other governmental subdivisions and
$14.6 million were corporate and municipal bonds. As of that same date, the
Bank's securities available for sale portfolio had an estimated market value of
$137.3 million, of which $109.1 million were securities issued by the U.S.
Treasury and federal government agencies, and $28.2 million were other bonds.
At December 31, 1997, $21.9 million, or 34.0%, of the $64.3 million of
total securities held to maturity by the Bank were scheduled to mature within
one year and had a weighted average yield of 5.50%. At December 31, 1997, $39.3
million, or 28.8%, of the $136.5 million of securities available for sale by the
Bank were scheduled to mature within one year and had a weighted average yield
of 5.74%.
14
<PAGE>
The following table sets forth the scheduled maturities, carrying
values, amortized cost, market values and weighted average yields for the Bank's
investment portfolio at December 31, 1997.
<TABLE>
<CAPTION>
At December 31, 1997
------------------------------------------------------------------------------------------
Within One Year One to Five Years Five to Ten Years More than Ten Years
-------------------- -------------------- -------------------- --------------------
Weighted Weighted Weighted Weighted
Amortized Average Amortized Average Amortized Average Amortized Average
Cost Yield Cost Yield Cost Yield Cost Yield
------------------------------------------------------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Investments and mortgage-backed
securities held to maturity:
Mortgage-backed securities.......... $ 6,770 5.28% $ 17,560 6.94% $ -- --% $ 10,768 7.34%
Federal Home Loan Bank stock........ -- -- -- -- -- -- 3,386 --
United States agency obligations.... 6,250 5.39 5,000 6.30 -- -- -- --
Obligations of state and political
subdivisions....................... 261 7.38 467 6.55 100 7.27 766 10.47
Corporate bonds..................... 8,590 5.69 3,074 6.22 1,349 7.46 -- --
------- -------- ------- --------
Total securities held to maturity. $21,871 $ 26,101 $ 1,449 $ 14,920
======= ======== ======= ========
Investments and mortgaged backed
securities available for sale:
Mortgage-backed securities.......... $ -- -- -- -- -- -- $ 14,903 7.54
United States treasury securities... 24,993 5.87 18,937 6.08 -- -- -- --
United States agency obligations.... 8,347 5.06 40,955 6.44 100 7.15 -- --
Equity securities................... -- -- -- -- -- -- 10 --
Corporate bonds..................... 6,007 6.12 21,400 6.17 877 6.59 -- --
------- -------- ------- --------
Total securities available for sale $39,347 $ 81,292 $ 977 $ 14,913
======= ======== ======= ========
At December 31, 1997
-------------------------------
Total
-------------------------------
Weighted
Amortized Market Average
Cost Value Yield
-------------------------------
<S> <C> <C> <C>
Investments and mortgage-backed
securities held to maturity:
Mortgage-backed securities.......... $35,098 $ 35,338 6.74%
Federal Home Loan Bank stock........ 3,386 3,386 --
United States agency obligations.... 11,250 11,217 5.79
Obligations of state and political
subdivisions....................... 1,594 1,712 8.62
Corporate bonds..................... 13,013 13,039 6.00
------- --------
Total securities held to maturity. $64,341 $ 64,692
======= ========
Investments and mortgaged backed
securities available for sale:
Mortgage-backed securities.......... $14,903 $ 15,098 7.54
United States treasury securities... 43,930 44,058 6.21
United States agency obligations.... 49,402 49,923 6.17
Equity securities................... 10 10 --
Corporate bonds..................... 28,284 28,249 6.17
-------- --------
Total securities available for sale $136,529 $137,338
======== ========
</TABLE>
15
<PAGE>
Cash and Cash Equivalents. The Bank also had cash and cash equivalents
consisting primarily of cash due from banks and federal funds sold totaling
$20.9 million and $15.5 million at December 31, 1996 and December 31, 1997,
respectively.
Mortgage-Backed Securities
The Bank has invested in a portfolio of mortgage-backed securities
which are insured or guaranteed by Freddie Mac, the Government National Mortgage
Association ("Ginnie Mae") or Fannie Mae. Mortgage-backed securities increase
the liquidity and the quality of the Bank's assets by virtue of their greater
liquidity compared to individual mortgage loans, the guarantees that back the
securities themselves and their ability to be used to collateralize borrowings
or other obligations of the Bank, including repurchase agreements. In addition,
at December 31, 1997, 19.2% of the Bank's mortgage-backed securities portfolio
consisted of pools of adjustable rate mortgages. Mortgage-backed securities of
this type serve to reduce the interest rate risk associated with changes in
interest rates. Also, 45.2% of the Bank's mortgage-backed securities consist of
five- to seven-year balloon maturities, providing further protection against
interest rate increases.
At December 31, 1997, the Bank's mortgage-backed securities in the held
to maturity category had a carrying value and estimated market value of $35.3
million. Of the entire $50.0 million portfolio (including mortgage-backed
securities held to maturity and available for sale), $24.3 million was scheduled
to mature in five years or less and $25.6 million was scheduled to mature after
ten years. Due to prepayments of the underlying loan, the actual maturities of
mortgage-backed securities generally are substantially less than the scheduled
maturities.
The $24.3 million of mortgage-backed securities held to maturity which
were scheduled to mature in five years or less at December 31, 1997 qualify for
regulatory liquidity and have fixed interest rates. Of the Bank's total
investment in mortgage-backed securities at December 31, 1997, $33.9 million
consisted of Freddie Mac certificates and $16.5 million consisted of Ginnie Mae
certificates.
Sources of Funds
General. Deposits are the primary source of the Bank's funds for
lending and other investment purposes. In addition to deposits, the Bank derives
funds from loan principal repayments. Loan repayments are a relatively stable
source of funds, while deposit inflows and outflows are significantly influenced
by general interest rates and money market conditions. Borrowings may be used on
a short-term basis to compensate for reductions in the availability of
funds from other sources. They may also be used on a longer term basis for
specific leverage investment programs.
Deposits. The Bank's deposits are attracted principally from within the
Bank's primary market area through the offering of a broad selection of deposit
instruments, money market accounts, regular savings accounts, and term
certificate accounts. Deposit account terms vary, with the principal differences
being the minimum balance required, the time periods the funds must remain on
deposit and the interest rate.
Interest rates paid, maturity terms, service fees and withdrawal
penalties are established by the Bank on a periodic basis. Determination of
rates and terms are predicated on funds acquisition and liquidity requirements,
rates paid by competitors, growth goals and federal regulations. The Bank does
not advertise for deposits outside its primary market area and does not utilize
the services of deposit brokers.
16
<PAGE>
The following table sets forth the change in dollar amounts of the
various types of deposit accounts offered by the Bank between the dates
indicated.
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------------------------------------------
1997 1996 1995
---------------------------- --------------------------- ----------------
Amount Percent $ Change Amount Percent $ Change Amount Percent
-------- ------- ---------- ------ ------- -------- ------ -------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Certificates of deposit:
Maturing within 12 months...... $229,472 46.5% $ 40,728 $188,744 38.4% $ 5,086 183,658 44.7%
Maturing within 13-24 months... 38,184 7.7 (1,619) 39,803 8.2 11,883 27,920 6.7
Maturing within 25-36 months... 17,760 3.5 (2,538) 20,298 4.1 (7,455) 27,753 6.8
Maturing beyond 36 months...... 3,437 0.7 (44,264) 47,701 9.7 25,235 22,466 5.5
------- ---- --------- -------- ---- -------- -------- -----
Total certificates of deposit 288,853 58.4 (7,693) 296,546 60.4 34,749 261,797 63.7
------- ---- --------- -------- ---- -------- -------- -----
Transaction accounts:
NOW............................ 15,774 3.2 (657) 16,431 3.3 6,876 9,555 2.3
Noninterest-bearing demand..... 28,164 5.7 2,798 25,366 5.2 14,566 10,800 2.6
Passbook statement............. 94,008 19.1 (10,202) 104,210 21.2 11,464 92,746 22.6
Club accounts.................. 264 0.1 (5) 269 0.1 50 219 0.1
Money market demand deposits... 61,457 12.5 16,663 44,794 9.1 11,899 32,895 8.0
Other.......................... 4,880 1.0 1,250 3,630 0.7 872 2,758 0.7
------- ---- --------- -------- ---- -------- -------- -----
Total transaction accounts... 204,547 41.6 9,847 194,700 39.6 45,727 148,973 36.3
------- ---- --------- -------- ---- -------- -------- -----
Total deposits............. $493,400 100.0% $ 2,154 $ 491,246 100.0% $ 80,476 $410,770 100.0%
======== ===== ========= ========= ===== ======== ======== =====
</TABLE>
The following table shows the interest rate and maturity information
for the Bank's certificates of deposit at December 31, 1997.
<TABLE>
<CAPTION>
Over 1 Over 2
1 Year Through Through Over 3
Interest Rate or Less 2 Years 3 Years Years Total
--------- --------- --------- --------- --------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
3-4% .............................. $ 3,639 $ -- $ -- $ -- $ 3,639
4.01-5%............................. 35,745 213 -- 7 35,965
5.01-6%............................. 182,312 34,182 6,338 3,401 226,283
6% and above........................ 7,776 3,789 11,372 29 22,966
-------- ------- -------- -------- --------
Total............................. $229,472 $38,184 $ 17,760 $ 3,437 $288,853
======== ======= ======== ======== ========
</TABLE>
The following table sets forth the scheduled maturities of the Bank's
certificates of deposit having principal amounts of $100,000 or more at December
31, 1997.
Certificates
Maturity Period of Deposit
------------
(In Thousands)
Three months or less...................... $ 8,259
Over three through six months............. 3,882
Over six through twelve months............ 8,535
Over twelve months........................ 5,442
-------
Total................................... $26,118
=======
17
<PAGE>
The following table sets forth the savings activities of the
Bank during the years indicated.
Year Ended December 31,
-----------------------------------------
1997 1996 1995
---------- ---------- ----------
(Dollars in Thousands)
Net decrease before
interest credited and assumption
of liabilities..................... $ (17,668) $ (10,642) $ (17,773)
Deposit liabilities acquired........ -- 73,177 33,974
Interest credited................... 19,822 17,941 17,010
--------- --------- ---------
Net increase in deposits............ $ 2,154 $ 80,476 $ 33,211
========= ========= =========
The following table sets out the average balances in the main
categories of the Bank's deposit base, for the years indicated.
<TABLE>
<CAPTION>
1997 1996 1995
----------------- ----------------- -----------------
Average Average Average Average Average Average
Balance Rate Balance Rate Balance Rate
-------- ------- ------- ------- ------- -------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Average certificates of deposit................. $290,007 5.36% $271,362 5.18% $251,932 5.16%
======== ======== ========
Interest-bearing savings deposits............... 100,603 2.21 94,569 2.54 112,269 2.59
Money market accounts........................... 50,509 3.34 33,841 3.54 28,162 3.09
Demand deposit accounts......................... 27,592 1.26 16,971 1.74 12,479 1.85
Other deposit accounts.......................... 19,621 -- 15,195 -- 11,303 --
-------- -------- --------
Average core deposits........................... $198,325 2.15 $160,576 2.43 $164,213 2.44
======== ======== ========
Total average deposits........................ $488,332 4.06% $431,938 4.15% $416,145 4.09%
======== ======== ========
</TABLE>
Borrowings. The Bank may obtain advances from the FHLB of New York upon
the security of the common stock it owns in that bank and certain of its
residential mortgage loans, provided certain standards related to
creditworthiness have been met. Such advances are made pursuant to several
credit programs, each of which has its own interest rate and range of
maturities. Such advances are generally available to meet seasonal and other
withdrawals of deposit accounts and to permit increased lending and investment.
In January 1997, the Board of Directors approved a borrowing agreement with
Morgan Stanley & Co., Inc. Pursuant to the borrowing agreement, the Bank
borrowed $30.0 million at an interest rate of 6.02% and for a term of three
years, and purchased a FNMA security that yields approximately 7.2%, matures
approximately ten years after the date of the purchase and is callable after
three years. Management may periodically recommend to the Board similar
borrowing opportunities.
The following table sets forth the maximum month-end balance and
average monthly balance of FHLB advances and other borrowings for the years
indicated. The Bank had no outstanding borrowings at December 31, 1996 and 1995.
18
<PAGE>
For the
Year Ended
December 31,
1997
--------------------
(Dollars in thousands)
Maximum Balance:
FHLB advances............................................. $ 5,050
Other secured borrowing................................... 30,000
Average Balance:
FHLB advances............................................. 2,400
Other secured borrowing................................... 30,000
Weighted Average Interest Rate:
FHLB advances............................................. 5.71%
Other secured borrowing................................... 6.02%
The following table sets forth certain information as to the Bank's
borrowings at the date indicated.
At
December 31,
1997
--------------
(In thousands)
FHLB advances............................................. $ --
Other secured borrowing................................... 30,000
---------
Total borrowings....................................... $ 30,000
Weighted average interest rate of FHLB advances........... --
Weighted average interest rate of
other secured borrowing................................ 6.02%
Quarterly Financial Information. The following table summarizes certain
1997 and 1996 quarterly financial data.
<TABLE>
<CAPTION>
Quarter Ended
----------------------------------------------------------------
December 31, September 30, June 30, March 31,
1997 1997 1997 1997
-------------- ------------- ---------- -----------
(In Thousands)
<S> <C> <C> <C> <C>
Interest income........................... $ 11,375 $ 11,009 $ 10,827 $ 10,646
Interest expense.......................... 5,608 5,571 5,324 5,328
Net interest income....................... 5,767 5,438 5,503 5,318
Provision for loan losses................. 186 1,274 204 10
Gain on security transactions............. 0 1,676 913 334
Operating expenses........................ 3,600 3,751 3,073 3,019
Income before tax expense................. 2,560 2,619 3,558 3,052
Net income for the quarter................ 1,565 1,668 2,276 1,953
Earnings per share-Basic.................. 0.17 0.19 0.25 0.22
Earnings per share-Diluted................ 0.17 0.19 0.25 0.22
</TABLE>
19
<PAGE>
<TABLE>
<CAPTION>
Quarter Ended
--------------------------------------------------------------
December 31, September 30, June 30, March 31,
1996 1996 1996 1996
------------ -------------- -------- ----------
(In Thousands)
<S> <C> <C> <C> <C>
Interest income........................... $ 10,241 $ 8,970 $ 8,850 $ 8,842
Interest expense.......................... 5,076 4,356 4,217 4,292
Net interest income....................... 5,165 4,614 4,633 4,550
Provision for loan losses................. -- -- -- --
Gain on security transactions............. 650 -- 617 1,572
Operating expenses........................ 3,235 2,369 2,002 2,063
Income before tax expense................. 3,037 2,430 3,410 4,234
Net income for the quarter................ 1,943 1,556 2,183 2,709
Earnings per share-Basic.................. 0.22 0.17 0.25 0.30
Earnings per share-Diluted................ 0.22 0.17 0.25 0.30
</TABLE>
Competition
The Bank faces strong competition both in attracting deposits and
making real estate and other loans. Its most direct competition for deposits has
historically come from other savings institutions, commercial banks and credit
unions located in central New Jersey, including many large financial
institutions which have greater financial and marketing resources available to
them. The Bank has eight branches in Mercer County, four in Burlington County
and two in Ocean County. In addition, the Bank has faced additional competition
for investors' funds from short-term money market securities and corporate
stocks and bonds. The ability of the Bank to attract and retain savings deposits
depends on its ability to generally provide a rate of return, liquidity and risk
comparable to that offered by competing investment opportunities.
The Bank competes for loans principally from other savings
institutions, commercial banks, and mortgage banking companies. The Bank
competes for loans principally through the interest rates and loan fees it
charges and the efficiency and quality of services it provides borrowers. TSBF
also markets asset-based lending products within the same geographic areas.
Competition may increase as a result of the continuing reduction of restrictions
on the interstate operations of financial institutions.
As of June 30, 1996, 27 commercial banks, 69 credit unions, and 59
savings institutions maintained 568 branch offices in the Bank's market area.
The Bank encounters strong competition both in attracting deposits and in
originating real estate and other loans. Its most direct competition for
deposits has historically come from commercial and savings banks, other savings
associations, and credit unions in its market area. The Bank expects continued
strong competition from such financial institutions in the foreseeable future,
including increased competition from "super-regional" banks entering the market
by purchasing large banks and savings institutions, as well as institutions
marketing "non-traditional" investments. Many of these regional institutions
have greater financial and marketing resources available to them than does the
Bank. As of June 30, 1996, the Bank held approximately 1.4% of all deposits held
by commercial banks, credit unions, and savings associations in the Bank's
market area. The Bank competes for savings deposits by offering depositors a
high level of personal service and a wide range of competitively priced
financial services.
The competition for real estate and other loans comes principally from
commercial banks, other savings institutions, and mortgage banking companies.
The Bank is one of a large number of institutions that compete for real estate
loans in the Bank's market area. This competition for loans has increased
substantially in recent years. Many of the Bank's competitors have substantially
greater financial and marketing resources available to them than does the f
Bank. The Bank competes for real estate loans primarily through the interest
rates and loan fees it charges and advertising.
20
<PAGE>
Personnel
The Bank and its subsidiary TSBF had 151 full-time equivalent employees
at December 31, 1997. None of these employees is party to a collective
bargaining agreement, and the Bank believes that it enjoys good relations with
its personnel.
REGULATION
As a federally chartered BIF-insured savings association, the Bank is
subject to examination, supervision and extensive regulation by the OTS and the
FDIC. The Bank is a member of the Federal Home Loan Bank ("FHLB") system. This
regulation and supervision establishes a comprehensive framework of activities
in which an institution can engage and is intended primarily for the protection
of the insurance fund and depositors. The Bank also is subject to regulation by
the Board of Governors of the Federal Reserve System (the "Federal Reserve
Board") governing reserves to be maintained against deposits and certain other
matters. The OTS examines the Bank and prepares reports for the consideration of
the Bank's Board of Directors on any deficiencies that they may find in the
Bank's operations. Thehe FDIC also examines the Bank in its role as the
administrator of the BIF. The Bank's relationship with its depositors and
borrowers also is regulated to a great extent by both federal and state laws
especially in such matters as the ownership of savings accounts and the form and
content of the Bank's mortgage documents. Any change in such regulation, whether
by the FDIC, OTS, or Congress, could have a material adverse impact on the
Holding Company and the Bank and their operations.
Federal Regulation of Savings Institutions
Business Activities. The activities of savings institutions are
governed by the Home Owners' Loan Act, as amended (the "HOLA") and, in certain
respects, the Federal Deposit Insurance Act (the "FDI Act") and the regulations
issued by the agencies to implement these statutes. These laws and regulations
delineate the nature and extent of the activities in which savings association
may engage. The description of statutory provisions and regulations applicable
to savings associations set forth herein does not purport to be a complete
description of such statutes and regulations and their effect on the Bank.
Loans to One Borrower. Under the HOLA, savings institutions are
generally subject to the national bank limits on loans to a single or related
group of borrowers. Generally, this limit is 15% of the Bank's unimpaired
capital and surplus, and an additional 10% of unimpaired capital and surplus if
such loan is fully secured by readily-marketable collateral, which is defined to
include certain financial instruments and bullion. The OTS by regulation has
amended the loans to one borrower rule to permit savings associations meeting
certain requirements to extend loans to one borrower in additional amounts under
circumstances limited essentially to loans to develop or complete residential
housing units.
Qualified Thrift Lender Test. In general, savings associations are
required to maintain at least 65% of their portfolio assets in certain qualified
thrift investments (which consist primarily of loans and other investments
related to residential real estate and certain other assets). A savings
association that fails the qualified thrift lender test is subject to
substantial restrictions on activities and to other significant penalties.
Recent legislation permits a savings association to qualify as a qualified
thrift lender not only by maintaining 65% of portfolio assets in qualified
thrift investments (the "QTL test") but also, in the alternative, by qualifying
under the Code as a "domestic building and loan association." The Bank qualifies
as a domestic building and loan association as defined in the Code.
Recent legislation also expands the QTL test to provide savings
associations with greater authority to lend and diversify their portfolios. In
particular, credit card and education loans may now be made by savings
associations without regard to any percentage-of-assets limit, and commercial
loans may be made in an amount up to 10 % of total assets, plus an additional
10% for small business loans. Loans for personal, family and household purposes
(other than credit card, small business and educational loans) are now included
without limit with other assets that, in the aggregate, may account for up to
20% of total assets. At December 31, 1997, under the expanded QTL test,
approximately 72.1% of the Bank's portfolio assets were qualified thrift
investments.
21
<PAGE>
Limitation on Capital Distributions. OTS regulations impose limitations
upon all capital distributions by savings institutions, such as cash dividends,
payments to repurchase or otherwise acquire its shares, payments to stockholders
of another institution in a cash-out merger and other distributions charged
against capital. The rule establishes three tiers of institutions, which are
based primarily on an institution's capital level. An institution, such as the
Bank, that exceeds all fully phased-in capital requirements before and after a
proposed capital distribution ("Tier 1 Association") and has not been advised by
the OTS that it is in need of more than normal supervision, could, after prior
notice but without the approval of the OTS, make capital distributions during a
calendar year equal to the greater of: (i) 100% of its net earnings to date
during the calendar year plus the amount that would reduce by one-half its
"surplus capital ratio" (the excess capital over its fully phased-in capital
requirements) at the beginning of the calendar year; or (ii) 75% of its net
earnings for the previous four quarters; provided that the institution would not
be undercapitalized, as that term is defined in the OTS Prompt Corrective Action
regulations, following the capital distribution. Any additional capital
distributions would require prior regulatory approval. In the event the Bank's
capital fell below its fully-phased in requirement or the OTS notified it that
it was in need of more than normal supervision, the Bank's ability to make
capital distributions could be restricted. In addition, the OTS could prohibit a
proposed capital distribution by any institution, which would otherwise be
permitted by the regulation, if the OTS determines that such distribution would
constitute an unsafe or unsound practice.
Liquidity. The Bank is required to maintain an average daily balance of
specified liquid assets equal to a monthly average of not less than a specified
percentage (currently 4%) of its net withdrawable deposit accounts plus
borrowings payable in one year or less. Monetary penalties may be imposed for
failure to meet these liquidity requirements. The Bank's average liquidity ratio
for the quarter ended December 31, 1997 was 28.5%, which exceeded the then
applicable requirements. The Bank has never been subject to monetary penalties
for failure to meet its liquidity requirements.
Community Reinvestment Act and Fair Lending Laws. Savings associations
share a responsibility under the Community Reinvestment Act ("CRA") and related
regulations of the OTS to help meet the credit needs of their communities,
including low- and moderate-income neighborhoods. In addition, the Equal Credit
Opportunity Act and the Fair Housing Act (together, the "Fair Lending Laws")
prohibit lenders from discriminating in their lending practices on the basis of
characteristics specified in those statutes. An institution's failure to comply
with the provisions of CRA could, at a minimum, result in regulatory
restrictions on its activities, and failure to complete with the Fair Lending
Laws could result in enforcement actions by the OTS, as well as other federal
regulatory agencies and the Department of Justice. The Bank received an
outstanding CRA rating under the current CRA regulations in its most recent
federal examination by the OTS.
Transactions with Related Parties. The Bank's authority to engage in
transactions with related parties or "affiliates" (i.e., any company that
controls or is under common control with an institution, including the Holding
Company and any non-savings institution subsidiaries) or to make loans to
certain insiders, is limited by Sections 23A and 23B of the Federal Reserve Act
("FRA"). Section 23A limits the aggregate amount of transactions with any
individual affiliate to 10% of the capital and surplus of the savings
institution and also limits the aggregate amount of transactions with all
affiliates to 20% of the savings institution's capital and surplus. Certain
transactions with affiliates are required to be secured by collateral in an
amount and of a type described in Section 23A and the purchase of low quality
assets from affiliates is generally prohibited. Section 23B provides that
certain transactions with affiliates, including loans and asset purchases, must
be on terms and under circumstances, including credit standards, that are
substantially the same or at least as favorable to the institution as those
prevailing at the time for comparable transactions with non-affiliated
companies.
Enforcement. Under the FDI Act, the OTS has primary enforcement
responsibility over savings institutions and has the authority to bring
enforcement action against all "institution-related parties," including
stockholders, and any attorneys, appraisers and accountants who knowingly or
recklessly participate in wrongful action likely to have an adverse effect on an
insured institution. Formal enforcement action may range from the issuance of a
capital directive or cease and desist order to removal of officers and/or
directors of the institutions, receivership, conservatorship or the termination
of deposit insurance. Civil penalties cover a wide range of violations and
actions, and range up to $25,000 per day, unless a finding of reckless disregard
is made, in which case penalties may be as high as $1 million per day. Under the
FDI Act, the FDIC has the authority to recommend to the Director of OTS that
enforcement action be taken
22
<PAGE>
with respect to a particular savings institution. If action is not taken by the
Director, the FDIC has authority to take such action under certain
circumstances.
Standards for Safety and Soundness. The FDI Act requires each federal
banking agency to prescribe for all insured depository institutions standards
relating to, among other things, internal controls, information systems and
audit systems, loan documentation, credit underwriting, interest rate risk
exposure, asset growth, and compensation fees and benefits and such other
operational and managerial standards as the agency deems appropriate. The
federal banking agencies adopted a final regulation and Interagency Guidelines
Prescribing Standards for Safety and Soundness ("Guidelines") to implement the
safety and soundness standards required under the FDI Act. The Guidelines set
forth the safety and soundness standards that the federal banking agencies use
to identify and address problems at insured depository institutions before
capital becomes impaired. The Guidelines address internal controls and
information systems; internal audit system; credit underwriting; loan
documentation; interest rate risk exposure; asset growth; and compensation, fees
and benefits. If the appropriate federal banking agency determines that an
institution fails to meet any standard prescribed by the Guidelines, the agency
may require the institution to submit to the agency an acceptable plan to
achieve compliance with the standard, as required by the FDI Act. The final
regulations establish deadlines for the submission and review of such safety and
soundness compliance plans.
Capital Requirements. The OTS capital regulations require savings
institutions to meet three capital standards: a 1.5% tangible capital standard,
a 3% leverage (core capital) ratio and an 8% risk based capital standard. Core
capital is defined as common stockholder's equity (including retained earnings),
certain non-cumulative perpetual preferred stock and related surplus, minority
interests in equity accounts of consolidated subsidiaries less intangibles other
than certain mortgage servicing rights ("MSRs") and credit card relationships.
The OTS regulations require that, in meeting the leverage ratio, tangible and
risk-based capital standards institutions generally must deduct investments in
and loans to subsidiaries engaged in activities not permissible for a national
bank. In addition, the OTS prompt corrective action regulation provides that a
savings institution that has a leverage capital ratio of less than 4% (3% for
institutions receiving the highest CAMEL examination rating) will be deemed to
be "undercapitalized" and may be subject to certain restrictions.
The risk-based capital standard for savings institutions requires the
maintenance of total capital (which is defined as core capital and supplementary
capital) to risk-weighted assets of 8%. In determining the amount of
risk-weighted assets, all assets, including certain off-balance sheet assets,
are multiplied by a risk-weight of 0% to 100%, as assigned by the OTS capital
regulation based on the risks OTS believes are inherent in the type of asset.
The components of core capital are equivalent to those discussed earlier under
the 3% leverage standard. The components of supplementary capital currently
include cumulative preferred stock, long-term perpetual preferred stock,
mandatory convertible securities, subordinated debt and intermediate preferred
stock and, within specified limits, the allowance for loan and lease losses.
Overall, the amount of supplementary capital included as part of total capital
cannot exceed 100% of core capital. At December 31, 1997, the Bank exceeded each
of the three OTS capital requirements on a fully phased-in basis. Set forth
below is a summary of the Bank's compliance with the OTS capital standards as of
December 31, 1997.
The OTS has incorporated an interest rate risk component into its
regulatory capital rule. The final interest rate risk rule also adjusts the
risk-weighting for certain mortgage derivative securities. Under the rule,
savings associations with "above normal" interest rate risk exposure would be
subject to a deduction from total capital for purposes of calculating their
risk-based capital requirements. A savings association's interest that risk is
measured by the decline in the net portfolio value of its assets (i.e., the
difference between incoming and outgoing discounted cash flows from assets,
liabilities and off-balance sheet contracts) that would result from a
hypothetical 200-basis point increase or decrease in market interest rates
divided by the estimated economic value of the association's assets, as
calculated in accordance with guidelines set forth by the OTS. A savings
association whose measured interest rate risk exposure exceeds 2% must deduct an
interest rate component in calculating its total capital under the risk-based
capital rule. The interest rate risk component is an amount equal to one-half of
the difference between the institution's measured interest rate risk and 2%,
multiplied by the estimated economic value of the association's assets. That
dollar amount is deducted from an association's total capital in calculating
compliance with its risk-based capital requirement. Under the rule, there is a
two quarter lag between the reporting date of an institution's financial data
and the effective date for the new capital requirement based on that data. A
savings association with assets of less than $300 million and a risk-based
capital ratio
23
<PAGE>
in excess of 12% is not subject to the interest rate risk component, unless the
OTS determines otherwise. The rule also provides that the Director of the OTS
may waive or defer an association's interest rate risk component on a
case-by-case basis. The OTS has postponed the date that the component will first
be deducted from an institution's total capital to provide it with an
opportunity to review the interest rate risk approaches taken by the other
federal banking agencies.
Thrift Charter. Congress has been considering legislation in various
forms that would require federal thrifts, such as the Bank, to convert their
charters to national or state bank charters. Recent legislation required the
Treasury Department to prepare for Congress a comprehensive study on development
of a common charter for federal savings association and commercial banks; and,
in the event that the thrift charter was eliminated by January 1, 1999, would
require the merger of the BIF and the SAIF into a single deposit insurance fund
on that date. The Bank cannot determine whether, or in what form, such
legislation may eventually be enacted and there can be no assurance that any
legislation that is enacted would not adversely affect the Bank and the Company.
Prompt Corrective Regulatory Action
Under the OTS Prompt Corrective Action regulations, the OTS is required
to take certain supervisory actions against undercapitalized institutions, the
severity of which depends upon the institution's degree of capitalization.
Generally, a savings institution that has total risk-based capital of less than
8.0% or a leverage ratio or a Tier 1 core capital ratio that is less than 4.0%
is considered to be undercapitalized. A savings institution that has the total
risk-based capital less than 6.0%, a Tier 1 core risk-based capital ratio of
less than 3.0% or a leverage ratio that is less than 3.0% is considered to be
"significantly undercapitalized" and a savings institution that has a tangible
capital to assets ratio equal to or less than 2.0% is deemed to be "critically
undercapitalized." Subject to a narrow exception, the banking regulator is
required to appoint a receiver or conservator for an institution that is
"critically undercapitalized." The regulation also provides that a capital
restoration plan must be filed with the OTS within 45 days of the date an
institution receives notice that it is "undercapitalized," "significantly
undercapitalized" or "critically undercapitalized." In addition, numerous
mandatory supervisory actions become immediately applicable to the institution,
including, but not limited to, restrictions on growth, investment activities,
capital distributions, and affiliate transactions. The OTS could also take any
one of a number of discretionary supervisory actions, including the issuance of
a capital directive and the replacement of senior executive officers and
directors. As of December 31, 1997, the Bank was considered "well capitalized."
Insurance of Deposit Accounts
The FDIC has adopted a risk-based insurance assessment system. The FDIC
assigns an institution to one of three capital categories based on the
institution's financial information, as of the reporting period ending seven
months before the assessment period, consisting of (1) well capitalized, (2)
adequately capitalized or (3) undercapitalized, and one of three supervisory
subcategories within each capital group. The supervisory subgroup to which an
institution is assigned is based on a supervisory evaluation provided to the
FDIC by the institution's primary federal regulator and information which the
FDIC determines to be relevant to the institution's financial condition and the
risk posed to the deposit insurance funds. An institution's assessment rate
depends on the capital category and supervisory category to which it is
assigned. The FDIC is authorized to raise the assessment rates in certain
circumstances. The FDIC has exercised this authority several times in the past
and may raise insurance premiums in the future. If such action is taken by the
FDIC, it could have an adverse effect on the earnings of the Bank.
Federal Home Loan Bank System
The Bank is a member of the FHLB System, which consists of 12 regional
FHLBs. The FHLBs provide a central credit facility primarily for member
institutions. The Bank, as a member of the FHLB-New York, is required to acquire
and hold shares of capital stock in that FHLB in an amount at least equal to 1%
of the aggregate principal amount of its unpaid residential mortgage loans and
similar obligations at the beginning of each year, or 1/20 of its advances
(borrowings) from the FHLB, whichever is greater. The Bank was in compliance
with this requirement with an investment in FHLB-New York stock, at December 31,
1997, of $3.4 million.
24
<PAGE>
The FHLBs are required to provide funds for the resolution of insolvent
thrifts and to contribute funds for affordable housing programs. These
requirements could reduce the amount of dividends that the FHLBs pay to their
members and could also result in the FHLBs imposing a higher rate of interest on
advances to their members. Dividends paid by the FHLB to the Bank for the year
ended December 31, 1997 totaled $221,000.
Federal Reserve System
The Federal Reserve Board regulations require savings institutions to
maintain non-interest-earning reserves against their transaction accounts
(primarily NOW and regular checking accounts). As of December 31, 1997, the Bank
was in compliance with these requirements. The balances maintained to meet the
reserve requirements imposed by the Federal Reserve Board may be used to satisfy
liquidity requirements imposed by the OTS.
Holding Company Regulation
The Company. The Company will be a non-diversified unitary savings and
loan holding company within the meaning of the HOLA. As such, the Company will
be required to register with the OTS and will be subject to OTS regulations,
examinations, supervision and reporting requirements. In addition, the OTS has
enforcement authority over the Company and its non-savings institution
subsidiaries. Among other things, this authority permits the OTS to restrict or
prohibit activities that are determined to be a serious risk to the subsidiary
savings institution. The Bank must notify the OTS 30 days before declaring any
dividend to the Company.
As a unitary savings and loan holding company, the Company generally
will not be restricted under existing laws as to the types of business
activities in which it may engage, provided that the Bank continues to be a QTL.
Upon any non-supervisory acquisition by the Company of another savings
association, the Company would become a multiple savings and loan holding
company (if the acquired institution is held as a separate subsidiary) and would
be subject to extensive limitations on the types of business activities in which
it could engage. The HOLA limits the activities of a multiple savings and loan
holding company and its non-insured institution subsidiaries primarily to
activities permissible for bank holding companies under Section 4(c)(8) of the
Bank Holding Company ("BHC") Act, subject to the prior approval of the OTS, and
to other activities authorized by OTS regulation. Recently proposed legislation
would treat all savings and loan holding companies as bank holding companies and
limit the activities of such companies to those permissible for bank holding
companies.
The HOLA prohibits a savings and loan holding company, directly or
indirectly, or through one or more subsidiaries, from acquiring another savings
institution or holding company thereof, without prior written approval of the
OTS. It also prohibits the acquisition or retention of, with certain exceptions,
more than 5% of a non-subsidiary savings institution, a non-subsidiary holding
company, or a non-subsidiary company engaged in activities other than those
permitted by the HOLA; or acquiring or retaining control of an institution that
is not federally insured. In evaluating applications by holding companies to
acquire savings institutions, the OTS must consider the financial and managerial
resources, future prospects of the company and institution involved, the effect
of the acquisition on the risk to the insurance fund, the convenience and needs
of the community and competitive factors.
The OTS is prohibited from approving any acquisition that would result
in a multiple savings and loan holding company controlling savings institutions
in more than one state, subject to two exceptions: (i) the approval of
interstate supervisory acquisitions by savings and loan holding companies, and
(ii) the acquisition of a savings institution in another state if the laws of
the state of the target savings institution specifically permit such
acquisitions. The states vary in the extent to which they permit interstate
savings and loan holding company acquisitions.
The Mid-Tier Holding Company and the Mutual Holding Company. The Mutual
Holding Company and the Mid-Tier Holding Company are non-diversified mutual
savings and loan holding companies within the meaning of the HOLA, as amended.
As such, the Mutual Holding Company and the Mid-Tier Holding Company are
registered with the OTS and are subject to OTS regulations, examinations,
supervision and reporting requirements. In addition, the OTS has enforcement
authority over the Mutual Holding Company and the Mid-Tier Holding Company and
any non-savings institution subsidiaries. Among other things, this authority
permits the OTS to restrict or prohibit activities that are determined to be a
serious risk to the subsidiary savings institution.
25
<PAGE>
Pursuant to Section 10(o) of the HOLA and OTS regulations and policy, a
mutual holding company and a federally chartered mid-tier holding company may
engage in the following activities: (i) investing in the stock of a savings
association; (ii) acquiring a mutual association through the merger of such
association into a savings association subsidiary of such holding company or an
interim savings association subsidiary of such holding company; (iii) merging
with or acquiring another holding company; one of whose subsidiaries is a
savings association; (iv) investing in a corporation, the capital stock of which
is available for purchase by a savings association under federal law or under
the law of any state where the subsidiary savings association or associations
share their home offices; (v) furnishing or performing management services for a
savings association subsidiary of such company; (vi) holding, managing or
liquidating assets owned or acquired from a savings subsidiary of such company;
(vii) holding or managing properties used or occupied by a savings association
subsidiary of such company properties used or occupied by a savings association
subsidiary of such company; (viii) acting as trustee under deeds of trust; (ix)
any other activity (A) that the Federal Reserve Board, by regulation, has
determined to be permissible for bank holding companies under Section 4(c) of
the Bank Holding Company Act of 1956, unless the Director, by regulation,
prohibits or limits any such activity for savings and loan holding companies; or
(B) in which multiple savings and loan holding companies were authorized (by
regulation) to directly engage on March 5, 1987; and (x) purchasing, holding, or
disposing of stock acquired in connection with a qualified stock issuance if the
purchase of such stock by such savings and loan holding company is approved by
the Director. If a mutual holding company acquires or merges with another
holding company, the holding company acquired or the holding company resulting
from such merger or acquisition may only invest in assets and engage in
activities listed in (i) through (x) above, and has a period of two years to
cease any non-conforming activities and divest of any non-conforming
investments.
The HOLA prohibits a savings and loan holding company, including the
Mid-Tier Holding Company and the Mutual Holding Company, directly or indirectly,
or through one or more subsidiaries, from acquiring another savings institution
or holding company thereof, without prior written approval of the OTS. It also
prohibits the acquisition or retention of, with certain exceptions, more than 5%
of a non-subsidiary savings institution, a non-subsidiary holding company, or a
non-subsidiary company engaged in activities other than those permitted by the
HOLA; or acquiring or retaining control of an institution that is not federally
insured. In evaluating applications by holding companies to acquire savings
institutions, the OTS must consider the financial and managerial resources,
future prospects of the company and institution involved, the effect of the
acquisition on the risk to the insurance fund, the convenience and needs of the
community and competitive factors.
The OTS is prohibited from approving any acquisition that would result
in a multiple savings and loan holding company controlling savings institutions
in more than one state, subject to two exceptions: (i) the approval of
interstate supervisory acquisitions by savings and loan holding companies, and
(ii) the acquisition of a savings institution in another state if the laws of
the state of the target savings institution specifically permit such
acquisitions. The states vary in the extent to which they permit interstate
savings and loan holding company acquisitions.
In addition, OTS regulations require the Mutual Holding Company to
notify the OTS of any proposed waiver of its right to receive dividends. It is
the OTS' recent practice to review dividend waiver notices on a case-by-case
basis, and, in general, not object to any such waiver if: (i) the mutual holding
company's board of directors determines that such waiver is consistent with such
directors' fiduciary duties to the mutual holding company's members; (ii) for as
long as the savings association subsidiary is controlled by the mutual holding
company, the dollar amount of dividends waived by the mutual holding company are
considered as a restriction on the retained earnings of the savings association,
which restriction, if material, is disclosed in the public financial statements
of the savings association as a note to the financial statements; (iii) the
amount of any dividend waived by the mutual holding company is available for
declaration as a dividend solely to the mutual holding company, and, in
accordance with SFAS No. 5, where the savings association determines that the
payment of such dividend to the mutual holding company is probable, an
appropriate dollar amount is recorded as a liability; (iv) the amount of any
waived dividend is considered as having been paid by the savings association in
evaluating any proposed dividend under OTS capital distribution regulations; and
(v) in the event the mutual holding company converts to stock form, the
appraisal submitted to the OTS in connection with the conversion application
takes into account the aggregate amount of the dividends waived by the mutual
holding company.
26
<PAGE>
Federal Securities Laws
The Mid-Tier Common Stock is registered with the SEC under the
Securities Act of 1933 (the "Securities Act") The Company has filed with the SEC
a registration statement under the Securities Act, for the registration of the
Common Stock to be issued pursuant to the Conversion. Upon completion of the
Conversion, the Common Stock will be registered with the SEC under the Exchange
Act. The Mid-Tier Holding Company is, and the Company will be subject to the
information, proxy solicitation, insider trading restrictions and other
requirements under the Exchange Act.
The registration under the Securities Act of shares of the Common Stock
to be issued in the Conversion does not cover the resale of such shares. Shares
of the Common Stock purchased by persons who are not affiliates of the Company
may be resold without registration. Shares purchased by an affiliate of the
Company will be subject to the resale restrictions of Rule 144 under the
Securities Act. If the Company meets the current public information requirements
of Rule 144 under the Securities Act, each affiliate of the Company who complies
with the other conditions of Rule 144 (including those that require the
affiliate's sale to be aggregated with those of certain other persons) would be
able to sell in the public market, without registration, a number of shares not
to exceed, in any three-month period, the greater of (i) 1% of the outstanding
shares of the Company or (ii) the average weekly volume of trading in such
shares during the preceding four calendar weeks. Provision may be made in the
future by the Company to permit affiliates to have their shares registered for
sale under the Securities Act under certain circumstances.
TAXATION
Federal Income Taxation
General. The Mid-Tier Holding Company and the Bank are, and the Company
will be, subject to federal income taxation in the same general manner as other
corporations, with some exceptions discussed below. The following discussion of
federal taxation is intended only to summarize certain pertinent federal income
tax matters and is not a comprehensive description of the tax rules applicable
to the Bank.
Method of Accounting. For federal income tax purposes, the Bank
currently reports its income and expenses on the accrual method of accounting
and uses a tax year ending December 31 for filing its federal income tax
returns. The Small Business Protection Act of 1996 (the "1996 Act") eliminated
the use of the reserve method of accounting for bad debt reserves by savings
institutions with assets greater than $500 million, effective for taxable years
beginning after 1995.
Bad Debt Reserves. Prior to the 1996 Act, the Bank was permitted to
establish a reserve for bad debts and to make annual additions to the reserve.
These additions could, within specified formula limits, be deducted in arriving
at the Bank's taxable income. As a result of the 1996 Act, the Bank must use the
specific charge off method in computing its bad debt deduction beginning with
its 1996 Federal tax return. In addition, the federal legislation requires the
recapture (over a six year period) of the excess of tax bad debt reserves at
December 31, 1995 over those established as of December 31, 1987. The amount of
such reserve subject to recapture as of December 31, 1997, was approximately
$2.5 million
Taxable Distributions and Recapture. Prior to the 1996 Act, bad debt
reserves created prior to January 1, 1988 were subject to recapture into taxable
income should the Bank fail to meet certain thrift asset and definitional tests.
New federal legislation eliminated these thrift related recapture rules.
However, under current law, pre-1988 reserves remain subject to recapture should
the Bank make certain non-dividend distributions or cease to maintain a bank
charter.
At December 31, 1997, the Bank's total federal pre-1988 reserve was
approximately $3.5 million. This reserve reflects the cumulative effects of
federal tax deductions by the Bank for which no Federal income tax provision has
been made.
Minimum Tax. The Code imposes an alternative minimum tax ("AMT") at a
rate of 20% on a base of regular taxable income plus certain tax preferences
("alternative minimum taxable income" or "AMTI"). The AMT
27
<PAGE>
is payable to the extent such AMTI is in excess of an exemption amount. Net
operating losses can offset no more than 90% of AMTI. Certain payments of
alternative minimum tax may be used as credits against regular tax liabilities
in future years. The Bank has not been subject to the alternative minimum tax
and has no such amounts available as credits for carryover.
Net Operating Loss Carryovers. A financial institution may carry back
net operating losses to the preceding two taxable years and forward to the
succeeding 20 taxable years. This provision applies to losses incurred in
taxable years beginning after August 6, 1997. At December 31, 1997, the Bank had
no net operating loss carryforwards for federal income tax purposes.
Corporate Dividends-Received Deduction. The Company may exclude from
its income 100% of dividends received from the Bank as a member of the same
affiliated group of corporations. The corporate dividends-received deduction is
80% in the case of dividends received from corporations with which a corporate
recipient does not file a consolidated return, and corporations which own less
than 20% of the stock of a corporation distributing a dividend may deduct only
70% of dividends received or accrued on their behalf.
The Bank's federal tax return has not been audited by the Internal
Revenue Service for any of the last ten years.
State and Local Taxation
State of New Jersey. The Bank files New Jersey income tax returns. For
New Jersey income tax purposes, savings institutions are presented taxed at a
rate equal to 3% of taxable income. For this purpose, "taxable income" generally
means federal taxable income, subject to certain adjustments (including the
addition of net interest income on state and municipal obligations). The Bank is
not currently under audit with respect to its New Jersey income tax returns.
The Company will be required to file a New Jersey income tax return
because it will be doing business in New Jersey. For New Jersey tax purposes,
regular corporations are presently taxed at a rate equal to 9% of taxable
income. For this purpose, "taxable income" generally means Federal taxable
income subject to certain adjustments (including addition of interest income on
state and municipal obligation). However, if the Company meets certain
requirements, it may be eligible to elect to be taxed as a New Jersey Investment
Company at a tax rate presently equal to 2.25% (25% of 9%) of taxable income.
Delaware Taxation. As a Delaware holding company not earning income in
Delaware, the Company is exempt from Delaware corporate income tax but is
required to file an annual report with and pay an annual franchise tax to the
State of Delaware.
28
<PAGE>
ITEM 2. PROPERTIES
At December 31, 1997, the Bank conducted its business from its
corporate center in Lawrenceville, New Jersey and 14 full service branch offices
located in Mercer and Burlington Counties, New Jersey. The aggregate net book
value of the Bank's premises and equipment was $6.7 million as of December 31,
1997. The following table sets forth certain information regarding the corporate
center, trust center, and 14 branch offices of the Bank at December 31, 1997.
<TABLE>
<CAPTION>
Year Leased Lease Expiration
Description/Address Opened Owned Date
- ------------------- ------ ------ -----------------
<S> <C> <C> <C>
Administrative Office
134 Franklin Corner Road 1993 Owned
Lawrenceville, New Jersey
Branch Offices
Trenton Branch 1994 Leased July 31, 1999
33 West State Street Three 5-year options
Trenton, New Jersey
Ewing Branch 1976 Leased August 31, 2006
1980 North Olden Avenue Two 10-year options
Trenton, New Jersey
Hamilton Branch 1977 Leased April 30, 2007
2465 South Broad Street Two 10-year options
Trenton, New Jersey
Robbinsville Branch 1980 Owned
2371 Route 33 & 526
Robbinsville, New Jersey
Lawrenceville Branch 1990 Leased January 31, 2000
2495 Brunswick Avenue Two 5-year options
Lawrenceville, New Jersey
Pennington Branch 1991 Owned
2583 Pennington Road
Pennington, New Jersey
Burlington Branch 1983 Owned
332 High Street
Burlington, New Jersey
Mt. Holly Branch 1989 Leased December 20, 2004
501 High Street Three 5-year options
Mt. Holly, New Jersey
Mercerville Branch 1991 Leased March 31, 2001
1750 Whitehorse-Mercerville Road One 5-year option
Mercerville, New Jersey
</TABLE>
29
<PAGE>
<TABLE>
<CAPTION>
Year Leased Lease Expiration
Description/Address Opened Owned Date
- ------------------- ------ ------ -----------------
<S> <C> <C> <C>
Leisure Village East 1995 Leased June 30, 2005
1 Dumbarton Drive Two 5-year options
Lakewood, NJ 08701
West Windsor Branch 1997 Leased August 31, 2006
1349 Princeton-Highstown Road Three 5-year options
Cranbury, NJ 08512
Burlington Branch 1988 Owned
1660 Beverly Road
Burlington, NJ 08016
Delanco Branch 1989 Leased August 31, 1999
Burlington Avenue & Coopertown Road Three 5-year options
Delanco, NJ 08075
Leisure Village West Branch 1997 Leased February 28, 2007
3-C Buckingham Drive Two 5-year options
Lakehurst, NJ 08733
Trust Services Center
Manchester Trust 1997 Leased May 30, 2000
2002 Route 70
Lakehurst, NJ 08733
</TABLE>
ITEM 3. LEGAL PROCEEDINGS
In the normal course of business, the Mid-Tier Holding Company and the
Bank may be a party to various outstanding legal proceedings and claims. In the
opinion of management, the financial condition of the Mid-Tier Holding Company
and the Bank will not be materially affected by the outcome of such legal
proceedings and claims.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted during the fourth quarter of fiscal year
ended December 31, 1997 to a vote of security holders.
PART II
ITEM 5. MARKET FOR BANK'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
There is an established market for Mid-Tier Common Stock which is
currently listed on the Nasdaq National Market under the symbol, "TSBS," and the
Mid-Tier Holding Company had 12 market makers as of December 31, 1997. In the
Conversion, Minority Shares will automatically, without further action by the
holders thereof, be converted into and become a right to receive a number of
shares of the Company's Common Stock that will be determined pursuant to the
Exchange Ratio. As a newly formed company, the Company has never issued capital
stock and consequently there is no established market for the Common Stock. It
is expected that the Common Stock will be more liquid than the Mid- Tier Common
Stock since there will be significantly more outstanding shares owned by the
public. The Company has
30
<PAGE>
received conditional approval to have its Common Stock listed on the Nasdaq
National Market under the Mid-Tier Holding Company's previous symbol "TSBS."
The following table sets forth the high and low bid quotes for the
Minority Shares and the cash dividends declared for the years ended December 31,
1996 and 1997.
Cash
Fiscal Year Ended Dividends
December 31, 1996 High Low Declared
- ----------------- -------- ------- --------
First quarter..................... 15 12 7/8 .0875
Second quarter.................... 15 13 1/4 .0875
Third quarter..................... 15 1/8 13 1/4 .0875
Fourth quarter.................... 16 3/8 14 .0875
Fiscal Year Ended
December 31, 1997
- -----------------
First quarter..................... 18 5/8 15 3/4 .0875
Second quarter.................... 20 5/8 17 7/8 .0875
Third quarter..................... 33 1/2 19 1/8 .0875
Fourth quarter.................... 45 3/4 28 .0875
ITEM 6. SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA
The following tables set forth selected consolidated historical
financial and other data of the Mid-Tier Holding Company (including its
subsidiaries) for the years indicated. The information is derived in part from
and should be read in conjunction with the Consolidated Financial Statements and
Notes thereto of the Mid-Tier Holding Company contained elsewhere herein.
<TABLE>
<CAPTION>
At December 31,
-------------------------------------------------------------
1997 1996 1995 1994 1993
--------- --------- --------- --------- --------
(In Thousands)
<S> <C> <C> <C> <C> <C>
Selected Financial Condition Data:
Total assets................................... $ 640,419 $ 601,016 $ 514,218 $ 441,019 $435,746
Cash and cash equivalents...................... 15,546 20,938 16,253 12,665 15,763
Securities available for sale.................. 137,338 87,648 83,776 64,961 --
Securities held to maturity:
Debt securities.............................. 25,857 37,935 36,945 27,017 121,814
Mortgage-backed securities................... 35,098 48,618 54,316 35,087 33,169
Federal Home Loan Bank stock................. 3,386 3,089 2,864 2,495 --
Loans, net..................................... 396,448 380,288 306,093 289,504 255,656
Deposits....................................... 493,400 491,246 410,770 377,559 383,840
Stockholders' equity........................... 110,038 103,352 97,542 58,769 49,123
Intangible assets.............................. 10,604 9,164 2,325 -- --
Borrowings..................................... 30,000 -- -- -- --
</TABLE>
31
<PAGE>
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------------------------------------------
1997 1996 1995 1994 1993
--------- --------- --------- --------- --------
(In Thousands)
<S> <C> <C> <C> <C> <C>
Selected Operating Data:
Total interest income.......................... $ 43,857 $ 36,903 $ 33,518 $ 29,468 $ 30,754
Total interest expense......................... 21,831 17,941 17,010 12,851 13,253
--------- --------- --------- --------- --------
Net interest income......................... 22,026 18,962 16,508 16,617 17,501
Provision for loan losses...................... 1,674 -- 150 180 880
--------- --------- --------- --------- --------
Net interest income after provision for
loan losses............................. 20,352 18,962 16,358 16,437 16,621
Other income................................... 4,880 3,818 4,946 3,150 3,819
Operating expenses............................. 13,443 9,669 7,792 7,475 6,536
--------- --------- --------- --------- --------
Income before income taxes and
cumulative effect of accounting change...... 11,789 13,111 13,512 12,112 13,904
Income taxes................................... 4,327 4,720 4,864 4,437 4,876
--------- --------- --------- --------- --------
Income before cumulative effect of
accounting change........................... 7,462 8,391 8,648 7,675 9,028
Cumulative effect of accounting change......... -- -- -- -- (529)
--------- --------- --------- --------- ---------
Net income............................. $ 7,462 $ 8,391 $ 8,648 $ 7,675 $ 8,499
========= ========= ========= ========= ========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
At or for the years Ended December 31,
------------------------------------------------------------
1997 1996 1995 1994 1993
--------- --------- --------- --------- -------
(In Thousands)
<S> <C> <C> <C> <C> <C>
Selected Operating Ratios and Other Data (1):
Performance Ratios (2):
Return on average assets......................... 1.18% 1.56% 1.73% 1.72% 2.00%
Return on average equity......................... 6.99% 8.34% 11.33% 13.45% 18.75%
Interest rate spread (3)......................... 3.09% 2.98% 2.96% 3.49% 3.94%
Net interest margin (3).......................... 3.66% 3.66% 3.47% 3.87% 4.26%
Net interest income after provision for
loan losses to total operating expense........ 151.39% 196.11% 209.93% 219.89% 254.30%
Operating expenses to average total assets....... 2.13% 1.80% 1.56% 1.67% 1.54%
Efficiency ratio (4)............................. 52.66% 46.53% 43.84% 42.95% 45.15%
Asset Quality Ratios:
Nonperforming loans to net loans at end of year.. 1.41% 1.03% 0.71% 0.87% 0.71%
Nonperforming assets to total assets at
end of year .................................. .92% 0.69% 0.43% 0.59% 0.42%
Allowance for loan losses to
nonperforming loans at end of year............ 60.92% 74.19% 80.91% 65.24% 80.65%
Average interest-earning assets to
average interest-bearing liabilities.......... 115.62% 119.80% 114.32% 112.72% 109.92%
Capital and Equity Ratios: (1)
Average equity to average assets................. 16.89% 18.67% 15.27% 12.78% 10.67%
Equity to assets at end of year.................. 17.18% 17.20% 18.97% 13.33% 11.27%
Per Share Data (2):
Book value per share............................. $ 12.16 $ 11.44 $ 10.94 N/A N/A
Earnings per share
Basic (5)..................................... $ 0.83 $ 0.94 N/A N/A N/A
Diluted (5)................................... $ 0.83 $ 0.94 N/A N/A N/A
Other Data:
Full service offices............................. 14 14 10 9 9
</TABLE>
- -----------------------
(1) The Minority Stock Offering, which raised net proceeds of $29.6 million,
was completed on August 3, 1995.
(2) During the fiscal years ended December 31, 1997, 1996 and 1995, the Bank
recorded net securities gains of $2.9 million, $2.8 million and $4.1
million, respectively. The Bank's portfolio of equity securities was
completely divested as of December 31, 1997 and management believes that
the Company's earnings in the future will not be enhanced by net securities
gains in the amounts recently experienced by the Bank.
(3) Interest rate spread represents the difference between the weighted average
yield on average interest-earning assets and the weighted average costs of
average interest-bearing liabilities, and net interest margin represents
net interest income as a percentage of average interest-earning assets.
32
<PAGE>
(4) The efficiency ratio is calculated by dividing non-interest expense, net of
nonrecurring items and amortization of intangible assets into net interest
income before provision for loan losses plus non-interest income, net of
non-recurring items.
(5) In 1997, the Bank adopted SFAS No. 128. Per share amounts for prior years
have been restated. The adoption of SFAS 128 did not have a material effect
on the Bank's reported earnings per share. See "Impact of New Accounting
Standards."
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
- --------------------------------------------------------------
General
The profitability of the Bank depends primarily on its net interest
income, which is the difference between interest a and dividend income on
interest-earning assets, principally loans and investment securities and
interest expense on a interest-bearing deposits and borrowed funds. Recognizing
that sole reliance upon net interest income for earnings is a becoming an
increasing matter of concern the Bank has formed an asset-based lending arm and
acquired a trust a company as the first steps towards increasing off-balance
sheet income. The Bank's net income also is dependent, to a a lesser extent, on
the level of its other operating income (including service charges and, when
available, gains on sales a of securities) and operating expenses, such as
salaries and employee benefits, net occupancy expense, deposit insurance a
premiums, professional fees, goodwill amortization, data processing and
miscellaneous other expenses, as well as a federal and state income tax
expenses.
Business Strategy
The Bank's current business strategy is to continue to serve its market
area as a community-oriented financial a institution dedicated to financing home
ownership and commercial activity and providing financial services to its a
customers in an efficient manner. The principal components of its strategy are
discussed below.
Emphasizing Traditional Lending and Investment Activities. The Bank is
a community-oriented savings institution a operating primarily in Mercer,
Burlington and Ocean Counties, New Jersey. The Bank's current lending emphasis
is a the origination of one-to-four family residential mortgage loans,
multi-family and commercial mortgage loans, home a equity and property
improvement loans, commercial business loans and consumer loans. The Bank
generally originates a loans for its own portfolio and, with limited exceptions,
has not engaged in the purchase or sale of loans. The Bank a generally limits
its lending activities to Mercer and Burlington Counties, New Jersey, and Bucks
County, a Pennsylvania. However, the Bank's asset-based lending subsidiary,
TSBusiness Finance ("TSBF"), provides funds to a corporations located throughout
the State of New Jersey and the greater Delaware Valley. The Bank does not
engage a in securities trading and limits its investments to U.S. Treasury and
federal government agency obligations, mortgage-backed securities issued by
federal government agencies or sponsored corporations, municipal securities and
corporate a obligations which are rated A or higher by a national rating agency.
By investing in these types of assets, the Bank's a objective has been to
supplement its loan portfolio and reduce significantly the credit and interest
rate risk of its asset a base in exchange for lower rates of return than would
typically be available through lending activities. In addition, the a Bank in
January 1997 instituted an investment leverage program by borrowing $30 million
for reinvestment in federal a agency securities which are designed as available
for sale.
Complementing the Bank's Traditional Lending by Growing the Portfolio
of Higher Yielding Loans. To a complement the Bank's traditional emphasis on
one-to-four family residential real estate lending, the Bank has recently a
increased its portfolio of higher yielding loans. During the twelve months ended
December 31, 1997, the Bank's portfolio a of commercial business loans increased
by $28.1 million or 81.6%, to $62.6 million from $34.5 million. This growth a
has resulted primarily from the Bank's acquisition of Burlington County Bank
("BCB"), discussed below, and its a establishment of TSBF. Because the yields on
these types of loans are generally higher than the yields on one-to-four a
family residential real estate loans, the Bank's goal over the next several
years is to increase its portfolio of such loans a in a controlled, safe and
sound manner. Although management believes that it can safely originate, service
and monitor a these loans, such loans generally expose lenders to greater risk
of loss than one-to-four family residential real estate loans.
33
<PAGE>
Increasing the Bank's Fee Income. On September 8, 1997, the Bank
completed the acquisition of Manchester Trust Bank ("Manchester Trust"), Ocean
County, New Jersey, a trust services company. Manchester Trust was acquired at a
purchase price of $4.0 million. As of December 31, 1997, Manchester Trust had $
166.8 million of assets under management. Manchester Trust, which is operated as
a subsidiary of the Bank, provides trust services primarily to retirees in Ocean
County, New Jersey. Management views this acquisition as the first step in a
strategic growth into the trust services business, and its goal over the next
several years is to increase its total assets under management, and its level of
non-interest income derived from providing such services, by offering similar
services in the other counties in the Bank's market area.
Strong Retail Deposit Base. The Bank has 12 full-service offices
located in Mercer and Burlington County and two full service offices located in
limited access retirement communities located in Ocean County, New Jersey. The
Bank believes it has a stable community real estate deposit base. The Bank
believes its market share of deposits is approximately 4.7% in Mercer County,
New Jersey and 3.4% in Burlington County, New Jersey. The Bank has recently
introduced several new products and services as part of a strategy of increasing
its transaction accounts and decreasing its reliance on certificates of deposit.
As of December 31, 1997 transaction and savings accounts totaled $204.5 million,
or 41.5% of the Bank's total deposit. The Bank does not solicit for deposits
outside its primary market area and does not utilize the services of deposit
brokers.
Growth Through Acquisitions. A component of the Bank's operating
strategy has recently been and continues to be growth through acquisitions. The
Bank believes that assets and expertise acquired in whole-bank acquisitions can
supplement the Bank's internal growth in areas that have not traditionally been
emphasized by the Bank. Accordingly, the Bank's growth in its portfolio of
higher yielding loans was supplemented by its acquisition on October 1, 1996 of
BCB, an $80.2 million commercial bank located in Burlington Township, New
Jersey, at a purchase price of $12.5 million, and the Bank's development of its
trust services business was the result of its acquisition of Manchester Trust
with $140.1 million of assets under management, and BCB with approximately $10.0
million of assets under management at the time of acquisition. Management's
strategy is to continue to grow these lines of business, as well as the Bank's
deposits and portfolio of other loans, through additional acquisitions and
internal development. The Company's ability to grow through selective
acquisitions of other financial institutions or branches of such institutions
will depend on successfully identifying, acquiring and integrating such
institutions or branches into the Bank. There can be no assurance the Company
will be able to generate internal growth or to identify attractive acquisition
candidates, acquire such candidates on favorable terms or successfully integrate
any acquired institutions or branches into the Bank. The Bank has no specific
agreements or understandings regarding any additional expansions or acquisitions
at this time. In addition, the Bank intends to grow internally through de novo
branching, and has received OTS approval to open a branch office in Bucks
County, Pennsylvania.
Market Risk and Asset and Liability Management
General. The Bank's most significant form of market risk is interest
rate risk, as the majority of the Bank's assets and liabilities are sensitive to
interest rate changes. It is the objective of the Bank to minimize, to the
degree prudently possible, its exposure to interest rate risk, while maintaining
an acceptable interest rate spread. Interest rate spread is the difference
between the Bank's yield on its interest-earning assets and its cost of
interest-bearing liabilities. Interest rate risk is generally understood to be
the sensitivity of the Bank's earnings, net asset values, and stockholders'
equity to changes in market interest rates.
Changes in interest rates affect the Bank's earnings. The effect on
earnings of changes in interest rates generally depends on how quickly the
Bank's yield on interest-earning assets and cost of interest-bearing liabilities
react to the changes in market rates of interest. If the Bank's cost of deposit
accounts reacts more quickly to changes in market interest rates than the yield
on the Bank's mortgage loans and other interest-earnings assets, then an
increasing interest rate environment is likely to adversely affect the Bank's
earnings and a decreasing interest rate environment is likely to favorably
affect the Bank's earnings. On the other hand, if the Bank's yield on its
mortgage loans and other interest-earnings assets reacts more quickly to changes
in market interest rates than the Bank's cost of deposit accounts, then an
increasing interest rate environment is likely to favorably affect the Bank's
earnings and a decreasing interest rate environment is likely to adversely
affect the Bank's earnings. Interest rate sensitivity is managed by the
Asset/Liability Management Committee ("ALCO"). The principal objective of ALCO
is to maximize income within acceptable levels of established risk policy.
34
<PAGE>
The table set forth below shows that the Bank's interest-bearing
liabilities which mature or reprice within short periods exceed its
interest-earning assets with similar characteristics. Accordingly, a material
and prolonged increasing interest rate environment generally would adversely
affect net interest income, while a material and prolonged decreasing interest
rate environment generally would have a positive effect on net interest income.
The Bank's current investment strategy is to maintain an overall
securities portfolio that provides a source of liquidity and that contributes to
the Bank's overall profitability and asset mix within given quality and maturity
considerations. The securities portfolio is concentrated in U.S. Treasury and
federal government agency securities providing high asset quality to the overall
balance sheet mix. Most securities recently purchased by the Bank have been
classified as available for sale to provide management with the flexibility to
make adjustments to the portfolio given changes in the economic or interest rate
environment, to fulfill unanticipated liquidity needs, or to take advantage of
alternative investment opportunities.
35
<PAGE>
The following table presents the difference between the Bank's
interest-earning assets and interest-bearing liabilities at December 31, 1997
expected to reprice or mature, based on certain assumptions, in each of the
future time periods shown. This table does not necessarily indicate the impact
of general interest rate movements on the Bank's net interest income because the
repricing of certain assets and liabilities is subject to competitive and other
limitations. As a result, certain assets and liabilities indicated as maturing
or otherwise repricing within a stated period may in fact mature or reprice at
different times and at different volumes.
<TABLE>
<CAPTION>
More than More than
Within One Year to Three Years Over
One Year Three Years to Five Years Five Years Total
-------- ----------- ------------- ---------- -----
<S> <C> <C> <C> <C> <C>
Interest-earning assets:
Mortgage loans:
Fixed-rate......................... $ 13,992 $ 21,531 $ 10,342 $ 61,904 $107,769
Adjustable-rate.................... 85,311 51,507 31,045 6,577 174,440
Non-mortgage loans:
Fixed-rate......................... 8,802 17,824 7,067 16,712 50,405
Adjustable rate.................... 61,570 4,946 743 128 67,387
Securities available for sale: (1)
Debt securities.................... 39,347 74,840 6,452 977 121,616
Equity securities.................. 10 0 0 0 10
Mortgage-backed securities ........ 1,788 2,959 2,291 7,865 14,903
Securities held to maturity:
Debt Securities.................... 20,101 3,205 336 2,215 25,857
Mortgage-backed securities ........ 18,617 9,868 5,998 615 35,098
Federal Home Loan Bank stock....... 0 0 0 3,386 3,386
Federal funds sold..................... 5,950 0 0 0 5,950
-------- -------- -------- -------- --------
Total interest-earning assets ...... $255,488 $186,680 $ 64,274 $100,379 $606,821
======== ======== ======== ======== ========
Interest-bearing liabilities:
Deposits:
Demand accounts.................... 38,996 21,248 7,676 37,475 105,395
Savings accounts................... 16,856 13,990 10,929 57,377 99,152
Certificates of deposit............... 229,472 55,944 3,430 7 288,853
Borrowings............................ 0 30,000 0 0 30,000
-------- -------- -------- -------- --------
Total interest-bearing liabilities $285,324 $121,182 $ 22,035 $ 94,859 $523,400
======== ======== ======== ======== ========
Excess (deficiency) of interest-
earning assets over interest-
bearing liabilities.................. $(29,836) $ 65,498 $ 42,239 $ 5,520
======== ======== ======== ========
Cumulative excess (deficiency) of
interest-earning assets over
interest-bearing liabilities......... $(29,836) $ 35,662 $ 77,901 $ 83,421
========= ======== ======== ========
Cumulative ratio of excess (deficiency)
of interest-earning assets as a
percentage of total assets........... (4.7%) 5.6% 12.2% 13.0%
======== ======== ======== ========
</TABLE>
- -------------------------
(1) Securities available for sale are reflected in this table at amortized cost.
35
<PAGE>
In preparing the table above, it has been assumed, in assessing the
interest rate sensitivity of the Bank, that: (i) mortgage loans will prepay at a
rate of 12.0% per year, (ii) fixed maturity deposits will not be withdrawn prior
to maturity; and (iii) demand and savings accounts will decay at the following
rates:
Over 1 Over 3
1 Year Through Through Over 5
or Less 3 Years 5 Years Years
------- ------- ------- ------
Demand accounts 37.0% 32.0% 17.0% 17.0%
Savings accounts 17.0% 17.0% 16.0% 14.0%
Certain shortcomings are inherent in the method of analysis presented
in the preceding table. For example, although certain assets and liabilities may
have similar maturities or periods to repricing, they may react in different
degrees to changes in market interest rates. In addition, the interest rates on
certain types of assets and liabilities may fluctuate in advance of changes in
market interest rates, while interest rates on other types may lag behind
changes in market rates. Certain assets, such as adjustable-rate mortgage loans,
have features which restrict changes in interest rates on short-term basis and
over the life of the assets. Further, in the event of a change in interest
rates, prepayment and early withdrawal levels would likely deviate significantly
from those assumed in calculating the table. Finally, the ability of many
borrowers to make payments on their adjustable-rate debt may decrease in the
event of an interest rate increase
Net Portfolio Value. The OTS has adopted a final rule that incorporates
an interest rate risk ("IRR") component into the risk-based capital rules. The
IRR component is a dollar amount that will be deducted from total capital for
the purpose of calculating an institution's risk based capital requirement and
is expressed in terms of the sensitivity of its net portfolio value ("NPV") to
changes in interest rates. NPV is the difference between discounted incoming and
outgoing cash flows from assets, liabilities, and off-balance sheet contracts.
An institution's IRR is measured as the change to its NPV as a result of a
hypothetical 200 basis point change in market interest rates. A resulting change
in NPV of more than 2% of the estimated market value of its assets will require
the institution to deduct from its capital 50% of that excess change. The rule
provides that the OTS will calculate the IRR component quarterly for each
institution from the institution's Thrift Financial Reports. The OTS has
postponed the date that the component will first be deducted from an
institution's total capital to provide it with an opportunity to review the
interest rate risk approaches taken by the other federal banking agencies. The
following table presents the Bank's NPV as of December 31, 1997, as calculated
by the OTS, based on information provided to the OTS to the Bank.
<TABLE>
<CAPTION>
Change in Change in NPV
Interest Rates as a percentage of
in Basis Points Net Portfolio Value Estimated Market
(Rate Shock) Amount $ Change % Change Value of Assets
--------------- -------- -------- -------- -----------------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
400 $ 75,074 $ (35,682) (32.22)% (8.02%)
200 $ 94,531 $ (16,225) (14.65)% (2.57%)
Static $ 110,756 -- -- --
(200) $ 122,763 $ 12,007 10.84% 1.90%
(400) $ 133,662 $ 22,906 20.6% 3.63%
</TABLE>
As shown by the table above, increases in interest rates will result in
net decreases in the Bank's NPV, while decreases in interest rates will result
in smaller net increases in the Bank's NPV. The table suggests that in the event
of a 200 basis point change in interest rates, the Bank would experience a 2.57%
decrease in NPV in a rising interest rate environment, and a 1.90% increase in
NPV in a decreasing interest rate environment.
36
<PAGE>
Comparison of Financial Condition
Stockholders' equity increased by $6.7 million, or 6.5%, to $110.0
million at December 31, 1997 from $103.4 million at December 31, 1996. The
increase in stockholders' equity was due to net income of $7.5 million for the
year ended December 31, 1997 which more than offset by a net after tax decrease
of $655,000 in the market value of the Bank's portfolio of available for sale
investments and dividends paid of $1.1 million. The decrease was primarily
attributed to the Bank's sale of equity securities to comply with OTS
regulations that require the Bank to divest its portfolio of equity securities.
The Bank completed the divestiture in the third quarter of 1997. At December 31,
1997 the Bancorp's tangible, core and risk based capital ratios were 15.76%,
15.76%, and 26.48%, respectively.
Total assets increased $39.4 million, or 6.6%, to $640.4 million at
December 31, 1997 from $601.0 million at December 31, 1996. Deposits increased
by $2.2 million, or .44%, to $493.4 million at December 31, 1997 from $491.2
million at December 31, 1996. Cash and cash equivalents decreased by $5.4
million, or 25.8%, to $15.6 million at December 31, 1997 from $20.9 million at
December 31, 1996. Securities available for sale increased $49.7 million, or
56.7%, to $137.3 million at December 31, 1997 from $87.6 million at December 31,
1996. On January 4, 1997, the bank instituted an investment leverage program by
borrowing $30 million for reinvestment in federal agency securities which were
designated as available for sale. Securities held to maturity decreased $25.6
million or 29.6% to $61.0 million at December 31, 1997 from $86.6 million at
December 31, 1996. Net loans increased $16.2 million, or 4.2%, to $396.4 million
at December 31, 1997 from $380.3 million at December 31, 1996. The loan
portfolio increased as mortgage backed security principal payments, and deposit
flows funded loan growth. The Bank's investment in Federal Home Loan Bank
("FHLB") stock increased $297,000, or 9.6%, to $3.4 million at December 31, 1997
from $3.1 million at December 31, 1996, as the Bank's larger mortgage loan
portfolio required additional investment in FHLB stock.
Average Balance Sheet
The following table sets forth certain information relating to the
Bank's average balance sheet and reflects the average yield on assets and
average cost of liabilities for the periods indicated and the average yields
earned and rates paid. Such yields and costs are derived by dividing income or
expense by the average balance of assets or liabilities, respectively, for the
years presented. Average balances are derived from daily average balances.
37
<PAGE>
Comparison of Results of Operations
Average Balance Sheet. The following table presents for the periods
indicated the total dollar amount of interest from average interest-earning
assets and the resultant yields, as well as the interest expense on average
interest-bearing liabilities, expressed both in dollar and rates, and the net
interest margin. Dividends received are included as interest income. The table
does not reflect any effect of income taxes. All average balances are based on
month-end balances. Management believes that using month-end balances, as
opposed to daily balances, has not caused any material differences in the
information presented.
<TABLE>
<CAPTION>
At December 31, Year Ended December 31,
1997 1997 1996
------------------- ------------------------------ -----------------------------
Average Average Average
Actual Yield/ Average Yield/ Average Yield/
Balance Cost Balance Interest Cost Balance Interest Cost
-------- ------- ------- -------- ------- ------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Assets: (1)
Interest-earning assets:
Mortgage loans...................... $282,209 7.42% $269,644 $19,884 7.38% $264,984 $19,489 7.35%
Consumer loans...................... 55,170 8,07 56,655 4,495 7.93 47,823 3,727 7.79
Commercial business loans........... 62,622 8.85 65,522 5,987 9.14 24,973 2,287 9.16
Securities available for sale: (2)
Debt securities................... 122,230 6.47 116,032 7,313 6.29 74,817 4,601 6.15
Equity securities................. 10 5.00 366 61 16.67 1,367 161 11.78
Mortgage-backed securities........ 15,098 7.42 6,258 404 6.46 0 0 0.00
Investments held to maturity:
Debt securities and FHLB stock.... 29,243 5.88 37,572 2,474 6.58 40,858 2,627 6.43
Mortgage-backed securities........ 35,098 6.67 41,894 2,811 6.71 47,990 3,234 6.74
Federal funds sold.................. 5,950 5.25 8,106 428 5.28 14,650 777 5.30
-------- ------- ------- -------- ------
Total interest-earning assets. 607,630 7.28 602,049 43,857 7.28 517,462 36,903 7.13
Non-interest earning assets (3)..... 32,789 30,195 21,195
-------- ------- --------
Total assets................ $640,419 $632,244 $538,657
======== ======== ========
Liabilities and Stockholders' equity:
Certificates of deposits........ $288,853 5.41% $290,007 $15,549 5.36% $271,362 $14,045 5.18%
Core deposits................... 204,547 2.19 198,325 4,273 2.15 160,576 3,896 2.43
-------- ------- ------- -------- ------
Borrowed funds.................. 30,000 6.03 32,400 2,009 6.20 0 0 0.00
Total interest-bearing liabilities.. 523,400 4.19 520,732 21,831 4.19 431,938 17,941 4.15
Non-interest bearing liabilities.... 6,981 4,747 6,166
-------- ------- --------
Total liabilities........... 530,381 525,479 438,104
-------- ------- --------
Stockholders' equity................ 110,038 106,765 100,553
-------- ------- --------
Total liabilities and
stockholders' equity.............. $640,419 $632,244 $538,657
======== ======== ========
Net interest income................. $22,026 $18,962
======= =======
Net interest spread (4)............. 3.09% 3.09% 2.98%
====== ===== ======
Net interest margin (5)............. 3.62% 3.66% 3.66%
====== ===== ======
Ratio of average interest-earning
assets to average interest-bearing
liabilities...................... 116.09% 115.62% 119.80%
====== ====== ======
<PAGE>
1995
-----------------------------
Average
Average Yield/
Balance Interest Cost
------- -------- -------
<S> <C> <C> <C>
Assets: (1)
Interest-earning assets:
Mortgage loans...................... $251,520 $18,558 7.38%
Consumer loans...................... 35,662 2,866 8.04
Commercial business loans........... 9,861 922 9.35
Securities available for sale: (2)
Debt securities................... 67,938 4,076 6.00
Equity securities................. 4,944 409 8.27
Mortgage-backed securities........ 0 0
Investments held to maturity:
Debt securities and FHLB stock.... 29,331 1,910 6.51
Mortgage-backed securities........ 51,323 3,273 6.38
Federal funds sold.................. 25,175 1,504 5.97
-------- -------
Total interest-earning assets. 475,754 33,518 7.05
Non-interest earning assets (3)..... 24,175
--------
Total assets................ $499,929
========
Liabilities and Stockholders' equity:
Certificates of deposits........ $251,932 $13,006 5.16%
Core deposits................... 164,213 4,004 2.44
-------- -------
Borrowed funds.................. 0 0 0.00
Total interest-bearing liabilities.. 416,145 17,010 4.09
Non-interest bearing liabilities.... 7,437
--------
Total liabilities........... 423,582
--------
Stockholders' equity................ 76,347
--------
Total liabilities and
stockholders' equity............. $499,929
========
Net interest income................. $16,508
=======
Net interest spread (4)............. 2.96%
=====
Net interest margin (5)............. 3.47%
=====
Ratio of average interest-earning
assets to average interest-bearing
liabilities...................... 114.32%
======
</TABLE>
- ---------------------------
(1) Average balances and rates include non-accrual loans.
(2) Securities available for sale are reflected in this table at amortized
cost.
(3) Includes market value adjustment on securities available for sale.
(4) Interest rate spread represents the difference between the weighted average
rates earned on interest-earning assets and the weighted average rates paid
on interest-bearing liabilities.
(5) Net yield on average interest-earning assets represents net interest income
as a percentage of average interest-earning assets.
38
<PAGE>
Rate/Volume Analysis. The following table describes the extent to which
changes in interest rates and changes in volume of interestrelated assets and
liabilities have affected the Bank's interest income and expense during the
years indicated. For each category of interest-earning assets and
interest-bearing liabilities, information is provided on changes attributable to
(i) changes in volume (change in volume multiplied by prior year rate), and (ii)
changes in rate (change in rate multiplied by prior year volume). The combined
effect of changes in both rate and volume has been allocated to the change due
to volume.
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------------------------
1997 vs. 1996 1996 vs. 1995
-------------------------- --------------------------
Increase/(Decrease) Due to Increase/(Decrease) Due to
-------------------------- --------------------------
Volume Rate Net Volume Rate Net
------ ------- ----- ------- ------- ------
(In Thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Mortgage loans..................................... $ 316 $ 79 $ 395 $1,006 $ (75) $ 931
Consumer loans..................................... 701 67 768 950 (89) 861
Commercial business loans.......................... 3,705 (5) 3,700 1,384 (19) 1,365
Securities available for sale:
Debt securities.................................. 2,607 105 2,712 423 102 525
Equity securities................................ (167) 67 (100) (422) 174 (248)
Mortgage-backed securities....................... 404 0 404 0 0 0
Securities held to maturity:
Debt securities and Federal
Home Loan Bank stock........................... (214) 61 (153) 740 (23) 717
Mortgage-backed securities..................... (409) (14) (423) (224) 185 (39)
Federal funds sold................................. (346) (3) (349) (558) (169) (727)
------- ------- ------- ------- ------- --------
Total........................................ 6,597 357 6,954 3,299 86 3,385
------ ------ ------ ------ ------ -------
Interest-bearing liabilities:
Certificates of deposit............................ 1,016 488 1,504 989 50 1,039
Interest-bearing savings deposits.................. 827 (450) 377 (92) (16) (108)
Borrowed funds..................................... 2,009 0 2,009 0 0 0
------ ------ ------ ------ ------ -------
Total............................................ 3,852 38 3,890 897 34 931
------ ------ ------ ------ ------ -------
Net change in net interest income.................... $2,745 $ 319 $3,064 $2,402 $ 52 $ 2,454
====== ====== ====== ====== ====== =======
</TABLE>
Comparison of Results of Operations
General. The return on average assets and return on average equity were
1.18% and 6.99% respectively for the year ended December 31, 1997 compared to
1.56% and 8.34% respectively for the year ended December 31, 1996.
Net income, including security gains of $2.9 million, was $7.5 million
for the year 1997 compared to $8.4 million for the year 1996, including net
securities gains of $2.8 million.
Net income, including security gains of $4.2 million was $8.6 million
for the year 1995.
Net Interest and Dividend Income. Total interest income increased by
$7.0 million, or 18.8%, to $43.9 million for the year ended December 31, 1997
from $36.9 million for the year ended December 31, 1996, as the Bank increased
its interest income from all loan categories, and debt and mortgage backed
securities available for sale, which increases were partially offset by
decreases in interest income from equity securities available for sale, federal
funds sold, and investment securities, FHLB stock, and mortgage-backed
securities held to maturity. The increase in interest income resulted primarily
from a $84.6 million, or 16.4%, increase in average interest-earning assets to
$602.0 million from $517.5 million and a 15 basis point increase in yield on the
Bank's average interestearning assets to 7.28% from 7.13%. The increase in
average interest-earning assets resulted primarily from the bank's acquisition
of BCB, the $30 million leverage program, and deposit inflows.
39
<PAGE>
Interest income from mortgage loans increased by $395,000, or 2.0%, to
$19.9 million for the year ended December 31, 1997, from $ 19.5 million for the
year ended December 31, 1996. This increase was due to a $4.7 million, or 1.8%,
increase in average mortgage loans to $269.6 million from $265.0 million,
combined with an increase in the yield on average mortgage loans to 7.38% from
7.35%. Interest income from consumer loans increased by $768 thousand, or 20.6%,
to $4.5 million from $3.7 million as a result of a $8.8 million increase in
average consumer loans to $56.7 million from $47.8 million. combined with a 14
basis point increase in the yield on average consumer loans. Interest income
from commercial business loans increased by $3.7 million or 161.8%, to $6.0
million for the year ended December 31, 1997 from $2.3 million for the year
ended December 31, 1996. This increase was due to a $40.5 million, or a 162.4%
increase in average commercial business loans to $65.5 million from $25 million
which offset a 2 basis point decrease in the yield on average commercial
business loans to 9.14% from 9.16%. The increase in average commercial business
loan balances was due to the acquisition of BCB and increased commercial
business loan activity. The Bank intends to focus its efforts in increasing its
portfolio of commercial business loans in the future. Interest income from debt
securities available for sale increased by $2.7 million, or 58.9%, to $7.3
million from $4.6 million due to a 14 point increase in the yield on average
debt securities available for sale to 6.29%, from 6.15%, and a $41.2 million, or
55.1% increase in average debt securities available for sale to $116.0 million
from $74.8 million. The increase in average debt securities available for sale
was primarily attributable to the investment of funds for the $30 million
leverage program. Interest income from mortgage backed securities available for
sale was $404,000 for the year ended December 31, 1997 with an average balance
of $6.3 million. There were no mortgage backed securities available for sale in
1996. Interest income from the mortgage-backed securities held to maturity
declined $423,000 or 13.1%, to $2.8 million for the year ended December 31,
1997, from $3.2 million, for the year ended December 31, 1996. The decrease in
income was primarily attributable to $6.1 million decrease in the average
balance of mortgage-backed securities held to maturity to $41.9 million from
$48.0 million combined with a decrease in the yield on average mortgage-backed
securities held to maturity to 6.71% from 6.74%.
The decrease in average equity securities available for sale resulted
from the Bank's liquidation of this portfolio as required by OTS regulations in
connection with the Bank's conversion to a federally chartered savings bank.
Accordingly, income from equity securities available for sale decreased by
$100,000, or 62.1%, to $61,000 from $161,000.
Interest income from debt securities held to maturity and FHLB stock
decreased by $153,000, or 5.8%, to $2.5 million for the year ended December 31,
1997 from $2.6 million for the year ended December 31, 1996 due to a $3.3
million, or 8.0% decrease in the average balance of debt securities to $37.6
million for the year ended December 31, 1997 from $40.9 million for the year
ended December 31, 1996. The decrease in average balance was offset by a 15
basis point increase in yield to 6.58% from 6.43%. Interest income from federal
funds sold decreased $349,000 to $428,000 from $777,000 due to a $6.5 million
decrease in average federal funds sold to $8.1 million from $14.7 million,
combined with a 2 basis point decrease in the yield on average federal funds
sold to 5.28% from 5.30%. The decrease in amount of federal funds sold reflects
the investment of available cash flow in higher yielding investments and the
Bank's utilization of a leverage strategy.
The increase in the Bank's average balance of mortgage, commercial
loans, consumer loans, and debt securities available for sale, resulted from the
bank's leverage program, the acquisition of BCB and internal loan growth. The
changes in yields on mortgage loans, consumer loans, commercial loans,
investment securities and federal funds sold resulted primarily from the
purchase of interest-earning assets at 1997 market yields.
Total interest income increased by $3.4 million, or 10.1%, to $36.9
million for the year ended December 31, 1996 from $33.5 million for the year
ended December 31, 1995, as the Bank increased its interest income from all loan
categories, debt securities available for sale, investment securities and FHLB
stock, which increases were partially offset by decreases in interest income
from equity securities available for sale, federal funds sold, and
mortgage-backed securities. The increase in interest income resulted primarily
from a $41.7 million, or 8.8%, increase in average interest-earning assets to
$517.5 million from $475.8 million and an eight basis point increase in yield on
the Bank's
40
<PAGE>
average interest-earning assets to 7.13% from 7.0%. The increase in average
interest-earning assets resulted from the Bank's acquisition of BCB and deposit
inflows.
Interest income from mortgage loans increased by $931,000, or 5.0%, to
$19.5 million for the year ended December 31, 1996, from $ 18.6 million for the
year ended December 31, 1995. This increase was due to a $ 13.5 million, or
5.4%, increase in average mortgage loans to $265.0 million from $251.5 million,
which offset a decrease in the yield on average mortgage loans to 7.35% from
7.38%. Interest income from consumer loans increased by $861,000, or 30.0%, to
$3.7 million from $2.9 million as a result of a $12.1 million increase in
average consumer loans to $47.8 million from $35.7 million, which was partially
offset by a 25 basis point decrease in the yield on average consumer loans.
Interest income from commercial business loans increased by $1.4 million, or
148.0%, to $2.3 million for the year ended December 31, 1996, from $922,000 for
the year ended December 31, 1995. This increase was due to a $15.1 million, or
153.3% increase in average commercial business loans to$25.0 million from $9.9
million which offset a 19 basis point decrease in the yield on average
commercial business loans to 9.16% from 9.35%. The increase in average
commercial business loan balances was due to the acquisition of BCB and
increased commercial business loan activity. Interest income from debt
securities available for sale increased by $525,000, or 12.9%, to $4.6 million
from $4.1 million due to a 15 basis point increase in the yield debt securities
available for sale to 6.15% from 6.00%, a $6.9 million, or 10.1% increase in
average debt securities available for sale to $74.8 million from $67.9 million.
Interest income from mortgage-backed securities remained at $3.2 million, as a
$3.3 million, or 6.5%, decrease in the average balance of mortgage-backed
securities to $48.0 million from $51.3 million was offset by an increase in the
yield on average mortgage-backed securities to 6.74% from 6.38%.
Income from equity securities available for sale decreased by $248,000,
or 60.6%, to $161,000 from $409,000 due to a $3.6 million, or 72.4%, decrease in
average equity securities available for sale to $1.4 million from $4.9 million,
partially offset by a 351 basis point increase in the yield on average equity
securities available for sale to 11.78% from 8.27%. The decrease in average
equity securities available for sale resulted from the Bank's continuing
strategy of liquidating such securities, as required in connection with the
Bank's conversion to a federally-chartered savings bank, while the increase in
yield resulted from the favorable market conditions for equities that existed
during 1996.
Interest income from debt securities held to maturity and FHLB stock
increased by $717,000, or 37.5%, to $2.6 million from $1.9 million. This
increase was due to an $11.5 million, or 39.3%, increase in the average balance
of debt securities to $40.9 million for 1996 from $29.3 million for 1995, the
effects of which were partially offset by an 8 basis point decrease in yield to
6.43% from 6.51%. Interest income from federal funds sold decreased $727,000 to
$777,000 from $1.5 million due to a $10.5 million decrease in average federal
funds sold to $14.7 million from $25.2 million. and a 67 basis point decrease in
the yield on average federal funds sold to 5.30% from 5.97%.
The increase in the Bank's average balance of mortgage, commercial
loans, consumer loans, debt securities available for sale, and investment
securities resulted from the acquisition of BCB and internal loan growth. The
decrease in yields on mortgage loans, consumer loans, commercial loans,
investment securities and federal funds sold resulted from the purchase of
interest-earning assets at market yields which were lower in 1996 than in 1995.
Total Interest Expense. Total interest expense increased by $3.9
million, or 21.7%, to $21.8 million for the year ended December 31, 1997, from
$17.9 million for the year ended December 31, 1996. The increase was due to a
$88.8 million, or 20.6% increase in average interest-bearing liabilities to
$520.7 million from $431.9 million, and a 4 basis point increase in the average
cost of the Bank's interest-bearing liabilities to 4.19% from 4.15%. The
increase in cost of average interest-bearing liabilities resulted from the $30
million borrowing at an interest cost of 6.02% in January 1997 for the Bank's
leverage investment program combined with an 18 basis point increase in the cost
of average certificates of deposit to 5.36% for the year ending December 31,
1997 from 5.18% for the year ending December 31, 1996 . These factors were
offset by a 28 basis point decrease in the cost of average core deposits to
2.15% for the year ending December 31, 1997, from 2.43% for the year ending
December 31, 1996. The increase in interest-bearing liabilities was largely the
result of the acquisition of BCB and the leverage program. The increase in
41
<PAGE>
rates paid on certificates of deposit was attributed to the effect of paying
higher market rates on these deposits. The increase in the average rate paid for
funds was also attributed to the higher cost of monies for the bank's leverage
program.
Total interest expense increased by $931,000, or 5.5%, to $ 17.9
million for the year ended December 31, 1996, from $ 17.0 million for the year
ended December 31, 1995. The increase was due to a $15.8 million, or 3.8%,
increase in average interest-bearing liabilities to $431.9 million from $416.1
million, and a 6 basis point increase in the average cost of the Bank's
interest-bearing liabilities to 4.15% from 4.09%. The increase in average
interest-bearing liabilities resulted from a $19.4 million, or 7.7%, increase in
average certificates of deposit which offset a $3.6 million, or 2.2% decrease in
average core deposits. The increase in interest-bearing liabilities was largely
the result of the acquisition of BCB. The increase in rates paid on deposits was
attributable to the effect of paying higher market rates on certificates of
deposit in 1996 and a slight decline in rates paid on less expensive core
deposits.
Interest Spread. The Bank's net interest income was $22.0 million for
the year ended December 31, 1997 compared to $19.0 million for the year ended
December 31, 1996. The Bank's interest rate spread was 3.09% for the year ended
December 31, 1997 compared to 2.98% for the year ended December 31, 1996, as the
yield on the Bank's interest-earning assets increased more rapidly than the
Bank's cost of interest-bearing liabilities. The Bank's net interest margin was
3.66% for both years.
The Bank's net interest income was $19.0 million for 1996 compared to
$16.5 million for 1995. The Bank's interest rate spread was 2.98% for 1996
compared to 2.96% for 1995, as the yield on the Bank's interest-earning assets
increased more rapidly than the Bank's cost of interest-bearing liabilities.
Provision for Loan Losses. The provision for loan losses was $1.7
million, for the year ended December 31, 1997. There was no provision for loan
losses during the comparable 1996 period. The provision for 1997 was primarily
attributable to a niche line of business that was inherited through the
acquisition of Burlington County Bank. Management has made the decision to exit
the automobile dealer floor plan financing business and has made provisions for
the deterioration of the portfolio. Management has taken steps to expeditiously
address the credit risk in these loans and any potential losses associated with
exiting this line of business. As of December 31, 1997, the Bancorp's total
non-performing loans and foreclosed assets amounted to $5.9 million, or $.92% of
total assets compared to $4.2 million, or .69% of total assets at December 31,
1996. At December 31, 1997, the Bank had $2.145 million of loans criticized as
special mention, $6.6 million classified as substandard, and $571,000 as
doubtful and no loans classified as loss.
Management believes that the allowance for loan losses is adequate
based on historical experience, the volume and type of lending conducted by the
Bank, the amount of non-performing loans, general economic conditions and other
factors relating to the Bank's loan portfolio. However, there can be no
assurances that actual losses will not exceed estimated amounts.
The decrease in the provisions to $0 in 1996 from $150,000 and $180,000
in 1995 and 1994, respectively, was based upon management's analysis of the loan
portfolio, history of charge-offs, and strength of the Bank's coverage ratios.
The acquisition of BCB added $1.2 million to the Bank's loan loss reserves,
increasing the total loan loss reserve at December 31, 1996 to $2.9 million.
Nonperforming loans totaled $3.9 million at December 31, 1996 compared to $2.2
million at December 31, 1995, primarily as the result of the acquisition of
BCB's substantial commercial loan portfolio. Non-performing assets as a
percentage of total assets increased from .43% at December 31, 1995 to .69% at
December 31, 1996.
Other Income. For the year ended December 31, 1997, the net gain on
security sales increased $84,000, or 3.0%, to $2.9 million, compared to a net
gain of $2.8 million for the year ended December 31, 1996. Service fees and
other income increased $1.0 million or 107.2% for the year ended December 31,
1997 to $2.0 million from $1.0 million for the year ended December 31, 1996. The
increase in fees is primarily attributable to the acquisition of BCB deposits
which have higher fee generating characteristics.
42
<PAGE>
In 1996, the net gain on security sales decreased $1.4 million, or
32.3%, to $2.8 million, compared to a net gain in 1995 of $4.2 million.
Consequently, other income decreased $1.1 million for the year ended December
31, 1996 compared to the year ended December 31, 1995. Service fees and other
income increased by $206,000 for fiscal 1996 compared to fiscal 1995.
Operating Expenses. Total operating expenses increased by $3.8 million,
or 39.0%, to $13.4 million for the year ended December 31, 1997 as compared to
$9.7 million for the year ended December 31, 1996. During the same period the
amortization of intangible assets increased by $411 thousand or 105.7% to
$800,000 from $400,000, reflecting the amortization of goodwill from the
acquisition of BCB and Manchester Trust Bank. Salaries and employee benefits
increased $2.3 million, or 44.4%, to $7.4 million for the year ended December
31, 1997 from $5.1 million for the year ended December 31, 1996, reflecting
normal salary increases, management incentive awards, and nine months of
additional salaries from the acquisition of BCB, additional salary expenses from
expansion of TSBF, and acquisition of Manchester Trust Bank. Net occupancy
expenses increased $268 thousand, or 20.5%, due to the addition of two branches
as well as the acquisition of three BCB branches. Other operating expenses
increased $.8 million, or 28.9%, to $3.7 million for the year ended December 31,
1997 as compared to $2.9 million for the year ended December 31, 1996,
reflecting routine expense increases and nine months of additional expenses from
the acquisition of BCB and approximately three months of additional expenses due
to the acquisition of Manchester Trust Bank.
Total operating expenses increased by $1.9 million, or 24.0%, to $9.7
million in 1996 as compared to $7.8 million in 1995. Salaries and employee
benefits increased $1.1 million, or 28.9%, to $5.1 million in 1996 from $4.0
million in 1995, reflecting normal salary increases, management incentive
awards, and three months of additional salaries from the acquisition of BCB.
Amortization of intangible assets increased from $226,000 in 1995 to $389,000 in
1996, reflecting the amortization of three months of goodwill from the
acquisition of BCB. Net occupancy expenses increased $175,000, or 15.5%, due to
the addition of one branch well as the acquisition of three BCB branches. Other
operating expenses increased $394,000, or 15.9%, to $2.9 million in 1996 as
compared to $2.5 million in 1995, reflecting routine expense increases and three
months of expenses from the acquisition of BCB. These expense increases were
offset by a $259,000 reduction in FDIC insurance premiums.
Income Taxes. For the year ended December 31, 1997, income tax expense
amounted to $4.3 million compared to $4.7 million for the year ended December
31, 1996, reflecting primarily the differences in income before taxes. The
effective tax rate was 36.7% in 1997 compared to 36.0% in 1996.
Income tax expense amounted to $4.7 million and $4.9 million, in 1996
and 1995, reflecting primarily the differences in income before income taxes for
such years. The effective income tax rate remained consistent in 1996 and 1995.
Liquidity and Capital Resources
The Bank is required under applicable federal regulations to maintain
specified levels of "liquid" investments in qualifying types of United States
Government, federal agency and other investments having maturities of five years
or less. Current OTS regulations require that a savings institution maintain
liquid assets of not less than 4% of its average daily balance of net
withdrawable deposit accounts and borrowings payable in one year or less.
Monetary penalties may be imposed for failure to meet applicable liquidity
requirements. At December 31, 1997, the Bank's liquidity, as measured for
regulatory purposes, was 28.5%, or $139.1 million in excess of the minimum OTS
requirement.
Cash was generated by the Bank's operating activities during the years
ended December 31, 1997, 1996, and 1995, primarily as a result of the
acquisition of BCB, the assumption of deposits, proceeds from the conversion,
borrowings for a leverage program and retained earnings. The adjustments to
reconcile net income to net cash provided by operations during the years
presented consisted primarily of net gains from sale of securities, the
provision for loan losses, depreciation and amortization expense, increases or
decreases in accrued interest payable or receivable, and
43
<PAGE>
increases or decreases in other assets and other liabilities. The primary
investing activity of the Bank is lending, which is funded with cash provided
from operations and financing activities including deposits, as well as proceeds
from amortization and prepayments on existing loans and proceeds from maturities
of mortgage-backed securities and other investment securities. For additional
information about cash flows from the bank's operating, financing and investing
activities, see the Consolidated Statements of Cash Flows included in the
Consolidated Financial Statements.
At December 31, 1997, the Bank had outstanding $ 18.2 million in
commitments to originate and purchase loans, and $ 19.8 million in commitments
under unused lines of credit for commercial business loans. At the same date,
the total amount of certificates of deposit which are scheduled to mature by
December 31, 1998 was $229 million. The Bank believes that it has adequate
resources to fund commitments as they arise and that it can adjust the rate on
savings certificates to retain deposits in changing interest rate environments.
If the Bank requires funds beyond its internal funding capabilities, advances
from the FHLB of New York and borrowings from correspondent banks are available
as an additional source of funds. At December 31, 1997, the Bank had $30.0
million of borrowings, which mature in January 2000.
Capital
The OTS requires that the Bancorp meet minimum tangible, core and
risk-based capital requirements. As of December 31, 1997, the Bank exceeded all
regulatory capital requirements. The Bank's required, actual, and excess capital
levels as of December 31, 1997, are as follows:
<TABLE>
<CAPTION>
Excess of
Actual Over
Regulatory
Required Actual Requirement
% of % of % of
Amount Assets Amount Assets Amount Assets
------ ------ ------ ------ ------ ------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Tangible Capital 9,449 1.50% 99,260 15.76% 89,811 14.26%
Core Capital 18,900 3.00 99,260 15.76 80,360 12.26
Risk-based Capital 31,019 8.00 102.675 26.48 71,656 18.48
</TABLE>
Impact of New Accounting Standards
In June 1997, the FASB issued Statement of Financial Accounting
Standards No. 130 (SEAS No. 130), "Reporting Comprehensive Income". This
Statement establishes standards for reporting and display of comprehensive
income and its components (revenues, expenses, gains and losses) in a full set
of general-purpose financial statements. This Statement is effective for fiscal
years beginning after December 31, 1997. Reclassification of financial
statements for earlier periods provided for comparative purposes is required.
The Bank has not determined the impact that this Statement will have on its
reporting of operations.
In June 1997, the FASB issued Statement of Financial Accounting
Standards No. 131 (SEAS No. 131), "Disclosures about Segments of an Enterprise
and Related Information". This statement established standards for the way that
public business enterprises report information about operating segments in
annual financial statements and requires that those enterprises report selected
information about operating segments in interim financial reports issued to
shareholders. It also established standards for related disclosure about
products and services, geographic areas, and major customers. This statement is
effective for financial statements for periods beginning after December 15,
1997. In the initial year of application, comparative information for earlier
years is to be restated. This Statement need not be applied to interim financial
statements in the initial year of its application, but comparative information
for interim
44
<PAGE>
periods in the initial year of application is to be reported in financial
statements for interim periods in the second year of application. This Statement
is not expected to change the reporting requirements of the Bank.
Impact of Inflation and Changing Prices
The financial statements and related financial data presented herein
have been prepared in accordance with GAAP, which requires the measurement of
financial position and operating results in terms in historical dollars, without
considering changes in relative purchasing power over time due to inflation.
Unlike most industrial companies, virtually all of the Bank's assets
and liabilities are monetary in nature. As a result, interest rates generally
have a more significant impact on a financial institution's performance than
does the effect of inflation.
Capability of the Bank's Data Processing Hardware to Accommodate the Year 2000
Like many financial institutions the Bank relies upon computers for the
daily conduct of its business and for data processing generally. There is
concern among industry experts that on January 1, 2000 computers will be unable
to "read" the new year and there may be widespread computer malfunctions. The
Bank generally relies on independent third parties to provide data processing
services to the Bank, and has been advised by its data processing service center
that the issue has been addressed. The Bank recognized that a comprehensive and
coordinated plan of action was needed to ensure 100% readiness to perform year
2000 processing. A year 2000 Committee has been formed to imitate and implement
the year 2000 project, policies, document readiness of the Bank to accommodate
year 2000 processing, and to track and test progress towards full compliance.
The Bank contracts with service bureaus to provide the majority of its data
processing and is dependent upon purchased application software. In house
applications are limited to word-processing and spreadsheet functions. The Bank
is in the process of ensuring that external vendors and servicers are adequately
addressing the system and software issues related to the year 2000 by obtaining
written system certifications that the systems are fully year 2000 compliant or
that the Vendor has a plan to become fully compliant in the very near future.
Beginning in the third quarter of 1998, the Bank will coordinate with primary
servicers end-to-end tests which allow the bank to simulate daily processing on
sensitive century dates. In the evaluation, the bank will ensure that critical
operations will continue if servicers or vendors are unable to achieve the year
2000 requirements. Upon the completion of the system inventory and vendor
certification, the committee will identify critical applications and develop
detailed plans for hardware system upgrades and system replacements where
necessary. All upgrades are scheduled to be implemented by December 31, 1998 to
allow a full year for system testing. Costs associated with the year 2000
conversion have not been and are not expected to be material to the consolidated
financial statements.
45
<PAGE>
ITEM 8. FINANCIAL STATEMENTS
PEOPLES BANCORP, INC.
Consolidated Financial Statements
December 31, 1997 and 1996
(With Independent Auditors' Report Thereon)
46
<PAGE>
[GRAPHIC OMITTED]
Independent Auditors' Report
The Board of Directors and Stockholders
Peoples Bancorp, Inc.:
We have audited the accompanying consolidated statements of condition of Peoples
Bancorp, Inc. (holding company for Trenton Savings Bank FSB) as of December 31,
1997 and 1996, and the related consolidated statements of income, stockholders'
equity and cash flows for each of the years in the three-year period ended
December 31, 1997. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Peoples Bancorp,
Inc. as of December 31, 1997 and 1996, and the results of its operations and its
cash flows for each of the years in the three-year period ended December 31,
1997 in conformity with generally accepted accounting principles.
/s/ KPMG Peat Marwick LLP
February 6, 1998
Short Hills, New Jersey
47
<PAGE>
PEOPLES BANCORP, INC.
Consolidated Statements of Condition
December 31, 1997 and 1996
(in thousands)
<TABLE>
<CAPTION>
Assets 1997 1996
---- ----
<S> <C> <C>
Cash and due from banks $ 9,596 12,938
Federal funds sold 5,950 8,000
--------- ---------
Total cash and cash equivalents 15,546 20,938
Investment and mortgage-backed securities available for
sale (note 5) 137,338 87,648
Investment and mortgage-backed securities held to
maturity (market value of $61,306 in 1997 and $86,512
in 1996) (notes 6 and 7) 60,955 86,553
Federal Home Loan Bank stock, at cost 3,386 3,089
Loans, net (note 8) 396,448 380,288
Bank premises and equipment, net (note 9) 6,747 6,982
Accrued interest receivable (note 10) 4,975 3,602
Prepaid expenses 1,105 1,471
Intangible assets (note 2) 10,604 9,164
Other assets (note 13) 3,315 1,281
--------- ---------
Total assets $ 640,419 601,016
Liabilities and Stockholders' Equity
Liabilities:
Deposits (note 11) 493,400 491,246
Borrowing (note 12) 30,000 -
Accrued interest payable 2,677 2,364
Accrued expenses and other liabilities (note 15) 4,304 4,054
--------- ---------
Total liabilities 530,381 497,664
Commitments and contingencies (notes 9 and 16)
Stockholders' equity:
Common stock. $.10 par value. Authorized
20,000,000 shares; issued and outstanding
9,046,444 shares at December 31, 1997 and
9,037,160 shares at December 31, 1996 905 904
Additional paid-in capital 30,502 30,357
Retained earnings - substantially restricted 78,870 72,545
Unearned Management Recognition Plan shares (673) (1,543)
Net unrealized gain on securities available for sale,
net of taxes 434 1,089
----------- ---------
Total stockholders' equity (notes 13 and 14) 110,038 103,352
Total liabilities and stockholders' equity $ 640,419 601,016
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
48
<PAGE>
PEOPLES BANCORP, INC.
Consolidated Statements of Income
Years ended December 31, 1997, 1996, and 1995
(in thousands)
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Interest and dividend income:
Interest and fees on loans $ 30,366 25,503 22,347
Interest on securities available for sale 7,778 4,762 4,484
Interest and dividends on securities held
to maturity 5,285 5,861 5,183
Interest on Federal funds sold 428 777 1,504
-------- -------- -------
Total interest income 43,857 36,903 33,518
Interest expense on deposits (note 11) 19,822 17,941 17,010
Interest expense on borrowings (note 12) 2,009 - -
-------- ---------- ------
Total interest expense 21,831 17,941 17,010
Net interest income 22,026 18,962 16,508
Provision for loan losses (note 8) 1,674 - 150
------- ---------- --------
Net interest income after provision
for loan losses 20,352 18,962 16,358
Other income:
Service fees on deposit accounts 1,362 485 361
Fees and other income 619 471 390
Net gain (loss) on sale of other real estate (24) 23 2
Net gain on sale of securities (note 5) 2,923 2,839 4,193
------- ------- -------
Total other income 4,880 3,818 4,946
Operating expense:
Salaries and employee benefits (note 15) 7,369 5,104 3,959
Net occupancy expense (note 9) 1,574 1,306 1,131
Equipment expense 120 88 58
Data processing fees 537 416 346
Amortization of intangible assets 800 389 226
FDIC insurance premium (note 18) 57 233 492
FDIC Special Assessment (note 18) - 177 -
Marketing expense 407 376 358
Other operating expense 2,579 1,580 1,222
------- ------- -------
Total operating expense 13,443 9,669 7,792
Income before income taxes 11,789 13,111 13,512
Income taxes (note 13) 4,327 4,720 4,864
------- ------- -------
Net income $ 7,462 8,391 8,648
Earnings per common share (note 19):
Basic $ 0.83 0.94 -
Diluted 0.83 0.94 -
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
49
<PAGE>
PEOPLES BANCORP, INC.
Consolidated Statements of Stockholders' Equity
Years ended December 31, 1997, 1996 and 1995
(in thousands)
<TABLE>
<CAPTION>
Additional
Number Common paid-in
of shares stock capital
--------- ----- -------
<S> <C> <C> <C>
Balance at December 31, 1994 - $ - -
Proceeds of the stock offering, net of issuance
expenses of $1,387, and mutual holding
company capitalization, $200 8,912,500 891 28,687
Net income for the year - - -
Dividends declared - - -
Net change in net unrealized gain on securities
available for sale, net of tax expense of $360 - - -
--------------- ----- ----------
Balance at December 31, 1995 8,912,500 891 28,687
Net income for the year - - -
Dividends declared - - -
Establishment of Management Recognition Plan 124,660 13 1,670
Amortization on unearned Management Recognition
Plan shares - - -
Net change in net unrealized gain on securities
available for sale, net of tax expense of $905 - - -
--------------- ----- ----------
Balance at December 31, 1996 9,037,160 904 30,357
Net income for the year - - -
Dividends declared - - -
Proceeds from exercise of stock options 9,284 1 20
Amortization on unearned Management Recognition
Plan shares - - 125
Net change in net unrealized gain on securities
available for sale, net of tax expense of $365 - - -
--------------- ----------- ----------
Balance at December 31, 1997 9,046,444 $ 905 30,502
</TABLE>
<TABLE>
<CAPTION>
Net
unrealized
gain on
Retained Unearned securities
earnings Management available Total
(substantially Recognition for sale, stockholders'
restricted) Plan shares net of taxes equity
---------- ----------- ------------ -------------
<S> <C> <C> <C> <C>
Balance at December 31, 1994 56,798 - 1,970 58,768
Proceeds of the stock offering, net of issuance
expenses of $1,387, and mutual holding
company capitalization, $200 - - - 29,578
Net income for the year 8,648 - - 8,648
Dividends declared (179) - - (179)
Net change in net unrealized gain on securities
available for sale, net of tax expense of $360 - - 727 727
---------- -------- ------ ----------
Balance at December 31, 1995 65,267 - 2,697 97,542
Net income for the year 8,391 - - 8,391
Dividends declared (1,113) - - (1,113)
Establishment of Management Recognition Plan - (1,683) - -
Amortization on unearned Management Recognition
Plan shares - 140 - 140
Net change in net unrealized gain on securities
available for sale, net of tax expense of $905 - - (1,608) (1,608)
---------- -------- ----- ---------
Balance at December 31, 1996 72,545 (1,543) 1,089 103,352
Net income for the year 7,462 - - 7,462
Dividends declared (1,137) - - (1,137)
Proceeds from exercise of stock options - - - 21
Amortization on unearned Management Recognition
Plan shares - 870 - 995
Net change in net unrealized gain on securities
available for sale, net of tax expense of $365 - - (655) (655)
---------- -------- ------ ----------
Balance at December 31, 1997 78,870 (673) 434 110,038
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
50
<PAGE>
PEOPLES BANCORP, INC.
Consolidated Statements of Cash Flows
Years ended December 31, 1997, 1996 and 1995
(in thousands)
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 7,462 8,391 8,648
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 1,674 - 150
Depreciation and amortization expense 623 507 433
Amortization of Management Recognition Plan shares 870 140 -
Amortization of intangible assets 800 389 226
Net accretion of premiums and discounts on securities (81) (586) (204)
(Increase) decrease in accrued interest receivable
and other assets (3,003) 602 (4,997)
Increase in accrued interest payable and other liabilities 563 863 855
Net gain on sale of securities (2,923) (2,839) (4,193)
Net loss (gain) on sale of other real estate 24 (23) (2)
--------- --------- ----------
Net cash provided by operating activities 6,009 7,444 916
Cash flows from investing activities:
Proceeds from maturities of investment securities available
for sale and held to maturity 54,823 51,756 44,850
Purchase of investment securities held to maturity (57) (11,759) (34,016)
Purchase of investment securities available for sale (79,036) (40,281) (44,949)
Proceeds from sales of securities available for sale 3,816 9,368 10,054
Purchase of Federal Home Loan Bank Stock (297) - -
Maturities and repayments of mortgage-backed securities 14,353 12,176 6,699
Purchase of mortgage-backed securities (15,740) (6,065) (25,495)
Net increase in loans (16,160) (26,266) (16,773)
Net additions to bank premises, furniture and equipment (388) (742) (387)
Proceeds from sales of other real estate owned 54 105 79
Payment for purchase of Burlington County Bank, net
of cash acquired - 3,363 -
Payment for purchase of Manchester Trust Bank, net
of cash acquired (3,807) - -
------- ---------- ------
Net cash used in investing activities (42,439) (8,345) (59,938)
Cash flows from financing activities:
Net proceeds from exercise of stock options 21 - -
Net proceeds received from stock offering - - 29,778
Dividends paid (1,137) (1,113) (179)
Capitalization of mutual holding company - - (200)
Net cash received from assumption of deposit liabilities - - 31,468
Net increase in demand deposits 18,804 4,856 1,405
Net (decrease) increase in savings and time deposits (16,650) 2,443 338
Repayment of subordinated note - (600) -
Net increase in borrowings 30,000 - -
------ ---------- ------
Net cash provided by financing activities 31,038 5,586 62,610
Net (decrease) increase in cash and cash equivalents (5,392) 4,685 3,588
Cash and cash equivalents as of beginning of year 20,938 16,253 12,665
------ ------ ------
Cash and cash equivalents as of end of year $ 15,546 20,938 16,253
Supplemental disclosure of cash flow information:
Cash paid:
Interest $ 21,518 15,577 16,394
Income taxes 4,980 4,875 5,805
Noncash investing activities:
Assets acquired in settlement of loans $ 374 723 34
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
51
<PAGE>
PEOPLES BANCORP, INC.
Notes to Consolidated Financial Statements
December 31, 1997, 1996 and 1995
(1) Organization and Summary of Significant Accounting Policies
Peoples Bancorp, Inc. (the Bancorp) is the holding company for its
wholly-owned subsidiary , Trenton Savings Bank FSB (the Bank). The Bank
provides banking services to individual and corporate customers primarily
in Mercer and Burlington counties in New Jersey and Bucks county in
Pennsylvania. The Bank is subject to competition from other financial
institutions and the regulations of certain Federal and state agencies
and undergoes periodic examinations by those regulatory authorities.
Basis of Financial Statement Presentation
The accompanying consolidated financial statements include the accounts
of the Bancorp, the Bank, Manchester Trust Bank, and TSBusiness Finance
Corporation. Significant intercompany accounts and transactions have been
eliminated in consolidation.
The financial statements have been prepared in conformity with generally
accepted accounting principles. In preparing the financial statements,
management is required to make estimates and assumptions that affect the
reported amounts of assets and liabilities as of the dates of the
financial statements and the reported amounts of revenues and expenses
during the periods presented. Actual results could differ significantly
from those estimates.
Material estimates that are particularly susceptible to significant
change in the near-term relate to the determination of the allowance for
loan losses. In connection with the determination of the allowance for
loan losses, management obtains independent appraisals for significant
properties.
Loans
Loans are stated at the principal amount outstanding, net of deferred
loan origination fees, costs and unearned discounts, and the allowance
for loan losses.
Interest income on commercial, real estate mortgage and installment loans
is credited to operations based upon the principal amount outstanding.
Loans are placed on a nonaccrual status when a default of principal or
interest has existed for a period of 90 days, except when, in the opinion
of management, the collection of the principal and interest is reasonably
anticipated or adequate collateral exists. Previously accrued and
uncollected interest is reversed when a loan is placed on nonaccrual
status. Interest income is recognized subsequently only in the period
collected. The amortization of deferred fees and costs is also
discontinued when a loan is placed on nonaccrual status. Loans are
returned to an accrual status when factors indicating doubtful
collectibility on a timely basis no longer exist.
Management, considering current information and events regarding the
borrowers ability to repay their obligations, considers a loan to be
impaired when it is probable that the Bank will be unable to collect all
amounts due according to the contractual terms of the loan agreement.
When a loan is considered to be impaired, the amount of impairment is
measured based on the fair value of the collateral. Impairment losses are
included in the allowance for loan losses through provisions charged to
operations.
52
<PAGE>
2
PEOPLES BANCORP, INC.
Notes to Consolidated Financial Statements Continued
(1) Organization and Summary of Significant Accounting Policies, cont.
The Bank has defined the population of impaired loans to be all
nonaccrual commercial loans. Impaired loans are individually assessed to
determine that the loan's carrying value is not in excess of the fair
value of the collateral or the present value of the loan's expected cash
flows. Smaller balance homogeneous loans that are collectively evaluated
for impairment, including mortgage and consumer loans, are specifically
excluded from the impaired loan portfolio.
Loan origination and commitment fees less certain costs have been
deferred, and the net amount amortized as an adjustment to the related
loan's yield over the contractual life of the related loan.
Allowance for Loan Losses
An allowance for loan losses is charged to operations based on
management's evaluation of the credit risk in its portfolio. Such
evaluation includes a review of all loans for which full collectibility
may not be reasonably assured and considers, among other matters, the
estimated net realizable value of the underlying collateral, economic
conditions and other matters which warrant consideration. All losses are
charged to the allowance when the loss actually occurs or when a
determination is made that a loss is probable. Subsequent recoveries, if
any, are added back to the allowance.
A substantial portion of the Bank's loans are secured by real estate in
the New Jersey market. Accordingly, the ultimate collectibility of a
substantial portion of the Bank's loan portfolio is susceptible to
changes in market conditions in New Jersey and the Bank's market area.
Management believes that the allowance for loan losses is adequate. While
management uses available information to recognize losses on loans,
future additions to the allowance may be necessary based on changes in
economic conditions, particularly in New Jersey. In addition, various
regulatory agencies, as an integral part of their examination process,
periodically review the Bank's allowance for loan losses. Such agencies
may require the Bank to recognize additions to the allowance based on
their judgments about information available to them at the time of their
examination.
Debt, Equity and Mortgage-Backed Securities
The Bank is required to report debt, readily-marketable equity and
mortgage-backed securities in one of the following categories (i)
"held-to-maturity" (management has a positive intent and ability to hold
to maturity) which are to be reported at amortized cost; (ii) "trading"
(held for current resale) which are to be reported at fair value, with
unrealized gains and losses included in earnings and (iii)
"available-for-sale" (all other debt, readily marketable equity and
mortgage-backed securities) which are to be reported at fair value, with
unrealized gains and losses excluded from earnings and reported, net of
tax, as a separate component of stockholders' equity.
53
<PAGE>
3
PEOPLES BANCORP, INC.
Notes to Consolidated Financial Statements Continued
(1) Organization and Summary of Significant Accounting Policies, cont.
Premiums and discounts on debt and mortgage-backed securities are
amortized to expense and accreted to income over the estimated life of
the respective security using the level-yield method.
Gains and losses on the sale of securities are based upon the amortized
cost of the security using the specific identification method.
Bank Premises and Equipment
Bank premises and equipment are carried at cost less accumulated
depreciation and amortization. Estimated useful lives are thirty years
for buildings, seven years for furniture and fixtures, three to five
years for office equipment and the lease term plus one renewal period,
for leasehold improvements. Depreciation is provided for on a
straight-line basis over the estimated useful lives of the respective
assets
Other Real Estate Owned (OREO)
Reported in other assets, OREO is carried at the lower of cost or fair
value, less estimated cost to sell. When a property is acquired, the
excess of the carrying amount over the fair value, if any, is charged to
the allowance for loan losses. All allowance for OREO has been
established, through charges to OREO expense, to maintain properties at
the lower of cost or fair value less estimated cost to sell. Operating
results of OREO, including rental income, operating expenses, and gains
and losses realized from the sale of properties owned, are included in
noninterest expenses.
Intangible Assets
Intangible assets consist of premiums paid upon the 1995 assumption of
deposits and goodwill arising from the 1996 acquisition of the net assets
of Burlington County Bank ("BCB") and the 1997 acquisition of the net
assets of Manchester Trust Bank ("MTB"). Premiums on deposits are
amortized on a straight-line basis over a period of ten years. Goodwill
is being amortized on a straight-line basis over 15 years. On a periodic
basis, the Bank reviews its intangible assets for the events or changes
in circumstances that may indicate that the carrying amount of the assets
may not be recoverable.
Income Taxes
The Bank records income taxes utilizing the asset and liability method.
Deferred tax assets and liabilities are recognized for the estimated
future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases. Deferred tax assets and liabilities are measured
using enacted tax rates in effect for the year in which those temporary
differences are expected to be recovered or settled.
54
<PAGE>
4
PEOPLES BANCORP, INC.
Notes to Consolidated Financial Statements, Continued
(1) Organization and Summary of Significant Accounting Policies, cont.
Pension Plan
The Bank has a pension plan covering employees and officers meeting
service and age requirements. The Bank's policy is to fund pension costs
accrued.
Other Postretirement Benefit Plans
In addition to the Bank's defined benefit plan, the Bank provides a
postretirement medical and life insurance plan to its retirees. The
benefits available under the plan depend on the years of service to the
Bank and the age of the retiree. The Bank's policy is to accrue for such
cost in the period which the benefit is earned.
Stock Option Plan
The Bank applies the "intrinsic value based method" as described in APB
Opinion No. 25, "Accounting for Stock Issued to Employees," and related
interpretations in accounting for its stock-based compensation.
Accordingly, no compensation cost has been recognized for the stock
option plan.
Management Recognition Plan
Compensation cost is incurred by the Bank over the vesting period based
upon the fair value of the shares at the date of allocation.
Statements of Cash Flows
The Bank considers all highly liquid debt instruments with original
maturities of three months or less to be cash equivalents.
Earnings Per Share
Basic earnings per common share is calculated by dividing net income by
the average daily number of common shares outstanding during the period.
Common stock equivalents are not included in the calculation.
Diluted earnings per common share is computed similar to that of the
basic earnings per share except that the denominator is increased to
include the number of additional common shares that would have been
outstanding if all potential dilutive common shares were issued.
Earnings per share data is not presented for the year ended December
31, 1995, as the Bank completed its initial public offering on August
3, 1995 and such data is not deemed meaningful by management.
Reclassifications
Certain reclassifications have been made to prior years amounts to
conform to the 1997 presentation.
55
<PAGE>
5
PEOPLES BANCORP, INC.
Notes to Consolidated Financial Statements, Continued
(2) Acquisitions
Intangible assets consist primarily of premium paid upon the assumption
of deposits and goodwill arising from the acquisitions of Burlington
County Bank and Manchester Trust Bank.
On September 8, 1997, the Bancorp completed the acquisition of MTB, a
trust services company with $140.1 million of assets under management.
The results of operations of MTB have been included in the statement of
operations from the date of acquisition. Under terms of the agreement,
MTB will be operated as a wholly-owned subsidiary of the Bank.
The following summarizes completed acquisitions of Peoples Bancorp, Inc.
as of December 31, 1997 (in thousands):
<TABLE>
<CAPTION>
Total as of the date acquired Method
Year Net Cash of
acquired Assets Loans Deposits assets paid accounting
-------- ------ ----- -------- ------ ---- ----------
Assumption of deposits
<S> <C> <C> <C> <C> <C> <C> <C>
from the RTC 1995 $ - - 33,974 - 2,506 Purchase
Burlington County Bank 1996 80,249 48,200 73,177 5,245 12,473 Purchase
Manchester Trust Bank 1997 2,013 - - 1,894 4,134 Purchase
</TABLE>
The above transactions resulted in the following goodwill (in thousands):
<TABLE>
<CAPTION>
Goodwill balance as of
December 31, Original Amortization
----------------------------------
1997 1996 1995 amount period
---- ---- ---- ------ ------
<S> <C> <C> <C> <C> <C>
from the RTC $ 1,786 2,054 2,325 2,506 10 years
Burlington County Bank 6,630 7,110 - 7,228 15 years
Manchester Trust Bank 2,188 - - 2,240 15 years
------- -------- -------- -------
$ 10,604 9,164 2,325 11,974
</TABLE>
The following supplemental schedule presents the unaudited pro forma
results of operations for the years ended December 31, 1997, 1996 and
1995 as though the companies had combined on January 1, 1995. The pro
forma results of operations do not necessarily reflect the results of
operations that would have occurred had the Bank, MTB and BCB been
combined during such periods.
1997 1996 1995
---- ---- ----
(in thousands)
Net interest income $ 22,091 21,599 20,126
Net income 7,555 8,633 9,219
Basic earnings per common
share 0.85 0.96 -
Pro forma basic earnings per common share for the year ended December 31,
1995 is not presented as its presentation would not be meaningful due to
the Bank's initial stock offering as of August 3, 1995.
56
<PAGE>
6
PEOPLES BANCORP, INC.
Notes to Consolidated Financial Statements, Continued
(3) Charter Conversion, Reorganization to a Mutual Holding Company and
Conversion to Stock Form of Ownership
On January 1, 1995 the Bank converted from a state chartered mutual
savings bank to a federally chartered mutual savings bank called Trenton
Savings Bank FSB.
On February 8, 1995, the Board of Directors of the Bank unanimously
adopted the Plan of Reorganization from a Federal Mutual Savings Bank to
a Federal Mutual Holding Company and Stock Issuance Plan, which plan was
subsequently amended (as amended, the Plan). Pursuant to the Plan, the
Bank reorganized from a Federally-chartered mutual savings bank into a
Federal mutual holding company, Peoples Bancorp, MHC and concurrently
formed a Federally-chartered capital stock savings subsidiary, which took
the name Trenton Savings Bank FSB. Each deposit account of the Bank at
the time of the reorganization became a deposit account in the
newly-formed bank in the same amount and upon the same terms and
conditions, except that the holder of each such deposit account has
voting and liquidation rights with respect to the holding company rather
than the Bank.
As part of the reorganization, the Bank was authorized to offer stock in
one or more offerings, up to a maximum of 49.9% of the issued and
outstanding shares of its common stock. On May 15, 1995, the Bank
received initial approval from the Office of Thrift Supervision (OTS) to
solicit subscribers for stock.
On August 3, 1995, the Bank completed its minority stock offering whereby
the Bank issued 3,116,500 shares at $10 per share for a total of
$31,165,000, which represents a minority ownership of 35.0% of the Bank
based upon its valuation by an independent appraiser. The net proceeds of
the stock offering, after reflecting offering expenses of $1.387 million
and costs to capitalize the mutual holding of $200,000, were $29.578
million. The net proceeds were added to the Bank's general funds to be
used for general corporate purposes.
In 1997, 1996 and 1995, the Bank declared cash dividends of $0.35, $0.35
and $0.0575, respectively, per common share to holders of common stock of
the Bank. The Bank's Federal mutual holding company, Peoples Bancorp,
MHC, waived the receipt of the cash dividends paid by the Bank, and it
currently intends to continue this policy. There can be no assurance that
the Bank's regulators will permit future dividend waivers, or the terms
of such waivers.
(4) Reorganization to a Two-Tiered Mutual Holding Company and Subsequent
Plan of Conversion to Full Stock Ownership Structure
On November 26, 1996 the Bank and Peoples Bancorp, Mutual Holding Company
(MHC) filed an application with the Office of Thrift Supervision (OTS),
their primary regulator, to reorganize into a two-tiered holding company.
Pursuant to the reorganization, which was approved by the OTS and
stockholders, the Bancorp was formed in July 1997 and became the
majority-owned subsidiary of Peoples Bancorp, MHC, and the Bank became
the wholly-owned subsidiary of the Bancorp. The relative ownership
interests of all stockholders of the Bank remained unchanged as a result
of the reorganization. After the reorganization, the Bank continued its
current business and operations as a Federally-chartered savings bank
under its existing name.
57
<PAGE>
7
PEOPLES BANCORP, INC.
Notes to Consolidated Financial Statements, Continued
(4) Reorganization to a Two-Tiered Mutual Holding Company and Subsequent
Plan of Conversion to Full Stock Ownership Structure, cont.
On September 24, 1997, the Board of Directors of the MHC unanimously
adopted the Plan of Conversion and Reorganization, pursuant to which the
MHC is converting from a federally charted mutual holding company to a
Delaware chartered stock corporation. As part of the Conversion each of
the issued and outstanding Minority Shares shall automatically, without
further action by the holder thereof, be converted into and become a
right to receive a number of shares of Common Stock determined pursuant
to the Exchange Ratio.
Pursuant to the Plan, the MHCis majority interests in the Mid-Tier
Holding Company will be converted into shares at the Exchange Ratio, and
sold in a subscription offering.
The affirmative vote of a majority of the total eligible votes of the
members of the MHC at the Special Meeting of Members is required to
approve the Plan of Conversion and the transactions incident to the
Conversion. The affirmative vote of the holders of at least (i)
two-thirds of the outstanding common stock of the Mid-Tier Holding
Company, and (ii) a majority of the Minority Shares at a special meeting
of stockholders of the Mid-Tier Holding Company is required to approve
the Plan of Conversion.
Consummation of the Conversion is also subject to the approval of the
OTS.
At the time of the conversion, the Bank will establish a liquidation
account in an amount equal to its equity as reflected in the statement of
financial condition used in the final conversion prospectus. The
liquidation account will be maintained for the benefit of eligible
account holders and supplemental eligible account holders who continue to
maintain their accounts at the Bank after the conversion. The liquidation
account will be reduced annually, to the extent that eligible account
holders and supplemental eligible account holders have reduced their
qualifying deposits as of each anniversary date. Subsequent increases
will not restore an eligible account holder's or supplemental eligible
account holder's interest in the liquidation account. In the event of a
complete liquidation of the Bank, each eligible account holder and
supplemental eligible account holder will be entitled to receive a
distribution from the liquidation account in an amount proportionate to
the current adjusted qualifying balances for accounts then held.
Subsequent to the conversion, the Bank may not declare or pay cash
dividends on or repurchase any of its shares of common stock if the
effect thereof would cause equity to be reduced below applicable
regulatory capital maintenance requirements or if such declaration and
payment would otherwise violate regulatory requirement.
Conversion costs will be deferred and reduce the proceeds from the sales
sold in the conversion. If the conversion is not completed, all costs
will be charged as an expense. There were approximately $296,000 of
capitalized conversion costs as of December 31, 1997.
As of December 31, 1997, the MHC had waived $4.4 million of dividends.
Upon completion of the conversion, restrictions on waived dividends will
no longer exist. Additionally, the restrictions and availability of
waived dividends will cease as the Bank's common stock will be 100%
publicly owned.
58
<PAGE>
8
PEOPLES BANCORP, INC.
Notes to Consolidated Financial Statements, Continued
(5) Investment and Mortgage-Backed Securities Available for Sale
The amortized cost and estimated market value of investment and
mortgage-backed securities available for sale as of December 31, 1997 and
1996 are as follows:
<TABLE>
<CAPTION>
1997
Gross Gross Estimated
Amortized unrealized unrealized market
cost gains losses value
---- ----- ------ -----
(in thousands)
Debt securities:
<S> <C> <C> <C> <C>
United States
Treasury securities $ 43,930 135 (7) 44,058
United States Agencies
securities 49,402 576 (55) 49,923
Other bonds 28,284 43 (78) 28,249
Mortgage-backed securities 14,903 195 - 15,098
-------- --- ---- --------
136,519 949 (140) 137,328
Equity securities 10 - - 10
----------- ----- ---- -----------
$ 136,529 949 (140) 137,338
1996
Gross Gross Estimated
Amortized unrealized unrealized market
cost gains losses value
---- ----- ------ -----
(in thousands)
Debt securities:
United States
Treasury securities $ 65,336 204 33 65,507
United States Agencies
securities 9,924 10 167 9,767
Other bonds 9,151 21 - 9,172
------- ------- ----- -------
84,411 235 200 84,446
Equity securities 894 2,308 - 3,202
-------- ----- ----- -------
$ 85,305 2,543 200 87,648
</TABLE>
59
<PAGE>
9
PEOPLES BANCORP, INC.
Notes to Consolidated Financial Statements, Continued
(5) Investment and Mortgage-Backed Securities Available for Sale, cont.
The amortized cost and estimated market value of investment and
mortgage-backed securities available for sale at December 31, 1997 by
contractual maturity are shown below. Expected maturities will differ
from contractual maturities because borrowers may have the right to call
or prepay obligations with or without penalties.
Estimated
Amortized market
cost value
---- -----
(in thousands)
Due within one year $ 39,347 39,452
Due after one year through five years 81,292 82,066
Due after five years through ten years 977 712
Due after ten years 14,903 15,098
--------- --------
136,519 137,328
Equity securities 10 10
----------- -----------
$ 136,529 137,338
During the years ended December 31, 1997, 1996, and 1995, proceeds from
sales of investment and mortgage-backed securities available for sale
resulted in gross gains and gross losses as follows:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
(in thousands)
<S> <C> <C> <C>
Proceeds from sales of investment and
mortgage-backed securities available
for sale $ 3,816 9,368 10,054
Gross realized gains 2,923 2,839 4,264
Gross realized losses - - 71
</TABLE>
As of December 31, 1997 United States Agency and Treasury securities with
a fair value of $32.4 million were pledged to secure a borrowing
agreement entered into during 1997.
60
<PAGE>
10
PEOPLES BANCORP, INC.
Notes to Consolidated Financial Statements, Continued
(6) Investment Securities Held to Maturity
The amortized cost and estimated market value of investment securities
held to maturity as of December 31, 1997 and 1996 are as follows:
<TABLE>
<CAPTION>
1997
Gross Gross Estimated
Amortized unrealized unrealized market
cost gains losses value
---- ----- ------ -----
(in thousands)
<S> <C> <C> <C> <C>
Debt securities:
United States Agencies $ 11,250 - (33) 11,217
Obligations of state and
political subdivisions 1,594 118 - 1,712
Corporate bonds 13,013 31 (5) 13,039
------ ---- ---- ------
$ 25,857 149 (38) 25,968
1996
Gross Gross Estimated
Amortized unrealized unrealized market
cost gains losses value
---- ----- ------ -----
(in thousands)
Debt securities:
United States Agencies $ 17,042 - 135 16,907
Obligations of state and
political subdivisions 3,400 98 - 3,498
Corporate bonds 17,493 55 28 17,520
------ ---- ---- ------
$ 37,935 153 163 37,925
</TABLE>
The amortized cost and estimated market value of debt securities held to
maturity as of December 31, 1997 by contractual maturity, are shown
below. Expected maturities will differ from contractual maturities
because borrowers may have the right to call or prepay obligations with
or without call or prepayment penalties.
Estimated
Amortized market
cost value
(in thousands)
Due in one year or less $ 15,101 15,070
Due after one year through five years 8,541 8,970
Due five years through ten years 1,449 1,106
Due after ten years 766 822
-------- --------
$ 25,857 25,968
As of December 31, 1997 and 1996, United States Treasury securities
with a face value of $800,000 and $3,900,000, respectively were held in
trust to secure deposits of public funds.
61
<PAGE>
11
PEOPLES BANCORP, INC.
Notes to Consolidated Financial Statements, Continued
(7) Mortgage-Backed Securities Held to Maturity
The amortized cost and estimated market value of mortgage-backed
securities held to maturity as of December 31, 1997 and 1996 are
as follows:
<TABLE>
<CAPTION>
1997
Gross Gross Estimated
Amortized unrealized unrealized market
cost gains losses value
---- ----- ------ -----
(in thousands)
<S> <C> <C> <C> <C>
Government National
Mortgage Association $ 1,367 - - 1,367
Federal Home Loan
Mortgage Corporation 33,731 354 (114) 33,971
------ --- ----
$ 35,098 354 (114) 35,338
1996
Gross Gross Estimated
Amortized unrealized unrealized market
cost gains losses value
---- ----- ------ -----
(in thousands)
Government National
Mortgage Association $ 1,614 38 8 1,644
Federal Home Loan
Mortgage Corporation 47,004 431 492 46,943
------ --- --- ------
$ 48,618 469 500 48,587
</TABLE>
The amortized cost and market value of mortgage-backed securities held to
maturity as of December 31, 1997, by contractual maturity, are shown
below. Expected maturities will differ from contractual maturities
because borrowers may have the right to call or prepay obligations with
or without call or prepayment penalties.
Estimated
Amortized market
cost value
---- -----
(in thousands)
Due in one year or less $ 6,770 6,737
Due after one year through five years 17,560 17,787
Due five years through ten years - -
Due after ten years 10,768 10,814
------ ------
$ 35,098 35,338
62
<PAGE>
12
PEOPLES BANCORP, INC.
Notes to Statements of Condition, Continued
(8) Loans
A summary of loans as of December 31, 1997 and 1996 follows:
1997 1996
(in thousands)
Mortgage loans:
One to four family $ 242,449 239,470
Commercial real estate and
multi-family 39,760 53,415
-------- --------
Total mortgage loans 282,209 292,885
Commercial 62,622 34,486
Home equity 34,657 28,138
Other consumer loans 20,513 27,478
-------- --------
Total other loans 117,792 90,102
Total loans 400,001 382,987
Allowance for loan loss (3,415) (2,901)
Premiums (discounts) 16 (24)
Net deferred (fees) costs (154) 226
---------- ----------
Total loans, net $ 396,448 380,288
A summary of the activity in the allowance for loan losses for the years
ended December 31, 1997, 1996 and 1995 is as follows:
1997 1996 1995
---- ---- ----
(in thousands)
Allowance for loan losses
at beginning of year $ 2,901 1,767 1,642
Acquired allowance - 1,186 -
Provision for loan losses 1,674 - 150
Chargeoffs (1,317) (110) (32)
Recoveries 157 58 7
------ ------- --------
Allowance for loan losses
at end of year $ 3,415 2,901 1,767
63
<PAGE>
13
PEOPLES BANCORP, INC.
Notes to Consolidated Financial Statements, Continued
(8) Loans, cont.
A substantial portion of the 1997 provision for loan losses, and
charge-offs were primarily attributable to a niche line of business,
automobile dealer floorplan financing, that was acquired through the
acquisition of BCB. Management has made the decision to exit this
business and has made provisions for the deterioration of this portfolio.
No further losses or additional provisions relating to this portfolio are
anticipated at this time.
Loans contractually in arrears by three months or more at December 31,
1997 and 1996 were as follows:
1997
Carrying Number % of
value of loans category
(in thousands)
Mortgage $ 2,591 36 0.92 %
Commercial 2,907 94 4.64
Consumer 60 16 0.11
------- ----
$ 5,558 146 1.39 %
1996
Carrying Number % of
value of loans category
(in thousands)
Mortgage $ 2,277 37 0.78 %
Commercial 1,183 19 2.01
Consumer 244 20 0.44
------ ----
$ 3,704 76 0.97 %
Nonaccrual loans totalled $4,407,000, $2,951,000 and $1,122,000 at
December 31, 1997, 1996 and 1995, respectively. Nonaccrual loans do not
include certain loans contractually in arrears by three months or more
for which adequate collateral exists or the collection of principal and
interest is reasonably anticipated. These loans totalled $1,151,000,
$753,000 and $10,000 as of December 31, 1997, 1996 and 1995,
respectively. The amount of interest income on nonaccrual loans, which
would have been recorded had these loans continued to pay interest at the
original contract rate, was approximately $475,000, $249,000 and $87,000
for the years ended December 31, 1997, 1996 and 1995, respectively.
Interest income on nonaccrual loans included in net income amounted to
$125,000, $76,000 and $14,000 for the years ended December 31, 1997, 1996
and 1995, respectively. There is no commitment to lend additional funds
to borrowers whose loans have been placed on nonaccrual.
64
<PAGE>
14
PEOPLES BANCORP, INC.
Notes to Consolidated Financial Statements, Continued
(8) Loans, cont.
Restructured loans totalled $48,000, $206,000 and $1,052,000 at December
31, 1997, 1996 and 1995, respectively. The amount of interest income on
restructured loans, which would have been recorded had these loans
continued to pay interest at the original contract rate, was
approximately $4,000, $21,000 and $87,000 for the years ended December
31, 1997, 1996 and 1995, respectively. Interest income on restructured
loans included in net income was approximately $3,000, $20,000 and
$80,000 for the years ended December 31, 1997, 1996 and 1995,
respectively. There is no commitment to lend additional funds to
borrowers whose loans have been restructured.
The recorded investment in loans receivable considered impaired and the
related allowance for loan losses at December 31, 1997 was $2,907,000 and
$710,000, respectively. The balances at December 31, 1996 were $1,183,000
and $448,000, respectively.
At December 31, 1997 and 1996, loans to officers and directors amounted
to $768,000, and $784,000, respectively. All such loans were performing
according to their original terms.
(9) Bank Premises and Equipment
Bank premises and equipment consists of the following as of December 31,
1997 and 1996:
1997 1996
---- ----
(in thousands)
Land $ 867 867
Buildings and improvements 5,014 5,166
Furniture and equipment 2,512 2,521
Leasehold improvements 1,319 1,214
----- -----
9,712 9,768
Less accumulated depreciation
and amortization 2,965 2,786
----- -----
$ 6,747 6,982
In the normal course of business, the Bank has entered into leases for
its branch locations. The lease terms range from five to twenty years and
expire at various times through the year 2007. The agreements provide for
renewal options and all but one require the Bank to pay common area
costs.
65
<PAGE>
15
PEOPLES BANCORP, INC.
Notes to Consolidated Financial Statements, Continued
(9) Bank Premises and Equipment, cont.
The following is a schedule of future minimum lease payments for
operating leases (with initial or remaining terms in excess of one year)
as of December 31, 1997:
December 31,
1998 $ 396,000
1999 359,000
2000 261,000
2001 229,000
2002 196,000
Thereafter 617,000
----------
Total minimum lease
payments $ 2,059,000
The annual rental expense amounted to $401,546, $304,000 and
$226,000 for the years ended December 31, 1997, 1996 and 1995,
respectively.
(10) Accrued Interest Receivable
A summary of accrued interest receivable at December 31, 1997 and 1996 is
as follows:
1997 1996
---- ----
(in thousands)
Loans $ 2,148 1,654
Investment and mortgage-backed
securities available for sale 2,258 1,114
Mortgage-backed securities held
to maturity 249 350
Investment securities held to
maturity 319 484
Federal funds sold 1 -
-------- -----
$ 4,975 3,602
66
<PAGE>
16
PEOPLES BANCORP, INC.
Notes to Consolidated Financial Statements, Continued
(11) Deposits
Deposit balances as of December 31, 1997 and 1996 are summarized as
follows:
<TABLE>
<CAPTION>
Weighted
average
rate at
Dec. 31, 1997 1996
--------------------- ------------
1997 Amount % Amount %
---- ------ - ------ -
(in thousands)
<S> <C> <C> <C> <C> <C>
Types of deposit:
Noninterest bearing
demand deposit
accounts - $ 28,164 5.7 $ 25,366 5.2
N.O.W. 1.24 15,774 3.2 16,431 3.3
Money market
demand accounts 3.46 61,457 12.5 44,794 9.1
Passbook 2.30 94,008 19.1 104,210 21.2
Club accounts - 264 .1 269 .1
Other - 4,880 .9 3,630 .7
--------- -------- --------- --------
204,547 41.5 194,700 39.6
Certificates of deposit 5.33 247,325 50.1 248,396 50.6
Retirement accounts 5.66 41,528 8.4 48,150 9.8
-------- ------- -------- -------
288,853 58.5 296,546 60.4
$ 493,400 100.0 $ 491,246 100.0
</TABLE>
As of December 31, 1997 and 1996, certificates of deposit, regular and
retirement accounts have scheduled maturities as follows:
1997 1996
(in thousands)
Within one year $ 229,472 188,744
One to two years 38,184 39,803
Two to three years 17,760 20,298
Three to five years 3,430 47,690
Thereafter 7 11
------------ -----------
$ 288,853 296,546
67
<PAGE>
17
PEOPLES BANCORP, INC.
Notes to Consolidated Financial Statements, Continued
(11) Deposits, cont.
An analysis of the interest expense for the years ended December 31,
1997, 1996 and 1995 by deposit category is as follows:
1997 1996 1995
---- ---- ----
(in thousands)
NOW, passbook and other
accounts $ 2,305 2,402 2,671
Money market demand accounts 1,950 1,233 1,066
Club accounts 18 14 14
Regular certificates of deposit 12,904 11,836 11,125
Retirement accounts 2,645 2,456 2,134
------- ------- -------
Total interest $ 19,822 17,941 17,010
Certificates of deposit greater than $100,000 amounted to $26,117,754 and
$26,093,000 at December 31, 1997 and 1996, respectively. The deposits of
the Bank are insured up to $100,000 by the BIF and SAIF, which is
administered by the FDIC and is backed by the full faith and credit of
the U.S. Government.
(12) Borrowing
On January 3, 1997, the Bank entered into an agreement to borrow $30
million at a fixed interest rate of 6.02%. The debt matures on January 3,
2000. The funds provided were used to fund a leveraging program whereby
proceeds from the borrowing were used to fund the purchase of Federal
agency securities designated as available for sale. The note is secured
by United States Agency and Treasury securities designated as available
for sale and having a fair value of $32.4 million as of December 31,
1997. The securities underlying the agreement are under the Bank's
control and fulfill the security agreement requirement that collateral
with a market value of 107% secure the note.
(13) Income Taxes
The Federal tax bad debt reserve method available to thrift institutions
was repealed in 1996 for tax years beginning after 1995. As a result, the
Bank must change from the reserve method to the specific charge-off
method to compute its bad debt deduction. In addition, the Bank is
required generally to recapture into income the portion of its bad debt
reserves (other than the supplemental reserve) that exceeds its base year
reserves, approximately $2,500,000.
The recapture amount resulting from the change in a thrift's method of
accounting for its bad debt reserves generally will be taken into taxable
income ratably (on a straight-line basis) over a six-year period. If the
Bank meets a "residential loan requirement" for a tax year beginning in
1996 or 1997, the recapture of the reserves will be suspended for such
tax year. Thus, recapture can potentially be deferred for up to two
years. The residential loan requirement is met if the principal amount of
housing loans made by the Bank during the year at issue (1996 and 1997)
is at least as much as the average of the principal amount of loans made
during the six most recent tax years prior to 1996. Refinancings and home
equity loans are excluded.
For 1997 the Bank has met the residential loan requirement and expects to
meet it for 1998.
68
<PAGE>
18
PEOPLES BANCORP, INC.
Notes to Consolidated Financial Statements, Continued
(13) Income Taxes, cont.
Retained earnings as of December 31, 1997 includes approximately
$3,500,000 for which no provision for Federal income tax has been made.
This reserve (base year and supplemental) is frozen not forgiven as
certain events could trigger a recapture.
Income tax expense for the years ended December 31, 1997, 1996 and 1995
is comprised of the following components:
1997 1996 1995
---- ---- ----
(in thousands)
Current income tax expense:
Federal $ 4,465 4,728 4,796
State 388 415 382
------ ------ ------
4,853 5,143 5,178
Deferred income tax (benefit) expense:
Federal (498) (401) (297)
State (28) (22) (17)
------- ------- -------
(526) (423) (314)
Total income tax expense $ 4,327 4,720 4,864
A reconciliation between the effective income tax expense and the
expected amount computed using the applicable statutory Federal income
tax rate for the years ended December 31, 1997, 1996 and 1995 is as
follows:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
(in thousands)
<S> <C> <C> <C>
Income before income taxes $ 11,789 13,111 13,512
Applicable statutory Federal tax rate 35 % 35 % 35 %
Expected Federal income tax expense 4,126 4,589 4,729
State tax net of Federal benefit 234 256 249
Increase (decrease) in Federal income tax resulting from:
Tax-exempt income (41) (24) (25)
Other 8 (101) (89)
-------- ------- --------
$ 4,327 4,720 4,864
Effective tax rate 36.7 % 36.0 % 36.0 %
</TABLE>
69
<PAGE>
19
PEOPLES BANCORP, INC.
Notes to Consolidated Financial Statements, Continued
(13) Income Taxes, cont.
The tax effects of temporary differences that give rise to significant
portions of the net deferred tax asset at December 31, 1997 and 1996 are
as follows:
1997 1996
(in thousands)
Deferred tax assets:
Loan fees $ - 49
Postretirement benefits 514 506
Pension 86 117
Nonaccrual interest 175 37
Supplemental Employee Retire-
ment Plan 314 211
Allowance for loan loss - book 1,262 980
Other 366 219
------ ------
2,717 2,119
Deferred tax liabilities:
Shareholders' equity - unrealized
gain on securities available
for sale 248 613
Allowance for loan losses - tax 1,031 930
Other 36 65
-------- -------
1,315 1,608
Net deferred tax asset $ 1,402 511
Management believes that it is more likely than not that the deferred tax
asset will be realized based upon taxable income in the carryback period
and the probability of future operations to generate sufficient taxable
income.
70
<PAGE>
20
PEOPLES BANCORP, INC.
Notes to Consolidated Financial Statements, Continued
(13) Income Taxes, cont.
Total deferred tax (benefits) expense for the years ended December 31,
1997, 1996 and 1995 were allocated as follows:
1997 1996 1995
---- ---- ----
(in thousands)
Income from operations $ (526) (423) (314)
Shareholders' equity - unrealized
gains on securities available
for sale (365) (905) 360
Business combination - (391) -
-------- ------ -----
$ (891) (1,719) 46
(14) Regulatory Matters
Office of Thrift Supervision (OTS) regulations require banks to maintain
minimum levels of regulatory capital. Under the regulations in effect at
December 31, 1997, the Bank was required to maintain (i) a minimum
tangible capital ratio of 1.50%, (ii) a minimum leverage ratio of Tier I
capital to total adjusted assets of 3.0%, and (iii) a minimum ratio of
total capital to risk-weighted assets of 8.0%.
Under its prompt corrective action regulations, the OTS is required to
take certain supervisory actions (and may take additional discretionary
actions) with respect to an undercapitalized institution. Such actions
could have a direct material effect on the institution's financial
statements. The regulations establish a framework for the classification
of savings institutions into five categories: well capitalized,
adequately capitalized, undercapitalized, significantly undercapitalized,
and critically undercapitalized. Generally, an institution is considered
well capitalized if it has a leverage (Tier I) capital ratio of at least
5.0%; a Tier 1 risk-based capital ratio of at least 6.0%; and a total
risk-based capital ratio of at least 10.0%.
The foregoing capital ratios are based in part on specific quantitative
measures of assets, liabilities and certain off-balance sheet items as
calculated under regulatory accounting practices. Capital amounts and
classifications are also subject to qualitative judgments by the OTS
about capital components, risk weightings and other factors.
Management believes that, as of December 31, 1997 and 1996, the Bank
meets all capital adequacy requirements to which it is subject. Further,
the most recent OTS notification categorized the Bank as a
well-capitalized institution under the prompt corrective action
regulations. There have been no conditions or events since that
notification that management believes have changed the Bank's capital
classification.
71
<PAGE>
21
PEOPLES BANCORP, INC.
Notes to Consolidated Financial Statements, Continued
(14) Regulatory Matters, cont.
The following is a summary of the Bank's and Bancorp's actual capital
amounts and ratios as of December 31, 1997 and 1996, compared to the OTS
minimum capital adequacy requirements and classification as a
well-capitalized institution:
<TABLE>
<CAPTION>
OTS Requirements
----------------------------------------------
For Classification
Minimum as Well
Actual Capital Adequacy Capitalized
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
December 31, 1997:
Tangible capital $ 99,260 15.8 % $ 9,449 1.50 % $ - - %
Tier I (core) capital 99,260 15.8 18,900 3.00 31,411 5.00
Risk-based capital:
Tier I 99,260 25.6 - - 23,247 6.00
Total 102,675 26.5 31,019 8.00 38,745 10.00
December 31, 1996:
Tangible capital 92,302 15.6 8,860 1.50 - -
Tier I (core) capital 92,302 15.6 17,721 3.00 29,534 5.00
Risk-based capital:
Tier I 92,302 27.5 - - 20,119 6.00
Total 95,200 28.4 26,825 8.00 33,531 10.00
</TABLE>
(15) Benefit Plans
Pension Plan
The Bank has a pension plan covering officers and employees meeting
certain eligibility requirements, including the attainment of age 21 and
completion of 1,000 hours of service during the twelve consecutive months
commencing on the employee commencement date. Prior service costs are
amortized over a forty-year period, changes in the unfunded liability due
to a prior year change in actuarial assumptions are amortized over thirty
years and pension costs are funded as accrued. Plan assets are invested
in U.S. and foreign equities and fixed income securities based on
parameters established by management.
72
<PAGE>
22
PEOPLES BANCORP, INC.
Notes to Consolidated Financial Statements, Continued
(15) Benefit Plans, cont.
A comparison of the most recent available accumulated plan benefits and
plan net assets for the pension plan, as determined by the plan actuaries
as of the latest actuarial valuation date is as follows:
1997 1996
(in thousands)
Actuarial present value of accumulated plan benefits:
Vested participants $ 2,451 2,082
Non-vested participants 106 87
------ -------
$ 2,557 2,169
Projected benefit obligation for services
rendered 3,306 3,081
Plan assets at fair value 2,987 2,807
----- -----
Projected benefit obligation
in excess of plan assets 319 274
Unrecognized gain 225 322
Unrecognized prior service cost (178) (182)
------ ------
Accrued pension expense $ 366 414
The components of net pension expense for the years ended December 31,
1997, 1996 and 1995 are as follows:
1997 1996 1995
---- ---- ----
(in thousands)
Service cost-benefits earned during the year $ 232 155 117
Interest cost on projected benefit obligation 258 199 214
Actual return on plan assets (233) (183) (182)
Net amortization and deferral 19 17 19
---- ---- ----
Net pension expense $ 276 188 168
Assumptions used to develop the net periodic pension cost for the years
ended December 31, 1997, 1996 and 1995 are as follows:
1997 1996 1995
---- ---- ----
Discount rate 7.5 % 7.75 % 8.25 %
Expected long-term rate of return 7.5 7.5 7.5
Rate of increase in compensation
levels 5.5 5.5 6.0
73
<PAGE>
23
PEOPLES BANCORP, INC.
Notes to Consolidated Financial Statements, Continued
(15) Benefit Plans, cont.
Postretirement Benefits
The Bank has established a postretirement medical and life insurance plan
for the benefit of substantially all employees. The Bank utilizes the
accrual method of accounting for postretirement benefits.
The following table sets forth the net periodic postretirement benefit
cost and accumulated postretirement benefit obligation (APBO) as
determined by the plan actuaries as of the latest actuarial valuation
date is as follows:
1997 1996
---- ----
(in thousands)
Accumulated postretirement benefit
obligation (APBO) $ (1,195) (1,177)
Fair value of assets - -
-------- ----
Projected benefit obligation (1,195) (1,177)
Accumulated net unrecognized gain ++(107) (109)
------ ------
Net postretirement accrued benefit cost $ (1,302) (1,286)
Net postretirement benefit costs for the years ended December 31, 1997,
1996 and 1995 are as follows:
1997 1996 1995
---- ---- ----
Service cost $ 47 30 26
Interest cost on accumulated post-
retirement benefit obligation 87 79 80
---- ---- ----
$ 134 109 106
For measurement purposes, the cost of medical benefits was projected to
increase at a rate of 9.50% and 10.00% in 1997 and 1996, respectively,
thereafter grading to a stable 5.5% medical inflation rate in 2005.
Increasing the assumed health care cost trend by one percent in each year
would increase the accumulated postretirement benefit obligation as of
January 1, 1997 by $167,000 and the aggregate of the service and interest
components of net periodic postretirement benefit cost for the year ended
December 31, 1997 by $10,000. The present value of the accumulated
benefit obligation assumed a 7.50% and 7.0% discount rate compounded
annually for 1997 and 1996, respectively. The plan is unfunded as of
December 31, 1997, as the Bank funds the plan on a cash basis.
74
<PAGE>
24
PEOPLES BANCORP, INC.
Notes to Consolidated Financial Statements, Continued
(15) Benefit Plans, cont.
Stock Option Plan
During 1996, the Bank's stockholders approved a stock option plan
authorizing 311,650 shares available to be granted to certain directors,
officers and employees of the Bank. Options granted under the plan are
exercisable at the fair value of the stock as of the grant date. The
options vest over a five-year term, and expire after 10 years from the
date of the grant.
The following table illustrates the status and changes to the stock
option plan during the past two years:
Weighted average
Shares exercise price
------ --------------
Outstanding, December 31, 1995 - $ -
Granted 234,000 13.50
-------
Outstanding, December 31, 1996 234,000 13.50
Granted 77,500 21.00
Exercised 15,879 13.50
--------
Outstanding, December 31, 1997 295,621 15.47
Exercisable at December 31, 1997 77,737 $ 13.50
The weighted average grant date fair value for the stock option plan's
options granted during 1997 and 1996 was $5.84 and $3.49, respectively.
The weighted average remaining contractual life of options outstanding at
December 31, 1997 was 8.4 years..
In October 1995, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 123 (SFAS No. 123),
"Accounting for Stock-Based Compensation". This Statement establishes
financial accounting and reporting standards for stock-based employee
compensation plans. SFAS No. 123 encourages all entities to adopt the
"fair value based method" of accounting for employee stock compensation
plans. However, SFAS No. 123 also allows an entity to continue to measure
compensation cost under such plans using the "intrinsic value based
method" as described in APB No. 25. Under the fair value based method,
compensation cost is measured at the grant date based on the value of the
award and is recognized over the service period, usually the vesting
period. Fair value is determined using an option pricing model that takes
into account the stock price at the grant date, the exercise price, the
expected life of the option, the volatility of the underlying stock and
the expected dividends on it, and the risk-free interest rate over the
expected life of the option.
The Bank continues to recognize compensation expense using the method
prescribed in APB No. 25. Had compensation cost been determined
consistent with SFAS No. 123 for options granted during 1997 and 1996,
additional compensation cost for the years ended
75
<PAGE>
25
PEOPLES BANCORP, INC.
Notes to Consolidated Financial Statements, Continued
(15) Benefit Plans, cont.
December 31, 1997 and 1996 would have been $361,000 and $61,000,
respectively. As a result, net income and basic earnings per common share
for the years ended December 31, 1997 and 1996 would have been reduced to
$7,231,000 and $0.81, and $8,352,000 and $0.93, respectively. The stock
option plan's fair value of options granted is estimated on the date of
grant using the Black-Scholes option-pricing model with the following
assumptions used for the grants issued during 1997 and 1996: dividend
yield of 1.67% and 2.59%, respectively, expected volatility of 23.79%;
risk-free interest rate of 6.1% and 6.7%, respectively, and expected
lives of 5 years.
Management Recognition Plan
During 1996, the Bank's stockholders approved the Trenton Savings Bank
Management Recognition Plan and authorized the issuance of 124,660 shares
from unissued common stock to the Management Recognition Plan. As of
December 31, 1997 and 1996, 124,660 shares have been allocated to
employees and directors of the Bank with a weighted average grant date
fair value of $13.50 per share. The shares were 60% vested as of December
31, 1997 and will fully vest upon completion of the stock offering.
(16) Commitments and Contingencies
The Bank is party to commitments to extend credit in the normal course of
business to meet the financial needs of its customers. Commitments to
extend credit are agreements to lend money to a customer as long as there
is no violation of any condition established in the contract. Commitments
to fund mortgage loans generally have fixed expiration dates or other
termination clauses, whereas home equity lines of credit have no
expiration date. Since some commitments are expected to expire without
being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. The Bank evaluates each customer's
creditworthiness on a case-by-case basis. Collateral is not required by
the Bank for loan commitments. The Bank's loans are located primarily in
the State of New Jersey and Bucks county in Pennsylvania.
At December 31, 1997 and 1996, the Bank had loan commitments (including
unused lines of credit) of $49,736,000 and $27,697,000, respectively,
consisting primarily of fixed rate loans which are not included in the
accompanying financial statements. The commitments at December 31, 1997
have commitment periods that range from 30 to 90 days and interest rates
ranging from 6% to 12%. There is no exposure to credit loss in the event
the other party to commitments to extend credit does not exercise its
right to borrow under the commitment.
In the normal course of business, the Bank may be a party to various
outstanding legal proceedings and claims. In the opinion of management,
the financial position of the Bank will not be materially affected by the
outcome of such legal proceedings and claims.
(17) Disclosures about Fair Value of Financial Instruments
The following methods and assumptions were used to estimate the fair
value of each class of financial instruments for which it is practicable
to estimate that value.
76
<PAGE>
26
PEOPLES BANCORP, INC.
Notes to Consolidated Financial Statements, Continued
(17) Disclosures about Fair Value of Financial Instruments, cont.
Cash and Cash Equivalents
The carrying amount is a reasonable estimate of the fair value of these
instruments.
Debt, Equity and Mortgage-Backed Securities
Fair values are based on quoted market prices or dealer quotes.
Loan Receivables
Fair values are estimated for portfolios of loans with similar financial
characteristics. Loans are segregated by type such as commercial,
residential mortgage and other consumer. Each loan category is further
segmented into fixed and adjustable rate interest terms.
The fair value is estimated using an estimate of current rates at which
similar loans would be made to borrowers with similar credit ratings and
for the same remaining maturities.
Deposit Liabilities
The fair value of demand deposits, savings accounts, and certain money
market deposits is the amount payable on demand as of December 31, 1997
and 1996. The fair value of certificates of deposit was estimated using
the rates currently offered for deposits of similar remaining maturities.
Commitments to Extend Credit
The fair value of commitments is estimated using the fees currently
charged to enter into similar agreements, taking into account the
remaining terms of the agreements and the present creditworthiness of the
counterparties. The outstanding commitment balance is a reasonable
estimate of fair value.
Limitations: The following fair value estimates were made as of December
31, 1997 and 1996, based on pertinent market data and relevant
information on the financial instrument. These estimates do not include
any premium or discount that could result from an offer to sell at one
time the Bank's entire holdings of a particular financial instrument or
category thereof. Since no market exists for a substantial portion of the
Bank's financial instruments, fair value estimates were necessarily based
on judgments with respect to future expected loss experience, current
economic conditions, risk assessments of various financial instruments
involving a myriad of individual borrowers, and other factors. Given the
inherently subjective nature of these estimates, the uncertainties
surrounding them and the matters of significant judgement that must be
applied, these fair value estimations cannot be calculated with
precision. Modifications in such assumptions could meaningfully alter
these estimates.
77
<PAGE>
27
PEOPLES BANCORP, INC.
Notes to Consolidated Financial Statements, Continued
(17) Disclosures about Fair Value of Financial Instruments, cont.
Since these fair value approximations were made solely for on and off
balance sheet financial instruments as of December 31, 1997 and 1996, no
attempt was made to estimate the value of anticipated future business or
the value of nonfinancial statement assets and liabilities. Furthermore,
certain tax implications related to the realization of the unrealized
gains and losses could have a substantial impact on these fair value
estimates and have not been incorporated into many of the estimates.
The estimated fair values of the Bank's financial instruments as of
December 31, 1997 and 1996 are as follows:
1997
Carrying Fair
amount value
(in thousands)
Financial assets:
Cash and cash equivalents $ 15,546 15,546
Investment and mortgage-backed securities
available for sale 137,338 137,338
Investment and mortgage-backed securities
held to maturity 60,955 61,306
Loans, net 396,448 396,822
Financial liabilities:
Deposits $ 493,400 497,791
Borrowed funds 30,000 30,131
Off balance sheet financial instruments:
Commitments to extend credit $ 49,736 49,736
1996
Carrying Fair
amount value
(in thousands)
Financial assets:
Cash and cash equivalents $ 20,938 20,938
Investment and mortgage-backed securities
available for sale 87,648 87,648
Investment and mortgage-backed securities
held to maturity 86,553 86,512
Loans, net 380,288 377,976
Financial liabilities:
Deposits $ 491,246 493,654
Off balance sheet financial instruments:
Commitments to extend credit $ 27,697 27,697
78
<PAGE>
28
PEOPLES BANCORP, INC.
Notes to Consolidated Financial Statements, Continued
(18) Insurance Funds Legislation
On September 30, 1996, legislation was enacted which, among other things,
imposed a special one-time assessment on SAIF-insured deposits to
recapitalize Savings Associations Insurance Fund (SAIF) and spread the
obligations for payment of Financing Corporation (FICO) bonds across all
SAIF and Bank Insurance Fund (BIF) members. The Federal Deposit Insurance
Corporation (FDIC) special assessment being levied amounts to 65.7 basis
points on SAIF assessable deposits held as of March 31, 1995. The Bank
recorded a $177,000 charge (before tax-effect) as a result of the FDIC
special assessment. This legislation will eliminate the substantial
disparity between the amount that BIF and SAIF member institutions had
been paying for deposit insurance premiums. As of December 31, 1996, the
Bank's deposits are primarily BIF-insured except for $34 million of
deposits which were acquired from a SAIF-insured institution.
Beginning on January 1, 1997, BIF members will pay a portion of the FICO
payment equal to 1.29 basis points per $100 in BIF-insured deposits
compared to 6.44 basis points per $100 in SAIF-insured deposits, and will
pay a pro rata share (approximately 2.4 basis points per $100 in
deposits) of the FICO payment on the earlier of January 1, 2000, or the
date upon which the last savings association ceases to exist. The
legislation also requires BIF and SAIF to be merged by January 1, 1999,
provided that subsequent legislation is adopted to eliminate the savings
association charter and no savings associations remain as of that time.
The FDIC has recently lowered SAIF assessments to a range comparable to
that of BIF members, although SAIF members must also make the FICO
payments described above. Management cannot predict the level of FDIC
insurance assessments on an on-going basis or whether the BIF and SAIF
will eventually be merged.
(19) Earnings per Common Share
The Bank adopted Statement of Financial Accounting Standards No. 128
(SFAS 128), "Earnings Per Share" on December 31, 1997. All earnings per
share data for previous periods have been restated to conform with the
provisions of SFAS 128.
The following table summarizes the computation of basic earnings and
diluted earnings per common share for the years ended December 31, 1997
and 1996:
1997 1996
---- ----
(in thousands, except
per share data)
Earnings available to common
shareholders $ 7,462 8,391
Weighted-average common
shares outstanding 8,935 8,913
Plus common stock equivalent 98 10
------- -------
Diluted weighted-average
shares outstanding $ 9,033 8,923
Earnings per common share:
Basic $ 0.83 0.94
Diluted 0.83 0.94
79
<PAGE>
29
PEOPLES BANCORP, INC.
Notes to Consolidated Financial Statements, Continued
(19) Earnings per Common Share, cont.
Earnings per common share for 1995 is not presented as the Bank completed
its initial public offering on August 3, 1995 and such data is not deemed
meaningful by management.
(20) Recent Accounting Pronouncements
In June 1997, the FASB issued Statement of Financial Accounting Standards
No. 130 (SFAS No. 130), "Reporting Comprehensive Income". This Statement
establishes standards for reporting and display of comprehensive income
and its components (revenues, expenses, gains and losses) in a full set
of general-purpose financial statements. This Statement is effective for
fiscal years beginning after December 31, 1997. Reclassification of
financial statements for earlier periods provided for comparative
purposes is required. The Bank has not determined the impact that this
Statement will have on its reporting of operations.
In June 1997, the FASB issued Statement of Financial Accounting Standards
No. 131 (SFAS No. 131), "Disclosures about Segments of an Enterprise and
Related Information". This statement established standards for the way
that public business enterprises report information about operating
segments in annual financial statements and requires that those
enterprises report selected information about operating segments in
interim financial reports issued to shareholders. It also established
standards for related disclosures about products and services, geographic
areas, and major customers. This Statement is effective for financial
statements for periods beginning after December 15, 1997. In the initial
year of application, comparative information for earlier years is to be
restated. This Statement need not be applied to interim financial
statements in the initial year of its application, but comparative
information for interim periods in the initial year of application is to
be reported in financial statements for interim periods in the second
year of application. This Statement is not expected to change the
reporting requirements of the Bank.
(21) Parent Company Only Information
The Mid-Tier Holding Company ("Parent Company") was formed to become the
stock holding company of the Bank in the two-tier reorganization of the
Bank and the Mutual Holding Company, which was completed in July 1997. In
the two-tier reorganization, all of the outstanding shares of the Bank's
common stock including shares held by the Mutual Holding Company and
Minority Stockholders, were converted into shares of Parent Company
common stock, and the Bank became the wholly-owned subsidiary of Parent
Company. As of December 31, 1997, Parent Company's only material asset
consisted of 100% of the outstanding shares of common stock of the Bank.
The following financial statements present the financial activity of the
Parent Company since its formation:
Condensed Statement of Condition
December 31, 1997
(in thousands)
Assets
Investment in subsidiary $ 110,038
-------------
Total assets $ 110,038
=============
Liabilities and Stockholders' Equity
Stockholders' equity 110,038
-------------
Total liabilities and stock-
holders' equity $ 110,038
=============
80
<PAGE>
30
PEOPLES BANCORP, INC.
Notes to Consolidated Financial Statements, Continued
(21) Parent Company Only Information, cont.
Condensed Statement of Income
For the period July 1, 1997 to
December 31, 1997
(in thousands)
Operating income:
Dividends from subsidiary $ 569
--------
Total operating income 569
Operating expense -
--------
569
Equity in undistributed net income
of subsidiary 3,660
--------
$ 4,229
========
Condensed Statement of Cash Flows
For the period July 1, 1997 to
December 31, 1997
(in thousands)
Operating activities:
Net income $ 4,229
Adjustments:
Equity in undistributed net
income of subsidiary (3,660)
--------
Net cash provided by operating
activities 569
Financing activities - Dividends paid (569)
--------
Net change in cash -
Cash at beginning of period -
--------
Cash at end of period $ -
========
81
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
There were no changes in or disagreements with accountants with respect
to the Bank's accounting and financial disclosures during the year ended
December 31, 1997.
PART III
ITEM 10. DIRECTORS AND OFFICERS OF THE BANK
Management of the Company
The Boards of Directors of the Company and the Mid-Tier Holding Company
are divided into three classes and are elected by the stockholders of the
Mid-Tier Holding Company and the Company, respectively, for staggered three year
terms, or until their successors are elected and qualified. One class of
directors, consisting of directors Breithaupt, Longstreth, Stokes and Truesdell
have terms of office expiring in 1998; a second class, consisting of directors
Pruitt, Reinhard and Trainer have terms of office expiring in 1999; and a third
class, consisting of director Sill has a term of office expiring in 2000. Their
names and biographical information are set forth under "Directors of the Bank"
and "Biographical Information."
The following individuals hold positions as executive officers of the
Company and the Mid-Tier Holding Company, or its subsidiary TSBF, as is set
forth below opposite their names.
Name Position
- ---- --------
Wendell T. Breithaupt................. Director, President and Chief
Executive Officer
Leo J. Bellarmino..................... Executive Vice President Officer
Richard L. Gallaudet.................. Vice President
Dean H. Lippincott.................... Vice President
Robert Russo.......................... Vice President and Treasurer
Robert C. Hollenbeck.................. Vice President and Corporate Secretary
Frank Sannella, Jr.................... President and Chief Executive Officer,
TSBusiness Finance
The executive officers of the Mid-Tier Holding Company and the Company
are elected annually and hold office until their respective successors have been
elected and qualified or until death, resignation or removal by the Board of
Directors.
Since the formation of the Mid-Tier Holding Company and the Company,
none of the executive officers, directors or other personnel has received
remuneration from the Mid-Tier Holding Company or the Company. Information
concerning the principal occupations, employment and compensation of the
directors and officers of the Mid-Tier Holding Company and the Company during
the past five years is set forth under "Executive Compensation."
82
<PAGE>
Directors of the Bank
The Bank's Board of Directors is composed of eight members. Directors
of the Bank are generally elected to serve for a three year period or until
their respective successors shall have been elected and shall qualify. The
following table sets forth certain information regarding the composition of the
Bank's Board of Directors as of December 31, 1997, including the terms of office
of Board members.
<TABLE>
<CAPTION>
Positions
Held in the Director Current Term
Name Age Bank Since (1) to Expire
---- --- ------------ --------- ---------
<S> <C> <C> <C> <C>
John B. Sill, Jr. 75 Chairman 1977 2000
Wendell T. Breithaupt 64 Director, President and 1979 1998
Chief Executive Officer
Peter S. Longstreth 53 Director 1992 1998
George A. Pruitt 51 Director 1991 1999
George W. Reinhard 65 Director 1983 1999
Charles E. Stokes, III 67 Director 1978 1998
Raymond E. Trainer 50 Director 1986 1999
Miles W. Truesdell, Jr. 54 Director 1992 1998
</TABLE>
- -------------------------
(1) Reflects initial appointment to the Board of Directors of the Bank's mutual
predecessor.
Executive Officers of the Bank Who Are Not Directors
The following table sets forth information regarding the executive
officers of the Bank who are not also directors.
<TABLE>
<CAPTION>
Positions
Held in the
Name Age Bank
---- --- --------
<S> <C> <C>
Leo J. Bellarmino 49 Executive Vice President
Richard L. Gallaudet 53 Vice President and Senior Lending Officer
Dean H. Lippincott 45 Vice President
Robert Russo 43 Vice President and Treasurer
Robert C. Hollenbeck 52 Vice President and Corporate Secretary
Frank Sannella, Jr. 60 President and Chief Executive Officer, TSBusiness Finance
</TABLE>
Biographical Information
The principal occupation during the past five years of each director
and executive officer of the Bank is set forth below. All directors have held
their present positions for five years unless otherwise stated.
John B. Sill, Jr. is President of Ivins & Taylor, Inc., funeral
directors located in Trenton, New Jersey.
Wendell T. Breithaupt is President and Chief Executive Officer of the
Bank and serves also as a Director. He has served as President since 1981 and as
Chief Executive Officer since 1982. He has been a Director since 1979. He is a
Director, Chairman of the Executive Committee, and Chairman of the Mercer County
Chamber of Commerce. He e is a member of the Mercer County Economic Development
Commission and serves as a trustee of the Drumthwacket e Foundation, Inc. and
serves as a member of the Banking Advisory Board of the State of New Jersey. Mr.
Breithaupt e serves as a director of RSI Retirement Systems, a New York
corporation.
Peter S. Longstreth is Managing Partner of Aegis Property Group, Ltd.,
a real estate development and project management company.
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George A. Pruitt is President of Thomas A. Edison State College.
George W. Reinhard is President of Lester Fellows Co., Inc., an
interstate trucking firm.
Charles E. Stokes, III is the retired President of The Home Rubber
Company, which manufactures mechanical rubber goods, hoses, etc.
Raymond E. Trainer is Chairman of General Sullivan Group, which is an
industrial distribution holding company. He also is a director and secretary of
the TRAF Group which owns a medical collection agency.
Miles W. Truesdell, Jr. is a Director and Partner of Truetech Controls,
Inc., which operates as a specialty distributor that services the industrial
market with process control instrumentation.
Executive Officers Who Are Not Directors. Set forth below is a brief
description of the background of each person who serves as an executive officer
of the Bank and who is not a director of the Bank. Unless otherwise noted, all
executive officers who are not directors have held their present position for
five years.
Leo J. Bellarmino is Executive Vice President, responsible for the
Bank's Human Resources, Marketing, Branch Network, Project Planning, Information
Services, Loan Operations, Staff Services and Corporate Finance. He joined the
Bank in October of 1995 and has 27 years of banking experience. Prior to joining
the Bank, Mr. Bellarmino served as Senior Vice President and Retail Franchise
Manager for CoreStates New Jersey National Bank's 140 branch network. Mr.
Bellarmino also serves as a Director of the non-profit Trenton Roebling
Community Development Corporation.
Richard L. Gallaudet is Vice President and Senior Lending Officer,
responsible for the direct management of all the Bank's lending activities. He
joined the Bank in 1990, prior to which he held a number of management positions
with other banks, including three years of service (1986-1989) as President and
Chief Executive Officer of Cherry Hill National Bank and thirteen years of
service (1973-1986) as a Senior Vice President with MidLantic National
Bank/South (formerly Heritage Bank).
Dean H. Lippincott has been Vice President in charge of the Bank's
Mortgage Department since 1988 and has served the Bank in a number of other
capacities since joining it in 1970. His responsibilities include home mortgage
loan originations. He participates as a member of The West Ward Community
Partnership Corp.
Robert Russo is Vice President and Treasurer, responsible for all bank
operations, financial reporting, and accounting systems. He joined the Bank in
1985 as an Assistant Vice President. He has held other positions in the thrift
industry since 1978.
Robert C. Hollenbeck is Vice President and Corporate Secretary
responsible for investor relations, bank t investments, budgeting and corporate
regulatory matters. He joined the Bank in November 1994. He has 28 years of
banking experience including 11 years as Executive Vice President and Director
of New Brunswick Savings Bank and five years as Executive Vice President of
Constellation Bank.
Frank Sannella, Jr. is President and Chief Executive Officer of
TSBusiness Finance Corporation, the wholly-owned subsidiary of the Bank. Mr.
Sannella previously held several senior management positions including Executive
Vice President and Senior Loan Officer of MidLantic Bank South and 1st National
Bank of Toms River, President of t Heritage Commercial Finance Company and
Executive Vice President of Meridian Commercial Finance Corporation.
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ITEM 11. EXECUTIVE COMPENSATION
Directors Compensation
Fees. During 1997, each member of the Board of Directors of the Bank,
except Mr. Breithaupt, was paid a fee of $650 per Board meeting attended and
$500 for attending meetings of the Executive, Examining (Audit) and Emergency
Operations Committees. Directors attending Loan Committee meetings received $300
per meeting, and directors attending Benefits and Compensation Committee
meetings received $250 per meeting. The Chairman of the Board received $900 per
meeting of the Board of Directors and Executive Committee, and the Chairman of
the Examining (Audit) Committee received $700 per meeting of the Examining
(Audit) Committee. In addition, non-officer directors other than the Chairman
were paid an annual retainer of $5,650, and the Chairman was paid an annual
retainer of $12,650.
1996 Option Plan. During 1996 the Bank and the Mutual Holding Company
adopted the Trenton Savings Bank and Peoples Bancorp, MHC 1996 Stock Option Plan
(the "1996 Option Plan"), which was approved by the Bank's stockholders. Under
the 1996 Option Plan, during 1996 Directors Sill, Stokes, Reinhard, Trainer,
Pruitt, Longstreth and Truesdell each received options to purchase 12,000 shares
of Bank Common Stock with an exercise price of $13.50 per share (i.e., the fair
market value of the Bank Common Stock on the date the option was granted), of
which 4,800 options for each Director vested during 1997, 4,800 options are
scheduled to vest upon consummation of the Conversion, and remaining options are
scheduled to vest one year after the consummation of the Conversion. During
1997, each such Director received additional options to purchase 3,500 shares of
Bank Common Stock with an exercise price of $21.00 per share (i.e., the fair
market value of the stock on the date of grant), of which 1,400 options for each
director vested in January 1998, 1,400 are scheduled to vest upon consummation
of the Conversion, and remaining options are scheduled to vest one year after
the consummation of the Conversion. The awards become fully vested upon a
director's disability, death, retirement or following termination of service in
connection with a change in control of the Bank or the Mutual Holding Company.
All options granted under the 1996 Option Plan expire upon the earlier of ten
years following the date of grant or, generally, nine years following the date
the optionee ceases to be a director.
1996 Recognition Plan. During 1996 the Bank adopted the Trenton Savings
Bank and Peoples Bancorp, MHC 1996 Recognition and Retention Plan (the "1996
Recognition Plan"), which was approved by the Bank's stockholders. During 1996,
9,364 shares of Bank Common Stock were awarded under the 1996 Recognition Plan
to Directors Sill, Stokes, Reinhard and Trainer, 7,491 shares were awarded to
Director Pruitt, and 7,257 shares were awarded to Directors Longstreth and
Truesdell. Such participants vested in 3,746, 2,996, and 2,903 of such shares,
respectively, during 1997, are scheduled to vest in a like amount upon
consummation of the Conversion, and are scheduled to vest in the remaining
shares one year after the consummation of the Conversion. Awards become fully
vested upon a director's disability, death, retirement or following termination
of service in connection with a change in control of the Bank or the Mutual
Holding Company. Unvested shares of restricted stock are forfeited by a
non-employee director upon failure to seek reelection, failure to be reelected,
or resignation from the Board. Prior to vesting, recipients of awards under the
1996 Recognition Plan receive dividends and may direct the voting of the shares
of restricted stock allocated to them.
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Executive Compensation
Summary Compensation Table. The following table sets forth for the
years ended December 31, 1997, 1996 and 1995, certain information as to the
total remuneration paid by the Bank to the Chief Executive Officer and executive
officers whose salary and bonuses exceeded $100,000 in 1997 ("Named Executive
Officers").
<TABLE>
<CAPTION>
Long-Term Compensation
---------------------------------
Annual Compensation Awards
---------------------------------- ------------------------
Year Other Restricted Shares All
Name and Ended Annual Com- Stock Underlying LTIP Other
Principal Position (1) Dec. 31, Salary (2) Bonus (3) pensation (4) Awards (5) Options (6) Payouts Compensation (7)
- --------------------- -------- ---------- --------- ------------- ----------- ----------- ------- ----------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Wendell T. Breithaupt 1997 $196,796 $50,000 -- -- 25,000 -- $80,712
President and Chief 1996 187,425 50,000 -- $560,426 78,000 -- 80,712
Executive Officer 1995 178,500 50,000 -- -- -- -- 80,231
Leo J. Bellarmino...... 1997 $140,000 $10,273 -- -- 10,000 -- $ 8,151
Executive Vice 1996 140,000 10,000 -- -- 34,000 -- 1,713
President 1995 25,846 -- -- -- -- -- --
Frank Sannella, Jr..... 1997 $120,000 -- -- -- -- -- $3,333
President and Chief 1996 47,077 -- -- -- -- -- 99
Executive Officer of TSBF
</TABLE>
- ------------------------------------
(1) No other executive officer received salary and bonuses that in the
aggregate exceeded $100,000.
(2) Includes amounts deferred at the election of the named executive officer
pursuant to the Bank's 401(k) Plan.
(3) Includes amounts earned during the year and awarded pursuant to the Bank's
Profit Sharing Plan. Payments pursuant to the Profit Sharing Plan are
reflected in the year earned, rather than the year in which the payment is
received.
(4) The Bank provides certain members of senior management with the use of an
automobile and other personal benefits which have not been included in the
table. The aggregate amount of such other benefits did not exceed the
lesser of $50,000 or 10% of each Named Executive Officer's cash
compensation.
(5) Includes awards of 41,513 shares of restricted stock to Mr. Breithaupt,
16,605 shares of which vested during the year ended December 31, 1997,
16,605 shares of which are scheduled to vest upon consummation of the
Conversion, and 8,303 shares of which are scheduled to vest one year after
consummation of the Conversion. The value of the awards is based on the
last sale price of the Bank Common Stock on the date of the award.
Dividends are paid to the holder of the restricted stock. As of December
31, 1997, the fair market value of the shares of restricted stock held by
Mr. Breithaupt was $1.1 million.
(6) Of such options awarded to Mr. Breithaupt and Bellarmino during 1996,
31,200 and 13,600 options, respectively, vested during the year ended f
December 31, 1997, an equal amount are scheduled to vest upon consummation
of the Conversion, and 15,600 and 6,800 options, respectively, are
scheduled to vest one year after consummation of the Conversion. Of such
options awarded to Messrs. Breithaupt and Bellermino during 1997, 10,000
and 4,000 options, respectively, vested in January 1998, 10,000 and 4,000
options, respectively, are scheduled to vest upon consummation of the
Conversion, and 5,000 and 2,000 options, respectively, are scheduled to
vest one year after consummation of the Conversion.
(7) Includes the Bank's contribution to the 401(k) Plan and the Bank's
Supplemental Executive Retirement Plan, and insurance premiums paid by the
Bank on behalf of Named Executive Officers.
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Benefit Plans
1996 Stock Option Plan. The Bank's 1996 Option Plan is available to
directors and officers and other employees of the Bank and its affiliates. The
plan is administered by a committee of outside directors. The plan authorizes
the grant of incentive stock options within the meaning of Section 422 of the
Internal Revenue Code of 1986 (the "Code"), "non-statutory options," which do
not qualify as incentive stock options, and certain "Limited Rights,"
exercisable only upon a "change in control" as defined in the Plan. The
following table sets forth certain information regarding awards under the 1996
Option Plan and information regarding the shares acquired and the value realized
during 1997 by Named Executive Officers upon exercise of options and the number
of shares of Mid-Tier Common Stock underlying options and the value of options
held by Named Executive Officers at December 31, 1997.
OPTION GRANTS IN 1997
<TABLE>
<CAPTION>
Potential Realizable Value
at Assumed Annual Rates
Individual Grants of Stock Price Appreciation
for Option Term
- ------------------------------------------------------------------------------------------------------------------------------------
Number of Percent of Total
Securities Options Granted to
Underlying Employees in FY Exercise or Expiration
Name Options 1997 Base Price Date 5% 10%
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Wendell T. Breithaupt 25,000 47.2% $21.00 August 2006 $289,000 $713,000
Leo J. Bellarmino 10,000 18.9% $21.00 August 2006 $116,000 $285,000
</TABLE>
AGGREGATED OPTION EXERCISES IN 1997 AND
FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
Number of Securities
Shares Value Underlying Unexercised Value of Unexercised In-
Name Acquired Realized Options at The-Money Options at
Upon Exercise Fiscal Year-End Fiscal Year-End (1)
------------------------------------------------------
Exercisable/Unexercisable Exercisable/Unexercisable
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Wendell T. Breithaupt 7,407 $108,327 23,793/71,800 $755,428/$2,092,150
Leo J. Bellarmino 2,056 $38,454 11,544/30,400 $366,522/$737,200
</TABLE>
(1) Equals the difference between the aggregate exercise price of such options
and the aggregate fair market value of the shares of Mid-Tier Common Stock
that would be received upon exercise, assuming such exercise occurred on
December 31, 1997, on which date the last sale of the Bank Common Stock was
at a price of $45.25.
Employment Memoranda. Mr. Breithaupt is a party to a memorandum
relating to compensation authorized by the Board of Directors and executed by
the then members of the Compensation Committee and Mr. Breithaupt dated August
27, 1994. The memorandum provides for employment by Mr. Breithaupt at the Bank
through December 31, 1999, with compensation continued through that date.
Pursuant to that memorandum, provided performance is satisfactory, Mr.
Breithaupt is guaranteed a base salary of at least $170,000 per annum during
this period plus an annual payment, intended to be invested by him to supplement
his retirement income, of $70,000 per annum payable prior to each January 30
following the completion of each year of service or, at his option, in monthly
installments. In addition, the memorandum also contemplates eligibility for an
annual bonus of up to $50,000 depending on obtaining
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<PAGE>
strategic and operational goals. Bonuses, if earned and awarded, are to be paid
no later than ninety days following conclusion of each fiscal year during this
period. See "--Employment Agreements."
Retirement Plan. The Bank maintains a defined benefit pension plan
("Retirement Plan") for all employees who have attained the age of 21 and have
completed one year of service with the Bank. In general, the Retirement Plan
provides for annual benefits payable monthly upon retirement at age 65 in an
amount equal to 1.65% of the "Average Compensation" of the employee (which is
equal to the average of the total compensation paid to him or her during the 60
consecutive calendar months within the final 120 consecutive calendar months of
service affording the highest average), for each year of service, plus, if
applicable, 0.65% of Average Compensation in excess of an employee's average
social security taxable wage base for each year of the 35 year period ending
with the employee's social security retirement age, multiplied by his or her
years of service, not in excess of 25 years.
Under the Retirement Plan, an employee's benefits are unvested prior to
the completion of five years of service and are fully vested after five years of
service. A year of service is any year in which an employee works a minimum of
1,000 hours. The Retirement Plan provides for an early retirement option with
reduced benefits for participants who are age 55 and who have 15 years of
service. The Bank's contribution for the Retirement Plan for 1996 was $188,285,
1995 was $168,308, and for 1994 was $115,000.
The following table illustrates annual pension benefits for retirement
at age 65 under various levels of compensation and years of service. The figures
in the table assume that the Retirement Plan continues in its present form, that
the participants retire at age 65 and that the participants elect a straight
life annuity form of benefit.
Five Year
Average 10 Years of 15 Years of 20 Years of 25 Years of
Compensation Service Service Service Service
------------ ----------- ----------- ----------- -----------
$ 40,000 $ 7,295 $ 10,942 $ 14,590 $ 18,238
50,000 9,595 14,392 19,190 23,988
60,000 11,895 17,842 23,790 29,738
70,000 14,195 21,292 28,390 35,488
80,000 16,495 24,742 32,990 41,238
90,000 18,795 28,192 37,590 46,988
100,000 21,095 31,642 42,190 52,738
110,000 23,395 35,092 46,790 58,488
120,000 25,695 38,542 51,390 64,238
130,000 27,995 41,992 55,990 69,988
140,000 30,295 45,442 60,590 75,738
150,000 32,595 48,892 65,190 81,488
160,000 34,895 52,342 69,780 87,238
The maximum annual compensation which may be taken into account under
the Code (as adjusted from time to time by the IRS) for calculating
contributions under qualified defined benefit plans is currently $160,000, and
the maximum annual benefit permitted under such plan is currently $125,000. At
September 30, 1997, Mr. Breithaupt had 18 years of service under the Retirement
Plan, and his five-year average compensation was $160,000 (as limited by the tax
law requirements).
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Employee Stock Ownership Plan and Trust. The Bank has established an
Employee Stock Ownership Plan and related trust ("ESOP") for eligible employees
in connection with the Offering. Messrs. Breithaupt and Bellarmino, and three
other employees of the Bank's subsidiaries will not participate in the ESOP. The
ESOP is a tax-qualified plan subject to the requirements of the Employee
Retirement Income Security Act of 1974 ("ERISA") and the Code. Employees with a
12-month period of employment with the Bank during which they worked at least
1,000 hours and who have attained age 21 are eligible to participate. As part of
the Offering, the ESOP plans to borrow funds from the Company and use the funds
to purchase up to 4% of the Common Stock to be sold in the Offering. Collateral
for the loan will be the Common Stock purchased by the ESOP. The loan will be
repaid principally from the Bank's contributions to the ESOP over a period of at
least twelve years. The interest rate for the loan will be the prime rate.
Shares purchased by the ESOP will be held in a suspense account for allocation
among participants as the loan is repaid.
Contributions to the ESOP and shares released from the suspense account
in an amount proportionate to the repayment of the ESOP loan will be allocated
among participants on the basis of compensation in the year of allocation, up to
an annual adjusted maximum level of compensation. Benefits generally become 100%
vested after five years of credited service or upon death, retirement, early
retirement, disability or in the event of a change in control of the Bank or the
Company. A participant will vest in 20% of his or her account balance after one
year of credited service and will vest in an additional 20% for each subsequent
year of credited service until a participant is 100% vested after five years.
Participants will receive credit under the ESOP for service with the Bank prior
to adoption of the ESOP. A participant who terminates employment before becoming
fully vested will forfeit the nonvested portion of their account balance.
Forfeitures will be reallocated among remaining participating employees in the
same proportion as contributions. The Bank's contributions to the ESOP are
discretionary, subject to the loan terms and tax law limits and, therefore,
benefits payable under the ESOP cannot be estimated.
In connection with the establishment of the ESOP, a committee will be
selected by the Bank to administer the ESOP (the "ESOP Committee"). The Bank
will appoint Manchester Trust as trustee of the ESOP. The ESOP trustee will vote
all allocated shares held in the ESOP in accordance with the instructions of the
participating employees, and unallocated shares and shares held in the suspense
account in a manner calculated to most accurately reflect the instructions the
ESOP trustee has received from participants regarding the allocated stock,
subject to and in accordance with the fiduciary duties under ERISA owed by the
ESOP trustee to the ESOP participants. Under ERISA, the Secretary of Labor is
authorized to bring an action against the ESOP trustee for the failure of the
ESOP trustee to comply with its fiduciary responsibilities. Such a suit could
seek to enjoin the ESOP trustee from violating its fiduciary responsibilities
and could result in the imposition of civil penalties or criminal penalties if
the breach is found to be willful.
1998 Stock Option Plan. At a meeting of the Company's shareholders to
be held at least six months after the completion of the Offering, the Board of
Directors intends to submit for shareholder approval the 1998 Stock Option Plan
for directors and officers of the Bank and of the Company. If approved by the
shareholders, Common Stock in an aggregate amount equal to 10% of the shares
sold in the Offering would be reserved for issuance by the Company upon the
exercise of the stock options granted under the 1998 Stock Option Plan. No
options would be granted under the 1998 Stock Option Plan until shareholder
approval is received.
If the 1998 Stock Option Plan is adopted within 12 months following the
Offering, the exercise price of the options granted under the 1998 Stock Option
Plan will be equal to the fair market value of the shares on the date of grant
of the stock options, and options will become exercisable at a rate of 20% at
the end of each twelve months of service with the Bank after the date of grant,
subject to early vesting in the event of death or disability. Options granted
under the 1998 Stock Option Plan would be adjusted for capital changes such as
stock splits and stock dividends. Notwithstanding the foregoing, awards will be
100% vested upon termination of employment due to death or disability, and if
the 1998 Stock Option Plan is adopted more than 12 months after the Offering,
awards would be 100% vested upon normal retirement or a change in control of the
Bank or the Company. Under OTS rules, if the 1998 Stock Option Plan is adopted
within the first 12 months after the Offering, no individual officer can receive
more than 25%
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<PAGE>
of the awards under the plan, no non-employee director can receive more than 5%
of the awards under the plan, and all outside non-employee directors as a group
can receive no more than 30% of the awards under the plan in the aggregate.
The 1998 Stock Option Plan would be administered by a Committee of
non-employee members of the Company's Board of Directors. Options granted under
the 1998 Stock Option Plan to employees may be "incentive" stock options
designed to result in a beneficial tax treatment to the employee but no tax
deduction to the Company. Non-qualified stock options may also be granted under
the 1998 Stock Option Plan, and will be granted to the non- employee directors
who receive grants of stock options. In the event an option recipient terminated
his employment or service as an employee or director, the options would
terminate during certain specified periods.
1998 Recognition Plan. At a meeting of the Company's shareholders to be
held at least six months after the completion of the Offering, the Board of
Directors also intends to submit a Recognition and Retention Plan (the "1998
Recognition Plan") for shareholder approval. The 1998 Recognition Plan will
provide the Bank's directors and officers an ownership interest in the Company
in a manner designed to encourage them to continue his or her service with the
Bank. The Bank will contribute funds to the 1998 Recognition Plan from time to
time to enable it to acquire an aggregate amount of Common Stock equal to up to
4% of the shares of Common Stock sold in the Offering, either directly from the
Company or in open market purchases. In the event that additional authorized but
unissued shares would be acquired by the 1998 Recognition Plan after the
Offering, the voting interests of existing shareholders would be diluted. The
executive officers and directors will be awarded Common Stock under the 1998
Recognition Plan without having to pay cash for the shares. No awards under the
1998 Recognition Plan would be made until the 1998 Recognition Plan is approved
by the Company's shareholders.
Awards under the 1998 Recognition Plan would be nontransferable and
nonassignable, and during the lifetime of the recipient could only be earned by
him. If the 1998 Recognition Plan is adopted within 12 months following the
Offering, the shares which are subject to an award would vest at a rate of 20%
of the shares awarded at the end of each full 12 months of service with the Bank
after the date of grant of the award. Awards would be adjusted for capital
changes such as stock dividends and stock splits. Notwithstanding the foregoing,
awards would be 100% vested upon termination of employment or service due to
death or disability, and if the 1998 Recognition Plan is adopted more than 12
months after the Offering, awards would be 100% vested upon normal retirement or
a change in control of the Bank or the Company. If employment or service were to
terminate for other reasons, the award recipient would forfeit any nonvested
award. If employment or service is terminated for cause (as would be defined in
the 1998 Recognition Plan), shares not already delivered under the 1998
Recognition Plan would be forfeited. Under OTS rules, if the 1998 Recognition
Plan is adopted within the first 12 months after the Offering, no individual
officer can receive more than 25% of the awards under the plan, no non-employee
director can receive more than 5% of the awards under the plan, and all
non-employee directors as a group can receive no more than 30% of the awards
under the plan in the aggregate.
When shares become vested under the 1998 Recognition Plan, the
participant will recognize income equal to the fair market value of the Common
Stock earned, determined as of the date of vesting, unless the recipient makes
an election under ss. 83(b) of the Code to be taxed earlier. The amount of
income recognized by the participant would be a deductible expense for tax
purposes for the Company. If the 1998 Recognition Plan is adopted within one
year following the Offering, dividends and other earnings will accrue and be
payable to the award recipient when the shares vest. If the 1998 Recognition
Plan is adopted within one year following the Offering, shares not yet vested
under the 1998 Recognition Plan will be voted by the trustee of the 1998
Recognition Plan, taking into account the best interests of the recipients of
the 1998 Recognition Plan awards. If the 1998 Recognition Plan is adopted more
than one year following the Offering, dividends declared on unvested shares will
be distributed to the participant when paid, and the participant will be
entitled to vote the unvested shares.
Employment Agreements. Upon completion of the Offering, it is
anticipated that the Bank will enter into an employment agreement with Mr.
Bellarmino (the "Executive"). The agreement will have a term of 36 months. On
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<PAGE>
each anniversary date, the agreement may be extended for an additional twelve
months, so that the remaining term shall be 36 months. If the agreement is not
renewed, the agreement will expire 24 months following the anniversary date.
Under the agreement, the current base salary for Mr. Bellarmino will be $140,000
(the "Base Salary"). The Base Salary may be increased but not decreased. In
addition to the Base Salary, the agreement provides for, among other things,
participation in retirement plans and other employee and fringe benefits
applicable to executive personnel. The agreement permits the Executive to be
terminated for cause at any time. In the event the Bank terminates the
Executive's employment for reasons other than for cause, or in the event of the
Executive's resignation from the Bank upon (i) failure to re-elect the executive
to his current offices, (ii) a material change in the Executive's functions,
duties or responsibilities, or relocation of his principal place of employment
by more than 30 miles, (iii) liquidation or dissolution of the Bank, (iv) a
breach of the agreement by the Bank, or (v) following a change in control of the
Bank or the Company, the Executive, or in the event of death, his beneficiary,
would be entitled to severance pay in an amount equal to three times (or, in the
event of a change in control, 2.99 times) the average of the five preceding
years Base Salary, including bonuses and any other taxable compensation and the
amount of any contributions made to any employee benefit plan. The Bank would
also continue the Executive's life, health, dental and disability coverage for
36 months from the date of termination. In the event the payments to the
executive would include an "excess parachute payment" as defined by Code Section
280G (relating to payments made in connection with a change in control), the
payments would be reduced by that amount necessary in order to avoid having an
excess parachute payment.
Upon the Executive's retirement, he will be entitled to all benefits
available to him under any retirement or other benefit plan maintained by the
Bank. In the event of the Executive's disability for a period of six months, the
Bank may terminate the agreement provided that the Bank will be obligated to pay
him his Base Salary, including bonuses and other cash compensation paid to the
Executive during such period, for the remaining term of the agreement or one
year, whichever is longer, reduced by any benefits paid to the executive
pursuant to any disability insurance policy or similar arrangement maintained by
the Bank. In the event of the Executive's death, the Bank will pay his Base
Salary to his named beneficiaries for one year following his death, and will
also continue medical, dental, and other benefits to his family for one year.
The employment agreement provides that, following his termination of employment
for reasons unrelated to a change in control, the Executive will not compete
with the Bank for a period of one year.
Severance Agreements. Upon completion of the Offering, it is
anticipated that the Bank will enter into Severance Agreements (the "Severance
Agreements") with certain executives of the Bank which would provide certain
benefits in the event of a change in control of the Bank or the Company. The
Severance Agreements would provide for up to an 18 month term. Commencing on
each anniversary date, the Board of Directors may extend any Severance Agreement
for an additional 18 months. The Severance Agreements would enable the Bank to
offer to designated officers certain protections against termination without
cause in the event of a change in control. These protections against termination
without cause in the event of a change in control are frequently offered by
other financial institutions, and the Bank may be at a competitive disadvantage
in attracting and retaining key employees if it does not offer similar
protections. Although the Severance Agreements may have the effect of making a
takeover more expensive to an acquiror, the Bank believes that the benefits of
enhancing the Bank's ability to attract and retain qualified management persons
by offering the Severance Agreements outweigh any disadvantage of such
agreements.
Following a change in control of the Company or the Bank, an officer
would be entitled to a payment under the Severance Agreement if the officer
voluntarily or involuntarily terminates employment during the term of such
agreement, other than for cause, as defined. In the event that an officer who is
a party to a Severance Agreement is entitled to receive payments pursuant to the
Severance Agreement, he would receive a cash payment up to a maximum of 1.5
times the average of the preceding year's annual base salary and bonuses. In
addition to the severance payment, each covered officer would be entitled to
receive life, health, dental and disability coverage for a period of up to 12
months from the date of termination. Notwithstanding any provision to the
contrary in the Severance Agreement, payments under the Severance Agreements are
limited so that they will not constitute an excess parachute payment under
Section 280G of the Internal Revenue Code.
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ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table includes, as of December 31, 1997, certain
information as to the Mid-Tier Common Stock beneficially owned by (i) the only
persons or entities, including any "group" as that term issued in Section
13(d)(3) of the Exchange Act, who or which was known to the Mid-Tier Holding
Company to be the beneficial owner of more than 5% of the issued and outstanding
Mid-Tier Common Stock, (ii) the directors of the Mid-Tier Holding Company and
the Bank, (iii) certain executive officers of the Mid-Tier Holding Company and
the Bank, and (iv) all directors and executive officers of the Bank as a group.
<TABLE>
<CAPTION>
Name of Beneficial Amount and Nature Percent of
Owner or Number of Beneficial Ownership Mid-Tier
of Persons in Group (1)(2)(3)(4)(5) Common Stock
- ---------------------- ----------------------- ------------
<S> <C> <C>
Peoples Bancorp, MHC............................... 5,796,000 64.1%
134 Franklin Corner Road
Trenton, New Jersey
John B. Sill, Jr................................... 23,064 *
Wendell T. Breithaupt.............................. 82,389 *
Peter S. Longstreth................................ 36,457 *
George A. Pruitt................................... 13,947 *
George W. Reinhard................................. 122,264 1.3
Charles E. Stokes, III............................. 19,564 *
Raymond E. Trainer................................. 46,170 *
Miles W. Truesdell, Jr............................. 33,457 *
Leo J. Bellarmino.................................. 15,870 *
Richard L. Gallaudet............................... 15,546 *
Dean H. Lippincott................................. 16,569 *
Robert Russo....................................... 9,494 *
Robert C. Hollenbeck............................... 11,732 *
Frank Sannella, Jr................................. 75 *
---------- -----
All directors and executive officers
as a group (13 persons)........................... 446,598 4.7%
========= =====
</TABLE>
- ----------------------------
* Less than 1%
(1) Based upon filings made pursuant to the Exchange Act and information
furnished by the respective individuals. In accordance with Rule 13d-3
under the Exchange Act, a person is deemed to be the beneficial owner for
purposes of this table, of any shares of Common Stock if he has shared
voting or investment power with respect to such security, or has a right to
acquire beneficial ownership at any time within 60 days from the date as to
which beneficial ownership is being determined. As used herein, "voting
power" is the power to vote or direct the voting of shares and "investment
power" is the power to dispose or direct the disposition of shares.
Includes all shares held directly as well as by spouses and minor children,
in trust and other indirect ownership, over which shares the named
individuals effectively exercise sole or shared voting and investment
power.
(2) The executive officers and directors of the Bank and the Mid-Tier Holding
Company are also executive officers and directors of Peoples Bancorp, MHC.
(3) Under applicable regulations, a person is deemed to have beneficial
ownership of any shares of Mid-Tier Common Stock which may be acquired
within 60 days of the date as of which beneficial ownership is being
determined pursuant to the exercise of outstanding stock options. Shares of
Mid-Tier Common Stock which are subject to stock options are deemed to be
outstanding for the purpose of computing the percentage of outstanding
Mid-Tier Common Stock owned by such person or group but not deemed
outstanding for the purpose of computing the percentage of Mid-Tier Common
Stock owned by any other person or group.
(4) Includes the following amounts of unvested shares of restricted stock
awarded under the 1996 Recognition Plan which may be voted by the recipient
pending vesting and distribution: Mr. Sill 5,618 shares; Mr. Breithaupt
24,907 shares; Mr. Longstreth 4,353 shares; Mr. Pruitt 4,494 shares; Mr.
Reinhard 5,618 shares; Mr. Stokes 5,618 shares; Mr. Trainer 5,618 shares;
Mr. Truesdell 4,353 shares; Mr. Gallaudet 2,931 shares; Mr. Lippincott
3,019 shares; Mr. Russo 2,664 shares; and Mr. Hollenbeck 2,399 shares.
Includes the following number of shares of Mid-Tier Common Stock underlying
options that are exercisable within 60 days of the date of which beneficial
ownership
92
<PAGE>
is being determined: Mr. Sill 6,200 shares; Mr. Breithaupt 33,293 shares; Mr.
Longstreth 6,200 shares; Mr. Pruitt 6,200 shares; Mr. Reinhard 6,200 shares; Mr.
Stokes 6,200 shares; Mr. Trainer 6,200 shares; Mr. Truesdell 6,200 shares; Mr.
Bellarmino 13,544 shares; Mr. Gallaudet 4,400 shares; Mr. Russo 3,600 shares;
Mr. Lippincott 400 shares; and Mr. Hollenbeck 1,200 shares.
ITEM 13. CERTAIN TRANSACTIONS
All loans made by the Bank to the Bank's directors, executive officers,
and members of such persons' families were made in the ordinary course of
business, on substantially the same terms, including interest rates and
collateral, as those prevailing at the time for comparable transactions with
other persons and did not involve more than the normal risk of collectibility or
present other unfavorable factors. All such loans comply with federal
regulations relating to loans to such persons.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
The exhibits and financial statement schedules filed as a part of this
Form 10-K are as follows:
(a)(1) Financial Statements
o Independent Auditors' Report
o Consolidated Statements of Condition (as of December 31, 1997 and
1996)
o Consolidated Statements of Income (for the years ended December 31,
1997, 1996 and 1995)
o Consolidated Statements of Stockholders' Equity (for the years ended
December 31, 1997, 1996 and 1995)
o Consolidated Statements of Cash Flows (for the years ended December
31, 1997, 1996 and 1995)
o Notes to Consolidated Financial Statements (for the years ended
December 31, 1997, 1996 and 1995)
(a)(2) Financial Statement Schedules
No financial statement schedules are filed because the required
information is not applicable or is included in the financial
statements or related notes.
93
<PAGE>
(a)(3) Exhibits
2 Plan of Conversion and Reorganization*
3.1 Certificate of Incorporation of the Mid-Tier Holding Company*
3.2 Bylaws of the Mid-Tier Holding Company*
4 Form of Common Stock Certificate of the Mid-Tier Holding Company*
10.1 Amended Employment Agreement between Trenton Savings Bank FSB and
Wendell T. Breithaupt**
10.2 Supplemental Executive Retirement Plan**
10.3 Trenton Savings Bank FSB and Peoples Bancorp, MHC 1996 Stock
Option Plan**
10.4 Trenton Savings Bank FSB and Peoples Bancorp, MHC 1996
Recognition and Retention Plan**
10.5 Form of Employment Agreement*
10.6 Form of Severance Agreement*
10.7 Employee Stock Ownership Plan*
21 Subsidiaries of the Registrant
23 Consent of KPMG Peat Marwick LLP
24 Power of Attorney (set forth on Signature Page)
27 EDGAR Financial Data Schedule
(b) Reports on Form 8-K:
- ---------------------
* Filed as exhibits to the Registration Statement on Form S-1 under the
Securities and Exchange Act of 1933 of Peoples Bancorp, Inc., filed with the
Securities and Exchange Commission on December 22, 1997 and amended February 5,
1998 (Registration No. 333-42889). All such previously filed documents are
hereby incorporated by reference in accordance with Item 601 of Regulation S-K.
** Filed as exhibits to the Registration Statement on Form S-4 under the
Securities and Exchange Act of 1933 of Peoples Bancorp, Inc., filed with the
Securities and Exchange Commission on March 10, 1997 and amended April 17, 1997
(Registration No. 333-23029). All of such previously filed documents are hereby
incorporated by reference in accordance with Item 601 of Regulation S-K.
94
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
PEOPLES BANCORP, INC.
Date: March 23, 1998 By: /s/ Wendell T. Breithaupt
-------------------------
Wendell T. Breithaupt
President and Chief Executive Officer
(Principal Executive Officer)
Pursuant to the requirements of the Securities Exchange of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
By: /s/ Robert Russo By: /s/ John B. Sill, Jr.
----------------------------------- -----------------------------
Robert Russo, Vice President John B. Sill, Jr., Chairman
and Treasurer (Principal Financial
and Accounting Officer)
Date: March 23, 1998 Date: March 23, 1998
By: /s/ Miles W. Truesdell, Jr. By: /s/ Peter S. Longstreth
----------------------------------- -----------------------------
Miles W. Truesdell, Jr., Director Peter S. Longstreth, Director
Date: March 23, 1998 Date: March 23, 1998
By: /s/ George A. Pruitt By: /s/ George W. Reinhard
----------------------------------- -----------------------------
George A. Pruitt, Director George W. Reinhard, Director
Date: March 23, 1998 Date: March 23, 1998
By: /s/ Charles E. Stokes By: /s/ Raymond E. Trainer
----------------------------------- -----------------------------
Charles E. Stokes, Director Raymond E. Trainer, Director
Date: March 23, 1998 Date: March 23, 1998
<PAGE>
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
<PAGE>
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
TSBusiness Finance Corporation
Manchester Trust Bank
<PAGE>
EXHIBIT 23
CONSENT OF KPMG PEAT MARWICK LLP
<PAGE>
INDEPENDENT AUDITORS' CONSENT
The Board of Directors
Peoples Bancorp, Inc.
We consent to incorporation by reference in the registration statement no.
333-29971 on Form S-8 of Peoples Bancorp, Inc. of our report dated February 6,
1998, relating to the consolidated statements of condition of Peoples Bancorp,
Inc. and subsidiaries as of December 31, 1997, and 1996, and the related
consolidated statements of income, stockholders' equity and cash flows for each
of the years in the three-year period ended December 31, 1997, which report
appears in the December 31, 1997 Form 10-K of Peoples Bancorp, Inc.
/s/ KPMG Peat Marwick LLP
Short Hills, New Jersey
March 30, 1998
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 15,546
<INT-BEARING-DEPOSITS> 465,236
<FED-FUNDS-SOLD> 5,950
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 136,529
<INVESTMENTS-CARRYING> 137,338
<INVESTMENTS-MARKET> 64,692
<LOANS> 396,448
<ALLOWANCE> 3,415
<TOTAL-ASSETS> 640,419
<DEPOSITS> 493,400
<SHORT-TERM> 30,000
<LIABILITIES-OTHER> 6,981
<LONG-TERM> 0
0
0
<COMMON> 905
<OTHER-SE> 109,133
<TOTAL-LIABILITIES-AND-EQUITY> 640,419
<INTEREST-LOAN> 30,366
<INTEREST-INVEST> 13,063
<INTEREST-OTHER> 428
<INTEREST-TOTAL> 43,857
<INTEREST-DEPOSIT> 19,822
<INTEREST-EXPENSE> 21,831
<INTEREST-INCOME-NET> 22,026
<LOAN-LOSSES> 1,674
<SECURITIES-GAINS> 2,923
<EXPENSE-OTHER> 13,443
<INCOME-PRETAX> 11,789
<INCOME-PRE-EXTRAORDINARY> 11,789
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 7,462
<EPS-PRIMARY> 0.83
<EPS-DILUTED> 0.83
<YIELD-ACTUAL> 7.28
<LOANS-NON> 4,407
<LOANS-PAST> 1,151
<LOANS-TROUBLED> 48
<LOANS-PROBLEM> 5,912
<ALLOWANCE-OPEN> 2,901
<CHARGE-OFFS> 1,317
<RECOVERIES> 157
<ALLOWANCE-CLOSE> 3,415
<ALLOWANCE-DOMESTIC> 3,415
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 192
</TABLE>
