<PAGE>
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, 1998
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
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PEOPLES BANCORP, INC.
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(Exact name of registrant as specified in its charter)
Delaware 22-6764023
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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
- ------------------------------------------------------ ----------
(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>
<S> <C>
Securities Registered Pursuant to Section 12(g) of the Act: Common Stock, par value $.10 per share
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(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 26, there were issued and outstanding 32,684,198 shares of
the Registrant's Common Stock. 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 February 26, 1999, was approximately $318.7 million.
DOCUMENTS INCORPORATED BY REFERENCE
None
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PART I
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ITEM 1. BUSINESS
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The Company
Peoples Bancorp, Inc., a Delaware corporation (the "Company") is the
holding company of Trenton Savings Bank FSB (the "Bank"). The Company was formed
in connection with the mutual-to-stock conversion (the "Conversion") of Peoples
Bancorp, MHC, a federal mutual holding company (the "Mutual Holding Company").
Prior to the Conversion, the Bank was the wholly owned subsidiary of Peoples
Bancorp, Inc., a federal corporation (the "Mid-Tier Holding Company"), the
Mutual Holding Company was the majority stockholder of the Mid-Tier Holding
Company, and the outstanding shares of common stock of the Mid-Tier Holding
Company (the "Mid-Tier Common Stock") that were not held by the Mutual Holding
Company were held by public stockholders. Prior to the July 1997 formation of
the Mid-Tier Holding Company, the Mutual Holding Company was the majority
stockholder of the Bank, and the outstanding shares of common stock of the Bank
("Bank Common Stock") that were not held by the Mutual holding company were held
by public stockholders.
The Conversion was completed in April 8, 1998. In the Conversion, the
shares of Mid-Tier Common Stock held by the Mutual Holding Company were
canceled, each share of Mid-Tier Common Stock held by public shareholders was
converted into 3.8243 shares of the Company's common stock ("Common Stock"), the
Company sold 23,805,827 additional shares of Common Stock for a purchase price
of $10 per share in a subscription offering, and the corporate existence of the
Mutual Holding Company and the Mid-Tier Holding Company ended.
References herein to the results of operations prior to the Conversion
generally refer to the consolidated operations of the Mid-Tier Holding Company,
and references to the results of operations prior to the formation of the Two-
Tier Holding Company refer to the consolidated operations of the Bank.
The Company's executive offices are located at 134 Franklin Corner Road,
Lawrenceville, New Jersey, and its telephone number at that location is (609)
844-3100.
The Merger Agreement
On September 7, 1998, the Company entered into an Agreement and Plan of
Merger with Sovereign Bancorp, Inc. ("Sovereign"), a Pennsylvania business
corporation that is the holding company for Sovereign Bank, a federal savings
bank. At December 31, 1998, Sovereign and its subsidiaries had total
consolidated assets of $21.9 billion, deposits of $12.3 billion and
shareholders' equity of $1.2 billion. The primary operating entity of Sovereign
is Sovereign Bank. Sovereign Bank's primary business consists of attracting
deposits from its network of community banking offices, and originating
commercial, consumer and residential mortgage loans and home equity lines of
credit in the communities served by those offices. Those offices are located
largely in the Pennsylvania counties of Berks, Lancaster, Bucks, Montgomery,
Philadelphia, Lehigh, Northampton and Lycoming, the New Jersey counties of
Essex, Mercer, Middlesex, Monmouth, Morris, Ocean and Union, and in New Castle
County in Delaware.
The proposed merger provides for the Company to merge with Sovereign, with
Sovereign surviving the merger. If the merger is completed, each share of Common
Stock will become a right to receive .80 shares of common stock of Sovereign.
Sovereign will adjust this exchange ratio proportionately if Sovereign effects a
stock split or stock dividend prior to the merger. Sovereign will pay cash to
the Company's shareholders in lieu of issuing fractional share interests of
Sovereign common stock. If the merger is completed, all outstanding options to
purchase shares of Common Stock under the Company's preexisting stock option
plans will be converted into options to acquire Sovereign common stock. The
number of shares of Sovereign common stock issuable upon the exercise of the
converted options and the exercise price for each option will adjusted to
reflect the exchange ratio.
<PAGE>
In connection with the merger, the Bank will merge with Sovereign Bank as
soon as practicable following the merger. When this occurs, the Bank will cease
to exist and Sovereign Bank will succeed to the business formerly conducted by
the Bank.
Completion of the merger is subject to various conditions customary for
transactions similar to the merger, including approval of the merger by the
Company's shareholders and approval of the merger by certain regulatory
agencies. Sovereign or the Company can terminate the merger agreement if the
other party has breached representations or warranties that materially affect it
or breached a material covenant or undertaking. The Company may also terminate
the merger agreement if Sovereign's average stock price during the 15 days
immediately prior to the effective date of the merger is less than $11.00 and
the proportionate decline in Sovereign's price exceeds by 10% the proportionate
decline in the average price of a group of eight specified thrift holding
companies. The merger will not occur if the merger agreement is terminated.
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 and the 1980s crisis in the banking and
thrift industries. At December 31, 1998, the Bank had $1.4 billion of total
assets, $505 million of total deposits, and $240 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 $29.8
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.
2
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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.
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, 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,
1998, the Bank's total loans receivable totaled $499.1 million, of which $279.0
million, or 55.9%, were one- to four-family residential real estate mortgage
loans, $62.8 million, or 12.6%, were commercial and multifamily residential real
estate loans, $37.7 million, or 7.6%, were home equity loans, $107.0 million, or
21.4%, were commercial business loans, and $12.5 million, or 2.5%, 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.
3
<PAGE>
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,
---------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
----------------- ----------------- ----------------- ----------------- -----------------
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ ------- ------ ------- ------ -------
(In Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Mortgage loans:
One- to four-family real estate .... $279,035 55.9 $242,449 60.7% $239,470 62.5% $227,717 74.0% $228,133 78.3%
Commercial real estate and
multi-family...................... 62,812 12.6 39,760 9.9 53,415 14.0 27,827 9.0 23,833 8.2
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Total mortgage loans ........... 341,847 68.5 282,209 70.6 292,885 76.5 255,544 83.0 251,966 86.5
Non-mortgage loans:
Home equity loans (1) .............. 37,707 7.6 34,657 8.6 28,138 7.3 21,833 7.1 22,043 7.6
Commercial business loans .......... 106,990 21.4 62,622 15.7 34,486 9.0 11,573 3.8 8,998 3.1
Other consumer loans (2) ........... 12,540 2.5 20,513 5.1 27,478 7.2 18,783 6.1 8,256 2.8
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Total non-mortgage loans ......... 157,237 31.5 117,792 29.4 90,102 23.5 52,189 17.0 39,297 13.5
Total loans .................... 499,084 100.0% 400,001 100.0% 382,987 100.0% 307,733 100.0% 291,263 100.0%
====== ====== ====== ====== ======
Net deferred costs (fees) .......... (620) (154) 226 104 (117)
Premiums (discounts) ............... 200 16 (24) 23 --
Allowance for possible loan losses.. (4,095) (3,415) (2,901) (1,767) (1,642)
-------- -------- -------- --------- --------
Net loans .......................... $494,569 $396,448 $380,288 $306,093 $289,504
======== ======== ======== ========= ========
</TABLE>
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(1) Includes home equity credit lines and second mortgages.
(2) Includes student loans, installment loans and auto loans.
Contractual Principal Repayments and Interest Rates. The following table
sets forth the maturity of the Bank's loan portfolio at December 31, 1998.
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.......... $16,215 $ 31,693 $ 34,536 $ 87,750 $171,653 $341,847
Total non-mortgage loans...... 41,668 58,651 27,807 15,794 13,317 157,237
------- -------- -------- -------- -------- --------
Total loans................... $57,883 $ 90,344 $ 62,343 $103,544 $184,970 $499,084
======= ======== ======== ======== ======== ========
</TABLE>
4
<PAGE>
Fixed- and Adjustable-Rate Loan Schedule. The following table sets forth
the dollar amount of total loans due after one year from December 31, 1998 which
have fixed interest rates or which have floating or adjustable interest rates.
Fixed Adjustable
Rates Rates Total
---------- ---------- ----------
(Dollars In Thousands)
Mortgage loans................... $ 174,313 $ 151,319 $ 325,632
Non-mortgage loans............... 65,801 49,768 115,569
---------- ---------- ----------
Total loans...................... $ 240,114 $ 201,087 $ 441,201
========== ========== ==========
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, 1998 was
$51.2 million. In February 1998, the Board of Directors of the Bank approved an
increase in the internal lending limit to one borrower to $10.0 million from
$5.0 million. The maximum non-commercial mortgage loan limit is $1.0 million. In
general, the maximum home equity loan the Bank will make is $150,000 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.
5
<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,
-----------------------------------
1998 1997 1996
--------- --------- ---------
(Dollars In Thousands)
<S> <C> <C> <C>
Loans receivable at beginning of period .................. $ 400,001 $ 382,987 $ 307,733
Originations:
Residential ........................................... 68,576 24,801 42,318
Commercial real estate and multifamily ................ 28,575 15,144 4,142
Commercial business loans ............................. 48,786 40,553 14,474
Home equity ........................................... 19,763 11,808 11,578
Other ................................................. 2,956 11,089 16,787
--------- --------- ---------
Total originations ....................................... 168,656 103,395 89,299
Purchased residential mortgage loans ..................... 23,545 -- 1,534
Loans acquired ........................................... -- -- 48,229
Transfer of mortgage loans to foreclosed real estate ..... (228) (352) (682)
Repossession of assets in lieu of loans .................. -- (22) (41)
Net charge offs .......................................... (1,475) (1,160) (52)
Repayments ............................................... (91,415) (84,847) (63,033)
--------- --------- ---------
Net loan activity ........................................ 99,083 17,014 75,254
--------- --------- ---------
Total loans receivable at end of period ............... $ 499,084 $ 400,001 $ 382,987
========= ========= =========
</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, 1998, $279.0 million, or 55.9%, 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.
As of December 31, 1998, 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
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.
6
<PAGE>
Commercial and Multi-family Residential Real Estate Mortgage Loans. At
December 31, 1998, $62.8 million, or 12.6%, 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 $28.6 million, $15.1
million and $4.1 million, or 16.9%, 14.6% and 4.6% of total loan originations
during fiscal 1998, 1997 and 1996, 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 $37.7 million, or 7.6%, of the total loan portfolio as of
December 31, 1998. Of this amount, $28.4 million were in the form of home equity
fixed rate loans; $8.4 million were in the form of home equity credit lines; and
$900 thousand were in the form of second mortgages. FHA Title I property
improvement loans amounted to $239,000.
The home equity fixed rate loan is available on any one-to four-family
home, townhouse, or condominium in the Bank's lending area. It is a fixed rate
mortgage which is based on equity in the home, and is generally secured by a
first or second mortgage on the residence. Loan amounts on owner-occupied
principal residences generally range from $5,000 to $150,000 (up to 80% of the
appraised value of the home less any outstanding senior mortgage or lien). The
current maximum term is 180 months.
The home equity credit line is available on any 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 on owner-occupied
principal residences generally range
7
<PAGE>
from $5,000 to $150,000 (up to 80% of the appraised value of the home less any
outstanding senior mortgage or lien). Loan amounts on investment properties
generally range from $5,000 to $10,000 (up to 70% of the appraised value of the
home less any outstanding senior mortgage or 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, 1998, $12.5 million, or 2.5%,
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 $9.0 million of indirect and direct
automobile loans. Indirect automobile loans 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, 1998 amounted to $753 thousand. 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, 1998 totaled $534 thousand.
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 be unsecured. The Bank generally
obtains personal guarantees from the principals of the borrower with respect to
all commercial business loans.
8
<PAGE>
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 $15,000,000 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, 1998, the Bank had $107.0 million, or 21.4%, 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 Bank ("MTB"). MTB 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. MTB 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, 1998, MTB managed funds totaling more
than $226 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, 1998.
<TABLE>
<CAPTION>
Commercial
Mortgage Business Consumer Total
-------------------- ------------------ ----------------- -----------------
Number Amount Number Amount Number Amount Number Amount
--------- -------- -------- -------- -------- -------- -------- --------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Loans delinquent for:
30-59 days ............. 42 $ 2,656 22 $ 1,958 62 $ 373 126 $ 4,987
60-89 days ............. 4 283 8 485 19 171 31 939
90 days and over ....... 19 1,975 56 1,848 17 300 92 4,123
------- ------- ------- ------- ------- ------- ------- -------
Total delinquent loans 65 $ 4,914 86 $ 4,291 98 $ 844 249 $10,049
======= ======= ======= ======= ======= ======= ======= =======
</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 of 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 collateral exists. In addition, the Bank places any loan
on non-accrual if any part of it is classified as doubtful or loss
9
<PAGE>
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, 1998, the Bank had one property 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 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 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, 1998, 1997,
1996, 1995 and 1994 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,
----------------------------------------------
1998 1997 1996 1995 1994
------ ------ ------ ------ ------
(Dollars In Thousands)
<S> <C> <C> <C> <C> <C>
Accruing loans 90 days or more delinquent ................. $ 478 $1,151 $ 753 $ 10 $ 448
Non-accruing loans 90 days or more delinquent:
Mortgage ................................................ 1,975 2,591 1,756 1,008 994
Non-mortgage ............................................ 1,670 1,816 1,195 114 31
Troubled debt restructured loans .......................... 102 48 206 1,052 1,044
------ ------ ------ ------ ------
Total non-performing loans ................................ 4,225 5,606 3,910 2,184 2,517
Foreclosed assets ......................................... 28 306 253 34 77
------ ------ ------ ------ ------
Total non-performing assets ............................... $4,253 $5,912 $4,163 $2,218 $2,594
====== ====== ====== ====== ======
Total non-performing loans as a percentage of net loans ... 0.85% 1.41% 1.03% 0.71% 0.87%
====== ====== ====== ====== ======
Total non-performing assets as a percentage of total assets 0.29% 0.92% 0.69% 0.43% 0.59%
====== ====== ====== ====== ======
</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 allowances established
to cover possible losses related to assets classified substandard or doubtful
may be included in determining an institution's regulatory capital, while
10
<PAGE>
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, 1998, the Bank had $3.1 million of loans criticized as
special mention, $3.5 million classified as substandard and $0.2 million
classified as doubtful and none as loss. As of December 31, 1998, total
nonperforming assets, which includes repossessed assets, amounted to $4.3
million or 0.29% 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, 1998, the Bank's allowance for loan
losses, which includes a general valuation allowance, amounted to $4.1 million
compared to $3.4 million at December 31, 1997.
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,
----------------------------------------------------------
1998 1997 1996 1995 1994
--------- --------- --------- --------- ---------
(Dollars In Thousands)
<S> <C> <C> <C> <C> <C>
Total loans outstanding ............................................ $ 499,084 $ 400,001 $ 382,987 $ 307,733 $ 291,263
========= ========= ========= ========= =========
Average loans outstanding .......................................... 448,696 $ 391,821 $ 337,780 $ 297,043 $ 282,068
========= ========= ========= ========= =========
Balance at beginning of period ..................................... $ 3,415 $ 2,901 $ 1,767 $ 1,642 $ 1,471
Charge-offs:
Mortgage loans ................................................... (51) (80) (67) -- --
Consumer loans ................................................... (165) (166) (34) (32) (23)
Commercial business loans ........................................ (1,505) (1,071) (9) -- --
Recoveries ......................................................... 246 157 58 7 14
--------- --------- --------- --------- ---------
Net charge-offs .................................................... (1,475) (1,160) (52) (25) (9)
Provision for loan losses .......................................... 2,155 1,674 -- 150 180
--------- --------- --------- --------- ---------
Acquired allowance ................................................. -- -- 1,186 -- --
--------- --------- --------- --------- ---------
Balance at end of period ........................................... $ 4,095 $ 3,415 $ 2,901 $ 1,767 $ 1,642
========= ========= ========= ========= =========
Allowance for loan losses as a percentage of total loans outstanding 0.82% 0.85% 0.76% 0.57% 0.56%
========= ========= ========= ========= =========
Net charge-offs as a percentage of average loans outstanding ....... 0.33% 0.30% 0.02% 0.01% 0.00%
========= ========= ========= ========= =========
Allowance for loan losses to non-performing loans .................. 96.92% 60.92% 74.19% 80.91% 65.24%
========= ========= ========= ========= =========
</TABLE>
11
<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,
---------------------------------------------------------------
1998 1997 1996
-------------------- -------------------- -------------------
% 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 .................... $1,190 68.5% $1,050 70.6% $ 906 76.5%
Consumer loans .................... 827 10.1 815 13.7 877 14.5
Commercial business loans ......... 1,583 21.4 1,358 15.7 813 9.0
Unallocated ....................... 495 -- 192 -- 305 --
------ ------ ------ ------ ------ ------
Total allowance for loan losses . $4,095 100.0% $3,415 100.0% $2,901 100.0%
====== ====== ====== ====== ====== ======
- ----------------------------------
</TABLE>
(1) Represents percentage of loans in each category to total loans.
<TABLE>
<CAPTION>
At December 31,
---------------------------------------------------------
1995 1994
--------------------------- --------------------------
% of % of
Total Total
Amount Loans (1) Amount Loans (1)
---------- --------------- ------------ --------------
<S> <C> <C> <C> <C>
Balance at end of year applicable to:
Mortgage loans ............................. $ 591 83.0% $ 593 86.5%
Consumer loans ............................. 610 13.2 453 10.4
Commercial business loans .................. 116 3.8 90 3.1
Unallocated ................................ 450 -- 506 --
------ ------ ------ ------
Total allowance for loan losses ............ 1,767 100.0% $1,642 100.0%
====== ====== ====== ======
- ------------------------------------------
</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.
Although OTS regulations generally permit federal associations to own
common stock of non-service corporations only in limited circumstances, the
Company is not subject to such limitations. Prior to the formation of the
Company, as part of its approval of the Bank's conversion from a New Jersey
savings bank charter to a federal charter, the OTS authorized the Bank to retain
common stocks that it owned at the time of the conversion. This authority
expired on December 31, 1997.
12
<PAGE>
The following table sets forth certain information relating to the
Company's investment securities and mortgage-backed securities held to maturity
and securities available for sale at the dates indicated.
<TABLE>
<CAPTION>
At December 31,
--------------------------------------------------------------------
1998 1997 1996
--------------------- -------------------- -----------------------
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
Obligations of state and political subdivisions ...... 1,383 1,538 1,594 1,712 3,400 3,497
Federal Home Loan Bank stock ......................... 29,055 29,055 3,386 3,386 3,089 3,089
Mortgage-backed securities ........................... 17,395 17,607 35,098 35,338 48,618 48,587
Corporate bonds ...................................... 4,056 4,068 13,013 13,039 17,493 17,521
-------- -------- -------- -------- -------- --------
Total securities held to maturity including
Federal Home Loan Bank stock ........................ 51,889 52,268 64,341 64,692 89,642 89,601
-------- -------- -------- -------- -------- --------
Investments and mortgage-backed securities
available for sale: (1)
United States treasury securities .................... 18,964 19,059 43,930 44,058 65,336 65,507
United States government and agency obligations ...... 48,352 49,109 49,402 49,923 9,924 9,767
Obligations of state and political subdivisions ...... 300 300 -- -- -- --
Equity securities .................................... 18,914 18,414 10 10 894 3,201
Mortgage-backed securities-United States Agency ...... 47,295 47,948 14,903 15,098
REMICs ............................................... 639,747 639,747 -- -- -- --
Corporate bonds ...................................... 36,577 36,876 28,284 28,249 9,151 9,172
-------- -------- -------- -------- -------- --------
Total securities available for sale .................... 810,149 811,453 136,529 137,338 85,305 87,647
-------- -------- -------- -------- -------- --------
Total investments ...................................... $862,038 $863,721 $200,870 $202,030 $174,947 $177,248
======== ======== ======== ======== ======== ========
</TABLE>
As of December 31, 1998, the Company's investment securities held to
maturity portfolio had a carrying value of $51.9 million, of which $29.1 million
was Federal Home Loan Bank ("FHLB") stock. As of that same date, the Bank's
securities available for sale portfolio had an estimated market value of $811.5
million, of which $68.2 million were securities issued by the U.S. Treasury and
federal government agencies, and $743.3 million were other bonds, equity
securities, obligation of state and political subdivisions and mortgage-backed
securities.
At December 31, 1998, $7.6 million, or 14.6%, of the $51.9 million of total
securities held to maturity by the Company were scheduled to mature within one
year and had a weighted average yield of 6.25%. At December 31, 1998, $666.5
million, or 82.3%, of the $810.1 million of securities available for sale by the
Company were scheduled to mature within one year and had a weighted average
yield of 6.57%.
13
<PAGE>
The following table sets forth the scheduled maturities, carrying values,
amortized cost, market values and weighted average yields for the Company's
investment portfolio at December 31, 1998.
<TABLE>
<CAPTION>
At December 31, 1998
------------------------------------------------------------------------
Within One Year One to Five Years Five to Ten Years
----------------------- ---------------------- -------------------------
Weighted Weighted Weighted
Amortized Average Amortized Average Amortized Average
Cost Yield Cost Yield Cost Yield
------------ --------- --------- -------- -------- -------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Investments and mortgage-backed
securities held to maturity:
Mortgage-backed securities ................................. $ 4,412 6.30% $ 7,510 6.71% $ 812 7.96%
Federal Home Loan Bank stock................................
United States agency obligations............................
Obligations of state and political subdivisions ............ 176 6.59% 517 6.67% 90 8.83%
Corporate bonds ............................................ 3,000 6.16% 60 5.82% 996 7.40%
-------- -------- --------
Total securities held to maturity ........................ $ 7,588 6.25% $ 8,087 6.70% $ 1,898 7.71%
======== ======== ========
Investments and mortgaged backed securities
available for sale:
Mortgage-backed securities-United States
Agency .................................................... 15,988 6.21% 20,751 6.14%
REMICs ..................................................... 639,747 6.59%
United States treasury securities .......................... 16,300 6.10% 2,664 5.97%
United States agency obligations ........................... 260 7.46% 11,793 6.00% 36,299 7.25%
Obligations of State and Political subdivisions ............ 300
Equity securities...........................................
Corporate bonds ............................................ 10,237 6.06% 24,044 6.05% 1,286 6.51%
-------- -------- --------
Total securities available for sale ...................... $666,544 6.57% $ 54,489 6.08% $ 58,636 6.82%
======== ======== ========
<CAPTION>
-------------------------------------------------------------
More than Ten Years Total
------------------------ ---------------------------------
Weighted Weighted
Amortized Average Amortized Market Average
Cost Yield Cost Value Yield
--------- -------- --------- -------- --------
<S> <C> <C> <C> <C> <C>
Investments and mortgage-backed
securities held to maturity:
Mortgage-backed securities .............................. $ 4,661 7.14% $ 17,395 $ 17,607 6.77%
Federal Home Loan Bank stock ............................ 29,055 7.00% 29,055 29,055 7.00%
United States agency obligations
Obligations of state and political subdivisions ......... 600 10.78% 1,383 1,538 8.58%
Corporate bonds ......................................... 4,056 4,068 6.46%
-------- -------- --------
Total securities held to maturity ..................... $ 34,316 7.09% $ 51,889 $ 52,268 6.92%
======== ======== ========
Investments and mortgaged backed securities
available for sale:
Mortgage-backed securities-United States
Agency ................................................. 10,556 7.42% 47,295 47,948 6.45%
REMICs .................................................. 639,747 639,747 6.59%
United States treasury securities ....................... 18,964 19,059 6.08%
United States agency obligations ........................ 48,352 49,109 6.94%
Obligations of State and Political subdivisions ......... 300 300 4.10%
Equity securities ....................................... 18,914 1.93% 18,914 18,414 1.93%
Corporate bonds ......................................... 1,010 5.80% 36,577 36,876 6.07%
-------- -------- --------
Total securities available for sale ................... $ 30,480 3.96% $810,149 $811,453 6.46%
========= ======== ========
</TABLE>
14
<PAGE>
Cash and Cash Equivalents. The Company also had cash and cash equivalents
consisting primarily of cash due from banks and federal funds sold totaling
$81.3 million and $15.5 million at December 31, 1998 and December 31, 1997,
respectively.
Mortgage-Backed Securities
The Company has invested in a variety of mortgage-backed security types.
The portfolio consists of privately issued AAA rated real estate mortgage
investment conduit ("REMIC") securities purchased subject to agreements to sell
those securities to Sovereign (see "Agreements to Sell Securities"), and
government agency backed mortgage obligations. Mortgage-backed securities
insured by government agencies are guaranteed by the Government National
Mortgage Association (Ginnie Mae), Freddie Mac, 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 (see "Borrowings").
At December 31, 1998, the Bank's mortgage-backed securities in the held to
maturity category had a carrying value and estimated market value of $17.4
million and $17.6 million respectively. At December 31, 1998, the Company and
the Bank held REMICs with a carrying value of $36.8 million and $602.9 million
respectively subject to agreements to sell the securities to Sovereign. (See
"Agreements to Sell Securities.")
At December 31, 1998, the Company's mortgage-backed securities - United
States Agency and REMICs in the available for sale category had a carrying value
and market value of $687.0 million and $687.7 million respectively. All
mortgage-backed securities not subject to agreements to sell to Sovereign are
backed by government agencies. As of December 31, 1998, these agency backed
securities had a carrying value and market value of $47.3 million and $47.9
million, respectively.
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.
15
<PAGE>
The following table sets forth the dollar amounts of the various types
of deposit accounts offered by the Bank between the dates indicated.
<TABLE>
<CAPTION>
At December 31,
------------------------------------------------------------------------------------------
1998 1997 1996
------------------------------ -------------------------------- ------------------------
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 ............ $216,517 42.9% $(12,955) $229,472 46.5% $ 40,728 $188,744 38.4%
Maturing within 13-24 months ......... 56,338 11.2 18,154 38,184 7.7 (1,619) 39,803 8.2
Maturing within 25-36 months ......... 6,871 1.4 (10,889) 17,760 3.5 (2,538) 20,298 4.1
Maturing beyond 36 months ............ 11,387 2.3 7,950 3,437 0.7 (44,264) 47,701 9.7
-------- -------- -------- -------- -------- -------- -------- --------
Total certificates of deposit ...... 291,113 57.8 2,260 288,853 58.4 (7,693) 296,546 60.4
-------- -------- -------- -------- -------- -------- -------- --------
Transaction accounts:
NOW .................................. 23,628 4.7 7,854 15,774 3.2 (657) 16,431 3.3
Noninterest-bearing demand ........... 33,407 6.6 5,243 28,164 5.7 2,798 25,366 5.2
Passbook statement ................... 87,435 17.3 (6,573) 94,008 19.1 (10,202) 104,210 21.2
Club accounts ........................ 247 -- (17) 264 0.1 (5) 269 0.1
Money market demand deposits ......... 64,350 12.7 2,893 61,457 12.5 16,663 44,794 9.1
Other ................................ 4,720 0.9 (160) 4,880 1.0 1,250 3,630 0.7
-------- -------- -------- -------- -------- -------- -------- --------
Total transaction accounts ......... 213,787 42.2 9,240 204,547 41.6 9,847 194,700 39.6
-------- -------- -------- -------- -------- -------- -------- --------
Total deposits ..................... $504,900 100.0% $ 11,500 $493,400 100.0% $ 2,154 $491,246 100.0%
======== ======== ======== ======== ======== ======== ======== ========
</TABLE>
The following table shows the interest rate and maturity information for
the Bank's certificates of deposit at December 31, 1998.
<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% ..................... $ 6,153 $ 13 $ -- $ 20 $ $6,186
4.01-5% .................. 52,213 4,037 589 859 57,698
5.01-6% .................. 154,267 40,947 6,252 10,473 211,939
6% and above ............. 3,884 11,341 30 35 15,290
---------- --------- ---------- ----------- -----------
Total .................. $ 216,517 $ 56,338 $ 6,871 $ 11,387 $ 291,113
========== ========= ========== =========== ===========
</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, 1998.
Certificates
Maturity Period of Deposit
(In Thousands)
Three months or less...................... $ 9,734
Over three through six months............. 7,013
Over six through twelve months............ 5,109
Over twelve months........................ 5,735
-------
Total................................... $27,591
=======
16
<PAGE>
The following table sets forth the savings activities of the Bank during
the years indicated.
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------
1998 1997 1996
--------- --------- ---------
(Dollars In Thousands)
<S> <C> <C> <C>
Net decrease before interest credited
and assumption of liabilities .......... $ (8,826) $(17,668) $(10,642)
Deposit liabilities acquired ............. -- -- 73,177
Interest credited ........................ 20,326 19,822 17,941
-------- -------- --------
Net increase in deposits ................. $ 11,500 $ 2,154 $ 80,476
======== ======== ========
</TABLE>
The following table sets out the average balances in the main categories of
the Bank's deposit base, for the years indicated.
<TABLE>
<CAPTION>
1998 1997 1996
-------------------- -------------------- --------------------
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 ........ $ 288,700 5.40% $ 290,007 5.36% $ 271,362 5.18%
========= ========= =========
Interest-bearing savings deposits ...... 92,518 2.29 100,603 2.21 94,569 2.54
Money market accounts .................. 59,770 3.52 50,509 3.34 33,841 3.54
Demand deposit accounts ................ 21,829 1.56 27,592 1.26 16,971 1.74
Other deposit accounts ................. 33,616 0.50 19,621 -- 15,195 --
--------- --------- ---------
Average core deposits .................. $ 207,733 2.28 $ 198,325 2.15 $ 160,576 2.43
========= ========= =========
Total average deposits ............... $ 496,433 4.09% $ 488,332 4.06% $ 431,938 4.15%
========= ========= =========
</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.
On November 16, 1998 and December 10, 1998 the Bank entered into
collateralized borrowing agreements with the FHLB. The monies received from
these agreements funded the acquisition of three private REMICs, rated Aaa,
which are subject to agreements to sell to Sovereign. (See "Agreements to Sell
Securities.")
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.
The following table sets forth the terms of the FHLB borrowings and
collateral.
<TABLE>
<CAPTION>
Amount Borrowing Maturity Certificate Amortized
Rate Borrowed Date Date Face Value Value Collateral Rating Yield
- ---- --------- --------- -------- ---------- --------- -------------------------------- -------- -----
<C> <C> <C> <C> <C> <C> <S> <C> <C>
5.11% $ 297,100 11/16/98 7/1/99 $300,000 $285,610 Residential Funding Mtg. Sec. Aaa 6.78%
6.75% due 8/25/2028
5.08% $284,000 12/10/98 7/1/99 $238,125 $231,825 Citicorp Mtg. Sec. Corp. Aaa 6.36%
6.25% due 11/25/2028
$ 50,000 $ 47,766 Residential Funding Mtg. Sec. Aaa 6.75%
6.75% due 8/25/2028
</TABLE>
17
<PAGE>
The following table sets forth the maximum month-end balance and average
monthly balance of FHLB advances and other borrowings for the year indicated.
<TABLE>
<CAPTION>
For the
Year Ended
December 31,
1998 1997
--------------------- -------------------
(Dollars in thousands)
<S> <C> <C>
Maximum Balance:
- ---------------
FHLB advances..................................$ 581,000 $ --
Other secured borrowing ....................... 30,000 30,000
Average Balance:
- ---------------
FHLB advances ................................. 54,561 --
Other secured borrowing ....................... 30,000 30,000
Weighted Average Interest Rate:
- ------------------------------
FHLB advances ................................. 5.10% --
Other secured borrowing ....................... 6.02% 6.02%
</TABLE>
The following table sets forth certain information as to the Bank's
borrowings at the date indicated.
<TABLE>
<CAPTION>
At
December 31,
1998 1997
---------- ----------
(In thousands)
<S> <C> <C>
FHLB advances ........................................... $ 581,100 $ --
Other secured borrowing ................................. 30,000 30,000
---------- ----------
Total borrowings ..................................... $ 611,100 $ 30,000
Weighted average interest rate of FHLB advances ......... 5.10% --
Weighted average interest rate of other secured borrowing 6.02% 6.02%
</TABLE>
Agreements to Sell Securities
Peoples Bancorp, Inc. and the Bank have entered into four agreements to
sell securities to Sovereign. The agreements were entered into for the purpose
of leveraging the balance sheet of the Company. The Agreements provide that in
the event the merger is not completed by the later of July 1, 1999 (the "Merger
Agreement Date") or such later date as may be agreed upon by the parties no
later than 10 days after the Merger Agreement Date, Sovereign will purchase the
securities at the amortized book value.
18
<PAGE>
The following table sets forth the agreement maturities and assets
under repurchase agreement for the Company and the Bank.
(In Thousands)
<TABLE>
<CAPTION>
Certificate Amortized
Term Face Value Value Issue Rating Yield
- ------------------------ ----------- --------- -------------------------------- -------- ----------
<S> <C> <C> <C> <C> <C>
With Trenton Savings Bank
11/05/98-7/1/99 $ 51,161 $ 37,701 Northwest Asset Securities Corp. Aaa 6.52%
6.52% due 2/25/2028
11/16/98-7/1/99 $ 300,000 $ 285,610 Residential Funding Mtg. Sec Aaa 6.78%
6.75% due 8/25/2028
12/10/98-7/1/99 $ 238,125 $ 231,825 Citicorp Mtg. Sec. Corp. Aaa 6.36%
6.25% due 11/25/2028
12/10/98-7/1/99 $ 50,000 $ 47,766 Residential Funding Mtg. Sec. Aaa 6.75%
6.75% due 8/25/2028
With the Company
11/5/98-7/1/99 $ 50,000 $ 36,845 Northwest Asset Securities Corp. Aaa 6.52%
6.52% due 2/25/2028
</TABLE>
Quarterly Financial Information. The following table summarizes certain
1998 and 1997 quarterly financial data.
<TABLE>
<CAPTION>
Quarter Ended
--------------------------------------------------
December 31, September 30, June 30, March 31,
1998 1998 1998 1998
----------- ----------- ----------- -----------
(In Thousands)
<S> <C> <C> <C> <C>
Interest income........................... $ 18,323 $ 14,426 $ 14,340 $ 11,314
Interest expense.......................... 8,313 5,536 5,593 5,538
Net interest income....................... 10,010 8,890 8,747 5,776
Provision for loan losses................. 899 709 361 186
Gain on security transactions............. 191 300 50 --
Operating expenses........................ 4,229 3,984 3,764 3,804
Income before tax expense................. 5,988 5,374 5,530 2,778
Net income for the quarter................ 3,589 3,278 3,499 1,703
Earnings per share-Basic.................. .10 .09 .10 .05
Earnings per share-Diluted................ .10 .09 .10 .05
<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............. -- 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.................. 0.05 0.05 0.06 0.06
Earnings per share-Diluted................ 0.05 0.05 0.06 0.06
</TABLE>
19
<PAGE>
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, 1998, 35 commercial banks, 69 credit unions, and 42
savings institutions maintained 689 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, 1998, the Bank held approximately 2.6% of all deposits held
by commercial banks, credit unions, and savings associations in the Bank's three
county 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 Bank.
The Bank competes for real estate loans primarily through the interest rates and
loan fees it charges and advertising.
Personnel
The Bank and its subsidiaries TSBF and MTB had 155 full-time equivalent
employees at December 31, 1998. 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 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. The FDIC also
examines the Bank in its role as the administrator of the BIF. The Bank's
relationship with its depositors
20
<PAGE>
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, 1998, under the expanded QTL test,
approximately 86.7% of the Bank's portfolio assets were qualified thrift
investments.
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
21
<PAGE>
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, 1998 was 36.2%, 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 a
satisfactory 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 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;
22
<PAGE>
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, 1998, 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, 1998.
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 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.
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
23
<PAGE>
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 3.0% is considered to be undercapitalized. A savings
institution that has 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
1.5% 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, 1998, 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 5% of its advances from
the FHLB, whichever is greater.
On November 16, 1998 and December 10, 1998 the Bank borrowed $297.1
million and $284.0 million respectively from the FHLB which were collateralized
by various mortgage pass through securities. In accordance with FHLB borrowing
requirements, the Bank increased its holdings of FHLB stock to $29.1 million at
December 31, 1998 from $3.4 million at December 31, 1997. See "Business-Sources
of Funds-Borrowings."
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, 1998 totaled $406,542.
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, 1998, 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.
24
<PAGE>
Holding Company Regulation
The Company. The Company is a non-diversified unitary savings and loan
holding company within the meaning of the HOLA. As such, the Company is
registered with the OTS and is 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 is
not 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. Legislation has recently been proposed
in various forms that 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.
Federal Securities Laws
The Common Stock is registered with the SEC under the Securities
Exchange Act of 1934 (the "Exchange Act"). The Company is subject to the
information, proxy solicitation, insider trading restrictions and other
requirements under the Exchange Act.
25
<PAGE>
TAXATION
Federal Income Taxation
General. The Company is 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, 1998, was approximately
$2.0 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, 1998, 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 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, 1998, 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 in which a corporate
recipient owns at least 20% but generally less than 80% of the corporation, 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.
26
<PAGE>
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 presently 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 is required to file a New Jersey income tax return because
it conducts 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.
ITEM 2. PROPERTIES
- -------------------
At December 31, 1998, 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 Company's premises and equipment was $6.8 million as of December
31, 1998. The following table sets forth certain information regarding the
corporate center, trust center, and 14 branch offices of the Bank at December
31, 1998.
Year Leased Lease Expiration
Description/Address Opened Owned Date
------------------- ------ ----- ----
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
27
<PAGE>
Year Leased Lease Expiration
Description/Address Opened Owned Date
------------------- ---------- ----- ----
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
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
28
<PAGE>
ITEM 3. LEGAL PROCEEDINGS
- --------------------------------------------------------------------------------
In the normal course of business, the Company and the Bank may be
parties to various outstanding legal proceedings and claims. In the opinion of
management, the financial condition of the 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, 1998 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 the Common Stock which is currently
listed on the Nasdaq National Market under the symbol, "TSBS," and the Company
had 32 market makers as of December 31, 1998.
The following table sets forth the high and low bid quotes for the
Common Stock, and prior to the issuance of the Common Stock, the Mid-Tier Common
Stock, and the cash dividends declared for the years ended December 31, 1997 and
1998. Information regarding the Mid-Tier Common Stock has been adjusted to
reflect the April 8 conversion of each share of Mid-Tier Common Stock into
3.8234 shares of Common Stock.
<TABLE>
<CAPTION>
Cash
Fiscal Year Ended Dividends
December 31, 1998 High Low Declared
- ----------------- -------- ------- --------
<S> <C> <C> <C>
First quarter........................................ 11.77 10.20 .0229
Second quarter....................................... 11.38 9.94 .0250
Third quarter........................................ 10.19 6.97 .0250
Fourth quarter....................................... 11.00 7.00 .0250
Fiscal Year Ended
December 31, 1997
- -----------------
First quarter........................................ 4.87 4.12 .0229
Second quarter....................................... 5.39 4.67 .0229
Third quarter........................................ 8.76 5.00 .0229
Fourth quarter....................................... 11.96 7.32 .0229
</TABLE>
29
<PAGE>
ITEM 6. SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA
- --------------------------------------------------------------------------------
The following tables set forth selected consolidated historical
financial and other data of the 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
Company contained elsewhere herein.
<TABLE>
<CAPTION>
At December 31,
--------------------------------------------------------------
1998 1997 1996 1995 1994
--------- --------- --------- --------- --------
(In Thousands)
<S> <C> <C> <C> <C> <C>
Selected Financial Condition Data:
Total assets................................... $1,469,598 $ 640,419 $ 601,016 $ 514,218 $441,019
Cash and cash equivalents...................... 81,268 15,546 20,938 16,253 12,665
Securities available for sale.................. 811,453 137,338 87,648 83,776 64,961
Securities held to maturity:
Debt securities............................. 5,438 25,857 37,935 36,945 27,017
Mortgage-backed securities.................. 17,396 35,098 48,618 54,316 35,087
Federal Home Loan Bank stock................ 29,055 3,386 3,089 2,864 2,495
Loans, net..................................... 494,569 396,448 380,288 306,093 289,504
Deposits....................................... 504,900 493,400 491,246 410,770 377,559
Stockholders' equity........................... 339,870 110,038 103,352 97,542 58,769
Intangible assets.............................. 9,757 10,604 9,164 2,325 --
Borrowings..................................... 611,100 30,000 -- -- --
<CAPTION>
Years Ended December 31,
-------------------------------------------------------------
1998 1997 1996 1995 1994
--------- --------- --------- --------- --------
(In Thousands)
<S> <C> <C> <C> <C> <C>
Selected Operating Data:
Total interest income.......................... $ 58,403 $ 43,857 $ 36,903 $ 33,518 $ 29,468
Total interest expense......................... 24,980 21,831 17,941 17,010 12,851
--------- --------- --------- --------- --------
Net interest income......................... 33,423 22,026 18,962 16,508 16,617
Provision for loan losses...................... 2,155 1,674 -- 150 180
--------- --------- --------- --------- --------
Net interest income after provision for
loan losses................................ 31,268 20,352 18,962 16,358 16,437
Other income................................... 4,183 4,880 3,818 4,946 3,150
Operating expenses............................. 15,781 13,443 9,669 7,792 7,475
--------- --------- --------- --------- --------
Income before income taxes..................... 19,670 11,789 13,111 13,512 12,112
Income taxes................................... 7,601 4,327 4,720 4,864 4,437
--------- --------- --------- --------- --------
Net income..................................... $ 12,069 $ 7,462 $ 8,391 $ 8,648 $ 7,675
========= ========= ========= ========= ========
</TABLE>
30
<PAGE>
<TABLE>
<CAPTION>
At or for the years Ended December 31,
-------------------------------------------------------------
1998 1997 1996 1995 1994
--------- --------- --------- --------- --------
(In Thousands)
<S> <C> <C> <C> <C> <C>
Selected Operating Ratios and Other Data (1):
Performance Ratios (2):
Return on average assets......................... 1.35% 1.18% 1.56% 1.73% 1.72%
Return on average equity......................... 4.24% 6.99% 8.34% 11.33% 13.45%
Interest rate spread (3)......................... 2.60% 3.09% 2.98% 2.96% 3.49%
Net interest margin (3).......................... 3.74% 3.66% 3.66% 3.47% 3.87%
Net interest income after provision for
loan losses to total operating expense........ 198.14% 151.39% 196.11% 209.93% 219.89%
Operating expenses to average total assets....... 1.77% 2.13% 1.80% 1.56% 1.67%
Efficiency ratio (4)............................. 40.06% 52.66% 46.53% 43.84% 42.95%
Asset Quality Ratios:
Nonperforming loans to net loans at end of year.. .85% 1.41% 1.03% 0.71% 0.87%
Nonperforming assets to total assets at
end of year................................... .29% .92% 0.69% 0.43% 0.59%
Allowance for loan losses to
nonperforming loans at end of year............ 96.92% 60.92% 74.19% 80.91% 65.24%
Average interest-earning assets to
average interest-bearing liabilities.......... 145.71% 115.62% 119.80% 114.32% 112.72%
Capital and Equity Ratios: (1)
Average equity to average assets................. 31.86% 16.89% 18.67% 15.27% 12.78%
Equity to assets at end of year.................. 23.13% 17.18% 17.20% 18.97% 13.33%
Per Share Data (2):
Book value per share............................. $ 9.51 $ 9.29 $ 9.10 $ 8.94 N/A
Earnings per share
Basic (5)..................................... $ 0.34 $ 0.22 $ 0.25 N/A N/A
Diluted (5)................................... $ 0.34 $ 0.22 $ 0.25 N/A N/A
Other Data:
Full service offices............................. 14 14 14 10 9
</TABLE>
- -----------------------
(1) The Minority Stock Offering, which raised net proceeds of $29.6 million,
was completed on August 3, 1995. The Conversion, which raised net proceeds
of $217 million was completed on April 8, 1998.
(2) During the fiscal years ended December 31, 1998, 1997 and 1996, the Bank
recorded net securities gains of $.5 million, $2.9 million and $2.8
million, respectively. The Bank's portfolio of equity securities was
completely divested as of December 31, 1998 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.
(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 Company's reported earnings per share. In addition, the earnings per
share for 1997 and prior years have been adjusted to reflect the exchange
of previously outstanding shares of Mid Tier Holding Company common stock
for shares of Common Stock at an exchange rate of 3.8243 shares of Common
Stock for each share of Mid-Tier Holding Company common stock in connection
with the Conversion.
31
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
General
The profitability of the Company depends primarily on its net interest
income, which is the difference between interest and dividend income on
interest-earning assets, principally loans and investment securities and
interest expense on interest-bearing deposits and borrowed funds. Recognizing
that sole reliance upon net interest income for earnings is becoming an
increasing matter of concern the Company has formed an asset-based lending arm
and acquired a trust company as the first steps towards increasing off-balance
sheet income. The Company's net income also is dependent, to a lesser extent, on
the level of its other operating income (including service charges and, when
available, gains on sales of securities) and operating expenses, such as
salaries and employee benefits, net occupancy expense, deposit insurance
premiums, professional fees, goodwill amortization, data processing and
miscellaneous other expenses, as well as federal and state income tax expenses.
The Company signed a definitive agreement and plan of merger on
September 7, 1998 providing for its merger with and into Sovereign Bancorp, Inc.
Under the terms of the merger agreement each share of the Company will be
exchanged for .80 shares of Sovereign Bancorp, Inc. common stock. The merger is
expected to be completed in the second quarter of 1999 pending shareholder and
regulatory approval. The transaction will be accounted for under the purchase
accounting method for business combinations. (See "The Merger Agreement").
Market Risk and Asset and Liability Management
General. The Company's most significant form of market risk is interest
rate risk, as the majority of the Company's assets and liabilities are sensitive
to interest rate changes. It is the objective of the Company 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 Company'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 Company's earnings, net asset values, and stockholders'
equity to changes in market interest rates.
Changes in interest rates affect the Company's earnings. The effect on
earnings of changes in interest rates generally depends on how quickly the
Company's yield on interest-earning assets and cost of interest-bearing
liabilities react to the changes in market rates of interest. If the Company's
cost of deposit accounts reacts more quickly to changes in market interest rates
than the yield on the Company's mortgage loans and other interest-earnings
assets, then an increasing interest rate environment is likely to adversely
affect the Company's earnings and a decreasing interest rate environment is
likely to favorably affect the Company's earnings. On the other hand, if the
Company's yield on its mortgage loans and other interest-earnings assets reacts
more quickly to changes in market interest rates than the Company's cost of
deposit accounts, then an increasing interest rate environment is likely to
favorably affect the Company's earnings and a decreasing interest rate
environment is likely to adversely affect the Company'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.
The table set forth below shows that the Company'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 Company's current investment strategy is to maintain an overall
securities portfolio that provides a source of liquidity and that contributes to
the Company'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
Company were for the purpose of leveraging the Company's balance sheet. These
securities 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.
32
<PAGE>
The following table presents the difference between the Company's
interest-earning assets and interest-bearing liabilities at December 31, 1998
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 Company'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......................... $ 25,347 $ 40,035 $ 21,042 $ 81,115 $ 167,539
Adjustable-rate.................... 105,281 37,598 25,742 5,687 174,308
Non-mortgage loans:
Fixed-rate......................... 30,949 26,758 20,043 11,104 88,854
Adjustable rate.................... 47,322 16,212 4,029 820 68,383
Securities available for sale: (1)
Debt securities.................... 26,797 38,110 391 38,895 104,193
Equity securities.................. -- -- -- 18,914 18,914
Mortgage-backed securities (2) .... 645,424 9,389 15,708 16,521 687,042
Securities held to maturity:
Debt Securities.................... 3,175 342 236 1,686 5,439
Mortgage-backed securities......... 5,971 7,697 841 2,886 17,395
Federal Home Loan Bank stock....... -- -- -- 29,055 29,055
Federal funds sold..................... 69,600 -- -- -- 69,600
--------- --------- --------- --------- ---------
Total interest-earning assets.......... $ 959,866 $ 176,141 $ 88,032 $ 206,683 $1,430,722
========= ========= ========= ========= ==========
Interest-bearing liabilities:
Deposits:
Demand accounts.................... 31,526 18,916 12,863 62,800 126,105
Savings accounts................... 17,536 13,328 10,227 46,591 87,682
Certificates of deposit.............. 216,517 63,209 11,365 22 291,113
Borrowings............................. 581,100 30,000 -- -- 611,100
--------- --------- --------- --------- ---------
Total interest-bearing liabilities..... $ 846,679 $ 125,453 $ 34,455 $ 109,413 $1,116,000
========= ========= ========= ========= ==========
Excess of interest- earning assets
over interest-bearing liabilities.... $ 113,187 $ 50,688 $ 53,577 $ 97,270
========= ========= ========= =========
Cumulative excess of interest-
earning assets over interest-
bearing liabilities.................. $ 113,187 $ 163,875 $ 217,452 $ 314,722
========= ========= ========= =========
Cumulative ratio of excess of
interest-earning assets as a
percentage of total assets........... 7.7% 11.2% 14.8% 21.4%
========= ========= ========= =========
</TABLE>
- -------------------------
(1) Securities available for sale are reflected in this table at amortized cost.
(2) Securities totaling $639.7 million are classified within one year since they
are subject to an agreement to sell those securities to Sovereign Bancorp,
Inc. at amortized book value if the plan of merger is not consummated.
33
<PAGE>
In preparing the table above, it has been assumed, in assessing the
interest rate sensitivity of the Company, 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:
<TABLE>
<CAPTION>
Over 1 Over 3
1 Year Through Through Over 5
or Less 3 Years 5 Years Years
-------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Demand accounts.......... 25% 20% 17% 17%
Savings accounts......... 20% 19% 18% 16%
</TABLE>
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, 1998, as calculated
by the OTS, based on information provided to the OTS to the Bank.
<TABLE>
<CAPTION>
Change in Change in NPV
Interest Rates Net Portfolio Value as a percentage of
in Basis Points ---------------------------------------- Estimated Market
(Rate Shock) Amount $ Change % Change Value of Assets
--------------- --------- --------- -------- ------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
400 $ 203,525 $(38,389) (15.87%) (2.27%)
200 $ 223,317 $(18,597) (7.69%) (1.08%)
Static $ 241,915 --
(200) $ 257,336 $ 15,421 6.37% .85%
(400) $ 271,334 $ 29,419 12.16% 1.59%
</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 1.08%
decrease in NPV in a rising interest rate environment, and a .85% increase in
NPV in a decreasing interest rate environment.
Comparison of Financial Condition
Stockholders' equity increased by $229.8 million, or 208.9%, to $339.9
million at December 31, 1998 from $110.0 million at December 31, 1997. The
increase is primarily attributable to the Conversion which generated proceeds of
$236.0 million, combined with 1998 net earnings of the Company.
34
<PAGE>
Total assets increased $829.2 million, or 129.5%, to $1,469.6 million
at December 31, 1998 from $640.4 million at December 31, 1997. The increase is
attributed to the Company's leverage programs which increased assets by $565.2
million at December 31, 1998 and stock offering proceeds of $236 million.
Deposits increased by $11.5 million, or 2.3%, to $504.9 million at December 31,
1998 from $493.4 million at December 31, 1997. Borrowings increased by $581.1
million to $611.1 million at December 31, 1998 from $30.0 million at December
31, 1997. The borrowing increase is attributed to the Bank's investment leverage
programs. Cash and cash equivalents increased by $65.7 million, or 422.8%, to
$81.3 million at December 31, 1998 from $15.5 million at December 31, 1997. This
increase is primarily attributed to the receipt of the stock offering proceeds
from the Conversion. Securities available for sale increased $674.1 million, or
490.8%, to $811.5 million at December 31, 1998 from $137.3 million at December
31, 1997. The increase in securities available for sale is primarily
attributable to the Company's leverage program. Securities held to maturity
decreased $38.1 million, or 62.5%, to $22.8 million at December 31, 1998 from
$61.0 million at December 31, 1997. Net loans increased $98.1 million, or 24.8%,
to $494.6 million at December 31, 1998 from $396.4 million at December 31, 1997.
The increase in loans is attributed to the planned expansion of commercial
lending. The Bank's investment in FHLB stock increased $25.7 million, or 758.1%,
to $29.1 million at December 31, 1998 from $3.4 million at December 31, 1997, in
accordance with FHLB requirements to increase stock ownership in proportion to
increased FHLB borrowings.
Average Balance Sheet
The following table sets forth certain information relating to the
Company'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.
35
<PAGE>
Comparison of Results of Operations
Average Balance Sheet. The following table presents for the years
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,
1998 1998 1997
-------------------- ------------------------------- --------------------------------
Average Average Average
Actual Yield/ Average Yield/ Average Yield/
Balance Cost Balance Interest Cost Balance Interest Cost
--------- -------- ---------- ---------- ------- ----------- ---------- -------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Assets: (1)
Interest-earning assets:
Mortgage loans ..................... $ 341,847 7.25% $ 305,204 $ 22,001 7.21% $ 269,644 $ 19,884 7.38%
Consumer loans ..................... 50,247 7.92 51,965 4,161 8.01 56,655 4,495 7.93
Commercial business loans .......... 106,990 8.83 91,527 7,996 8.74 65,522 5,987 9.14
Securities available for sale: (2)
Debt securities .................... 104,193 6.49 143,630 9,184 6.39 116,032 7,313 6.29
Equity securities ................ 18,914 1.92 10,612 234 2.21 366 61 16.67
Mortgage-backed securities ....... 687,042 6.58 103,127 6,669 6.47 6,258 404 6.46
Investments held to maturity:
Debt securities and FHLB stock ... 34,494 6.88 21,092 1,289 6.11 37,572 2,474 6.58
Mortgage-backed securities ....... 17,395 6.90 25,458 1,717 6.74 41,894 2,811 6.71
Federal funds sold ................. 69,600 4.83 93,927 5,152 5.49 8,106 428 5.28
---------- ---------- ---------- ---------- ----------
Total interest-earning assets .. 1,430,722 6.81 846,542 58,403 6.90 602,049 43,857 7.28
Non-interest earning assets (3) .... 38,876 46,539 30,195
---------- ---------- ----------
Total assets ................... $1,469,598 $ 893,081 $ 632,244
========== ========== ==========
Liabilities and Stockholders'
equity:
Certificates of deposits ......... $ 291,113 5.26 288,700 15,596 5.40 $ 290,007 $ 15,549 5.36%
Core deposits .................... 213,787 2.14 207,733 4,730 2.28 198,325 4,273 2.15
Borrowed funds ................... 611,100 5.15 84,561 4,654 5.50 32,400 2,009 6.20
---------- ---------- ---------- ---------- ----------
Total interest-bearing liabilities . 1,116,000 4.60 580,994 24,980 4.30 520,732 21,831 4.19
Non-interest bearing liabilities ... 13,728 27,550 4,747
---------- ---------- ----------
Total liabilities .............. 1,129,728 608,554 525,479
---------- ---------- ----------
Stockholders' equity ............... 339,870 284,527 106,765
---------- ---------- ----------
Total liabilities and
stockholders' equity ........... $1,469,598 $ 893,081 $ 632,244
========== ========== ==========
Net interest income ................ $ 33,423 $ 22,026
========== ==========
Net interest spread (4) ............ 2.21% 2.60% 3.09%
======= ====== ======
Net interest margin (5) ............ 3.31% 3.95% 3.66%
======= ====== ======
Ratio of average interest-earning
assets to average interest-
bearing liabilities .............. 128.17% 145.71% 115.62%
======= ====== ======
<CAPTION>
1996
----------------------------------
Average
Average Yield/
Balance Interest Cost
--------- ---------- -------
<S> <C> <C> <C>
Assets: (1)
Interest-earning assets:
Mortgage loans ..................... $ 264,984 $ 19,489 7.35%
Consumer loans ..................... 47,823 3,727 7.79
Commercial business loans .......... 24,973 2,287 9.16
Securities available for sale: (2)
Debt securities .................... 74,817 4,601 6.15
Equity securities ................ 1,367 161 1.78
Mortgage-backed securities ....... -- -- --
Investments held to maturity:
Debt securities and FHLB stock ... 40,858 2,627 6.43
Mortgage-backed securities ....... 47,990 3,234 6.74
Federal funds sold ................. 14,650 777 5.30
----------- ----------
Total interest-earning assets .. 517,462 36,903 7.13
Non-interest earning assets (3) .... 21,195
-----------
Total assets ................... $ 538,657
===========
Liabilities and Stockholders'
equity:
Certificates of deposits ......... $ 271,362 $ 14,045 5.18%
Core deposits .................... 160,576 3,896 2.43
Borrowed funds ................... -- -- 0.00
Total interest-bearing liabilities . 431,938 17,941 4.15
Non-interest bearing liabilities ... 6,166
-----------
Total liabilities .............. 438,104
-----------
Stockholders' equity ............... 100,553
-----------
Total liabilities and
stockholders' equity ........... $ 538,657
===========
Net interest income ................ $ 18,962
==========
Net interest spread (4) ............ 2.98%
======
Net interest margin (5) ............ 3.66%
======
Ratio of average interest-earning
assets to average interest-
bearing liabilities .............. 119.80%
======
</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.
<PAGE>
Rate/Volume Analysis. The following table describes the extent to which
changes in interest rates and changes in volume of interest related assets and
liabilities have affected the Company'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,
---------------------------------------------------------------
1998 vs. 1997 1997 vs. 1996
------------------------------- ------------------------------
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............................... $ 2,579 $ (462) $ 2,117 $ 316 $ 79 $ 395
Consumer loans............................... (378) 44 (334) 701 67 768
Commercial business loans.................... 2,274 (265) 2,009 3,705 (5) 3,700
Securities available for sale:
Debt securities............................ 1,750 121 1,871 2,607 105 2,712
Equity securities.......................... 226 (53) 173 (167) 67 (100)
Mortgage-backed securities................. 6,265 -- 6,265 404 0 404
Securities held to maturity:
Debt securities and Federal
Home Loan Bank stock....................... (1,009) (176) (1,185) (214) 61 (153)
Mortgage-backed securities................. (1,108) 14 (1,094) (409) (14) (423)
Federal funds sold........................... 4,707 17 4,724 (346) (3) (349)
------- ------- ------- ------- -------- --------
Total.................................... 15,306 (760) 14,546 6,597 357 6,954
------- ------- ------- ------ ------- -------
Interest-bearing liabilities:
Certificates of deposit...................... (75) 122 47 1,016 488 1,504
Interest-bearing savings deposits............ 205 252 457 827 (450) 377
Borrowed funds............................... 2,871 (226) 2,645 2,009 0 2,009
------- ------- ------- ------ ------- -------
Total...................................... 3,001 148 3,149 3,852 38 3,890
------- ------- ------- ------ ------- -------
Net change in net interest income.............. $12,305 $ (908) $11,397 $2,745 $ 319 $ 3,064
======= ======= ======= ====== ======= =======
</TABLE>
Comparison of Results of Operations
General. The return on average assets and return on average equity were
1.35% and 4.24%, respectively for the year ended December 31, 1998 compared to 1
.18% and 6.99% respectively for the year ended December 31, 1997.
Net income including securities gains of $.5 million, was $12.1 million
for the year ended 1998 compared to $7.5 million for the year ended 1997,
including securities gains of $2.9 million.
Net income, including security gains of $2.8 million, was $8.4 million
for the year 1996.
Net Interest and Dividend Income. Total interest income increased by
$14.5 million, or 33.2%, to $58.4 million for the year ended December 31, 1998
from $43.9 million for the year ended December 31, 1997, as the Company
increased its interest income from mortgage and commercial business loans, debt
and mortgage-backed securities available for sale, and FHLB stock, which
increases were partially offset by decreases in investment securities held to
maturity. The increase in interest income resulted primarily from a $244.5
million, or 40.6%, increase in average interest-earning assets to $846.5 million
from $602.0 million which offset a 38 basis point decrease in yield on the
Bank's average interest earning assets to 6.90% from 7.28%. The increase in
average interest-earning assets resulted primarily from the Company's receipt of
Conversion proceeds, the $581.1 million leverage program, which commenced in the
fourth quarter and a $56.9 million, or 14.5%, increase in the average loan
portfolio.
37
<PAGE>
Interest income from mortgage loans increased by $2.1 million, or
10.6%, to $22.0 million for the year ended December 31, 1998, from $19.9 million
for the year ended December 31, 1997. Of this increase, $2.6 million was due to
a $35.6 million, or 13.2%, increase in average mortgage loans to $305.2 million
from $269.6 million which offset a decrease in the yield on average mortgage
loans to 7.21% from 7.38%. In September 1998, the Bank purchased $23.5 million
of 15 year fixed rate balloon mortgages with an average life estimated at three
years. Interest income from consumer loans decreased by $.3 million, or 7.4%, to
$4.2 million from $4.5 million as a result of a $4.7 million decrease in average
consumer loans to $52.0 million from $56.7 million which offset a 8 basis point
increase in the yield on average consumer loans. From year-end 1997 consumer
loans declined $7.9 million in the Bank's indirect automobile portfolio acquired
from BCB which are no longer being generated. Interest income from commercial
business loans increased by $2.0 million, or 33.6%, to $8.0 million for the year
ended December 31, 1998 from $6.0 million for the year ended December 31, 1997.
This increase was due to a $26.0 million, or a 39.7%, increase in average
commercial business loans to $91.5 million from $65.5 million which offset a 40
basis point decrease in the yield on average commercial business loans to 8.74%
from 9.14%. The increase in average commercial business loans was due to the
increased focus on commercial business loan activity. Of the $44.4 million
growth from December 31, 1997 to 1998 in the commercial loan portfolio,
approximately $30.0 million was in the portfolio of the Bank's subsidiary,
TSBusiness Finance. An integral part of the Company's Business Plan continues to
be an expansion of commercial business lending. Interest income from debt
securities available for sale increased by $1.9 million, or 25.6%, to $9.2
million from $7.3 million due to a 10 basis point increase in the yield on
average debt securities available for sale to 6.39% from 6.29% and a $27.6
million, or 23.8% increase in average debt securities available for sale to
$143.6 million from $116.0 million. The increase in average debt securities
available for sale was primarily attributable to the investment of funds from
the Conversion. Interest income from mortgage-backed securities available for
sale increased by $6.3 million for the year ended December 31, 1998 from $.4
million for the year ended December 31, 1997. The increase was attributable to
the Bank's leverage program which increased average mortgage-backed securities
available for sale from $6.3 million for the year ended December 31, 1997 to
$103.1 million for the year ended December 31, 1998. The Company instituted an
investment leverage program in the fourth quarter of 1998 and had mortgage-
backed securities available for sale outstanding at December 31, 1998 from this
program of approximately $565.2 million. Interest income from mortgage-backed
securities held to maturity declined $1.1 million, or 38.9%, to $1.7 million for
the year ended December 31, 1998, from $2.8 million, for the year ended December
31, 1997. The decrease in income was primarily attributable to $16.4 million
decrease in the average balance of mortgage-backed securities held to maturity
to $25.5 million from $41.9 million which offset an increase in the yield on
average mortgage-backed securities held to maturity to 6.74% from 6.71%.
Interest income from debt securities held to maturity and FHLB stock
decreased by $1.2 million, or 48%, to $1.3 million for the year ended December
31, 1998 from $2.5 million for the year ended December 31, 1997 due to a $16.5
million, or 43.9% decrease in the average balance to $21.1 million for the year
ended December 31, 1998 from $37.6 million for the year ended December 31, 1997.
The decrease in average balance was combined with a 47 basis point decrease in
yield to 6.11% from 6.58%. In November and December 1998, the Bank increased its
FHLB stock ownership from $3.4 million at December 31, 1997 to $29.0 million at
December 31, 1998, in conjunction with the increased FHLB borrowings related to
the leverage program. Interest income from Federal Funds sold for the year ended
December 31, 1998 increased $4.7 million to $5.2 million from $.4 million for
the year ended December 31, 1997. This large increase in federal funds income
was due to a $85.8 increase in the average federal funds sold to $93.9 million
from $8.1 million, combined with a 21 basis point increase in the yield on
average federal funds sold to 5.49% from 5.28%. The increase in amount of
federal funds sold reflects the temporary investment of funds from the
Conversion.
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
38
<PAGE>
in yield on the Bank's average interest-earning 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.
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%.
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.
Total Interest Expense. Total interest expense increased by $3.2
million, or 14.4%, to $25.0 million for the year ended December 31, 1998, from
$21.8 million for the year ended December 31, 1997. The increase was due to a
$60.3 million, or 11.6% increase in average interest-bearing liabilities to $581
million from $520.7 million and a 11 basis point increase in the average cost of
interest-bearing liabilities to 4.30% from 4.19%. The increase in cost of
average borrowings resulted from the $581.1 million leverage borrowings at an
average interest cost of 5.10% in November and December of 1998. The overall
cost of deposits was 4.09% for the year ended December 31, 1998 compared to
4.06% for the year ended December 31, 1997. The overall cost of core deposits
for the year ended December 31, 1998 was 2.28% or 13 basis points over the cost
of core deposits of 2.15% for the year ended December 31, 1997. This increase
was due to the changing mix from lower cost savings products to higher cost
money market deposits. Overall core deposits increased an average $9.4 million
for the year ended December 31, 1998 over 1997. The cost of average certificates
of deposit increased 4 basis points to 5.40% for the year ended December 31,
1998 from 5.36% for the year ended December 31, 1997 reflecting higher
promotional rates in early 1998.
39
<PAGE>
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 Company'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 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.
Interest Spread. The Company's net interest income was $33.4 million
for the year ended December 31, 1998 compared to $21.8 million for the year
ended December 31, 1997. The increase in net interest income is attributed
primarily to the increase in interest income of $14.6 million for the year ended
December 31, 1998 or an increase of 33.2% from the year ended December 31, 1997.
This increase is due to a 40.6% increase in the level of average interest-
earning assets for the year ended December 31, 1998 to $846.5 million from
$602.0 million. This increase represents the deployment of the Conversion
proceeds and the implementation of the Company's leverage investment program.
This increase in interest income was offset by a 38 basis points decrease in the
average yield earned on earning assets. This decrease reflects the year to year
decline in rates as well as the shorter term maturities of the investment
portfolio.
As a result of the above, the Company's interest rate spread of 2.60%
for the year ended December 31, 1998 declined from 3.09% for the year ended
December 31, 1997 and the interest margin of 3.95% for the year ended December
31, 1998 increased from 3.66% for the year ended December 31, 1997. The Bank's
net interest income was $21.8 million for the year ended December 31, 1997
compared to $18.9 million for the year ended December 31, 1996. The Company'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.
Provision for Loan Losses. Management records a provision for loan
losses in an amount that it believes will result in an allowance for loan losses
sufficient to cover all potential net charge-offs and risks believed to be
inherent in the loan portfolio. Management's evaluation includes such factors as
past loan loss experience as related to current loan mix, evaluation of actual
and potential losses in the loan portfolio, regional and national economic
conditions, regular internal loan reviews and examinations of the loan portfolio
conducted by bank regulatory authorities, and other factors that management
believes are relevant. As a result of management's evaluation of these factors,
the provision for loan losses was $2.2 million for the year ended December 31,
1998 or an increase of 28.7% from $1.7 million for the year ended December 31,
1997. This increase was due primarily to the growth in the loan portfolio of
24.8% with the continued growth in the commercial sector of 71%. The allowance
for loan losses as a percentage of loans outstanding was .82% at December 31,
1998 compared to .85% at December 31, 1997 and the allowance for loan losses as
a percentage of non-performing loans was 96.92% at December 31, 1998 compared to
60.92% at December 31, 1997.
As of December 31, 1998, the Bank's non-performing loans and foreclosed
assets amounted to $4.3 million, or .29% of total assets. As of December 31,
1997 the Bank's non-performing loans and foreclosed assets amounted to $5.9
million, or .92% of total assets. At December 31, 1998, the Bank had $3.1
million of loans criticized as special mention, $3.5 million classified as
substandard and $.2 million classified as doubtful and no loans classified as
loss.
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
40
<PAGE>
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.
Other Income. Total other income was $4.2 million for the year ended
December 31, 1998, compared to $4.9 million for the year ended December 31,
1997. Other income for the year ended December 31, 1998 includes $.5 million of
gains from the sale of securities compared to $2.9 million of gains from the
sale of securities for the year ended December 31, 1997. Excluding gains on
sales of securities, other income increased $1.7 million or 86.1% to $3.6
million for the year ended December 31, 1998 compared to $2.0 million for the
year ended December 31, 1997. The increase is primarily attributable to fees
earned by MTB which was acquired in September 1997. Fees on loans and deposits
of $1.6 million for the year ended December 31, 1998 increased 17.3% from $1.3
million for the year ended December 31, 1997 due to the increased volume of
loans in 1998 and the impact of increases in deposit service fees in 1998.
For the year ended December 31, 1997, total other income increased $1.1
million, or 28.9%, to $4.9 million compared to the year ended December 31, 1996.
This increase was in fees on loans and deposits which were $1.3 million, or 70%
over 1996, due to the full year impact of service charges on BCB acquired
deposits. Trust fees of $0.5 million for the year ended December 31, 1997
represent the acquisition of MTB in September 1997. Net gain on sales of
securities increased $84,000, or 3.0%, to $2.9 million compared to the year
ended December 31, 1996.
Operating Expenses. Total operating expenses increased by $2.4 million,
or 17.4%, to $15.8 million for the year ended December 31, 1998 as compared to
$13.4 million for the year ended December 31, 1997. Salaries and employees
benefits increased $1.6 million, or 21.3%, to $8.9 million for the year ended
December 31, 1998 from $7.4 million for the year ended December 31, 1997,
reflecting normal salary increases, management incentive awards, ESOP expense,
expansion of TSBusiness Finance and the full year impact of the MTB acquisition.
During the same period the amortization of intangible assets increased by
$85,000, or 10.6%, to $885,000 from $800,000, reflecting the amortization of
goodwill from the acquisition of BCB and MTB. All other operating expense
reflect normalized increases due to the increased volume of loans and deposits
as well as the continued expansion of TSBusiness Finance and the full year
impact of the MTB acquisition in September 1997.
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.
Income Taxes. For the year ended December 31, 1998, income tax expense
amounted to $7.6 million compared to $4.3 million for the year ended December
31, 1997, reflecting primarily the differences in income before taxes. The
effective tax rate was 38.6% in 1998 compared to 36.7% in 1997.
41
<PAGE>
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.
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, 1998, the Bank's liquidity, as measured for
regulatory purposes, was 32.43%, or $139.9 million in excess of the minimum OTS
requirement.
Cash was generated by the Company's operating activities during the
years ended December 31, 1998, 1997, and 1996, primarily as a result of proceeds
from the Conversion, borrowings for a leverage program, the acquisition of BCB,
and the assumption of deposits 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 increases or decreases
in other assets and other liabilities. The primary investing activities of the
Bank are lending and investment securities purchases, which are 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 and in
1998 the proceeds from the Conversion and borrowings from the FHLB. 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, 1998, the Bank had outstanding $45.7 million in
commitments to originate and purchase loans, and $16.7 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, 1999 was $217 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, 1998, the Bank had $581.1
million of borrowings from the FHLB which mature on July 1, 1999 and $30.0
million with Morgan Stanley & Co., Inc. which mature in January 2000.
Capital
The OTS requires that the Bank meet minimum tangible, core and
risk-based capital requirements. As of December 31, 1998, the Bank exceeded all
regulatory capital requirements. The Bank's required, actual, and excess capital
levels as of December 31, 1998, 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> <C>
Tangible capital $ 20,360 1.50% $ 230,345 16.97% $209,985 15.47%
Core capital
to tangible assets $ 40,720 3.00 $ 230,345 16.97 $189,625 13.97
Core capital to risk-
adjusted assets $ 26,216 4.00 $ 230,345 35.15 $204,129 31.15
Risk-based capital to
risk-adjusted assets $ 52,431 8.00 $ 234,059 35.71 $181,628 27.71
</TABLE>
42
<PAGE>
Impact of New Accounting Standards
Statement of Financial Accounting Standards No. 133 (SFAS No. 133),
"Accounting for Derivative Instruments and Hedging Activities," established
accounting and reporting standards for derivative instruments, and for hedging
activities. SFAS 133 supersedes the disclosure requirements in Statements No.
80, 105 and 119. This statement is effective for fiscal quarters of fiscal years
beginning after June 15, 1999. The adoption of SFAS 133 is not expected to have
a material impact on the financial position or results of operations of the
Company.
Statement of Financial Accounting Standards No. 134 (SFAS No. 134),
"Accounting for Mortgage-backed Securities Retained after the Securitization of
Mortgage Loans Held for Sale by a Mortgage Banking Enterprise" amends FASB No.
65, "Accounting for Certain Mortgage Banking Activities," to require that after
the securitization of mortgage loans held for sale, an entity engaged in
mortgage banking activities classify the resulting mortgage-backed securities or
other retained interest based on its ability and intent to sell or hold those
investments. SFAS 134 is effective January 1, 1999. The adoption of this
statement is not expected to have a material impact on the financial position or
results of operations of the Company.
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.
Impact of Year 2000
Like many financial institutions, the Company relies upon computers for
the daily conduct of its business and for data processing generally. There is a
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
Company began to address its Year 2000 issues in 1997. A Year 2000 Committee was
formed to formulate and implement the Year 2000 Plan, develop policies, modify
and replace existing hardware and software as necessary, and to monitor and test
Year 2000 plans and remediation efforts of third party servicers.
The Company primarily relies on independent third parties to provide
data processing services and application software. In-house applications are
limited to word processing and spread sheet functions. In March 1998 the
Committee completed an inventory and risk assessment of hardware and software
and identified "mission critical" systems and application interdependencies. At
December 31, 1998, 90% of the identified "mission critical" systems have been
upgraded to the Year 2000 version distributed and tested by the applicable
vendor. The Company has installed a test lab simulating Year 2000 environment to
accomplish its testing of "mission critical" systems. The Company commenced
testing of these "mission critical" systems in the fourth quarter of 1998 and
will continue testing into 1999. As of January 31, 1999, the Company's testing
was approximately 80% complete.
The estimated cost of the Year 2000 conversion is not expected to be
material. Upgrades of the hardware and software are being made in the ordinary
course of business and testing is being done with existing staff and equipment.
All costs are being expensed as incurred.
In the development of the Company's Year 2000 Plan, the Company has
followed the guidelines published by the Federal Institution's Examination
Council (FFIEC), the formal interagency body empowered to prescribe uniform
principles, standards and examination procedures for the examination of
financial institutions by the federal regulatory agencies.
The Company has communicated with vendors, customers, governmental
agencies and others to obtain assurance of their Year 2000 compliance. Failure
of the Company or its third party data processing vendor to correct Year 2000
issues could cause a disruption in operation and increased operating costs. The
Company continues to
43
<PAGE>
monitor its major commercial borrowers who may be adversely affected by Year
2000 issues. When a determination is made that a borrower is so affected, the
Bank is obtaining appropriate information from the borrower as to the
remediation of those issues. In appropriate cases, compliance with Year 2000 has
been made a condition of the loan. To the extent that the Company's loan
customers' financial positions are weakened due to Year 2000 issues, credit
quality could be adversely impacted. The Company is formulating detailed
contingency plans in the event that the company's vendors are not successful
with their Year 2000 remediation plans. These contingency plans are projected to
be completed by the end of the second quarter of 1999. The Company believes at
this time that its efforts are adequate to address its Year 2000 concerns.
ITEM 8. FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
44
<PAGE>
[LETTERHEAD OF KPMG APPEARS HERE]
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. as of December 31, 1998 and 1997, 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, 1998. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Peoples Bancorp,
Inc. as of December 31, 1998 and 1997, and the results of their operations and
their cash flows for each of the years in the three-year period ended December
31, 1998 in conformity with generally accepted accounting principles.
KPMG LLP
January 25, 1999
45
<PAGE>
PEOPLES BANCORP, INC.
Consolidated Statements of Condition
December 31, 1998 and 1997
(in thousands)
<TABLE>
<CAPTION>
Assets 1998 1997
---- ----
<S> <C> <C>
Cash and due from banks $ 11,668 9,596
Federal funds sold 69,600 5,950
---------------- ----------------
Total cash and cash equivalents 81,268 15,546
Investment and mortgage backed securities available for
sale, at market (note 5) 811,453 137,338
Investment and mortgage backed securities held to maturity,
at cost (market value of $23,213 in 1998 and $61,306
in 1997) (notes 6 and 7) 22,834 60,955
Federal Home Loan Bank stock, at cost 29,055 3,386
Loans, net (note 8) 494,569 396,448
Bank premises and equipment, net (note 9) 6,763 6,747
Accrued interest receivable (note 10) 8,657 4,975
Prepaid expenses 810 1,105
Intangible assets (note 2) 9,757 10,604
Other assets (note 13) 4,432 3,315
---------------- ----------------
Total assets $ 1,469,598 640,419
================ ================
Liabilities and Stockholders' Equity
Liabilities:
Deposits (note 11) 504,900 493,400
Borrowings (note 12) 611,100 30,000
Accrued interest payable 5,865 2,677
Accrued expenses and other liabilities (note 15) 7,863 4,304
---------------- ----------------
Total liabilities 1,129,728 530,381
Commitments and contingencies (notes 9 and 16)
---------------- ----------------
Stockholders' equity:
Common stock. $.01 par value. Authorized
70,000,000 shares; issued 36,411,645 shares and
outstanding 35,741,676 shares at December 31, 1998,
issued and outstanding 36,236,500 shares at
December 31, 1997 364 362
Additional paid in capital 267,533 31,045
Unallocated ESOP shares (note 15) (9,040) -
Treasury stock, at cost (669,969 shares at December 31,
1998) (6,808) -
Retained earnings 87,091 78,870
Unearned Management Recognition Plan shares (note 15) (84) (673)
Accumulated other comprehensive income, net of tax 814 434
---------------- ----------------
Total stockholders' equity (notes 13 and 14) 339,870 110,038
---------------- ----------------
Total liabilities and stockholders' equity $ 1,469,598 640,419
================ ================
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
46
<PAGE>
PEOPLES BANCORP, INC.
Consolidated Statements of Income
Years ended December 31, 1998, 1997, and 1996
(in thousands)
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Interest and dividend income:
Interest and fees on loans $ 34,158 30,366 25,503
Interest on securities available for sale 16,087 7,778 4,762
Interest and dividends on securities held
to maturity 3,006 5,285 5,861
Interest on Federal funds sold 5,152 428 777
------------- ------------- ------------
Total interest income 58,403 43,857 36,903
Interest expense on deposits (note 11) 20,326 19,822 17,941
Interest expense on borrowings (note 12) 4,654 2,009 -
------------- ------------- ------------
Total interest expense 24,980 21,831 17,941
------------- ------------- ------------
Net interest income 33,423 22,026 18,962
Provision for loan losses (note 8) 2,155 1,674 -
------------- ------------- ------------
Net interest income after provision
for loan losses 31,268 20,352 18,962
------------- ------------- ------------
Other income:
Fees on loans and deposit accounts 1,564 1,333 784
Fees for trust services 1,686 471 -
Net gain (loss) on sale of other real estate (127) (24) 23
Net gain on sale of securities (note 5) 541 2,923 2,839
Other income 519 177 172
------------- ------------- ------------
Total other income 4,183 4,880 3,818
------------- ------------- ------------
Operating expense:
Salaries and employee benefits (note 15) 8,940 7,369 5,104
Net occupancy expense (note 9) 1,661 1,574 1,306
Equipment expense 163 120 88
Data processing fees 653 537 416
Amortization of intangible assets 885 800 389
FDIC insurance premium 79 57 233
FDIC Special Assessment - - 177
Marketing expense 577 407 376
Other operating expense 2,823 2,579 1,580
------------- ------------- ------------
Total operating expense 15,781 13,443 9,669
------------- ------------- ------------
Income before income taxes 19,670 11,789 13,111
Income taxes (note 13) 7,601 4,327 4,720
------------- ------------- ------------
Net income $ 12,069 7,462 8,391
============= ============= ============
Earnings per common share (note 18):
Basic $ 0.34 0.22 0.25
Diluted 0.34 0.22 0.25
============= ============= ============
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
47
<PAGE>
PEOPLES BANCORP, INC.
Consolidated Statements of Stockholders' Equity
Years ended December 31, 1998, 1997 and 1996
(in thousands)
<TABLE>
<CAPTION>
Additional
Number Common paid in Treasury Retained
of shares stock capital stock earnings
--------- ----- ------- ----- -----------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1995 35,724,259 $ 357 29,221 -- 65,267
Net income -- -- -- -- 8,391
Other comprehensive income:
Net change in net unrealized gain on securities
available for sale, net of tax expense of $905 -- -- -- -- --
Less: Reclassification adjustment, net of tax
expense of $1,002 -- -- -- -- --
Comprehensive income --
Dividends declared -- -- -- -- (1,113)
Establishment of Management Recognition Plan 476,737 5 1,678 -- --
Amortization on unearned Management
Recognition Plan shares -- -- -- -- --
---------- ---------- ---------- ---------- ----------
Balance at December 31, 1996 36,200,996 362 30,899 -- 72,545
Net income -- -- -- -- 7,462
Other comprehensive income:
Net change in net unrealized gain on securities
available for sale, net of tax expense of $365 -- -- -- -- --
Less: Reclassification adjustment, net of tax
expense of $993 -- -- -- -- --
Comprehensive income --
Dividends declared -- -- -- -- (1,137)
Proceeds from exercise of stock options 35,504 -- 21 -- --
Amortization on unearned Management
Recognition Plan shares -- -- 125 -- --
---------- ---------- ---------- ---------- ----------
Balance at December 31, 1997 36,236,500 362 31,045 -- 78,870
Net income -- -- -- -- 12,069
Other comprehensive income:
Net change in net unrealized gain on securities
available for sale, net of tax expense of $259 -- -- -- -- --
Less: Reclassification adjustment, net of tax
expense of $101 -- -- -- -- --
Comprehensive income --
Proceeds from common stock offer and conversion
of Peoples Bancorp -- -- 236,024 -- --
Dividends declared -- -- -- -- (3,848)
Proceeds from exercise of stock options 175,145 2 464 -- --
Treasury stock repurchase (669,969) -- -- (6,808) --
Establishment of ESOP plan -- -- -- -- --
Allocation of ESOP plan shares -- -- -- -- --
Amortization on unearned Management
Recognition Plan shares -- -- -- -- --
---------- ---------- ---------- ---------- ----------
Balance at December 31, 1998 35,741,676 $ 364 267,533 (6,808) 87,091
========== ========== ========== ========== ==========
<CAPTION>
Accumu-
Unearned lated other
Unallocated Management compre- Total
ESOP Recognition hensive stockholders'
Plan shares Plan shares income equity
----------- ----------- ------ ------
<S> <C> <C> <C> <C>
Balance at December 31, 1995 -- -- 2,697 97,542
Net income -- -- -- 8,391
Other comprehensive income:
Net change in net unrealized gain on securities
available for sale, net of tax expense of $905 -- -- 172 172
Less: Reclassification adjustment, net of tax
expense of $1,002 -- -- (1,780) (1,780)
----------
Comprehensive income 6,783
Dividends declared -- -- -- (1,113)
Establishment of Management Recognition Plan -- (1,683) -- --
Amortization on unearned Management
Recognition Plan shares -- 140 -- 140
---------- ---------- ---------- ----------
Balance at December 31, 1996 -- (1,543) 1,089 103,352
Net income -- -- -- 7,462
Other comprehensive income:
Net change in net unrealized gain on securities
available for sale, net of tax expense of $365 -- -- 1,057 1,057
Less: Reclassification adjustment, net of tax
expense of $993 -- -- (1,712) (1,712)
----------
6,807
Comprehensive income
Dividends declared -- -- -- (1,137)
Proceeds from exercise of stock options -- -- -- 21
Amortization on unearned Management
Recognition Plan shares -- 870 -- 995
---------- ---------- ---------- ----------
Balance at December 31, 1997 -- (673) 434 110,038
Net income -- -- -- 12,069
Other comprehensive income:
Net change in net unrealized gain on securities
available for sale, net of tax expense of $259 -- -- 540 540
Less: Reclassification adjustment, net of tax
expense of $101 -- -- (160) (160)
----------
12,449
Comprehensive income
Proceeds from common stock offer and conversion
of Peoples Bancorp -- -- -- 236,024
Dividends declared -- -- -- (3,848)
Proceeds from exercise of stock options -- -- -- 466
Treasury stock repurchase -- -- -- (6,808)
Establishment of ESOP plan (9,522) -- -- (9,522)
Allocation of ESOP plan shares 482 -- -- 482
Amortization on unearned Management
Recognition Plan shares -- 589 -- 589
---------- ---------- ---------- ----------
Balance at December 31, 1998 (9,040) (84) 814 339,870
========== ========== ========== ==========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
48
<PAGE>
PEOPLES BANCORP, INC.
Consolidated Statements of Cash Flows
Years ended December 31, 1998, 1997 and 1996
(in thousands)
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 12,069 7,462 8,391
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 2,155 1,674 -
Depreciation and amortization expense 719 623 507
Amortization of Management Recognition Plan shares 589 870 140
Amortization of intangible assets 885 800 389
Amortization of ESOP 482 - -
Net amortization (accretion) of premiums and
discounts on securities 14 (81) (586)
(Increase) decrease in accrued interest receivable
and other assets (3,532) (3,003) 602
Increase in accrued interest payable and other
liabilities 6,747 563 863
Net gain on sale of securities (541) (2,923) (2,839)
Net loss (gain) on sale of other real estate 127 24 (23)
------------- ------------- -------------
Net cash provided by operating activities 19,714 6,009 7,444
------------- ------------- -------------
Cash flows from investing activities:
Proceeds from maturities of investment securities available
for sale and held to maturity 147,445 54,823 51,756
Purchase of investment securities held to maturity - (57) (11,759)
Purchase of investment securities available for sale (218,544) (79,036) (40,281)
Proceeds from sales of securities available for sale 5,146 3,816 9,368
Purchase of Federal Home Loan Bank Stock (25,669) (297) -
Maturities and repayments of mortgage-backed securities 42,581 14,353 12,176
Purchase of mortgage backed securities (614,679) (15,740) (6,065)
Net increase in loans (98,801) (16,160) (26,266)
Net additions to bank premises, furniture and equipment (735) (388) (742)
Proceeds from sales of other real estate owned 352 54 105
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 (762,904) (42,439) (8,345)
------------- ------------- -------------
Cash flows from financing activities:
Net proceeds from exercise of stock options 466 21 -
Net proceeds received from stock offering, net of
establishment of ESOP 226,502 - -
Purchase of treasury shares (6,808) - -
Dividends paid (3,848) (1,137) (1,113)
Net increase in demand deposits 13,097 18,804 4,856
Net (decrease) increase in savings and time deposits (1,597) (16,650) 2,443
Repayment of subordinated note - - (600)
Net increase in borrowings 581,100 30,000 -
------------- ------------- -------------
Net cash provided by financing activities 808,912 31,038 5,586
------------- ------------- -------------
Net increase (decrease) in cash and cash equivalents 65,722 (5,392) 4,685
Cash and cash equivalents as of beginning of year 15,546 20,938 16,253
------------- ------------- -------------
Cash and cash equivalents as of end of year $ 81,268 15,546 20,938
============= ============= =============
Supplemental disclosure of cash flow information:
Cash paid:
Interest $ 21,792 21,518 15,577
Income taxes 5,649 4,980 4,875
============= ============= =============
Noncash investing activities:
Assets acquired in settlement of loans $ 286 374 723
============= ============= =============
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
49
<PAGE>
PEOPLES BANCORP, INC.
Notes to Consolidated Financial Statements
December 31, 1998, 1997 and 1996
(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.
50
<PAGE>
PEOPLES BANCORP, INC.
Notes to Consolidated Financial Statements Continued
(1) Organization and Summary of Significant Accounting Policies, cont.
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.
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, on a monthly basis, of all loans and
considers, among other matters, the estimated net realizable value of the
underlying collateral, economic conditions, historical loan loss
experience, changes in the volume and composition of the loan portfolio
and other matters which management believes 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.
51
<PAGE>
PEOPLES BANCORP, INC.
Notes to Consolidated Financial Statements Continued
(1) Organization and Summary of Significant Accounting Policies, cont.
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.
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.
52
<PAGE>
PEOPLES BANCORP, INC.
Notes to Consolidated Financial Statements, Continued
(1) Organization and Summary of Significant Accounting Policies, cont.
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.
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.
53
<PAGE>
PEOPLES BANCORP, INC.
Notes to Consolidated Financial Statements, Continued
(1) Organization and Summary of Significant Accounting Policies, cont.
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.
Employee Stock Ownership Plan
All shares of the Employee Stock Ownership Plan (ESOP) are accounted for
under Statement of Position 93-6. Compensation cost is recognized based
on the fair market value of the shares at the date the shares are
committed to be released, pro rated over the vesting period.
Reclassifications
Certain reclassifications have been made to prior years amounts to
conform to the 1998 presentation.
(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.
The following summarizes completed acquisitions of Peoples Bancorp, Inc.
as of December 31, 1998 (in thousands):
<TABLE>
<CAPTION>
Total as of the date acquired
--------------------------------------------- Method
Year Net Cash of
acquired Assets Loans Deposits assets paid accounting
-------- ------ ----- -------- ------ ---- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Assumption of
deposits 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>
54
<PAGE>
PEOPLES BANCORP, INC.
Notes to Consolidated Financial Statements, Continued
(2) Acquisitions, cont.
The above transactions resulted in the following goodwill (in thousands):
<TABLE>
<CAPTION>
Goodwill balance as of
December 31, Amorti-
------------------------------------------- Original zation
1998 1997 1996 amount period
---- ---- ---- ------ ------
<S> <C> <C> <C> <C> <C>
Assumption of deposits
from the RTC $ 1,535 1,786 2,054 2,506 10 years
Burlington County Bank 6,185 6,630 7,110 7,228 15 years
Manchester Trust Bank 2,037 2,188 - 2,240 15 years
------------ ------------ ------------ ------------
$ 9,757 10,604 9,164 11,974
============ ============ ============ ============
</TABLE>
(3) 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.
On September 24, 1997, the Board of Directors of the MHC unanimously
adopted the Plan of Conversion and Reorganization, pursuant to which the
MHC converted 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 automatically, and without
further action by the holder thereof, was converted into and become a
right to receive a number of shares of Common Stock determined pursuant
to the Exchange Ratio.
55
<PAGE>
PEOPLES BANCORP, INC.
Notes to Consolidated Financial Statements, Continued
(3) Reorganization to a Two-Tiered Mutual Holding Company and Subsequent Plan
of Conversion to Full Stock Ownership Structure, cont.
The Conversion was completed on April 8, 1998. In the Conversion, the
shares of Mid-Tier Holding Company Common Stock held by the MHC were
cancelled, each share of Mid-Tier Holding Company Common Stock held by
public shareholders was converted into 3.8243 shares of Bancorp's common
stock ("Common Stock"), the Bancorp sold 23,805,827 additional shares of
Common Stock for a purchase price of $10 per share in a subscription
offering, and the corporate existence of the MHC and the Mid-Tier Holding
Company ended. All share and per share information has been restated to
reflect the conversion.
At the time of the Conversion, the Bank established 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.
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.
As of December 31, 1997, the MHC had waived $4.4 million of dividends.
Upon completion of the conversion, restrictions on waived dividends no
longer exist. Additionally, the restrictions and availability of waived
dividends had ceased as the Bank's common stock is 100% publicly owned.
(4) Plan of Merger
The Bancorp signed a definitive agreement and plan of merger on September
7, 1998 providing for its merger with and into Sovereign Bancorp, Inc.
Under the terms of the merger agreement each share of the Bancorp will be
exchanged for .80 shares of Sovereign Bancorp, Inc. common stock. The
merger is expected to be completed in the second quarter of 1999 pending
shareholder and regulatory approval. The transaction will be accounted
for under the purchase accounting method for business combinations.
56
<PAGE>
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, 1998 and
1997 are as follows:
<TABLE>
<CAPTION>
1998
------------------------------------------------------------------
Gross Gross Estimated
Amortized unrealized unrealized market
cost gains losses value
---- ----- ------ -----
(in thousands)
<S> <C> <C> <C> <C>
Debt securities:
United States
Treasury securities $ 18,964 95 - 19,059
United States Agencies
securities 48,352 757 - 49,109
Other bonds 36,577 299 - 36,876
Mortgage backed securities-
United States Agency 47,295 653 - 47,948
REMICs 639,747 - - 639,747
State and political sub-
division 300 - - 300
-------------- ------------- ------------- --------------
791,235 1,804 - 793,039
Equity securities 18,914 1,272 1,772 18,414
-------------- ------------- ------------- --------------
$ 810,149 3,076 1,772 811,453
============== ============= ============= ==============
<CAPTION>
1997
------------------------------------------------------------------
Gross Gross Estimated
Amortized unrealized unrealized market
cost gains losses value
---- ----- ------ -----
(in thousands)
<S> <C> <C> <C> <C>
Debt securities:
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-
United States Agency 14,903 195 - 15,098
-------------- ------------- ------------- --------------
136,519 949 (140) 137,328
Equity securities 10 - - 10
-------------- ------------- ------------- --------------
$ 136,529 949 (140) 137,338
============== ============= ============= ==============
</TABLE>
57
<PAGE>
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 at December 31, 1998 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 $ 666,546 666,717
Due after one year through five years 54,487 54,954
Due after five years through ten years 58,636 59,500
Due after ten years 11,566 11,868
------------ -----------
791,235 793,039
Equity securities 18,914 18,414
------------ -----------
$ 810,149 811,453
============ ===========
During the years ended December 31, 1998, 1997, and 1996, proceeds from
sales of investment and mortgage-backed securities available for sale
resulted in gross gains and gross losses as follows:
1998 1997 1996
---- ---- ----
(in thousands)
Proceeds from sales of investment
and mortgage-backed securities
available for sale $ 5,146 3,816 9,368
Gross realized gains 571 2,923 2,839
Gross realized losses 30 - -
======== ======== ========
58
<PAGE>
PEOPLES BANCORP, INC.
Notes to Consolidated Financial Statements, Continued
(5) Investment and Mortgage-Backed Securities Available for Sale, cont.
As of December 31, 1998 and 1997, mortgage-backed and Treasury securities
with a fair value of $642.1 million and $32.4 million, respectively, were
pledged to secure borrowing agreements.
As of December 31, 1998, the Bancorp had purchased mortgage-backed
securities totaling $639.7 million which are subject to an agreement to
sell those securities to Sovereign Bancorp, Inc. at amortized book value
if the plan of merger discussed in note 4 is not consummated. The
securities purchases and related sale agreements with Sovereign were
entered into for the purpose of leveraging the balance sheet of the
Company. Such securities estimated fair market value is deemed equal to
their amortized cost.
(6) Investment Securities Held to Maturity
The amortized cost and estimated market value of investment securities
held to maturity as of December 31, 1998 and 1997 are as follows:
<TABLE>
<CAPTION>
1998
--------------------------------------------------------------------
Gross Gross Estimated
Amortized unrealized unrealized market
cost gains losses value
---- ----- ------ -----
(in thousands)
Debt securities:
Obligations of state and
political subdivisions $ 1,383 155 - 1,538
Corporate bonds 4,056 12 - 4,068
-------------- -------------- -------------- ---------------
$ 5,439 167 - 5,606
============== ============== ============== ===============
<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
============== ============== ============== ===============
</TABLE>
59
<PAGE>
PEOPLES BANCORP, INC.
Notes to Consolidated Financial Statements, Continued
(6) Investment Securities Held to Maturity, cont.
The amortized cost and estimated market value of debt securities held to
maturity as of December 31, 1998 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 $ 3,176 3,183
Due after one year through five years 577 590
Due five years through ten years 1,086 1,102
Due after ten years 600 731
-------- --------
$ 5,439 5,606
======== ========
As of December 31, 1998 and 1997, United States Treasury securities with
a face value of $700,000 and $800,000, respectively were held in trust to
secure deposits of public funds.
(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, 1998 and 1997 are as
follows:
<TABLE>
<CAPTION>
1998
------------------------------------------------
Gross Gross Estimated
Amortized unrealized unrealized market
cost gains losses value
---- ----- ------ -----
(in thousands)
<S> <C> <C> <C> <C>
Government National
Mortgage Association $ 2,735 3 - 2,738
Federal Home Loan
Mortgage Corporation 12,196 170 - 12,366
Federal National Mortgage
Association 2,464 39 - 2,503
--------- ------- -------- ----------
$ 17,395 212 - 17,607
========= ======= ======== ==========
</TABLE>
60
<PAGE>
PEOPLES BANCORP, INC.
Notes to Consolidated Financial Statements, Continued
(7) Mortgage-Backed Securities Held to Maturity, cont.
<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
========= ======== ======= ==========
</TABLE>
The amortized cost and market value of mortgage-backed securities held to
maturity as of December 31, 1998, 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.
<TABLE>
<CAPTION>
Estimated
Amortized market
cost value
---- -----
(in thousands)
<S> <C> <C>
Due in one year or less $ 4,412 4,446
Due after one year through five years 7,510 7,631
Due five years through ten years 812 848
Due after ten years 4,661 4,682
--------- --------
$ 17,395 17,607
========= ========
</TABLE>
61
<PAGE>
PEOPLES BANCORP, INC.
Notes to Statements of Condition, Continued
(8) Loans
A summary of loans as of December 31, 1998 and 1997 follows:
1998 1997
---- ----
(in thousands)
Mortgage loans:
One to four family $ 279,035 242,449
Commercial real estate
and multi family 62,812 39,760
-------------- ---------------
Total mortgage loan 341,847 282,209
-------------- ---------------
Commercial 106,990 62,622
Home equity 37,707 34,657
Other consumer loans 12,540 20,513
-------------- ---------------
Total other loan 157,237 117,792
-------------- ---------------
Total loans 499,084 400,001
Allowance for loan loss (4,095) (3,415)
Premiums 200 16
Net deferred (fees) cost (620) (154)
-------------- ---------------
Total loans, net $ 494,569 396,448
============== ===============
A summary of the activity in the allowance for loan losses for the years
ended December 31, 1998, 1997 and 1996 is as follows:
1998 1997 1996
---- ---- ----
(in thousands)
Allowance for loan losses
at beginning of year $ 3,415 2,901 1,767
Acquired allowance - - 1,186
Provision for loan losses 2,155 1,674 -
Chareoffs (1,721) (1,317) (110)
Recoveries 246 157 58
----------- ----------- -----------
Allowance for loan losses
at end of year $ 4,095 3,415 2,901
=========== =========== ===========
62
<PAGE>
PEOPLES BANCORP, INC.
Notes to Consolidated Financial Statements, Continued
(8) Loans, cont.
Loans contractually in arrears by three months or more at December 31,
1998 and 1997 were as follows:
1998
--------------------------------------------
Carrying Number % of
value of loans category
----- -------- --------
(in thousands)
Mortgage $ 1,975 19 0.58 %
Commercial 1,848 56 1.73
Consumer 300 17 0.60
------------ ------------
$ 4,123 92 0.83 %
============ ============ =========
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 %
============ ============ =========
Nonaccrual loans totalled $3,645,000, $4,407,000 and $2,951,000 at
December 31, 1998, 1997 and 1996, 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 $478,000,
$1,151,000 and $753,000 as of December 31, 1998, 1997 and 1996,
respectively. The amount of interest income on nonaccrual loans, which
would have been recorded had these loans continued to pay interest at the
contract rate, was approximately $307,000, $475,000 and $249,000 for the
years ended December 31, 1998, 1997 and 1996, respectively. Interest
income on nonaccrual loans included in net income amounted to $111,000,
$125,000 and $76,000 for the years ended December 31, 1998, 1997 and
1996, respectively. There is no commitment to lend additional funds to
borrowers whose loans have been placed on nonaccrual.
63
<PAGE>
PEOPLES BANCORP, INC.
Notes to Consolidated Financial Statements, Continued
(8) Loans, cont.
Restructured loans totalled $102,000, $48,000 and $206,000 at December
31, 1998, 1997 and 1996, 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 $9,000, $4,000 and $21,000 for the years ended December 31,
1998, 1997 and 1996, respectively. Interest income on restructured loans
included in net income was approximately $7,000, $3,000 and $20,000 for
the years ended December 31, 1998, 1997 and 1996, 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, 1998 was $1,783,000 and
$492,000, respectively. The balances at December 31, 1997 were $2,907,000
and $710,000, respectively.
At December 31, 1998 and 1997, loans to officers and directors amounted
to $765,000 and $768,000, 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,
1998 and 1997:
1998 1997
---- ----
(in thousands)
Land $ 867 867
Buildings and improvements 5,154 5,014
Furniture and equipment 3,028 2,512
Leasehold improvements 1,319 1,319
------------- -------------
10,368 9,712
Less accumulated depreciation
and amortization 3,605 2,965
------------- -------------
$ 6,763 6,747
============= =============
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.
64
<PAGE>
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, 1998:
December 31
-----------
1999 $ 382,000
2000 369,000
2001 341,000
2002 308,000
2003 294,000
Thereafter 513,000
----------------
Total minimum lease
payments $ 2,207,000
================
The annual rental expense amounted to $516,016, $401,546 and $304,000 for
the years ended December 31, 1998, 1997 and 1996, respectively.
(10) Accrued Interest Receivable
A summary of accrued interest receivable at December 31, 1998 and 1997 is
as follows:
1998 1997
---- ----
(in thousands)
Loans $ 2,571 2,148
Investment and mortgage backed
securities available for sale 5,799 2,258
Investment and mortgage backed
securities held to maturity 203 568
Federal funds sold 84 1
------------ ------------
$ 8,657 4,975
============ ============
65
<PAGE>
PEOPLES BANCORP, INC.
Notes to Consolidated Financial Statements, Continued
(11) Deposits
Deposit balances as of December 31, 1998 and 1997 are summarized as
follows:
<TABLE>
<CAPTION>
Weighted
average
rate at 1998 1997
Dec. 31, ----------------------- ------------------------
1998 Amount % Amount %
---- ------ - ------ -
(in thousands)
<S> <C> <C> <C> <C> <C>
Types of deposit:
Noninterest bearing
demand deposit
accounts - $ 33,407 6.6 $ 28,164 5.7
N.O.W. 1.23 23,628 4.7 15,774 3.2
Money market
demand accounts 3.60 64,350 12.7 61,457 12.5
Passbook 2.29 87,435 17.3 94,008 19.1
Club accounts - 247 0.1 264 0.1
Other - 4,720 0.9 4,880 0.9
---------- -------- ---------- --------
213,787 42.3 204,547 41.5
---------- -------- ---------- --------
Certificates of deposit 5.19 243,680 48 247,325 50.1
Retirement accounts 5.61 47,433 9.4 41,528 8.4
---------- -------- ---------- --------
291,113 57.7 288,853 58.5
---------- -------- ---------- --------
$ 504,900 100.0 $ 493,400 100.0
========== ======== ========== ========
</TABLE>
66
<PAGE>
PEOPLES BANCORP, INC.
Notes to Consolidated Financial Statements, Continued
(11) Deposits, cont.
As of December 31, 1998 and 1997, certificates of deposit, regular and
retirement accounts have scheduled maturities as follows:
1998 1997
---- ----
(in thousands)
Within one year $ 216,517 229,472
One to two years 56,338 38,184
Two to three years 6,871 17,760
Three to five years 11,365 3,430
Thereafter 22 7
-------------- ---------------
$ 291,113 288,853
============== ===============
An analysis of the interest expense for the years ended December 31,
1998, 1997 and 1996 by deposit category is as follows:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
(in thousands)
NOW, passbook and other $ 2,098 2,305 2,402
accounts 2,446 1,950 1,233
Money market demand accounts 18 18 14
Club accounts 14,110 12,904 11,836
Regular certificates of deposit 1,654 2,645 2,456
Retirement accounts -------- -------- ---------
Total interest $ 20,326 19,822 17,941
======== ======== =========
</TABLE>
Certificates of deposit greater than $100,000 amounted to $27,591,000 and
$26,118,000 at December 31, 1998 and 1997, 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.
67
<PAGE>
PEOPLES BANCORP, INC.
Notes to Consolidated Financial Statements, Continued
(12) Borrowings
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% 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.
On November 16, 1998 and December 10, 1998, the Bank entered into
collateralized borrowing agreements with the FHLB. The monies received
from these agreements funded the acquisition of three private mortgage
backed securities (Aaa) which are subject to agreements to sell those
securities to Sovereign Bancorp, Inc.
The following table sets forth the maximum month-end balance and average
monthly balance of FHLB advances and other borrowings for the year
indicated:
For the year
December 31,
------------------------------
1998 1997
---- ----
(in thousands)
Maximum balance: $ 581,100 -
FHLB advances 30,000 30,000
Other secured borrowing
Average balance: 54,561 -
FHLB advances 30,000 30,000
Other secured borrowing
Weighted average interest rate: 5.10 % -
FHLB advances 6.02 6.02 %
Other secured borrowing
The following table sets forth certain information as to the Bank's
borrowings at the date indicated:
December 31,
------------------------------
1998 1997
---- ----
(in thousands)
FHLB advances $ 581,100 -
Other secured borrowing 30,000 30,000
-------------- -------------
Total borrowings $ 611,100 30,000
============== =============
Weighted average interest rate:
FHLB advances 5.10 % -
Other secured borrowing 6.02 6.02 %
68
<PAGE>
PEOPLES BANCORP, INC.
Notes to Consolidated Financial Statements, Continued
(12) Borrowings, cont.
The following table sets forth the borrowing terms for securities pledged
as collateral for FHLB (in thousands):
<TABLE>
<CAPTION>
Certi- Amortized
Borrow- ficate value
ing face Dec. 31,
rate Term value 1998 Issue Rating Yield
---- ---- ----- ---- ----- ------ -----
<C> <C> <C> <C> <S> <C> <C>
5.11% 11/16/98-7/1/99 $ 300,000 $ 285,610 Residential Funding Mtg. Aaa 6.78 %
Sec., 6.75% due
8/25/28
5.80% 12/10/98-7/1/99 $ 238,125 $ 231,825 Citicorp Mtg. Sec. Corp. Aaa 6.36 %
6.25% due 11/25/28
5.80% 12/10/98-7/1/99 $ 50,000 $ 47,766 Residential Funding Mtg. Aaa 6.75 %
Sec., 6.75% due
8/25/28
</TABLE>
69
<PAGE>
PEOPLES BANCORP, INC.
Notes to Consolidated Financial Statements, Continued
(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 changed 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 Bank has previously provided for
this liability in the financial statements.
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. The Bank met the residential loan test for 1997 and 1996 and
began to recapture a portion of its bad debt reserve in 1998.
Retained earnings as of December 31, 1998 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, 1998, 1997 and 1996
is comprised of the following components:
1998 1997 1996
---- ---- ----
(in thousands)
Current income tax expense: $ 7,175 4,465 4,728
Federal 778 388 415
State --------- --------- ---------
7,953 4,853 5,143
--------- --------- ---------
Deferred income tax
benefit: (333) (498) (401)
Federal (19) (28) (22)
State --------- --------- ---------
(352) (526) (423)
--------- --------- ---------
Total income tax expense $ 7,601 4,327 4,720
========= ========= =========
70
<PAGE>
PEOPLES BANCORP, INC.
Notes to Consolidated Financial Statements, Continued
(13) Income Taxes, cont.
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, 1998, 1997 and 1996 is as
follows:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
(in thousands)
<S> <C> <C> <C>
Income before income taxes $ 19,670 11,789 13,111
Applicable statutory Federal tax rate 35% 35% 35%
Expected Federal income tax expense 6,885 4,126 4,589
State tax net of Federal benefit 493 234 256
Increase (decrease) in Federal income
tax resulting from:
Tax exempt income (29) (41) (24)
Other 252 8 (101)
--------- ---------- ---------
$ 7,601 4,327 4,720
========= ========== =========
Effective tax rate 38.64% 36.70% 36.00%
========= ========== =========
</TABLE>
The tax effects of temporary differences that give rise to significant
portions of the net deferred tax asset at December 31, 1998 and 1997 are
as follows:
Deferred tax assets:
Postretirement benefits $ 442 514
Pension 68 86
Nonaccrual interest 71 175
Supplemental Employee Retirement Plan 418 314
Allowance for loan loss -- book 1,528 1,262
Reserves for losses 83 107
Management Recognition Plan 93 94
Core deposits 122 91
Other 13 74
---------- ----------
2,838 2,717
---------- ----------
Deferred tax liabilities:
Shareholders' equity -- unrealized gain on
securities available for sale 507 248
Allowance for loan losses - tax 832 1,031
Other 4 36
---------- ----------
1,343 1,315
---------- ----------
Net deferred tax asset $ 1,495 1,402
========== ==========
71
<PAGE>
PEOPLES BANCORP, INC.
Notes to Consolidated Financial Statements, Continued
(13) Income Taxes, cont.
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.
Total deferred tax benefit for the years ended December 31, 1998, 1997
and 1996 were allocated as follows:
1998 1997 1996
---- ---- ----
(in thousands)
Income from operations $ (352) (526) (423)
Shareholders' equity - change in
unrealized gains (losses) on
securities available for sal 259 (365) (905)
Business combination - - (391)
------- ------- ---------
$ (93) (891) (1,719)
======= ======= =========
(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, 1998, the Bank was required to maintain (i) a minimum
tangible capital ratio of 1.5%, (ii) a minimum leverage ratio of Tier I
capital to total adjusted assets of 3.0%, (iii) a minimum ratio of Tier I
capital to risk-weighted assets of 4.0%, and (iv) 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.
72
<PAGE>
PEOPLES BANCORP, INC.
Notes to Consolidated Financial Statements, Continued
(14) Regulatory Matters, cont.
Management believes that, as of December 31, 1998 and 1997, 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.
The following is a summary of the Bank's actual capital amounts and
ratios as of December 31, 1998 and 1997, compared to the OTS minimum
capital adequacy requirements and classification as a well-capitalized
institution:
<TABLE>
<CAPTION>
OTS Requirements
-----------------------------------------
Minimum For Classification
Capital as Well
Actual Adequacy Capitalized
------------------ --------------- -----------------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1998:
Tangible capital $ 230,345 16.97 $ 20,360 1.50 $ - -
Tier I (core) capital 230,345 16.97 40,720 3.00 67,868 5.00
Risk-based capital:
Tier I 230,345 35.15 26,216 4.00 39,323 6.00
Total 234,059 35.71 52,431 8.00 65,538 10.00
As of 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 15,510 4.00 23,247 6.00
Total 102,675 26.5 31,019 8.00 38,745 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.
73
<PAGE>
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:
At or for the year
ended December 31,
----------------------
1998 1997
---- ----
(in thousands)
Actuarial present value of accumulated
plan benefits:
Vested participants $ 3,549 3,127
Non-vested participants 182 159
-------- --------
$ 3,731 3,286
======== ========
Projected benefit obligation - beginning 4,083 3,306
Service cost 361 232
Interest cost 284 259
Actuarial gain/loss 387 415
Annuity payments (135) (129)
Settlements (37) -
-------- --------
Projected benefit obligation - ending 4,943 4,083
-------- --------
Fair value of plan assets - beginning 3,661 2,987
Actual return on plan assets 438 443
Employer contribution 430 360
Annuity payments (135) (129)
Settlements (37) -
-------- --------
Fair value of plan assets - ending 4,357 3,661
-------- --------
Projected benefit obligation
in excess of plan assets 586 422
Less:
Unrecognized loss (gain) 217 (19)
Unrecognized prior service cost 139 159
-------- --------
Accrued pension expense $ 230 282
======== ========
74
<PAGE>
PEOPLES BANCORP, INC.
Notes to Consolidated Financial Statements, Continued
(15) Benefit Plans, cont.
1998 1997
---- ----
(in thousands)
Accrued pension expense - beginning $ 282 366
Employer contribution (430) (360)
Total pension expense 378 276
------------ ------------
Accrued pension expense - ending $ 230 282
============ ============
The components of net pension expense for the years ended December 31,
1998, 1997 and 1996 are as follows:
1998 1997 1996
---- ---- ----
(in thousands)
Service cost-benefits earned during
the year $ 361 232 155
Interest cost on projected benefit
obligations 284 258 199
Actual return on plan assets (286) (233) (183)
Net amortization and deferral 19 19 17
------- ------- ------
$ 378 276 188
======= ======= ======
Assumptions used to develop the net periodic pension cost for the years
ended December 31, 1998, 1997 and 1996 are as follows:
1998 1997 1996
---- ---- ----
Discount rate 6.50 % 7.50 % 7.75 %
Expected long term rate of return 7.50 7.50 7.50
Rate of increase in compensation
levels 4.50 5.50 5.50
======= ======== ========
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.
75
<PAGE>
PEOPLES BANCORP, INC.
Notes to Consolidated Financial Statements, Continued
(15) Benefit Plans, cont.
The following table sets forth the accumulated post-retirement benefit
obligation (APBO) and net periodic postretirement benefit cost as
determined by the plan actuaries as of the latest actuarial valuation
date is as follows:
At or for the year
ended December 31,
-----------------------------
1998 1997
---- ----
(in thousands)
Accumulated post-retirement benefit
obligation (APBO) - beginning $ (498) (1,177)
Service cost (11) (7)
Interest cost (33) (33)
Amendments - 434
Actuarial gain/loss (149) 229
Benefits paid 47 56
--------- ---------
Accumulated post-retirement benefit
obligation (APBO) - ending (644) (498)
Fair value of plan assets - -
--------- ---------
Plan assets under accumulated post-
retirement benefit obligation (APBO) (644) (498)
Accumulated net unrecognized gain (146) (304)
Unrecognized past service cost (413) (434)
--------- ---------
Net postretirement accrued benefit cost $ (1,203) (1,236)
========= =========
Net postretirement benefit costs for the years ended December 31, 1998,
1997 and 1996 are as follows:
1998 1997 1996
---- ---- ----
Service cost $ 11 7 30
Interest cost on accumulated post-
retirement benefit obligation 33 34 79
Net amortization and deferral (32) (34) -
------ ------ ------
$ 12 7 109
====== ====== ======
76
<PAGE>
PEOPLES BANCORP, INC.
Notes to Consolidated Financial Statements, Continued
(15) Benefit Plans, cont.
For measurement purposes, the cost of medical benefits was projected to
increase at a rate of 6.50% and 7.0% in 1998 and 1997, respectively,
thereafter grading to a stable 5.0% 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
December 31, 1998 by $82,477 and the aggregate of the service and
interest components of net periodic postretirement benefit cost for the
year ended December 31, 1998 by $6,921. The present value of the
accumulated benefit obligation assumed a 6.50% and 6.75% discount rate
compounded annually for 1998 and 1997, respectively. The plan is unfunded
as of December 31, 1998, as the Bank funds the plan on a cash basis.
Stock Option Plan
During 1996, the Bank's stockholders approved a stock option plan
authorizing 1,191,815 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 three years:
Weighted
average
exercise
Shares price
------ -----
Outstanding, December 31, 1995 - $ -
Granted 894,872 3.53
Exercised - -
------------
Outstanding, December 31, 1996 894,872 3.53
Granted 296,370 5.49
Exercised 63,724 3.53
------------
Outstanding, December 31, 1997 1,127,518 4.05
Granted - -
Exercised 205,445 3.82
------------
Outstanding, December 31, 1998 922,073 $ 4.04
============
Exercisable at December 31, 1998 647,121 $ 4.04
============
77
<PAGE>
PEOPLES BANCORP, INC.
Notes to Consolidated Financial Statements, Continued
(15) Benefit Plans, cont.
The weighted average grant date fair value for the stock option plan's
options granted during 1997 and 1996 was $1.53 and $0.91, respectively.
The weighted average remaining contractual life of options outstanding at
December 31, 1998 was 7.4 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 December 31, 1998, 1997
and 1996 would have been $905,000, $361,000 and $61,000, respectively. No
options were granted during 1998. As a result, net income and basic
earnings per common share for the years ended December 31, 1998, 1997 and
1996 would have been reduced to $11,490,000 and $0.33, $7,231,000 and
$0.21, and $8,352,000 and $0.24, 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 476,737 shares
from unissued common stock to the Management Recognition Plan. As of
December 31, 1998, 476,737 shares have been allocated to employees and
directors of the Bank with a weighted average grant date fair value of
$3.53 per share. The shares were 80% vested as of December 31, 1998.
78
<PAGE>
PEOPLES BANCORP, INC.
Notes to Consolidated Financial Statements, Continued
(15) Benefit Plans, cont.
Employee Stock Ownership Plan
The Bank established an Employee Stock Ownership Plan and related trust
(ESOP) for eligible employees in connection with the Conversion. 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. The ESOP borrowed $9.5 million from the Bancorp and
purchased 9,522,000 shares in the Conversion, or 4% of the shares sold.
Shares purchased by the ESOP are held in a suspense account for
allocation among participants as the loan is repaid. All shares in the
Plan are accounted for under SOP 93-6.
Contributions to the ESOP and shares released from the suspense account
in an amount proportionate to the repayment of the ESOP loan are
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 Bancorp. A participant
vests in 20% of his or her account balance after one year of credit
service and vests in an additional 20% for each subsequent year of credit
service until a participant is 100% vested after five years. Participants
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 forfeits the nonvested portion of their account balance.
Forfeitures are 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. Dividends
on unallocated shares in the Plan are used to reduce contributions
required by the Bank.
Compensation cost is recognized based on the fair market value of the
stock when it is committed to be released. The fair market value of
unearned shares at December 31, 1998 is $9,831,000. At December 31, 1998,
the plan had allocated 48,200 shares to participants and holds no shares
in suspense and 48,200 shares as committed-to-be released. Compensation
cost amounted to $482,000 in 1998.
Unallocated shares are deducted from common shares outstanding for
earnings per share purposes with shares which are committed-to-be
released during the year added back to weighted average shares
outstanding.
79
<PAGE>
PEOPLES BANCORP, INC.
Notes to Consolidated Financial Statements, Continued
(15) Benefit Plans, cont.
Savings Incentive Plan
The Bank provides a savings incentive plan which covers employees with a
12-month period of employment with the Bank during which they worked
1,000 hours and have attained age 21. The plan permits eligible employees
to make contributions to the plan of up to 11% of their base
compensation. Under the current plan, the Bank matches 90% of the first
6% of the employee contribution. For the years ended December 31, 1998,
1997 and 1996, matching contributions to the plan amounted to $194,781,
$182,301 and $110,981, respectively
(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, 1998 and 1997, the Bank had loan commitments (including
unused lines of credit) of $62,436,000 and $49,736,000, respectively,
consisting primarily of fixed rate loans which are not included in the
accompanying financial statements. The commitments at December 31, 1998
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.
80
<PAGE>
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, dealer quotes or
contractual amounts if appropriate.
Federal Home Loan Bank Stock
The fair value of FHLB stock is cost as this is the only price at which
it can be sold.
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, 1998
and 1997. The fair value of certificates of deposit was estimated using
the rates currently offered for deposits of similar remaining maturities.
Borrowings
The fair value of borrowings at December 31, 1998 and 1997 are estimated
using current rates at which similar funds could be borrowed for the same
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.
81
<PAGE>
PEOPLES BANCORP, INC.
Notes to Consolidated Financial Statements, Continued
(17) Disclosures about Fair Value of Financial Instruments, cont.
Limitations: The following fair value estimates were made as of December
31, 1998 and 1997, 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.
Since these fair value approximations were made solely for on and off
balance sheet financial instruments as of December 31, 1998 and 1997, 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, 1998 and 1997 are as follows:
1998
-------------------------
Carrying Fair
amount value
------ -----
(in thousands)
Financial assets:
Cash and cash equivalents $ 81,268 81,268
Investment and mortgage backed securities
available for sale 814,040 814,040
Investment and mortgage backed securities
held to maturity 22,834 23,213
Federal Home Loan Bank Stock 29,055 29,055
Loans, net 494,569 495,183
========== ==========
Financial liabilities:
Deposits $ 504,900 508,182
Borrowings 611,100 611,351
========== ==========
Off balance sheet financial instruments:
Commitments to extend credit $ 62,436 62,436
========== ==========
82
<PAGE>
PEOPLES BANCORP, INC.
Notes to Consolidated Financial Statements, Continued
(17) Disclosures about Fair Value of Financial Instruments, cont.
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
Federal Home Loan Bank Stock 3,386 3,386
Loans, net 396,448 396,822
========== ==========
Financial liabilities:
Deposits $ 493,400 497,791
Borrowings 30,000 30,131
========== ==========
Off balance sheet financial instruments:
Commitments to extend credit $ 49,736 49,736
========== ==========
18) Earnings per Common Share
The following table summarizes the computation of basic earnings and
diluted earnings per common share for the years ended December 31, 1998,
1997 and 1996:
1998 1997 1996
---- ---- ----
(in thousands, except per share data)
Earnings available to common
shareholders $ 12,069 7,462 8,391
========= ========== ==========
Weighted average common
shares outstanding 35,344 34,170 34,086
Plus common stock equivalent 457 375 38
--------- ---------- ----------
Diluted weighted average
shares outstanding $ 35,801 34,545 34,124
========= ========== ==========
Earnings per common share:
Basic $ 0.34 0.22 0.25
Diluted 0.34 0.22 0.25
========= ========== ==========
83
<PAGE>
PEOPLES BANCORP, INC.
Notes to Consolidated Financial Statements, Continued
(18) Earnings per Common Share, cont.
Earnings per share for 1997 and 1996 are restated to reflect the
mutual-to-stock conversion of the Mutual Holding Company on April 8,
1998, which included the exchange of previously outstanding shares of
common stock at an exchange ratio of 3.8243 shares of common stock for
each share of Mid-Tier Holding Company Common Stock.
(19) Recent Accounting Pronouncements
Statement of Financial Accounting Standards No. 133 (SFAS No. 133),
"Accounting for Derivative Instruments and Hedging Activities",
established accounting and reporting standards for derivative
instruments, and for hedging activities. SFAS 133 supersedes the
disclosure requirements in Statements No. 80, 105 and 119. This statement
is effective for fiscal quarters of fiscal years beginning after June 15,
1999. The adoption of SFAS 133 is not expected to have a material impact
on the financial position or results of operations of the Bancorp.
Statement of Financial Accounting Standards No. 134 (SFAS No. 134),
"Accounting for Mortgage-Backed Securities Retained after the
Securitization of Mortgage Loans Held for Sale by a Mortgage Banking
Enterprise" amends FASB No. 65, "Accounting for Certain Mortgage Banking
Activities", to require that after the securitization of mortgage loans
held for sale, an entity engaged in mortgage banking activities classify
the resulting mortgage-backed securities or other retained interest based
on its ability and intent to sell or hold those investments. SFAS 134 is
effective January 1, 1999. The adoption of this statement is not expected
to have a material impact on the financial position or results of
operations of the Bancorp.
(20) 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. The following financial statements present the financial
activity of the Parent Company:
84
<PAGE>
PEOPLES BANCORP, INC.
Notes to Consolidated Financial Statements, Continued
(20) Parent Company Only Information, cont.
Condensed Statement of Condition
December 31, 1998 and 1997
(in thousands)
Assets 1998 1997
----- ----
Cash $ 2,436 -
Federal funds sold 43,800 -
Investments and mortgage-backed
securities available for sale 55,230 -
Employee Stock Ownership Plan
Trust Loan 9,205 -
Other assets 1,529 -
Investment in subsidiary 231,158 110,038
----------- -----------
Total assets $ 343,358 110,038
=========== ===========
Liabilities and
Stockholders' Equity
Other liabilities 1,873 -
Stockholders' equity 341,485 110,038
----------- -----------
Total liabilities and stock-
holders' equity $ 343,358 110,038
=========== ===========
85
<PAGE>
PEOPLES BANCORP, INC.
Notes to Consolidated Financial Statements, Continued
(20) Parent Company Only Information, cont.
Condensed Statement of Income
Year ended December 31, 1998 and
period July 1, 1997 to December 31, 1997
(in thousands)
1998 1997
---- ----
Operating income:
Interest and dividend income
on securities available for sale $ 1,598 -
Interest income on Federal
funds sold 2,167 -
Interest income on ESOP loan 748 -
Gain on sales of investment
securities 530 -
Dividends from subsidiary 285 569
---------- ---------
Total operating income 5,328 569
Operating expense 257 -
---------- ---------
Income before income taxes 5,071 569
Income taxes 1,974 -
---------- ---------
Net income 3,097 569
Equity in undistributed net income
of subsidiary 8,972 3,660
---------- ---------
$ 12,069 4,229
========== =========
86
<PAGE>
PEOPLES BANCORP, INC.
Notes to Consolidated Financial Statements, Continued
(20) Parent Company Only Information, cont.
Condensed Statement of Cash Flows
Years ended December 31, 1998 and
period July 1,1997 to December 31, 1997
(in thousands)
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income $ 12,069 4,229
Adjustments to reconcile net income to net cash
provided by operating activities:
Net gain on sales of securities (530) -
Increase in other assets (1,529) -
Increase in other liabilities 1,873 -
Equity in undistributed net income of subsidiary (8,972) (3,660)
----------- ----------
Net cash provided by operating activities 2,911 569
----------- ----------
Cash flows from investing activities:
Proceeds from maturities of securities available for sale 58,000 -
Proceeds from sales of securities available for sale 6,154 -
Repayments of mortgage-backed securities 2,667 -
Purchase of securities available for sale (121,796) -
Investment in subsidiary (118,329) -
Loan to Employee Stock Ownership Plan Trust (9,522) -
Loan Payments from Employee Stock Ownership
Plan Trust 317 -
----------- ----------
Net cash used in investing activities (182,509) -
----------- ----------
Cash flows from financing activities:
Net proceeds from exercise of stock options 466 -
Net proceeds received from stock offering 236,024 -
Purchase of treasury shares (6,808) -
Dividends paid (3,848) (569)
----------- ----------
Net cash provided by (used in) financing activities 225,834 (569)
----------- ----------
Net increase in cash and cash equivalents 46,236 -
Cash and cash equivalents as of beginning of year - -
----------- ----------
Cash and cash equivalents as of end of year $ 46,236 -
=========== ==========
</TABLE>
87
<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 Company's accounting and financial disclosures during the year ended
December 31, 1998.
PART III
ITEM 10. DIRECTORS AND OFFICERS
- --------------------------------------------------------------------------------
Management of the Company
The Boards of Directors of the Company are divided into three classes
and are elected by the stockholders of the Company for staggered three year
terms, or until their successors are elected and qualified. One class of
directors, consisting of directors Pruitt, Reinhard and Trainer have terms of
office expiring in 1999; a second class, consisting of director Sill has a term
of office expiring in 2000, and a third class consisting of directors
Breithaupt, Longstreth, Stokes and Truesdell have terms of office expiring in
2001. 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 or its subsidiaries, 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 and
Chief Operating Officer
Dan A. Chila.......................... Senior Vice President and
Chief Financial 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
William F. Bedle...................... Chairman and Chief Executive Officer,
Manchester Trust Bank
The executive officers of 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 Company, none of the executive officers,
directors or other personnel has received remuneration from the Company.
Information concerning the principal occupations, employment and compensation of
the directors and officers of the Company is set forth under "Biographical
Information."
88
<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, 1998, 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. 76 Chairman 1977 2000
Wendell T. Breithaupt 65 Director, President and 1979 2001
Chief Executive Officer
Peter S. Longstreth 54 Director 1992 2001
George A. Pruitt 52 Director 1991 1999
George W. Reinhard 66 Director 1983 1999
Charles E. Stokes, III 68 Director 1978 2001
Raymond E. Trainer 51 Director 1986 1999
Miles W. Truesdell, Jr. 55 Director 1992 2001
</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 50 Executive Vice President and Chief Operating Officer
Dan A. Chila 51 Senior Vice President and Chief Financial Officer
Richard L. Gallaudet 54 Vice President and Senior Lending Officer
Dean H. Lippincott 46 Vice President
Robert Russo 44 Vice President and Treasurer
Robert C. Hollenbeck 53 Vice President and Corporate Secretary
Frank Sannella, Jr. 61 President and Chief Executive Officer, TSBusiness Finance
William F. Bedle 61 Chairman and Chief Executive Officer, Manchester Trust Bank
</TABLE>
89
<PAGE>
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 is a member of the Mercer County Economic Development
Commission, a trustee of the Drumthwacket Foundation, Inc. and a member of the
Banking Advisory Board of the State of New Jersey. Mr. Breithaupt also serves as
a director of RSI Retirement Systems, a New York corporation.
Peter S. Longstreth is Managing Partner of Aegis Property Group, a
regional real estate company.
George A. Pruitt is President of Thomas A. Edison State College.
George W. Reinhard is Chairman of the Board and Chief Executive Officer
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.
Dan A. Chila is Senior Vice President and Chief Financial Officer of
the Company and the Bank, responsible for all financial, investment, and
treasury activities. He joined the Bank in June 1998. He is a Certified Public
Accountant and has 23 years experience in banking, including Chief Financial
Officer positions at Citizens Bancorp, New Jersey National Bank, CoreStates New
Jersey National Bank, CoreStates First Pennsylvania Bank and was Senior Vice
President and Financial Manager of CoreStates Retail Division. He also served
five years as audit supervisor at Deloitte & Touche LLP.
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
90
<PAGE>
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
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 investments and corporate regulatory
matters. He joined the Bank in November 1994. He has 30 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 Heritage Commercial Finance Company and
Executive Vice President of Meridian Commercial Finance Corporation.
William F. Bedle is Chairman and Chief Executive Officer of Manchester
Trust Bank, a wholly-owned subsidiary of the Bank. Mr. Bedle is a founder of
Manchester Trust and has served as Chief Executive Officer since 1990. He
previously held trust executive positions with other banks.
ITEM 11. EXECUTIVE COMPENSATION
- --------------------------------------------------------------------------------
Directors Compensation
Fees. During 1998, 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) Committees and
$250 for attending meetings of the 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 $800 for 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 $8,000, and the Chairman was paid an annual retainer of $16,000.
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 vested
during 1998, and all remaining options are scheduled to vest during 1999. 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 2,800 options for each
director vested in 1998, and all remaining options are scheduled to vest during
1999. Each option to purchase a share of Bank Common Stock was converted into an
option to purchase a share of Mid-Tier Common Stock in the reorganization of the
Bank into the two-tier mutual holding company structure (the "Two-Tier
Reorganization"), and each option to purchase a share of Mid-Tier Common Stock
91
<PAGE>
was converted into options to purchase 3.8243 shares of Common Stock in the
Conversion. The exercise price of the options to purchase Mid-Tier Common Stock
was similarly reduced by a factor of 3.8243. All 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 Company or the Bank. 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, 3,746, 2,296 and 2,903 of such shares, respectively,
during 1998, and are scheduled to vest in all remaining shares during 1999. Each
share of Bank Common Stock was converted into a share of Mid-Tier Common Stock
in the Two-Tier Reorganization, and each share of Mid-Tier Common Stock was
converted into 3.8243 shares of Common Stock in 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
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.
Executive Compensation
Summary Compensation Table. The following table sets forth for the
years ended December 31, 1998, 1997 and 1996, certain information as to the
total remuneration paid by the Company and subsidiaries to the Chief Executive
Officer and executive officers whose salary and bonuses exceeded $100,000 in
1998 ("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 1998 $260,000 $100,000 -- -- -- -- $81,268
President and Chief 1997 196,796 50,000 -- -- 25,000 -- 80,712
Executive Officer 1996 187,425 50,000 -- $560,426 78,000 -- 80,712
William F. Bedle 1998 $107,500 $ 26,970 -- -- -- -- $6,356
Chairman of the Board 1997 30,625 7,131 -- -- -- -- 148
and Chief Executive
Officer
Manchester Trust Bank
Leo J. Bellarmino 1998 $150,000 $ 25,000 -- -- -- -- $8,111
Executive Vice President 1997 140,000 10,273 -- -- 10,000 -- 8,151
and Chief Operating
Officer 1996 140,000 10,000 -- -- 34,000 -- 1,713
Frank Sannella, Jr. 1998 $126,000 $ 37,879 -- -- -- -- $7,355
President and Chief 1997 120,000 -- -- -- -- -- 3,333
Executive Officer
of TSBF 1996 47,077 -- -- -- -- -- 99
</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.
92
<PAGE>
(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 158,745 restricted shares of Bank Common Stock to Mr.
Breithaupt, 63,498 shares of which vested during the year ended December
31, 1998. Each share of Bank Common Stock was converted into a share of
Mid-Tier Common Stock in the Two-Tier Reorganization, and each share of
Mid-Tier Common Stock was converted into 3.8243 shares of Common Stock in
the Conversion. he 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, 1998, the fair market
value of the shares of restricted stock held by Mr. Breithaupt was
$345,270.
(6) Information is presented for awards of options to purchase Bank Common
Stock. Each option to purchase a share of Bank Common Stock was converted
into an option to purchase a share of Mid-Tier Common Stock in the Two-Tier
Reorganization, and each option to purchase a share of Mid-Tier Common
Stock was converted into options to purchase 3.8243 shares of Common Stock
in the Conversion. Of the awards to Mr. Breithaupt and Bellarmino during
1997, 157,560 and 67,306 options to purchase shares of Bank Common Stock,
respectively, vested during the year ended December 31, 1998, and all
remaining options are scheduled to vest during 1999. Of the awards to Mr.
Breithaupt and Bellarmino during 1996, 157,560 and 67,306 options to
purchase shares of Bank Common Stock, respectively, vested during the year
ended December 31, 1997,157,560 and 67,306 options to purchase shares of
Bank Common Stock, respectively, vested during the year ended December 31,
1998, and 78,780 and 33,653 options to purchase shares of Bank Common
Stock, respectively, are scheduled to vest during 1999.
(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.
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, the value realized
during 1998 by Named Executive Officers upon exercise of options, the number
of shares of Common Stock underlying options and the value of options held by
Named Executive Officers at December 31, 1998. No options were granted under
terms of the 1996 Option Plan in 1998.
AGGREGATED OPTION EXERCISES IN 1998 AND FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
Number of Securities Value of
Underlying Unexercised
Shares Net Unexercised In-the-Money
Acquired Value Options at Options at Fiscal
Name Upon Exercise Realized Fiscal Year-end Year-End (1)
- ----------------- -------------- ---------- ------------------------- -------------------------
Exercisable/Unexercisable Exercisable/Unexercisable
------------------------- -------------------------
<S> <C> <C> <C> <C>
Wendell T. Breithaupt 28,327 199,139 230,139/78,780 $1,540,458/$541,162
Leo J. Bellarmino 24,148 161,564 102,603/33,653 $693,655/$232,191
</TABLE>
(1) Equals the difference between the aggregate exercise price of such options
and the aggregate fair market value of the shares of Common Stock that
would be received upon exercise, assuming such exercise occurred on
December 31, 1998, on which date the last sale of the Common Stock was at a
price of $10.875.
93
<PAGE>
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 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."
Employment Agreements. The Bank has entered into an employment
agreement with Mr. Bellarmino (the "Executive"). The agreement has a term of 36
months. On 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 is $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. The Bank has entered into severance agreements
with Frank Sannella, Jr., and MTB has entered into a severance agreement with
William Bedle (the "Severance Agreement") which provide certain benefits in the
event of a change in control of the Bank or the Company. The Severance
Agreements 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. 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
94
<PAGE>
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.
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 Company's pension expense for the Retirement Plan for 1998 was
$377,718, 1997 was $276,428, 1996 was $188,285 and 1995 was $168,308.
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.
<TABLE>
<CAPTION>
Five Year
Average 10 Years of 15 Years of 20 Years of 25 Years of
Compensation Service Service Service Service
------------ ------- ------- ------- -------
<S> <C> <C> <C> <C>
$ 40,000 $ 7,177 $ 10,765 $ 14,353 $ 17,942
50,000 9,477 14,215 18,953 23,692
60,000 11,777 17,665 23,553 29,442
70,000 14,077 21,115 28,153 35,192
80,000 16,377 24,565 32,753 40,942
90,000 18,677 28,015 37,353 46,692
100,000 20,977 31,465 41,953 52,442
110,000 23,277 34,915 46,553 58,192
120,000 25,577 38,365 51,153 63,942
130,000 27,877 41,815 55,753 69,692
140,000 30,177 45,265 60,353 75,442
150,000 32,477 48,715 64,953 81,192
160,000 34,778 52,165 69,553 86,942
</TABLE>
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, 1998, Mr. Breithaupt had 19 years of service under the Retirement
Plan, and his five-year average compensation was $160,000 (as limited by the tax
law requirements).
95
<PAGE>
Compensation Committee Interlocks and Insider Participation
During 1998, the Compensation Committee of the Bank was chaired by Mr.
Sill, and Messrs. Longstreth, Pruitt and Trainer served as members. No such
member has ever been an employee of the Company or its subsidiaries, or has been
involved in any transaction with the Company required to be disclosed by the SEC
rules regarding transactions with an affiliate.
Indebtedness of Management
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.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT
- --------------------------------------------------------------------------------
The following table includes, as of December 31, 1998, certain
information as to the 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 Company to be the beneficial owner
of more than 5% of the issued and outstanding Common Stock, (ii) the directors
of the Company and the Bank, (iii) certain executive officers of the 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
Owner or Number of Beneficial Ownership Percent of
of Persons in Group (1)(2)(3)(4)(5) Common Stock
- ---------------------- ----------------------- ------------
<S> <C> <C>
John B. Sill, Jr................................... 104,954 *
Wendell T. Breithaupt.............................. 494,946 1.38%
Peter S. Longstreth................................ 173,132 *
George A. Pruitt................................... 29,626 *
George W. Reinhard................................. 514,318 1.44%
Charles E. Stokes, III............................. 98,528 *
Raymond E. Trainer................................. 208,418 *
Miles W. Truesdell, Jr............................. 165,802 *
Leo J. Bellarmino.................................. 131,055 *
Dan A. Chila....................................... 8,000
Richard L. Gallaudet............................... 73,592 *
Dean H. Lippincott................................. 75,279 *
Robert Russo....................................... 55,851 *
Robert C. Hollenbeck............................... 43,109 *
Frank Sannella, Jr................................. 6,531 *
William F. Bedle................................... 12,754 *
---------- -----
All directors and executive officers as a
group (13 persons)............................... 2,195,805 6.14%
---------- -----
Franklin Mutual Advisors, Inc...................... 1,905,899 5.33%
51 John F. Kennedy Parkway
Shirt Hills, New Jersey 07078
Thomson Horstman & Bryant, Inc..................... 2,062,000 5.44%
park 80 West
Plaza One
Saddle Brook, New Jersey 07663
</TABLE>
- ----------------------------
* Less than 1%
96
<PAGE>
(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 are also executive
officers and directors of the Company.
(3) Under applicable regulations, a person is deemed to have beneficial
ownership of any shares of 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 Common
Stock which are subject to stock options are deemed to be outstanding for
the purpose of computing the percentage of outstanding Common Stock owned
by such person or group but not deemed outstanding for the purpose of
computing the percentage of 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 7,159 shares; Mr. Breithaupt
31,749 shares; Mr. Longstreth 5,549 shares; Mr. Pruitt 5,728 shares; Mr.
Reinhard 7,159 shares; Mr. Stokes 7,159 shares; Mr. Trainer 7,159 shares;
Mr. Truesdell 5,549 shares; Mr. Gallaudet 3,736 shares; Mr. Lippincott
3,847 shares; Mr. Russo 3,395 shares; and Mr. Hollenbeck 3,059 shares.
Includes the following number of shares of Common Stock underlying options
that are exercisable within 60 days of the date of which beneficial
ownership is being determined: Mr. Sill 10,708 shares; Mr. Breithaupt
258,467 shares; Mr. Longstreth 47,421 shares; Mr. Stokes 47,421 shares; Mr.
Trainer 47,42 1 shares; Mr. Truesdell 47,421 shares; Mr. Bellarmino 102,603
shares; Mr. Gallaudet 33,653 shares; Mr. Russo 27,534 shares; and Mr.
Lippincott 15,297 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
--------------------
. Independent Auditors' Report
. Consolidated Statements of Condition (as of December
31, 1998 and 1997)
. Consolidated Statements of Income (for the years ended
December 31, 1998, 1997 and 1996)
. Consolidated Statements of Stockholders' Equity (for
the years ended December 31, 1998, 1997 and 1996)
. Consolidated Statements of Cash Flows (for the years
ended December 31, 1998, 1997 and 1996)
. Notes to Consolidated Financial Statements (for the
years ended December 31, 1998, 1997 and 1996)
(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.
97
<PAGE>
(a)(3) Exhibits
--------
2 Plan of Conversion and Reorganization*
3.1 Certificate of Incorporation of the Company*
3.2 Bylaws of the Company*
4 Form of Common Stock Certificate of the 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 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.
98
<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 , 1999 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/ Dan A. Chila By: /s/ John B. Sill, Jr.
-------------------------------- ---------------------------------
Dan A. Chila, Senior Vice John B. Sill, Jr., Chairman
President and Chief Financial
Officer (Principal Financial
and Accounting Officer)
Date: March , 1999 Date: March , 1999
----- -----
By: /s/ Miles W. Truesdell, Jr. By: /s/ Peter S. Longstreth
-------------------------------- ---------------------------------
Miles W. Truesdell, Jr., Director Peter S. Longstreth, Director
Date: March , 1999 Date: March , 1999
----- -----
By: /s/ George A. Pruitt By: /s/ George W. Reinhard
-------------------------------- ---------------------------------
George A. Pruitt, Director George W. Reinhard, Director
Date: March , 1999 Date: March , 1999
----- -----
By: /s/ Charles E. Stokes By: /s/ Raymond E. Trainer
-------------------------------- ---------------------------------
Charles E. Stokes, Director Raymond E. Trainer, Director
Date: March , 1999 Date: March , 1999
- ----- -----
99
<PAGE>
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
<PAGE>
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
Trenton Savings Bank FSB
TSBusiness Finance Corporation (as subsidiary of Trenton Savings Bank FSB)
Manchester Trust Bank (a subsidiary of Trenton Savings Bank FSB)
<PAGE>
EXHIBIT 23
CONSENT OF KPMG 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 January 25,
1999, relating to the consolidated statements of condition of Peoples Bancorp,
Inc. and subsidiaries as of December 31, 1998, and 1997, 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, 1998, which report
appears in the December 31, 1998 Form 10-K of Peoples Bancorp, Inc.
/s/ KPMG LLP
Short Hills, New Jersey
March 25, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 11,668
<INT-BEARING-DEPOSITS> 504,900
<FED-FUNDS-SOLD> 69,600
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 811,453
<INVESTMENTS-CARRYING> 22,834
<INVESTMENTS-MARKET> 23,213
<LOANS> 494,569
<ALLOWANCE> 4,095
<TOTAL-ASSETS> 1,469,598
<DEPOSITS> 504,900
<SHORT-TERM> 581,100
<LIABILITIES-OTHER> 7,863
<LONG-TERM> 30,000
0
0
<COMMON> 364
<OTHER-SE> 339,870
<TOTAL-LIABILITIES-AND-EQUITY> 1,469,598
<INTEREST-LOAN> 34,158
<INTEREST-INVEST> 24,245
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 58,403
<INTEREST-DEPOSIT> 20,326
<INTEREST-EXPENSE> 24,980
<INTEREST-INCOME-NET> 33,423
<LOAN-LOSSES> 2,155
<SECURITIES-GAINS> 541
<EXPENSE-OTHER> 15,781
<INCOME-PRETAX> 19,670
<INCOME-PRE-EXTRAORDINARY> 19,670
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 12,069
<EPS-PRIMARY> .34
<EPS-DILUTED> .34
<YIELD-ACTUAL> 6.90
<LOANS-NON> 3,645
<LOANS-PAST> 478
<LOANS-TROUBLED> 102
<LOANS-PROBLEM> 3,082
<ALLOWANCE-OPEN> 3,415
<CHARGE-OFFS> 1,721
<RECOVERIES> 246
<ALLOWANCE-CLOSE> 4,095
<ALLOWANCE-DOMESTIC> 4,095
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
