SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-KSB
(Mark One)
x ANNUAL REPORT UNDER SECTION 13 OR
15(d) OF THE
SECURITIES EXCHANGE ACT
OF 1934
For the fiscal year ended December 31, 1998
TRANSITION REPORT UNDER SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [NO FEE REQUIRED]
For the transition period from to
Commission File No. 000-24169
PEOPLES BANCORP, INC.
(Exact name of registrant as specified in its
Charter)
Maryland
52-2027776
(State or other jurisdiction (I.R.S.
Employer
of incorporation or organization) Identification
No.)
100 Spring Avenue, Chestertown, Maryland
21620
(Address of principal executive offices)
(Zip Code)
Issuers telephone number, including area code: (410)
778-3500
Securities registered under Section 12(b) of the
Exchange Act: Name of each
exchange
Title of each class on which
registered
None
None
Securities registered under Section 12(g) of the
Exchange Act: Common
Stock
(Title of Class)
Check whether the small business issuer (1) filed all
reports required to be filed by Section 13 or 15(d) of
the
Securities Exchange Act during the past 12 months (or
for such shorter period that the small business issuer
was
required to file such reports), and (2) has been
subject to such filing requirements for the past 90
days.
Yes x No
Check if there is no disclosure of delinquent filers
in response to Item 405 of Regulation S-B contained in
this
form, and no disclosure will be contained, to the best
of the small business issuers knowledge, in definitive
proxy
or information statements incorporated by reference in
Part III of this Form 10-KSB or any amendment to this
Form 10-KSB. [ X ]
State small business issuers revenues for its most
recent fiscal year: $9,882,170.
The aggregate market value of the Common Stock held by
nonaffiliates of the small business issuer on December
31, 1998, was $27,891,760. This calculation is based
upon an estimation by the Companys Board of Directors
of
fair market value of the Common Stock of $32.50 per
share. There is not an active trading market for the
Common Stock and it is not possible to identify
precisely the market value of the Common Stock.
On March 4, 1999, 855,088 shares of the small
business issuers common stock were issued and
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
The Companys Annual report to Shareholders for the
year ended December 31, 1998, is incorporated by
reference
in this Form 10-KSB in Part II Item 5, Item 6, and
Item 7. The Companys Proxy Statement for Annual
Meeting
of Shareholders to be held on May 12, 1999, is
incorporated by reference in this Form 10-KSB in Part
III, Item 9,
Item 10, Item 11, and Item 12.
This Report contains statements which constitute
forward-
looking statements within the meaning of Section 27A
of the Securities Act of 1933 and the Securities
Exchange Act of 1934. These statements appear in a
number of places in
this Report and include all statements regarding the
intent, belief or current expectations of the
Company, its directors, or its officers with respect
to, among other things: (i) the Companys financing
plans; (ii) trends affecting the Companys financial
condition or results of operations; (iii) the
Companys growth strategy and operating strategy; and
(iv) the
declaration and payment of dividends. Investors are
cautioned that any such forward-looking statements
are not guarantees
of future performance and involve risks and
uncertainties, and that actual results may differ
materially from those projected in the forward-
looking statements as a result of various factors
discussed herein and those factors discussed in
detail in the Companys filings with the Securities
and Exchange Commission. PART I
Item 1. Description of Business
General
Peoples Bancorp, Inc. (the Company) was
incorporated as a Maryland corporation on December
10, 1996. The Company
acquired Peoples Bank of Kent County, Chestertown,
Maryland (the Bank) on March 24, 1997. The
Company was organized to
become the holding company for the Bank under the
federal Bank Holding Company Act of 1956, as amended.
Currently, the Bank is the Companys only subsidiary
and the Companys only business is its investment in
all of the issued and outstanding shares of the Banks
voting common stock.
The Companys holding company structure can assist the
bank
in maintaining its required capital ratio because the
Company
may, subject to compliance with debt guidelines
implemented by the Board of Governors of the Federal
Reserve System (the Board of Governors or the
Federal Reserve), borrow money and contribute the
proceeds to the bank as primary capital. The holding
company structure also permits greater flexibility in
issuing stock for cash, property, or services and in
reorganization transactions. Moreover,
subject to certain regulatory limitations, a holding
company can purchase shares of its own stock, which
the bank may not do without
regulatory approval. A holding company may also
engage in certain nonbanking activities which the
Board of Governors has deemed
to be closely related to banking and proper incidents
to the
business of a bank holding company. These activities
include making or
servicing loans and certain types of leases;
performing certain data processing services; acting as
a fiduciary or investment or financial
advisor; acting as a management consultant for other
depository institutions; providing courier, appraisal,
and consumer financial counseling services; providing
tax planning and preparation services; providing check
guaranty and collection agency services; engaging in
limited real estate investment activities;
underwriting, brokering, and selling credit life and
disability insurance; engaging
in certain other limited insurance activities;
providing discount brokerage services; underwriting
and dealing in certain government obligations and
money market instruments and providing portfolio
investment advice; acting as a futures commission
merchant with respect to certain financial instrument
transactions; providing foreign exchange advisory and
transactional services; making investments in certain
corporations for projects designed primarily to
promote community welfare; and owning and operating
certain
healthy savings and loans associations. Although the
Company has no present intention of engaging in any of
these services, if circumstances should lead the
Companys management to believe that there is a need
for these services in the banks marketing area and
that such activities could be profitably conducted,
the management of the Company would have the
flexibility of commencing these
activities upon filing notice thereof with the Board
of Governors.
Location and Service Area
The Bank is a full service bank offering a
variety of services to satisfy the needs of the
consumer and commercial customers
in the area. The principal services offered by the
Bank include most types of loans, including
commercial, consumer and real estate
loans.
The Company operates from five branches located
throughout
Kent County. The Company draws most of its customer
deposits and conducts most of its lending transactions
from within its primary service area, which
encompasses Kent and Queen
Annes Counties, Maryland.
The principal components of Kent Countys economy
are agriculture and light industry. The County is also
growing as a tourist and retirement area. The tourist
business is centered primarily in Chestertown and Rock
Hall. There is a large retirement
community, Heron Point, located in Chestertown. The
seafood business, once prominent, is in decline. There
are three healthcare
facilities located in Chestertown. Agriculture and
agriculturallyrelated businesses are the largest
overall employers in the
county.
There are several light industry companies. The
largest industrial employers are Chestertown
Foods and KRM, Inc., the holding
company for Dixon Valve and Coupling.
Banking Services
The Bank offers a full range of deposit services that
are
typically available in most banks and savings and loan
associations, including checking accounts, NOW
accounts, savings accounts and other time deposits of
various types, ranging from daily money market
accounts to longer-term certificates of deposit. The
transaction accounts and time certificates are
tailored to the
Banks principal market area at rates competitive to
those offered in the area. In addition, the Bank
offers certain retirement account
services, such as Individual Retirements Accounts
(IRAs). All deposits are insured by the Federal
Deposit Insurance Corporation (the
FDIC) up to the maximum amount allowed by law
(generally, $100,000 per depositor subject to
aggregation rules). The Bank solicits
these accounts from individuals, businesses,
associations and organizations, and governmental
authorities.
The Company, through the Bank, also offers a full
range of
short- to medium-term commercial and personal loans.
Commercial loans include both secured and unsecured
loans for working capital (including inventory and
receivables), business expansion (including
acquisition of real estate and improvements), and
purchase of equipment and machinery. Consumer loans
include secured and unsecured loans for financing
automobiles, home improvements, education, and
personal investments. The Company also originates
mortgage loans and real estate construction and
acquisition loans. These lending activities are
subject to a
variety of lending limits imposed by state and federal
law. The Bank may make any loans to any director,
officer, or employee (except
for commercial loans to directors who are not officers
or employees) unless the loans are approved by the
Board of Directors of the
bank. The Board of Directors must review any such
loans every six months.
Other bank services include cash management services,
safe
deposit boxes, travelers checks, direct deposit of
payroll and social security checks, and automatic
drafts for various accounts. The Company is associated
with the Honor network of automated teller machines
that may be used by Bank customers throughout Maryland
and other regions. The Company also offers credit
card services through a correspondent bank.
Competition
The Company faces strong competition in all areas
of its operations. The competition comes from
entities operating in Kent and Queen Annes Counties,
Maryland and includes branches of some of the largest
banks in Maryland and surrounding states. Its
most direct competition for deposits historically has
come from other commercial banks, savings banks,
savings and loan associations,
and credit unions operating in its service areas.
The banks compete for deposits with money market
mutual funds and corporate and
government securities. The banks compete with these
same banking entities for loans, as well as mortgage
banking companies and other institutional lenders.
The competition for loans varies from time to time
depending on certain factors. These factors include,
among others, the general availability of lendable
funds and credit, general and local economic
conditions, current interest
rate levels,
conditions in the mortgage market, and other factors
which are not readily predictable.
Employees
As of December 31, 1998, the Bank employed 54 full-
time and
12 part-time employees. The Companys operations are
conducted through the Bank. Consequently, the Company
does not have separate employees. None of the
employees of the Bank are represented by any
collective bargaining unit. Relations with employees
are considered to be good.
SUPERVISION AND REGULATION
Banks and bank holding companies are extensively
regulated
under both federal and state law. These laws and
regulations
are intended to protect depositors, not stockholders.
To the extent that the following information describes
statutory and regulatory
provisions, it is qualified in its entirety by
reference to the particular statutory and regulatory
provisions. Any change in the applicable
law or regulation may have a material effect on the
business and prospects of the Company and the Bank.
The Company
Because it owns the outstanding common stock of
the Bank, the Company is a bank holding company within
the meaning of
the federal Bank Holding Company Act of 1956 (the
BHCA). Under the BHCA, the Company is subject to
periodic examination by
the Federal Reserve and is required to file periodic
reports of its operations and such additional
information as the
Federal Reserve may require. The Companys and the
Banks activities are limited to banking, managing or
controlling banks, furnishing services to or
performing services for its subsidiaries, or engaging
in any other activity that the Federal Reserve
determines
to be so closely related to banking or managing and
controlling banks as to be a proper incident thereto.
Investments, Control, and Activities. With
certain limited exceptions, the BHCA requires every
bank holding company to obtain the prior approval of
the Federal Reserve before (i)
acquiring substantially all the assets of any bank,
(ii) acquiring direct or
indirect ownership or control of any voting shares of
any bank if after such acquisition it would own or
control more than 5% of the voting shares of such bank
(unless it already owns or controls the majority of
such shares), or (iii) merging or consolidating with
another bank holding company.
In addition, and subject to certain exceptions,
the BHCA and the Change in Bank Control Act, together
with regulations thereunder, require Federal Reserve
approval (or, depending on the circumstances, no
notice of disapproval) prior to any person or company
acquiring control of a bank holding company, such as
the Company. Control is conclusively presumed to
exist if an individual or company acquires 25% or more
of any class of voting securities of the bank holding
company. Because the Companys Common Stock is
registered under the Securities Exchange Act of 1934,
under Federal Reserve regulations control will be
rebuttably presumed to exist if a person acquires at
least 10% of the
outstanding shares of any class of voting securities
of the Company. The
regulations provide a procedure for challenge of the
rebuttable control presumption.
Under the BHCA, the Company is generally
prohibited from engaging in, or acquiring direct or
indirect control of more than 5% of the voting shares
of any company engaged in nonbanking activities,
unless the Federal Reserve, by order or regulation,
has found
those activities to be so closely related to banking
or managing or controlling banks as to be a proper
incident thereto. Some of the
activities that the Federal Reserve has determined by
regulation to be proper incidents to the business of
banking include making or
servicing loans and certain types of leases, engaging
in certain insurance and discount brokerage
activities, performing certain data
processing services, acting in certain circumstances
as a fiduciary or investment or financial advisor,
owning savings associations, and
making investments in certain corporations or projects
designed primarily to promote community welfare.
Source of Strength; Cross-Guarantee. In
accordance with Federal Reserve policy, the Company is
expected to act as a source of financial strength to
its bank and to commit resources to support the Bank
in circumstances in which the Company might not
otherwise do so. Under the BHCA, the Federal Reserve
may require a bank holding company to terminate any
activity or relinquish control of a nonbank subsidiary
(other than a nonbank subsidiary of a bank) upon the
Federal Reserves determination that such activity
or control constitutes a serious risk to the financial
soundness or stability of any subsidiary depository
institution of the bank holding
company. Further, federal bank regulatory authorities
have additional discretion to require a bank holding
company to divest itself of
any bank or nonbank subsidiary if the agency
determines that divestiture may aid the depository
institutions financial condition. The
Bank may be required to indemnify, or cross-guarantee,
the FDIC against losses it incurs with respect to any
other bank controlled by
the Company, which in effect makes the Companys equity
investments in healthy bank subsidiaries available to
the FDIC to assist any
failing or failed bank subsidiary of the Company.
The Bank
General. The Bank operates as a state nonmember
banking association incorporated under the laws of the
State of Maryland.
It is subject to examination by the FDIC and the
State Bank Commissioner. Deposits in the Bank are
insured by the FDIC up to a
maximum amount (generally $100,000 per depositor,
subject to aggregation rules). The Commissioner and
FDIC regulate or monitor all areas of the Banks
operations, including security devices and procedures,
adequacy of capitalization and loss reserves, loans,
investments, borrowings, deposits, mergers, issuances
of securities, payment of dividends, interest rates
payable on deposits, interest
rates or fees chargeable on loans, establishment of
branches,
corporate reorganizations, maintenance of books and
records, and adequacy of staff training to carry on
safe lending and deposit gathering practices. The
FDIC requires the Bank to maintain certain
capital ratios and imposes limitations on the banks
aggregate investment in real estate, bank premises,
and furniture and fixtures. The
Bank is required by the FDIC and the Commissioner to
prepare quarterly reports on the banks financial
condition.
Under FDICIA, all insured institutions must
undergo periodic on-site examination by their
appropriate banking agency. The cost of examinations
of insured depository institutions and any affiliates
may be assessed by the appropriate agency against each
institution or affiliate as it deems necessary or
appropriate. Insured institutions are required to
submit annual reports to the FDIC and
the appropriate agency (and state supervisor when
applicable). FDICIA also directs the FDIC to develop
with other appropriate agencies a method for insured
depository institutions to provide supplemental
disclosure of the estimated fair market value of
assets and
liabilities, to the extent feasible and practicable,
in any balance sheet, financial statement, report of
condition, or other report of any
insured depository institution. FDICIA also requires
the federal
banking regulatory agencies to prescribe, by
regulation, standards for
all insured depository institutions and depository
institution holding companies relating, among other
things, to: (i) internal controls,
information systems, and audit systems; (ii) loan
documentation; (iii) credit underwriting; (iv)
interest rate risk exposure; and (v) asset
quality.
Transactions With Affiliates and Insiders. The
Bank is subject to Section 23A of the Federal Reserve
Act, which places limits on the amount of loans or
extensions of credit to, or investment in, or certain
other transactions with, affiliates and on the amount
of advances to third parties collateralized by the
securities or obligations of affiliates. In addition,
most of these loans and certain other
transactions must be secured in prescribed amounts.
The Bank is also subject to Section 23B of the Federal
Reserve Act which, among
other things, prohibits an institution from engaging
in certain transactions with certain affiliates unless
the transactions are on terms
substantially the same, or at least as favorable to
such institution or its subsidiaries, as those
prevailing at the time for comparable
transactions with nonaffiliate companies. The Bank is
subject to certain restrictions on extensions of
credit to executive officers,
directors, certain principal shareholders, and their
related interests. Such extensions of credit (i) must
be made on substantially the
same terms, including interest rates and collateral,
as those prevailing at the time for comparable
transactions with third parties, and (ii)
must not involve more than the normal risk of
repayment or present
other unfavorable features.
Branching. Under Maryland law, the Bank may open
branches state-wide, subject to the prior approval of
the Commissioner
and the FDIC. Maryland law permits banking
organizations in other states to acquire Maryland
banking organizations, as long as such states grant
similar privileges for acquiring banking organizations
in their states to banking organizations in Maryland,
by opening a de
novo branch, by acquiring an existing branch from a
Maryland depository institution, or as a result of an
interstate merger with a
Maryland banking organization.
Community Reinvestment Act. The Community
Reinvestment Act
requires that each insured depository institution
shall be evaluated by its primary federal regulator
with respect to its record in meeting the credit needs
of its local community, including low
and moderate income neighborhoods, consistent with the
safe and sound operation of those institutions. These
factors are also considered in evaluating mergers,
acquisitions, and applications to open a branch or
facility. The Bank received a satisfactory rating in
its most recent evaluation.
Other Regulations. Interest and certain other
charges collected or contracted for by the Bank is
subject to state usury laws
and certain federal laws concerning interest rates.
Loan operations are also subject to certain federal
laws applicable to credit
transactions, such as the federal Truth-In-Lending Act
governing disclosures of credit terms to consumer
borrowers, the Home Mortgage Disclosure Act of 1975
requiring financial institutions to provide
information to enable the public and public officials
to
determine whether a financial institution is
fulfilling its obligation to help meet the housing
needs of the community it serves, the Equal
Credit Opportunity Act prohibiting discrimination on
the basis of race, creed, or other prohibited factors
in extending credit, the Fair
Credit Reporting Act of 1978 governing the use and
provision of information to credit reporting agencies,
the Fair Debt Collection Act
governing the manner in which consumer debts may be
collected by collection agencies, and the rules and
regulations of the various federal agencies charged
with the responsibility of implementing such federal
laws. The deposit operations of the Bank are also
subject
to the Right to Financial Privacy Act, which imposes a
duty to maintain confidentiality of consumer financial
records and prescribes
procedures for complying with administrative subpoenas
of financial records, and the Electronic Funds
Transfer Act and Regulation E
issued by the Federal Reserve Board to implement that
act, which governs automatic deposits to and
withdrawals from deposit accounts
and customers rights and liabilities arising from the
use of automated teller machines and other electronic
banking services.
Deposit Insurance
The deposits of the Bank are currently insured to a
maximum
of $100,000 per depositor, subject to certain
aggregation rules.
The FDIC establishes rates for the payment of
premiums by federally insured banks and thrifts for
deposit insurance. Separate
insurance funds (BIF and SAIF) are maintained for
commercial banks and thrifts, with insurance premiums
from the industry used to offset losses from insurance
payouts when banks and thrifts fail. During 1996, the
FDIC revised the range of premiums from $.00 to $.31
per $100 in deposits.
The assessment rate for the Bank is currently
$1,000 for each six-month period. In addition to the
FDIC assessment, banks
are required to pay an assessment to the Financing
Corporation (FICO) to service the interest on its bond
obligations. The insurance
assessment will remain at $.00 to $.31 per $100 in
deposits through June 1999. Any increase in deposit
insurance premiums for the
banks will increase the Banks cost of funds, and there
can be no assurance that such costs can be passed on
to the Banks customers.
Dividends
The principal source of the Companys cash revenues
comes
from dividends received from the Bank. The amount of
dividends that may be paid by the Bank to the Company
depends on the Banks earnings and capital position and
is limited by federal and state laws, regulations, and
policies. The Federal Reserve has stated that bank
holding companies should refrain from or limit
dividend increases or reduce or eliminate dividends
under circumstances in which the bank holding company
fails to meet minimum
capital requirements or in which earnings are
impaired.
The Companys ability to pay any cash dividends to
its shareholders in the future will depend primarily
on the Banks ability
to pay dividends to the Company. In order to pay
dividends to the Company, the Bank must comply with
the requirements of all applicable laws and
regulations. Under Maryland law, the Bank must pay a
cash dividend only from the following, after providing
for
due or accrued expenses, losses, interest, and taxes:
(i) its undivided profits, or (ii) with the prior
approval of the Commissioner, its
surplus in excess of 100% of its required capital
stock. Under FDICIA, the Bank may not pay a dividend
if, after paying the dividend,
the Bank would be undercapitalized. See "Capital
Regulations" below. See Item 5 for a discussion of
dividends paid by the Bank in the
past two years.
In addition to the availability of funds from the
Bank, the
future dividend policy of the Company is subject to
the discretion of
the Board of Directors and will depend upon a number
of factors, including future earnings, financial
condition, cash needs, and general business
conditions. If dividends should be declared in the
future, the amount of such dividends presently cannot
be estimated
and it cannot be known whether such dividends would
continue for future periods.
Capital Regulations
The federal bank regulatory authorities have
adopted riskbased capital guidelines for banks and
bank holding companies that are designed to make
regulatory capital requirements more sensitive to
differences in risk profile among banks and bank
holding
companies, account for off-balance sheet exposure,
and minimize disincentives for holding liquid assets.
The resulting capital ratios
represent qualifying capital as a percentage of total
riskweighted assets and off-balance sheet items. The
guidelines are minimums,
and the regulators have noted that banks and bank
holding companies contemplating significant expansion
programs should not allow
expansion to diminish their capital ratios and should
maintain ratios well in excess of the minimums. The
current guidelines require
all bank holding companies and federally regulated
banks to maintain a minimum risk-based total capital
ratio equal to 8%, of which at
least 4% must be Tier 1 capital. Tier 1 capital
includes common shareholders equity before the
unrealized gains and losses on securities available
for sale, qualifying perpetual preferred stock, and
minority interests in equity accounts of consolidated
subsidiaries,
but excludes goodwill and most other intangibles, and
excludes the allowance for loan and lease losses.
Tier 2 capital includes the excess of any preferred
stock not included in Tier 1 capital, mandatory
convertible securities, hybrid capital instruments,
subordinated
debt and intermediate term-preferred stock, and
general reserves for loan and lease losses up to 1.25%
of risk-weighted assets.
Under the guidelines, banks and bank holding companies
assets are given risk-weights of 0%, 20%, 50%, and
100%. In addition, certain off-balance sheet items
are given credit conversion factors to convert them to
asset equivalent amounts to which an
appropriate risk-weight will apply. These
computations result in the total risk-weighted assets.
Most loans are assigned to the 100%
risk category, except for first mortgage loans fully
secured by residential property and, under certain
circumstances, residential construction loans, both of
which carry a 50% rating. Most investment securities
are assigned to the 20% category, except for municipal
or state revenue bonds, which have a 50% rating, and
direct obligations of or obligations guaranteed by the
United States
Treasury or United States Government agencies, which
have a 0% rating.
The federal bank regulatory authorities have also
implemented a leverage ratio, which is Tier 1 capital
as a percentage of average total assets less
intangibles, to be used as a supplement to the risk-
based guidelines. The principal objective of the
leverage
ratio is to place a constraint on the maximum degree
to which a bank holding company may leverage its
equity capital base. The minimum required leverage
ratio for top-rated institutions is 3%, but most
institutions are required to maintain an additional
cushion of
at least 100 to 200 basis points.
FDICIA established a new capital-based regulatory
scheme
designed to promote early intervention for troubled
banks and requires the FDIC to choose the least
expensive resolution of bank failures. The new
capital-based regulatory framework contains five
categories for compliance with regulatory capital
requirements, including well capitalized,
adequately capitalized, undercapitalized,
significantly undercapitalized, and critically
undercapitalized. To qualify as a well capitalized
institution, a
bank must have a leverage ratio of no less than 5%, a
Tier 1 riskbased ratio of no less than 6%, and a total
risk-based capital ratio of no
less than 10%, and the bank must not be under any
order or directive from the appropriate regulatory
agency to meet and maintain a
specific capital level. As of December 31, 1998, the
Company and the Bank were qualified as well
capitalized. See Item 6. Managements Discussion and
Analysis or Plan of Operation Capital.
Item 2. Description of Property
The Company owns its main office facility located at
100
Spring Avenue in Chestertown, Maryland 21620, which is
being expanded. The original building is
approximately 12,000 square feet. The main office is
also a full service branch. The Company also
maintains branches at the following locations, each of
which is owned by the Company:
Location
Approximate square footage
600 Washington Avenue, Chestertown, Maryland
21620
3,500
166 North Main Street, Galena, Maryland
21635 2,000 21337 Rock Hall Avenue, Rock
Hall, Maryland 21661
2,000
31905 River Road, Millington, Maryland 21651
see comment below
The Millington branch is currently housed in a
temporary
trailer. A permanent facility is planned for 1999.
Proof and bookkeeping operations are centralized at
the
Washington Avenue Branch.
Each branch has a manager that also serves as its
loan officer. All offices participate in normal day-
to-day banking operations.
Item 3. Legal Proceedings
There are no material pending legal proceedings
to which the Company or the Bank or any of their
properties are subject.
Item 4. Submission of Matters to a Vote of Security
Holders
There were no matters submitted to a vote of the
shareholders of the Company during the fourth quarter
of 1998.
PART II
Item 5. Market for Common Equity and Related
Stockholder Matters
The Companys Articles of Incorporation authorize
it to issue up to 1,000,000 shares of the common
stock.
As of March 4, 199, there were approximately 546
holders of
record of the common stock and 855,088 shares of
Common Stock issued and outstanding. There is no
established public trading market in the stock, and
there is no
likelihood that a trading market will develop in the
near future. The development of a trading market may
be inhibited
because a large portion of the Companys shares is
held by insiders. Transactions in the common stock
are infrequent and are negotiated privately between
the persons involved in those transactions.
All outstanding shares of common stock of the Company
are
entitled to share equally in dividends from funds
legally available, when, as, and if declared by the
Board of Directors. The Company paid dividends of
$.93 per share in 1998, and $.64 per share in 1997.
In 1997 the Company issued a stock split effected in
the form of a 200% stock dividend.
Item 6. Managements Discussion and Analysis or Plan
of Operation
BUSINESS OF THE COMPANY
Peoples Bancorp, Inc. (the Company) was
incorporated as a Maryland corporation on December
10, 1996. The Company
acquired Peoples Bank of Kent County, Maryland,
Chestertown, Maryland (the Bank) on March 24, 1997.
The Company was organized to become the holding
company for the Bank under the Federal Bank Holding
Company Act of 1956, as amended. Currently, the Bank
is the Companys only subsidiary and the
Companys only business is its investment in all of the
issued and outstanding shares of the Banks voting
common stock.
Peoples Bancorp, Inc. (the Company) was incorporated
as a
Maryland corporation on December 10, 1996, to
become a one-bank holding company by acquiring all of
the capital stock of Peoples Bank of Kent County,
Maryland,
Chestertown, Maryland (the Bank). The Bank was
incorporated under the laws of the State of Maryland
in 1910. The
Bank is a full-service commercial bank offering a
variety of services to satisfy the needs of consumers
and small-tomedium-sized businesses and professional
enterprises. The Bank operates five branches located
entirely in Kent County, Maryland. The Bank draws
most of its customer deposits and conducts the bulk
of its lending business within its primary
service area which encompasses all of Kent County,
northern Queen Annes County, and southern Cecil
County, Maryland.
This primary service area is located between the
Chesapeake Bay
and the western boundary of Delaware.
The bank offers a full range of deposit services that
are
typically available in most banks and savings and
loan associations, including checking accounts, NOW
accounts, savings accounts and other time deposits of
various types,
ranging from daily money market accounts to longer-
term certificates of deposit. In addition, the bank
offers certain retirement account services, such as
Individual Retirement Accounts. The bank also offers
a full range of short- to mediumterm commercial and
personal loans. The bank originates mortgage loans,
real estate construction and acquisition loans, as
well as fixed rate and adjustable rate mortgages.
These loans generally have a demand feature. Other
bank services include
cash management services, safe deposit boxes,
travelers checks, direct deposit of payroll and
social security checks, and automatic drafts for
various accounts.
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion of the Companys
financial condition and results of operations should
be read in
conjunction with the Companys financial statements and
related notes and other statistical information
included elsewhere
herein.
Overview
Consolidated income of the Company is derived
primarily from operation of the bank. The 1998 net
income was
$1,782,896 compared to $1,754,615 for 1997. This
produced a return on average equity of 11.11% and
return on average
assets of 1.46% for 1998, compared to returns of
11.42% and 1.53%, respectively for 1997.
Results of Operations
The Company reported net income of $1,782,896, or
$2.06 per
share, for the year ended December 31, 1998,
which was an increase of $28,281, or 1.61%, over the
net income of $1,754,615, or $2.00 per share, for the
year ended
December 31, 1997. The Company was able to maintain
its net margin on earning assets but operating
expenses increased
as the result of opening a new branch in Millington.
The Company also recorded $30,709 from writing off
the organization
costs of forming the holding company. This expense
is net of $15,820 and is the result of the early
adoption of a new accounting standard.
Net interest income increased $256,648, or
4.91%, to $5,482,040 in 1998, from $5,225,392 in
1997. This increase
in net interest income was the result of an
increase in interest revenue of $419,459 while
interest expense increased by $162,811. Net
interest income increased primarily because the
balance of interest-earning assets grew faster than
the
balance of deposits and borrowed funds. The yield
on interestearning assets decreased to 8.12% in
1998, from 8.16% in
1997, while the combined yield on deposits and
borrowed funds decreased to 3.96% from 3.98% for the
same period.
The provision for loan losses was $25,841 in
1998, a decrease of $63,317 from the $89,158 provision
in 1997. The
decreased provision is the result of a $7,111 decrease
in net charge-offs for 1998, creating a net charge-off
of $418. The allowance as a percentage of gross loans
was 1.01% for both years.
Noninterest income and noninterest expense increased
by
11.79% and 9.53%, respectively during 1998, compared
to 1997. Discussion of these items is presented later
under their respective headings.
Net Interest Income
The primary source of income for the Company is
net interest income, which is the difference between
revenue on interest-earning assets, such as investment
securities and loans, and interest incurred on
interest-bearing sources of funds,
such as deposits and borrowings. The level of net
interest income is determined primarily by the average
balance of
interest-earning assets and funding sources and the
various rate spreads between the interest-earning
assets and the
Companys funding sources. The table "Average
Balances, Income and Expenses, and Rates" which
follows shows the
Companys average volume of interest-earning assets
and interestbearing liabilities for 1998 and 1997,
and related
income/expense and yields. Changes in net interest
income from period to period result from increases or
decreases in the volume of interest-earning assets and
interest-bearing liabilities, and increases or
decreases in the average rates earned and
paid on such assets and liabilities. The volume of
interest
earning assets and interest-bearing liabilities is
affected by the ability to manage the earning-asset
portfolio (which includes loans), and the availability
of particular sources of funds, such as noninterest
bearing deposits. The table Analysis of Changes in
Net Interest Income shows the amount of net interest
income change from rate changes and from activity
changes.
The key performance measure for net interest income is
the
net margin on interest-bearing assets, or net
interest
income divided by average interest-earning assets.
The Companys net interest margin for 1998, was 4.80%
compared to
4.82% for 1997. Management of the Company expects to
maintain the net margin on interest-earning assets.
The net
margin may decline, however, if competition increases,
loan demand decreases, or the cost of funds rises
faster than the
return on loans and securities. Although such
expectations are based on managements judgment, actual
results will depend
on a number of factors that cannot be predicted
with certainty, and fulfillment of managements
expectations cannot be
assured.
Average Balances, Interest, and Yields
For the Year Ended
For the Year Ended
December 31, 1998
December 31, 1997
Average
Average
balance
Interest
Yield
balance
Interest
Yield
Assets
Federal
funds sold
5766933
308291
5.35
%
1158306
64472
5.57
%
Investment
securities
:
U. S.
Treasury
13786945
806432
5.85
%
21847352
1259818
5.77
%
U. S.
Agency
6005619
323880
5.39
%
4156745
234029
5.63
%
State and
municipal
0
0
0
%
104640
9123
8.72
%
Other
361466
26232
7.26
%
93006
798
0.86
%
Total investment
securities
20154030
1156544
5.74
%
26201743
1503768
5.74
%
Loans:
Demand and time
14728796
1328998
9.02
%
13805156
1389219
10.06
%
Mortgage
72048388
6196039
8.60
%
66286187
5672075
8.56
%
Installment
2940206
326931
11.12
%
2354627
265078
11.26
%
Total loans
89717390
7851968
8.75
%
82445970
7326372
8.89
%
Allowance for loan
losses
897395
816481
Total loans, net of
allowance
88819995
7851968
8.84
%
81629489
7326372
8.98
%
Total interest-
earning assets
114740958
9316803
8.12
%
108989538
8894612
8.16
%
Noninterest-bearing
cash
2996352
2496262
Premises and
equipment
2615467
1745555
Other assets
1613737
1467368
Total assets
121966514
114698723
Liabilities and
Stockholders Equity
Interest-bearing
Deposits
Savings and NOW
deposits
28287997
700456
2.48
%
27724729
705567
2.54
%
Money market and
supernow
9481124
263814
2.78
%
7863097
209030
2.66
%
Other time deposits
49059920
2692545
5.49
%
48346940
2623974
5.43
%
Total interest-bearing
deposits 86829041
3656815
4.21
%
83934766
3538571
4.22
%
Borrowed funds
4727614
150857
3.19
%
3182718
106290
3.34
%
Total interest-bearing
liabilities 91556655
3807672
4.16
%
87117484
3644861
4.18
%
Noninterest-bearing
deposits 13669913
11686894
105226568
98804378
Other liabilities
688181
536328
Stockholders
equity
16051765
15358017
Total
liabilities and
stockholders
equity 121966514
114698723
Net interest
spread
3.96
%
3.98
%
Net interest
income
5509131
5249751
Net margin on interest-earning
assets
4.80
%
4.82
%
Analysis of Changes in Net
Interest Income
Year ended December 31,
Year ended December 31,
1998 compared with 1997
1997 compared with 1996
variance due to
variance due to
Total
Rate
Volume
Total
Rate
Volume
Earning assets
Interest bearing deposits
0
0
0
- -6475
0
- -6475
Federal funds sold
243819
- -12700
256519
- -153916
1409
- -155325
Investment
securities:
U. S. Treasury
- -453386
11414
- -464800
59807
50894
8913
U. S. Agency
89851
- -14242
104093
- -102913
15243
- -118156
State, county, and
municipals
- -9123
0
- -9123
- -11781
- -1115
- -10666
Other
25434
23131
2303
- -3386
- -4309
923
Loans:
Demand and time
- -60221
- -153167
92946
97222
19613
77609
Mortgage
523964
30895
493069
473544
- -172760
646304
Installment
61853
- -4070
65923
- -2563
1601
- -4164
Total
interest revenue
422191
- -118740
540931
349539
- -89424
438963
Interest-bearing
liabilities
Savings and NOW
deposits
- -5111
- -19446
14335
- -29579
6662
- -36241
Money market and
supernow
54784
11711
43013
23022
16377
6645
Other time
deposits
68571
29875
38696
- -76632
- -71583
- -5049
Other borrowed
funds
44567
- -7026
51593
49970
10496
39474
Total
interest expense
162811
15174
147637
- -33219
- -38048
4829
Net interest
income
259380
- -133914
393294
382758
- -51376
434134
Interest on tax-exempt securities are reported on
fully taxable equivalent
basis.
The variance that is both rate/volume related is
reported with the rate
variance.
Composition of Loan Portfolio
Because loans are expected to produce higher yields
than
investment securities and other interest-earning
assets
(assuming that loan losses are not excessive), the
absolute volume of loans and the volume as a
percentage of total earning
assets is an important determinant of net interest
margin. Average loans, net of the allowance for loan
losses, were $88,819,995 and $81,629,489 during 1998
and 1997, respectively, which constituted 77.41% and
74.90% of average
interest-earning assets for the respective periods.
At December 31, 1998, the Companys loan to deposit
ratio was 82.10% compared to 86.83% at December 31,
1997, while the 1998 average loans to average
deposits were 88.38%. The Company
extends loans primarily to customers located in and
near Kent, Queen Annes and Cecil Counties, Maryland.
There are no industry concentrations in the Companys
loan portfolio. The Company does, however, have a
substantial portion of its
loans in real estate and its performance will be
influenced by the real estate market in the region.
The following table sets forth the composition of the
Companys loan portfolio as of December 31, 1998 and
1997, respectively.
Composition of Loan Portfolio
December 31,
1998
1997
Percent
Percent
Amount
of total
Amount
of total
Commercial
13989837
15.67%
12789753
14.75%
Real estate residential
33348619
37.35%
33503212
38.64%
Real estate - commercial
34869397
39.05%
33890358
39.09%
Construction
2435864
2.73%
1772198
2.04%
Consumer
4645552
5.20%
4741988
5.48%
Total loans
89289269
100.00%
86697509
100.00%
Less deferred origination fees
203792
238883
Less allowance for credit losses
901139
875716
Net loans
88184338
85582910
The following table sets forth the maturity
distribution,
classified according to sensitivity to changes in
interest
rates, for selected components of the Companys loan
portfolio as
of December 31, 1998.
Loan Maturity Schedule and Sensitivity to Changes
in Interest Rates
December 31, 1998
Over one
One year
Through
Over five
or less
five years
years
Total
Commercial
12969113
1020724
0
13989837
Real estate - residential
13758123
19590496
0
33348619
Real estate - commercial
20571625
14297772
0
34869397
Construction
2435864
0
0
2435864
Consumer
2637636
2007916
0
4645552
Total
52372361
36916908
0
89289269
Fixed interest rate
24865835
32211888
0
57077723
Variable interest rate
27506526
4705020
0
32211546
Total
52372361
36916908
0
89289269
As of December 31, 1998, $32,211,546, or 36.08%,
of the total loans were either variable rate loans or
loans written on demand.
The Company has the following commitments, lines of
credit,
and letters of credit outstanding as of December 31,
1998 and 1997, respectively.
1998
1997
Check loan lines of credit
350035
302355
Mortgage lines of credit
5217816
4507300
Commercial lines of credit
8537798
7440628
Construction loan commitments
969393
973741
Standby letters of credit
846861
887134
Total
15921903
14111158
Loan commitments are agreements to lend to a
customer as long as there is no violation of any
condition to the
contract. Loan commitments may have interest fixed at
current rates, fixed expiration dates, and may require
the payment
of a fee. Letters of credit are commitments issued
to guarantee the performance of a customer to a
third party. Loan commitments and letters of credit
are made on the same terms, including collateral, as
outstanding loans. The Companys exposure to credit
loss in the event of nonperformance by the borrower
is represented by the contract amount of the
commitment. Management is not aware of any
accounting loss the Company will incur by the
funding of these
commitments.
Loan Quality
The allowance for loan losses represents a reserve
for
potential losses in the loan portfolio. The
adequacy of the allowance for loan losses is
evaluated periodically based on a review of all
significant loans, with a particular emphasis on non-
accruing, past due, and other loans that management
believes require attention. The determination of
the reserve level
rests upon managements judgment about factors
affecting loan quality and assumptions about the
economy. Management
considers the year-end allowance appropriate and
adequate to cover possible losses in the loan
portfolio; however,
managements judgment is based upon a number of
assumptions about future events, which are believed to
be reasonable,
but which may or may not prove valid. Thus, there can
be no assurance that charge-offs in future periods
will not exceed
the allowance for loan loss or that additional
increases in the loan loss allowance will not be
required.
For significant problem loans, managements
review consists of evaluation of the financial
strengths of the
borrowers and guarantors, the related collateral, and
the effects of economic conditions. The overall
evaluation of the
adequacy of the total allowance for loan losses is
based on an analysis of historical loan loss ratios,
loan charge-offs, delinquency trends, and previous
collection experience, along with an assessment of the
effects of external economic
conditions. Although the Company has a history of low
loan chargeoffs, its current policy is to maintain an
allowance of approximately 1.00% of gross loans unless
managements evaluation of the risk associated with
each loan indicates that the
allowance should be higher. This allowance may be
increased for reserves for specific loans identified
as substandard
during managements loan review. Generally, the
Company will not require a negative provision to
reduce the allowance as
a result of either net recoveries or a decrease in
loans. This may cause the allowance as a percentage
of gross loans to
exceed the Companys target of 1.00%.
The table Allocation of Allowance for Loan Losses
which
follows shows the specific allowance applied by loan
type and also the general allowance included in the
December 31, 1998 and 1997, allowance for loan
losses.
The provision for loan losses is a charge to
earnings in the current period to replenish the
allowance and maintain it
at a level management has determined to be adequate.
As of both December 31, 1998 and 1997, the allowance
for loan
losses was 1.01%.
Allocation of Allowance for
Loan Losses
1998
1997
Commercial
101049
11.21
%
83595
9.55
%
Real estate - residential
262023
29.08
216280
24.70
Real estate - commercial
360103
39.96
299070
34.15
Consumer
74641
8.28
70477
8.05
General
103323
11.47
206294
23.55
Total
901139
100.00
%
875716
100.00
%
Allowance for Loan Losses
1998
1997
Balance at beginning of year
875716
794087
Loan losses:
Commercial
0
0
Mortgages
0
0
Consumer
2269
8203
Total loan
losses
2269
8203
Recoveries on loans previously
charged off
Commercial
0
0
Mortgages
0
0
Consumer
1851
674
Total loan
recoveries
1851
674
Net loan losses
418
7529
Provision for loan losses
charged to expense
25841
89158
Balance at end of year
901139
875716
Allowance for loan losses to loans outstanding
at end of year
1.01%
1.01%
Net charge-offs to average loans
0.00%
0.01%
As a result of managements ongoing review of the loan
portfolio, loans are classified as nonaccrual when it
is not reasonable to expect collection of interest
under the original terms. These loans are classified
as nonaccrual even though the presence of collateral
or the borrowers financial strength may be sufficient
to provide for ultimate repayment. Interest
on nonaccrual loans is recognized only when received.
A delinquent loan is generally placed in nonaccrual
status when it
becomes 90 days or more past due. When a loan is
placed in nonaccrual status, all interest which has
been accrued on the loan but remains unpaid is
reversed and deducted from earnings as a reduction of
reported interest income. No additional
interest is accrued on the loan balance until the
collection of both principal and interest becomes
reasonably certain.
The Company had nonperforming loans of $1,114,132 and
$842,183 at December 31, 1998 and 1997, respectively.
Where real estate acquired by foreclosure and held for
sale is
included with nonperforming loans, the result
comprises nonperforming assets. Nonperforming assets
at December 31, 1998, totaled $1,114,132 compared to
$1,187,252 as of
December 31, 1997. Management sold all properties
held as other real estate during 1998. Loans are
classified as
impaired when the collection of contractual
obligations, including principal and interest, is
doubtful. Management has
identified no significant impaired loans as of
December 31, 1998 or 1997.
Liquidity and Interest Rate Sensitivity
The primary objective of asset/liability management is
to
ensure the steady growth of the Companys primary
source of earnings, net interest income. Net interest
income can fluctuate with significant interest rate
movements. To
lessen the impact of these margin swings, the balance
sheet should be structured so that repricing
opportunities exist for
both assets and liabilities in roughly equivalent
amounts at approximately the same time intervals.
Imbalances in these repricing opportunities at any
point in time constitute interest rate sensitivity.
Liquidity represents the ability to provide
steady sources of funds for loan commitments and
investment activities,
as well as to provide sufficient funds to cover
deposit withdrawals and payment of debt and operating
obligations. These funds can be obtained by
converting assets to cash or by attracting new
deposits.
Average liquid assets (cash and amounts due from
banks,
interest bearing deposits in other banks, federal
funds
sold, and investment securities) were 28.77% of
average deposits for 1998, compared to 31.22% for
1997.
Interest rate sensitivity may be controlled on
either side of the balance sheet. On the asset side,
management can
exercise some control on maturities. Also, loans may
be structured with rate floors and ceilings on
variable rate notes and
by providing for repricing opportunities on fixed rate
notes. The Companys investment portfolio, including
federal funds
sold, provides the most flexible and fastest control
over rate sensitivity since it can generally be
restructured more quickly than the loan portfolio.
On the liability side, deposit products can be
restructured
so as to offer incentives to attain the maturity
distribution desired. Competitive factors sometimes
make control over deposits more difficult and less
effective.
Interest rate sensitivity refers to the
responsiveness of interest-bearing assets and
liabilities to changes in market interest rates. The
rate-sensitive position, or gap, is the difference in
the volume of rate-sensitive assets and liabilities at
a
given time interval. The general objective of gap
management is to actively manage rate-sensitive assets
and liabilities to
reduce the impact of interest rate fluctuations on
the net interest margin. Management generally
attempts to maintain a balance between rate-
sensitive assets and liabilities as the exposure
period is lengthened to minimize the overall
interest rate risk to the Company.
The asset mix of the balance sheet is
continually evaluated in terms of several variables;
yield, credit quality, appropriate funding sources,
and liquidity. Management of the liability mix of
the balance sheet focuses on expanding the various
funding sources.
The interest rate sensitivity position at
December 31, 1998, is presented in the table Interest
Sensitivity Analysis.
The difference between rate-sensitive assets and rate-
sensitive liabilities, or the interest rate
sensitivity gap, is shown at the bottom of the table.
The Company was liability-sensitive for the first
twelve month time horizon and asset-sensitive
thereafter. For asset-sensitive institutions, if
interest rates should decrease, the net interest
margins should decline. Since all interest rates and
yields do not adjust at the same velocity, the gap is
only a general indicator of rate sensitivity.
Interest
Sensitivity
Analysis
December 31, 1998
After three
Within
but within
After one
three
Twelve
but within
After
months
Months
five years
five years
Total
Assets
Earning assets
Federal funds
sold
7244554
0
0
0
7244554
Investment
securities
available
for sale 2000313
3524688
14101113
354800
19980914
held to maturity
19734
3980401
1501793
67998
5569926
Loans
32701883
19670478
36916908
0
89289269
Total earning
assets 41966484
27175567
52519814
422798
122084663
Liabilities
Interest-bearing
liabilities
Money market and
Supernow 10156459
0
0
0
10156459
Savings and NOW
deposits
30020180
0
0
0
30020180
Certificates $100,000
and over
1513812
1784086
5492045
8789943
Certificates under
$100,000
6775871
16826778
20022351
2871
43627871
Securities sold
under agreements
to repurchase
3309357
600000
428784
0
4338141
Total interest-bearing
liabilities 51775679
19210864
25943180
2871
96932594
Period gap
- -9809195
7964703
26576634
419927
25152069
Cumulative gap
- -9809195
- -1844492
24732142
25152069
25152069
Ratio of cumulative gap to
total earning assets
- -8.03%
- -1.51%
20.26%
20.60%
20.60%
The table Investment Securities Maturity
Distribution and Yields shows that as of December 31,
1998, $9,545,359
of the investment portfolio matures in one year or
less. The balance of the debt securities mature
within five years except for mortgage-backed
securities, which have expected maturities within 10
years. Other sources of liquidity include letters of
credit, overnight federal funds, and reverse
repurchase agreements available from correspondent
banks. The total lines of
credit available from correspondent banks at December
31, 1998, was $6,000,000. Additionally, the Company
has an
unused line of credit of $15,000,000 from the Federal
Home Loan Bank of Atlanta which is secured by the
residential
mortgages of the Bank.
Investment Securities Maturity Distribution and Yields
1998
1997
Carying
Yearend
Carying
Yearend
value
Yield
value
yield
U.S. Treasury
One year or
less
9525137
6.01%
7998550
5.62%
Over one through
five years
2051251
5.41%
9526335
6.02%
Total U.S.
Treasury
11576388
5.90%
17524885
5.83%
U.S. Government
agency
One year or
less
20222
8.84%
2506333
5.96%
Over one through
five years
13549486
5.00%
1536860
6.71%
Over five through
ten years
69678
7.20%
86856
7.20%
Total U.S.
Government agency
13639386
5.02%
4130049
6.27%
Total debt securities
25215774
5.42%
21654934
5.92%
Federal Home Loan Bank stock
354800
342900
Total securities
25570574
21997834
Deposits and Other Interest-Bearing Liabilities
Average interest-bearing liabilities increased
$4,439,171, or 5.10 %, to $91,556,655 in 1997, from
$87,117,484 in
1997. Average interest-bearing deposits increased
$2,894,275, or 3.45%, to $86,829,041 in 1998, from
$83,934,766 in 1997, while average demand deposits
increased $1,983,019, or 16.97% to $13,669,913 in
1998, from $11,686,894 in 1997. At December
31,
1998, total deposits were $107,410,703, compared to
$98,561,827 at December 31, 1997, an increase of
8.98%.
The following table sets forth the deposits of
the Company by category as of December 31, 1998 and
1997,
respectively.
December 31,
1998
1997
Percent of
Percent of
Amount
deposits
Amount
deposits
Demand deposit
accounts
14816250
13.79
%
13708219
13.91
%
Savings and NOW
accounts
30020180
27.95
27335924
27.73
Money market and
Supernow accounts
10156459
9.46
9455226
9.59
Time deposits less
than $100,000
43627871
40.62
39944071
40.53
Time deposits of
$100,000 or more
8789943
8.18
8118387
8.24
Total
deposits
107410703
100.00
%
98561827
100
%
Core deposits, which exclude certificates of deposit
of
$100,000 or more, provide a relatively stable funding
source for the Companys loan portfolio and other
earning assets. The Companys core deposits increased
$8,177,320 during 1998.
Deposits, and particularly core deposits, have been
the Companys primary source of funding and have
enabled the
Company to meet both its short-term and long-term
liquidity needs. Management anticipates that such
deposits will
continue to be the Companys primary source of funding
in the future. The maturity distribution of the
Companys time
deposits over $100,000 at December 31, 1998, is
shown in the following table.
December 31, 1998
After six
After three
through
Within three
Through
twelve
After twelve
months
six months
months
months
Total
Certificates of deposit of $100,000
or more
1513812
899121
884965
5492045
8789943
Large certificate of deposit customers tend to
be extremely sensitive to interest rate levels,
making these deposits
less reliable sources of funding for liquidity
planning purposes than core deposits. Some financial
institutions partially fund their balance sheets
using large certificates of deposit obtained through
brokers. These brokered deposits are generally
expensive and are unreliable as long-term funding
sources. Accordingly, the Company does not accept
brokered deposits.
Noninterest Income
Noninterest income for 1998 was $592,458,
compared to noninterest income in 1997 of $529,990, an
increase of
$62,468, or 11.79%. Service charges income has
increased with the increased volume in deposits.
During 1998, the
Company collected a full year of fees for automatic
teller machine usage from noncustomers, increasing
noninterest income
by $12,360.
The following table presents the principal components
of
noninterest income for the years ended December 31,
1998
and 1997, respectively.
Noninterest Income
1998
1997
Service charges on deposit accounts
467497
427179
Securities gains
0
1845
Other noninterest revenue
124961
100966
Total noninterest income
592458
529990
Noninterest income as a percentage of average
total assets
0.49%
0.46%
Noninterest Expense
Noninterest expense increased by $277,701, or
9.53%, from $2,913,384 in 1997 to $3,191,085 in
1998. Increased
personnel costs of $161,306 were due to annual
raises and additional staff for the new Millington
branch. Other operating expenses have increased
with the growth in deposits and the opening of the
Millington branch.
The following table presents the principal
components of noninterest expense for the years
ended December 31,
1998 and 1997, respectively.
Noninterest Expense
1998
1997
Compensation and
related expenses
2030624
1869318
Occupancy expense
147218
131520
Furniture and
equipment expense
135221
93390
Advertising
34331
26443
Business Manager
22377
30104
Correspondent bank
fees
36434
37802
Data processing
204200
194460
Deposit insurance
11602
11364
Director fees
72556
59341
Insurance
22886
28269
Office supplies
42844
50751
Other real estate
holding costs
5887
0
Writedown of other
real estate
18986
- -12294
Postage
69796
68509
Printing and
stationery
56414
39963
Professional fees
75190
83701
Telephone
32842
30830
Other
171677
169913
Total noninterest
expense
3191085
2913384
Noninterest expense as a percentage of average total
assets
2.62%
2.54%
Capital
Under the capital guidelines of the Federal
Reserve Board and the FDIC, the Company and the bank
are currently
required to maintain a minimum risk-based total
capital ratio of 8%, with at least 4% being Tier 1
capital. Tier 1 capital consists of common
shareholders equity, qualifying perpetual preferred
stock, and minority interests in equity accounts of
consolidated subsidiaries, less certain intangibles.
In addition, the Company and the bank must maintain a
minimum Tier
1 leverage ratio (Tier 1 capital to total assets) of
at least 3%, but this minimum ratio is increased by
100 to 200 basis points
for other than the highest-rated institutions.
At December 31, 1998, the Company and the bank
exceeded their regulatory capital ratios, as set forth
in the
following table.
Analysis of Capital
1998
1997
Required
Consolidated
Consolidated
Minimums
Company
Bank
Company
Bank
Total risk-based capital ratio
8.0%
17.9%
17.5%
18.8%
18.5%
Tier I risk-based capital
ratio
4.0%
17.0%
16.6%
17.8%
17.5%
Tier I leverage ratio
3.0%
12.7%
12.4%
13.7%
13.4%
Accounting Rule Changes
FASB Statement No. 130, Reporting
Comprehensive Income requires that all items
that are required to be
recognized under accounting standards as components
of comprehensive income be reported in a financial
statement that is displayed with the same prominence
as other financial statements. Comprehensive income
of the Company includes
unrealized gains and losses on securities available
for sale, net of tax. The Statement is effective for
years beginning after December 15, 1997. The Company
adopted the standard in the financial statements for
the year-ended December 31, 1998
with restatement of prior periods.
FASB Statement No. 131, Disclosures about Segments of
an
Enterprise and Related Information requires that a
public company report financial and descriptive
information about its reportable operating segments.
Operating segments
are components of an enterprise about which separate
financial information is available that is evaluated
regularly by management in deciding how to allocate
resources and in assessing performance. Generally,
financial information is
required to be reported on the basis that is used
internally for evaluating segment performance and
deciding how to allocate resources to segments. This
Statement was effective for financial statements for
periods beginning after December 15, 1997.
The standard had no effect on the Companys financial
statements.
FASB Statement No. 132, Employers Disclosures
about Pension and Other Postretirement Benefits, an
amendment
of FASB Statements No. 87, 88, and 106 standardizes
the disclosure requirements for pension and
postretirement benefits.
It requires additional information on the changes in
benefit obligations and fair values of plan assets and
eliminates certain disclosures that are not longer
useful. It was effective for fiscal years beginning
after December 15, 1997. The pension disclosures have
been restated to conform to this pronouncement.
FASB Statement No. 133, Accounting for Derivative
Instruments and Hedging Activities requires that an
entity recognize all derivatives as either assets or
liabilities in the statement of financial position and
measure those instruments at fair value. It is
effective for fiscal years beginning after June 15,
1999. The Company has no derivatives and expects no
additional disclosures from the adoption of this
statement.
FASB Statement No. 134, Accounting for
Mortgage-Backed Securities Retained after the
Securitization of
Mortgage Loans Held for Sale by a Mortgage Banking
Enterprise, is an amendment of FASB Statement No.65.
After the
securitization of a mortgage loan held for sale, any
retained mortgage-backed securities shall be
classified in accordance
with the provisions of Statement 115. However, a
mortgage banking enterprise must classify as trading
any mortgage-
backed securities that it commits to sell before or
during the securitization process. This Statement
shall be effective for the first fiscal quarter
beginning after December 15, 1998. The Company does
not engage in the activities described by this
statement.
Statement of Position 98-5 of the Accounting
Standards Executive Committee of the American
Institute of
Certified Public Accountants, Reporting on the Costs
of Start-up Activities, requires that start-up costs
and organization
costs be expensed as incurred. Prior to 1998,
organization costs were amortized over five years.
This Statement, which is effective for fiscal years
beginning after December 15, 1998, requires that the
unamortized balance of organization costs be written
off when the statement is adopted. The Company
elected early adoption of this pronouncement. The
cumulative
effect of changing to this accounting method was a
reduction of earnings of $30,709, net of income taxes.
Impact of Inflation
Unlike most industrial companies, the assets and
liabilities of financial institutions such as the
Company and the
Bank are primarily monetary in nature. Therefore,
interest rates have a more significant effect on the
Companys
performance than do the effects of changes in the
general rate of inflation and change in prices. In
addition, interest rates
do not necessarily move in the same direction or in
the same magnitude as the prices of goods and
services. As discussed previously, management seeks
to manage the relationships between interest
sensitive assets and liabilities in order to
protect against wide interest rate fluctuations,
including those resulting from inflation. See
Liquidity and Interest Rate Sensitivity above.
Industry Developments
Certain recently enacted and proposed
legislation could have an effect on both the costs of
doing business and the
competitive factors facing the financial institution
industry.
The Company is unable at this time to assess the
impact of this legislation on its financial condition
or results of operations.
Year 2000 Issues
The Company has determined the scope of the Year 2000
issue
(Y2k) as it relates to the operation of the bank.
The internal systems have been tested and those found
not to be compliant will be compliant before the end
of 1999.
Management formed a committee that has contacted
vendors and large customers to assess and educate
major suppliers and
borrowers of the Y2k issue. Should large borrowers
not sufficiently address this area, the Company may
experience an increase in loan defaults. Management
is working with borrowers to minimize the Banks
exposure from borrowers failure
to plan for Y2k.
The financial nature of banks makes them dependent
on
computer systems. The Committee has reviewed the
testing done by the Banks third party data
processor. Although most applications have passed
the tests performed, one
deposit application is in the process of correction.
Future testing of failed systems will be done and
completed by June 30,1999.
The Company incurred no significant incremental
Y2k compliance costs during 1998. Management estimates
that
the cost of making all applications compliant in 1999
and the cost of educating customers will be $20,000.
Item 7. Financial Statements
In response to this Item, the information
included on pages 7 through 12 of the Companys Annual
Report to Shareholders
for the year ended December 31, 1998, is incorporated
herein by reference.
PART III
Item 8. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosures
Not applicable.
Item 9. Directors and Executive Officers; Compliance
with Section 16(a) of the Exchange Act
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
Section 16(a) of the Securities Exchange Act of
1934 requires the Companys directors, executive
officers and
persons who own more than ten percent of the Companys
Stock (a Section 16 Insider) to file monthly reports
and an
annual report with both the Securities and Exchange
Commission and the National Association of Securities
Dealers.
Based on a review of the reports submitted to the
Company, the Company believes that all Section 16(a)
reporting
requirements applicable to the Companys directors,
officers and 10% Shareholders were satisfied , buy not
on a timely
basis because of misunderstandings due to first time
filings.
Item 10. Executive Compensation
EXECUTIVE COMPENSATION
The following table sets forth the compensation paid
or
allocated for services rendered to the Company in all
capacities during the years ended December 31, 1996,
1997 and 1998 to the chief executive officer of the
Company. The
Compensation of other members of executive management
is not required to be provided because the base
compensation of each of such individuals does not
exceed $100,000.
SUMMARY COMPENSAION TABLE
Salary
Bonus
Name and Principal Position
Year ($)
($)
--------------------------------
- ----- -------- --------
E. Roy Owens, Chairman and President and
CEO 1998 122,000 18,915
E. Roy Owens, Chairman and President and
CEO 1997 118,000 18,971
E. Roy Owens, Chairman and President and
CEO 1996 112,500 14,786
The Company has no employment agreements, termination
of
employment, or change-in-control agreements or
understandings with any of its directors, executive
officers or any other party.
Item 11. Security Ownership of Certain Beneficial
Owners and Management
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The following table sets forth, as of December 31,
1998, certain information concerning shares of the
Common Stock of the Company beneficially owned by ( i
) the chief executive officer of the company; ( ii )
all directors and nominees for directors of the
Company; ( iii
) all directors and officers of the Company as a
group.
Amount and Nature of
Beneficial Percent of
Name and address of Beneficial Owner (11)
Ownership (1) Class (1) ----------
- ---------------------------------------------------
- --------------- ----------
- --
Directors:
Robert W. Clark, Jr.
5,505(2)
*
LaMonte E. Cooke
20
*
Gary B. Fellows
20
*
Herman E. Hill, Jr.
4,405(3)
*
Elmer E. Horsey
720(4)
*
Arthur E. Kendall.
2,031
*
P. Patrick McClary
5,226
*
Robert A. Moore..
6,315(5)
*
E. Roy Owens.
3,945(6)
*
Alexander P. Rasin, III.
29,500(7)
3.44%
Stefan R. Skipp.
30,000(8)
3.50%
Thomas G. Stevenson...
11,085(9)
.29%
Elizabeth A. Strong...
30
*
William G. Wheatley
6,928(10)
*
All Directors and Executive Officers of the Company
as a group (15 persons)..
108,495 12.64%
- -------------------------------
* Less than 1%
(1) Unless otherwise indicated, the named person has
sole voting and investment power with respect to all
shares. (2) Includes 2,664 shares owned by Mr. Clarks
minor children. Excludes 401 shares owned by Mr.
Clarks wife.
(3) Includes 4,089 shares owned jointly by Mr. Hill
and his wife. Excludes 165 shares owned by Mr. Hills
wife.
(4) Excludes 89,100 shares owned by Nylon Capital
Shopping Center, Inc. for which Mr. Horsey serves as
President, but
does not own any beneficial interest, and excludes 864
shares owned by Mr. Horseys wife.
(5) Includes 5,310 shares owned jointly by Mr. Moore
and his wife. (6) Includes 1,365 shares owned jointly
by Mr. Owens and his wife. Excludes 185 shares owned
by Mr. Owenss wife.
(7) Includes 23,460 shares owned by a family trust.
Excludes 1,422 shares owned by Mr. Rasins wife.
(8) Includes 9,000 shares owned by a family
estate/trust account. Excludes 1,800 shares owned by
Mr. Skipps minor
children.
(9) Includes 8,100 shares owned by three family
trusts, and 1,500 shares owned by a family
partnership.
(10) Includes 6,843 shares owned jointly by Mr.
Wheatley and his wife. Excludes 9 shares owned by Mr.
Wheatleys wife.
(11) All directors and executive officers may be
contacted at the Companys corporate offices by
addressing correspondence
to the appropriate person, care of Peoples Bancorp
Inc., 100 Spring Avenue, P. O. Box 210, Chestertown,
Maryland
21620-0210.
Item 12. Certain Relationships and Related
Transactions
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
During the past year the Bank has had banking
transactions in the ordinary course of its business
with: ( i) its
directors and nominees for directors; (ii) its
executive officers; (iii) its 5% or greater
shareholders; (iv) members of the immediately family
if its directors, nominees for directors or executive
officers and 5% shareholders; and (v) the associates
of such persons on substantially the same terms,
including interest rates, collateral, and repayment
terms on loans, as those prevailing at the same time
for comparable transactions with others. The
extensions of credit by the Bank to these persons have
not and do not currently involve more than the normal
risk of collectibility or present other unfavorable
features. At
December 31, 1998, the balance of the loans
outstanding to directors, executive officers, owners
of 5% or more of the outstanding Common Stock, and
their associates, including loans guaranteed by such
persons, aggregated $2,664,886,
which represented approximately 16.37% of the
Companys equity capital accounts.
Alexander P. Rasin, III, a director of both the
Company and the Bank, is a partner of the law firm of
Rasin, Wright
and Wootton which performs legal services for the
Company and its subsidiaries. Management believes
that the terms of
these transactions were at least as favorable to the
Company as
could have been obtained elsewhere.
Robert A. Moore, a director of both the Company
and the Bank, is Chairman of Dukes Moore Insurance
Agency, Inc.
an insurance brokerage firm through which the Company
and the Bank place various insurance policies. The
Company and the
Bank paid total premiums for insurance policies placed
by Dukes Moore Insurance Agency, Inc. in 1998 of
$88,077.
Management believes that the terms of these
transactions were at least as favorable to the Company
as could have been obtained elsewhere.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
3.1 Articles of Incorporation of the Company
(incorporated
by reference to Exhibit 3.1 of Registration Statement
Form
S-4, File No. 33-99762).
3.2 Bylaws of the Company (incorporated by reference
to
Exhibit 3.2 of Registration Statement Form S-4, File
No. 33-99762).
13 Annual Report to Shareholders for the year
ended
December 31, 1998.
21 Subsidiaries of the Company.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the
fourth quarter of the year ended December 31, 1998.
SIGNATURES
In accordance with 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.
(Registrant)
Date: March 26, 1999 By: /s/ E. Roy Owens
E. Roy Owens
President and Chief Executive Officer
In accordance with the Securities Exchange Act 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.
Date: March 26, 1999 By: /s/ Robert W.
Clark, Jr.
Robert W. Clark, Jr.,
Director
Date: March 26, 1999 By: /s/
LaMonte E. Cooke
LaMonte E. Cooke, Director
Date: March 26, 1999 By: /s/ Gary
B. Fellows
Gary B. Fellows, Director
Date: March 26, 1999 By: /s/ Herman
E. Hill, Jr.
Herman E. Hill, Jr.,
Director
Date: March 26, 1999 By: /s/ Elmer E.
Horsey
Elmer E. Horsey, Director
Date: March 26, 1999 By: /s/ Arthur
E. Kendall
Arthur E. Kendall, Director
Date: March 26, 1999 By: /s/ P.
Patrick McCleary
P. Patrick McCleary,
Director
Date: March 26, 1999 By: /s/ Robert
A. Moore
Robert A. Moore, Director
Date: March 26, 1999 By: /s/ E. Roy
Owens
E. Roy Owens, President
and Chief Executive
Officer
Date: March 26, 1999 By: /s/ Alexander
P. Rasin, III
Alexander P. Rasin, III,
Director
Date: March 26, 1999 By: /s/ Stefan R.
Skipp
Stefan R. Skipp, Director
Date: March 26, 1999 By: /s/ Thomas
G. Stevenson
Thomas G. Stevenson,
Executive Vice
President
Date: March 26, 1999 By: /s/
Elizabeth A. Strong
Elizabeth A. Strong,
Director
Date: March 26, 1999 By: /s/ William
G. Wheatley
William G. Wheatley,
Director
March 22, 1999 To our Shareholders,
Customers, and Friends:
It is truly a pleasure, on behalf of our Board
of Directors and our entire staff, to present this
Annual Report to you
for the year of 1998. Since your holding company is
basically a shell type entity, most all of my
comments will relate to the subsidiary, which is, as
you know, Peoples Bank of Kent County, Maryland. I
believe in my letter in last years annual
report I made the statement that some exciting events
had taken place during the year. As a result of those
events, we can proudly say this past year has been
equally or even more gratifying. We have achieved
respectable results from those events, on which I will
expand further in this letter. We are delighted to
report, once again, our company produced record
earnings and growth this past year. I am convinced
that the efforts of researching and strategic planning
of our Board of Directors and staff are directly
responsible for the growth in these earnings and
bottom line numbers in our statement of condition.
I do not mean to overwhelm you with a raft of numbers
and
percentages since most of this information will be
included in a section of this report. But, I do want
to point out the fact that our total assets increased
to $128,590,825 at year-end from $118,322,331 at the
beginning of the year, representing an increase for
the year of 8.68%. We are also grateful for the
increase in earnings, which totaled $1,782,896 at year-
end, as compared to $1,754,615 for the same period
last year. We are indeed thankful for the opportunity
to deliver these kinds of figures to you in this
report. Certainly, a
great deal of the performance of these numbers is a
direct result of the manner in which our staff
delivered our financial
products and services to our customers.
You will notice our consolidated stockholders equity
(including accumulated other comprehensive income)
remains in a very healthy position, which is at
$16,281,345 as of December 31, 1998 as compared to
$15,854,505 one year
ago. In comparing these figures with the outstanding
common stock at year-end, we find that we have a book
value of
$18.97 per share. By comparison, if we look at the
book value at the end of 1993, we arrive at a total of
$13.59 per share (restated due to a 200% stock
dividend in 1997), which represents an annual growth
rate of 6.90% over the past five years.
In addition, if you factor in the cash dividends your
investment grows even larger. We are pleased that we
have been able to achieve these levels in your equity
position and you can trust that we will strive to keep
these ratios moving forward as we continue to manage
your investment in Peoples Bancorp and its subsidiary.
As a result of our marketing efforts and the
favorable trends in our economy, we were able to grow
our loan
portfolio by $2,601,428, or 3.04%. At year-end our
total loan portfolio tallied $88,184,338 as compared
to $85,582,910 a
year earlier. Since our loan portfolio is our
greatest incomeproducing asset, we are grateful for
the devoted efforts of our loan officers for making it
possible to give these results to you. In fact, our
loan portfolio is the largest that it has ever been in
the history of our company. It is most important to
emphasize that our loan losses in recent years have
been very
minimal, as you will see by reviewing the analysis of
loans and allowances for loan losses found in the
Notes to Financial Statements.
In my initial paragraph of this letter, I indicated
some
exciting events that have taken place this past year.
One of
them has been the opening of our Millington Branch in
temporary facilities until we can have our permanent
building
constructed. We are getting close to finalizing our
plans and we hope to break ground in the near future.
We are indeed
excited about this opportunity of growing your bank,
and we are very pleased with the warm reception that
we have
experienced in Millington up to this point. Our
branch staff has worked very hard in promoting our
services in that locale
and we are very appreciative of their efforts.
Early in the year, we initiated a new service
through Invest Financial Corporation that gives us
the ability to offer
security services, such as mutual funds, stocks,
bonds, and some insurance products. We are indeed
fortunate to have this service administered by one of
our senior vice-presidents, H. Lawrence Lyons. As
you know, most of us know Mr. Lyons as
Larry, who is a certified financial planner as well
as a licensed
securities representative. We are really excited
about this new service, so if you are interested in
a financial plan I encourage you to give him a call
for a private and confidential
assessment of your financial goals. Please help us
to advertise this new service by telling your family
members and friends.
You can be assured that the consultations will be
strictly
confidential. His office is at the main branch of
our company located next to the post office in
Chestertown, Maryland.
We would be remiss if we did not mention
something about the much publicized Y2K matters
regarding electronic
data equipment that may have problems functioning in
the proper manner because of the year 2000 date.
Please be assured
that we are on top of this potential problem, and to
date we have already tested many of our data
processing operations. Our
final testing should be completed by mid-year. Some
of our equipment that has been obsolete for quite
some time has been replaced with Y2K compliant
features. Our best advice to you, as business people
and individuals, is to be cautious with the
Y2K problem and seek advice whenever you may have
concerns about a transaction. The Federal Deposit
Insurance
Corporation has already audited our bank concerning
Y2K matters and has left some pointers on which we
will follow up
by midyear.
After many months of toiling with the addition
and renovations of our main office, we have
scheduled an Open
House Celebration on May 12, 1999 from the hours
of 3:00 P.M. to 8:00 P.M. Since this celebration
will follow our
Annual Stockholders Meeting, we hope you will take
time to visit with us and give us the opportunity to
offer you personal
tours before the general public begins to arrive.
We are very proud of the changes that we have made,
and we are most
anxious to personally show you around the premises.
Prizes will be awarded every hour with a grand prize
awarded at 8:00
P.M. You will also receive a personal gift to
commemorate the occasion on that day.
So now, as we go forward into the next millennium,
we are
confident that our bank will prosper and grow with
the community. We know that we could not even begin
to make these statements without the unfailing
support and dedication
of our entire staff and Board of Directors, and we
are most grateful for their loyalty and faithfulness.
On behalf of our entire
staff and Board of Directors, I want to especially
thank our stockholders for their loyal support and
confidence that they too are so willing to give as we
strive to offer the best service possible to our
customers and friends. We continue to look forward
with great anticipation as we move closer to the 21st
Century in striving to promote an even stronger bond
between
your holding company and your independent community
bank and the banking public, who deserve the best
because of their
faith in all of us.
Respectfully
submitted,
/s/ E. Roy
Owens
E. Roy Owens
Chairman and
President
EXHIBIT 13
ANNUAL REPORT TO
SHAREHOLDERS
FOR THE YEAR ENDED
DECEMBER 31, 1998
Peoples Bancorp, Inc. Financial Statements December
31, 1998 BUSINESS OF THE COMPANY
Peoples Bancorp, Inc. (the Company) was
incorporated as a
Maryland corporation on December 10, 1996. The
Company acquired Peoples Bank of Kent County,
Chestertown, Maryland (the Bank) on March 24,
1997. The Company was organized to become the
holding company for the Bank under the federal Bank
Holding Company Act of 1956, as amended.
Currently, the Bank is the Companys only subsidiary
and the Companys only business is its investment in
all of the issued and outstanding shares of the Banks
voting common stock.
Peoples Bancorp, Inc. (the Company) was incorporated
as a
Maryland corporation on December 10, 1996, to
become a one-bank holding company by acquiring all of
the capital stock of Peoples Bank of Kent County,
Chestertown,
Maryland (the Bank). The Bank was incorporated
under the laws of the State of Maryland in 1910. The
Bank is a full-
service commercial bank offering a variety of services
to satisfy the needs of consumers and small-to-medium-
sized
businesses and professional enterprises. The Bank
operates five branches located entirely in Kent
County, Maryland. The
Bank draws most of its customer deposits and conducts
the bulk of its lending business within its primary
service area
which encompasses all of Kent county, northern Queen
Annes County, and southern Cecil County, Maryland.
This
primary service area is located between the Chesapeake
Bay and the western boundary of Delaware.
The bank offers a full range of deposit
services that are typically available in most banks
and savings and loan associations, including checking
accounts, NOW accounts, savings accounts and other
time deposits of various types,
ranging from daily money market accounts to longer-
term certificates of deposit. In addition, the banks
offer certain retirement account services, such as
Individual Retirement Accounts. The banks also offer
a full range of short- to medium-term commercial and
personal loans. The banks originate fixed rate
mortgage loans and real estate construction
and acquisition loans. These loans generally have a
demand feature. Other bank services include cash
management
services, safe deposit boxes, travelers checks,
direct deposit of payroll and social security checks,
and automatic drafts
for various accounts.
MANAGEMENTS DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion of the Companys
financial condition and results of operations should
be read in
conjunction with the Companys financial statements and
related notes and other statistical information
included
elsewhere herein.
Overview
Consolidated income of the Company is derived
primarily from operation of the bank. The 1998 net
income was
$1,782,896 compared to $1,754,615 for 1997. This
produced a return on average equity of 11.11% and
return on
average assets of 1.46% for 1998, compared to returns
of 11.42% and 1.53%, respectively for 1997.
RESULTS OF OPERATIONS
The Company reported net income of $1,782,896, or
$2.06 per
share, for the year ended December 31, 1998,
which was an increase of $28,281, or 1.61%, over the
net income of $1,754,615, or $2.00 per share, for the
year ended
December 31, 1997. The Company was able to maintain
its net margin on earning assets but operating
expenses
increased as the result of opening a new branch in
Millington.
The Company also recorded $30,709 from writing off the
organization costs of forming the holding company.
This expense is net of $15,820 and is the result of
the early adoption
of a new accounting standard.
Net interest income increased $256,648, or 4.91%, to
$5,482,040 in 1998, from $5,225,392 in 1997. This
increase in net interest income was the result of an
increase in interest revenue of $419,459 while
interest expense
increased by $162,811. Net interest income increased
primarily because the balance of interest-earning
assets grew
faster than the balance of deposits and borrowed
funds. The yield on interest-earning assets decreased
to 8.12% in 1998,
from 8.16% in 1997, while the combined yield on
deposits and borrowed funds decreased to 3.96% from
3.98% for the
same period.
The provision for loan losses was $25,841 in
1998, a decrease of $63,317 from the $89,158 provision
in 1997.
The decreased provision is the result of a $7,111
decrease in net charge-offs for 1998, creating a net
charge-off of $418.
The allowance as a percentage of gross loans was 1.01%
for both years.
Noninterest income for 1998 was $592,458, compared to
noninterest income in 1997 of $529,990, an increase
of $62,468, or 11.79%. Service charges income has
increased with the increased volume in deposits.
During 1998, the
Company collected a full year of fees for automatic
teller machine usage from noncustomers, increasing
noninterest
income by $12,360.
Noninterest expense increased by $277,701, or 9.53%,
from
$2,913,384 in 1997 to $3,191,085 in 1998.
Increased personnel costs of $161,306 were due to
annual raises and additional staff for the new
Millington branch.
Other operating expenses have increased with the
growth in deposits and the opening of the Millington
branch.
BALANCE SHEETS
DECEMBER 31,
ASSETS
1998
1997
1996
Cash and due from banks
3006344
3976505
4912984
Federal funds sold
7244554
2604868
1163607
Securities available for sale
19980914
13873611
20496399
Securities held to maturity (market value of
$5,624,558,
$8,136,502, and $8,384,388)
5589660
8124223
8386520
Loans, less allowance for loan losses of
$901,139,
$875,716, and $794,087
88184338
85582910
77446272
Premises and equipment
3033957
2337662
1200497
Accrued interest receivable
912965
990132
1017688
Other real estate owned
0
345069
224500
Deferred income taxes
153439
179779
180433
Other assets
484654
307572
224610
128590825
118322331
115253510
The accompanying notes are an integral part of
these financial statements.
LIABILITIES AND STOCKHOLDERS EQUITY
1998
1997
1996
Deposits
Demand
14816250
13708219
11077187
Savings and NOW
30020180
27335924
29817791
Money market and Supernow
10156459
9455226
7444037
Other time
52417814
48062458
47552926
107410703
98561827
95891941
Securities sold under repurchase agreements
4338141
3390120
3881705
Accrued interest payable
411077
391360
392449
Other liabilities
149559
124519
76028
Dividend payable
0
0
365000
112309480
102467826
100607123
Stockholders equity
Common stock, par value $10 per share;
authorized
1,000,000 shares; issued and outstanding 858,208
shares in
1998, 875,573 shares in 1997, and 292,000 shares
in 1996
8582080
8755730
2920000
Surplus
2920866
2920000
2920000
Undivided profits
4767900
4167590
8822783
16270846
15843320
14662783
Accumulated other comprehensive income
10499
11185
- -16396
16281345
15854505
14646387
128590825
118322331
115253510
The accompanying notes are an integral part of
these financial statements.
STATEMENTS
OF INCOME
YEARS ENDED
DECEMBER 31,
1998
1997
1996
INTEREST
REVENUE
Loans,
including
fees
7824877
7304892
6746384
U. S. Treasury securities
806432
1259818
1200011
U. S. Government agency
securities
323880
234029
336942
State and municipal securities
0
6244
14275
Other securities
26232
798
4184
Federal funds sold
308291
64472
218388
Time deposits
0
0
6475
Total interest revenue
9289712
8870253
8526659
INTEREST EXPENSE
Certificates of deposit of
$100,000 or more
485258
492032
460577
Other deposits
3171557
3046539
3161183
Borrowed funds
150857
106290
56320
Total interest expense
3807672
3644861
3678080
Net interest income
5482040
5225392
4848579
PROVISION FOR LOAN LOSSES
25841
89158
20347
Net interest income after provision for
loan losses 5456199
5136234
4828232
OTHER OPERATING REVENUE
Service charges on deposit accounts
467497
427179
419952
Securities gains (losses)
0
1845
- -3960
Other noninterest revenue
124961
100966
69975
Total other revenue
592458
529990
485967
OTHER EXPENSES
Salaries
1624243
1512289
1419196
Employee benefits
406381
357029
365981
Occupancy
147218
131520
143638
Furniture and equipment
135221
93390
90460
Other operating
878022
819156
870871
Total other expenses
3191085
2913384
2890146
Income before income taxes and cumulative effect of
a change in
accounting method
2857572
2752840
2424053
INCOME TAXES
1043967
998225
897246
Income before cumulative effect of a change in
accounting method 1813605
1754615
1526807
Cumulative effect of a change in the method of
accounting for
organization costs, net of income taxes of $15,820
- -30709
0
0
NET INCOME
1782896
1754615
1526807
Earnings per common share
Income before cumulative effect of a change in
accounting method
2.09
2.00
1.74
Cumulative effect of a change in the method of
accounting for
organization costs, net of income taxes
- -0.03
0
0
EARNINGS PER COMMON SHARE
2.06
2.00
1.74
The accompanying notes are an integral part of these
financial statements.
STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY
THREE YEARS ENDED DECEMBER 31, 1998
Accumulated
other
Common stock
Undivided
comprehensive
Comprehensive
Shares
Par value
Surplus
profits
income
income
Balance,
December 31,
1995 292000
2920000
2920000
7996776
67257
Net income
0
0
0
1526807
0
1526807
Unrealized gain (loss)
on investment
securities available for
sale net
of income taxes
0
0
0
0
- -83653
- -83653
Cash dividend, $.80 per
share
0
0
0
- -700800
0
0
Balance, December 31,
1996
292000
2920000
2920000
8822783
- -16396
1443154
Net income
0
0
0
1754615
0
1754615
Unrealized gain (loss)
on investment
securities available for
sale net
of income taxes
0
0
0
0
27581
27581
Stock split in
the form of
a 200% stock
dividend
584000
5840000
0
- -5840000
0
0
Repurchase of
stock
- -427
- -4270
0
- -9168
0
0
Cash dividend,
$.64 per share 0
0
0
- -560640
0
0
Balance, December
31, 1997
875573
8755730
2920000
4167590
11185
1782196
Net income
0
0
0
1782896
0
1782896
Unrealized gain (loss)
on investment
securities available for
sale net
of income taxes
0
0
0
0
- -686
- -686
Sale of stock
40
400
866
0
0
0
Repurchase of
stock
- -17405
- -174050
0
- -375693
0
0
Cash dividend,
$.93 per share 0
0
0
- -806893
0
0
Balance, December
31, 1998 858208
8582080
2920866
4767900
10499
1782210
The accompanying notes are an integral part of
these financial statements.
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31,
1998
1997
1996
CASH FLOWS FROM OPERATING
ACTIVITIES
Interest received
9352056
8879088
8478215
Fees and commissions
received
593310
555222
490931
Interest paid
- -3787955
- -3645950
- -3688157
Cash paid to suppliers and
employees
- -3107187
- -2438801
- -2665561
Income taxes paid
- -1154452
- -1395064
- -1002462
1895772
1954495
1612966
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from maturities and calls of investment
securities
Held to maturity
2532522
260477
10404972
Available for sale
8000000
7002695
298000
Purchase of investment securities
Held to maturity
0
0
- -7018266
Available for sale
- -14126651
- -342900
- -7501012
Loans made, net of principal collected
- -2592176
- -8195461
- -3750885
Purchases of premises, equipment, and software
- -807552
- -1293383
- -135536
Proceeds from sale of other real estate owned and
equipment
326083
92704
219499
Purchases of other real estate owned
0
- -213068
0
- -6667774
- -2688936
- -7483228
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in
Time deposits
4355356
509532
1244909
Other deposits
3491641
2160354
2369829
Securities sold under repurchase agreements
1949900
- -491585
1602889
Dividends paid
- -806893
- -925640
- -671600
Proceeds from stock issued
1266
0
0
Repurchase of stock
- -549743
- -13438
0
8441527
1239223
4546027
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS
3669525
504782
- -1324235
Cash and cash equivalents at beginning of year
6581373
6076591
7400826
Cash and cash equivalents at end of year
10250898
6581373
6076591
The accompanying notes are an integral part of
these financial statements.
STATEMENTS OF CASH FLOWS, CONTINUED
YEARS ENDED DECEMBER 31,
1998
1997
1996
RECONCILIATION OF NET INCOME TO NET CASH
PROVIDED BY
OPERATING ACTIVITIES
Net income
1782896
1754615
1526807
ADJUSTMENTS TO RECONCILE NET INCOME TO NET
CASH PROVIDED BY
OPERATING ACTIVITIES
Loss (gain) on sale of investment
securities
0
- -1845
3960
Amortization of premiums and accretion of
discounts
20270
11614
12167
Provision for loan losses
25841
89158
20347
Depreciation and software amortization
162642
112454
113066
Loss (gain) and writedowns on other real
estate
18986
- -204
119087
Deferred income taxes
26772
- -16721
- -26339
Decrease (increase) in
Accrued interest receivable
77167
27556
- -94494
Other assets
- -76363
- -9732
- -15300
Increase (decrease) in
Deferred origination fees and costs, net
- -35093
- -30335
33883
Income taxes payable, net of refunds
- -153077
- -15118
- -78877
Accrued interest payable
19717
- -1089
- -10077
Other liabilities
26014
34142
8736
1895772
1954495
1612966
The accompanying notes are an integral part of these
financial statements.
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounting and reporting policies reflected
in the accompanying financial statements conform to
generally accepted accounting principles and to
general practices within the banking industry.
Peoples Bancorp, Inc. is a one-bank holding company.
Its
subsidiary, Peoples Bank of Kent County, Maryland, is
a
financial institution operating primarily in Kent and
Queen Annes Counties. The Bank offers deposit
services and loans to individuals, small businesses,
associations, and government
entities. Other services include direct deposit of
payroll and social
security checks, automatic drafts from accounts,
automated teller machine services, cash management
services, safe deposit
boxes, money orders, and travelers cheques. The Bank
also offers credit card services and discount
brokerage services through
a correspondent.
The preparation of financial statements in conformity
with
generally accepted accounting principles requires
management
to make estimates and assumptions that affect the
reported amounts of assets and liabilities and
disclosure of contingent assets
and liabilities at the date of the financial
statements. These estimates and assumptions may
affect the reported amounts of revenues and expenses
during the reporting period. Actual results could
differ from these estimates.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the
accounts of the Company and the Bank. Intercompany
balances and transactions have been eliminated.
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
CASH EQUIVALENTS
For purposes of reporting cash flows, cash and cash
equivalents include cash on hand, amounts due form
banks,
and federal funds sold. Generally, federal funds are
purchased and sold for one-day periods.
INVESTMENT SECURITIES
As securities are purchased, management determines if
the
securities should be classified as held to maturity
or available for sale. Securities which management
has the intent and ability to hold to maturity are
recorded at amortized cost which is
cost adjusted for amortization of premiums and
accretion of discounts to maturity, or over the
expected life of mortgagebacked
securities. Securities which may be sold before
maturity are classified as available for sale and
carried at fair value with unrealized gains and losses
included in stockholders equity on an after tax basis.
LOANS AND ALLOWANCE FOR LOAN LOSSES
Loans are stated at face value, plus deferred
origination
costs, less deferred origination fees and the
allowance for loan losses.
Interest on loans is accrued based on the principal
amounts
outstanding. Origination fees and costs are recorded
as
income over the estimated terms of the loans. The
accrual of interest is discontinued when any
portion of the principal or interest is ninety days
past due and collateral is insufficient to discharge
the debt
in full. When the accrual of interest is
discontinued, loans are reviewed for impairment.
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
LOANS AND ALLOWANCE FOR LOAN LOSSES (CONTINUED)
An allowance for loan losses is maintained at a
level deemed appropriate by management to provide
adequately for known and inherent risks in the loan
portfolio. The allowance is based upon a continuing
review of past loan loss experience, current economic
conditions which may affect the borrowers ability to
pay, and the underlying collateral value of the
loans. If the current economy or real estate market
were to
suffer a severe downturn, the estimate for
uncollectible accounts would need to be increased.
Loans which
are deemed to be uncollectible are charged off and
deducted from the allowance. The allowance for loan
losses is increased by the current year provision for
loan losses and by recoveries on loans previously
charged off.
PREMISES AND EQUIPMENT
Premises and equipment are recorded at cost less
accumulated depreciation. Depreciation is computed
using the straight-line method over estimated useful
lives of three to forty years.
ORGANIZATION COSTS
In 1998, the Company adopted Statement of
Position 98-5 of the Accounting Standards Executive
Committee of the
American Institute of Certified Public Accountants,
Reporting on the Costs of Start-up Activities, which
requires that start-
up costs and organization costs be expensed as
incurred. During 1998, the Company wrote off
organization costs totaling
$46,529, all of which were incurred prior to 1998.
Prior to 1998, organization costs were amortized over
five years.
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
INCOME TAXES
The provision for income taxes includes taxes
payable for the current year and deferred income
taxes.
Deferred income taxes are provided for the temporary
differences between financial and taxable income.
The Bank recognizes deferred tax assets and
liabilities for
the expected future tax consequences of
events that have been included in the financial
statements or tax returns. Deferred tax assets and
liabilities
are determined based on the difference between the
financial statement and tax bases of assets and
liabilities
using enacted tax rates in effect for the year in
which the differences are expected to reverse.
OTHER REAL ESTATE OWNED
Real estate obtained through foreclosure, or in the
process
of foreclosure, is recorded at the lower of
cost or net realizable value on the date acquired.
Losses incurred at the time of acquisition of the
property
are charged to the allowance for loan losses.
Subsequent reductions in the estimated carrying value
of the
property and other expenses of owning the property are
included in other operating expense.
COMPREHENSIVE INCOME
The Bank adopted Statement No. 130 of the
Financial Accounting Standards Board, Reporting
Comprehensive
Income, in 1998. Comprehensive income includes net
income and the unrealized gain on investment
securities available
for sale. The statements of changes in stockholders
equity have been restated to include comprehensive
income for the
years ended December 31, 1997 and 1996.
2. CASH AND DUE FROM BANKS
The Bank normally carries balances with other banks
that
exceed the federally insured limit. The
average balances carried in excess of the limit,
including unsecured federal funds sold to the same
banks,
were $6,264,394 for 1998, $2,556,200 for 1997, and
$4,003,100 for 1996.
Banks are required to carry noninterest-bearing
cash reserves at specified percentages of deposit
balances.
The Banks normal amount of cash on hand and on deposit
with other banks is sufficient to satisfy the reserve
requirements.
NOTES TO FINANCIAL STATEMENTS
3. INVESTMENT SECURITIES
Investment securities are summarized
as follows:
Amortized
Unrealized
Unrealized
Market
DECEMBER 31, 1998
cost
gains
losses
value
Available for sale
U. S. Treasury
7542235
34018
0
7576253
U. S. Government
agency
12066821
25248
42208
12049861
Federal Home Loan
Bank stock
354800
0
0
354800
19963856
59266
42208
19980914
Held to maturity
U. S. Treasury
4000135
40178
0
4040313
U. S. Government
agency
1501793
0
7448
1494345
Mortgage-backed
securities
87732
2168
0
89900
5589660
42346
7448
5624558
December 31,
1997
Available for
sale
U. S. Treasury
11511450
23675
10747
11524378
U. S. Government
agency
2001083
5250
0
2006333
Federal Home Loan
Bank stock
342900
0
0
342900
13855433
28925
10747
13873611
Held to maturity
U. S. Treasury
6000508
40743
0
6041251
U. S. Government
agency
2003167
0
32156
1971011
Mortgage-backed
securities
120548
3692
0
124240
8124223
44435
32156
8136502
December 31,
1996
Available for
sale
U. S.
Treasury
18520423
22485
56338
18486570
U. S.
Government
agency
2002756
7073
0
2009829
20523179
29558
56338
20496399
Held to
maturity
U. S.
Treasury
6000630
34157
6657
6028130
U. S.
Government
agency
2004543
0
44762
1959781
State and municipal
202600
11489
0
214089
Mortgage-backed securities
178747
3641
0
182388
8386520
49287
51419
8384388
NOTES TO FINANCIAL STATEMENTS
3. INVESTMENT SECURITIES (CONTINUED)
Contractual maturities and the amount of pledged
securities are shown below. Actual maturities will
differ from
contractual maturities because issuers may have the
right to call or prepay obligations with or without
call or prepayment penalties.
Available for sale
Held to
maturity
Amortized
Market
Amortized
Market
DECEMBER 31,
1998
cost
value
cost
value
Maturing
Within one
year 5503818
5525001
4000135
4040313
Over one to
five years
14105238
14101113
1501793
1494345
Mortgage-
backed
0
0
87732
89900
Federal Home Loan
Bank stock
354800
354800
0
0
19963856
0
19980914
5589660
0
5624558
Pledged securities
4990118
5013830
4773410
4798827
December 31,
1997
Within one year
8002670
8005084
2499799
2503825
Over one to five
years
5509863
5525627
5503876
5508438
Mortgage-backed
0
0
120548
124239
Federal Home Loan
Bank stock
342900
342900
0
0
138554
33
0
138736
11
812422
3
0
813650
2
Pledge
d
securi
ties
651078
3
652406
5
450070
8
453570
0
December 31,
1996
Maturing
Within one
year 7004429
7002501
0
0
Over one to
five years
13518750
13493898
8107773
8099740
Over five
years
0
0
100000
102260
Mortgage-
backed
0
0
178747
182388
20523179
20496399
8386520
8384388
Pledged securities
8522692
8497194
1503131
1505709
Investments are pledged to secure the deposits of
federal and local governments and as collateral on
repurchase
agreements.
NOTES TO FINANCIAL STATEMENTS
4. LOANS AND ALLOWANCE FOR LOAN LOSSES
Major classifications of loans are as follows:
1998
1997
1996
Commercial
13989837
12789753
11874563
Real estate
Residential
33348619
33503212
30115234
Commercial
34869397
33890358
31034261
Construction
2435864
1772198
1462471
Consumer
4645552
4741988
4023049
89289269
86697509
78509578
Deferred fees, net of
deferred costs 203792
238883
269219
Allowance for loan
losses
901139
875716
794087
1104931
1114599
1063306
88184338
85582910
77446272
Final maturities of the loan portfolio are
as follows:
Within ninety days
32701883
35057713
35477299
Over ninety days to one year
19670478
21497053
17212075
Over one year to five years
36916908
29634102
25317822
Over five years
0
508641
502382
89289269
86697509
78509578
Transactions in the allowance for loan
losses were as follows:
Beginning of year
875716
794087
761457
Provision charged to operations
25841
89158
20347
Recoveries
1851
674
36727
903408
883919
818531
Loans charged off
2269
8203
24444
End of year
901139
875716
794087
Management has identified no significant impaired
loans.
NOTES TO FINANCIAL STATEMENTS
4. LOANS AND ALLOWANCE FOR LOAN LOSSES (CONTINUED)
Loans on which the accrual of interest has been
discontinued or reduced, and the interest that would
have been
accrued at December 31, are as follows:
1998
1997
1996
Loan balances
486235
556876
174630
Interest not accrued
45822
36388
1495
Amounts past due 90 days or more at December 31,
including nonaccruing loans, are as follows:
Demand and time
15030
0
0
Mortgage
1096517
829827
649888
Installment
2585
12356
13784
1114132
842183
663672
Outstanding loan commitments, unused lines of
credit, and
letters of credit as of December 31, are as follows:
Check loan lines of credit
350035
302355
343971
Mortgage lines of credit
5217816
4507300
3282667
Commercial lines of credit
8537798
7440628
7464522
Undisbursed construction loan commitments
969393
973741
1590394
15075042
13224024
12681554
Standby letters of credit
846861
887134
914519
Loan commitments and lines of credit are
agreements to lend to a customer as long as there is
no violation of any
condition to the contract. Loan commitments generally
have interest rates fixed at current market rates,
fixed expiration
dates, and may require payment of a fee. Lines of
credit generally have variable interest rates. Such
lines do not represent future cash requirements
because it is unlikely that all customers will draw
upon their lines in full at any time.
Letters of credit are commitments issued to guarantee
the
performance of a customer to a third party.
Loan commitments, lines of credit, and letters of
credit are made on the same terms, including
collateral, as
outstanding loans. The Banks exposure to credit loss
in the event of nonperformance by the borrower is
represented by
the contract amount of the commitment. Management is
not aware of any accounting loss the Bank will incur
by the
funding of these commitments.
The Bank lends to customers located primarily in and
near
Kent County, Maryland. Although the loan portfolio is
diversified, its performance will be influenced by the
economy of the region.
NOTES TO FINANCIAL STATEMENTS
5. PREMISES AND EQUIPMENT
A summary of premises and equipment and related
depreciation expense is as follows:
1998
1997
1996
Land
1056945
745976
578177
Premises
1217687
1097604
1090066
Furniture and equipment
1074747
992649
939463
Construction in progress
1326531
1032129
74647
4675910
3868358
2682353
Accumulated depreciation
1641953
1530696
1481856
Net premises and equipment
3033957
2337662
1200497
Depreciation expense
116113
99575
111231
Outstanding commitments related to the main
office expansion and remodeling program totaled
$39,184 and
$136,882 as of December 31, 1998 and 1997,
respectively.
6. OTHER TIME DEPOSITS
Included in other time deposits are certificates
of deposit in amounts of $100,000 or more. These
certificates and
their remaining maturities at December 31, are
as follows:
1998
1997
1996
Three months or less
1513812
1360729
890406
Over three through twelve months
1784086
1698809
1759855
Over twelve months
5492045
5058849
4269570
8789943
8118387
6919831
7. SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
The Bank has repurchase agreements that are
collateralized by government agency securities owned
by the Bank.
The following applied to these repurchase agreements:
1998
1997
1996
Maximum amount outstanding
5975986
4069611
3881705
Average amount outstanding
3733386
3399467
2784391
Average rate paid during the year
4.04%
4.21%
3.64%
Investment securities underlying agreements at year-
end
Carrying value
9500000
8026619
8002510
Estimated fair value
9546847
8051877
8008759
NOTES TO FINANCIAL STATEMENTS
8. INCOME TAXES
The components of income tax expense, including
taxes related to the change in accounting method for
origination
costs, are as follows:
1998
1997
1996
Current
Federal
873060
896997
796143
State
128315
117949
127442
1001375
1014946
923585
Deferred
26772
- -16721
- -26339
1028147
998225
897246
The components of the deferred income tax expense are
as
follows:
Provision for loan losses
- -9980
- -34432
- -7858
Other real estate loss provision
42307
7644
- -35263
Prepaid pension costs
16105
21226
21441
Depreciation
10049
2757
538
Discount accretion
- -5979
8218
1755
Nonaccrual interest
- -3643
- -13476
231
Deferred compensation
- -9989
- -8658
- -7183
Organization costs
- -12098
0
0
26772
- -16721
- -26339
The components of the net deferred tax asset are
as follows:
Deferred tax assets
Allowance for loan losses
217363
207383
172951
Other real estate loss allowance
0
42307
49951
Deferred compensation
25830
15841
7183
Nonaccrual interest
17696
14053
577
Organization costs
12098
0
0
Unrealized loss on investment securities
available for sale
0
0
10383
272987
279584
241045
Deferred tax liabilities
Depreciation
47658
37609
34852
Discount accretion
10017
15996
7778
Prepaid pension costs
55313
39208
17982
Unrealized gain on investment securities
available for sale
6560
6992
0
119548
99805
60612
Net deferred tax asset
153439
179779
180433
NOTES TO FINANCIAL STATEMENTS
8. INCOME TAXES (CONTINUED)
A reconciliation of the provisions for income
taxes from
statutory federal rates to effective rates
follows:
1998
1997
1996
Tax at statutory federal income tax rate
34
%
34
%
34
%
Tax effect of
Tax-exempt income
- -0.5
- -0.6
- -0.5
State income taxes, net of federal benefit
3
2.8
3.3
Other, net
0.1
0.1
0.2
36.6
%
36.3
%
37
%
9. PROFIT SHARING PLAN
The Bank has a profit sharing plan qualifying
under section 401(k) of the Internal Revenue Code
that covers all
employees with one year of service who have attained
age 21. The contributions to the plan for 1998,
1997, and 1996,
were $31,184, $28,326, and $42,153, respectively.
NOTES TO FINANCIAL STATEMENTS
10. PENSION
The Bank has a defined benefit pension plan
covering
substantially all of the employees. Benefits are
based on years of service and the employees
highest average rate of earnings for five
consecutive years during the final ten full years
before retirement. The Banks funding policy is
to contribute annually the maximum amount that
can be deducted for income tax purposes,
determined using the projected unit credit cost
method. Assets of the plan are held in deposit
accounts at the Bank.
The following table sets forth the financial
status of the plan at December 31:
1998
1997
1996
Change in plan assets
Fair value of plan assets at beginning of year
999343
870686
765988
Actual return on plan assets
66559
63883
55355
Employer contribution
89208
92201
85140
Benefits paid
- -65444
- -27427
- -35797
Fair value of plan at end of year
1089666
999343
870686
Change in benefit obligation
Benefit obligation at beginning of year
1046430
908283
789748
Service cost
49741
42216
40508
Interest cost
75824
67007
55598
Benefits paid
- -65444
- -27427
- -35797
Actuarial loss
21078
56351
58226
Benefit obligation at end of year
1127629
1046430
908283
Funded status
- -37963
- -47087
- -37597
Unamortized prior service cost
- -17903
- -19281
- -20658
Unrecognized net loss
242996
217287
159702
Unamortized net obligation from
transition -43907
- -49396
- -54885
Prepaid pension expense included in
other assets 143223
101523
46562
NOTES TO FINANCIAL STATEMENTS
10. PENSION (CONTINUED)
Net pension expense includes the following
components:
1998
1997
1996
Service cost
49741
42216
40508
Interest cost
75824
67007
55598
Expected return on assets
- -76089
- -68112
- -59619
Amortization of transition asset
- -5489
- -5489
- -5489
Amortization of prior service cost
- -1377
- -1377
- -1377
Amortization of loss
4898
2995
0
Net pension expense
47508
37240
29621
Assumptions used in the accounting for net
pension expense were:
Discount rates
7.5%
7.5%
7.5%
Rate of increase in
compensation level 5.0%
5.0%
5.0%
Long-term rate of return
on assets 7.5%
7.5%
7.5%
NOTES TO FINANCIAL
STATEMENTS
11. OTHER OPERATING EXPENSES
Other operating expenses consist of
the following:
1998
1997
1996
Advertising
34331
26443
25517
Business Manager
22377
30104
21547
Correspondent bank fees
36434
37802
34562
Data processing
204200
194460
188942
Directors fees
72556
59341
58713
FDIC assessment
11602
11364
2000
Insurance
22886
28269
27716
Office supplies
42844
50751
54040
Other real estate
holding costs 5887
0
10644
Writedown of other
real estate 18986
- -12294
121711
Postage
69796
68509
62005
Printing and
stationery
56414
39963
31188
Professional fees
75190
83701
42410
Telephone
32842
30830
27160
Other
171677
169913
162716
878022
819156
870871
NOTES TO FINANCIAL
STATEMENTS
12. EARNINGS PER
COMMON SHARE
Earnings per common share are determined by
dividing net income by the weighted average
number of shares
outstanding giving retroactive effect to stock
dividends.
13. RELATED PARTY TRANSACTIONS
In the normal course of banking business, loans
are made to senior officers and directors of the
Bank as well as to companies and individuals
affiliated with those officers and directors. The
terms of these transactions are substantially the
same as the terms provided to other borrowers
entering into similar loan transactions. In the
opinion of management,
these loans are consistent with sound banking
practices, are within regulatory lending limitations,
and do not involve more than normal credit risk. The
total amount of such loans outstanding at December 31,
1998, 1997, and 1996 was $3,605,424, $5,582,424, and
$6,464,206, respectively.
14. LINES OF CREDIT
The Bank has unused lines of credit of $5,000,000
in unsecured overnight federal funds and $1,000,000 in
secured
repurchase agreements at December 31, 1998. In
addition, the Bank has an unused line of credit of
$15,000,000 from the
Federal Home Loan Bank of Atlanta secured by
residential mortgages.
15. YEAR 2000
Management has determined the scope of the Year
2000 issue as it relates to the operation of the Bank.
The
internal systems have been tested and those found not
to be compliant will be compliant before the end of
1999. The
Company incurred minimal incremental costs during
1998 related to Year 2000. Management has budgeted
$20,000 in
1999 for the Year 2000 issue.
Management has contacted vendors and large
customers to assess their preparedness and expects no
significant impact
on the operations of the Bank.
NOTES TO FINANCIAL STATEMENTS
16. CAPITAL STANDARDS
The Federal Reserve Board and the Federal
Deposit Insurance Corporation have adopted risk-
based capital
standards for banking organizations. These
standards require ratios of capital to assets for
minimum capital adequacy
and to be classified as well capitalized under
prompt corrective action provisions. As of December
31, 1998, 1997, and
1996, the capital ratios and minimum capital
requirements of the Bank are as follows:
Minimum
To be well
Actual
capital
adequacy
capitalized
(in
thousands)
Amount
Ratio
Amount
Ratio
Amount
Ratio
December
31, 1998
Total capital
(to risk-
weighted assets)
16739
17.5%
7642
8.0%
9552
10.%
Tier 1 capital
(to risk-
weighted assets)
15838
16.6%
3821
4.0%
5731
6.0%
Tier 1
capital
(to fourth
quarter
average
assets)
15838
12.4%
5102
4.0%
6377
5.0%
December
31, 1997
Total capital
(to risk-
weighted assets)
16358
18.5%
7075
8.0%
8844
10.%
Tier 1 capital
(to risk-
weighted assets)
15482
17.5%
3537
4.0%
5306
6.0%
Tier 1
capital
(to
fourth
quarter
average
assets)
15482
13.4%
4630
4.0%
5787
5.0%
December 31, 1996
Total capital
(to risk-
weighted assets)
15475
22.5%
5514
8.0%
6892
10.0%
Tier 1 capital
(to risk-
weighted assets)
14663
21.3%
2757
4.0%
4135
6.0%
Tier 1 capital
(to fourth
quarter
average assets)
14663
12.6%
4644
4.0%
5806
5.0%
Tier 1 capital consists of capital stock,
surplus, and undivided profits. Total capital
includes a limited amount of the allowance for
credit losses. In calculating risk-weighted
assets, specified risk percentages are applied to
each category of asset and off-balance sheet
items.
Failure to meet the capital requirements
could affect the Banks ability to pay dividends
and accept deposits and
may significantly affect the operations of the Bank.
NOTES TO FINANCIAL STATEMENTS
17. FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair values of the Banks financial
instruments are summarized below. The fair values of
a
significant portion of these financial instruments are
estimates derived using present value techniques
prescribed by the
FASB and may not be indicative of the net realizable
or liquidation values. Also, the calculation of
estimated fair values
is based on market conditions at a specific point in
time and may not reflect current or future fair
values.
December 31,
1998
1997
1996
Carrying
Fair
Carrying
Fair
Carrying
Fair
amount
value
amount
value
amount
value
Financial assets
Cash and due from
banks
3006344
3006344
3976505
3976505
4912984
4912984
Federal funds
sold
7244554
7244554
2604868
2604868
1163607
1163607
Investment
securities (total)
25570574
25605472
21997834
22010113
28882919
28880787
Loans, net
88184338
88303288
85582910
85401762
77446272
77456683
Accrued interest
receivable
912965
912965
990132
990132
1017688
1017688
Financial
liabilities
Noninterest-
bearing
deposits
14816250
14816250
13708219
13708219
11077187
11077187
Interest-bearing
deposits and
securities sold
under
repurchase
agreements
96932594
97811411
88243728
88859054
88696459
89540598
Dividend payable
0
0
0
0
365000
365000
Accrued interest payable
411077
411077
391360
391360
392449
392449
The fair value of interest-bearing deposits with
other
financial institutions is estimated based on quoted
interest rates for certificates of deposit with
similar remaining terms.
The fair values of securities are estimated
using a matrix that considers yield to maturity,
credit quality, and marketability.
The fair value of fixed-rate loans is estimated to
be the
present value of scheduled payments discounted using
interest rates currently in effect for loans of the
same class and term. The fair value of variable-rate
loans, including
loans with a demand feature, is estimated to equal the
carrying amount. The valuation of loans is adjusted
for possible
loan losses.
The fair value of interest-bearing checking, savings,
and
money market deposit accounts is equal to the carrying
amount. The fair value of fixed-maturity time
deposits is estimated based on interest rates
currently offered for deposits of similar remaining
maturities.
It is not practicable to estimate the fair value
of outstanding loan commitments, unused lines of
credit, and letters of
credit.
NOTES TO FINANCIAL STATEMENTS
18. PARENT COMPANY FINANCIAL INFORMATION
The balance sheets and statements of income and
cash flows for Peoples Bancorp, Inc. (Parent Only)
follow:
December 31,
Balance Sheets
1998
1997
Assets
Cash
404939
303860
Investment in subsidiary
15838226
15492609
Organization costs
0
46529
Deferred income taxes
12098
Other assets
26082
12707
Total assets
16281345
15855705
Liabilities and Stockholders
Equity
Other liabilities
0
1200
Stockholders equity
Common stock, par value $10.00
per share;
authorized 1,000,000 shares;
issued and
outstanding 858,208 shares in 1998 and
875,573 shares
in 1997
8582080
8755730
Additional paid-in capital
2920866
2920000
Retained earnings
4767900
4167590
Accumulated other comprehensive income
10499
11185
Total stockholders equity
16281345
15854505
Total liabilities and stockholders
equity 16281345
15855705
Years Ended December 31,
Statemen
ts of
Income
1998
1997
Interest
revenue
18456
10432
Dividends from subsidiary
1486373
960640
Equity in undistributed income
of subsidiary
346303
818641
1851132
1789713
Expenses
Legal fees
33080
34917
Amortization of organization
costs
46529
8211
Other
14100
4677
93709
47805
Income before income taxes
1757423
1741908
Income tax reduction
25473
12707
Net income
1782896
1754615
NOTES TO FINANCIAL STATEMENTS
18. PARENT COMPANY FINANCIAL INFORMATION
(Continued)
Years Ended December 31,
Statements of Cash Flows
1998
1997
Cash flows from operating activities
Interest and dividends received
1504829
971072
Cash paid for operating expenses
- -48380
- -38394
1456449
932678
Cash flows from investing activities
Cash paid for organization costs
0
- -54740
Cash flows from financing activities
Dividends paid
- -806893
- -560640
Repurchase of stock, net of
stock sold
- -548477
- -13438
- -1355370
- -574078
Net increase in cash
101079
303860
Cash at beginning of year
303860
0
Cash at end of year
404939
303860
Reconciliation of net income
to net cash
provided by operating
activities
Net income
1782896
1754615
Adjustments to reconcile net income to net cash
used in operating activities
Undistributed net income of subsidiary
- -346303
- -818641
Amortization
46529
8211
Deferred income taxes
- -12098
0
Increase (decrease) in
Accrued expenses
- -1200
1200
Taxes payable, net of refunds
- -13375
- -12707
1456449
932678
THE FOLLOWING COMMENT IS REQUIRED BY THE FEDERAL
DEPOSIT INSURANCE CORPORATION.
This statement has not been reviewed or confirmed for
accuracy or relevance by the Federal Deposit Insurance
Corporation.
NOTES TO FINANCIAL STATEMENTS
19. QUARTERLY RESULTS OF OPERATIONS
(UNAUDITED)
(in thousands)
Three Months Ended
except per share information
December 31,
September 30,
June 30,
March 30,
1998
Interest revenue
$2,402
$2,323
$2,295
$2,270
Interest expense
980
971
941
916
Net interest income
1422
1352
1354
1354
Provision for loan losses
- -23
14
25
10
Net income
405
452
471
455
Comprehe
nsive
income
347
509
475
452
Earnings
per
share
0.48
0.52
0.54
0.52
1997
Interest
revenue
$2,324
$2,223
$2,143
$2,180
Interest
expense
918
928
905
894
Net interest income
1406
1295
1238
1286
Provision for loan losses
35
26
5
23
Net income
465
422
450
418
Comprehensive income
468
449
507
358
Earnings per share
0.53
0.48
0.51
0.48
REPORT OF INDEPENDENT
AUDITORS
THE BOARD OF DIRECTORS AND
STOCKHOLDERS PEOPLES
BANCORP, INC.
CHESTERTOWN, MARYLAND
We have audited the accompanying consolidated
balance sheets of Peoples Bancorp, Inc. as of December
31,
1998, 1997, and 1996, and the related consolidated
statements of income, changes in stockholders equity,
and cash flows
for the years then ended. These consolidated
financial statements are the responsibility of the
Companys management.
Our responsibility is to express an opinion on these
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 consolidated 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,
1997, and 1996, and the results of its operations
and its cash flows for the years then ended, in
conformity with generally accepted accounting
principles.
/s/
Rowles & Company, LLP
Salisbury Maryland
January 22, 1999
EXHIBIT 21
SUBSIDIARIES OF THE COMPANY
Peoples Bank of Kent County, Maryland, a state
bank organized under the laws of the State of
Maryland.
FINANCIAL
DATA SCHEDULE
Item
December 31
Number
1998
9-03(1)
Cash and due
from banks
3006344
9-03(2)
Interest-
bearing
deposits 0
9-03(3)
Federal funds sold
7244554
9-03(4)
Trading account assets
9-03(6)
Investment and mortgage-
backed securities
held for sale
19980914
9-03(6)
Investment and mortgage-
backed securities
held to maturity carrying
value
5589660
9-03(6)
Investment and mortgage-
backed securities
held to maturity market
value
5624558
9-03(7)
Loans
89085477
9-03(7)(2)
Allowance for losses
901139
9-03(11)
Total assets
128590825
9-03(12)
Deposits
107410703
9-03(13)
Short-term borrowings
4338141
9-03(15)
Other liabilities
560636
9-03(16)
Long-term debt
9-03(19)
Preferred stock-mandatory
redemption
9-03(20)
Preferred stock - no mandatory
redemption
9-03(21)
Common stocks
8582080
9-03(22)
Other stockholders equity
7699265
9-03(23)
Total liabilities and
stockholders equity 128590825
FINANCIAL DATA SCHEDULE
(continued)
Guide
December 31
Number
1998
9-04(1)
Interest and fees on
loans
7824877
9-04(2)
Interest and dividends on
investments 1156544
9-04-(4)
Other interest income
308291
9-04-(5)
Total interest income
9289712
9-04-(6)
Interest on deposits
3656815
9-04-(9)
Total interest expense
3807672
9-04-(10)
Net interest income
5482040
9-04-(11)
Provision for loan losses
25841
9-04-(13)(h)
Investment securities
gains/(losses) 0
9-04-(14)
Other expenses
3191085
9-04(15)
Income/loss before income
tax
2857572
9-04(17)
Income/loss before extraordinary
items 1813605
9-04(18)
Extraordinary items, less tax
9-04(19)
Cumulative change in accounting
principles -30709
9-04(20)
Net income or loss
1782896
9-04(21)
Earnings per share-primary
2.06
9-04(21)
Earnings per share - full diluted
2.06
I.B.5
Net yield on interest earning
assets
4.8
%
III.C.1(a)
Loans on nonaccrual
0
III.C.1(b)
Accruing loans past due 90 days
or more 627897
III.C.1(c)
Troubled debt restructuring
0
III.C.2
Potential problem loans
0
IV.A.1
Allowance for loan loss -
beginning of period 875716
IV.A.2
Total chargeoffs
2269
IV.A.3
Total recoveries
1851
IV.A.4
Allowance for loan loss - end of
period
901139
IV.B.1
Loan loss allowance allocated to
domestic loans 797816
IV.B.2
Loan loss allowance allocated to
foreign loans
IV.B.3
Loan loss allowance-unallocated
103323
60
