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)
Issuer's 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 issuer's 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 issuer's revenues for it's most recent fiscal year:
$9,882,170.
The aggregate market value of the Common Stock held by non-affiliates of the
small business issuer on December 31, 1998, was $27,891,760. This calculation
is based upon an estimation by the Company's 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 issuer's common stock
were issued and outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
The Company's 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 Company's 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 Company's financing plans; (ii) trends affecting
the Company's financial condition or results of operations; (iii) the Company's
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 Company's 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 Company's
only subsidiary and the Company's only business is its investment in all of the
issued and outstanding shares of the Bank's voting common stock.
The Company's 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 Company's management to believe that there is a
need for these services in the bank's 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 Anne's Counties, Maryland.
The principal components of Kent County's 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 health-care facilities
located in Chestertown. Agriculture and agriculturally-related 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
Bank's 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 Anne's 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 Company's 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 Company's and the Bank's 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 resumed to exist if an individual or company
acquires 25% or more of any class of voting securities of the bank holding
company. Because the Company's 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 Reserve's 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 institution's 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 Company's 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 Bank's operations, including security devices and
procedures, adequacy of capitalization and loss reserves, loans, investments,
borrowings, deposits, mergers, issuance's 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 bank's 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 bank's 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 Bank's cost of funds, and there can be no assurance
that such costs can be passed on to the Bank's customers.
DIVIDENDS
The principal source of the Company's 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 Bank's 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 Company's ability to pay any cash dividends to its shareholders in the
future will depend primarily on the Bank's 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 risk-based 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 risk-weighted
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 risk-based 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.
Management's 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 Company's 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 Company's 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. MANAGEMENT'S 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 Company's only subsidiary and the Company's only business is its investment
in all of the issued and outstanding shares of the Bank's 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-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 Anne's
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 medium-term 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.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion of the Company's financial condition and results
of operations should be read in conjunction with the Company's 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 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 Company's funding sources. The table "Average Balances, Income and
Expenses, and Rates" which follows shows the Company's average volume of
interest-earning assets and interest-bearing 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 Company's 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
management's judgment, actual results will depend on a number of factors that
cannot be predicted with certainty, and fulfillment of management's 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 & 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 sol 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 Company's 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
Anne's and Cecil Counties, Maryland. There are no industry concentrations in
the Company's 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 Company's 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
Company's 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 Company's 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
management's 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, management's
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, management's 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 charge-offs,
its current policy is to maintain an allowance of approximately 1.00% of gross
loans unless management's 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 management's
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 Company's 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 9158
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 management's 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 borrower's 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 TATE SENSITIVITY
The primary objective of asset/liability management is to ensure the steady
growth of the Company's 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
Company's 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 244554 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 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 Company's loan portfolio and
other earning assets. The Company's core deposits increased $8,177,320 during
1998. Deposits, and particularly core deposits, have been the Company's 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 Company's primary source of funding in the future. The
maturity distribution of the Company's 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 rat 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 underaccounting 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 Company's
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 Company's
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
Bank's 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 Bank's 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 Company's 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 Company's
directors, executive officers and persons who own more than ten percent of the
Company's 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 Company's 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) 1.29%
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. Clark's minor children. Excludes 401
shares owned by Mr. Clark's wife.
(3) Includes 4,089 shares owned jointly by Mr. Hill and his wife. Excludes 165
shares owned by Mr. Hill's 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. Horsey's 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. Owens's wife.
(7) Includes 23,460 shares owned by a family trust. Excludes 1,422 shares
owned by Mr. Rasin's wife.
(8) Includes 9,000 shares owned by a family estate/trust account. Excludes
1,800 shares owned by Mr. Skipp's 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. Wheatley's wife.
(11) All directors and executive officers may be contacted at the Company's
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 Company's 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 year's 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 income-producing
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 April 28, 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 Company's
only subsidiary and the Company's only business is its investment in all of the
issued and outstanding shares of the Bank's 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 Anne's 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.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion of the Company's financial condition and results
of operations should be read in conjunction with the Company's 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 Compre-
Common stock Undivided comprehensive hensive
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 employee -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 afinancial institution operating
primarily in Kent and Queen Anne's Counties. The Bank offers deposit services
and loansto 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 mortgage-backed
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 Bank's 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
Cost value cost value
DECEMBER 31, 1998
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 19980914 5589660 5624558
Pledged securities 4990118 5013830 4773410 4798827
DECEMBER 31, 1997
Maturing
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
13855433 13873611 8124223 8136502
Pledged securities 6510783 6524065 4500708 4535700
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 Bank's 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
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 employee's
highest average rate of earnings for five consecutive years during the final ten
full years before retirement. The Bank's 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 impacton 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:
(in thousands) Minimum To be well
Actual capital adequacy capitalized
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 Bank's 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 Bank's 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,
STATEMENTS 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
Comprehensive 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 statments are the
responsibility of the Company's 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 9980914
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 10332
