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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1996
Or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number 0-7449
PEOPLE'S BANCSHARES, INC.
(Exact name of registrant as specified in its charter)
MASSACHUSETTS 04-3272233
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
545 PLEASANT STREET
NEW BEDFORD, MASSACHUSETTS 02740
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (508) 991-2601
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Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common stock, $0.10
par value
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES [X] NO [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates of the
registrant, based on the closing price of the registrant's common stock $0.10
par value per share ("Common Stock") on March 27, 1997 on the Nasdaq National
Market was $12.00. Although directors and executive officers of the
registrant were assumed to be "affiliates" of the registrant for the purposes of
this calculation, this classification is not to be interpreted as an admission
of such status. As of March 27, 1997, 3,592,170 shares of the registrant's
Common Stock were issued and outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's definitive Proxy Statement for the Annual Meeting
of Stockholders to be held on May 13, 1997 are incorporated by reference into
Part III of this Form 10-K. Portions of the Registrant's Annual Report to
Stockholders for 1996 are incorporated by reference into Part II of this Form
10-K.
Exhibit Index appears on page 22.
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Part I
Item 1. Business
General
The Company. People's Bancshares, Inc. is a Massachusetts business
corporation formed at the direction of People's Savings Bank of Brockton (the
"Bank") to serve as the holding company for the Bank. On February 8, 1996, the
Company and the Bank completed a reorganization (the "Reorganization") in which
the Bank became a wholly owned subsidiary of the Company, and each issued and
outstanding share of common stock of the Bank was converted into and exchanged
for one share of common stock of the Company. As a result of the Reorganization,
the Bank became a wholly owned subsidiary of the Company. The Company is a
unitary bank holding company subject to the Bank Holding Company Act of 1956, as
amended (the "BHC Act"), the principal business of which consists of the
business of the Bank. The only significant asset of the Company is the common
stock of the Bank. Although the Company is a legal entity separate from the
Bank, the Company itself is not engaged in any business activities.
The Bank. The Bank was chartered as a Massachusetts mutual savings bank on
February 6, 1895. On October 30, 1986, the Bank converted to a Massachusetts
chartered savings bank in stock form. The Bank is engaged principally in the
business of attracting deposits from individuals, business and industry, and
investing those funds in residential and commercial mortgages, consumer,
commercial and construction loans and investments, primarily mortgage-backed
securities. The Bank generally originates loans for investment except for
residential mortgage loans. The Bank primarily originates 1-4 family residential
loans for sale in the secondary market, generally with the servicing rights of
such loans. Loan sales are made from loans on which the Bank's mortgage banking
subsidiary has obtained purchase commitments from investors prior to funding.
The Bank's revenues are derived principally from interest on its loans and
interest and dividends on its investment securities, customer fees, and gains on
residential mortgage loan sales. The Bank's primary sources of funds are
deposits, principal and interest payments on loans and investment securities,
FHLB advances, and proceeds from the sale of loans. The Bank offers a variety of
deposit accounts, including NOW accounts, regular savings accounts, money market
accounts, fixed rate certificates of deposit, and various retirement accounts.
The Bank has seven wholly owned subsidiaries. People's Mortgage
Corporation, which was organized in March 1995, acts as the mortgage banking
subsidiary of the Bank. PSB Security Corporation I, II, and III, organized in
March 1996, are "security corporations" for Massachusetts tax purposes, which
allow a more favorable tax rate on income derived from securities held in the
security corporations. Currently, only PSB Security Corporation I is active.
The remaining subsidiaries of the Bank are primarily engaged in the management
and sale of foreclosed real estate.
Management Strategy
The Company's overall strategy is to use the Bank's traditional strengths
as a community bank specializing in real estate lending to fulfill the Bank's
commitment to satisfy the financial needs of the communities it serves. The goal
of the Bank's senior management team has been and continues to be to maintain
profitability as well as a strong capital position that provides the capacity to
respond to a changing financial landscape. Senior management has focused its
efforts on pursuing a strategy established by the Board of Directors to embark
on a new era of growth, both internally and through selected acquisitions
following the Bank's return to profitability. The principal components of this
strategy include:
o Improving asset quality
o Redirecting lending efforts
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o Managing interest rate risk
o Reducing non-interest expenses
o Increasing fee-based revenues
o Providing superior customer service in a cost-effective manner
o Achieving growth through carefully chosen acquisitions
Improving Asset Quality. At December 31, 1991, the Bank's non-performing
assets amounted to $22.2 million, or 13.4% of total assets and 110.6% of total
equity and loan loss reserves. The ratio of the allowance for loan losses to
non-accrual loans at December 31, 1991 was 47.7%. The Bank's poor asset quality
reflected a weak regional economy and a depressed local real estate market. The
Bank had to this point specialized in multi-family and commercial real estate
lending, two areas that were especially adversely affected by such economic
conditions. During the next 60 months, the Bank was able to reduce
non-performing assets by 80%. At December 31, 1996, the Bank's non-performing
assets were $4.4 million, or 0.88% of total assets, and 12.2% of total equity
and loan loss reserves. The ratio of the allowance for loan losses to
non-accrual loans was 122.1%. The Bank achieved these results through efforts to
resolve existing credit problems and to avoid future problems through a
restructuring of the lending function. Each of the members of the Bank's senior
management team had experience in evaluating and resolving problem assets before
joining the Bank.
Redirecting Lending Efforts. The Bank has chosen to de-emphasize
multi-family real estate and consumer lending. The Bank believes that the local
market for multi-family lending is depressed. Regarding consumer lending, the
Bank believes that it was operating at a competitive disadvantage in comparison
to large banks and non-bank lenders for home equity loans as well as indirect
and direct automobile financing. The Bank also was adversely affected by
governmental actions that diminished the attractiveness of education lending.
The Bank has instead chosen to focus its growth on 1-4 family residential,
residential construction, commercial, and commercial real estate lending.
Although the Bank will continue to evaluate the viability of consumer lending,
the Bank believes that prudent commercial and commercial real estate lending
will yield the highest return.
Managing Interest Rate Risk. The Bank's Asset/Liability Committee, which
includes three outside directors, meets quarterly to monitor interest rate risk.
Management's strategy is to limit interest rate risk by matching interest
earning assets and interest bearing liabilities. Management will from time to
time allow some imbalance in the matching of interest earning assets and
interest bearing liabilities with repricing characteristics of less than one
year. Beginning in 1992, the Bank matched the pricing of its deposit liabilities
with the pricing of other banks throughout Massachusetts as opposed to its local
market competition. The Bank faces substantial competition in its immediate
deposit-gathering market from community credit unions, which, because of their
lack of state or federal taxation, are able to offer higher deposit rates. By
establishing its rates with reference to a wider market, the Bank has been able
to significantly reduce its deposit interest expense while meeting the
commercial credit demands that competing credit unions can not supply.
In 1993, the Bank began to match mortgage-backed securities with the funds
borrowed to purchase such securities, which consist primarily of FHLB advances
and LIBOR-based repurchase agreements. The Bank either matches the expected
maturities of these mortgage-backed securities with the borrowed funds or
matches mortgage-backed securities secured by adjustable-rate mortgages with
short-term funding. The Bank avoids high risk investment instruments such as
interest-only or principal-only strips in favor of US agency and high quality
private sector mortgage-backed securities. The mortgage-backed securities bought
by the Bank do not constitute "high risk" securities under the standards of the
Federal Financial Institutions Examination Council ("FFIEC"). Although this
strategy results in lower financial ratios that are computed on the basis of
average assets, it increases income and return on equity, at what the Bank
considers to be a low level of risk.
Reducing Non-Interest Expenses. The Bank has worked to reduce its cost
structure through a restructuring of its operations and through the effecting of
cost reductions. During the last several years the Bank has used competitive
bids for its third-party services and supply contracts, which has contributed to
the significant improvement in its efficiency ratio from 90.3% for the year
ended December 31, 1991 to 70.9% for the year ended
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December 31, 1996. In 1996, the efficiency ratio increased from 64.3% in 1995
was primarily attributable to the Company's mortgage subsidiary operating at a
small loss and to non-recurring expenses associated with the acquisition of 5
branches and with the severance costs associated with the resignation of the
former CEO.
Increasing Fee-Based Revenues. The Bank continues to review options to
increase revenue. Along with the match-funded investment program discussed
above, the Bank has recently strengthened its efforts to increase revenues
through mortgage banking activities. The Bank's mortgage-banking subsidiary,
People's Mortgage Corporation, sells most of its mortgage loan origination
volume into the secondary market and does not retain the servicing rights. The
Bank believes that it is not large enough to make loan servicing a profitable
venture. In 1994, the Bank originated $17.2 million in new mortgage loans of
which $6.4 million were sold in the secondary market. The Bank originated $88.3
million in new mortgage loans in 1995 of which $68.9 million were sold in the
secondary market. The Bank originated $229.4 million in new mortgage loans in
1996 of which $152.7 million were sold in the secondary market. People's
Mortgage Corporation currently has six loan origination offices located in
Massachusetts and Connecticut. The Bank has hired experienced mortgage-banking
professionals to conduct its mortgage banking operations.
Providing Superior Customer Service in a Cost-Effective Manner. Management
recognizes the paramount need to manage the Bank in a safe and sound manner for
the protection of its stockholders and depositors. Although the Bank has
traditionally limited its lending activities to real estate, it plans to expand
these activities, consistent with sound banking practices, to serve other
financial needs of the community and to complement its deposit activity with
alternative investment opportunities such as annuities and mutual funds.
Management also recognizes that superior customer service combined with local
levels of decision-making authority is what distinguishes a community bank from
the much larger regional commercial banks. For these reasons, customer service
is a high management priority. At the same time, management recognizes that to
achieve its profit goals, it must provide superior service in a cost efficient
manner. Management's goal is to reduce the Bank's efficiency ratio without
sacrificing its high level of customer service.
Achieving Growth Through Carefully Chosen Acquisitions. The Bank believes
that it can deliver the most value to the community and its stockholders as a
mid-sized bank combining the community-oriented and responsive service of a
smaller institution with the cost and operational efficiencies of a larger bank.
As such, the Bank sees branch acquisitions and governmental assisted mergers as
a low cost profit opportunity. Through branch acquisitions, the Bank has the
opportunity to expand into new territories and leverage the Bank's existing
management and operational infrastructure.
Recent Developments
In 1995 the Bank expanded its market presence in southeastern Massachusetts
through acquisitions of the branches of other financial institutions and, in one
case, through a merger with another financial institution. In July 1995, the
Bank assumed approximately $9.7 million in deposits from Haymarket Co-operative
Bank and reallocated the deposits to one of the Bank's existing branches in
Brockton. In May 1995, the Bank merged with the Bank of Taunton, A Co-operative
Bank ("Bank of Taunton") as part of a supervisory conversion of the Bank of
Taunton, with the Bank as the surviving institution. The Bank of Taunton had
total deposits of approximately $17.0 million at the time of the acquisition. In
the acquisition of the Bank of Taunton, the Bank acquired two branch offices of
the Bank of Taunton located in Taunton and East Taunton, Massachusetts. In
September 1995, the Bank acquired certain assets and assumed approximately $13.0
million of deposits of the Mansfield, Massachusetts branch of Bank of Boston.
On March 31, 1995, the Bank purchased the assets of Minuteman Funding
Corporation, a mortgage broker located in Andover, Massachusetts. On March 31,
1995, the Bank transferred the acquired assets to People's Mortgage Corporation,
a newly established wholly owned subsidiary of the Bank. The headquarters of
People's Mortgage Corporation and its loan production office are located at the
Bank's service center in Easton, Massachusetts. In October 1995, People's
Mortgage Corporation opened offices in Sturbridge, Massachusetts, and in Hamden,
Connecticut.
On September 30, 1995, the Bank entered into separate Purchase and
Assumption Agreements (each, an "Agreement," and together the "Agreements") with
each of Fleet Bank of Massachusetts, National Association ("Fleet") and Shawmut
Bank, National Association ("Shawmut," and collectively with Fleet,
"Fleet/Shawmut"). The Agreements provided for (i) assumption of deposit
liabilities (the "Fleet/Shawmut Deposits") by the Bank relating to one branch of
Fleet located in Mattapoissett, Massachusetts and four branches of Shawmut
located in
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New Bedford (two), South Dartmouth and Taunton, Massachusetts (together, the
"Fleet/Shawmut Branches") and (ii) the acquisition of the Fleet/Shawmut Loans
and Fleet/Shawmut Assets (each as defined below) (the "Branch Acquisitions").
The Fleet/Shawmut Branches were divested in connection with the merger of
Shawmut National Corporation into Fleet Financial Group, Inc.
At the closing of the Branch Acquisitions on March 8,1996, the Bank assumed
the Fleet/Shawmut Deposits and paid Fleet/Shawmut a premium of 5.5% on the
average Fleet/Shawmut Deposits for the 30 days prior to the closing of the
transaction. The Fleet/Shawmut Deposits totaled $144.7 million.
In the Branch Acquisitions, the Bank acquired certain first mortgage
residential, commercial and commercial real estate and consumer loans of
Fleet/Shawmut (the "Fleet/Shawmut Loans"), as well as the real property owned or
leased by Fleet and Shawmut for operation of the Fleet/Shawmut Branches and
related automated teller machines, furniture, equipment, and other fixed
operating assets (the "Fleet/Shawmut Assets").
The Bank acquired the Fleet/Shawmut Loans at face value and the
Fleet/Shawmut Assets at a specified purchase price with the exception of
furniture, equipment and other fixed assets, which were acquired at book value.
The Bank acquired an aggregate of approximately $113.7 million of Fleet/Shawmut
Loans. The total purchase price of the Fleet/Shawmut Assets was approximately
$1.8 million.
According to the terms of the Agreements, the obligation of the Bank and
Fleet/Shawmut to consummate the Branch Acquisitions was subject to the
satisfaction of certain conditions, including the receipt of capital financing
necessary to fund the Branch Acquisitions and enable the Bank to comply with
applicable minimum equity capital or other regulatory requirements following the
Branch Acquisitions (the "Capital Financing Condition").
To enable the Company to satisfy the Capital Financing Condition, the
Company offered shares of its Common Stock at $8.875 per share in a rights
offering to shareholders of record as of February 8, 1996 and "standby"
purchasers. The Company completed the offering in March 1996, raising net
proceeds of approximately $7.5 million through the sale of 968,352 shares.
Market Area and Competition
The Bank's main office is located in Brockton, Massachusetts. The Bank also
has thirteen other branch offices in Massachusetts, three of which are located
in the Plymouth County community of Brockton, one of which is located in the
Norfolk County community of Stoughton, two of which are located in each of the
Bristol County communities of New Bedford and Taunton, and one of which is
located in each of the Bristol County communities of Easton, Mansfield, East
Taunton, Mattapoisett and South Dartmouth. In 1996, the Bank relocated its
service center to New Bedford, Massachusetts. The Bank's primary market area is
the City of Brockton, City of New Bedford, and surrounding towns, including
portions of Plymouth, Norfolk, and Bristol counties. In addition, the Bank
conducts its residential lending activities principally in southern New England
through its mortgage banking subsidiary, People's Mortgage Corporation.
The Bank faces significant competition both in generating loans and in
attracting deposits. The southeastern Massachusetts area is a highly competitive
market. The Bank faces direct competition from a significant number of financial
institutions operating in its market area, many with a state-wide or regional
presence and, in some cases, a national presence. Many of these financial
institutions are significantly larger and have greater financial resources than
the Bank. The Bank's competition for loans comes principally from commercial
banks, savings banks, mortgage banking companies, credit unions and insurance
companies. Its most direct competition for deposits has historically come from
credit unions located in the Bank's market area that have been able to offer
higher deposit rates due to their exemption from federal and state taxation. The
Bank also faces competition from savings and commercial banks. In addition, the
Bank faces increasing competition for deposits from non-bank institutions such
as brokerage firms and insurance companies in such instruments as short-term
money market funds, corporate and government securities funds, mutual funds, and
annuities. Competition may also increase as a result of the lifting of
restrictions on the interstate operations of financial institutions.
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\
Regulation of the Company and the Bank
The Company. As a business corporation incorporated under Massachusetts
law, the Company is subject to regulation by the Secretary of State of
Massachusetts and the rights of its stockholders are governed by Massachusetts
corporate law. As a bank holding company, the Company is subject to regulation
and supervision by the Board of Governors of the Federal Reserve System (the
"Federal Reserve Board") pursuant to the BHC Act.
The Federal Reserve Board has adopted capital adequacy guidelines that
generally require bank holding companies to maintain total capital equal to 8%
of total risk-weighted assets, with at least one-half of that amount consisting
of Tier 1 capital. Tier 1 capital for bank holding companies generally consists
of the sum of common stockholders' equity and perpetual preferred stock (subject
in the case of the latter to limitations on the kind and amount of such stocks
which may be included as Tier 1 capital), less goodwill and other intangibles.
Total capital consists of Tier 1 capital plus supplementary capital, which
includes hybrid capital instruments and perpetual debt; perpetual preferred
stock which is not eligible to be included as Tier 1 capital; term subordinated
debt and intermediate-term preferred stock; and, subject to limitations, general
allowances for loan losses. Assets are adjusted under the risk-based guidelines
to take into account different levels of credit risk, with the categories
ranging from 0% (requiring no additional capital) for assets such as cash to
100% for assets such as commercial real estate loans, commercial business loans
and consumer loans. The Federal Reserve Board also has imposed credit
conversion standards for interest rate and exchange rate contracts.
In addition to the risk-based capital requirements, the Federal Reserve
Board requires bank holding companies to maintain a minimum ratio of Tier 1
capital to total assets of 3%, with most bank holding companies required to
maintain a 4% ratio. Furthermore, the bank holding company rating system used by
the Federal Reserve Board to analyze the adequacy of a bank holding company's
management, operation, earnings and capital generally evaluates "primary
capital" and "total capital," with the respective ratios being 5.5% and 6%,
respectively. The Federal Reserve Board also declares that it will closely
examine the capital levels of bank holding companies considering expansion to
ensure they will remain strongly capitalized.
The Bank. The Bank is subject to extensive regulation and examination by
the Commissioner of Banks of Massachusetts (the "Commissioner") and by the
FDIC, which insures its deposits to the maximum extent permitted by law, and
to certain requirements established by the Federal Reserve Board. The federal
and state laws and regulations which are applicable to banks regulate, among
other things, the scope of their business, their investments, their
reserves against deposits, the timing of the availability of deposited funds
and the nature and amount of and collateral for certain loans. The laws and
regulations governing the Bank generally have been promulgated to protect
depositors and not for the purpose of protecting stockholders.
Pursuant to the FDIC's risk-based assessment system, an institution is
assigned to one of three capital groups based solely on the level of the
institution's capital -- "well capitalized," "adequately capitalized" and
"undercapitalized" -- which would be defined in generally the same manner as the
regulations establishing the prompt corrective action system under Section 38 of
the Federal Deposit Insurance Act (the "FDIA"). The three capital groups are
divided into three subgroups which reflect varying levels of supervisory
concern, from those considered to be healthy to those considered to be of
substantial supervisory concern. The matrix so created results in nine
assessment risk classifications. Beginning with the first semiannual assessment
period of 1996, rates under these classifications will range from 0% for well
capitalized, healthy institutions to 0.27% for undercapitalized institutions
with substantial supervisory concerns, subject to a statutory requirement that
all institutions pay at least $2,000 annually for FDIC insurance.
The FDIC has promulgated regulations and adopted a statement of policy
regarding the capital adequacy of state-chartered banks which, like the Bank,
are not members of the Federal Reserve System. These requirements are
substantially similar to those adopted by the Federal Reserve Board regarding
bank holding companies, as described above.
The federal banking agencies continue to consider capital requirements
applicable to banking organizations. The federal banking agencies have adopted
amendments to their risk-based capital regulations to provide for the
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consideration of interest rate risk in the determination of a bank's minimum
capital requirements. The amendments presently do not codify a measurement
framework but rather more generally require that banks effectively measure and
monitor their interest rate risk and that they maintain capital adequate for
that risk. The agencies also have published a joint policy statement to gather
information to eventually establish an explicit capital charge for interest rate
risk. In addition, the federal banking agencies have adopted amendments to their
risk-based capital standards to provide for the concentration of credit risk and
certain risks arising from nontraditional activities, as well as a bank's
ability to manage these risks, as important factors in assessing a bank's
overall capital adequacy. Failure to meet the minimum regulatory capital
requirements could subject a banking institution to a variety of enforcement
remedies available for federal regulatory authorities, including the termination
of deposit insurance by the FDIC and seizure of the institution.
At December 31, 1996, the Bank was in compliance with all minimum Federal
regulatory capital requirements which are generally applicable to FDIC-insured
banks. As of such date, the Bank's Tier 1 risk-based capital ratio and total
risk-based capital ratio equaled 12.38% and 13.64%, respectively, and Tier 1
leverage capital ratio equaled 6.04%.
In response to a Massachusetts law enacted in 1996, the Commissioner has
proposed rules that generally would give Massachusetts banks powers equivalent
to those of national banks. The Commissioner also has adopted procedures
expediting branching by strongly capitalized banks.
In 1996, Massachusetts enacted interstate banking laws in response to the
Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994. The laws
permit, subject to certain deposit and other limitations, interstate
acquisitions, mergers and branching on a reciprocal basis. The new interstate
banking law likely to make it easier for out-of-state institutions to attempt to
purchase or otherwise acquire or to compete with the Bank in Massachusetts, and
similarly makes it easier for Massachusetts banks to compete outside the state.
Certain Other Regulatory Matters. In granting its approval of the
Reorganization, the Commissioner included a provision which requires the Bank
and the Company to maintain Tier 1 leverage capital ratio of at least 4%, which
is equivalent to the minimum Tier 1 leverage capital ratios of the FDIC and
Federal Reserve Board. The Commissioner has indicated to the Bank that this
minimum capital requirement is not related to the Bank's financial condition but
instead reflects the policy of the Commissioner to impose minimum capital
requirements with respect to all one-bank holding company formations. The
approval also provides that if the Bank's Tier 1 leverage capital ratio is below
4%, the Bank must seek Commissioner approval before paying dividends to the
Company.
Regulation Under Federal Securities Laws. Upon consummation of the
Reorganization, the reporting obligations of the Bank under the Exchange Act, as
administered by the FDIC, were replaced with substantially identical obligations
of the Company under the Exchange Act, as administered by the Securities and
Exchange Commission ("SEC"). Pursuant to the Exchange Act, the Company files
annual, quarterly and periodic reports with the SEC. The Company is also subject
to the insider trading requirements of Sections 16(a) and 16(b) of the Exchange
Act as administered by the SEC. In connection with the Reorganization, the Bank
deregistered the Bank's common stock under the Exchange Act.
The foregoing references to laws and regulations which are applicable to
the Company and the Bank are brief summaries thereof which do not purport to be
complete and which are qualified in their entirety by reference to such laws and
regulations.
Loan Portfolio
The Bank's commercial and consumer lending activities are conducted
principally in southeastern Massachusetts and the Bank's residential lending
activities are conducted principally in southern New England. The Bank's loan
portfolio includes single family and multifamily residential loans, commercial
real estate loans, commercial loans, and a variety of consumer loans. In
addition, the Bank grants loans for the construction of residential homes,
commercial real estate properties, and for land development. Approximately 90%
of the loans granted by the Bank are secured by real estate collateral. The
ability and willingness of the single-family residential and consumer borrowers
to honor their repayment commitments is generally dependent, among other things,
on the level of overall economic activity within the borrowers' geographic areas
and real estate values. The ability and willingness of a commercial real estate,
commercial, or construction loan borrower to honor its repayment commitments is
generally affected by changing economic conditions in the borrower's particular
geographic area, business or industry that could impair the borrower's future
operating performance.
At December 31, 1996, the Bank had total loans and loans held for sale of
$276.6 million of which $257.9 million, or 93% of total loans, were mortgage
loans. The Bank also had $18.7 million of other loans not secured by real estate
composed of commercial and consumer loans other than home equity loans. Of the
Bank's total loans and loans held for sale, 71% were secured by 1-4 family
residential mortgages, 16% by commercial properties, 4%
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by multi-family properties, and 2% represent residential construction loans. Of
the Bank's total loans and loans held for sale not secured by real estate,
4% loans are small business commercial loans not secured primarily by
commercial real estate and 3% are loans to consumers.
The types of loans that the Bank may originate are subject to federal and
state law and regulations. Interest rates charged by the Bank on loans are
affected principally by the demand for such loans, the supply of money available
for lending purposes and the rates offered by competitors. These factors are, in
turn, affected by general economic conditions, monetary policies of the federal
government, including the Federal Reserve Board, legislative tax policies, and
governmental budgetary matters. The following table presents the outstanding
balance of loans as of the end of the periods indicated:
<TABLE>
<CAPTION>
At December 31,
--------------------------------------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Mortgage Loans:
Residential 1-4 family $ 160,730 $ 67,641 $ 56,533 $ 52,002 $ 48,566
Commercial:
Residential multi-family 11,217 9,366 9,362 8,058 7,309
Commercial real estate 44,149 30,019 25,510 27,099 28,258
Construction 7,359 8,459 4,383 7,260 4,866
Equity lines of credit 10,297 7,274 7,718 8,885 9,568
--------- ---------- ---------- ---------- ----------
Total principal balances 233,752 122,759 103,506 103,304 98,567
Less undisbursed amount
of loans in process (1,450) (3,623) (948) (2,491) (1,405)
--------- ---------- ---------- ---------- ----------
Total mortgage loans 232,302 119,136 102,558 100,813 97,162
--------- ---------- ---------- ---------- ----------
Other Loans:
Retail installment sales contracts 1,830 2,620 3,203 3,359 3,566
Consumer 6,161 2,423 2,783 3,348 3,378
Commercial lines of credit 5,622 3,462 2,602 1,568 1,534
Commercial loans 4,838 5,597 2,774 2,276 2,676
Education 207 296 409 274 515
--------- ---------- ---------- ---------- ----------
Total other loans 18,658 14,398 11,771 10,825 11,669
--------- ---------- ---------- ---------- ----------
Total loans 250,960 133,534 114,329 111,638 108,831
Deferred loan origination fees
(costs), net (49) 57 (32) (78) (40)
Allowance for loan losses (4,716) (3,813) (3,194) (3,654) (3,641)
--------- ---------- ---------- ---------- ----------
Loans, net $ 246,195 $ 129,778 $ 111,103 $ 107,906 $ 105,150
========== ========= ========= ========= =========
</TABLE>
At December 31, 1996, the Bank had eight credit relationships exceeding $1
million in size that aggregated $16.9 million or 6.7% of the portfolio. All of
these relationships are composed of performing loans. The Bank has one
non-performing credit relationship between $500,000 and $1 million that is
secured by multi-family residential properties. All other non-performing credit
relationships are under $500,000.
Residential Mortgage Lending. The Bank offers first mortgage loans and home
equity lines of credit secured by 1-4 family residences. Typically, such
residences are single family homes that serve as the primary residence of the
owner. Loan originations are generally obtained from existing or past customers
and referrals from real estate agents, builders, and members of communities to
which the Bank provides services.
Before 1995, the Bank originated loans through its retail branch system. In
1995, the Bank formed a wholly owned subsidiary, People's Mortgage Corporation
("PMC"). Through PMC, the Bank seeks to expand its residential loan origination
market share and profitably increase revenues from loan sales. PMC approves new
loans only after obtaining purchase commitments from investors. Currently, PMC
secures such commitments on a
8
<PAGE> 9
loan-by-loan basis. PMC uses commissioned loan originators to obtain 1-4 family
residential mortgages based upon investors' underwriting standards, which may
differ from those of the Bank. The Bank's strategy is to sell new loans
originated by PMC in the secondary market, including the related servicing
rights. However, as part of its asset liability management strategy, or to
accommodate borrowers who desire a local servicer, the Bank may buy 1-4 family
residential mortgages from PMC. The Bank's policy is to purchase ARMs that meet
FNMA or FHLMC underwriting guidelines, except that loans may exceed the maximum
loan limits of FNMA or FHLMC.
Prior to 1995, the Bank originated fixed-rate 1-4 family residential
mortgage loans to sell in the secondary market after first obtaining purchase
commitments from investors. During this period, the Bank both originated ARMs
for sale in the secondary market, after first obtaining purchase commitments
from investors, and for the Bank's portfolio to the extent consistent with its
asset/liability management strategy.
At December 31, 1996, 71% of the Bank's total loans and loans held for sale
were secured by 1-4 family residential mortgages, of which 55% were ARMs.
Generally, ARMs pose credit risks that differ from the risks inherent in
fixed-rate loans because when interest rates rise the borrower's payments rise,
thereby increasing the potential for default. However, long-term fixed-rate
mortgages expose the Bank to higher interest-rate risk.
Commercial Real Estate Lending. Of the Bank's loans at December 31, 1996,
16% were secured by commercial properties that typically have terms of 3 years
or less and were ARMs. Of loans secured by properties other than 1-4 family
residences, 50% were ARMs. These loans are made to owners who use properties
for business purposes (owner-user properties) or rent the properties to
other businesses (commercial investment properties). While the Bank
suffered significant losses on these properties in the past, most of
these losses occurred on loans originated before the installation of the
Bank's current senior management team. The Bank believes that such loans,
underwritten and monitored prudently, should be a focus of its loan growth,
along with commercial lending to small businesses.
Loans made on commercial investment properties are based upon several
factors. These include the property's sustainable cash flow, expenses, quality
of tenants, location, and market factors such as the demand for similar
properties. Management reviews such loans at least annually through the analysis
of market trends, property cash flows, financial statements, and federal income
tax returns. When it appears that such loans are in danger of becoming
collateral dependent through the properties' inability to generate or achieve
sustainable cash flows to service the debt, then the Bank will assign the credit
to its internal "Classified and Watch List Loan Report" to closely monitor the
loan and assess the likelihood of loss.
Loans made on commercial owner-user properties include loans made to small
and medium sized local businesses where the underlying collateral is
predominantly commercial real estate used by the business. The Bank underwrites
such loans on the borrower's cash flow and ability to service debt from earnings
and seeks to structure such loans to have more than one source of repayment. The
borrower is required to provide the Bank with sufficient information to allow an
informed credit decision to be made. This generally includes three years of
financial statements, projected cash flows, current financial information on
guarantors, and reports that show financial trends such as accounts receivable
agings and concentrations, inventory reports, accounts payable reports, and
sales reports. The Bank considers such loans to be a focus for future loan
growth.
Loans secured by commercial real estate properties are generally larger and
involve a greater degree of risk than 1-4 family residential mortgage loans.
Because payments on loans secured by commercial real estate properties are often
dependent on successful operation or management of the properties, repayment of
such loans may be subject largely to the then prevailing conditions in the real
estate market or the economy. The Bank seeks to minimize these risks through its
underwriting standards.
Commercial Lending. Of the Bank's loans at December 31, 1996, 4% were
small business commercial loans not secured primarily through commercial real
estate. Such loans are underwritten using the same standards as for
commercial owner-user real estate properties. The Bank considers such loans
to be a focus for future loan growth.
The Bank's commercial loans are usually secured by all the borrower's
business assets. Commercial loans are generally larger and involve a greater
degree of risk than 1-4 family residential mortgage loans. Because payments on
commercial loans secured by business assets are often dependent on the
successful operation of the business, repayment of the loans may be dependent
largely on the then prevailing conditions in the economy. The Bank seeks to
minimize these risks through its underwriting policies.
9
<PAGE> 10
Residential Construction Lending. Of the Bank's loans at December 31, 1996,
2% represent residential construction lending. Such lending is to local real
estate developers who have a proven track record in successfully responding to
residential home building cycles or to individuals who are contracting to build
homes for their use. The Bank considers such loans to be a focus for future loan
growth.
Construction and land financing is generally considered to involve a higher
degree of credit risk than long-term financing on improved, owner-occupied real
estate. Risk of loss on a construction loan is dependent largely upon the
accuracy of the initial estimate of the property's value at completion of
construction or development compared to the estimated cost (including interest)
of construction. If the estimate of value proves to be inaccurate, the Bank may
be confronted with a project that when completed, has a value that is
insufficient to assure full repayment. The Bank seeks to minimize these risks
through its underwriting policies.
Consumer Lending. Of the Bank's total loans at December 31, 1996, 3%
were consumer loans. The decreasing importance of consumer loans in the Bank's
loan portfolio in recent years can be attributed to the increasing competition
of non-bank lenders for automobile and personal loans as well as the effect
of government actions on education loan originations. The Bank does not
consider this area to be a focus of future loan growth, but offers such
loans as an accommodation to deposit customers.
Multi-Family Residential Lending. Of the Bank's loans at December 31, 1996,
4% were secured by multi-family properties. The Bank historically suffered a
high level of loss in this area as well as in non-owner occupied 1-4 family
residential loans. As such, the Bank rarely makes such loans, except to
facilitate sales of foreclosed properties or to replace existing borrowers with
borrowers who are more financially secure.
Loans secured by apartment buildings and other multi-family residential
properties are generally larger and involve a greater degree of risk than 1-4
family residential mortgage loans. Because payments on loans secured by
multi-family properties are often dependent on successful operation or
management of the properties, repayment of such loans may be subject to a
greater extent to the then prevailing conditions in the real estate market or
the economy. The Bank seeks to minimize these risks through its underwriting
policies.
Credit Administration. The Board of Directors, through its policies and
procedures, has directed the management team to be proactive in its risk
management. This process involves the implementation of systems that promote the
identification of credit risk and actions that mitigate such risk. Management
plays an active role in promoting a credit culture in which each employee
involved in the lending function is expected to manage the risk in the portion
of the portfolio for which such employee is responsible with systems that
provide management with important information on a frequent basis.
Approval Process. The Bank uses a committee process to approve its loans.
Loans over $250,000 and up to and including $500,000 must be authorized by the
Credit Committee, including the members of the Bank's senior management
team. Loans over $500,000 are submitted to the Executive Committee of the Board
of Directors. If any proposed loan has an exception, the Bank requires approval
of the Board of Directors or Executive Committee. The Executive Committee meets
weekly to approve loans and review reports pertaining to the portfolio's
performance.
Management may also delegate loan authority to certain senior loan
officers, whereby the designated officer may lend up to pre-established limits,
provided that the loan meets minimum underwriting criteria and is documented
according to the Bank's customary procedures. These loans are subsequently
reported to senior management and the Executive Committee.
Credit Administration Oversight. The Bank's credit administration
department uses various systems to monitor the loan portfolio and lending
activity. These include reports generated by the Bank's data processing system
to monitor loan performance.
The Board of Directors requires that all loans be classified on a grading
system according to measurable elements of risk. The system used is standard
throughout the banking industry and recognized by the Bank's primary regulators,
the Commissioner of Banks and the FDIC. This system allows management to track
pools of similar credits for potential risk of loss. These pools consist of same
grade credits that have similar levels of risk and establish a framework for
migration analysis used to determine the levels of loan loss reserves.
10
<PAGE> 11
The grading system assigns loan pools to seven categories ranging from
"pass" to "loss." There are three pools in the "pass" category, which consists
of credits found to be of acceptable risk. Generally, loans in this category are
to companies that have profit records, adequate capital for normal operations,
and sufficient cash flow to service the loan. When a loan shows signs of
potential weaknesses that may affect repayment of the loan or the collateral,
the loan is reclassified "specially mentioned." A loan that has further
deterioration and exhibits defined weaknesses in the borrower's capacity to
repay is reclassified "substandard." Loans that exhibit signs of doubtful
repayment are graded "doubtful" and loans that show signs of partial or full
loss are charged off immediately.
Management provides its lenders with training and systems to monitor the
risk of credits and requires a formal process to change the risk grade. When a
credit is downgraded, or the risk element has increased due to some potential
repayment weaknesses, the credit is given more attention to protect the Bank's
ability to collect the loan.
Portfolio Reviews. The Bank uses a "loan officer driven" grading system,
whereby all loans are periodically reviewed by loan officers as well as
management for common risk trends. The loan officers prepare a quarterly report
for management that reviews all the loans for changes in risk and identifies
areas for growth opportunities. This process allows management to proactively
monitor the portfolio for problems and, if needed, take action to mitigate risk.
Classified Asset Management. All classified assets and specially mentioned
credits that are currently outstanding or recently downgraded are generally
reported to management monthly, but in any case not less frequently than
quarterly. These reports are prepared by the Credit Administrative Officer
and draw attention to the credit problems, strategies to correct the same, and
dates for accomplishing the strategies. The reports also point out projected
weaknesses or strengths that could cause the credit to be downgraded or
upgraded.
When evaluating the reports, management determines if specific reserves
should be set up on the relevant credit, depending on the nature of the problem
and the underlying collateral. During this process, management evaluates the
borrower's cash flow and underlying collateral value. If there is erosion in
either case, prompt action is taken to protect the Bank's position. Such actions
may include taking additional collateral, obtaining further guarantees,
declaring a default and accelerating the loan, and such other legal remedies as
may be available to the Bank pursuant to the loan documents to take control of
the collateral. Each month management provides reports to the Board of Directors
analyzing the allowance for loan losses, foreclosed properties, classified and
non-performing assets, and loan charge-offs.
The reports are summarized on a tracking system used to monitor the
activity of the credits both for changing loan balances and required reporting
based on the initial target dates set by management.
Since 1988 economic conditions and declining real estate values in
Massachusetts and New England have negatively affected certain of the Bank's
borrowers. Since 1992 the Bank experienced improvement in the level of
non-performing assets. The following presents an analysis of the balance of the
allowance for loan losses:
11
<PAGE> 12
<TABLE>
<CAPTION>
At December 31,
----------------------------------------------------------------------------------
1996 1995 1994
------------------------- ----------------------- -------------------------
Percent of Percent of Percent of
Loans in Loans in Loans in
Amount each Amount each Amount each
of Category to of Category to of Category to
Allowance Total Loans Allowance Total Loan Allowance Total Loans
--------- ----------- --------- ---------- --------- -----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Residential 1-4 family
and loans held for sale $ 464 67.37% $ 270 52.53% $ 159 49.45%
Commercial:
Residential multi-family 733 4.06 808 6.75 805 8.19
Commercial real estate 1,405 15.96 1,514 21.63 1,249 22.31
Construction 59 2.14 48 3.48 35 3.00
Equity lines of credit 103 3.72 79 5.24 84 6.75
Other loans 474 6.75 235 10.37 234 10.30
Unallocated 1,478 N/A 859 N/A 628 N/A
------ ------ ------ ------ ------ ------
Total $4,716 100.00% $3,813 100.00% $3,194 100.00%
====== ====== ====== ====== ====== ======
</TABLE>
<TABLE>
<CAPTION>
At December 31,
------------------------------------------------------
1993 1992
------------------------- -----------------------
Percent of Percent of
Loans in Loans in
Amount each Amount each
of Category to of Category to
Allowance Total Loans Allowance Total Loan
--------- ----------- --------- ----------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Residential 1-4 family
and loans held for sale $ 195 48.11% $ 383 45.38%
Commercial:
Residential multi-family 588 7.01 653 6.62
Commercial real estate 1,778 23.58 2,067 25.61
Construction 48 4.15 36 3.14
Equity lines of credit 97 7.73 105 8.67
Other loans 221 9.42 290 10.58
Unallocated 727 N/A 107 N/A
------ ------ ------ ------
Total $3,654 100.00% $3,641 100.00%
====== ====== ====== ======
</TABLE>
The allowance for loan losses has been established to absorb reasonably
foreseeable losses inherent in the loan portfolio. The provision to and the
level of the allowance are evaluated on a periodic basis by management and the
Board of Directors. The evaluation is based on the results of the Bank's
internal loan review, historical loan loss experience, trends in delinquent and
non-accrual loans, known and inherent risks in the nature and volume of the loan
portfolio, adverse situations which may affect the borrower's ability to repay,
collateral values, an estimate of potential loss exposure on significant
credits, concentrations of credit, and present and prospective economic
conditions based on facts then known. Management believes that the resulting
allowance for loan losses is adequate to cover any known losses and any
reasonably foreseeable losses in its loan portfolio.
The following table presents a summary of the Bank's loan loss experience:
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Balance at beginning of year $ 3,813 $ 3,194 $ 3,654 $ 3,641 $ 4,865
Provisions for loan losses 75 525 807 1,492 1,363
Charge-offs:
Residential 1-4 family (463) (438) (202) (435) (560)
Residential multi-family (470) (433) (777) (493) (849)
Commercial real estate (89) (235) (519) (515) (1,194)
Equity lines of credit (20) (30) (7) (60) (30)
Other (89) (60) (105) (159) (229)
-------- ------- ------- ------- -------
Total (1,131) (1,196) (1,610) (1,662) (2,862)
Recoveries 307 143 343 183 275
-------- ------- ------- ------- -------
Net loans charged off (824) (1,053) (1,267) (1,479) (2,587)
Allowance acquired in acquisitions 1,652 1,147 - - -
-------- ------- ------- ------- -------
Balance at end of year $ 4,716 $ 3,813 $ 3,194 $ 3,654 $ 3,641
======== ======= ======= ======= =======
Ratio of net charge-offs to
average loans outstanding
during the year 0.34% 0.83% 1.15% 1.32% 2.21%
</TABLE>
Non-performing loans amounted to $3.9 million, $4.8 million, $2.3 million,
$3.7 million, and $5.9 million, at December 31, 1996, 1995, 1994, 1993, and
1992, respectively. If prior periods had been restated for the adoption of SFAS
114, non-performing loans would have amounted to $4.7 million, $6.5 million, and
$9.8 million at December 31, 1994, 1993, and 1992, respectively.
12
<PAGE> 13
Included in non-performing loans were $2.3 million, $1.3 million, $1.2
million, $2.0 million and $3.8 million of loans that were troubled debt
restructurings at December 31, 1996, 1995, 1994, 1993 and 1992,
respectively. In addition, the Bank had troubled debt restructurings
totaling $355,000, $631,000, $1.0 million, $4.3 million and $7.8 million at
December 31, 1996, 1995, 1994, 1993 and 1992, respectively, that were accounted
for on the accrual basis as they performed under the restructured terms for
a reasonable period, and the current interest rate approximates a market
interest rate. Interest income recognized on a cash-basis for non-accrual loans
amounted to $357,000, $629,000, $334,000, $242,000 and $207,000 for the
years ended December 31, 1996, 1995, 1994, 1993, and 1992, respectively.
The maturity distribution and interest rate sensitivity of selected
loan categories at December 31, 1996 is presented in the following table.
<TABLE>
<CAPTION>
At December 31, 1996
-----------------------------------------------------
Within 1-5 After
1 Year Years 5 Years Total
------ ----- ------- -----
(Dollars in thousands)
<S> <C> <C> <C> <C>
Loan Maturity:
Mortgage loans:
Construction $ 5,909 $ - $ - $ 5,909
Other loans:
Commercial lines of credit 5,622 - - 5,622
Commercial 1,443 2,635 760 4,838
-------- -------- -------- --------
$ 12,974 $ 2,635 $ 760 $ 16,369
======== ======== ======== ========
Rate Sensitivity:
Floating interest rates $ 2,093 $ 760 $ 2,853
Fixed interest rates 542 - 542
-------- ------- ---------
Total loans $ 2,635 $ 760 $ 3,395
======== ======= =========
</TABLE>
Investment Securities
Investment securities, consisting primarily of mortgage-backed securities,
increased $25.8 million during 1996 as the Bank deployed funds from acquired
deposits to leverage its capital position. This continued the execution of the
Bank's strategy begun in 1993 to maximize the Bank's return on equity by
deploying unused funds into investments having minimal credit risk. Under this
strategy, mortgage-backed securities purchases are structured to realize rate
spreads between the mortgage-backed securities and funding liabilities while
matching the expected maturities of the securities to the funding provided by
repurchase agreements and Federal Home Loan Bank ("FHLB") advances.
These transactions have the effect of lowering certain financial ratios
such as the Tier 1 leverage capital ratio, return on assets, the weighted
average interest rate spread, and the net yield on average interest-earning
assets, because they substantially increase the average asset base used in such
computations. On the other hand, this strategy results in substantial benefits
to pre-tax income and return on equity.
Mortgage-backed securities are primarily composed of issues guaranteed by
government and quasi-government agencies and high quality private sector
entities. When interest rates decline, mortgage refinancings increase, resulting
in accelerated principal repayments and lower net rate spreads. When rates
increase, prepayments decrease thus resulting in longer expected average lives.
Net spreads may increase or decrease depending on the repricing characteristics
of the mortgage-backed securities and the related funding liabilities.
At December 31, 1996, the carrying value of the Bank's investment
securities amounted to $192.5 million, representing 38.8% of the Bank's total
assets. As of December 31, 1995, the Bank's investment securities accounted for
51.4% of the Bank's total assets.
13
<PAGE> 14
The following table summarizes investment securities:
<TABLE>
<CAPTION>
At December 31,
---------------------------------------
1996 1995 1994
---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C>
Securities available for sale, at fair value $ 184,195 $ 160,582 $ 32,719
Securities held to maturity, at amortized cost - - 65,770
Restricted equity securities 8,322 6,127 5,132
---------- --------- ---------
$ 192,517 $ 166,709 $ 103,621
========== ========= =========
</TABLE>
<TABLE>
The following table sets forth the amortized cost and estimated fair value
for the Bank's held to maturity investment securities portfolio:
<CAPTION>
At December 31,
---------------------------
1994
---------------------------
Amortized Fair
Cost Value
---- -----
(Dollars in thousands)
<S> <C> <C>
Mortgage-backed securities $ 61,283 $ 57,095
U.S. Government and federal
agency obligations 4,487 4,278
---------- ----------
Total held to maturity $ 65,770 $ 61,373
======== ========
</TABLE>
The following table sets forth the amortized cost and estimated fair value
for the Bank's available for sale investment portfolio:
<TABLE>
<CAPTION>
At December 31,
---------------------------------------------------------------------------
1996 1995 1994
---------------------- ---------------------- ----------------------
Amortized Fair Amortized Fair Amortized Fair
Cost Value Cost Value Cost Value
---- ----- ---- ----- ---- -----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
U. S. Government and federal
agency obligations $ 2,500 $ 2,415 $ 4,499 $ 4,395 $ - $ -
Mortgage-backed securities 181,998 180,800 155,781 155,242 32,903 31,759
Corporate debt securities 1,000 980 1,000 945 1,000 960
--------- --------- --------- --------- ---------- ----------
Total available for sale $ 185,498 $ 184,195 $ 161,280 $ 160,582 $ 33,903 $ 32,719
========= ========= ========= ========= ========== ==========
</TABLE>
14
<PAGE> 15
<TABLE>
The following tables set forth as of the dates indicated, the maturities of
investment securities and the weighted-average yields of such securities, which
have been calculated on the cost basis, weighted for the scheduled maturity of
each security:
<CAPTION>
At December 31, 1996
--------------------------------------------
Weighted
Amortized Fair Average
Cost Value Rate
---- ----- ----
(Dollars in thousands)
<S> <C> <C> <C>
Investments Available for Sale
Mortgage-backed securities:
After 5 years but within 10 years $ 18,395 $ 17,724 6.44%
After 10 years 163,603 163,076 6.98%
--------- ---------
Total mortgage-backed securities 181,998 180,800 6.92%
--------- ---------
U.S. Government and federal agency obligations:
After 1 but within 5 years 2,500 2,415 4.61%
--------- ---------
Total U.S. government and federal
agency obligations 2,500 2,415 4.61%
--------- ---------
Corporate investments:
After 1 but within 5 years 1,000 980 6.24%
--------- ---------
Total corporate investments 1,000 980 6.24%
--------- ---------
Total investments available for sale $ 185,498 $ 184,195 6.89%
========= =========
</TABLE>
<TABLE>
<CAPTION>
At December 31, 1995
-------------------------------------------
Weighted
Amortized Fair Average
Cost Value Rate
---- ----- ----
(Dollars in thousands)
<S> <C> <C> <C>
Investments Available for Sale
Mortgage-backed securities:
After 10 years $ 155,781 $ 155,242 7.38%
--------- ---------
Total mortgage-backed securities 155,781 155,242 7.38%
--------- ---------
U.S. Government and federal agency obligations:
Within 1 year 2,000 1,977 4.44%
After 1 but within 5 years 2,499 2,418 4.39%
--------- ---------
Total U.S. Government and federal
agency obligations 4,499 4,395 4.41%
--------- ---------
Corporate investments:
After 1 but within 5 years 1,000 945 5.93%
--------- ---------
Total corporate investments 1,000 945 5.93%
--------- ---------
Total investments available for sale $ 161,280 $ 160,582 7.29%
========= =========
</TABLE>
<TABLE>
<CAPTION>
At December 31, 1994
-------------------------------------------
Weighted
Amortized Fair Average
Cost Value Rate
---- ----- ----
(Dollars in thousands)
<S> <C> <C> <C>
Investments Held to Maturity
Mortgage-backed securities:
After 1 but within 5 years $ 9,090 $ 8,493 6.29%
After 5 but within 10 years 33,318 30,502 6.51%
After 10 years 18,875 18,100 5.54%
-------- ---------
Total mortgage-backed securities 61,283 57,095 6.18%
-------- ---------
Obligations of other U.S. Government agencies:
After 1 but within 5 years 4,487 4,278 4.94%
-------- ---------
Total investments held to maturity $ 65,770 $ 61,373 6.10%
========= ==========
Investments Available for Sale
Mortgage-backed securities:
After 5 but within 10 years $ 180 $ 173 6.50%
After 10 years 32,723 31,586 5.97%
--------- ---------
Total mortgage-backed securities 32,903 31,759 5.97%
--------- ---------
Corporate investments:
After 1 but within 5 years 1,000 960 6.58%
--------- ---------
Total investments available for sale $ 33,903 $ 32,719 5.98%
========= =========
</TABLE>
15
<PAGE> 16
The following table sets forth securities from any single issuer, excluding
the U.S. Government or its agencies, for which amortized cost exceeds 10% of
stockholders' equity:
<TABLE>
<CAPTION>
At December 31, 1996
---------------------------------------------
Percent of
Amortized Stockholders' Fair
Cost Equity Value
---- ------ -----
(Dollars in thousands)
<S> <C> <C> <C>
Mortgage-backed securities:
Sears Mortgage Securities $ 3,120 10% $ 3,104
Saxon Mortgage Securities Corp. 6,178 20% 6,215
</TABLE>
Deposits
Deposits generated from within the Bank's local market area are the primary
source of funds for the Bank's lending and investment operations. In addition to
savings deposits, NOW, and money market deposits, the Bank offers several
checking account programs to meet the individual needs of its customers.
Substantially all the Bank's deposits are derived from customers who work or
reside in the Bank's market area.
The average daily amount of deposits and the average rate paid on each of
the following deposit categories is summarized below for the years indicated:
<TABLE>
<CAPTION>
For the Years Ended December 31,
--------------------------------------------------------------------------
1996 1995 1994
---------------------- ---------------------- ---------------------
Average Average Average
Average Rate Average Rate Average Rate
Balance Paid Balance Paid Balance Paid
------- ---- ------- ---- ------- ----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Non-interest bearing
demand deposits $ 33,542 N/A $ 11,758 N/A $ 8,578 N/A
NOW 36,828 1.41% 17,041 1.47% 14,314 1.47%
Savings 89,003 2.70 48,814 2.76 46,336 2.45
Money market 14,880 2.94 11,219 2.90 14,452 2.54
Time 125,422 5.64 64,856 5.57 53,559 4.11
---------- --------- ---------
Total $ 299,675 3.48% $ 153,688 3.60% $ 137,239 2.85%
========== ========= =========
</TABLE>
As of December 31, 1996, term certificates of deposit in amounts of
$100,000 or more had the following maturities:
(Dollars in thousands)
Under 3 months $ 21,709
3 to 6 months 5,068
6 to 12 months 3,449
Over 12 months 6,696
---------
Total $ 36,922
========
16
<PAGE> 17
Borrowings
The following table summarizes the outstanding balances of borrowings for
the years indicated:
<TABLE>
<CAPTION>
At or For the Years Ended December 31,
--------------------------------------
1996 1995 1994
---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C>
FHLB advances:
Balance at end of year $ 89,250 $ 88,470 $ 75,615
Average balance 114,380 78,731 44,021
Maximum month-end balance 134,277 91,600 75,615
Weighted average rate during the period 5.63% 5.77% 5.28%
Year-end average rate 5.64% 5.73% 5.54%
Securities sold under agreements to repurchase:
Balance at end of year $ 34,670 $ 37,775 $ 1,965
Average balance 32,103 18,767 6,541
Maximum month-end balance 44,740 37,775 9,679
Weighted average rate during the period 5.36% 5.75% 4.86%
Year-end average rate 5.28% 5.77% 6.50%
</TABLE>
Employees
At December 31, 1996, the Company had 212 full-time equivalent employees.
Employee benefits include a pension plan, 401(k) Plan, and life, health, travel,
accident and long-term disability insurance, tuition assistance and an Employee
Stock Ownership Plan, which is offered by the Company to all employees who meet
the minimum hours worked requirements. None of the employees of the Company is
represented by a collective bargaining group, and management considers its
relationship with its employees to be good.
YEAR 2000 ISSUES
An issue receiving much attention in the media and by regulatory agencies
has been the risk posed by programming code in existing computer application
programs as the industry enters the new millennium. The essence of the problem
relates to the existing standard for computer programs being inadequate for
financial computations. The regulatory and business concern is that adequate
measures be taken now to correct this problem. In People's case, we utilize the
services of a third party data center for most of our data processing and as a
vendor for certain programs maintained in-house. We have been kept apprised of
their efforts to ensure that all programs be fully Year 2000 compliant. Such
efforts have been subject to FFIEC examination review and appear to be
sufficient to ensure that software used by the Company will adequately address
regulatory concerns.
Item 2. Properties
The Bank's main office has been located in its current quarters in downtown
Brockton since 1908. In April 1996, the Company moved its service center to New
Bedford from Easton.
All branches provide a broad range of bank services. All Bank locations,
except for the service center and main office, have ATMs. The Bank is a member
of the Cirrus, Cashstream, and NYCE ATM networks, which provide service to its
customers throughout New England and the United States.
The following table sets forth certain information relating to real estate
owned or leased by the Company as of December 31, 1996. The Company believes
that the fair market value exceeds the net book value of its owned real estate.
Net Book Value at Owned/
Location December 31, 1996 Leased
- -------- ----------------- ------
(Dollars in thousands)
People's Savings Bank of Brockton
Service Center and Branch:
545 Pleasant Street, New Bedford $5,508 Owned
Main Office:
221 Main Street, Brockton 27 Owned
17
<PAGE> 18
Other Branches:
580 Washington Street, South Easton $309 Owned
757 Centre Street, Brockton 290 Owned
500 Washington Street, Stoughton 308 Owned
116 Torrey Street, Brockton (1) 177 Leased
200 Westgate Drive, Brockton (2) 89 Leased
33 Weir Street, Taunton 566 Owned
478 Middleboro Avenue, East Taunton(3) 1 Leased
84 Copeland Drive, Mansfield (4) 333 Leased
2206 Acushnet Ave, New Bedford 447 Owned
28 County Road, Mattapoisett 492 Owned
280 Winthrop Street, Taunton (5) 324 - Leased
686 Dartmouth Street, South Dartmouth 869 Owned
People's Mortgage Corporation:
580 Washington Street, South Easton, MA (6) - Leased
206 Andover Street, Andover, MA (7) - Leased
58 Main Street, Sturbridge, MA (8) - Leased
2337 Whitney Avenue, Hamden, CT (9) 19 Leased
545 Pleasant Street, New Bedford (6) - Leased
(1) Lease expires December 31, 1997 with an option to renew for two
five-year periods.
(2) Lease expires October 31, 1998.
(3) Tenant-at-will.
(4) Lease expires December 31, 1998 with two additional five year renewal
options.
(5) Lease expires October 31, 1999.
(6) People's Mortgage Corporation leases space from the Company as a
tenant-at-will.
(7) Tenant-at-will.
(8) Lease expires November 30, 1998 with an option to renew for three
years.
(9) Lease expires November 30, 1997.
The Bank owns other properties, consisting primarily of foreclosed real
estate, through its subsidiaries G.B.L., Inc. ("GBL"), PECO, Inc. ("PECO") and
Longworth, Inc.
Item 3. Legal Proceedings
The Company is involved from time to time as a party to legal proceedings
occurring in the ordinary course of its business. The Company believes that none
of these proceedings would, individually, if adversely determined, have a
material effect on the Company's consolidated financial condition or results
of operations.
Item 4. Submission of Matters to a Vote of Security Holders
18
<PAGE> 19
Not applicable.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
Since the consummation of the Reorganization on February 8, 1996, the
Common Stock of the Company has been traded in the over-the-counter market on
the Nasdaq National Market under the symbol "PBKB." Prior to that time, the
common stock of the Bank was traded on the Nasdaq National Market. The following
table sets forth the high and low sales prices of the common stock of the Bank
as reported on the Nasdaq National Market during the periods indicated.
Sales Price
-----------
High Low
---- ---
1995
First Quarter.............................................. $ 6.375 $ 4.625
Second Quarter............................................. 7.25 5.50
Third Quarter.............................................. 8.125 6.75
Fourth Quarter............................................. 10.50 7.375
1996
First Quarter.............................................. $10.50 $ 8.50
Second Quarter............................................. 10.125 8.75
Third Quarter.............................................. 10.50 9.00
Fourth Quarter............................................. 11.625 10.00
On March 27, 1997, the closing sale price of a share of Common Stock of
the Company on the Nasdaq National Market was $12.00.
At March 27, 1997, there were approximately 750 holders of record of the
Common Stock. The number of holders of record does not reflect the number of
persons or entities who or which hold their stock in nominee or "street" name
through various brokerage firms or other entities.
The Company's ability to pay dividends on the Common Stock depends on the
receipt of dividends from the Bank. Although the Company has adopted a policy of
paying regular quarterly dividends on the Common Stock, there can be no
assurance that such dividends will be paid in the future, or if paid, the amount
of any such dividends.
Declarations of dividends by the Board of Directors of the Company will
depend on a number of factors, including capital requirements, regulatory
limitations, the Bank's operating results and financial condition and general
economic conditions. As the principal asset of the Company, the Bank currently
provides the only source of payment of dividends by the Company. Under
Massachusetts law, stock savings banks such as the Bank may pay dividends only
out of "net profits" and only to the extent that such payments will not impair
the Bank's capital stock and surplus account. If, prior to the declaration of a
dividend, the Bank's capital stock and surplus account do not equal at least 10%
of its deposit liabilities, then prior to payment of the dividend the Bank must
transfer from net profits to its surplus account the amount required to make the
surplus account equal to either (i) together with capital stock, 10% of deposit
liabilities or, (ii) subject to certain adjustments, 100% of capital stock.
These restrictions on the ability of the Bank to pay dividends to the Company
may restrict the ability of the Company to pay dividends to the holders of the
Common Stock. Although Massachusetts law does not define what constitutes "net
profits," it is generally assumed that the term includes a bank's undivided
profits account (retained earnings) and does not include its surplus account
(additional paid-in capital).
The Company and the Bank are subject to capital ratio requirements
established by the Federal Reserve Board and the FDIC. Under Section 38 of the
Federal Deposit Insurance Act, the Bank would be prohibited from making any
capital distribution, including the payment of dividends, if the Bank would be
undercapitalized
19
<PAGE> 20
following such distribution under the FDIC's prompt corrective action
regulations. In addition to such regulatory limitations on the payment of
dividends, the effect of the payment of dividends on the capital ratios of the
Bank or the Company, as the case may be, may be a factor in the determination by
the Board of Directors to pay such dividends.
In addition, under current law, to the extent that the Bank makes
"non-dividend distributions" to the Company that are considered to have been
made from certain portions of the Bank's bad debt reserve, an amount based on
the amount distributed will be included in the Bank's taxable income.
The most recent quarterly dividend was declared by the Bank on January 29,
1997, totaled $0.09 per share and was paid on March 14, 1997. The Bank declared
and paid a quarterly dividend of $0.05, $0.07, $0.07, and $0.08 per share in the
first, second, third, and fourth quarters of 1996. The Bank declared and paid a
quarterly dividend of $0.04 per share in the fourth quarter of 1995. This was
the first dividend paid since 1990. The dividend payout ratio was 24.36% and
4.24% in 1996 and 1995, respectively, . There were no dividends paid out in the
years ended December 31, 1994, 1993, 1992, or 1991.
Item 6. Selected Financial Data
The information required by this item appears on page 4 of the Annual
Report to Stockholders for the fiscal year ended December 31, 1996 and is
incorporated herein by reference.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The information required by this item appears in the Management's
Discussion and Analysis of Financial Condition and Results of Operations on
pages 2 to 12 inclusive of the Annual Report to Stockholders for the fiscal year
ended December 31, 1996 and is incorporated herein by reference.
Item 8. Financial Statements and Supplementary Data
The Information required by this item appears on pages 13 to 26 inclusive
of the Annual Report to Stockholders for the fiscal year ended December 31, 1996
and is incorporated herein by reference.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
Not applicable.
PART III
Item 10. Directors and Executive Officers of the Registrant
The information required by this item will appear under the headings
"Directors of the Company," "Executive Officers of the Company" and "Compliance
with Section 16(a) of the Exchange Act" in the Company's definitive Proxy
Statement for the Annual Meeting of Stockholders to be held on May 13, 1997 (the
"Proxy Statement"), to be filed with the Securities and Exchange Commission
pursuant to Regulation 14A within 120 days after the end of the Company's fiscal
year, and is incorporated herein by reference.
Item 11. Executive Compensation
The information required by this item will appear in the Proxy Statement
under the headings "Executive Compensation" and "Compensation of Directors" and
is incorporated herein by reference.
20
<PAGE> 21
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information required by this item will appear in the Proxy Statement
under the heading "Security Ownership of Certain Beneficial Owners and
Management" and is incorporated herein by reference.
Item 13. Transactions with Certain Related Persons.
The information required by this item will appear in the Proxy Statement
under the heading "Certain Transactions" and is incorporated herein by
reference.
PART IV
Item 14. Exhibits, Financial Statement Schedules, And Reports on Form 8-K
(a)(1) Index of Financial Statements. The following financial statements
appear in response to Item 8 of this Report:
Independent Auditors' Report
Consolidated Balance Sheets as of December 31, 1996 and 1995
Consolidated Statements of Income for the years ended December 31, 1996,
1995 and 1994
Consolidated Statements of Changes in Stockholders' Equity for the years
ended December 31, 1996, 1995 and 1994
Consolidated Statements of Cash Flows for the years ended December 31,
1996, 1995 and 1994
Notes to Consolidated Financial Statements
(a)(2) Index of Financial Statement Schedules. All financial statement
schedules have been omitted because they are not required, not applicable or are
included in Notes to Consolidated to Financial Statements.
(a)(3) Exhibits.
21
<PAGE> 22
EXHIBIT INDEX
Exhibit Description
------- -----------
2.1 Plan of Reorganization and Acquisition by and between the Company and
the Bank dated as of March 31, 1995 (filed as Exhibit 10.1 to the
Company's Registration Statement on Form S-1 (No. 33-99772) and
incorporated herein by reference.)
3.1 Restated Articles of Organization of the Company (filed as Exhibit 3.1
to the Company's Annual Report on Form 10-K for the year ended
December 31, 1995 and incorporated herein by reference.)
3.2 By-laws of the Company, as amended and restated
4.1 Specimen certificate for shares of Common Stock of the Company (filed
as Exhibit 4.1 to the Company's Annual Report on Form 10-K for the
year ended December 31, 1995 and incorporated herein by reference.)
4.2 Articles IV and VI(I)-(K) of Restated Articles of Organization of the
Company (see Exhibit 3.1)
4.3 Articles I and IV of By-laws of the Company (see Exhibit 3.2)
10.1 Amended and Restated Special Termination Agreement by and among the
Company, the Bank and Colin C. Blair, dated as of February 7, 1996+
(filed as Exhibit 10.5 to the Company's Registration Statement on
Form S-1, File No. 33-99772 (the "S-1") and incorporated herein by
reference.)
10.2 Amended and Restated Special Termination Agreement by and between the
Bank and Donna L. Boulanger, dated as of February 7, 1996 (filed as
Exhibit 10.6 to the S-1 and incorporated herein by reference.)
10.3 Amended and Restated Special Termination Agreement by and between the
Bank and Charles R. Leyton, dated as of February 7, 1996 (filed as
Exhibit 10.7 to the S-1 and incorporated herein by reference.)
10.4 Amended and Restated Special Termination Agreement by and between the
Bank and Lorraine P. Healy, dated as of February 7, 1996 (filed as
Exhibit 10.8 to the S-1 and incorporated herein by reference.)
10.5 Amended and Restated Special Termination Agreement by and between the
Bank and Robert Cully, dated as of February 7, 1996 (filed as
Exhibit 10.9 to the S-1 and incorporated herein by reference.)
10.6 Amended and Restated Special Termination Agreement by and between the
Bank and Maureen A. Gregory, dated as of February 7, 1996 (filed as
Exhibit 10.10 to the S-1 and incorporated herein by reference.)
10.7 Employment Agreement by and between People's Mortgage Corporation and
John J. Kiernan, Jr. dated as of October 6, 1995 (filed as Exhibit
10.11 to the S-1 and incorporated herein by reference.)
22
<PAGE> 23
10.8 Employment Agreement by and between People's Mortgage Corporation and
James F. Ryder, Jr. dated October 6, 1995 (filed as Exhibit 10.12 to
the S-1 and incorporated herein by reference)
10.9 Employment Agreement by and between People's Mortgage Corporation and
Michael C. Gillis dated as of March 31, 1995 (filed as Exhibit 10.13
to the S-1 and incorporated herein by reference)
10.10 Employment Agreement by and between People's Mortgage Corporation and
Vincent E. Hayes, Jr. dated as of March 31, 1995 (filed as Exhibit
10.14 to the S-1 and incorporated herein by reference)
10.11 Employment Agreement by and between the Bank and Raymond F. Wheeler
dated as of May 10, 1995 (filed as Exhibit 10.15 to the S-1 and
incorporated herein by reference)
10.12 Discretionary Bonus Plan of the Bank+ (filed as Exhibit 10.16 to the
S-1 and incorporated herein by reference)
10.13 Amended and Restated Directors' Stock Option Plan+ (filed as Exhibit
10.17 to the Company's Annual Report on Form 10-K for the year ended
December 31, 1995 and incorporated herein by reference.)
10.14 Amended and Restated Incentive and Nonqualified Stock Option Plan+
(filed as Exhibit 10.18 to the Company's Annual Report on Form 10-K
for the year ended December 31, 1995 and incorporated herein by
reference.)
10.15 Asset Purchase Agreement by and among People's Saving Bank of
Brockton, Minuteman Funding Corporation, and the Stockholders of
Minuteman Funding Corporation dated as of March 31, 1995 (filed as
Exhibit 10.27 to the S-1 and incorporated herein by reference)
10.16 Agreement for Purchase and Sale of Assets and Assumption of
Liabilities by and between People's Savings Bank of Brockton and The
First National Bank of Boston, N.A. dated as of May 11, 1995 (filed
as Exhibit 10.28 to the S-1 and incorporated herein by reference)
10.17 Purchase and Assumption Agreement by and between People's Savings Bank
of Brockton and Fleet Bank of Massachusetts, N.A. dated as of
September 30, 1995 (filed as Exhibit 10.29 to the S-1 and
incorporated herein by reference)
10.18 Purchase and Assumption Agreement by and between People's Savings Bank
of Brockton and Shawmut Bank, N.A. dated as of September 30, 1995
(filed as Exhibit 10.30 to the S-1 and incorporated herein by
reference)
10.19 Amendment No. 1 to Purchase and Assumption Agreement, dated as of
March 8, 1996, by and between People's Savings Bank of Brockton, Fleet
Bank of Massachusetts, N.A. and certain other parties dated as of
September 30, 1995. (filed as Exhibit 10.31 to the Company's Annual
Report on Form 10-K for the year ended December 31, 1995 and
incorporated herein by reference.)
23
<PAGE> 24
10.20 Amendment No. 1 to Purchase and Assumption Agreement, dated as of
March 8, 1996, by and between People's Savings Bank of Brockton, Fleet
National Bank of Massachusetts (formerly Shawmut Bank, N.A.) and
certain other parties dated as of September 30, 1995. (filed as
Exhibit 10.32 to the Company's Annual Report on Form 10-K for the year
ended December 31, 1995 and incorporated herein by reference.)
*10.21 1996 Stock Option and Incentive Plan+
*10.22 Form of Director Nonqualified Stock Option Agreement
*10.23 Form of Employee Nonqualified Stock Option Agreement
*10.24 Form of Incentive Stock Option Agreement
*13 People's Bancshares, Inc. 1996 Annual Report to Stockholders
*21 Schedule of subsidiaries of the Company
*23 Consent of Wolf & Company, P.C., as independent certified public
accountants
*27 Financial Data Schedule
- ---------------
* Filed herewith.
+ Management contract or compensatory plan required to be filed as an exhibit
to this Form 10-K pursuant to Item 14 of Form 10-K.
(b) Reports on Form 8-K. The Company filed a Current Report on Form 8-K with
the Securities and Exchange Commission on December 6, 1996 in connection
with the resignation of its President and Chief Executive Officer.
24
<PAGE> 25
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Registration Statement
to be signed on its behalf by the undersigned, thereunto duly authorized on
March 25, 1997.
PEOPLE'S BANCSHARES, INC.
By: /s/ Colin C. Blair
---------------------------------
Colin C. Blair
Vice President, Treasurer and
Chief Financial Officer
(principal financial and
accounting officer)
25
<PAGE> 26
Pursuant to the requirements of 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.
Signature Title Date
--------- ----- ----
/s/ Colin C. Blair Chief Financial Officer March 25, 1997
- ----------------------------- & Treasurer (principal
Colin C. Blair executive officer)
/s/ Frederick W. Adami III Director March 25, 1997
- -----------------------------
Frederick W. Adami, III
/s/ Virginia M. Burke Director March 25, 1997
- -----------------------------
Virginia M. Burke
/s/ B. Benjamin Cavallo Director March 25, 1997
- -----------------------------
B. Benjamin Cavallo
/s/ John R. Eaton Director March 25, 1997
- -----------------------------
John R. Eaton
/s/ S. David Goldberg Director March 25, 1997
- -----------------------------
S. David Goldberg
/s/ Terrence Gomes Director March 25, 1997
- -----------------------------
Terrence Gomes
/s/ Fred W. Green Director March 25, 1997
- -----------------------------
Fred W. Green
/s/ Dr. Loring C. Johnson Director March 25, 1997
- -----------------------------
Dr. Loring C. Johnson
/s/ Richard D. Matthews Director March 25, 1997
- -----------------------------
Richard D. Matthews
26
<PAGE> 27
Signature Title Date
--------- ----- ----
/s/ Gerald R. Rodman Director March 25, 1997
- -----------------------------
Gerald R. Rodman
/s/ Davis H. Scudder Director March 25, 1997
- -----------------------------
Davis H. Scudder
/s/ Stanley D. Siskind Director March 25, 1997
- -----------------------------
Stanley D. Siskind
/s/ Colin C. Blair Vice President, Treasurer March 25, 1997
- ---------------------------- and Chief Financial Officer
Colin C. Blair (principal financial and
accounting officer)
<PAGE> 1
EXHIBIT 10.21
PEOPLE'S BANCSHARES, INC.
1996 STOCK OPTION AND INCENTIVE PLAN
SECTION 1. GENERAL PURPOSE OF THE PLAN; DEFINITIONS
The name of the plan is the People's Bancshares, Inc. 1996 Stock Option and
Incentive Plan (the "Plan"). The purpose of the Plan is to encourage and enable
the officers, employees, directors and other key persons of People's Bancshares,
Inc. (the "Company") and its Subsidiaries upon whose judgment, initiative and
efforts the Company largely depends for the successful conduct of its business
to acquire a proprietary interest in the Company. It is anticipated that
providing such persons with a direct stake in the Company's welfare will assure
a closer identification of their interests with those of the Company, thereby
stimulating their efforts on the Company's behalf and strengthening their desire
to remain with the Company.
The following terms shall be defined as set forth below:
"Act" means the Securities Exchange Act of 1934, as amended.
"Award" or "Awards," except where referring to a particular category of
grant under the Plan, shall include Incentive Stock Options, Non-Qualified Stock
Options, Restricted Stock Awards, and Unrestricted Stock Awards.
"Board" means the Board of Directors of the Company.
"Cause" as such term relates to the termination of any person means the
occurrence of one or more of the following: (i) such person is convicted of,
pleads guilty to, or confesses to any felony or any act of fraud,
misappropriation or embezzlement which has an immediate and materially adverse
effect on the Company or any Subsidiary, as determined by the Board in good
faith in its sole discretion; (ii) such person engages in a fraudulent act to
the material damage or prejudice of the Company or any Subsidiary or in conduct
or activities materially damaging to the property, business or reputation of the
Company or any Subsidiary, all as determined by the Board in good faith in its
sole discretion; (iii) any material act or omission by such person involving
malfeasance or negligence in the performance of such person's duties to the
Company or any Subsidiary to the material detriment of the Company or any
Subsidiary, as determined by the Board in good faith in its sole discretion,
which has not been corrected by such person within 30 days after written notice
from the Company of any such act or omission; (iv) failure by such person to
comply in any material respect with the terms of his employment agreement, if
any, or any written policies or directives of the Board as determined by the
Board in good faith in its sole discretion, which has not been corrected by such
person within 30 days after written notice from the Company of such failure; or
(v) material breach by such person of his noncompetition agreement with the
Company, if any, as determined by the Board in good faith in its sole
discretion.
"Change of Control" is defined in Section 12.
<PAGE> 2
"Code" means the Internal Revenue Code of 1986, as amended, and any
successor Code, and related rules, regulations and interpretations.
"Committee" means the Committee of the Board referred to in Section 2.
"Disability" means an individual's inability to engage in any substantial
gainful activity by reason of any medically determinable physical or mental
impairment which can be expected to result in death or which has lasted or can
be expected to last for a continuous period of not less than 12 months.
"Disinterested Person" means an Independent Director who qualifies as such
under Rule 16b-3(c)(2)(i) promulgated under the Act, or any successor definition
under said Rule.
"Effective Date" means the date on which the Plan is approved by
stockholders as set forth in Section 14.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended, and the related rules, regulations and interpretations.
"Fair Market Value" on any given date means the closing price per share of
Stock or, if no Stock is traded on such date, the next preceding date on which
Stock was traded, as reflected on the Nasdaq National Market.
"Incentive Stock Option" means any Stock Option designated and qualified as
an "incentive stock option" as defined in Section 422 of the Code.
"Independent Director" means a member of the Board who is not also an
employee of the Company or any Subsidiary.
"Non-Qualified Stock Option" means any Stock Option that is not an
Incentive Stock Option.
"Option" or "Stock Option" means any option to purchase shares of Stock
granted pursuant to Section 5.
"Restricted Stock Award" means Awards granted pursuant to Section 6.
"Stock" means the Common Stock, par value $.10 per share, of the Company,
subject to adjustments pursuant to Section 3.
"Subsidiary" means any corporation or other entity (other than the Company)
including, without limitation, People's Savings Bank of Brockton (the "Bank"),
in any unbroken chain of corporations or other entities, beginning with the
Company if each of the corporations or entities
2
<PAGE> 3
(other than the last corporation or entity in the unbroken chain) owns stock or
other interests possessing 50% or more of the economic interest or the total
combined voting power of all classes of stock or other interests in one of the
other corporations or entities in the chain.
"Unrestricted Stock Award" means any Award granted pursuant to Section 7.
SECTION 2. ADMINISTRATION OF PLAN; COMMITTEE AUTHORITY TO SELECT PARTICIPANTS
AND DETERMINE AWARDS
(a) Committee. The Plan shall be administered by the Option Committee which
shall consist of not less than two Independent Directors as appointed by the
Board from time to time. Each member of the Committee shall be a Disinterested
Person and an "outside director" within the meaning of Section 162(m) of the
Code and the regulations promulgated thereunder.
(b) Powers of Committee. The Committee shall have the power and authority
to grant Awards consistent with the terms of the Plan, including the power and
authority:
(i) to select the officers, employees and key persons of the Company
and its Subsidiaries to whom Awards may from time to time be granted;
(ii) to determine the time or times of grant, and the extent, if any,
of Incentive Stock Options, Non-Qualified Stock Options, Restricted Stock
Awards, Unrestricted Stock Awards, or any combination of the foregoing,
granted to any one or more participants;
(iii) to determine the number of shares of Stock to be covered by any
Award;
(iv) to determine and modify from time to time the terms and
conditions, including restrictions, not inconsistent with the terms of the
Plan, of any Award, which terms and conditions may differ among individual
Awards and participants, and to approve the form of written instruments
evidencing the Awards;
(v) to accelerate at any time the exercisability or vesting of all or
any portion of any Award;
(vi) subject to the provisions of Section 5(a)(ii), to extend at any
time the period in which Stock Options may be exercised;
(vii) to determine at any time whether, to what extent, and under what
circumstances Stock and other amounts payable with respect to an Award
shall be deferred either automatically or at the election of the
participant and whether and to what extent the Company shall pay or credit
amounts constituting interest (at rates determined by the Committee) or
dividends or deemed dividends on such deferrals; and
3
<PAGE> 4
(viii) at any time to adopt, alter and repeal such rules, guidelines
and practices for administration of the Plan and for its own acts and
proceedings as it shall deem advisable; to interpret the terms and
provisions of the Plan and any Award (including related written
instruments); to make all determinations it deems advisable for the
administration of the Plan; to decide all disputes arising in connection
with the Plan; and to otherwise supervise the administration of the Plan.
All decisions and interpretations of the Committee shall be binding on all
persons, including the Company and Plan participants.
SECTION 3. STOCK ISSUABLE UNDER THE PLAN; MERGERS; SUBSTITUTION
(a) Stock Issuable. The maximum number of shares of Stock reserved and
available for issuance under the Plan shall be 334,000 shares. For purposes of
this limitation, the shares of Stock underlying any Awards which are forfeited,
canceled, reacquired by the Company, satisfied without the issuance of Stock or
otherwise terminated (other than by exercise) shall be added back to the shares
of Stock available for issuance under the Plan. Subject to such overall
limitation, shares of Stock may be issued up to such maximum number pursuant to
any type or types of Award. The shares available for issuance under the Plan may
be authorized but unissued shares of Stock or shares of Stock reacquired by the
Company.
Notwithstanding the foregoing, the sum of the aggregate number of shares of
Stock underlying (i) outstanding Options granted under the Plan, (ii)
outstanding options granted under the People's Bancshares, Inc. Amended and
Restated Directors' Stock Option Plan, (iii) outstanding options granted under
the People's Bancshares, Inc. Amended and Restated Incentive and Nonqualified
Stock Option Plan, and (iv) outstanding warrants to purchase Stock granted by
the Bank in 1992 shall at no time exceed 20% of the aggregate number of shares
of Stock then issued and outstanding.
(b) Recapitalizations. If, through or as a result of any merger,
consolidation, sale of all or substantially all of the assets of the Company,
reorganization, recapitalization, reclassification, stock dividend, stock split,
reverse stock split or other similar transaction, the outstanding shares of
Stock are increased or decreased or are exchanged for a different number or kind
of shares or other securities of the Company, or additional shares or new or
different shares or other securities of the Company or other non-cash assets are
distributed with respect to such shares of Stock or other securities, the
Committee shall make an appropriate or proportionate adjustment in (i) the
maximum number of shares reserved for issuance under the Plan, (ii) the number
of Stock Options that can be granted to any one individual participant, (iii)
the number and kind of shares or other securities subject to any then
outstanding Awards under the Plan, and (iv) the price for each share subject to
any then outstanding Stock Options under the Plan, without changing the
aggregate exercise price (i.e., the exercise price multiplied by the number of
Stock Options) as to which such Stock Options remain exercisable. The adjustment
by the Committee shall be final, binding and conclusive. No fractional shares of
Stock shall be issued under the
4
<PAGE> 5
Plan resulting from any such adjustment, but the Committee in its discretion may
make a cash payment in lieu of fractional shares.
(c) Mergers. Upon consummation of a consolidation or merger or sale of all
or substantially all of the assets of the Company in which outstanding shares of
Stock are exchanged for securities, cash or other property of an unrelated
corporation or business entity or in the event of a liquidation of the Company,
the Plan and all outstanding Options issued hereunder shall terminate, unless
provision is made in connection with such transaction for the assumption of
Options theretofore granted, or the substitution for such Options of new options
of the acquiring or succeeding corporation (or an affiliate thereof), with
appropriate adjustment as to the number and kind of shares and the per share
exercise prices, as provided in Section 3(b). In the event of such termination,
all outstanding Options shall be exercisable in full for at least 15 days prior
to the date of such termination whether or not otherwise exercisable during such
period.
(d) Substitute Awards. The Committee may grant Awards under the Plan in
substitution for stock and stock based awards held by employees of another
corporation who become employees of the Company or a Subsidiary as the result of
a merger or consolidation of the employing corporation with the Company or a
Subsidiary or the acquisition by the Company or a Subsidiary of property or
stock of the employing corporation. The Committee may direct that the substitute
awards be granted on such terms and conditions as the Committee considers
appropriate in the circumstances.
SECTION 4. ELIGIBILITY
Participants in the Plan will be such full or part-time officers and other
employees and key persons of the Company and its Subsidiaries who are
responsible for or contribute to the management, growth or profitability of the
Company and its Subsidiaries as are selected from time to time by the Committee,
in its sole discretion. Independent Directors are also eligible to participate
in the Plan but only to the extent provided in Section 5(b) below.
SECTION 5. STOCK OPTIONS
Any Stock Option granted under the Plan shall be in such form as the
Committee may from time to time approve.
Stock Options granted under the Plan may be either Incentive Stock Options
or Non- Qualified Stock Options. Incentive Stock Options may be granted only to
employees of the Company or any Subsidiary that is a "subsidiary corporation"
within the meaning of Section 424(f) of the Code. To the extent that any Option
does not qualify as an Incentive Stock Option, it shall be deemed a
Non-Qualified Stock Option.
No Incentive Stock Option shall be granted under the Plan after March 26,
2006.
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(a) Stock Options Granted to Employees and Key Persons. The Committee in
its discretion may grant Stock Options to eligible employees and key persons of
the Company or any Subsidiary. No person shall be eligible to receive any Option
under this Section 5(a) if at the date of grant such person beneficially owns in
excess of 10% of the outstanding Stock of the Company. Stock Options granted
pursuant to this Section 5(a) shall be subject to the following terms and
conditions and shall contain such additional terms and conditions, not
inconsistent with the terms of the Plan, as the Committee shall deem desirable:
(i) Exercise Price. The exercise price per share for the Stock covered
by a Stock Option granted pursuant to this Section 5(a) shall be determined
by the Committee at the time of grant but shall not be less than 100% of
the Fair Market Value on the date of grant. If an employee owns or is
deemed to own (by reason of the attribution rules applicable under Section
424(d) of the Code) more than 10% of the combined voting power of all
classes of stock of the Company or any Subsidiary or parent corporation and
an Incentive Stock Option is granted to such employee, the option price of
such Incentive Stock Option shall be not less than 110% of the Fair Market
Value on the grant date.
(ii) Option Term. The term of each Stock Option shall be fixed by the
Committee, but no Incentive Stock Option shall be exercisable more than ten
years after the date the option is granted. If an employee owns or is
deemed to own (by reason of the attribution rules of Section 424(d) of the
Code) more than 10% of the combined voting power of all classes of stock of
the Company or any Subsidiary or parent corporation and an Incentive Stock
Option is granted to such employee, the term of such Incentive Stock Option
shall be no more than five years from the date of grant.
(iii) Exercisability; Rights of a Stockholder. Stock Options shall
become vested and exercisable at such time or times, whether or not in
installments, as shall be determined by the Committee at or after the grant
date. The Committee may at any time accelerate the exercisability of all or
any portion of any Stock Option. An optionee shall have the rights of a
stockholder only as to shares acquired upon the exercise of a Stock Option
and not as to unexercised Stock Options.
(iv) Method of Exercise. Stock Options may be exercised in whole or in
part, by giving written notice of exercise to the Company, specifying the
number of shares to be purchased. Payment of the purchase price may be made
by one or more of the following methods:
(A) In cash, by certified or bank check or other instrument
acceptable to the Committee;
(B) In the form of shares of Stock that are not then subject to
restrictions under any Company plan and that have been held by the
optionee for at least six months, if permitted by the Committee in its
discretion. Such surrendered shares shall be valued at Fair Market
Value on the exercise date; or
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(C) By the optionee delivering to the Company a properly executed
exercise notice together with irrevocable instructions to a broker to
promptly deliver to the Company cash or a check payable and acceptable
to the Company to pay the purchase price; provided that in the event
the optionee chooses to pay the purchase price as so provided, the
optionee and the broker shall comply with such procedures and enter
into such agreements of indemnity and other agreements as the
Committee shall prescribe as a condition of such payment procedure.
Payment instruments will be received subject to collection. The delivery of
certificates representing the shares of Stock to be purchased pursuant to
the exercise of a Stock Option will be contingent upon receipt from the
optionee (or a purchaser acting in his stead in accordance with the
provisions of the Stock Option) by the Company of the full purchase price
for such shares and the fulfillment of any other requirements contained in
the Stock Option or applicable provisions of laws.
(v) Termination by Reason of Death. If an optionee's employment by (or
other business relationship with) the Company and its Subsidiaries is
terminated by reason of death, any Stock Option held by such optionee may
thereafter be exercised, to the extent it was exercisable on the date of
death, by the legal representative or legatee of the optionee, for a period
of 12 months (or such longer period as the Committee shall specify at any
time) from the date of death, or until the expiration of the stated term of
the Option, if earlier. To the extent that any portion of any Stock Option
is not exercisable on the date of such death, such portion of the Stock
Option shall terminate immediately and be of no force or effect.
(vi) Termination by Reason of Disability.
(A) If an optionee's employment by (or other business
relationship with) the Company and its Subsidiaries is terminated by
reason of Disability, any Stock Option held by such optionee may
thereafter be exercised, to the extent it was exercisable on the date
of termination of employment (or business relationship), for a period
of 12 months (or such longer period as the Committee shall specify at
any time) from the date of such termination of employment (or business
relationship), or until the expiration of the stated term of the
Option, if earlier. To the extent that any portion of any Stock Option
is not exercisable on the date of such termination of employment (or
business relationship), such portion of the Stock Option shall
terminate immediately and be of no force or effect.
(B) The Committee shall have sole authority and discretion to
determine whether a participant's employment (or business
relationship) has been terminated by reason of Disability.
(C) Except as otherwise provided by the Committee at any time,
the death of an optionee during the period provided in this Section
5(a)(vi) for the
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exercise of a Stock Option shall extend such period for 12 months from
the date of death, subject to termination on the expiration of the
stated term of the Option, if earlier.
(vii) Termination for Cause. If any optionee's employment by (or
business relationship with) the Company and its Subsidiaries is
terminated by resignation or other voluntary reason (other than
retirement) or for Cause, any Stock Option held by such optionee,
including any Stock Option that is immediately exercisable at the time
of such termination, shall terminate immediately and be of no further
force and effect.
(viii) Other Termination. Unless otherwise determined by the
Committee, if an optionee's employment by (or business relationship
with) the Company and its Subsidiaries terminates for any reason other
than death, Disability, voluntary action (other than retirement), or
for Cause, any Stock Option held by such optionee may thereafter be
exercised, to the extent it was exercisable on the date of termination
of employment (or business relationship), for three months (or such
longer period as the Committee shall specify at any time) from the
date of termination of employment (or business relationship) or until
the expiration of the stated term of the Option, if earlier. To the
extent that any portion of any Stock Option is not exercisable on the
date of such termination of employment (or business relationship),
such portion of the Stock Option shall terminate immediately and be of
no force or effect.
(ix) Annual Limit on Incentive Stock Options. To the extent
required for "incentive stock option" treatment under Section 422 of
the Code, the aggregate Fair Market Value (determined as of the time
of grant) of the shares of Stock with respect to which Incentive Stock
Options granted under this Plan and any other plan of the Company or
its parent and subsidiary corporations become exercisable for the
first time by an optionee during any calendar year shall not exceed
$100,000. To the extent that any Stock Option exceeds this limit, it
shall constitute a Non-Qualified Stock Option.
(b) Stock Options Granted to Independent Directors.
(i) Automatic Grant of Options.
(A) Upon initial election or appointment to the Board of the
Company or the board of directors of the Bank, as the case may
be, an Independent Director shall automatically be granted a
Stock Option to acquire 1,000 shares of Stock. Each Independent
Director who is serving as an Independent Director of the Company
on the Friday after each annual meeting of stockholders,
beginning with the 1997 annual meeting, shall automatically be
granted on such day a Stock Option to acquire 1,000 shares of
Stock, provided, however, that in no event shall the aggregate
number of shares of Stock underlying options granted to any
Independent Director pursuant to the Plan or the Company's
Amended and Restated Directors' Stock Option Plan exceed 10,000
shares. A grant of a Stock
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Option under this subsection shall be reduced to the extent
necessary to comply with the proviso in the foregoing sentence.
(B) The exercise price per share for the Stock covered by a
Stock Option granted under this Section 5(b) shall be equal to
the Fair Market Value of the Stock on the date the Stock Option
is granted.
(ii) Exercise; Termination.
(A) Subject to Section 12, any Option granted under this
Section 5(b) shall be exercisable upon the completion by the
Independent Director of one year of service as an Independent
Director of the Company or Subsidiary; provided that any Option
so granted shall become immediately exercisable upon the
termination of service of the Independent Director because of
Disability or death. An Option issued under this Section 5(b)
shall not be exercisable after the expiration of ten years from
the date of grant.
(B) Any Option granted to an Independent Director and
outstanding on the date of his death may be exercised by the
legal representative or legatee of the optionee for a period of
12 months from the date of death or until the expiration of the
stated term of the Option, if earlier.
(C) Any Option granted to an Independent Director and
outstanding on the date of his Disability may be exercised by the
optionee for a period of 12 months from the date of Disability or
until the expiration of the stated term of the Option, if
earlier.
(D) Any Option granted to an Independent Director and
outstanding on the date of his resignation from the Board may be
exercised by the optionee for a period of 12 months from the date
of such resignation or until the expiration of the stated term of
the Option, if earlier.
(E) If a Director ceases to be an Independent Director for
any reason other than those set forth in Sections
5(b)(ii)(B)-(D), any Option held by such Independent Director,
including any Option that is immediately exercisable at the time
of such termination, shall terminate immediately and be of no
further force and effect.
(F) Options granted under this Section 5(b) may be exercised
only by written notice to the Company specifying the number of
shares to be purchased. The minimum number of shares with respect
to which an Option may be exercised at any one time shall be 100
shares, or such lesser number as is subject to exercise under the
Option at such time. Payment of the full purchase price of the
shares to be purchased may be made by one or more of the methods
specified in Section
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5(a)(iv). An optionee shall have the rights of a stockholder only
as to shares acquired upon the exercise of a Stock Option and not
as to unexercised Stock Options.
(iii) Limited to Independent Directors. The provisions of this Section
5(b) shall apply only to Options granted or to be granted to Independent
Directors, and shall not be deemed to modify, limit or otherwise apply to
any other provision of this Plan or to any Option issued under this Plan to
a participant who is not an Independent Director of the Company. To the
extent inconsistent with the provisions of any other Section of this Plan,
the provisions of this Section 5(b) shall govern the rights and obligations
of the Company and Independent Directors respecting Options granted or to
be granted to Independent Directors. The provisions of this Section 5(b)
which affect the price, date of exercisability, option period or amount of
shares of Stock under an Option shall not be amended more than once in any
six-month period, other than to comport with changes in the Code or ERISA.
(c) Non-transferability of Options. No Stock Option shall be transferable
by the optionee otherwise than by will or by the laws of descent and
distribution and all Stock Options shall be exercisable, during the optionee's
lifetime, only by the optionee. Notwithstanding the foregoing, the Committee may
provide in an option agreement that the optionee may transfer, without
consideration for the transfer, his Stock Options to members of his immediate
family, to trusts for the benefit of such family members and to partnerships in
which such family members are the only partners.
(d) Form of Settlement. Shares of Stock issued upon exercise of a Stock
Option shall be free of all restrictions under the Plan, except as otherwise
provided in the Plan.
SECTION 6. RESTRICTED STOCK AWARDS
(a) Nature of Restricted Stock Awards. The Committee may grant Restricted
Stock Awards to any employee or key person of the Company or any Subsidiary. A
Restricted Stock Award is an Award entitling the recipient to acquire, at par
value or such other purchase price determined by the Committee, shares of Stock
subject to such restrictions and conditions as the Committee may determine at
the time of grant ("Restricted Stock"). Conditions may be based on continuing
employment (or other business relationship) and/or achievement of
pre-established performance goals and objectives.
(b) Rights as a Stockholder. Upon execution of a written instrument setting
forth the Restricted Stock Award and paying any applicable purchase price, a
participant shall have the rights of a stockholder with respect to the voting of
the Restricted Stock, subject to such conditions contained in the written
instrument evidencing the Restricted Stock Award. Unless the Committee shall
otherwise determine, certificates evidencing the Restricted Stock shall remain
in the possession of the Company until such Restricted Stock is vested as
provided in Section 6(d) below.
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(c) Restrictions. Restricted Stock may not be sold, assigned, transferred,
pledged or otherwise encumbered or disposed of except as specifically provided
herein or in the written instrument evidencing the Restricted Stock Award. If a
participant's employment (or other business relationship) with the Company and
its Subsidiaries terminates for any reason, the Company shall have the right to
repurchase Restricted Stock with respect to which conditions have not lapsed at
their purchase price, from the participant or the participant's legal
representative.
(d) Vesting of Restricted Stock. The Committee at the time of grant shall
specify the date or dates and/or the attainment of pre-established performance
goals, objectives and other conditions on which the non-transferability of the
Restricted Stock and the Company's right of repurchase or forfeiture shall
lapse. Subsequent to such date or dates and/or the attainment of such
pre-established performance goals, objectives and other conditions, the shares
on which all restrictions have lapsed shall no longer be Restricted Stock and
shall be deemed "vested." Except as may otherwise be provided by the Committee
at any time, a participant's rights in any shares of Restricted Stock that have
not vested shall automatically terminate upon the participant's termination of
employment (or other business relationship) with the Company and its
Subsidiaries and such shares shall either be forfeited or subject to the
Company's right of repurchase as provided in Section 6(c) above.
(e) Waiver, Deferral and Reinvestment of Dividends. The written instrument
evidencing the Restricted Stock Award may require or permit the immediate
payment, waiver, deferral or investment of dividends paid on the Restricted
Stock.
SECTION 7. UNRESTRICTED STOCK AWARDS
(a) Grant or Sale of Unrestricted Stock. The Committee may, in its sole
discretion, grant (or sell at a purchase price determined by the Committee) an
Unrestricted Stock Award to any employee or key person of the Company or any
Subsidiary, pursuant to which such employee or key person may receive shares of
Stock free of any restrictions ("Unrestricted Stock") under the Plan.
Unrestricted Stock Awards may be granted or sold as described in the preceding
sentence in respect of past services or other valid consideration, or in lieu of
any cash compensation due to such employee or key person.
(b) Elections to Receive Unrestricted Stock In Lieu of Compensation. Upon
the request of an employee or a key person of the Company or any Subsidiary and
with the consent of the Committee, each employee or key person may, pursuant to
an irrevocable written election delivered to the Company no later than the date
or dates specified by the Committee, receive a portion of the cash compensation
otherwise due to such employee or key person in the form of shares of
Unrestricted Stock (valued at Fair Market Value on the date or dates the cash
compensation would otherwise be paid). With respect to any employee who is
subject to Section 16 of the Act, such irrevocable election shall become
effective no earlier than six months and one day following the date of such
election and the revocation of such election shall be effective six months and
one day following the date of the revocation.
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(c) Restrictions on Transfers. The right to receive Unrestricted Stock on a
deferred basis may not be sold, assigned, transferred, pledged or otherwise
encumbered, other than by will or the laws of descent and distribution.
SECTION 8. TAX WITHHOLDING
(a) Payment by Participant. Each participant shall, no later than the date
as of which the value of an Award or of any Stock or other amounts received
thereunder first becomes includable in the gross income of the participant for
Federal income tax purposes, pay to the Company, or make arrangements
satisfactory to the Committee regarding payment of, any Federal, state, or local
taxes of any kind required by law to be withheld with respect to such income.
The Company and its Subsidiaries shall, to the extent permitted by law, have the
right to deduct any such taxes from any payment of any kind otherwise due to the
participant.
(b) Payment in Stock. A participant may elect to have such tax withholding
obligation satisfied, in whole or in part, by (i) authorizing the Company to
withhold from shares of Stock to be issued pursuant to any Award a number of
shares with an aggregate Fair Market Value (as of the date the withholding is
effected) that would satisfy the withholding amount due, or (ii) transferring to
the Company shares of Stock owned by the participant with an aggregate Fair
Market Value (as of the date the withholding is effected) that would satisfy the
withholding amount due. With respect to any participant who is subject to
Section 16 of the Act, the following additional restrictions shall apply:
(A) the election to satisfy tax withholding obligations relating to an
Award in the manner permitted by this Section 8(b) shall be made either (1)
during the period beginning on the third business day following the date of
release of quarterly or annual summary statements of sales and earnings of
the Company and ending on the twelfth business day following such date, or
(2) at least six months prior to the date as of which the receipt of such
an Award first becomes a taxable event for Federal income tax purposes;
(B) such election shall be irrevocable;
(C) such election shall be subject to the consent or disapproval of
the Committee; and
(D) the Stock withheld to satisfy tax withholding must pertain to an
Award which has been held by the participant for at least six months from
the date of grant of the Award.
Notwithstanding the foregoing, the provision of Section 8(b)(A)(1) shall not be
applicable until the Company has been subject to the reporting requirements of
Section 13(a) of the Act for at least a year prior to the election and has filed
all reports and statements required to be filed pursuant to that Section for
that year.
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SECTION 9. TRANSFER, LEAVE OF ABSENCE, ETC.
For purposes of the Plan, the following events shall not be deemed a
termination of employment:
(a) a transfer to the employment of the Company from a Subsidiary or from
the Company to a Subsidiary, or from one Subsidiary to another; or
(b) an approved leave of absence for military service or sickness, or for
any other purpose approved by the Company, if the employee's right to
re-employment is guaranteed either by a statute or by contract or under the
policy pursuant to which the leave of absence was granted or if the Committee
otherwise so provides in writing.
SECTION 10. AMENDMENTS AND TERMINATION
The Board may, at any time, amend or discontinue the Plan and the Committee
may, at any time, amend or cancel any outstanding Award (or provide substitute
Awards at the same or reduced exercise or purchase price or with no exercise or
purchase price in a manner not inconsistent with the terms of the Plan, but such
price, if any, must satisfy the requirements which would apply to the substitute
or amended Award if it were then initially granted under this Plan) for the
purpose of satisfying changes in law or for any other lawful purpose, but no
such action shall adversely affect rights under any outstanding Award without
the holder's consent. If and to the extent determined by the Committee to be
required by the Act to ensure that Awards granted under the Plan are exempt
under Rule 16b-3 promulgated under the Act, or that Incentive Stock Options
granted under the Plan are qualified under Section 422 of the Code, Plan
amendments shall be subject to approval by the Company stockholders entitled to
vote at a meeting of stockholders.
SECTION 11. STATUS OF PLAN
With respect to the portion of any Award which has not been exercised and
any payments in cash, Stock or other consideration not received by a
participant, a participant shall have no rights greater than those of a general
creditor of the Company unless the Committee shall otherwise expressly determine
in connection with any Award or Awards. In its sole discretion, the Committee
may authorize the creation of trusts or other arrangements to meet the Company's
obligations to deliver Stock or make payments with respect to Awards hereunder,
provided that the existence of such trusts or other arrangements is consistent
with the foregoing sentence.
SECTION 12. CHANGE OF CONTROL PROVISIONS
Upon the occurrence of a Change of Control as defined in this Section 12:
(a) Each outstanding Stock Option shall automatically become fully
exercisable.
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(b) Each Restricted Stock Award shall be subject to such terms, if
any, with respect to a Change of Control as have been provided by the
Committee in connection with such Award.
(c) "Change of Control" shall mean the occurrence of any one of the
following events:
(i) any "person," as such term is used in Sections 13(d) and
14(d) of the Act (other than the Company, any of its Subsidiaries, or
any trustee, fiduciary or other person or entity holding securities
under any employee benefit plan or trust of the Company or any of its
Subsidiaries), together with all "affiliates" and "associates" (as
such terms are defined in Rule 12b-2 under the Act) of such person,
shall become the "beneficial owner" (as such term is defined in Rule
13d-3 under the Act), directly or indirectly, of securities of the
Company representing 25% or more of either (A) the combined voting
power of the Company's then outstanding securities having the right to
vote in an election of the Company's Board of Directors ("Voting
Securities") or (B) the then outstanding shares of Stock of the
Company (in either such case other than as a result of an acquisition
of securities directly from the Company); or
(ii) persons who, as of the Effective Date, constitute the
Company's Board of Directors (the "Incumbent Directors") cease for any
reason, including, without limitation, as a result of a tender offer,
proxy contest, merger or similar transaction, to constitute at least a
majority of the Board, provided that any person becoming a director of
the Company subsequent to the Effective Date whose election or
nomination for election was approved by a vote of at least a majority
of the Incumbent Directors shall, for purposes of this Plan, be
considered an Incumbent Director; or
(iii) the stockholders of the Company shall approve (A) any
consolidation or merger of the Company or any Subsidiary where the
stockholders of the Company, immediately prior to the consolidation or
merger, would not, immediately after the consolidation or merger,
beneficially own (as such term is defined in Rule 13d-3 under the
Act), directly or indirectly, shares representing in the aggregate 80%
or more of the voting shares of the corporation issuing cash or
securities in the consolidation or merger (or of its ultimate parent
corporation, if any), (B) any sale, lease, exchange or other transfer
(in one transaction or a series of transactions contemplated or
arranged by any party as a single plan) of all or substantially all of
the assets of the Company or (C) any plan or proposal for the
liquidation or dissolution of the Company.
Notwithstanding the foregoing, a Change of Control shall not be deemed to
have occurred for purposes of the foregoing clause (i) solely as the result of
an acquisition of securities by the Company which, by reducing the number of
shares of Stock or other Voting Securities outstanding, increases (x) the
proportionate number of shares of Stock beneficially owned by any person to 25%
or more of the shares of Stock then outstanding or (y) the proportionate voting
power represented by the Voting Securities beneficially owned by any person to
25% or more of the combined voting power of all then outstanding Voting
Securities; provided, however, that if any person referred to in clause (x) or
(y) of this sentence shall thereafter become the beneficial
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owner of any additional shares of Stock or other Voting Securities (other than
pursuant to a stock split, stock dividend, or similar transaction), then a
"Change of Control" shall be deemed to have occurred for purposes of the
foregoing clause (i).
SECTION 13. GENERAL PROVISIONS
(a) No Distribution; Compliance with Legal Requirements. The Committee may
require each person acquiring Stock pursuant to an Award to represent to and
agree with the Company in writing that such person is acquiring the shares
without a view to distribution thereof.
No shares of Stock shall be issued pursuant to an Award until all
applicable securities law and other legal and stock exchange or similar
requirements have been satisfied. The Committee may require the placing of such
stop-orders and restrictive legends on certificates for Stock and Awards as it
deems appropriate.
(b) Delivery of Stock Certificates. Delivery of stock certificates to
participants under this Plan shall be deemed effected for all purposes when the
Company or a stock transfer agent of the Company shall have mailed such
certificates in the United States mail, addressed to the participant, at the
participant's last known address on file with the Company.
(c) Release of Financial Information. A copy of the Company's annual report
to stockholders shall be delivered to each optionee at the time such report is
distributed to the Company's stockholders. Upon request the Company shall
furnish to each optionee a copy of its most recent annual report and each
quarterly report and current report filed under the Act since the end of the
Company's prior fiscal year.
(d) Other Compensation Arrangements; No Employment Rights. Nothing
contained in this Plan shall prevent the Board from adopting other or additional
compensation arrangements, including trusts, and such arrangements may be either
generally applicable or applicable only in specific cases. The adoption of this
Plan and the grant of Awards do not confer upon any employee any right to
continued employment with the Company or any Subsidiary.
SECTION 14. EFFECTIVE DATE OF PLAN
This Plan shall become effective upon approval by the holders of a majority
of the shares of Stock of the Company present or represented and entitled to
vote at a meeting of stockholders. Subject to such approval by the stockholders
and to the requirement that no Stock may be issued hereunder prior to such
approval, Stock Options and other Awards may be granted hereunder on and after
adoption of this Plan by the Board.
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SECTION 15. GOVERNING LAW
This Plan shall be governed by Massachusetts law except to the extent such
law is preempted by federal law.
Date approved by Board of Directors: March 26, 1996
Date approved by Stockholders: May 14, 1996
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EXHIBIT 10.22
PEOPLE'S BANCSHARES, INC.
1996 STOCK OPTION AND INCENTIVE PLAN
NONQUALIFIED STOCK OPTION AGREEMENT
FOR NON-EMPLOYEE DIRECTORS
Name of Optionee: Name Date of Grant: May 17, 1996
Number of Option Shares: 100 Expiration Date: May 16, 2006
Option Exercise Price: $9.875
THIS AGREEMENT is entered into by and between People's Bancshares, Inc., a
Massachusetts corporation (the "Company"), and the Optionee named above (the
"Optionee").
WHEREAS, the Company adopted the People's Bancshares Inc. 1996 Stock Option
and Incentive Plan (the "Plan") in order to grant options to directors to
purchase common stock, par value $.10 per share, ("Common Stock") of the Company
so as to enable them to acquire or increase a proprietary interest in the
success of the Company and to insure that they continue to serve as directors of
the Company; and
WHEREAS, the Optionee renders important services to the Company as a
director and the Company desires to grant a nonqualified stock option to the
Optionee;
NOW, THEREFORE, in consideration of the foregoing and the mutual promises
herein contained, the parties agree as follows:
1. Grant of Option. The Company hereby grants to the Optionee the option to
purchase from the Company, upon the terms and conditions set forth herein and in
the Plan, the number of shares of Common Stock specified above (the "Option
Shares") at the Option Exercise Price per share specified above (the "Option
Exercise Price"). This option is intended to be a Non-qualified Stock Option as
defined in the Plan.
2. Exercise of Option.
(a) No portion of this option may be exercised until this option shall
have vested. Except as otherwise set forth herein or in the event of a Change of
Control of the Company (as defined in the Plan) (in which event the option shall
immediately vest and become exercisable in full), this option shall be fully
vested and exercisable on the first anniversary of the Date of Grant. Subject to
the foregoing, this option may be exercised at any time until the Expiration
Date set forth above (the "Expiration Date"), unless the option is sooner
terminated as hereinafter provided.
<PAGE> 2
(b) At any given time, the Optionee may elect partially to exercise
this option and purchase a lesser number of Option Shares than the total number
which the Optionee is eligible to purchase hereunder; provided that the number
of Option Shares the Optionee purchases, when aggregated with the total number
of Option Shares the Optionee has purchased pursuant to previous exercises of
this option, does not exceed the total number of Option Shares the Optionee is
eligible to purchase hereunder.
(c) The minimum number of Option Shares with respect to which this
option may be exercised at any one time shall be 100, or such lesser number as
is subject to exercise under the option at the time.
3. Method of Exercise; Payment of Purchase Price.
(a) This option may be exercised by the Optionee by delivering to the
Company a written notice specifying the number of vested Option Shares the
Optionee then desires to purchase (the "Notice").
(b) Payment for the Option Shares purchased pursuant to the exercise
of the option shall be made either: (i) in cash, by certified or bank check or
other instrument acceptable to the Option Committee equal to the option price
for the number of shares specified in the Notice (the "Total Option Price");
(ii) by delivery of shares of Common Stock having a fair market value,
determined as provided in the Plan, equal to or less than the Total Option
Price, plus cash in an amount equal to the excess, if any, of the Total Option
Price over the fair market value of such shares of Common Stock; (iii) by
delivery to the Company of a properly executed exercise notice together with
irrevocable instructions to a broker to promptly deliver to the Company cash or
a check payable and acceptable to the Company to pay the Total Option Price;
provided that in the event the Optionee chooses to pay the Total Option Price as
so provided, the Optionee and the broker shall comply with such procedures and
enter into such agreements of indemnity and other agreements as the Option
Committee shall prescribe as a condition of such payment procedure; or (iv) a
combination of (i), (ii) and (iii) above.
4. Adjustment Upon Changes in Capitalization. If the shares of Common Stock
as a whole are increased, decreased, changed into or exchanged for a different
number or kind of shares or securities of the Company, whether through merger,
consolidation, reorganization, recapitalization, reclassification, stock
dividend, stock split, combination of shares, exchange of shares, change in
corporate structure or the like, an appropriate and proportionate adjustment
shall be made by the Option Committee in the number, kind and per share exercise
price of the Option Shares then subject to this option. In the event of any such
adjustment in the option, the Optionee thereafter shall have the right to
purchase the number of shares under such option at the per share price, as so
adjusted, which the Optionee could purchase at the total purchase price
applicable to the option immediately prior to such adjustment.
2
<PAGE> 3
5. Dissolution; Merger; Sale of Assets. In the event of (i) the dissolution
or liquidation of the Company, (ii) a reorganization, merger or consolidation in
which the Company is acquired by another entity or in which the Company is not
the surviving corporation or (iii) the sale of all or substantially all of the
property of the Company to another corporation, this option shall terminate,
unless provision is made in connection with such transaction for the assumption
of the option, or the substitution for such option of a new option of the
successor corporation or parent thereof, with appropriate adjustment as provided
in paragraph 4. In the event of such termination, the outstanding portion of the
option shall be exercisable in full for at least fifteen (15) days prior to the
date of such termination whether or not otherwise exercisable during such
period.
6. Termination of Option. If the Optionee ceases for any reason to be a
director of the Company at any time prior to exercise of this option in full,
this option shall terminate in accordance with the following provisions:
(a) if the Optionee resigns from the Board, this option may be
exercised, to the extent it was exercisable at the time of resignation, for a
period of twelve (12) months following such resignation or until the Expiration
Date, if earlier;
(b) if the Optionee ceases to be a director of the Company due to his
or her death or Disability (as defined in the Plan), this option shall become
immediately vested and exercisable in full, whether or not vested and
exercisable at such time, and may be exercised by the Optionee (or, if the
Optionee is not living, by his or her heirs, legatees or legal representatives)
for a period of twelve (12) months from the date the Optionee ceases to be a
director of the Company or until the Expiration Date, if earlier; or
(c) if the Optionee ceases to be a director of the Company due to any
reason other than those discussed in subparagraphs (a) and (b) above, the option
shall terminate immediately and be of no further force and effect;
provided, however, that the exercise of this option shall at all times be
subject to the provisions of paragraph 2 hereof.
7. Miscellaneous.
(a) The option shall not be transferable by the Optionee other than by
will or by the laws of descent and distribution. The option shall be exercisable
during the Optionee's lifetime only by the Optionee or his or her guardian or
legal representative.
(b) The Optionee shall not be deemed for any purpose to be the owner
of any shares of Common Stock subject to this option unless and until (i) the
option shall have been exercised pursuant to the terms hereunder, (ii) the
Company shall have issued and delivered the shares to the Optionee, and (iii)
the Optionee's name shall have been entered as a
3
<PAGE> 4
stockholder of record on the books of the Company. Thereupon, the Optionee shall
have full voting, dividend and other ownership rights with respect to such
shares of Common Stock.
(c) Nothing herein contained shall impose any obligation on the
Company or any of its subsidiaries or the Optionee with respect to the
Optionee's continued performance of services for the Company or any of its
subsidiaries. Nothing herein contained shall impose any obligation upon the
Optionee to exercise the option. The Company makes no representation as to the
tax treatment to the Optionee upon receipt or exercise of the option or sale or
other disposition of the shares covered by the option.
(d) Notice hereunder shall be given to the Company at its principal
place of business, and shall be given to the Optionee at the address set forth
below, or in either case at such other address as one party may subsequently
furnish to the other party in writing.
(e) This option does not confer upon the Optionee any rights with
respect to continuance as a director.
(f) Pursuant to Section 10 of the Plan, the Option Committee may at
any time amend or cancel any outstanding portion of this option, but no such
action may be taken which adversely affects the Optionee's rights under this
Agreement without the Optionee's consent.
8. Relationship to the Plan. The option contained in this agreement has
been granted pursuant to the Plan and is in all respects subject to the terms,
conditions and definitions of the Plan. The Optionee hereby accepts this option
subject to all the terms and provisions of the Plan and agrees that all
decisions under and interpretations of the Plan by the Option Committee shall be
final, binding and conclusive upon the Optionee and his heirs.
9. Governing Law. This agreement shall be subject to and construed in
accordance with the law of The Commonwealth of Massachusetts, except to the
extent that such law is preempted by federal law.
[REMAINDER OF PAGE LEFT BLANK INTENTIONALLY]
4
<PAGE> 5
IN WITNESS WHEREOF, the Company and the Optionee have executed this
agreement.
PEOPLE'S BANCSHARES, INC.
By:
__________________________________
Name:
Title:
OPTIONEE
______________________________________
Address of Optionee's Legal Residence:
______________________________________
______________________________________
______________________________________
5
<PAGE> 1
EXHIBIT 10.23
PEOPLE'S BANCSHARES, INC.
1996 STOCK OPTION AND INCENTIVE PLAN
NONQUALIFIED STOCK OPTION AGREEMENT
Name of Optionee: [Name] Date of Grant: [Date]
Number of Option Shares: [Number] Expiration Date: [Expiration]
Option Exercise Price: [Price]
THIS AGREEMENT is entered into by and between People's Bancshares, Inc., a
Massachusetts corporation (the "Company"), and the Optionee named above (the
"Optionee").
WHEREAS, the Company adopted the 1996 Stock Option and Incentive Plan (the
"Plan") in order to grant options to certain key employees to purchase common
stock, par value $.10 per share, of the Company ("Common Stock") so as to give
them a proprietary interest in the Company's success and to ensure their
continuance as employees of the Company; and
WHEREAS, the Optionee renders important services to the Company, and the
Company desires to grant an incentive stock option to the Optionee;
NOW, THEREFORE, in consideration of the foregoing and the mutual promises
herein contained, the parties agree as follows:
1. Grant of Option. The Company hereby grants to the Optionee the option to
purchase from the Company, upon the terms and conditions set forth herein and in
the Plan, the number of shares of Common Stock specified above (the "Option
Shares") at the Option Exercise Price per share specified above (the "Option
Exercise Price").
2. Term of Option. This option may be exercised at any time until the
Expiration Date set forth above (the "Expiration Date"), unless the option is
sooner terminated as hereinafter provided. At any given time, the Optionee may
elect partially to exercise this option and purchase a lesser number of Option
Shares than the total number which the Optionee is eligible to purchase
hereunder; provided that the number of Option Shares the Optionee purchases,
when aggregated with the total number of Option Shares the Optionee has
purchased pursuant to previous exercises of this option, does not exceed the
total number of Option Shares the Optionee is eligible to purchase hereunder.
3. Exercise of Option.
(a) The Optionee may exercise this option only in the following manner:
from time to time on or prior to the Expiration Date of this option, the
Optionee may give
<PAGE> 2
written notice to the Company of his or her election to purchase some or all of
the vested Option Shares purchasable at the time of such notice. This notice
shall specify the number of Option Shares to be purchased.
Payment of the purchase price for the Option Shares may be made by one or
more of the following methods: (i) in cash, by certified or bank check or other
instrument acceptable to the Option Committee; (ii) in the form of shares of
Common Stock that are not then subject to restrictions under any Company plan
and that have been held by the Optionee for at least six months; (iii) by the
Optionee delivering to the Company a properly executed exercise notice together
with irrevocable instructions to a broker to promptly deliver to the Company
cash or a check payable and acceptable to the Company to pay the option purchase
price; provided, that in the event the Optionee chooses to pay the option
purchase price as so provided, the Optionee and the broker shall comply with
such procedures and enter into such agreements of indemnity and other agreements
as the Committee shall prescribe as a condition of such payment procedure; or
(iv) a combination of (i), (ii) and (iii) above. Payment instruments will be
received subject to collection.
The delivery of certificates representing the Option Shares will be
contingent upon the Company's receipt from the Optionee of full payment for the
Option Shares, as set forth above and any agreement, statement or other evidence
that the Company may require to satisfy itself that the issuance of Common Stock
to be purchased pursuant to the exercise of Options under the Plan and any
subsequent resale of the shares of Common Stock will be in compliance with
applicable laws and regulations.
(b) Certificates for the shares of Common Stock purchased upon
exercise of this option shall be issued and delivered to the Optionee upon
compliance to the satisfaction of the Option Committee with all requirements
under applicable laws or regulations in connection with such issuance and with
the requirements hereof and of the Plan. The determination of the Option
Committee as to such compliance shall be final and binding on the Optionee. The
Optionee shall not be deemed to be the holder of, or to have any of the rights
of a holder with respect to, any shares of Common Stock subject to this option
unless and until this option shall have been exercised pursuant to the terms
hereof, the Company shall have issued and delivered the shares to the Optionee,
and the Optionee's name shall have been entered as the stockholder of record on
the books of the Company. Thereupon, the Optionee shall have full voting,
dividend and other ownership rights with respect to such shares of Common Stock.
(c) The minimum number of shares with respect to which this option may
be exercised at any one time shall be 100 shares, or such lesser number of
shares as may be subject to exercise under this option at the time.
(d) Notwithstanding any other provision hereof or of the Plan, no
portion of this option shall be exercisable after the Expiration Date hereof.
2
<PAGE> 3
4. Tax Withholding. The Optionee shall, not later than the date as of which
the exercise of this option becomes a taxable event for federal income tax
purposes, pay to the Company or make arrangements satisfactory to the Option
Committee for payment of any federal, state and local taxes required by law to
be withheld on account of such taxable event. The Optionee may elect to have
such tax withholding obligations satisfied, in whole or in part, by (i)
authorizing the Company to withhold from shares of Common Stock to be issued or
(ii) transferring to the Company a number of shares of Common Stock with an
aggregate fair market value (determined in accordance with the Plan) that would
satisfy the withholding amount due. If the Optionee is a director or officer of
the Company within the meaning of Section 16(b) of the Securities Exchange Act
of 1934, as amended, then the following restrictions shall apply to such
elections:
(iii) such election shall be made either at least six months prior to the
date as of which the exercise of this option becomes a taxable event
for federal income tax purposes, or during the period beginning on the
third business day following the date of release of quarterly or
annual summary statements of earnings of the Company and ending on the
twelfth business day following such date;
(iv) such election shall be irrevocable; and
(v) such election shall be subject to the consent or disapproval of the
Option Committee.
5. Stock Dividends; Stock Splits; Stock Combinations; Recapitalizations.
Appropriate adjustment shall be made in the maximum number of shares of Common
Stock subject to this option and in the number, kind, and Option Exercise Price
of Option Shares covered by this option to the extent it is outstanding to give
effect to any stock dividends, stock splits, stock combinations,
recapitalizations and other similar changes in the capital structure of the
Company after the date of grant of the option.
6. Merger; Sale of Assets; Dissolution. In the event of a change of the
Common Stock resulting from a merger, the formation of a holding company, or a
similar reorganization as to which the Company is the surviving corporation, the
number and kind of Option Shares then subject to this option and the Option
Exercise Price thereof shall be appropriately adjusted in such manner as the
Option Committee may deem equitable to prevent dilution or enlargement of the
rights available or granted hereunder. Except as otherwise determined by the
Board of Directors of the Company, a merger or a similar reorganization in which
the Company does not survive, or a sale of all or substantially all of the
assets of the Company, shall cause this option to the extent then outstanding to
terminate, unless any surviving entity agrees to assume the rights and
obligations hereunder.
3
<PAGE> 4
7. Termination of Option. If the Optionee ceases for any reason to be an
employee of the Company, or a subsidiary of the Company, at any time prior to
exercise of this option in full, this option shall terminate in accordance with
the following provisions:
(a) if the Optionee's employment shall have terminated by resignation
or other voluntary action (other than retirement), or if such employment shall
have been terminated involuntarily for Cause (as defined in the Plan), this
option shall terminate and may no longer be exercised;
(b) unless otherwise determined by the Option Committee, if the
Optionee's employment shall have been terminated for any reason other than for
Cause, resignation or other voluntary action before he is eligible to retire,
becomes disabled or dies, the Optionee may exercise this option, to the extent
it was exercisable on the date of termination of the Optionee's employment, at
any time within a period of three (3) months after such termination of
employment, or until the Expiration Date, if earlier;
(c) if the Optionee's employment shall have been terminated because of
Disability (as defined in the Plan), the Optionee may exercise this option, to
the extent that the option was exercisable on the date of termination of the
Optionee's employment, at any time within a period of twelve (12) months after
such termination of employment or until the Expiration Date, if earlier;
provided, that the death of the Optionee during the 12-month period provided in
this Section 7(c) shall extend such period for another 12 months from the date
of death or until the Expiration Date, if earlier; and
(d) if the Optionee's employment shall have been terminated because of
death, the option, to the extent that the Optionee was entitled to exercise it
on the date of death, may be exercised within a period of twelve (12) months or
until the Expiration Date, if earlier, after the Optionee's death by the person
or persons to whom the Optionee's rights under the option shall pass by will or
by the laws of descent and distribution;
provided, however, that the exercise of this option shall at all times be
subject to the provisions of paragraph 2 hereof. The Option Committee's
determination of the reason for termination of the Optionee's employment shall
be conclusive and binding on the Optionee and his or her representatives or
legatees.
8. Miscellaneous.
(a) The Optionee shall have no rights as a stockholder with respect to
the Option Shares subject to the option until the exercise of the option and the
issuance of a stock certificate for the shares with respect to which the option
shall have been exercised. Nothing herein contained shall impose any obligation
on the Company or any of its subsidiaries or the Optionee with respect to the
Optionee's continued employment by the Company or any of its subsidiaries.
Nothing herein contained shall impose any obligation upon the Optionee to
exercise the option.
4
<PAGE> 5
(b) Notice hereunder shall be given to the Company at its principal
place of business, and shall be given to the Optionee at the address set forth
below, or in either case at such other address as one party may subsequently
furnish to the other party in writing.
(c) Pursuant to Section 10 of the Plan, the Option Committee may at
any time amend or cancel any outstanding portion of this option, but no such
action may be taken which adversely affects the Optionee's rights under this
Agreement without the Optionee's consent.
9. Relationship to the Plan. The option contained in this agreement has
been granted pursuant to the Plan and is in all respects subject to the terms,
conditions and definitions of the Plan. The Optionee hereby accepts this option
subject to all the terms and provisions of the Plan and agrees that all
decisions under and interpretations of the Plan by the Board of Directors of the
Company (or any committee to which it has delegated such authority) shall be
final, binding and conclusive upon the Optionee and his heirs.
10. Transferability. This Agreement is personal to the Optionee, is
non-assignable and is not transferable in any manner, by operation of law or
otherwise, other than by will or the laws of descent and distribution. This
option is exercisable, during the Optionee's lifetime, only by the Optionee, and
thereafter, only by the Optionee's legal representative or legatee.
11. Governing Law. This agreement shall be subject to and construed in
accordance with the law of The Commonwealth of Massachusetts.
5
<PAGE> 6
IN WITNESS WHEREOF, the Company and the Optionee have executed this
agreement.
PEOPLE'S BANCSHARES, INC.
By:
__________________________________
Name:
Title:
OPTIONEE
______________________________________
Address of Optionee's Legal Residence:
______________________________________
______________________________________
______________________________________
6
<PAGE> 1
EXHIBIT 10.24
PEOPLE'S BANCSHARES, INC.
1996 STOCK OPTION AND INCENTIVE PLAN
INCENTIVE STOCK OPTION AGREEMENT
Name of Optionee: Name Date of Grant: Date
Number of Option Shares: Number Expiration Date: Expiration
Option Exercise Price: Price
THIS AGREEMENT is entered into by and between People's Bancshares, Inc., a
Massachusetts corporation (the "Company"), and the Optionee named above (the
"Optionee").
WHEREAS, the Company adopted the 1996 Stock Option and Incentive Plan (the
"Plan") in order to grant options to certain key employees to purchase common
stock, par value $.10 per share, of the Company ("Common Stock") so as to give
them a proprietary interest in the Company's success and to ensure their
continuance as employees of the Company; and
WHEREAS, the Optionee renders important services to the Company, and the
Company desires to grant an incentive stock option to the Optionee;
NOW, THEREFORE, in consideration of the foregoing and the mutual promises
herein contained, the parties agree as follows:
1. Grant of Option. The Company hereby grants to the Optionee the option to
purchase from the Company, upon the terms and conditions set forth herein and in
the Plan, the number of shares of Common Stock specified above (the "Option
Shares") at the Option Exercise Price per share specified above (the "Option
Exercise Price").
2. Term of Option. This option may be exercised at any time until the
Expiration Date set forth above (the "Expiration Date"), unless the option is
sooner terminated as hereinafter provided. At any given time, the Optionee may
elect partially to exercise this option and purchase a lesser number of Option
Shares than the total number which the Optionee is eligible to purchase
hereunder; provided that the number of Option Shares the Optionee purchases,
when aggregated with the total number of Option Shares the Optionee has
purchased pursuant to previous exercises of this option, does not exceed the
total number of Option Shares the Optionee is eligible to purchase hereunder.
3. Exercise of Option.
(a) The Optionee may exercise this option only in the following
manner: from time to time on or prior to the Expiration Date of this option, the
Optionee may give
<PAGE> 2
written notice to the Company of his or her election to purchase some or all of
the vested Option Shares purchasable at the time of such notice. This notice
shall specify the number of Option Shares to be purchased.
Payment of the purchase price for the Option Shares may be made by one or
more of the following methods: (i) in cash, by certified or bank check or other
instrument acceptable to the Option Committee; (ii) in the form of shares of
Common Stock that are not then subject to restrictions under any Company plan
and that have been held by the Optionee for at least six months; (iii) by the
Optionee delivering to the Company a properly executed exercise notice together
with irrevocable instructions to a broker to promptly deliver to the Company
cash or a check payable and acceptable to the Company to pay the option purchase
price; provided, that in the event the Optionee chooses to pay the option
purchase price as so provided, the Optionee and the broker shall comply with
such procedures and enter into such agreements of indemnity and other agreements
as the Committee shall prescribe as a condition of such payment procedure; or
(iv) a combination of (i), (ii) and (iii) above. Payment instruments will be
received subject to collection.
The delivery of certificates representing the Option Shares will be
contingent upon the Company's receipt from the Optionee of full payment for the
Option Shares, as set forth above and any agreement, statement or other evidence
that the Company may require to satisfy itself that the issuance of Common Stock
to be purchased pursuant to the exercise of Options under the Plan and any
subsequent resale of the shares of Common Stock will be in compliance with
applicable laws and regulations.
(b) Certificates for the shares of Common Stock purchased upon
exercise of this option shall be issued and delivered to the Optionee upon
compliance to the satisfaction of the Option Committee with all requirements
under applicable laws or regulations in connection with such issuance and with
the requirements hereof and of the Plan. The determination of the Option
Committee as to such compliance shall be final and binding on the Optionee. The
Optionee shall not be deemed to be the holder of, or to have any of the rights
of a holder with respect to, any shares of Common Stock subject to this option
unless and until this option shall have been exercised pursuant to the terms
hereof, the Company shall have issued and delivered the shares to the Optionee,
and the Optionee's name shall have been entered as the stockholder of record on
the books of the Company. Thereupon, the Optionee shall have full voting,
dividend and other ownership rights with respect to such shares of Common Stock.
(c) The minimum number of shares with respect to which this option may
be exercised at any one time shall be 100 shares, or such lesser number of
shares as may be subject to exercise under this option at the time.
(d) Notwithstanding any other provision hereof or of the Plan, no
portion of this option shall be exercisable after the Expiration Date hereof.
2
<PAGE> 3
4. Status of Option. This option is intended to qualify as an "incentive
stock option" under Section 422 of the Internal Revenue Code of 1986, as amended
(the "Code"), but the Company does not represent or warrant that this option
qualifies as such. The Optionee should consult with his or her own tax advisors
regarding the tax effects of this option and the requirements necessary to
obtain favorable income tax treatment under Section 422 of the Code, including,
but not limited to, holding period requirements. If the Optionee intends to
dispose or does dispose (whether by sale, gift, transfer or otherwise) of any
Option Shares within the one-year period beginning on the date after the
transfer of such shares to him or her, or within the two-year period beginning
on the day after the grant of this Option, he or she will notify the Company
within 30 days after such disposition.
5. Stock Dividends; Stock Splits; Stock Combinations; Recapitalizations.
Appropriate adjustment shall be made in the maximum number of shares of Common
Stock subject to this option and in the number, kind, and Option Exercise Price
of Option Shares covered by this option to the extent it is outstanding to give
effect to any stock dividends, stock splits, stock combinations,
recapitalizations and other similar changes in the capital structure of the
Company after the date of grant of the option.
6. Merger; Sale of Assets; Dissolution. In the event of a change of the
Common Stock resulting from a merger, the formation of a holding company, or a
similar reorganization as to which the Company is the surviving corporation, the
number and kind of Option Shares then subject to this option and the Option
Exercise Price thereof shall be appropriately adjusted in such manner as the
Option Committee may deem equitable to prevent dilution or enlargement of the
rights available or granted hereunder. Except as otherwise determined by the
Board of Directors of the Company, a merger or a similar reorganization in which
the Company does not survive, or a sale of all or substantially all of the
assets of the Company, shall cause this option to the extent then outstanding to
terminate, unless any surviving entity agrees to assume the rights and
obligations hereunder.
7. Termination of Option. If the Optionee ceases for any reason to be an
employee of the Company, or a subsidiary of the Company, at any time prior to
exercise of this option in full, this option shall terminate in accordance with
the following provisions:
(a) if the Optionee's employment shall have terminated by resignation
or other voluntary action (other than retirement), or if such employment shall
have been terminated involuntarily for Cause (as defined in the Plan), this
option shall terminate and may no longer be exercised;
(b) unless otherwise determined by the Option Committee, if the
Optionee's employment shall have been terminated for any reason other than for
Cause, resignation or other voluntary action before he is eligible to retire,
becomes disabled or dies, the Optionee may exercise this option, to the extent
it was exercisable on the date of termination of the Optionee's employment, at
any time within a period of three (3) months after such termination of
employment, or until the Expiration Date, if earlier;
3
<PAGE> 4
(c) if the Optionee's employment shall have been terminated because of
Disability (as defined in the Plan), the Optionee may exercise this option, to
the extent that the option was exercisable on the date of termination of the
Optionee's employment, at any time within a period of twelve (12) months after
such termination of employment or until the Expiration Date, if earlier;
provided, that the death of the Optionee during the 12-month period provided in
this Section 7(c) shall extend such period for another 12 months from the date
of death or until the Expiration Date, if earlier; and
(d) if the Optionee's employment shall have been terminated because of
death, the option, to the extent that the Optionee was entitled to exercise it
on the date of death, may be exercised within a period of twelve (12) months or
until the Expiration Date, if earlier, after the Optionee's death by the person
or persons to whom the Optionee's rights under the option shall pass by will or
by the laws of descent and distribution;
provided, however, that the exercise of this option shall at all times be
subject to the provisions of paragraph 2 hereof. The Option Committee's
determination of the reason for termination of the Optionee's employment shall
be conclusive and binding on the Optionee and his or her representatives or
legatees.
8. Miscellaneous.
(a) The Optionee shall have no rights as a stockholder with respect to
the Option Shares subject to the option until the exercise of the option and the
issuance of a stock certificate for the shares with respect to which the option
shall have been exercised. Nothing herein contained shall impose any obligation
on the Company or any of its subsidiaries or the Optionee with respect to the
Optionee's continued employment by the Company or any of its subsidiaries.
Nothing herein contained shall impose any obligation upon the Optionee to
exercise the option.
(b) Notice hereunder shall be given to the Company at its principal
place of business, and shall be given to the Optionee at the address set forth
below, or in either case at such other address as one party may subsequently
furnish to the other party in writing.
(c) Pursuant to Section 10 of the Plan, the Option Committee may at
any time amend or cancel any outstanding portion of this option, but no such
action may be taken which adversely affects the Optionee's rights under this
Agreement without the Optionee's consent.
9. Relationship to the Plan. The option contained in this agreement has
been granted pursuant to the Plan and is in all respects subject to the terms,
conditions and definitions of the Plan. The Optionee hereby accepts this option
subject to all the terms and provisions of the Plan and agrees that all
decisions under and interpretations of the Plan by the Board of Directors of the
Company (or any committee to which it has delegated such authority) shall be
final, binding and conclusive upon the Optionee and his heirs.
4
<PAGE> 5
10. Transferability. This Agreement is personal to the Optionee, is
non-assignable and is not transferable in any manner, by operation of law or
otherwise, other than by will or the laws of descent and distribution. This
option is exercisable, during the Optionee's lifetime, only by the Optionee, and
thereafter, only by the Optionee's legal representative or legatee.
11. Governing Law. This agreement shall be subject to and construed in
accordance with the law of The Commonwealth of Massachusetts.
IN WITNESS WHEREOF, the Company and the Optionee have executed this
agreement.
PEOPLE'S BANCSHARES, INC.
By:
__________________________________
Name:
Title:
OPTIONEE
______________________________________
Address of Optionee's Legal Residence:
______________________________________
______________________________________
______________________________________
5
<PAGE> 1
To Our Shareholders
For People's Bancshares, Inc., 1996 was a year marked by significant growth and
achievement. During 1996, we completed the purchase of five branches from
subsidiaries of Fleet Financial Group. On March 8, 1996, People's Bancshares,
Inc. also completed a public offering of 968,352 shares of its common stock,
resulting in net proceeds of approximately $7.5 million.
Operating results for 1996 were greatly influenced by the positive effects of
the branch acquisitions, significant growth in residential mortgage loan
originations generated by the Company's mortgage banking subsidiary, continued
reductions in levels of non-performing assets, and decreased utilization of tax
loss benefits. As a result, net income in 1996 increased to $3.6 million, or
$1.09 per share, compared to $2.2 million or $0.91 per share in 1995.
People's was able to increase pre-tax income by $2.4 million or 80% in 1996.
This was achieved by increasing net interest income by $6.6 million and other
income, primarily gains on loan sales and customer service fees, by $2.3
million. Other contributions to pre-tax income were made by reductions of
$533,000 in other real estate owned ("OREO") expenses and the provision for
loan losses. These positive trends were partially offset by a $7.0 million
increase in operating expenses other than OREO expenses and by a $1.1 million
increase in income tax expense.
The decrease in expenses associated with non-performing assets marks our
continued success in restoring People's asset quality. At the end of 1991,
non-performing assets amounted to 13.35% of total assets, the allowance for loan
losses amounted to 34.8% of non-performing loans, and our return on average
equity was negative. Five years later at the end of 1996, non-performing assets
were 0.88% of total assets, the allowance for loan losses was 122.1% of
non-performing loans, and return on average equity was a more respectable
13.03%. These improvements led to People's recovery from a pre-tax loss of $11.0
million in 1991 to pre-tax income of $5.4 million in 1996.
While proud of these accomplishments, we are not satisfied. People's continues
to seek opportunities not only to reduce costs, but to generate profitable
revenues and enhance shareholder value. We believe that our acquisitions and
other initiatives will help us achieve our goal of exceeding a 15% annual
return on average equity. While aware of the risks associated with the volatile
financial services arena, we also believe that great change is accompanied by
great opportunities. Finally, we remain fully committed to being an active and
positive community presence and a leader in the Southeastern Massachusetts
area's economic growth.
Very truly yours,
/s/ COLIN C. BLAIR
Colin C. Blair
Chief Financial Officer & Treasurer
1
<PAGE> 2
Average Balance Sheets, Net Interest Income
(Dollars in thousands)
<TABLE>
<CAPTION>
Year Ended December 31, 1996
----------------------------
Interest
Average Income/ Yield/
Balance Expense Rate
------- ------- ------
<S> <C> <C> <C>
ASSETS
Loans and loans held for sale 1:
Real estate $210,422 $17,129 8.14%
Other loans 30,321 2,864 9.45
-------- -------
Total loans, net of unearned income 240,743 19,993 8.30
Short-term investments 2,798 154 5.50
Investment securities 2 210,962 13,614 6.45
-------- -------
Total interest-earning assets 454,503 33,761 7.43
-------
Allowance for loan losses (4,613)
Other real estate owned, net 961
Other assets 28,183
--------
Total assets $479,034
========
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing liabilities:
NOW $36,828 $ 518 1.41
Savings 89,003 2,407 2.70
Money market 14,880 437 2.94
Time 125,422 7,073 5.64
-------- -------
Total interest-bearing deposits 266,133 10,435 3.92
Borrowed funds 146,483 8,160 5.57
-------- -------
Total interest-bearing liabilities 412,616 18,595 4.51
-------
Demand deposits 33,542
Other liabilities 5,552
--------
Total liabilities 451,710
Stockholders' equity 27,324
--------
Total liabilities and stockholders' equity $479,034
========
Net interest income $15,166
-------
Weighted average interest rate spread 2.92%
Net yield on average interest-earning assets 3.34%
</TABLE>
1 Non-accrual loan balances and interest received on such loans are included in
this table.
2 Average balances of investment securities are based upon amortized cost.
2
<PAGE> 3
and Net Yield on Average Earning Assets
<TABLE>
<CAPTION>
Year Ended December 31, 1995 Year Ended December 31, 1994
---------------------------- ----------------------------
Interest Interest
Average Income/ Yield/ Average Income/ Yield/
Balance Expense Rate Balance Expense Rate
------- -------- ------ ------- -------- -------
<S> <C> <C> <C> <C> <C>
$111,516 $ 9,926 8.90% $ 97,553 $ 8,434 8.65%
15,363 1,257 8.18 12,810 1,005 7.85
-------- ------- -------- -------
126,879 11,183 8.81 110,363 9,439 8.55
2,168 152 7.01 1,633 52 3.18
130,453 8,394 6.43 84,314 4,802 5.70
-------- ------- -------- -------
259,500 19,729 7.60 196,310 14,293 7.28
------- -------
(3,608) (3,453)
827 4,224
15,360 9,742
-------- --------
$272,079 $206,823
======== ========
$17,041 $ 250 1.47 $ 14,314 $ 211 1.47
48,814 1,346 2.76 46,336 1,137 2.45
11,219 325 2.90 14,452 367 2.54
64,856 3,610 5.57 53,559 2,203 4.11
-------- ------- -------- -------
141,930 5,531 3.90 128,661 3,918 3.05
97,498 5,618 5.76 50,562 2,641 5.22
-------- ------- -------- -------
239,428 11,149 4.66 179,223 6,559 3.66
------- -------
11,758 8,578
2,062 2,289
-------- --------
253,248 190,090
18,831 16,733
-------- --------
$272,079 $206,823
======== ========
$ 8,580 $ 7,734
======= =======
2.94% 3.62%
3.31% 3.94%
</TABLE>
3
<PAGE> 4
Selected Consolidated Financial Data
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
At December 31,
------------------------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Total assets $496,133 $324,440 $231,566 $190,661 $163,483
Investment securities 192,517 166,709 103,621 64,671 30,818
Loans, net 246,195 129,778 111,103 107,906 105,150
Deposits 336,238 174,583 134,345 137,602 146,814
Borrowed funds 123,920 126,245 77,580 35,000 -
Stockholders' equity 31,064 19,677 16,975 15,971 14,872
</TABLE>
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
CONSOLIDATED OPERATING DATA:
Interest and dividend income $33,761 $19,729 $14,293 $12,057 $12,997
Interest expense 18,595 11,149 6,559 4,998 6,671
------- ------- ------- ------- -------
Net interest income 15,166 8,580 7,734 7,059 6,326
Provision for loan losses 75 525 807 1,492 1,363
------- ------- ------- ------- -------
Net interest income after provision for loan losses 15,091 8,055 6,927 5,567 4,963
Other income 4,031 1,755 1,033 1,368 1,154
Operating expenses 13,678 6,787 6,226 6,920 8,507
------- ------- ------- ------- -------
Income (loss) before income taxes and extraordinary item 5,444 3,023 1,734 15 (2,390)
Provision (benefit) for income taxes 1,885 829 (240) (1,038) (983)
------- ------- ------- ------- -------
Income (loss) before extraordinary item 3,559 2,194 1,974 1,053 (1,407)
Extraordinary item - - - - 1,030
------- ------- ------- ------- -------
Net income (loss) $ 3,559 $ 2,194 $ 1,974 $ 1,053 $ (377)
PER SHARE DATA:
Weighted average shares outstanding 3,259,794 2,413,922 2,338,274 2,300,000 2,300,000
Primary earnings (loss) per share before
extraordinary item $1.09 $0.91 $0.84 $0.46 $ (0.61)
Fully diluted earnings (loss) per share
before extraordinary item 1.09 0.87 0.84 0.46 (0.61)
Primary earnings (loss) per share 1.09 0.91 0.84 0.46 (0.16)
Fully diluted earnings (loss) per share 1.09 0.87 0.84 0.46 (0.16)
Cash dividends paid per share 0.27 0.04 - - -
Book value per common share 8.72 8.47 7.38 6.94 6.47
SELECTED FINANCIAL RATIOS:
Return (loss) on average assets 0.74% 0.81% 0.95% 0.62% (0.23)%
Return (loss) on average equity 13.03 11.65 11.80 6.77 (2.62)
Weighted average interest rate spread 2.92 2.94 3.62 4.26 3.91
Average equity to average assets 5.70 6.92 8.09 9.23 8.82
</TABLE>
4
<PAGE> 5
Management's Discussion and Analysis of
Financial Condition and Results of Operations
PRELIMINARY NOTE IN REGARD TO FORWARD-LOOKING STATEMENTS. This annual report
contains forward-looking statements. For this purpose, any statements contained
herein that are not statements of historical fact may be deemed to be
forward-looking statements. Without limiting the foregoing, the words
"believes," "anticipates," "plans," "expects" and similar expressions are
intended to identify forward-looking statements. There are a number of
important factors that could cause the registrant's actual results to differ
materially from those contemplated by such forward-looking statements. These
factors include, without limitation, those set forth below under the caption
"Certain Factors That May Affect Future Results."
CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS. The following important
factors, among others, could cause actual results to differ materially from
those contemplated by forward-looking statements made in this annual report or
presented elsewhere by management from time to time. A number of uncertainties
exist that could affect the Company's future operating results, including,
without limitation, the Bank's continued ability to originate quality loans,
fluctuation of interest rates, real estate market conditions in the Bank's
lending areas, general and local economic conditions, the Bank's continued
ability to attract and retain deposits, the Company's ability to control costs,
new accounting pronouncements, and changing regulatory requirements.
The following analysis of the Company's consolidated results of operations and
financial condition should be read in conjunction with the consolidated
financial statements and accompanying notes included in this report.
GENERAL
The Company. People's Bancshares, Inc. (the "Company") is a Massachusetts
business corporation formed at the direction of People's Savings Bank of
Brockton (the "Bank") to serve as the holding company for the Bank. On
February 8, 1996, the Company and the Bank completed a reorganization in which
the Bank became a wholly-owned subsidiary of the Company, and each issued and
outstanding share of common stock of the Bank was converted into and exchanged
for one share of common stock of the Company. As a result of the
reorganization, the Bank became a wholly-owned subsidiary of the Company. The
Company is a unitary bank holding company subject to the Bank Holding Company
Act ("BHC Act"), the principal business of which consists of the business of
the Bank. The only significant asset of the Company is the capital stock of
the Bank. Although the Company is a legal entity separate from the Bank, the
Company itself is not engaged in any business activities.
The Bank. The Bank was chartered as a Massachusetts mutual savings bank on
February 6, 1895. On October 30, 1986, the Bank converted to a Massachusetts
chartered savings bank in stock form. The Bank is engaged principally in the
business of attracting deposits from individuals, business and industry, and
investing those funds in residential and commercial mortgages, consumer,
commercial and construction loans and investments, consisting primarily of
mortgage-backed securities. The Bank originates loans for investment with the
exception of residential mortgage loans. The Bank originates 1-4 family
residential loans primarily for sale in the secondary market, generally with
the servicing rights of such loans. Loan sales are made from loans originated
by the Bank's mortgage banking subsidiary, People's Mortgage Corporation
("PMC"), on which PMC has obtained purchase commitments from investors prior to
funding. The Bank's revenues are derived principally from interest on its
loans, interest and dividends on its investment securities, customer fees, and
gains on residential mortgage loan sales. The Bank's primary sources of funds
are customer deposits, amortization and repayment of loan principal, interest
and dividends on loans and investments, maturity or sale of investment
securities, collateralized borrowings and proceeds from the sale of loans. The
Bank offers a variety of deposit accounts, including NOW accounts, regular
savings accounts, money market accounts, fixed rate certificates of deposit and
various retirement accounts.
The Bank has seven wholly-owned subsidiaries. People's Mortgage Corporation,
which was organized in March 1995, acts as the mortgage-banking subsidiary of
the Bank. PSB Security Corporation I, II, and III, organized in March 1996,
are "security corporations" for Massachusetts tax purposes, which allow a more
favorable tax rate on income derived from securities held in the security
corporations. Currently, only PSB Security Corporation I is active. The
remaining subsidiaries of the Bank are primarily engaged in the management and
sale of foreclosed real estate.
OVERVIEW
Comparative operating results for 1996, 1995, and 1994 were strongly influenced
by the acquisition of earning assets; the significant growth in residential
mortgage loan originations generated by the Company's mortgage banking
subsidiary; continued reductions in levels of non-performing assets, and
increased income tax provisions. Average earning assets increased 131% from
$196.3 million in 1994 to $454.5 million in 1996. Mortgage loan originations
increased 1218% from $17.4 million in 1994 to $229.4 million in 1996.
Non-performing assets decreased 48% from $8.5 million, or 4.43% of total
assets, at the beginning of 1994 to $4.4 million, or 0.88% of total assets, at
the end of 1996. Finally, the Company recognized an income tax benefit of
$240,000 in 1994 compared to an income tax provision of $1.9 million in 1996.
It is within this context of rapid organizational change that the Company's
operating results must be analyzed.
Net income amounted to $3.6 million or $1.09 per share for the year ended
December 31, 1996, compared to $2.2 million or $0.91 per share for the year
ended December 31, 1995. Fully diluted earnings per share was $1.09 for the
year ended December 31, 1996, compared to $0.87 for the year ended December 31,
1995. Income before income taxes increased by $2.4 million or 80%, to $5.4
million for the year ended December 31, 1996 from $3.0 million for the year
ended December 31, 1995. Tax expense amounted to $1.9 million for the year
ended December 31, 1996 compared to tax expense of $829,000 for the year ended
December 31, 1995.
The improvement in pre-tax income for 1996 was due to an increase of $6.6
million or 77% in net interest income, a $450,000 or 86% reduction in the
provision for loan losses, an $83,000 or 58% reduction in OREO expenses, and a
$2.3 million or 130% increase in other income. The increase in other income
was due to a $1.3 million increase in gains on sales of loans, a $578,000
increase in customer service fees, and a $212,000 decrease in losses on sales
of securities.
The reduction in costs associated with non-performing assets corresponds with
the Bank's reducing non-performing assets from $5.6 million at the beginning of
1995 to $4.4 million at the end of 1996. The increase in net interest income
was attributable to a substantial increase in average earning assets that
offset a tightening of weighted average interest rate spreads from 2.94% for
the year ended December 31, 1995 to 2.92% for the year ended
5
<PAGE> 6
December 31, 1996. The tighter spreads were mainly due to a decrease in loan
interest rates. The increase in earning assets was a result of the Bank
borrowing funds to invest in mortgage-backed securities and loan growth
generated internally and through acquisition.
The increase in gains on loan sales was the result of the Bank's residential
mortgage originations increasing 159% during 1996. This is attributable to the
continued growth of the Bank's mortgage banking subsidiary. The increase in
customer fees was the result of the Bank acquiring the deposits of five
branches in 1996 as well as the acquisitions completed during 1995.
Operating expenses other than OREO expenses increased $7.0 million primarily
due to a $4.1 million increase in salaries and benefits expense, a $735,000
increase in occupancy expense, and a $709,000 increase in data processing
expense. These increases were primarily attributable to the operations of the
Bank's mortgage banking subsidiary, the five new branches acquired in 1996, and
a full year of operations for four branches acquired in 1995.
Assets at December 31, 1996 totaled $496.1 million compared to $324.4 million
at December 31, 1995. The increase in total assets of $171.7 million or 53% is
largely attributable to a $137.7 million increase in loans and loans held for
sale and a $25.8 million increase in investments. Of the $137.7 million
increase in loans and loans held for sale, $24 million represents net new loan
originations by the Bank and $113.7 million represents loans purchased in the
acquisition of the Fleet/Shawmut branches in 1996.
The $25.8 million increase in investments represents the Bank's continued use
of borrowed funds to generate additional interest income by investing the
proceeds in high quality mortgage-backed securities. This increase also
represents the use of cash received from the Bank's acquisition of five
branches in 1996 until such funds can be profitably redeployed in loans meeting
the Bank's underwriting guidelines.
The allowance for loan losses at December 31, 1996, totaled $4.7 million or
1.71% of total loans and loans held for sale, compared to $3.8 million or 2.75%
at year-end 1995. The allowance for loan losses as a percentage of
non-performing loans amounted to 122.1% at December 31, 1996, compared to 79.8%
at December 31, 1995. Non-performing assets decreased to $4.4 million or 0.88%
of total assets at December 31, 1996, compared to $5.3 million or 1.65% of
total assets at December 31, 1995. Performing loans accounted for as troubled
debt restructurings decreased to $355,000 at December 31, 1996, compared to
$631,000 at December 31, 1995.
The Company's book value per share at December 31, 1996 amounted to $8.72 per
share compared to $8.47 per share at December 31, 1995.
1996 DEVELOPMENTS
On September 30, 1995, the Bank entered into separate Purchase and Assumption
Agreements (each, an "Agreement," and together the "Agreements") with each of
Fleet Bank of Massachusetts, National Association ("Fleet") and Shawmut Bank,
National Association ("Shawmut," and collectively with Fleet, "Fleet/Shawmut").
The Agreements provided for (i) assumption of deposit liabilities (the
"Fleet/Shawmut Deposits") by the Bank relating to one branch of Fleet located
in Mattapoisett, Massachusetts and four branches of Shawmut located in New
Bedford (two), South Dartmouth and Taunton, Massachusetts (together, the
"Fleet/Shawmut Branches") and (ii) the acquisition of the Fleet/Shawmut Loans
and Fleet/Shawmut Assets (each as defined below) ("the Branch Acquisitions").
The Fleet/Shawmut Branches were divested in connection with the merger of
Shawmut National Corporation with and into Fleet Financial Group, Inc., which
was consummated on November 30, 1995.
At the closing of the Branch Acquisitions, and subject to the terms of the
Agreements, the Bank assumed the Fleet/Shawmut Deposits and paid Fleet/Shawmut
a premium of 5.5% on average Fleet/Shawmut Deposits in the 30 days prior to the
settlement of the Branch Acquisitions. The Bank also assumed certain other
obligations of Fleet/Shawmut relating to the Fleet/Shawmut Branches.
In the Branch Acquisitions, the Bank acquired certain first mortgage
residential, commercial and commercial real estate and consumer loans of
Fleet/Shawmut (the "Fleet/Shawmut Loans"), as well as the real property owned
or leased by Fleet and Shawmut for operation of the Fleet/Shawmut Branches and
related automated teller machines, furniture, equipment and other fixed
operating assets (the "Fleet/Shawmut Assets").
The Bank acquired the Fleet/Shawmut Loans at face value and the Fleet/Shawmut
Assets at a specified purchase price with the exception of furniture, equipment
and other fixed assets, which were acquired at book value. The Bank acquired an
aggregate of $113.7 million of Fleet/Shawmut Loans. The total purchase price
of the Fleet/Shawmut Assets was approximately $1.8 million.
To enable the Company to complete the Branch Acquisitions, the Company sold
968,352 shares of its common stock at $8.875 per share in a rights offering to
shareholders of record as of February 8, 1996 and "standby" purchasers ("the
Offering"). The Company received net proceeds from the Offering of $7.5
million on March 8, 1996. The Branch Acquisitions were consummated during the
first quarter of 1996, shortly after the completion of the Offering.
GOVERNMENT REGULATION
The Company has been incorporated as a business corporation under Massachusetts
law. Thus, the Company is subject to regulation by the Secretary of State of
Massachusetts and the rights of its stockholders are governed by Massachusetts
corporate law. As a bank holding company, the Company is subject to regulation
and supervision by the Board of Governors of the Federal Reserve System (the
"Federal Reserve Board") pursuant to the BHC Act. As a state chartered savings
bank whose deposits are insured by the FDIC, the Bank is subject to regulation
by federal and state regulatory authorities including, but not limited to, the
FDIC and the Commissioner of Banks of Massachusetts (the "Commissioner").
In granting approval of the reorganization in which the Bank became a
wholly-owned subsidiary of the Company, the Commissioner included a provision
which requires the Bank and the Company to maintain Tier 1 leverage capital
ratio of at least 4.00%, which is equivalent to the minimum Tier 1 leverage
capital ratios of the FDIC and Federal Reserve Board. The Commissioner has
indicated to the Bank that this minimum capital requirement is not related to
the Bank's financial condition, but instead reflects the policy of the
Commissioner to impose minimum capital requirements with respect to all
one-bank holding company formations. The approval also provides that if the
Bank's Tier 1 leverage capital ratio is below 4.00%, the Bank must seek
Commissioner approval before paying dividends to the Company. The Bank's tier 1
leverage capital ratio is 6.04% as of December 31, 1996.
FINANCIAL CONDITION
Cash and cash equivalents increased $1.2 million during 1996 as the Bank
acquired five branches.
6
<PAGE> 7
Investment securities, consisting primarily of mortgage-backed securities,
increased $25.8 million during 1996 as the Bank deployed acquired deposits to
leverage its capital position. This continued the execution of the Bank's
strategy begun in 1993 to maximize the Bank's return on equity by deploying
unused funds into investments having minimal credit risk. Under this strategy,
mortgage-backed securities purchases are structured to realize rate spreads
between the mortgage-backed securities and funding liabilities while matching
the expected maturities of the securities to the funding provided by repurchase
agreements and FHLB advances.
These transactions had the effect of lowering certain financial ratios such as
the Tier 1 leverage capital ratio, return on assets, the weighted average
interest rate spread, and the net yield on average interest-earning assets,
because they substantially increase the average asset base used in such
computations. On the other hand, this strategy resulted in substantial
benefits to pre-tax income and return on equity.
When interest rates decline, mortgage refinancings increase, which results in
accelerated principal repayments. When interest rates increase, prepayments
decrease, which results in longer expected average lives. Net spreads may
increase or decrease depending on the repricing characteristics of the
mortgage-backed securities and the related funding liabilities.
Loans and loans held for sale increased $137.7 million, or 99%, to $276.5
million at December 31, 1996, from $138.9 million at December 31, 1995.
Contributing to this increase was the acquisition of $113.7 million in loans
from the Fleet/Shawmut Branch Acquisition, of which $82.4 million were 1-4
family residential loans. People's Mortgage Corporation increased the Bank's
1-4 family residential loan originations to $229.4 million for 1996 compared to
$88.3 million for 1995. These loans were mostly sold to investors resulting in
net gains of $2.1 million for 1996 compared to $793,000 for 1995.
The allowance for loan losses was $4.7 million, or 1.71% of loans and loans
held for sale, at December 31, 1996, compared to $3.8 million, or 2.75% of
loans and loans held for sale, at December 31, 1995. The allowance for loan
losses amounted to 122.1% of non-performing loans at December 31, 1996,
compared to 79.8% of non-performing loans at December 31, 1995. During 1996,
the Bank acquired $1.7 million of loan loss allowance from the Branch
Acquisition. Non-performing loans totaled $3.9 million at December 31, 1996
and $4.8 million at December 31, 1995. Foreclosed real estate amounted to
$493,000 at December 31, 1996, compared to $571,000 at December 31, 1995.
An increase of $9.5 million in bank premises and equipment is attributable to
the Branch Acquisitions. Intangible assets decreased $170,000 during 1996.
There were no intangible assets resulting from the Branch Acquisitions as $6.6
million of the purchase premium was allocated to fixed assets and $4.2 million
of the purchase premium was allocated to residential mortgages based on the
fair value of the assets.
Deposits increased $161.7 million during 1996 primarily from the assumption of
$144.7 million in deposits from the Branch Acquisitions. Borrowed funds
decreased $2.3 million during 1996.
At December 31, 1996, there were $821,000 in unrealized losses, net of tax
effects, on investment securities available for sale compared to $440,000 in
unrealized losses, net of tax effects, at December 31, 1995. Without these net
unrealized losses, book value per share would have been $8.95 at December 31,
1996, and $8.66 at December 31, 1995.
RESULTS OF OPERATIONS
Net interest income increased to $15.2 million in 1996, from $8.6 million in
1995, and $7.7 million in 1994.
Interest and dividend income amounted to $33.8 million in 1996, compared to
$19.7 million in 1995, and $14.3 million in 1994. The increases in interest
and dividend income in 1996 and 1995 were due to $195.0 million and $63.2
million increases in average interest-earning assets, respectively. The
increases in average assets were primarily due to the Fleet/Shawmut Branch
Acquisition and to assets acquired during three transactions in 1995.
Interest and fees on loans increased to $20.0 million in 1996 from $11.2
million in 1995 and $9.4 million in 1994, primarily as a result of a higher
volume of average loans outstanding. The yield on average loans was adversely
affected as a result of restructuring agreements the Bank entered into with
certain borrowers whose financial condition had deteriorated. These
restructurings included modification of the interest rates being paid by the
borrowers and resulted in the Bank foregoing interest amounting to $158,000,
$103,000, and $104,000, for 1996, 1995, and 1994, respectively.
Interest and dividends from investment securities, increased to $13.6 million
in 1996, from $8.4 million in 1995, and $4.8 million in 1994. The increases in
1996 and 1995 were due primarily to an increase in funds invested in
mortgage-backed securities. Interest on short-term investments amounted to
$154,000 in 1996, $152,000 in 1995, and $52,000 in 1994.
Interest expense amounted to $18.6 million in 1996, $11.1 million in 1995, and
$6.6 million in 1994. The Bank's average cost of funds was 4.51% in 1996,
compared to 4.66% in 1995, and 3.66% in 1994. Interest on deposits increased
to $10.4 million for 1996 from $5.5 million for 1995 and $3.9 million for 1994.
The increase in deposit interest expense for 1996, was due to a $124.2 million
increase in average interest-bearing deposits and a 2 basis point increase in
deposit yield paid compared to 1995. Deposit interest expense increased by $1.6
million in 1995 compared to 1994. The 1995 deposit expense increase is
attributable to the effect of interest rate increases by the Federal Reserve
Board on prevailing market interest rates paid by banks and their non-bank
competitors.
Interest on borrowed funds increased to $8.2 million for 1996, from $5.6
million for 1995 and $2.6 million in 1994. The increase in interest expense on
borrowed funds for 1996 was due to a $49.0 million increase in average borrowed
funds offset by a 19 basis point decrease in yield paid on borrowed funds
compared to the same period in 1995. As mentioned above, the Bank has
leveraged its capital by borrowing funds and investing in mortgage-backed
securities. Interest expense on borrowed funds increased $3.0 million in 1995
over 1994 as the Bank increased average borrowed funds by $46.9 million and
average rates paid increased by 54 basis points.
The following sets forth changes in income and expense attributable to changes
in interest rates and changes in the volumes of interest-earning assets and
interest-bearing liabilities. The change attributable to both volume and rate
has been allocated proportionately to the change due to volume and the change
due to rate.
7
<PAGE> 8
Rate-Volume Analysis
(Dollars in thousands)
<TABLE>
<CAPTION>
1996 Compared to 1995 1995 Compared to 1994
Increase (Decrease) Increase (Decrease)
----------------------------- ------------------------------
Variance Variance
due to due to
------------------ ------------------
Total Total
Change Volume Rate Change Volume Rate
------- ------- -------- -------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
INCOME FROM INTEREST-EARNING ASSETS
Loans and loans held for sale:
Real estate $ 7,203 $ 7,768 $(565) $1,492 $1,237 $ 255
Other 1,607 1,732 (125) 252 207 45
------- ------- ----- ------ ------ ------
Total loans 8,810 9,500 (690) 1,744 1,444 300
Short-term investments 2 39 (37) 100 21 79
Investment securities 5,220 5,195 25 3,592 2,903 689
------- ------- ----- ------ ------ ------
Total interest and dividend income 14,032 14,734 (702) 5,436 4,368 1,068
------- ------- ----- ------ ------ ------
EXPENSE ON INTEREST-BEARING LIABILITIES
DEPOSITS:
NOW 268 279 (11) 39 40 (1)
Savings 1,061 1,087 (26) 209 63 146
Money market 112 107 5 (42) (89) 47
Time 3,463 3,415 48 1,407 526 881
------- ------- ----- ------ ------ ------
Total interest on deposits 4,904 4,888 16 1,613 540 1,073
Borrowed funds 2,542 2,735 (193) 2,977 2,679 298
------- ------- ----- ------ ------ ------
Total interest expense 7,446 7,623 (177) 4,590 3,219 1,371
------- ------- ----- ------ ------ ------
Net interest income $ 6,586 $ 7,111 $(525) $ 846 $1,149 $ (303)
======= ======= ===== ====== ====== ======
</TABLE>
PROVISION FOR LOAN LOSSES
The provision for loan losses represents the charge to earnings necessary to
maintain the allowance for loan losses at a level adequate to absorb reasonably
foreseeable loan losses in the loan portfolio. If the economy or real estate
values in the Bank's market area decline, additional provisions could be
necessary.
The provision for loan losses was $75,000 in 1996, $525,000 in 1995, and
$807,000 in 1994. These provisions were the result of the Bank's internal loan
review, historical loss experience, trends in delinquent and non-accrual loans,
known and inherent risks in the nature and volume of the loan portfolio,
adverse situations that may affect the borrower's ability to repay, collateral
values, an estimate of potential loss on significant credits, concentrations of
credit, and present and prospective economic conditions based on facts then
known.
OTHER INCOME
The Company's other income totaled $4.0 million in 1996, $1.8 million in 1995,
and $1.0 million in 1994. Customer service fees amounted to $1.6 million in
1996, $995,000 in 1995, and $789,000 in 1994, respectively. The increase in
1996 is due to an increase in the Bank's deposit customer base as a result of
nine branches acquired during 1995 and 1996. Gains on sales of loans increased
to $2.1 million in 1996, from $793,000 in 1995 and $99,000 in 1994. The
increases in 1996 and in 1995 are attributable to the volume generated by the
Bank's mortgage banking subsidiary.
In 1996, the Bank sold investments for net losses of $19,000 compared to net
losses of $231,000 and $1,000 in 1995 and 1994, respectively.
OPERATING EXPENSES
Operating expenses totaled $13.7 million in 1996, $6.8 million in 1995, and
$6.2 million in 1994. The Bank's efficiency ratio (operating expenses,
exclusive of expenses associated with OREO, divided by net interest income and
non-interest income) was 70.9%, 64.3%, and 60.4% for the years ended 1996,
1995, and 1994, respectively. The 1995 increase is attributable to the effect
of the initial year's operations of PMC. The 1996 increase is attributable to
non-recurring costs associated with the Branch Acquisitions and to operating
losses generated by PMC.
Salaries and benefits expense amounted to $7.6 million in 1996, $3.5 million in
1995, and $2.4 million in 1994. The 1996 increase is primarily attributable to
the increased size of the Bank, the first full year of operations of the
Bank's mortgage banking subsidiary and the significant increase in mortgage
origination volume. Occupancy and equipment expenses amounted to $1.5 million
in 1996, $734,000 in 1995, and $589,000 in 1994. The 1996 increase was
primarily due to nine branches acquired during 1995 and 1996.
Data processing fees increased to $950,000 in 1996 compared to $241,000 in 1995
and $291,000 in 1994. This increase was attributable to branch acquisitions
and the Bank's out-sourcing of item processing. Professional fees amounted to
$614,000 in 1996, $430,000 in 1995, and $451,000 in 1994. The Bank uses outside
professionals for various services, including attorneys, accountants,
shareholder services, and appraisers. Legal fees were $206,000 in 1996,
$100,000 in 1995 and $139,000 in 1994. Other professional fees amounted to
$408,000, $330,000, and $312,000 for 1996, 1995, and 1994, respectively.
The Bank incurred OREO expenses totaling $59,000 in 1996, $142,000 in 1995, and
$935,000 in 1994. OREO operating expenses such as property taxes, insurance,
maintenance, and repairs, totaled $204,000, $282,000, and $528,000 for 1996,
1995, and 1994, respectively. The Bank recognized net gains on sales of OREO of
$145,000 and $140,000 in 1996 and 1995, respectively. The Bank recognized or
provided for losses on OREO amounting to $407,000 in 1994. The differences in
year-to-year amounts is attributable to
8
<PAGE> 9
decreases in OREO volumes. Due to the level of non-performing loans at
December 31, 1996, foreclosures are likely to continue in 1997. The level of
OREO expenses cannot be reasonably estimated since the holding period for OREO
is difficult to predict and depends upon the nature of the foreclosed property
and opportunities for disposition.
Other general and administrative expenses amounted to $2.9 million in 1996,
$1.7 million in 1995, and $1.5 million in 1994. Deposit insurance expense was
$9,000 in 1996, compared to $213,000 in 1995, and $380,000 in 1994. The
fluctuations were primarily the result of changes in the FDIC insurance
assessment rate. Amortization of intangible assets increased to $249,000 from
$87,000 in 1995 and $31,000 in 1994. The Bank increased advertising expense to
$717,000 in 1996, from $402,000 in 1995, and $200,000 in 1994, as it sought to
re-establish market visibility after years of diminished spending. The 1996
expense also reflected added costs of breaking into new markets acquired as a
result of the Branch Acquisitions. Insurance expense amounted to $103,000 in
1996, $92,000 in 1995, and $127,000 in 1994. Finally various other categories
of other operating expenses increased to $1.8 million during 1996 compared to
$960,000 and $802,000 in 1995 and 1994, respectively, due to the Bank's
increase in size and the growing operations of its mortgage banking subsidiary.
INCOME TAXES
The Bank recorded income tax expense of $1.9 million and $829,000 in 1996 and
1995, respectively, compared to tax benefits of $240,000 for 1994,
respectively.
At January 1, 1993, the Bank had $2.3 million of available income tax benefits.
However, because of the Bank's then recent significant operating losses as well
as the general economic conditions that existed in its market area, the Bank
assumed at that time that it would be unlikely that any benefit would be
realized. As a result of its subsequent return to operating profitability,
reduction in non-performing assets, strengthened financial condition, and
expectation of future taxable income, the Bank recognized $136,000, $410,000,
and $842,000 of these income tax benefits against future income expected to be
earned prior to the expiration date of such tax benefits during 1996, 1995 and
1994, respectively.
If economic conditions deteriorate whereby the anticipated future earnings do
not materialize, the recognition of these income tax benefits will be reversed
to the extent unrealized. At December 31, 1996, there were $159,000 of
additional income tax benefits that could be recognized if future earnings
during the carryforward period exceed the amount anticipated by the Bank.
However, based upon the nature of the remaining tax benefits available for
future realization at December 31, 1996, the Bank anticipates that no such
benefits will actually be recognized after December 31, 1996.
The available tax benefits that the Bank anticipates will not be recognized
relate to state tax loss carryforwards and federal tax capital loss
carryforwards. Such state loss carryforwards arose in the Bank's subsidiaries
that are engaged in the management of other real estate owned. The Bank
anticipates that such state loss carryforwards are not likely to be offset by
future operating income in those subsidiaries. The Bank does not expect to
generate income qualifying for capital gains treatment within the permissible
federal tax loss carryforward period.
CASH FLOWS
Cash flows from operating activities during 1996, 1995 and 1994 have primarily
been affected by net income after adjustment for noncash items that are
principally: (1) the level of provisions for loan losses and write-downs of
other real estate owned, (2) the effects of deferred tax provisions, benefits,
and recognition of tax assets under SFAS 109, (3) depreciation and
amortization, and (4) loans originated for sale and subsequently sold.
Operating activities resulted in cash outflows of $14.4 million and $1.5
million in 1996 and 1995, respectively, and provided cash inflows of $6.9
million for the year ended December 31, 1994.
The Bank's deployment of cash flows, provided by increased deposits in 1996 and
by borrowed funds in 1995 and 1994, into investment securities, primarily
mortgage-backed securities, was the primary reason for the Bank's positive cash
flows from financing activities and negative cash flows from investing
activities. This corresponds with the Bank's strategy of using borrowed funds
to leverage its capital profitably.
The Bank deployed cash flows into investment purchases, net of proceeds from
investment sales, maturities, and amortization, of $25.8 million, $63.0
million, and $40.9 million for the years ended December 31, 1996, 1995 and
1994, respectively. This largely explains the Bank's net cash flows used in
investing activities of $7.3 million, $43.8 million, and $44.1 million for the
years ended December 31, 1996, 1995 and 1994, respectively.
The Bank funded these investment purchases through an increase in deposits of
$17 million in 1996 and borrowed funds, net of repayments amounting to $48.7
million, and $42.6 million for the years ended December 31, 1995 and 1994,
respectively. This largely explains the Bank's net cash flows provided by
financing activities of $22.9 million, $49.1 million, and $39.4, million for
the years ended December 31, 1996, 1995 and 1994, respectively. The Bank also
funded these investment purchases through deployment of $20.7 million and $24.1
million in cash received during acquisition transactions in 1996 and 1995,
respectively.
During 1996 and 1995, the Bank experienced net cash inflows from deposits of
$17.0 million and $381,000. The increase in 1996 is primarily the result of
new municipal deposit products. During 1994, the Bank experienced net cash
outflows from deposits of $3.3 million as the Bank was affected by its
decision not to compete on deposit interest rates offered by local community
credit unions.
During 1996, the Bank assumed liabilities in the Branch Acquisitions of $145.5
million. In 1995, the Bank assumed liabilities in acquisition transactions
amounting to $40.7 million.
ASSET/LIABILITY MANAGEMENT
The earnings of most banking institutions are influenced by interest rate
fluctuations because their balance sheets, both assets and liabilities, are
predominantly interest-bearing. The objective of the Bank's asset/liability
management is to prudently minimize the interest rate risk of its assets and
liabilities. Nonetheless, the Bank, by its very nature, will always be in the
business of taking on interest rate risk. It is the responsibility of the
Bank's Investment Committee, under the authority of the Board of Directors, to
oversee the Bank's management of interest rate risk.
One of the tools used by management to monitor interest rate sensitivity is gap
analysis. Gap analysis involves comparing the difference or "gap" between
interest-earning assets and interest-bearing liabilities that mature or reprice
during a specific period of time. These differences are a primary component of
the risk to net interest income. A gap is considered positive when the amount
of interest rate sensitive assets exceeds the amount of interest rate sensitive
liabilities. A gap is considered negative when the amount of interest
9
<PAGE> 10
rate sensitive liabilities exceeds the amount of interest rate sensitive
assets. During a period of rising interest rates, therefore, a negative gap
theoretically would tend to adversely affect net income. Conversely, during a
period of falling interest rates, a negative gap position theoretically would
tend to result in an increase in net interest income.
In addition, the Bank analyzes the cumulative amount of the excess or
deficiency of rate-sensitive assets over rate-sensitive liabilities during a
specified period of time. This method, known as cumulative gap analysis, is
demonstrated in the interest rate sensitivity table below. At December 31,
1996, the cumulative one-year gap was a positive $39.0 million or 7.9% of total
assets.
The following table sets forth a comparison of the carrying value of the Bank's
rate sensitive assets and liabilities at December 31, 1996, for the intervals
indicated. The table does not include non-interest earning assets or
non-interest bearing deposit accounts. Mortgage-backed securities are
allocated based upon expected maturities. NOW, savings, and money market
deposit accounts are allocated with FDIC guidelines for interest rate risk
management.
Gap Analysis
(Dollars in thousands)
<TABLE>
<CAPTION>
At December 31, 1996
--------------------------------------------------------------------
One Year 1-2 2-3 3-5 Over 5
or Less Years Years Years Years Total
-------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
ASSETS SUBJECT TO INTEREST RATE ADJUSTMENT:
Short-term investments $ 10 $ - $ - $ - $ - $ 10
Investment securities 164,045 2,286 1,299 13,800 2,765 184,195
Adjustable-rate loans 99,948 12,562 15,376 11,067 2,585 141,538
Fixed-rate loans 39,137 5,035 7,016 8,300 75,546 135,034
-------- -------- -------- -------- ------- --------
Total 303,140 19,883 23,691 33,167 80,896 460,777
-------- -------- -------- -------- ------- --------
LIABILITIES SUBJECT TO INTEREST RATE ADJUSTMENT:
NOW 12,602 8,402 4,201 16,804 - 42,009
Savings 28,639 19,093 9,546 38,186 - 95,464
Money market 12,714 4,238 4,238 - - 21,190
Term deposits 106,809 20,763 7,287 4,702 115 139,676
Borrowed funds 103,420 20,500 - - - 123,920
-------- -------- -------- -------- ------- --------
Total 264,184 72,996 25,272 59,692 115 422,259
-------- -------- -------- -------- ------- --------
Excess (deficiency) of rate-sensitive
assets over rate-sensitive liabilities $ 38,956 $(53,113) $ (1,581) $(26,525) $80,781 $ 38,518
======== ======== ======== ======== ======= ========
Cumulative excess (deficiency) of
rate-sensitive assets over rate-sensitive liabilities $ 38,956 $(14,157) $(15,738) $(42,263) $38,518
======== ======== ======== ======== =======
As a percent of total assets 7.85% (2.85)% (3.17)% (8.52)% 7.76%
======== ======== ======== ======== =======
</TABLE>
Certain shortcomings are inherent in the method of analysis presented in the
foregoing table. For example, although certain assets and liabilities may have
similar maturities or periods to repricing, they may react in different degrees
to changes in market interest rates. Also, the interest rates on certain types
of assets and liabilities may fluctuate in advance of changes in market
interest rates, while interest rates on other types of assets may lag behind
changes in market rates. Additionally, certain assets, such as adjustable rate
loans, have features which restrict changes in interest rates both on a
short-term basis and over the life of the asset. Further, in the event of a
change in interest rates, prepayment and early withdrawal levels would likely
deviate significantly from those assumed in calculating the table. Finally,
the ability of many borrowers to make scheduled payments on their adjustable
rate loans may decrease in the event of an interest rate increase.
The Bank further enhances this gap analysis by using a computer based
asset/liability management simulation model. This model measures changes in
net interest income by projecting the future composition of the Bank's
interest-earning assets and interest- bearing liabilities and assessing the
effect of rising, flat, and declining interest rate scenarios within a two year
horizon. The simulation model allows the Bank to measure the effects of
changing interest rate environments on net interest margins, net income,
capital, and liquidity. In response to such analysis, the Bank seeks to adjust
its assets and liabilities to diminish the future possible adverse effects of
extreme changes in interest rates.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity is the ability of the Bank to have sufficient cash reserves and cash
equivalents to meet current and future loan commitments and reasonable deposit
withdrawals. Management monitors its liquidity requirements so as to meet
reasonable funding needs. The Bank's principal sources of liquidity are
customer deposits, amortization and repayment of loan principal, interest and
dividends on loans and investments, maturity or sale of investment securities,
collateralized borrowings from the Federal Home Loan Bank and proceeds from the
sale of loans. In addition to the aforementioned sources of
10
<PAGE> 11
funds, the Bank, as a member of the Depositors Insurance Fund, has the ability
to borrow from the Fund for short-term cash needs by pledging certain assets.
The Company and the Bank are required to meet certain minimum regulatory
capital requirements. Banks that are highly rated must maintain a minimum
leverage ratio of Tier 1 (or core) capital to total assets of at least 3.00%.
All other banks must maintain a minimum leverage ratio that is at least 4.00%.
Banks are also required to maintain minimum risk-based capital ratios of Tier 1
and qualifying total capital to risk-weighted assets of 4.00% and 8.00%,
respectively.
Tier 1 capital or core capital consists of common stockholders' equity,
non-cumulative perpetual preferred stock and minority interest in consolidated
subsidiaries, minus intangible assets and unrealized gains or losses on debt
securities available for sale. Federal banking regulators limit the inclusion
in Tier 1 capital of deferred tax benefits whose recognition is dependent on
future taxable income to the lesser of 10% of core capital or to the amount
that could be realized within one year.
The Company had a Tier 1 leverage ratio of 6.01%, a risk-weighted Tier 1 ratio
of 12.31% and a total risk-based capital ratio of 13.56% at December 31, 1996.
The Bank had a Tier 1 leverage ratio of 6.04%, a risk-weighted Tier 1 ratio of
12.38% and a total risk-based capital ratio of 13.64% at December 31, 1996.
NON-PERFORMING ASSETS
The Bank considers loans to be non-performing when doubt exists as to the
ultimate collection of interest or principal. Such loans are placed on
non-accrual status and related accrued interest is charged off against current
period interest income. In addition, the Bank considers certain restructured
loans to be non-performing until the borrower demonstrates a sustained payment
performance usually for a minimum of six months.
The following table sets forth the Bank's non-performing assets at December 31,
1996, 1995, and 1994:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C>
Non-performing loans:
Mortgage loans $3,816 $4,725 $2,198
Commercial loans 45 37 30
Consumer loans 2 14 26
------ ------ ------
3,863 4,776 2,254
Other real estate owned, net 493 571 3,310
------ ------ ------
Non-performing assets $4,356 $5,347 $5,564
====== ====== ======
</TABLE>
At December 31, 1996, there were no individual non-performing assets with a
balance greater than $1.0 million.
Included in OREO at December 31, 1994 are properties that have been
substantively repossessed, totaling $2.5 million. Prior to the Bank's adoption
of SFAS 114, a troubled real estate loan was deemed an in-substance foreclosure
when it was determined that the borrower had little or no equity in the
underlying collateral and the Bank expected repayment only from the sale or
operation of the collateral. Property that has been acquired by foreclosure or
substantively repossessed was valued at the lower of the loan balance or the
fair value of the property less estimated costs to sell. With the adoption of
SFAS 114 on January 1, 1995, $2.5 million of loans previously classified as
OREO were reclassified as non-performing loans. At December 31, 1996, $85,000
of these loans were included in non-performing loans. The decline in the
balance of such loans is primarily due to actual foreclosures of the properties
securing these loans. If prior periods had been restated for the adoption of
SFAS 114, non-performing loans would have amounted to $4.7 million at December
31, 1994. Additionally, the Bank of Taunton transaction resulted in the Bank's
acquisition of $599,000 in non-performing assets. No non-performing assets
were acquired at the time of the Branch Acquisitions.
Non-accrual loans amounted to $3.9 million, $4.8 million and $2.3 million at
December 31, 1996, 1995, and 1994, respectively. For December 31, 1996,
interest income that would have been recorded if the non-accrual loans had been
current was $357,000 and the interest income that was included in net income
for the period was $261,000. Included in non-performing loans were troubled
debt restructurings which amounted to $2.3 million, $1.3 million, and $1.2
million at December 31, 1996, 1995, and 1994, respectively. For 1996, interest
income that would have been recorded under the original terms of the
restructured loans was $222,000. Interest income that was recognized for the
same period amounted to $64,000. In addition, the Bank had troubled debt
restructurings totaling $355,000, $631,000 and $1.0 million at December 31,
1996, 1995, and 1994, respectively, that were accounted for on the accrual
basis as they performed under the restructured terms for a reasonable period,
and the current interest rate approximates a market interest rate. A troubled
debt restructuring is a loan on which the Bank has reduced the rate of interest
to a below-market rate or has forgiven all or part of the interest income or
part of the principal balance of the loan due to the borrower's financial
condition, including reduced cash flow, reduced collateral value or other
conditions that impair the borrower's ability to repay the loan according to
the original terms.
ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses has been established to absorb reasonably
foreseeable losses inherent in the loan portfolio. The provision to and the
level of the allowance are evaluated on a periodic basis by management and the
Board of Directors. These provisions were the results of the Bank's internal
loan review, historical loan loss experience, trends in delinquent and
non-accrual loans, known and inherent risks in the nature and volume of the
loan portfolio, adverse situations that may affect the borrower's ability to
repay, collateral values, an estimate of potential loss exposure on significant
credits, concentrations of credit, and present and prospective economic
conditions based on facts then known.
Periodically, management reviews the portfolio, classifying each loan into
categories by assessing the degree of risk involved. Considering this review,
the Bank establishes the adequacy of its allowance and necessary additions are
charged to earnings through the provision for loan losses. The allowance is an
estimate. Ultimate losses may vary from current estimates and additions to the
allowance may be necessary. In addition, regulatory agencies, as part of the
examination process, review the Bank's allowance and may require the Bank to
provide additions to the allowance based on their assessment, which may differ
from management's.
The Bank's allowance for loan losses at December 31, 1996 and 1995, was $4.7
million and $3.8 million, respectively. The Bank's ratio of its allowance for
loan losses to total loans and loans held for sale at December 31, 1996 and
1995 was 1.7% and 2.8%, respectively. The Bank's ratio of its allowance for
loan losses to non-performing loans at December 31, 1996 and 1995 was 122.1%
and 79.8%, respectively.
11
<PAGE> 12
Management believes the allowance for loan losses was adequate at December 31,
1996, to absorb reasonably foreseeable loan losses in the loan portfolio. If
the economy or real estate values in the Bank's market decline, additional
charge-offs and an increase in the allowance for loan losses could result.
IMPACT OF INFLATION
The consolidated financial statements and the consolidated financial data
presented herein have been prepared in accordance with generally accepted
accounting principles that require the measurement of financial position and
operating results in terms of historical dollars without considering changes in
the relative purchasing power of money over time due to inflation. Virtually
all of the assets and liabilities of a financial institution are monetary in
nature. As a result, interest rates typically have a more significant impact on
a financial institution's performance than the effects of general levels of
inflation. Interest rates do not necessarily move in the same direction or in
the same magnitude as the prices of goods and services.
RECENT ACCOUNTING PRONOUNCEMENTS
In May 1993, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") 114, "Accounting by Creditors for
Impairment of a Loan." The Statement requires that impaired loans be measured
on a loan by loan basis by either the present value of expected future cash
flows discounted at the loan's effective interest rate, the loan's obtainable
market price, or the fair value of the collateral if the loan is collateral
dependent. SFAS 114 is applicable to all creditors and to all loans, except
large groups of smaller balance homogeneous loans that are collectively
evaluated for impairment, loans that are measured at fair value or at the lower
of cost or fair value, leases, and convertible or nonconvertible debentures and
bonds and other debt securities.
SFAS 114 also limits the classification of loans as in-substance foreclosures
to situations where the creditor actually receives physical possession of the
debtor's assets. This provision resulted in the reclassification of certain
loans accounted for as in-substance foreclosures from other real estate owned
to loans. In practice, most such loans would be considered by the Bank to be
non-performing. If SFAS 114 had been in effect at December 31, 1994, loans
would have increased by $2.5 million and other real estate owned would have
decreased by the same amount in the balance sheet. The Bank adopted SFAS 114
on January 1, 1995 and reclassified $2.5 million of in-substance foreclosures
to loans. At December 31, 1996, $85,000 of these loans were included in
non-performing loans. The $2.4 million decline in the balance of such loans is
primarily due to actual foreclosures of the properties securing these loans.
The adoption of SFAS 114 had no significant effect on the Bank's income
statement during 1996 or 1995.
In October, 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based
Compensation." This Statement encourages all entities to adopt a fair value
based method of accounting for employee stock compensation plans, whereby
compensation cost is measured at the grant date based on the value of the award
and is recognized over the service period, which is usually the vesting period.
However, it also allows an entity to continue to measure compensation cost for
those plans using the intrinsic value based method of accounting prescribed by
APB Opinion No. 25, "Accounting for Stock Issued to Employees," whereby
compensation cost is the excess, if any, of the quoted market price of the
stock at the grant date (or other measurement date) over the amount an employee
must pay to acquire the stock. Stock options issued under the Company's stock
option plans have no intrinsic value at the grant date, and under Opinion No.
25 no compensation cost is recognized for them. The Company has elected to
remain with the accounting in Opinion No. 25 and, as a result, must make pro
forma disclosures of net income and earnings per share and other disclosures,
as if the fair value based method of accounting had been applied. The
disclosure requirements of this Statement are effective for the Company's
consolidated financial statements for the year ended December 31, 1996. The pro
forma disclosures include the effects of all awards granted on or after January
1, 1995. (See Note 13.)
In November 1995, the FASB issued a guide to implementation of SFAS 115. In
that guidance, the FASB allowed enterprises to reassess the appropriateness of
their classification of securities and make necessary reclassifications by
December 31, 1995. As a result of this implementation guidance, the Bank
reclassified all of its investment securities as available for sale in the
fourth quarter of 1995. This resulted in the reclassification of $54.0 million
of investment securities. The Bank believes this reclassification will allow
greater flexibility in its asset/liability and liquidity management.
In June 1996, the FASB issued SFAS No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities." The
accounting and reporting standards of this Statement are based on a financial
components approach that focuses on control, whereby after a transfer of
financial assets, an entity recognizes only financial and servicing assets it
controls and liabilities it has incurred. Liabilities incurred will be
initially recognized at fair value, if practicable. Financial assets are
derecognized when control has been surrendered, and liabilities are
derecognized when extinguished. The determination of whether control over a
financial asset has been surrendered is based on meeting specific criteria as
defined in the Statement.
The Statement provides standards for distinguishing transfers of financial
assets that are sales from transfers that are secured borrowings, and impacts
the accounting for various transactions including the servicing of financial
assets, securitizations, securities lending transactions, repurchase agreements
including "dollar rolls," "wash sales," loan syndications and participations,
and transfers of receivables with recourse.
The Statement is effective for transfers and servicing of financial assets and
extinguishments of liabilities occurring after December 31, 1996, and is to be
applied on a prospective basis. In December 1996, the FASB voted to defer for
one year the provisions of the Statement that relate to secured borrowings and
collateral.
Management is currently evaluating the impacts of the Statement on its secured
borrowings such as repurchase agreements but does not expect, based on the
general terms of its current agreements, that the Statement will significantly
change its accounting for similar transactions in the future. Other provisions
of the Statement will not, in management's opinion, have a significant impact
on the consolidated financial statements.
12
<PAGE> 13
Consolidated Balance Sheets
<TABLE>
<CAPTION>
December 31,
-----------------------
1996 1995
---- ----
(Dollars in thousands)
<S> <C> <C>
ASSETS
Cash and cash equivalents $12,478 $11,303
Investment securities (Notes 3 and 9) 192,517 166,709
Loans held for sale 25,612 5,272
Loans 250,911 133,591
Less allowance for loan losses (4,716) (3,813)
---------- ----------
Loans, net (Notes 4, 9, and 15) 246,195 129,778
---------- ----------
Other real estate owned, net (Note 5) 493 571
Banking premises and equipment, net (Note 6) 13,034 3,578
Accrued interest receivable 2,888 2,104
Deferred income taxes (Note 7) 550 1,826
Intangible assets (Note 2) 1,338 1,508
Due from broker - 938
Other assets 1,028 853
---------- ----------
Total assets $496,133 $324,440
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits (Note 8) $336,238 $174,583
Borrowed funds (Note 9) 123,920 126,245
Mortgagors' escrow accounts 973 494
Accrued interest payable 1,114 843
Accrued expenses (Note 12) 1,941 1,653
Other liabilities 883 945
---------- ----------
Total liabilities 465,069 304,763
---------- ----------
Commitments and contingencies (Note 10)
Stockholders' equity (Notes 2, 11, 13, 14, and 17):
Serial preferred stock - par value $0.10 per share; authorized
10,000,000 shares, none issued - -
Common stock - par value $0.10 per share; authorized 20,000,000 shares;
issued and outstanding 3,562,970 and 2,324,007 shares 356 232
Additional paid-in capital 22,967 14,015
Retained earnings 8,562 5,870
---------- ----------
31,885 20,117
Net unrealized loss on securities available for sale, after tax effects (Notes 3 and 7) (821) (440)
---------- ----------
Total stockholders' equity 31,064 19,677
---------- ----------
Total liabilities and stockholders' equity $496,133 $324,440
========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
13
<PAGE> 14
Consolidated Statements of Income
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------------------
1996 1995 1994
---- ---- ----
(Dollars in thousands, except per share data)
<S> <C> <C> <C>
Interest and dividend income:
Interest and fees on loans $19,993 $11,183 $9,439
Interest on short-term investments 154 152 52
Interest and dividends on investment securities 13,614 8,394 4,802
------------ ------------ ------------
Total interest and dividend income 33,761 19,729 14,293
------------ ------------ ------------
Interest expense:
Interest on deposits 10,435 5,531 3,918
Interest on borrowed funds 8,160 5,618 2,641
------------ ------------ ------------
Total interest expense 18,595 11,149 6,559
------------ ------------ ------------
Net interest income 15,166 8,580 7,734
Provision for loan losses (Note 4) 75 525 807
------------ ------------ ------------
Net interest income, after provision for loan losses 15,091 8,055 6,927
------------ ------------ ------------
Other income:
Customer service fees 1,573 995 789
Losses on sales of investment securities, net (19) (231) (1)
Gains on sales of loans, net 2,100 793 99
Gains on sales of banking premises and equipment 162 - -
Miscellaneous 215 198 146
------------ ------------ ------------
Total other income 4,031 1,755 1,033
------------ ------------ ------------
Operating expenses:
Salaries and employee benefits (Notes 12 and 13) 7,644 3,499 2,420
Occupancy and equipment (Notes 6 and 10) 1,469 734 589
Data processing 950 241 291
Professional fees 614 430 451
Other real estate owned, net (Note 5) 59 142 935
Other general and administrative 2,942 1,741 1,540
------------ ------------ ------------
Total operating expenses 13,678 6,787 6,226
------------ ------------ ------------
Income before income taxes 5,444 3,023 1,734
Provision (benefit) for income taxes (Note 7) 1,885 829 (240)
------------ ------------ ------------
Net income $3,559 $2,194 $1,974
============ ============ ============
Weighted average equivalent shares outstanding- primary 3,259,794 2,413,922 2,338,274
Weighted average equivalent shares outstanding- fully diluted 3,267,890 2,523,135 2,338,274
Net income per share:
Primary $1.09 $0.91 $0.84
Fully diluted 1.09 0.87 0.84
</TABLE>
See accompanying notes to consolidated financial statements.
14
<PAGE> 15
Consolidated Statements of Changes in Stockholders' Equity
<TABLE>
<CAPTION>
Years Ended December 31, 1996, 1995, and 1994
-------------------------------------------------------------
Net Unrealized
Gain (Loss) on
Additional Securities
Common Paid-in Retained Available
Stock Capital Earnings for Sale Total
-------- ---------- --------- -------------- ---------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1993 $230 $13,900 $1,795 $46 $15,971
Net income - - 1,974 - 1,974
Exercise of stock warrants - 4 - - 4
Change in net unrealized gain (loss) on
securities available for sale, after tax effects - - - (974) (974)
-------- -------- --------- ---------- ---------
Balance at December 31, 1994 230 13,904 3,769 (928) 16,975
Net income - - 2,194 - 2,194
Exercise of stock warrants 2 99 - - 101
Exercise of stock options - 12 - - 12
Cash dividends declared ($.04 per share) - - (93) - (93)
Change in net unrealized gain (loss) on
securities available for sale, after tax effects - - - 488 488
-------- -------- --------- ---------- ---------
Balance at December 31, 1995 232 14,015 5,870 (440) 19,677
Net income - - 3,559 - 3,559
Exercise of stock warrants 18 887 - - 905
Exercise of stock options 9 625 - - 634
Issuance of common stock 97 7,440 - - 7,537
Cash dividends declared ($0.27 per share) - - (867) - (867)
Change in net unrealized gain (loss) on
securities available for sale, after tax effects - - - (381) (381)
-------- -------- --------- ---------- ---------
Balance at December 31, 1996 $356 $22,967 $8,562 $(821) $31,064
======== ======== ========= ========== =========
</TABLE>
See accompanying notes to consolidated financial statements.
15
<PAGE> 16
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Years Ended December 31,
-----------------------------
1996 1995 1994
---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $3,559 $2,194 $1,974
Adjustments to reconcile net income to net cash provided (used) by operating activities:
Provision for loan losses 75 525 807
Depreciation and amortization 1,516 420 503
Gains on sales of banking premises and equipment (162) - -
Losses on sales of investment securities, net 19 231 1
Loans originated for sale (173,082) (28,200) (6,422)
Principal balance of loans sold 152,742 22,927 9,716
Write-downs, provisions, and net gain on sales of other real estate owned, net (145) (140) 407
Deferred tax (benefit) provision 1,500 826 (274)
Change in other assets, net of other liabilities (435) (263) 214
----------- --------- ---------
Net cash provided (used) by operating activities (14,413) (1,480) 6,926
----------- --------- ---------
Cash flows from investing activities:
Cash and cash equivalents received through acquisitions 20,664 24,054 -
Proceeds from sales of investment securities available for sale 82,983 76,529 18,987
Proceeds from maturities of investment securities available for sale 2,000 - 1,450
Proceeds from maturities of investment securities held to maturity - - 1,500
Proceeds from amortization of mortgage-backed securities 38,779 19,714 13,302
Purchase of investment securities available for sale (149,545) (158,220) (41,273)
Purchase of investment securities held to maturity - (995) (34,851)
Loan (originations and purchases) amortization and payoffs, net (1,772) (5,161) (6,148)
Proceeds from sale of other real estate owned 1,118 1,755 2,757
Disbursements for other real estate owned - (15) (160)
Payments received on other real estate owned - - 576
Proceeds from sale of banking premises and equipment 424 - -
Additions to banking premises and equipment, net (1,929) (1,455) (199)
----------- --------- ---------
Net cash used in investing activities (7,278) (43,794) (44,059)
----------- --------- ---------
Cash flows from financing activities:
Net increase (decrease) in deposits 16,952 381 (3,257)
Net (decrease) increase in borrowings with maturities of three months or less (52,295) 10,065 20,630
Proceeds from issuance of borrowings with maturities in excess of three months 99,520 62,600 24,950
Repayment of borrowings with maturities in excess of three months (49,550) (24,000) (3,000)
Increase (decrease) in mortgagors' escrow accounts 30 (41) 80
Proceeds from issuance of common stock 7,537 - -
Proceeds from exercise of stock warrants and options 1,539 113 4
Cash dividends (867) (93) -
----------- --------- ---------
Net cash provided by financing activities 22,866 49,025 39,407
----------- --------- ---------
Net increase in cash and cash equivalents 1,175 3,751 2,274
Cash and cash equivalents at beginning of year 11,303 7,552 5,278
----------- --------- ---------
Cash and cash equivalents at end of year $12,478 $11,303 $7,552
=========== ========= =========
Supplementary information:
Interest paid on deposit accounts and borrowed funds $18,324 $10,900 $6,312
Income taxes paid (refunded), net 25 35 (42)
Transfers from loans to other real estate owned 895 1,361 2,184
Transfer from other real estate owned to banking premises and equipment - 150 -
Transfers from other real estate owned to loans - 2,460 -
Transfers from investment securities available for sale to investment
securities held to maturity - - 17,108
Transfers from investment securities held to maturity to investment
securities held for sale - 53,963 -
Increase (decrease) in due from broker (938) 938 -
Assets acquired in acquisitions of bank and branches 124,845 16,622 -
Liabilities assumed in acquisitions of bank and branches 145,509 40,676 -
</TABLE>
See accompanying notes to consolidated financial statements.
16
<PAGE> 17
Notes to Consolidated Financial Statements
1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION AND CONSOLIDATION
The consolidated financial statements include the accounts of People's
Bancshares, Inc. (the "Company") and its wholly owned subsidiary, People's
Savings Bank of Brockton (the "Bank"). The Bank formed the Company as a
subsidiary of the Bank on March 31, 1995 and completed a reorganization on
February 8, 1996, where the Company became the Bank's parent company. The
Bank's wholly owned subsidiaries PECO Inc., Longworth Inc., and G.B.L., Inc.
engage primarily in the management and sale of other real estate owned.
People's Mortgage Corporation, organized in March 1995, engages in mortgage
banking and PSB Security Corporation I, organized in February 1996, engages in
the purchase and sale of investment securities. All significant intercompany
accounts and transactions have been eliminated in consolidation.
USE OF ESTIMATES
In preparing consolidated financial statements in conformity with generally
accepted accounting principles, management is required to make estimates and
assumptions that affect the reported amounts of assets and liabilities as of
the date of the consolidated balance sheet and reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates. Material estimates that are particularly susceptible to significant
change in the near term relate to the determination of the allowance for loan
losses, the valuation of other real estate owned, and the valuation reserve on
deferred tax assets.
BUSINESS
The Bank provides a variety of financial services to individuals and small
businesses through its fourteen offices in southeastern Massachusetts. Its
primary deposit products are checking, savings and term certificate accounts
and its primary lending products are residential and commercial mortgage loans.
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform to the current
year presentation.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include amounts due from banks and short-term
investments purchased with maturities of three months or less.
INVESTMENT SECURITIES
Investments in debt securities that management has the positive intent and
ability to hold to maturity are classified as "held to maturity" and reflected
at amortized cost. Investments classified as "available for sale" are
reflected at fair value, with unrealized gains and losses reported as a
separate component of stockholders' equity, net of tax effects.
Restricted equity securities are reflected at cost. Purchase premiums and
discounts are amortized to earnings by a method that approximates the interest
method over the terms of the investments. Declines in the value of investments
that are deemed to be other than temporary are reflected in earnings when
identified. Gains and losses on disposition of investments are computed by the
specific identification method.
In November 1995, the Financial Accounting Standards Board ("FASB") issued
guidance allowing a one-time reassessment of an entity's investment
classifications during the period November 15, 1995 to December 31, 1995. As a
result, the amortized cost of securities held to maturity that were transferred
to available for sale amounted to $54.0 million, and the related unrealized
loss amounted to $626,000.
For regulatory purposes, unrealized gains or losses on debt securities
available for sale, after tax effects, are not recognized in capital.
LOANS
The Bank grants mortgage, commercial, and consumer loans to customers. A
substantial portion of the loan portfolio is represented by mortgage loans in
southeastern Massachusetts. The ability of the Bank's debtors to honor their
contracts is dependent upon the real estate and construction markets and
general economic sectors.
Interest on loans is recognized on a simple interest basis and is not accrued
on loans which are impaired or when in the judgment of management the ultimate
collectibility of principal or interest is doubtful. Interest income previously
accrued on such loans is reversed against current period interest income.
Interest on nonaccrual and impaired loans is recorded on a cash basis.
Net deferred loan fees or costs and loan premiums are amortized as an
adjustment of the related loan yields using the level interest method. Loans,
as reported, have been adjusted by undisbursed amounts on loans in process, net
deferred loan fees or costs, loan premiums, and the allowance for loan losses.
Mortgage loans held for sale are carried at the lower of aggregate cost or
market value, based upon commitments from investors to purchase loans. Net
unrealized losses are recognized in a valuation allowance by charges to
earnings, when applicable. Gains and losses on the sale of loans are
recognized at the time of sale based upon the difference between the selling
price and the carrying value of the loans sold. The Bank sells only whole
loans servicing released and, accordingly, does not record mortgage servicing
rights.
ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses has been established to absorb foreseeable losses
inherent in the loan portfolio. The provisions for loan losses and the level of
the allowance are evaluated periodically by management and the Board of
Directors. These provisions are the results of the Bank's internal loan review,
historical loan loss experience, trends in delinquent and non-accrual loans,
known and inherent risks in the nature and volume of the loan portfolio,
adverse situations that may affect the borrower's ability to repay, collateral
values, an estimate of potential loss exposure on significant credits,
concentrations of credit, and present and prospective economic conditions based
on facts then known.
Periodically, management reviews the portfolio, classifying each loan into
categories by assessing the degree of risk involved. Considering this review,
the Bank establishes the adequacy of its allowance and necessary additions are
charged to earnings through the provision for loan losses. Loan losses are
charged against the allowance when management believes the collectibility of
the loan balance is unlikely. Subsequent recoveries are credited to the
allowance.
The allowance is an estimate. Ultimate losses may vary from current estimates
and future additions to the allowance may become necessary. In addition,
regulatory agencies, as an integral part of their examination process, review
the Bank's allowance and may require the Bank to provide additions to the
allowance based on their assessment, which may differ from management's.
17
<PAGE> 18
The Bank adopted the provisions of Statement of Financial Accounting Standards
("SFAS") 114, "Accounting by Creditors for Impairment of a Loan," on January 1,
1995. Under this statement, a loan is considered impaired when, based on
current information and events, it is probable that a creditor will be unable
to collect the scheduled payments of principal or interest when due according
to the contractual terms of the loan agreement. Factors considered by
management in determining impairment include payment status, collateral value,
and the probability of collecting scheduled principal and interest payments
when due. An insignificant delay or insignificant shortfall in the amount of
payments does not constitute impairment. Management determines the significance
of payment delays and payment shortfalls on a case-by-case basis, taking into
consideration all of the circumstances surrounding the loan and the borrower,
including the length of the delay, the reasons for the delay, the borrower's
prior payment record, and the amount of the shortfall in relation to the
principal and interest owed. Impairment is measured on a loan by loan basis by
either the present value of expected future cash flows discounted at the loan's
effective interest rate, the loan's obtainable market price, or the fair value
of the collateral if the loan is collateral dependent. All of the Bank's loans
that have been identified as impaired have been measured by the fair value of
existing collateral. Impaired loans are considered non-accrual loans and are
charged off when management believes the collectibility of the loan balance is
unlikely.
SFAS 114 is not applicable to large groups of smaller balance homogeneous loans
that are collectively evaluated for impairment and loans that are measured at
fair value. Accordingly, the Bank has not applied SFAS 114 to its consumer
loans which are collectively evaluated for impairment or to loans held for
sale.
SFAS 114 also limits the classification of loans as in-substance foreclosures
to situations where the creditor actually receives physical possession of the
debtor's assets. Accordingly, upon adoption of SFAS 114, the Bank transferred
loans previously classified as in-substance foreclosures in the amount of $2.5
million to its impaired loan portfolio. In practice, most such loans are
considered by the Bank to be non-performing.
The adoption of SFAS 114 had no effect on the Bank's assessment of the overall
adequacy of the allowance for loan losses. The restatement of previously
issued financial statements to conform with SFAS 114 is expressly prohibited.
OTHER REAL ESTATE OWNED
Other real estate owned ("OREO") is held for sale. OREO is recorded at the
lower of cost or fair value less estimated selling costs and an allowance for
losses and consists of properties acquired by foreclosure or by deed-in-lieu of
foreclosure. In years prior to 1995, loans meeting the in-substance
foreclosure criteria were classified as foreclosed real estate. A troubled
real estate loan was deemed an in-substance foreclosure when it was determined
that the borrower had little or no equity in the underlying collateral and the
Bank expected repayment only from the sale or operation of the collateral. On
January 1, 1995, upon adoption of SFAS 114, $2.5 million of in-substance
foreclosed assets were reclassified to loans.
OREO properties are initially recorded at the lower of cost or estimated fair
value less disposition costs. Costs to administer OREO properties are
expensed.
BANKING PREMISES AND EQUIPMENT
Land is carried at cost. Buildings, leasehold improvements, and equipment are
carried at cost, less accumulated depreciation and amortization computed on the
straight-line method over the estimated useful lives of the assets or the terms
of the leases, if shorter. The costs of maintenance and repairs are charged to
earnings when incurred. Major expenditures for betterments are capitalized and
depreciated.
INTANGIBLE ASSETS
Intangible assets are comprised of organizational costs, deposit premium
intangible, and goodwill. Organizational costs and goodwill are amortized
using straight-line amortization methods over 5 and 15 years, respectively.
Deposit premium intangibles are amortized over 8 years using accelerated
amortization methods.
RETIREMENT PLAN
The compensation cost of an employee's pension benefit is recognized on the net
periodic pension cost method over the employee's approximate service period.
The aggregate cost method is used for funding purposes.
STOCK COMPENSATION PLANS
In October, 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based
Compensation." This Statement encourages all entities to adopt a fair value
based method of accounting for employee stock compensation plans, whereby
compensation cost is measured at the grant date based on the value of the award
and is recognized over the service period, which is usually the vesting period.
However, it also allows an entity to continue to measure compensation cost for
those plans using the intrinsic value based method of accounting prescribed by
APB Opinion No. 25, "Accounting for Stock Issued to Employees," whereby
compensation cost is the excess, if any, of the quoted market price of the
stock at the grant date (or other measurement date) over the amount an employee
must pay to acquire the stock. Stock options issued under the Company's stock
option plans have no intrinsic value at the grant date, and under Opinion No.
25 no compensation cost is recognized for them. The Company has elected to
remain with the accounting in Opinion No. 25 and, as a result, must make pro
forma disclosures of net income and earnings per share and other disclosures,
as if the fair value based method of accounting had been applied. The
disclosure requirements of this Statement are effective for the Company's
consolidated financial statements for the year ended December 31, 1996. The
pro forma disclosures include the effects of all awards granted on or after
January 1, 1995. (See Note 13.)
INCOME TAXES
Deferred tax assets and liabilities are reflected at currently enacted income
tax rates applicable to the period in which the deferred tax assets or
liabilities are expected to be realized or settled. As changes in tax laws or
rates are enacted, deferred tax assets and liabilities are adjusted accordingly
through the provision for income taxes. The Bank's base amount of its federal
income tax reserve for loan losses is a permanent difference for which there is
no recognition of a deferred tax liability. However, the loan loss allowance
maintained for financial reporting purposes is a temporary difference with
allowable recognition of a related deferred tax asset, if it is deemed
realizable.
EARNINGS PER SHARE
Earnings per share of common stock is computed using the weighted average
equivalent number of shares outstanding during each period. Primary earnings
per share computations include common stock and dilutive common stock
equivalents attributable to outstanding stock options and warrants. Fully
diluted earnings per share computations reflect the higher market price of the
Company's common stock at the end of the period and the assumed further
dilution applicable to outstanding stock options and warrants.
RECENT ACCOUNTING PRONOUNCEMENT
In June 1996, the FASB issued SFAS No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities." The
accounting
18
<PAGE> 19
and reporting standards of this Statement are based on a financial components
approach that focuses on control, whereby after a transfer of financial assets,
an entity recognizes only financial and servicing assets it controls and
liabilities it has incurred. Liabilities incurred will be initially recognized
at fair value, if practicable. Financial assets are derecognized when control
has been surrendered, and liabilities are derecognized when extinguished. The
determination of whether control over a financial asset has been surrendered is
based on meeting specific criteria as defined in the Statement.
The Statement provides standards for distinguishing transfers of financial
assets that are sales from transfers that are secured borrowings, and impacts
the accounting for various transactions including the servicing of financial
assets, securitizations, securities lending transactions, repurchase agreements
including "dollar rolls," "wash sales," loan syndications and participations,
and transfers of receivables with recourse.
The Statement is effective for transfers and servicing of financial assets and
extinguishments of liabilities occurring after December 31, 1996, and is to be
applied on a prospective basis. In December 1996, the FASB voted to defer for
one year the provisions of the Statement that relate to secured borrowings and
collateral.
Management is currently evaluating the impacts of the Statement on its secured
borrowings such as repurchase agreements but does not expect, based on the
general terms of its current agreements, that the Statement will significantly
change its accounting for similar transactions in the future. Other provisions
of the Statement will not, in management's opinion, have a significant impact
on the consolidated financial statements.
2 - ACQUISITIONS
On May 10, 1995, the Bank acquired the Bank of Taunton, A Co-operative Bank
("Bank of Taunton"). The acquisition was effected pursuant to the Plan of
Voluntary Supervisory Conversion and Acquisition dated January 24, 1995.
Simultaneously with the conversion the Bank of Taunton merged into the Bank and
the acquisition was accounted for as a purchase. Bank of Taunton's assets
amounted to $17.8 million at acquisition and no goodwill resulted from the
transaction.
The Bank assumed $9.7 million in deposits from Haymarket Co-operative Bank in
July 1995, and assumed $13.0 million in deposits from the purchase of a branch
of the First National Bank of Boston, N.A. located in Mansfield, Massachusetts
in September 1995. On March 31, 1995, the Bank purchased the assets of
Minuteman Funding Corporation, a mortgage broker located in Andover,
Massachusetts and transferred the acquired assets to People's Mortgage
Corporation, a newly established wholly owned subsidiary of the Bank.
On March 8, 1996, the Bank acquired five branches ("Branch Acquisitions") from
Fleet Bank N.A. and Shawmut Bank N.A. ("Fleet/Shawmut"). At the closing of the
Branch Acquisitions on March 8, 1996, the Bank assumed the Fleet/Shawmut
Deposits and paid Fleet/Shawmut a premium on the Fleet/Shawmut Deposits. The
Fleet/Shawmut Deposits totaled $144.7 million. There were no intangible assets
resulting from the Fleet/Shawmut Branch Acquisition as $6.6 million of the
purchase premium was allocated to fixed assets and $4.2 million of the purchase
premium was allocated to residential mortgages based on the fair value of the
assets.
In the Branch Acquisitions, the Bank acquired certain first mortgage
residential, commercial and commercial real estate and consumer loans of
Fleet/Shawmut (the "Fleet/Shawmut Loans"), as well as the real property owned
or leased by Fleet and Shawmut for operation of the Fleet/Shawmut Branches and
related automated teller machines, furniture, equipment and other fixed
operating assets (the "Fleet/Shawmut Assets").
The Bank acquired the Fleet/Shawmut Loans at face value and the Fleet/Shawmut
Assets at a specific purchase price with the exception of furniture, equipment
and other fixed assets, which were acquired at book value. The Bank acquired
an aggregate of approximately $113.7 million of Fleet/Shawmut Loans. The total
purchase price of the Fleet/Shawmut Assets was $1.8 million.
To enable the Company to comply with applicable minimum equity capital or other
regulatory requirements following the Branch Acquisitions, the Company offered
shares of its common stock at $8.875 per share in a rights offering to
shareholders of record as of February 8, 1996 and "standby" purchasers. The
Company completed the offering on March 8, 1996 raising net proceeds of $7.5
million through the sale of 968,352 shares.
Intangible assets were recorded as a result of the organization costs of
forming People's Mortgage Corporation and People's Bancshares, Inc. as well as
the acquisition of Minuteman Funding Corporation, the deposits of the Haymarket
Bank branch, and the deposits of Bank of Boston's Mansfield Branch. At
December 31, 1996, intangible assets amounted to $1,338,000. Amortization of
intangibles amounted to $249,000, $87,000, and $31,000 for 1996, 1995, and
1994, respectively.
3 - INVESTMENT SECURITIES
The following table summarizes investment securities:
<TABLE>
<CAPTION>
December 31,
---------------------
1996 1995
---- ----
(Dollars in thousands)
<S> <C> <C>
Securities available for sale, at fair value $184,195 $160,582
Restricted equity securities:
Federal Home Loan Bank of Boston 7,018 4,823
Massachusetts Savings Bank Life Insurance 1,304 1,304
-------- --------
$192,517 $166,709
======== ========
</TABLE>
At December 31, 1996, a debt security issued by the FHLB with a carrying value
of $1,500,000, a fair value of $1,455,000, and accrued interest receivable of
$8,000, has been pledged as collateral for the Bank's treasury, tax and loan
accounts. At December 31, 1996, mortgage-backed securities with an amortized
cost of $37,520,000, a fair value of $37,345,000, and accrued interest
receivable of $273,000 have been pledged as collateral on securities sold under
agreements to repurchase.
The following tables summarize the amortized cost and estimated fair value of
investment securities:
<TABLE>
<CAPTION>
December 31, 1996
-----------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- ---------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Available for sale:
U.S. Government and federal
agency obligations $ 2,500 $ - $ (85) $ 2,415
Mortgage-backed securities 181,998 315 (1,513) 180,800
Corporate debt securities 1,000 - (20) 980
-------- ---- -------- --------
Total securities available
for sale $185,498 $315 $(1,618) $184,195
======== ==== ======== ========
</TABLE>
19
<PAGE> 20
<TABLE>
<CAPTION>
December 31, 1995
-----------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- ---------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Available for sale:
U.S. Government and federal
agency obligations $ 4,499 $ - $(104) $ 4,395
Mortgage-backed securities 155,781 260 (799) 155,242
Corporate debt securities 1,000 - (55) 945
-------- ---- ------ --------
Total securities available
for sale $161,280 $260 $(958) $160,582
======== ==== ====== ========
</TABLE>
The following table summarizes the amortized cost and estimated fair value of
investment securities by contractual maturity:
<TABLE>
<CAPTION>
December 31, 1996
--------------------
Amortized Fair
Cost Value
--------- -------
(Dollars in thousands)
<S> <C> <C>
After 1 year through 5 years $ 3,500 $ 3,395
Mortgage-backed securities 181,998 180,800
-------- --------
$185,498 $184,195
======== ========
</TABLE>
For the years ended December 31, 1996, 1995, and 1994, proceeds from sales of
securities available for sale amounted to $82,983,000, $76,529,000 and
$18,987,000, respectively. Gross realized gains amounted to $273,000, $364,000
and $185,000 in 1996, 1995, and 1994, respectively and gross realized losses
amounted to $292,000, $595,000, and $186,000 in 1996, 1995, and 1994,
respectively.
4 - LOANS, NET
A summary of the balances of loans follows:
<TABLE>
<CAPTION>
December 31,
-----------------------
1996 1995
---- ----
<S> <C> <C>
(Dollars in thousands)
Mortgage loans:
Residential 1 - 4 family $160,730 $ 67,641
Residential multi-family 11,217 9,366
Commercial real estate 44,149 30,019
Construction 7,359 8,459
Equity lines of credit 10,297 7,274
-------- --------
233,752 122,759
Less undisbursed amount on loans in process (1,450) (3,623)
Deferred loan origination costs (fees), net (49) 57
-------- --------
Total mortgage loan 232,253 119,193
-------- --------
Other loans:
Retail installment sale contracts 1,830 2,620
Consumer 6,161 2,423
Commercial lines of credit 5,622 3,462
Commercial 4,838 5,597
Education 207 296
-------- --------
Total other loans 18,658 14,398
-------- --------
Total loans 250,911 133,591
Allowance for loan losses (4,716) (3,813)
-------- --------
Loans, net $246,195 $129,778
======== ========
</TABLE>
An analysis of the allowance for loan losses follows:
<TABLE>
<CAPTION>
Years Ended December 31,
---------------------------
1996 1995 1994
---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C>
Balance at beginning of year $3,813 $3,194 $3,654
Provision for loan losses 75 525 807
Loans charged off (1,131) (1,196) (1,610)
Recoveries 307 143 343
Allowance for loan losses
acquired in acquisition 1,652 1,147 -
------- ------ ------
Balance at end of year $4,716 $3,813 $3,194
====== ====== ======
</TABLE>
At December 31, 1996 and 1995, premiums on residential mortgage loans acquired
in acquisitions included in loans, net amounted to $4,655,000 and $995,000,
repectively. Amortization of premiums amounted to $404,000 and $36,000 for 1996
and 1995, respectively.
At December 31, 1996 and 1995, the recorded investment in impaired loans (see
Note 1) totaled $3.9 million and $4.8 million, respectively with a related
valuation allowance of $567,000 and $681,000, respectively. There were no
impaired loans which did not have a valuation allowance.
For the years ended December 31, 1996 and 1995, the average recorded investment
in impaired loans amounted to $4.8 million and $5.8 million, respectively. The
Bank recognized $261,000 and $182,000, respectively of interest income on
impaired loans, during the period that they were impaired, on the cash basis.
Non-accrual loans totaled $3.9 million, $4.8 million, and $2.3 million at
December 31, 1996, 1995, and 1994, respectively, including $2.3 million, $1.3
million, and $1.2 million of restructured loans, respectively. Interest earned
but not accrued on such loans amounted to $357,000, $629,000 and $334,000 at
December 31, 1996, 1995, and 1994, respectively. Restructured loans on accrual
totaled $355,000, $631,000, and $1.0 million at December 31, 1996, 1995, and
1994, respectively.
Interest income that would have been recorded under the original terms of
restructured loans and the interest income actually recognized is as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
---------------------------
1996 1995 1994
---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C>
Interest income that would
have been recorded $222 $202 $230
Interest income recognized 64 99 126
---- ---- ----
Interest income foregone $158 $103 $104
==== ==== ====
</TABLE>
The Bank is not committed to lend additional funds to borrowers whose loans are
considered impaired or have been modified in connection with troubled debt
restructurings.
5 - OTHER REAL ESTATE OWNED, NET
A summary of other real estate owned is as follows:
<TABLE>
<CAPTION>
December 31,
---------------
1996 1995
---- ----
(Dollars in thousands)
<S> <C> <C>
Undeveloped land $ 75 $ 75
Residential real estate 418 436
Commercial real estate - 75
--- ---
493 586
Allowance for losses - (15)
--- ----
$493 $571
==== ====
</TABLE>
20
<PAGE> 21
OREO expenses include the following:
<TABLE>
<CAPTION>
Years Ended December 31,
---------------------------
1996 1995 1994
---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C>
Net gain on sales of real estate $(145) $(184) $(20)
Write-downs to net realizable value - 44 362
Provision for losses - - 65
Operating expenses, net of rental income 204 282 528
----- ----- ----
$ 59 $ 142 $935
===== ===== ====
</TABLE>
An analysis of the allowance for losses on OREO is as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
---------------------------
1996 1995 1994
---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C>
Balance at beginning of year $ 15 $ 273 $ 634
Provision for losses - - 65
Charge-offs (15) (318) (426)
Allowance acquired in acquisition - 60 -
---- ----- -----
Balance at end of year $ - $ 15 $ 273
==== ===== =====
</TABLE>
6 - BANKING PREMISES AND EQUIPMENT, NET
A summary of the cost, accumulated depreciation and amortization, and
estimated useful lives of banking premises and equipment follows:
<TABLE>
<CAPTION>
December 31,
------------------- Estimated
1996 1995 Useful Lives
---- ---- ----------------
(Dollars in thousands)
<S> <C> <C> <C>
Land $ 1,417 $ 892
Buildings 8,472 1,581 20 to 39 years
Leasehold improvements 1,370 909 Terms of lease
Furniture and equipment 4,376 2,251 5 to 10 years
------- --------
15,635 5,633
Less accumulated depreciation
and amortization (2,601) (2,055)
------- --------
$13,034 $ 3,578
======= ========
</TABLE>
Depreciation and amortization expense for the years ended December 31, 1996,
1995, and 1994 amounted to $546,000, $268,000, and $259,000, respectively.
7 - INCOME TAXES
Allocation of federal and state income taxes between current and deferred
portions is as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
---------------------------
1996 1995 1994
---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C>
Current:
Federal $1,059 $ - $ 50
State 124 3 34
Utilization of loss carryforwards (635) - (50)
Utilization of tax credits (163) - -
------ ------ -----
Total current 385 3 34
------ ------ -----
Deferred:
Federal 1,469 819 473
State 167 417 95
------ ------ -----
Total deferred 1,636 1,236 568
------ ------ -----
Changes in valuation reserve (136) (410) (842)
------ ------ -----
Income tax provision (benefit) $1,885 $ 829 $(240)
====== ====== =====
</TABLE>
The components of the net deferred tax asset are as follows:
<TABLE>
<CAPTION>
December 31,
-----------------------------
1996 1995
---- ----
(Dollars in thousands)
<S> <C> <C>
Deferred tax asset:
Federal $ 2,270 $ 3,219
State 745 780
------- -------
3,015 3,999
Valuation reserve on asset (159) (311)
------- -------
2,856 3,688
------- -------
Deferred tax liability:
Federal (1,714) (1,384)
State (592) (478)
------- -------
(2,306) (1,862)
------- -------
Net deferred tax asset $ 550 $ 1,826
======= =======
</TABLE>
The tax effects of each type of item that gives rise to deferred taxes are:
<TABLE>
<CAPTION>
December 31,
-----------------------------
1996 1995
---- ----
(Dollars in thousands)
<S> <C> <C>
Allowance for loan losses $ 542 $1,096
Federal net operating losses - 635
Federal tax credits 370 471
Other tax loss carryovers 221 308
Deferred pension expense 261 251
Unrealized loss on securities available for sale 482 258
Investment in limited partnership (710) (661)
Other investments (483) (483)
Other, net 26 262
----- ------
709 2,137
Valuation reserve (159) (311)
----- ------
Net deferred tax asset $ 550 $1,826
===== ======
</TABLE>
A summary of the change in the net deferred tax asset is as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
---------------------------
1996 1995 1994
---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C>
Balance at beginning of year $ 1,826 $ 2,035 $1,085
Deferred tax provision (1,636) (1,236) (568)
Deferred tax benefit (liability)
on unrealized gains and losses
on securities available for sale 224 (389) 676
Deferred tax resulting
from acquisition - 1,006 -
Utilization of valuation reserve 136 410 842
------- ------ ------
Balance at end of year $ 550 $1,826 $2,035
======= ====== ======
</TABLE>
A summary of the change in the valuation reserve is as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
---------------------------
1996 1995 1994
---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C>
Balance at beginning of year $ 311 $ 628 $1,317
Benefit generated by
current year's operations - 47 153
Valuation reserve resulting
from acquisition - 46 -
Change in assumptions due to anticipation
of future income (136) (410) (842)
Benefits expired unutilized (16) - -
----- ----- ------
Balance at end of year $ 159 $ 311 $ 628
===== ===== ======
</TABLE>
21
<PAGE> 22
At December 31, 1996, for federal income tax purposes, general business credit
carryforwards of $280,000, and alternative minimum tax credits of $90,000 are
available to offset future years' income taxes. The general business credit
carryforwards will expire in varying amounts in the years 2007 through 2010.
The alternative minimum tax credits do not expire.
The reasons for the differences between the tax at the statutory federal income
tax rate and the effective tax rate are summarized as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
---------------------------
1996 1995 1994
---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C>
Tax at statutory rate of 34% $1,851 $1,028 $ 590
Increase (decrease) resulting from:
State taxes, net of federal tax benefit 130 277 60
Utilization of deferred tax asset valuation
reserve due to change in assumptions (34) (410) (817)
Other, net (62) (66) (73)
------ ------ -----
Income tax provision (benefit) $1,885 $ 829 $(240)
====== ====== =====
</TABLE>
The federal income tax reserve for loan losses at the Bank's base year is
approximately $2,020,000. If any portion of the reserve is used for purposes
other than to absorb loan losses approximately 150% of the amount actually
used, limited to the amount of the reserve, would be subject to taxation in the
fiscal year in which used. As the Bank intends to use the reserve only to
absorb loan losses, a deferred income tax liability of approximately $825,000
has not been provided.
8 - DEPOSITS
A summary of deposit balances, by type, follows:
<TABLE>
<CAPTION>
December 31,
-----------------------------
1996 1995
---- ----
(Dollars in thousands)
<S> <C> <C>
Demand $ 37,899 $ 16,120
NOW 42,009 21,061
Savings 95,464 54,230
Money market 21,190 10,321
-------- --------
Total non-certificate accounts 196,562 101,732
-------- --------
Term certificates of $100,000 or more 36,922 12,583
Term certificates less than $100,000 102,754 60,268
-------- --------
Total certificate accounts 139,676 72,851
-------- --------
Total deposits $336,238 $174,583
======== ========
</TABLE>
A summary of certificate accounts, by maturity, follows:
<TABLE>
<CAPTION>
December 31, 1996 December 31, 1995
-------------------------- --------------------------
Weighted Weighted
Amount Average Rate Amount Average Rate
---------- ------------ -------- ------------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Within 1 year $106,809 5.40% $45,038 5.41%
Over 1 year to 3 years 28,050 5.94 23,381 6.55
Over 3 years to 5 years 4,702 6.29 4,432 6.45
Over 5 years 115 6.76 - -
-------- ---- ------- ----
$139,676 5.54 $72,851 5.84
======== ==== ======= ====
</TABLE>
9 - BORROWED FUNDS
The following summarizes borrowed funds:
<TABLE>
<CAPTION>
December 31,
-----------------------------
1996 1995
---- ----
(Dollars in thousands)
<S> <C> <C>
Securities sold under agreements
to repurchase $ 34,670 $ 37,775
Federal Home Loan Bank advances 89,250 88,470
-------- --------
$123,920 $126,245
======== ========
</TABLE>
The amount of securities collateralizing the agreements to repurchase remains
in investment securities and the obligation to repurchase securities sold is
reflected as a liability in the consolidated balance sheets. The
mortgage-backed securities underlying the agreement are held by the dealers who
arranged the transactions. The dealers may have disposed of the investments in
the normal course of their operations, and have agreed to resell substantially
identical investments at the maturities of the agreements to the Bank. The
repurchase agreements have original maturities of under one year. The highest
month-end balance for 1996 and 1995 was $44,740,000 and $37,775,000
respectively. The average balances of repurchase agreements during 1996 and
1995 were $32,103,000 and $18,767,000, respectively, and the weighted average
interest rates were 5.28% and 5.77% at December 31, 1996 and 1995,
respectively. For the years ended December 31, 1996, 1995, and 1994 interest
expense on repurchase agreements was $1.7 million, $1.1 million, and
$318,000, respectively.
The Bank has an available line of credit of $10 million with the Federal Home
Loan Bank of Boston ("FHLB") at an interest rate that adjusts daily. Borrowings
under the line are limited to 2% of the Bank's total assets. Advances on the
line of credit amounted to $3.4 million and $4.8 million at December 31, 1996
and 1995, respectively and are included in the table below. The FHLB advances
are secured by a blanket lien on qualified collateral, defined principally as
75% of the carrying value of first mortgage loans on owner-occupied residential
property and 90% of the market value of U.S. government and federal agency
securities. A summary of FHLB advances by maturity follows:
<TABLE>
<CAPTION>
December 31, 1996 December 31, 1995
-------------------------- --------------------------
Weighted Weighted
Amount Average Rate Amount Average Rate
--------- ------------ --------- ------------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Within 1 year, including
variable rate demand advances $68,750 5.61% $46,970 5.70%
Over 1 year to 3 years 20,500 5.72 41,500 5.77
------- ---- ------- ----
$89,250 5.64 $88,470 5.73
======= ==== ======= ====
</TABLE>
For the years ended December 31, 1996, 1995, and 1994, interest expense on FHLB
advances was $6.5 million, $4.5 million, and $2.3 million, respectively.
10 - COMMITMENTS AND CONTINGENCIES
In the normal course of business, there are outstanding commitments and
contingencies that are not reflected in the consolidated financial statements.
SPECIAL TERMINATION AGREEMENTS
The Company has severance agreements with certain officers that provide for a
lump-sum severance payment under certain circumstances following a "change in
control" as defined in the agreements.
LOAN COMMITMENTS
The Bank is party to financial instruments with off-balance-sheet risk in the
normal course of business to meet the financing needs of its customers. These
financial instruments include commitments to extend credit, lines of credit,
and standby letters of credits. Such commitments involve, to varying degrees,
elements of credit and interest rate risk in excess of the amount recognized in
the consolidated balance sheets. The Bank's exposure to credit loss is
represented by the contractual amount of these commitments. The Bank uses the
same credit policies in making commitments as it does for on-balance-sheet
instruments.
22
<PAGE> 23
The following financial instruments were outstanding, the contract amounts of
which represent credit risk:
<TABLE>
<CAPTION>
December 31,
-----------------------------
1996 1995
---- ----
(Dollars in thousands)
<S> <C> <C>
Commercial lines of credit $16,222 $4,345
Commitments to grant loans 27,502 17,388
Unadvanced funds on equity lines of credit 11,855 7,641
Standby letters of credit 411 58
</TABLE>
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. The commitments for lines of credit may expire
without being drawn upon. Therefore, the total commitment amounts do not
necessarily represent future cash requirements. The Bank evaluates each
customer's credit worthiness on a case-by-case basis. Funds disbursed under
these financial instruments are generally collateralized by real estate.
Standby letters of credit are conditional commitments issued by the Bank to
guarantee the performance of a customer to a third party. Those letters of
credit are primarily issued to support borrowing arrangements. All letters of
credit outstanding as of December 31, 1996, have expiration dates within one
year. The credit risk involved in issuing letters of credit is essentially the
same as that involved in extending loan facilities to customers. The letters of
credit are generally secured.
OPERATING LEASE COMMITMENTS
Under terms of noncancelable lease agreements for banking premises and
equipment future minimum rent commitments are as follows:
<TABLE>
<CAPTION>
Years Ending December 31, (Dollars in thousands)
- -------------------------
<S> <C>
1997 $ 227
1998 137
1999 33
-------
$ 397
=======
</TABLE>
The leases contain options to extend for periods from three to ten years. The
cost of such rentals is not included above. Total rent expense for 1996, 1995,
and 1994, amounted to $302,000, $120,000, and $96,000, respectively.
OTHER CONTINGENCIES
In the ordinary course of business, the Company is involved in various legal
claims that, in the opinion of management, will not have a material effect on
the Company's consolidated financial position.
11 - STOCKHOLDERS' EQUITY
MINIMUM REGULATORY CAPITAL REQUIREMENTS
The Company (on a consolidated basis) and the Bank are subject to various
regulatory capital requirements administered by the federal banking agencies.
Failure to meet minimum capital requirements can initiate certain mandatory and
possibly additional discretionary actions by regulators that, if undertaken,
could have a direct material effect on the Company's and Bank's financial
statements. Under capital adequacy guidelines and the regulatory framework for
prompt corrective action, the Company and the Bank must meet specific capital
guidelines that involve quantitative measures of their assets, liabilities and
certain off-balance sheet items as calculated under regulatory accounting
practices. The capital amounts and classification are also subject to
qualitative judgments by the regulators about components, risk weightings, and
other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Company and the Bank to maintain minimum amounts and ratios (set
forth in the following table) of total and Tier 1 capital (as defined) to
average assets (as defined). Management believes, as of December 31, 1996,
that the Company and the Bank meet all capital adequacy requirements to which
they are subject.
As of December 31, 1996, the most recent notifications from the Federal Reserve
Board and the Federal Deposit Insurance Corporation categorized the Company and
the Bank as well capitalized under the regulatory framework for prompt
corrective action. To be categorized as well capitalized, they must maintain
minimum total risk-based, Tier 1 risk-based and Tier 1 leverage ratios as set
forth in the following table. There are no conditions or events since the
notifications that management believes have changed the Company's or Bank's
category. The Company's and the Bank's actual capital amounts and ratios as of
December 31, 1996 are also presented in the table.
<TABLE>
<CAPTION>
Minimum
To Be Well
For Minimum Capitalized Under
Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
--------------------- -------------------- --------------------
Amount Ratio Amount Ratio Amount Ratio
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Total Capital to Risk Weighted Assets:
Consolidated $33,671 13.56% $19,858 8.0% $24,822 10.0%
People's Savings Bank of Brockton 33,857 13.64 19,858 8.0 24,822 10.0
Tier 1 Capital to Risk Weighted Assets:
Consolidated 30,547 12.31 9,929 4.0 14,893 6.0
People's Savings Bank of Brockton 30,733 12.38 9,929 4.0 14,893 6.0
Tier 1 Capital to Average Assets:
Consolidated 30,547 6.01 20,348- 4.0- 25,435 5.0
25,435 5.0
People's Savings Bank of Brockton 30,733 6.04 20,340- 4.0- 25,425 5.0
25,425 5.0
</TABLE>
STOCK WARRANTS
As a result of a class action suit brought by certain shareholders, the Bank
agreed in 1992 to issue stock warrants for 230,000 shares of common stock. The
warrants were exercisable at $5.00 per share and expired in December 1996.
During the years ended December 31, 1996, 1995 and 1994, stock warrants for
181,191, 20,296 and 711 shares were exercised, respectively. As of December
31, 1996, no warrants were outstanding.
12 - EMPLOYEE BENEFIT PLANS
PENSION PLAN
The Company has a qualified defined benefit plan providing pension benefits
through membership in the Savings Banks Employees Retirement Association. Each
employee becomes a participant in the plan once they attain age 21 and complete
one year of service, consisting of at least 1,000 hours, beginning with their
initial employment date. Each participant becomes 100% vested when they have
been credited with three years of such service.
23
<PAGE> 24
An analysis of net periodic pension cost for the plan years ended October 31,
1996, 1995, and 1994 follows:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C>
Service cost-benefits earned
during the period $106 $104 $132
Interest cost on projected benefits 125 141 127
Actual return on plan assets (294) (334) (95)
Net amortization and deferral (8) (8) (8)
Net loss (gain) 113 177 (23)
------- ------ ------
$42 $80 $133
======= ====== ======
</TABLE>
Total pension expense for the years ended December 31, 1996, 1995, and 1994
amounted to $38,000, $95,000, and $126,000, respectively.
According to the Association's actuary, a reconciliation of the funded status
of the plan follows:
<TABLE>
<CAPTION>
October 31,
-------------------------
1996 1995
---- ----
(Dollars in thousands)
<S> <C> <C>
Plan assets at fair value $2,273 $1,945
Projected benefit obligation 1,915 1,778
-------- --------
Excess of plan assets over projected
benefit obligation 358 167
Unamortized net surplus since
adoption of SFAS 87 (130) (138)
Unrecognized net gain (908) (667)
-------- --------
Pension liability $(680) $(638)
======== ========
</TABLE>
The accumulated benefit obligation (substantially all vested) at October 31,
1996, amounted to $1,428,000, which was less than the fair value of plan assets
at that date. For the plan years ended October 31, 1996, 1995, and 1994,
actuarial assumptions include an assumed discount rate on benefit obligations
of 7.5%, 7%, and 8%, respectively and an expected long term rate of return on
plan assets of 8%, 8%, and 7%, respectively. An annual salary increase of 5%
was used for 1996 and 4% was used for 1995 and 1994.
401(K) PLAN
The Company has a 401(k) plan that provides for voluntary contributions by
participating employees ranging from one to fifteen percent of their
compensation, subject to certain limitations. Under terms of the plan the
Company at its discretion will match one half of an employee's contribution to
the 401(k) plan subject to a maximum match of 3% of the employee's base salary.
The Company's contribution is based upon the achievement of several goals such
as cost containment or levels of pre-tax income that are set during the first
quarter of each year. The Company's expense for this plan for the years ended
December 31, 1996, 1995, and 1994 was $36,000, $42,000, and $28,000,
respectively.
13 - STOCK OPTION PLANS
At December 31, 1996, the Company has three stock-based compensation plans
which are described below. The Company applies APB Opinion 25 and related
Interpretations in accounting for the plans. Accordingly, no compensation cost
has been recognized for its stock plans. Had compensation cost for the
Company's stock-based compensation plans been determined based on the fair
value at the grant dates for awards under those plans consistent with the
method prescribed by SFAS No. 123, the Company's net income and earnings per
share would have been reduced to the pro forma amounts as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------
1996 1995
---- ----
(Dollars in thousands
except per share data)
<S> <C> <C>
Net income As reported $3,559 $2,194
Pro forma $3,404 $2,109
Primary earnings per share
As reported $1.09 $0.91
Pro forma $1.04 $0.87
Fully diluted earnings per share
As reported $1.09 $0.87
Pro forma $1.04 $0.84
</TABLE>
Under the 1995 Employee and Director Stock Option Plans and 1996 Stock Option
and Incentive Plan, the Company may grant options to its directors, officers
and employees for up to 564,000 shares of common stock. Both incentive stock
options and non-qualified stock options may be granted under the Plans. The
exercise price of each option equals the market price of the Company's stock on
the date of grant and an option's maximum term is ten years.
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants in 1996 and 1995, respectively; dividend yield of
2.75 and 2.78 percent; expected volatility of 36 and 44 percent, risk-free
interest rates of 7.0 and 6.6 percent and expected lives of ten years.
A summary of the status of the Company's stock option plans as of December 31,
1996, 1995 and 1994, and changes during the years then ended, is presented
below:
<TABLE>
<CAPTION>
1996 1995 1994
-------------------- ----------------- -------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
------ ----- ------ ----- ------ -----
(In thousands, except weighted average exercise price)
<S> <C> <C> <C> <C> <C> <C>
Shares under option:
Outstanding at
beginning of year 200 $5.52 169 $5.17 87 $4.12
Granted 63 9.56 35 7.11 91 6.06
Exercised (89) 7.09 (3) 4.25 - -
Canceled (2) 9.50 (1) 6.13 (9) 4.00
Outstanding at ---- --- ---
end of year 172 $6.09 200 $5.52 169 $5.17
---- --- ---
Options exercisable
at year-end 172 $6.09 199 $5.52 169 $5.17
Weighted-average fair value of
options granted during the year $3.78 $3.30 N/A
</TABLE>
Information pertaining to options outstanding at December 31, 1996 is as
follows:
<TABLE>
<CAPTION>
Options Outstanding
-----------------------------------------
Weighted
Average Weighted
Remaining Average
Range of Number Contractual Exercise
Exercise Prices Outstanding Life Price
--------------- ------------- ------------ ----------
(In thousands)
<S> <C> <C> <C>
$4.00 - $6.00 79 7.2 years $4.60
6.10 - 9.88 93 8.2 years 7.35
-------
Outstanding at end of year 172 7.7 years $6.09
=======
</TABLE>
24
<PAGE> 25
14 - EMPLOYEES' STOCK OWNERSHIP PLAN
The Company has an Employee Stock Ownership Plan (the "ESOP") for eligible
employees that is funded by the Company's contributions of cash or common
stock. Benefits may be paid in shares of common stock or in cash. There was
no ESOP expense during 1996, 1995, and 1994. Shares held by the ESOP were
27,212 and 29,941 at December 31, 1996 and 1995, respectively, all of which
were allocated.
15 - RELATED PARTY TRANSACTIONS
In the ordinary course of business, the Company has granted loans to principal
officers and directors and their affiliates. Such loans totaled $2,618,000 at
December 31, 1996, and $2,756,000 at December 31, 1995. During 1996, total
principal additions were $182,000 and total principal payments were $312,000.
Principal officers who resigned during 1996 had loans outstanding totaling
$8,000 at December 31, 1995.
16 - FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS No. 107, "Disclosures about Fair Value of Financial Instruments" requires
disclosure of estimated fair values of all financial instruments where it is
practicable to estimate such values. In cases where quoted market prices are
not available, fair values are based on estimates using present value or other
valuation techniques. Those techniques are significantly affected by the
assumptions used, including the discount rate and estimates of future cash
flows. Accordingly, the derived fair value estimates cannot be substantiated by
comparison to independent markets and, in many cases, could not be realized in
immediate settlement of the instrument. SFAS 107 excludes certain financial
instruments and all nonfinancial instruments from its disclosure requirements.
Accordingly, the aggregate fair value amounts presented do not represent the
underlying value of the Company.
The following methods and assumptions were used by the Company in estimating
fair value disclosures for financial instruments:
Cash and cash equivalents: The carrying amounts of cash and cash equivalents
approximate fair values.
Investment securities: Fair values for these investments, excluding restricted
equity securities, are based on quoted market prices, where available. If
quoted market prices are not available, fair values are based on quoted market
prices of comparable instruments. The carrying values of restricted equity
securities approximate fair values.
Loans receivable: Fair values for loans are estimated using discounted cash
flow analyses, using interest rates currently being offered for loans with
similar terms to borrowers of similar credit quality. For installment loans and
loans that reprice frequently at market rates, the fair values are based on
carrying values. Fair values for non-performing loans are estimated using
discounted cash flow analyses or underlying collateral values, where
applicable. The carrying value of loans held for sale approximates fair
values.
Deposit liabilities: The fair values disclosed for demand deposits (e.g.,
interest and non-interest checking, passbook savings, and certain types of
money market accounts) are their carrying amounts. Fair values for fixed rate
certificates of deposit are estimated using a discounted cash flow calculation
that applies interest rates currently being offered on certificates to a
schedule of aggregated expected monthly maturities on time deposits.
Borrowed funds: The carrying amounts of federal funds purchased and borrowings
under repurchase agreements maturing within 90 days approximate their fair
values. The fair values of Federal Home Loan Bank advances are estimated
using discounted cash flow analyses based on the Company's current incremental
borrowing rates for similar types of borrowing arrangements.
Accrued interest: The carrying amounts of accrued interest approximate fair
value.
Off-balance-sheet instruments: Fair values for off-balance-sheet lending
commitments are based on fees currently charged to enter into similar
agreements, taking into account the remaining terms of the agreements and the
counterparties' credit standing.
The estimated fair values, and related carrying amounts, of the Company's
financial instruments are as follows:
<TABLE>
<CAPTION>
December 31,
-----------------------------------------
1996 1995
------------------- --------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
(Dollars in thousands)
<S> <C> <C> <C> <C>
Financial assets:
Cash and cash equivalents $12,478 $12,478 $11,303 $11,303
Securities available for sale 184,195 184,195 160,582 160,582
Restricted stock 8,322 8,322 6,127 6,127
Loans held for sale 25,612 25,612 5,272 5,272
Loans, net 246,195 247,896 129,778 132,774
Accrued interest receivable 2,888 2,888 2,104 2,104
Financial liabilities:
Deposits 336,238 336,738 174,583 176,636
Borrowed funds 123,920 123,577 126,245 126,351
Accrued interest payable 1,114 1,114 843 843
</TABLE>
The estimated fair values of off-balance-sheet financial instruments at
December 31, 1996 and 1995 are immaterial.
17 - RESTRICTIONS ON DIVIDENDS, LOANS AND ADVANCES
Federal and state banking regulations place certain restrictions on dividends
paid and loans or advances made by the Bank to the Company. The total amount of
dividends which may be paid at any date is generally limited to the retained
earnings of the Bank, and loans and advances are limited to 10% of the Bank's
capital stock and surplus on a secured basis.
At December 31, 1996, the Bank's retained earnings available for the payment of
dividends was approximately $8,617,000 and funds available for loans and
advances amounted to $3,073,000. Accordingly, $22,502,000 of the Company's
equity in the net assets of the Bank was restricted at December 31, 1996.
In addition, dividends paid by the Bank to the Company would be prohibited if
the effect thereof would cause the Bank's capital to be reduced below
applicable minimum capital requirements.
25
<PAGE> 26
18 - CONDENSED FINANCIAL STATEMENTS OF PARENT COMPANY
Financial information pertaining only to People's Bancshares, Inc. is as
follows:
BALANCE SHEET
<TABLE>
<CAPTION>
December 31,1996
----------------
(In thousands)
<S> <C>
Assets
- ------
Cash and due from banks $50
Investment in common stock of People's Savings Bank of Brockton 31,119
Organization costs, net of accumulated amortization 186
----------
Total assets $31,355
==========
Liabilities and Stockholders' Equity
- ------------------------------------
Accrued expenses $2
Due to People's Savings Bank of Brockton 289
----------
Total liabilities 291
----------
Stockholders' equity:
Serial preferred stock -
Common stock 356
Additional paid-in capital 22,967
Retained earnings 8,562
----------
31,885
Net unrealized loss on securities
available for sale, after tax effects (821)
----------
Total stockholder's equity 31,064
----------
Total liabilities and stockholders' equity $31,355
==========
</TABLE>
STATEMENT OF INCOME
<TABLE>
<CAPTION>
For the Period
February 8, 1996 to
December 31,1996
-------------------
(In thousands)
<S> <C>
Income:
Dividends from People's Savings Bank of Brockton $751
Total income 751
----------
Operating expenses 41
Amortization of organization costs 42
----------
Total operating expenses 83
----------
Income before income taxes and equity in
undistributed income of People's Savings Bank of Brockton 668
Applicable income tax benefit (28)
----------
696
Equity in undistributed income of
People's Savings Bank of Brockton 2,662
----------
Net income $3,358
==========
</TABLE>
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
For the Period
February 8, 1996 to
December 31,1996
-------------------
(In thousands)
<S> <C>
Cash flows from operating activities:
Net income $3,358
----------
Adjustments to reconcile net income
to net cash provided by operating activities:
Equity in undistributed income of People's
Savings Bank of Brockton (2,662)
Amortization of organization costs 42
Increase in accrued expenses 2
Increase in due to People's Savings Bank of Brockton 289
----------
Net cash provided by operating activities 1,029
----------
Cash flows from investing activities:
Organization costs (228)
----------
Net cash used for investing activities (228)
----------
Cash flows from financing activities:
Cash dividends paid on common stock (751)
----------
Net cash used for financing activities (751)
----------
Net increase in cash and cash equivalents 50
Cash and cash equivalents, beginning of period -
----------
Cash and cash equivalents, end of period $50
==========
</TABLE>
19 - QUARTERLY DATA (UNAUDITED)
Quarterly consolidated operating results are summarized as follows:
<TABLE>
<CAPTION>
1996
-----------------------------------------
Fourth Third Second First
Quarter Quarter Quarter Quarter
-------- ------- -------- --------
(Dollars in thousands, except per share data)
<S> <C> <C> <C> <C>
Interest and dividend income $9,222 $9,274 $8,656 $6,609
Interest expense 4,911 5,097 4,932 3,655
------ ------ ------ ------
Net interest income 4,311 4,177 3,724 2,954
Provision for loan losses - - - 75
------ ------ ------ ------
Net interest income, after
provision for loan losses 4,311 4,177 3,724 2,879
Other income 960 892 1,284 895
Operating expenses 3,902 3,619 3,477 2,680
------ ------ ------ ------
Income before income taxes 1,369 1,450 1,531 1,094
Provision for income taxes 438 476 564 407
------ ------ ------ ------
Net income $931 $974 $967 $687
====== ====== ====== ======
Net income per share - primary $0.28 $0.28 $0.28 $0.25
====== ====== ====== ======
</TABLE>
<TABLE>
<CAPTION>
1995
-----------------------------------------
Fourth Third Second First
Quarter Quarter Quarter Quarter
-------- ------- -------- --------
(Dollars in thousands, except per share data)
<S> <C> <C> <C> <C>
Interest and dividend income $5,450 $5,430 $4,717 $4,132
Interest expense 3,189 3,059 2,687 2,214
------ ------ ------ ------
Net interest income 2,261 2,371 2,030 1,918
Provision for loan losses 75 150 150 150
------ ------ ------ ------
Net interest income, after
provision for loan losses 2,186 2,221 1,880 1,768
Other income 604 585 323 243
Operating expenses 1,893 1,885 1,570 1,439
------ ------ ------ ------
Income before income taxes 897 921 633 572
Provision for income taxes 246 276 159 148
------ ------ ------ ------
Net income $651 $645 $474 $424
====== ====== ====== ======
Net income per share - primary $0.27 $0.26 $0.20 $0.18
====== ====== ====== ======
</TABLE>
Fluctuations in the quarterly results are due primarily to the effect of
fluctuating provisions for loan losses, and the seasonality of the
mortgage-banking subsidiary. Earnings have also fluctuated due to the timing
of recognition of tax benefits. Additionally, during 1996 and 1995 the Bank
completed several acquisitions that significantly affected operating results.
26
<PAGE> 27
Independent Auditors' Report
To the Board of Directors and Stockholders of People's Bancshares, Inc.:
We have audited the consolidated balance sheets of People's Bancshares, Inc.
and its subsidiary as of December 31, 1996 and 1995, and the related
consolidated statements of income, changes in stockholders' equity and cash
flows for each of the years in the three-year period ended December 31, 1996.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of People's
Bancshares, Inc. and its subsidiary as of December 31, 1996 and 1995, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1996 in conformity with generally accepted
accounting principles.
/s/ Wolf & Company, P.C.
Boston, Massachusetts
January 24, 1997
27
<PAGE> 28
BOARD OF DIRECTORS
Frederick W. Adami, III Esq.
Attorney,
Adami, Reed, & Kaiser
Virginia M. Burke
Retired, Regional Public Affairs Manager,
NYNEX
Benjamin Cavallo
Partner,
Cavallo & Signoriello Insurance Agency
John R. Eaton
President,
Thompson, Eaton & Boyden Insurance
Agency, Inc.
S. David Goldberg, Esq.
Attorney
Terrence Gomes
Dean of Faculty & Instruction,
Massasoit Community College
Fred W. Green
President,
F. W. Green Associates
Dr. Loring C. Johnson
Orthodontist
Richard D. Matthews
President and Treasurer,
R.D. Matthews Construction Co., Inc.
Gerald R. Rodman
Retired Vice President & Partner,
Rodman Ford Sales
Davis H. Scudder
Treasurer,
Scudder Bros. Fuel Co., Inc.
Stanley D. Siskind
Retired, First Vice President,
Rix Dunnington, Inc.
OFFICERS
PEOPLE'S BANCSHARES, INC.
Colin C. Blair
Chief Financial Officer and Treasurer
PEOPLE'S SAVINGS BANK OF BROCKTON
Colin C. Blair
Chief Financial Officer and Treasurer
Donna L. Boulanger
Senior Lending Officer
Charles R. Leyton
Credit Administration Officer
Maureen A. Gregory
Branch Administrator
Jean M. Levesque
Comptroller
PEOPLE'S MORTGAGE CORPORATION
John J. Kiernan, Jr.
President
James F. Ryder
Executive Vice President
George M. Custodio
Chief Financial Officer
INDEPENDENT AUDITORS
Wolf & Company, P.C.
One International Place
Boston, Massachusetts 02110
SHAREHOLDER INFORMATION
Stock Listing: People's Bancshares, Inc. common stock is quoted on the NASDAQ
National Market System. Current price information on the Company's stock may be
found in major daily newspaper stock tables.
Trading Symbol: "PBKB"
The following table sets forth the high and low closing prices for the period
indicated:
<TABLE>
<CAPTION>
High Low
------- -------
<S> <C> <C>
1996
First Quarter $10.50 $8.50
Second Quarter 10.125 8.75
Third Quarter 10.50 9.00
Fourth Quarter 11.625 10.00
1995
First Quarter $6.375 $4.625
Second Quarter 7.25 5.50
Third Quarter 8.125 6.75
Fourth Quarter 10.50 7.375
</TABLE>
At December 31, 1996 there were approximately 750 stockholders of record.
The most recent quarterly dividend was declared by the Bank on January 29,
1997, totaled $0.09 per share and was paid on March 14, 1997. The Bank declared
and paid a quarterly dividend of $0.05, $0.07, $0.07, and $0.08 per share on
the first, second, third, and fourth quarters of 1996. The Bank declared and
paid a quarterly dividend of $0.04 per share in the fourth quarter of 1995.
This was the first dividend paid since 1990. The dividend payout ratio was
24.36% and 4.24% in 1996 and 1995, respectively. There were no dividends paid
out in the years ended December 31, 1994, 1993, 1992, or 1991.
Annual Meeting: The Annual Meeting of Stockholders of People's Bancshares, Inc.
will be held on Tuesday, May 13, 1997
ANNUAL REPORT ON FORM 10-K: PEOPLE'S BANCSHARES, INC.'S ANNUAL REPORT ON FORM
10-K WILL BE PROVIDED TO SHAREHOLDERS, WITHOUT CHARGE, UPON WRITTEN REQUEST TO
THE SHAREHOLDER RELATIONS DEPARTMENT.
Transfer Agent: Our Transfer Agent is responsible for our shareholder records,
issuance of stock certificates, and distribution of our dividends and the IRS
form 1099. Your requests, as shareholders, concerning these matters are most
efficiently answered by corresponding directly with State Street Bank and Trust
Co. at the following address:
State Street Bank and Trust Co.
c/o BFDS
Shareholder Communications
P.O. Box 8200
Boston, MA 02266-8200
1-800-426-5523
For additional information about People's Bancshares, Inc., please contact:
Shareholder Relations Department
People's Bancshares, Inc.
P.O. Box 1468
Brockton, Massachusetts 02403
(508) 588-6600
This Annual Report has not been reviewed or confirmed for accuracy or relevance
by the Securities and Exchange Commission
28
<PAGE> 1
EXHIBIT 21
Schedule of Subsidiaries of the Company
Parent Company: People's Bancshares, Inc.
Subsidiary: People's Savings Bank of Brockton
A Massachusetts Savings Bank
<PAGE> 1
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in Registration Statement Number
333-1176 (dated February 7, 1996 on Form S-3), Registration Statement Number
333-1178 (dated February 8, 1996 on Form S-8), Registration Statement Number
333-3004 (dated March 29, 1996 on Form S-8) and Registration Statement Number
333-17439 (dated December 6, 1996 on Form S-8) of People's Bancshares, Inc.
of our report dated January 24, 1997 on the financial statements of People's
Bancshares, Inc., appearing in the Annual Report on Form 10-K of People's
Bancshares, Inc. for the year ended December 31, 1996.
WOLF & COMPANY, P.C.
Boston, Massachusetts
March 28, 1997
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM PEOPLE'S
BANCSHARES, INC. AND SUBSIDIARY QUARTERLY FINANCIAL STATEMENTS FOR THE NINE
MONTHS ENDED DECEMBER 31, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS CONTAINED IN SUCH FORM 10-Q.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> US $
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<EXCHANGE-RATE> 1
<CASH> 12,478
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 192,517
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 250,911
<ALLOWANCE> 4,716
<TOTAL-ASSETS> 496,133
<DEPOSITS> 336,238
<SHORT-TERM> 12,900
<LIABILITIES-OTHER> 883
<LONG-TERM> 111,020
0
0
<COMMON> 356
<OTHER-SE> 30,708
<TOTAL-LIABILITIES-AND-EQUITY> 496,133
<INTEREST-LOAN> 19,993
<INTEREST-INVEST> 13,614
<INTEREST-OTHER> 154
<INTEREST-TOTAL> 33,761
<INTEREST-DEPOSIT> 10,435
<INTEREST-EXPENSE> 18,595
<INTEREST-INCOME-NET> 15,166
<LOAN-LOSSES> 75<F1>
<SECURITIES-GAINS> (19)
<EXPENSE-OTHER> 13,678
<INCOME-PRETAX> 5,444
<INCOME-PRE-EXTRAORDINARY> 5,444
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,559
<EPS-PRIMARY> 1.09
<EPS-DILUTED> 1.09
<YIELD-ACTUAL> 3.34
<LOANS-NON> 3,900
<LOANS-PAST> 0
<LOANS-TROUBLED> 355
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 3,813
<CHARGE-OFFS> 1,131
<RECOVERIES> 307
<ALLOWANCE-CLOSE> 4,716
<ALLOWANCE-DOMESTIC> 3,238
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 1,478
<FN>
<F1>THE COMPANY RECORDED $1.7 MILLION IN LOAN LOSS ALLOWANCE FROM THE ACQUISITION OF
FIVE BRANCHES FROM SUBSIDIARIES OF FLEET FINANCIAL GROUP, INC. ON MARCH 8, 1996.
</FN>
</TABLE>
