<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1998
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ______ TO _______
Commission file number 0-7449
------
PEOPLE'S BANCSHARES, INC.
(Exact name of registrant as specified in its charter)
MASSACHUSETTS 04-3272233
- ------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
545 PLEASANT STREET
NEW BEDFORD, MASSACHUSETTS 02740
- ---------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (508) 991-2601
--------------
-----------------------------
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 [ ].
The number of shares of Registrant's Common Stock, $0.10 par value, outstanding
as of September 30, 1998 was 3,317,218.
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PEOPLE'S BANCSHARES, INC.
FORM 10-Q
QUARTERLY REPORT
--------------------
TABLE OF CONTENTS
Facing Page 1
Table of Contents 2
PART I. FINANCIAL INFORMATION (*)
Item 1. Financial Statements:
Consolidated Balance Sheets 3
Consolidated Statements of Income 4
Consolidated Statements of Changes in
Stockholders' Equity 6
Consolidated Statements of Cash Flows 7
Notes to Unaudited Consolidated Financial
Statements 9
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 11
Item 3 Quantitative and Qualitative Disclosures
about Market Risk 19
PART II OTHER INFORMATION 20
SIGNATURES 21
EXHIBITS 22
(*) The financial information at December 31, 1997 has been derived from
the audited financial statements at that date and should be read in
conjunction therewith. All other financial statements are unaudited.
2
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PEOPLE'S BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
------------- ------------
<S> <C> <C>
ASSETS
------
Cash and cash equivalents $ 26,188 $ 30,693
Investment securities 353,593 304,713
Loans held for sale 33,255 24,735
Loans 461,354 386,698
Less allowance for loan losses (4,561) (4,291)
-------- --------
Loans, net 456,793 382,407
Other real estate owned, net 102 111
Banking premises and equipment, net 13,691 12,940
Accrued interest receivable 5,847 4,435
Intangible assets 525 1,148
Other assets 1,764 1,728
-------- --------
Total assets $891,758 $762,910
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Deposits $420,713 $355,083
Borrowed funds 413,500 356,550
Mortgagors' escrow accounts 1,225 1,114
Accrued expenses and other liabilities 9,794 6,227
Subordinated debentures 13,800 13,800
-------- --------
Total liabilities 859,032 732,774
-------- --------
Stockholders' equity:
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 3,672,218 and 3,643,686 shares 367 364
Additional paid-in capital 23,649 23,400
Retained earnings 15,960 12,253
-------- --------
39,976 36,017
Treasury stock, at cost - 355,000 shares (6,213) (6,213)
Net unrealized gain (loss) on securities available
for sale, after tax effects (1,037) 332
-------- --------
Total stockholders' equity 32,726 30,136
-------- --------
Total liabilities and stockholders' equity $891,758 $762,910
======== ========
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
3
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PEOPLE'S BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Dollars and shares in thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------ ------------------------
1998 1997 1998 1997
------- ------- ------- -------
<S> <C> <C> <C> <C>
Interest and dividend income:
Interest and fees on loans $ 9,729 $ 6,538 $26,741 $17,688
Interest and dividends on investment securities 6,305 4,706 17,461 13,514
Interest on short-term investments 57 150 291 208
------- ------- ------- -------
Total interest and dividend income 16,091 11,394 44,493 31,410
------- ------- ------- -------
Interest expense:
Interest on deposits 3,940 2,910 11,073 8,619
Interest on borrowed funds 6,206 3,854 17,428 9,128
------- ------- ------- -------
Total interest expense 10,146 6,764 28,501 17,747
------- ------- ------- -------
Net interest income 5,945 4,630 15,992 13,663
Provision for loan losses 150 - 450 -
------- ------- ------- -------
Net interest income, after provision for loan losses 5,795 4,630 15,542 13,663
------- ------- ------- -------
Other income:
Customer service fees 327 377 1,025 1,121
Gains on sales of securities and purchased
loans, net 767 5 949 2
Gains on sales of loans, net 1,797 1,089 4,559 2,883
Miscellaneous 27 55 164 137
------- ------- ------- -------
Total other income 2,918 1,526 6,697 4,143
------- ------- ------- -------
Operating expenses:
Salaries and employee benefits 2,655 2,147 7,486 6,326
Occupancy and equipment 559 583 1,603 1,478
Data processing 304 322 953 911
Professional fees 192 228 608 584
Other real estate owned, net (4) 140 (27) 231
Other general and administrative 1,536 820 3,524 2,297
------- ------- ------- -------
Total operating expenses 5,242 4,240 14,147 11,827
------- ------- ------- -------
Income before income taxes and cumulative
effect of accounting change 3,471 1,916 8,092 5,979
Provision for income taxes 1,233 697 2,910 2,176
------- ------- ------- -------
Income before cumulative effect of accounting
change 2,238 1,219 5,182 3,803
Cumulative effect of accounting change for
organizational costs, net of income tax expense
of $106,000 - - 186 -
------- ------- ------- -------
Net income $ 2,238 $ 1,219 $ 4,996 $ 3,803
======= ======= ======= =======
</TABLE>
4
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<TABLE>
<S> <C> <C> <C> <C>
Per share data:
Diluted earnings per share:
Income before cumulative effect of accounting
change $ 0.66 $ 0.36 $ 1.53 $ 1.07
Cumulative effect of accounting change for
organizational costs - - (0.06) -
------- ------- ------- -------
Net income $ 0.66 $ 0.36 $ 1.47 $ 1.07
======= ======= ======= =======
Basic earnings per share:
Income before cumulative effect of accounting
change $ 0.68 $ 0.37 $ 1.57 $ 1.09
Cumulative effect of accounting change for
organizational costs - - (0.06) -
------- ------- ------- -------
Net income $ 0.68 $ 0.37 $ 1.51 $ 1.09
======= ======= ======= =======
Weighted average shares outstanding -
assuming dilution for stock options 3,394 3,377 3,386 3,552
Weighted average shares outstanding 3,317 3,324 3,308 3,499
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
5
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PEOPLE'S BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
(Dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Accumulated
Additional Other
Comprehensive Common Paid-in Retained Treasury Comprehensive
Income Stock Capital Earnings Stock Income (Loss) Total
------------- ------ --------- -------- -------- ------------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1997 $364 $23,400 $12,253 $(6,213) $ 332 $30,136
Comprehensive income:
Net income $ 4,996 - - 4,996 - - 4,996
Change in net unrealized gain (loss)
on securities available for sale,
after tax effects (1,369) - - - - (1,369) (1,369)
-------
Comprehensive income $ 3,627
=======
Cash dividends paid - - (1,289) - - (1,289)
Exercise of stock options 3 249 - - - 252
---- ------- ------- ------- ------- -------
Balance at September 30, 1998 $367 $23,649 $15,960 $(6,213) $(1,037) $32,726
==== ======= ======= ======= ======= =======
Balance at December 31, 1996 $356 $22,967 $ 8,562 $ - $ (821) $31,064
Comprehensive income:
Net income $ 3,803 - - 3,803 - - 3,803
Change in net unrealized gain (loss)
on securities available for sale,
after tax effects 1,422 - - - - 1,422 1,422
-------
Comprehensive income $ 5,225
=======
Purchase of treasury stock - - - (6,213) - (6,213)
Cash dividends paid - - (1,078) - - (1,078)
Exercise of stock options 8 409 - - - 417
---- ------- ------- ------- ------- -------
Balance at September 30, 1997 $364 $23,376 $11,287 $(6,213) $ 601 $29,415
==== ======= ======= ======= ======= =======
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
6
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PEOPLE'S BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
-----------------------------
1998 1997
--------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 4,996 $ 3,803
Adjustments to reconcile net income to net
cash provided (used) by operating activities:
Provision for loan losses 450 -
Depreciation and amortization 1,241 933
Net amortization (accretion) on securities and purchased loans (1,670) 134
Gains on sales of securities and purchased loans, net (949) (2)
Loans originated for sale (387,736) (185,313)
Principal balance of loans sold 379,216 182,718
(Gain) losses on sale of other real estate owned, net (73) 65
Other, net (660) (344)
--------- ---------
Net cash provided (used) by operating activities (5,185) 1,994
--------- ---------
Cash flows from investing activities:
Proceeds from sales of securities available for sale 219,174 97,323
Proceeds from maturities of securities available for sale 34,631 2,500
Proceeds from amortization of mortgage-backed securities 53,442 92,045
Purchase of securities available for sale (295,276) (255,604)
Purchase of securities held to maturity (54,590) (18,972)
Proceeds from sales of purchased loans 8,268 -
Loan (originations and purchases) amortization and payoffs, net (85,348) (114,146)
Proceeds from sales of other real estate owned 245 1,126
Additions to banking premises and equipment (1,520) (649)
--------- ---------
Net cash used in investing activities (120,974) (196,377)
--------- ---------
Cash flows from financing activities:
Net increase in deposits 65,630 12,468
Net (decrease) increase in borrowings with maturities of three months or less (17,250) 31,350
Proceeds from issuance of borrowings with maturities in excess of three months 249,700 227,200
Repayment of borrowings with maturities in excess of three months (175,500) (74,020)
Increase in mortgagors' escrow accounts 111 283
Proceeds from exercise of stock options 252 417
Proceeds from issuance of subordinated debentures - 12,874
Payments to acquire treasury stock - (6,213)
Cash dividends (1,289) (1,078)
--------- ---------
Net cash provided by financing activities 121,654 203,281
--------- ---------
Net change in cash and cash equivalents (4,505) 8,898
Cash and cash equivalents at beginning of period 30,693 12,478
--------- ---------
Cash and cash equivalents at end of period $ 26,188 $ 21,376
========= =========
</TABLE>
7
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<TABLE>
<S> <C> <C>
Supplementary information:
Interest paid $ 28,278 $ 16,960
Income taxes paid 2,908 1,687
Transfer from loans to other real estate owned, net 163 823
Change in due to/from brokers, net 3,588 11,160
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
8
<PAGE> 9
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Consolidated Balance Sheet as of September 30, 1998, and the
Consolidated Statements of Income, Changes in Stockholders' Equity, and
Cash Flows for the periods ended September 30, 1998 and 1997 of People's
Bancshares, Inc. and Subsidiaries (the "Company") furnished in this report
are unaudited; however, these interim consolidated financial statements
reflect all adjustments that are, in the opinion of management, necessary
for a fair statement of the results for the interim periods presented.
Interim results are not necessarily indicative of results to be expected
for the year.
The unaudited consolidated interim financial statements furnished in this
report are intended to be read in conjunction with the consolidated
financial statements of the Company presented in its Annual Report for the
year ended December 31, 1997.
In the third quarter of 1998, the Company elected early adoption of the
provisions of the Accounting Standards Executive Committee ("ACSEC")
Statement of Position 98-5, "Reporting on the Costs of Start-Up Activities"
("SOP 98-5"), retroactively effective as of January 1, 1998 in accordance
with SOP 98-5. SOP 98-5 requires the costs of start-up activities to be
expensed as incurred instead of being capitalized and amortized. SOP 98-5
became effective in June, 1998 and would have required adoption by the
Company in the first quarter of 1999.
The cumulative effect of this accounting change at January 1, 1998 was to
decrease net income by $186,000 or $0.05 per diluted share in the first
quarter of 1998 and to decrease net income by $42,000 or $0.01 per diluted
share in the second quarter of 1998.
The Company's restated condensed financial information as a result of the
retroactive adoption of SOP 98-5 on the previous two quarters is summarized
below:
<TABLE>
<CAPTION>
Previously Previously
Reported Restated Reported Restated
---------- -------- ---------- --------
Three months ended Three months ended
March 31, 1998 June 30, 1998
--------------------------- ---------------------------
(in thousands)
<S> <C> <C> <C> <C>
Net interest income,
after provision for loan losses $ 4,678 $ 4,678 $ 5,069 $ 5,069
Other income 1,687 1,687 2,092 2,092
Operating expenses 4,100 4,074 4,757 4,831
Income before taxes 2,265 2,291 2,404 2,330
Provision for income taxes 825 833 876 844
Income before cumulative effect of a change
in accounting principle 1,440 1,458 1,528 1,486
Cumulative effect of accounting change for
organizational costs, net of income tax
expense of $106,000 - 186 - -
Net income 1,440 1,272 1,528 1,486
Diluted earnings per share 0.43 0.38 0.45 0.44
Basic earnings per share 0.44 0.38 0.46 0.45
Intangible assets 1,089 823 1,368 1,028
Total assets 862,000 861,734 858,377 858,037
Accrued expenses and other liabilities 6,529 6,431 5,164 5,034
Stockholders' equity 31,625 31,457 32,463 32,253
Total liabilities and stockholders' equity 862,000 861,734 858,377 858,037
</TABLE>
9
<PAGE> 10
(2) STOCKHOLDERS' EQUITY AND EARNINGS PER SHARE
In June 1997, FASB issued SFAS No. 130, "Reporting Comprehensive Income,"
effective for fiscal years beginning after December 15, 1997. Accounting
principles generally require that recognized revenue, expenses, gains and
losses be included in net income. Certain FASB statements, however, require
entities to report specific changes in assets and liabilities, such as
unrealized gains and losses on available-for-sale securities, as a separate
component of the equity section of the balance sheet. Such items, along
with net income, are components of comprehensive income. SFAS No. 130
requires that all items of comprehensive income be reported in a financial
statement that is displayed with the same prominence as other financial
statements. Additionally, SFAS No. 130 requires that the accumulated
balance of other comprehensive income be displayed separately from retained
earnings and additional paid-in capital in the equity section of the
balance sheet. The Company has adopted these disclosure requirements as of
the quarter ended March 31, 1998.
Basic earnings per share represents income available to common stock
divided by the weighted-average number of common shares outstanding during
the period. Diluted earnings per share reflects additional common shares
that would have been outstanding if dilutive potential common shares had
been issued, as well as any adjustment to income that would result from the
assumed conversion. Potential common shares that may be issued by the
Company relate solely to outstanding stock options, and are determined
using the treasury stock method. The assumed conversion of outstanding
dilutive stock options would increase the shares outstanding but would not
require an adjustment to income as a result of the conversion.
10
<PAGE> 11
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with the
unaudited consolidated financial statements and related notes included in this
report.
ASSETS
The Company's total assets at September 30, 1998 were $891.8 million, an
increase of $128.8 million from December 31, 1997. This increase includes an
increase of $48.9 million in investment securities consisting primarily of
mortgage-backed securities and an increase of $74.7 million in loans as a result
of purchases of 1-4 family residential mortgage loans and commercial loan
growth. These transactions were funded with a $57.0 million increase in borrowed
funds and a $65.6 million increase in deposits.
LOANS
Total loans and loans held for sale increased $83.2 million primarily as a
result of the purchase of residential mortgage loans and the growth in the
Bank's commercial loan portfolio. The Company's loans and loans held for sale
were as follows:
September 30, December 31,
1998 1997
------------- ------------
(in millions)
Residential mortgage loans, including
home equity loans $365,049 $328,176
Commercial, commercial real estate
and construction loans 124,046 78,104
Consumer loans 5,514 5,153
-------- --------
Total $494,609 $411,433
======== ========
DEPOSITS
Total deposits increased $65.6 million to $420.7 million at September 30, 1998
from $355.1 million at December 31, 1997. The increase in deposits reflects a
$15.5 million increase in IRAs and time certificates of deposit, a $47.9 million
increase in municipal deposits and a $2.2 million increase in savings and demand
deposits.
NON-PERFORMING ASSETS AND ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses has been established to absorb foreseeable losses
inherent in the loan portfolio. The provision 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 Company'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
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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 Company establishes the adequacy of its allowance and necessary additions
are charged to operations through the provision for loan losses. Loan losses are
charged against the allowance when management believes the collectibility of the
loan balance is unlikely.
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 Company's allowance and may require the Company to provide additions to the
allowance based on their assessment, which may differ from management's.
At September 30, 1998, the Company's allowance for loan losses totaled $4.6
million or 0.99% of total loans and 239% of non-performing loans compared to
$4.3 million or 1.11% of total loans and 110% of non-performing loans at
December 31, 1997, and compared to $4.2 million or 1.17% of total loans and 120%
of non-performing loans at September 30, 1997. Management recorded a provision
for loan losses of $150,000 and $450,000 for the three and nine month periods
ended September 30, 1998 and no provision for the same periods in 1997. Net
charge-offs for the three and nine months ended September 30, 1998, were $82,000
and $180,000, compared to net charge-offs of $120,000 and $481,000 for the same
periods in 1997.
Non-performing assets were $2.0 million or 0.23% of total assets at September
30, 1998 compared to $4.0 million or 0.52% of total assets at December 31, 1997
and $3.6 million or 0.51% of total assets at September 30, 1997.
RESULTS OF OPERATIONS
EARNINGS
People's Bancshares, Inc. recognized net income of $2.2 million or $0.66 diluted
earnings per share for the quarter ended September 30, 1998 compared to $1.2
million or $0.36 diluted earnings per share for the quarter ended September 30,
1997. For the nine month period ended September 30, 1998, the Company reported
net income of $5.0 million or $1.47 per diluted share, compared to net income of
$3.8 million or $1.07 per diluted share for the nine month period ended
September 30, 1997. Diluted earnings per share excluding securities gains and
non-recurring items would have been $0.63 and $1.51 for the three and nine
months ended September 30, 1998. Basic earnings per share were $0.68 and $1.51
for the three and nine months ended September 30, 1998 compared to $0.37 and
$1.09 for the three and nine months ended September 30, 1997.
In the three months ended September 30, 1998, the Company recognized $767,000 in
gains on sales of securities. In the third quarter, the Company elected early
adoption of a new accounting standard for organization and start-up costs. The
early adoption of AICPA Statement of Position 98-5 required the Company to
retroactively write-off such
12
<PAGE> 13
intangible assets. As a result 1998 first and second quarter diluted earnings
per share have been restated to $0.38 and $0.44, respectively from $0.43 and
$0.45 previously reported to reflect retroactive intangible write-offs of
$266,000 and $74,000. Additionally, in the quarter ended September 30, 1998, the
Company expensed $68,000 of organizational costs in connection with new PMC
branches and wrote-off $475,000 of goodwill and took a $75,000 restructuring
charge in connection with the closing of a branch. In the three months ended
September 30, 1997, the Company recognized $5,000 in gains on sales of
securities and purchased loans and had no non-recurring items. The supplementary
financial data table shows the quarterly breakout of operating results on a
diluted earnings per share basis.
In the nine months ended September 30, 1998, the Company recognized $949,000 in
net gains on sales of securities and purchased loans compared to $2,000 of net
gains in the nine months ended September 30, 1997. These gains substantially
offset non-recurring expenses of $186,000 from prepayment penalties incurred on
early retirement of Federal Home Loan Bank advances, $75,000 in branch
restructuring charges, and $883,000 in write-offs of intangible assets. There
were no such non-recurring expenses in the nine months ended September 30, 1997.
OVERVIEW
Comparisons of year to year operating results have been significantly affected
by the growth of the Bank and its mortgage banking subsidiary, People's Mortgage
Corporation ("PMC") that have resulted in the Company increasing its asset size
from $496.1 million at December 31, 1996 to $891.8 million at September 30,
1998. Operating results have been significantly affected by the Company
increasing its average loans and average investments to $473.8 million and
$315.1 million during the first nine months of 1998, compared to $283.6 million
and $259.1 million during the first nine months of 1997. This growth in earning
assets was funded by the Company increasing its average deposits and average
borrowings to $356.2 million and $399.2 million in the first nine months of
1998, compared to $297.4 million and $207.1 million in the first nine months of
1997. Secondly, operating results have also been significantly affected by the
growth of PMC which is reflected in gains on sales of loans of $4.6 million,
interest and other income of $1.8 million, operating expenses of $4.8 million,
and income before income taxes of $1.6 million from PMC operations in the first
nine months of 1998 compared to $2.9 million, $1.6 million, $3.7 million and
$809,000, respectively, in the corresponding period of 1997.
In addition, operating results have been affected by mortgage refinancings.
These refinancings have adversely affected the Company's net interest margin due
to the resulting write-offs of purchase premiums associated with mortgage-backed
securities and purchased residential mortgage loans. The amortization and
write-offs of such premiums amounted to a $0.09 and a $0.48 charge against
earnings for the three and nine month periods ended September 30, 1998, compared
to $0.04 and $0.09 for the same periods in 1997. Conversely, this heightened
refinancing activity resulted in PMC increasing its diluted earnings per share
contribution to $0.15 and $0.35 for the three and nine month periods ended
September 30, 1998 from $0.07 and $0.12 for the same periods in 1997.
Return on average assets was 1.02% and 0.81%, and return on average equity was
26.45% and 20.72% for the three and nine months ended September 30, 1998. Return
on average assets was 0.77% and 0.89% and return on average equity was 16.39%
and 16.37% for the same periods in 1997. Net income amounted to $2.2 million and
$5.0 million or $0.66 and $1.47 per diluted share for the three and nine months
ended September 30, 1998 compared to net income of $1.2
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<PAGE> 14
million and $3.8 million or $0.36 and $1.07 per diluted share for the same
periods in 1997. Basic earnings per share were $0.68 and $1.51 per share for the
three and nine months ended September 30, 1998, compared to $0.37 and $1.09 per
share for the same periods in 1997.
NET INTEREST INCOME
Net interest income increased $1.3 million and $2.3 million for the three and
nine months ended September 30, 1998 compared to the same periods in 1997. This
change resulted mostly from increased average earning assets. For the first nine
months of 1998, average earning assets increased 45% compared to the same period
in 1997.
Interest and dividend income increased to $16.1 million and $44.5 million for
the three and nine months ended September 30, 1998 from $11.4 million and $31.4
million for the same periods in 1997. The yield on average earning assets
increased to 7.67% for the three months ended September 30, 1998 from 7.54% for
the same period in 1997. The yield on average earning assets decreased to 7.45%
for the nine months ended September 30, 1998 from 7.63% for the same period in
1997. Yields on loans decreased from 8.28% and 8.31% for the three and nine
months ended September 30, 1997 to 7.71% and 7.52% for the same periods in 1998.
The decrease in the loan yields is primarily attributable to the Company's
growth in consumer mortgages. Yields on investments increased to 7.64% and 7.39%
for the three and nine months ended September 30, 1998 compared to 6.77% and
6.95% for the same periods in 1997.
Interest expense increased to $10.1 million and $28.5 million for the three and
nine months ended September 30, 1998 from $6.8 million and $17.7 million for the
same periods in 1997. This increase was due to a $2.3 million and $8.3 million
increase in interest expense on borrowed funds for the three and nine months
ended September 30, 1998. Interest expense on deposits increased $1.0 million
and $2.5 million for the three and nine months ended September 30, 1998,
compared to the same periods in 1997.
During the first nine months of 1998, average borrowed funds amounted to $399.2
million compared to $207.1 million during the same period of 1997. The Company
has increased its use of borrowed funds to fund purchases of mortgage-backed
securities and loans. Rates paid on average borrowed funds were 5.85% and 5.82%
for the three and nine months ended September 30, 1998 compared to 6.12%and
5.88% for the same periods in 1997.
Deposit interest expense increased due to an increase in average deposits to
$356.2 million for the nine month period ended September 30, 1998 compared to
$297.4 million for the same period in 1997. The increase in deposit interest
expense was due to the increase in average deposits and an increase in the
average cost of deposits to 4.24% and 4.15% for the three and nine month periods
ended September 30, 1998 from 3.82% and 3.86% for the same periods in 1997.
PROVISION FOR LOAN LOSSES
A provision for loan losses of $150,000 and $450,000 was made for the three and
nine months ended September 30, 1998. No provision for loan losses was made for
the same periods in 1997.
OTHER INCOME
Other income was $2.9 million and $6.7 million for the three and nine months
ended September
14
<PAGE> 15
30, 1998 compared to $1.5 million and $4.1 million for the same periods in 1997.
The year to date increase is attributable to a $1.7 million increase in gains
from sales of loans and a $947,000 increase in net gains on sales of securities
and purchased loans. The increase in loan sale gains reflects the growth of
People's Mortgage Corporation.
OPERATING EXPENSES
Total operating expenses amounted to $5.2 million and $14.1 million for the
three and nine months ended September 30, 1998 compared to $4.2 million and
$11.8 million for the same periods in 1997.
Salaries and benefits expense increased $508,000 and $1.2 million for the three
and nine months ended September 30, 1998 compared to the same periods in 1997.
The increase in salaries and benefits reflects general salary increases, added
lending personnel, and additional PMC staffing.
Occupancy and equipment expense decreased $24,000 for the three months ended
September 30, 1998 and increased $125,000 for the nine months ended September
30, 1998, compared to the same periods in 1997. Other real estate owned expenses
decreased $144,000 and $258,000 for the three and nine months ended September
30, 1998 compared to the same periods in 1997. Other general and administrative
expenses increased $716,000 and $1.2 million for the three and nine months ended
September 30, 1998 compared to the same periods in 1997. The Company expensed
$68,000 of organizational costs and wrote-off $475,000 of goodwill and took a
$75,000 restructuring charge in connection with the closing of a branch in the
third quarter of 1998. There were no non-recurring items in the third quarter of
1997.
The efficiency ratio for the Company for the three and nine month periods ended
September 30, 1998, was 55.36% and 58.68%, respectively. For the same periods in
1997, the ratios were 63.12% and 63.82%, respectively. The efficiency ratio for
the Company, excluding PMC was 50.37% and 54.01% for the three and nine months
ended September 30, 1998, respectively. For the same periods in 1997, the ratios
were 60.92% and 59.50%, respectively. The efficiency ratio for PMC for the three
and nine month periods ended September 30, 1998, was 67.08% and 69.81%,
respectively and for the same periods in 1997 the ratios were 70.60% and 80.06%,
respectively. Increases in operating expense, other than OREO related expenses,
are primarily due to additional costs associated with the growth of PMC,
write-off of goodwill of $475,000, restructuring charges of $75,000 and FHLB
prepayment penalties of $186,000.
PROVISION FOR INCOME TAXES
The Company recognized income tax expense of $1.2 million and $2.9 million in
the three and nine months ended September 30, 1998 compared to income tax
expense of $697,000 and $2.2 million for the same periods in 1997. The effective
tax rate for the three and nine months ended September 30, 1998 and 1997 was
approximately 36%.
15
<PAGE> 16
LIQUIDITY AND CAPITAL RESOURCES
The Company's liquidity management focuses upon the Company's ability to provide
the cash reserves and cash equivalents necessary to honor contractual
liabilities and commitments, meet depositors' withdrawal demands, fund
operations and provide customers with adequate available credit. The Company's
primary sources of liquidity are customer deposits, principal and interest
payments on loans, interest and dividends on investments and proceeds from the
maturity or sale of investments. The Company also has the ability to borrow from
the Federal Home Loan Bank of Boston on a collateralized basis. The Company
believes that it has adequate liquidity to meet its current needs.
At September 30, 1998, the Company's capital exceeded all regulatory
requirements. The Company's Tier 1 leverage capital ratio at September 30, 1998
was 5.13%, compared to 5.25% at December 31, 1997. Federal Reserve guidelines
for the calculation of the Tier 1 leverage capital ratio limit the amount of
subordinated debt included in Tier 1 capital to 25% of total Tier 1 capital. All
$13.8 million of the total proceeds of the Company's subordinated debentures is
included in total risk-based capital. At September 30, 1998, the Company's
risk-based capital ratio was 10.94%. The Company's book value per share was
$9.87 at September 30, 1998, $9.16 at December 31, 1997, and $8.96 at September
30, 1997.
IMPACT OF THE YEAR 2000 ISSUE
The Year 2000 (Y2K) issue exists because many computer systems and applications
currently use two-digit date fields to designate a year. As the century date
change occurs, date sensitive systems recognize the year 2000 as 1900, or, not
at all. This inability to recognize or properly treat the year 2000 may cause
systems to process critical financial and operational information incorrectly.
In the discussion that follows, systems refers to the Company's information
technology systems and non-information technology systems.
This section contains certain statements that are forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933, as amended,
and Section 21E of the Securities Exchange Act of 1934, as amended. The words
"believe," "expect," "anticipate," "intend," "estimate," "assume," and other
similar expressions which are predictions of or indicate future events and
trends and which do not relate to historical matters identify forward-looking
statements. The Company's readiness for the Y2K, and the eventual effects of
the Y2K on the Company may be materially different than currently projected.
This may be due to, among other things, unanticipated delays and expenses in
the completion of the Company's Y2K initiative, the failure of its proposed
contingency plans, if such contingency plans become necessary, to achieve their
desired results and the failure of third parties with whom the Company has a
significant business relationship to achieve Y2K readiness.
To become Y2K compliant, the Company is following the Y2K project management
guidelines provided by the Federal Financial Institutions Examination Council
(FFIEC) interagency statement. The statement outlines five project management
phases essential to Y2K preparedness. The five phases and the Company's status
in its efforts in completing each follows:
- AWARENESS AND ASSESSMENT PHASES: The Company has completed these
initial phases for all systems.
- RENOVATION PHASE: Approximately 14% of the Company's systems are in the
renovation/replacement phase.
- VALIDATION PHASE: Approximately 31% are in the testing/validation phase.
- IMPLEMENTATION PHASE: In this phase, systems should be certified as Y2K
compliant and be accepted by the company. Approximately 1% of the
systems are in the implementation phase. Currently, 54% of the Company's
systems are Y2K compliant.
It is anticipated that all reprogramming efforts will be completed by December
31, 1998, which the Company expects will allow adequate time for testing. The
Company has formed an internal task force, the Y2K Committee, which meets
monthly to monitor the progress of the Company's Y2K plan. An outside consultant
meets with the head of the Y2K Committee each month to ensure compliance with
the Y2K Committee's schedule.
The Company has initiated formal communications with all of its significant
processing vendors to determine the extent to which the Company is vulnerable to
the failure of those vendors to become Y2K compliant. All critical vendors are
contacted monthly regarding their compliance programs. Based on communications
to date, the Company does not anticipate any Y2K problems with respect to
critical vendors. Other vendors that the Company determined were less critical
were contacted via letter in the assessment phase.
Actual costs for implementing the Company's Y2K plan totalled $35,000 for the
nine months ending September 30, 1998. These costs were charged to earnings as
incurred. The Company expects that future costs relating to the implementation
of the Y2K plan will not exceed $100,000.
Based on the phases of the Y2K plan completed to date, if the Company is unable
to fully implement its Y2K Plan in a timely manner, there is a risk that some
internal systems will fail, in which case the Company plans to utilize the
systems that are in working order until the non-working systems can be replaced.
Noncompliance by third party vendors would have a greater impact on the Company.
The Company is in the process of developing a contingency plan, which the
Company expects to be completed by December 1998. The contingency plan will be
continually monitored and revised, if necessary, due to changes in the status of
critical third parties. The Company's contract with its primary third party
servicer, Bisys, states that if the Bisys system currently used by the Company
is not ready for Y2K, the Company's operations will be converted to Bisys'
fully-compliant server at no cost to the Company. The Company does not
anticipate that this conversion will be necessary.
OTHER INFORMATION
On October 20, 1998, the Company declared a $0.19 dividend to be paid on
December 4, 1998 to shareholders of record on November 13, 1998.
The Company announced a stock repurchase plan on September 1, 1998. Under the
plan the Company is authorized to repurchase up to 10% of its currently
outstanding common stock in the open market over the next 18 months. No shares
have been repurchased as of November 16, 1998.
People's maintains twelve banking locations in Southeastern Massachusetts and
six loan production offices in Massachusetts and Connecticut. People's trades
under the symbol "PBKB" and is quoted on the NASDAQ National Market System.
16
<PAGE> 17
People's Bancshares, Inc.
Supplementary Financial Data 1997
<TABLE>
<CAPTION>
1st 2nd 3rd Nine 4th
Quarter Quarter Quarter Months Quarter
1997 1997 1997 1997 1997 1997
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Bank net of premium amortization, security
gains and non-recurring items $ 0.34 $ 0.37 $ 0.33 $ 1.04 $ 0.44 $ 1.48
Premium amortization expense (1) (0.02) (0.03) (0.04) (0.09) (0.09) (0.18)
-------- -------- -------- -------- -------- --------
Bank net income 0.32 0.34 0.29 0.95 0.35 1.30
Mortgage subsidiary net income 0.04 0.01 0.07 0.12 0.05 0.17
-------- -------- -------- -------- -------- --------
Bancshares, net of security gains and
non-recurring items 0.36 0.35 0.36 1.07 0.40 1.47
Security gains and non-recurring items, net 0.00 0.00 0.00 0.00 0.00 0.00
-------- -------- -------- -------- -------- --------
Reported diluted earnings per share $ 0.36 $ 0.35 $ 0.36 $ 1.07 $ 0.40 $ 1.47
======== ======== ======== ======== ======== ========
Return on average equity 16.50% 16.24% 16.39% 16.37% 17.49% 16.65%
Return on average assets 0.98% 0.91% 0.77% 0.89% 0.71% 0.83%
Average assets (in thousands) $538,629 $559,848 $624,630 $574,369 $708,839 $615,037
Bank efficiency ratio (2) 59.61% 57.88% 60.92% 59.50% 55.98% 58.55%
Company efficiency ratio (2) 62.99% 65.36% 63.12% 63.82% 62.27% 63.39%
Net interest margin 3.45% 3.48% 3.06% 3.32% 2.62% 3.12%
Mortgage company income as a percentage
of Company 11.11% 2.86% 19.44% 11.21% 12.50% 11.56%
Gains on sales of loans (in thousands) $ 913 $ 881 $ 1,088 $ 2,882 $ 1,253 $ 4,135
Mortgage loan applications (in thousands) $103,757 $119,964 $118,143 $341,864 $129,353 $471,217
Mortgage backlog at end of quarter (3)
(in thousands) $ 81,295 $ 93,979 $ 90,984 $ 95,716
</TABLE>
(1) Amortization of premiums from purchases of 1-4 family mortgage-backed
securities and mortgage loans. Such premiums are subject to faster amortization
in a mortgage "refinancing" market. The mortgage subsidiary has no assets
subject to prepayment risk as all gains are "cash" gains and are recorded when
investor payments are received.
(2) Equals non-interest expense divided by net interest income. Excludes
provisions for loan losses, OREO expenses, non-recurring items, gains and losses
on securities and purchased loan transactions, and interest expense on
subordinated debentures.
(3) Equals 80% of the Company's loan applications in process plus all loans held
for sale. Generally, this backlog will be sold in the following quarter.
17
<PAGE> 18
People's Bancshares, Inc.
Supplementary Financial Data 1998
<TABLE>
<CAPTION>
1st 2nd 3rd Nine
Quarter Quarter Quarter Months
1998 1998 1998 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Bank net of premium amortization, security gains and
non-recurring items $ 0.53 $ 0.54 $ 0.57 $ 1.64
Premium amortization expense (1) (0.19) (0.20) (0.09) (0.48)
-------- -------- -------- --------
Bank net income 0.34 0.34 0.48 1.16
Mortgage subsidiary net income 0.11 0.09 0.15 0.35
-------- -------- -------- --------
Bancshares, net of security gains and non-recurring items 0.45 0.43 0.63 1.51
Security gains and non-recurring items, net (0.08) 0.01 0.03 (0.04)
-------- -------- -------- --------
Reported diluted earnings per share $ 0.37 $ 0.44 $ 0.66 $ 1.47
======== ======== ======== ========
Return on average equity 16.68% 18.49% 26.45% 20.72%
Return on average assets 0.66% 0.72% 1.02% 0.81%
Average assets (in thousands) $782,930 $826,916 $868,570 $826,313
Bank efficiency ratio (2) 56.44% 55.79% 50.37% 54.01%
Company efficiency ratio (2) 58.61% 62.54% 55.36% 58.68%
Net interest margin 2.56% 2.62% 2.83% 2.68%
Mortgage company income as a percentage of Company 29.73% 20.45% 22.73% 23.81%
Gains on sales of loans (in thousands) $ 1,316 $ 1,446 $ 1,797 $ 4,559
Mortgage loan applications (in thousands) $226,597 $185,105 $217,596 $629,298
Mortgage backlog at end of quarter (3) (in thousands) $148,331 $140,562 $165,342
</TABLE>
(1) Amortization of premiums from purchases of 1-4 family mortgage-backed
securities and mortgage loans. Such premiums are subject to faster amortization
in a mortgage "refinancing" market. The mortgage subsidiary has no assets
subject to prepayment risk as all gains are "cash" gains and are recorded when
investor payments are received.
(2) Equals non-interest expense divided by net interest income. Excludes
provisions for loan losses, OREO expenses, non-recurring items, gains and losses
on securities and purchased loan transactions, and interest expense on
subordinated debentures.
(3) Equals 80% of the Company's loan applications in process plus all loans held
for sale. Generally, this backlog will be sold in the following quarter.
18
<PAGE> 19
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
For quantitative information about market risk, see Management's Discussion and
Analysis of Financial Condition and Results of Operations - Asset/Liability
Management in the Company's Annual Report.
There has been no material change in the quantitative and qualitative
disclosures about market risk as of September 30, 1998 from those presented in
the Company's Annual Report.
19
<PAGE> 20
PART II - OTHER INFORMATION
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K
- ------
(a) Exhibits
Exhibit Description
- ------- -----------
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 (filed as
Exhibit 3.2 to the Company's Annual Report on Form 10-K for
the year ended December 31, 1995 and incorporated herein by
reference)
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)
27 Financial Data Schedule (Filed herewith).
(b) Reports on Form 8-K. No reports on Form 8-K were filed during
the quarter ended September 30, 1998.
20
<PAGE> 21
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
PEOPLE'S BANCSHARES, INC.
11/10/98 By: /s/ Richard S. Straczynski
--------------------- -------------------------------------
Date Richard S. Straczynski
President and Chief Executive Officer
11/10/98 By: /s/ Colin C. Blair
--------------------- -------------------------------------
Date Colin C. Blair
Chief Financial Officer
21
<PAGE> 22
EXHIBIT INDEX
Exhibit Description
- ------- -----------
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 (filed as
Exhibit 3.2 to the Company's Annual Report on Form 10-K for
the year ended December 31, 1995 and incorporated herein by
reference)
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)
27 Financial Data Schedule (Filed herewith).
22
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM PEOPLE'S
BANCSHARES, INC. AND SUBSIDIARIES QUARTERLY FINANCIAL STATEMENTS FOR THE NINE
MONTHS ENDED SEPTEMBER 30, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS CONTAINED IN SUCH FORM 10-Q
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<EXCHANGE-RATE> 1
<CASH> 13,676
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 12,512
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 262,922
<INVESTMENTS-CARRYING> 90,671
<INVESTMENTS-MARKET> 91,402
<LOANS> 494,609
<ALLOWANCE> 4,561
<TOTAL-ASSETS> 891,758
<DEPOSITS> 420,713
<SHORT-TERM> 20,300
<LIABILITIES-OTHER> 11,019
<LONG-TERM> 407,000
367
0
<COMMON> 0
<OTHER-SE> 32,359
<TOTAL-LIABILITIES-AND-EQUITY> 891,758
<INTEREST-LOAN> 26,741
<INTEREST-INVEST> 17,461
<INTEREST-OTHER> 291
<INTEREST-TOTAL> 44,493
<INTEREST-DEPOSIT> 11,073
<INTEREST-EXPENSE> 28,501
<INTEREST-INCOME-NET> 15,992
<LOAN-LOSSES> 450
<SECURITIES-GAINS> 949
<EXPENSE-OTHER> 14,147
<INCOME-PRETAX> 8,092
<INCOME-PRE-EXTRAORDINARY> 5,182
<EXTRAORDINARY> 0
<CHANGES> 186
<NET-INCOME> 4,996
<EPS-PRIMARY> 1.51
<EPS-DILUTED> 1.47
<YIELD-ACTUAL> 2.68
<LOANS-NON> 1,905
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 4,291
<CHARGE-OFFS> 480
<RECOVERIES> 300
<ALLOWANCE-CLOSE> 4,561
<ALLOWANCE-DOMESTIC> 3,824
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 737
</TABLE>
