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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 AND EXCHANGE
ACT OF 1934
For the fiscal year ended DECEMBER 31, 1997
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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.
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(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
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<S> <C>
Securities registered pursuant to Section 12(g) of the Act: COMMON STOCK, $0.10 PAR VALUE
(Title of Class)
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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
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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 16, 1998 on the Nasdaq National
Market was $71,289,794. 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 16, 1998, 3,664,786 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 19, 1998 are incorporated by reference into
Part III of this Form 10-K. Portions of the Registrant's Annual Report to
Shareholders for 1997 are incorporated by reference into Part II of this Form
10-K.
Exhibit Index appears on page 24.
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PART I
ITEM 1. BUSINESS
GENERAL
The Company. People's Bancshares, Inc. (the "Company") is a unitary bank
holding company subject to the Bank Holding Company Act ("BHC"), the principal
business of which consists of the business of People's Savings Bank of Brockton
(the "Bank"). The only significant assets of the Company are the capital stock
of the Bank and the Company's equity interest in People's Bancshares Capital
Trust, a Delaware business trust (the "Trust") formed in 1997. Although the
Company is a legal entity separate from the Bank and the Trust, the Company
itself is not engaged in any business activities. The Trust issued $13.8 million
of trust preferred securities to the public on June 26, 1997 to purchase
subordinated debentures from the Company.
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, businesses and governments,
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 and its mortgage banking
subsidiary originate 1-4 family residential loans primarily for sale in the
secondary market, generally with the servicing rights of such loans. The Bank
sold 92%, 93% and 78% of its 1-4 family residential loan originations, including
table funded loans, in 1997, 1996 and 1995, respectively. 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 actively manages the purchase and sale of investments and loans
which are serviced by third parties. These purchases are funded by FHLB
advances, repurchase agreements and municipal deposits. Such leveraged assets
amounted to $414.0 million and $147.6 million at December 31, 1997 and 1996,
respectively. 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 and investment
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
deposits and various retirement accounts.
The Bank has eight wholly-owned subsidiaries. PMC, 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, and are subject to a more favorable tax rate on
income derived from securities held in them. 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 an adequate capital position that provides the capacity
to respond to a changing financial landscape. Senior management has focused its
efforts on continuing the strategy established by the Board of Directors to grow
internally and through selected acquisitions. The principal components of this
strategy include:
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- Improving asset quality
- Redirecting lending efforts
- Managing interest rate risk
- Reducing non-interest expenses
- Increasing fee-based revenues
- Providing superior customer service in a cost-effective manner
- Achieving growth through carefully chosen acquisitions
Improving Asset Quality. At December 31, 1992, the Bank's non-performing
assets amounted to $14.9 million, or 9.12% of total assets and 80.51% of total
equity and loan loss reserves. The ratio of the allowance for loan losses to
non-accrual loans, adjusted to reflect the adoption of SFAS 114, at December 31,
1992 was 37.2%. 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 73%. At December
31, 1997, the Bank's non-performing assets were $4.0 million, or 0.52% of total
assets, and 11.63% of total equity and loan loss reserves. The ratio of the
allowance for loan losses to non-accrual loans was 110.2%. 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 Investment Committee, which
includes five 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 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. In 1997, the Bank began to purchase
residential mortgage loans with servicing retained by the seller. These
purchased 1-4 family residential loan packages exhibit many of the
characteristics of mortgage-backed securities except that the Bank earns a
higher yield for assumption of credit risk. Although these strategies result in
lower financial ratios that are computed on the basis of average assets, it
increases income and return on equity, at what the Company considers to be a low
level of risk.
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PMC seeks to reduce interest rate risk by not retaining or purchasing
servicing rights that would result in premiums subject to prepayment risk in a
decreasing interest rate environment. PMC also obtains purchase commitments on
all residential mortgage loans prior to their funding. This reduces market
depreciation in rising interest rate environments.
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 84.2% for the year
ended December 31, 1992 to 65.3% for the year ended December 31, 1997.
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, $229.4 million and $349.7 million in new mortgage loans in 1995, 1996
and 1997, respectively, of which $63.6 million, $194.2 million and $322.2
million, respectively, were sold in the secondary market, including table funded
loans. People's Mortgage Corporation currently has six loan origination offices
located in Massachusetts and Connecticut.
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 improve 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 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
On June 26, 1997, the Company raised total proceeds of $13.8 million in a
sale of subordinated debentures to People's Bancshares Capital Trust which
funded the purchase in a public offering of 1.38 million trust preferred
securities with a liquidation value of $10 each. Using interest payments made by
the Company on the debentures, the Trust pays quarterly dividends to preferred
security holders. The annual percentage rate of interest payable on the
subordinated debentures and distributions payable on the preferred securities is
9.76%. Dividends on the preferred securities will be cumulative and the Trust
may defer the payments for up to five years. The preferred securities mature in
June 2027 unless the Company elects and obtains regulatory approval to
accelerate the maturity date to as early as June 2002. This subordinated debt
may be included in regulatory Tier 1 capital subject to a limitation that such
amounts not exceed 25% of Tier 1 capital. All such subordinated debt may be
included in total risk-based capital at December 31, 1997.
On July 17, 1997, the Company repurchased 355,000 common shares or 10% of
its outstanding stock as of June 30, 1997, at an average cost of $17.50 in an
open market transaction under a repurchase program announced on July 15, 1997.
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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 one of its loan production offices are located
at the Bank's headquarters in Easton, Massachusetts. In 1995, People's Mortgage
Corporation opened offices in Sturbridge, Massachusetts, and in Hamden,
Connecticut. In 1996, PMC opened a New Bedford office. In 1997, PMC opened
offices in Norwell and Wellesley, Massachusetts and closed its Sturbridge
office.
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 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 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 Easton, Massachusetts. The Bank also
has twelve other branch offices in
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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,
three of which are located in the Bristol County community of Taunton, two of
which are located in the Bristol County community of New Bedford, and one of
which is located in each of the Bristol County communities of Mansfield,
Mattapoisett and South Dartmouth. In 1996, the Bank relocated its service center
to New Bedford, Massachusetts. In 1997, the Bank received approval to close one
of its Brockton branches and has petitioned to close the smallest of its three
Taunton branches. 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.
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 the bulk of assets which are typically held by a bank holding company,
including 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. 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.
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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
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, 1997, 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 9.38% and 10.43%, respectively, and Tier 1
leverage capital ratio equaled 5.26%.
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
Riegel-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 is 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 in which the Bank became a wholly owned subsidiary of the Company
(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, in which the
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Company acquired the stock of the Bank, 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. In addition, the
the Bank purchases residential mortgage loans with servicing retained by the
seller. 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, 1997, the Bank had total loans and loans held for sale of
$411.4 million of which $393.0 million, or 96%, were mortgage loans. The Bank
also had $18.6 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, 80% were secured by 1-4 family residential
mortgages, 11% by commercial properties, 3% by multi-family properties, and 2%
represent residential construction loans. Of the Bank's loans not secured by
real estate, 3% of total loans are small business commercial loans not secured
primarily by commercial real estate and 1% of total loans are 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 years indicated:
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<TABLE>
<CAPTION>
AT DECEMBER 31,
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1997 1996 1995 1994 1993
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(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Mortgage Loans:
Residential 1-4 family $293,402 $160,730 $ 67,641 $ 56,533 $ 52,002
Commercial:
Residential multi-family 11,030 11,217 9,366 9,362 8,058
Commercial real estate 44,714 44,149 30,019 25,510 27,099
Construction 11,162 7,359 8,459 4,383 7,260
Equity lines of credit 10,152 10,297 7,274 7,718 8,885
-------- -------- -------- -------- --------
Total principal balances 370,460 233,752 122,759 103,506 103,304
Deferred loan origination (fees)
costs, net (113) (49) 57 (32) (78)
Less undisbursed amount
of loans in process (2,239) (1,450) (3,623) (948) (2,491)
-------- -------- -------- -------- --------
Total mortgage loans 368,108 232,253 119,193 102,526 100,735
-------- -------- -------- -------- --------
Other Loans:
Retail installment sales contracts 915 1,830 2,620 3,203 3,359
Consumer 5,007 6,161 2,423 2,783 3,348
Commercial lines of credit 6,089 5,622 3,462 2,602 1,568
Commercial loans 6,433 4,838 5,597 2,774 2,276
Education 146 207 296 409 274
-------- -------- -------- -------- --------
Total other loans 18,590 18,658 14,398 11,771 10,825
-------- -------- -------- -------- --------
Total loans 386,698 250,911 133,591 114,297 111,560
Allowance for loan losses (4,291) (4,716) (3,813) (3,194) (3,654)
-------- -------- -------- -------- --------
Loans, net $382,407 $246,195 $129,778 $111,103 $107,906
======== ======== ======== ======== ========
</TABLE>
At December 31, 1997, the Bank had eleven credit relationships exceeding
$1 million in size that aggregated $17.1 million or 4.4% 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 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. In 1996,
the Bank began to purchase residential mortgage loans with servicing retained by
the seller. During 1996 and 1997, the Bank purchased $13.2 million and $146.6
million, respectively, of these loan packages, which include loans originated
throughout the United States. These purchased 1-4 family residential loan
packages exhibit many of the
9
<PAGE> 10
characteristics of mortgage-backed securities except that the Bank earns a
higher yield for assumption of credit risk.
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, 1997, 80% of the Bank's total loans and loans held for
sale were secured by 1-4 family residential mortgages, of which 66% were ARMs.
Generally, ARMs pose credit risks that differ from the risks inherent in
fixed-rate loans because the borrower's payments rise as interest rates 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, 1997,
11% were secured by commercial properties that typically have terms of 3 years
or less and that are ARMs. Of loans secured by properties other than 1-4 family
residences, 77% are 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, 1997, 3% are 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.
Residential Construction Lending. Of the Bank's loans at December 31,
1997, 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.
10
<PAGE> 11
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, 1997, 1% are
consumer loans. At December 31, 1990, 13% of the Bank's total loans were
consumer loans. The decrease 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,
1997, 3% 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 four 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 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.
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
11
<PAGE> 12
loan. When a loan shows signs of potential weaknesses that may affect repayment
of the loan or the collateral, the loan is reclassified as "specially
mentioned." A loan that has further deterioration and exhibits defined
weaknesses in the borrower's capacity to repay is reclassified as "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 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:
<TABLE>
<CAPTION>
At December 31,
1997 1996 1995 1994 1993
--------------------- --------------------- --------------------- --------------------- ---------------------
Percent of Percent of Percent of Percent of Percent of
Loans in Loans in Loans in Loans in Loans in
Amount each Amount each Amount each Amount each Amount each
of Category to of Category to of Category to of Category to of Category to
Allowance Total Loans Allowance Total Loans Allowance Total Loans Allowance Total Loans Allowance Total Loans
--------- ----------- --------- ----------- --------- ----------- --------- ----------- --------- -----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Residential
1-4 family and
loans held for
sale $ 932 77.30% $ 464 67.37% $ 270 52.53% $ 159 49.45% $ 195 48.11%
Commercial:
Residential
multi-family 763 2.68 733 4.06 808 6.75 805 8.19 588 7.01
Commercial
real estate 1,222 10.86 1,405 15.96 1,514 21.63 1,249 22.31 1,778 23.58
Construction 89 2.17 59 2.14 48 3.48 35 3.00 48 4.15
Equity lines
of credit 102 2.47 103 3.72 79 5.24 84 6.75 97 7.73
Other loans 507 4.52 474 6.75 235 10.37 234 10.30 221 9.42
Unallocated 676 N/A 1,478 N/A 859 N/A 628 N/A 727 N/A
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total $4,291 100.00% $4,716 100.00% $3,813 100.00% $3,194 100.00% $3,654 100.00%
====== ====== ====== ====== ====== ====== ====== ====== ====== ======
</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
12
<PAGE> 13
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,
-------------------------------------------------------
1997 1996 1995 1994 1993
------- ------- ------- ------- -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Balance at beginning of year $ 4,716 $ 3,813 $ 3,194 $ 3,654 $ 3,641
Provisions for loan losses 100 75 525 807 1,492
Charge-offs:
Residential 1-4 family (433) (463) (438) (202) (435)
Residential multi-family (161) (470) (433) (777) (493)
Commercial real estate (45) (89) (235) (519) (515)
Equity lines of credit - (20) (30) (7) (60)
Other (88) (89) (60) (105) (159)
------- ------- ------- ------- -------
Total (727) (1,131) (1,196) (1,610) (1,662)
Recoveries 202 307 143 343 183
------- ------- ------- ------- -------
Net loans charged off (525) (824) (1,053) (1,267) (1,479)
Allowance acquired in acquisition - 1,652 1,147 - -
------- ------- ------- ------- -------
Balance at end of year $ 4,291 $ 4,716 $ 3,813 $ 3,194 $ 3,654
======= ======= ======= ======= =======
Ratio of net charge-offs to
average loans outstanding
during the year 0.17% 0.34% 0.83% 1.15% 1.32%
</TABLE>
Non-performing loans amounted to $3.9 million, $3.9 million, $4.8 million,
$2.3 million, and $3.7 million, at December 31, 1997, 1996, 1995, 1994, and
1993, respectively. If prior periods had been restated for the adoption of SFAS
114, non-performing loans would have amounted to $4.7 million, and $6.5 million
at December 31, 1994, and 1993, respectively.
Included in non-performing loans were $1.7 million, $2.3 million, $1.3
million, $1.2 million and $2.0 million of loans that were troubled debt
restructurings at December 31, 1997, 1996, 1995, 1994 and 1993, respectively. In
addition, the Bank had troubled debt restructurings totaling $339,000, $355,000,
$631,000, $1.0 million and $4.3 million at December 31, 1997, 1996, 1995, 1994
and 1993, 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 $171,000, $261,000, $182,000,
$334,000 and $242,000 for the years ended December 31, 1997, 1996, 1995, 1994,
and 1993, respectively.
The maturity distribution and interest rate sensitivity of selected loan
categories at December 31, 1997 is presented in the following table.
13
<PAGE> 14
At December 31, 1997
---------------------------------------
Within 1-5 After
1 Year Years 5 Years Total
------- ------ ------- -------
(Dollars in thousands)
Loan Maturity:
Mortgage loans:
Construction $ 8,923 $ - $ - $ 8,923
Other loans:
Commercial lines of credit 6,089 - - 6,089
Commercial 4,173 2,231 29 6,433
------- ------ ------- -------
$19,185 $2,231 $ 29 $21,445
======= ====== ======= =======
Rate Sensitivity:
Floating interest rates $1,137 $ - 1,137
Fixed interest rates 1,094 29 1,123
------ ------- -------
Total loans $2,231 $ 29 $ 2,260
====== ======= =======
INVESTMENT SECURITIES
Investment securities, consisting primarily of mortgage-backed securities,
increased $112.2 million during 1997 as the Bank deployed funds from deposits
and borrowings 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 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 average 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 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, 1997, the carrying value of the Bank's investment
securities amounted to $304.7 million, representing 39.9% of the Bank's total
assets. At December 31, 1996, the Bank's investment securities accounted for
38.8% of the Bank's total assets.
14
<PAGE> 15
The following table summarizes investment securities:
At December 31,
------------------------------
1997 1996 1995
-------- -------- --------
(Dollars in thousands)
Securities available for sale, at fair value $245,636 $184,195 $160,582
Securities held to maturity, at amortized cost 44,253 - -
Restricted equity securities 14,824 8,322 6,127
-------- -------- --------
$304,713 $192,517 $166,709
======== ======== ========
The following table sets forth the amortized cost and estimated fair value
for the Bank's held to maturity investment securities portfolio:
At December 31,
-----------------------
1997
-----------------------
Amortized Fair
Cost Value
--------- --------
(Dollars in thousands)
U.S. Government and federal
agency obligations $ 44,253 $ 44,439
======== ========
The following table sets forth the amortized cost and estimated fair value
for the Bank's available for sale investment securities portfolio:
<TABLE>
<CAPTION>
At December 31,
---------------------------------------------------------------
1997 1996 1995
------------------- ------------------- -------------------
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 $ 27,919 $ 27,944 $ 2,500 $ 2,415 $ 4,499 $ 4,395
Mortgage-backed securities 202,047 202,352 181,998 180,800 155,781 155,242
Corporate debt securities 15,148 15,340 1,000 980 1,000 945
-------- -------- -------- -------- -------- --------
Total available for sale $245,114 $245,636 $185,498 $184,195 $161,280 $160,582
======== ======== ======== ======== ======== ========
</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:
15
<PAGE> 16
<TABLE>
<CAPTION>
At December 31, 1997
-----------------------------------
Weighted
Amortized Fair Average
Cost Value Rate
--------- -------- --------
(Dollars in thousands)
<S> <C> <C> <C>
INVESTMENTS AVAILABLE FOR SALE
Mortgage-backed securities:
Less than 1 year $ 2,993 $ 3,003 6.83%
After 1 year but within 5 years 75 72 10.00%
After 5 years but within 10 years 2,676 2,639 8.00%
After 10 years 196,303 196,638 7.17%
-------- --------
Total mortgage-backed securities 202,047 202,352 7.18%
-------- --------
U.S. Government and federal agency obligations:
After 5 but within 10 years 13,537 13,543 7.33%
After 10 years 14,382 14,401 7.39%
-------- --------
Total U.S. Government and federal
agency obligations 27,919 27,944 7.36%
-------- --------
Corporate investments:
After 1 but within 5 years 1,000 988 5.79%
After 10 years 14,148 14,352 9.55%
-------- --------
Total corporate investments 15,148 15,340 9.31%
-------- --------
Total investments available for sale $245,114 $245,636 7.33%
======== ========
INVESTMENTS HELD TO MATURITY
U.S. Government and federal agency obligations:
After 10 years $ 44,253 $ 44,439 8.57%
======== ========
At December 31, 1996
-----------------------------------
Weighted
Amortized Fair Average
Cost Value Rate
--------- -------- --------
(Dollars in thousands)
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%
-------- --------
Corporate investments:
After 1 but within 5 years 1,000 980 6.24%
-------- --------
Total investments available for sale $185,498 $184,195 6.89%
======== ========
</TABLE>
16
<PAGE> 17
<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%
-------- --------
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 investments available for sale $161,280 $160,582 7.29%
======== ========
</TABLE>
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, 1997
------------------------------------
Percent of
Amortized Stockholder's Fair
Cost Equity Value
--------- ------------- --------
(Dollars in thousands)
<S> <C> <C> <C>
Mortgage-backed securities:
Countrywide Home Loans, Series 1997-2, Class A13 $ 5,548 18% $ 5,618
GE Capital Mortgage Services, Inc. Series 1997-8, Class A14 3,817 13% 3,802
PNC Mortgage Securities Corp., Series 1997-2, Class A5 3,159 10% 3,187
Prudential Home Mortgage Securities, Series 1994-26, Class A5 8,795 29% 9,111
Residential Funding Mortgage Securities I, Series 1997-S13,
Class A4 9,758 32% 9,752
Residential Funding Mortgage Securities I, Series 1997-S13,
Class A17 9,846 33% 9,870
Corporate debt securities:
Main Street Capital Trust I, Special Purpose, Series 144A 4,000 13% 4,060
</TABLE>
DEPOSITS
Deposits generated from within the Bank's local market area are a 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:
17
<PAGE> 18
<TABLE>
<CAPTION>
For The Years Ended December 31,
------------------------------------------------------------
1997 1996 1995
------------------ ------------------ -------------------
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 $ 34,818 N/A $ 33,542 N/A $ 11,758 N/A
NOW 40,007 1.23% 36,828 1.41% 17,041 1.47%
Savings 92,336 2.57 89,003 2.70 48,814 2.76
Money market 26,849 3.37 14,880 2.94 11,219 2.90
Time 144,033 5.57 125,422 5.64 64,856 5.57
-------- -------- --------
Total $338,043 3.49% $299,675 3.48% $153,688 3.60%
======== ======== ========
</TABLE>
As of December 31, 1997, term certificates of deposit in amounts of
$100,000 or more had the following maturities:
(Dollars in thousands)
Under 3 months $41,717
3 to 6 months 12,789
6 to 12 months 7,043
Over 12 months 5,183
-------
Total $66,732
=======
BORROWINGS
The following table summarizes the outstanding balances of borrowings for
the years indicated:
<TABLE>
<CAPTION>
At or For The Years Ended December 31,
--------------------------------------
1997 1996 1995
-------- -------- --------
(Dollars in thousands)
<S> <C> <C> <C>
FHLB advances:
Balance at end of year $260,500 $ 89,250 $88,470
Average balance 161,399 114,380 78,731
Maximum month-end balance 260,500 134,277 91,600
Weighted average rate during the period 5.78% 5.63% 5.77%
Year-end average rate 5.75% 5.64% 5.73%
Securities sold under agreements to repurchase:
Balance at end of year $ 96,050 $ 34,670 $37,775
Average balance 73,734 32,103 18,767
Maximum month-end balance 96,050 44,740 37,775
Weighted average rate during the period 5.92% 5.36% 5.75%
Year-end average rate 5.90% 5.28% 5.77%
</TABLE>
EMPLOYEES
At December 31, 1997, the Company had 225 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 are 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.
18
<PAGE> 19
ITEM 2. PROPERTIES
The Bank's main office is located in Easton, Massachusetts. 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, 1997. The Company believes
that the fair market value exceeds the net book value of its owned real estate.
<TABLE>
<CAPTION>
Net Book Value at Owned/
Location December 31, 1997 Leased
- -------- ----------------- ------
(Dollars in thousands)
<S> <C> <C>
People's Savings Bank of Brockton
Service Center and Branch:
545 Pleasant Street, New Bedford $5,646 Owned
Main Office:
580 Washington Street, Easton $ 403 Owned
Other Branches:
221 Main Street, Brockton (Closed in 1997) $ 61 Owned
757 Centre Street, Brockton 280 Owned
500 Washington Street, Stoughton 304 Owned
116 Torrey Street, Brockton (1) 161 Leased
200 Westgate Drive, Brockton (2) 81 Leased
33 Weir Street, Taunton 553 Owned
478 Middleboro Avenue, East Taunton(3) - Leased
84 Copeland Drive, Mansfield (4) 296 Leased
2206 Acushnet Ave, New Bedford 446 Owned
28 County Road, Mattapoisett 482 Owned
280 Winthrop Street, Taunton (5) 289 Leased
686 Dartmouth Street, South Dartmouth 855 Owned
People's Mortgage Corporation:
580 Washington Street, Easton, MA (6) $ 35 Leased
206 Andover Street, Andover, MA (7) - Leased
57 River Street, Wellesley, MA (8) - Leased
2337 Whitney Avenue, Hamden, CT (9) 31 Leased
545 Pleasant Street, New Bedford (6) - Leased
45 Pond Street, Norwell, MA (10) - Leased
</TABLE>
(1) Lease expires January 1, 2001 with an option to renew for one three year
period.
(2) Lease expires October 31, 1998, with an option to renew for one seven year
period.
(3) Tenant-at-will.
19
<PAGE> 20
(4) Lease expires December 31, 1998 with two additional five year renewal
options.
(5) Lease expires October 31, 1999, with an option to renew for one three year
period.
(6) People's Mortgage Corporation leases space from the Company as a
tenant-at-will.
(7) Lease expires February 28, 2003.
(8) Lease expires October 30, 2000.
(9) Lease expires November 30, 1998, with an option to renew for one three year
period.
(10) Lease expires February 28, 2001.
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, 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
Not applicable.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
Since the Company acquired the stock of the Bank 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
Company or the Bank, as applicable, as reported on the Nasdaq National Market
during the periods indicated.
Sales Price
----------------------
High Low
------- -------
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
1997
----
First Quarter............................ $13.125 $10.375
Second Quarter........................... 15.50 11.50
Third Quarter............................ 20.75 15.00
Fourth Quarter........................... 25.25 17.00
20
<PAGE> 21
On March 16, 1998, the closing sale price of a share of Common Stock of
the Company on the Nasdaq National Market was $24.625.
At February 28, 1998, there were approximately 680 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 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 Company on January
28, 1998, totaled $0.12 per share and was paid on February 28, 1998. The Company
declared and paid quarterly dividends of $0.09, $0.11, $0.11, and $0.11 per
share in the first, second, third, and fourth quarters, respectively, of 1997.
The Company declared and paid quarterly dividends of $0.05, $0.07, $0.07, and
$0.08 per share in the first, second, third and fourth quarters, respectively,
of 1996. The Company declared and paid a quarterly dividend of $0.04 in the
fourth quarter of 1995. The dividend payout ratio was 28.2%, 24.3% and 4.2% in
1997, 1996 and 1995, respectively. There were no dividends paid out in the years
ended December 31, 1994 and 1993.
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, 1997 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
21
<PAGE> 22
Condition and Results of Operations on pages 2 to 13 inclusive of the Annual
Report to Shareholders for the fiscal year ended December 31, 1997 and is
incorporated herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Information required by this item appears on pages 14 to 29 inclusive
of the Annual Report to Shareholders for the fiscal year ended December 31, 1997
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 19, 1998 (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.
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, 1997 and 1996
Consolidated Statements of Income for the years ended December 31, 1997,
1996 and 1995
22
<PAGE> 23
Consolidated Statements of Changes in Stockholders' Equity for the years
ended December 31, 1997, 1996 and 1995
Consolidated Statements of Cash Flows for the years ended December 31,
1997, 1996 and 1995
Notes to Consolidated Financial Statements
(a)(2) Index of Financial Statements 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.
23
<PAGE> 24
*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 (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)
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)
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)
24
<PAGE> 25
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 1996 Stock Option and Incentive Plan+ (filed as Exhibit 10.21 to the
Company's Annual Report on Form 10-K for the year ended December 31,
1996 and incorporated herein by reference)
10.16 Form of Director Nonqualified Stock Option Agreement (filed as
Exhibit 10.22 to the Company's Annual Report on Form 10-K for the
year ended December 31, 1996 and incorporated herein by reference)
10.17 Form of Employee Nonqualified Stock Option Agreement (filed as
Exhibit 10.23 to the Company's Annual Report on Form 10-K for the
year ended December 31, 1996 and incorporated herein by reference)
10.18 Form of Incentive Stock Option Agreement (filed as Exhibit 10.24 to
the Company's Annual Report on Form 10-K for the year ended December
31, 1996 and incorporated herein by reference)
*10.19 Special termination agreement by and among the Company, the Bank and
Richard S. Straczynski, dated as of April 7, 1997+.
*13 People's Bancshares, Inc. 1997 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
*27.1 Restated Financial Data Schedule
*27.2 Restated Financial Data Schedule
*27.3 Restated Financial Data Schedule
*27.4 Restated Financial Data Schedule
*27.5 Restated Financial Data Schedule
*27.6 Restated Financial Data Schedule
*27.7 Restated 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. No reports on Form 8-K were filed during the quarter
ended December 31, 1997.
25
<PAGE> 26
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 31, 1998.
PEOPLE'S BANCSHARES, INC.
By: /s/ Richard s. Straczynski
--------------------------------------------
Richard S. Straczynski
President & Chief Executive Officer
By: /s/ Colin c. Blair
--------------------------------------------
Colin C. Blair
Chief Financial Officer
(principal financial and accounting officer)
26
<PAGE> 27
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.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ Richard S. Straczynski President & CEO March 31, 1998
- -------------------------------
Richard S. Straczynski Director
/s/ Colin C. Blair Chief Financial Officer March 31, 1998
- -------------------------------
Colin C. Blair
/s/ Frederick W. Adami III Director March 31, 1998
- -------------------------------
Frederick W. Adami, III
/s/ Virginia M. Burke Director March 31, 1998
- -------------------------------
Virginia M. Burke
/s/ B. Benjamin Cavallo Director March 31, 1998
- -------------------------------
B. Benjamin Cavallo
/s/ John R. Eaton Director March 31, 1998
- -------------------------------
John R. Eaton
/s/ Terrence Gomes Director March 31, 1998
- -------------------------------
Terrence Gomes
/s/ Fred W. Green Director March 31, 1998
- -------------------------------
Fred W. Green
/s/ Dr. Loring C. Johnson Director March 31, 1998
- -------------------------------
Dr. Loring C. Johnson
/s/ Richard D. Matthews Director March 31, 1998
- -------------------------------
Richard D. Matthews
/s/ Scott W. Ramsay Director March 31, 1998
- -------------------------------
Scott W. Ramsay
</TABLE>
27
<PAGE> 28
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ Gerald R. Rodman Director March 31, 1998
- -------------------------------
Gerald R. Rodman
/s/ Davis H. Scudder Director March 31, 1998
- -------------------------------
Davis H. Scudder
/s/ Stanley D. Siskind Director March 31, 1998
- -------------------------------
Stanley D. Siskind
</TABLE>
28
<PAGE> 29
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 (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)
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)
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
29
<PAGE> 30
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 1996 Stock Option and Incentive Plan+ (filed as Exhibit 10.21 to the
Company's Annual Report on Form 10-K for the year ended December 31,
1996 and incorporated herein by reference)
10.16 Form of Director Nonqualified Stock Option Agreement (filed as
Exhibit 10.22 to the Company's Annual Report on Form 10-K for the
year ended December 31, 1996 and incorporated herein by reference)
10.17 Form of Employee Nonqualified Stock Option Agreement (filed as
Exhibit 10.23 to the Company's Annual Report on Form 10-K for the
year ended December 31, 1996 and incorporated herein by reference)
10.18 Form of Incentive Stock Option Agreement (filed as Exhibit 10.24 to
the Company's Annual Report on Form 10-K for the year ended
December 31, 1996 and incorporated herein by reference)
*10.19 Special termination agreement by and among the Company, the Bank and
Richard S. Straczynski, dated as of April 7, 1997+.
*13 People's Bancshares, Inc. 1997 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
*27.1 Restated Financial Data Schedule
*27.2 Restated Financial Data Schedule
*27.3 Restated Financial Data Schedule
*27.4 Restated Financial Data Schedule
*27.5 Restated Financial Data Schedule
*27.6 Restated Financial Data Schedule
*27.7 Restated 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. No reports on Form 8-K were filed during the quarter
ended December 31, 1997.
30
<PAGE> 1
Exhibit 10.19
-------------
SPECIAL TERMINATION AGREEMENT
THIS AGREEMENT, dated as of April 7, 1997, by and among PEOPLE'S
BANCSHARES, INC., a Massachusetts corporation (the "Company"), PEOPLE'S SAVINGS
BANK OF BROCKTON, a Massachusetts savings bank with its main office in New
Bedford, Massachusetts (the "Bank") (the Bank and the Company being hereinafter
collectively referred to as the "Employers"), and RICHARD S. STRACZYNSKI (the
"Executive"), an individual presently employed by both the Company and the Bank
in the capacity of President and Chief Executive Officer.
1. PURPOSE. In order to allow the Executive to consider the prospect of a
Change in Control (as defined in Section 2) in an objective manner and in
consideration of the services rendered and to be rendered by the Executive to
the Employers and other good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged by the Employers, the Employers are
willing to provide, subject to the terms of this Agreement, certain severance
benefits to protect the Executive from the consequences of a Terminating Event
(as defined in Section 3) occurring subsequent to a Change in Control.
2. CHANGE IN CONTROL. A "Change in Control" shall be deemed to have
occurred if any of the following events has occurred:
(i) if there has occurred a change in control of either of the
Employers within the meaning of Item 1 of Form 8-K promulgated under the
Securities Exchange Act of 1934, as amended (the "1934 Act"), or, if such
regulation is no longer in effect, any regulations promulgated by the
Securities and Exchange Commission pursuant to the 1934 Act which are
intended to serve similar purposes (other than in the case of the Bank, the
Company's ownership of the capital stock of the Bank);
(ii) when any "person" (as such term is used in Sections 13(d) and
14(d)(2) of the 1934 Act) becomes a "beneficial owner" (as such term is
defined in Rule 13d-3 promulgated under the 1934 Act), directly or
indirectly, of securities of either of the Employers representing
twenty-five percent (25%) or more of the total number of votes that may be
cast for the election of directors of the Company or the Bank (other than
in the case of the Bank, the Company's ownership of the capital stock of
the Bank);
(iii) during any period of two consecutive years (not including any
period prior to the execution of this Agreement), individuals who are
Continuing Directors (as hereinafter defined) cease for any reason to
constitute at least a majority of the Board of Directors of the Company or
the Bank. For this purpose, a "Continuing Director" shall mean (a) an
individual who was a director of the Company or the Bank at the beginning
of such period or (b) any new director (other than a director designated by
a person who has entered into an agreement with the Company or the Bank, as
the case may be, to effect a transaction described in clause (ii), (iv) or
(v) of this Section 2) whose election by the Board or nomination for
election by the stockholders of the Company or the Bank, as the case may
<PAGE> 2
be, was approved by a vote of at least two-thirds (2/3) of the directors
then still in office who either were directors at the beginning of such
period or whose election or nomination for election was previously so
approved;
(iv) the stockholders of the Company or the Bank approve a merger or
consolidation of the Company or the Bank, as the case may be, with any
other corporation, other than (a) a merger or consolidation which would
result in the voting securities of the Company or the Bank, as the case may
be, outstanding immediately prior thereto continuing to represent (either
by remaining outstanding or by being converted into voting securities of
the surviving entity) more than 80% of the combined voting power of the
voting securities of the Company or the Bank, as the case may be, or such
surviving entity outstanding immediately after such merger or consolidation
or (b) a merger or consolidation effected to implement a recapitalization
of the Company or the Bank (or similar transaction) in which no "person"
(as hereinabove defined) acquires more than 30% of the combined voting
power of the then outstanding securities of the Company or the Bank, as the
case may be; or
(v) the stockholders of the Company or the Bank approve a plan of
complete liquidation of the Company or the Bank or an agreement for the
sale or disposition by the Company or the Bank of all or substantially all
of the assets of the Company or the Bank, as the case may be.
3. TERMINATING EVENT. A "Terminating Event" shall mean (a) termination by
either of the Employers of the employment of the Executive with either of the
Employers for any reason other than (i) death, (ii) deliberate dishonesty of the
Executive with respect to either of the Employers or any subsidiary or affiliate
of either, or (iii) conviction of the Executive of a crime involving moral
turpitude, or (b) resignation of the Executive from the employ of either of the
Employers, while the Executive is not receiving payments or benefits from the
Employers by reason of the Executive's disability, subsequent to the occurrence
of any of the following events:
(i) A significant change in the nature or scope of the Executive's
responsibilities, authorities, powers, functions or duties from the
responsibilities, authorities, powers, functions or duties exercised
by the Executive immediately prior to the Change in Control; or
(ii) A reasonable determination by the Executive that, as a result of a
Change in Control, the Executive is unable to exercise the
responsibilities, authorities, powers, functions or duties exercised
by the Executive immediately prior to such Change in Control; or
(iii)A decrease in the total annual compensation payable by the Employers
to the Executive other than as a result of a decrease in compensation
payable to the Executive and to all other executive officers of the
Employers on a comparable basis as a result of the Employers'
financial performance; or
2
<PAGE> 3
(iv) The relocation of the Employers' office at which the Executive is
principally employed immediately prior to the Change in Control to a
location more than 25 miles from New Bedford, Massachusetts.
4. SEVERANCE PAYMENT. Subject to the provisions of Section 5 below, in the
event a Terminating Event occurs within three (3) years after a Change in
Control, the Employers shall pay to the Executive an aggregate amount equal to
three times the "base amount" (as defined in Section 280G(b)(3) of the Internal
Revenue Code of 1986, as amended (the "Code")) applicable to the Executive,
payable in one lump-sum payment on the date of such termination or resignation;
PROVIDED, HOWEVER, that the Employers shall not be required to make any lump-sum
payment hereunder to the extent the Employers are limited or prohibited in
making such payment by regulation or order of any regulatory agency having
jurisdiction over either of the Employers or by applicable law.
5. LIMITATION ON BENEFITS.
(a) It is the intention of the Executive and of the Employers that no
payments by the Employers to or for the benefit of the Executive under this
Agreement and/or any other agreement or plan pursuant to which the Executive is
entitled to receive payments or benefits shall be non-deductible to the
Employers by reason of the operation of Section 280G of the Code relating to
parachute payments. Accordingly, and notwithstanding any other provision of this
Agreement or any such agreement or plan, if by reason of the operation of said
Section 280G, any such payments exceed the amount which can be deducted by the
Employers in the aggregate, such payments shall be reduced to the maximum amount
which can be deducted by the Employers. To the extent that payments exceeding
such maximum deductible amount have been made to or for the benefit of the
Executive, such excess payments shall be refunded to the Employers with interest
thereon at the applicable Federal Rate determined under Section 1274(d) of the
Code, compounded annually, or at such other rate as may be required in order
that no such payments shall be non-deductible to the Employers by reason of the
operation of said Section 280G. To the extent that there is more than one method
of reducing the payments to bring them within the limitations of said Section
280G, the Executive shall determine which method shall be followed, provided
that if the Executive fails to make such determination within forty-five days
after the Employers have sent him written notice of the need for such reduction,
the Employers may determine the method of such reduction in their sole
discretion.
(b) If any dispute between the Employers and the Executive as to any of
the amounts to be determined under this Section 5, or the method of calculating
such amounts, cannot be resolved by the Employers and the Executive, either the
Employers or the Executive after giving three days written notice to the other,
may refer the dispute to a partner in the Boston office of a firm of independent
certified public accountants selected jointly by the Employers and the
Executive. The determination of such partner as to the amount to be determined
under Section 5(a) and the method of calculating such amounts shall be final and
binding on both the Employers and the Executive. The Employers shall bear the
costs of any such determination.
3
<PAGE> 4
6. EMPLOYMENT STATUS. This Agreement is not an agreement for the employment
of the Executive and shall confer no rights on the Executive except as herein
expressly provided.
7. TERM. This Agreement shall take effect as of the date first above
written, and shall terminate upon the earlier of (a) the termination by the
Employers of the employment of the Executive because of death, deliberate
dishonesty of the Executive with respect to either of the Employers or any
subsidiary or affiliate of either, or conviction of the Executive of a crime
involving moral turpitude, (b) the resignation or termination of the Executive
for any reason prior to a Change in Control, or (c) the resignation of the
Executive after a Change in Control for any reason other than the occurrence of
any of the events enumerated in Section 3(b)(i)-(iv) of this Agreement.
8. WITHHOLDING. All payments made by the Employers under this Agreement
shall be net of any tax or other amounts required to be withheld by the
Employers under applicable law.
9. ARBITRATION OF DISPUTES. Any controversy or claim arising out of or
relating to this Agreement or the breach thereof shall be settled by arbitration
in accordance with the laws of the Commonwealth of Massachusetts by three
arbitrators, one of whom shall be appointed by the Employers, one by the
Executive and the third by the first two arbitrators. If the first two
arbitrators cannot agree on the appointment of a third arbitrator, then the
third arbitrator shall be appointed by the American Arbitration Association in
the City of Boston. Such arbitration shall be conducted in the City of Boston in
accordance with the rules of the American Arbitration Association, except with
respect to the selection of arbitrators which shall be as provided in this
Section 9. Judgment upon the award rendered by the arbitrators may be entered in
any court having jurisdiction thereof. In the event that it shall be necessary
or desirable for the Executive to retain legal counsel and/or incur other costs
and expenses in connection with the enforcement of any or all of the Executive's
rights under this Agreement, the Employers shall pay (or the Executive shall be
entitled to recover from the Employers, as the case may be), the Executive's
reasonable attorneys' fees and other reasonable costs and expenses in connection
with the enforcement of said rights (including the enforcement of any
arbitration award in court) regardless of the final outcome, unless and to the
extent the arbitrators shall determine that under the circumstances recovery by
the Executive of all or a part of any such fees and costs and expenses would be
unjust. This provision shall not apply to Section 5(b), except in the event that
the Employers and the Executive cannot agree on the selection of the accounting
partner described in said section.
10. ASSIGNMENT; SUCCESSORS AND ASSIGNS, ETC. Neither the Employers nor the
Executive may make any assignment of this Agreement or any interest herein, by
operation of law or otherwise, without the prior written consent of the other
parties. This Agreement shall inure to the benefit of and be binding upon the
Employers and the Executive, their respective successors, executors,
administrators, heirs and permitted assigns. In the event of the Executive's
death prior to the completion by the Employers of all payments due to the
Executive under this Agreement, the Employers shall continue such payments to
the Executive's beneficiary designated in writing
4
<PAGE> 5
to the Employers prior to the Executive's death (or to the Executive's estate,
if the Executive fails to make such designation).
11. ENFORCEABILITY. If any portion or provision of this Agreement shall to
any extent be declared illegal or unenforceable by a court of competent
jurisdiction, then the remainder of this Agreement, or the application of such
portion or provision in circumstances other than those as to which it is so
declared illegal or unenforceable, shall not be affected thereby, and each
portion and provision of this Agreement shall be valid and enforceable to the
fullest extent permitted by law.
12. WAIVER. No waiver of any provision hereof shall be effective unless
made in writing and signed by the waiving party. The failure of any party to
require the performance of any term or obligation of this Agreement, or the
waiver by any party of any breach of this Agreement, shall not prevent any
subsequent enforcement of such term or obligation or be deemed a waiver of any
subsequent breach.
13. NOTICES. Any notices, requests, demands and other communications
provided for by this Agreement shall be sufficient if in writing and delivered
in person or sent by registered or certified mail, postage prepaid, to the
Executive at the last address the Executive has filed in writing with the
Employers or, in the case of either of the Employers, at its main office,
attention of the Clerk.
14. ELECTION OF REMEDIES. An election by the Executive to resign after a
Change in Control under the provisions of this Agreement shall not constitute a
breach by the Executive of any employment agreement between the Employers and
the Executive and shall be deemed a voluntary termination of employment by the
Executive for the purpose of interpreting the provisions of any of the
Employers' benefit plans, programs or policies. Nothing in this Agreement shall
be construed to limit the rights of the Executive under any employment agreement
the Executive may then have with the Employers, PROVIDED, HOWEVER, that if there
is a Terminating Event under Section 3 hereof, the Executive may elect either to
receive the severance payment provided under Section 4 or such termination
benefits as the Executive may have under any such employment agreement, but may
not elect to receive both.
15. AMENDMENT. This Agreement may be amended or modified only by a written
instrument signed by the Executive and by duly authorized representatives of
each of the Employers.
16. ALLOCATION OF OBLIGATIONS BETWEEN EMPLOYERS. The obligations of the
Employers under this Agreement are intended to be the joint and several
obligations of the Bank and the Company and the Employers shall, as between
themselves, allocate these obligations in a manner agreed upon by them.
5
<PAGE> 6
17. GOVERNING LAW. This is a Massachusetts contract and shall be construed
under and be governed in all respects by the laws of the Commonwealth of
Massachusetts.
IN WITNESS WHEREOF, this Agreement has been executed as a sealed instrument
by the Employers and the Executive as of the date first above written.
PEOPLE'S BANCSHARES, INC.
By: \s\ Colin C. Blair
------------------------------
Title: Chief Financial Officer
PEOPLE'S SAVINGS BANK OF BROCKTON
By: \s\ Colin C. Blair
------------------------------
Title: Chief Financial Officer
EXECUTIVE:
\s\ Richard S. Straczynski
----------------------------------
Richard S. Straczynski
6
<PAGE> 1
EXHIBIT 13
TO OUR SHAREHOLDERS
We are pleased to present the 1997 Annual Report for People's Bancshares, Inc.
This year marked the fifth consecutive year of growth and profitability allowing
us to achieve a record 16.65% return on average equity in 1997. Operating
results for 1997 were strongly influenced by the Company's issuance of 1.38
million shares of trust preferred stock, a 10% common stock repurchase,
increased earning assets, and the increased contribution of People's Mortgage
Corporation ("PMC") to our profitability. As a result, net income in 1997
increased to $5.1 million or $1.47 per diluted share compared to $3.6 million or
$1.09 per diluted share in 1996. Annual dividends paid to common shareholders
increased from $0.27 in 1996 to $0.42 in 1997.
Pre-tax income increased by $2.6 million or 48% in 1997. This improvement was a
result of a $3.1 million increase in net interest income and a $2.0 million
increase in gains on loan sales. The increase in net interest income was
primarily attributable to a 29% increase in average earning assets and the
increase in loan sale gains was generated by a 52% increase in mortgage loan
originations at PMC. These increases to income were partially offset by a $2.7
million increase in operating expenses primarily attributable to PMC's growing
operations. People's continued to successfully manage non-performing assets
which represented 0.52% of total assets at December 31, 1997, compared to 0.88%
of total assets at December 31, 1996.
In addition to these positive financial achievements, there were several
business developments that occurred in 1997. We received regulatory approval to
close our former headquarters facility located at 221 Main Street, Brockton, MA.
Subsequent to the approval, the building was donated to the 21st Century
Corporation, a non-profit group concerned with the economic growth and
revitalization of downtown Brockton. We also have petitioned for regulatory
approval to close our branch in East Taunton, Massachusetts. Additionally, in
1997 we opened PMC branches in Wellesley and Norwell, Massachusetts to increase
our presence in the Greater Boston area and its southern suburbs.
We would like to take this opportunity to extend our sincere thanks to our
customers and shareholders for their continued support. Finally, I would like to
thank every member of our staff and our Board of Directors for their efforts to
enhance shareholder value during 1997.
Very truly yours,
/s/ Richard S. Straczynski
Richard S. Straczynski
President & Chief Executive Officer
1
<PAGE> 2
AVERAGE BALANCE SHEETS, NET INTEREST INCOME AND
NET YIELD ON AVERAGE EARNING ASSETS
(Dollars in thousands)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1997
----------------------------------------
INTEREST
AVERAGE INCOME/ YIELD/
BALANCE EXPENSE RATE
-------- -------- ------
<S> <C> <C> <C>
ASSETS
Loans and loans held for sale(1):
Real estate $278,678 $22,100 7.93%
Other loans 33,553 3,197 9.53
-------- -------
Total loans 312,231 25,297 8.10
Short-term investments 7,057 374 5.30
Investment securities(2) 267,855 18,829 7.03
-------- -------
Total interest-earning assets 587,143 44,500 7.58
-------
Allowance for loan losses (4,380)
Other real estate owned, net 520
Other assets 31,754
--------
Total assets $615,037
========
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing liabilities:
NOW $ 40,007 494 1.23
Savings 92,336 2,369 2.57
Money market 26,849 905 3.37
Time 144,033 8,017 5.57
-------- -------
Total interest-bearing deposits 303,225 11,785 3.89
Borrowed funds 242,263 14,400 5.94
-------- -------
Total interest-bearing liabilities 545,488 26,185 4.80
-------
Demand deposits 34,818
Other liabilities 3,907
--------
Total liabilities 584,213
Stockholders' equity 30,824
--------
Total liabilities and stockholders' equity $615,037
========
Net interest income $18,315
=======
Weighted average interest rate spread 2.78%
Net yield on average interest-earning assets 3.12%
</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
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1996 YEAR ENDED DECEMBER 31, 1995
---------------------------- ----------------------------
INTEREST INTEREST
AVERAGE INCOME/ YIELD/ AVERAGE INCOME/ YIEL
BALANCE EXPENSE RATE BALANCE EXPENSE RATE
--------- --------- ------ --------- --------- -----
<S> <C> <C> <C> <C> <C> <C>
$ 210,422 $ 17,129 8.14% $ 111,516 $ 9,926 8.90%
30,321 2,864 9.45 15,363 1,257 8.18
--------- --------- --------- ---------
240,743 19,993 8.30 126,879 11,183 8.81
2,798 154 5.50 2,168 152 7.01
210,962 13,614 6.45 130,453 8,394 6.43
--------- --------- --------- ---------
454,503 33,761 7.43 259,500 19,729 7.60
--------- ---------
(4,613) (3,608)
961 827
28,183 15,360
--------- ---------
$ 479,034 $ 272,079
========= =========
$ 36,828 518 1.41 $ 17,041 250 1.47
89,003 2,407 2.70 48,814 1,346 2.76
14,880 437 2.94 11,219 325 2.90
125,422 7,073 5.64 64,856 3,610 5.57
--------- --------- --------- ---------
266,133 10,435 3.92 141,930 5,531 3.90
146,483 8,160 5.57 97,498 5,618 5.76
--------- --------- --------- ---------
412,616 18,595 4.51 239,428 11,149 4.66
--------- ---------
33,542 11,758
5,552 2,062
--------- ---------
451,710 253,248
27,324 18,831
--------- ---------
$ 479,034 $ 272,079
========= =========
$ 15,166 $ 8,580
========= =========
2.92% 2.94%
3.34% 3.31%
</TABLE>
3
<PAGE> 4
SELECTED CONSOLIDATED FINANCIAL DATA
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
AT DECEMBER 31,
---------------------------------------------------------------------
1997 1996 1995 1994
----------- ----------- ----------- -----------
CONSOLIDATED BALANCE SHEET DATA:
<S> <C> <C> <C> <C>
Total assets $ 762,910 $ 496,133 $ 324,440 $ 231,566
Investment securities 304,713 192,517 166,709 103,621
Loans, net 382,407 246,195 129,778 111,103
Deposits 355,083 336,238 174,583 134,345
Borrowed funds 356,550 123,920 126,245 77,580
Stockholders' equity 30,136 31,064 19,677 16,975
YEARS ENDED DECEMBER 31,
---------------------------------------------------------------------
1997 1996 1995 1994
----------- ----------- ----------- -----------
CONSOLIDATED OPERATING DATA:
Interest and dividend income $ 44,500 $ 33,761 $ 19,729 $ 14,293
Interest expense 26,185 18,595 11,149 6,559
----------- ----------- ----------- -----------
Net interest income 18,315 15,166 8,580 7,734
Provision for loan losses 100 75 525 807
----------- ----------- ----------- -----------
Net interest income, after provision for loan losses 18,215 15,091 8,055 6,927
Other income 6,197 4,031 1,755 1,033
Operating expenses 16,347 13,678 6,787 6,226
----------- ----------- ----------- -----------
Income before income taxes 8,065 5,444 3,023 1,734
Provision (benefit) for income taxes 2,934 1,885 829 (240)
----------- ----------- ----------- -----------
Net income $ 5,131 $ 3,559 $ 2,194 $ 1,974
=========== =========== =========== ===========
PER SHARE DATA:
Weighted average shares outstanding assuming dilution 3,500,048 3,267,890 2,523,135 2,338,274
Weighted average shares outstanding 3,446,299 3,196,436 2,313,399 2,300,224
Diluted earnings per share $ 1.47 $ 1.09 $ 0.87 $ 0.84
Basic earnings per share 1.49 1.11 0.95 0.86
Cash dividends paid per share 0.42 0.27 0.04 -
Book value per common share 9.16 8.72 8.47 7.38
SELECTED FINANCIAL RATIOS:
Return on average assets 0.83% 0.74% 0.81% 0.95%
Return on average equity 16.65 13.03 11.65 11.80
Weighted average interest rate spread 2.78 2.92 2.94 3.62
Average equity to average assets 5.01 5.70 6.92 8.09
Allowance for loan losses to non-performing loans(2) 110.20 122.08 79.84 67.76
Allowance for loan losses to total loans 1.11 1.88 2.85 2.79
Efficiency ratio(1) 65.29 68.10 62.89 60.34
Efficiency ratio of the Company excluding mortgage
banking subsidiary(1): 59.94 60.84 57.33 N/A
</TABLE>
<TABLE>
<CAPTION>
AT DECEMBER 31,
----------------
1993
-----------
CONSOLIDATED BALANCE SHEET DATA:
<S> <C>
Total assets $ 190,661
Investment securities 64,671
Loans, net 107,906
Deposits 137,602
Borrowed funds 35,000
Stockholders' equity 15,971
YEARS ENDED DECEMBER 31,
------------------------
1993
-----------
CONSOLIDATED OPERATING DATA:
Interest and dividend income $ 12,057
Interest expense 4,998
-----------
Net interest income 7,059
Provision for loan losses 1,492
-----------
Net interest income, after provision for loan losses 5,567
Other income 1,368
Operating expenses 6,920
-----------
Income before income taxes 15
Provision (benefit) for income taxes (1,038)
-----------
Net income $ 1,053
===========
PER SHARE DATA:
Weighted average shares outstanding assuming dilution 2,330,000
Weighted average shares outstanding 2,300,000
Diluted earnings per share $ 0.45
Basic earnings per share 0.46
Cash dividends paid per share -
Book value per common share 6.94
SELECTED FINANCIAL RATIOS:
Return on average assets 0.62%
Return on average equity 6.77
Weighted average interest rate spread 4.26
Average equity to average assets 9.23
Allowance for loan losses to non-performing loans(2) 55.99
Allowance for loan losses to total loans 3.27
Efficiency ratio(1) 69.58
Efficiency ratio of the Company excluding mortgage
banking subsidiary 1: N/A
</TABLE>
1 Equals non-interest expense excluding provisions for loan losses, OREO
expenses, and non-recurring expenses divided by net interest income and other
income, excluding securities gains.
2 Periods prior to 1995 are restated to reflect the adoption of SFAS 114.
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 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, changing regulatory requirements
and new tax or other state and national legislation.
The following analysis of the Bank'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 unitary bank holding
company subject to the Bank Holding Company Act ("BHC"), the principal business
of which consists of the business of People's Savings Bank of Brockton (the
"Bank"). The only significant assets of the Company are the capital stock of the
Bank and the Company's equity interest in People's Bancshares Capital Trust, a
Delaware business trust (the "Trust") formed in 1997. Although the Company is a
legal entity separate from the Bank and the Trust, the Company itself is not
engaged in any business activities. The Trust issued $13.8 million of trust
preferred securities to the public on June 26, 1997 to purchase subordinated
debentures from the Company.
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, businesses and governments,
and investing those funds in residential and commercial mortgages, consumer,
commercial and construction loans and investments, consisting primarily of
mortgage-backed securities. The Bank and its mortgage banking subsidiary
originate 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. The Bank
sold 92%, 93% and 78% of its 1-4 family residential loan originations in 1997,
1996 and 1995, respectively. 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 actively manages the purchase and sale of investments and loans which
are serviced by third parties. These purchases are funded by FHLB advances,
repurchase agreements and municipal deposits. Such leveraged assets amounted to
$414.0 million and $147.6 million at December 31, 1997 and 1996, respectively.
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 and investment 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 deposits and
various retirement accounts.
The Bank has eight wholly-owned subsidiaries. PMC, which was organized in
February 1995, acts as the mortgage banking subsidiary of the Bank. PSB Security
Corporation I, II, and III, organized in February 1996, are "security
corporations" for Massachusetts tax purposes, and are subject to a more
favorable tax rate on income derived from securities held in them. 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
Operating results for 1997, 1996 and 1995 were influenced by the Company's
issuance of trust preferred securities through the Trust; a 10% common stock
repurchase; the increase in earning assets through loan originations, loan
purchases, investment purchases and the acquisition of nine branches in four
transactions; the continued growth in residential mortgage loan originations
generated by PMC; and increased income tax provisions. Average earning assets
increased 126% from $259.5 million in 1995 to $587.1 million in 1997. Mortgage
loan originations increased 295% from $88.3 million in 1995 to $349.7 million in
1997. Finally, the Company recognized an income tax provision of $829,000 in
1995 compared to an income tax provision of $2.9 million in 1997. It is within
this context that the Company's operating results should be analyzed.
Net income amounted to $5.1 million or $1.47 per diluted share for the year
ended December 31, 1997, compared to $3.6 million or $1.09 per diluted share for
the year ended December 31, 1996. Basic earnings per share was $1.49 for the
year ended December 31, 1997 compared to $1.11 for the year ended December 31,
1996. Income before income taxes increased by $2.6 million or 48%, to $8.1
million for the year ended December 31, 1997 from $5.4 mil-
5
<PAGE> 6
lion for the year ended December 31, 1996. Tax expense amounted to $2.9 million
for the year ended December 31, 1997 compared to tax expense of $1.9 million for
the year ended December 31, 1996.
The improvement in pre-tax income for 1997 was due to an increase of $3.1
million or 21% in net interest income, and a $2.2 million or 54% increase in
other income, offset by a $2.7 million increase in operating expenses.
The increase in net interest income was primarily attributable to a substantial
increase in average earning assets which accounted for 84% of the increase in
the net interest margin. The positive contributions to the net interest margin
of increased interest rates earned on average investments and decreased rates
paid on average deposits was sufficient to offset the negative effects of
decreased yields earned on average loans and increased rates paid on average
borrowed funds. Net interest margins were adversely effected by the amortization
of premiums associated with purchased loans, mortgage-backed securities and
loans acquired in branch acquisitions due to increased prepayments on 1-4 family
residential loans. The adverse effect of amortization of such premiums on
diluted earnings per share were as follows for 1997, 1996 and 1995:
<TABLE>
<CAPTION>
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
First quarter $ 0.02 $ 0.05 $ 0.02
Second quarter 0.03 0.08 -
Third quarter 0.04 0.02 0.01
Fourth quarter 0.09 0.01 0.03
------- ------- -------
$ 0.18 $ 0.16 $ 0.06
======= ======= =======
</TABLE>
The total premiums on purchased 1-4 family residential loans, mortgage-backed
securities, and loans acquired in branch acquisitions amounted to $8.0 million
and $7.5 million at December 31, 1997 and 1996, respectively.
The increase in other income was due to a $2.0 million increase in gains on
sales of loans, and a $280,000 increase in gains on sales of securities. The
increase in gains on loan sales was the result of residential mortgage
originations increasing 52% during 1997. This is attributable to the continued
growth of the Bank's mortgage banking subsidiary. PMC's results of operations
are volatile and highly influenced by the interest rate environment. Generally,
PMC will be more profitable during periods of low or declining interest rates.
During 1997, 1996, and 1995 PMC has made the following contributions (charges)
to diluted earnings per share.
<TABLE>
<CAPTION>
1997 1996 1995
------ ------ ------
<S> <C> <C> <C>
First quarter $0.04 $(0.01) N/A
Second quarter 0.01 0.01 (0.04)
Third quarter 0.07 (0.04) 0.01
Fourth quarter 0.05 - (0.04)
----- ------ ------
$0.17 $(0.04) $(0.07)
===== ====== ======
</TABLE>
Operating expenses other than OREO expenses increased $2.5 million primarily due
to a $1.1 million increase in salaries and benefits expenses, a $424,000
increase in occupancy expenses, a $234,000 increase in data processing expenses,
and a $514,000 increase in other general and administrative expenses. These
increases were primarily attributable to the growing operations of the Bank's
mortgage banking subsidiary and a full year of operations for five new branches
acquired in March 1996. At December 31, 1997, PMC had 75 employees compared to
68 and 46 at December 31, 1996 and 1995, respectively.
Assets at December 31, 1997 totaled $762.9 million compared to $496.1 million at
December 31, 1996. The increase in total assets of $266.8 million or 54% is
largely attributable to the Bank's continued use of borrowed funds to generate
additional interest income by investing the proceeds in mortgage-backed
securities and purchasing 1-4 family residential loans. During 1997, the Bank
purchased $146.6 million of 1-4 family residential loans that are being serviced
by third parties.
The allowance for loan losses at December 31, 1997 totaled $4.3 million or 1.11%
of total loans compared to $4.7 million or 1.88% at year-end 1996. The allowance
for loan losses as a percentage of non-performing loans amounted to 110% at
December 31, 1997, compared to 122% at December 31, 1996. Non-performing assets
decreased to $4.0 million or 0.52% of total assets at December 31, 1997,
compared to $4.4 million or 0.88% of total assets at December 31, 1996.
The Bank's book value per share at December 31, 1997 was $9.16 per share
compared to $8.72 per share at December 31, 1996.
1997 DEVELOPMENTS
On June 26, 1997, the Company raised total proceeds of $13.8 million in a sale
of subordinated debentures to People's Bancshares Capital Trust which funded the
purchase in a public offering of 1,380,000 trust preferred securities with a
liquidation value of $10 each. Using interest payments made by the Company on
the debentures, the Trust pays quarterly dividends to preferred security
holders. The annual percentage rate of interest payable on the subordinated
debentures and distributions payable on the preferred securities is 9.76%.
Dividends on the preferred securities will be cumulative and the Trust may defer
the payments for up to five years. The preferred securities mature in June 2027
unless the Company elects and obtains regulatory approval to accelerate the
maturity date to as early as June 2002. This subordinated debt may be included
in regulatory Tier 1 capital subject to a limitation that such amounts not
exceed 25% of Tier 1 capital. At December 31, 1997, all such subordinated debt
currently is included in total risk-based capital.
On July 17, 1997, the Company repurchased 355,000 common shares or 10% of its
outstanding stock as of June 30, 1997, at an average cost of $17.50 in an open
market transaction under a repurchase program announced on July 15, 1997.
6
<PAGE> 7
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 the
Commonwealth 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
was 5.26% as of December 31, 1997.
FINANCIAL CONDITION
Cash and cash equivalents increased $18.2 million during 1997. The Bank's
short-term investment portfolio increased to $16.9 million at December 31, 1997
from $10,000 at December 31, 1996.
Investment securities, consisting primarily of mortgage-backed securities,
increased $112.2 million during 1997 as the Bank deployed borrowed and deposit
funds 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 increased 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 $134.9 million, or 49%, to $411.4
million at December 31, 1997, from $276.5 million at December 31, 1996.
Contributing to this increase was the purchase of $146.6 million of residential
real estate loans. People's Mortgage Corporation increased the Bank's 1-4 family
residential loan originations to $349.7 million for 1997 compared to $229.4
million for 1996. These loans were mostly sold to investors resulting in net
gains of $4.1 million for 1997 compared to $2.1 million for 1996.
The allowance for loan losses was $4.3 million, or 1.11% of total loans at
December 31, 1997, compared to $4.7 million, or 1.88% of total loans at December
31, 1996. The allowance for loan losses amounted to 110% of non-performing loans
at December 31, 1997, compared to 122% of non-performing loans at December 31,
1996. During 1996, the Bank acquired $1.7 million of loan loss allowance from
the branch acquisitions. Non-performing loans totaled $3.9 million at December
31, 1997 and 1996. Foreclosed real estate amounted to $111,000 at December 31,
1997, compared to $493,000 at December 31, 1996.
Deposits increased $18.8 million during 1997 primarily as a result of the growth
of municipal deposit products which increased from $23.7 million at December 31,
1996 to $57.4 million at December 31, 1997. Non-certificate accounts excluding
municipal deposits decreased from $190.1 million at December 31, 1996 to $179.8
million at December 31, 1997. Borrowed funds increased $232.6 million during
1997 to fund the purchase of mortgage loans and mortgage-backed securities.
At December 31, 1997, there were $332,000 in net unrealized gains, after tax
effects, on investment securities available for sale compared to $821,000 in net
unrealized losses, after tax effects, at December 31, 1996. Without these net
unrealized gains and losses, book value per share would have been $9.06 at
December 31, 1997, and $8.95 at December 31, 1996. The small net increase in
book value per share during 1997 was primarily attributable to the repurchase of
355,000 shares of treasury stock at a significant premium to book value which
offset the increase resulting from 1997 net income.
RESULTS OF OPERATIONS
Net interest income increased to $18.3 million in 1997, from $15.2 million in
1996 and $8.6 million in 1995.
Interest and dividend income amounted to $44.5 million in 1997, compared to
$33.8 million in 1996 and $19.7 million in 1995. The increases in interest and
dividend income in 1997 and 1996 were due to $132.6 million and $195.0 million
increases in average interest-earning assets, respectively. The increases in
average assets were primarily due to the deployment of borrowed and deposit
funds in purchased mortgage loans and mortgage-backed securities and branch
acquisitions in 1996 and 1995.
Interest and fees on loans increased to $25.3 million in 1997 from $20.0 million
in 1996 and $11.2 million in 1995, primarily as a result of a higher volume of
average loans outstanding. The yield on average loans was adversely affected as
a result of falling interest rates and the resulting effect of prepayments on
purchased and acquired loans premiums.
7
<PAGE> 8
Interest and dividends from investment securities increased to $18.8 million in
1997, from $13.6 million in 1996, and $8.4 million in 1995. The increases in
1997 and 1996 were due to an increase in funds invested in investment securities
and increasing yields on average investments. The yield earned increased despite
falling mortgage loan interest rates due to the investment in higher yielding
agency and trust preferred securities in 1997. Interest on short-term
investments amounted to $374,000 in 1997, $154,000 in 1996, and $152,000 in
1995.
Interest expense amounted to $26.2 million in 1997, $18.6 million in 1996, and
$11.1 million in 1995. The Bank's average cost of funds was 4.80% in 1997,
compared to 4.51% in 1996, and 4.66% in 1995. Interest on deposits increased to
$11.8 million for 1997 from $10.4 million for 1996 and $5.5 million for 1995.
The increase in deposit interest expense for 1997, was due to a $37.1 million
increase in average interest-bearing deposits offset by a 3 basis point decrease
in deposit yield paid compared to 1996. Deposit interest expense increased by
$4.9 million in 1996 compared to 1995. The 1996 increase was attributable to the
$124.2 million increase in average interest-bearing deposits.
Interest on borrowed funds increased to $14.4 million for 1997, from $8.2
million for 1996 and $5.6 million in 1995. The increase in interest expense on
borrowed funds for 1997 was due to a $95.8 million increase in average borrowed
funds and a 37 basis point increase in yield paid on borrowed funds compared to
the same period in 1996. As mentioned above, the Bank has leveraged its capital
by borrowing funds and investing in mortgage-backed securities and purchasing
residential real estate loans. Interest expense on borrowed funds increased $2.5
million in 1996 over 1995 as the Bank increased average borrowed funds by $49.0
million offset by a decrease in average rates paid by 19 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.
RATE-VOLUME ANALYSIS
(Dollars in thousands)
<TABLE>
<CAPTION>
1997 COMPARED TO 1996 1996 COMPARED TO 1995
INCREASE (DECREASE) INCREASE (DECREASE)
----------------------------------- -----------------------------------
VARIANCE VARIANCE
DUE TO DUE TO
--------------------- ----------------------
TOTAL TOTAL
CHANGE VOLUME RATE CHANGE VOLUME RATE
-------- -------- -------- -------- -------- --------
INCOME FROM INTEREST-EARNING ASSETS
Loans and loans held for sale:
<S> <C> <C> <C> <C> <C> <C>
Real estate $ 4,971 $ 5,423 $ (452) $ 7,203 $ 7,768 $ (565)
Other 333 308 25 1,607 1,732 (125)
-------- -------- -------- -------- -------- --------
Total loans 5,304 5,731 (427) 8,810 9,500 (690)
-------- -------- -------- -------- -------- --------
Short-term investments 220 226 (6) 2 39 (37)
Investment securities 5,215 3,918 1,297 5,220 5,195 25
-------- -------- -------- -------- -------- --------
Total interest and dividend income 10,739 9,875 864 14,032 14,734 (702)
-------- -------- -------- -------- -------- --------
EXPENSE ON INTEREST-BEARING LIABILITIES
Deposits:
NOW (24) 42 (66) 268 279 (11)
Savings (38) 88 (126) 1,061 1,087 (26)
Money market 468 395 73 112 107 5
Time 944 1,037 (93) 3,463 3,415 48
-------- -------- -------- -------- -------- --------
Total interest on deposits 1,350 1,562 (212) 4,904 4,888 16
Borrowed funds 6,240 5,660 580 2,542 2,735 (193)
-------- -------- -------- -------- -------- --------
Total interest expense 7,590 7,222 368 7,446 7,623 (177)
-------- -------- -------- -------- -------- --------
Net interest income $ 3,149 $ 2,653 $ 496 $ 6,586 $ 7,111 $ (525)
======== ======== ======== ======== ======== ========
</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 decline, additional provisions could be necessary.
The provision for loan losses was $100,000 in 1997, $75,000 in 1996, and
$525,000 in 1995. 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 exposure on significant credits, concentrations of
credit, and present and prospective economic conditions based on facts then
known.
8
<PAGE> 9
OTHER INCOME
The Bank's other income totaled $6.2 million in 1997, $4.0 million in 1996, and
$1.8 million in 1995. Customer service fees amounted to $1.5 million in 1997,
$1.6 million in 1996, and $995,000 in 1995, respectively. The increase in 1996
was 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
$4.1 million in 1997, from $2.1 million in 1996 and $793,000 in 1995. The
increase in 1997 and 1996 is attributable to the increasing volume generated by
the Bank's mortgage banking subsidiary.
In 1997, the Bank sold investments for net gains of $261,000 compared to net
losses of $19,000 and $231,000 in 1996 and 1995, respectively.
OPERATING EXPENSES
Operating expenses totaled $16.3 million in 1997, $13.7 million in 1996, and
$6.8 million in 1995. The Bank's efficiency ratio (operating expenses, exclusive
of expenses associated with OREO and non-recurring expenses, divided by net
interest income and non-interest income, exclusive of securities gains) was
65.3%, 68.1%, and 62.9% for 1997, 1996, and 1995, respectively. The 1997
decrease is attributable to the improved profitability of PMC. The 1996 increase
is attributable to operating losses generated by PMC and the Branch
Acquisitions.
Salaries and benefits expense amounted to $8.7 million in 1997, $7.6 million in
1996, and $3.5 million in 1995. The 1997 and 1996 increase is primarily
attributable to the growth of PMC and the significant increase in mortgage
origination volume. Occupancy and equipment expenses amounted to $1.9 million in
1997, $1.5 million in 1996, and $734,000 in 1995. The increases were primarily
due to nine branches acquired during 1996 and 1995 and to the opening of five
PMC offices during 1997, 1996 and 1995.
Data processing fees increased to $1.2 million in 1997 compared to $950,000 in
1996 and $241,000 in 1995. The 1997 and 1996 increases were attributable to
branch acquisitions and the Bank's outsourcing of item processing. Professional
fees amounted to $858,000 in 1997, $614,000 in 1996, and $430,000 in 1995. The
Bank uses outside professionals for various services, including attorneys,
accountants, shareholder services, and appraisers. Legal fees were $264,000 in
1997, $206,000 in 1996 and $100,000 in 1995. Other professional fees amounted to
$594,000, $408,000, and $330,000 for 1997, 1996, and 1995, respectively.
The Bank incurred OREO expenses totaling $245,000 in 1997, $59,000 in 1996, and
$142,000 in 1995. OREO operating expenses such as property taxes, insurance,
maintenance, and repairs, totaled $246,000, $204,000, and $282,000 for 1997,
1996, and 1995, respectively. The Bank recognized net gains on sales of OREO,
after write-downs, of $1,000, $145,000 and $140,000 in 1997, 1996 and 1995,
respectively. Due to the level of non-performing loans at December 31, 1997,
foreclosures are likely to continue in 1998. 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 $3.5 million in 1997, $2.9
million in 1996, and $1.7 million in 1995. Amortization of intangible assets
amounted to $235,000 in 1997 from, $249,000 in 1996 and $87,000 in 1995. The
Bank's advertising expense was $577,000 in 1997, $717,000 in 1996, and $402,000
in 1995. The 1996 expense reflected added costs of breaking into new markets
acquired as a result of the branch acquisitions. Insurance expense amounted to
$99,000 in 1997, $103,000 in 1996, and $92,000 in 1995. Finally, various other
categories of other operating expenses increased to $2.5 million during 1997
compared to $1.8 million and $960,000 in 1996 and 1995, respectively, due to the
Bank's increase in size, non-recurring charges in 1997 associated with the
branch closings, and the growing operations of PMC.
INCOME TAXES
The Bank recorded income tax expense of $2.9 million in 1997 compared to $1.9
million and $829,000 for 1996 and 1995, respectively.
In prior years, the Bank had significant available income tax benefits, which
were not expected to be realized because of the Bank's then significant
operating losses, as well as the general economic conditions that existed in its
market area. 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 and $410,000
of these income tax benefits against future income expected to be earned prior
to the expiration date of such tax benefits during 1996 and 1995, respectively.
In 1997, the Bank recognized an additional $45,000 as a result of generating
income qualifying for capital gain treatment.
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, 1997, there were $114,000 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, 1997, the Bank anticipates that no such
benefits will actually be recognized after December 31, 1997. The available tax
benefits that the Bank anticipates will not be recognized relate to state tax
loss carryforwards and federal tax capital loss carryforwards.
CASH FLOWS
Cash flows from operating activities during 1997, 1996 and 1995 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 inflows of $7.0 million in 1997 and cash outflows of $14.4
million and $1.5 million in 1996 and 1995, respectively.
9
<PAGE> 10
The Bank's deployment of cash flows, provided by increased deposits in 1997 and
1996, borrowed funds in 1997, 1996 and 1995, and the issuance of subordinated
debentures in 1997, into investment securities, primarily mortgage-backed
securities, and mortgage loans 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 $109.2 million, $25.8
million, and $63.0 million for the years ended December 31, 1997, 1996 and 1995,
respectively. The Bank also deployed cash flows into loan purchases and
originations, net of amortization and payoffs of $137.3 million, $1.8 million,
and $5.2 million for the years ended December 31, 1997, 1996 and 1995,
respectively. This largely explains the Bank's net cash flows used in investing
activities of $246.0 million, $7.3 million, and $43.8 million for the years
ended December 31, 1997, 1996 and 1995, respectively.
The Bank funded the investment and loan purchases through increases in deposits
of $18.8 million and $17.0 million in 1997 and 1996 and borrowed funds, net of
repayments amounting to $232.6 million in 1997 and $48.7 million in 1995. This
largely explains the Bank's net cash flows provided by financing activities of
$257.2 million, $22.9 million, and $49.0 million for the years ended December
31, 1997, 1996 and 1995, respectively. The Bank also funded these investment
purchases through the deployment of $20.7 million and $24.1 million in cash
received during acquisition transactions in 1996 and 1995, respectively.
During 1997, 1996 and 1995, the Bank experienced net cash inflows from deposits
of $18.8 million, $17.0 million and $381,000. The increase in 1997 and 1996 is
primarily the result of municipal deposit products.
During 1996, the Bank assumed liabilities in branch acquisition transactions 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
predominately 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 sensitivity
liabilities. A gap is considered negative when the amount of interest 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. At
December 31, 1997, the cumulative one-year gap was a negative $72.2 million or
9.47% of total assets.
Market risk sensitive instruments are generally defined as on and off balance
sheet derivatives and other financial instruments. The following table shows the
Bank's financial instruments that are sensitive to changes in interest rates,
categorized by expected maturity, for the intervals indicated and the
instruments' fair values at December 31, 1997. Mortgage-backed securities are
allocated based upon expected maturities. Adjustable rate loans tied to prime
and adjustable rate mortgage products tied to one and three year U.S. Treasury
Notes are included in the table based on their next repricing date. Of the
products tied to U.S. Treasury Notes there are caps for life time and period
adjustments of 6% and 2% respectively. There are no prepayment assumptions
included in this schedule. NOW, savings, and money market deposit accounts are
allocated with FDIC guidelines for interest rate risk management.
10
<PAGE> 11
INTEREST RATE SENSITIVITY ANALYSIS
<TABLE>
<CAPTION>
(Dollars in thousands) AT DECEMBER 31, 1997
------------------------------------------------------------------------------------------------
ONE YEAR 1-2 2-3 3-4 4-5 OVER 5
OR LESS YEARS YEARS YEARS YEARS YEARS TOTAL
-------- -------- -------- -------- -------- -------- --------
INTEREST SENSITIVE ASSETS:
<S> <C> <C> <C> <C> <C> <C> <C>
Short-term investments $ 16,934 $ - $ - $ - $ - $ - $ 16,934
Average interest rate 6.00% - - - - - 6.00%
Investment securities 103,280 967 9,648 13,113 - 162,359 289,367
Average interest rate 7.90% 9.13% 7.32% 8.58% - 7.20% 7.52%
Adjustable-rate loans 155,564 17,770 90,248 10,232 3,410 2,062 279,286
Average interest rate 7.93% 7.50% 6.94% 8.14% 8.14% 8.68% 7.60%
Fixed-rate loans 27,894 3,913 3,035 3,311 6,150 87,844 132,147
Average interest rate 7.81% 9.09% 8.77% 8.97% 8.97% 7.96% 8.05%
-------- -------- -------- -------- -------- -------- --------
Total $303,672 $ 22,650 $102,931 $ 26,656 $ 9,560 $252,265 $717,734
======== ======== ======== ======== ======== ======== ========
INTEREST SENSITIVE LIABILITIES:
NOW $ 8,118 $ 4,054 $ 4,054 $ 4,054 $ 4,054 $ 16,256 $ 40,590
Average interest rate 1.00% 1.00% 1.00% 1.00% 1.00% 1.00% 1.00%
Savings 17,617 8,808 8,808 8,808 8,808 35,234 88,083
Average interest rate 2.56% 2.56% 2.56% 2.56% 2.56% 2.56% 2.56%
Money market 19,632 3,228 3,227 - - - 26,087
Average interest rate 2.92% 2.82% 2.82% - - - 2.82%
Term deposits 140,205 15,206 6,118 2,011 1,706 118 165,364
Average interest rate 5.50% 5.87% 6.29% 5.83% 6.07% 6.85% 5.57%
Borrowed funds 190,350 123,500 42,700 - - - 356,550
Average interest rate 5.71% 5.84% 5.96% - - - 5.79%
Subordinated debentures - - - - - 13,800 13,800
Average interest rate - - - - - 9.76% 9.76%
-------- -------- -------- -------- -------- -------- --------
Total $375,922 $154,796 $ 64,907 $ 14,873 $ 14,568 $ 65,408 $690,474
======== ======== ======== ======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
(Dollars in thousands) AT DECEMBER 31, 1997
------------
FAIR
VALUE
--------
INTEREST SENSITIVE ASSETS:
<S> <C>
Short-term investments $ 16,934
Average interest rate
Investment securities 289,889
Average interest rate
Adjustable-rate loans 275,132
Average interest rate
Fixed-rate loans 132,773
Average interest rate
--------
Total $714,728
========
INTEREST SENSITIVE LIABILITIES:
NOW $ 40,590
Average interest rate
Savings 88,083
Average interest rate
Money market 26,087
Average interest rate
Term deposits 165,658
Average interest rate
Borrowed funds 356,010
Average interest rate
Subordinated debentures 14,760
Average interest rate
--------
Total $691,188
========
</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 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 and investment principal, interest
and dividends on loans and investments, maturity or sale of investment
securities, and collateralized borrowings from the Federal Home Loan Bank and
proceeds from the sale of loans. In addition to the aforementioned sources of
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. Subordinated debt may also be included in
regulatory Tier 1 capital subject to a limitation that such amounts not exceed
25% of Tier 1 capital.
The Company had a Tier 1 leverage ratio of 5.25%, a risk-weighted Tier 1 ratio
of 9.27% and a total risk-based capital ratio of 11.23% at December 31, 1997.
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.
11
<PAGE> 12
The Bank had a Tier 1 leverage ratio of 5.26%, a risk-weighted Tier 1 ratio of
9.38% and a total risk-based capital ratio of 10.43% at December 31, 1997. 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,
1997, 1996, and 1995:
<TABLE>
<CAPTION>
1997 1996 1995
------ ------ ------
(Dollars in thousands)
Non-performing loans:
<S> <C> <C> <C>
Mortgage loans $3,832 $3,816 $4,725
Commercial loans 59 45 37
Consumer loans 3 2 14
------ ------ ------
3,894 3,863 4,776
Other real estate owned, net 111 493 571
------ ------ ------
Non-performing assets $4,005 $4,356 $5,347
====== ====== ======
</TABLE>
At December 31, 1997, there were no individual non-performing assets with a
balance greater than $1.0 million.
Non-accrual and impaired loans amounted to $3.9 million, $3.9 million and $4.8
million at December 31, 1997, 1996, and 1995, respectively. The average
investment in impaired loans amounted to $3.8 million, $4.8 million and $5.8
million for the years ended December 31, 1997, 1996 and 1995, respectively.
Interest income recognized on a cash basis on impaired loans amounted to
$171,000, $261,000 and $182,000 for the years ended December 31, 1997, 1996, and
1995.
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. The provision is the result 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, 1997 and 1996, was $4.3
million and $4.7 million, respectively. The Bank's ratio of its allowance for
loan losses to total loans at December 31, 1997 and 1996 was 1.11% and 1.88%,
respectively. The Bank's ratio of its allowance for loan losses to
non-performing loans at December 31, 1997 and 1996 was 110.2% and 122.1%,
respectively.
Management believes the allowance for loan losses was adequate at December 31,
1997, 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
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 no necessarily move in the same direction or in the
same magnitude as the prices of goods and services.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("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 will adopt these disclosure
requirements beginning in the first quarter of 1998.
In June 1997, FASB issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information," effective for fiscal years beginning after
December 15, 1997. SFAS No. 131 establishes standards for the way that public
business enterprises report information about operating segments in annual and
interim
12
<PAGE> 13
financial statements. It also establishes standards for related disclosures
about products and services, geographic areas and major customers. Generally,
financial information is required to be reported on the basis that it is used
internally for evaluating segment performance and deciding how to allocate
resources to segments. The Statement also requires descriptive information about
the way that the operating segments were determined, the products and services
provided by the operating segments, differences between the measurements used in
reporting segment information and those used by the enterprise in its general
purpose financial statements, and changes in the measurement of segment amounts
from period to period. Management has not yet determined how the adoption of
SFAS No. 131 will impact the Company's financial reporting.
YEAR 2000 ISSUE
The Year 2000 Issue is the result of computer programs being written using two
digits rather than four to define the applicable year. Any of the Company's
computer programs that use date-sensitive software may recognize a date using
"00" as the year 1900 rather than the year 2000. This could result in a system
failure or miscalculations causing disruptions of operations, including, among
other things, a temporary inability to process transactions, send invoices, or
engage in similar normal business activities.
The Company will utilize both internal and external resources to identify,
correct or reprogram and test the systems and software for Year 2000 compliance.
The Company has initiated formal communications with all of its significant
processing vendors to determine the extent to which the Company is vulnerable to
those third parties' failure to remediate their own Year 2000 Issue. It is
anticipated that all reprogramming efforts will be completed by December 31,
1998, allowing adequate time for testing. Although the Company cannot currently
estimate the extent to which any failure to process date information correctly
could have a material adverse effect on the Company's business, operations or
financial condition, management believes that, if not adequately addressed, such
delays, errors or failures could have a significant adverse impact on the
financial condition and results of operations of the Company.
Monitoring and managing the Year 2000 project will result in additional direct
and indirect costs to the Company. Direct costs include potential charges by
third party software vendors for product enhancements, costs involved in testing
software products for Year 2000 compliance, and any resulting costs for
developing and implementing contingency plans for critical software products
which are not enhanced. Indirect costs will principally consist of the time
devoted by existing employees in monitoring software vendor progress, testing
enhanced software products and implementing any necessary contingency plans.
Management expects the cost of achieving Year 2000 compliance to be immaterial,
if as expected, the Company's third party data service provider is able to
achieve Year 2000 compliance. Actual costs will be charged to earnings as
incurred. Such costs have not been material to date.
13
<PAGE> 14
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1997 1996
--------- ---------
ASSETS (Dollars in thousands)
<S> <C> <C>
Cash and due from banks $ 13,759 $ 12,468
Short-term investments 16,934 10
--------- ---------
Total cash and cash equivalents 30,693 12,478
Investment securities (Notes 3 and 9) 304,713 192,517
Loans held for sale 24,735 25,612
Loans 386,698 250,911
Less allowance for loan losses (4,291) (4,716)
--------- ---------
Loans, net (Notes 4, 9 and 16) 382,407 246,195
--------- ---------
Other real estate owned, net (Note 5) 111 493
Banking premises and equipment, net (Note 6) 12,940 13,034
Accrued interest receivable 4,435 2,888
Intangible assets (Note 2) 1,148 1,338
Other assets (Notes 7 and 10) 1,728 1,578
--------- ---------
Total assets $ 762,910 $ 496,133
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits (Note 8) $ 355,083 $ 336,238
Borrowed funds (Note 9) 356,550 123,920
Mortgagors' escrow accounts 1,114 973
Accrued expenses and other liabilities (Notes 7 and 13) 6,227 3,938
Subordinated debentures (Note 10) 13,800 -
--------- ---------
Total liabilities 732,774 465,069
--------- ---------
Commitments and contingencies (Note 11)
Stockholders' equity (Notes 2, 12, 14, 15 and 18):
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 3,643,686 and 3,562,970 shares 364 356
Additional paid-in capital 23,400 22,967
Retained earnings 12,253 8,562
--------- ---------
36,017 31,885
Treasury stock, at cost - 355,000 shares (6,213) -
Net unrealized gain (loss) on securities available for sale, after tax effects (Notes 3 and 7) 332 (821)
--------- ---------
Total stockholders' equity 30,136 31,064
--------- ---------
Total liabilities and stockholders' equity $ 762,910 $ 496,133
========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
14
<PAGE> 15
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------------------
1997 1996 1995
----------- ----------- -----------
(Dollars in thousands, except per share data)
Interest and dividend income:
<S> <C> <C> <C>
Interest and fees on loans $ 25,297 $ 19,993 $ 11,183
Interest on short-term investments 374 154 152
Interest and dividends on investment securities 18,829 13,614 8,394
----------- ----------- -----------
Total interest and dividend income 44,500 33,761 19,729
----------- ----------- -----------
Interest expense:
Interest on deposits 11,785 10,435 5,531
Interest on borrowed funds 14,400 8,160 5,618
----------- ----------- -----------
Total interest expense 26,185 18,595 11,149
----------- ----------- -----------
Net interest income 18,315 15,166 8,580
Provision for loan losses (Note 4) 100 75 525
----------- ----------- -----------
Net interest income, after provision for loan losses 18,215 15,091 8,055
----------- ----------- -----------
Other income:
Customer service fees 1,526 1,573 995
Gains (losses) on sales of securities available for sale, net (Note 3) 261 (19) (231)
Gains on sales of loans, net 4,135 2,100 793
Gains on sales of banking premises and equipment, net - 162 -
Miscellaneous 275 215 198
----------- ----------- -----------
Total other income 6,197 4,031 1,755
----------- ----------- -----------
Operating expenses:
Salaries and employee benefits (Note 13) 8,711 7,644 3,499
Occupancy and equipment (Notes 6 and 11) 1,893 1,469 734
Data processing 1,184 950 241
Professional fees 858 614 430
Other real estate owned, net (Note 5) 245 59 142
Other general and administrative 3,456 2,942 1,741
----------- ----------- -----------
Total operating expenses 16,347 13,678 6,787
----------- ----------- -----------
Income before income taxes 8,065 5,444 3,023
Provision for income taxes (Note 7) 2,934 1,885 829
----------- ----------- -----------
Net income $ 5,131 $ 3,559 $ 2,194
=========== =========== ===========
Weighted average shares outstanding- assuming dilution for stock options 3,500,048 3,267,890 2,523,135
Weighted average shares outstanding 3,446,299 3,196,436 2,313,399
Net income per share:
Diluted earnings per share $ 1.47 $ 1.09 $ 0.87
Basic earnings per share 1.49 1.11 0.95
</TABLE>
See accompanying notes to consolidated financial statements.
15
<PAGE> 16
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
NET UNREALIZED
GAIN (LOSS) ON
ADDITIONAL SECURITIES
COMMON PAID-IN RETAINED TREASURY AVAILABLE
STOCK CAPITAL EARNINGS STOCK FOR SALE TOTAL
-------- -------- -------- -------- -------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
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 paid ($.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 paid ($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
Net income - - 5,131 - - 5,131
Purchase of treasury stock - - - (6,213) - (6,213)
Exercise of stock options 8 433 - - - 441
Cash dividends paid ($0.42 per share) - - (1,440) - - (1,440)
Change in net unrealized gain (loss)
on securities available for sale, after tax effects - - - - 1,153 1,153
-------- -------- -------- -------- -------- --------
Balance at December 31, 1997 $ 364 $ 23,400 $ 12,253 $ (6,213) $ 332 $ 30,136
======== ======== ======== ======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
16
<PAGE> 17
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------
1997 1996 1995
--------- --------- ---------
(Dollars in thousands)
Cash flows from operating activities:
<S> <C> <C> <C>
Net income $ 5,131 $ 3,559 $ 2,194
Adjustments to reconcile net income to net cash provided (used) by operating activities:
Provision for loan losses 100 75 525
Depreciation and amortization 429 1,516 420
Gains on sales of banking premises and equipment - (162) -
(Gains) losses on sales of securities available for sale, net (261) 19 231
Loans originated for sale (270,627) (173,082) (28,200)
Principal balance of loans sold 271,504 152,742 22,927
Write-downs, and net gain on sales of other real estate owned, net (1) (145) (140)
Deferred tax provision 902 1,500 826
Change in other assets, net of other liabilities (181) (435) (263)
--------- --------- ---------
Net cash provided (used) by operating activities 6,996 (14,413) (1,480)
--------- --------- ---------
Cash flows from investing activities:
Cash and cash equivalents received through acquisitions - 20,664 24,054
Proceeds from sales of securities available for sale 316,904 82,983 76,529
Proceeds from maturities of securities available for sale 4,275 2,000 -
Proceeds from amortization of mortgage-backed securities 32,021 38,779 19,714
Purchase of securities available for sale (419,245) (149,545) (158,220)
Purchase of securities held to maturity (43,193) - (995)
Loan (originations and purchases) amortization and payoffs, net (137,345) (1,772) (5,161)
Proceeds from sale of other real estate owned 1,470 1,118 1,740
Proceeds from sale of banking premises and equipment - 424 -
Additions to banking premises and equipment, net (848) (1,929) (1,455)
--------- --------- ---------
Net cash used in investing activities (245,961) (7,278) (43,794)
--------- --------- ---------
Cash flows from financing activities:
Net increase in deposits 18,845 16,952 381
Net (decrease) increase in borrowings with maturities of three months or less 15,950 (52,295) 10,065
Proceeds from issuance of borrowings with maturities in excess of three months 319,200 99,520 62,600
Repayment of borrowings with maturities in excess of three months (102,520) (49,550) (24,000)
Increase (decrease) in mortgagors' escrow accounts 141 30 (41)
Proceeds from issuance of common stock - 7,537 -
Proceeds from exercise of stock warrants and options 441 1,539 113
Proceeds from issuance of subordinated debentures 12,776 - -
Payments to acquire treasury stock (6,213) - -
Cash dividends (1,440) (867) (93)
--------- --------- ---------
Net cash provided by financing activities 257,180 22,866 49,025
--------- --------- ---------
Net increase in cash and cash equivalents 18,215 1,175 3,751
Cash and cash equivalents at beginning of year 12,478 11,303 7,552
--------- --------- ---------
Cash and cash equivalents at end of year $ 30,693 $ 12,478 $ 11,303
========= ========= =========
Supplementary information:
Interest paid $ 24,876 $ 18,324 $ 10,900
Income taxes paid, net 2,093 25 35
Transfers from loans to other real estate owned 1,087 895 1,361
Change in due to/from broker, net 163 (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.
17
<PAGE> 18
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 subsidiaries, People's
Savings Bank of Brockton (the "Bank") and People's Bancshares Capital Trust (the
"Trust"). 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 Trust issued $13.8 million trust preferred
securities on June 26, 1997 to raise funds to purchase subordinated debentures
from the Company. The Bank's active wholly owned subsidiaries, People's Mortgage
Corporation ("PMC"), 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 savings and term certificate accounts and its
primary lending products are residential and commercial mortgage loans. PMC acts
as the mortgage banking subsidiary.
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.
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.
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. Net deferred loan fees or costs and loan premiums are amortized as
an adjustment of the related loan yields using the level interest method.
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.
A loan is considered impaired when, based on current information and
18
<PAGE> 19
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
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 the fair value of the
collateral. Impaired loans are considered non-accrual loans and are charged off
when management believes the collectibiltiy of the loan balance is unlikely.
Large groups of smaller balance homogeneous loans are collectively evaluated for
impairment. Accordingly, the Bank does not separately identify individual
consumer loans for impairment disclosures.
OTHER REAL ESTATE OWNED
Other real estate owned ("OREO") is held for sale and consists of properties
acquired by foreclosure or by deed-in-lieu of foreclosure.
OREO properties are initially recorded at the lower of cost or estimated fair
value less disposition costs. Costs to administer OREO properties are expensed.
Valuations are periodically performed by management and provisions for losses
are charged to other real estate owned expenses if the carrying value of a
property exceeds its fair value less estimated disposition costs.
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
intangibles, 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 Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("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 continue with the accounting methodology 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 pro forma disclosures include the effects of all awards
granted on or after January 1, 1995. (See Note 14.)
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
In February 1997, FASB issued SFAS No. 128, "Earnings per Share" which requires
that earnings per share be calculated on a basic and dilutive basis. 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. The Statement is effective for interim and annual periods ending
after December 15, 1997, and requires the restatement of all prior-period
earnings per share data presented. Accordingly, the Company has restated all
earnings per share data presented herein.
For the years ended December 31, 1996 and 1995, options applicable to 12,000
shares and 23,500 shares, respectively, were anti-dilutive and excluded from the
diluted earnings per share computations. For the year ended December 31, 1997 no
options were anti-dilutive.
RECENT ACCOUNTING PRONOUNCEMENTS
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 will adopt these disclosure
requirements beginning in the first quarter of 1998.
19
<PAGE> 20
In June 1997, FASB issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information," effective for fiscal years beginning after
December 15, 1997. SFAS No. 131 establishes standards for the way that public
business enterprises report information about operating segments in annual and
interim financial statements. It also establishes standards for related
disclosures about products and services, geographic areas and major customers.
Generally, financial information is required to be reported on the basis that it
is used internally for evaluating segment performance and deciding how to
allocate resources to segments. The Statement also requires descriptive
information about the way that the operating segments were determined, the
products and services provided by the operating segments, differences between
the measurements used in reporting segment information and those used by the
enterprise in its general purpose financial statements, and changes in the
measurement of segment amounts from period to period. Management has not yet
determined how the adoption of SFAS No. 131 will impact the Company's financial
reporting.
2 - ACQUISITIONS
On May 10, 1995, the Bank acquired the Bank of Taunton, A Co-operative bank
("Bank of Taunton"). 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 Bank of Boston located in Mansfield, Massachusetts in September 1995. On
March 31, 1995, the Bank purchased 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 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,
1997, intangible assets amounted to $1,148,000. Amortization of intangibles
amounted to $235,000, $249,000 and $87,000 for 1997, 1996 and 1995 respectively.
3 - INVESTMENT SECURITIES
The following table summarizes investment securities:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1997 1996
-------- --------
(Dollars in thousands)
<S> <C> <C>
Securities available for sale, at fair value $245,636 $184,195
Securities held to maturity, at amortized cost 44,253 -
Restricted equity securities:
Federal Home Loan Bank of Boston 13,520 7,018
Massachusetts Savings Bank Life Insurance 1,304 1,304
-------- --------
$304,713 $192,517
======== ========
</TABLE>
At December 31, 1997, a debt security issued by the Federal Home Loan Bank of
Boston ("FHLB") with an amortized cost of $712,000, a fair value of $719,000,
and accrued interest receivable of $1,000, has been pledged as collateral for
the Bank's treasury, tax and loan accounts. At December 31, 1997, investment
securities with an amortized cost of $116,989,000, a fair value of $117,110,000,
and accrued interest receivable of $1,056,000 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, 1997
------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
-------- -------- -------- --------
(Dollars in thousands)
Available for sale:
<S> <C> <C> <C> <C>
U.S. Government and federal agency obligations $ 27,919 $ 25 $ - $ 27,944
Mortgage-backed securities 202,047 662 (357) 202,352
Corporate debt securities 15,148 230 (38) 15,340
-------- -------- -------- --------
Total securities available for sale $245,114 $ 917 $ (395) $245,636
======== ======== ======== ========
Held to maturity:
U.S. Government and federal agency obligations $ 44,253 $ 186 $ - $ 44,439
-------- -------- -------- --------
Total securities held to maturity $ 44,253 $ 186 $ - $ 44,439
======== ======== ======== ========
</TABLE>
20
<PAGE> 21
<TABLE>
<CAPTION>
DECEMBER 31, 1996
------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
-------- -------- -------- --------
(Dollars in thousands)
Available for sale:
<S> <C> <C> <C> <C>
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>
The amortized cost and estimated fair value of investment securities by
contractual maturity at December 31, 1997 is as follows:
<TABLE>
<CAPTION>
HELD TO MATURITY AVAILABLE FOR SALE
----------------------------------------------
AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE
-------- -------- -------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C>
After 1 year to 5 years $ - $ - $ 1,000 $ 988
After 5 years to 10 years - - 13,537 13,543
Over 10 years 44,253 44,439 28,530 28,753
Mortgage-backed securities - - 202,047 202,352
------- ------- -------- --------
$44,253 $44,439 $245,114 $245,636
======= ======= ======== ========
</TABLE>
For the years ended December 31, 1997, 1996, and 1995, proceeds from sales of
securities available for sale amounted to $316,904,000, $82,983,000 and
$76,529,000, respectively. Gross realized gains amounted to $1,201,000, $273,000
and $364,000 in 1997, 1996, and 1995, respectively and gross realized losses
amounted to $940,000, $292,000, and $595,000 in 1997, 1996, and 1995,
respectively.
In November 1995, the 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.
4 - LOANS, NET
A summary of the balances of loans follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1997 1996
--------- ---------
(Dollars in thousands)
Mortgage loans:
<S> <C> <C> <C> <C>
Residential 1 - 4 family $ 293,402 $ 160,730
Residential multi-family 11,030 11,217
Commercial real estate 44,714 44,149
Construction 11,162 7,359
Equity lines of credit 10,152 10,297
--------- ---------
370,460 233,752
--------- ---------
Deferred loan origination fees, net (113) (49)
Less undisbursed amount on loans in process (2,239) (1,450)
--------- ---------
Total mortgage loans 368,108 232,253
--------- ---------
Other loans:
Retail installment sale contracts 915 1,830
Consumer 5,007 6,161
Commercial lines of credit 6,089 5,622
Commercial 6,433 4,838
Education 146 207
--------- ---------
Total other loans 18,590 18,658
--------- ---------
Total loans 386,698 250,911
Allowance for loan losses (4,291) (4,716)
--------- ---------
Loans, net $ 382,407 $ 246,195
========= =========
</TABLE>
An analysis of the allowance for loan losses follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------
1997 1996 1995
------- ------- -------
(Dollars in thousands)
<S> <C> <C> <C>
Balance at beginning of year $ 4,716 $ 3,813 $ 3,194
Provision for loan losses 100 75 525
Loans charged off (727) (1,131) (1,196)
Recoveries 202 307 143
Allowance for loan losses acquired in acquisition - 1,652 1,147
------- ------- -------
Balance at end of year $ 4,291 $ 4,716 $ 3,813
======= ======= =======
</TABLE>
At December 31, 1997 and 1996, premiums on residential mortgage loans purchased
or acquired in acquisitions included in loans, net amounted to $6,152,000 and
$4,655,000, respectively. Amortization of premiums amounted to $615,000 and
$404,000 and $36,000 for 1997, 1996 and 1995, respectively.
The following is a summary of information pertaining to impaired and nonaccrual
loans:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1997 1996
------ ------
(Dollars in thousands)
<S> <C> <C>
Impaired loans without a valuation allowance $ - $ 85
Impaired loans with a valuation allowance 3,894 3,778
------ ------
Total impaired loans $3,894 $3,863
====== ======
Valuation allowance allocated to impaired loans $ 576 $ 567
====== ======
Non-accrual loans $3,894 $3,863
====== ======
</TABLE>
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------
1997 1996 1995
------ ------ ------
(Dollars in thousands)
<S> <C> <C> <C>
Average investment in impaired loans $3,764 $4,752 $5,834
====== ====== ======
Interest income recognized on impaired loans $ 171 $ 261 $ 182
====== ====== ======
Interest income recognized on a cash basis
on impaired loans $ 171 $ 261 $ 182
====== ====== ======
</TABLE>
No additional funds are committed to be advanced in connection with impaired
loans.
21
<PAGE> 22
5 - OTHER REAL ESTATE OWNED, NET
A summary of other real estate owned is as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------
1997 1996
---- ----
(Dollars in thousands)
<S> <C> <C>
Undeveloped land $ - $ 75
Residential real estate 111 418
---- ----
$111 $493
==== ====
</TABLE>
OREO expenses include the following:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------
1997 1996 1995
----- ----- -----
(Dollars in thousands)
<S> <C> <C> <C>
Net gain on sales of real estate $ (15) $(145) $(184)
Write-downs to net realizable value 14 - 44
Operating expenses, net of rental income 246 204 282
----- ----- -----
$ 245 $ 59 $ 142
===== ===== =====
</TABLE>
An analysis of the allowance for losses on OREO is as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------
1996 1995
----- -----
(Dollars in thousands)
<S> <C> <C>
Balance at beginning of year $ 15 $ 273
Charge-offs (15) (318)
Allowance acquired in acquisition - 60
----- -----
Balance at end of year $ - $ 15
===== =====
</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
1997 1996 USEFUL LIVES
-------- -------- ---------------
(Dollars in thousands)
<S> <C> <C> <C>
Land $ 1,452 $ 1,417 -
Buildings 8,482 8,472 20 to 39 years
Leasehold improvements 1,218 1,370 Terms of lease
Furniture and equipment 4,860 4,376 5 to 10 years
-------- --------
16,012 15,635
Less accumulated depreciation and amortization (3,072) (2,601)
-------- --------
$ 12,940 $ 13,034
======== ========
</TABLE>
Depreciation and amortization expense for the years ended December 31, 1997,
1996, and 1995 amounted to $951,000, $546,000, and $268,000, 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,
--------------------------------------
1997 1996 1995
------- ------- -------
(Dollars in thousands)
Current:
<S> <C> <C> <C>
Federal $ 2,184 $ 1,059 $ -
State 257 124 3
Utilization of operating loss carry forwards - (635) -
Utilization of tax credits (409) (163) -
------- ------- -------
Total current 2,032 385 3
------- ------- -------
Deferred:
Federal 799 1,469 819
State 148 167 417
------- ------- -------
Total deferred 947 1,636 1,236
------- ------- -------
Changes in valuation reserve (45) (136) (410)
------- ------- -------
Income tax provision $ 2,934 $ 1,885 $ 829
======= ======= =======
</TABLE>
The components of the net deferred tax asset (liability) are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1997 1996
------- -------
(Dollars in thousands)
Deferred tax asset:
<S> <C> <C>
Federal $ 1,862 $ 2,270
State 805 745
------- -------
2,667 3,015
Valuation reserve on asset (114) (159)
------- -------
2,553 2,856
------- -------
Deferred tax liability:
Federal (2,649) (1,714)
State (928) (592)
------- -------
(3,577) (2,306)
------- -------
Net deferred tax asset (liability) $(1,024) $ 550
======= =======
</TABLE>
The tax effects of each type of item that gives rise to deferred taxes are as
follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1997 1996
------- -------
(Dollars in thousands)
<S> <C> <C>
Allowance for loan losses $ 121 $ 542
Federal tax credits - 370
Other tax loss carryovers 155 221
Deferred pension expense 326 261
Unrealized (gain)loss on securities available for sale (190) 482
Investment in limited partnership (863) (710)
Other investments (534) (483)
Other, net 75 26
------- -------
(910) 709
Valuation reserve (114) (159)
------- -------
Net deferred tax asset (liability) $(1,024) $ 550
======= =======
</TABLE>
22
<PAGE> 23
A summary of the change in the net deferred tax asset (liability) is as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------
1997 1996 1995
------- ------- -------
(Dollars in thousands)
<S> <C> <C> <C>
Balance at beginning of year $ 550 $ 1,826 $ 2,035
Deferred tax provision (947) (1,636) (1,236)
Deferred tax benefit (liability) on unrealized
(gains) losses on securities available for sale (672) 224 (389)
Deferred tax resulting from acquisition - - 1,006
Utilization of valuation reserve 45 136 410
------- ------- -------
Balance at end of year $(1,024) $ 550 $ 1,826
======= ======= =======
</TABLE>
A summary of the change in the valuation reserve is as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------
1997 1996 1995
----- ----- -----
(Dollars in thousands)
<S> <C> <C> <C>
Balance at beginning of year $ 159 $ 311 $ 628
Benefit generated by current year's operations - - 47
Valuation reserve resulting from acquisition - - 46
Change in assumptions due to
anticipation of future income (45) (136) (410)
Benefits expired - (16) -
----- ----- -----
Balance at end of year $ 114 $ 159 $ 311
===== ===== =====
</TABLE>
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,
---------------------------------
1997 1996 1995
------- ------- -------
(Dollars in thousands)
<S> <C> <C> <C>
Tax at statutory rate of 34% $ 2,742 $ 1,851 $ 1,028
Increase (decrease) resulting from:
State taxes, net of federal tax benefit 267 130 277
Utilization of deferred tax asset valuation
reserve due to change in assumptions (45) (34) (410)
Other, net (30) (62) (66)
------- ------- -------
Income tax provision $ 2,934 $ 1,885 $ 829
======= ======= =======
</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,
----------------------
1997 1996
-------- --------
(Dollars in thousands)
<S> <C> <C>
Demand $ 34,959 $ 37,899
NOW 40,590 42,009
Savings 88,083 95,464
Money market 26,087 21,190
-------- --------
Total non-certificate accounts 189,719 196,562
-------- --------
Term certificates of $100,000 or more 66,732 36,922
Term certificates less than $100,000 98,632 102,754
-------- --------
Total certificate accounts 165,364 139,676
-------- --------
Total deposits $355,083 $336,238
======== ========
</TABLE>
Municipal deposits amounted to $57.4 million and $23.7 million at December 31,
1997 and 1996, respectively.
A summary of certificate accounts, by maturity, follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1997 DECEMBER 31, 1996
---------------------- -----------------------
WEIGHTED WEIGHTED
AMOUNT AVERAGE RATE AMOUNT AVERAGE RATE
-------- ------------ -------- ------------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Within 1 year $140,205 5.50% $106,809 5.40%
Over 1 year to 3 years 21,324 5.97 28,050 5.94
Over 3 years to 5 years 3,717 5.95 4,702 6.29
Over 5 years 118 6.80 115 6.76
-------- --------
$165,364 5.57 $139,676 5.54
======== ========
</TABLE>
9 - BORROWED FUNDS
The following summarizes borrowed funds:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1997 1996
-------- --------
(Dollars in thousands)
<S> <C> <C>
Securities sold under agreements to repurchase $ 96,050 $ 34,670
Federal Home Loan Bank advances 260,500 89,250
-------- --------
$356,550 $123,920
======== ========
</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 highest
month-end balance for 1997 and 1996 was $96,050,000 and $44,740,000,
respectively. The average balances of repurchase agreements during 1997 and 1996
were $73,734,000 and $32,103,000, respectively. For the years ended December 31,
1997, 1996, and 1995 interest expense on repurchase agreements was $4.4 million,
$1.7 million, and $1.1 million, respectively. A summary of securities sold under
agreements to repurchase by maturity follows:
23
<PAGE> 24
<TABLE>
<CAPTION>
DECEMBER 31, 1997 DECEMBER 31, 1996
---------------------- ----------------------
WEIGHTED WEIGHTED
AMOUNT AVERAGE RATE AMOUNT AVERAGE RATE
-------- ------------ -------- ------------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Within 1 year $17,850 5.81% $34,670 5.28%
Over 1 year through 3 years 45,500 5.78 - -
After 3 years 32,700 6.10 - -
------- -------
$96,050 5.90 $34,670 5.28
======= =======
</TABLE>
The Bank has an available line of credit of $15 million with the 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
at December 31, 1996, and are included in the table below. There were no
outstanding advances under the line of credit at December 31, 1997. 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, 1997 DECEMBER 31, 1996
---------------------- ----------------------
WEIGHTED WEIGHTED
AMOUNT AVERAGE RATE AMOUNT AVERAGE RATE
-------- ------------ -------- ------------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Within 1 year, including
variable rate demand advances $160,500 5.71% $ 68,750 5.61%
Over 1 year through 3 years 26,000 6.06 20,500 5.72
After 3 years 74,000 5.71 - -
-------- --------
$260,500 5.75 $ 89,250 5.64
======== ========
</TABLE>
For the years ended December 31, 1997, 1996, and 1995 interest expense on FHLB
advances was $9.3 million, $6.5 million, and $4.5 million, respectively.
10 - SUBORDINATED DEBENTURES
On June 26, 1997, the Company raised net proceeds of $12.8 million in a sale of
$13.8 million of subordinated debentures to People's Bancshares Capital Trust
which funded the purchase through a public offering of 1,380,000 trust preferred
securities with a liquidation value of $10 each. Using interest payments made by
the Company on the debentures, the Trust pays quarterly dividends to preferred
security holders. The annual percentage rate of interest payable on the
subordinated debentures and distributions payable on the preferred securities is
9.76%. Dividends on the preferred securities will be cumulative and the Trust
may defer the payments for up to five years. The preferred securities mature in
June 2027 unless the Company elects and obtains regulatory approval to
accelerate the maturity date to as early as June 2002. This subordinated debt
may be included in regulatory Tier 1 capital subject to a limitation that such
amounts not exceed 25% of Tier 1 capital. At December 31, 1997, all such
subordinated debt is included in total risk-based capital. For the year ended
December 31, 1997 interest expense on subordinated debentures amounted to
$709,000. Deferred debt financing costs of $1,007,000 are included in other
assets at December 31, 1997. These costs are being amortized over the life of
the debentures. Amortization of deferred debt financing costs for 1997 was
$17,000 and is included in interest expense.
11 - 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 credit. 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.
The following financial instruments were outstanding, the contract amounts of
which represent credit risk:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1997 1996
------- -------
(Dollars in thousands)
<S> <C> <C>
Commercial lines of credit $13,082 $16,222
Commitments to grant loans 40,033 27,502
Unadvanced funds on equity lines of credit 10,426 11,855
Standby letters of credit 485 411
</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, 1997, 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:
YEARS ENDING DECEMBER 31, (DOLLARS IN THOUSANDS)
- -------------------------
1998 $288
1999 165
2000 123
2001 36
2002 36
Thereafter 6
----
$654
====
24
<PAGE> 25
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 1997, 1996,
and 1995, amounted to $333,000, $302,000, and $120,000, 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 or results of operations.
12 - 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 consolidated
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 tables) of total and Tier 1 capital (as defined) to
average assets (as defined). Management believes, as of December 31, 1997, that
the Company and the Bank meet all capital adequacy requirements to which they
are subject.
As of December 31, 1997, the most recent notification from the Federal Deposit
Insurance Corporation categorized the Bank as well capitalized under the
regulatory framework for prompt corrective action. To be categorized as well
capitalized, the Bank must maintain minimum total risk-based, Tier 1 risk-based
and Tier 1 leverage ratios as set forth in the following tables. There are no
conditions or events since that notification that management believes have
changed the Bank's category. The Company's and the Bank's actual capital amounts
and ratios as of December 31, 1997 and 1996 are also presented in the tables.
<TABLE>
<CAPTION>
MINIMUM
TO BE WELL
MINIMUM CAPITALIZED UNDER
CAPITAL PROMPT CORRECTIVE
ACTUAL REQUIREMENT ACTION PROVISIONS
------------------ -------------------- -----------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
------- ------- ------- ------- ------- -----
<S> <C> <C> <C> <C> <C> <C>
DECEMBER 31, 1997 (Dollars in thousands)
Total Capital to Risk Weighted Assets:
Consolidated $46,749 11.23% $33,293 8.0% $ N/A N/A%
Bank 42,870 10.43 32,889 8.0 41,112 10.0
Tier 1 Capital to Risk Weighted Assets:
Consolidated 38,593 9.27 16,647 4.0 N/A N/A
Bank 38,579 9.38 16,445 4.0 24,667 6.0
Tier 1 Capital to Average Assets:
Consolidated 38,593 5.25 29,432 4.0 N/A N/A
Bank 38,579 5.26 29,344 4.0 36,680 5.0
DECEMBER 31, 1996
Total Capital to Risk Weighted Assets:
Consolidated 33,671 13.56 19,858 8.0% N/A N/A
Bank 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 N/A N/A
Bank 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 N/A N/A
Bank 30,733 6.04 20,340 4.0 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 and 1995, stock warrants for 181,191
and 20,296 shares were exercised, respectively.
13 - EMPLOYEE BENEFIT PLANS
PENSION PLAN
The Bank has a qualified defined benefit plan providing pension benefits through
membership in the Savings Banks Employees Retirement Association (the
"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.
An analysis of net periodic pension cost for the plan years ended October 31,
1997, 1996, and 1995 follows:
<TABLE>
<CAPTION>
1997 1996 1995
----- ----- -----
(Dollars in thousands)
<S> <C> <C> <C>
Service cost-benefits earned during the period $ 181 $ 106 $ 104
Interest cost on projected benefits 144 125 141
Actual return on plan assets (343) (294) (334)
Net amortization and deferral (8) (8) (8)
Net loss 125 113 177
----- ----- -----
$ 99 $ 42 $ 80
===== ===== =====
</TABLE>
Total pension expense for the years ended December 31, 1997, 1996, and 1995
amounted to $128,000, $38,000, and $95,000, respectively.
According to the Association's actuary, a reconciliation of the funded status of
the plan follows:
<TABLE>
<CAPTION>
OCTOBER 31,
--------------------
1997 1996
------- -------
(Dollars in thousands)
<S> <C> <C>
Plan assets at fair value $ 2,095 $ 2,273
Projected benefit obligation 2,330 1,915
------- -------
Excess (deficiency) of plan assets over
projected benefit obligation (235) 358
Unamortized net surplus since adoption of SFAS 87 (122) (130)
Unrecognized net gain (422) (908)
------- -------
Pension liability $ (779) $ (680)
======= =======
</TABLE>
The accumulated benefit obligation (substantially all vested) at October 31,
1997, amounted to $1,464,000, which was less than the fair value of plan assets
at that date. For the plan years ended October 31, 1997, 1996, and 1995,
actuarial assumptions include an assumed discount rate on benefit obligations of
7.25%, 7.5%, and 7%, respectively and an expected long term rate of return on
plan assets of 8% for all years. An annual salary increase of 5% was used for
1997, and 1996, and 4% was used for 1995.
25
<PAGE> 26
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 the 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 expense for this plan for the years ended December 31,
1997, 1996, and 1995 was $214,000, $36,000, and $42,000, respectively.
14 - STOCK OPTION PLANS
At December 31, 1997, the Company has three stocked-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 indicated below.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------
1997 1996 1995
------- ------- -------
(Dollars in thousands, except per share data)
<S> <C> <C> <C> <C>
Net income As reported $ 5,131 $ 3,559 $ 2,194
Pro forma $ 4,884 $ 3,404 $ 2,109
Basic earnings per share As reported $ 1.49 $ 1.11 $ 0.95
Pro forma $ 1.42 $ 1.06 $ 0.91
Diluted earnings per share As reported $ 1.47 $ 1.09 $ 0.87
Pro forma $ 1.40 $ 1.04 $ 0.84
</TABLE>
Under the 1995 Employee and Director Stock Option Plans and the 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:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Dividend yield 2.88% 2.75% 2.78%
Expected life 10 years 10 years 10 years
Expected volatility 24% 36% 44%
Risk-free interest rate 6.5% 7.0% 6.6%
</TABLE>
A summary of the status of the Company's stock option plans as of December 31,
1997, 1996 and 1995, and changes during the years then ended, is as follows:
<TABLE>
<CAPTION>
1997 1996 1995
------------------- ------------------- --------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
------ -------- ------ -------- ------ --------
(In thousands, except weighted average exercise price)
Shares under option:
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year 172 $ 6.09 200 $5.52 169 $5.17
Granted 94 14.56 63 9.56 35 7.11
Exercised (81) 5.75 (89) 7.09 (3) 4.25
Canceled - - (2) 9.50 (1) 6.13
--- --- ---
Outstanding at end of year 185 $10.55 172 $6.09 200 $5.52
=== === ===
Options exercisable at year-end 165 $10.09 172 $6.09 199 $5.52
Weighted-average fair value of
options granted during the year $ 4.69 $3.78 $3.30
</TABLE>
Information pertaining to options outstanding at December 31, 1997 is as
follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
-------------------------------------------- -------------------------
WEIGHTED AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
RANGE of NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
EXERCISE PRICES OUTSTANDING LIFE PRICE EXERCISABLE PRICE
--------------- -------------- ---------- ---------- -------------- --------
(In thousands) (In thousands)
<S> <C> <C> <C> <C> <C>
$4.00 - $9.25 61 6.2 years $ 4.88 61 4.88
$9.50 - $20.00 124 9.3 years 13.31 104 13.11
--- ---
Outstanding at end of year 185 8.2 years $10.55 165 $10.09
=== ===
</TABLE>
15 - 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 1997, 1996, and 1995. Shares held by the ESOP were 24,351 and
27,212 at December 31, 1997 and 1996, respectively, all of which were allocated.
16 - RELATED PARTY TRANSACTIONS
In the ordinary course of business, the Bank has granted loans to
principal officers and directors and their affiliates. Such loans totaled
$2,502,000 at December 31, 1997 and $2,618,000 at December 31, 1996. During
1997, total principal additions were $580,000 and total principal payments were
$270,000. Directors who resigned during 1997 had loans outstanding totaling
$426,000 at December 31, 1996.
17 - 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.
26
<PAGE> 27
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 short-term
instruments 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.
Subordinated debentures: Fair value for subordinated debentures is based on
the quoted market price of the trust preferred securities underlying the
subordinated debentures.
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 Bank's financial
instruments are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------------------------
1997 1996
--------------------- ---------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
-------- --------- -------- --------
(Dollars in thousands)
Financial assets:
<S> <C> <C> <C> <C>
Cash and cash equivalents $ 30,693 $ 30,693 $ 12,478 $ 12,478
Securities available for sale 245,636 245,636 184,195 184,195
Securities held to maturity 44,253 44,439 - -
Restricted stock 14,824 14,824 8,322 8,322
Loans held for sale 24,735 24,735 25,612 25,612
Loans, net 382,407 383,170 246,195 247,896
Accrued interest receivable 4,435 4,435 2,888 2,888
Financial Liabilities:
Deposits 355,083 355,377 336,238 336,738
Borrowed funds 356,550 356,010 123,920 123,577
Accrued interest payable 2,423 2,423 1,114 1,114
Subordinated debentures 13,800 14,760 - -
</TABLE>
The estimated fair values of off-balance-sheet financial instruments at December
31, 1997 and 1996 are immaterial.
18 - 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, 1997, the Bank's retained earnings available for the
payment of dividends was approximately $10,603,000 and funds available for loans
and advances amounted to $3,968,000. Accordingly, $29,072,000 of the
Company's equity in the net assets of the Bank was restricted at December 31,
1997.
In addition, dividends paid by the Bank to the Company would be prohibited if
such payment would cause the Bank's capital to be reduced below applicable
minimum capital requirements.
19 - SEGMENT INFORMATION
The Company is comprised of the Bank and the mortgage banking subsidiary.
Summarized data for the Company's mortgage banking operations for the years
ended December 31, 1997 and 1996 and the period from March 31, 1995 to December
31, 1995 is as follows:
PERIODS ENDED DECEMBER 31,
-----------------------------------
1997 1996 1995
------- ------- ------
(In thousands)
Net interest and dividend income $ 1,509 $ 696 $ -
Net gain on sale of mortgage loans 4,119 2,190 675
Other income 160 146 75
------- ------- ------
Total income 5,788 3,032 750
Operating expenses 4,766 3,239 1,016
------- ------- ------
Income (loss) before income tax 1,022 (207) (266)
Income tax expense (benefit) 431 $ (66) (89)
------- ------- ------
Net income (loss) $ 591 $ (141) $ (177)
======= ======= ======
Total assets $26,731 $27,707 $6,246
======= ======= ======
Depreciation expense $ 93 $ 55 $ 11
======= ======= ======
Capital expenditures $ 211 $ 208 $ 253
======= ======= ======
27
<PAGE> 28
20 - CONDENSED FINANCIAL STATEMENTS OF PARENT COMPANY
Financial information pertaining only to People's Bancshares, Inc. is as
follows:
BALANCE SHEETS
<TABLE>
<CAPTION> DECEMBER 31,
-----------------------
1997 1996
-------- --------
(In thousands)
<S> <C> <C>
Assets
Cash and cash equivalents $ 62 $ 50
Securities available for sale 3,214 -
Investment in common stock of
People's Savings Bank of Brockton 39,675 31,119
Investment in common stock of
People's Bancshares Capital Trust 427 -
Organization costs, net of
accumulated amortization 140 186
Deferred debt financing costs and other assets 1,083 -
-------- --------
Total assets $ 44,601 $ 31,355
======== ========
Liabilities and Stockholders' Equity
Accrued expenses $ 15 $ 2
Due to People's Savings Bank of Brockton 223 289
Subordinated debentures 14,227 -
-------- --------
Total liabilities 14,465 291
Stockholders' equity:
Serial preferred stock - -
Common stock 364 356
Additional paid-in capital 23,400 22,967
Retained earnings 12,253 8,562
-------- --------
36,017 31,885
Treasury stock, at cost - 355,000 shares (6,213) -
Net unrealized gain (loss) on securities
available for sale, after tax effects 332 (821)
-------- --------
Total stockholders' equity 30,136 31,064
-------- --------
Total liabilities and stockholders' equity $ 44,601 $ 31,355
======== ========
</TABLE>
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
FOR THE PERIOD
YEAR ENDED FEBRUARY 8, 1996 TO
DECEMBER 31, 1997 DECEMBER 31,1996
----------------- ----------------
(In thousands)
<S> <C> <C>
Income:
Dividends from People's Savings Bank $ 3,565 $ 751
of Brockton
Dividends from People's Bancshares 21 -
Capital Trust
Interest on investment securities 77 -
Interest on short-term investments 157 -
------- -------
Total income 3,820 751
------- -------
Expenses:
Interest on subordinated debentures 731 -
Operating expenses 134 41
Amortization of organization costs 46 42
------- -------
Total operating expenses 911 83
------- -------
Income before income taxes and equity in
undistributed income of People's Savings
Bank of Brockton 2,909 668
Income tax benefit (223) (28)
------- -------
3,132 696
Equity in undistributed income of
People's Savings Bank of Brockton 1,999 2,662
------- -------
Net income $ 5,131 $ 3,358
======= =======
</TABLE>
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE PERIOD
YEAR ENDED FEBRUARY 8, 1996 TO
DECEMBER 31, 1997 DECEMBER 31, 1996
----------------- -------------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 5,131 $ 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 (1,999) (2,662)
Amortization of organization costs 46 42
Increase (decrease) in accrued expenses (2) 2
Increase (decrease) in due to bank subsidiary (66) 289
Increase in other assets (63) -
-------- --------
Net cash provided by operating activities 3,047 1,029
-------- --------
Cash flows from investing activities:
Investments in subsidiaries (5,856) -
Purchase of investment securities (3,174) -
Organization costs - (228)
-------- --------
Net cash used by investing activities (9,030) (228)
-------- --------
Cash flows from financing activities:
Proceeds from exercise of stock options 441 -
Payments for issuance of subordinated debentures 13,207 -
Payments to acquire treasury stock (6,213) -
Cash dividends paid on common stock (1,440) (751)
-------- --------
Net cash provided (used) by financing activities 5,995 (751)
-------- --------
Net increase in cash and cash equivalents 12 50
Cash and cash equivalents, beginning of period 50 -
-------- --------
Cash and cash equivalents, end of period $ 62 $ 50
======== ========
</TABLE>
28
<PAGE> 29
21 - QUARTERLY DATA (UNAUDITED)
Quarterly consolidated operating results are summarized as follows:
<TABLE>
<CAPTION>
1997
-------------------------------------------
FOURTH THIRD SECOND FIRST
QUARTER QUARTER QUARTER QUARTER
------- ------- ------- -------
(Dollars in thousands, except per share data)
<S> <C> <C> <C> <C>
Interest and dividend income $13,090 $11,394 $10,286 $ 9,729
Interest expense 8,438 6,764 5,668 5,315
------- ------- ------- -------
Net interest income 4,652 4,630 4,618 4,414
Provision for loan losses 100 - - -
------- ------- ------- -------
Net interest income, after provision for loan losses 4,552 4,630 4,618 4,414
Other income 2,054 1,526 1,335 1,282
Operating expenses 4,520 4,240 3,938 3,648
------- ------- ------- -------
Income before income taxes 2,086 1,916 2,015 2,048
Provision for income taxes 758 697 738 741
------- ------- ------- -------
Net income $ 1,328 $ 1,219 $ 1,277 $ 1,307
======= ======= ======= =======
Diluted earnings per share $ 0.40 $ 0.36 $ 0.35 $ 0.36
Basic earnings per share 0.40 0.37 0.36 0.36
</TABLE>
<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
====== ====== ====== ======
Diluted earnings per share $ 0.28 $ 0.28 $ 0.28 $ 0.25
Basic earnings per share 0.27 0.29 0.29 0.26
</TABLE>
Fluctuations in the quarterly results are due primarily to the effect of
fluctuating provisions for loan losses, the seasonality of the mortgage-banking
subsidiary and various non-recurring expenses. Additionally, during March 1996,
the Bank completed the Branch Acquisitions, which significantly affected
operating results. Non-recurring expenses related to the Branch Acquisitions
amounted to $223,000, $70,000, $50,000 and $3,000 for the first through fourth
quarters of 1996, respectively. The Company also had non-recurring severance
costs of $292,000 in the fourth quarter of 1996 and non-recurring restructuring
charges of $268,000 associated with the proposed closing of two branches in the
fourth quarter of 1997.
29
<PAGE> 30
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
subsidiaries as of December 31, 1997 and 1996, 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, 1997. 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 subsidiaries as of December 31, 1997 and 1996, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1997 in conformity with generally accepted accounting
principles.
Boston, Massachusetts
January 23, 1998
30
<PAGE> 31
<TABLE>
<CAPTION>
BOARD OF DIRECTORS OFFICERS
<S> <C>
PEOPLE'S BANCSHARES, INC.
Frederick W. Adami, III Esq. Richard S. Straczynski
Attorney, President & Chief Executive Officer
Reed, Adami, & Kaiser Colin C. Blair
Virginia M. Burke Chief Financial Officer
Retired, Regional Public Affairs Manager, PEOPLE'S SAVINGS BANK OF BROCKTON
NYNEX Richard S. Straczynski
Benjamin Cavallo President & Chief Executive Officer
Partner, Colin C. Blair
Cavallo & Signoriello Insurance Agency Chief Financial Officer
John R. Eaton George M. Custodio
Executive Vice President, Treasurer
Cushman & Eaton Insurance Agency, Inc. Donna L. Boulanger
Terrence Gomes Senior Lending Officer
Dean of Faculty & Instruction, Charles R. Leyton
Massasoit Community College Credit Administration Officer
Fred W. Green Maureen A. Gregory
President, Branch Administrator
F. W. Green Associates Jean M. Levesque
Dr. Loring C. Johnson Comptroller
Orthodontist PEOPLE'S MORTGAGE CORPORATION
Richard D. Matthews Richard S. Straczynski
President and Treasurer, Chief Executive Officer
R.D. Matthews Construction Co., Inc. John J. Kiernan, Jr.
Scott W. Ramsay President
Senior Vice President/Retail Colin C. Blair
Shaws Supermarkets Chief Financial Officer
Gerald R. Rodman James F. Ryder
Retired Vice President & Partner, Executive Vice President
Rodman Ford Sales Andrew A. Brown
Davis H. Scudder Comptroller
Executive Vice President Treasurer, INDEPENDENT AUDITORS
Scudder Bros. Fuel Co., Inc. Wolf & Company, P.C.
Stanley D. Siskind One International Place
Retired, First Vice President, Boston, Massachusetts 02110
Rix Dunnington, Inc. SHAREHOLDER INFORMATION
Richard S. Straczynski Stock Listing: People's Bancshares, Inc. common stock
is quoted on the NASDAQ National Market System.
President & Chief Executive Officer, Current price information on the Company's stock may
be found in major daily newspaper stock tables.
People's Bancshares, Inc.
Trading Symbol: "PBKB"
</TABLE>
31
<PAGE> 32
The following table sets forth the high and low closing prices for the period
indicated:
HIGH LOW
1997
First Quarter $13.125 $10.375
Second Quarter 15.50 11.50
Third Quarter 20.75 15.00
Fourth Quarter 25.25 17.00
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
At February 28, 1998, there were approximately 680 stockholders of record.
The most recent quarterly dividend was declared by the Company on January 28,
1998, totaled $0.12 per share and was paid on February 28, 1998. The Company
declared and paid a quarterly dividend of $0.09, $0.11, $0.11, and $0.11 per
share in the first, second, third and fourth quarters of 1997. The Company
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 dividend
payout ratio was 28.2%, 24.3%, and 4.2% in 1997, 1996 and 1995, respectively.
Annual Meeting: The Annual Meeting of Stockholders of People's Bancshares, Inc.
will be held on Tuesday, May 19, 1998.
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 3203
New Bedford, Massachusetts 02741-3203
(888) 222-9839
This Annual Report has not been reviewed or confirmed for accuracy or relevance
by the Securities and Exchange Commission.
32
<PAGE> 1
EXHIBIT 21
Schedule of Subsidiaries of the Company
Parent Company: People's Bancshares, Inc.
Subsidiaries: People's Savings Bank of Brockton
A Massachusetts Savings Bank
People's Bancshares Capital Trust
<PAGE> 1
[LOGO] One International Place
Boston, Massachusetts 02110-9801
617/439-9700 Fax 617/439-0476
1441 Main Street
Springfield, Massachusetts 01103
413/747-9042 Fax 413/733-1990
http://www.wolfandco.com
- --------------------------------------------------------------------------------
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 23, 1998 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, 1997.
Wolf & Company, P.C.
- --------------------
Wolf & Company, P.C.
Boston, Massachusetts
March 30, 1998
Member of Associated Regional Accounting Firms and TGI International
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM PEOPLE'S
BANCSHARES, INC. AND SUBSIDIARIES ANNUAL FINANCIAL STATEMENTS FOR THE YEAR ENDED
DECEMBER 31, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS CONTAINED IN FORM 10-K.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> US DOLLARS
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<EXCHANGE-RATE> 1
<CASH> 13,759
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 16,934
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 245,636
<INVESTMENTS-CARRYING> 44,253
<INVESTMENTS-MARKET> 44,439
<LOANS> 411,433
<ALLOWANCE> 4,291
<TOTAL-ASSETS> 762,910
<DEPOSITS> 355,083
<SHORT-TERM> 178,350
<LIABILITIES-OTHER> 6,227
<LONG-TERM> 192,000
0
0
<COMMON> 364
<OTHER-SE> 29,772
<TOTAL-LIABILITIES-AND-EQUITY> 762,910
<INTEREST-LOAN> 25,297
<INTEREST-INVEST> 18,829
<INTEREST-OTHER> 374
<INTEREST-TOTAL> 44,500
<INTEREST-DEPOSIT> 11,785
<INTEREST-EXPENSE> 26,185
<INTEREST-INCOME-NET> 18,315
<LOAN-LOSSES> 100
<SECURITIES-GAINS> 261
<EXPENSE-OTHER> 16,347
<INCOME-PRETAX> 8,065
<INCOME-PRE-EXTRAORDINARY> 8,065
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,131
<EPS-PRIMARY> 1.49
<EPS-DILUTED> 1.47
<YIELD-ACTUAL> 3.12
<LOANS-NON> 3,894
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 4,716
<CHARGE-OFFS> 727
<RECOVERIES> 202
<ALLOWANCE-CLOSE> 4,291
<ALLOWANCE-DOMESTIC> 3,615
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 676
</TABLE>
<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, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS CONTAINED IN SUCH FORM 10-Q.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<EXCHANGE-RATE> 1
<CASH> 10,868
<INT-BEARING-DEPOSITS> 10,508
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 266,058
<INVESTMENTS-CARRYING> 22,712
<INVESTMENTS-MARKET> 22,552
<LOANS> 391,694
<ALLOWANCE> 4,235
<TOTAL-ASSETS> 717,451
<DEPOSITS> 348,706
<SHORT-TERM> 44,250
<LIABILITIES-OTHER> 17,080
<LONG-TERM> 278,000
0
0
<COMMON> 364
<OTHER-SE> 29,051
<TOTAL-LIABILITIES-AND-EQUITY> 717,451
<INTEREST-LOAN> 17,688
<INTEREST-INVEST> 13,514
<INTEREST-OTHER> 208
<INTEREST-TOTAL> 31,410
<INTEREST-DEPOSIT> 8,619
<INTEREST-EXPENSE> 17,747
<INTEREST-INCOME-NET> 13,663
<LOAN-LOSSES> 0
<SECURITIES-GAINS> 2
<EXPENSE-OTHER> 11,827
<INCOME-PRETAX> 5,979
<INCOME-PRE-EXTRAORDINARY> 5,979
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,803
<EPS-PRIMARY> 1.09
<EPS-DILUTED> 1.07
<YIELD-ACTUAL> 3.32
<LOANS-NON> 3,519
<LOANS-PAST> 0
<LOANS-TROUBLED> 187
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 4,716
<CHARGE-OFFS> 638
<RECOVERIES> 157
<ALLOWANCE-CLOSE> 4,235
<ALLOWANCE-DOMESTIC> 3,583
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 652
</TABLE>
<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 SIX
MONTHS ENDED JUNE 30, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS CONTAINED IN SUCH FORM 10-Q.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<EXCHANGE-RATE> 1
<CASH> 13,598
<INT-BEARING-DEPOSITS> 9,018
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 269,610
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 254,557
<ALLOWANCE> 4,355
<TOTAL-ASSETS> 585,678
<DEPOSITS> 335,568
<SHORT-TERM> 63,200
<LIABILITIES-OTHER> 5,940
<LONG-TERM> 147,500
0
0
<COMMON> 360
<OTHER-SE> 33,110
<TOTAL-LIABILITIES-AND-EQUITY> 585,678
<INTEREST-LOAN> 11,150
<INTEREST-INVEST> 8,808
<INTEREST-OTHER> 58
<INTEREST-TOTAL> 20,016
<INTEREST-DEPOSIT> 5,709
<INTEREST-EXPENSE> 10,983
<INTEREST-INCOME-NET> 9,033
<LOAN-LOSSES> 0
<SECURITIES-GAINS> (3)
<EXPENSE-OTHER> 7,587
<INCOME-PRETAX> 4,063
<INCOME-PRE-EXTRAORDINARY> 4,063
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,584
<EPS-PRIMARY> .72
<EPS-DILUTED> .71
<YIELD-ACTUAL> 3.47
<LOANS-NON> 3,991
<LOANS-PAST> 0
<LOANS-TROUBLED> 197
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 4,716
<CHARGE-OFFS> 481
<RECOVERIES> 120
<ALLOWANCE-CLOSE> 4,355
<ALLOWANCE-DOMESTIC> 3,443
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 892
</TABLE>
<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 THREE
MONTHS ENDED MARCH 31, 1997, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS CONTAINED IN SUCH FORM 10-Q.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<EXCHANGE-RATE> 1
<CASH> 14,494
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 252,346
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 249,340
<ALLOWANCE> 4,378
<TOTAL-ASSETS> 548,774
<DEPOSITS> 328,331
<SHORT-TERM> 20,308
<LIABILITIES-OTHER> 477
<LONG-TERM> 164,050
0
0
<COMMON> 359
<OTHER-SE> 30,431
<TOTAL-LIABILITIES-AND-EQUITY> 548,774
<INTEREST-LOAN> 5,599
<INTEREST-INVEST> 4,091
<INTEREST-OTHER> 39
<INTEREST-TOTAL> 9,729
<INTEREST-DEPOSIT> 2,836
<INTEREST-EXPENSE> 5,315
<INTEREST-INCOME-NET> 4,414
<LOAN-LOSSES> 0
<SECURITIES-GAINS> (11)
<EXPENSE-OTHER> 3,647
<INCOME-PRETAX> 2,049
<INCOME-PRE-EXTRAORDINARY> 2,049
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,308
<EPS-PRIMARY> .36
<EPS-DILUTED> .36
<YIELD-ACTUAL> 3.07
<LOANS-NON> 3,610
<LOANS-PAST> 0
<LOANS-TROUBLED> 351
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 4,716
<CHARGE-OFFS> 374
<RECOVERIES> 36
<ALLOWANCE-CLOSE> 4,378
<ALLOWANCE-DOMESTIC> 3,219
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 1,159
</TABLE>
<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 12 MONTHS
ENDED DECEMBER 31, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS CONTAINED IN SUCH FORM 10-K.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<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
<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> 1.11
<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>
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 3,
1996.
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM (A) PEOPLE'S
BANCSHARES INC. IND SUBSIDIARY QUARTERLY FINANCIAL STATEMENTS FOR THE 9 MONTHS
ENDED SEPTEMBER 30, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
(B) FINANCIAL STATEMENTS CONTAINED IN SUCH FORM 10-Q
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<EXCHANGE-RATE> 1
<CASH> 13,980
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 3,633
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 214,895
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 254,855
<ALLOWANCE> 4,747
<TOTAL-ASSETS> 513,421
<DEPOSITS> 339,112
<SHORT-TERM> 37,750
<LIABILITIES-OTHER> 977
<LONG-TERM> 103,020
0
0
<COMMON> 339
<OTHER-SE> 28,485
<TOTAL-LIABILITIES-AND-EQUITY> 513,421
<INTEREST-LOAN> 14,374
<INTEREST-INVEST> 10,041
<INTEREST-OTHER> 123
<INTEREST-TOTAL> 24,538
<INTEREST-DEPOSIT> 7,448
<INTEREST-EXPENSE> 13,684
<INTEREST-INCOME-NET> 10,854
<LOAN-LOSSES> 75
<SECURITIES-GAINS> (28)
<EXPENSE-OTHER> 9,776
<INCOME-PRETAX> 4,074
<INCOME-PRE-EXTRAORDINARY> 4,074
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,628
<EPS-PRIMARY> .84
<EPS-DILUTED> .81
<YIELD-ACTUAL> 2.46
<LOANS-NON> 5,095
<LOANS-PAST> 0
<LOANS-TROUBLED> 550
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 3,813
<CHARGE-OFFS> 946
<RECOVERIES> 153
<ALLOWANCE-CLOSE> 4,747
<ALLOWANCE-DOMESTIC> 3,404
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 1,343
<FN>
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>
<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 6 MONTHS
ENDED JUNE 30, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS CONTAINED IN SUCH FORM 10-Q.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-31-1996
<PERIOD-END> JUN-30-1996
<EXCHANGE-RATE> 1
<CASH> 21,465
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 5,031
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 223,118
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 250,244
<ALLOWANCE> 4,922
<TOTAL-ASSETS> 524,443
<DEPOSITS> 330,399
<SHORT-TERM> 41,200
<LIABILITIES-OTHER> 979
<LONG-TERM> 120,370
0
0
<COMMON> 337
<OTHER-SE> 27,435
<TOTAL-LIABILITIES-AND-EQUITY> 524,443
<INTEREST-LOAN> 8,809
<INTEREST-INVEST> 6,391
<INTEREST-OTHER> 64
<INTEREST-TOTAL> 15,264
<INTEREST-DEPOSIT> 4,531
<INTEREST-EXPENSE> 8,587
<INTEREST-INCOME-NET> 6,677
<LOAN-LOSSES> 75
<SECURITIES-GAINS> (24)
<EXPENSE-OTHER> 6,157
<INCOME-PRETAX> 2,624
<INCOME-PRE-EXTRAORDINARY> 2,624
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,654
<EPS-PRIMARY> .55
<EPS-DILUTED> .53
<YIELD-ACTUAL> 2.87
<LOANS-NON> 4,811
<LOANS-PAST> 0
<LOANS-TROUBLED> 726
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 3,813
<CHARGE-OFFS> 740
<RECOVERIES> 122
<ALLOWANCE-CLOSE> 4,922
<ALLOWANCE-DOMESTIC> 3,634
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 1,288
<FN>
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>
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SHCEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM PEOPLE'S
BANCSHARES, INC. AND SUBSIDIARY QUARTERLY FINANCIAL STATEMENTS FOR THE 3 MONTHS
ENDED MARCH 31, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS CONTAINED IN SUCH FORM 10-Q
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> MAR-31-1996
<EXCHANGE-RATE> 1
<CASH> 19,182
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 26
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 223,458
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 251,160
<ALLOWANCE> 5,166
<TOTAL-ASSETS> 533,134
<DEPOSITS> 322,261
<SHORT-TERM> 37,367
<LIABILITIES-OTHER> 30,154
<LONG-TERM> 115,970
0
0
<COMMON> 334
<OTHER-SE> 27,048
<TOTAL-LIABILITIES-AND-EQUITY> 533,134
<INTEREST-LOAN> 3,674
<INTEREST-INVEST> 2,902
<INTEREST-OTHER> 32
<INTEREST-TOTAL> 6,609
<INTEREST-DEPOSIT> 1,752
<INTEREST-EXPENSE> 3,655
<INTEREST-INCOME-NET> 2,954
<LOAN-LOSSES> 75
<SECURITIES-GAINS> (24)
<EXPENSE-OTHER> 2,680
<INCOME-PRETAX> 1,094
<INCOME-PRE-EXTRAORDINARY> 1,094
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 687
<EPS-PRIMARY> .26
<EPS-DILUTED> .25
<YIELD-ACTUAL> 3.38
<LOANS-NON> 5,491
<LOANS-PAST> 0
<LOANS-TROUBLED> 603
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 3,813
<CHARGE-OFFS> 437
<RECOVERIES> 63
<ALLOWANCE-CLOSE> 5,166
<ALLOWANCE-DOMESTIC> 3,745
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 1,421
<FN>
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>
