<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1999
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ______ TO _______
Commission file number 0-7449
------
PEOPLE'S BANCSHARES, INC.
(Exact name of registrant as specified in its charter)
MASSACHUSETTS 04-3272233
- ------------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
545 PLEASANT STREET
NEW BEDFORD, MASSACHUSETTS 02740
- -------------------------- -----
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (508) 991-2601
-------------------
-----------------------------
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No .
--- ---
The number of shares of Registrant's Common Stock, $0.10 par value, outstanding
as of March 31, 1999 was 3,320,218.
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PEOPLE'S BANCSHARES, INC.
FORM 10-Q
QUARTERLY REPORT
--------------------
TABLE OF CONTENTS
<TABLE>
<S> <C>
Facing Page 1
Table of Contents 2
PART I. FINANCIAL INFORMATION (*)
Item 1. Financial Statements:
Consolidated Balance Sheets 3
Consolidated Statements of Income 4
Consolidated Statements of Changes in Stockholders' Equity 5
Consolidated Statements of Cash Flows 6
Notes to Unaudited Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 9
Item 3 Quantitative and Qualitative Disclosures about Market Risk 16
PART II OTHER INFORMATION 17
SIGNATURES 18
EXHIBITS 19
</TABLE>
(*) The financial information at December 31, 1998 has been derived from the
audited financial statements at that date and should be read in
conjunction therewith. All other financial statements are unaudited.
2
<PAGE> 3
PEOPLE'S BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
--------- ---------
ASSETS
<S> <C> <C>
Cash and due from banks $ 11,112 $ 19,794
Short-term investments 11 16,016
--------- ---------
Total cash and cash equivalents 11,123 35,810
Interest-bearing deposits 2,780 2,084
Securities available for sale 55,371 189,739
Securities held to maturity (fair value
of $401,569 in 1999 and $186,125 in 1998) 403,794 186,559
Restricted equities securities, at cost 19,841 19,841
Loans held for sale 33,234 63,918
Loans, net of allowance for loan losses of
$4,908 in 1999 and $4,866 in 1998 399,005 423,778
Other real estate owned, net 135 105
Banking premises and equipment, net 14,473 13,927
Accrued interest receivable 7,434 6,418
Intangible assets 497 509
Other assets 2,123 1,952
--------- ---------
Total assets $ 949,810 $ 944,640
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits $ 481,894 $ 470,887
Borrowed funds 410,788 416,900
Mortgagors' escrow accounts 1,290 1,408
Accrued expenses and other liabilities 5,552 6,978
Subordinated debentures 13,800 13,800
--------- ---------
Total liabilities 913,324 909,973
--------- ---------
Stockholders' equity:
Serial preferred stock - par value $0.10 per share; authorized
10,000,000 shares, none issued -- --
Common stock - par value $0.10 per share; authorized 20,000,000 shares,
issued 3,675,218 and 3,675,218 shares 368 368
Additional paid-in capital 23,683 23,683
Retained earnings 19,578 17,948
Treasury stock, at cost - 355,000 shares (6,213) (6,213)
Accumulated other comprehensive loss (930) (1,119)
--------- ---------
Total stockholders' equity 36,486 34,667
--------- ---------
Total liabilities and stockholders' equity $ 949,810 $ 944,640
========= =========
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
3
<PAGE> 4
PEOPLE'S BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Dollars and shares in thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
------------------------
1999 1998
-------- --------
<S> <C> <C>
Interest and dividend income:
Interest and fees on loans $ 8,405 $ 7,976
Interest and dividends on investment securities 8,675 5,649
Interest on short-term investments 100 108
-------- --------
Total interest and dividend income 17,180 13,733
-------- --------
Interest expense:
Interest on deposits 4,330 3,328
Interest on borrowed funds 6,223 5,577
-------- --------
Total interest expense 10,553 8,905
-------- --------
Net interest income 6,627 4,828
Provision for loan losses -- 150
-------- --------
Net interest income, after provision for loan losses 6,627 4,678
-------- --------
Other income:
Customer service fees 319 350
Gains (losses) on sales of securities, net 73 (5)
Gains on sales of loans, net 1,774 1,315
Miscellaneous 48 27
-------- --------
Total other income 2,214 1,687
-------- --------
Operating expenses:
Salaries and employee benefits 3,093 2,272
Occupancy and equipment 595 514
Data processing 304 316
Professional fees 334 164
Other real estate owned, net 21 (34)
Other general and administrative 1,020 842
-------- --------
Total operating expenses 5,367 4,074
-------- --------
Income before income taxes and cumulative effect of accounting change 3,474 2,291
Provision for income taxes 1,213 833
------- -------
Income before cumulative effect of accounting change 2,261 1,458
Cumulative effect of accounting change for organization cost, net of tax -- (186)
------- -------
Net income $ 2,261 $ 1,272
======= =======
Net income per share:
Diluted earnings per share $ 0.67 $ 0.37
Basic earnings per share 0.68 0.39
Weighted average shares outstanding - assuming dilution for stock options 3,391 3,377
Weighted average shares outstanding 3,320 3,298
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
4
<PAGE> 5
PEOPLE'S BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Three Months Ended March 31, 1999 and 1998
(Dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Accumulated
Additional Other
Common Paid-in Retained Treasury Comprehensive
Stock Capital Earnings Stock Income Total
----- ------- -------- ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1998 $ 368 $ 23,683 $ 17,948 $ (6,213) $ (1,119) $ 34,667
--------
Comprehensive income:
Net income -- -- 2,261 -- -- 2,261
Change in net unrealized gain (loss)
on securities available for sale,
after tax effects -- -- -- -- 189 189
--------
Comprehensive income 2,450
--------
Cash dividends paid -- -- (631) -- -- (631)
-------- -------- -------- -------- -------- --------
Balance at March 31, 1999 $ 368 $ 23,683 $ 19,578 $ (6,213) $ (930) $ 36,486
======== ======== ======== ======== ======== ========
Balance at December 31, 1997 $ 364 $ 23,400 $ 12,253 $ (6,213) $ 332 $ 30,136
--------
Comprehensive income:
Net income -- -- 1,272 -- -- 1,272
Change in net unrealized gain (loss)
on securities available for sale,
after tax effects -- -- -- -- 253 253
--------
Comprehensive income 1,525
--------
Cash dividends paid -- -- (395) -- -- (395)
Exercise of stock options 2 189 -- -- -- 191
-------- -------- -------- -------- -------- --------
Balance at March 31, 1998 $ 366 $ 23,589 $ 13,130 $ (6,213) $ 585 $ 31,457
======== ======== ======== ======== ======== ========
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
5
<PAGE> 6
PEOPLE'S BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
-------------------------
1999 1998
--------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 2,261 $ 1,272
Adjustments to reconcile net income to net cash provided (used) by
operating activities:
Provision for loan losses -- 150
Depreciation and amortization 318 82
Net amortization (accretion) on securities and purchased loans (521) (178)
(Gains) losses on sales of securities, net (73) 5
Net change in loans held for sale 30,684 (21,359)
(Gain) loss on other real estate owned 9 (56)
Increase in other assets, net of other liabilities (2,553) 186
--------- ---------
Net cash provided (used) by operating activities 30,125 (19,898)
--------- ---------
Cash flows from investing activities:
Proceeds from sales of investment securities available for sale 48,524 62,175
Proceeds from maturities of securities available for sale -- 13,900
Proceeds from maturities, prepayments and calls of securities held to maturity 11,369 --
Proceeds from amortization of mortgage-backed securities 17,328 22,448
Purchase of securities available for sale (63,163) (103,641)
Purchase of securities held to maturity (96,414) --
Proceeds from sales of purchased loans -- 8,268
Loan (originations and purchases) amortization and payoffs, net 24,145 (75,896)
Proceeds from sales of other real estate owned 96 102
Additions to banking premises and equipment (843) (386)
--------- ---------
Net cash used in investing activities (58,958) (73,030)
--------- ---------
Cash flows from financing activities:
Net increase in deposits 11,007 31,116
Net increase (decrease) in borrowings with maturities of three months or less 888 (7,000)
Proceeds from issuance of borrowings with maturities in excess of three months 10,000 164,000
Repayment of borrowings with maturities in excess of three months (17,000) (91,000)
(Decrease) increase in mortgagors' escrow accounts (118) 183
Proceeds from exercise of stock options -- 191
Cash dividends (631) (395)
--------- ---------
Net cash provided by financing activities 4,146 97,095
--------- ---------
Net (decrease) increase in cash and cash equivalents (24,687) 4,167
Cash and cash equivalents at beginning of period 35,810 30,693
--------- ---------
Cash and cash equivalents at end of period $ 11,123 $ 34,860
========= =========
Supplementary information:
Interest paid $ 10,587 $ 8,717
Income taxes paid 1,807 1,337
Transfer from loans to other real estate owned, net 135 60
Change in due from brokers, net -- 163
Transfers from investment securities available for sale to investment
securities held to maturity 150,261 --
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
6
<PAGE> 7
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Consolidated Balance Sheet as of March 31, 1999, and the Consolidated
Statements of Income, Changes in Stockholders' Equity, and Cash Flows for
the periods ended March 31, 1999 and 1998 of People's Bancshares, Inc. and
Subsidiaries (the "Company") furnished in this report are unaudited;
however, these interim consolidated financial statements reflect all
adjustments that are, in the opinion of management, necessary for a fair
statement of the results for the interim periods presented. Interim results
are not necessarily indicative of results to be expected for the year.
The unaudited consolidated interim financial statements furnished in this
report are intended to be read in conjunction with the consolidated
financial statements of the Company presented in its Annual Report for the
year ended December 31, 1998.
In the third quarter of 1998, the Company elected early adoption of the
provisions of the Accounting Standards Executive Committee ("ACSEC")
Statement of Position 98-5, "Reporting on the Costs of Start-Up Activities"
("SOP 98-5"), retroactively effective as of January 1, 1998 in accordance
with SOP 98-5. SOP 98-5 requires the costs of start-up activities to be
expensed as incurred instead of being capitalized and amortized. SOP 98-5
became effective in June, 1998 and would have required adoption by the
Company in the first quarter of 1999. The cumulative effect of this
accounting change at January 1, 1998 was to decrease net income by $186,000
or $0.05 per diluted share in the first quarter of 1998 and to decrease net
income by $42,000 or $0.01 per diluted share in the second quarter of 1998.
The Company's restated condensed financial information as a result of the
retroactive adoption of SOP 98-5 is summarized below:
<TABLE>
<CAPTION>
Previously Previously
reported Restated reported Restated
--------- -------- ---------- --------
Three months ended Three months ended
March 31, 1998 June 30, 1998
--------------------- -----------------------
(Dollars in thousands, except per share data)
<S> <C> <C> <C> <C>
Net interest income, after provision
for loan losses $ 4,678 $ 4,678 $ 5,069 $ 5,069
Other income 1,687 1,687 2,092 2,092
Operating expenses 4,100 4,074 4,757 4,831
-------- -------- -------- --------
Income before taxes 2,265 2,291 2,404 2,330
Provision for income taxes 825 833 876 844
-------- -------- -------- --------
Income before cumulative effect of a change
in accounting principle 1,440 1,458 1,528 1,486
Cumulative effect of accounting change for
organization costs, net of income tax
expense of $106,000 -- 186 -- --
-------- -------- -------- --------
Net income $ 1,440 $ 1,272 $ 1,528 $ 1,486
Diluted earnings per share $ 0.43 $ 0.37 $ 0.45 $ 0.44
Basic earnings per share 0.44 0.39 0.46 0.45
Intangible assets $ 1,089 $ 823 $ 1,368 $ 1,028
Total assets 862,000 861,734 858,377 858,037
Accrued expenses and other liabilities 6,529 6,431 5,164 5,034
Stockholders' equity 31,625 31,457 32,463 32,253
Total liabilities and stockholders' equity 862,000 861,734 858,377 858,037
</TABLE>
7
<PAGE> 8
(2) EARNINGS PER SHARE
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.
8
<PAGE> 9
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with the
unaudited consolidated financial statements and related notes included in this
report.
ASSETS
The Company's total assets at March 31, 1999 were $949.8 million, an increase of
$5.2 million from December 31, 1998. This increase includes an increase of $83.6
million in investment securities consisting primarily of mortgage-backed and
trust preferred securities and a decrease of $24.7 million in loans as a result
of prepayments.
LOANS
Loans held for sale decreased $30.7 million primarily as a result of seasonal
mortgage banking activity. The Company's loans were as follows:
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
--------- ------------
(in millions)
<S> <C> <C>
Residential mortgage loans, including
home equity loans $ 315,718 $ 343,017
Commercial, commercial real estate
and construction loans 83,183 80,375
Consumer loans 5,012 5,252
----------- ------------
Total $ 403,913 $ 428,644
========= ==========
</TABLE>
DEPOSITS
Total deposits increased $11.0 million to $481.9 million at March 31, 1999 from
$470.9 million at December 31, 1998. The increase in deposits reflects a $9.7
million increase in IRAs and time certificates of deposit, a $5.1 million
increase in municipal deposits and a $3.8 million decrease in savings and demand
deposits.
NON-PERFORMING ASSETS AND ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses has been established to absorb estimated losses in
the loan portfolio. The provision for loan losses and the level of the allowance
are evaluated periodically by management and the Board of Directors. These
provisions are the results of the Company's internal loan review, historical
loan loss experience, trends in delinquent and non-accrual loans, known and
inherent risks in the nature and volume of the loan portfolio, adverse
situations that may affect the borrower's ability to repay, collateral values,
an estimate of potential loss exposure on significant credits, concentrations of
credit, and economic conditions based on facts then known.
Periodically, management reviews the portfolio, classifying each loan into
categories by assessing the degree of risk involved. Considering this review,
the Company establishes the adequacy of its allowance and necessary additions
are charged to operations through the provision for loan losses. Loan losses are
charged against the allowance when management believes the collectibility of the
loan balance is unlikely.
9
<PAGE> 10
The allowance is an estimate. Ultimate losses may vary from current estimates
and future additions to the allowance may become necessary. In addition,
regulatory agencies, as an integral part of their examination process, review
the Company's allowance and may require the Company to provide additions to the
allowance based on their assessment, which may differ from management's.
At March 31, 1999, the Company's allowance for loan losses totaled $4.9 million
or 1.22% of total loans and 262% of non-performing loans compared to $4.9
million or 1.14% of total loans and 321% of non-performing loans at December 31,
1998, and compared to $4.3 million or 0.95% of total loans and 124% of
non-performing loans at March 31, 1998. Net recoveries for the three months
ended March 31, 1999 were $42,000 compared to net charge-offs of $125,000 for
the corresponding period in 1998.
Non-performing assets were $2.0 million or 0.21% of total assets at March 31,
1999 compared to $1.6 million or 0.17% of total assets at December 31, 1998 and
$3.6 million or 0.42% of total assets at March 31, 1998.
RESULTS OF OPERATIONS
EARNINGS
People's Bancshares, Inc. recognized net income of $2.3 million or $0.67 diluted
earnings per share for the quarter ended March 31, 1999 compared to $1.3 million
or $0.37 diluted earnings per share for the quarter ended March 31, 1998.
Diluted earnings per share excluding securities gains and non-recurring items
would have been $0.66 for the three months ended March 31, 1999. Basic earnings
per share were $0.68 for the three months ended March 31, 1999 compared to $0.39
for the three months ended March 31, 1998.
In the three months ended March 31, 1999, the Company recognized $73,000 in net
gains on sales of securities compared to net losses of $5,000 in the three
months ended March 31, 1998. There were no non-recurring expenses in the first
quarter of 1999. Included in the 1998 results were non-recurring expenses of
$0.08 per share of which $0.06 per share was related to the retroactive
restatement resulting from the early adoption of the accounting change for
organization costs.
OVERVIEW
Comparisons of year to year operating results have been significantly affected
by the growth of the Bank and its mortgage banking subsidiary, People's Mortgage
Corporation ("PMC"), which has resulted in the Company increasing its asset size
from $762.9 million at December 31, 1997 to $949.8 million at March 31, 1999.
Operating results have been significantly affected by the Bank's increasing its
average loans and average investments to $451.3 million and $470.4 million
during the first quarter of 1999, compared to $435.0 million and $311.7 million
during the first quarter of 1998. This growth in earning assets was funded by
the Bank increasing its average deposits and average borrowings to $437.3
million and $439.8 million in the first quarter of 1999, compared to $331.1
million and $382.4 million in the first quarter of 1998. Operating results have
also been significantly affected by the growth of PMC, which is reflected in
gains on sales of loans of $1.8 million, net interest and other income of
$299,000, operating expenses of $2.0 million, and income before income taxes of
$99,000 from PMC operations in the first quarter of 1999 compared to $1.3
million, $510,000, $1.2 million and $595,000, respectively, in the corresponding
period of 1998.
10
<PAGE> 11
In addition, operating results have been affected by mortgage refinancings.
Mortgage refinancings adversely affect the Company's net interest margin due to
the resulting write-offs of purchase premiums associated with mortgage-backed
securities and purchased residential mortgage loans. The amortization and
write-offs of such premiums amounted to a $0.15 charge against earnings for the
first quarter ended March 31, 1999, compared to $0.19 for the same period in
1998. Conversely, this reduced refinancing activity resulted in PMC decreasing
its diluted earnings per share contribution to $0.02 for the first quarter ended
March 31, 1999 from $0.11 for the same period in 1998.
Return on average assets was 0.96%, and return on average equity was 25.91% for
the three months ended March 31, 1999. Return on average assets was 0.66% and
return on average equity was 16.78% for the same period in 1998. Net income
amounted to $2.3 million or $0.67 per diluted share for the three months ended
March 31, 1999 compared to net income of $1.3 million or $0.37 per diluted share
for the same period in 1998. Basic earnings per share were $0.68 per share for
the three months ended March 31, 1999, compared to $0.39 per share for the same
period in 1998.
NET INTEREST INCOME
Net interest income increased $1.8 million for the three months ended March 31,
1999, compared to the same period in 1998. This change resulted mostly from
increased average earning assets. For the first three months of 1999, average
earning assets increased 23% compared to the same period in 1998.
Interest and dividend income increased to $17.2 million for the three months
ended March 31, 1999 from $13.7 million for the same period in 1998. The yield
on average earning assets increased to 7.43% for the three months ended March
31, 1999 from 7.28% for the same period in 1998. Yields on loans increased from
7.33% for the three months ended March 31, 1998, to 7.45% for the same period in
1999. The increase in the loan yields is primarily attributable to the Bank's
growth in consumer and commercial loans. Yields on investments increased to
7.38% for the three months ended March 31, 1999, compared to 7.25% for the same
period in 1998.
Interest expense increased to $10.6 million for the three months ended March 31,
1999 from $8.9 million for the same period in 1998. This increase was due to a
$646,000 increase in interest expense on borrowed funds for the three months
ended March 31, 1999. Interest expense on deposits increased $1.0 million for
the three months ended March 31, 1999, compared to the same period in 1998.
During the first three months of 1999, average borrowed funds amounted to $439.8
million compared to $382.4 million during the same period of 1998. The Company
has increased its use of borrowed funds to fund purchases of mortgage-backed
securities, trust preferred securities, and loans. The average rate paid on
borrowed funds was 5.66% for the three months ended March 31, 1999 compared to
5.83% for the same period in 1998.
Deposit interest expense increased due to an increase in average deposits to
$437.3 million for the three month period ended March 31, 1999 compared to
$331.1 million for the same period in 1998. The average cost of deposits
decreased to 3.96% for the three month periods ended March 31, 1999 from 4.02%
for the same period in 1998.
11
<PAGE> 12
PROVISION FOR LOAN LOSSES
Management determined that a provision for loan losses was not necessary for the
three months ended March 31, 1999. A provision for loan losses of $150,000 was
made for the three months ended March 31, 1998.
OTHER INCOME
Other income was $2.2 million for the three months ended March 31, 1999 compared
to $1.7 million for the same period in 1998. The increase is attributable to a
$459,000 increase in gains from sales of loans and a $78,000 increase in net
gains on sales of securities. The increase in loan sale gains reflects the
growth of People's Mortgage Corporation.
OPERATING EXPENSES
Total operating expenses amounted to $5.4 million for the three months ended
March 31, 1999 compared to $4.1 million for the same period in 1998.
Salaries and benefits expense increased $821,000 for the three months ended
March 31, 1999 compared to the same period in 1998. The increase in salaries and
benefits reflects general salary increases, added lending personnel, and
additional PMC staffing.
Occupancy and equipment expense increased $81,000 for the three months ended
March 31, 1999, compared to the same period in 1998. Other real estate owned
expenses increased $55,000 for the three months ended March 31, 1999 compared to
the same period in 1998. Other general and administrative expenses increased
$178,000 for the three months ended March 31, 1999 compared to the same period
in 1998.
The efficiency ratio for the Company for the three month period ended March 31,
1999, was 58.20%. For the same period in 1998, the ratio was 58.61%. The
efficiency ratio for the Company excluding PMC was 46.01% for the three months
ended March 31, 1999. For the same period in 1998, the ratio was 56.44%.
Increases in operating expenses are primarily due to additional costs associated
with the growth of PMC and increases of salary and benefits.
PROVISION FOR INCOME TAXES
The Company recognized income tax expense of $1.2 million in the three months
ended March 31, 1999 compared to income tax expense of $833,000 for the same
period in 1998. The effective tax rates for the three months ended March 31,
1999 and 1998 were approximately 36% and 35%, respectively.
LIQUIDITY AND CAPITAL RESOURCES
The Company's liquidity management strategy focuses upon maintaining the
Company's ability to provide the cash reserves and cash equivalents necessary to
honor contractual liabilities and commitments, meet depositors' withdrawal
demands, fund operations and provide customers with adequate available credit.
The Company's primary sources of liquidity are customer deposits, principal and
interest payments on loans, interest and dividends on investments and proceeds
from the maturity or sale of investments. The Company also has the ability to
borrow from the Federal Home Loan Bank of Boston on a collateralized basis. The
Company believes that it has adequate liquidity to meet its current needs.
12
<PAGE> 13
At March 31, 1999, the Company's capital exceeded all regulatory requirements.
The Company's Tier 1 leverage capital ratio at March 31, 1999 was 5.19%,
compared to 5.05% at December 31, 1998. Federal Reserve guidelines for the
calculation of the Tier 1 leverage capital ratio limit the amount of
subordinated debt included in Tier 1 capital to 25% of total Tier 1 capital. All
$13.8 million of the total proceeds of the Company's subordinated debentures is
included in total risk-based capital. At March 31, 1999, the Company's
risk-based capital ratio was 10.18%. The Company's book value per share was
$10.99 at March 31, 1999, $10.44 at December 31, 1998, and $9.56 at March 31,
1998.
IMPACT OF THE YEAR 2000 ISSUE
The Year 2000 (Y2K) issue exists because many computer systems and applications
currently use the two-digit date fields to designate a year. As the century date
change occurs, date sensitive systems recognize the year 2000 as 1900, or not at
all. This inability to recognize or properly treat the year 2000 may cause
systems to process critical financial and operational information incorrectly.
In the discussion that follows, "systems" refers to the Company's information
technology systems and non-information technology systems.
This section contains certain statements that are forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended. The words
"believe," "expect," "anticipate," "intend," "estimate," "assume," and other
similar expressions which are predictions of or indicate future events and
trends which do not relate to historical matters identify forward-looking
statements. The Company's readiness for the Y2K, and the eventual effects of the
Y2K on the Company, may be materially different than currently projected. This
may be due to, among other things, unanticipated delays and expenses in the
completion of the Company's Y2K initiative, the failure of its proposed
contingency plans, if such contingency plans become necessary, to achieve their
desired results and the failure of third parties with whom the Company has a
significant business relationship to achieve Y2K readiness.
To become Y2K compliant, the Company is following the Y2K project management
guidelines provided by the Federal Financial Institutions Examination Council
(FFIEC) interagency statement. The statement outlines five project management
phases essential to Y2K preparedness. The five phases and the Company's status
in its efforts in completing each follows:
o AWARENESS AND ASSESSMENT PHASES: The Company has completed these initial
phases for all systems.
o RENOVATION PHASE: The Company has completed the renovation of mission
critical systems.
o VALIDATION PHASE: The Company has completed the validation phase of its Y2K
systems.
o IMPLEMENTATION PHASE: In this phase, systems should be certified as Y2K
compliant and be accepted by the Company. Currently, 90% of the Company's
systems are Y2K compliant.
The Company has formed an internal task force, the Y2K Committee, which meets
monthly to monitor the progress of the Company's Y2K plan. An outside consultant
meets with the head of the Y2K Committee each month to ensure compliance with
the Y2K Committee's schedule.
The Company has initiated formal communications with all of its significant
processing vendors to determine the extent to which the Company is vulnerable to
the failure of those vendors to become Y2K compliant. All critical vendors are
contacted monthly
13
<PAGE> 14
regarding their compliance programs. Based on communications to date, the
Company does not anticipate any Y2K problems with respect to critical vendors.
Other vendors that the Company determined were less critical were contacted via
letter in the assessment phase.
Actual costs for implementing the Company's Y2K plan totaled $3,000 for the
three months ending March 31, 1999. These costs were charged to earnings as
incurred. The Company expects that future costs relating to the implementation
of the Y2K plan will not exceed $100,000.
Based on the phases of the Y2K plan completed to date, if the Company is unable
to fully implement its Y2K Plan in a timely manner, there is a risk that some
internal systems will fail, in which case the Company plans to utilize the
systems that are in working order until the non-working systems can be replaced.
Noncompliance by third party vendors would have a greater impact on the Company.
The Company is in the process of developing a contingency plan, which the
Company expects to be completed by June 1999. The contingency plan will be
continually monitored and revised, if necessary, due to changes in the status of
critical third parties. The Company's contract with its primary third party
servicer, BISYS, states that if the BISYS system currently used by the Company
is not ready for Y2K, the Company's operations will be converted to BISYS' fully
compliant server at no cost to the Company. The Company does not anticipate that
this conversion will be necessary.
OTHER INFORMATION
On April 14, 1999, the Company declared a $0.20 dividend to be paid on May 14,
1999 to shareholders of record on April 30, 1999.
People's maintains twelve banking locations in Southeastern Massachusetts and
six loan production offices in Massachusetts and Connecticut. People's trades
under the symbol "PBKB" and is quoted on the NASDAQ National Market System.
14
<PAGE> 15
PEOPLE'S BANCSHARES, INC.
SUPPLEMENTARY FINANCIAL DATA
<TABLE>
<CAPTION>
--------------------------------------------------------------------
1st 1st 2nd 3rd 4th
Quarter Quarter Quarter Quarter Quarter
1999 1998 1998 1998 1998 1998
--------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Bank net of premium amortization,
security gains and non-recurring items $ 0.79 $ 0.53 $ 0.54 $ 0.58 0.62 $ 2.27
Premium amortization expense (1) (0.15) $ (0.19) $ (0.20) $ (0.09) (0.09) $ (0.57)
-------- -------- -------- -------- ---- --------
Bank net income 0.64 $ 0.34 $ 0.34 $ 0.49 0.53 $ 1.70
-------- -------- -------- -------- ---- --------
Mortgage subsidiary net income, net
of non-recurring items 0.02 $ 0.11 $ 0.09 $ 0.14 0.17 $ 0.51
-------- -------- -------- -------- ---- --------
Bancshares, net of security gains
and non-recurring items 0.66 $ 0.45 $ 0.43 $ 0.63 0.70 $ 2.21
Security gains and non-recurring
items, net 0.01 $ (0.08) $ 0.01 $ 0.03 0.08 $ 0.04
-------- -------- -------- -------- ---- --------
Reported diluted earnings per share 0.67 $ 0.37 $ 0.44 $ 0.66 0.78 $ 2.25
======== ======== ======== ======== ==== ========
Return on average equity 25.91% 16.68% 18.49% 26.45% 30.69% 23.33%
Return on average assets 0.96% 0.66% 0.72% 1.02% 1.11% 0.89%
Average assets $952,050 $782,762 $826,748 $868,402 $935,273
Bank efficiency ratio (2) 46.01% 56.44% 55.79% 50.37% 51.15% 53.20%
Company efficiency ratio (2) 58.20% 58.61% 62.54% 55.36% 55.18% 57.67%
Net interest margin 2.87% 2.56% 2.62% 2.83% 2.91% 2.74%
Mortgage company core income as a
percentage of Company core income 3.03% 24.44% 20.93% 22.22% 24.29% 23.08%
Gains on sales of loans (in thousands) $ 1,774 $ 1,250 $ 1,446 $ 1,797 $ 1,922 $ 6,481
Mortgage loan applications
(in thousands) $209,795 $226,597 $185,105 $217,596 $234,645 $863,943
Mortgage backlog at end of quarter
(in thousands) (3) $135,322 $148,331 $140,562 $165,342 $164,872 --
</TABLE>
(1) Premiums are from purchases of investment securities, primarily
mortgage~backed securities, and loans, both purchased in the secondary
market and through past acquisitions. Such premiums are subject to faster
amortization in a mortgage refinancing market. The mortgage company has no
assets subject to prepayment risk as all gains are "cash" gains and are
recorded when investor payments are received.
(2) Equals non-interest expense divided by net interest income. Excludes
provisions for loan losses, OREO expenses, non-recurring expenses, gains
and losses on securities and purchased loan transactions, and interest
expense on subordinated debentures.
(3) Equals 80% of the Company's loan applications in process plus all loans
held for sale. Generally, this backlog will be sold in the following
quarter.
15
<PAGE> 16
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
For quantitative information about market risk, see Management's Discussion and
Analysis of Financial Condition and Results of Operations - Asset/Liability
Management in the Company's Annual Report to Shareholders which is incorporated
by reference in the Company's Annual Report on Form 10-K.
There has been no material change in the quantitative and qualitative
disclosures about market risk as of March 31, 1999 from those presented in the
Company's Annual Report to Shareholders which is incorporated by reference in
the Company's Annual Report on Form 10-K.
16
<PAGE> 17
PART II - OTHER INFORMATION
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K
-------
(a) Exhibits
Exhibit Description
------- -----------
3.1 Restated Articles of Organization of the Company (filed as
Exhibit 3.1 to the Company's Annual Report on Form 10-K for
the year ended December 31, 1995 and incorporated herein by
reference)
3.2 By-laws of the Company, as amended and restated (filed as
Exhibit 3.2 to the Company's Annual Report on Form 10-K for
the year ended December 31, 1995 and incorporated herein by
reference)
4.1 Specimen certificate for shares of Common Stock of the Company
(filed as Exhibit 4.1 to the Company's Annual Report on Form
10-K for the year ended December 31, 1995 and incorporated
herein by reference)
4.2 Articles IV and VI(I)-(K) of Restated Articles of Organization
of the Company (see Exhibit 3.1)
4.3 Articles I and IV of By-laws of the Company (see Exhibit 3.2)
27 Financial Data Schedule (Filed herewith).
(b) Reports on Form 8-K. No reports on Form 8-K were filed during
the quarter ended March 31, 1999.
17
<PAGE> 18
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
PEOPLE'S BANCSHARES, INC.
5/12/99 By: /s/ Richard S. Straczynski
------------ -----------------------------------------
Date Richard S. Straczynski
President and Chief Executive Officer
5/12/99 By: /s/ Colin C. Blair
------------ -----------------------------------------
Date Colin C. Blair
Chief Financial Officer
18
<PAGE> 19
EXHIBIT INDEX
Exhibit Description
------- -----------
3.1 Restated Articles of Organization of the Company (filed as
Exhibit 3.1 to the Company's Annual Report on Form 10-K for
the year ended December 31, 1995 and incorporated herein by
reference)
3.2 By-laws of the Company, as amended and restated (filed as
Exhibit 3.2 to the Company's Annual Report on Form 10-K for
the year ended December 31, 1995 and incorporated herein by
reference)
4.1 Specimen certificate for shares of Common Stock of the Company
(filed as Exhibit 4.1 to the Company's Annual Report on Form
10-K for the year ended December 31, 1995 and incorporated
herein by reference)
4.2 Articles IV and VI(I)-(K) of Restated Articles of Organization
of the Company (see Exhibit 3.1)
4.3 Articles I and IV of By-laws of the Company (see Exhibit 3.2)
27 Financial Data Schedule (Filed herewith).
19
<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 THREE
MONTHS ENDED MARCH 31, 1999, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS CONTAINED IN SUCH FORM 10Q.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<EXCHANGE-RATE> 1
<CASH> 11,112
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 11
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 55,371
<INVESTMENTS-CARRYING> 426,415
<INVESTMENTS-MARKET> 0
<LOANS> 403,913
<ALLOWANCE> 4,908
<TOTAL-ASSETS> 949,810
<DEPOSITS> 481,894
<SHORT-TERM> 75,788
<LIABILITIES-OTHER> 6,842
<LONG-TERM> 348,800
0
0
<COMMON> 368
<OTHER-SE> 36,118
<TOTAL-LIABILITIES-AND-EQUITY> 949,810
<INTEREST-LOAN> 8,405
<INTEREST-INVEST> 8,675
<INTEREST-OTHER> 100
<INTEREST-TOTAL> 17,180
<INTEREST-DEPOSIT> 4,330
<INTEREST-EXPENSE> 10,553
<INTEREST-INCOME-NET> 6,627
<LOAN-LOSSES> 0
<SECURITIES-GAINS> 73
<EXPENSE-OTHER> 5,367
<INCOME-PRETAX> 3,474
<INCOME-PRE-EXTRAORDINARY> 2,261
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,261
<EPS-PRIMARY> .68
<EPS-DILUTED> .67
<YIELD-ACTUAL> 2.87
<LOANS-NON> 1,826
<LOANS-PAST> 211
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 4,866
<CHARGE-OFFS> 227
<RECOVERIES> 269
<ALLOWANCE-CLOSE> 4,908
<ALLOWANCE-DOMESTIC> 3,523
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 1,385
</TABLE>
