<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 JUNE 30, 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 June 30, 1999 was 3,331,734.
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PEOPLE'S BANCSHARES, INC.
FORM 10-Q
QUARTERLY REPORT
--------------------
<TABLE>
<CAPTION>
TABLE OF CONTENTS
<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 8
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 10
Item 3 Quantitative and Qualitative Disclosures about Market Risk 18
PART II OTHER INFORMATION 19
SIGNATURES 20
EXHIBITS 21
(*) 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.
</TABLE>
2
<PAGE> 3
PEOPLE'S BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
--------- -----------
ASSETS
<S> <C> <C>
Cash and due from banks $ 11,891 $ 19,794
Short-term investments 12 16,016
---------- --------
Total cash and cash equivalents 11,903 35,810
Interest-bearing deposits 3,701 2,084
Securities available for sale 37,524 189,739
Securities held to maturity (fair value of $440,503 in 1999 and $186,125 in 1998) 464,395 186,559
Restricted equity securities, at cost 19,841 19,841
Loans held for sale 31,962 63,918
Loans, net of allowance for loans losses of $4,510 in 1999 and $4,866 in 1998 429,475 423,778
Other real estate owned, net 35 105
Banking premises and equipment, net 14,772 13,927
Accrued interest receivable 7,125 6,418
Intangible assets 484 509
Other assets 2,416 1,952
---------- --------
Total assets $1,023,633 $944,640
========== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits $ 537,389 $470,887
Borrowed funds 428,800 416,900
Mortgagors' escrow accounts 852 1,408
Accrued expenses and other liabilities 4,744 6,978
Subordinated debentures 13,800 13,800
---------- --------
Total liabilities 985,585 909,973
---------- --------
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 and outstanding 3,689,734 and 3,675,218 shares 369 368
Additional paid-in capital 23,776 23,683
Retained earnings 21,349 17,948
Treasury stock, at cost - 358,000 shares in 1999 and 355,000 shares in 1998 (6,269) (6,213)
Accumulated other comprehensive loss (1,177) (1,119)
Total stockholders' equity ---------- --------
38,048 34,667
Total liabilities and stockholders' equity $1,023,633 $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 Six Months Ended
June 30, June 30,
---------------------------- ---------------------------
1999 1998 1999 1998
------- -------- -------- --------
Interest and dividend income:
<S> <C> <C> <C> <C>
Interest and fees on loans $ 8,697 $ 9,036 $17,102 $17,012
Interest and dividends on investment securities 8,917 5,507 17,592 11,156
Interest on short-term investments 141 126 241 234
------- ------- ------- -------
Total interest and dividend income 17,755 14,669 34,935 28,402
------- ------- ------- -------
Interest expense:
Interest on deposits 4,811 3,805 9,141 7,133
Interest on borrowed funds 6,157 5,645 12,380 11,222
------- ------- ------- -------
Total interest expense 10,968 9,450 21,521 18,355
------- ------- ------- -------
Net interest income 6,787 5,219 13,414 10,047
Provision (credit) for loan losses (425) 150 (425) 300
------- ------- ------- -------
Net interest income, after provision (credit)
for loan losses 7,212 5,069 13,839 9,747
------- ------- ------- -------
Other income:
Customer service fees 321 348 640 698
Gains (losses) on sales of securities (37) 252 36 182
Gains on sales of loans, net 1,605 1,447 3,379 2,762
Miscellaneous 60 45 108 137
------- ------- ------- -------
Total other income 1,949 2,092 4,163 3,779
------- ------- ------- -------
Operating expenses:
Salaries and employee benefits 3,049 2,464 6,142 4,736
Occupancy and equipment 573 530 1,168 1,044
Data processing 321 333 625 649
Professional fees 190 245 524 409
Other real estate owned, net 12 11 33 (23)
Other general and administrative 1,268 1,248 2,288 2,090
------- ------- ------- -------
Total operating expenses 5,413 4,831 10,780 8,905
------- ------- ------- -------
Income before income taxes and accounting change 3,748 2,330 7,222 4,621
Income tax expense 1,311 844 2,524 1,677
------- ------- ------- -------
Income before accounting change 2,437 1,486 4,698 2,944
Cumulative effect of changing accounting method
for organizational costs, net of tax -- -- -- (186)
------- ------- ------- -------
Net income $ 2,437 $ 1,486 $ 4,698 $ 2,758
======= ======= ======= =======
Net income per share:
Diluted earnings per share $ 0.72 $ 0.44 $ 1.39 $ 0.81
Basic earnings per share 0.73 0.45 1.41 0.84
Weighted average shares outstanding -
assuming dilution for stock options 3,390 3,392 3,385 3,387
Weighted average shares outstanding 3,325 3,309 3,329 3,304
</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
SIX MONTHS ENDED JUNE 30, 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 -- -- 4,698 -- -- 4,698
Change in net unrealized gain (loss)
on securities available for sale,
after tax effects -- -- -- -- (58) (58)
-------
Comprehensive income 4,640
-------
Purchase of treasury stock -- -- -- (56) -- (56)
Cash dividends paid -- -- (1,297) -- -- (1,297)
Exercise of stock options 1 93 -- -- -- 94
---- ------- ------- ------- ------- -------
Balance at June 30, 1999 $369 $23,776 $21,349 $(6,269) $(1,177) $38,048
==== ======= ======= ======= ======= =======
Balance at December 31, 1997 $364 $23,400 $12,253 $(6,213) $ 332 $30,136
-------
Comprehensive income:
Net income -- -- 2,758 -- -- 2,758
Change in net unrealized gain (loss)
on securities available for sale,
after tax effects -- -- -- -- (55) (55)
-------
Comprehensive income 2,703
-------
Cash dividends paid -- -- (824) -- -- (824)
Exercise of stock options 3 235 -- -- -- 238
---- ------- ------- ------- ------- -------
Balance at June 30, 1998 $367 $23,635 $14,187 $(6,213) $ 277 $32,253
==== ======= ======= ======= ======= =======
</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>
Six Months Ended
June 30,
--------------------------
1999 1998
--------------------------
Cash flows from operating activities:
<S> <C> <C>
Net income $ 4,698 $ 2,758
Adjustments to reconcile net income to net
cash provided (used) by operating activities:
Provision (credit) for loan losses (425) 300
Depreciation and amortization 975 637
Net amortization (accretion) on securities and purchased loans (1,222) (745)
Gains on sales of securities, net (36) (182)
(Gains) losses on sale of other real estate owned 10 (56)
Net change in:
Loans held for sale 31,956 (19,211)
Other assets, net of other liabilities (3,360) (1,395)
-------- --------
Net cash provided (used) by operating activities 32,596 (17,894)
-------- --------
Cash flows from investing activities:
Net change in interest bearing deposits (1,584) --
Activity in securities available for sale:
Sales 70,527 130,132
Maturities, prepayments, and calls -- 20,400
Purchases (71,207) (199,064)
Activity in securities held to maturity
Purchases (168,755) --
Maturities, prepayments and calls 11,369 --
Proceeds from amortization of mortgage-backed securities 34,483 32,362
Proceeds from sales of purchased loans -- 8,268
Loan originations and purchases, net of amortization and payoffs (6,341) (84,044)
Proceeds from sales of other real estate owned 195 227
Additions to banking premises and equipment (1,777) (1,183)
-------- --------
Net cash used in investing activities (133,090) (92,902)
-------- --------
Cash flows from financing activities:
Net increase in deposits 66,502 38,191
Net increase in borrowings with maturities of three months or less 27,600 7,850
Proceeds from issuance of borrowings with maturities in excess of three months 10,000 210,700
Repayment of borrowings with maturities in excess of three months (25,700) (162,500)
Decrease in mortgagors' escrow accounts (556) (38)
Proceeds from exercise of stock options 94 238
Payments to acquire treasury stock (56) --
Cash dividends (1,297) (824)
-------- --------
Net cash provided by financing activities 76,587 93,617
-------- --------
Net change in cash and cash equivalents (23,907) (17,179)
Cash and cash equivalents at beginning of period 35,810 30,693
-------- --------
Cash and cash equivalents at end of period $ 11,903 $ 13,514
======== ========
</TABLE>
6
<PAGE> 7
<TABLE>
<S> <C> <C>
Supplementary information:
Interest paid $ 21,694 $ 18,412
Income taxes paid 3,732 2,504
Transfer from loans to other real estate owned, net 135 95
Change in due to/from brokers, net 371 3,739
Transfers from investment securities available for sale to investment securities
held to maturity 150,261 --
See accompanying notes to unaudited consolidated financial statements.
</TABLE>
7
<PAGE> 8
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Consolidated Balance Sheet as of June 30, 1999, and the Consolidated
Statements of Income, Changes in Stockholders' Equity, and Cash Flows for
the periods ended June 30, 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>
8
<PAGE> 9
(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.
9
<PAGE> 10
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 June 30, 1999 were $1.02 billion, an increase of
$79.0 million from December 31, 1998. This increase includes an increase of
$127.2 million in investment securities consisting primarily of mortgage-backed
and trust preferred securities offset by a decrease of $26.6 million in loans
and loans held for sale as a result of prepayments and a decrease of $23.9
million in cash and cash equivalents.
LOANS
Loans held for sale decreased $32.0 million primarily as a result of seasonal
mortgage banking activity. The Company's loans were as follows:
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
-------- ----------
(in millions)
<S> <C> <C>
Residential mortgage loans, including
home equity loans $334,408 $343,017
Commercial, commercial real estate
and construction loans 94,515 80,375
Consumer loans 5,062 5,252
-------- --------
Total $433,985 $428,644
======== ========
</TABLE>
DEPOSITS
Total deposits increased $66.5 million to $537.4 million at June 30, 1999 from
$470.9 million at December 31, 1998. The increase in deposits reflects a $25.8
million increase in IRAs and time certificates of deposit, and a $46.1 million
increase in municipal deposits, which were partially offset by a $5.4 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
10
<PAGE> 11
provision for loan losses. Loan losses are charged against the allowance when
management believes the collectibility of the loan balance is unlikely.
The allowance is an estimate. Ultimate losses may vary from current estimates
and future additions to the allowance may become necessary. In addition,
regulatory agencies, as an integral part of their examination process, review
the Company's allowance and may require the Company to provide additions to the
allowance based on their assessment, which may differ from management's.
At June 30, 1999, the Company's allowance for loan losses totaled $4.5 million
or 1.04% of total loans and 571% 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 $4.5 million or 0.98% of total loans and 153% of
non-performing loans at June 30, 1998. Net recoveries for the three and six
months ended June 30, 1999 were $27,000 and $69,000, respectively compared to
net recoveries of $27,000 and net charge-offs of $98,000 for the corresponding
periods in 1998.
Non-performing assets were $825,000 or 0.08% of total assets at June 30, 1999
compared to $1.6 million or 0.17% of total assets at December 31, 1998 and $3.0
million or 0.35% of total assets at June 30, 1998.
RESULTS OF OPERATIONS
EARNINGS
People's Bancshares, Inc. recognized net income of $2.4 million or $0.72 diluted
earnings per share for the quarter ended June 30, 1999 compared to $1.5 million
or $0.44 diluted earnings per share for the quarter ended June 30, 1998. Basic
earnings per share were $0.73 for the three months ended June 30, 1999 compared
to $0.45 for the three months ended June 30, 1998.
In the three months ended June 30, 1999, the Company recognized $37,000 in net
losses on sales of securities compared to net gains of $252,000 in the three
months ended June 30, 1998. Diluted earnings per share excluding securities
gains, losses and non-recurring items would have been $0.69 for the three months
ended June 30, 1999 compared to $0.43 for the three months ended June 30, 1998.
Non-recurring items for the second quarter of 1999 included a $0.04 charge for
branch restructuring costs, $0.01 for securities losses and $0.08 of income for
a reduction in the allowance for loan losses.
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 $1.02 billion at June 30, 1999.
Operating results have been significantly affected by the Bank's increasing
average investments to $477.0 million during the first half of 1999, compared to
$307.9 million during the first half of 1998. This growth in earning assets was
funded by the Bank increasing its average deposits and average borrowings to
$457.9 million and $437.1 million in the first half of 1999, compared to $348.4
million and $386.5 million in the first half of 1998. Operating results have
also been significantly affected by the growth of PMC, which is reflected in
gains on sales of loans of $3.4 million, net interest and other income of
$791,000, operating expenses of $4.0 million, and income before income taxes of
$182,000 from PMC
11
<PAGE> 12
operations in the first half of 1999 compared to $2.8 million, $1.2, million and
$2.9 million and $1.1 million, respectively, in the corresponding period of
1998.
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 $0.13 and $0.28 charge against
earnings for the three and six months ended June 30, 1999, compared to $0.20 and
$0.39 for the same periods in 1998. Conversely, this reduced refinancing
activity resulted in PMC decreasing its diluted earnings per share contribution
to $0.01 and $0.03 for the three and six months ended June 30, 1999, from $0.09
and $0.20 for the same periods in 1998.
Return on average assets was 0.99% and 0.98%, and return on average equity was
26.46% and 26.20% for the three month and six months ended June 30, 1999. Return
on average assets was 0.72% and 0.69% and return on average equity was 18.49%
and 17.61% for the same periods in 1998. Net income amounted to $2.4 million and
$4.7 million or $0.72 and $1.39 per diluted share for the three and six months
ended June 30, 1999 compared to net income of $1.5 million and $2.9 million or
$0.44 and $0.81 per diluted share for the same periods in 1998. Basic earnings
per share were $0.73 and $1.41 per share for the three and six months ended June
30, 1999, compared to $0.45 and $0.84 per share for the same periods in 1998.
NET INTEREST INCOME
Net interest income increased $1.6 million and $3.4 million for the three and
six months ended June 30, 1999, compared to the same periods in 1998. This
change resulted mostly from increased average earning assets. For the first six
months of 1999, average earning assets increased 21.5% compared to the same
period in 1998.
Interest and dividend income increased to $17.8 million and $34.9 million for
the three and six months ended June 30, 1999 from $14.7 million and $28.4
million for the same periods in 1998. The yield on average earning assets
increased to 7.44% and 7.49% for the three and six months ended June 30, 1999
from 7.40% and 7.39% for the same periods in 1998. Yields on loans was 7.53% and
7.48% for the three and six months ended June 30, 1998, compared to 7.50% and
7.53% for the same periods in 1999. Yields on investments increased to 7.40% and
7.44% for the three and six months ended June 30, 1999, compared to 7.25% and
7.31% for the same periods in 1998.
Interest expense increased to $11.0 million and $21.5 million for the three and
six months ended June 30, 1999 from $9.5 million and $18.4 million for the same
periods in 1998. This increase was due to a $512,000 and $1.2 million increase
in interest expense on borrowed funds for the three and six months ended June
30, 1999. Interest expense on deposits increased $1.0 million and $2.0 million
for the three and six months ended June 30, 1999, compared to the same periods
in 1998.
During the first half of 1999, average borrowed funds amounted to $437.1 million
compared to $386.5 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 5.69% and 5.71% for the three and six months ended June 30,
1999 compared to 5.80% and 5.85% for the same periods in 1998.
Deposit interest expense increased due to an increase in average deposits to
$457.9 million for the six month period ended June 30, 1999 compared to $348.4
million for the same period in 1998. The average cost of deposits decreased to
4.03% and 4.03% for the three and six month periods ended June 30, 1999 from
4.18% and 4.13% for the same periods in 1998.
12
<PAGE> 13
PROVISION FOR LOAN LOSSES
During the second quarter of 1999 a re-evaluation of the general reserve on
multi-family loans resulted in a $425,000 credit to the loan loss provision. A
provision for loan losses of $150,000 and $300,000 was made for the three and
six months ended June 30, 1998. Prior to crediting the loan loss provision, the
Company undertook its normal quarterly review of the underlying assumptions used
in providing general reserves against the various loan types in its portfolio.
It became clear during the quarter that a favorable change had occurred in the
fundamentals of the Company's highest risk loan type - urban multi-family loans.
Discussions with landlords, realtors and attorneys as well as the Company's loan
originators and internal problem loan resolution officer in conjunction with
refinancing activity, recent repayment experience, and sales of such properties
led the Company to reduce this sector's general reserve allocation to a level
commensurate with other commercial real estate. A strong local economy and real
estate market combined with urban renewal efforts and new commuter railway
access into Boston have helped raise the desirability of such properties to
renters and landlords. After reducing the portion of the allowance allocated to
this loan type, the Company then found that the unallocated portion of its
reserve exceeded its internal limits and thus took a $425,000 credit to the
provision for loan losses.
OTHER INCOME
Other income was $1.9 million and $4.2 million for the three and six months
ended June 30, 1999 compared to $2.1 million and $3.8 million for the same
periods in 1998. The quarter to date decrease reflects an increase of $158,000
in gains from sales of loans offset by an increase of $289,000 in losses on
sales of securities. The year to date increase is attributable to a $617,000
increase in gains from sales of loans offset by a $146,000 decrease 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 and $10.8 million for the
three and six months ended June 30, 1999 compared to $4.8 million and $8.9
million for the same periods in 1998.
Salaries and benefits expense increased $585,000 and $1.4 million for the three
and six months ended June 30, 1999 compared to the same periods in 1998. The
increase in salaries and benefits reflects general salary increases, added
lending personnel, and additional PMC staffing.
Occupancy and equipment expense increased $43,000 and $124,000 for the three and
six months ended June 30, 1999, compared to the same periods in 1998. Other real
estate owned expenses increased $1,000 and $56,000 for the three and six months
ended June 30, 1999 compared to the same periods in 1998. Other general and
administrative expenses increased $20,000 and $198,000 for the three and six
months ended June 30, 1999 compared to the same periods in 1998.
The efficiency ratio for the Company for the three and six month periods ended
June 30, 1999, was 56.70% and 57.68%, respectively. For the same periods in
1998, the ratio was 62.54% and $60.64%, respectively. The efficiency ratio for
the Company excluding PMC was 45.51% and 46.43% for the three and six months
ended June 30, 1999. For the same periods in 1998, the ratio was 55.79% and
56.11%, respectively. Increases in operating expenses are primarily due to
additional costs associated with the growth of PMC and increases of salary and
benefits.
13
<PAGE> 14
PROVISION FOR INCOME TAXES
The Company recognized income tax expense of $1.3 million and $2.5 million in
the three and six months ended June 30, 1999 compared to income tax expense of
$844,000 and $1.7 million for the same periods in 1998. The effective tax rates
for the three and six months ended June 30, 1999 was 35.0%, compared to 36.2%
and 36.3% for the same periods in 1998.
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.
At June 30, 1999, the Company's capital exceeded all regulatory requirements.
The Company's Tier 1 leverage capital ratio at June 30, 1999 was 5.24%, 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 June 30, 1999, the Company's risk-based capital ratio was
10.14%. The Company's book value per share was $11.42 at June 30, 1999, $10.44
at December 31, 1998, and $9.79 at June 30, 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:
14
<PAGE> 15
* AWARENESS AND ASSESSMENT PHASES: The Company has completed these initial
phases for all systems.
* RENOVATION PHASE: The Company has completed the renovation of mission
critical systems.
* VALIDATION PHASE: The Company has completed the validation phase of its Y2K
systems.
* IMPLEMENTATION PHASE: The Company has completed the implementation phase
of its Y2K systems.
The Company has formed an internal task force, the Y2K Committee, which meets
monthly to monitor the progress of the Company's Y2K plan. An outside consultant
meets with the head of the Y2K Committee each month to ensure compliance with
the Y2K Committee' s schedule.
The Company has initiated formal communications with all of its significant
processing vendors to determine the extent to which the Company is vulnerable to
the failure of those vendors to become Y2K compliant. All critical vendors are
contacted monthly regarding their compliance programs. Based on communications
to date, the Company does not anticipate any Y2K problems with respect to
critical vendors. Other vendors that the Company determined were less critical
were contacted via letter in the assessment phase. Based on communications to
date, the Company has made any necessary changes and does not anticipate any Y2K
problems with respect to non-critical vendors.
Actual costs for implementing the Company's Y2K plan totaled $7,000 and $10,000
for the three and six months ending June 30, 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 completed the contingency plan. 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 July 22, 1999, the Company declared a $0.21 dividend to be paid on August 27,
1999 to shareholders of record on August 13, 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.
15
<PAGE> 16
PEOPLE'S BANCSHARES, INC.
SUPPLEMENTARY FINANCIAL DATA
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
1st Quarter 2nd Quarter 6 Months 3rd Quarter 4th Quarter
1998 1998 1998 1998 1998 1998
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Bank income net of premium amortization, security gains $ 0.53 $ 0.54 $ 1.07 $ 0.58 $ 0.62 $ 2.27
and non-recurring items
Premium amortization expense (1) ($ 0.19) ($ 0.20) ($ 0.39) ($ 0.09) ($ 0.09) ($ 0.57)
-------------------------------------------------------------------------
Bank net income $ 0.34 $ 0.34 $ 0.68 $ 0.49 0.53 $ 1.70
Mortgage subsidiary net income, net of non-recurring items $ 0.11 $ 0.09 $ 0.20 $ 0.14 0.17 $ 0.51
-------------------------------------------------------------------------
Bancshares, net of security gains and non-recurring items $ 0.45 $ 0.43 $ 0.88 $ 0.63 0.70 $ 2.21
Security gains and non-recurring items, net ($ 0.08) $ 0.01 ($ 0.07) $ 0.03 0.08 $ 0.04
-------------------------------------------------------------------------
Reported diluted earnings per share $ 0.37 $ 0.44 $ 0.81 $ 0.66 $ 0.78 $ 2.25
=========================================================================
Return on average equity 16.68% 18.49% 17.61% 26.45% 30.69% 23.33%
Return on average assets 0.66% 0.72% 0.69% 1.02% 1.11% 0.89%
Bank efficiency ratio (2) 56.44% 55.79% 56.11% 50.37% 51.15% 53.20%
Company efficiency ratio (2) 58.61% 62.54% 60.64% 55.36% 55.18% 57.67%
Net interest margin 2.56% 2.63% 2.62% 2.83% 2.91% 2.74%
Mortgage company core income as a percentage of
Company core income 24.44% 20.93% 22.68% 22.22% 24.29% 23.08%
Gains on sales of loans (in thousands) $ 1,250 $ 1,446 $ 2,696 $1,797 $ 1,922 $ 6,481
Mortgage loan applications (in thousands) $226,597 $185,105 $411,702 $217,596 $234,645 $863,943
Mortgage backlog at end of quarter (in thousands) (3) $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.
16
<PAGE> 17
PEOPLE'S BANCSHARES, INC.
SUPPLEMENTARY FINANCIAL DATA
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------
1st Quarter 2nd Quarter 6 Months
1999 1999 1998
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Bank income net of premium amortization, security gains and non-recurring items $ 0.79 $ 0.81 $ 1.60
Premium amortization expense (1) ($ 0.15) ($ 0.13) ($ 0.28)
Bank net income $ 0.64 $ 0.68 $ 1.32
Mortgage subsidiary net income, net of non-recurring items $ 0.02 $ 0.01 $ 0.03
Bancshares, net of security gains and non-recurring items $ 0.66 $ 0.69 $ 1.35
Security gains and non-recurring items, net ($ 0.01) $ 0.03 ($ 0.04)
Reported diluted earnings per share $ 0.67 $ 0.72 $ 1.39
Return on average equity 25.91% 26.46% 26.20%
Return on average assets 0.96% 0.99% 0.98%
Bank efficiency ratio (2) 46.50% 45.51% 46.43%
Company efficiency ratio (2) 58.66% 56.70% 57.68%
Net interest margin 2.87% 2.85% 2.88%
Mortgage company core income as a percentage of Company core income 3.03% 1.45% 2.22%
Gains on sales of loans (in thousands) $ 1,774 $ 1,605 $ 3,379
Mortgage loan applications (in thousands) $209,795 $206,948 $416,643
Mortgage backlog at end of quarter (in thousands) (3) $135,322 $141,482
</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.
17
<PAGE> 18
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 June 30, 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. .
18
<PAGE> 19
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 June 30, 1999.
19
<PAGE> 20
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.
8/12/99 By: /s/ Richard S. Straczynski
---------- ----------------------------
Date Richard S. Straczynski
President and Chief Executive Officer
8/12/99 By: /s/ Colin C. Blair
------- ----------------------------
Date Colin C. Blair
Chief Financial Officer
20
<PAGE> 21
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).
21
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM PEOPLE'S
BANCHARES, INC. AND SUBSIDIARIES QUARTERLY STATEMENTS FOR THE SIX MONTHS ENDED
JUNE 30, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS CONTAINED IN SUCH FORM 10-Q
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<EXCHANGE-RATE> 1
<CASH> 11,891
<INT-BEARING-DEPOSITS> 3,701
<FED-FUNDS-SOLD> 12
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 37,524
<INVESTMENTS-CARRYING> 464,395
<INVESTMENTS-MARKET> 440,503
<LOANS> 465,947
<ALLOWANCE> 4,510
<TOTAL-ASSETS> 1,023,633
<DEPOSITS> 537,389
<SHORT-TERM> 27,600
<LIABILITIES-OTHER> 4,744
<LONG-TERM> 415,000
0
0
<COMMON> 369
<OTHER-SE> 37,679
<TOTAL-LIABILITIES-AND-EQUITY> 1,023,633
<INTEREST-LOAN> 17,102
<INTEREST-INVEST> 17,592
<INTEREST-OTHER> 241
<INTEREST-TOTAL> 34,935
<INTEREST-DEPOSIT> 9,141
<INTEREST-EXPENSE> 21,521
<INTEREST-INCOME-NET> 13,414
<LOAN-LOSSES> (425)
<SECURITIES-GAINS> 36
<EXPENSE-OTHER> 10,780
<INCOME-PRETAX> 7,222
<INCOME-PRE-EXTRAORDINARY> 7,222
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,698
<EPS-BASIC> 1.41
<EPS-DILUTED> 1.39
<YIELD-ACTUAL> 7.49
<LOANS-NON> 825,000
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 4,866
<CHARGE-OFFS> 244
<RECOVERIES> 313
<ALLOWANCE-CLOSE> 4,510
<ALLOWANCE-DOMESTIC> 3,150
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 1,360
</TABLE>
