<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2000
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ______ TO _______
Commission file number 0-7449
------
PEOPLE'S BANCSHARES, INC.
(Exact name of registrant as specified in its charter)
MASSACHUSETTS 04-3272233
------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
545 PLEASANT STREET
NEW BEDFORD, MASSACHUSETTS 02740
---------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (508) 991-2601
--------------
-----------------------------
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ].
The number of shares of Registrant's Common Stock, $0.10 par value, outstanding
as of September 30, 2000 was 3,221,734.
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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 8
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, 1999 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>
September 30, December 31,
2000 1999
----------- -----------
ASSETS
<S> <C> <C>
Cash and due from banks $ 17,217 $ 11,875
Short-term investments 1,800 --
----------- -----------
Total cash and cash equivalents 19,017 11,875
Interest-bearing deposits 9,924 5,916
Securities available for sale 37,499 42,068
Securities held to maturity (fair value of $471,551 in 2000 and
$481,018 in 1999) 523,915 524,581
Restricted equity securities, at cost 19,869 21,701
Loans held for sale 40,577 23,681
Loans, net of allowance for loans losses of $4,154 in 2000 and $4,096 in 1999 396,905 413,215
Other real estate owned, net 50 285
Banking premises and equipment, net 16,985 16,630
Accrued interest receivable 7,787 7,051
Intangible assets 1,398 1,460
Other assets 3,074 2,713
----------- -----------
Total assets $ 1,077,000 $ 1,071,176
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits $ 620,405 $ 561,614
Borrowed funds 383,007 447,950
Mortgagors' escrow accounts 1,131 1,106
Accrued expenses and other liabilities 5,039 5,842
Subordinated debentures 23,800 13,800
----------- -----------
Total liabilities 1,033,382 1,030,312
----------- -----------
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 3,694,734 and 3,689,734 shares 369 369
Additional paid-in capital 23,834 23,776
Retained earnings 29,673 24,617
Treasury stock, at cost - 473,000 shares in 2000 and 358,000
shares in 1999 (8,364) (6,269)
Accumulated other comprehensive loss (1,894) (1,629)
----------- -----------
Total stockholders' equity 43,618 40,864
----------- -----------
Total liabilities and stockholders' equity $ 1,077,000 $ 1,071,176
=========== ===========
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
3
<PAGE> 4
PEOPLE'S BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------- ---------------------
2000 1999 2000 1999
--------- -------- -------- --------
<S> <C> <C> <C> <C>
Interest and dividend income:
Interest and fees on loans $ 9,268 $ 8,762 $ 26,714 $ 25,864
Interest and dividends on securities 11,619 9,890 34,098 27,482
Interest on short-term investments 30 6 204 247
-------- -------- -------- --------
Total interest and dividend income 20,917 18,658 61,016 53,593
-------- -------- -------- --------
Interest expense:
Interest on deposits 7,368 5,350 20,226 14,491
Interest on borrowed funds and subordinated
debentures 6,187 6,253 18,885 18,633
-------- -------- -------- --------
Total interest expense 13,555 11,603 39,111 33,124
-------- -------- -------- --------
Net interest income 7,362 7,055 21,905 20,469
Credit for loan losses -- (425) -- (850)
-------- -------- -------- --------
Net interest income, after credit for loan losses 7,362 7,480 21,905 21,319
-------- -------- -------- --------
Other income:
Customer service fees 323 308 959 948
Gain on sales of securities available for sale, net -- -- -- 36
Gain on sales of loans, net 2,409 1,643 6,362 5,022
Miscellaneous 49 34 166 142
-------- -------- -------- --------
Total other income 2,781 1,985 7,487 6,148
-------- -------- -------- --------
Operating expenses:
Salaries and employee benefits 3,426 3,455 10,381 9,597
Occupancy and equipment 898 702 2,818 1,870
Data processing 341 310 1,016 935
Professional fees 466 228 1,099 752
Other real estate owned, net 2 15 (12) 48
Other general and administrative 1,342 1,329 3,581 3,617
-------- -------- -------- --------
Total operating expenses 6,475 6,039 18,883 16,819
-------- -------- -------- --------
Income before income taxes 3,668 3,426 10,509 10,648
Provision for income taxes 1,191 1,088 3,411 3,612
-------- -------- -------- --------
Net income $ 2,477 $ 2,338 $ 7,098 $ 7,036
======== ======== ======== ========
Net income per share:
Diluted earnings per share $ 0.76 $ 0.69 $ 2.16 $ 2.08
Basic earnings per share 0.77 0.71 2.19 2.12
Weighted average shares outstanding -
assuming dilution for stock options 3,270 3,389 3,293 3,386
Weighted average shares outstanding 3,222 3,332 3,245 3,326
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
4
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PEOPLE'S BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
(Dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Accumulated
Additional Other
Common Paid-in Retained Comprehensive Treasury
Stock Capital Earnings Loss Stock Total
-------- -------- -------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1999 $ 369 $ 23,776 $ 24,617 $ (1,629) $ (6,269) $ 40,864
--------
Comprehensive income:
Net income -- -- 7,098 -- -- 7,098
Change in net unrealized gain/loss
on securities available for sale,
after tax effects -- -- -- (265) -- (265)
--------
Total comprehensive income 6,833
--------
Purchase of treasury stock -- -- -- -- (2,095) (2,095)
Cash dividends paid -- -- (2,042) -- -- (2,042)
Exercise of stock options -- 58 -- -- -- 58
-------- -------- -------- -------- -------- --------
Balance at September 30, 2000 $ 369 $ 23,834 $ 29,673 $ (1,894) $ (8,364) $ 43,618
======== ======== ======== ======== ======== ========
Balance at December 31, 1998 $ 368 $ 23,683 $ 17,948 $ (1,119) $ (6,213) $ 34,667
--------
Comprehensive income:
Net income -- -- 7,036 -- -- 7,036
Change in net unrealized gain/loss
on securities available for sale,
after tax effects and
reclassification adjustment -- -- -- (306) -- (306)
--------
Total comprehensive income 6,730
--------
Purchase of treasury stock -- -- -- -- (56) (56)
Cash dividends paid -- -- (1,997) -- -- (1,997)
Exercise of stock options 1 93 -- -- -- 94
-------- -------- -------- -------- -------- --------
Balance at September 30, 1999 $ 369 $ 23,776 $ 22,987 $ (1,425) $ (6,269) $ 39,438
======== ======== ======== ======== ======== ========
</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>
Nine Months Ended
September 30,
---------------------------
2000 1999
--------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 7,098 $ 7,036
Adjustments to reconcile net income to net cash provided (used) by
operating activities:
Credit for loan losses -- (850)
Depreciation and amortization 1,422 1,032
Net accretion on securities and purchased loans (6,022) (2,487)
Gains on sales of securities available for sale, net -- (36)
Loss (gain) on sale of other real estate owned (12) 10
Net change in:
Loans held for sale (16,896) 34,724
Other assets, net of other liabilities (1,469) (3,566)
--------- ---------
Net cash provided (used) by operating activities (15,879) 35,863
--------- ---------
Cash flows from investing activities:
Net change in interest bearing deposits (4,008) (2,017)
Activity in securities available for sale:
Sales -- 70,527
Purchases -- (77,985)
Amortization of mortgage-backed securities 4,085 4,296
Activity in securities held to maturity:
Purchases (31,544) (190,368)
Maturities, prepayments and calls 15,774 11,369
Amortization of mortgage-backed securities 23,042 41,765
Redemption of restricted equity securities 1,832 -
Loan (originations and purchases) net of amortization and payoffs 15,772 5,052
Proceeds from sales of other real estate owned 297 262
Additions to banking premises and equipment (1,661) (3,667)
--------- ---------
Net cash provided (used) in investing activities 23,589 (140,766)
--------- ---------
Cash flows from financing activities:
Net increase in deposits 58,791 72,469
Net increase in borrowings with maturities of three months or less 4,757 6,140
Proceeds from issuance of borrowings with maturities in excess of three months 135,000 43,500
Repayment of borrowings with maturities in excess of three months (204,700) (39,200)
Increase (decrease) in mortgagors' escrow accounts 25 (367)
Proceeds from exercise of stock options 58 94
Proceeds from issuance of subordinated debentures 9,638 -
Payments to acquire treasury stock (2,095) (56)
Cash dividends (2,042) (1,997)
--------- ---------
Net cash provided (used) by financing activities (568) 80,583
--------- ---------
Net change in cash and cash equivalents 7,142 (24,320)
Cash and cash equivalents at beginning of period 11,875 35,810
--------- ---------
Cash and cash equivalents at end of period $ 19,017 $ 11,490
========= =========
Supplementary information:
Interest paid $ 38,907 $ 33,165
Income taxes paid 4,017 4,972
Transfer from loans to other real estate owned, net 50 473
Transfers from securities available for sale to 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 accompanying financial statements of People's Bancshares, Inc. and
Subsidiaries (the "Company") furnished in this report are unaudited. In the
opinion of management, the information presented includes all adjustments,
consisting of normal recurring accruals 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.
These interim financial statements have been prepared in accordance with
the instructions for Form 10-Q and therefore do not include all information
and footnotes necessary for a complete presentation of operations,
financial position and cash flows of the Company in conformity with
generally accepted accounting principles. The Company filed audited
consolidated financial statements, which included information and footnotes
necessary for such presentation, for the year ended December 31, 1999 as
part of its Annual Report on Form 10-K filed with the Securities and
Exchange Commission. These unaudited consolidated financial statements
should be read in conjunction with the audited consolidated financial
statements and notes thereto for the year ended December 31, 1999 included
in the Company's Form 10-K Report.
(2) EARNINGS PER SHARE
Basic earnings per share is computed by dividing income available to common
stock by the weighted-average number of common shares outstanding during
the period. Diluted earnings per share reflect additional common shares
issuable from the exercise of stock options calculated using the treasury
stock method.
(3) SUBORDINATED DEBENTURES
On July 26, 2000, the Company completed the sale of $10 million in
subordinated debentures to People's Bancshares Capital Trust II, a newly
formed subsidiary of the Company. The Trust funded the purchase of the
subordinated debentures through the sale of 10,000 trust preferred
securities with a liquidation value of $10,000,000. The Trust would use
interest payments made by the Company on the debentures in order to pay
semi-annual dividends to preferred security holders. The annual percentage
rate of the interest payable on the subordinated debentures and the
distributions payable on the preferred securities is 11.695%. 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 July 2030
unless the Company elects and obtains regulatory approval to accelerate the
maturity date to as early as July 2010. The Company's ownership interest in
the Trust may be included in regulatory Tier 1 capital, subject to a
limitation that amounts with respect to such trusts not exceed 25% of Tier
1 capital. All such ownership interests may be included in total risk-based
capital. The net proceeds of this offering were used to increase the
capital level of the Company's primary subsidiary, People's Savings Bank of
Brockton. Reference is made to OTHER INFORMATION contained in MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
appearing elsewhere herein.
7
<PAGE> 8
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
STATEMENTS REGARDING FORWARD-LOOKING INFORMATION. This report contains
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995. 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", "intends" and similar expressions are intended to identify
forward-looking statements. You should not rely on forward-looking statements,
because they involve known and unknown risks, uncertainties and other factors,
some of which are beyond the control of the Company. These expressed or implied
important risks, uncertainties and other factors may cause the Company's actual
results, performance or achievements to differ materially from those expressed
or implied by such forward-looking statements and could materially affect the
price of its common stock. Some of the factors that could cause actual results,
performance or achievements to differ materially from those expressed or implied
by such forward-looking statements were disclosed in the Company's 1999 Annual
Report on Form 10-K. These and other current risk factors, which include risks
associated with potential changes in the allowance for loan losses, potential
changes related to regulatory matters, potential changes limiting or prohibiting
the Company from paying dividends on its common stock or interest on its
subordinated debentures and potential changes resulting from strategic
initiatives being considered by management and described under "Other
Information" below, 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, new tax or other state or
national legislation, and others may not be exhaustive. Therefore, the
information in that Form 10-K should be read together with other reports and
documents that are filed by the Company with the SEC from time to time,
including quarterly reports on Form 10-Q and current reports on Form 8-K, if
any, which may supplement, modify, supersede or update these risk factors. The
Company does not promise to, and may decide not to, update any forward-looking
statements to reflect changes in underlying assumptions or factors, new
information, future events or other changes.
The Company's unaudited consolidated financial statements and notes included in
this report and the audited financial statements for the year ended December 31,
1999 and the notes included in the Company's annual report on Form 10-K should
be read in conjunction with the following discussion.
ASSETS
The Company's total assets at September 30, 2000 were $1.077 billion, an
increase of $5.8 million from December 31, 1999. This increase includes an
increase of $7.1 million in cash and due from banks, an increase of $4.0 million
in interest-bearing deposits and a $16.9 million increase in loans held for
sale, partially offset by an $16.3 million decrease in loans and a $5.2 million
decrease in securities.
LOANS
The Company's loans were as follows:
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
------------- ------------
(in thousands)
<S> <C> <C>
Residential mortgage loans, including
home equity loans $ 298,627 $ 317,393
Commercial, commercial real estate
and construction loans 95,647 94,508
Consumer loans 6,785 5,410
--------- ----------
Total $ 401,059 $ 417,311
========= ==========
</TABLE>
8
<PAGE> 9
DEPOSITS
Total deposits increased $58.8 million to $620.4 million at September 30, 2000
from $561.6 million at December 31, 1999. The increase in deposits reflects a
$16.8 million increase in IRAs and time certificates of deposit, a $29.3 million
increase in municipal deposits, and a $12.7 million increase in savings and
demand deposits.
NON-PERFORMING ASSETS AND ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses has been established to absorb estimated losses in
the loan portfolio. The provision (credit) for loan losses and the level of the
allowance are evaluated periodically by management and the Board of Directors.
These provisions (credits) 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 adjustments
are charged (credited) to operations through the provision for loan losses. Loan
losses are charged against the allowance when management believes the
collectibility of the loan balance is unlikely.
The allowance is an estimate. Ultimate losses may vary from current estimates
and future additions to the allowance may become necessary. In addition,
regulatory agencies, as an integral part of their examination process, review
the Company's allowance and may require the Company to provide additions to the
allowance based on their assessment, which may differ from management's.
At September 30, 2000, the Company's allowance for loan losses totaled $4.2
million or 0.94% of total loans and loans held for sale and 1,180% of
non-performing loans compared to $4.1 million or 0.93% of total loans and loans
held for sale and 814% of non-performing loans at December 31, 1999, and
compared to $4.0 million or 0.90% of total loans and loans held for sale and
875% of non-performing loans at September 30, 1999. Net recoveries for the three
and nine months ended September 30, 2000 were $8 thousand and $58 thousand,
compared to net charge-offs of $44 thousand and net recoveries of $25 thousand
for the corresponding periods in 1999.
Non-performing assets were $402 thousand or 0.04% of total assets at September
30, 2000 compared to $788 thousand or 0.07% of total assets at December 31, 1999
and $768 thousand or 0.07% of total assets at September 30, 1999.
RESULTS OF OPERATIONS
EARNINGS
Net income for the three and nine months ended September 30, 2000 was $2.5
million, or $0.76 per diluted share, and $7.1 million, or $2.16 per diluted
share compared to $2.3 million, or $0.69 per diluted share, and $7.0 million, or
$2.08 per diluted share for the corresponding periods in 1999. Basic earnings
per share were
9
<PAGE> 10
$0.77 and $2.19 per share for the three and nine months ended September 30, 2000
compared to $0.71 and $2.12 for the same periods in 1999. Non-recurring charges
included in the three months ended September 30, 2000 were $337 thousand and
related to the write-off of obsolete equipment, prepayment fees for the early
extinguishment of FHLB borrowings, and various professional fees associated with
regulatory issues. Return on average assets was 0.91% and 0.88%, and return on
average equity was 23.18% and 22.97%, respectively, for the three and nine
months ended September 30, 2000. Return on average assets during 1999 was 0.91%
and 0.95% for the respective three and nine month periods and return on average
equity was 24.13% and 25.48% for the same periods in 1999.
OVERVIEW
Operating results have been significantly affected by the growth of the Bank and
of its mortgage banking subsidiary, People's Mortgage Corporation ("PMC"). The
Company increased its asset size from $944.6 million at December 31, 1998 to
$1.077 billion at September 30, 2000. Operating results have been affected by
the Bank's increase in average investments to $592.0 million during the first
nine months of 2000, compared to $497.4 million during the first nine months of
1999. This growth in earning assets was primarily funded by the Bank's increase
in average deposits to $572.3 million in the first nine months of 2000, compared
to $475.7 million in the first nine months of 1999. Average loans for the first
nine months of 2000 were $439.4 million compared to $456.2 million for the
corresponding period in 1999. Average borrowings declined for the nine month
period from $435.9 million for 1999 to $417.4 million for 2000. Operating
results have also been significantly affected by the growth of PMC, including
the purchase of Allied Bancshares Mortgage Group, LLC ("Allied") on September 1,
1999. Combined results of PMC and Allied, for the first nine months of 2000,
resulted in gains on sales of loans of $6.4 million and net interest and other
income of $1.8 million, while operating expenses were $8.3 million, and the net
loss for PMC and Allied was $120 thousand. Comparable results for 1999 were $5.0
million, $1.2 million, $6.5 million, and $185 thousand, respectively. Included
in the 1999 third quarter results of PMC are $430 thousand of first month losses
at Allied.
NET INTEREST INCOME
Net interest income increased $307 thousand and $1.4 million for the three and
nine months ended September 30, 2000 compared to the same periods in 1999. This
change reflects growth in earning asset volume and mix partially offset by a
decrease in the net interest margin. For the first nine months of 2000, average
earning assets increased 8% over 1999. Net interest margin was 2.83% for the
nine months ended September 30, 2000, compared to 2.86% for the same period in
1999.
Interest and dividend income increased to $20.9 million and $61.0 million for
the three and nine months ended September 30, 2000 from $18.7 million and $53.6
million for the comparable 1999 periods. The yield on average earning assets
increased to 7.96% and 7.88% for the three and nine months ended September 30,
2000 from 7.47% and 7.48% for the 1999 quarter and year-to-date. Yields on loans
were 8.24% and 8.13% for the three and nine months ended September 30, 2000,
compared to 7.65% and 7.55% for the 1999 periods. Yields on investments
increased to 7.75% and 7.70% for the three and nine months ended September 30,
2000, compared to 7.29% and 7.39% for the comparable 1999 periods.
Interest expense increased to $13.6 million and $39.1 million for the three and
nine months ended September 30, 2000 from $11.6 million and $33.1 million for
the same periods in 1999. Deposit interest increased $2.0 million and $5.7
million for the three and nine month periods, compared to 1999. Interest expense
on borrowings decreased $66 thousand for the three months ended September 30,
2000 and increased $252 thousand for the nine months ended September 30, 2000.
10
<PAGE> 11
During the first nine months of 2000, average borrowed funds amounted to $417.4
million compared to $435.9 million during the same period of 1999. Average
borrowed funds have decreased as the Company has experienced deposit growth. The
average rate paid on borrowed funds was 6.13% and 6.05% for the three and nine
months ended September 30, 2000 compared to 5.72% for the same periods in 1999.
Deposit interest expense increased due to an increase in average deposits to
$572.3 million for the nine month period ended September 30, 2000 compared to
$475.7 million for the same period in 1999. The average interest rate paid on
deposits increased to 4.91% and 4.72% for the three and nine month periods ended
September 30, 2000 from 4.15% and 4.07% for the same periods in 1999.
OTHER INCOME
Other income was $2.8 million and $7.5 million for the three and nine months
ended September 30, 2000, compared to $2.0 million and $6.1 million for the same
periods in 1999. The increases were primarily due to increases in the gains on
sales of loans.
OPERATING EXPENSES
Total operating expenses were $6.5 million and $18.9 million for the three and
nine months ended September 30, 2000 compared to $6.0 million and $16.8 million
for the same periods in 1999. These increases in operating expenses are
primarily due to additional costs associated with the acquisition of Allied and,
in the case of the nine month expenses, general increases of salary and
benefits.
Salaries and benefits expense decreased $29 thousand for the three months ended
September 30, 2000 and increased $784 thousand for the nine months ended
September 30, 2000 compared to the same periods in 1999. The decrease in
salaries and benefits for the three months reflects staff reductions at PMC and
decreased pension expense. The increase in salaries and benefits for the nine
months reflects general salary increases and the addition of Allied employees
for all nine months in 2000 compared with only one month during 1999.
Occupancy and equipment expense increased $196 thousand and $948 thousand for
the three and nine months ended September 30, 2000, compared to the same periods
in 1999. Professional fees increased $238 thousand and $347 thousand for the
three and nine months ended September 30, 2000 compared to the same periods in
1999. The increase primarily reflects costs associated with legal and regulatory
matters. Other general and administrative expenses decreased $13 thousand and
$36 thousand for the three and nine months ended September 30, 2000 compared to
the same periods in 1999.
The efficiency ratio for the Company for the three and nine months ended
September 30, 2000, was 57.34% and 59.79%. For the same periods in 1999, the
ratio was 59.61% and 58.34%. The efficiency ratio for the Company excluding PMC
was 45.83% and 44.70% for the three and nine months ended September 30, 2000.
For the same periods in 1999, the ratio was 48.84% and 47.25%.
PROVISION FOR INCOME TAXES
The Company recognized income tax expense of $1.2 million and $3.4 million in
the three and nine months ended September 30, 2000 compared to income tax
expense of $1.1 million and $3.6 million for the same periods in 1999. The
effective tax rates for the three and nine months ended September 30, 2000 were
32.5% and were 31.8% and 33.9% for the corresponding periods of 1999.
11
<PAGE> 12
LIQUIDITY AND CAPITAL RESOURCES
The Company's liquidity management strategy focuses upon the Company's ability
to provide the cash reserves and cash equivalents necessary to honor contractual
liabilities and commitments, meet depositors' withdrawal demands, fund
operations and provide customers with adequate available credit. The Company's
primary sources of liquidity are customer deposits, principal and interest
payments on loans, interest and dividends on investments and proceeds from the
maturity or sale of investments. The Company also has the ability to borrow from
the Federal Home Loan Bank of Boston on a collateralized basis. The Company
believes that it has adequate liquidity to meet its current needs.
At September 30, 2000, the Company's capital exceeded all applicable regulatory
requirements imposed by statute or regulations. Reference is made to OTHER
INFORMATION, below.
<TABLE>
<CAPTION>
Amount Percent
----------------------------------------- --------------------------------------
Adequately Well Adequately Well
Capitalized Capitalized Capitalized Capitalized
Actual Minimums Minimums Actual Minimums Minimums
--------- ----------- ----------- ------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
People's Bancshares, Inc.
Tier 1 Leverage Capital $ 59,285 $43,132 n/a 5.50% 4.00% n/a
Tier 1 Capital 59,285 23,304 n/a 10.17% 4.00% n/a
Total Capital 72,069 46,607 n/a 12.37% 8.00% n/a
People's Savings Bank of Brockton
Tier 1 Leverage Capital $ 67,400 $43,212 $ 54,015 6.24% 4.00% 5.00%
Tier 1 Capital 67,400 35,317 35,317 11.59% 4.00% 6.00%
Total Capital 71,554 47,089 58,862 12.30% 8.00% 10.00%
</TABLE>
OTHER INFORMATION
On October 31, 2000, the Company declared a dividend of $0.21 per share, payable
on December 7, 2000 to shareholders of record on November 17, 2000.
As previously announced, People's Savings Bank of Brockton, the primary
subsidiary of the Company (the "Bank"), has entered into an informal agreement
with its regulators (the Federal Deposit Insurance Corporation and the
Massachusetts Commissioner of Banks) (the "Bank Agreement") in which the Bank
has agreed, among other matters, to develop plans to reduce over time the level
of its investment in trust preferred securities to less than 100% of its Tier 1
Leverage Capital. In addition, the Bank has agreed to achieve and subsequently
maintain a Tier 1 Leverage Capital ratio of not less than 6.5% of total assets.
During the third quarter, the Company sold $10 million in subordinated
debentures to People's Bancshares Capital Trust II (the "Trust"), a newly formed
subsidiary of the Company. The Trust funded the purchase of the subordinated
debentures through a sale of trust-preferred shares with a liquidation value of
$10,000,000. The net proceeds of this sale were contributed by the Company to
the Bank in order to increase the Tier 1 Leverage Capital level of the Bank by
$9.64 million. At September 30, 2000 the actual Tier 1 Leverage Capital ratio of
the Bank was 6.24%.
Additional provisions of the Bank Agreement require the Bank to assess the
Bank's management and staffing
12
<PAGE> 13
needs, develop revised strategic and capital plans, improve the quality of the
investment portfolio and investment administration, improve liquidity and the
management thereof, develop a plan for reducing interest rate risk exposure and
address other operational issues.
In addition to the Bank Agreement, the Company expects to enter into a formal
agreement (the "Company Agreement") with the Federal Reserve Bank of Boston (the
"Reserve Bank") that would require prior approval of the Reserve Bank and the
Division of Banking Supervision and Regulation of the Board of Governors of the
Federal Reserve System for the Bank to pay dividends to the Company or for the
Company to pay dividends on its common stock or interest on the subordinated
debentures the Company issued in 1997 and 2000. While the Company intends to
seek such approvals, there is no assurance that approval to pay all or any
portion of such dividends and/or interest will be received. In the event that
the required approvals are not received, the Company, to the applicable, will
reduce or eliminate dividends on its common stock and defer the payment of
interest on the debentures (to the extent required) to the relevant trusts
(pursuant to the terms of the instruments under which they were organized) and
the trusts will defer (to the extent required) paying dividends on the trust
preferred shares issued by them. During the term of any such deferral,
distributions to which holders are entitled will continue to accrue interest or
dividends at the stated annual rate, plus additional interest of 2% compounded
quarterly, on any unpaid distributions in accordance with the terms of the
underlying securities.
The Company has suspended its stock purchase program announced in 1998. In the
first half of 2000, the Company repurchased 115,000 shares of the outstanding
common stock at an average cost of $18.21 per share in open market transactions.
The Company anticipates that the terms of the Company Agreement will preclude
the purchase of any additional shares without the prior written approval of the
Reserve Bank and that the Company will be required to maintain a minimum
consolidated Tier 1 Leverage Capital ratio of not less than 5.0%. At September
30, 2000, the Company's consolidated Tier 1 Leverage Capital ratio was 5.50%.
The Company also anticipates that the terms of the Company Agreement will state
that it is the common goal of the Company and the Reserve Bank to restore and
maintain the financial soundness of the Company and will preclude the Company
from increasing its borrowings, incurring debt or renewing existing debt without
the prior approval of the Reserve Bank.
Management is currently evaluating a number of initiatives to improve and
maintain the financial soundness of the Company and the Bank. The Company may
restructure its consolidated balance sheet to reduce interest rate risk while
improving liquidity and balance sheet fundamentals. This strategy would enhance
the mix of earning assets and liabilities through the divestiture of higher risk
earning assets while reducing dependence on higher cost volatile liabilities. In
addition, such restructuring would improve asset quality and reduce the
Company's exposure to rising interest rates. While the financial impact of such
a strategy has not been quantified, and no decision has been reached as to the
manner in which such a strategy would be implemented, it is likely that such
initiatives would reduce the Company's future operating results.
People's maintains twelve banking locations in Southeastern Massachusetts and 12
loan production offices in Massachusetts, Connecticut, Maryland, and Virginia.
People's trades under the symbol "PBKB" and is quoted on the NASDAQ National
Market System.
13
<PAGE> 14
People's Bancshares, Inc.
Supplementary Financial Data
<TABLE>
<CAPTION>
1st Quarter 2nd Quarter 3rd Quarter 9 months 4th Quarter
1999 1999 1999 1999 1999 1999
------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Bank net of premium amortization, security gains
and non-recurring items $ 0.79 $ 0.81 $ 0.77 $ 2.37 $ 0.76 $ 3.14
Premium amortization expense (1) $ (0.15) $ (0.13) $ (0.09) $ (0.37) $ (0.07) $ (0.45)
------------------------------------------------------------------------------
Bank net income, net of non-recurring item $ 0.64 $ 0.68 $ 0.68 $ 2.00 $ 0.69 $ 2.69
Mortgage subsidiary net income (loss), net of
non-recurring items $ 0.02 $ 0.01 $ 0.01 $ 0.04 -- $ 0.04
------------------------------------------------------------------------------
Bancshares, net of security gains and non-
recurring items $ 0.66 $ 0.69 $ 0.69 $ 2.04 $ 0.69 $ 2.73
Security gains and non-recurring items, net $ 0.01 $ 0.03 -- $ 0.04 -- $ 0.04
------------------------------------------------------------------------------
Reported diluted earnings per share $ 0.67 $ 0.72 $ 0.69 $ 2.08 $ 0.69 $ 2.77
==============================================================================
Return on average equity 25.91% 26.46% 24.13% 25.48% 23.00% 24.82%
Return on average assets 0.96% 0.99% 0.91% 0.95% 0.86% 0.93%
Bank efficiency ratio (2) 46.50% 45.51% 48.84% 47.25% 51.35% 48.32%
Company efficiency ratio (2) 58.66% 56.70% 59.61% 58.34% 65.49% 60.32%
Net interest margin 2.87% 2.85% 2.82% 2.86% 2.82% 2.84%
Mortgage company core income (loss) as a
percentage of Company core income 3.03% 1.45% 1.45% 1.96% -- 1.44%
Gains on sales of loans (in thousands) $ 1,774 $ 1,605 $ 1,643 $ 5,022 $ 2,480 $ 7,502
Mortgage loan applications (in thousands) $209,795 $206,948 $180,632 597,375 $205,373 $802,748
Mortgage backlog at end of quarter (in
thousands) (3) $135,322 $141,482 $172,579 $135,009
</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.
14
<PAGE> 15
People's Bancshares, Inc.
Supplementary Financial Data
<TABLE>
<CAPTION>
1st Quarter 2nd Quarter 3rd Quarter 9 Months
2000 2000 2000 2000
----------- ----------- ----------- --------
<S> <C> <C> <C> <C>
Bank net of premium amortization, security gains
and non-recurring items $ 0.84 $ 0.83 $ 0.78 $ 2.45
Premium amortization expense (1) $ (0.04) $ (0.06) $ (0.05) $ (0.15)
-----------------------------------------------------
Bank net income $ 0.80 $ 0.77 $ 0.73 $ 2.30
Mortgage subsidiary net income, net of non-
recurring items $ (0.13) $ 0.01 $ 0.10 $ (0.02)
-----------------------------------------------------
Bancshares, net of security gains and non-
recurring items $ 0.67 $ 0.78 $ 0.83 $ 2.28
Security gains and non-recurring items, net -- $ (0.05) $ (0.07) $ (0.12)
-----------------------------------------------------
Reported diluted earnings per share $ 0.67 $ 0.73 $ 0.76 $ 2.16
=====================================================
Return on average equity 22.05% 23.66% 23.18% 22.97%
Return on average assets 0.84% 0.90% 0.91% 0.88%
Bank efficiency ratio (2) 42.88% 45.41% 45.83% 44.70%
Company efficiency ratio (2) 62.32% 59.89% 57.34% 59.79%
Net interest margin 2.80% 2.85% 2.80% 2.83%
Mortgage company core income (loss) as a percentage
of Company core income (16.25)% 1.39% 13.70% (0.70)%
Gains on sales of loans (in thousands) $ 1,798 $ 2,155 $ 2,409 $ 6,362
Mortgage loan applications (in thousands) $272,364 $259,431 $212,780 $744,575
Mortgage backlog at end of quarter (in thousands) (3) $200,187 $201,852 $173,385
</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
The objective of the Bank's asset/liability management process is to monitor and
control the variation in repricing intervals between assets and liabilities. The
process monitors interest rate sensitivity by analyzing the estimated changes in
net interest margin assuming various interest rate scenarios over a two year
period. The Bank's current methodology incorporates a number of assumptions
concerning the timing between the repricing and maturity of interest earning
assets and interest bearing liabilities. These assumptions include changes in
the prepayment experience of mortgage related securities, callable features of
certain assets and liabilities and volume assumptions for certain categories of
assets and liabilities which may be at variance with actual changes in balances
as a result of changes in interest rates during a particular measurement period.
The Board has established limits on interest rate risk which specify that
changes in interest rates will not impact estimated net interest income for the
subsequent 12 and 24 months by more than 10% and 20%, respectively. Based upon
the Bank's current methodology, the Company was in compliance with this limit at
September 30, 2000.
2.0% Rate 2.0% Rate
Increase Decrease
-------- --------
Year 1 (4.24)% 5.25%
Year 2 (11.19)% 3.13%
16
<PAGE> 17
PART II - OTHER INFORMATION
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K
-----
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION
<S> <C>
3.1 Restated Articles of Organization of the Company (filed as Exhibit 3.1 to the
Company's Annual Report on Form 10-K for the year ended December 31, 1995 and
incorporated herein by reference)
3.2 By-laws of the Company, as amended and restated (filed as Exhibit 3.2 to the Company's
Annual Report on Form 10-K for the year ended December 31, 1995 and incorporated
herein by reference)
4.1 Specimen certificate for shares of Common Stock of the Company (filed as Exhibit 4.1
to the Company's Annual Report on Form 10-K for the year ended December 31, 1995 and
incorporated herein by reference)
4.2 Articles IV and VI(I)-(K) of Restated Articles of Organization of the Company (see
Exhibit 3.1)
4.3 Articles I and IV of By-laws of the Company (see Exhibit 3.2)
27 Financial Data Schedule (filed herewith).
(b) Reports on Form 8-K. No reports on Form 8-K were filed during the quarter ended September 30, 2000.
</TABLE>
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.
11/14/2000 By: /s/ Richard S. Straczynski
--------------------- --------------------------------------
Date Richard S. Straczynski
President and Chief Executive Officer
11/14/2000 By: /s/ James K. Hunt
--------------------- --------------------------------------
Date James K. Hunt
Executive Vice President/Finance &
Administration and
Chief Financial Officer
18
<PAGE> 19
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit Description
------- -----------
<S> <C>
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).
</TABLE>
19
