ITEM 1. BUSINESS
GENERAL
The Company. People's Bancshares, Inc. (the "Company") is a unitary bank holding company subject to the Bank Holding Company Act ("Act"), the principal business of which consists of the business of People's Savings Bank of Brockton (the "Bank"). The only significant assets of the Company are the capital stock of the Bank and the Company's equity interest in People's Bancshares Capital Trust, a Delaware business trust (the "Trust") formed in 1997. Although the Company is a legal entity separate from the Bank and the Trust, the Company itself is not engaged in any business activities. The Trust issued $13.8 million of trust preferred securities to the public on June 26, 1997 and used the proceeds to purchase subordinated debentures from the Company.
The Bank. The Bank was chartered as a Massachusetts mutual savings bank on February 6, 1895. On October 30, 1986, the Bank converted to a Massachusetts chartered savings bank in stock form. The Bank is engaged principally in the business of attracting deposits from individuals, businesses and governments, and investing those funds in residential and commercial mortgages, consumer, commercial and construction loans and investments, consisting primarily of mortgage-backed securities and trust preferred securities. The Bank originates loans for investment with the exception of residential mortgage loans. The Bank and its mortgage banking subsidiary originate 1-4 family residential loans primarily for sale in the secondary market, generally with the servicing rights of such loans. The Company sold 97%, 92%, and 93% of its 1-4 family residential loan originations, including table funded loans, in 1998, 1997, and 1996, respectively. Loans sold are originated by the Bank's mortgage banking subsidiary, People's Mortgage Corporation ("PMC"), on which PMC has obtained purchase commitments from investors prior to funding.
The Bank actively manages the purchase and sale of investments and loans which are serviced by third parties. These purchases are funded by FHLB advances, repurchase agreements, and municipal deposits. Such leveraged assets amounted to $558.5 million, $414.0 million and $147.6 million at December 31, 1998, 1997 and 1996, respectively. The Bank's revenues are derived principally from interest on its loans, interest and dividends on its investment securities, customer fees, and gains on residential mortgage loan sales. The Bank's primary sources of funds are customer deposits, amortization and repayment of loan and investment principal, interest and dividends on loans and investments, maturity or sale of investment securities, collateralized borrowings and proceeds from the sale of loans. The Bank offers a variety of deposit accounts, including NOW accounts, regular savings accounts, money market accounts, fixed rate certificates of deposits and various retirement accounts.
The Bank has eight wholly-owned subsidiaries. PMC, which was organized in March 1995, acts as the mortgage banking subsidiary of the Bank. PSB Security Corporation I, II, and III, organized in February 1996, are "security corporations" for Massachusetts tax purposes, and are subject to a more favorable tax rate on income derived from securities held in them. The remaining subsidiaries of the Bank, are primarily engaged in the management and sale of foreclosed real estate.
MANAGEMENT STRATEGY
The Company's overall strategy is to use the Bank's traditional strengths as a community bank specializing in real estate lending to fulfill the Bank's commitment to satisfy the financial needs of the communities it serves. The goal of the Bank's senior management team has been and continues to be to maintain a strong return on stockholders' equity. Senior management has focused its efforts on continuing the strategy established by the Board of Directors to grow internally and through selected acquisitions. The principal components of this strategy include:
* Improving asset quality
* Redirecting lending efforts
* Managing interest rate risk
* Reducing non-interest expenses
* Increasing fee-based revenues
* Providing superior customer service in a cost-effective manner
* Achieving growth through carefully chosen acquisitions
Improving Asset Quality. At December 31, 1993, the Bank's non-performing assets amounted to $8.5 million, or 4.43% of total assets and 43.08% of total equity and loan loss allowances. The ratio of the allowance for loan losses, as adjusted to reflect the adoption of SFAS 114, to non-performing loans at December 31, 1993 was 56.0%. The Bank's asset quality reflected a weak regional economy and a depressed local real estate market. The Bank had to this point specialized in multi-family and commercial real estate lending, two areas that were especially adversely affected by such economic conditions. During the next 60 months, the Bank was able to reduce non-performing assets by 81%. At December 31, 1998, the Bank's non-performing assets were $1.6 million, or 0.17% of total assets, and 4.10% of total equity and loan loss allowances. The ratio of the allowance for loan losses to non-accrual loans was 320.8%. The Bank achieved these results through efforts to resolve existing credit problems and to avoid future problems through a restructuring of the lending function.
Redirecting Lending Efforts. The Bank has chosen to de-emphasize multi-family real estate and consumer lending. The Bank believes that the local market for multi-family lending is improving, yet the Bank still maintains a portfolio of long-term multi-family mortgages. Regarding consumer lending, the Bank believes that it was operating at a competitive disadvantage in comparison to large banks and non-bank lenders for home equity loans as well as indirect and direct automobile financing. The Bank also was adversely affected by governmental actions that diminished the attractiveness of education lending. The Bank has instead chosen to focus its growth on 1-4 family residential, home equity loans, residential construction, commercial, and commercial real estate lending. Although the Bank will continue to evaluate the viability of consumer lending, the Bank believes that prudent commercial and commercial real estate lending will yield the highest long-term return.
Managing Interest Rate Risk. The Bank's Investment Committee, which includes five outside directors, meets quarterly to monitor interest rate risk. Management uses a computer based asset/liability management simulation model. This model measures changes in net interest income by projecting the future composition of the Bank's interest-earning assets and interest-bearing liabilities and assessing the effect of rising, flat, and declining interest rate scenarios within a two year horizon. The simulation model allows the Bank to measure the effects of changing interest rate environments on net interest margins, net income, capital, and liquidity. Management's strategy is to adjust its assets and liabilities to diminish future possible adverse effects of extreme changes in interest rates and to limit interest rate risk by matching interest-earning assets and interest-bearing liabilities. Management will from time to time allow some imbalance in the matching of interest-earning assets and interest-bearing liabilities. Beginning in 1992, the Bank matched the pricing of its deposit liabilities with the pricing of other banks throughout Massachusetts as opposed to its local market competition. The Bank faces substantial competition in its immediate deposit-gathering market from community credit unions, which, because of their lack of state or federal taxation, are able to offer higher deposit rates. By establishing its rates with reference to a wider market, the Bank has been able to maintain competitive deposit rates and meet commercial credit demands. The Bank also has aggressively pursued municipal deposits as an alternative to higher rate borrowings.
In 1993, the Bank began to match mortgage-backed securities with the funds borrowed to purchase such securities, which consist primarily of FHLB advances and LIBOR-based repurchase agreements. The Bank either matches the expected maturities of these mortgage-backed securities with the borrowed funds or matches mortgage-backed securities secured by adjustable-rate mortgages with short-term funding. The Bank avoids high risk
investment instruments such as interest-only or principal-only strips in favor of US agency and high quality private sector mortgage-backed securities. The Bank also began investing in trust preferred securities in 1997 which offer attractive yields. In 1997, the Bank began to purchase residential mortgage loans with servicing retained by the seller. These purchased 1-4 family residential loan packages exhibit many of the characteristics of mortgage-backed securities except that the Bank earns a higher yield for assumption of credit risk. Although this strategy results in lower financial ratios that are computed on the basis of average assets, it increases income and return on equity, at what the Company considers to be a low level of risk.
PMC seeks to reduce interest rate risk by not retaining or purchasing servicing rights that would result in premiums subject to prepayment risk in a decreasing interest rate environment. PMC also obtains purchase commitments on all residential mortgage loans prior to their funding. This substantially eliminates market depreciation in rising interest rate environments.
Reducing Non-Interest Expenses. The Bank has worked to reduce its cost structure through a restructuring of its operations and through cost reductions. During the last several years the Bank has used competitive bids for its third-party services and supply contracts, which has contributed to the significant improvement in its efficiency ratio from 69.6% for the year ended December 31, 1993 to 57.7% for the year ended December 31, 1998.
Increasing Fee-Based Revenues. The Bank continues to review options to increase revenue. Along with the match-funded investment program discussed above, the Bank continues its efforts to increase revenues through mortgage banking activities. The Bank's mortgage-banking subsidiary, People's Mortgage Corporation, sells most of its mortgage loan origination volume into the secondary market and does not retain the servicing rights. The Bank believes that it is not large enough to make loan servicing a profitable venture. In 1994, the Bank originated $17.2 million in new mortgage loans of which $6.4 million were sold in the secondary market. The Bank originated $88.3 million, $229.4 million, $349.7 million, and $688.9 million in new mortgage loans in 1995, 1996, 1997 and 1998, respectively, of which $63.6 million, $194.2 million, $322.2 million, and $668.2 million, respectively, were sold in the secondary market, including table funded loans. People's Mortgage Corporation currently has eight loan origination offices located in Massachusetts, Rhode Island, and Connecticut.
Providing Superior Customer Service in a Cost-Effective Manner. Management recognizes the paramount need to manage the Bank in a safe and sound manner for the protection of its stockholders and depositors. Although the Bank has traditionally limited its lending activities to real estate, it plans to expand these activities, consistent with sound banking practices, to serve other financial needs of the community and to complement its deposit activity with alternative investment opportunities such as annuities and mutual funds. Management also recognizes that superior customer service combined with local levels of decision-making authority is what distinguishes a community bank from the much larger regional commercial banks. For these reasons, customer service is a high management priority. At the same time, management recognizes that to achieve its profit goals, it must provide superior service in a cost efficient manner. Management's goal is to improve the Bank's efficiency ratio without sacrificing its high level of customer service.
Achieving Growth Through Carefully Chosen Acquisitions. The Bank believes that it can deliver the most value to the community and its stockholders as a mid-sized bank combining the community-oriented and responsive service of a smaller institution with the cost and operational efficiencies of a larger bank. As such, the Bank sees acquisitions as a low cost profit opportunity. Through branch acquisitions, the Bank has had the opportunity to expand into new territories and leverage the Bank's existing management and operational infrastructure.
RECENT DEVELOPMENTS
In 1998, the Bank restructured its branch operations to eliminate underperforming branches and relocate to more desirable market areas. In 1998 the Bank closed the smallest of its three Taunton branches and opened a commercial loan office in Brockton. Also, the construction of a new Brockton branch was substantially complete in 1998. The new branch opened in early 1999 and a small Brockton branch was closed in early 1999. PMC continued to expand its branch network in 1998, opening a branch in Portsmouth, Rhode Island.
The Company announced a second stock repurchase plan on September 1, 1998, allowing the repurchase of up to 10% of its currently outstanding common stock over an eighteen month period. No stock has been repurchased
under this plan as of March 11, 1999.
On June 26, 1997, the Company raised total proceeds of $13.8 million in a sale of subordinated debentures to People's Bancshares Capital Trust which funded the purchase in a public offering of 1.38 million trust preferred securities with a liquidation value of $10 each. Using interest payments made by the Company on the debentures, the Trust pays quarterly dividends to preferred security holders. The annual percentage rate of interest payable on the subordinated debentures and distributions payable on the preferred securities is 9.76%. Dividends on the preferred securities will be cumulative and the Trust may defer the payments for up to five years. The preferred securities mature in June 2027 unless the Company elects and obtains regulatory approval to accelerate the maturity date to as early as June 2002. This subordinated debt may be included in regulatory Tier 1 capital subject to a limitation that such amounts not exceed 25% of Tier 1 capital. All such subordinated debt may be included in total risk-based capital at December 31, 1998.
On July 17, 1997, the Company repurchased 355,000 common shares or 10% of its outstanding stock as of June 30, 1997, at an average cost of $17.50 in an open market transaction under a repurchase program announced on July 15, 1997.
On March 31, 1995, the Bank purchased the assets of Minuteman Funding Corporation, a mortgage broker located in Andover, Massachusetts. On March 31, 1995, the Bank transferred the acquired assets to People's Mortgage Corporation, a newly established wholly owned subsidiary of the Bank. The headquarters of People's Mortgage Corporation and one of its loan production offices are located at the Bank's headquarters in Easton, Massachusetts. In 1995, People's Mortgage Corporation opened offices in Sturbridge, Massachusetts, and in Hamden, Connecticut. In 1996, PMC opened a New Bedford office. In 1997, PMC opened offices in Norwell and Wellesley, Massachusetts and closed its Sturbridge office. In 1998, PMC opened an office in Portsmouth, Rhode Island.
In 1995 the Bank expanded its market presence in southeastern Massachusetts through acquisitions of the branches of other financial institutions and, in one case, through a merger with another financial institution. In July 1995, the Bank assumed approximately $9.7 million in deposits from Haymarket Co-operative Bank and reallocated the deposits to one of the Bank's existing branches in Brockton. In May 1995, the Bank merged with the Bank of Taunton, A Co-operative Bank ("Bank of Taunton") as part of a supervisory conversion of the Bank of Taunton, with the Bank as the surviving institution. The Bank of Taunton had total deposits of approximately $17.0 million at the time of the acquisition. In the acquisition of the Bank of Taunton, the Bank acquired two branch offices of the Bank of Taunton located in Taunton and East Taunton, Massachusetts. In September 1995, the Bank acquired certain assets and assumed approximately $13.0 million of deposits of the Mansfield, Massachusetts branch of Bank of Boston.
On September 30, 1995, the Bank entered into separate Purchase and Assumption Agreements (each, an "Agreement," and together the "Agreements") with each of Fleet Bank of Massachusetts, National Association ("Fleet") and Shawmut Bank, National Association ("Shawmut," and collectively with Fleet, "Fleet/Shawmut"). The Agreements provided for (i) assumption of deposit liabilities (the "Fleet/Shawmut Deposits") by the Bank relating to one branch of Fleet located in Mattapoisett, Massachusetts and four branches of Shawmut located in New Bedford (two), South Dartmouth and Taunton, Massachusetts (together, the "Fleet/Shawmut Branches") and (ii) the acquisition of the Fleet/Shawmut Loans and Fleet/Shawmut Assets (each as defined below) (the "Branch Acquisitions"). The Fleet/Shawmut Branches were divested in connection with the merger of Shawmut National Corporation into Fleet Financial Group, Inc.
At the closing of the Branch Acquisitions on March 8, 1996, the Bank assumed the Fleet/Shawmut Deposits and paid Fleet/Shawmut a premium of 5.5% on the average Fleet/Shawmut Deposits for the 30 days prior to the closing of the transaction. The Fleet/Shawmut Deposits totaled $144.7 million.
In the Branch Acquisitions, the Bank acquired certain first mortgage residential, commercial and commercial real estate and consumer loans of Fleet/Shawmut (the "Fleet/Shawmut Loans"), as well as the real property owned or leased by Fleet and Shawmut for operation of the Fleet/Shawmut Branches and related automated teller machines, furniture, equipment, and other fixed operating assets (the "Fleet/Shawmut Assets").
The Bank acquired the Fleet/Shawmut Loans at face value and the Fleet/Shawmut Assets at a specified purchase price with the exception of furniture, equipment and other fixed assets, which were acquired at book value. The Bank acquired an aggregate of approximately $113.7 million of Fleet/Shawmut Loans. The total purchase price of the Fleet/Shawmut Assets was approximately $1.8 million.
According to the terms of the Agreements, the obligation of the Bank and Fleet/Shawmut to consummate the Branch Acquisitions was subject to the satisfaction of certain conditions, including the receipt of capital financing necessary to fund the Branch Acquisitions and enable the Bank to comply with applicable minimum equity capital or other regulatory requirements following the Branch Acquisitions (the "Capital Financing Condition").
To enable the Company to satisfy the Capital Financing Condition, the Company offered shares of its Common Stock at $8.875 per share in a rights offering to shareholders of record as of February 8, 1996 and "standby" purchasers. The Company completed the offering on March 8, 1996, raising net proceeds of approximately $7.5 million through the sale of 968,352 shares.
MARKET AREA AND COMPETITION
The Bank's main office is located in Easton, Massachusetts. The Bank also has eleven other branch offices and one commercial loan office in Massachusetts, three of which are located in the Plymouth County community of Brockton, one of which is located in the Norfolk County community of Stoughton, two of which are located in the Bristol County community of Taunton, two of which are located in the Bristol County community of New Bedford, and one of which is located in each of the Bristol County communities of Mansfield, Mattapoisett and South Dartmouth. In 1996, the Bank relocated its service center to New Bedford, Massachusetts. The Bank's primary market area is the City of Brockton, City of New Bedford, and surrounding towns, including portions of Plymouth, Norfolk, and Bristol counties. In addition, the Bank conducts its residential lending activities principally in southern New England through its mortgage banking subsidiary, People's Mortgage Corporation.
The Bank faces significant competition both in generating loans and in attracting deposits. The southeastern Massachusetts area is a highly competitive market. The Bank faces direct competition from a significant number of financial institutions operating in its market area, many with a state-wide or regional presence and, in some cases, a national presence. Many of these financial institutions are significantly larger and have greater financial resources than the Bank. The Bank's competition for loans comes principally from commercial banks, savings banks, mortgage banking companies, credit unions and insurance companies. Its most direct competition for deposits has historically come from credit unions located in the Bank's market area that have been able to offer higher deposit rates due to their exemption from federal and state taxation. The Bank also faces competition from savings and commercial banks. In addition, the Bank faces increasing competition for deposits from non-bank institutions such as brokerage firms and insurance companies in such instruments as short-term money market funds, corporate and government securities funds, mutual funds, and annuities. Competition may also increase as a result of the lifting of restrictions on the interstate operations of financial institutions.
REGULATION OF THE COMPANY AND THE BANK
The Company. As a business corporation incorporated under Massachusetts law, the Company is subject to regulation by the Secretary of State of Massachusetts and the rights of its stockholders are governed by Massachusetts corporate law. As a bank holding company, the Company is subject to regulation and supervision by the Board of Governors of the Federal Reserve System (the "Federal Reserve Board") pursuant to the BHC Act.
The Federal Reserve Board has adopted capital adequacy guidelines that generally require bank holding companies to maintain total capital equal to 8% of total risk-weighted assets, with at least one-half of that amount consisting of Tier 1 capital. Tier 1 capital for bank holding companies generally consists of the sum of common stockholders' equity and perpetual preferred stock (subject in the case of the latter to limitations on the kind and amount of such stocks which may be included as Tier 1 capital), less goodwill and other intangibles. Total capital consists of Tier 1 capital plus supplementary capital, which includes hybrid capital instruments and perpetual debt; perpetual preferred stock which is not eligible to be included as Tier 1 capital; term subordinated debt and intermediate-term preferred stock; and, subject to limitations, general allowances for loan losses. Assets are adjusted
under the risk-based guidelines to take into account different levels of credit risk, with the categories ranging from 0% (requiring no additional capital) for assets such as cash to 100% for the bulk of assets which are typically held by a bank holding company, including commercial real estate loans, commercial business loans and consumer loans. The Federal Reserve Board also has imposed credit conversion standards for interest rate and exchange rate contracts. In addition to the risk-based capital requirements, the Federal Reserve Board requires bank holding companies to maintain a minimum ratio of Tier 1 capital to total assets of 3%, with most bank holding companies required to maintain a 4% ratio. The Federal Reserve Board also declares that it will closely examine the capital levels of bank holding companies considering expansion to ensure they will remain strongly capitalized.
The Bank. The Bank is subject to extensive regulation and examination by the Commissioner of Banks of Massachusetts (the "Commissioner") and by the FDIC, which insures its deposits to the maximum extent permitted by law, and to certain requirements established by the Federal Reserve Board. The federal and state laws and regulations which are applicable to banks regulate, among other things, the scope of their business, their investments, their reserves against deposits, the timing of the availability of deposited funds and the nature and amount of and collateral for certain loans. The laws and regulations governing the Bank generally have been promulgated to protect depositors and not for the purpose of protecting stockholders.
Pursuant to the FDIC's risk-based assessment system, an institution is assigned to one of three capital groups based solely on the level of the institution's capital -- "well capitalized," "adequately capitalized" and "undercapitalized" -- which would be defined in generally the same manner as the regulations establishing the prompt corrective action system under Section 38 of the Federal Deposit Insurance Act (the "FDIA"). The three capital groups are divided into three subgroups which reflect varying levels of supervisory concern, from those considered to be healthy to those considered to be of substantial supervisory concern. The matrix so created results in nine assessment risk classifications. Beginning with the first semi-annual assessment period of 1996, rates under these classifications will range from 0% for well capitalized, healthy institutions to 0.27% for undercapitalized institutions with substantial supervisory concerns, subject to a statutory requirement that all institutions pay at least $2,000 annually for FDIC insurance.
The FDIC has promulgated regulations and adopted a statement of policy regarding the capital adequacy of state-chartered banks which, like the Bank, are not members of the Federal Reserve System. These requirements are substantially similar to those adopted by the Federal Reserve Board regarding bank holding companies, as described above.
The federal banking agencies continue to consider capital requirements applicable to banking organizations. The federal banking agencies have adopted amendments to their risk-based capital regulations to provide for the consideration of interest rate risk in the determination of a bank's minimum capital requirements. The amendments presently do not codify a measurement framework but rather more generally require that banks effectively measure and monitor their interest rate risk and that they maintain capital adequate for that risk. The agencies also have published a joint policy statement to gather information to eventually establish an explicit capital charge for interest rate risk. In addition, the federal banking agencies have adopted amendments to their risk-based capital standards to provide for the concentration of credit risk and certain risks arising from nontraditional activities, as well as a bank's ability to manage these risks, as important factors in assessing a bank's overall capital adequacy. Failure to meet the minimum regulatory capital requirements could subject a banking institution to a variety of enforcement remedies available for federal regulatory authorities, including the termination of deposit insurance by the FDIC and seizure of the institution.
At December 31, 1998, the Bank was in compliance with all minimum Federal regulatory capital requirements which are generally applicable to FDIC-insured banks. As of such date, the Bank's Tier 1 risk-based capital ratio and total risk-based capital ratio equaled 9.15% and 10.22%, respectively, and Tier 1 leverage capital ratio equaled 5.18%.
In response to a Massachusetts law enacted in 1996, the Commissioner has proposed rules that generally would give Massachusetts banks powers equivalent to those of national banks. The Commissioner also has adopted procedures expediting branching by strongly capitalized banks.
In 1996, Massachusetts enacted interstate banking laws in response to the Riegel-Neal Interstate Banking and Branching Efficiency Act of 1994. The laws permit, subject to certain deposit and other limitations, interstate acquisitions, mergers and branching on a reciprocal basis. The new interstate banking law is likely to make it easier for out-of-state institutions to attempt to purchase or otherwise acquire or to compete with the Bank in Massachusetts, and similarly makes it easier for Massachusetts banks to compete outside the state.
Certain Other Regulatory Matters. In granting its approval of the reorganization in which the Bank became a wholly owned subsidiary of the Company (the "Reorganization"), the Commissioner included a provision which requires the Bank and the Company to maintain Tier 1 leverage capital ratio of at least 4%, which is equivalent to the minimum Tier 1 leverage capital ratios of the FDIC and Federal Reserve Board. The Commissioner has indicated to the Bank that this minimum capital requirement is not related to the Bank's financial condition but instead reflects the policy of the Commissioner to impose minimum capital requirements with respect to all one-bank holding company formations. The approval also provides that if the Bank's Tier 1 leverage capital ratio is below 4%, the Bank must seek Commissioner approval before paying dividends to the Company.
Regulation Under Federal Securities Laws. Upon consummation of the Reorganization, in which the Company acquired the stock of the Bank, the reporting obligations of the Bank under the Exchange Act, as administered by the FDIC, were replaced with substantially identical obligations of the Company under the Exchange Act, as administered by the Securities and Exchange Commission ("SEC"). Pursuant to the Exchange Act, the Company files annual, quarterly and periodic reports with the SEC. The Company's officers and directors are also subject to the insider trading requirements of Sections 16(a) and 16(b) of the Exchange Act as administered by the SEC. In connection with the Reorganization, the Bank deregistered the Bank's common stock under the Exchange Act.
The foregoing references to laws and regulations which are applicable to the Company and the Bank are brief summaries thereof which do not purport to be complete and which are qualified in their entirety by reference to such laws and regulations.
LOAN PORTFOLIO
The Bank's commercial and consumer lending activities are conducted principally in southeastern Massachusetts and the Bank's residential lending activities are conducted principally in southern New England. In addition, the Bank purchases residential mortgage loans with servicing retained by the seller. The Bank's loan portfolio includes single family and multifamily residential loans, commercial real estate loans, commercial loans, and a variety of consumer loans. In addition, the Bank grants loans for the construction of residential homes, commercial real estate properties, and for land development. Approximately 90% of the loans granted by the Bank are secured by real estate collateral. The ability and willingness of the single-family residential and consumer borrowers to honor their repayment commitments is generally dependent, among other things, on the level of overall economic activity within the borrowers' geographic areas and real estate values. The ability and willingness of a commercial real estate, commercial, or construction loan borrower to honor its repayment commitments is generally affected by changing economic conditions in the borrower's particular geographic area, business or industry that could impair the borrower's future operating performance.
At December 31, 1998, the Bank had net loans and loans held for sale of $487.7 million of which $476.2 million, or 98%, were mortgage loans. The Bank also had $16.4 million of other loans not secured by real estate composed of commercial and consumer loans other than home equity loans. Of the Bank's total loans and loans held for sale, 81% were secured by 1-4 family residential mortgages, 11% by commercial properties, 2% by multi-family properties, and 3% represent residential construction loans. Of the Bank's loans not secured by real estate, 2% of total loans are small business commercial loans not secured primarily by commercial real estate and 1% of total loans are to consumers.
The types of loans that the Bank may originate are subject to federal and state law and regulations. Interest rates charged by the Bank on loans are affected principally by the demand for such loans, the supply of money available for lending purposes and the rates offered by competitors. These factors are, in turn, affected by general economic
conditions, monetary policies of the federal government, including the Federal Reserve Board, legislative tax policies, and governmental budgetary matters. The following table presents the outstanding balance of loans as of the end of the years indicated:
At December 31, 1998, the Bank had eighteen credit relationships exceeding $1 million in size that aggregated $35.7 million or 8.3% of total loans. All of these relationships are composed of performing loans. All non-performing credit relationships are under $500,000.
Residential Mortgage Lending. The Bank offers first mortgage loans and home equity lines of credit secured by 1-4 family residences. Typically, such residences are single family homes that serve as the primary residence of the owner. Loan originations are generally obtained from existing or past customers and referrals from real estate agents, builders, and members of communities to which the Bank provides services.
Before 1995, the Bank originated loans through its retail branch system. In 1995, the Bank formed a wholly owned subsidiary, People's Mortgage Corporation ("PMC"). Through PMC, the Bank seeks to expand its residential loan origination market share and profitably increase revenues from loan sales. PMC approves new loans only after obtaining purchase commitments from investors. Currently, PMC secures such commitments on a loan-by-loan basis. PMC uses commissioned loan originators to obtain 1-4 family residential mortgages based upon investors' underwriting standards, which may differ from those of the Bank. The Bank's strategy is to sell new loans originated by PMC in the secondary market, including the related servicing rights. However, as part of its asset/ liability management strategy, or to accommodate borrowers who desire a local servicer, the Bank may buy 1-4 family residential mortgages from PMC. The Bank's policy is to purchase ARMs that meet FNMA or FHLMC underwriting guidelines, except that loans may exceed the maximum loan limits of FNMA or FHLMC. In 1996, the Bank began to purchase residential mortgage loans with servicing retained by the seller. During 1996, 1997 and 1998, the Bank purchased $13.2 million, $146.6 million, and $174.7 million, respectively, of these loan packages, which include loans originated throughout the United States. These purchased 1-4 family residential loan packages
exhibit many of the characteristics of mortgage-backed securities except that the Bank earns a higher yield for assumption of credit risk.
Prior to 1995, the Bank originated fixed-rate 1-4 family residential mortgage loans to sell in the secondary market after first obtaining purchase commitments from investors. During this period, the Bank both originated ARMs for sale in the secondary market, after first obtaining purchase commitments from investors, and for the Bank's portfolio to the extent consistent with its asset/liability management strategy.
At December 31, 1998, 81% of the Bank's total loans and loans held for sale were secured by 1-4 family residential mortgages, of which 54% were ARMs. Generally, ARMs pose credit risks that differ from the risks inherent in fixed-rate loans because the borrower's payments rise as interest rates rise, thereby increasing the potential for default. However, long-term fixed-rate mortgages expose the Bank to higher interest-rate risk.
Commercial Real Estate Lending. Of the Bank's loans at December 31, 1998, 11% were secured by commercial properties that typically have terms of 3 years or less and that are ARMs. Of loans secured by properties other than 1-4 family residences, 77% are ARMs. These loans are made to owners who use properties for business purposes (owner-user properties) or rent the properties to other businesses (commercial investment properties). While the Bank suffered significant losses on these properties in the past, most of these losses occurred on loans originated before the installation of the Bank's current senior management team. The Bank believes that such loans, underwritten and monitored prudently, should be a focus of its loan growth, along with commercial lending to small businesses.
Loans made on commercial investment properties are based upon several factors. These include the property's sustainable cash flow, expenses, quality of tenants, location, and market factors such as the demand for similar properties. Management reviews such loans at least annually through the analysis of market trends, property cash flows, financial statements, and federal income tax returns. When it appears that such loans are in danger of becoming collateral dependent through the properties' inability to generate or achieve sustainable cash flows to service the debt, then the Bank will assign the credit to its internal "Classified and Watch List Loan Report" to closely monitor the loan and assess the likelihood of loss.
Loans made on commercial owner-user properties include loans made to small and medium sized local businesses where the underlying collateral is predominantly commercial real estate used by the business. The Bank underwrites such loans on the borrower's cash flow and ability to service debt from earnings and seeks to structure such loans to have more than one source of repayment. The borrower is required to provide the Bank with sufficient information to allow an informed credit decision to be made. This generally includes three years of financial statements, projected cash flows, current financial information on guarantors, and reports that show financial trends such as accounts receivable agings and concentrations, inventory reports, accounts payable reports, and sales reports. The Bank considers such loans to be a focus for future loan growth.
Loans secured by commercial real estate properties are generally larger and involve a greater degree of risk than 1-4 family residential mortgage loans. Because payments on loans secured by commercial real estate properties are often dependent on successful operation or management of the properties, repayment of such loans may be subject largely to the then prevailing conditions in the real estate market or the economy. The Bank seeks to minimize these risks through its underwriting standards.
Commercial Lending. Of the Bank's loans at December 31, 1998, 2% are small business commercial loans not secured primarily through commercial real estate. Such loans are underwritten using the same standards as for commercial owner-user real estate properties. The Bank considers such loans to be a focus for future loan growth.
The Bank's commercial loans are usually secured by all the borrower's business assets. Commercial loans are generally larger and involve a greater degree of risk than 1-4 family residential mortgage loans. Because payments on commercial loans secured by business assets are often dependent on the successful operation of the business, repayment of the loans may be dependent largely on the then prevailing conditions in the economy. The Bank seeks to minimize these risks through its underwriting policies.
Residential Construction Lending. Of the Bank's loans at December 31, 1998, 3% represent residential construction lending. Such lending is to local real estate developers who have a proven track record in successfully
responding to residential home building cycles or to individuals who are contracting to build homes for their use. The Bank considers such loans to be a focus for future loan growth.
Construction and land financing is generally considered to involve a higher degree of credit risk than long-term financing on improved, owner-occupied real estate. Risk of loss on a construction loan is dependent largely upon the accuracy of the initial estimate of the property's value at completion of construction or development compared to the estimated cost (including interest) of construction. If the estimate of value proves to be inaccurate, the Bank may be confronted with a project that when completed, has a value that is insufficient to assure full repayment. The Bank seeks to minimize these risks through its underwriting policies.
Consumer Lending. Of the Bank's total loans at December 31, 1998, 1% are consumer loans. At December 31, 1990, 13% of the Bank's total loans were consumer loans. The decrease can be attributed to the increasing competition of non-bank lenders for automobile and personal loans as well as the effect of government actions on education loan originations. The Bank does not consider this area to be a focus of future loan growth, but offers such loans as an accommodation to deposit customers.
Multi-Family Residential Lending. Of the Bank's loans at December 31, 1998, 2% were secured by multi-family properties. The Bank historically suffered a high level of loss in this area as well as in non-owner occupied 1-4 family residential loans. As such, the Bank rarely makes such loans, except to facilitate sales of foreclosed properties or to replace existing borrowers with borrowers who are more financially secure.
Loans secured by apartment buildings and other multi-family residential properties are generally larger and involve a greater degree of risk than 1-4 family residential mortgage loans. Because payments on loans secured by multi-family properties are often dependent on successful operation or management of the properties, repayment of such loans may be subject to a greater extent to the then prevailing conditions in the real estate market or the economy. The Bank seeks to minimize these risks through its underwriting policies.
Credit Administration. The Board of Directors, through its policies and procedures, has directed the management team to be proactive in its risk management. This process involves the implementation of systems that promote the identification of credit risk and actions that mitigate such risk. Management plays an active role in promoting a credit culture in which each employee involved in the lending function is expected to manage the risk in the portion of the portfolio for which such employee is responsible with systems that provide management with important information on a frequent basis.
Approval Process. The Bank uses a committee process to approve its loans. Loans over $250,000 and up to and including $500,000 must be authorized by the Credit Committee, including four members of the Bank's senior management team. Loans over $500,000 are submitted to the Executive Committee of the Board of Directors. If any proposed loan has an exception, the Bank requires approval of the Board of Directors or Executive Committee. The Executive Committee meets bi-weekly to approve loans and review reports pertaining to the portfolio's performance.
Management may also delegate loan authority to certain senior loan officers, whereby the designated officer may lend up to pre-established limits, provided that the loan meets minimum underwriting criteria and is documented according to the Bank's customary procedures. These loans are subsequently reported to senior management and the Executive Committee.
Credit Administration Oversight. The Bank's credit administration department uses various systems to monitor the loan portfolio and lending activity. These include reports generated by the Bank's data processing system to monitor loan performance.
The Board of Directors requires that all loans be classified on a grading system according to measurable elements of risk. The system used is standard throughout the banking industry and recognized by the Bank's primary regulators, the Commissioner and the FDIC. This system allows management to track pools of similar credits for potential risk of loss. These pools consist of same grade credits that have similar levels of risk and establish a framework for migration analysis used to determine the levels of loan loss reserves.
The grading system assigns loan pools to seven categories ranging from "pass" to "loss." There are three pools
in the "pass" category, which consists of credits found to be of acceptable risk. Generally, loans in this category are to companies that have profit records, adequate capital for normal operations, and sufficient cash flow to service the loan. When a loan shows signs of potential weaknesses that may affect repayment of the loan or the collateral, the loan is reclassified as "specially mentioned." A loan that has further deterioration and exhibits defined weaknesses in the borrower's capacity to repay is reclassified as "substandard." Loans that exhibit signs of doubtful repayment are graded "doubtful" and loans that show signs of partial or full loss are charged off immediately.
Management provides its lenders with training and systems to monitor the risk of credits and requires a formal process to change the risk grade. When a credit is downgraded, or the risk element has increased due to some potential repayment weaknesses, the credit is given more attention to protect the Bank's ability to collect the loan.
Portfolio Reviews. The Bank uses a "loan officer driven" grading system, whereby all loans are periodically reviewed by loan officers as well as management for common risk trends. The loan officers prepare a quarterly report for management that reviews all the loans for changes in risk and identifies areas for growth opportunities. This process allows management to proactively monitor the portfolio for problems and, if needed, take action to mitigate risk.
Classified Asset Management. All classified assets and specially mentioned credits that are currently outstanding or recently downgraded are reported to management monthly, but in any case not less frequently than quarterly. These reports are prepared by the Credit Administrative Officer and draw attention to the credit problems, strategies to correct the same, and dates for accomplishing the strategies. The reports also point out projected weaknesses or strengths that could cause the credit to be downgraded or upgraded.
When evaluating the reports, management determines if specific reserves should be set up on the relevant credit, depending on the nature of the problem and the underlying collateral. During this process, management evaluates the borrower's cash flow and underlying collateral value. If there is erosion in either case, prompt action is taken to protect the Bank's position. Such actions may include taking additional collateral, obtaining further guarantees, declaring a default and accelerating the loan, and such other legal remedies as may be available to the Bank pursuant to the loan documents to take control of the collateral. Each month management provides reports to the Board of Directors analyzing the allowance for loan losses, foreclosed properties, classified and non-performing assets, and loan charge-offs.
The reports are summarized on a tracking system used to monitor the activity of the credits both for changing loan balances and required reporting based on the initial target dates set by management.
The allowance for loan losses has been established to absorb estimated losses in the loan portfolio. The provision to and the level of the allowance are evaluated on a periodic basis by management and the Board of Directors. The following presents the allocation of the allowance for loan losses:
In addition, the allowance incorporates the results of measuring impaired loans as provided in:
* Statement of Financial Accounting Standards ("SFAS") No. 114, "Accounting by Creditors for Impairment of a Loan" and
* SFAS No. 118, "Accounting by Creditors for Impairment of a Loan -- Income Recognition and Disclosures."
These accounting standards prescribe the measurement methods, income recognition and disclosures concerning impaired loans.
The general allowance is calculated by applying loss factors to outstanding loans based on the internal risk grade of those loans. Changes in risk grades of both performing and non-performing loans affect the amount of the general allowance. Loss factors are based on our historical loss experience and may be adjusted for significant factors that, in management's judgement, affect the collectibility of the portfolio as of the evaluation date.
Loss factors for graded, ungraded and pooled loans are based on long-term industry benchmarks for losses adjusted for the particular attributes of the Company's portfolio. Such factors are derived based upon the collective wisdom and experience of management, examiners and auditors. Management annually reviews loss factors to determine if there has been significant changes in the risks inherent in a particular sector of the loan portfolio to justify changing loss factors. Management believes that a problem loan is a problem loan irrespective of the current economic environment and that adjustment of loss factors to reflect temporary conditions would be imprudent.
Specific allowances are established where management has identified significant conditions or circumstances related to a credit that management believes indicate the probability that a loss has been incurred.
The unallocated allowance is based upon management's evaluation of various conditions, the effects of which are not directly measured in determining the general and specific allowances. The evaluation of the inherent loss regarding these conditions involves a higher degree of uncertainty because they are not identified with specific problem credits or portfolio segments. The conditions evaluated in connection with the unallocated allowance include the following conditions that existed as of the balance sheet date:
* then existing general economic and business conditions affecting our key lending areas.
* credit quality trends, including trends in nonperforming loans expected to result from existing conditions.
* collateral values
* loan volumes and concentrations
* seasoning of the loan portfolio
* specific industry conditions within portfolio segments
* recent loss experience in particular segments of the portfolio
* duration of the current business cycle.
* bank regulatory examination results and
* findings of our internal credit examiners.
Executive management reviews these conditions periodically in discussion with our senior credit officers. If any of these conditions is evidenced by a specifically identifiable problem credit or portfolio segment as of the evaluation date, management's estimate of the effect of this condition may be reflected as a specific allowance applicable to this credit or portfolio segment. Where any of these conditions is not evidenced by a specifically identifiable problem credit or portfolio segment as of the evaluation date, management's evaluation of the probable loss concerning this condition is reflected in the unallocated allowance.
The allowance for loan losses is based upon estimates of probable losses inherent in the loan portfolio. The amount actually incurred for these losses can vary significantly from the estimated amounts. Our methodology includes several features that are intended to reduce the differences between estimated and actual losses. The loss migration model is used to establish yearly budgeted loan loss provisions. Similarly, by basing the expected losses on loss experience over the last five years, the methodology is designed to take our recent loss experience into account. Furthermore, our methodology permits adjustments to any loss factor used in the computation of the general allowance in the event that, in management's judgement, significant factors that affect the collectibility of the portfolio as of the evaluation date are not reflected in the loss factors. By assessing the probable estimated
losses inherent in the loan portfolio periodically, we are able to adjust specific and inherent loss estimates based upon any more recent information that has become available.
Entering 1998, our loan loss provisioning based upon our forecast level of non-performing loans indicated that $600,000 would be an appropriate level to replace expected charge-offs. This would have indicated an expected charge-off rate of approximately 20% versus a five year average charge-off rate of 22% of average non-performing assets. Expected decreases in non-performing assets were forecast to drop 4% against an economic background of an expected slow down in U.S. and local market growth rates.
During 1998, it became clearer that the budgeted forecasts understated the improvement in levels of non-performing assets and overstated the levels of actual losses incurred. However, there also occurred a significant decrease in business sentiment as to the future prospects of the economy with wide spread forecasts of possible impending recessionary conditions. It was against this background that management decided to maintain the same level of loan loss provisioning in the second half of 1998 as in the first half of the year.
The following table presents a summary of the Bank's loan loss experience:
Non-performing loans amounted to $1.5 million $3.9 million, $3.9 million, $4.8 million, and $2.3 million, at December 31, 1998, 1997, 1996, 1995, and 1994, respectively. If prior periods had been restated for the adoption of SFAS 114, non-performing loans would have amounted to $4.7 million at December 31, 1994.
Included in non-performing loans were $859,000, $1.7 million, $2.3 million, $1.3 million, and $1.2 million of loans that were troubled debt restructurings at December 31, 1998, 1997, 1996, 1995, and 1994, respectively. In addition, the Bank had troubled debt restructurings totaling $849,000, $339,000, $355,000, $631,000, and $1.0 million at December 31, 1998, 1997, 1996, 1995, and 1994, respectively, that were accounted for on the accrual basis as they performed under the restructured terms for a reasonable period, and the current interest rate approximates a market interest rate. Interest income recognized on a cash-basis for non-accrual loans amounted to $103,000, $171,000, $261,000, $182,000, and $334,000 for the years ended December 31, 1998, 1997, 1996, 1995, 1994, respectively.
The maturity distribution and interest rate sensitivity of selected loan categories at December 31, 1998 is presented in the following table.
INVESTMENT SECURITIES
Investment securities, including interest-bearing deposits and restricted equity securities, consisting primarily of mortgage-backed securities and trust preferred securities, increased $93.5 million during 1998 as the Bank deployed funds from deposits and borrowings to leverage its capital position. This continued the execution of the Bank's strategy begun in 1993 to maximize the Bank's return on equity by deploying unused funds into investments having minimal credit risk. Under this strategy, securities purchases are structured to realize rate spreads between the securities and funding liabilities while matching the expected maturities of the securities to the funding provided by repurchase agreements and Federal Home Loan Bank ("FHLB") advances.
These transactions have the effect of lowering certain financial ratios such as the Tier 1 leverage capital ratio, return on assets, the weighted average interest rate spread, and the net yield on average interest-earning assets, because they substantially increase the average asset base used in such computations. On the other hand, this strategy results in substantial benefits to pre-tax income and return on average equity.
Mortgage-backed securities are primarily composed of issues guaranteed by government and quasi-government agencies and high quality private sector entities. When interest rates decline, mortgage refinancings increase, resulting in accelerated principal repayments and lower net rate spreads. When rates increase, prepayments decrease resulting in longer expected average lives. Net spreads may increase or decrease depending on the repricing characteristics of the mortgage-backed securities and the related funding liabilities.
At December 31, 1998, the carrying value of the Bank's investment securities, including interest-bearing deposits and restricted equity securities, amounted to $398.2 million, representing 42.2% of the Bank's total assets. At December 31, 1997, and 1996, the Bank's investment securities, including interest-bearing deposits and restricted equity securities, accounted for 39.9% and 38.8%, respectively, of the Bank's total assets.
The following table sets forth the amortized cost and estimated fair value for the Company's held to maturity investment securities portfolio:
The following table sets forth the amortized cost and estimated fair value for the Company's available for sale investment portfolio:
The following tables set forth as of the dates indicated, the maturities of investment securities and the weighted-average yields of such securities, which have been calculated on the cost basis, weighted for the scheduled maturity of each security:
The following table sets forth securities from any single issuer, excluding the U.S. Government or its agencies, for which amortized cost exceeds 10% of stockholders' equity:
DEPOSITS
Deposits generated from within the Bank's local market area are the primary source of funds for the Bank's lending and investment operations. In addition to savings deposits, NOW, and money market deposits, the Bank offers several checking account programs to meet the individual needs of its customers. Substantially all the Bank's deposits are derived from customers who work or reside in the Bank's market area.
The average daily amount of deposits and the average rate paid on each of the following deposit categories is summarized below for the years indicated:
As of December 31, 1998, term certificates of deposit in amounts of $100,000 or more had the following maturities:
BORROWINGS
The following table summarizes the outstanding balances of borrowings for the years indicated:
EMPLOYEES
At December 31, 1998, the Company had 262 full-time equivalent employees. Employee benefits include a pension plan, 401(k) Plan, and life, health, travel, accident and long-term disability insurance, tuition assistance and an Employee Stock Ownership Plan, which are offered by the Company to all employees who meet the minimum hours worked requirements. None of the employees of the Company is represented by a collective bargaining group, and management considers its relationship with its employees to be good.
ITEM 2.
ITEM 2. PROPERTIES
The Bank's main office is located in Easton, Massachusetts. In April 1996, the Company moved its service center to New Bedford from Easton.
All branches provide a broad range of bank services. All Bank locations, except for the service center and main office, have ATMs. The Bank is a member of the Cirrus, Cashstream, and NYCE ATM networks, which provide service to its customers throughout New England and the United States.
The following table sets forth certain information relating to real estate owned or leased by the Company as of December 31, 1998. The Company believes that the fair market value exceeds the net book value of its owned real estate.
(1) Lease expires January 1, 2001 with an option to renew for one three year period.
(2) Tenant-at-will.
(3) Lease expires October 31, 2000.
(4) Lease expires December 31, 2003.
(5) Lease expires October 31, 1999.
(6) People's Mortgage Corporation leases space from the Company as a tenant-at-will.
(7) Lease expires February 28, 2003.
(8) Lease expires October 30, 2000.
(9) Lease expires November 30, 2001.
(10) Lease expires February 28, 2001.
(11) Lease expires June 30, 2000.
(12) Lease expires July 31, 2001.
The Bank owns other properties, consisting primarily of foreclosed real estate, through its subsidiaries G.B.L., Inc. PECO, Inc. and Longworth, Inc.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
The Company is involved from time to time as a party to legal proceedings occurring in the ordinary course of its business. The Company believes that none of these proceedings would, if adversely determined, have a material effect on the Company's consolidated financial condition or results of operations.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
Since the Company acquired the stock of the Bank on February 8, 1996, the Common Stock of the Company has been traded in the over-the-counter market on the Nasdaq National Market under the symbol "PBKB." Prior to that time, the common stock of the Bank was traded on the Nasdaq National Market. The following table sets forth the high and low sales prices of the common stock of the Company as reported on the Nasdaq National Market during the periods indicated.
On March 11, 1999, the closing sale price of a share of Common Stock of the Company on the Nasdaq National Market was $20.125.
At February 26, 1999, there were approximately 626 holders of record of the Common Stock. The number of holders of record does not reflect the number of persons or entities who or which hold their stock in nominee or "street" name through various brokerage firms or other entities.
The Company's ability to pay dividends on the Common Stock depends on the receipt of dividends from the Bank. Although the Company has adopted a policy of paying regular quarterly dividends on the Common Stock, there can be no assurance that such dividends will be paid in the future, or if paid, the amount of any such dividends.
Declarations of dividends by the Board of Directors of the Company will depend on a number of factors, including capital requirements, regulatory limitations, the Bank's operating results and financial condition and general economic conditions. As the principal asset of the Company, the Bank currently provides the only source of payment of dividends by the Company. Under Massachusetts law, stock savings banks such as the Bank may pay dividends only out of "net profits" and only to the extent that such payments will not impair the Bank's capital stock and surplus account. If, prior to the declaration of a dividend, the Bank's capital stock and surplus account do not equal at least 10% of its deposit liabilities, then prior to payment of the dividend the Bank must transfer from net profits to its surplus account the amount required to make the surplus account equal to either (i) together with
capital stock, 10% of deposit liabilities or, (ii) subject to certain adjustments, 100% of capital stock. These restrictions on the ability of the Bank to pay dividends to the Company may restrict the ability of the Company to pay dividends to the holders of the Common Stock. Although Massachusetts law does not define what constitutes "net profits," it is generally assumed that the term includes a bank's undivided profits account (retained earnings) and does not include its surplus account (additional paid-in capital).
The Company and the Bank are subject to capital ratio requirements established by the Federal Reserve Board and the FDIC. Under Section 38 of the Federal Deposit Insurance Act, the Bank would be prohibited from making any capital distribution, including the payment of dividends, if the Bank would be undercapitalized following such distribution under the FDIC's prompt corrective action regulations. In addition to such regulatory limitations on the payment of dividends, the effect of the payment of dividends on the capital ratios of the Bank or the Company, as the case may be, may be a factor in the determination by the Board of Directors to pay such dividends.
In addition, under current law, to the extent that the Bank makes "non-dividend distributions" to the Company that are considered to have been made from certain portions of the Bank's bad debt reserve, an amount based on the amount distributed will be included in the Bank's taxable income.
The most recent quarterly dividend was declared by the Bank on February 8, 1999, totaled $0.19 per share and was paid on March 16, 1999. The Company declared and paid quarterly dividends of $0.12, $0.13, $0.14, and $0.19 per share in the first, second, third, and fourth quarters, respectively, of 1998. The Company declared and paid quarterly dividends of $0.09, $0.11, $0.11, and $0.11 per share in the first, second, third, and fourth quarters, respectively, of 1997. The Company declared and paid quarterly dividends of $0.05, $0.07, $0.07, and $0.08 per share in the first, second, third and fourth quarters, respectively, of 1996. The dividend payout ratio was 25.2%, 28.2%, 24.3% and 4.2% in 1998, 1997, 1996 and 1995, respectively. There were no dividends paid out in the years ended December 31, 1994.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
The information required by this item appears on page 4 of the Annual Report to Stockholders for the fiscal year ended December 31, 1998 and is incorporated herein by reference.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The information required by this item appears in the Management's Discussion and Analysis of Financial Condition and Results of Operations on pages 2 to 12 inclusive of the Annual Report to Stockholders for the fiscal year ended December 31, 1998 and is incorporated herein by reference.
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information required by this item appears on pages 9 and 10 of the Annual Report to Stockholders for the fiscal year ended December 31, 1998 and is incorporated herein by reference.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Information required by this item appears on pages 13 to 28 inclusive of the Annual Report to Stockholders for the fiscal year ended December 31, 1998 and is incorporated herein by reference.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item will appear under the headings "Directors of the Company," "Executive Officers of the Company" and "Compliance with Section 16(a) of the Exchange Act" in the Company's definitive Proxy Statement for the Annual Meeting of Stockholders to be held on May 18, 1999 (the "Proxy Statement"), to be filed with the Securities and Exchange Commission pursuant to Regulation 14A within 120 days after the end of the Company's fiscal year, and is incorporated herein by reference.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item will appear in the Proxy Statement under the headings "Executive Compensation" and "Compensation of Directors" and is incorporated herein by reference.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item will appear in the Proxy Statement under the heading "Security Ownership of Certain Beneficial Owners and Management" and is incorporated herein by reference.
ITEM 13.
ITEM 13. TRANSACTIONS WITH CERTAIN RELATED PERSONS.
The information required by this item will appear in the Proxy Statement under the heading "Certain Transactions" and is incorporated herein by reference.
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a)(1) Index of Financial Statements. The following financial statements appear in response to Item 8 of this Report:
Independent Auditors' Report
Consolidated Balance Sheets as of December 31, 1998 and 1997
Consolidated Statements of Income for the years ended December 31, 1998, 1997 and 1996
Consolidated Statements of Changes in Stockholders' Equity for the years ended December 31, 1998, 1997 and 1996
Consolidated Statements of Cash Flows for the years ended December 31, 1998, 1997 and 1996
Notes to Consolidated Financial Statements
(a)(2) Index of Financial Statements Schedules. All financial statement schedules have been omitted because they are not required, not applicable or are included in Notes to Consolidated to Financial Statements.
(b) Exhibits.
*EXHIBIT DESCRIPTION -------- -----------
2.1 Plan of Reorganization and Acquisition by and between the Company and the Bank dated as of March 31, 1995 (filed as Exhibit 10.1 to the Company's Registration Statement on Form S-1 (No. 33-99772), (the "S-1") and incorporated herein by reference)
3.1 Restated Articles of Organization of the Company (filed as Exhibit 3.1 to the Company's Annual Report on Form 10-K for the year ended December 31, 1995 and incorporated herein by reference)
3.2 By-laws of the Company, as amended and restated (filed on exhibit 3.2 to the Company's Annual Report on Form 10-K for the year ended December 31, 1995 and incorporated herein by reference)
4.1 Specimen certificate for shares of Common Stock of the Company (filed as Exhibit 4.1 to the Company's Annual Report on Form 10-K for the year ended December 31, 1995 and incorporated herein by reference)
4.2 Articles IV and VI(I)-(K) of Restated Articles of Organization of the Company (see Exhibit 3.1)
4.3 Articles I and IV of By-laws of the Company (see Exhibit 3.2)
10.1 Amended and Restated Special Termination Agreement by and among the Company, the Bank and Colin C. Blair, dated as of February 7, 1996+ (filed as Exhibit 10.5 to the S-1 and incorporated herein by reference)
10.2 Amended and Restated Special Termination Agreement by and between the Bank and Donna L. Boulanger, dated as of February 7, 1996 (filed as Exhibit 10.6 to the S-1 and incorporated herein by reference)
10.4 Amended and Restated Special Termination Agreement by and between the Bank and Lorraine P. Healy, dated as of February 7, 1996 (filed as Exhibit 10.8 to the S-1 and incorporated herein by reference)
10.6 Amended and Restated Special Termination Agreement by and between the Bank and Maureen A. Gregory, dated as of February 7, 1996 (filed as Exhibit 10.10 to the S-1 and incorporated herein by reference)
10.7 Employment Agreement by and between People's Mortgage Corporation and John J. Kiernan, Jr. dated as of October 6, 1995 (filed as Exhibit 10.11 to the S-1 and incorporated herein by reference)
10.8 Employment Agreement by and between People's Mortgage Corporation and James F. Ryder, Jr. dated October 6, 1995 (filed as Exhibit 10.12 to the S-1 and incorporated herein by reference)
10.9 Employment Agreement by and between People's Mortgage Corporation and Michael C. Gillis dated as of March 31, 1995 (filed as Exhibit 10.13 to the S-1 and incorporated herein by reference)
10.10 Employment Agreement by and between People's Mortgage Corporation and Vincent E. Hayes, Jr. dated as of March 31, 1995 (filed as Exhibit 10.14 to the S-1 and incorporated herein by reference)
10.11 Employment Agreement by and between the Bank and Raymond F. Wheeler dated as of May 10,
1995 (filed as Exhibit 10.15 to the S-1 and incorporated herein by reference)
10.12 Discretionary Bonus Plan of the Bank+ (filed as Exhibit 10.16 to the S-1 and incorporated herein by reference)
10.13 Amended and Restated Directors' Stock Option Plan+ (filed as Exhibit 10.17 to the Company's Annual Report on Form 10-K for the year ended December 31, 1995 and incorporated herein by reference)
10.14 Amended and Restated Incentive and Nonqualified Stock Option Plan+ (filed as Exhibit 10.18 to the Company's Annual Report on Form 10-K for the year ended December 31, 1995 and incorporated herein by reference)
10.15 1996 Stock Option and Incentive Plan+ (filed as Exhibit 10.21 to the Company's Annual Report on Form 10-K for the year ended December 31, 1996 and incorporated herein by reference)
10.16 Form of Director Nonqualified Stock Option Agreement (filed as Exhibit 10.22 to the Company's Annual Report on Form 10-K for the year ended December 31, 1996 and incorporated herein by reference)
10.17 Form of Employee Nonqualified Stock Option Agreement (filed as Exhibit 10.23 to the Company's Annual Report on Form 10-K for the year ended December 31, 1996 and incorporated herein by reference)
10.18 Form of Incentive Stock Option Agreement (filed as Exhibit 10.24 to the Company's Annual Report on Form 10-K for the year ended December 31, 1996 and incorporated herein by reference)
*10.19 Special Termination Agreement by and among the Company, the Bank and Richard S. Straczynski, dated as of April 7, 1997+. (filed as exhibit 10.19 to the Company's Annual Report on Form 10-K for the year ended December 31, 1998 and incorporated by refernce).
*13 People's Bancshares, Inc. 1998 Annual Report to Stockholders
*21 Schedule of subsidiaries of the Company
*23 Consent of Wolf & Company, P.C., as independent certified public accountants
*27 Financial Data Schedule
- ----------
* Filed herewith.
+ Management contract or compensatory plan required to be filed as an exhibit to this Form 10-K pursuant to Item 14 of Form 10-K.
(c) Reports on Form 8-K. No reports on Form 8-K were filed during the quarter ended December 31, 1998.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized on March 30, 1999.
PEOPLE'S BANCSHARES, INC.
By: /s/ Richard S. Straczynski -------------------------------------------- Richard S. Straczynski President & Chief Executive Officer
By: /s/ Colin C. Blair -------------------------------------------- Colin C. Blair Chief Financial Officer (principal financial and accounting officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE --------- ----- ----
/s/ RICHARD S. STRACZYNSKI President & CEO March 30, 1999 - -------------------------- Richard S. Straczynski Director
/s/ COLIN C. BLAIR Chief Financial Officer March 30, 1999 - -------------------------- Colin C. Blair
/s/ FREDERICK W. ADAMI, III Director March 30, 1999 - --------------------------- Frederick W. Adami, III
/s/ B. BENJAMIN CAVALLO Director March 30, 1999 - -------------------------- B. Benjamin Cavallo
/s/ JOHN R. EATON Director March 30, 1999 - -------------------------- John R. Eaton
/s/ TERRENCE GOMES Director March 30, 1999 - -------------------------- Terrence Gomes
/s/ DR. LORING C. JOHNSON Director March 30, 1999 - -------------------------- Dr. Loring C. Johnson
/s/ RICHARD D. MATTHEWS Director March 30, 1999 - -------------------------- Richard D. Matthews
/s/ SCOTT W. RAMSAY Director March 30, 1999 - -------------------------- Scott W. Ramsay
/s/ DAVIS H. SCUDDER Director March 30, 1999 - -------------------------- Davis H. Scudder
/s/ STANLEY D. SISKIND Director March 30, 1999 - -------------------------- Stanley D. Siskind
EXHIBIT INDEX
*EXHIBIT DESCRIPTION -------- -----------
2.1 Plan of Reorganization and Acquisition by and between the Company and the Bank dated as of March 31, 1995 (filed as Exhibit 10.1 to the Company's Registration Statement on Form S-1 (No. 33-99772), (the "S-1") and incorporated herein by reference)
3.1 Restated Articles of Organization of the Company (filed as Exhibit 3.1 to the Company's Annual Report on Form 10-K for the year ended December 31, 1995 and incorporated herein by reference)
3.2 By-laws of the Company, as amended and restated (filed as exhibit 3.2 to the Company's Annual Report on Form 10-K for the year ended December 31, 1995 and incorporated herein by Reference)
4.1 Specimen certificate for shares of Common Stock of the Company (filed as Exhibit 4.1 to the Company's Annual Report on Form 10-K for the year ended December 31, 1995 and incorporated herein by reference)
4.2 Articles IV and VI(I)-(K) of Restated Articles of Organization of the Company (see Exhibit 3.1)
4.3 Articles I and IV of By-laws of the Company (see Exhibit 3.2)
10.1 Amended and Restated Special Termination Agreement by and among the Company, the Bank and Colin C. Blair, dated as of February 7, 1996+ (filed as Exhibit 10.5 to the S-1 and incorporated herein by reference)
10.2 Amended and Restated Special Termination Agreement by and between the Bank and Donna L. Boulanger, dated as of February 7, 1996 (filed as Exhibit 10.6 to the S-1 and incorporated herein by reference)
10.3 Amended and Restated Special Termination Agreement by and between the Bank and Charles R. Leyton, dated as of February 7, 1996 (filed as Exhibit 10.7 to the S-1 and incorporated herein by reference)
10.4 Amended and Restated Special Termination Agreement by and between the Bank and Lorraine P. Healy, dated as of February 7, 1996 (filed as Exhibit 10.8 to the S-1 and incorporated herein by reference)
10.5 Amended and Restated Special Termination Agreement by and between the Bank and Robert Cully, dated as of February 7, 1996 (filed as Exhibit 10.9 to the S-1 and incorporated herein by reference)
10.6 Amended and Restated Special Termination Agreement by and between the Bank and Maureen A. Gregory, dated as of February 7, 1996 (filed as Exhibit 10.10 to the S-1 and incorporated herein by reference)
10.7 Employment Agreement by and between People's Mortgage Corporation and John J. Kiernan, Jr. dated as of October 6, 1995 (filed as Exhibit 10.11 to the S-1 and incorporated herein by reference)
10.8 Employment Agreement by and between People's Mortgage Corporation and James F. Ryder, Jr. dated October 6, 1995 (filed as Exhibit 10.12 to the S-1 and incorporated herein by reference)
10.9 Employment Agreement by and between People's Mortgage Corporation and Michael C. Gillis
dated as of March 31, 1995 (filed as Exhibit 10.13 to the S-1 and incorporated herein by reference)
10.10 Employment Agreement by and between People's Mortgage Corporation and Vincent E. Hayes, Jr. dated as of March 31, 1995 (filed as Exhibit 10.14 to the S-1 and incorporated herein by reference)
10.11 Employment Agreement by and between the Bank and Raymond F. Wheeler dated as of May 10, 1995 (filed as Exhibit 10.15 to the S-1 and incorporated herein by reference)
10.12 Discretionary Bonus Plan of the Bank+ (filed as Exhibit 10.16 to the S-1 and incorporated herein by reference)
10.13 Amended and Restated Directors' Stock Option Plan+ (filed as Exhibit 10.17 to the Company's Annual Report on Form 10-K for the year ended December 31, 1995 and incorporated herein by reference)
10.14 Amended and Restated Incentive and Nonqualified Stock Option Plan+ (filed as Exhibit 10.18 to the Company's Annual Report on Form 10-K for the year ended December 31, 1995 and incorporated herein by reference)
10.15 1996 Stock Option and Incentive Plan+ (filed as Exhibit 10.21 to the Company's Annual Report on Form 10-K for the year ended December 31, 1996 and incorporated herein by reference)
10.16 Form of Director Nonqualified Stock Option Agreement (filed as Exhibit 10.22 to the Company's Annual Report on Form 10-K for the year ended December 31, 1996 and incorporated herein by reference)
10.17 Form of Employee Nonqualified Stock Option Agreement (filed as Exhibit 10.23 to the Company's Annual Report on Form 10-K for the year ended December 31, 1996 and incorporated herein by reference)
10.18 Form of Incentive Stock Option Agreement (filed as Exhibit 10.24 to the Company's Annual Report on Form 10-K for the year ended December 31, 1996 and incorporated herein by reference)
10.19 Special termination agreement by and among the Company, the Bank and Richard S. Straczynski, dated as of April 7, 1997+. (filed as exhibit 10.19 to the Company's Annual Report on Form 10-K for the year ended December 31, 1998 and incorporated by reference).
*13 People's Bancshares, Inc. 1997 Annual Report to Stockholders
*21 Schedule of subsidiaries of the Company
*23 Consent of Wolf & Company, P.C., as independent certified public accountants
*27 Financial Data Schedule
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* Filed herewith.
+ Management contract or compensatory plan required to be filed as an exhibit to this Form 10-K pursuant to Item 14 of Form 10-K.
(c) Reports on Form 8-K. No reports on Form 8-K were filed during the quarter ended December 31, 1998.