SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------------------------
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998.
[_] 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 0-22641
PEOPLES BANCORP, INC.
---------------------
(Exact name of registrant as specified in its charter)
Delaware 22-6764023
- ---------------------------------- ------------------------
(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification Number)
134 Franklin Corner Road, Lawrenceville, New Jersey 08648
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(Address of principal executive offices)
Registrant's telephone number, including area code: 609-844-3100
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_______________________________________________________
Former name, former address and former fiscal year,
if changed since last report
Indicate by check 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 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
--- ---
APPLICABLE ONLY TO CORPORATE ISSUERS:
As of September 30, 1998 there were 36,373,038 shares of the company's
common stock.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed by the undersigned thereunto
duly authorized.
PEOPLES BANCORP, INC.
Date: November 10, 1998 By: /s/ Wendell T. Breithaupt
-------------------------------------
Wendell T. Breithaupt
President and Chief Executive Officer
Date: November 10, 1998 By: /s/ Dan A. Chila
-------------------------------------
Dan A. Chila
Senior Vice President and Chief
Financial Officer
PEOPLES BANCORP, INC.
INDEX
Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of Condition as of
September 30, 1998 and December 31, 1997......................................4
Consolidated Statements of Income for the three and nine
months ended September 30, 1998 and 1997......................................5
Consolidated Statements of Stockholders' Equity for the
nine months ended September 30, 1998 and 1997.................................6
Consolidated Statements of Cash Flows for the nine months ended
September 30, 1998 and 1997...................................................7
Notes to the Consolidated Financial Statements......................................8-12
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations..........................................................13-14
PART II. OTHER INFORMATION.............................................................................15
3
Part I. Financial Information
Item I. Financial Statements
PEOPLES BANCORP, INC.
CONSOLIDATED STATEMENTS OF CONDITION
(In Thousands of Dollars)
September 30 December 31
ASSETS 1998 1997
------ -------------- -------------
(unaudited)
Cash and due from banks $ 9,498 $ 9,596
Federal funds sold 69,400 5,950
-------------- -------------
Total cash and cash equivalents 78,898 15,546
-------------- -------------
Securities available for sale 244,765 137,338
Securities held to maturity 33,833 60,955
Federal Home Loan Bank stock, at cost 3,386 3,386
Loans, net 483,282 396,448
Bank premises and equipment, net 6,862 6,747
Accrued interest receivable 6,269 4,975
Prepaid expenses 569 1,105
Intangible assets 9,978 10,604
Other assets 4,636 3,315
-------------- -------------
Total assets $ 872,478 $ 640,419
============== =============
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Deposits $ 491,631 $ 493,400
Borrowed funds 30,000 30,000
Accrued expenses and other liabilities 8,711 6,981
-------------- -------------
Total liabilities 530,342 530,381
-------------- -------------
Stockholders' Equity
Common Stock: par value $0.01; authorized 363 362
70,000,000 shares as of September 30, 1998; issued
& outstanding 36,373,038 shares as of September 30, 1998
and 36,236,500 shares as of December 31, 1997
Additional paid in capital 267,534 31,045
Unearned ESOP Plan shares (9,201) 0
Unearned Management Recognition Plan shares (168) (673)
Retained earnings - substantially restricted 84,341 78,870
Accumulated other comprehensive income, net of tax (733) 434
-------------- -------------
Total stockholders' equity 342,136 110,038
-------------- -------------
Total liabilities and stockholders' equity $ 872,478 $ 640,419
============== =============
See accompanying notes to Consolidated Financial Statements.
4
PEOPLES BANCORP, INC.
CONSOLIDATED STATEMENTS OF INCOME
[In Thousands of Dollars]
[unaudited]
Three Months Nine Months
Ended September 30 Ended September 30
----------------------------- ----------------------------
1998 1997 1998 1997
----------- ----------- ----------- -----------
Interest and dividend income:
Interest and fees on loans $8,763 $7,580 $24,861 $22,393
Interest on securities 4,341 3,293 11,035 9,817
Interest on Federal funds sold 1,322 136 4,192 406
----------- ----------- ----------- -----------
Total interest income 14,426 11,009 40,088 32,616
----------- ----------- ----------- -----------
Interest expense 5,536 5,571 16,667 16,223
----------- ----------- ----------- -----------
Net interest income 8,890 5,438 23,421 16,393
Provision for loan losses 709 1,274 1,256 1,488
----------- ----------- ----------- -----------
Net interest income after provision
for loan losses 8,181 4,164 22,165 14,905
----------- ----------- ----------- -----------
Other income:
Service fees on deposit accounts 200 200 624 651
Fees and other income 677 330 2,097 595
Net gain on sale of securities 300 1,676 350 2,923
----------- ----------- ----------- -----------
Total other income 1,177 2,206 3,071 4,169
----------- ----------- ----------- -----------
Operating expense:
Salaries and employee benefits 2,232 2,035 6,584 5,357
Net occupancy expense 433 409 1,252 1,171
Equipment expense 46 27 123 84
FDIC insurance premium 26 20 62 39
Amortization of intangible assets 221 201 663 577
Data processing fees 162 134 485 392
Other operating expense 864 925 2,385 2,224
----------- ----------- ----------- -----------
Total operating expense 3,984 3,751 11,554 9,844
----------- ----------- ----------- -----------
Income before income taxes 5,374 2,619 13,682 9,230
Income taxes 2,096 951 5,202 3,332
----------- ----------- ----------- -----------
Net income $3,278 $1,668 $8,480 $5,898
=========== =========== =========== ===========
Earnings per common share:
Basic $0.09 $0.05 $0.24 $0.17
=========== =========== =========== ===========
Diluted $0.09 $0.05 $0.24 $0.17
=========== =========== =========== ===========
See accompanying notes to Consolidated Financial Statements.
5
PEOPLES BANCORP, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For the Nine Month Period ended September 30, 1998 and 1997
(In Thousands, except share data)
(unaudited)
Unearned
Number Unearned Management
of Additional ESOP Recognition
Common Common paid-in Plan Plan
Shares stock capital Shares Shares
------------ ------------ ------------ ------------ ------------
Balance at December 31, 1996 36,200,996 $362 $30,899 ($1,543)
Net income for the nine months
ended September 30, 1997
Other comprehensive income, net of tax
Dividends declared
Proceeds from exercise of stock options 33,023 13
Amortization of unearned Management
Recognition Plan shares 125 589
------------ ------------ ------------ ------------ ------------
Balance at September 30, 1997 36,234,019 $362 $31,037 -- ($954)
============ ============ ============ ============ ============
Balance at December 31, 1997 36,236,500 $362 $31,045 ($673)
Common stock offering and
conversion of Peoples Bancorp, Inc. 236,024
Establishment of ESOP plan (9,522)
Net income for the nine months
ended September 30, 1998
Other comprehensive income, net of tax
Dividends declared
Exercise of stock options 136,538 1 465
Amortization of unearned Management
Recognition Plan shares 505
Amortization of ESOP shares 321
------------ ------------ ------------ ------------ ------------
Balance at September 30, 1998 36,373,038 $363 $267,534 ($9,201) ($168)
============ ============ ============ ============ ============
Accumulated
Other Total
Retained Comprehensive Stockholders'
Earnings Income equity
---------- ------------- --------------
Balance at December 31, 1996 $72,545 $1,089 $103,352
Net income for the nine months
ended September 30, 1997 5,898 $5,898
Other comprehensive income, net of tax (887) ($887)
Dividends declared (851) ($851)
Proceeds from exercise of stock options $13
Amortization of unearned Management
Recognition Plan shares 714
---------- ------------- --------------
Balance at September 30, 1997 $77,592 $202 $108,239
========== ============= ==============
Balance at December 31, 1997 $78,870 $434 $110,038
Common stock offering and
conversion of Peoples Bancorp, Inc. $236,024
Establishment of ESOP plan ($9,522)
Net income for the nine months
ended September 30, 1998 8,480 $8,480
Other comprehensive income, net of tax (1,167) ($1,167)
Dividends declared (3,009) ($3,009)
Exercise of stock options $466
Amortization of unearned Management
Recognition Plan shares $505
Amortization of ESOP shares $321
---------- ------------- --------------
Balance at September 30, 1998 $84,341 ($733) $342,136
========== ============= ==============
See accompanying Notes to Consolidated Financial Statements.
6
PEOPLES BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands of Dollars)
(unaudited)
Nine Months Ended September 30,
1998 1997
---------- ----------
Cash flows from operating activities:
Net income $ 8,480 $ 5,898
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses 1,256 1,488
Depreciation and amortization expense 2,029 1,156
Net accretion of premiums and discounts on securities 23 (64)
Increase in accrued interest receivable and other assets (2,079) (3,626)
Decrease in accrued interest payable and other liabilities 820 826
Net gain on sale of securities (350) (2,923)
-------- -------
Net cash provided by operating activities 10,179 2,755
-------- -------
Cash flows used in investing activities:
Proceeds from maturities of securities available for sale and held to maturity $ 69,105 $39,940
Purchase of securities available for sale (172,830) (73,046)
Proceeds from sales of securities available for sale 3,428 3,816
Purchase of Federal Home Loan Bank Stock 0 (297)
Maturities and repayments of mortgage-backed securities 17,858 9,337
Net increase in loans (86,834) (17,758)
Net additions to bank premises, furniture, & equipment (654) (398)
Proceeds from sale of bank premises, furniture & equipment 0 312
-------- -------
Net cash used in investing activities (169,927) (38,094)
-------- -------
Cash flows from financing activities:
Net (decrease) increase in savings and time deposits (1,769) 2,088
Dividends paid (2,099) (851)
Net increase in borrowings 0 30,000
Proceeds from stock offering 226,502 0
Proceeds from exercise of stock options 466 0
-------- -------
Net cash provided by financing activities 223,100 31,237
-------- -------
Net increase (decrease) in cash and cash equivalents 63,352 (7,729)
Cash and cash equivalents as of beginning of year $ 15,546 $20,938
-------- -------
Cash and cash equivalents as of end of period $ 78,898 $13,209
======== =======
Supplemental disclosure of cash flow information:
Cash paid:
Interest $ 16,568 $16,112
======== =======
Income taxes $ 5,952 $ 3,351
======== =======
See accompanying Notes to Consolidated Financial Statements.
NOTES TO THE FINANCIAL STATEMENTS
(1) Basis of Presentation
The accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and in conformity with the instructions to Form 10-Q and Article 10
of Regulation S-X for Peoples Bancorp, Inc. (the "Registrant").
In the opinion of management, all adjustments (consisting of only normal
recurring accruals) necessary to present fairly the financial condition, results
of operations, and changes in cash flows have been made at and for the three and
nine month periods ended September 30, 1998 and 1997. The results of operations
for the three and nine month periods ended September 30, 1998 are not
necessarily indicative of results that may be expected for the entire year
ending December 31, 1998.
(2) The Conversion of the Mutual Holding Company to the Stock Form of
Organization
Peoples Bancorp, Inc. (the "Mid-Tier Holding Company") a federal
corporation and the Registrant's predecessor, became the holding company for
Trenton Savings Bank, FSB (the "Bank") in a reorganization (the "Two-Tier
Reorganization"), in which all of the outstanding shares of the Bank's common
stock ("Bank Common Stock"), including shares held by Peoples Bancorp, MHC (the
"Mutual Holding Company") and stockholders other than the Mutual Holding Company
(the "Minority Stockholders"), were converted into shares of common stock of the
Mid-Tier Holding Company ("Mid-Tier Common Stock"), and the Bank became the
wholly-owned subsidiary of the Mid-Tier Holding Company. From July 1997 through
April 8, 1998, the Mid-Tier Holding Company's only material asset consisted of
100% of the outstanding shares of common stock of the Bank. The Registrant,
Peoples Bancorp, Inc., a Delaware corporation, is the successor to the Mid-Tier
Holding Corporation. The Company was formed as part of the mutual-to-stock
conversion (the "Conversion") of the Mutual Holding Company. In the Conversion
the Bank became the wholly-owned subsidiary of the Company and the corporate
existence of the Mutual Holding Company ended. The Conversion was completed on
April 8, 1998. Prior to the completion of the Conversion the Company had
insignificant assets and liabilities.
As part of the Conversion each of the outstanding shares of Mid-Tier Common
Stock held by Minority Stockholders was automatically converted into 3.8243
shares of common stock, par value $.01 per share (the "Common Stock") of the
Company. As part of the Conversion and in addition to the 12,430,673 shares
issued due to the Conversion of Mid-Tier Common Stock into Common Stock, the
Company sold 23,805,827 shares of Common Stock for a subscription price of
$10.00 per share in a subscription offering (the "Offering"). Net proceeds of
the Offering were approximately $217 million. At the conclusion of the
Conversion there were 36,236,500 shares of Common Stock outstanding, including
952,233 shares held by the Company's employee stock ownership plan (the "ESOP").
The following diagrams outline (i) the organization structure of the Mutual
Holding Company, the Mid-Tier Holding Company, and the Bank and its subsidiaries
prior to the completion of the Conversion and (ii) the organizational structure
of the Company and the Bank and its subsidiaries following the Conversion.
8
Mutual Holding Company Minority Stockholders
64.1% 35.9%
Mid-Tier
Holding Company
100%
Bank
100% 100%
Manchester Trust Bank TSBusiness Finance
Organizational structure following the Conversion:
Public Stockholders
100%
Company
100%
Bank
100% 100%
Manchester Trust Bank TSBusiness Finance
9
(3) Plan of Merger
On September 7, 1998, the Company and Sovereign Bancorp, Inc. ("Sovereign")
entered into an Agreement and Plan of Merger (the "Agreement") providing for,
among other things, the merger (the "Merger") of the Company with and into
Sovereign, with Sovereign as the surviving entity. As part of the Merger, the
Bank has entered into a Bank Plan of Merger with Sovereign Bank, a federally
chartered savings bank and Sovereign's wholly-owned subsidiary, which provides
for, among other things, the merger of the Bank with and into Sovereign Bank
with Sovereign Bank as the surviving entity.
Pursuant to the Merger Agreement, each share of the Company's Common Stock,
outstanding immediately prior to the effective time (the "Effective Date") of
the Merger shall automatically be converted into and become the right to receive
.80 shares of common stock, no par value per share, of Sovereign ("Sovereign
Common Stock"). Holders of the Company's Common Stock who would be entitled to
receive fractional shares of Sovereign Common Stock will instead receive cash in
an amount equal to such fraction of a share multiplied by the Sovereign Market
Price (as defined in the Agreement) as of the Effective Date.
In addition, in connection with the Agreement, the Company and Sovereign
entered into a Stock Option Agreement pursuant to which the Company granted to
Sovereign the option to purchase, under certain conditions, up to 7,225,000
shares of the Company's Common Stock at an exercise price of $8.50 per share,
subject to adjustment as provided in the Stock Option Agreement. The option is
exercisable only upon the occurrence of certain events that would jeopardize the
completion of the Merger.
(4) Non Performing Loans, Non Performing Assets and the Allowance for Loan
Losses
Loans contractually in arrears by three months or more at September 30,
1998 and December 31, 1997 are as follows (in thousands of dollars):
September 30, 1998 December 31, 1997
------------------ -----------------
Loans delinquent 90 days or more $6,342 $5,558
Loans delinquent 90 days or more
as a percentage of net loans
receivable 1.31% 1.40%
An analysis of the allowance for loan losses for the nine month periods
ended September 30, 1998 and 1997 is as follows (in thousands of dollars):
September 30, 1998 September 30, 1997
------------------ ------------------
Balance at beginning of the period $3,415 $2,901
Provision charged to operations 1,256 1,488
(Charge-offs), Recoveries, net (597) (1,187)
------------------ -----------------
Balance at the end of the period $4,074 $3,202
================== =================
Generally, the Bank's loans are placed on a non-accrual status when a
default of principal or interest has existed for a period of 90 days except
when, in the opinion of management, the collection of principal or interest is
reasonably anticipated or adequate collateral exists. In addition, the Bank
places any loan on non-accrual status if any part of it is classified as
doubtful or loss or if any part has been charged to the allowance for loan
losses. Real estate owned consists of property acquired through formal
foreclosures and acquired by deed in lieu of foreclosure, and is recorded at the
lower of cost or fair value. At September 30, 1998, the Bank had $.5 million
classified as real estate owned.
The Bank continually reviews the quality of the loan portfolio, and engages
an outside consultant to perform routine reviews of the portfolio on a quarterly
basis. Management believes that the allowance for loan losses is adequate based
on historical experience, the volume and type of lending conducted by the Bank,
the amount of non-performing loans, general economic conditions and other
factors relating to the Bank's loan portfolio. However, there can be no
assurance that actual losses will not exceed estimated amounts.
10
As of September 30, 1998, the Bank's total non-performing loans and
foreclosed assets amounted to $5.0 million, or .57% of total assets, compared to
$5.9 million, or .92% of total assets at December 31, 1997.
Federal regulations required that each insured savings institution classify
its assets on a regular basis. There are four classifications for problem
assets: "special mention," "substandard," "doubtful" and "loss." At September
30, 1998, the Bank had $6.3 million of loans classified as special mention, $3.9
million classified as substandard and $1.2 million classified as doubtful or
loss.
It is management's policy to maintain an allowance for estimated loan
losses based upon an assessment [1] in the case of residential loans,
management's review of delinquent loans, loans in foreclosure and market
conditions, [2] in the case of commercial business loans and commercial mortgage
loans, when a significant decline in value can be identified as well as an
overall assessment of the inherent risk in the portfolio and [3] in the case of
consumer loans, based on the assessment of risks inherent in the loan portfolio.
The Bank's allowance for loan losses, which includes a general valuation
allowance, amounted to approximately $4.1 million and $3.4 million, respectively
at September 30, 1998 and December 31, 1997.
(5) Per Share Data
As discussed in Note 2, the Company completed the Conversion on April 8,
1998, which included the exchange of previously outstanding shares of Mid-Tier
Common Stock for shares of common stock at an exchange ratio of 3.8243 shares of
Common Stock for each share of Mid-Tier Common Stock. All historical share and
per share information has been adjusted to reflect this change.
(6) Comprehensive Income
During the first quarter of 1998, the Bank adopted the provisions of
Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive
Income" ("SFAS 130"). SFAS 130 establishes standards for reporting and display
of comprehensive income and its components (revenues, expenses, gains and
losses) in a full set of general-purpose financial statements. This Statement
requires that all items that are required to be recognized under accounting
standards as components of comprehensive income be reported in a financial
statement that is displayed with the same prominence as other financial
statements. This Statement requires that an enterprise (a) classify items of
other comprehensive income by their nature in a financial statement and (b)
display the accumulated balance of other comprehensive income separately from
retained earnings and additional paid-in capital in the equity section of a
statement of financial position. In accordance with the provisions of SFAS 130
for interim period reporting, The Bank's total comprehensive income for the nine
months ended September 30, 1998 and 1997 was $1.2 million and $.9 million,
respectively. The difference between the Bank's net income and total
comprehensive income for these periods relates to the change in the net
unrealized gains on securities available for sale during the applicable period
of time.
(7) Recent Accounting Pronouncements
In February 1998, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 132, "Employers' Disclosures About Pensions and Other Postretirement
Benefits." This Statement standardizes the disclosure requirements for pension
and other postretirement benefits by requiring additional information that will
facilitate financial analysis, and eliminating certain disclosures that are
considered no longer useful. SFAS No. 132 supersedes the disclosure requirements
in SFAS Nos. 87, 88 and 106. This Statement is effective for fiscal years
beginning after December 15, 1997 and will be adopted December 31, 1998.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This statement establishes accounting and
reporting standards for derivative instruments, and for hedging activities. SFAS
No. 133 supersedes the disclosure requirements in SFAS Nos. 80, 105 and 119.
This statement is effective for periods after September 15, 1999. The adoption
of SFAS No. 133 is not expected to have a material impact on the financial
position or results of operations of the Company.
(8) Year 2000
The Company began to address its Year 2000 issues in 1997. A Year 2000
Committee was formed to formulate and implement the Year 2000 Plan, develop
policies, modify and replace existing hardware and software as necessary, and to
monitor and test Year 2000 plans and remediation efforts of third party
servicers.
The Company primarily relies on independent third parties to provide data
processing services and application software. In-house applications are limited
to word-processing and spreadsheet functions. In March 1998 the Committee
completed an
11
inventory and risk assessment of hardware and software and identified "mission
critical" systems and application interdependencies. At September 30, 1998, 85%
of the identified "mission critical" systems had been upgraded to the Year 2000
version distributed and tested by the applicable vendor. Beginning in November
1998 through January 1999, the Company will conduct independent tests of these
"mission critical" systems. The Company has installed a test lab simulating a
Year 2000 environment to accomplish its testing, which is scheduled for
completion by January 31, 1999.
The estimated cost for the Year 2000 conversion are not expected to be
material and are being expensed as incurred.
In the development of the Company's Year 2000 Plan, the Company has
followed the guidelines published by the Federal Institution's Examination
Council (FFIEC), the formal interagency body empowered to prescribe uniform
principles, standards and examination procedures for the examination of
financial institutions by the federal regulatory agencies.
The Company has communicated with vendors, customers, governmental agencies
and others to obtain assurance of their Year 2000 compliance. Failure of the
Company or its third party data processing vendor to correct Year 2000 issues
could cause a disruption in operations and increased operating costs. To the
extent that the Company's loan customers' financial positions are weakened due
to Year 2000 issues, credit quality could be adversely impacted. The Company is
formulating detailed contingency plans in the event that the Company's vendors
are not successful with their Year 2000 remediation plan. The Company believes
at this time that its efforts are adequate to address its Year 2000 concerns.
12
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Financial Condition
Total assets increased by $232.1 million, or 36.2%, to $872.5 million at
September 30, 1998 from $640.4 million at December 31, 1997 primarily due to the
Conversion proceeds. Cash and cash equivalents increased by $63.4 million to
$78.9 million at September 30, 1998 from $15.5 million at December 31, 1997.
Securities available for sale increased by $107.5 million, or 78.2% to $244.8
million at September 30, 1998 from $137.3 million at December 31, 1997.
Securities held to maturity decreased $27.2 million, or 44.6% to $33.8 million
at September 30, 1998 from $61.0 million at December 31, 1997 as management
maintained its policy of designating all new investments as available for sale.
Loans increased by $86.9 million, or 21.9%, to $483.3 million at September 30,
1998 from $396.4 million at December 31, 1997. Deposits decreased by $ 1.8
million, or .4%, to $491.6 million at September 30, 1998 from $ 493.4 million
at December 31, 1997.
Stockholders' equity increased by $232.1 million, or 211.0%, to $342.1
million at September 30, 1998 from $110.0 million at December 31, 1997. The
increase in stockholders' equity was primarily due to the Conversion which
provided approximately $217 million in net proceeds. At September 30, 1998 the
Registrant had a stated equity of $342.1 million and tangible equity of $332.1
million. At September 30, 1998 the stated equity as a percentage of assets was
39.21% and the tangible equity a percentage of assets was 38.06%.
Results of Operations
Net income was $3.3 million (including net securities gains of $.3 million)
for the third quarter of 1998 compared to $1.7 million (including net securities
gain of $1.7 million) for the third quarter of 1997.
Total interest income increased $3.4 million, or 30.9%, to $14.4 million
for the quarter ended September 30, 1998 from $11.0 million for the quarter
ended September 30, 1997. The increase resulted from an increase in average
interest earnings assets to $843.2 million for the quarter ended September 30,
1998 from $606.3 million for the quarter ended September 30, 1997 which offset a
decline in the average yield on interest-earnings assets to 6.84% for the
quarter ended September 30, 1998 from 7.24% for the quarter ended September 30,
1997. The $236.9 million increase in average interest earnings assets was
primarily attributable to the Conversion.
Total interest expense decreased slightly to $5.5 million for the quarter
ended September 30, 1998 from $5.6 million for the quarter ended September 30,
1997. The average rate paid on deposits and the amount of average deposits was
relatively flat for the quarter ended September 30, 1998 compared to the quarter
ended September 30, 1997.
Total other income was $1.2 million for the quarter ended September 30,
1998 compared to $2.2 million for the quarter ended September 30, 1997. Other
income included $.3 million of gains from the sale of equity securities for the
quarter ended September 30, 1998 compared to $1.7 million from the sale of
equity securities for the quarter ended September 30, 1997. Excluding gains on
sales of securities, other income increased $.4 million, or 80.0%, to $.9
million for the quarter ended September 30, 1998 compared to $.5 million for the
quarter ended September 30, 1997. The increase in other income is primarily
attributed to fees earned by Manchester Trust Bank ( "MTB" ) which was acquired
in September of 1997. Total operating expenses increased by $.2 million, or
5.3%, to $4.0 million for the quarter ended September 30, 1998 compared to $3.8
million for the quarter ended September 30, 1997. Operating expenses were
impacted by the acquisition of MTB, staff expansion within the Bank and
expansion within TSBusiness Finance Corporation.
The Bank made a $.7 million provision for loan losses for the quarter ended
September 30, 1998 compared to a $1.3 million provision for the three months
ended September 30, 1997. The provision for the nine months ended September 30,
1997 was primarily recorded in the quarter ended September 30, 1997 and was
attributable to the exiting of a niche line of business that was inherited
through the acquisition of Burlington County Bank The provision in 1998
generally reflects loan growth. The evaluation of the loan loss provision
includes a review of all loans for which full collectibility may not be
reasonably assured and considers, among other matters, the estimated net
realizable value of the underlying collateral, economic conditions and other
matters which warrant consideration.
13
Total interest income increased $7.5 million, or 23.0%, to $40.1 million
for the nine months ended September 30, 1998 from $32.6 million for the nine
months ended September 30, 1997. The increase resulted from an increase in
average earnings assets to $771.5 million for the nine months ended September
30, 1998 from $599.4 million for the nine months ended September 30, 1997 which
offset a decrease in the average yield on interest earnings assets to 6.93% for
the nine months ended September 30, 1998 from 7.25% for the nine months ended
September 30, 1997. The $172.1 million increase in average interest earnings
assets was primarily attributed to the Conversion.
Total interest expense increased by $.5 million, or 3.1%, to $16.7 million
for the nine months ended September 30, 1998 from $16.2 million for the nine
months ended September 30, 1997. The increase was primarily the result of an
increase in average deposits to $499.6 million for the nine months ended
September 30, 1998 from $486.5 million for the nine months ended September 30,
1997 combined with an increase in the average rate paid on deposits to 4.08% for
the nine months ended September 30, 1998 from 4.04% for the nine months ended
September 30,1997. The increase in deposits is primarily attributed to normal
branch deposit inflows and a new branch opening in the third quarter of 1997.
The slight increase in the average rate paid on deposits was attributable to a
shift in deposit mix to higher yielding deposit products.
Total other income was $3.1 million for the nine months ended September 30,
1998 compared to $4.2 million for the nine months ended September 30, 1997.
Other income included $.4 million from the sale of equity securities for the
nine months ended September 30, 1998 compared to $2.9 million of gains from the
sale of equity securities for the nine months ended September 30,1997. Excluding
gains on sales of securities, other income increased $1.5 million, or 125.0% for
the nine months ended September 30, 1998 compared to the nine months ended
September 30, 1997. The increase in other income is primarily attributed to fees
earned by MTB which was acquired in September of 1997. Total operating expenses
increased by $1.8 million, or 18.4% to $11.6 million for the nine months ended
September 30, 1998 compared to $9.8 million for the nine months ended September
30, 1997. Operating expenses were impacted by the acquisition of MTB, staff
expansion within the Bank, ESOP expense of the new 1998 Plan and an increase in
staff and expansion of TSBusiness Finance Corporation.
The Bank made a $1.3 million loan loss provision for the nine months ended
September 30, 1998 compared to a $1.5 million loan loss provision for the nine
months ended September 30, 1997. The provision in 1998 generally reflects loan
growth.
Bank Capital
The OTS requires that the Bank meet minimum tangible, core and risk-based
capital requirements. As of September 30, 1998, the Bank exceeded all regulatory
capital requirements. The Bank's required, actual, and excess capital levels as
of September 30, 1998, are as follows:
Required Actual Excess of
-------------------- ------------------ Actual Over
% of % of Regulatory
Amount Assets Amount Assets Requirement
-------- --------- --------- ------- -----------
(Dollars in Thousands)
Core Capital $30,183 4.0% $226,917 30.07% $196,734
Risk-based Capital $42,377 8.0% $230,991 43.61% $188,614
Bank Liquidity
The Bank is required to maintain minimum levels of liquid assets as defined
by OTS regulations. This requirement, which varies from time to time depending
upon economic conditions and deposit flows, is based upon a percentage of
deposits and short-term borrowings. The required ratio currently is 4%. The
Bank's liquidity ratio averaged 45.93% during the third quarter of 1998 and
39.24% at September 30, 1998. The Bank adjusts liquidity as appropriate to meet
its asset and liability management objectives.
14
PART II. OTHER INFORMATION
Legal Proceedings
There are various claims and lawsuits in which the Company and the Bank are
periodically involved incidental to their business. In the opinion of
management, no material loss is expected from any of such pending claims or
lawsuits.
Changes in Securities
Not applicable.
Defaults upon Senior Securities
Not applicable.
Submission of Matters to a Vote of Security Holders
Not applicable.
Other Information
Not applicable.
Exhibits and Report on Form 8-K.
On September 21, 1998, Peoples Bancorp, Inc. filed an 8-K to report the
previously mentioned Agreement and Plan of Merger between Sovereign
Bancorp, Inc. and Peoples Bancorp, Inc. dated September 7, 1998.
(a) Exhibits.
(27) Financial Data Schedule.
15