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 March 31, 1999.
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________________ to _________________
Commission File Number 0-22641
PEOPLES BANCORP, INC.
---------------------
(Exact name of registrant to specified in its charter)
DELAWARE 22-6764023
- -------------------------------- ------------------------------------
(State or other jurisdiction of (IRS Employer Identification Number)
incorporation or organization)
134 FRANKLIN CORNER ROAD, LAWRENCEVILLE, NEW JERSEY 08648
---------------------------------------------------------
(Address of principal executive offices)
Registrant's telephone number, including area code: 609-844-3100
________________________________________________________________________________
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 March 31, 1999 there were 32,654,198 shares of the company's common
stock outstanding.
PEOPLES BANCORP, INC.
INDEX
PAGE
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of Condition as of
March 31, 1999 and December 31, 1998.......................................... 3
Consolidated Statements of Income for the three
months ended March 31, 1999 and 1998.......................................... 4
Consolidated Statements of Stockholders' Equity for the
three months ended March 31, 1999 and 1998.................................... 5
Consolidated Statements of Cash Flows for the three month ended
March 31, 1999 and 1998....................................................... 6
Notes to the Consolidated Financial Statements..................................... 7-11
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.......................................................... 12-13
PART II. OTHER INFORMATION............................................................................ 13
Signatures......................................................................... 14
2
ITEM I. FINANCIAL STATEMENTS
PEOPLES BANCORP, INC.
CONSOLIDATED STATEMENTS OF CONDITION
(In Thousands of Dollars)
MARCH 31 DECEMBER 31
ASSETS 1999 1998
------ ---------- ------------
(unaudited)
Cash and due from banks $ 13,193 $ 11,668
Federal funds sold 99,500 69,600
---------- -----------
Total cash and cash equivalents 112,693 81,268
---------- -----------
Investment and mortgage backed securities
available for sale, at market 759,517 811,453
Investment and mortgage backed securities held
to maturity, at cost (market value of $15,436 in
1999 and $23,213 in 1998) 15,210 22,834
Federal Home Loan Bank stock, at cost 29,055 29,055
Loans, net 498,382 494,569
Bank premises and equipment, net 6,698 6,763
Accrued interest receivable 7,982 8,657
Prepaid expenses 1,021 810
Intangible assets 9,536 9,757
Other assets 4,107 4,432
---------- -----------
Total assets $1,444,201 $ 1,469,598
========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Liabilities:
Deposits $ 506,976 $ 504,900
Borrowings 611,100 611,100
Accrued interest payable 5,712 5,865
Accrued expenses and other liabilities 7,836 7,863
---------- -----------
Total liabilities 1,131,624 1,129,728
---------- -----------
Stockholders' Equity
Common Stock: par value $0.01; authorized
70,000,000 shares; issued 36,458,067 shares and
outstanding 32,654,198 shares at March 31, 1999
issued 36,411,645 shares and outstanding
35,741,676 shares at December 31, 1998 365 364
Additional paid in capital 267,500 267,533
Unallocated ESOP shares (8,920) (9,040)
Treasury stock, at cost (3,803,869 shares at March
31, 1999) and 669,969 shares at December 31, 1998) (38,257) (6,808)
Retained earnings 91,822 87,091
Unearned Management Recognition Plan shares 0 (84)
Accumulated other comprehensive income, net of tax 67 814
---------- -----------
Total stockholders' equity 312,577 339,870
---------- -----------
Total liabilities and stockholders' equity $1,444,201 $ 1,469,598
========== ===========
See accompanying notes to Consolidated Financial Statements.
3
CONSOLIDATED STATEMENTS OF INCOME
(In Thousands of Dollars)
(Unaudited)
THREE MONTHS
ENDED MARCH 31
----------------------
1999 1998
----------------------
Interest and dividend income:
Interest and fees on loans $ 9,418 $ 7,793
Interest on securities available for sale 13,129 2,522
Interest and dividends on securities held to maturity 330 736
Interest on Federal funds sold 796 263
------- -------
Total interest income 23,673 11,314
------- -------
Interest expense on deposits 4,876 5,086
Interest expense on borrowings 7,854 452
------- -------
Total interest expense 12,730 5,538
Net interest income 10,943 5,776
Provision for loan losses 600 186
------- -------
Net interest income after provision for loan losses 10,343 5,590
------- -------
Other income:
Fees on loans and deposit accounts 211 196
Fees for trust services 442 415
Net gain on sale of securities 299 --
Other income 310 381
------- -------
Total other income 1,262 992
------- -------
Operating expense:
Salaries and employee benefits 2,158 2,269
Net occupancy expense 412 386
Equipment expense 33 33
Data processing fees 182 148
Amortization of intangible assets 221 221
FDIC insurance premium 17 18
Marketing expense 93 105
Other operating expense 785 624
------- -------
Total operating expense 3,901 3,804
------- -------
Income before income taxes 7,704 2,778
Income taxes 2,973 1,075
------- -------
Net income $ 4,731 $ 1,703
======= =======
Earnings per common share:
Basic $ 0.14 $ 0.05
======= =======
Diluted $ 0.14 $ 0.05
======= =======
See accompanying notes to Consolidated Financial Statements.
4
PEOPLES BANCORP, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For the Three Months ended March 31, 1999 and 1998
(In Thousands)
(Unaudited)
NUMBER RETAINED
OF ADDITIONAL EARNINGS UNALLOCATED
COMMON COMMON PAID-IN TREASURY (SUBSTANTIALLY ESOP
SHARES STOCK CAPITAL STOCK RESTRICTED) PLAN SHARES
----------- ------------ ------------ ---------- ----------------- ----------------
Balance at December 31, 1997 36,236,500 $ 362 $ 31,045 $ 0 $ 78, 870 $ 0
Net income for three months
ended March 31, 1998 1,703
Other comprehensive income:
Net change in net unrealized gain
on securities available for sale
Comprehensive income
Dividends declared (285)
Amortization of unearned Management
Recognition Plan shares
------------ ----------- ----------- --------- ------------- ----------
Balance at March 31, 1998 36,236,500 362 31,045 0 80,288 0
============ =========== =========== ========= ============= ==========
Balance at December 31,1998 35,741,676 364 267,533 (6,808) 87.091 9,040
Net income for three months
ended March 31, 1999 4,731
Other comprehensive income:
Net change in unrealized gain on
securities available for sale
Comprehensive income
Proceeds from exercise of
stock options 46,422 1 (33)
Treasury stock repurchase (3,133,900) (31,449)
Allocation of ESOP plan shares 120
Amortization of unearned Management
Recognition Plan shares
------------ ----------- ----------- --------- ------------- ----------
Balance at March 31, 1999 32,654,198 $ 365 $ 267,500 $ (38,257) $ 91.822 $ (8,920)
============ =========== =========== ========= ============= ==========
UNEARNED ACCUMULATED
MANAGEMENT OTHER TOTAL
RECOGNITION COMPREHENSIVE STOCKHOLDER
PLAN SHARES INCOME EQUITY
---------------- ---------------- -------------
Balance at December 31, 1997 $ (673) $ 434 $ 110,038
Net income for three months
ended March 31, 1998
Other comprehensive income: 1,703
Net change in net unrealized gain
on securities available for sale 248 248
-----------
Comprehensive income 1,951
Dividends declared (285)
Amortization of unearned Management
Recognition Plan shares 336 336
------------- ------------ -----------
Balance at March 31, 1998 (337) 682 112,040
============= ============ ===========
Balance at December 31,1998 (84) 814 339,870
Net income for three months
ended March 31, 1999 4,731
Other comprehensive income:
Net change in unrealized gain on
securities available for sale (747) (747)
-----------
Comprehensive income 3,984
Proceeds from exercise of stock options (32)
Treasury stock repurchase (31,449)
Allocation of ESOP plan shares 120
Amortization of unearned Management
Recognition Plan shares 84 84
------------- ------------ -----------
Balance at March 31, 1999 $ 0 $ 67 $ 312,577
============= ============ ===========
See accompanying Notes to Consolidated Financial Statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands of Dollars)
(unaudited)
THREE MONTHS ENDED MARCH 31,
1999 1998
-------------- -------------
Cash flows from operating activities:
Net income $ 4,731 $ 1,703
Adjustments to reconcile net income
to net cash provided by operating
activities:
Provision for loan losses 600 186
Depreciation and amortization expense 183 178
Amortization of Management
Recognition Plan shares 84 336
Amortization of intangible assets 221 221
Amortization of ESOP 120 0
Net amortization (accretion) of
premiums and discounts on securities 164 (26)
Decrease in accrued interest
receivable and other assets 789 19
increase in accrued interest
payable and other liabilities 708 353
Net gain on sale of securities (299) 0
-------------- -------------
Net cash provided by operating
activities 7,301 2,970
-------------- -------------
Cash flows used in investing activities:
Proceeds from maturities of investment
securities available for sale and held
to maturity 14,700 19,370
Purchase of investment securities
available for sale (3,323) (15,570)
Maturities and repayments of
mortgage-backed securities 44,669 4,745
Net increase in loans (3,760) (16,297)
Net additions to bank, premises,
furniture, and equipment (116) (207)
Proceeds from sales of securities
available for sale 2,213 0
-------------- -------------
Net cash provided by (used in)
investing financing activities 54,383 (7,959)
-------------- -------------
Cash flows from financing activities:
Net proceeds from exercise of stock
options 1 0
Net proceeds received from stock
offering subscriptions 0 229,052
Purchase of treasury shares (31,449) 0
Dividends paid (887) (285)
Net increase in demand deposits 5,502 11,780
Net (decrease) increase in savings
and time deposits (3,426) 5,266
-------------- -------------
Net cash provided by (used in)
financing activities (30,259) 245,813
-------------- -------------
Net increase in cash and cash
equivalents 31,425 240,824
Cash and cash equivalents as of
beginning of year 81,268 15,546
Cash and cash equivalents as of -------------- -------------
end of year $112,693 $256,370
-------------- -------------
Supplemental disclosure of cash
flow information:
Cash paid: -------------- -------------
Interest $ 12,883 $ 5,582
============== =============
Income taxes $ 795 $ 0
============== =============
Non investing activities:
Assets acquired in settlement
of loans $ 11 $ 9
============== =============
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
6
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" or "Company").
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
month periods ended March 31, 1999 and 1998. The results of operations for the
three month period ended March 31, 1999 are not necessarily indicative of
results that may be expected for the entire year ending December 31, 1999.
(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 ("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 Comany's employee stock ownership plan (the "ESOP").
(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.
7
(3) PLAN OF MERGER, CONT.
The merger is expected to be completed in the second quarter of 1999
pending shareholder and regulatory approval. The transaction will be accounted
for under the purchase accounting method for business combinations.
(4) NON PERFORMING LOANS, NON PERFORMING ASSETS AND THE ALLOWANCE FOR LOAN
LOSSES
Loans contractually in arrears by three months or more at March 31, 1999
and December 31, 1998 are as follows (in thousands of dollars):
March 31, 1999 December 31, 1998
---------------------- -------------------------
Loans delinquent 90 days or more $ 3,632 $ 4,123
Loans delinquent 90 days or more
as a percentage of net loans
receivable 0.73% 0.83%
An analysis of the allowance for loan losses for the three month periods
ended March 31, 1999 and 1998 is as follows (in thousands of dollars):
March 31, 1999 March 31, 1998
--------------------- -------------------
Balance at beginning of the period $ 4,095 $ 3,415
Provision charged to operations 600 186
(Charge-offs), Recoveries, net 53 (39)
--------------------- -------------------
Balance at the end of the period $ 4,748 $ 3,562
--------------------- -------------------
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 March 31, 1999, the Bank had $35 thousand
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.
As of March 31, 1999, the Bank's total non-performing loans and foreclosed
assets amounted to $3.6 million, or .25% of total assets, compared to $4.3
million, or .29% of total assets at December 31, 1998.
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
March 31, 1999, the Bank had $6.8 million of loans classified as special
mention, $6.2 million classified as substandard and $.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 $4.7 million and $3.6 million, respectively
at March 31, 1999 and December 31, 1998.
8
(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) RECENT ACCOUNTING PRONOUNCEMENTS
Statement of Financial Accounting Standards No. 133 (SFAS No. 133),
"Accounting for Derivative Instruments and Hedging Activities", established
accounting and reporting standards for derivative instruments, and for hedging
activities. SFAS No. 133 supersedes the disclosure requirements in Statements
No. 80, 105 and 119. This statement is effective for fiscal quarters of fiscal
years beginning after June 15, 1999. The adoption of SFAS 133 is not expected to
have a material impact on the financial position or results of operations of the
Company.
Statement of Financial Accounting Standards No. 134 (SFAS No. 134),
"Accounting for Mortgage-Backed Securities Retained after the Securitization of
Mortgage Loans Held for Sale by a Mortgage Banking Enterprise" amends FASB No.
65, "Accounting for Certain Mortgage Banking Activities", to require that after
the securitization of mortgage loans held for sale, an entity engaged in
mortgage banking activities classify the resulting mortgage-backed securities or
other retained interest based on its ability and intent to sell or hold those
investments. SFAS No. 134 was effective January 1, 1999. The adoption of this
statement is not expected to have a material impact on the financial position or
results of operations of the Company.
(7) BORROWINGS
The Bank may obtain advances from the Federal Home Loan Bank ("FHLB") of
New York upon the security of the common stock it owns in that bank and certain
of its residential mortgage loans, provided certain standards related to
creditworthiness have been met. Such advances are made pursuant to several
credit programs, each of which has its own interest rate and range of
maturities. Such advances are generally available to meet seasonal and other
withdrawals of deposit accounts and to permit increased lending and investment.
On November 16, 1998 and December 10, 1998 the Bank entered into
collateralized borrowing agreements with the FHLB. The monies received from
these agreements funded the acquisition of three private mortgaged-backed
securities (REMICS), rated Aaa, which are subject to agreements to sell to
Sovereign.
In January 1997, the Board of Directors approved a borrowing agreement with
Morgan Stanley & Co., Inc. Pursuant to the borrowing agreement, the Bank
borrowed $30.0 million at an interest rate of 6.02% and for a term of three
years, and purchased a FNMA security that yields approximately 7.2%, matures
approximately ten years after the date of the purchase and is callable after
three years.
The following table sets forth the terms of the FHLB borrowings and
collateral at March 31, 1999.
Amount Borrowing Maturity Certificate Amortized
Rate Borrowed Date Date Face Value Value Collateral Rating Yield
- ---- -------- --------- -------- ----------- --------- ----------------------------- ------ -----
5.11% $297,100 11/16/98 7/1/99 $ 300,000 $ 273,935 Residential Funding Mtg. Sec. Aaa 6.78%
6.75% due 8/25/2028
5.08% $284,000 12/10/98 7/1/99 $ 238,125 $ 223,381 Citicorp Mtg. Sec. Corp. Aaa 6.36%
6.25% due 11/25/2028
$ 50,000 $ 45,815 Residential Funding Mtg. Sec. Aaa 6.75%
6.75% due 8/25/2028
9
(7) BORROWINGS, CONT.
During the fourth quarter 1998, the Company and the Bank entered into
agreements to sell securities to Sovereign. The agreements were entered into for
the purpose of leveraging the balance sheet of the Company. The Agreements
provide that in the event the merger is not completed by the later of July 1,
1999 (the "Merger Agreement Date") or such later date as may be agreed upon by
the parties no later than 10 days after the Merger Agreement Date, Sovereign
will purchase the securities at the amortized book value.
The following table sets forth for the Company and the Bank at March 31,
1999, the maturities and securities under agreements to sell securities to
Sovereign. The securities are carried at amortized value and are classified as
available for sale securities.
(In Thousands of Dollars)
Certificate Amortized
Term Face Value Value Issue Rating Yield
- ------------ -------------- --------- -------------------------------------------- -------- -------
WITH THE BANK
11/05/98-7/1/99 $ 51,161 $ 30,441 Northwest Asset Securities Corp. Aaa 6.52%
6.52% due 2/25/2028
11/16/98-7/1/99 $ 300,000 $273,381 Residential Funding Mtg. Sec. Aaa 6.78%
6.75% due 8/25/2028
12/10/98-7/1/99 $ 238,125 $223,381 Citicorp. Mtg. Sec. Corp. Aaa 6.36%
6.75% due 11/25/2028
12/10/98-7/1/99 $ 50,000 $ 45,815 Residential Funding Mtg. Sec. Aaa 6.75%
6.75% due 8/25/2028
WITH THE COMPANY
11/5/98-7/1/99 $ 50,000 $ 29,750 Northwest Asset Securities Corp. Aaa 6.52%
6.52% due 2/25/2028
(8) IMPACT OF YEAR 2000
Like many financial institutions, the Company relies upon computers for the
daily conduct of its business and for data processing generally. There is a
concern among industry experts that on January 1, 2000 computers will be unable
to "read" the new year and there may be widespread computer malfunctions. 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 spread sheet functions. In March 1998 the Committee
completed an inventory and risk assessment of hardware and software and
identified "mission critical" systems and application interdependencies. At
March 31, 1999, 100% of the identified "mission critical" systems have been
upgraded to the Year 2000 version distributed and tested by the applicable
vendor. The Company has installed a test lab simulating Year 2000 environment
to accomplish its testing of
10
(8) IMPACT OF YEAR 2000, CONT.
"mission critical" systems. The Company commenced testing of these "mission
critical" systems in the fourth quarter of 1998 and will continue testing into
1999. As of March 31, 1999, the Company's testing was approximately 90%
complete.
The estimated cost of the Year 2000 conversion is not expected to be
material. Upgrades of the hardware and software are being made in the ordinary
course of business and testing is being done with existing staff and equipment.
All costs are being expenses 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 operation and increased operating costs. The Company
continues to monitor its major commercial borrowers who may be adversely
affected by Year 2000 issues. When a determination is made that a borrower is so
affected, the Bank is obtaining appropriate information from the borrower as to
the remediation of those issues. In appropriate cases, compliance with Year 2000
has been made a condition of the loan. 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 plans. These contingency plans are projected to
be completed by the end of the second quarter of 1999. The Company believes at
this time that its efforts are adequate to address its Year 2000 concerns.
11
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FINANCIAL CONDITION
Total assets decreased by $25.4 million, or 1.7%, to 1,444.2 million at
March 31, 1999 from $1,469.6 million at December 31, 1998 primarily due to
normal maturities of securities available for sale and held to maturity. Cash
and cash equivalents increased by $31.4 million to $112.7 million at March 31,
1999 from $81.3 million at December 31, 1998. The net increase reflects the
proceeds from securities maturities, redemptions and prepayments, offset by the
funds used to repurchase common stock. Securities available for sale decreased
by $51.9 million, or 6.40% to $759.5 million at March 31, 1999 from $811.5
million at December 31, 1998. During the first quarter, redemptions and
prepayments of principal on mortgage pass-through instruments in the securities
available for sale category were primarily held as cash and equivalents.
Securities held to maturity decreased $7.6 million, or 33.4% to $15.2 million at
March 31, 1999 from $22.8 million at December 31, 1998. Loans increased by $3.8
million, or .8%, to $498.4 million at March 31, 1999 from $494.6 million at
December 31, 1998. Deposits increased by $2.1 million, or .4%, to $507.0 million
at March 31, 1999 from $504.9 million at December 31, 1998.
Stockholders' equity decreased by $27.3 million, or 8.03%, to $312.6
million at March 31, 1999 from $339.9 million at December 31, 1998. The decrease
in stockholders' equity was primarily due to the common stock repurchases which
reduced equity from December 31, 1998 by $31.4 million, offset by the increase
in net income for the first quarter of $4.7 million. At March 31, 1999 the
stated equity as a percentage of assets was 21.64% and the tangible equity as a
percentage of assets was 20.99%.
RESULTS OF OPERATIONS
Net income was $4.7 million (including net securities gains of $.3 million)
for the first quarter of 1999 compared to $1.7 million for the first quarter
1998. There were no securities gains for the first quarter of 1998.
Total interest income increased $12.4 million, or 109.2%, to $23.7 million
for the quarter ended March 31, 1999 from $11.3 million for the quarter ended
March 31, 1998. The increase resulted from an increase in average interest
earnings assets to $1,401.4 million for the quarter ended March 31, 1999 from
$625.3 million for the quarter ended March 31, 1998 which offset a decline in
the average yield on interest-earnings assets to 6.76% for the quarter ended
March 31, 1999 from 7.24% for the quarter ended March 31, 1998. The $776.1
million increase in average interest earnings assets was primarily attributable
to the Conversion on April 8, 1998 and the $581.1 million leverage program
instituted in the fourth quarter of 1998.
Total interest expense increased by $7.2 million, or 130%, to $12.7 million
for the three months ended March 31, 1999 from $5.5 million for the three months
ended March 31, 1998. Interest on deposits decreased by $210 thousand to $4.9
million for the three months ended March 31, 1999. The overall cost of deposits
was 3.88% for the three months ended March 31, 1999 compared to 3.97% for the
three months ended March 31, 1998.
Interest expense on borrowings increased $7.4 million to $7.9 million for
the three months ended March 31, 1999 compared to the three months ended March
31, 1998. The increase in cost of average borrowings resulted from the $581.1
million leverage borrowings at an average interest cost of 5.10% in November and
December of 1998.
Total other income was $1.3 million for the quarter ended March 31, 1999
compared to $1.0 million for the quarter ended March 31, 1998. Other income
included $.3 million of gains from the sale of securities for the quarter ended
March 31, 1999 compared to $0 from the sale of securities for the quarter ended
March 31, 1998. Excluding gains on sales of securities, other income was
approximately the same for both quarters. Total operating expenses increased by
$.1 million, or 2.55%, to $3.9 million for the quarter ended March 31, 1999
compared to $3.8 million for the quarter ended March 31, 1998.
The evaluation of the loan loss reserve adequacy and the resultant 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
realized value of the underlying collateral, economic conditions and other
matters which warrant consideration.
The provision for loan losses was $.6 million for the quarter ended March
31, 1999 compared to $.2 million for the three months ended March 31, 1998. The
increase was due primarily to the growth in the loan portfolio of 20.9% with the
continued
12
RESULTS OF OPERATIONS, CONT.
growth in commercial loans of 42.1%. The allowance for loan losses as a
percentage of loans outstanding was .94% at March 31, 1999 compared to .82% at
December 31, 1998. The allowance for loan losses as a percentage of non-
performing loans was 131.3% at March 31, 1999 compared to 96.92% at December 31,
1998.
BANK CAPITAL
The OTS requires that the Bank meet minimum tangible, core and risk-based
capital requirements. As of March 31, 1999, the Bank exceeded all regulatory
capital requirements. The Bank's required, actual, and excess capital levels as
of March 31, 1999, are as follows:
EXCESS OF ACTUAL OVER
REQUIRED ACTUAL REGULATORY REQUIREMENT
----------------------------------------------------------------------
% of % of % of
AMOUNT ASSETS AMOUNT ASSETS AMOUNT ASSETS
----------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
Tangible capital to tangible assets $20,462 1.50% $232,843 17.07% $212,381 15.57%
Core capital to tangible assets $40,924 3.00% $232,843 17.07% $191,919 14.07%
Core capital to risk-adjusted assets $26,250 4.00% $232,843 35.48% $206,593 31.48%
Risk-based capital to risk-adjusted assets $52,500 8.00% $237,591 36.20% $185,091 28.20%
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 was 76.40% at March 31, 1998 and 35.79% at March 31,
1999. The Bank adjusts liquidity as appropriate to meet its asset and liability
management objectives.
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
Exhibit 27 Edgar Financial Data Schedule
13
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: May 10, 1999 By: /s/ Wendell T. Breithaupt
-------------------------------
Wendell T. Breithaupt
President and Chief Executive
Officer
Date: May 10, 1999 By: /s/ Dan A. Chila
-------------------------------
Dan A. Chila
Senior Vice President and Chief
Financial Officer
14