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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT
OF 1934, FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997, OR
[ ] 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 (To be assigned)
__________PREMIER BANCORP, INC.__________
(Exact name of Registrant as specified in its charter)
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PENNSYLVANIA 23-232921058
- ------------------------------------------------------------ -------------------
(State or other jurisdiction of incorporation or (I.R.S. Employer
organization) Identification No.)
</TABLE>
<TABLE>
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<S> <C>
379 NORTH MAIN STREET, DOYLESTOWN, PENNSYLVANIA 18901
- ------------------------------------------------------------ ----------
(Address of principal executive offices) (Zip Code)
</TABLE>
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (215) 345-5100
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
None
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
None
Common Stock, $0.33 par value
---------------------------------
(Title of class)
Indicate by check mark whether the Registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES __X__ . NO ____ .
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB [X]
The Registrant's revenues for the year ended December 31, 1997 were
$13,598,619.
As of March 16, 1998, 2,630,340 shares of Common Stock of the Registrant
were outstanding and the aggregate market value of the Common Stock of the
Registrant, held by non-affiliates was $12,333,126.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the Registrant's 1998 Annual Meeting of
Shareholders are incorporated by reference into Part III of this report.
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PREMIER BANCORP, INC.
FORM 10-KSB
INDEX
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PAGE
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PART I
Item 1 Business.................................................... 1
Item 2 Properties.................................................. 4
Item 3 Legal Proceedings........................................... 5
Item 4 Submission of Matters to a Vote of Security Holders......... 5
PART II
Item 5 Market for Registrant's Common Stock and Related Stockholder
Matters................................................... 5
Item 6 Management's Discussion and Analysis of Financial Condition
and Results of Operation.................................. 6
Item 7 Financial Statements and Supplementary Data................. 25
Item 8 Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................. 48
PART III
Item 9 Directors and Executive Officers of the Registrant.......... 48
Item 10 Executive Compensation...................................... 48
Item 11 Security Ownership of Certain Beneficial Owners and
Management................................................ 48
Item 12 Certain Relationships and Related Transactions.............. 48
PART IV
Item 13 Exhibits, Financial Statement Schedules and Reports on Form
8-K....................................................... 49
Signatures.................................................. 50
</TABLE>
<PAGE>
PART I
ITEM 1 -- BUSINESS
Premier Bancorp, Inc. (the "Company") was incorporated under the laws of
the Commonwealth of Pennsylvania on July 15, 1997. It was reorganized as a one
bank holding company of Premier Bank (the "Bank") on November 17, 1997. The
Company is registered with the Federal Reserve Board as a bank holding company
under the Bank Holding Company Act of 1956, as amended, and conducts its
business through its wholly-owned subsidiary, Premier Bank. The principal
business of the Company, through the Bank, is commercial banking and consists
of, among other things, attracting deposits from the general public and using
these funds in making loans secured by real estate, commercial loans, and
consumer loans, and purchasing investment securities.
The Company was organized for the purpose of becoming the holding company
of the Bank, pursuant to a Plan of Reorganization approved by the Bank's
shareholders on October 9, 1997. In accordance with the terms of the Plan of
Reorganization, each share of the Bank's common stock previously outstanding was
automatically converted into one share of the Company's common stock and the
Bank became a wholly owned subsidiary of the Company. The Company's primary
asset is its investment in the Bank. The holding company is subject to
regulation and examination by the Board of Governors of the Federal Reserve
System (the "Federal Reserve").
At December 31, 1997 the holding company does not own or lease any property
and has no paid employees.
PREMIER BANK
The Bank was organized in 1990 as a Pennsylvania state-chartered banking
institution and member of the Federal Reserve and Federal Deposit Insurance
Corporation (the "FDIC"). The Bank commenced operations on April 24, 1992. The
Bank is a community-oriented financial services provider where consumers and
small business customers can obtain a wide variety of products and services
usually associated with larger financial institutions. The Bank places an
emphasis on serving customer needs by providing personal attention and service.
For consumers, the Bank provides deposit products which include checking,
savings, and money market accounts as well as certificates of deposit. The Bank
offers numerous credit products but specializes in lending to small commercial
establishments and professionals. Other credit products include residential
mortgage loans, home equity loans and lines of credit, personal lines of credit,
and other consumer loans. The Bank also offers other services such as safe
deposit boxes, telephone banking and automated teller services.
For small businesses, the Bank offers various deposit and transaction
services including business checking and savings accounts, electronic banking
and cash management services. The Bank offers a full array of short-term and
adjustable rate lending products including loans secured by real estate and
other assets, working capital lines and other commercial loans.
The Bank is subject to regulation and examination by the Federal Reserve
Bank of Philadelphia (the "Fed"), the Commonwealth of Pennsylvania and the FDIC.
The Bank's deposits are insured by the FDIC to the extent provided by law.
The Bank and Company's main office is located at 379 North Main Street,
Doylestown, Pennsylvania. The Bank conducts business from its main office and
two other retail offices located in Southampton, Bucks County and Easton,
Northampton County. The Bank also has a loan origination office in Yardley,
Bucks County. The Bank plans to open a fourth branch office (the "Yardley
branch") in Lower Makefield Township, Bucks County, Pennsylvania. The
Pennsylvania Department of Banking approved the Bank's application for the
Yardley branch on July 16, 1997.
The Bank had 34 full-time employees and 12 part-time employees, at December
31, 1997.
1
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As of December 31, 1997, the Company, on a consolidated basis, had total
assets of $193,523,440, total gross loans of $108,857,509, total deposits of
$143,603,202, and total shareholders' equity of $10,433,837.
MARKET AREA
The Bank's primary market area is Doylestown, Pennsylvania and its
surrounding Bucks County and Greater Delaware Valley communities. The Bank also
services Northampton County and parts of the Lehigh Valley from its Easton
office. The Bank is not dependent upon a single customer, or a few customers,
the loss of which would have a material adverse effect on the Bank.
LENDING ACTIVITIES
The Bank offers a variety of loan products to its customers, including
loans secured by real estate, commercial, and consumer loans. The Bank's gross
loans totaled $108,857,509 and $83,084,586 at December 31, 1997 and 1996,
respectively. The portfolio represented approximately 56.3% and 54.1% of the
Company's total assets at December 31, 1997 and 1996, respectively.
Loans secured by real estate totaled $98,975,380 and $75,487,851 at
December 31, 1997 and 1996, respectively, and represented 91% of total loans in
both years. Loans secured by residential properties amounted to $26,603,120 and
$22,756,292 while loans secured by commercial real estate totaled $72,372,260
and $52,731,559, respectively, at December 31, 1997 and 1996.
Other loans not secured by real estate include commercial and consumer
loans. Commercial loans were $9,084,458 and $6,861,611, and consumer loans
$797,671 and $735,124, respectively, at December 31, 1997 and 1996.
INVESTMENT ACTIVITIES
At December 31, 1997 and 1996, the Company's investment portfolio, in the
aggregate amount of $77,603,775 and $66,787,274, consisted primarily of U.S.
government agency obligations and mortgage-backed securities, and state and
municipal securities. Subject to applicable limits, the Company is permitted to
invest in equity securities which include stock in the Federal Home Loan Bank
(the "FHLB"), the Fed, and Atlantic Central Bankers Bank, the Bank's principal
correspondent bank. Investment securities available for sale are recorded at
fair value with the unrealized holding gain or loss, net of taxes, included in
shareholders' equity, while investment securities held to maturity are recorded
at amortized cost. At December 31, 1997 and 1996, the carrying value of the
available for sale portfolio was $62,434,137 and $52,899,668 and the balance of
the held to maturity portfolio was $15,169,638 and $13,887,606, respectively.
The Company views its investment portfolio as a source of earnings and
liquidity. Decisions on maturity and type of investment are dictated by the
Bank's investment and balance sheet management policies as approved annually by
the Board of Directors. The final decision regarding the specific selection of
investments for the Bank's portfolio are made by the Chief Financial Officer.
The Asset Liability Committee considers the Bank's financial performance
objectives and interest rate sensitivity in setting investment guidelines and
strategy.
SOURCES OF FUNDS
The Bank offers a variety of deposit products including checking accounts,
savings, money market accounts, and certificates of deposit. Deposits in the
Bank are insured up to $100,000 by the FDIC. In addition, the Bank uses short
and long-term advances from the FHLB and overnight borrowings from Atlantic
Central Bankers Bank as sources of funds.
2
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COMPETITION
The Bank competes actively for loans and deposits with other financial
services companies including: other commercial banks, savings banks, savings and
loan associations, insurance companies, securities brokerage firms, credit
unions, finance companies, mutual funds, money market funds, and certain
government agencies. Competition among financial institutions is based upon a
number of factors, including, but not limited to, the quality of services
rendered, interest rates offered on deposit accounts, interest charged on loans,
service charges, the convenience of banking facilities, location and hours of
operation and, in case of loans to larger commercial borrowers, relative lending
limits.
Many of these competitors are significantly larger than Premier Bank and
have substantially greater financial resources, personnel and locations from
which to conduct business. In addition, the Bank is subject to regulation (See
"Supervision and Regulation") while certain competitors are not. Generally,
barriers of entry into the industry are considered low.
SUPERVISION AND REGULATION
Holding Company Regulation
As a registered holding company under the Bank Holding Company Act, (the
"BHCA"), the Company is regulated by the Federal Reserve Board (the "FRB"). The
Company is also subject to the provisions of section 115 of the Pennsylvania
Banking Code of 1965.
As a bank holding company, the Company is required to file with the FRB an
annual report and such additional information regarding the holding company and
its subsidiary bank as required pursuant to the BHCA. The FRB may also make
examinations of the holding company and its subsidiary. The FRB possesses
cease-and-desist powers over bank holding companies and their non-bank
subsidiaries where their actions would constitute an unsafe or unsound practice
or violation of law.
In addition to the restrictions imposed by the BHCA relating to a bank
holding company's ability to acquire control of additional banks, the BHCA
generally prohibits a bank holding company from (i) acquiring a direct or
indirect interest in, or control of 5% or more of the outstanding voting shares
of any company, and (ii) engaging directly or indirectly in activities other
than that of banking, managing or controlling banks or furnishing services to
subsidiaries. However, a bank holding company may engage in, and may own shares
of companies engaged in, certain activities deemed by the FRB to be closely
related to banking or managing or controlling banks.
Bank Regulation
The Bank is a state-chartered bank, member of the Federal Reserve System
and is FDIC insured. The Federal Reserve Board, the FDIC, and federal and state
law extensively regulate various aspects of the banking business, including but
not limited to, permissible types and amounts of loans, investment and other
activities, capital adequacy, branching, interest rates on loans and the safety
and soundness of banking practices.
Federal Reserve Board Requirements
Regulation D of the FRB imposes reserve requirements on all depository
institutions, including the Bank, that maintain transaction accounts or
non-personal time and savings accounts. These reserves may be in the form of
cash or non-interest bearing deposits with the Philadelphia Federal Reserve
Bank. Under current Regulation D, the Bank must establish reserves equal to 3.0%
of the first $44.9 million of net transaction accounts and 10.0% of the
remainder. The reserve requirement on non-personal savings and time deposits
with an original maturity of less than 18 months is 3.0%. Cash and due from
banks are used as a deduction against the reserve. At December 31, 1997 and
1996, the Bank met applicable FRB reserve requirements which were $751,000 and
$414,000, respectively.
3
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Environmental Laws
Neither the Company nor the Bank anticipate that compliance with
environmental laws and regulations will have any material effect on capital,
expenditures, earnings, or on its competitive position. However, environmentally
related hazards have become a source of high risk and potentially unlimited
liability for financial institutions. Environmentally contaminated properties
owned by an institution's borrowers may result in a drastic reduction in the
value of the collateral securing the institution's loans to such borrowers, high
environmental clean up costs to the borrower affecting its ability to repay the
loans, the subordination of any lien in favor of the institution to a state or
federal lien securing clean up costs, and liability to the institution for clean
up costs if it forecloses on the contaminated property or becomes involved in
the management of the borrower. To minimize this risk, the Bank may require an
environmental examination of and report with respect to the property of any
borrower or prospective borrower if circumstances affecting the property
indicate a potential for contamination, taking into consideration a potential
loss to the institution in relation to the borrower. Such examination must be
performed by an engineering firm experienced in environmental risk studies and
acceptable to the institution, and the cost of such examinations and reports are
the responsibility of the borrower. These costs may be substantial and may deter
prospective borrowers from entering into a loan transaction with the Bank. The
Company is not aware of any borrower who is currently subject to any
environmental investigation or clean up proceeding that is likely to have a
material adverse effect on the financial condition or results of operations of
the Bank.
In 1995, the Pennsylvania General Assembly enacted the Economic Development
Agency, Fiduciary and Lender Environmental Liability Protection Act which, among
other things, provides protection to lenders from environmental liability and
remediation costs under the environmental laws for releases and contamination
caused by others. A lender who engages in activities involved in the routine
practices of commercial lending, including, but not limited to, the providing of
financial services, holding of security interests, workout practices,
foreclosure or the recovery of funds from the sale of property shall not be
liable under the environmental acts or common law equivalents to the
Pennsylvania Department of Environmental Resources or to any other person by
virtue of the fact that the lender engages in such commercial lending practice.
A lender, however, will be liable if it, its employees or agents, directly cause
an immediate release or directly exacerbate a release of regulated substance on
or from the property, or knowingly and willfully compelled the borrower to
commit an action which caused such release or violation of an environmental act.
The Economic Development Agency, Fiduciary and Lender Environmental Liability
Protection Act, however, does not limit federal liability which still exists
under certain circumstances.
The required statistical information for Item 1 can be found in "Item 6 --
Management's Discussion and Analysis of Financial Condition and Results of
Operations" of this report.
ITEM 2 -- PROPERTIES
The Bank and Company's main office is located at 379 North Main Street,
Doylestown, Pennsylvania. The Bank conducts business from its main office and
two other retail offices located in Southampton, Bucks County and Easton,
Northampton County. The Bank also has a loan origination office in Yardley,
Bucks County. The Bank is in the process of opening a fourth branch office (the
"Yardley branch") in Lower Makefield Township, Bucks County, Pennsylvania. The
Pennsylvania Department of Banking approved the Bank's application for the
Yardley branch on July 16, 1997.
The Bank leases all facilities from which it currently operates. The leases
on its Doylestown and Easton offices expire in 1998. The Bank expects to
exercise its option to purchase these properties during the fiscal year 1998.
Management considers that its facilities are adequate for its business. A parcel
of land was purchased for the construction of the Yardley branch in September
1997.
4
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The following table details the Bank's properties:
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1) Doylestown, Pa................... Main office and branch -- leased
requiring rental payments of $69,799 per
year
2) Easton, Pa....................... Branch -- leased requiring rental
payments of $49,304 per year
3) Southampton, Pa.................. Branch and operations center -- leased
requiring rental payments of $59,670
per year
4) Yardley, Pa...................... Loan origination office -- leased
requiring rental payments of $10,188 per
year
5) Lower Makefield Township, Pa..... Land for future branch -- owned
</TABLE>
ITEM 3 -- LEGAL PROCEEDINGS
As of December 31, 1997, there were no material pending legal proceedings,
other than ordinary routine litigation incidental to the business, to which the
Company or its subsidiary are a party or by which any of their property is in
the subject.
ITEM 4 -- SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
PART II
ITEM 5 -- MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SHAREHOLDER
MATTERS
The common stock of the Company is not actively traded. There were
30,000,000 shares of common stock authorized at both December 31, 1997 and 1996.
The total number of shares outstanding as of December 31, 1997 and 1996 was
2,630,340 and 2,604,303, respectively. The Company had 476 shareholders of
record as of March 16, 1998. There is no other class of common stock authorized
or outstanding. The Company effected a three-for-one stock split on December 31,
1997 at which time the par value was changed from $1.00 to $.33 per share.
During 1997 and 1996, the price range of the common stock known by management to
have traded was $5.00 to $6.00 per share and $3.64 to $5.00 per share,
respectively. The Company is restricted as to the amount of dividends that it
can pay holders of its common stock by virtue of the restrictions on the Bank's
ability to pay dividends to the Company. See Note 20 to the 1997 Consolidated
Financial Statements elsewhere herein. No dividends have been declared or paid.
All information has been retroactively restated to give effect to the stock
split in 1997.
5
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SELECTED FINANCIAL AND OTHER DATA
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FOR THE YEARS ENDED DECEMBER 31, 1997 1996
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Income and Expense
Interest income......................................... $ 13,448,692 10,103,117
Interest expense........................................ 7,532,471 5,543,472
------------ ------------
Net interest income..................................... 5,916,221 4,559,645
Provision for loan losses............................... 400,000 350,000
Non-interest income..................................... 149,927 208,131
Non-interest expense.................................... 3,735,191 2,886,679
------------ ------------
Income before income taxes.............................. 1,930,957 1,531,097
Income tax expense...................................... 590,000 435,462
------------ ------------
Net income.............................................. $ 1,340,957 1,095,635
============ ============
Per Share Data
Basic earnings per share................................ $ 0.51 0.42
Diluted earnings per share.............................. 0.49 0.40
Book value.............................................. 3.97 3.43
Average common shares outstanding....................... $ 2,606,473 2,604,303
Balance Sheet at Year-End
Loans, net of unearned income........................... $108,532,674 82,909,836
Investment securities held to maturity.................. 15,169,638 13,887,606
Investment securities available for sale................ 62,434,137 52,899,668
Other earning assets.................................... 85,823 206,313
Total assets............................................ 193,523,440 153,686,788
Deposits................................................ 143,603,202 118,093,242
Other interest bearing liabilities...................... 36,342,740 23,640,568
Shareholders' equity.................................... $ 10,433,837 8,942,793
Selected Financial Ratios
Net interest margin..................................... 3.44% 3.52%
Return on average assets................................ 0.78% 0.85%
Return on average shareholders' equity.................. 14.28% 13.32%
Average shareholders' equity to average assets.......... 5.45% 6.35%
</TABLE>
ITEM 6 -- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
Premier Bancorp, Inc. (the "Company") is a Pennsylvania business
corporation and registered bank holding company headquartered in Doylestown,
Bucks County, Pennsylvania. The Company was incorporated on July 15, 1997 and
reorganized on November 17, 1997 at the direction of the Board of Directors of
Premier Bank as a one bank holding company of Premier Bank (the "Bank").
Currently the primary business of the Company is the operation of its
wholly-owned subsidiary, Premier Bank.
Premier Bank is a Pennsylvania chartered commercial bank and member of the
Federal Reserve Bank of Philadelphia (the "Fed") and the Federal Deposit
Insurance Corporation (the "FDIC"). The Bank was organized in 1990 and started
operations on April 24, 1992. The Bank's principal business has been, and
continues to be, gathering deposits from customers within its market area, and
investing
6
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those deposits, primarily in loans, mortgage-backed securities, and obligations
of U.S. government agencies and government sponsored entities ("GSE's"). The
Bank's revenues are derived principally from interest on its loan and securities
portfolios. The Bank's primary sources of funds are: deposits, repayments,
prepayments and maturities of loans; repayments, prepayments and maturities of
mortgage-backed and investment securities, and, borrowed funds. The Bank
currently has three full service Pennsylvania banking offices: Doylestown,
Easton and Southampton. The Bank also has a loan production office in Yardley,
Pennsylvania. The Bank faces significant competition from other financial
services companies many of which are larger organizations with more resources
and locations than the Bank.
The Company's consolidated results of operations are dependent primarily on
net interest income, which is the difference between the interest income earned
on its interest-earning assets, such as loans and securities, and the interest
expense paid on its interest-bearing liabilities, such as deposits and other
borrowed money. The Company also generates non-interest income such as service
charges and other fees. The Company's non-interest expenses primarily consist of
employee compensation and benefits, occupancy expenses, marketing, data
processing fees and other operating expenses. As a Bank, the Company is subject
to losses from its loan portfolio if borrowers fail to meet their obligations.
The Company's results of operations are also significantly affected by general
economic and competitive conditions, particularly changes in market interest
rates, government policies, changes in accounting standards and actions of
regulatory agencies.
The intention of this section is to provide the reader with a better
understanding of the consolidated results of operations and financial condition
of Premier Bancorp, Inc. and its wholly owned subsidiary, Premier Bank, for the
years 1997 and 1996. The results of operations and financial condition discussed
herein are presented on a consolidated basis and the consolidated entity is
referred to herein as "PBI". PBI's consolidated financial condition and results
of operations consist almost entirely of Premier Bank's financial condition and
results of operations. This section should be read in conjunction with the
financial statements and notes beginning on page 27. Current performance may not
be indicative of future performance.
In addition to historical information, this management discussion and
analysis contains forward-looking statements. The forward-looking statements
contained herein are subject to certain risks and uncertainties that could cause
actual results to differ materially from those projected in the forward-looking
statements. Important factors that might cause such a difference include, but
are not limited to, those discussed in this section entitled "Management
Discussion and Analysis of Financial Condition and Results of Operations."
Readers are cautioned not to place undue reliance on these forward-looking
statements, which reflect management's analysis only as of the date hereof. The
Company undertakes no obligation to publicly revise or update these
forward-looking statements to reflect events or circumstances that arise after
the date hereof. Readers should carefully review the risk factors described in
other documents the Company files from time to time with the Securities and
Exchange Commission, including Quarterly Reports on Form 10-QSB to be filed by
the Company in 1998, and any Current Reports on Form 8-K filed by the Company.
The following factors are among the factors that could cause actual results
to differ materially from the forward-looking statements: general economic
conditions, including their impact on capital expenditures; business conditions
in the banking industry; the regulatory environment; rapidly changing technology
and evolving banking industry standards, Year 2000 issues, competitive factors,
including increased competition with community, regional and national financial
institutions; new service and products offerings by competitors and price
pressures; and like items.
7
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The following table indicates certain key average balance sheet amounts and
their corresponding earnings/expenses and rates.
AVERAGE BALANCES, RATES AND INTEREST INCOME AND EXPENSE SUMMARY
<TABLE>
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1997 1996
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AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE INTEREST RATE BALANCE INTEREST RATE
------------ ----------- ------- ------------ ----------- -------
<S> <C> <C> <C> <C> <C> <C>
Assets
Interest-bearing deposits.... $ 298,644 14,334 4.80% $ 762,313 41,325 5.42%
Fed funds sold............... 1,496,408 82,081 5.49% 1,182,305 62,133 5.26%
Investment securities
available for sale
Taxable.................... 50,572,153 3,384,850 6.69% 35,252,588 2,348,307 6.66%
Tax-exempt(1).............. 5,030,358 276,573 5.50% 4,844,426 262,381 5.42%
Investment securities held to
maturity................... 13,749,072 937,551 6.82% 14,910,194 1,001,579 6.72%
------------ ----------- ---- ------------ ----------- ----
Total investment
securities............... 69,351,583 4,598,974 6.63% 55,007,208 3,612,267 6.57%
Loans, net of unearned
income(2).................. 95,146,116 8,753,303 9.20% 68,593,534 6,387,392 9.31%
------------ ----------- ---- ------------ ----------- ----
Total earning assets......... 166,292,751 13,448,692 8.09% 125,545,360 10,103,117 8.05%
Cash and due from banks...... 2,777,906 1,978,163
Allowance for loan losses.... (1,142,571) (829,894)
Other assets................. 4,269,907 2,816,642
------------ ------------
Total assets................... $172,197,993 $129,510,271
============ ============
Liabilities and shareholders'
equity
Interest checking............ $ 8,829,154 224,223 2.54% $ 6,178,914 150,795 2.44%
Money market deposit
accounts................... 1,535,182 38,930 2.54% 1,374,314 34,544 2.51%
Savings accounts............. 42,107,494 1,648,694 3.92% 36,286,047 1,508,194 4.16%
Time deposits................ 69,725,010 3,984,653 5.71% 51,165,128 2,894,233 5.66%
------------ ----------- ---- ------------ ----------- ----
Total interest-bearing
deposits................. 122,196,840 5,896,500 4.83% 95,004,403 4,587,766 4.83%
Short-term borrowings........ 24,007,462 1,355,255 5.65% 17,003,164 955,706 5.62%
Long-term borrowings......... 2,972,603 161,567 5.44% -- -- --
Subordinated debt............ 1,467,123 119,149 8.12% -- -- --
------------ ----------- ---- ------------ ----------- ----
Total interest-bearing
liabilities................ 150,644,028 7,532,471 5.00% 112,007,567 5,543,472 4.95%
Non-interest bearing
deposits................... 9,576,018 7,174,913
Other liabilities............ 2,586,024 2,100,022
Shareholders' equity......... 9,391,923 8,227,769
------------ ------------
Total liabilities and
shareholders' equity......... $172,197,993 $129,510,271
============ ============
Net interest income/rate
spread..................... 5,916,221 3.09% 4,559,645 3.10%
=========== ==== =========== ====
Net interest margin(3)....... 3.44% 3.52%
Average interest earning
assets as a percentage of
average interest-bearing
liabilities................ 110.39% 112.09%
</TABLE>
- ------------------
(1) Interest income on tax-exempt investment securities has not been presented
on a tax equivalent basis.
(2) Includes non-accrual loans of $511,903 and $651,165 on average in 1997 and
1996, respectively.
(3) Net interest margin is calculated as net interest income divided by average
total assets.
8
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MANAGEMENT STRATEGY
The Bank's primary management strategy for 1998 and beyond is to increase
its loan and deposit market shares in the communities it serves and to expand
its branch network to new markets as deemed appropriate. This is accomplished
principally through aggressive pricing, direct marketing efforts of Bank
personnel and use of the media. The Bank plans to open its fourth branch
location (the "Yardley branch") in 1998 in Lower Makefield Township, Bucks
County, Pennsylvania.
The Bank also attempts to maximize its earnings, given its current level of
capital, by borrowing funds and purchasing investment securities (See "Capital
Leverage Strategy"). Management uses appropriate portfolio and asset/liability
management techniques to manage the effects of interest rate volatility on the
Bank's profitability and capital and to maintain asset quality for loans and
investments.
RESULTS OF OPERATIONS
The Company reported net income of $1,340,957 or $.49 diluted earnings per
share for the year ended December 31, 1997. This represents an increase of
$245,322 or 22.4% from the net income of $1,095,635 or $.40 diluted earnings per
share reported in 1996. Return on average assets and return on average
shareholders' equity were .78% and 14.28%, respectively, in 1997 compared with
.85% and 13.32% in 1996.
Results for 1997 reflect a higher net interest income of $5,916,221 in
comparison with $4,559,645 for 1996 resulting principally from growth in
interest earning assets. Results for 1997 also include $400,000 in provision for
loan losses in comparison with $350,000 for 1996. Non-interest income amounted
to $149,927, a decrease of $58,204 from the $208,131 earned in 1996. The
decrease in non-interest income in 1997 as compared with 1996 is primarily due
to lower gains on sales of loans held for sale and losses on the sale of real
estate owned. Non-interest expense amounted to $3,735,191 for 1997, an $848,512
increase over the $2,886,679 reported in 1996. The increase in non-interest
expense in 1997 is primarily due to the opening of the Bank's third branch in
Southampton, Bucks County, Pennsylvania (Southampton branch) in February 1997,
and an increase in lending and operations personnel in conjunction with the
continued growth of the institution.
NET INTEREST INCOME
The Company's profitability, like that of most community financial
institutions, is dependent to a large extent upon its net interest income. Net
interest income depends upon the relative amounts of interest earning assets and
interest-bearing liabilities and the interest rates earned or paid on them and,
the amount of earning assets funded by non-interest-bearing deposits,
liabilities and shareholders' equity. Net interest income is the Company's
primary source of operating income.
The net interest rate spread is the difference between average rates
received on earning assets and average rates paid on interest-bearing
liabilities. Net interest rate margin is net interest income divided by average
assets. Interest rates received and paid on loan and deposit products
respectively, are generally heavily influenced by the overall interest rate
environment and by competition.
Net interest income for 1997 increased $1,356,576 or 29.8% to $5,916,221.
The increase in net interest income is primarily a function of asset growth
rather than rate changes. The increase in net interest income was due to the
$40,747,391 or 32.5% increase in average earning assets combined with a 4 basis
point increase in rate. Average investments and average loans increased
$14,344,375 and $26,552,582, respectively. The average yield on investments was
up 6 basis points while the average rate on loans declined 11 basis points in
1997. On the liability side, average interest-bearing deposits increased
$27,192,437 or 28.6% with no change in average rate while non-interest bearing
deposits increased $2,401,105 or 33.5%. Average borrowings increased $11,444,024
with a corresponding rate increase of 13 basis points in 1997.
9
<PAGE>
The Rate-Volume Analysis table below highlights the impact of changing
rates and volumes on total interest income and interest expense.
RATE VOLUME ANALYSIS OF CHANGES IN NET INTEREST INCOME
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31, 1997 VS. 1996 1996 VS. 1995
-------------------------------- -------------------------------- --------------------------------
VOLUME RATE TOTAL VOLUME RATE TOTAL
---------- ------- --------- ---------- ------- ---------
<S> <C> <C> <C> <C> <C> <C>
Interest income
Fed funds sold...................... $ 17,127 2,821 19,948 (45,079) (12,399) (57,478)
Interest-bearing deposits........... (22,711) (4,280) (26,991) 36,525 (748) 35,777
Investment securities held to
maturity.......................... (78,985) 14,957 (64,028) 380,372 23,762 404,134
Investment securities available for
sale.............................. 1,020,708 30,027 1,050,735 1,101,355 725 1,102,080
Loans............................... 2,446,355 (80,444) 2,365,911 1,711,574 (94,131) 1,617,443
---------- ------- --------- ---------- ------- ---------
Total interest income................... 3,382,494 (36,919) 3,345,575 3,184,747 (82,791) 3,101,956
---------- ------- --------- ---------- ------- ---------
Interest expense
Interest checking................... 67,078 6,350 73,428 35,567 (13,125) 22,442
Money market accounts............... 4,077 309 4,386 (11,622) (7,010) (18,632)
Savings............................. 231,659 (91,159) 140,500 494,672 (68,651) 426,021
Time................................ 1,060,365 30,055 1,090,420 786,957 23,732 810,689
Short-term borrowings............... 395,384 4,165 399,549 638,532 (20,705) 617,827
Long-term borrowings................ 161,567 -- 161,567 -- -- --
Subordinated debt................... 119,149 -- 119,149 -- -- --
---------- ------- --------- ---------- ------- ---------
Total interest expense.................. 2,039,279 (50,280) 1,988,999 1,944,106 (85,759) 1,858,347
---------- ------- --------- ---------- ------- ---------
Net interest income..................... $1,343,215 13,361 1,356,576 1,240,641 2,968 1,243,609
========== ======= ========= ========== ======= =========
</TABLE>
Variances which were not specifically attributed to volume or rate were
allocated proportionately between volume and rate. Non-performing assets are
treated as a change due to rate.
INTEREST INCOME
Total interest income increased $3,345,575 or 33.1% in 1997 to $13,448,692.
Higher average earning asset balances contributed $3,382,494 to interest income
while changes in interest rates on earning assets negatively impacted interest
income by $36,919. Higher average investment and loan balances added $2,446,355
and $941,723, respectively, to interest income in 1997. Lower yields on loans
and interest bearing deposits negatively impacted total interest income by
$80,444 and $4,280, respectively. The yield on earning assets increased 4 basis
points to 8.09% with the average yields on fed funds sold, and investment
securities increasing 23 basis points, and 6 basis points, respectively, during
1997. The yield on interest bearing deposits and loans decreased 62 basis points
and 11 basis points, respectively, during the year.
Non-accrual loans of $497,734 in 1997 and $870,961 in 1996 resulted in the
non-recognition of $51,900 and $80,434 in interest income for the respective
periods. Non-accrual loans are included in the impact of rate changes.
INTEREST EXPENSE
Total interest expense increased $1,988,999 or 35.9% in 1997 to $7,532,471.
A $38,636,461 or 34.5% increase in average interest-bearing liabilities to
$150,644,028 resulted in an increase in interest expense of $2,039,279. Interest
rates on total interest-bearing deposits were unchanged from 1996 at 4.83%.
While the overall rate paid on interest-bearing deposits did not change, the
deposit mix and the rates paid on the different products did change. Average
interest checking accounts increased $2,650,240 or 42.9% to $8,829,154 while the
corresponding rate increased 10 basis points. Average money market balances were
basically unchanged while the average rate increased 3 basis points to 2.54%.
Average savings accounts increased $5,821,447 or 16.0% to $42,107,494 while the
rate declined 24 basis points to 3.92%. The average balance and rate on time
deposits increased $18,559,882 or 36.3% to $69,725,010 and 5 basis points,
respectively. The interest rate on short-term
10
<PAGE>
borrowings was basically unchanged while the average balance increased
$7,004,298 or 41.2% to $24,007,462. Interest expense of $161,567 and $119,149 on
long-term borrowings and subordinated debt, respectively, issued in 1997 were
treated as changes in volume as there were no such borrowings in 1996. Long-term
borrowings are subject to repricing every six months and mature in the year
2002. The subordinated debt reprices annually and matures in the year 2012. The
subordinated debt, which qualifies as Tier II capital, was issued for the
purpose of funding the Bank's growth and maintenance of certain regulatory
capital ratios.
INTEREST RATE SENSITIVITY
As a financial institution, the Company is subject to interest rate risk.
Fluctuations in interest rates will ultimately impact both the level of income
and expense recorded on a large portion of the Bank's assets and liabilities,
and the market value of all interest-earning assets and interest-bearing
liabilities, other than those which possess a short term to maturity. Since all
of the Company's interest-bearing liabilities and virtually all of the Company's
interest-earning assets are located at the Bank, all significant interest rate
risk management procedures are performed at the Bank level. Based upon the
Bank's nature of operations, the Bank is not directly subject to foreign
currency exchange or commodity price risk. At December 31, 1997, the Company
does not have any hedging transactions in place such as interest rate swaps,
caps or floors.
The Bank analyzes interest rate risk/sensitivity through the use of gap
analysis and simulation models. Interest rate risk/sensitivity management seeks
to minimize the effect of interest rate changes on net interest income through
periods of changing interest rates. The Asset/Liability Management Committee
(ALCO) is responsible for managing interest rate risk and for evaluating the
impact of changing interest rate conditions on net interest income and net
income.
Gap analysis measures the difference between volumes of rate sensitive
assets and liabilities and quantifies these repricing differences for various
time intervals. Static gap analysis describes interest rate sensitivity at a
point in time. However, it alone does not accurately measure the magnitude of
changes in net interest income since changes in interest rates do not impact all
categories of assets and liabilities equally or simultaneously nor does it
consider future growth. Interest rate sensitivity analysis also involves
assumptions on certain categories of assets and deposits. For purposes of
interest rate sensitivity analysis, assets and liabilities are stated at either
their contractual maturity, estimated likely call date, or earliest repricing
opportunity. Mortgage-backed securities and amortizing loans are scheduled based
on their anticipated cash flow including estimated prepayments.
Savings accounts, including passbook, statement savings, money market, and
interest checking accounts, do not have a stated maturity or repricing term and
can be withdrawn or repriced at any time. This may impact PBI's margin if more
expensive alternative sources of deposits are required to fund loans or deposit
runoff. Management projects the repricing characteristics of these accounts
based on historical performance and assumptions that it believes reflect their
rate sensitivity.
A positive gap results when the amount of interest rate sensitive assets
exceeds interest rate sensitive liabilities and generally means the institution
will benefit during periods of rising interest rates. A negative gap results
when the amount of interest rate sensitive liabilities exceeds interest rate
sensitive assets and generally means the institution will benefit during periods
of falling interest rates.
11
<PAGE>
The following table depicts the Bank's year end 1997 gap analysis given
management assumptions:
INTEREST RATE SENSITIVITY
<TABLE>
<CAPTION>
WITHIN 4 TO 6 7 MONTHS 1 TO 3 3 TO 5 AFTER
DECEMBER 31, 1997 3 MONTHS MONTHS TO 1 YEAR YEARS YEARS 5 YEARS TOTAL
----------------- ----------- ---------- ---------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Assets
Interest-bearing
deposits............. $ 85,823 -- -- -- -- -- 85,823
Investment
securities........... 16,592,070 5,797,034 15,208,052 10,300,848 5,453,892 24,251,879 77,603,775
Loans.................. 32,637,098 1,972,926 6,950,728 28,437,980 27,353,839 11,180,103 108,532,674
----------- ---------- ---------- ----------- ----------- ----------- -----------
Total rate sensitive
assets................. 49,314,991 7,769,960 22,158,780 38,738,828 32,807,731 35,431,982 186,222,272
=========== ========== ========== =========== =========== =========== ===========
Total cumulative
assets................. 49,314,991 57,084,951 79,243,731 117,982,559 150,790,290 186,222,272
Liabilities
Interest checking,
money market and
savings accounts..... 2,322,663 1,741,994 3,483,989 34,839,892 11,613,299 4,064,654 58,066,491
Time deposits.......... 14,264,074 10,078,857 25,808,896 22,530,489 1,251,043 26,032 73,959,391
Short-term
borrowings........... 14,094,429 97,429 194,858 779,432 779,432 3,897,160 19,842,740
Long-term borrowings... -- -- -- -- 15,000,000 -- 15,000,000
Subordinated debt...... 1,500,000 -- -- -- -- -- 1,500,000
----------- ---------- ---------- ----------- ----------- -----------
Total rate sensitive
liabilities............ 32,181,166 11,918,280 29,487,743 58,149,813 28,643,774 7,987,846 168,368,622
=========== ========== ========== =========== =========== =========== ===========
Total cumulative
liabilities............ 32,181,166 44,099,446 73,587,189 131,737,002 160,380,776 168,368,622
Gap during period........ $17,133,825 (4,148,320) (7,328,963) (19,410,985) 4,163,957 27,444,136
Cumulative gap........... $17,133,825 12,985,505 5,656,542 (13,754,443) (9,590,486) 17,853,650
Cumulative gap as a
percentage of earning
assets................. 9.20% 6.97% 3.04% (7.39)% (5.15)% 9.59%
</TABLE>
Due to the Bank's high growth rate to date, PBI also uses computer based
simulation models to assess the impact of changes in interest rates on net
interest income. The model incorporates management's business plan assumptions
and related asset and liability yields, deposit sensitivity and the size,
composition and maturity or repricing characteristics of the balance sheet. The
assumptions are based on what management believes at that time to be the most
likely interest rate environment. Management also evaluates the impact of higher
and lower interest rates.
Actual results may differ from simulated results due to various factors
including time, magnitude and frequency of interest rate changes, the
relationship or spread between various rates, loan pricing and deposit
sensitivity, and asset/liability strategies. Based on management's estimate of
balance sheet growth and composition and interest rates for the next year, net
interest income in 1998 is expected to increase compared with 1997 net interest
income.
CAPITAL ADEQUACY
A strong capital position is fundamental to support the continued growth
and profitability of the institution. In addition, the Bank is subject to
various regulatory capital requirements as issued by banking regulatory
authorities. Regulatory capital is defined in terms of Tier I capital
(shareholders' equity excluding unrealized gains or losses on available for sale
securities and certain intangible assets), Tier II capital (which includes a
portion of the allowance for loan losses and certain other instruments including
subordinated debt), and total capital (Tier I plus Tier II). Risk-based capital
ratios are expressed as a percentage of risk-weighted assets. Risk-weighted
assets are determined by assigning various weights to all assets and off-balance
sheet arrangements, such as letters of credit and loan commitments, based on
associated risk. Regulators have also adopted minimum Tier I leverage ratio
standards, which measure the ratio of Tier I capital to total assets.
At December 31, 1997, the Bank believes it was in compliance with all
applicable regulatory capital requirements to be classified as "well
capitalized" pursuant to the FDIC regulations. PBI plans to remain "well
capitalized" and manages the Bank accordingly.
12
<PAGE>
The following table depicts the Bank's capital components and ratios along
with the "adequately" and "well" capitalized criteria as defined by the
regulators.
CAPITAL COMPONENTS
<TABLE>
<CAPTION>
DECEMBER 31, 1997 1996
- ------------ ------------ -----------
<S> <C> <C>
Tier I
Shareholders' equity.................................... $ 10,328,646 8,942,793
Intangible assets....................................... -- (24,000)
Net unrealized security gains........................... (52,175) (6,799)
------------ -----------
Total Tier I............................................ 10,276,471 8,911,994
============ ===========
Tier II
Allowable portion of the allowance for loan losses...... 1,360,148 960,672
Allowable portion of subordinated debt.................. 1,500,000 --
------------ -----------
Total Tier II........................................... 2,860,148 960,672
============ ===========
Total capital........................................... 13,136,619 9,872,666
Risk-weighted assets.................................... $120,736,000 90,600,000
</TABLE>
CAPITAL RATIOS
<TABLE>
<CAPTION>
ACTUAL ACTUAL "ADEQUATELY" "WELL"
DECEMBER 31, 1997 1996 CAPITALIZED RATIOS CAPITALIZED RATIOS
- ------------ ------ ------ ------------------ ------------------
<S> <C> <C> <C> <C>
Total risk-based capital/risk-weighted
assets................................... 10.88% 10.90% 8.00% 10.00%
Tier I capital/risk-weighted assets........ 8.51% 9.84% 4.00% 6.00%
Tier I capital/average assets (leverage
ratio)................................... 5.45% 5.80% 4.00% 5.00%
</TABLE>
The future dividend policy of the Company is subject to the discretion of
the Board of Directors and will depend upon a number of factors, including
future earnings, financial conditions, cash needs, and general business
conditions. Holders of common stock will be entitled to receive dividends as and
when declared by the Board of Directors out of funds legally available for that
purpose. The Company is restricted as to the amount of dividends that it can pay
holders of its common stock by virtue of the restrictions on the Bank's ability
to pay dividends to the Company. Payment of dividends by the Bank is subject to
the regulatory restrictions set forth in the Pennsylvania Banking Code of 1965,
the Federal Reserve Act and the Federal Deposit Insurance Corporation Act.
The Pennsylvania Banking Code of 1965 provides that cash dividends may be
declared and paid only out of accumulated net earnings which are $2,384,881 at
December 31, 1997. Cash dividends must be approved by the Federal Reserve Board
if the total of all cash dividends declared by the Bank in any calendar year,
including the proposed cash dividend, exceeds the total of the Bank's net
profits for that year plus its retained net profits from the preceding two years
less any required transfers to surplus or a fund for the retirement of preferred
stock, if any. The Federal Deposit Insurance Corporation Act generally prohibits
all payments of dividends by any bank which is in default of any assessment of
the FDIC. As of December 31, 1997 and 1996, the Bank was not in default of any
FDIC assessments.
As a practical matter, the Company has not nor plans to pay cash dividends
in the foreseeable future. All earnings are being retained to help finance the
continued growth of the institution. The growth rate of the institution
continues to exceed returns on equity. If this trend continues, the Company will
need additional capital. The formation of the holding company in November 1997
was largely for the purpose of providing additional capital raising alternatives
which the Company will
13
<PAGE>
consider in 1998 and beyond. In January 1997, the Bank issued $1,500,000 in
subordinated debt to supplement its Tier II and total capital ratios in order to
remain "well capitalized".
LIQUIDITY
Liquidity represents an institution's ability to generate cash or otherwise
obtain funds at reasonable rates to satisfy commitments to borrowers and demands
of depositors. The Company's primary sources of funds are deposits, proceeds
from principal and interest payments on loans, mortgage-backed securities and
investments, and borrowings. While maturities and scheduled amortization of
loans and investments are a predictable source of funds, deposit flows, loan
prepayments and mortgage-backed securities prepayments are influenced by
interest rates, economic conditions and competition.
The primary asset deployment activities of the Bank are the origination of
loans secured by real estate, and the purchase of mortgage-backed and other
securities. During the year ended December 31, 1997, the Bank's loan portfolio
grew $26,737,265 as compared to an increase of $22,588,404 for the year ended
December 31, 1996. Purchases of mortgage-backed and other securities totaled
$54,644,870 for the year ended December 31, 1997 compared to $60,402,105 for the
year ended December 31, 1996. These activities were funded primarily by deposit
growth and borrowings, principal repayments on loans and mortgage-backed
securities, and by sales and calls of investments. Principal repayments on
mortgage-backed securities totaled $11,673,262 during the year ended December
31, 1997, compared to $10,085,629 for the year ended December 31, 1996.
Investment securities which were called and repaid by the issuer totaled
$3,000,000 and $2,000,000, respectively, during the fiscal years ended December
31, 1997 and 1996.
In addition, the Bank uses overnight fed funds and interest-bearing
deposits in other banks to absorb daily excess liquidity. Conversely, overnight
fed funds may be purchased to satisfy daily liquidity needs. Fed funds are sold
or purchased overnight through a correspondent bank which diversifies the
holdings to an approved group of commercial banks throughout the country.
Deposits increased $25,509,960 and $25,286,040 during the years ended
December 31, 1997 and 1996, respectively. Deposit flows are affected by the
level of interest rates, the interest rates and products offered by local
competitors, and other factors. Certificates of deposit which are scheduled to
mature in one year or less from December 31, 1997 totaled $50,447,768. Based
upon the Company's current pricing strategy and deposit retention experience,
management believes that a significant portion of such deposits will remain with
the Company. Net borrowings increased $12,702,172 during the fiscal year ended
December 31, 1997, with the majority of this growth in borrowings from the FHLB
of Pittsburgh. As part of its master credit agreement, the FHLB maintains a
blanket lien against all assets of the Bank.
Shareholders' equity increased $1,491,044 during the year ended December
31, 1997. The increase was principally attributed to net income of $1,340,957.
Stock options exercised in December 1997 contributed $105,192 to capital.
The Bank is required to maintain a minimum average daily balance of liquid
assets and short-term liquid assets as a percentage of net withdrawable deposit
accounts plus short-term borrowings as defined by the Federal Reserve Board. The
reserve balance maintained in accordance with such requirement was $751,000 as
of December 31, 1997. The Bank was also required to maintain $300,000 on deposit
with its correspondent bank at year end 1997.
The Bank monitors its liquidity position on a daily basis. Excess
short-term liquidity is invested in overnight federal funds sales through its
primary correspondent bank. In the event that the Bank should require funds
beyond its ability to generate them internally, additional sources of funds are
available through the use of one of the following: $2,000,000 unsecured fed
funds line of credit with Atlantic Central Bankers Bank or, the Bank's
$58,704,000 borrowing limit at the FHLB of Pittsburgh. The Bank could also sell
or borrow against investment securities. At December 31, 1997, the Bank had
14
<PAGE>
$27,500,000 in borrowings outstanding at the FHLB of Pittsburgh. The Bank had a
remaining unused borrowing capacity from the FHLB of Pittsburgh of $31,204,000.
In 1998 the Bank plans to exercise the purchase options on its leases for
both its Doylestown and Easton offices. Also, the Bank plans to construct its
Yardley branch on land already owned. Such capital expenditures will aggregate
approximately $2,000,000 in 1998.
CAPITAL LEVERAGE STRATEGY
The Bank intends to maintain its classification as a "well capitalized"
bank as defined by its regulators. Current capital levels exceed all such
regulatory requirements. A portion of this "excess" capital has been temporarily
deployed through the use of a capital leverage strategy whereby the Bank invests
in high quality mortgage-backed securities, municipal, corporate and U.S.
government agency securities ("leverage assets") funded by short and
intermediate term borrowings principally from the FHLB of Pittsburgh. The
capital leverage strategy generates additional earnings for the Company by
virtue of a positive interest rate spread between the yield on the leverage
assets and the cost of the borrowings. This positive spread is created because
the average term to maturity of the leverage assets exceeds that of the
borrowings used to fund their purchase. The net interest income earned on the
leverage strategy would be expected to decline in a rising interest rate
environment. To date, the capital leverage strategy has been undertaken in
accordance with limits established by the Board of Directors, aimed at enhancing
profitability under moderate levels of interest rate exposure.
INVESTMENT SECURITIES
Investment policies, approved annually by PBI's Board of Directors, include
strict standards regarding permissible investment categories, credit quality,
maturity intervals and investment concentrations. The purchasing of specific
investment securities, within such standards, is left to the judgment of
management. At December 31, 1997 and 1996, 84.1% and 87.0%, respectively, of
PBI's investment securities were either issued by U.S. government sponsored
enterprises ("GSE's") or agencies.
Investment securities are classified at the time of purchase by one of
three purposes: trading, available for sale (AFS) or held to maturity (HTM). To
date, the Bank has not purchased any securities for trading purposes. The Bank
usually classifies securities, in particular mortgage-backed securities, as AFS
to provide management the flexibility to sell certain securities and adjust its
balance sheet in response to changing market conditions.
Investments Held to Maturity
Investment securities held to maturity are recorded at amortized cost and
are purchased with the intent and ability to hold to maturity. The majority of
securities included in this portfolio are U.S. government agency bonds with
short term call options embedded. The call options minimize the price
appreciation potential of bonds in a declining interest rate environment. In
exchange for such call provisions, the Bank receives a higher yield on its
investment. In a rising rate environment, calls would generally not be exercised
leaving the Bank with below market investments in its portfolio.
Investments Available for Sale
The Bank usually classifies its investment securities purchased as AFS.
This affords management the flexibility to sell securities in response to
changes in market interest rates and related prepayment risk or in response to
liquidity needs. The AFS portfolio is primarily comprised of mortgage-backed
securities issued by GSE's (FNMA, FHLMC, GNMA) and municipal securities. During
1998 the Bank has also added high quality corporate bonds to its AFS portfolio.
The AFS portfolio also includes certain equity investments which are required of
the Bank as members of the FHLB, Fed, and Atlantic Central Bankers Bank. These
equity securities are reported at cost which approximates fair value.
15
<PAGE>
AFS securities are reported at fair value, with unrealized gains and
losses, net of tax effects, reported as a separate component of shareholders'
equity, with no income statement effect. If interest rates rise, the value of
the investment portfolio would be expected to decrease. If interest rates fall,
the value of the investment portfolio would be expected to increase.
Accordingly, changes in interest rates will impact the valuation of the AFS
portfolio which will change reported shareholders' equity. The effects on
shareholders' equity caused by these unrealized gains and losses in its AFS
portfolio are excluded for regulatory capital purposes.
The tables below depict details of the Bank's investment portfolio:
INVESTMENT SECURITIES
<TABLE>
<CAPTION>
1997
--------------------------------------------------
HELD TO MATURITY AVAILABLE FOR SALE
------------------------ -----------------------
AMORTIZED ESTIMATED AMORTIZED ESTIMATED
COST FAIR VALUE COST FAIR VALUE
----------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
U.S. government agency obligations.................... $11,985,870 11,956,250 -- --
Mortgage-backed securities............................ 3,183,768 3,143,715 50,131,927 50,121,230
State and municipal securities........................ -- -- 10,326,107 10,402,857
Equity securities..................................... -- -- 1,780,050 1,793,050
Other debt securities................................. -- -- 117,000 117,000
----------- ---------- ---------- ----------
Total................................................. $15,169,638 15,099,965 62,355,084 62,434,137
=========== ========== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
1996
--------------------------------------------------
HELD TO MATURITY AVAILABLE FOR SALE
------------------------ -----------------------
AMORTIZED ESTIMATED AMORTIZED ESTIMATED
COST FAIR VALUE COST FAIR VALUE
----------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
U.S. government agency obligations.................... $ 9,977,441 9,830,313 -- --
Mortgage-backed securities............................ 3,910,165 3,846,986 44,212,778 44,190,049
State and municipal securities........................ -- -- 6,662,286 6,695,319
Equity securities..................................... -- -- 1,897,300 1,897,300
Other debt securities................................. -- -- 117,000 117,000
----------- ---------- ---------- ----------
Total................................................. $13,887,606 13,677,299 52,889,364 52,899,668
=========== ========== ========== ==========
</TABLE>
16
<PAGE>
INVESTMENT SECURITIES MATURITIES AND WEIGHTED AVERAGE YIELDS
<TABLE>
<CAPTION>
UNDER OVER 10
DECEMBER 31, 1997 1 YEAR 1-5 YEARS 5-10 YEARS YEARS TOTAL
- ----------------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
INVESTMENT SECURITIES AVAILABLE FOR SALE
Mortgage-backed securities:
Fair value............................... $8,136,630 19,403,808 11,968,055 10,612,737 50,121,230
Weighted average yield................... 7.07% 7.07% 7.05% 7.09% 7.07%
State and municipal securities:
Fair value............................... -- -- -- 10,402,857 10,402,857
Weighted average yield................... -- -- -- 5.32% 5.32%
Equity securities:
Fair value............................... -- -- -- 1,793,050 1,793,050
Weighted average yield................... -- -- -- 6.16% 6.16%
Other debt securities:
Fair value............................... 2,000 15,000 100,000 -- 117,000
Weighted average yield................... 2.00% 3.00% 7.50% -- 6.83%
---------- ---------- ---------- ---------- ----------
TOTAL FAIR VALUE........................... $8,138,630 19,418,808 12,068,055 22,808,644 62,434,137
========== ========== ========== ========== ==========
WEIGHTED AVERAGE YIELD..................... 7.07% 7.07% 7.05% 6.21% 6.75%
INVESTMENT SECURITIES HELD TO MATURITY
U.S. government agency obligations:
Amortized cost........................... $ -- 1,000,000 2,985,870 8,000,000 11,985,870
Weighted average yield................... -- 5.96% 6.46% 7.38% 7.03%
Mortgage-backed securities:
Amortized cost........................... 1,184,645 1,891,861 106,990 272 3,183,768
Weighted average yield................... 6.41% 6.45% 7.12% 6.91% 6.46%
---------- ---------- ---------- ---------- ----------
TOTAL AMORTIZED COST....................... $1,184,645 2,891,861 3,092,860 8,000,272 15,169,638
========== ========== ========== ========== ==========
WEIGHTED AVERAGE YIELD..................... 6.41% 6.28% 6.48% 7.38% 6.93%
</TABLE>
LOANS
Loans are the most significant component of earning assets. Inherent within
the lending function is the evaluation and acceptance of credit risk and
interest rate risk along with the opportunity cost of alternative deployment of
funds. PBI manages credit risk associated with its lending activities through
portfolio diversification, underwriting policies and procedures, and loan
monitoring practices. PBI's commercial lending activity is focused on small
businesses and professionals within the local community. More than 90% of the
loan portfolio is collateralized at least in part by real estate as shown by the
following table:
LOAN PORTFOLIO
<TABLE>
<CAPTION>
DECEMBER 31, 1997 % OF TOTAL 1996 % OF TOTAL
- ------------ ------------ ---------- ----------- ----------
<S> <C> <C> <C> <C>
Real estate-farmland.................... $ 500,000 0.46% $ -- --%
Real estate-construction................ 1,188,288 1.09% 1,952,730 2.35%
Real estate-residential................. 22,965,889 21.10% 19,665,913 23.67%
Real estate-multi-family................ 1,948,943 1.79% 1,137,649 1.37%
Real estate-commercial.................. 72,372,260 66.48% 52,731,559 63.47%
Commercial.............................. 9,084,458 8.35% 6,861,611 8.26%
Consumer installment.................... 797,671 0.73% 735,124 0.88%
------------ ------ ----------- ------
Total................................... $108,857,509 100.00% $83,084,586 100.00%
============ ====== =========== ======
</TABLE>
17
<PAGE>
LOAN MATURITIES AND INTEREST SENSITIVITY
<TABLE>
<CAPTION>
UNDER 1-5 OVER
DECEMBER 31, 1997 1 YEAR YEARS 5 YEARS TOTAL
- ----------------- ----------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
Real estate-farmland................. $ 500,000 -- -- 500,000
Real estate-construction............. 1,188,288 -- -- 1,188,288
Real estate-residential.............. 8,812,860 12,242,768 1,910,261 22,965,889
Real estate-multi-family............. 206,527 1,195,095 547,321 1,948,943
Real estate-commercial............... 12,140,767 54,317,415 5,914,078 72,372,260
Commercial........................... 3,657,673 4,966,674 460,111 9,084,458
Consumer installment................. 343,577 454,094 -- 797,671
----------- ---------- ---------- -----------
Total................................ $26,849,692 73,176,046 8,831,771 108,857,509
=========== ========== ========== ===========
</TABLE>
The following shows the amount of loans due after one year that have fixed,
variable or adjustable interest rates at December 31, 1997:
Loans with fixed predetermined interest rates $69,003,743
Loans with variable or adjustable interest rates $13,004,074
The Bank's real estate loan portfolio, which is concentrated primarily
within the greater Lehigh and Delaware Valleys (Eastern Pennsylvania), is
subject to risks associated with the local economy.
The Bank continues to pursue new commercial banking relationships and to
develop new products to meet the credit needs of the community. The production
of commercial loans is directly related to the number of lenders. Accordingly,
the Bank continues to hire commercial loan officers and plans to add more as
future opportunities exist.
NON-PERFORMING ASSETS
Non-performing assets are defined as accruing loans past due 90 days or
more, non-accruing loans, restructured loans, and other real estate owned.
Non-performing assets represented .67% and .96% of total assets at December 31,
1997 and 1996, respectively.
Non-accrual loans are those on which the accrual of interest has ceased.
Loans are placed on non-accrual status immediately if, in the opinion of
management, collection is doubtful. Interest accrued, but not collected at the
date a loan is placed on non-accrual status, is reversed and charged against
interest income. Subsequent cash receipts are applied either to the outstanding
principal or recorded as interest income, depending on management's assessment
of ultimate collectibility of principal and interest.
Included in the loan portfolio are non-accruing loans of $497,734 and
$870,961 at December 31, 1997 and 1996, respectively. If interest had been
accrued throughout the period on these loans, interest income for the years
ended December 31, 1997 and 1996, would have increased approximately $51,900 and
$80,434, respectively. There was no interest income on these loans included in
net income in 1997. In 1996, $10,101 in interest income was recorded on
non-accrual loans.
Other real estate owned totaled $638,286 at December 31, 1997 and $389,253
at December 31, 1996. This real estate is recorded at the fair value of the
property less estimated costs to sell.
18
<PAGE>
NON-PERFORMING ASSETS
<TABLE>
<CAPTION>
DECEMBER 31, 1997 1996
- ------------ ---------- ---------
<S> <C> <C>
Loans past due 90 days or more and accruing
Real estate-construction.................................. $ 146,492 210,623
Consumer installment...................................... 4,576 820
---------- ---------
Total loans past due 90 days or more and accruing...... 151,068 211,443
Loans accounted for on a non-accrual basis
Real estate-construction.................................. 299,200 299,200
Commercial................................................ 191,534 571,761
Consumer installment...................................... 7,000 --
---------- ---------
Total non-accrual loans................................ 497,734 870,961
Real estate owned......................................... 638,286 389,253
---------- ---------
Total non-performing assets............................ $1,287,088 1,471,657
========== =========
Total as a percentage of total assets....................... 0.67% 0.96%
</TABLE>
ALLOWANCE FOR LOAN LOSSES
The determination of an appropriate level of the allowance for loan losses
is based upon an analysis of the risk inherent in PBI's loan portfolio. Each
loan is assigned a specific loan loss reserve using a scoring system. This
scoring system takes into consideration collateral type and value, loan to value
ratios, the borrower's risk rating and other factors. Borrower risk ratings are
determined by loan officers at the inception of each loan and are subject to
on-going analysis and update. Homogeneous loans, comprised primarily of home
equity and non-real estate secured consumer loans, are analyzed in the
aggregate. Since the Bank is less than six years old with a limited history for
loan losses, management also uses peer group analysis to gauge the overall
reasonableness of its loan loss reserves.
In addition, regulatory authorities, as an integral part of their
examinations, periodically review the allowance for loan losses. They may
require additions to the allowance based upon their judgments about information
available to them at the time of examination.
While the allowance is determined and calculated based on specific loans or
loan categories, the total allowance is considered available for losses in the
entire loan portfolio. While PBI believes that its allowance is adequate to
cover losses in the loan portfolio, there remain inherent uncertainties
regarding future economic events and their potential impact on asset quality.
A loan is considered impaired, based on current information and events, if
it is probable that PBI will be unable to collect the scheduled payments of
principal or interest when due according to the contractual terms of the loan
agreement. The measurement of impaired loans is generally based on the present
value of expected future cash flows discounted at the effective interest rate,
except that all collateral-dependent loans are measured for impairment based on
the fair value of the collateral. At December 31, 1997 and 1996, the recorded
investment in loans for which impairment has been recognized totaled $497,734
and $870,961, respectively, of which $497,734 and $507,140 related to loans with
a corresponding valuation allowance of $50,823 and $126,785, respectively. Most
of the loans identified as impaired are collateral-dependent.
PROVISION FOR LOAN LOSSES
The provision for loan losses represents the amount necessary to be charged
to operations to bring the allowance for loan losses to a level considered
adequate in relation to the risk of inherent losses in the loan portfolio.
Actual loan losses, net of recoveries, serve to reduce the allowance. The
provision was $400,000 in 1997 compared to $350,000 in 1996. Gross charge-offs
for 1997 were $524 versus $127,641 for 1996. Charge-offs in 1996 included
$125,000 pertaining to one borrower.
19
<PAGE>
ALLOWANCE FOR LOAN LOSS ALLOCATION
<TABLE>
<CAPTION>
DECEMBER 31, 1997 1996
- ------------ ------------------------ ----------------------
% OF LOANS % OF LOANS
TO TO
AMOUNT TOTAL LOANS AMOUNT TOTAL LOANS
---------- ----------- -------- -----------
<S> <C> <C> <C> <C>
Balance at end of period applicable to:
Real estate-farmland..................... $ 5,026 0.46% $ -- --
Real estate-construction................. 37,297 1.09% 94,901 2.35%
Real estate-residential.................. 271,697 21.10% 201,055 23.67%
Real estate-multi-family................. 18,785 1.79% 12,690 1.37%
Real estate commercial................... 875,503 66.48% 559,291 63.47%
Commercial............................... 141,718 8.35% 75,866 8.26%
Consumer installment..................... 10,122 0.73% 16,869 0.88%
---------- ------- -------- ------
Total.................................... $1,360,148 100.00% $960,672 100.00%
========== ======= ======== ======
</TABLE>
ALLOWANCE FOR LOAN LOSSES
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1997 1996
- ----------------------- ------------ ----------
<S> <C> <C>
Balance, January 1......................................... $ 960,672 738,313
Charge-offs:
Real estate-commercial................................... -- 125,000
Consumer installment..................................... 524 2,641
------------ ----------
Total charge-offs.......................................... 524 127,641
Provision for loan losses.................................. 400,000 350,000
------------ ----------
Balance, December 31....................................... $ 1,360,148 960,672
============ ==========
Total gross loans
Average.................................................. $ 95,403,549 68,770,995
Year-end................................................. 108,857,509 83,084,586
Ratios
Charge-offs to:
Average loans............................................ -- 0.19%
Loans at year-end........................................ -- 0.15%
Allowance for loan losses................................ 0.04% 13.29%
Provision for loan losses................................ 0.13% 36.47%
Allowance for loan losses to:
Total gross loans at year-end............................ 1.25% 1.16%
Non-performing loans..................................... 209.64% 88.75%
</TABLE>
DEPOSITS
The Bank, a traditional community-based bank, is largely dependent upon its
base of competitively priced core deposits to provide a stable funding source.
The Bank has retained and grown its customer base since inception through a
combination of price, quality service, convenience, and a stable and experienced
staff. Core deposits, which exclude time deposits greater than $100,000, were
$129,528,602 or 90.2% of total deposits at December 31, 1997. Total time
deposits as of December 31, 1997 were $73,959,391 or 51.5% of total deposits, of
which $23,511,623 mature after one year. Depending on market conditions,
management prices its time deposits in an effort to lengthen the maturities of
deposit liabilities beyond one year. Over the twelve month period ending
December 31, 1997, the Bank experienced a strong retention rate on maturing
certificates of deposit.
20
<PAGE>
PBI primarily attracts deposits from within its market area by offering
various deposit products, including demand deposits, interest checking accounts,
money market accounts, savings accounts and time deposits. Recently financial
institutions have been challenged to increase core deposits. Record performance
by the U.S. stock markets and the proliferation of mutual funds have absorbed
much of the domestic savings dollars.
Total deposits increased 21.6% to $143,603,202 at December 31, 1997, from
$118,093,242 at year end 1996. An analysis of the change in average deposits
provides a more meaningful measure of deposit change. Average total deposits
increased $29,593,542 or 29.0% in 1997 and $28,812,824 or 39.3% in 1996. Average
non-interest-bearing deposits increased $2,401,105 or 33.5% to $9,576,018 in
1997 and $2,092,237 or 41.2% in 1996 to $7,174,913. Non-interest-bearing
deposits are an important source of funds for a bank because they lower the
bank's overall deposit costs. Average interest checking accounts increased
$2,650,240 or 42.9% in 1997 to $8,829,154 and $1,421,137 or 29.9% in 1996 to
$6,178,914. Average time deposits increased $18,559,882 or 36.3% in 1997 and
$13,916,606 or 37.4% in 1996, while average money market accounts increased
$160,868 or 11.7% in 1997 and decreased $434,664 or 24.0% in 1996. The yield on
PBI's money market accounts was basically unchanged during 1997. To date, money
market accounts have not been a significant source of funds for the Bank. Time
deposits are generally more sensitive to rising rates as financial institutions
are more likely to increase rates on these deposits as opposed to non-maturity
deposits. Additional deposit growth will be accomplished through deposit
promotions, business development programs and continued branch expansion.
AVERAGE DEPOSITS BY MAJOR CLASSIFICATION
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1997 1996
- ----------------------- ------------------- -------------------
BALANCE RATE BALANCE RATE
------------ ---- ------------ ----
<S> <C> <C> <C> <C>
Non-interest-bearing deposits................. $ 9,576,018 -- $ 7,174,913 --
Interest checking............................. 8,829,154 2.54% 6,178,914 2.44%
Money market deposit accounts................. 1,535,182 2.54% 1,374,314 2.51%
Savings accounts.............................. 42,107,494 3.92% 36,286,047 4.16%
Time deposits................................. 69,725,010 5.71% 51,165,128 5.66%
------------ ---- ------------ ----
Total....................................... $131,772,858 4.45% $102,179,316 4.46%
============ ==== ============ ====
</TABLE>
MATURITY OF TIME DEPOSITS OF $100,000 OR MORE
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1997
- ----------------------- ------------
<S> <C>
Three months or less.......................... $ 5,810,476
Over three through six months................. 1,770,437
Over six through twelve months................ 2,884,071
Over twelve months............................ 3,609,616
------------
Total $ 14,074,600
============
</TABLE>
At year end 1997 time deposits greater than $100,000 included $3,000,000 of
public funds deposits from one municipality which was secured by investment
securities.
21
<PAGE>
NON-INTEREST INCOME COMPARISON
<TABLE>
<CAPTION>
CHANGE
-----------------
1997 1996 AMOUNT %
-------- -------- ------- -------
<S> <C> <C> <C> <C>
Service charges and other fees................. $148,113 126,700 21,413 16.90%
Gain (loss) on sale of investment securities
available for sale........................... 14,818 (5,582) 20,400 365.46%
Gain on sale of loans held for sale............ 20,500 87,013 (66,513) (76.44%)
Loss on sale of real estate owned.............. (33,504) -- (33,504) --
-------- -------- ------- -------
Total non-interest income.................... $149,927 208,131 (58,204) (27.97%)
======== ======== ======= =======
</TABLE>
Total non-interest income was $149,927 in 1997, a $58,204 decrease from the
$208,131 earned in 1996. Income from the sale of loans held for sale was $66,513
lower in 1997. The Bank was engaged in the sale of residential loans for only
five months in 1997 as compared to a full year in 1996. In both years the Bank
engaged outside companies to originate residential mortgages on its behalf and
arrange for the sale of loans with correspondents. In 1997, the Bank also sold
three foreclosed commercial properties with a carrying value of $714,786 for a
loss of $33,504. There were no sales of real estate owned in 1996. Service
charges and other fees increased $21,413 and relate principally to monthly
account maintenance and overdraft charges on deposit transaction accounts. This
increase is a reflection of the 37.3% growth in transaction accounts from
$17,551,169 at December 31, 1996 to $24,092,307 at December 31, 1997. The
Company had net gains of $14,818 from the sale of investment securities
available for sale in 1997 as compared to a net loss of $5,582 in 1996.
NON-INTEREST EXPENSE COMPARISON
<TABLE>
<CAPTION>
CHANGE
---------------
1997 1996 AMOUNT %
---------- ---------- ------- -----
<S> <C> <C> <C> <C>
Salaries and employee benefits................ $1,784,876 1,346,300 438,576 32.6%
Occupancy costs............................... 400,196 282,375 117,821 41.7%
Data processing............................... 381,840 270,477 111,363 41.2%
Professional services......................... 282,449 221,923 60,526 27.3%
Marketing..................................... 163,975 170,834 (6,859) (4.0%)
Amortization of organization costs............ 24,000 72,000 (48,000) (66.7%)
FDIC insurance premiums....................... 14,774 2,000 12,774 638.7%
Pennsylvania shares tax....................... 70,526 63,706 6,820 10.7%
Other......................................... 612,555 457,064 155,491 34.0%
---------- ---------- ------- -----
Total non-interest expense.................... $3,735,191 2,886,679 848,512 29.4%
========== ========== ======= =====
</TABLE>
Total non-interest expense increased $848,512 or 29.4% in 1997 to
$3,735,191 from $2,886,679 in 1996. Much of this increase is directly related to
the opening of the Bank's third full service branch in Southampton in February
1997, an increase in the lending and operations staff, and enhancements to
computer systems. Salaries and benefits expense for 1997 increased $438,576 or
32.6 %, to $1,784,876 from $1,346,300 in 1996 and included the addition of seven
full time equivalent employees. Occupancy expense increased $117,821 or 41.7% in
1997 to $400,196 from $282,375 in 1996. This increase is primarily due to the
additional rent and depreciation of leasehold improvements for the Southampton
location and relocation of the operations center to this facility.
Data processing expense was $381,840 in 1997 and $270,477 in 1996, an
increase of $111,363 or 41.2%. In May 1996, the Bank converted to a different
provider of outsourced data processing. The new system is more expensive and
requires higher cost computer networking and related communications expenses
which were incurred for the full year of 1997. Other data processing cost
increases relate to higher item processing and statement rendering costs
associated with the growth in deposits. Additional expenditures were also
incurred in 1997 as they relate to the relocation of the computer network to the
Southampton operations center, equipping a new branch location, depreciation of
new computer equipment and software, and outsourced network consulting.
22
<PAGE>
Professional services include legal, accounting and consulting expense.
These costs increased $60,526 or 27.3% in 1997, to $282,449. This was partially
due to the increased legal and other expenses related to the formation of the
bank holding company in November 1997. Amortization of the Bank's start-up costs
was completed in April 1997, as compared with a full year's expense in 1996. The
FDIC insurance premium increased to $14,774 in 1997 from $2,000 in 1996, an
increase of $12,774.
Other expenses consist primarily of furniture and equipment expense, loan
and real estate owned expense, employee travel and entertainment, stationary,
supplies and postage. Other expense increased $155,491 to $612,555 in 1997 from
$457,064 in 1996. A portion of this increase is attributed to $41,742 in expense
to maintain real estate owned. Increases of $32,110, $26,754, and $15,823 in
furniture and fixtures, stationary and postage expense, respectively, are
attributed to the growth of the institution.
In 1998, the Bank plans to open its fourth branch, the Yardley branch. This
new branch is expected to increase overhead expenses by approximately $400,000
annually. The actual timing of the branch opening will determine the impact on
overhead expenses in 1998.
INCOME TAXES
Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect of a change in
tax rates on deferred tax assets and liabilities is recognized in income in the
period that includes the enactment date.
Applicable income taxes and effective tax rates were $590,000 or 30.6 % for
1997 compared to $435,462 or 28.4% for 1996. The increase in the effective tax
rate in 1997 is principally due to a decrease in the percentage of income
derived from non-taxable loans and investments, and the end of certain tax
deductible expenses relating to the formation of the Bank in 1992.
IMPACT OF INFLATION AND CHANGING PRICES
The financial statements and notes thereto presented herein have been
prepared in accordance with generally accepted accounting principles, which
generally require the measurement of financial position and operating results in
terms of historical dollars without considering the changes in the relative
purchasing power of money over time due to inflation. The impact of inflation is
reflected in the increased cost of the Bank's operations. Unlike industrial
companies, nearly all of the assets and liabilities of the Bank are monetary in
nature. As a result, interest rates have a greater impact on the Bank's
performance than do the effects of general levels of inflation. Interest rates
do not necessarily move in the same direction or to the same extent as the price
of goods and services.
YEAR 2000
Management is aware of the issues associated with the programming code in
existing computer systems as the millennium (Year 2000) approaches. The
inability of computer systems to properly recognize date sensitive information
when the year changes to 2000 could result in major system failure or
miscalculation.
The Year 2000 issue creates risk for the Company from unforeseen problems
in its own computer systems and from third parties with whom the Company
transacts business. There is also unknown impact on the overall economy from
failures of other companies and industries to successfully address this problem
both nationally and internationally.
23
<PAGE>
The Company outsources much of its data processing to third party
processors including all of its deposit and loan accounting functions. These
third party processors are working on the necessary programming changes to
prepare their systems for the Year 2000 and will absorb most of the direct
programming costs. The Company is monitoring the progress of its processors and
plans to test their systems for Year 2000 compliance in late 1998. The Company
does not expect to incur significant incremental direct expenses related to the
Year 2000, provided that its third party processors are successful in their
efforts. Failure of third party computer systems relative to the Year 2000 would
have a material adverse impact on the Company's ability to conduct its business.
Costs associated with the Year 2000 problem are expected to be expensed as
incurred in compliance with generally accepted accounting principles.
RECENT ACCOUNTING PRONOUNCEMENTS
Reporting Comprehensive Income
In June 1997, the Financial Accounting Standards Board (the "FASB") issued
Statement No. 130, "Reporting Comprehensive Income." This statement establishes
standards for the reporting and display of comprehensive income and its
components in a full set of general-purpose financial statements. Statement No.
130 requires that the components of comprehensive income be reported in a
financial statement that is displayed with the same prominence as other
financial statements. This Statement does not require a specific format for that
financial statement, but requires that an enterprise display an amount
representing comprehensive income for the period in that financial statement.
Statement No. 130 is effective for fiscal years beginning after December 15,
1997. The impact of this Statement on the Company would be to require additional
disclosures in the Company's financial statements.
Operating Segment Disclosure
In June 1997, the FASB issued Statement No. 131, "Disclosures About
Segments of an Enterprise and Related Information." Statement No. 131
establishes standards for the way that public business enterprises report
information about operating segments in annual financial statements and requires
that those enterprises report selected information about operating segments in
interim financial reports issued to shareholders. It also establishes standards
for related disclosures about products and services, geographic areas and major
customers. Statement No. 131 is effective for periods beginning after December
15, 1997. The impact, if any, of the Statement on the Company would be to
require additional disclosures in the Company's financial statements.
Employers' Disclosures about Pension and Other Postretirement Benefits
In February 1998, the FASB issued Statement No. 132, "Employers'
Disclosures about Pensions and Other Postretirement Benefits," which amends the
disclosure requirements of Statement No. 87, "Employers' Accounting for
Pensions," Statement No. 88, "Employers' Accounting for Settlements and
Curtailments of Defined Benefit Pension Plans and for Termination Benefits," and
Statement No. 106, "Employers' Accounting for Postretirement Benefits Other than
Pensions." Statement No. 132 is applicable to all entities. This Statement
standardizes the disclosure requirements of Statement Nos. 87 and 106 to the
extent practicable and recommends a parallel format for presenting information
about pensions and other postretirement benefits. Statement No. 132 only
addresses disclosure and does not change any of the measurement recognition
provisions of Statement Nos. 87, 88, and 106. This Statement is effective for
fiscal years beginning after December 15, 1997. Restatement of comparative
period disclosures is required unless the information is not readily available,
in which case the notes to the financial statements shall include all available
information and a description of information not available. The impact, if any,
of this Statement on the Company would be to require additional disclosures in
the Company's financial statements.
24
<PAGE>
ITEM 7 -- FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
(a) The following audited consolidated financial statements and related
documents are set forth in this Annual Report on Form 10-KSB on the following
pages:
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Auditors.............................. 26
Consolidated Balance Sheets................................. 27
Consolidated Statements of Income........................... 28
Consolidated Statements of Changes in Shareholders'
Equity.................................................... 29
Consolidated Statements of Cash Flows....................... 30
Notes to Consolidated Financial Statements.................. 31
</TABLE>
(b) SUMMARY OF QUARTERLY FINANCIAL DATA
<TABLE>
<CAPTION>
QUARTERS ENDING 1997
----------------------------------------------
DEC 31 SEPT 30 JUNE 30 MARCH 31
---------- --------- --------- ---------
<S> <C> <C> <C> <C>
Interest income........................... $3,685,112 3,519,620 3,233,895 3,010,065
Interest expense.......................... 2,066,718 1,993,421 1,798,756 1,673,576
---------- --------- --------- ---------
Net interest income....................... 1,618,394 1,526,199 1,435,139 1,336,489
Provision for loan losses................. 120,000 105,000 100,000 75,000
Non-interest income....................... 16,183 56,471 37,414 39,859
Non-interest expense...................... 969,556 958,675 934,016 872,944
---------- --------- --------- ---------
Income before income tax.................. 545,021 518,995 438,537 428,404
Income tax expense........................ 150,000 160,000 145,000 135,000
---------- --------- --------- ---------
Net income................................ $ 395,021 358,995 293,537 293,404
========== ========= ========= =========
Basic earnings per share.................. 0.15 0.14 0.11 0.11
</TABLE>
<TABLE>
<CAPTION>
QUARTERS ENDING 1996
----------------------------------------------
DEC 31 SEPT 30 JUNE 30 MARCH 31
---------- --------- --------- ---------
<S> <C> <C> <C> <C>
Interest income........................... $2,825,961 2,622,530 2,406,058 2,248,568
Interest expense.......................... 1,558,278 1,453,354 1,311,562 1,220,278
---------- --------- --------- ---------
Net interest income....................... 1,267,683 1,169,176 1,094,496 1,028,290
Provision for loan losses................. 210,000 62,500 37,500 40,000
Non-interest income....................... 41,188 52,604 42,119 72,220
Non-interest expense...................... 784,005 738,858 703,254 660,562
---------- --------- --------- ---------
Income before income tax.................. 314,866 420,422 395,861 399,948
Income tax expense........................ 52,711 141,000 124,000 117,751
---------- --------- --------- ---------
Net income................................ $ 262,155 279,422 271,861 282,197
========== ========= ========= =========
Basic earnings per share.................. 0.10 0.11 0.10 0.11
</TABLE>
25
<PAGE>
[KMPG Peat Marwick LLP Logo]
1600 Market Street
Philadelphia, PA 19103-7212
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Premier Bancorp, Inc.
We have audited the accompanying consolidated balance sheets of Premier Bancorp,
Inc. and subsidiary as of December 31, 1997 and 1996, and the related
consolidated statements of income, shareholders' equity, and cash flows for the
years then ended. These consolidated financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Premier Bancorp,
Inc. and subsidiary as of December 31, 1997 and 1996, and the results of their
operations and their cash flows for the years then ended in conformity with
generally accepted accounting principles.
[KMPG Peat Marwick LLP Logo]
February 26, 1998
26
<PAGE>
PREMIER BANCORP, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, 1997 1996
- ------------ ------------ ------------
<S> <C> <C>
Assets
Cash and due from banks................................. $ 4,307,164 2,124,076
Interest-bearing deposits............................... 85,823 206,313
Investment securities:
Held to maturity (fair value $15,099,965 in 1997 and
$13,677,299 in 1996)............................... 15,169,638 13,887,606
Available for sale (amortized cost $62,355,084 in 1997
and $52,889,364 in 1996)........................... 62,434,137 52,899,668
Loans held for sale..................................... 197,944 --
Loans receivable (net of allowance for loan losses of
$1,360,148 in 1997 and $960,672 in 1996).............. 107,172,526 81,949,164
Accrued interest receivable............................. 1,451,899 1,115,650
Premises and equipment.................................. 1,174,769 467,073
Real estate owned....................................... 638,286 389,253
Deferred taxes.......................................... 404,906 298,281
Other assets............................................ 486,348 325,704
Organizational costs.................................... -- 24,000
------------ ------------
Total assets............................................ $193,523,440 153,686,788
============ ============
Commitments and contingencies (Note 15)
Liabilities and Shareholders' Equity
Deposits................................................ $143,603,202 118,093,242
Borrowings.............................................. 34,842,740 23,640,568
Accrued interest payable................................ 1,346,123 1,036,884
Other liabilities....................................... 1,797,538 1,973,301
Subordinated debt....................................... 1,500,000 --
------------ ------------
Total liabilities....................................... 183,089,603 144,743,995
Shareholders' equity
Common stock -- $0.33 par value; 30,000,000 shares
authorized; 2,630,340 and 2,604,303 shares issued and
outstanding in 1997 and 1996.......................... 876,780 868,128
Additional paid-in capital.............................. 7,120,001 7,023,942
Retained Earnings....................................... 2,384,881 1,043,924
Unrealized net gain on securities available for sale.... 52,175 6,799
------------ ------------
Total shareholders' equity.............................. 10,433,837 8,942,793
------------ ------------
Total liabilities and shareholders' equity.............. $193,523,440 153,686,788
============ ============
The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
27
<PAGE>
PREMIER BANCORP, INC.
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31, 1997 1996
- -------------------------------- ----------- -----------
<S> <C> <C>
Interest income:
Loans................................................... $ 8,753,303 6,387,392
Federal funds sold and interest bearing deposits........ 96,415 103,458
Investments:
Taxable.............................................. 4,322,401 3,349,885
Tax-exempt........................................... 276,573 262,382
----------- -----------
Total interest income..................................... 13,448,692 10,103,117
----------- -----------
Interest expense:
Deposits................................................ 5,896,500 4,587,766
Borrowings.............................................. 1,635,971 955,706
----------- -----------
Total interest expense.................................... 7,532,471 5,543,472
----------- -----------
Net interest income....................................... 5,916,221 4,559,645
Provision for loan losses................................. 400,000 350,000
----------- -----------
Net interest income after loan loss provision............. 5,516,221 4,209,645
Non-interest income:
Service charges and other fees.......................... 148,113 126,700
Gain (loss) net, on sale of investment securities held
for sale............................................. 14,818 (5,582)
Gain on sale of loans held for sale..................... 20,500 87,013
Loss on sale of real estate owned....................... (33,504) --
----------- -----------
Total non-interest income................................. 149,927 208,131
Non-interest expense:
Salaries and employee benefits.......................... 1,784,876 1,346,300
Occupancy............................................... 400,196 282,375
Data processing......................................... 381,840 270,477
Professional services................................... 282,449 221,923
Marketing............................................... 163,975 170,834
Amortization of organization costs...................... 24,000 72,000
Pennsylvania shares tax................................. 70,526 63,706
Other................................................... 627,329 459,064
----------- -----------
Total non-interest expense................................ 3,735,191 2,886,679
----------- -----------
Income before income tax.................................. 1,930,957 1,531,097
Income tax expense........................................ 590,000 435,462
----------- -----------
Net income................................................ $ 1,340,957 1,095,635
=========== ===========
Earnings per share:
Basic................................................... $ 0.51 0.42
Diluted................................................. 0.49 0.40
Weighted average number of shares outstanding:
Basic................................................... 2,606,473 2,604,303
Diluted................................................. 2,752,462 2,705,831
The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
28
<PAGE>
PREMIER BANCORP, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
-------------------------------------------------------------------
UNREALIZED
NET GAIN (LOSS)
ADDITIONAL RETAINED ON SECURITIES TOTAL
COMMON PAID-IN EARNINGS AVAILABLE SHAREHOLDERS'
STOCK CAPITAL (DEFICIT) FOR SALE EQUITY
-------- ---------- --------- --------------- -------------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1995.... $868,128 7,023,942 (51,711) (9,349) 7,831,010
Change in unrealized net gain
on securities available for
sale........................ -- -- -- 16,148 16,148
Net income for year ended
December 31, 1996........... -- -- 1,095,635 -- 1,095,635
-------- --------- --------- ------ ----------
Balance, December 31, 1996.... 868,128 7,023,942 1,043,924 6,799 8,942,793
======== ========= ========= ====== ==========
Change in unrealized net gain
on securities available for
sale........................ -- -- -- 45,376 45,376
Net income for year ended
December 31, 1997........... -- -- 1,340,957 -- 1,340,957
Fractional shares redeemed.... (27) (454) -- -- (481)
Stock issued for options
exercised................... 8,679 96,513 -- -- 105,192
-------- --------- --------- ------ ----------
Balance, December 31, 1997.... $876,780 7,120,001 2,384,881 52,175 10,433,837
======== ========= ========= ====== ==========
The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
29
<PAGE>
PREMIER BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31, 1997 1996
- -------------------------------- ------------ ------------
<S> <C> <C>
Operating activities:
Net income................................................ $ 1,340,957 1,095,635
Adjustments to reconcile net income to cash provided by
operating activities:
Depreciation expense.................................... 174,031 119,941
Provision for loan losses............................... 400,000 350,000
Writedowns and losses on sale of real estate owned...... 33,504 --
Amortization of organization cost....................... 24,000 72,000
Amortization of premiums and discounts on investment
securities held to maturity............................ 10,694 20,594
Amortization of premiums and discounts on investment
securities available for sale.......................... 203,083 229,949
(Gain) loss on sale of securities available for sale.... (14,818) 5,582
Gain on sale of loans held for sale..................... (20,500) (87,013)
Increase in accrued interest receivable................. (336,249) (289,512)
Increase in deferred tax asset.......................... (130,000) (23,650)
(Increase) decrease in other assets..................... (160,644) 79,606
Increase in deferred loan fees.......................... 150,085 21,314
Increase in accrued interest payable.................... 309,239 54,258
(Increase) decrease in other liabilities................ (149,471) 625,235
Loss on sale of equipment............................... -- 7,563
------------ ------------
Net cash provided by operating activities................... 1,833,911 2,281,502
------------ ------------
Investing activities:
Proceeds from sale of securities available for sale....... 29,024,898 29,732,585
Repayment on securities available for sale................ 10,965,988 9,225,645
Purchase of securities available for sale................. (49,644,870) (54,420,855)
Repayment on securities held to maturity.................. 3,707,274 2,859,984
Purchase of securities held to maturity................... (5,000,000) (5,981,250)
Net increase in loans receivable.......................... (26,737,265) (22,588,404)
Originations of loans held for sale....................... (2,329,594) (6,284,725)
Proceeds from sale of loans held for sale................. 2,152,150 7,334,638
Proceeds from sale of premises and equipment.............. -- 1,350
Proceeds from sale of real estate owned................... 681,282 --
Purchases of premises and equipment....................... (881,727) (293,653)
------------ ------------
Net cash used in investing activities....................... (38,061,864) (40,414,685)
------------ ------------
Financing activities:
Net increase in deposits.................................. 25,509,960 25,286,040
Net increase in borrowings less than 90 days.............. 1,202,172 7,614,454
Increase in borrowings greater than 90 days............... 15,000,000 5,000,000
Repayment of borrowings greater than 90 days.............. (5,000,000) --
Proceeds from subordinated debt........................... 1,500,000 --
Proceeds from exercised stock options..................... 78,900 --
Redemption of fractional shares of common stock........... (481) --
------------ ------------
Net cash provided by financing activities................... 38,290,551 37,900,494
------------ ------------
Increase in cash and cash equivalents....................... 2,062,598 (232,689)
Cash and cash equivalents:
Beginning of period....................................... 2,330,389 2,563,078
------------ ------------
End of year............................................... 4,392,987 2,330,389
============ ============
Composed of:
Cash and due from banks................................... 4,307,164 2,124,076
Interest bearing deposits................................. 85,823 206,313
------------ ------------
Total cash and cash equivalents............................. $ 4,392,987 2,330,389
============ ============
Supplemental disclosures:
Cash payments for:
Interest expense........................................ $ 7,223,232 5,489,214
Taxes................................................... 800,000 442,882
The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
30
<PAGE>
PREMIER BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business
Premier Bancorp, Inc. ("PBI") was incorporated under the laws of the
Commonwealth of Pennsylvania on July 15, 1997. In accordance with this
reorganization, each share of the Bank's common stock previously outstanding was
automatically converted into one share of the Company's common stock. The
Company was reorganized as a one bank holding company of Premier Bank (the
"Bank") on November 17, 1997. Premier Bancorp, Inc. through its subsidiary bank,
Premier Bank, provides a full range of banking services to individual and
corporate customers through its branch banking system located in Bucks and
Northampton Counties in Pennsylvania. Premier Bank is a Pennsylvania chartered
commercial bank and member of the Federal Reserve Bank of Philadelphia (the
"Fed") and the Federal Deposit Insurance Corporation (the "FDIC"). The Bank is
subject to competition from other financial institutions and other financial
services companies with respect to these services and customers. PBI is also
subject to the regulations of certain federal agencies and undergoes periodic
examinations by such regulatory authorities.
Basis of Financial Statement Presentation
The consolidated financial statements include the accounts of PBI and its
wholly owned subsidiary, Premier Bank. Such statements have been prepared in
accordance with generally accepted accounting principles and general practice
within the banking industry. All significant intercompany accounts and
transactions have been eliminated in the consolidated financial statements.
Certain previously reported amounts have been reclassified to conform to current
presentation standards. These reclassifications had no effect on net income.
Use of Estimates
In preparing the consolidated financial statements, management is required
to make estimates and assumptions that affect the reported amounts of assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from such estimates. Material estimates that are particularly susceptible to
significant change in the near term include the determination of the allowance
for loan losses.
Investment Securities
Debt and equity securities are classified as either held to maturity
securities ("HTM") or as available for sale ("AFS") securities. Investment
securities that PBI has the positive intent and ability to hold to maturity can
be classified as held to maturity securities and reported at amortized cost.
Investment securities not classified as held to maturity nor held for the
purpose of trading in the near term are classified as available for sale
securities and reported at fair value, with unrealized gains and losses, net of
tax, excluded from earnings and reported as a separate component of
shareholders' equity. The Bank does not engage in any trading activities.
Management determines the appropriate classification of securities at the time
of purchase.
AFS securities include securities that management intends to use as part of
its asset/liability management strategy and that may be sold in response to
changes in market interest rates and related changes in the securities'
prepayment risk or to meet liquidity needs. The majority of the Company's
investment portfolio is classified as available for sale.
Premiums and discounts on debt securities are recognized in interest income
using a constant yield method. Gains and losses on sales of investment
securities are computed on the specific identification basis and included in
non-interest income based on trade date.
Equity securities are limited to stocks owned in the Federal Reserve Bank
of Philadelphia, the Federal Home Loan Bank of Pittsburgh (the "FHLB") and
Atlantic Central Bankers Bank.
31
<PAGE>
PREMIER BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
Loans
Loans are stated at the principal amount outstanding, net of deferred loan
fees and costs. Interest income is accrued on the principal amount outstanding.
Loan origination fees and related direct costs are deferred and amortized to
income over the term of the respective loan and loan commitment period as a
yield adjustment.
Non-accrual loans are those on which the accrual of interest has ceased.
Commercial loans are generally placed on non-accrual status if, in the opinion
of management, collection is doubtful, or when principal or interest is past due
90 days or more. Interest accrued, but not collected at the date a loan is
placed on non-accrual status, is reversed and charged against interest income.
Subsequent cash receipts are applied either to the outstanding principal or
recorded as interest income, depending on management's assessment of ultimate
collectibility of principal and interest. Loans are returned to an accrual
status when the borrower's ability to make periodic principal and interest
payments has returned to normal (i.e. -- brought current with respect to
principal or interest or restructured) and the paying capacity of the borrower
and the underlying collateral is deemed sufficient to cover principal and
interest. Consumer loans are not automatically placed on non-accrual status when
principal or interest payments are 90 days past due, but; in most instances, are
charged-off when deemed uncollectible or after reaching 120 days past due.
Residential mortgages held for sale are carried at the lower of aggregate
cost or market value. Gains and losses on residential mortgages held for sale
are included in non-interest income. The servicing of such loans is released to
the purchaser upon sale.
Allowance for Loan Losses
The provision for loan losses charged to operating expense reflects the
amount deemed appropriate by management to produce an adequate reserve to meet
the present and foreseeable risk characteristics of the existing loan portfolio.
Management's judgment is based on the evaluation of individual loans, past
experience, the assessment of current economic conditions, and other relevant
factors. Loan losses are charged directly against the allowance for loan losses
and recoveries on previously charged-off loans are added to the allowance.
Significant estimates are made by management in determining the allowance
for loan losses. Consideration is given to a variety of factors in establishing
these estimates including current economic conditions, diversification of the
loan portfolio, delinquency statistics, borrowers' perceived financial and
managerial strengths, the adequacy of underlying collateral, if collateral
dependent, or present value of future cash flows, and other relevant factors.
Since the allowance for loan losses is dependent, to a great extent, on
conditions that may be beyond PBI's control, it is at least reasonably possible
that management's estimates of the allowance for loan losses, and actual results
could differ in the near term.
In addition, regulatory authorities, as an integral part of their
examinations, periodically review the allowance for loan losses. They may
require additions to the allowance based upon their judgments about information
available to them at the time of examination.
Recognition of impairment in the performance of a loan is required when it
is probable that all amounts, including both principal and interest, will not be
collected in accordance with the loan agreement. Impaired loans are measured
based on the present value of expected future cash flows discounted at the
loan's effective interest rate or at the loan's observable market price or the
fair value of the collateral if the loan is collateral dependent. Impairment
criteria are applied to the loan portfolio exclusive of smaller homogeneous
loans such as consumer loans which are evaluated collectively for impairment.
32
<PAGE>
PREMIER BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
Premises and Equipment
Premises and equipment are stated at cost, less accumulated depreciation
and amortization. Depreciation and amortization are calculated on a
straight-line basis over the estimated useful lives of the assets as follows:
leasehold improvements -- lesser of useful life or lease term, equipment -- 5 to
10 years, and software -- 5 years. Expenditures for maintenance and repairs are
charged to operations as incurred. Gains or losses upon disposition are
reflected in earnings as realized. Land is carried at cost.
Real Estate Owned
Other real estate owned is comprised of properties acquired through
foreclosure proceedings or acceptance of a deed in lieu of foreclosure. Other
real estate owned is recorded at the lower of the carrying value of the loan or
the fair value of the property, net of estimated selling costs. Costs relating
to the development or improvement of the properties are capitalized while
holding expenses related to the operation and maintenance of properties are
expensed as incurred. Gains and losses upon disposition are reflected in
earnings as realized.
Income Taxes
PBI and its subsidiary file a consolidated Federal income tax return and
the amount of income tax expense or benefit is computed and allocated on a
separate return basis. To provide for income taxes, PBI uses the asset and
liability method under which deferred tax assets and liabilities are recognized
for the future tax consequences attributable to the difference between the
financial statement carrying amounts of existing assets and liabilities and
their respective tax bases. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered or settled. The
effect of a change in tax rates on deferred tax assets and liabilities is
recognized in income in the period which includes the enactment date.
Stock Options
PBI accounts for its stock option plan in accordance with the provisions of
Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued
to Employees", and related interpretations. As such , compensation expense is
recorded on the date of grant only if the current market price of the underlying
stock exceeded the exercise price. On January 1, 1996, PBI adopted Statement No.
123, "Accounting for Stock-Based Compensation", which permits entities to
recognize as expense over the vesting period, the fair value of all stock-based
awards on the date of grant. Alternatively, Statement No. 123 also allows
entities to continue to apply the provisions of APB Opinion No. 25 and provide
pro forma net income and pro forma earnings per share disclosures for stock
option grants made in 1995 and future years as if the fair-value based method
defined in Statement No. 123 had been applied. PBI has elected to continue to
apply the provisions of APB Opinion No. 25 and provide the pro forma disclosure
provisions of Statement No. 123.
Earnings Per Share
In February 1997, the Financial Accounting Standards Board (the "FASB")
issued Statement No. 128, "Earnings Per Share". Statement No. 128 was designed
to simplify the computation of earnings per share and requires disclosure of
"basic earnings per share" and, if applicable, "diluted earnings per share".
Restatement of all prior period earnings per share data is required upon
adoption. The Statement, which was adopted on December 31, 1997, did not have a
material impact on the reported earnings per share of the Company.
33
<PAGE>
PREMIER BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
Basic earnings per share is calculated on the basis of the weighted average
number of shares outstanding, after giving retroactive effect to the
three-for-one stock split effected on December 31, 1997. Diluted earnings per
common share includes dilutive common stock equivalents as computed under the
treasury stock method using average common stock prices over the fiscal year.
Statement of Cash Flows
Cash and cash equivalents for purposes of this statement consist of cash
and due from banks, interest-bearing deposits, and overnight fed funds sold.
Reporting Comprehensive Income
In June 1997, the FASB issued Statement No. 130, "Reporting Comprehensive
Income". This statement establishes standards for the reporting and display of
comprehensive income and its components in a full set of general-purpose
financial statements. Statement No. 130 requires that the components of
comprehensive income be reported in a financial statement that is displayed with
the same prominence as other financial statements. This Statement does not
require a specific format for that financial statement, but requires that an
enterprise display an amount representing comprehensive income for the period in
that financial statement. Statement No. 130 is effective for fiscal years
beginning after December 15, 1997. The impact of this Statement, if any, on the
Company would be to require additional disclosures in the Company's financial
statements.
Operating Segment Disclosure
In June 1997, the FASB issued Statement No. 131, "Disclosures About
Segments of an Enterprise and Related Information." Statement No. 131
establishes standards for the way that public business enterprises report
information about operating segments in annual financial statements and requires
that those enterprises report selected information about operating segments in
interim financial reports issued to shareholders. It also establishes standards
for related disclosures about products and services, geographic areas and major
customers. Statement No. 131 is effective for periods beginning after December
15, 1997. The impact, if any, of the Statement on the Company would be to
require additional disclosures in the Company's financial statements.
Employers' Disclosures about Pension and Other Postretirement Benefits
In February 1998, the FASB issued Statement No. 132, "Employers'
Disclosures about Pensions and Other Postretirement Benefits," which amends the
disclosure requirements of Statement 87, "Employers' Accounting for Pensions",
Statement No. 88, "Employers' Accounting for Settlements and Curtailments of
Defined Benefit Pension Plans and for Termination Benefits", and Statement No.
106, "Employers' Accounting for Postretirement Benefits Other than Pensions".
Statement No. 132 is applicable to all entities. This Statement standardizes the
disclosure requirements of Statement Nos. 87 and 106 to the extent practicable
and recommends a parallel format for presenting information about pensions and
other postretirement benefits. Statement No. 132 only addresses disclosure and
does not change any of the measurement recognition provisions of Statement Nos.
87, 88, and 106. This Statement is effective for fiscal years beginning after
December 15, 1997. Restatement of comparative period disclosures is required
unless the information is not readily available, in which case the notes to the
financial statements shall include all available information and a description
of information not available. The impact, if any, of this Statement on the
Company would be to require additional disclosures in the Company's financial
statements.
34
<PAGE>
PREMIER BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 2 -- STOCK SPLIT
On December 31, 1997, PBI effected a three-for-one stock split to
shareholders of record as of December 31, 1997 which changed the par value from
$1.00 to $.33 per share. The number of shares and per share amounts have been
restated to reflect this event.
NOTE 3 -- CASH AND DUE FROM BANKS
The Bank is required to maintain certain daily average reserve balances in
accordance with Federal Reserve Board and Atlantic Central Bankers Bank
requirements. The reserve balances maintained in accordance with such
requirements as of December 31, 1997 were $751,000 and $300,000, respectively.
NOTE 4 -- INVESTMENT SECURITIES
The amortized cost and estimated fair values of investment securities at
December 31, 1997 and 1996 were as follows:
<TABLE>
<CAPTION>
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR CARRYING
DECEMBER 31, 1997 COST GAINS LOSSES VALUE VALUE
- ----------------- ----------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
HELD TO MATURITY
Mortgage-backed securities..... $ 3,183,768 384 (40,437) 3,143,715 3,183,768
U.S. government agency
obligations.................. 11,985,870 1,250 (30,870) 11,956,250 11,985,870
----------- ------- -------- ---------- ----------
15,169,638 1,634 (71,307) 15,099,965 15,169,638
AVAILABLE FOR SALE
Mortgage-backed securities..... 50,131,927 113,350 (124,047) 50,121,230 50,121,230
State and municipal
securities................... 10,326,107 80,394 (3,644) 10,402,857 10,402,857
Equity securities.............. 1,780,050 13,000 -- 1,793,050 1,793,050
Other debt securities.......... 117,000 -- -- 117,000 117,000
----------- ------- -------- ---------- ----------
62,355,084 206,744 (127,691) 62,434,137 62,434,137
----------- ------- -------- ---------- ----------
TOTAL INVESTMENT SECURITIES.... $77,524,722 208,378 (198,998) 77,534,102 77,603,775
=========== ======= ======== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR CARRYING
DECEMBER 31, 1996 COST GAINS LOSSES VALUE VALUE
- ----------------- ----------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
HELD TO MATURITY
Mortgage-backed securities..... $ 3,910,165 -- (63,179) 3,846,986 3,910,165
U.S. government agency
obligations.................. 9,977,441 -- (147,128) 9,830,313 9,977,441
----------- ------- -------- ---------- ----------
13,887,606 -- (210,307) 13,677,299 13,887,606
AVAILABLE FOR SALE
Mortgage-backed securities..... 44,212,778 84,412 (107,141) 44,190,049 44,190,049
State and municipal
securities................... 6,662,286 37,967 (4,934) 6,695,319 6,695,319
Equity securities.............. 1,897,300 -- -- 1,897,300 1,897,300
Other debt securities.......... 117,000 -- -- 117,000 117,000
----------- ------- -------- ---------- ----------
52,889,364 122,379 (112,075) 52,899,668 52,899,668
----------- ------- -------- ---------- ----------
TOTAL INVESTMENT SECURITIES.... $66,776,970 122,379 (322,382) 66,576,967 66,787,274
=========== ======= ======== ========== ==========
</TABLE>
35
<PAGE>
PREMIER BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 4 -- INVESTMENT SECURITIES -- (CONTINUED)
The amortized cost and estimated fair value of debt securities AFS and HTM
by contractual maturity at December 31, 1997 are shown in the following table.
Expected maturities will differ from contractual maturities because borrowers
may have the right to call or prepay obligations with or without penalties.
<TABLE>
<CAPTION>
INVESTMENT SECURITIES INVESTMENT SECURITIES
HELD TO MATURITY AVAILABLE FOR SALE
------------------------ -----------------------
AMORTIZED ESTIMATED AMORTIZED ESTIMATED
COST FAIR VALUE COST FAIR VALUE
----------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Due in one year or less............... $ 1,184,645 1,169,742 8,140,367 8,138,630
Due after one year through five
years............................... 2,891,860 2,861,810 19,422,949 19,418,808
Due after five years through ten
years............................... 3,092,861 3,075,644 12,070,609 12,068,055
Due after 10 years.................... 8,000,272 7,992,769 22,721,159 22,808,644
----------- ---------- ---------- ----------
Total................................. $15,169,638 15,099,965 62,355,084 62,434,137
=========== ========== ========== ==========
</TABLE>
Proceeds from sales of investment securities AFS are as follows:
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Proceeds....................................... $29,024,898 29,732,585
Gross gains.................................... 69,028 54,632
Gross losses................................... 54,210 60,214
</TABLE>
NOTE 5 -- LOANS
<TABLE>
<CAPTION>
1997 1996
------------ ----------
<S> <C> <C>
Real estate-farmland........................... $ 500,000 --
Real estate-construction....................... 1,188,288 1,952,730
Real estate-residential........................ 22,965,889 19,665,913
Real estate-multifamily........................ 1,948,943 1,137,649
Real estate-commercial......................... 72,372,260 52,731,559
Consumer....................................... 797,671 735,124
Commercial..................................... 9,084,458 6,861,611
------------ ----------
Total loans.................................... 108,857,509 83,084,586
Unearned income................................ 324,835 174,750
Allowance for loan losses...................... 1,360,148 960,672
------------ ----------
Total loans, net............................... $107,172,526 81,949,164
============ ==========
</TABLE>
Loans secured by real estate totaled $98,975,380 and $75,487,851 at
December 31, 1997 and 1996, respectively, and represented 91% of total loans in
both years. Real estate commercial loans include all loans collateralized at
least in part by commercial real estate. These loans are generally for
commercial real estate investment transactions.
At December 31, 1997, the recorded investment in loans for which impairment
has been recognized totaled $497,734 and $870,961, respectively, of which
$497,734 and $507,140 related to loans with a corresponding valuation allowance
of approximately $50,823 and $126,785. Most of the loans identified as impaired
are collateral-dependent. For the years ended December 31, 1997 and 1996, the
average recorded investment in impaired loans was approximately $502,792 and
$651,165.
36
<PAGE>
PREMIER BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 5 -- LOANS -- (CONTINUED)
No interest income was recognized on these loans in 1997. In 1996, $10,101 of
interest income was recorded on impaired loans. Included within the loan
portfolio are loans on non-accrual status of $497,734 and $870,961 at December
31, 1997 and 1996, respectively. If interest had been accrued throughout the
period, interest income for the years ended December 31, 1997, and 1996, would
have increased approximately $51,900 and $80,434, respectively. There was no
interest income on these loans included in net income in 1997. In 1996, $10,101
in interest income was recorded on non-accrual loans.
PBI generally lends in the Greater Philadelphia region with a majority of
its borrowers living in communities surrounding its three branches. To a large
extent PBI makes loans collateralized at least in part by real estate.
Accordingly, its lending activities could be affected by changes in the general
economy, the regional economy, or real estate values.
NOTE 6 -- ALLOWANCE FOR LOAN LOSSES
Activity in the allowance for loan losses is shown below:
<TABLE>
<CAPTION>
DECEMBER 31, 1997 1996
- ------------ ---------- --------
<S> <C> <C>
Balance at beginning of year................... $ 960,672 738,313
Charge-offs.................................... (524) (127,641)
Provision for loan losses...................... 400,000 350,000
---------- --------
Balance at end of year......................... $1,360,148 960,672
========== ========
</TABLE>
NOTE 7 -- PREMISES AND EQUIPMENT
Premises and equipment, stated at cost less accumulated depreciation and
amortization, are summarized below:
<TABLE>
<CAPTION>
DECEMBER 31, 1997 1996
- ------------ ---------- -------
<S> <C> <C>
Land............................................ $ 254,761 --
Leasehold improvements.......................... 372,883 104,865
Furniture, fixtures and equipment............... 980,128 621,180
---------- -------
Book value...................................... 1,607,772 726,045
Accumulated depreciation and amortization....... 433,003 258,972
---------- -------
Net book value.................................. $1,174,769 467,073
========== =======
</TABLE>
Depreciation and amortization expense on premises and equipment amounted to
$174,031 and $119,941, for the years ended December 31, 1997, and 1996,
respectively.
The Company leases all facilities from which it currently operates. Rental
expense on operating leases amounted to approximately $180,797 and $143,175 for
the years ended December 31, 1997 and 1996, respectively. Most leases have
options for renewal. Required minimum annual rentals due on non-cancelable
leases expiring after one year approximate $238,680 in the aggregate at December
31, 1997. Future minimum annual rental payments due on non-cancelable leases for
each of the years 1998 through 2002 are approximately $183,101, $59,670,
$59,670, $59,670 and $59,670, respectively.
37
<PAGE>
PREMIER BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 8 -- DEPOSITS
<TABLE>
<CAPTION>
DECEMBER 31, 1997 1996
- ------------ -------------------------------- --------------------------------
<S> <C> <C> <C> <C> <C> <C>
WEIGHTED WEIGHTED
AVERAGE AVERAGE
INTEREST % OF INTEREST % OF
RATE AMOUNT TOTAL RATE AMOUNT TOTAL
---- ------------ ------ ---- ------------ ------
Interest checking..................... 2.62% $ 10,847,705 7.56% 2.52% $ 7,341,202 6.22%
Money market.......................... 2.57% 1,667,282 1.16% 2.56% 1,441,254 1.22%
Savings............................... 3.90% 45,551,504 31.72% 4.16% 41,055,794 34.77%
Time.................................. 5.66% 73,959,391 51.50% 5.58% 59,486,279 50.37%
---- ------------ ------ ---- ------------ ------
Total interest bearing deposits..... 4.76% 132,025,882 91.94% 4.80% 109,324,529 92.58%
==== ====
Non-interest bearing deposits......... 11,577,320 8.06% 8,768,713 7.42%
------------ ------ ------------ ------
Total deposits........................ $143,603,202 100.00% $118,093,242 100.00%
============ ====== ============ ======
</TABLE>
Time deposits of less than $100,000 by date of maturity are as follows:
<TABLE>
<CAPTION>
<S> <C>
1998........................................... $39,982,784
1999........................................... 15,211,325
2000........................................... 3,702,313
2001........................................... 514,937
2002........................................... 471,381
2003 and thereafter............................ 2,051
-----------
$59,884,791
===========
</TABLE>
Time deposits of $100,000 or more by date of maturity are as follows:
<TABLE>
<CAPTION>
<S> <C>
1998........................................... $10,464,984
1999........................................... 2,888,738
2000........................................... 519,365
2001........................................... --
2002........................................... 201,513
2003 and thereafter............................ --
-----------
$14,074,600
===========
</TABLE>
Accrued interest payable on deposits amounted to $1,231,662 and $946,105 at
December 31, 1997 and 1996, respectively.
Interest expense on deposits is as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1997 1996
- ------------ ---------- ---------
<S> <C> <C>
Interest checking............................. $ 224,223 150,797
Money Market.................................. 54,087 47,835
Savings....................................... 1,648,694 1,508,191
Time.......................................... 3,969,496 2,880,943
---------- ---------
Total interest expense on deposits............ $5,896,500 4,587,766
========== =========
</TABLE>
38
<PAGE>
PREMIER BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 9 -- BORROWINGS
<TABLE>
<CAPTION>
DECEMBER 31, 1997 1996
- ------------ ---------------------- ----------------------
<S> <C> <C> <C> <C>
WEIGHTED WEIGHTED
AVERAGE AVERAGE
AMOUNT RATE AMOUNT RATE
----------- ---- ----------- ----
Short-term:
Securities sold under agreement to
repurchase (1)........................... $18,345,740 5.54% $2l,973,568 5.70%
Other (2).................................. 1,497,000 6.31% 1,667,000 6.44%
----------- ---- ----------- ----
19,842,740 5.59% 23,640,568 5.75%
Long-term:
Federal Home Loan Bank advances (3)........ 15,000,000 5.42% -- --
----------- ---- ----------- ----
Total borrowings........................... $34,842,740 5.52% $23,640,568 5.75%
=========== ==== =========== ====
</TABLE>
- ------------------
(1) At December 31, 1997 securities sold under agreement to repurchase consisted
of $12,500,000 in borrowings from the Federal Home Loan Bank (the "FHLB")
which mature within 90 days and $5,845,740 in borrowings from customers
which mature overnight. At December 31, 1996 borrowings from the FHLB and
customers were $21,100,000 and $873,568, respectively. All borrowings from
the FHLB are secured by a blanket lien against all of the Bank's assets.
(2) Other consists of overnight borrowings from Atlantic Central Bankers Bank.
(3) Long-term FHLB advances are detailed as follows:
<TABLE>
<CAPTION>
1997 INTEREST
DECEMBER 31, AMOUNT DUE RATE
- ------------ ----------- -------- --------
<S> <C> <C> <C>
Issued 9/25/97.......................... $ 5,000,000 9/25/02 5.45%
Issued 10/17/97......................... 5,000,000 10/17/02 5.47%
Issued 11/19/97......................... 5,000,000 11/19/02 5.34%
-----------
$15,000,000
===========
</TABLE>
The above long-term advances are subject to repricing every six months at
which time the issuer may convert the borrowing to a variable rate if current
rates are higher. Should the issuer convert the borrowing, the Company may
prepay the debt without penalty.
Accrued interest on borrowings amounted to $114,461 and $90,779 at December
31, 1997 and 1996, respectively.
<TABLE>
<CAPTION>
DECEMBER 31, 1997 1996
- ------------ ----------- ----------
<S> <C> <C>
Short-term:
Average balance outstanding.................... $24,007,462 17,003,164
Maximum amount outstanding at any month-end
during the period............................ 31,329,745 17,940,711
Weighted average interest rate during the
period....................................... 5.65% 5.62%
</TABLE>
At December 31, 1997, the Bank has a $2,000,000 unsecured fed funds line of
credit with Atlantic Central Bankers Bank and a $58,704,000 borrowing limit at
the FHLB. At December 31, 1997, the Bank had unused borrowing capacity of
$503,000 and $31,204,000 from Atlantic Central Bankers Bank and the FHLB,
respectively.
39
<PAGE>
PREMIER BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 10 -- SUBORDINATED DEBT
On January 9, 1997, the Bank borrowed $1,500,000 from Pennsylvania National
Bank and Trust Company for the purpose of funding its continued growth and to
assist in the maintenance of certain regulatory capital ratios. The loan is
unsecured and matures on January 12, 2012. The term note carries an annually
adjustable rate based upon the one-year Treasury index plus 240 basis points. At
December 31, 1997 the interest rate on the subordinated debt was 8.01%. The note
requires monthly interest payments for the first ten years with principal
payments beginning in the eleventh year with full amortization by the maturity
date.
NOTE 11 -- EARNINGS PER SHARE
The following is a reconciliation of the numerators and denominators of the
basic and diluted earnings per share calculations.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, 1997
-------------------------------------
PER SHARE
NET INCOME SHARES AMOUNT
----------- ---------- ----------
<S> <C> <C> <C>
Basic earnings per share.............................. $1,340,957 2,606,473 $0.51
Effect of dilutive stock options...................... -- 145,989 --
---------- --------- -----
Diluted earnings per share............................ $1,340,957 2,752,462 $0.49
========== ========= =====
</TABLE>
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, 1996
-------------------------------------
PER SHARE
NET INCOME SHARES AMOUNT
----------- ---------- ----------
<S> <C> <C> <C>
Basic earnings per share.............................. $1,095,635 2,604,303 $0.42
Effect of dilutive securities:
Stock options....................................... -- 101,528 --
---------- --------- -----
Diluted earnings per share............................ $1,095,635 2,705,831 $0.40
========== ========= =====
</TABLE>
Earnings per share was calculated on the basis of weighted average number
of shares after giving retroactive effect to the three-to-one stock split
distributed on December 31, 1997. Options to purchase 662,172 and 476,739 shares
of common stock were outstanding at December 31, 1997 and 1996, respectively.
The dilutive effect of such options using the treasury method was included in
the computation of diluted earnings per share.
NOTE 12 -- INCOME TAXES
The components of the provision for income taxes are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1997 1996
- ----------------------- -------- --------
<S> <C> <C>
Current tax expense............................... $720,000 459,112
Deferred income tax benefit....................... (130,000) (23,650)
-------- --------
Income tax expense................................ $590,000 435,462
======== ========
</TABLE>
40
<PAGE>
PREMIER BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 12 -- INCOME TAXES -- (CONTINUED)
At December 31, 1997 and 1996, the tax effects of temporary differences
that represent the significant portion of deferred tax assets and liabilities
are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1997 1996
- ----------------------- -------- --------
<S> <C> <C>
Deferred tax assets:
Allowance for possible loan loss................ $439,812 303,812
Start-up and organization costs................. 8,217 13,600
Other........................................... 7,509 5,004
-------- --------
Deferred tax assets............................... 455,538 322,416
Deferred tax liabilities:
Unrealized net gain on securities available for
sale......................................... (26,878) (3,503)
Depreciation.................................... (23,754) (20,632)
-------- --------
Net deferred tax asset............................ $404,906 298,281
======== ========
</TABLE>
The realizability of deferred tax assets is dependent upon a variety of
factors, including the generation of future taxable income, the existence of
taxes paid and recoverable, the reversal of deferred tax liabilities and tax
planning strategies. Based upon these and other factors, management believes it
is more likely than not that PBI will realize the benefits of these deferred tax
assets.
A reconciliation of income tax expense in the accompanying statements of
operations with the amount computed by applying the statutory federal income tax
rate to earnings before income taxes is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1997 1996
- ----------------------- -------- --------
<S> <C> <C>
Tax expense at 34% rate........................... $656,525 520,573
Interest from tax exempt loans and investments.... (109,117) (89,784)
Other, net........................................ 42,592 4,673
-------- --------
Income tax expense................................ $590,000 435,462
======== ========
</TABLE>
NOTE 13 -- EMPLOYEE BENEFIT PLANS
PBI maintains a defined contribution savings plan covering substantially
all employees. The plan allows eligible employees to make contributions by
salary reduction pursuant to the provisions of 401(k) of the Internal Revenue
Code. Discretionary matching contributions by the Bank expensed in the financial
statements for 1997 and 1996 were $33,702 and $26,818, respectively.
NOTE 14 -- STOCK OPTIONS
In connection with its initial stock offering, the Bank issued options to
purchase common stock to certain incorporators, directors, officers, and
institutional investors. The options are exercisable at a price of $3.03 per
share and expire April 23, 2002. The options are transferable and contain
certain customary anti-dilution clauses in the case of certain events. At
December 31, 1997 and 1996, 437,307 and 463,344 options were issued and
outstanding, respectively.
In addition, the Bank adopted, in 1995, a stock option program whereby up
to 300,000 options may be granted to employees or directors based on a
discretionary incentive program. The exercise price of options granted under
this program are to be at the fair value of common stock as of the grant date.
Options expire ten years from the date of grant with vesting periods, if any,
determined by the Board of Directors. In January 1996, 13,395 options were
granted under this program at an exercise price of $3.67 per share and were
immediately vested. In January 1997, 211,470 options were granted
41
<PAGE>
PREMIER BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 14 -- STOCK OPTIONS -- (CONTINUED)
under this plan at an exercise price of $5.00 per share of which 130,470 were
immediately vested and 81,000 subject to a four year vesting period.
Stock option activity during the periods indicated is as follows:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
NUMBER OF EXERCISE RANGE OF
OPTIONS PRICE EXERCISE PRICE
--------- --------- --------------
<S> <C> <C> <C>
December 31, 1995............................. 463,344 $3.03 3.03
Granted..................................... 13,395 3.67 --
------- ----- ---------
December 31, 1996............................. 476,739 3.05 3.03-3.67
Granted..................................... 211,470 5.00
Exercised................................... (26,037) 3.03
------- ----- ---------
December 31, 1997............................. 662,172 $3.67 3.03-5.00
======= ===== =========
</TABLE>
At December 31, 1997, the number of options exercisable was 581,172. The
weighted average exercise price of those options was $3.49 per share and the
weighted average remaining contractual life of outstanding options was 5.5
years.
In January 1998, 15,030 incentive options were granted under the 1995 plan
at an exercise price of $6.00 per share expiring January 2008.
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation", provides an alternative method of accounting for
stock-based compensation arrangements. This method is based on the fair value of
the stock-based compensation determined by an option pricing model utilizing
various assumptions regarding the underlying attributes of the options and PBI's
stock, rather than the existing method of accounting for stock-based
compensation which is provided in Accounting Principles Board Opinion No. 25
(APB No. 25), "Accounting for Stock Issued to Employees." The Financial
Accounting Standards Board encourages entities to adopt the fair value based
method, but does not require the adoption of this method.
PBI applies APB No. 25 and related Interpretations in accounting for the
Plan. The fair value of each option grant using the Black-Scholes option pricing
model was $3.45 and $1.91 in 1997 and 1996, respectively. The following
assumptions were used for grants in 1997 and 1996: no dividends for both years;
risk-free interest rates of 6.40% and 6.72% for 1997 and 1996 options,
respectively; and expected lives of ten years for both years. Had compensation
cost for the Plan been determined consistent with Statement No. 123, PBI's net
income and earnings per share would have been reduced to the pro forma amounts
indicated as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1997 1996
- ------------ ---------- ----------
<S> <C> <C>
Net income
As reported................................... $1,340,957 1,095,635
Pro forma..................................... 890,835 1,070,007
Basic earnings per share
As reported................................... 0.51 0.42
Pro forma..................................... 0.34 0.41
Diluted earnings per share
As reported................................... 0.49 0.40
Pro forma..................................... 0.32 0.40
</TABLE>
42
<PAGE>
PREMIER BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 15 -- COMMITMENTS AND CONTINGENCIES
FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
The Bank is a party to financial instruments with off-balance sheet risk in
the normal course of business to meet the financing needs of its customers.
These financial instruments include commitments to extend credit and stand-by
letters of credit. Those instruments involve, to varying degrees, elements of
credit and interest rate risk in excess of the amount recognized in the
statement of financial condition. The contract or notional amounts of those
instruments reflect the extent of involvement the Bank has in particular classes
of financial instruments.
The Bank's exposure to credit loss in the event of nonperformance by the
other party to the financial instrument for commitments to extend credit and
stand-by letters of credit is represented by the contractual or notional amount
of those instruments.
Financial instruments whose contract amounts represent credit risk at
December 31, 1997 and 1996 are as follows:
<TABLE>
<CAPTION>
CONTRACT OR NOTIONAL AMOUNT
----------------------------
1997 1996
------------ ----------
<S> <C> <C>
Commitments to extend credit.................... $10,994,649 7,592,000
Stand-by letters of credit...................... 1,160,062 1,073,000
</TABLE>
Commitments to extend credit are agreements to lend to a customer as long
as there is no violation of any conditions established in the contract. The Bank
evaluates each customer's creditworthiness on a case-by-case basis. The amount
of collateral obtained, if deemed necessary, by the Bank upon extension of
credit is based on management's credit evaluation of the counter-party.
Collateral held varies but may include inventory, property, plant and equipment,
and income producing commercial properties. The commitments at December 31, 1997
were principally to originate commercial loans and other loans secured by real
estate.
Stand-by letters of credit are conditional commitments issued by the Bank
to guarantee the performance of a customer to a third party. Most guarantees
extend for one year or less. The credit risk involved in issuing letters of
credit is essentially the same as that involved in extending loan facilities to
customers.
The amount of collateral received on loan commitments and on stand-by
letters of credit is dependent upon the individual transaction and the
creditworthiness of the customer.
CONCENTRATIONS OF CREDIT RISK
The Bank's loan portfolio represents loans principally made in the Bucks
and Northampton County areas in Pennsylvania which are secured by both
residential and commercial real estate. Accordingly, the Bank's primary
concentration of credit risk is related to the real estate market in the Bucks
and Northampton County areas. The ultimate collectibility of this portion of the
Bank's portfolio is susceptible to changes in local market conditions, and
therefore, dependent upon the local economic environment. In addition, loan
concentrations are also considered to exist when there are amounts loaned or
committed to be loaned to a multiple number of borrowers engaged in similar
activities which would cause their ability to meet contractual obligations to be
similarly impacted by economic or other conditions. Though the Bank views many
of its loans as made to individuals or, secured by residential real estate, the
Bank's loan portfolio contains many borrowers who are employed in various
professions such as, the medical, dental, legal and real estate professions.
43
<PAGE>
PREMIER BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 15 -- COMMITMENTS AND CONTINGENCIES -- (CONTINUED)
LEGAL PROCEEDINGS
As of December 31, 1997, there were no material pending legal proceedings,
other than ordinary routine litigation incidental to the business, to which the
Company or its subsidiary are a party or by which any of their property is in
the subject.
NOTE 16 -- RELATED PARTY TRANSACTIONS
As a matter of policy, the Bank does not extend credit to employees,
officers or directors. The following table presents the amount due from one of
the Bank's directors. This loan was made prior to this individual's election to
the Board of Directors. This loan was made in the ordinary course of business on
substantially the same terms, including interest rates and collateral, as those
prevailing at the time for comparable transactions with other persons. Also,
this loan did not involve a more than normal risk of collectibility or present
any other unfavorable features.
<TABLE>
<CAPTION>
<S> <C>
Balance, December 31, 1996............................... $ 316,158
Repayments............................................... ( 18,744)
---------
Balance, December 31, 1997............................... $ 297,414
=========
</TABLE>
The outstanding loan balance was repaid in January 1998.
The Bank's offices in Doylestown and Easton are owned by Norbuck Associates
(Norbuck), a Pennsylvania limited partnership consisting of several directors of
the Bank. The leases with Norbuck have an initial term expiring December 31,
1998. Rent paid to Norbuck in 1997 and 1996 was $117,368 and $113,954,
respectively.
NOTE 17 -- DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
PBI is required to disclose estimated fair values for its financial
instruments, whether or not recognized in the balance sheet. For PBI, as for
most financial institutions, substantially all of its assets and liabilities are
considered financial instruments.
Estimates of fair value are made at a specific point in time, based upon,
where available, relevant market prices and information about the financial
instrument. Such estimates do not include any premium or discount that could
result from offering for sale at one time the Company's entire holdings of a
particular financial instrument. For a substantial portion of the Company's
financial instruments, no quoted market exists. Therefore, estimates of fair
value are necessarily based on a number of significant assumptions regarding the
amount and timing of estimated future cash flows which are discounted to reflect
varying degrees of risk. Given the uncertainties surrounding these assumptions,
the reported fair values may not represent actual values of financial
instruments that could have been realized as of year-end or that will be
realized in the future. Use of different assumptions or methodologies is likely
to result in significantly different fair value estimates.
The fair value of non-interest bearing demand deposits, interest checking
accounts, money market accounts and savings accounts is equal to the carrying
amount because these deposits have no stated maturity. This approach to
estimating fair value excludes the significant benefit that results from the
low-cost funding provided by such deposit liabilities, as compared to
alternative sources of funding. As a consequence the values below may distort
the actual fair value of a banking organization that is a going concern.
44
<PAGE>
PREMIER BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 17 -- DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS -- (CONTINUED)
The estimated fair values and carrying amounts are summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1997 DECEMBER 31, 1996
-------------------------- -------------------------
ESTIMATED CARRYING ESTIMATED CARRYING
FAIR VALUE AMOUNT FAIR VALUE AMOUNT
------------ ----------- ----------- -----------
<S> <C> <C> <C> <C>
FINANCIAL ASSETS:
Cash and due from banks........... $ 4,307,164 4,307,164 2,124,076 2,124,076
Interest-bearing deposits......... 85,823 85,823 206,313 206,313
Investment securities:
Available for sale.............. 62,434,137 62,434,137 52,899,668 52,899,668
Held to maturity................ 15,099,965 15,169,638 13,677,299 13,887,606
Loans held for sale............... 199,344 197,944 -- --
Net loans......................... 108,225,722 107,172,526 83,824,718 81,949,164
Accrued interest receivable....... 1,451,899 1,451,899 1,115,650 1,115,650
------------ ----------- ----------- -----------
Total financial assets............ $191,804,054 190,819,131 153,847,724 152,182,477
============ =========== =========== ===========
FINANCIAL LIABILITIES:
Deposits with no stated
maturities...................... $ 69,643,811 69,643,811 58,606,963 58,606,963
Deposits with stated maturities... 76,482,989 73,959,391 59,592,618 59,486,279
Borrowings........................ 33,629,286 34,842,740 24,646,883 23,640,568
Subordinated debt................. 1,500,000 1,500,000 -- --
Accrued interest payable.......... 1,346,123 1,346,123 1,036,884 1,036,884
------------ ----------- ----------- -----------
Total financial liabilities....... $182,602,209 181,292,065 143,883,348 142,770,694
============ =========== =========== ===========
</TABLE>
The following methods and assumptions were used to estimate the fair value
of each major classification of financial instruments at December 31, 1997 and
1996.
Cash and due from banks and Federal funds sold: Current carrying amounts
approximate estimated fair value.
Investment securities: Current quoted market prices were used to determine
fair value.
Loans: Fair values were estimated using the present value of the estimated
cash flows, using interest rates currently being offered for loans with similar
terms to borrowers of similar credit quality.
Deposit liabilities: The fair value of deposits with no stated maturity
(i.e. demand deposits, interest checking accounts, money market accounts and
savings accounts) are by definition, equal to the amount payable on demand at
the reporting date (i.e. their carrying amounts). Deposits with a stated
maturity (time deposits) have been valued using the present value of cash flows
discounted at rates approximating the current market for similar deposits.
Borrowings: Borrowings have been valued using the present value of cash
flows discounted at rates approximating the current market for similar
liabilities.
Off-balance-sheet instruments: Off-balance-sheet instruments are primarily
comprised of loan commitments which are generally priced at market at the time
of funding. Fees on commitments to extend credit and standby letters of credit
are deemed to be immaterial and these instruments are expected to be settled at
face value or expire unused. It is impractical to assign any fair value to these
instruments. At December 31, 1997 and 1996 loan commitments were $10,994,649 and
$7,592,000, respectively. Stand-by letters of credit were $1,160,062 and
$1,073,000 at December 31, 1997 and 1996, respectively.
45
<PAGE>
PREMIER BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 18 -- PARENT COMPANY FINANCIAL INFORMATION
CONDENSED STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
DECEMBER 31, 1997 1996
- ------------ ----------- ----------
<S> <C> <C>
Assets
Cash on deposit with subsidiary............................ $ 78,900 --
Investment in subsidiary................................... 10,328,645 8,942,793
Other...................................................... 26,292 --
----------- ----------
Total assets............................................. $10,433,837 8,942,793
=========== ==========
Liabilities and shareholders' equity:
Shareholders' equity:
Common stock............................................... $ 7,996,781 7,892,070
Retained Earnings.......................................... 2,384,881 1,043,924
Unrealized gains on securities available for sale.......... 52,175 6,799
----------- ----------
Total shareholders' equity............................... 10,433,837 8,942,793
----------- ----------
Total liabilities and shareholders' equity................. $10,433,837 8,942,793
=========== ==========
CONDENSED STATEMENT OF OPERATIONS
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31, 1997 1996
- -------------------------------- ----------- ----------
<S> <C> <C>
Equity in undistributed income of subsidiary............... $ 1,340,957 1,095,635
----------- ----------
Other...................................................... 693 --
----------- ----------
Total income............................................... 1,341,650 1,095,635
----------- ----------
Interest Expense........................................... 513 --
Other expenses............................................. 180 --
----------- ----------
Total expense.............................................. 693 --
----------- ----------
Income before taxes........................................ 1,340,957 1,095,635
Income tax expense......................................... -- --
----------- ----------
Net income................................................. $ 1,340,957 1,095,635
=========== ==========
CONDENSED STATEMENTS OF CASH FLOWS
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31, 1997 1996
- -------------------------------- ----------- ----------
<S> <C> <C>
Cash flows from operating activities:
Net income................................................. $ 1,340,957 1,095,635
Deduct items not affecting cash flows:
Equity in undistributed income of subsidiary............. (1,340,957) (1,095,635)
----------- ----------
Net cash provided from operating activities................ -- --
Cash flows from financing activities:
Proceeds from exercised stock options...................... 78,900 --
----------- ----------
Net cash provided from financing activities................ 78,900 --
----------- ----------
Net increase in cash and cash equivalents.................. 78,900 --
Cash and cash equivalents at beginning of year............. -- --
----------- ----------
Cash and cash equivalensts at end of year.................. $ 78,900 --
=========== ==========
</TABLE>
46
<PAGE>
PREMIER BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 19 -- REGULATORY RESTRICTIONS
The Bank is subject to various regulatory capital requirements administered
by the federal banking agencies. Failure to meet minimum capital requirements
can initiate certain mandatory and possibly additional discretionary actions by
regulators that if undertaken, could have a direct material effect on the Bank's
financial statements. Under capital adequacy guidelines and the regulatory
framework for prompt corrective action, the Bank must meet specific capital
guidelines that involve quantitative measures of the Bank's assets, liabilities,
and certain off-balance sheet items as calculated under accounting practices.
The Bank's capital amounts and classification are also subject to qualitative
judgments by the regulators about components, risk weightings, and other
factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain certain minimum amounts and ratios to be considered
adequately capitalized (set forth in the table below). Management believes that
the Bank meets, as of December 31, 1997 and 1996, all capital adequacy
requirements to which it is subject. As of September 30, 1996, the most recent
notification from the Federal Reserve Bank categorized the Bank as well
capitalized under the regulatory framework for prompt corrective action
provisions of Section 3b of the Federal Deposit Insurance Act. There are no
calculations or events since that notification that management believes have
changed the Bank's category. To be categorized as well capitalized, the Bank
must maintain minimum ratios as set forth in the table below.
The Bank's actual capital amounts and ratios are also presented in the
table.
<TABLE>
<CAPTION>
TO BE WELL
CAPITALIZED
FOR CAPITAL UNDER THE CORRECTIVE
ACTUAL ADEQUACY PURPOSES ACTION PROVISION
------------------- ------------------- ---------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
----------- ----- ----------- ----- ------------ ------
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1997:
Total capital to risk-weighted assets..... $13,136,619 10.88% $ 9,658,880 8.00% $12,073,600 10.00%
Tier 1 capital to risk-weighted assets.... 10,276,471 8.51% 4,829,440 4.00% 7,244,160 6.00%
Tier 1 capital to average assets.......... 10,276,471 5.45% 7,536,161 4.00% 9,420,201 5.00%
As of December 31, 1996:
Total capital to risk-weighted assets..... $ 9,872,666 10.90% $ 7,248,000 8.00% $ 9,060,000 10.00%
Tier I capital to risk-weighted assets.... 8,911,994 9.84% 3,624,000 4.00% 5,436,000 6.00%
Tier I capital to average assets.......... 8,911,994 5.80% 6,146,512 4.00% 7,683,139 5.00%
</TABLE>
NOTE 20 -- DIVIDEND POLICY
The future dividend policy of the Company is subject to the discretion of
the Board of Directors and will depend upon a number of factors, including
future earnings, financial conditions, cash needs, and general business
conditions. Holders of common stock will be entitled to receive dividends as and
when declared by the Board of Directors out of funds legally available for that
purpose. The Company is restricted as to the amount of dividends that it can pay
holders of its common stock by virtue of the restrictions on the Bank's ability
to pay dividends to the Company. Payment of dividends by the Bank is subject to
the regulatory restrictions set forth in the Pennsylvania Banking Code of 1965,
the Federal Reserve Act and the Federal Deposit Insurance Corporation Act.
The Pennsylvania Banking Code of 1965 provides that cash dividends may be
declared and paid only out of accumulated net earnings which are $2,384,881 at
December 31, 1997. Cash dividends must be approved by the Federal Reserve Board
if the total of all cash dividends declared by the Bank in any calendar year,
including the proposed cash dividend, exceeds the total of the Bank's net
profits for that year plus its retained net profits from the preceding two years
less any required transfers to surplus or a fund for the retirement of preferred
stock, if any. The Federal Deposit Insurance Corporation Act generally prohibits
all payments of dividends by any bank which is in default of any assessment of
the FDIC. As of December 31, 1997 and 1996, the Bank was not in default of any
FDIC assessments.
47
<PAGE>
ITEM 8 -- CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
None
PART III
ITEM 9 -- DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item, relating to directors, executive
officers, and control persons is set forth in the sections captioned
"Information as to Nominees and Directors" of the Registrant's definitive Proxy
Statement to be used in connection with the 1998 Annual Meeting of Shareholders,
which pages are incorporated herein by reference.
ITEM 10 -- EXECUTIVE COMPENSATION
The information required by Item 10 is incorporated by reference to the
information appearing under the caption "Executive Compensation" in the Proxy
Statement to be used in connection with the 1998 Annual Meeting of Shareholders.
ITEM 11 -- SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by Item 11 is incorporated by reference to the
information appearing under the caption "Beneficial Ownership by Officers,
Directors and Nominees" in the Proxy Statement to be used in connection with the
1998 Annual Meeting of Shareholders.
ITEM 12 -- CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by Item 12 is incorporated by reference to the
information appearing under the caption "Certain Transactions" in the Proxy
Statement to be used in connection with the 1998 Annual Meeting of Shareholders.
48
<PAGE>
PART IV
ITEM 13 -- EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) 1. The consolidated financial statements listed on the index set forth in
Item 8 of this Annual Report on Form 10-KSB are filed as part of this
Annual Report.
2. Financial Statement Schedules
All schedules are omitted because they are either not applicable, the
data are not significant or the required information is shown in the
financial statements or the notes thereto or elsewhere herein.
3. Exhibits
The following exhibits are incorporated by reference herein or annexed to
this Form 10-KSB:
3.1 Articles of Incorporation (Incorporated by reference to Exhibit
3i to the Company's Registration Statement No. 333-34243 on Form
S-4 filed with the Securities and Exchange Commission on August
22, 1997)
3.2 By-Laws (Incorporated by reference to Exhibit 3ii to the
Company's Registration Statement No. 333-34243 on Form S-4 filed
with the Securities and Exchange Commission on August 22, 1997)
10.1 Premier Bank's 1995 Incentive Stock Option Plan (Incorporated by
reference to Exhibit 99.6 to the Company's Registration
Statement No. 333-34243 on Form S-4 filed with the Securities
and Exchange Commission on August 22, 1997)
21.1 Subsidiaries of the Registrant
23.1 Consent of Auditors
27.1 Financial Data Schedule
(b) Reports on Form 8-K
None
49
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities and
Exchange Act of 1934, the Registrant has duly caused this report be signed on
its behalf by the undersigned, thereunto duly authorized.
<TABLE>
<S> <C>
PREMIER BANCORP, INC.
</TABLE>
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
By: /s/ JOHN C. SOFFRONOFF President, Chief Executive Officer, March 27, 1998
- ---------------------------------- (Principal Executive Officer), Director
John C. Soffronoff
By: /s/ BRUCE E. SICKEL Chief Financial Officer, (Principal March 27, 1998
- ---------------------------------- Financial Officer), Director
Bruce E. Sickel
By: /s/ JOANNE M. CALIBEO Controller (Principal Accounting March 27, 1998
- ---------------------------------- Officer)
Joanne M. Calibeo
</TABLE>
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report is signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
By: /s/ JOHN C. SOFFRONOFF President, Chief Executive Officer, March 27, 1998
- ---------------------------------- (Principal Executive Officer), Director
John C. Soffronoff
By: /s/ CLARK S. FRAME Chairman of the Board, Director March 27, 1998
- ----------------------------------
Clark S. Frame
By: /s/ BRUCE E. SICKEL Chief Financial Officer, (Principal March 27, 1998
- ---------------------------------- Financial Officer), Director
Bruce E. Sickel
By: /s/ BARRY J. MILES Director March 27, 1998
- ----------------------------------
Barry J. Miles
By: /s/ DANIEL E. COHEN Director March 27, 1998
- ----------------------------------
Daniel E. Cohen
By: /s/ PETER A. COOPER Director March 27, 1998
- ----------------------------------
Peter A. Cooper
By: /s/ HELEN BETH GAROFALO VILCEK Director March 27, 1998
- ----------------------------------
Helen Beth Garofalo Vilcek
By: /s/ DR. THOMAS E. MACKEL Director March 27, 1998
- ----------------------------------
Dr. Thomas E. Mackel
</TABLE>
50
<PAGE>
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
By: /s/ DR. DANIEL A. NESI Director March 27, 1998
- ----------------------------------
Dr. Daniel A. Nesi
<S> <C> <C>
By: /s/ NEIL NORTON Director March 27, 1998
- ----------------------------------
Neil Norton
By: /s/ THOMAS M. O'MARA Director March 27, 1998
- ----------------------------------
Thomas M. O'Mara
By: /s/ MICHAEL PERRUCCI Director March 27, 1998
- ----------------------------------
Michael Perrucci
By: /s/ BRIAN R. RICH Director March 27, 1998
- ----------------------------------
Brian R. Rich
By: /s/ RICHARD F. RYON Director March 27, 1998
- ----------------------------------
Richard F. Ryon
By: /s/ GERALD SCHATZ Director March 27, 1998
- ----------------------------------
Gerald Schatz
By: /s/ IRVING N. STEIN Director March 27, 1998
- ----------------------------------
Irving N. Stein
By: /s/ THOMAS P. STITT Director March 27, 1998
- ----------------------------------
Thomas P. Stitt
By: /s/ GEORGE H. WETHERILL Director March 27, 1998
- ----------------------------------
George H. Wetherill
By: /s/ JOHN A. ZEBROWSKI Director March 27, 1998
- ----------------------------------
John A. Zebrowski
By: /s/ EZIO ROSSI Director March 27, 1998
- ----------------------------------
Ezio Rossi
</TABLE>
51
<PAGE>
CORPORATE INFORMATION
Annual Meeting
The Annual Meeting of Shareholders of Premier Bancorp, Inc. will be held at
The Barley Sheaf Bed and Breakfast Inn, Route 202, Holicong, PA on May 14, 1998,
at 9:00 a.m.
Transfer Agent
Registrar and Transfer Company
10 Commerce Drive
Cranford, NJ 07016-3572
(800) 368-5948
Form 10-KSB
A copy of Premier Bancorp Inc.'s Annual Report on Form 10-KSB, as filed
with the Securities and Exchange Commission, is available, without charge to
shareholders, by writing John C. Soffronoff, Premier Bancorp, Inc., 379 North
Main Street, Doylestown, PA 18901-0818. The Annual Report and other Company
reports are also filed electronically through the Electronic Data Gathering,
Analysis, and Retrieval System ("EDGAR") which performs automated collection,
validation, indexing, acceptance, and forwarding of submissions to the
Securities and Exchange Commission (SEC) and is accessible by the public using
the Internet at http://www.sec.gov./edgarhp.htm.
Directors of Premier Bancorp, Inc.
<TABLE>
<S> <C>
Mario Andretti* Brian R. Rich
Daniel E. Cohen Ezio U. Rossi
Peter A. Cooper Richard F. Ryon
Clark S. Frame Gerald Schatz
David C. Frame* Bruce E. Sickel
Thomas E. Mackell John C. Soffronoff
Barry J. Miles, Sr. Irving N. Stein
Daniel A. Nesi Thomas P. Stitt
Neil W. Norton HelenBeth Garofalo Vilcek
Thomas M. O'Mara George H. Wetherill
Michael J. Perucci John A. Zebrowski
</TABLE>
- ------------------
*Director Emeritus
Officers of Premier Bancorp, Inc.
Clark S. Frame, Chairman of the Board
Barry J. Miles, Sr., Vice Chairman
John C. Soffronoff, President and Chief Executive Officer
Bruce E. Sickel, Treasurer, Senior Vice President and Chief Financial
Officer
John J. Ginley, Secretary, Senior Vice President and Senior Lending Officer
Executive Management of Premier Bank
John C. Soffronoff, President and Chief Executive Officer
Bruce E. Sickel, Senior Vice President and Chief Financial Officer
John J. Ginley, Senior Vice President and Senior Lending Officer
<PAGE>
Officers of Premier Bank
Anthony Betz, Vice President and Loan Officer -- Easton
Joanne M. Calibeo, Controller
Edward A. Grosik, Vice President and Loan Officer -- Yardley
James P. DeBow, Vice President and Loan Officer -- Southampton
Rose M. DeLaurentis, Vice President and Loan Officer -- Southampton
Suzanne Hartshorne, Vice President and Loan Officer -- Doylestown
Mark Mann, Vice President and Loan Officer -- Doylestown
James A. Miller, Vice President and Loan Officer -- Yardley
Karen D. Moffat, Vice President and Branch Manager -- Doylestown
Stephen A. Patterson, Vice President and Loan Officer -- Easton
Michelle A. Pedersen, Vice President and Loan Officer -- Doylestown
David Grow, Assistant Vice President and Branch Manager -- Easton
Dale O. Smith, Assistant Vice President and Branch Manager -- Southampton
Office Locations
Main Office
379 North Main Street
Doylestown, PA 18901
(215) 345-5100
Karen D. Moffat, Branch Manager
Christopher A. Nardo, Assistant Branch Manager
Easton Office
2201 Northampton Street
Easton, PA 18042
(610) 258-5100
David Grow, Branch Manager
Southampton Office
Southampton Shopping Center
516 Second Street Pike
Southampton, PA 18966
(215) 322-5400
Dale O. Smith, Branch Manager
Elaine Lydon, Assistant Branch Manager
Commercial Loan Office
90 West Afton Avenue, Suite 203
Yardleyville Square
Yardley, PA 19067
(215) 493-9474
<PAGE>
EXHIBIT 3.1
ARTICLES OF INCORPORATION
Incorporated by reference to Exhibit 3i to the Company's Registration
Statement No. 333-34243 on Form S-4 filed with the Securities and Exchange
Commission on August 22, 1997.
<PAGE>
EXHIBIT 3.2
BYLAWS
Incorporated by reference to Exhibit 3ii to the Company's Registration
Statement No. 333-34243 on Form S-4 filed with the Securities and Exchange
Commission on August 22, 1997.
<PAGE>
EXHIBIT 10.1
PREMIER BANK'S 1995 INCENTIVE STOCK OPTION PLAN
Incorporated by reference to Exhibit 99.6 to the Company's Registration
Statement No. 333-34243 on Form S-4 filed with the Securities and Exchange
Commission on August 22, 1997.
<PAGE>
EXHIBIT 21.1
SUBSIDIARIES
<TABLE>
<CAPTION>
NAME STATE OF INCORPORATION
- ---- ----------------------
<S> <C>
Premier Bank Pennsylvania
</TABLE>
<PAGE>
EXHIBIT 23.1
CONSENT OF AUDITORS
The Board of Directors
Premier Bancorp, Inc.
We consent to incorporation by reference in the registration statement (No.
333-34243) on Form S-4 of Premier Bancorp, Inc., of our report dated February
26, 1998, relating to the consolidated balance sheets of Premier Bancorp, Inc.
and subsidiary as of December 31, 1997 and 1996, and the related consolidated
statements of income, shareholders' equity, and cash flows for the years then
ended, which report appears in the December 31, 1997, annual report on Form
10-KSB of Premier Bancorp, Inc.
/s/ KPMG Peat Marwick LLP
March 25, 1998
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C> <C>
<PERIOD-TYPE> 12-MOS 12-MOS
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1996
<PERIOD-END> DEC-31-1997 DEC-31-1996
<CASH> 4,307,164 2,124,076
<INT-BEARING-DEPOSITS> 85,823 206,313
<FED-FUNDS-SOLD> 0 0
<TRADING-ASSETS> 0 0
<INVESTMENTS-HELD-FOR-SALE> 62,434,137 52,899,668
<INVESTMENTS-CARRYING> 15,169,638 13,887,606
<INVESTMENTS-MARKET> 15,099,965 13,677,299
<LOANS> 108,532,674 82,909,836
<ALLOWANCE> 1,360,148 960,672
<TOTAL-ASSETS> 193,523,440 153,686,788
<DEPOSITS> 143,603,202 118,093,242
<SHORT-TERM> 19,842,740 23,640,568
<LIABILITIES-OTHER> 3,143,661 3,010,185
<LONG-TERM> 16,500,000 0
0 0
0 0
<COMMON> 7,996,781 7,892,070
<OTHER-SE> 2,437,056 1,050,723
<TOTAL-LIABILITIES-AND-EQUITY> 193,523,440 153,686,788
<INTEREST-LOAN> 8,753,303 6,387,392
<INTEREST-INVEST> 4,598,974 3,612,267
<INTEREST-OTHER> 96,415 103,458
<INTEREST-TOTAL> 13,448,692 10,103,117
<INTEREST-DEPOSIT> 5,896,500 4,587,766
<INTEREST-EXPENSE> 7,532,471 5,543,472
<INTEREST-INCOME-NET> 5,916,221 4,559,645
<LOAN-LOSSES> 400,000 350,000
<SECURITIES-GAINS> 14,818 (5,582)
<EXPENSE-OTHER> 3,735,191 2,886,679
<INCOME-PRETAX> 1,930,957 1,531,097
<INCOME-PRE-EXTRAORDINARY> 1,930,957 1,531,097
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 1,340,957 1,095,635
<EPS-PRIMARY> .51 .42
<EPS-DILUTED> .49 .40
<YIELD-ACTUAL> 3.09 3.10
<LOANS-NON> 497,734 870,961
<LOANS-PAST> 151,068 211,443
<LOANS-TROUBLED> 0 0
<LOANS-PROBLEM> 497,734 870,961
<ALLOWANCE-OPEN> 960,672 738,313
<CHARGE-OFFS> 524 127,641
<RECOVERIES> 0 0
<ALLOWANCE-CLOSE> 1,360,148 960,672
<ALLOWANCE-DOMESTIC> 1,360,148 960,672
<ALLOWANCE-FOREIGN> 0 0
<ALLOWANCE-UNALLOCATED> 0 0
</TABLE>
