As filed with the Securities and Exchange Commission on December 16, 1998.
Registration No. 333-64885
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
PRE-EFFECTIVE AMENDMENT NO. 2
TO
FORM SB-2
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
PREMIER BANCORP, INC.
----------------------------------------------
(Name of small business issuer in its charter)
Pennsylvania
--------------------------------
(State or jurisdiction of incorporation or organization)
6022
------------------------------
(Primary Standard Industrial Classification Code Number)
23-2921058
------------------
(I.R.S. Employer Identification No.)
379 North Main Street
Doylestown, Pennsylvania 18901
(215) 345-5100
----------------------------------------
(Address and telephone number of principal
executive offices and principal place of business)
John C. Soffronoff, President and CEO
PREMIER BANCORP, INC.
379 North Main Street
Doylestown, Pennsylvania 18901
(215) 345-5100
---------------------------------------
(Name, address and telephone number
of agent for service)
With Copies To:
Nicholas Bybel, Jr., Esquire
SHUMAKER WILLIAMS, P.C.
P.O. Box 88
Harrisburg, Pennsylvania 17108
Approximate date of proposed sale to the public: December 14, 1998 or as
soon as practicable after this Registration Statement becomes effective.
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
<PAGE>
<TABLE>
CALCULATION OF REGISTRATION FEE
<CAPTION>
Title of Each Class Proposed Maximum Proposed Maximum Amount of
of Securities Number of Units/ Offering Price Aggregate Registration
to be Registered Shares to be Registered Per Share(1) Offering Price(1) Fee(2)
<S> <C> <C> <C> <C>
Common Stock
$0.33 par value 500,000 $11.00 $5,500,000 $1,622.50
<FN>
(1) Based upon the maximum offering price in accordance with Rule 457(o).
(2) Registration fee paid by Registrant prior to filing original Registration
Statement on September 30, 1998.
</FN>
</TABLE>
The registrant hereby amends this registration statement on such date or dates
as may be necessary to delay its effective date until the registrant shall file
a further amendment which specifically states that this registration statement
shall thereafter become effective in accordance with section 8(a) of the
Securities Act of 1933 or until the registration statement shall become
effective on such date as the Commission, acting pursuant to said section 8(a),
may determine.
INDEX TO EXHIBITS FOUND ON PAGE 139
PAGE 2 OF 170 SEQUENTIALLY NUMBERED PAGES
<PAGE>
PROSPECTUS
PREMIER BANCORP, INC.
DOYLESTOWN, PENNSYLVANIA
500,000 SHARES OF COMMON STOCK
($0.33 per share par value)
SUBSCRIPTION PRICE: $11.00
OFFERING MINIMUM SUBSCRIPTION: 100 Shares
OFFERING MAXIMUM SUBSCRIPTION: 10,000 Shares
Premier Bancorp, Inc. (the "Company"), is a Pennsylvania business
corporation and a bank holding company registered under the provisions of the
Bank Holding Company Act of 1956, as amended. The Company is the parent company
of Premier Bank (the "Bank"). The Company is hereby offering shares of its
common stock, par value $0.33 per share (herein referred to as the "Shares" or
the "Common Stock") for $11.00 per share (the "Offering Price") in an offering
to the general public. The Shares are being offered by the Company's directors,
officers and employees on a "best-efforts" basis, with no required aggregate
minimum, on the terms and conditions set forth herein. The Company is offering
to the general public in a direct community offering up to a maximum of 500,000
Shares in the aggregate at the Offering Price (the "Offering"). The minimum and
maximum subscriptions for each subscriber in the Offering are 100 Shares and
10,000 Shares, respectively. No fractional Shares will be issued. All
subscriptions will be irrevocable by the subscriber. The Company reserves the
right, to accept subscriptions on a partial basis as well as to reject any
subscription in whole or in part and for any reason, in the event subscriptions
to purchase more than the maximum number of Shares are received. The Company
reserves the right, in its sole discretion, to waive any of the limitations set
forth herein. See PLAN OF DISTRIBUTION.
The Offering will commence on December 14, 1998 or as soon as practicable
after this Registration Statement becomes effective and will terminate at 5:00
p.m. on February 15, 1999, or such later date as shall be determined by the
Company, but in no event later than 5:00 p.m. on March 31, 1999, (the "Offering
Termination Date"). The Company reserves the right to withdraw the Offering at
any time and to terminate this Offering at any time. There is no aggregate
minimum number of Shares that must be sold in order to complete this Offering.
In the event of a withdrawal or termination of the Offering or a rejection
of a subscription, any funds advanced but not accepted will be returned as
promptly as possible of the withdrawal, termination or rejection. Funds returned
will not include interest earned on funds advanced or be reduced to cover
expenses or charges.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION, THE PENNSYLVANIA SECURITIES COMMISSION, OR ANY OTHER STATE
SECURITIES AUTHORITY. NONE OF THE AFOREMENTIONED HAS PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
<TABLE>
<CAPTION>
Price(1) Underwriting Discounts Proceeds to Company(3)(4)
and Commissions(2)
<S> <C> <C> <C>
Per Unit $11 $0 $5,447,000
Total - Maximum (500,000 Shares) $5,500,000 $0 $5,447,000
Total - Minimum (5) (0 Shares) $0 $0 $0
<FN>
(1) See DETERMINATION OF OFFERING PRICE.
(2) The Company has employed no underwriters or selling agents in connection
with the sale of the Shares offered hereby to which compensation would be
payable. The Company is offering the Shares to be sold in the Offering
through the efforts of its directors, officers and employees on a
best-efforts basis. None of these individuals will be entitled to receive
any discounts or commissions for selling such Shares, but each of them may
be reimbursed by the Company for reasonable expenses, if any, incurred in
connection with the sale of the Shares. No Company director, officer or
employee will receive any additional compensation for acting in connection
with the sale of the Shares.
(3) These amounts assume that a maximum of 500,000 Shares are sold. The Board
of Directors of the Company reserves the right to accept individual
subscriptions for less than 100 Shares and individual subscriptions for
more than 10,000 Shares.
(4) After deducting offering expenses incurred by the Company in connection
with the Offering estimated at $53,000. (5) There is no aggregate minimum
number of Shares that must be sold in order to complete the Offering.
</FN>
</TABLE>
The date of this Prospectus is December 14, 1998.
THIS OFFERING INVOLVES A DEGREE OF RISK. Prior to subscribing for Shares
offered hereby, investors should carefully consider the matters set forth under
RISK FACTORS on Pages 1- 5.
<PAGE>
THIS PROSPECTUS CONTAINS ESSENTIAL INFORMATION ABOUT THE COMPANY AND THE
SECURITIES BEING OFFERED HEREBY. PERSONS ARE ADVISED TO READ THIS PROSPECTUS
CAREFULLY PRIOR TO MAKING ANY DECISION TO PURCHASE THESE SECURITIES.
-------------------
NO AGENT, OFFICER OR DIRECTOR OF THE COMPANY OR ANY OTHER PERSON HAS BEEN
AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN
THOSE CONTAINED IN THIS PROSPECTUS, AND IF GIVEN OR MADE, SUCH INFORMATION AND
REPRESENTATIONS SHOULD NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE
COMPANY. THIS PROSPECTUS IS NOT AN OFFER TO SELL OR A SOLICITATION TO BUY ANY
SECURITIES OTHER THAN THOSE SPECIFICALLY OFFERED HEREBY, NOR IS IT AN OFFER OR
SOLICITATION IN ANY JURISDICTION TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE
SUCH AN OFFER OR SOLICITATION IN SUCH JURISDICTION. NEITHER THE DELIVERY OF THIS
PROSPECTUS NOR ANY SALE HEREUNDER SHALL UNDER ANY CIRCUMSTANCES CREATE ANY
IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE
THE DATE HEREOF. HOWEVER, THIS PROSPECTUS WILL BE AMENDED IN THE EVENT THAT
THERE ARE MATERIAL CHANGES, OF WHICH THE COMPANY IS AWARE, DURING THE COURSE OF
THE OFFERING.
-------------------
THE SHARES OF THE COMPANY'S COMMON STOCK OFFERED HEREBY ARE NOT SAVINGS
ACCOUNTS, DEPOSITS OR OTHER OBLIGATIONS OF A BANK OR SAVINGS ASSOCIATION AND ARE
NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY OTHER
GOVERNMENTAL AGENCY. AN INVESTMENT IN THE SHARES OF THE COMPANY'S COMMON STOCK
IS NOT GUARANTEED BY A BANK NOR AN OBLIGATION OF A BANK.
-------------------
THE OFFERING OF SHARES PURSUANT TO THE OFFERING WILL EXPIRE AT 5:00 P.M.,
ON FEBRUARY 15, 1999, UNLESS EXTENDED BY THE COMPANY TO A TIME AND DATE NO LATER
THAN 5:00 P.M. ON MARCH 31, 1999. See TERMS OF THE OFFERING - Subscription
Procedure.
<PAGE>
AVAILABLE INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"SEC") in Washington, D.C., a registration statement under the Securities Act of
1933, as amended, (the "Registration Statement") for the registration of its
Common Stock to be issued in this Offering. This Prospectus is a part of such
Registration Statement. Pursuant to the rules and regulations of the SEC, this
Prospectus omits certain information contained in the Registration Statement.
For additional information pertaining to the Company and the Bank and the
securities to be issued in the Offering, reference is made to such Registration
Statement, including the exhibits thereto. The Registration Statement and
exhibits may be examined during normal business hours at the offices of the
Securities and Exchange Commission, 450 Fifth Street, N.W., Room 1024,
Washington, D.C. 20549, telephone number (202) 272-7450. The Company's
Registration Statement and its exhibits, as well as other documents filed by the
Company with the SEC, can be accessed via the internet by visiting the SEC's
website at http://www.sec.gov.
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and, accordingly, files
reports, proxy statements and other information with the SEC. Such reports,
proxy statements and other information filed with the Commission are available
for inspection and copying at the public reference facilities maintained by the
SEC at Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, and at
the SEC Regional Offices located at Citicorp Center, 500 West Madison Street,
Suite 1400, Chicago, Illinois 60661 and at World Trade Center, Suite 1300, New
York, New York 10048. Copies of such documents may also be obtained from the
Public Reference Section of the SEC at Judiciary Plaza, 450 Fifth Street, N.W.,
Washington, D.C. 20549, at prescribed rates. The Company is an electronic filer
with the SEC. The SEC maintains a website that contains reports, proxy and
information statements and other information regarding registrants that file
electronically with the SEC. The address of the SEC's website is:
http://www.sec.gov.
Upon written or oral request of any person who receives a Prospectus, a
copy of any information incorporated by reference herein (not including the
exhibits to the information that is incorporated by reference, unless such
exhibits are specifically incorporated by reference) may be obtained, without
charge, from Bruce E. Sickel, Chief Financial Officer of Premier Bank and
Treasurer of Premier Bancorp, Inc., 379 North Main Street, Doylestown,
Pennsylvania 18901, (215)345-5100.
FORWARD LOOKING STATEMENTS
From time to time, the Company may publish forward-looking statements
relating to such matters as anticipated financial performance, business
prospects, technological developments, new products, research and development
activities and similar matters. The Private Securities Litigation Reform Act of
1995 provides a safe harbor for forward-looking statements. In order to comply
with the terms of the safe harbor, the Company notes that a variety of factors
could cause the Company's actual results and experience to differ materially
from the anticipated results or other expectations expressed in the Company's
forward-looking statements. The risks and uncertainties that may affect the
operations, performance, development and results of the Company's business
include the following: general economic conditions, including their impact on
capital expenditures; business
<PAGE>
conditions in the banking industry; the regulatory environment; rapidly changing
technology and evolving banking industry standards; competitive factors,
including increased competition with community, regional and national financial
institutions; new service and product offerings by competitors and price
pressures; the inability of the Company to accurately estimate the cost of
systems preparation for Year 2000 compliance; and similar items.
[This Space Intentionally Left Blank]
<PAGE>
PROSPECTUS SUMMARY
The following summary of this Prospectus is provided for your convenience
and is not intended to be complete. This summary is qualified in its entirety by
the detailed information set forth elsewhere in this Prospectus.
The Company
Premier Bancorp, Inc. (the "Company") is a bank holding company
headquartered in Doylestown, Pennsylvania and is the holding company for Premier
Bank (the "Bank"), a Pennsylvania chartered banking institution established in
1990. The Company's consolidated financial condition and results of operations
consist almost entirely of the Bank's financial condition and results of
operations. At September 30, 1998, the Company had total consolidated assets,
deposits and shareholders' equity of $232,557,374, $174,405,400 and $11,135,265,
respectively. See DESCRIPTION OF BUSINESS - Description of the Company.
The principal executive offices of the Company and the Bank are located at
379 North Main Street, Doylestown, Pennsylvania 18901 and the telephone number
is (215) 345-5100.
The Bank
The Bank is a community-oriented financial services provider where
consumers and small business customers can obtain a wide variety of products and
services, including: checking, savings, money market accounts as well as
certificates of deposit, residential mortgage loans, home equity loans and lines
of credit, personal lines of credit, working capital lines, and other commercial
loans. The Bank also offers other services such as electronic banking, cash
management services, safe deposit boxes, telephone banking and automated teller
services. The Bank places an emphasis on serving customer needs by providing
personal attention and service. The Bank's primary service areas are Bucks
County, Pennsylvania and the Lehigh Valley region. Specifically, the main office
of the Bank is located in Doylestown, the county seat of Bucks County. The Bank
conducts business from its main office and two other retail offices located in
Southampton, Bucks County and Easton, Northampton County. In addition, the Bank
has a loan origination office in Yardley, Bucks County. A fourth branch office
in Lower Makefield Township in Bucks County is expected to open during the
fourth quarter of 1998. See DESCRIPTION OF BUSINESS - Description of the Bank.
As of September 30, 1998, the Bank had $227,142,473 in assets, $174,980,426
in deposits and $128,298,723 in net loans. The Bank is a member of the Federal
Reserve System and the Bank's deposits are insured by the Bank Insurance Fund
("BIF") of the Federal Deposit Insurance Corporation ("FDIC") to the fullest
extent provided by law.
<PAGE>
<TABLE>
<CAPTION>
THE OFFERING
<S> <C>
Number of Shares of Common Stock
Authorized and Outstanding............................... Common Stock, par value $0.33 per share;
30,000,000 shares authorized; 2,630,340
shares outstanding as of November 1, 1998.
Number of Shares Offered Hereby............................ 500,000 Shares of Common Stock.
Offering Price............................................. $11.00 per share for the Offering. See
---
DETERMINATION OF OFFERING
PRICE and MARKET FOR COMMON
STOCK AND RELATED
STOCKHOLDER MATTERS.
Use of Proceeds............................................ The Company will use the net proceeds for
general corporate purposes, including
investments in or advances to the Bank to
increase the Bank's capital position in order to
allow the Bank to provide for higher per
borrower lending limits, permitting the Bank
to make larger loans and increase the Bank's
lending activity. In addition, these proceeds
may be used to support the continuing
development of the Bank's franchise through
possible expansion into related businesses.
See USE OF PROCEEDS.
---
Offering................................................... The Company is offering up to 500,000
Shares, directly to the public. There is a
minimum required subscription of 100 Shares
in the Offering. There also is a maximum
subscription of 10,000 Shares in the Offering.
See TERMS OF THE OFFERING - Subscription Procedure.
---
Expiration of Offering..................................... The Offering will expire at 5:00 p.m.
on February 15, 1999, and may
be extended to a time and date no later than
5:00 p.m. on March 31, 1999. See TERMS
OF THE OFFERING - Subscription Procedure.
<PAGE>
Rejection of Subscriptions................................. The Company reserves the right to reject any
subscription, in whole or in part, for any
reason including for the reason that the
Company has already accepted subscriptions
for 500,000 Shares and for the reason that the
Company believes that other subscribers will
be more likely to direct business to the Bank.
Decisions regarding the acceptance or
rejection of a subscription shall be made
within 15 days of receipt by the Company of a
properly executed Subscription Agreement
accompanied by payment in full of the
subscription price. In the event of a rejection
of a subscription, any funds advanced but not
accepted will be returned as promptly as
possible. Funds returned will not include
interest earned on funds advanced or be
reduced to cover expenses or charges. See
---
PLAN OF DISTRIBUTION and TERMS
OF THE OFFERING.
Dilution and Effect of Offering on
Book Value of Common Stock............................... As of September 30, 1998, the Company had
2,630,340 shares of Common Stock issued
and outstanding. As of September 30, 1998
the Company had total equity capital of
$11,135,265 and a book value of $4.23 per
share. In the event all 500,000 Shares of
Common Stock offered hereby are sold at the
Offering Price of $11.00 per Share, the capital
of the Company will increase, after payment
of anticipated expenses associated with the
Offering, by an aggregate of approximately
$5,447,000. The book value per share will
increase by $1.07 per share to $5.30; however,
there will be an immediate dilution of book
value to investors of $5.70 per share. There
can be no assurance, however, that all or any
Shares will be sold in the Offering. An
existing shareholder who does not purchase
shares in the Offering will experience a
dilution in his/her stock ownership because
such shareholder's comparative percentage of
the issued and outstanding Common Stock of
the Company will be reduced.
</TABLE>
<PAGE>
SUMMARY OF SELECTED CONSOLIDATED FINANCIAL DATA
AND OTHER INFORMATION
The following is a summary of selected consolidated financial data and
other information for the Company at and for each of the indicated two years
ended December 31, 1997 and 1996, respectively, and at and for the nine month
periods ended September 30, 1998 and 1997. The selected consolidated financial
statements include the accounts of Premier Bancorp, Inc. and its wholly-owned
subsidiaries: Premier Bank and PBI Capital Trust. All material intercompany
balances and transactions have been eliminated. The following financial data is
qualified by reference to the more detailed information contained in the
consolidated financial statements and notes thereto included elsewhere herein.
See INDEX TO CONSOLIDATED FINANCIAL STATEMENTS. Results for the periods ended
September 30, 1998 and 1997, respectively, are not necessarily indicative of the
results of operations that may be expected for the entire year.
<PAGE>
<TABLE>
<CAPTION>
SELECTED CONSOLIDATD FINANCIAL DATA
AND OTHER INFORMATION
(in 000's except per share data and percentages)
At or For the 9 Month Period Ended At or For the Year Ended
September 30 December 31
------------ -----------
1998 1997 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Total Interest Income $ 11,920 9,764 13,448 10,103
Total Interest Expense 6,569 5,466 7,532 5,543
----- ----- ----- -----
Net Interest Income 5,351 4,298 5,916 4,560
Provision for Loan Losses 355 280 400 350
Total Non-Interest Income 233 134 150 208
Total Non-Interest Expense 3,473 2,766 3,735 2,887
----- ----- ----- -----
Net Income Before Income Taxes 1,756 1,386 1,931 1,531
Provision for Income Taxes 575 440 590 435
--- --- --- ---
Net Income 1,181 946 1,341 1,096
PER SHARE AND SHARE DATA (1):
Earnings Per Share-Basic $ 0.45 0.36 0.51 0.42
Earnings Per Share-Diluted 0.40 0.35 0.49 0.40
Book Value Per Share at End of Period 4.23 3.82 3.97 3.43
Average Basic Shares 2,630 2,604 2,606 2,604
Average Diluted Shares 2,919 2,738 2,752 2,706
BALANCE SHEET DATA:
Loans, Net of Unearned Income $ 129,954 102,265 108,533 82,910
Investment Securities Available For Sale 83,535 61,073 62,434 52,900
Investment Securities Held to Maturity 9,854 13,346 15,170 13,888
Total Assets 232,557 184,575 193,523 153,687
Deposits 174,405 140,789 143,603 118,093
Borrowings 27,655 30,817 36,343 23,641
Shareholders' Equity 11,135 9,946 10,434 8,943
AVERAGE BALANCE SHEET DATA:
Loans, Net of Unearned Income $ 117,936 91,764 95,146 68,594
Investment Securities 77,408 67,727 69,352 55,007
Interest Earning Assets 198,953 161,072 166,293 125,545
Total Assets 205,619 166,737 172,198 129,510
Deposits 163,790 128,129 131,773 102,179
Borrowings 25,908 26,944 28,447 17,003
Shareholders' Equity 10,861 9,200 9,392 8,228
PERFORMANCE RATIOS :
Return on Average Assets (4) 0.77% 0.76% 0.78% 0.85%
Return on Average Stockholders' Equity (4) 14.53% 13.75% 14.28% 13.32%
Net Interest Margin (2)(4) 3.60% 3.57% 3.56% 3.63%
Efficiency Ratio (3) 62.20% 62.27% 61.57% 60.55%
Number of Full Service Branches 3 3 3 2
ASSET QUALITY RATIOS:
Allowance for Loan Losses to Non-performing Loans 135.16% 241.59% 209.64% 88.75%
Allowance for Loan Losses to Total Loans 1.27% 1.21% 1.25% 1.16%
Non-performing Assets to Total Assets 0.84% 0.83% 0.67% 0.96%
Net Charge-offs to Average Loans 0.05% -- 0.00% 0.19%
CAPITAL RATIOS:
Stockholders' Equity to Total Assets 4.79% 5.39% 5.39% 5.82%
Tier 1 Risk-Based Capital 8.77% 8.70% 8.60% 9.84%
Total Risk-Based Capital 14.07% 11.11% 10.97% 10.90%
Tier 1 Leverage 7.02% 5.39% 5.51% 5.80%
<FN>
(1) Per share information for all periods has been restated to reflect a
3-for-1 stock split effective December 31, 1997 which increased total
shares outstanding to 2,630,340.
(2) Net interest income divided by average interest-earning assets.
(3) Non-interest expense divided by the sum of net interest income and
non-interest income.
(4) Interim periods have been annualized.
</FN>
</TABLE>
<PAGE>
PREMIER BANCORP, INC.
Premier Bancorp, Inc. (the "Company") is a bank holding company registered
under the provisions of the Bank Holding Company Act of 1956, as amended. The
Company was incorporated under the business corporation law of the Commonwealth
of Pennsylvania on July 15, 1997 and reorganized on November 17, 1997 as a
one-bank holding company. It is headquartered in Doylestown, Pennsylvania. The
Company has one subsidiary, Premier Bank (the "Bank").
The Company's and the Bank's principal executive offices are located at 379
North Main Street, Doylestown, Pennsylvania 18901; telephone number: (215)
345-5100. For further information about the Company, the Bank, its officers and
directors, and their operations, see the captions entitled DIRECTORS, EXECUTIVE
OFFICERS, PROMOTERS AND CONTROL PERSONS, MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS, and DESCRIPTION OF BUSINESS
appearing elsewhere in this Prospectus.
RISK FACTORS
Investment in the Common Stock involves a degree of risk. There is no
assurance of receiving any specific rate of return on the Common Stock. Money
invested in the purchase of the Common Stock, unlike money deposited with the
Bank, is not and will not be insured by the FDIC. Funds invested in Common Stock
will not earn interest. In considering an investment in the Common Stock,
prospective investors should carefully consider the following factors among
others described in this Prospectus.
Dependence on Key Personnel. The business success of the Company and the
Bank has depended, and will continue to depend, to a great extent upon the
services of John C. Soffronoff, Bruce E. Sickel and John J. Ginley as officers
and/or Directors of the Bank and Company. In order to mitigate this risk, the
Company, the Bank and these three individual executive officers (the
"Executives") entered into Change of Control Agreements. The Agreements define
certain severance benefits that will be paid by the Company and the Bank to the
Executives in the event of a change of control. The Bank employs approximately
forty-eight (48) full-time equivalent employees. The loss of key personnel by
the Company or the Bank would have a material adverse effect upon the future
prospects of the Company and the Bank. However, the Company has instituted the
Premier Bank Stock Incentive Plan to encourage key employees and directors to
maintain their relationship with the Company or Bank, as the case may be.
Dividend Restrictions. The Company's current dividend policy is to retain
earnings, and not pay dividends, in order to support the Company's and Bank's
growth. The Company's future dividend policy will depend on a number of factors,
including, among other things, statutory restrictions, operating results,
financial position, business conditions and the discretion of the Company's
Board of Directors. Further, the ability of the Company to pay cash dividends is
dependent upon the ability of the Bank to pay dividends. See MARKET FOR COMMON
STOCK AND RELATED STOCKHOLDER MATTERS - Dividends.
<PAGE>
Offering Price Arbitrarily Determined. The Offering Price of the Common
Stock has been determined by the Board of Directors after analyses based largely
on market conditions and current shareholders' equity per share. The Offering
Price bears no necessary relationship to the Company's present and future
earnings potential or trading prices for the Common Stock. See DILUTION.
Absence of Public Trading Market. The Common Stock is traded on a limited
basis, in the local over-the-counter market, primarily in Doylestown, Easton and
the surrounding areas. While the Company intends to comply with regulatory
requirements necessary for brokerage firms to make an active market in the
Common Stock, no assurance can be given that a liquid market for the Common
Stock will develop or, if developed, be maintained.
Control; Market Illiquidity. The Company's directors and principal officers
and their associates beneficially own in the aggregate, l,766,474 shares of
Common Stock, representing 54.6% of the total outstanding shares of Common
Stock. Moreover, the risks associated with the substantial percentage ownership
by these persons will exist regardless of the number of Shares purchased by
these persons in the Offering. For example, even if these persons purchase no
Shares in the Offering and the maximum number of Shares is sold, the collective
percentage ownership by this group would be diluted by approximately 7.1
percent. The ownership of a substantial percentage of the outstanding Common
Stock by a limited number of shareholders can adversely affect the liquidity of
the market for the Common Stock since only a limited number of shares are widely
dispersed and likely to change hands. Stock prices in an illiquid market tend to
increase and decrease in a more volatile manner than stock prices in a liquid
market, since prices for a relatively small number of shares can have a
significant impact on the prices quoted for the Common Stock. The Company is
unable to estimate the number of shares of Common Stock that may be offered and
sold in the future by any of its shareholders. Such sales will depend upon a
number of factors, including the market price for the Common Stock and the
circumstances applicable to each shareholder. The offer and sale of a
substantial amount of Common Stock in the public market is likely to have an
adverse impact on the market price of the Common Stock.
Indemnification Provisions for Directors. The Company's by-laws contain
provisions limiting the liability of directors of the Company in connection with
any actions they take as directors. Such provisions can result in the loss to
the Company and shareholders of a cause of action against the directors for
monetary damages. Causes of action for self-dealing, willful misconduct or
recklessness and claims for non-monetary relief, however, are generally
unaffected by such provisions. The restriction on monetary liability can
discourage derivative litigation seeking such relief and, in the case of claims
having merit, could reduce the recovery by the Company of monetary damages. One
of the significant effects of the indemnification provisions in the by-laws is
to authorize indemnification against judgments and settlements in a derivative
suit. As a result, damages assessed for a director that would be paid to the
Company would be at least reduced by the indemnification amounts owed by the
Company to such persons. The Company, accordingly, will not receive any net
benefit from such awards or settlement amounts and could incur a loss after
indemnification payments are made. Management believes, however, that these
provisions are appropriate because any such possible economic loss to the
Company could be offset by a possible
<PAGE>
reduction in the cost to the Company of defending baseless litigation, which
also could be discouraged by the same provisions of the by-laws.
Anti-takeover Provisions. The Company's articles of incorporation and
by-laws, as well as the applicable provisions of Pennsylvania corporation law
and federal and state banking law, contain a number of provisions that can be
deemed to have an anti-takeover purpose or effect. The overall effect of these
provisions can be to deter a future non-negotiated takeover offer that a
majority of the shareholders might possibly view to be in their best interests
as the offer might include a substantial premium over the market price for the
Company's Common Stock at that time. See DESCRIPTION OF SECURITIES -
Anti-takeover Provisions.
Possible Lost Opportunity Cost of Investing in the Offering. It should be
noted that persons who subscribe for Shares pursuant to the Offering may
experience lost opportunity costs in the event their subscriptions to purchase
Shares are rejected or in the event of a delay in the completion of the
Offering. No interest will be earned on any subscription price paid nor refunded
on any subscription price rejected by the Company.
Intense Competition. The Company and the Bank operate in a highly
competitive banking environment. In Pennsylvania generally, larger banks
dominate the commercial banking industry. In addition to commercial banks, the
Company and the Bank also compete with other financial institutions, such as,
savings and loan associations, credit unions, money market funds, mutual funds,
stock brokerage firms, insurance companies, as well as other institutions in
obtaining lendable funds and in making loans. Also, future competitors,
including new commercial banks, may enter the Bank's market area. The Company's
and Bank's strategy is to attract customers by providing personalized services
and to utilize the directors' business and personal contacts within the
community. There can be no assurance that the Company and the Bank can
successfully continue to pursue this strategy. The Company and the Bank cannot
predict the effect of competition on its ability to continue to gain market
acceptance and to operate profitably. See DESCRIPTION OF BUSINESS - Description
of the Bank.
Economic Conditions and Related Uncertainties. Commercial banking, which is
the Company's primary source of income, is affected, directly and indirectly, by
local, regional, national and international economic and political conditions,
and by governmental monetary and fiscal policies. Conditions such as inflation,
recession, unemployment, volatile interest rates, tight money supply, scarce
natural resources, real estate values, international conflicts and other factors
beyond the Company's and the Bank's control can adversely affect the potential
profitability of the Company and the Bank. Future rising interest rates, while
increasing the income yield on the Company's and the Bank's earning assets, can
adversely affect loan demand and, consequently, the profitability of the Company
and the Bank. Future decreases in interest rates can adversely affect the
Company's and the Bank's profitability because any such decrease can reduce the
return the Company and the Bank earn on their assets. Economic downturns,
particularly in the Bank's primary service area, could result not only in
decreased loan demand but an increase in the delinquency of those loans which
are outstanding. The trading prices of the Common Stock may fluctuate in
response to market forces which bears no direct relationship to the financial or
other performance of the Company.
<PAGE>
Management does not expect any one particular factor to affect the Company's and
the Bank's success or failure. See DESCRIPTION OF BUSINESS.
Government Regulations. The Company and the Bank are subject to extensive
governmental supervision, regulation and control. Future legislation and
governmental policy could adversely affect the commercial banking industry and
the operations of the Company and the Bank. See DESCRIPTION OF BUSINESS -
Supervision and Regulation - The Company, and Supervision and Regulation - The
Bank.
Possible Change of Regulations. The Company's and the Bank's organization
and operations are strictly regulated and supervised by a variety of state and
federal regulatory bodies in accordance with applicable statutes and
regulations. Prospective investors should be aware that the statutes and
regulations governing financial institutions in general, and the commercial
banking industry in particular, are in a state of continuous change and have
been modified substantially during recent years. Such governing laws can be
anticipated to continue to be the subject of modification and management of the
Company and the Bank (the "Management") cannot predict what effect any such
future modifications will have on the operations of the Company and Bank. See
DESCRIPTION OF BUSINESS - Supervision and Regulation - The Company, and
Supervision and Regulation - The Bank.
Possible Effects of Year 2000 Computer Problems. The "Year 2000 Problem"
(Y2K) arose because many existing computer programs use only the last two digits
to refer to a year. Therefore, these computer programs do not properly recognize
a year that begins with "20" instead of the familiar "19." If not corrected,
many computer applications could fail or create erroneous results by or at the
year 2000. This could cause entire system failures, miscalculations, and
disruptions of normal business operations, including, among other things, a
temporary inability to process transactions, generate statements, compute
payments, interest or delinquency, or engage in similar daily business
activities. The extent of the potential impact of the Year 2000 Problem is not
yet known, and if not timely corrected, it could affect the global economy. The
Company has followed the guidelines contained in the series of Federal Financial
Institution's Examination Council's (FFIEC) Interagency Guidelines and the SEC's
Release No. 33-7558 and has designed and initiated an enterprise-wide program to
prepare the Company's computer systems and applications for the year 2000 and
beyond. See MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - Year 2000 Issues.
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
<PAGE>
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.
At September 30, 1998, the Company's investment portfolio included $38.9
million of corporate bonds. These bonds are comprised of fixed and floating rate
securities issued by other U.S. banking companies. The ultimate collectibility
of these bonds depends on the continued success of these financial institutions.
The Company evaluates the credit-worthiness of each issuer prior to investing in
such securities. These financial institutions include some of the largest
banking companies in the country, as well as smaller regional and super regional
institutions. These companies are influenced by the general economic conditions
in the United States in particular, and may also be subject, to a greater extent
than the Company itself, to international economic events and conditions.
PBI Capital Trust Securities. On August 11, 1998, the Company's recently
formed subsidiary, PBI Capital Trust (the "Trust") issued $10.0 million of 8.57%
Capital Securities due August 15, 2028. The Trust is a statutory business trust
created under the laws of Delaware. The Company is the sole owner of the Trust.
The Trust used the proceeds from the Capital Securities to acquire $10.0 million
in 8.57% Junior Subordinated Deferrable Interest Debentures issued by the
Company. The Junior Subordinated Debentures are the sole assets of the Trust,
and payments under the Junior Subordinated Debentures are the sole revenue of
the Trust. The Company is using the proceeds from the sale of the Junior
Subordinated Debentures for general corporate purposes, including, but not
limited to, investments in and advances to its subsidiary, Premier Bank,
repurchases of common stock of the Company, branch expansion, the purchase of
certain branch facilities being leased and funding loans. The precise amount and
timing of the application of the net proceeds used for such corporate purposes
depends on the funding requirements and the availability of other funds to the
Company and the Bank. At present, the majority of the net proceeds have been
temporarily invested in investment securities available for sale. Proceeds from
the Capital Securities provide the Company with additional Tier I and Tier II
capital. The annual expense for the Capital Securities is $875,000.
Management's Discretion Over the Use of Proceeds. Management intends to use
the net proceeds to contribute to the capital of the Bank to support growth and
fund the cost of possible future new Bank branches, finance possible expansion
into related businesses, and for general corporate purposes, including working
capital. See USE OF PROCEEDS.
USE OF PROCEEDS
The net proceeds to the Company, if the maximum number of Shares are sold,
are estimated to be $5,447,000 after deducting expenses incurred by the Company
in connection with the Offering, estimated at $53,000. The size of the Company
is a function of its capital base. The larger the capital base, the larger the
institution can grow its assets. In each of the past five years, the Company's
assets have grown in excess of 30% while its returns on equity have ranged from
9.90% to 14.53% during that period. This trend is typical for a young banking
company and causes capital ratios to decline.
<PAGE>
Banking regulations require that the Bank maintain certain capital ratios and if
those ratios are not maintained, growth can be limited. Though the Company
cannot predict its future growth rate specifically, management believes its
growth will continue to exceed its ability to generate and retain earnings. The
proceeds from this Offering are intended to make up this difference and assist
managment in maintaining its "well capitalized" classification for the next
three years given its current business plan and growth expectation.
Under banking regulations, per borrower lending limits have been
established. By increasing the Bank's capital position, the Bank can make larger
loans to customers and thereby potentially increase the Bank's lending activity.
Further, the net proceeds may be used to support the continuing development of
the Bank's franchise through expansion into related businesses.
DETERMINATION OF OFFERING PRICE
There is no established public market for the Common Stock being registered
and offered for sale. The Offering Price has been determined by the Board of
Directors after analyses based largely on market conditions and current
shareholders' equity per share and bears no necessary relationship to the
Company's present and future earnings potential or trading prices for the Common
Stock. During the third quarter of 1998, based on information known to
Management, the Common Stock traded at a high and low price of $11.00 and $9.00
per share, respectively and during the fourth quarter of 1998, based on
information known to Management, the Common Stock has traded at a high and low
price of $11.00 and $11.00 per share, respectively. See MARKET FOR COMMON STOCK
AND RELATED STOCKHOLDER MATTERS.
DILUTION
The net tangible book value of the Company at September 30, 1998 was
$11,135,265 or $4.23 per share of Common Stock. Net tangible book value per
share represents the amount of total tangible assets less total liabilities,
divided by the number of shares of Common Stock outstanding. Without taking into
account any changes in such tangible book value after September 30, 1998, as a
result of normal operating income and expenses, the pro forma net tangible book
value at September 30, 1998, giving effect to the sale of all 500,000 Shares
offered hereby and after payment of anticipated expenses associated with the
Offering of approximately $53,000, would have been approximately $5.30. This
figure represents an immediate increase in net tangible book value of $1.07 per
share to existing shareholders who do not purchase any Shares of Common Stock
offered hereby.
Dilution represents the difference between the Offering Price per share and
the net tangible book value per share after the sale of the Shares offered
hereby. The following table sets forth the present book value per share prior to
and after the Offering, the change in book value, the dilution expressed in
dollars and percentages and the results thereof, if 25%, 50%, 75% and 100% of
the 500,000 Shares of Common Stock offered hereby are sold.
<PAGE>
<TABLE>
<CAPTION>
Book Value(1) Dilution(2)(3)
Prior to After the Aggregate
Percentage of Offering Offering Increase in Equity Change in Dollar Amount
Offering Sold (per share) (per share) (000's) Book Value (1) (per share) (1) Percentage
- --------------- ------------- ---------------- ----------------- --------------- ----------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
25% $ 4.23 $ 4.52 $ 1,322 6.86% $ 6.48 58.91%
50% $ 4.23 $ 4.80 $ 2,697 13.48% $ 6.20 56.36%
75% $ 4.23 $ 5.06 $ 4,072 19.62% $ 5.94 54.00%
100% $ 4.23 $ 5.30 $ 5,447 25.30% $ 5.70 51.82%
- --------------------------
(1) Rounded to the nearest cent or hundredths of a percent.
(2) Dilution is the difference between the Offering Price per share and the net
tangible book value per share after the sale of the Shares offered hereby.
(3) Includes offering expenses estimated at approximately $53,000.
</TABLE>
PLAN OF DISTRIBUTION
The Company is offering hereby, on a best-efforts basis, 500,000 shares of
Common Stock for a price of $11.00 per Share, (the "Offering Price"), for an
aggregate amount of $5,500,000. The Shares are being offered to the general
public (the "Offering"). It should be noted, however, that because the Offering
is made on a best-efforts basis there can be no assurance that all, or any, of
the shares of Common Stock offered hereby will be sold. No minimum number of
Shares must be sold by the Company in order to close the Offering.
The Company is offering the Common Stock through the efforts of the
Company's and the Bank's directors, officers and employees. None of those
individuals will be entitled to receive any discount, commission or additional
compensation for selling such Common Stock, but each may be reimbursed by the
Company for reasonable expenses, if any, incurred in connection with the sale of
the Common Stock. The Company intends to satisfy the safe harbor provisions of
Rule 3a4-1 of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), to ensure that the Company's and Bank's directors, officers and employees
will not be deemed "brokers", as defined in the Exchange Act, in connection with
the Offering.
The Offering to the general public will commence on December 14, 1998 or as
soon as practicable after this Registration Statement becomes effective. The
minimum and maximum subscriptions in the Offering for each subscriber are 100
and 10,000 Shares, respectively. The Company reserves the right to waive any
restrictions if, in its sole discretion, it deems it appropriate to do so. The
Offering will terminate at 5:00 p.m. on February 15, 1999, or such later date as
shall be determined by the Company, but in no event later than 5:00 p.m. on
March 31, 1999 (the "Offering Termination Date"). The Company reserves the right
to withdraw the Offering at any time or to terminate the Offering after it has
accepted subscriptions for 500,000 Shares of Common Stock.
<PAGE>
In the event of a withdrawal or termination of the Offering or a rejection
of a subscription, any funds advanced but not accepted will be returned as
promptly as possible after the withdrawal, termination or rejection. Funds
returned will not include interest earned on funds advanced or be reduced to
cover expenses or charges.
TERMS OF THE OFFERING
Subscriptions for the Shares offered hereby in the Offering are made by
completion and tender of an "Offering Subscription Agreement" and a check or
money order made payable to "Premier Bancorp, Inc." for the subscription price
of $11.00 per Share multiplied by the number of shares being subscribed, unless
the subscriber authorizes withdrawal from a checking or savings account or
certificate of deposit at the Bank. Any applicable penalty for early withdrawal
will be waived by the Bank.
A complete description of the subscription procedure for the Offering is
set forth below.
Subscription Procedure
Persons who wish to purchase Shares must submit a completed Offering
Subscription Agreement together with the full amount of the subscription price
($11.00 per Share multiplied by the number of shares being subscribed), unless
the subscriber authorizes withdrawal from a checking or savings account or
certificate of deposit held at the Bank. Any applicable penalty for early
withdrawal will be waived by the Bank. The Offering will expire on or before
5:00 p.m. on February 15, 1999 unless the Offering is terminated earlier or
extended.
The Offering Subscription Agreement together with the full amount of the
aggregate subscription price must be mailed to Premier Bancorp, Inc., 379 North
Main Street, Doylestown, Pennsylvania 18901, Attn: John C. Soffronoff,
President, unless the subscriber authorizes withdrawal from a checking or
savings account or certificate of deposit held at the Bank. Any applicable
penalty for early withdrawal will be waived. The form of Offering Subscription
Agreement (or a facsimile) may be used for this purpose. The subscription price
must be paid in United States dollars by check or money order drawn to the order
of "Premier Bancorp, Inc." An Offering Subscription Agreement will be considered
if:
(1) properly filled in, dated, signed and received before the Offering
Termination Date; and
(2) accompanied by payment in full by check or money order, unless the
subscriber authorizes withdrawal from a checking or savings account or
certificate of deposit held at the Bank. Any applicable penalty for
early withdrawal will be waived.
Funds which accompany the Offering Subscription Agreement pursuant to the
Offering will be negotiated and deposited by the Company into one of the
Company's bank accounts until the Offering Subscription Agreement is accepted by
the Company. Decisions regarding the acceptance
<PAGE>
or rejection of a subscription shall be made within 15 days of receipt by the
Company of a properly executed Subscription Agreement accompanied by payment in
full of the subscription price. With respect to any rejected subscriptions, all
refunds, without interest or deduction, will be mailed to subscribers as
promptly as possible after rejection. Certificates for Shares duly subscribed
and paid for will be issued promptly after the acceptance of the Offering
Subscription Agreements by the Company.
Expiration of the Offering will be at 5:00 p.m. on February 15, 1999,
unless the Company extends the Offering to a time and date no later than 5:00
p.m. on March 31, 1999.
IN DETERMINING WHICH SUBSCRIPTIONS TO ACCEPT IN THE OFFERING, IN WHOLE OR
IN PART, THE COMPANY MAY TAKE INTO ACCOUNT A SUBSCRIBER'S POTENTIAL TO DO
BUSINESS WITH, OR TO DIRECT CUSTOMERS TO, THE BANK. THE COMPANY RESERVES THE
RIGHT TO REJECT, IN WHOLE OR IN PART, IN ITS SOLE DISCRETION, ANY SUBSCRIPTION
FOR ANY REASON IN THE OFFERING.
UNLESS WAIVED BY THE COMPANY, SUBSCRIBERS MUST PURCHASE AT LEAST ONE
HUNDRED (100) SHARES AND CANNOT PURCHASE MORE THAN TEN THOUSAND (10,000) SHARES
UNDER THE OFFERING.
IF THERE IS AN OVER-SUBSCRIPTION FOR THE SHARES OFFERED PURSUANT TO THE
OFFERING, THE COMPANY MAY ACCEPT SAID SUBSCRIPTIONS ON A PRO RATA BASIS.
LEGAL PROCEEDINGS
In the opinion of Management, there are no proceedings pending to which the
Company or the Bank is a party or to which their property is subject, which, if
determined adversely to the Company or the Bank, would be material in relation
to the Company's and the Bank's capital, liquidity, financial condition, or
results of operations. There are no proceedings pending other than ordinary
routine litigation incident to the business of the Company and the Bank. In
addition, no material proceedings are pending or are known to be threatened or
contemplated against the Company or the Bank by government authorities.
DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS
AND CONTROL PERSONS
Directors of the Company and of the Bank
The following table contains certain information with respect to the
Company's Class 1 Directors (whose term expires in 1999), Class 2 Directors
(whose term expires in 2000) and Class 3 Directors (whose term expires in 2001).
Each of the Class 1, 2 and 3 Directors also serves as a Director of the Bank.
<PAGE>
<TABLE>
<CAPTION>
Age as of Principal Occupation for Past Director Since
November Five Years and Position Company/
Name 1, 1998 Held with Company Bank
---- ------- ----------------- ----
<S> <C> <C> <C>
Class 1 Directors
Michael Perrucci 45 Partner - Florio & Perrucci 1997/1992
(2) (Law Firm)
Gerald Schatz 63 Chairman - Wordsworth Academy, Play 1997/1992
(4) and Learn Centers, and Wyncote Academy
Bruce E. Sickel 38 Senior Vice President/Chief Financial 1997/1992
(4) Officer of the Bank and Treasurer of the
Company
Thomas P. Stitt 55 Attorney At Law 1997/1993
(4)
John A. Zebrowski 56 President - J.A.Z. Associates (Plastic Resins 1997/1992
(2) Sales)
Brian R. Rich 39 President - Jack Rich, Inc. 1997/1993
(2) (Fuel Oil Dealer)
Ezio U. Rossi 68 Retired, Former Owner - Arctic Foods, Inc. 1997/1994
(4)
Daniel E. Cohen 54 Partner - Laub, Seidel, Cohen & Hof 1997/1992
(1)(3) (Law Firm)
Class 2 Directors
Thomas E. Mackell 53 Surgeon 1997/1992
(4)
Neil Norton 53 President - Norton Oil Company 1997/1992
(2)
Helen Beth Garofalo-Vilcek 41 Real Estate Broker 1997/1992
(2)
George H. Wetherill 61 Owner - GH Wetherill Opticians and GH 1997/1992
(3) Wetherill Hearing Aid Associates
Irving N. Stein 49 Vice President - Keystone Motors, Inc. 1997/1992
(4)
Class 3 Directors
Thomas M. O'Mara 46 Owner - Master Gardener 1997/1992
(1)(4)
Richard F. Ryan 48 Partner - Richard B. Ryan Insurance 1997/1993
(4)
<PAGE>
John C. Soffronoff 51 President/Chief Executive Officer of the 1997/1992
(3)(4) Company and the Bank
Peter A. Cooper 40 President - Lexus of the Lehigh Valley 1997/1992
(1)(4)
Clark S. Frame 48 Chairman of the Board 1997/1992
(1)(3)(4)
Barry J. Miles, Sr. 49 Vice Chairman of the Board 1997/1992
(1)(2)(3)
Daniel A. Nesi 61 Surgeon 1997/1992
(1)(3)
- ------------------
<FN>
(1) Member of the Executive Committee. This Committee met 3 times during 1997.
(2) Member of the Audit/Compliance Committee. This Committee serves as a direct
link between the Board and the Independent Auditors, enabling the Board to
discharge its responsibility to oversee Management's financial control and
reporting system. The Committee also provides oversight for the Bank's
regulatory compliance program. The Committee met 1 time during 1997.
(3) Member of the Loan Committee. This Committee reviews and approves loans in
accordance with the established loan policy, as exists from time to time.
The Committee met 39 times during 1997.
(4) Member of the Investment/Asset/Liability Management Committee ("ALCO").
This Committee reviews the operating results of the Bank, its interest rate
sensitivity, investment portfolio and performance verses the annual budget.
The Committee met 4 times during 1997.
</FN>
</TABLE>
Management of the Company and the Bank
The following table sets forth selected information about the principal
officers of the Company and the Bank, each of whom is elected by the Board of
Directors and each of whom holds office at the discretion of the Board of
Directors.
<TABLE>
<CAPTION>
Number of Shares Age as of
Position with Held Position with Held Beneficially November 1,
Name the Company(1) Since the Bank Since Owned(2) 1998
- ---- -------------- ----- -------- ----- ------ ----
<S> <C> <C> <C> <C> <C> <C>
Clark S. Frame Chairman of the Board 1997 Chairman of the Board 1992 167,420(3) 48
Barry J. Miles, Sr. Vice Chairman 1997 Vice Chairman 1992 62,763(3) 49
of the Board of the Board
John C. Soffronoff President, Chief 1997 President, Chief 1992 42,570(3) 51
Executive Officer, Executive Officer,
Member of the Member of the
Board of Directors Board of Directors
John J. Ginley Senior Vice President, 1997 Senior Vice President, 1992 42,882(4) 55
Secretary Chief Loan Officer,
Secretary
<PAGE>
Bruce E. Sickel Senior Vice President, 1997 Senior Vice President, 1992 44,415(3) 38
Chief Financial Officer, Chief Financial Officer,
Treasurer, Member of Treasurer, Member of the
the Board of Directors Board of Directors
- -------------
<FN>
(1) The Company has no employees.
(2) For the definition of "Beneficial Ownership", see footnotes to the section
"Beneficial Ownership by Directors and Officers", infra, at page 15.
(3) For details regarding the Beneficial Ownership of this individual, see
table and footnotes to "Beneficial Ownership by Directors and Officers",
infra, at page 15.
(4) Includes an option held by Mr. Ginley to purchase 12,282 shares.
</FN>
</TABLE>
Family Relationships
Dr. David C. Frame, a principal owner, is the brother of Mr. Clark S.
Frame. See SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT -
Principal Owners.
Involvement in Certain Legal Proceedings
None of the Company's or Bank's directors or officers have been involved in
any disclosable legal proceedings such as those involving: (1) a bankruptcy
petition; (2) a criminal conviction; (3) any order, judgment or decree of any
court of competent jurisdiction limiting his or her involvement in any type of
business, securities or banking activities; or (4) a violation of federal or
state securities or commodities law.
EXECUTIVE COMPENSATION
Shown below is information concerning the annual compensation for services
in all capacities to the Company and the Bank for the fiscal years ended
December 31, 1997, 1996 and 1995 of the Chief Executive Officer and the other
most highly compensated executive officers of the Company and the Bank to the
extent such persons' annual salary and bonus exceeded $100,000.
<PAGE>
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
Annual Compensation Long-Term Compensation
Awards Payouts
(a) (b) (c) (d) (e) (f) (g) (h) (i)
Other Securities
Annual Restricted Underlying All other
Compen- Stock Options/ LTIP(3) Compen-
Salary Bonus sation Award(s) SARs(2) Payouts sation
Name and Principal Position Year ($)(1) ($) $ ($) (#) ($) ($)
--------------------------- ---- ------ --- - --- --- --- ---
<S> <C> <C> <C> <C> <C> <C> <C> <C>
John C. Soffronoff, President, Chief 1997 104,382 20,000 -- -- -- -- 11,427 (4)
Executive Officer, Member the Board 1996 98,193 10,000 -- -- -- -- 11,305
of Directors 1995 95,333 10,000 -- -- -- -- 14,191
John J. Ginley, Senior Vice President,1997 116,493 20,000 -- -- -- -- 8,739 (5)
Secretary 1996 110,276 10,000 -- -- -- -- 8,552
1995 107,059 10,000 -- -- -- -- 4,800
Bruce E. Sickel, Senior Vice President1997 90,475 20,000 -- -- -- -- 2,055 (6)
Chief Financial Officer, Treasurer, 1996 86,643 10,000 -- -- -- -- 1,671
Member of the Board of Directors 1995 84,209 11,500 -- -- -- -- --
<FN>
(1) Yearly salary adjustments are made on or about April 24 of each year.
(2) Stock appreciation rights ("SARs").
(3) Long-term incentive plans ("LTIPs").
(4) Includes the use of a car, allowance of $4,800 for each of 1997, 1996 and
1995 and 40l(k) Plan contributions in 1997 and 1996 of $3,575 and $3,390,
respectively. Also includes payment of country club dues in 1997, 1996 and
1995 of $3,052, $3,115 and $9,391, respectively.
(5) Includes 401(k) Plan contributions of $3,939 and $3,752 in each of 1997 and
1996, and a car allowance of $4,800 for each of 1997, 1996 and 1995.
(6) Includes 401(k) Plan contribution.
</FN>
</TABLE>
Compensation of Directors
Directors who attended at least seventy-five percent (75%) of all Board
meetings, received stock options under the Bank Stock Option Plan for attendance
at Board and committee meetings in accordance with the following formula:
Options for thirty (30) shares per Board meeting and thirty (30) shares per
committee meeting. There was no cash compensation paid to Directors in 1997 for
attendance at meetings.
Mr. Clark Frame was paid a cash fee of $59,000 and $56,000 in 1997 and
1996, respectively, to serve as Chairman of the Board of Directors and Chairman
of the Loan Committee. Cash payments to Mr. Frame for 1998 will approximate
$64,000. These amounts are included in the Statement of Income as "Professional
fees". Mr. Frame, like the other directors, received option and share awards for
attending Board meetings. Mr. Frame is also provided a membership to a local
country club for marketing purposes.
<PAGE>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT
Principal Owners
The following table sets forth, as of November 1, 1998, the name and
address of each person who owns of record or who is known by the Board of
Directors to be the beneficial owner of more than five percent (5%) of the
Company's outstanding Common Stock, the number of shares beneficially owned by
such person and the percentage of the Company's outstanding Common Stock so
owned.
<TABLE>
<CAPTION>
Percent of Outstanding
Common Stock
Name and Address Shares Beneficially Owned (1) Beneficially Owned
- ---------------- ------------------------- ------------------
<S> <C> <C>
David C. Frame(2) 173,091 (3) 5.39%
c/o Premier Bancorp, Inc.
379 North Main Street
Doylestown, Pennsylvania
Clark S. Frame(2) 167,420 (4) 5.18%
c/o Premier Bancorp, Inc.
379 North Main Street
Doylestown, Pennsylvania
- ---------------
<FN>
(1) For the definition of beneficial ownership, see footnote 1 to the table,
following.
(2) Dr. David C. Frame is the brother of Mr. Clark S. Frame.
(3) Includes an option to purchase 26,235 shares.
(4) Includes an option to purchase 23,760 shares.
</FN>
</TABLE>
Beneficial Ownership By Directors and Officers
The following table sets forth, as of November 1, 1998, the amount and
percentage of the Common Stock of the Company beneficially owned by each
director and all officers and directors of the Company as a group. This
information has been furnished by the individual reporting persons.
<TABLE>
<CAPTION>
Name of Individual Amount and Nature of Percent
or Identity Of Group Beneficial Ownership (1)(2) of Class (23)
<S> <C> <C>
Class 1 Directors
Michael Perrucci 74,600 (3) 2.31%
Gerald Schatz 115,954 (4) 3.58%
Bruce E. Sickel 44,415 (5) 1.37%
Thomas P. Stitt 71,265 (6) 2.20%
<PAGE>
John A. Zebrowski 92,633 (7) 2.86%
Brian R. Rich 101,204 (8) 3.13%
Ezio U. Rossi 124,752 (9) 3.86%
Daniel E. Cohen 104,922 (10) 3.24%
Class 2 Directors
Thomas E. Mackell 75,513 (11) 2.33%
Neil Norton 87,333 (12) 2.70%
Helen Beth Garofalo-Vilcek 41,934 (13) 1.30%
George H. Wetherill 77,661 (14) 2.40%
Irving N. Stein 69,441 (15) 2.15%
Class 3 Directors
Thomas M. O'Mara 54,069 (16) 1.67%
Richard F. Ryan 93,890 (17) 2.90%
John C. Soffronoff 42,570 (18) 1.32%
Peter A. Cooper 111,948 (19) 3.46%
Clark S. Frame 167,420 (20) 5.18%
Barry J. Miles, Sr. 62,763 (21) 1.64%
Daniel A. Nesi 106,905 (22) 3.30%
All Officers and Directors
as a Group (21 persons) (24) 1,766,474 54.6%
- --------------
<FN>
(1) The securities "beneficially owned" by an individual are determined in
accordance with the definitions of "beneficial ownership" set forth in the
regulations of the Federal Reserve and the SEC and may include securities
owned by or for the individual's spouse and minor children and any other
relative who has the same home, as well as securities as to which the
individual has or shares voting or investment power or has the right to
acquire beneficial ownership within sixty (60) days after November 1, 1998.
Beneficial ownership may be disclaimed as to certain of the securities.
(2) Unless otherwise indicated, all shares are legally owned by the reporting
person individually or jointly with a spouse.
(3) Includes an option held by Mr. Perrucci to purchase 32,010 shares.
(4) Includes an option held by Mr. Schatz to purchase 25,983 shares.
(5) Includes an option held by Mr. Sickel to purchase 24,585 shares.
(6) Includes 55,700 shares for which Mr. Stitt is trustee and an option to
purchase 10,155 shares.
(7) Includes an option held by Mr. Zebrowski to purchase 22,950 shares.
(8) Includes an option held by Mr. Rich to purchase 20,289 shares.
(9) Includes an option held by Mr. Rossi to purchase 21,627 shares.
(10) Includes an option held by Mr. Cohen to purchase 44,730 shares.
(11) Includes an option held by Mr. Mackell to purchase 25,155 shares.
(12) Includes an option held by Mr. Norton to purchase 40,935 shares.
(13) Includes an option held by Ms. Garofalo-Vilcek to purchase 13,635 shares.
<PAGE>
(14) Includes an option held by Mr. Wetherill to purchase 26,958 shares.
(15) Includes an option held by Mr. Stein to purchase 21,615 shares.
(16) Includes an option held by Mr. O'Mara to purchase 20,343 shares.
(17) Includes an option held by Mr. Ryan to purchase 15,615 shares.
(18) Includes an option held by Mr. Soffronoff to purchase 22,770 shares.
(19) Includes an option held by Mr. Cooper to purchase 50,865 shares.
(20) Includes an option held by Mr. Frame to purchase 23,760 shares.
(21) Includes an option held by Mr. Miles to purchase 19,683 shares.
(22) Includes an option held by Mr. Nesi to purchase 40,695 shares.
(23) Percentages assume that all options exercisable within sixty (60) days of
November 1, 1998 have been exercised. Therefore, on a pro forma basis,
3,234,789 shares would be outstanding.
(24) Includes an option held by Mr. John J. Ginley, Senior Vice President of the
Bank, to purchase 12,282 shares.
</FN>
</TABLE>
DESCRIPTION OF SECURITIES
Common Stock
The Company is authorized to issue 30,000,000 shares of Common Stock, par
value $0.33 per share ("Shares" or "Common Stock"), of which approximately
2,630,340 Shares are outstanding as of November 1, 1998. The remaining
(approximately 27,369,660) authorized but unissued Shares may be issued by the
Board of Directors without further shareholder approval. Issuance of these
Shares could cause a dilution of the book value of the Common Stock and of the
voting power of present shareholders.
As of November 1, 1998 there were Four Hundred Sixty-Six (466) shareholders
of record. The holders are entitled to one vote per share on all matters
presented to them and have cumulative voting rights in the election of
directors.
The Common Stock has no contractual or non-contractual preemptive,
subscription or conversion rights or redemption or repurchase provisions. The
Common Stock is nonassessable and requires no sinking fund. Each shareholder is
entitled to receive dividends that may be declared by the Board of Directors and
to share pro rata in the event of dissolution or liquidation. For information
concerning dividend restrictions, see the caption entitled MARKET FOR COMMON
STOCK AND RELATED STOCKHOLDER MATTERS.
Anti-takeover Provisions
The Company's articles of incorporation, as amended, and by-laws contain
provisions that may be deemed to be "anti-takeover" in nature. These provisions,
as described below, may serve to entrench current Management by enabling it to
retain its current position and placing it in a better position to resist
changes that the shareholders may want to make if dissatisfied with the conduct
of the Company's Management and business. Two of these provisions are the
authorization of 30,000,000 Shares, described above, and the absence of
preemptive rights for shareholders to subscribe for additional Shares on a pro
rata basis.
<PAGE>
The ability to issue additional Common Stock and the absence of preemptive
rights to Common Stock were authorized for the purpose of providing the Board of
Directors of the Company with as much flexibility as possible to issue
additional Shares, without further shareholder approval, for proper corporate
purposes including financing, acquisitions, stock dividends, stock splits,
employee incentive plans and other similar purposes. The ability to issue
additional Shares may, however, also be used by the Board of Directors to deter
future attempts to gain control over the Company.
Other provisions that could be considered anti-takeover in nature are the
provisions in the Company's amended articles of incorporation requiring the
affirmative vote of either the holders of at least sixty-six and two-thirds
percent (66-2/3%) of the outstanding Shares to approve any merger,
consolidation, liquidation or dissolution of the Company or the sale of all or
substantially all of its assets. Further, the articles of incorporation require
approval by the affirmative vote of the holders of sixty-six and two-thirds
percent (66-2/3%) of the outstanding Shares in order to amend this provision
contained within the articles of incorporation. The provisions discussed above
were included in the articles of incorporation in order to ensure that any
extraordinary corporate transaction is effected only if it receives a clear
mandate from the shareholders. These provisions, however, could give the Board
of Directors a veto power over certain transactions regardless of whether it is
desired by or beneficial to a majority of the shareholders and thereby assist
the Board of Directors in retaining its present position. Also, these provisions
could give the holders of a minority of the Company's outstanding Shares a veto
power over this type of transaction even if the Board of Directors and/or a
majority of the shareholders believes such transaction to be desirable and
beneficial. Absent such provisions in the articles of incorporation, the
affirmative vote of a majority of the directors and at least a majority of the
Shares outstanding would generally be required to approve a merger,
consolidation, liquidation, dissolution or the sale of all or substantially all
of the assets of the Company, and at least a majority of the Shares would be
required to approve an amendment to the articles of incorporation. The Company's
by-laws can be amended or repealed in whole or in part, by a majority vote of
the members of the Board of Directors or by the affirmative vote of the holders
of sixty-six and two-thirds percent (66-2/3%) of the outstanding Shares entitled
to vote thereon.
The Company elects directors for staggered terms of office (a classified
board). The Board of Directors believes that a classified board, consisting of
three classes, helps ensure continuity and stability of corporate leadership and
policy. In addition, a classified board moderates the pace of any change in
control of the Board of Directors by extending the time required to elect a
majority of the directors to at least two successive annual meetings. Since the
extension of time also tends to discourage a tender offer or takeover bid, this
provision may also be deemed to be anti-takeover in nature. Further, a
classified board makes it more difficult for a majority of the shareholders to
change the composition of the Board of Directors even though this may be
considered desirable by them.
The final major provision considered to be anti-takeover in nature which is
applicable to the Company is in the Company's articles of incorporation and
enables the Board of Directors to oppose an offer to acquire the Company on the
basis of factors other than short-term economic benefits to
<PAGE>
shareholders. Consideration may be given to certain other constituencies such
as: the impact the acquisition of the Company would have on the community; the
effect of the acquisition upon shareholders, employees, depositors and
customers; and the reputation and business practices of the tender offeror. This
provision was included in the articles of incorporation to emphasize the ability
of the Board of Directors to recognize, pursuant to state law, the interests of
these various constituent groups.
The overall effect of these provisions: (1) may result in the Company being
less attractive to a potential acquirer; (2) may be to deter a future
non-negotiated takeover offer that a majority of the shareholders might possibly
view to be in their best interests as the offer might include a substantial
premium over the market price of the Company's Common Stock at that time; and
(3) may result in shareholders receiving less for their shares than otherwise
might be available in the event of a takeover attempt. As stated above, these
provisions may have the effect of entrenching current Management against the
wishes of the shareholders.
STATEMENT AS TO INDEMNIFICATION
Pennsylvania law and the by-laws of the Company provide for broad
indemnification of officers and directors of the Company against liabilities and
expenses incurred by such persons in legal proceedings. In addition, the by-laws
of the Company limit, under certain conditions, the liability of directors from
monetary damages in connection with any actions they take as directors. Such
provisions can have, as one significant effect, the loss to the Company and
shareholders of a cause of action against the directors for monetary damages.
Causes of action for self-dealing, willful misconduct or recklessness and claims
for non-monetary relief, however, could be unaffected by such provisions. The
restriction on monetary liability can discourage derivative litigation seeking
such relief and, in the case of claims having merit, could reduce the recovery
by the Company of monetary damages. One of the significant effects of the
indemnification provisions in the by-laws is to authorize indemnification
against judgments and settlements in a derivative suit. As a result, damages
assessed for a director that would be paid to the Company would be at least
reduced by the indemnification amounts owed by the Company to such persons. The
Company, accordingly, would not receive any net benefit from such awards or
settlement amounts and could incur a loss after indemnification payments are
made.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers or persons controlling the
Company pursuant to the foregoing provisions, the Company has been informed that
in the opinion of the SEC such indemnification is against public policy as
expressed in the Securities Act of 1933 and is, therefore, unenforceable.
<PAGE>
CERTAIN RELATIONSHIPS AND
RELATED TRANSACTIONS
Except as disclosed below, there have been no material transactions between
the Company and the Bank, nor any material transactions or proposed material
transactions, with any director or executive officer of the Company or the Bank,
or any associate of any of the foregoing persons during the past two years. The
Bank maintains a policy of not extending or granting credit to any director,
officer, employee or any member of their immediate family. In 1996, a loan was
made to an individual prior to that individual's election to the Board of
Directors of the Company and the Bank. 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 customers. Also, this loan did not involve a more than normal risk of
collectability or present any other unfavorable features. The outstanding loan
balance was repaid in January 1998 and no further extensions of credit will be
issued to any director, officer or employee until such time as the Bank's policy
is changed.
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. Rent paid to Norbuck in 1997 and 1996 was $117,368 and $113,954,
respectively. The leases with Norbuck have an initial term expiring December 31,
1998 and the Bank intends to exercise its purchase option on these properties.
The purchase price will be based on the appraised value of these properties and
is expected to be in the range of $1,200,000 to $1,300,000. The buildings were
purchased by Norbuck in 1994 for $1,000,000.
DESCRIPTION OF BUSINESS
Description of the Company
Premier Bancorp, Inc., a Pennsylvania business corporation, is a bank
holding company registered with and supervised by the Board of Governors of the
Federal Reserve System (the "Federal Reserve Board"). The Company was
incorporated on July 15, 1997 under the business corporation law of the
Commonwealth of Pennsylvania and reorganized on November 17, 1997 for the
purpose of becoming a one-bank holding company. Since commencing operations, the
Company's business has consisted primarily of managing and supervising the Bank
and its principal source of income has been revenues generated by the Bank. The
Company has two wholly-owned subsidiaries, the Bank and PBI Capital Trust.
The principal executive office of the Company is located at 379 North Main
Street, Doylestown, Bucks County, Pennsylvania 18901. The telephone number of
the Company is (215) 345-5100.
<PAGE>
Supervision and Regulation - The Company
The Company is subject to the provisions of the Bank Holding Company Act of
1956, as amended (the "Bank Holding Company Act"), and to supervision by the
Federal Reserve Board. The Bank Holding Company Act requires the Company to
secure the prior approval of the Federal Reserve Board before it owns or
controls, directly or indirectly, more than five percent (5%) of the voting
shares or substantially all of the assets of any institution, including another
bank. The Bank Holding Company Act prohibits acquisition by the Company of more
than five percent (5%) of the voting shares of, or interest in, all or
substantially all of the assets of any bank located outside of Pennsylvania
unless such acquisition is specifically authorized by the laws of the state in
which such bank is located.
A bank holding company is prohibited from engaging in or acquiring direct
or indirect control of more than five percent (5%) of the voting shares of any
company engaged in non-banking activities unless the Federal Reserve Board, by
order or regulation, has found such activities to be so closely related to
banking or managing or controlling banks as to be a proper incident thereto. In
making this determination, the Federal Reserve Board considers whether the
performance of these activities by a bank holding company would offer benefits
to the public that outweigh possible adverse effects.
The Company is required to file an annual report with the Federal Reserve
Board and any additional information that the Federal Reserve Board may require
pursuant to the Bank Holding Company Act. The Federal Reserve Board may also
make examinations of the Company and any or all of its subsidiaries. Further,
under Section 106 of the 1970 amendments to the Bank Holding Company Act and the
Federal Reserve Board's regulations, a bank holding company and its subsidiaries
are prohibited from engaging in certain tie-in arrangements in connection with
any extension of credit or provision of credit or provision of any property or
services. The so-called "anti-tie in" provisions state generally that a bank may
not extend credit, lease, sell property or furnish any service to a customer on
the condition that the customer not obtain other credit or service from a
competitor of the bank, its bank holding company or any subsidiary of its bank
holding company.
Federal law also prohibits acquisitions of control of a bank holding
company without prior notice to certain federal bank regulators. Control is
defined for this purpose as the power, directly or indirectly, to direct the
management or policies of the bank or bank holding company or to vote 25% or
more of any class of voting securities of the bank holding company. A person or
group holding revocable proxies to vote 25% or more of the stock of a bank or
its holding company would presumably be deemed to control the institution for
purposes of this federal law.
Subsidiary banks of a bank holding company are subject to certain
restrictions imposed by the Federal Reserve Act on any extensions of credit to
the bank holding company or any of its subsidiaries, on investments in the stock
or other securities of the bank holding company and on taking of such stock or
securities as collateral for loans to any borrower.
<PAGE>
Permitted Activities
The Federal Reserve Board permits bank holding companies to engage in
activities so closely related to banking or managing or controlling banks as to
be a proper incident thereto. The Company does not at this time engage in any of
the permissible activities described below, nor does the Company have any
current plans to engage in these activities in the foreseeable future.
While the types of permissible activities are subject to a variety of
limitations and to change by the Federal Reserve Board, the principal activities
that presently may be conducted by a bank holding company and may in the future
be engaged by the Company are: (1) making, acquiring or servicing loans and
other extensions of credit for its own account or for the account of others,
such as would be made by consumer finance, credit card, mortgage, commercial
finance and factoring companies; (2) operating as an industrial bank or similar
entity in the manner authorized by state law so long as the institution does not
both accept demand deposits and make commercial loans; (3) operating as a trust
company in the manner authorized by federal or state law so long as the
institution does not make certain types of loans or investments or accept
deposits, except as may be permitted by the Federal Reserve Board; (4) acting as
an investment or financial advisor to investment companies and other persons;
(5) leasing personal and real property or acting as agent, broker or advisor in
leasing property; (6) making equity and debt investments in corporations or
projects designed primarily to promote community welfare; (7) providing to
others financially oriented data processing or bookkeeping services; (8) acting
as an insurance agent or broker in relation to insurance for itself and its
subsidiaries or for insurance directly related to extensions of credit; (9)
acting as underwriter for credit life insurance and credit accident and health
insurance; (10) providing courier services of a limited character; (11)
providing management consulting advice to nonaffiliated banks and nonbank
depository institutions; (12) selling money orders, travelers' checks and United
States savings bonds; (13) performing appraisals of real estate; (14) acting as
intermediary for the financing of commercial or industrial income-producing real
estate by arranging for the transfer of the title, control and risk of such a
real estate project to one or more investors; (15) providing securities
brokerage services, related securities credit activities and incidental
activities such as offering custodial services, individual retirement accounts
and cash management services, if the securities brokerage services are
restricted to buying and selling securities solely as agent for the account of
customers and do not include securities underwriting or dealing or investment
advice or research services; (16) underwriting and dealing in obligations of the
United States, general obligations of states and their political subdivisions
and other obligations such as bankers' acceptances and certificates of deposit;
(17) providing general information, advisory services and statistical
forecasting with respect to foreign exchange markets; (18) acting as a futures
commission merchant in the execution and clearance on major commodity exchanges
of futures contracts and options on futures contracts for bullion, foreign
exchange, government securities, certificates of deposit and other money market
instruments; (19) performing personal property appraisals that require expertise
regarding all types of personal and business property, including intangible
property such as corporate securities; (20) providing commodity trading and
futures commission merchant advice; (21) providing consumer financial counseling
to individuals on consumer-oriented financial management matters, including debt
consolidation, mortgage applications, bankruptcy, budget management, real estate
tax shelters, tax planning, retirement and estate planning, insurance and
general investment management, so long as this activity does not include the
sale of specific
<PAGE>
products or investments; (22) providing tax planning and preparation advice to
corporations and individuals; (23) providing check guaranty services to
subscribing merchants; (24) operating a collection agency and credit bureau; and
(25) acquiring and operating thrift institutions, including savings and loan
associations, building and loan associations and FDIC-insured savings banks.
Certain Provisions of Pennsylvania Banking Law
Under the Pennsylvania Banking Code of 1965, as amended, (the "Code"), the
Company has been permitted since March 4, 1990 to control an unlimited number of
banks. However, the Company would be required under the Bank Holding Company Act
to obtain the prior approval of the Federal Reserve Board before it could
acquire all or substantially all of the assets of any bank, or acquire ownership
or control of any voting shares of any bank other than the Bank, if, after such
acquisition, it would own or control more than five percent (5%) of the voting
shares of such bank. The Bank Holding Company Act does not permit the Federal
Reserve Board to approve the acquisition by the Company or any subsidiary of any
voting shares of, or interest in, all or substantially all of the assets of, any
bank located outside the Commonwealth of Pennsylvania, unless the acquisition is
specifically authorized by the laws of the state in which that bank is located.
Since 1995, the Pennsylvania Banking Code has authorized full interstate
banking and branching. Specifically, the law authorizes interstate bank mergers
and reciprocal interstate branching into Pennsylvania by interstate banks, and
permits Pennsylvania institutions to branch into other states with the prior
approval of the Department of Banking. Overall, this law is likely to continue
to have the effect of increasing consolidation and competition and promoting
geographic diversification in the banking industry. For a further discussion of
interstate banking and branching, see the section entitled Supervision and
Regulation - The Bank.
Legislation and Regulatory Changes
From time to time, legislation is enacted which has the effect of
increasing the cost of doing business, limiting or expanding permissible
activities or affecting the competitive balance between banks and other
financial institutions. Proposals to change the laws and regulations governing
the operations and taxation of banks, bank holding companies and other financial
institutions are frequently made in Congress, and before various bank regulatory
agencies. No prediction can be made as to the likelihood of any major changes or
the impact such changes might have on the Company and its subsidiary, the Bank.
Certain changes of potential significance to the Company which have been enacted
recently and others which are currently under consideration by Congress or
various regulatory or professional agencies are discussed in the section
entitled Supervision and Regulation - The Bank.
The Federal Reserve Board, which has primary supervisory authority over the
Bank, regularly examines banks in such areas as reserves, loans, investments,
management practices, and other aspects of operations. These examinations are
designed for the protection of the Bank's depositors rather than the Bank's
shareholders. The Bank must furnish annual and quarterly reports to the Federal
Reserve Board, which has the authority under the Financial Institutions
Supervisory Act to prevent the Bank from engaging in an unsafe or unsound
practice in conducting its business.
<PAGE>
Federal and state banking laws and regulations govern, among other things,
the scope of the Bank's business, the investments the Bank may take, the
reserves against deposits the Bank must maintain, the types and terms of loans
the Bank may make and the collateral it may take, the activities of the Bank
with respect to mergers and consolidations, and the establishment of branches.
Pennsylvania law permits statewide branching.
The Bank is required to comply with the Federal Reserve Boards risk-based
capital guidelines. The guidelines require all United States banks and bank
holding companies to maintain a minimum risk-based capital ratio of 8.00% (of
which at least 4% must be "Tier 1 Capital," consisting principally of common
shareholders' equity, noncumulative perpetual preferred stock, a limited amount
of cumulative perpetual preferred stock, and minority interests in the equity
accounts of consolidated subsidiaries, less certain intangible assets). The
remainder ("Tier 2 Capital") may consist of a limited amount of subordinated
debt, minority interests in the equity accounts of consolidated subsidiaries,
and intermediate-term preferred stock, certain hybrid capital instruments and
other debt securities, perpetual preferred stock, and a limited amount of the
general loan loss allowance.
The federal banking agencies have specified, by regulation, the levels at
which an insured institution is considered "well capitalized," "adequately
capitalized," "undercapitalized," "significantly undercapitalized," or
"critically undercapitalized." Under these regulations, an institution is
considered "well capitalized" if it has a total risk-based capital ratio of 10%
or greater, a Tier 1 risk-based capital ratio of 6% or greater, a leverage ratio
of 5% or greater, and is not subject to any order or written directive to meet
and maintain a specific capital level. At September 30, 1998, Management
believed that the Company was in compliance with these regulatory standards to
be classified as "well capitalized." Assets are assigned to five risk
categories, with higher levels of capital required for the categories perceived
as representing greater risk. The required capital ratios represent equity and
(to the extent permitted) non-equity capital as a percentage of total
risk-weighted assets. The risk-based capital rules are designed to make
regulatory capital requirements more sensitive to differences in risk profiles
among banks and bank holding companies and to minimize disincentives for holding
liquid assets.
The Bank is subject to FDIC deposit insurance assessments. The FDIC has
adopted a riskrelated premium assessment system for both the Bank Insurance Fund
("BIF") for banks and the Savings Association Insurance Fund ("SAIF") for
savings association. Under this system, FDIC insurance premiums are assessed
based on capital and supervisory measures.
Under the risk-related premium assessment system, the FDIC, on a
semi-annual basis, assigns each institution to one of three capital groups (well
capitalized, adequately capitalized, or undercapitalized) and further assigns
such institution to one of three subgroups within a capital group corresponding
to the FDIC's judgment of its strength based on supervisory evaluations,
including examination reports, statistical analysis, and other information
relevant to gauging the risk posed by the institution. Only institutions with a
total risk-based capital to risk-adjusted assets ratio of 10% or greater, a Tier
1 capital to risk-adjusted assets ratio of 6% or greater, and a Tier 1 leverage
ratio of 5% or greater, are assigned to the well-capitalized group. As of
September 30, 1998, the Bank was assigned to the well-capitalized group.
<PAGE>
Pending Legislation
Various congressional bills and other proposals have proposed a sweeping
overhaul of the banking system, including provisions for: limitations on deposit
insurance coverage; changing the timing and method financial institutions use to
pay for deposit insurance; expanding the power of banks by removing the
restrictions on bank underwriting activities; tightening the regulation of bank
derivatives activities; allowing commercial enterprises to own banks; and
permitting bank holding companies to own affiliates that engage in securities,
mutual funds and insurance activities.
Management has no way of anticipating whether any of these measures will be
enacted or if enacted, their impact on the Company's financial position and
reported results of operation. As a consequence of the extensive regulation of
commercial banking activities in the United States, the Company's and the Bank's
business is particularly susceptible to being affected by federal and state
legislation and regulations that may increase the costs of doing business.
Effects of Inflation
Inflation has some impact on the Company's and the Bank's operating costs.
Unlike many industrial companies, however, substantially all of the Bank's
assets and liabilities are monetary in nature. As a result, interest rates have
a more significant impact on the Company's and the Bank's performance than the
general level of inflation. Over short periods of time, interest rates may not
necessarily move in the same direction or in the same magnitude as prices of
goods and services.
Monetary Policy
The earnings of the Company and the Bank are affected by domestic economic
conditions and the monetary and fiscal policies of the United States Government
and its agencies. An important function of the Federal Reserve System is to
regulate the money supply and interest rates. Among the instruments used to
implement those objectives are open market operations in United States
government securities and changes in reserve requirements against member bank
deposits. These instruments are used in varying combinations to influence
overall growth and distribution of bank loans, investments and deposits, and
their use may also affect rates charged on loans or paid for deposits.
The Bank is a member of the Federal Reserve System and, therefore, the
policies and regulations of the Federal Reserve Board have a significant effect
on its deposits, loans and investment growth, as well as the rate of interest
earned and paid, and are expected to affect the Bank's operations in the future.
The effect of such policies and regulations upon the future business and
earnings of the Company and the Bank cannot be predicted.
Environmental Regulation
There are several federal and state statutes which regulate the obligations
and liabilities of financial institutions pertaining to environmental issues. In
addition to the potential for attachment of liability resulting from its own
actions, a bank may be held liable under certain circumstances for
<PAGE>
the actions of its borrowers, or third parties, when such actions result in
environmental problems on properties that collateralize loans held by the bank.
Further, the liability has the potential to far exceed the original amount of
the loan issued by the Bank. Currently, neither the Company nor the Bank is a
party to any pending legal proceeding pursuant to any environmental statute, nor
is the Company and the Bank aware of any circumstances which may give rise to
liability under any such statute.
Year 2000
The Year 2000 issue is created by the potential inability of computer
systems to use more than two digits in the data field for the year, thus making
them unable to identify years after 1999 with accuracy. If a bank does not
resolve problems related to the Year 2000 issue, computer systems may
incorrectly compute payment, interest or delinquency information and may be
unable to process transactions among other items. In addition, because payment
and other important data systems are linked by computer, if the banks with which
the Bank conducts ongoing operations do not resolve this potential problem in
time, the Bank may experience significant data processing delays, mistakes or
failures. These delays, mistakes or failures may have a significant adverse
impact on the financial condition and results of operations of the Company and
the Bank.
Management has initiated an enterprise-wide program to prepare the
Company's computer systems and applications for the Year 2000. The Company has
developed a comprehensive inventory of all PC based applications, third-party
relationships, environmental systems, proprietary programs and non-computer
related systems (such as postage meters and fax machines). The Company
recognizes that the Bank's operating, processing and accounting operations are
computer reliant and could be affected by the Y2K issue and has developed a plan
to make the systems Y2K ready and to conduct testing on them by March 1999. As
of September 30, 1998, approximately 80% of the Company's systems were Year 2000
ready, with all systems expected to be ready by March 1999.
The Company has acquired its mission-critical system which supports the
Company's core business processes from a highly regarded third-party vendor.
This vendor began in 1997 and completed by October 1998 renovations to its
systems to make them Y2K ready. The remediated software was placed into daily
production in September 1998. Beginning in November 1998, the Bank, along with
other clients of this vendor, will begin comprehensive testing of the system's
Y2K readiness. Such testing is anticipated to be completed in January 1999.
However, because most computer systems are, by their very nature,
interdependent, it is possible that noncompliant third-party computers could
impact the Company's computer systems. The Company could be adversely affected
by the Y2K problem if it or unrelated parties fail to successfully address the
problem. The Company has taken steps to communicate with the unrelated parties
with whom it deals to coordinate Year 2000 compliance. Additionally, the Company
is dependent on external suppliers, such as, wire transfer systems, telephone
systems, electric companies, and other utility companies for continuation of
service. The Company is also assessing the impact, if any, the century date
change may have on its credit risk.
The Company has initiated communications with all of its significant
vendors, suppliers and large commercial customers to determine the extent to
which the Company is vulnerable to those third-parties' failure to remedy their
own Year 2000 Problems. The Y2K Project Manager has available each vendors' Y2K
readiness efforts which includes their remediation plan, renovation approach,
testing methodologies and target dates. In the event that any of the Company's
significant vendors, suppliers and large commercial customers do not
successfully achieve Year 2000 compliance in a timely manner, the Company's
business or operations could be adversely affected. If significant suppliers
fail to meet Year 2000 operating requirements, the Company intends to engage
alternative suppliers. For insignificant vendors, the Company will not
necessarily validate that they are Year 2000 compliant. However, for any
insignificant vendor who responds that they will not be compliant by March 1999,
the Company will seek a new vendor or system that is compliant. The Bank has
surveyed its large commercial customers as to their Y2K preparedness. At the
present time, in excess of 95% of these surveys have been returned. Respondents
have acknowledged their awareness of Y2K issues and currently believe that these
issues will not materially affect their financial condition, liquidity, or
results of operations. The extent to which customers are Y2K compliant is
considered in the Bank's decision to extend credit.
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. The impact on the overall economy from failures of other
companies and industries to successfully address this problem nationally and
internationally is unknown. See MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Year 2000 Issues.
Description of the Bank
The Bank was organized in 1990 as a Pennsylvania chartered banking
institution and is a member of the Federal Reserve System. The Bank commenced
operations on April 24, 1992. Customers' deposits held by the Bank are insured
by the FDIC to the maximum extent permitted by
<PAGE>
law. The Bank's legal headquarters are located at 379 North Main Street,
Doylestown, Bucks County, Pennsylvania 18901.
The Bank is a community-oriented financial services provider where
consumers and small business customers can obtain a wide variety of products and
services, including: checking, savings, money market accounts as well as
certificates of deposit, residential mortgage loans, home equity loans and lines
of credit, personal lines of credit, working capital lines, and other commercial
loans. The Bank also offers other services such as electronic banking, cash
management services, safe deposit boxes, telephone banking and automated teller
services. The Bank places an emphasis on serving customer needs by providing
personal attention and service. The Bank's primary service areas are Bucks
County, Pennsylvania and the Lehigh Valley region. Specifically, the main office
of the Bank is located in Doylestown, the county seat of Bucks County. The Bank
conducts business from its main office and two other retail offices located in
Southampton, Bucks County and Easton, Northampton County. In addition, the Bank
has a loan origination office in Yardley, Bucks County. A fourth branch office
in Lower Makefield Township in Bucks County is expected to open during the
fourth quarter of 1998.
The Bank's primary market area includes Doylestown, Pennsylvania and the
surrounding Bucks County and Greater Delaware Valley communities, as well as
Northampton County and parts of the Lehigh Valley, which is serviced from the
Bank's Easton office. Within this market area, the banking business is highly
competitive. The Bank actively competes with regionally-based commercial banks,
many of which have greater assets, capital and lending limits. The Bank also
competes with savings banks, savings and loan associations, money market funds,
mutual funds, insurance companies, stock brokerage firms, regulated small loan
companies, credit unions and with the issuers of commercial paper and other
securities. However, the Bank is generally competitive with all financial
institutions in its service area with respect to interest rates paid on time and
savings deposits, service charges on deposit accounts, interest rates charged on
loans, the convenience of banking facilities, location and hours of operation
and relative lending limits.
Lending Activities
The Bank offers a variety of loan products to its customers, including
loans secured by real estate, commercial and consumer loans. It is the Bank's
general policy to grant a majority of its loans in its primary trade area. This
trade area includes Doylestown, Pennsylvania and the surrounding Bucks County
and Greater Delaware Valley communities as well as Northampton County and parts
of the Lehigh Valley. The Bank's lending objectives are as follows: (1) to
establish a diversified loan portfolio composed of commercial loans, mortgage
loans, consumer loans and all other loan types; (2) to provide a satisfactory
rate of return to its shareholders by properly pricing loans to include the cost
of funds, administrative costs, bad debts, local economic conditions,
competition, customer relationships, the term of the loan, credit risk,
collateral quality, and a reasonable profit margin; and, (3) to provide
protection for its depositors by maintaining a predetermined level of loans to
deposits to ensure liquidity. The Bank recognizes that the lending of money is a
community responsibility which involves a degree of credit risk and therefore
manages such risk through portfolio diversification, underwriting policies and
procedures, and loan monitoring practices.
<PAGE>
The Bank makes loans for its portfolio to both commercial entities and
individual consumers. The types of loans offered include: (1) loans for
businesses and individuals on a short term or seasonal basis; (2) loans to
individuals for consumer purchases; (3) loans secured by marketable stocks and
bonds providing adequate margins for market fluctuations; (4) short term working
capital loans secured by the assignment of accounts receivable and inventory;
(5) automobile loans; and (6) second liens on commercial and residential real
estate. Loans of these types will be considered desirable by the Bank provided
such loans meet the test of sound credit.
The Bank has adopted the following loan-to-value ("LTV") ratios, in
accordance with standards adopted by its bank supervisory agencies:
Loan Category Loan-to-Value Limit
------------- -------------------
Commercial 70 %
Consumer 85 %
Real estate - farmland 80 %
Real estate - construction 80 %
Real estate - residential 90 %
Real estate - multifamily 75 %
Real estate - commercial 70 %
A description of each of the aforementioned loan categories is as follows:
Commercial Loans
Commercial loans are used to finance the acquisition of machinery and
equipment and other working capital needs of local commercial, retail and
professional firms. Commercial loans are generally collateralized by business
assets, excluding real property. Commercial loans are generally guaranteed by
the principals of the borrowing entity. As of September 30, 1998, $13.2 million
in commercial loans were outstanding, representing 10.16% of the total loan
portfolio. Risks associated with these loans include the general level of
economic activity in the Bank's trade area and its effect on the borrower's
ability to repay.
Consumer Loans
Consumer loans consist generally of automobile loans and personal loans. As
of September 30, 1998, $1.1 million in consumer loans were outstanding,
representing .81% of the total loan portfolio. The risks associated with these
loans involve potential decreases in the borrower's income and loss or damage to
collateral, if any.
Real Estate - Farmland
To date, the Bank has made one loan that it classified as secured by
farmland. This loan was paid off in September 1998. The Bank does not normally
engage in agricultural lending making an exception in this instance due to the
financial strength of the borrower.
<PAGE>
Real Estate - Construction
Construction loans are originated to partially fund land acquisition and
development and the hard cost of constructing, primarily, single family homes
for owner occupants in the Bank's market area. The risks assocated with these
loans involve cost of completion, economic conditions in the Bank's trade area,
repayment ability, a potential rise in interest rates and potential decreases in
property values. As of September 30, 1998, construction loans totaled $2.0
million or 1.57% of the loan portfolio.
Real Estate - Residential
Real estate loans secured by 1-4 family residential property totaled $23.7
million or 18.19% of total loans outstanding at September 30, 1998. These loans
include both first and second mortgages on single family homes. The majority of
the credits in this category represent loans to small businesses and
professionals that are secured by personal residences. Home equity loans and
lines to retail customers represented approximately $2.0 million of this
category. The risks involved with these types of loans are associated with the
financial condition of the borrowers and with potential decreases in real estate
values.
The Bank does not portfolio conventional first mortgages on residential
property which are unrelated to the business activity of the borrower. Other
conventional residential first mortgage loans are originated by an outside
company on behalf of the Bank and sold to correspondents.
Real Estate - Multifamily
As of September 30, 1998, loans secured by apartments and other multifamily
residential properties totaled $5.2 million or 4.00% of the total loan
portfolio. In assessing these loans, the Bank considers the condition and cash
flow of the properties and the experience of the owner operators. The risks
involved with these types of loans are associated with the financial condition
of the borrowers and with potential decreases in real estate values.
Real Estate - Commercial
Commercial mortgages are generated for both owner occupied commercial
properties and investment income producing properties located primarily in the
Bank's trade area and such loans are secured by an array of commercial
properties. As of September 30, 1998, $85.1 million in commercial mortgage loans
were outstanding, representing 65.27% of the total loan portfolio. The risks
involved with these types of loans are associated with the financial condition
of the borrowers and with potential decreases in real estate values.
Lending Limit
The amount of funds that the Bank may lend to a single borrower is limited
generally under Pennsylvania law to 15% of the aggregate of its capital,
surplus, undivided profits, loan loss reserves and capital securities of the
Bank (all as defined by statute and by regulation). At September 30,
<PAGE>
1998 the Bank's lending limit for most loans was approximately $2.0 million. In
order to compete for customer relationships with larger institutions having
higher regulatory lending limits, the Bank has, from time to time, engaged in
loan participation agreements with other financial institutions in order to make
loans which would otherwise be above its lending limit. The Bank expects to
continue to engage in participation relationships as it grows its customer base.
Loan Approval Process
The Bank generates loans in its primary trade area through the business
development efforts of its loan officers, referrals from existing or past
customers, directors and its network of attorneys and other professionals. When
applicable, an appraisal of real estate intended to secure the proposed loans is
undertaken by an independent fee appraiser. In connection with the approval
process, the Bank's loan officers analyze the borrower's financial conditions,
cash flow and collateral involved. Depending upon the size or type of credit
involved, the loan analysis is submitted to the loan committee of the Board of
Directors for approval. Loan applicants are notified of the decision of the Bank
by a letter setting forth the terms and conditions of the decision.
Loans are the most significant components of earning assets. Inherent with
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. The Company manages credit risk associated with its lending activities
through portfolio diversification, underwriting policies and procedures, and
loan monitoring practices. Commercial lending activity continues to be focused
on small businesses and professionals within the local community. Approximately
90% of the loan portfolio is collateralized at least in part by real estate as
shown by the following table:
<TABLE>
<CAPTION>
September 30, 1998 % of Total December 31, 1997 % of Total
------------------ ---------- ----------------- ----------
<S> <C> <C> <C> <C>
Real estate-farmland $ -- -- 500,000 0.46%
Real estate-construction 2,038,921 1.57% 1,188,288 1.09%
Real estate-residential 23,715,561 18.19% 22,965,889 21.10%
Real estate-multifamily 5,217,174 4.00% 1,948,943 1.79%
Real estate-commercial 85,084,787 65.27% 72,372,260 66.48%
Consumer 1,060,699 0.81% 797,671 0.73%
Commercial 13,239,115 10.16% 9,084,458 8.35%
-------------- ------- ------------- --------
Total Loans $130,356,257 100.00% 108,857,509 100.00%
Unearned income 402,350 324,835
Allowance for loan losses 1,655,184 1,360,148
--------------- -------------
Total loans, net $128,298,723 107,172,526
============ ===========
</TABLE>
The Bank's real estate portfolio, which is concentrated primarily within
the greater Lehigh and Delaware Valleys (Eastern Pennsylvania), is subject to
risks associated with the local economy.
<PAGE>
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.
At September 30, 1998, the Company's investment portfolio included $38.9
million of corporate bonds. These bonds are comprised of fixed and floating rate
securities issued by other U.S. banking companies. The ultimate collectibility
of these bonds depends on the continued success of these financial institutions.
The Company evaluates the credit-worthiness of each issuer prior to investing in
such securities. These financial institutions include some of the largest
banking companies in the country, as well as smaller regional and super regional
institutions. These companies are influenced by the general economic conditions
in the United States in particular, and may also be subject to a greater extent
than the Company itself, to international economic events and conditions.
Employees
As of November 1, 1998, the Bank has approximately forty-eight (48)
full-time equivalent employees and a total of fifty-six (56) employees.
Supervision and Regulation - The Bank
The Bank is subject to supervision, regulation and examination by the
Pennsylvania Department of Banking, the FDIC and the Federal Reserve Board. In
addition, the Bank is subject to a variety of local, state and federal laws that
affect its operation.
The laws of Pennsylvania applicable to the Bank include, among other
things, provisions that: (1) require the maintenance of certain reserves against
deposits; (2) limit the type and amount of loans that may be made and the
interest that may be charged thereon; (3) restrict investments and other
activities; and (4) limit the payment of dividends. The amount of funds that the
Bank may lend to a single borrower is limited generally under Pennsylvania law
to fifteen percent (15%) of the aggregate of its capital, surplus, undivided
profits, loan loss reserves and capital securities of the Bank (all as defined
by statute and by regulation).
<PAGE>
Applicable Pennsylvania law also requires that a bank obtain the approval
of the Department of Banking prior to effecting any merger where the surviving
bank would be a Pennsylvania-chartered bank. In reviewing any such merger
application, the Department of Banking considers, among other things, whether
the merger would be consistent with adequate and sound banking practices and in
the public interest on the basis of several factors, including the potential
effect of the merger on competition and the convenience and needs of the area
primarily to be served by the bank resulting from the merger.
Federal law also prohibits acquisitions of control of a bank without prior
notice to certain federal bank regulators. "Control" is defined for this purpose
as the power, directly or indirectly, to direct the management or policies of a
bank or to vote twenty-five percent (25%) or more of any class of voting
securities of a bank.
As a subsidiary bank of a bank holding company, the Bank is subject to
certain restrictions imposed by the Federal Reserve Act on any extensions of
credit to the bank holding company or its subsidiaries, on investments in the
stock or other securities of the bank holding company or its subsidiaries, and
on taking such stock or securities as collateral for loans. The Federal Reserve
Act and Federal Reserve Board regulations also place certain limitations and
reporting requirements on extensions of credit by the Bank to principal
shareholders of its parent holding company, among others, and to related
interests of such principal shareholders. In addition, such legislation and
regulations may affect the terms upon which any person becoming a principal
shareholder of a holding company may obtain credit from banks with which the
subsidiary bank maintains a correspondent relationship.
Riegle-Neal Interstate Banking and Branching Efficiency Act
Since September of 1995, the Riegle-Neal Interstate Banking and Branching
Efficiency Act of 1994 (the "Interstate Banking and Branch Act") has permitted
interstate banking. Bank holding companies, pursuant to an amendment to the Bank
Holding Company Act, can acquire a bank located in any state, as long as the
acquisition does not result in the bank holding company controlling more than
10% of the deposits in the United States, or 30% of the deposits in the target
bank's state. The law permits states to waive the concentration limits and
require that the target institution be in existence for up to five years before
it can be acquired by an out-of-state bank or bank holding company. Interstate
branching and merging of existing banks has been permitted since 1997 if the
bank is adequately capitalized and demonstrates good management. The Interstate
Banking and Branch Act also amends the International Banking Act to allow a
foreign bank to establish and operate a federal branch or agency upon approval
of the appropriate federal and state banking regulator. A national bank can move
across state lines as long as the relocation does not exceed thirty miles, and
also retain as branches the offices located in the original state.
Federal Deposit Insurance Act
Under the Federal Deposit Insurance Act ("FDIA"), the FRB possesses the
power to prohibit institutions regulated by it (such as the Bank) from engaging
in any activity that would be an unsafe and unsound banking practice or would
otherwise be in violation of the law. Moreover, the
<PAGE>
Financial Institutions Regulatory and Interest Rate Control Act of 1978 ("FIRA")
generally expanded the circumstances under which officers or directors of a bank
may be removed by the institution's federal supervisory agency, restricts
lending by a bank to its executive officers, directors, principal shareholders
or related interests thereof and restricts management personnel of a bank from
serving as directors or in other management positions with certain depository
institutions whose assets exceed a specified amount or which have an office
within a specified geographic area, and restricts management personnel from
borrowing from another institution that has a correspondent relationship with
their bank. Additionally, FIRA requires that no person may acquire control of a
bank unless the appropriate federal supervisory agency has been given sixty (60)
days prior written notice and within that time has not disapproved the
acquisition or otherwise extended the period for disapproval. Control for
purposes of FIRA, means the power, directly or indirectly, to direct the
management or policies or to vote twenty-five percent (25%) or more of any class
of outstanding stock of a financial institution or its respective holding
company. A person or group holding revocable proxies to vote twenty-five percent
(25%) or more of the outstanding common stock of a financial institution or bank
holding company, such as the Company, would presumably be deemed to control the
institution for purposes of FIRA.
Financial Institutions Reform, Recovery and Enforcement Act
The Financial Institutions Reform, Recovery and Enforcement Act of 1989
("FIRREA") was enacted in August of 1989. This law was enacted primarily to
improve the supervision of savings associations by strengthening capital,
accounting and other supervisory standards. In addition, FIRREA reorganized the
FDIC by creating two deposit insurance funds to be administered by the FDIC: the
Savings Association Insurance Fund and the Bank Insurance Fund. Customers'
deposits held by the Bank are insured under the Bank Insurance Fund. FIRREA also
regulates real estate appraisal standards and the supervisory/enforcement powers
and penalty provisions in connection with the regulation of the Bank.
Garn-St. Germain Depository Institutions Act
The Garn-St. Germain Depository Institutions Act of 1982 ("Garn-St.
Germain") removed certain restrictions on a bank's lending powers and
liberalized its depository capabilities. Garn-St. Germain also amended FIRA (see
above) by eliminating the statutory limits on lending by a bank to its executive
officers, directors, principal shareholders or related interests thereof and by
relaxing certain reporting requirements. Garn-St. Germain, however, also
tightened FIRA provisions respecting management interlocks and correspondent
bank relationships involving a bank's management personnel.
Community Reinvestment Act
Under the Community Reinvestment Act of 1977, as amended ("CRA"), the FRB
is required to assess the record of all financial institutions regulated by it
to determine if these institutions are meeting the credit needs of the community
(including low and moderate income neighborhoods) which they serve and to take
this record into account in its evaluation of any application made by any of
such institutions for, among other things, approval of a branch or other deposit
facility, office
<PAGE>
relocation, a merger or an acquisition of bank shares. The Financial
Institutions Reform, Recovery and Enforcement Act of 1989 ("FIRREA") amended the
CRA to require, among other things, that the FRB make publicly available the
evaluation of a bank's record of meeting the credit needs of its entire
community, including low and moderate income neighborhoods. This evaluation will
include a descriptive rating ("outstanding", "satisfactory", "needs to improve"
or "substantial noncompliance") and a statement describing the basis for the
rating. These ratings are publicly disclosed.
In April, 1995, regulations revised CRA with an emphasis on performance
over process and documentation. Under the revised rules, the five-point rating
scale is still utilized; however, the twelve (12) assessment factors have been
replaced with a three-prong test. A bank's compliance is determined by a
three-prong test whereby examiners assign a numerical score for a bank's
performance in each of three (3) areas: lending, service and investment. The
area of lending is weighted to increase its importance in the application of the
test. The rule became effective July 1, 1995.
Under the new regulation, banks will enjoy a reduction in compliance
burden. Specifically, banks are not required to keep extensive documentation to
prove that directors have participated in drafting and review of CRA policies. A
formal CRA statement does not have to be prepared. The efforts banks make to
market in low and moderate income communities do not have to be documented, nor
will banks have to justify the basis for their community delineation or the
methods utilized to determine the credit needs of the community.
Bank Secrecy Act
Under the Bank Secrecy Act ("BSA"), banks and other financial institutions
are required to report to the Internal Revenue Service currency transactions of
more than $10,000 or multiple transactions of which the Bank is aware in any one
day that aggregate in excess of $10,000. Civil and criminal penalties are
provided under the BSA for failure to file a required report, for failure to
supply information required by the BSA or for filing a false or fraudulent
report.
Competitive Equality Banking Act
An omnibus federal banking bill, known as the Competitive Equality Banking
Act ("CEBA"), was signed into law in August of 1987. Included in the legislation
were measures: (1) imposing certain restrictions on transactions between banks
and their affiliates; (2) expanding the powers available to federal bank
regulators in assisting failed and failing banks; (3) limiting the amount of
time banks may hold certain deposits prior to making such funds available for
withdrawal and any interest thereon; and (4) requiring that any adjustable rate
mortgage loan secured by a lien on a one-to-four family dwelling include a
limitation on the maximum rate at which interest may accrue on the principal
balance during the term of such loan. The Bank does not believe that this
legislation will have a material adverse effect on its anticipated operations or
its competitive position.
<PAGE>
Federal Deposit Insurance Corporation Improvement Act
Capital Categories
In December of 1991 the Federal Deposit Insurance Corporation Improvement
Act of 1991 ("FDICIA") became law. Under FDICIA, institutions must be
classified, based on their risk-based capital ratios into one of five defined
categories, as illustrated below (well capitalized, adequately capitalized,
undercapitalized, significantly undercapitalized and critically
undercapitalized).
<TABLE>
<CAPTION>
Total Risk- Tier 1 Risk- Tier 1 Capital Under
Based Based Leverage an Order or
Ratio Ratio Ratio Directive
---------- ------------ -------- --------------
<S> <C> <C> <C> <C>
CAPITAL CATEGORY
Well capitalized >10.0 >6.0 >5.0 No
- - -
Adequately capitalized > 8.0 >4.0 >4.0*
- - -
Undercapitalized < 8.0 <4.0 <4.0*
Significantly undercapitalized < 6.0 <3.0 <3.0
Critically undercapitalized <2.0
-
*3.0 for those banks having the highest available regulatory rating.
</TABLE>
Prompt Corrective Action
In the event an institution's capital deteriorates to the undercapitalized
category or below, FDICIA prescribes an increasing amount of regulatory
intervention, including: (1) the institution of a capital restoration plan and a
guarantee of the plan by a parent institution; and (2) the placement of a hold
on increases in assets, number of branches or lines of business. If capital has
reached the significantly or critically undercapitalized levels, further
material restrictions can be imposed, including restrictions on interest payable
on accounts, dismissal of management and (in critically undercapitalized
situations) appointment of a receiver. For well capitalized institutions, FDICIA
provides authority for regulatory intervention where the institution is deemed
to be engaging in unsafe or unsound practices or receives a less than
satisfactory examination report rating for asset quality, management, earnings
or liquidity. All but well capitalized institutions are prohibited from
accepting brokered deposits without prior regulatory approval.
Operational Controls
Under FDICIA, financial institutions are subject to increased regulatory
scrutiny and must comply with certain operational, managerial and compensation
standards to be developed by Federal Reserve Board regulations. FDICIA also
requires the regulators to issue new rules establishing certain minimum
standards to which an institution must adhere including standards requiring a
minimum ratio of classified assets to capital, minimum earnings necessary to
absorb losses and minimum ratio of market value to book value for publicly held
institutions. Additional regulations are required to be developed relating to
internal controls, loan documentation, credit underwriting, interest rate
exposure, asset growth and excessive compensation, fees and benefits.
<PAGE>
Real Estate Loans
FDICIA also requires that banking agencies reintroduce loan-to-value
("LTV") ratio regulations which were previously repealed by Garn-St. Germain.
LTV's will limit the amount of money a financial institution may lend to a
borrower, when the loan is secured by real estate, to no more than a percentage
to be set by regulation of the value of the real estate.
Truth-In-Savings
A separate subtitle within FDICIA, called the "Bank Enterprise Act of
1991", requires "truthin-savings" on consumer deposit accounts so that consumers
can make meaningful comparisons between the competing claims of banks with
regard to deposit accounts and products. Under this provision, the Bank is
required to provide information to depositors concerning the terms of their
deposit accounts, and in particular, to disclose the annual percentage yield.
There are some operational costs of complying with the Truth-In-Savings law.
Management believes that full implementation of FDICIA has had no material
impact on liquidity, capital resources or reported results of operation.
Economic Development, Agency, Fiduciary and Lender Environmental Liability
Protection Act
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.
From time to time, various types of federal and state legislation have been
proposed that could result in additional regulation of, and restrictions on, the
business of the Bank. It cannot be predicted whether any such legislation will
be adopted or how such legislation would affect the business of the Bank. As a
consequence of the extensive regulation of commercial banking activities in the
United States, the Bank's business is particularly susceptible to being affected
by federal and state legislation and regulations that may increase the costs of
doing business.
<PAGE>
DESCRIPTION OF PROPERTY
The Bank leases its main office located at 379 North Main Street,
Doylestown, Pennsylvania and two additional branch offices located at 2201
Northampton Street, (Wilson Borough) Easton, Pennsylvania (the "Easton Branch")
and 516 Second Street Pike, Southampton, Bucks County, Pennsylvania (the
"Southampton Branch"). The Bank's main office in Doylestown is a two-story
building consisting of approximately 5,000 square feet. The Easton and
Southampton branches occupy approximately 2,800 and 3,060 square feet,
respectively. In addition, the Bank leases a 674 square foot loan production
center in Yardley, Bucks County, Pennsylvania and 3,060 square foot operations
center in Southampton, Pennsylvania. Beginning in December 1998, the Bank will
lease a loan production office in Southampton, Pennsylvania consisting of
approximately 1,000 square feet.
Rental expense on operating leases amounted to approximately $180,797 and
$143,175 for the years ended December 31, 1997 and 1996, respectively. All
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
$184,601, $77,670, $76,170, $59,670 and $59,670, respectively.
The Bank leases its Doylestown and Easton offices from a partnership
consisting of several of the Company's directors. These leases expire in
December 1998 but allow the Bank the right of first refusal to purchase these
premises. The Bank intends to exercise its purchase option on these properties
at a combined price in the range of $1,200,000 to $1,300,000.
The Bank is currently in the process of constructing its fourth full
service location in Lower Makefield Township, Pennsylvania. This site will be a
two story structure comprising approximately 5,000 square feet. This location is
owned by the Bank and is expected to open during the fourth quarter of 1998. The
Bank will close its Yardley loan origination office as soon as possible
following the opening of this facility. Total capital expenditures for the Lower
Makefield branch are expected to be $1,200,000. The parcel of land for this
branch office was purchased in September 1997 for approximately $250,000 and as
of September 30, 1998 approximately $250,000 of improvements have been made to
the site. An additional $700,000 will be expended for the completion of the
Lower Makefield (Yardley) branch.
Management considers that its facilities are adequate for its business.
<PAGE>
MARKET FOR COMMON STOCK
AND RELATED STOCKHOLDER MATTERS
Market Information
The Common Stock is the Company's only class of stock issued and
outstanding. The common stock 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 at December 31, 1997 and 1996 was 2,630,340 and
2,604,303, respectively. The number of shares outstanding as of September 30,
1998 was 2,630,340. The Common Stock issued and outstanding is traded on a
limited basis in the local over-the-counter market, primarily in the Company's
immediate geographic area. The table below reports the highest and lowest bid
information per share of the Common Stock known to Management which has been
restated for all periods to reflect a threefor-one stock split on December 31,
1997 at which time the par value was changed from $1.00 to $.33 per share.
<TABLE>
<CAPTION>
1998 1997 1996
Quarter High Low High Low High Low
- ------- ---- --- ---- --- ---- ---
<S> <C> <C> <C> <C> <C> <C>
First 9.00 9.00 5.33 5.00 4.25 3.33
Second 11.00 10.00 5.50 5.50 4.58 4.58
Third 11.00 9.00 5.67 5.67 5.00 5.00
Fourth 11.00 11.00 6.00 6.00 5.00 4.67
</TABLE>
Shareholders
As of November 1, 1998, the Company has 466 shareholders of record.
Dividends
The Company maintains a philosophy of retaining earnings to fund the Bank's
growth. Therefore, the Company has never paid a cash dividend and has no plans
to do so for the foreseeable future. Any decision to pay a cash dividend in the
future must necessarily depend upon earnings, financial condition, appropriate
legal restrictions and other factors relevant at the time the Board of Directors
of the Company considers dividend policy. Cash available for dividend
distribution to shareholders of the Company must initially come from dividends
paid by the Bank to the Company. Therefore, the restrictions on the Bank's
dividend payments are directly applicable to the Company.
Under the Pennsylvania Business Corporation Law of 1988, as amended
("BCL"), the Company may not pay a dividend if, after giving effect thereto: (1)
the Company would be unable to pay its debts as they become due or (2) the
Holding Company's total assets would be less than its total liabilities plus an
amount needed to satisfy any preferential rights of shareholders. Total assets
and liabilities shall be determined by the Board of Directors, which may base
its determination on such factors as it considers relevant, including without
limitation: (i) the book value of the assets and
<PAGE>
liabilities of the Company, as reflected on its books and records; and (ii)
unrealized appreciation and depreciation of the assets of the Company.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following is management's discussion and analysis of the significant
changes in the results of operations, capital resources and liquidity presented
in the accompanying consolidated financial statements for Premier Bancorp, Inc.
and its wholly owned subsidiaries: Premier Bank and PBI Capital Trust. 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"
or the "Company". The Company's consolidated financial condition and results of
operations consist almost entirely of the Bank's financial condition and results
of operations. Such financial condition and results of operations are not
intended to be indicative of future performance. This discussion should be read
in conjunction with the Consolidated Financial Statements and related notes
beginning on page F-1 of this Propsectus.
Certain statements in this document may be considered to be
"forward-looking statements" as that term is defined in the U.S. Private
Securities Litigation Reform Act of 1995, such as statements that include the
words "may", "believes", "expect", "estimate", "project", "anticipate",
"should", "intend", "probability", "risk", "target", "objective" and similar
expressions or variations on such expressions. 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. For example, risks and uncertainties can arise with changes in:
general economic conditions, including their impact on capital expenditures;
business conditions in the financial services industry; the regulatory
environment, including evolving banking industry standards; rapidly changing
technology and competition with community, regional and national financial
institutions; new service and product offerings by competitors and price
pressures; the inability of the Company to accurately estimate the cost of
systems preparation for Year 2000 compliance; and similar items. 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 the
Company's Annual Report on Form 10-KSB for the year ended December 31, 1997,
Quarterly Reports on Form 10-QSB filed by the Company in 1998, and any Current
Reports on Form 8-K filed by the Company. Information for the interim period is
not necessarily indicative of results that will occur for the remainder of 1998.
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
<PAGE>
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 Bank's deposits are insured by the
Bank Insurance Fund of the Federal Deposit Insurance Corporation to the fullest
extent provided by law. 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 those
deposits, primarily in loans, mortgage-backed securities, corporate bonds, and
obligations of U.S. government agencies and government sponsored entities. 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.
Management Strategy
The Bank's primary 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. The Bank plans to open its fourth
branch location in Lower Makefield Township, Bucks County, Pennsylvania (the
"Yardley branch") by year end 1998.
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.
Growth Trend
Total assets have grown in excess of 30% in each of the past five years
from $38,336,413 at December 31, 1993 to $232,557,374 at September 30, 1998.
During this same period, total deposits and total loans grew in excess of 20%
each year. Total loans have grown from $26,982,780 at December 31, 1993 to
$130,356,257 at September 30, 1998. The Company's lending strategy continues to
be focused on providing personal attention and credit solutions for small
businesses and professionals. New loan officers have been and continue to be
hired to grow the loan portfolio. Total deposits have grown from $33,103,423 at
December 31, 1993 to $174,405,400 at September 30, 1998. To date, deposits have
grown as a result of aggressive pricing, direct marketing and branch
<PAGE>
expansion. The Southampton branch was opened in February 1997 with total
deposits exceeding $23 million at September 30, 1998. By year end 1998, the
Company expects to open its fourth branch (the "Yardley branch") in Lower
Makefield Township, Bucks County, Pennsylvania. To support the Company's past
and future plans for growth, new operations personnel and improved computer
systems have also been added throughout the years.
The discussion that follows compares the financial results for the three
and nine months ended September 30, 1998 to the same periods in 1997. The change
in financial results over the past year are described mostly in terms of the
overall growth of the Company as discussed above.
As of and for the three and nine month periods ended September 30, 1998 and
1997.
Results of Operations
For the three months ended September 30, 1998, the Company reported net
income of $419,489 or $.14 diluted earnings per share. This represents an
increase of $60,493 or 16.9% from the $358,996 or $.13 diluted earnings per
share reported for the same period in 1997. Return on average assets was .76%
and .79% for the three months ended September 30, 1998 and 1997, respectively.
Return on average equity was 14.75% and 14.87% for the three months ended
September 30, 1998 and 1997, respectively. Net interest income and non-interest
expenses for the three months ended September 30, 1998 were higher than the
comparable period in 1997 and reflect the overall growth of the institution. The
provision for loan losses was $120,000 in 1998 in comparison with $105,000 for
1997. Non-interest income totaled $126,538, an increase of $70,066 from the
$56,472 earned in 1997. The increase in non-interest income is primarily due to
higher gains on the sale of investment securities available for sale.
Non-interest expense amounted to $1,365,743 for 1998, a $407,068 increase over
the $958,675 reported in 1997. Salaries and benefits increased $114,740 in 1998
in conjunction with the overall growth of the institution. The number of full
time equivalent employees has increased from 40 at September 30, 1997 to 47 at
September 30, 1998. In addition, non-interest expense for the three months ended
September 30,1998 includes $123,432 in minority interest in expense of
subsidiaries related to the Capital Securities issued on August 11, 1998 and
$77,460 in write-downs on real estate owned.
For the nine months ended September 30, 1998, the Company reported net
income of $1,180,569 or $.40 diluted earnings per share. This represents an
increase of $234,632 or 24.8% from the $945,937 or $.35 diluted earnings per
share reported for the same period in 1997. Return on average assets was .77%
and .76% for the nine months ended September 30, 1998 and 1997, respectively.
Return on average equity was 14.53% and 13.75% for the nine months ended
September 30, 1998 and 1997, respectively. Net interest income, non-interest
income and non-interest expenses for the nine months ended September 30, 1998
were higher than the comparable period in 1997 and reflect the overall growth of
the institution. The provision for loan losses was $355,000 in 1998 in
comparison with $280,000 for 1997. Non-interest income totaled $233,102, an
increase of $99,357 from the $133,745 earned in 1997. Service charges, gains on
the sale of investment securities available for sale and gains on the sale of
loans held for sale increased $23,849, $48,400 and $27,108, respectively in
1998. Non-interest expense amounted to $3,473,582 for 1998, a $707,947 increase
over the $2,765,635 reported in 1997. Salaries and benefits increased $347,547
in 1998 due to the hiring of new lending and operations personnel. Data
processing costs were $45,518 higher in 1998 due to an increase in the deposit
transactions and improved computer
<PAGE>
systems. Other expenses were $156,095 higher in 1998 and include $77,460 in
write-downs on real estate owned and $38,514 in printing and filing costs for
new shareholder/regulatory reporting. In addition, non-interest expense for the
nine months ended September 30,1998 includes $123,432 in minority interest in
expense of subsidiaries related to the Capital Securities issued on August 11,
1998.
The following table sets forth, for the periods indicated, certain key
balance sheet amounts and their corresponding earnings/expenses and rates (which
have been annualized).
<TABLE>
AVERAGE BALANCES, RATES AND INTEREST INCOME
AND EXPENSE SUMMARY
<CAPTION>
For the three months ended September 30, 1998 1997
- ---------------------------------------- ---- ----
Average Average Average Average
Balance Interest Rate Balance Interest Rate
------------ -------- ------- ------- -------- -------
<S> <C> <C> <C> <C> <C> <C>
Assets
Interest-bearing deposits $ 215,513 2,549 4.69% $ 279,799 3,191 4.52%
Federal funds sold 2,246,957 33,550 5.92% 1,635,967 22,809 5.53%
Investment securities available for sale
Taxable 63,804,182 1,077,370 6.70% 54,898,914 906,908 6.55%
Tax-exempt (1) 10,777,289 139,553 5.14% 4,222,052 58,663 5.51%
Investment securities held to maturity
(taxable) 10,587,228 177,213 6.64% 13,693,251 231,301 6.70%
---------- ------- ---- ----------- ------- ----
Total investment securities 85,168,699 1,394,136 6.49% 72,814,217 1,196,872 6.52%
Loans, net of unearned income (2)(3) 125,793,770 2,850,854 8.99% 98,947,292 2,296,748 9.21%
----------- --------- ---- ----------- --------- ----
Total earning assets 213,424,939 4,281,089 7.96% 173,677,275 3,519,620 8.04%
Cash and due from banks 3,326,896 2,888,721
Allowance for loan losses (1,602,181) (1,189,274)
Other assets 4,547,290 4,449,705
------------- -------------
Total assets $219,696,944 $179,826,427
============ ============
Liabilities, minority interest in
subsidiaries and shareholders' equity
Interest checking $ 13,110,597 86,439 2.62% $ 9,379,573 60,350 2.55%
Money market deposit accounts 1,775,661 11,483 2.57% 1,763,664 11,380 2.56%
Savings accounts 52,249,804 508,737 3.86% 41,836,812 410,468 3.89%
Time deposits 92,363,018 1,343,861 5.77% 76,366,480 1,102,590 5.73%
---------- --------- ---- ---------- --------- ----
Total interest-bearing deposits 159,499,080 1,950,520 4.85% 129,346,529 1,584,788 4.86%
Short-term borrowings 8,500,323 116,828 5.45% 26,267,536 373,052 5.63%
Long-term borrowings 15,000,000 205,338 5.43% 326,087 4,542 5.53%
Total borrowings 23,500,323 322,166 5.44% 26,593,623 377,594 5.63%
Subordinated debt 1,500,000 29,709 7.86% 1,500,000 31,039 8.21%
--------- ------ ---- --------- ------ ----
Total interest-bearing liabilities 184,499,403 2,302,395 4.95% 157,440,152 1,993,421 5.02%
Non interest bearing-deposits 14,610,542 9,949,797
Capital securities 5,543,478 --
Other liabilities 3,759,391 2,861,382
Shareholders' equity 11,284,130 9,575,096
Total liabilities, minority interest in
subsidiaries and shareholders' equity $219,696,944 $179,826,427
============ ============
Net interest income/rate spread 1,978,694 3.01% 1,526,199 3.02%
========= ==== ========= ====
Net interest margin 3.68% 3.49%
Average interest-earning assets as a percentage
of average interest-bearing liabilities 115.68% 110.31%
- -------------------
<FN>
(1) Interest income on tax-exempt investment securities has not been presented
on a tax equivalent basis.
(2) Includes nonaccrual loans of $283,280 and $502,701 on average for the three
months ended September 30, 1998 and 1997, respectively.
(3) Includes tax-exempt loans of $1,325,043 and $1,442,378 on average for the
three months ended September 30, 1998 and 1997, respectively. These loans
have not been presented on a tax equivalent basis.
</FN>
</TABLE>
The following table sets forth, for the periods indicated, certain key
average balance sheet amounts and their corresponding earnings/expenses and
rates (which have been annualized).
<PAGE>
<TABLE>
AVERAGE BALANCES, RATES AND INTEREST INCOME
AND EXPENSE SUMMARY
<CAPTION>
For the nine months ended September 30, 1998 1997
- --------------------------------------- ---- ----
Average Average Average Average
Balance Interest Rate Balance Interest Rate
------- ------- ------- ------- -------- -------
<S> <C> <C> <C> <C> <C> <C>
Assets
Interest-bearing deposits $ 294,760 8,762 3.97% 274,116 9,602 4.68%
Federal funds sold 3,313,645 137,220 5.54% 1,306,022 53,625 5.49%
Investment securities available for sale
Taxable 54,858,957 2,731,612 6.66% 53,304,187 2,678,048 6.72%
Tax-exempt (1) 10,039,402 391,920 5.22% 4,444,841 185,961 5.59%
Investment securities held to maturity
(taxable) 12,509,533 628,561 6.72% 9,978,397 528,024 7.07%
---------- ------- ---- --------- ------- ----
Total investment securities 77,407,892 3,752,093 6.48% 67,727,425 3,392,033 6.70%
Loans, net of unearned income (2)(3) 117,936,290 8,022,003 9.09% 91,764,146 6,308,320 9.19%
----------- --------- ---- ---------- --------- ----
Total earning assets 198,952,587 11,920,078 8.01% 161,071,709 9,763,580 8.10%
Cash and due from banks 3,332,355 2,646,588
Allowance for loan losses (1,498,162) (1,091,428)
Other assets 4,832,077 4,109,754
--------- ---------
Total assets $ 205,618,857 166,736,623
============= ===========
Liabilities, minority interest in
subsidiaries and shareholders' equity
Interest checking $ 12,362,205 240,120 2.60% 8,415,883 159,053 2.53%
Money market deposit accounts 1,746,337 33,360 2.55% 1,445,284 27,294 2.52%
Savings accounts 49,260,177 1,425,432 3.87% 41,528,731 1,221,459 3.93%
Time deposits 87,632,858 3,791,504 5.78% 67,745,583 2,886,947 5.70%
---------- --------- ---- ---------- --------- ----
Total interest-bearing deposits 151,001,577 5,490,416 4.86% 119,135,481 4,294,753 4.82%
Short-term borrowings 9,408,382 381,373 5.42% 25,377,674 1,077,680 5.68%
Long-term borrowings 15,000,000 608,497 5.42% 109,890 4,542 5.53%
Total borrowings 24,408,382 989,870 5.42% 25,487,564 1,082,222 5.68%
Subordinated debt 1,500,000 88,243 7.87% 1,456,044 88,778 8.15%
--------- ------ ---- --------- ------ ----
Total interest-bearing liabilities 176,909,959 6,568,529 4.96% 146,079,089 5,465,753 5.00%
Non interest-bearing deposits 12,788,689 8,993,193
Capital securities 1,868,132 --
Other liabilities 3,191,366 2,464,381
Shareholders' equity 10,860,711 9,199,960
---------- ---------
Total liabilities, minority interest in
subsidiaries and shareholders' equity $205,618,857 166,736,623
============ ===========
Net interest income/rate spread 5,351,549 3.05% 4,297,827 3.10%
========= ==== ========= ====
Net interest margin 3.60% 3.57%
Average interest-earning assets as a
percentage of average interest-bearing
liabilities 112.46% 110.26%
- --------------------
<FN>
(1) Interest income on tax-exempt investment securities has not been presented
on a tax-equivalent basis.
(2) Includes non-accrual loans of $249,042 and $517,294 on average for the nine
months ended September 30, 1998 and 1997, respectively.
(3) Includes tax-exempt loans of $1,356,353 and $1,471,761 on average for the
nine months ended September 30, 1998 and 1997, respectively. These loans
have not been presented on a tax-equivalent basis.
</FN>
</TABLE>
Net Interest Income
Historically, the Company's earnings have depended primarily upon the
Bank's net interest income, which is the difference between interest earned on
interest-earning assets and interest paid on interest-bearing liabilities.
Interest rates received and paid on loans and deposit products are heavily
influenced by the overall interest rate environment and by competition. Interest
rates have generally moved lower during 1998.
The net interest rate spread is the difference between average rates
received on interest-earning assets and average rates paid on interest-bearing
liabilities. Net interest margin is net interest income divided by average
interest-earning assets.
For the three months ended September 30, 1998, net interest income was
$452,495 higher than the same period in 1997. This increase was primarily a
function of asset growth. The net interest margin was 3.68% for the three months
ended September 30, 1998 as compared to 3.49% for the same period in 1997. While
the net interest spread was relatively unchanged during the three months ended
September 30, 1998 as compared to 1997, the increase in net interest margin is
attributed to the higher ratio of interest-earning assets to interest-bearing
liabilities. For the three months ended September 30, 1998 the ratio of
interest-earning assets to interest-bearing liabilities was 115.68% as compared
to 110.31% for the same period in 1997. Average earning assets grew $39,747,664
with an 8 basis point decrease in rate. Average investments and average loans
increased $12,354,482 and $26,846,478, respectively. The average yield on
investments and average yield on loans dropped 3 basis points and 22 basis
points, respectively, for the three months ended September 30, 1998. The overall
rate paid on interest bearing liabilities decreased 7 basis points. While the
average rate on borrowings and subordinated debt decreased 19 basis points and
35 basis points, respectively, average deposit costs were relatively unchanged.
Average interest bearing deposits increased $30,152,551 while average borrowings
decreased $3,093,300. Non-interest bearing deposits increased $4,660,745 or
46.8%.
For the nine months ended September 30, 1998, net interest income was
$1,053,722 or 24.5% higher than the same period in 1997. This increase was
primarily a function of asset growth as average earning assets grew $37,880,878
with a 9 basis point decrease in rate. The net interest margin was 3.60% for the
nine months ended September 30, 1998 as compared to 3.57% for the same period in
1997. The net interest margin increased due to the higher ratio of
interest-earning assets to interest-bearing liabilities, despite a 5 basis point
decrease in the net interest spread. For the nine months ended September 30,
1998 the ratio of interest-earning assets to interest-bearing liabilities was
112.46% as compared to 110.26% for the same period in 1997. Average investments
and average loans increased $9,680,467 and $26,172,144, respectively, for the
nine months ended
<PAGE>
September 30, 1998. The average yield on investments and average yield on loans
dropped 22 basis points and 10 basis points, respectively. The overall rate paid
on interest bearing liabilities decreased 4 basis points. While deposit costs
were higher in 1998 the rate on borrowings and subordinated debt decreased 26
basis points and 28 basis points, respectively. Average interest bearing
deposits increased $31,866,096 with a 4 basis point increase in rate, as most of
the growth was concentrated in higher costing time deposits. Non-interest
bearing deposits increased $3,795,496 or 42.2%.
Average borrowings decreased $1,079,182.
Non-Interest Income
Total non-interest income was $126,538 for the three months ended September
30, 1998 as compared to the $56,472 earned for the same period in 1997. The
increase is principally due to higher gains on the sale of investment securities
available for sale.
Total non-interest income was $233,102 for the nine months ended September
30, 1998 as compared to the $133,745 earned for the same period in 1997. Service
charges, gains on the sale of investment securities available for sale and gains
on the sale of loans held for sale increased $23,849, $48,400 and $27,108,
respectively.
Non-Interest Expense
For the three months ended September 30, 1998, non-interest expenses were
$1,365,743 as compared to $958,675 during the same period in 1997. The $407,068
increase in non-interest expense relates principally to $114,740 in higher
salary costs due to an increase in the number of employees and the overall
growth of the institution; $123,432 in minority interest in expense of
subsidiaries related to the Capital Securities issued in August 1998, and
$77,460 in write-downs on real estate owned.
For the nine months ended September 30, 1998, non-interest expenses were
$3,473,582 or $707,947 higher than the $2,765,635 reported during the same
period in 1997. Salaries and benefits increased $347,547 in 1998 due to the
addition of new lending and operations personnel. Data processing costs were
$45,518 higher in 1998 principally due to growth of the institution and variable
costs associated with item processing and account volumes. Other expenses were
$156,095 higher in 1998 and include $77,460 in write-downs on real estate owned
and $38,514 in printing and filing costs for new shareholder/regulatory
reporting. In addition, 1998 results include $123,432 in minority interest in
expense of subsidiaries related to the Capital Securities issued on August 11,
1998.
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.
<PAGE>
The provision for loan losses was $120,000 for the three months ended
September 30, 1998 as compared to $105,000 for the same period in 1997. For the
nine months ended September 30, 1998 and 1997 the provision for loan losses
totaled $355,000 and $280,000, respectively. The provision for loan losses for
the three and nine months ended September 30, 1998 were higher than the
comparable periods in 1997 due to the overall increase in the size of the loan
portfolio as well as the continuing concentration of commercial and commercial
real estate loan originations. Gross charge-offs for the nine months ended
September 30, 1998 were $67,992 versus $524 for 1997. Charge-offs for the nine
months ended September 30, 1998 included $47,064 for one loan which was
transferred to real estate owned in the first quarter of 1998. Because the
Bank's portfolio is relatively immature given its recent growth rates, current
charge-off and non-performing asset trends may not be indicative of future
performance.
Income Tax Expense
Income tax expense for the quarter ended September 30, 1998 was $200,000 as
compared to $160,000 for the quarter ended September 30, 1997. For the nine
months ended September 30, 1998, income tax expense totaled $575,500 as compared
to $440,000 for the same period in 1997. The tax provision for the three and
nine months ended September 30, 1998 increased due to the increase in taxable
earnings.
The effective tax rate for the three months ended September 30, 1998 was
32.3% as compared to 30.8% for the same period in 1997. The effective tax rate
for the nine months ended September 30, 1998 was 32.8% as compared to 31.2% for
the same period in 1997. The effective tax rate for the three and nine months
ended September 30, 1997 was higher than the comparable period in 1998, in part,
due to the deduction of remaining deferred organization costs in 1997. Deferred
organization costs were deducted for tax purposes over a 5 year period ending in
1997.
Financial Condition
Investment Securities
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 and
corporate bonds, as AFS to provide management the flexibility to sell certain
securities and adjust its balance sheet in response to capital levels and/or
changes in market conditions. The carrying values for AFS and HTM securities
were $83,535,485 and $9,854,181, respectively, as of September 30, 1998. During
1998, management sold certain mortgage-backed securities in reaction to higher
than expected prepayments triggered by generally falling interest rates.
Proceeds from 1998 security sales were $74,503,245 with net gains of $69,108
recorded. Investment purchases totaled $105,530,615 and were concentrated in
fixed rate GNMA securities and corporate bonds.
The estimated fair value of the Company's investment securities available
for sale declined $725,971 from an unrealized net gain of $79,053 at December
31, 1997 to an estimated unrealized loss of $646,918 at September 30, 1998.
Following the issuance of the Company's own $10 million of Capital Securities in
August 1998, the Company and the Bank invested in similar type securities
<PAGE>
issued by other banking companies which are classified as Corporate Bonds. The
Corporate Bond investments included $20 million of fixed rate securities which
were made to generally offset the costs of the Company's own issue.
Additionally, the Company invested $18 million in floating rate Corporate Bonds
to provide a variable rate element to its portfolio. Although the Bank has no
immediate plans to sell these securities, it has chosen to classify these
securities as available for sale pursuant to SFAS 115 which allows management
the flexibility to sell the securities and adjust its portfolio as future
conditions change. Available for sale securities are marked to market on the
balance sheet with an adjustment to equity, net of tax, and presented in the
caption "Accumulated other comprehensive income".
In late August and throughout September 1998 global financial markets
experienced high volatility following certain highly publicized events such as
Russia defaulting on its debt and the rippling effects on certain money
management funds ("Hedge Funds"). These events had a negative impact on non-U.S.
Government bond and credit markets as there was an overall "flight to quality"
of U.S. Treasury Bonds. Corporate bond prices were deeply discounted by the
markets and consequently, the Company's portfolio experienced an unrealized loss
in value. The Company believes that the credit quality of its corporate bond
portfolio is strong and therefore, the unrealized loss is deemed temporary. The
Company evaluates the credit worthiness of the issuer prior to investing in such
securities. Approximately 70% of the issuers are investment grade as rated by
Moody's Investors Service. The Company monitors market conditions closely and
adjusts its portfolio as it considers necessary.
<TABLE>
<CAPTION>
September 30, 1998
------------------
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 $ 6,987,666 7,030,000 -- --
Mortgage-backed securities 2,366,515 2,350,118 30,643,852 30,839,242
State and municipal securities -- -- 11,428,665 11,724,773
Corporate bonds -- -- 38,994,286 37,842,870
Equity securities -- -- 3,000,600 3,013,600
Other debt securities 500,000 500,000 115,000 115,000
------------- ----------- ------------- -------------
Total $ 9,854,181 9,880,118 84,182,403 83,535,485
============ ========== =========== ===========
<CAPTION>
December 31, 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>
<PAGE>
Loans Held for Sale
The Bank uses an outside company to originate and sell residential
mortgages on its behalf. The $289,152 increase in loans held for sale from
$197,944 at December 31, 1997 to $487,096 at September 30, 1998 relates to the
timing of loan originations versus their sale. Typically, these loans are sold
within 30 days of their settlement.
Loans
Loans are the most significant components of earning assets. Inherent with
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. The Company manages credit risk associated with its lending activities
through portfolio diversification, underwriting policies and procedures, and
loan monitoring practices. Commercial lending activity continues to be focused
on small businesses and professionals within the local community. Approximately
90% of the loan portfolio is collateralized at least in part by real estate as
shown by the following table:
<TABLE>
<CAPTION>
September 30, 1998 % of Total December 31, 1997 % of Total
------------------ ---------- ----------------- ----------
<S> <C> <C>
Real estate-farmland $ -- -- 500,000 0.46%
Real estate-construction 2,038,921 1.57% 1,188,288 1.09%
Real estate-residential 23,715,561 18.19% 22,965,889 21.10%
Real estate-multifamily 5,217,174 4.00% 1,948,943 1.79%
Real estate-commercial 85,084,787 65.27% 72,372,260 66.48%
Consumer 1,060,699 0.81% 797,671 0.73%
Commercial 13,239,115 10.16% 9,084,458 8.35%
------------- ------- ------------- --------
Total Loans $130,356,257 100.00% 108,857,509 100.00%
Unearned income 402,350 324,835
Allowance for loan losses 1,655,184 1,360,148
--------------- -------------
Total loans, net $128,298,723 107,172,526
============ ===========
</TABLE>
The Bank's real estate portfolio, which is concentrated primarily within
the greater Lehigh and Delaware Valleys (Eastern Pennsylvania), is subject to
risks associated with the local economy.
For a further discussion of loan categories, see the section entitled
DESCRIPTION OF BUSINESS - Lending Activities.
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, and
considers various factors, including current economic conditions, actual loss
experience and the current risk profile of the portfolio which is based, in
part, on the composition of loan types within the portfolio. Each loan is
assigned a specific loan loss reserve using a scoring system. This scoring
system takes into consideration collateral
<PAGE>
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 nonreal estate secured consumer loans,
are analyzed in the aggregate. Since the Bank is less than six years old with a
limited history of 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.
At September 30, 1998, the Bank had $1,655,184 in its allowance for loan
losses, representing 1.27% of outstanding loans receivable as compared to 1.25%
and 1.21% at December 31, 1997 and September 30, 1997, respectively.
The following table sets forth the activity in the allowance for loan
losses and certain key ratios for the periods indicated.
<TABLE>
<CAPTION>
For the Nine For the Nine
Months Ended For the Year Ended Months Ended
September 30, 1998 December 31, 1997 September 30, 1997
------------------ ----------------- ------------------
<S> <C> <C> <C>
Balance at beginning of period $ 1,360,148 960,672 960,672
Charge-offs
Real estate-residential 60,064 -- --
Consumer installment 7,928 524 524
---------------- ----------- ----------
Total charge-offs 67,992 524 524
Recoveries
Consumer installment 8,028 -- --
---------------- ----------- -----------
Net charge-offs 59,964 524 524
Provision for possible loan losses 355,000 400,000 280,000
-------------- ---------- -----------
Balance at end of period 1,655,184 1,360,148 1,240,148
============= =========== ==========
Total gross loans:
Average 118,334,741 95,403,549 92,004,276
End of period 130,356,257 108,857,509 102,265,120
Ratios:
Net charge-offs to:
Average loans 0.05% -- --
Loans at end of period 0.05% -- --
Allowance for loan losses 3.62% 0.04% 0.04%
Provision for loan losses 16.89% 0.13% 0.19%
Allowance for loan losses to:
Total gross loans at end of period 1.27% 1.25% 1.21%
Non-performing loans 135.16% 209.64% 241.59%
Non-performing assets 84.68% 105.68% 80.48%
</TABLE>
<PAGE>
Charge-offs against the allowance for loan losses in 1998 totaled $67,992
of which $47,064 related to one loan which was transferred to real estate owned
during the first quarter of 1998. Because the Bank's loan portfolio is
relatively immature given its recent growth rates, current charge-off and
non-performing asset trends may not be indicative of future performance.
Non-Performing Assets
Non-performing assets are defined as accruing loans past due 90 days or
more, non-accruing loans, restructured loans and real estate owned.
<TABLE>
<CAPTION>
September 30, 1998 December 31, 1997 September 30, 1997
------------------ ----------------- ------------------
<S> <C> <C> <C>
Loans past due 90 days or more and accruing
Real estate residential $ 131,755 146,492 --
Consumer installment 252 4,576 12,175
---------------- ------------ ---------
Total loans past due 90 days
or more and accruing 132,007 151,068 12,175
Loans accounted for on a non-accrual basis
Real estate-construction -- 299,200 299,200
Real estate-residential 25,000 -- --
Real estate-multi family 898,890 -- --
Commercial real estate 168,714 191,534 201,942
Consumer installment -- 7,000 --
------------------ ----------- ----------
Total non-accrual loans 1,092,604 497,734 501,142
Real estate owned 730,000 638,286 1,027,539
------------ --------- ---------
Total non-performing assets $ 1,954,611 1,287,088 1,540,856
============ ========= =========
Total as a percentage of total assets 0.84% 0.67% 0.83%
</TABLE>
Total non-accrual loans increased $594,870 from $497,734 at December 31,
1997 to $1,092,604 at September 30, 1998. The increase relates principally to
the placement of one multi-family real estate loan in the amount of $898,890 on
non-accrual in September 1998. In addition, a loan in the amount of $297,064 and
secured by residential property was transferred to real estate owned in January
1998. A $47,064 charge-off against the loan loss reserve was recorded concurrent
with this transfer.
Real Estate Owned
Real estate owned increased $91,714 from $638,286 at December 31, 1997 to
$730,000 at September 30, 1998. At September 30, 1998, this balance included two
residential properties carried at $250,000 and $480,000, respectively.
During the first quarter of 1998, the Company foreclosed on a non-accruing
loan secured by residential property valued at $250,000 and sold an investment
property for $80,826. During the
<PAGE>
third quarter of 1998, a $77,460 write-down was taken on the $480,000 property.
This property was subsequently sold in October 1998 with no resulting gain or
loss on the sale.
Deferred Taxes
The $246,830 increase in deferred taxes from $404,906 at December 31, 1997
to $651,736 at September 30, 1998 relates principally to the change in the
estimated fair market value of investment securities available for sale.
Other Assets
The $126,756 increase in other assets from $486,348 at December 31, 1997 to
$613,104 at September 30, 1998 relates primarily to the capitalization and
deferral of $332,420 in costs related to the Capital Securities issued in August
1998. These deferred costs were partially offset by a $220,121 decrease in
principal payments due on FHLMC mortgage-backed securities as the Company
reduced its holdings in this agency.
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. The Bank primarily attracts deposits from within its market area.
Additional deposit growth will be accomplished through deposit promotions,
business development programs and continued branch expansion. The Bank expects
to open its fourth branch, the Yardley branch, by the end of 1998.
Total deposits at September 30, 1998 were $174,405,400, representing an
increase of $30,802,198 from deposits of $143,603,202 at December 31, 1997. The
majority of this increase relates to the success of the Company's certificate of
deposit promotion, which was held in the month of February 1998. This promotion,
which offered a premium rate on nine-month certificates of deposits, generated
approximately $11,600,000 in funds. In addition, $6.5 million in public funds
were on deposit at September 30, 1998 with $2.5 million and $4.0 million
maturing in October 1998 and December 1998, respectively. Savings accounts
increased $6,487,515 or 14.2% to $52,039,019 at September 30, 1998 from
$45,551,504 at December 31, 1997.
Core deposits, which exclude time deposits greater than $100,000 were
$155,350,774 or 89.07% of total deposits at September 30, 1998. Total time
deposits at September 30, 1998 were $93,870,711 or 53.82% of total deposits, of
which $21,049,411 mature after one year.
Borrowings
Borrowings decreased $7,187,522 from $34,842,740 at December 31, 1997 to
$27,655,218 at September 30, 1998. Borrowings from the Federal Home Loan Bank
("FHLB") and retail
<PAGE>
repurchase agreements decreased $2,500,000 and $3,190,522, respectively. The
remaining decrease relates to overnight federal funds.
At September 30, 1998 securities sold under agreement to repurchase
consisted of $10,000,000 in borrowings from the FHLB maturing in 30 days and
$2,655,218 in retail repurchase agreements maturing overnight. At December 31,
1997 borrowings from the FHLB and retail customers were $12,500,000 and
$5,845,740, respectively. All borrowings from the FHLB are secured by a blanket
lien against the Bank's assets.
Long-term FHLB advances mature in the year 2002. These 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.
<TABLE>
<CAPTION>
September 30, 1998 December 31, 1997
------------------ -----------------
Weighted Weighted
Average Average
Amount Rate Amount Rate
-------- ------- ------ --------
<S> <C> <C> <C> <C>
Short-term:
Securities sold under agreement
to repurchase $12,655,218 5.28% 18,345,740 5.54%
Other -- -- 1,497.000 6.31%
------------- ------- ----------- -----
$12,655,218 5.28% 19,842,740 5.59%
Long-term:
Federal Home Loan Bank advances 15,000,000 5.42% 15,000,000 5.42%
0 ------------ ----- ---------- -----
Total borrowings $27,655,218 5.36% 34,842,740 5.52%
=========== ===== ========== =====
</TABLE>
Other Liabilities
The $4,083,488 increase in other liabilities from $1,797,538 at December
31, 1997 to $5,881,026 at September 30, 1998 relates primarily to the accrual of
$4,000,000 in security purchases. These purchases settled in October 1998.
Capital Adequacy
At September 30, 1998, management believes that the Company was in
compliance with all applicable regulatory requirements to be classified as "well
capitalized" pursuant to FDIC regulations. The Company plans to remain well
capitalized and manages the Bank accordingly. On August 11, 1998, $10.0 million
in Capital Securities were issued by the Company's recently formed subsidiary,
PBI CCapital Trust. Proceeds from the Capital Securities provide the Company
with additional Tier I and Tier II capital. The Capital Securities, which
represent the minority interest in equity accounts of subsidiaries, are limited
to 25% of Tier I capital. As the Company's equity grows, a greater portion of
the Capital Securities will count towards Tier I capital.
<PAGE>
Several large capital expenditures are planned for the remainder of 1998
through 1999. These include the purchase of the Doylestown and Easton branches,
which are currently leased, and the completion of the Yardley branch
construction. These expenditures are estimated to cost $2.0 million.
The tables below depict the Company's capital components and ratios along
with the "adequately" and "well" capitalized criteria as defined by the
regulators. At September 30, 1998, the Company exceeded all regulatory
requirements and is classified as "well capitalized".
<TABLE>
CAPITAL COMPONENTS
<CAPTION>
September 30, 1998 December 31, 1997
------------------ ------------------
<S> <C> <C>
Tier I
Shareholders' equity $ 11,135,265 10,433,837
Allowable portion of minority interest
in equity of subsidiaries 3,850,000
Net unrealized security losses (gains) 426,966 (52,175)
---------------- -------------
Total Tier I Capital $ 15,412,231 10,381,662
============ ===========
Tier II
Allowable portion of the allowance
for loan losses $ 1,655,184 1,360,148
Allowable portion of minority interest
in equity of subsidiaries 6,150,000 --
Allowable portion of subordinated debt 1,500,000 1,500,000
-------------- ------------
Total Tier II Capital $ 9,305,184 2,860,148
============= ============
Total Capital $ 24,717,415 13,241,810
Risk-weighted assets 175,717,000 120,736,000
</TABLE>
<TABLE>
CAPITAL RATIOS
<CAPTION>
Actual Actual Adequately Well
September 30, 1998 December 31, 1997 Capitalized Capitalized
------------------ ----------------- ----------- -----------
<S> <C> <C> <C> <C>
Total risk-based
capital/risk-weighted assets 14.07% 10.97% 8.00% 10.00%
Tier I capital/risk-weighted
assets 8.77% 8.60% 4.00% 6.00%
Tier I capital/average
assets (leverage ratio) 7.02% 5.51% 4.00% 5.00%
</TABLE>
<PAGE>
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 Bank's primary asset deployment activities are the origination of loans
secured by real estate, and the purchase of mortgage-backed securities,
corporate bonds and other securities. During the nine months ended September 30,
1998, the Bank's loan portfolio grew $21,808,714 as compared to an increase of
$20,144,477 for the same period in 1997. Purchases of mortgage-backed and other
securities totaled $105,530,615 for the nine months ended September 30, 1998 as
compared to $37,318,168 for the nine months ended September 30, 1997. 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. In addition, the $10.0 million in proceeds from the Capital
Securities issued in August 1998 were temporarily invested in investments
available for sale. Proceeds from the sale of investment securities totaled
$74,503,245 and $18,900,322 for the nine months ended September 30, 1998 and
September 30, 1997, respectively. The Bank sold $55,444,887 in mortgage-backed
securities in 1998 in reaction to higher than expected prepayments caused by
generally lower and falling interest rates. Principal repayments on
mortgage-backed securities totaled $8,444,557 for the nine months ended
September 30, 1998 and $10,711,552 for the nine months ended September 30, 1997.
Investment securities which were called and repaid by the issuer totaled
$6,000,000 in 1998. There were no securities called in 1997.
Deposits increased $30,802,198 during the nine months ended September 30,
1998 as compared to $22,695,645 during the same period in 1997. Deposit flows
are affected by the level of interest rates, the interest rates and products
offered by local competitors, and other factors. The Bank offered a premium rate
for nine-month certificates of deposit in February 1998, which accounted for
approximately $11.6 million of the increase in deposits in 1998. In addition,
$6,500,000 in public funds are also included in total deposits at September 30,
1998. Borrowings decreased $7,187,522 during the nine months ended September 30,
1998 and increased $5,676,550 during the nine months ended September 30, 1997.
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". The
subordinated debt matures on January 12, 2012 but can be prepaid with the
written approval of the Federal Reserve Bank of Philadelphia. On August 11,
1998, the Company's recently formed subsidiary, PBI Capital Trust, issued
$10,000,000 of 8.57% Capital Securities due August 15, 2028. Proceeds from the
Capital Securities provide the Company with additional Tier I and Tier II
capital.
The Bank monitors it liquidity position on a daily basis. Excess short-term
liquidity is invested in overnight federal funds sales through its correspondent
bank, Atlantic Central Bankers Bank. Conversely, overnight federal funds may be
purchased to satisfy daily liquidity needs.
<PAGE>
Additional sources of funds are available through use of one of the following:
$2,000,000 unsecured federal funds line of credit with Atlantic Central Bankers
Bank or, the Bank's $43,329,000 borrowing limit at the Federal Home Loan Bank of
Pittsburgh (the "FHLB"). The Bank could also sell or borrow against certain
investment securities. At September 30, 1998, the Bank had $25,000,000 in
borrowings outstanding at the FHLB.
PBI Capital Trust Securities
On August 11, 1998, the Company's recently formed subsidiary, PBI Capital
Trust (the "Trust") issued $10.0 million of 8.57% Capital Securities due August
15, 2028. The Trust is a statutory business trust created under the laws of
Delaware. The Company is the sole owner of the Trust. The Trust used the
proceeds from the Capital Securities to acquire $10.0 million in 8.57% Junior
Subordinated Deferrable Interest Debentures issued by the Company. The Junior
Subordinated Debentures are the sole assets of the Trust, and payments under the
Junior Subordinated Debentures are the sole revenue of the Trust. The Company is
using the proceeds from the sale of the Junior Subordinated Debentures for
general corporate purposes, including, but not limited to, investments in and
advances to its subsidiary, Premier Bank, repurchases of common stock of the
Company, branch expansion, the purchase of certain branch facilities being
leased and funding loans. The precise amount and timing of the application of
the net proceeds used for such corporate purposes depends on the funding
requirements and the availability of other funds to the Company and the Bank. At
present, the majority of the net proceeds have been temporarily invested in
investment securities available for sale. Proceeds from the Capital Securities
provide the Company with additional Tier I and Tier II capital. The annual
expense for the Capital Securities is $875,000.
These Capital Securities are reported in the Consolidated Statements of
Financial Condition under the caption "Corporation-obligated mandatorily
redeemable capital securities of subsidiary trust holding solely junior
subordinated debentures of the Corporation."
<PAGE>
As of and for the years ended December 31, 1997 and 1996.
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. Noninterest 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.
The following table indicates certain key average balance sheet amounts and
their corresponding earnings/expenses and rates.
<TABLE>
AVERAGE BALANCES, RATES AND INTEREST INCOME AND EXPENSE SUMMARY
<CAPTION>
1997 1996
---- ----
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 69,351,583 4,598,974 6.63% 55,007,208 3,612,267 6.57%
securities
Loans, net of
unearned income(2) 95,146,116 8,753,303 9.20% 68,593,534 6,387,392 9.31%
---------- --------- ----- ---------- --------- -----
1997 1996
---- ----
Total earning assets 166,292,751 13,448,692 8.09% 125,545,360 120,103,117 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 1,816,642
--------- ---------
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- 122,196,840 5,896,500 4.93% 95,004,403 4,587,766 4.83%
bearing deposits
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 150,644,028 7,532,471 5.00% 112,007,567 5,543,472 4.95%
liabilities
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) 3.56% 3.63%
Average interest
earning assets as a
percentage of
average
interest-bearing
liabilities 110.39% 112.09%
- -----------------------------------
<FN>
(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
interest-earning assets.
</FN>
</TABLE>
<PAGE>
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 on 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
interest-earning 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 net interest margin was 3.56% for 1997 as compared to 3.63% for 1996. While
the net interest spread was relatively unchanged for the year ended December 31,
1997 as compared to 1996, the decrease in net interest margin is attributed to
the lower ratio of interest-earning assets to interest-bearing liabilities. The
ratio of interest-earning assets to interest-bearing liabilities was 110.39% for
1997 as compared to 112.09% for 1996. 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.
The Rate-Volume Analysis table below highlights the impact of changing
rates and volumes on total interest income and interest expense.
<TABLE>
<CAPTION>
RATE VOLUME ANALYSIS OF CHANGES IN NET INTEREST INCOME
FOR THE YEARS ENDED FOR THE YEARS ENDED
------------------- -------------------
DECEMBER 31, 1997 vs. 1996 DECEMBER 31, 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
<CAPTION>
FOR THE YEARS ENDED FOR THE YEARS ENDED
DECEMBER 31, 1997 vs. 1996 DECEMBER 31, 1996 vs. 1995
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 395,385 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
nonrecognition 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 borrowings was basically unchanged
while the average balance increased
<PAGE>
$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
<PAGE>
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.
The following table depicts the Bank's year end 1997 gap analysis given
management assumptions:
<TABLE>
INTEREST RATE SENSITIVITY
<CAPTION>
WITHIN 3 4 TO 6 7 MONTHS 1 TO 3 3 TO 5 AFTER
DECEMBER 31, 1997 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 account 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,
<PAGE>
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.
<TABLE>
NON-INTEREST INCOME COMPARISON
<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 an outside company to originate residential mortgages on its behalf and
arrange for the sale of loans with correspondents. The Bank's relationship with
this outside company was terminated in May of 1997. 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.
<TABLE>
NON-INTEREST EXPENSE COMPARISON
<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
<PAGE>
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 Company's contract with its data
processor was terminated and it converted to a new provider. The new data
processing system was selected, in part, due to its ability to provide an
image-based item processing platform as well as provide for the current and
future needs of the Company including electronic banking capabilities. 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.
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.
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. The provision for
loan losses increased in 1997 due to the overall increase in the size of the
loan portfolio as well as the continuing concentration of commercial and
commercial real estate loan originations. Gross charge-offs for 1997 were $524
versus $127,641 for 1996. Charge-offs in 1996 included $125,000 pertaining to
one borrower. Because the Bank's loan portfolio is relatively immature given its
recent growth rates, current chargeoff and nonperforming asset trends may not be
indicative of future performance.
<PAGE>
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.
Financial Condition
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.
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,
<PAGE>
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:
<TABLE>
INVESTMENT SECURITIES
<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
=========== ========== ========== ==========
<CAPTION>
1996
----
HELD TO MATURITY AVAILABLE FOR SALE
- ------------------------------------------------------------------------------------------------
AMORTIZED ESTIMATED AMORTIZED ESTIMATED
COST FAIR VALUE COST FAIR VALUE
- ------------------------------------------------------------------------------------------------
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>
<PAGE>
<TABLE>
INVESTMENT SECURITIES MATURITIES AND WEIGHTED AVERAGE YIELDS
<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>
<PAGE>
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:
<TABLE>
LOAN PORTFOLIO
<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%
<CAPTION>
LOAN MATURITIES AND INTEREST SENSITIVITY
UNDER 1-5 OVER
DECEMBER 31, 1997 1 YEAR YEARS 5 YEARS TOTAL
- ----------------- ------ ----- ------- -----
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
<PAGE>
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.
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, and
considers various factors, including current economic conditions, actual loss
experience and the current risk profile of the portfolio which is based, in
part, on the composition of loan types within the 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 nonreal estate secured consumer loans, are analyzed in the aggregate.
Since the Bank is less than six years old with a limited history of 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 primarily 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.
<PAGE>
<TABLE>
ALLOWANCE FOR LOAN LOSS ALLOCATION
<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% 12,960 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>
<TABLE>
ALLOWANCE FOR LOAN LOSSES
<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 los 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>
<PAGE>
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.
NON-PERFORMING ASSETS
December 31, 1997 1996
- ------------ ---- ----
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 919,534 571,761
Consumer installment 7,000 --
--------- ------------
Total non-accural 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%
<PAGE>
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.
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
<PAGE>
non-maturity deposits. Additional deposit growth will be accomplished through
deposit promotions, business development programs and continued branch
expansion.
<TABLE>
AVERAGE DEPOSITS BY MAJOR CLASSIFICATION
<CAPTION>
YEAR ENDED DECEMBER 31, 1997 1996
- ----------------------- ---- ----
BALANCE RATE BALANCE RATE
<S> <C> <C> <C> <C>
Noninterest-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
YEAR ENDED DECEMBER 31, 1997
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
==============
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.
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.
<PAGE>
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.
The following table depicts the Bank's capital components and ratios
along with the "adequately" and "well" capitalized criteria as defined by the
regulators.
<TABLE>
CAPITAL COMPONENTS
<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>
<TABLE>
CAPITAL RATIOS
<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>
<PAGE>
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
payholders of its common stock by virtue of the restrictions on the Bank's
abilityto 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
bedeclared 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
yearsless any required transfers to surplus or a fund for the retirement of
preferredstock, if any. The Federal Deposit Insurance Corporation Act generally
prohibitsall 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 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".
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.
<PAGE>
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. Deposit growth over the past two years has been
achieved primarily through aggressive pricing, direct marketing, the maturation
of existing branches and branch expansion. Recent bank mergers have also
resulted in new deposits for the Bank as many customers switched to community
banks as an alternative to the larger financial institutions. In addition, the
Southampton branch was opened in February 1997. The Southampton branch had total
deposits in excess of $9,000,000 at December 31, 1997. 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.
<PAGE>
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
$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.
Year 2000 Issues
The following section contains forward-looking statements which involve
risks and uncertainties. The actual impact on the Company of the Year 2000 issue
could materially differ from that which is anticipated in the forward-looking
statements as a result of certain factors identified below.
The "Year 2000 Problem" (Y2K) arose because many existing computer programs
use only the last two digits to refer to a year. Therefore, these computer
programs do not properly recognize a year that begins with "20" instead of the
familiar "19". If not corrected, many computer applications could fail or create
erroneous results by or at the year 2000. This could cause entire system
failures, miscalculations, and disruptions of normal business operations
including, among other things, a temporary inability to process transactions,
generate statements, compute payments, interest or delinquency, or engage in
similar daily business activities. The extent of the potential impact of the
Year 2000 Problem is not yet known, and if not timely corrected, it could affect
the global economy.
The Bank is subject to the regulation and oversight of various banking
regulators, whose oversight includes the provision of specific timetables,
programs and guidance regarding Year 2000 issues. Regulatory examination of the
Bank's Year 2000 programs are conducted on a quarterly basis and reports are
submitted by the Bank to the banking regulators on a periodic basis. In
addition, oral reports are currently provided on a monthly basis to the Board of
Directors.
<PAGE>
Company's State of Readiness
Management is committed to ensuring that the Company's daily operations
suffer little or no impact from the century date change. The Company has applied
due diligence throughout the Y2K process, following the guidelines contained in
the series of Federal Financial Institutions Examinations Council's Interagency
Guidelines and the SEC's Release No. 33-7558. The guidelines identify the
following phases: awareness, assessment, renovation or remediation, testing or
validation and implementation.
Based on an ongoing assessment, the Company has determined that it will be
required to modify or replace portions of its software so that its computer
systems will properly use dates beyond December 31, 1999. The Company presently
believes that as a result of modifications to existing software and hardware and
conversions to new software, the Year 2000 Problem can be mitigated. However, if
such modifications and conversions are not made, or are not completed on a
timely basis, the Year 2000 Problem could have a material adverse impact on the
operations of the Company.
Management has initiated an enterprise-wide program to prepare the
Company's computer systems and applications for the Year 2000. The Company has
developed a comprehensive inventory of all PC based applications, third-party
relationships, environmental systems, proprietary programs and non-computer
related systems (such as postage meters and fax machines). The Company
recognizes that the Bank's operating, processing and accounting operations are
computer reliant and could be affected by the Y2K issue and has developed a plan
to make the systems Y2K ready and to conduct testing on them by March 1999. As
of September 30, 1998, approximately 80% of the Company's systems were Year 2000
ready, with all systems expected to be ready by March 1999.
The Company has acquired its mission-critical system which supports the
Company's core business processes from a highly regarded third-party vendor.
This vendor began in 1997 and completed by October 1998 renovations to its
systems to make them Y2K ready. The remediated software was placed into daily
production in September 1998. Beginning in November 1998, the Bank, along with
other clients of this vendor, will begin comprehensive testing of the system's
Y2K readiness. Such testing is anticipated to be completed in January 1999.
However, because most computer systems are, by their very nature,
interdependent, it is possible that noncompliant third-party computers could
impact the Company's computer systems. The Company could be adversely affected
by the Y2K problem if it or unrelated parties fail to successfully address the
problem. The Company has taken steps to communicate with the unrelated parties
with whom it deals to coordinate Year 2000 compliance. Additionally, the Company
is dependent on external suppliers, such as, wire transfer systems, telephone
systems, electric companies, and other utility companies for continuation of
service. The Company is also assessing the impact, if any, the century date
change may have on its credit risk.
The Company has initiated communications with all of its significant
vendors, suppliers and large commercial customers to determine the extent to
which the Company is vulnerable to those third-parties' failure to remedy their
own Year 2000 Problems. The Y2K Project Manager has available each vendors' Y2K
readiness efforts which includes their remediation plan, renovation approach,
testing methodologies and target dates. In the event that any of the Company's
significant
<PAGE>
vendors, suppliers and large commercial customers do not successfully achieve
Year 2000 compliance in a timely manner, the Company's business or operations
could be adversely affected. If significant suppliers fail to meet Year 2000
operating requirements, the Company intends to engage alternative suppliers. For
insignificant vendors, the Company will not necessarily validate that they are
Year 2000 compliant. However, for any insignificant vendor who responds that
they will not be compliant by March 1999, the Company will seek a new vendor or
system that is compliant. The Bank has surveyed its large commercial customers
as to their Y2K preparedness. At the present time, in excess of 95% of these
surveys have been returned. Respondents have acknowledged their awareness of Y2K
issues and currently believe that these issues will not materially affect their
financial condition, liquidity, or results of operations. The extent to which
customers are Y2K compliant is considered in the Bank's decision to extend
credit.
Costs of Year 2000
As of September 30, 1998, $31,000 has been expended as Year 2000 costs.
Management expects to spend a total of $150,000 for the entire project. Of the
total project's cost, approximately $75,000 is attributable to the purchase of
new software which will be capitalized. The remaining $75,000 will be expensed
as incurred over the next 15 months. The estimated Year 2000 project costs
include the costs and time associated with the impact of third-parties' Year
2000 issues, and are based on presently available information. The total cost of
the project is being funded through operating cash flows. The Company continues
to evaluate appropriate courses of corrective action, including replacement of
certain systems whose associated costs would be recorded as assets and
amortized. Accordingly, the Company does not expect the amounts required to be
expensed over the next 15 months to have a material effect on the financial
position or results of operations. The Company believes that the cost of
addressing the Y2K issues will not be a material event or uncertainty that would
cause reported financial information not to be necessarily indicative of future
operating results or financial conditions. However, if compliance is not
achieved in a timely manner by the Company or any of its significant related
third-parties, be it a supplier of services or customer, the Y2K issue could
possibly have a material effect on the Company's operations and financial
position. The Company believes that the costs or the consequences of incomplete
or untimely resolution of its Year 2000 issues do not represent a known material
event or uncertainty that is reasonably likely to affect its future financial
results, or cause its reported financial information not to be necessarily
indicative of future operating results or future financial condition.
The cost of the projects and the date on which the Company plans to
complete both Year 2000 modifications and systems conversions are based on
management's best estimates, which were derived utilizing numerous assumptions
of future events including the continued availability of certain resources,
third-party modification plans and other factors. However, there can be no
guarantee that these estimates will be achieved and actual results could differ
materially from those plans. Specific factors that might cause such material
differences include, but are not limited to, the availability and cost of
personnel trained in this area, the ability to locate and correct all relevant
computer codes, and similar uncertainties.
<PAGE>
Risks of Year 2000
At present, management believes it's progress in remedying the Company's
systems, programs and applications and installing Y2K compliant upgrades is on
target. The Y2K computer problem creates risk for the Company from unforeseen
problems in its own computer systems and from third-party vendors who provide
the majority of mainframe and PC based computer applications. Failure of
third-party systems relative to the Y2K issue could have a material impact on
the Company's ability to conduct business.
Contingency Plans
The Company is in the process of obtaining back-up service providers,
working up contingency plans and assessing the potential adverse risks to the
Company. The Company's contingency plans involve the use of manual labor to
compensate for the loss of certain automated computer systems and inconveniences
caused by disruption in command systems.
A contingency plan will be developed for mission-critical and required
mainframe and PC based applications, third-party relationships, environmental
systems, proprietary programs and non-computer related systems. This contingency
plan will identify scheduled completion dates, test dates and trigger dates.
A business resumption contingency plan is currently under development with
a target completion date of June 1999. The resumption contingency plan will
calculate a risk factor for each core business line and/or product. Based upon
the calculated risk factor, such business resumption contingency plan will be
designed and tested.
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.
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.
<PAGE>
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. All financial
statements included herein reflect the provisions of Statement No. 130.
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.
Derivative Instruments and Hedging Activities
In June 1998, the FASB issued Statement No. 133 "Accounting for Derivative
Instruments and Hedging Activities". This Statement standardizes the accounting
for derivative instruments, including certain derivative instruments imbedded in
other contracts, and those used for hedging activities, by requiring that an
entity recognize those items as assets or liabilities in the statement of
financial position and measure them at fair value. The Statement categorized
derivatives used for hedging purposes as either fair value hedges, cash flow
hedges, foreign currency fair value hedges, foreign currency cash flow hedges,
or hedges of certain foreign currency exposures. The Statement generally
provides for matching of gain or loss recognition on the hedging instrument with
the recognition of the changes in the fair value of the hedged asset or
liability that are attributable to the hedged risk, so long as the hedge is
effective. Prospective application of Statement No. 133 is
<PAGE>
required for all fiscal years beginning after June 15, 1999, however earlier
application is permitted. Currently, the Company does not use any derivative
instruments nor does it engage in any hedging activities. The Company has not
yet determined the impact, if any, of this Statement, including its provisions
for the potential reclassifications of investment securities, on earnings,
financial condition or equity.
Accounting for Mortgage-backed Securities Retained after the Securitization of
Mortgage Loans Held for Sale by a Mortgage Banking Enterprise
In October 1998, the FASB issued Statement No. 134, "Accounting for
Mortgage-backed Securities Retained after the Securitization of Mortgage Loans
Held for Sale by a Mortgage Banking Enterprise". This Statement requires that
after the securitization of a mortgage loan held for sale, an entity engaged in
mortgage banking activities classify any retained mortgage-backed securities
based on the ability and intent to sell or hold those investments, except that a
mortgage banking enterprise must classify as trading any retained
mortgage-backed securities that it commits to sell before or during the
securitization process. This Statement is effective for the first fiscal quarter
beginning after January 30, 1999 with earlier adoption permitted. This Statement
provides a one-time opportunity for an enterprise to reclassify, based on the
ability and intent on the date of adoption of this Statement, mortgage-backed
securities and other beneficial interests retained after securitization of
mortgage loans held for sale from the trading category, except for those with
commitments in place. The Company has not yet determined the impact, if any, of
this Statement, including, if applicable, its provisions for the potential
reclassifications of certain investment securities, on earnings, financial
condition or equity.
<PAGE>
<TABLE>
SUMMARY OF QUARTERLY FINANCIAL DATA
<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
Diluted earnings per share 0.14 0.13 0.11 0.11
<CAPTION>
QUARTERS ENDING 1996
DEC 31 SEPT 30 JUNE 30 MARCH 31
------ ------- ------- --------
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
Diluted earnings per share 0.10 0.10 0.10 0.11
</TABLE>
A $125,000 charge-off for one borrower was recorded in December 1996. The
$210,000 provision for loan losses in the fourth quarter of 1996 included an
amount to replenish the allowance for loan losses for this charge-off.
<PAGE>
LEGAL OPINION
Shumaker Williams, P.C., special counsel to the Company, has delivered an
opinion with respect to, and will pass upon, certain issues concerning the
legality of the Shares being offered pursuant to the Offering.
EXPERTS
The consolidated financial statements of the Company and its subsidiary,
Premier Bank, as of December 31, 1997 and 1996 and for the years then ended
included in this Prospectus, have been so included in reliance upon the report
of KPMG Peat Marwick LLP, independent certified public accountants, and upon the
authority of such firm as experts in accounting and auditing.
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PREMIER BANCORP, INC.
Page
CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Statements of Financial Condition as of September 30, 1998
and December 31,1997.....................................................F-1
Statements of Income for the Three and Nine Months Ended
September 30, 1998 and 1997..............................................F-2
Statements of Cash Flows for the Nine Months Ended
September 30, 1998 and 1997........................................F-3 - F-4
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS, SEPTEMBER 30, 1998 (UNAUDITED).........................F-5 - F-8
INDEPENDENT AUDITORS' REPORT...............................................F-9
CONSOLIDATED FINANCIAL STATEMENTS
Balance Sheets for Years Ended December 31, 1997 and 1996..................F-10
Statements of Income for Years Ended December 31, 1997 and 1996............F-11
Statements of Shareholders' Equity and Comprehensive Income
for Years Ended December 31, 1997 and 1996...............................F-12
Statements of Cash Flows for Years Ended
December 31, 1997 and 1996........................................F-13 - F-14
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS..........................F-15 - F-38
<PAGE>
PREMIER BANCORP, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Unaudited)
September 30, 1998 December 31, 1997
------------------ -----------------
ASSETS
Cash and due from banks $ 2,945,909 4,307,164
Federal funds sold 2,200,000 --
Interest-bearing deposits 157,270 85,823
--------------- ---------
Total cash and cash equivalents 5,303,179 4,392,987
Investment securities:
Held to maturity (fair value
$9,880,118 in 1998 and
$15,099,965 in 1997) 9,854,181 15,169,638
Available for sale (amortized
cost of $84,182,403 in 1998
and $62,355,084 in 1997) 83,535,485 62,434,137
Loans held for sale 487,096 197,944
Loans receivable (net of allowance for
loan losses of $1,655,184
in 1998 and $1,360,148 in 1997) 128,298,723 107,172,526
Accrued interest receivable 1,869,126 1,451,899
Premises and equipment 1,214,744 1,174,769
Real estate owned 730,000 638,286
Deferred taxes 651,736 404,906
Other assets 613,104 486,348
---------------- --------------
Total Assets $ 232,557,374 193,523,440
============= ===========
LIABILITIES, MINORITY INTEREST
IN SUBSIDIARIES
AND SHAREHOLDERS' EQUITY:
Liabilities:
Deposits $ 174,405,400 143,603,202
Borrowings 27,655,218 34,842,740
Accrued interest payable 1,980,465 1,346,123
Other liabilities 5,881,026 1,797,538
Subordinated debt 1,500,000 1,500,000
--------------- -------------
Total Liabilities 211,422,109 183,089,603
Corporation-obligated mandatorily
redeemable capital securities of
subsidiary trust holding solely junior
subordinated debentures of
the Corporation 10,000,000 --
Shareholders' Equity:
Common stock - $0.33 par value;
30,000,000 shares authorized;
2,630,340 shares issued and
outstanding in 1998 and 1997 876,780 876,780
Additional paid-in capital 7,120,00 7,120,001
Retained earnings 3,565,450 2,384,881
Accumulated other comprehensive
(loss) income (426,966) 52,175
---------------- ---------------
Total Shareholders' Equity 11,135,265 10,433,837
--------------- ------------
Total liabilities, minority
interest in subsidiaries and
shareholders' equity $ 232,557,374 193,523,440
============== ===========
The accompanying notes are an integral part of the consolidated financial
statements.
F-1
<PAGE>
<TABLE>
PREMIER BANCORP, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
<CAPTION>
For the three months For the nine months
ended September 30, ended September 30,
------------------- -------------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Interest income:
Loans $2,850,854 2,296,748 8,022,003 6,308,320
Federal funds sold and interest-bearing deposits 36,099 26,000 145,982 63,227
Investments:
Taxable 1,254,583 1,138,209 3,360,173 3,206,072
Tax-exempt 139,553 58,663 391,920 185,961
------------ ------------ ------------ -----------
Total interest income 4,281,089 3,519,620 11,920,078 9,763,580
----------- ---------- ---------- ----------
Interest expense:
Deposits 1,950,520 1,584,788 5,490,416 4,294,753
Borrowings 351,875 408,633 1,078,113 1,171,000
------------ ----------- ----------- ----------
Total interest expense 2,302,395 1,993,421 6,568,529 5,465,753
----------- ---------- ----------- ----------
Net interest income 1,978,694 1,526,199 5,351,549 4,297,827
Provision for loan losses 120,000 105,000 355,000 280,000
------------ ----------- ------------ -----------
Net interest income after loan loss provision 1,858,694 1,421,199 4,996,549 4,017,827
Non-interest income:
Service charges and other fees 41,082 38,648 132,026 108,177
Gain, on sale of investment
securities available for sale, net 74,812 12,964 69,108 20,708
Gain on sale of loans held for sale 10,644 4,860 31,968 4,860
------------- ------------- ------------- -------------
Total non-interest income 126,538 56,472 233,102 133,745
Non-interest expense:
Salaries and employee benefits 586,151 471,411 1,637,037 1,289,490
Occupancy 104,469 97,476 303,847 299,373
Data processing 120,088 99,198 332,540 287,022
Professional services 82,660 82,709 222,430 211,171
Marketing 55,000 23,120 154,082 134,460
Other 293,943 184,761 700,214 544,119
Minority interest in expense of subsidiaries 123,432 -- 123,432 --
---------------------------- ----------------------------
Total non-interest expense 1,365,743 958,675 3,473,582 2,765,635
----------- ----------- ----------- ----------
Income before income tax 619,489 518,996 1,756,069 1,385,937
Income tax expense 200,000 160,000 575,500 440,000
------------ ----------- ------------ -----------
Net income $ 419,489 358,996 1,180,569 945,937
=========== =========== =========== ===========
Earnings per share:
Basic $ 0.16 0.14 0.45 0.36
Diluted 0.14 0.13 0.40 0.35
Weighted average number of shares outstanding:
Basic 2,630,340 2,604,303 2,630,340 2,604,303
Diluted 2,939,386 2,757,662 2,918,689 2,737,631
The accompanying notes are an integral part of the consolidated financial
statements.
</TABLE>
F-2
<PAGE>
<TABLE>
PREMIER BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<CAPTION>
For the nine months ended September 30, 1998 1997
- --------------------------------------- ---------------- ----------
<S> <C> <C>
Operating activities:
Net income $ 1,180,569 $ 945,937
Adjustments to reconcile net income to cash
provided by operating activities:
Depreciation expense 162,070 128,222
Provision for loan losses 355,000 280,000
Writedown of real estate owned 77,460 --
Amortization of organization cost -- 24,000
Amortization of premiums and discounts on investment
securities held to maturity 13,336 12,496
Amortization of premiums and discounts on investment
securities available for sale 126,724 170,897
Gain on sale of investment securities available for sale (69,108) (20,708)
Gain on sale of loans held for sale (31,968) (4,860)
Originations of loans held for sale (5,008,100) (1,147,554)
Proceeds from sale of loans held for sale 4,750,916 1,002,002
Increase in accrued interest receivable (417,227) (303,333)
Increase in other assets (126,756) (554,845)
Increase in deferred loan fees 77,516 69,504
Increase in accrued interest payable 634,342 503,323
Increase (decrease) in other liabilities 4,083,488 (491,143)
------------- ------------
Net cash provided by operating activities 5,808,262 613,938
-------------- -------------
Investing activities:
Proceeds from sale of investment securities available for sale 74,503,245 18,900,322
Repayment on investment securities available for sale 7,643,374 10,182,093
Purchase of investment securities available for sale (104,031,553) (37,318,168)
Repayment on investment securities held to maturity 6,801,183 529,459
Purchase of investment securities held to maturity (1,499,062) --
Net increase in loans receivable (21,808,714) (20,144,477)
Proceeds from sale of real estate owned 80,826 325,533
Purchases of premises and equipment (202,045) (795,619)
------------- -------------
Net cash used in investing activities (38,512,746) (28,320,857)
------------ ------------
(continued on next page)
F-3
<PAGE>
<CAPTION>
PREMIER BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS, Continued
(Unaudited)
For the nine months ended September 30, 1998 1997
- --------------------------------------- ---------------- ----------
<S> <C> <C>
Financing activities:
Net increase in deposits 30,802,198 22,695,645
Net (decrease) increase in borrowings less than 90 days (12,187,522) 5,426,550
Proceeds from borrowings greater than 90 days 5,000,000 34,000,000
Repayment of borrowings greater than 90 days -- (33,750,000)
Proceeds from issuance of subordinated debt -- 1,500,000
Proceeds from issuance of capital securities 10,000,000 --
------------ -------------
Net cash provided by financing activities 33,614,676 29,872,195
------------ ------------
Increase in cash and cash equivalents 910,192 2,165,276
Cash and cash equivalents:
Beginning of period 4,392,987 2,330,389
------------- -------------
End of period 5,303,179 4,495,665
============= =============
Composed of:
Cash and due from banks 2,945,909 3,744,883
Federal funds sold 2,200,000 618,000
Interest-bearing deposits 157,270 132,782
-------------- -------------
Total cash and cash equivalents $ 5,303,179 4,495,665
============ =============
Cash payments for:
Interest expense $ 5,934,188 $ 4,962,430
Taxes $ 700,000 $ 650,000
Supplemental disclosure of noncash activities:
Change in unrealized net gain on securities available for sale (479,141) 57,667
Change in deferred tax asset related to securities available for sale 246,830 (29,706)
Transfer of loans to real estate owned 297,064 963,819
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-4
<PAGE>
PREMIER BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Note 1 -- Organization
Premier Bancorp, Inc. (the "Company") was incorporated under the laws of
the Commonwealth of Pennsylvania on July 15, 1997. It was reorganized as a
registered one-bank holding company of Premier Bank (the "Bank") on November 17,
1997. 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
Bank was organized in 1990 as a Pennsylvania state-chartered banking institution
and commenced operations on April 24, 1992. The Bank is a member of the Federal
Reserve System. The Bank's deposits are insured by the Bank Insurance Fund of
the Federal Deposit Insurance Corporation to the extent provided by law.
Note 2 -- Basis of Financial Statement Presentation
The accompanying unaudited consolidated financial statements were prepared
in accordance with instructions for quarterly reports on Form 10-QSB and,
therefore, do not include information or footnotes necessary for a complete
presentation of financial condition, results of operations, shareholders' equity
and cash flows in conformity with generally accepted accounting principles.
However, the financial statements reflect all adjustments, which in the opinion
of management are necessary for fair statement of financial results and that all
adjustments are of a normal recurring nature. The results of operations for the
three and nine months ended September 30, 1998 and 1997 are not necessarily
indicative of the results, which may be expected for the entire fiscal year.
Note 3 -- Principles of Consolidation
The consolidated financial statements include the accounts of Premier
Bancorp, Inc. and its wholly owned subsidiaries: Premier Bank and PBI Capital
Trust. All material intercompany balances and transactions have been eliminated.
Note 4 -- 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, the realizability of deferred tax assets and the carrying value
of real estate owned.
F-5
<PAGE>
Note 5 -- Earnings Per Share
Earnings per share was calculated in accordance with Statement of Financial
Accounting Standards ("SFAS") No. 128, "Earnings Per Share". Basic 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 677,349 and 662,169 shares of common
stock were outstanding at September 30, 1998 and 1997, respectively. The
dilutive effect of such options using the treasury stock method was included in
the computation of diluted 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 three months ended September 30, 1998
Per share
Net income Shares Amount
<S> <C> <C> <C>
Basic earnings per share $ 419,489 2,630,340 0.16
Effect of dilutive stock options -- 309,046 (0.02)
---------------- ----------- -----
Diluted earnings per share $ 419,489 2,939,386 0.14
========== ========== =====
For the three months ended September 30, 1997
Per share
Net income Shares Amount
Basic earnings per share $ 358,996 2,604,303 0.14
Effect of dilutive stock options -- 153,359 (0.01)
----------------- ----------- -----
Diluted earnings per share $ 358,996 2,757,662 0.13
========== ========== =====
For the nine months ended September 30, 1998
Per share
Net income Shares Amount
Basic earnings per share $1,180,569 2,630,340 0.45
Effect of dilutive stock options -- 288,349 (0.05)
----------------- ----------- ------
Diluted earnings per share $1,180,569 2,918,689 0.40
========== ========== =====
F-6
<PAGE>
For the nine months ended September 30, 1997
Per share
Net income Shares Amount
Basic earnings per share $ 945,937 2,604,303 0.36
Effect of dilutive stock options -- 133,328 (0.01)
---------------- ----------- ------
Diluted earnings per share $ 945,937 2,737,631 0.35
============= ========== =====
</TABLE>
Note 6 -- Comprehensive Income
On January 1, 1998, the Company adopted SFAS No. 130, "Reporting
Comprehensive Income". The following table displays net income and the
components of other comprehensive income to arrive at total comprehensive
income. For the Company, the only component of other comprehensive income is the
change in the estimated fair value of investment securities available for sale.
<TABLE>
<CAPTION>
For the three months For the nine months
ended September 30, ended September 30,
1998 1997 1998 1997
<S> <C> <C> <C> <C>
Net income $ 419,489 358,996 1,180,569 945,937
--------- ------- --------- ---------
Other comprehensive income, net of tax:
Unrealized gains on securities:
Unrealized holding (losses) gains during the period (454,128) 50,610 (433,530) 71,333
Less: Reclassification adjustment for gains included
in net income (49,376) (8,556) (45,611) (13,667)
---------- --------- --------- ----------
Other comprehensive (loss) income (503,504) 42,054 (479,141) 57,666
--------- --------- -------- -----------
Comprehensive (loss) income $ (84,015) 401,050 701,428 1,003,603
========= ======== ========= =========
</TABLE>
Note 7 -- Capital Securities
On August 11, 1998, the Company's recently formed subsidiary, PBI Capital
Trust (the "Trust") issued $10.0 million of 8.57% Capital Securities due August
15, 2028. The Trust is a statutory business trust created under the laws of
Delaware. The Company is the sole owner of the Trust. The Trust used the
proceeds from the Capital Securities to acquire $10.0 million in 8.57% Junior
Subordinated Deferrable Interest Debentures issued by the Company. The Junior
Subordinated Debentures are the sole assets of the Trust, and payments under the
Junior Subordinated Debentures are the sole revenue of the Trust. The Company is
using the proceeds from the sale of the Junior Subordinated Debentures for
general corporate purposes, including, but not limited to, investments in and
advances to its subsidiary, Premier Bank, repurchases of common stock of the
Company, branch expansion, the purchase of certain branch facilities being
leased and funding loans. The precise amount and timing of the application of
the net proceeds used for such corporate purposes depends on the funding
requirements and the availability of other funds to the
F-7
<PAGE>
Company and the Bank. At present, the majority of the net proceeds have been
temporarily invested in investment securities available for sale. Proceeds from
the Capital Securities provide the Company with additional Tier I and Tier II
capital.
These Capital Securities are reported in the Consolidated Statements of
Financial Condition under the caption "Corporation-obligated mandatorily
redeemable capital securities of subsidiary trust holding solely junior
subordinated debentures of the Corporation".
F-8
<PAGE>
KPMG PEAT MARWICK LLP
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 comprehensive
income, and cash flows for the years then ended. These consolidated 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.
/s/ KPMG Peat Marwick LLP
- -------------------------
KPMG Peat Marwick LLP
February 26, 1998
Philadelphia, Pennsylvania
F-9
<PAGE>
PREMIER BANCORP, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1997 AND 1996
DECEMBER 31, 1997 1996
- ------------ ---- ----
ASSETS:
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
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:
Liabilities:
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
Accumulated other comprehensive income 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.
F-10
<PAGE>
<TABLE>
PREMIER BANCORP, INC.
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 1997 AND 1996
<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
F-11
<PAGE>
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
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
<TABLE>
PREMIER BANCORP, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY AND
COMPREHENSIVE INCOME
YEARS ENDED DECEMBER 31, 1997 AND 1996
<CAPTION>
Accumulated
Other
Additional Retained Comprehen- Total
Comprehensive Common paid-in Earnings sive Shareholders'
Income Stock capital (deficit) Income Equity
------------ ------- ---------- -------- --------- ------------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1995 $ 868,128 7,023,942 (51,711) (9,349) 7,831,010
Comprehensive Income:
Net Income $ 1,095,635 1,095,635 1,095,635
Other Comprehensive income,
net of tax:
Unrealized gains on
securities 160
Less: Reclassification
adjustment for losses included
in net income 15,988
Other Comprehensive
income 16,148 16,148 16,148
------
Comprehensive Income $ 1,111,783
=============
Balance, December 31, 1996 $ 868,128 7,023,942 1,043,924 6,799 8,942,793
========== ========= ========= ===== =========
Comprehensive Income:
Net Income $ 1,340,957 1,340,957 1,340,957
Other Comprehensive income,
net of tax:
Unrealized gains on securities 89,109
Less: Reclassification adjust-
ment for gains included in
net income (43,733)
Other Comprehensive
income 45,376 45,376 45,376
-------
Comprehensive Income $ 1,386,333
============
Fractional shares redeemed (27) (454) -- -- (481)
F-12
<PAGE>
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>
<TABLE>
PREMIER BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1997 AND 1996
<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)
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
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 1,656,467 3,331,415
---------- ---------
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)
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 (37,884,420) (41,464,598)
------------ ------------
F-13
<PAGE>
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 2,330,389 563,078
---------- -------
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
Supplemental disclosure of non-cash and financing activities:
Change in unrealized net gain on securities available
for sale $ 45,376 16,148
Change in deferred tax asset related to securities
available for sale (23,375) (8,319)
Tax effect of exercised stock options 26,292 --
Transfer of loans to real estate owned 963,819 389,253
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-14
<PAGE>
PREMIER BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
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.
F-15
<PAGE>
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.
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.
F-16
<PAGE>
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.
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
F-17
<PAGE>
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.
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.
F-18
<PAGE>
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. All financial statements included herein
reflect the provisions of Statement No. 130.
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
F-19
<PAGE>
Statement on the Company would be to require additional disclosures in the
Company's financial statements.
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
============= ======= ========= =========== ==========
F-20
<PAGE>
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR CARRYING
DECEMBER 31, 1996 COST GAINS LOSSES VALUE VALUE
- ------------------------------------------------------------------------------------------------------------------
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>
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 2,808,644
--------- --------- ---------- ---------
Total $ 15,169,638 15,099,965 62,355,084 62,434,137
============ ========== ========== ==========
</TABLE>
Proceeds from sales of investment securities AFS are as follows:
Proceeds $ 29,024,898 29,732,585
Gross gains 69,028 54,632
Gross losses 54,210 60,214
F-21
<PAGE>
Note 5 -- Loans
1997 1996
----- ----
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 loan 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
============== ==========
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. 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.
F-22
<PAGE>
Note 6 -- Allowance for Loan Losses
Activity in the allowance for loan losses is shown below:
DECEMBER 31, 1997 1996
- ------------ ---- ----
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
= ========= =======
Note 7 -- Premises and Equipment
Premises and equipment, stated at cost less accumulated depreciation and
amortization, are summarized below:
DECEMBER 31, 1997 1996
- ------------ ---- ----
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
=========== =======
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.
F-23
<PAGE>
Note 8 -- Deposits
<TABLE>
DECEMBER 31, 1997 1996
- ------------ ---- ----
<CAPTION>
WEIGHTED WEIGHTED
AVERAGE AVERAGE
INTEREST % OF INTEREST % OF
RATE AMOUNT TOTAL RATE AMOUNT TOTAL
--------- ------- ----- ---------- ------ -----
<S> <C> <C> <C> <C> <C>
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:
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
===========
Time deposits of $100,000 or more by date of maturity are as follows:
1998...........................................$10,464,984
1999........................................... 2,888,738
2000........................................... 519,365
2001........................................... --
2002........................................... 201,513
2003 and thereafter............................ --
$14,074,600
===========
Accrued interest payable on deposits amounted to $1,231,662 and $946,105 at
December 31, 1997 and 1996, respectively.
F-24
<PAGE>
Interest expense on deposits is as follows:
DECEMBER 31, 1997 1996
- ------------ ---- ----
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
=========== =========
Note 9 -- Borrowings
<TABLE>
DECEMBER 31, 1997 1996
- ------------ ----- ----
<CAPTION>
WEIGHTED WEIGHTED
AVERAGE AVERAGE
AMOUNT RATE AMOUNT RATE
------- -------- ------- --------
<S> <C> <C> <C> <C>
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%
============== ===== ============== =====
<FN>
(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:
</FN>
</TABLE>
INTEREST
DECEMBER 31, 1997 AMOUNT DUE RATE
- ----------------- ------ --- ----
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
F-25
<PAGE>
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.
DECEMBER 31, 1997 1996
- ------------ ---- ----
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%
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.
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.
FOR THE YEAR ENDED DECEMBER 31, 1997
PER SHARE
NET INCOME SHARES AMOUNT
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
=========== ========= =========
F-26
<PAGE>
FOR THE YEAR ENDED DECEMBER 31, 1996
PER SHARE
NET INCOME SHARES AMOUNT
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
============== ========= =========
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:
YEAR ENDED DECEMBER 31, 1997 1996
- ----------------------- ----- ----
Current tax expense $ 720,000 459,112
Deferred income tax benefit (130,000) (23,650)
--------------- --------
Income tax expense $ 590,000 435,462
=============== ========
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:
YEAR ENDED DECEMBER 31, 1997 1996
- ----------------------- ---- ----
Deferred tax assets:
Allowance for possible loan loss $ 439,812 303,812
Start-up and organization costs 8,217 3,600
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
======== =======
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
F-27
<PAGE>
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:
YEAR ENDED DECEMBER 31, 1997 1996
- ----------------------- ---- ----
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
======== ========
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 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.
F-28
<PAGE>
Stock option activity during the periods indicated is as follows:
WEIGHTED
AVERAGE
NUMBER OF EXERCISE RANGE OF
OPTIONS PRICE EXERCISE PRICE
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
======= ====== =========
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:
F-29
<PAGE>
DECEMBER 31, 1997 1996
- ------------ ----- -----
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
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:
CONTRACT OR NOTIONAL AMOUNT
1997 1996
---- ----
Commitments to extend credit $ 10,994,649 7,592,000
Stand-by letters of credit 1,160,062 1,073,000
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.
F-30
<PAGE>
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.
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.
Balance, December 31, 1996 $ 316,158
Repayments (18,744)
---------
Balance, December 31, 1997 $ 297,414
==========
The outstanding loan balance was repaid in January 1998.
F-31
<PAGE>
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.
The estimated fair values and carrying amounts are summarized as follows:
DECEMBER 31, 1997 DECEMBER 31, 1996
----------------- -----------------
ESTIMATED CARRYING ESTIMATED CARRYING
FAIR VALUE AMOUNT FAIR VALUE AMOUNT
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
----------- ----------- ---------- ----------
F-32
<PAGE>
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
============== =========== =========== ===========
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 and subordinated debt: Borrowings and subordinated debt 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.
F-33
<PAGE>
Note 18 -- Parent Company Financial Information
CONDENSED STATEMENTS OF FINANCIAL CONDITION
DECEMBER 31, 1997 1996
- -----------------------------------------------------------------------------
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
FOR THE YEARS ENDED DECEMBER 31, 1997 1996
- ---------------------------------------------------------------------
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
============== =========
F-34
<PAGE>
CONDENSED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1997 1996
- --------------------------------------------------------------------------------
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 --
=============== ===========
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.
F-35
<PAGE>
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
Actuual 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.
F-36
<PAGE>
Note 21-- Other Comprehensive Income
The tax effects allocated to each component of "Other Comprehensive Income" are
as follows:
<TABLE>
<CAPTION>
Tax
Before-Tax (Expense) Net-of-Tax
Amount Benefit Amount
---------- -------- -----------
<S> <C> <C> <C>
FOR THE YEAR ENDED DECEMBER 31, 1997:
Unrealized gains on securities
Unrealized holding gains arising during
the period $ 135,014 (45,905) 89,109
Less: reclassification adjustment for
gains included in net income (62,971) 19,238 (43,733)
------------------------------------------------
Other Comprehensive Income $ 72,043 (26,667) 45,376
============ ========= ========
<CAPTION>
Tax
Before-Tax (Expense) Net-of-Tax
Amount Benefit Amount
---------- -------- -----------
FOR THE YEAR ENDED DECEMBER 31, 1996:
Unrealized gains on securities
Unrealized holding gains arising during
the period $ 242 (82) 160
Less: reclassification adjustment for
losses included in net income 12,448 3,540 15,988
-----------------------------------------------
Other Comprehensive Income $ 12,690 3,458 16,148
============ ========== =========
</TABLE>
F-37
<PAGE>
TABLE OF CONTENTS
Page
----
AVAILABLE INFORMATION.............................iii
PROSPECTUS SUMMARY ................................v
The Company......................................v
The Bank.........................................v
The Offering....................................vi
Summary of Selected Consolidated Financial
Data and Other Information.................viii
Selected Consolidatd Financial
Data and Other Information...................ix
PREMIER BANCORP, INC...............................1
RISK FACTORS.......................................1
USE OF PROCEEDS....................................5
DETERMINATION OF OFFERING PRICE....................6
DILUTION...........................................6
PLAN OF DISTRIBUTION...............................7
TERMS OF THE OFFERING..............................8
LEGAL PROCEEDINGS..................................9
DIRECTORS, EXECUTIVE OFFICERS,
PROMOTERS AND CONTROL PERSONS.....................9
EXECUTIVE COMPENSATION............................12
SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND
MANAGEMENT.......................................14
DESCRIPTION OF SECURITIES.........................16
STATEMENT AS TO INDEMNIFICATION...................18
CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS....................................19
DESCRIPTION OF BUSINESS...........................19
Description of the Company......................19
Supervision and Regulation-The Company..........20
Effects of Inflation............................24
Monetary Policy.................................24
Environmental Regulation........................24
Year 2000.......................................25
Description of the Bank.........................25
Lending Activities..............................26
Supervision and Regulation-The Bank.............30
DESCRIPTION OF PROPERTY...........................36
MARKET FOR COMMON STOCK AND
RELATED STOCKHOLDER MATTERS......................36
MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS........................38
LEGAL OPINION.....................................82
EXPERTS...........................................82
INDEX TO CONSOLIDATED FINANCIAL
STATEMENTS.......................................83
500,000 Shares
Common Stock
at
$11.00 per share
PREMIER BANCORP, INC.
------------------------------
Prospectus dated
December 14, 1998
------------------------------
<PAGE>
PART II. INFORMATION NOT REQUIRED IN PROSPECTUS
Item 24. Indemnification of Directors and Officers.
Subchapter D of Chapter 17 of the Pennsylvania Business Corporation Law of
1988, as amended (15 Pa. C.S. ss.ss.1741-1750), provides that a business
corporation such as the Registrant shall have the power under certain
circumstances to indemnify its directors, officers, employees and agents against
certain expenses incurred by them in connection with any threatened, pending or
completed action, suit or proceeding. The Registrant's by-laws contain a number
of provisions that require the Registrant to indemnify these persons in
accordance with Pennsylvania law.
Item 25. Other Expenses of Issuance and Distribution.
Registration Fee $ 1,622.50
--------------
Legal Fees and Expenses 40,000.00
--------------
Accountants Fees 5,000.00
--------------
Printing Fees and Postage 4,000.00
--------------
Blue Sky Registration Filing Fees 1,500.00
--------------
Miscellaneous 877.50
--------------
$ 53,000.00
==============
Item 26. Recent Sales of Unregistered Securities.
Not Applicable
Item 27. Exhibits.
Exhibit
Number Description of Exhibit
- ------ ------------------------
3(i).1 Articles of Amendment of Premier Bancorp, Inc.
3(i).2 Amended and Restated Articles of Incorporation of Premier Bancorp,
Inc.
3(ii)By-laws of Premier Bancorp, Inc.
5 Opinion of Shumaker Williams, P.C. of Camp Hill, Pennsylvania, Special
Counsel to Registrant.
10.1 Change of Control Agreement between Premier Bank and John C.
Soffronoff.
R-1
<PAGE>
10.2 Change of Control Agreement between Premier Bank and John J. Ginley.
10.3 Change of Control Agreement between Premier Bank and Bruce E. Sickel.
21 Subsidiaries of Premier Bancorp, Inc.
23(i)Consent of Shumaker Williams, P.C. of Camp Hill, Pennsylvania,
Special Counsel to Registrant, (contained in Opinion Letter filed as
Exhibit 5).
23(ii) Consent of KPMG Peat Marwick LLP, Certified Public Accountants.
24 Power of Attorney given by the Officers and Directors of Premier
Bancorp, Inc. (included on Signature Page).
27 Financial Data Schedule.
99 Form of Subscription Agreement.
Item 28. Undertakings.
(a) Rule 415 Offering. The small business issuer will:
(1) File, during any period which it offers or sells securities, a
post-effective amendment to this registration statement to:
(i) Include any prospectus required by section 10(a)(3) of the
Securities Act;
(ii) Reflect in the prospectus any facts or events which,
individually or together, represent a fundamental change in the
information in the registration statement. Notwithstanding the
foregoing, any increase or decrease in volume of securities offered
(if the total dollar value of securities offered (if the total dollar
value of securities offered would not exceed that which was
registered) and any deviation from the low or high end of the
estimated maximum offering range may be reflected in the form of
prospects filed with the Commission pursuant to Rule 424(b)
(ss.230.424(b) of this chapter) if, in the aggregate, the changes in
the volume and price represent no more than a 20% change in the
maximum aggregate offering price set forth in the "Calculation of
Registration Fee" table in the effective registration statement; and
(iii) Include any additional or changed material information on
the plan of distribution.
R-2
<PAGE>
(2) For determining liability under the Securities Act, treat each
post-effective amendment as a new registration statement of the securities
offered, and the offering of the securities at that time to be the initial
bona fide offering.
(3) File a post-effective amendment to remove from registration any of
the securities that remain unsold at the end of the offering.
(e) Request for acceleration of effective date (under Rule 461).
Insofar as indemnification for liabilities arising under the
Securities Act of 1933 (the "Act") may be permitted to directors,
officers and controlling persons of the small business issuer pursuant
to the foregoing provisions, or otherwise, the small business issuer
has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable.
In the event that a claim for indemnification against such
liabilities (other than the payment by the small business issuer of
expenses incurred or paid by a director, officer or controlling person
of the small business issuer in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered,
the small business issuer will, unless in the opinion of its counsel
the matter has been settled by controlling precedent, submit to a
court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such
issue.
Subchapter D of Chapter 17 of the Pennsylvania Business
Corporation Law of 1988, as amended (15 Pa. C.S. ss.ss.1101-4162)
("BCL") provides that a business corporation shall have the power
under certain circumstances to indemnify its directors, officers,
employees and agents against certain expenses incurred by them in
connection with any threatened, pending or completed action, suit or
proceeding.
Article 10 of the Bylaws of Premier Bancorp, Inc. provides for
the indemnification if its directors, officers, employees and agents
in accordance with, and to the maximum extent permitted by, the
provisions of Subchapter D of Chapter 17 of the BCL.
R-3
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, as
amended, the Registrant certifies that it has reasonable grounds to believe that
it meets all of the requirements of filing on Form SB-2 and has duly authorized
this Amendment No. 2 to the Registration Statement No. 333-64885 to be signed on
its behalf by the undersigned, in the City of Doylestown, State of Pennsylvania
on December 15, 1998.
PREMIER BANCORP, INC.
By: /s/ John C. Soffronoff
----------------------
John C. Soffronoff, President and CEO
Principal Executive Officer
In accordance with the requirements of the Securities Act of 1933, as
amended, this Amendment No. 2 to the Registration Statement on Form SB-2 was
signed by the following persons in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Capacity Date
--------- -------- -----
<S> <C> <C>
John C. Soffronoff Director, President and CEO December 15, 1998
(Principal Executive Officer)
Clark S. Frame Director and Chairman of the Board December 15, 1998
Bruce E. Sickel Director and CFO December 15, 1998
(Principal Financial and Accounting Officer)
Barry J. Miles, Sr. Director and Vice Chairman of the Board December 15, 1998
Daniel E. Cohen Director December 15, 1998
Peter A. Cooper Director December 15, 1998
Helen Beth Garofalo-Vilcek Director December 15, 1998
Dr. Thomas E. Mackell Director December 15, 1998
Dr. Daniel A. Nesi Director December 15, 1998
Neil Norton Director December 15, 1998
Thomas M. O'Mara Director December 15, 1998
Michael Perrucci Director December 15, 1998
Brian R. Rich Director December 15, 1998
Richard F. Ryan Director December 15, 1998
Gerald Schatz Director December 15, 1998
Irving N. Stein Director December 15, 1998
Thomas P. Stitt Director December 15, 1998
John A. Zebrowski Director December 15, 1998
Ezio U. Rossi Director December 15, 1998
</TABLE>
R-4
<PAGE>
By: /s/ John C. Soffronoff
-----------------------
John C. Soffronoff
Attorney-in-Fact
By: /s/ Bruce E. Sickel
----------------------
Bruce E. Sickel
Attorney-in-Fact
R-5
<PAGE>
INDEX TO EXHIBITS
Page
Number In
Exhibit Sequential
Index Numbering
Number Description System
- ------ ------------ -----------
3(i).1 Articles of Amendment of Premier Bancorp, Inc. *
3(i).2 Amended and Restated Articles of Incorporation
of Premier Bancorp, Inc. *
3(ii) By-laws of Premier Bancorp, Inc. *
5 Opinion of Shumaker Williams, P.C., of Camp Hill, *
Pennsylvania Special Counsel to Registrant
10.1 Change of Control Agreement between Premier Bank *
and John C. Soffronoff
10.2 Change of Control Agreement between Premier Bank
and John J. Ginley *
10.3 Change of Control Agreement between Premier Bank
and Bruce E. Sickel *
21 Subsidiaries of Premier Bancorp, Inc. *
23(i) Consent of Shumaker Williams, P.C., Special Counsel *
to Registrant, (contained in Opinion Letter
filed as Exhibit 5)
23(ii) Consent of KPMG Peat Marwick LLP, 162
Certified Public Accountants
24 Power of Attorney given by the Officers and Directors *
of Premier Bancorp, Inc. (included on Signature Page)
27 Financial Data Schedule 164
99 Form of Subscription Agreement *
- -----------------------------
* Previously Filed.
EXHIBIT 23(ii)
KPMG Peat Marwick LLP
1600 Market Street
Philadelphia, PA 19103-7212
The Board of Directors
Premier Bancorp, Inc.:
We consent to the use of our reports included herein and to the reference to our
firm under the heading "Experts" in the prospectus.
/s/ KPMG Peat Marwick LLP
- --------------------------
KPMG Peat Marwick LLP
Philadelphia, Pennsylvania
December 15, 1998
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C> <C>
<PERIOD-TYPE> 9-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1997
<PERIOD-END> SEP-30-1998 SEP-30-1997
<CASH> 2,945,909 3,744,883
<INT-BEARING-DEPOSITS> 157,270 132,782
<FED-FUNDS-SOLD> 2,200,000 618,000
<TRADING-ASSETS> 0 0
<INVESTMENTS-HELD-FOR-SALE> 83,535,485 61,072,605
<INVESTMENTS-CARRYING> 9,854,181 13,345,651
<INVESTMENTS-MARKET> 9,880,118 13,172,364
<LOANS> 129,953,907 102,020,867
<ALLOWANCE> 1,655,184 1,240,148
<TOTAL-ASSETS> 232,557,374 184,574,767
<DEPOSITS> 174,405,400 140,788,887
<SHORT-TERM> 12,655,218 29,317,118
<LIABILITIES-OTHER> 7,861,491 3,022,365
<LONG-TERM> 16,500,000 1,500,000
0 0
0 0
<COMMON> 7,996,781 7,892,070
<OTHER-SE> 3,138,484 2,054,327
<TOTAL-LIABILITIES-AND-EQUITY> 232,557,374 184,574,767
<INTEREST-LOAN> 8,022,003 6,308,320
<INTEREST-INVEST> 3,752,093 3,392,033
<INTEREST-OTHER> 145,982 63,227
<INTEREST-TOTAL> 11,920,078 9,763,580
<INTEREST-DEPOSIT> 5,490,416 4,294,753
<INTEREST-EXPENSE> 6,568,529 5,465,753
<INTEREST-INCOME-NET> 5,351,549 4,297,827
<LOAN-LOSSES> 355,000 280,000
<SECURITIES-GAINS> 69,108 20,708
<EXPENSE-OTHER> 3,473,582 2,765,635
<INCOME-PRETAX> 1,756,069 1,385,937
<INCOME-PRE-EXTRAORDINARY> 1,756,069 1,385,937
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 1,180,569 945,937
<EPS-PRIMARY> 0.45 0.36
<EPS-DILUTED> 0.40 0.35
<YIELD-ACTUAL> 8.01 8.10
<LOANS-NON> 1,092,604 501,142
<LOANS-PAST> 132,007 12,175
<LOANS-TROUBLED> 0 0
<LOANS-PROBLEM> 1,092,604 501,142
<ALLOWANCE-OPEN> 1,360,148 960,672
<CHARGE-OFFS> 67,992 524
<RECOVERIES> 8,028 0
<ALLOWANCE-CLOSE> 1,655,184 1,240,148
<ALLOWANCE-DOMESTIC> 1,602,580 1,199,665
<ALLOWANCE-FOREIGN> 0 0
<ALLOWANCE-UNALLOCATED> 52,604 40,483
</TABLE>
