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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934, FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998, OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934, FOR THE TRANSITION PERIOD FROM _______________ TO
_______________ .
COMMISSION FILE NUMBER 333-34243
PREMIER BANCORP, INC.
------------------------------------------------------
(Exact name of Registrant as specified in its charter)
PENNSYLVANIA 23-2921058
- ----------------------------------------------------------- -------------------
(State or other jurisdiction of in Company or organization) (I.R.S. Employer
Identification No.)
379 NORTH MAIN STREET, DOYLESTOWN, PENNSYLVANIA 18901
- ------------------------------------------------------------ ----------
(Address of principal executive offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (215) 345-5100
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
None
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
None
Common Stock, $0.33 par value
-----------------------------
(Title of class)
Indicate by check mark whether the Registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES __X__ NO ____
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB [X]
The Registrant's revenues for the year ended December 31, 1998 were
$16,873,853.
As of March 12, 1999, 2,744,050 shares of Common Stock of the Registrant
were outstanding and the aggregate market value of the Common Stock of the
Registrant, held by non-affiliates was approximately $16,458,750.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the Registrant's 1999 Annual Meeting of
Shareholders are incorporated by reference into Part III of this report.
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<PAGE>
PREMIER BANCORP, INC.
FORM 10-KSB
INDEX
PAGE
----
PART I
Item 1 Business.................................................... 1
Item 2 Properties.................................................. 5
Item 3 Legal Proceedings........................................... 5
Item 4 Submission of Matters to a Vote of Security Holders......... 5
PART II
Item 5 Market for Registrant's Common Stock and Related Shareholder
Matters................................................... 5
Item 6 Management's Discussion and Analysis of Financial Condition
and Results of Operation.................................. 6
Item 7 Financial Statements and Supplementary Data................. 29
Item 8 Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................. 56
PART III
Item 9 Directors and Executive Officers of the Registrant;
Compliance with Section 16(a) of the Exchange Act......... 56
Item 10 Executive Compensation...................................... 56
Item 11 Security Ownership of Certain Beneficial Owners and
Management................................................ 56
Item 12 Certain Relationships and Related Transactions.............. 56
PART IV
Item 13 Exhibits, Financial Statement Schedules and Reports on Form
8-K....................................................... 57
Signatures.................................................. 58
<PAGE>
PART I
ITEM 1 -- BUSINESS
PREMIER BANCORP, INC.
We are a Pennsylvania business corporation and a registered bank holding
company headquartered in Doylestown, Bucks County, Pennsylvania. We were
incorporated on July 15, 1997 and reorganized on November 17, 1997 as the
one-bank holding company of Premier Bank. Each outstanding share of Premier Bank
common stock was converted into one share of Premier Bancorp, Inc. stock under
the Plan of Reorganization approved by the Bank's shareholders. The primary
business of the Company is the operation of its wholly owned subsidiary, Premier
Bank, which is managed as a single business segment.
Our consolidated financial condition and results of operations consist
almost entirely of Premier Bank's financial condition and results of operations.
At December 31, 1998, we had total consolidated assets of $249,193,000, total
deposits of $191,226,000 and total shareholders' equity of $11,767,000.
As of December 31, 1998, the holding company did not own or lease any
property and had no paid employees.
PREMIER BANK
Premier Bank was organized in 1990 as a Pennsylvania chartered banking
institution and began operations on April 24, 1992. The Bank is a
community-oriented financial services provider whose business primarily consists
of attracting retail deposits from the general public and small businesses and
originating commercial and consumer loans in its market area. The Bank conducts
business from its main office in Doylestown, Pennsylvania and two other retail
offices located in Southampton, Bucks County and Easton, Northampton County,
Pennsylvania. Premier Bank opened its fourth branch office in Lower Makefield
Township, Bucks County, Pennsylvania on February 19, 1999.
Premier Bank provides personal attention and service to its customers. The
Bank's deposit products include checking, savings and money market accounts as
well as certificates of deposit. The Bank offers numerous credit products but
specializes in lending to small commercial businesses and professionals. The
Bank offers a full array of lending products including loans secured by real
estate and other assets, working capital lines and other commercial loans. Other
credit products include residential mortgage loans, home equity loans and lines
of credit, personal lines of credit and other consumer loans. Premier Bank also
offers other services such as electronic banking, telephone banking, cash
management services, automated teller services and safe deposit boxes. The Bank
plans to offer certain internet banking products in 1999.
The Bank is a member of the Federal Reserve System. Deposits are insured by
the Bank Insurance Fund of the Federal Deposit Insurance Corporation to the
fullest extent provided by law.
At December 31, 1998 the Bank had 44 full-time and 13 part-time employees.
MARKET AREA
The Bank's primary market area is Doylestown, Pennsylvania and its
surrounding Bucks County and Greater Delaware Valley communities. The Bank also
services Northampton County and parts of the Lehigh Valley from its Easton,
Pennsylvania office. The Bank's operating revenue is derived from a large and
diversified customer base within its geographic area.
1
<PAGE>
LENDING ACTIVITIES
The Bank offers a variety of loan products to its customers, including
loans secured by real estate, commercial and consumer loans. The Bank's lending
objectives are as follows:
o to establish a diversified loan portfolio comprised of commercial loans,
mortgage loans, consumer loans and all other loan types;
o to provide a satisfactory 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
o to provide protection for its depositors by maintaining a predetermined
level of loans to deposits to ensure liquidity.
The Bank manages credit risk through portfolio diversification,
underwriting policies and procedures and loan monitoring practices.
Gross loans totaled $140,348,000 December 31, 1998 compared with
$108,857,000 at December 31, 1997. In both years, gross loans represented
approximately 56.3% of total assets. At December 31, 1998, $124,074,000 or 88.4%
of loans were secured by real estate compared with $98,975,000 or 90.9% at
December 31, 1997.
Loans secured by residential properties include both first and second
mortgages on single family loans. Many of these loans were made to small
business owners and professionals. Loans secured by residential property totaled
$32,931,000 and $24,154,000 at December 31, 1998 and 1997, respectively.
Loans secured by commercial properties include owner occupied commercial
properties and investment income producing properties. Commercial mortgages
totaled $86,008,000 and $72,372,000 at December 31, 1998 and 1997, respectively.
Loans secured by apartments and other multi-family residential properties
totaled $5,135,000 at December 31, 1998 and $1,949,000 at December 31, 1997.
Other loans not secured by real estate include commercial and consumer
loans. Commercial loans are generally made to finance the acquisition of
machinery and equipment and provide working capital for local commercial, retail
and professional companies. These loans are usually secured by business assets,
excluding real property, and guaranteed by the owners. Commercial loans totaled
$14,434,000 and $9,084,000, at December 31, 1998 and 1997, respectively.
Consumer loans consist generally of automobile loans and personal loans. At
December 31, 1998 and 1997, these loans totaled $1,840,000 and $798,000,
respectively.
INVESTMENT ACTIVITIES
At December 31, 1998 and 1997, the Company's investment portfolio, totaled
$99,380,000 and $77,604,000, respectively. Investments consisted primarily of
U.S. government agency obligations, mortgage-backed securities, corporate bonds
and state and municipal securities. The corporate bonds included in our
investment portfolio were issued by other banking companies and are similar in
type to the capital securities we issued in August 1998. Equity securities
include stock in the Federal Home Loan Bank, the Federal Reserve Bank and
Atlantic Central Bankers Bank, the Bank's principal correspondent bank.
Investment securities available for sale are recorded at market value with the
unrealized holding gain or loss, net of taxes, included in shareholders' equity,
while investment securities held to maturity are recorded at amortized cost. At
December 31, 1998 and 1997, the carrying value of the available for sale
portfolio was $93,888,000 and $62,434,000, respectively. The carrying value of
the held to maturity portfolio was $5,492,000 and $15,170,000, at December 31,
1998 and 1997, respectively.
2
<PAGE>
The Company views its investment portfolio as a source of earnings and
liquidity. Decisions on maturity and type of investment are dictated by the
Company's investment and balance sheet management policies as approved annually
by the Board of Directors. The Chief Financial Officer makes the decision
regarding the specific selection of investments for the Company's portfolio. The
Asset Liability Committee sets investment guidelines and strategy based on the
Company's financial goals and interest rate sensitivity.
SOURCES OF FUNDS
The Bank uses deposits and borrowings to finance lending and investment
activities. Borrowing sources include short and long-term advances from the
Federal Home Loan Bank and overnight borrowings from Premier Bank's customers
and correspondent bank.
COMPETITION
The Bank actively competes with other financial services companies for
deposit and loan business. Competitors include other commercial banks, savings
banks, savings and loan associations, insurance companies, securities brokerage
firms, credit unions, finance companies, mutual funds, money market funds, and
certain government agencies. Financial institutions compete mostly on the
quality of services rendered, interest rates offered on deposit accounts,
interest charged on loans, service charges, the convenience of banking
facilities, location and hours of operation and, in case of loans to larger
commercial borrowers, relative lending limits.
Many of these competitors are significantly larger than Premier Bank and
have significantly greater financial resources, personnel and locations from
which to conduct business. In addition, the Bank is subject to regulation while
certain competitors are not. Non-regulated companies face relatively few
barriers for entry into the financial services industry. For more information,
see the "Supervision and Regulation" section below.
SUPERVISION AND REGULATION
Holding Company Regulation
As a registered holding company under the Bank Holding Company Act, the
Company is regulated by the Federal Reserve Board and the provisions of section
115 of the Pennsylvania Banking Code of 1965.
The Bank Holding Company Act requires the Company to file an annual report
with the Federal Reserve Board regarding the holding company and its subsidiary
bank. The Federal Reserve Board may also make examinations of the holding
company and its subsidiary bank. The Federal Reserve Board possesses
cease-and-desist powers over bank holding companies and their non-bank
subsidiaries where their actions would constitute an unsafe or unsound practice
or violation of law.
The Bank Holding Company Act restricts a bank holding company's ability to
acquire control of additional banks. In addition, the Act generally prohibits a
bank holding company from:
o acquiring a direct or indirect interest in, or control of 5% or more of
the outstanding voting shares of any company; and
o engaging directly or indirectly in activities other than that of banking,
managing or controlling banks or furnishing services to subsidiaries.
However, the Federal Reserve Board permits a bank holding company to engage
in, and own shares of companies engaged in, certain activities deemed closely
related to banking or the managing or controlling of banks.
3
<PAGE>
Bank Regulation
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.
Banking regulations include, but are not limited to, permissible types and
amounts of loans, investment and other activities, capital adequacy, branching,
interest rates on loans and the safety and soundness of banking practices.
Environmental Laws
Neither the Company nor the Bank anticipates that compliance with
environmental laws and regulations will have any material effect on capital,
expenditures, earnings, or on its competitive position. However, environmentally
related hazards have become a source of high risk and potentially unlimited
liability for financial institutions. Environmentally contaminated properties
owned by an institution's borrowers may result in a drastic reduction in the
value of the collateral securing the institution's loans to such borrowers, high
environmental clean up costs to the borrower affecting its ability to repay the
loans, the subordination of any lien in favor of the institution to a state or
federal lien securing clean up costs, and liability to the institution for clean
up costs if it forecloses on the contaminated property or becomes involved in
the management of the borrower. To minimize this risk, the Bank may require an
environmental examination of and report with respect to the property of any
borrower or prospective borrower if circumstances affecting the property
indicate a potential for contamination, taking into consideration a potential
loss to the institution in relation to the borrower. Such examination must be
performed by an engineering firm experienced in environmental risk studies and
acceptable to the institution, and the cost of such examinations and reports are
the responsibility of the borrower. These costs may be substantial and may deter
prospective borrowers from entering into a loan transaction with the Bank. The
Company is not aware of any borrower who is currently subject to any
environmental investigation or clean up proceeding that is likely to have a
material adverse effect on the financial condition or results of operations of
the Bank.
In 1995, the Pennsylvania General Assembly enacted the Economic Development
Agency, Fiduciary and Lender Environmental Liability Protection Act which, among
other things, provides protection to lenders from environmental liability and
remediation costs under the environmental laws for releases and contamination
caused by others. A lender who engages in activities involved in the routine
practices of commercial lending, including, but not limited to, the providing of
financial services, holding of security interests, workout practices,
foreclosure or the recovery of funds from the sale of property shall not be
liable under the environmental acts or common law equivalents to the
Pennsylvania Department of Environmental Resources or to any other person by
virtue of the fact that the lender engages in such commercial lending practice.
A lender, however, will be liable if it, its employees or agents, directly cause
an immediate release or directly exacerbate a release of regulated substance on
or from the property, or known and willfully compelled the borrower to commit an
action which caused such release or violate 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.
Federal Reserve Board Requirements
Regulation D of the Federal Reserve Board requires all depository
institutions to maintain reserves on transaction accounts. These reserves may be
in the form of cash or non-interest-bearing deposits with the Federal Reserve
Bank of Philadelphia. Under Regulation D, the Bank must establish reserves equal
to 3.0% of the first $47,800,000 of net transaction accounts plus 10% on the
remainder. The Bank's reserve requirement was $862,000 and $751,000 at December
31, 1998 and 1997, respectively.
4
<PAGE>
ITEM 2 -- PROPERTIES
Our main office is located at 379 North Main Street, Doylestown,
Pennsylvania. The Bank currently conducts business from the main office and
three other retail offices located in Southampton, Bucks County, Easton,
Northampton County, and Lower Makefield Township, Bucks County. The Floral Vale
Branch in Lower Makefield Township, Bucks County was opened on February 19,
1999.
Commercial lenders are located in each of the Bank's retail offices with
the exception of Southampton. In December 1998, the Bank opened a commercial
loan production office in Southampton, Pennsylvania.
During 1998 and 1997 the Bank leased all facilities from which it operated.
Management believes that its facilities are adequate for its business. The
following table details the Bank's properties at December 31, 1998:
1) Doylestown, Pa....... Main office and branch -- leased
2) Easton, Pa........... Branch -- leased
3) Southampton, Pa...... Branch and operations center -- leased requiring
rental payments of $59,670 per year
4) Southampton, Pa...... Loan production office -- leased requiring rental
payments of $17,750 per year
The leases on the Doylestown and Easton offices expired on December
31,1998. In January 1999, the Bank exercised its option to purchase these
buildings.
ITEM 3 -- LEGAL PROCEEDINGS
At December 31, 1998, there were no material legal proceedings pending.
ITEM 4 -- SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5 -- MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SHAREHOLDER
MATTERS
The Company's common stock is not actively traded. At December 31, 1998,
30,000,000 shares of common stock were authorized and 2,635,340 shares were
outstanding. The Company had 671 shareholders of record as of March 12, 1999. No
other class of common stock is authorized or outstanding. The Company declared a
three-for-one stock split on December 31, 1997 at which time the par value was
changed from $1.00 to $.33 per share. All information has been retroactively
restated to give effect to the stock split in 1997.
To the best of management's knowledge, shares of common stock traded in the
range of $6.00 to $11.00 per share during 1998 and $5.00 to $6.00 per share
during 1997. The Company's ability to pay dividends to shareholders is dependent
upon its ability to obtain dividends from the Bank. The Bank's ability to pay
dividends is subject to certain regulatory restrictions, which are described in
greater detail at Note 20 to the 1998 Consolidated Financial Statements. The
Company has not declared or paid any dividends.
On December 22, 1998 the Company commenced an offering of 500,000 shares of
common stock at $11.00 per share. This offering is expected to expire on March
31, 1999. The Company will use the net proceeds of the stock offering for
general corporate purposes, including investments in or advances to the Bank
which increase the Bank's capital position and loan to one borrower lending
limits. In addition, these proceeds may be used to support the continuing
development of the Bank's franchise through possible expansion into related
businesses.
5
<PAGE>
SELECTED FINANCIAL AND OTHER DATA
<TABLE>
<CAPTION>
AS OF OR FOR THE YEARS ENDED DECEMBER 31, 1998 1997
- ----------------------------------------- ------------ ------------
(IN THOUSANDS, EXCEPT PER SHARE
DATA)
<S> <C> <C>
Income and Expense
Interest income............................................ $ 16,516 $ 13,448
Interest expense........................................... 8,922 7,532
---------- ----------
Net interest income........................................ 7,594 5,916
Provision for loan losses.................................. 505 400
Non-interest income........................................ 357 150
Non-interest expense....................................... 4,903 3,735
---------- ----------
Income before income taxes................................. 2,543 1,931
Income tax expense......................................... 788 590
---------- ----------
Net income................................................. $ 1,755 $ 1,341
========== ==========
Per Share Data
Basic earnings per share................................... $ 0.67 $ 0.51
Diluted earnings per share................................. 0.60 0.49
Book value................................................. 4.46 3.97
Average common shares outstanding.......................... 2,630,573 2,606,473
Average diluted shares outstanding......................... 2,920,024 2,752,462
Balance Sheet
Loans, net of deferred fees................................ $ 139,905 $ 108,532
Investment securities held to maturity..................... 5,492 15,170
Investment securities available for sale................... 93,888 62,434
Other earning assets....................................... 135 86
Total assets............................................... 249,193 193,523
Deposits................................................... 191,226 143,603
Borrowings................................................. 29,936 34,843
Subordinated debt.......................................... 1,500 1,500
Capital securities......................................... 10,000 --
Shareholders' equity....................................... 11,767 10,434
Selected Financial Ratios
Net interest margin........................................ 3.82% 3.67%
Return on average assets................................... 0.82% 0.78%
Return on average shareholders' equity..................... 16.05% 14.28%
Average shareholders' equity to average assets............. 5.11% 5.45%
</TABLE>
ITEM 6 -- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
Premier Bancorp, Inc. is a Pennsylvania business corporation and a
registered bank holding company headquartered in Doylestown, Bucks County,
Pennsylvania. The Company was incorporated on July 15, 1997 and reorganized on
November 17, 1997 as the one-bank holding company of Premier Bank. The primary
business of the Company is the operation of its wholly owned subsidiary, Premier
Bank, which is managed as a single business segment.
6
<PAGE>
Premier Bank was organized in 1990 as a Pennsylvania chartered banking
institution and began operations on April 24, 1992. The Bank is a
community-oriented financial services provider whose business primarily consists
of attracting retail deposits from the general public and small businesses and
originating commercial and consumer loans in its market area. The Bank also
invests in securities such as mortgage-backed securities, obligations of U.S.
government agencies and government sponsored entities, corporate bonds and state
and municipal bonds.
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.
Currently, the Bank has four full-service Pennsylvania banking offices:
Doylestown, Easton, Southampton and Floral Vale. The Bank opened the Floral Vale
Branch on February 19, 1999. The Bank also has a loan production office in
Southampton, Pennsylvania. The Bank faces significant competition from other
financial services companies, many of which are larger organizations with more
resources and locations than the Bank.
The Company's consolidated results of operations are dependent primarily on
net interest income, which is the difference between the interest income earned
on its interest-earning assets, such as loans and securities, and the interest
expense paid on its interest-bearing liabilities, such as deposits and borrowed
money. The Company also generates non-interest income such as service charges
and other fees. The Company's non-interest expenses primarily consist of
employee compensation and benefits, occupancy expenses, marketing, data
processing costs and other operating expenses. The Bank is subject to losses
from its loan portfolio if borrowers fail to meet their obligations. The
Company's results of operations are also significantly affected by general
economic and competitive conditions, particularly changes in market interest
rates, government policies and actions of regulatory agencies.
The following discussion focuses on the major components of the Company's
operations and presents an overview of the significant changes in the results of
operations and financial condition for the past two years. This discussion
section should be read in conjunction with the Consolidated Financial Statements
and accompanying Notes beginning on page 31. Current performance may not be
indicative of future performance.
In addition to historical information, this management discussion and
analysis contains forward-looking statements. Forward-looking statements are
subject to certain risks and uncertainties that could cause actual results to
differ materially from those projected. We caution readers not to place undue
reliance on these forward-looking statements, which reflect management's
analysis only as of this date. The Company is not obligated to publicly revise
or update these forward-looking statements to reflect events or circumstances
that arise after this date. Readers should carefully review the risk factors
described in other documents the Company files from time to time with the
Securities and Exchange Commission, including quarterly reports on Form 10-QSB
and any current reports on Form 8-K.
MANAGEMENT STRATEGY
Our primary strategy is to increase loan and deposit market shares in the
communities we serve and to expand our branch network to new markets as deemed
appropriate. We plan to accomplish this growth principally through aggressive
pricing and marketing. The Bank opened a fourth branch office in Lower Makefield
Township, Bucks County on February 19, 1999.
The Company also tries to maximize earnings, given its current level of
capital and interest rate sensitivity, by borrowing funds and purchasing
investment securities as discussed in "Capital Leverage Strategy," below.
Management continually monitors the quality of its loan and investment
portfolios. In addition, the Company uses various asset/liability modeling
techniques to measure and manage the impact of interest rate changes on the
Company's net interest income and capital.
7
<PAGE>
Management believes that a strong capital position is fundamental to
support the continued growth of the institution. Accordingly, management will
continue to analyze capital raising alternatives. In 1998, the Company issued
$10,000,000 in capital securities for this purpose as discussed at Note 21 to
the Consolidated Financial Statements. We are currently in the process of
raising additional capital through a common stock offering set to expire on
March 31, 1999 as described at Note 22 to the Consolidated Financial Statements.
RESULTS OF OPERATIONS
The Company reported net income of $1,755,000 or $.60 diluted earnings per
share for the year ended December 31, 1998. This represents an increase of
$414,000 or 30.9% from the net income of $1,341,000 or $.49 diluted earnings per
share reported in 1997. Return on average assets and return on average
shareholders' equity were .82% and 16.05%, respectively, in 1998 compared with
.78% and 14.28% in 1997.
Earnings for 1998 were higher than 1997 primarily due to the continued
growth in interest-earning assets. The Bank continues to hire new loan officers
to grow the loan portfolio. Total gross loans grew $31,491,000 or 28.9% over the
prior year. Investments grew $21,776,000 or 28.1% in 1998 consistent with our
overall capital leverage strategy. In August 1998, $10,000,000 in capital
securities were issued. The majority of the proceeds from the capital securities
were temporarily invested in investment securities available for sale.
The following tables and discussion related to net interest income,
interest income and interest expense were prepared on a tax-equivalent basis.
NET INTEREST INCOME
Net interest income is the most significant component of the Company's
operating income. Net interest income depends upon the levels of
interest-earning assets and interest-bearing liabilities and the difference or
"spread" between the respective yields earned and rates paid. The interest rate
spread is influenced by the overall interest rate environment and by
competition.
Net interest income, on a tax equivalent basis, increased $1,813,000 or
29.7% in 1998 compared with $1,396,000 or 29.6% in 1997. The increase in net
interest income over the past two years is primarily a function of asset growth
rather than rate changes. Average earning assets increased $40,967,000 or 24.6%
in 1998 and $40,748,000 or 32.5% in 1997. Average loans and average investments
increased $26,959,000 and $12,072,000, respectively in 1998. On the liability
side, average interest-bearing deposits increased $33,203,000 while average
borrowings declined $1,623,000. Despite a decline in overall interest rates
during 1998, our interest rate spread moved slightly higher to 3.23%. Lower
yields on loans were offset by lower deposit and borrowing costs. The yield on
total investment securities was relatively unchanged. The net interest margin
increased 15 basis points to 3.82%. The increase in net interest margin is
primarily due to a higher ratio of interest-earning assets to interest-bearing
liabilities. This ratio was 113.72% in 1998 compared with 110.39% in 1997.
8
<PAGE>
The following table presents certain key average balance sheet amounts and
the corresponding earnings/expenses and rates:
AVERAGE BALANCES, RATES AND INTEREST INCOME AND EXPENSE SUMMARY
<TABLE>
<CAPTION>
1998 1997 1996
----------------------------- ----------------------------- -----------------------------
AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE INTEREST RATE BALANCE INTEREST RATE BALANCE INTEREST RATE
-------- -------- ------- -------- -------- ------- -------- -------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Assets
Interest-bearing deposits...... $ 273 $ 11 4.03% $ 299 $ 14 4.68% $ 762 $ 41 5.38%
Federal funds sold............. 3,459 189 5.46% 1,497 82 5.48% 1,182 62 5.25%
Investment securities available
for sale
Taxable...................... 59,580 4,002 6.72% 50,572 3,385 6.69% 35,253 2,348 6.66%
Tax-exempt(1)................ 10,590 830 7.84% 5,030 420 8.35% 4,844 398 8.22%
Investment securities held to
maturity..................... 11,253 764 6.79% 13,749 937 6.82% 14,910 1,002 6.72%
-------- ------- ---- -------- ------- ---- -------- ------- ----
Total investment
securities................. 81,423 5,596 6.87% 69,351 4,742 6.84% 55,007 3,748 6.81%
Loans, net of deferred
fees(2)(3)................... 122,105 11,050 9.05% 95,146 8,805 9.25% 68,594 6,407 9.34%
-------- ------- ---- -------- ------- ---- -------- ------- ----
Total earning assets........... 207,260 16,846 8.13% 166,293 13,643 8.20% 125,545 10,258 8.17%
Cash and due from banks........ 3,477 2,778 1,978
Allowance for loan losses...... (1,555) (1,143) (830)
Other assets................... 4,936 4,270 2,817
-------- -------- --------
Total assets..................... $214,118 $172,198 $129,510
======== ======== ========
Liabilities and shareholders'
equity
Interest checking.............. $ 12,858 $ 335 2.61% $ 8,829 224 2.54% $ 6,179 $ 151 2.44%
Money market deposit
accounts..................... 1,720 44 2.56% 1,535 39 2.54% 1,374 34 2.47%
Savings accounts............... 50,679 1,905 3.76% 42,108 1,649 3.92% 36,286 1,508 4.16%
Time deposits.................. 90,143 5,164 5.73% 69,725 3,984 5.71% 51,165 2,894 5.66%
-------- ------- ---- -------- ------- ---- -------- ------- ----
Total interest-bearing
deposits................... 155,400 7,448 4.79% 122,197 5,896 4.82% 95,004 4,587 4.83%
Short-term borrowings.......... 10,357 543 5.24% 24,007 1,355 5.64% 17,003 956 5.62%
Long-term borrowings........... 15,000 813 5.42% 2,973 162 5.45% -- -- --
-------- ------- ---- -------- ------- ---- -------- ------- ----
Total borrowings............. 25,357 1,356 5.35% 26,980 1,517 5.62% 17,003 956 5.62%
Subordinated debt.............. 1,500 118 7.87% 1,467 119 8.11% -- -- --
-------- ------- ---- -------- ------- ---- -------- ------- ----
Total interest-bearing
liabilities................ 182,257 8,922 4.90% 150,644 7,532 5.00% 112,007 5,543 4.95%
Non-interest bearing
deposits..................... 13,628 9,576 7,175
Other liabilities.............. 3,382 2,586 2,100
Capital securities............. 3,918 -- --
Shareholders' equity........... 10,933 9,392 8,228
-------- -------- --------
Total liabilities and
shareholders' equity........... $214,118 $172,198 $129,510
======== ======== ========
Net interest income/rate
spread....................... $ 7,924 3.23% $ 6,111 3.20% $ 4,715 3.22%
======= ==== ======= ==== ======= ====
Net interest margin(4)......... 3.82% 3.67% 3.76%
Average interest earning assets
as a percentage of average
interest-bearing
liabilities.................. 113.72% 110.39% 112.09%
</TABLE>
- ------------------
(1) Interest income on tax-exempt investment securities was presented on a
tax-equivalent basis. Tax exempt yields were adjusted to a tax equivalent
basis using a 34% rate.
(2) Includes non-accrual loans of $460,000, $512,000 and $651,000 on average in
1998, 1997 and 1996, respectively.
(3) Includes tax-exempt loans of $1,339,000, $1,457,000 and $617,000 on average
in 1998, 1997 and 1996, respectively. Tax exempt yields were adjusted to a
tax equivalent basis using a 34% rate.
(4) Net interest margin is calculated as net interest income divided by average
interest-earning assets.
9
<PAGE>
The following table sets forth certain information regarding changes in net
interest income attributable to changes in the volumes of interest-earning
assets and interest-bearing liabilities and changes in rates for the periods
indicated.
For each category of interest-earning assets and interest-bearing
liabilities, information is provided on changes attributable to:
o changes in volume (change in volume multiplied by prior year rate);
o changes in rates (change in rate multiplied by prior year volume); and
o total change.
Changes due to the combination of rate and volume changes (changes in
volume multiplied by changes in rate) were allocated proportionately between
changes in rate and changes in volume.
RATE VOLUME ANALYSIS OF CHANGES IN NET INTEREST INCOME
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31, 1998 VS. 1997 1997 VS. 1996
- -------------------------------- -------------------------- --------------------------
VOLUME RATE TOTAL VOLUME RATE TOTAL
------- ------- ------ ------- ------- ------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Interest income
Federal funds sold............................ $ 107 $ -- $ 107 $ 17 $ 3 $ 20
Interest-bearing deposits..................... (1) (2) (3) (22) (5) (27)
Investment securities available for sale...... 1,003 24 1,027 1,061 (2) 1,059
Investment securities held to maturity........ (169) (4) (173) (79) 14 (65)
Loans(1)...................................... 2,455 (210) 2,245 2,460 (62) 2,398
------- ------- ------ ------- ------- ------
Total interest income............................. 3,395 (192) 3,203 3,437 (52) 3,385
------- ------- ------ ------- ------- ------
Interest expense
Interest checking............................. 105 6 111 67 6 73
Money market accounts......................... 5 -- 5 5 -- 5
Savings....................................... 324 (68) 256 232 (91) 141
Time.......................................... 1,170 10 1,180 1,060 30 1,090
Short-term borrowings......................... (722) (90) (812) 395 4 399
Long-term borrowings.......................... 651 -- 651 162 -- 162
Subordinated debt............................. 3 (4) (1) 119 -- 119
------- ------- ------ ------- ------- ------
Total interest expense............................ 1,536 (146) 1,390 2,040 (51) 1,989
------- ------- ------ ------- ------- ------
Net interest income............................... $ 1,859 $ (46) $1,813 $ 1,397 $ (1) $1,396
======= ======= ====== ======= ======= ======
</TABLE>
- ------------------
(1) Interest income foregone on non-accrual loans was presented as a change in
rate.
INTEREST INCOME
Total interest income, on a tax equivalent basis, increased $3,203,000 or
23.5% in 1998 to $16,846,000. Higher average investment and loan balances added
$834,000 and $2,455,000, respectively, to interest income in 1998. Lower yields
on loans reduced total interest income by $210,000. The yield on earning assets
decreased 7 basis points to 8.13% as overall interest rates fell in 1998. In
addition, the Bank faces increased pressure from competitors to lower its rates.
The yield on loans decreased 20 basis points to 9.05% in 1998.
INTEREST EXPENSE
Total interest expense increased $1,390,000 or 18.5% in 1998 to $8,922,000.
Higher deposit balances added $1,604,000 to total interest expense while lower
total borrowings decreased interest expense by $71,000. The average rate on
interest-bearing deposits decreased 3 basis points to 4.79% lowering interest
expense by $52,000. The deposit mix remained concentrated in higher yielding
deposits. Rates on savings and time deposits were adjusted downward in 1998 in
response
10
<PAGE>
to the overall interest rate environment. The average rate on savings accounts
decreased 16 basis points to 3.76% and lowered interest expense by $68,000. The
average rate on time deposits was higher in 1998 as many certificates of
deposits were renewed for longer maturities at higher rates. The average rate on
short-term borrowings decreased 40 basis points to 5.24% and lowered interest
expense by $90,000. Long term borrowings were issued by the Federal Home Loan
Bank and mature in the year 2002. The Federal Home Loan Bank has the option to
convert these borrowings from a fixed rate to a variable rate every six months.
The Bank can prepay these borrowings without penalty if they are converted. The
issuer is likely to convert these borrowings to a variable rate in a rising rate
environment. The interest rate on long term borrowings was unchanged in 1998 due
to the decline in overall interest rates. Subordinated debt reprices annually
and matures in the year 2012. The average rate on subordinated debt decreased 24
basis points and lowered interest expense by $4,000.
INTEREST RATE SENSITIVITY
The Company is subject to interest rate risk inherent in its lending,
investing and financing activities. Fluctuations in interest rates will impact
both the interest income/expense and market value of all interest-earning assets
and interest-bearing liabilities, other than those with a short term to
maturity. At December 31, 1998, the Company does not have any hedging
transactions in place such as interest rate swaps, futures, caps or floors. The
Company is not directly subject to foreign currency exchange or commodity price
risk.
The Company's primary objective in managing interest rate risk is to
minimize the adverse impact of changes in interest rates on the Company's net
interest income while creating an asset/liability structure that maximizes
earnings. The Asset Liability Management Committee actively monitors and manages
the Company's interest rate exposure using gap analysis and simulation models.
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
assets and liabilities at the same speed, to the same extent, or on the same
basis. Furthermore, gap analysis does not consider future growth.
A positive gap results when the amount of interest rate sensitive assets
exceeds interest rate sensitive liabilities and generally means the institution
will benefit during periods of rising interest rates. A negative gap results
when the amount of interest rate sensitive liabilities exceeds interest rate
sensitive assets and generally means the institution will benefit during periods
of falling interest rates.
Gap and interest rate simulation analyses require assumptions on certain
categories of assets and deposits. For purposes of these analyses, assets and
liabilities are stated at 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. Loans held for sale are included in the earliest period
since they are typically sold within thirty days of their settlement date.
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 the Company'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. Customer repurchase agreements included in
short-term borrowings were assigned repricing characteristics similar to
non-maturing deposits.
11
<PAGE>
The Company's gap analysis at December 31, 1998 is as follows:
INTEREST RATE SENSITIVITY
<TABLE>
<CAPTION>
WITHIN 4 TO 6 7 MONTHS 1 TO 3 3 TO 5 AFTER
DECEMBER 31, 1998 3 MONTHS MONTHS TO 1 YEAR YEARS YEARS 5 YEARS TOTAL
----------------- -------- -------- --------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Assets
Federal funds sold..................... $ 1 $ -- $ -- $ -- $ -- $ -- $ 1
Interest-bearing deposits.............. 134 -- -- -- -- -- 134
Investment securities.................. 22,715 2,901 2,540 4,042 2,631 64,551 99,380
Loans, net of deferred fees(1)......... 30,660 5,714 10,705 38,471 48,679 7,303 141,532
-------- -------- -------- -------- -------- -------- --------
Total rate sensitive assets.............. 53,510 8,615 13,245 42,513 51,310 71,854 241,047
-------- -------- -------- -------- -------- -------- --------
Total cumulative assets.................. 53,510 62,125 75,370 117,883 169,193 241,047
-------- -------- -------- -------- -------- --------
Liabilities
Interest checking, money market and
savings accounts..................... $ 2,894 $ 2,162 $ 4,325 $ 43,250 $ 14,417 $ 5,046 $ 72,094
Time deposits.......................... 14,927 13,131 35,049 34,912 2,086 2 100,107
Short-term borrowings.................. 11,066 66 131 525 525 2,623 14,936
Long-term borrowings................... -- -- -- -- 15,000 -- 15,000
Subordinated debt...................... 1,500 -- -- -- -- -- 1,500
-------- -------- -------- -------- -------- -------- --------
Total rate sensitive liabilities......... 30,387 15,359 39,505 78,687 32,028 7,671 203,637
-------- -------- -------- -------- -------- -------- --------
Total cumulative liabilities............. 30,387 45,746 85,251 163,938 195,966 203,637
-------- -------- -------- -------- -------- --------
Gap during period........................ $ 23,123 $ (6,744) $(26,260) $(36,174) $ 19,282 $ 64,183 $ 37,410
======== ======== ======== ======== ======== ======== ========
Cumulative gap........................... $ 23,123 $ 16,379 $ (9,881) $(46,055) $(26,773) $ 37,410
======== ======== ======== ======== ======== ========
Cumulative gap as a percentage of:
Earning assets......................... 9.59% 6.79% (4.10)% (19.11)% (11.11)% 15.52%
Total assets........................... 9.28% 6.57% (3.97)% (18.48)% (10.74)% 15.01%
</TABLE>
- ------------------
(1) Includes loans held for sale.
The Company 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.
Actual results may differ from simulated results due to various factors
including time, magnitude and frequency of interest rate changes, the
relationship or spread between various rates, loan pricing and deposit
sensitivity, and asset/liability strategies.
NON-INTEREST INCOME COMPARISON
<TABLE>
<CAPTION>
CHANGE
--------------
1998 1997 AMOUNT %
------ ------ ------ -----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Service charges and other fees........................ $ 169 $ 148 $ 21 14.2%
Gain, net, on sale of investment securities available
for sale............................................ 133 15 118 786.7%
Gain on sale of loans held for sale................... 55 20 35 175.0%
Loss on sale of real estate owned..................... -- (33) 33 --
------ ------ ------ -----
Total non-interest income........................ $ 357 $ 150 $ 207 138.0%
====== ====== ====== =====
</TABLE>
Non-interest income increased $207,000 during 1998 to $357,000. This
increase was largely attributed to net gains of $133,000 on the sale of
investment securities available for sale. The level
12
<PAGE>
of gains realized on investment sales is dependent upon the volume of
transactions, the types of securities sold, timing and the interest rate
environment. In response to falling interest rates during 1998, the Company sold
certain mortgage-backed securities in anticipation of higher than expected
prepayments. The Company recorded net losses of $96,000 on the sale of
$58,988,000 in mortgage-backed securities. These net losses were offset by net
gains of $70,000 on sales of $22,405,000 in corporate bonds and $159,000 in net
gains on sales of $8,038,000 in municipal bonds in 1998. The Bank was also
engaged in the sale of residential loans for a full year in 1998 as compared to
only five months in 1997. This accounted for the $35,000 increase in gains on
sale of loans. The Company continues to use an outside company to originate and
sell residential mortgages on its behalf. In 1998, the Bank recorded no gain or
loss on the sale of two other real estate owned properties. These properties had
a carrying value of $561,000 after write-downs of $77,000 in 1998. These
write-downs were recorded as non-interest expense. In 1997 the Bank sold three
commercial properties with a carrying value of $714,786 for a loss of $33,505.
Service charges and other fees increased $21,000 and included monthly account
maintenance and overdraft charges on deposit transaction accounts. This increase
is attributed to the 41.5% growth in average transaction accounts during 1998.
NON-INTEREST EXPENSE COMPARISON
<TABLE>
<CAPTION>
CHANGE
--------------
1998 1997 AMOUNT %
------ ------ ------ -----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Salaries and employee benefits........................ $2,245 $1,785 $ 460 25.8%
Occupancy costs....................................... 419 400 19 4.8%
Data processing....................................... 484 382 102 26.7%
Professional services................................. 299 282 17 6.0%
Marketing............................................. 187 164 23 14.0%
Other real estate owned expense....................... 134 43 91 211.6%
Minority interest in expense subsidiaries............. 347 -- 347 --
Other................................................. 788 679 109 16.1%
------ ------ ------ -----
Total non-interest expense.......................... $4,903 $3,735 $1,168 31.3%
====== ====== ====== =====
</TABLE>
Non-interest expense increased $1,168,000 during 1998 to $4,903,000. The
majority of this increase occurred in salaries and employee benefits, which
increased $460,000. This increase primarily resulted from the addition of 10
full-time equivalent employees and annual salary adjustments. The Company will
continue to hire new lenders and support staff to grow the Bank. Data processing
costs increased $102,000 principally due to the growth of the institution,
variable costs associated with item processing and account volumes, and new
services. We also incurred higher network administration costs associated with
software upgrades and additional expenses related to the Year 2000 project.
Minority interest in expense of subsidiaries of $347,000 relates to the capital
securities issued in August 1998. In 1999, the Company will incur a full year of
expense estimated at $875,000 related to the capital securities. Other real
estate owned expense includes write-downs and maintenance expenses on foreclosed
properties. The Bank recorded $127,000 in write-downs on three properties during
1998. Only one of these properties remains unsold at December 31, 1998. Other
real estate owned expense for 1997 relates to maintenance of properties. Other
expenses consist primarily of furniture and equipment expense, employee travel
and entertainment, stationery, supplies and postage. The $109,000 increase in
other expenses is principally attributed to the growth of the institution.
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 that management
deems adequate to provide for potential losses. The amount of the provision for
loan losses and the amount of the allowance for
13
<PAGE>
loan losses is subject to ongoing analysis of the loan portfolio which considers
current economic conditions, actual loss experience, the current risk profile of
the portfolio, and composition of loan types within the portfolio. Net
charge-offs were $60,000 in 1998 and $1,000 in 1997. The Bank's loan portfolio
is relatively immature given its recent growth rates. Therefore, charge-off and
non-performing trends may not be indicative of future performance,
The provision for loan losses increased from $400,000 in 1997 to $505,000
in 1998. The increase is due to the overall increase in the size of the loan
portfolio and an increase in non-performing loans as a percentage of total
loans. The ratio of non-performing loans to total loans increased to 1.20% in
1998 from .60% in 1997. This increase is principally attributed to the placement
of one loan for $890,000 on non-accrual status in September 1998. The allowance
for loan losses was $1,805,000 at December 31, 1998, a 32.7% increase from the
level reported at December 31, 1997. The loan loss allowance as a percentage of
total loans was 1.29% in 1998 versus 1.25% in 1997.
INCOME TAXES
The Company recorded a $788,000 or 31.0% tax provision for the year ended
December 31, 1998 compared with a tax provision of $590,000 or 30.6% for 1997.
The provision for income taxes includes federal, state and local income taxes
currently payable and those deferred because of temporary differences between
the financial statement and tax bases of assets and liabilities. 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.
FINANCIAL CONDITION
Consolidated assets grew $55,670,000 or 28.8% during 1998. Loans and
investments grew $31,491,000 and $21,776,000, respectively. Asset growth was
funded by a $47,623,000 increase in deposits and $10,000,000 in proceeds from
capital securities issued in August 1998. Borrowings were reduced $4,907,000 due
to the availability of other funding sources. Shareholders' equity grew
$1,333,000 to $11,767,000 at December 31, 1998. This increase was attributable
to earnings, offset in part by unrealized losses on investments available for
sale.
INVESTMENT SECURITIES
The Company's investment policies include strict standards on permissible
investment categories, credit quality, maturity intervals and investment
concentrations. Management is responsible for making the specific investment
purchases within such standards. Investment securities grew $21,776,000 or 28.1%
during 1998. At December 31, 1998 approximately 40.7% of the investment
portfolio was comprised of U.S. government sponsored enterprises ("GSE") or
government agency debt or mortgage-backed securities compared with 84.1% at
December 31, 1997.
During 1998, the Company sold certain mortgage-backed securities in order
to minimize the impact of higher prepayment risk due to falling interest rates.
In addition, the majority of GSE agency debt was called. Proceeds from security
sales in 1998 were $89,564,000 with net gains of $133,000 recorded. Investment
purchases totaled $134,049,000 and were concentrated in lower coupon fixed rate
GNMA securities and corporate bonds. At December 31, 1998 corporate bonds
comprised $35,850,000 or 36.1% of the total investment portfolio.
The estimated fair value of the Company's investment securities available
for sale declined $684,000 from an unrealized gain of $79,000 at December 31,
1997 to an unrealized loss of $605,000 at December 31, 1998. The majority of
this unrealized loss relates to the corporate bond portfolio. Following the
issuance of the Company's own $10,000,000 of capital securities in August 1998,
the Company began investing in similar type securities issued by other banking
companies
14
<PAGE>
which it classifies as corporate bonds. In the third quarter of 1998 global
financial markets experienced high volatility following certain events such as
Russia's default on debt and concerns over "hedge funds". These events had a
negative effect on non-U.S. government bond and credit markets. As a result,
there was a "flight to quality" into U.S. treasury bonds and a deep discounting
of corporate bond issues. At that time, the Company's corporate bond 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 temporary. The Company evaluates the credit quality of corporate bond
issues prior to their purchase. The Company monitors market conditions closely
and adjusts its portfolio as it considers necessary. At December 31, 1998,
corporate bonds included $19,205,000 of fixed rate securities which were
purchased to generally offset the cost of the Company's own issue. Floating rate
corporate bonds totaling $16,645,000 at December 31, 1998 were purchased to
provide a variable rate component to the Company's portfolio. Although the
Company has no immediate plans to sell these securities, it has classified them
as "available for sale" allowing management the flexibility to sell the
securities and adjust its portfolio as future conditions change.
Securities available for sale are marked to market on the balance sheet
with an adjustment to equity, net of tax. This adjustment is included in the
caption "Accumulated other comprehensive income".
The composition and maturity of the Company's investment portfolio is as
follows:
<TABLE>
<CAPTION>
1998
HELD TO MATURITY AVAILABLE FOR SALE
AMORTIZED ESTIMATED AMORTIZED ESTIMATED
COST FAIR VALUE COST FAIR VALUE
--------- ---------- --------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
U.S. government agency obligations.............. $ 2,998 $ 2,993 $ -- $ --
Mortgage-backed securities...................... 1,994 1,986 35,411 35,463
State and municipal securities.................. -- -- 18,533 18,702
Equity securities............................... -- -- 3,745 3,758
Corporate bonds................................. -- -- 36,689 35,850
Other debt securities........................... 500 500 115 115
------- ------- ------- -------
Total......................................... $ 5,492 $ 5,479 $94,493 $93,888
======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
1997
HELD TO MATURITY AVAILABLE FOR SALE
AMORTIZED ESTIMATED AMORTIZED ESTIMATED
COST FAIR VALUE COST FAIR VALUE
--------- ---------- --------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
U.S. government agency obligations.............. $11,986 $11,956 $ -- $ --
Mortgage-backed securities...................... 3,184 3,144 50,132 50,121
State and municipal securities.................. -- -- 10,326 10,403
Equity securities............................... -- -- 1,780 1,793
Other debt securities........................... -- -- 117 117
------- ------- ------- -------
Total......................................... $15,170 $15,100 $62,355 $62,434
======= ======= ======= =======
</TABLE>
15
<PAGE>
INVESTMENT SECURITIES MATURITIES AND WEIGHTED AVERAGE YIELDS
<TABLE>
<CAPTION>
UNDER 5-10 OVER 10
DECEMBER 31, 1998 1 YEAR 1-5 YEARS YEARS YEARS TOTAL
- ----------------- ------ --------- ------ ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
INVESTMENT SECURITIES AVAILABLE FOR SALE
Mortgage-backed securities:
Amortized cost.......................... $4,429 $10,691 $6,293 $13,998 $35,411
Weighted average yield.................. 6.48% 6.46% 6.43% 6.35% 6.41%
State and municipal securities:
Amortized cost.......................... -- -- -- 18,533 18,533
Weighted average yield(1)............... -- -- -- 7.32% 7.32%
Equity securities:
Amortized cost.......................... -- -- -- 3,745 3,745
Weighted average yield.................. -- -- -- 6.39% 6.39%
Corporate bonds:
Amortized cost.......................... -- -- -- 36,689 36,689
Weighted average yield.................. -- -- -- 6.85% 6.85%
Other debt securities:
Amortized cost.......................... 15 -- 100 -- 115
Weighted average yield.................. 3.00% -- 7.50% -- 6.91%
------ ------- ------ ------- -------
TOTAL AMORTIZED COST...................... $4,444 $10,691 $6,393 $72,965 $94,493
====== ======= ====== ======= =======
TOTAL FAIR VALUE.......................... $4,494 $10,818 $6,437 $72,139 $93,888
====== ======= ====== ======= =======
WEIGHTED AVERAGE YIELD.................... 6.47% 6.46% 6.33% 6.85% 6.76%
INVESTMENT SECURITIES HELD TO MATURITY
U.S. government agency obligations:
Amortized cost.......................... $ -- $ -- $1,000 $ 1,998 $ 2,998
Weighted average yield.................. -- -- 7.00% 6.53% 6.69%
Mortgage-backed securities:
Amortized cost.......................... 878 1,088 28 -- 1,994
Weighted average yield.................. 5.58% 5.61% 6.32% -- 5.61%
Other debt securities:
Amortized cost.......................... -- -- -- 500 500
Weighted average yield.................. -- -- -- 6.75% 6.75%
------ ------- ------ ------- -------
TOTAL AMORTIZED COST...................... $ 878 $ 1,088 $1,028 $ 2,498 $ 5,492
====== ======= ====== ======= =======
WEIGHTED AVERAGE YIELD.................... 5.58% 5.61% 6.98% 6.53% 6.30%
</TABLE>
- ------------------
(1) Presented on a tax equivalent basis using a 34% rate.
LOANS HELD FOR SALE
The Bank uses an outside company to originate and sell residential
mortgages on its behalf. Loans held for sale increased $1,429,000 to $1,627,000
at December 31, 1998. The increase is attributed to the timing of loan
originations versus their sale. These loans are typically sold within thirty
days of their settlement.
Total loans sold were $7,059,000 in 1998 as compared with $2,132,000 in
1998. The Company was engaged in this activity for the full year of 1998 versus
five months in 1997. Lower interest rates in 1998 contributed to the increased
volumes of loan originations and sales.
16
<PAGE>
LOANS
Gross loans increased $31,491,000 to $140,348,000 at December 31, 1998. The
majority of the loan portfolio is collateralized, at least in part, by real
estate in the greater Lehigh and Delaware Valleys. Real estate values are
subject to risks associated with the general economy. Loans secured by
residential and commercial properties increased $7,804,000 and $13,636,000,
respectively, during 1998.
Inherent within the lending function is the evaluation and acceptance of
credit risk and interest rate risk. The Company manages credit risk through
portfolio diversification, underwriting policies and procedures, and loan
monitoring practices. Interest rate risk is managed within the Company's
asset/liability framework using various modeling techniques and analyses. The
majority of the Bank's loans are either fixed rate for a period of five years or
less or variable rate.
The Bank's commercial lending activity is focused on small businesses and
professionals within the local community. Lenders will continue to be hired to
meet the credit needs of the community.
LOAN PORTFOLIO
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994
------------------ ------------------ ----------------- ----------------- -----------------
DECEMBER 31, AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
- ------------ -------- ------- -------- ------- ------- ------- ------- ------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Real $ -- -- $ 500 0.46% $ -- -- $ -- -- $ -- --
estate-farmland....
Real estate-
construction....... 2,161 1.54% 1,188 1.09% 1,953 2.35% 3,056 5.07% 4,071 8.99%
Real
estate-residential.. 30,770 21.92% 22,966 21.10% 19,666 23.67% 13,631 22.63% 11,004 24.30%
Real estate-multi-
family............. 5,135 3.66% 1,949 1.79% 1,138 1.37% 1,423 2.36% 1,313 2.90%
Real estate-
commercial......... 86,008 61.28% 72,372 66.48% 52,731 63.47% 37,415 62.10% 26,140 57.72%
Commercial........... 14,434 10.29% 9,084 8.35% 6,862 8.26% 3,572 5.93% 1,965 4.34%
Consumer
installment........ 1,840 1.31% 798 0.73% 735 0.88% 1,153 1.91% 793 1.75%
-------- ------ -------- ------ ------- ------ ------- ------ ------- ------
Total................ $140,348 100.00% $108,857 100.00% $83,085 100.00% $60,250 100.00% $45,286 100.00%
======== ====== ======== ====== ======= ====== ======= ====== ======= ======
</TABLE>
LOAN MATURITIES AND INTEREST SENSITIVITY
<TABLE>
<CAPTION>
UNDER 1-5 OVER
DECEMBER 31, 1998 1 YEAR YEARS 5 YEARS TOTAL
- ----------------- ------- -------- ------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Real estate-construction........................ $ 1,821 $ 340 $ -- $ 2,161
Real estate-residential......................... 8,892 20,923 955 30,770
Real estate-multi-family........................ 547 4,588 -- 5,135
Real estate-commercial.......................... 15,351 67,655 3,002 86,008
Commercial...................................... 6,334 7,245 855 14,434
Consumer installment............................ 1,062 743 35 1,840
------- -------- ------ --------
Total........................................... $34,007 $101,494 $4,847 $140,348
======= ======== ====== ========
</TABLE>
The following shows the amount of loans due after one year that have fixed
or variable interest rates at December 31, 1998:
<TABLE>
<S> <C>
Loans with fixed predetermined interest rates......... $ 96,298,000
Loans with variable interest rates.................... 10,043,000
</TABLE>
ALLOWANCE FOR LOAN LOSSES
The Company maintains an allowance for loan losses and charges losses to
this allowance when such losses are considered probable. The allowance for loan
losses is maintained at a level which management considers adequate to provide
for potential losses based upon known and
17
<PAGE>
inherent risks in the loan portfolio. Management's evaluation includes such
factors as current economic conditions, actual loss experience and the current
risk profile of the loan portfolio. Each commercial 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 previously described. Borrower risk ratings are
determined by loan officers at the inception of each loan and are subject to
on-going analysis and update. Homogeneous loans comprised primarily of home
equity and non-real estate secured consumer loans, are analyzed in the
aggregate. Since the Bank is less than seven years old with a limited history
for loan losses, management also uses peer group analysis to gauge the overall
reasonableness of its loan loss reserves. While the allowance is determined and
calculated based on specific loans or loan categories, the total allowance is
considered available for losses in the entire loan portfolio. Changes in
economic conditions and the financial condition of borrowers can occur quickly,
and as a result, impact the estimates made by management.
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.
Management considers the allowance for loan losses to be adequate. However,
to comply with industry reporting requirements, management has allocated the
allowance for loan losses as shown in the table below into components by loan
type at each year-end. Through such allocation, management does not intend to
imply that actual future charge-offs will necessarily follow the same pattern or
that any portion of the allowance is restricted.
ALLOWANCE FOR LOAN LOSS ALLOCATION
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994
---------------- ---------------- ---------------- ---------------- ----------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
------ ------- ------ ------- ------ ------- ------ ------- ------ -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at end of period
applicable to:
Real
estate-farmland.. $ -- --% $ 5 0.46% $ -- --% $ -- --% $ -- --%
Real estate-
construction..... 20 1.54% 37 1.09% 95 2.35% 37 5.07% 54 8.99%
Real
estate-residential.. 403 21.92% 272 21.10% 201 23.67% 168 22.63% 146 24.30%
Real estate-multi-
family........... 125 3.66% 19 1.79% 13 1.37% 17 2.36% 17 2.90%
Real estate
commercial....... 999 61.28% 875 66.48% 559 63.47% 458 62.10% 348 57.72%
Commercial......... 239 10.29% 142 8.35% 76 8.26% 44 5.93% 26 4.34%
Consumer
installment...... 19 1.31% 10 0.73% 17 0.88% 14 1.91% 11 1.75%
------ ------ ------ ------ ---- ------ ---- ------ ---- ------
Total.............. $1,805 100.00% $1,360 100.00% $961 100.00% $738 100.00% $602 100.00%
====== ====== ====== ====== ==== ====== ==== ====== ==== ======
</TABLE>
18
<PAGE>
Changes in the allowance for loan losses during the last five fiscal years
are as follows:
ALLOWANCE FOR LOAN LOSSES
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1998 1997 1996 1995 1994
- ----------------------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Balance, January 1........................ $ 1,360 $ 961 $ 738 $ 602 $ 287
Charge-offs:
Real estate-residential................. 60 -- -- -- --
Real estate-commercial.................. -- -- 125 -- --
Commercial.............................. -- -- -- 14 --
Consumer installment.................... 8 1 2 -- --
-------- -------- -------- -------- --------
Total charge-offs......................... 68 1 127 14 --
Recoveries:
Consumer installment.................... 8 -- -- -- --
-------- -------- -------- -------- --------
Total recoveries.......................... 8 -- -- -- --
-------- -------- -------- -------- --------
Net charge-offs........................... 60 1 127 14 --
Provision for loan losses................. 505 400 350 150 315
-------- -------- -------- -------- --------
Balance, December 31...................... $ 1,805 $ 1,360 $ 961 $ 738 $ 602
======== ======== ======== ======== ========
Total gross loans:
Average................................. $122,526 $ 95,404 $ 68,771 $ 50,359 $ 35,014
Year-end................................ 140,348 108,857 83,085 60,250 45,286
Ratios:
Net charge-offs to:
Average loans........................... 0.05% -- 0.19% 0.03% --
Loans at year-end....................... 0.04% -- 0.15% 0.02% --
Allowance for loan losses............... 3.32% 0.04% 13.29% 1.90% --
Provision for loan losses............... 11.88% 0.13% 36.47% 9.33% --
Allowance for loan losses to:
Total gross loans at year-end........... 1.29% 1.25% 1.16% 1.22% 1.33%
Non-performing loans.................... 106.74% 209.64% 88.75% 113.71% 474.02%
</TABLE>
Charge-offs against the allowance for loan losses in 1998 totaled $68,000
of which $47,000 related to one loan. The balance of this loan was transferred
to other real estate owned in 1998.
NON-PERFORMING ASSETS
<TABLE>
<CAPTION>
DECEMBER 31, 1998 1997 1996 1995 1994
- ------------ ------ ------ ------ ---- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Loans past due 90 days or more and accruing
Real estate-construction............................. $ -- $ -- $ 211 $ -- $ --
Real estate-residential.............................. 605 146 -- 124 --
Commercial........................................... 6 -- -- -- --
Consumer installment................................. -- 5 1 6 2
------ ------ ------ ---- ----
Total loans past due 90 days or more and
accruing........................................ 611 151 212 130 2
Loans accounted for on a non-accrual basis
Real estate-construction............................. -- -- 299 519 --
Real estate-residential.............................. 25 299 -- -- 125
Real estate-multi-family............................. 890 -- -- -- --
Real estate-commercial............................... 165 192 572 -- --
Consumer installment................................. -- 7 -- -- --
------ ------ ------ ---- ----
Total non-accrual loans........................... 1,080 498 871 519 125
Real estate owned.................................... 200 638 389 -- --
------ ------ ------ ---- ----
Total non-performing assets....................... $1,891 $1,287 $1,472 $649 $127
====== ====== ====== ==== ====
Ratio of non-performing loans to total loans........... 1.20% 0.60% 1.30% 1.08% 0.28%
Ratio of non-performing assets to total assets......... 0.76% 0.67% 0.96% 0.57% 0.20%
</TABLE>
19
<PAGE>
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 0.76% of total assets at December 31, 1998
compared with 0.67% at December 31, 1997. The increase in non-performing assets
is attributable to the placement of one loan secured by an apartment building on
non-accrual status in September 1998 and the classification of one loan secured
by a residential property as non-performing. Such additions were offset by the
sale of two properties previously classified as other real estate owned.
Non-accrual loans are those where the accrual of interest has ceased.
Non-consumer loans are placed on non-accrual status immediately if, in the
opinion of management, collection is doubtful or when principal or interest is
past due 90 days or more and collateral is insufficient 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.
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. Non-accruing loans increased $582,000 during 1998. This
increase was due to the placement of the aforementioned loan secured by an
apartment building on non-accrual status in September 1998. This addition was
offset by the transfer of one loan secured by a residential property and
previously classified as non-accruing to other real estate owned in January
1998. No interest was recognized on non-accrual loans in 1998 or 1997. Interest
foregone on non-accrual loans totaled $69,000 in 1998 and $52,000 in 1997.
Other Real Estate Owned
Other real estate owned totaled $200,000 at December 31, 1998 and consisted
of one 1-4 family residential property. This property was classified as a
non-accruing loan at December 31, 1997 and transferred to other real estate
owned in January 1998 with a corresponding $47,000 charge-off recorded against
the allowance for loan losses. Additional write-downs on this property totaling
$50,000 were taken in the fourth quarter of 1998 and included in non-interest
expense.
Other real estate owned totaled $638,000 at December 31, 1997. The two
properties included in this balance were sold in 1998 with no gain or loss
recognized. Write-downs of $77,000 were taken on these properties prior to their
sale and included in non-interest expense in 1998.
DEFERRED TAXES
Deferred taxes increased $421,000 during 1998 to $826,000. Unrealized
losses on investment securities available for sale resulted in a $233,000
increase in deferred tax assets. The remainder of the increase relates primarily
to the provision for loan losses.
OTHER ASSETS
Other assets increased $251,000 during 1998 to $737,000. The majority of
this increase relates to the capitalization of issuance costs related to the
capital securities and common stock offering. The capital securities were issued
on August 1998 with deferred issuance costs amortized over the term of the
securities. The common stock offering is set to expire on March 31, 1999. Costs
related to the stock offering will be net against proceeds and recorded to
shareholders' equity. These capitalized costs were offset by a decrease in
principal due on deferred payment mortgage-backed securities. During 1998, the
Company significantly reduced its holdings in this type of security.
DEPOSITS
Premier Bank, a traditional community-based bank, is largely dependent upon
its base of competitively priced core deposits to provide a stable source of
funding. 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
20
<PAGE>
than $100,000, grew $46,360,000 or 35.8% during 1998 to $175,888,000. Most of
this growth occurred in time deposits. Total time deposits at December 31, 1998
were $100,107,000 or 52.4% of total deposits, of which $37,246,000 mature after
one year. In February 1998, the Bank raised approximately $11,600,000 during a
promotion of a nine-month certificate of deposit. Upon maturity most of this new
money was renewed for a longer term. Depending on market conditions, management
generally prices its time deposits to extend maturities beyond a year. During
1998, the Bank experienced a strong retention rate on maturing time deposits.
Total deposits increased $47,623,000 or 33.2% during 1998 to $191,226,000.
An analysis of the change in average deposits may provide a more meaningful
measure of deposit change. Total average deposits increased $37,255,000 or 28.3%
in 1998 and $29,594,000 or 28.9% in 1997. Average savings accounts grew
$8,571,000 or 20.4% during 1998 to $50,679,000 while average time deposits grew
$20,418,000 or 29.3% during 1998 to $90,143,000. Non-interest-bearing deposits
are an important source of funds for a bank because they lower overall deposit
costs. These accounts increased $4,052,000 or 42.3% on average during 1998 to
$13,628,000. Interest checking accounts grew $4,029,000 or 45.6% in 1998 to
$12,858,000. Our deposit mix shifted slightly towards non-interest bearing
deposits and interest checking accounts as these products experienced the
largest percentage growth in 1998. However, the majority of our deposit mix
remains concentrated in savings and time deposits. At December 31, 1998, average
savings accounts and average time deposits were 30% and 53% of total average
deposits, respectively.
Additional deposit growth will be accomplished through deposit promotions,
business development programs, maturation of existing branches and branch
expansion. In February 1999, the Bank opened its fourth branch in Lower
Makefield Township, Bucks County.
AVERAGE DEPOSITS BY MAJOR CLASSIFICATION
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1998 1997 1996
- ----------------------- --------------- --------------- ---------------
BALANCE RATE BALANCE RATE BALANCE RATE
-------- ---- -------- ---- -------- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Non-interest-bearing deposits........ $ 13,628 -- $ 9,576 -- $ 7,175 --
Interest checking.................... 12,858 2.61% 8,829 2.54% 6,179 2.44%
Money market deposit accounts........ 1,720 2.56% 1,535 2.54% 1,374 2.47%
Savings accounts..................... 50,679 3.76% 42,108 3.92% 36,286 4.16%
Time deposits........................ 90,143 5.73% 69,725 5.71% 51,165 5.66%
-------- ---- -------- ---- -------- ----
Total.............................. $169,028 4.41% $131,773 4.47% $102,179 4.49%
======== ==== ======== ==== ======== ====
</TABLE>
MATURITY OF TIME DEPOSITS OF $100,000 OR MORE
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1998
----------------------- --------------
(IN THOUSANDS)
<S> <C>
Three months or less............................ $ 3,160
Over three through six months................... 2,490
Over six through twelve months.................. 5,458
Over twelve months.............................. 4,230
-------
Total......................................... $15,338
=======
</TABLE>
OTHER LIABILITIES
Other liabilities increased $1,436,000 during 1998 to $3,233,000. The
majority of this increase relates to a $911,000 increase in the Company's own
official checking accounts. Official checking accounts are primarily used for
disbursements to customers and vendors. Official checking account balances
fluctuate daily due to the timing of payments. In addition, other liabilities at
December 31, 1998 included $340,000 in accrued expenses related to the capital
securities issued in August 1998.
21
<PAGE>
CAPITAL
Capital Requirements
A strong capital position is fundamental to support the continued growth
and profitability of the institution. In addition, the Company and the Bank are
subject to various regulatory capital requirements. Regulatory capital is
defined in terms of Tier I capital (shareholders' equity plus the allowable
portion of the minority interest in equity of subsidiaries, less 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,
minority interest and 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 financial instruments, 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.
Proceeds from the capital securities issued in August 1998 provided 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.
At December 31, 1998, management believes the Bank is "well capitalized"
and in compliance with regulatory capital requirements.
The Company's capital components are depicted in the following table.
CAPITAL COMPONENTS
<TABLE>
<CAPTION>
DECEMBER 31, 1998 1997
- ------------ -------- --------
(IN THOUSANDS)
<S> <C> <C>
Tier I
Shareholders' equity........................................ $ 11,767 $ 10,434
Allowable portion of minority interest in equity of
subsidiaries.............................................. 4,000 --
Net unrealized security (losses) gains...................... 399 (52)
-------- --------
Total Tier I capital........................................ $ 16,166 $ 10,382
======== ========
Tier II
Allowable portion of minority interest in equity of
subsidiaries.............................................. $ 6,000 $ --
Allowable portion of the allowance for loan losses.......... 1,805 1,360
Allowable portion of subordinated debt...................... 1,500 1,500
-------- --------
Total Tier II capital....................................... $ 9,305 $ 2,860
======== ========
Total capital............................................... $ 25,471 $ 13,242
Risk-weighted assets........................................ $185,263 $120,736
</TABLE>
The following table compares the Company's capital ratios to the
"adequately capitalized" and "well capitalized" regulatory requirements.
CAPITAL RATIOS
<TABLE>
<CAPTION>
"ADEQUATELY "WELL
CAPITALIZED" CAPITALIZED"
DECEMBER 31, 1998 1997 RATIOS RATIOS
- ------------ ----- ----- ------------- -------------
<S> <C> <C> <C> <C>
Total risk-based capital/risk-weighted assets...... 13.75% 10.97% 8.00% 10.00%
Tier capital/risk-weighted assets.................. 8.73% 8.60% 4.00% 6.00%
Tier I capital/average assets (leverage ratio)..... 6.75% 5.51% 4.00% 5.00%
</TABLE>
22
<PAGE>
Capital Resources
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's ability to pay dividends depends on its ability to obtain
dividends from the Bank.
The Bank's ability to pay dividends 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 provides that cash dividends may be declared and paid only out of
accumulated net earnings, which were $4,424,000 at December 31, 1998. 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 to 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, 1998 and 1997, 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. On August 11, 1998, $10,000,000 in capital securities were issued
by the Company's recently formed subsidiary, PBI Capital 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.
On December 22, 1998 the Company commenced an offering of 500,000 shares of
common stock at $11.00 per share. This offering is set to expire on March 31,
1999. The Company will use the net proceeds of the stock offering for general
corporate purposes, including investments in or advances to the Bank which
increase the Bank's capital position and loan to one borrower lending limits. In
addition, these proceeds may be used to support the continuing development of
the Bank's franchise through possible expansion into related businesses.
CAPITAL LEVERAGE STRATEGY
The Company plans to remain "well capitalized" and is managed accordingly.
Current capital levels exceed the regulatory requirement for "well capitalized"
classification. A portion of the "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 and corporate bonds and U.S.
government agency securities, together, called leverage assets, funded by short
and intermediate term borrowings principally from the Federal Home Loan Bank 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. The capital leverage strategy has been undertaken in accordance
with the limits established by the Board of Directors for enhancing
profitability under moderate levels of interest rate risk.
23
<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 and investments, sales of
investment securities available for sale 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.
During 1998, operating and financing activities provided cash and cash
equivalents of $2,208,000 and $52,731,000, respectively, while investing
activities used $54,432,000. The cash provided by financing activities resulted
primarily from an increase in deposits and proceeds from the issuance of capital
securities. Other significant sources of cash included principal repayments on
loans and mortgage-backed securities and sales and calls of investment
securities. Together, this cash was primarily used for loan originations, the
purchase of corporate bonds, mortgage-backed and other securities and the
repayment of borrowings. During 1998, loans and investments grew $31,801,000 and
$22,510,000, respectively. Borrowings were reduced by $4,907,000 in 1998.
In 1997, operating and financing activities provided $1,657,000 and
$38,291,000, respectively, while investing activities used $37,885,000. The cash
provided by financing activities resulted primarily from an increase in deposits
and borrowings and the issuance of subordinated debt. Deposits and borrowings
grew $25,510,000 and $11,202,000, respectively. This cash was primarily used for
loans originations and investment purchases. During 1997, loans and investments
grew $26,737,000 and $10,947,000, respectively
The Bank monitors its liquidity position on a daily basis. The Bank uses
overnight federal funds and interest-bearing deposits in other Banks to absorb
daily excess liquidity. Conversely, overnight federal funds may be purchased to
satisfy daily liquidity needs. Federal funds are sold or purchased overnight
through a correspondent bank, which diversifies the holdings to an approved
group of commercial banks throughout the country.
In the event 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 federal funds line with its
correspondent bank or, the Bank's $38,697,000 borrowing limit at the Federal
Home Loan Bank. The Bank could also sell or reverse repurchase investment
securities. At December 31, 1998, the Bank had $26,000,000 in borrowings
outstanding at the Federal Home Loan Bank. The Bank had a remaining unused
borrowing capacity from the Federal Home Loan Bank of $12,697,000. In March
1999, our correspondent bank increased our federal funds line of credit to
$4,000,000.
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
required reserve balance was $862,000 as of December 31, 1998. The Bank was also
required to maintain $300,000 on deposit with its correspondent bank at December
31, 1998.
At December 31, 1998, certain investment securities were pledged as
collateral for Federal Home Loan Bank borrowings and customer repurchase
agreements. In addition, investment securities were pledged to satisfy a reserve
requirement of our capital securities issue. At December 31, 1998, an estimated
$27,004,000 in investment securities were pledged for these purposes.
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
24
<PAGE>
statements. Statement No. 130 requires that the components of comprehensive
income be reported in a financial statement that is displayed with the same
prominence as other financial statements. This Statement does not require a
specific format for that financial statement, but requires that an enterprise
display an amount representing comprehensive income for the period in that
financial statement. Statement No. 130 is effective for fiscal years beginning
after December 15, 1997. The required disclosures under Statement No. 130 are
displayed in the "Consolidated Statement of Shareholders' Equity and
Comprehensive Income" for the years ended December 31, 1998 and 1997.
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 Company manages its business as a single operating segment and has
determined that no additional disclosures were required in the 1998 Consolidated
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. No additional
disclosures were required since the Company does not currently offer
postretirement benefits nor have a defined benefit pension plan.
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 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 required for all
fiscal years beginning after June 15, 1999, however earlier application is
permitted. 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.
25
<PAGE>
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 quarter
beginning after December 15, 1998 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 does not expect any impact on
earnings, financial condition or equity from this Statement since it does not
currently engage in the securitization of mortgage loans held for sale.
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 may 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 examinations of the
Bank's Year 2000 programs are conducted on a quarterly basis. Management reports
on the status of Y2K readiness to the Board of Directors on a monthly basis.
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 identified certain systems that
require modification or replacement in order to use properly 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.
26
<PAGE>
Management 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 June 1999. As of December 31, 1998,
substantially all of the Company's systems were believed to be Year 2000 ready.
The Company will continue to test and validate certain systems for Y2K readiness
through the second quarter of 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 October 1998. In November 1998, the Bank, along with other clients
of this vendor, began comprehensive testing of the system's Y2K readiness. Such
testing was completed in January 1999 and believed to be Y2K compliant. 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 that it deals with 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 communicated 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 June 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 December 31, 1998, $47,000 has been expensed as Year 2000 costs.
Management expects to spend an additional $60,000 for this project which will be
expensed as incurred over the next 12 months. The estimated Year 2000 project
costs include the costs and time associated with the impact of third-parties'
Year 2000 issues and the development of contingency plans, 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 12
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
27
<PAGE>
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 project 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.
Risks of Year 2000
At present, management believes its progress in remedying the Company's
systems, programs and applications; installing Y2K compliant upgrades; and
developing contingency plans 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, especially electric and telephone
utilities, 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 developing 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. The
contingency plan is targeted for completion by June 30, 1999.
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 accompanying notes thereto presented in this
Form 10-KSB have been prepared in accordance with generally accepted accounting
principles, which 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.
28
<PAGE>
ITEM 7 -- FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
(a) The following audited consolidated financial statements and related
documents are set forth in this Annual Report on Form 10-KSB on the following
pages:
PAGE
----
Report of Independent Auditors ......................................... 30
Consolidated Statements of Financial Condition ......................... 31
Consolidated Statements of Operations .................................. 32
Consolidated Statements of Shareholders' Equity and
Comprehensive Income ................................................. 33
Consolidated Statements of Cash Flows .................................. 34
Notes to Consolidated Financial Statements ............................. 35
(b) A summary of quarterly results for the years 1998 and 1997 is as
follows:
SUMMARY OF QUARTERLY FINANCIAL DATA
<TABLE>
<CAPTION>
QUARTERS ENDING 1998
-----------------------------------------------
DECEMBER 31 SEPTEMBER 30 JUNE 30 MARCH 31
----------- ------------ ------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Interest income............................... $4,596 $4,281 $3,907 $3,732
Interest expense.............................. 2,354 2,302 2,177 2,089
------ ------ ------ ------
Net interest income........................... 2,242 1,979 1,730 1,643
Provision for loan losses..................... 150 120 121 114
Non-interest income........................... 125 126 30 76
Non-interest expense.......................... 1,429 1,366 1,059 1,049
------ ------ ------ ------
Income before income tax...................... 788 619 580 556
Income tax expense............................ 213 200 194 181
------ ------ ------ ------
Net income.................................... $ 575 $ 419 $ 386 $ 375
====== ====== ====== ======
Basic earnings per share...................... $ 0.22 $ 0.16 $ 0.15 $ 0.14
Diluted earnings per share.................... 0.20 0.14 0.13 0.13
</TABLE>
<TABLE>
<CAPTION>
QUARTERS ENDING 1997
-----------------------------------------------
DECEMBER 31 SEPTEMBER 30 JUNE 30 MARCH 31
----------- ------------ ------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Interest income............................... $3,685 $3,519 $3,234 $3,010
Interest expense.............................. 2,067 1,993 1,799 1,673
------ ------ ------ ------
Net interest income........................... 1,618 1,526 1,435 1,337
Provision for loan losses..................... 120 105 100 75
Non-interest income........................... 16 57 38 39
Non-interest expense.......................... 969 959 934 873
------ ------ ------ ------
Income before income tax...................... 545 519 439 428
Income tax expense............................ 150 160 145 135
------ ------ ------ ------
Net income.................................... $ 395 $ 359 $ 294 $ 293
====== ====== ====== ======
Basic earnings per share...................... $ 0.15 $ 0.14 $ 0.11 $ 0.11
Diluted earnings per share.................... 0.14 0.13 0.11 0.11
</TABLE>
Net interest income and net income for the fourth quarter of 1998 were
higher than the prior quarter due to the leveraging of proceeds from the capital
securities issued in August 1998.
29
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Premier Bancorp, Inc.:
We have audited the accompanying consolidated statements of financial condition
of Premier Bancorp, Inc. and subsidiaries as of December 31, 1998 and 1997, and
the related consolidated statements of operations, 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 consolidated 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 subsidiaries as of December 31, 1998 and 1997, and the results of their
operations and their cash flows for the years then ended in conformity with
generally accepted accounting principles.
/s/ KPMG LLP
February 18, 1999
Philadelphia, Pennsylvania
[KPMG LOGO]
30
<PAGE>
PREMIER BANCORP, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
DECEMBER 31, 1998 1997
- ------------ ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Assets
Cash and due from banks..................................... $ 4,765 $ 4,307
Federal funds sold.......................................... 1 --
Interest-bearing deposits................................... 134 86
Investment securities:
Held to maturity (fair value $5,479 in 1998 and $15,100
in 1997)............................................... 5,492 15,170
Available for sale (amortized cost $94,493 in 1998 and
$62,355 in 1997)....................................... 93,888 62,434
Loans held for sale......................................... 1,627 198
Loans receivable (net of allowance for loan losses of $1,805
in 1998 and $1,360 in 1997)............................... 138,100 107,172
Accrued interest receivable................................. 1,785 1,452
Premises and equipment...................................... 1,638 1,175
Other real estate owned..................................... 200 638
Deferred taxes.............................................. 826 405
Other assets................................................ 737 486
-------- --------
Total assets................................................ $249,193 $193,523
======== ========
Liabilities, minority interest in subsidiaries and
shareholders' equity
Deposits.................................................... $191,226 $143,603
Borrowings.................................................. 29,936 34,843
Accrued interest payable.................................... 1,531 1,346
Other liabilities........................................... 3,233 1,797
Subordinated debt........................................... 1,500 1,500
-------- --------
Total liabilities........................................... 227,426 183,089
Corporation-obligated mandatorily redeemable capital
securities of subsidiary trust holding solely junior
subordinated debentures of the Corporation................ 10,000 --
Commitments and contingencies (Note 15)
Shareholders' equity
Common stock - $0.33 par value; 30,000,000 shares
authorized; issued and outstanding 2,635,340 at December
31, 1998 and 2,630,340 at December 31, 1997............... 879 877
Additional paid-in capital.................................. 7,147 7,120
Retained earnings........................................... 4,140 2,385
Accumulated other comprehensive (loss) income............... (399) 52
-------- --------
Total shareholders' equity.................................. 11,767 10,434
-------- --------
Total liabilities, minority interest in subsidiaries and
shareholders' equity...................................... $249,193 $193,523
======== ========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
31
<PAGE>
PREMIER BANCORP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31, 1998 1997
- -------------------------------- ----------- -----------
(IN THOUSANDS, EXCEPT PER
SHARE DATA)
<S> <C> <C>
Interest income:
Loans..................................................... $ 11,002 $ 8,753
Federal funds sold and interest-bearing deposits.......... 200 96
Investments:
Taxable................................................... 4,766 4,322
Tax-exempt................................................ 548 277
--------- ---------
Total interest income....................................... 16,516 13,448
Interest expense:
Deposits.................................................. 7,448 5,896
Borrowings................................................ 1,474 1,636
--------- ---------
Total interest expense...................................... 8,922 7,532
--------- ---------
Net interest income......................................... 7,594 5,916
Provision for loan losses................................... 505 400
--------- ---------
Net interest income after loan loss provision............... 7,089 5,516
Non-interest income:
Service charges and other fees............................ 169 148
Gain, net, on sale of investment securities available for
sale................................................... 133 15
Gain on sale of loans held for sale....................... 55 20
Loss on sale of other real estate owned................... -- (33)
--------- ---------
Total non-interest income................................... 357 150
Non-interest expense:
Salaries and employee benefits............................ 2,245 1,785
Occupancy................................................. 419 400
Data processing........................................... 484 382
Professional services..................................... 299 282
Marketing................................................. 187 164
Other real estate owned expense........................... 134 43
Minority interest in expense of subsidiaries.............. 347 --
Other..................................................... 788 679
--------- ---------
Total non-interest expense.................................. 4,903 3,735
--------- ---------
Income before income tax.................................... 2,543 1,931
Income tax expense.......................................... 788 590
--------- ---------
Net income.................................................. $ 1,755 $ 1,341
========= =========
Earnings per share:
Basic..................................................... $ 0.67 $ 0.51
Diluted................................................... 0.60 0.49
Weighted average number of shares outstanding:
Basic..................................................... 2,630,573 2,606,473
Diluted................................................... 2,920,024 2,752,462
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
32
<PAGE>
PREMIER BANCORP, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY AND COMPREHENSIVE INCOME
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
------------------------------------------------------------------------------
ACCUMULATED
ADDITIONAL OTHER TOTAL
COMPREHENSIVE COMMON PAID-IN RETAINED COMPREHENSIVE SHAREHOLDERS'
INCOME STOCK CAPITAL EARNINGS INCOME (LOSS) EQUITY
------------- ------ ---------- -------- ------------- -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1996..... $ 868 $7,024 $1,044 $ 7 $ 8,943
Comprehensive income
Net income................... $1,341 -- -- 1,341 -- 1,341
Other comprehensive income,
net of tax
Unrealized gains on
securities available
for sale............... 89 -- -- -- -- --
Less: reclassification
adjustment for gains
included in net
income................. (44) -- -- -- -- --
------
Other comprehensive income... 45 -- -- -- 45 45
------
Comprehensive income........... $1,386
======
Stock issued for options
exercised.................... 9 96 -- -- 105
------ ------ ------ ----- -------
Balance, December 31, 1997..... $ 877 $7,120 $2,385 $ 52 $10,434
====== ====== ====== ===== =======
Comprehensive income
Net income................... $1,755 -- -- $1,755 -- $ 1,755
Other comprehensive income,
net of tax
Unrealized losses on
securities available
for sale............... (423) -- -- -- -- --
Less: reclassification
adjustment for gains
included in net
income................. (28) -- -- -- -- --
------
Other comprehensive
loss................... (451) -- -- -- (451) (451)
------
Comprehensive income........... $1,304
======
Stock issued for options
exercised.................... 2 27 -- -- 29
------ ------ ------ ----- -------
Balance, December 31, 1998..... $ 879 $7,147 $4,140 $(399) $11,767
====== ====== ====== ===== =======
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
33
<PAGE>
PREMIER BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, 1998 1997
- ------------------------------- ---- ----
(IN THOUSANDS)
<S> <C> <C>
Operating activities:
Net income................................................ $ 1,755 $ 1,341
Adjustments to reconcile net income to cash provided by
operating activities:
Depreciation expense.................................... 219 174
Provision for loan losses............................... 505 400
Writedowns and losses on sale of other real
estate owned........................................... 127 33
Amortization of organization costs...................... -- 24
Amortization of premiums and discounts on investment
securities held to maturity............................ 18 11
Amortization of premiums and discounts on investment
securities available for sale.......................... 165 203
Gain, net, on sale of securities available for sale..... (133) (15)
Gain on sale of loans held for sale..................... (55) (20)
Originations of loans held for sale..................... (8,488) (2,329)
Proceeds from sale of loans held for sale............... 7,114 2,152
Increase in accrued interest receivable................. (333) (336)
Provision for deferred taxes............................ (188) (130)
Increase in other assets................................ (251) (161)
Increase in deferred loan fees.......................... 118 150
Increase in accrued interest payable.................... 185 309
Increase (decrease) in other liabilities................ 1,450 (149)
--------- ---------
Net cash provided by operating activities................... 2,208 1,657
--------- ---------
Investing activities:
Proceeds from sale of securities available for sale....... 89,564 29,025
Repayment on securities available for sale................ 8,818 10,966
Purchase of securities available for sale................. (130,552) (49,645)
Repayment on securities held to maturity.................. 13,157 3,707
Purchase of securities held to maturity................... (3,497) (5,000)
Net increase in loans receivable.......................... (31,801) (26,737)
Proceeds from sale of other real estate owned............. 561 681
Purchases of premises and equipment....................... (682) (882)
--------- ---------
Net cash used in investing activities....................... (54,432) (37,885)
--------- ---------
Financing activities:
Net increase in deposits.................................. 47,623 25,510
Net (decrease) increase in borrowings less than 90 days... (4,907) 1,202
Increase in borrowings greater than 90 days............... 5,000 15,000
Repayment of borrowings greater than 90 days.............. (5,000) (5,000)
Proceeds from subordinated debt........................... -- 1,500
Proceeds from exercised stock options..................... 15 79
Proceeds from capital securities.......................... 10,000 --
--------- ---------
Net cash provided by financing activities................... 52,731 38,291
--------- ---------
Increase in cash and cash equivalents....................... 507 2,063
Cash and cash equivalents:
Beginning of year......................................... 4,393 2,330
--------- ---------
End of year............................................... $ 4,900 $ 4,393
========= =========
Composed of:
Cash and due from banks................................... 4,765 4,307
Federal funds sold........................................ 1 --
Interest bearing deposits................................. 134 86
--------- ---------
Total cash and cash equivalents............................. $ 4,900 $ 4,393
========= =========
Supplemental disclosures:
Cash payments for:
Interest expense........................................ $ 8,737 $ 7,223
Taxes................................................... 950 800
Supplemental disclosure of noncash activities:
Change in unrealized gain on securities available for
sale.................................................... $ (684) $ 69
Change in deferred tax asset related to securities
available for sale...................................... 233 (24)
Tax effect of exercised stock options..................... 14 26
Transfer of loans to other real estate owned.............. 297 964
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
34
<PAGE>
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business
Premier Bancorp, Inc. (the "Company") was incorporated under the laws of
the Commonwealth of Pennsylvania on July 15, 1997. It was reorganized as a
one-bank holding company of Premier Bank (the "Bank") on November 17, 1997.
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,
all of which is managed as one operating segment. Premier Bank is a Pennsylvania
chartered commercial bank and member of the Federal Reserve Bank of Philadelphia
(the "FRB") 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. The Company 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 Premier
Bancorp, Inc. and its wholly owned subsidiaries, Premier Bank and PBI Capital
Trust. 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 and the carrying value of other real estate owned.
Investment Securities
Debt and equity securities are classified as either held to maturity
("HTM") securities or as available for sale ("AFS") securities. Investment
securities that the Company has the positive intent and ability to hold to
maturity are classified as HTM securities and reported at amortized cost.
Investment securities not classified as held to maturity nor held for the
purpose of trading in the near term are classified as AFS 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
Company 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.
35
<PAGE>
PREMIER BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
Equity securities are limited to stocks owned in the FRB, the Federal Home
Loan Bank of Pittsburgh 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.
Non-consumer 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 and collateral is insufficient to cover principal and interest.
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/or 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.
Impaired loans are measured based on the present value of expected future
discounted cash flows, the market price of the loan or the fair value of the
underlying collateral if the loan is collateral dependent. The recognition of
interest income on impaired loans is the same as for non-accrual loans discussed
above.
Loans Held for Sale
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 these loans is released to
the purchaser upon sale.
Allowance for Loan Losses
The provision for loan losses charged to operating expense reflects the
amount deemed appropriate by management to produce an adequate reserve to meet
the present and foreseeable risk characteristics of the existing loan portfolio.
Management's judgment is based on the evaluation of individual loans, past
experience, the assessment of current economic conditions, and other relevant
factors. Loan losses are charged directly against the allowance for loan losses
and recoveries on previously charged-off loans are added to the allowance.
Management uses significant estimates to determine 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 the Company'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.
36
<PAGE>
PREMIER BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
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.
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:
buildings -- 40 years; 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.
Other Real Estate Owned
Other real estate owned is comprised of properties acquired through
foreclosure proceedings or acceptance of a deed in lieu of foreclosure. Other
real estate owned is recorded at the lower of the carrying value of the loan or
the fair value of the property, net of estimated selling costs. Costs relating
to the development or improvement of the properties are capitalized while
holding expenses related to the operation and maintenance of properties are
expensed as incurred. Gains and losses upon disposition are reflected in
earnings as realized.
Income Taxes
Premier Bancorp, Inc. and its subsidiaries 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, the
Company 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.
Earnings Per Share
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 distributed 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.
Stock Options
The Company accounts for its stock option plans in accordance with the
provisions of Accounting Principles Board ("APB") Opinion No. 25, "Accounting
for Stock Issued to Employees", and related interpretations, as permitted by
Statement No. 123, "Accounting for Stock-Based Compensation". 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. Statement No. 123
requires entities which continue to apply the provisions of APB Opinion No. 25
to provide pro-forma net income and pro-forma earnings per share disclosures for
stock option grants made in 1995 and subsequent years as if the fair-value based
method defined in Statement No. 123 had
37
<PAGE>
PREMIER BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
been applied. The Company has elected to continue to apply the provisions of APB
Opinion No. 25 and provide the pro-forma disclosure provisions of Statement No.
123.
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 federal funds sold.
RECENT ACCOUNTING PRONOUNCEMENTS
Reporting Comprehensive Income
In June 1997, the FASB issued Statement No. 130, "Reporting Comprehensive
Income". This Statement establishes standards for the reporting and display of
comprehensive income and its components in a full set of general-purpose
financial statements. Statement No. 130 requires that the components of
comprehensive income be reported in a financial statement that is displayed with
the same prominence as other financial statements. This Statement does not
require a specific format for that financial statement, but requires that an
enterprise display an amount representing comprehensive income for the period in
that financial statement. Statement No. 130 is effective for fiscal years
beginning after December 15, 1997. The required disclosures under Statement No.
130 are presented in the Company's Consolidated Financial Statements.
Operating Segment Disclosure
In June 1997, the FASB issued Statement No. 131, "Disclosures about
Segments of an Enterprise and Related Information." Statement No. 131
establishes standards for the way that public business enterprises report
information about operating segments in annual financial statements and requires
that those enterprises report selected information about operating segments in
interim financial reports issued to shareholders. It also establishes standards
for related disclosures about products and services, geographic areas and major
customers. Statement No. 131 is effective for periods beginning after December
15, 1997. The Company manages its business as a single operating segment and has
determined that no additional disclosures are required in the 1998 Consolidated
Financial Statements.
Employers' Disclosure 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 Statements 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 Statements 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. No additional
disclosures were made under Statement No. 132 since the Company does not provide
postretirement benefits nor have a defined benefit pension plan.
38
<PAGE>
PREMIER BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
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 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 required for all
fiscal years beginning after June 15, 1999, however earlier application is
permitted. 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 quarter
beginning after December 15, 1998 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 does not expect any impact on
earnings, financial condition or equity from this Statement since it does not
currently engage in the securitization of mortgage loans held for sale.
NOTE 2 -- STOCK SPLIT
On December 31, 1997, the Company declared and distributed a three-for-one
stock split to shareholders of record as of December 31, 1997. This stock split
changed the par value from $1.00 to $0.33 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. Required reserve balances as of December 31, 1998 were $862,000
and $300,000, respectively.
39
<PAGE>
NOTE 4 -- INVESTMENT SECURITIES
The amortized cost and estimated fair values of investment securities at
December 31, 1998 and 1997 were as follows:
<TABLE>
<CAPTION>
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSS VALUE
--------- ---------- ---------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
DECEMBER 31, 1998
- -----------------
Held to Maturity:
Mortgage-backed securities...................... $ 1,994 $ -- $ (8) $ 1,986
U.S. government agency obligations.............. 2,998 15 (20) 2,993
Other debt securities........................... 500 -- -- 500
------- ---- ----- -------
$ 5,492 $ 15 $ (28) $ 5,479
======= ==== ===== =======
Available for Sale:
Mortgage-backed securities...................... $35,411 $121 $ (69) $35,463
State and municipal securities.................. 18,533 188 (19) 18,702
Corporate bonds................................. 36,689 40 (879) 35,850
Equity securities............................... 3,745 13 -- 3,758
Other debt securities........................... 115 -- -- 115
------- ---- ----- -------
$94,493 $362 $(967) $93,888
======= ==== ===== =======
</TABLE>
<TABLE>
<CAPTION>
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSS VALUE
--------- ---------- ---------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
DECEMBER 31, 1997
- -----------------
Held to Maturity:
Mortgage-backed securities...................... $ 3,184 $ -- $ (40) $ 3,144
U.S. government agency obligations.............. 11,986 1 (31) 11,956
------- ---- ----- -------
$15,170 $ 1 $ (71) $15,100
======= ==== ===== =======
Available for Sale:
Mortgage-backed securities...................... $50,132 $113 $(124) $50,121
State and municipal securities.................. 10,326 81 (4) 10,403
Equity securities............................... 1,780 13 -- 1,793
Other debt securities........................... 117 -- -- 117
------- ---- ----- -------
$62,355 $207 $(128) $62,434
======= ==== ===== =======
</TABLE>
At December 31, 1998, certain investment securities were pledged as
collateral for Federal Home Loan Bank borrowings and customer repurchase
agreements. In addition, investment securities were pledged to satisfy a reserve
requirement of our capital securities issue. At December 31, 1998, an estimated
$27,004,000 in investment securities were pledged for these purposes.
40
<PAGE>
PREMIER BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4 -- INVESTMENT SECURITIES -- (CONTINUED)
The amortized cost and estimated fair value of investment securities AFS
and HTM by contractual maturity at December 31, 1998 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
--------------------- ---------------------
ESTIMATED ESTIMATED
AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE
--------- --------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Due in one year or less.......................... $ 878 $ 874 $ 4,444 $ 4,494
Due after one year through five years............ 1,088 1,084 10,691 10,818
Due after five years through ten years........... 1,028 1,043 6,393 6,437
Due after 10 years............................... 2,498 2,478 72,965 72,139
------ ------ ------- -------
Total............................................ $5,492 $5,479 $94,493 $93,888
====== ====== ======= =======
</TABLE>
Proceeds from sales of investment securities AFS are as follows:
<TABLE>
<CAPTION>
1998 1997
------- -------
(IN THOUSANDS)
<S> <C> <C>
Proceeds.............................................. $89,564 29,025
Gross gains........................................... 402 69
Gross losses.......................................... 269 54
</TABLE>
NOTE 5 -- LOANS
<TABLE>
<CAPTION>
1998 1997
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Real estate--farmland............................... $ -- $ 500
Real estate--construction........................... 2,161 1,188
Real estate--residential............................ 30,770 22,966
Real estate--multifamily............................ 5,135 1,949
Real estate--commercial............................. 86,008 72,372
Commercial.......................................... 14,434 9,084
Consumer............................................ 1,840 798
-------- --------
Total loans......................................... 140,348 108,857
Deferred fees....................................... (443) (325)
Allowance for loan losses........................... (1,805) (1,360)
-------- --------
Total loans, net.................................... $138,100 $107,172
======== ========
</TABLE>
The Company generally lends in the Greater Philadelphia Region with a
majority of its borrowers living in communities surrounding its branches. Most
loans are collateralized in part by real estate. Accordingly, lending activities
could be affected by changes in the general economy, the regional economy or
real estate values.
Loans secured by real estate totaled $124,074,000 and $98,975,000 at
December 31, 1998 and December 31, 1997, respectively. Real estate secured loans
represent 88.4% and 90.9% of total loans at December 31, 1998 and December 31,
1997, respectively.
The Company had impaired loans totaling $1,080,000 and $498,000 at December
31, 1998 and 1997, respectively. The average recorded investment in these loans
was $460,000 and $512,000 for 1998 and 1997, respectively. Each of the impaired
loans at December 31, 1998 and 1997 had a corresponding allowance for losses.
The allowance for losses on impaired loans totaled $93,000 at December 31, 1998
compared with $51,000 at December 31, 1997. Most of the loans identified as
impaired are collateral-dependent. No interest income was recognized on these
loans in 1998 or 1997.
41
<PAGE>
PREMIER BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5 -- LOANS -- (CONTINUED)
Non-accrual loans totaled $1,080,000 and $498,000 at December 31, 1998 and
December 31, 1997, respectively. If interest on these loans had been recorded,
interest income would have increased by $69,000 in 1998 and $52,000 in 1997. The
Bank had $931,000 in loans which, although performing at December 31, 1998, are
believed to require increased supervision and review; and may, depending on the
economic environment and other factors, become non-performing assets in future
periods. All of these loans are secured by real estate.
NOTE 6 -- ALLOWANCE FOR LOAN LOSSES
Activity in the allowance for loan losses is shown below:
<TABLE>
<CAPTION>
DECEMBER 31, 1998 1997
- ------------ ------ ------
(IN THOUSANDS)
<S> <C> <C>
Balance at begining of year......................... $1,360 $ 961
Charge-offs......................................... (68) (1)
Recoveries.......................................... 8 --
Provision for possible loan losses.................. 505 400
------ ------
Balance at end of year.............................. $1,805 $1,360
====== ======
</TABLE>
NOTE 7 -- PREMISES AND EQUIPMENT
Premises and equipment, stated at cost less accumulated depreciation and
amortization, are summarized below:
<TABLE>
<CAPTION>
DECEMBER 31, 1998 1997
- ------------ ------ ------
(IN THOUSANDS)
<S> <C> <C>
Building............................................ $ 406 $ --
Land................................................ 255 255
Leasehold improvements.............................. 400 373
Furniture, fixtures and equipment................... 1,229 980
------ ------
Book value.......................................... 2,290 1,608
Accumulated depreciation and amortization........... (652) (433)
------ ------
Carrying value...................................... $1,638 $1,175
====== ======
</TABLE>
Depreciation and amortization expense on premises and equipment amounted to
$219,000 and $174,000 for the years ended December 31, 1998, and 1997,
respectively.
All premises were leased in 1998 and 1997. Rent expense on these operating
leases was $183,000 in 1998 and $181,000 in 1997. Building and land balances
relate to the construction of the Company's fourth branch office in Lower
Makefield Township, Bucks County, Pennsylvania ("Floral Vale Branch") which
opened in February 1999.
Premises under lease include the Southampton loan production office, which
opened in December 1998, and the Southampton branch. These leases include
options for renewal. Required minimum annual rentals due on non-cancelable
leases expiring after one year approximate $333,000 in the aggregate at December
31, 1998. Future minimum payments under these leases for each of the years 1999
through 2003 are $77,000, 76,000, 60,000, 60,000, and 60,000, respectively. The
leases on the Doylestown and Easton offices expired on December 31, 1998. The
Bank exercised its option to purchase these facilities in January 1999.
42
<PAGE>
PREMIER BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8 -- DEPOSITS
<TABLE>
<CAPTION>
DECEMBER 31, 1998 1997
- ------------ ---------------------------- ------------------------------
<S> <C> <C> <C> <C> <C> <C>
WEIGHTED WEIGHTED
AVERAGE AVERAGE
INTEREST % OF INTEREST % OF
RATE AMOUNT TOTAL RATE AMOUNT TOTAL
-------- -------- ------ -------- -------- --------
(IN THOUSANDS)
Interest checking............ 2.62% $ 16,432 8.59% 2.62% $ 10,848 7.56%
Money market................. 2.57% 1,580 0.83% 2.57% 1,667 1.16%
Savings...................... 3.44% 54,082 28.28% 3.90% 45,552 31.72%
Time......................... 5.46% 100,107 52.35% 5.66% 73,959 51.50%
---- -------- ------ ---- -------- -------
Total interest bearing
deposits................... 4.53% 172,201 90.05% 4.76% 132,026 91.94%
==== ====
Non-interest bearing
deposits................... 19,025 9.95% 11,577 8.06%
-------- ------ -------- -------
Total deposits............... $191,226 100.00% $143,603 100.00%
======== ====== ======== =======
</TABLE>
Time deposits by date of maturity are as follows:
<TABLE>
<CAPTION>
AMOUNTS AMOUNTS
GREATER THAN LESS THAN
$100,000 $100,000 TOTAL
------------ --------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
1999................................... $11,108 $51,753 $ 62,861
2000................................... 3,716 29,684 33,400
2001................................... -- 1,714 1,714
2002................................... 214 616 830
2003................................... 300 1,000 1,300
2004 and thereafter.................... -- 2 2
------- ------- --------
$15,338 $84,769 $100,107
======= ======= ========
</TABLE>
Accrued interest payable on deposits amounted to $1,460,000 and $1,232,000
at December 31, 1998 and 1997, respectively. Interest expense on deposits is as
follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1998 1997
- ------------ ------ ------
(IN THOUSANDS)
<S> <C> <C>
Interest checking................................... $ 335 $ 224
Money market........................................ 44 54
Savings............................................. 1,905 1,649
Time................................................ 5,164 3,969
------ ------
$7,448 $5,896
====== ======
</TABLE>
43
<PAGE>
PREMIER BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9 -- BORROWINGS
<TABLE>
<CAPTION>
MAXIMUM
AMOUNT AVERAGE WEIGHTED
TOTAL OUTSTANDING AMOUNT AVERAGE
BALANCE WEIGHTED AT MONTH END OUTSTANDING INTEREST
END OF AVERAGE DURING THE DURING THE RATE
PERIOD RATE PERIOD PERIOD DURING THE PERIOD
------- -------- ------------ -------------- -----------------
<S> <C> <C> <C> <C> <C>
1998
- ----
Federal funds purchased and
securities sold under agreement
to repurchase..................... $14,936 4.74% $16,093 $10,357 5.24%
FHLB advances....................... 15,000 5.42% 15,000 15,000 5.42%
-------
$29,936
=======
1997
- ----
Federal funds purchased and
securities sold under agreement
to repurchase..................... $19,843 5.59% $31,330 $16,093 5.65%
FHLB advances....................... 15,000 5.42% 15,000 2,973 5.44%
-------
$34,843
=======
</TABLE>
At December 31, 1998 short-term borrowings included $11,000,000 in
borrowings from FHLB which mature within 7 days and $3,936,000 in overnight
borrowings from customers. At December 31, 1997, short-term borrowings included
$12,500,000 in FHLB repurchase agreements, $5,846,000 in overnight borrowings
from customers and $1,497,000 in overnight borrowings from Atlantic Central
Bankers Bank.
All borrowings from the FHLB are secured by a blanket lien against all of
the Bank's assets. In addition, the FHLB amended its policies in 1998 to require
its borrowers who exceed 50% of their maximum borrowing capacity to deliver
certain securities to them as collateral. As of December 31, 1998 the Bank
delivered $21,714,000 in investments as collateral to the FHLB under this new
policy. There was no such collateral delivery requirement at December 31, 1997.
Customer repurchase agreements are collateralized by investment securities in an
amount equal to or exceeding such borrowings. These pledged securities are
controlled by the Bank.
Long-term FHLB borrowings consisted of the following at December 31, 1998:
INTEREST
AMOUNT DUE RATE
------- -------- --------
(DOLLARS IN THOUSANDS)
Issued 9/25/97........................... $ 5,000 9/25/02 5.45%
Issued 10/17/97.......................... 5,000 10/17/02 5.47%
Issued 11/19/97.......................... 5,000 11/19/02 5.34%
-------
$15,000
=======
The FHLB has the option to convert these borrowings from a fixed rate to a
variable rate every six months. Should the issuer convert the borrowing, the
Company may prepay the debt without penalty.
Accrued interest on borrowings totaled $71,000 and $114,000 at December 31,
1998 and 1997, respectively.
At December 31, 1998, the Bank had a $2,000,000 unsecured federal funds
line of credit from its correspondent bank and a $38,697,000 borrowing limit at
the FHLB. At December 31, 1998, the
44
<PAGE>
PREMIER BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9 -- BORROWINGS -- (CONTINUED)
Bank had unused borrowing capacity of $2,000,000 and $12,697,000 from the
correspondent bank and the FHLB, respectively.
NOTE 10 -- SUBORDINATED DEBT
On January 9, 1997, the Bank borrowed $1,500,000 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. The note requires monthly interest
payments for the first ten years with principal payments beginning in the
eleventh year with full amortization by the maturity date.
NOTE 11 -- EARNINGS PER SHARE
The following is a reconciliation of the numerators and denominators of the
basic and diluted earnings per share calculations.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, 1998
---------------------------------------------
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
PER SHARE
NET INCOME SHARES AMOUNT
----------- ---------- ----------
<S> <C> <C> <C>
Basic earnings per share........................... $1,755 2,630,573 $ 0.67
Effect of dilutive stock options................... -- 289,451 (0.07)
------ --------- ------
Diluted earnings per share......................... $1,755 2,920,024 $ 0.60
====== ========= ======
</TABLE>
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, 1997
---------------------------------------------
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
PER SHARE
NET INCOME SHARES AMOUNT
----------- ---------- ----------
<S> <C> <C> <C>
Basic earnings per share........................... $1,341 2,606,473 $ 0.51
Effect of dilutive stock options................... -- 145,989 (0.02)
------ --------- ------
Diluted earnings per share......................... $1,341 2,752,462 $ 0.49
====== ========= ======
</TABLE>
Earnings per share is 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 672,349 and 662,169 shares
of common stock were outstanding at December 31, 1998 and 1997, respectively,
and to the extent dilutive, were included in the computation of diluted earnings
per share.
NOTE 12 -- INCOME TAXES
The components of the provision for income taxes are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1998 1997
- ----------------------- ----- -----
(IN THOUSANDS)
<S> <C> <C>
Current tax expense................................... $ 976 $ 720
Deferred income tax benefit........................... (188) (130)
----- -----
Income tax expense.................................... $ 788 $ 590
===== =====
</TABLE>
45
<PAGE>
PREMIER BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 12 -- INCOME TAXES -- (CONTINUED)
At December 31, 1998 and 1997, the tax effects of temporary differences
that represent the significant portion of deferred tax assets and liabilities
are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1998 1997
- ----------------------- ---- ----
(IN THOUSANDS)
<S> <C> <C>
Deferred tax assets:
Unrealized net loss on securities available for
sale............................................... $206 $ --
Allowance for loan losses............................. 593 440
Other................................................. 51 16
---- ----
Total deferred tax assets............................... 850 456
---- ----
Deferred tax liabilities:
Unrealized net gain on securities available for
sale............................................... -- (27)
Depreciation.......................................... (24) (24)
---- ----
Total deferred tax liabilities.......................... (24) (51)
---- ----
Net deferred tax asset.................................. $826 $405
==== ====
</TABLE>
The realizability of deferred tax assets is dependent upon a variety of
factors, including the generation of future taxable income, the existence of
taxes paid and recoverable, the reversal of deferred tax liabilities and tax
planning strategies. Based upon these and other factors, management believes it
is more likely than not that the Company will realize the benefits of these
deferred tax assets.
A reconciliation of income tax expense in the accompanying statements of
operations with the amount computed by applying the statutory federal income tax
rate to earnings before income taxes is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1998 1997
- ----------------------- ----- -----
(IN THOUSANDS)
<S> <C> <C>
Tax expense at 34% rate............................... $ 865 $ 656
Interest from tax exempt loans and investments........ (185) (109)
Other, net............................................ 108 43
----- -----
Income tax expense.................................... $ 788 $ 590
===== =====
</TABLE>
NOTE 13 -- EMPLOYEE BENEFIT PLANS
The Company 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 1998 and 1997 were $49,000 and $34,000,
respectively.
NOTE 14 -- STOCK OPTION PLAN
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,
46
<PAGE>
PREMIER BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 14 -- STOCK OPTION PLAN -- (CONTINUED)
1998 and 1997, there were 432,304 and 437,304 of such options issued and
outstanding, respectively.
In addition, the Bank adopted a stock option program in 1995 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 is to be at the fair value of common stock as of the grant date.
Options expire ten years from the date of grant. 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 five-year vesting
period. In January 1998, 15,180 options were granted at an exercise price of
$6.00 per share and were immediately vested. In January 1999, 12,820 options
were granted at an exercise price of 11.00 per share and were immediately
vested.
A summary of the Company's stock option plans as of December 31, 1998 and
1997 is as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
-----------------------------------------
1998 1997
------------------- -------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
EXERCISE EXERCISE
SHARES PRICE SHARES PRICE
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Outstanding at beginning of year................ 662,169 $3.67 476,736 $3.05
Granted......................................... 15,180 6.00 211,470 5.00
Exercised....................................... (5,000) 3.03 (26,037) 3.03
-------- ----- -------- -----
Outstanding at end of of year................... 672,349 $3.73 662,169 $3.67
======== ===== ======== =====
Options exercisable at end of year.............. 599,449 581,169
======== ========
Weighted-average fair value of options granted
and vested during the year.................... $107,000 $450,000
======== ========
</TABLE>
The following summarizes information about stock options outstanding and
exercisable at December 31, 1998 and 1997:
<TABLE>
<CAPTION>
DECEMBER 31, 1998
- -------------------------------------------------------------------------------------------------------------
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
- -------------------------------------------------------------------------------------------------------------
WEIGHTED-
AVERAGE WEIGHTED- WEIGHTED-
RANGE OF REMAINING AVERAGE AVERAGE
EXERCISE NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
PRICES OUTSTANDING LIFE (IN YEARS) PRICE EXERCISABLE PRICE
- --------------- ----------- --------------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C>
$ 3.03 432,304 3.33 $3.03 432,304 $3.03
3.67 13,395 7.00 3.67 13,395 3.67
5.00 211,470 8.00 5.00 138,570 5.00
6.00 15,180 9.00 6.00 15,180 6.00
- --------------- ------- ---- ----- ------- -----
$ 3.03 to $6.00 672,349 5.00 $3.73 599,449 $3.57
=============== ======= ==== ===== ======= =====
</TABLE>
47
<PAGE>
PREMIER BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 14 -- STOCK OPTION PLAN -- (CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31, 1997
- ----------------------------------------------------------------------------------------------------------
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
- ----------------------------------------------------------------------------------------------------------
WEIGHTED-
AVERAGE WEIGHTED- WEIGHTED-
RANGE OF REMAINING AVERAGE AVERAGE
EXERCISE NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
PRICES OUTSTANDING LIFE (IN YEARS) PRICE EXERCISABLE PRICE
- ------------- ----------- --------------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C>
$ 3.03 437,304 4.33 $3.03 437,304 $3.03
3.67 13,395 8.00 3.67 13,395 3.67
5.00 211,470 9.00 5.00 130,470 5.00
- --------------- ------- ---- ----- ------- -----
$ 3.03 to $5.00 662,169 5.90 $3.67 581,169 $3.49
=============== ======= ==== ===== ======= =====
</TABLE>
Statement of Financial Accounting Standards No. 123 (Statement No. 123),
"Accounting for Stock-Based Compensation" encourages, but does not require, the
adoption of fair-value accounting for stock-based compensation to employees. The
Company, as permitted, has elected not to adopt the fair-value accounting
provisions of Statement No. 123, and has instead continued to apply APB Opinion
25 and related interpretation in accounting for the plans and has provided the
required pro-forma disclosures of Statement No. 123.
The fair value of each option using the Black Scholes options pricing model
was $5.24 in 1998 and $3.45 in 1997. Significant assumptions used in the model
for 1998 and 1997 grants included a weighted average risk-free rate of return of
5.46% in 1998 and 6.40% in 1997; expected option life of ten years for both
years; and no dividends for both years. Had the grant-date fair-value provisions
of Statement No. 123 been adopted, the Company would have recognized additional
compensation expense of $107,000 in 1998 and $450,000 in 1997. As a result, the
Company's net income and earnings per share would have been reduced to the
pro-forma amounts indicated below:
DECEMBER 31, 1998 1997
- ------------ ---------------- ---------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Net income
As reported.......................... $1,755 $1,341
Pro forma............................ 1,648 891
Basic earnings per share
As reported.......................... $ 0.67 $ 0.51
Pro forma............................ 0.63 0.34
Diluted earnings per share
As reported.......................... $ 0.60 $ 0.49
Pro forma............................ 0.56 0.32
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. These financial instruments include commitments
to extend credit and stand-by letters of credit business to meet the financing
needs of its customers. These 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.
48
<PAGE>
PREMIER BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 15 -- COMMITMENTS AND CONTINGENCIES -- (CONTINUED)
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, 1998 and 1997 are as follows:
CONTRACT OR NOTIONAL AMOUNT
--------------------------------
1998 1997
-------------- --------------
(IN THOUSANDS)
Commitments to extend credit................. $15,627 $10,995
Stand-by letters of credit................... 1,588 1,160
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, 1998 were
principally to originate commercial loans and other loans secured by real
estate. At December 31, 1998, fixed and variable rate commitments totalled
$79,000 and $15,548,000, respectively.
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 credit
worthiness 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, restaurant, hotel, and real
estate professions.
Legal Proceedings
As of December 31, 1998, there were no material legal proceedings pending.
49
<PAGE>
PREMIER BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 16 -- RELATED PARTY TRANSACTIONS
As a matter of policy, the Bank does not extend credit to employees,
officers or directors. At December 31, 1997 one loan in the amount of $297,000
was 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. This
loan was repaid in January 1998.
The Bank's offices in Doylestown and Easton were owned by Norbuck
Associates (Norbuck), a Pennsylvania limited partnership consisting of several
directors of the Bank. Rent paid to Norbuck in 1998 and 1997 was $120,000 and
$119,000, respectively. The leases with Norbuck expired December 31, 1998. In
January 1999, the Bank exercised its option to purchase these buildings.
NOTE 17 -- DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company is required to disclose estimated fair values for its financial
instruments, whether or not recognized in the balance sheet. For Premier
Bancorp, Inc., 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.
50
<PAGE>
PREMIER BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 17 -- DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS -- (CONTINUED)
The estimated fair values and carrying amounts are summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1998 DECEMBER 31, 1997
--------------------- ---------------------
ESTIMATED CARRYING ESTIMATED CARRYING
FAIR VALUE AMOUNT FAIR VALUE AMOUNT
---------- -------- ---------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Financial assets:
Cash and due from banks...................... $ 4,765 $ 4,765 $ 4,307 $ 4,307
Federal funds sold........................... 1 1 -- --
Interest-bearing deposits.................... 134 134 86 86
Investment securities:
Available for sale......................... 93,888 93,888 62,434 62,434
Held to maturity........................... 5,479 5,492 15,100 15,170
Loans held for sale.......................... 1,634 1,627 199 198
Net loans.................................... 141,445 138,100 108,226 107,172
Accrued interest receivable.................. 1,785 1,785 1,452 1,452
-------- -------- -------- --------
Total financial assets....................... $249,131 $245,792 $191,804 $190,819
======== ======== ======== ========
Financial liabilities:
Deposits with no stated maturities........... $ 91,119 $ 91,119 $ 69,644 $ 69,644
Deposits with stated maturities.............. 100,815 100,107 76,483 73,959
Borrowings................................... 30,553 29,936 33,629 34,843
Subordinated debt............................ 1,500 1,500 1,500 1,500
Accrued interest payable..................... 1,531 1,531 1,346 1,346
-------- -------- -------- --------
Total financial liabilities.................. $225,518 $224,193 $182,602 $181,292
======== ======== ======== ========
</TABLE>
The following methods and assumptions were used to estimate the fair value
of each major classification of financial instruments at December 31, 1998 and
1997.
Cash and due from banks and Federal funds sold: Current carrying amounts
approximate estimated fair value.
Investment securities: Current quoted market prices used to estimate fair
value.
Loans: Fair values were estimated using the present value of the estimated
cash flows, using interest rates currently being offered for loans with similar
terms to borrowers of similar credit quality.
Deposit liabilities: The fair value of deposits with no stated maturity
(i.e. demand deposits, interest checking accounts, money market accounts and
savings accounts) are by definition, equal to the amount payable on demand at
the reporting date (i.e. their carrying amounts). Deposits with a stated
maturity (time deposits) have been valued using the present value of cash flows
discounted at rates approximating the current market for similar deposits.
Borrowings: Borrowings have been valued using the present value of cash
flows discounted at rates approximating the current market for similar
liabilities.
Off-balance-sheet instruments: Off-balance-sheet instruments are primarily
comprised of loan commitments which are generally priced at market at the time
of funding. Fees on commitments to extend credit and stand-by 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, 1998 and 1997 loan commitments were $15,627,000 and
$10,995,000, respectively. Stand-by letters of credit were $1,588,000 and
$1,160,000 at December 31, 1998 and 1997, respectively.
51
<PAGE>
NOTE 18 -- PARENT COMPANY FINANCIAL INFORMATION
CONDENSED STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
DECEMBER 31, 1998 1997
- ------------ ------- -------
(IN THOUSANDS)
<S> <C> <C>
Assets
Cash on deposit with subsidiary bank........................ $ 553 $ 79
Investment securities available for sale.................... 4,980 --
Investment in subsidiaries.................................. 16,290 10,329
Deferred issuance costs on capital securities............... 425 --
Accrued interest receivable................................. 67 --
Other....................................................... 152 26
------- -------
Total assets.............................................. $22,467 $10,434
======= =======
Liabilities and shareholders' equity
Borrowings from subsidiary trust............................ $10,310 $ --
Accrued interest payable.................................... 349 --
Other....................................................... 41 --
------- -------
Total liabilities......................................... 10,700 --
Shareholders' equity
Common stock................................................ 879 877
Additional paid-in capital.................................. 7,147 7,120
Retained earnings........................................... 4,140 2,385
Unrealized (losses) gains on securities available for
sale...................................................... (399) 52
------- -------
Total shareholders' equity................................ 11,767 10,434
======= =======
Total liabilities and shareholders' equity.................. $22,467 $10,434
======= =======
CONDENSED STATEMENTS OF OPERATIONS
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31, 1998 1997
- ------------------------------- ------- -------
<S> <C> <C>
Interest income on securities available for sale............ $ 123 $ --
Interest income on capital securities of subsidiary trust... 9 --
Equity in undistributed income of subsidiaries.............. 2,039 1,341
Other....................................................... -- 1
------- -------
Total income................................................ 2,171 1,342
------- -------
Interest expense............................................ 350 1
Other expense............................................... 66 --
------- -------
Total expense............................................... 416 1
------- -------
Income before taxes......................................... 1,755 1,341
Income tax expense.......................................... -- --
------- -------
Net income.................................................. $ 1,755 $ 1,341
======= =======
</TABLE>
52
<PAGE>
PREMIER BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 18 -- PARENT COMPANY FINANCIAL INFORMATION -- (CONTINUED)
<TABLE>
<CAPTION>
CONDENSED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1998 1997
- -------------------------------- ------- -------
(IN THOUSANDS)
<S> <C> <C>
Cash flows from operating activities:
Net income................................................................................. $ 1,755 $ 1,341
Deduct items not affecting cash flows:
Equity in undistributed income of subsidiary............................................. (2,039) (1,341)
Amortization of deferred issuance costs on capital securities............................ 13 --
Increase in accrued interest receivable.................................................. (67) --
Increase in other assets................................................................. (81) --
Increase in accrued interest payable..................................................... 349 --
Increase in other liabilities............................................................ 41 --
------- -------
Net cash used in operating activities...................................................... (29) --
Cash flows from investing activities:
Purchase of securities available for sale.................................................. (7,164) --
Proceeds from sale of securities available for sale........................................ 2,090 --
Capital investment in subsidiary bank...................................................... (4,000) --
Purchase of capital securities of subsidiary trust......................................... (310) --
------- -------
Net cash used in financing activities...................................................... (9,384) --
Cash flows from financing activities:
Proceeds from junior subordinated debt..................................................... 10,310 --
Proceeds from exercised stock options...................................................... 15 79
Issuance costs related to capital securities............................................... (438) --
------- -------
Net cash provided by financing activities.................................................. 9,887 79
------- -------
Net increase in cash and cash equivalents.................................................. 474 79
Cash and cash equivalents at beginning of year............................................. 79 --
------- -------
Cash and cash equivalensts at end of year.................................................. $ 553 $ 79
======= =======
</TABLE>
NOTE 19 -- REGULATORY RESTRICTIONS
The Company is subject to various regulatory capital requirements of
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
Company's financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Company must meet
specific capital guidelines that involve quantitative measures of assets,
liabilities, and certain off-balance sheet items as calculated under accounting
practices. Capital amounts and classification are also subject to qualitative
judgments by the regulators about components, risk weightings, and other
factors.
The Company must maintain certain minimum capital amounts and ratios to be
considered adequately capitalized as set forth in the table below. Management
believes that the Company meets, as of December 31, 1998 and 1997, all capital
adequacy requirements to which it is subject. Management believes that the
Company and Bank were well capitalized at December 31, 1998 and 1997 under the
regulatory framework for prompt corrective action provisions of Section 3b of
the Federal Deposit Insurance Act.
53
<PAGE>
PREMIER BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 19 -- REGULATORY RESTRICTIONS -- (CONTINUED)
To be categorized as well capitalized, the Company must maintain the
minimum ratios listed in the table below.
The Company's capital amounts and ratios are presented in the following
table.
<TABLE>
<CAPTION>
TO BE WELL
CAPITALIZED
FOR CAPITAL UNDER THE CORRECTIVE
ACTUAL ADEQUACY PURPOSES ACTION PROVISION
---------------- ------------------ --------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
------- ----- ------- ----- ------- -----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
AS OF DECEMBER 31, 1998:
- ------------------------
Total capital to risk-weighted assets............. $25,471 13.75% $14,821 8.00% $18,526 10.00%
Tier I capital to risk-weighted assets............ 16,166 8.73% 7,411 4.00% 11,116 6.00%
Tier I capital to average assets.................. 16,166 6.75% 9,580 4.00% 11,975 5.00%
AS OF DECEMBER 31, 1997:
- ------------------------
Total capital to risk-weighted assets............. $13,242 10.97% $ 9,659 8.00% $12,074 10.00%
Tier I capital to risk-weighted assets............ 10,382 8.60% 4,829 4.00% 7,244 6.00%
Tier I capital to average assets.................. 10,382 5.51% 7,536 4.00% 9,420 5.00%
</TABLE>
NOTE 20 -- DIVIDEND POLICY
The Company's ability to pay dividends is dependent upon its ability to
obtain dividends from the Bank. The future dividend policy of the Bank 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 of the Bank out
of funds legally available for that purpose. Such payment, however, will be
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 provides that cash dividends may be declared
and paid only out of accumulated net earnings, which were $4,424,000 at December
31, 1998. 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 to 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, 1998 and 1997, the Bank was not in default of any
FDIC assessments.
NOTE 21 -- CAPITAL SECURITIES
On August 11, 1998, the Company's recently formed subsidiary, PBI Capital
Trust (the "Trust") issued $10,000,000 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 $10,000,000 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
54
<PAGE>
PREMIER BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 21 -- CAPITAL SECURITIES -- (CONTINUED)
Company and the Bank. At present, the majority of the net proceeds were
temporarily invested in investment securities available for sale. Proceeds from
the capital securities provide the Company with additional Tier I and Tier II
capital.
At December 31, 1998, the Company was required to maintain a reserve
account equal to one year's expense on its capital securities. This reserve is
required at all times except during times that the ratio of the Company's total
unsecured debt to shareholders' equity is equal to or less than 70% and the Bank
has the capacity to pay dividends in an amount equal to or greater than two
times the amount of interest payable on the junior subordinated debentures for a
one-year period. At December 31, 1998, the Company was required to maintain a
reserve account since its unsecured debt to equity ratio exceeded 70%. This
reserve account was invested in available for sale investment securities with an
estimated fair market value of $940,000 at December 31, 1998.
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".
NOTE 22 -- COMMON STOCK OFFERING
On December 22, 1998 the Company commenced an offering of 500,000 shares of
common stock at $11.00 per share. This offering is expected to expire on March
31, 1999. The Company will use the net proceeds of the stock offering for
general corporate purposes, including investments in or advances to the Bank to
increase the Bank's capital position in order to raise borrowing lending limits
and increase 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.
NOTE 23 -- OTHER COMPREHENSIVE INCOME
The tax effects allocated to each component of "Other comprehensive income"
are as follows:
<TABLE>
<CAPTION>
BEFORE-TAX TAX(EXPENSE) NET-OF-TAX
AMOUNT BENEFIT AMOUNT
---------- ------------ ----------
FOR THE YEAR ENDED DECEMBER 31, 1997 (IN THOUSANDS)
<S> <C> <C> <C>
Unrealized gains on securities available for sale
Unrealized holding losses arising during the period...................... $ 136 $ (47) $ 89
Less: reclassification adjustment for gains included in net income....... (67) 23 (44)
------ ------ ------
Other comprehensive income................................................. $ 69 $ (24) $ 45
====== ====== ======
<CAPTION>
TAX
BEFORE-TAX (EXPENSE) NET-OF-TAX
AMOUNT BENEFIT AMOUNT
---------- ------------ ----------
FOR THE YEAR ENDED DECEMBER 31, 1998 (IN THOUSANDS)
<S> <C> <C> <C>
Unrealized gains on securities available for sale
Unrealized holding losses arising during the period...................... $ (642) $ 219 $ (423)
Less: reclassification adjustment for gains included in net income....... (42) 14 (28)
------ ------ ------
Other comprehensive loss................................................... $ (684) $ 233 $ (451)
====== ====== ======
</TABLE>
55
<PAGE>
ITEM 8 -- CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
None.
PART III
ITEM 9 -- DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item, relating to directors, executive
officers and control persons is set forth in the sections captioned "Information
as to Nominees and Directors" of the Registrant's definitive Proxy Statement to
be used in connection with the 1999 Annual Meeting of Shareholders, which pages
are incorporated herein by reference.
ITEM 10 -- EXECUTIVE COMPENSATION
The information required by Item 10 is incorporated by reference to the
information appearing under the caption "Executive Compensation" in the Proxy
Statement to be used in connection with the 1999 Annual Meeting of Shareholders.
ITEM 11 -- SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by Item 11 is incorporated by reference to the
information appearing under the caption "Beneficial Ownership by Officers,
Directors and Nominees" in the Proxy Statement to be used in connection with the
1999 Annual Meeting of Shareholders.
ITEM 12 -- CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by Item 12 is incorporated by reference to the
information appearing under the caption "Certain Relationships and Related
Transactions" in the Proxy Statement to be used in connection with the 1999
Annual Meeting of Shareholders.
56
<PAGE>
PART IV
ITEM 13 -- EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) 1. The consolidated financial statements listed on the index set forth in
Item 7 of this Annual Report on Form 10-KSB are filed as part of this
Annual Report.
2. Financial Statement Schedules All schedules are omitted because they are
either not applicable, the data are not significant or the required
information is shown in the financial statements or the notes thereto or
elsewhere herein.
3. Exhibits
The following exhibits are incorporated by reference herein or annexed to
this 10-KSB:
3.1 Articles of Incorporation (Incorporated by reference to Exhibit
3i to the Company's Registration Statement No. 333-34243 on Form
S-4 filed with the Securities and Exchange Commission on August
22, 1997).
3.2 By-Laws (Incorporated by reference to Exhibit 3ii to the
Company's Registration Statement No. 333-34243 on Form S-4 filed
with the Securities and Exchange Commission on August 22, 1997).
10.1 Premier Bank's 1995 Incentive Stock Option Plan (Incorporated by
reference to Exhibit 99.6 to the Company's Registration
Statement No. 333-34243 on Form S-4 filed with the Securities
and Exchange Commission on August 22, 1997).
11.1 Statement re: Computation of Earnings per share (Included at
Note 11 to the 1998 Consolidated Financial Statements)
21.1 Subsidiaries of the Registrant
23.1 Consent of Auditors
27.1 Financial Data Schedule
(b) Reports on Form 8-K
None
57
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities and
Exchange Act of 1934, the Registrant has duly caused this report be signed on
its behalf by the undersigned, thereunto duly authorized.
<TABLE>
<S> <C>
PREMIER BANCORP, INC.
</TABLE>
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
By: /s/ JOHN C. SOFFRONOFF President, Chief Executive Officer, March 26, 1999
-------------------------------------- (Principal Executive Officer), Director
John C. Soffronoff
By: /s/ BRUCE E. SICKEL Chief Financial Officer, (Principal Financial March 26, 1999
-------------------------------------- Officer), Director
Bruce E. Sickel
By: /s/ JOANNE M. CALIBEO Controller (Principal Accounting Officer) March 26, 1999
--------------------------------------
Joanne M. Calibeo
</TABLE>
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report is signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
By: /s/ JOHN C. SOFFRONOFF President, Chief Executive Officer, March 26, 1999
-------------------------------------- (Principal Executive Officer), Director
John C. Soffronoff
By: /s/ CLARK S. FRAME Chairman of the Board, Director March 26, 1999
--------------------------------------
Clark S. Frame
By: /s/ BRUCE E. SICKEL Chief Financial Officer, (Principal Financial March 26, 1999
-------------------------------------- Officer), Director
Bruce E. Sickel
By: /s/ BARRY J. MILES Director March 26, 1999
--------------------------------------
Barry J. Miles
By: /s/ DANIEL E. COHEN Director March 26, 1999
--------------------------------------
Daniel E. Cohen
By: /s/ PETER A. COOPER Director March 26, 1999
--------------------------------------
Peter A. Cooper
By: /s/ HELEN BETH GAROFALO VILCEK Director March 26, 1999
--------------------------------------
Helen Beth Garofalo Vilcek
By: /s/ DR. THOMAS E. MACKEL Director March 26, 1999
--------------------------------------
Dr. Thomas E. Mackel
</TABLE>
58
<PAGE>
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
By: /s/ DR. DANIEL A. NESI Director March 26, 1999
--------------------------------------
Dr. Daniel A. Nesi
By: /s/ NEIL NORTON Director March 26, 1999
--------------------------------------
Neil Norton
By: /s/ THOMAS M. O'MARA Director March 26, 1999
--------------------------------------
Thomas M. O'Mara
By: /s/ MICHAEL PERRUCCI Director March 26, 1999
--------------------------------------
Michael Perrucci
By: /s/ BRIAN R. RICH Director March 26, 1999
--------------------------------------
Brian R. Rich
By: /s/ RICHARD F. RYON Director March 26, 1999
--------------------------------------
Richard F. Ryon
By: /s/ GERALD SCHATZ Director March 26, 1999
--------------------------------------
Gerald Schatz
By: /s/ IRVING N. STEIN Director March 26, 1999
--------------------------------------
Irving N. Stein
By: /s/ THOMAS P. STITT Director March 26, 1999
--------------------------------------
Thomas P. Stitt
By: /s/ GEORGE H. WETHERILL Director March 26, 1999
--------------------------------------
George H. Wetherill
By: /s/ JOHN A. ZEBROWSKI Director March 26, 1999
--------------------------------------
John A. Zebrowski
By: /s/ EZIO ROSSI Director March 26, 1999
--------------------------------------
Ezio Rossi
</TABLE>
59
EXHIBIT 3.1
ARTICLES OF INCORPORATION
Incorporated by reference to Exhibit 3i to the Company's Registration
Statement No. 333-34243 on Form S-4 filed with the Securities and Exchange
Commission on August 22, 1997.
60
EXHIBIT 3.2
BYLAWS
Incorporated by reference to Exhibit 3ii to the Company's Registration
Statement No. 333-34243 on Form S-4 filed with the Securities and Exchange
Commission on August 22, 1997.
61
EXHIBIT 10.1
PREMIER BANK'S 1995 INCENTIVE STOCK OPTION PLAN
Incorporated by reference to Exhibit 99.6 to the Company's Registration
Statement No. 333-34243 on Form S-4 filed with the Securities and Exchange
Commission on August 22, 1997.
62
EXHIBIT 11.1
STATEMENT RE: COMPUTATION OF EARNINGS PER SHARE
Included at Note 11 to the 1998 Consolidated Financial Statements.
63
EXHIBIT 21.1
SUBSIDIARIES
NAME STATE OF INCORPORATION
----- ----------------------
Premier Bank Pennsylvania
PBI Capital Trust Delaware
64
EXHIBIT 23.1
CONSENT OF AUDITORS
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The Board of Directors
Premier Bancorp, Inc.:
We consent to incorporation by reference in the registration statement (No.
333-34243) on Form S-4 of Premier Bancorp, Inc., of our report dated February
18, 1999, relating to the consolidated statements of financial condition of
Premier Bancorp, Inc. and subsidiaries as of December 31, 1998 and 1997, and the
related consolidated statements of operations, shareholders' equity and
comprehensive income, and cash flows for the years then ended, which report
appears in the December 31, 1998 Form 10-KSB of Premier Bancorp, Inc.
/s/ KPMG LLP
March 24, 1999
Philadelphia, Pennsylvania
65
CORPORATE INFORMATION
Annual Meeting
The Annual Meeting of Shareholders of Premier Bancorp, Inc. will be held at
The Barley Sheaf Bed and Breakfast Inn, Route 202, Holicong, PA on May 13, 1999,
at 9:00 a.m.
Transfer Agent
Registrar and Transfer Company
311 Cox Street
Roselle, NJ 07203
(800) 368-5948
Form 10-KSB
A copy of Premier Bancorp Inc.'s Annual Report on Form 10-KSB, as filed
with the Securities and Exchange Commission, is available, without charge to
shareholders, by writing John C. Soffronoff, President and Chief Executive
Officer, Premier Bancorp, Inc., 379 North Main Street, Doylestown, Pennsylvania,
18901-0818. The Annual Report and other Company reports are filed electronically
through the SEC's Electronic Data Gathering, Analysis, and Retrieval System
("EDGAR") which performs automated collection, validation, indexing, acceptance,
and forwarding of submissions to the Securities and Exchange Commission and is
accessible by the public using the Internet at http://www.sec.gov./edgarhp.htm.
Directors of Premier Bancorp, Inc. and Premier Bank
<TABLE>
<S> <C>
Mario Andretti* Brian R. Rich
Daniel E. Cohen Ezio U. Rossi
Peter A. Cooper Richard F. Ryon
Clark S. Frame Gerald Schatz
David C. Frame* Bruce E. Sickel
Thomas E. Mackell John C. Soffronoff
Barry J. Miles, Sr. Irving N. Stein
Daniel A. Nesi Thomas P. Stitt
Neil W. Norton HelenBeth Garofalo Vilcek
Thomas M. O'Mara George H. Wetherill
Michael J. Perrucci John A. Zebrowski
</TABLE>
- ------------------
*Director Emeritus
Officers of Premier Bancorp, Inc.
Clark S. Frame, Chairman of the Board
Barry J. Miles, Sr., Vice Chairman
John C. Soffronoff, President and Chief Executive Officer
Bruce E. Sickel, Treasurer, Senior Vice President and Chief Financial
Officer
John J. Ginley, Secretary, Senior Vice President and Senior Lending Officer
Executive Management of Premier Bank
John C. Soffronoff, President and Chief Executive Officer
Bruce E. Sickel, Senior Vice President and Chief Financial Officer
John J. Ginley, Senior Vice President and Senior Lending Officer
67
<PAGE>
Officers of Premier Bank
Warren Beideman, Vice President and Loan Officer -- Southampton
Anthony Betz, Vice President and Loan Officer -- Easton
Joanne M. Calibeo, Controller
James P. DeBow, Vice President and Loan Officer -- Southampton
Rose M. DeLaurentis, Vice President and Loan Officer -- Southampton
Edward A. Grosik, Vice President and Loan Officer -- Floral Vale
David Grow, Assistant Vice President and Branch Manager -- Easton
Suzanne Hartshorne, Vice President and Loan Officer -- Doylestown
Dolores J. Kleppinger, Operations Controller
Mark Mann, Vice President and Loan Officer -- Floral Vale
James A. Miller, Vice President and Loan Officer -- Floral Vale
Karen D. Moffat, Vice President and Branch Manager -- Doylestown
Christopher A. Nardo, Branch Manager -- Floral Vale
Stephen A. Patterson, Vice President and Loan Officer -- Easton
Michele Pedersen, Vice President and Loan Officer -- Doylestown
Dale O. Smith, Vice President and Branch Manager -- Southampton
Office Locations
Main Office
379 North Main Street
Doylestown, PA 18901
(215) 345-5100
Karen D. Moffat, Branch Manager
Kimberly S. Roth, Assistant Branch Manager
Easton Office
2201 Northampton Street
Easton, PA 18042
(610) 258-5100
David Grow, Branch Manager
Southampton Office
Southampton Shopping Center
516 Second Street Pike
Southampton, PA 18966
(215) 322-5400
Dale O. Smith, Branch Manager
Elaine Lydon, Assistant Branch Manager
Floral Value Office
101 Floral Vale Boulevard
Yardley, PA 19067
(215) 579-6100
Christopher A. Nardo, Branch Manager
Michele A. Thompson, Assistant Branch Manager
Commercial Loan Office
283 Second Street Pike
Suite 130
Southampton, PA 18966
(215) 953-2822
68
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> Year
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 4,765
<INT-BEARING-DEPOSITS> 134
<FED-FUNDS-SOLD> 1
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 93,888
<INVESTMENTS-CARRYING> 5,492
<INVESTMENTS-MARKET> 5,479
<LOANS> 139,905
<ALLOWANCE> 1,805
<TOTAL-ASSETS> 249,193
<DEPOSITS> 191,226
<SHORT-TERM> 14,936
<LIABILITIES-OTHER> 4,764
<LONG-TERM> 16,500
0
0
<COMMON> 8,026
<OTHER-SE> 3,741
<TOTAL-LIABILITIES-AND-EQUITY> 239,193
<INTEREST-LOAN> 11,002
<INTEREST-INVEST> 5,314
<INTEREST-OTHER> 200
<INTEREST-TOTAL> 16,516
<INTEREST-DEPOSIT> 7,448
<INTEREST-EXPENSE> 8,922
<INTEREST-INCOME-NET> 7,594
<LOAN-LOSSES> 505
<SECURITIES-GAINS> 133
<EXPENSE-OTHER> 4,903
<INCOME-PRETAX> 2,543
<INCOME-PRE-EXTRAORDINARY> 2,543
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,755
<EPS-PRIMARY> 0.67
<EPS-DILUTED> 0.60
<YIELD-ACTUAL> 7.97
<LOANS-NON> 1,080
<LOANS-PAST> 611
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 931
<ALLOWANCE-OPEN> 1,360
<CHARGE-OFFS> 68
<RECOVERIES> 8
<ALLOWANCE-CLOSE> 1,805
<ALLOWANCE-DOMESTIC> 1,805
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
