U. S. Securities and Exchange Commission
Washington, D.C. 20549
Form 10-QSB
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: March 31, 1999
[ ] TRANSITION REPORT PURSUANT 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 small business issuer as specified in its charter)
Pennsylvania 23-2921058
- ------------------------------- ---------------------------------
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
379 North Main Street, Doylestown, PA 18901
-------------------------------------------
(Address of principal executive offices)
(215) 345-5100
---------------------------
(Issuer's telephone number)
N/A
----------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 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 __
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date: 2,907,756 as of April 30,
1999.
Transitional Small Business Disclosure format (check one):
Yes __ No X
1
<PAGE>
PART I - Financial Information
Item 1 -- Financial Statements
PREMIER BANCORP, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
March 31, 1999 December 31, 1998
(Unaudited)
-------------- -----------------
(Dollars in thousands)
<S> <C> <C>
Assets
Cash and due from banks $ 7,996 $ 4,765
Federal funds sold 2,502 1
Interest-bearing deposits 164 134
--------- ---------
Cash and cash equivalents 10,662 4,900
Investment securities:
Held to maturity (fair value $5,302 in 1999 and $5,479 in 1998) 5,337 5,492
Available for sale (amortized cost $104,747 in 1999 and $94,493 in 1998) 103,655 93,888
Loans held for sale 129 1,627
Loans receivable (net of allowance for loan losses of $1,959 in 1999
and $1,805 in 1998) 151,622 138,100
Accrued interest receivable 2,084 1,785
Premises and equipment 3,266 1,638
Other real estate owned 200 200
Deferred taxes 992 826
Other assets 752 737
--------- ---------
Total assets $ 278,699 $ 249,193
========= =========
Liabilities, minority interest in subsidiaries and shareholders' equity
Deposits $ 202,648 $ 191,226
Borrowings 44,924 29,936
Accrued interest payable 1,914 1,531
Other liabilities 2,858 3,233
Subordinated debt 1,500 1,500
--------- ---------
Total liabilities 253,844 227,426
Corporation-obligated mandatorily redeemable capital securities of subsidiary
trust holding solely junior subordinated debentures of the Corporation 10,000 10,000
Shareholders' equity
Common stock-$0.33 par value; 30,000,000 shares authorized; issued and
outstanding 2,907,756 at March 31, 1999 and 2,635,340 at December 31, 1998 969 879
Additional paid-in capital 9,896 7,147
Retained earnings 4,711 4,140
Accumulated other comprehensive loss (721) (399)
--------- ---------
Total shareholders' equity 14,855 11,767
--------- ---------
Total liabilities, minority interest in subsidiaries and shareholders' equity $ 278,699 $ 249,193
========= =========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
2
<PAGE>
PREMIER BANCORP, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
<TABLE>
<CAPTION>
For the three months ended March 31, 1999 1998
- ------------------------------------ ---- ----
(Dollars in thousands; except per share data)
<S> <C> <C>
Interest income:
Loans $ 3,185 $ 2,499
Federal funds sold and interestbearing deposits 7 40
Investments:
Taxable 1,387 1,074
Tax-exempt 249 119
---------- ----------
Total interest income 4,828 3,732
---------- ----------
Interest expense:
Deposits 1,991 1,664
Borrowings 458 425
---------- ----------
Total interest expense 2,449 2,089
---------- ----------
Net interest income 2,379 1,643
Provision for loan losses 167 114
---------- ----------
Net interest income after loan loss provision 2,212 1,529
Noninterest income:
Service charges and other fees 50 44
(Loss) gain, net, on sale of investment securities available for sale (47) 27
Gain on sale of loans held for sale 40 5
---------- ----------
Total non-interest income 43 76
Noninterest expense:
Salaries and employee benefits 683 549
Occupancy 107 99
Data processing 161 92
Professional services 46 69
Marketing 66 60
Minority interest in expense of subsidiaries 212 --
Other 221 180
---------- ----------
Total noninterest expense 1,496 1,049
---------- ----------
Income before income tax 759 556
Income tax expense 188 181
---------- ----------
Net income $ 571 $ 375
========== ==========
Earnings per share:
Basic $ 0.21 $ 0.14
Diluted 0.19 0.13
Weighted average number of shares outstanding:
Basic 2,737,857 2,630,340
Diluted 3,047,757 2,903,278
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
3
<PAGE>
PREMIER BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
For the three months ended March 31, 1999 1998
- ------------------------------------ ---- ----
(In thousands)
<S> <C> <C>
Operating activities:
Net income $ 571 $ 375
Adjustments to reconcile net income to cash provided by operating activities:
Depreciation expense 79 37
Provision for loan losses 167 114
Amortization of premiums and discounts on investment securities held to maturity 3 5
Amortization of premiums and discounts on investment securities available for sale 36 58
Loss (gain) on sale of investment securities available for sale 47 (27)
Gain on sale of loans held for sale (40) (5)
Originations of loans held for sale (2,928) (2,041)
Proceeds from sale of loans held for sale 4,466 861
Increase in accrued interest receivable (299) (150)
Increase in other assets (15) (293)
Increase in deferred loan fees 44 32
Increase in accrued interest payable 383 199
(Decrease) increase in other liabilities (375) 606
-------- --------
Net cash provided by (used in) operating activities 2,139 (229)
-------- --------
Investing activities:
Proceeds from sale of securities available for sale 5,003 23,340
Repayment of securities available for sale 1,166 3,536
Purchase of securities available for sale (16,506) (29,162)
Repayment of securities held to maturity 152 4,244
Purchase of securities held to maturity -- (999)
Net increase in loans receivable (13,734) (5,052)
Proceeds from sale of other real estate owned -- 81
Purchases of premises and equipment (1,707) (62)
-------- --------
Net cash used in investing activities (25,626) (4,074)
-------- --------
Financing activities:
Net increase in deposits 11,422 19,791
Net increase (decrease) in borrowings less than 90 days 14,988 (15,120)
Proceeds from borrowings greater than 90 days -- 5,000
Proceeds from the issuance of common stock, net 2,839 --
-------- --------
Net cash provided by financing activities 29,249 9,671
-------- --------
Increase in cash and cash equivalents 5,762 5,368
Cash and cash equivalents:
Beginning of period 4,900 4,393
-------- --------
End of period $ 10,662 $ 9,761
======== ========
Composed of:
Cash and due from banks $ 7,996 $ 3,984
Federal funds sold 2,502 5,341
Interest-bearing deposits 164 436
-------- --------
Total cash and cash equivalents $ 10,662 $ 9,761
======== ========
Supplemental disclosures:
Cash payments for:
Interest expense $ 2,057 $ 1,890
Taxes 250 300
Supplemental disclosure of noncash activities:
Change in unrealized (loss) gain on securities available for sale $ 487 $ (75)
Change in deferred tax asset related to securities available for sale 166 26
Transfer of loans to other real estate owned -- 297
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
4
<PAGE>
PREMIER BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Organization
Premier Bancorp, Inc. (the Company) was incorporated under the laws of the
Commonwealth of Pennsylvania on July 15, 1997. It was reorganized as a one-bank
holding company of Premier Bank (the Bank) on November 17, 1997. Premier
Bancorp, Inc., through its principal 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
competes with other financial institutions and other financial services
companies with respect to services offered and customers. The Company is
regulated by certain federal agencies and undergoes periodic examinations by
such regulatory authorities.
2. Basis of Financial Statement Presentation
The accompanying unaudited consolidated financial statements were prepared
in accordance with instructions for quarterly reports on Form 10-QSB and,
therefore, do not include information or footnotes necessary for a complete
presentation of financial condition, results of operations, shareholders' equity
and cash flows in conformity with generally accepted accounting principles. The
consolidated financial statements include the accounts of Premier Bancorp, Inc.
and its wholly owned subsidiaries, Premier Bank and PBI Capital Trust. 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. The results of operations for the
three months ended March 31, 1999 and 1998 are not necessarily indicative of the
results, that may be expected for the entire fiscal year.
3. 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.
4. Earnings Per Share
Basic earnings per share is calculated on the basis of weighted average
number of shares outstanding. Options to purchase 685,169 and 677,349 shares of
common stock were outstanding at March 31, 1999 and 1998, respectively. Diluted
earnings per common share includes dilutive common stock equivalents as computed
under the treasury stock method using average common stock prices.
5
<PAGE>
PREMIER BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. Earnings Per Share (continued)
The following is a reconciliation of the numerators and denominators of the
basic and diluted earnings per share calculations.
For the three months ended March 31, 1999
-----------------------------------------
(Dollars in thousands; except per share data)
Per share
Net income Shares Amount
---------- ----------- ----------
Basic earnings per share $ 571 2,737,857 $ 0.21
Effect of dilutive stock options -- 309,900 (0.02)
------ --------- ------
Diluted earnings per share $ 571 3,047,757 $ 0.19
====== ========= ======
For the three months ended March 31, 1998
-----------------------------------------
(Dollars in thousands; except per share data)
Per share
Net income Shares Amount
---------- ----------- ----------
Basic earnings per share $ 375 2,630,340 $ 0.14
Effect of dilutive stock options -- 272,938 (0.01)
------ --------- ------
Diluted earnings per share $ 375 2,903,278 $ 0.13
====== ========= ======
5. Comprehensive Income
The following table displays net income and the components of other
comprehensive income to arrive at total comprehensive income. For the Company,
the only component of other comprehensive income is the change in the estimated
fair value of investment securities available for sale.
For the three months ended March 31, 1999 1998
- ------------------------------------ ---- ----
(Dollars in thousands)
Net income $ 571 $ 375
Other comprehensive loss, net of tax:
Unrealized losses on investment
securities available for sale:
Unrealized holding losses during the period (353) (33)
Less: Reclassification adjustment for
losses (gains) included in net income 31 (16)
----- -----
Other comprehensive loss (322) (49)
----- -----
Comprehensive income $ 249 $ 326
===== =====
6
<PAGE>
PREMIER BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. Capital Securities
On August 11, 1998, the Company's 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 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, and funding loans. The precise amount and timing of the application
of the net proceeds used for such corporate purposes depends on the funding
requirements and the availability of other funds to the Company and the Bank.
Proceeds from the capital securities provide the Company with additional Tier I
and Tier II capital.
At March 31, 1999, 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 March 31, 1999, 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 $943,000 at March 31, 1999.
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". Expenses related to the capital securities are
included in the "Non-interest expense" section of the Consolidated Statements of
Income under the caption "Minority interest in expense of subsidiaries".
7. Common Stock Offering
On December 22, 1998, the Company commenced an offering of common stock at
$11.00 per share. This offering expired on March 31, 1999. The Company issued
272,416 shares during this offering with net proceeds totaling $2,839,000. 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 lending limits and increase lending
activity. In addition, these proceeds may be used to support the continuing
development of the Bank's franchise through branch expansion and possible
expansion into related businesses. At March 31, 1999, 2,907,756 shares of common
stock were issued and outstanding.
7
<PAGE>
Item 2 -- Management's Discussion and Analysis of Financial Condition and
Results of Operations
General
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.
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 is management's discussion and analysis of the significant
changes in the results of operations for the three months ended March 31, 1999
as compared to the same period in 1998 and changes in financial condition from
December 31, 1998 to March 31, 1999. Current performance may not be indicative
of future performance. This discussion should be read in conjunction with the
1998 Annual Report on Form 10-KSB.
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 annual reports on Form 10-KSB,
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 its fourth branch office in Lower
Makefield Township, Bucks County, Pennsylvania (the Floral Vale branch) in
February 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.
8
<PAGE>
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.
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 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 and reverse repurchase agreements. 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.
9
<PAGE>
The following table sets forth, for the periods indicated, certain key
average balance sheet amounts and their corresponding earnings/expenses and
rates (which have been annualized).
Average Balances, Rates and Interest Income and Expense Summary
<TABLE>
<CAPTION>
For the three months ended March 31,
1999 1998
-------------------------------- --------------------------------
Average Average Average Average
Balance Interest Rate Balance Interest Rate
------- -------- -------- ------- -------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Assets
Interest-bearing deposits $ 285 $ 2 2.85% $ 286 $ 1 1.42%
Federal funds sold 430 5 4.72% 2,781 39 5.69%
Investment securities available for sale
Taxable 75,884 1,298 6.94% 50,128 823 6.66%
Tax-exempt (1) 19,743 377 7.74% 9,068 180 8.05%
Investment securities held to maturity 6,012 89 6.00% 14,861 251 6.85%
-------- ------ ---- -------- ------ ----
Total investment securities 101,639 1,764 7.04% 74,057 1,254 6.87%
Loans, net of unearned income (2) (3) 146,535 3,196 8.85% 110,031 2,511 9.26%
-------- ------ ---- -------- ------ ----
Total earning assets 248,889 4,967 8.09% 187,155 3,805 8.25%
Cash and due from banks 4,042 3,575
Allowance for loan losses (1,875) (1,409)
Other assets 6,796 4,846
-------- --------
Total assets $257,852 $194,167
======== ========
Liabilities, minority interest in subsidiaries
and shareholders' equity
Interest checking $ 15,907 103 2.63% $ 11,217 72 2.60%
Money market deposit accounts 1,882 12 2.59% 1,766 11 2.53%
Savings accounts 54,991 466 3.44% 46,041 441 3.88%
Time deposits 106,251 1,410 5.38% 79,739 1,140 5.80%
-------- ------ ---- -------- ------ ----
Total interest-bearing deposits 179,031 1,991 4.51% 138,763 1,664 4.86%
Short-term borrowings 19,513 231 4.80% 14,581 196 5.45%
Long-term borrowings 15,000 201 5.43% 15,000 200 5.41%
-------- ------ ---- -------- ------ ----
Total borrowings 34,513 432 5.08% 29,581 396 5.43%
Subordinated debt 1,500 26 7.03% 1,500 29 7.84%
-------- ------ ---- -------- ------ ----
Total interest-bearing liabilities 215,044 2,449 4.62% 169,844 2,089 4.99%
Non interest-bearing deposits 16,720 11,935
Other liabilities 3,266 1,899
Capital securities 10,000
Shareholders' equity 12,822 10,489
-------- --------
Total liabilities, minority interest in
subsidiaries and shareholders' equity $257,852 $194,167
======== ========
Net interest income/rate spread $2,518 3.47% $1,716 3.26%
====== ==== ====== ====
Net interest margin(4) 4.10% 3.72%
Average interest-earning assets as a percentage
of average interest-bearing liabilities 115.74% 110.19%
</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 $1,059,000 and $283,000 on average for the
three months ended March 31, 1999 and 1998, respectively.
(3) Includes tax-exempt loans of $1,258,000 and $1,387,000 on average for the
three months ended March 31, 1999 and 1998, 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.
10
<PAGE>
Growth Trend
Total assets grew in excess of 25% in each of the past five years from
$38,336,000 at December 31, 1993 to $278,699,000 at March 31, 1999. During this
same period, total loans and total deposits grew in excess of 25% and 20%,
respectively, each year. Total loans grew from $26,983,000 at December 31, 1993
to $154,068,000 at March 31, 1999. We continue to focus our lending activity on
small businesses and professionals within the local community. As in the past,
we will continue to hire new loan officers to grow our loan portfolio. Total
deposits grew from $33,103,000 at December 31, 1993 to $202,648,000 at March 31,
1999. We increased deposits through aggressive pricing, direct marketing and
branch expansion. In February 1999, the Bank opened its fourth branch (the
Floral Vale branch) in Lower Makefield Township, Bucks County, Pennsylvania. New
personnel have been hired and improvements to our computer systems have been
made to support our growth initiatives.
The discussion that follows compares the financial results for the three
months ended March 31, 1999 to the same periods in 1998. The change in financial
results over the past year are described mostly in terms of our growth.
Results of Operations
For the three months ended March 31, 1999, the Company reported diluted
earnings per share of $.19, an increase of 46.2% from the $.13 reported for the
same period in 1998. Net income of $571,000 for the three months ended March 31,
1999 was $196,000 or 52.3% higher than the $375,000 reported for the same period
in 1998. Return on average assets and return on average equity were .90% and
18.06% for the three months ended March 31, 1999, respectively, compared to .78%
and 14.50% for the same period in 1998. Earnings in 1999 were higher than 1998
primarily due to the continued growth in interest-earning assets.
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.
For the three months ended March 31, 1999, net interest income, on a
tax-equivalent basis, was $802,000 higher than the same period in 1998. This
increase was primarily a function of asset growth and a higher ratio of
interest-earning assets to interest-bearing liabilities. Average
interest-earning assets grew $61,734,000 or 33% from $187,155,000 at March 31,
1998 to $248,889,000 at March 31, 1999. Average investment and average loan
balances increased $27,582,000 and $36,504,000, respectively. The ratio of
average interest-earning assets to average interest-bearing liabilities
increased from 110.19% at March 31, 1998 to 115.74% at March 31, 1999. This
increase had a positive impact on net interest income and net interest margin.
The growth in interest-earning assets was funded, in part, by the proceeds from
our capital securities issued in August 1998. The net interest margin improved
38 basis points from 3.72% at March 31, 1998 to 4.10% at March 31, 1999. The net
interest rate spread improved 21 basis points from 3.26% at March 31, 1998 to
3.47% at March 31, 1999. Overall interest rates moved lower during the later
part of 1998 and were relatively unchanged during the first quarter of 1999. The
16 basis point decrease in average yield on interest-earning assets was more
than offset by the 37 basis point decrease in the average rate on
interest-bearing liabilities.
11
<PAGE>
Non-interest income
Total non-interest income was $43,000 for the three months ended March 31,
1999 as compared to $76,000 for the same period in 1998. The decrease is
principally due to $47,000 in net losses on the sale of investment securities
available for sale during the three months ended March 31, 1999 as compared to
$27,000 in net gains for the same period in 1998. Net losses on investment sales
in 1999 related primarily to corporate bonds. The level of gains or losses on
investment sales is dependent upon the volume of transactions, the types of
securities sold, timing and the interest rate environment. Net losses on
investment sales were partially offset by a $35,000 increase in gains on the
sale of loans held for sale due to increased lending activity. The Company
continues to use an outside company to originate and sell residential mortgages
on its behalf. The volume of loan originations and sales increased in 1999 due
to the addition of one mortgage solicitor and lower interest rates.
Non-interest expense
For the three months ended March 31, 1999, non-interest expenses were
$1,496,000 or $447,000 higher than the $1,049,000 recorded during the same
period in 1998. Overhead expenses continue to increase due to the growth of the
institution which includes the opening of our Floral Vale branch in February
1999. Salaries and benefits were $134,000 or 24.4% higher in 1999 as compared to
1998. This increase is principally due to an increase in the number of employees
and salary adjustments. The number of full-time equivalent employees grew from
44 at March 31, 1998 to 54 at March 31, 1999. In addition, 1999 results include
$212,000 in minority interest in expense of subsidiaries related to the capital
securities issued in August 1998. Data processing costs increased $69,000
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 adminstration costs related to software upgrades and 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 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 the compisition of loan types within the portfolio.
The provision for loan losses increased from $114,000 during the three
months ended March 31,1998 to $167,000 during the same period in 1999. 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.
Income tax expense
The Company recorded a $188,000 or 24.8% tax provision for the three months
ended March 31, 1999 compared to $181,000 or 32.6% for the same period in 1998.
The effective tax rate for the three months ended March 31, 1999 was lower than
the comparable period in 1998 due principally to a higher level of tax-exempt
securities.
Financial Condition
Consolidated assets grew $29,506,000 or 11.8% during the three months ended
March 31, 1999. Loans and investments grew $13,720,000 and $9,612,000,
respectively. Asset growth was funded by an $11,422,000 and $14,988,000 increase
in deposits and borrowings, respectively. Shareholders' equity grew by
$3,088,000 to $14,855,000 at March 31, 1999. This increase was attributable to
$2,839,000 in net proceeds from our common stock offering and $571,000 in
earnings, which were offset, in part, by unrealized losses on investments
available for sale.
12
<PAGE>
Investment securities
Investment securities are classified at the time of purchase by one of
three purposes: trading, available for sale (AFS) or held to maturity (HTM). To
date, the Bank has not purchased any securities for trading purposes. The Bank
usually classifies securities, in particular mortgage-backed securities and
corporate bonds, as AFS to provide management the flexibility to sell certain
securities and adjust its balance sheet in response to capital levels, liquidity
needs and/or changes in market conditions. The carrying values for AFS and HTM
securities were $103,655,000 and $5,337,000, respectively, as of March 31, 1999.
Total investments grew $9,612,000 to $108,992,000. During the first quarter of
1999, management sold certain corporate bonds. Proceeds from security sales were
$5,003,000 with net losses of $47,000 recorded. Investment purchases totaled
$16,506,000 and were concentrated in mortgage-backed securities and municipal
bonds.
The estimated fair value of the Company's investment securities available
for sale declined $487,000 from an unrealized loss of $605,000 at December 31,
1998 to an estimated unrealized loss of $1,092,000 at March 31, 1999. The
estimated fair value of fixed rate securities moved lower during the first
quarter of 1999 due to higher interest rates. At March 31, 1999, the majority of
the unrealized loss on investment securities available for sale related to the
corporate bond portfolio. Following the issuance of the Company's own
$10,000,000 of capital securities in August 1998, the Company and the Bank
invested in similar type securities issued by other banking companies which are
classified as corporate bonds. These corporate bonds include $18,073,000 of
fixed rate securities which were made to generally offset the costs of the
Company's own issue. Additionally, the Company owns $14,803,000 in floating rate
corporate bonds to provide a variable rate element to its portfolio. Although
the Bank has no immediate plans to sell these securities, it has chosen to
classify these securities as available for sale pursuant to SFAS 115 which
allows management the flexibility to sell the securities and adjust its
portfolio as future conditions change. Available for sale securities are marked
to market on the balance sheet with an adjustment to equity, net of tax, and
presented in the caption "Accumulated other comprehensive (loss) income".
In late August and throughout September 1998 global financial markets
experienced volatility following certain highly publicized events such as Russia
defaulting on its debt and the rippling effects on certain money management
funds (Hedge Funds). These events had a negative impact on non-U.S. government
bond and credit markets as there was an overall "flight to quality" in U.S.
treasury bonds. Corporate bond prices were deeply discounted by the markets and
consequently, the Company's portfolio experienced an unrealized loss in value
which has yet to recover. The Company believes that the credit quality of its
corporate bond portfolio is strong and therefore, the unrealized loss is deemed
temporary. The Company evaluates the credit worthiness of the issuer prior to
investing in such securities. The Company monitors market conditions closely and
adjusts its portfolio as it considers necessary.
13
<PAGE>
Investment Portfolio
<TABLE>
<CAPTION>
March 31, 1999
----------------------------------------------------
Held to maturity Available for Sale
----------------------- ------------------------
Amortized Estimated Amortized Estimated
Cost Fair Value Cost Fair Value
-------- ---------- --------- ----------
(Dollars in thousands)
<S> <C> <C> <C> <C>
U.S. government agency obligations $ 2,998 $ 2,969 $ -- $ --
Mortgage-backed securities 1,839 1,833 45,443 45,172
State and municipal securities -- -- 21,275 21,233
Corporate bonds -- -- 33,668 32,876
Equity securities -- -- 4,246 4,259
Other debt securities 500 500 115 115
-------- -------- -------- --------
Total $ 5,337 $ 5,302 $104,747 $103,655
======== ======== ======== ========
<CAPTION>
December 31, 1998
----------------------------------------------------
Held to maturity Available for Sale
----------------------- ------------------------
Amortized Estimated Amortized Estimated
Cost Fair Value Cost Fair Value
---------- ---------- --------- ----------
(Dollars 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
Corporate bonds -- -- 36,689 35,850
Equity securities -- -- 3,745 3,758
------- ------- ------- -------
Other debt securities 500 500 115 115
------- ------- ------- -------
Total $ 5,492 $ 5,479 $94,493 $93,888
======= ======= ======= =======
</TABLE>
Loans held for sale
The Bank uses an outside company to originate and sell residential
mortgages on its behalf. The $1,498,000 decrease in loans held for sale from
$1,627,000 at December 31, 1998 to $129,000 at March 31, 1999 relates to the
timing of loan originations versus their sale. Typically, these loans are sold
within 30 days of their settlement.
Total loans sold were $4,466,000 and $861,000 for the three months ended
March 31, 1999 and 1998, respectivley. Lower interest rates in 1999 and the
addition of one mortgage solicitor resulted in increased loan originations and
sales volumes.
Loans
Gross loans increased $13,720,000 to $154,068,000 at March 31, 1999. 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.
Inherent with the lending function is the evaluation and acceptance of
credit risk and interest rate risk along with the opportunity cost of
alternative deployment of funds. The Company manages credit risk associated with
its lending activities through portfolio diversification, underwriting policies
and procedures, and loan monitoring practices. 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.
14
<PAGE>
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>
March 31, 1999 % of Total December 31, 1998 % of Total
-------------- ---------- ----------------- ----------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Real estate-construction $ 2,132 1.38% $ 2,161 1.54%
Real estate-residential 31,320 20.33% 30,770 21.92%
Real estate-multifamily 5,738 3.72% 5,135 3.66%
Real estate-commercial 95,751 62.15% 86,008 61.28%
Commercial 18,094 11.75% 14,434 10.29%
Consumer 1,033 0.67% 1,840 1.31%
--------- ------ --------- ------
Total loans $ 154,068 100.00% $ 140,348 100.00%
====== ======
Unearned income 487 443
Allowance for loan losses 1,959 1,805
--------- ---------
Total loans, net $ 151,622 $ 138,100
========= =========
</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 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, delinquency and other factors
previously described. Borrowers' risk ratings are determined by loan officers at
the inception of each loan and are subject to ongoing 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 eight 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.
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 judgment about information
available to them at the time of examination.
At March 31, 1999, the Bank had $1,959,000 in its allowance for loan
losses, representing 1.27% of outstanding loans receivable as compared to 1.29%
and 1.25% at December 31, 1998 and March 31, 1998, respectively.
15
<PAGE>
The following table sets forth the activity in the allowance for loan
losses and certain key ratios for the periods indicated.
Allowance for Loan Losses
<TABLE>
<CAPTION>
For the three For the year ended For the three
Months Ended December 31, Months Ended
March 31,1999 1998 March 31,1998
------------- ------------------ -------------
(Dollars in thousands)
<S> <C> <C> <C>
Balance at beginning of period $ 1,805 $ 1,360 $ 1,360
Charge-offs:
Real estate-residential -- 60 47
Commercial 2
Consumer 11 8 7
-------- -------- --------
Total charge-offs 13 68 54
Recoveries:
Consumer -- 8 --
-------- -------- --------
Net charge-offs 13 60 54
Provision for loan losses 167 505 114
-------- -------- --------
Balance at end of period $ 1,959 $ 1,805 $ 1,420
======== ======== ========
Total gross loans:
Average 147,083 122,526 110,412
End of period 154,068 140,348 113,605
Ratios:
Net charge-offs to:
Average loans 0.01% 0.05% 0.05%
Loans at end of period 0.01% 0.04% 0.05%
Allowance for loan losses 0.66% 3.32% 3.80%
Provision for loan losses 7.78% 11.88% 47.37%
Allowance for loan losses to:
Total gross loans at end of period 1.27% 1.29% 1.25%
Non-performing loans 130.95% 106.74% 696.08%
</TABLE>
Charge-offs against the allowance for loan losses in 1999 totaled $13,000.
Because the Bank's loan portfolio is relatively immature given its recent growth
rates, current charge-off and non-performing asset trends may not be indicative
of future performance.
16
<PAGE>
Non-performing assets
Non-performing assets are defined as accruing loans past due 90 days or
more, non-accruing loans, restructured loans and other real estate owned .
Non-Performing Assets
<TABLE>
<CAPTION>
March 31, 1999 December 31, 1998
-------------- -----------------
(Dollars in thousands)
<S> <C> <C>
Loans past due 90 days or more and accruing
Real estate-residential $ 602 $ 605
Commercial 4 6
------ ------
Total loans past due 90 days or more and accruing $ 606 $ 611
Loans accounted for on a nonaccrual basis
Real estate-residential $ 25 $ 25
Real estate-multifamily 865 890
Real estate-commercial -- 165
------ ------
Total non-accrual loans $ 890 $1,080
Other real estate owned 200 200
------ ------
Total non-performing assets $1,696 $1,891
====== ======
Ratio of non-performing loans to total loans 0.97% 1.20%
Ratio of non-performing assets to total assets 0.61% 0.76%
</TABLE>
Total non-accrual loans decreased $190,000 from $1,080,000 at December 31,
1998 to $890,000 at March 31, 1999. The decrease relates principally to the
repayment of one commercial real estate loan in the amount of $165,000 in March
1999. Non-accrual multifamily real estate loans at March 31, 1999 include one
loan in the amount of $865,000, which is secured by an apartment building. The
Bank is in process of foreclosing on this property.
Premises and equipment
Premises and equipment increased $1,628,000 from $1,638,000 at December 31,
1998 to $3,266,000 at March 31, 1999. 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 for $1,234,000 in the aggregate. The
remainder of the increase relates primarily to the Floral Vale branch which
opened in February 1999.
Other real estate owned
Other real estate owned totaled $200,000 at March 31, 1999 and December 31,
1998. This balance consisted of one 1-4 family residential property. This
property was sold in April 1999 with no gain or loss recorded.
Deferred taxes
The $166,000 increase in deferred taxes from $826,000 at December 31, 1998
to $992,000 at March 31, 1999 relates to the change in the estimated fair market
value of investment securities available for sale.
17
<PAGE>
Deposits
Premier Bank, a traditional community-based bank, is largely dependent upon
its base of competitively priced core deposits to provide a stable funding
source. The Bank has retained and grown its customer base since inception
through a combination of price, quality service, convenience, and a stable and
experienced staff. The Bank primarily attracts deposits from within its market
area.
Core deposits, which exclude time deposits greater than $100,000 grew
$9,895,000 or 5.6% during the three months ended March 31, 1999 to $185,783,000.
Most of this growth occurred in time deposits. Total time deposits at March 31,
1999 were 109,782,000 or 54.2% of total deposits, of which $43,762,000 mature
after one year. Depending on market conditions, management generally prices its
time deposits to extend maturities beyond one year.
During the three months ended March 31, 1999 total deposits grew
$11,422,000 or 6.0% to $202,648,000. Future deposit growth will be accomplished
through deposit promotions, business development programs and continued branch
expansion. The Bank opened its fourth branch in February 1999.
Deposits by Major Classification
<TABLE>
<CAPTION>
March 31, 1999 December 31, 1998
----------------------------------- ---------------------------------
Weighted Weighted
Average Average
Interest % of Interest % of
Rate Amount Total Rate Amount Total
---------- --------- ------- --------- -------- -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest checking 2.99% $ 18,232 9.01% 2.62% $ 16,432 8.59%
Money market 2.59% 2,077 1.02% 2.57% 1,580 0.83%
Savings 3.44% 56,077 27.67% 3.44% 54,082 28.28%
Time 5.35% 109,782 54.17% 5.46% 100,107 52.35%
----- -------- ------ ---- -------- ------
Total interest-bearing deposits 4.51% 186,168 91.87% 4.53% 172,201 90.05%
===== ====
Non interest-bearing deposits 16,480 8.13% 19,025 9.95%
-------- ------ -------- ------
Total deposits $202,648 100.00% $191,226 100.00%
======== ====== ======== ======
</TABLE>
Borrowings
Borrowings increased $14,988,000 from $29,936,000 at December 31, 1998 to
$44,924,000 at March 31, 1999. At March 31, 1999 securities sold under agreement
to repurchase consisted of $15,000,000 in borrowings from the FHLB maturing in
30 days; $10,730,000 in borrowings from a securities broker maturing in 30 days,
and $4,194,000 in retail repurchase agreements maturing overnight. At December
31, 1998 borrowings from the FHLB and retail customers were $11,000,000 and
$3,936,000, respectively.
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 March 31, 1999 the Bank
delivered $24,389,000 in investments as collateral to the FHLB under this new
policy. In addition, $11,139,000 in investment securities are held by a
securities broker as collateral against our borrowings. Customer repurchase
agreements are collateralized by investment securities in an amount equal to or
exceeding such borrowings.
Long-term FHLB advances mature in the year 2002. These advances are subject
to repricing every six months at which time the issuer may convert the borrowing
to a variable rate if current rates are higher. Should the issuer convert the
borrowing, the Company may prepay the debt without penalty.
18
<PAGE>
Borrowings
<TABLE>
<CAPTION>
March 31, 1999 December 31, 1998
-------------------- ---------------------
Weighted Weighted
Average Average
Amount Rate Amount Rate
-------- -------- -------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Securities sold under agreement to repurchase $ 29,924 4.85% $ 14,936 4.74%
FHLB advances 15,000 5.42% 15,000 5.42%
-------- ---- -------- ----
$ 44,924 5.04% $ 29,936 5.08%
======== ==== ======== ====
</TABLE>
Other liabilities
Other liabilities decreased $375,000 from $3,233,000 at December 31, 1998
to $2,858,000 at March 31, 1999. This decrease relates principally to a $231,000
decrease in expenses payable on our capital securities and the timing difference
between the accrual and payment of other normal recurring operating expenses.
Expenses related to our capital securities are payable semi-annually in February
and August.
Capital Adequacy
At March 31, 1999, management believes that the Company is in compliance
with all applicable regulatory requirements to be classified as "well
capitalized" pursuant to FDIC regulations. The Company plans to remain well
capitalized and manages the Bank accordingly. During the past twelve months the
Company completed two capital raising initiatives.
On August 11, 1998, $10,000,000 in capital securities were issued by the
Company's 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 common stock at
$11.00 per share. This offering expired on March 31, 1999. The Company issued
272,416 shares during this offering with net proceeds totaling $2,839,000. 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.
19
<PAGE>
The tables below depict the Company's capital components and ratios along
with the "adequately" and "well" capitalized criteria as defined by FDIC
regulations. At March 31, 1999, the Company exceeded all regulatory requirements
and is classified as "well capitalized".
Capital Components
<TABLE>
<CAPTION>
March 31, 1999 December 31, 1998
-------------- -----------------
(Dollars in thousands)
<S> <C> <C>
Tier I
Shareholders' equity $ 14,855 $ 11,767
Allowable portion of minority interest in equity
of subsidiaries 5,200 4,000
Net unrealized security losses 721 399
-------- --------
Total Tier I Capital $ 20,776 $ 16,166
======== ========
Tier II
Allowable portion of minority interest in equity
of subsidiaries $ 4,800 $ 6,000
Allowable portion of the allowance for loan losses 1,959 1,805
Allowable portion of subordinated debt 1,500 1,500
-------- --------
Total Tier II Capital $ 8,259 $ 9,305
======== ========
Total Capital $ 29,035 $ 25,471
Risk-weighted assets 198,691 185,263
</TABLE>
<TABLE>
<CAPTION>
Capital Ratios
"Adequately" "Well"
Actual Actual Capitalized Capitalized
March 31, 1999 December 31, 1998 Ratios Ratios
-------------- ----------------- ------------ -----------
<S> <C> <C> <C> <C>
Total risk-based capital/risk-weighted assets 14.61% 13.75% 8.00% 10.00%
Tier I capital/risk-weighted assets 10.46% 8.73% 4.00% 6.00%
Tier I capital/average assets (leverage ratio) 8.06% 6.75% 4.00% 5.00%
</TABLE>
Liquidity
Liquidity represents an institution's ability to generate cash or otherwise
obtain funds at reasonable rates to satisfy commitments to borrowers and demands
of depositors. The Company's primary sources of funds are deposits, proceeds
from principal and interest payments on loans, mortgage-backed securities and
investments, and borrowings. While maturities and scheduled amortization of
loans and investments are a predictable source of funds, deposit flows, loan
prepayments and mortgage-backed securities prepayments are influenced by
interest rates, economic conditions and competition.
For the three months ended March 31, 1999, operating and financing
activities provided cash and cash equivalents of $2,139,000 and $29,249,000,
respectively, while investing activities used $25,626,000. The cash provided by
financing activities resulted from an increase in deposits and borrowings and
the issuance of common stock. Deposits and borrowings grew $11,422,000 and
$14,988,000, respectively, while net proceeds from the common stock offering
totaled $2,839,000. This cash was primarily used for loan originations and the
purchase of mortgage-backed and other securities. For the three months ended
March 31, 1999, loans and investments grew $13,734,000 and $10,185,000,
respectively.
20
<PAGE>
For the three months ended March 31, 1998, financing activities provided
cash and cash equivalents of $9,671,000 while operating and investing activities
used $229,000 and $4,074,000, respectively. The cash provided by financing
activities resulted from a $19,791,000 increase in deposits. Cash totaling
$31,120,000 was also provided by the sales and repayment 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. For the three months ended March 31, 1998, loans grew
$5,052,000 while borrowings decreased by $10,120,000. Investment balances grew
$959,000 as purchases were mostly offset by investment sales and repayments.
The Bank monitors it liquidity position on a daily basis. Excess short-term
liquidity is invested in overnight federal funds sales through its correspondent
bank, Atlantic Central Bankers Bank. Conversely, overnight federal funds may be
purchased to satisfy daily liquidity needs. Additional sources of funds are
available through use of one of the following: $4,000,000 unsecured federal
funds line of credit with Atlantic Central Bankers Bank or, the Bank's
$38,697,000 borrowing limit at the Federal Home Loan Bank of Pittsburgh (the
FHLB). The Bank could also sell or borrow against certain investment securities.
At March 31, 1999, the Bank had $30,000,000 in borrowings outstanding at the
FHLB. Borrowings against certain investment securities totaled $10,730,000 at
March 31, 1999.
Recent Accounting Pronouncements
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. There was no impact on earnings, financial
condition or equity from the adoption of this Statement since the company does
not engage in the securitization of mortgage loans held for sale.
21
<PAGE>
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
required 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.
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 March 31, 1999,
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 with no Y2K related failures. 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
22
<PAGE>
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.
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
To date, approximately $51,000 has been expensed as Year 2000 costs.
Management expects to spend an additional $55,000 for this project which will be
expensed as incurred over the next nine 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 nine
months to have a material effect on the financial position or results of
operations. The Company believes that the cost of addressing the Y2K issues will
not be a material event or uncertainty that would cause reported financial
information not to be necessarily indicative of future operating results or
financial conditions. However, if compliance is not achieved in a timely manner
by the Company or any of its significant related third-parties, be it a supplier
of services or customer, the Y2K issue could possibly have a material effect on
the Company's operations and financial position. The Company believes that the
costs or the consequences of incomplete or untimely resolution of its Year 2000
issues do not represent a known material event or uncertainty that is reasonably
likely to affect its future financial results, or cause its reported financial
information not to be necessarily indicative of future operating results or
future financial condition.
The cost of the projects and the date on which the Company plans to
complete both Year 2000 modifications and systems conversions are based on
management's best estimates, which were derived utilizing numerous assumptions
of future events including the continued availability of certain resources,
third-party modification plans and other factors. However, there can be no
guarantee that these estimates will be achieved and actual results could differ
materially from those plans. Specific factors that might cause such material
differences include, but are not limited to, the availability and cost of
personnel trained in this area, the ability to locate and correct all relevant
computer codes, and similar uncertainties.
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.
23
<PAGE>
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.
24
<PAGE>
PART II -- OTHER INFORMATION
Item 1 -- Legal Proceedings
At March 31, 1999, there were no material legal proceedings pending.
Item 2 -- Changes in Securities and Use of Proceeds
On December 22, 1998 the Company commenced an offering of common stock at
$11.00 per share. This offering expired on March 31, 1999. The Company issued
272,416 shares during this offering with net proceeds totaling $2,839,000. 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.
Item 3 -- Defaults Upon Senior Securities
None.
Item 4 -- Submission of Matters to a Vote of Security Holders
None.
Item 5 -- Other Information
See Item 2 above.
Item 6 -- Exhibits and Reports on Form 8-K
The following exhibits are incorporated by reference herein or attached to this
Form 10-QSB:
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 SEC 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 SEC on
August 22,1997 as amended on September 9, 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 SEC on August 22,1997).
10.2 Change of Control Agreement between Premier Bank and John C. Soffronoff
(Incorporated by reference to Exhibit 10.2 to the Company's Quarterly
Report on Form 10-QSB filed with the SEC on November 13, 1998).
10.3 Change of Control Agreement between Premier Bank and John J. Ginley
(Incorporated by reference to Exhibit 10.3 to the Company's Quarterly
Report on Form 10-QSB filed with the SEC on November 13, 1998).
10.4 Change of Control Agreement between Premier Bank and Bruce E. Sickel
(Incorporated by reference to Exhibit 10.4 to the Company's Quarterly
Report on Form 10-QSB filed with the SEC on November 13, 1998).
11.1 Statement re: Computation of per share earnings (Included at Note 4 of
this Form 10-QSB).
27.1 Financial Data Schedule (Exhibit 27).
25
<PAGE>
Signatures
In accordance with the requirements of the Securities Exchange Act of 1934, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
Premier Bancorp, Inc.
Date Signature
- ---- ---------
May 12, 1999 /s/ John C. Soffronoff
----------------------
John C. Soffronoff
President, Chief Executive Officer, Director
(Principal Executive Officer)
May 12, 1999 /s/ Bruce E. Sickel
-------------------
Bruce E. Sickel
Chief Financial Officer, Director
(Principal Financial Officer)
26
<PAGE>
<TABLE>
<CAPTION>
Index of Exhibits
Page
----
<S> <C> <C>
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 as amended on
September 9, 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).
10.2 Change of Control Agreement between Premier Bank and John C. Soffronoff *
(Incorporated by reference to Exhibit 10.2 to the Company's Quarterly
Report on Form 10-QSB filed with the Securities Exchange Commission on
November 13, 1998).
10.3 Change of Control Agreement between Premier Bank and John J. Ginley *
(Incorporated by reference to Exhibit 10.3 to the Company's Quarterly
Report on Form 10-QSB filed with the Securities Exchange Commission on
November 13, 1998).
10.4 Change of Control Agreement between Premier Bank and Bruce E. Sickel *
(Incorporated by reference to Exhibit 10.4 to the Company's Quarterly
Report on Form 10-QSB filed with the Securities Exchange Commission on
November 13, 1998).
11.1 Statement re: Computation of per share earnings (Included at Note 4 of 6
this Form 10-QSB).
27.1 Financial Data Schedule (Exhibit 27). 35
</TABLE>
* Incorporated by reference.
27
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).
28
Exhibit 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 as amended on September 9, 1997).
29
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).
30
Exhibit 10.2
Change of Control Agreement between Premier Bank and John C. Soffronoff
(Incorporated by reference to Exhibit 10.2 to the Company's Quarterly Report on
Form 10-QSB filed with the Securities Exchange Commission on November 13, 1998).
31
Exhibit 10.3
Change of Control Agreement between Premier Bank and John J. Ginley
(Incorporated by reference to Exhibit 10.3 to the Company's Quarterly Report on
Form 10-QSB filed with the Securities Exchange Commission on November 13, 1998).
32
Exhibit 10.4
Change of Control Agreement between Premier Bank and Bruce E. Sickel
(Incorporated by reference to Exhibit 10.4 to the Company's Quarterly Report on
Form 10-QSB filed with the Securities Exchange Commission on November 13, 1998).
33
Exhibit 11.1
Statement re: Computation of per share earnings
(Included at Note 4 of this Form 10-QSB).
34
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