<PAGE>
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended MARCH 31, 1999
--------------
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _________ to _________
Commission file number 1-13213
-------
PREMIER NATIONAL BANCORP, INC.
------------------------------
(Exact name of registrant as specified in its charter)
New York 14-1668718
- ------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer)
incorporation or organization) Identification No.)
PO Box 310, 240 Route 55, Lagrangeville, NY 12540
- ----------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(914)471-1711
- -------------
(Registrant`s telephone number, including area code)
____________________________________________________________________________
(Former name, former address and former fiscal year, if changed since last
report.)
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 the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
15,327,323 shares of Common Stock outstanding, par value $.80 per share, at
April 30, 1999.
<PAGE>
PREMIER NATIONAL BANCORP, INC. & SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
Page Reference
--------------
<S> <C> <C>
PART I
Item 1 - Financial Statements
Condensed Consolidated Balance Sheets 1
Condensed Consolidated Statements
of Income & Expense 2
Condensed Consolidated Statements
of Cash Flows 3
Condensed Consolidated Statement
of Changes in Stockholders' Equity 4
Condensed Consolidated Statements of
Comprehensive Income 5
Notes to Unaudited Condensed Consolidated
Financial Statements 6
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations 11
Item 3 - Quantitative and Qualitative Disclosures About
Market Risk 27
PART II
Item 6(a) Exhibits 28
Exhibit Index 29
Signatures 30
</TABLE>
<PAGE>
PREMIER NATIONAL BANCORP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
----------- -----------
<S> <C> <C>
ASSETS
Cash and due from banks $ 49,448 $ 53,230
Federal funds sold 30,382 121,100
----------- -----------
Total cash and cash equivalents 79,830 174,330
Securities
Available for sale, at fair value 422,295 359,612
Held to maturity, at cost, (fair value of $17,736 in 1999 17,442 17,536
and $19,866 in 1998)
Regulatory securities (at cost which approximates fair value) 9,718 9,703
Gross loans 960,876 973,847
Allowance for loan losses (21,542) (21,270)
----------- -----------
Net loans 939,334 952,577
Premises and equipment, net 27,629 28,714
Accrued income 11,714 8,940
Deferred Taxes 12,103 10,463
Other real estate owned 863 628
Intangible assets, net 5,937 6,734
Other assets 1,983 4,932
=========== ===========
TOTAL ASSETS $ 1,528,848 $ 1,574,169
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Non-interest bearing $ 218,664 $ 241,289
Interest bearing 1,146,324 1,165,770
----------- -----------
Total deposits 1,364,988 1,407,059
Notes payable -- 1,725
Other liabilities 11,262 9,231
----------- -----------
TOTAL LIABILITIES 1,376,250 1,418,015
STOCKHOLDERS' EQUITY (see notes)
Preferred stock
($.01 par value; 5,000,000 shares authorized; none issued) -- --
Common stock ($.80 par value; 20,000,000 shares authorized) 12,620 12,558
15,783,750 shares issued less 327,427 treasury shares in 1999 and 15,697,290
shares issued less 2,166 treasury shares in 1998
Additional paid-in capital 85,516 84,492
Retained earnings 60,159 57,621
Accumulated other comprehensive income 296 1,521
Treasury stock (5,993) (38)
----------- -----------
TOTAL STOCKHOLDERS' EQUITY 152,598 156,154
=========== ===========
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 1,528,848 $ 1,574,169
=========== ===========
</TABLE>
See notes to condensed consolidated financial statements.
1
<PAGE>
PREMIER NATIONAL BANCORP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND EXPENSE
(dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Three Three
Months Ended Months Ended
03/31/99 03/31/98
--------------------------------------
<S> <C> <C>
Interest income:
Loans, including fees $20,483 $23,254
Federal finds sold 902 853
Taxable securities 4,568 5,613
Tax-exempt securities 938 895
--------------------------------------
Total interest income 26,891 30,615
Interest expense 10,669 13,880
--------------------------------------
Net interest income 16,222 16,735
Provision for loan losses 1,000 975
--------------------------------------
Net interest income
after provision for loan losses 15,222 15,760
--------------------------------------
Noninterest income:
Service charges and fees 1,962 1,684
Trust earnings 263 220
Gains on sales of securities, net 76 51
Gains on sales of loans, net 66 119
Other income 265 150
--------------------------------------
Total noninterest income 2,632 2,224
--------------------------------------
GROSS OPERATING INCOME 17,854 17,984
--------------------------------------
Noninterest expense:
Salaries and employee benefits 5,709 5,720
Net occupancy and equipment expense 1,755 1,762
Other real estate owned 20 48
Merger expenses 0 797
Other expenses 2,984 3,008
--------------------------------------
Total noninterest expense 10,468 11,335
--------------------------------------
Income before income taxes 7,386 6,649
Income taxes 2,654 2,518
======================================
Net income $4,732 $4,131
======================================
Weighted average common shares outstanding (1)
Basic 15,705,000 15,503,000
Diluted 15,995,000 16,004,000
Per common share data:
Basic earnings $0.30 $0.27
Diluted earnings $0.30 $0.26
Cash dividends declared 0.13 0.12
Book value at period end $9.87 $9.76
</TABLE>
(1) Adjusted for 10% Stock Dividend declared December 1998.
See notes to consolidated financial statements.
2
<PAGE>
PREMIER NATIONAL BANCORP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Three
Months Ended
OPERATING ACTIVITIES 03/31/99 03/31/98
--------- ---------
<S> <C> <C>
Net income $ 4,732 $ 4,131
Adjustment to reconcile net income to net
cash provided by operating activities:
Provision for loan losses 1,000 975
Depreciation and amortization 776 699
Amortization of security premiums and
accretion of discounts 157 234
Amortization of goodwill/core deposit intangible/acquistion costs 380 373
Realized gains on sales of securities and loans (142) (170)
Gains on sales of other real estate -- (71)
Gains on sale of premises and equipment (216) 6
Deferred income tax benefits (2,510) (868)
Increase in accrued income (2,774) (303)
Other, net 6,937 2,164
--------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES 8,340 7,170
--------- ---------
INVESTING ACTIVITIES
Proceeds from sales of securities available for sale 6,107 6,055
Proceeds from maturities of securities available for sale 36,309 47,997
Proceeds from maturities of securities held to maturity -- 14,024
Purchases of securities available for sale (104,304) (70,294)
Purchases of securities held to maturity (2,892) (6,595)
Sale of loans 780 8,722
Net (increase) decrease in loans 11,529 (3,096)
Purchase of premises and equipment (72) (1,507)
Proceeds from sales of premises and equipment 597 14
Proceeds from sale of OREO -- 209
--------- ---------
NET CASH USED IN INVESTING ACTIVITIES (51,946) (4,471)
--------- ---------
FINANCING ACTIVITIES
Net increase (decrease) in deposit accounts (42,071) 31,100
Proceeds from issuance of common stock from treasury 1,270 684
Repurchase of common stock (6,328) (95)
Repayment of borrowings (1,725)
Cash dividends-common (2,040) (1,690)
--------- ---------
NET CASH PROVIDED BY (USED IN) BY FINANCING ACTIVITIES (50,894) 29,999
--------- ---------
INCREASE(DECREASE) IN CASH AND CASH EQUIVALENTS (94,500) 32,698
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 174,330 93,261
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 79,830 $ 125,959
========= =========
CASH PAID FOR:
Interest $ 10,480 $ 12,994
Taxes 1,230 973
NON-CASH ITEMS
Transfer from loans to OREO 289 332
Net change in unrealized gains (losses) recorded
on securities available for sale (520) (710)
Change in deferred taxes on unrealized (gains)
losses recorded on securities available for sale (870) 82
Loans to finance OREO -- 129
Purchase of land by issuance of shares -- 300
</TABLE>
3
<PAGE>
PREMIER NATIONAL BANCORP, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
(dollars in thousands, except per share date)
(unaudited)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
Accumulated
Additional Other
Common Paid-in Retained Comprehensive Treasury
Stock Capital Earnings Income Stock Total
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance January 1, 1999 $ 12,558 $ 84,492 $ 57,621 $ 1,521 ($ 38) $156,154
Net Income 4,732 4,732
Cash dividends declared on common stock($0.13 per share) (2,005) (2,005)
Dividend reinvestment and stock purchase plan - 17,087 shares 14 285 299
Options exercised - 82,337 shares 48 749 185 982
Cash in leiu issued for fractional shares (11) (11)
Effect of Treasury stockissued at less than cost (188) 188 0
Purchase of treasury stock - 347,966 shares (6,328) (6,328)
Net change in unrealized gain on securities, after tax (1,225) (1,225)
-------------------------------------------------------------------
Balance March 31, 1999 $ 12,620 $ 85,515 $ 60,160 $ 296 ($ 5,993) $152,598
===================================================================
Balance January 1, 1998 $ 11,308 $ 59,628 $ 78,612 $ 1,647 ($ 2,358) $148,837
Net Income 4,131 4,131
Cash dividends declared on common stock($0.12 per share) (1,700) (1,700)
Dividend reinvestment and stock purchase plan - 14,905 shares 295 295
Options exercised - 56,437 shares 38 293 58 389
Purchase of land by issuances of treasury shares - 15,998 300 300
Effect of Treasury stock issued at less than cost (232) 232 0
Purchase of treasury stock - 2,775 shares (95) (95)
Net change in unrealized gain on securities, after tax (425) (425)
-------------------------------------------------------------------
Balance March 31, 1998 $ 11,346 $ 59,921 $ 80,811 $ 1,222 ($ 1,568) 151,732
===================================================================
</TABLE>
See notes to condensed consolidatd financial statements
4
<PAGE>
PREMIER NATIONAL BANCORP, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(dollars in thousands)
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------
Year ended March 31,
1999 1998
- ---------------------------------------------------------------------
<S> <C> <C>
Net Income 4,732 4,131
Other Comprehensive income, net of tax:
Net unrealized gains (loss) on securities:
Net unrealized holding gains (losses)
arising during year (1,334) 3,559
Less reclassification adjustment for (gains)
losses included in net income: 109 21
------ ------
Other comprehensive income (loss) (1,225) 3,580
------ ------
COMPREHENSIVE INCOME 3,507 7,711
====== ======
</TABLE>
See notes to consolidated financial statements
5
<PAGE>
FORM 10-Q
PREMIER NATIONAL BANCORP, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Basis of Presentation
- ---------------------
The unaudited condensed consolidated financial statements and related notes of
Premier National Bancorp, Inc. (the "Company") have been prepared in accordance
with Regulation S-X under the Securities Exchange Act of 1934, as amended, and
consequently the accompanying unaudited, condensed consolidated financial
statements and notes do not contain all disclosures required by generally
accepted accounting principles. The financial statements include the Company's
wholly owned subsidiary, Premier National Bank, and its subsidiaries, (the
"Bank"). These interim financial statements should be read in conjunction with
the Company's audited consolidated financial statements and note disclosures in
the Annual Report on Form 10-K for the year ended December 31, 1998.
In the opinion of management, the accompanying unaudited condensed consolidated
financial statements contain all adjustments (consisting only of normal
recurring accruals) necessary to present fairly the Company's consolidated
financial position as of March 31, 1999 and December 31, 1998 and its
consolidated results of operations and comprehensive income for the three month
period ended March 31, 1999 and 1998 and the consolidated cash flows and changes
in consolidated stockholders' equity for the three months ended March 31, 1999
and 1998.
In preparing such financial statements, management is required to make estimates
and assumptions that affect the reported amounts of assets and liabilities as of
the dates of the consolidated statements of condition and the revenues and
expenses for the periods reported. Actual results could differ significantly
from those estimates.
Estimates that are particularly susceptible to significant change relate to the
determination of the adequacy of the allowance for loan losses and the valuation
of other real estate acquired in connection with foreclosures or in satisfaction
of loan receivables. In connection with the determination of the balances of
the allowance for loan losses and other real estate owned, management obtains
independent appraisals for significant properties, according to Bank policy or
regulation.
The results of operations for the three months ended March 31, 1999 are not
necessarily indicative of the results to be expected for the full year.
Material intercompany items and transactions have been eliminated in
consolidation. Certain reclassifications have been made to conform to the
current presentation.
Forward-Looking Statements
- --------------------------
The Company has made, and may continue to make, various forward-looking
statements with respect to earnings, credit quality and other financial and
business matters for the remainder of 1999 and, in certain instances, subsequent
periods. The Company cautions that these forward-looking statements are subject
to numerous assumptions, risks and uncertainties, and that statements for
subsequent periods are subject to greater uncertainty because of the increased
likelihood of changes in underlying factors and assumptions. Actual results
could differ materially from forward-looking statements.
6
<PAGE>
In addition to those factors previously disclosed by the Company and those
factors identified elsewhere herein, the following factors could cause actual
results to differ materially from such forward-looking statements: pricing
pressures on loan and deposit products; continual high level of prepayments of
loans; actions of competitors; changes in economic conditions; the extent and
timing of actions of the Federal Reserve Board; customer deposit
disintermediation; changes in customers' acceptance of the Company's products
and services; other normal business risks such as credit losses, litigation,
etc.; continued performance of unseasoned loans; continued increases in the
levels of nonperforming assets; the extent and timing of legislative and
regulatory actions and reform, estimated cost savings from recent or anticipated
acquisitions and mergers cannot be fully realized within the expected time
frame, revenues following such transactions are lower than expected, and costs
or difficulties related to the integration of acquired and existing businesses
are greater than expected or system costs related to the year 2000 are greater
than expected.
The Company's forward-looking statements speak only as of the date on which such
statements are made. By making any forward-looking statements, the Company
assumes no duty to update them to reflect new, changing or unanticipated events
or circumstances.
7
<PAGE>
Loans
- -----
Major classifications of loans (excluding loans held for sale, of which there
are none at March 31, 1999 and March 31, 1998) are summarized below (in
thousands):
<TABLE>
<CAPTION>
At March 31, 1999 At December 31, 1998
----------------- --------------------
<S> <C> <C>
Commercial and industrial $113,580 $113,680
Consumer installment 129,359 134,152
Real estate - construction 47,086 50,888
Real estate - mortgage
(Commercial) 249,177 242,062
Real estate - mortgage
(Residential & Home Equity) 418,494 427,440
Other loans 3,180 5,625
-------- --------
Total $960,876 $973,847
======== ========
</TABLE>
Deposits
- --------
Major classifications of deposits are summarized below (in thousands):
<TABLE>
<CAPTION>
At March 31, 1999 At December 31, 1998
----------------- --------------------
<S> <C> <C>
Demand deposits $ 218,664 $ 241,289
NOW accounts 58,131 61,816
Money market deposit
accounts 322,256 326,102
Savings accounts 291,802 304,578
Time deposits under $100,000 327,031 347,662
Time deposits over $100,000 147,104 125,612
---------- ----------
Total $1,364,988 $1,407,059
========== ==========
</TABLE>
8
<PAGE>
Securities
- ----------
Securities consist of the following (in thousands):
<TABLE>
<CAPTION>
At March 31, 1999 At December 31, 1998
----------------------------------------------------------------------
Carrying Amortized Fair Carrying Amortized Fair
Amount Cost Value Amount Cost Value
----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
US Treasury:
Available for Sale $ 60,047 $ 59,683 $ 60,047 $ 64,933 $ 64,027 $ 64,933
US Gov't Agencies:
Available for Sale 76,088 76,014 76,088 28,461 28,270 28,461
Obligations of States and
Political Subdivisions:
Available for Sale 128,080 126,935 128,080 97,082 94,905 97,082
Held to Maturity 17,367 17,367 17,657 17,461 17,461 18,038
Other Securities:
Available for Sale 158,071 159,134 158,071 169,136 169,795 169,136
Held to Maturity 75 75 79 75 75 79
Regulatory Securities 9,727 9,727 9,727 9,703 9,703 9,703
----------------------------------------------------------------------
Total Securities $449,455 $448,935 $449,749 $386,851 $384,236 $387,432
======================================================================
Total Available for Sale $422,286 $421,766 $422,286 $359,612 $356,997 $359,612
Total Held to Maturity 17,442 17,442 17,736 17,536 17,536 18,117
Regulatory Securities 9,727 9,727 9,727 9,703 9,703 9,703
----------------------------------------------------------------------
Total Securities $449,455 $448,935 $449,749 $386,851 $384,236 $387,432
======================================================================
</TABLE>
At March 31, 1999 the net unrealized gain on securities available for sale (net
of tax effect of $224,000) that was included in accumulated other comprehensive
income, a separate component of stockholders' equity, was $296,000. Gross
unrealized gains and losses on available for sale securities at March 31, 1999
were $2,923,000 and $2,403,000, respectively.
Earnings per common share 1998 data has been adjusted for the 10% stock split
- -------------------------
which the Company declared in December 1998.
9
<PAGE>
Basic earnings per common share is computed as follows (in thousands, except per
share data):
<TABLE>
<CAPTION>
Three months ended
March 31,
------------------
1999 1998
-------- --------
<S> <C> <C>
Weighted average common shares
outstanding 15,705 15,503
Total basic shares 15,705 15,503
======= =======
Net income $ 4,732 $ 4,131
======= =======
Basic earnings per common share $ 0.30 $ 0.27
======= =======
</TABLE>
Diluted earnings per common share is computed as follows (in thousands, except
per share data):
<TABLE>
<CAPTION>
Three months ended
March 31,
------------------
1999 1998
-------- --------
<S> <C> <C>
Weighted average common shares
outstanding 15,705 15,503
Effect of dilutive stock options 290 501
------- -------
Total diluted shares 15,995 16,004
======= =======
Net income $ 4,732 $ 4,131
======= =======
Diluted earnings per common share $ 0.30 $ 0.26
======= =======
</TABLE>
Stockholders' Equity
- --------------------
Issued and outstanding shares (net of treasury shares) at March 31, 1999 and
December 31, 1998, were 15,456,323 and 15,695,124, respectively. The Company
purchased approximately 325,000 treasury shares in open market transactions
during the first quarter of 1999. The Company paid a 10% stock dividend in
January 1998 which increased common shares outstanding by 1,426,800. (All 1998
share data has been accordingly restated in the condensed consolidated
statements of income and expense and Stockholders' Equity.)
10
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Financial Condition
- --------------------
Total assets of the Company declined from $1,574.2 million at December 31, 1998
to $1,528.8 million at March 31, 1999, or a decline of $45.4 million (2.9%).
This decline was the result of cash and cash equivalent decreases of $94.5
million to $79.8 million at March 31, 1999 and $13.2 million decrease in net
loans outstanding to $939.3 million at March 31, 1999. These declines were
partially offset by securities increases of $62.6 million to $449.5 million at
March 31, 1999.
In the first quarter of 1999 the Bank originated $57.4 million of new loans.
Amortization, prepayments and sales into the secondary market were $70.3 million
resulting in a net decrease from year end 1998 in gross loans outstanding to
$960.9 million at March 31, 1999. The net increase in commercial mortgages of
$7.1 million or 2.9% was more than offset by declines in other categories as
follows: residential mortgage loans (including home equity) of $8.9 million
(2.1%), consumer installment of $4.8 million (3.6%), real estate construction of
$3.8 million (7.5%) and other loans of $2.4 million (43.5%). As witnessed
throughout the last three quarters of 1998, consumers have been refinancing and
consolidating first lien adjustable mortgages and home equity loans resulting in
significant prepayments of the Company's loan balances in these categories. The
Company has identified approximately $62 million of higher quality first
mortgage loans in its portfolio that may be more susceptible to prepayment and
began an active campaign to solicit these borrowers to refinance their loans
with the Company at present market rates rather than let the loan balances be
refinanced elsewhere. Although such loans will be re-booked at rates lower than
the borrower's present rates, such rates will still be higher than alternative
investment opportunities.
Period end total deposits decreased $42.1 million in the first three months of
1999 to $1,365.0 million. Of this amount, total Public (Municipal) Funds
increased $34.0 million or 51.3% to $100.3 million and total non-public funds
decreased by $76.1 million to $1,264.7 million.
11
<PAGE>
The following tables summarize the net changes in public (municipal) fund and
non-public fund deposits from December 31, 1998 to March 31, 1999 (in
thousands):
<TABLE>
<CAPTION>
PUBLIC FUNDS
Percent
Change
Balance Balance Net over
12/31/98 3/31/99 Change Y/E'98
----------------------------------------
<S> <C> <C> <C> <C>
Demand accounts $ 2,482 $ 2,347 $ (135) (5.44)%
NOW accounts 12,211 12,472 261 2.14
Money market accounts 10,901 16,688 5,787 53.09
Savings accounts 2,418 2,467 49 2.03
Time deposits 38,309 66,340 28,031 73.17
----------------------------------------
Total public deposits $ 66,321 $100,314 $33,993 51.26%
========================================
</TABLE>
Public funds balances increased in the first three months of 1999 due both to
matching competitive pricing on large time deposits as funding for a portion of
the securities portfolio and seasonal increases due to tax collections.
<TABLE>
<CAPTION>
NON PUBLIC FUNDS
Percent
Change
Balance Balance Net over
12/31/98 3/31/99 Change Y/E'98
--------------------------------------------
<S> <C> <C> <C> <C>
Demand accounts $ 238,807 $ 216,317 $(22,490) (9.42)%
NOW accounts 49,605 45,659 (3,946) (7.95)
Money market accounts 315,201 305,569 (9,632) (3.06)
Savings accounts 302,160 289,335 (12,825) (4.24)
Time deposits 434,965 407,794 (27,171) (6.25)
--------------------------------------------
Total non public deposits $1,340,738 $1,264,674 $(76,064) (5.67)%
============================================
</TABLE>
Non-public deposits declined $76,064,000 compared to December 31, 1998. The
decrease in demand, NOW and money market accounts reflects the historical
seasonality experienced by the Bank. Savings and time deposits declines are the
result of the Company's pricing policies, as the Company has actively reduced
the rates paid on these deposits in order to improve the net interest margin.
Consolidated stockholders' equity at quarter end was $152.6 million, down $3.6
million over year end 1998, primarily due to the purchase of approximately
325,000 shares of Treasury stock during the quarter ($6.3 million) and by the
decrease in unrealized gains, after tax, in the market value of the Company's
available-for-sale securities portfolio ($1.2 million). These decreases were
partially offset by the Company's net retained earnings for the first three
months of $2.7 million and by $1.3 million of stock issuance proceeds from the
Company's stock option and dividend reinvestment plans. The ratio of
shareholders' equity to total assets remained strong at March 31, 1999 standing
at 9.98%.
12
<PAGE>
Results of Operations
- ---------------------
Interest income as reported, for the three months ended March 31, 1999, compared
to the same period in 1998, decreased $3.7 million while interest expense
decreased by $3.2 million. This resulted in a decrease in net interest income
of $.5 million. Provision for loan losses increased by $25,000. Total non-
interest income increased $408,000 or 18.3%. Total noninterest expenses were
$.9 million or 7.6% less than the first quarter of 1998, due mainly to merger-
related expenses of $.8 million incurred in that quarter. Excluding merger
related expenses, total non-interest expense was down $.1 million. Net income
after tax increased by $.6 million or 14.5% to $4.7 million. Diluted earnings
per common share increased to $.30 for the three months of 1999 compared to $.26
for 1998. Excluding merger-related expenses incurred in 1998 of $.8 million (or
$.5 million after-tax) comparative net income for the 1998 first quarter on a
pro forma basis would have been $4.6 million and diluted earnings per common
share would have been $.29.
The net income and earnings per common share data discussed above is presented
in the following table:
<TABLE>
<CAPTION>
Three months ended
-----------------------------------------------------
Pro forma
Actual 3/31/99 Actual 3/31/98* 3/31/98(1)
----------------- ------------------ --------------
<S> <C> <C> <C>
Net income (in thousands) $4,732 $4,131 $4,611
Per common share:*
Basic earnings 0.30 0.27 0.30
Diluted earnings 0.30 0.26 0.29
(1)Excludes merger-related expenses after tax of $.5 million for the three months
ended March 31, 1998.
* Adjusted for the 10% stock dividend declared December 1998.
</TABLE>
13
<PAGE>
The Company's return on average assets and return on average equity for the
three months ended March 31, 1999 and 1998, and pro forma (excluding merger-
related expenses of $.5 million after tax), are detailed in the table below:
<TABLE>
<CAPTION>
Three months ended
-----------------------------------------
<S> <C> <C> <C>
Actual Actual Pro forma
----------- ----------- -------------
3/31/99 3/31/98 3/31/98(1)
----------- ----------- -------------
Actual:
- -------
Return on assets 1.23% 1.01% 1.13%
Return on total
stockholders'equity 12.26 11.00 12.27
(1)Excludes merger-related expenses after tax of $.5 million for
the three months ended March 31, 1998.
</TABLE>
Interest income
- ---------------
On a tax equivalent basis, gross interest income decreased by $3.7 million or
12.2% for the three months ended March 31, 1999 compared to the same period in
1998, due principally to the decrease in average earning assets of $92.2
million. Average loans decreased by $73.4 million, securities decreased $32.0
million and lower yielding federal funds increased by $13.2 million.
Total interest expense decreased by $3.2 million or 23.1% for the three month
period ended March 31, 1999 as compared to the three months ended March 31, 1998
due primarily to lower interest rates paid on deposits and declines in average
balances of $77.2 million and $52.1 million in time and savings deposits,
respectively.
Average yields on interest earning assets continued the declining trend
witnessed in recent quarters to 7.59% for the three months ended March 31, 1999
vs. 8.10% as of the same period in 1998 reflecting both declines in loan yields
or adjustable rate loans as well as lower yields on taxable securities and fed
funds. These declines were modestly offset by an increase in yield on tax-
exempt securities. Average interest bearing liability rates decreased to 3.72%
for the three months ended March 31, 1999 vs. 4.45% for the three months ended
March 1998 due primarily to the Company's continued downward management of
deposit interest rates paid to reflect its increasing liquidity. Accordingly,
net interest margins on a tax equivalent basis increased to 4.63% for the three
months ended March 31, 1999 compared to 4.48% in 1998. However, this
improvement in net interest margin was not sufficient to offset the full impact
of the decline in interest earning assets (principally loans). Thus, while
variances due to changes in rates (primarily reductions in interest expense)
produced a $512,000 increase in net interest income in the three months of 1999
compared to the same period in 1998, the decrease in average earning assets of
$92.2 million principally contributed to the $1,025,000 decrease in net interest
income due to volume variances over the same period. The net effect was that
net interest income before provisions for loan losses was $16.2 million for the
three months ended March 31, 1999 compared to $16.7 million for the comparable
period in 1998, or a decrease of $513,000. (3.1%).
14
<PAGE>
The table below sets forth the consolidated average balance sheets for the
Company for the periods indicated. Also set forth is information regarding
weighted average yields on interest-earning assets and weighted average rates
paid on interest-bearing liabilities.
<TABLE>
<CAPTION>
Three Months Ended March 31,
1999 1998
---- ----
Average Interest Yield/ Average Interest Yield/
Balance Cost Balance Cost
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Interest-earning assets:
Loans (1) $ 964,610 $20,483 8.49% $1,037,963 $23,254 8.96%
Taxable Securities 323,771 4,568 5.64% 355,467 5,613 6.32%
Tax-exempt Securities (2) 77,116 1,409 7.31% 77,441 1,356 7.00%
Fed Funds Sold 76,282 902 4.73% 63,112 853 5.41%
---------- ------- ---------- -------
Total Interest Earning Assets 1,441,779 27,362 7.59% 1,533,983 31,076 8.10%
NonInterest Earning Assets:
Cash & Due from Banks 55,793 50,445
Premises & Equipment 28,342 25,725
Other Assets 29,845 41,358
Allowance for Loan Losses (21,009) (19,362)
---------- ------- ---------- -------
Total Assets $1,534,750 $27,362 7.13% $1,632,149 $31,076 7.62%
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Interest-Bearing Liabilities:
Savings Deposits $ 296,295 $ 2,019 2.73% $ 348,361 $ 3,228 3.71%
NOW Accounts 62,219 155 1.00% 74,503 224 1.20%
Money Market Accounts 320,831 2,829 3.53% 297,641 3,344 4.49%
CD's over $100,000 131,884 1,842 5.59% 115,325 1,558 5.40%
Other Time Deposits 334,184 3,810 4.56% 411,399 5,503 5.35%
Borrowed Funds 1,035 14 5.41% 1,725 23 5.33%
---------- ------- ---------- -------
Total Interest-Bearing Liabilities 1,146,448 10,669 3.72% 1,248,954 13,880 4.45%
Noninterest-Bearing Liabilities:
Demand Deposits 223,080 213,186
Other 10,845 19,724
---------- ----------
Total Noninterest-Bearing 1,380,373 10,669 3.09% 1,481,864 13,880 3.75%
Liabilities
Stockholders' Equity 154,377 150,285
---------- ------- ---------- -------
Total Liabilities and $1,534,750 10,669 $1,632,149 13,880
Stockholders' Equity ========== ------- ========== -------
Net interest Margin 16,693 4.63% 17,196 4.48%
Less Tax Equivalent Adjustments (471) (461)
------- -------
Net Interest Income $16,222 4.50% $16,735 4.36%
======= ==== ======= ====
Excess of interest earning assets
over interest bearing liabilities $ 295,331 $ 285,030
Ratio of Average Interest-Earning 125.76% 122.82%
Assets to Average Interest-Bearing
Liabilities
</TABLE>
- --------------------------------------------------------------------------------
(1) Average Balances include non-accrual loans.
(2) Tax Equivalent Yields on tax-exempt securities based on a Federal tax rate
of 35%.
15
<PAGE>
The table below details the changes in interest income and interest expense for
the period indicated due to both changes in average outstanding balances and
changes in average interest rates (in thousands):
Rate/Volume Analysis (in thousands)
<TABLE>
<CAPTION>
Three Months Ended March 31,
1999 vs. 1998
----------------------------------------
Increase (Decrease) due to
----------------------------------------
Volume Rate Net(1)
------------ ------------ ------------
<S> <C> <C> <C>
Interest Income:
Loans $ (1,558) $(1,213) $(2,771)
Taxable investment securities (447) (598) (1,045)
Tax-exempt investment(2) (6) 59 53
securities
Federal funds sold 156 (107) 49
-----------------------------------------
Total interest income (1,855) (1,859) (3,714)
Interest expense:
Savings deposits (355) (854) (1,209)
NOW/accounts (31) (38) (69)
Money market accounts 204 (719) (515)
Certificates over $100,000 231 53 284
Other Time Deposits (880) (813) (1,693)
Borrowed funds (9) 0 (9)
-----------------------------------------
Total interest expense (840) (2,371) (3,211)
-----------------------------------------
Net interest margin (1,015) 512 (503)
Less tax equivalent effect (10) 0 (10)
-----------------------------------------
Net interest income ($1,025) $ 512 ($513)
======== ======= =======
(1)The change in interest due to both rate and volume has been allocated to
volume and rate changes in proportion to the relationship of the
absolute dollar amounts of the change in each to the total change.
(2)Yields on tax exempt securities based on a Federal tax rate of 35%.
</TABLE>
Provision for loan losses and credit quality
- --------------------------------------------
Provisions for loan losses are based on management's assessment of risk of loss
inherent in the loan portfolio and as such reflect, among other things, both
trends in local economic conditions and the categorization of the credit quality
of individual loans. Such assessment is ongoing, and may not directly reflect
the charge-offs taken in any accounting period, although the trend in charge-
offs is an important element in the evaluation of the adequacy of the allowance
for loan losses. Provision for loan losses
16
<PAGE>
increased slightly from $975,000 to $1,000,000 in the first three months of 1999
compared to 1998.
Net charge-offs for the first three months of 1999 were $728,000 compared to
$757,000 for the same period in 1998. The ratio of net chargeoffs to average
loans, on an annualized basis, increased to .32% in the first three months of
1999 vs. .28% for the same period of 1998 primarily due to declines in average
loans outstanding.
Total non-performing assets were approximately $12.0 million at the end of March
1999, up $1.3 million over the $10.7 million at March 1998,and up $2.0 million
from the year end 1998 level of $10.0 million representing .79% of total assets,
vs. .64% at year end. OREO balances at $.8 million were up from the $.6 million
reported at year end 1998 and quarter end non-performing loans of $11.2 million
were up $1.8 million over the December 31, 1998 level of $9.4 million primarily
due to the two larger borrowing relationships (secured by real estate) being
classified as non-accrual.
Nonperforming assets represent 148 loans or OREO properties of which on1y 5 have
balances in excess of $300,000, and no nonperforming asset has a balance greater
than $725,000. Of the total nonperforming loans, 50% is collateralized by
residential property, 42% by commercial property, and 8% by other assets or
unsecured.
Management believes that the allowance for loan losses is adequate to cover the
risk of loss inherent in the portfolio. However, the Company had experienced
substantial growth in its residential mortgage and related residential housing
construction portfolios in recent years. As a result of this growth, a portion
of the Company's loan portfolio may be considered "unseasoned". Until these
portfolios become more "seasoned", it is more difficult to assess the latent
risk in these portfolios, and, therefore, are based on the present performance
indices of this portfolio. Furthermore, no assurance can be given that the
relatively stable current economic conditions of the Company's overall market
area will not be unsettled by future events. Any such developments would be
expected to adversely effect the financial performance of the Company.
17
<PAGE>
The table below summarizes the Company's loan loss experience for the periods
indicated:
<TABLE>
<CAPTION>
For the three months For the year
ended March 31, ended December 31,
1999 1998 1998 1997 1996
---------------------- ---------------------------
<S> <C> <C> <C> <C> <C>
Balance at beginning of
period $21,270 $19,331 $19,331 $18,533 $16,803
Chargeoffs:
Commercial & industrial 28 188 406 1,448 894
Consumer installment & other 377 336 1,620 1,146 821
Real estate mortgage 461 417 3,344 2,164 2,575
---------------------- ---------------------------
Total charge-offs 866 941 5,370 4,758 4,290
Recoveries:
Commercial & industrial 20 32 462 164 118
Consumer installment & other 118 85 481 160 180
Real estate mortgage 67 437 757 572
---------------------- ---------------------------
Total recoveries 138 184 1,380 1,081 870
---------------------- ---------------------------
Net charge-offs (728) (757) (3,990) (3,677) (3,420)
Provision for loan losses 1,000 975 5,929 4,475 5,150
---------------------- ---------------------------
Balance at end of period $21,542 $19,549 $21,270 $19,331 $18,533
====================== ===========================
Ratio of net charge-offs to
average loans outstanding
during the period
(annualized) .32% .28% .40% .35% .34%
Allowance for loan losses as
a percent of period-end loans 2.24% 1.89% 2.18% 1.85% 1.78%
Allowance as a percent of
non-performing loans 192% 210% 226% 214% 181%
Nonperforming loans and OREO
to total loans and OREO 1.25% 1.04% 1.03% 1.00% 1.32%
</TABLE>
18
<PAGE>
The table below summarizes the Company's nonperforming assets and restructured
loans at the dates indicated (dollars in thousands):
<TABLE>
<CAPTION>
at March 31, at December 31,
------------ ---------------
1999 1998 1998 1997 1996
------------------- ------------------------------
<S> <C> <C> <C> <C> <C>
Nonaccrual loans: (1)
Real estate mortgage $10,407 $ 8,433 $ 8,282 $ 7,602 $ 8,088
Commercial & Industrial 689 90 558 164 712
Consumer & other 40 68 83 123 313
------------------- ------------------------------
Total nonaccrual loans 11,136 8,591 8,868 7,889 9,113
Loans 90 days or more
past due and still
accruing:
Real estate mortgage 62 224 129 430
Commercial & industrial 23 164 205 188 193
Consumer & other 11 13 68 126 22
------------------- ------------------------------
Total 90 days past due
accruing 34 239 497 443 645
Restructured - real
estate 27 501 28 682 500
------------------- ------------------------------
Total non-performing
and restructured loans 11,197 9,331 9,393 9,014 10,258
Other real estate owned 863 1,406 628 1,366 2,923
------------------- ------------------------------
Total non-performing
assets $12,060 $10,737 $10,021 $10,380 $13,181
=================== =============================
Non-performing and re-
structured loans as a
percent of total loans 1.17% 1.04% .96% .87% .98%
=================== =============================
Nonperforming assets as
a percent of total
assets .79% .65% .64% .64% .84%
=================== =============================
</TABLE>
(1) Nonaccrual status denotes loans on which, in the opinion of management, the
collection of interest is unlikely, or loans that meet other nonaccrual criteria
as established by regulatory authorities. Payments received on loans classified
as nonaccrual are either applied to the outstanding principal balance or
recorded as interest income, depending upon management's assessment of the
collectibility of the loan.
Other real estate owned totals $863,000 at March 31, 1999 and includes
14 properties acquired through foreclosure: 8 residences, and 6 non-farm
nonresidential properties.
19
<PAGE>
In addition to the nonperforming loans and other nonperforming assets noted
above, at March 31, 1999, the Company had approximately $17.0 million in loans
requiring special attention (substandard) compared to $19.0 million of similar
loans at December 31, 1998. Such loans are being monitored so that if present
concerns about the borrowers ability to comply with repayment terms becomes
evident, management will be able to quickly assess impairment. Further
deterioration in such borrowers' financial position may result in reclassifying
them as nonperforming assets. The following table summarizes impaired loans for
the periods indicated (in thousands):
<TABLE>
<CAPTION>
March 31, 1999 December 31, 1998
-------------- -----------------
<S> <C> <C>
Impaired loans with allowance established
($2,508,000 and $2,242,000, respectively) $ 8,972,000 $5,545,000
Impaired loans which have been written down
($1,509,000 and $1,641,000, respectively) 2,394,000 3,323,000
----------- ----------
Total $11,366,000 $8,868,000
=========== ==========
Average amount of impaired loans
for the period $10,117,000 $8,700,000
=========== ==========
</TABLE>
The following table shows, at the dates indicated, the allocation of the
allowance for loan losses, by category, and the percentage of loans in each
category to total gross loans (dollars in thousands):
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998 1998 1997 1996
------------------------------------ ---------------------------------------------------
Balance at end % of % of % of % of % of
of period Amount total Amount total Amount total Amount total Amount total
applicable to: loans loans loans loans loans
------------------------------------ ----------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial &
industrial $ 2,102 11.80 $ 2,782 11.60 $ 2,472 11.70% $ 2,131 9.0% $ 2,476 7.9%
Consumer & other 2,709 13.80 2,241 14.20 3,530 14.40 3,699 15.20 3,341 14.50
Real estate -
mortgage 11,050 74.40 12,701 74.20 11,679 73.90 12,124 75.80 11,577 77.60
Unallocated 5,681 1,824 3,589 1,377 1,139
------------------------------------- ----------------------------------------------------
Total $21,542 100.00% $19,548 100.00% $21,270 100.00% $19,331 100.00% $18,533 100.00%
===================================== ====================================================
</TABLE>
20
<PAGE>
Noninterest Income
- ------------------
Total non interest income increased by $408,000 or 18.3% during the first
quarter of 1999 compared to the same period of 1998. Specifically, service
charges and fees increased $278,000 as a result of the implementation of a
singular fee schedule for the merged bank. In addition, due to nonrecurring
sales of properties (which became redundant as a result of the merger), other
income increased by $115,000. While trust earnings and gains on sales of
securities increased by $43,000 and $25,000, respectively, lower levels of sales
of loans into the secondary market resulted in a decrease in gains on sales of
loans of $53,000.
Other Expenses
- --------------
In total, noninterest expense decreased by $867,000 or 6% to $10.5 million for
the first three months of 1999 compared to the same period of 1998, due mainly
to merger-related expenses incurred in 1998 of $797,000.
Salaries and employee benefits expense was little changed at $5,720,000 vs.
$5,709,000 in the first three months of 1999 compared to 1998, as merger-related
reductions in salary expense allowed the Company to absorb normal salary
increases for its staff during the year and add 18 full time equivalent staff in
connection with new branches established during the second and third quarters of
1998.
Occupancy and equipment expense was little changed over the same period in 1998,
as the effect of branch closings in connection with the merger was offset by the
costs of new branches opened in 1998. Other real estate owned expense decreased
by $28,000. Other expenses declined by $24,000 primarily in the areas of legal
and professional fees, supplies, postage and 1998 merger related expenses
partially offset by increases in data processing expense, telecommunications
expense and $95,000 in Y2K expense.
Net Income
- ----------
Pretax income increased by $737,000. The Company's effective tax rate decreased
to 35.9% from 37.9%. Net income was $4.7 million for the three months ended
March 31, 1999 vs. $4.1 million for the same period in 1998, an increase of
$601,000 or 14.6%.
Asset/Liability Management
- --------------------------
The primary functions of asset/liability management are to assure adequate
liquidity and maintain an appropriate balance between interest-sensitive earning
assets and interest-bearing liabilities and capital resources. The Company's
Investment Committee of the Board monitors, and the Bank, through its treasury
division, controls the rate sensitivity of the balance sheet while maintaining
an appropriate level of net interest income contribution to the operations of
the Company.
The Company's net interest revenue is affected by fluctuations in market
interest rates as a result of timing differences in the repricing of its assets
and liabilities. These repricing differences are quantified in specific time
intervals and are referred to as interest rate sensitivity
21
<PAGE>
gaps. The Company manages the interest rate risk of current and future earnings
to a level that is consistent with its mix of businesses and seeks to limit such
risk exposure to appropriate percentages of both earnings and the imputed value
of stockholders' equity. The objective in managing interest rate risk is to
support the achievement of business strategies, while controlling earnings
variability and ensuring appropriate liquidity. Further, the historical level of
demand deposits (approximately 20% of total assets) serves to mitigate the
effects of increases in interest rates and reduces the average cost of total
liabilities.
The following chart (in thousands) provides a quantification of the Company's
interest rate sensitivity gap as of March 31, 1999, based upon the known
repricing dates of certain assets at amortized cost and liabilities and the
assumed repricing dates of others. As shown in the chart below, at March 31,
1999, assuming no management action, the Company's principal interest rate risk
is to a rising rate environment and particularly within one year time frame.
That is, net interest revenue would be expected to be adversely affected by an
increase in interest rates above the rates embedded in the current yield curve,
principally due to the higher level of liabilities ($1,067 million) that would
reprice relative to similarly situated assets ($710 million) in that time frame.
This exposure would be mitigated over the longer term as the Company has $640.6
million more in repriceable interest earning assets than interest bearing
liabilities beyond one year.
22
<PAGE>
This chart displays only a static view of the Company's interest rate
sensitivity gap and does not capture the dynamics of balance sheet, rate and
spread movements nor management actions that may be taken to manage this risk.
<TABLE>
<CAPTION>
Greater
Total than
Maturity Repricing 3 months 4 months within One yr. five
Date (1)(2) or less to one yr. one yr. to 5 yrs. yrs. Total
--------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Securities (3) $ 103,516 $ 52,806 $ 156,322 $186,556 $106,057 $ 448,935
Fed Funds 30,382 30,382 30,382
Fixed rate loans 78,216 61,458 139,674 167,471 55,940 363,085
Floating rate loans (3) 181,309 202,057 383,366 201,227 2,153 586,746
--------- --------- ---------- -------- -------- ----------
Total interest
earning assets (1) 393,423 316,321 709,744 555,254 164,150 1,429,148
--------- --------- ---------- -------- -------- ----------
Other interest bearing
deposits (4) 364,593 307,597 672,190 672,190
Time/Other (5) 223,863 171,417 395,280 75,227 3,627 474,134
--------- --------- ---------- -------- -------- ----------
Total interest-bearing
liabilities 588,456 479,014 1,067,470 75,227 3,627 1,146,324
--------- --------- ---------- -------- -------- ----------
Interest Sensitivity
gap (6) $(195,033) $(162,693) $ (357,726) $480,027 $160,523 $ 282,824
========= ========= ========== ======== ======== ==========
Gap as a percent of
earnings assets (13.6)% (11.4)% (25.0)% 33.6% 11.2% 19.8%
========= ========= ========== ======== ======== ==========
</TABLE>
(1) Interest rate sensitivity gaps are defined as the fixed rate positions
(assets less liabilities) for a given time period. The gaps measure the
time weighted dollar equivalent volume of positions fixed for a particular
period. The gap positions reflect a repricing date at which date funds are
assumed to "mature" and reprice to a current market rate for the asset or
liability. The table does not include loans on nonaccrual status or net
unrealized losses recorded on available-for-sale securities as of
March 31, 1999.
(2) Variable rate balances are reported based on their repricing formulas.
Fixed rate balances are reported based on their scheduled contractual
maturity dates, except for certain investment securities and loans secured
by 1-4 family residential properties that are based on anticipated cash
flows.
(3) Prime-priced loans and investments are considered as 1 to 3 month assets.
(4) Other interest-bearing deposits include Money Market accounts (three months
or less) and Savings and NOW accounts (four months to one year) reflecting
the lagging period that historically exists in Savings and NOW account
interest rate movements. The remainder of other interest-bearing deposits
are "Merit" accounts (savings accounts whose yield is repriced directly
with the Federal Reserve Discount Rate). This discount rate changes less
frequently than other market rates. As a result, management places these
balances at one-half in the three month or less category and the balance in
four months to one year repricing category (the Federal Reserve Discount
Rate has not changed since January 1996.) The interest rate sensitivity
assumptions presented for these deposits are based on historical and
current experiences regarding balance retention and interest rate repricing
behavior.
(5) Time/Other: Time deposits and other interest-bearing liabilities are
classified by contractual maturity or repricing frequency.
(6) Non-interest bearing deposit liabilities were approximately $219 million at
March 31, 1999.
23
<PAGE>
Capital Resources and Liquidity
- -------------------------------
The following summarizes the minimum capital requirements and capital position
at March 31, 1999:
<TABLE>
<CAPTION> To be Well
Capitalized
Under "Prompt
Capital Position at Corrective Action"
March 31, 1999 Provision of FDICIA
------------------------- -------------------
Bank Only Consolidated
---------- -------------
<S> <C> <C> <C>
Total Capital
to Risk-Weighted Assets 13.7% 15.8% 10%
Tier 1 Capital
to Risk-Weighted Assets 12.5 14.5 6
Tier 1 Capital to Average
Assets (Leverage Ratio) 8.4 9.6 5(1)
</TABLE>
(1) Regulatory authorities require all but the most highly rated banks and
bank holding companies to have a leverage ratio of at least between
4.0% - 5.0%.
At March 31, 1999, the Bank met the requirements for a "well capitalized"
institution based on its capital ratios as of such date. The Company believes
that its cash and cash equivalents of $79.8 million in addition to its
securities available for sale of $422.3 million at March 31, 1999 are sufficient
to meet both the funding needs of its borrowers and the liquidity requirements
of its depositors.
The Company's total capital to assets level is 9.98% at March 31, 1999. As
such, management believes that the Company has ample capital available for
future expansion and diversification and regularly evaluates appropriate
business opportunities to efficiently deploy its capital resources.
Year 2000
- ---------
1) The Company's state of readiness
Information Technology: The Company relies heavily on complex internal and
third party computer systems for all phases of its operations, including
document and electronic transaction processing, interest calculation,
financial record keeping and customer service. The Company has outsourced
services and software for substantially all its mission critical systems,
and has been working with these third party providers since mid-1997 to
address Year 2000 concerns.
24
<PAGE>
By December 31, 1998 the Company had successfully completed testing its
wire transfer system with the Federal Reserve Bank, and had also
successfully completed its testing with the automated clearinghouse system.
At March 31, 1999, the Company has substantially completed the testing of
its mission-critical software, including 1998 testing of the wire transfer
and automated clearinghouse systems. Based on its initial review of the
test results, the Company believes that its mission critical systems are
now year 2000 compliant.
A modest portion of the bank's ATM network (8 out of 38 machines), included
in its inventory of mission critical software, was not tested by March 31,
1999. This portion of the ATM network is scheduled for testing during May
1999. To the extent that a Year 2000 failure is identified during the
testing, management anticipates that there is sufficient time to remediate
or replace this part of its network well before the end of 1999.
A bank-wide evaluation of non-mission critical software and hardware was
completed by February 28, 1999. This evaluation was conducted in
conjunction with an upgrade of branch automation software planned for 1998
and 1999. Replacement of non-compliant non-mission critical hardware and
software is targeted for completion by June 30, 1999, and will be largely
accomplished as the bank completes the roll-out of the planned branch
automation hardware and software upgrade.
Non-Information Technology: The Company's exposure to non-information
technology systems is not material, in that its fixtures such as vaults,
elevators and environmental control systems are not generally equipped with
date sensitive microchips.
Third Parties: During 1998, the Company implemented a process for
evaluating the credit risk associated with its major customers. The Year
2000 risk associated with each credit is based in part on responses to a
Year 2000 questionnaire, in part on evaluations completed by account
officers and in part on other considerations, such as the type of industry
and reliance on automated systems. The Company disclaims any liability or
obligation for the completeness, or lack thereof, of its customers' Year
2000 remediation plans. To the extent that this process discloses
borrowers or classes of borrowers with significant Year 2000 risk, the
Company plans to allocate appropriate reserves for possible Y2K related
credit losses.
This allocation will be based on the Company's assessment that credit risk
combined with Year 2000 risk increases its exposure to loss. The amount of
the allocation for each individual loan will vary depending on the degree
of credit weakness, whether the Year 2000 risk is deemed to be moderate or
high, and whether the Company has demonstrated satisfactory or
unsatisfactory Year 2000 compliance programs. While such reserves will be
established during the second quarter of this year, based on present
assessments, the Company does not anticipate such reserves will have a
material effect on the level of its allowance for loan losses.
25
<PAGE>
The Company continues to work with key vendors and suppliers and its
correspondent banks and brokers to assure no interruption in the business
relationship between the Company and these important third party providers.
These key providers include, but are not limited to, payroll service
providers, secondary market software providers, telephone and utility
companies and fiduciary record keeping processors. The Company has
completed some testing of these key vendors and suppliers, and plans to
test or obtain assurances from all others.
At March 31, 1999, the Company is not aware of the likely failure of any of
these suppliers, but will continue to monitor and evaluate their Year 2000
readiness.
The Company notes that it is critically dependent on certain unrelated
third parties for the conduct of its business, such as the Federal Reserve
payment system, the automated clearinghouse system, and telecommunications
and local energy providers. The Company exercises no influence over these
providers, and there are few, if any, alternatives for obtaining these
services.
2) The costs to address the Company's Year 2000 issues
Management does not consider the amounts expended to date to be material,
and the projected costs to be incurred over the remainder of 1999 are not
expected to have a material effect on the Company's results of operations
or financial position. To date, the Company has incurred costs associated
with the renovation of custom code by a third party provider, proxy
testing, the cost of consultants, and the renovation of certain ATMs. In
addition, costs were incurred in connection with certain phases of the
Company's test plan, such as test time with the Bank's primary service
bureau and the costs of consultants engaged to evaluate the results of the
Company's Year 2000 testing program.
At March 31, 1999, the Company has expensed approximately $123,000 of the
originally estimated $300,000 in anticipated Year 2000 costs. Although
this original estimate seems to remain appropriate, no assurance can be
given that challenges will not be arise in the future that will require
additional expense to resolve, particularly in connection with testing and
remediating the Company's contingency plans.
Although the Company does not specifically monitor the cost of internal
resources diverted to the Year 2000 project, these costs have consumed, and
can be expected to continue to consume, a substantial portion of these
internal resources, notably information technology department resources.
Management will fund these Year 2000 costs, which represent our current
best estimates, from normal cash flow.
3) The risks of the Company's Year 2000 issues
At March 31, 1999, the Company views an extended disruption in service to
its customers as the most likely worst case scenario. If the Company's
26
<PAGE>
mission critical systems are not compliant, it may not be able to correctly
process transactions in a reasonable period of time. This scenario could
result in a wide variety of claims for improper handling of its assets as
well as liabilities and other borrowings from its customers.
At March 31, 1999, management deems the probability of this scenario to be
low, but the impact of any such disruption on the Company could be
anticipated to be material, and to raise serious concerns about the ability
of the Company to continue as a going concern.
A more likely scenario is one in which the Company experiences temporary
disruptions in service if one or more of the unrelated vendors on which the
Bank is critically dependent is not Year 2000 compliant. These unrelated
vendors include providers of telecommunication services and other
utilities. The Company would manage this risk by relying, temporarily, on
manual record keeping; as well as by closing or limiting hours of
operations at selected offices, and by transferring staff and equipment to
locations not affected by the loss of service.
4) The Company's contingency plans
The Company completed the preparation of its initial mission critical Year
2000 contingency plans by March 31, 1999, and anticipates testing and
validating essential elements of the plan by June 30, 1999.
Item 3. Quantitative and Qualitative Disclosure About Market Risk.
Quantitative and qualitative disclosure about market risk is presented at
December 31, 1998 in Item 7A in the Company's Annual Report on Form 10-K filed
with the Securities and Exchange Commission on March 31, 1999. The following is
an update of the discussion provided therein:
General. The Company's largest component of market risk continues to be
interest rate risk. The Company is not subject to foreign currency exchange or
commodity price risk. At March 31, 1999, neither the Company nor the Bank owned
any trading assets, nor did they utilize hedging transactions such as interest
rate swaps and caps.
GAP Analysis. The one-year and five-year cumulative interest sensitivity gap as
a percentage of total assets have increased from (19.5%) and 31.4% at December
31, 1998, respectively, to (25%) and 33.6% at March 31, 1999, respectively,
utilizing similar assumptions as at December 1998.
Interest Rate Risk Compliance. The Bank continues to monitor the impact of
interest rate volatility upon net interest income and net portfolio value in the
same manner as at December 31, 1998. There have been no changes in the board
approved limits of acceptable variance in net interest income and net portfolio
value change at March 31, 1999 compared to December 31, 1998, and the projected
changes continue to fall within all board approved limits for potential interest
rate volatility.
27
<PAGE>
Part II
Item 5. Other Information
- ------- -----------------
Item 6(a). Exhibits
- --------------------
28
<PAGE>
EXHIBIT INDEX
Exhibit
Number Description
- ------- -----------
27 Financial Data Schedule
29
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has caused this report to be signed in its behalf by the undersigned
thereunto duly authorized.
Premier National Bancorp, Inc.
(Registrant)
Date: May 13, 1999 /s/ Paul A. Maisch
------------------
Paul A. Maisch
Duly Authorized Officer and
Principal Financial Officer
30
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