U. S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED: JUNE 30, 2002
[ ] 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: 1-15513
PREMIER BANCORP, INC.
---------------------
(Exact name of Registrant as specified in its charter)
PENNSYLVANIA 23-2921058
(State or other jurisdiction of incorporation or organization) (IRS Employer Identification No.)
379 NORTH MAIN STREET, DOYLESTOWN, PA 18901
-------------------------------------------
(Address of principal executive offices)
(215) 345-5100
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(Registrant's telephone number)
N/A
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(Former name, former address and former fiscal year,
if changed since last report)
Check whether the Registrant (1) filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act 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 __
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the Registrant's
classes of common stock, as of the latest practicable date: 3,417,073 shares of
$0.33 par value common stock issued and outstanding as of July 31, 2002.
PART I - FINANCIAL INFORMATION
ITEM 1 -- FINANCIAL STATEMENTS
PREMIER BANCORP, INC.
CONSOLIDATED BALANCE SHEETS
JUNE 30, 2002
(UNAUDITED) DECEMBER 31, 2001
--------- ---------
(DOLLARS IN THOUSANDS)
ASSETS:
Cash and due from banks $ 20,005 $ 14,383
Short-term investments 44,775 14,137
Interest-bearing deposits 4,292 1,084
--------- ---------
Cash and cash equivalents 69,072 29,604
Investment securities:
Held to maturity (fair value $500 in 2002 and $500 in 2001) 500 500
Available for sale (amortized cost $87,422 in 2002 and $102,399 in 2001) 84,800 97,851
Loans receivable (net of allowance for loan losses of $4,338 in 2002
and $3,817 in 2001) 349,087 310,876
Loans held for sale 80 127
Other real estate owned -- 475
Premises and equipment 4,522 4,598
Accrued interest receivable 2,863 2,939
Deferred income taxes 2,232 2,887
Other assets 931 712
--------- ---------
Total assets $ 514,087 $ 450,569
========= =========
LIABILITIES, MINORITY INTEREST IN SUBSIDIARY AND SHAREHOLDERS' EQUITY:
Deposits $ 405,702 $ 358,282
Borrowings 49,513 49,605
Accrued interest payable 2,586 4,554
Other liabilities 7,087 5,019
Subordinated debt 3,500 3,500
--------- ---------
Total liabilities 468,388 420,960
Corporation-obligated mandatorily redeemable capital securities of subsidiary
trust holding solely junior subordinated debentures of the corporation 10,000 10,000
SHAREHOLDERS' EQUITY:
Preferred stock- no par value; 20,000,000 shares authorized; Series A Preferred
issued and outstanding 552,000 at June 30, 2002 and none at December 31, 2001 12,345 --
Common stock- $0.33 par value; 30,000,000 shares authorized; issued and
outstanding 3,452,273 at June 30, 2002 and 3,242,215 at December 31, 2001 1,139 1,070
Additional paid-in capital 12,545 12,085
Retained earnings 11,400 9,455
Accumulated other comprehensive loss (1,730) (3,001)
--------- ---------
Total shareholders' equity 35,699 19,609
--------- ---------
Total liabilities, minority interest in subsidiary and shareholders' equity $ 514,087 $ 450,569
========= =========
The accompanying notes are an integral part of the consolidated financial
statements.
2
PREMIER BANCORP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS FOR THE SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
(UNAUDITED) (UNAUDITED)
----------------------------- -----------------------------
2002 2001 2002 2001
----------- ----------- ----------- -----------
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
INTEREST INCOME:
Loans $ 6,468 $ 5,523 $ 12,460 $ 10,792
Short-term investments and interest-bearing deposits 109 52 212 195
Investments:
Taxable 1,234 1,521 2,456 2,921
Tax-exempt 225 239 472 441
----------- ----------- ----------- -----------
Total interest income 8,036 7,335 15,600 14,349
INTEREST EXPENSE:
Deposits 3,252 3,777 6,579 7,666
Borrowings 529 436 1,048 655
----------- ----------- ----------- -----------
Total interest expense 3,781 4,213 7,627 8,321
----------- ----------- ----------- -----------
Net interest income 4,255 3,122 7,973 6,028
Provision for loan losses 240 239 525 339
----------- ----------- ----------- -----------
Net interest income after loan loss provision 4,015 2,883 7,448 5,689
NON-INTEREST INCOME:
Service charges and other deposit-related fees 96 84 190 153
Gain (loss), net, on sale of investment securities
available for sale 77 33 39 (3)
Gain (loss) on sale of other real estate owned 33 (17) 33 (17)
Gain on sale of loans held for sale 12 20 25 25
Other fees 111 60 159 128
----------- ----------- ----------- -----------
Total non-interest income 329 180 446 286
NON-INTEREST EXPENSE:
Salaries and employee benefits 1,283 1,088 2,540 2,163
Occupancy 200 194 400 390
Data processing 294 244 549 483
Professional services 83 85 147 165
Marketing 87 103 153 224
Minority interest in expense of subsidiary 218 218 436 436
Other 549 377 954 741
----------- ----------- ----------- -----------
Total non-interest expense 2,714 2,309 5,179 4,602
----------- ----------- ----------- -----------
Income before income tax 1,630 754 2,715 1,373
Income tax expense 487 189 770 344
----------- ----------- ----------- -----------
Net income $ 1,143 $ 565 $ 1,945 $ 1,029
=========== =========== =========== ===========
EARNINGS PER COMMON SHARE:
Basic $ 0.33 $ 0.18 $ 0.58 $ 0.32
Diluted $ 0.32 $ 0.16 $ 0.56 $ 0.30
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING:
Basic 3,440,186 3,223,965 3,359,112 3,198,478
Diluted 3,548,846 3,446,395 3,489,676 3,406,674
The accompanying notes are an integral part of the consolidated financial
statements.
3
PREMIER BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS
ENDED JUNE 30,
(UNAUDITED)
-----------------------------
2002 2001
-------- --------
(IN THOUSANDS)
OPERATING ACTIVITIES:
Net income $ 1,945 $ 1,029
Adjustments to reconcile net income to cash provided by operating
activities:
Depreciation expense 238 267
Provision for loan losses 525 339
Amortization of premiums and discounts on investment securities 59 89
available for sale
(Gain) loss on sales of investment securities available for sale (39) 3
(Gain) loss on sales of other real estate owned (33) 17
Gain on sales of loans held for sale (25) (25)
Originations of loans held for sale (3,966) (3,922)
Proceeds from sales of loans held for sale 4,038 3,585
Decrease (increase) in accrued interest receivable 76 (301)
Increase in other assets (219) (372)
Increase in deferred loan fees 344 172
Decrease in accrued interest payable (1,968) (12)
Increase (decrease) in other liabilities 2,146 (86)
-------- --------
Net cash provided by operating activities 3,121 783
-------- --------
INVESTING ACTIVITIES:
Proceeds from sales of investment securities available for sale 34,273 21,111
Repayment of investment securities available for sale 6,654 5,020
Purchases of investment securities available for sale (25,970) (32,081)
Repayment of investment securities held to maturity -- 1,528
Net increase in loans receivable (39,080) (33,192)
Proceeds from sales of other real estate owned 508 235
Purchases of premises and equipment (162) (142)
-------- --------
Net cash used in investing activities (23,777) (37,521)
-------- --------
FINANCING ACTIVITIES:
Net increase in deposits 47,420 7,987
Net (decrease) increase in borrowings less than 90 days (92) 6,790
Proceeds from borrowings greater than 90 days -- 30,000
Net proceeds from preferred stock offering 12,345 --
Proceeds from exercised common stock options 451 241
-------- --------
Net cash provided by financing activities 60,124 45,018
-------- --------
Increase in cash and cash equivalents 39,468 8,280
Cash and cash equivalents:
Beginning of period 29,604 8,026
-------- --------
End of period $ 69,072 $ 16,306
======== ========
Supplemental disclosures:
Cash payments for:
Interest expense $ 9,595 $ 8,333
Taxes 1,230 210
Supplemental disclosure of noncash activities:
Change in the estimated fair value of investment securities available for $ 1,926 $ 392
sale
Change in deferred tax asset related to investment securities available (655) (133)
for sale
Tax effect of exercised common stock options 78 187
The accompanying notes are an integral part of the consolidated financial
statements.
4
PREMIER BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. ORGANIZATION
Premier Bancorp, Inc. (PBI) is a Pennsylvania business corporation and a
registered financial holding company headquartered in Doylestown, Bucks County,
Pennsylvania. PBI was incorporated on July 15, 1997 and reorganized on November
17, 1997 as the one-bank holding company of Premier Bank. PBI's primary business
is the operation of its wholly-owned subsidiary, Premier Bank, which is managed
as a single business segment.
Premier Bank provides a full range of banking services to individual and
corporate customers through its branch banking system located in Bucks,
Montgomery and Northampton Counties in Pennsylvania. Premier Bank is a
Pennsylvania chartered commercial bank and a member of the Federal Reserve Bank
of Philadelphia and the Federal Deposit Insurance Corporation. Premier Bank
competes with other financial institutions and other financial services
companies with respect to customers and services offered.
Both PBI and Premier Bank are regulated and periodically examined by
certain federal and state agencies.
2. BASIS OF FINANCIAL STATEMENT PRESENTATION
The accompanying unaudited consolidated financial statements of PBI have
been prepared in accordance with accounting principles generally accepted in the
United States for interim financial information and with the instructions to
Form 10-Q and Article 10 of Regulation S-X. The consolidated financial
statements include the accounts of Premier Bancorp, Inc. and its wholly-owned
subsidiaries: Premier Bank, PBI Capital Trust, Lenders Abstract, LLC and Premier
Bank Insurance Services, LLC. In the opinion of management, the accompanying
unaudited financial statements contain all material adjustments, including
elimination of all significant intercompany accounts and transactions, necessary
to present fairly PBI's financial position, results of operations and cash flows
for the periods indicated, and have been prepared in a manner consistent with
the audited financial statements as of December 31, 2001. These results of
operations for the three and six months ended June 30, 2002 and 2001 are not
necessarily indicative of the results that may be expected for the full fiscal
year. These financial statements should be read in conjunction with the audited
financial statements and the footnotes for the fiscal year ended December 31,
2001 included in PBI's annual report on Form 10-KSB filed with the Securities
and Exchange Commission.
3. USE OF ESTIMATES
In preparing the consolidated financial statements in accordance with
accounting principles generally accepted in the United States as applied to the
banking industry, 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.
4. DERIVATIVE FINANCIAL INSTRUMENTS
PBI and its subsidiaries have limited involvement with derivative
financial instruments and currently use them only in relation to Premier Bank's
Index Powered SM Certificate of Deposit (IPCD) product. The IPCD, which was
introduced in the first quarter of 2001, contains an embedded derivative feature
that provides a potential return to the depositor based upon a formula that is
dependent on the return of the Standard & Poor's 500 (R) Index. This innovative
5-year term deposit product allows the customer to receive a return that is
based on an equity market index in place of a stated interest rate but, like
other traditional certificates of deposit, is insured by the FDIC to the extent
provided by law.
5
PREMIER BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
4. DERIVATIVE FINANCIAL INSTRUMENTS (CONTINUED)
Premier Bank entered into derivative contracts with the Federal Home Loan
Bank of Pittsburgh (FHLB) in order to offset the risks associated with the
variable cost of the IPCD. Under the terms of these derivative contracts,
Premier Bank will receive an amount equal to the amount to be paid to the IPCD
depositor in exchange for a periodic payment stream expressed as a rate of
interest.
The derivative contracts with the FHLB and the derivatives embedded in the
IPCD are accounted for in accordance with Financial Accounting Standards Board
Statement No. 133, "Accounting for Derivative Instruments and Hedging
Activities", as amended. Accordingly, PBI carries these derivatives at fair
value in the Consolidated Balance Sheets and recognizes any changes in fair
value in current period earnings. We obtain the fair value estimates for these
derivatives from a third party financial institution.
The notional amount of derivative contracts was $16,098,000 and $10,905,000
at June 30, 2002 and December 31, 2001, respectively. The fair value of
derivatives is included in "Other liabilities" and approximated $2,773,000 and
$2,055,000 at June 30, 2002 and December 31, 2001, respectively. During the
three and six months ended June 30, 2002 approximately $115,000 and $95,000,
respectively, was recorded in other expense for net changes in the fair value of
derivatives compared to $15,000 and $22,000 in expense for the three and six
months ended June 30, 2001, respectively. The fair value adjustments are due to
changes in prevailing interest rates and the resulting valuations of future
payments due to the FHLB.
5. EARNINGS PER COMMON SHARE
Basic earnings per common share is calculated on the basis of the weighted
average number of common shares outstanding. Diluted earnings per common share
includes dilutive common stock equivalents as computed under the treasury stock
method using average common stock prices for the respective period. Options to
purchase 303,748 and 556,278 shares of common stock were outstanding at June 30,
2002 and 2001, respectively, and to the extent dilutive, were included in the
computation of earnings per diluted common share. Options to purchase 51,998
shares of common stock were anti-dilutive and excluded from the calculation of
earnings per diluted common share for the three and six months ended June 30,
2002 and 2001.
Earnings are reduced by the amount of dividends declared on preferred
stock, if any. There were no dividends declared on preferred stock during the
three and six months ended June 30, 2002.
6
PREMIER BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
5. EARNINGS PER COMMON SHARE (CONTINUED)
The following is a reconciliation of the numerators and denominators of the
basic and diluted earnings per common share calculations.
COMMON PER COMMON
FOR THE THREE MONTHS ENDED JUNE 30, 2002 NET INCOME SHARES SHARE AMOUNT
--------- --------- ------------
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
Basic earnings per common share $ 1,143 3,440,186 $0.33
Effect of dilutive common stock options -- 108,660 (0.01)
--------- --------- -----
Diluted earnings per common share $ 1,143 3,548,846 $0.32
========= ========= =====
COMMON PER COMMON
FOR THE THREE MONTHS ENDED JUNE 30, 2001 NET INCOME SHARES SHARE AMOUNT
--------- --------- ------------
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
Basic earnings per common share $ 565 3,223,965 $0.18
Effect of dilutive common stock options -- 222,430 (0.02)
--------- --------- -----
Diluted earnings per common share $ 565 3,446,395 $0.16
========= ========= =====
COMMON PER COMMON
FOR THE SIX MONTHS ENDED JUNE 30, 2002 NET INCOME SHARES SHARE AMOUNT
--------- --------- ------------
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
Basic earnings per common share $ 1,945 3,359,112 $0.58
Effect of dilutive common stock options -- 130,564 (0.02)
--------- --------- -----
Diluted earnings per common share $ 1,945 3,489,676 $0.56
========= ========= =====
COMMON PER COMMON
FOR THE SIX MONTHS ENDED JUNE 30, 2001 NET INCOME SHARES SHARE AMOUNT
--------- --------- ------------
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
Basic earnings per common share $ 1,029 3,198,478 $0.32
Effect of dilutive common stock options -- 208,196 (0.02)
--------- --------- -----
Diluted earnings per common share $ 1,029 3,406,674 $0.30
========= ========= =====
6. COMPREHENSIVE INCOME
The following table displays net income and the components of other
comprehensive income to arrive at total comprehensive income. 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 FOR THE SIX MONTHS ENDED
JUNE 30, 2002 JUNE 30, 2001 JUNE 30, 2002 JUNE 30, 2001
-------- -------- -------- --------
(DOLLARS IN THOUSANDS)
Net income $ 1,143 $ 565 $ 1,945 $ 1,029
Other comprehensive income, net of tax:
Unrealized gains (losses) on investment
securities available for sale:
Unrealized holding gains (losses) during 1,169 (208) 1,297 257
the period
Reclassification adjustment for (gains)
losses included in net income (51) (22) (26) 2
-------- -------- -------- --------
Other comprehensive income (loss), net of tax 1,118 (230) 1,271 259
-------- -------- -------- --------
Comprehensive income $ 2,261 $ 335 $ 3,216 $ 1,288
======== ======== ======== ========
7
PREMIER BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
7. PREFERRED STOCK
On June 19, 2002, PBI completed its public offering of 552,000 shares of
Series A 9.25% Non-Cumulative Perpetual Preferred Stock at $25.00 per share.
PBI's Series A Preferred Stock trades on the AMEX under the symbol PPA.Pr.A.
Dividends on the Series A Preferred Stock, if declared by the board of
directors, are payable quarterly.
On July 11, 2002 PBI's board of directors approved a cash dividend of
$.2698 per share to shareholders of record on July 16, 2002. This dividend
totaling $149,000 was paid on July 31, 2002 and represented payment for the
period from June 19, 2002 to July 30, 2002, the amount of time the shares of
Series A Preferred Stock have been outstanding.
8. COMMON STOCK BUY-BACK PROGRAM
On July 11, 2002 PBI's board of directors approved a plan to purchase up to
4.9% of its outstanding common stock in the open market or in privately
negotiated transactions. PBI expects to fund these purchases using available
excess capital.
8
ITEM 2 -- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following is management's discussion and analysis of the significant
changes in the results of operations for the three and six months ended June 30,
2002 as compared to the same periods in 2001 and changes in the balance sheet
from December 31, 2001 to June 30, 2002. Current performance may not be
indicative of future performance. This discussion should be read in conjunction
with PBI's 2001 Annual Report on Form 10-KSB.
Management has made forward-looking statements in this Quarterly Report on
Form 10-Q. These forward-looking statements may be subject to risks and
uncertainties. Forward-looking statements include the information concerning
possible or assumed future results of operations of Premier Bancorp, Inc. and
its subsidiaries, Premier Bank, PBI Capital Trust, Lenders Abstract, LLC and
Premier Bank Insurance Services, LLC. When words such as "believes", "expects",
"anticipates" or similar expressions occur in this Form 10-Q, management is
making forward-looking statements.
Shareholders should note that many factors, some of which are discussed
elsewhere in this Form 10-Q, could affect the future financial results of PBI
and its subsidiaries, both individually and collectively, and could cause those
results to differ materially from those expressed in the forward-looking
statements contained in this Form 10-Q. These factors include but are not
limited to the following:
- operating, legal and regulatory risks, such as continued levels of
loan quality and origination volumes, continued relationships with
major customers, and technological changes;
- economic, political and competitive forces affecting Premier Bank's
business, such as changes in economic conditions, especially in the
bank's market area, interest rate fluctuations, competitive product
and pricing pressures within the bank's market, personal and corporate
bankruptcies, monetary policy and inflation;
- our ability to grow internally or through acquisitions; and
- the risk that management's analyses of these risks and forces could be
incorrect and/or that the strategies developed to address them could
be unsuccessful.
Management cautions readers not to place undue reliance on these
forward-looking statements that reflect its analysis only as of this date.
Management is not obliged 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
that we file from time to time with the Securities and Exchange Commission,
including Annual Reports on Form 10-K and any current reports on Form 8-K.
GENERAL
Premier Bancorp, Inc. (PBI) is a Pennsylvania business corporation and a
registered financial 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. Our primary business
is the operation of our wholly-owned subsidiary, Premier Bank, which we manage
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 financial
services provider whose business primarily consists of attracting retail
deposits from the general public and originating loans to small to mid-sized
businesses and their owners. The bank also invests in securities such as
mortgage-backed securities, obligations of U.S. government agencies and
government sponsored entities, corporate bonds and municipal bonds.
Premier Bank's revenues are derived principally from interest on its loan
and securities portfolios. The bank's primary sources of funds are deposits,
repayments of loans and investment securities, and borrowed funds. Premier Bank
has seven full-service Pennsylvania banking offices: Doylestown, Easton,
Southampton, Bethlehem, Floral Vale, Bensalem and Montgomeryville. The bank also
operates a limited service branch in the Heritage Towers Retirement Community in
Doylestown. Premier Bank faces significant competition from other financial
services companies, many of which are larger organizations with more resources
and locations.
Our consolidated results of operations are dependent primarily on net
interest income, which is the difference between the interest income earned on
interest-earning assets, such as loans and securities, and the interest expense
paid on interest-bearing liabilities, such as deposits and borrowed money. We
also generate non-interest income such as service charges on deposit products,
fees from sales of title insurance and other fees. Our non-interest
9
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 and investment portfolios if
borrowers/issuers fail to meet their obligations or if the market value of its
investment securities declines. Our 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.
MANAGEMENT'S STRATEGY
Premier Bank's lending activities are specialized in small to mid-sized
businesses and professionals. The bank seeks to fund these activities by
developing a stable core deposit base catering primarily to retail and small to
mid-sized business depositors. Premier Bank has a strong commitment to highly
personalized customer service. To support its growth, without compromising
personalized service, Premier Bank has made significant investments in
experienced personnel and has incurred significant costs related to branch
office expansion. Since Premier Bank's 1992 inception, it has grown to seven
full-service Pennsylvania banking offices.
In conjunction with its branch expansion, Premier Bank added significantly
to its commercial lending staff in order to grow the loan portfolio and shift
assets toward loans and away from investments. However, investment securities
can be added to a portfolio quickly as a means to generate additional earnings.
Therefore, the bank may buy or sell investment securities from time to time
depending on market conditions, business trends, liquidity and capital levels.
In addition to the ongoing expansion of the bank's traditional business,
management continuously reviews and considers new products and services to offer
customers. These new products and services are largely intended to generate and
increase fee income. In December 2000, we organized Lenders Abstract, LLC to
generate fee income from the sales of title insurance policies. Substantially
all of Lenders Abstract, LLC's business to date has been derived from Premier
Bank's customers. During the three and six months ended June 30, 2002, Lenders
Abstract, LLC generated fee income of $46,000 and $86,000, respectively.
In March 2002, we organized Premier Bank Insurance Services, LLC to further
diversify our products and services. This subsidiary will primarily sell
long-term health care insurance policies on an agency basis. Premier Bank
Insurance Services, LLC commenced operations in June 2002.
Recent changes to federal banking laws allow financial institutions to
engage in a broader range of activities than previously permitted. These
legislative changes may serve to increase both opportunity as well as
competition.
CRITICAL ACCOUNTING POLICIES
The following discussion and analysis of our financial condition and
results of operations is based upon our consolidated financial statements, which
have been prepared in accordance with accounting principles generally accepted
in the United States. The preparation of these financial statements requires
management to make estimates and judgments that affect the reported amounts of
assets and liabilities, revenues and expenses, and related disclosures of
contingent assets and liabilities at the date of the financial statements.
Actual results may differ from these estimates under different assumptions and
conditions.
In management's opinion, the most critical accounting policies impacting
PBI's consolidated financial statements are:
Evaluation of the allowance for loan losses
The loan loss allowance policy involves significant judgments and
assumptions by management that may have a material impact on the carrying value
of net loans and, potentially, on the net income recognized from period to
period. For a description of our accounting policies and estimation methodology
related to the allowance for loan losses, see "Allowance for loan losses,"
below.
10
Accrual and recognition of interest on loans
These policies involve significant judgments and assumptions by management,
which may have a material impact on the interest income recognized from period
to period. For a description of our accounting policies in connection with
accrual and recognition of interest on loans, see Note 1 (Summary of Significant
Accounting Policies) to PBI's audited consolidated financial statements for the
fiscal year ended December 31, 2001 (the "Annual Financial Statements") included
in Form 10-K for the year ended December 31, 2001.
Realization of deferred income tax items
Estimates of deferred tax assets and deferred tax liabilities make up the
asset category titled, "Deferred income taxes." These estimates involve
significant judgments and assumptions by management, which may have a material
impact on the carrying value of deferred tax assets for financial reporting
purposes. For a more detailed description of these items and estimates, see Note
13 (Income Taxes) to the Annual Financial Statements included in Form 10-K for
the year ended December 31, 2001.
Unrealized gains and losses on debt securities available for sale
We receive estimated fair values of debt securities from an independent
valuation service and brokers. In developing these fair values, the valuation
service and brokers use estimates of cash flows based on historical performance
of similar instruments in similar rate environments. Based on experience,
management is aware that estimated fair values of debt securities vary among
brokers and other valuation services. Debt securities available for sale are
mostly comprised of mortgage-backed securities and corporate bonds. For more
detail on the estimated fair value of debt securities, see "Investment
securities," below.
The Notes to our consolidated financial statements set forth herein and in
the Annual Financial Statements identify other significant accounting policies
used in the development and presentation of our financial statements. This
discussion and analysis, the significant accounting policies and other financial
statement disclosures identify and address key variables and other qualitative
and quantitative factors that are necessary for an understanding and evaluation
of our results of operations.
RESULTS OF OPERATIONS
We reported net income of $1,143,000 or $.32 earnings per common share on a
diluted basis for the three months ended June 30, 2002. This represents an
increase of $578,000 or 102% from the net income of $565,000 or $.16 earnings
per common share on a diluted basis reported for the same period in 2001. Net
interest income was $1,133,000 higher in 2002 compared to 2001 due to a
$101,991,000 or 27% increase in average interest-earning assets and a wider net
interest rate spread and margin. Loans accounted for $88,363,000 of the growth
in average interest-earning assets. Our net interest rate spread increased 51
basis points from 2.79% for the three months ended June 30, 2001 to 3.30% for
the three months ended June 30, 2002. Our net interest margin increased 21 basis
points from 3.50% for the three months ended June 30, 2001 to 3.71% for the
three months ended June 30, 2002. Non-interest income was $149,000 or 83% higher
for the three months ended June 30, 2002 compared to the same period in 2001.
Non-interest income was higher in 2002 due primarily to gains on the sales of
other real estate owned, a small business administration (SBA) loan, and
investment securities available for sale. Non-interest expenses were $405,000 or
18% higher for the three months ended June 30, 2002 compared to the same period
in 2001. Non-interest expenses continue to trend higher due in part to the
overall growth of the company.
Return on average assets and return on average common shareholders' equity
on an annualized basis were .93% and 20.80%, respectively, for the three months
ended June 30, 2002 compared to .59% and 12.72%, respectively, for the same
period in 2001. Return on average common shareholders' equity, exclusive of the
unrealized loss on investment securities available for sale, on an annualized
basis, was 18.72% for the three months ended June 30, 2002 compared to 10.88%
for the same period in 2001.
We reported net income of $1,945,000 or $.56 earnings per common share on a
diluted basis for the six months ended June 30, 2002. This represents an
increase of $916,000 or 89% from the net income of $1,029,000 or $.30 earnings
per common share on a diluted basis reported for the same period in 2001. Net
interest income was
11
$1,945,000 higher in 2002 compared to 2001 due to a $98,097,000 or 27% increase
in average interest-earning assets and a wider net interest rate spread and
margin. Loans accounted for $84,681,000 of the growth in average
interest-earning assets. Our net interest rate spread increased 42 basis points
from 2.76% for the six months ended June 30, 2001 to 3.18% for the six months
ended June 30, 2002. Our net interest margin increased 13 basis points from
3.49% for the six months ended June 30, 2001 to 3.62% for the six months ended
June 30, 2002. Non-interest income was $160,000 or 56% higher for the six months
ended June 30, 2002 compared to the same period in 2001. Non-interest income was
higher in 2002 due primarily to an increase in service charges and other deposit
related fees and gains from the sales of an SBA loan, other real estate owned
and investment securities available for sale. Non-interest expenses were
$577,000 or 13% higher for the six months ended June 30, 2002 compared to the
same period in 2001. Non-interest expenses continue to trend higher due in part
to the overall growth of the company.
Return on average assets and return on average common shareholders'
equity on an annualized basis were .82% and 18.43%, respectively, for the six
months ended June 30, 2002 compared to .56% and 11.89%, respectively, for the
same period in 2001. Return on average common shareholders' equity, exclusive of
the unrealized loss on investment securities available for sale, on an
annualized basis, was 16.47% for the six months ended June 30, 2002 compared to
10.13% for the same period in 2001.
Net interest income
Net interest income is the most significant component of our 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, the composition and characteristics of
interest-earning assets and interest-bearing liabilities, and by competition.
The interest rate spread is also influenced by differences in the maturity and
repricing of assets versus the liabilities that fund them.
Responding to generally weak economic conditions, the Federal Reserve cut
the targeted federal funds rate by an unprecendented 4.75% to a rate of 1.75% in
2001. As a result, the current interest rate environment is at one of its all
time historic low levels. The bank's interest-earning assets and
interest-bearing liabilities continue to originate and reprice in this lower
rate environment. The yields on average loans for the three and six months ended
June 30, 2002 were 7.50% and 7.51%, respectively, compared to 8.57% and 8.68%,
respectively, for the three and six months ended June 30, 2001. Similarly, the
yields on average investments for the three and six months ended June 30, 2002
were 6.23% and 6.39%, respectively, compared to 6.88% and 6.99%, respectively,
for the three and six months ended June 30, 2001 due in part to the repricing of
variable rate securities and the restructuring of the portfolio at current
rates. The rate on average interest-bearing liabilities declined from 5.24% for
the three months ended June 30, 2001 to 3.60% for same period in 2002 and from
5.37% for the six months ended June 30, 2001 to 3.78% for the same period in
2002 due in part to lower rates. In the current environment we had considerable
success in raising non-maturity deposits that are generally less costly than
time deposits. Changes in the composition of our interest-earning assets and
interest-bearing liabilities combined with lower rates had a positive effect on
the net interest rate spread and margin for the three and six months ended June
30, 2002 compared to the same periods in 2001.
For the three and six months ended June 30, 2002, net interest income, on a
tax-equivalent basis, was $1,136,000 and $1,981,000 higher, respectively, than
the same periods in 2001. The increase in net interest income in 2002 was
primarily a function of interest-earning asset growth and a lower yield on
average interest-bearing liabilities. These favorable items were offset in part
by a lower rate on average interest-earning assets and a lower ratio of average
interest-earning assets to average interest-bearing liabilities.
Average interest-earning assets grew $101,991,000 or 27% from $373,376,000
for the three months ended June 30, 2001 to $475,367,000 for the three months
ended June 30, 2002. Average loan balances, average short-term investments and
average interest-bearing deposits increased $88,363,000, $8,141,000 and
$13,881,000, respectively. The ratio of average interest-earning assets to
average interest-bearing liabilities decreased from 115.74% for the three months
ended June 30, 2001 to 112.69% for the three months ended June 30, 2002. The
yield on average interest-earning assets and the rate on average
interest-bearing liabilities decreased 113 basis points and 164 basis points,
respectively, due to the decline in overall interest rates in 2001. The decrease
in rate on average interest-bearing liabilities is mostly due to the repricing
of certificates of deposit in the lower interest rate environment and the change
in deposit mix. Short-term borrowings and subordinated debt also repriced lower
in 2002.
12
The net interest margin on a tax equivalent basis increased 21 basis points
from 3.50% for the three months ended June 30, 2001 to 3.71% for the same period
in 2002. The net interest rate spread increased 51 basis points from 2.79% for
the three months ended June 30, 2001 to 3.30% for the same period in 2002.
Average interest-earning assets grew $98,097,000 or 27% from $362,292,000
for the six months ended June 30, 2001 to $460,389,000 for the six months ended
June 30, 2002. Average loan balances, average short-term investments and average
interest-bearing deposits increased $84,681,000, $7,769,000 and $9,020,000,
respectively. The ratio of average interest-earning assets to average
interest-bearing liabilities decreased from 115.91% for the six months ended
June 30, 2001 to 113.17% for the six months ended June 30, 2002. The yield on
average interest-earning assets and the rate on average interest-bearing
liabilities decreased 117 basis points and 159 basis points, respectively, due
to the decline in overall interest rates in 2001. The decrease in rate on
average interest-bearing liabilities is mostly due to the repricing of
certificates of deposit in the lower interest rate environment and the change in
deposit mix. Short-term borrowings and subordinated debt also repriced lower in
2002.
The net interest margin on a tax equivalent basis increased 13 basis points
from 3.49% for the six months ended June 30, 2001 to 3.62% for the same period
in 2002. The net interest rate spread increased 42 basis points from 2.76% for
the six months ended June 30, 2001 to 3.18% for the same period in 2002.
13
The following tables set forth, for the periods indicated, certain average
balance sheet amounts and their corresponding earnings/expenses and rates (which
have been annualized).
AVERAGE BALANCES, RATES AND INTEREST INCOME AND EXPENSE SUMMARY
FOR THE THREE MONTHS ENDED JUNE 30,
---------------------------------------------------------------------
2002 2001
---------------------------------- -------------------------------
AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE INTEREST RATE BALANCE INTEREST RATE
--------- --------- ---- --------- --------- ----
(DOLLARS IN THOUSANDS)
Assets:
Short-term investments $ 11,980 $ 52 1.74% $ 3,839 $ 45 4.70%
Interest-bearing deposits 14,571 57 1.57% 690 7 4.07%
Investment securities available for sale
Taxable (1) 82,720 1,226 5.94% 85,869 1,440 6.73%
Tax-exempt (1) (2) 18,124 340 7.52% 19,018 362 7.63%
Investment securities held to maturity 500 8 6.42% 4,851 81 6.70%
--------- --------- ---- --------- --------- ----
Total investment securities 101,344 1,574 6.23% 109,738 1,883 6.88%
Loans, net of unearned income (3) (4) 347,472 6,493 7.50% 259,109 5,537 8.57%
Total interest-earning assets 475,367 8,176 6.90% 373,376 7,472 8.03%
--------- --------- ---- --------- --------- ----
Cash and due from banks 15,784 6,668
Allowance for loan losses (4,225) (3,212)
Other assets (5) 9,962 10,065
--------- ---------
Total assets $ 496,888 $ 386,897
========= =========
Liabilities, minority interest in subsidiary
and shareholders' equity:
Interest checking $ 114,585 813 2.85% $ 25,705 164 2.56%
Money market deposit accounts 16,536 95 2.30% 18,832 169 3.60%
Savings accounts 48,525 271 2.24% 42,696 336 3.16%
Time deposits 189,730 2,073 4.38% 199,793 3,108 6.24%
--------- --------- ---- --------- --------- ----
Total interest-bearing deposits 369,376 3,252 3.53% 287,026 3,777 5.28%
Short-term borrowings 18,960 36 0.76% 17,365 162 3.74%
Long-term borrowings 30,000 444 5.94% 16,703 247 5.93%
Subordinated debt 3,500 49 5.62% 1,500 27 7.22%
--------- --------- ---- --------- --------- ----
Total borrowings 52,460 529 4.04% 35,568 436 4.92%
--------- --------- ---- --------- --------- ----
Total interest-bearing liabilities 421,836 3,781 3.60% 322,594 4,213 5.24%
Non interest-bearing deposits 29,882 24,873
Other liabilities 9,000 8,605
Capital securities 10,000 10,000
Shareholders' equity (6) 26,170 20,825
--------- ---------
Total liabilities, minority interest in
subsidiary and shareholders' equity $ 496,888 $ 386,897
========= =========
Net interest income/rate spread $ 4,395 3.30% $ 3,259 2.79%
========= ==== ========= ====
Net interest margin (7) 3.71% 3.50%
Average interest-earning assets as a percentage
of average interest-bearing liabilities 112.69% 115.74%
-------------------
(1) Excludes the SFAS 115 valuation allowance on investment securities
available for sale.
(2) 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.
(3) Includes non-accrual loans of $2,318,000 and $150,000 on average for the
three months ended June 30, 2002 and 2001, respectively.
(4) Includes tax-exempt loans of $2,232,000 and $1,218,000 on average for the
three months ended June 30, 2002 and 2001, respectively. Tax-exempt yields
were adjusted to a tax-equivalent basis using a 34% rate.
(5) Excludes the deferred tax asset related to the SFAS 115 valuation allowance
on investment securities available for sale.
(6) Excludes the SFAS 115 valuation allowance on investment securities
available for sale, net of tax.
(7) Net interest margin is calculated as net interest income divided by average
interest-earning assets.
14
AVERAGE BALANCES, RATES AND INTEREST INCOME AND EXPENSE SUMMARY
FOR THE SIX MONTHS ENDED JUNE 30,
---------------------------------------------------------------------
2002 2001
---------------------------------- -------------------------------
AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE INTEREST RATE BALANCE INTEREST RATE
--------- --------- ---- --------- --------- ----
(DOLLARS IN THOUSANDS)
Assets:
Short-term investments $ 14,790 $ 137 1.87% $ 7,021 $ 182 5.23%
Interest-bearing deposits 9,565 75 1.58% 545 13 4.81%
Investment securities available for sale
Taxable (1) 80,678 2,441 6.10% 80,380 2,745 6.89%
Tax-exempt (1) (2) 18,936 715 7.61% 17,770 668 7.58%
Investment securities held to maturity 500 15 6.05% 5,337 176 6.65%
--------- --------- ---- --------- --------- ----
Total investment securities 100,114 3,171 6.39% 103,487 3,589 6.99%
Loans, net of unearned income (3) (4) 335,920 12,503 7.51% 251,239 10,815 8.68%
--------- --------- ---- --------- --------- ----
Total interest-earning assets 460,389 15,886 6.96% 362,292 14,599 8.13%
Cash and due from banks 14,139 6,476
Allowance for loan losses (4,066) (3,143)
Other assets (5) 9,974 9,685
--------- ---------
Total assets $ 480,436 $ 375,310
========= =========
Liabilities, minority interest in subsidiary
and shareholders' equity:
Interest checking $ 96,294 1,348 2.82% $ 25,461 321 2.54%
Money market deposit accounts 16,627 190 2.30% 18,096 366 4.08%
Savings accounts 47,129 522 2.23% 42,745 705 3.33%
Time deposits 195,625 4,519 4.66% 199,506 6,274 6.34%
--------- --------- ---- --------- --------- ----
Total interest-bearing deposits 355,675 6,579 3.73% 285,808 7,666 5.41%
Short-term borrowings 17,640 67 0.77% 16,847 353 4.23%
Long-term borrowings 30,000 883 5.94% 8,398 247 5.93%
Subordinated debt 3,500 98 5.65% 1,500 55 7.39%
--------- --------- ---- --------- --------- ----
Total borrowings 51,140 1,048 4.13% 26,745 655 4.94%
--------- --------- ---- --------- --------- ----
Total interest-bearing liabilities 406,815 7,627 3.78% 312,553 8,321 5.37%
Non interest-bearing deposits 29,607 24,944
Other liabilities 9,357 7,331
Capital securities 10,000 10,000
Shareholders' equity (6) 24,657 20,482
--------- ---------
Total liabilities, minority interest in
subsidiary and shareholders' equity $ 480,436 $ 375,310
========= =========
Net interest income/rate spread $ 8,259 3.18% $ 6,278 2.76%
========= ==== ========= ====
Net interest margin (7) 3.62% 3.49%
Average interest-earning assets as a percentage
of average interest-bearing liabilities 113.17% 115.91%
-------------------
(1) Excludes the SFAS 115 valuation allowance on investment securities
available for sale.
(2) 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.
(3) Includes non-accrual loans of $2,503,000 and $75,000 on average for the six
months ended June 30, 2002 and 2001, respectively.
(4) Includes tax-exempt loans of $2,248,000 and $1,100,000 on average for the
six months ended June 30, 2002 and 2001, respectively. Tax-exempt yields
were adjusted to a tax-equivalent basis using a 34% rate.
(5) Excludes the deferred tax asset related to the SFAS 115 valuation allowance
on investment securities available for sale.
(6) Excludes the SFAS 115 valuation allowance on investment securities
available for sale, net of tax.
(7) Net interest margin is calculated as net interest income divided by average
interest-earning assets.
15
Non-interest income
Non-interest income consists primarily of service charges and other deposit
related fees, fees from sales of title insurance policies and gains (losses) on
the sale of investment securities available for sale, loans held for sale and
other real estate owned.
For the three months ended June 30, 2002, non-interest income was $329,000
or $149,000 higher than the $180,000 recorded during the same period in 2001. Of
this increase $46,000 pertained to the gain on the sale of a small business
administration loan. During 2002, we recorded $77,000 in gains on the sale of
investment securities available for sale compared to $33,000 in 2001. In
addition we recognized $33,000 in gains on the sale of other real estate owned
during the second quarter of 2002 compared to $17,000 in losses during the
second quarter of 2001.
For the six months ended June 30, 2002, non-interest income was $446,000 or
$160,000 higher than the $286,000 recorded during the same period in 2001. In
2001, non-interest income included $50,000 in fees related to a loan pay-off.
Excluding this non-recurring 2001 fee, non-interest income increased $210,000 or
89% in 2002. Of this increase, $37,000 pertained to service charges and
activities related to deposit accounts which have grown considerably in the past
year and $46,000 to the gain on the sale of a small business administration
loan. Fees from sales of title insurance policies by Lenders Abstract, LLC were
$25,000 higher in 2002 due to greater volume. During 2002 we recorded $39,000 in
gains on the sale of investment securities available for sale compared to $3,000
in losses during 2001. In addition, we recorded $33,000 in gains on the sale of
other real estate owned in 2002 compared to $17,000 in losses in 2001.
Non-interest expense
For the three months ended June 30, 2002, non-interest expenses were
$2,714,000 or $405,000 higher than the $2,309,000 recorded during the same
period in 2001. For the six months ended June 30, 2002, non-interest expenses
were $5,179,000 or $577,000 higher than the $4,602,000 recorded during the same
period in 2001. Non-interest expenses in 2002 increased principally due to the
continued growth of the company.
Salaries and benefits were $195,000 or 18% higher in the second quarter of
2002 compared to the same period in 2001. This increase was principally due to
an increase in the number of employees and salary adjustments. The number of
full-time equivalent employees grew from 78 at June 30, 2001 to 90 at June 30,
2002. Data processing expenses increased $50,000 primarily due to the growth of
the company, variable costs associated with item processing and account volumes,
and new services. Marketing expenses were $16,000 lower during the second
quarter of 2002 compared to the same period in 2001. Advertising expenses were
reduced because deposit growth exceeded expectations. Other expenses, which
consist primarily of furniture and equipment expense, employee travel, meals and
entertainment, stationery, supplies, postage and Board of Directors' fees,
increased $172,000 or 46% compared to the second quarter of 2001. Of this
increase, $100,000 pertained to the fair market adjustment of derivatives
related to Premier Bank's IPCD. The remaining increase is primarily attributed
to the growth of the company.
Salaries and benefits were $377,000 or 17% higher for the six months ended
June 30, 2002 compared to the same period in 2001. This increase was principally
due to an increase in the number of employees and salary adjustments. Data
processing expenses increased $66,000 primarily due to the growth of the
company, variable costs associated with item processing and account volumes, and
new services. Marketing expenses were $71,000 lower in 2002 compared to the same
period in 2001. Advertising expenses were reduced because deposit growth
exceeded expectations. Other expenses increased $213,000 or 29% in 2002 compared
to 2001. Of this increase, $74,000 pertained to the fair market adjustment of
derivatives related to Premier Bank's IPCD. The remaining increase is primarily
attributed to the growth of the company.
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 represents
management's best estimate of known and inherent losses in the bank's loan
portfolio. 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
16
current risk profile of the portfolio, delinquency statistics, and the
composition of loan types within the portfolio. Net charge-offs were $4,000 for
both the six months ended June 30, 2002 and 2001. The bank's loan portfolio is
relatively immature given its recent growth rates. Therefore, charge-off and
non-performing trends may not be indicative of future performance.
The provision for loan losses was $240,000 for the three months ended June
30, 2002 compared to $239,000 for the same period in 2001. The amount of the
loan loss provision for the three months ended June 30, 2002 was driven by the
risk profile of the portfolio rather than loan volume. Non-performing loans
totaled $2,413,000 at June 30, 2002 compared to $350,000 at June 30, 2001.
During the three months ended June 30, 2002 total gross loans grew $15,286,000
compared to $22,870,000 for the same period in 2001.
For the six months ended June 30, 2002 the provision for loan losses was
$525,000 or $186,000 higher than the $339,000 recorded during the comparable
period in 2001. This increase is due to the aforementioned increase in
non-performing loans at June 30, 2002 compared to June 30, 2001 and loan growth.
Total gross loans grew $39,076,000 or 12% during the six months ended June 30,
2002 compared to $33,188,000 or 14% during the same period in 2001.
The loan loss allowance as a percentage of total loans was 1.22% at June
30, 2002 and 1.23% at June 30, 2001.
Income tax expense
We recorded a $487,000 tax provision representing an effective tax rate of
29.9% for the three months ended June 30, 2002 compared to $189,000 or 25.1% for
the same period in 2001. We recorded a $770,000 tax provision representing an
effective tax rate of 28.4% for the six months ended June 30, 2002 compared to
$344,000 or 25.1% for the same period in 2001. The effective tax rates for the
three and six months ended June 30, 2002 were higher than the comparable periods
in 2001 principally due to a lower ratio of tax-exempt interest to total pre-tax
income.
FINANCIAL CONDITION
Consolidated assets grew $63,518,000 or 14% during the six months ended
June 30, 2002 to $514,087,000. Cash and cash equivalents and total gross loans
grew $39,468,000 and $39,076,000, respectively, during the six months ended June
30, 2002. Asset growth was primarily funded by a $47,420,000 increase in
deposits, mostly interest checking accounts. Investments decreased $13,051,000
during the six months ended June 30, 2002. Shareholders' equity increased
$16,090,000 from $19,609,000 at December 31, 2001 to $35,699,000 at June 30,
2002. This increase was attributable to $12,345,000 in net proceeds from the
sale of preferred stock, $1,945,000 in earnings, a $1,271,000 improvement in the
estimated fair value of investment securities available for sale, net of tax,
and $529,000 from the exercise of common stock options.
Investment securities
Investment policies dictate permissible investment categories, credit
quality, maturity intervals and investment concentrations. Management is
responsible for making the specific investment purchases within these standards.
The carrying value of investment securities at June 30, 2002 totaled $85,300,000
or 17% of total assets. At June 30, 2002 approximately 42% of the investment
portfolio was comprised of mortgage-backed securities that amortize and provide
monthly cash flow. Corporate bonds and municipal bonds comprised 35% and 21% of
the investment portfolio, respectively. At June 30, 2002, approximately 86% of
the investment portfolio was fixed rate.
Management buys and sells investment securities from time to time depending
on market conditions, business trends, liquidity, and capital levels. Investment
purchases provide a way to add assets quickly and generate additional earnings.
The bank generally earns a positive interest spread by assuming interest rate
risk and using deposits and/or borrowings to purchase securities with longer
maturities.
Management classifies investment securities at the time of purchase by one
of three categories: trading, available for sale (AFS) or, held to maturity
(HTM). To date, management has not purchased any securities for trading
purposes. Management classifies most securities as AFS even though it has no
immediate intent to sell them. The AFS designation affords management the
flexibility to sell securities and adjust the balance sheet in response to
capital levels, liquidity needs and/or changes in market conditions. Securities
AFS are marked to market in the
17
Consolidated Balance Sheets with an adjustment to equity, net of tax, that is
presented in the caption "Accumulated other comprehensive income (loss)."
At June 30, 2002, the AFS portfolio had an estimated market depreciation of
$2,622,000 before tax and an equity adjustment of $1,730,000, net of tax. This
represents a $1,271,000 improvement in the estimated fair value of securities
AFS, net of tax, over the prior year-end primarily due to the lower rate
environment. The market depreciation is concentrated in the bank's corporate
bond portfolio, which had an unrealized loss of $2,720,000 at June 30, 2002. The
market continues to discount these corporate bonds due to perceived credit risk.
At June 30, 2002, the corporate bond portfolio amounted to $29,473,000 or 35% of
the total investment portfolio. Approximately 60% of corporate bonds are fixed
rate and 40% are variable rate at June 30, 2002.
Management evaluated the credit quality of corporate bond issuers prior to
purchasing these securities and monitors them on an ongoing basis. Management
believes that the credit quality of the corporate bond portfolio is sound and
that the company will ultimately be repaid. Therefore, management views the
unrealized loss in the market value of the corporate bonds as temporary. If, at
some future date, management believes that this loss is other than temporary or
that the recovery of the unrealized loss on corporate bonds is not probable, we
will recognize the loss through earnings, which would reduce regulatory capital.
Corporate bonds are classified as available for sale allowing us the
flexibility to sell them and adjust the portfolio as future conditions change.
During the six months ended June 30, 2002, we sold $5,900,000 of fixed rate
corporate bonds and purchased $2,000,000 of variable rate corporate bonds.
INVESTMENT PORTFOLIO
Investment Securities
JUNE 30, 2002
----------------------------------------------------------------
HELD TO MATURITY AVAILABLE FOR SALE
-------------------------- --------------------------
AMORTIZED ESTIMATED AMORTIZED ESTIMATED
COST FAIR VALUE COST FAIR VALUE
------- ------- ------- -------
(IN THOUSANDS)
Mortgage-backed securities $ -- $ -- $34,972 $35,446
Municipal securities -- -- 18,124 17,748
Equity securities -- -- 2,023 2,023
Corporate bonds -- -- 32,193 29,473
Other debt securities 500 500 110 110
------- ------- ------- -------
Total $ 500 $ 500 $87,422 $84,800
======= ======= ======= =======
DECEMBER 31, 2001
----------------------------------------------------------------
HELD TO MATURITY AVAILABLE FOR SALE
-------------------------- --------------------------
AMORTIZED ESTIMATED AMORTIZED ESTIMATED
COST FAIR VALUE COST FAIR VALUE
-------- -------- -------- --------
(IN THOUSANDS)
Mortgage-backed securities $ -- $ -- $ 43,286 $ 43,365
Municipal securities -- -- 20,796 20,031
Equity securities -- -- 2,023 2,023
Corporate bonds -- -- 36,184 32,322
Other debt securities 500 500 110 110
-------- -------- -------- --------
Total $ 500 $ 500 $102,399 $ 97,851
======== ======== ======== ========
18
Loans
Gross loans increased $39,076,000 or 12% from $316,066,000 at December 31,
2001 to $355,142,000 at June 30, 2002.
We originate a wide variety of loans primarily to small to mid-sized
businesses and professionals. Our policies as well as applicable laws and
regulations require risk analysis and ongoing portfolio and credit management.
The majority of our loan portfolio is collateralized, at least in part, by real
estate in the greater Delaware and Lehigh Valleys of Pennsylvania and New
Jersey. Real estate values are typically subject to risks associated with the
general economy, among other matters.
Inherent in the lending function is the evaluation and acceptance of credit
risk and interest rate risk. We manage credit risk through portfolio
diversification, underwriting policies and procedures, and loan monitoring
practices. We manage interest rate risk using various asset/liability modeling
techniques and analyses. Most loans are adjustable rate that reset in intervals
of five years or less. When possible, the bank also originates variable rate
loans.
LOAN PORTFOLIO
JUNE 30, 2002 DECEMBER 31, 2001
---------------------------- ----------------------------
AMOUNT % OF TOTAL AMOUNT % OF TOTAL
--------- -------- --------- --------
(DOLLARS IN THOUSANDS)
Real estate-farmland $ 205 0.06% $ 214 0.07%
Real estate-construction 10,566 2.98% 15,911 5.03%
Real estate-residential 30,555 8.60% 30,188 9.55%
Real estate-multifamily 18,594 5.23% 15,011 4.75%
Real estate-commercial 245,076 69.01% 208,412 65.94%
Commercial 49,182 13.85% 45,238 14.31%
Consumer 964 0.27% 1,092 0.35%
Total loans 355,142 100.00% 316,066 100.00%
Less:
Deferred loan fees (1,717) (1,373)
Allowance for loan losses (4,338) (3,817)
Total loans, net $ 349,087 $ 310,876
========= =========
Allowance for loan losses
The allowance for loan losses reflects management's best estimate of
losses, both known and inherent, in the existing loan portfolio. Management's
judgment is based on the evaluation of individual loans, past experience, the
assessment of current economic conditions, and other relevant factors. The
provision for loan losses charged to operating expenses represents the amount
necessary to maintain an appropriate allowance. Loan losses are charged directly
against the allowance for loan losses when loans are deemed to be uncollectible.
Recoveries on previously charged-off loans are added to the allowance when
received.
Estimates are used to determine the allowance for loan losses. A variety of
factors are considered in establishing these estimates including current
economic conditions, diversification of the loan portfolio, delinquency
statistics, borrowers' perceived financial and managerial strengths, the
adequacy of underlying collateral, if collateral dependent, or present value of
future cash flows, and other relevant factors. Each commercial loan is assigned
a specific loan loss reserve using a scoring system. This scoring system takes
into consideration collateral type and value, loan to value ratios, the
borrower's risk rating, and other factors previously described. An independent
loan reviewer determines borrower risk ratings at the inception of each loan and
monitors/updates these ratings on an ongoing basis. Homogeneous loans, comprised
primarily of home equity and non-real estate secured consumer loans, are
analyzed in the aggregate.
19
Because the bank is only ten years old with a limited history of loan
losses, management also uses peer group analysis to gauge the overall
reasonableness of loan loss reserves. While management calculates the allowance
based on specific loans or loan categories, it considers the total allowance
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 management's estimates.
We maintained an unallocated loan loss reserve at June 30, 2001 based on a
shift in risk ratings following the hiring of an independent loan reviewer in
the second quarter of 1999. This unallocated reserve was based on the assumption
that additional risk factors would be identified and further changes to risk
ratings would be made as this independent review process was consistently
applied to the entire commercial loan portfolio over an extended period of time.
We adjusted our loan scoring system in the fourth quarter of 2001 to reflect
current economic conditions and trends in risk ratings over the past several
years. As a result, there are no unallocated loan loss reserves at June 30, 2002
or December 31, 2001.
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 and information available to them at the
time of examination.
Management considers the allowance for loan losses to be appropriate. To
comply with industry reporting requirements, management allocated the allowance
for loan losses by loan categories in the table below. Management does not
intend to imply that actual future charge-offs will necessarily follow this
allocation or that any portion of the allowance is restricted.
ALLOWANCE FOR LOAN LOSS ALLOCATION
Allowance for Loan Loss Allocation
JUNE 30, 2002 DECEMBER 31, 2001 JUNE 30, 2001
---------------------- ---------------------- ----------------------
% LOANS TO % LOANS TO % LOANS TO
AMOUNT TOTAL LOANS AMOUNT TOTAL LOANS AMOUNT TOTAL LOANS
------ ------ ------ ------ ------ ------
(DOLLARS IN THOUSANDS)
Balance at end of period
applicable to:
Real estate-farmland $ 2 0.06% $ 2 0.07% $ 2 0.08%
Real estate-construction 99 2.52% 115 5.03% 51 3.07%
Real estate-residential 294 9.29% 266 9.55% 235 10.04%
Real estate-multi-family 129 5.33% 103 4.75% 104 4.62%
Real estate-commercial 2,713 68.63% 2,338 65.94% 1,690 68.52%
Commercial 1,092 13.87% 982 14.31% 710 12.81%
Consumer 9 0.30% 11 0.35% 15 0.86%
Unallocated -- -- -- -- 560 --
------ ------ ------ ------ ------ ------
Total $4,338 100.00% $3,817 100.00% $3,367 100.00%
====== ====== ====== ====== ====== ======
At June 30, 2002, the allowance for loan losses totaled $4,338,000 or 1.22%
of total loans compared to 1.21% and 1.23% at December 31, 2001 and June 30,
2001, respectively.
20
The following table sets forth the activity in the allowance for loan
losses and certain key ratios for the periods indicated. The bank's loan
portfolio is relatively immature given its recent growth rates. Therefore,
current charge-off and non-performing asset trends may not be indicative of
future performance.
ALLOWANCE FOR LOAN LOSSES
FOR THE SIX FOR THE FOR THE SIX
MONTHS ENDED YEAR ENDED MONTHS ENDED
JUNE 30, 2002 DECEMBER 31, 2001 JUNE 30, 2001
-------- -------- --------
(DOLLARS IN THOUSANDS)
Balance at beginning of period $ 3,817 $ 3,032 $ 3,032
Charge-offs
Real estate-commercial -- 29 --
Commercial 4 4 4
-------- -------- --------
Total charge-offs 4 33 4
Recoveries -- -- --
Net charge-offs 4 33 4
Provision for loan losses 525 818 339
-------- -------- --------
Balance at end of period $ 4,338 $ 3,817 $ 3,367
======== ======== ========
Total gross loans:
Average $337,575 $271,318 $252,196
End of period $355,142 $316,066 $272,633
Ratios:
Net charge-offs to:
Average loans -- 0.01% --
Loans at end of period -- 0.01% --
Allowance for loan losses 0.09% 0.86% 0.12%
Provision for loan losses 0.76% 4.03% 1.18%
Allowance for loan losses to:
Total gross loans at end of period 1.22% 1.21% 1.23%
Non-performing loans 179.78% 142.05% N/M
---------------
(1) N/M stands for "not meaningful". The allowance for loan losses exceeded
the amount of non-performing loans by more than nine times at June 30,
2001.
21
Non-performing assets
Non-performing assets are defined as accruing loans past due 90 days or
more, non-accruing loans, restructured loans and other real estate owned.
Non-performing assets represented .47% and .70% of total assets at June 30, 2002
and December 31, 2001, respectively.
NON-PERFORMING ASSETS
JUNE 30, 2002 DECEMBER 31, 2001
(DOLLARS IN THOUSANDS)
Loans past due 90 days or more and accruing $ -- $ --
Non-accrual loans 2,413 2,687
Other real estate owned -- 475
--------- ------
Total non-performing assets $ 2,413 $3,162
========= ======
Ratio of non-performing loans to total loans 0.68% 0.85%
Ratio of non-performing assets to total assets 0.47% 0.70%
The non-accrual/impaired loan balance was substantially comprised of one
borrower totaling $2,011,000 and $2,330,000 at June 30, 2002 and December 31,
2001, respectively. This borrower's enterprise failed and we placed the
relationship on non-accrual in November 2001. Other real estate owned at
December 31, 2001 was sold at a gain of $33,000 in May 2002.
The average balance of non-accrual/impaired loans was $2,318,000 for the
three months ended June 30, 2002. There was $2,000 and $4,000 in interest income
recognized on non-accrual/impaired loans during the three months ended June 30,
2002 and 2001, respectively. Total interest income that would have been
recognized on non-accrual loans was $50,000 and $9,000 for the three months
ended June 30, 2002 and 2001, respectively.
The average balance of non-accrual loans was $2,503,000 for the six months
ended June 30, 2002. There was $4,000 and $10,000 in interest income recognized
on non-accrual/impaired loans during the six months ended June 30, 2002 and
2001, respectively. Total interest income that would have been recognized on
non-accrual loans was $114,000 and $15,000 for the six months ended June 30,
2002 and 2001, respectively.
In August 2002 we placed one additional borrower, with loans totaling
$2,510,000, on non-accrual.
Loans held for sale
The balance of loans held for sale was $80,000 at June 30, 2002 compared to
$127,000 at December 31, 2001. The decrease in loans held for sale relates to
the timing of residential mortgage loan originations versus their sale.
We sold $4,013,000 and $3,560,000 of residential mortgages during the six
months ended June 30, 2002 and 2001, respectively. Residential mortgage
originations and sales are significantly influenced by the interest rate
environment.
Deferred taxes
Deferred taxes decreased $655,000 from $2,887,000 at December 31, 2001 to
$2,232,000 at June 30, 2002. This decrease relates to the change in the
estimated fair value of investment securities available for sale.
Other assets
The $219,000 increase in other assets from $712,000 at December 31, 2001 to
$931,000 at June 30, 2002 was primarily due to an increase in normal prepaid
operating expenses.
22
Deposits
We are largely dependent upon our base of competitively priced core
deposits to provide a stable source of funding. The bank has retained and grown
its customer base since inception through a combination of price, quality
service, customer confidence, convenience, a stable and experienced staff and
through expansion of our network of offices. Core deposits, which exclude time
deposits of $100,000 and greater, grew $47,201,000 or 16% during the six months
ended June 30, 2002 to $351,481,000. This growth was primarily generated by the
Golden Checking product, which is an interest-bearing checking account. The bank
has maintained the rate payable on this account at an annual percentage yield of
3.05% despite the falling rate environment. As prevailing interest rates
declined, Golden Checking accounts increased $59,835,000 during the six months
ended June 30, 2002 and the bank's deposit mix, although still concentrated in
time deposits, shifted significantly toward non-maturity interest checking
products. Interest checking accounts at June 30, 2002 were $125,443,000 or 31%
of total deposits compared to $58,826,000 or 16% of total deposits at December
31, 2001. Total time deposits at June 30, 2002 were $182,733,000 or 45% of total
deposits compared to $208,057,000 or 58% of total deposits at December 31, 2001.
Approximately $79,902,000 of time deposits will mature after one year.
Total deposits increased $47,420,000 or 13% during the six months ended
June 30, 2002 to $405,702,000. Total average deposits increased $74,530,000 or
24% from $310,752,000 for the six months ended June 30, 2001 to $385,282,000 for
the six months ended June 30, 2002. Non-interest-bearing deposits are an
important source of funds for a bank because they lower overall deposit costs.
The average balance of these accounts increased $4,663,000 or 19% during the six
months ended June 30, 2002 compared to the same period in 2001. The interest
rates offered on most deposit products were lowered in 2001 and through the
first half of 2002 in response to overall market conditions. Management expects
the certificate of deposit portfolio to continue to reprice lower in 2002, as
higher rate accounts mature.
The growth of mutual funds over the past decade has made it increasingly
difficult for financial institutions to attract deposits. The continued flow of
cash into mutual funds, much of which is made through tax deferred investment
vehicles such as 401(k) plans, as well as a generally strong economy, have,
until recently, fueled high returns for these investments, and in particular,
certain equity funds. In 2001 and, continuing to date, the returns of the
domestic equity markets were weak and volatile as the U.S. economy was generally
sluggish. These conditions improved the environment for deposit acquisition for
financial institutions as investors sought the relative safety of FDIC insured
deposits, despite a low interest rate environment.
We plan to continue to grow deposits through promotions, business
development programs, maturation of existing branches and branch expansion. In
addition, Premier Bank introduced the IPCD product in the first quarter of 2001.
The IPCD product contains an embedded derivative feature that provides a
potential return to the depositor based on a formula that is dependent on the
return of the Standard & Poor's 500(R) Index. This innovative deposit product
allows a customer to receive a return that is based on an equity market index in
place of a stated interest rate but, like other traditional certificates of
deposit, is insured by the FDIC to the extent provided by law. As of June 30,
2002, the bank generated $16,098,000 in IPCD deposits with an initial term of
five years. Approximately $13,145,000 of IPCD balances at June 30, 2002 was from
institutional depositors. These depositors generally require us to obtain
letters of credit guaranteeing the principal amounts of IPCD's in excess of FDIC
insured levels. As of June 30, 2002, Premier Bank maintained $11,300,000 in
letters of credit from the FHLB for this purpose. The amount of IPCD product,
net of embedded derivatives, included in total deposits in the Consolidated
Balance Sheet at June 30, 2002 was $13,495,000. See the section entitled
"Derivative Financial Instruments."
23
DEPOSITS BY MAJOR CLASSIFICATION
JUNE 30, 2002 DECEMBER 31, 2001
------------------------------------ -------------------------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
INTEREST % OF INTEREST % OF
RATE AMOUNT TOTAL RATE AMOUNT TOTAL
---- --------- ------ ---- -------- -------
(DOLLARS IN THOUSANDS)
Interest checking 2.82% $ 125,443 30.92% 2.69% $ 58,826 16.42%
Money market 2.30% 16,152 3.98% 2.32% 16,997 4.74%
Savings 2.24% 49,493 12.20% 2.25% 44,059 12.30%
Time 4.08% 182,733 45.04% 5.31% 208,057 58.07%
---- --------- ------ ---- -------- -------
Total interest-bearing 3.34% 373,821 92.14% 4.27% 327,939 91.53%
---- --------- ------ ---- -------- -------
deposits
Non interest-bearing deposits 31,881 7.86% 30,343 8.47%
--------- ------ -------- -------
Total deposits $405,702 100.00% $358,282 100.00%
========= ====== ======== =======
Borrowings
Borrowings totaled $49,513,000 at June 30, 2002 compared to $49,605,000 at
December 31, 2001.
Included in borrowings are customer repurchase agreements of $19,513,000
and $19,605,000 at June 30, 2002 and December 31, 2001, respectively. The
balance in customer repurchase agreements fluctuates daily because it is
dependent on the level of available funds in depositor accounts. Customer
repurchase agreements are collateralized by investment securities in an amount
equal to or exceeding such borrowings. The bank controls these pledged
securities.
Borrowings also included $30,000,000 in long-term advances from the FHLB at
both June 30, 2002 and December 31, 2001.
The weighted average interest rate on borrowings was 3.84% and 3.83% at
June 30, 2002 and December 31, 2001, respectively.
Other liabilities
Other liabilities increased $2,068,000 from $5,019,000 at December 31, 2001
to $7,087,000 at June 30, 2002. This increase relates principally to a
$1,000,000 accrued investment purchase, an $888,000 increase in normal operating
accounts and a $718,000 increase in the balance of derivatives related to our
IPCD product. These increases were partially offset by a $538,000 decrease in
federal income taxes payable.
CAPITAL ADEQUACY
Capital is fundamental to support our continued growth. In addition, PBI
and Premier Bank are subject to various regulatory capital requirements.
Regulatory capital is defined in terms of Tier 1 capital (shareholders' equity
plus the allowable portion of the minority interest in equity of subsidiaries,
minus unrealized gains or plus unrealized losses on available for sale
securities, and minus certain intangible assets), Tier 2 capital (which includes
a portion of the allowance for loan losses, minority interest in equity of
subsidiaries and subordinated debt), and total capital (Tier 1 plus Tier 2).
Risk-based capital ratios are expressed as a percentage of risk-weighted assets.
Risk-weighted assets are determined by assigning various weights to all assets
and off-balance sheet financial instruments, such as letters of credit and loan
commitments, based on associated risk. Regulators have also adopted minimum Tier
1 leverage ratio standards, which measure the ratio of Tier 1 capital to total
average quarterly assets.
On June 19, 2002 PBI completed its public offering of 552,000 shares of
Series A 9.25% Non-Cumulative Perpetual Preferred Stock at $25.00 per share. The
net proceeds from this offering totaled $12,345,000 and will be utilized to
sustain our growth rate, which continues to exceed our return on shareholders'
equity. The Series A
24
Preferred stock qualifies as Tier 1 capital. Annual dividends on the Series A
Preferred stock are $2.3125 per share or $1,276,500. These dividends are payable
quarterly, but only if declared by our board of directors. On July 11, 2002 our
board of directors approved a cash dividend of $.2698 per share to shareholders
of record on July 16, 2002. This dividend totaling $149,000 was paid on July 31,
2002 and represented payment for the period from June 19, 2002 to July 30, 2002,
the amount of time the shares of Series A Preferred Stock have been outstanding.
On July 11, 2002 our board of directors approved a plan to purchase up to
4.9% of our outstanding common stock in the open market or in privately
negotiated transactions. We expect to fund these purchases using available
excess capital.
The tables below depict our capital components and ratios along with the
"adequately" and "well" capitalized criteria as defined by FDIC regulations.
CAPITAL COMPONENTS
JUNE 30, 2002 DECEMBER 31, 2001
-------- --------
(DOLLARS IN THOUSANDS)
Tier 1
Shareholders' equity $ 35,699 $ 19,609
Allowable portion of minority interest in equity of subsidiary 10,000 7,537
Net unrealized losses on investment securities available for sale 1,730 3,001
-------- --------
Total Tier 1 Capital $ 47,429 $ 30,147
======== ========
Tier 2
Allowable portion of minority interest in equity
of subsidiary $ -- $ 2,463
Allowable portion of the allowance for loan losses 4,338 3,817
Allowable portion of subordinated debt 3,500 3,500
-------- --------
Total Tier 2 Capital $ 7,838 $ 9,780
======== ========
Total Capital $ 55,267 $ 39,927
Risk-weighted assets $412,993 $375,981
CAPITAL RATIOS
"ADEQUATELY "WELL
CAPITALIZED" CAPITALIZED"
JUNE 30, 2002 DECEMBER 31, 2001 RATIOS RATIOS
------------- ----------------- ------ ------
Total risk-based capital/risk-weighted assets 13.38% 10.62% 8.00% 10.00%
Tier 1 capital/risk-weighted assets 11.48% 8.02% 4.00% 6.00%
Tier 1 capital/average assets (leverage ratio) 9.55% 6.83% 4.00% 5.00%
25
INTEREST RATE SENSITIVITY
We are subject to the interest rate risk inherent in our lending, investing
and financing activities. Fluctuations in interest rates will impact both the
interest income/expense and market value of all interest-earning assets and
interest-bearing liabilities, other than those with a short term to maturity.
The primary objective in managing interest rate risk is to minimize the
adverse impact of changes in interest rates on our net interest income while
creating an asset/liability structure that maximizes earnings. The Asset
Liability Management Committee actively monitors and manages our interest rate
exposure using gap analysis and simulation models. Simulation models require
significant assumptions about future business trends and interest rates.
Gap analysis measures the difference between volumes of interest
rate-sensitive assets and liabilities and quantifies these repricing differences
for various time intervals. Static gap analysis depicts interest sensitivity at
a point in time. However, it alone does not accurately measure the magnitude of
changes in net interest income because changes in interest rates do not always
impact assets and liabilities at the same time or in the same magnitude.
Furthermore, gap analysis does not consider future growth, changes in asset and
liability composition or market conditions.
A positive gap results when the amount of interest rate-sensitive assets
exceeds interest rate-sensitive liabilities repricing within the relevant time
period and, generally means that the institution will benefit during periods of
rising interest rates. A negative gap results when the amount of interest
rate-sensitive liabilities exceeds interest rate-sensitive assets repricing
within the relevant time period and, generally means that the institution will
benefit during periods of falling interest rates. As depicted in the table
below, we have a cumulative positive gap within the one-year time interval.
WITHIN 4 TO 6 7 MONTHS 1 TO 3 3 TO 5 AFTER
JUNE 30, 2002 3 MONTHS MONTHS TO 1 YEAR YEARS YEARS 5 YEARS TOTAL
(DOLLARS IN THOUSANDS)
-------- --------- --------- --------- -------- -------- --------
Assets
Short-term investments $ 44,775 $ -- $ -- $ -- $ -- $ -- $ 44,775
Interest-bearing deposits 4,292 -- -- -- -- -- 4,292
Investment securities 14,725 1,653 2,054 5,886 3,873 57,109 85,300
Loans, net of deferred fees 44,128 24,230 34,147 106,383 133,723 10,814 353,425
-------- --------- --------- --------- -------- -------- --------
Total interest rate-sensitive assets $107,920 $ 25,883 $ 36,201 $ 112,269 $137,596 $ 67,923 $487,792
======== ========= ========= ========= ======== ======== ========
Total cumulative assets $107,920 $ 133,803 $ 170,004 $ 282,273 $419,869 $487,792
======== ========= ========= ========= ======== ========
Liabilities
Interest checking, money market
and savings accounts $ 7,644 $ 5,733 $ 11,465 $ 114,574 $ 38,218 $ 13,454 $191,088
Time deposits 30,939 25,462 46,431 53,243 26,658 -- 182,733
Short-term borrowings 19,513 -- -- -- -- -- 19,513
Long-term borrowings -- -- -- -- -- 30,000 30,000
Subordinated debt 2,000 -- 1,500 -- -- -- 3,500
-------- --------- --------- --------- -------- -------- --------
Total interest rate-sensitive $ 60,096 $ 31,195 $ 59,396 $ 167,817 $ 64,876 $ 43,454 $426,834
======== ========= ========= ========= ======== ======== ========
liabilities
Total cumulative liabilities $ 60,096 $ 91,291 $ 150,687 $ 318,504 $383,380 $426,834
======== ========= ========= ========= ======== ========
Gap during period $ 47,824 $ (5,312) $ (23,195) $ (55,548) $ 72,720 $ 24,469 $ 60,958
======== ========= ========= ========= ======== ======== ========
Cumulative gap $ 47,824 $ 42,512 $ 19,317 $ (36,231) $ 36,489 $ 60,958
======== ========= ========= ========= ======== ========
Cumulative gap as a percentage of:
Interest earning assets 9.80% 8.72% 3.96% (7.43%) 7.48% 12.50%
Total assets 9.30% 8.27% 3.76% (7.05%) 7.10% 11.86%
26
We use two different simulation models to measure and monitor interest rate
risk. One model is a licensed software program that is run internally and
incorporates all of management's assumptions including future growth. The other
is a program developed by an outside consulting firm utilizing data we supply
(the "consulting model"), and considers only the existing composition and
characteristics of the balance sheet without giving effect to anticipated future
growth and interest rate changes. Although management has and expects to
continue to grow interest-sensitive assets and liabilities, its assumptions
about future growth and interest rates are excluded from the consulting model.
Management believes that this approach provides a more conservative measure of
our interest rate risk because assumed growth at current market interest rates
tends to lessen the effects of rate changes in simulation models in the
short-term.
Actual results may differ from simulated results due to various factors
including the time and magnitude of interest rate changes, changes in customer
behavior, effects of competition, and other factors. These variables influence
the interest-rate spread and product mix. The consulting model predicts a base
net interest income amount that is larger than that actually earned in the past
12 months or last fiscal year. This is principally the result of an actual
increase in earning assets over the past year, which created a larger starting
point for the next 12-month projection. Past experience drives many of the
assumptions used in the models. Actual results could vary substantially if our
future performance differs from past experience.
NET INTEREST
CHANGE IN INTEREST RATES INCOME DOLLAR CHANGE PERCENT CHANGE
------------------------ ------ ------------- --------------
(DOLLARS IN THOUSANDS)
+200 Basis Points $ 17,263 $ 6 0.03%
+100 Basis Points 17,268 11 0.06%
Flat Rate 17,257 - -
-100 Basis Points 17,143 (114) -0.66%
-200 Basis Points 16,998 (259) -1.50%
The table below summarizes estimated changes in net interest income over a
twelve-month period beginning July 1, 2002, under alternate interest rate
scenarios using the consulting model described above.
Simulation models require assumptions about certain categories of assets
and liabilities. The models schedule existing assets and liabilities by their
contractual maturity, estimated likely call date, or earliest repricing
opportunity. Mortgage-backed securities and amortizing loans are scheduled based
on their anticipated cash flow including estimated prepayments. For investment
securities, we use a third party service to provide cash flow estimates in the
various rate environments. Savings accounts, including passbook, statement
savings, money market, and interest checking accounts, do not have a stated
maturity or repricing term and can be withdrawn or repriced at any time. This
may impact the margin if more expensive alternative sources of deposits are
required to fund loans or deposit runoff. Management projects the repricing
characteristics of these accounts based on historical performance and
assumptions that it believes reflect their rate sensitivity. The consulting
model reinvests all maturities, repayments and prepayments for each type of
asset or liability into the same product for a new like term. As a result, the
mix of interest-earning assets and interest bearing-liabilities is held
constant.
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. Our primary sources of funds are deposits, proceeds from
principal and interest payments on loans and investments, sales of investment
securities AFS 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. Deposit growth within the
banking industry has been generally slow due to strong competition from a
variety of financial services companies. Competition for deposits may require
banks to increase rates on deposits or expand their branch office networks to
adequately grow deposits in the future.
27
For the six months ended June 30, 2002, cash and cash equivalents increased
$39,468,000. Operating and financing activities provided cash and cash
equivalents of $3,121,000 and $60,124,000, respectively, while investing
activities used $23,777,000. The cash provided by financing activities was
primarily from a $47,420,000 increase in deposits. Net proceeds from our
preferred stock offering provided $12,345,000. Other significant sources of cash
included principal repayments on loans and mortgage-backed securities and sales
of investment securities. Together, this cash was used to finance loan growth of
$39,080,000.
For the six months ended June 30, 2001, cash and cash equivalents increased
$8,280,000. Operating and financing activities provided cash and cash
equivalents of $783,000 and $45,018,000, respectively, while investing
activities used $37,521,000. The cash provided by financing activities was
primarily from increases in deposits and borrowings of $7,987,000 and
$36,790,000, respectively. Other significant sources of cash included principal
repayments on loans and mortgage-backed securities and sales of investment
securities. Together, this cash was primarily used for loan originations and
purchases of investment securities. For the six months ended June 30, 2001,
loans grew $33,192,000. Investments grew $4,422,000 during the six months ended
June 30, 2001, exclusive of the change in unrealized losses on investment
securities AFS.
We monitor our liquidity position on a daily basis. We use overnight
federal funds and interest-bearing deposits in other banks to absorb daily
excess liquidity. Conversely, overnight federal funds may be purchased to
satisfy daily liquidity needs. Federal funds are sold or purchased through a
correspondent bank, which diversifies the holdings to an approved group of
commercial banks throughout the country. If the bank requires funds beyond its
ability to generate them internally, additional sources of funds are available
through use of a $6,000,000 unsecured federal funds line of credit with its
correspondent bank, and its $99,342,000 borrowing limit at the FHLB. The bank
could also sell or borrow against certain investment securities. At June 30,
2002, the bank had available borrowing capacity of $58,042,000 and $6,000,000
with the FHLB and a correspondent bank, respectively.
DERIVATIVE FINANCIAL INSTRUMENTS
We have limited involvement with derivative financial instruments and
currently use them only in relation to Premier Bank's Index Powered SM
Certificate of Deposit (IPCD) product. The IPCD, which was introduced in the
first quarter 2001, contains an embedded derivative feature that provides a
potential return to the depositor based on a formula that is dependent on the
return of the Standard & Poor's 500(R) Index. This innovative 5-year term
deposit product allows the customer to receive a return that is based on an
equity market index in place of a stated interest rate but, like other
traditional certificates of deposit, is insured in its principal amount by the
FDIC to the extent provided by law.
We entered into derivative contracts with the FHLB in order to offset the
risks associated with the variable cost of the IPCD. Under the terms of these
derivative contracts, Premier Bank will receive an amount equal to the amount to
be paid to the IPCD depositor, in exchange for a periodic payment stream
expressed as a rate of interest.
The derivative contracts with the FHLB and the derivatives embedded in the
IPCD are accounted for in accordance with Statement No. 133, "Accounting for
Derivative Instruments and Hedging Activities", as amended. Accordingly, PBI
carries these derivatives at fair value in the Consolidated Balance Sheets and
recognizes any changes in fair value in current period earnings.
The notional amount of derivative contracts was $16,098,000 and $10,905,000
at June 30, 2002 and December 31, 2001, respectively. The fair value of
derivatives is included in "Other liabilities" and approximated $2,773,000 and
$2,055,000 at June 30, 2002 and December 31, 2001, respectively. During the
three and six months ended June 30, 2002 approximately $115,000 and $95,000,
respectively, was recorded in other expense for net changes in the fair value of
derivatives compared to $15,000 and $22,000 in expense for the three and six
months ended June 30, 2001, respectively. The fair value adjustments are due to
changes in prevailing interest rates and the resulting valuations of future
payments due the FHLB.
28
RECENT ACCOUNTING PRONOUNCEMENTS
Goodwill and Other Intangible Assets
In June 2001, the FASB issued Statement No. 142, "Goodwill and Other
Intangible Assets." The Statement addresses financial accounting and reporting
for acquired goodwill and other intangible assets and supersedes APB Opinion No.
17, "Intangible Assets." It addresses how intangible assets that are acquired
individually or with a group of other assets (but not those acquired in a
business combination) should be accounted for in financial statements upon their
acquisition. The Statement also addresses how goodwill and other intangible
assets should be accounted for after they have been initially recognized in the
financial statements.
The provisions of the Statement are required to be applied starting with
fiscal years beginning after December 15, 2001, except that goodwill and
intangible assets acquired after June 30, 2001, will be subject immediately to
the nonamortization and amortization provisions of the Statement. Early
application is permitted for entities with fiscal years beginning after March
15, 2001, provided that the first interim financial statements have not
previously been issued. The Statement is required to be applied at the beginning
of an entity's fiscal year and to be applied to all goodwill and other
intangible assets recognized in its financial statements at that date. There was
no impact on earnings, financial condition, or equity upon adoption of Statement
No. 142 on January 1, 2002.
Asset Retirement Obligations
In June 2001, the FASB issued Statement No. 143, "Accounting for Asset
Retirement Obligations." This Statement addresses financial accounting and
reporting for obligations associated with the retirement of tangible long-lived
assets and the associated asset retirement costs. It applies to legal
obligations associated with the retirement of long-lived assets that result from
the acquisition, construction, development and (or) the normal operation of a
long-lived asset, except for certain obligations of lessees. As used in this
Statement, a legal obligation is an obligation that a party is required to
settle as a result of an existing or enacted law, statute, ordinance, or written
or oral contract or by legal construction of a contract under the doctrine of
promissory estoppel. This Statement requires that the fair value of a liability
for an asset retirement obligation be recognized in the period in which it is
incurred if a reasonable estimate of fair value can be made. The associated
asset retirement costs are capitalized as part of the carrying amount of the
long-lived asset.
This Statement amends FASB Statement No. 19, "Financial Accounting and
Reporting by Oil and Gas Producing Companies," and it applies to all entities.
It is effective for financial statements issued for fiscal years beginning after
June 15, 2002. Earlier application is encouraged. There is no expected impact on
earnings, financial condition, or equity upon adoption of Statement No. 143.
Impairment or Disposal of Long-Lived Assets
In August 2001, the FASB issued Statement No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." This Statement addresses financial
accounting and reporting for the impairment or disposal of long-lived assets and
supersedes Statement No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of." However, the Statement
retains the fundamental provisions of Statement No. 121 for (a) recognition and
measurement of the impairment of long-lived assets to be held and used and (b)
measurement of long-lived assets to be disposed of by sale.
This Statement supersedes the accounting and reporting provisions of APB
Opinion No. 30, "Reporting the Results of Operations-Reporting the Effects of
Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently
Occurring Events and Transactions," for the disposal of a segment of a business.
However, this Statement retains the requirement of Opinion No. 30 to report
discontinued operations separately from continuing operations and extends that
reporting to a component of an entity that either has been disposed of (by sale,
by abandonment, or in distribution to owners) or is classified as held for sale.
This Statement also amends ARB No. 51, "Consolidated Financial Statements," to
eliminate the exception to consolidation for a temporarily controlled
subsidiary.
The provisions of this Statement are effective for financial statements
issued for fiscal years beginning after December 15, 2001 and interim periods
within those fiscal years, with earlier application encouraged. The provisions
of this Statement generally are to be applied prospectively. There was no impact
on earnings, financial condition, or equity upon adoption of Statement No. 144
on January 1, 2002.
29
Rescission of FASB Statements No. 4, 44, and 64
In April 2002, the FASB issued SFAS No. 145 "Rescission of FASB Statements
No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections." This Statement rescinds FASB Statement No. 4, Reporting Gains and
Losses from Extinguishment of Debt, and an amendment of that Statement, FASB
Statement No. 64, Extinguishments of Debt Made to Satisfy Sinking-Fund
Requirements, along with rescinding FASB Statement No. 44, Accounting for
Intangible Assets of Motor Carriers and amending FASB Statement No. 13,
Accounting for Leases. This Statement (1) eliminates an inconsistency between
the required accounting for sale-leaseback transactions and the required
accounting for certain lease modifications that have economic effects that are
similar to sale-leaseback transactions, (2) eliminates the extraordinary item
treatment of reporting gains and losses from extinguishment of debt, and (3)
makes certain other technical corrections.
The provisions of this Statement related to the rescission of Statement 4
shall be applied in fiscal years beginning after May 15, 2002. The provisions of
this Statement related to Statement 13 shall be effective for transactions
occurring after May 15, 2002. All other provisions of this Statement shall be
effective for financial statements issued on or after May 15, 2002. Early
application of this Statement is encouraged. There is no expected impact on
earnings, financial condition, or equity upon adoption of Statement No. 145.
Accounting for Costs Associated with Exit or Disposal Activities
In June 2002, the FASB issued SFAS No. 146 "Accounting for Costs Associated
with Exit or Disposal Activities." This Statement addresses financial accounting
and reporting for costs associated with exit or disposal activities and
nullifies Emerging Issues Task Force (EITF) Issue No. 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity (including Certain Costs Incurred in a Restructuring)."
The provisions of this Statement are effective for exit or disposal
activities that are initiated after December 31, 2002, with early application
encouraged. There is no expected impact on earnings, financial condition, or
equity upon adoption of Statement No. 146.
ITEM 3 -- QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information required herein is set forth in Item 2, above.
30
PART II -- OTHER INFORMATION
ITEM 1 -- LEGAL PROCEEDINGS
At June 30, 2002, there were no known material legal proceedings pending
against PBI, its subsidiaries or its property. In addition, no material
proceedings are known to be contemplated by government authorities against PBI,
its subsidiaries or its property.
ITEM 2 -- CHANGES IN SECURITIES AND USE OF PROCEEDS
None.
ITEM 3 -- DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4 -- SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5 -- OTHER INFORMATION
None.
ITEM 6 -- EXHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibits are incorporated by reference herein or attached to
this Form 10-Q:
3(i) Articles of Incorporation. (Incorporated by reference to
Exhibit 4.1 to PBI's Registration Statement No. 333-87420 on
Form S-2 filed with the SEC on May 2, 2002.)
3(ii) By-Laws. (Incorporated by reference to Exhibit 3(ii) to PBI's
Quarterly Report on Form 10-QSB filed with the SEC on November
14, 2000 and amended on December 19, 2000.)
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 and amended on September 9, 1997.)
10.2 Change of Control Agreement between Premier Bancorp, Inc.,
Premier Bank and John C. Soffronoff. (Incorporated by
reference to Exhibit 10.2 to our Quarterly Report on Form
10-QSB filed with the SEC on November 13, 1998.)
10.3 Change of Control Agreement between Premier Bancorp, Inc.,
Premier Bank and John J. Ginley. (Incorporated by reference to
Exhibit 10.3 to our Quarterly Report on Form 10-QSB filed with
the SEC on November 13, 1998.)
10.4 Change of Control Agreement between Premier Bancorp, Inc.,
Premier Bank and Bruce E. Sickel. (Incorporated by reference
to Exhibit 10.4 to our Quarterly Report on Form 10-QSB filed
with the SEC on November 13, 1998.)
11 Statement re: computation of per share earnings.
99.1 Certification of Principal Executive Officer and Principal
Financial Officer pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002, filed herewith.
(b) Reports on Form 8-K
(None)
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.
Registrant
DATE SIGNATURE
August 14, 2002 /s/ John C. Soffronoff
-----------------------------------
John C. Soffronoff
President, Chief Executive Officer,
Director
(Principal Executive Officer)
August 14, 2002 /s/ Bruce E. Sickel
-----------------------------------
Bruce E. Sickel
Chief Financial Officer, Director
(Principal Financial Officer)
INDEX OF EXHIBITS
Page
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3(i) Amended and Restated Articles of Incorporation. (Incorporated by reference to *
Exhibit 4.1 to PBI's Registration Statement No. 333-87420 on Form S-2 filed
with the SEC on May 2, 2002.)
3(ii) By-Laws. (Incorporated by reference to Exhibit 3(ii) to PBI's Quarterly
Report * on Form 10-QSB filed with the SEC on November 14, 2000 and
amended on December 19, 2000.)
10.1 Premier Bank's 1995 Incentive Stock Option Plan. (Incorporated by reference to *
Exhibit 99.6 to PBI's Registration Statement No. 333-34243 on Form S-4
filed with the SEC on August 22,1997 and amended on September 9, 1997.)
10.2 Change of Control Agreement between Premier Bancorp, Inc., Premier Bank and *
John C. Soffronoff. (Incorporated by reference to Exhibit 10.2 to PBI's Quarterly Report
on Form 10-QSB filed with the SEC on November 13, 1998.)
10.3 Change of Control Agreement between Premier Bancorp, Inc., Premier Bank and *
John J. Ginley. (Incorporated by reference to Exhibit 10.3 to PBI's Quarterly Report
on Form 10-QSB filed with the SEC on November 13, 1998.)
10.4 Change of Control Agreement between Premier Bancorp, Inc., Premier Bank and *
Bruce E. Sickel. (Incorporated by reference to Exhibit 10.4 to PBI's Quarterly Report
on Form 10-QSB filed with the SEC on November 13, 1998.)
11 Statement re: computation of per share earnings. 6
99.1 Certification of Principal Executive Officer and Principal Financial
Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002, filed herewith.
* Incorporated by reference.