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: SEPTEMBER 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 (IRS Employer Identification No.)
incorporation or organization)
379 NORTH MAIN STREET, DOYLESTOWN, PA 18901
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(Address of principal executive offices)
(215) 345-5100
--------------
(Registrant's telephone number)
N/A
----------------------------------------------------
(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.
Common stock: $0.33 par value; 3,342,415 shares issued and outstanding as
of October 31, 2002.
PART I - FINANCIAL INFORMATION
ITEM 1 -- FINANCIAL STATEMENTS
PREMIER BANCORP, INC.
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 2002
(UNAUDITED) DECEMBER 31, 2001
------------------- -----------------
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
ASSETS:
Cash and due from banks $ 24,113 $ 14,383
Short-term investments 33,817 14,137
Interest-bearing deposits 9,337 1,084
--------------- -----------------
Cash and cash equivalents 67,267 29,604
Investment securities:
Held to maturity (fair value $500 in 2002 and $500 in 2001) 500 500
Available for sale (amortized cost $166,933 in 2002 and $102,399 in 2001) 165,175 97,851
Loans receivable (net of allowance for loan losses of $4,133 in 2002
and $3,817 in 2001) 353,939 310,876
Loans held for sale 1,508 127
Other real estate owned - 475
Premises and equipment 4,489 4,598
Accrued interest receivable 3,031 2,939
Deferred income taxes 1,938 2,887
Other assets 1,529 712
--------------- -----------------
Total assets $ 599,376 $ 450,569
=============== =================
LIABILITIES, MINORITY INTEREST IN SUBSIDIARIES AND SHAREHOLDERS' EQUITY:
Deposits $ 434,347 $ 358,282
Borrowings 89,035 49,605
Accrued interest payable 2,916 4,554
Other liabilities 8,514 5,019
Subordinated debt 3,500 3,500
--------------- -----------------
Total liabilities 538,312 420,960
Corporation-obligated mandatorily redeemable capital securities of subsidiary
trusts holding solely junior subordinated debentures of the corporation 25,000 10,000
SHAREHOLDERS' EQUITY:
Preferred stock- no par value; 20,000,000 shares authorized; Series A Preferred
issued and outstanding 552,000 at September 30, 2002 and none at December 31, 2001 12,345 -
Common stock- $0.33 par value; 30,000,000 shares authorized; issued and
outstanding 3,342,415 at September 30, 2002 and 3,242,215 at December 31, 2001 1,139 1,070
Additional paid-in capital 12,545 12,085
Retained earnings 12,513 9,455
Treasury stock at cost; 109,858 shares at September 30, 2002 and none at December 31, 2001 (1,318) -
Accumulated other comprehensive loss (1,160) (3,001)
--------------- -----------------
Total shareholders' equity 36,064 19,609
--------------- -----------------
Total liabilities, minority interest in subsidiaries and shareholders' equity $ 599,376 $ 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 NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
2002 2001 2002 2001
------------- ------------- ----------- ------------
(UNAUDITED) (UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
INTEREST INCOME:
Loans $ 6,633 $ 5,783 $ 19,093 $ 16,575
Short-term investments and interest-bearing deposits 194 106 406 301
Investments:
Taxable 1,439 1,497 3,895 4,418
Tax-exempt 159 270 631 711
------------ ------------ ------------ ------------
Total interest income 8,425 7,656 24,025 22,005
INTEREST EXPENSE:
Deposits 3,179 3,586 9,758 11,252
Borrowings 640 611 1,688 1,266
------------ ------------ ------------ ------------
Total interest expense 3,819 4,197 11,446 12,518
------------ ------------ ------------ ------------
Net interest income 4,606 3,459 12,579 9,487
Provision for loan losses 245 179 770 518
------------ ------------ ------------ ------------
Net interest income after loan loss provision 4,361 3,280 11,809 8,969
NON-INTEREST INCOME:
Service charges and other deposit-related fees 104 84 294 241
Gain, net, on sale of investment securities
available for sale 85 3 124 -
Gain (loss) on sale of other real estate owned - - 33 (17)
Gain on sale of loans held for sale 14 7 39 32
Other fees 54 44 213 168
------------ ------------ ------------ ------------
Total non-interest income 257 138 703 424
NON-INTEREST EXPENSE:
Salaries and employee benefits 1,358 1,099 3,898 3,262
Occupancy 209 190 609 580
Data processing 293 233 842 716
Professional services 56 75 203 240
Marketing 83 92 236 316
Minority interest in expense of subsidiaries 230 219 666 655
Other 546 454 1,500 1,195
------------ ------------ ------------ ------------
Total non-interest expense 2,775 2,362 7,954 6,964
------------ ------------ ------------ ------------
Income before income tax 1,843 1,056 4,558 2,429
Income tax expense 581 266 1,351 610
------------ ------------ ------------ ------------
Net income $ 1,262 $ 790 $ 3,207 $ 1,819
============ ============ ============ ============
Less: Preferred stock dividends $ (149) $ - $ (149) $ -
------------ ------------ ------------ ------------
Net income applicable to common shareholders $ 1,113 $ 790 $ 3,058 $ 1,819
============ ============ ============ ============
EARNINGS PER COMMON SHARE:
Basic $ 0.33 $ 0.24 $ 0.91 $ 0.57
Diluted $ 0.32 $ 0.23 $ 0.87 $ 0.53
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING:
Basic 3,401,023 3,224,960 3,373,236 3,207,402
Diluted 3,524,628 3,478,243 3,500,077 3,430,627
The accompanying notes are an integral part of the consolidated financial
statements.
3
PREMIER BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS
ENDED SEPTEMBER 30,
(UNAUDITED)
------------------------
2002 2001
---- ----
(IN THOUSANDS)
OPERATING ACTIVITIES:
Net income $ 3,207 $ 1,819
Adjustments to reconcile net income to cash provided by operating activities:
Depreciation expense 358 393
Provision for loan losses 770 518
Amortization of premiums and discounts on investment securities available for sale 99 131
Gain on sales of investment securities available for sale (124) -
(Gain) loss on sales of other real estate owned (33) 17
Gain on sales of loans held for sale (39) (32)
Originations of loans held for sale (7,514) (5,572)
Proceeds from sales of loans held for sale 6,172 5,604
Increase in accrued interest receivable (92) (579)
Increase in other assets (817) (140)
Increase in deferred loan fees 199 320
(Decrease) increase in accrued interest payable (1,638) 610
Increase (decrease) in other liabilities 3,573 (1,574)
---------- ---------
Net cash provided by operating activities 4,121 1,515
---------- ---------
INVESTING ACTIVITIES:
Proceeds from sales of investment securities available for sale 54,288 24,161
Repayment of investment securities available for sale 8,688 8,265
Purchases of investment securities available for sale (127,485) (40,389)
Repayment of investment securities held to maturity - 3,528
Net increase in loans receivable (44,032) (51,289)
Proceeds from sales of other real estate owned 508 235
Purchases of premises and equipment (249) (183)
---------- ---------
Net cash used in investing activities (108,282) (55,672)
---------- ---------
FINANCING ACTIVITIES:
Net increase in deposits 76,065 31,952
Net increase in borrowings less than 90 days 9,430 5,033
Proceeds from borrowings greater than 90 days 30,000 30,000
Proceeds from the issuance of trust preferred securities 15,000 -
Net proceeds from preferred stock offering 12,345 -
Payment of preferred stock dividends (149) -
Purchases of treasury stock (1,318) -
Proceeds from exercised common stock options 451 241
---------- ---------
Net cash provided by financing activities 141,824 67,226
---------- ---------
Increase in cash and cash equivalents 37,663 13,069
Cash and cash equivalents:
Beginning of period 29,604 8,026
---------- ---------
End of period $ 67,267 $ 21,095
========== =========
Supplemental disclosures:
Cash payments for:
Interest expense $ 13,084 $ 11,908
Taxes 2,080 470
Supplemental disclosure of noncash activities:
Change in the estimated fair value of investment securities available for sale $ 2,790 $ 1,875
Change in deferred tax asset related to investment securities available for sale (949) (638)
Tax effect of exercised common stock options 78 187
Transfer of loans to other real estate owned - 475
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 elected financial
holding company status in December 2000. 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. Premier Bank's deposits are insured to the legal limits by 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, Premier Capital Trust II, 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 nine months ended September 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 $16,518,000 and $10,905,000
at September 30, 2002 and December 31, 2001, respectively. The fair value of
derivatives is included in "Other liabilities" and approximated $2,744,000 and
$2,055,000 at September 30, 2002 and December 31, 2001, respectively. During the
three and nine months ended September 30, 2002 approximately $84,000 and
$179,000, respectively, was recorded in other expense for net changes in the
fair value of derivatives compared to $61,000 and $83,000 in expense for the
three and nine months ended September 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
September 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 were excluded from
the calculation of earnings per diluted common share for the first and second
quarters of 2002. There were no anti-dilutive options for the third quarter
ended September 30, 2002. 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 first, second and third quarters of 2001.
Earnings per common share are reduced by the amount of preferred stock
dividends declared, if any. There were $149,000 in preferred stock dividends
declared and paid during the three and nine months ended September 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.
NET INCOME
APPLICABLE TO COMMON PER COMMON
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2002 COMMON SHAREHOLDERS SHARES SHARE AMOUNT
----------------------------------------------- --------------------- -------------------- ----------------
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
Basic earnings per common share $1,113 3,401,023 $ 0.33
Effect of dilutive common stock options - 123,605 (0.01)
------ --------- ------
Diluted earnings per common share $1,113 3,524,628 $ 0.32
====== ========= ======
NET INCOME
APPLICABLE TO COMMON PER COMMON
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2001 COMMON SHAREHOLDERS SHARES SHARE AMOUNT
----------------------------------------------- --------------------- -------------------- ----------------
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
Basic earnings per common share $ 790 3,224,960 $ 0.24
Effect of dilutive common stock options - 253,283 (0.01)
------ --------- ------
Diluted earnings per common share $ 790 3,478,243 $ 0.23
====== ========= ======
NET INCOME
APPLICABLE TO COMMON PER COMMON
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2002 COMMON SHAREHOLDERS SHARES SHARE AMOUNT
----------------------------------------------- --------------------- -------------------- ----------------
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
Basic earnings per common share $3,058 3,373,236 $ 0.91
Effect of dilutive common stock options - 126,841 (0.04)
------ --------- ------
Diluted earnings per common share $3,058 3,500,077 $ 0.87
====== ========= ======
NET INCOME
APPLICABLE TO COMMON PER COMMON
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2001 COMMON SHAREHOLDERS SHARES SHARE AMOUNT
----------------------------------------------- --------------------- -------------------- ----------------
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
Basic earnings per common share $1,819 3,207,402 $ 0.57
Effect of dilutive common stock options - 223,225 (0.04)
------ --------- ------
Diluted earnings per common share $1,819 3,430,627 $ 0.53
====== ========= ======
7
PREMIER BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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 NINE MONTHS ENDED
SEPTEMBER 30, 2002 SEPTEMBER 30, 2001 SEPTEMBER 30, 2002 SEPTEMBER 30, 2001
------------------ ------------------ ------------------ ------------------
(Dollars in thousands) (Dollars in thousands)
Net income $1,262 $ 790 $3,207 $1,819
Other comprehensive income, net of tax:
Unrealized gains on investment securities
available for sale:
Unrealized holding gains during the period 626 980 1,923 1,237
Reclassification adjustment for gains
included in net income (56) (2) (82) -
------ ------ ------ ------
Other comprehensive income, net of tax 570 978 1,841 1,237
------ ------ ------ ------
Comprehensive income $1,832 $1,768 $5,048 $3,056
====== ====== ====== ======
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
$0.2698 per share to preferred 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.
On October 7, 2002, PBI's board of directors approved a cash dividend of
$0.578125 per share or $319,000 to preferred shareholders of record on October
16, 2002. This dividend was paid on October 31, 2002 and represented payment for
the quarter August 1, 2002 through October 31, 2002.
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.
On October 22, 2002, PBI's board of directors announced the termination of
its stock repurchase program after the repurchase of 109,858 shares at an
average price of $12.00 per share during the third quarter of 2002. These stock
repurchases are presented as "Treasury stock" in the Consolidated Balance
Sheets.
8
PREMIER BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
9. CAPITAL SECURITIES
Capital securities totaled $25,000,000 at September 30, 2002 and were
comprised of two issues. Proceeds from the capital securities provide PBI with
additional Tier 1 and Tier 2 capital as determined by regulatory capital
guidelines.
On September 26, 2002, PBI's subsidiary, Premier Capital Trust II, issued
$15,000,000 of variable rate corporate securities due November 30, 2032. The
trust is a Delaware statutory business trust. PBI is the sole owner of the
trust. The trust used the proceeds from the capital securities to acquire
$15,000,000 in variable rate junior subordinated deferrable interest debentures
issued by PBI. The interest rate on both the capital securities and junior
subordinated debentures is based on the 90-day LIBOR index plus 345 basis
points. At September 30, 2002 the interest rate was 5.25%. The junior
subordinated debentures are the sole assets of the trust and payments under the
junior subordinated debentures are the sole revenue of the trust.
In August 1998, PBI Capital Trust issued $10,000,000 in 8.57% capital
securities due August 15, 2028.
9
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 nine months ended
September 30, 2002 as compared to the same periods in 2001 and changes in the
balance sheet from December 31, 2001 to September 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, Premier Capital Trust II,
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
10
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 and has significantly added to its
commercial lending staff.
PBI 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.
While our ultimate goal is loan growth, the development of a quality loan
portfolio requires significant time. During the third quarter of 2002, we
increased the investment portfolio by $67,324,000 due to excess liquidity from
deposit growth, new borrowings and proceeds from our trust preferred securities
issuance.
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 nine months ended September 30, 2002,
Lenders Abstract, LLC generated fee income of $29,000 and $115,000,
respectively.
In March 2002, we organized Premier Bank Insurance Services, LLC to
further diversify our products and services. This subsidiary primarily sells
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.
11
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-KSB 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-KSB 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 applicable to common shareholders of $1,113,000 or
$.32 earnings per common share on a diluted basis for the three months ended
September 30, 2002. This represents an increase of $323,000 or 41% from the net
income applicable to common shareholders of $790,000 or $.23 earnings per common
share on a diluted basis reported for the same period in 2001. Net interest
income was $1,147,000 higher in 2002 compared to 2001 due to a $119,381,000 or
30% increase in average interest-earning assets. Loans accounted for $77,776,000
of the growth in average interest-earning assets. During the third quarter of
2002 we recorded $172,000 in deferred fee income related to renegotiated loans
which was partially offset by $84,000 in interest income reversals on
non-accrual loans. Excluding these items, the net interest margin compressed by
6 basis points from 3.58% during the three months ended September 30, 2001 to
3.52% during the same period in 2002. The net interest spread, excluding
deferred fee income on renegotiated loans and interest income reversals on
non-accrual loans, increased by 16 basis points from 2.96% for the three months
ended September 30, 2001 to 3.12% for the three months ended September 30, 2002.
Non-interest income was $257,000 for the three months ended September 30, 2002
compared to $138,000 for the same period in 2001. Non-interest income was
$119,000 or 86% higher in 2002 due primarily to gains on the sales of investment
securities available for sale. Non-interest expenses were $2,775,000 for the
three months ended September 30, 2002 compared to $2,362,000 for the same period
in 2001. Non-interest expenses were $413,000 or 17% higher in 2002 due in part
to the overall growth of the company.
We reported net income applicable to common shareholders of $3,058,000 or
$.87 earnings per common share on a diluted basis for the nine months ended
September 30, 2002. This represents an increase of $1,239,000 or 68% from the
net income applicable to common shareholders of $1,819,000 or $.53 earnings per
common share on a diluted basis reported for the same period in 2001. Net
interest income was $3,092,000 higher in 2002 compared to 2001 due to a
$105,270,000 or 28% increase in average interest-earning assets, a wider net
interest rate spread and a
12
wider net interest margin. Loans accounted for $82,354,000 of the growth in
average interest-earning assets. During the nine months ended September 30, 2002
we recorded $172,000 in deferred fee income related to renegotiated loans which
was partially offset by $105,000 in interest income reversals on non-accrual
loans. Excluding these items, our net interest rate spread increased 33 basis
points from 2.83% for the nine months ended September 30, 2001 to 3.16% for the
same period in 2002. Our net interest margin, excluding deferred fee income on
renegotiated loans and interest income reversals on non-accrual loans, increased
7 basis points from 3.52% for the nine months ended September 30, 2001 to 3.59%
for the same period in 2002. Non-interest income was $703,000 for the nine
months ended September 30, 2002 compared to $424,000 the same period in 2001.
Non-interest income was $279,000 or 66% 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 $7,954,000 for the nine months
ended September 30, 2002 compared to $6,964,000 for the same period in 2001.
Non-interest expenses were $990,000 or 14% higher in 2002 due in part to the
overall growth of the company.
Return on average assets and return on average equity on an annualized
basis are presented in the following table for the three and nine months ended
September 30, 2002 and 2001.
FOR THE THREE MONTHS FOR THE NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
2002 2001 2002 2001
---------- ---------- ---------- ----------
Return on Average Assets (1) 0.81% 0.76% 0.82% 0.63%
Return of Average Common Equity (2) 18.61% 16.50% 18.49% 13.53%
Return of Average Common Equity,
excluding SFAS 115 valuation allowance (3) 17.64% 14.56% 16.88% 11.67%
------------------------------------
(1) Calculated as net income after preferred stock dividends divided by
average assets.
(2) Calculated as net income after preferred stock dividends divided by
average total equity less prefered stock.
(3) Calculated as net income after preferred stock dividends divided by
average total equity less preferred stock plus unrealized loss on
AFS securities.
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 nine months
ended September 30, 2002 were 7.42% and 7.47%, respectively, compared to 8.28%
and 8.54%, respectively, for the three and nine months ended September 30, 2001.
Similarly, the yields on average investments for the three and nine months ended
September 30, 2002 were 5.74% and 6.15%, respectively, compared to 6.83% and
6.93%, respectively, for the three and nine months ended September 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 4.78% for the three months ended September 30, 2001 to 3.32% for
same period in 2002 and from 5.16% for the nine months ended September 30, 2001
to 3.61% 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.
13
For the three and nine months ended September 30, 2002, net interest
income, on a tax-equivalent basis, was $1,093,000 and $3,065,000 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. In addition, net interest income
for the three and nine months ended September 30, 2002 was positively impacted
by the net of deferred fees on renegotiated loans and interest income reversals
on non-accrual loans. These items added $88,000 and $67,000 to interest income
on loans for the three and nine months ended September 30, 2002, respectively.
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 $119,381,000 or 30% from $400,285,000
for the three months ended September 30, 2001 to $519,666,000 for the three
months ended September 30, 2002. Average loan balances, average interest-bearing
deposits, average short-term investments, and average investment balances
increased $77,776,000, $24,630,000, $11,627,000 and $5,348,000, respectively.
The ratio of average interest-earning assets to average interest-bearing
liabilities decreased from 115.03% for the three months ended September 30, 2001
to 113.75% for the three months ended September 30, 2002. The yield on average
interest-earning assets and the rate on average interest-bearing liabilities
decreased 123 basis points and 146 basis points, respectively, due to the
decline in overall interest rates in 2001. Excluding deferred fee income on
renegotiated loans and interest income reversals on non-accrual loans, the yield
on interest earning assets decreased 130 basis points. 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, the change in
deposit mix and new long-term borrowings at lower rates. Short-term borrowings
and subordinated debt also repriced lower in 2002.
The net interest margin on a tax equivalent basis was virtually unchanged
at 3.59% for the three months ended September 30, 2002 compared to 3.58% for the
same period in 2001. Excluding deferred fee income on renegotiated loans and
interest income reversals on non-accrual loans, the net interest margin
compressed by 6 basis points to 3.52% for the three months ended September 30,
2002. The net interest rate spread increased 23 basis points from 2.96% for the
three months ended September 30, 2001 to 3.19% for the same period in 2002.
Excluding deferred fee income on renegotiated loans and interest income
reversals on non-accrual loans, the net interest rate spread improved 16 basis
points to 3.12% during the three months ended September 30, 2002.
Average interest-earning assets grew $105,270,000 or 28% from $375,095,000
for the nine months ended September 30, 2001 to $480,365,000 for the nine months
ended September 30, 2002. Average loan balances, average interest-bearing
deposits and average short-term investments increased $82,354,000, $14,281,000
and $9,069,000, respectively. The ratio of average interest-earning assets to
average interest-bearing liabilities decreased from 115.59% for the nine months
ended September 30, 2001 to 113.38% for the nine months ended September 30,
2002. The yield on average interest-earning assets and the rate on average
interest-bearing liabilities decreased 120 basis points and 155 basis points,
respectively, due to the decline in overall interest rates in 2001. Excluding
deferred fee income on renegotiated loans and interest income reversals on
non-accrual loans, the yield on interest earning assets decreased 122 basis
points. 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, the change in deposit mix and new long-term borrowings at lower
rates. Short-term borrowings and subordinated debt also repriced lower in 2002.
The net interest margin on a tax equivalent basis increased 9 basis points
from 3.52% for the nine months ended September 30, 2001 to 3.61% for the same
period in 2002. Excluding deferred fee income on renegotiated loans and interest
income reversals on non-accrual loans, the net interest margin increased by 7
basis points to 3.59% for the nine months ended September 30, 2002. The net
interest rate spread increased 35 basis points from 2.83% for the nine months
ended September 30, 2001 to 3.18% for the same period in 2002. Excluding
deferred fee income on renegotiated loans and interest income reversals on
non-accrual loans, the net interest rate spread improved 33 basis points to
3.16% during the nine months ended September 30, 2002.
14
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 SEPTEMBER 30,
-----------------------------------------------------------------------
2002 2001
------------------------------- ----------------------------------
AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE INTEREST RATE BALANCE INTEREST RATE
------- -------- ------- ------- -------- --------
(Dollars in thousands
Assets:
Short-term investments $ 22,287 $ 92 1.64% $ 10,660 $ 94 3.50%
Interest-bearing deposits 25,931 102 1.56% 1,301 12 3.66%
Investment securities available for sale
Taxable (1) 102,944 1,432 5.52% 86,036 1,434 6.61%
Tax-exempt (1) (2) 12,667 240 7.52% 20,795 409 7.80%
Investment securities held to maturity 500 7 5.55% 3,932 63 6.36%
-------- ------ ----- -------- ------ ----
Total investment securities 116,111 1,679 5.74% 110,763 1,906 6.83%
Loans, net of unearned income (3) (4) 355,337 6,649 7.42% 277,561 5,795 8.28%
-------- ------ ----- -------- ------ ----
Total interest-earning assets 519,666 8,522 6.51% 400,285 7,807 7.74%
Cash and due from banks 19,115 7,346
Allowance for loan losses (4,377) (3,456)
Other assets (5) 9,566 9,740
-------- --------
Total assets $543,970 $413,915
======== ========
Liabilities, minority interest in subsidiaries
and shareholders' equity:
Interest checking $137,845 986 2.84% $ 29,292 192 2.60%
Money market deposit accounts 16,918 97 2.27% 19,450 151 3.08%
Savings accounts 50,510 286 2.25% 44,878 323 2.86%
Time deposits 185,583 1,810 3.87% 202,187 2,920 5.73%
-------- ------ ----- -------- ------ ----
Total interest-bearing deposits 390,856 3,179 3.23% 295,807 3,586 4.81%
Short-term borrowings 21,418 41 0.76% 20,685 134 2.57%
Long-term borrowings 41,087 550 5.31% 30,000 449 5.94%
Subordinated debt 3,500 49 5.55% 1,500 28 7.41%
-------- ------ ----- -------- ------ ----
Total borrowings 66,005 640 3.85% 52,185 611 4.65%
-------- ------ ------ -------- ------ ----
Total interest-bearing liabilities 456,861 3,819 3.32% 347,992 4,197 4.78%
Non interest-bearing deposits 31,118 26,646
Other liabilities 7,797 7,746
Capital securities 10,815 10,000
Shareholders' equity (6) 37,379 21,531
-------- --------
Total liabilities, minority interest in
subsidiaries and shareholders' equity $543,970 $413,915
======== ========
Net interest income/rate spread $4,703 3.19% $3,610 2.96%
====== ===== ====== ====
Net interest margin (7) 3.59% 3.58%
Average interest-earning assets as a percentage
of average interest-bearing liabilities 113.75% 115.03%
-------------------
(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 $3,610,000 and $244,000 on average for the
three months ended September 30, 2002 and 2001, respectively.
(4) Includes tax-exempt loans of $2,202,000 and $2,416,000 on average for the
three months ended September 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
AVERAGE BALANCES, RATES AND INTEREST INCOME AND EXPENSE SUMMARY
FOR THE NINE MONTHS ENDED SEPTEMBER 30,
-----------------------------------------------------------------------
2002 2001
------------------------------- ----------------------------------
AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE INTEREST RATE BALANCE INTEREST RATE
------- -------- ------- ------- -------- --------
(Dollars in thousands)
Assets:
Short-term investments $17,316 $ 229 1.77% $ 8,247 $ 276 4.47%
Interest-bearing deposits 15,081 177 1.57% 800 25 4.18%
Investment securities available for sale
Taxable (1) 88,181 3,873 5.87% 81,834 4,175 6.82%
Tax-exempt (1) (2) 16,824 956 7.60% 18,789 1,077 7.66%
Investment securities held to maturity 500 22 5.88% 5,316 243 6.11%
-------- ------- ---- -------- ------- ----
Total investment securities 105,505 4,851 6.15% 105,939 5,495 6.93%
Loans, net of unearned income (3) (4) 342,463 19,142 7.47% 260,109 16,610 8.54%
-------- ------- ---- -------- ------- ----
Total interest-earning assets 480,365 24,399 6.79% 375,095 22,406 7.99%
Cash and due from banks 15,816 6,769
Allowance for loan losses (4,171) (3,248)
Other assets (5) 9,837 9,703
-------- --------
Total assets $501,847 $388,319
======== ========
Liabilities, minority interest in subsidiaries
and shareholders' equity:
Interest checking $110,297 2,334 2.83% $ 26,752 512 2.56%
Money market deposit accounts 16,725 287 2.29% 18,552 518 3.73%
Savings accounts 48,268 807 2.24% 43,464 1,028 3.16%
Time deposits 192,241 6,330 4.40% 200,409 9,194 6.13%
-------- ------- ---- -------- ------- ----
Total interest-bearing deposits 367,531 9,758 3.55% 289,177 11,252 5.20%
Short-term borrowings 18,914 108 0.76% 18,140 487 3.59%
Long-term borrowings 33,736 1,433 5.68% 15,678 696 5.94%
Subordinated debt 3,500 147 5.62% 1,500 83 7.40%
-------- ------- ---- -------- ------- ----
Total borrowings 56,150 1,688 4.02% 35,318 1,266 4.79%
-------- ------- ---- -------- ------- ----
Total interest-bearing liabilities 423,681 11,446 3.61% 324,495 12,518 5.16%
Non interest-bearing deposits 30,116 25,517
Other liabilities 8,831 7,472
Capital securities 10,275 10,000
Shareholders' equity (6) 28,944 20,835
-------- --------
Total liabilities, minority interest in
subsidiaries and shareholders' equity $501,847 $388,319
======== ========
Net interest income/rate spread $12,953 3.18% $ 9,888 2.83%
======= ==== ======= ====
Net interest margin (7) 3.61% 3.52%
Average interest-earning assets as a percentage
of average interest-bearing liabilities 113.38% 115.59%
-------------------
(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 $2,876,000 and $132,000 on average for the
nine months ended September 30, 2002 and 2001, respectively.
(4) Includes tax-exempt loans of $2,232,000 and $1,543,000 on average for the
nine months ended September 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.
16
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 September 30, 2002, non-interest income was
$257,000 or $119,000 higher than the $138,000 recorded during the same period in
2001. During 2002, we recorded $85,000 in gains on the sale of investment
securities available for sale compared to $3,000 in 2001. Service charges and
other deposit-related fees were $20,000 higher for the three months ended
September 30, 2002 compared to the same period in 2001.
For the nine months ended September 30, 2002, non-interest income was
$703,000 or $279,000 higher than the $424,000 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
$329,000 or 88% in 2002. Of this increase, $53,000 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
$18,000 higher in 2002 due to greater volume. During 2002 we recorded $124,000
in gains on the sale of investment securities available for sale compared to no
gains 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 September 30, 2002, non-interest expenses were
$2,775,000 or $413,000 higher than the $2,362,000 recorded during the same
period in 2001. For the nine months ended September 30, 2002, non-interest
expenses were $7,954,000 or $990,000 higher than the $6,964,000 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 $259,000 or 24% higher in the third quarter of
2002 compared to the same period in 2001. This increase was principally due to
an increase in the number of employees, salary adjustments and higher health
insurance costs. The number of full-time equivalent employees grew from 78 at
September 30, 2001 to 90 at September 30, 2002. Data processing expenses
increased $60,000 primarily due to the growth of the company, variable costs
associated with item processing and account volumes, and new services. Other
expenses, which consist primarily of furniture and equipment expense, employee
travel, meals and entertainment, stationery, supplies, postage and Board of
Directors' fees, increased $92,000 or 20% compared to the third quarter of 2001.
Of this increase, $23,000 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 $636,000 or 19% higher for the nine months
ended September 30, 2002 compared to the same period in 2001. This increase was
principally due to an increase in the number of employees, salary adjustments
and higher health insurance costs. Data processing expenses increased $126,000
primarily due to the growth of the company, variable costs associated with item
processing and account volumes, and new services. Marketing expenses were
$80,000 lower in 2002 compared to the same period in 2001. Advertising expenses
were reduced because deposit growth exceeded expectations. Other expenses
increased $305,000 or 26% in 2002 compared to 2001. Of this increase, $96,000
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 allowance for loan losses is subject to
ongoing analysis of the loan portfolio, which considers current economic
conditions, actual loss experience, the current risk profile of the portfolio,
delinquency statistics, and the composition of loan types within the portfolio.
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.
17
The provision for loan losses was $245,000 and $770,000 for the three and
nine months ended September 30, 2002, respectively, compared to $179,000 and
$518,000 for the same periods in 2001. The amount of the loan loss provision for
the three and nine months ended September 30, 2002 was higher than the
comparable periods in 2001 primarily due to an increase in non-performing loans
and higher net charge offs. Non-performing loans totaled $5,123,000 at September
30, 2002 compared to $0 at September 30, 2001. Net charge-offs were $454,000 for
the nine months ended September 30, 2002 compared to $33,000 for the same period
in 2001.
The loan loss allowance as a percentage of total loans was 1.15% at
September 30, 2002 and 1.21% at September 30, 2001.
Income tax expense
We recorded a $581,000 tax provision representing an effective tax rate of
31.5% for the three months ended September 30, 2002 compared to $266,000 or
25.2% for the same period in 2001. We recorded a $1,351,000 tax provision
representing an effective tax rate of 29.6% for the nine months ended September
30, 2002 compared to $610,000 or 25.1% for the same period in 2001. The
effective tax rates for the three and nine months ended September 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. Our statutory federal tax rate is
34%.
FINANCIAL CONDITION
Consolidated assets grew $148,807,000 or 33% during the nine months ended
September 30, 2002 to $599,376,000. During this period we raised $27,345,000 in
new capital through the issuance of preferred stock and capital securities. This
new capital, together with a $76,065,000 increase in deposits, mostly interest
checking accounts, and a $30,000,000 increase in long-term FHLB advances, funded
our asset growth. Investments, total gross loans and cash and cash equivalents
grew $67,324,000, $43,578,000 and $37,663,000, respectively, during the nine
months ended September 30, 2002.
Shareholders' equity increased $16,455,000 from $19,609,000 at
December 31, 2001 to $36,064,000 at September 30, 2002. This increase was
attributable to $12,345,000 in net proceeds from the sale of preferred stock,
$3,058,000 in earnings after preferred stock dividends, a $1,841,000 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. Shareholders'
equity was reduced by $1,318,000 due to the repurchase of common stock.
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 September 30, 2002 totaled
$165,675,000 or 28% of total assets. At September 30, 2002 approximately 56% of
the investment portfolio was comprised of mortgage-backed securities that
amortize and provide monthly cash flow. Corporate bonds and municipal bonds
comprised 31% and 7% of the investment portfolio, respectively. At September 30,
2002, approximately 61% 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. During the third quarter of 2002, we purchased of $101,515,000 of AFS
investments using the proceeds from our two recent capital initiatives and
excess liquidity from deposit growth and new long-term borrowings. Investment
purchases were concentrated in mortgage-backed securities and corporate bonds.
During the third quarter of 2002 we also sold $19,929,000 in AFS securities at a
net gain of $85,000. The majority of these gains were recognized from the sales
of certain mortgage-backed securities in order to lower our prepayment exposure.
For the nine months ended September 30, 2002 investment purchases and
sales totaled $127,485,000 and $54,104,000, respectively. Net gains on sales of
AFS securities were $124,000 for the nine months ended September 30, 2002.
18
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 Consolidated Balance Sheets with an adjustment
to equity, net of tax, that is presented in the caption "Accumulated other
comprehensive income (loss)."
At September 30, 2002, the AFS portfolio had an estimated market
depreciation of $1,758,000 before tax and an equity adjustment of $1,160,000,
net of tax. This represents a $1,841,000 improvement in the estimated fair value
of AFS securities, net of tax, over the prior year-end primarily due to the
lower rate environment. The market depreciation is concentrated in a sector of
the bank's corporate bond portfolio comprised of long-term trust preferred
securities issued by other financial institutions. These trust preferred
securities had an unrealized loss of $2,983,000 at September 30, 2002. The
market continues to discount these corporate bonds due to perceived credit risk.
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.
INVESTMENT PORTFOLIO
SEPTEMBER 30, 2002
------------------------------------------------------
HELD TO MATURITY AVAILABLE FOR SALE
----------------------- ------------------------
AMORTIZED ESTIMATED AMORTIZED ESTIMATED
COST FAIR VALUE COST FAIR VALUE
--------- ---------- --------- ----------
(In thousands)
Mortgage-backed securities $ - $ - $ 92,276 $ 93,274
Municipal securities - - 11,214 11,441
Equity securities - - 3,584 3,584
Mutual funds - - 5,000 5,000
Corporate bonds - - 54,749 51,766
Other debt securities 500 500 110 110
---- ---- -------- --------
Total $500 $500 $166,933 $165,175
==== ==== ======== ========
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
==== ==== ========= =======
19
Loans
Gross loans increased $43,578,000 or 14% from $316,066,000 at December 31,
2001 to $359,644,000 at September 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
SEPTEMBER 30, 2002 DECEMBER 31, 2001
-------------------------------- --------------------------------
AMOUNT % OF TOTAL AMOUNT % OF TOTAL
--------------- --------------- --------------- ---------------
(Dollars in thousands)
Real estate-farmland $ 200 0.06% $ 214 0.07%
Real estate-construction 10,291 2.86% 15,911 5.03%
Real estate-residential 33,283 9.26% 30,188 9.55%
Real estate-multifamily 20,135 5.60% 15,011 4.75%
Real estate-commercial 246,944 68.66% 208,412 65.94%
Commercial 47,737 13.27% 45,238 14.31%
Consumer 1,054 0.29% 1,092 0.35%
-------- ------ -------- ------
Total loans 359,644 100.00% 316,066 100.00%
====== ======
Less:
Deferred loan fees (1,572) (1,373)
Allowance for loan losses (4,133) (3,817)
-------- --------
Total loans, net $353,939 $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. Independent loan
reviewers determine borrower risk ratings at the inception of each loan and
monitor/update 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.
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
20
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 September 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
December 31, 2001 or September 30, 2002.
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
SEPTEMBER 30, 2002 DECEMBER 31, 2001 SEPTEMBER 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 $ 1 0.06% $ 2 0.07% $ 2 0.07%
Real estate-construction 99 2.86% 115 5.03% 65 3.71%
Real estate-residential 321 9.26% 266 9.55% 240 9.59%
Real estate-multi-family 169 5.60% 103 4.75% 71 4.23%
Real estate-commercial 2,492 68.66% 2,338 65.94% 1,795 68.22%
Commercial 1,041 13.27% 982 14.31% 730 13.76%
Consumer 10 0.29% 11 0.35% 12 0.42%
Unallocated - - - - 602 -
------ ------ ------ ------ ------ ------
Total $4,133 100.00% $3,817 100.00% $3,517 100.00%
====== ====== ====== ====== ====== ======
At September 30, 2002, the allowance for loan losses totaled $4,133,000 or
1.15% of total loans compared to 1.21% and 1.21% at December 31, 2001 and
September 30, 2001, respectively. We charged $454,000 in loan losses against the
allowance for loan losses during the nine months ended September 30, 2002.
$450,000 of total 2002 loan losses related to one borrower.
21
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 NINE FOR THE FOR THE NINE
MONTHS ENDED YEAR ENDED MONTHS ENDED
SEPTEMBER 30, 2002 DECEMBER 31, 2001 SEPTEMBER 30, 2001
-------------------- ---------------------- ----------------------
(Dollars in thousands)
Balance at beginning of period $ 3,817 $ 3,032 $ 3,032
Charge-offs
Real estate-commercial 295 29 29
Commercial 159 4 4
-------- -------- --------
Total charge-offs 454 33 33
Recoveries - - -
-------- -------- --------
Net charge-offs 454 33 33
Provision for loan losses 770 818 518
-------- -------- --------
Balance at end of period $ 4,133 $ 3,817 $ 3,517
======== ======== ========
Total gross loans:
Average $344,146 $271,318 $261,148
End of period $359,644 $316,066 $290,226
Ratios:
Net charge-offs to:
Average loans 0.13% 0.01% 0.01%
Loans at end of period 0.13% 0.01% 0.01%
Allowance for loan losses 10.98% 0.86% 0.94%
Provision for loan losses 58.96% 4.03% 6.37%
Allowance for loan losses to:
Total gross loans at end of period 1.15% 1.21% 1.21%
Non-performing loans 80.68% 142.05% N/M
---------------
(1) N/M stands for "not meaningful". There were no non-performing loans at
September 30, 2001.
22
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 .85% and .70% of total assets at September 30,
2002 and December 31, 2001, respectively.
NON-PERFORMING ASSETS
SEPTEMBER 30, 2002 DECEMBER 31, 2001
-------------------- -------------------
(Dollars in thousands)
Loans past due 90 days or more and accruing $ - $ -
Non-accrual loans 5,123 2,687
Other real estate owned - 475
------ ------
Total non-performing assets $5,123 $3,162
====== ======
Ratio of non-performing loans to total loans 1.42% 0.85%
Ratio of non-performing assets to total assets 0.85% 0.70%
During the third quarter of 2002 we placed a total of $2,710,000 in loans
on non-accrual and reversed a total of $84,000 in interest income. The
non-accrual/impaired loan balance was substantially comprised of two borrowers
with loans totaling $2,510,000 and $1,535,000 at September 30, 2002. At December
31, 2001 the non-accrual loan balance was substantially comprised of one
borrower with loans totaling $2,330,000. After a $450,000 charge-off in the
third quarter of 2002 and $345,000 in payments, this borrower remains on
non-accrual with a balance of $1,535,000 at September 30, 2002. During the third
quarter of 2002 we placed a $2,510,000 relationship on non-accrual and reversed
$61,000 in interest income related to it. This $2,510,000 relationship is
collateralized by three pieces of real estate.
The average balance of non-accrual/impaired loans was $3,610,000 for the
three months ended September 30, 2002. There was $1,000 and $0 interest income
recognized on non-accrual/impaired loans during the three months ended September
30, 2002 and 2001, respectively. Total interest income that would have been
recognized on non-accrual loans was $140,000 and $0 for the three months ended
September 30, 2002 and 2001, respectively.
The average balance of non-accrual loans was $2,876,000 for the nine months
ended September 30, 2002. There was $5,000 and $0 in interest income recognized
on non-accrual/impaired loans during the nine months ended September 30, 2002
and 2001, respectively. Total interest income that would have been recognized on
non-accrual loans was $255,000 and $0 for the nine months ended September 30,
2002 and 2001, respectively.
Other real estate owned at December 31, 2001 was sold at a gain of $33,000
in May 2002.
Loans held for sale
The balance of loans held for sale was $1,508,000 at September 30, 2002
compared to $127,000 at December 31, 2001. The increase in loans held for sale
relates to the timing of residential mortgage loan originations versus their
sale.
We sold $6,133,000 and $5,572,000 of residential mortgages during the nine
months ended September 30, 2002 and 2001, respectively. Residential mortgage
originations and sales are significantly influenced by the interest rate
environment.
Deferred taxes
Deferred taxes decreased $949,000 from $2,887,000 at December 31, 2001 to
$1,938,000 at September 30, 2002. This decrease relates to the change in the
estimated fair value of investment securities available for sale.
23
Other assets
The $817,000 increase in other assets from $712,000 at December 31, 2001 to
$1,529,000 at September 30, 2002 was primarily due to the deferral of $413,000
in costs related to our September issuance of $15,000,000 of trust preferred
securities. These costs will be amortized over the life of the securities and
reported as "Minority interest in expense of subsidiary." The remaining increase
relates to increases in the principal due on delay-payment type mortgage-backed
securities and in normal prepaid operating expenses.
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 $75,413,000 or 25% during the nine months
ended September 30, 2002 to $379,693,000. This growth was primarily generated by
the Golden Checking product, which is an interest-bearing checking account.
Through September 30, 2002, the bank 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
$73,732,000 during the nine months ended September 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
September 30, 2002 were $145,373,000 or 33% of total deposits compared to
$58,826,000 or 16% of total deposits at December 31, 2001. Total time deposits
at September 30, 2002 were $187,911,000 or 43% of total deposits compared to
$208,057,000 or 58% of total deposits at December 31, 2001. Approximately
$94,492,000 of time deposits will mature after one year.
Total deposits increased $76,065,000 or 21% during the nine months ended
September 30, 2002 to $434,347,000. Total average deposits increased $82,953,000
or 26% from $314,694,000 for the nine months ended September 30, 2001 to
$397,647,000 for the nine months ended September 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 $4,599,000 or 18%
during the nine months ended September 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 and reprice in the lower rate
environment.
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. During 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 September
30, 2002, the bank generated $16,518,000 in IPCD deposits with an initial term
of five years. Approximately $13,145,000 of IPCD balances at September 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 September 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 September 30, 2002 was $13,966,000. See the
section entitled "Derivative Financial Instruments."
24
DEPOSITS BY MAJOR CLASSIFICATION
SEPTEMBER 30, 2002 DECEMBER 31, 2001
---------------------------- ----------------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
INTEREST % OF INTEREST % OF
RATE AMOUNT TOTAL RATE AMOUNT TOTAL
-------- ------ --------- -------- ------ --------
(Dollars in thousands)
Interest checking 2.57% $145,373 33.47% 2.69% $ 58,826 16.42%
Money market 2.27% 17,391 4.01% 2.32% 16,997 4.74%
Savings 2.24% 51,131 11.77% 2.25% 44,059 12.30%
Time 3.86% 187,911 43.26% 5.31% 208,057 58.07%
---- -------- ------ ---- -------- ------
Total interest-bearing deposits 3.12% 401,806 92.51% 4.27% 327,939 91.53%
==== -------- ------ ==== -------- ------
Non interest-bearing deposits 32,541 7.49% 30,343 8.47%
-------- ------ -------- ------
Total deposits $434,347 100.00% $358,282 100.00%
======== ====== ======== ======
Borrowings
Borrowings totaled $89,035,000 at September 30, 2002 compared to
$49,605,000 at December 31, 2001.
Included in borrowings are customer repurchase agreements of $29,035,000
and $19,605,000 at September 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 $60,000,000 and $30,000,000 in long-term advances
from the FHLB at September 30, 2002 and December 31, 2001, respectively. New
long-term borrowings for the third quarter of 2002 included two $15,000,000
fixed rate 10-year advances from the FHLB. These advances may convert to a
variable rate if the LIBOR index hits 7% and 8%, respectively. The bank has the
option to prepay these advances if they convert to a variable rate.
The weighted average interest rate on borrowings was 3.45% and 3.83% at
September 30, 2002 and December 31, 2001, respectively.
Other liabilities
Other liabilities increased $3,495,000 from $5,019,000 at December 31, 2001
to $8,514,000 at September 30, 2002. This increase relates principally to
$3,883,000 in accrued investment purchases, and a $689,000 increase in the
balance of derivatives related to our IPCD product. These increases were
partially offset by an $807,000 decrease in federal income taxes payable and a
$270,000 decrease in normal operating accounts.
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.
25
Since year-end 2001, we completed two capital raising initiatives, which
together generated $27,345,000. With the addition of this new capital we believe
that we are well positioned to sustain the growth of our core business and to
take advantage of diversification and expansion opportunities as they surface.
On September 26, 2002, we issued $15,000,000 of variable rate capital
securities due November 30, 2032 through our Delaware subsidiary, Premier
Capital Trust II. Interest on the capital securities is based on the 90-day
LIBOR index plus 345 basis points. Proceeds from the capital securities provide
PBI with Tier 1 and Tier 2 capital as determined by regulatory capital
guidelines. See Footnote #9 entitled "Capital Securities".
On June 19, 2002, we completed our 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. The Series A Preferred
stock qualifies as Tier 1 capital. Annual dividends on the Series A Preferred
stock are $2.3125 per share or $1,276,500. 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 $0.2698
per share to preferred 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 were outstanding for the quarter.
On October 7, 2002, PBI's board of directors approved a cash dividend of
$0.578125 per share or $319,000 to preferred shareholders of record on October
16, 2002. This dividend was paid on October 31, 2002 and represented payment for
the quarter August 1, 2002 through October 31, 2002.
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. On October 22, 2002 our board of directors announced
the termination of its stock repurchase program after the repurchase of 109,858
shares during the third quarter of 2002.
On October 11, 2002, PBI repaid $2,000,000 in variable rate subordinated
debt which was included as Tier 2 capital at September 30, 2002.
26
The tables below depict our capital components and ratios along with the
"adequately" and "well" capitalized criteria as defined by FDIC regulations.
CAPITAL COMPONENTS
SEPTEMBER 30, 2002 DECEMBER 31, 2001
---------------------- ----------------------
(Dollars in thousands)
Tier 1
Shareholders' equity $ 36,064 $ 19,609
Allowable portion of minority interest in equity of subsidiaries 10,000 7,537
Net unrealized losses on investment securities available for sale 1,160 3,001
-------- --------
Total Tier 1 Capital $ 47,224 $ 30,147
======== ========
Tier 2
Allowable portion of minority interest in equity
of subsidiaries $ 15,000 $ 2,463
Allowable portion of the allowance for loan losses 4,133 3,817
Allowable portion of subordinated debt 3,500 3,500
-------- --------
Total Tier 2 Capital $ 22,633 $ 9,780
======== ========
Total Capital $ 69,857 $ 39,927
Risk-weighted assets $448,219 $375,981
CAPITAL RATIOS
"ADEQUATELY "WELL
CAPITALIZED" CAPITALIZED"
SEPTEMBER 30, 2002 DECEMBER 31, 2001 RATIOS RATIOS
------------------ ----------------- ------------ ------------
Total risk-based capital/risk-weighted assets 15.59% 10.62% 8.00% 10.00%
Tier 1 capital/risk-weighted assets 10.54% 8.02% 4.00% 6.00%
Tier 1 capital/average assets (leverage ratio) 8.68% 6.83% 4.00% 5.00%
27
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
SEPTEMBER 30, 2002 3 MONTHS MONTHS TO 1 YEAR YEARS YEARS 5 YEARS TOTAL
------------------ -------- ------ --------- ------ ------ ------- -----
(DOLLARS IN THOUSANDS)
ASSETS
Short-term investments $ 33,817 $ - $ - $ - $ - $ - $ 33,817
Interest-bearing deposits 9,337 - - - - - 9,337
Investment securities 65,436 2,337 3,398 15,783 7,958 70,763 165,675
Loans, net of deferred fees 61,698 12,890 26,647 104,290 143,964 8,583 358,072
-------- -------- -------- -------- -------- -------- --------
Total interest rate-sensitive assets $170,288 $ 15,227 $ 30,045 $120,073 $151,922 $ 79,346 $566,901
======== ======== ======== ======== ======== ======== ========
Total cumulative assets $170,288 $185,515 $215,560 $335,633 $487,555 $566,901
======== ======== ======== ======== ======== ========
LIABILITIES
Interest checking, money market
and savings accounts $ 8,556 $ 6,417 $ 12,834 $128,117 $ 42,779 $ 15,192 $213,895
Time deposits 30,786 22,819 39,816 62,533 31,957 - 187,911
Short-term borrowings 29,035 - - - - - 29,035
Long-term borrowings - - - - - 60,000 60,000
Subordinated debt 2,000 1,500 - - - - 3,500
-------- -------- -------- -------- -------- -------- --------
Total interest rate-sensitive liabilities $ 70,377 $ 30,736 $ 52,650 $190,650 $ 74,736 $ 75,192 $494,341
======== ======== ======== ======== ======== ======== ========
Total cumulative liabilities $ 70,377 $101,113 $153,763 $344,413 $419,149 $494,341
======== ======== ======== ======== ======== ========
Gap during period $ 99,911 $(15,509) $(22,605) $(70,577) $ 77,186 $ 4,154 $ 72,560
======== ======== ======== ======== ======== ======== ========
Cumulative gap $ 99,911 $ 84,402 $ 61,797 $ (8,780) $ 68,406 $ 72,560
======== ======== ======== ======== ======== ========
Cumulative gap as a percentage of:
Interest earning assets 17.62% 14.89% 10.90% (1.55%) 12.07% 12.80%
Total assets 16.67% 14.08% 10.31% (1.46%) 11.41% 12.11%
28
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.
The table below summarizes estimated changes in net interest income over a
12-month period beginning October 1, 2002, under alternate interest rate
scenarios using the consulting model described above.
NET INTEREST
CHANGE IN INTEREST RATES INCOME DOLLAR CHANGE PERCENT CHANGE
------------------------ ------------ ------------- --------------
(DOLLARS IN THOUSANDS)
+200 Basis Points $18,858 $ (22) -0.12%
+100 Basis Points 18,914 34 0.18%
Flat Rate 18,880 - -
-100 Basis Points 18,657 (223) -1.18%
-200 Basis Points 18,375 (505) -2.67%
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 AFS
securities 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.
29
For the nine months ended September 30, 2002, cash and cash equivalents
increased $37,663,000. Operating and financing activities provided cash and cash
equivalents of $4,121,000 and $141,824,000, respectively, while investing
activities used $108,282,000. The cash provided by financing activities was
primarily from a $76,065,000 increase in deposits and $30,000,000 in long-term
borrowings. We also raised $15,000,000 from the issuance of trust securities and
$12,345,000 from our preferred stock offering. Other significant sources of cash
included principal repayments on loans and mortgage-backed securities, proceeds
from the sales of investment securities and an increase in short-term
borrowings. Together, this cash was used to finance investment purchases of
$127,485,000 and loan growth of $44,032,000.
For the nine months ended September 30, 2001, investing activities used
cash and cash equivalents of $55,672,000 while operating and financing
activities provided $1,515,000 and $67,226,000, respectively. The cash provided
by financing activities was primarily from increases of $35,033,000 and
$31,952,000 in borrowings and deposits, respectively. Cash was also provided by
sales of AFS securities and by payments/maturities of investment securities.
Together, this cash was primarily used for loan originations and purchases of
mortgage-backed securities, municipal bonds and corporate bonds. During the nine
months ended September 30, 2001, loans grew $51,289,000. Investments grew
$4,304,000 during the nine months ended September 30, 2001, exclusive of the
change in unrealized losses on securities available for sale.
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 $84,675,000 borrowing limit at the FHLB. The bank
could also sell or borrow against certain investment securities. At September
30, 2002, the bank had available borrowing capacity of $13,375,000 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 $16,518,000 and $10,905,000
at September 30, 2002 and December 31, 2001, respectively. The fair value of
derivatives is included in "Other liabilities" and approximated $2,744,000 and
$2,055,000 at September 30, 2002 and December 31, 2001, respectively. During the
three and nine months ended September 30, 2002 approximately $84,000 and
$179,000, respectively, was recorded in other expense for net changes in the
fair value of derivatives compared to $61,000 and $83,000 in expense for the
three and nine months ended September 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.
30
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.
31
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.
Acquisitions of Certain Financial Institutions
In October 2002, the FASB issued Statement No. 147, "Acquisitions of
Certain Financial Institutions," which amends SFAS No. 72, "Accounting for
Certain Acquisitions of Banking or Thrift Institutions," SFAS No.144,
"Accounting for the Impairment or Disposal of Long-Lived Assets," and FASB
Interpretation No. 9. Except for transactions between two or more mutual
enterprises, this Statement removes acquisitions of financial institutions from
the scope of both Statement No. 72 and Interpretation 9 and requires that those
transactions be accounted for in accordance with FASB Statements No. 141,
"Business Combinations," and No. 142, "Goodwill and Other Intangible Assets."
Thus, the requirement in paragraph 5 of Statement No. 72 to recognize any excess
of the fair value of liabilities assumed over the fair value of tangible and
identifiable intangible assets acquired as an unidentifiable intangible asset no
longer applies to acquisitions within the scope of this Statement. In addition,
this Statement amends Statement No. 144 to include in its scope long-term
customer-relationship intangible assets of financial institutions such as
depositor- and borrower-relationship intangible assets and credit cardholder
intangible assets. Consequently, those intangible assets are subject to the same
undiscounted cash flow recoverability test and impairment loss recognition and
measurement provisions that Statement No. 144 requires for other long-lived
assets that are held and used.
With some exceptions, the requirements of Statement No. 147 are effective
October 1, 2002. The adoption of this Statement did not have an impact on our
earnings, financial condition, or equity.
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information required herein is set forth in Item 2, above.
32
ITEM 4 - CONTROLS AND PROCEDURES
As required by Rule 13a-15 under the Exchange Act, within the 90 days prior
to the filing date of this report, PBI carried out an evaluation of the
effectiveness of the design and operation of its disclosure controls and
procedures. This evaluation was carried out under the supervision and with the
participation of PBI's management, including PBI's Chairman, Chief Executive
Officer and President and PBI's Chief Financial Officer. Based upon that
evaluation, PBI's Chairman, Chief Executive Officer and President and PBI's
Senior Vice President and Chief Financial Officer concluded that PBI's
disclosure controls and procedures are effective. There have been no significant
changes in PBI's internal controls or in other factors, which could
significantly affect internal controls subsequent to the date PBI carried out
its evaluation.
Disclosure controls and procedures are designed to ensure that information
required to be disclosed in PBI reports filed or submitted under the Exchange
Act is recorded, processed, summarized and reported within the time periods
specified in the Securities and Exchange Commission's rules and forms.
Disclosure controls and procedures include, without limitation, controls and
procedures designed to ensure that information required to be disclosed in PBI
reports filed under the Exchange Act is accumulated and communicated to
management, including PBI's Chairman, Chief Executive Officer and President and
PBI's Senior Vice President and Chief Financial Officer as appropriate, to allow
timely decisions regarding required disclosure.
33
PART II - OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS
At September 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 pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, filed herewith.
99.2 Certification of 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
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
November 8, 2002 /s/ John C. Soffronoff
----------------------
John C. Soffronoff
President, Chief Executive Officer
(Principal Executive Officer)
November 8, 2002 /s/ Bruce E. Sickel
-------------------
Bruce E. Sickel
Chief Financial Officer
(Principal Financial Officer)
CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER
PURSUANT TO 18 U.S.C. SECTION 1350
AS ADDED BY
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, John C. Soffronoff, President and Chief Executive Officer, certify, that:
1. I have reviewed this quarterly report on Form 10-Q of Premier
Bancorp, Inc.;
2. Based on my knowledge, the quarterly report does not contain
any untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other
financial information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash flows
of the registrant as of, and for, the periods presented in this quarterly
report;
4. The registrant's other certifying officer and I are
responsible for establishing and maintaining disclosure controls and procedures
(as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we
have:
(a) designed such disclosure controls and procedures to
ensure that material information relating to the registrant, including
its consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this quarterly
report is being prepared;
(b) evaluated the effectiveness of the registrant's
disclosure controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation Date"); and
(c) presented in this quarterly report our conclusions
about the effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date.
5. The registrant's other certifying officer and I have
disclosed, based on our most recent evaluation, to the registrant's auditors
and the audit committee of registrant's board of directors (or persons
performing the equivalent function):
(a) all significant deficiencies in the design or
operation of the internal controls which could adversely affect the
registrant's ability to record, process, summarize and report financial
data and have identified for the registrant's auditors any material
weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves
management or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officer and I have indicated
in this quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect the
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant deficiencies and
material weaknesses.
Date: November 8, 2002 By: /s/ John C. Soffronoff
----------------------
John C. Soffronoff
President and Chief Executive Officer
(Principal Executive Officer)
CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER
PURSUANT TO 18 U.S.C. SECTION 1350
AS ADDED BY
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Bruce E. Sickel, Chief Financial Officer, certify, that:
1. I have reviewed this quarterly report on Form 10-Q of Premier
Bancorp, Inc.;
2. Based on my knowledge, the quarterly report does not contain
any untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under
which such statements were made, not misleading with respect to the period
covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other
financial information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash flows
of the registrant as of, and for, the periods presented in this quarterly
report;
4. The registrant's other certifying officer and I are
responsible for establishing and maintaining disclosure controls and procedures
(as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we
have:
(a) designed such disclosure controls and procedures to
ensure that material information relating to the registrant, including
its consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this quarterly
report is being prepared;
(b) evaluated the effectiveness of the registrant's
disclosure controls and procedures as of a date within 90 days prior
to the filing date of this quarterly report (the "Evaluation Date");
and
(c) presented in this quarterly report our conclusions
about the effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date.
5. The registrant's other certifying officer and I have
disclosed, based on our most recent evaluation, to the registrant's
auditors and the audit committee of registrant's board of directors (or persons
performing the equivalent function):
(a) all significant deficiencies in the design or
operation of the internal controls which could adversely affect the
registrant's ability to record, process, summarize and report financial
data and have identified for the registrant's auditors any material
weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves
management or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officer and I have indicated
in this quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect the
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant deficiencies and
material weaknesses.
Date: November 8, 2002 By: /s/ Bruce E. Sickel
-------------------
Bruce E. Sickel
Chief Financial Officer
(Principal Financial Officer)
INDEX OF EXHIBITS
PAGE
----
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 pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, filed herewith.
99.2 Certification of 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.