U. S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED: JUNE 30, 2001
[ ] 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 small business issuer as specified in its charter)
PENNSYLVANIA 23-2921058
------------ ----------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
379 NORTH MAIN STREET, DOYLESTOWN, PA 18901
-------------------------------------------
(Address of principal executive offices)
(215) 345-5100
--------------
(Issuer's telephone number)
N/A
----------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes X No
--- ---
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date: 3,224,960 shares of $0.33 par
value common stock issued and outstanding as of July 31, 2001.
Transitional Small Business Disclosure format (check one):
Yes No X
--- ---
1
PART I - FINANCIAL INFORMATION
ITEM 1 -- FINANCIAL STATEMENTS
PREMIER BANCORP, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(UNAUDITED)
JUNE 30, 2001 DECEMBER 31, 2000
------------- -----------------
(Dollars in thousands, except share data)
Assets:
Cash and due from banks $ 8,150 $ 7,970
Federal funds sold 7,645 --
Interest-bearing deposits 511 56
--------- ---------
Cash and cash equivalents 16,306 8,026
Investment securities:
Held to maturity (fair value $4,451 in 2001 and $5,912 in 2000) 4,498 6,026
Available for sale (amortized cost $105,406 in 2001 and $99,548 in 2000) 100,823 94,573
Loans receivable (net of allowance for loan losses of $3,367 in 2001
and $3,032 in 2000) 268,233 235,552
Loans held for sale 362 --
Other real estate owned -- 252
Premises and equipment 4,728 4,853
Accrued interest receivable 2,818 2,517
Deferred income taxes 2,570 2,703
Other assets 1,071 699
--------- ---------
Total assets $ 401,409 $ 355,201
========= =========
Liabilities, minority interest in subsidiary and shareholders' equity:
Deposits $ 311,280 $ 303,293
Borrowings 51,194 14,404
Accrued interest payable 4,115 4,127
Other liabilities 5,149 5,422
Subordinated debt 1,500 1,500
--------- ---------
Total liabilities 373,238 328,746
Corporation-obligated mandatorily redeemable capital securities of subsidiary
trust holding solely junior subordinated debentures of the corporation 10,000 10,000
Shareholders' equity:
Common stock - $0.33 par value; 30,000,000 shares authorized; issued and
outstanding 3,224,960 at June 30, 2001 and 3,105,248 at December 31, 2000 1,064 1,025
Additional paid-in capital 12,181 11,792
Retained earnings 7,950 6,921
Accumulated other comprehensive loss (3,024) (3,283)
--------- ---------
Total shareholders' equity 18,171 16,455
--------- ---------
Total liabilities minority interest in subsidiary and shareholders' equity $ 401,409 $ 355,201
========= =========
The accompanying notes are an integral part of the
consolidated financial statements.
2
PREMIER BANCORP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
FOR THE THREE FOR THE SIX
MONTHS ENDED MONTHS ENDED
JUNE 30, JUNE 30, JUNE 30, JUNE 30,
2001 2000 2001 2000
-------- -------- -------- --------
(Dollars in thousands; except per share data)
Interest income:
Loans $ 5,523 $ 4,623 $ 10,792 $ 8,966
Federal funds sold and interest-bearing deposits 52 89 195 216
Investments:
Taxable 1,521 1,592 2,921 3,198
Tax-exempt 239 221 441 442
----------- ----------- ----------- -----------
Total interest income 7,335 6,525 14,349 12,822
Interest expense:
Deposits 3,777 3,055 7,666 5,702
Borrowings 436 599 655 1,432
----------- ----------- ----------- -----------
Total interest expense 4,213 3,654 8,321 7,134
----------- ----------- ----------- -----------
Net interest income 3,122 2,871 6,028 5,688
Provision for loan losses 239 125 339 275
----------- ----------- ----------- -----------
Net interest income after loan loss provision 2,883 2,746 5,689 5,413
Non-interest income:
Service charges and other fees 144 66 281 117
Gain (loss), net, on sale of investment
securities available for sale 33 -- (3) --
Loss on sale of other real estate owned (17) -- (17) --
Gain on sale of loans held for sale 20 10 25 17
----------- ----------- ----------- -----------
Total non-interest income 180 76 286 134
Non-interest expense:
Salaries and employee benefits 1,088 879 2,163 1,924
Occupancy 194 143 390 291
Data processing 244 187 483 418
Professional services 85 98 165 204
Marketing 103 89 224 250
Minority interest in expense of subsidiary 218 218 436 436
Other 377 392 741 697
----------- ----------- ----------- -----------
Total non-interest expense 2,309 2,006 4,602 4,220
----------- ----------- ----------- -----------
Income before income tax 754 816 1,373 1,327
Income tax expense 189 212 344 320
----------- ----------- ----------- -----------
Net income $ 565 $ 604 $ 1,029 $ 1,007
=========== =========== =========== ===========
Earnings per share:
Basic $ 0.18 $ 0.19 $ 0.32 $ 0.33
Diluted $ 0.16 $ 0.18 $ 0.30 $ 0.29
Weighted average number of shares outstanding:
Basic 3,223,965 3,100,328 3,198,478 3,089,621
Diluted 3,430,070 3,424,441 3,381,120 3,435,729
The accompanying notes are an integral part of
the consolidated financial statements.
3
PREMIER BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
FOR THE SIX MONTHS ENDED JUNE 30, 2001 2000
--------------------------------- ---- ----
(In thousands)
Operating activities:
Net income $ 1,029 $ 1,007
Adjustments to reconcile net income to cash provided
by operating activities:
Depreciation expense 267 213
Provision for loan losses 339 275
Write-off of capitalized costs related to branch expansion -- 68
Amortization of premiums and discounts on
investment securities held to maturity -- 4
Amortization of premiums and discounts on
investment securities available for sale 89 58
Loss on sale of investment securities available for sale 3 --
Loss on sale of other real estate owned 17 --
Gain on sale of loans held for sale (25) (17)
Originations of loans held for sale (3,922) (2,469)
Proceeds from sale of loans held for sale 3,585 2,486
Increase in accrued interest receivable (301) (105)
(Increase) decrease in other assets (372) 62
Increase in deferred loan fees 172 55
(Decrease) increase in accrued interest payable (12) 1,200
Decrease in other liabilities (86) (34)
-------- --------
Net cash provided by operating activities 783 2,803
-------- --------
Investing activities:
Proceeds from sale of investment securities available for sale 21,111 --
Repayment of investment securities available for sale 5,020 2,103
Purchase of investment securities available for sale (32,081) (50)
Repayment of investment securities held to maturity 1,528 202
Net increase in loans receivable (33,192) (15,661)
Proceeds from sale of other real estate owned 235 --
Purchases of premises and equipment (142) (608)
-------- --------
Net cash used in investing activities (37,521) (14,014)
-------- --------
Financing activities:
Net increase in deposits 7,987 32,164
Net increase (decrease) in borrowings less than 90 days 6,790 (2,236)
Proceeds from borrowings greater than 90 days 30,000 --
Repayment of borrowings greater than 90 days -- (10,000)
Proceeds from exercised common stock options 241 76
-------- --------
Net cash provided by financing activities 45,018 20,004
-------- --------
Increase in cash and cash equivalents 8,280 8,793
Cash and cash equivalents:
Beginning of period 8,026 8,491
-------- --------
End of period $ 16,306 $ 17,284
======== ========
Supplemental disclosures:
Cash payments for:
Interest expense $ 8,333 $ 5,934
Taxes 367 321
Supplemental disclosure of noncash activities:
Change in the estimated fair value of investment securities
available for sale $ 392 $ (317)
Change in the deferred tax asset related to investment securities
available for sale (133) 108
Tax effect of exercised common stock options 187 63
The accompanying notes are an integral part
of the consolidated financial statements.
4
PREMIER BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Organization
Premier Bancorp, Inc. (PBI) is a Pennsylvania business corporation and a
registered financial holding company headquartered in Doylestown, Bucks County,
Pennsylvania. PBI was incorporated on July 15, 1997 and reorganized on November
17, 1997 as the one-bank holding company of Premier Bank. PBI's primary business
is the operation of its wholly owned subsidiary, Premier Bank, which we manage
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. The bank is a Pennsylvania
chartered commercial bank and member of the Federal Reserve Bank of Philadelphia
and the Federal Deposit Insurance Corporation. The bank competes with other
financial institutions and other financial services companies with respect to
services offered and customers.
The company and bank are regulated by certain federal and state agencies
and are periodically examined by them.
2. Basis of Financial Statement Presentation
We prepared the accompanying interim unaudited consolidated financial
statements in accordance with accounting principles generally accepted in the
United States of America as applied to the banking industry and in accordance
with instructions for quarterly reports on Form 10-QSB. These statements do not
include information or footnotes necessary for a complete presentation of
financial condition, results of operations, shareholders' equity and cash flows.
The consolidated financial statements include the accounts of Premier Bancorp,
Inc. and its wholly owned subsidiaries: Premier Bank, PBI Capital Trust and
Lenders Abstract, LLC. All significant intercompany accounts and transactions
were eliminated in the consolidated financial statements. Certain previously
reported amounts have been reclassified to conform to current presentation
standards. These reclassifications had no effect on net income. The results of
operations for the three and six months ended June 30, 2001 and 2000 are not
necessarily indicative of the results that may be expected for the entire fiscal
year. These quarterly financial statements should be read in conjunction with
the audited consolidated financial statements on Form 10-KSB and notes thereto
for the year ended December 31, 2000.
3. Use of Estimates
In preparing the consolidated financial statements, we are required to make
estimates and assumptions that affect the reported amounts of assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from such estimates. Material estimates that are particularly susceptible to
significant change in the near term include the determination of the allowance
for loan losses and the carrying value of other real estate owned, if any.
4. Derivative Financial Instruments
The company has limited involvement with derivative financial instruments
and currently uses them only in relation to the 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 dependant on the
return of the Standard & Poor's 500(R) Index. This deposit product is unique in
that the customer may 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.
5
PREMIER BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. Derivative Financial Instruments (Continued)
In order to offset the risks associated with the variable cost of the IPCD,
the bank entered into a derivative contract with the Federal Home Loan Bank of
Pittsburgh (FHLB). The terms of the derivative entered into with the FHLB
provide for receipt of an amount equal to the amount to be paid to the IPCD
depositor, in exchange for a periodic payment stream expressed as a fixed rate
of interest.
The bank accounts for its derivative contract with the FHLB and the
derivative embedded in the IPCD in accordance with Statement No. 133,
"Accounting for Derivative Instruments and Hedging Activities", as amended.
Accordingly, the bank carries these derivatives at fair value in the
Consolidated Statements of Financial Condition and recognizes any changes in
fair value in current period earnings.
The notional amount of derivative contracts with the FHLB and IPCD
customers was $6,182,000 at June 30, 2001. The fair value of derivatives is
included in "Other liabilities" and approximates $1,264,000 at June 30, 2001.
During the three and six months ended June 30, 2001, approximately $7,000 and
$22,000, respectively, was recorded in other expense for net changes in the
fair market value of derivative contracts.
5. Stock Dividend
On February 17, 2000, the company declared a 5% common stock dividend to
shareholders of record as of February 29, 2000 that was paid on March 10, 2000.
The number of shares and per share amounts have been restated to reflect this
event as of the earliest date presented in this Form 10-QSB.
6. Earnings Per Share
Basic earnings per share is calculated on the basis of the weighted average
number of shares outstanding after giving retroactive effect to the 5% common
stock dividend declared on February 17, 2000. 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 556,278 and 700,325 shares of common stock were outstanding at June 30,
2001 and 2000, respectively, and to the extent dilutive, were included in the
computation of earnings per diluted common share. Options to purchase 51,998
shares of common stock were anti-dilutive and excluded from the calculation of
earnings per diluted common share for the three and six months ended June 30,
2001 and 2000.
6
PREMIER BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. Earnings Per Share (Continued)
The following is a reconciliation of the numerators and denominators of the
basic and diluted earnings per share calculations.
FOR THE THREE MONTHS ENDED JUNE 30, 2001
----------------------------------------
(Dollars in thousands, except per share data)
Per share
Net income Shares Amount
---------- --------- -------
Basic earnings per share $ 565 3,223,965 $ 0.18
Effect of dilutive stock options -- 206,105 (0.02)
------ --------- -------
Earnings per diluted share $ 565 3,430,070 $ 0.16
======= ========= =======
FOR THE THREE MONTHS ENDED JUNE 30, 2000
----------------------------------------
(Dollars in thousands, except per share data)
Per share
Net income Shares Amount
---------- --------- --------
Basic earnings per share $ 604 3,100,328 $ 0.19
Effect of dilutive stock options -- 324,113 (0.01)
------- --------- -------
Earnings per diluted share $ 604 3,424,441 $ 0.18
======= ========= =======
FOR THE SIX MONTHS ENDED JUNE 30, 2001
-------------------------------------------
(Dollars in thousands, except per share data)
Per share
Net income Shares Amount
---------- --------- --------
Basic earnings per share $ 1,029 3,198,478 $ 0.32
Effect of dilutive stock options -- 182,642 (0.02)
------- --------- -------
Earnings per diluted share $ 1,029 3,381,120 $ 0.30
======= ========= =======
FOR THE SIX MONTHS ENDED JUNE 30, 2000
-------------------------------------------
(Dollars in thousands, except per share data)
Per share
Net income Shares Amount
---------- --------- --------
Basic earnings per share $ 1,007 3,089,621 $ 0.33
Effect of dilutive stock options -- 346,108 (0.04)
------- --------- -------
Earnings per diluted share $ 1,007 3,435,729 $ 0.29
======= ========= =======
7
PREMIER BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. Comprehensive Income (Loss)
The following table displays net income and the components of other
comprehensive income (loss) to arrive at total comprehensive income (loss). The
only component of other comprehensive income (loss) for PBI is the change in the
estimated fair value of investment securities available for sale.
FOR THE THREE MONTHS ENDED FOR THE SIX MONTHS ENDED
JUNE 30, 2001 JUNE 30, 2000 JUNE 30, 2001 JUNE 30, 2000
----------------------------- ------------------------------
(Dollars in thousands) (Dollars in thousands)
Net income $ 565 $ 604 $ 1,029 $ 1,007
Other comprehensive income (loss), net of tax:
Unrealized gains (losses) on investment securities
available for sale:
Unrealized holding gains (losses) during the period (252) 65 261 (209)
Less: reclassification adjustment for gains (losses)
included in net income 22 -- (2) --
----- ----- ------- -------
Other comprehensive income (loss), net of tax (230) 65 259 (209)
----- ----- ------- -------
Comprehensive income $ 335 $ 669 $ 1,288 $ 798
===== ===== ======= =======
8
ITEM 2 -- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
Premier Bancorp, Inc. (PBI) is a Pennsylvania business corporation and a
registered financial holding company headquartered in Doylestown, Bucks County,
Pennsylvania. PBI was incorporated on July 15, 1997 and reorganized on November
17, 1997 as the one-bank holding company of Premier Bank. PBI's primary business
is the operation of its wholly owned subsidiary, Premier Bank, which 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
community-oriented financial services provider whose business primarily consists
of attracting retail deposits from the general public and small businesses and
originating commercial and consumer loans in its market area. The bank also
invests in securities such as mortgage-backed securities, obligations of U.S.
government agencies and government sponsored entities, corporate bonds and
municipal bonds.
The bank's revenues are derived principally from interest on its loans and
securities portfolios. The bank's primary sources of funds are deposits,
repayments, prepayments and maturities of loans, repayments, prepayments and
maturities of mortgage-backed and investment securities and borrowed funds.
Currently, the bank has seven full-service Pennsylvania banking offices:
Doylestown, Easton, Southampton, Floral Vale, Bethlehem, Bensalem and
Montgomeryville and a limited service office in the Heritage Towers Retirement
Community in Doylestown. The bank opened its Bensalem and Montgomeryville
branches in October 2000. The bank faces significant competition from other
financial services companies, many of which are larger organizations with more
resources and locations than the bank.
PBI's 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. The
company also generates non-interest income such as service charges, fees from
sales of title insurance and other fees. Non-interest expenses primarily consist
of employee compensation and benefits, occupancy expenses, marketing, data
processing costs and other operating expenses. The company is subject to losses
from its loan portfolio if borrowers fail to meet their obligations. PBI's
results of operations are also significantly affected by general economic and
competitive conditions, particularly changes in market interest rates,
government policies and actions of regulatory agencies.
Overhead expenses in 2001 are expected to be higher than in 2000 due to a
full year of expenses for new branches opened in October 2000. In addition, the
bank is facing increased competition for deposits and loans in the current
interest rate environment. This may also impact PBI's results of operations for
2001.
The following is management's discussion and analysis of the significant
changes in the results of operations for the three and six months ended June 30,
2001 as compared to the same periods in 2000 and changes in financial condition
from December 31, 2000 to June 30, 2001. Current performance may not be
indicative of future performance. This discussion should be read in conjunction
with the 2000 Annual Report on Form 10-KSB.
In addition to historical information, this management discussion and
analysis contains forward-looking statements. Forward-looking statements are
subject to certain risks and uncertainties that could cause actual results to
differ materially from those projected. We caution readers not to place undue
reliance on these forward-looking statements, which reflect our analysis only as
of this date. We are not obligated to publicly revise or update these
forward-looking statements to reflect events or circumstances that arise after
this date. Readers should carefully review the risk factors described in other
documents we file from time to time with the Securities and Exchange Commission,
including annual reports on Form 10-KSB, quarterly reports on Form 10-QSB and
any current reports on Form 8-K.
9
MANAGEMENT'S STRATEGY
The bank's lending activities are specialized in small and medium sized
businesses, professionals and individuals. In order to fund its lending
activities and allow for increased contact with customers, the bank is
establishing a branch network to develop a stable core deposit base catering
primarily to retail and business depositors. We have a strong commitment to
highly personalized customer service. To support the company's growth, without
compromising personalized service, we have made significant investments in
experienced personnel and have incurred significant costs related to branch
office expansion.
Since the 1992 opening of Premier Bank, the company has grown to seven full
service Pennsylvania banking offices. The bank opened its fifth office in
Bethlehem, Northampton County, in December 1999 and a limited service office in
the Heritage Towers Retirement Community in Doylestown in July 2000. The bank
opened its sixth and seventh Pennsylvania full service offices in Bensalem and
Montgomeryville in October 2000. New branches normally contribute positively to
earnings after they mature and grow.
In conjunction with its branch expansion, the bank added significantly to
its commercial lending staff in 1999 to grow its loan portfolio and shift assets
toward loans and away from investments. However, the development of a quality
loan portfolio takes considerable time. Investment securities can be added to a
portfolio quickly. Therefore, the bank may buy or sell investment securities
from time to time depending on market conditions, business trends, liquidity,
and capital levels.
In addition to the ongoing expansion of the bank's traditional business, we
continuously review and consider 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 formed Lenders Abstract, LLC to generate fee
income from the origination of title insurance policies.
Recent changes in 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 and competition.
10
The following table sets forth, for the periods indicated, certain average
balance sheet amounts and their corresponding earnings/expenses and rates (which
have been annualized).
AVERAGE BALANCES, RATES AND INTEREST INCOME AND EXPENSE SUMMARY
FOR THE THREE MONTHS ENDED JUNE 30, 2001 2000
------------------------------------ ------------------------------------
AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE INTEREST RATE BALANCE INTEREST RATE
--------- -------- ---- ------- -------- ----
(Dollars in thousands)
Assets
Interest-bearing deposits $ 690 $ 7 4.07% $ 266 $ 5 7.56%
Federal funds sold 3,839 45 4.70% 5,294 84 6.38%
Investment securities available for sale
Taxable (1) 85,869 1,440 6.73% 84,996 1,480 7.00%
Tax-exempt (1)(2) 19,018 362 7.63% 17,858 335 7.54%
Investment securities held to maturity 4,851 81 6.70% 6,864 112 6.56%
--------- ------- ---- --------- ------- ----
Total investment securities 109,738 1,883 6.88% 109,718 1,927 7.06%
Loans, net of unearned income (3)(4) 259,109 5,537 8.57% 212,476 4,634 8.77%
--------- ------- ---- --------- ------- ----
Total interest-earning assets 373,376 7,472 8.03% 327,754 6,650 8.16%
Cash and due from banks 6,668 5,646
Allowance for loan losses (3,212) (2,732)
Other assets (5) 10,065 8,014
--------- ---------
Total assets $ 386,897 $ 338,682
========= =========
Liabilities, minority interest in subsidiary
and shareholders' equity
Interest checking $ 25,705 164 2.56% $ 22,222 139 2.52%
Money market deposit accounts 18,832 169 3.60% 3,440 39 4.56%
Savings accounts 42,696 336 3.16% 51,347 448 3.51%
Time deposits 199,793 3,108 6.24% 167,149 2,429 5.84%
--------- ------- ---- --------- ------- ----
Total interest-bearing deposits 287,026 3,777 5.28% 244,158 3,055 5.03%
Short-term borrowings 17,365 162 3.74% 37,521 567 6.08%
Long-term borrowings 16,703 247 5.93% -- -- --
--------- ------- ---- --------- ------- ----
Total borrowings 34,068 409 4.82% 37,521 567 6.08%
Subordinated debt 1,500 27 7.22% 1,500 32 8.58%
--------- ------- ---- --------- ------- ----
Total interest-bearing liabilities 322,594 4,213 5.24% 283,179 3,654 5.19%
Non-interest-bearing deposits 24,873 22,103
Other liabilities 8,605 5,158
Capital securities 10,000 10,000
Shareholders' equity (6) 20,825 18,242
--------- ---------
Total liabilities, minority interest in
subsidiary and shareholders' equity $ 386,897 $ 338,682
========= =========
Net interest income/rate spread $ 3,259 2.79% $ 2,996 2.97%
======= ==== ======= ====
Net interest margin (7) 3.50% 3.68%
Average interest-earning assets as a percentage
of average interest-bearing liabilities 115.74% 115.74%
-----------
(1) Excludes the SFAS 115 valuation allowance on investment securities available
for sale.
(2) Interest income on tax-exempt investment securities was presented on a
tax-equivalent basis. Tax-exempt yields were adjusted to a tax
equivalent basis using a 34% rate.
(3) Includes non-accrual loans of $150,000 on average for the three months ended
June 30, 2001. There were no non-accrual loans during the three months ended
June 30, 2000.
(4) Includes tax-exempt loans of $1,218,000 and $1,097,000 on average for the
three months ended June 30, 2001 and 2000, 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.
11
AVERAGE BALANCES, RATES AND INTEREST INCOME AND EXPENSE SUMMARY
FOR THE SIX MONTHS ENDED JUNE 30, 2001 2000
---------------------------------- ------------------------------------
AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE INTEREST RATE BALANCE INTEREST RATE
--------- --------- ---- --------- ------- ----
(Dollars in thousands)
Assets
Interest-bearing deposits $ 545 $ 13 4.81% $ 386 $ 12 6.25%
Federal funds sold 7,021 182 5.23% 6,890 204 5.95%
Investment securities available for sale
Taxable (1) 80,380 2,745 6.89% 85,476 2,973 6.99%
Tax-exempt (1)(2) 17,770 668 7.58% 17,859 670 7.54%
Investment securities held to maturity 5,337 176 6.65% 6,970 225 6.49%
--------- ------- ---- --------- ------- ------
Total investment securities 103,487 3,589 6.99% 110,305 3,868 7.05%
Loans, net of unearned income (3)(4) 251,239 10,815 8.68% 207,497 8,987 8.71%
--------- ------- ---- --------- ------- ----
Total interest-earning assets 362,292 14,599 8.13% 325,078 13,071 8.09%
Cash and due from banks 6,476 5,529
Allowance for loan losses (3,143) (2,654)
Other assets (5) 9,685 7,858
--------- ---------
Total assets $ 375,310 $ 335,811
========= =========
Liabilities, minority interest in subsidiary
and shareholders' equity
Interest checking $ 25,461 321 2.54% $ 21,643 273 2.54%
Money market deposit accounts 18,096 366 4.08% 2,235 45 4.05%
Savings accounts 42,745 705 3.33% 51,825 901 3.50%
Time deposits 199,506 6,274 6.34% 157,705 4,483 5.72%
--------- ------- ---- --------- ------- ----
Total interest-bearing deposits 285,808 7,666 5.41% 233,408 5,702 4.91%
Short-term borrowings 16,847 353 4.23% 46,415 1,368 5.93%
Long-term borrowings 8,398 247 5.93% -- -- --
--------- ------- ---- --------- ------- ----
Total borrowings 25,245 600 4.79% 46,415 1,368 5.93%
Subordinated debt 1,500 55 7.39% 1,500 64 8.58%
--------- ------- ---- --------- ------- ----
Total interest-bearing liabilities 312,553 8,321 5.37% 281,323 7,134 5.10%
Non-interest-bearing deposits 24,944 21,654
Other liabilities 7,331 4,835
Capital securities 10,000 10,000
Shareholders' equity (6) 20,482 17,999
--------- ---------
Total liabilities, minority interest in
subsidiary and shareholders' equity $ 375,310 $ 335,811
========= =========
Net interest income/rate spread $ 6,278 2.76% $ 5,937 2.99%
======= ==== ======= ====
Net interest margin (7) 3.49% 3.67%
Average interest-earning assets as a percentage
of average interest-bearing liabilities 115.91% 115.55%
-----------
(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 $75,000 and $39,000 on average for the six
months ended June 30, 2001 and 2000, respectively.
(4) Includes tax-exempt loans of $1,100,000 and $1,112,000 on average for the
six months ended June 30, 2001 and 2000, 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.
12
Results of Operations
PBI reported net income of $565,000 or $.16 earnings per common share on a
diluted basis for the three months ended June 30, 2001. This represents a
decrease of $39,000 or 6% from the net income of $604,000 or $.18 earnings per
common share on a diluted basis reported for the same period in 2000. Growth in
net interest income was slowed by significant decreases in the prime lending
rate during the first half of 2001. The national prime lending rate decreased
three times for a total of 125 basis points during the three months ended June
30, 2001. These rate cuts affected the rates on new loans and existing
adjustable/variable rate loans. The provision for loan losses was $114,000
higher due to the more rapid rate of loan growth in 2001. Loans grew $22,870,000
or 9% during the three months ended June 30, 2001 compared to $7,028,000 or 3%
during the same period in 2000. Other income was $104,000 higher in 2001 due
mostly to fees generated from our new title insurance business, financial
advisory services and gains on the sale of investment securities available for
sale. Overhead expenses were $371,000 or 19% higher for the three months ended
June 30, 2001 compared to the same period in 2000, exclusive of $68,000 in
one-time charges in 2000. This increase is due in part to the bank's opening of
two new branches in October 2000 and the overall growth of the company. Return
on average assets and return on average shareholders' equity were .59% and
12.72%, respectively, for the three months ended June 30, 2001 compared to .73%
and 18.93% for the same period in 2000. Return on average shareholders' equity,
exclusive of the unrealized loss on investment securities available for sale was
10.88% for the three months ended June 30, 2001 compared to 13.32% for the same
period in 2000.
PBI reported net income of $1,029,000 or $.30 earnings per common share on
a diluted basis for the six months ended June 30, 2001. This represents an
increase of $22,000 or 2% from the net income of $1,007,000 or $.29 earnings per
common share on a diluted basis reported for the same period in 2000. Both net
income and net interest income grew during the six months ended June 30, 2001
compared to the same period in 2000. However, growth in net interest income was
slowed by six decreases in the national prime lending rate totaling 275 basis
points during the first half of 2001. These rate cuts affected the rates on new
loans and existing adjustable/variable rate loans. The provision for loan losses
was $64,000 higher due to a more rapid rate of loan growth in 2001. Loans grew
$33,188,000 or 14% during the six months ended June 30, 2001 compared to
$15,655,000 or 8% during the same period in 2000. Other income was $152,000
higher in 2001 due mostly to $78,000 in fees generated from our new title
insurance business and financial advisory services combined and $50,000 in fees
related to a loan pay-off. Overhead expenses were $565,000 or 14% higher for the
six months ended June 30, 2001 compared to the same period in 2000, exclusive of
$183,000 in one-time charges in 2000. Overhead expenses were higher due in part
to the bank's opening of two new branches in October 2000 and the overall growth
of the company. Return on average assets and return on average shareholders'
equity were .56% and 11.89%, respectively, for the six months ended June 30,
2001 compared to .61% and 16.03% for the same period in 2000. Return on average
shareholders' equity, exclusive of the unrealized loss on investment securities
available for sale was 10.13% for the six months ended June 30, 2001 compared to
11.25% for the same period in 2000.
Net interest income
Net interest income is the most significant component of the company's
operating income. Net interest income depends upon the levels of
interest-earning assets and interest-bearing liabilities and the difference or
"spread" between the respective yields earned and rates paid. The interest rate
spread is influenced by the overall interest rate environment and by
competition. The interest rate spread is also influenced by differences in the
maturity and repricing of assets versus the liabilities that fund them. During
the past year, the bank increased its loan portfolio by $57,754,000 or 27%. Much
of this growth was funded by deposit generation. The bank continues to face
strong competition for both loans and deposits. This competition continues to
put pressure on our net interest income.
During the first half of 2001 the Federal Reserve cut the targeted federal
funds rate an unprecedented six times for a total of 2.75%. Three rate cuts
totaling 1.50% occurred in the first quarter of 2001; three rate cuts totaling
1.25% occurred in the second quarter of 2001. These cuts immediately lowered the
national prime lending rates
13
and in turn reduced prime rate based loans in the bank's portfolio. In addition,
the magnitude of the Federal Reserve rate cuts increases the likelihood that
customers with higher fixed rate loans will seek to renegotiate lower interest
rates or prepay their loans. Although we cannot predict the extent or timing of
such refinance activity, we do expect the yield on our loan portfolio to decline
as this activity occurs. We cannot predict to what extent the lower asset yields
will be offset by lower cost of funds.
The interest rate environment during the first half of 2001 is in direct
contrast with the same period in 2000. During the first half of 2000, the
national prime lending rate increased three times for a total of 1.00%. As a
result the yields on average interest-earning assets and average
interest-bearing liabilities trended higher in 2000 and through the first
quarter of 2001.
For the three months ended June 30, 2001, net interest income, on a
tax-equivalent basis, was $263,000 higher than the same period in 2000. This
increase was primarily a function of asset growth, which was offset in part by a
lower yield on average interest-earning assets and a higher rate on average
interest-bearing liabilities. The ratio of average interest-earning assets to
average interest-bearing liabilities was 115.74% for both quarters. Average
interest-earning assets grew $45,622,000 or 14% from $327,754,000 at June 30,
2000 to $373,376,000 at June 30, 2001. Average loan balances increased
$46,633,000 while average investments were flat at approximately $109,700,000.
The yield on average interest-earning assets decreased 13 basis points while the
rate on average interest-bearing liabilities increased 5 basis points. The
increase in rate on average interest-bearing liabilities was mostly due to the
aggressive promotion of the 9-month and 23-month certificates of deposit
yielding 7% in 2000. The full effect of these promotions was reflected in 2001
results as the rate on average time deposits increased 40 basis points. As of
June 30, 2001, approximately $31,000,000 in 9-month certificates of deposit
yielding 7% matured. These time deposits were retained/replaced at a lower rate.
In the first quarter of 2002 approximately $23,311,000 in 23-month certificates
of deposits yielding 7% are scheduled to mature. Borrowings, subordinated debt
and non-maturity deposits repriced lower in 2001 and offset, in part, the
increased rate on time deposits. We expect the yield on average interest-earning
assets and the rate on average interest-bearing liabilities to continue to trend
downward in 2001 as a result of the recent rate cuts. The net interest margin
decreased 18 basis points from 3.68% at June 30, 2000 to 3.50% at June 30, 2001.
The net interest rate spread decreased 18 basis points from 2.97% at June 30,
2000 to 2.79% at June 30, 2001. The maturity/repricing characteristics of our
portfolios in combination with increased competition for loans and deposits, has
contributed to this margin compression.
For the six months ended June 30, 2001, net interest income, on a
tax-equivalent basis, was $341,000 higher than the same period in 2000. This
increase was primarily a function of asset growth and a higher yield on average
interest-earning assets. These positive items were offset in part by a higher
rate on average interest-bearing liabilities. The ratio of average
interest-earning assets to average interest-bearing liabilities improved
slightly from 115.55% for the six months ended June 30, 2000 to 115.91% for the
six months ended June 30, 2001. Average interest-earning assets grew $37,214,000
or 11% from $325,078,000 at June 30, 2000 to $362,292,000 at June 30, 2001.
Average loan balances increased $43,742,000 while average investments decreased
$6,818,000. Although, the average yield on each category within total average
interest-earning assets declined, the overall yield on total average
interest-earning assets increased 4 basis points due to a greater concentration
in higher yielding loans. The rate on average interest-bearing liabilities
increased 27 basis points mostly due to the aggressive promotion of the 9-month
and 23-month certificates of deposit in 2000. Borrowings and subordinated debt
repriced lower in 2001 and offset, in part, the increased rate on time deposits.
The net interest margin decreased 18 basis points from 3.67% at June 30, 2000 to
3.49% at June 30, 2001. The net interest rate spread decreased 23 basis points
from 2.99% at June 30, 2000 to 2.76% at June 30, 2001.
Non-interest income
Non-interest income consists primarily of service charges on deposits, fees
from sales of title insurance, fees for financial advisory services and gains
(losses) on the sale of investment securities available for sale and loans held
for sale.
Total non-interest income was $180,000 for the three months ended June 30,
2001 compared to $76,000 for the same period in 2000. Second quarter 2001
results include: $49,000 in fees generated from sales of title
14
insurance, $11,000 in fees from financial advisory services and $33,000 in gains
from the sale of investment securities available for sale. Gains on the sale of
loans held for sale were $10,000 higher for the three months ended June 30, 2001
compared to the same period in 2000. Offsetting these positive items was a
$17,000 loss on the sale of other real estate owned in May 2001.
Total non-interest income was $286,000 for the six months ended June 30,
2001 compared to $134,000 for the same period in 2000. The increase is mostly
due to $78,000 in combined fees from sales of title insurance and financial
advisory services. In addition, $50,000 in fees was recorded during the first
quarter of 2001 related to a loan pay-off.
Non-interest expense
For the three months ended June 30, 2001, non-interest expenses were
$2,309,000 or $303,000 higher than the $2,006,000 recorded during the same
period in 2000. Overhead expenses increased principally due to the continued
growth of our franchise, namely the opening of our Bensalem and Montgomeryville
offices in October 2000. Salaries and benefits were $209,000 higher in 2001, an
increase of 24%, compared to the same period in 2000. This increase was
principally due to an increase in the number of employees and salary
adjustments. The number of full-time equivalent employees grew from 72 at June
30, 2000 to 78 at June 30, 2001. Occupancy expenses were $51,000 higher due
primarily to the additional rent, maintenance and utility costs for new
branches. Data processing expenses increased $57,000 principally due to the
growth of the institution, variable costs associated with item processing and
account volumes, and new services. Other expenses consist primarily of furniture
and equipment expense, employee travel, meals and entertainment, stationery,
supplies, postage and Board of Directors' fees. Results for the second quarter
of 2000 included $68,000 for the write-off of improvements related to a proposed
branch in Bensalem that was relocated. Exclusive of these one-time charges in
2000, other expenses increased $53,000 or 16% due principally to the growth of
the institution.
For the six months ended June 30, 2001, non-interest expenses were
$4,602,000 or $382,000 higher than the $4,220,000 recorded during the same
period in 2000. Overhead expenses for the six months ended June 30, 2000
included one-time charges of $115,000 related to two discontinued internet
banking initiatives and $68,000 for the write-off of improvements to a proposed
branch site in Bensalem which was relocated. Excluding these one-time charges,
overhead increased $565,000 or 14% principally due to the continued growth of
our franchise, namely the opening of our Bensalem and Montgomeryville offices in
October 2000. Salaries and benefits were $239,000 higher in 2001, an increase of
12%, compared to the same period in 2000. This increase was principally due to
an increase in the number of employees and salary adjustments. Occupancy
expenses were $99,000 higher due primarily to the additional rent, maintenance
and utility costs for new branches. Data processing expenses increased $65,000
principally due to the growth of the institution, variable costs associated with
item processing and account volumes, and new services. Professional services and
marketing expenses were lower for the six months ended June 30, 2001 due in part
to the one-time charges in 2000. Other expenses consist primarily of furniture
and equipment expense, employee travel, meals and entertainment, stationery,
supplies, postage and Board of Directors' fees. Other expenses in 2000 included
$68,000 for the write-off of improvements related to a proposed branch site that
was relocated. Exclusive of these one-time charges in 2000, other expenses
increased $112,000 or 18% due principally to the growth of the institution and
$22,000 in fair market value write-downs on derivatives related to the Index
Powered [SM] Certificate of Deposit.
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 we deem
adequate to provide for known and inherent losses. The amount of the provision
for loan losses and the amount of the allowance for loan losses is subject to
ongoing analysis of the loan portfolio which considers current economic
conditions, actual loss experience, the current risk profile of the portfolio,
delinquency statistics, and the composition of loan types within the portfolio.
Net charge-offs were
15
$4,000 and $6,000 for the six months ended June 30, 2001 and June 30, 2000,
respectively. The bank's loan portfolio is relatively immature given its recent
growth rates. Therefore, charge-off and non-performing trends may not be
indicative of future performance.
The provision for loan losses increased $114,000 from $125,000 during the
three months ended June 30, 2000 to $239,000 during the same period in 2001. The
provision for loan losses also increased $64,000 from $275,000 during the six
months ended June 30, 2000 to $339,000 during the same period in 2001. The
increase is due to a more rapid rate of loan growth in 2001 versus 2000. Total
loans grew $22,870,000 or 9% during the three months ended June 30, 2001
compared to $7,028,000 or 3% during the same period in 2000. Total loans grew
$33,188,000 or 14% during the six months ended June 30, 2001 compared to
$15,655,000 or 8% during the same period in 2000. The loan loss allowance as a
percentage of total loans was 1.23% and 1.29% at June 30, 2001 and June 30,
2000, respectively.
Income tax expense
We recorded a $189,000 or 25.1% tax provision for the three months ended
June 30, 2001 compared to $212,000 or 26.0% for the same period in 2000. We
recorded a $344,000 or 25.1% tax provision for the six months ended June 30,
2001 compared to $320,000 or 24.1% for the same period in 2000. The effective
tax rate for the six months ended June 30, 2001 was higher than the comparable
period in 2000, due principally to a lower ratio of tax-exempt interest relative
to total taxable income.
FINANCIAL CONDITION
Consolidated assets grew $46,208,000 or 13% during the six months ended
June 30, 2001. Federal funds sold, investments and total gross loans grew
$7,645,000, $4,722,000 and $33,188,000, respectively. Asset growth was primarily
funded by increases in borrowings and deposits and by proceeds from the sale of
investment securities available for sale. Borrowings grew $36,790,000 from
$14,404,000 at December 31, 2000 to $51,194,000 at June 30, 2001. Deposits grew
$7,987,000 from $303,293,000 at December 31, 2000 to $311,280,000 at June 30,
2001. Shareholders' equity increased $1,716,000 from $16,455,000 at December 31,
2000 to $18,171,000 at June 30, 2001. This increase was attributable to
$1,029,000 in earnings, a $259,000 improvement in the estimated fair value of
investment securities available for sale, net of tax, and $428,000 from the
exercise of common stock options.
Investment securities
The company's investment policies dictate permissible investment
categories, credit quality, maturity intervals and investment concentrations. We
are responsible for making the specific investment purchases within these
standards. Total investments increased by $4,722,000 from $100,599,000 at
December 31, 2000 to $105,321,000 at June 30, 2001.
We buy and sell investment securities from time to time depending on market
conditions, business trends, liquidity and capital levels. Investment securities
provide an interim way to add to assets quickly and generate additional
earnings. While loan growth is the company's ultimate goal, the development of a
quality loan portfolio requires significant time. We generally earn a positive
interest spread by assuming interest rate risk using deposits and short-term
borrowings to purchase securities with longer maturities.
We were a net buyer of securities during the six months ended June 30,
2001. Mortgage-backed securities, municipal bonds and corporate bonds increased
$1,248,000, $2,939,000 and $5,411,000, respectively, during the six months ended
June 30, 2001, excluding changes in estimated fair value. U.S. government agency
obligations decreased $5,343,000 during the six months ended June 30, 2001,
excluding changes in estimated fair value.
Investment securities are classified at the time of purchase by one of
three purposes: trading, available for sale (AFS) or held to maturity (HTM). To
date, we have not purchased any securities for trading purposes. We classify
most of our securities as AFS even though we have no immediate intent to sell
them. The AFS designation affords
16
us the flexibility to sell certain securities and adjust the balance sheet in
response to capital levels; liquidity needs and/or changes in market conditions.
AFS securities are marked to market in the Consolidated Statements of Financial
Condition with an adjustment to equity, net of tax, and presented in the caption
"Accumulated other comprehensive income (loss)." The carrying values for AFS and
HTM securities were $100,823,000 and $4,498,000, respectively, as of June 30,
2001.
The estimated fair value of AFS securities improved $392,000 from an
unrealized loss of $4,975,000 at December 31, 2000 to an unrealized loss of
$4,583,000 at June 30, 2001. The estimated fair value of AFS securities improved
during the first half of 2001 principally due to lower interest rates. At June
30, 2001, approximately 76% of the unrealized loss on AFS securities related to
the corporate bond portfolio.
At June 30, 2001 corporate bonds comprised $34,947,000 or 33% of the total
investment portfolio. Approximately 67% of our corporate bonds are fixed rate
and 33% are variable rate. We began investing in the corporate bonds of other
banking companies after the issuance of our $10,000,000 of capital securities in
August 1998. In the third quarter of 1998 there was a deep discounting of
corporate bond issues in response to certain world events. Our corporate bond
portfolio experienced an unrealized loss in value beyond that caused by rising
interest rates alone as the market deeply discounted these securities due to
perceived credit risk. We believe that the market valuations of our corporate
bonds were discounted further because certain bonds were issued by non-rated or
below investment grade rated companies.
We evaluated the credit quality of corporate bond issues prior to their
purchase and monitor these issuers on an ongoing basis. We believe that the
credit quality of our corporate bond portfolio is sound and that we will
ultimately be repaid. Therefore, we view the unrealized loss in the market value
of our corporate bonds as temporary. If, at some future date, we believe that
the recovery of the unrealized loss on our corporate bonds is not probable and
other than temporary, we will recognize the loss through earnings.
Although we have no immediate plans to sell these securities, we have
classified them as "available for sale" allowing us the flexibility to sell the
securities and adjust our portfolio as future conditions change. Although
interest rates have recently declined, these bonds have yet to materially
recover their unrealized losses in estimated fair market value. At this time we
plan to hold these investment positions realizing it may be some time before
market conditions improve.
INVESTMENT PORTFOLIO
JUNE 30, 2001
--------------------------------------------------------
HELD TO MATURITY AVAILABLE FOR SALE
AMORTIZED ESTIMATED AMORTIZED ESTIMATED
COST FAIR VALUE COST FAIR VALUE
---- ---------- ---- ----------
(In thousands)
U.S. government agency obligations $ 3,998 $ 3,951 $ -- $ --
Mortgage-backed securities -- -- 47,541 47,031
Municipal securities -- -- 20,795 20,202
Equity securities -- -- 2,008 2,008
Corporate bonds -- -- 34,947 31,467
Other debt securities 500 500 115 115
------- ------- --------- ---------
Total $ 4,498 $ 4,451 $ 105,406 $ 100,823
======= ======= ========= =========
DECEMBER 31, 2000
--------------------------------------------------------
HELD TO MATURITY AVAILABLE FOR SALE
AMORTIZED ESTIMATED AMORTIZED ESTIMATED
COST FAIR VALUE COST FAIR VALUE
---- ---------- ---- ----------
(In thousands)
U.S. government agency obligations $ 4,997 $ 4,888 $ 4,344 $ 4,363
Mortgage-backed securities 529 524 45,764 45,142
Municipal securities -- -- 17,856 17,292
Equity securities -- -- 1,933 1,933
Corporate bonds -- -- 29,536 25,728
Other debt securities 500 500 115 115
------- ------- --------- ---------
Total $ 6,026 $ 5,912 $ 99,548 $ 94,573
======= ======= ========= =========
17
Loans
The bank originates a wide variety of loans principally to small and medium
size businesses, professionals and individuals. Company policies and applicable
laws and regulations require risk analysis as well as ongoing portfolio and
credit management. We manage credit risk through lending limit constraints,
credit review, approval policies, and ongoing internal monitoring. A majority of
the loan portfolio is collateralized, at least in part, by real estate in the
greater Lehigh and Delaware Valleys of Pennsylvania and New Jersey. Real estate
values are typically subject to risks associated with the general economy, among
other matters.
In addition to credit risk, interest rate risk is inherent with the lending
function. We manage interest rate risk within our asset/liability framework
using various modeling techniques and analyses. Most loans are adjustable rate
that reset in intervals of five years or fewer. When possible the bank also
originates variable rate loans.
Gross loans increased $33,188,000 or 14% from $239,445,000 at December 31,
2000 to $272,633,000 at June 30, 2001. Loans secured by commercial real estate
grew $25,102,000 during the six months ended June 30, 2001.
LOAN PORTFOLIO
JUNE 30, 2001 % OF TOTAL DECEMBER 31, 2000 % OF TOTAL
------------- ---------- ----------------- ----------
(Dollars in thousands)
Real estate-farmland $ 222 0.08% $ 230 0.10%
Real estate-construction 8,379 3.07% 4,395 1.83%
Real estate-residential 27,384 10.04% 25,401 10.61%
Real estate-multifamily 12,585 4.62% 13,667 5.71%
Real estate-commercial 186,777 68.52% 161,675 67.52%
Commercial 34,931 12.81% 32,295 13.49%
Consumer 2,355 0.86% 1,782 0.74%
--------- ------ --------- ------
Total loans 272,633 100.00% 239,445 100.00%
====== ======
Less:
Unearned income 1,033 861
Allowance for loan losses 3,367 3,032
--------- ---------
Total loans, net $ 268,233 $ 235,552
========= =========
Allowance for loan losses
We maintain an allowance for loan losses and charge losses to this
allowance when losses are realized. The allowance for loan losses is maintained
at a level that we consider adequate to provide for known and inherent losses in
the loan portfolio. Our evaluation includes such factors as current economic
conditions, actual loss experience and the current risk profile of the loan
portfolio. Each commercial loan is assigned a specific loan loss reserve using a
scoring system. This scoring system takes into consideration collateral type and
value, loan to value ratios, the borrower's risk rating, delinquency statistics
and other factors previously described. Loan officers determine borrowers' risk
ratings at the inception of each loan. These risk ratings are subject to ongoing
analysis and update by an independent loan reviewer. Homogeneous loans,
comprised primarily of home equity and non-real estate secured consumer loans,
are analyzed in the aggregate. Because the bank is less than ten years old with
a limited history for loan losses, we also use peer group analysis to gauge the
overall reasonableness of the loan loss allowance. While we calculate the
allowance based on specific loans or loan categories, we consider the total
18
allowance available for losses in the entire loan portfolio. The unallocated
portion of the reserve is primarily determined based on our assessment of the
collateral risk inherent in non-real estate secured commercial loans as well as
other risk factors that may not have manifested themselves in the company's
historical loss experience. Some of these other risk factors include the economy
and inherent delays in obtaining information regarding a customer's financial
condition or changes in their unique business conditions affecting the
identification and estimation of losses.
While we believe that we use the best information available to determine
the allowance for loan losses, unforeseen market conditions could result in
adjustments to the allowance, and net income could be significantly affected if
circumstances differ substantially from the assumptions used in determining the
allowance.
ALLOWANCE FOR LOAN LOSS ALLOCATION
JUNE 30, 2001 DECEMEBER 31, 2000 JUNE 30, 2000
--------------------------- --------------------------- ---------------------------
% LOANS TO % LOANS TO % LOANS TO
AMOUNT TOTAL LOANS AMOUNT TOTAL LOANS AMOUNT TOTAL LOANS
------ ----------- ------ ----------- ------ -----------
(Dollars in thousands)
Balance at end of period
applicable to:
Real estate-farmland $ 2 0.08% $ 2 0.10% $ 2 0.11%
Real estate-construction 51 3.07% 30 1.83% 38 2.49%
Real estate-residential 235 10.04% 236 10.61% 275 10.71%
Real estate-multi-family 104 4.62% 76 5.71% 68 5.88%
Real estate-commercial 1,690 68.52% 1,419 67.52% 1,287 67.17%
Commercial 710 12.81% 662 13.49% 673 12.78%
Consumer 15 0.86% 14 0.74% 14 0.86%
Unallocated 560 -- 593 -- 423 --
------- ------ ------- ------ ------- ------
Total $ 3,367 100.00% $ 3,032 100.00% $ 2,780 100.00%
======= ====== ======= ====== ======= ======
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.
At June 30, 2001, the allowance for loan losses totaled $3,367,000,
representing 1.23% of outstanding loans receivable compared to 1.27% and 1.29%
at December 31, 2000 and June 30, 2000, respectively.
19
The following table sets forth the activity in the allowance for loan
losses and certain key ratios for the periods indicated. The bank's loan
portfolio is relatively immature given its recent growth rates. Therefore,
current charge-off and non-performing asset trends may not be indicative of
future performance.
ALLOWANCE FOR LOAN LOSSES
FOR THE SIX FOR THE FOR THE SIX
MONTHS ENDED YEAR ENDED MONTHS ENDED
JUNE 30, 2001 DECEMBER 31, 2000 JUNE 30, 2000
------------- ----------------- -------------
(Dollars in thousands)
Balance at beginning of period $ 3,032 $ 2,511 $ 2,511
Charge-offs:
Real estate-residential -- 6 6
Commercial 4 1 --
--------- --------- ---------
Total charge-offs 4 7 6
Recoveries: -- -- --
Net charge-offs 4 7 6
--------- --------- ---------
Provision for loan losses 339 528 275
--------- --------- ---------
Balance at end of period $ 3,367 $ 3,032 $ 2,780
========= ========= =========
Total gross loans:
Average $ 252,196 $ 217,128 $ 208,169
End of period $ 272,633 $ 239,445 $ 214,879
Ratios:
Net charge-offs to:
Average loans -- -- --
Loans at end of period -- -- --
Allowance for loan losses 0.12% 0.23% 0.22%
Provision for loan losses 1.18% 1.33% 2.18%
Allowance for loan losses to:
Total gross loans at end of period 1.23% 1.27% 1.29%
Non-performing loans(1) N/M N/M N/M
----------------
(1) Ratio is not meaningful since the allowance for loan losses exceeds the
amount of non-performing loans by more than nine times at June 30, 2001 and
June 30, 2000. There were no non-performing loans at December 31, 2000.
20
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 at June 30, 2001 consist of one non-accruing loan secured
by commercial real estate. Non-performing assets at December 31, 2000 consisted
of seven residential properties classified as other real estate owned. These
other real estate owned properties were sold in May 2001 at a loss of $17,000.
NON-PERFORMING ASSETS
JUNE 30, 2001 DECEMBER 31, 2000
------------- -----------------
(Dollars in thousands)
Loans past due 90 days or more and accruing $ -- $ --
Non-accrual loans 350 --
Other real estate owned -- 252
----- -----
Total non-performing assets $ 350 $ 252
===== =====
Ratio of non-performing loans to total loans (1) 0.13% N/M
Ratio of non-performing assets to total assets 0.09% 0.07%
----------------
(1) Ratio is not meaningful because there were no non-performing loans at
December 31, 2000.
Loans held for sale
An outside company originates and sells residential mortgages on our
behalf. The balance of loans held for sale was $362,000 at June 30, 2001
compared to no loans held for sale at December 31, 2000. The increase in loans
held for sale relates to the timing of loan originations versus their sale.
Typically, these loans are sold within 30 days of their settlement.
Other real estate owned
Other real estate owned at December 31, 2000 was sold in May 2001 for a
loss of $17,000. There was no other real estate owned at June 30, 2001.
Deferred taxes
The $133,000 decrease in deferred taxes from $2,703,000 at December 31,
2000 to $2,570,000 at June 30, 2001 relates to the change in the estimated fair
value of investment securities available for sale.
Other assets
The $372,000 increase in other assets from $699,000 at December 31, 2000 to
$1,071,000 at June 30, 2001 primarily relates to principal due on delay payment
type securities that were sold as of June 30, 2001.
21
Deposits
Premier Bank, a traditional community-based bank, is largely dependent upon
its base of competitively priced core deposits to provide a stable funding
source. The bank has retained and grown its customer base since inception
through a combination of price, quality service, convenience, and a stable and
experienced staff. During the six months ended June 30, 2001 total deposits grew
$7,987,000 from $303,293,000 at December 31, 2000 to $311,280,000 at June 30,
2001. Deposits grew only 3% during the six months ended June 30, 2001. However,
as a result of recent interest rate trends, we were able to significantly lower
our cost of deposits, excluding non-interest-bearing accounts, from 5.62% at
December 31, 2000 to 4.94% at June 30, 2001. Core deposits, which exclude time
deposits greater than $100,000, grew only $2,260,000 or 1% during the six months
ended June 30, 2001 to $262,129,000. Our personal cash management account, which
has been aggressively promoted since the second quarter of 2000, grew $4,279,000
during the six months ended June 30, 2001. During the six months ended June 30,
2001 approximately $31,000,000 in 9-month certificate of deposits yielding 7%
matured. Certificate of deposits that matured during the six months ended June
30, 2001 were either retained or replaced as total certificates of deposit grew
a modest $1,109,000 during that same period. In January 2001 the bank introduced
the Index Powered SM Certificate of Deposit which totaled $4,945,000 at June 30,
2001. Certificate of deposit accounts at June 30, 2001 totaled $194,845,000 or
63% of total deposits, of which $39,877,000 mature after one year.
The growth of mutual funds over the past decade have made it increasingly
difficult for community-based financial institutions like Premier Bank to
attract deposits as many consumers in search of higher returns have shifted
their investment dollars into the stock market and away from traditional bank
deposit products. In addition, insurance companies recently have become more
significant competitors for deposits through their thrift and banking
subsidiaries.
We expect to continue to grow deposits through promotions, business
development programs, maturation of existing branches and branch expansion. The
bank opened its sixth and seventh branches in Bensalem and Montgomeryville,
respectively, in October 2000.
DEPOSITS BY MAJOR CLASSIFICATION
JUNE 30, 2001 DECEMBER 31, 2000
---------------------------------- -------------------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
INTEREST % OF INTEREST % OF
RATE AMOUNT TOTAL RATE AMOUNT TOTAL
---- ------ ----- ---- ------ -----
(Dollars in thousands)
Interest checking 2.52% $ 26,028 8.36% 2.53% $ 25,690 8.47%
Money market 3.30% 19,626 6.30% 5.37% 15,347 5.06%
Savings 3.01% 42,276 13.58% 3.50% 40,682 13.41%
Time 5.85% 194,845 62.60% 6.50% 193,736 63.88%
---- --------- ------ ---- --------- ------
Total interest-bearing deposits 4.94% 282,775 90.84% 5.62% 275,455 90.82%
Non-interest-bearing deposits ==== ====
Total deposits 28,505 9.16% 27,838 9.18%
--------- ------ --------- ------
$ 311,280 100.00% $ 303,293 100.00%
========= ====== ========= ======
Borrowings
Borrowings increased $36,790,000 from $14,404,000 at December 31, 2000 to
$51,194,000 at June 30, 2001. Additional borrowings were utilized during the six
months ended June 30, 2001 to fund increases in loans and investments.
22
At June 30, 2001 borrowings consisted of $30,000,000 in FHLB borrowings
maturing in approximately 7 years and $21,194,000 in overnight borrowings from
customers. At December 31, 2000 borrowings included $785,000 in overnight
federal funds purchased and $13,619,000 in overnight borrowings from customers.
The weighted average interest rate on borrowings was 4.57% and 5.59% at June 30,
2001 and December 31, 2000, respectively.
Customer repurchase agreements are collateralized by investment securities
in an amount equal to or exceeding such borrowings. The company controls the
securities pledged as collateral for customer repurchase agreements.
Other liabilities
Other liabilities decreased $273,000 from $5,422,000 at December 31, 2000
to $5,149,000 at June 30, 2001. This decrease relates principally to the
settlement of a $2,000,000 security purchase that was accrued at December 31,
2000. This decrease was mostly offset by a $463,000 net increase in
accruals/payables related to normal operations and the recording of an estimated
$1,264,000 for the derivatives associated with our Index Powered[SM] Certificate
of Deposit.
CAPITAL ADEQUACY
At June 30, 2001, we believe that the company was in compliance with all
applicable regulatory requirements to be classified as "well capitalized"
pursuant to FDIC regulations.
The tables below depict the company's capital components and ratios along
with the "adequately" and "well" capitalized criteria as defined by FDIC
regulations. At June 30, 2001, the company exceeded all regulatory requirements
and was classified as "well capitalized".
The company's growth rate continues to exceed returns on equity. In
addition, the company has continued to shift assets into the higher risk
weighted asset categories (i.e. certain loans) as defined by regulatory capital
guidelines. If these trends continue, the company will need additional capital
to remain "well capitalized".
23
CAPITAL COMPONENTS
JUNE 30, 2001 DECEMBER 31, 2000
------------- -----------------
(Dollars in thousands)
Tier I
Shareholders' equity $ 18,171 $ 16,455
Allowable portion of minority interest in equity
of subsidiary 7,065 6,580
Net unrealized security losses 3,024 3,283
--------- ---------
Total Tier I Capital $ 28,260 $ 26,318
========= =========
Tier II
Allowable portion of minority interest in equity
of subsidiary $ 2,935 $ 3,420
Allowable portion of the allowance for loan losses 3,367 3,032
Allowable portion of subordinated debt 1,500 1,500
--------- ---------
Total Tier II Capital $ 7,802 $ 7,952
========= =========
Total Capital $ 36,062 $ 34,270
Risk-weighted assets $ 328,088 $ 284,544
CAPITAL RATIOS
"ADEQUATELY "WELL
CAPITALIZED" CAPITALIZED"
JUNE 30, 2001 DECEMBER 31, 2000 RATIOS RATIOS
------------- ----------------- ------------ ------------
Total risk-based capital/risk-weighted assets 10.99% 12.04% 8.00% 10.00%
Tier I capital/risk-weighted assets 8.61% 9.25% 4.00% 6.00%
Tier I capital/average assets (leverage ratio) 7.36% 7.41% 4.00% 5.00%
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, mortgage-backed securities and
investments and borrowings. While maturities and scheduled amortization of loans
and investments are a predictable source of funds, deposit flows, loan
prepayments and mortgage-backed securities prepayments are influenced by
interest rates, economic conditions and competition.
For the six months ended June 30, 2001, investing activities used cash and
cash equivalents of $37,521,000 while operating and financing activities
provided $783,000 and $45,018,000, respectively. The cash provided by financing
activities was primarily from increases of $36,790,000 and $7,987,000 in
borrowings and deposits, respectively. Cash was also provided by the sale 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. For the six months ended June
30, 2001, loans grew $33,192,000. Investments grew $4,422,000 during the six
months ended June 30, 2001, exclusive of the change in unrealized losses on
securities available for sale.
24
For the six months ended June 30, 2000, operating and financing activities
provided cash and cash equivalents of $2,803,000 and $20,004,000, respectively,
while investing activities used $14,014,000. The cash provided by financing
activities resulted primarily from a $32,164,000 increase in deposits. This
increase in deposits was mostly due to the promotion of 23-month certificates of
deposit. This cash was primarily used for loan originations and the repayment of
borrowings. For the six months ended June 30, 2000, loans grew $15,661,000 while
borrowings decreased $12,236,000. Investments decreased $2,255,000, exclusive of
the change in unrealized losses on securities available for sale.
The bank monitors its liquidity position on a daily basis. The bank uses
overnight federal funds and interest-bearing deposits in other banks to absorb
daily excess liquidity. Conversely, overnight federal funds may be purchased to
satisfy daily liquidity needs. Federal funds are sold or purchased 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 one of the following: $6,000,000 unsecured federal funds line of
credit with the bank's correspondent bank, and the bank's $62,582,000 borrowing
limit at the Federal Home Loan Bank of Pittsburgh. The bank could also sell or
borrow against certain investment securities. At June 30, 2001, the bank had
$30,000,000 in borrowings from the Federal Home Loan Bank and no borrowings
outstanding with its correspondent bank.
DERIVATIVE FINANCIAL INSTRUMENTS
The company has limited involvement with derivative financial instruments
and currently uses them only in relation to the 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 dependant on the
return of the Standard & Poor's 500(R) Index. This deposit product is unique in
that the customer may 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.
In order to offset the risks associated with the variable cost of the
IPCD, the bank entered into a derivative contract with the Federal Home Loan
Bank of Pittsburgh (FHLB). The terms of the derivative entered into with the
FHLB provide for receipt of an amount equal to the amount to be paid to the IPCD
depositor, in exchange for a periodic payment stream expressed as a fixed rate
of interest.
The bank accounts for its derivative contract with the FHLB and the
derivative embedded in the IPCD in accordance with Statement No. 133,
"Accounting for Derivative Instruments and Hedging Activities", as amended.
Accordingly, the bank carries these derivatives at fair value in the
Consolidated Statements of Financial Condition and recognizes any changes in
fair value in current period earnings.
The notional amount of derivative contracts with the FHLB and IPCD
customers was $6,182,000 at June 30, 2001. The fair value of derivatives is
included in "Other liabilities" and approximates $1,264,000 at June 30, 2001.
During the three and six months ended June 30, 2001, approximately $7,000 and
$22,000, respectively, was recorded in other expense for net changes in the fair
market value of derivative contracts.
RECENT ACCOUNTING PRONOUNCEMENTS
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities
In September 2000, the FASB issued Statement No. 140, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities."
The Statement supercedes and replaces the guidance in Statement No. 125. It
revises the standards for accounting for securitizations and other transfers of
financial assets and collateral and requires certain disclosures, although it
carries over most of Statement No. 125's provisions without reconsideration. The
Statement is effective for transfers and servicing of financial assets and
extinguishments of
25
liabilities occurring after March 31, 2001 and for recognition and
reclassification of collateral and for disclosures relating to securitization
transactions and collateral for fiscal years ending after December 15, 2000.
This Statement is to be applied prospectively with certain exceptions. Other
than those exceptions, earlier or retroactive application of its accounting
provisions is not permitted. There was no impact on earnings, financial
condition, or equity upon adoption of Statement No. 140.
Business Combinations
In June 2001, the FASB issued Statement No. 141, "Business Combinations."
The Statement addresses financial accounting and reporting for business
combinations and supersedes APB Opinion No. 16, "Business Combinations," and
FASB Statement No. 38, "Accounting for Preacquisition Contingencies of Purchased
Enterprises." All business combinations in the scope of the Statement are to be
accounted for using the purchase method.
The provisions of the Statement apply to all business combinations
initiated after June 30, 2001. The Statement also applies to all business
combinations accounted for using the purchase method for which the date of
acquisition is July 1, 2001, or later. There is no expected impact on earnings,
financial condition, or equity upon adoption of Statement No. 141.
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 is
no expected impact on earnings, financial condition, or equity upon adoption of
Statement No. 142.
26
PART II -- OTHER INFORMATION
ITEM 1 -- LEGAL PROCEEDINGS
At June 30, 2001, there were no material legal proceedings pending against
the company.
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-QSB:
3(i) Articles of Incorporation (Incorporated by reference to
Exhibit 3(i) to our Quarterly Report on Form 10-QSB filed with
the SEC on November 14, 2000 and as amended on December 19,
2000).
3(ii) By-Laws (Incorporated by reference to Exhibit 3(ii) to our
Quarterly Report on Form 10-QSB filed with the SEC on November
14, 2000 and as 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 as 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).
(b) Reports on Form 8-K
None.
27
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of 1934, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
Premier Bancorp, Inc.
---------------------
Registrant
DATE SIGNATURE
---- ---------
August 10, 2001 /s/ John C. Soffronoff
----------------------
John C. Soffronoff
President, Chief Executive Officer, Director
(Principal Executive Officer)
August 10, 2001 /s/ Bruce E. Sickel
-------------------
Bruce E. Sickel
Chief Financial Officer, Director
(Principal Financial Officer)
28
INDEX OF EXHIBITS
Page
3(i) Articles of Incorporation (Incorporated by reference to Exhibit 3(i) to our *
Quarterly Report on Form 10-QSB filed with the SEC on November 14, 2000 and
as amended on December 19, 2000).
3(ii) By-Laws (Incorporated by reference to Exhibit 3(ii) to our Quarterly *
Report on Form 10-QSB filed with the SEC on November 14, 2000 and as
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 as 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).
* Incorporated by reference.
29