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: MARCH 31, 2003
| | 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
incorporation or organization) Identification No.)
379 NORTH MAIN STREET, DOYLESTOWN, PA 18901
(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 |_|
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Exchange Act Rule 12b-2). Yes |_| No |X|
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; 3,527,578 shares issued and 3,417,720
shares outstanding as of May 9, 2003.
PART I - FINANCIAL INFORMATION
ITEM 1 -- FINANCIAL STATEMENTS
PREMIER BANCORP, INC.
CONSOLIDATED BALANCE SHEETS
MARCH 31, DECEMBER 31,
2003 2002
--------- ---------
(UNAUDITED)
(IN THOUSANDS)
ASSETS:
Cash and due from banks $ 22,030 $ 23,027
Short-term investments 9,544 10,530
Interest-bearing deposits 6,017 4,486
--------- ---------
Cash and cash equivalents 37,591 38,043
Investment securities:
Held to maturity (fair value $500 in 2003 and 2002) 500 500
Available for sale (amortized cost $183,819 in 2003 and $202,605 in 2002) 184,456 202,641
Loans held for sale 1,910 1,928
Loans receivable (net of allowance for loan losses of $4,284 in 2003
and $4,229 in 2002) 360,514 355,598
Premises and equipment 4,601 4,432
Accrued interest receivable 3,070 3,528
Deferred income taxes 1,317 1,522
Other assets 3,086 1,780
--------- ---------
Total assets $ 597,045 $ 609,972
========= =========
LIABILITIES, MINORITY INTEREST IN SUBSIDIARIES
AND SHAREHOLDERS' EQUITY:
Deposits $ 442,245 $ 456,486
Borrowings 79,997 80,067
Accrued interest payable 2,661 2,709
Other liabilities 5,407 5,774
Subordinated debt 1,500 1,500
--------- ---------
Total liabilities 531,810 546,536
Corporation-obligated mandatorily redeemable capital securities of subsidiary
trusts holding solely junior subordinated debentures of the corporation 25,000 25,000
SHAREHOLDERS' EQUITY:
Preferred stock- no par value; 20,000,000 shares authorized; Series A Preferred
issued and outstanding 552,000 at March 31, 2003 and December 31, 2002 12,345 12,345
Common stock- $0.33 par value; 30,000,000 shares authorized; 3,527,373 shares issued
and 3,417,515 shares outstanding at March 31, 2003; 3,452,273 shares issued and
3,342,415 shares outstanding at December 31, 2002 1,164 1,139
Additional paid-in capital 12,906 12,545
Retained earnings 14,718 13,701
Treasury stock at cost; 109,858 shares at March 31, 2003 and December 31, 2002 (1,318) (1,318)
Accumulated other comprehensive income 420 24
--------- ---------
Total shareholders' equity 40,235 38,436
--------- ---------
Total liabilities, minority interest in subsidiaries and shareholders' equity $ 597,045 $ 609,972
========= =========
The accompanying notes are an integral part of the
consolidated financial statements.
2
PREMIER BANCORP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS
ENDED MARCH 31,
------------------------------
2003 2002
----------- -----------
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
INTEREST INCOME:
Loans $ 6,271 $ 5,992
Short-term investments and interest-bearing deposits 50 103
Investments:
Taxable 1,898 1,222
Tax-exempt 139 247
----------- -----------
Total interest income 8,358 7,564
INTEREST EXPENSE:
Deposits 2,603 3,327
Borrowings 745 519
----------- -----------
Total interest expense 3,348 3,846
----------- -----------
Net interest income 5,010 3,718
Provision for loan losses 70 285
----------- -----------
Net interest income after loan loss provision 4,940 3,433
NON-INTEREST INCOME:
Service charges and other deposit-related fees 93 94
Gain (loss), net, on sale of investment securities
available for sale 15 (38)
Gain on sale of loans held for sale 129 13
Fees from sales of title insurance policies 24 40
Other fees 20 27
----------- -----------
Total non-interest income 281 136
NON-INTEREST EXPENSE:
Salaries and employee benefits 1,452 1,257
Occupancy 240 200
Data processing 315 255
Professional services 69 64
Marketing 47 66
Minority interest in expense of subsidiaries 412 218
Other 495 424
----------- -----------
Total non-interest expense 3,030 2,484
----------- -----------
Income before income tax 2,191 1,085
Income tax expense 685 283
----------- -----------
Net income $ 1,506 $ 802
=========== ===========
Less: Preferred stock dividends $ (319) $ --
----------- -----------
Net income applicable to common shareholders $ 1,187 $ 802
=========== ===========
EARNINGS PER COMMON SHARE:
Basic $ 0.35 $ 0.24
Diluted $ 0.34 $ 0.23
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING:
Basic 3,366,983 3,277,115
Diluted 3,483,467 3,429,582
The accompanying notes are an integral part of the
consolidated financial statements.
3
PREMIER BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS
ENDED MARCH 31,
------------------------
2003 2002
-------- --------
(UNAUDITED)
(IN THOUSANDS)
OPERATING ACTIVITIES:
Net income $ 1,506 $ 802
Adjustments to reconcile net income to cash provided by operating activities:
Depreciation expense 120 120
Provision for loan losses 70 285
Fair market value adjustments on IPCD derivatives 28 (19)
Amortization of premiums/discounts on investment securities available for sale 278 36
Gain (loss) on sales of investment securities available for sale (15) 38
Gain on sales of loans held for sale (129) (13)
Originations of loans held for sale (5,770) (2,390)
Proceeds from sales of loans held for sale 5,917 2,051
Decrease in accrued interest receivable 458 126
Increase in other assets (1,306) (321)
Increase in deferred loan fees 28 227
Decrease in accrued interest payable (48) (797)
Decrease (increase) in other liabilities (438) 1,109
-------- --------
Net cash provided by operating activities 699 1,254
-------- --------
INVESTING ACTIVITIES:
Proceeds from sales of investment securities available for sale 40,589 16,230
Repayment of investment securities available for sale 9,691 3,488
Purchases of investment securities available for sale (31,757) (19,355)
Net increase in loans receivable (5,014) (23,790)
Purchases of premises and equipment (289) (33)
-------- --------
Net cash provided by (used in) investing activities 13,220 (23,460)
-------- --------
FINANCING ACTIVITIES:
Net (decrease) increase in deposits (14,241) 32,962
Net (decrease) increase in borrowings less than 90 days (70) 2,628
Payment of preferred stock dividends (319) --
Proceeds from exercised common stock options 259 250
-------- --------
Net cash (used in) provided by financing activities (14,371) 35,840
-------- --------
(Decrease) increase in cash and cash equivalents (452) 13,634
CASH AND CASH EQUIVALENTS:
Beginning of period 38,043 29,604
-------- --------
End of period $ 37,591 $ 43,238
======== ========
SUPPLEMENTAL DISCLOSURES:
Cash payments for:
Interest expense $ 3,396 $ 4,643
Taxes -- 650
SUPPLEMENTAL DISCLOSURE OF NONCASH ACTIVITIES:
Change in the estimated fair value of investment securities available for sale $ 601 $ 232
Change in the deferred tax asset related to investment securities
available for sale (205) (79)
Tax effect of exercised common stock options 127 14
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. PENDING ACQUISITION
On January 16, 2003, PBI announced that it had entered into a definitive
agreement to be acquired by Fulton Financial Corporation based in Lancaster,
Pennsylvania. Under the terms of the agreement, Fulton Financial will acquire
all of PBI's issued and outstanding shares of common stock. As of January 16,
2003, each share of PBI common stock outstanding was entitled to an exchange for
1.34 shares of Fulton common stock. This exchange ratio was adjusted to 1.407
pursuant to Fulton Financial's declaration of a 5% common stock dividend on
April 15, 2003 to shareholders of record on April 30, 2003. All outstanding
shares of PBI preferred stock are expected to be redeemed as of or before the
closing date of the transaction. This acquisition, which is subject to the
approval of bank regulators and PBI shareholders, is expected to close by the
third quarter of 2003.
3. 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, 2002.
These results of operations for the three months ended March 31, 2003 and 2002
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, 2002 included in PBI's annual report on Form 10-K filed with the
Securities and Exchange Commission.
4. 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.
5
PREMIER BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
5. 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.
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 $16,601,000 and
$16,575,000 at March 31, 2003 and December 31, 2002, respectively. The fair
value of derivatives is included in "Other liabilities" and approximated
$2,448,000 and $2,608,000 at March 31, 2003 and December 31, 2002, respectively.
During the three months ended March 31, 2003 approximately $28,000 was recorded
in other expense for net changes in the fair value of derivatives compared to
$19,000 in other income for the three ended March 31, 2002. The fair value
adjustments are due to changes in prevailing interest rates and the resulting
valuations of future payments due to the FHLB.
6. 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 221,760 and 395,463 shares of common stock were outstanding at March
31, 2003 and 2002, respectively, and to the extent dilutive, were included in
the computation of earnings per diluted common share. There were no
anti-dilutive options excluded from the calculation of earnings per diluted
common share for the first quarter ended March 31, 2003 compared to 51,998 of
such options for the first quarter ended March 31, 2002.
Earnings are reduced as applicable to common shareholders by the amount of
preferred stock dividends paid, if any. PBI paid $319,000 in preferred stock
dividends during the three months ended March 31, 2003.
6
PREMIER BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
6. 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.
FOR THE THREE MONTHS ENDED MARCH 31, 2003
------------------------------------------------------------------
NET INOME WEIGHTED AVERAGE
APPLICABLE TO NUMBER OF PER COMMON
COMMON SHAREHOLDERS COMMON SHARES SHARE AMOUNT
----------------------- -------------------- ----------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
Basic earnings per common share $ 1,187 3,366,983 $ 0.35
Effect of dilutive common stock options - 116,484 (0.01)
--------------- --------------- -----------
Earnings per diluted common share $ 1,187 3,483,467 $ 0.34
=============== =============== ===========
FOR THE THREE MONTHS ENDED MARCH 31, 2002
------------------------------------------------------------------
NET INOME WEIGHTED AVERAGE
APPLICABLE TO NUMBER OF PER COMMON
COMMON SHAREHOLDERS COMMON SHARES SHARE AMOUNT
----------------------- -------------------- ----------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
Basic earnings per common share $ 802 3,277,115 $ 0.24
Effect of dilutive common stock options - 152,467 (0.01)
--------------- --------------- -----------
Earnings per diluted common share $ 802 3,429,582 $ 0.23
=============== =============== ===========
7. 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
MARCH 31, 2003 MARCH 31, 2002
-------------- --------------
(DOLLARS IN THOUSANDS)
Net income $ 1,506 $ 802
Other comprehensive income, net of tax:
Unrealized gains on investment securities
available for sale:
Unrealized holding gains during the period 406 128
Reclassification adjustment for (gains) losses
included in net income (10) 25
------------- ------------
Other comprehensive income, net of tax 396 153
------------- ------------
Comprehensive income $ 1,902 $ $ 955
============= ============
7
PREMIER BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
8. STOCK DIVIDENDS
Common Stock Dividends
On February 13, 2003, PBI's board of directors approved a cash dividend of
$0.05 per share or $170,000 to common shareholders of record on March 21, 2003.
This dividend was paid on April 15, 2003.
On May 8, 2003, PBI's board of directors approved a cash dividend of $0.05
per share to common shareholders of record on June 23, 2003 and payable on July
15, 2003.
Preferred Stock Dividends
On January 6, 2003, PBI's board of directors approved a cash dividend of
$0.578125 per share or $319,000 to preferred shareholders of record on January
16, 2003. This dividend was paid on January 31, 2003 and represented payment for
the quarter November 1, 2002 through January 31, 2003.
On April 7, 2003, PBI's board of directors approved a cash dividend of
$0.578125 per share or $319,000 to preferred shareholders of record on April 16,
2003. This dividend was paid on April 30, 2003 and represented payment for the
quarter February 1, 2003 through April 30, 2003.
9. STOCK-BASED COMPENSATION
PBI maintains two stock option plans. In connection with the bank's
initial stock offering in 1992, 486,497 options were issued to certain
incorporators, directors, officers and institutional investors. In addition, PBI
adopted a stock option plan in 1995 whereby up to 315,000 options may be granted
to employees or directors based on a discretionary incentive basis.
In December 2002, the FASB issued Statement No. 148, "Accounting for
Stock-Based Compensation--Transition and Disclosure--an amendment of FASB
Statement No. 123." This Statement amends FASB Statement No. 123, Accounting for
Stock-Based Compensation, to provide alternative methods of transition for a
voluntary change to the fair value based method of accounting for stock-based
employee compensation. The Statement also amends the disclosure requirements of
Statement 123 to require prominent disclosures in both annual and interim
financial statements about the method of accounting for stock-based employee
compensation and the effect of the method used on reported results.
PBI accounts for its stock option plans under the recognition and
measurement principles of Accounting Principles Board (APB) Opinion 25,
"Accounting for Stock Issued to Employees," and related interpretations. No
stock based employee compensation is reflected in net income, as all options
granted under those plans had an exercise price equal to the market value of the
underlying common stock on the date of grant. PBI continues to apply the
provisions of APB Opinion No. 30, as permitted by Statement No. 123, and
provides pro-forma net income and pro-forma earnings per share disclosures for
stock option grants made in 1995 and subsequent years as if the fair value
method had been applied. During the three months ended March 31, 2003 and 2002,
no options were granted.
8
PREMIER BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
9. STOCK-BASED COMPENSATION (CONTINUED)
FOR THE THREE MONTHS ENDED MARCH,
2003 2002
---- ----
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Net income per common share:
As reported $ 1,187 $ 802
Pro forma 1,187 802
Basic earnings per common share:
As reported $ 0.35 $ 0.24
Pro forma 0.35 0.24
Diluted earnings per common share:
As reported $ 0.34 $ 0.23
Pro forma 0.34 0.23
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 months ended March 31, 2003
as compared to the same period in 2002 and changes in the balance sheet from
December 31, 2002 to March 31, 2003. Current performance may not be indicative
of future performance. This discussion should be read in conjunction with PBI's
2002 Annual Report on Form 10-K.
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:
o operating, legal and regulatory risks, such as continued levels of
loan quality and origination volumes, continued relationships with
major customers, and technological changes;
o 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; and
o 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.
Premier Bancorp, Inc. (PBI) is a registered financial holding company. We
were incorporated in the Commonwealth of Pennsylvania in July 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 principal
subsidiary, Premier Bank, which we manage as a single business segment and which
is a state chartered Federal Reserve member commercial bank whose deposits are
insured by the Federal Deposit Insurance Corporation's Bank Insurance Fund to
the fullest extent provided by law. Premier Bank was organized in 1990 and began
operations on April 24, 1992.
Our consolidated financial condition and results of operations consist
almost entirely of those of Premier Bank. At March 31, 2003, we had total
consolidated assets of $597,045,000, total deposits of $442,245,000 and total
shareholders' equity of $40,235,000.
Our other wholly-owned subsidiaries include PBI Capital Trust, Premier
Capital Trust II, Lenders Abstract, LLC and Premier Bank Insurance Services,
LLC. PBI Capital Trust and Premier Capital Trust II are Delaware statutory
business trusts established for the sole purpose of issuing $10,000,000 and
$15,000,000, respectively, in trust preferred securities. PBI Capital Trust and
Premier Capital Trust II were established in 1998 and 2002, respectively.
Lenders Abstract, LLC is a Pennsylvania limited liability company organized in
December 2000 to sell title insurance policies. Premier Bank Insurance Services,
LLC is a Pennsylvania limited liability company organized in March 2002
principally to sell long-term health care insurance policies.
On January 16, 2003, PBI announced that it had entered into a definitive
agreement to be acquired by Fulton Financial Corporation based in Lancaster,
Pennsylvania. Under the terms of the agreement, Fulton Financial will acquire
all of PBI's issued and outstanding shares of common stock. As of January 16,
2003, each share of PBI common stock outstanding was entitled to an exchange for
1.34 shares of Fulton common stock. This exchange ratio
10
was adjusted to 1.407 pursuant to Fulton Financial's declaration of a 5% common
stock dividend on April 15, 2003 to shareholders of record on April 30, 2003.
The exchange ratio is subject to further adjustment in the event of additional
stock splits, stock dividends and similar matters of Fulton common stock through
the effective date of the acquisition. All outstanding shares of PBI preferred
stock are expected to be redeemed as of or before the closing date of the
transaction. This acquisition, which is subject to the approval of bank
regulators and PBI shareholders, is expected to close by the third quarter of
2003.
Premier Bank
Premier Bank is a Pennsylvania chartered financial services provider whose
business primarily consists of originating loans to small to mid-sized
businesses and attracting retail deposits from the general public. The bank also
invests in securities such as mortgage-backed securities, obligations of U.S.
government agencies and government sponsored entities, collateralized mortgage
obligations, corporate bonds and municipal bonds. The bank's revenues are
primarily derived from net interest income. Over our eleven-year history, we
have grown significantly through internal growth.
Our deposit products include checking, savings, and money market accounts,
as well as certificates of deposit. We offer numerous credit products, but
specialize in lending to small to mid-sized businesses and professionals. We
offer a full array of lending products including loans secured by real estate
and other assets, working capital lines and other commercial loans. We make a
wide range of consumer loan products available such as residential mortgage
loans, home equity loans and lines of credit, personal lines of credit and other
consumer loans. We sell our retail -based residential mortgage loans in the
secondary market. We also offer other services such as internet banking,
telephone banking, cash management services, automated teller services and safe
deposit boxes. Further, through our subsidiary, Lenders Abstract, LLC, we sell
title insurance. We also offer long-term health care insurance products through
our subsidiary, Premier Bank Insurance Services, LLC.
Premier Bank conducts business from seven full-service Pennsylvania
banking offices in Doylestown, Easton, Southampton, Floral Vale, Bethlehem,
Montgomeryville, and Bensalem. In addition, the bank operates a limited service
branch in the Heritage Towers Retirement Community in Doylestown. We opened our
eighth full-service Pennsylvania banking office in Abington, Montgomery County
on May 12, 2003.
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,
gains from sales of residential mortgages, fees from sales of title insurance
and other fees. Our non-interest expenses primarily consist of employee
compensation and benefits, occupancy expenses, marketing, data processing costs
and other operating expenses. The bank is subject to losses from its loan 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.
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.
11
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".
Realization of deferred income tax items
Estimates of deferred tax assets and deferred tax liabilities make up the
asset category titled, "Deferred income taxes." These estimates involve
significant judgments and assumptions by management, which may have a material
impact on the carrying value of deferred tax assets for financial reporting
purposes. For a more detailed description of these items and estimates, see Note
13 (Income Taxes) to the Annual Financial Statements included in Form 10-K for
the year ended December 31, 2002.
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 $1,187,000 or
$.34 earnings per common share on a diluted basis for the three months ended
March 31, 2003. This represents an increase of $385,000 or 48% from the net
income applicable to common shareholders of $802,000 or $.23 earnings per common
share on a diluted basis reported for the same period in 2002. Net interest
income was $1,292,000 higher for the three months ended March 31, 2003 compared
to the same period in 2002 due to a $124,314,000 or 28% increase in average
interest-earning assets, a 125 basis point decrease in the rate on average
interest-bearing liabilities and a higher ratio of average interest-earning
assets to average interest-bearing liabilities. Average investment and average
loan balances were $88,707,000 and $39,636,000 higher, respectively, than the
comparable average balances for the three months ended March 31, 2002. This
growth was funded by proceeds from the issuance of preferred stock and capital
securities, deposit growth and an increase in long-term FHLB advances. The rate
on average interest-bearing deposits decreased 142 basis points from 3.95% for
the three months ended March 31, 2002 to 2.53% for the three months ended March
31, 2003 primarily due to the repricing of certificates of deposit in the lower
rate environment and the shift in deposit mix toward interest-bearing checking
accounts. The ratio of average interest-earning assets to average
interest-bearing liabilities increased from 113.69% for the three months ended
March 31, 2002 to 114.34% for the three months ended March 31, 2003.
Non-interest income was $281,000 for the three months ended March 31, 2003
compared to $136,000 for the same period in 2002. The $145,000 or 107% increase
in non-interest income for the three months ended March 31, 2003 was primarily
due to higher gains on the sales of residential mortgages held for sale.
Non-interest expenses were $3,030,000 for the three months ended March 31, 2003
compared to $2,484,000 for the same period in 2002. Non-interest expenses were
$546,000 or 22% higher during the three months ended March 31, 2003 due in part
to the overall growth of the company and the additional cost related to the
$15,000,000 in capital securities issued in September 2002.
12
Return on average assets and return on average equity on an annualized
basis are presented in the following table for the three months ended March 31,
2003 and 2002.
FOR THE THREE MONTHS
ENDED MARCH 31,
2003 2002
---- ----
Return on Average Assets (1) 0.80% 0.71%
Return of Average Common Equity (2) 17.72% 15.85%
-------------------------------
(1) Calculated as net income applicable to common shareholders divided by
average assets.
(2) Calculated as net income applicable to common shareholders divided by
average total equity less average preferred stock.
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 .50% in 2002 and 4.75% in 2001. As a result,
the current interest rate environment is at a historically low level. The bank's
interest-earning assets and interest-bearing liabilities continue to originate
and reprice in this lower rate environment. The yields on our average
interest-earning assets were 6.03% for the three months ended March 31, 2003
compared to 7.02% for the same period in 2002. The rates on our average
interest-bearing liabilities were 2.73% for the three months ended March 31,
2003 compared to 3.98% for the same period in 2002.
Net interest income on a tax-equivalent basis increased $1,252,000 or 32%
from $3,864,000 for the three months ended March 31, 2002 to $5,116,000 for the
three months ended March 31, 2003. This increase was primarily a function of
asset growth, a lower rate on average interest-bearing liabilities and a higher
ratio of average interest-earning assets to average interest-bearing
liabilities. These positive factors were partially offset by a lower yield on
average interest-earning assets. Average interest-earning assets grew
$124,314,000 or 28% while the yield on average interest-earning assets declined
99 basis points. Average investments grew $88,707,000 with a decrease in the
average yield on such investments of 199 basis points. Average loans grew
$39,636,000 with a decrease in the average yield on such loans of 49 basis
points. The average rate on interest-bearing liabilities improved due mostly to
the repricing of certificates of deposits in the lower rate environment, the
change in deposit mix and new long-term borrowings at lower rates. The offering
rates on our deposit products have been lowered in response to the interest rate
environment. Despite this lower interest rate environment we had considerable
success in raising non-maturity deposits that are generally less costly than
time deposits. The average balance of non-maturity deposits grew $86,922,000 and
was concentrated in interest checking accounts. The ratio of average
interest-earning assets to average interest-bearing liabilities increased from
113.69% for the three months ended March 31, 2002 to 114.34% for the three
months ended March 31, 2003. The net interest rate spread and net interest
margin improved 26 and 12 basis points, respectively.
13
The following tables set forth, for the periods indicated, certain average
balance sheet amounts and their corresponding earnings/expenses and rates (which
have been annualized).
AVERAGE BALANCES, RATES AND INTEREST INCOME AND EXPENSE SUMMARY
FOR THE THREE MONTHS ENDED MARCH 31,
---------------------------------------------------------------------------
2003 2002
------------------------------------- ----------------------------------
AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE INTEREST RATE BALANCE INTEREST RATE
--------- --------- --------- --------- --------- ---------
(DOLLARS IN THOUSANDS)
Assets:
Short-term investments $ 7,224 $ 21 1.18% $ 17,655 $ 85 1.95%
Interest-bearing deposits 10,899 29 1.08% 4,497 18 1.62%
Investment securities available
for sale
Taxable (1) 175,641 1,892 4.37% 78,620 1,215 6.27%
Tax-exempt (1) (2) 11,443 211 7.48% 19,757 375 7.70%
Investment securities held to
maturity 500 6 4.87% 500 7 5.68%
--------- --------- --------- --------- --------- ---------
Total investment securities 187,584 2,109 4.56% 98,877 1,597 6.55%
Loans, net of unearned
income (3) (4) 363,821 6,305 7.03% 324,185 6,010 7.52%
--------- --------- --------- --------- --------- ---------
Total interest-earning assets 569,528 8,464 6.03% 445,214 7,710 7.02%
Cash and due from banks 21,419 12,471
Allowance for loan losses (4,296) (3,904)
Other assets (5) 13,979 9,989
--------- ---------
Total assets $ 600,630 $ 463,770
========= =========
Liabilities, minority interest in
subsidiaries and shareholders' equity:
Interest checking $ 145,131 547 1.53% $ 77,736 535 2.79%
Money market deposit accounts 20,438 90 1.79% 16,718 95 2.30%
Savings accounts 60,188 248 1.67% 45,704 251 2.23%
Time deposits 191,738 1,718 3.63% 201,620 2,446 4.92%
--------- --------- --------- --------- --------- ---------
Total interest-bearing deposits 417,495 2,603 2.53% 341,778 3,327 3.95%
Short-term borrowings 19,114 15 0.32% 16,311 31 0.77%
Long-term borrowings 60,000 712 4.81% 30,000 439 5.93%
Subordinated debt 1,500 18 4.87% 3,500 49 5.68%
--------- --------- --------- --------- --------- ---------
Total borrowings 80,614 745 3.75% 49,811 519 4.23%
--------- --------- --------- --------- --------- ---------
Total interest-bearing liabilities 498,109 3,348 2.73% 391,589 3,846 3.98%
Non interest-bearing deposits 30,657 29,334
Other liabilities 7,671 9,721
Capital securities 25,000 10,000
Shareholders' equity (6) 39,193 23,126
--------- ---------
Total liabilities, minority interest
in subsidiaries and shareholders'
equity $ 600,630 $ 463,770
========= =========
Net interest income/rate spread $ 5,116 3.30% $ 3,864 3.04%
========= ========= ========= =========
Net interest margin (7) 3.64% 3.52%
Average interest-earning assets as a percentage
of average interest-bearing liabilities 114.34% 113.69%
-------------------
(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 $4,961,000 and $2,690,000 on average for
the three months ended March 31, 2003 and 2002, respectively.
(4) Includes tax-exempt loans of $4,822,000 and $2,263,000 on average for
the three months ended March 31, 2003 and 2002, respectively.
Tax-exempt yields were adjusted to a tax-equivalent basis using a 34%
rate.
(5) Excludes the deferred tax asset related to the SFAS 115 valuation
allowance on investment securities available for sale.
(6) Excludes the SFAS 115 valuation allowance on investment securities
available for sale, net of tax.
(7) Net interest margin is calculated as net interest income divided by
average interest-earning assets.
14
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 March 31, 2003, non-interest income was $281,000
or $145,000 higher than the $136,000 recorded during the same period in 2002.
During the three months ended March 31, 2003, we recorded $129,000 in gains on
the sale of residential mortgages held for sale compared to $13,000 during the
same period in 2002. During the three months ended March 31, 2003, we recorded
$15,000 in gains on the sale of AFS securities compared to $38,000 in losses
during the same period in 2002.
Non-interest expense
For the three months ended March 31, 2003, non-interest expenses were
$3,030,000. This was $546,000 or 22% higher than the $2,484,000 in non-interest
expenses recorded during the same period in 2002. Non-interest expenses in 2003
increased principally due to the continued growth of the company and additional
costs related to the $15,000,000 in capital securities issued in September 2002.
Salaries and benefits were $195,000 or 16% higher in the first quarter of
2003 compared to the same period in 2002. 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 83 at
March 31, 2002 to 93 at March 31, 2003. 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. We incurred an
additional $194,000 in minority interest expense related to the $15,000,000 in
capital securities issued in September 2002. Other expenses consisted primarily
of furniture and equipment expense, shareholder-related expenses, loan expense,
Pennsylvania shares tax expense, employee travel, meals and entertainment,
stationery/supplies, postage and board of directors' fees. The $92,000 or 20%
increase in other expenses is primarily attributed to the growth of the company
and an increase in loan collection expenses.
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.
The provision for loan losses was $70,000 for the three months ended March
31, 2003, respectively, compared to $285,000 for the same period in 2002. The
amount of the loan loss provision for the three months ended March 31, 2003 was
lower than the comparable period in 2002 primarily due to less loan growth
during the first quarter of 2003 compared to the first quarter of 2002. Total
gross loans grew $4,998,000 or 1% during the three months ended March 31, 2003
compared to $23,790,000 or 8% during same period in 2002.
The loan loss allowance as a percentage of total loans was 1.17% and 1.21%
at March 31, 2003 and 2002, respectively.
Income tax expense
We recorded a $685,000 tax provision representing an effective tax rate of
31.3% for the three months ended March 31, 2003 compared to $283,000 or 26.1%
for the same period in 2002. The effective tax rate for the three months ended
March 31, 2003 was higher than the comparable period in 2002, principally due to
a lower ratio of tax-exempt interest to total pre-tax income. Our statutory
federal tax rate is 34%.
15
FINANCIAL CONDITION
Consolidated assets decreased $12,927,000 or 2% during the three months
ended March 31, 2003 to $597,045,000. Investment balances decreased $18,185,000
while net loans grew $4,916,000. Deposits decreased $14,241,000 with the most
significant reduction occurring in interest checking accounts. The reduction in
deposits was a result of us lowering rates in response to the overall interest
rate environment.
Shareholders' equity increased $1,799,000 from $38,436,000 at December 31,
2002 to $40,235,000 at March 31, 2003. This increase was attributable to
$1,187,000 in earnings after preferred stock dividends, a $396,000 improvement
in the estimated fair value of investment securities available for sale, net of
tax, and $386,000 from the exercise of common stock options. These increases
were partially offset by $170,000 in common stock dividends declared.
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 March 31, 2003 totaled
$184,956,000 or 31% of total assets. At March 31, 2003, approximately 54% and 7%
of the investment portfolio was comprised of mortgage-backed securities and
collateralized mortgage obligations, respectively, that amortize and provide
monthly cash flow. Corporate bonds and municipal bonds comprised 28% and 6% of
the investment portfolio, respectively. At March 31, 2003, approximately 64% of
the investment portfolio was fixed rate compared to 66% at December 31, 2002.
Management buys and sells investment securities from time to time depending
on market conditions, business trends, liquidity and capital levels. Investment
purchases provide a way to add assets quickly and generate additional earnings.
The bank generally earns a positive interest spread by assuming interest rate
risk and using deposits and borrowings to purchase securities with longer
maturities.
Management classifies investment securities at the time of purchase by one
of three categories: trading, available for sale (AFS) or, held to maturity
(HTM). To date, management has not purchased any securities for trading
purposes. Management classifies most of its securities as AFS. 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. AFS securities are marked to market in the Consolidated
Balance Sheets with an adjustment to equity, net of tax, and presented in the
caption "Accumulated other comprehensive income (loss)."
During the three months ended March 31, 2003, investments, exclusive of the
SFAS 115 valuation allowance, decreased $18,786,000. Corporate bonds, exclusive
of the SFAS 115 valuation allowance, decreased $19,212,000. Mortgage-backed
securities, exclusive of the SFAS 115 valuation allowance, decreased
$12,363,000. The decrease in mortgage-backed securities was partially offset by
an increase in similar collateralized mortgage obligations of $12,131,000.
At March 31, 2003, the AFS portfolio had an estimated market appreciation
of $637,000 before tax and an equity adjustment of $420,000, net of tax. This
represents a $396,000 improvement in the estimated fair value of AFS securities,
net of tax, compared to December 31, 2002. The gross unrealized gain on
mortgage-backed securities was $1,414,000 at March 31, 2003 while corporate
bonds had a gross unrealized loss of $1,005,000.
The majority of the unrealized losses in our corporate bond portfolio are
concentrated in variable rate single issuer trust preferred securities issued by
other financial institutions. Management evaluated the credit quality of these
single issuer trust preferred securities prior to purchasing them and monitors
them on an ongoing basis. Management believes that the credit quality of these
securities is sound and that the company will ultimately be repaid.
Additionally, management believes that the low interest rate environment has
adversely impacted the valuation of these variable rate bonds. Management views
the unrealized loss in the market value of these single issuer trust preferred
securities 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
variable rate single issuer trust preferred securities is not probable, we will
recognize the loss through earnings which will reduce regulatory capital.
16
INVESTMENT PORTFOLIO
MARCH 31, 2003
----------------------------------------------------------------------------
Held to Maturity Available for Sale
------------------------------ -------------------------------
Amortized Estimated Amortized Estimated
Cost Fair Value Cost Fair Value
-------- -------- -------- --------
(In thousands)
Mortgage-backed securities $ -- $ -- $ 98,164 $ 99,578
Collateralized mortgage obligations -- -- 12,131 12,161
Municipal securities -- -- 11,718 11,921
Equity securities -- -- 4,123 4,123
Corporate bonds -- -- 52,573 51,568
Mutual funds -- -- 5,000 4,995
Other debt securities 500 500 110 110
-------- -------- -------- --------
Total $ 500 $ 500 $183,819 $184,456
======== ======== ======== ========
DECEMBER 31, 2002
-------------------------------------------------------------------------
Held to Maturity Available for Sale
------------------------------- --------------------------------
Amortized Estimated Amortized Estimated
Cost Fair Value Cost Fair Value
-------- -------- -------- --------
(In thousands)
Mortgage-backed securities $ -- $ -- $110,527 $111,806
Municipal securities -- -- 11,214 11,368
Equity securities -- -- 3,969 3,969
Corporate bonds -- -- 71,785 70,388
Mutual funds -- -- 5,000 5,000
Other debt securities 500 500 110 110
-------- -------- -------- --------
Total $ 500 $ 500 $202,605 $202,641
======== ======== ======== ========
Loans
Gross loans increased $4,998,000 or 1% from $361,495,000 at December 31,
2002 to $366,493,000 at March 31, 2003. Loan growth during the first quarter of
2003 was minimal primarily due to loan pay-offs and competition for new loans.
The majority of the 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 subject to risks associated with the local
economy. Loans secured by commercial properties grew $4,302,000 during the three
months ended March 31, 2003.
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, we also originate variable rate loans.
Our lending activity is focused on small to mid-sized businesses and
professionals within our market area.
17
LOAN PORTFOLIO
MARCH 31, 2003 DECEMBER 31, 2002
------------------------------- ------------------------------
AMOUNT % OF TOTAL AMOUNT % OF TOTAL
----------- ----------- ----------- -----------
(DOLLARS IN THOUSANDS)
Real estate-farmland $ 189 0.05% $ 194 0.05%
Real estate-construction 12,130 3.31% 10,574 2.92%
Real estate-residential 29,749 8.12% 32,446 8.98%
Real estate-multifamily 19,632 5.36% 19,350 5.35%
Real estate-commercial 257,659 70.30% 253,357 70.09%
Commercial 46,183 12.60% 44,387 12.28%
Consumer 951 0.26% 1,187 0.33%
----------- ----------- ----------- -----------
Total loans 366,493 100.00% 361,495 100.00%
=========== ===========
Less:
Deferred loan fees (1,695) (1,668)
Allowance for loan losses (4,284) (4,229)
----------- -----------
Total loans, net $ 360,514 $ 355,598
=========== ===========
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. Borrower risk
ratings are determined by loan officers at the inception of each loan and are
subject to on-going 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 only eleven years old with a limited history of loan
losses, management also uses peer group analysis to gauge the overall
reasonableness of loan loss reserves. While management calculates the allowance
based on specific loans or loan categories, it considers the total allowance
available for losses in the entire loan portfolio. Changes in economic
conditions and the financial condition of borrowers can occur quickly, and as a
result, impact management's estimates.
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.
18
To comply with industry reporting requirements, management allocated the
allowance for loan losses by loan categories in the table below.
ALLOWANCE FOR LOAN LOSS ALLOCATION
MARCH 31, 2003 DECEMBER 31, 2002 MARCH 31, 2002
----------------------- ----------------------- -----------------------
% 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 0.05% $ 1 0.05% $ 2 0.06%
Real estate-construction 103 3.31% 89 2.92% 74 2.52%
Real estate-residential 306 8.12% 335 8.98% 275 9.29%
Real estate-multifamily 171 5.36% 169 5.35% 121 5.33%
Real estate-commercial 2,556 70.30% 2,580 70.09% 2,551 68.63%
Commercial 1,137 12.62% 1,043 12.28% 1,069 13.87%
Consumer 10 0.24% 12 0.33% 10 0.30%
------ ------ ------ ------ ------ ------
Total $4,284 100.00% $4,229 100.00% $4,102 100.00%
====== ====== ====== ====== ====== ======
At March 31, 2003, the allowance for loan losses totaled $4,284,000 or
1.17% of total loans compared to 1.17% and 1.21% at December 31, 2002 and March
31, 2002, 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 THREE FOR THE FOR THE THREE
MONTHS ENDED YEAR ENDED MONTHS ENDED
MARCH 31, 2003 DECEMBER 31, 2002 MARCH 31, 2002
-------------- ----------------- --------------
(DOLLARS IN THOUSANDS)
Balance at beginning of period $ 4,229 $ 3,817 $ 3,817
Charge-offs
Real estate-commercial -- 295 --
Commercial 15 163 --
-------- -------- --------
Total charge-offs 15 458 --
Recoveries -- -- --
-------- -------- --------
Net charge-offs 15 458 --
Provision for loan losses 70 870 285
-------- -------- --------
Balance at end of period $ 4,284 $ 4,229 $ 4,102
======== ======== ========
Total gross loans:
Average $365,554 $348,169 $325,803
End of period $366,493 $361,495 $339,856
Ratios:
Net charge-offs to:
Average loans -- 0.13% --
Loans at end of period -- 0.13% --
Allowance for loan losses 0.35% 10.83% --
Provision for loan losses 21.43% 52.64% --
Allowance for loan losses to:
Total gross loans at end of period 1.17% 1.17% 1.21%
Non-performing loans 85.85% 87.21% 156.03%
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 represented .84% and .79% of total assets at March 31,
2003 and December 31, 2002, respectively. Non-accrual and impaired loans were
one and the same at March 31, 2003 and December 31, 2002.
NON-PERFORMING ASSETS
MARCH 31, DECEMBER 31,
2003 2002
--------- ---------
(DOLLARS IN THOUSANDS)
Loans past due 90 days or more and accruing $ -- $ --
Non-accrual loans 4,990 4,849
Other real estate owned -- --
--------- ---------
Total non-performing assets $ 4,990 $ 4,849
========= =========
Ratio of non-performing loans to total loans 1.36% 1.34%
Ratio of non-performing assets to total assets 0.84% 0.79%
At March 31, 2003, seven unrelated borrowers with an aggregate loan balance
of $4,990,000 were classified as non-accrual with two of these borrowers
comprising most of the balance with loans of $2,360,000 and $1,511,000,
respectively. These two borrowers also comprised the majority of the non-accrual
loan balance at December 31, 2002.
During April 2003, approximately $2,188,000 of non-accrual loans were
repaid including $1,676,000 on the $2,360,000 credit mentioned above.
Disposition of the $1,511,000 credit has been delayed because the borrower filed
for bankruptcy. In April 2003, $232,000 in non-accruing loans were transferred
to other real estate owned.
The average balance of non-accrual loans was $4,961,000 for the three
months ended March 31, 2003. No interest income was recognized on
non-accrual/impaired loans during either the three months ended March 31, 2003
or 2002. Total interest income that would have been recognized on non-accrual
loans was $114,000 and $62,000 for the three months ended March 31, 2003 and
2002, respectively.
Loans held for sale
Residential mortgages generated at the retail level are generally sold
within 30 days of their settlement pursuant to pre-existing commitments. At
March 31, 2003, loans held for sale totaled $1,910,000 compared to $1,928,000 at
December 31, 2002. The fluctuation in balances relates to the timing of the loan
originations versus their sale. We sold $5,788,000 and $2,038,000 of residential
mortgages during the three months ended March 31, 2003 and 2002, respectively.
Residential mortgage originations and sales are significantly influenced by the
interest rate environment.
Deferred taxes
Deferred taxes decreased $205,000 from $1,522,000 at December 31, 2002 to
$1,317,000 at March 31, 2003. This decrease relates to the increase in the
estimated fair value of investment securities available for sale.
Other assets
The $1,306,000 increase in other assets from $1,780,000 at December 31,
2002 to $3,086,000 at March 31, 2003 was primarily due to a $591,000 increase in
the principal receivable on delay-payment type mortgage-backed securities and
$231,000 in capitalized costs related to our pending acquisition by Fulton
Financial Corporation. In addition, we recorded a $247,000 receivable from our
insurance company to cover losses related to fraudulent activity in a
depositor's account. These insurance proceeds were received in April 2003. The
remaining $237,000 increase in other assets primarily relates to an increase in
prepaid operating expenses.
21
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 branches.
Total average deposits increased $77,040,000 or 21% from $371,112,000 for
the three months ended March 31, 2002 to $448,152,000 for the three months ended
March 31, 2003. Our Golden Checking product was the primary source of growth in
average deposits.
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. As a
result, the environment for deposit acquisition for financial institutions
improved 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. We opened our eighth Pennsylvania branch in
Abington, Montgomery County on May 12, 2003.
Core deposits, which exclude time deposits of $100,000 and greater,
decreased $23,248,000 or 6% during the three months ended March 31, 2003 to
$385,977,000. This decrease was concentrated in the Golden Checking product,
which is an interest-bearing checking account. Golden Checking accounts
decreased $22,294,000 during the three months ended March 31, 2003 as a result
of lowered pricing. Through September 30, 2002, the bank maintained the rate
payable on Golden Checking accounts at an annual percentage yield of 3.05%.
However, as prevailing market rates continued to decline, the bank lowered the
interest rate offered on this product, as well as on most deposit products
through March 31, 2003. Interest checking accounts at March 31, 2003 were
$134,443,000 or 30% of total deposits compared to $157,691,000 or 35% of total
deposits at December 31, 2002. Total time deposits at March 31, 2003 were
$194,175,000 or 44% of total deposits compared to $189,115,000 or 41% of total
deposits at December 31, 2002. Approximately $106,804,000 of time deposits will
mature after one year. Total deposits decreased $14,241,000 or 3% during the
three months ended March 31, 2003 to $442,245,000.
DEPOSITS BY MAJOR CLASSIFICATION
MARCH 31, 2003 DECEMBER 31, 2002
--------------------------------------------- --------------------------------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
INTEREST % OF INTEREST % OF
RATE AMOUNT TOTAL RATE AMOUNT TOTAL
----------- ----------- ----------- ----------- ----------- -----------
(DOLLARS IN THOUSANDS)
Interest checking 1.45% $ 134,443 30.40% 1.68% $ 157,691 34.54%
Money market 1.69% 22,261 5.03% 1.97% 18,611 4.08%
Savings 1.58% 60,127 13.60% 1.84% 58,182 12.75%
Time 3.58% 194,175 43.91% 3.69% 189,115 41.43%
----------- ----------- ----------- ----------- ----------- -----------
Total interest-bearing
deposits 2.49% 411,006 92.94% 2.61% 423,599 92.80%
=========== ===========
Non interest-bearing deposits 31,239 7.06% 32,887 7.20%
----------- ----------- ----------- -----------
Total deposits $ 442,245 100.00% $ 456,486 100.00%
=========== =========== =========== ===========
22
Borrowings
Borrowings totaled $79,997,000 at March 31, 2003 compared to $80,067,000 at
December 31, 2002.
Borrowings included customer repurchase agreements of $19,997,000 and
$20,067,000 at March 31, 2003 and December 31, 2002, respectively. Under
customer repurchase agreements, depositors agree to lend excess demand deposits
to us overnight at rates below the federal funds rate. The balance in customer
repurchase agreements will therefore fluctuate daily based on the level of
available funds in depositor accounts. These overnight borrowings from customers
are collateralized by certain investment securities controlled by the bank.
Borrowings also included $60,000,000 in long-term advances from the FHLB at
both March 31, 2003 and December 31, 2002. $30,000,000 of the total long-term
FHLB borrowings is fixed rate and matures in 2008. The remaining $30,000,000 is
convertible debt that may change from a fixed rate to a variable rate depending
on the LIBOR index. This convertible debt matures in 2012. Borrowings from the
FHLB are secured by a blanket lien against all of the bank's assets.
The weighted average interest rate on borrowings was 3.64% and 3.62% at
March 31, 2003 and December 31, 2002, respectively.
Other liabilities
Other liabilities decreased $367,000 from $5,774,000 at December 31, 2002
to $5,407,000 at March 31, 2003. This decrease relates principally to a $298,000
decrease in accrued compensation costs, a $159,000 decrease in the fair value
balance of derivatives related to our IPCD product, and a $246,000 decrease in
expenses payable on our capital securities. In addition accrued expenses and
other operating accounts used in the normal course of business decreased
$222,000 in the aggregate. These decreases were partially offset by a $558,000
increase in federal income taxes payable.
CAPITAL ADEQUACY
Capital is fundamental to support our continued growth. In addition, PBI
and Premier Bank are subject to various regulatory capital requirements.
Regulatory capital is defined in terms of Tier 1 capital (shareholders' equity
plus the allowable portion of the minority interest in equity of subsidiaries,
minus unrealized gains or plus unrealized losses on available for sale
securities, and minus certain intangible assets), Tier 2 capital (which includes
a portion of the allowance for loan losses, minority interest in equity of
subsidiaries and subordinated debt), and total capital (Tier 1 plus Tier 2).
Risk-based capital ratios are expressed as a percentage of risk-weighted assets.
Risk-weighted assets are determined by assigning various weights to all assets
and off-balance sheet financial instruments, such as letters of credit and loan
commitments, based on associated risk. Regulators have also adopted minimum Tier
1 leverage ratio standards that measure the ratio of Tier 1 capital to total
average quarterly assets.
During 2002, we completed two capital raising initiatives that together
netted $27,345,000. 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. Proceeds from the capital securities provide PBI with
Tier 1 and Tier 2 capital as determined by regulatory capital guidelines. 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. As part of our announced acquisition by Fulton
Financial Corporation, all outstanding shares of PBI preferred stock are
expected to be redeemed as of or before the closing date of the transaction.
The tables below depict our capital components and ratios along with the
"adequately" and "well" capitalized criteria as defined by FDIC regulations. At
March 31, 2003, management believes that PBI is "well capitalized" and in
compliance with all regulatory capital requirements.
23
CAPITAL COMPONENTS
MARCH 31, DECEMBER 31,
2003 2002
--------- ---------
(IN THOUSANDS)
Tier 1
Shareholders' equity $ 40,235 $ 38,436
Allowable portion of minority interest in equity of subsidiaries 10,000 10,000
Net unrealized gain on investment securities available for sale (420) (24)
--------- ---------
Total Tier 1 Capital $ 49,815 $ 48,412
========= =========
Tier 2
Allowable portion of minority interest in equity of subsidiaries $ 15,000 $ 15,000
Allowable portion of the allowance for loan losses 4,284 4,229
Allowable portion of subordinated debt 1,500 1,500
--------- ---------
Total Tier 2 Capital $ 20,784 $ 20,729
========= =========
Total capital $ 70,599 $ 69,141
Risk-weighted assets $ 452,984 $ 461,376
CAPITAL RATIOS
"ADEQUATELY "WELL
MARCH 31, DECEMBER 31, CAPITALIZED" CAPITALIZED"
2003 2002 RATIOS RATIOS
---- ---- ------ ------
Total risk-based capital/risk-weighted assets 15.59% 14.99% 8.00% 10.00%
Tier 1 capital/risk-weighted assets 11.00% 10.49% 4.00% 6.00%
Tier 1 capital/average assets (leverage ratio) 8.28% 8.05% 4.00% 5.00%
24
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 at all time intervals.
WITHIN 4 TO 6 7 MONTHS 1 TO 3 3 TO 5 AFTER
March 31, 2003 3 months months to 1 year years years 5 years Total
-------- --------- --------- --------- -------- --------- --------
(DOLLARS IN THOUSANDS)
Assets
Short-term investments $ 9,544 $ -- $ -- $ -- $ -- $ -- $ 9,544
Interest-bearing deposits 6,017 -- -- -- -- -- 6,017
Investment securities 75,992 5,900 15,333 31,581 13,416 42,734 184,956
Loans, net of deferred fees 60,544 14,808 28,010 102,748 147,744 10,944 364,798
-------- --------- --------- --------- -------- --------- --------
Total interest rate-sensitive assets $152,097 $ 20,708 $ 43,343 $ 134,329 $161,160 $ 53,678 $565,315
======== ========= ========= ========= ======== ========= ========
Total cumulative assets $152,097 $ 172,805 $ 216,148 $ 350,477 $511,637 $ 565,315
======== ========= ========= ========= ======== =========
Liabilities
Interest checking, money market
and savings accounts $ 6,505 $ 6,505 $ 13,011 $ 130,110 $ 43,370 $ 17,330 $216,831
Time deposits 35,069 17,641 34,659 68,606 38,085 115 194,175
Short-term borrowings 19,997 -- -- -- -- -- 19,997
Long-term borrowings -- -- -- -- -- 60,000 60,000
Subordinated debt -- -- 1,500 -- -- -- 1,500
-------- --------- --------- --------- -------- --------- --------
Total interest rate-sensitive
liabilities $ 61,571 $ 24,146 $ 49,170 $ 198,716 $ 81,455 $ 77,445 $492,503
======== ========= ========= ========= ======== ========= ========
Total cumulative liabilities $ 61,571 $ 85,717 $ 134,887 $ 333,603 $415,058 $ 492,503
======== ========= ========= ========= ======== =========
Gap during period $ 90,526 $ (3,438) $ (5,827) $ (64,387) $ 79,705 $ (23,767) $ 72,812
======== ========= ========= ========= ======== ========= ========
Cumulative gap $ 90,526 $ 87,088 $ 81,261 $ 16,874 $ 96,579 $ 72,812
======== ========= ========= ========= ======== =========
Cumulative gap as a percentage of:
Interest-earning assets 16.01% 15.41% 14.37% 2.98% 17.08% 12.88%
Total assets 15.16% 14.59% 13.61% 2.83% 16.18% 12.20%
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
25
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 April 1, 2003, 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 $18,622 $ 119 0.64%
+100 Basis Points 18,662 159 0.86%
Flat Rate 18,503 -- --
-100 Basis Points 18,046 (457) (2.47)%
-200 Basis Points 17,740 (763) (4.12)%
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. Competition for deposits
may require banks to increase rates on deposits or expand their branch office
networks to adequately grow deposits in the future.
During the three months ended March 31, 2003, cash and cash equivalents
decreased $452,000. Operating and investing activities provided cash and cash
equivalents of $699,000 and $13,220,000, respectively, while financing
activities used $14,371,000. The cash provided by investing activities was
primarily from sales and repayment of AFS securities that together generated
$50,280,000. This cash was used to finance investment purchases of $31,757,000
and loan growth of $5,014,000. Deposit balances decreased $14,241,000.
During the three months ended March 31, 2002, cash and cash equivalents
increased $13,634,000. Operating and financing activities provided cash and cash
equivalents of $1,254,000 and $35,840,000, respectively, while investing
activities used $23,460,000. The cash provided by financing activities was
primarily from increases in deposits and borrowings of $32,962,000 and
$2,628,000, respectively. Other significant sources of cash included
26
principal repayments on loans and mortgage-backed securities and sales/calls of
investment securities. Together, this cash was used to finance loan growth of
$23,790,000.
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 we require funds beyond our 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 a correspondent
bank, and a $165,531,000 borrowing limit at the FHLB. We could also sell or
reverse repurchase investment securities. At March 31, 2003, we had available
borrowing capacity of $94,231,000 and $6,000,000 with the FHLB and our
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 $16,601,000 and $16,575,000
at March 31, 2003 and December 31, 2002, respectively. The fair value of
derivatives is included in "Other liabilities" and approximated $2,448,000 and
$2,608,000 at March 31, 2003 and December 31, 2002, respectively. During the
three months ended March 31, 2003 approximately $28,000 was recorded in other
expense for net changes in the fair value of derivatives compared to $19,000 in
other income for the same period in 2002. The fair value adjustments are due to
changes in prevailing interest rates and the resulting valuations of future
payments due the FHLB.
27
RECENT ACCOUNTING PRONOUNCEMENTS
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
must be applied in fiscal years beginning after May 15, 2002. The provisions of
this Statement related to Statement 13 are effective for transactions occurring
after May 15, 2002. All other provisions of this Statement are effective for
financial statements issued on or after May 15, 2002. There was no 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. There was no 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 were effective
October 1, 2002. The adoption of this Statement did not have an impact on our
earnings, financial condition, or equity.
Stock-Based Compensation
In December 2002, the FASB issued Statement No. 148, "Accounting for
Stock-Based Compensation--Transition and Disclosure--an amendment of FASB
Statement No. 123." This Statement amends FASB Statement No. 123, Accounting for
Stock-Based Compensation, to provide alternative methods of transition for a
voluntary change to the fair value based method of accounting for stock-based
employee compensation. The Statement also amends the disclosure requirements of
Statement 123 to require prominent disclosures in both annual and interim
financial statements about the method of accounting for stock-based employee
compensation and the effect of the method used on reported results. This
Statement was effective for fiscal years ending after December 15, 2002, except
for financial reports containing condensed financial statements for interim
periods for which disclosure was effective for periods beginning after December
15, 2002. This Statement announces that "in the near future, the
28
Board plans to consider whether it should propose changes to the U.S. standards
on accounting for stock-based compensation". We have not changed to the fair
value method of accounting for stock-based employee compensation. We continue to
apply the provisions of APB Opinion No. 30, as permitted by Statement No. 123,
and provide pro-forma net income and pro-forma earnings per share disclosures
for stock option grants made in 1995 and subsequent years as if the fair value
method had been applied.
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information required herein is set forth in Item 2, above.
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.
29
PART II -- OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS
At March 31, 2003, 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:
2.1 Agreement and Plan of Merger. (Incorporated by reference to
PBI's Form 8-K filed with the SEC on January 21, 2003.)
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 Earnings per share. (Included at
Note 6 herein.)
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
PBI's announced definitive agreement to be acquired by Fulton Financial
Corporation based in Lancaster, Pennsylvania was filed on Form 8-K with the
SEC on January 21, 2003.
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
May 14, 2003 /s/ John C. Soffronoff
----------------------
John C. Soffronoff
President, Chief Executive Officer
(Principal Executive Officer)
May 14, 2003 /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: May 14, 2003 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: May 14, 2003 By: /s/ Bruce E. Sickel
--------------------------------------
Bruce E. Sickel
Chief Financial Officer
(Principal Financial Officer)
INDEX OF EXHIBITS
Page
----
2.1 Agreement and Plan of Merger. (Incorporated by reference to PBI's Form *
8-K filed with the SEC on January 21, 2003.)
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 Earnings per share. 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. Exhibit 99.1, p. 1 of 1
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. Exhibit 99.2, p. 1 of 1
* Incorporated by reference.