10-Q 1 w63291e10vq.txt PREMIER BANCORP, INC. U. S. SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED: JUNE 30, 2002 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM .............. TO .............. COMMISSION FILE NUMBER: 1-15513 PREMIER BANCORP, INC. --------------------- (Exact name of Registrant as specified in its charter) ~~PENNSYLVANIA 23-2921058 (State or other jurisdiction of incorporation or organization) (IRS Employer Identification No.)~~

379 NORTH MAIN STREET, DOYLESTOWN, PA 18901 ------------------------------------------- (Address of principal executive offices) (215) 345-5100 -------------- (Registrant's telephone number) N/A ------------------------------------------------------------------------------- (Former name, former address and former fiscal year, if changed since last report) Check whether the Registrant (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No __ APPLICABLE ONLY TO CORPORATE ISSUERS State the number of shares outstanding of each of the Registrant's classes of common stock, as of the latest practicable date: 3,417,073 shares of $0.33 par value common stock issued and outstanding as of July 31, 2002. PART I - FINANCIAL INFORMATION ITEM 1 -- FINANCIAL STATEMENTS PREMIER BANCORP, INC. CONSOLIDATED BALANCE SHEETS

The accompanying notes are an integral part of the consolidated financial statements. 2 PREMIER BANCORP, INC. CONSOLIDATED STATEMENTS OF OPERATIONS

The accompanying notes are an integral part of the consolidated financial statements. 3 PREMIER BANCORP, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS

The accompanying notes are an integral part of the consolidated financial statements. 4 PREMIER BANCORP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 1. ORGANIZATION Premier Bancorp, Inc. (PBI) is a Pennsylvania business corporation and a registered financial holding company headquartered in Doylestown, Bucks County, Pennsylvania. PBI was incorporated on July 15, 1997 and reorganized on November 17, 1997 as the one-bank holding company of Premier Bank. PBI's primary business is the operation of its wholly-owned subsidiary, Premier Bank, which is managed as a single business segment. Premier Bank provides a full range of banking services to individual and corporate customers through its branch banking system located in Bucks, Montgomery and Northampton Counties in Pennsylvania. Premier Bank is a Pennsylvania chartered commercial bank and a member of the Federal Reserve Bank of Philadelphia and the Federal Deposit Insurance Corporation. Premier Bank competes with other financial institutions and other financial services companies with respect to customers and services offered. Both PBI and Premier Bank are regulated and periodically examined by certain federal and state agencies. 2. BASIS OF FINANCIAL STATEMENT PRESENTATION The accompanying unaudited consolidated financial statements of PBI have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. The consolidated financial statements include the accounts of Premier Bancorp, Inc. and its wholly-owned subsidiaries: Premier Bank, PBI Capital Trust, Lenders Abstract, LLC and Premier Bank Insurance Services, LLC. In the opinion of management, the accompanying unaudited financial statements contain all material adjustments, including elimination of all significant intercompany accounts and transactions, necessary to present fairly PBI's financial position, results of operations and cash flows for the periods indicated, and have been prepared in a manner consistent with the audited financial statements as of December 31, 2001. These results of operations for the three and six months ended June 30, 2002 and 2001 are not necessarily indicative of the results that may be expected for the full fiscal year. These financial statements should be read in conjunction with the audited financial statements and the footnotes for the fiscal year ended December 31, 2001 included in PBI's annual report on Form 10-KSB filed with the Securities and Exchange Commission. 3. USE OF ESTIMATES In preparing the consolidated financial statements in accordance with accounting principles generally accepted in the United States as applied to the banking industry, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from such estimates. Material estimates that are particularly susceptible to significant change in the near term include the determination of the allowance for loan losses. 4. DERIVATIVE FINANCIAL INSTRUMENTS PBI and its subsidiaries have limited involvement with derivative financial instruments and currently use them only in relation to Premier Bank's Index Powered SM Certificate of Deposit (IPCD) product. The IPCD, which was introduced in the first quarter of 2001, contains an embedded derivative feature that provides a potential return to the depositor based upon a formula that is dependent on the return of the Standard & Poor's 500 (R) Index. This innovative 5-year term deposit product allows the customer to receive a return that is based on an equity market index in place of a stated interest rate but, like other traditional certificates of deposit, is insured by the FDIC to the extent provided by law. 5 PREMIER BANCORP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 4. DERIVATIVE FINANCIAL INSTRUMENTS (CONTINUED) Premier Bank entered into derivative contracts with the Federal Home Loan Bank of Pittsburgh (FHLB) in order to offset the risks associated with the variable cost of the IPCD. Under the terms of these derivative contracts, Premier Bank will receive an amount equal to the amount to be paid to the IPCD depositor in exchange for a periodic payment stream expressed as a rate of interest. The derivative contracts with the FHLB and the derivatives embedded in the IPCD are accounted for in accordance with Financial Accounting Standards Board Statement No. 133, "Accounting for Derivative Instruments and Hedging Activities", as amended. Accordingly, PBI carries these derivatives at fair value in the Consolidated Balance Sheets and recognizes any changes in fair value in current period earnings. We obtain the fair value estimates for these derivatives from a third party financial institution. The notional amount of derivative contracts was $16,098,000 and $10,905,000 at June 30, 2002 and December 31, 2001, respectively. The fair value of derivatives is included in "Other liabilities" and approximated $2,773,000 and $2,055,000 at June 30, 2002 and December 31, 2001, respectively. During the three and six months ended June 30, 2002 approximately $115,000 and $95,000, respectively, was recorded in other expense for net changes in the fair value of derivatives compared to $15,000 and $22,000 in expense for the three and six months ended June 30, 2001, respectively. The fair value adjustments are due to changes in prevailing interest rates and the resulting valuations of future payments due to the FHLB. 5. EARNINGS PER COMMON SHARE Basic earnings per common share is calculated on the basis of the weighted average number of common shares outstanding. Diluted earnings per common share includes dilutive common stock equivalents as computed under the treasury stock method using average common stock prices for the respective period. Options to purchase 303,748 and 556,278 shares of common stock were outstanding at June 30, 2002 and 2001, respectively, and to the extent dilutive, were included in the computation of earnings per diluted common share. Options to purchase 51,998 shares of common stock were anti-dilutive and excluded from the calculation of earnings per diluted common share for the three and six months ended June 30, 2002 and 2001. Earnings are reduced by the amount of dividends declared on preferred stock, if any. There were no dividends declared on preferred stock during the three and six months ended June 30, 2002. 6 PREMIER BANCORP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 5. EARNINGS PER COMMON SHARE (CONTINUED) The following is a reconciliation of the numerators and denominators of the basic and diluted earnings per common share calculations.

6. COMPREHENSIVE INCOME The following table displays net income and the components of other comprehensive income to arrive at total comprehensive income. The only component of other comprehensive income is the change in the estimated fair value of investment securities available for sale.

7 PREMIER BANCORP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 7. PREFERRED STOCK On June 19, 2002, PBI completed its public offering of 552,000 shares of Series A 9.25% Non-Cumulative Perpetual Preferred Stock at $25.00 per share. PBI's Series A Preferred Stock trades on the AMEX under the symbol PPA.Pr.A. Dividends on the Series A Preferred Stock, if declared by the board of directors, are payable quarterly. On July 11, 2002 PBI's board of directors approved a cash dividend of $.2698 per share to shareholders of record on July 16, 2002. This dividend totaling $149,000 was paid on July 31, 2002 and represented payment for the period from June 19, 2002 to July 30, 2002, the amount of time the shares of Series A Preferred Stock have been outstanding. 8. COMMON STOCK BUY-BACK PROGRAM On July 11, 2002 PBI's board of directors approved a plan to purchase up to 4.9% of its outstanding common stock in the open market or in privately negotiated transactions. PBI expects to fund these purchases using available excess capital. 8 ITEM 2 -- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following is management's discussion and analysis of the significant changes in the results of operations for the three and six months ended June 30, 2002 as compared to the same periods in 2001 and changes in the balance sheet from December 31, 2001 to June 30, 2002. Current performance may not be indicative of future performance. This discussion should be read in conjunction with PBI's 2001 Annual Report on Form 10-KSB. Management has made forward-looking statements in this Quarterly Report on Form 10-Q. These forward-looking statements may be subject to risks and uncertainties. Forward-looking statements include the information concerning possible or assumed future results of operations of Premier Bancorp, Inc. and its subsidiaries, Premier Bank, PBI Capital Trust, Lenders Abstract, LLC and Premier Bank Insurance Services, LLC. When words such as "believes", "expects", "anticipates" or similar expressions occur in this Form 10-Q, management is making forward-looking statements. Shareholders should note that many factors, some of which are discussed elsewhere in this Form 10-Q, could affect the future financial results of PBI and its subsidiaries, both individually and collectively, and could cause those results to differ materially from those expressed in the forward-looking statements contained in this Form 10-Q. These factors include but are not limited to the following: - operating, legal and regulatory risks, such as continued levels of loan quality and origination volumes, continued relationships with major customers, and technological changes; - economic, political and competitive forces affecting Premier Bank's business, such as changes in economic conditions, especially in the bank's market area, interest rate fluctuations, competitive product and pricing pressures within the bank's market, personal and corporate bankruptcies, monetary policy and inflation; - our ability to grow internally or through acquisitions; and - the risk that management's analyses of these risks and forces could be incorrect and/or that the strategies developed to address them could be unsuccessful. Management cautions readers not to place undue reliance on these forward-looking statements that reflect its analysis only as of this date. Management is not obliged to publicly revise or update these forward-looking statements to reflect events or circumstances that arise after this date. Readers should carefully review the risk factors described in other documents that we file from time to time with the Securities and Exchange Commission, including Annual Reports on Form 10-K and any current reports on Form 8-K. GENERAL Premier Bancorp, Inc. (PBI) is a Pennsylvania business corporation and a registered financial holding company headquartered in Doylestown, Bucks County, Pennsylvania. We were incorporated on July 15, 1997 and reorganized on November 17, 1997 as the one-bank holding company of Premier Bank. Our primary business is the operation of our wholly-owned subsidiary, Premier Bank, which we manage as a single business segment. Premier Bank was organized in 1990 as a Pennsylvania chartered banking institution and began operations on April 24, 1992. The bank is a financial services provider whose business primarily consists of attracting retail deposits from the general public and originating loans to small to mid-sized businesses and their owners. The bank also invests in securities such as mortgage-backed securities, obligations of U.S. government agencies and government sponsored entities, corporate bonds and municipal bonds. Premier Bank's revenues are derived principally from interest on its loan and securities portfolios. The bank's primary sources of funds are deposits, repayments of loans and investment securities, and borrowed funds. Premier Bank has seven full-service Pennsylvania banking offices: Doylestown, Easton, Southampton, Bethlehem, Floral Vale, Bensalem and Montgomeryville. The bank also operates a limited service branch in the Heritage Towers Retirement Community in Doylestown. Premier Bank faces significant competition from other financial services companies, many of which are larger organizations with more resources and locations. Our consolidated results of operations are dependent primarily on net interest income, which is the difference between the interest income earned on interest-earning assets, such as loans and securities, and the interest expense paid on interest-bearing liabilities, such as deposits and borrowed money. We also generate non-interest income such as service charges on deposit products, fees from sales of title insurance and other fees. Our non-interest 9 expenses primarily consist of employee compensation and benefits, occupancy expenses, marketing, data processing costs and other operating expenses. The bank is subject to losses from its loan and investment portfolios if borrowers/issuers fail to meet their obligations or if the market value of its investment securities declines. Our results of operations are also significantly affected by general economic and competitive conditions, particularly changes in market interest rates, government policies and actions of regulatory agencies. MANAGEMENT'S STRATEGY Premier Bank's lending activities are specialized in small to mid-sized businesses and professionals. The bank seeks to fund these activities by developing a stable core deposit base catering primarily to retail and small to mid-sized business depositors. Premier Bank has a strong commitment to highly personalized customer service. To support its growth, without compromising personalized service, Premier Bank has made significant investments in experienced personnel and has incurred significant costs related to branch office expansion. Since Premier Bank's 1992 inception, it has grown to seven full-service Pennsylvania banking offices. In conjunction with its branch expansion, Premier Bank added significantly to its commercial lending staff in order to grow the loan portfolio and shift assets toward loans and away from investments. However, investment securities can be added to a portfolio quickly as a means to generate additional earnings. Therefore, the bank may buy or sell investment securities from time to time depending on market conditions, business trends, liquidity and capital levels. In addition to the ongoing expansion of the bank's traditional business, management continuously reviews and considers new products and services to offer customers. These new products and services are largely intended to generate and increase fee income. In December 2000, we organized Lenders Abstract, LLC to generate fee income from the sales of title insurance policies. Substantially all of Lenders Abstract, LLC's business to date has been derived from Premier Bank's customers. During the three and six months ended June 30, 2002, Lenders Abstract, LLC generated fee income of $46,000 and $86,000, respectively. In March 2002, we organized Premier Bank Insurance Services, LLC to further diversify our products and services. This subsidiary will primarily sell long-term health care insurance policies on an agency basis. Premier Bank Insurance Services, LLC commenced operations in June 2002. Recent changes to federal banking laws allow financial institutions to engage in a broader range of activities than previously permitted. These legislative changes may serve to increase both opportunity as well as competition. CRITICAL ACCOUNTING POLICIES The following discussion and analysis of our financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires management to make estimates and judgments that affect the reported amounts of assets and liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities at the date of the financial statements. Actual results may differ from these estimates under different assumptions and conditions. In management's opinion, the most critical accounting policies impacting PBI's consolidated financial statements are: Evaluation of the allowance for loan losses The loan loss allowance policy involves significant judgments and assumptions by management that may have a material impact on the carrying value of net loans and, potentially, on the net income recognized from period to period. For a description of our accounting policies and estimation methodology related to the allowance for loan losses, see "Allowance for loan losses," below. 10 Accrual and recognition of interest on loans These policies involve significant judgments and assumptions by management, which may have a material impact on the interest income recognized from period to period. For a description of our accounting policies in connection with accrual and recognition of interest on loans, see Note 1 (Summary of Significant Accounting Policies) to PBI's audited consolidated financial statements for the fiscal year ended December 31, 2001 (the "Annual Financial Statements") included in Form 10-K for the year ended December 31, 2001. Realization of deferred income tax items Estimates of deferred tax assets and deferred tax liabilities make up the asset category titled, "Deferred income taxes." These estimates involve significant judgments and assumptions by management, which may have a material impact on the carrying value of deferred tax assets for financial reporting purposes. For a more detailed description of these items and estimates, see Note 13 (Income Taxes) to the Annual Financial Statements included in Form 10-K for the year ended December 31, 2001. Unrealized gains and losses on debt securities available for sale We receive estimated fair values of debt securities from an independent valuation service and brokers. In developing these fair values, the valuation service and brokers use estimates of cash flows based on historical performance of similar instruments in similar rate environments. Based on experience, management is aware that estimated fair values of debt securities vary among brokers and other valuation services. Debt securities available for sale are mostly comprised of mortgage-backed securities and corporate bonds. For more detail on the estimated fair value of debt securities, see "Investment securities," below. The Notes to our consolidated financial statements set forth herein and in the Annual Financial Statements identify other significant accounting policies used in the development and presentation of our financial statements. This discussion and analysis, the significant accounting policies and other financial statement disclosures identify and address key variables and other qualitative and quantitative factors that are necessary for an understanding and evaluation of our results of operations. RESULTS OF OPERATIONS We reported net income of $1,143,000 or $.32 earnings per common share on a diluted basis for the three months ended June 30, 2002. This represents an increase of $578,000 or 102% from the net income of $565,000 or $.16 earnings per common share on a diluted basis reported for the same period in 2001. Net interest income was $1,133,000 higher in 2002 compared to 2001 due to a $101,991,000 or 27% increase in average interest-earning assets and a wider net interest rate spread and margin. Loans accounted for $88,363,000 of the growth in average interest-earning assets. Our net interest rate spread increased 51 basis points from 2.79% for the three months ended June 30, 2001 to 3.30% for the three months ended June 30, 2002. Our net interest margin increased 21 basis points from 3.50% for the three months ended June 30, 2001 to 3.71% for the three months ended June 30, 2002. Non-interest income was $149,000 or 83% higher for the three months ended June 30, 2002 compared to the same period in 2001. Non-interest income was higher in 2002 due primarily to gains on the sales of other real estate owned, a small business administration (SBA) loan, and investment securities available for sale. Non-interest expenses were $405,000 or 18% higher for the three months ended June 30, 2002 compared to the same period in 2001. Non-interest expenses continue to trend higher due in part to the overall growth of the company. Return on average assets and return on average common shareholders' equity on an annualized basis were .93% and 20.80%, respectively, for the three months ended June 30, 2002 compared to .59% and 12.72%, respectively, for the same period in 2001. Return on average common shareholders' equity, exclusive of the unrealized loss on investment securities available for sale, on an annualized basis, was 18.72% for the three months ended June 30, 2002 compared to 10.88% for the same period in 2001. We reported net income of $1,945,000 or $.56 earnings per common share on a diluted basis for the six months ended June 30, 2002. This represents an increase of $916,000 or 89% from the net income of $1,029,000 or $.30 earnings per common share on a diluted basis reported for the same period in 2001. Net interest income was 11 $1,945,000 higher in 2002 compared to 2001 due to a $98,097,000 or 27% increase in average interest-earning assets and a wider net interest rate spread and margin. Loans accounted for $84,681,000 of the growth in average interest-earning assets. Our net interest rate spread increased 42 basis points from 2.76% for the six months ended June 30, 2001 to 3.18% for the six months ended June 30, 2002. Our net interest margin increased 13 basis points from 3.49% for the six months ended June 30, 2001 to 3.62% for the six months ended June 30, 2002. Non-interest income was $160,000 or 56% higher for the six months ended June 30, 2002 compared to the same period in 2001. Non-interest income was higher in 2002 due primarily to an increase in service charges and other deposit related fees and gains from the sales of an SBA loan, other real estate owned and investment securities available for sale. Non-interest expenses were $577,000 or 13% higher for the six months ended June 30, 2002 compared to the same period in 2001. Non-interest expenses continue to trend higher due in part to the overall growth of the company. Return on average assets and return on average common shareholders' equity on an annualized basis were .82% and 18.43%, respectively, for the six months ended June 30, 2002 compared to .56% and 11.89%, respectively, for the same period in 2001. Return on average common shareholders' equity, exclusive of the unrealized loss on investment securities available for sale, on an annualized basis, was 16.47% for the six months ended June 30, 2002 compared to 10.13% for the same period in 2001. Net interest income Net interest income is the most significant component of our operating income. Net interest income depends upon the levels of interest-earning assets and interest-bearing liabilities and the difference or "spread" between the respective yields earned and rates paid. The interest rate spread is influenced by the overall interest rate environment, the composition and characteristics of interest-earning assets and interest-bearing liabilities, and by competition. The interest rate spread is also influenced by differences in the maturity and repricing of assets versus the liabilities that fund them. Responding to generally weak economic conditions, the Federal Reserve cut the targeted federal funds rate by an unprecendented 4.75% to a rate of 1.75% in 2001. As a result, the current interest rate environment is at one of its all time historic low levels. The bank's interest-earning assets and interest-bearing liabilities continue to originate and reprice in this lower rate environment. The yields on average loans for the three and six months ended June 30, 2002 were 7.50% and 7.51%, respectively, compared to 8.57% and 8.68%, respectively, for the three and six months ended June 30, 2001. Similarly, the yields on average investments for the three and six months ended June 30, 2002 were 6.23% and 6.39%, respectively, compared to 6.88% and 6.99%, respectively, for the three and six months ended June 30, 2001 due in part to the repricing of variable rate securities and the restructuring of the portfolio at current rates. The rate on average interest-bearing liabilities declined from 5.24% for the three months ended June 30, 2001 to 3.60% for same period in 2002 and from 5.37% for the six months ended June 30, 2001 to 3.78% for the same period in 2002 due in part to lower rates. In the current environment we had considerable success in raising non-maturity deposits that are generally less costly than time deposits. Changes in the composition of our interest-earning assets and interest-bearing liabilities combined with lower rates had a positive effect on the net interest rate spread and margin for the three and six months ended June 30, 2002 compared to the same periods in 2001. For the three and six months ended June 30, 2002, net interest income, on a tax-equivalent basis, was $1,136,000 and $1,981,000 higher, respectively, than the same periods in 2001. The increase in net interest income in 2002 was primarily a function of interest-earning asset growth and a lower yield on average interest-bearing liabilities. These favorable items were offset in part by a lower rate on average interest-earning assets and a lower ratio of average interest-earning assets to average interest-bearing liabilities. Average interest-earning assets grew $101,991,000 or 27% from $373,376,000 for the three months ended June 30, 2001 to $475,367,000 for the three months ended June 30, 2002. Average loan balances, average short-term investments and average interest-bearing deposits increased $88,363,000, $8,141,000 and $13,881,000, respectively. The ratio of average interest-earning assets to average interest-bearing liabilities decreased from 115.74% for the three months ended June 30, 2001 to 112.69% for the three months ended June 30, 2002. The yield on average interest-earning assets and the rate on average interest-bearing liabilities decreased 113 basis points and 164 basis points, respectively, due to the decline in overall interest rates in 2001. The decrease in rate on average interest-bearing liabilities is mostly due to the repricing of certificates of deposit in the lower interest rate environment and the change in deposit mix. Short-term borrowings and subordinated debt also repriced lower in 2002. 12 The net interest margin on a tax equivalent basis increased 21 basis points from 3.50% for the three months ended June 30, 2001 to 3.71% for the same period in 2002. The net interest rate spread increased 51 basis points from 2.79% for the three months ended June 30, 2001 to 3.30% for the same period in 2002. Average interest-earning assets grew $98,097,000 or 27% from $362,292,000 for the six months ended June 30, 2001 to $460,389,000 for the six months ended June 30, 2002. Average loan balances, average short-term investments and average interest-bearing deposits increased $84,681,000, $7,769,000 and $9,020,000, respectively. The ratio of average interest-earning assets to average interest-bearing liabilities decreased from 115.91% for the six months ended June 30, 2001 to 113.17% for the six months ended June 30, 2002. The yield on average interest-earning assets and the rate on average interest-bearing liabilities decreased 117 basis points and 159 basis points, respectively, due to the decline in overall interest rates in 2001. The decrease in rate on average interest-bearing liabilities is mostly due to the repricing of certificates of deposit in the lower interest rate environment and the change in deposit mix. Short-term borrowings and subordinated debt also repriced lower in 2002. The net interest margin on a tax equivalent basis increased 13 basis points from 3.49% for the six months ended June 30, 2001 to 3.62% for the same period in 2002. The net interest rate spread increased 42 basis points from 2.76% for the six months ended June 30, 2001 to 3.18% for the same period in 2002. 13 The following tables set forth, for the periods indicated, certain average balance sheet amounts and their corresponding earnings/expenses and rates (which have been annualized). AVERAGE BALANCES, RATES AND INTEREST INCOME AND EXPENSE SUMMARY

------------------- (1) Excludes the SFAS 115 valuation allowance on investment securities available for sale. (2) Interest income on tax-exempt investment securities was presented on a tax-equivalent basis. Tax-exempt yields were adjusted to a tax equivalent basis using a 34% rate. (3) Includes non-accrual loans of $2,503,000 and $75,000 on average for the six months ended June 30, 2002 and 2001, respectively. (4) Includes tax-exempt loans of $2,248,000 and $1,100,000 on average for the six months ended June 30, 2002 and 2001, respectively. Tax-exempt yields were adjusted to a tax-equivalent basis using a 34% rate. (5) Excludes the deferred tax asset related to the SFAS 115 valuation allowance on investment securities available for sale. (6) Excludes the SFAS 115 valuation allowance on investment securities available for sale, net of tax. (7) Net interest margin is calculated as net interest income divided by average interest-earning assets. 15 Non-interest income Non-interest income consists primarily of service charges and other deposit related fees, fees from sales of title insurance policies and gains (losses) on the sale of investment securities available for sale, loans held for sale and other real estate owned. For the three months ended June 30, 2002, non-interest income was $329,000 or $149,000 higher than the $180,000 recorded during the same period in 2001. Of this increase $46,000 pertained to the gain on the sale of a small business administration loan. During 2002, we recorded $77,000 in gains on the sale of investment securities available for sale compared to $33,000 in 2001. In addition we recognized $33,000 in gains on the sale of other real estate owned during the second quarter of 2002 compared to $17,000 in losses during the second quarter of 2001. For the six months ended June 30, 2002, non-interest income was $446,000 or $160,000 higher than the $286,000 recorded during the same period in 2001. In 2001, non-interest income included $50,000 in fees related to a loan pay-off. Excluding this non-recurring 2001 fee, non-interest income increased $210,000 or 89% in 2002. Of this increase, $37,000 pertained to service charges and activities related to deposit accounts which have grown considerably in the past year and $46,000 to the gain on the sale of a small business administration loan. Fees from sales of title insurance policies by Lenders Abstract, LLC were $25,000 higher in 2002 due to greater volume. During 2002 we recorded $39,000 in gains on the sale of investment securities available for sale compared to $3,000 in losses during 2001. In addition, we recorded $33,000 in gains on the sale of other real estate owned in 2002 compared to $17,000 in losses in 2001. Non-interest expense For the three months ended June 30, 2002, non-interest expenses were $2,714,000 or $405,000 higher than the $2,309,000 recorded during the same period in 2001. For the six months ended June 30, 2002, non-interest expenses were $5,179,000 or $577,000 higher than the $4,602,000 recorded during the same period in 2001. Non-interest expenses in 2002 increased principally due to the continued growth of the company. Salaries and benefits were $195,000 or 18% higher in the second quarter of 2002 compared to the same period in 2001. This increase was principally due to an increase in the number of employees and salary adjustments. The number of full-time equivalent employees grew from 78 at June 30, 2001 to 90 at June 30, 2002. Data processing expenses increased $50,000 primarily due to the growth of the company, variable costs associated with item processing and account volumes, and new services. Marketing expenses were $16,000 lower during the second quarter of 2002 compared to the same period in 2001. Advertising expenses were reduced because deposit growth exceeded expectations. Other expenses, which consist primarily of furniture and equipment expense, employee travel, meals and entertainment, stationery, supplies, postage and Board of Directors' fees, increased $172,000 or 46% compared to the second quarter of 2001. Of this increase, $100,000 pertained to the fair market adjustment of derivatives related to Premier Bank's IPCD. The remaining increase is primarily attributed to the growth of the company. Salaries and benefits were $377,000 or 17% higher for the six months ended June 30, 2002 compared to the same period in 2001. This increase was principally due to an increase in the number of employees and salary adjustments. Data processing expenses increased $66,000 primarily due to the growth of the company, variable costs associated with item processing and account volumes, and new services. Marketing expenses were $71,000 lower in 2002 compared to the same period in 2001. Advertising expenses were reduced because deposit growth exceeded expectations. Other expenses increased $213,000 or 29% in 2002 compared to 2001. Of this increase, $74,000 pertained to the fair market adjustment of derivatives related to Premier Bank's IPCD. The remaining increase is primarily attributed to the growth of the company. Provision for loan losses The provision for loan losses represents the amount necessary to be charged to operations to bring the allowance for loan losses to a level that represents management's best estimate of known and inherent losses in the bank's loan portfolio. The amount of the provision for loan losses and the amount of the allowance for loan losses is subject to ongoing analysis of the loan portfolio which considers current economic conditions, actual loss experience, the 16 current risk profile of the portfolio, delinquency statistics, and the composition of loan types within the portfolio. Net charge-offs were $4,000 for both the six months ended June 30, 2002 and 2001. The bank's loan portfolio is relatively immature given its recent growth rates. Therefore, charge-off and non-performing trends may not be indicative of future performance. The provision for loan losses was $240,000 for the three months ended June 30, 2002 compared to $239,000 for the same period in 2001. The amount of the loan loss provision for the three months ended June 30, 2002 was driven by the risk profile of the portfolio rather than loan volume. Non-performing loans totaled $2,413,000 at June 30, 2002 compared to $350,000 at June 30, 2001. During the three months ended June 30, 2002 total gross loans grew $15,286,000 compared to $22,870,000 for the same period in 2001. For the six months ended June 30, 2002 the provision for loan losses was $525,000 or $186,000 higher than the $339,000 recorded during the comparable period in 2001. This increase is due to the aforementioned increase in non-performing loans at June 30, 2002 compared to June 30, 2001 and loan growth. Total gross loans grew $39,076,000 or 12% during the six months ended June 30, 2002 compared to $33,188,000 or 14% during the same period in 2001. The loan loss allowance as a percentage of total loans was 1.22% at June 30, 2002 and 1.23% at June 30, 2001. Income tax expense We recorded a $487,000 tax provision representing an effective tax rate of 29.9% for the three months ended June 30, 2002 compared to $189,000 or 25.1% for the same period in 2001. We recorded a $770,000 tax provision representing an effective tax rate of 28.4% for the six months ended June 30, 2002 compared to $344,000 or 25.1% for the same period in 2001. The effective tax rates for the three and six months ended June 30, 2002 were higher than the comparable periods in 2001 principally due to a lower ratio of tax-exempt interest to total pre-tax income. FINANCIAL CONDITION Consolidated assets grew $63,518,000 or 14% during the six months ended June 30, 2002 to $514,087,000. Cash and cash equivalents and total gross loans grew $39,468,000 and $39,076,000, respectively, during the six months ended June 30, 2002. Asset growth was primarily funded by a $47,420,000 increase in deposits, mostly interest checking accounts. Investments decreased $13,051,000 during the six months ended June 30, 2002. Shareholders' equity increased $16,090,000 from $19,609,000 at December 31, 2001 to $35,699,000 at June 30, 2002. This increase was attributable to $12,345,000 in net proceeds from the sale of preferred stock, $1,945,000 in earnings, a $1,271,000 improvement in the estimated fair value of investment securities available for sale, net of tax, and $529,000 from the exercise of common stock options. Investment securities Investment policies dictate permissible investment categories, credit quality, maturity intervals and investment concentrations. Management is responsible for making the specific investment purchases within these standards. The carrying value of investment securities at June 30, 2002 totaled $85,300,000 or 17% of total assets. At June 30, 2002 approximately 42% of the investment portfolio was comprised of mortgage-backed securities that amortize and provide monthly cash flow. Corporate bonds and municipal bonds comprised 35% and 21% of the investment portfolio, respectively. At June 30, 2002, approximately 86% of the investment portfolio was fixed rate. Management buys and sells investment securities from time to time depending on market conditions, business trends, liquidity, and capital levels. Investment purchases provide a way to add assets quickly and generate additional earnings. The bank generally earns a positive interest spread by assuming interest rate risk and using deposits and/or borrowings to purchase securities with longer maturities. Management classifies investment securities at the time of purchase by one of three categories: trading, available for sale (AFS) or, held to maturity (HTM). To date, management has not purchased any securities for trading purposes. Management classifies most securities as AFS even though it has no immediate intent to sell them. The AFS designation affords management the flexibility to sell securities and adjust the balance sheet in response to capital levels, liquidity needs and/or changes in market conditions. Securities AFS are marked to market in the 17 Consolidated Balance Sheets with an adjustment to equity, net of tax, that is presented in the caption "Accumulated other comprehensive income (loss)." At June 30, 2002, the AFS portfolio had an estimated market depreciation of $2,622,000 before tax and an equity adjustment of $1,730,000, net of tax. This represents a $1,271,000 improvement in the estimated fair value of securities AFS, net of tax, over the prior year-end primarily due to the lower rate environment. The market depreciation is concentrated in the bank's corporate bond portfolio, which had an unrealized loss of $2,720,000 at June 30, 2002. The market continues to discount these corporate bonds due to perceived credit risk. At June 30, 2002, the corporate bond portfolio amounted to $29,473,000 or 35% of the total investment portfolio. Approximately 60% of corporate bonds are fixed rate and 40% are variable rate at June 30, 2002. Management evaluated the credit quality of corporate bond issuers prior to purchasing these securities and monitors them on an ongoing basis. Management believes that the credit quality of the corporate bond portfolio is sound and that the company will ultimately be repaid. Therefore, management views the unrealized loss in the market value of the corporate bonds as temporary. If, at some future date, management believes that this loss is other than temporary or that the recovery of the unrealized loss on corporate bonds is not probable, we will recognize the loss through earnings, which would reduce regulatory capital. Corporate bonds are classified as available for sale allowing us the flexibility to sell them and adjust the portfolio as future conditions change. During the six months ended June 30, 2002, we sold $5,900,000 of fixed rate corporate bonds and purchased $2,000,000 of variable rate corporate bonds. INVESTMENT PORTFOLIO Investment Securities

18 Loans Gross loans increased $39,076,000 or 12% from $316,066,000 at December 31, 2001 to $355,142,000 at June 30, 2002. We originate a wide variety of loans primarily to small to mid-sized businesses and professionals. Our policies as well as applicable laws and regulations require risk analysis and ongoing portfolio and credit management. The majority of our loan portfolio is collateralized, at least in part, by real estate in the greater Delaware and Lehigh Valleys of Pennsylvania and New Jersey. Real estate values are typically subject to risks associated with the general economy, among other matters. Inherent in the lending function is the evaluation and acceptance of credit risk and interest rate risk. We manage credit risk through portfolio diversification, underwriting policies and procedures, and loan monitoring practices. We manage interest rate risk using various asset/liability modeling techniques and analyses. Most loans are adjustable rate that reset in intervals of five years or less. When possible, the bank also originates variable rate loans. LOAN PORTFOLIO

Allowance for loan losses The allowance for loan losses reflects management's best estimate of losses, both known and inherent, in the existing loan portfolio. Management's judgment is based on the evaluation of individual loans, past experience, the assessment of current economic conditions, and other relevant factors. The provision for loan losses charged to operating expenses represents the amount necessary to maintain an appropriate allowance. Loan losses are charged directly against the allowance for loan losses when loans are deemed to be uncollectible. Recoveries on previously charged-off loans are added to the allowance when received. Estimates are used to determine the allowance for loan losses. A variety of factors are considered in establishing these estimates including current economic conditions, diversification of the loan portfolio, delinquency statistics, borrowers' perceived financial and managerial strengths, the adequacy of underlying collateral, if collateral dependent, or present value of future cash flows, and other relevant factors. Each commercial loan is assigned a specific loan loss reserve using a scoring system. This scoring system takes into consideration collateral type and value, loan to value ratios, the borrower's risk rating, and other factors previously described. An independent loan reviewer determines borrower risk ratings at the inception of each loan and monitors/updates these ratings on an ongoing basis. Homogeneous loans, comprised primarily of home equity and non-real estate secured consumer loans, are analyzed in the aggregate. 19 Because the bank is only ten years old with a limited history of loan losses, management also uses peer group analysis to gauge the overall reasonableness of loan loss reserves. While management calculates the allowance based on specific loans or loan categories, it considers the total allowance available for losses in the entire loan portfolio. Changes in economic conditions and the financial condition of borrowers can occur quickly, and as a result, impact management's estimates. We maintained an unallocated loan loss reserve at June 30, 2001 based on a shift in risk ratings following the hiring of an independent loan reviewer in the second quarter of 1999. This unallocated reserve was based on the assumption that additional risk factors would be identified and further changes to risk ratings would be made as this independent review process was consistently applied to the entire commercial loan portfolio over an extended period of time. We adjusted our loan scoring system in the fourth quarter of 2001 to reflect current economic conditions and trends in risk ratings over the past several years. As a result, there are no unallocated loan loss reserves at June 30, 2002 or December 31, 2001. Regulatory authorities, as an integral part of their examinations, periodically review the allowance for loan losses. They may require additions to the allowance based upon their judgment and information available to them at the time of examination. Management considers the allowance for loan losses to be appropriate. To comply with industry reporting requirements, management allocated the allowance for loan losses by loan categories in the table below. Management does not intend to imply that actual future charge-offs will necessarily follow this allocation or that any portion of the allowance is restricted. ALLOWANCE FOR LOAN LOSS ALLOCATION Allowance for Loan Loss Allocation

At June 30, 2002, the allowance for loan losses totaled $4,338,000 or 1.22% of total loans compared to 1.21% and 1.23% at December 31, 2001 and June 30, 2001, respectively. 20 The following table sets forth the activity in the allowance for loan losses and certain key ratios for the periods indicated. The bank's loan portfolio is relatively immature given its recent growth rates. Therefore, current charge-off and non-performing asset trends may not be indicative of future performance. ALLOWANCE FOR LOAN LOSSES

--------------- (1) N/M stands for "not meaningful". The allowance for loan losses exceeded the amount of non-performing loans by more than nine times at June 30, 2001. 21 Non-performing assets Non-performing assets are defined as accruing loans past due 90 days or more, non-accruing loans, restructured loans and other real estate owned. Non-performing assets represented .47% and .70% of total assets at June 30, 2002 and December 31, 2001, respectively. NON-PERFORMING ASSETS

The non-accrual/impaired loan balance was substantially comprised of one borrower totaling $2,011,000 and $2,330,000 at June 30, 2002 and December 31, 2001, respectively. This borrower's enterprise failed and we placed the relationship on non-accrual in November 2001. Other real estate owned at December 31, 2001 was sold at a gain of $33,000 in May 2002. The average balance of non-accrual/impaired loans was $2,318,000 for the three months ended June 30, 2002. There was $2,000 and $4,000 in interest income recognized on non-accrual/impaired loans during the three months ended June 30, 2002 and 2001, respectively. Total interest income that would have been recognized on non-accrual loans was $50,000 and $9,000 for the three months ended June 30, 2002 and 2001, respectively. The average balance of non-accrual loans was $2,503,000 for the six months ended June 30, 2002. There was $4,000 and $10,000 in interest income recognized on non-accrual/impaired loans during the six months ended June 30, 2002 and 2001, respectively. Total interest income that would have been recognized on non-accrual loans was $114,000 and $15,000 for the six months ended June 30, 2002 and 2001, respectively. In August 2002 we placed one additional borrower, with loans totaling $2,510,000, on non-accrual. Loans held for sale The balance of loans held for sale was $80,000 at June 30, 2002 compared to $127,000 at December 31, 2001. The decrease in loans held for sale relates to the timing of residential mortgage loan originations versus their sale. We sold $4,013,000 and $3,560,000 of residential mortgages during the six months ended June 30, 2002 and 2001, respectively. Residential mortgage originations and sales are significantly influenced by the interest rate environment. Deferred taxes Deferred taxes decreased $655,000 from $2,887,000 at December 31, 2001 to $2,232,000 at June 30, 2002. This decrease relates to the change in the estimated fair value of investment securities available for sale. Other assets The $219,000 increase in other assets from $712,000 at December 31, 2001 to $931,000 at June 30, 2002 was primarily due to an increase in normal prepaid operating expenses. 22 Deposits We are largely dependent upon our base of competitively priced core deposits to provide a stable source of funding. The bank has retained and grown its customer base since inception through a combination of price, quality service, customer confidence, convenience, a stable and experienced staff and through expansion of our network of offices. Core deposits, which exclude time deposits of $100,000 and greater, grew $47,201,000 or 16% during the six months ended June 30, 2002 to $351,481,000. This growth was primarily generated by the Golden Checking product, which is an interest-bearing checking account. The bank has maintained the rate payable on this account at an annual percentage yield of 3.05% despite the falling rate environment. As prevailing interest rates declined, Golden Checking accounts increased $59,835,000 during the six months ended June 30, 2002 and the bank's deposit mix, although still concentrated in time deposits, shifted significantly toward non-maturity interest checking products. Interest checking accounts at June 30, 2002 were $125,443,000 or 31% of total deposits compared to $58,826,000 or 16% of total deposits at December 31, 2001. Total time deposits at June 30, 2002 were $182,733,000 or 45% of total deposits compared to $208,057,000 or 58% of total deposits at December 31, 2001. Approximately $79,902,000 of time deposits will mature after one year. Total deposits increased $47,420,000 or 13% during the six months ended June 30, 2002 to $405,702,000. Total average deposits increased $74,530,000 or 24% from $310,752,000 for the six months ended June 30, 2001 to $385,282,000 for the six months ended June 30, 2002. Non-interest-bearing deposits are an important source of funds for a bank because they lower overall deposit costs. The average balance of these accounts increased $4,663,000 or 19% during the six months ended June 30, 2002 compared to the same period in 2001. The interest rates offered on most deposit products were lowered in 2001 and through the first half of 2002 in response to overall market conditions. Management expects the certificate of deposit portfolio to continue to reprice lower in 2002, as higher rate accounts mature. The growth of mutual funds over the past decade has made it increasingly difficult for financial institutions to attract deposits. The continued flow of cash into mutual funds, much of which is made through tax deferred investment vehicles such as 401(k) plans, as well as a generally strong economy, have, until recently, fueled high returns for these investments, and in particular, certain equity funds. In 2001 and, continuing to date, the returns of the domestic equity markets were weak and volatile as the U.S. economy was generally sluggish. These conditions improved the environment for deposit acquisition for financial institutions as investors sought the relative safety of FDIC insured deposits, despite a low interest rate environment. We plan to continue to grow deposits through promotions, business development programs, maturation of existing branches and branch expansion. In addition, Premier Bank introduced the IPCD product in the first quarter of 2001. The IPCD product contains an embedded derivative feature that provides a potential return to the depositor based on a formula that is dependent on the return of the Standard & Poor's 500(R) Index. This innovative deposit product allows a customer to receive a return that is based on an equity market index in place of a stated interest rate but, like other traditional certificates of deposit, is insured by the FDIC to the extent provided by law. As of June 30, 2002, the bank generated $16,098,000 in IPCD deposits with an initial term of five years. Approximately $13,145,000 of IPCD balances at June 30, 2002 was from institutional depositors. These depositors generally require us to obtain letters of credit guaranteeing the principal amounts of IPCD's in excess of FDIC insured levels. As of June 30, 2002, Premier Bank maintained $11,300,000 in letters of credit from the FHLB for this purpose. The amount of IPCD product, net of embedded derivatives, included in total deposits in the Consolidated Balance Sheet at June 30, 2002 was $13,495,000. See the section entitled "Derivative Financial Instruments." 23 DEPOSITS BY MAJOR CLASSIFICATION

Borrowings Borrowings totaled $49,513,000 at June 30, 2002 compared to $49,605,000 at December 31, 2001. Included in borrowings are customer repurchase agreements of $19,513,000 and $19,605,000 at June 30, 2002 and December 31, 2001, respectively. The balance in customer repurchase agreements fluctuates daily because it is dependent on the level of available funds in depositor accounts. Customer repurchase agreements are collateralized by investment securities in an amount equal to or exceeding such borrowings. The bank controls these pledged securities. Borrowings also included $30,000,000 in long-term advances from the FHLB at both June 30, 2002 and December 31, 2001. The weighted average interest rate on borrowings was 3.84% and 3.83% at June 30, 2002 and December 31, 2001, respectively. Other liabilities Other liabilities increased $2,068,000 from $5,019,000 at December 31, 2001 to $7,087,000 at June 30, 2002. This increase relates principally to a $1,000,000 accrued investment purchase, an $888,000 increase in normal operating accounts and a $718,000 increase in the balance of derivatives related to our IPCD product. These increases were partially offset by a $538,000 decrease in federal income taxes payable. CAPITAL ADEQUACY Capital is fundamental to support our continued growth. In addition, PBI and Premier Bank are subject to various regulatory capital requirements. Regulatory capital is defined in terms of Tier 1 capital (shareholders' equity plus the allowable portion of the minority interest in equity of subsidiaries, minus unrealized gains or plus unrealized losses on available for sale securities, and minus certain intangible assets), Tier 2 capital (which includes a portion of the allowance for loan losses, minority interest in equity of subsidiaries and subordinated debt), and total capital (Tier 1 plus Tier 2). Risk-based capital ratios are expressed as a percentage of risk-weighted assets. Risk-weighted assets are determined by assigning various weights to all assets and off-balance sheet financial instruments, such as letters of credit and loan commitments, based on associated risk. Regulators have also adopted minimum Tier 1 leverage ratio standards, which measure the ratio of Tier 1 capital to total average quarterly assets. On June 19, 2002 PBI completed its public offering of 552,000 shares of Series A 9.25% Non-Cumulative Perpetual Preferred Stock at $25.00 per share. The net proceeds from this offering totaled $12,345,000 and will be utilized to sustain our growth rate, which continues to exceed our return on shareholders' equity. The Series A 24 Preferred stock qualifies as Tier 1 capital. Annual dividends on the Series A Preferred stock are $2.3125 per share or $1,276,500. These dividends are payable quarterly, but only if declared by our board of directors. On July 11, 2002 our board of directors approved a cash dividend of $.2698 per share to shareholders of record on July 16, 2002. This dividend totaling $149,000 was paid on July 31, 2002 and represented payment for the period from June 19, 2002 to July 30, 2002, the amount of time the shares of Series A Preferred Stock have been outstanding. On July 11, 2002 our board of directors approved a plan to purchase up to 4.9% of our outstanding common stock in the open market or in privately negotiated transactions. We expect to fund these purchases using available excess capital. The tables below depict our capital components and ratios along with the "adequately" and "well" capitalized criteria as defined by FDIC regulations. CAPITAL COMPONENTS

CAPITAL RATIOS

25 INTEREST RATE SENSITIVITY We are subject to the interest rate risk inherent in our lending, investing and financing activities. Fluctuations in interest rates will impact both the interest income/expense and market value of all interest-earning assets and interest-bearing liabilities, other than those with a short term to maturity. The primary objective in managing interest rate risk is to minimize the adverse impact of changes in interest rates on our net interest income while creating an asset/liability structure that maximizes earnings. The Asset Liability Management Committee actively monitors and manages our interest rate exposure using gap analysis and simulation models. Simulation models require significant assumptions about future business trends and interest rates. Gap analysis measures the difference between volumes of interest rate-sensitive assets and liabilities and quantifies these repricing differences for various time intervals. Static gap analysis depicts interest sensitivity at a point in time. However, it alone does not accurately measure the magnitude of changes in net interest income because changes in interest rates do not always impact assets and liabilities at the same time or in the same magnitude. Furthermore, gap analysis does not consider future growth, changes in asset and liability composition or market conditions. A positive gap results when the amount of interest rate-sensitive assets exceeds interest rate-sensitive liabilities repricing within the relevant time period and, generally means that the institution will benefit during periods of rising interest rates. A negative gap results when the amount of interest rate-sensitive liabilities exceeds interest rate-sensitive assets repricing within the relevant time period and, generally means that the institution will benefit during periods of falling interest rates. As depicted in the table below, we have a cumulative positive gap within the one-year time interval.

26 We use two different simulation models to measure and monitor interest rate risk. One model is a licensed software program that is run internally and incorporates all of management's assumptions including future growth. The other is a program developed by an outside consulting firm utilizing data we supply (the "consulting model"), and considers only the existing composition and characteristics of the balance sheet without giving effect to anticipated future growth and interest rate changes. Although management has and expects to continue to grow interest-sensitive assets and liabilities, its assumptions about future growth and interest rates are excluded from the consulting model. Management believes that this approach provides a more conservative measure of our interest rate risk because assumed growth at current market interest rates tends to lessen the effects of rate changes in simulation models in the short-term. Actual results may differ from simulated results due to various factors including the time and magnitude of interest rate changes, changes in customer behavior, effects of competition, and other factors. These variables influence the interest-rate spread and product mix. The consulting model predicts a base net interest income amount that is larger than that actually earned in the past 12 months or last fiscal year. This is principally the result of an actual increase in earning assets over the past year, which created a larger starting point for the next 12-month projection. Past experience drives many of the assumptions used in the models. Actual results could vary substantially if our future performance differs from past experience.

The table below summarizes estimated changes in net interest income over a twelve-month period beginning July 1, 2002, under alternate interest rate scenarios using the consulting model described above. Simulation models require assumptions about certain categories of assets and liabilities. The models schedule existing assets and liabilities by their contractual maturity, estimated likely call date, or earliest repricing opportunity. Mortgage-backed securities and amortizing loans are scheduled based on their anticipated cash flow including estimated prepayments. For investment securities, we use a third party service to provide cash flow estimates in the various rate environments. Savings accounts, including passbook, statement savings, money market, and interest checking accounts, do not have a stated maturity or repricing term and can be withdrawn or repriced at any time. This may impact the margin if more expensive alternative sources of deposits are required to fund loans or deposit runoff. Management projects the repricing characteristics of these accounts based on historical performance and assumptions that it believes reflect their rate sensitivity. The consulting model reinvests all maturities, repayments and prepayments for each type of asset or liability into the same product for a new like term. As a result, the mix of interest-earning assets and interest bearing-liabilities is held constant. LIQUIDITY Liquidity represents an institution's ability to generate cash or otherwise obtain funds at reasonable rates to satisfy commitments to borrowers and demands of depositors. Our primary sources of funds are deposits, proceeds from principal and interest payments on loans and investments, sales of investment securities AFS and borrowings. While maturities and scheduled amortization of loans and investments are a predictable source of funds, deposit flows, loan prepayments and mortgage-backed securities prepayments are influenced by interest rates, economic conditions, and competition. Deposit growth within the banking industry has been generally slow due to strong competition from a variety of financial services companies. Competition for deposits may require banks to increase rates on deposits or expand their branch office networks to adequately grow deposits in the future. 27 For the six months ended June 30, 2002, cash and cash equivalents increased $39,468,000. Operating and financing activities provided cash and cash equivalents of $3,121,000 and $60,124,000, respectively, while investing activities used $23,777,000. The cash provided by financing activities was primarily from a $47,420,000 increase in deposits. Net proceeds from our preferred stock offering provided $12,345,000. Other significant sources of cash included principal repayments on loans and mortgage-backed securities and sales of investment securities. Together, this cash was used to finance loan growth of $39,080,000. For the six months ended June 30, 2001, cash and cash equivalents increased $8,280,000. Operating and financing activities provided cash and cash equivalents of $783,000 and $45,018,000, respectively, while investing activities used $37,521,000. The cash provided by financing activities was primarily from increases in deposits and borrowings of $7,987,000 and $36,790,000, respectively. Other significant sources of cash included principal repayments on loans and mortgage-backed securities and sales of investment securities. Together, this cash was primarily used for loan originations and purchases of investment securities. For the six months ended June 30, 2001, loans grew $33,192,000. Investments grew $4,422,000 during the six months ended June 30, 2001, exclusive of the change in unrealized losses on investment securities AFS. We monitor our liquidity position on a daily basis. We use overnight federal funds and interest-bearing deposits in other banks to absorb daily excess liquidity. Conversely, overnight federal funds may be purchased to satisfy daily liquidity needs. Federal funds are sold or purchased through a correspondent bank, which diversifies the holdings to an approved group of commercial banks throughout the country. If the bank requires funds beyond its ability to generate them internally, additional sources of funds are available through use of a $6,000,000 unsecured federal funds line of credit with its correspondent bank, and its $99,342,000 borrowing limit at the FHLB. The bank could also sell or borrow against certain investment securities. At June 30, 2002, the bank had available borrowing capacity of $58,042,000 and $6,000,000 with the FHLB and a correspondent bank, respectively. DERIVATIVE FINANCIAL INSTRUMENTS We have limited involvement with derivative financial instruments and currently use them only in relation to Premier Bank's Index Powered SM Certificate of Deposit (IPCD) product. The IPCD, which was introduced in the first quarter 2001, contains an embedded derivative feature that provides a potential return to the depositor based on a formula that is dependent on the return of the Standard & Poor's 500(R) Index. This innovative 5-year term deposit product allows the customer to receive a return that is based on an equity market index in place of a stated interest rate but, like other traditional certificates of deposit, is insured in its principal amount by the FDIC to the extent provided by law. We entered into derivative contracts with the FHLB in order to offset the risks associated with the variable cost of the IPCD. Under the terms of these derivative contracts, Premier Bank will receive an amount equal to the amount to be paid to the IPCD depositor, in exchange for a periodic payment stream expressed as a rate of interest. The derivative contracts with the FHLB and the derivatives embedded in the IPCD are accounted for in accordance with Statement No. 133, "Accounting for Derivative Instruments and Hedging Activities", as amended. Accordingly, PBI carries these derivatives at fair value in the Consolidated Balance Sheets and recognizes any changes in fair value in current period earnings. The notional amount of derivative contracts was $16,098,000 and $10,905,000 at June 30, 2002 and December 31, 2001, respectively. The fair value of derivatives is included in "Other liabilities" and approximated $2,773,000 and $2,055,000 at June 30, 2002 and December 31, 2001, respectively. During the three and six months ended June 30, 2002 approximately $115,000 and $95,000, respectively, was recorded in other expense for net changes in the fair value of derivatives compared to $15,000 and $22,000 in expense for the three and six months ended June 30, 2001, respectively. The fair value adjustments are due to changes in prevailing interest rates and the resulting valuations of future payments due the FHLB. 28 RECENT ACCOUNTING PRONOUNCEMENTS Goodwill and Other Intangible Assets In June 2001, the FASB issued Statement No. 142, "Goodwill and Other Intangible Assets." The Statement addresses financial accounting and reporting for acquired goodwill and other intangible assets and supersedes APB Opinion No. 17, "Intangible Assets." It addresses how intangible assets that are acquired individually or with a group of other assets (but not those acquired in a business combination) should be accounted for in financial statements upon their acquisition. The Statement also addresses how goodwill and other intangible assets should be accounted for after they have been initially recognized in the financial statements. The provisions of the Statement are required to be applied starting with fiscal years beginning after December 15, 2001, except that goodwill and intangible assets acquired after June 30, 2001, will be subject immediately to the nonamortization and amortization provisions of the Statement. Early application is permitted for entities with fiscal years beginning after March 15, 2001, provided that the first interim financial statements have not previously been issued. The Statement is required to be applied at the beginning of an entity's fiscal year and to be applied to all goodwill and other intangible assets recognized in its financial statements at that date. There was no impact on earnings, financial condition, or equity upon adoption of Statement No. 142 on January 1, 2002. Asset Retirement Obligations In June 2001, the FASB issued Statement No. 143, "Accounting for Asset Retirement Obligations." This Statement addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. It applies to legal obligations associated with the retirement of long-lived assets that result from the acquisition, construction, development and (or) the normal operation of a long-lived asset, except for certain obligations of lessees. As used in this Statement, a legal obligation is an obligation that a party is required to settle as a result of an existing or enacted law, statute, ordinance, or written or oral contract or by legal construction of a contract under the doctrine of promissory estoppel. This Statement requires that the fair value of a liability for an asset retirement obligation be recognized in the period in which it is incurred if a reasonable estimate of fair value can be made. The associated asset retirement costs are capitalized as part of the carrying amount of the long-lived asset. This Statement amends FASB Statement No. 19, "Financial Accounting and Reporting by Oil and Gas Producing Companies," and it applies to all entities. It is effective for financial statements issued for fiscal years beginning after June 15, 2002. Earlier application is encouraged. There is no expected impact on earnings, financial condition, or equity upon adoption of Statement No. 143. Impairment or Disposal of Long-Lived Assets In August 2001, the FASB issued Statement No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." This Statement addresses financial accounting and reporting for the impairment or disposal of long-lived assets and supersedes Statement No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." However, the Statement retains the fundamental provisions of Statement No. 121 for (a) recognition and measurement of the impairment of long-lived assets to be held and used and (b) measurement of long-lived assets to be disposed of by sale. This Statement supersedes the accounting and reporting provisions of APB Opinion No. 30, "Reporting the Results of Operations-Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions," for the disposal of a segment of a business. However, this Statement retains the requirement of Opinion No. 30 to report discontinued operations separately from continuing operations and extends that reporting to a component of an entity that either has been disposed of (by sale, by abandonment, or in distribution to owners) or is classified as held for sale. This Statement also amends ARB No. 51, "Consolidated Financial Statements," to eliminate the exception to consolidation for a temporarily controlled subsidiary. The provisions of this Statement are effective for financial statements issued for fiscal years beginning after December 15, 2001 and interim periods within those fiscal years, with earlier application encouraged. The provisions of this Statement generally are to be applied prospectively. There was no impact on earnings, financial condition, or equity upon adoption of Statement No. 144 on January 1, 2002. 29 Rescission of FASB Statements No. 4, 44, and 64 In April 2002, the FASB issued SFAS No. 145 "Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections." This Statement rescinds FASB Statement No. 4, Reporting Gains and Losses from Extinguishment of Debt, and an amendment of that Statement, FASB Statement No. 64, Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements, along with rescinding FASB Statement No. 44, Accounting for Intangible Assets of Motor Carriers and amending FASB Statement No. 13, Accounting for Leases. This Statement (1) eliminates an inconsistency between the required accounting for sale-leaseback transactions and the required accounting for certain lease modifications that have economic effects that are similar to sale-leaseback transactions, (2) eliminates the extraordinary item treatment of reporting gains and losses from extinguishment of debt, and (3) makes certain other technical corrections. The provisions of this Statement related to the rescission of Statement 4 shall be applied in fiscal years beginning after May 15, 2002. The provisions of this Statement related to Statement 13 shall be effective for transactions occurring after May 15, 2002. All other provisions of this Statement shall be effective for financial statements issued on or after May 15, 2002. Early application of this Statement is encouraged. There is no expected impact on earnings, financial condition, or equity upon adoption of Statement No. 145. Accounting for Costs Associated with Exit or Disposal Activities In June 2002, the FASB issued SFAS No. 146 "Accounting for Costs Associated with Exit or Disposal Activities." This Statement addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies Emerging Issues Task Force (EITF) Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)." The provisions of this Statement are effective for exit or disposal activities that are initiated after December 31, 2002, with early application encouraged. There is no expected impact on earnings, financial condition, or equity upon adoption of Statement No. 146. ITEM 3 -- QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The information required herein is set forth in Item 2, above. 30 PART II -- OTHER INFORMATION ITEM 1 -- LEGAL PROCEEDINGS At June 30, 2002, there were no known material legal proceedings pending against PBI, its subsidiaries or its property. In addition, no material proceedings are known to be contemplated by government authorities against PBI, its subsidiaries or its property. ITEM 2 -- CHANGES IN SECURITIES AND USE OF PROCEEDS None. ITEM 3 -- DEFAULTS UPON SENIOR SECURITIES None. ITEM 4 -- SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. ITEM 5 -- OTHER INFORMATION None. ITEM 6 -- EXHIBITS AND REPORTS ON FORM 8-K (a) The following exhibits are incorporated by reference herein or attached to this Form 10-Q: 3(i) Articles of Incorporation. (Incorporated by reference to Exhibit 4.1 to PBI's Registration Statement No. 333-87420 on Form S-2 filed with the SEC on May 2, 2002.) 3(ii) By-Laws. (Incorporated by reference to Exhibit 3(ii) to PBI's Quarterly Report on Form 10-QSB filed with the SEC on November 14, 2000 and amended on December 19, 2000.) 10.1 Premier Bank's 1995 Incentive Stock Option Plan. (Incorporated by reference to Exhibit 99.6 to the Company's Registration Statement No. 333-34243 on Form S-4 filed with the SEC on August 22,1997 and amended on September 9, 1997.) 10.2 Change of Control Agreement between Premier Bancorp, Inc., Premier Bank and John C. Soffronoff. (Incorporated by reference to Exhibit 10.2 to our Quarterly Report on Form 10-QSB filed with the SEC on November 13, 1998.) 10.3 Change of Control Agreement between Premier Bancorp, Inc., Premier Bank and John J. Ginley. (Incorporated by reference to Exhibit 10.3 to our Quarterly Report on Form 10-QSB filed with the SEC on November 13, 1998.) 10.4 Change of Control Agreement between Premier Bancorp, Inc., Premier Bank and Bruce E. Sickel. (Incorporated by reference to Exhibit 10.4 to our Quarterly Report on Form 10-QSB filed with the SEC on November 13, 1998.) 11 Statement re: computation of per share earnings. 99.1 Certification of Principal Executive Officer and Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, filed herewith. (b) Reports on Form 8-K (None) SIGNATURES In accordance with the requirements of the Securities Exchange Act of 1934, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Premier Bancorp, Inc. Registrant DATE SIGNATURE August 14, 2002 /s/ John C. Soffronoff ----------------------------------- John C. Soffronoff President, Chief Executive Officer, Director (Principal Executive Officer) August 14, 2002 /s/ Bruce E. Sickel ----------------------------------- Bruce E. Sickel Chief Financial Officer, Director (Principal Financial Officer) INDEX OF EXHIBITS

* Incorporated by reference.

PREMIER BANCORP INC /PA/ 10-Q