<PAGE>
2,000,000 COMMON SHARES
PREMIER FINANCIAL BANCORP, INC.
_________________
All Common Shares, without par value (the "Common Shares"), offered
hereby (the "Offering") are being sold by Premier Financial Bancorp, Inc.
(the "Company"). Prior to this Offering, there has been no established
public trading market for Common Shares of the Company. The Common Shares
have been approved for quotation on the National Association of Securities
Dealers' Automated Quotation System - National Market System ("NASDAQ - NMS")
under the symbol "PFBI". See "UNDERWRITING" for the factors considered in
determining the initial public offering price.
SEE "RISK FACTORS" BEGINNING AT PAGE 11 OF THIS PROSPECTUS FOR CERTAIN
CONSIDERATIONS RELEVANT TO AN INVESTMENT IN THE COMMON SHARES.
__________________
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION ("SEC") OR ANY STATE SECURITIES COMMISSION NOR HAS THE SEC
OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
Underwriting Proceeds to
Price to Public Discount (1) Company (2)
Per Share . . . $13.00 $0.91 $12.09
Total (3) . . . $26,000,000 $1,820,000 $24,180,000
(1) The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933. See
"UNDERWRITING."
(2) Before deducting expenses payable by the Company estimated at $600,000.
(3) The Company has granted the Underwriters an option to purchase up to an
additional 300,000 Common Shares to cover over-allotments, if any. If all of
such shares are purchased, the total Price to Public, Underwriting Discount
and Proceeds to Company will be increased to $29,900,000, $2,093,000 and
$27,807,000, respectively. The managing underwriter will receive a financial
advisory fee of $100,000, $75,000 of which is payable only upon consummation
of the Offering. See "UNDERWRITING."
_________________
The Common Shares are offered by the several Underwriters, subject to prior
sale, when, as and if delivered to and accepted by them, subject to approval of
certain legal matters by counsel for the Underwriters and certain other
conditions. The Underwriters reserve the right to withdraw, cancel or modify
such offer without notice and to reject orders in whole or in part. It is
expected that delivery of the Common Shares will be made against payment
therefor on or about May 22, 1996 in Louisville, Kentucky.
_________________
ADVEST, INC.
The date of this Prospectus is May 16, 1996
<PAGE>
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON
SHARES AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
THE COMMON SHARES OFFERED HEREBY ARE NOT SAVINGS ACCOUNTS, DEPOSITS OR
OTHER OBLIGATIONS OF A BANK AND ARE NOT INSURED BY THE FEDERAL DEPOSIT
INSURANCE CORPORATION ("FDIC"), THE BANK INSURANCE FUND OR ANY OTHER
GOVERNMENTAL AGENCY.
________________
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and the
rules and regulations thereunder, and in accordance therewith files reports,
proxy or information statements and other information with the SEC. Such
reports, statements and other information filed with the SEC can be inspected
and copied at the public reference facilities maintained by the SEC at
Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, and at its
regional offices at Seven World Trade Center, Suite 1300, New York, New York
10048 and Citicorp Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661. Copies of such material may be obtained at prescribed rates
from the Public Reference Section of the SEC at Judiciary Plaza, 450 Fifth
Street, N.W., Washington, D.C. 20549. This Prospectus does not contain all
the information set forth in the Registration Statement that the Company has
filed with the SEC under the Securities Act of 1933, as amended (the
"Securities Act"), of which this Prospectus is a part, and to which reference
is hereby made for further information with respect to the Company and the
Common Shares.
2
<PAGE>
Page 3 of the prospectus shows 2 maps. One map shows the Service area map
for Premier Financial Bancorp, Inc. The map shows the states of Missouri,
Illinois, Indiana, Ohio, West Virginia, Virginia, Kentucky and Tennessee. The
second map is a blow up of the first map, including Indiana, Ohio and Kentucky.
This map shows symbols and locations for Citizens Bank & Trust, Bank of
Germantown, Georgetown Bank & Trust Company, Citizens Bank, Sharpsburg and
Farmers Deposit Bank (pending) throughout the three state area indicated.
3
<PAGE>
[THIS PAGE INTENTIONALLY LEFT BLANK]
4
<PAGE>
PROSPECTUS SUMMARY
THIS PROSPECTUS SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE DETAILED
INFORMATION, DEFINITIONS AND FINANCIAL STATEMENTS APPEARING ELSEWHERE HEREIN.
CAPITALIZED TERMS USED IN THIS PROSPECTUS SUMMARY WHICH HAVE NOT BEEN DEFINED IN
THE FOREGOING TEXT ARE DEFINED IN THE MORE DETAILED INFORMATION PRESENTED
HEREINAFTER. UNLESS OTHERWISE INDICATED OR THE CONTEXT OTHERWISE REQUIRES, ALL
REFERENCES HEREIN TO THE COMPANY INCLUDE ITS SUBSIDIARIES AND THEIR
SUBSIDIARIES. THE NUMBER OF COMMON SHARES OFFERED AND OUTSTANDING PRIOR TO AND
AFTER THE OFFERING GIVES EFFECT TO A 2-FOR-1 STOCK SPLIT EFFECTED IN THE FORM OF
A SHARE DIVIDEND ON MARCH 29, 1996.
THE COMPANY
The Company was incorporated in 1991 under the laws of Kentucky and is
registered under the Bank Holding Company Act of 1956, as amended. The
Company, through its subsidiaries, focuses on providing quality, community
banking services to individuals and small-to-medium sized businesses
principally in non-urban areas. The Company serves as a parent holding
company for four banking subsidiaries located in Georgetown, Kentucky (the
"Georgetown Bank"), Vanceburg, Kentucky (the "Vanceburg Bank"), Germantown,
Kentucky (the "Germantown Bank"), and Sharpsburg, Kentucky (the "Sharpsburg
Bank"), and a data processing subsidiary. Through its experiences in
acquiring the Germantown Bank (1992), the Georgetown Bank (1995) and the
Sharpsburg Bank (1995), the Company has successfully developed and
implemented a strategy of joining together community banks that retain their
commitment to local orientation and direction, while having the benefit of
the Company's capital for growth and staff assistance to promote safety,
soundness and regulatory compliance.
The Company intends to seek additional acquisitions of other financial
institutions that either have or are viewed as capable of obtaining a
significant market share in a short period of time, and whose addition to the
Company will favorably impact the Company's earnings within a reasonable
period of time. The Company believes that it offers to many community banks
a very favorable alternative to a sale to a large Kentucky or out-of-state
bank holding company that consolidates affiliates in ways in which the
5
<PAGE>
selling community bank's local identity may be lost, independent decision
making authority may be greatly diminished and local community support that
the community bank has historically provided may be greatly reduced or
eliminated.
At December 31, 1995, the Company had consolidated total assets of $155.5
million, total deposits of $136.2 million and stockholders' equity of $11.2
million. The Company's headquarters are located at 120 N. Hamilton Street,
Georgetown, Kentucky 40324 and its telephone number is (502) 863-7500.
THE EMINENCE TRANSACTION
The Company recently agreed to acquire Farmers Deposit Bancorp, Eminence,
Kentucky ("Eminence") and, indirectly, its commercial bank subsidiary, Farmers
Deposit Bank (the "Eminence Bank"), pursuant to an Agreement and Plan of Share
Exchange dated March 4, 1996 in which shareholders of Eminence will receive
approximately $12.5 million in cash (the "Eminence Transaction"). The Eminence
Bank serves a non-urban market that is expected to benefit from the economic
growth and development occurring in the triangle formed by the cities of
Louisville and Lexington, Kentucky and Cincinnati, Ohio. The Eminence Bank has
benefitted from this economic activity in recent years, with total assets
increasing from $87 million at December 31, 1993 to $107.1 million at December
31, 1995, net loans increasing from $63.5 million in 1993 to $77.8 million in
1995 and total deposits increasing from $72.3 million in 1993 to $89.8 million
in 1995. See "THE EMINENCE TRANSACTION"; "USE OF PROCEEDS"; "PRO FORMA
CONDENSED COMBINED FINANCIAL DATA OF THE COMPANY AND EMINENCE"; "INDEX TO
CONSOLIDATED FINANCIAL STATEMENTS - Eminence.
6
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Common Shares Offered . . . . . . . . . . . . . . 2,000,000 shares by the Company (1)
Common Shares Outstanding prior to the
Offering . . . . . . . . . . . . . . . . . . . . 1,909,090 shares
Common Shares Outstanding after the
Offering . . . . . . . . . . . . . . . . . . . . 3,909,090 shares (1)
Estimated Net Proceeds to the Company . . . . . . $23,580,000 (1)(2)
</TABLE>
Dividends on Common Shares
Since the third quarter of 1995, the Company has paid a quarterly
cash dividend on its Common Shares of $0.125 per share, and has increased its
annual cash dividend five consecutive years from $0.12 in 1991 to $0.45 in
1995, as adjusted to give effect to prior stock splits effected in the form
of share dividends. While the Company currently expects to declare
comparable cash dividends in the future, there can be no assurance that it
will do so. Future declarations of dividends by the Board of Directors will
depend upon a number of factors, including the Company's and the Banks'
financial condition and results of operations, investment opportunities
available to the Company or the Banks, capital requirements, regulatory
limitations, tax considerations, the amount of net proceeds retained by the
Company and general economic conditions. See "PRICE RANGE OF COMMON SHARES;
DIVIDENDS," and "RISK FACTORS - Limitations on Payment of Dividends."
Use of Proceeds
Approximately $12.5 million of the net proceeds to be received by
the Company from this Offering will be paid to stockholders of Eminence in
the Eminence Transaction. See "THE EMINENCE TRANSACTION." Approximately $7
million of the net proceeds to be received by the Company from this Offering
will be used to fully discharge $5 million of existing debt of the Company
and, assuming completion of the Eminence Transaction, $2 million of existing
debt of Eminence. Up to $3 million of such proceeds may be used by the
Company to provide additional equity capital to the Georgetown Bank and the
Eminence Bank to support anticipated future growth. The remaining net
proceeds may be used by the Company for possible future acquisitions and for
general corporate purposes.
7
<PAGE>
Risk Factors
Prospective investors in the Common Shares should consider the
information discussed under the heading "RISK FACTORS.
NASDAQ - NMS Symbol
PFBI
___________
(1) Assumes no exercise of the Underwriters' over-allotment option to
purchase up to 300,000 Common Shares. See "UNDERWRITING."
(2) After deducting expenses in the Offering payable by the Company estimated
at $600,000.
SUMMARY CONSOLIDATED FINANCIAL DATA
The following tables present summary consolidated financial data of
the Company that give effect to the acquisition in March, 1995 of Georgetown
Bancorp, Inc. ("Georgetown"), the parent company of the Georgetown Bank, on a
"pooling of interests" basis by retroactively combining historical Company
and Georgetown data for all periods presented.
The selected consolidated financial data at and for the years ended
December 31, 1995, 1994, 1993, 1992 and 1991 were derived from the Company's
consolidated financial statements, which have been restated to include
Georgetown. The financial data for 1995 also reflects the results of
operations for the Sharpsburg Bank since November 1, 1995. The selected
consolidated financial data should be read in conjunction with the Company's
audited consolidated financial statements at December 31, 1995 and 1994 and
for the years ended December 31, 1995, 1994 and 1993. See "INDEX TO
CONSOLIDATED FINANCIAL STATEMENTS - The Company" as to the consolidated
financial statements and related notes of the Company, which financial
information should be read in conjunction with the consolidated selected
financial data and management's discussion and analysis of financial
condition and results of operations of the Company included in this
Prospectus. See "SELECTED FINANCIAL DATA" and "MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS." See also "THE
EMINENCE TRANSACTION," "PRO FORMA CONDENSED COMBINED FINANCIAL DATA OF THE
COMPANY AND EMINENCE" and the audited consolidated financial statements of
Eminence at June 30, 1995 and 1994 referenced in "INDEX TO CONSOLIDATED
FINANCIAL STATEMENTS - Eminence." All share data presented in the following
tables have been adjusted to reflect all prior stock splits, including the
2-for-1 stock split effected in the form of a share dividend on March 29,
1996.
8
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL DATA
<TABLE>
<CAPTION>
EARNINGS
(DOLLARS IN THOUSANDS) FOR THE YEAR ENDED DECEMBER 31,
--------------------------------------------------
1995 1994 1993 1992 1991
------- ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Interest income . . . . . . . . $11,103 $8,962 $8,345 $7,272 $7,474
Interest expense . . . . . . . 5,080 3,438 3,407 3,069 3,963
------- ------ ------ ------ ------
Net interest income . . . . . . 6,023 5,524 4,938 4,203 3,511
Provision for
possible loan losses . . . . . 86 207 170 325 602
Non-interest income . . . . . . 825 684 733 592 453
Non-interest expenses . . . . . 4,493 4,005 3,640 3,375 2,955
------- ------ ------ ------ ------
Income before income taxes . . 2,269 1,996 1,861 1,095 407
Income taxes . . . . . . . . . 113 483 510 366 180
------- ------ ------ ------ ------
Net income . . . . . . . . . . $ 2,156 $1,513 $1,351 $ 729 $ 227
------- ------ ------ ------ ------
------- ------ ------ ------ ------
</TABLE>
<TABLE>
<CAPTION>
SHARE DATA (1) FOR THE YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------
1995 1994 1993 1992 1991
--------- --------- --------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Interest income . . . . . . . $1.13 $0.80 $0.72 $0.39 $0.13
Book value . . . . . . . . . 5.87 5.02 4.72 4.05 3.73
Dividends . . . . . . . . . . 0.45 0.36 0.28 0.20 0.12
Weighted average shares
outstanding . . . . . . . . 1,903,260 1,881,818 1,880,200 1,880,200 1,703,096
</TABLE>
FINANCIAL POSITION AT DECEMBER 31,
---------------------------------------------------
(DOLLARS IN THOUSANDS) 1995 1994 1993 1992 1991
-------- -------- -------- -------- -------
Total assets . . . . . . $155,475 $115,443 $108,774 $100,364 $80,347
Loans, net . . . . . . . 111,329 80,390 73,566 64,221 57,141
Securities . . . . . . . 24,929 19,688 21,864 18,965 11,160
Deposits . . . . . . . . 136,246 102,839 98,846 91,704 72,480
Debt . . . . . . . . . . 5,000 1,500 -0- -0- -0-
Stockholders'equity . . 11,215 9,453 8,868 7,617 7,006
9
<PAGE>
<TABLE>
<CAPTION>
SUMMARY CONSOLIDATED FINANCIAL DATA (CONT.)
RATIOS AT OR FOR THE YEAR ENDED DECEMBER 31,
----------------------------------------
1995 1994 1993 1992 1991
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Return on average assets . . . . . . . . . . 1.69% 1.36% 1.23% 0.88% 0.29%
Return on average stockholders' equity . . . 20.5% 16.4% 15.4% 9.97% 3.49%
Net interest margin . . . . . . . . . . . . 5.23% 5.41% 4.93% 5.40% 4.82%
Non-interest expenses to average assets . . 3.52% 3.60% 3.33% 4.06% 3.78%
Stockholders' equity to total assets
(at period end) . . . . . . . . . . . . . . 7.21% 8.19% 8.15% 7.59% 8.72%
Risk-based capital ratios (fully
phased-in guidelines):
Tier I capital . . . . . . . . . . . . . 9.47% 11.94% 11.56% 11.26% 12.34%
Total capital . . . . . . . . . . . . . . 10.72% 13.19% 12.71% 12.65% 13.88%
Leverage ratio (2) . . . . . . . . . . . . . 6.92% 8.42% 8.15% 7.59% 8.72%
Loan loss reserve to total loans . . . . . . 1.53% 1.09% 1.19% 1.44% 1.51%
Nonperforming loans to total loans . . . . . 0.93% 0.33% 1.55% 1.17% 1.24%
Net chargeoffs to average loans . . . . . . 0.04% 0.26% 0.30% 0.47% 0.86%
</TABLE>
___________________________
(1) All per share data and the number of outstanding Common Shares have been
adjusted retroactively to give effect to all prior stock splits, including
the 2-for-1 stock split effected in the form of a share dividend on
March 29, 1996.
(2) The leverage ratio is defined as the ratio of Tier I capital to average
total assets.
10
<PAGE>
RISK FACTORS
A PROSPECTIVE INVESTOR SHOULD REVIEW AND CONSIDER CAREFULLY THE
FOLLOWING RISK FACTORS, TOGETHER WITH THE OTHER INFORMATION CONTAINED IN THIS
PROSPECTUS, IN EVALUATING AN INVESTMENT IN THE COMMON SHARES.
NO ASSURANCE OF ACQUISITIONS
A substantial portion of the net proceeds from the Offering is
expected to be used for the funding of acquisitions of bank holding companies,
banks (or their branches), thrift institutions (or their branches) or companies
conducting business deemed closely related to banking or managing or controlling
banks or thrift institutions. The Company recently agreed to acquire a bank
holding company in a transaction in which that bank holding company's
stockholders will receive approximately $12.5 million in cash. Such
acquisitions are subject to a number of conditions, including availability,
price and regulatory approval. There can be no assurance that future
acquisitions meeting the Company's investment criteria will be available or that
the required regulatory approval for such acquisitions can be obtained. See
"THE EMINENCE TRANSACTION" and "SUPERVISION AND REGULATION."
INTEREST OF CHAIRMAN OF THE BOARD IN CERTAIN OTHER BANKING ORGANIZATIONS
The Company's Chairman of the Board, Marshall T. Reynolds, directly or
through affiliates or family members, holds a 10% or greater ownership
interest in four other banking organizations (and serves as a member of the
board of directors at three of these organizations) that may be viewed by the
Federal Reserve Board and other federal banking agencies as enabling him to
exercise, directly or indirectly, a controlling influence over the management
or policies of such banking organizations. For information about these
ownership interests, see footnote (6) regarding Mr. Reynolds in "MANAGEMENT -
Directors." As a consequence of such ownership interests and positions, and
Mr. Reynolds' ownership interest and position with the Company, the Federal
Reserve Board regards these other banking organizations and the Company to
collectively constitute a chain banking organization, and reviews the capital
adequacy, other financial and managerial resources, and future prospects of
these other banking organizations in considering whether to approve any
proposed acquisition by the Company. While each of these other banking
organizations in which Mr. Reynolds directly or indirectly holds a
significant ownership interest is "well capitalized" under applicable federal
banking regulations, and is not operating under any written agreement,
letter, memorandum or similar supervisory directive issued by any bank
regulatory agency, a deterioration in the capital adequacy or financial or
managerial resources or future prospects of any of these other banking
organizations could adversely affect the Company's ability to obtain
regulatory approval for an acquisition of another bank holding company, bank,
thrift institution or other company whose business is closely related to
banking, even though the capital adequacy and financial and managerial
resources or future prospects of the Company, if considered apart from the
capital adequacy and the financial and managerial resources or future
prospects of these other banking organizations, would support approval of
such acquisition by the Federal Reserve Board. See "SUPERVISION AND
REGULATION."
GROWTH STRATEGY AND POSSIBLE NEED FOR ADDITIONAL CAPITAL
The Company intends to continue its growth strategy. This strategy is
focused upon growth through acquisitions and, to a lesser extent, the ability
of the Company to develop new account relationships and generate loans and
deposits at acceptable risk levels and on acceptable terms. While the
Company believes that, following this Offering, its capital, together with
existing credit facilities, will
11
<PAGE>
provide funds sufficient to support the Company's operations and anticipated
expansion for the foreseeable future (the Company's capital meets all regulatory
requirements and is currently sufficient to support the Company's operations
within its existing markets absent such anticipated expansion), other factors
such as acquisitions requiring higher than expected capital outlays, faster than
anticipated growth, reduced earnings levels and revisions in regulatory
requirements may require the Company to seek additional capital. There can be
no assurance that the Company will be successful in implementing, or will have
the necessary regulatory capital or acquisition opportunities to implement, its
growth strategy. Moreover, the Company anticipates that it will be in
substantial competition with other financial institutions for potential
acquisition candidates. See "SUPERVISION AND REGULATION." Further, there are
risks associated with the Company's acquisition strategy that could adversely
affect net income. These risks include, among others, incorrectly assessing the
asset quality of a particular institution being acquired, encountering greater
than anticipated costs of incorporating acquired businesses into the Company,
and being unable to deploy funds acquired in an acquisition
profitably.
DETERMINATION OF OFFERING PRICE
The offering price of the Common Shares has been determined by negotiation
between the Company and the Underwriters based on certain factors, including
an analysis of the Company's assets, earnings and other established criteria
of value, comparisons of the relationships between market prices, earnings
and book values of other banking institutions of a similar size and asset
quality, and sales prices for Common Shares known to the Company based on
limited historical trading. See "UNDERWRITING." Such decision has not been
based upon an established public trading market for the Common Shares;
accordingly, there can be no assurance that the Common Shares may be resold
at or above the offering price.
LIMITED TRADING MARKET; POSSIBLE VOLATILITY OF STOCK PRICE
Prior to this Offering there has been no established public trading market
for the Common Shares of the Company, with trading in Common Shares being
limited and infrequent. Since June 30, 1995, trading volume for Common
Shares has averaged less than 100 shares per week. The Common Shares are
expected to be approved for listing on the NASDAQ -NMS upon completion of the
Offering. In addition, Advest, Inc. has advised the Company that it intends
to make a market in Common Shares so long as the volume of trading activity
in the Common Shares and certain other market making considerations justify
doing so. However, there can be no assurance that an established and liquid
trading market will develop or, if developed, will be sustained following the
Offering. The market price of the Common Shares could be subject to
significant fluctuations in response to variations in quarterly and yearly
operating results, general trends in the banking industry and other factors.
In addition, the stock market can experience price and volume fluctuations
that may be unrelated or disproportionate to the operating performance of
affected companies. These broad fluctuations may adversely affect the market
price of the Common Shares.
CONTROL BY MANAGEMENT
A total of 800,470 Common Shares of the Company is beneficially owned by the
directors and executive officers of the Company, or 20.48% of the Common
Shares outstanding following the Offering, assuming members of Management
purchase no additional shares in the Offering and that the Underwriters do
not exercise the over-allotment option. The Underwriters may offer Common
Shares in the Offering to members of management, but it is not known how many
shares, if any, they will purchase. Therefore, to the extent they vote
together, the directors and executive officers of the Company will have
12
<PAGE>
the ability to exert significant influence over the election of the Company's
Board of Directors and other corporate actions requiring stockholder approval.
See "SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT."
DILUTION
Based on the public offering price per share of $13.00 and assuming no
exercise of the Underwriters' over-allotment option, the Company's tangible
value per share as of December 31, 1995 would have been $8.83. Accordingly,
purchasers of Common Shares offered hereby would suffer immediate dilution in
tangible book value per share of $4.17. Additionally, assuming consummation
of the Eminence Transaction, existing stockholders and new investors would
suffer an immediate dilution of $1.34 per share. See "DILUTION."
LIMITATIONS ON PAYMENT OF DIVIDENDS
The Banks are wholly-owned subsidiaries of the Company and are its principal
income-producing entities. Accordingly, dividends payable by the Company are
subject to the financial conditions of the Banks and the Company as well as
other business considerations. In addition, because each Bank is a
depository institution insured by the FDIC, a Bank may not pay dividends or
distribute any of its capital assets if it is in default on any assessment
due the FDIC. In addition, FDIC regulations also impose certain minimum
capital requirements that affect the amount of cash available for the payment
of dividends by a Bank. The Kentucky Financial Institutions Law also imposes
certain restrictions on the payment of dividends by a Bank. At April 1,
1996, $1,270,000 was available for payment as dividends from the Banks to the
Company without the need for approval from the FDIC or the Kentucky
Department of Financial Institutions. Even if any Bank is able to generate
sufficient earnings to pay dividends, there is no assurance that its Board of
Directors might not decide or be required to retain a greater portion of that
Bank's earnings in order to maintain existing capital or achieve additional
capital necessary because of (i) an increase in the capital requirements
established by the FDIC, (ii) a significant increase in the total of
risk-weighted assets held by such Bank, (iii) a significant decrease in such
Bank's income, (iv) a significant deterioration of the quality of such Bank's
loan portfolio, (v) a determination by the FDIC that the payment of a
dividend would (under the circumstances) constitute an "unsafe or unsound"
banking practice, or (vi) new federal or state regulations. The occurrence
of any of these events would decrease the amount of funds potentially
available for the payment of dividends. In addition, under Federal Reserve
Board policy, the Company is required to maintain adequate regulatory capital
and is expected to act as a source of financial strength to each of the Banks
and to commit resources to support each Bank in circumstances where it might
not do so absent such a policy. This policy could have the effect of
reducing the amount of dividends declarable by the Company. The Eminence
Bank that the Company expects to acquire through the Eminence Transaction is
subject to the same capital requirements and limitations on dividends as the
Banks.
DEPENDENCE ON KEY PERSONNEL
The Company currently is dependent on the continued services of J. Howell
Kelly, President of the Company, Benjamin T. Pugh, Executive Vice President
and Treasurer of the Company and the President and Chief Executive Officer of
the Vanceburg Bank and the Germantown Bank, Gardner E. Daniel, a Senior Vice
President and Assistant Secretary of the Company and the President and Chief
Executive Officer of the Georgetown Bank and the Sharpsburg Bank, and certain
other senior officers at the Banks.
13
<PAGE>
Although the Company believes that it has sufficiently experienced management
personnel to accommodate the loss of any senior officer, the loss of two or more
of these senior officers' services could have a material adverse effect on the
Company. The Company does not have an employment contract with any of these
senior officers (except for Mr. Daniel through March 16, 1998), nor does it
maintain key person life insurance on any of its personnel. See
"MANAGEMENT."
ADEQUACY OF ALLOWANCE FOR CREDIT LOSSES
The risk of credit losses varies with, among other things, general economic
conditions, the type of loan being made, the creditworthiness of the borrower
over the term of the loan and, in the case of a collateralized loan, the
value of the collateral for the loan. Management maintains an allowance for
credit losses based upon, among other things, historical experience, an
evaluation of economic conditions and regular review of delinquencies and
loan portfolio quality. Based upon such factors, management makes various
assumptions and judgments about the ultimate collectibility of the loan
portfolio and provides an allowance for credit losses based upon a percentage
of the outstanding balances and for specific loans when their ultimate
collectibility is considered questionable. If management's assumptions and
judgments prove to be incorrect and the allowance for credit losses is
inadequate to absorb future credit losses, or if the bank regulatory
authorities require any Bank to increase the allowance for credit losses,
such Bank's earnings could be significantly and adversely affected. Because
certain lending activities involve greater risks, the percentage applied to
specific loan types may vary.
As of December 31, 1995, the allowance for credit losses was $1,735,000,
which represented 1.53% of total loans, net of unearned income.
Nonperforming loans were $1,048,000 and other nonperforming assets were
$132,000, for total nonperforming assets of $1,180,000. The Company actively
manages its nonperforming loans in an effort to minimize credit losses and
monitors its asset quality to maintain an adequate allowance for possible
loan losses. Although management believes that its allowance for possible
loan losses is adequate, there can be no assurance that the allowance will
prove sufficient to cover future credit losses. Further, although management
uses the best information available to make determinations with respect to
the allowance for possible loan losses, future adjustments may be necessary
if economic conditions differ substantially from the assumptions used or
adverse developments arise with respect to the Company's nonperforming or
performing loans. Material additions to the Company's allowance for possible
loan losses would result in a decrease in the Company's net income, possibly
its capital, and could result in the inability to pay dividends, among other
adverse consequences. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS."
EFFECT OF INTEREST RATE FLUCTUATIONS
The Company's consolidated results of operations depend to a large
extent on the level of its net interest income, which is the difference
between interest income from interest-earning assets (such as loans and
investments) and interest expense on interest-bearing liabilities (such as
deposits and borrowings). If interest-rate fluctuations cause its cost of
funds to increase faster than the yield on its interest-earning assets, net
interest income will be reduced. The Company measures its interest-rate risk
using simulation, price elasticity and gap analyses. The differences between
an institution's interest-rate sensitive assets and its interest-rate
sensitive liabilities at a point in time is its gap position. A negative gap
indicates that cumulative interest-rate sensitive liabilities exceed
cumulative interest-rate sensitive assets for that period. A positive gap
indicates that cumulative interest-rate sensitive assets exceed cumulative
interest-rate sensitive liabilities for that period.
14
<PAGE>
While the Company uses various monitors of interest-rate risk, it is unable
to predict future fluctuations in interest rates or the specific impact
thereof. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS."
SHARES ELIGIBLE FOR FUTURE SALE
All of the executive officers, directors and principal stockholders of the
Company have agreed that, for a period of 180 days after the closing of the
Offering, they will not sell, offer for sale or take any action that may
constitute a transfer of Common Shares. On May 1, 1996, these executive
officers, directors and principal stockholders beneficially owned an
aggregate of 1,146,520 Common Shares. After completion of the Offering,
these 1,146,520 Common Shares will become eligible for sale by such officers,
directors and principal stockholders pursuant to Rule 144 under the
Securities Act, subject to the volume, notice and manner of sale limitations
of that rule. The remaining 762,570 Common Shares outstanding immediately
prior to the Offering will, following completion of the Offering, be freely
tradable immediately after completion of the Offering and will not be subject
to any resale restrictions. The sale of any substantial number of Common
Shares in the public market following the Offering, or the potential of such
sales, could have an adverse impact on the then-prevailing market prices of
the shares. See "SHARES ELIGIBLE FOR FUTURE SALE."
COMPETITION
Banking institutions operate in a highly competitive environment. The
Company competes with other commercial banks, credit unions, savings
institutions, finance companies, mortgage companies, mutual funds, and other
financial institutions, many of which have substantially greater financial
resources than the Company. Certain of these competitors offer products and
services that are not offered by the Company and certain competitors are not
subject to the same extensive laws and regulations as the Company. Federal
and state legislation and/or regulations also affect the Company's
competitiveness in the financial services business. It is impossible to
predict the competitive impact on the Company of certain federal and state
legislation and/or regulations relating to the banking industry and
interstate banking. See "BUSINESS" and "SUPERVISION AND REGULATION."
ECONOMIC CONDITIONS AND MONETARY POLICY
The operating results of the Company will depend to a great extent upon the
rate differentials that result from the difference between the income it
receives from its loans, securities and other earning assets and the interest
expense it pays on its deposits and other interest-bearing liabilities.
These rate differentials are highly sensitive to many factors beyond the
control of the Company, including general economic conditions and the
policies of various governmental and regulatory authorities, in particular
the Federal Reserve Board.
Like other depository institutions, the Company is affected by the monetary
policies implemented by the Federal Reserve Board. A primary instrument of
monetary policy employed by the Federal Reserve Board is the restriction on
the expansion of the money supply through open market operations, including
the purchase and sale of government securities and the adjustment of reserve
requirements. These actions may at times result in significant fluctuations
in interest rates, which could have adverse effects on the operations of the
Company. In particular, the Company's ability to make loans and attract
deposits, as well as public demand for loans, could be adversely affected.
See "SUPERVISION AND REGULATION - Monetary Policy and Economic Control."
15
<PAGE>
LOCAL ECONOMIC CONDITIONS
The success of the Company is dependent to a certain extent upon the general
economic conditions in the geographic markets served by the Banks. Although
the Company expects that economic conditions will be favorable in these
markets, no assurance can be given that favorable economic conditions will
occur. Adverse changes in economic conditions in the geographic markets that
the Banks serve could result in lower lending activity, impair the Banks'
ability to collect existing loans, or otherwise have a negative effect on the
operating results and financial condition of the Company. See "BUSINESS."
GOVERNMENT REGULATION
The Company and the Banks each are subject to extensive state and federal
governmental supervision, regulation and control. Future legislation and
government policy could adversely affect the banking industry and the
operations of the Company and the Banks. See "SUPERVISION AND REGULATION."
RECENT DEVELOPMENTS
THE COMPANY
The following is a summary of the Company's financial condition as of March
31, 1996, and results of operations for the three month periods ended March
31, 1996 and March 31, 1995. Discussion and analysis as to share data has
been retroactively adjusted to give effect to the 5-for-4 stock split
effected in the form of a 25% share dividend in September, 1995 and the
2-for-1 stock split effected in the form of a 100% share dividend on March
29, 1996.
<TABLE>
Statement of Financial
Condition Data (1): At March 31, 1996 At December 31, 1995
---------------------- ----------------- --------------------
<S> <C> <C>
(Dollars In Thousands Except Share Data and Ratios)
Loans $115,027 $113,064
Allowance for possible loan losses (1,790) (1,735)
Investment securities 28,525 24,929
Cash, cash equivalents and federal
funds sold 9,929 12,680
Real estate acquired through foreclosure 132 132
Other assets 6,314 6,405
-------- --------
Total assets $158,137 $155,475
-------- --------
-------- --------
Deposits $138,864 $136,246
Debt 6,399 6,502
Other liabilities 1,509 1,512
-------- --------
Total liabilities 146,772 144,260
Stockholders' equity 11,365 11,215
-------- --------
Total liabilities and stockholders'
equity $158,137 $155,475
-------- --------
-------- --------
Tangible stockholders' equity per share $ 5.84 $ 5.73
-------- --------
-------- --------
</TABLE>
16
<PAGE>
<TABLE>
For the Three For the Three
Months Ended Months Ended
Statement of Operations Data (1): March 31, 1996 March 31, 1995
--------------------------------- -------------- --------------
<S> <C> <C>
Interest and dividend income $ 3,474 $ 2,451
Interest expense 1,653 1,022
------------- ---------------
Net interest income 1,821 1,429
Provision for possible loan losses 73 17
------------- ---------------
Net interest income after provision for
possible loan losses 1,748 1,412
Non-interest income:
Service charges 147 105
Investment securities gains (losses) 0 (25)
Other 172 57
------------- ---------------
Total non-interest income 319 137
------------- ---------------
Non-interest expenses:
Salaries and employee benefits 817 605
Occupancy and equipment expenses 129 152
Other expenses 451 332
------------- ---------------
Total non-interest expenses 1,397 1,089
------------- ---------------
Income before income taxes 670 460
Provision for income taxes 172 66
------------- ---------------
Net income $ 498 $ 394
------------- ---------------
------------- ---------------
Share Data:
Net income $ 0.26 $ 0.21
Cash dividend $ 0.125 $ 0.10
Ratios (2):
Return on average assets 1.27% 1.36%
Return on average equity 17.65% 16.17%
Net interest margin (tax equivalent basis) 5.19% 5.47%
Stockholders' equity to total assets
at period end 7.19% 8.51%
Nonperforming loans to total loans 1.04% .04%
Allowance for possible loan losses to
total loans 1.56% 1.06%
</TABLE>
17
<PAGE>
(1) In the opinion of management, financial information at March
31, 1996 and for the three months ended March 31, 1996 and 1995 reflect
all adjustments (consisting only of normal recurring accruals) which are
necessary to present fairly the results for such periods.
(2) With the exception of end of period ratios, all ratios are based on
average balances during the periods and are annualized where appropriate.
Net income for the three months ended March 31, 1996 was $498,000 or $0.26
per share in comparison to $394,000 or $0.21 per share for the three months
ended March 31, 1995. This 26% increase in net income was due primarily to a
$392,000 increase in net interest income, reflecting primarily growth of
$38,298,000 in average interest-earning assets. The acquisition of the
Sharpsburg Bank on November 1, 1995 for cash in a transaction accounted for
as a purchase and the continued growth of the Company resulted in an increase
in average loans of $31,007,000 for the three months ended March 31, 1996
compared to the same period of 1995. The net interest margin was 5.19% for
the first quarter of 1996 compared to a 5.47% net interest margin earned
during the same period of 1995, and is comparable to the net interest margin
of 5.23% earned for the full year 1995.
The provision for possible loan losses and net chargeoffs were $73,000 and
$18,000, respectively, for the first quarter of 1996, compared to $17,000 and
$7,000, respectively, for the first quarter of 1995. Total nonperforming
loans were $1,197,000 at March 31, 1996 compared to $1,048,000 at December
31, 1995.
Non-interest income increased $182,000 to $319,000 for the first
three months of 1996 compared to $137,000 for the first three months of 1995.
The increase is attributable to the growth and expansion of the Company's
business and its customer base. In addition, a $50,000 fee was received
during the first three months of 1996 in connection with an exchange of an
investment in preferred stock. The acquisition of the Sharpsburg Bank
contributed $24,000 to the increase in non-interest income.
Non-interest expenses were $1,397,000 or 3.56% of average assets on an
annualized basis during the first quarter of 1996 compared to $1,089,000 or
3.75% of average assets during the same period of 1995. This increase in the
amount of non-interest expense was largely due to expansion of the Company's
operations. The operations of the Sharpsburg Bank added $131,000 to
non-interest expense during the first quarter of 1996.
Income tax expense was $172,000 for the first quarter of 1996 compared to
$66,000 for the first quarter of 1995. Income tax expense for 1996 was
higher than that of 1995 due primarily to higher income before taxes in 1996.
The lower income tax expense in the 1995 period is also due to the reduction
of the valuation allowance for deferred tax assets by approximately $15,000
at the Georgetown Bank.
EMINENCE
The following is a summary of Eminence's financial condition as of March 31,
1996, and results of operations for the three month periods ended March 31,
1996 and March 31, 1995.
18
<PAGE>
<TABLE>
Statement of Financial
Condition Data (1): At March 31, 1996 At December 31, 1995
---------------------- ----------------- --------------------
(Dollars In Thousands Except Share Data and Ratios)
<S> <C> <C>
Loans $ 80,735 $ 78,652
Allowance for possible loan losses (809) (800)
Investment securities 18,157 18,292
Cash, cash equivalents and federal funds sold 2,958 7,303
Real estate acquired through foreclosure 319 396
Other assets 3,202 3,248
------------ -----------
Total assets $ 104,562 $ 107,091
------------ -----------
------------ -----------
Deposits $ 85,819 $ 89,758
Debt 10,973 10,004
Other liabilities 520 372
------------ -----------
Total liabilities 97,312 100,134
------------ -----------
Stockholders' equity 7,250 6,957
------------ -----------
Total liabilities and stockholders' equity $ 104,562 $ 107,091
------------ -----------
------------ -----------
For the Three For the Three
Months Ended Months Ended
Statement of Operations Data (1): March 31, 1996 March 31, 1995
-------------------------------- -------------- ----------------
Interest and dividend income $ 2,148 $ 1,987
Interest expense 1,247 1,079
-------------- ---------------
Net interest income 901 908
Provision for possible loan losses 169 57
Net interest income after provision for
possible loan losses 732 851
Non-interest income:
Service charges 54 49
Investment securities gains (losses) 2 2
Other 80 66
-------------- ---------------
Total non-interest income 136 117
-------------- ---------------
Non-interest expenses:
Salaries and employee benefits 287 257
Occupancy and equipment expenses 89 99
Other expenses 163 161
-------------- ---------------
Total non-interest expenses 539 517
-------------- ---------------
Income before income taxes 329 451
Provision for income taxes 66 45
-------------- ---------------
Net income $ 263 $ 406
-------------- ---------------
-------------- ---------------
</TABLE>
19
<PAGE>
<TABLE>
For the Three For the Three
Months Ended Months Ended
Statement of Operations Data (1) (Cont.): March 31, 1996 March 31, 1995
----------------------------------------- ------------ -----------
<S> <C> <C>
Ratios (2):
Return on average assets .99% 1.66%
Return on average equity 14.81% 26.21%
Net interest margin (tax equivalent basis) 3.82% 4.11%
Stockholders' equity to total assets
at period end 6.93% 6.47%
Nonperforming loans to total loans .92% 1.37%
Allowance for possible loan losses
to total loans 1.00% 1.01%
</TABLE>
--------------------
(1) In the opinion of management, financial information at March 31, 1996
and for the three months ended March 31, 1996 and 1995 reflect all
adjustments (consisting only of normal recurring accruals) which are
necessary to present fairly the results for such periods.
(2) With the exception of end of period ratios, all ratios are based on
average balances during the periods and are annualized where appropriate.
THE COMPANY
The Company was incorporated in 1991 under the laws of Kentucky and is
registered under the Bank Holding Company Act of 1956, as amended. The
Company only conducts business through the Banks and other direct or indirect
subsidiaries. The Company was organized in connection with the
reorganization of Citizens Deposit Bank and Trust Company, Vanceburg,
Kentucky (the "Vanceburg Bank") into a bank holding company structure. The
Vanceburg Bank is a banking corporation organized under the laws of Kentucky,
resulting from the merger in 1930 of Deposit Bank, chartered in 1894, with
Citizens Bank, chartered in 1903. In 1992, the Company acquired Bank of
Germantown, Germantown, Kentucky (the "Germantown Bank"), a banking
corporation organized under the laws of Kentucky in 1900. The Company in
March, 1995 acquired Georgetown Bank and Trust Company, Georgetown, Kentucky
(the "Georgetown Bank"), a banking corporation organized under the laws of
Kentucky in 1988, and in October, 1995, Citizens Bank, Sharpsburg, Kentucky
(the "Sharpsburg Bank"), a banking corporation organized under the laws of
Kentucky in 1903. At December 31, 1995, the Company had consolidated total
assets of $155.5 million, total deposits of $136.2 million and stockholders'
equity of $11.2 million. The Vanceburg Bank, the Germantown Bank, the
Georgetown Bank and the Sharpsburg Bank are herein referred to individually
as a "Bank" and collectively as the "Banks."
The Company has one non-banking subsidiary, Premier Data Services, Inc.,
a Kentucky corporation that provides data processing services to the Banks
and one non-affiliated bank. The Company also has an indirect subsidiary,
County Finance, Inc., that is a Kentucky consumer loan company. County
Finance, Inc., a subsidiary of the Vanceburg Bank, provides consumer loan
services to clientele within the Lewis County, Kentucky market that, due to
credit experience or other factors, may not be able to obtain loans from
commercial bank lenders.
On March 4, 1996 the Company agreed to acquire Farmers Deposit Bancorp,
Eminence, Kentucky ("Eminence") and, indirectly, its commercial bank
subsidiary, Farmers Deposit Bank (the "Eminence
20
<PAGE>
Bank"), pursuant to an Agreement and Plan of Share Exchange dated March 4,
1996 (the "Eminence Transaction"). See "THE EMINENCE TRANSACTION"; "USE OF
PROCEEDS"; "PRO FORMA CONDENSED COMBINED FINANCIAL DATA OF THE COMPANY AND
EMINENCE"; "INDEX TO CONSOLIDATED FINANCIAL STATEMENTS - Eminence."
PROPERTIES
The Company owns the banking office of the Georgetown Bank at 120 N.
Hamilton Street, Georgetown, Kentucky, at which the Company's executive
offices are located. Each of the Banks owns the real property and
improvements on their respective main offices and branches, except that the
Georgetown Bank is a party to a ground lease on which its one branch is
located that involves a monthly rental payment of $750. This lease has a
maturity date of June 30, 1996. The Georgetown Bank has the option to
purchase this real property for $260,000 from the landlord and it is
anticipated that this purchase option will be exercised in 1996.
The Vanceburg Bank, in addition to its main office at 400 Second
Street, Vanceburg, Kentucky, has four branch offices in Lewis County,
Kentucky. The Germantown Bank, with its main office on Highway 10,
Germantown, Kentucky, has no other offices in Bracken County, Kentucky. The
Georgetown Bank, in addition to its main office, has one branch in Scott
County, Kentucky. The Sharpsburg Bank, with its main office on Main Street,
Sharpsburg, Kentucky, has no other offices in Bath County, Kentucky.
LEGAL PROCEEDINGS
The Banks are respectively parties to legal actions that are ordinary
routine litigation incidental to a commercial banking business. In
management's opinion, the outcome of these matters, individually or in the
aggregate, will not have a material adverse impact on the results of
operations or financial position of the Company.
COMPETITION
The Banks encounter strong competition both in making loans and
attracting deposits. The deregulation of the banking industry and the
widespread enactment of state laws that permit multi-bank holding companies
as well as the availability of nationwide interstate banking has created a
highly competitive environment for financial services providers. In one or
more aspects of its business, each Bank competes with other commercial banks,
savings and loan associations, credit unions, finance companies, mutual
funds, insurance companies, brokerage and investment banking companies and
other financial intermediaries operating in its market and elsewhere, many of
whom have substantially greater financial and managerial resources. With
respect to the Georgetown Bank and the Germantown Bank, primary competitors
include large bank holding companies having substantially greater resources
that offer certain services that these two Banks do not currently provide.
Each Bank seeks to minimize the competitive effect of larger financial
institutions through a community banking approach that emphasizes direct
customer access to the Bank's president and other officers in an environment
conducive to friendly, informed and courteous service. See "BUSINESS -
General."
Management believes that each Bank is well positioned to compete
successfully in its respective primary market area, although no assurances
can be given. Competition among financial institutions is based upon interest
rates offered on deposit accounts, interest rates charged on loans and other
credit and service charges, the quality and scope of the services rendered,
the convenience of the banking facilities
21
<PAGE>
and, in the case of loans to commercial borrowers, relative lending limits.
Management believes that the commitment of its Banks to personal service,
innovation and involvement in their respective communities and primary market
areas, as well as their commitment to quality community banking service, are
factors that contribute to their competitiveness.
EMPLOYEES
The Company and its subsidiaries collectively had approximately 96
full-time equivalent employees as of March 31, 1996. Its executive offices
are located at 120 N. Hamilton Street, Georgetown, Kentucky, telephone number
(502) 863-7500 (facsimile number (502) 863-7503).
THE EMINENCE TRANSACTION
GENERAL
On March 4, 1996, the Company entered into an Agreement and Plan of Share
Exchange (the "Share Exchange Agreement") with Farmers Deposit Bancorp,
Eminence, Kentucky ("Eminence"), a one-bank holding company owning all of the
shares of Farmers Deposit Bank (the "Eminence Bank"). Under the Share
Exchange Agreement, the Company will acquire all of the outstanding shares of
Eminence in a statutory share exchange in exchange for $1,035 cash per share,
or an aggregate cash purchase price of $12,549,375. Following consummation
of the share exchange, Eminence will be a wholly owned subsidiary of the
Company and the Eminence Bank will be an indirect wholly owned subsidiary of
the Company. The executive management of the Eminence Bank and substantially
all of the directors of the Eminence Bank are expected to continue their
service in such positions following consummation of the share exchange.
At December 31, 1995, Eminence had consolidated total assets of $107.1
million (including net loans of $77.8 million), consolidated total
liabilities of $100.1 million (including total deposits of $89.8 million and
long-term debt of $2 million) and consolidated total stockholders' equity of
$7 million. See "PRO FORMA CONDENSED COMBINED FINANCIAL DATA OF THE COMPANY
AND EMINENCE"; "INDEX TO CONSOLIDATED FINANCIAL STATEMENTS - Eminence."
Eminence and the Eminence Bank each is generally subject to the regulatory,
economic and other considerations, limitations and risks to which the Company
and the Banks are subject. See "RISK FACTORS" and "SUPERVISION AND
REGULATION."
STRATEGIC RATIONALE
The Eminence Transaction will enable the Company to affiliate with the
Eminence Bank, the largest bank in Henry County, Kentucky. The Eminence Bank
is located approximately 50 miles northwest of the Georgetown Bank and the
Company's headquarters, and approximately 35 miles north of Louisville,
Kentucky. The city of Eminence is 12 miles from each of Interstate 64 and
Interstate 71, the two main highways connecting Louisville, Kentucky,
respectively, to Lexington, Kentucky and Cincinnati, Ohio. While agriculture
is the primary industry within Henry County, industrial and residential
development have been increasing and Henry County is expected to experience
economic growth and development over the next decade as economic growth and
development continues to expand within the triangle formed by the cities of
Louisville and Lexington, Kentucky and Cincinnati, Ohio. The Company also
regards the Eminence Bank's customer base as local and loyal, and its
management, based upon prior results of operations, as capable of continuing
to manage the Eminence Bank on the decentralized basis on which the Company's
business strategy is based. See "BUSINESS."
22
<PAGE>
SHARE EXCHANGE AGREEMENT
The Share Exchange Agreement contains representations and warranties
relating to, among other things, (i) the organization of the Company and its
subsidiaries, and Eminence and its subsidiary; (ii) the capital structure of
the Company and Eminence; (iii) authorization, execution, delivery,
performance and enforceability of the Share Exchange Agreement and related
matters; (iv) financial statements and their preparation in accordance with
generally accepted accounting principles; (v) absence of certain changes or
events since the respective date of a party's most recent audited financial
statements; (vi) absence of undisclosed liabilities; (vii) adequacy of
allowance for credit losses; (viii) liability under environmental laws; (ix)
accuracy of information supplied in connection with the Company's filings
with governmental entities, including the Registration Statement and this
Prospectus; (x) material violations of charter documents, contractual
obligations or orders, writs, injunctions or decrees; (xi) compliance with
applicable laws; (xii) material pending or threatened litigation; (xiii)
filing of tax returns and payment of taxes; (xiv) certain contracts relating
to employment, benefits and other matters; (xv) retirement and other employee
plans and matters relating to the Employee Retirement Income Security Act of
1974, as amended; (xvi) subsidiaries; (xvii) the stockholder vote required to
approve the Share Exchange Agreement; (xviii) good title to properties; (xix)
completeness and accuracy of corporate documents, books and records and (xx)
certain matters related to insurance. None of the representations and
warranties made by the Company and Eminence to each other will survive
consummation of the share exchange transaction contemplated by the Share
Exchange Agreement.
Pursuant to the Share Exchange Agreement, Eminence has agreed to, and
has agreed to cause the Eminence Bank to, (i) conduct its business in the
usual, regular and ordinary course of business consistent with past practice
and (ii) use its reasonable best efforts to maintain and preserve intact its
business organization, employees and advantageous business relationships and
retain the services of its officers and key employees. Consummation of the
transactions contemplated by the Share Exchange Agreement are subject to
various customary conditions, including approval of the Share Exchange
Agreement by the holders of a majority of the outstanding shares of common
stock of Eminence and the receipt of requisite regulatory approvals. While
management of the Company is not aware of any basis on which the receipt of
all required regulatory approvals could not be obtained, there can be no
assurance that such regulatory approvals will be obtained. See "RISK FACTORS
- No Assurance of Acquisitions"; "SUPERVISION AND REGULATION." Similarly,
while there can be no assurance that the stockholders of Eminence will
approve the Share Exchange Agreement, the Company has obtained written
agreements from the four directors of Eminence to vote all of their shares of
common stock, constituting in the aggregate approximately 40% of the
outstanding voting power of Eminence, in favor of approval of the Share
Exchange Agreement and the transactions contemplated thereby.
The Company has agreed, among other things, (i) to cause the corporate
existence of Eminence Bank to continue with the same corporate name for the
foreseeable future, (ii) to the extent permitted by the Kentucky Business
Corporation Act, to indemnify any director, officer or employee of Eminence
or the Eminence Bank against any losses, claims, damages, liabilities,
expenses (including attorneys' fees and expenses), judgments, fines and
amounts paid in settlement in connection with any threatened or actual claim,
action, suit, proceeding or investigation arising out of the Share Exchange
Agreement or arising out of or based in part upon any act or failure to act
(other than acts involving fraud, intentional or willful misconduct or bad
faith) before the effective time of the share exchange transaction and (iii)
to direct the Underwriters to reserve for issuance in the Offering up to
100,000 Common Shares to stockholders of Eminence that the Eminence Board of
Directors shall identify to the Company prior to the effectiveness of the
Offering.
23
<PAGE>
The Share Exchange Agreement may be terminated by the mutual written
consent of the Company and Eminence. The Share Exchange Agreement also may
be terminated by either the Company or Eminence if (i) the other shall have
failed to perform in any material respect any of its material obligations
under the Share Exchange Agreement to be performed at or prior to such date
of termination, which failure to perform is incapable of being cured by
August 1, 1996, (ii) any representation or warranty of the other contained in
the Share Exchange Agreement shall not be true and correct (except a failure
to be true and correct that is not reasonably likely to have a material
adverse effect on the party making the representation or warranty), provided
such failure is incapable of being cured prior to August 1, 1996, (iii) the
stockholders of Eminence shall fail to approve the Share Exchange Agreement
or (iv) the transactions contemplated by the Share Exchange Agreement shall
not have been consummated by August 1, 1996. Because the Company expects to
use net proceeds from the Offering to complete the Eminence Transaction, the
Company has made no alternative arrangements to fund the completion of the
Eminence Transaction at this time.
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 2,000,000 Common
Shares offered by the Company (after giving effect to the payment of
estimated offering expenses) are estimated to be approximately $23,580,000
($27,207,000 if the Underwriters' over-allotment option is exercised in
full). Such proceeds will qualify under the capital adequacy guidelines of
the Federal Reserve Board as Tier I capital for the Company. Approximately
$12.5 million of the net proceeds to be received by the Company from this
Offering will be paid to stockholders of Eminence in the Eminence
Transaction. See "THE EMINENCE TRANSACTION." Approximately $7 million of the
net proceeds will be used to discharge in full $5 million of outstanding debt
of the Company bearing interest at the lender's prime rate and having a
maturity date of June 30, 1996, and $2 million of outstanding debt of
Eminence bearing interest at a rate of one-half percent in excess of the
lender's prime rate and having a maturity date of April 30, 2001. Up to $3
million of such net proceeds may be used by the Company to provide additional
equity capital to the Georgetown Bank and the Eminence Bank to support
anticipated future growth. The remaining net proceeds will be available for
general corporate purposes, including expansion of the Company's business
through acquisitions of other financial institutions, their branches or
deposits or establishment of new operations or branch offices. Pending their
longer-term use, the net proceeds remaining after repayment of the Company's
debt will be invested in short-term investment grade obligations.
24
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company as of
December 31, 1995, as adjusted for the Offering (after giving effect to the
payment of estimated offering expenses) and the 2-for-1 common stock split
effected in the form of a share dividend on March 29, 1996.
AT DECEMBER 31, 1995
--------------------
(Dollars In Thousands)
AS ADJUSTED
OUTSTANDING FOR THE OFFERING (1)
----------- --------------------
Debt (2) . . . . . . . . . . . . . . . . . $ 5,000 $ 0
Stockholders' equity:
Preferred Shares, without par value,
authorized 1,000,000 shares; none issued. - -
Common Shares, without par value;
authorized,10,000,000 shares; issued,
1,909,090 shares, 3,909,090 shares
as adjusted for the Offering . . . . . . $ 954 $ 954
Capital surplus . . . . . . . . . . . . . $ 5,898 $ 29,478
Retained earnings . . . . . . . . . . . . $ 4,493 $ 4,493
Unrealized losses on securities
available for sale . . . . . . . . . . $ (130) $ (130)
---------- --------
Total stockholders' equity . . . . $ 11,215 $ 34,795
---------------------
(1) Assumes that the Underwriters' over-allotment option for 300,000 shares
is not exercised. If the Underwriters' over-allotment option is exercised
in full, Common Shares, capital surplus, retained earnings and total
stockholders' equity would be $954,000, $33.1 million, $4.5 million and
$38.4 million.
(2) Does not include advances from the Federal Home Loan Bank in the amount of
$755,000.
25
<PAGE>
The following table sets forth capital ratios required by the Federal
Reserve to be maintained by the Company, and the Company's actual and pro forma
ratios of capital to total regulatory or risk-weighted assets, as applicable, at
December 31, 1995.
<TABLE>
At December 31, 1995
-------------------------------------------------
Company As adjusted As adjusted for
Regulatory for the the Eminence
Minimum Actual Offering (1)(2) Transaction (1)(2)
---------- ------ --------------- ------------------
<S> <C> <C> <C> <C>
Tier I capital . . . . . . . . . . . . . . . 4.00% 9.47% 30.28% 15.27%
Total risk-based capital . . . . . . . . . . 8.00% 10.72% 31.54% 16.52%
Leverage ratio . . . . . . . . . . . . . . . 4.00% 6.92% 19.20% 10.89%
</TABLE>
-----------------------------
(1) Assumes that the Underwriters' over-allotment option for 300,000
shares is not exercised.
(2) Assumes that the net proceeds of the Offering were received on December 31,
1995.
In addition to the capitalization described in the table above, the
Company employs other sources to fund operations. Such funding sources for
the Company at December 31, 1995 included non-interest-bearing demand
deposits of approximately $16 million and interest-bearing deposits of
approximately $120 million.
DILUTION
The net tangible book value of the Company as of December 31, 1995 was
$10,940,000 or $5.73 per share. Giving effect to the sale by the Company of
2,000,000 Common Shares at the offering price of $13.00 per share and
assuming that underwriting commissions and expenses of the offering aggregate
9.31% of gross proceeds, the pro forma net tangible book value of the Company
at December 31, 1995, would have been $34,520,000 or $8.83 per share,
representing an immediate increase in net tangible book value of $3.10 per
share to present stockholders and an immediate dilution of $4.17 per share to
new investors purchasing shares at the public offering price. Additionally,
assuming consummation of the Eminence Transaction, existing stockholders and
new investors would suffer an immediate dilution of $1.34 per share.
The following table illustrates this per share dilution from the Offering:
Public offering price (1) . . . . . . . . . . . . . . . . . . . . . . $13.00
Net tangible book value before Offering (2). . . . . . . . . . . . . . 5.73
Increase attributable to payment for shares purchased by
new investors . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.10
Pro forma net tangible book value after Offering (2) . . . . . . . . . 8.83
Dilution to new investors . . . . . . . . . . . . . . . . . . . . . . 4.17
26
<PAGE>
The following table illustrates the per share dilution from the Offering and
the Eminence Transaction:
Public offering price (1) . . . . . . . . . . . . . . . . . . . . . . $13.00
Pro forma net tangible book value after the Offering (2). . . . . . . 8.83
Dilution due to the Eminence Transaction 1.34
Pro forma net tangible book value after the Offering
and after the Eminence Transaction (2) . . . . . . . . . . . . . . 7.49
Dilution to new investors from the Offering and the Eminence Transaction 5.51
--------------------
(1) Before underwriting commissions and offering expenses.
(2) Net tangible book value per share is determined by dividing the
number of Common Shares outstanding into the net tangible book value
of the Company.
PRICE RANGE OF COMMON SHARES; DIVIDENDS
Prior to this Offering there has been no established public trading
market for the Common Shares of the Company, with trading in Common Shares
being limited and infrequent. Since January 1, 1996, the Company is aware of
approximately 16 trading transactions involving approximately 4,400 Common
Shares at a sales price of $12.50 per share (as adjusted for the 2-for-1
stock split effected in the form of a share dividend on March 29, 1996).
Sales of Common Shares may have occurred in private transactions at prices
that are not known to the Company. Further, these sale prices may not be
representative of prices that might be realized in trading transactions in
Common Shares following the Offering. At May 1, 1996, the Company had
approximately 266 record holders of its Common Shares.
The following table sets forth on a quarterly basis cash dividends paid
during the quarters indicated. The Company effected a 5-for-4 stock split
effected in the form of a 25% share dividend in September, 1995 and a 2-for-1
stock split effected in the form of a 100% share dividend in March, 1996.
Cash dividends paid per share shown below have been adjusted retroactively to
reflect these stock splits effected in the form of share dividends.
CASH
DIVIDENDS PAID
--------------
1992:
First Quarter . . . . . . . . . . . . $0.04
Second Quarter. . . . . . . . . . . . 0.04
Third Quarter . . . . . . . . . . . . 0.06
Fourth Quarter. . . . . . . . . . . . 0.06
-----
$0.20
-----
-----
1993:
First Quarter . . . . . . . . . . . . $0.06
Second Quarter . . . . . . . . . . . 0.06
Third Quarter . . . . . . . . . . . . 0.08
Fourth Quarter . . . . . . . . . . . 0.08
-----
$0.28
-----
-----
1994:
First Quarter . . . . . . . . . . . . $0.08
Second Quarter . . . . . . . . . . . 0.08
Third Quarter . . . . . . . . . . . . 0.10
Fourth Quarter . . . . . . . . . . . 0.10
-----
$0.36
-----
-----
27
<PAGE>
CASH
DIVIDENDS PAID (CONT.)
--------------
1995:
First Quarter . . . . . . . . . . . . $0.10
Second Quarter . . . . . . . . . . . 0.10
Third Quarter . . . . . . . . . . . . 0.125
Fourth Quarter . . . . . . . . . . . 0.125
------
$0.45
------
------
1996:
First Quarter . . . . . . . . . . . . $0.125
The Company has paid consecutive quarterly cash dividends since its
organization. The Company's annual cash dividend has increased 5 consecutive
years, from $0.12 per share in 1991 to $0.45 per share in 1995. While the
Company currently expects to declare comparable cash dividends in the future,
there can be no assurance that it will do so. The determination whether to
pay cash dividends and the amount of such dividends is at the discretion of
the Company's Board of Directors.
The payment of dividends by the Company depends largely upon the
ability of the Banks to declare and pay dividends to the Company because the
principal source of the Company's revenue will be dividends paid by the
Banks. At April 1, 1996, approximately $1,270,000 was available for payment
as dividends from the Banks to the Company without the need for approval from
the FDIC or the Kentucky Department of Financial Institutions. In
considering the payment of dividends, the Board of Directors will take into
account the Company's financial condition, results of operations, tax
considerations, costs of expansion, industry standards, economic conditions
and need for funds, as well as governmental policies and regulations
applicable to the Company and the Banks. See "RISK FACTORS - Limitations on
Payment of Dividends.
28
<PAGE>
SELECTED FINANCIAL DATA
The following table presents consolidated selected financial data for the
Company, it does not purport to be complete and is qualified in its entirety
by more detailed financial information and the audited consolidated financial
statements contained elsewhere in this Prospectus. The consolidated selected
financial data presented below has been retroactively adjusted to reflect all
prior stock splits effected in the form of share dividends, including the
2-for-1 stock split effected in the form of a share dividend on March 29,
1996.
<TABLE>
<CAPTION>
At or for the Year Ended December 31,
_____________________________________________________________________
1995 1994 1993 1992 1991
_________ _________ _________ _________ _________
(In Thousands Except Share Data And Ratios)
<S> <C> <C> <C> <C> <C>
EARNINGS
Net interest income . . . . . . $ 6,023 $ 5,524 $ 4,938 $ 4,203 $ 3,511
Provision for possible
loan losses . . . . . . . . . 86 207 170 325 602
Non-interest income . . . . . . 825 684 733 592 453
Non-interest expense. . . . . . 4,493 4,005 3,640 3,375 2,955
________ ________ ________ ________ ________
Income taxes. . . . . . . . . . 113 483 510 366 180
________ ________ ________ ________ ________
Net Income . . . . . . . . . . $ 2,156 $ 1,513 $ 1,351 $ 729 $ 227
________ ________ ________ ________ ________
________ ________ ________ ________ ________
FINANCIAL POSITION
Total assets. . . . . . . . . . $ 155,475 $ 115,443 $ 108,774 $ 100,364 $ 80,347
Loans, net of unearned
income. . . . . . . . . . . . 113,064 81,276 74,450 65,159 58,015
Allowance for possible
loan losses . . . . . . . . . 1,735 886 884 938 874
Securities. . . . . . . . . . . 24,929 19,688 21,864 18,965 11,160
Deposits. . . . . . . . . . . . 136,246 102,839 98,846 91,704 72,480
Debt. . . . . . . . . . . . . . 5,000 1,500 0 0 0
Stockholders' equity. . . . . . 11,215 9,453 8,868 7,617 7,006
SHARE DATA
Net income. . . . . . . . . . . $ 1.13 $ 0.80 $ 0.72 $ 0.39 $ 0.13
Book value. . . . . . . . . . . 5.87 5.02 4.72 4.05 3.73
Cash dividend . . . . . . . . . 0.45 0.36 0.28 0.20 0.12
Common shares outstanding
(year-end). . . . . . . . . . 1,909,090 1,883,410 1,880,200 1,880,200 1,880,200
Average common shares
outstanding . . . . . . . . . 1,903,260 1,881,818 1,880,200 1,880,200 1,703,096
RATIOS
Return on average assets. . . . 1.69% 1.36% 1.23% 0.88% 0.29%
Return on average equity. . . . 20.5% 16.4% 15.4% 9.97% 3.49%
Dividend payout . . . . . . . . 39.8% 45.0% 38.9% 51.3% 92.3%
Stockholders' equity to total
assets at period-end . . . . 7.21% 8.19% 8.15% 7.59% 8.72%
Average stockholders' equity to
average total assets. . . . . 8.25% 8.27% 8.04% 8.80% 8.31%
</TABLE>
29
<PAGE>
PRO FORMA CONDENSED COMBINED FINANCIAL
DATA OF THE COMPANY AND EMINENCE
The following table sets forth certain pro forma condensed combined
financial data for the Company as of and for the year ended December 31,
1995, giving effect to the net proceeds of the Offering involving the sale of
2,000,000 Common Shares at an offering price of $13.00 per share, the
acquisition of the Sharpsburg Bank on October 31, 1995 and the probable
acquisition of Eminence anticipated to be consummated in June, 1996. See
"THE EMINENCE TRANSACTION." The acquisition of the Sharpsburg Bank is, and
the acquisition of the Eminence Bank will be, accounted for under the
purchase method of accounting as if they had occurred as of January 1, 1995,
after giving effect to the pro forma adjustments described in the Notes to
the Pro Forma Condensed Combined Financial Statements. This information
should be read in conjunction with the historical consolidated financial
statements of the Company and Eminence, including the respective notes
thereto, that are included elsewhere in this Prospectus, and in conjunction
with the consolidated historical financial data for the Company and the other
pro forma financial information, including the notes thereto, appearing
elsewhere in this Prospectus. The pro forma financial data are not
necessarily indicative of the results that actually would have occurred had
the acquisitions been consummated on the dates indicated or that may be
obtained in the future. The pro forma information presented has been
retroactively adjusted to reflect all prior stock splits effected in the form
of share dividends, including the 2-for-1 stock split effected in the form of
a share dividend on March 29, 1996.
30
<PAGE>
PRO FORMA CONDENSED COMBINED BALANCE SHEET
DECEMBER 31, 1995
(In Thousands)
<TABLE>
<CAPTION>
HISTORICAL OFFERING EMINENCE
________________________ PRO FORMA PRO FORMA PRO FORMA
COMPANY(6) EMINENCE(5) ADJUSTMENTS ADJUSTMENTS COMBINED
__________ ___________ ___________ ___________ _________
<S> <C> <C> <C> <C> <C>
ASSETS
Cash and due from banks $ 6,340 $ 2,228 $ 23,580(1) $ (12,549)(3) $ 12,549
(5,000)(2) (2,050)(4)
Federal funds sold 6,340 5,075 11,415
Investment securities:
Available for sale 16,039 5,866 21,905
Held to maturity 8,890 12,426 300(3) 21,616
Loans $ 113,775 $ 79,992 $ 193,767
Less: unearned income (711) (1,340) (2,051)
Less: allowance for loan losses (1,735) (800) (2,535)
_________ _________ _________
Net loans $ 111,329 $ 77,852 $ 189,181
Premises and equipment 2,129 881 200(3) 3,210
Other real estate owned 132 396 528
Goodwill 248 0 5,262(3) 5,510
Other assets 4,028 2,367 6,395
_________ _________ ________ ________ _________
TOTAL ASSETS $ 155,475 $ 107,091 $ 18,580 $ (8,837) $ 272,309
LIABILITIES
Deposits:
Non-interest bearing $ 16,000 $ 11,773 $ 27,773
Interest bearing 120,246 77,985 198,231
_________ _________ _________
Total deposits $ 136,246 $ 89,758 $ 226,004
Repurchase agreements 747 5,000 5,747
Advances from FHLB 755 2,954 3,709
Other liabilities 1,512 372 170(3) 2,054
Debt 5,000 2,050 (5,000)(2) (2,050)(4) 0
_________ _________ ________ ________ _________
TOTAL LIABILITIES $ 144,260 $ 100,134 $ (5,000) $ (1,880) $ 237,514
STOCKHOLDERS'
EQUITY
Common stock $ 954 $ 469 $ $ (469)(3) $ 954
Surplus 5,898 2,000 23,580(1) (2,000)(3) 29,478
Retained earnings 4,493 4,433 (4,433)(3) 4,493
Net unrealized gain (loss) (130) 55 (55)(3) (130)
_________ _________ ________ ________ _________
Total stockholders' equity $ 11,215 $ 6,957 $ 23,580 $ (6,957) $ 34,795
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 155,475 $ 107,091 $ 18,580 $ (8,837) $ 272,309
</TABLE>
31
<PAGE>
NOTES
(1) To record net proceeds received from the sale of 2,000,000 Common Shares
at the offering price of $13.00 per share. Because the Company expects
to use net proceeds from the Offering to complete the Eminence
Transaction, the Company has made no alternative arrangements to fund
the completion of the Eminence Transaction at this time.
(2) To record the discharge of debt of the Company.
(3) To record the purchase of Eminence and related goodwill. The cost of this
transaction has been allocated to identifiable assets acquired and
liabilities assumed based upon their fair values as estimated during the
Company's acquisition review of Eminence. The excess of the purchase price
of $12,549,000 over the unadjusted net assets acquired of $6,957,000 has
been allocated as follows:
Purchase price $12,549,000
Less: unadjusted net assets acquired (6,957,000)
__________
Excess $ 5,592,000
Less: Market value adjustment to investment securities (300,000)
Less: Market value adjustment to Bank premises (200,000)
Add: Deferred taxes on market value adjustments 170,000
___________
Purchase price in excess of adjusted net assets
acquired (Goodwill) $ 5,262,000
(4) To record the discharge of debt of Eminence.
(5) Eminence's most recent audited financial statements are as of and for the
year ended June 30, 1995. Amounts for Eminence included above have been
updated to reflect the results of operations through December 31, 1995.
The balance sheet as of December 31, 1995 has not been audited by
independent public accountants; however, in the opinion of management such
information reflects all adjustments necessary for a fair presentation.
All such adjustments are of a normal and recurring nature.
(6) Amounts for the Company are derived from the audited financial statements
for the Company as of and for the year ended December 31, 1995.
32
<PAGE>
PRO FORMA CONDENSED COMBINED STATEMENT OF INCOME
YEAR ENDED DECEMBER 31, 1995
(In Thousands Except Share Data)
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA PRO FORMA
COMPANY(1) EMINENCE(2) SHARPSBURG BANK(3) ADJUSTMENTS COMBINED
__________ __________ _________________ ___________ _________
<S> <C> <C> <C> <C> <C>
INTEREST INCOME:
Interest and fees on loans $ 9,488 $ 6,944 $ 1,143 $ $ 17,575
Interest on investment securities:
Taxable 904 658 212 (9)(6) 1,765
Tax-exempt 397 373 19 (46)(6) 743
Interest on federal funds sold 280 180 15 475
Other interest income 34 34
_______ _______ ______ ______ _______
Total interest income $ 11,103 $ 8,155 1,389 $ (55) $ 20,592
INTEREST EXPENSE:
Interest on deposits 4,768 4,000 659 $ $ 9,427
Interest on other borrowings 312 668 6 (454)(8) 532
_______ _______ ______ ______ _______
Total interest expense $ 5,080 $ 4,668 $ 665 $ (454) $ 9,959
Net interest income $ 6,023 $ 3,487 $ 724 $ 399 $ 10,633
Provision for loan losses 86 491 237 814
_______ _______ ______ ______ _______
Net interest income after provision
for loan losses $ 5,937 $ 2,996 $ 487 $ 399 $ 9,819
NON-INTEREST INCOME:
Service charges and fees $ 530 $ 207 $ 82 $ $ 819
Insurance commissions 156 110 3 269
Other income 145 190 6 341
Securities gains (losses) (6) 4 0 (2)
_______ _______ ______ ______ _______
Total non-interest income $ 825 $ 511 $ 91 $ $ 1,427
NON-INTEREST EXPENSES:
Salaries and benefits $ 2,309 $ 1,171 $ 238 $ $ 3,718
Occupancy and equip. expenses 633 341 30 7(7) 1,011
FDIC insurance 124 147 37 308
Acquisition expense 110 0 0 110
Other expenses 1,316 514 275 351(4) 2,470
14(5)
_______ _______ ______ ______ _______
Total non-interest expenses $ 4,492 $ 2,173 $ 580 $ 372 $ 7,617
Income before income taxes $ 2,270 $ 1,334 $ (2) $ 27 $ 3,629
Applicable income taxes 113 312 0 154(8) 559
(18)(6)
(2)(7)
_______ _______ ______ ______ _______
NET INCOME $ 2,157 $ 1,022 $ (2) $ (107) $ 3,070
_______ _______ ______ ______ _______
_______ _______ ______ ______ _______
Earnings per common share:
Primary $ 1.13 $ 0.79(9)(10)
Fully diluted $ 1.13 $ 0.79(9)(10)
Weighted average number of shares
outstanding (in thousands):
Primary 1,903 3,903(9)
Fully diluted 1,903 3,903(9)
</TABLE>
33
<PAGE>
NOTES
(1) Amounts for the Company are derived from the audited financial statements
for the Company as of and for the year ended December 31, 1995.
(2) Eminence's most recent audited financial statements are as of and for
the year ended June 30, 1995. Amounts for Eminence included above have
been updated to reflect the results of operations for the period January
1, 1995 through December 31, 1995. The balance sheet and statement of
income as of and for the six months ended December 31, 1995 have not been
audited by independent public accountants; however, in the opinion of
management such information reflects all adjustments necessary for a
fair presentation of the results for the interim period. All such
adjustments are of a normal and recurring nature.
(3) Amounts for the Sharpsburg Bank are derived from audited financial
statements as of and for the ten months ended October 31, 1995.
Amounts for the period November 1, 1995 through December 31, 1995
are included in amounts shown for the Company.
(4) To record amortization of goodwill (including any core deposit
intangible, which has not been separately identified and valued)
relating to the purchase of Eminence over an accelerated period of 15
years.
(5) To record amortization of goodwill (including any core deposit
intangible, which has not been separately identified and valued)
relating to the purchase of the Sharpsburg Bank over an accelerated
period of 15 years.
(6) To record amortization of premiums on investment securities and related
tax effect relating to the purchase of Eminence over a 7 year period
using the constant yield method.
(7) To record depreciation expense on the step-up of Bank premises and
related tax effect relating to the purchase of Eminence over a 30
year period using the straight line method.
(8) To eliminate actual interest expense and related tax benefit incurred
on average debt outstanding during 1995 of $4,950,000. Total debt
outstanding at December 31, 1995 of $7,050,000 will be discharged with
the proceeds from the sale of Common Shares.
(9) Reflects the effect of the sale of 2,000,000 Common Shares.
(10) Does not reflect the additional net income of approximately $0.06 per
common share from the investment of excess funds from the sale of common
stock of $3,981,000 and additional funds of $2,100,000 that would have
been available during 1995 due to the difference between the average
debt outstanding during 1995 of $4,950,000 and the amount of debt assumed
discharged at December 31, 1995 of $7,050,000 at an interest rate of
5.75% (which is an interest rate less than the 6.8% rate actually
achieved by the Company on its investment portfolio in 1995).
34
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following management's discussion and analysis is intended to
provide additional insight into the major factors and trends affecting the
performance of the Company and should be read in conjunction with the
accompanying audited consolidated financial statements, notes and tables
presented elsewhere herein. Discussion and analysis as to share data has
been retroactively adjusted to give effect to the 5-for-4 stock split
effected in the form of a 25% share dividend in September, 1995 and the
2-for-1 stock split effected in the form of a 100% share dividend in March,
1996.
OVERVIEW
The Company is a bank holding company, the results of which are
primarily dependent upon the results of operations of the four subsidiary
Banks. The Banks conduct a commercial banking business which consists of
attracting deposits from the general public and applying those funds to the
origination of secured and unsecured commercial, consumer, agriculture, and
real estate loans (including commercial loans collateralized by real estate).
The Company continued its growth and expansion during 1995. On March
24, 1995, in a transaction accounted for on a pooling of interests basis, the
Company acquired the Georgetown Bank through the acquisition of its holding
company in exchange for 163,636 Common Shares. At the acquisition date,
Georgetown Bank had total assets of $21,129,000, net loans of $14,720,000,
and total deposits of $18,217,000. All financial data for prior periods have
been restated to reflect the Georgetown Bank pooling of interests
transaction. On November 1, 1995, the Company acquired the Sharpsburg Bank
for cash in a transaction accounted for as a purchase. Accordingly, the
financial statements for the current year reflect the results of operation
for the Sharpsburg Bank since November 1, 1995. At the acquisition date, the
Sharpsburg Bank had total assets of $19,807,000, net loans of $15,119,000,
and total deposits of $18,274,000. Prior to the acquisition, the Sharpsburg
Bank had incurred operating losses during 1994 and 1995, had nonperforming
loans of $888,000, was undercapitalized, and was operating under a Cease and
Desist Order effective as of November 24, 1994 jointly issued by the FDIC and
the Kentucky Department of Financial Institutions. Upon acquisition, the
Company contributed $400,000 in capital to the Sharpsburg Bank. On December
4, 1995, the Cease and Desist Order was removed and a less stringent
Memorandum of Understanding was entered into with the FDIC. See "-Capital."
Net income for 1995 was $2,156,000, or $1.13 per share, compared to
$1,513,000, or $0.80 per share in 1994, and represented increases of 42% and
41%, respectively. The results of operations were favorably impacted by
significantly lower income tax expense as a result of the elimination of a
$504,000 valuation allowance with respect to deferred tax assets at the
Georgetown Bank. (See Income Taxes for further discussion). Net income was
adversely impacted as the result of $110,000 of expenses associated with the
Georgetown acquisition.
Return on assets (ROA) and return on equity (ROE) achieved historical
peaks for the Company in 1995 and were 1.69% and 20.5%, respectively.
The Company continued its five-year trend of increased annual cash
dividends with total cash dividends paid in 1995 of $0.45 per share, or
$859,000.
Stockholders' equity increased 18.6% to $11,215,000 at December 31,
1995, from $9,453,000 at December 31, 1994, reflecting the financial
performance of the Company.
35
<PAGE>
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Net income for 1995 was $2,156,000 or $1.13 per share, compared to
$1,513,000 or $0.80 per share in 1994, and represented increases of 42%, and
41%, respectively. The results of operations were favorably impacted by
significantly lower tax expenses as a result of the elimination of a $504,000
valuation allowance with respect to deferred tax assets at the Georgetown
Bank. (See Income Taxes for further discussion.) In addition, the increase
in net income is also attributable to an increase in net interest income and
non-interest income and a reduction in provisions for possible loan losses,
less the increase in other expenses. Net income was adversely impacted as
the result of $110,000 of expenses associated with the Georgetown acquisition.
Return on average assets was 1.69% while return on equity was 20.5% for
the year ended December 31, 1995 versus 1.36% and 16.4%, respectively, for
the year ended December 31, 1994. Total assets were $155,475,000 at December
31, 1995, an increase of 34.7% from $115,443,000 at December 31, 1994. This
increase was primarily the result of the Company's acquisition of the
Georgetown Bank and the Sharpsburg Bank.
The Company's total loans, net of unearned income, totaled $113,064,000
at December 31, 1995, compared to $81,276,000 at December 31, 1994, an
increase of $31,788,000 or 39.1%. Of this $31,788,000 increase, $14,176,000
is attributable to the acquisition of the Sharpsburg Bank, and the remaining
$17,612,000 increase is due to a 21.6% growth in loans at the other Banks,
particularly the Georgetown Bank where loans increased from $13,654,000 at
December 31, 1994 to $21,657,000 at December 31, 1995. The allowance for
possible loan losses increased to $1,735,000 at December 31, 1995 from
$886,000 at December 31, 1994. $803,000 or 94.6% of this increase was
attributable to the acquisition of the Sharpsburg Bank. See "-Provision and
Allowance for Possible Loan Losses."
Net income for 1994 was $1,513,000, or $.80 per share, compared to
$1,351,000, or $.72 per share, in 1993, and represented increases of 12.0%
and 11.1%, respectively. Higher net interest income was partially offset by
higher non-interest expenses and a higher provision for loan losses in 1994
in comparison to 1993. Return on assets was 1.36% and return on equity was
16.4% in 1994 in comparison to 1.23% and 15.4% in 1993, respectively.
NET INTEREST INCOME
Net interest income is the largest component of the Company's earnings.
It is calculated by subtracting the cost of interest-bearing liabilities from
the income earned on interest-earning assets, and represents the earnings
from the Company's primary business of gathering deposits and making loans
and investments. The Company's long-term objective is to manage this income
to provide the largest possible amount of income while balancing interest
rate, credit and liquidity risks.
Taxable equivalent net interest income for 1995 was $6,224,000 compared
with $5,665,000 in 1994 and $5,013,000 in 1993. The tax equivalent
adjustment (which is net of the effect of the non-deductible portion of
interest expense) reflected in the following table is based on a federal
income tax rate of 34%. The discussion of factors influencing net interest
income that follows is based on taxable equivalent data.
36
<PAGE>
SUMMARY OF NET INTEREST INCOME
(Dollars in Thousands on a taxable equivalent basis)
1995 1994 1993
_______ _______ _______
Interest income . . . . . . . $ 11,103 $ 8,962 $ 8,345
Tax equivalent adjustment . . 202 141 75
_______ ______ ______
Interest income . . . . . . . 11,305 9,103 8,420
Interest expense. . . . . . . 5,081 3,438 3,407
_______ ______ ______
Net interest income . . . $ 6,224 $ 5,665 $ 5,013
_______ ______ ______
_______ ______ ______
The increase in taxable equivalent net interest income in 1995 of
$559,000 to $6,224,000 in comparison to $5,665,000 in 1994 was due
principally to an increase in average interest-earning assets of $14,407,000
or 13.8% in 1995, reflecting an increase in average loans of $12,216,000.
The favorable impact of the increase in average interest-earning assets was
partially offset by an 18 basis point decrease in the net interest margin
from 5.41% in 1994 to 5.23% in 1995.
The net interest margin in 1995 was impacted by a 109 basis point
increase in the cost of interest-bearing liabilities in comparison to an 80
basis point increase in the yield on interest-earning assets. During a
period of generally rising interest rates in 1994 and through mid-1995, the
cost of interest-bearing liabilities increased more than the yield on
interest-earning assets due principally to the significant amount of
certificates of deposits ("CDs") that matured during the period and were
replaced by CDs with a higher interest cost. CDs are a significant component
of the deposit base and generally are sensitive to changes in interest rates.
In 1994, taxable equivalent net interest income increased $652,000 to
$5,665,000 in comparison to $5,013,000 in 1993. The increase was due
principally to an increase in the net interest margin of 49 basis points to
5.41% in 1994 in comparison to 4.92% in 1993. The yield on interest-earning
assets increased 43 basis points while the cost of interest-bearing
liabilities decreased 6 basis points. During 1993 and the first two quarters
of 1994, the Company experienced less competitive pricing on deposits from
competitors and was able to delay increasing the interest rates paid on
deposits despite the generally rising interest rate environment.
The increase in average interest-earning assets of $2,861,000 in 1994 in
comparison to 1993 contributed $236,000 of the increase in taxable equivalent
net interest income in 1994.
37
<PAGE>
The following table presents average balances and interest rates for
the three-year period ended December 31, 1995.
<TABLE>
COMPARATIVE AVERAGE BALANCES, YIELDS AND RATES
(Dollars In Thousands)
1995 1994 1993
--------------------------- --------------------------- ---------------------------
Average Average Average
Interest Rate Interest Rate Interest Rate
Average Income/ Earned/ Average Income/ Earned/ Average Income/ Earned/
Balance Expense Paid Balance Expense Paid Balance Expense Paid
-------- -------- ------- -------- -------- ------- -------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Assets:
Interest-earning assets
U.S. Treasury and federal agency
securities $ 14,122 $ 786 5.57% $ 15,012 $ 736 4.90% $ 16,611 $ 1,046 6.30%
States and municipal obligations(1) 5,495 440 8.01 4,823 391 8.11 4,605 296 6.43
Other securities (1) 2,499 277 11.08 1,400 116 8.29 845 63 7.46
-------- ------- -------- -------- -------- --------
Total investment securities $ 22,116 $ 1,503 6.80 $ 21,235 $ 1,243 5.85 $ 22,061 $ 1,405 6.37
Federal funds sold 4,966 279 5.62 3,696 145 3.92 5,223 214 4.10
Interest-bearing deposits with
banks 436 35 8.03 396 15 3.79 0 0 0
Loans, net of unearned income
(3) (4)
Commercial 55,040 5,624 10.22 48,590 4,627 9.52 45,741 3,909 8.55
Real estate mortgage 26,229 2,642 10.07 22,393 2,140 9.56 21,204 1,972 9.30
Installment 10,242 1,222 11.93 8,312 933 11.22 7,532 920 12.21
-------- ------- -------- -------- -------- --------
Total loans $ 91,511 $ 9,488 10.37 $ 79,295 $ 7,700 9.71 $ 74,477 $ 6,801 9.13
Total interest-earning assets $119,029 $11,305 9.50% $104,622 $ 9,103 8.70% $101,761 $ 8,420 8.27%
Allowance for possible loan losses (1,049) (963) (880)
Cash and due from banks 4,073 4,295 5,671
Premises and equipment 1,689 1,309 1,197
Other assets 3,820 2,000 1,695
-------- -------- --------
Total assets $127,562 $111,263 $109,444
Liabilities:
Interest-bearing deposits:
NOW and money market $ 15,175 $ 381 2.51% $ 15,299 $ 390 2.55% $ 16,208 $ 521 3.21%
Savings 15,009 434 2.89 17,796 524 2.95 17,606 549 3.12
Certificates of deposit and other
time deposits 69,040 3,953 5.73 55,932 2,470 4.42 53,562 2,324 4.34
-------- ------- -------- -------- -------- --------
Total interest-bearing deposits $ 99,224 $ 4,768 4.81 $ 89,027 $ 3,384 3.80 $ 87,376 $ 3,394 3.88
Other borrowings 400 16 4.00 302 16 5.30 140 13 9.29
FHLB advances 713 44 6.17 179 10 5.58 0 0 0
Debt 2,891 253 8.75 311 28 9.00 0 0 0
-------- ------- -------- -------- -------- --------
Total interest-bearing liabilities $103,228 $ 5,081 4.92% $ 89,819 $ 3,438 3.83% $ 87,516 $ 3,407 3.89%
Non-interest-bearing demand
deposits 12,841 11,414 12,299
Other liabilities 974 828 834
Total liabilities $117,043 $102,061 $100,649
Stockholders' Equity: 10,519 9,202 8,795
-------- -------- --------
Total liabilities and stockholders'
equity $127,562 $111,263 $109,444
Net interest income (1) $ 6,224 $ 5,665 $ 5,013
------- -------- --------
------- -------- --------
Net interest spread (1) 4.58% 4.87% 4.38%
Net interest margin (1) 5.23% 5.41% 4.92%
</TABLE>
------------------------------
(1) Taxable equivalent yields are calculated assuming a 34% federal income
tax rate.
(2) Yields are calculated on historical cost except for yields on marketable
equity securities which are calculated using fair value.
(3) Includes loan fees, immaterial in amount, in both interest income and
the calculation of yield on loans.
(4) Includes loans on nonaccrual status.
38
<PAGE>
The accompanying analysis of changes in net interest income in the
following table shows the relationships of the volume and rate portions of these
increases for 1995 and 1994.
Rate/Volume Interest Analysis
(Dollars in Thousands on a taxable equivalent basis)
<TABLE>
1995 vs. 1994 1994 vs. 1993
Increase (decrease) due to change in: Increase (decrease) due to change in:
------------------------------------- -------------------------------------
Average Average Average Average
Volume Rate Net Change Volume Rate Net Change
------- ------- ---------- ------- ------- ----------
<S> <C> <C> <C> <C> <C> <C>
Interest Income:
Loans $1,241 $ 547 $ 1,788 $ 454 $ 445 $ 899
Investment securities 53 207 260 (51) (111) (162)
Federal funds sold 59 75 134 (60) (10) (70)
Deposits with banks 2 18 20 16 0 16
------ ------ --------- ------- ------- ----------
Total interest income $1,355 $ 847 $ 2,202 $ 359 $ 324 $ 683
Interest Expense:
Deposits - NOW and money market (3) (6) (9) (27) (104) (131)
Savings (80) (10) (90) 6 (31) (25)
Negotiable certificates
of deposit 651 832 1,483 96 50 146
Other borrowings 12 (1) 11 (1) (7) (8)
FHLB borrowings 21 2 23 21 0 21
Debt 226 (1) 225 28 0 28
------ ------ --------- ------- ------- ----------
Total interest expense $ 827 $ 816 $ 1,643 $ 123 $ (92) $ 31
Change in net interest
income $ 528 $ 31 $ 559 $ 236 $ 416 $ 652
------ ------ --------- ------- ------- ----------
------ ------ --------- ------- ------- ----------
</TABLE>
The change in interest income and expense due to both rate and volume has
been allocated to changes in average volume and changes in average rates in
proportion to the relationship of the absolute dollar amounts of change in
each category.
PROVISION AND ALLOWANCE FOR POSSIBLE LOAN LOSSES
The Company maintains its allowance for possible loan losses (allowance) at a
level that is considered sufficient to absorb potential losses in the loan
portfolio. The allowance is increased by the provision for possible loan
losses as well as recoveries of previously charged-off loans, and is
decreased by loan charge-offs. The provision is the necessary charge to
expense to provide for current loan losses and to maintain the allowance at
an adequate level commensurate with management's evaluation of the risks
inherent in the loan portfolio. Various factors are taken into consideration
when the Company determines the amount of the provision and the adequacy of
the allowance. Some of these factors include:
- Past due and nonperforming assets;
- Specific internal analyses of loans requiring special attention;
39
<PAGE>
- The current level of regulatory classified and criticized assets and
the associated risk factors with each;
- Examinations and reviews by the Company's independent accountants and
internal loan review personnel; and
- Examinations of the loan portfolio by federal and state regulatory agencies.
The data collected from these sources is evaluated with regard to current
national and local economic trends, prior loss history, underlying collateral
values, credit concentrations, and industry risks. An estimate of potential
future loss on specific loans is developed in conjunction with an overall risk
evaluation of the total loan portfolio.
The following table is a summary of the Company's loan loss experience for
each of the past five years.
SUMMARY OF LOAN LOSS EXPERIENCE
(Dollars In Thousands)
<TABLE>
Years Ended December 31,
--------------------------------------------------------
1995 1994 1993 1992 1991
--------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Balance at beginning of year $ 886 $ 884 $ 938 $ 874 $ 746
Balance of allowance for possible
loan losses of acquired
subsidiaries at acquisition date 803 0 0 20 0
Amounts charged off:
Commercial 28 270 275 223 358
Real estate mortgage 19 5 21 33 65
Consumer 44 35 38 96 88
--------- ------- ------- ------- -------
Total loans charged off $ 91 $ 310 $ 334 $ 352 $ 511
Recoveries on amounts
previously charged off:
Commercial 28 89 60 53 10
Real estate mortgage 2 5 38 0 0
Consumer 21 11 12 18 21
--------- ------- ------- ------- -------
Total recoveries 51 105 110 71 31
Net charge-offs 40 205 224 281 480
Provision for possible loan losses 86 207 170 325 608
--------- ------- ------- ------- -------
Balance at end of year $ 1,735 $ 886 $ 884 $ 938 $ 874
--------- ------- ------- ------- -------
--------- ------- ------- ------- -------
Total loans, net of unearned income:
Average $ 91,511 $79,295 $74,477 $59,916 $55,705
At December 31 $113,064 $81,276 $74,450 $65,159 $58,015
As a percentage of average loans:
Net charge-offs .04% .26% .30% .47% .86%
Provision for possible loan losses .09% .26% .23% .54% 1.09%
Allowance as a percentage of
year-end net loans 1.53% 1.09% 1.19% 1.44% 1.51%
Allowance as a multiple of
net charge-offs 43 4 4 3 2
</TABLE>
The provision for possible loan losses for 1995 was $86,000 compared to
$207,000 for 1994, a decrease of $121,000. During 1995 net charge-offs were
$40,000 compared to $205,000 in 1994, a decrease
40
<PAGE>
of $165,000. At December 31, 1995, the Company's allowance for possible loan
losses was 1.53% of period-end loans compared to 1.09% at December 31, 1994.
Net charge-offs to average loans were .04% for the year 1995, compared to
.26% for the year 1994. The Company's allowance for possible loan losses
totaled $1,735,000 at December 31, 1995, representing an increase of $849,000
over the amount reported at December 31, 1994. The increase includes an
allowance of $803,000 related to loans acquired in the acquisition of the
Sharpsburg Bank. The allowance for possible loan losses was 165.55% of
nonperforming loans on December 31, 1995. Nonperforming loans represented
0.93% of total outstanding loans on December 31, 1995.
The provision for possible loan losses for 1994 was $207,000, compared to
$170,000 for 1993. During 1994, net charge-offs were $205,000 compared to
$224,000 in 1993, a decrease of $19,000.
The following tables set forth an allocation for the allowance for possible
loan losses by category of loan and a percentage distribution of the
allowance allocation. In making the allocation, consideration was given to
such factors as management's evaluation of risk in each category, current
economic conditions and charge-off experience. An allocation for the
allowance for possible loan losses is an estimate of the portion of the
allowance that will be used to cover future charge-offs in each major loan
category, but it does not preclude any portion of the allowance allocated to
one type of loan being used to absorb losses of another loan type.
ALLOCATION OF ALLOWANCE FOR POSSIBLE LOAN LOSSES
(Dollars In Thousands)
<TABLE>
At December 31,
---------------------------------------------------------------------------
1995 1994 1993 1992 1991
------ ------ ------ ------ ------
Amount % Amount % Amount % Amount % Amount %
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial $ 653 37.6% $ 537 60.6% $ 535 60.5% $ 581 61.9% $ 493 56.4%
Real estate mortgage 563 32.5 160 18.1 126 14.3 131 14.0 147 16.8
Consumer 396 22.8 99 11.2 120 13.6 118 12.6 144 16.5
Unallocated 123 7.1 90 10.1 103 11.6 108 11.5 90 10.3
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
Total $1,735 100.0% $ 886 100.0% $ 884 100.0% $ 938 100.0% $ 874 100.0%
</TABLE>
NON-INTEREST INCOME AND EXPENSES
Non-interest income is a significant component of the Company's total income.
The Company continues to develop and enhance existing products and to create
new products in order to augment fee income as trends in the financial
services industry and the economic environment continue to put pressure on
the Company's ability to increase its net interest income. Non-interest
income includes deposit service charges, fees from data processing and trust
services, and fees and commissions from many other corporate and retail
products.
Non-interest income was $825,000 in 1995, an increase of $141,000 or 20.61%
over 1994. Service charges on deposit accounts increased $134,000 or 33.8%
and insurance commissions increased $64,000 or 70% from 1994 to 1995. These
increases were partially offset by a $76,000 decrease in investment
securities gains from 1994 to 1995.
Non-interest income decreased from $733,000 in 1993 to $684,000 in 1994, a
6.7% decrease. Although service charges increased $54,000 and insurance
commissions increased $25,000 from 1993 to
41
<PAGE>
1994, these increases were more than offset by the decreases in securities
gains of $50,000 and other income of $78,000.
Non-interest expense increased from $4,005,000 in 1994 to $4,492,000 in 1995,
or 12.16%. Non-interest expense increased from $3,640,000 in 1993 to
$4,005,000 in 1994, or 10.02%.
The largest category of non-interest expense is salaries and employee
benefits, which represents approximately 51.40% of total non-interest expense
in 1995. Salaries and employee benefits were $2,309,000 in 1995, an increase
of $327,000 or 16.50% compared to 1994. Salaries and employee benefits
increased $170,000 or 9.38% in 1994 from the 1993 amount of $1,812,000. The
increases were due primarily to the increase in the number of full-time
equivalent employees which increased from 72 at December 31, 1993 to 76 at
December 31, 1994, and then increased to 87 at December 31, 1995, excluding
the nine full-time equivalent employees at the Sharpsburg Bank. The
increased number of employees was necessary to support the growth of the
Company and its operations.
Net occupancy and equipment expense increased $147,000, or 30.25%, to
$633,000 in 1995 from 1994. The increase in net occupancy expense is
substantially the result of the purchase of banking premises for the
Georgetown Bank and the additional facilities required by Premier Data
Services, Inc., and County Finance, Inc. Net occupancy and equipment expense
increased $54,000 or 12.5% in 1994 from $432,000 in 1993 due primarily to
increased depreciation expense on additions to premises and equipment during
1993 and 1994.
Other non-interest expense, which is the second largest category of
non-interest expense, includes communications, postage and other operating
expenses, increased $46,000, or 6.1%, from 1994 to 1995 and increased $28,000
or 3.8% from 1993, due to the growth of the Company and inflationary
increases.
FDIC insurance premiums decreased $98,000 in 1995 from $222,000 in 1994 to
$124,000 in 1995 due to the decreases in the premiums charged by the FDIC
commencing as of June 1, 1995 resulting from the completed recapitalization
of the FDIC's Bank Insurance Fund. The Company anticipates a further
reduction in FDIC insurance premium expense under existing FDIC regulations
of approximately $70,000 in 1996. The FDIC insurance premium in 1994 was
comparable to that paid in 1993.
Data processing expense increased $50,000, or 28.7%, to $224,000 in 1995 from
$174,000 in 1994, due primarily to the growth of the Company and the
additional expense incurred by Georgetown Bank to convert from its outside
service center to Premier Data Services, Inc. The data processing expense in
1994 was comparable to that paid in 1993.
Legal and professional expenses decreased $95,000 in 1995 from $235,000 in
1994 to $140,000 in 1995 due to additional expenses incurred in 1994 in
connection with the settlement of a stockholder dispute at Georgetown
Bancorp, Inc.
Acquisition expenses increased from $37,000 in 1994 to $110,000 in 1995, or
197%, substantially all of which were related to the Georgetown acquisition.
Non-interest expenses of the Sharpsburg Bank were $73,000 since the date of
its acquisition, or approximately 1.5% of the Company totals for the year.
The Company has committed efforts to develop fees and other income for
services provided while holding operating expense to the minimum amount
necessary to provide quality service. As the Company
42
<PAGE>
strategically plans for the future, management will continue to endeavor to
enhance productivity through organizational changes and investments in
technology.
The following table is a summary of non-interest income and
expense for the three year period indicated.
NON-INTEREST INCOME AND EXPENSE
(Dollars In Thousands)
<TABLE>
FOR THE YEAR INCREASE FOR THE YEAR INCREASE
ENDED DECEMBER 31, (DECREASE) ENDED DECEMBER 31, (DECREASE)
------------------ 1995 VS. ------------------ 1994 VS.
1995 1994 1994 1994 1993 1993
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Non-Interest Income:
Service charges on deposit accounts $ 530 $ 396 $ 134 $ 396 $ 342 $ 54
Insurance income 156 92 64 92 67 25
Investment securities gain (losses) (6) 70 (76) 70 120 (50)
Other 145 126 19 126 204 (78)
-------- -------- -------- -------- -------- -------
Total other income $ 825 $ 684 $ 141 $ 684 $ 733 $ (49)
-------- -------- -------- -------- -------- -------
-------- -------- -------- -------- -------- -------
Non-Interest Expense:
Salaries and employee benefits 2,309 1,982 $ 327 1,982 1,812 $ 170
Net occupancy and equipment 633 486 147 486 432 54
FDIC insurance 124 222 (98) 222 207 15
Legal and professional 140 235 (95) 235 179 56
Data processing 224 174 50 174 168 6
Taxes, other than payroll, property
and income 146 109 37 109 110 (1)
Acquisition expenses 110 37 73 37 0 37
Other 806 760 46 760 732 28
-------- -------- -------- -------- -------- -------
Total non-interest expenses $ 4,492 $ 4,005 $ 487 $ 4,005 $ 3,640 $ 365
-------- -------- -------- -------- -------- -------
-------- -------- -------- -------- -------- -------
Net non-interest expenses as a
percent of average assets 2.87% 2.98% 2.98% 2.66%
</TABLE>
INCOME TAXES
The Company recorded income tax expense of $113,000 in 1995, compared to
income tax expense of $483,000 in 1994, a decrease of $370,000. The decrease
in 1995 is attributable to an increase in tax-exempt income and the
utilization of certain tax credits, but is primarily due to the elimination
of the valuation allowance of $504,000 for deferred tax assets at the
Georgetown Bank. In assessing the realizability of deferred tax assets,
management considers whether it is more likely than not that some portion or
all of the deferred tax assets will not be realized. The ultimate
realization of deferred tax assets is dependent upon the generation of future
taxable income during the periods in which those temporary differences become
deductible. Management considers the scheduled reversal of deferred tax
liabilities, projected future taxable income, and tax planning strategies in
making this assessment. Based upon the level of historical taxable income
and projections for future taxable income over the periods in which the
deferred tax assets are deductible, management believes it is more likely
than not the Company will realize the benefits of these deductible
differences.
Income tax expense in 1994 decreased $27,000 from income tax expense of
$510,000 in 1993. The decrease in income tax expense for 1994 is attributable
to an increase in tax-exempt income and utilization
43
<PAGE>
of certain tax credits. Income taxes recorded for 1995, 1994 and 1993
represent effective income tax rates of 5.0%, 24.2%, and 27.4%, respectively.
FINANCIAL CONDITION
LENDING ACTIVITIES
Loans are the Company's primary use of financial resources and represent
the largest component of earning assets. The Company's loans are made
predominately within the Banks' market areas and the portfolio is
diversified. Credit risk is inherent in each financial institution's loan
and investment portfolio. In an effort to minimize credit risk, the Company
utilizes a credit administration network, including specific lending
authorities for each loan officer, a system of loan committees to review and
approve loans, and a loan review and credit quality rating system. This
network assists in the evaluation of the quality of new loans and in the
identification of problem or potential problem credits and provides
information to aid management in determining the adequacy of the allowance
for possible loan losses.
Total loans, net of unearned income, averaged $91,511,000 in 1995,
compared with $79,295,000 in 1994. At year-end 1995, loans net of unearned
income totaled $113,064,000 compared to $81,276,000 at December 31, 1994, an
increase of $31,788,000. Of this $31,788,000 increase, $14,176,000 is
attributable to the acquisition of the Sharpsburg Bank and the remaining
$17,612,000 increase is due to a 21.6% growth in loans at the other banks,
particularly the Georgetown Bank where loans increased from $13,654,000 at
December 31, 1994 to $21,657,000 at December 31, 1995.
The following table presents a summary of the Company's loan portfolio by
category for each of the last five years. Other than the categories noted,
there is no concentration of loans in any industry greater than 5% in the
portfolio. The Company has no foreign loans or highly leveraged transactions
in its loan portfolio.
<TABLE>
<CAPTION>
LOAN PORTFOLIO COMPOSITION
(Dollars In Thousands)
At December 31,
----------------------------------------------------------------------------------------------------
1995 % 1994 % 1993 % 1992 % 1991 %
-------- ----- ------- ----- ------- ----- ------- ----- ------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial $ 57,246 50.3% $46,973 57.7% $43,212 57.7% $37,898 57.7% $28,809 49.1%
Real estate construction 2,119 1.9 1,822 2.2 881 1.2 708 1.1 455 0.8
Real estate mortgage 32,678 28.7 21,700 26.6 20,259 27.1 16,340 24.9 17,272 29.5
Agricultural 5,216 4.6 1,073 1.3 992 1.3 1,217 1.9 1,077 1.8
Consumer 16,087 14.1 9,647 11.9 9,252 12.4 9,167 13.9 10,646 18.2
Other 429 0.4 274 0.3 247 0.3 316 0.5 362 0.6
-------- ----- ------- ----- ------- ----- ------- ----- ------- ------
Total loans $113,775 100.0% $81,489 100.0% $74,843 100.0% $65,646 100.0% $58,621 100.0%
Less unearned income 711 213 393 487 606
-------- ------- ------- ------- -------
Total loans net of
unearned income $113,064 $81,276 $74,450 $65,159 $58,015
-------- ------- ------- ------- -------
-------- ------- ------- ------- -------
</TABLE>
Commercial loans generally are made to small-to-medium size businesses
located within a Bank's defined market area and typically are generally
secured by business assets and guarantees of the principal owners. Real
estate mortgage loans include residential, farm and commercial properties.
Mortgage loans generally do not exceed 80% of the value of the real property
securing the loan, based on recent independent appraisals. The Company's real
estate mortgage loan portfolio primarily consists of adjustable rate
residential mortgage loans. The origination of these mortgage loans can be
more difficult in a low interest
44
<PAGE>
rate environment where there is a significant demand for fixed rate
mortgages. Consumer loans generally are made to individuals living in a
Bank's defined market area who are known to the Bank's staff. Consumer loans
are made for terms of up to seven years on a secured or unsecured basis.
While consumer loans generally provide the Company with increased interest
income, consumer loans may involve a greater risk of default. Loss
experience in all loan categories has declined steadily over the past five
years, with net chargeoffs being less than .05% of loans in 1995. With
respect to consumer loans in particular, total chargeoffs for the year ended
December 31, 1995 were $44,000, or .2% of total consumer loans outstanding at
December 31, 1995.
The following table sets forth the maturity distribution and interest
sensitivity of selected loan categories at December 31, 1995. Maturities are
based upon contractual terms. The Company's policy is to specifically review
and approve any loan renewed; no loans are automatically rolled over.
LOAN MATURITIES AND INTEREST SENSITIVITY
DECEMBER 31, 1995
(Dollars In Thousands)
One Year One Through Over Total
or Less Five Years Five Years Loans
------- ---------- ---------- -------
Commercial $26,041 $12,857 $18,348 $57,246
Real estate construction 2,119 0 0 2,119
Agricultural 3,770 1,413 33 5,216
------- ------- ------- -------
Total $31,930 $14,270 $18,381 $64,581
------- ------- ------- -------
------- ------- ------- -------
Fixed rate loans $ 6,959 $11,711 $18,381 $37,051
Floating rate loans 24,971 2,559 0 27,530
------- ------- ------- -------
Total $31,930 $14,270 $18,381 $64,581
------- ------- ------- -------
------- ------- ------- -------
NONPERFORMING ASSETS
Nonperforming assets consist of loans on which interest is no longer
accrued, certain restructured loans where interest rate or other terms have
been renegotiated, accruing loans past due 90 days or more and real estate
acquired through foreclosure.
The Company discontinues the accrual of interest on loans that become 90
days past due as to principal or interest unless they are adequately secured
and in the process of collection. A loan remains in a nonaccrual status
until doubts concerning collectibility no longer exist. A loan is classified
as a restructured loan when the interest rate is materially reduced or the
term is extended beyond the original maturity date because of the inability
of the borrower to service the loan under the original terms. Other real
estate is recorded at the lower of cost or fair value less estimated costs to
sell.
45
<PAGE>
A summary of the components of nonperforming assets, including several
ratios using period-end data, is shown below:
NONPERFORMING ASSETS
(Dollars In Thousands)
<TABLE>
<CAPTION>
At December 31,
-----------------------------------------------------
1995 1994 1993 1992 1991
------ ---- ------ ------ ------
<S> <C> <C> <C> <C> <C>
Nonaccrual loans $ 592 $ 46 $ 749 $ 473 $ 165
Accruing loans which are contractually
past due 90 days or more 456 219 407 291 553
Restructured loans 0 0 0 0 0
------ ---- ------ ------ ------
Total nonperforming and restructured
loans $1,048 $265 $1,156 $ 764 $ 718
Other real estate and in-substance
foreclosures 132 393 51 328 436
------ ---- ------ ------ ------
Total nonperforming and restructured
loans and other real estate $1,180 $658 $1,207 $1,092 $1,154
Nonperforming and restructured loans
as a percentage of net loans .93% .32% 1.55% 1.17% 1.24%
Nonperforming and restructured loans
and other real estate as a percentage
of total assets .76% .57% 1.11% 1.09% 1.44%
</TABLE>
Nonaccrual loans at December 31, 1995 were $592,000 compared to $46,000
at December 31, 1994. This $546,000 increase is due to the acquisition of
the Sharpsburg Bank, which accounted for $539,000 of the increase. Total
nonperforming assets at December 31, 1995 were $1,180,000, an increase of
$522,000 from the $658,000 reported at December 31, 1994. Of the $1,180,000
total nonperforming assets at December 31, 1995, $847,000 relates to the
Sharpsburg Bank. Excluding the Sharpsburg Bank, total nonperforming assets
decreased $325,000 from December 31, 1994 to December 31, 1995. Total
nonperforming assets at December 31, 1994 were $549,000 less than the
year-end 1993 amount of $1,207,000.
The Company continues to follow its long-standing policy of not engaging
in international lending and not concentrating lending activity in any one
industry.
46
<PAGE>
The following table reflects interest income on nonaccrual and
restructured loans for the five years ended December 31, 1995.
INTEREST INCOME ON NONACCRUAL AND RESTRUCTURED LOANS
YEAR ENDED DECEMBER 31
(Dollars In Thousands)
1995 1994 1993 1992 1991
---- ---- ---- ---- ----
Contractual interest $227 $ 9 $ 21 $ 50 $ 74
Interest recognized 22 0 6 3 12
INVESTMENT ACTIVITIES
The securities portfolio consists of debt and equity securities which
provide the Company with a long-term, relatively stable source of income.
Additionally, the investment portfolio provides a balance to interest rate
and credit risks in other categories of the balance sheet. The securities
portfolio is also used as a secondary source of liquidity by the Company.
The Company has classified all municipal securities and certain U.S. agency
securities as held to maturity based on management's positive intent and
ability to hold such securities to maturity. These municipal securities
provide tax-free income and are within management's guidelines with respect
to credit risk and market risk. The municipal securities have been issued
principally by Kentucky municipalities. The U.S. agency securities are held
as a source of stable, long-term income which can be used as collateral to
secure municipal deposits and repurchase agreements. All other investment
securities are classified as available for sale. The securities portfolio
does not contain significant holdings in mortgage-backed securities,
collaterized mortgage obligations or other mortgage-related derivative
products and/or structured notes.
Securities as a percentage of average interest-earning assets decreased
from 21.7% in 1993 to 20.3% in 1994 and decreased to 18.6% in 1995. At
December 31, 1995 investment securities represented 17.5% of interest-earning
assets. These decreases in securities reflect management's emphasis on
originating higher yielding loans and placing a lesser reliance on the
securities portfolio for sources of income.
At December 31, 1995 and 1994, the Company's investment in noncumulative
perpetual preferred stock of First Guaranty Bank, Hammond, Louisiana exceeded
10% of stockholders' equity. The market value of this investment
approximates their book value which totalled $2,000,000 and $1,000,000 at
December 31, 1995 and 1994, respectively. The dividend rate on the preferred
stock is 2% in excess of the prime rate as in effect from time to time. See
"CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS."
47
<PAGE>
The following tables present the carrying values and maturity distribution
of investment securities.
CARRYING VALUE OF SECURITIES
(Dollars In Thousands)
AT DECEMBER 31,
------------------------------
1995 1994 1993
---- ---- ----
U.S. Treasury and Federal agencies:
Available for sale $13,220 $ 8,698 $ 0
Held to maturity 2,300 4,221 16,428
State and municipal obligations:
Available for sale 0 0 0
Held to maturity 6,348 4,965 4,602
Equity securities:
Available for sale 2,819 1,806 835
Held to maturity 0 0 0
Other securities:
Available for sale 0 0 0
Held to maturity 242 0 0
Total securities:
Available for sale 16,039 10,504 835
Held to maturity 8,890 9,186 21,030
------- ------- -------
Total $24,929 $19,690 $21,865
------- ------- -------
------- ------- -------
48
<PAGE>
MATURITY DISTRIBUTION OF SECURITIES
At December 31, 1995
(Dollars In Thousands)
<TABLE>
<CAPTION>
ONE FIVE
YEAR THROUGH THROUGH OVER
OR FIVE TEN TEN EQUITY MARKET
LESS YEARS YEARS YEARS SECURITIES TOTAL VALUE
------ ------- ------ ----- ---------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
U.S. Treasury and Federal agencies:
Available for sale $5,992 $ 6,502 $ 800 $ 0 $ 0 $13,294 $13,220
Held to maturity 0 2,300 0 0 0 2,300 2,259
State and municipal obligations:
Available for sale 0 0 0 0 0 0 0
Held to maturity 1,535 2,096 2,667 49 0 6,347 6,388
Other securities:
Available for sale 0 0 0 0 2,900 2,900 2,819
Held to maturity 0 0 0 0 243 243 243
Total securities:
Available for sale 5,992 6,502 800 0 2,900 16,194 16,039
Held to maturity 1,535 4,396 2,667 49 243 8,890 8,890
------ ------- ------ ----- ------ ------- -------
Total $7,527 $10,898 $3,467 $ 49 $3,143 $25,084 $24,929
------ ------- ------ ----- ------ ------- -------
------ ------- ------ ----- ------ ------- -------
Percent of total 30.0% 43.5% 13.8% 0.2% 12.5% 100% 99.4%
Weighted average yield(1) 5.41% 5.74% 5.76% 5.53% 9.10% 6.07% 6.10%
</TABLE>
----------
(1) The weighted average yields are calculated on historical cost on a non
tax-equivalent basis.
DEPOSIT ACTIVITIES
Managing the mix and repricing of deposit liabilities is an important
factor affecting the Company's ability to maximize its net interest margin.
The strategies used to manage interest-bearing deposit liabilities are
designed to adjust as the interest rate environment changes. In this regard,
management of the Company regularly assesses its funding needs, deposit
pricing, and interest rate outlooks.
Total deposits averaged $112,065,000 in 1995, an 11.57% increase over
1994. Total deposits averaged $100,441,000 in 1994, an increase of $766,000,
or 0.7%, over 1993. Non-interest bearing deposits averaged 11.5% of total
deposits in 1995, compared to 11.4% in 1994 and 12.3% in 1993.
At December 31, 1995, deposits totaled $136,246,000, compared to
$102,839,000 at December 31, 1994, an increase of $33,407,000, or 32.5%. Of
this $33,407,000 increase, $18,976,000 is attributable to the acquisition of
Sharpsburg Bank. Excluding Sharpsburg Bank, deposits increased $14,431,000
from December 31, 1994 to December 31, 1995, representing a 14.0% increase.
49
<PAGE>
The table below provides information on the maturities of time deposits of
$100,000 or more at December 31, 1995.
MATURITY OF TIME
DEPOSITS OF $100,000 OR MORE
December 31, 1995
------------------
(in thousands)
Maturing 3 months or less $ 6,126
Maturing over 3 months through 6 months 3,410
Maturing over 6 months through 12 months 4,490
Maturing over 12 months 6,211
-------
Total $20,237
-------
-------
The following table sets forth the average amount of and average rate
paid on selected deposit categories during the past three full years.
<TABLE>
<CAPTION>
1995 1994 1993
------------------ -------------------- -----------------
AMOUNT RATE(%) AMOUNT RATE(%) AMOUNT RATE(%)
------- ------ -------- ------- ------- ------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Demand $ 12,841 0% $ 11,414 0% $12,299 0%
NOW and money
market accounts 15,175 2.51 15,299 2.55 16,208 3.21
Savings 15,009 2.89 17,796 2.95 17,606 3.12
Certificates of deposit
and other time 69,040 5.73 55,932 4.42 53,562 4.34
-------- -------- -------
Total $112,065 4.25% $100,441 3.37% $99,675 3.40%
-------- -------- -------
-------- -------- -------
</TABLE>
CAPITAL
The Company's primary source of additional capital over the past three
years has been from the earnings of the Bank subsidiaries.
Accordingly, the Company's principal source of funds for dividend
payments to stockholders is dividends received from the subsidiary Banks.
Banking regulations limit the amount of dividends that may be paid without
prior approval of regulatory agencies. Under these regulations, the amount
of dividends that may be paid without prior approval of regulatory agencies
in any calendar year is limited to the current year's net profits, as
defined, combined with the retained net profits of the preceding two years,
subject to the capital requirement limitations. On April 1, 1996, the Banks
could, without prior approval, declare dividends to the Company of
approximately $1,111,000 plus any 1996 net profits retained to the date of
the dividend declaration.
50
<PAGE>
The various regulatory agencies having supervisory authority over financial
institutions have adopted risk-based capital guidelines which define the
adequacy of the capital levels of regulated institutions. These risk-based
capital guidelines require minimum levels of capital based upon the risk rating
of assets and certain off-balance-sheet items. Assets and off-balance-sheet
items are assigned regulatory risk-weights ranging from 0% to 100% depending on
their level of credit risk. The guidelines classify capital in two tiers, Tier
I and Tier II, the sum of which is total capital. Tier I capital is essentially
common equity, less intangible assets. Tier II capital is essentially
qualifying long-term debt and a portion of the allowance for possible loan
losses.
The Company's capital ratios at December 31, 1995 and 1994 were as
follows:
SELECTED CAPITAL INFORMATION
(Dollars In Thousands)
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------
1995 1994 CHANGE
-------- ------- ------
<S> <C> <C> <C>
Stockholders' equity $ 11,215 $ 9,453 $1,762
Less disallowed amounts of goodwill
and other intangibles (325) (90) (235)
Less disallowed amounts of deferred
tax assets (210) 0 (210)
Add unrealized loss on securities
available for sale 50 317 (267)
-------- ------- ------
Tier I capital $ 10,730 $ 9,680 $1,050
Tier II capital adjustments:
Allowance for possible loan losses 1,416 1,014 402
-------- ------- ------
Total capital $ 12,146 $10,694 $1,452
-------- ------- ------
-------- ------- ------
Total risk-weighted assets $113,280 $81,097
Ratios
Tier I capital to risk-weighted assets 9.47% 11.94%
Total capital to risk-weighted assets 10.72% 13.19%
Leverage ratio 6.92% 8.42%
</TABLE>
The Sharpsburg Bank is currently operating under a "memorandum of
understanding" between the board of directors of the Sharpsburg Bank and the
Kentucky Department of Financial Institutions and the FDIC in which the board
of directors of the Sharpsburg Bank has agreed to adopt a plan to lessen the
risk of certain loans, provide periodic progress reports and maintain a Tier
I leverage ratio equal to or greater than 7%. At December 31, 1995, the
Sharpsburg Bank's Tier I leverage ratio was 7.92%. The Company believes it
is in compliance with the memorandum of understanding.
The Company believes that its capital, together with existing credit
facilities and its ability to obtain future credit facilities, provide funds
sufficient to support the Company's current operations.
51
<PAGE>
On September 12, 1995, the Board of Directors approved a 5-for-4 stock
split effective September 30, 1995, in the form of a dividend of the
Company's common stock to stockholders of record on September 15, 1995.
On January 19, 1996, the Board of Directors approved a 2-for-1 stock
split effected March 29, 1996 in the form of a share dividend to stockholders
of record on February 22, 1996. Additionally, on March 15, 1996 the
stockholders approved an amendment to the Company's articles of incorporation
that increased the number of Common Shares authorized from 1,800,000 to
10,000,000, eliminated the $1.00 par value per share relating to Common
Shares and authorized 1,000,000 preferred shares, without par value.
On January 19, 1996, the Board of Directors adopted, and on March 15, 1996
the Company's stockholders approved, the Premier Financial Bancorp, Inc. 1996
Employee Stock Ownership Incentive Plan, whereby certain employees of the
Company are eligible to receive stock options under the Plan. A maximum of
100,000 shares of the Company's common stock (adjusted for the 2-for-1 stock
split effected March 29, 1996) may be issued through exercise of these stock
options. The option price is the fair market value of the Company's shares
at the date of the grant.
LIQUIDITY
Liquidity for a financial institution can be expressed in terms of
maintaining sufficient cash flows to meet both existing and unplanned
obligations in a cost effective manner. Adequate liquidity allows the Company
to meet the demands of both the borrower and the depositor on a timely basis,
as well as pursuing other business opportunities as they arise. Thus,
liquidity management embodies both an asset and liability aspect. Liquidity
is maintained through the Company's ability to convert assets into cash,
manage the maturities of liabilities and generate funds through the
attraction of local deposits.
As part of its liquidity management, the Company maintains funding
relationships with other financial institutions and the Federal Home Loan
Bank. The Company prefers to manage its liquidity requirements generally
through the matching of maturities of assets and liabilities.
The cash flow statements for the periods presented in the financial
statements provide an indication of the Company's sources and uses of cash as
well as an indication of the ability of the Company to maintain an adequate
level of liquidity. A discussion of the cash flow statements for 1995, 1994
and 1993 follows.
Net cash provided from operating activities was $1,817,000, $1,052,000 and
$1,760,000 for the years ended December 31, 1995, 1994 and 1993,
respectively. The increase in net cash provided from operating activities
was primarily due to higher net income, partially offset by the cash used to
fund the net changes in other assets and liabilities.
Cash used in investing activities was $19,066,000, $6,632,000 and
$8,643,000 for the years ended December 31, 1995, 1994 and 1993,
respectively. Cash was used to fund net loan growth, the acquisition of the
Sharpsburg Bank, and the acquisition of additional premises and equipment.
The Company's policy is to reinvest the proceeds from the sale, maturity and
call of investment securities into similar type investment securities if such
proceeds are not required to fund loans. In 1995, the Company received
$11,903,000 and $2,213,000 from sales, calls and maturities of securities
available for sale and securities held to maturity, respectively, and
purchased $13,314,000 and $1,674,000 of securities available for sale and
securities held to maturity, respectively. In 1994, the Company received
proceeds of $7,752,000 and $723,000 from sales, calls and maturity of
securities available for sale and securities held to maturity and
52
<PAGE>
purchased $5,697,000 and $1,081,000, respectively. In 1993, the Company
received proceeds of $15,178,000 from sales, calls and maturities of
securities held to maturity and purchased $17,971,000 of securities held to
maturity.
Cash provided from financing activities was $18,647,000, $5,590,000 and
$6,940,000 for the years ended December 31, 1995, 1994 and 1993,
respectively. The cash provided from financing activities was primarily
attributable to deposit growth and proceeds from debt and other borrowings.
Liquidity risk is the possibility that the Company may not be able to meet
its cash requirements. Management of liquidity risk includes maintenance of
adequate cash and sources of cash to fund operations and meet the needs of
borrowers, depositors and creditors. Liquidity must be maintained at a level
which is adequate but not excessive. Excess liquidity may have a negative
impact on earnings due to the generally lower yields earned on short-term
assets.
In addition to cash, cash equivalents and federal funds sold, the
securities portfolio provides an important source of liquidity. The total of
securities maturing within one year along with cash, due from banks and
federal funds sold totaled $20,200,000 as of December 31, 1995.
Additionally, securities available-for-sale with maturities greater than one
year and equity securities totaled $10,200,000 at December 31, 1995. These
securities are available to meet liquidity needs on a continuing basis.
To maintain a desired level of liquidity, the Company has several sources
of funds available. One source is the cash flow generated daily from the
Banks' various loan portfolios in the form of principal and interest
payments. Another source is its deposit base. The Company maintains a
relatively stable base of customer deposits which has historically exhibited
steady growth. This growth, when combined with other sources, is expected to
be adequate to meet its demand for funds. Due to the nature of the markets
served by the Company's subsidiary banks, management believes that the
majority of certificates of deposit of $100,000 or more are no more volatile
than its core deposits. During a period of relatively low interest rates,
these balances have remained relatively stable for 1995 and 1994.
Certificates of deposits and other time deposits of $100,000 or more
represented approximately 15% and 12% of total deposits for 1995 and 1994,
respectively. A number of techniques are used to measure the liquidity
position, including the utilization of several ratios that are presented
below. These ratios are calculated based on annual averages for each year.
LIQUIDITY RATIOS
1995 1994 1993
----- ----- -----
Total loans/total deposits 82.99% 79.03% 75.32%
Total loans/total deposits less float 84.63% 83.52% 75.97%
Net short-term borrowings/total assets 0.87% 0.43% 0.13%
This analysis shows that the Company's loan to deposit ratios increased in
1995 and 1994 compared to the prior year due to an increase in loan demand
that exceeded the increase in deposit activity.
53
<PAGE>
Information regarding short-term borrowings for the past three years is
presented in the following table.
SHORT-TERM BORROWINGS
(Dollars In Thousands)
1995 1994 1993
---- ---- ----
Federal funds purchased and repurchase
agreements:
Balance at year end $ 747 $ 0 $ 0
Weighted average rate at year end 3.25% 0% 0%
Average balance during the year $ 400 $ 302 $ 11
Weighted average rate during the year 3.85% 5.30% 3.04%
Maximum month-end balance $ 747 $ 650 $ 0
Other short-term borrowings:
Balance at year end $ 755 $ 755 $ 0
Weighted average rate at year end 6.05% 5.53% 0%
Average balance during the year $ 713 $ 179 $ 0
Weighted average rate during the year 6.17% 5.58% 0%
Maximum month-end balance $ 755 $ 755 $ 0
Total short-term borrowings:
Balance at year end $1,502 $ 755 $ 0
Weighted average rate at year end 4.88% 5.53% 0%
Average balance during the year $1,113 $ 481 $ 11
Weighted average rate during the year 5.34% 5.40% 3.04%
Maximum month-end balance $1,502 $1,405 $ 0
Substantially all federal funds purchased and repurchase agreements
mature in one business day. Other short-term borrowings principally
represent Federal Home Loan Bank ("FHLB") advances to Georgetown Bank (with
varying maturity dates), which are funding residential mortgage and
commercial loans.
54
<PAGE>
INTEREST RATE SENSITIVITY
The interest spread and liability funding discussed above are directly
related to changes in asset and liability mixes, volumes, maturities and
repricing opportunities of interest-earning assets and interest-bearing
liabilities. Interest-sensitive assets and liabilities are those which are
subject to being repriced in the near term, including both floating or
adjustable rate instruments and instruments approaching maturity. The
interest sensitivity gap is the difference between total interest-sensitive
assets and total interest-sensitive liabilities. Interest rates on the
Company's various asset and liability categories do not respond uniformly to
changing market conditions. Interest rate risk is the degree to which
interest rate fluctuations in the marketplace can affect net interest income.
The need for interest sensitivity gap management is most critical in times
of a significant change in overall interest rates. Management generally
seeks to limit the exposure of the Company to interest rate fluctuations by
maintaining a relatively balanced mix of rate sensitive assets and
liabilities on a one-year time horizon. This mix is altered periodically
depending upon management's assessment of current business conditions and the
interest rate outlook.
One tool which is used to monitor interest rate risk is the interest
sensitivity analysis as shown in the table below. This analysis reflects the
repricing characteristics of assets and liabilities over various time
periods. The gap indicates the level of assets and liabilities that are
subject to repricing over a given time period.
As shown by the interest rate sensitivity analysis as
of December 31, 1995, the total amount of the Company's interest earning assets
repricing during the first year is less than the total amount of its interest
bearing liabilities repricing during this period. This position, which is
normally termed a negative interest sensitivity gap, generally allows for
enhanced net interest income during periods of decreasing interest rates. This
negative gap is within the Company's internal policy guidelines and is not
expected to impact significantly the Company's net interest income during a
period of rising interest rates.
INTEREST RATE SENSITIVITY ANALYSIS
(Dollars In Thousands)
<TABLE>
0 - 90 91 days - 1 - 5 Over 5
Days 1 Year Years Years Total
------- --------- ------- ------- --------
<S> <C> <C> <C> <C> <C>
Assets
Loans, net of unearned income $33,204 $ 17,640 $30,206 $31,421 $112,471
Investment securities 1,874 6,608 10,931 5,516 24,929
Federal funds sold 6,340 0 0 0 6,340
------- -------- ------- ------- --------
Total earning assets $41,418 $ 24,248 $41,137 $36,937 $143,740
------- -------- ------- ------- --------
------- -------- ------- ------- --------
Sources of Funds
NOW, money market and
savings $ 7,916 $ 23,748 $ 0 $ 0 $ 31,664
Time deposits 25,220 14,610 48,752 0 88,582
Short-term borrowings 747 5,755 0 0 6,502
------- -------- ------- ------- --------
Total interest bearing deposits $33,883 $ 44,113 $48,752 $ 0 $126,748
------- -------- ------- ------- --------
------- -------- ------- ------- --------
Interest Sensitivity Gap
For the period 7,535 (19,865) (7,615) 36,937 16,992
Cumulative 7,535 (12,330) (19,945) 16,992 -
Cumulative as a percent of
earning assets 5.24% (8.58)% (13.88)% 11.82%
</TABLE>
55
<PAGE>
EFFECTS OF INFLATION
A financial institution's asset and liability structure is
substantially different from that of an industrial company, in that virtually
all assets and liabilities are monetary in nature. Accordingly, changes in
interest rates, which are generally impacted by inflation rates, may have a
significant impact on a financial institution's performance. The impact of
interest rate changes depends on the sensitivity to change of the
institution's interest-earning assets and interest-bearing liabilities. The
effects of the changing interest rate environment in recent years and the
Company's interest sensitivity position are discussed above.
BUSINESS
GENERAL
The Company serves as a parent holding company for its four banking
subsidiaries and one non-banking subsidiary. Through the Banks and its data
processing subsidiary, the Company focuses on providing quality, community
banking services to individuals and small-to-medium sized businesses
primarily in non-urban areas. By seeking to provide such banking services in
non-urban areas, the Company believes that it can minimize the competitive
effect of larger financial institutions that typically are focused on large
metropolitan areas. Through its experiences in acquiring its Banks, the
Company has successfully developed and implemented a strategy of joining
together community banks that retain their commitment to local orientation
and direction, while having the benefit of the Company's capital for growth
and staff assistance to promote safety, soundness and regulatory compliance.
Each Bank is managed on a decentralized basis that offers customers direct
access to the Bank's president and other officers in an environment conducive
to friendly, informed and courteous service. This decentralization approach
also enables each Bank to offer local and timely decision-making, and
flexible and reasonable operating procedures and credit policies limited only
by a framework of centralized risk controls provided by the Company to
promote prudent banking practices. Each Bank maintains its community
orientation by, among other things, having selected members of its community
as members of its board of directors, who assist in the introduction of
prospective customers to the Bank and in the development or modification of
products and services to meet customer needs. As a result of the development
of personal banking relationships with its customers and the convenience and
service offered by the Banks, the Banks' lending and investing activities are
funded primarily by core deposits.
When appropriate and economically advantageous, the Company centralizes
certain of the Banks' back office, support and investment functions in order
to achieve consistency and cost efficiency in the delivery of products and
services. The Company centrally provides services such as data processing,
operations support, accounting, loan review and compliance and internal
auditing to the Banks to enhance their ability to compete effectively. The
Company also provides overall direction in the areas of credit policy and
administration, strategic planning, marketing, investment portfolio
management and other financial and administrative services. Each Bank
participates in product development by advising management of new products
and services needed by their customers and desirable changes to existing
products and services.
56
<PAGE>
Each of the Banks provides a wide range of retail and commercial banking
services, including commercial, real estate, agricultural and consumer
lending; depository and funds transfer services; collections; safe deposit
boxes; cash management services; and other services tailored for both
individuals and businesses. The Georgetown Bank and the Vanceburg Bank also
offer limited trust services and act as executor, administrator, trustee and
in various other fiduciary capacities. Through Premier Data Services, Inc.,
the Company's data processing subsidiary, the Company currently provides
centralized data processing services to the Banks as well as one
non-affiliated bank.
The Banks' residential mortgage lending activities consist primarily of
loans for purchasing personal residences, or loans for commercial or consumer
purposes secured by residential mortgages. Consumer lending activities
consist of traditional forms of financing for automobile and personal loans.
The Banks' range of deposit services include checking accounts, NOW
accounts, savings accounts, money market accounts, club accounts, individual
retirement accounts, certificates of deposit and overdraft protection.
Deposits of the Banks are insured by the Bank Insurance Fund administered by
the FDIC.
County Finance, Inc., a subsidiary of the Vanceburg Bank, is a consumer
loan company that provides secured and unsecured loans to customers who would
generally not qualify, due to credit experience or other factors, for loans
at that bank. The Company anticipates expanding the business of this
consumer loan company, both in markets served by the Company's other Banks as
well as potentially in other as yet unidentified markets in Kentucky where
business prospects appear favorable.
BUSINESS STRATEGY
Management believes that the continuing rapid changes taking place in
the increasingly competitive financial institutions industry will result in
the concentration of business activity by larger, regional and money-center
financial institutions in urban markets, leaving non-urban markets that are
separate and distinct in terms of culture, community pride and banking needs
under-served. By creating a federation of local community banks, each with
considerable autonomy, a distinct local identity and local management with
meaningful decision-making authority, the Company believes that it can become
a highly profitable bank holding company that competes effectively in its
selected markets.
At December 31, 1995, Kentucky had over 200 independent commercial
banks, of which over half have total assets less than the Company's total
assets. Because of its business strategy, its prior success in affiliating
with three commercial banks (two of which became affiliated in 1995), its
emphasis on providing management of its bank subsidiaries with a high level
of operating independence and the increasingly difficult regulatory
environment in which these independent banks must operate, the Company
believes that it offers to many of these community banks a very favorable
alternative to a sale to a Kentucky affiliate of a large, Kentucky or
out-of-state bank holding company that consolidates affiliates, in which
typically the community bank's local identity is lost, the ability of their
management to make independent decisions may be greatly diminished and the
banking and community support services that these community banks have
historically provided may be greatly reduced or eliminated.
The Company endeavors to find banks with which it may
affiliate that have strong community ties, a core of existing capable management
and staff, and a desire to continue to serve their distinctive banking market
with substantial autonomy. Generally, the Company focuses on affiliation
candidates that either have a significant market share or the potential to
garner a significant market share in a short period of time, and whose addition
to the Company will favorably impact the Company's earnings within a reasonable
period of time. Through this strategy, the Company believes that its various
bank subsidiaries, oper-
57
<PAGE>
ating in culturally distinct banking markets, can collectively generate
superior profitability while preserving their ability to effectively compete
within their respective local communities in which their customers generally
reside.
MANAGEMENT
EXECUTIVE OFFICERS
The following table sets forth the names and ages of all executive
officers of the Company and their positions.
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
J. Howell Kelly 50 President and Chief Executive Officer of the Company
Benjamin T. Pugh 46 Executive Vice President and Treasurer of the Company; President and Chief Executive Officer of
the Vanceburg Bank and the Germantown Bank; Chairman of Premier Data Services, Inc.
Gardner E. Daniel 60 Senior Vice President and Assistant Secretary of the Company; President and Chief Executive Officer
of the Georgetown Bank and the Sharpsburg Bank
</TABLE>
For additional information about these executive officers, see
" - Directors" below.
DIRECTORS
The Articles of Incorporation and Bylaws of the Company provide that the
number of directors shall be fixed from time to time by the Board of
Directors. Neither the Articles of Incorporation nor the Bylaws of the
Company provide that the directors shall be classified into different classes
and, consequently, each director serves a one-year term, subject to
re-election at the Annual Meeting of Stockholders of the Company. Presently,
the Board of Directors of the Company consists of eight members listed below.
58
<PAGE>
<TABLE>
<CAPTION>
DIRECTOR OF
COMPANY
PRINCIPAL OCCUPATION CONTINUOUSLY
NAME OR EMPLOYMENT(1) AGE SINCE
---------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Toney K. Adkins Vice President - Administration 46 7/12/91
Champion Industries, Inc.
(commercial printing and office supplies)(2)
Gardner E. Daniel Senior Vice President and Assistant 60 4/11/95
Secretary of the Company; President
and Chief Executive Officer of the
Georgetown Bank and the Sharpsburg Bank(3)
Helen S. Fisher Community and Charitable Activities 76 7/12/91
E.V. Holder, Jr. Attorney at Law 63 7/12/91
Wilbur M. Jenkins Retired Business Owner 68 4/11/95
(cable manufacturing)
J. Howell Kelly President and Chief Executive Officer of 50 2/14/95
the Company(4)
Benjamin T. Pugh Executive Vice President and Treasurer of 46 7/12/91
the Company; President and Chief Executive
Officer of the Vanceburg Bank and the
Germantown Bank; Chairman of
Premier Data Services, Inc.(5)
Marshall T. Reynolds Chairman and Chief Executive Officer, 59 1/19/96
Champion Industries, Inc.
(commercial printing and office supplies)(6)
</TABLE>
----------
(1) Except where otherwise indicated, this principal occupation or employment
has continued during the past five years.
(2) Mr. Adkins has held this position since November 18, 1995. Prior to that
time he was President of KYOWVA Corrugated, Inc. (corrugated box
manufacturer), Huntington, West Virginia.
(3) Mr. Daniel became Vice President of the Company on April 11, 1995 and
Assistant Secretary on January 19, 1996. Mr. Daniel has served as
President of the Georgetown Bank since April, 1992. Mr. Daniel has served
as President of the Sharpsburg Bank since November, 1995. From February,
1991 to March, 1992, Mr. Daniel served as President of First United
Bancshares, Glasgow, Kentucky. From March, 1987 to January, 1991,
Mr. Daniel served as Executive Vice President of American National Bank,
Bowling Green, Kentucky, and as a Senior Vice President of that bank's
affiliate, First National Bank of Louisville (Kentucky).
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<PAGE>
(4) Mr. Kelly became President of the Company on February 14, 1995. Mr. Kelly
has been a director of Cambridge Financial Services, Inc., Iselin, New
Jersey, a financial advisory and management consulting firm, since 1992.
Prior to 1992, Mr. Kelly was an independent consultant providing financial
advice to financial institutions, individuals and industrial corporations.
From 1983 until December 1994, Mr. Kelly served as a director of Banc One
West Virginia, Inc. (or its predecessor, Key Centurion Bancshares, Inc.)
and served as chairman of that corporation's audit committee.
(5) Mr. Pugh assumed the positions of Executive Vice President and Treasurer of
the Company on January 19, 1996. Prior to January 19, 1996, Mr. Pugh was
Chief Executive Officer of the Company and prior to February 14, 1995, also
its President.
(6) Mr. Reynolds also serves as the Company's Chairman of the
Board. From 1985 to November, 1993, Mr. Reynolds served as Chairman of the
Board of Directors of Banc One West Virginia, Inc. (or its predecessor, Key
Centurion Bancshares, Inc.). Mr. Reynolds also serves a member of the
board of directors of Abigail Adams Bancorp, Inc. (and its bank subsidiary,
Adams National Bank), Washington, D.C., a bank holding company in which
Mr. Reynolds, directly or through affiliates or family members, holds a
42.3% ownership interest in the common voting stock of that holding
company. Since 1993, Mr. Reynolds has served as a member of the board of
directors of First Guaranty Bank, Hammond, Louisiana, a commercial bank in
which Mr. Reynolds, directly or through affiliates or family members, holds
a 41.4% ownership interest in the common voting stock of that commercial
bank. Since 1995, Mr. Reynolds has served as a member of the board of
directors of St. Mary Holding Corporation (and its bank subsidiary,
St. Mary Bank & Trust Company), Franklin, Louisiana, a bank holding company
in which Mr. Reynolds, directly or through affiliates or family members,
holds a 10.2% ownership interest in the common voting stock of that holding
company. Mr. Reynolds also holds, directly or through affiliates or family
members, a 13.3% ownership interest in the common voting stock of First
State Bank of Sarasota (Florida).
CERTAIN INFORMATION CONCERNING THE BOARD
The Board of Directors considers nominations of candidates for election
as directors. The Company's Bylaws establish an advance notice procedure for
shareholders to make nominations of candidates for election as directors (the
"Shareholder Notice Procedure"). The Shareholder Notice Procedure provides
that only persons who are nominated by, or at the direction of, the Board of
Directors, or by a shareholder who has given timely written notice to the
Secretary of the Company prior to the meeting at which directors are to be
elected, will be eligible for election as directors of the Company. Under
the Shareholder Notice Procedure, to be timely, notice of shareholder
nominations to be made at an annual or special meeting must bereceived by the
Company not less than 14 days nor more than 50 days prior to the scheduled
date of the meeting (or, if less than 21 days' notice of the date of the
meeting is given, the 7th day following the day such notice was given). By
requiring advance notice of nominations by shareholders, the Shareholder
Notice Procedure affords the Board an opportunity to consider the
qualifications of the proposed nominees and, to the extent deemed necessary
or desirable by the Board, to inform shareholders about such qualifications.
Directors of the Company are not paid for serving on the Board or any
committee of the Board. During 1995, there were a total of eight meetings of
the Company's Board of Directors. The Board of Directors has established an
Executive Committee, of which Messrs. Daniel, Kelly and Pugh are members and
Mr. Kelly is Chairman. The Executive Committee of the Board of Directors of
the Company held four meetings during 1995.
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<PAGE>
On January 19, 1996, the Board established an Audit Committee, comprised of
the following three non-employee directors: Toney K. Adkins, E. V. Holder, Jr.
and Wilbur M. Jenkins. These three directors also comprise the committee
appointed by the Board of Directors to administer the Company's 1996 Employee
Stock Ownership Incentive Plan. The Board of Directors of the Company has not
established a Nominating Committee or a Compensation Committee.
The Company's Chairman of the Board, Marshall T. Reynolds, serves as a
director of the following publicly held companies or banks whose shares are
registered under the Exchange Act: Abigail Adams Bancorp, Inc., Washington,
D.C.; Champion Industries, Inc., Huntington, West Virginia; and First
Guaranty Bank, Hammond, Louisiana.
EXCULPATION AND INDEMNIFICATION
The Articles of Incorporation of the Company contain a provision that,
subject to certain exceptions described below, eliminates the liability of a
director to the Company or its stockholders for monetary damages for any
breach of duty as a director. This provision does not, however, eliminate
the liability of the director: (i) for any transaction in which the
director's personal financial interest is in conflict with the financial
interests of the Company or its stockholders; (ii) for acts or omissions not
in good faith or which involve intentional misconduct or are known to the
director to be a violation of law; (iii) for any vote or assent to an
unlawful distribution to stockholders for which there is liability under
Section 8-330 of the Kentucky Business Corporation Act, as amended (the
"Kentucky Corporation Law"); or (iv) any transaction from which the director
derived an improper personal benefit.
The Articles of Incorporation of the Company require the Company to
indemnify any director or officer of the Company who was, is, or is
threatened to be made a named defendant or respondent in any threatened,
pending or contemplated action, suit or proceeding, whether civil, criminal,
administrative or investigative, by reason of service by such person as a
director or officer of the Company or as a director, officer, employee or
agent of another corporation, including the Banks, for which such person
served as such at the request of the Company. Directors are entitled to be
indemnified against judgments, taxes, fines, settlements and expenses
actually incurred by the director in connection with the proceeding, except
that no payments may be made with respect to liability for which
indemnification is not permitted under the Kentucky Corporation Law. The
Kentucky Corporation Law does not permit the Company to indemnify an
individual against a liability incurred unless the individual conducted
himself in good faith and reasonably believed that his conduct was in the
Company's best interests (or in certain instances, at least not opposed to
the Company's best interests). Directors and officers are also entitled to
have the Company advance any such expenses prior to final disposition of the
proceeding, upon the delivery of a written affirmation by the director or
officer of his good faith belief that the standard of conduct necessary for
indemnification has been met and a written undertaking to repay the amounts
advanced if it is ultimately determined that the standard of conduct has not
been met.
In addition to the Articles of Incorporation of the Company,
Section 8-520 of the Kentucky Corporation Law requires the Company to indemnify
any director who has been successful on the merits or otherwise in defending any
proceeding described above. The Kentucky Corporation Law also provides that a
court may order indemnification of a director if it determines that the director
is fairly and reasonably entitled to such indemnification.
The Board of Directors of the Company also has the authority to extend
to its employees and agents the same indemnification rights held by directors
and officers, subject to all of the accompanying conditions and obligations.
The Board of Directors may determine in the future to extend such
indemnification rights to any one or more of its employees or agents, but to
date it has not done so.
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<PAGE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Banks have made loans to certain executive officers and directors of
the Company or Banks or to related interests of these executive officers and
directors which aggregated approximately $4.1 million at December 31, 1995,
an amount equal to 37.4% of the Company's Tier I capital at December 31,
1995. These loans were made in the ordinary course of business, were made on
substantially the same terms, including interest rate and collateral
requirements, as those prevailing at the time for comparable transactions
with unrelated customers and are not regarded to involve more than the normal
risk of collectibility or to present other unfavorable features.
In June, 1995, the Company made a $1,000,000 investment in First Guaranty
Bank, Hammond, Louisiana ("First Guaranty"), a commercial bank in which the
Company's Chairman of the Board, Marshall T. Reynolds, beneficially owns
41.4% of that bank's outstanding common stock. Mr. Reynolds also serves as a
director of First Guaranty. The Company's investment in First Guaranty was
made through the purchase of 1,000 shares of Series B Preferred Stock (the
"Series B Stock"), which is non-voting, is not convertible into common stock
of First Guaranty, and has a non-cumulative quarterly dividend preference (on
a parity with Series A Preferred Stock) in a per annum amount equal to two
percent in excess of "prime rate" (as published in THE WALL STREET JOURNAL
during the quarter for which any dividend on common stock of First Guaranty
is paid). The Company has received a quarterly dividend in the full amount
of the dividend preference for each quarter during which the Series B Stock
has been held by it. The Company's purchase of the Series B Stock was funded
through a credit facility with an unaffiliated commercial bank lender. Under
that credit facility, the Company pays interest on the outstanding principal
balance at an annual rate equal to that lender's prime rate. In January,
1996, the Company acquired an additional 1,000 shares of Series B Stock (and
in connection therewith received a $50,000 cash payment from First Guaranty)
in consideration of its exchanging 1,000 shares of Series A Preferred Stock
of First Guaranty purchased by the Company at an aggregate cost of $1,000,000
in September, 1994. The purchase of the Series A Preferred Stock was financed
under the same credit facility described above that was used to purchase the
Series B Stock in 1995. The Company determined that it was in its best
interests to exchange its Series A Preferred Stock for additional Series B
Stock because (i) it no longer viewed any conversion of the Series A
Preferred Stock for common stock of First Guaranty as a viable opportunity in
view of the Company's strategic growth plans, and it regarded as attractive
the $50,000 payment offered by First Guaranty to encourage the Company to
exchange the Series A Preferred Stock, thereby eliminating the Company's
ability to convert such stock into common stock, and (ii) it determined that
an increase in the dividend preference to two percent in excess of prime rate
(which preference the Series B Stock has), as opposed to one percent in
excess of prime rate (which preference the series A Preferred Stock has),
provided a more favorable yield on a tax equivalent basis in view of the
Company's strategic growth plans and its determination that any conversion of
Series A Preferred Stock was not a likely event in the foreseeable future.
Mr. Reynolds was not Chairman of the Board or a director of the Company at
the times when the Company's Board of Directors determined to purchase the
Series B Stock or acquire additional Series B Stock in exchange for its
Series A Preferred Stock in First Guaranty.
During the years ended December 31, 1995, 1994 and 1993, the Company or
its subsidiaries have paid approximately $65,000, $53,000 and $49,000,
respectively, for commercial printing services and office supplies from
Champion Industries, Inc., Huntington, West Virginia, of which the Company's
Chairman of the Board, Marshall T. Reynolds, is its President and Chief
Executive Officer and a principal shareholder. The Company or its
subsidiaries have also paid to Champion Industries, Inc. approximately
$223,000, $185,000 and $15,000 in 1995, 1994 and 1993, respectively, to
permit employees of the Company and its subsidiaries to participate in that
other corporation's medical benefit plan. These relationships have continued
in 1996.
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EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table summarizes
compensation earned in 1995, 1994 and 1993 by the Company's Chief Executive
Officer and certain of the Company's other executive officers (the "Named
Executive Officers") who earned a salary and/or bonus in 1995 that exceeded
$100,000. In accordance with rules of the Securities and Exchange Commission,
the compensation of the Company's other executive officers is not required to be
disclosed because none of these executive officers earned a salary and/or bonus
in 1995 that exceeded $100,000.
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
------------------------------------
OTHER
ANNUAL ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY ($) BONUS ($) COMPENSATION COMPENSATION
($) ($)(1)
--------------------------- ---- ---------- --------- ------------ ------------
<S> <C> <C> <C> <C> <C>
J. Howell Kelly
President & CEO(2) 1995 82,385 36,000 5,325 -0-
Benjamin T. Pugh
President & CEO(3) 1995 82,500 36,000 3,600 8,000
1994 80,000 30,000 2,700 7,386
1993 74,000 24,000 2,700 4,745
</TABLE>
(1) Employer contributions to the Company's Profit Sharing Plan.
(2) Mr. Kelly became President on February 14, 1995. The amount shown
includes $17,000 paid by Citizens Deposit Bank and Trust Company during the
period of January 1, 1995 through April 30, 1995 for services rendered to
that bank subsidiary. Mr. Kelly's annual salary as President of the Company
is $110,000. Other annual compensation includes director's fees paid by
other bank subsidiaries of the Company.
(3) Mr. Pugh was President until February 14, 1995. Salary and bonus
amounts for all years were paid by the Company's subsidiary, Citizens Deposit
Bank and Trust Company, for services rendered by Mr. Pugh as President and
Chief Executive Officer of that bank subsidiary. Other annual compensation
includes director's fees paid by other bank subsidiaries of the Company.
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<PAGE>
1996 EMPLOYEE STOCK OWNERSHIP INCENTIVE PLAN
On January 19, 1996, the Company's Board of Directors adopted the Premier
Financial Bancorp, Inc. 1996 Employee Stock Ownership Incentive Plan (the
"Employee Stock Plan"). The Employee Stock Plan became effective on April 1,
1996 following its approval by the stockholders of the Company at the 1996
Annual Meeting of Stockholders.
The purpose of the Employee Stock Plan is to advance the interests of the
Company by encouraging employees who will largely be responsible for the
long-term success and development of the Company to acquire and retain an
ownership interest in the Company. The Employee Stock Plan is also intended
to provide flexibility to the Company in attracting and retaining key
employees and stimulating their efforts on behalf of the Company.
ELIGIBILITY
Employees of the Company and its subsidiaries as selected by the Committee
(as hereinafter defined) will be eligible to receive awards under the
Employee Stock Plan. Over the term of the Employee Stock Plan, it is
estimated that up to 10 persons will be recipients of awards under the plan.
ADMINISTRATION
The Employee Stock Plan will be administered by a committee (the
"Committee") consisting of not less than three directors appointed by the
Company's Board of Directors. A director may serve on the Committee only if
he or she is not eligible and has not received an award under the Employee
Stock Plan or any other stock plan of the Company or any affiliate for at
least one year before his or her appointment, and otherwise satisfies the
definition of a "disinterested person" for purposes of Rule 16b-3 under the
Exchange Act. The Company's Board of Directors has designated Toney K.
Adkins, E.V. Holder, Jr. and Wilbur M. Jenkins as the directors to serve on
the Committee.
AWARDS
The Employee Stock Plan permits the Committee to grant nontransferable
stock options that qualify as incentive stock options under Section 422 of
the Internal Revenue Code of 1986, as amended ("ISOs"), and stock options
that do not so qualify ("NQSOs"). All awards of options under the plan must
have an exercise price that is equal to at least 100% of the Fair Market
Value (as defined in the plan) of the shares to which the options relate (as
of the option grant date), and ISOs granted to any employee possessing more
than 10% of the combined voting power of all classes of stock of the Company
must be granted at 110% of Fair Market Value (as of the option grant date).
Participants under the Employee Stock Plan may exercise their options by
paying cash, by using the cashless exercise procedure allowed under Federal
Reserve Board Regulation T or by tendering shares of the Company that they
already own. Upon a "Change in Control" of the Company (as defined in the
Employee Stock Plan), any outstanding options will become fully vested and
immediately exercisable.
The grant of a stock option will not result in taxable income at the time
of grant for the grantee or the Company. The grantee will have no taxable
income upon exercising an ISO (except that the alternative minimum tax may
apply) and the Company will receive no deduction when an ISO is exercised.
Upon exercising a nonqualified stock option, the grantee will recognize
ordinary income in the amount by which the fair market value exceeds the
option price; the Company will be entitled to a deduction for the same
amount. The treatment to a grantee of a disposition of shares acquired
through the exercise of an option is
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dependent upon the length of time the shares have been held and on whether
such shares were acquired by exercising an ISO or a nonqualified stock
option. Generally, there will be no tax consequence to the Company in
connection with the disposition of shares acquired under an option except
that the Company may be entitled to a deduction in the case of a disposition
of shares acquired upon exercise of an ISO before the applicable ISO holding
periods have been satisfied.
PROPOSED AWARDS
The Committee under the Employee Stock Plan intends prior to the
Offering to grant to each of the Company's President, Mr. Kelly, and the
Company's Executive Vice President, Mr. Pugh, an option to acquire 20,000
Common Shares, with each of Mr. Kelly and Mr. Pugh having the right to
exercise his option after six months from the date of grant with respect to
7,000 of those shares, each having the right to exercise the option with
respect to an additional 7,000 shares on or after April 1, 1997 if on such
date he remains employed with the Company and each having the right to
exercise the option with respect to 2,000 additional shares on or after April
1, 1998, April 1, 1999 and April 1, 2000 if on such vesting dates he remains
employed with the Company (subject to earlier vesting in circumstances of
death, disability or a change in control of the Company). The options to be
granted to Mr. Kelly and Mr. Pugh are intended to be ISOs that will have a
ten year term and an exercise price per share equal to the fair market value
on the date of the option grant (which the Company believes is the Offering
price per share).
SHARES RESERVED
The total number of Common Shares reserved for issuance upon the exercise
of stock options under the Employee Stock Plan will be 100,000 - as adjusted
to reflect the 2-for-1 stock split effected on March 29, 1996. If an award
of a stock option terminates or is forfeited without having been exercised in
full, the shares underlying such award will be available for future grants
under the Employee Stock Plan, subject to certain limits. In the event of a
merger, reorganization, consolidation, recapitalization, reclassification,
split-up, spin-off, separation, liquidation, stock dividend, stock split,
reverse stock split, cash dividend, property dividend, share repurchase,
share combination, share exchange, issuance of warrants, rights or
debentures, or other change in the corporate structure of the Company
affecting the shares of the Company, the Committee will substitute or adjust
the total number and class of shares or other securities that may be issued
under the Employee Stock Plan, and the number, class and/or price of shares
or other securities subject to outstanding awards, as it determines to be
appropriate and equitable to prevent dilution or enlargement of the rights of
participants and to preserve for participants the benefits of any
appreciation of the Common Shares underlying awards.
AMENDMENT, MODIFICATION AND TERMINATION
The Employee Stock Plan will terminate on the earliest to occur of the
date when all shares of the Company available under the plan have been
acquired through the exercise of awards under the plan, January 19, 2006 or
such earlier date as the Company's Board of Directors may determine. The
Company's Board of Directors may amend, modify or terminate the Employee
Stock Plan, but may not without the prior approval of shareholders make any
amendments that would (i) materially increase the benefits accruing to
participants under the plan, (ii) materially increase the total number of
shares that may be issued under the plan or (iii) materially modify the class
of employees eligible to participate in the plan. No amendment of the plan
will impair the rights of any participant without such participant's consent.
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SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding the
beneficial ownership of the Company's outstanding Common Shares as of May 1,
1996 by (i) each person known to the Company to own beneficially 5% or
more of its Common Shares (including such person's business, mailing or
residence address), (ii) each director of the Company, (iii) each Named
Executive Officer of the Company, and (iv) all executive officers and
directors of the Company as a group. The number of Common Shares gives
effect to a 2-for-1 stock split effected in the form of a share dividend on
March 29, 1996. Except as otherwise indicated, the persons named in the
table have sole voting and investment power with respect to all Common Shares
owned by them.
<TABLE>
Current Beneficial Ownership Percent of Class Percent of Class
Name of Beneficial Owner No. of Shares(1) Before Offering(2) After Offering
---------------------------- ---------------- ------------------ ----------------
<S> <C> <C> <C>
Marshall T. Reynolds, Director
and Chairman of the Board
P.O. Box 4040
Huntington, West Virginia 25729 525,774 27.5% 13.5%
Joan C. Edwards
2100 South Ocean Lane
Ft. Lauderdale, Florida 33316 346,050 18.1% 8.9%
Helen S. Fisher, Director
424 Clinton Road
Lexington, Kentucky 40502 121,498 6.4% 3.1%
Wilbur M. Jenkins, Director
1482 Cincinnati Road
Georgetown, Kentucky 40324 114,610 6.0% 2.9%
Toney K. Adkins, Director 5,586 (3) (3)
Gardner E. Daniel, Director 28,872 1.5% (3)
E.V. Holder, Jr., Director 1,500 (3) (3)
J. Howell Kelly, Director and Named
Executive Officer 1,250 (3) (3)
Benjamin T. Pugh, Director and Named
Executive Officer 1,380 (3) (3)
Total of all directors and
executive officers as a group
(8 persons) 800,470 41.9% 20.5%
</TABLE>
----------------------
(1) In accordance with Rule 13d-3 promulgated pursuant to the Exchange
Act, a person is deemed to be the beneficial owner of a security for purposes
of the Rule if he or she has or shares voting or investment power with
respect to such security or has the right to acquire such ownership within 60
days. As used herein, "voting power" is the power to vote or direct the
voting of shares, and "investment power" is the power to dispose or direct
the disposition of shares, irrespective of any economic interest therein.
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<PAGE>
(2) In calculating the percentage ownership for a given individual or group,
the number of shares subject to options, warrants, rights or conversion
privileges held by such individual or member of a group is deemed to be
outstanding for the purpose of computing the percentage ownership of such
individual or group, but is not deemed to be outstanding for the purpose of
computing the ownership percentage of any other person.
(3) Less than 1%.
DESCRIPTION OF CAPITAL STOCK
AUTHORIZED CAPITAL STOCK
The Company's authorized capital stock consists of 11 million shares, of
which 10 million are Common Shares, without par value, and 1 million are
Preferred Shares, without par value. The Company has 1,909,090 Common Shares
issued and outstanding and 100,000 Common Shares reserved for issuance under
the Employee Stock Plan, as adjusted for the 2-for-1 stock split effected in
the form of a share dividend on March 29, 1996. No Preferred Shares are
outstanding or reserved for issuance.
COMMON SHARES
Holders of Common Shares will be entitled to one vote for each share on all
matters voted on by stockholders, other than the election of directors, and,
except as required by law or provided in any resolution adopted by the
Company's Board of Directors with respect to any series of Preferred Shares,
will exclusively possess all voting power. In the election of directors,
holders of Common Shares have cumulative voting rights whereby each holder is
entitled to vote the number of shares held multiplied by the number of
directors to be elected, and each holder may cast the whole number of votes
for one candidate or distribute such votes among two or more candidates.
Holders of Common Shares do not have any conversion, redemption or preemptive
rights. Subject to any preferential rights of any outstanding series of
Preferred Shares designated by the Company's Board of Directors from time to
time, the holders of Common Shares will be entitled to such dividends as may
be declared from time to time by the Board of Directors from funds available
therefor, and upon liquidation will be entitled to receive pro rata all
assets of the Company available for distribution to such holders. See "PRICE
RANGE OF COMMON SHARES; DIVIDENDS."
PREFERRED SHARES
The Company's Board of Directors is authorized to provide for the issuance of
Preferred Shares, in one or more series, and to fix for each such series such
voting powers, designations, and relative, participating, optional and other
special rights, and such qualifications, limitations or restrictions, as are
stated in the resolution adopted by the Board of Directors providing for the
issuance of such series and as are permitted by the Kentucky Business
Corporation Act.
SHARES AVAILABLE FOR FUTURE ISSUANCE
Following the Offering, the Company will have additional authorized Common
Shares and all of its authorized Preferred Shares available for issuance as
the need arises in connection with future acquisitions, combinations, equity
financings, share distributions and dividends, employee benefit plans and
other corporate purposes. The issuance of additional Common Shares and the
issuance of any Preferred Shares may occur without further authorization by
shareholders on such terms as the Company's Board of Directors, subject to
its fiduciary duties, may lawfully determine. The effect of the issuance of
additional Common Shares (other than on a pro rata basis among holders of
Common Shares) would be to dilute the
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present voting power and, depending on the terms of issuance, possibly the book
or market value of the Common Shares from that prior to such issuance.
The ability to issue additional Common Shares or any Preferred Shares,
in addition to the other corporate purposes described above, could enable the
Board of Directors to make more difficult the replacement of incumbent
directors or the accomplishment of certain business combinations or takeover
attempts opposed by the Board of Directors, even though any such business
combination or takeover attempt may be supported by holders of a significant
percentage of the Company's outstanding Common Shares.
The Company presently has no plan, understanding or arrangement to issue
additional Common Shares, other than in connection with the Offering or upon
the proper exercise of stock options granted pursuant to the Company's 1996
Employee Stock Ownership Incentive Plan. See "EXECUTIVE COMPENSATION - 1996
Employee Stock Ownership Incentive Plan." However, in view of the Company's
strategy to aggressively pursue acquisitions of bank holding companies, banks
(or their branches), thrift institutions (or their branches) or companies
conducting business deemed closely related to banking or managing or
controlling banks or thrift institutions, the Company believes that it is
likely that additional Common Shares and possibly Preferred Shares may be
issued in the future in connection with acquisitions that the Company may be
able to make in the future.
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the Offering, the Company will have issued and
outstanding 3,909,090 Common Shares (4,209,000 if the Underwriters'
over-allotment option is exercised in full). Of these shares, the 2,000,000
Common Shares being sold pursuant to the Offering (2,300,000 if the
Underwriters' over-allotment option is exercised in full) will be freely
tradable without restriction or further registration under the Securities
Act, except for any shares purchased by persons deemed to be "affiliates" of
the Company for purposes of the Securities Act. Of the remaining 1,909,090
Common Shares outstanding following completion of the Offering, 1,146,520
Common Shares will be owned by affiliates of the Company. See "SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT." Pursuant to Rule 144
under the Securities Act, these 1,146,520 Common Shares will be eligible for
sale immediately after the Offering only upon compliance with the volume,
notice and manner of sale limitations imposed by Rule 144. The remaining
762,570 shares will be eligible for sale in the open market upon completion
of this Offering without restriction or registration under the Securities
Act. Persons holding an aggregate of 1,146,520 Common Shares after
completion of this Offering have agreed that during a period of 180 days from
the date of this Prospectus, they will not, without the prior written consent
of the Representative of the Underwriters, sell, offer to sell, grant any
option for the sale of, or otherwise dispose of, any Common Shares presently
owned by them, directly or indirectly.
In general, under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated under the Rule) who has beneficially owned his
shares for at least two years, including persons deemed to be affiliates of
the Company, would be entitled to sell within any three month period a number
of shares that does not exceed the greater of 1% of the then outstanding
Common Shares of the Company (39,090 shares immediately following the
Offering) or the average weekly trading volume of the Common Shares during
the four calendar weeks preceding such sale. Sales under Rule 144 are also
subject to certain manner of sale provisions, notice requirements and the
availability of current public information regarding the Company. A person
who is not deemed to have been an affiliate of the Company at any time during
the 90 days preceding a sale, and who has beneficially owned his shares for
at least three years, would be entitled to sell such shares under Rule 144
without regard to the volume limitations, manner of sale provisions,
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<PAGE>
notice requirements or the availability of certain public information. Upon
completion of the Offering, 1,146,520 Common Shares will be owned by
stockholders presently regarded by the Company as affiliates.
The Company intends to file a registration statement under the
Securities Act to register Common Shares reserved for issuance under its
Employee Stock Plan. See "MANAGEMENT - 1996 Employee Stock Ownership
Incentive Plan." After such registration statement becomes effective, Common
Shares issued upon exercise of options granted under the Employee Stock Plan
will be eligible for sale in the open market.
Prior to this Offering, there has been no established public trading
market for the Company's Common Shares, and no predictions can be made of the
effect, if any, that market sales of Common Shares or the availability of
Common Shares for sale will have on market prices prevailing from time to
time. Nevertheless, sales of substantial amounts of Common Shares in the
public market following this Offering could adversely affect then-prevailing
market prices.
SUPERVISION AND REGULATION
GENERAL
Bank holding companies and commercial banks are extensively regulated under
both federal and state law. These laws and regulations are intended primarily
to protect depositors and not shareholders. To the extent that the following
information describes statutory and regulatory provisions, it is qualified in
its entirety by reference to the particular statutory and regulatory
provisions. Any change in applicable law or regulations may have a material
effect on the business and prospects of the Company, the Banks and their
respective subsidiaries.
BANK HOLDING COMPANY ACT
The Company is a registered bank holding company subject to regulation and
examination by the Bank Holding Company Act ("BHCA"). The Company is
required to file with the Federal Reserve Board ("FRB") quarterly and annual
reports and any additional information that may be required under the BHCA.
The BHCA also requires every bank holding company to obtain the prior
approval of the FRB before (i) acquiring all or substantially all of the
assets of or direct or indirect ownership or control of more than 5% of the
outstanding voting stock of any bank that is not already majority owned, or
(ii) acquiring or merging or consolidating with any other bank holding
company. The FRB will not approve any acquisition, merger or consolidation
that would have a substantially anti-competitive effect, unless the
anti-competitive impact of the proposed transaction is clearly outweighed by
a greater public interest in meeting the convenience and needs of the
community to be served. The FRB also considers capital adequacy and other
financial and managerial resources and future prospects of the companies and
the banks concerned, together with the convenience and needs of the community
to be served, when reviewing acquisitions, mergers or consolidations. In
cases where the FRB determines that two or more bank holding companies or
banks, separate in terms of corporate structure, have a degree of common
identity of ownership and/or management sufficient to regard all of such
companies or banks as a chain banking organization, the FRB considers the
foregoing factors with respect to each bank holding company or bank deemed to
be within the chain banking organization when evaluating any acquisition,
merger or consolidation involving any one member of the chain banking
organization, regardless of whether that one company or bank is actually part
of the same holding company structure as that in which the other bank holding
companies or banks deemed members of the chain banking organization are
situated. See "RISK FACTORS - Interest of Chairman of the Board in Certain
Other Banking Organizations."
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The BHCA now provides that the FRB may not approve any acquisition of
control of any bank operating outside the bank holding company's principal
state of operations, unless such action is specifically authorized by the
statutes of the state in which the bank to be acquired is located. This
prohibition on interstate acquisitions has been amended, effective September
29, 1995. Beginning September 29, 1995, adequately capitalized bank holding
companies may acquire control of banks in any state although states may limit
the eligibility of banks to be acquired to those in existence for a minimum
period of time, not to exceed five years. Presently, the Company, with
Kentucky as its state of operations, may acquire control of any bank
operating in any other state whose legislation regulating the acquisition of
banks is reciprocal to Kentucky's statute regulating the acquisition of
Kentucky banks. The FRB previously has determined that the interstate
banking statutes of West Virginia, Ohio, Indiana and Tennessee are reciprocal
to the banking statute in Kentucky regulating the acquisition of its banks.
Beginning June 1, 1997, banks may merge across state lines and may
establish new branches in other states. The date relating to mergers may be
accelerated by any state, and mergers may be prohibited by any state. The
provision relating to new branches requires a state's specific approval. The
Company is unable to predict the ultimate impact of interstate banking
legislation on it or its competitors, or the nature of legislation that
Kentucky may enact in response to those provisions of federal law that grant
a state discretion whether to prohibit or permit certain actions.
Additionally, the BHCA prohibits a bank holding company, with certain
limited exceptions, from (i) acquiring or retaining direct or indirect
ownership or control of more than 5% of the outstanding voting stock of any
company that is not a bank or bank holding company or (ii) engaging directly
or indirectly in activities other than those of banking, managing or
controlling banks, or performing services for its subsidiaries, unless such
non-banking business is determined by the FRB to be so closely related to
banking or managing or controlling banks as to be properly incident thereto.
In making such determinations, the FRB is required to weigh the expected
benefits to the public, such as greater convenience, increased competition or
gains in efficiency, against the possible adverse effects, such as undue
concentration of resources, decreased or unfair competition, conflicts of
interest, or unsound banking practices.
CAPITAL ADEQUACY
The federal banking agencies have adopted risk-based capital guidelines for
banks and bank holding companies. The minimum guideline for the ratio of
total capital ("Total Capital") to risk-weighted assets (including certain
off-balance-sheet items, such as standby letters of credit) is 8%, and the
minimum ratio of Tier I Capital must be composed of common stock, minority
interest in the equity accounts of consolidated subsidiaries, and
noncumulative perpetual preferred stock (subject to certain limitations),
less goodwill and certain other intangible assets ("Tier I Capital"). The
remainder may consist of subordinated debt, other preferred stock and a
limited amount of loan loss reserves. At December 31, 1995, the Company's
Tier I Risk Based Capital and Total Risk Based Capital ratios were 9.47% and
10.72%, respectively.
In addition, the federal banking agencies have established minimum
leverage ratio guidelines for banks and bank holding companies. Their
guidelines provide for a minimum ratio of Tier I Capital to average assets,
less goodwill and certain other intangible assets (the "Leverage Ratio"), of
4% for banks that meet certain specific criteria, including having the
highest regulatory rating. All other banks generally are required to
maintain a Leverage Ratio of at least 4%, plus an additional cushion of 100
to 200 basis points. The Company's Leverage Ratio at December 31, 1995 was
7%. The guidelines also provide that banks experiencing internal growth or
making acquisitions will be expected to maintain a strong capital position
substantially above the minimum supervisory levels without significant
reliance on intangible assets. Furthermore, the FRB has indicated that it
will consider a "Tangible Tier I Capital Leverage Ratio" (deducting all
intangibles) and other indications of capital strength in evaluating
proposals for expansion or new activities.
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All of the federal banking agencies have recently promulgated regulations
that qualitatively take into account the amount of an institution's exposure
to interest rate risk when evaluating risk-based capital adequacy. In
addition, bank regulators continue to indicate their desire generally to
raise capital requirements applicable to banking organizations beyond their
current levels. However, management of the Company is unable to predict
whether and when higher capital requirements would be imposed and, if so, at
what levels and on what schedule.
HOLDING COMPANY SUPPORT OF THE BANKS
Because the Company is the parent holding company of the Banks, its right
to participate in the assets of any subsidiary upon the latter's liquidation
or reorganization will be subject to the prior claims of the subsidiary's
creditors (including depositors in the case of a Bank) except to the extent
that any Bank may itself be a creditor with recognized claims against any
other subsidiary of the Company.
Under FRB policy, the Company is expected to act as a source of financial
strength to, and commit resources to support, each of the Banks. The support
may be required at times when, absent such a policy, the Company may not be
inclined to provide it. In addition, capital loans made by a bank holding
company to any of its subsidiary banks are subordinate in right of payment to
deposits and to certain other indebtedness of such subsidiary bank. In the
event of a bank holding company's bankruptcy, any commitment by the bank
holding company to a federal bank regulatory agency to maintain the capital
of a subsidiary bank will be assumed by the bankruptcy trustee and entitled
to a priority of payment.
Under the Federal Deposit Insurance Act, a depository institution
insured by the FDIC can be held liable for any loss incurred by, or
reasonably expected to be incurred by, the FDIC in connection with (i) the
default of a commonly-controlled FDIC-insured depository institution or (ii)
any assistance provided by the FDIC to any commonly-controlled FDIC-insured
depository institution "in danger of default." "Default" is defined
generally as the appointment of a conservator or receiver and "in danger of
default" is defined generally as the existence of certain conditions
indicating that a default is likely to occur in the absence of regulatory
assistance. The FDIC's claim for damages is superior to claims of
depositors, secured creditors and holders of subordinated debt (other than
affiliates) of the commonly-controlled FDIC-insured depository institution.
Each Bank, and any future bank subsidiaries of the Company, will be subject
to these cross-guarantee provisions.
INSURANCE OF DEPOSIT ACCOUNTS
The Company's Banks, because their deposits are insured up to prescribed
limits by the FDIC under the Federal Deposit Insurance Act, are subject to
supervision, regulation and examination by the FDIC. The FDIC has
implemented a risk-related assessment system for deposit insurance premiums.
All depository institutions have been assigned to one of nine risk assessment
classifications based upon certain capital and supervisory measures.
Currently, all depository institutions pay an annual assessment of up to
$0.27 per $100 of deposits, with a minimum required annual assessment of
$2,000 per institution, depending upon their risk classification. Under this
current risk classification, each of the Company's Banks, except the
Sharpsburg Bank acquired in October, 1995, pays only the minimum $2,000
annual assessment because of its favorable supervisory risk classification.
The Sharpsburg Bank currently is required to pay an assessment of $0.24 per
$100 of deposits, although the Company believes that its risk-related
assessment will in the future be reduced as the benefit of the capital and
management support available to the Sharpsburg Bank as a result of its
acquisition in October, 1995 by the Company becomes known to the FDIC
following an anticipated examination of the Sharpsburg Bank by the FDIC in
the near future.
OTHER BANKING LAWS
The Company and each of the Company's Banks is subject to supervision,
regulation and examination by the Kentucky Department of Financial
Institutions (as well as the FDIC and the FRB). The
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Vanceburg Bank was last examined by the FDIC and/or the Kentucky Department
of Financial Institutions in April 1995, the Georgetown Bank was last
examined in September 1995, the Germantown Bank was last examined in May 1995
and the Sharpsburg Bank was last examined in October 1995. With the
exception of the Sharpsburg Bank, examined prior to its acquisition by the
Company, none of these examinations resulted in any regulatory order,
agreement, memorandum or directive that materially restricted the conduct of
the Bank's business or in any way related to the Bank's capital adequacy or
management. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS -Overview," for information concerning the
Sharpsburg Bank prior to its acquisition by the Company in October, 1995.
Each of the Company's Banks and the Company also are subject to
significant laws, regulations and interpretations relating to or limiting:
deposits, investments, loans, consumer law compliance, the issuance of
securities, the payment of dividends, the establishment and closing of
branches, mergers and consolidations, changes in control, electronic funds
transfer, community reinvestment, transactions with related parties,
branching, management practices and other aspects of operations. Each is
subject to disclosure requirements in connection with consumer and mortgage
loans, interest on deposits and reserve requirements, as well as numerous
federal, state and local laws and regulations that set forth specific
restrictions and procedural requirements with respect to the extension of
credit, credit practices, the disclosure of credit terms and discrimination
in credit transactions.
Federal regulatory agencies have broad powers to take prompt
corrective action to resolve problems at banking institutions, including in
certain cases the appointment of a conservator or receiver. The extent of
these powers is generally influenced by the level of capital at the
institution. The Company does not believe that it or any of the Banks will
become subject to these prompt corrective action provisions.
As a consequence of the extensive regulation of the banking business in
the United States, the business of the Company and each of its respective
subsidiaries are particularly susceptible to changes in federal and state
legislation and regulations that may increase the cost of doing business.
MONETARY POLICY AND ECONOMIC CONTROL
The commercial banking business in which the Company engages through its
bank subsidiaries is affected not only by general economic conditions, but
also by the monetary policies of the FRB. Changes in the discount rate on
member bank borrowing, availability of borrowing at the "discount window,"
open market operations, the imposition of changes in reserve requirements
against member banks' deposits and assets of foreign branches and the
imposition of and change in reserve requirements against certain borrowings
by banks and their affiliates are some of the instruments of monetary policy
available to the FRB. These monetary policies are used in varying
combinations to influence overall growth and distributions of bank loans,
investments and deposits, and this use may affect interest rates charged on
loans or paid on deposits. The monetary policies of the FRB have had a
significant effect on the operating results of commercial banks and are
expected to do so in the future. The monetary policies of these agencies are
influenced by various factors, including inflation, unemployment, short-term
and long-term changes in the international trade balance and in the fiscal
policies of the United States Government. Future monetary policies and the
effect of such policies on the future business and earnings of the Company
and its subsidiaries cannot be predicted.
PROPOSED FEDERAL LEGISLATION
Legislation proposing a comprehensive reform of the banking and thrift
industries is being considered in the U.S. Congress. Under recently proposed
legislation, (i) a one-time assessment on thrift deposits to recapitalize the
SAIF would be due, (ii) the BIF and the SAIF would be merged on January 1,
1998 at which time thrifts and banks would pay the same deposit insurance
premiums, (iii) federal savings associations would be required to convert to
a national bank or a state-chartered thrift by January 1, 1998,
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(iv) thrifts' 8% bad-debt tax deduction would be eliminated, (v) all savings
and loan holding companies would become bank holding companies as of January
1, 1998 and (vi) the OTS would be abolished. The House and Senate have each
passed separate measures incorporating some or all of these proposals, over
which Senate and House conferences may determine to deliberate. The Senate
version proposes to act immediately on the SAIF recapitalization proposal
(item (i) above) but postpone action on the other proposals (items (ii),
(iii), (iv), (v) and (vi) above). The House version proposes to act on all
the proposals simultaneously.
In separate proposed legislation, in connection with the conversion of a
federal savings association to a national bank, thrifts would be required to
recapture into income over a six-year period their post-1987 additions to
their bad debt tax reserves, thereby generating additional tax liability.
Under this proposal, the bad debt recapture would be suspended in each year
that thrift meets a residential loan requirement.
In addition to the matters discussed above, there have been proposed a
number of legislation and regulatory proposals designed to strengthen the
federal deposit insurance system and to improve the overall financial
stability of the U.S. banking system, and to provide for changes in the bank
regulatory structure, including proposals to reduce regulatory burdens on
banking organizations and to expense the nature of products and services
banks and bank holding companies may offer.
It is uncertain when or if any of the proposed legislation discussed
above will be passed, and, if passed, in what form it would be passed. As a
result, management of the Company cannot accurately predict the possible
impact of such legislation on the business of the Company, although
management does not believe the impact of such legislation on the business of
the Company, as presently proposed, will be material.
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement among the
Company and the Underwriters named below, each of the Underwriters has
severally agreed to purchase from the Company the respective number of Common
Shares set forth opposite their names below:
UNDERWRITERS NO. OF SHARES
------------ ---------------
Advest, Inc. . . . . . . . . . . . . . . . . 1,250,000
Robert W. Baird & Co., Incorporated. . . . . 45,000
J.C. Bradford & Co.. . . . . . . . . . . . . 45,000
Dain Bosworth Incorporated . . . . . . . . . 45,000
EVEREN Securities, Inc.. . . . . . . . . . . 45,000
First Albany Corporation . . . . . . . . . . 45,000
First of Michigan Corporation. . . . . . . . 45,000
Friedman, Billings, Ramsey & Co., Inc. . . . 45,000
J.J.B. Hilliard, W.L. Lyons, Inc.. . . . . . 45,000
McDonald & Company Securities, Inc.. . . . . 45,000
Morgan Keegan & Company, Inc.. . . . . . . . 45,000
The Robinson-Humphrey Company, Inc.. . . . . 45,000
Scott & Stringfellow, Inc. . . . . . . . . . 45,000
Stifel, Nicolaus & Company, Incorporated . . 45,000
Wheat First Butcher Singer. . . . . . . . .. 45,000
Dominick & Dominick, Inc.. . . . . . . . . . 30,000
Ferris, Baker Watts, Incorporated. . . . . . 30,000
Mesirow Financial, Inc.. . . . . . . . . . . 30,000
Sterne Agee & Leach, Inc.. . . . . . . . . . 30,000
---------
Total. . . . . . . . . . . . . . . . . . 2,000,000
---------
The Underwriters are committed to purchase and pay for all such shares if any
are purchased. The Underwriting Agreement provides that the obligations of
the several Underwriters are subject to approval of certain matters by their
counsel and to various other conditions.
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The Company has been advised that the Underwriters propose to offer the
Common Shares directly to the public at the offering price within the price
range set forth on the cover page of this Prospectus and to certain selected
dealers at such price less a concession of $0.54 per share. The
Underwriters may allow, and such dealers may re-allow, a concession not in
excess of $0.10 per share to certain other dealers. After the initial
public offering of the shares, the public offering price concession and
re-allowance to dealers may be changed by the Underwriters. In addition, the
Company has agreed to pay a financial advisory fee of $100,000 to the
managing underwriter, Advest, Inc., $25,000 of which has already been paid,
with the remainder payable upon the successful completion of the Offering.
The Company has granted to the Underwriters an option exercisable
during the 30-day period beginning on the date of this Prospectus, to
purchase up to 300,000 additional Common Shares, solely to cover
over-allotments, if any, at the public offering price less the underwriting
discount, as set forth on the cover page of this Prospectus. If the
Underwriters exercise such option, the Underwriters have severally agreed,
subject to certain conditions, to purchase approximately the same percentage
thereof that the number of shares to be purchased by each of them, as shown
in the table above, bears to 2,000,000 Common Shares. If purchased, such
additional shares will be sold by the Underwriters on the same terms as those
on which the 2,000,000 shares are being sold.
At the request of the Company, the Underwriters have reserved up to
100,000 Common Shares for sale at the initial public offering price to
stockholders of Eminence that the Eminence Board of Directors shall identify
to the Company before the effectiveness of the Offering. The number of Common
Shares available for sale to the general public will be reduced to the extent
such persons purchase such reserved shares. Any reserved shares which are not
so purchased will be offered by the Underwriters to the general public on the
same basis as the other shares offered hereby.
The executive officers, directors and principal stockholders of the Company
have agreed that they will not sell, contract to sell, or otherwise dispose
of, any Common Shares or securities convertible into Common Shares held by
them now or in the future for a period of 180 days from the date of this
Prospectus, without the prior written consent of Advest, Inc.
The Company and the Underwriters have agreed to indemnify each other
against certain liabilities, including liabilities under the Securities Act,
or to contribute to payments that the Underwriters or the Company may be
required to make in respect thereof.
The foregoing is a summary of the principal terms of the Underwriting
Agreement and does not purport to be complete. Reference is made to a copy
of the Underwriting Agreement which is on file as an exhibit to the
Registration Statement.
Prior to the Offering, there has been no established public trading
market for the Common Shares. The Offering Price for the Common Shares was
determined by negotiations between the Company and the Underwriters based on
certain factors, including an analysis of the Company's assets, earnings and
other established criteria of value, comparisons of the relationships between
market prices, earnings and book values of other banking institutions of a
similar size and asset quality, and sales prices for Common Shares known to
the Company based on limited historical trading.
LEGAL MATTERS
The validity of the Common Shares offered hereby will be passed upon for
the Company by Hirn Doheny & Harper, Louisville, Kentucky. Certain legal
matters in connection with the Offering will be passed upon for the
Underwriters by Brown Todd & Heyburn PLLC, Louisville, Kentucky.
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EXPERTS
The consolidated financial statements of the Company (as restated to include
Georgetown) at December 31, 1995, and for the year ended December 31, 1995,
appearing in this Prospectus and Registration Statement have been audited by
Eskew & Gresham, PSC, independent auditors, as set forth in their report
thereon appearing elsewhere herein and in the Registration Statement, and are
included in reliance upon such report, given upon the authority of such firm
as experts in accounting and auditing.
The consolidated financial statements of the Company at December 31,
1994 and 1993 and for each of the years in the period ended December 31,
1994, appearing in this Prospectus and Registration Statement have been
audited by McNeal, Williamson & Co., independent auditors, as set forth in
their report thereon appearing elsewhere herein and in the Registration
Statement, and are included in reliance upon such report, given upon the
authority of such firm as experts in accounting and auditing.
The consolidated financial statements of Eminence at June 30, 1995 and
1994 and for each of the years in the three-year period ended June 30, 1995,
appearing in this Prospectus and Registration Statement have been audited by
Strothman & Company, PSC, independent auditors, as set forth in their report
thereon appearing elsewhere herein and in the Registration Statement, and are
included in reliance upon such report, given upon the authority of such firm
as experts in accounting and auditing.
The financial statements of the Sharpsburg Bank at October 31, 1995 and
for the ten months ended October 31, 1995, incorporated by reference as an
exhibit to the Registration Statement, have been audited by Eskew & Gresham,
PSC, independent auditors, as set forth in their report thereon incorporated
by reference in the Registration Statement, and are included as an exhibit to
the Registration Statement in reliance upon such report, given upon the
authority of such firm as experts in accounting and auditing.
On November 22, 1995, McNeal, Williamson & Co. resigned as the Company's
auditors and the Company engaged Eskew & Gresham, PSC, independent auditors,
as its new independent auditors to audit the Company's financial statements.
There were no disagreements during 1992, 1993, 1994 or 1995 between the
Company and McNeal, Williamson & Co. on any matter of accounting principles
or practices, financial statement disclosure or auditing scope or procedure,
which disagreement, if not resolved to the satisfaction of McNeal, Williamson
& Co., would have caused it to make reference to the subject matter of the
disagreement in connection with its report.
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INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGES
THE COMPANY
INDEPENDENT AUDITORS' REPORT ............................................. F-2
FINANCIAL STATEMENTS:
Consolidated Balance Sheets .......................................... F-3
Consolidated Statements of Income .................................... F-4
Consolidated Statements of Stockholders' Equity ...................... F-5
Consolidated Statements of Cash Flows ................................ F-6
Notes to Consolidated Financial Statements ........................... F-8
INDEPENDENT AUDITORS' REPORT ............................................. F-29
FINANCIAL STATEMENTS:
Consolidated Balance Sheets ......................................... F-30
Consolidated Statements of Income ................................... F-32
Consolidated Statements of Stockholders' Equity ..................... F-34
Consolidated Statements of Cash Flows ............................... F-35
Notes to Consolidated Financial Statements .......................... F-37
EMINENCE
INDEPENDENT AUDITORS' REPORT ............................................. F-47
FINANCIAL STATEMENTS:
Consolidated Balance Sheets .......................................... F-48
Consolidated Statements of Income .................................... F-49
Consolidated Statements of Stockholders' Equity ...................... F-51
Consolidated Statements of Cash Flows ................................ F-52
Notes to Consolidated Financial Statements ........................... F-54
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors
Premier Financial Bancorp, Inc.
Georgetown, Kentucky
We have audited the accompanying consolidated balance sheet of Premier
Financial Bancorp, Inc. and Subsidiaries as of December 31, 1995, and the
related consolidated statements of income, changes in stockholders' equity
and cash flows for the year then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audit. The
consolidated financial statements of Premier Financial Bancorp, Inc. and
Subsidiaries as of December 31, 1994 and 1993 were audited by other auditors
whose report dated February 10, 1995 expressed an unqualified opinion on
those statements.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the 1995 consolidated financial statements referred to
above present fairly, in all material respects, the financial position of
Premier Financial Bancorp, Inc. and Subsidiaries as of December 31, 1995 and
the results of its operations and its cash flows for the year then ended in
conformity with generally accepted accounting principles.
We previously examined and reported upon the consolidated statements of
income and changes in financial position for the years ended December 31,
1994 and 1993 of the other company included in the restatement for the 1995
pooling of interests. We also have applied procedures to the combination of
the accompanying consolidated statements of income and cash flows for the
years ended December 31, 1994 and 1993, after restatement for the 1995
pooling of interests; in our opinion, such consolidated statements have been
properly combined on the basis described in Note 2 of notes to the
consolidated financial statements.
As discussed in Note 4 to the consolidated financial statements,
in 1994, the Company adopted the provisions of the Financial Accounting
Standards Board's Statement of Financial Accounting Standards No. 115,
"Accounting for Certain Investments in Debt and Equity Securities."
February 8, 1996, except for Note 15, Eskew & Gresham, PSC
as to which the date is March 15, 1996 Lexington, Kentucky
F-2
<PAGE>
PREMIER FINANCIAL BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
December 31
1995 1994
------------ -------------
<S> <C> <C>
ASSETS
Cash and due from banks (Notes 3 and 16) $ 6,339,777 $ 4,941,557
Federal funds sold (Note 16) 6,340,000 5,770,000
Interest bearing deposits in other banks 0 523,609
Investment securities (Notes 4, 7, 12 and 16):
Available for sale 16,038,918 10,504,325
Held to maturity (fair value of $8,889,980 and
$8,561,906, respectively) 8,889,617 9,186,221
Loans, net (Notes 5, 7, 16, 17 and 18) 111,329,224 80,389,985
Premises and equipment, net (Note 6) 2,129,049 1,345,524
Interest receivable 1,622,774 951,793
Real estate acquired through foreclosure 131,661 392,702
Income taxes refundable 152,938 0
Deferred income taxes (Note 9) 648,763 244,677
Other assets (Note 2) 1,851,918 1,192,193
------------ -------------
TOTAL ASSETS $155,474,639 $115,442,586
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits (Note 16):
Non-interest bearing $ 16,000,676 $ 12,745,962
Time deposits, $100,000 and over 20,237,290 12,186,335
Other interest bearing 100,008,471 77,906,686
------------ -------------
Total deposits $136,246,437 $102,838,983
Agreements to repurchase securities (Note 16) 747,118 0
Federal Home Loan Bank advances (Notes 7 and 16) 755,000 755,000
Interest payable 1,147,986 557,057
Income taxes payable 0 103,299
Other liabilities 362,786 235,610
Debt (Notes 8 and 16) 5,000,000 1,500,000
------------ -------------
Total liabilities $144,259,327 $105,989,949
STOCKHOLDERS' EQUITY (Notes 2, 4, 13, 14 and 15)
Preferred stock, no par value; 1,000,000 shares
authorized; none issued or outstanding $ 0 $ 0
Common stock, no par value; 10,000,000 shares
authorized; 954,545 shares in 1995 (753,364 shares
in 1994) issued and outstanding 954,545 753,364
Surplus 5,897,585 5,973,766
Retained earnings 4,493,184 3,195,793
Net unrealized losses on securities available for sale (130,002) (470,286)
------------ -------------
Total stockholders' equity $ 11,215,312 $ 9,452,637
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $155,474,639 $115,442,586
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE>
PREMIER FINANCIAL BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
Year Ended December 31
1995 1994 1993
<S> <C> <C> <C>
INTEREST INCOME:
Loans, including fees $ 9,487,756 $7,700,113 $6,801,078
Investment securities -
Taxable 903,515 827,449 1,108,828
Tax-exempt 397,404 274,612 221,056
Federal funds sold 279,673 144,515 214,351
Other interest income 34,896 15,486 0
----------- ---------- -----------
Total interest income $11,103,244 $8,962,175 $8,345,313
INTEREST EXPENSE:
Deposits $ 4,767,554 $3,384,338 $3,393,756
Other borrowings 60,030 26,066 13,274
Debt 252,999 28,006 0
----------- ---------- -----------
Total interest expense $ 5,080,583 $3,438,410 $3,407,030
Net interest income $ 6,022,661 $5,523,765 $4,938,283
Provision for possible loan losses (Note 5) 85,950 207,000 169,835
----------- ---------- -----------
Net interest income after provision
for possible loan losses $ 5,936,711 $5,316,765 $4,768,448
NON-INTEREST INCOME:
Service charges $ 530,178 $ 395,835 $ 341,645
Insurance commissions 155,968 92,051 67,105
Investment securities gains (losses)(Note 4) (6,026) 69,716 120,105
Other 145,108 126,820 203,682
----------- ---------- -----------
$ 825,228 $ 684,422 $ 732,537
NON-INTEREST EXPENSES:
Salaries and employee benefits $ 2,309,307 $1,982,111 $1,811,617
Occupancy and equipment expenses 632,984 485,683 431,988
FDIC insurance 123,965 222,142 206,643
Professional fees 139,593 234,769 179,264
Data processing expenses 224,055 173,581 168,399
Taxes, other than payroll, property and income 145,619 109,100 109,516
Acquisition expenses 110,296 37,139 0
Other expenses 806,646 760,002 732,133
----------- ---------- -----------
$ 4,492,465 $4,004,527 $3,639,560
Income before income taxes $ 2,269,474 $1,996,660 $1,861,425
Provision for income taxes (Note 9) 112,992 483,213 510,210
----------- ---------- -----------
NET INCOME $ 2,156,482 $1,513,447 $1,351,215
Primary earnings per share $ 1.13 $ 0.80 $ 0.72
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE>
PREMIER FINANCIAL BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
<TABLE>
NET
UNREALIZED UNREALIZED
LOSS ON GAIN (LOSS)
MARKETABLE ON SECURITIES
COMMON RETAINED EQUITY AVAILABLE
STOCK SURPLUS EARNINGS SECURITIES FOR SALE TOTAL
<S> <C> <C> <C> <C> <C> <C>
Balances, December 31, 1992,
as previously reported $ 578,000 $3,045,000 $ 2,915,340 $(55,398) $ 0 $ 6,482,942
Adjustments for acquisition of Georgetown
Bancorp, Inc. accounted for using the
pooling-of-interests method (Note 2) 152,080 2,606,425 (1,624,209) 0 0 1,134,296
---------- ---------- ----------- -------- ----------- ----------
Balances, December 31, 1992, as restated $ 730,080 $5,651,425 $ 1,291,131 $(55,398) $ 0 $7,617,238
Issuance of 55,000 shares of common
stock 22,000 308,000 330,000
Increase in unrealized loss on marketable
equity securities (9,990) (9,990)
Net income 1,351,215 1,351,215
Dividends ($.28 per share) (420,000) (420,000)
---------- ---------- ----------- -------- ----------- ----------
Balances, December 31, 1993 $ 752,080 $5,959,425 $ 2,222,346 $(65,388) $ 0 $8,868,463
Issuance of 125 shares of Georgetown
Bancorp, Inc. common stock (Note 2) 1,284 14,341 15,625
Cumulative effect of change in the method
of accounting for investment securities
(Note 4) 175,595 175,595
Decrease in unrealized loss on marketable
equity securities 65,388 65,388
Net change in unrealized losses on
securities available for sale (Note 4) (645,881) (645,881)
Net income 1,513,447 1,513,447
Dividends ($.36 per share) (540,000) (540,000)
---------- ---------- ----------- -------- ----------- ----------
Balances, December 31, 1994 $ 753,364 $5,973,766 $3,195,793 $ 0 $ (470,286) $9,452,637
Issuance of 1,000 shares of Georgetown
Bancorp, Inc. common stock (Note 2) 10,272 114,728 125,000
Net change in unrealized losses on
securities available for sale 340,284 340,284
Five for four common stock split (Note 14) 190,909 (190,909) 0
Net income 2,156,482 2,156,482
Dividends ($.45 per share) (859,091) (859,091)
---------- ---------- ----------- -------- ----------- ----------
BALANCES, DECEMBER 31, 1995 $ 954,545 $5,897,585 $4,493,184 $ 0 $ (130,002) $11,215,312
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE>
PREMIER FINANCIAL BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
Year Ended December 31
1995 1994 1993
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $2,156,482 $ 1,513,447 $ 1,351,215
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 239,963 171,477 109,445
Provision for loan losses 85,950 207,000 169,835
Investment securities losses (gains), net 6,026 (69,716) (120,105)
Losses (gains) on sale of other assets 4,940 (2,261) 5,156
Losses (gains) on sale of real estate acquired through
foreclosure (20,059) 649 (26,679)
Write-downs of real estate acquired through
foreclosure 5,340 11,340 13,040
Changes in:
Interest receivable (120,900) 45,907 (158,363)
Deferred tax (221,516) (85,323) 1,512
Other assets (385,504) (695,600) 285,943
Interest payable 273,338 47,072 (19,747)
Other liabilities 54,384 (129,491) 106,525
Income tax payable (261,102) 37,230 42,052
------------- ------------ -------------
Net cash provided by operating activities $ 1,817,342 $ 1,051,731 $ 1,759,829
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of deposits held in other banks $ 0 $ (523,609) $ 0
Proceeds from maturity of deposits held in other
banks 523,609 0 0
Purchases of securities available for sale (13,314,011) (5,697,070) 0
Proceeds from sales of securities available for sale 7,553,462 4,452,459 0
Proceeds from calls of securities available for sale 350,000 800,000 0
Proceeds from maturities of securities available for
sale 4,000,000 2,500,000
Purchases of investment securities held to maturity (1,673,728) (1,081,135) (17,971,413)
Proceeds from calls of securities held to maturity 702,544 588,045 25,000
Proceeds from maturities of securities held
to maturity 510,000 135,000 3,515,318
Proceeds from sales of investment securities held
to maturity 1,000,000 0 11,637,674
Net change in federal funds sold (395,000) (108,000) 3,898,000
Proceeds from sale of real estate acquired
through foreclosure 291,760 32,000 200,655
Net change in loans (16,725,288) (7,411,964) (9,619,216)
Purchases of bank premises and equipment (1,327,066) (391,664) (380,821)
Proceeds from sale of premises and equipment 437,132 73,685 51,394
Cash payment related to acquisition, net of
cash received (999,742) 0 0
------------- ------------ -------------
Net cash used in investing activities $(19,066,328) $(6,632,253) $ (8,643,409)
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE>
PREMIER FINANCIAL BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(CONTINUED)
<TABLE>
Year Ended December 31
1995 1994 1993
<S> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Net change in deposits $15,134,179 $ 3,993,210 $7,141,510
Repayment of other borrowings 0 (118,571) (111,202)
Advances from Federal Home Loan Bank 0 755,000 0
Debt proceeds 3,500,000 1,500,000 0
Proceeds from issuance of agreements to
repurchase securities 747,118 0 0
Proceeds from issuance of common stock 125,000 0 330,000
Dividends paid (859,091) (540,000) (420,000)
----------- ---------- ----------
Net cash provided by financing activities $18,647,206 $5,589,639 $6,940,308
Net increase in cash and cash equivalents $ 1,398,220 $ 9,117 $ 56,728
Cash and cash equivalents at beginning
of year 4,941,557 4,932,440 4,875,712
----------- ---------- ----------
CASH AND CASH EQUIVALENTS AT END
OF YEAR $ 6,339,777 $4,941,557 $4,932,440
SUPPLEMENTAL DISCLOSURES OF CASH
FLOW INFORMATION:
Cash paid during the year for:
Interest expense $ 4,807,245 $3,391,338 $3,426,777
Income taxes 644,234 698,027 402,970
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING ACTIVITIES:
Non-cash transfer from securities held to
maturity to securities available for sale $ 500,000 $12,036,169 $ 0
Change in unrealized loss on marketable
equity securities 0 65,388 (9,990)
Change in unrealized loss on securities
available for sale 340,284 (470,286) 0
Loans transferred to real estate acquired
through foreclosure 16,000 382,675 104,026
</TABLE>
See notes to consolidated financial statements.
F-7
<PAGE>
PREMIER FINANCIAL BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A. BASIS OF PRESENTATION - The consolidated financial statements of
Premier Financial Bancorp, Inc. (the Company), give retroactive effect to the
acquisition of Georgetown Bancorp, Inc. and its Subsidiary, Georgetown Bank
and Trust Company, on March 24, 1995, which has been accounted for as a
pooling of interests, as described in Note 2 to the consolidated financial
statements.
B. PRINCIPLES OF CONSOLIDATION - The consolidated financial statements
include the accounts of Premier Financial Bancorp, Inc. and its wholly-owned
subsidiaries, Georgetown Bancorp, Inc., Georgetown, Kentucky, Citizens
Deposit Bank & Trust, Vanceburg, Kentucky, Bank of Germantown, Germantown,
Kentucky and Citizens Bank, Sharpsburg, Kentucky (the "Banks"). In addition,
the Company has a data processing service subsidiary, Premier Data Services,
Inc., Vanceburg, Kentucky. All material intercompany transactions and
balances have been eliminated. Certain prior year amounts have been
reclassified to conform with 1995 presentations.
C. NATURE OF OPERATIONS - The Banks operate under State bank charters,
and provide full banking services, including trust services. As state banks,
the Banks are subject to regulation by the Kentucky Department of Financial
Institutions and the Federal Deposit Insurance Corporation. The Company is
also subject to regulation by the Federal Reserve Bank.
D. ESTIMATES IN THE FINANCIAL STATEMENTS - The presentation of
financial statements in conformity with generally accepted accounting
principles requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of contingent
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 those estimates.
E. CASH AND CASH EQUIVALENTS - For purposes of reporting cash flows,
cash and cash equivalents include cash on hand and amounts due from banks.
F. INVESTMENT SECURITIES - The Company is required to classify its
investment securities into three categories: trading, available for sale and
held to maturity. The Company has classified all municipal securities and
certain U. S. agency securities as held to maturity based on management's
positive intent and ability to hold such securities to maturity. All
remaining investment securities are classified as available for sale.
Investment securities available for sale are carried at fair value.
Adjustments from amortized cost to fair value are recorded in stockholders'
equity, net of related income tax, under unrealized loss on investment
securities. The adjustment is computed on the difference between fair value
and cost adjusted for amortization of premiums and accretion of discounts
which are recorded as adjustments to interest income using the constant yield
method.
F-8
<PAGE>
PREMIER FINANCIAL BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
(CONTINUED)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Investment securities held to maturity are stated at cost, adjusted for
amortization of premiums and accretion of discounts which are recorded as
adjustments to interest income using the constant yield method.
Gains or losses on dispositions are determined by the specific
identification method.
G. LOANS - Loans are stated at the amount of unpaid principal, reduced
by unearned income and an allowance for loan losses. Interest income on
loans is recognized on the accrual basis except for those loans in a
nonaccrual income status. Loans are placed in a nonaccrual income status
when management believes, after consideration of economic and business
conditions and collection efforts, that the borrowers' financial condition is
such that collection of interest is doubtful.
The allowance for loan losses is established through a provision for loan
losses charged to expense. The allowance is an amount that management
believes will be adequate to absorb possible losses on existing loans that
may become uncollectible, based on evaluations of the collectibility of loans
and prior loan loss experience. The evaluations take into consideration such
factors as changes in the nature and volume of the loan portfolio, overall
portfolio quality, review of specific problem loans, and current economic
conditions that may affect the borrowers' ability to pay. Loans are charged
against the allowance for loan losses when management believes that the
collectibility of the principal is unlikely.
On January 1, 1995, the Company adopted Statement of Financial Accounting
Standards No. 114, "Accounting by Creditors for Impairment of a Loan". The
Statement requires allowances for loan losses on impaired loans to be
determined using the present value of estimated future cash flows of the
loan, discounted at the loan's effective interest rate or the fair value of
the underlying collateral. A loan is considered to be impaired when it is
probable that all principal and interest amounts will not be collected
according to the loan contract. Upon adoption, the Company recorded no
additional loan loss provision.
Smaller-balance homogeneous loans are evaluated for impairment in total.
Such loans include residential first and second mortgage loans, residential
construction, home equity, automobile and other consumer loans. Commercial
loans and mortgage loans secured by other properties are evaluated
individually for impairment. When analysis of borrower operating results and
financial condition indicates that underlying cash flows of the borrower are
not adequate to meet debt service requirements, the loan is evaluated for
impairment. This may be associated with a delay or shortfall in payments of
90 days or more. Loans are generally moved to nonaccrual status when 90 days
or more past due, unless the loan is well secured and in the process of
collection. These loans are often also considered impaired. Impaired loans,
in whole or in part, are charged off when deemed uncollectible using the same
criteria as any other loan.
F-9
<PAGE>
PREMIER FINANCIAL BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
(CONTINUED)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Carrying values of impaired loans are periodically adjusted to reflect
payments, revised estimates of future cash flows, and increases in the
present value of expected cash flows due to the passage of time. Cash
payments representing interest income are reported as such. Other cash
payments reduce carrying value, while increases due to changes in estimates
of future payments and the passage of time are reported as interest income
and decreases as provision for loan losses.
H. PREMISES AND EQUIPMENT - Premises and equipment are stated at cost
less accumulated depreciation. Depreciation is recorded principally by the
straight-line method over the estimated useful lives of the premises and
equipment.
I. REAL ESTATE ACQUIRED THROUGH FORECLOSURE - Real estate acquired
through foreclosure is carried at the lower of the recorded investment in the
property or its fair value. The value of the underlying loan is written down
to the fair value of the real estate to be acquired by a charge to the
allowance for loan losses, if necessary. Any subsequent write-downs are
charged to operating expenses. Certain parcels of real estate are being
leased to third parties to offset holding period costs. Operating expenses
of such properties, net of related income, and gains and losses on their
disposition are included in other expenses.
J. PURCHASE METHOD OF ACCOUNTING - Net assets of subsidiaries acquired
in purchase transactions are recorded at the fair value at the date of
acquisition. The excess of cost over net assets acquired (goodwill) is
included in other assets on the consolidated balance sheet and is being
amortized by the straight-line method over fifteen years.
K. INCOME TAXES - The Company and its subsidiaries file a consolidated
federal income tax return. The Subsidiaries are charged or credited an amount
equal to the income tax that would have been applicable on a separate return
basis.
The Company uses the liability method for computing deferred income taxes.
Under the liability method, deferred income taxes are based on the change
during the year in the deferred tax liability or asset established for the
expected future tax consequences of differences in the financial reporting
and tax bases of assets and liabilities. The differences relate principally
to premises and equipment, unrealized gains and losses on investment
securities available for sale, net operating loss carryforwards, changes in
tax methods of accounting, and the allowance for loan losses.
L. PER SHARE INFORMATION - Primary earnings per share is computed by
dividing net income by the weighted average number of shares of common stock
outstanding and the number of shares of common stock which would be assumed
outstanding under the treasury-stock method.
F-10
<PAGE>
PREMIER FINANCIAL BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
(CONTINUED)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
M. IMPACT OF NEW ACCOUNTING STANDARDS - In December 1991, the Financial
Accounting Standards Board issued SFAS No. 107, "Disclosures about Fair Value
of Financial Instruments," which is applicable to financial statements of
entities with total assets in excess of $150 million for fiscal years ending
after December 15, 1992 and to financial statements of entities with total
assets less than $150 million for fiscal years ending after December 15,
1995. SFAS No. 107 requires the disclosure of (i) fair value of financial
instruments for which it is practicable to estimate that value, and (ii) the
methods and significant assumptions used to estimate fair value. Because the
Statement requires only disclosure of fair value, without recognition of any
changes in the Company's financial statements, there is no impact on the
Company's financial condition or its results of operations.
In October 1994, the Financial Accounting Standards Board issued SFAS No.
119, "Disclosure about Derivative Financial Instruments and Fair Value of
Financial Instruments," which is applicable for financial statements issued
for fiscal years ending after December 15, 1994, except for entities with
less than $150 million in total assets, for which it is effective for fiscal
years ending after December 15, 1995. SFAS No. 119 requires disclosures
about amounts, nature and terms of derivative financial instruments that are
not subject to SFAS No. 105. It also amends SFAS No. 105 and SFAS No. 107 to
require that distinction in certain disclosures required by those statements.
The effect of adopting the new guidance was not material to the Company's
consolidated financial statements.
In March, 1995, the Financial Accounting Standards Board issued SFAS No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed of ," which requires the recognition of a loss on
impaired assets when the carrying value of an asset exceeds its fair value
and the carrying amount of the asset may not be recoverable. The Statement
is effective for fiscal years beginning after December 15, 1995. The Company
adopted SFAS No. 121, as required, on January 1, 1996. The effect of
adopting the new guidance was not material to the Company's consolidated
financial statements.
In May, 1995, the Financial Accounting Standards Board issued SFAS No.
122, "Accounting for Mortgage-Servicing Rights." This Statement is effective
for fiscal years beginning after December 31, 1995 and requires the
capitalization of the cost of mortgage-servicing rights originated or
acquired based on the fair value of the rights. The Company adopted the
Statement, as required, on January 1, 1996. The effect of adopting the new
guidance was not material to the Company's consolidated financial statements.
In October, 1995, the Financial Accounting Standards Board issued SFAS No.
123, "Accounting for Stock-Based Compensation." The Statement defines the
methods of accounting available for employee stock compensation plans and is
effective for years beginning after December 15, 1995. The Company adopted
the Statement, as required, on January 1, 1996. The effect of adopting the
new guidance was not material to the Company's consolidated financial
statements.
F-11
<PAGE>
PREMIER FINANCIAL BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
(CONTINUED)
NOTE 2 - BUSINESS COMBINATIONS
On March 24, 1995, the Company acquired Georgetown Bancorp, Inc. and its
wholly-owned subsidiary, Georgetown Bank & Trust, Georgetown, Kentucky, in a
business combination accounted for as a pooling of interests. All of the
outstanding shares of Georgetown Bancorp were exchanged for 409,090 shares, as
adjusted for subsequent stock splits, of Premier Financial Bancorp's common
stock. The accompanying consolidated financial statements for 1995 are based
on the assumption that the companies were combined for the full year, and
financial statements of prior years have been restated to give effect of the
combination.
Summarized results of operations of the separate companies for the period
January 1, 1995 through the date of acquisition are as follows:
PREMIER
FINANCIAL GEORGETOWN
BANCORP BANCORP
(IN THOUSANDS)
Net interest income after provision for
loan losses $1,107 $212
Other operating income 77 54
Other operating expenses 791 231
Net income $ 329 $735
Following is a reconciliation of interest income, other operating income
and net income previously reported with restated amounts:
YEAR ENDED DECEMBER 31
1994 1993
(IN THOUSANDS)
Interest income:
As previously reported $7,616 $7,070
Acquired subsidiary 1,346 1,275
------ ------
As restated $8,962 $8,345
Other operating income:
As previously reported $ 470 $ 511
Acquired subsidiary 214 222
------ ------
As restated $ 684 $ 733
Net income:
As previously reported $1,534 $1,211
Acquired subsidiary (21) 140
------ ------
As restated $1,513 $1,351
F-12
<PAGE>
PREMIER FINANCIAL BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
(CONTINUED)
NOTE 2 - BUSINESS COMBINATIONS (CONTINUED)
On October 31, 1995, the Company acquired all of the outstanding shares of
Citizens Bank of Sharpsburg, Kentucky, for cash. The total acquisition cost
was $1,496,387, which exceeded the fair value of tangible assets acquired by
approximately $248,000. This combination was accounted for as a purchase and
the results of operations of Citizens Bank are included in the consolidated
financial statements from November 1, 1995.
The fair value of assets acquired and liabilities assumed as of the
acquisition date are as follows:
(IN THOUSANDS)
Assets
Cash and due from banks $ 497
Investment securities 3,976
Net loans 14,316
Other assets 1,117
---------
Total assets $ 19,906
Liabilities
Deposits $ 18,273
Other liabilities 385
---------
Total liabilities $ 18,658
Net assets acquired $ 1,248
Cash consideration given for above 1,496
---------
Cost in excess of net assets acquired $ 248
Unaudited pro forma condensed results of operations for the years ended
December 31, 1995 and 1994, as though the above subsidiary had been acquired
January 1, 1994 are listed below. The results are not necessarily indicative
of future consolidated operations.
YEAR ENDED
1995 1994
(IN THOUSANDS)
Net interest income after provision
for loan losses $6,424 $4,513
Other operating income 916 745
Other operating expenses 5,072 4,601
Net income $2,154 $ 348
Earnings per share $ 1.13 $ 0.18
F-13
<PAGE>
PREMIER FINANCIAL BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
(CONTINUED)
NOTE 3 - RESTRICTIONS ON CASH AND DUE FROM BANKS
Included in cash and due from banks are certain non-interest bearing
deposits that are held at the Federal Reserve or maintained in vault cash in
accordance with average balance requirements specified by the Federal Reserve
Board of Governors. The average balance requirement was $549,000 at December
31, 1995.
NOTE 4 - INVESTMENT SECURITIES
On January 1, 1994, the Company changed its method of accounting for
certain debt and equity securities to conform with the new requirements of
Statement of Financial Accounting Standards No. 115. The effect of this
change at December 31, 1994 was to decrease stockholders' equity by $316,738,
which is net of deferred income taxes of $134,573.
Amortized cost and fair value of investment securities, by category, at
December 31, 1995 are as follows:
<TABLE>
<CAPTION>
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
<S> <C> <C> <C> <C>
Available for sale:
U. S. Treasury securities $ 2,546,872 $10,051 $ (1,241) $ 2,555,682
U. S. agency securities 10,747,373 17,575 (100,892) 10,664,056
Preferred stock (Note 12) 2,000,000 0 0 2,000,000
Other equity securities 900,000 0 (80,820) 819,180
----------- ------- --------- -----------
Total available for sale $16,194,245 $27,626 $(182,953) $16,038,918
Held to maturity:
Obligations of states and political
subdivisions $ 6,347,298 $86,434 $ (45,521) $ 6,388,211
U. S. agency securities 2,300,000 0 (41,110) 2,258,890
Other securities 242,319 560 0 242,879
----------- ------- --------- -----------
Total held to maturity $ 8,889,617 $86,994 $ (86,631) $ 8,889,980
</TABLE>
Amortized cost and fair value of investment securities, by category, at December
31, 1994 are as follows:
<TABLE>
<CAPTION>
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
<S> <C> <C> <C> <C>
Available for sale:
U. S. Treasury securities $ 3,101,661 $ 0 $ (60,887) $ 3,040,774
U. S. agency securities 6,047,650 294 (390,818) 5,657,126
Preferred stock (Note 12) 1,000,000 0 0 1,000,000
Other equity securities 959,907 0 (153,482) 806,425
----------- ---- --------- -----------
Total available for sale $11,109,218 $294 $(605,187) $10,504,325
</TABLE>
F-14
<PAGE>
PREMIER FINANCIAL BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
(CONTINUED)
NOTE 4 - INVESTMENT SECURITIES (CONTINUED)
<TABLE>
<CAPTION>
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
<S> <C> <C> <C> <C>
Held to maturity:
Obligations of states and political
subdivisions $4,964,818 $18,386 $(279,237) $4,703,967
U. S. agency securities 4,221,403 0 (363,464) 3,857,939
---------- ------- --------- ----------
Total held to maturity $9,186,221 $18,386 $(642,701) $8,561,906
</TABLE>
The amortized cost and fair value of investment securities at December 31,
1995, by category and contractual maturity are shown below. Expected
maturities will differ from contractual maturities because borrowers may have
the right to call or prepay obligations with or without call or prepayment
penalties.
<TABLE>
<CAPTION>
AMORTIZED FAIR
COST VALUE
<S> <C> <C>
Available for sale:
Due in one year or less $ 5,992,185 $ 5,896,330
Due after one year through five years 6,502,060 6,512,656
Due after five years through ten years 800,000 810,752
Other securities 2,900,000 2,819,180
----------- -----------
Total available for sale $16,194,245 $16,038,918
Held to maturity:
Due in one year or less $ 1,535,220 $ 1,523,166
Due after one year through five years 4,395,565 4,418,667
Due after five years through ten years 2,667,028 2,658,217
Due after ten years 49,485 47,051
Other securities 242,319 242,879
----------- -----------
Total held to maturity $ 8,889,617 $ 8,889,980
</TABLE>
Proceeds from sales of investment securities during 1995, 1994 and 1993
were $8,557,146, $4,495,504 and $11,637,674, respectively. Gross gains of
$25,650, $73,990 and $121,659 and gross losses of $31,676, $4,274 and $1,554,
respectively, were realized on those sales. Proceeds from calls of investment
securities during 1995, 1994 and 1993 were $1,048,860, $1,345,000 and $25,000,
respectively. No gains or losses were realized on those calls.
During 1995, the Company sold a security classified as held to maturity,
with an amortized cost of $1,000,000 and a fair value of $1,000,000. The
Company was notified by the issuer that the security was being called. The
Company disposed of the security approximately five months prior to the call
date in order to utilize the funds for reinvestment.
F-15
<PAGE>
PREMIER FINANCIAL BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
(CONTINUED)
NOTE 4 - INVESTMENT SECURITIES (CONTINUED)
During December, 1995, the Company made a one time transfer of investment
securities from held to maturity to available for sale of $500,000, as allowed
under the Financial Accounting Series Special Report, "A Guide to
Implementation of Statement 115", issued in November 1995. The investments
were transferred at fair value at the date of transfer. This transfer did not
have a material effect on the Company's stockholders' equity.
At December 31, 1995 and 1994, the Company's investment in noncumulative
perpetual preferred stock of First Guaranty Bank, Hammond, Louisiana exceeded
10% of stockholders' equity. The market value of these investments
approximates their book value which totaled $2,000,000 and $1,000,000 at
December 31, 1995 and 1994, respectively. The divided rate on the preferred
stock is 2% over the prevailing prime rate.
Investment securities with an approximate carrying value of $8,015,000 and
$5,145,000 at December 31, 1995 and 1994, respectively, were pledged to secure
public deposits, trust funds, securities sold under agreements to repurchase
and for other purposes as required by law.
NOTE 5 - LOANS
Major classifications of loans are summarized as follows:
DECEMBER 31
1995 1994
(IN THOUSANDS)
Commercial $ 57,246 $46,973
Real estate construction 2,119 1,822
Real estate mortgage 32,678 21,700
Agricultural 5,216 1,073
Consumer 16,087 9,647
Other 429 274
-------- -------
$113,775 $81,489
Unearned interest (711) (213)
Allowance for loan losses (1,735) (886)
-------- -------
$111,329 $80,390
Certain directors and executive officers of the Banks, including their
immediate families and companies in which they are principal owners, were loan
customers of the Banks during 1995 and 1994. Total loans to these persons at
December 31, 1995 and 1994 amounted to $4,067,191 and $2,625,473,
respectively. Such loans were made in the ordinary course of business at the
Banks' normal credit terms and interest rates. An analysis of the 1995
activity with respect to all director and executive officer loans is as
follows:
F-16
<PAGE>
PREMIER FINANCIAL BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
(CONTINUED)
NOTE 5 - LOANS (CONTINUED)
Balance, December 31, 1994 $2,625,473
Additions, including loans now meeting
disclosure requirements 2,360,392
Additions related to acquired subsidiary 31,501
Amounts collected, including loans no longer
meeting disclosure requirements (950,175)
----------
Balance, December 31, 1995 $4,067,191
Changes in the allowance for loan losses were as follows:
<TABLE>
<CAPTION>
1995 1994 1993
<S> <C> <C> <C>
Balance, beginning of year $ 886,175 $ 884,079 $ 938,293
Allowance related to acquired subsidiary 803,177 0 0
Net charge-offs (39,820) (204,904) (224,049)
Provision for loan losses 85,950 207,000 169,835
---------- --------- ---------
Balance, end of year $1,735,482 $ 886,175 $ 884,079
</TABLE>
The principal balance of nonaccrual loans at December 31, 1995 and 1994,
was $592,544 and $46,000, respectively. The interest that would have been
recorded if such loans had been current in accordance with their original
terms was approximately $8,600 in 1995, $9,200 in 1994, and $26,800 in 1993.
The amount of interest income that was actually recorded for those loans was
approximately $1,000 in 1995, $0 in 1994, and $0 in 1993.
The Company's recorded investment in impaired loans was approximately
$886,000 at December 31, 1995 as measured using the value of the underlying
collateral. Of that amount, $401,000 represents loans for which an allowance
for loan losses, in the amount of $101,000 has been established under SFAS
114. The average recorded investment of impaired loans was approximately
$424,000 for the year ended December 31, 1995. Interest income recognized on
impaired loans totaled approximately $26,000 for the year ended December 31,
1995, which represented actual cash payments received during 1995 on impaired
loans.
Changes in the allowance for credit losses on impaired loans were as
follows:
Balance, at adoption $ 9,000
Allowance related to acquired subsidiary 93,000
Charge-off of impaired loans (6,000)
Additions to allowance 5,000
---------
Balance, end of year $ 101,000
F-17
<PAGE>
PREMIER FINANCIAL BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
(CONTINUED)
NOTE 6 - PREMISES AND EQUIPMENT
Premises and equipment are summarized as follows:
DECEMBER 31
1995 1994
Land $ 223,118 $ 108,015
Buildings and leasehold improvements 1,939,142 1,291,674
Furniture and equipment 2,424,905 2,291,192
----------- -----------
$ 4,587,165 $ 3,690,881
Less accumulated depreciation (2,458,116) (2,345,357)
----------- -----------
$ 2,129,049 $ 1,345,524
Depreciation expense was $218,178, $164,796 and $105,276 in 1995, 1994
and 1993, respectively.
NOTE 7 - FEDERAL HOME LOAN BANK ADVANCES
Advances from the Federal Home Loan Bank as of December 31, 1995 and 1994
were $755,000 for both years. These advances consist of short-term advances
which are due within one year with an interest rate of 6.05% at December 31,
1995. These advances are collateralized by Federal Home Loan Bank stock with
a cost of $59,900 and first mortgage loans amounting to at least 150% of
outstanding borrowings, or $1,133,000 at December 31, 1995. Federal Home Loan
Bank stock is included in investment securities.
NOTE 8 - DEBT
Debt consists of the following:
DECEMBER 31
1995 1994
Revolving note, $5,000,000 maximum limit, secured
by 100% of the common stock of the subsidiary
banks, interest at prime rate payable monthly,
principal due at maturity, June 30, 1996. $5,000,000 $1,500,000
F-18
<PAGE>
PREMIER FINANCIAL BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
(CONTINUED)
NOTE 9 - INCOME TAXES
The components of the provision for income taxes are as follows:
<TABLE>
<CAPTION>
1995 1994 1993
<S> <C> <C> <C>
Current $ 334,508 $568,536 $508,698
Deferred 282,659 (92,463) 48,977
Change in valuation allowance (504,175) 7,140 (47,465)
--------- -------- --------
$ 112,992 $483,213 $510,210
</TABLE>
The Company's deferred tax assets and liabilities at December 31, 1995 and
1994 are shown below. Based upon the level of historical taxable income over
the last three years and projections for future taxable income over the three
years subsequent to December 31, 1995 in which deferred tax assets are
expected to become deductible, management believes it is more likely than not
the Company will realize the benefits of these deductible differences;
therefore, no valuation allowance for the realization of deferred tax assets
is considered necessary at December 31, 1995.
<TABLE>
<CAPTION>
1995 1994
<S> <C> <C>
Deferred tax assets:
Allowance for loan losses $287,852 $ 145,397
NOL carryforwards 435,116 450,840
Unrealized loss on investment securities 25,325 134,573
Accrual to cash conversion 0 32,257
-------- ---------
Total deferred tax assets $748,293 $ 763,067
Deferred tax liabilities:
Change in accounting method $(22,461) $ (9,541)
Depreciation (44,820) (4,358)
Other (32,249) (316)
-------- ---------
Total deferred tax liabilities $(99,530) $ (14,215)
Valuation allowance 0 (504,175)
-------- ---------
Net deferred tax asset $648,763 $ 244,677
</TABLE>
At December 31, 1995, two of the subsidiary Banks had net operating loss
carryforwards totaling approximately $1,266,000, which begin expiring in 2005.
The utilization of these net operating loss carryforwards is subject to
limitations imposed by Section 382 of the Internal Revenue Code.
F-19
<PAGE>
PREMIER FINANCIAL BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
(CONTINUED)
NOTE 9 - INCOME TAXES (CONTINUED)
An analysis of the differences between the effective tax rates and the
statutory U.S. federal income tax rate is as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
1995 1994 1993
<S> <C> <C> <C> <C> <C> <C>
U. S. federal income tax rate $ 772 34.0% $ 679 34.0% $633 34.0%
Changes from the statutory rate:
Tax-exempt investment income (141) (6.2) (100) (5.0) (84) (4.5)
Non-deductible interest expense
related to carrying tax-exempt
investments 15 0.7 12 0.6 10 0.5
Tax credits (69) (3.0) (18) (0.9) 0 0
Change in valuation allowance (504) (22.2) 7 0.3 (48) (2.5)
Other 40 1.7 (97) (4.8) (1) (0.1)
----- ----- ---- ---- ---- ----
$ 113 5.0% $483 24.2% $510 27.4%
</TABLE>
Income taxes (benefits) applicable to investment securities gains (losses)
were $(2,049), $23,703 and $40,836 for 1995, 1994 and 1993, respectively.
NOTE 10 - OPERATING LEASE COMMITMENTS
The Company has entered into lease agreements for certain premises and
equipment.
Future minimum lease payments under the leases during the five years
subsequent to December 31, 1995 are as follows:
1996 $129,151
1997 149,179
1998 144,914
1999 144,914
2000 144,914
Total rental expense incurred amounted to approximately $19,000, $80,000
and $98,000 in 1995, 1994 and 1993, respectively.
F-20
<PAGE>
PREMIER FINANCIAL BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
(CONTINUED)
NOTE 11 - PROFIT-SHARING PLANS
The Company has qualified profit-sharing plans which cover substantially
all employees. Profit sharing contributions are at the discretion of the
Company's Board of Directors. Profit sharing contributions were $103,744,
$88,730 and $64,425 in 1995, 1994 and 1993, respectively.
NOTE 12 - RELATED PARTY TRANSACTIONS
During the years ended December 31, 1995, 1994 and 1993, the Company paid
approximately $65,000, $53,000 and $49,000, respectively, for printing and
supplies from a company affiliated by common ownership. The Company also paid
this affiliate approximately $223,000, $185,000 and $15,000 in 1995, 1994 and
1993, respectively, to permit the Company's employees to participate in its
employee medical benefit plan.
The Company has purchased and currently holds noncumulative perpetual
preferred stock with a carrying value of $2,000,000 in a bank in Louisiana
controlled by the Company's largest shareholder. The dividend rate on the
preferred stock is 2% over the prevailing prime rate.
NOTE 13 - REGULATORY MATTERS
The various regulatory agencies having supervisory authority over financial
institutions have adopted risk-based capital guidelines which define the
adequacy of the capital levels of regulated institutions. These risk-based
capital guidelines require minimum levels of capital based upon the risk
rating of assets and certain off-balance-sheet items. Assets and
off-balance-sheet items are assigned regulatory risk-weights ranging from 0%
to 100% depending on their level of credit risk. The guidelines classify
capital in two tiers, Tier I and Tier II, the sum of which is total capital.
Tier I capital is essentially common equity, less intangible assets. Tier II
capital is essentially qualifying long-term debt and a portion of the
allowance for loan losses.
Company Regulatory
Ratio Minimum
Tier I risk based capital ratio 9.47% 4%
Total risk based capital ratio 10.72% 8%
Tier I leverage ratio 6.92% 4%
F-21
<PAGE>
PREMIER FINANCIAL BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
(CONTINUED)
NOTE 13 - REGULATORY MATTERS (CONTINUED)
Citizens Bank of Sharpsburg, Kentucky, is currently operating under a
"Memorandum of Understanding" between the Board of Directors (the Board) of
Citizens Bank and the Kentucky Department of Financial Institutions and the
Federal Deposit Insurance Corporation in which the Board has agreed to adopt
a plan to lessen the risk of certain loans, provide periodic progress reports
and maintain a Tier I leverage ratio equal to or greater than 7%. At
December 31, 1995, Citizens Bank's Tier I leverage ratio was 7.92%.
The Company's principal source of funds for dividend payments is
dividends received from the subsidiary Banks. Banking regulations limit the
amount of dividends that may be paid without prior approval of regulatory
agencies. Under these regulations, the amount of dividends that may be paid
in any calendar year is limited to the current year's net profits, as
defined, combined with the retained net profits of the preceding two years,
subject to the capital requirements as defined above. During 1996, the Banks
could, without prior approval, declare dividends of approximately $1,111,000
plus any 1996 net profits retained to the date of the dividend declaration.
NOTE 14 - COMMON STOCK SPLIT
On September 12, 1995, the Board of Directors approved a 5-for-4 stock
split effective September 30, 1995, in the form of a dividend of the Company's
common stock to shareholders of record on September 15, 1995. All references in
the accompanying financial statements to the number of average shares and per
share data have been restated to reflect the stock split except for the number
of shares issued and outstanding at December 31, 1994, as reflected on the
consolidated balance sheets.
NOTE 15 - SUBSEQUENT EVENTS
On March 15, 1996, the shareholders approved a 2-for-1 stock split
effective March 29, 1996, in the form of a dividend of the Company's common
stock to shareholders of record on February 22, 1996. Additionally, the
shareholders approved an increase in the number of common stock shares
authorized from 1,800,000 to 10,000,000, approved a change in the par value
of the common shares from $1 to no par value and approved the authorization
of 1,000,000 preferred shares, without par value. All references in the
accompanying financial statements to the number of average shares and per
share data have been restated to reflect the stock split except for the
number of shares issued and outstanding as reflected on the consolidated
balance sheets.
F-22
<PAGE>
PREMIER FINANCIAL BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
(CONTINUED)
NOTE 15 - SUBSEQUENT EVENTS (CONTINUED)
On March 15, 1996, the shareholders approved adoption of the Premier
Financial Bancorp, Inc. 1996 Employee Stock Ownership Incentive Plan, whereby
certain employees of the Company are eligible to receive incentive stock
options under the Plan. A maximum of 100,000 shares, as adjusted for the
2-for-1 stock split effective March 29, 1996, of the Company's common stock
may be issued through the exercise of these incentive stock options. The
option price is the fair market value of the Company's shares at the date of
the grant. The options are exercisable 10 years from the date of vesting.
NOTE 16 - DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair
value of each class of financial instruments for which it is practicable to
estimate that value:
CASH AND CASH EQUIVALENTS - For these short-term instruments, the
carrying amount is a reasonable estimate of fair value.
FEDERAL FUNDS SOLD - For these short-term instruments, the carrying
amount is a reasonable estimate of fair value.
INVESTMENT SECURITIES - For investment securities, fair values
are based on quoted market prices or dealer quotes.
LOANS - Fair value is estimated by discounting the future cash
flows using the current rates at which similar loans would be made
to borrowers with similar credit ratings and for the same remaining
maturities.
DEPOSIT LIABILITIES - The fair value of demand deposits, savings
accounts, and certain money market deposits is the amount payable
on demand at the reporting date. The fair value of fixed-maturity
certificates of deposit is estimated by discounting future cash flows
using the rates currently offered for deposits of similar remaining
maturities.
SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE - For these short-term
instruments, the carrying amount is a reasonable estimate of fair value.
F-23
<PAGE>
PREMIER FINANCIAL BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
(CONTINUED)
NOTE 16 - DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
(CONTINUED)
Federal Home Loan Bank Advances - Rates currently available to the
Company for advances with similar terms and remaining maturities
are used to estimate fair value of existing debt.
Debt - The carrying value of variable rate borrowed funds is a
reasonable estimate of fair value.
Commitments to Extend Credit and Standby Letters of Credit -
Commitments to extend credit and standby letters of credit
represent agreements to lend to a customer at the market rate
when the loan is extended, thus the commitments and letters of credit
are not considered to have a fair value.
The fair values of the Company's financial instruments at December
31, 1995 are as follows:
Carrying Fair
Amount Value
Financial assets:
Cash and cash equivalents $ 6,339,777 $ 6,339,777
Federal funds sold 6,340,000 6,340,000
Investment securities 24,928,535 24,928,898
Loans 113,064,706 114,631,209
Less: allowance for loan losses (1,735,482) (1,735,482)
------------ -----------
$148,937,536 $150,504,402
Financial liabilities:
Deposits $136,246,437 $137,728,752
Securities sold under
agreements to repurchase 747,118 747,118
Federal Home Loan Bank advances 755,000 755,000
Debt 5,000,000 5,000,000
------------ -----------
$142,748,555 $144,230,870
NOTE 17 - FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
The Banks are parties to financial instruments with off-balance sheet
risk in the normal course of business to meet the financing needs of their
customers. These financial instruments include standby letters of credit and
commitments to extend credit in the form of unused lines of credit. The
Banks use the same credit policies in making commitments and conditional
obligations as they do for on-balance sheet instruments.
F-24
<PAGE>
PREMIER FINANCIAL BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
(CONTINUED)
NOTE 17 - FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
(CONTINUED)
At December 31, 1995 and 1994, the Banks had the following financial
instruments whose approximate contract amounts represent credit risk:
1995 1994
Standby letters of credit $ 953,900 $ 368,000
Commitments to extend credit $4,571,904 $5,187,000
Standby letters of credit represent conditional commitments issued by
the Banks to guarantee the performance of a third party. The credit risk
involved in issuing these letters of credit is essentially the same as the
risk involved in extending loans to customers.
Commitments to extend credit are agreements to lend to a customer
as long as there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination clauses
and may require payment of a fee. The Banks evaluate each customer's
creditworthiness on a case-by-case basis. Since some of the commitments are
expected to expire without being drawn upon, the total commitment amounts do not
necessarily represent future cash requirements. Collateral held varies but may
include accounts receivable, inventory, property and equipment, and income
producing properties.
NOTE 18 - CONCENTRATION OF CREDIT RISK
The Banks grant residential, commercial and consumer related loans to
customers primarily located in Lewis, Bracken, Scott, Bath and adjoining
counties in Kentucky. Although they have diverse loan portfolios, a
substantial portion of their debtors' ability to perform is somewhat
dependent on the economic conditions of the counties in which they operate.
NOTE 19 - LEGAL PROCEEDINGS
Legal proceedings involving the Company and its subsidiaries periodically
arise in the ordinary course of business, including claims by debtors and
their related interests against the Company's subsidiaries following initial
collection proceedings. These legal proceedings sometimes can involve claims
for substantial damages. At December 31, 1995, management is unaware of any
legal proceedings, the ultimate result of which, would have a material
adverse effect upon the consolidated financial statements of the Company.
F-25
<PAGE>
PREMIER FINANCIAL BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
(CONTINUED)
NOTE 20 - PARENT COMPANY FINANCIAL STATEMENTS
Condensed Balance Sheets
December 31
1995 1994
ASSETS
Cash $ 361,651 $ 299,557
Investment in subsidiaries 12,952,170 9,018,180
Other investments 2,000,000 1,500,000
Premises and equipment 596,639 0
Other assets 400,133 141,500
------------ -----------
TOTAL ASSETS $ 16,310,593 $10,959,237
LIABILITIES AND STOCKHOLDERS' EQUITY
Debt $5,000,000 $1,500,000
Other liabilities 95,281 6,600
------------ -----------
Total liabilities $5,095,281 $1,506,600
Stockholders' equity:
Preferred stock, no par value;
1,000,000 shares authorized; none
issued or outstanding $ 0 $ 0
Common stock, no par value;
10,000,000 shares authorized;
954,545 shares in 1995 (753,364
shares in 1994) issued and
outstanding 954,545 753,364
Surplus 5,897,585 5,973,766
Retained earnings 4,493,184 3,195,793
Net unrealized losses on securities
available for sale (130,002) (470,286)
------------ -----------
Total stockholders' equity $11,215,312 $ 9,452,637
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $16,310,593 $10,959,237
F-26
<PAGE>
PREMIER FINANCIAL BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
(CONTINUED)
NOTE 20 - PARENT COMPANY FINANCIAL STATEMENTS (CONTINUED)
Condensed Statements of Income
Year Ended December 31
1995 1994 1993
Income:
Dividends from subsidiary banks $1,825,000 $ 553,002 $ 420,000
Other income 176,794 28,671 0
---------- ---------- ----------
Total income $2,001,794 $ 581,673 $ 420,000
Expenses:
Interest expense $ 252,999 $ 28,006 $ 0
Other expenses 341,627 127,315 47,717
---------- ---------- ----------
Total expenses $ 594,626 $ 155,321 $ 47,717
Income before income taxes and
equity in undistributed
income of subsidiaries $1,407,168 $ 426,352 $ 372,283
Applicable income tax benefits 178,065 30,157 0
---------- ---------- ----------
Income before equity in
undistributed income of
subsidiaries $1,585,233 $ 456,509 $ 372,283
Equity in undistributed income
of subsidiaries 571,249 1,056,938 978,932
---------- ---------- ----------
NET INCOME $2,156,482 $1,513,447 $1,351,215
F-27
<PAGE>
PREMIER FINANCIAL BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
(CONTINUED)
NOTE 20 - PARENT COMPANY FINANCIAL STATEMENTS (CONTINUED)
Condensed Statements of Cash Flows
Year Ended December 31
1995 1994 1993
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $2,156,482 $1,513,447 $1,351,215
Adjustments to reconcile net
income to net cash provided by
operating activities:
Depreciation 10,632 0 0
Equity in undistributed
income of subsidiaries (571,249) $(1,056,938) (978,932)
Change in other assets (258,633) (16,866) 4,029
Change in other liabilities 88,681 6,600 0
Net cash provided by operating
activities $ 1,425,913 $ 446,243 $ 376,312
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of subsidiary bank $(1,496,387) $ 0 $ 0
Capital contributed to subsidiary (1,401,000) 0 0
Purchase of other investments (500,000) (1,500,000) 0
Purchase of premises and equipment (607,341) 0 0
Net cash used in investing
activities $(4,004,728) $(1,500,000) $ 0
CASH FLOWS FROM FINANCING ACTIVITIES:
Dividends paid $ (859,091) $ (540,000) $ (420,000)
Proceeds from issuance of common
stock 0 0 330,000
Proceeds from debt 3,500,000 1,500,000 0
Repayment of note payable 0 0 (217,625)
Net cash provided by (used in)
financing activities $ 2,640,909 $ 960,000 $ (307,625)
Net increase (decrease) in cash
and cash equivalents $ 62,094 $ (93,757) $ 68,687
Cash and cash equivalents at
beginning of year 299,557 393,314 324,627
CASH AND CASH EQUIVALENTS AT END
OF YEAR $ 361,651 $ 299,557 $ 393,314
F-28
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Premier Financial Bancorp, Inc. and Subsidiaries:
We have audited the accompanying consolidated balance sheet of Premier
Financial Bancorp, Inc. and Subsidiaries as of December 31, 1994, and 1993
and the related consolidated statements of income, changes in stockholders'
equity, and cash flows for the two years in the period ended December 31,
1994. These financial statements are the responsibility of the company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinions.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Premier
Financial Bancorp, Inc. and Subsidiaries as of December 31, 1994, and 1993
and the consolidated results of their operations and their cash flows for the
two years in the period ended December 31, 1994 in conformity with generally
accepted accounting principles.
As discussed in Note 1 to the consolidated financial statements, the Company
changed its method of accounting for investment securities in 1994 and for
income taxes in 1993.
McNeal, Williamson & Co.
Logan, West Virginia
February 10, 1995
F-29
<PAGE>
PREMIER FINANCIAL BANCORP, INC. AND SUBSIDIARIES
Consolidated Balance Sheet
ASSETS
<TABLE>
<CAPTION>
1994 1993
---- ----
<S> <C> <C>
CASH AND DUE FROM BANKS . . . . . . $ 3,588,830 $4,343,958
INTEREST BEARING DEPOSITS IN
OTHER BANKS . . . . . . . . . . . . 523,609 0
SECURITIES:
Available for Sale . . . . . . . . 9,249,972 0
Held to Maturity . . . . . . . . . 8,786,221 20,364,356
---------- -----------
Total Investment Securities . . . 18,036,193 20,364,356
FEDERAL FUNDS SOLD . . . . . . . . . 3,220,000 4,377,000
LOANS:
Commercial and Financial Loans . 46,762,305 42,572,190
Real Estate Loans . . . . . . . 13,706,512 12,650,055
Installment Loans . . . . . . . 7,851,479 7,641,970
---------- -----------
Total Loans . . . . . . . . . 68,320,296 62,864,215
Less: Unearned Interest . . . . (198,303) (380,231)
Reserve for Loan Losses . . . (706,213) (650,652)
---------- -----------
Net Loans . . . . . . . . . . 67,415,780 61,833,332
BANK PREMISES AND EQUIPMENT . . . 1,257,769 1,133,670
ACCRUED INTEREST RECEIVABLE AND
OTHER ASSETS . . . . . . . . . . 2,364,755 1,388,625
---------- -----------
TOTAL ASSETS . . . . . . . . . . . $96,406,936 $93,440,941
----------- -----------
----------- -----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-30
<PAGE>
PREMIER FINANCIAL BANCORP, INC. AND SUBSIDIARIES
Consolidated Balance Sheet (Cont.)
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
December 31,
1994 1993
---- ----
<S> <C> <C>
DEPOSITS:
Non-Interest Bearing Demand
Deposits . . . . . . . . . . . $ 9,931,593 $ 10,345,970
Interest Bearing Demand
Deposits . . . . . . . . . . 11,638,191 12,093,034
Savings Deposits . . . . . . . . 14,655,275 16,064,688
Time Deposits, $100,000 and Over. 8,775,932 7,069,422
Other Time Deposits . . . . . . . 41,048,913 39,437,826
----------- -----------
Total Deposits . . . . . . . . 86,049,904 85,010,940
BORROWED FUNDS:
Kentucky Housing Corporation . . 0 118,571
Line of Credit . . . . . . . . . 1,500,000 0
ACCRUED AND OTHER LIABILITIES:
Accrued Interest . . . . . . . . 490,513 463,006
Other . . . . . . . . . . . . . . 23,601 21,071
----------- -----------
Total Accrued and Other
Liabilities . . . . . . . . . . 514,114 484,077
FEDERAL INCOME TAXES:
Current . . . . . . . . . . . . . 103,299 232,790
----------- -----------
TOTAL LIABILITIES . . . . . . . . . 88,167,317 85,846,378
----------- -----------
CAPITAL FUNDS:
Common Stock - Par Value $1.00
per share; 1,800,000 shares
authorized, 600,000 in 1994 and
578,000 in 1993 issued and
outstanding . . . . . . . . . . . 600,000 600,000
Surplus . . . . . . . . . . . . . . 3,353,000 3,353,000
Retained Earnings . . . . . . . . . 4,701,398 3,706,951
Net unrealized loss on investment
securities available for sale . . (414,779) (65, 388)
----------- -----------
TOTAL STOCKHOLDERS' EQUITY . . . . . 8,239,619 7,594,563
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY . . . . . . . . . . . . . $96,406,936 $93,440,941
----------- -----------
----------- -----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-31
<PAGE>
PREMIER FINANCIAL BANCORP, INC. AND SUBSIDIARIES
Consolidated Statement of Income
For The Years Ended December 31, 1994, and 1993
<TABLE>
<CAPTION>
1994 1993
---- ----
<S> <C> <C>
INTEREST INCOME:
Interest and Fees on Loans . . . . . $6,494,253 $5,652,801
Interest on Securities:
Securities Available for Sale . . 547,690 0
Obligations of U.S. Government and
Government Agencies . . . . . . . 187,565 956,441
Obligations of State and
Political Subdivisions . . . . . 258,456 221,056
Other Security Income . . . . . . . 23,079 61,892
Interest on Federal Funds Sold . . . 89,400 177,897
Interest on Deposits in Other Banks . 15,486 0
--------- ----------
7,615,929 7,070,087
--------- ----------
INTEREST EXPENSE:
Interest on Deposits . . . . . . . . . 2,932,143 2,934,046
Interest on Borrowings . . . . . . . . 31,803 11,416
--------- ---------
2,963,946 2,945,462
--------- ---------
Net Interest Income . . . . . . . . . 4,651,983 4,124,625
--------- ---------
PROVISION FOR LOAN LOSSES . . . . . . . 141,000 151,335
--------- ---------
Net Interest Income After
Provision For Loan Losses . . . . 4,510,983 3,973,290
--------- ---------
OTHER INCOME:
Service Fees . . . . . . . . . . . . . 218,588 172,677
Other . . . . . . . . . . . . . . . . 93,539 155,254
Security Gains (Losses) . . . . . . . 71,216 120,105
Trust Department Fees . . . . . . . . 1,056 999
Insurance Commissions . . . . . . . . 85,380 61,637
--------- ---------
Total Other Income . . . . . . . . $ 469,779 $ 510,672
--------- ---------
--------- ---------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-32
<PAGE>
PREMIER FINANCIAL BANCORP, INC. AND SUBSIDIARIES
Consolidated Statement of Income
For the Years Ended December 31, 1994, and 1993
1994 1993
---- ----
OTHER EXPENSES:
Salaries and Employee Benefits $1,458,349 $1,346,361
Taxes 192,912 173,836
Depreciation 149,102 90,438
Repairs and Maintenance 96,928 84,301
Computer Services 113,247 110,496
Advertising 59,943 69,753
Insurance 222,618 222,783
Legal and Auditing 127,012 144,217
Occupancy 152,708 142,197
Other Operating Expenses 390,283 377,759
---------- ----------
2,963,102 2,762,141
---------- ----------
INCOME BEFORE INCOME TAXES 2,017,660 1,721,821
---------- ----------
FEDERAL INCOME TAXES:
Current 568,536 508,698
Deferred (85,323) 1,512
---------- ----------
Total Federal Income Taxes 483,213 510,210
---------- ----------
NET INCOME $1,534,447 $1,211,611
---------- ----------
---------- ----------
EARNINGS PER SHARE OF COMMON STOCK:
NET INCOME $2.56 $2.02
---------- ----------
---------- ----------
The accompanying notes are an integral part of these financial statements.
F-33
<PAGE>
PREMIER FINANCIAL BANCORP, INC. AND SUBSIDIARIES
Consolidated Statement of Changes in Stockholders' Equity
For the Years Ended December 31, 1994, and 1993
<TABLE>
<CAPTION>
Net Unrealized
Appreciation
on Available
Common Retained For Sale
Stock Surplus Earnings Securities Total
------ ---------- ---------- --------------- ---------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1992 578,000 3,045,000 2,915,340 (55,398) 6,482,942
Sale of 22,000 Shares of Stock
in January 1993 22,000 308,000 0 0 330,000
Appropriation for Market Value
Change on Equity Securities 0 0 0 (9,990) (9,990)
Dividends ($.70 per share) 0 0 (420,000) 0 (420,000)
Net Income 0 0 1,211,611 0 1,211,611
-------- ---------- ---------- --------- ----------
Balance at December 31, 1993 $600,000 $3,353,000 $3,706,951 $ (65,388) $7,594,563
Cumulative effect of change in
method of accounting for
investment securities 170,891 170,891
Net change in unrealized Losses on
Securities 0 0 0 (520,282) (520,282)
Dividends (.90) 0 0 (540,000) 0 (540,000)
Net Income 0 0 1,534,447 0 1,534,447
-------- ---------- ---------- --------- ----------
Balance at December 31, 1994 $600,000 $3,353,000 $4,701,398 $(414,779) $8,239,619
-------- ---------- ---------- --------- ----------
-------- ---------- ---------- --------- ----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-34
<PAGE>
PREMIER FINANCIAL BANCORP, INC. AND SUBSIDIARIES
Consolidated Statement of Changes in Cash Flow
For the Years Ended December 31, 1994, and 1993
Increases (Decreases) In Cash and Cash Equivalents
<TABLE>
<CAPTION>
1994 1993
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $1,534,447 $1,211,611
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 149,102 90,438
Provision for Loan Losses 141,000 151,335
Deferred tax (85,323)
Transfer to Securities Available for Sale from Held to Maturity (8,535,726)
(Gain) Loss on Sale of Securities (71,216) (120,105)
Premium Amortization and Accretion on Securities 6,681 (2,119)
Increases (Decreases) in Income Taxes Payable (129,491) 106,525
(Increases) Decreases in Interest Receivable and Other Assets (976,129) 166,056
Increases (Decreases) in Interest Payable 27,507 (6,477)
Increases (Decreases) in Accrued Liabilities 2,530 (32,907)
(Gain) Loss on Sale of Premises and Equipment (11,785) 5,156
----------- -----------
Net Cash Provided by Operating Activities $ 587,323 $1,569,513
----------- -----------
----------- -----------
CASH FLOW FROM INVESTING ACTIVITIES:
Net (increase) decrease in Interest Bearing Deposits with Banks $ (523,609) $ 0
Purchase of Securities Available for Sale (4,906,250) 0
Proceeds from Maturities of Securities 2,535,000 2,695,000
Proceeds from Sales of Securities Available for Sale 5,192,004 0
Proceeds from Sale of Securities Held to Maturity 0 11,662,674
Purchase of Securities Held to Maturity (681,135) (17,271,475)
Net (Increases) Decreases in Federal Funds Sold 1,157,000 3,798,000
Net (Increases) Decreases in Commercial Loans (4,275,554) (5,803,124)
Net (Increases) Decreases in Real Estate Loans (1,056,457) (3,499,204)
Net (Increases) Decreases in Installment Loans (391,437) (287,774)
Proceeds from Sale of Premises and Equipment 73,685 51,394
Purchase of Bank Premises and Equipment (346,091) (356,331)
----------- -----------
Net Cash Provided by Investing Activities $(3,222,844) $(9,010,840)
----------- -----------
----------- -----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-35
<PAGE>
PREMIER FINANCIAL BANCORP, INC. AND SUBSIDIARIES
Consolidated Statement of Changes in Cash Flow
For the Years Ended December 31, 1994, and 1993
Increases (Decreases) in Cash and Cash Equivalents
<TABLE>
<CAPTION>
1994 1993
---- ----
<S> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Net Increases (Decreases) in Demand Deposits $ (414,377) $1,315,399
Net Increases (Decreases) in Interest Bearing Demand Deposits (454,843) 2,539,353
Net Increases (Decreases) in Savings Deposits (1,409,413) 1,306,241
Net Increases (Decreases) in Time Deposits, 100,000 and Over 1,706,510 2,693,389
Net Increases (Decreases) in Other Time Deposits 1,611,087 (157,889)
Repayment of Kentucky Housing Corporation (118,571) (111,202)
Dividends Paid (540,000) (420,000)
Proceeds from the Sale of Common Stock 0 330,000
Proceeds from Line of Credit 1,500,000 0
---------- ----------
Net Cash Provided by Financing Activities $1,880,393 $7,495,291
---------- ----------
---------- ----------
Net Increase (Decrease) in Cash and Cash Equivalents $ (755,128) $ 53,964
---------- ----------
Cash and Cash Equivalents at Beginning of Year 4,343,958 4,289,994
---------- ----------
Cash and Cash Equivalents at End of Year $3,588,830 $4,343,958
---------- ----------
---------- ----------
Supplemental Disclosures of Cash Flow Information 1994 1993
---- ----
Cash Paid for:
Interest $2,936,439 $2,951,939
Income Taxes $ 698,027 $ 402,970
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-36
<PAGE>
PREMIER FINANCIAL BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
For the Years Ended December 31, 1994, and 1993
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
A. Reorganization and Consolidation:
On July 12, 1991, Premier Financial Bancorp, Inc., ("Premier") a bank holding
company, was incorporated under the laws of the Commonwealth of Kentucky for
the purpose of becoming the bank holding company for Citizens Deposit Bank &
Trust, ("Citizens"). Under the terms of the agreement and plan of
reorganization, effective October 29, 1992, the shareholders of Citizens
exchanged all their shares of common stock for shares of common stock in
Premier, at a ratio of one share of Citizens for one share of Premier. This
reorganization was accounted for as a pooling of interests, and resulted in
Citizens becoming a wholly-owned subsidiary of Premier.
On October 30, 1992, Premier acquired Bank of Germantown, ("Germantown") in a
business combination accounted for under the purchase method. In accordance
with the agreement and plan of merger the shareholders of Germantown
exchanged all the outstanding common stock (3,500 shares) for cash
consideration of $1,925,000.
At the effective date of this exchange, Germantown became a wholly-owned
subsidiary of Premier.
Citizens and Germantown are collectively referred to herein as the "Banks."
Significant intercompany transactions and amounts have been eliminated.
B. Investments in Securities:
Effective with the issuance of SFAS 115, (Accounting For Certain Investments
in Debt and Equity Securities), the Banks' investment insecurities are
classified in two categories and accounted for as follows:
Securities to be Held to Maturity; Bonds, notes and debentures for which the
banks have the positive intent and ability to hold to maturity are reported
at cost, adjusted for amortization of premiums and accretion of discounts
which are recognized in interest income using the Interest Method over the
period to maturity.
Securities Available for Sale; Securities available for sale consist of
bonds, notes, debentures, and certain equity securities not classified as
securities held to maturity. These securities are carried at their fair
value, unrealized gains and losses, net of tax, are reported as a net amount
in a separate component of shareholders' equity until realized. Gains and
losses on sale of securities available for sale are determined using the
Specific-Identification Method.
C. Loans and Reserve for Loan Losses:
Loans are stated at face value, reduced by unearned discounts and reserve for
loan losses. Unearned discounts on a portion of installment loans are
recognized as income over the terms of the loans by the sum-of-the-months
digits method (Rule of 78's). Because of the terms of these loans, interest
incme is not materially different than it would be under other methods.
Interest on other loans is calculated by using the simple interest method on
daily balances of the principal amount outstanding. Accrual of interest is
discontinued on a loan when management believes, after considering economic
and business conditions and collection efforts, that the borrowers' financial
condition is such that collection of interest is doubtful. Upon such
discontinuance, all accrued interest is reversed.
The reserve for loan losses is established through a provision for loan
losses charged to expense. Loans are charged against the reserve for loan
losses when management believes that the collectibility of
F-37
<PAGE>
PREMIER FINANCIAL BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
For the Years Ended December 31, 1994, and 1993
(Continued)
C. Loans and Reserve for Loan Losses: (Continued)
the principal is unlikely. The reserve is an amount that management believes
will be adequate to absorb possible losses on existing loans that may become
uncollectible, based on evaluations of the collectibility of loans and prior
loan loss experience. The evaluations take into consideration such factors as
changes in the nature and volume of the loan portfolio, overall portfolio
quality, review of specific problem loans, and current economic conditions
that may affect the borrowers' ability to pay.
Statement of Financial Accounting Standards No. 114, "Accounting By Creditors
For Impairment of a Loan," requires creditors to measure impairment of a loan
based on the present value of expected future cash flows related to the loan.
The Statement is effective for years beginning after December 15, 1994, with
earlier adoption encouraged. The Bank has elected to adopt the Statement
effective January 1, 1995. Adoption of the Statement is not expected to have
a significant effect on the Company's consolidated financial condition or
results of operations.
D. Depreciation:
Banks' premises and equipment are stated at cost less accumulate
depreciation. Depreciation has been provided over the estimated useful lives
of the assets as follows:
Assets Method
Buildings & Improvements Straight Line/
Declining Balance
Furniture & Fixtures Straight Line/
Declining Balance
Vehicles Straight Line
E. Other Real Estate:
Other real estate, acquired through partial or total satisfaction of loans,
is carried at the lower of cost or fair market value. At the date of
acquisition, losses are charged to the reserve for loan losses. Any
subsequent loss incurred on these assets is recognized in the statement of
income.
F. Income Taxes:
Provisions for income taxes are based on Premier's income after exclusion of
nontaxable income such as interest on state and municipal securities. These
current payables are charged to operations as they are incurred.
Deferred tax provisions/benefits are calculated for certain transactions and
events because of differing treatments under generally accepted accounting
principles and the currently enacted tax laws of the Federal government. The
results of these differences on a cumulative basis, known as temporary
differences, result in the recognition and measurement of deferred tax assets
and liabilities in the accompanying balance sheet. Deferred tax assets and
liabilities are at currently enacted income tax rates applicable to the
period in which the deferred tax assets and liabilities are expected to be
realized or settled as prescribed in SFAS 109 (Accounting For Income Taxes).
F-38
<PAGE>
PREMIER FINANCIAL BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
For the Years Ended December 31, 1994, and 1993
(Continued)
G. Net Income Per Share of Common Stock:
Net income per share of common stock is computed by dividing net income by
the weighted average number of shares of common stock outstanding during the
period, after giving retroactive effect for pooling of interest
reorganizations.
H. Statement of Cash Flows:
Cash and cash equivalents are defined as those amounts included in the
balance sheet caption, "Cash and Due From Banks."
2. SECURITIES:
The amortized cost and fair value of investment securities, by category, at
December 31, 1994 are as follows:
<TABLE>
<CAPTION>
Amortized Unrealized Unrealized Fair
Cost Gain Loss Value
----------- ------------ ----------- ----------
<S> <C> <C> <C> <C>
Securities Available For Sale:
Equity Securities................ $1,900,007 $ 0 $153,482 $1,746,525
U.S Treasury Securities.......... 3,001,701 0 55,241 2,946,460
U.S Agency Securities............ 4,897,650 0 340,663 4,556,987
----------- ------------ ----------- ----------
Total Available For Sale......... $9,799,358 $ 0 $549,386 $9,249,972
----------- ------------ ----------- ----------
----------- ------------ ----------- ----------
Securities Held to Maturity:
U.S Agency Securities............ $3,821,403 $ 0 $350,488 $3,470,915
Obligations of States and
Political Subdivisions.......... 4,964,818 18,386 279,237 4,703,967
----------- ------------ ----------- ----------
Total Held to Maturity............. $8,786,221 $ 18,386 $629,725 $8,174,882
----------- ------------ ----------- ----------
----------- ------------ ----------- ----------
</TABLE>
The amortized cost and fair value of investment securities, by category, at
December 31, 1993 are as follows:
<TABLE>
<CAPTION>
Amortized Unrealized Unrealized Fair
Cost Gain Loss Value
------------ ------------ ----------- ----------
<S> <C> <C> <C> <C>
U.S. Treasury Securities.......... $ 5,799,321 $196,641 $ 0 $ 5,995,962
U.S. Agency Securities............ 9,128,691 8,871 26,686 9,108,876
Obligations of States and
Political Subdivisions........... 4,601,726 141,711 15,966 4,727,471
Equity Securities................. 900,007 0 65,389 834,618
------------ ------------ ----------- -----------
Total Investment Securities....... $20,429,745 $347,223 $110,041 $20,666,927
------------ ------------ ----------- -----------
------------ ------------ ----------- -----------
</TABLE>
F-39
<PAGE>
PREMIER FINANCIAL BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
For the Years Ended December 31, 1994, and 1993
(Continued)
2. SECURITIES: (Continued)
The par value of securities pledged to secure public deposits and for other
purposes amounted to $4,495,000 and $4,564,293 in 1994 and 1993, respectively.
The amortized cost and estimated market value of investment in debt
securities at December 31, 1994, by contractual maturity, are shown below.
Expected maturities will differ from contractual maturities because borrowers
may have the right to call or prepay obligations with or without call as
prepayment penalties.
<TABLE>
<CAPTION>
AVAILABLE FOR SALE
------------------------
AMORTIZED MARKET
COST VALUE
---------- ----------
<S> <C> <C>
Due in one year.................................. $3,501,701 $3,394,585
Due after one year through five years............ 3,747,650 3,513,137
Due after five years through ten years........... 650,000 595,725
Due after ten years.............................. 0 0
---------- ----------
Total Debt Securities............................ $7,899,351 $7,503,447
---------- ----------
---------- ----------
HELD TO MATURITY
------------------------
AMORTIZED MARKET
COST VALUE
---------- ----------
<S> <C> <C>
Due in one year.................................. $ 550,991 $ 551,681
Due after one year through five years............ 4,797,648 4,488,068
Due after five years through ten years........... 2,225,385 2,076,777
Due after ten years.............................. 1,212,197 1,058,356
---------- ----------
Total Debt Securities............................ $8,786,221 $8,174,882
---------- ----------
---------- ----------
</TABLE>
Proceeds from sales of all types of Securities during 1994 and 1993 were
approximately $5,192,004 and $11,662,674, respectively. Gross gains of
$71,216 and $120,105 were realized on those sales during 1994 and 1993,
respectively.
During 1987, Citizens invested in a mutual fund which has been classified as
other bonds, notes and debentures. This type of investment has been accounted
for as an "equity security" pursuant to FASB Number 12. At December 31, 1994,
and 1993, the reserve (the aggregate cost of the mutual fund exceeded market
value) amounted to $153,482 and $65,388, respectively. Accordingly, the net
change in the reserve was made as an appropriation of retained earnings in
the amount of ($88,094), $9,990, and ($28,153) for the years 1994 and 1993 in
the statement of changes in stockholders' equity.
F-40
<PAGE>
PREMIER FINANCIAL BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
For the Years Ended December 31, 1994, and 1993
(Continued)
3. LOANS:
Major classifications of loans at December 31, 1994 and 1993 are as
follows:
<TABLE>
<CAPTION>
1994 1993
----------- -----------
<S> <C> <C>
Commercial $46,762,305 $42,572,190
Mortgage......................................... 13,706,512 12,650,055
Installment...................................... 7,851,479 7,641,970
----------- -----------
68,320,296 62,864,215
Unearned Discount................................ 198,303 380,231
----------- -----------
68,121,993 62,483,984
Reserve for Loan Losses.......................... 706,213 650,652
----------- -----------
$67,415,780 $61,833,332
----------- -----------
----------- -----------
</TABLE>
Loans on which the accrual of interest has been suspended were as follows:
<TABLE>
<CAPTION>
1994 1993
----------- -----------
<S> <C> <C>
Principal amount of Loans........................ $ 0 $724,583
Interest recorded as income when received........ $ 0 $ 5,619
Estimated interest that would have been recorded
had accrual not been suspended.................. $ 0 $ 20,206
</TABLE>
Changes in the reserve for loan losses were as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1994 1993
----------- -----------
<S> <C> <C>
Balance, beginning of year $ 650,652 $ 625,816
Provision for loan losses....................... 141,000 151,335
Loans charged off............................... (182,512) (175,876)
Recoveries...................................... 97,073 49,377
----------- -----------
Balance, end of year $ 706,213 $ 650,652
----------- -----------
----------- -----------
</TABLE>
F-41
<PAGE>
PREMIER FINANCIAL BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
For the Years Ended December 31, 1994, and 1993
(Continued)
4. BANK PREMISES AND EQUIPMENT:
Major classifications of bank premises and equipment were as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------
1994 1993
---------- ----------
<S> <C> <C>
Land $ 108,015 $ 166,282
Buildings......................................... 1,251,482 1,213,567
Furniture, fixtures and equipment................. 2,165,975 1,882,124
---------- ----------
3,525,472 3,261,973
Accumulated depreciation.......................... 2,267,703 2,128,303
---------- ----------
$1,257,769 $1,133,670
---------- ----------
---------- ----------
</TABLE>
Depreciation expense amounted to $149,102 and $90,438 in 1994 and 1993,
respectively.
5. BORROWED FUNDS:
In 1994, Premier obtained a line of credit from a non-affiliated bank for
$5,000,000. The line of credit is secured by all the stock of the subsidiary
banks. The line of credit carries a prime rate of interest with monthly
interest payments on a one-year term until July 1, 1995. Any draw on the line
can be termed out to 36 months.
Borrowed funds for 1993 consisted of a 6.625% note payable to Kentucky
Housing Corporation under the Loans to Lenders Program 1979 Series A.
Principal and interest repayment requirements at December 31, 1993 were
$118,571, in principal and $3,928, in interest.
Line of Credit $1,500,000
----------
----------
6. FEDERAL INCOME TAXES:
The provisions for Federal income taxes for the years ended December 31, 1994
and 1993 were less than the respective amounts that would result from
applying the statutory Federal income tax rate of 34% due primarily to the
Banks' tax exempt interest income, and utilization of tax credit carryforward
in 1993.
A reconciliation of the differences between the US statutory income tax rate
and the effective tax rates with resulting dollar amounts are shown in the
following table:
<TABLE>
<CAPTION>
1 9 9 4 1 9 9 3
----------------- ------------------
AMOUNT PERCENT AMOUNT PERCENT
--------- ------- -------- -------
<S> <C> <C> <C> <C>
Tax Expense at Statutory Rate........ $686,004 34.00% $585,419 34.00%
Increase (decrease) resulting from
tax exempt interest................. (94,555) - 4.69% (83,562) - 4.85%
Tax Credit........................... (17,572) - 0.87% 0.00%
Other................................ (90,664) 4.49% 8,353 0.49%
--------- ------- -------- -------
Total................................ $483,213 24.90% $510,210 29.64%
--------- ------- -------- -------
--------- ------- -------- -------
</TABLE>
F-42
<PAGE>
PREMIER FINANCIAL BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
For the Years Ended December 31, 1994, and 1993
(Continued)
6. FEDERAL INCOME TAXES: (Continued)
Premier adopted SFAS No. 109, "Accounting for Income Taxes," which requires
a liability approach to financial accounting and reporting for income taxes.
The differences between the financial statement and tax bases of assets and
liabilities are determined annually and deferred income tax assets and
liabilities are computed for those differences that have future tax
consequences.
The effect of adopting SFAS No. 109 on 1993 income from continuing operations
and net income was immaterial. The tax effect of significant temporary
differences which comprise noncurrent taxes and noncurrent deferred tax
assets and liabilities as of December 31, 1994 are as follows:
ASSETS:
Allowances for Investments $135,912
Reserve for Loan Losses 85,323
Accrual to Cash Conversion 23,442
________
Gross Deferred Tax Asset 244,677
LIABILITIES: 0
________
Net Deferred Tax Asset $244,677
________
________
7. RELATED PARTY TRANSACTIONS:
At December 31, 1994 and 1993, certain officers and directors, and companies
in which they have 10% or more beneficial ownership, were indebted to the
Banks in the aggregate amount of $2,157,363 and $1,934,415, respectively.
The following is a summary of activity for the aggregate of those loans
for the year 1994.
BALANCE LOAN BALANCE
DECEMBER 31, NEW LOANS PAYMENTS DECEMBER 31,
1993 1994 1994 1994
$2,934,415 $326,309 $103,361 $2,157,363
__________ ________ ________ __________
__________ ________ ________ __________
During the years ended December 31, 1994 and 1993, the Company paid
approximately $53,000 and $49,000, respectively, for printing supplies from a
company affiliated by common ownership. The Company also paid this company
approximately $185,000 and $15,000 in 1994 and 1993, respectively, to permit
the Company's employees to participate in its employee medical benefit plan.
F-43
<PAGE>
PREMIER FINANCIAL BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
For the Years Ended December 31, 1994, and 1993
(Continued)
8. DISCRETIONARY PROFIT SHARING PLAN:
Citizens has a profit sharing plan that covers all eligible employees.
Contributions to the plan are at the discretion of the Board of Directors.
During 1994 and 1993, contributions to the plan charged to operations were
$84,330 and $60,000, respectively.
9. FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK AND FINANCIAL
INSTRUMENTS WITH CONCENTRATION OF CREDIT RISK:
The Banks are party to financial instruments with off-balance-sheet risk in
the normal course of business to meet the financing needs of its customers.
These financial instruments include loan commitments, unused credit loan
limits, and standby letters of credit. The instruments involve, to varying
degrees, elements of credit and interest rate risk in excess of the amount
recognized in the financial statements.
The Banks exposure to credit loss in the event of nonperformance by the other
party to the financial instrument for loan commitments and standby letters of
credit is represented by the contractual amount of those instruments. The
Banks use the same credit policies in making commitments and conditional
obligations as it does for on-balance sheet instruments.
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination
clauses and may require payment of a fee. Since many of the commitments are
expected to expire without being drawn upon, the total commitment amounts do
not necessarily represent future cash requirements. At December 31, 1994, the
Banks have $4,029,000 of loan commitments outstanding with all expiring
within one year. The exposure to credit loss in the event of nonperformance
by the other party to the financial instrument for these commitments is
represented by the contractual amount. The credit risk involved in issuing
letters of credit is essentially the same as that involved in extending loan
commitments to customers.
The total amounts of off-balance-sheet financial instruments with credit risk
are as follows:
1994 1993
_________ _________
Loan commitments................. $4,029,000 $4,238,000
Standby letters of credit........ $ 313,000 $ 332,000
The Banks grant retail, commercial and commercial real estate loans to
customers located throughout Kentucky, southern Ohio, and western West
Virginia. The Banks evaluate each customer's creditworthiness on a
case-by-case basis. The amount of collateral obtained, if deemed necessary by
the Banks upon extension of credit, is based on management's credit
evaluation of the customer. Collateral held varies but may include accounts
receivable, inventory, property, plant and equipment, and income-producing
commercial properties. Although the Banks have a diversified loan portfolio,
a substantial portion of the debtors' ability to honor their contracts is
dependent upon the economic conditions in each loan's respective location.
10. RESTRICTION ON CASH AND DUE FROM BANKS AND CONTINGENT LIABILITIES:
The Banks are required to maintain average balances with the Federal Reserve
Bank. The average required reserve balances were $351,764, and $347,517, for
1994 and 1993, respectively.
F-44
<PAGE>
PREMIER FINANCIAL BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
For the Years Ended December 31, 1994, and 1993
(Continued)
10. RESTRICTION ON CASH AND DUE FROM BANKS AND CONTINGENT LIABILITIES:
(Continued)
The Banks have various claims and suits pending at December 31, 1994 arising
in the ordinary course of its business. It is the opinion of management and
legal counsel that such litigation will not materially affect the Banks'
financial position or earnings.
11. DIVIDEND RESTRICTION:
Payment of dividends by the Banks is subject to various regulatory
restrictions. Generally state banks are to maintain surplus in an amount
equal to the par value of capital stock and restrict that amount from
dividends. Under Kentucky law, any dividends in excess of the sum of profits
for that year and retained net profits for the preceding two years, less any
required transfers to surplus, must be approved by the regulators.
12. PROPOSED HOLDING COMPANY MERGER
The Board of Directors of the Holding Company have approved a merger
agreement with Georgetown Bancorp, Inc., a Kentucky Bank Holding Company. The
Transaction is anticipated to be accounted for under the Pooling of Interest
Method and is subject to the approval of both holding companies, shareholders
of Georgetown and appropriate regulatory authorities.
The acquisition of Georgetown will be effected by issuance of 163,636 shares
of common stock in Premier Financial Bancorp, Inc. to the shareholders of
Georgetown Bancorp, Inc. Premier would, by this transaction, acquire all the
outstanding shares of common stock of Georgetown and, therefore, Georgetown
would become a wholly-owned subsidiary of Premier. This transaction would be
accounted for as a business combination under the Pooling of Interest Method.
13. PARENT ONLY CONDENSED FINANCIAL INFORMATION:
Condensed Balance Sheet: DECEMBER 31,
__________________________
1994 1993
__________ __________
Assets:
Cash......................................... $ 299,557 $ 393,314
Other assets................................. 1,641,500 124,561
Investment in subsidiaries................... 7,805,162 7,076,688
__________ __________
Total Assets................................... $9,746,219 $7,594,563
__________ __________
__________ __________
Liabilities and Equity:
Line of Credit............................... $1,500,000 $ 0
Other liabilities............................ 6,600
Common stock................................. 600,000 600,000
Surplus...................................... 3,353,000 3,353,000
Retained earnings............................ 4,286,619 3,641,563
__________ __________
Total Liabilities and Equity................... $9,746,219 $7,594,563
__________ __________
__________ __________
F-45
<PAGE>
PREMIER FINANCIAL BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
For the Years Ended December 31, 1994, and 1993
(Continued)
13. PARENT ONLY CONDENSED FINANCIAL INFORMATION:
(Continued)
<TABLE>
<CAPTION>
Condensed Statement of Income: FOR THE YEAR ENDED
______________________________
DECEMBER 31, DECEMBER 31,
1994 1993
____________ ____________
<S> <C> <C>
Dividends and Interest.................................... $ 581,673 $ 420,000
Equity in net earnings
of subsidiaries......................................... 1,077,938 839,328
Operating expense......................................... 197,172 83,326
____________ ____________
Net Income before Income Taxes............................ 1,462,439 1,176,002
Provision for Income Taxes................................ (72,008) (35,609)
Net Income................................................ $1,534,447 $1,211,611
____________ ____________
____________ ____________
CONDENSED STATEMENT OF CHANGES IN CASH FLOW
Cash Flow From Operating Activities
1994 1993
____________ ____________
Net Income................................................ $1,534,447 $1,211,611
Adjustments to Reconcile Net Income to Net Cash
Provided by Operating Activities:
Equity in Net Earnings ofSubsidiaries.................... (1,077,938) (839,328)
(Increase) Decrease in Other Assets....................... (16,866) 4,029
Increase (Decrease) in Other Liabilities.................. 6,600 0
____________ ____________
Net Cash Provided by Operating Activities................. 446,243 376,312
Cash Flows From Investing Activities
(Increase) Decrease in Earning Assets..................... (1,500,000) 0
____________ ____________
Net Cash Provided by Investing Activities............. (1,500,000) 0
Cash Flow From Financing Activities:
Increase in Notes Payable............................... 1,500,000 0
Repayment of Notes Payable.............................. 0 (217,625)
Proceeds from Sale of Common Stock...................... 0 330,000
Dividend Paid........................................... (540,000) (420,000)
____________ ____________
Net Cash Provided by Financing Activities............. 960,000 (307,625)
Net Increase (Decrease) in Cash........................... (93,757) 68,687
Cash at Beginning of Year................................. 393,314 324,627
____________ ____________
Cash at End of Year....................................... $ 299,557 $ 393,314
____________ ____________
____________ ____________
</TABLE>
F-46
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors
Farmers Deposit Bancorp and Subsidiary
Eminence, Kentucky
We have audited the consolidated balance sheets of Farmers Deposit Bancorp
and Subsidiary as of June 30, 1995 and 1994, and the related consolidated
statements of income, stockholders' equity and cash flows for each of the
years in the three-year period ended June 30, 1995. These financial
statements are the responsibility of the Bancorp's management. Our
responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Farmers
Deposit Bancorp and Subsidiary as of June 30, 1995 and 1994 and the results
of its operations and its cash flows for each of the years in the three-year
period ended June 30, 1995 in conformity with generally accepted accounting
principles.
As discussed in Note A to the consolidated financial statements, the Bancorp
changed its method of accounting for certain investments in debt and equity
securities in 1995.
Strothman & Company, PSC
Louisville, Kentucky
March 29, 1996
F-47
<PAGE>
FARMERS DEPOSIT BANCORP AND SUBSIDIARY
Consolidated Balance Sheets
JUNE 30
------------------------- DECEMBER 31,
1995 1994 1995
----------- ---------- ------------
(UNAUDITED)
ASSETS
Cash and due from banks $ 2,172,892 $ 1,503,087 $ 2,227,716
Federal funds sold 1,275,000 1,950,000 5,075,000
------------ ------------ ------------
CASH AND CASH EQUIVALENTS 3,447,892 3,453,087 7,302,716
Securities available for sale 6,414,543 5,865,927
Investment securities, fair value
of $11,969,160 (June 30, 1995),
$17,396,346 (June 30, 1994) and
$12,725,383 (December 31, 1995) 11,861,910 17,486,221 12,425,622
Loans, less allowance for loan
losses of $780,150 (June 30,
1995), $650,053 (June 30, 1994)
and $800,000 (December 31, 1995) 75,767,084 66,480,376 77,851,632
Accrued interest receivable 1,893,506 1,549,204 2,245,860
Premises and equipment 930,803 720,900 881,338
Other real estate owned 143,946 263,641 396,212
Other assets 242,994 201,096 121,203
------------ ------------ ------------
TOTAL ASSETS $100,702,678 $90,154,525 $107,090,510
------------ ------------ ------------
------------ ------------ ------------
LIABILITIES
Deposits
Demand (non-interest bearing) $ 10,862,496 $10,311,712 $ 11,773,004
Demand (interest bearing) 20,301,153 18,240,575 20,894,015
Savings and individual
retirement accounts 7,949,943 8,175,052 7,945,409
Certificates of deposit,
$100,000 and over 9,513,722 12,017,566 15,673,662
Other certificates of deposit 34,898,973 25,872,910 33,471,987
------------ ------------ ------------
TOTAL DEPOSITS 83,526,287 74,617,815 89,758,077
Securities sold under agreements
to repurchase 5,000,000 5,000,000 5,000,000
Advances from Federal Home Loan
Bank (FHLB) 2,913,991 2,157,887 2,954,287
Other borrowed funds 2,050,000 2,300,000 2,050,000
Accrued interest payable 429,246 304,390 371,403
Other liabilities 167,855 113,400 121
------------ ------------ ------------
TOTAL LIABILITIES 94,087,379 84,493,492 100,133,888
STOCKHOLDERS' EQUITY
Common Stock, par value $50
per share; 18,750 shares
authorized, 12,125 shares
issued and outstanding 468,750 468,750 468,750
Surplus 2,000,000 2,000,000 2,000,000
Retained earnings 4,093,271 3,192,283 4,432,713
Net unrealized gains on securities
available for sale 53,278 55,159
------------ ------------ ------------
TOTAL STOCKHOLDERS' EQUITY 6,615,299 5,661,033 6,956,622
------------ ------------ ------------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $100,702,678 $90,154,525 $107,090,510
------------ ------------ ------------
------------ ------------ ------------
See Notes to Financial Statements
F-48
<PAGE>
FARMERS DEPOSIT BANCORP AND SUBSIDIARY
Consolidated Statements of Income
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED JUNE 30 DECEMBER 31,
------------------------------- ---------------------
1995 1994 1993 1995 1994
--------- -------- --------- --------- --------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C>
INTEREST INCOME
Loans $6,472,841 $5,750,355 $5,785,188 $3,530,204 $3,058,730
Investment securities
U. S. Government and
agency securities
(including mortgage-
backed securities) 608,591 573,944 740,483 318,980 296,588
States and municipal
securities 390,694 414,796 392,510 196,858 199,988
FHLB stock dividends 23,991 16,499 2,764 14,419 11,667
Federal funds sold 144,226 114,928 104,615 98,278 62,605
---------- ---------- ---------- ---------- ---------
TOTAL INTEREST INCOME 7,640,343 6,870,522 7,025,560 4,158,739 3,629,578
INTEREST EXPENSE
Deposits 3,476,829 2,905,665 3,181,495 2,114,029 1,581,526
Securities sold under
agreements to repurchase 276,799 168,485 160,939 145,718 131,166
Other borrowed funds 201,997 167,866 176,379 97,058 97,686
Advances from FHLB 143,776 100,759 84,608 89,910 68,557
---------- ---------- ---------- ---------- ---------
TOTAL INTEREST EXPENSE 4,099,401 3,342,775 3,603,421 2,446,715 1,878,935
---------- ---------- ---------- ---------- ---------
NET INTEREST INCOME 3,540,942 3,527,747 3,422,139 1,712,024 1,750,643
PROVISION FOR LOAN LOSSES 531,066 743,575 676,825 200,181 240,547
---------- ---------- ---------- ---------- ---------
NET INTEREST INCOME
AFTER PROVISION FOR
LOAN LOSSES 3,009,876 2,784,172 2,745,314 1,511,843 1,510,096
---------- ---------- ---------- ---------- ---------
NON-INTEREST INCOME
Service charges on deposit
accounts 203,146 202,517 175,117 107,511 103,855
Insurance commissions 99,508 120,594 127,682 25,670 53,834
Realized net gains on sale
of investment securities 114,661
Refund -- FDIC assessments 50,827
Other income 205,141 164,927 145,866 106,929 79,526
---------- ---------- ---------- ---------- ---------
TOTAL NON-INTEREST
INCOME 507,795 488,038 563,326 290,937 237,215
</TABLE>
F-49
<PAGE>
FARMERS DEPOSIT BANCORP AND SUBSIDIARY
Consolidated Statements of Income -- Continued
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED JUNE 30 DECEMBER 31,
------------------------------------ ------------------------
1995 1994 1993 1995 1994
---------- --------- --------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
NON-INTEREST EXPENSE
Salaries and employee benefits 1,132,772 1,006,114 947,573 604,229 566,037
Occupancy andequipment expense 205,000 199,345 190,201 96,536 84,297
FDIC assessments 173,339 158,631 154,906 54,081 84,669
Bankshares tax 120,900 113,600 98,380 62,480 58,421
Provision for other real estate owned losses 61,769 129,556 18,298 63,825 21,769
Amortization of non-compete agreements 32,275 137,922 137,922 32,275
Other 357,667 287,136 305,755 264,062 158,319
--------- --------- --------- --------- ---------
TOTAL NON-INTEREST EXPENSE 2,083,722 2,032,304 1,853,035 1,145,213 1,005,787
--------- --------- --------- --------- ---------
INCOME BEFORE INCOME TAXES
AND CUMULATIVE EFFECT OF
CHANGE IN ACCOUNTING PRINCIPLE 1,433,949 1,239,906 1,455,605 657,567 741,524
INCOME TAXES 387,461 389,570 449,000 160,500 219,461
--------- --------- --------- --------- ---------
INCOME BEFORE CUMULATIVE EFFECT
OF CHANGE IN ACCOUNTING PRINCIPLE 1,046,488 850,336 1,006,605 497,067 522,063
CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE -- INCOME TAXES 54,000
--------- --------- --------- --------- ---------
NET INCOME $1,046,488 $ 904,336 $1,006,605 $ 497,067 $ 522,063
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
NET INCOME PER COMMON SHARE
Income before cumulative effect
of accounting change $86.31 $70.13 $83.02 $41.00 $43.06
Cumulative effect of accounting change 4.45
--------- --------- --------- --------- ---------
$86.31 $74.58 $83.02 $41.00 $43.06
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
See Notes to Financial Statements
F-50
<PAGE>
<TABLE>
<CAPTION>
FARMERS DEPOSIT BANCORP AND SUBSIDIARY
Consolidated Statements of Stockholders' Equity
Years Ended June 30, 1995, 1994, 1993 and Six Months Ended December 31, 1995 (Unaudited)
NET
UNREALIZED
GAINS ON
COMMON STOCK SECURITIES
----------------- RETAINED AVAILABLE
SHARES DOLLARS SURPLUS EARNINGS FOR SALE TOTAL
------ ------- ---------- ---------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, JULY 1, 1992 12,125 $468,750 $2,000,000 $1,535,967 $4,004,717
Net Income 1,006,605 1,006,605
Cash Dividends,
$10.00 per share (121,250) (121,250)
------ -------- ---------- ---------- ----------
BALANCE,
JUNE 30, 1993 12,125 468,750 2,000,000 2,421,322 4,890,072
Net income 904,336 904,336
Cash dividends,
$11.00 per share (133,375) (133,375)
------ -------- ---------- ---------- ----------
BALANCE,
JUNE 30, 1994 12,125 468,750 2,000,000 3,192,283 5,661,033
Effect of change in method
of accounting for
unrealized gains on
investment securities $43,103 43,103
Net income 1,046,488 1,046,488
Cash dividends,
$12.00 per share (145,500) (145,500)
Net change in unrealized
gains on securities
available for sale 10,175 10,175
------ -------- ---------- ---------- ------- ----------
BALANCE,
JUNE 30, 1995 12,125 468,750 2,000,000 4,093,271 53,278 6,615,299
Net income for the six
months (unaudited) 497,067 497,067
Cash dividends,
$13.00 per share (157,625) (157,625)
Net change in unrealized
gains on securities
available for sale 1,881 1,881
------ -------- ---------- ---------- ------- ----------
BALANCE,
DECEMBER 31, 1995
(UNAUDITED) 12,125 $468,750 $2,000,000 $4,432,713 $55,159 $6,956,622
------ -------- ---------- ---------- ------- ----------
------ -------- ---------- ---------- ------- ----------
</TABLE>
See Notes to Financial Statements
F-51
<PAGE>
FARMERS DEPOSIT BANCORP AND SUBSIDIARY
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED JUNE 30 DECEMBER 31,
------------------------------------ -----------------------
1995 1994 1993 1995 1994
---------- ---------- ---------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net income $1,046,488 $904,336 $1,006,605 $497,067 $522,063
Adjustments to reconcile net income to net
cash provided by operating activities
Provision for loan losses 531,066 743,575 676,825 200,181 240,547
Provision for other real estate owned losses 61,769 129,556 18,298 63,825 21,769
Depreciation, amortization and accretion 122,187 141,421 163,430 80,093 65,307
Realized net gains on sale of
investment securities (114,662)
Changes in assets and liabilities
Accrued interest receivable (344,302) 104,004 246,801 (352,354) (293,477)
Other assets (69,344) 54,313 132,544 120,821 21,916
Accrued interest payable 124,856 (61,496) (80,090) (57,843) (54,969)
Other liabilities 54,455 49,799 (134,307) (167,733) (25,902)
----------- ----------- ----------- ---------- ----------
NET CASH PROVIDED BY OPERATING ACTIVITIES 1,527,175 2,065,508 1,915,444 384,057 497,254
INVESTING ACTIVITIES
Proceeds from maturities and calls of
securities available for sale 2,135,000 1,245,000 300,000
Proceeds from maturities and calls of
investment securities 1,180,322 3,661,060 5,752,045 1,052,864 977,431
Proceeds from sales of investment securities 1,812,153
Purchases of securities available for sale (1,075,140) (702,664) (678,586)
Purchases of investment securities (2,984,791) (4,609,225) (7,449,614) (1,627,539) (860,590)
Net increase in loans (9,844,576) (5,686,095) (5,276,043) (2,631,941) (5,569,258)
Purchases of premises and equipment (296,989) (43,258) (1,178) (10,535) (94,447)
Proceeds from sales of other real estate owned 84,728 113,628 191,402 31,121 23,529
----------- ----------- ----------- ---------- ----------
NET CASH USED IN INVESTING ACTIVITIES (10,801,446) (6,563,890) (4,971,235) (2,643,694) (5,901,921)
FINANCING ACTIVITIES
Net increase in deposits 8,908,472 5,161,469 1,662,354 6,231,790 5,364,979
Payment on note payable (250,000) (200,000) (228,000)
Proceeds from advances from FHLB 1,468,500 642,000 1,240,000 600,000 750,000
Payments on advances from FHLB (712,396) (296,212) (392,846) (559,704) (555,184)
Dividends paid (145,500) (133,375) (121,250) (157,625) (145,500)
----------- ----------- ----------- ---------- ----------
NET CASH PROVIDED BY FINANCING ACTIVITIES 9,269,076 5,173,882 2,160,258 6,114,461 5,414,295
----------- ----------- ----------- ---------- ----------
NET INCREASE (DECREASE) IN
CASH AND CASH EQUIVALENTS (5,195) 675,500 (895,533) 3,854,824 9,628
CASH AND CASH EQUIVALENTS
BEGINNING OF YEAR OR PERIOD 3,453,087 2,777,587 3,673,120 3,447,892 3,453,087
----------- ----------- ----------- ---------- ----------
CASH AND CASH EQUIVALENTS
END OF YEAR OR PERIOD $3,447,892 $3,453,087 $2,777,587 $7,302,716 $3,462,715
----------- ----------- ----------- ---------- ----------
----------- ----------- ----------- ---------- ----------
</TABLE>
F-52
<PAGE>
FARMERS DEPOSIT BANCORP AND SUBSIDIARY
Consolidated Statements of Cash Flows--Continued
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED JUNE 30 DECEMBER 31,
---------------------------------------- ------------------------
1995 1994 1993 1995 1994
---------- ---------- ---------- ---------- ----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
SUPPLEMENTAL DISCLOSURES OF
CASH FLOW INFORMATION
Cash paid during the year for
Interest $3,974,545 $3,362,184 $3,549,214 $2,407,500 $1,933,904
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
Income taxes $ 385,500 $ 360,000 $ 590,477 $ 180,000 $ 130,000
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
Noncash investing activities
Transfers from loans to
other real estate owned $ 26,802 $ 41,453 $ 623,764 $ 347,212 $ -0-
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
Transfer of investment securities
to securities available for
sale (at fair value) $7,473,000 $7,473,000
---------- ----------
---------- ----------
</TABLE>
See Notes to Financial Statements
F-53
<PAGE>
FARMERS DEPOSIT BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1995, 1994, 1993 AND DECEMBER 31, 1995 (UNAUDITED) AND 1994 (UNAUDITED)
NOTE A -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION--The consolidated financial statements include the
accounts of Farmers Deposit Bancorp (Corporation) and its wholly-owned
subsidiary, Farmers Deposit Bank (Bank). All significant intercompany
balances and transactions have been eliminated in consolidation.
NATURE OF OPERATIONS--Farmers Deposit Bank provides a variety of financial
services to individuals and corporate customers through its home office and
two branches in Eminence and Jericho, Kentucky. The Bank's primary deposit
products are certificates of deposit and other interest-bearing deposits.
Its primary lending products are real estate mortgages, agricultural and
commercial business loans.
USE OF ESTIMATES--The preparation of consolidated financial statements in
conformity with generally accepted accounting principles requires management
to make estimates and assumptions that affect the reported amounts of assets
and liabilities and disclosure of contingent 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 those
estimates.
The material estimate that is particularly susceptible to significant change
relates to the determination of the allowance for losses on loans. In
connection with the determination of the allowances for losses on loans,
management obtains independent appraisals for significant properties.
A majority of the Bank's loan portfolio consists of single-family
residential, farmland and commercial loans in the Eminence and Henry County
area. The regional economy depends heavily on the agricultural industry,
which has a significant impact on the local economy.
CASH AND CASH EQUIVALENTS--For purposes of reporting cash flows, cash and
cash equivalents include cash on hand, amounts due from banks, and federal funds
sold.
SECURITIES--Prior to July 1, 1994, investment securities were carried at cost
adjusted for amortization of premiums and accretion of discounts. The
adjusted costs of the specific security sold is used to compute gains or
losses on the sale of these securities.
Effective July 1, 1994, the Bank adopted Statement of Financial Accounting
Standards (SFAS) No. 115 "Accounting for Certain Investments in Debt and
Equity Securities". SFAS No. 115 establishes a uniform system of accounting
and reporting for all debt securities and certain equity securities and
requires that all securities be classified into one of the following
categories.
- TRADING--This category includes debt and equity securities that are
bought and held for resale in the near term. It also includes
mortgage loans held for sale that have been securitized (that is,
converted into a mortgage-backed security). These securities are
carried at fair value, and changes in market value are recognized
in the income statement.
F-54
<PAGE>
FARMERS DEPOSIT BANCORP AND SUBSIDIARY
Notes to Consolidated Financial Statements
June 30, 1995, 1994, 1993 and December 31, 1995 (Unaudited) and 1994 (Unaudited)
NOTE A--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--Continued
- HELD-TO-MATURITY--This category consists of debt securities that
the investor has the positive intent and ability to hold to maturity.
These securities are carried at amortized cost.
- AVAILABLE-FOR-SALE--This category includes all of the other
marketable securities not included in one of the preceding
categories. Those securities are carried at fair value, and
net changes are recognized as direct increases or decreases in
a separate component of equity, net of related tax effects.
To implement SFAS No. 115, the Bank classified investment securities with an
amortized cost of $7,408,000 and with fair values of $7,473,000 to available
for sale securities as a result of SFAS No. 115 guidance on securities that
cannot be classified as held to maturity (i.e. securities that might be sold
because of changes in such factors as changes in market interest rates,
availability of and yield on alternative investments or a security's
prepayment risk). The initial adoption of SFAS No. 115 required the
recognition of unrealized gains of approximately $43,000 as a separate
component of equity, net of related taxes of $22,000.
LOANS--Interest on loans is computed on the principal balance outstanding,
except income from installment loans which is recognized as income using a
method which approximates the interest method.
Loans, other than installment loans, are placed on non-accrual status
when they become past due 90 days or more as to principal or interest, unless
they are adequately secured or in the process of collection. Such loans remain
on non-accrual status until the borrower demonstrates the ability to maintain
the loan current or the loan is deemed uncollectible and is charged-off.
Installment loans generally are not placed on non-accrual status but are
reviewed periodically and charged off when deemed uncollectible.
ALLOWANCE FOR LOAN LOSSES--The allowance for loan losses is supported by a
periodic review and evaluation of various factors which affect the loan's
collectibility and result in provisions for loan losses which are charged to
expense. Recoveries are credited to the allowance. Numerous factors are
considered in the evaluation, including, but not necessarily limited to, a
review of the borrower's current financial status and credit standing, an
evaluation of available collateral, loss experience in relation to
outstanding loans and the overall loan portfolio quality and management's
judgement regarding prevailing and anticipated economic conditions and other
relevant factors.
PREMISES AND EQUIPMENT--Premises and equipment are stated at cost less
accumulated depreciation and amortization. Depreciation is computed over the
estimated useful lives of the related assets, principally by the
straight-line method.
OTHER REAL ESTATE OWNED--Other real estate owned is carried at the lower of
cost (fair value of property acquired in settlement of loans) or estimated
net realizable value. Valuation allowances for estimated losses are
subsequently provided when the carrying value of the real estate acquired
exceeds the net realizable value.
F-55
<PAGE>
FARMERS DEPOSIT BANCORP AND SUBSIDIARY
Notes to Consolidated Financial Statements
June 30, 1995, 1994, 1993 and December 31, 1995 (Unaudited) and 1994 (Unaudited)
NOTE A--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--CONTINUED
NON-COMPETE AGREEMENT--Other assets on the consolidated balance sheets
include non-compete agreements associated with the repurchase of common
shares from certain directors in 1991 totaling $515,000, whereby the certain
directors agreed not to compete for a period of three to four years. The
cost has been amortized on the straight-line method over the terms of the
arrangement. The accumulated amortization at June 30, 1995, 1994 and 1993
was $515,000, $482,725, and $344,803, respectively. The amount charged to
expense for the years ended June 30, 1995, 1994 and 1993 was $32,275,
$137,922, and $137,922, respectively, and $32,275 for the six months ended
December 31, 1994 (unaudited). The noncompetition agreements were fully
amortized at June 30, 1995.
INCOME TAXES--Effective July 1, 1993, the Corporation adopted SFAS No. 109,
"Accounting for Income Taxes", which requires an asset and liability approach to
financial accounting and reporting for income taxes. The difference between the
financial statement and tax bases of assets and liabilities is determined
annually. Deferred income tax assets and liabilities are computed for those
differences and for other items that have future tax consequences, using the
currently enacted tax laws and rates that apply to the periods in which they are
expected to affect taxable income. Income tax expense is the current tax
payable or refundable for the period plus or minus the net change in the
deferred tax assets and liabilities.
The cumulative effect of the Corporation's adoption of SFAS No. 109 resulted
in an increase to net income of $54,000 (reflected in the accompanying
statement of income).
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS (STATEMENTS ON FINANCIAL ACCOUNTING
STANDARDS "SFAS")
SFAS NO. 107 "DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL
INSTRUMENTS" -- SFAS No. 107 requires all entities to disclose
information about the fair value of financial instruments for which
it is practicable to estimate fair value. The required disclosure
information shall be presented either in the body of the financial
instruments or in the accompanying notes. The statement includes
all financial instruments, both on- and off-balance sheet and is
effective for entities with less than $150 million in total assets
for fiscal years ending after December 15, 1995.
SFAS NO. 114 "ACCOUNTING BY CREDITORS FOR IMPAIRMENT OF A LOAN" --
SFAS No. 114 requires that impaired loans within the scope of the
Statement be measured based upon present value of expected future
cash flows, discounted at the loan's effective interest rate; at
the loan's observable market price; or the fair value of the
collateral, if the loan is collateral dependent. The statement is
effective for fiscal years ending after December 15, 1995.
SFAS NO. 119 "DISCLOSURE ABOUT DERIVATIVE FINANCIAL INSTRUMENTS AND
FAIR VALUE OF FINANCIAL INSTRUMENTS" -- SFAS No. 119 is effective
for entities less than $150 million in total assets for fiscal
years ending after December 15, 1995 and requires disclosures about
financial instruments used in the Bank's activities.The adoption of
the recently issued pronouncements above are not expected to have a
material impact on the financial statements.
The adoption of the recently issued pronouncements above are not expected
to have a material impact on the financial statements.
F-56
<PAGE>
FARMERS DEPOSIT BANCORP AND SUBSIDIARY
Notes to Consolidated Financial Statements
June 30, 1995, 1994, 1993 and December 31, 1995 (Unaudited) and 1994 (Unaudited)
NOTE A--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--CONTINUED
RECLASSIFICATIONS--Certain reclassifications have been made to 1995 and 1994
financial statements to conform to the Securities and Exchange Act Regulation
S-X Article 9.
INTERIM FINANCIAL STATEMENTS--In the opinion of management, the unaudited
interim consolidated financial information of the Corporation contains all
adjustments, consisting only of those of normal recurring nature, necessary
to present fairly the Corporation's financial position as of December 31,
1995 and the results of its operations and changes in cash flows and
stockholders' equity for the six months then ended December 31, 1995 and 1994
are not necessarily indicative of the results to be expected for the full
year.
NOTE B--CASH AND DUE FROM BANKS
The Bank is required to maintain average reserve balances with the Federal
Reserve Bank. Cash and due from banks in the balance sheet include amounts
so restricted of $407,000 and $385,000 at June 30, 1995 and 1994,
respectively, and $430,000 at December 31, 1995 (unaudited).
NOTE C--INVESTMENT SECURITIES
<TABLE>
JUNE 30, 1995
---------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
---------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
SECURITIES AVAILABLE FOR SALE
U. S. Government and
agency securities $4,209,066 $24,369 $(10,818) $4,222,617
States and municipal
securities 2,124,752 72,976 (5,802) 2,191,926
---------- ---------- ---------- ---------
TOTAL SECURITIES
AVAILABLE FOR SALE $6,333,818 $97,34 5 $(16,620) $6,414,543
---------- ---------- ---------- ---------
---------- ---------- ---------- ---------
</TABLE>
F-57
<PAGE>
FARMERS DEPOSIT BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1995, 1994, 1993 AND DECEMBER 31, 1995 (UNAUDITED) AND 1994 (UNAUDITED)
NOTE C--INVESTMENT SECURITIES--Continued
<TABLE>
JUNE 30, 1995
______________________________________________________
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
___________ ___________ ___________ ___________
<S> <C> <C> <C> <C>
INVESTMENT SECURITIES
U. S. Government and
agency securities $6,495,060 $ 44,786 $(69,744) $ 6,470,102
States and municipal
securities 4,495,417 154,410 (18,960) 4,630,867
Mortgage-backed
securities 475,933 6,986 (10,228) 472,691
Federal Home Loan
Bank Stock 395,500 395,500
____________ _________ _________ ____________
TOTAL INVESTMENT
SECURITIES $11,861,910 $206,182 $(98,932) $11,969,160
____________ _________ _________ ____________
</TABLE>
<TABLE>
JUNE 30, 1994
______________________________________________________
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
___________ ___________ ___________ __________
<S> <C> <C> <C> <C>
INVESTMENT SECURITIES
U. S. Government and
agency securities $10,365,372 $ 29,260 $(223,482) $10,171,150
States and municipal
securities 6,520,970 193,163 (88,814) 6,625,319
Mortgage-backed
securities 228,179 27 (29) 228,177
Federal Home Loan
Bank Stock 371,700 371,700
___________ ___________ ___________ __________
TOTAL INVESTMENT
SECURITIES $17,486,221 $222,450 $(312,325) $17,396,346
___________ ___________ ___________ __________
</TABLE>
<TABLE>
DECEMBER 31, 1995 (UNAUDITED)
______________________________________________________
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
___________ ___________ ___________ __________
<S> <C> <C> <C> <C>
SECURITIES AVAILABLE
FOR SALE
U. S. Government and
agency securities $ 3,904,139 $ 20,277 $ (2,220) $ 3,922,196
States and municipal
securities 1,878,215 68,532 (3,016) 1,943,731
___________ ___________ ___________ ___________
TOTAL SECURITIES
AVAILABLE FOR SALE $ 5,782,354 $ 88,809 $ (5,236) $ 5,865,927
___________ ___________ ___________ ___________
___________ ___________ ___________ ___________
</TABLE>
F-58
<PAGE>
FARMERS DEPOSIT BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1995, 1994, 1993 AND DECEMBER 31, 1995 (UNAUDITED) AND 1994 (UNAUDITED)
NOTE C--INVESTMENT SECURITIES--Continued
<TABLE>
DECEMBER 31, 1995 (UNAUDITED)
______________________________________________________
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
___________ ___________ ___________ __________
<S> <C> <C> <C> <C>
U. S. Government and
agency securities $ 6,487,949 $ 68,563 $(23,727) $6,532,785
States and municipal
securities 5,054,329 253,103 (1,378) 5,306,054
Mortgage-backed securities 473,544 5,791 (2,591) 476,744
Federal Home Loan
Bank Stock 409,800 409,800
____________ ________ _________ ____________
TOTAL INVESTMENT
SECURITIES $12,425,622 $327,457 $(27,696) $12,725,383
____________ ________ _________ ____________
____________ ________ _________ ____________
</TABLE>
The amortized costs and fair values of securities at June 30, 1995, by
contractual maturity, are as follows:
<TABLE>
SECURITIES AVAILABLE
FOR SALE INVESTMENT SECURITIES
_________________________ _________________________
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
___________ ___________ ___________ __________
<S> <C> <C> <C> <C>
Due in one year $2,994,772 $2,991,161 $ 400,424 $ 393,860
Due after one year
through five years 3,176,716 3,265,188 5,852,264 5,839,897
Due after five years
through ten years 162,330 158,194 3,444,331 3,541,544
Due after ten years 1,293,458 1,325,668
Mortgage-backed securities 475,933 472,691
Federal Home Loan Bank Stock 395,500 395,500
__________ ___________ ___________ ___________
Total $6,333,818 $6,414,543 $11,861,910 $11,969,160
__________ ___________ ___________ ___________
__________ ___________ ___________ ___________
</TABLE>
F-59
<PAGE>
FARMERS DEPOSIT BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1995, 1994, 1993 AND DECEMBER 31, 1995 (UNAUDITED) AND 1994 (UNAUDITED)
NOTE C--INVESTMENT SECURITIES--Continued
The amortized costs and fair values of securities at December 31, 1995
(unaudited), by contractual maturity, are as follows:
<TABLE>
SECURITIES AVAILABLE
FOR SALE INVESTMENT SECURITIES
_________________________ _________________________
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
___________ ___________ ___________ __________
<S> <C> <C> <C> <C>
Due in one year $2,892,623 $2,907,312 $ 200,016 $ 199,250
Due after one year
through five years 2,889,731 2,958,615 5,995,653 6,031,120
Due after five years
through ten years 3,986,604 4,176,398
Due after ten years 1,360,005 1,432,071
Mortgage-backed securities 473,544 476,744
Federal Home Loan Bank
Stock 409,800 409,800
___________ ___________ ____________ ___________
Total $5,782,354 $5,865,927 $12,425,622 $12,725,383
___________ ___________ ____________ ___________
___________ ___________ ____________ ___________
</TABLE>
At June 30, 1995 and December 31, 1995 (unaudited), securities with
amortized costs of $13,868,000 and $15,644,733 and fair values of $14,022,000
and $15,976,986, respectively, were pledged to secure public funds and other
purposes.
Also, at June 30, 1995, the Bank had lent two $200,000 U. S. Government
and agency securities with amortized costs of $492,000 and fair values of
$493,000 to its safekeeping correspondent. These securities were
subsequently returned to the Bank's portfolio in July 1995. At December 31,
1995 (unaudited), management has informed us that there were no securities
lending arrangements.
F-60
<PAGE>
FARMERS DEPOSIT BANCORP AND SUBSIDIARY
Notes to Consolidated Financial Statements
June 30, 1995, 1994, 1993 and December 31, 1995 (Unaudited) and 1994 (Unaudited)
NOTE D--LOANS
JUNE 30
------------------------- DECEMBER 31
1995 1994 1995
---------- ---------- ------------
(UNAUDITED)
Commercial and agricultural $20,696,534 $18,036,904 $21,896,426
Real estate mortgages 46,685,024 40,677,082 46,583,692
Installment 9,170,518 8,803,964 9,376,784
Construction 1,215,000 864,000 2,048,000
Other 78,072 50,793 86,696
----------- ---------- ----------
TOTAL LOANS 77,845,148 68,432,743 79,991,598
Unearned discount (1,297,914) (1,302,314) (1,339,966)
Allowance for loan losses (780,150) (650,053) (800,000)
----------- ---------- ----------
LOANS, NET $75,767,084 $66,480,376 $77,851,632
----------- ---------- ----------
----------- ---------- ----------
The Bank reviews each prospective credit in order to determine an adequate
level of security or collateral, prior to making the loan. The type of
collateral will vary and range from liquid assets to real estate. The Bank
has access to collateral, in the event of borrower default, through adherence
to state lending laws and the Bank's sound lending standards and credit
monitoring procedures.
The Bank originates loans to customers primarily located in Henry County,
Kentucky and surrounding counties (i.e. Oldham, Shelby and Jefferson
Counties, Kentucky). Although the Bank has a diverse loan portfolio, a
portion of the debtors' abilities to perform on their contracts is dependent
upon the agricultural industry.
Loans to officers, directors and principal security holders and associates
made in the normal course of business on substantially the same terms,
including interest rates and collateral, as those with other persons is
summarized as follows:
BEGINNING NEW PRINCIPAL ENDING
YEAR ENDED BALANCE LOANS PAYMENTS BALANCE
-------------------------- --------- ------ ---------- -------
December 31, 1995 (unaudited) $547,300 $(171,300) $376,000
June 30, 1995 $179,800 $373,000 $(5,500) $547,300
June 30, 1994 $288,400 $(108,600) $179,800
June 30, 1993 $212,700 $80,000 $(4,300) $288,400
F-61
<PAGE>
FARMERS DEPOSIT BANCORP AND SUBSIDIARY
Notes to Consolidated Financial Statements
June 30, 1995, 1994, 1993 and December 31, 1995 (Unaudited) and 1994 (Unaudited)
NOTE D--LOANS--Continued
There were no loans on non-accrual status at June 30, 1995. Loans on which
the accrual of interest has been discontinued amounted to $326,000 and
$375,300 at June 30, 1994 and 1993, respectively. If interest on those loans
had been accrued, such income would have approximated $33,600 and $21,800.
The amount of interest income recorded for such loans approximated $12,500
and $3,700 for the years ended June 30, 1994 and 1993, respectively.
At December 31, 1995 and for the six months ended (unaudited), loans on
non-accrual status and the related interest income recorded versus what
should have been recorded were insignificant. Loans on which the accrual of
interest has been discontinued amounted to $130,600 at December 31, 1994
(unaudited). The related interest income recorded versus what should have
been recorded was insignificant for the six months ended December 31, 1994.
NOTE E--ALLOWANCE FOR LOAN LOSSES
<TABLE>
SIX MONTHS ENDED
YEAR ENDED JUNE 30 DECEMBER 31,
------------------------------------- ------------------------
1995 1994 1993 1995 1994
--------- ----------- ---------- ---------- ----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Balance, beginning of year $650,053 $600,000 $452,322 $780,150 $650,053
Provision charged to earnings 531,066 743,575 676,825 200,181 240,547
Loans charged off (509,622) (735,116) (553,689) (201,456) (242,479)
Recoveries 108,653 41,594 24,542 21,125 85,043
--------- ----------- ---------- ---------- ----------
BALANCE, END OF YEAR $780,150 $650,053 $600,000 $800,000 $733,164
--------- ----------- ---------- ---------- ----------
--------- ----------- ---------- ---------- ----------
</TABLE>
NOTE F--PREMISES AND EQUIPMENT
JUNE 30
-------------------------- DECEMBER 31
1995 1994 1995
----------- ------------ -------------
(UNAUDITED)
Land $ 75,750 $ 75,750 $ 75,750
Buildings 1,081,614 929,304 1,081,614
Furniture, fixtures and equipment 967,811 823,131 978,345
----------- ------------ -------------
2,125,175 1,828,185 2,135,709
Less accumulated depreciation (1,194,372) (1,107,285) (1,254,371)
----------- ------------ -------------
PREMISES AND EQUIPMENT, NET $ 930,803 $ 720,9 $ 881,338
----------- ------------ -------------
----------- ------------ -------------
F-62
<PAGE>
FARMERS DEPOSIT BANCORP AND SUBSIDIARY
Notes to Consolidated Financial Statements
June 30, 1995, 1994, 1993 and December 31, 1995 (Unaudited) and 1994 (Unaudited)
NOTE G--SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
Securities sold under agreements to repurchase consists of agreements with
the Commonwealth of Kentucky which generally mature within 30 days.
The detail of these agreements are as follows:
<TABLE>
SIX MONTHS ENDED
YEAR ENDED JUNE 30 DECEMBER 31,
--------------------------------------------------- -------------------------------
1995 1994 1993 1995 1994
---------- ----------- ----------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Balance at period ended $5,000,000 $5,000,000 $5,000,000 $5,000,000 $5,000,000
----------- ---------- ---------- ---------- ----------
----------- ---------- ---------- ---------- ----------
Average amount outstanding
for the period $5,000,000 $5,000,000 $5,000,000 $5,000,000 $5,000,000
----------- ---------- ---------- ---------- ----------
----------- ---------- ---------- ---------- ----------
Maximum amount
outstanding at any month end $5,000,000 $5,000,000 $5,000,000 $5,000,000 $5,000,000
----------- ---------- ---------- ---------- ----------
----------- ---------- ---------- ---------- ----------
Average interest rate
for the period 5.18 % 3.15 % 3.18 % 5.68 % 5.06 %
----- ----- ---- ---- ----
----- ----- ---- ---- ----
Average interest rate
on period ended balance 5.85 % 4.20 % 3.10 % 5.71 % 5.85 %
----- ----- ---- ---- ----
----- ----- ---- ---- ----
</TABLE>
NOTE H--ADVANCES FROM FEDERAL HOME LOAN BANK
At June 30, 1995 and 1994 and December 31, 1995 (unaudited), the Bank had
advances from Federal Home Loan Bank (FHLB) totalling $2,913,991, $2,157,887,
and $2,954,287, respectively, with fixed and variable interest rates ranging
from 4.65% to 8.45% (June 30, 1995 and December 31, 1995 - unaudited) and
4.65% to 7.95% (June 30, 1994).
The Bank has provided the FHLB with a blanket floating lien of first mortgage
loans equalling 150% of advances outstanding ($4,370,987 and $4,431,431 at
June 30, 1995 and December 31, 1995 - unaudited, respectively).
F-63
<PAGE>
FARMERS DEPOSIT BANCORP AND SUBSIDIARY
Notes to Consolidated Financial Statements
June 30, 1995, 1994, 1993 and December 31, 1995 (Unaudited) and 1994 (Unaudited)
NOTE I--OTHER BORROWED FUNDS
At June 30, 1995 and 1994 and December 31, 1995 (unaudited), the Corporation
had an outstanding balance of $2,050,000, $2,300,000 and $2,050,000,
respectively, on a note payable to a financial institution bearing interest
at prime plus .5% (9.5% at June 30, 1995 and December 31, 1995 - unaudited
and 7.5% at June 30, 1994) and maturing April 30, 2001. Interest payments
are due quarterly and principal payments are scheduled as follows.
April 30, 1996 $ 195,000
April 30, 1997 217,000
April 30, 1998 240,000
April 30, 1999 267,000
April 30, 2000 296,000
April 30, 2001 835,000
---------
$2,050,000
---------
---------
The principal asset of the Corporation is its investment in the Bank and
payment of the note payable is dependent upon future dividends to be received
from the Bank. The Corporation has made principal payment reductions in
advance of scheduled payments as required in the loan agreement. The note is
collateralized by the Bank's Common Stock owned by the Corporation.
NOTE J--INCOME TAXES
Income tax expense consists of the following:
SIX MONTHS ENDED
YEAR ENDED JUNE 30 DECEMBER 31,
----------------------------------- ----------------------
1995 1994 1993 1995 1994
--------- -------- --------- ------- ---------
(UNAUDITED) (UNAUDITED)
Current $395,461 $425,570 $449,000 $147,600 $216,461
Deferred (8,000) (36,000) 12,900 3,000
--------- -------- --------- ------- ---------
$387,461 $389,570 $449,000 $160,500 $219,461
--------- -------- --------- ------- ---------
--------- -------- --------- ------- ---------
F-64
<PAGE>
FARMERS DEPOSIT BANCORP AND SUBSIDIARY
Notes to Consolidated Financial Statements
June 30, 1995, 1994, 1993 and December 31, 1995 (Unaudited) and 1994 (Unaudited)
NOTE J--INCOME TAXES--Continued
An analysis of the differences between the effective tax rates and the
statutory federal income tax rate is as follows:
<TABLE>
SIX MONTHS ENDED
YEAR ENDED JUNE 30 DECEMBER 31,
----------------------------------------------------------- --------------------------------------
1995 1994 1993 1995 1994
---------------- -------------------- ------------------ ---------------- ------------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
U. S. federal income
tax rate $ 487,543 34.0 % $ 421,568 34.0 % $ 494,906 34.0 % $223,573 34.0 % $252,118 34.0 %
Changes from
statutory rate
Tax-exempt
investment income (128,399) (9.0) (141,952) (11.4) (133,453) (9.2) (69,953) (10.6) (69,847) (9.4)
Non-deductible
interest
expense related to
carrying tax-exempt
investments 13,850 1.0 15,639 .9 14,685 1.0 5,980 .9 7,870 1.1
Amortization of
non-compete
agreements 38,677 3.4 7,438 .5 2,500 .3
Other 14,467 1.0 55,638 4.5 65,424 1.2 900 .1 26,820 3.6
--------- ------ --------- ------ --------- ----- -------- ----- -------- ------
$ 387,461 27.0 % $ 389,570 31.4 % $ 449,000 27.5 % $160,500 24.4 % $219,461 29.6 %
--------- ------ --------- ------ --------- ----- -------- ----- -------- ------
--------- ------ --------- ------ --------- ----- -------- ----- -------- ------
</TABLE>
F-65
<PAGE>
FARMERS DEPOSIT BANCORP AND SUBSIDIARY
Notes to Consolidated Financial Statements
June 30, 1995, 1994, 1993 and December 31, 1995 (Unaudited) and 1994 (Unaudited)
Farmers Deposit Bancorp and SubsidiaryNotes to Consolidated Financial
StatementsJune 30, 1995, 1994, 1993 and December 31, 1995 (Unaudited) and 1994
(Unaudited)
NOTE J--INCOME TAXES--Continued
The Corporation's deferred tax assets and liabilities at June 30, 1995 and
1994 and at December 31, 1995 (unaudited) are shown below. Based upon the
level of historical taxable income and projections for future taxable income
over the periods in which deferred tax assets are deductible, management
believes it is more likely than not the Corporation will realize the benefits
of these deductible differences; therefore, no valuation allowance for the
realization of deferred tax assets is considered necessary at June 30, 1995
and 1994 and at December 31, 1995 (unaudited).
JUNE 30
--------------------- DECEMBER 31,
1995 1994 1995
-------- -------- ------------
(UNAUDITED)
DEFERRED TAX ASSETS
Allowance for loan losses $82,000 $90,000 $82,000
Write-down of other real estate owned 26,000 25,000
-------- -------- --------
TOTAL DEFERRED TAX ASSETS 108,000 115,000 82,000
-------- -------- --------
Deferred Tax Liabilities
Depreciation (9,000) (17,000) (17,100)
Unrealized gains on securities
available for sale (27,000) (28,400)
FHLB stock dividends (17,000) (8,000) (22,000)
-------- -------- --------
TOTAL DEFERRED TAX LIABILITIES (53,000) (25,000) (67,500)
-------- -------- --------
TOTAL DEFERRED TAX ASSETS $55,000 $90,000 $14,500
-------- -------- --------
-------- -------- --------
NOTE K--RETIREMENT PLAN
The Bank has a noncontributory retirement plan (profit sharing plan) covering
substantially all employees. Contributions to the Plan are determined
annually by the Board of Directors. Retirement Plan expense for the year
ended June 30, 1995, 1994 and 1993 was approximately $72,000 each year and
for the six months ended December 31, 1995 and 1994 was $66,000 (unaudited)
and $36,000 (unaudited), respectively.
The Bank has no significant commitments to pay post-retirement or
post-employment benefits other than described above.
F-66
<PAGE>
FARMERS DEPOSIT BANCORP AND SUBSIDIARY
Notes to Consolidated Financial Statements
June 30, 1995, 1994, 1993 and December 31, 1995 (Unaudited) and 1994 (Unaudited)
NOTE L--CONTINGENT LIABILITIES AND COMMITMENTS
The financial statements do not reflect various commitments and contingent
liabilities that arise in the normal course of business and that involve
elements of credit risk, interest rate risk and liquidity risk. These
commitments and contingent liabilities are commitments to extend credit,
commercial and standby letters of credit. A summary of the Bank's
commitments and contingent liabilities are as follows:
<TABLE>
<CAPTION>
JUNE 30
------------------------ DECEMBER 31,
1995 1994 1995
---------- ---------- ------------
(UNAUDITED)
<S> <C> <C> <C>
Commitments to extend credit $3,010,000 $2,733,000 $2,113,000
---------- ---------- ------------
---------- ---------- ------------
Commercial and standby letters of credit $ 281,000 $ 230,000 $ 278,000
---------- ---------- ------------
---------- ---------- ------------
</TABLE>
Commitments to extend credit, commercial and standby letters of credit all
include exposure to some credit loss in the event of nonperformance of the
customer. The Bank's credit policies and procedures for credit commitments
and financial guarantees are the same as those for extension of credit that
are recorded on the balance sheet. Because these instruments have fixed
maturity dates, and because many of them expire without being drawn upon,
they do not generally present any significant liquidity risk to the Bank.
The Bank's experience has been that approximately 75% of loan commitments are
drawn upon by customers. The Bank has not had any utilization of commercial
or standby letters of credit in 1995, 1994 and 1993 or for the six months
ended December 31, 1995 (unaudited) and December 31, 1994 (unaudited) or has
not incurred any losses on its commitments.
The Corporation entered into an employment contract with its President during
December 1994 addressing compensation and non-compete provisions. The
Contract establishes an annual base salary of $75,000 which may be increased
at the discretion of the Corporation's Board and provides for annual bonuses
as follows:
DECEMBER 31,
1995 $11,500
1996 13,500
1997 15,000
1998 25,000
1999 35,000
The Corporation and the Bank are party to litigation and claims arising in
the normal course of business. Management, after consultation with legal
counsel, believes that the liabilities, if any, arising from such litigation
and claims will not be material to the financial statements.
F-67
<PAGE>
FARMERS DEPOSIT BANCORP AND SUBSIDIARY
Notes to Consolidated Financial Statements
June 30, 1995, 1994, 1993 and December 31, 1995 (Unaudited) and 1994 (Unaudited)
NOTE M--CONCENTRATIONS OF CREDIT
All of the Bank's loans, commitments, and commercial and standby letters of
credit have been granted to customers in the Bank's market area. All such
customers are primarily depositors of the Bank. Investments in state and
municipal securities also involve primarily governmental entities within the
Bank's market area. The concentrations of credit by type of loan are set
forth in Note D. The distribution of commitments to extend credit
approximates the distribution of loans outstanding. Commercial and standby
letters of credit were granted primarily to commercial borrowers.
NOTE N--REGULATORY MATTERS
Banking regulations limit the amount of dividends that may be paid to the
Corporation without prior approval of the Bank's regulatory agency. Under
these regulations, the amount of dividends that may be paid in any calendar
year is limited to the current year's net profits, as defined, combined with
the retained net profits of the preceding two years, less any dividends
declared during those periods. At June 30, 1995, the Bank had $1,476,000 of
retained earnings available for dividend payments. At January 1, 1996
(unaudited), the retained earnings of the Bank available for payment of
dividends without regulatory approval were approximately $1,308,000.
Bank holding companies and their subsidiary banks are required by regulators
to meet risk based capital standards. These standards, or ratios, measure
the relationship of capital to a combination of balance sheet and off balance
sheet risks. The values of both balance sheet and off-balance sheet items
are adjusted to reflect credit risks.
At June 30, 1995, the Corporation's tier one and total risk based capital
ratios were 9.55% and 10.87%, and at December 31, 1995 (unaudited) were 9.13%
and 10.38%. These ratios exceed the 4.00% tier one and 8.00% total risk
based capital minimums. A minimum leverage ratio, adopted by the Federal
Reserve to assist the assessment of capital adequacy, supplements the risk
based capital requirements. The minimum leveraged ratio is 3.00%; most bank
holding companies will be required to maintain a minimum in excess of that
amount. The Corporation's leverage ratio was 6.35% at both June 30, 1995 and
December 31, 1995 (unaudited), respectively.
F-68
<PAGE>
FARMERS DEPOSIT BANCORP AND SUBSIDIARY
Notes to Consolidated Financial Statements
June 30, 1995, 1994, 1993 and December 31, 1995 (Unaudited) and 1994 (Unaudited)
NOTE O--FARMERS DEPOSIT BANCORP FINANCIAL STATEMENTS (PARENT COMPANY ONLY)
BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30
---------------------- DECEMBER 31,
1995 1994 1995
---------- ---------- -------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Investment in bank subsidiary $8,697,799 $7,961,033 $9,054,555
---------- ---------- -------------
---------- ---------- -------------
LIABILITIES
Other borrowed funds -
note payable to bank $2,050,000 $2,300,000 $2,050,000
Accrued interest payable 32,500 47,933
---------- ---------- -------------
TOTAL LIABILITIES 2,082,500 2,300,000 2,097,933
STOCKHOLDERS' EQUITY
Common stock 468,750 468,750 468,750
Surplus 2,000,000 2,000,000 2,000,000
Retained earnings 4,093,271 3,192,283 4,432,713
Net unrealized gains on
securities available for sale 53,278 55,159
---------- ---------- -------------
TOTAL STOCKHOLDERS' EQUITY 6,615,299 5,661,033 6,956,622
---------- ---------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $8,697,799 $7,961,033 $9,054,555
---------- ---------- -------------
---------- ---------- -------------
</TABLE>
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED JUNE 30 DECEMBER 31,
-------------------------------------- ------------------------
1995 1994 1993 1995 1994
------------ ----------- ----------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Income - dividends
from bank subsidiary $ 564,997 $543,328 $ 525,629 $239,250 $243,186
Interest expense
- other borrowed funds 201,997 167,866 176,379 97,058 97,686
------------ ----------- ----------- ----------- -----------
INCOME BEFORE EQUITY IN
UNDISTRIBUTED INCOME OF
BANK SUBSIDIARY 363,000 375,462 349,250 142,192 145,500
Equity in undistributed
income of bank subsidiary 683,488 528,874 657,355 354,875 376,563
------------ ----------- ----------- ----------- -----------
NET INCOME $1,046,488 $904,336 $1,006,605 $497,067 $522,063
------------ ----------- ----------- ----------- -----------
------------ ----------- ----------- ----------- -----------
</TABLE>
F-69
<PAGE>
FARMERS DEPOSIT BANCORP AND SUBSIDIARY
Notes to Consolidated Financial Statements
June 30, 1995, 1994, 1993 and December 31, 1995 (Unaudited) and 1994 (Unaudited)
NOTE O--FARMERS DEPOSIT BANCORP FINANCIAL STATEMENTS (PARENT COMPANY ONLY)
--Continued
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED JUNE 30 DECEMBER 31,
--------------------------------- ---------------------
1995 1994 1993 1995 1994
---------- --------- ---------- --------- ----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net income $1,046,488 $ 904,336 $1,006,605 $ 497,067 $ 522,063
Adjustments to reconcile
net income to net
cash provided by
operating activities
Equity in undistributed
income of bank
subsidiary (683,488) (528,874) (657,355) (354,875) (376,563)
Dividend receivable from
bank subsidiary (42,087)
Increase (decrease) in
accrued interest payable 32,500 (42,087) 42,087 15,433
---------- --------- ---------- --------- ----------
NET CASH PROVIDED BY
OPERATING ACTIVITIES 395,500 333,375 349,250 157,625 145,500
FINANCING ACTIVITIES
Payments on note payable (250,000) (200,000) (228,000)
Dividends paid (145,500) (133,375) (121,250) (157,625) (145,000)
---------- --------- ---------- --------- ----------
NET CASH USED IN
FINANCING ACTIVITIES (395,500) (333,375) (349,250) (157,625) (145,500)
---------- --------- ---------- --------- ----------
NET INCREASE (DECREASE)
IN CASH AND CASH
EQUIVALENTS -0- -0- -0- -0- -0-
CASH AND CASH EQUIVALENTS
BEGINNING OF YEAR -0- -0- -0- -0- -0-
---------- --------- ---------- --------- ----------
CASH AND CASH EQUIVALENTS
END OF YEAR $ -0- $ -0- $ -0- $ -0- $ -0-
---------- --------- ---------- --------- ----------
---------- --------- ---------- --------- ----------
</TABLE>
F-70
<PAGE>
FARMERS DEPOSIT BANCORP AND SUBSIDIARY
Notes to Consolidated Financial Statements
June 30, 1995, 1994, 1993 and December 31, 1995 (Unaudited) and 1994 (Unaudited)
NOTE P--ACQUISITIONS
On March 4, 1996, the Board of Directors of Farmers Deposit Bancorp
(Corporation) entered into an Agreement and Plan of Share Exchange with
Premier Financial Bancorp, Inc. (Premier) which allows Premier to purchase
the Corporation's common stock for $1,035 per share. The consummation of the
Agreement and Plan of Share Exchange is contingent upon shareholder approval
and required regulatory approvals.
On February 28, 1996, Premier filed a Form S-1 Registration Statement with
Securities and Exchange Commission (SEC) seeking to register under the
federal securities laws to sell up to 2,300,000 common shares in an
underwritten public offering. Premier estimates net proceeds of $22,650,000
of which $14,500,000 will be used to acquire the Corporation's common shares
as discussed above. The Agreement and Plan of Share Exchange may be
terminated by Premier prior to closing if Premier does not receive the net
proceeds from the public offering contemplated above by June 15, 1996 and the
Corporation in good faith determines after consultation with its legal and
other advisors that it is reasonably likely that Premier cannot raise equity
capital in an amount sufficient to enable Premier to consummate the
transactions contemplated hereunder by August 1, 1996 in a manner consistent
with any commitments made by Premier to, or any conditions imposed upon
Premier by, the Federal Reserve in connection with Premier seeking approval
of the transactions contemplated by this Agreement by the Federal Reserve
under the ""The Bank Holding Company Act''. If Premier terminates the
Agreement, they will be required to pay the Corporation a termination fee
equal of $375,000.
F-71
<PAGE>
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NO DEALER, SALESMAN OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE
ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS IN CONNECTION WITH
THIS OFFERING OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND,
IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE
RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY
UNDERWRITER. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY
OFFER OR SALE MADE HEREUNDER SHALL UNDER ANY CIRCUMSTANCES CREATE
ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF
THE COMPANY SINCE THE DATE HEREOF OR THAT THE INFORMATION
CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE
HEREOF. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A
SOLICITATION OF ANY OFFER TO BUY TO ANY PERSON IN ANY
JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION WOULD BE
UNLAWFUL OR TO ANY PERSON TO WHOM IT IS
UNLAWFUL.
-----------------
TABLE OF CONTENTS
PAGE
----
Available Information . . . . . . . . . . . . 2
Map . . . . . . . . . . . . . . . . . . . . . 3
Prospectus Summary . . . . . . . . . . . . . 5
Risk Factors . . . . . . . . . . . . . . . . 11
Recent Developments . . . . . . . . . . . . . 16
The Company . . . . . . . . . . . . . . . . . 20
The Eminence Transaction . . . . . . . . . . 22
Use of Proceeds . . . . . . . . . . . . . . . 24
Capitalization . . . . . . . . . . . . . . . 25
Dilution . . . . . . . . . . . . . . . . . . 26
Price Range of Common Shares; Dividends . . . 27
Selected Financial Data . . . . . . . . . . . 29
Pro Forma Condensed Combined Financial Data
of the Company and Eminence . . . . . . . . 30
Management's Discussion and Analysis of
Financial Condition and Results of
Operations . . . . . . . . . . . . . . . . . 35
Business . . . . . . . . . . . . . . . . . . 56
Management . . . . . . . . . . . . . . . . . . 58
Executive Compensation . . . . . . . . . . . . 63
Security Ownership of Certain Beneficial
Owners and Management . . . . . . . . . . . 66
Description of Capital Stock . . . . . . . . . 67
Shares Eligible for Future Sale . . . . . . . 68
Supervision and Regulation . . . . . . . . . , 69
Underwriting . . . . . . . . . . . . . . . . . 73
Legal Matters . . . . . . . . . . . . . . . . 74
Experts . . . . . . . . . . . . . . . . . . . 75
Index to Consolidated Financial Statements . . F-1
-----------------
Until June 10, 1996, (25 days after the date of this
Prospectus), all dealers effecting transactions in the Common
Shares offered hereby, whether or not participating in this
distribution, may be required to deliver a Prospectus. This
delivery requirement is in addition to the obligation of dealers
to deliver a Prospectus when acting as underwriters and with
respect to their unsold allotments or subscriptions.
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2,000,000 COMMON SHARES
PREMIER FINANCIAL
BANCORP, INC.
----------
PROSPECTUS
----------
ADVEST, INC.
May 16, 1996
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