<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
- ----- EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended December 31, 1997
OR
_____ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from to
Commission file number 0-20908
PREMIER FINANCIAL BANCORP, INC.
(Exact name of registrant as specified in its charter)
KENTUCKY 61-1206757
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
120 N. HAMILTON STREET
GEORGETOWN, KENTUCKY 40324
(Address of principal executive offices) (Zip Code)
Registrants' telephone number: (502) 863-7500
Securities registered pursuant to Section 12 (b) of the Act:
NONE
Securities registered pursuant to Section 12 (g) of the Act:
COMMON STOCK
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to
filing requirements for the past 90 days. Yes X No
--- ----
Indicate by check mark if the disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of the registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this 10-K or
any amendment to this Form 10-K. [ ]
The aggregate market value of voting stock held by non-affiliates of the
Registrant as of March 24, 1998 was $107,497,472. The number of shares
outstanding of the Registrant's Common Stock as of March 24, 1998 was
4,985,390.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the following documents are incorporated by reference into the
Form 10-K part indicated:
Document Form 10-K
-------- ---------
(1) Proxy statement for the 1998 annual meeting of Part III
shareholders
<PAGE>
PART I
ITEM 1. DESCRIPTION OF BUSINESS
THE COMPANY
Premier is a multi-bank holding company that, as of March 24,
1998, operated fourteen banking offices in Kentucky and three banking offices
in Ohio through its seven bank subsidiaries (the "Affiliate Banks"), the
seventh of which was acquired on March 20, 1998. At December 31, 1997,
Premier had total consolidated assets of $425.4 million, total consolidated
deposits of $324.6 million and total consolidated shareholders' equity of
$47.8 million.
Premier began an acquisition program in 1993 and has acquired five
commercial banks and two branches of another commercial bank since that time.
Premier also owns nonbank subsidiaries that provide consumer lending and data
processing services.
Premier continues to explore opportunities to acquire banks,
savings associations, branches of either and nonbank companies as permitted
by the Bank Holding Company Act of 1956, as amended (the "BHC Act"). Premier
regularly reviews, analyzes and engages in discussions regarding possible
additional acquisitions. It is not presently known whether, or on what terms,
such discussions will result in further acquisitions, if any. Premier
generally does not announce an acquisition until after the execution of a
definitive agreement.
Premier is a legal entity separate and distinct from its Affiliate
Banks and nonbank subsidiaries. Accordingly, the right of Premier, and thus
the right of Premier's creditors and shareholders, to participate in any
distribution of the assets or earnings of any of the Affiliate Banks or
nonbank subsidiaries is necessarily subject to the prior claims of creditors
of such subsidiaries, except to the extent that claims of Premier, in its
capacity as a creditor, may be recognized. The principal sources of Premier's
revenues are dividends and fees from its Affiliate Banks and nonbank
subsidiaries. See "REGULATORY MATTERS -- Dividend Restrictions" for
discussion of the restrictions on the Affiliate Banks' ability to pay
dividends to Premier.
Premier was incorporated as a Kentucky corporation in 1991 and has
functioned as a bank holding company since its formation. Premier's principal
executive offices are located at 120 N. Hamilton Street, Georgetown, Kentucky
40324, and its telephone number is (502) 863-7500.
BUSINESS
GENERAL
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
decentralized 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.
<PAGE>
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 service needed by their customers and desirable changes to
existing products and services.
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, the Eminence 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 three of
the Banks as well as two non-affiliated banks.
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 market in Kentucky
where business prospects appear favorable.
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 has 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.
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 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.
<PAGE>
REGULATORY MATTERS
The following discussion sets forth certain elements of the
regulatory framework applicable to bank holding companies and their
subsidiaries and provides certain specific information relevant to Premier.
This regulatory framework is intended primarily for the protection of
depositors and the federal deposit insurance funds and not for the protection
of the holders of securities, including Premier Common Shares. To the extent
that the following information describes statutory or regulatory provisions,
it is qualified in its entirety by reference to those provisions. A change in
the statutes, regulations or regulatory policies applicable to Premier or its
subsidiaries may have a material effect on the business of Premier.
GENERAL - As a bank holding company, Premier is subject to regulation under
the Bank Holding Company Act ("BHC Act"), and to inspection, examination and
supervision by the Board of Governors of the Federal Reserve System ("Federal
Reserve"). Under the BHC Act, bank holding companies generally may not
acquire ownership or control of more than 5% of the voting shares or
substantially all the assets of any company, including a bank, without the
Federal Reserve's prior approval. Similarly, bank holding companies generally
may not acquire ownership or control of a savings association without the
prior approval of the Federal Reserve. Further, branching by the Affiliate
Banks is subject to the jurisdiction, and requires the approval, of each
Affiliate Bank's primary federal banking regulator and, if the Affiliate Bank
is a state-chartered bank, the appropriate state banking regulator. In
addition, bank holding companies generally may engage, directly or
indirectly, only in banking and such other activities as are determined by
the Federal Reserve to be closely related to banking.
Under the BHC Act, the Federal Reserve has the authority to
require a bank holding company to terminate any activity or relinquish
control of the nonbank subsidiary (other than a nonbank subsidiary of a bank)
upon the Federal Reserve's determination that such activity or control
constitutes a risk to the financial soundness and stability of any bank
subsidiary of the bank holding company. Premier and the Affiliate Banks are
subject to the Federal Reserve Act, which limits borrowings by Premier and
its nonbank subsidiaries from the Affiliate Banks and also limits various
other transactions between Premier and its nonbank subsidiaries with the
Affiliate Banks.
The five Affiliate Banks chartered in Kentucky are supervised,
regulated and examined by the Kentucky Department of Financial Institutions,
and the two Affiliate Banks chartered in Ohio are supervised, regulated and
examined by the Ohio Division of Financial Institutions. In addition, those
Affiliate Banks that are state banks and members of the Federal Reserve
System are supervised and regulated by the Federal Reserve, and those state
banks that are not members of the Federal Reserve System are supervised and
regulated by the Federal Deposit Insurance Corporation ("FDIC"). Each banking
regulator has the authority to issue cease-and-desist orders if it determines
that the activities of a bank regularly represent an unsafe and unsound
banking practice or a violation of law.
Both federal and state law extensively regulates various aspects
of the banking business, such as, for example, reserve and capital
requirements, truth-in-lending and truth-in-savings disclosure, equal credit
opportunity, fair credit reporting, trading in securities and other aspects
of banking operations. Premier, the Affiliate Banks and Premier's nonbank
subsidiaries are also affected by the fiscal and monetary policies of the
federal government and the Federal Reserve and by various other governmental
laws, regulations and requirements. Further, the earnings of Premier and
Affiliate Banks are affected by general economic conditions and prevailing
interest rates. Legislation and administrative actions affecting the banking
industry are frequently considered by the United States Congress, state
legislatures and various regulatory agencies. It is not possible to predict
with certainty whether such legislation or administrative actions will be
enacted or the extent to which the banking industry, in general, or Premier
and the Affiliate Banks, in particular, would be affected.
<PAGE>
LIABILITY FOR BANK SUBSIDIARIES - The Federal Reserve has a policy to the
effect that a bank holding company is expected to act as a source of
financial and managerial strength to each of its subsidiary banks and to
maintain resources adequate to support each such subsidiary bank. This
support may be required at times when Premier may not have the resources to
provide it. 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 would be assumed by the bankruptcy
trustee and entitled to priority of payment.
Any depository institution insured by the FDIC may be held liable
for any loss incurred, 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 a
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. In the event that such a default occurred
with respect to a bank, any loans to the bank from its parent holding company
will be subordinate in right of payment to payment of the bank's depositors
and certain of its other obligations.
CAPITAL REQUIREMENTS - Premier is subject to capital ratios, requirements and
guidelines imposed by the Federal Reserve, which are substantially similar to
the ratios, requirements and guidelines imposed by the Federal Reserve and
the FDIC on the banks within their respective jurisdictions. These capital
requirements establish higher capital standards for banks and bank holding
companies that assume greater credit risks. For this purpose, a bank's or
holding company's assets and certain specified off-balance sheet commitments
are assigned to four risk categories, each weighted differently based on the
level of credit risk that is ascribed to such assets or commitments. A bank's
or holding company's capital is divided into two tiers: "Tier I" capital,
which includes common shareholders' equity, noncumulative perpetual preferred
stock and related surplus (excluding auction rate issues), minority interests
in equity accounts of consolidated subsidiaries, less goodwill, certain
identifiable intangible assets and certain other assets; and "Tier 2"
capital, which includes, among other items, perpetual preferred stock not
meeting the Tier I definition, mandatory convertible securities, subordinated
debt and allowances for loan and lease losses, subject to certain
limitations, less certain required deductions.
Bank holding companies currently are required to maintain Tier I
and total capital (the sum of Tier 1 and Tier 2 capital) equal to at least 4%
and 8% of total risk-weighted assets, respectively. At December 31, 1997,
Premier met both requirements, with Tier I and total capital equal to 19.82%
and 25.43% of its total risk-weighted assets, respectively.
In addition to the risk-based capital guidelines, the Federal
Reserve requires bank holding companies to maintain a minimum "leverage
ratio" (Tier I capital to adjusted total assets) of 3%, if the holding
company has the highest regulatory ratings for risk-based capital purposes
and, accordingly, is required to maintain a minimum "leverage ratio" of 3%.
All other bank holding companies are required to maintain a leverage ratio of
3% plus at least 100 to 200 basis points. At December 31, 1997, Premier's
leverage ratio was 13.52%.
The foregoing capital requirements are minimum requirements. The
Federal Reserve may set capital requirements higher than the minimums
described above for holding companies whose circumstances warrant it. For
example, holding companies experiencing or anticipating significant growth
may be expected to maintain capital ratios, including tangible capital
positions, well above the minimum levels. The Federal Reserve has not,
however, imposed any such special capital requirements on Premier.
Additionally, the Federal Deposit Insurance Corporation
Improvement Act of 1991 ("FDICIA"), among other things, identifies five
capital categories for insured depository institutions (well capitalized,
adequately capitalized, undercapitalized, significantly undercapitalized and
critically undercapitalized) and requires the respective federal regulatory
agencies to implement systems for "prompt corrective action" for insured
depository institutions that do not meet minimum capital requirements within
such categories. FDICIA imposes progressively more restrictive constraints on
operations, management and capital distributions, depending on the category
in which an institution is classified. Failure to meet the capital guidelines
could also
<PAGE>
subject a banking institution to capital raising requirements. An
"undercapitalized" bank must develop a capital restoration plan and its
parent holding company must guarantee the bank's compliance with the plan.
The liability of the parent holding company under any such guarantee is
limited to the lesser of 5% of the Bank's assets at the time it became
"undercapitalized" or the amount needed to comply with the plan. Furthermore,
in the event of the bankruptcy of the parent holding company, such guarantee
would take priority over the parent's general unsecured creditors. In
addition, FDICIA requires the various regulatory agencies to prescribe
certain non-capital standards for safety and executive compensation and
permits regulatory action against a financial institution that does not meet
such standards.
DIVIDEND RESTRICTIONS - Premier is dependent to a large extent on dividends
from its Affiliate Banks for its revenues. Various federal and state
regulatory provisions limit the amount of dividends the Affiliate Bank can
pay to Premier without regulatory approval. At December 31, 1997, $7.7
million of the total shareholders' equity of the Affiliate Banks was
available for payment of dividends to Premier without approval by the
applicable regulatory authority.
In addition, federal bank regulatory authorities have authority to
prohibit Premier's Affiliate Banks from engaging in an unsafe or unsound
practice in conducting their business. The payment of dividends, depending
upon the financial condition of the bank in question, could be deemed to
constitute such an unsafe or unsound practice. The ability of the Affiliate
Banks to pay dividends in the future is presently, and could be further,
influenced by bank regulatory policies and capital guidelines as well as each
Affiliate Bank's earnings and financial condition.
INTERSTATE BANKING - Under the Riegle-Neal Interstate Banking and Branching
Efficiency Act of 1994 (the "Riegle-Neal Act"), subject to certain
concentration limits, (i) bank holding companies, such a Premier, are
permitted to acquire banks and bank holding companies located in any state of
the United States, subject to certain restrictions, and (ii) banks are
permitted to acquire branch offices outside their home state by merging with
out-of-state banks, purchasing branches in other states or establishing de
novo branch offices in other states; provided that, in the case of any such
purchase or opening of individual branches, the host state has adopted
legislation "opting in" to the relevant provisions of the Riegle-Neal Act;
and provided further, that, in the case of a merger with a bank located in
another state, the host state has not adopted legislation "opting out" of the
relevant provisions of the Riegle-Neal Act.
NUMBER OF EMPLOYEES
The Company and its subsidiaries collectively had approximately
193.5 full-time equivalent employees as of March 24, 1998. Its executive
offices are located at 120 N. Hamilton Street, Georgetown, Kentucky,
telephone number (502) 863-7500 (facsimile number (502) 863-7503).
ITEM 2. PROPERTIES
The Company owns the banking office of the Georgetown Bank at 120
North Hamilton Street, Georgetown, Kentucky, at which the Company's executive
offices are located. In addition, the Company owns a building at 115 North
Hamilton Street, Georgetown, Kentucky which is being remodeled for future
offices, a branch banking office of the Georgetown Bank located at 103 Finley
Drive, Georgetown, Kentucky and property at 812 South Broadway, Georgetown
Kentucky where the Georgetown Bank has a temporary branch facility. In
Sharpsburg, Kentucky, the Company owns the main banking office of the
Sharpsburg bank at 648 Main Street and a building at 652 Main Street which is
being remodeled for future offices. The Company also owns property located at
237 Frankfort Street, Brooksville, Kentucky, which was purchased as a
possible future branch site for the Germantown Bank. Except as noted, each of
the Banks owns the real property and improvements on where their banking
activities are conducted.
<PAGE>
The Vanceburg Bank, in addition to its main office at 400 Second
Street, Vanceburg, Kentucky has five branch offices in Lewis County,
Kentucky, including one leased facility. 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 two
branches in Scott County, Kentucky. The Sharpsburg Bank has, in addition to
its main office, one branch located in Bath County, Kentucky. The Eminence
Bank has its main office on Main Street, Eminence, Kentucky, and two branches
in Henry County, Kentucky. The Sabina Bank has its main office at 135 North
Howard Street, Sabina, Ohio, and two branches, one each located in Hardin and
Auglaize Counties, Ohio.
ITEM 3. 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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders,
through solicitation of proxies or otherwise during the fourth quarter of the
fiscal year covered by this report.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Prior to the Company's public offering in May, 1996, there had
been no established public trading market for the common shares of the
Company, with trading in common shares being limited and infrequent. During
the 120 days prior to the offering, the Company was aware of certain trading
transactions involving common shares at a sales price of $12.50 per share.
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 have
been representative of prices that might have been realized in trading
transactions in common shares following the offering. The Company's common
stock is listed on the NASDAQ under the symbol PFBI. At March 24, 1998, the
Company had approximately 608 record holders of its common shares.
The following table sets forth on a quarterly basis cash dividends
paid and the range of high and low sales prices on a per share basis during
the quarters indicated. Cash dividends paid per share shown below have been
adjusted retroactively to reflect prior stock splits effected in the form of
share dividends.
<TABLE>
<CAPTION>
CASH SALES PRICE
DIVIDENDS PAID HIGH LOW
-------------- ----- ------
<S> <C> <C> <C>
1995:
First Quarter $ 0.10 $ * $ *
Second Quarter 0.10 * *
Third Quarter 0.125 * *
Fourth Quarter 0.125 * *
------
$ 0.45
======
1996:
First Quarter $0.125 $ * $ *
Second Quarter 0.125 14.25 13.50
Third Quarter 0.125 14.00 12.25
Fourth Quarter 0.125 14.12 12.00
------
$0.50
======
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
CASH SALES PRICE
DIVIDENDS PAID HIGH LOW
-------------- ----- ------
<S> <C> <C> <C>
1997:
First Quarter $ 0.125 $15.62 $13.50
Second Quarter 0.125 18.75 14.25
Third Quarter 0.15 21.25 17.00
Fourth Quarter 0.15 27.50 20.12
------
$ 0.55
======
1998:
First Quarter **$0.15 $25.75 $21.56
</TABLE>
* No established public trading market.
** Dividend declared March 10, 1998 to shareholders of record as of
March 20, 1998, payable March 31, 1998.
The Company has paid consecutive quarterly cash dividends since
its organization. The Company's annual cash dividend has increased 7
consecutive years, from $0.12 per share in 1991 to $0.55 per share in 1997.
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 December 31, 1997, approximately $7.7 million was available for
payment as dividends from the Banks to the Company without the need for
approval from the FDIC or the state banking regulators. 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.
<PAGE>
ITEM 6. 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 annual report. The consolidated
selected financial data presented below has been retroactively adjusted to
reflect all prior stock splits effected in the form of share dividends and
has been restated to give the effect of acquisitions accounted for as a
pooling of interests.
<TABLE>
<CAPTION>
AT OR FOR THE YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------------------
1997 1996 1995 1994 1993
-------- -------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
EARNINGS
Net interest income $ 16,100 $ 12,426 $ 7,697 $ 7,319 $ 6,974
Provision for loan losses 1,232 760 196 335 389
Non-interest income 4,367 1,721 1,018 870 936
Non-interest expense 11,022 8,075 5,943 5,464 5,304
Income taxes 2,605 1,588 146 567 582
Net income $ 5,608 $ 3,724 $ 2,430 $ 1,823 $ 1,635
FINANCIAL POSITION
Total assets $ 425,436 $ 329,127 $ 192,273 $ 154,653 $ 151,975
Loans, net of unearned
income 283,390 242,625 137,550 106,431 97,521
Allowance for loan losses 3,144 2,854 1,997 1,172 1,192
Goodwill and other intangibles 7,262 5,490 248 8 16
Securities 69,211 52,660 33,919 30,619 35,582
Deposits 324,554 267,208 168,170 136,613 137,538
Other borrowings 20,897 14,977 1,502 0 0
Debt 28,750 0 5,000 1,500 0
Stockholders equity 47,797 44,625 15,603 13,617 12,767
SHARE DATA
Net income - basic $ 1.20 $ 0.99 $ 1.02 $ 0.77 $ 0.69
Net income - diluted 1.19 0.99 1.02 0.77 0.69
Book value 10.20 9.52 6.54 5.77 5.42
Cash dividend 0.55 0.50 0.45 0.36 0.28
RATIOS
Return on average assets 1.37% 1.42% 1.48% 1.19% 1.06%
Return on average equity 12.17% 11.39% 16.49% 13.70% 13.02%
Dividend payout 44.38% 53.22% 41.01% 33.60% 36.24%
Stockholders' equity to total
assets at period-end 11.23% 13.56% 8.12% 8.80% 8.40%
Average stockholders' equity
to average total assets 11.22% 12.48% 8.90% 8.69% 8.14%
CAPITAL RATIOS
Equity to assets 11.23% 13.56% 8.12% 8.80% 8.40%
Leverage ratio 13.52% 12.11% 8.13% 8.84% 8.39%
</TABLE>
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
This discussion presents Management's analysis of the primary factors
affecting Premier Financial Bancorp, Inc.'s (the "Company" or "Premier")
performance and financial condition. It should be read in conjunction with
the accompanying audited consolidated financial statements beginning on page
36 of this report. Unless otherwise noted, all amounts and per share data
have been restated to give the effect of acquisitions accounted for as a
pooling of interests. All dollar amounts (except per share data) are
presented in thousands unless otherwise noted.
FORWARD-LOOKING STATEMENTS
Management's discussion and analysis contains forward-looking statements that
are provided to assist in the understanding of anticipated future financial
performance. However, such performance involves risks and uncertainties, and
there are certain important factors that may cause actual results to differ
materially from those anticipated. These important factors include, but are
not limited to, economic conditions (both generally and more specifically in
the markets in which Premier operates), competition for Premier's customers
from other providers of financial services, government legislation and
regulation (which changes from time to time), changes in interest rates,
Premier's ability to originate quality loans and attract and retain deposits,
the impact of Premier's rapid growth, Premier's ability to control costs, and
new accounting pronouncements, all of which are difficult to predict and many
of which are beyond the control of Premier.
OVERVIEW
In 1997, Premier continued to pursue its strategic plan to build a network of
independently managed community banks into a strongly capitalized, risk
controlled bank holding company with high quality earnings and shareholder
liquidity. Premier continued to post record results in three key financial
areas: earnings, total assets and shareholders' equity. For 1997, net income
rose 50.6% to $5,608 from $3,723, as restated, in 1996; total assets
increased to $425,436 from the $292,565 reported in 1996, and shareholders'
equity increased to $47,797 from the $39,863 reported in 1996.
During 1997, a number of larger financial institutions announced plans to
divest of branches. In order to take advantage of these potential
opportunities and to provide additional capital for other expansion
opportunities, Premier issued $28.75 million of capital securities of
subsidiary trust (capital securities) in June. A portion of these funds were
used in December in connection with the purchase of two branches with $23.3
million in deposits and the balance will be used to complete the acquisition
of three branches with total deposits of $148 million expected to be
completed in June 1998. In the third and fourth quarters of 1997, Premier
invested the proceeds of the capital securities in temporary investments
realizing gross investment gains of $2.2 million which were added to
earnings. At year end 1997, Premier had Tier I capital totaling $56.5 million
which will provide sufficient capital to complete the proposed acquisitions
as well as additional acquisitions which may become available.
<PAGE>
Highlights of Premier's 1997 performance and financial condition include:
- Return on Average Assets of 1.37%
- Return on Average Equity of 12.17%
- Net Interest Margin 4.32%
- Efficiency Ratio 57.3%
- Allowance for Loan Losses to Non-Performing Loans 167%
ACQUISITIONS
Premier's acquisition philosophy is to seek community bank candidates in
primarily non-urban areas that can become a part of Premier on a non-dilutive
basis within a two year timeframe. In evaluating acquisition opportunities,
Premier conducts a due diligence review to determine both risks and earnings
potential. Desirable candidates have an established base of community
involvement, strong local directors, a history of earnings and readily
identifiable asset risks. Acquisition transactions are structured to make a
fair return on investment while meeting the needs of the shareholders of
banks joining Premier.
In 1997, Premier completed one acquisition and also acquired the deposits and
banking facilities of two branches. On November, 13, 1997, Premier acquired
The Sabina Bank, Sabina, Ohio, in a share exchange accounted for as a pooling
of interests.
On December 11, 1997, two branch offices of the Fifth Third Bank of Western
Ohio located in Waynesfield and Ada, Ohio, were acquired for cash and
accounted for as a purchase.
Also in 1997, Premier announced its intention to acquire Ohio River Bank,
Ironton, Ohio, in the first quarter of 1998, in a business combination
anticipated to be accounted for as a pooling of interests and also announced
its planned purchase of three branch offices of Banc One Corporation located
in Madison, Phillippi and Van, West Virginia, expected to be completed in the
second quarter of 1998.
In 1996, Premier completed one acquisition. On July 1, 1996, Farmers Deposit
Bancorp of Eminence, Kentucky, and its wholly owned subsidiary, Farmers
Deposit Bank, were acquired in a cash transaction that was accounted for as a
purchase.
In 1995, Premier completed two acquisitions. 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.
On October 31, 1995, Premier acquired all of the outstanding shares of
Citizens Bank of Sharpsburg, Kentucky, for cash. This combination was
accounted for as a purchase.
The significant financial data relative to these acquisitions is set forth in
Note 2 to the financial statements.
CAPITAL SECURITIES OF SUBSIDIARY TRUST
On June 9, 1997, Premier completed its public offering of $28.75 million of
mandatorily redeemable capital securities of a subsidiary trust (capital
securities). These securities qualify as Tier I capital up to an amount not
to exceed 25% of Tier I capital and the portion that exceeds the 25%
limitation qualifies as Tier 2 capital. The issuance of these securities and
resultant increase in capital has allowed the Company to pursue larger
financial institutions as potential acquisitions and to bid for branches
offered for sale by other financial institutions.
<PAGE>
RESULTS OF OPERATIONS
Earnings Summary
Premier recorded net income for 1997 of $5,608, versus $3,723 and $2,431,
respectively, in 1996 and 1995. Basic earnings per common share were $1.20 in
1997 compared to $.99 in 1996 and $1.02 in 1995. Net income increased $1,885
or 50.6% in 1997 compared to 1996. The primary factors contributing to the
higher earnings in 1997 were a 29.6% increase in net interest income from
$12,426 in 1996 to $16,100 in 1997 and an increase in the gain on the sale of
investment securities of $2,202. Offsetting these increases was an increase
in the provision for loan losses from $760 in 1996 to $1,232 in 1997, an
increase in noninterest expense of $2,947 from $8,075 in 1996 to $11,022 in
1997 and an increase of $1,016 in income taxes from $1,589 in 1996 to $2,605
in 1997. Fully diluted earnings per share increased 20.2% in 1997 compared to
1996 despite the increase in the weighted average number of shares from 3.8
million in 1996 to 4.7 million in 1997.
Net income of $3,723 in 1996 represented a 53.2% increase over the 1995
amount of $2,431. Net interest income increased 61.4% to $12,426 in 1996
versus $7,697 in 1995. Offsetting this increase was a $564 increase in the
provision for loan losses and a $1,443 increase in income taxes from $146 in
1995 to $1,589 in 1996.
In 1995, income taxes were substantially reduced as a result of the
elimination of a $504 valuation allowance related to the deferred tax assets
at Georgetown Bancorp, Inc. Per share earnings in 1996 of $0.99 were down
$0.03 or 2.9% from the $1.02 recorded in 1995. The reduced level of per share
earnings was primarily attributable to the increase in outstanding shares of
2,300,000 as a result of the Company's initial public offering in May of 1996.
NET INTEREST INCOME
Premier's primary source of revenue is its net interest income, which is the
difference between the interest received on its earning assets and the
interest paid on the funds acquired to support those assets. Loans made to
businesses and individuals are the primary interest earning assets, followed
by investment securities and federal funds sold in the inter-bank market.
Deposits are the primary interest bearing liabilities used to support the
interest earning assets. The level of net interest income is affected by both
the balances and mix of interest earning assets and interest bearing
liabilities, the changes in their corresponding yields and costs, by the
volume of interest earning assets funded by noninterest bearing deposits, and
the level of capital. Premier'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.
Nontaxable income from loans and investment securities is presented on a
tax-equivalent basis whereby income exempt from tax has been adjusted upward
by an amount equivalent to the prevailing federal income taxes that would
have been paid if the income had been fully taxable. The discussion of
factors influencing net interest income that follows is based on taxable
equivalent data. In each of the three years, this adjustment is based on an
assumed federal income tax rate of 34%.
<PAGE>
SUMMARY OF NET INTEREST INCOME.
(Dollars in thousands on a taxable equivalent basis)
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Interest income.................. $ 33,995 $ 22,401 $ 13,990
Tax equivalent adjustment........ 516 420 279
--------- --------- ---------
Interest income.............. 34,511 22,821 14,269
Interest expense................. 17,894 9,975 6,294
--------- --------- ---------
Net interest income.......... $ 16,617 $ 12,846 $ 7,975
========= ========= =========
</TABLE>
The table below shows, for the three year period ended December 31, 1997, the
average distribution of assets, liabilities and the interest earned or paid
on those items, together with the level of shareholders' equity, as well as
Premier's net interest spread and net interest margin on interest earning
assets (net interest income divided by average earning assets). In 1997, tax
equivalent net interest income increased to $16,617 from $12,846 in 1996, an
increase of $3,771 or 29.4%. This increase was due to an increase of $141,028
or 57.8% in average earning assets and an increase of $130,897 or 65.7% in
average interest bearing liabilities. The yield on earning assets in 1997 of
8.96% was 39 basis points lower than the 9.35% earned in 1996 while the cost
of interest bearing liabilities increased 41 basis points from 5.01% in 1996
to 5.42% in 1997. Consequently, Premier's net interest spread decreased from
4.34% in 1996 to 3.54% in 1997 and the net interest margin decreased from
5.26% in 1996 to 4.32% in 1997. The decrease in net interest spread and net
interest margin is primarily attributable to the issuance of $28.75 million
of mandatorily redeemable capital securities (capital securities) at an
interest rate of 9.75% and the Company's implementation of an arbitrage
investment strategy as described below.
In an effort to minimize the adverse impact on net income until a permanent
investment can be made of the funds from the issuance of the capital
securities, the Company initiated an investment strategy at the end of the
second quarter of 1997 of selling approximately $110 million of short-term
(60 days) repurchase agreements and investing the proceeds in 2 to 5 year
U.S. Treasury and agency securities with a weighted average interest rate of
approximately 1% higher than the weighted average rate paid on the repurchase
agreements. The Company's policy is to unwind its position whenever the
spread between the weighted average interest rate of the repurchase
agreements and the weighted average rate on the underlying securities falls
below 50 basis points. During the third quarter of 1997 and again during the
fourth quarter of 1997, the spread fell below 50 basis points, the Company
unwound its positions and recognized net gains of $2.2 million on the sale of
the underlying securities in the arbitrage portfolio. Although the Company's
investment strategy to minimize the adverse impact on net income has been
successful, the Company's net interest spread and net interest margin have
been significantly reduced by its implementation. Excluding the effects of
the capital securities and the Company's investment strategy, net interest
spread would have been 4.28% in 1997 compared to 4.34% in 1996 and net
interest margin would have been 5.20% in 1997 versus the 5.26% achieved in
1996.
The net interest spread declined 12 basis points from 4.46% in 1995 to 4.34%
in 1996, while the net interest margin, which measure net interest income as
a percent of average earning assets, increased from 5.24% in 1995 to 5.26% in
1996. The increase in net interest margin is attributable to the higher
levels of noninterest bearing deposits and capital supporting interest
earning assets which rose from 22.5% in 1995 to 24.6% in 1996.
<PAGE>
The following table presents average balances and interest rates for the three
year period ended December 31, 1997.
<TABLE>
<CAPTION>
AVERAGE CONSOLIDATED BALANCE SHEETS AND NET INTEREST
ANALYSIS
(Dollars in thousands.)
1997 1996 1995
------------------------- ---------------------------- ---------------------------
AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE INTEREST RATE BALANCE INTEREST RATE BALANCE INTEREST RATE
------------------------- ---------------------------- ---------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS:
Interest earning assets
U.S. Treasury and federal
agency securities $ 85,670 $ 5,288 6.17% $ 30,559 $ 1,772 5.80% $ 21,038 $ 1,186 5.64%
States and municipal
obligations(1) 18,027 1,455 8.07 12,783 1,017 7.96 8,088 667 8.25
Other securities (1) 5,155 507 9.84 3,716 395 10.63 2,556 280 10.95
-------- ------- ----- --------- ------- ----- -------- ------- -----
Total investment
securities $108,852 $ 7,250 6.66 $ 47,058 $ 3,184 6.77 $ 31,682 $ 2,133 6.73
Federal funds sold 16,694 937 5.61 7,662 415 5.42 5,222 292 5.59
Interest-bearing deposits
with banks 0 0 0 376 19 5.05 436 34 7.80
Loans, net of unearned
income (3) (4)
Commercial 111,448 11,260 10.10 88,161 8,923 10.12 59,650 6,138 10.29
Real estate mortgage 110,519 10,778 9.75 72,026 7,135 9.91 33,918 3,436 10.13
Installment 37,545 4,286 11.42 28,747 3,145 10.94 21,428 2,236 10.43
-------- ------- ----- --------- ------- ----- -------- ------- -----
Total loans $259,512 $26,324 10.14 $ 188,934 19,203 10.16 $114,996 $11,810 10.27
Total interest-earning assets $385,058 $34,511 8.96% $ 244,030 $22,821 9.35% $152,336 $14,269 9.37%
Allowance for loan losses (2,975) (2,427) (1,299)
Cash and due from banks 8,961 7,431 5,744
Premises and equipment 5,451 3,526 2,341
Other assets 14,200 8,921 4,800
-------- ---------- --------
Total assets $410,695 $ 261,481 $163,922
LIABILITIES:
Interest bearing deposits:
NOW and money market $ 45,135 $ 1,521 3.37% $ 32,532 $ 1,073 3.30% $ 19,828 $ 510 2.57
Savings 29,499 869 2.95 23,598 682 2.89 19,302 547 2.83
Certificates of deposit
and other time deposits 175,302 10,342 5.90 133,356 7,630 5.72 84,486 4,877 5.77
-------- ------- ----- --------- ------- ----- -------- ------- ----
Total interest-
bearing deposits $249,936 $12,732 5.09 $ 189,486 $ 9,385 4.95 $123,616 $ 5,934 4.80
Other borrowings 49,358 2,721 5.51 3,983 214 5.37 994 63 6.34
FHLB advances 14,301 810 5.66 3,660 208 5.68 713 44 6.17
Debt 16,460 1,631 9.91 2,029 168 8.28 2,891 253 8.75
-------- ------- ----- --------- ------- ----- -------- ------- ----
Total interest-bearing
liabilities $330,055 $17,894 5.42% $ 199,158 $ 9,975 5.01% $128,214 $ 6,294 4.91%
Non-interest bearing demand
deposits 31,263 27,250 19,617
Other liabilities 3,279 2,373 1,372
-------- --------- --------
Total liabilities $364,597 $ 228,781 $149,203
SHAREHOLDERS' EQUITY: 46,098 32,700 14,719
-------- --------- --------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $410,695 $ 261,481 $163,922
NET INTEREST INCOME (1) 16,617 12,846 7,975
NET INTEREST SPREAD (1) 3.54% 4.34% 4.46%
NET INTEREST MARGIN (1) 4.32% 5.26% 5.24%
</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.
<PAGE>
The accompanying analysis of changes in net interest income in the following
table shows the relationship of the volume and rate portions of these changes
in 1997 and 1996.
<TABLE>
<CAPTION>
ANALYSIS OF CHANGES IN NET
INTEREST INCOME
(Dollars in thousands on a taxable equivalent basis)
1997 VS. 1996 1996 VS. 1995
INCREASE (DECREASE) DUE INCREASE (DECREASE) DUE
TO CHANGE IN TO CHANGE IN
---------------------------- ----------------------------
VOLUME RATE NET CHANGE VOLUME RATE NET CHANGE
<S> <C> <C> <C> <C> <C> <C>
Interest Income:
Loans $ 7,166 $ (45) $ 7,121 $ 7,520 $ (127) $ 7,393
Investment securities 4,144 (78) 4,066 1,038 14 1,052
Federal funds sold 506 16 522 133 (10) 123
Deposits with banks (19) (19) (4) (12) (16)
-------- ------ -------- ------- ------ -------
Total interest income $ 11,797 $ (107) $ 11,690 $ 8,687 $ (135) $ 8,552
Interest Expense:
Deposits -
NOW and money market $ 424 $ 24 $ 448 $ 390 $ 173 $ 563
Savings 173 14 187 124 11 135
Certificates of deposit 2,467 245 2,712 2,796 (43) 2,753
Other borrowings 2,501 6 2,507 159 (8) 151
FHLB borrowings 603 (1) 602 168 (4) 164
Debt 1,424 39 1,463 (72) (13) (85)
-------- ------ -------- ------- ------ -------
Total interest expense $ 7,592 $ 327 $ 7,919 $ 3,565 $ 116 $ 3,681
Net interest income $ 4,205 $ (434) $ 3,771 $ 5,122 $ (251) $ 4,871
</TABLE>
<PAGE>
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 the factors include:
- Past due and nonperforming assets;
- Specific internal analyses of loans requiring special attention;
- 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.
<PAGE>
The following table is a summary of the Company's loan loss experience for
each of the past five years.
<TABLE>
<CAPTION>
SUMMARY OF LOAN LOSS EXPERIENCE
(Dollars in Thousands)
YEARS ENDED DECEMBER 31,
---------------------------------------------------------
1997 1996 1995 1994 1993
-------- -------- -------- -------- -------
<S> <C> <C> <C> <C> <C>
Balance at beginning of year $ 2,854 $ 1,996 $ 1,172 $ 1,192 $ 1,349
Balance of allowance for loan losses of
acquired subsidiaries at acquisition date 0 812 803 0 0
Amounts charged off:
Commercial 532 250 74 312 372
Real estate mortgage 139 68 19 5 47
Consumer 513 619 180 200 279
-------- -------- -------- -------- -------
Total loans charged off $ 1,184 $ 937 $ 273 $ 517 $ 698
Recoveries on amounts previously charged off:
Commercial 48 89 32 94 76
Real estate mortgage 0 4 2 5 64
Consumer 194 130 64 63 12
-------- -------- -------- -------- -------
Total recoveries 242 223 98 $ 162 $ 152
Net charge-offs 942 714 175 355 546
Provision for loan losses 1,232 760 196 335 389
-------- -------- -------- -------- -------
Balance at end of year $ 3,144 $ 2,854 $ 1,996 $ 1,172 $ 1,192
Total loans, net of unearned income:
Average 259,512 188,934 114,996 102,515 99,464
At December 31 283,390 242,625 137,550 106,431 97,521
As a percentage of average loans:
Net charge-offs .36% .38% .15% .35% .55%
Provision for possible loan losses .47% .40% .17% .33% .39%
Allowance as a percentage of year-end net loans 1.11% 1.18% 1.45% 1.10% 1.22%
Allowance as a multiple of net charge-offs 3 4 11 3 2
</TABLE>
The provision for possible loan losses for 1997 was $1,232 compared to $760
in 1996, an increase of $472. This increase resulted from loan growth, the
inclusion of Farmers Deposit Bancorp for a full year, and provisions made for
possible loan losses for certain indirect consumer loans at the consumer
finance subsidiary operated by Citizens Deposit Bank. In 1997, net
charge-offs were $942 compared to $714 in 1996, an increase of $228. This
increase was primarily attributable to the charge-off of loans acquired in
the acquisition of Farmers Deposit Bancorp. At December 31, 1997, Premier's
allowance for possible loan losses was 1.11% of period-end loans compared to
1.18% at December 31, 1996.
<PAGE>
Net charge-offs to average loans were .36% for the year 1997 compared to .38%
for the year 1996. At December 31, 1997, Premier's allowance for possible
loan losses totaled $3,144, representing an increase of $290 over the amount
reported at December 31, 1996. The allowance for possible loan losses was
167% of nonperforming loans on December 31, 1997, compared to 155% at
December 31, 1996. At year end 1997, nonperforming loans represented .50% of
total outstanding loans, down from .56% on December 31, 1996.
The provision for possible loan losses for 1996 was $760, an increase of $564
over the $196 in 1995. Net charge-offs in 1996 were $714, versus $175
charged-off in 1995.
The following table sets 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 LOAN LOSSES
(Dollars in thousands)
<TABLE>
<CAPTION>
At December 31,
---------------------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
Amount % Amount % Amount % Amount % Amount %
---------------- ---------------- -------------- --------------- --------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial $1,186 37.7% $1,038 36.4% $ 675 33.8% $ 560 47.8% $ 566 47.5%
Real estate 550 17.5 1,097 38.4 575 28.8 175 14.9 159 13.3
mortgage
Consumer 852 27.1 626 21.9 573 28.7 292 24.9 304 25.5
Unallocated 556 17.7 93 3.3 173 8.7 145 12.4 163 13.7
------ ---- ------ ------ ------ ----- ------ ------ ------ ----
Total $3,144 100.0% $2,854 100.0% $1,996 100.0% $1,172 100.0% $1,192 100.0%
</TABLE>
<PAGE>
NONINTEREST INCOME AND EXPENSES
Noninterest 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. Noninterest income
includes deposit service charges, fees from data processing and trust
services, fees and commissions from many other corporate and retail products
and gains and losses from the sale of investment securities.
The discussion that follows considers the impact for comparative purposes of
the acquisition of Farmers Deposit Bancorp (Farmers Deposit) on July 1, 1996.
Since the acquisition was accounted for as a purchase, only amounts from that
date through December 31, 1996 are included in the consolidated financial
statements for 1996, whereas the 1997 consolidated financial statements
include Farmers Deposit for the full year.
Total fees and other income increased $444 or 25.8% in 1997 to $2,163 from
$1,719 in 1996. Excluding Farmers Deposit, fees and other income increased
$164 or 11.3%. All categories increased in 1997, with service charges on
deposit accounts increasing 15.4%, insurance commissions increasing 32.4% and
all other income increasing 46.5%.
Total fees and other income in 1996 increased $695 or 67.9% over 1995.
Excluding Farmers Deposit, the increase would have been $427 for a 41.7%
increase. In 1996, service charges on deposit accounts increased 54.0%,
insurance commissions increased 88.4% and other income increased 94.8% over
the amounts recorded in 1995.
Investment securities gains in 1997 were $2,204 versus $1 in 1996 and losses
in 1995 of $6. The significant increase in 1997 was due to the unwinding of
an arbitrage investment portfolio established to maximize the utilization of
the proceeds received from the issuance of capital securities.
Noninterest expenses increased $2,947 or 36.5% in 1997, from $8,075 in 1996
to $11,022 in 1997, and increased $2,132 or 35.9% in 1996 from $5,943 in
1995. Excluding Farmers Deposit, noninterest expense increased 25.6% in 1997
and 16.3% in 1996.
Salaries and employee benefits, the largest component of noninterest expense,
increased 27.8% in 1997 and 43.6% in 1996. Excluding Farmers Deposit, the
increases were 16.7% in 1997 and 19.4% in 1996. The increases include salary
increases and reflect increases in the number of full time equivalent
employees from 111 at December 31, 1995 to 150 at December 31, 1996 and 161
at December 31, 1997, due to acquisitions and expansion of the Company's
business activity.
Occupancy and equipment expense for 1997 of $1,421 was $224 or 18.7% higher
than the $1,197 for 1996. Excluding Farmers Deposit, the increase was $122 or
11.2%. The increase in 1996 was $208 or 21.0% from $989 in 1995. The increase
in 1996 and 1997 are primarily attributable to the expansion in the number of
banking locations from 9 at December 31, 1995 up to 16 at December 31, 1997.
Other noninterest expense, which is the second largest category, increased
$540 or 30.6% in 1997 and $384 or 27.9% in 1996. Excluding Farmers Deposit,
the increase in 1997 would have been 36.0% and the increase in 1996 would
have been 2.7%.
The Company incurred expenses relating to the acquisition of The Sabina Bank
of $467 in 1997. No acquisition expenses were incurred in 1996, while
acquisition expenses of $110 were incurred in 1995. Expenses related to
acquisitions are charged to expense for acquisitions accounted for as pooling
of interests while expense related to acquisitions accounted for as purchases
are capitalized as a component of the purchase price and ultimately increase
the amount of goodwill included with the purchase.
<PAGE>
Goodwill amortization increased in 1997 primarily due to the inclusion of
Farmers Deposit for the full year versus half the year in 1996.
The Company continually seeks to develop fees and other income for services
provided while holding operating expenses to the minimum amount required to
provide quality service. In 1997, total net noninterest expenses (excluding
investment securities gains and acquisition expenses) as a percent of average
total assets were reduced to 2.04% from 2.43% in 1996 and 2.93% in 1995.
The following table is a summary of non-interest income and expense for the
three year period indicated.
<TABLE>
<CAPTION>
NON-INTEREST INCOME AND EXPENSE
(Dollars in thousands)
INCREASE INCREASE
(DECREASE) (DECREASE)
1997 VS. 1996 VS.
1997 1996 1996 1996 1995 1995
------- ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
Non-Interest Income:
Service charges on deposit accounts $ 1,155 $1,001 $ 154 $1,001 $ 650 $ 351
Insurance income 409 309 100 309 164 145
Other 599 409 190 409 210 199
------- ------ ------ ------ ------ ------
Total fees and other income $ 2,163 $1,719 $ 444 $1,719 $1,024 $ 695
Investment securities gains (losses) 2,204 1 2,203 2 (6) 8
------- ------ ------ ------ ------- ------
Total non-interest income $ 4,367 $1,720 $2,647 $1,721 $1,018 $ 703
Non-Interest Expense:
Salaries and employee benefits 5,587 4,372 1,215 4,372 3,044 1,328
Occupancy and equipment expense 1,421 1,197 224 1,197 989 208
Professional fees 472 259 213 259 209 50
Taxes, other than payroll, property
and income 387 288 99 288 210 78
Acquisition related expenses 467 0 467 0 110 (110)
Amortization of intangibles 386 197 189 197 3 194
Other expenses 2,302 1,762 540 1,762 1,378 384
------- ------ ------ ------ ------ ------
Total non-interest expenses $11,022 $8,075 $2,947 $8,075 $5,943 $2,132
Net non-interest expenses as a percent
of average assets 1.62% 2.43% 2.43% 3.00%
Net non-interest expenses as a percent
of average assets (excluding
investment securities gains and
losses and acquisition related
expenses) 2.04% 2.43% 2.43% 2.93%
INCOME TAXES
Premier's provision for income taxes was $2,605 in 1997, which represented
31.7% of pre-tax income versus $1,589 or 29.9% of pre-tax income in 1996. The
increase is primarily due to the lower percentage of tax-exempt income in
relation to total pre-tax income and the increase in nondeductible
amortization expense. Income tax expense for 1995 was $146 or 5.7% of pre-tax
income. The lower income tax for 1995 was attributable primarily to the
elimination of the valuation allowance of $504 for deferred tax assets at
Georgetown Bank & Trust.
<PAGE>
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
predominantly 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 $259,512 in 1997 compared with
$188,934 in 1996. At year end 1997, loans net of unearned income totaled
$283,390 compared to $242,625 at December 31, 1996, an increase of $40,765 or
16.8%.
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.
LOAN PORTFOLIO COMPOSITION
LOANS OUTSTANDING
(Dollars in thousands)
December 31
-------------------------------------------------------------------------------------------------
1997 % 1996 % 1995 % 1994 % 1993 %
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Commercial, secured by real
estate $ 66,893 23.41% $ 60,018 24.52% $ 39,568 28.57% $ 30,643 28.55% $ 29,274 29.46%
Commercial, other 45,024 15.75 35,393 14.46 19,702 14.23 18,850 17.56 16,587 16.69
Real estate construction 7,857 2.75 4,138 1.69 2,377 1.72 1,822 1.70 881 .89
Real estate mortgage 93,789 32.82 87,335 35.69 41,096 29.67 30,067 28.01 27,557 27.73
Agricultural 13,208 4.62 11,731 4.79 6,924 5.00 3,271 3.05 3,226 3.25
Consumer 58,523 20.47 44,753 18.29 28,397 20.50 22,397 20.87 21,581 21.72
Other 504 .18 1,363 .56 435 0.31 279 0.26 254 .26
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Total loans $285,798 100.00% $244,731 100.00% $138,499 100.00% $107,329 100.00% $ 99,360 100.00%
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Less unearned income (2,408) (2,106) (949) (898) (1,839)
Total loans net of
unearned income $283,390 $242,625 $137,550 $106,431 $ 97,521
</TABLE>
<PAGE>
Commercial loans generally are made to small-to-medium size businesses
located within a Bank's defined market area and typically are secured by
business assets and guarantees of the principal owners. Collateral for real
estate mortgage loans include residential properties and the 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 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 categories has remained low over the past five years, with net charge
offs being .36% of loans in 1997 and .38% in 1996. With respect to consumer
loans in particular, net charge offs for the year ended December 31, 1997
were $319, or .55% of total consumer loans outstanding at December 31, 1997,
and $489 in 1996, or 1.09% of total consumer loans outstanding at December
31, 1996.
The following table sets forth the maturity distribution and interest
sensitivity of selected loan categories at December 31, 1997. 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, 1997
(Dollars in thousands)
<TABLE>
<CAPTION>
One Year One Through Over Total
or Less Five Years Five Years Loans
<S> <C> <C> <C> <C>
Commercial, secured by real estate $ 10,670 $ 12,595 $ 43,628 $ 66,893
Commercial, other 23,535 12,596 8,893 45,024
Real estate construction 6,856 301 700 7,857
Agricultural 7,024 3,595 2,589 13,208
-------- -------- -------- --------
Total $ 48,085 $ 29,087 $ 55,810 $132,982
Fixed rate loans $ 29,997 $ 21,446 $ 29,384 $ 80,827
Floating rate loans 18,088 7,641 26,426 52,155
-------- -------- -------- --------
Total $ 48,085 $ 29,087 $ 55,810 $132,982
</TABLE>
<PAGE>
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. All loans considered impaired under SFAS 114 are included
in nonperforming loans.
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 the 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.
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>
DECEMBER 31
----------------------------------------------------
1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C>
Nonaccrual loans $ 562 $ 768 $ 693 $ 203 $ 1,028
Accruing loans which are contractually
past due 90 days or more 490 588 480 261 543
Restructured loans 356 0 0 0 0
------- ------- ------- ----- -------
Total nonperforming and restructured
loans $ 1,408 $ 1,356 $ 1,173 $ 464 $ 1,571
Other real estate acquired through
foreclosures 836 485 132 427 110
------- ------- ------- ----- -------
Total nonperforming and restructured
loans and other real estate $ 2,244 $ 1,841 $ 1,305 $ 891 $ 1,681
Nonperforming and restructured loans
as a percentage of net loans .50% .56% .85% .44% 1.61%
Nonperforming and restructured loans
and other real estate as a percentage
of total assets .53% .56% .44% .58% 1.11%
</TABLE>
Nonaccrual loans decreased from $768 at December 31, 1996 to $562 at December
31, 1997. Total nonperforming assets increased from $1,841 at December 31, 1996
to $2,244 at December 31, 1997, however the percentage of nonperforming loans to
total loans decreased from .56% to .50%
The Company continues to follow its long-standing policy of not engaging in
international lending and not concentrating lending activity in any one
industry.
<PAGE>
Although loans may be classified as nonperforming, many continue to pay interest
irregularly or at less than original contractual rates. A summary of actual
income recognized on nonperforming loans versus their full contractual yields
for each of the past five years is presented below.
INTEREST INCOME ON NON-ACCRUAL AND RESTRUCTURED LOANS
YEAR ENDED DECEMBER 31
(Dollars in thousands)
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C>
Contractual interest 77 73 32 15 49
Interest recognized 61 2 22 0 6
</TABLE>
INVESTMENT ACTIVITIES
The securities portfolio consists of debt and equity securities which provide
the Company with a 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. Treasury and 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. Treasury and 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,
collateralized mortgage obligations or other mortgage-related derivative
products and/or structured notes.
Securities, exclusive of the arbitrage portfolio, as a percentage of average
interest-earning assets decreased to 15.1% in 1997 versus 19.3% in 1996 and
20.8% in 1995.. 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, 1997 and 1996, the Company had an investment in noncumulative
perpetual preferred stock of First Guaranty Bank, Hammond, Louisiana. The
market value of this investment approximated its book value which totaled $2
million at December 31, 1997 and 1996. The dividend rate on the preferred
stock is 2% in excess of the prime rate as in effect from time to time.
<PAGE>
The following tables present the carrying values and maturity
distribution of investment securities.
CARRYING VALUE OF SECURITIES
(Dollars in thousands)
<TABLE>
<CAPTION>
DECEMBER 31
1997 1996 1995
<S> <C> <C> <C>
U.S. Treasury and Federal agencies:
Available for sale $ 35,967 $ 22,720 $ 19,163
Held to maturity 5,588 8,387 2,300
State and municipal obligations:
Available for sale 3,564 4,464 2,864
Held to maturity 14,625 12,190 6,347
Equity securities:
Available for sale 2,795 2,788 2,819
Held to maturity 0 0 0
Other securities:
Available for sale 3,600 0 0
Held to maturity 149 416 18
Total securities:
Available for sale 45,926 29,972 24,846
Held to maturity 20,362 20,993 8,665
-------- -------- --------
Total $ 66,288 $ 50,965 $ 33,511
</TABLE>
MATURITY DISTRIBUTION OF SECURITIES
December 31, 1997
(Dollars in thousands)
<TABLE>
<CAPTION>
ONE FIVE
YEAR THROUGH THROUGH OVER
OR FIVE TEN TEN OTHER 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 $20,869 $ 9,315 $ 4,403 $1,380 $ 0 $35,967 $35,967
Held to maturity 2,300 2,986 301 0 0 5,587 5,603
State and municipal obligations:
Available for sale 414 2,160 613 377 0 3,564 3,564
Held to maturity 732 5,321 5,657 2,916 0 14,626 15,110
Other securities:
Available for sale 0 0 0 0 6,395 6,395 6,395
Held to maturity 0 0 0 0 149 149 149
Total securities:
Available for sale 21,283 11,475 5,016 1,757 6,395 45,926 45,926
Held to maturity 3,032 8,307 5,958 2,916 149 20,362 20,862
------- ------- ------- ------ ------ ------- -------
Total $24,315 $19,782 $10,974 $4,673 $6,544 $66,288 $66,788
======= ======= ======= ====== ====== ======= =======
Percent of total 36.68% 29.84% 16.56% 7.05% 9.87% 100.00% 100.75%
Weighted average yield* 4.85% 4.61% 5.11% 4.55% 8.52% 5.17%
</TABLE>
*The weighted average yields are calculated on historical cost on a non
tax-equivalent basis.
<PAGE>
DEPOSIT ACTIVITIES
Managing the mix and repricing of deposit liabilities is an important aspect of
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 $281,199 in 1997, a 29.7% increase over 1996. Total
deposits averaged $216,736 in 1996, an increase of $73,503 or 51.37% over 1995.
Noninterest bearing deposits averaged 12.5% of total deposits in 1997, compared
to 14.4% in 1996 and 15.9% in 1995.
At December 31, 1997, deposits totaled $324,554, compared to $267,208 at
December 31, 1996, an increase of $57,346, or 21.5%. Of this increase,
approximately $23,300 is attributable to the acquisition of two branches during
1997. Exclusive of the acquisition, deposits increased $34,046 from December 31,
1996 to December 31, 1997, representing a 12.7% increase.
The table below provides information on the maturities of time deposits of
$100,000 or more at December 31, 1997.
MATURITY OF TIME
DEPOSITS OF $100,000 OR MORE
<TABLE>
<CAPTION>
December 31, 1997
-----------------
(in thousands)
<S> <C>
Maturing 3 months or less $ 9,200
Maturing over 3 months through 6 months 8,459
Maturing over 6 months through 12 months 12,510
Maturing over 12 months 16,936
--------
Total $ 47,105
========
</TABLE>
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>
1997 1996 1995
CATEGORY AMOUNT RATE (%) AMOUNT RATE (%) AMOUNT RATE (%)
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Demand $ 31,263 0% $ 27,250 0% $ 19,617 0%
NOW and money
market accounts 45,135 3.37% 32,532 3.30% 19,828 2.57%
Savings 29,499 2.95% 23,598 2.89% 19,302 2.83%
Certificates of deposit
and other time 175,302 5.90% 133,356 5.72% 84,486 5.57%
-------- ----- -------- ----- -------- -----
Total $281,199 4.53% $216,736 4.33% $143,233 4.14%
</TABLE>
<PAGE>
CAPITAL
Stockholders' equity increased $3,172 in 1997 to $47.8 million or 11.2% of total
assets at December 31, 1997. This compares to $44.6 million, or 13.6% of total
assets at December 31, 1996. The primary source of growth in stockholders'
equity in 1997 was the retention of net earnings of $3,119. The primary sources
of growth in 1996 were the issuance of common stock in the Company's initial
public offering of $27.1 million and retention of net earnings of $1,741. The
consolidated statements of changes in stockholders' equity details the changes
in equity for the last three years.
The fair value adjustment of the Company's available for sale securities
portfolio, which is recorded as a component of stockholders' equity, may change
significantly as market conditions change. At December 31, 1997 and 1996, the
adjustment resulted in a reduction of stockholders' equity of $65 and $118,
respectively. Further volatility in stockholders' equity may occur in the future
as market conditions change.
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 regulatory capital requirement
limitations. During 1998, the Banks could, without prior approval, declare
dividends to the Company of approximately $7,656 plus any 1998 net profits
retained to the date of the dividend declaration.
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 2, the sum of which is total capital. Tier I capital is essentially
common equity, less intangible assets. Tier 2 capital is essentially qualifying
long-term debt and a portion of the allowance for possible loan losses.
During 1997, the Company completed its public offering of $28.75 million of
mandatorily redeemable capital securities of a subsidiary trust. These
securities qualify as Tier I capital up to an amount not to exceed 25% of Tier I
capital and the portion that exceeds the 25% limitation qualifies as Tier 2
capital. Consequently, the Company's capital ratios as of December 31, 1997
increased significantly over the ratios at December 31, 1996 as noted in the
following table:
SELECTED CAPITAL INFORMATION
(Dollars in thousands)
<TABLE>
<CAPTION>
DECEMBER 31
1997 1996 CHANGE
<S> <C> <C> <C>
Stockholders' Equity $ 47,797 $ 44,625 $ 3,172
Qualifying capital securities of subsidiary
trust 15,931 0 15,931
Disallowed amounts of goodwill and other
intangibles (7,262) (5,490) (1,772)
Unrealized loss on securities available
for sale (5) 6 (11)
-------- -------- -------
Tier I capital $ 56,461 $ 39,141 $17,320
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
DECEMBER 31
1997 1996 CHANGE
<S> <C> <C> <C>
Tier II capital adjustments:
Qualifying capital securities of subsidiary
trust 12,819 0 12,819
Allowance for loan losses 3,144 2,854 290
-------- -------- --------
Total capital $ 72,424 $ 41,995 $ 30,429
Total risk-weighted assets $284,846 $238,210
Ratios
Tier I capital to risk-weighted assets 19.82% 16.43%
Total capital to risk-weighted assets 25.43% 17.63%
Leverage at year-end 13.52% 12.10%
</TABLE>
The Company believes that its capital, together with existing credit facilities
and its ability to obtain future credit facilities, provides funds sufficient to
support the Company's current operations.
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 the Federal Home Loan Bank and other financial institutions, including a
$20 million revolving line of credit available for both general corporate
purposes and future acquisitions. The Company prefers to manage its liquidity
requirements generally through the matching of maturities of assets and
liabilities.
The consolidated statements of cash flows 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.
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 has a negative impact on earnings
resulting from the lower yields 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 $76.7 million as of December 31, 1997. Additionally, securities
available-for-sale with maturities greater than one year and equity securities
totaled $24.7 million at December 31, 1997. These securities represent a
secondary source available to meet liquidity needs on a continuing basis.
<PAGE>
To maintain a desired level of liquidity, the Company has several sources of
funds available. One 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 stable interest rates, these balances as a percentage of total
deposits have remained relatively the same for 1997 and 1996. Certificates of
deposits and other time deposits of $100,000 or more represented approximately
14.5% and 15.0% of total deposits at December 31, 1997 and 1996, 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.
<TABLE>
<CAPTION>
LIQUIDITY RATIOS
1997 1996 1995
<S> <C> <C> <C>
Total loans/total deposits..................... 92.29% 87.17% 80.29%
Total loans/total deposits less float.......... 93.28% 88.81% 81.41%
Net short-term borrowings/total assets......... 13.67% 2.82% .87%
</TABLE>
This analysis shows that the Company's loan to deposit ratios increased in 1997
and 1996 compared to the prior year due to an increase in loan demand that
exceeded the increase in deposit activity.
<PAGE>
Information regarding short-term borrowings for the past three years is
presented in the following table.
SHORT-TERM BORROWINGS
(Dollars in thousands)
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Federal funds purchased and repurchase
agreements:
Balance at year end $ 5,634 $ 5,599 $ 747
Weighted average rate at year end 5.38% 5.05% 3.25%
Average balance during the year $ 49,227 $ 3,702 $ 721
Weighted average rate during the year 5.51% 5.10% 4.91%
Maximum month-end balance $120,257 $ 6,696 $1,547
Other short-term borrowings:
Balance at year end $ 4,082 $ 7,055 $ 755
Weighted average rate at year end 6.17% 5.57% 6.05%
Average balance during the year $ 6,914 $ 3,660 $ 713
Weighted average rate during the year 6.04% 5.68% 6.17%
Maximum month-end balance $ 9,396 $ 8,555 $ 755
Total short-term borrowings:
Balance at year end $ 9,716 $12,654 $1,502
Weighted average rate at year end 5.71% 5.34% 4.88%
Average balance during the year $ 56,141 $ 7,362 $1,434
Weighted average rate during the year 5.57% 5.39% 5.54%
Maximum month-end balance $129,653 $ 15,251 $2,302
</TABLE>
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.
<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, 1997, the
cumulative amount of the Company's interest earning assets repricing during the
first year is higher than the total amount of its interest bearing liabilities
repricing during this period. This position, which is normally termed a positive
interest sensitivity gap, generally allows for enhanced net interest income
during periods of rising interest rates. This positive 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 declining interest rates.
The following table provides an analysis of the Company's interest rate
sensitivity at December 31, 1997.
INTEREST RATE SENSITIVITY ANALYSIS
(Dollars in Thousands)
<TABLE>
<CAPTION>
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 $ 73,646 $ 75,375 $ 75,742 $58,627 $283,390
Investment securities 10,393 19,852 22,732 16,234 69,211
Federal funds sold 40,771 0 0 0 40,771
-------- -------- -------- ------- --------
Total earning assets $124,810 $ 95,227 $ 98,474 $74,861 $393,372
Sources of Funds
NOW, money market and
savings $ 22,438 $ 22,713 $ 28,841 $ 1,291 $ 75,283
Time deposits 43,186 95,267 72,989 127 211,569
Other 9,716 0 11,086 95 20,897
-------- -------- -------- ------- --------
Total interest bearing liabilities $ 75,340 $117,980 $112,916 $ 1,513 $307,719
Interest Sensitivity Gap
For the period $ 49,470 $(22,753) $(14,442) $73,348 $ 85,623
Cumulative 49,470 26,717 12,275 85,623
Cumulative as a percent of
earning assets 12.58% 6.79% 3.12% 21.77%
</TABLE>
<PAGE>
MARKET RISK MANAGEMENT
Market risk is the risk of gain or loss from changes in the fair value of
financial instruments due to changes in interest rates, exchange rates and
equity prices. Premier's market risk is composed almost exclusively with
interest rate risk. This exposure is managed primarily through the strategy of
selecting the types and terms of interest earning assets and interest bearing
liabilities which generate favorable earnings, while limiting the potential
negative effects of changes in market interest rates. Since Premier's primary
source of interest bearing liabilities is customer deposits, the ability to
manage the types and terms of such deposits may be somewhat limited by customer
preferences in the market areas in which it operates. Borrowings, which include
Federal Home Loan Bank advances, short-term borrowings and long-term borrowings,
are generally structured with specific terms which in management's judgment,
when aggregated with the terms for outstanding deposits and matched with
interest earning assets, mitigate our exposure to interest rate risk.
The Company's Asset/Liability Committee (ALCO) is responsible for reviewing the
interest rate sensitivity of the Company and establishing policies to monitor
and limit exposure to interest rate risk. Interest rate risk is monitored
through the use of three complementary measures: static gap analysis, earnings
simulation modeling and net present value estimation. While each of the interest
rate risk measurements has limitations, taken together they represent a
reasonably comprehensive view of the magnitude of interest rate risk in the
Company, the distribution of risk along the yield curve, the level of risk
through time, and the amount of exposure to changes in certain interest rate
relationships.
STATIC GAP ANALYSIS
Premier uses interest rate sensitivity gap analysis to monitor the relationship
between the maturity and repricing of its interest earning assets and interest
bearing liabilities, while maintaining an acceptable interest spread rate
spread. Gap is defined as the difference between the amount of interest earnings
assets maturing or repricing within a specific time period and the amount of
interest bearing liabilities maturing or repricing within that time period. A
gap is considered positive when the amount of interest rate sensitive assets
exceeds the amount of interest rate sensitive liabilities, and is considered
negative when the amount of interest rate sensitive liabilities exceeds the
amount of interest rate sensitive assets. Generally, during a period of rising
interest rates, a negative gap would adversely affect net interest income, while
a positive gap would result in an increase in net interest income. Conversely,
during a period of falling interest rates, a negative gap would result in an
increase in net interest income, while a positive gap would negatively affect
net interest income. It is management's goal to maintain a reasonable balance
between exposure to interest rate fluctuations and earnings.
EARNINGS SIMULATION MODELING
The earnings simulation model forecasts net interest income under different
scenarios that incorporate changes in the level of interest rates and their
relationships with each other. The most recent earnings simulation model
projects net interest income would decrease by approximately 3.5% of stable rate
net interest income if rates fall by two percentage points over the next year.
It projects an increase of 3.4% if the rates rise by two percentage points.
Management believes this reflects a slight asset sensitive rate risk position
for the one year horizon. Within the same time frame, but assuming an additional
one percentage point move in rates, the model forecasts that net interest income
would fall below that earned in a stable rate environment by 5.3% in a falling
rate scenario and increase by 5.1% in a rising rate scenario.
<PAGE>
This simulation model includes assumptions about how the balance sheet is likely
to evolve through time. Loan prepayments are developed from industry median
estimates for prepayment speeds. Noncontractual deposit pricing and sensitivity
are assumed to follow historical patterns.
NET PRESENT VALUE
The Net Present Value (NPV) of the balance sheet, at a point in time, is defined
as the discounted present value of asset cash flows minus the discounted value
of liability cash flows. The resulting percentage change in NPV is an indication
of the longer term repricing risk imbedded in the balance sheet. At year end, a
200 basis point increase in rates is estimated to reduce NPV by 8.0%.
Additionally, NPV is projected to decrease by 7.0% if rates fall by 200 basis
points. The calculations of present value have certain shortcomings. The
discount rates utilized are based on estimated market interest rate levels for
similar loans and securities nationwide. The unique characteristics of Premier's
loans and securities may not necessarily parallel those assumed in this
calculation, and therefore, would likely result in different discount rates,
prepayment experiences and present values. The discount rates utilized for
deposits and borrowings are based upon available alternative types and sources
of funds which are not necessarily indicative of the present value of deposits
and FHLB advances since such deposits and advances are unique to, and have
certain price and customer relationship advantages for, depository institutions.
A higher or lower interest rate environment will most likely result in different
investment and borrowing strategies by Premier designed to further mitigate the
effect on the value of, and the net earnings generated from, the Company's net
assets from any change in interest rates.
Summary information about each of the three interest rate risk measures is
presented below:
<TABLE>
<CAPTION>
Year-End Year-End ALCO
1997 1996 Guidelines
<S> <C> <C> <C>
Static 1-Year Cumulative Gap 6.8% 3.1% +10%
-
1-Year Net Interest Income Simulation Project
-200 bp change vs. Stable Rate -3.5 -4.4 +10%
-
+200 bp change vs. Stable Rate 3.4 4.4 +10%
-
1-Year Net Interest Income Simulation Project
-300 bp change vs. Stable Rate -5.3 -6.7 +10%
-
+300 bp change vs. Stable Rate 5.1 6.6 +10%
-
Static Net Present Value Change
-200 bp Shock vs. Stable Rate -7.0 -1.7 +10%
-
+200 bp Shock vs. Stable Rate -8.0 3.0 +10%
-
</TABLE>
INTEREST RATE RISK MANAGEMENT
Premier's strategy of investing primarily in loans and securities permits it to
limit its exposure to interest rate risk, together with credit risk, while at
the same time achieving a positive interest rate spread from the difference
between the income earned on interest earning assets and the cost of interest
bearing liabilities. Managing this exposure involves significant assumptions
about the relationship of various interest rate indices of certain financial
instruments. Prepayments on loans generally increase when long-term interest
rates fall or are at historically low levels relative to short-term interest
rates making fixed rate loans more desirable. Investment securities, other than
those with early call provisions, generally do not have significant imbedded
options and repay pursuant to specific terms until maturity. While savings and
checking deposits generally may be withdrawn upon the customer's request without
prior notice, a continuing relationship with customers resulting in future
deposits and withdrawals is generally predictable resulting in a dependable and
uninterruptible source of funds. Time deposits generally have early withdrawal
penalties which discourage customer withdrawal, while
<PAGE>
term Federal Home Loan Bank advances have prepayment penalties, which discourage
prepayment prior to maturity.
Certain shortcomings are inherent in the method of analysis presented in the
foregoing table. For example, although certain assets and liabilities may have
similar maturities or periods to repricing, they may react in different degrees
to changes in market interest rates. Also, the interest rates on certain types
of assets and liabilities may fluctuate in advance of changes in market interest
rates, while interest rates on other types may lag behind changes in market
rates. Additionally, certain assets, such as adjustable rate mortgage loans,
have features that restrict changes in interest rates on a short-term basis and
over the life of the loan. Further, in the event of a change in interest rates,
prepayment and early withdrawal levels could deviate significantly from those
assumed in calculating the table. Finally, the ability of many borrowers to
service their debt may decrease in the event of a significant interest rate
increase.
The previous table does not necessarily indicate the impact of general interest
rate movements on Premier's net interest income because the repricing of certain
categories of assets and liabilities are subject to competitive and other
pressures beyond our control. As a result, certain assets and liabilities
indicated as maturing or otherwise repricing within a stated period may in fact
mature or reprice at different times and at different volumes.
Management expects interest rates to be relatively stable during 1998 and
believes that the current modest level of asset sensitivity is appropriate.
TRADE RISK MANAGEMENT
Premier does not maintain a trading account which would primarily provide
investment products and risk management services to its customers as well as to
take propriety risk positions.
DERIVATIVE INSTRUMENTS
A derivative financial instrument includes futures, forwards, interest rate
swaps, options and other financial instruments with similar characteristics.
Premier currently does not enter into futures, forwards, swaps or options.
However, the Company is 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 commitments to make loans and
standby letters of credit, which involve to varying degrees elements of credit
risk and interest rate in excess of amounts recognized on the balance sheets.
Commitments to make loans are agreements to lend to a customer as long as there
is no violation of any contract condition. Commitments generally have fixed
expiration dates and may require collateral if deemed necessary. Standby letters
of credit are conditional commitments issued by Premier to guarantee the
performance of a customer to a third party up to a stipulated amount and with
specific terms and conditions. Commitments to make loans and standby letters of
credit are not recorded as an asset or liability by the Company until the
instrument is exercised.
OTHER
Year 2000 - Premier initiated the process of preparing its computer systems and
applications for the year 2000 during 1997. This process involves assessing,
then modifying or replacing certain hardware and software maintained by the
Company as well as communicating with external service providers to ensure that
they are taking the appropriate action to remedy their Year 2000 issues.
Management intends to have substantially all of the system and application
changes completed by the end of 1998 and anticipates the estimated cumulative
costs of compliance will not be material to the Company's financial statements.
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Company's Financial Statements and related Independent Auditors'
Report are presented in the following pages. The financial statements filed in
this Item 8 are as follows:
Independent Auditors' Report
Financial Statements:
Balance Sheets - December 31, 1997 and 1996
Statements of Income - Years Ended December 31, 1997, 1996 and 1995
Statements of Changes in Stockholders' Equity - Years ended
December 31, 1997, 1996 and 1995
Statements of Cash Flows - Years ended December 31, 1997, 1996
and 1995
Notes to Financial Statements
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
There have been no changes in or disagreements with accountants on
accounting or financial disclosure matters.
<PAGE>
PREMIER FINANCIAL BANCORP, INC.
CONTENTS
Pages
INDEPENDENT AUDITORS' REPORT.............................................1
FINANCIAL STATEMENTS:
Consolidated Balance Sheets............................................2
Consolidated Statements of Income......................................3
Consolidated Statements of Stockholders' Equity........................4
Consolidated Statements of Cash Flows..................................5 - 6
Notes to Consolidated Financial Statements.............................7 - 30
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors
Premier Financial Bancorp, Inc.
Georgetown, Kentucky
We have audited the accompanying consolidated balance sheets of Premier
Financial Bancorp, Inc. as of December 31, 1997 and 1996, and the related
consolidated statements of income, changes in stockholders' equity and cash
flows for each of the three years in the period ended December 31, 1997.
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 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 Premier
Financial Bancorp, Inc. as of December 31, 1997 and 1996 and the results of
its operations and its cash flows for each of the three years in the period
ended December 31, 1997 in conformity with generally accepted accounting
principles.
/s/ Eskew & Gresham, PSC
February 3, 1998
<PAGE>
PREMIER FINANCIAL BANCORP, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31
1997 1996
<S> <C> <C>
ASSETS
Cash and due from banks $ 11,609,886 $ 9,303,925
Federal funds sold 40,771,000 10,935,000
Investment securities:
Available for sale 45,925,758 29,971,958
Held to maturity 20,361,807 20,993,089
Loans $285,798,438 $244,731,159
Unearned income (2,408,652) (2,106,364)
Allowance for loan losses (3,144,142) (2,853,725)
------------ ------------
Net loans $280,245,644 $239,771,070
Federal Home Loan Bank and Federal Reserve stock 2,923,250 1,695,350
Premises and equipment, net 6,894,894 4,519,815
Real estate and other property acquired through foreclosure 836,201 485,003
Interest receivable 5,237,264 4,322,289
Income taxes refundable 70,974 22,319
Deferred income taxes 170,027 393,231
Goodwill and other intangibles 7,261,591 5,490,210
Other assets 3,127,721 1,162,461
------------ ------------
TOTAL ASSETS $425,436,017 $329,065,720
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Non-interest bearing $ 37,702,480 $ 32,464,664
Time deposits, $100,000 and over 47,105,404 40,150,498
Other interest bearing 239,746,157 194,592,712
------------ ------------
Total deposits $324,554,041 $267,207,874
Securities sold under agreements to repurchase 5,634,132 5,599,420
Federal Home Loan Bank advances 15,263,339 9,377,456
Interest payable 1,657,599 1,394,550
Other liabilities 1,779,936 861,340
------------ ------------
Total liabilities $348,889,047 $284,440,640
Mandatorily redeemable capital securities of subsidiary trust $ 28,750,000 $ 0
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;
4,685,390 shares issued and outstanding 982,308 982,308
Surplus 33,824,798 33,824,798
Retained earnings 13,054,826 9,935,858
Net unrealized losses on securities available for sale (64,962) (117,884)
------------ ------------
Total stockholders' equity $ 47,796,970 $ 44,625,080
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $425,436,017 $329,065,720
</TABLE>
See notes to consolidated financial statements.
Page 2
<PAGE>
PREMIER FINANCIAL BANCORP, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
Year Ended December 31
1997 1996 1995
<S> <C> <C> <C>
INTEREST INCOME:
Loans, including fees $26,324,299 $19,192,986 $11,809,666
Investment securities -
Taxable 5,411,453 1,942,904 1,302,417
Tax-exempt 1,157,751 815,821 547,496
Federal funds sold 936,570 424,546 292,588
Other interest income 164,689 24,711 38,136
----------- ----------- -----------
Total interest income $33,994,762 $22,400,968 $13,990,303
INTEREST EXPENSE:
Deposits $12,731,585 $ 9,357,130 $ 5,933,460
Other borrowings 3,531,542 450,433 106,808
Debt 1,631,467 167,413 252,999
----------- ----------- ----------
Total interest expense $17,894,594 $ 9,974,976 $ 6,293,267
Net interest income $16,100,168 $12,425,992 $ 7,697,036
Provision for loan losses 1,232,208 759,831 195,950
----------- ----------- -----------
Net interest income after provision
for loan losses $14,867,960 $11,666,161 $ 7,501,086
NON-INTEREST INCOME:
Service charges $ 1,154,979 $ 1,001,179 $ 649,473
Insurance commissions 409,407 308,690 164,338
Investment securities gains (losses) 2,203,545 1,459 (6,026)
Other 598,659 409,447 210,347
----------- ----------- ----------
$ 4,366,590 $ 1,720,775 $ 1,018,132
NON-INTEREST EXPENSES:
Salaries and employee benefits $ 5,586,124 $ 4,371,715 $ 3,043,367
Occupancy and equipment expenses 1,421,139 1,196,731 989,052
Professional fees 471,857 258,758 209,298
Taxes, other than payroll, property and income 387,255 288,132 209,901
Acquisition related expenses 467,035 0 110,296
Amortization of intangibles 386,134 197,357 2,553
Other expenses 2,302,157 1,762,416 1,378,317
----------- ----------- -----------
$11,021,701 $ 8,075,109 $ 5,942,784
Income before income taxes $ 8,212,849 $ 5,311,827 $ 2,576,434
Provision for income taxes 2,604,939 1,588,610 145,732
----------- ----------- -----------
NET INCOME $ 5,607,910 $ 3,723,217 $ 2,430,702
Earnings per share $ 1.20 $ .99 $ 1.02
Earnings per share assuming dilution $ 1.19 $ .99 $ 1.02
</TABLE>
See notes to consolidated financial statements.
Page 3
<PAGE>
PREMIER FINANCIAL BANCORP, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
Net
Unrealized
Gain
(Loss) on
Securities
Common Retained Available
Stock Surplus Earnings For Sale Total
<S> <C> <C> <C> <C> <C>
Balances, January 1, 1995 $758,127 $ 6,857,637 $ 6,760,575 $ (470,286) $13,906,053
Issuance of 1,000 shares of Georgetown
Bancorp, Inc. common stock 10,272 114,728 125,000
Net change in unrealized losses on
securities available for sale 399,019 399,019
5-for-4 common stock split 190,909 (190,909)
Net income 2,430,702 2,430,702
Dividends paid - Company ($.45 per
share) (859,091) (859,091)
Dividends paid - Sabina prior to pooling (137,500) (137,500)
-------- ----------- ----------- ---------- -----------
Balances, December 31, 1995 $959,308 $ 6,781,456 $ 8,194,686 $ (71,267) $15,864,183
Issuance of 2,300,000 shares of Company
common stock 23,000 27,043,342 27,066,342
Net change in unrealized losses on
securities available for sale (46,617) (46,617)
Net income 3,723,217 3,723,217
Dividends paid - Company ($.50 per
share) (1,817,045) (1,817,045)
Dividends paid - Sabina prior to pooling (165,000) (165,000)
-------- ----------- ----------- ---------- -----------
Balances, December 31, 1996 $982,308 $33,824,798 $ 9,935,858 $ (117,884) $44,625,080
Net change in unrealized losses on
securities available for sale 52,922 52,922
Net income 5,607,910 5,607,910
Dividends paid - Company ($.55 per
share) (2,406,442) (2,406,442)
Dividends paid - Sabina prior to pooling (82,500) (82,500)
-------- ----------- ----------- ---------- -----------
BALANCES, DECEMBER 31, 1997 $982,308 $33,824,798 $13,054,826 $ (64,962) $47,796,970
</TABLE>
See notes to consolidated financial statements.
Page 4
<PAGE>
PREMIER FINANCIAL BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31
1997 1996 1995
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 5,607,910 $ 3,723,217 $ 2,430,702
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation 485,602 321,173 273,772
Amortization, net 373,180 363,043 181,927
Provision for loan losses 1,232,208 759,831 195,950
Deferred income taxes 256,664 (10,929) (248,964)
FHLB stock dividends (155,000) (46,000) (4,800)
Investment securities losses (gains), net (2,203,545) (1,459) 6,026
Changes in:
Interest receivable (914,975) (385,317) (102,508)
Other assets (2,015,799) 658,194 (376,229)
Interest payable 263,049 (200,003) 330,117
Other liabilities 918,596 390,745 50,854
Income taxes refundable (48,655) 221,530 (281,667)
------------- ------------ ------------
Net cash provided by operating activities $ 3,799,235 $ 5,794,025 $ 2,455,180
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturity of deposits held in other
banks $ 0 $ 0 $ 523,609
Purchases of securities available for sale (307,051,391) (15,463,076) (15,679,289)
Proceeds from sales of securities available for sale 277,135,191 2,499,125 7,553,462
Proceeds from maturities and calls of securities
available for sale 16,169,544 13,388,575 9,050,000
Purchases of investment securities held to maturity (4,254,989) (2,741,799) (1,673,728)
Proceeds from maturities and calls of securities
held to maturity 4,878,764 2,241,255 1,212,544
Proceeds from sales of investment securities held
to maturity 0 0 1,000,000
Purchases of FHLB stock (1,072,900) (753,300) (315,800)
Net change in federal funds sold (29,836,000) (2,145,000) (1,495,000)
Proceeds from sale of real estate acquired through
foreclosure 290,925 131,701 340,812
Net change in loans (42,348,905) (23,239,040) (16,345,596)
Purchases of premises and equipment (2,256,831) (1,062,587) (1,376,591)
Proceeds from sale of premises and equipment 31,575 20,085 437,132
Net cash received (paid) related to acquisitions 20,613,412 (10,576,808) (999,742)
------------- ------------ ------------
Net cash used in investing activities $ (67,701,605) $(37,700,869) $(17,768,187)
</TABLE>
See notes to consolidated financial statements.
Page 5
<PAGE>
PREMIER FINANCIAL BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(CONTINUED)
<TABLE>
<CAPTION>
Year Ended December 31
1997 1996 1995
<S> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Net change in deposits $ 34,026,678 $12,246,554 $13,283,731
Advances from Federal Home Loan Bank 17,727,000 6,800,000 0
Repayment of Federal Home Loan Bank advances (11,841,117) (2,067,206) 0
Debt proceeds 0 0 3,500,000
Repayment of debt 0 (6,850,000) 0
Net change in agreements to repurchase securities 34,712 (1,797,697) (52,882)
Proceeds from issuance of capital securities of
subsidiary trust 28,750,000 0 0
Proceeds from issuance of common stock 0 27,066,342 125,000
Dividends paid (2,488,942) (1,982,045) (996,591)
------------ ----------- -----------
Net cash provided by financing activities $ 66,208,331 $33,415,948 $15,859,258
Net increase in cash and cash equivalents $ 2,305,961 $ 1,509,104 $ 546,251
Cash and cash equivalents at beginning of year 9,303,925 7,794,821 7,248,570
------------ ----------- -----------
CASH AND CASH EQUIVALENTS AT END
OF YEAR $ 11,609,886 $ 9,303,925 $ 7,794,821
SUPPLEMENTAL DISCLOSURES OF CASH
FLOW INFORMATION:
Cash paid during the year for -
Interest $ 17,631,545 $10,174,979 $ 5,963,150
Income taxes 2,462,000 1,062,063 719,974
SUPPLEMENTAL SCHEDULE OF NON-CASH
INVESTING ACTIVITIES:
Non-cash transfer from securities held to
maturity to securities available for sale $ 0 $ 0 $ 500,000
Change in unrealized loss on securities
available for sale 52,922 (46,617) 399,019
Loans transferred to real estate acquired
through foreclosure 730,371 80,849 16,000
</TABLE>
See notes to consolidated financial statements.
Page 6
<PAGE>
PREMIER FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A. Basis of Presentation - The consolidated financial statements include
the accounts of Premier Financial Bancorp, Inc. (the Company) and its
wholly-owned subsidiaries, Georgetown Bank & Trust Co., Georgetown, Kentucky;
Citizens Deposit Bank & Trust, Vanceburg, Kentucky; Bank of Germantown,
Germantown, Kentucky; Citizens Bank, Sharpsburg, Kentucky; Farmers Deposit
Bank, Eminence, Kentucky; and The Sabina Bank, Sabina, Ohio (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.
Prior period consolidated financial statements have been restated to
include the accounts of significant acquisitions accounted for using the
pooling of interests method of accounting. Business combinations accounted
for as purchases are included in the consolidated financial statements from
the respective dates of acquisition. Assets and liabilities of financial
institutions accounted for as purchases are adjusted to their fair values as
of their dates of acquisition. Certain 1995 and 1996 amounts have been
reclassified to conform with the 1997 financial reporting presentation.
B. 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 their respective state banking
regulators and the Federal Deposit Insurance Corporation (FDIC). The Company
is also subject to regulation by the Federal Reserve Bank.
C. Estimates in the Financial Statements - The preparation 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, 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.
D. Cash and Cash Equivalents - For purposes of reporting cash flows,
cash and cash equivalents include cash on hand and amounts due from banks.
E. Investment Securities - The Company classifies its investment
securities portfolio into three categories: trading, securities available for
sale and securities held to maturity. Fair value adjustments are made to the
securities based on their classification with the exception of the held to
maturity category. The Company has no investments classified as trading.
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 net unrealized gains (losses) on
securities available for sale. 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.
Page 7
<PAGE>
PREMIER FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Investment securities for which the Banks have the positive intent and
ability to hold 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 based on the net proceeds and
adjusted carrying amount of the securities sold using the specific
identification method.
F. 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 of
income status. The accrual of interest on impaired loans is discontinued 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. When interest accrual is discontinued,
interest income is subsequently recognized only to the extent cash payments
are received.
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 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 collection of
principal is unlikely.
The allowance for loan losses on impaired loans is 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. The entire change in present value of expected cash flows is
reported as provision for loan losses in the same manner in which impairment
initially was recognized or as a reduction in the amount of provision for
loan losses that otherwise would be reported.
Certain loan origination fees and direct origination costs are
capitalized and recognized as an adjustment of the yield on the related loan.
G. 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.
Page 8
<PAGE>
PREMIER FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
H. 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.
I. Goodwill and Other Intangibles - The unamortized costs in excess of
the fair value of acquired net tangible assets are included in goodwill and
other intangibles. Identifiable intangibles, except for premiums on purchased
deposits which are amortized on a straight-line method over 10 years, are
amortized over the estimated periods benefited. The remaining costs
(goodwill) are amortized on a straight-line basis over 15 years.
J. Income Taxes - 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, FHLB stock, and the allowance for loan
losses.
K. Per Share Information - In the fourth quarter of 1997, the Company
adopted Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings
Per Share", under which basic and diluted earnings per share are computed.
Prior amounts have been restated to be comparable. Basic earnings per share
is based on net income divided by the weighted average number of shares
outstanding during the period. Diluted earnings per share shows the dilutive
effect of additional common shares issuable under stock options.
L. Effect of New Accounting Standards - The Financial Accounting
Standards Board has issued SFAS No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities", which
provides accounting and reporting guidance regarding various financial
instruments and related transactions. The Statement was effective for
transactions occurring after December 31, 1996 and was adopted by the
Company, as required, on January 1, 1997. The effect of adopting the new
guidance was not material to the Company's consolidated financial statements.
Page 9
<PAGE>
PREMIER FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
In June 1997, the Financial Accounting Standards Board issued SFAS No.
130, "Reporting Comprehensive Income". The Statement establishes standards
for reporting the components of comprehensive income and requires that all
items that are required to be recognized under accounting standards as
components of comprehensive income be included in a financial statement that
is displayed with the same prominence as other financial statements.
Comprehensive income includes net income as well as certain items that are
reported directly within a separate component of stockholders' equity and
bypass net income. The provisions of this Statement are effective beginning
with 1998 interim reporting. These disclosure requirements will have no
impact on financial position or results of operations.
M. Marketing Expense - The Company charges all marketing expenses to
operations when incurred. No amounts have been established for any future
benefits relative to these expenditures.
2. BUSINESS COMBINATIONS
CONSUMMATED ACQUISITIONS
On November 13, 1997, the Company acquired The Sabina Bank, Sabina, Ohio
(Sabina), in a business combination accounted for as a pooling of interests.
All of the outstanding shares of Sabina were exchanged for 476,300 shares of
the Company's common stock. The accompanying consolidated financial
statements for 1997 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 the effect of the combination.
Summarized results of operations of the separate companies for the
period January 1, 1997 through the date of acquisition are as follows:
<TABLE>
<CAPTION>
Premier Financial The Sabina
Bancorp, Inc. Bank
(in thousands)
<S> <C> <C>
Net interest income after provision for loan losses $ 11,205 $ 1,321
Other operating income 3,804 208
Other operating expenses 8,446 1,270
Net income $ 4,507 $ 215
</TABLE>
Page 10
<PAGE>
PREMIER FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(CONTINUED)
2. BUSINESS COMBINATIONS (CONTINUED)
Following is a reconciliation of interest income, non-interest income and
net income previously reported with restated amounts:
<TABLE>
<CAPTION>
Year Ended December 31
1996 1995
(in thousands)
<S> <C> <C>
Interest income:
As previously reported $ 19,674 $11,103
Acquired subsidiary 2,727 2,887
-------- -------
As restated $ 22,401 $13,990
Non-interest income:
As previously reported $ 1,484 $ 825
Acquired subsidiary 237 193
-------- -------
As restated $ 1,721 $ 1,018
Net income:
As previously reported $ 3,436 $ 2,156
Acquired subsidiary 287 275
-------- -------
As restated $ 3,723 $ 2,431
</TABLE>
On December 11, 1997, Sabina completed its purchase and assumption of
two branch offices of the Fifth Third Bank of Western, Ohio. Included in the
purchase was approximately $23.3 million of deposits from the Ada and
Waynesfield, Ohio branches. A premium of approximately $2.1 million was paid
for the purchase of these deposits.
On July 1, 1996, the Company acquired all of the outstanding shares of
Farmers Deposit Bancorp, Eminence, Kentucky (Farmers Deposit), a one-bank
holding company owning all of the shares of Farmers Deposit Bank, for cash.
The total acquisition cost was $12,588,000, which exceeded the fair value of
tangible net assets acquired by approximately $5,400,000. The combination was
accounted for as a purchase and the results of operations of Farmers Deposit
are included in the consolidated financial statements from July 1, 1996.
The major categories of assets acquired and liabilities assumed from
Farmers Deposit as of the acquisition date are as follows:
<TABLE>
<CAPTION>
(in thousands)
<S> <C>
Cash and due from banks $ 2,011
Investment securities 19,263
Net loans 81,988
Intangibles and other assets 9,035
Deposits 86,791
Other borrowings 10,540
Debt 1,850
Other liabilities 528
--------
Total acquisition cost $ 12,588
</TABLE>
Page 11
<PAGE>
PREMIER FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(CONTINUED)
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 net 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 major categories of assets acquired and liabilities assumed from
Citizens Bank as of the acquisition date are as follows:
<TABLE>
<CAPTION>
(in thousands)
<S> <C>
Cash and due from banks $ 497
Investment securities 3,976
Net loans 14,316
Intangibles and other assets 1,365
Deposits 18,273
Other liabilities 385
-------
Total acquisition cost $ 1,496
</TABLE>
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 the Company's common stock. The
accompanying consolidated financial statements for 1995 are based on the
assumption that the companies were combined for the full year.
PENDING ACQUISITIONS
On October 31, 1997, the Company entered into an Agreement and Plan of
Merger with Ohio River Bank (Ohio River), Ironton, Ohio, whereby the Company
will exchange 300,000 common shares for all the issued and outstanding shares
of Ohio River in a business combination anticipated to be accounted for as a
pooling of interests. At December 31, 1997, Ohio River had total assets of
$39.5 million and total stockholders' equity of $4.3 million. The share
exchange is expected to be completed in the first quarter of 1998.
On December 30, 1997, the Company entered into a purchase and assumption
agreement to acquire three branch offices of Banc One Corporation located in
Madison, Philippi and Van, West Virginia. Included in the purchase is
approximately $148 million in deposits, $10 million in loans and $1.2 million
in facilities. The net premium to be paid for these branches is approximately
$14.3 million. The acquisition is expected to be completed in the second
quarter of 1998.
Page 12
<PAGE>
PREMIER FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(CONTINUED)
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 $725,000 and $999,000
at December 31, 1997 and 1996, respectively.
4. INVESTMENT SECURITIES
Amortized cost and fair value of investment securities, by category, at
December 31, 1997 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 $ 10,070,978 $ 2,837 $ (11,486) $ 10,062,329
U. S. agency securities 25,965,520 29,205 (90,335) 25,904,390
Obligations of states and political
subdivisions 3,457,927 109,529 (3,602) 3,563,854
Asset-backed securities 3,629,753 0 (29,225) 3,600,528
Preferred stock 2,000,000 0 0 2,000,000
Other securities 900,007 0 (105,350) 794,657
------------ --------- --------- ------------
Total available for sale $ 46,024,185 $ 141,571 $(239,998) $ 45,925,758
Held to maturity:
U. S. Treasury securities $ 1,249,985 $ 5,896 $ (849) $ 1,255,032
U. S. agency securities 4,337,802 15,928 (5,422) 4,348,308
Obligations of states and political
subdivisions 14,625,016 499,959 (15,435) 15,109,540
Asset-backed securities 149,004 905 (420) 149,489
------------ --------- --------- ------------
Total held to maturity $ 20,361,807 $ 522,688 $ (22,126) $ 20,862,369
</TABLE>
Amortized cost and fair value of investment securities, by category, at
December 31, 1996 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 $ 5,991,476 $ 4,691 $ (8,566) $ 5,987,601
U. S. agency securities 16,880,922 40,445 (190,296) 16,731,071
Obligations of states and political
subdivisions 4,330,371 136,779 (2,165) 4,464,985
Preferred stock 2,000,000 0 0 2,000,000
Other securities 900,007 0 (111,706) 788,301
------------ --------- --------- ------------
Total available for sale $ 30,102,776 $ 181,915 $(312,733) $ 29,971,958
</TABLE>
Page 13
<PAGE>
PREMIER FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(CONTINUED)
4. INVESTMENT SECURITIES (CONTINUED)
<TABLE>
<CAPTION>
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
<S> <C> <C> <C> <C>
Held to maturity:
U. S. Treasury securities $ 2,058,469 $ 5,787 $ (9,366) $ 2,054,890
U. S. agency securities 6,328,804 18,482 (26,209) 6,321,077
Obligations of states and political
subdivisions 12,190,012 249,553 (59,327) 12,380,238
Asset-backed securities 415,804 3,933 (4,045) 415,692
------------ --------- --------- ------------
Total held to maturity $ 20,993,089 $ 277,755 $ (98,947) $ 21,171,897
</TABLE>
The amortized cost and fair value of investment securities at December
31, 1997, 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 $ 21,336,870 $ 21,283,274
Due after one year through five years 11,447,265 11,475,189
Due after five years through ten years 4,971,058 5,015,370
Due after ten years 1,739,232 1,756,740
Other securities 6,529,760 6,395,185
------------ ------------
Total available for sale $ 46,024,185 $ 45,925,758
Held to maturity:
Due in one year or less $ 3,032,278 $ 3,038,537
Due after one year through five years 8,307,082 8,449,812
Due after five years through ten years 5,957,470 6,184,088
Due after ten years 2,915,973 3,040,443
Asset-backed securities 149,004 149,489
------------ ------------
Total held to maturity $ 20,361,807 $ 20,862,369
</TABLE>
Proceeds from sales of investment securities during 1997, 1996 and 1995
were $277,135,191, $2,499,125 and $8,553,462, respectively. Gross gains of
$2,193,933, $70 and $25,650 and gross losses of $938, $611 and $31,676,
respectively, were realized on those sales. Proceeds from maturities and
calls of investment securities during 1997, 1996 and 1995 were $21,048,308,
$15,629,830 and $10,262,544, respectively. Gross gains of $10,550, $2,000 and
$0 were realized on those calls and maturities during 1997, 1996 and 1995,
respectively. No losses were realized on calls and maturities during 1997,
1996 and 1995.
Page 14
<PAGE>
PREMIER FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(CONTINUED)
4. INVESTMENT SECURITIES (CONTINUED)
Investment securities with an approximate carrying value of $29,616,908
and $28,136,619 at December 31, 1997 and 1996, respectively, were pledged to
secure public deposits, trust funds, securities sold under agreements to
repurchase and for other purposes as required or permitted by law.
5. LOANS
Major classifications of loans are summarized as follows:
<TABLE>
<CAPTION>
December 31
1997 1996
(in thousands)
<S> <C> <C>
Commercial, secured by real estate $ 66,893 $ 60,018
Commercial, other 45,024 35,393
Real estate construction 7,857 4,138
Real estate mortgage 93,789 87,335
Agricultural 13,208 11,731
Consumer and home equity 58,523 44,753
Other 504 1,363
--------- ---------
$ 285,798 $ 244,731
</TABLE>
Certain directors and executive officers of the Banks and companies in
which they have beneficial ownership, were loan customers of the Banks during
1997 and 1996. Total loans to these persons at December 31, 1997 and 1996
amounted to $4,409,332 and $4,511,218, respectively. Such loans were made in
the ordinary course of business at the Banks' normal credit terms and
interest rates. An analysis of the 1997 activity with respect to all director
and executive officer loans is as follows:
<TABLE>
<CAPTION>
<S> <C>
Balance, December 31, 1996 $ 4,511,218
Additions, including loans now
meeting disclosure requirements 1,880,220
Amounts collected, including loans
no longer meeting disclosure requirements (1,982,106)
----------
Balance, December 31, 1997 $ 4,409,332
</TABLE>
Changes in the allowance for loan losses were as follows:
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Balance, beginning of year $ 2,853,725 $ 1,997,042 $ 1,171,704
Allowance related to acquired
subsidiaries 0 812,000 803,177
Loans charged off (1,184,093) (938,019) (272,393)
Recoveries 242,302 222,871 98,604
Provision for loan losses 1,232,208 759,831 195,950
----------- ----------- -----------
Balance, end of year $ 3,144,142 $ 2,853,725 $ 1,997,042
</TABLE>
Page 15
<PAGE>
PREMIER FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(CONTINUED)
5. LOANS (CONTINUED)
The Company's recorded investment in impaired loans was approximately
$1,049,308 and $910,305 at December 31, 1997 and 1996, respectively, as
measured using the value of the underlying collateral. Of those amounts,
$1,049,308 and $617,799 represent loans for which an allowance for loan
losses, in the amount of $149,486 and $274,409, respectively, has been
established. The average recorded investment of impaired loans was
approximately $1,261,561 and $712,500 for the years ended December 31, 1997
and 1996, respectively. Interest income recognized on impaired loans totaled
approximately $60,660 and $2,000 for the years ended December 31, 1997 and
1996, respectively, which represented actual cash payments received on
impaired loans.
6. PREMISES AND EQUIPMENT
Premises and equipment are summarized as follows:
<TABLE>
<CAPTION>
December 31
1997 1996
<S> <C> <C>
Land $ 1,221,962 $ 1,190,628
Buildings and leasehold improvements 4,667,550 3,193,754
Furniture and equipment 5,175,463 3,832,485
------------ ------------
$ 11,064,975 $ 8,216,867
Less: accumulated depreciation (4,170,081) (3,697,052)
------------ ------------
$ 6,894,894 $ 4,519,815
</TABLE>
Depreciation expense was $485,602, $321,173 and $273,772 in 1997, 1996
and 1995, respectively.
7. DEPOSITS
At December 31, 1997, the scheduled maturities of time deposits are as
follows:
<TABLE>
<CAPTION>
<S> <C>
1998 $ 138,452,753
1999 53,510,697
2000 12,240,618
2001 5,524,855
2002 and thereafter 1,839,200
-------------
$ 211,568,123
</TABLE>
Certain directors and executive officers of the Banks and companies in
which they have beneficial ownership are deposit customers of the Banks. The
amount of these deposits was approximately $6,174,000 and $7,902,000 at
December 31, 1997 and 1996, respectively.
Page 16
<PAGE>
PREMIER FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(CONTINUED)
8. SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
Securities sold under agreements to repurchase generally mature within
one to ninety days from the transaction date. Information concerning
securities sold under agreements to repurchase is summarized as follows:
<TABLE>
<CAPTION>
December 31
1997 1996
<S> <C> <C>
Year-end balance $ 5,634,132 $ 5,599,420
Average balance during the year 49,226,593 5,599,420
Average interest rate during the year 5.51% 5.14%
Maximum month-end balance during the year $ 5,955,482 $ 6,495,743
</TABLE>
U. S. Treasury and agency securities underlying the agreements are as
follows:
<TABLE>
<CAPTION>
December 31
1997 1996
<S> <C> <C>
Carrying value $ 6,385,288 $ 6,221,104
Estimated fair value $ 6,397,694 $ 6,216,000
</TABLE>
9. FEDERAL HOME LOAN BANK ADVANCES
The Banks own stock of the Federal Home Loan Bank (FHLB) of Cincinnati,
Ohio. This stock allows the Banks to borrow advances from the FHLB which the
Banks use to fund loans.
At December 31, 1997 and 1996, $15,263,339 and $9,377,456, respectively,
represented the balance due on the above advances from the FHLB. All advances
are paid either on a monthly basis or at maturity, over remaining terms of
one to nineteen years, with interest rates ranging from 5.55% to 7.95%.
Advances are secured by the FHLB stock and all single family first mortgage
loans of the participating Banks. Scheduled principal payments due on
advances during the five years subsequent to December 31, 1997 are as
follows: 1998 -$10,568,765; 1999 - $2,575,264; 2000 - $529,331; 2001 -
$564,048; 2002 and years thereafter - $1,025,931.
10. CAPITAL SECURITIES OF SUBSIDIARY TRUST
Mandatorily Redeemable Capital Securities of Subsidiary Trust (Capital
Securities) represent preferred beneficial interests in the assets of PFBI
Capital Trust (Trust). The Trust holds certain 9.75% junior subordinated
debentures due June 30, 2027 issued by the Company on June 9, 1997.
Distributions on the Capital Securities will be payable at an annual rate of
9.75% of the stated liquidation amount of $25 per Capital Security, payable
quarterly. Cash distributions on the Capital Securities are made to the
extent interest on the debentures is received by the Trust. In the event of
certain changes or amendments to regulatory requirements or federal tax
rules, the Capital Securities are redeemable in whole. Otherwise, the Capital
Securities are generally redeemable in whole or in part on or after June 30,
2002 at 100% of the liquidation amount.
Page 17
<PAGE>
PREMIER FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(CONTINUED)
11. LINE OF CREDIT
In February 1997, the Company received approval for a two year, $20
million revolving line of credit from a financial institution. The line of
credit is available for general corporate purposes, including acquisitions.
The credit agreement contains certain covenants and performance terms. The
common stock of the Banks is pledged to secure the revolving line of credit.
As of December 31, 1997, there have been no borrowings under this line of
credit.
12. INCOME TAXES
The components of the provision for income taxes are as follows:
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Current $ 2,348,275 $ 1,599,539 $ 394,696
Deferred 256,664 (10,929) 255,211
Change in valuation allowance 0 0 (504,175)
----------- ----------- ---------
$ 2,604,939 $ 1,588,610 $ 145,732
</TABLE>
The Company's deferred tax assets and liabilities at December 31, 1997
and 1996 are shown below. No valuation allowance for the realization of
deferred tax assets is considered necessary.
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
Deferred tax assets:
Allowance for loan losses $ 419,567 $ 423,871
NOL carryforwards 198,573 330,426
Unrealized loss on investment securities 33,466 13,382
Other 39,900 33,093
---------- ----------
Total deferred tax assets $ 691,506 $ 800,772
Deferred tax liabilities:
Depreciation $ (285,374) $ (197,755)
Change in accounting method (77,276) (93,874)
Federal Home Loan Bank dividends (103,764) (45,520)
Other (55,065) (70,392)
---------- ----------
Total deferred tax liabilities $ 521,479 $ (407,541)
Net deferred tax asset $ 170,027 $ 393,231
</TABLE>
At December 31, 1997, two of the subsidiary Banks had net operating loss
carryforwards totaling approximately $584,000, 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.
Page 18
<PAGE>
PREMIER FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(CONTINUED)
12. 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>
1997 1996 1995
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
U. S. federal income tax rate $ 2,792 34.0% $ 1,806 34.0% $ 876 34.0%
Changes from the statutory rate:
Tax-exempt investment income (408) (5.0) (295) (5.6) (194) (7.5)
Non-deductible interest expense
related to carrying tax-exempt
investments 50 0.6 34 0.6 21 0.8
Tax credits (70) (0.8) (70) (1.3) (69) (2.7)
Change in valuation allowance 0 0.0 0 0.0 (504) (19.5)
Goodwill amortization 131 1.6 67 1.3 1 0.0
Other 110 1.3 47 0.9 15 0.6
------- ---- ------- ---- ----- ----
$ 2,605 31.7% $ 1,589 29.9% $ 146 5.7%
</TABLE>
Income taxes (benefits) applicable to investment securities gains
(losses) were $749,205, $496 and $(2,049) for 1997, 1996 and 1995,
respectively.
13. 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, 1997 are as follows:
<TABLE>
<CAPTION>
<S> <C>
1998 $ 157,602
1999 155,721
2000 151,456
2001 12,856
2002 and thereafter 10,178
</TABLE>
Total rental expense incurred amounted to approximately $199,000,
$156,000 and $19,000 in 1997, 1996 and 1995, respectively.
Page 19
<PAGE>
PREMIER FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(CONTINUED)
14. EMPLOYEE BENEFIT 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 $176,347,
$202,500 and $132,744 in 1997, 1996 and 1995, respectively.
The Company also maintains the Premier Financial Bancorp, Inc. 1996
Employee Stock Ownership Incentive Plan (the Plan), whereby certain employees
of the Company are eligible to receive incentive stock options. The Plan is
accounted for in accordance with Accounting Principles Board Opinion (APB)
No. 25, "Accounting for Stock Issued to Employees", and related
interpretations. Under the Plan, a maximum of 100,000 shares 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 ten years from the date of
grant. At December 31, 1997, the Company had granted options to certain key
employees to purchase 40,000 shares at an option price of $13.00 per share,
of which 28,000 are currently eligible for exercise. Options outstanding at
December 31, 1997, have a remaining contractual life of 8.5 years.
Although the Company has elected to follow APB No. 25, SFAS No. 123,
"Accounting for Stock Based Compensation" requires pro forma disclosure of
net income and earnings per share as if the Company had accounted for its
employee stock options under that Statement. The fair value of each option
grant was estimated on the grant date using an option-pricing model.
Under SFAS No. 123, compensation cost is recognized in the amount of the
estimated fair value of the options and amortized to expense over the
options' vesting period. The pro forma effect on 1997 and 1996 net income and
earnings per share of this statement are as follows:
<TABLE>
<CAPTION>
1997 1996
(in thousands)
<S> <C> <C>
Net income
As reported $ 5,608 $ 3,723
Pro forma $ 5,555 $ 3,698
Earnings per share
As reported $ 1.20 $ 0.99
Pro forma $ 1.19 $ 0.98
Earnings per share assuming dilution
As reported $ 1.19 $ 0.99
Pro forma $ 1.18 $ 0.98
</TABLE>
Page 20
<PAGE>
PREMIER FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(CONTINUED)
14. EMPLOYEE BENEFIT PLANS (CONTINUED)
<TABLE>
<CAPTION>
1997 1996
(in thousands)
<S> <S> <S>
Weighted averages
Fair value of options granted $ 5.77 $ 2.70
Risk free interest rate 6.00% 6.50%
Expected life 10 years 10 years
Expected volatility 38.02% 13.97%
Expected dividend $ 0.60 $ .50
</TABLE>
15. RELATED PARTY TRANSACTIONS
During the years ended December 31, 1997, 1996 and 1995, the Company
paid approximately $211,000, $241,000 and $65,000, respectively, for printing
and supplies from a company affiliated by common ownership. The Company also
paid this affiliate approximately $339,000, $317,000 and $223,000 in 1997,
1996 and 1995, 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 stockholder. The dividend rate on the
preferred stock is 2% over the prevailing prime rate.
16. DIVIDEND LIMITATIONS
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 below. During 1998, the Banks
could, without prior approval, declare dividends of approximately $7,656,000
plus any 1998 net profits retained to the date of the dividend declaration.
17. EARNINGS PER SHARE
A reconciliation of the numerators and denominators of the earnings per
common share and earnings per common share assuming dilution computations for
1997, 1996 and 1995 is presented below:
<TABLE>
<CAPTION>
Year Ended
1997 1996 1995
<S> <C> <C> <C>
Earnings Per Share
Net income available to common
stockholders $ 5,607,910 $ 3,723,217 $ 2,430,702
Weighted average common shares
outstanding 4,685,390 3,763,805 2,379,560
Earnings per share $ 1.20 $ .99 $ 1.02
</TABLE>
Page 21
<PAGE>
PREMIER FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(CONTINUED)
17. EARNINGS PER SHARE (CONTINUED)
<TABLE>
<CAPTION>
Year Ended
1997 1996 1995
<S> <C> <C> <C>
Earnings Per Share Assuming Dilution
Net income available to common
stockholders $ 5,607,910 $ 3,723,217 $ 2,430,702
Weighted average common shares
outstanding 4,685,390 3,763,805 2,379,560
Add dilutive effects of assumed exercise of
stock options 13,074 214 0
----------- ----------- -----------
Weighted average common and dilutive
potential common shares outstanding 4,698,464 3,764,019 2,379,560
Earnings per share assuming dilution $ 1.19 $ .99 $ 1.02
</TABLE>
18. STOCKHOLDERS' EQUITY
On May 22, 1996, the Company completed its initial public offering by
selling 2,000,000 common shares at an offering price of $13.00 per share and
on June 19, 1996, the Company completed the sale of an additional 300,000
common shares (which represented the Underwriters' over-allotment option) at
a price of $13.00 per share. Total proceeds to the Company, net of the
underwriting discount and issuance costs, were $27,066,342.
On March 15, 1996, the stockholders approved a 2-for-1 stock split
effective March 29, 1996, in the form of a dividend of the Company's common
stock to stockholders of record on February 22, 1996. Additionally, the
stockholders approved an increase in the number of common 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.
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. All
references in the accompanying financial statements to the number of average
shares and per share data have been restated to reflect the stock splits.
Page 22
<PAGE>
PREMIER FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(CONTINUED)
19. 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 Due From Banks - 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.
Federal Home Loan Bank and Federal Reserve Stock - For FHLB and Federal
Reserve stock, carrying value is a reasonable estimate of fair value.
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.
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.
Mandatorily Redeemable Capital Securities of Subsidiary Trust - The
carrying value of these 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.
Page 23
<PAGE>
PREMIER FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(CONTINUED)
19. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
(CONTINUED)
The fair values of the Company's financial instruments at December 31,
1997 and 1996 are as follows:
<TABLE>
<CAPTION>
1997 1996
Carrying Fair Carrying Fair
Amount Value Amount Value
<S> <C> <C> <C> <C>
Financial assets:
Cash and due from banks $ 11,609,886 $ 11,610,000 $ 9,303,925 $ 9,304,000
Federal funds sold 40,771,000 40,771,000 10,935,000 10,935,000
Investment securities 66,287,565 66,788,000 50,965,047 51,144,000
Federal Home Loan Bank
and Federal Reserve stock 2,923,250 2,923,000 1,695,350 1,695,000
Loans 283,389,786 282,655,000 242,624,795 242,656,000
Less: allowance for loan
losses (3,144,142) (3,144,000) (2,853,725) (2,854,000)
------------- ------------- ------------- -------------
$ 401,837,345 $ 401,603,000 $ 312,670,392 $ 312,880,000
Financial liabilities:
Deposits $ (324,554,041) $(326,330,000) $(267,207,874) $(268,988,000)
Securities sold under
agreements to repurchase (5,634,132) (5,634,000) (5,599,420) (5,600,000)
Federal Home Loan Bank
advances (15,263,339) (15,290,000) (9,377,456) (9,412,000)
Mandatorily redeemable
capital securities of
subsidiary trust (28,750,000) (28,750,000) 0 0
------------- ------------- ------------- -------------
$ (374,201,512) $(376,004,000) $(282,184,750) $(284,000,000)
</TABLE>
20. 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.
Page 24
<PAGE>
PREMIER FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(CONTINUED)
20. FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
(CONTINUED)
At December 31, 1997 and 1996, the Banks had the following financial
instruments whose approximate contract amounts represent credit risk:
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
Standby letters of credit $ 1,099,300 $ 1,081,875
Commitments to extend credit $ 17,692,415 $ 11,367,341
</TABLE>
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. Collateral held varies but
primarily includes real estate and certificates of deposit. Some letters of
credit are unsecured.
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.
21. CONCENTRATION OF CREDIT RISK
The Banks grant residential, commercial and consumer related loans to
customers primarily located in the counties and adjoining counties in
Kentucky and Ohio in which the Banks operate. 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.
22. 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, 1997, management
is unaware of any legal proceedings, of which the ultimate result would have
a material adverse effect upon the consolidated financial statements of the
Company.
Page 25
<PAGE>
PREMIER FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(CONTINUED)
23. REGULATORY MATTERS
The Company and the subsidiary Banks are subject to various regulatory
capital requirements administered by the federal banking agencies. Failure to
meet minimum capital requirements can initiate certain mandatory and possibly
additional discretionary actions by regulators that, if undertaken, could
have a direct material effect on the Company's financial statements. Under
capital adequacy guidelines and the regulatory framework for prompt
corrective action, the Company and the Banks must meet specific guidelines
that involve quantitative measures of their assets, liabilities, and certain
off-balance sheet items as calculated under regulatory accounting practices.
The capital amounts and classifications are also subject to qualitative
judgments by the regulators about components, risk weightings, and other
factors.
Quantitative measures established by regulation to ensure capital
adequacy require the Company and Banks to maintain minimum amounts and ratios
(set forth in the table below) of Total and Tier I capital (as defined in the
regulations) to risk-weighted assets (as defined), and of Tier I capital (as
defined) to average assets (as defined). Management believes, as of December
31, 1997, the Company and the Banks meet all capital adequacy requirements to
which they are subject.
As of December 31, 1997, the most recent notification from the Federal
Reserve Bank categorized the Company as well capitalized under the regulatory
framework for prompt corrective action. To be categorized as well
capitalized, the Company must maintain minimum Total risk-based, Tier I
risk-based and Tier I leverage ratios as set forth in the following table.
There are no conditions or events since that notification that management
believes have changed the Company's category.
The Company's and the two largest subsidiary Banks' capital amounts and
ratios as of December 31, 1997 and 1996 are presented in the table below.
<TABLE>
<CAPTION>
To Be Well
Capitalized
Under Prompt
For Capital Corrective
Actual Adequacy Purposes Action Provisions
1997 Amount Ratio Amount Ratio Amount Ratio
(amounts in thousands)
<S> <C> <C> <C> <C> <C> <C>
Total Capital (to Risk-Weighted Assets):
Consolidated $ 72,424 25.43% $ 22,788 8.0% $ 28,485 10.0%
Farmers Deposit Bank 13,019 13.65 7,632 8.0 9,540 10.0
Citizens Deposit Bank 9,864 12.98 6,078 8.0 7,599 10.0
Tier I Capital (to Risk-Weighted Assets):
Consolidated $ 56,461 19.82% $ 11,394 4.0% $ 16,428 6.0%
Farmers Deposit Bank 12,009 12.59 3,816 4.0 5,223 6.0
Citizens Deposit Bank 9,036 11.89 3,039 4.0 4,559 6.0
Tier I Capital (to Average Assets):
Consolidated $ 56,461 13.52% $ 17,091 4.0% $ 20,535 5.0%
Farmers Deposit Bank 12,009 9.70 4,793 4.0 5,991 5.0
Citizens Deposit Bank 9,036 8.75 3,885 4.0 4,856 5.0
</TABLE>
Page 26
<PAGE>
PREMIER FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(CONTINUED)
23. REGULATORY MATTERS (CONTINUED)
<TABLE>
<CAPTION>
To Be Well
Capitalized
Under Prompt
For Capital Corrective
Actual Adequacy Purposes Action Provisions
1997 Amount Ratio Amount Ratio Amount Ratio
(amounts in thousands)
<S> <C> <C> <C> <C> <C> <C>
Total Capital (to Risk-Weighted Assets):
Consolidated $ 41,995 17.63% $ 19,057 8.0% $ 23,821 10.0%
Farmers Deposit Bank 10,878 13.20 7,012 8.0 8,765 10.0
Citizens Deposit Bank 8,085 11.75 5,505 8.0 6,882 10.0
Tier I Capital (to Risk-Weighted Assets):
Consolidated $ 39,141 16.43% $ 9,528 4.0% $ 14,293 6.0%
Farmers Deposit Bank 10,003 12.14 3,506 4.0 5,259 6.0
Citizens Deposit Bank 7,375 10.72 2,753 4.0 4,129 6.0
Tier I Capital (to Average Assets):
Consolidated $ 39,141 12.10% $ 12,885 4.0% $ 16,106 5.0%
Farmers Deposit Bank 10,003 8.95 4,685 4.0 5,857 5.0
Citizens Deposit Bank 7,375 8.73 3,379 4.0 4,223 5.0
</TABLE>
Page 27
<PAGE>
PREMIER FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(CONTINUED)
24. PARENT COMPANY FINANCIAL STATEMENTS
Condensed Balance Sheets
<TABLE>
<CAPTION>
December 31
1997 1996
(in thousands)
<S> <C> <C>
ASSETS
Cash $ 1,584 $ 1,654
Interest bearing deposits in subsidiary banks 4,371 4,047
-------- --------
Total cash and cash equivalents $ 5,955 $ 5,701
Federal funds sold 16,340 0
Investment in subsidiaries 42,833 35,750
Investment securities available for sale 2,000 2,000
Loans 5,621 0
Premises and equipment 2,419 1,186
Other assets 1,546 114
-------- --------
TOTAL ASSETS $ 76,714 $ 44,751
LIABILITIES AND STOCKHOLDERS' EQUITY
Deferred income taxes $ 12 $ 0
Other liabilities 155 126
-------- --------
Total liabilities $ 167 $ 126
Mandatorily redeemable capital securities of subsidiary
trust $ 28,750 $ 0
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; 4,685,390 shares issued and outstanding 982 982
Surplus 33,825 33,825
Retained earnings 13,055 9,936
Net unrealized losses on securities
available for sale (65) (118)
-------- --------
Total stockholders' equity $ 47,797 $ 44,625
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 76,714 $ 44,751
</TABLE>
Page 28
<PAGE>
PREMIER FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(CONTINUED)
24. PARENT COMPANY FINANCIAL STATEMENTS (CONTINUED)
Condensed Statements of Income
<TABLE>
<CAPTION>
Year Ended December 31
1997 1996 1995
(in thousands)
<S> <C> <C> <C>
Income:
Dividends from subsidiary banks $ 0 $ 597 $ 1,825
Interest and dividend income 4,049 361 166
Gain on sale of investment securities 2,183 0 0
Other income 16 73 11
------ ------- -------
Total income $ 6,248 $ 1,031 $ 2,002
Expenses:
Interest expense $ 4,037 $ 167 $ 253
Salaries and employee benefits 465 287 71
Other expenses 804 186 271
------ ------- -------
Total expenses $ 5,306 $ 640 $ 595
Income before income taxes and
equity in undistributed income of
subsidiaries $ 942 $ 391 $ 1,407
Income tax expense (benefit) 326 (95) (178)
------- ------- -------
Income before equity in undistributed
income of subsidiaries $ 616 $ 486 $ 1,585
Equity in undistributed income of
subsidiaries 4,992 3,237 846
------ ------- -------
NET INCOME $ 5,608 $ 3,723 $ 2,431
</TABLE>
Page 29
<PAGE>
PREMIER FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(CONTINUED)
24. PARENT COMPANY FINANCIAL STATEMENTS (CONTINUED)
Condensed Statements of Cash Flows
<TABLE>
<CAPTION>
Year Ended December 31
1997 1996 1995
(in thousands)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 5,608 $ 3,723 $ 2,431
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 74 28 11
Investment securities gains (2,183) 0 0
Equity in undistributed income of
subsidiaries (4,992) (3,237) (846)
Change in other assets (1,453) 286 (259)
Change in other liabilities 41 30 89
--------- -------- --------
Net cash (used in) provided by operating
activities $ (2,905) $ 830 $ 1,426
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of subsidiary banks $ 0 $(12,622) $ (1,496)
Capital contributed to subsidiaries (2,100) (2,500) (1,401)
Purchase of securities available for sale (273,500) 0 (500)
Proceeds from sale of securities 275,683 0 0
Net change in federal funds sold (16,340) 0 0
Net change in loans (5,621) 0 0
Purchase of premises and equipment (1,307) (618) (608)
--------- -------- --------
Net cash used in investing activities $ (23,185) $(15,740) $ (4,005)
CASH FLOWS FROM FINANCING ACTIVITIES:
Dividends paid $ (2,406) $ (1,817) $ (859)
Proceeds from issuance of common stock 0 27,066 0
Proceeds from issuance of capital securities
of subsidiary trust 28,750 0 0
Proceeds from debt 0 0 3,500
Repayment of debt 0 (5,000) 0
--------- -------- --------
Net cash provided by financing activities $ 26,344 $ 20,249 $ 2,641
Net increase in cash and cash equivalents $ 254 $ 5,339 $ 62
Cash and cash equivalents at beginning of year 5,701 362 300
--------- -------- --------
CASH AND CASH EQUIVALENTS AT END $ 5,955 $ 5,701 $ 362
OF YEAR
</TABLE>
Page 30
<PAGE>
PART III
ITEM 10, 11, 12 AND 13. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT;
EXECUTIVE COMPENSATION; SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT; AND CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by these Items is omitted because the
Corporation is filing a definitive proxy statement pursuant to Regulation 14A
not later than 120 days after the end of the fiscal year covered by this
report which includes the required information. The required information
contained in the Corporation's proxy statement is incorporated herein by
reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this report:
1. Financial Statements:
Independent Auditors' Report
Balance Sheets - December 31, 1997 and 1996
Statements of Loss - Years Ended December 31, 1997, 1996 and 1995
Statements of Changes in Stockholders' Equity - Years Ended
December 31, 1997, 1996 and 1995
Statements of Cash Flows - Years Ended December 31, 1997, 1996
and 1995
Notes to Financial Statements
2. Financial Statement Schedules:
No financial statement schedules have been included as part of this
report because they are either not required or the information is
otherwise included.
3. List of Exhibits:
The following is a list of exhibits required by Item 601 of Regulation
S-K and by paragraph (c) of this Item 14.
<TABLE>
<CAPTION>
<S> <C>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
3.1 Form of Articles of Incorporation of registrant (included as Exhibit 3.1 to registrant's
Registration Statement on Form S-1, Registration No. 333-1702, filed on February 28, 1996 with
the Commission and incorporated herein by reference).
3.2 Form of Articles of Amendment to Articles of Incorporation effective March 15, 1996 re:
amendment to Article IV (included as Exhibit 3.2 to registrant's Amendment No. 1 to
Registration Statement on Form S-1, Registration No. 333-1702, filed on March 25, 1996 with
the Commission and incorporated herein by reference).
<PAGE>
3.3 Bylaws of registrant (included as Exhibit 3.2 to registrant's Registration Statement on Form
S-1, Registration No. 333-1702, filed on February 28, 1996 with the Commission and
incorporated herein by reference).
4.1 Form of Junior Subordinated Indenture dated as of June 6, 1997 between Registrant and Bankers
Trust Company, as Trustee, with respect to 9.75% Junior Subordinated Deferrable Interest
Debentures due June 30, 2027 (incorporated by reference to Exhibit 4.1 to the Registration
Statement on Form S-1 of Registrant filed May 28, 1997 with the Commission (Registration No.
333-27943)).
4.2 Form of 9.75% Junior Subordinated Deferrable Interest Debenture Certificate (incorporated by
reference to Exhibit 4.2 to the Registration Statement on Form S-1 of Registrant filed May 28,
1997 with the Commission (Registration No. 333-27943)).
4.3 Form of Amended and Restated Trust Agreement dated as of June 6, 1997 among Registrant, as
Depositor, Bankers Trust Company, as Property Trustee, and Bankers Trust (Delaware), as
Delaware Trustee (incorporated by reference to Exhibit 4.4 to the Registration Statement on
Form S-1 of Registrant filed May 28, 1997 with the Commission (Registration No. 333-27943)).
4.4 Form of Guarantee Agreement dated as of June 6, 1997 between Registrant and Bankers Trust
Company (incorporated by reference to Exhibit 4.6 to the Registration Statement on Form S-1 of
Registrant filed May 28, 1997 with the Commission (Registration No. 333-27943)).
10.1 Amended and Restated Preferred Stock Purchase Agreement dated as of September 29, 1994
between First Guaranty Bank, Hammon, Louisiana, and registrant (included as Exhibit 10.3 to
registrant's Registration Statement on Form S-1, Registration No. 333-1702, filed on February
28, 1996 with the Commission and incorporated herein by reference).
10.2 Employment Agreement dated March 16, 1992, between Georgetown Bank & Trust Company and Gardner
E. Daniel (included as Exhibit 10.4 to registrant's Registration Statement on Form S-1,
Registration No. 333-1702, filed on February 28, 1996 with the Commission and incorporated
herein by reference).
10.3 Deferred Compensation Agreement dated December 17, 1992, between Georgetown Bank & Trust
Company and Gardner E. Daniel (included as Exhibit 10.5 to registrant's Registration Statement
on Form S-1, Registration No. 333-1702, filed on February 28, 1996 with the Commission and
incorporated herein by reference).
10.4 Premier Financial Bancorp, Inc. 1996 Employee Stock Ownership Incentive Plan (included as
Exhibit 10.6 to registrant's Registration Statement on Form S-1, Registration No. 333-1702,
filed on February 28, 1996 with the Commission and incorporated herein by reference).
21 Subsidiaries of registrant
23.1 Consent of Eskew & Gresham, P.S.C.
27 Financial Data Schedule for year ended December 31, 1997
<PAGE>
(b Reports on Form 8-K
Form 8-K dated December 19, 1997 reporting consummation of the Company's
acquisition of The Sabina Bank, Sabina, Ohio, consummation of the acquisition
of two branch banks and earnings through December 15, 1997.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
registrant has duly caused this Annual Report on Form 10-K to be signed on its
behalf by the undersigned thereunto duly authorized, in the City of Georgetown,
Commonwealth of Kentucky, on the 26th day of March, 1998.
PREMIER FINANCIAL BANCORP, INC.
By: /s/ J. Howell Kelly, President
--------------------------------
J. Howell Kelly, President
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Annual Report on Form 10-K has been signed below by the following
persons on behalf of the registrant in the capacities and on the dates
indicated.
Principal Executive, Financial and
March 26, 1998 /s/ J. Howell Kelly Accounting Officer, Director
--------------------------
J. Howell Kelly
March 26, 1998 /s/ Toney K. Adkins Director
--------------------------
Toney K. Adkins
March 26, 1998 /s/ Gardner E. Daniel Director
--------------------------
Gardner E. Daniel
March 26, 1998 /s/ E. V. Holder, Jr. Director
--------------------------
E. V. Holder, Jr.
March 26, 1998 /s/ Wilbur M. Jenkins Director
--------------------------
Wilbur M. Jenkins
March 26, 1998 /s/ Benhamin T. Pugh Director
--------------------------
Benjamin T. Pugh
March 26, 1998 /s/ Marshall T. Reynolds Director
--------------------------
Marshall T. Reynolds
</TABLE>
<PAGE>
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
The following is a list of all subsidiaries of Premier Financial
Bancorp, Inc. and their state of incorporation.
Subsidiary State of Incorporation
Citizens Deposit Bank and Trust Company Kentucky
County Finance (a direct subsidiary of Citizens Deposit
Bank and Trust Company) Kentucky
Bank of Germantown Kentucky
Georgetown Bancorp, Inc. Kentucky
Georgetown Bank and Trust Company (a direct subsidiary
of Georgetown Bancorp, Inc.) Kentucky
Citizens Bank Kentucky
Premier Data Services, Inc. Kentucky
Farmers Deposit Bancorp, Inc. Kentucky
Farmers Deposit Bank (a direct subsidiary of Farmers
Deposit Bancorp, Inc.) Kentucky
The Sabina Bank Ohio
Ohio River Bank Ohio
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the inclusion of our report dated February 3, 1998
in the annual report on Form 10-K of Premier Financial Bancorp, Inc. for the
years ended December 31, 1997, 1996 and 1995.
/s/ Eskew & Gresham, PSC
------------------------------
Eskew & Gresham, PSC
Lexington, Kentucky
March 25, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 11,610
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 40,771
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 45,926
<INVESTMENTS-CARRYING> 20,362
<INVESTMENTS-MARKET> 20,862
<LOANS> 283,390
<ALLOWANCE> 3,144
<TOTAL-ASSETS> 425,436
<DEPOSITS> 324,554
<SHORT-TERM> 5,634
<LIABILITIES-OTHER> 3,438
<LONG-TERM> 44,013
0
0
<COMMON> 982
<OTHER-SE> 46,815
<TOTAL-LIABILITIES-AND-EQUITY> 425,436
<INTEREST-LOAN> 26,324
<INTEREST-INVEST> 6,570
<INTEREST-OTHER> 1,101
<INTEREST-TOTAL> 33,995
<INTEREST-DEPOSIT> 12,732
<INTEREST-EXPENSE> 17,895
<INTEREST-INCOME-NET> 16,100
<LOAN-LOSSES> 1,232
<SECURITIES-GAINS> 2,204
<EXPENSE-OTHER> 11,022
<INCOME-PRETAX> 8,213
<INCOME-PRE-EXTRAORDINARY> 8,213
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,608
<EPS-PRIMARY> 1.20
<EPS-DILUTED> 1.19
<YIELD-ACTUAL> 4.32<F1>
<LOANS-NON> 562
<LOANS-PAST> 490
<LOANS-TROUBLED> 356
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 2,854
<CHARGE-OFFS> 1,184
<RECOVERIES> 242
<ALLOWANCE-CLOSE> 3,144
<ALLOWANCE-DOMESTIC> 3,144
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
<FN>
<F1>Computed on a tax-equivalent basis
</FN>
</TABLE>
