<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, 1998
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.)
115 N. HAMILTON STREET
GEORGETOWN, KENTUCKY 40324
(Address of principal executive offices) (Zip Code)
Registrants' telephone number: (502) 863-1955
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 26, 1999 was $74,559,662. The number of shares
outstanding of the Registrant's Common Stock as of March 26, 1999 was 5,232,257.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the following documents are incorporated by reference into the Form
10-K part indicated:
DOCUMENT FORM 10-K
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(1) Proxy statement for the 1999 annual meeting of Part III
shareholders
<PAGE>
PART I
ITEM 1. DESCRIPTION OF BUSINESS
THE COMPANY
Premier Financial Bancorp, Inc. (Premier or the Company) is a multi-bank
holding company that, as of March 26, 1999, operated twenty banking offices in
Kentucky, six banking offices in Ohio, and three banking offices in West
Virginia through its ten bank subsidiaries (the "Affiliate Banks"), the tenth of
which was acquired on January 20, 1999. At December 31, 1998, Premier had total
consolidated assets of $657.7 million, total consolidated deposits of $523.2
million and total consolidated shareholders' equity of $54.4 million.
Premier began an acquisition program in 1993 and has acquired six
commercial banks and five branches of other commercial banks 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 source of Premier's
revenue is dividends 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 115 N. Hamilton Street, Georgetown, Kentucky
40324, and its telephone number is (502) 863-1955.
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 services 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. Farmers Deposit Bank and Citizens Deposit Bank & Trust in Eminence
and Vanceburg, Kentucky, 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 eight of the
Banks as well as one non-affiliated bank.
The Banks' residential mortgage lending activities consist primarily of
loans for purchasing personal residences, or loans for commercial or consumer
purposes secured by residential mortgages. Consumer lending activities consist
of traditional forms of financing for automobile and personal loans.
The Banks' range of deposit services include checking accounts, NOW
accounts, savings accounts, money market accounts, club accounts, individual
retirement accounts, certificates of deposit and overdraft protection. Deposits
of the Banks are insured by the Bank Insurance Fund administered by the FDIC.
County Finance, Inc., a subsidiary of Citizens Deposit Bank & Trust in
Vanceburg, Kentucky, 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.
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. Being smaller
financial institutions, each of the Banks' competitors include large bank
holding companies having substantially greater resources and offer certain
services that Premier Banks may 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 six Affiliate Banks chartered in Kentucky are supervised, regulated
and examined by the Kentucky Department of Financial Institutions, the two
Affiliate Banks chartered in Ohio are supervised, regulated and examined by the
Ohio Division of Financial Institutions, and the two Affiliate Banks chartered
in West Virginia are supervised, regulated and examined by the West Virginia
Division of Banking. 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, 1998, Premier met
both requirements, with Tier I and total capital equal to 12.6% and 16.2% 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, 1998, Premier's leverage ratio was 8.1%.
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 subject a banking institution to capital raising requirements.
<PAGE>
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, 1998, $11.0 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 325
full-time equivalent employees as of March 26, 1999. Its executive offices are
located at 115 N. Hamilton Street, Georgetown, Kentucky, telephone number (502)
863-1955 (facsimile number (502) 863-5604).
ITEM 2. PROPERTIES
The Company owns 115 North Hamilton Street in Georgetown, Kentucky,
at which the Company's executive offices are located. Additionally in
Georgetown, the Company owns 120 North Hamilton Street, 103 Finley Drive, and
812 South Broadway which serves as the main office and branch locations of
Georgetown Bank & Trust Co. In Sharpsburg, Kentucky, the Company owns the
main banking office of Citizens Bank at 648 Main Street and a building at 652
Main Street which is being used for the Bank's operations. The Company also
owns property located at 237 Frankfort Street, Brooksville, Kentucky, which
was purchased as a possible future branch site for the Bank of Germantown. In
South Webster, Ohio, Premier owns 110 North Jackson Street, which is the site
occupied by a branch of Ohio River Bank. Except as noted, each of the Banks
owns the real property and improvements on where their banking activities are
conducted.
<PAGE>
Citizens Deposit Bank & Trust, 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 Bank of Germantown, with its main
office on Highway 10, Germantown, Kentucky, has no other offices in Bracken
County, Kentucky. Georgetown Bank & Trust Co., in addition to its main office
has two branches in Scott County, Kentucky. Citizens Bank of Sharpsburg has, in
addition to its main office, one branch located in Bath County, Kentucky.
Farmers Deposit 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. Ohio River Bank in addition to its main
office at 221 Railroad Street, Ironton, Ohio has one branch in Sciota County,
Ohio. The Bank of Philippi's main office is located at 2 South Main Street in
Philippi, West Virginia. Boone County Bank, in addition to its main office at
300 State Street, Madison, West Virginia, has a branch located in Van, West
Virginia.
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
The Company's common stock is listed on the NASDAQ under the symbol
PFBI. At March 26, 1999, the Company had approximately 818 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.
CASH SALES PRICE
DIVIDENDS PAID HIGH LOW
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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
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$ 0.55
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CASH SALES PRICE
DIVIDENDS PAID HIGH LOW
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1998:
First Quarter $ 0.15 $25.75 $21.56
Second Quarter 0.15 23.50 20.00
Third Quarter 0.15 22.50 18.81
Fourth Quarter 0.15 19.75 16.50
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$ 0.60
1999:
First Quarter *$ 0.15 $17.50 $14.00
* Dividend declared March 10, 1999 to shareholders of record as of
March 22, 1999, payable March 31, 1999.
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 $0.60 per share in 1998. 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, 1998, approximately $11.0 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 dividends and 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,
1998 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C>
EARNINGS
Net interest income $ 20,108 $ 17,458 $ 13,454 $ 8,021 $ 7,319
Provision for loan losses 1,742 1,399 953 314 335
Non-interest income 4,673 4,562 1,835 1,042 870
Non-interest expense 15,338 12,232 9,230 6,865 5,464
Income taxes 1,997 2,605 1,588 146 567
Net income $ 5,704 $ 5,784 $ 3,518 $ 1,737 $ 1,823
FINANCIAL POSITION
Total assets $ 657,744 $ 464,890 $ 363,739 $ 208,502 $ 154,653
Loans, net of unearned
income 395,620 312,102 265,453 147,321 106,431
Allowance for loan losses 4,363 3,479 3,127 2,114 1,172
Goodwill and other intangibles 21,555 7,262 5,565 345 8
Securities 177,192 73,409 58,253 34,924 30,619
Deposits 523,193 358,605 297,116 179,792 136,613
Other borrowings 47,671 21,842 15,392 1,502 0
Debt 28,750 28,750 0 5,000 1,500
Stockholders' equity 54,399 52,007 48,694 19,883 13,617
SHARE DATA
Net income - basic $ 1.09 $ 1.11 $ .82 $ 0.59 $ 0.77
Net income - diluted 1.09 1.10 .82 0.59 0.77
Book value 10.40 9.94 9.30 6.78 5.77
Cash dividend 0.60 0.55 0.50 0.45 0.36
RATIOS
Return on average assets .97% 1.29% 1.22% 1.27% 1.19%
Return on average equity 10.80% 11.51% 9.54% 11.47% 13.70%
Dividend payout 53.80% 41.61% 51.66% 49.45% 33.60%
Stockholders' equity to total
assets at period-end 8.27% 11.19% 13.39% 9.54% 8.80%
Average stockholders' equity
to average total assets 9.02% 11.21% 12.79% 11.05% 8.69%
CAPITAL RATIOS
Equity to assets 8.3% 11.2% 13.4% 9.5% 8.8%
Leverage ratio 8.1% 13.6% 12.2% 10.0% 8.8%
</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 included in 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 1998, Premier continued to pursue its strategic plan to build a network of
independently managed community banks into a well capitalized, risk controlled
bank holding company with quality earnings and shareholder liquidity. Premier
continued to post strong results in three key financial areas: earnings, total
assets and shareholders' equity. For 1998, net income was $5,704 compared to
$5,784 as restated for 1997; total assets increased to $657,744 from the
$464,890 restated for 1997, and shareholders' equity increased to $54,399 from
$52,007 in 1997.
Quarterly unaudited financial information for the Company for the years ended
December 31, 1998 and 1997, is summarized as follows:
<PAGE>
QUARTERLY FINANCIAL INFORMATION
(Dollars in thousands except per share amounts)
<TABLE>
<CAPTION>
FULL
FIRST SECOND THIRD FOURTH YEAR
<S> <C> <C> <C> <C> <C>
1998
Interest Income $9,835 $10,605 $12,456 $12,454 $45,350
Interest Expense 5,279 5,887 7,183 6,894 25,243
Net Interest Income 4,556 4,718 5,273 5,560 20,107
Provision for Loan Losses 276 720 299 447 1,742
Securities Gains 2 141 8 74 225
Net Overhead 2,676 1,702 3,186 3,325 10,889
Income before Income Taxes 1,606 2,437 1,796 1,862 7,701
Net Income 1,381 1,642 1,291 1,390 5,704
Basic Net Income per share 0.28 0.33 0.25 0.23 1.09
Diluted Net Income per share 0.28 0.33 0.25 0.23 1.09
Dividends Paid per share 0.15 0.15 0.15 0.15 0.60
1997
Interest Income $7,696 $8,678 $10,530 $9,947 $36,851
Interest Expense 3,504 4,273 6,210 5,406 19,393
Net Interest Income 4,192 4,405 4,320 4,541 17,458
Provision for Loan Losses 236 328 554 281 1,399
Securities Gains 0 8 1,164 1,032 2,204
Net Overhead 2,177 2,193 2,967 2,537 9,874
Income before Income Taxes 1,779 1,892 1,963 2,755 8,389
Net Income 1,274 1,347 1,367 1,796 5,784
Basic Net Income per share 0.25 0.26 0.26 0.34 1.11
Diluted Net Income per share 0.25 0.26 0.26 0.33 1.10
Dividends Paid per share 0.125 0.125 0.15 0.15 0.55
</TABLE>
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 1998, Premier completed acquisitions of three banks. On March 20, 1998,
Premier acquired Ohio River Bank, located in Ironton, Ohio, in a share exchange
accounted for as a pooling of interests. On June 26, 1998, the Company chartered
Boone County Bank, Inc. in Madison, West Virginia, and The Bank of Philippi,
Inc. in Philippi, West Virginia, for the purpose of acquiring three branch
offices of Banc One Corporation located in Madison, Van and Philippi, West
Virginia.
<PAGE>
Also in 1998, the Company signed a definitive agreement to acquire Mount Vernon
Bancshares and its wholly owned subsidiary, Bank of Mount Vernon, with offices
in Somerset, Mount Vernon, Berea and Richmond, Kentucky. The cash purchase of
Mount Vernon Bancshares was completed January 20, 1999.
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.
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.
The significant financial data relative to these acquisitions is set forth in
Note 2 to the financial statements.
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.
RESULTS OF OPERATIONS
Earnings Summary
Premier recorded net income for 1998 of $5,704, versus $5,784 and $3,518
restated for 1997 and 1996. Basic earnings per common share were $1.09 in 1998
compared to $1.11 in 1997 and $.82 in 1996. Primary increases can be attributed
to an increase in net interest income from 17,458 in 1997 to $20,108 in 1998, an
increase of $2,650 or 15.2%, and a decrease in provision for income taxes from
$2,605 in 1997 to $1,997 in 1998, a difference of $608 or 23.3%. Offsetting
these increases was an increase in the provision for loan losses from $1,399 in
1997 to $1,742 in 1998 and an increase in noninterest expense of $3,106 from
$12,232 in 1997 to $15,338 in 1998.
Net income of $5,784 in 1997 represented a 64.4% increase over the 1996 amount
of $3,518. Net interest income increased 29.8% to $17,458 in 1997 versus $13,454
in 1996. Offsetting this increase was a $446 increase in the provision for loan
losses and a $1,016 increase in income taxes from $1,589 in 1996 to $2,605 in
1997. Fully diluted earnings per share increased 34.1% in 1997 compared to 1996
despite the increase in the weighted average number of shares from 4.3 million
in 1996 to 5.2 million in 1997.
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.
<PAGE>
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 non interest 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%.
SUMMARY OF NET INTEREST INCOME
(Dollars in thousands on a taxable equivalent basis)
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Interest income................................ $ 45,350 $ 36,851 $ 24,393
Tax equivalent adjustment...................... 607 516 421
----------- ----------- -----------
Interest income............................ 45,957 37,367 24,814
Interest expense............................... 25,242 19,393 10,939
----------- ----------- -----------
Net interest income........................ $ 20,715 $ 17,974 $ 13,875
=========== =========== ===========
</TABLE>
The following table shows, for the three year period ended December 31,
1998,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
1998, tax equivalent net interest income increased to $20,715 from $17,974 in
1997, an increase of $2,741 or 15.2%. This increase was due to an increase of
$119,241 or 28.4% in average earning assets and an increase of $114,899 or
31.9% in average interest bearing liabilities. The yield on earning assets in
1998 of 8.53% was 38 basis points lower than the 8.91% earned in 1997, and
the cost of interest bearing liabilities decreased 7 basis points to 5.32% in
1998 from 5.39% in 1997. Consequently, Premier's net interest spread
decreased from 3.52% in 1997 to 3.21% in 1998 and the net interest margin
decreased from 4.28% in 1997 to 3.85% in 1998. The decrease in net interest
spread and net interest margin is primarily attributable to the acquisition
of the deposit liabilities of the three West Virginia branches. Proceeds from
these branches were placed in lower yielding assets until higher yielding
assets could be generated. The Company also experienced the first full year
effect of the issuance in the second quarter of 1997 of the Company's 28.75
million in mandatorily redeemable capital securities, the proceeds of which
were primarily used to fund the West Virginia acquisition.
In an effort to minimize the adverse impact on net income until a permanent
investment could be made of the funds from the issuance of the capital
securities, the Company initiated an investment strategy during the second
quarter of 1998 of selling approximately $75 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.
<PAGE>
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 second quarter of 1998, the spread fell below 50 basis points and the
Company unwound its positions and recognized net gains of $135,000 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 3.67% in 1998 compared to 4.26% in 1997 and net interest margin
would have been 4.48% in 1998 versus the 5.16% achieved in 1997.
The net interest spread declined 75 basis points from 4.27% in 1996 to 3.52% in
1997, while the net interest margin, which measures net interest income as a
percent of average earning assets, decreased from 5.18% in 1996 to 4.28% in
1997. The decrease in net interest margin is attributable to the issuance of the
capital securities in the second quarter of 1997 and the utilization of a
similar investment strategy as used in 1998 to minimize the adverse impact on
earnings caused by the temporary placement of the securities proceeds.
<PAGE>
The following table presents average balances and interest rates for the
three-year period ended December 31, 1998.
AVERAGE CONSOLIDATED BALANCE SHEETS AND NET INTEREST
ANALYSIS
(Dollars in thousands)
<TABLE>
<CAPTION>
1998 1997 1996
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 $139,655 $ 8,249 5.91% $ 92,530 $ 5,679 6.14% $ 34,039 $ 1,971 5.76%
States and municipal obligations(1) 20,623 1,555 8.09 18,027 1,455 8.07 12,783 1,017 7.96
Other securities (1) 4,553 565 9.49 5,155 507 9.84 3,716 395 10.63
-------- -------- ---- -------- -------- ----- -------- -------- -----
Total investment securities $164,831 $ 10,369 6.29 $115,712 $ 7,641 6.60 $ 50,538 $ 3,383 6.67
Federal funds sold 31,667 1,686 5.32 18,572 1,037 5.58 9,945 534 5.37
Interest-bearing deposits with Banks 2,146 115 5.36 0 0 0 376 19 5.05
Loans, net of unearned income(3) (4)
Commercial 144,557 14,284 9.88 118,530 11,944 10.08 92,435 9,333 10.10
Real estate mortgage 145,004 14,208 9.80 120,863 11,640 9.63 78,194 7,654 9.79
Installment 50,528 5,295 10.48 45,815 5,105 11.14 36,377 3,891 10.70
-------- -------- ---- -------- -------- ----- -------- -------- -----
Total loans $340,089 $ 33,787 9.93 $285,208 $ 28,689 10.06 $207,006 $ 20,878 10.09
Total interest-earning assets $538,733 $ 45,957 8.53% $419,492 $ 37,367 8.91% $267,865 $ 24,814 9.26%
Allowance for loan losses (3,936) (3,256) (2,618)
Cash and due from banks 17,657 10,083 8,482
Premises and equipment 9,850 7,034 5,273
Other assets 23,280 14,734 9,250
-------- -------- --------
Total assets $585,584 $448,087 $288,252
Liabilities:
Interest bearing deposits:
NOW and money market $ 93,741 $ 3,268 3.49% $ 51,268 $ 1,733 3.38% $ 38,085 $ 1,267 3.33%
Savings 51,818 1,525 2.94 32,671 968 2.96 25,904 754 2.91
Certificates of deposit and other
time deposits 251,047 14,666 5.84 195,177 11,495 5.89 144,581 8,293 5.74
-------- -------- ---- -------- -------- ----- -------- -------- -----
Total interest-bearing deposits $396,606 $19,459 4.91 $279,116 $14,196 5.09 $208,570 $ 10,314 4.95
Other borrowings 18,271 1,194 6.53 49,993 2,755 5.50 4,585 249 5.43
FHLB advances 31,141 1,737 5.58 14,301 810 5.66 3,660 208 5.68
Debt 28,750 2,852 9.91 16,460 1,632 9.91 2,029 168 8.28
-------- -------- ---- -------- -------- ----- -------- -------- -----
Total interest-bearing liabilities $474,768 $25,242 5.32% $359,870 $19,393 5.39% $218,844 $ 10,939 5.00%
Non-interest bearing demand deposits 54,043 34,462 30,004
Other liabilities 3,949 3,514 2,538
-------- -------- --------
Total liabilities $532,760 $397,846 $251,386
Shareholders' Equity: 52,824 50,241 36,866
Total liabilities and shareholders' -------- -------- --------
equity $585,584 $448,087 $288,252
Net interest income (1) 20,715 17,974 13,875
Net interest spread (1) 3.21% 3.52% 4.26%
Net interest margin (1) 3.85% 4.28% 5.18%
</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 that 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
1998 and 1997.
ANALYSIS OF CHANGES IN NET
INTEREST INCOME
(Dollars in thousands on a taxable equivalent basis)
<TABLE>
<CAPTION>
1998 VS. 1997 1997 VS. 1996
INCREASE (DECREASE) DUE TO INCREASE (DECREASE) DUE TO
CHANGE IN CHANGE IN
NET NET
VOLUME RATE CHANGE VOLUME RATE CHANGE
<S> <C> <C> <C> <C> <C> <C>
Interest Income:
Loans $ 5,456 $ (358) $ 5,098 $ 7,867 $ (56) $ 7,811
Investment securities 3,105 (377) 2,728 4,304 (46) 4,258
Federal funds sold 699 (50) 649 481 22 503
Deposits with banks 115 115 (19) (19)
--------- --------- --------- --------- --------- ---------
Total interest income $ 9,375 $ (785) $ 8,590 $ 12,633 $ (80) $ 12,553
Interest Expense:
Deposits -
NOW and money market $ 1,479 $ 56 $ 1,535 $ 445 $ 21 $ 466
Savings 564 (7) 557 200 14 214
Certificates of deposit 3,265 (94) 3,171 2,969 233 3,202
Other borrowings (1,999) 438 (1,561) 2,503 3 2,506
FHLB borrowings 940 (13) 927 603 (1) 602
Debt 1,219 1 1,220 1,424 40 1,464
--------- --------- --------- --------- --------- ---------
Total interest expense $ 5,468 $ 381 $ 5,849 $ 8,144 $ 310 $ 8,454
Net interest income $ 3,907 $ (1,166) $ 2,741 $ 4,489 $ (390) $ 4,099
</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:
o Past due and nonperforming assets;
o Specific internal analyses of loans requiring special attention;
o The current level of regulatory classified and criticized assets and the
associated risk factors with each;
o Examinations and reviews by the Company's independent accountants and
internal loan review personnel; and
o 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.
SUMMARY OF LOAN LOSS EXPERIENCE
(Dollars in Thousands)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------------------------
1998 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C>
Balance at beginning of year $ 3,479 $ 3,127 $ 2,114 $ 1,172 $ 1,192
Balance of allowance for loan losses of
Acquired subsidiaries at acquisition date 115 0 812 803 0
Amounts charged off:
Commercial 502 532 252 74 312
Real estate mortgage 60 139 68 19 5
Consumer 630 634 657 181 200
--------- -------- --------- ---------- ----------
Total loans charged off $ 1,190 $ 1,305 $ 977 $ 274 $ 517
Recoveries on amounts previously charged off:
Commercial 45 48 91 32 94
Real estate mortgage 1 0 4 2 5
Consumer 170 210 130 64 63
--------- -------- --------- ---------- ----------
Total recoveries 216 258 225 98 $ 162
Net charge-offs 974 1,047 752 176 355
Provision for loan losses 1,742 1,399 953 315 335
--------- -------- --------- ---------- ----------
Balance at end of year $ 4,362 $ 3,479 $ 3,127 $ 2,114 $ 1,172
Total loans, net of unearned income:
Average 340,089 285,208 207,006 117,947 102,515
At December 31 395,620 312,102 265,453 147,321 106,431
As a percentage of average loans:
Net charge-offs .29% .37% .36% .15% .35%
Provision for possible loan losses .51% .49% .46% .27% .33%
Allowance as a percentage of year-end net 1.10% 1.11% 1.18% 1.43% 1.10%
loans
Allowance as a multiple of net charge-offs 4 3 4 12 3
</TABLE>
The provision for possible loan losses for 1998 was $1,742 compared to $1,399 in
1997, an increase of $343. This increase can be mainly attributed to loan growth
and the provisions necessary to maintain an adequate reserve. In 1998, net
charge-offs were $974 compared to $1,047 in 1997, a decrease of $73. At December
31, 1998, Premier's allowance for possible loan losses was 1.10% of period-end
loans compared to 1.11% at December 31, 1997. This allowance is consistent with
the historical net charge-off experience.
<PAGE>
Net charge-offs to average loans were .29% for the year 1998 compared to .37%
for the year 1997. At December 31, 1998, Premier's allowance for possible loan
losses totaled $4,362, representing an increase of $883 over the amount restated
for December 31, 1997. The allowance for possible loan losses was 89% of
nonperforming loans on December 31, 1998, compared to 242% at December 31, 1997.
At year end 1997, nonperforming loans represented 1.25% of total outstanding
loans, up from .46% on December 31, 1997.
The provision for possible loan losses for 1998 was $1,742, an increase of $343
over the $1,399 in 1997. Net charge-offs in 1998 were $974, down $73 or 7.0%
from the $1,047 charged off in 1997.
The following table sets forth an allocation for the allowance for possible loan
losses by category of loan and a percentage of loans in that category. 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 THE ALLOWANCE FOR LOAN LOSSES AND
PERCENT OF LOANS TO TOTAL LOANS
(Dollars in thousands)
<TABLE>
<CAPTION>
At December 31,
---------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
Amount % Amount % Amount % Amount % Amount %
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial $1,695 22.5% $1,226 27.0% $1,066 18.5% $ 704 19.6% $ 560 20.7%
Real estate mortgage 1,728 57.8 732 51.1 1,229 60.7 616 58.3 175 58.1
Consumer 738 19.7 965 21.9 739 20.8 620 22.1 292 21.2
Unallocated 202 -- 556 -- 93 -- 174 -- 145 --
------ ---- ------ ---- ------ ---- ------- ---- ------- ----
Total $4,363 100.0% $3,479 100.0% $3,127 100.0% $ 2,114 100.0% $ 1,172 100.0%
</TABLE>
There were no material changes in estimation methods or assumptions affecting
allowance allocation. Any reallocation to the allowance is primarily indicative
of changes in loan portfolio mix, not changes in loan concentrations or terms.
The Company does consider quality in regards to specific loans when determining
an adequate allowance allocation. The level of increase in nonperforming loans,
which is more specifically addressed in the nonperforming loan section, is
believed to be temporary and should not materially affect the allowance.
<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.
Total fees and other income increased $758 or 32.1% in 1998 to $3,117 from
$2,359 in 1997. Service charges on deposit accounts increased 25.7% and all
other income increased 73.0%.
Total fees and other income in 1997 increased $525 or 28.6% over 1996. In 1997,
service charges on deposit accounts increased 17.7%, insurance commissions
increased 40.4% and other income increased 46.8% over the amounts recorded in
1996.
Investment securities gains in 1998 were $225 versus $2,204 in 1997 and $1 in
1996. 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.
Premier recognized a $1.3 million finder's fee during the second quarter of
1998. Received in cash and without recourse, the fee is the Company's portion of
an agreement to assist another financial institution in connection with the
acquisition and subsequent resale of several branches of Banc One Corporation
located in West Virginia.
Noninterest expenses increased $3,105 or 25.4% in 1998, from $12,232 in 1997 to
$15,337 in 1998, and increased $3,002 or 32.5% in 1997 from $9,230 in 1996.
Salaries and employee benefits, the largest component of noninterest expense,
increased 23.4% in 1998 and 25.4% in 1997. The increases include salary
increases and reflect increases in the number of full time equivalent employees
from 146 at December 31, 1996 to 177 at December 31, 1997 and 273 at December
31, 1998, due to acquisitions and expansion of the Company's business activity.
Occupancy and equipment expense for 1998 of $2,181 was $547 or 33.5% higher than
the $1,634 for 1997. The increase in 1997 was $226 or 16.1% from $1,408 in 1996.
The increase in 1997 and 1998 are primarily attributable to the expansion in the
number of banking locations from 14 at December 31, 1996 up to 23 at December
31, 1998.
Other noninterest expense, which is the second largest category, increased $801
or 30.9% in 1998 and $544 or 26.5% in 1997. This increase includes the addition
of the purchased West Virginia branches and their respective operating expenses
as full service banks.
The Company incurred expenses relating to the acquisitions of Ohio River Bank
and the West Virginia branches of $132 in 1998. Acquisition expenses of $482
were incurred in 1997 and no acquisition expenses were incurred in 1996.
Expenses related to acquisitions are charged to expense for acquisitions
accounted for as pooling of interests while certain expenses 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 1998 primarily due to the intangible cost
regarding branch acquisitions.
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 1998, total net noninterest expenses (excluding
investment securities gains, finders fee and acquisition expenses) as a percent
of average total assets were reduced to 2.06% from 2.10% in 1997 and 2.57% in
1996.
The following table is a summary of non-interest income and expense for the
three year period indicated.
NON-INTEREST INCOME AND EXPENSE
(Dollars in thousands)
<TABLE>
<CAPTION>
INCREASE INCREASE
(DECREASE) (DECREASE)
1998 VS. 1997 VS.
1998 1997 1997 1997 1996 1996
-------- -------- --------- -------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
Non-Interest Income:
Service charges on deposit accounts $ 1,585 $ 1,261 $ 324 $ 1,261 $ 1,071 $ 190
Insurance income 468 483 (15) 483 344 139
Other 1,064 615 449 615 419 196
-------- -------- --------- -------- -------- ---------
Total fees and other income $ 3,117 $ 2,359 $ 758 $ 2,359 $ 1,834 $ 525
Investment securities gains 225 2,204 (1,979) 2,204 1 2,203
Finders Fee 1,331 0 1,331 0 0 0
-------- -------- --------- -------- -------- ---------
Total non-interest income $ 4,673 $ 4,563 $ 110 $ 4,563 $ 1,835 $ 2,728
Non-Interest Expense:
Salaries and employee benefits 7,633 6,185 1,448 6,185 4,931 1,254
Occupancy and equipment expense 2,181 1,634 547 1,634 1,408 226
Professional fees 452 504 (52) 504 289 215
Taxes, other than payroll, property
and income 559 445 114 445 353 92
Acquisition related expenses 132 482 (350) 482 0 482
Amortization of intangibles 983 386 597 386 197 189
Other expenses 3,397 2,596 801 2,596 2,052 544
-------- -------- --------- -------- -------- ---------
Total non-interest expenses $ 15,337 $ 12,232 $ 3,105 $ 12,232 $ 9,230 $ 3,002
Net non-interest expenses as a percent
of average assets 1.82% 1.71% 1.71% 2.57%
Net non-interest expenses as a percent
of average assets (excluding
investment securities gains, finders
fee, and acquisition related expenses) 2.06% 2.10% 2.10% 2.57%
</TABLE>
<PAGE>
INCOME TAXES
Premier's provision for income taxes was $1,997 in 1998, which represented 25.9%
of pre-tax income versus $2,605 or 31.1% of pre-tax income in 1997. The decrease
is primarily due to the higher percentage of tax-exempt income in relation to
total pre-tax income and the elimination of the valuation allowance of $235 for
deferred tax assets at Ohio River Bank. Income tax expense for 1996 was $1,589
or 31.1% of pre-tax income.
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 $340,089 in 1998 compared with
$285,208 in 1997. At year end 1998, loans net of unearned income totaled
$395,620 compared to $312,102 at December 31, 1997, an increase of $83,518 or
26.8%.
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)
<TABLE>
<CAPTION>
DECEMBER 31
1998 % 1997 % 1996 % 1995 % 1994 %
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial, secured by
real estate $ 86,010 21.57% $ 71,818 22.83% $ 63,179 23.61% $ 39,724 26.79% $ 30,643 28.55%
Commercial, other 73,982 18.56 48,309 15.36 37,609 14.06 22,115 14.92 18,850 17.56
Real estate 13,374 3.35 8,352 2.66 4,523 1.69 2,495 1.68 1,822 1.70
construction
Real estate mortgage 131,212 32.91 103,664 32.96 94,844 35.45 44,215 29.82 30,067 28.01
Agricultural 15,433 3.87 13,232 4.21 11,751 4.39 6,924 4.67 3,271 3.05
Consumer 74,215 18.61 68,461 21.77 54,160 20.24 32,362 21.83 22,397 20.87
Other 4,502 1.13 674 .21 1,493 .56 435 0.29 279 0.26
Total loans $398,728 100.00% $314,510 100.00% $267,559 100.00% $148,270 100.00% $107,329 100.00%
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Less unearned income (3,108) (2,408) (2,106) (949) (898)
-------- -------- -------- -------- --------
Total loans net of
unearned income $395,620 $312,102 $265,453 $147,321 $106,431
</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. A number of the banks do
participate in the origination of loans into the secondary market and recognize
the referral fees into other income. 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 been at an acceptable level over the past
five years, with net charge-offs being .29% of loans in 1998 and .37% in 1997.
With respect to consumer loans in particular, net charge-offs for the year ended
December 31, 1998 were $460, or .62% of total consumer loans outstanding at
December 31, 1998, and $424 in 1997, or .62% of total consumer loans outstanding
at December 31, 1997.
The following table sets forth the maturity distribution and interest
sensitivity of selected loan categories at December 31, 1998. 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, 1998
(Dollars in thousands)
<TABLE>
<CAPTION>
One Year One Over Total
or Less Through Five Years Loans
Five Years
<S> <C> <C> <C> <C>
Commercial, secured by real estate $ 22,524 $ 11,573 $ 51,913 $ 86,010
Commercial, other 28,844 21,774 23,364 73,982
Real estate construction 12,666 196 512 13,374
Agricultural 8,469 2,600 4,364 15,433
---------- ---------- ---------- ----------
Total $ 72,503 $ 36,143 $ 80,153 $ 188,799
========== ========== ========== ==========
Fixed rate loans $ 47,450 $ 29,033 $ 57,368 $ 133,851
Floating rate loans 25,053 7,110 22,785 54,948
---------- ---------- ---------- ----------
Total $ 72,503 $ 36,143 $ 80,153 $ 188,799
========== ========== ========== ==========
</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 as follows:
<PAGE>
NONPERFORMING ASSETS
(Dollars in thousands)
<TABLE>
<CAPTION>
DECEMBER 31
1998 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C>
Nonaccrual loans $3,500 $ 562 $ 768 $ 693 $ 203
Accruing loans which are contractually
past due 90 days or more 1,322 522 594 480 261
Restructured loans 105 356 0 0 0
------ ------ ------ ------ ------
Total nonperforming and restructured
Loans $4,927 $1,440 $1,362 $1,173 $ 464
Other real estate acquired through
Foreclosures 961 836 485 132 427
------ ------ ------ ------ ------
Total nonperforming and restructured
loans and other real estate $5,888 $2,276 $1,847 $1,305 $ 891
Nonperforming and restructured loans
as a percentage of net loans 1.25% .46% .51% .80% .44%
Nonperforming and restructured loans
and other real estate as a percentage
of total assets .90% .49% .51% .63% .58%
</TABLE>
Nonaccrual loans increased from $562 at December 31, 1997 to $3,500 at December
31, 1998. Total nonperforming assets increased from $2,276 at December 31, 1997
to $5,888 at December 31, 1998. The percentage of nonperforming loans to total
loans increased from .46% to 1.25%
The increase in nonaccrual loans is generally related to real estate secured
loans with one loan of $1,562, accounting for 53% of the increase. This loan is
fully secured by real estate with an appraised value of $3,000 and under an
agreement with the borrower will be sold during the second quarter. No loss is
anticipated. The balance of the increase is also largely real estate secured
loans except for one loan of $282, which is currently in litigation. Potential
losses on all nonaccrual loans are not expected to be substantial.
The increase in accruing loans past due more than 90 days is primarily
represented by one loan of $511 secured by a portfolio of residential and
commercial properties the sale of which is expected to occur in the second
quarter.
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 nonaccrual 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>
1998 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C>
Contractual interest 135 77 73 32 15
Interest recognized 6 62 2 22 0
</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 Company also uses the securities
portfolio as a secondary source of liquidity. The Company has classified the
majority of its 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 portfolio does contain holdings in GNMA
mortgage-backed securities. The securities portfolio does not contain
significant holdings in collateralized mortgage obligations or other
mortgage-related derivative products and/or structured notes.
Securities as a percentage of average interest-earning assets increased to 30.6%
in 1998 versus 27.6% in 1997 and 18.9% in 1996. The 1998 increase in securities
reflects the acquisition of deposits held in the West Virginia branches until
transferred to higher yielding loans.
At December 31, 1998 and 1997, 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, 1998 and 1997. 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
1998 1997 1996
<S> <C> <C> <C>
U.S. Treasury and Federal agencies:
Available for sale $132,106 $ 43,088 $ 28,313
Held to maturity 3,530 5,588 8,387
State and municipal obligations:
Available for sale 3,831 3,564 4,464
Held to maturity 16,474 14,625 12,190
Equity securities:
Available for sale 2,798 2,795 2,788
Held to maturity 0 0 0
Other securities:
Available for sale 18,405 3,600 0
Held to maturity 48 149 416
Total securities:
Available for sale 157,140 53,047 35,565
Held to maturity 20,052 20,362 20,993
-------- -------- --------
Total $177,192 $ 73,409 $ 56,558
</TABLE>
MATURITY DISTRIBUTION OF SECURITIES
December 31, 1998
(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 $11,664 $ 83,113 $ 35,779 $ 1,550 $ 0 $132,106 $132,106
Held to maturity 0 3,530 0 0 0 3,530 3,472
State and municipal obligations:
Available for sale 448 2,689 412 282 0 3,831 3,831
Held to maturity 1,025 5,473 6,653 3,323 0 16,474 17,244
Other securities:
Available for sale 0 0 0 0 21,203 21,203 21,203
Held to maturity 0 0 0 0 48 48 48
Total securities:
Available for sale 12,112 85,802 36,191 1,832 21,203 157,140 157,140
Held to maturity 1,025 9,003 6,653 3,323 48 20,052 20,764
------- -------- -------- ------- ------- -------- --------
Total $13,137 $ 94,805 $ 42,844 $ 5,155 $21,251 $177,192 $177,904
======= ======== ======== ======= ======= ======== ========
Percent of total 7.41% 53.50% 24.18% 2.91% 11.99% 100.00%
Weighted average yield* 5.49% 5.64% 5.89% 5.84% 5.96% 5.73%
</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 $450,649 in 1998, a 43.7% increase over 1997. Total
deposits averaged $313,578 in 1997, an increase of $74,486 or 31.2% over 1996.
Noninterest bearing deposits averaged 12.0% of total deposits in 1998, compared
to 11.0% in 1997 and 12.5% in 1996.
At December 31, 1998, deposits totaled $523,193, compared to $358,605 at
December 31, 1997, an increase of $164,588, or 45.9%. Of this increase,
approximately $151,000 is attributable to the acquisition of the West Virginia
branches. Exclusive of the acquisitions, deposits increased $13,588 from
December 31, 1997 to December 31, 1998, representing a 3.8% increase.
The table below provides information on the maturities of time deposits of
$100,000 or more at December 31, 1998.
MATURITY OF TIME
DEPOSITS OF $100,000 OR MORE
December 31, 1998
(in thousands)
Maturing 3 months or less $ 13,957
Maturing over 3 months through 6 months 10,227
Maturing over 6 months through 12 months 19,758
Maturing over 12 months 17,248
---------
Total $ 61,190
=========
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>
1998 1997 1996
CATEGORY AMOUNT RATE(%) AMOUNT RATE(%) AMOUNT RATE(%)
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Demand $ 54,043 0% $ 34,462 0% $ 30,004 0%
NOW and money
market accounts 93,741 3.49% 51,268 3.38% 38,085 3.33%
Savings 51,818 2.94% 32,671 2.96% 25,904 2.91%
Certificates of deposit
and other time 251,047 5.84% 195,177 5.89% 144,581 5.74%
-------- ---- -------- ---- -------- ----
Total $450,649 4.32% $313,578 4.53% $238,574 4.33%
</TABLE>
<PAGE>
CAPITAL
Stockholders' equity increased $2,392 in 1998 to $54.4 million or 8.3% of total
assets at December 31, 1998. This compares to $52.0 million, or 11.2% of total
assets at December 31, 1997. The primary source of growth in stockholders'
equity in 1998 was the retention of net earnings of $2,635. The primary source
of growth in 1997 was the retention of net earnings of $3,378. The consolidated
statements of changes in stockholders' equity detail 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, 1998 and 1997, the
adjustment resulted in a reduction of stockholders' equity of $300 and $56.
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 1999, the Banks could, without prior approval, declare
dividends to the Company of approximately $10,956 plus any 1999 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.
<PAGE>
SELECTED CAPITAL INFORMATION
(Dollars in thousands)
<TABLE>
<CAPTION>
DECEMBER 31
1998 1997 CHANGE
<S> <C> <C> <C>
Stockholders' Equity $ 54,399 $ 52,007 $ 2,392
Qualifying capital securities of subsidiary
Trust 18,213 17,181 1,032
Disallowed amounts of goodwill and other
Intangibles (21,555) (7,261) (14,294)
Unrealized loss on securities available
for sale 231 (13) 244
-------- -------- --------
Tier I capital $ 51,288 $ 61,914 $(10,626)
Tier II capital adjustments:
Qualifying capital securities of subsidiary
Trust 10,537 11,569
Allowance for loan losses 4,363 3,478
-------- --------
Total capital $ 66,188 $ 76,961
Total risk-weighted assets $408,245 $313,638
Ratios
Tier I capital to risk-weighted assets 12.56% 19.74%
Total capital to risk-weighted assets 16.21% 24.54%
Leverage at year-end 8.05% 13.58%
</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.
<PAGE>
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 meets 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 $52.7 million as of December 31, 1998. Additionally, securities
available-for-sale with maturities greater than one year and equity securities
totaled $145.0 million at December 31, 1998. These securities represent a
secondary source available to meet liquidity needs on a continuing basis.
To maintain a desired level of liquidity, the Company has several sources of
funds available. One 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. Certificates of
deposits and other time deposits of $100,000 or more represented approximately
11.7% and 14.5% of total deposits at December 31, 1998 and 1997. A number of
techniques are used to measure the liquidity position, including the utilization
of ratios that are presented below. These ratios are calculated based on annual
averages for each year.
LIQUIDITY RATIOS
1998 1997 1996
Total loans/total deposits ................. 75.47% 90.95% 86.58%
Total loans/total deposits less float ...... 76.31% 91.78% 88.06%
This analysis shows that the Company's loan to deposit ratio decreased in 1998
from the 1997 and 1996 levels. This is due to the acquisition of deposits held
in the West Virginia branches.
<PAGE>
Information regarding short-term borrowings for the past three years is
presented below.
SHORT-TERM BORROWINGS
(Dollars in thousands)
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Repurchase Agreements:
Balance at year end $ 7,772 $ 6,579 $ 6,014
Weighted average rate at year end 4.47% 5.38% 5.05%
Average balance during the year $ 20,167 $ 49,939 $ 3,784
Weighted average rate during the year 4.58% 5.51% 5.09%
Maximum month-end balance $ 82,755 $ 120,257 $ 7,111
Other short-term borrowings:
Balance at year end $ 18,225 $ 4,082 $ 7,055
Weighted average rate at year end 5.74% 6.17% 5.57%
Average balance during the year $ 14,867 $ 6,914 $ 3,660
Weighted average rate during the year 5.83% 6.04% 5.68%
Maximum month-end balance $ 19,800 $ 9,396 $ 8,555
Total short-term borrowings:
Balance at year end $ 25,997 $ 10,661 $ 13,069
Weighted average rate at year end 5.36% 5.68% 5.33%
Average balance during the year $ 35,242 $ 56,782 $ 7,444
Weighted average rate during the year 5.12% 5.49% 5.38%
Maximum month-end balance $ 92,719 $ 130,348 $ 15,666
</TABLE>
Substantially all federal funds purchased and repurchase agreements mature in
one business day. Other short-term borrowings represent draws on the
Company's line of credit and Federal Home Loan Bank (FHLB) advances to Bank
Affiliates (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 either 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, 1998, the
cumulative amount of the Company's interest earning assets repricing during the
first year is lower than the total amount of its interest bearing liabilities
repricing during this period. This position, which is normally termed a negative
interest sensitivity gap, generally allows for enhanced net interest income
during periods of falling interest rates. This negative gap is within the
Company's internal policy guidelines and is not expected to impact significantly
the Company's net interest income during a period of rising interest rates.
<PAGE>
The following table provides an analysis of the Company's interest rate
sensitivity at December 31, 1998.
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 $ 108,988 $ 80,299 $ 115,546 $ 90,787 $ 395,620
Investment securities 12,899 14,982 92,332 60,394 180,607
Federal funds sold 19,406 0 0 0 19,406
--------- --------- ---------- --------- ----------
Total earning assets $ 141,293 $ 95,281 $ 207,878 $ 151,181 $ 595,633
Sources of Funds
NOW, money market and
Savings $ 20,240 $ 40,471 $ 109,456 $ 8,225 $ 178,392
Time deposits 60,435 136,825 84,325 402 281,987
Short-term borrowings 15,772 9,934 4,334 17,631 47,671
--------- --------- ---------- --------- ----------
Total interest bearing
liabilities $ 96,447 $ 187,230 $ 198,115 $ 26,258 $ 508,050
Interest Sensitivity Gap
For the period $ 44,846 $ (91,949) $ 9,763 $ 124,923 $ 87,583
Cumulative 44,846 (47,103) (37,340) 87,583
Cumulative as a percent of
Earning assets 7.53% -7.91% -6.27% 14.70%
</TABLE>
<PAGE>
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
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 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 increase by approximately 7.1% of stable rate
net interest income if rates fall by two percentage points over the next year.
It projects a decrease of 7.2% if the rates rise by two percentage points.
Management believes this reflects a slight liability sensitive rate risk
position for the one-year horizon.
<PAGE>
Within the same time frame, but assuming an additional one percentage point move
in rates, the model forecasts that net interest income would rise above that
earned in a stable rate environment by 10.7% in a falling rate scenario and
decrease by 10.8% in a rising rate scenario. The slight variance from ALCO
guidelines can be attributed to the large block of deposits held in the West
Virginia branches that have been temporarily invested in marketable securities
while the loan activities of these banks as being reestablished. Management
believes this variance to be self-correcting as the deposit base held by these
branches is reinvested in loans, which is occurring.
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 15.6%.
Additionally, NPV is projected to decrease by 15.6% 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
1998 1997 Guidelines
<S> <C> <C> <C>
Static 1-Year Cumulative Gap -7.9% 5.2% +/-10%
1-Year Net Interest Income Simulation Project
-200 bp change vs. Stable Rate 7.1% -3.7% +/-10%
+200 bp change vs. Stable Rate -7.2% 3.9% +/-10%
1-Year Net Interest Income Simulation Project
-300 bp change vs. Stable Rate 10.7% -5.6% +/-10%
+300 bp change vs. Stable Rate -10.8% 5.8% +/-10%
Static Net Present Value Change
-200 bp Shock vs. Stable Rate 15.6% -7.0% +/-10%
+200 bp Shock vs. Stable Rate -15.6% 7.0% +/-10%
</TABLE>
<PAGE>
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 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 1999 and
believes that the current modest level of liability 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.
<PAGE>
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.
YEAR 2000
Management has assessed the operational and financial implications of its Year
2000 needs and developed a plan to ensure that data processing systems can
properly handle the change. Management has determined that if a business
interruption as a result of the Year 2000 issue occurred, such an interruption
could be material. The primary effort required to prevent a potential business
interruption was the installation of the most current software release from the
Company's third party provider and replacement of certain system hardware. The
third party software provider has warranted that Year 2000 remediation and
testing efforts to become compliant have been successfully completed.
Non-compliant hardware has already been replaced through routine hardware
upgrades. Management locally installed and tested the current software release
before the end of 1998, which completed the Year 2000 plan for mission critical
systems. Non-mission critical systems, including systems other than data
processing with embedded technology, will continue to be evaluated and if
necessary, will be upgraded or replaced. Management projects that the cost of
Year 2000 readiness will be in a range of $40,000 to $100,000, which will be
expensed as incurred. Year 2000 expenses are subject to change and could vary
from current estimates if the final requirements for Year 2000 readiness exceed
management's expectations.
<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, 1998 and 1997
Statements of Income - Years Ended December 31, 1998, 1997 and 1996
Statements of Changes in Stockholders' Equity - Years ended December
31, 1998, 1997 and 1996
Statements of Cash Flows - Years ended December 31, 1998, 1997 and
1996
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.
CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998, 1997 and 1996
CONTENTS
REPORT OF INDEPENDENT AUDITORS.......................................... 1
FINANCIAL STATEMENTS
Consolidated Balance Sheets............................................ 2
Consolidated Statements of Income and Comprehensive Income............. 3-4
Consolidated Statements of Changes in Stockholders' Equity............. 5
Consolidated Statements of Cash Flows.................................. 6-7
Notes to Consolidated Financial Statements............................. 8-32
<PAGE>
- --------------------------------------------------------------------------------
REPORT OF INDEPENDENT AUDITORS
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, 1998 and 1997, and the related
consolidated statements of income and comprehensive income, changes in
stockholders' equity and cash flows for each of the three years in the period
ended December 31, 1998. 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, 1998 and 1997 and the results of its operations
and its cash flows for each of the three years in the period ended December 31,
1998 in conformity with generally accepted accounting principles.
/s/ Crowe, Chizek and Company LLP
Lexington, Kentucky
February 18, 1999
- --------------------------------------------------------------------------------
<PAGE>
PREMIER FINANCIAL BANCORP, INC.
CONSOLIDATED BALANCE SHEETS
December 31, 1998 and 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1998 1997
------------- -------------
<S> <C> <C>
ASSETS
Cash and due from banks $ 20,171,313 $ 13,050,829
Federal funds sold 19,406,000 41,246,000
Investment securities
Available for sale 157,139,714 53,047,321
Held to maturity 20,051,992 20,361,807
Loans 398,727,950 314,510,251
Unearned income (3,108,324) (2,408,652)
Allowance for loan losses (4,362,567) (3,478,761)
------------- -------------
Net loans 391,257,059 308,622,838
Federal Home Loan Bank and Federal Reserve stock 3,415,700 3,033,050
Premises and equipment, net 11,763,723 8,463,994
Real estate and other property acquired through foreclosure 991,947 836,201
Interest receivable 8,053,201 5,488,339
Goodwill and other intangibles 21,554,909 7,261,591
Other assets 3,938,665 3,477,563
------------- -------------
TOTAL ASSETS $ 657,744,223 $ 464,889,533
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits
Non-interest bearing $ 62,813,476 $ 41,010,401
Time deposits, $100,000 and over 61,189,879 51,891,095
Other interest bearing 399,189,543 265,703,518
------------- -------------
Total deposits 523,192,898 358,605,014
Securities sold under agreements to repurchase 7,772,472 6,579,132
Federal Home Loan Bank advances 31,898,391 15,263,339
Other borrowed funds 8,000,000 --
Interest payable 2,383,540 1,805,906
Other liabilities 1,347,945 1,878,778
------------- -------------
Total liabilities 574,595,246 384,132,169
Guaranteed preferred beneficial interest in Company's debentures 28,750,000 28,750,000
Stockholders' equity
Preferred stock, no par value; 1,000,000 shares
authorized; none issued or outstanding -- --
Common stock, no par value; 10,000,000 shares authorized;
5,232,257 and 4,983,230 shares issued and outstanding 1,103,374 985,286
Surplus 43,445,031 38,795,333
Retained earnings 10,150,610 12,283,199
Accumulated other comprehensive income (loss), net of tax (300,038) (56,454)
------------- -------------
Total stockholders' equity 54,398,977 52,007,364
------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 657,744,223 $ 464,889,533
============= =============
</TABLE>
See accompanying notes.
- --------------------------------------------------------------------------------
2.
<PAGE>
PREMIER FINANCIAL BANCORP, INC.
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
Years Ended December 31, 1998, 1997 and 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Interest income
Loans, including fees $33,786,671 $28,689,594 $20,878,157
Investment securities -
Taxable 8,582,307 5,802,592 2,131,241
Tax-exempt 1,179,637 1,157,751 815,821
Federal funds sold 1,686,455 1,036,560 543,346
Other interest income 115,258 164,689 24,711
----------- ----------- -----------
Total interest income 45,350,328 36,851,186 24,393,276
Interest expense
Deposits 19,458,496 14,196,047 10,314,443
Other borrowings 2,931,656 3,565,542 457,433
Debt 2,852,473 1,631,467 167,413
----------- ----------- -----------
Total interest expense 25,242,625 19,393,056 10,939,289
Net interest income 20,107,703 17,458,130 13,453,987
Provision for loan losses 1,742,393 1,398,808 952,959
----------- ----------- -----------
Net interest income after provision for loan losses 18,365,310 16,059,322 12,501,028
Non-interest income
Service charges 1,584,980 1,260,536 1,070,851
Insurance commissions 467,812 482,766 343,735
Investment securities gains 224,530 2,203,545 1,459
Other income 2,395,744 614,648 418,752
----------- ----------- -----------
4,673,066 4,561,495 1,834,797
Non-interest expenses
Salaries and employee benefits 7,633,491 6,185,092 4,930,886
Occupancy and equipment expenses 2,181,305 1,633,957 1,408,093
Professional fees 452,358 503,685 288,916
Taxes, other than payroll, property and income 558,607 445,204 352,334
Acquisition related expenses 132,208 482,056 --
Amortization of intangibles 982,566 386,134 197,357
Other expenses 3,397,343 2,595,791 2,052,110
----------- ----------- -----------
15,337,878 12,231,919 9,229,696
Income before income taxes 7,700,498 8,388,898 5,106,129
Provision for income taxes 1,996,754 2,604,939 1,588,610
----------- ----------- -----------
NET INCOME $ 5,703,744 $ 5,783,959 $ 3,517,519
=========== =========== ===========
</TABLE>
(Continued)
See accompanying notes.
- --------------------------------------------------------------------------------
3.
<PAGE>
PREMIER FINANCIAL BANCORP, INC.
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
Years Ended December 31, 1998, 1997 and 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAX:
Unrealized gains and (losses) arising during
the period $ (95,394) $ 1,521,393 $ (51,277)
Reclassification of realized amount (148,190) (1,454,340) (963)
----------- ----------- -----------
Net change in unrealized gain (loss) on
securities (243,584) 67,053 (52,240)
----------- ----------- -----------
COMPREHENSIVE INCOME $ 5,460,160 $ 5,851,012 $ 3,465,279
=========== =========== ===========
Earnings per share $ 1.09 $ 1.11 $ .82
Earnings per share assuming dilution $ 1.09 $ 1.10 $ .82
</TABLE>
See accompanying notes.
- --------------------------------------------------------------------------------
4.
<PAGE>
PREMIER FINANCIAL BANCORP, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Years Ended December 31, 1998, 1997 and 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Accumulated
Other
Common Retained Comprehensive
Stock Surplus Earnings Income (Loss) Total
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Balances, January 1, 1996 $ 962,286 $ 11,751,991 $ 7,452,708 $ (71,267) $ 20,095,718
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 -- -- -- (52,240) (52,240)
Net income -- -- 3,517,519 -- 3,517,519
Dividends paid - Company ($.50 per
share) -- -- (1,817,045) -- (1,817,045)
Dividends paid - Sabina prior to pooling -- -- (165,000) -- (165,000)
------------ ------------ ------------ ------------ ------------
Balances, December 31, 1996 985,286 38,795,333 8,988,182 (123,507) 48,645,294
Net change in unrealized losses on
securities available for sale -- -- -- 67,053 67,053
Net income -- -- 5,783,959 -- 5,783,959
Dividends paid - Company ($.55 per
share) -- -- (2,406,442) -- (2,406,442)
Dividends paid - Sabina prior to pooling -- -- (82,500) -- (82,500)
------------ ------------ ------------ ------------ ------------
Balances, December 31, 1997 985,286 38,795,333 12,283,199 (56,454) 52,007,364
Net change in unrealized losses on
securities available for sale -- -- -- (243,584) (243,584)
Net income -- -- 5,703,744 -- 5,703,744
Dividends paid - Company ($.60 per
share) -- -- (3,068,547) -- (3,068,547)
Stock dividend 118,088 4,649,698 (4,767,786) -- --
------------ ------------ ------------ ------------ ------------
BALANCES, DECEMBER 31, 1998 $ 1,103,374 $ 43,445,031 $ 10,150,610 $ (300,038) $ 54,398,977
============ ============ ============ ============ ============
</TABLE>
See accompanying notes.
- --------------------------------------------------------------------------------
5.
<PAGE>
PREMIER FINANCIAL BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS Years Ended
December 31, 1998, 1997 and 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1998 1997 1996
------------- ------------- -------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 5,703,744 $ 5,783,959 $ 3,517,519
Adjustments to reconcile net income to
net cash from operating activities
Depreciation 871,646 643,696 477,849
Amortization, net 591,139 377,900 374,697
Provision for loan losses 1,742,393 1,398,808 952,959
FHLB stock dividends (227,400) (155,000) (46,000)
Investment securities gains, net (224,530) (2,203,545) (1,459)
Changes in
Interest receivable (2,564,862) (945,561) (540,251)
Other assets (160,546) (1,794,527) 875,055
Interest payable 577,634 295,835 (108,263)
Other liabilities (530,833) 908,566 236,963
------------- ------------- -------------
NET CASH FROM OPERATING ACTIVITIES 5,778,385 4,310,131 5,739,069
Cash flows from investing activities
Purchases of securities available for sale (640,534,674) (311,372,750) (21,071,076)
Proceeds from sales of securities available for sale 222,749,694 277,135,191 2,499,125
Proceeds from maturities and calls of securities
available for sale 313,670,924 18,869,544 14,388,575
Purchases of investment securities held to maturity (4,977,589) (4,254,989) (2,741,799)
Proceeds from maturities and calls of securities
held to maturity 5,276,493 4,878,764 2,241,255
Purchases of FHLB stock (155,250) (1,072,900) (753,300)
Net change in federal funds sold 21,840,000 (27,348,000) (2,875,000)
Net change in loans (75,665,244) (48,436,475) (36,357,610)
Purchases of premises and equipment, net (2,128,680) (2,231,797) (1,053,310)
Proceeds from sale of other real estate acquired
through foreclosure 398,884 367,572 156,353
Net cash received (paid) related to acquisitions 123,970,812 20,613,412 (10,576,808)
------------- ------------- -------------
NET CASH FROM INVESTING ACTIVITIES (35,554,630) (72,852,428) (56,143,595)
</TABLE>
See accompanying notes.
6.
<PAGE>
PREMIER FINANCIAL BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 1998, 1997 and 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES
Net change in deposits 14,136,884 38,169,728 30,532,564
Advances from Federal Home Loan Bank 27,225,000 17,727,000 6,800,000
Repayment of Federal Home Loan Bank advances (10,589,948) (11,841,117) (2,067,206)
Proceeds from other borrowed funds 8,000,000 -- --
Repayment of other borrowed funds -- -- (6,894,863)
Net change in agreements to repurchase securities 1,193,340 564,712 (1,382,697)
Proceeds from issuance of guaranteed preferred
beneficial interests in Company's debentures -- 28,750,000 --
Proceeds from issuance of common stock -- -- 27,066,342
Dividends paid (3,068,547) (2,488,942) (1,982,045)
------------ ------------ ------------
NET CASH FROM FINANCING ACTIVITIES 36,896,729 70,881,381 52,072,095
------------ ------------ ------------
Net change in cash and cash equivalents 7,120,484 2,339,084 1,667,569
Cash and cash equivalents at beginning
of year 13,050,829 10,711,745 9,044,176
------------ ------------ ------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 20,171,313 $ 13,050,829 $ 10,711,745
============ ============ ============
Supplemental disclosures of cash flow information:
Cash paid during the year for -
Interest $ 24,664,991 $ 19,097,220 $ 11,047,552
Income taxes 2,550,000 2,462,000 1,062,063
Loans transferred to real estate acquired
through foreclosure $ 554,630 $ 829,199 $ 105,501
</TABLE>
See accompanying notes.
- --------------------------------------------------------------------------------
7.
<PAGE>
PREMIER FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998, 1997 and 1996
- --------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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; The Sabina Bank, Sabina, Ohio; Ohio River Bank, Ironton, Ohio; The
Bank of Philippi, Inc., Philippi, West Virginia; and Boone County Bank, Inc.,
Madison, West Virginia (the Banks). In addition, the Company has a data
processing service subsidiary, Premier Data Services, Inc., Vanceburg, Kentucky
and PFBI Capital Trust subsidiary discussed in Note 11. 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 prior amounts have been reclassified to conform with the current year
presentation.
NATURE OF OPERATIONS: The Banks operate under state bank charters and provide
traditional banking services, including trust services, to customers
primarily located in the counties and adjoining counties in Kentucky, Ohio,
and West Virginia in which the Banks operate. Chartered as state banks, the
Banks are subject to regulation by their respective state banking regulators
and the Federal Deposit Insurance Corporation (FDIC) or the Federal Reserve
Bank (FRB) for member banks. The Company is also subject to regulation by
the Federal Reserve Bank.
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. The
allowance for loan losses and fair values of financial instruments are
particularly subject to change.
CASH FLOWS: For purposes of reporting cash flows, cash and cash equivalents
include cash on hand and amounts due from banks. Net cash flows are reported for
loans, federal funds sold, deposits, and other borrowing transactions.
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.
- --------------------------------------------------------------------------------
(Continued)
8.
<PAGE>
PREMIER FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998, 1997 and 1996
- --------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
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.
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.
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.
A loan is impaired when full payment under the loan terms is not expected.
Impairment is evaluated in total for smaller-balance loans of similar nature
such as residential mortgage, consumer, and credit card loans, and on an
individual loan basis for other loans. If a loan is impaired, a portion of the
allowance is allocated so that the loan is reported, net, at the present value
of estimated future cash flows using the loan's existing rate or at the fair
value of collateral if repayment is expected solely from the collateral.
Certain loan origination fees and direct origination costs are capitalized and
recognized as an adjustment of the yield on the related loan.
- --------------------------------------------------------------------------------
(Continued)
9.
<PAGE>
PREMIER FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998, 1997 and 1996
- --------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
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.
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.
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 to 25 years.
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.
EARNINGS PER COMMON SHARE: Basic earnings per common share is net income divided
by the weighted average number of common shares outstanding during the period.
Diluted earnings per common share includes the dilutive effect of additional
potential common shares issuable under stock options. Earnings and dividends per
share are restated for all stock splits and dividends through the date of
issuance of the financial statements.
COMPREHENSIVE INCOME: Comprehensive income consists of net income and other
comprehensive income. Other comprehensive income includes unrealized gains and
losses on securities available for sale which are also recognized as a separate
component of equity. The accounting standard that requires reporting
comprehensive income first applies for 1998, with prior information restated to
be comparable.
- --------------------------------------------------------------------------------
(Continued)
10.
<PAGE>
PREMIER FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998, 1997 and 1996
- --------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
NEW ACCOUNTING PRONOUNCEMENTS: Beginning January 1, 2000, a new accounting
standard will require all derivatives to be recorded at fair value. Unless
designated as hedges, changes in these fair values will be recorded in the
income statement. Fair value changes involving hedges will generally be recorded
by offsetting gains and losses on the hedge and on the hedged item, even if the
fair value of the hedged item is not otherwise recorded. This is not expected to
have a material effect, but the effect will depend on derivative holdings when
this standard applies.
INDUSTRY SEGMENTS: All of the Company's operations are considered by management
to be aggregated into one reportable operating segment.
NOTE 2 - BUSINESS COMBINATIONS
On October 5, 1998, the Company entered into a definitive agreement to purchase
Mt. Vernon Bancshares, Inc., the holding company for The Bank of Mt. Vernon (Mt.
Vernon), in a cash transaction. Mt. Vernon offers full service banking in
Rockcastle and Pulaski counties and has two loan production offices in Madison
County, Kentucky. Total acquisition cost was $13.5 million which exceeded the
net assets acquired by $4.6 million. The merger was completed January 20, 1999.
Mt. Vernon had total assets of $129.5 million and earnings for the year of $863
thousand at December 31, 1998.
On June 26, 1998, the Company chartered Boone County Bank, Inc. in Madison, West
Virginia, and The Bank of Philippi, Inc. in Philippi, West Virginia, for the
purpose of acquiring three branch offices of Banc One Corporation located in
Madison, Philippi and Van, West Virginia. Included in the purchase were $150
million in deposits, $9 million in loans and $1.5 million in premises and
equipment. These branches were part of a larger group of branches acquired in
cooperation with another bank holding company headquartered in Kentucky. Certain
individual branches within the group were not retained by either company. The
gain on disposition of these branches was shared between the Company and the
other bank holding company. The Company's portion of the gain, $1,331,430, is
included in other income in the accompanying financial statements.
On March 20, 1998, the Company acquired Ohio River Bank, Ironton, Ohio, (Ohio
River) whereby the Company exchanged 297,840 shares of its common stock for all
the issued and outstanding shares of Ohio River in a business combination
accounted for as a pooling of interests. Based on the date of the acquisition
agreement, the market value of the shares exchanged was $7.7 million. The
accompanying consolidated financial statements for 1998 are based on the
assumption that the companies were combined for the full year. Prior years
presented have been restated to give effect to the combination. At the date of
acquisition, Ohio River had $40.9 million in total assets, $28.0 million in net
loans, $35.2 million in deposits, and $4.3 million in stockholders' equity.
- --------------------------------------------------------------------------------
(Continued)
11.
<PAGE>
PREMIER FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998, 1997 and 1996
- --------------------------------------------------------------------------------
NOTE 2 - BUSINESS COMBINATIONS (Continued)
Following is a reconciliation of interest income, non-interest income and net
income previously reported with restated amounts:
Year Ended December 31
1997 1996
(in thousands)
Interest income
As previously reported $ 33,995 $ 22,401
Ohio River 2,856 1,992
--------- ---------
As restated $ 36,851 $ 24,393
========= =========
Non-interest income
As previously reported $ 4,367 $ 1,721
Ohio River 194 114
--------- ---------
As restated $ 4,561 $ 1,835
========= =========
Net income
As previously reported $ 5,608 $ 3,723
Ohio River 176 (205)
--------- ---------
As restated $ 5,784 $ 3,518
========= =========
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. Based on the date of the acquisition agreement, the
market value of the shares exchanged was $7.6 million. The 1997 consolidated
financial statements are based on the assumption that the companies were
combined for a full year. Prior years presented have been restated to give the
effect of the combination. At the date of acquisition, Sabina had $23.8 million
in net loans, $36.6 million in total assets, $31.6 million in deposits, and $4.4
million in stockholders' equity.
- --------------------------------------------------------------------------------
(Continued)
12.
<PAGE>
PREMIER FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998, 1997 and 1996
- --------------------------------------------------------------------------------
NOTE 2 - BUSINESS COMBINATIONS (Continued)
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. The net deposits assumed exceeded the cash received by $2.1 million.
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 exceeded net assets acquired by approximately $5.4 million. 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. Included in the purchase were $19.3 million in investments, $82.0
million in net loans, $86.8 million in deposits, and $12.5 million in borrowed
funds.
NOTE 3 - RESTRICTIONS ON CASH AND DUE FROM BANKS
Included in cash and due from banks are certain non-interest bearing deposits
that are held at the Federal Reserve or maintained in vault cash in accordance
with average balance requirements specified by the Federal Reserve Board of
Governors. The average balance requirement at December 31, 1998 and 1997 was
$1,109,000 and $728,000.
NOTE 4 - INVESTMENT SECURITIES
Amortized cost and fair value of investment securities, by category, at December
31, 1998 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 $ 7,184,532 $ 44,376 $ (112) $ 7,228,796
U. S. agency securities 125,371,969 45,437 (540,453) 124,876,953
Obligations of states and political
subdivisions 3,691,320 141,750 (2,437) 3,830,633
Mortgage-backed securities 18,451,999 19,580 (66,537) 18,405,042
Preferred stock 2,000,000 -- -- 2,000,000
Other securities 900,006 -- (101,716) 798,290
------------ ------------ ------------ ------------
Total available for sale $157,599,826 $ 251,143 $ (711,255) $157,139,714
============ ============ ============ ============
</TABLE>
- --------------------------------------------------------------------------------
(Continued)
13.
<PAGE>
PREMIER FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998, 1997 and 1996
- --------------------------------------------------------------------------------
NOTE 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 $ 899,400 $ 16,069 $ -- $ 915,469
U. S. agency securities 2,630,499 -- (73,346) 2,557,153
Obligations of states and political
subdivisions 16,473,940 769,999 (594) 17,243,345
Mortgage-backed securities 48,153 232 (59) 48,326
----------- ----------- ----------- -----------
Total held to maturity $20,051,992 $ 786,300 $ (73,999) $20,764,293
=========== =========== =========== ===========
</TABLE>
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 $16,277,679 $ 19,950 $ (14,581) $16,283,048
U. S. agency securities 26,867,490 29,205 (91,461) 26,805,234
Obligations of states and political
subdivisions 3,457,927 109,529 (3,602) 3,563,854
Mortgage-backed securities 3,629,753 -- (29,225) 3,600,528
Preferred stock 2,000,000 -- -- 2,000,000
Other securities 900,007 -- (105,350) 794,657
----------- ----------- ----------- -----------
Total available for sale $53,132,856 $ 158,684 $ (244,219) $53,047,321
=========== =========== =========== ===========
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
Mortgage-backed securities 149,004 905 (420) 149,489
----------- ----------- ----------- -----------
Total held to maturity $20,361,807 $ 522,688 $ (22,126) $20,862,369
=========== =========== =========== ===========
</TABLE>
- --------------------------------------------------------------------------------
(Continued)
14.
<PAGE>
PREMIER FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998, 1997 and 1996
- --------------------------------------------------------------------------------
NOTE 4 - INVESTMENT SECURITIES (Continued)
The amortized cost and fair value of investment securities at December 31, 1998,
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 $ 12,089,373 $ 12,112,321
Due after one year through five years 85,989,434 85,802,694
Due after five years through ten years 36,349,311 36,191,221
Due after ten years 1,819,703 1,830,146
Mortgage-backed securities 18,451,999 18,405,042
Preferred stock 2,000,000 2,000,000
Other securities 900,006 798,290
------------- -------------
Total available for sale $ 157,599,826 $ 157,139,714
============= =============
Held to maturity
Due in one year or less $ 1,025,446 $ 1,039,505
Due after one year through five years 9,003,683 9,203,825
Due after five years through ten years 6,653,998 6,967,024
Due after ten years 3,320,712 3,505,613
Mortgage-backed securities 48,153 48,326
------------- -------------
Total held to maturity $ 20,051,992 $ 20,764,293
============= =============
</TABLE>
Proceeds from sales of investment securities during 1998, 1997 and 1996 were
$222,749,694, $277,135,191 and $2,499,125. Gross gains of $232,499, $2,204,483
and $2,070, and gross losses of $7,969, $938 and $611 were realized on those
sales.
Investment securities with an approximate carrying value of $45,574,176 and
$33,991,908 at December 31, 1998 and 1997 were pledged to secure public
deposits, trust funds, securities sold under agreements to repurchase and for
other purposes as required or permitted by law.
- --------------------------------------------------------------------------------
(Continued)
15.
<PAGE>
PREMIER FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998, 1997 and 1996
- --------------------------------------------------------------------------------
NOTE 5 - LOANS
Major classifications of loans are summarized as follows:
<TABLE>
<CAPTION>
December 31
------------------------
1998 1997
-------- --------
(in thousands)
<S> <C> <C>
Commercial, secured by real estate $ 86,010 $ 71,818
Commercial, other 73,982 48,309
Real estate construction 13,374 8,352
Real estate mortgage 131,212 103,664
Agricultural 15,433 13,232
Consumer and home equity 74,215 68,461
Other 4,502 674
-------- --------
$398,728 $314,510
======== ========
</TABLE>
Certain directors and executive officers of the Banks and companies in which
they have beneficial ownership, were loan customers of the Banks during 1998 and
1997. Such loans were made in the ordinary course of business at the Banks'
normal credit terms and interest rates. An analysis of the 1998 activity with
respect to all director and executive officer loans is as follows:
<TABLE>
<S> <C>
Balance, December 31, 1997 $ 4,999,373
Additions, including loans now meeting disclosure
requirements 12,199,146
Amounts collected, including loans no longer meeting
disclosure requirements (5,624,848)
------------
Balance, December 31, 1998 $ 11,573,671
============
</TABLE>
Changes in the allowance for loan losses were as follows:
<TABLE>
<CAPTION>
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Balance, beginning of year $ 3,478,761 $ 3,126,610 $ 2,114,146
Allowance related to acquired subsidiaries 115,000 - 812,000
Loans charged off (1,189,665) (1,305,215) (977,170)
Recoveries 216,078 258,558 224,675
Provision for loan losses 1,742,393 1,398,808 952,959
----------- ----------- -----------
Balance, end of year $ 4,362,567 $ 3,478,761 $ 3,126,610
=========== =========== ===========
</TABLE>
- --------------------------------------------------------------------------------
(Continued)
16.
<PAGE>
PREMIER FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998, 1997 and 1996
- --------------------------------------------------------------------------------
NOTE 5 - LOANS (Continued)
Impaired loans are as follows:
<TABLE>
<CAPTION>
1998 1997 1996
------- -------- -------
<S> <C> <C> <C>
Year end loans with no allocated allowance
for loan losses $ 2,562 $ 1,049 $ 618
Year end loans with allocated allowance for
loan losses 791 - 292
------- -------- -------
Total $ 3,353 $ 1,049 $ 910
======= ======== =======
Amount of the allowance for loan losses allocated $ 659 $ 149 $ 274
Average of impaired loans during the year $ 905 $ 1,262 $ 713
Interest income recognized during impairment 6 62 2
</TABLE>
NOTE 6 - PREMISES AND EQUIPMENT
Premises and equipment are summarized as follows:
<TABLE>
<CAPTION>
December 31
-------------------------------
1998 1997
------------ ------------
<S> <C> <C>
Land $ 1,682,547 $ 1,289,972
Buildings and leasehold improvements 8,174,472 5,684,913
Furniture and equipment 7,204,898 6,018,162
------------ ------------
17,061,917 12,993,047
Less: accumulated depreciation (5,298,194) (4,529,053)
------------ ------------
$ 11,763,723 $ 8,463,994
============ ============
</TABLE>
NOTE 7 - DEPOSITS
At December 31, 1998, the scheduled maturities of time deposits are as follows:
1999 $ 228,492,511
2000 58,890,421
2001 18,196,660
2002 8,028,777
2003 and thereafter 2,356,469
-------------
$ 315,964,838
=============
- --------------------------------------------------------------------------------
(Continued)
17.
<PAGE>
PREMIER FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998, 1997 and 1996
- --------------------------------------------------------------------------------
NOTE 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:
December 31
-----------------------------
1998 1997
------------ ------------
Year-end balance $ 7,772,472 $ 6,579,132
Average balance during the year 20,167,213 49,939,497
Average interest rate during the year 4.58% 5.51%
Maximum month-end balance during the year $ 82,754,719 $120,257,123
NOTE 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, 1998 and 1997, $31,898,391 and $15,263,339 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 seventeen years,
with interest rates ranging from 4.81% to 8.45%. 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, 1998 are as follows: 1999 - $9,941,708; 2000 -
$3,431,285; 2001 - $566,190; 2002 - $364,921; 2003 and years thereafter -
$17,594,287.
NOTE 10 - OTHER BORROWED FUNDS
The Company has a $20 million line of credit with a financial institution for
general corporate purposes, including acquisitions. The line of credit,
expiring April 1999, contains certain covenants and performance terms, all of
which have been complied with at December 31, 1998. Interest is payable
monthly at LIBOR plus 1.125% and adjusts based on agreed term. Common stock
of five of the Company's subsidiary Banks is pledged to secure the agreement.
At December 31, 1998, $8 million of the line was advanced. There were no
amounts borrowed under this agreement at December 31, 1997.
- --------------------------------------------------------------------------------
(Continued)
18.
<PAGE>
PREMIER FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998, 1997 and 1996
- --------------------------------------------------------------------------------
NOTE 11 - GUARANTEED PREFERRED BENEFICIAL INTERESTS IN COMPANY'S
DEBENTURES
Guaranteed preferred beneficial interests in Company's debentures (Preferred
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 Preferred 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 Preferred 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
Preferred Securities are redeemable in whole. Otherwise, the Preferred
Securities are generally redeemable in whole or in part on or after June 30,
2002 at 100% of the liquidation amount. The Trust's obligations under the
Preferred Securities are fully and unconditionally guaranteed by the Company.
NOTE 12 - INCOME TAXES
The components of the provision for income taxes are as follows:
<TABLE>
<CAPTION>
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Current $ 2,349,608 $ 2,348,275 $ 1,599,539
Deferred (117,887) 316,664 (80,929)
Change in valuation allowance (234,967) (60,000) 70,000
----------- ----------- -----------
$ 1,996,754 $ 2,604,939 $ 1,588,610
=========== =========== ===========
</TABLE>
The Company's deferred tax assets and liabilities at December 31, 1998 and 1997
are shown below. No valuation allowance for the realization of deferred tax
assets is considered necessary at December 31, 1998.
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
Deferred tax assets
Allowance for loan losses $ 847,640 $ 500,815
NOL carryforwards 95,652 301,952
Unrealized loss on investment securities 160,074 29,083
Other 182,951 100,996
---------- ----------
Total deferred tax assets 1,286,317 932,846
</TABLE>
- --------------------------------------------------------------------------------
(Continued)
19.
<PAGE>
PREMIER FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998, 1997 and 1996
- --------------------------------------------------------------------------------
NOTE 12 - INCOME TAXES (Continued)
<TABLE>
<CAPTION>
1998 1997
--------- ---------
<S> <C> <C>
Deferred tax liabilities
Depreciation (331,555) (296,130)
Change in accounting method (39,789) (77,276)
Federal Home Loan Bank dividends (181,900) (103,764)
Other (83,584) (55,065)
--------- ---------
Total deferred tax liabilities (636,828) (532,235)
Valuation allowance -- (234,967)
--------- ---------
Net deferred tax asset $ 649,489 $ 165,644
========= =========
</TABLE>
At December 31, 1998, two of the subsidiary Banks had net operating loss
carryforwards totaling approximately $281,000, which begin expiring in 2003. The
utilization of these net operating loss carryforwards is subject to limitations
imposed by Section 382 of the Internal Revenue Code.
An analysis of the differences between the effective tax rates and the statutory
U.S. federal income tax rate is as follows:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
U. S. federal income tax rate $ 2,618 34.0% $ 2,852 34.0% $ 1,736 34.0%
Changes from the statutory rate
Tax-exempt investment income (425) (5.5) (408) (5.0) (295) (5.6)
Non-deductible interest expense
related to carrying tax-exempt
investments 57 .7 50 .6 34 .6
Tax credits (149) (1.9) (70) (0.8) (70) (1.3)
Change in valuation allowance (235) (3.1) (60) (.6) 70 1.3
Goodwill amortization 137 1.8 131 1.6 67 1.3
Other (6) (.1) 110 1.3 47 0.8
------- ---- ------- ---- ------- ----
$ 1,997 25.9% $ 2,605 31.1% $ 1,589 31.1%
======= ======= =======
</TABLE>
NOTE 13 - EMPLOYEE BENEFIT PLANS
The Company has qualified profit sharing plans which cover substantially all
employees. Contributions to the plans consist of a Company match and additional
amounts are at the discretion of the Company's Board of Directors. Total
contributions to the plans were $180,135, $191,073 and $215,007 in 1998, 1997
and 1996.
- --------------------------------------------------------------------------------
(Continued)
20.
<PAGE>
PREMIER FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998, 1997 and 1996
- --------------------------------------------------------------------------------
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.
A summary of the Company's stock option activity is as follows:
<TABLE>
<CAPTION>
1998 1997 1996
------------------- ------------------ ------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Options Price Options Price Options Price
------- ----- ------- ----- ------- -----
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year 40,000 $ 13.00 40,000 $ 13.00 -- $ --
Granted 20,000 16.50 -- -- 40,000 13.00
------- ------- -------
Outstanding at year end 60,000 $ 14.17 40,000 $ 13.00 40,000 $ 13.00
======= ======= =======
Exercisable at year end 40,000 28,000 14,000
Weighted average remaining life 8.3 8.5 9.5
</TABLE>
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.
- --------------------------------------------------------------------------------
(Continued)
21.
<PAGE>
PREMIER FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998, 1997 and 1996
- --------------------------------------------------------------------------------
NOTE 13 - EMPLOYEE BENEFIT PLANS (Continued)
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 net income and earnings per share of
this statement are as follows:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
(in thousands)
Net income
As reported $ 5,704 $ 5,784 $ 3,518
Pro forma 5,649 5,731 3,493
Earnings per share
As reported $ 1.09 $ 1.11 $ .82
Pro forma 1.08 1.10 .81
Earnings per share assuming dilution
As reported $ 1.09 $ 1.10 $ .82
Pro forma 1.08 1.09 .81
Weighted averages
Fair value of options granted $ 4.66 $ 5.77 $ 2.70
Risk free interest rate 5.50% 6.00% 6.50%
Expected life 10 years 10 years 10 years
Expected volatility 17.88% 38.02% 13.97%
Expected dividend $ .60 $ .60 $ .50
</TABLE>
Future pro forma net income will be negatively impacted should the Company
choose to grant additional options.
NOTE 14 - RELATED PARTY TRANSACTIONS
During 1998, 1997 and 1996, the Company paid approximately $369,000, $233,000
and $264,000 for printing and supplies from a company affiliated by common
ownership. The Company also paid this affiliate approximately $649,000, $339,000
and $317,000 in 1998, 1997 and 1996 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 Louisiana bank controlled by the
Company's largest stockholder. The dividend rate on the preferred stock is 2%
over the prevailing prime rate.
- --------------------------------------------------------------------------------
(Continued)
22.
<PAGE>
PREMIER FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998, 1997 and 1996
- --------------------------------------------------------------------------------
NOTE 15 - 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 1999, the Banks could, without prior
approval, declare dividends of approximately $10,956,000 plus any 1999 net
profits retained to the date of the dividend declaration.
NOTE 16 - 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 1998,
1997 and 1996 is presented below:
<TABLE>
<CAPTION>
Year Ended
-----------------------------------------
1998 1997 1996
---------- ----------- -----------
<S> <C> <C> <C>
Earnings Per Share
Net income available to common stockholders $5,703,744 $ 5,783,959 $ 3,517,519
Weighted average common shares outstanding 5,232,257 5,232,257 4,310,672
Earnings per share $ 1.09 $ 1.11 $ .82
Earnings Per Share Assuming Dilution
Net income available to common stockholders $5,703,744 $ 5,783,959 $ 3,517,519
Weighted average common shares outstanding 5,232,257 5,232,257 4,310,672
Add dilutive effects of assumed exercise of stock
options 14,972 13,074 214
---------- ----------- -----------
Weighted average common and dilutive potential
common shares outstanding 5,247,229 5,245,331 4,310,886
Earnings per share assuming dilution $ 1.09 $ 1.10 $ .82
</TABLE>
NOTE 17 - STOCKHOLDERS' EQUITY
The Company paid a 5% stock dividend on September 30, 1998 to stockholders of
record on September 21, 1998. For comparability, prior earnings per share
information has been restated to reflect the 249,027 shares issued as a result.
- --------------------------------------------------------------------------------
(Continued)
23.
<PAGE>
PREMIER FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998, 1997 and 1996
- --------------------------------------------------------------------------------
NOTE 17 - STOCKHOLDERS' EQUITY (Continued)
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.
NOTE 18 - DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair values of the Company's financial instruments at December 31, 1998 and
1997 are as follows:
<TABLE>
<CAPTION>
1998 1997
------------------------------- -------------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
<S> <C> <C> <C> <C>
Financial assets
Cash and due from banks $ 20,171,313 $ 20,171,000 $ 13,050,829 $ 13,051,000
Federal funds sold 19,406,000 19,406,000 41,246,000 41,246,000
Investment securities 177,191,706 177,904,000 73,409,128 73,910,000
Loans, net 391,257,059 393,047,000 308,622,838 307,814,000
Federal Home Loan Bank and
Federal Reserve stock 3,415,700 3,416,000 3,033,050 3,033,000
Financial liabilities
Deposits $(523,192,898) $(526,733,000) $(358,605,014) $(360,567,000)
Securities sold under agreements
to repurchase (7,772,472) (7,772,000) (6,579,132) (6,579,000)
Federal Home Loan Bank advances (31,898,391) (32,163,000) (15,263,339) (15,290,000)
Other borrowed funds (8,000,000) (8,000,000) -- --
Guaranteed preferred beneficial
interests in Company's debentures (28,750,000) (28,750,000) (28,750,000) (28,750,000)
</TABLE>
- --------------------------------------------------------------------------------
(Continued)
24.
<PAGE>
PREMIER FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998, 1997 and 1996
- --------------------------------------------------------------------------------
NOTE 18 - DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
(Continued)
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.
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.
FEDERAL HOME LOAN BANK AND FEDERAL RESERVE STOCK: For FHLB and Federal Reserve
stock, carrying value is a reasonable estimate of fair value.
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.
OTHER BORROWED FUNDS: The carrying value of these borrowings is a reasonable
estimate of fair value.
GUARANTEED PREFERRED BENEFICIAL INTERESTS IN COMPANY'S DEBENTURES: The carrying
value of these funds is a reasonable estimate of fair value.
- --------------------------------------------------------------------------------
(Continued)
25.
<PAGE>
PREMIER FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998, 1997 and 1996
- --------------------------------------------------------------------------------
NOTE 18 - DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
(Continued)
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. The fair value of
commitments and letters of credit are not considered material.
NOTE 19 - 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.
At December 31, 1998 and 1997, the Banks had the following financial instruments
whose approximate contract amounts represent credit risk:
1998 1997
(in thousands)
Standby letters of credit $ 1,010 $ 1,099
Commitments to extend credit $34,254 $17,692
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. Outstanding
commitments include both fixed and variable rates, substantially all of which at
year end approximate current market rates. 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.
- --------------------------------------------------------------------------------
(Continued)
26.
<PAGE>
PREMIER FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998, 1997 and 1996
- --------------------------------------------------------------------------------
NOTE 20 - 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, 1998, 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.
NOTE 21 - 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 following table) 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,
1998, the Company and the Banks meet all capital adequacy requirements to which
they are subject.
As of December 31, 1998, 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.
- --------------------------------------------------------------------------------
(Continued)
27.
<PAGE>
PREMIER FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998, 1997 and 1996
- --------------------------------------------------------------------------------
NOTE 21 - REGULATORY MATTERS (Continued)
The Company's and the three largest subsidiary Banks' capital amounts and ratios
as of December 31, 1998 and 1997 are presented in the table below.
<TABLE>
<CAPTION>
To Be Well
Capitalized
Under Prompt
For Capital Corrective
Actual Adequacy Purposes Action Provisions
1998 Amount Ratio Amount Ratio Amount Ratio
---- (dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Total Capital (to Risk-Weighted Assets):
Consolidated $66,188 16.2% $32,660 8.0% $40,825 10.0%
Farmers Deposit Bank 15,297 15.6 7,833 8.0 9,792 10.0
Boone County Bank 10,975 17.3 5,068 8.0 6,336 10.0
Citizens Deposit Bank 11,730 13.5 6,948 8.0 8,685 10.0
Tier I Capital (to Risk-Weighted Assets):
Consolidated $51,288 12.6% $16,330 4.0% $24,495 6.0%
Farmers Deposit Bank 14,075 14.4 3,917 4.0 5,875 6.0
Boone County Bank 10,817 17.1 2,534 4.0 3,801 6.0
Citizens Deposit Bank 10,800 12.4 3,474 4.0 5,211 6.0
Tier I Capital (to Average Assets):
Consolidated $51,288 8.1% $25,483 4.0% $31,854 5.0%
Farmers Deposit Bank 14,075 10.5 5,350 4.0 6,687 5.0
Boone County Bank 10,817 9.3 4,649 4.0 5,812 5.0
Citizens Deposit Bank 10,800 9.0 4,775 4.0 5,969 5.0
1997
----
Total Capital (to Risk-Weighted Assets):
Consolidated $76,961 24.5% $25,091 8.0% $31,364 10.0%
Farmers Deposit Bank 13,019 13.7 7,632 8.0 9,540 10.0
Citizens Deposit Bank 9,864 13.0 6,078 8.0 7,599 10.0
Tier I Capital (to Risk-Weighted Assets):
Consolidated $61,914 19.7% $12,546 4.0% $18,818 6.0%
Farmers Deposit Bank 12,009 12.6 3,816 4.0 5,223 6.0
Citizens Deposit Bank 9,036 11.9 3,039 4.0 4,559 6.0
Tier I Capital (to Average Assets):
Consolidated $61,914 13.6% $18,243 4.0% $22,804 5.0%
Farmers Deposit Bank 12,009 9.7 4,793 4.0 5,991 5.0
Citizens Deposit Bank 9,036 8.8 3,885 4.0 4,856 5.0
9.30
</TABLE>
- --------------------------------------------------------------------------------
(Continued)
28.
<PAGE>
PREMIER FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998, 1997 and 1996
- --------------------------------------------------------------------------------
NOTE 21 - REGULATORY MATTERS (Continued)
Pro forma capital amounts, in millions, and ratios of the Company assuming the
acquisition of Mt. Vernon (Note 2) was completed as of December 31, 1998 are
approximately as follows:
<TABLE>
<CAPTION>
To Be Well
Capitalized
Under Prompt
For Capital Corrective
Actual Adequacy Purposes Action Provisions
1998 Amount Ratio Amount Ratio Amount Ratio
----
<S> <C> <C> <C> <C> <C> <C>
Total Capital (to Risk-Weighted Assets) $ 61.6 12.3% $ 40.0 8% $ 50.1 10%
Tier I Capital (to Risk-Weighted Assets) 46.7 9.3 20.0 4 30.0 6
Tier I Capital (to Average assets) 46.7 6.1 30.7 4 38.3 5
</TABLE>
- --------------------------------------------------------------------------------
(Continued)
29.
<PAGE>
PREMIER FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998, 1997 and 1996
- --------------------------------------------------------------------------------
NOTE 22 - PARENT COMPANY FINANCIAL STATEMENTS
Condensed Balance Sheets
December 31, 1998 and 1997
<TABLE>
<CAPTION>
1998 1997
-------- --------
(in thousands)
<S> <C> <C>
ASSETS
Cash $ 317 $ 1,584
Interest bearing deposits in subsidiary banks -- 4,371
-------- --------
Total cash and cash equivalents 317 5,955
Federal funds sold -- 16,340
Investment in subsidiaries 83,297 47,043
Investment securities available for sale 2,000 2,000
Loans -- 5,621
Premises and equipment 3,594 2,419
Other assets 2,080 1,546
-------- --------
TOTAL ASSETS $ 91,288 $ 80,924
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Other liabilities $ 139 $ 167
Other borrowed funds 8,000 --
-------- --------
Total liabilities 8,139 167
Guaranteed preferred beneficial interests in Company's
debentures 28,750 28,750
Stockholders' equity
Preferred stock -- --
Common stock 1,103 985
Surplus 43,445 38,795
Retained earnings 10,151 12,283
Accumulated other comprehensive income (loss),
net of tax (300) (56)
-------- --------
Total stockholders' equity 54,399 52,007
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 91,288 $ 80,924
======== ========
</TABLE>
- --------------------------------------------------------------------------------
(Continued)
30.
<PAGE>
PREMIER FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998, 1997 and 1996
- --------------------------------------------------------------------------------
NOTE 22 - PARENT COMPANY FINANCIAL STATEMENTS (Continued)
Condensed Statements of Income
Years Ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
1998 1997 1996
------- ------- -------
(in thousands)
<S> <C> <C> <C>
Income
Dividends from subsidiary banks $ -- $ -- $ 597
Interest and dividend income 1,748 4,049 361
Gain on sale of investment securities 136 2,183 --
Other income 1,620 16 73
------- ------- -------
Total income 3,504 6,248 1,031
Expenses
Interest expense 3,593 4,037 167
Salaries and employee benefits 461 465 287
Other expenses 684 804 186
------- ------- -------
Total expenses 4,738 5,306 640
Income (loss) before income taxes and equity
in undistributed income of subsidiaries (1,234) 942 391
Income tax expense (benefit) (516) 326 (95)
------- ------- -------
Income (loss) before equity in undistributed
income of subsidiaries (718) 616 486
Equity in undistributed income of subsidiaries 6,422 5,168 3,031
------- ------- -------
NET INCOME $ 5,704 $ 5,784 $ 3,517
======= ======= =======
</TABLE>
- --------------------------------------------------------------------------------
(Continued)
31.
<PAGE>
PREMIER FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998, 1997 and 1996
- --------------------------------------------------------------------------------
NOTE 22 - PARENT COMPANY FINANCIAL STATEMENTS (Continued)
Condensed Statements of Cash Flows
Years Ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
1998 1997 1996
--------- --------- ---------
(in thousands)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 5,704 $ 5,784 $ 3,517
Adjustments to reconcile net income to net
cash from operating activities
Depreciation 134 74 28
Investment securities gains (136) (2,183) --
Equity in undistributed income of
subsidiaries (6,422) (5,168) (3,031)
Change in other assets (534) (1,453) 286
Change in other liabilities (28) 41 30
--------- --------- ---------
NET CASH FROM OPERATING ACTIVITIES (1,282) (2,905) 830
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of subsidiary banks (15,168) -- (12,622)
Capital contributed to subsidiaries (14,908) (2,100) (2,500)
Purchase of securities available for sale (87,687) (273,500) --
Proceeds from sale of securities 87,823 275,683 --
Net change in federal funds sold 16,340 (16,340) --
Net change in loans 5,621 (5,621) --
Purchase of premises and equipment (1,309) (1,307) (618)
--------- --------- ---------
NET CASH FROM INVESTING ACTIVITIES (9,288) (23,185) (15,740)
CASH FLOWS FROM FINANCING ACTIVITIES
Dividends paid (3,068) (2,406) (1,817)
Proceeds from issuance of common stock -- -- 27,066
Proceeds from issuance of guaranteed preferred
beneficial interests in Company's debentures -- 28,750 --
Proceeds from other borrowed funds 8,000 -- --
Repayment of other borrowed funds -- -- (5,000)
--------- --------- ---------
NET CASH FROM FINANCING ACTIVITIES 4,932 26,344 20,249
Net change in cash and cash equivalents (5,638) 254 5,339
Cash and cash equivalents at beginning of year 5,955 5,701 362
--------- --------- ---------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 317 $ 5,955 $ 5,701
========= ========= =========
</TABLE>
<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, 1998 and 1997
Statement of Income - Years Ended December 31, 1998, 1997 and 1996
Statements of Changes in Stockholders' Equity - Years Ended December
31, 1998, 1997 and 1996
Statements of Cash Flows - Years Ended December 31, 1998, 1997 and
1996 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.
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 Crowe, Chizek and Company, LLP
<PAGE>
(b) REPORTS ON FORM 8-K
Form 8-K dated November 13, 1998 reporting consummation of the Company's
acquisition from Bank One West Virginia NA, three branches located in Madison,
Van and Philippi, West Virginia.
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, 1999.
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.
March 26, 1999 /s/ J. Howell Kelly Principal Executive, Financial
---------------------------- and Accounting Officer, Director
J. Howell Kelly
March 26, 1999 /s/ Toney K. Adkins Director
----------------------------
Toney K. Adkins
March 26, 1999 /s/ Gardner E. Daniel Director
----------------------------
Gardner E. Daniel
March 26, 1999 /s/ E. V. Holder, Jr. Director
----------------------------
E. V. Holder, Jr.
March 26, 1999 /s/ Wilbur M. Jenkins Director
----------------------------
Wilbur M. Jenkins
March 26, 1999 /s/ Benjamin T. Pugh Director
----------------------------
Benjamin T. Pugh
March 26, 1999 /s/ Marshall T. Reynolds Director
----------------------------
Marshall T. Reynolds
March 26, 1999 /s/ Neal Scaggs Director
----------------------------
Neal Scaggs
<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
Mt. Vernon Bancshares, Inc. Kentucky
The Bank of Mt. Vernon (a direct subsidiary of
Mt. Vernon Bancshares, Inc.) Kentucky
The Sabina Bank Ohio
Ohio River Bank Ohio
The Bank of Philippi West Virginia
Boone County Bank West Virginia
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the inclusion of our report dated February 18, 1999 in
the annual report on Form 10-K of Premier Financial Bancorp, Inc. as of December
31, 1998 and 1997 and for each of years in the three year period ended December
31, 1998.
/s/ Crowe, Chizek and Company, LLP
-----------------------------------------
Crowe, Chizek and Company, LLP
Lexington, Kentucky
March 26, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 20,171
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 19,406
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 157,140
<INVESTMENTS-CARRYING> 20,052
<INVESTMENTS-MARKET> 20,764
<LOANS> 395,620
<ALLOWANCE> 4,363
<TOTAL-ASSETS> 657,744
<DEPOSITS> 523,193
<SHORT-TERM> 25,714
<LIABILITIES-OTHER> 3,731
<LONG-TERM> 50,707
0
0
<COMMON> 1,103
<OTHER-SE> 53,296
<TOTAL-LIABILITIES-AND-EQUITY> 657,744
<INTEREST-LOAN> 33,787
<INTEREST-INVEST> 9,762
<INTEREST-OTHER> 1,801
<INTEREST-TOTAL> 45,350
<INTEREST-DEPOSIT> 19,458
<INTEREST-EXPENSE> 25,243
<INTEREST-INCOME-NET> 20,108
<LOAN-LOSSES> 1,742
<SECURITIES-GAINS> 225
<EXPENSE-OTHER> 15,338
<INCOME-PRETAX> 7,700
<INCOME-PRE-EXTRAORDINARY> 5,704
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,704
<EPS-PRIMARY> 1.09
<EPS-DILUTED> 1.09
<YIELD-ACTUAL> 3.85<F1>
<LOANS-NON> 3,500
<LOANS-PAST> 1,322
<LOANS-TROUBLED> 105
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 3,479
<CHARGE-OFFS> 1,190
<RECOVERIES> 216
<ALLOWANCE-CLOSE> 4,362<F2>
<ALLOWANCE-DOMESTIC> 4,362
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 202
<FN>
<F1>Computed on a tax equivalent basis.
<F2>Includes allowance acquired through merger.
</FN>
</TABLE>
