-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, GFlxeHrrYugwY0hQYhSYyor+SMrh+ln3jkgaho1+XF7vlcSpoQm++x+K6O2Z189p nKhQSCWSAOAHoCZkrKWzzQ== 0000887919-00-000007.txt : 20000331 0000887919-00-000007.hdr.sgml : 20000331 ACCESSION NUMBER: 0000887919-00-000007 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000330 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PREMIER FINANCIAL BANCORP INC CENTRAL INDEX KEY: 0000887919 STANDARD INDUSTRIAL CLASSIFICATION: STATE COMMERCIAL BANKS [6022] IRS NUMBER: 611206757 STATE OF INCORPORATION: KY FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-20908 FILM NUMBER: 588681 BUSINESS ADDRESS: STREET 1: 115 N HAMILTON ST STREET 2: P O BOX 9 CITY: GEORGETOWN STATE: KY ZIP: 40324 BUSINESS PHONE: 6067963001 10-K 1 10-K 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, 1999 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 24, 2000 was $43,492,912. The number of shares outstanding of the Registrant's Common Stock as of March 24, 2000 was 5,232,230. DOCUMENTS INCORPORATED BY REFERENCE Portions of the following documents are incorporated by reference into the Form 10-K part indicated: Document Form 10-K (1) Proxy statement for the 2000 annual meeting of Part III shareholders PART I Item 1. Description of Business THE COMPANY Premier Financial Bancorp, Inc. (the "Company" or "Premier") is a multi-bank holding company that, as of March 24, 2000, operated twenty banking offices in Kentucky, six banking offices in Ohio, and four 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, 1999, Premier had total consolidated assets of $852.5 million, total consolidated deposits of $692.8 million and total consolidated shareholders' equity of $52.1 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 North 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. 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 in Eminence, Kentucky, also offers limited trust services and acts 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 includes 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 have 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. 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 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. 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, 1999, Premier met both requirements, with Tier I and total capital equal to 8.9% and 11.9% 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, 1999, Premier's leverage ratio was 6.2%. 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. 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. 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, 1999, approximately $8.0 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. Additional information regarding dividend limitations can be found in Note 19 of the accompanying audited consolidated financial statements. 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. Gramm-Leach-Bliley Act - On November 12, 1999, the Gramm-Leach-Bliley Act (the "Act") was signed into law, breaking down the last remaining barriers to full convergence of the banking, securities, and insurance industries. The major provisions of the Act take effect on March 12, 2000. The Act enables a broad-scale consolidation among banks, securities, firms and insurance companies by creating a new type of financial services company called a "financial holding company," a bank holding company with dramatically expanded powers. Financial holding companies can offer virtually any type of financial service, including banking, securities underwriting, insurance (both agency and underwriting), and merchant banking. Activities at U. S. banking organizations are currently permitted to conduct both domestically and overseas can be conducted by financial holding companies domestically (they include a broad range of financial activities, including operating a travel agency). In addition, the Act permits the Federal Reserve and the Treasury Department to authorize additional activities for financial holding companies, but only if they jointly determine that such activities are "financial in nature" or "complementary to financial activities." The FRB serves as the primary "umbrella" regulator of financial holding companies, with jurisdiction over the parent company and more limited oversight over its subsidiaries. The primary regulator of each subsidiary of a financial holding company depends on the activities conducted by the subsidiary. A financial holding company need not obtain FRB approval prior to engaging, either de novo or through acquisition, in financial activities previously determined to be permissible by the FRB. Instead, a financial holding company need only provide notice to the FRB within 30 days after commencing the new activity or consummating the acquistion. The Company is currently contemplating whether to become a financial holding company. Number of Employees The Company and its subsidiaries collectively had approximately 351 full-time equivalent employees as of March 24, 2000. Its executive offices are located at 115 North 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. The Company also owns property located at 104 Jefferson Street, Brooksville, Kentucky, which serves as a branch for 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. Citizens Deposit Bank & Trust, in addition to its main office at 400 Second Street in Vanceburg, Kentucky, has five branch offices in Lewis County, Kentucky, including one leased facility. The Bank of Germantown, with its main office located on Highway 10 in Germantown, Kentucky, has one branch located in Bracken County, Kentucky. Georgetown Bank & Trust Co., in addition to its main office at 120 North Hamilton Street in Georgetown, Kentucky, has two branches in Scott County, Kentucky. Citizens Bank, in addition to its main office at 648 Main Street in Sharpsburg, Kentucky, has one additional branch located in Bath, Kentucky. Farmers Deposit Bank, in addition to its main office at 5230 South Main Street in Eminence, Kentucky, has two branches in Henry County, Kentucky. The Sabina Bank, in addition to its main office at 135 North Howard Street in Sabina, Ohio, has two branches, one each located in Hardin and Auglaize Counties, Ohio. Ohio River Bank, in addition to its main office at 221 Railroad Street in Ironton, Ohio, has two branches, one each located in Lawrence and Scioto Counties, Ohio. The Bank of Philippi, in addition to its main office at 2 South Main Street in Philippi, West Virginia, has a branch located in Upshur County, West Virginia, and a loan production office located in Barbour County, West Virginia. Boone County Bank, in addition to its main office at 300 State Street, Madison, West Virginia, has a branch located in Boone County, West Virginia, and a loan production office located in Logan County, West Virginia. The Bank of Mt. Vernon, in addition to its main office at 112 Saint George Street in Richmond, Kentucky, has two branches in Rockcastle County, one branch in Pulaski County, and one loan production office in Madison County, Kentucky. 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 24, 2000, the Company had approximately 822 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 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 --------- $ 0.60 1999: First Quarter $ 0.15 $17.50 $14.00 Second Quarter 0.15 14.88 12.31 Third Quarter 0.15 14.44 11.00 Fourth Quarter 0.15 11.88 9.00 --------- $ 0.60 2000: First Quarter *$0.15 $10.00 $8.06 *Dividend declared March 1, 2000 to shareholders of record as of March 20, 2000, payable March 31, 2000. The Company has paid consecutive quarterly cash dividends since its organization. The Company's annual cash dividend has increased from $0.12 per share in 1991 to $0.60 per share in 1999. 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, 1999, approximately $8.0 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. 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.
At or for the Year Ended December 31, 1999 1998 1997 1996 1995 Earnings Net interest income $ 28,665 $ 20,107 $ 17,458 $ 13,454 $ 8,021 Provision for loan losses 3,294 1,742 1,399 953 314 Non-interest income 3,776 4,673 4,562 1,835 1,042 Non-interest expense 22,630 15,337 12,232 9,230 6,865 Income taxes 1,927 1,997 2,605 1,588 146 Net income $ 4,590 $ 5,704 $ 5,784 $ 3,518 $ 1,737 Financial Position Total assets $ 852,468 $ 657,744 $ 464,890 $ 363,739 $ 208,502 Loans, net of unearned income 570,106 395,620 312,102 265,453 147,321 Allowance for loan losses 6,812 4,363 3,479 3,127 2,114 Goodwill and other intangibles 24,339 21,555 7,262 5,565 345 Securities 170,420 177,192 73,409 58,253 34,924 Deposits 692,843 523,193 358,605 297,116 179,792 Other borrowings 73,929 47,670 21,842 15,392 1,502 Debt 28,750 28,750 28,750 0 5,000 Stockholders' equity 52,127 54,399 52,007 48,694 19,883 Share Data Net income - basic $ .88 $ 1.09 $ 1.11 $ .82 $ 0.59 Net income - diluted .88 1.09 1.10 .82 0.59 Book value 9.96 10.40 9.94 9.30 6.78 Cash dividend 0.60 0.60 0.55 0.50 0.45 Ratios Return on average assets .57% .97% 1.29% 1.22% 1.27% Return on average equity 8.54% 10.80% 11.51% 9.54% 11.47% Dividend payout 68.41% 53.79% 41.60% 51.66% 49.45% Stockholders' equity to total assets at period-end 6.11% 8.27% 11.19% 13.39% 9.54% Average stockholders' equity to average total assets 6.72% 9.02% 11.21% 12.79% 11.05% Capital Ratios Equity to assets 6.1% 8.3% 11.2% 13.4% 9.5% Leverage ratio 6.2% 8.1% 13.6% 12.2% 10.0%
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 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 1999, 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. For 1999, net income was $4,590 compared to $5,704 for 1998; total assets increased to $852,468 from the $657,744 in 1998, and shareholders' equity decreased to $52,127 from $54,399 in 1998. Quarterly unaudited financial information for the Company for the years ended December 31, 1999 and 1998, is summarized as follows: Quarterly Financial Information (Dollars in thousands except per share amounts)
Full First Second Third Fourth Year 1999 Interest Income $14,785 $15,672 $15,936 $16,479 $62,872 Interest Expense 8,067 8,427 8,541 9,172 34,207 Net Interest Income 6,718 7,245 7,395 7,307 28,665 Provision for Loan Losses 474 621 1,648 551 3,294 Securities Gains 31 (26) 2 10 17 Net Overhead 4,613 4,737 4,626 4,895 18,871 Income before Income Taxes 1,662 1,861 1,123 1,871 6,517 Net Income 1,218 1,311 771 1,290 4,590 Basic Net Income per share 0.23 0.25 0.15 0.25 0.88 Diluted Net Income per share 0.23 0.25 0.15 0.25 0.88 Dividends Paid per share 0.15 0.15 0.15 0.15 0.60 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 73 224 Net Overhead 2,676 1,702 3,186 3,324 10,888 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 0.26 0.31 0.25 0.27 1.09 Diluted Net Income per share 0.26 0.31 0.25 0.27 1.09 Dividends Paid per share 0.15 0.15 0.15 0.15 0.60
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 1999, Premier completed one acquisition. On January 20, 1999, the Company acquired Mount Vernon Bancshares and its wholly owned subsidiary, Bank of Mt. Vernon, with offices in Somerset, Mt. Vernon, Berea and Richmond, Kentucky, in a cash transaction that was accounted for as a purchase. 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. 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. 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 1999 of $4,590, versus $5,704 and $5,784 for 1998 and 1997. Basic earnings per common share were $0.88 in 1999 compared to $1.09 in 1998 and $1.11 in 1997. Primary increases can be attributed to an increase in net interest income from $20,107 in 1998 to $28,665 in 1999, an increase of $8,558 or 42.6%, and a decrease in provision for income taxes from $1,997 in 1998 to $1,927 in 1999, a difference of $70 or 3.5%. Offsetting these increases was an increase in the provision for loan losses from $1,742 in 1998 to $3,294 in 1999, an increase in noninterest expense of $7,293 from $15,337 in 1998 to $22,630 in 1999, and a decrease in other income of $1,167 from $2,396 in 1998 to $1,229 in 1999. Net income of $5,704 in 1998 represented a 1.4% decrease from the 1997 amount of $5,784. Net interest income increased from $17,458 in 1997 to $20,107 in 1998, an increase of $2,649 or 15.2%, and the provision for income taxes decreased 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 $3,105, or 25.4%, from $12,232 in 1997 to $15,337 in 1998. NET INTEREST INCOME Premier's primary source of revenue is its net interest income, which is the difference between the interest received on its earning assets and the interest paid on the funds acquired to support those assets. Loans made to businesses and individuals are the primary interest earning assets, followed by investment securities and federal funds sold in the inter-bank market. Deposits are the primary interest bearing liabilities used to support the interest earning assets. The level of net interest income is affected by both the balances and mix of interest earning assets and interest bearing liabilities, the changes in their corresponding yields and costs, by the volume of interest earning assets funded by 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)
1999 1998 1997 Interest income.......................................... $ 62,872 $ 45,350 $ 36,851 Tax equivalent adjustment................................ 726 608 516 ------------- ------------- ------------- Interest income...................................... 63,598 45,958 37,367 Interest expense......................................... 34,207 25,243 19,393 ------------- ------------- ------------- Net interest income.................................. $ 29,391 $ 20,715 $ 17,974 ============= ============= =============
The following table shows, for the three year period ended December 31, 1999, 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 1999, tax equivalent net interest income increased to $29,391 from $20,715 in 1998, an increase of $8,676 or 41.9%. This increase was due to an increase of $188,915 or 35.1% in average earning assets and an increase of $197,897 or 41.7% in average interest bearing liabilities. The yield on earning assets in 1999 of 8.74% was 21 basis points higher than the 8.53% earned in 1998, and the cost of interest bearing liabilities decreased 23 basis points to 5.09% in 1999 from 5.32% in 1998. Consequently, Premier's net interest spread increased from 3.21% in 1998 to 3.65% in 1999 and the net interest margin increased from 3.85% in 1998 to 4.04% in 1999. The increase in net interest spread and net interest margin is primarily attributable to the placement of funds in higher yielding loans and the overall lowering of the cost of interest bearing liabilities. 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. 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 following table presents average balances and interest rates for the three-year period ended December 31, 1999. Average Consolidated Balance Sheets and Net Interest Analysis (Dollars in thousands)
1999 1998 1997 Average Average Average Average Average Average Balance Interest Rate Balance Interest Rate Balance Interest Rate Assets: Interest earning assets U.S. Treasury and federal agency Securities $ 152,454 $ 9,213 6.04% $ 139,655 $ 8,249 5.91% $ 92,530 $ 5,679 6.14% States and municipal obligations(1) 23,906 1,920 8.03 19,223 1,556 8.09 18,027 1,455 8.07 Other securities (1) 6,839 577 8.44 5,953 565 9.49 5,155 507 9.84 --------- ---------- ------- --------- --------- ------- --------- --------- ------ Total investment securities $ 183,199 $ 11,710 6.39 $ 164,831 $ 10,370 6.29 $ 115,712 $ 7,641 6.60 Federal funds sold 20,909 1,047 5.01 31,667 1,686 5.32 18,572 1,037 5.58 Interest-bearing deposits with Banks 3,273 192 5.87 2,146 115 5.36 0 0 0 Loans, net of unearned income(3)(4) Commercial 211,948 20,200 9.53 144,557 14,284 9.88 118,530 11,944 10.08 Real estate mortgage 241,708 23,065 9.54 145,004 14,208 9.80 120,863 11,640 9.63 Installment 66,611 7,384 11.09 50,528 5,295 10.48 45,815 5,105 11.14 --------- ---------- ------- --------- --------- ------- --------- --------- ------ Total loans $ 520,267 $ 50,649 9.74 $ 340,089 $ 33,787 9.93 $ 285,208 $ 28,689 10.06 Total interest-earning assets $ 727,648 $ 63,598 8.74% $ 538,733 $ 45,958 8.53% $ 419,492 $ 37,367 8.91% Allowance for loan losses (6,084) (3,936) (3,256) Cash and due from banks 21,794 17,657 10,083 Premises and equipment 14,120 9,850 7,034 Other assets 41,395 23,280 14,734 --------- --------- --------- Total assets $ 798,873 $ 585,584 $ 448,087 Liabilities: Interest bearing deposits: NOW and money market $ 150,165 $ 5,475 3.65% $ 93,741 $ 3,268 3.49% $ 51,268 $ 1,733 3.38% Savings 63,227 1,961 3.10 51,818 1,525 2.94 32,671 968 2.96 Certificates of deposit and other time deposits 368,720 20,372 5.53 251,047 14,666 5.84 195,177 11,495 5.89 --------- ---------- ------- --------- --------- ------- --------- --------- ------ Total interest-bearing deposits $ 582,112 $ 27,808 4.78 $ 396,606 $ 19,459 4.91 $ 279,116 $ 14,196 5.09 Other borrowings 28,977 1,754 6.05 18,271 1,194 6.53 49,993 2,755 5.51 FHLB advances 32,826 1,793 5.46 31,141 1,738 5.58 14,301 810 5.66 Debt 28,750 2,852 9.91 28,750 2,852 9.91 16,460 1,632 9.91 --------- ---------- ------- --------- --------- ------- --------- --------- ------ Total interest-bearing liabilities $ 672,665 $ 34,207 5.09% $ 474,768 $ 25,243 5.32% $ 359,870 $ 19,393 5.39% Non-interest bearing demand deposits 66,483 54,043 34,462 Other liabilities 6,005 3,949 3,514 --------- --------- --------- Total liabilities $ 745,153 $ 532,760 $ 397,846 Shareholders' Equity: 53,720 52,824 50,241 Total liabilities and shareholders' Equity $ 798,873 $ 585,584 $ 448,087 Net interest income (1) 29,391 20,715 17,974 Net interest spread (1) 3.65% 3.21% 3.52% Net interest margin (1) 4.04% 3.85% 4.28%
(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. 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 1999 and 1998. Analysis of Changes in Net Interest Income (Dollars in thousands on a taxable equivalent basis)
1999 vs. 1998 1998 vs. 1997 Increase (decrease) due to change in Increase (decrease) due to change in Net Net Volume Rate Change Volume Rate Change Interest Income: Loans $ 17,554 $ (692) $ 16,862 $ 5,456 $ (358) $ 5,098 Investment securities 1,172 169 1,341 3,105 (377) 2,728 Federal funds sold (544) (95) (639) 699 (50) 649 Deposits with banks 65 12 77 115 115 ----------- ----------- ----------- ----------- ----------- ----------- Total interest income $ 18,247 $ (606) $ 17,641 $ 9,375 $ (785) $ 8,590 Interest Expense: Deposits - NOW and money market $ 2,051 $ 156 $ 2,207 $ 1,479 $ 56 $ 1,535 Savings 350 86 436 564 (7) 557 Certificates of deposit 6,540 (834) 5,706 3,265 (94) 3,171 Other borrowings 654 (94) 560 (1,999) 438 (1,561) FHLB borrowings 93 (37) 56 939 (12) 927 Debt - - - 1,219 1 1,220 ----------- ----------- ----------- ----------- ----------- ----------- Total interest expense $ 9,688 $ (723) $ 8,965 $ 5,467 $ 382 $ 5,849 Net interest income $ 8,559 $ 117 $ 8,676 $ 3,908 $ (1,167) $ 2,741
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. 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)
Years Ended December 31, ----------------------------------------------------------------------- 1999 1998 1997 1996 1995 Balance at beginning of year $ 4,363 $ 3,479 $ 3,127 $ 2,113 $ 1,172 Balance of allowance for loan losses of Acquired subsidiaries at acquisition date 1,310 115 - 812 803 Amounts charged off: Commercial 1,380 500 532 252 74 Real estate mortgage 381 60 139 68 19 Consumer 795 629 634 656 181 ----------- ----------- ----------- ------------ ------------ Total loans charged off $ 2,556 $ 1,189 $ 1,305 $ 976 $ 274 Recoveries on amounts previously charged off: Commercial 158 45 48 91 32 Real estate mortgage 12 1 - 4 2 Consumer 231 170 210 130 64 ----------- ----------- ----------- ------------ ------------ Total recoveries 401 216 258 225 98 Net charge-offs 2,155 973 1,047 751 176 Provision for loan losses 3,294 1,742 1,399 953 314 ----------- ----------- ----------- ------------ ------------ Balance at end of year $ 6,812 $ 4,363 $ 3,479 $ 3,127 $ 2,113 Total loans, net of unearned income: Average 520,267 340,089 285,208 207,006 117,947 At December 31 570,106 395,620 312,102 265,453 147,321 As a percentage of average loans: Net charge-offs .41% .29% .37% .36% .15% Provision for possible loan losses .63% .51% .49% .46% .27% Allowance as a percentage of year-end net loans 1.19% 1.10% 1.11% 1.18% 1.43% Allowance as a multiple of net charge-offs 3 4 3 4 12
The provision for possible loan losses for 1999 was $3,294 compared to $1,742 in 1998, an increase of $1,552. This increase can be mainly attributed to loan growth, additional charge-offs, and the additional provision of $950,000 recorded in the quarter ended September 30, 1999. This additional provision was deemed prudent after revision of loan loss reserve adequacy measurement methods. In 1999, net charge-offs were $2,155 compared to $973 in 1998, an increase of $1,182. The increase in 1999 net charge-offs is primarily attributed to one fraud loss and small business lending losses in one of the Company's markets which experienced an economic downturn. Also contributing to the 1999 increase were net charge-offs in connection with the Mt. Vernon purchase. At December 31, 1999, Premier's allowance for possible loan losses was 1.19% of period-end loans compared to 1.10% at December 31, 1998. Net charge-offs to average loans were .41% for the year 1999 compared to .29% for the year 1998. At December 31, 1999, Premier's allowance for possible loan losses totaled $6,812, representing an increase of $2,449 over the amount for December 31, 1998. The allowance for possible loan losses was 98% of nonperforming loans on December 31, 1999, compared to 89% at December 31, 1998. At year end 1999, nonperforming loans represented 1.22% of total outstanding loans, down from 1.25% on December 31, 1998. 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)
At December 31, ----------------------------------------------------------------------------------------------------------- 1999 1998 1997 1996 1995 Amount % Amount % Amount % Amount % Amount % Commercial $ 2,123 20.6% $ 1,695 22.5% $ 1,226 27.0% $ 1,066 18.5% $ 704 19.6% Real estate mortgage 2,490 61.9 1,728 57.8 732 51.1 1,229 60.7 616 58.3 Consumer 948 17.5 738 19.7 965 21.9 739 20.8 620 22.1 Unallocated 1,251 -- 202 -- 556 -- 93 -- 174 -- ------- ----- ------- ----- ------- ----- ------- ----- -------- ----- Total $ 6,812 100.0% $ 4,363 100.0% $ 3,479 100.0% $ 3,127 100.0% $ 2,114 100.0%
Any reallocation of the allowance is primarily indicative of changes in loan portfolio mix, not changes in loan concentrations or terms. The Company considers 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. 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 in 1999 increased $641 or 20.6% to $3,759 from $3,118 in 1998. Service charges on deposit accounts increased 24.0% or $380 to $1,965 from $1,585 in 1998. Insurance commissions increased 20.7% and other income increased 15.4%. Total fees and other income increased $759 or 32.2% in 1998 to $3,118 from $2,359 in 1997. Service charges on deposit accounts increased 25.7% and all other income increased 73.2%. Gains on the sale of investment securities in 1999 were $17, a decrease of $207 from 1998. Investment securities gains in 1998 were $224 versus $2,203 in 1997. The amount in 1997 was primarily 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. There was no similar non-recurring fee recognized in 1999. Noninterest expenses increased $7,293 or 47.6% in 1999, from $15,337 in 1998 to $22,630 in 1999, and increased $3,105 or 25.4% in 1998 from $12,232 in 1997. Salaries and employee benefits, the largest component of noninterest expense, increased 53.0% in 1999 and 23.4% in 1998. The increases include salary increases and reflect increases in the number of full time equivalent employees from 177 at December 31, 1997 to 273 at December 31, 1998 and 351 at December 31, 1999, due to acquisitions and expansion of the Company's business activity. 1999 was the first full year of salaries and employee benefits expense associated with the mid year 1998 purchase of the West Virginia branches. Also contributing to the 1999 increase was the January 20, 1999 acquisition of Mt. Vernon Bancshares. Occupancy and equipment expense for 1999 of $2,885 was $704 or 32.3% higher than the $2,181 for 1998. The increase in 1998 was $547 or 33.5% from $1,634 in 1997. The increase in 1998 and 1999 are primarily attributable to the expansion in the number of banking locations from 23 at December 31, 1997 up to 30 at December 31, 1999. Other noninterest expense, which is the second largest category, increased $1,703 or 50.1% in 1999 and $801 or 30.9% in 1998. This increase includes the addition of the purchased West Virginia branches in June 1998 and their respective operating expenses as full service banks. Also included in the 1999 increases are the respective costs acquired with the Mt. Vernon Bancshares purchase. Premier incurred no acquisition-related expenses in 1999. 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. 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. Amortization of intangibles increased $643 or 65.5% to $1,625 for 1999 from the 1998 amount of $982. The 1998 amount is an increase of $596 from the amount of $386 in 1997. Both the 1999 and 1998 increases are primarily attributed to goodwill amortization of intangible cost regarding branch acquisitions along with the purchase of Mt. Vernon Bancshares. 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 1999, total net noninterest expenses (excluding investment securities gains, finders fee and acquisition expenses) as a percent of average total assets were 2.36%, compared to 2.06% in 1998 and 2.10% in 1997. 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)
Increase Increase (decrease) (decrease) 1999 vs. 1998 vs. 1999 1998 1998 1998 1997 1997 --------- --------- ----------- --------- --------- ----------- Non-Interest Income: Service charges on deposit accounts $ 1,965 $ 1,585 $ 380 $ 1,585 $ 1,261 $ 324 Insurance income 565 468 97 468 483 (15) Other 1,229 1,065 164 1,065 615 450 --------- --------- ----------- --------- --------- ----------- Total fees and other income $ 3,759 $ 3,118 $ 641 $ 3,118 $ 2,359 $ 759 Investment securities gains 17 224 (207) 224 2,203 (1,979) Finders Fee - 1,331 (1,331) 1,331 0 1,331 --------- --------- ------------ --------- --------- ----------- Total non-interest income $ 3,776 $ 4,673 $ (897) $ 4,673 $ 4,562 $ 111 Non-Interest Expense: Salaries and employee benefits 11,679 7,634 4,045 7,634 6,185 1,449 Occupancy and equipment expense 2,885 2,181 704 2,181 1,634 547 Professional fees 547 452 95 452 504 (52) Taxes, other than payroll, property and income 794 559 235 559 445 114 Acquisition related expenses - 132 (132) 132 482 (350) Amortization of intangibles 1,625 982 643 982 386 596 Other expenses 5,100 3,397 1,703 3,397 2,596 801 --------- --------- ----------- --------- --------- ----------- Total non-interest expenses $ 22,630 $ 15,337 $ 7,293 $ 15,337 $ 12,232 $ 3,105 Net non-interest expenses as a percent of average assets 2.36% 1.82% 1.82% 1.71% Net non-interest expenses as a percent of average assets (excluding investment securities gains, finders fee, and acquisition related expenses) 2.36% 2.06% 2.06% 2.10%
INCOME TAXES The Company's provision for income taxes was $1,927 in 1999, which represented 29.6% of pre-tax income versus $1,997 in 1998. The decrease is primarily attributed to the decrease in income before 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. 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 $520,267 in 1999 compared with $340,089 in 1998. At year end 1999, loans net of unearned income totaled $570,106 compared to $395,620 at December 31, 1998, an increase of $174,486 or 44.1%. The following table presents a summary of the Company's loan portfolio by category for each of the last five years. Other than the categories noted, there is no concentration of loans in any industry greater than 5% in the portfolio. The Company has no foreign loans or highly leveraged transactions in its loan portfolio. LOAN PORTFOLIO COMPOSITION Loans Outstanding (Dollars in thousands)
December 31 1999 % 1998 % 1997 % 1996 % 1995 % Commercial, secured by real estate $135,078 23.7% $ 86,010 21.6% $ 71,818 22.8% $ 63,179 23.6% $ 39,724 26.8% Commercial, other 98,543 17.3 73,982 18.6 48,309 15.4 37,609 14.1 22,115 14.9 Real estate construction 26,092 4.6 13,374 3.4 8,352 2.7 4,523 1.7 2,495 1.7 Real estate mortgage 192,088 33.6 131,212 33.0 103,664 33.0 94,844 35.4 44,215 29.8 Agricultural 17,525 3.1 15,433 3.9 13,232 4.2 11,751 4.4 6,924 4.7 Consumer 100,075 17.5 73,100 18.4 68,461 21.8 54,160 20.2 32,362 21.8 Other 1,352 0.2 4,502 1.1 674 .2 1,493 .6 435 0.3 -------- ---- -------- ---- -------- ---- -------- ---- -------- ----- Total loans $570,753 100.0% $397,613 100.0% $314,510 100.0% $267,559 100.0% $148,270 100.0% Less unearned income (647) (1,993) (2,408) (2,106) (949) -------- -------- -------- -------- -------- Total loans net of unearned income $570,106 $395,620 $312,102 $265,453 $147,321
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 .41% of loans in 1999 and .29% in 1998. With respect to consumer loans in particular, net charge-offs for the year ended December 31, 1999 were $564, or .56% of total consumer loans outstanding at December 31, 1999, and $460 in 1998, or .63% of total consumer loans outstanding at December 31, 1998. The following table sets forth the maturity distribution and interest sensitivity of selected loan categories at December 31, 1999. 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, 1999 (Dollars in thousands)
One Year One Through Over Total or Less Five Years Five Years Loans Commercial, secured by real estate $ 92,557 $ 37,341 $ 5,180 $ 135,078 Commercial, other 78,267 16,816 3,460 98,543 Real estate construction 19,143 5,846 1,103 26,092 Agricultural 17,525 - - 17,525 ------------ ------------ ------------ ------------ Total $ 207,492 $ 60,003 $ 9,743 $ 277,238 ============ ============ ============ ============ Fixed rate loans $ 157,528 $ 60,003 $ 9,743 $ 227,274 Floating rate loans 49,964 - - 49,964 ------------ ------------ ------------ ------------ Total $ 207,492 $ 60,003 $ 9,743 $ 277,238 ============ ============ ============ ============
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 generally 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: Nonperforming Assets (Dollars in thousands)
December 31 ---------------------------------------------------------------------------------- 1999 1998 1997 1996 1995 Nonaccrual loans $ 4,540 $ 3,500 $ 562 $ 768 $ 693 Accruing loans which are contractually past due 90 days or more 1,721 1,322 522 594 480 Restructured loans 666 105 356 0 0 --------------- --------------- --------------- -------------- -------------- Total nonperforming and restructured Loans $ 6,927 $ 4,927 $ 1,440 $ 1,362 $ 1,173 Other real estate acquired through Foreclosures 3,009 961 836 485 132 --------------- --------------- --------------- -------------- -------------- Total nonperforming and restructured loans and other real estate $ 9,936 $ 5,888 $ 2,276 $ 1,847 $ 1,305 Nonperforming and restructured loans as a percentage of net loans 1.22% 1.25% .46% .51% .80% Nonperforming and restructured loans and other real estate as a percentage of total assets 1.17% .90% .49% .51% .63%
Nonaccrual loans increased from $3,500 at December 31, 1998 to $4,540 at December 31, 1999. Total nonperforming assets increased from $5,888 at December 31, 1998 to $9,936 at December 31, 1999. The percentage of nonperforming loans to total loans decreased from 1.25% to 1.22% The increase in total nonperforming loans and other real estate owned of $4,048 is largely attributable to loans at the Bank of Mt. Vernon acquired in January 1999. The $2,932 of nonperforming loans and other real estate owned at the Bank of Mt. Vernon are primarily residential real estate development and rental properties which are expected to be liquidated in 2000. The increase in other real estate owned of $2,048 represents the acquisition of real estate with an appraised value of $3,000. This property was acquired at year end 1999 and is currently leased with a purchase option. Reserves allocated in connection with these assets are believed to be adequate. The Company continues to follow its long-standing policy of not engaging in international lending and not concentrating lending activity in any one industry. 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 and restructured 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)
1999 1998 1997 1996 1995 Contractual interest 272 135 77 73 32 Interest recognized 6 6 62 2 22
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 decreased to 25.2% in 1999 versus 30.6% in 1998 and 27.6% in 1997. The 1999 decrease in securities reflects the movement of funds into higher yielding loan balances, primarily in regards to the acquisition of deposits held in the West Virginia branches. At December 31, 1999 and 1998, 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, 1999 and 1998. The dividend rate on the preferred stock is 2% in excess of the prime rate as in effect from time to time. The following tables present the carrying values and maturity distribution of investment securities. Carrying Value of Securities (Dollars in thousands)
December 31 1999 1998 1997 U.S. Treasury and Federal agencies: Available for sale $ 128,101 $ 132,106 $ 43,088 Held to maturity 1,733 3,529 5,588 State and municipal obligations: Available for sale 7,354 3,831 3,564 Held to maturity 16,876 16,474 14,625 Equity securities: Available for sale 2,775 2,798 2,795 Held to maturity 0 0 0 Other securities: Available for sale 13,557 18,405 3,600 Held to maturity 24 49 149 Total securities: Available for sale 151,787 157,140 53,047 Held to maturity 18,633 20,052 20,362 ---------- ---------- ---------- Total $ 170,420 $ 177,192 $ 73,409
Maturity Distribution of Securities December 31, 1999 (Dollars in thousands)
One Five Year Through Through Over Or Five Ten Ten Other Market Less Years Years Years Securities Total Value U.S. Treasury and Federal agencies: Available for sale $ 12,889 $ 68,687 $ 38,325 $ 8,200 $ - $ 128,101 $ 128,101 Held to maturity 370 1,363 - - - 1,733 1,703 State and municipal obligations: Available for sale 488 2,131 2,357 2,378 - 7,354 7,354 Held to maturity 810 5,555 8,928 1,583 - 16,876 16,858 Other securities: Available for sale - - - - 16,332 16,332 16,332 Held to maturity - - - - 24 24 24 Total securities: Available for sale 13,377 70,818 40,682 10,578 16,332 151,787 151,787 Held to maturity 1,180 6,918 8,928 1,583 24 18,633 18,585 --------- --------- ---------- -------- -------- ---------- ---------- Total $ 14,557 $ 77,736 $ 49,610 $ 12,161 $ 16,356 $ 170,420 $ 170,372 ========= ========= ========== ======== ======== ========== ========== Percent of total 8.54% 45.61% 29.11% 7.14% 9.60% 100.00% Weighted average yield* 5.25% 5.91% 6.23% 6.85% 7.37% 6.16%
*The weighted average yields are calculated on historical cost on a non tax-equivalent basis. Deposit Activities Managing the mix and repricing of deposit liabilities is an important 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 $648,595 in 1999, a 43.9% increase over 1998. Total deposits averaged $450,649 in 1998, an increase of $137,071 or 43.7% over 1997. Noninterest bearing deposits averaged 10.3% of total deposits in 1999, compared to 12.0% in 1998 and 11.0% in 1997. At December 31, 1999, deposits totaled $692,843, compared to $523,193 at December 31, 1998, an increase of $169,650, or 32.4%. Of this increase, approximately $115,000 is attributable to the acquisition of Mt. Vernon Bancshares. Exclusive of this acquisition, deposits increased $54,650 from December 31, 1998 to December 31, 1999, representing a 10.4% increase. The table below provides information on the maturities of time deposits of $100,000 or more at December 31, 1999. Maturity of Time Deposits of $100,000 or More December 31, 1999 (In thousands) Maturing 3 months or less $ 24,044 Maturing over 3 months through 6 months 16,153 Maturing over 6 months through 12 months 30,532 Maturing over 12 months 28,563 ------------- Total $ 99,292 ============= The following table sets forth the average amount of and average rate paid on selected deposit categories during the past three full years.
Selected Deposit Categories (Dollars in Thousands) 1999 1998 1997 Category Amount Rate (%) Amount Rate (%) Amount Rate (%) Demand $ 66,483 0% $ 54,043 0% $ 34,462 0% NOW and money market accounts 150,165 3.65% 93,741 3.49% 51,268 3.38% Savings 63,227 3.10% 51,818 2.94% 32,671 2.96% Certificates of deposit and other time 368,720 5.53% 251,047 5.84% 195,177 5.89% ----------- --------- ----------- --------- ----------- --------- Total $ 648,595 4.29% $ 450,649 4.32% $ 313,578 4.53%
Capital Stockholders' equity decreased $2,272 in 1999 to $52.1 million or 6.1% of total assets at December 31, 1999. This compares to $54.4 million, or 8.3% of total assets at December 31, 1998. The primary reason for the 1999 decrease in stockholders' equity was the increase in unrealized loss on securities of $3,722 from ($300) on December 31, 1998, to ($4,022) on December 31, 1999. This is a component of accumulated other comprehensive income. The decrease was partially offset by the retention of net earnings of $1,450 in 1999. The primary source of growth in stockholders' equity in 1998 was the retention of net earnings of $2,636. 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, 1999 and 1998, the adjustment resulted in a reduction of stockholders' equity of $4,022 and $300. 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 2000, the Banks could, without prior approval, declare dividends to the Company of approximately $8.0 million plus any 2000 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. Selected Capital Information (Dollars in thousands)
December 31 1999 1998 Change Stockholders' Equity $ 52,127 $ 54,399 $ (2,272) Qualifying capital securities of subsidiary trust 18,683 18,213 470 Disallowed amounts of goodwill and other intangibles (24,339) (21,555) (2,784) Unrealized loss on securities available for sale 3,923 231 3,692 -------- -------- -------- Tier I capital $ 50,394 $ 51,288 $ (894) Tier II capital adjustments: Qualifying capital securities of subsidiary trust 10,067 10,537 Allowance for loan losses 6,812 4,363 -------- -------- Total capital $ 67,273 $ 66,188 Total risk-weighted assets $566,632 $408,245 Ratios Tier I capital to risk-weighted assets 8.9% 12.6% Total capital to risk-weighted assets 11.9% 16.2% Leverage at year-end 6.2% 8.1%
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. The Company prefers to manage its liquidity requirements generally through the matching of maturities of assets and liabilities. The consolidated statements of cash flows for the periods presented in the financial statements provide an indication of the Company's sources and uses of cash as well as an indication of the ability of the Company to maintain an adequate level of liquidity. Liquidity risk is the possibility that the Company may not be able to meet its cash requirements. Management of liquidity risk includes maintenance of adequate cash and sources of cash to fund operations and 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, interest-earning balances with banks maturing within one year, and Federal funds sold totaled $68.9 million as of December 31, 1999. Additionally, securities available-for-sale with maturities greater than one year, equity securities, and interest-earning balances with banks with maturities greater than one year, totaled $143.3 million at December 31, 1999. 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 14.3% and 11.7% of total deposits at December 31, 1999 and 1998. 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 1999 1998 1997 Total loans/total deposits.................. 80.2% 75.5% 91.0% Total loans/total deposits less float....... 81.0% 76.3% 91.8% This analysis shows that the Company's loan to deposit ratio decreased in 1998 from the 1997 level. This is due to the acquisition of deposits held in the West Virginia branches. The increase in 1999 is primarily the result of those funds moving from lower yielding assets into higher yielding loans. Information regarding short-term borrowings for the past three years is presented below. Short-Term Borrowings (Dollars in thousands)
1999 1998 1997 Repurchase Agreements: Balance at year end $ 21,282 $ 7,772 $ 6,579 Weighted average rate at year end 5.80% 4.47% 5.38% Average balance during the year $ 8,640 $ 20,167 $ 49,939 Weighted average rate during the year 5.14% 4.58% 5.51% Maximum month-end balance $ 21,282 $ 82,755 $ 120,257 Other short-term borrowings: Balance at year end $ 11,225 $ 18,225 $ 4,082 Weighted average rate at year end 5.93% 5.74% 6.17% Average balance during the year $ 12,184 $ 14,867 $ 6,914 Weighted average rate during the year 5.61% 5.83% 6.04% Maximum month-end balance $ 15,788 $ 19,800 $ 9,396 Total short-term borrowings: Balance at year end $ 32,507 $ 25,997 $ 10,661 Weighted average rate at year end 5.84% 5.36% 5.68% Average balance during the year $ 20,824 $ 35,034 $ 56,853 Weighted average rate during the year 5.41% 5.12% 5.49% Maximum month-end balance $ 32,507 $ 92,719 $ 130,348
Substantially all federal funds purchased and repurchase agreements mature in less than ninety days. Other short-term borrowings primarily represent Federal Home Loan Bank (FHLB) advances to Bank Affiliates (with varying maturity dates) which are funding residential mortgage and commercial loans. 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, 1999, the cumulative amount of the Company's interest earning assets repricing during the first year is higher than the total amount of its interest bearing liabilities repricing during this period. This position, which is normally termed a positive interest sensitivity gap, generally allows for enhanced net interest income during periods of rising interest rates. This positive gap is within the Company's internal policy guidelines and is not expected to impact significantly the Company's net interest income during a period of falling interest rates. The following table provides an analysis of the Company's interest rate sensitivity at December 31, 1999. Interest Rate Sensitivity Analysis (Dollars in Thousands)
0 - 90 91 days - 1 - 5 Over 5 Days 1 Year Years Years Total Assets Loans, net of unearned income $ 222,417 $ 168,232 $ 137,617 $ 41,840 $ 570,106 Investment securities 6,518 8,039 77,736 82,250 174,543 Interest-earning balances 900 - 580 154 1,634 Federal funds sold 25,197 - - - 25,197 ------------ ----------- ------------ ----------- ------------ Total earning assets $ 255,032 $ 176,271 $ 215,933 $ 124,244 $ 771,480 Sources of Funds NOW, money market and savings $ 40,737 $ 58,031 $ 48,078 $ 86,389 $ 233,235 Time deposits 90,116 190,397 110,605 - 391,118 Borrowings 25,559 12,832 35,538 - 73,929 ------------ ----------- ------------ ----------- ------------ Total interest bearing liabilities $ 156,412 $ 261,260 $ 194,221 $ 86,389 $ 698,282 Interest Sensitivity Gap For the period $ 98,620 $ (84,989) $ 21,712 $ 37,855 $ 73,198 Cumulative 98,620 13,631 35,343 73,198 - Cumulative as a percent of Earning assets 12.78% 1.77% 4.58% 9.49%
Item 7A. Quantitative and Qualitative Disclosures About Market Risk Asset/Liability Management and Market Risk 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 Board of Directors 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 an earnings simulation model to analyze net interest income sensitivity. The earnings simulation model forecasts the effect of instantaneous movements in interest rates of both 100 and 200 basis points. The most recent earnings simulation model projects net interest income would increase by approximately 3.0% of stable rate net interest income if rates rise by 100 basis points over the next year. It projects a decrease of 3.2% if the rates fall by 100 basis points. Management believes this reflects a slight asset sensitive rate risk position for the one-year horizon. Within the same time frame, but assuming a 200 basis point movement in rates, the model forecasts that net interest income would rise above that earned in a stable rate environment by 5.3% in a rising rate scenario and decrease by 9.3% in a falling rate scenario. Under both the 100 and 200 basis point forecast, the percentage changes in net interest income are within Company guidelines. 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. The Economic Value at Risk (EVR) 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 EVR is an indication of the longer term repricing risk imbedded in the balance sheet. At December 31, 1999, a 200 basis point increase in rates is estimated to increase EVR by .5%. Additionally, EVR is projected to decrease by 16.2% 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 the simulation model's interest rate risk measures is presented below:
Year-End Year-End ALCO 1999 1998 Guidelines Projected 1-Year Net Interest Income -100 bp change vs. Base Rate -3.2% 3.5% +/-10% +100 bp change vs. Base Rate 3.0% -3.6% +/-10% Projected 1-Year Net Interest Income -200 bp change vs. Base Rate -9.3% 7.1% +/-10% +200 bp change vs. Base Rate 5.3% -7.2% +/-10% Economic Value Change -200 bp change vs. Base Rate -16.2% 15.6% +/-10% +200 bp change vs. Base Rate .5% -15.6% +/-10%
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 biased toward increasing slightly during 2000 and believes that the current modest level of asset sensitivity is appropriate when taken in conjunction with the unlikely event of a significant rate decrease. Premier's interest sensitivity profile changed from 1998 to 1999 as a result of the increase in shorter term loan instruments. Trade Risk Management Premier does not maintain a trading account, which would primarily provide investment products and risk management services to its customers as well as to take propriety risk positions. Derivative Instruments A derivative financial instrument includes futures, forwards, interest rate swaps, options and other financial instruments with similar characteristics. Premier currently does not enter into futures, forwards, swaps or options. However, the Company is party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to make loans and standby letters of credit, which involve to varying degrees elements of credit risk and interest rate risk 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 Premier undertook a project (the "Year 2000 Plan") to identify and assess the readiness of its computer systems, programs and other infrastructure that could be affected by the Year 2000 issue and to remedy any problems identified. Premier's Year 2000 Plan also included an assessment of the Year 2000 readiness of key third parties on whom the Company's operations depend, as well as customers Premier deemed to have material Year 2000 issues. Premier also developed contingency plans permitting the company to continue operations, consistent with the highest quality standards, in the event Year 2000 problems arose. Management believes that its Year 2000 Plan proceeded successfully as all operating systems performed well during the year change. While management does not expect future problems resulting from the Year 2000 issue, it is possible that other dates in the year 2000 may further affect computer software or systems, or cause a Year 2000 problem relating to the Company's own systems or to those of key third parties with whom Premier conducts business that could adversely affect its financial condition. Premier has incurred costs of approximately $200,000 attributable to Year 2000 remediation which has been expensed as incurred. Management projects additional Year 2000 expenses to be minimal, however Year 2000 expenses are subject to change and could vary from current estimates if the final requirements for complete year 2000 readiness exceed management's expectations. Monitoring of computer date sensitive issues will continue at least through the year 2000. Corrective action will be taken if management encounters any previously unidentified Year 2000 problems internally or in interfacing with third parties, and the Company's contingency plans remain available. Management has determined that if an unlikely business interruption as a result of computer date-sensitive issues occurred, such an interruption could be material to Premier's overall financial performance. 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, 1999 and 1998 Statements of Income - Years Ended December 31, 1999, 1998 and 1997 Statements of Changes in Stockholders' Equity - Years ended December 31, 1999, 1998 and 1997 Statements of Cash Flows - Years ended December 31, 1999, 1998 and 1997 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. PREMIER FINANCIAL BANCORP, INC. CONSOLIDATED FINANCIAL STATEMENTS December 31, 1999, 1998 and 1997 PREMIER FINANCIAL BANCORP, INC. CONSOLIDATED FINANCIAL STATEMENTS December 31, 1999, 1998 and 1997 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 - 30 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, 1999 and 1998, 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, 1999. 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, 1999 and 1998 and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1999 in conformity with generally accepted accounting principles. /s/ Crowe, Chizek and Company LLP Lexington, Kentucky February 18, 2000 PREMIER FINANCIAL BANCORP, INC. CONSOLIDATED BALANCE SHEETS December 31, 1999 and 1998 - --------------------------------------------------------------------------------
1999 1998 ---- ---- (In Thousands) ASSETS Cash and due from banks $ 28,227 $ 20,171 Interest earning balances with banks 1,634 - ------------ ------------ Cash and cash equivalents 29,861 20,171 Federal funds sold 25,197 19,406 Investment securities Available for sale 151,787 157,140 Held to maturity 18,633 20,052 Loans 570,753 397,613 Unearned income (647) (1,993) Allowance for loan losses (6,812) (4,363) ------------ ------------ Net loans 563,294 391,257 Federal Home Loan Bank and Federal Reserve Bank stock 4,123 3,416 Premises and equipment, net 14,935 11,764 Real estate and other property acquired through foreclosure 3,019 992 Interest receivable 9,814 8,053 Goodwill and other intangibles 24,339 21,555 Other assets 7,466 3,938 ------------ ------------ Total assets $ 852,468 $ 657,744 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY Deposits Non-interest bearing $ 68,490 $ 62,813 Time deposits, $100,000 and over 99,292 61,190 Other interest bearing 525,061 399,190 ------------ ------------ Total deposits 692,843 523,193 Securities sold under agreements to repurchase 21,282 7,772 Federal Home Loan Bank advances 32,647 31,898 Other borrowed funds 20,000 8,000 Interest payable 3,265 2,384 Other liabilities 1,554 1,348 ------------ ------------ Total liabilities 771,591 574,595 Guaranteed preferred beneficial interests in Company's debentures 28,750 28,750 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; 5,232,230 shares issued and outstanding 1,103 1,103 Surplus 43,445 43,445 Retained earnings 11,601 10,151 Accumulated other comprehensive income (4,022) (300) ------------ ------------ Total stockholders' equity 52,127 54,399 ------------ ------------ Total liabilities and stockholders' equity $ 852,468 $ 657,744 ============ ============
- -------------------------------------------------------------------------------- See accompanying notes 2. PREMIER FINANCIAL BANCORP, INC. CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME Years Ended December 31 - --------------------------------------------------------------------------------
1999 1998 1997 ---- ---- ---- (In Thousands) Interest income Loans, including fees $ 50,649 $ 33,787 $ 28,690 Investment securities - Taxable 9,575 8,582 5,802 Tax-exempt 1,409 1,180 1,158 Federal funds sold 1,047 1,686 1,036 Other interest income 192 115 165 ----------- ----------- ----------- Total interest income 62,872 45,350 36,851 Interest expense Deposits 27,808 19,459 14,196 Other borrowings 3,547 2,932 3,566 Debt 2,852 2,852 1,631 ----------- ----------- ----------- Total interest expense 34,207 25,243 19,393 Net interest income 28,665 20,107 17,458 Provision for loan losses 3,294 1,742 1,399 ----------- ----------- ----------- Net interest income after provision for loan losses 25,371 18,365 16,059 Non-interest income Service charges 1,965 1,585 1,261 Insurance commissions 565 468 483 Investment securities gains 17 224 2,203 Other income 1,229 2,396 615 ----------- ----------- ----------- 3,776 4,673 4,562 Non-interest expenses Salaries and employee benefits 11,679 7,634 6,185 Occupancy and equipment expenses 2,885 2,181 1,634 Professional fees 547 452 504 Taxes, other than payroll, property and income 794 559 445 Acquisition related expenses - 132 482 Amortization of intangibles 1,625 982 386 Other expenses 5,100 3,397 2,596 ----------- ----------- ----------- 22,630 15,337 12,232 Income before income taxes 6,517 7,701 8,389 Provision for income taxes 1,927 1,997 2,605 ----------- ----------- ----------- Net income $ 4,590 $ 5,704 $ 5,784 =========== =========== =========== Weighed average common shares outstanding: Basic 5,232 5,232 5,232 Diluted 5,232 5,247 5,245 Earnings per share: Basic $ .88 $ 1.09 $ 1.11 Diluted .88 1.09 1.10
- -------------------------------------------------------------------------------- (Continued) 3. PREMIER FINANCIAL BANCORP, INC. CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME Years Ended December 31 - --------------------------------------------------------------------------------
1999 1998 1997 ---- ---- ---- (In Thousands) Other comprehensive income (loss), net of tax: Unrealized gains and (losses) arising during the period $ (3,711) $ (95) $ 1,521 Reclassification of realized amount (11) (149) (1,454) ----------- ----------- ----------- Net change in unrealized gain (loss) on securities (3,722) (244) 67 ----------- ----------- ----------- Comprehensive income $ 868 $ 5,460 $ 5,851 =========== =========== ===========
- -------------------------------------------------------------------------------- See accompanying notes 4. PREMIER FINANCIAL BANCORP, INC. CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY Years Ended December 31, 1999, 1998 and 1997 - --------------------------------------------------------------------------------
Accumulated Other Common Retained Comprehensive Stock Surplus Earnings Income Total ----- ------- -------- ------ ----- (In Thousands, Except Per Share Data) Balances, January 1, 1997 $ 985 $ 38,795 $ 8,988 $ (123) $ 48,645 Net change in unrealized losses on securities available for sale - - - 67 67 Net income - - 5,784 - 5,784 Dividends paid - $.55 per share - - (2,406) - (2,406) Dividends paid - Sabina prior to pooling - - (83) - (83) -------- --------- --------- ---------- ---------- Balances, December 31, 1997 985 38,795 12,283 (56) 52,007 Net change in unrealized losses on securities available for sale - - - (244) (244) Net income - - 5,704 - 5,704 Dividends paid - $.60 per share - - (3,068) - (3,068) Stock dividend 118 4,650 (4,768) - - -------- --------- --------- ---------- ---------- Balances, December 31, 1998 1,103 43,445 10,151 (300) 54,399 Net change in unrealized losses on securities available for sale - - - (3,722) (3,722) Net income - - 4,590 - 4,590 Dividends paid - $.60 per share - - (3,140) - (3,140) -------- --------- --------- ---------- ---------- Balances, December 31, 1999 $ 1,103 $ 43,445 $ 11,601 $ (4,022) $ 52,127 ======== ========= ========= ========== ==========
- -------------------------------------------------------------------------------- See accompanying notes 5. PREMIER FINANCIAL BANCORP, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS Years Ended December 31 - --------------------------------------------------------------------------------
1999 1998 1997 ---- ---- ---- (In Thousands) Cash flows from operating activities Net income $ 4,590 $ 5,704 $ 5,784 Adjustments to reconcile net income to net cash from operating activities Depreciation 1,214 872 644 Provision for loan losses 3,294 1,742 1,399 Amortization, net 1,750 591 378 FHLB stock dividends (254) (227) (155) Investment securities gains, net (17) (224) (2,203) Changes in Interest receivable (409) (2,566) (946) Other assets (311) (161) (1,795) Interest payable 256 578 296 Other liabilities 127 (531) 908 ------------ ----------- ----------- Net cash from operating activities 10,240 5,778 4,310 Cash flows from investing activities Purchases of securities available for sale (82,373) (640,535) (311,373) Proceeds from sales of securities available for sale 40,082 222,750 277,135 Proceeds from maturities and calls of securities available for sale 52,865 313,671 18,870 Purchases of investment securities held to maturity (2,055) (4,978) (4,255) Proceeds from maturities and calls of securities held to maturity 3,472 5,276 4,879 Purchases of FHLB stock (61) (155) (1,073) Net change in federal funds sold 6,933 21,840 (27,348) Net change in loans (82,882) (75,665) (48,436) Purchases of premises and equipment, net (2,396) (2,129) (2,232) Proceeds from sale of other real estate acquired through foreclosure 943 399 368 Net cash received (paid) related to acquisitions (8,579) 123,971 20,613 ------------ ----------- ----------- Net cash from investing activities (74,051) (35,555) (72,852) Cash flows from financing activities Net change in deposits 50,983 14,137 38,170 Advances from Federal Home Loan Bank 16,345 27,225 17,727 Repayment of Federal Home Loan Bank advances (15,596) (10,590) (11,842) Proceeds from other borrowed funds 12,000 8,000 - Net change in agreements to repurchase securities 12,909 1,193 565 Proceeds from issuance of guaranteed preferred beneficial interests in Company's debentures - - 28,750 Dividends paid (3,140) (3,068) (2,489) ------------ ----------- ----------- Net cash from financing activities 73,501 36,897 70,881 ------------ ----------- -----------
- -------------------------------------------------------------------------------- (Continued) 6. PREMIER FINANCIAL BANCORP, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS Years Ended December 31 - --------------------------------------------------------------------------------
1999 1998 1997 ---- ---- ---- (In Thousands) Net change in cash and cash equivalents $ 9,690 $ 7,120 $ 2,339 Cash and cash equivalents at beginning of year 20,171 13,051 10,712 ------------ ----------- ----------- Cash and cash equivalents at end of year $ 29,861 $ 20,171 $ 13,051 ============ =========== =========== Supplemental disclosures of cash flow information: Cash paid during the year for - Interest $ 33,951 $ 24,665 $ 19,097 Income taxes 2,050 2,550 2,462 Loans transferred to real estate acquired through foreclosure $ 2,943 $ 555 $ 829
- -------------------------------------------------------------------------------- See accompanying notes 7. PREMIER FINANCIAL BANCORP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1999, 1998 and 1997 - -------------------------------------------------------------------------------- NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The consolidated financial statements include the accounts of Premier Financial Bancorp, Inc. (the Company) and its wholly owned subsidiaries: December 31, 1999 Year Net Acquired Assets Income -------- ------ ------ (In Thousands) Citizens Deposit Bank & Trust Vanceburg, Kentucky 1991 $ 129,261 $1,650 Bank of Germantown Germantown, Kentucky 1992 27,006 200 Georgetown Bank & Trust Co. Georgetown, Kentucky 1995 60,399 802 Citizens Bank Sharpsburg, Kentucky 1995 46,306 836 Farmers Deposit Bank Eminence, Kentucky 1996 142,065 1,794 The Sabina Bank Sabina, Ohio 1997 57,584 414 Ohio River Bank Ironton, Ohio 1998 57,200 422 The Bank of Philippi, Inc. Philippi, West Virginia 1998 59,506 169 Boone County Bank, Inc. Madison, West Virginia 1998 137,991 649 The Bank of Mt. Vernon Mt. Vernon, Kentucky 1999 130,979 1,068 The Company also has a data processing subsidiary, Premier Data Services, Inc., and PFBI Capital Trust subsidiary as discussed in Note 11. All 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 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 - -------------------------------------------------------------------------------- (Continued) 8. PREMIER FINANCIAL BANCORP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1999, 1998, and 1997 - -------------------------------------------------------------------------------- NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) 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, amounts due from banks and interest-earning balances with 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. 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 accumulated other comprehensive income 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. - -------------------------------------------------------------------------------- (Continued) 9. PREMIER FINANCIAL BANCORP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1999, 1998 and 1997 - -------------------------------------------------------------------------------- NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) 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. 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, 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. - -------------------------------------------------------------------------------- (Continued) 10. PREMIER FINANCIAL BANCORP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1999, 1998 and 1997 - -------------------------------------------------------------------------------- NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) 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. New Accounting Pronouncements: Beginning January 1, 2001, 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 standard is not expected to have a material effect, but the effect will depend on derivative holdings when it 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 January 20, 1999, the Company acquired all of the outstanding shares of Mt. Vernon Bancshares, Inc., Mt. Vernon, Kentucky, a one-bank holding company owning all of the shares of Bank of Mt. Vernon (Mt. Vernon) for cash. Mt. Vernon offers full service banking in the counties of Rockcastle, Pulaski, and Madison, Kentucky. The total acquisition cost exceeded the fair value of net assets acquired by approximately $4.5 million. The combination was accounted for as a purchase and the results of operations of Mt. Vernon are included in the consolidated financial statements from January 20, 1999. At date of acquisition, Mt. Vernon had total assets of $129.5 million, total loans of $96.8 million, and total deposits of $118.7 million. 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 and $9 million in loans. 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, $1.3 million, 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 - -------------------------------------------------------------------------------- (Continued) 11. PREMIER FINANCIAL BANCORP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1999, 1998 and 1997 - -------------------------------------------------------------------------------- NOTE 2 - BUSINESS COMBINATIONS (Continued) 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. 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. 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. 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. 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 balance requirement at December 31, 1999 and 1998 was $2.2 million and $1.1 million. NOTE 4 - INVESTMENT SECURITIES Amortized cost and fair value of investment securities, by category, at December 31, 1999 are as follows:
Amortized Unrealized Unrealized Fair Cost Gains Losses Value ---- ----- ------ ----- (In Thousands) Available for sale U. S. Treasury securities $ 2,900 $ - $ (6) $ 2,894 U. S. agency securities 130,254 - (5,047) 125,207 Obligations of states and political subdivisions 7,468 - (114) 7,354 Mortgage-backed securities 14,333 - (776) 13,557 Preferred stock 2,000 - - 2,000 Other securities 925 - (150) 775 ----------- -------- --------- ----------- Total available for sale $ 157,880 $ - $ (6,093) $ 151,787 =========== ======== ========= ===========
- -------------------------------------------------------------------------------- (Continued) 12. PREMIER FINANCIAL BANCORP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1999, 1998 and 1997 - -------------------------------------------------------------------------------- NOTE 4 - INVESTMENT SECURITIES (Continued)
Amortized Unrealized Unrealized Fair Cost Gains Losses Value ---- ----- ------ ----- (In Thousands) Held to maturity U. S. Treasury securities $ 500 $ - $ (1) $ 499 U. S. agency securities 1,233 - (29) 1,204 Obligations of states and political subdivisions 16,876 132 (150) 16,858 Mortgage-backed securities 24 - - 24 ----------- -------- --------- ----------- Total held to maturity $ 18,633 $ 132 $ (180) $ 18,585 =========== ======== ========= ===========
Amortized cost and fair value of investment securities, by category, at December 31, 1998 are as follows:
Amortized Unrealized Unrealized Fair Cost Gains Losses Value ---- ----- ------ ----- (In Thousands) Available for sale U. S. Treasury securities $ 7,185 $ 44 $ - $ 7,229 U. S. agency securities 125,372 45 (540) 124,877 Obligations of states and political subdivisions 3,691 142 (2) 3,831 Mortgage-backed securities 18,452 20 (67) 18,405 Preferred stock 2,000 - - 2,000 Other securities 900 - (102) 798 ----------- -------- --------- ----------- Total available for sale $ 157,600 $ 251 $ (711) $ 157,140 =========== ======== ========= =========== Held to maturity U. S. Treasury securities $ 899 $ 16 $ - $ 915 U. S. agency securities 2,630 - (73) 2,557 Obligations of states and political subdivisions 16,474 770 (1) 17,243 Mortgage-backed securities 49 - - 49 ----------- -------- --------- ----------- Total held to maturity $ 20,052 $ 786 $ (74) $ 20,764 =========== ======== ========= ===========
- -------------------------------------------------------------------------------- (Continued) 13. PREMIER FINANCIAL BANCORP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1999, 1998 and 1997 - -------------------------------------------------------------------------------- NOTE 4 - INVESTMENT SECURITIES (Continued) The amortized cost and fair value of investment securities at December 31, 1999, 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.
Amortized Fair Cost Value ---- ----- (In Thousands) Available for sale Due in one year or less $ 13,524 $ 13,377 Due after one year through five years 72,661 70,818 Due after five years through ten years 42,966 40,682 Due after ten years 11,471 10,578 Mortgage-backed securities 14,333 13,557 Preferred stock 2,000 2,000 Other securities 925 775 ----------- ----------- Total available for sale $ 157,880 $ 151,787 =========== =========== Held to maturity Due in one year or less $ 1,180 $ 1,181 Due after one year through five years 6,918 6,973 Due after five years through ten years 8,928 8,866 Due after ten years 1,583 1,541 Mortgage-backed securities 24 24 ----------- ----------- Total held to maturity $ 18,633 $ 18,585 =========== ===========
Proceeds from sales of investment securities during 1999, 1998 and 1997 were $40.1 million, $222.7 million and $277.1 million. Gross gains of $44,000, $232,000 and $2.2 million, and gross losses of $27,000, $8,000 and $1,000 were realized on those sales. Investment securities with an approximate carrying value of $76.3 million and $45.6 million at December 31, 1999 and 1998 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) 14. PREMIER FINANCIAL BANCORP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1999, 1998 and 1997 - -------------------------------------------------------------------------------- NOTE 5 - LOANS Major classifications of loans are summarized as follows:
----------December 31---------- 1999 1998 ---- ---- (In Thousands) Commercial, secured by real estate $ 135,078 $ 86,010 Commercial, other 98,543 73,982 Real estate construction 26,092 13,374 Residential real estate 192,088 131,212 Agricultural 17,525 15,433 Consumer and home equity 100,075 73,100 Other 1,352 4,502 ------------ ------------ $ 570,753 $ 397,613 ============ ============
Certain directors and executive officers of the Banks and companies, in which they have beneficial ownership, were loan customers of the Banks during 1999 and 1998. Such loans were made in the ordinary course of business at the Banks' normal credit terms and interest rates. An analysis of the 1999 activity with respect to all director and executive officer loans is as follows:
(In Thousands) Balance, December 31, 1998 $ 11,574 Additions, including loans now meeting disclosure requirements 3,700 Amounts collected, including loans no longer meeting disclosure requirements (2,998) -------------- Balance, December 31, 1999 $ 12,276 ==============
- -------------------------------------------------------------------------------- (Continued) 15. PREMIER FINANCIAL BANCORP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1999, 1998 and 1997 - -------------------------------------------------------------------------------- NOTE 5 - LOANS (Continued) Changes in the allowance for loan losses are as follows:
1999 1998 1997 ---- ---- ---- (In Thousands) Balance, beginning of year $ 4,363 $ 3,479 $ 3,127 Allowance related to acquired subsidiaries 1,310 115 - Loans charged off (2,556) (1,189) (1,305) Recoveries 401 216 258 Provision for loan losses 3,294 1,742 1,399 --------- --------- --------- Balance, end of year $ 6,812 $ 4,363 $ 3,479 ========= ========= =========
Information about impaired loans is presented below. There were no impaired loans for the periods presented without an allowance allocation.
1999 1998 1997 ---- ---- ---- (In Thousands) Impaired loans at year end $ 2,717 $ 2,562 $ 1,049 Amount of the allowance for loan losses allocated 543 659 149 Average of impaired loans during the year 3,810 905 1,262 Interest income recognized during impairment 6 6 62 Nonperforming loans at year end were as follows: Loans past due over 90 days still on accrual $ 1,721 $ 1,322 $ 522 Nonaccrual loans 4,540 3,500 562
Nonperforming loans include impaired loans and smaller balance homogeneous loans, such as residential mortgage and consumer loans, that are collectively evaluated for impairment. - -------------------------------------------------------------------------------- (Continued) 16. PREMIER FINANCIAL BANCORP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1999, 1998 and 1997 - -------------------------------------------------------------------------------- NOTE 6 - PREMISES AND EQUIPMENT Premises and equipment are summarized as follows:
---------December 31------- 1999 1998 ---- ---- (In Thousands) Land $ 2,275 $ 1,683 Buildings and leasehold improvements 10,543 8,174 Furniture and equipment 8,655 7,205 ---------- ---------- 21,473 17,062 Less: accumulated depreciation (6,538) (5,298) ---------- ---------- $ 14,935 $ 11,764 ========== ==========
NOTE 7 - DEPOSITS At December 31, 1999, the scheduled maturities of time deposits are as follows: (In Thousands) 2000 $ 275,518 2001 78,223 2002 24,993 2003 5,917 2004 and thereafter 6,467 ---------- $ 391,118 ========== 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------- 1999 1998 ---- ---- (Dollars In Thousands) Year-end balance $ 21,282 $ 7,772 Average balance during the year 8,640 20,167 Average interest rate during the year 5.14% 4.58% Maximum month-end balance during the year $ 21,282 $ 82,755 - -------------------------------------------------------------------------------- (Continued) 17. PREMIER FINANCIAL BANCORP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1999, 1998 and 1997 - -------------------------------------------------------------------------------- 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. At December 31, 1999 and 1998, $32.6 million and $31.9 million 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 sixteen years, with interest rates ranging from 5.08% to 8.45%. Advances are secured by the FHLB stock and substantially all single family first mortgage loans of the participating Banks. Scheduled principal payments due on advances during the five years subsequent to December 31, 1999 are as follows: (In Thousands) 2000 $ 13,853 2001 620 2002 396 2003 143 2004 and thereafter 17,635 ---------- $ 32,647 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 2001, contains certain covenants and performance terms, all of which have been complied with at December 31, 1999. Interest is payable at term at LIBOR plus 1.125% and adjusts based on agreed terms. Common stock of eight of the Company's subsidiary Banks is pledged to secure the agreement. There was $20 million and $8 million borrowed under this agreement at December 31, 1999 and 1998. 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 is 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 by the Company 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. - -------------------------------------------------------------------------------- (Continued) 18. PREMIER FINANCIAL BANCORP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1999, 1998 and 1997 - -------------------------------------------------------------------------------- NOTE 12 - INCOME TAXES The components of the provision for income taxes are as follows:
1999 1998 1997 ---- ---- ---- (In Thousands) Current $ 2,157 $ 2,350 $ 2,348 Deferred (230) (118) 317 Change in valuation allowance - (235) (60) -------- -------- -------- $ 1,927 $ 1,997 $ 2,605 ======== ======== ========
The Company's deferred tax assets and liabilities at December 31, 1999 and 1998 are shown below. No valuation allowance for the realization of deferred tax assets is considered necessary at December 31, 1999.
1999 1998 ---- ---- (In Thousands) Deferred tax assets Allowance for loan losses $ 1,703 $ 848 NOL carryforwards - 96 Unrealized loss on investment securities 2,071 160 Other 184 182 --------- --------- Total deferred tax assets 3,958 1,286 Deferred tax liabilities Depreciation (445) (331) Change in accounting method (20) (40) Federal Home Loan Bank dividends (300) (182) Other (115) (84) -------- --------- Total deferred tax liabilities (880) (637) Net deferred tax asset, included in other assets $ 3,078 $ 649 ========= =========
At December 31, 1999, the balances presented above include net deferred tax assets of $288,000 associated with the January 20, 1999 acquisition of Mt. Vernon. - -------------------------------------------------------------------------------- (Continued) 19. PREMIER FINANCIAL BANCORP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1999, 1998 and 1997 - -------------------------------------------------------------------------------- NOTE 12 - INCOME TAXES (Continued) An analysis of the differences between the effective tax rates and the statutory U.S. federal income tax rate is as follows:
1999 1998 1997 ---- ---- ---- (Dollars In Thousands) U. S. federal income tax rate $ 2,216 34.0% $ 2,618 34.0% $ 2,852 34.0% Changes from the statutory rate Tax-exempt investment income (494) (7.6) (425) (5.5) (408) (5.0) Non-deductible interest expense related to carrying tax-exempt investments 66 1.0 57 .7 50 .6 Tax credits (70) (1.1) (149) (1.9) (70) (0.8) Change in valuation allowance - - (235) (3.1) (60) (0.6) Goodwill amortization 202 3.1 137 1.8 131 1.6 Other 7 0.1 (6) (0.1) 110 1.3 --------- --- -------- --- --------- --- $ 1,927 29.5% $ 1,997 25.9% $ 2,605 31.1% ========= ===== ======== ===== ========= =====
NOTE 13 - EMPLOYEE BENEFIT PLANS The Company has qualified profit sharing plans that 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 $251,000, $180,000 and $191,000 in 1999, 1998 and 1997. 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. - -------------------------------------------------------------------------------- (Continued) 20. PREMIER FINANCIAL BANCORP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1999, 1998 and 1997 - -------------------------------------------------------------------------------- NOTE 13 - EMPLOYEE BENEFIT PLANS (Continued) A summary of the Company's stock option activity is as follows:
---------1999--------- ---------1998--------- ----------1997---------- Weighted Weighted Weighted Average Average Average Exercise Exercise Exercise Options Price Options Price Options Price Outstanding at beginning of year 62,000 $ 13.71 42,000 $ 12.38 42,000 $ 12.38 Granted - - 20,000 16.50 - - -------- -------- -------- Outstanding at year end 62,000 $ 13.71 62,000 $ 13.71 42,000 $ 12.38 ======== ======== ======== Exercisable at year end 49,800 41,600 29,400 Weighted average remaining life 7.3 8.3 8.5
Although the Company has elected to follow APB No. 25, SFAS No. 123, "Accounting for Stock Based Compensation" requires pro forma disclosure of net income and earnings per share as if the Company had accounted for its employee stock options under that Statement. The fair value of each option grant was estimated on the grant date using an option-pricing model. Under SFAS No. 123, compensation cost is recognized in the amount of the estimated fair value of the options and amortized to expense over the options' vesting period. The pro forma effect on net income and earnings per share of this statement are as follows:
1999 1998 1997 ---- ---- ---- (Dollars In Thousands) Net income As reported $ 4,590 $ 5,704 $ 5,784 Pro forma 4,550 5,649 5,731 Basic earnings per share As reported $ .88 $ 1.09 $ 1.11 Pro forma .87 1.08 1.10 Diluted earnings per share As reported $ .88 $ 1.09 $ 1.10 Pro forma .87 1.08 1.09
- -------------------------------------------------------------------------------- (Continued) 21. PREMIER FINANCIAL BANCORP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1999, 1998 and 1997 - -------------------------------------------------------------------------------- NOTE 13 - EMPLOYEE BENEFIT PLANS (Continued) The weighted average assumptions for options granted during the year and the resulting estimated weighted average fair value per share used in computing pro forma disclosures are as follows:
1999 1998 1997 ---- ---- ---- (Dollars In Thousands) Weighted averages Fair value of options granted $ - $ 4.66 $ 5.77 Risk free interest rate - 5.50% 6.00% Expected life - 10 years 10 years Expected volatility - 17.88% 38.02% Expected dividend $ - $ .60 $ .60
Future pro forma net income will be negatively impacted should the Company choose to grant additional options. NOTE 14 - RELATED PARTY TRANSACTIONS During 1999, 1998 and 1997, the Company paid approximately $432,000, $369,000 and $233,000 for printing, supplies, furniture, and equipment from a company affiliated by common ownership. The Company also paid this affiliate approximately $820,000, $649,000 and $339,000 in 1999, 1998 and 1997 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 $2.0 million 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. PREMIER FINANCIAL BANCORP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1999, 1998 and 1997 - -------------------------------------------------------------------------------- NOTE 15 - 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 1999, 1998 and 1997 is presented below:
------------------Year Ended---------------- 1999 1998 1997 ---- ---- ---- (In Thousands, Except Per Share Data) Basic earnings per share Net income available to common stockholders $ 4,590 $ 5,704 $ 5,784 Weighted average common shares outstanding 5,232 5,232 5,232 Earnings per share $ .88 $ 1.09 $ 1.11 Diluted earnings per share Net income available to common stockholders $ 4,590 $ 5,704 $ 5,784 Weighted average common shares outstanding 5,232 5,232 5,232 Add dilutive effects of assumed exercise of stock options - 15 13 --------- --------- --------- Weighted average common and dilutive potential common shares outstanding 5,232 5,247 5,245 Earnings per share assuming dilution $ .88 $ 1.09 $ 1.10
Stock options for 62,000 shares of common stock were not included in the 1999 computation of earnings per share assuming dilution because their impact was anti-dilutive. - -------------------------------------------------------------------------------- (Continued) 23. PREMIER FINANCIAL BANCORP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1999, 1998 and 1997 - -------------------------------------------------------------------------------- NOTE 16 - DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS The fair values of the Company's financial instruments at December 31, 1999 and 1998 are as follows:
--------------1999------------- -------------1998-------------- Carrying Fair Carrying Fair Amount Value Amount Value (In Thousands) Financial assets Cash and due from banks $ 28,227 $ 28,227 $ 20,171 $ 20,171 Interest-earning balances 1,634 1,642 - - Federal funds sold 25,197 25,197 19,406 19,406 Investment securities 170,420 170,372 177,192 177,904 Loans, net 563,294 563,324 391,257 393,047 Federal Home Loan Bank and Federal Reserve Bank stock 4,123 4,123 3,416 3,416 Interest receivable 9,814 9,814 8,053 8,053 Financial liabilities Deposits $ (692,843) $ (693,250) $ (523,193) $ (526,733) Securities sold under agreements to repurchase (21,282) (21,282) (7,772) (7,772) Federal Home Loan Bank advances (32,647) (32,236) (31,898) (32,163) Other borrowed funds (20,000) (20,000) (8,000) (8,000) Guaranteed preferred beneficial interests in Company's debentures (28,750) (28,063) (28,750) (28,750) Interest payable (3,265) (3,265) (2,384) (2,384)
Carrying amount is the estimated fair value for cash and cash equivalents, short-term borrowings, Federal Home Loan Bank and Federal Reserve Bank stock, accrued interest receivable and payable, demand deposits, short-term debt, and variable rate loans or deposits that reprice frequently and fully. Security fair values are based on market prices or dealer quotes, and if no such information is available, on the rate and term of the security and information about the issuer. For fixed rate loans or deposits and for variable rate loans or deposits with infrequent repricing or repricing limits, fair value is based on discounted cash flows using current market rates applied to the estimated life and credit risk. Fair values for impaired loans are estimated using discounted cash flow analysis or underlying collateral values. Fair value of debt is based on current rates for similar financing. The fair value of commitments to extend credit and standby letters of credit is not considered material. - -------------------------------------------------------------------------------- (Continued) 24. PREMIER FINANCIAL BANCORP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1999, 1998 and 1997 - -------------------------------------------------------------------------------- NOTE 17 - FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK The Banks are parties to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of their customers. These financial instruments include standby letters of credit and commitments to extend credit in the form of unused lines of credit. The Banks use the same credit policies in making commitments and conditional obligations as they do for on-balance sheet instruments. At December 31, 1999 and 1998, the Banks had the following financial instruments whose approximate contract amounts represent credit risk: 1999 1998 ---- ---- (In Thousands) Standby letters of credit $ 2,219 $ 1,010 Commitments to extend credit: Fixed $ 19,638 $ 28,673 Variable 31,623 5,581 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 are at current market rates. Fixed rate loan commitments have interest rates ranging from 6% to 18%. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. The Banks evaluate each customer's creditworthiness on a case-by-case basis. Since some of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. Collateral held varies but may include accounts receivable, inventory, property and equipment, and income producing properties. NOTE 18 - 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, 1999, 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. - -------------------------------------------------------------------------------- (Continued) 25. PREMIER FINANCIAL BANCORP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1999, 1998 and 1997 - -------------------------------------------------------------------------------- NOTE 19 - STOCKHOLDERS' EQUITY Common Stock - 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. 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 discussed below. During 2000, the Banks could, without prior approval, declare dividends of approximately $8.0 million plus any 2000 net profits retained to the date of the dividend declaration. 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. These 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, 1999, the Company and the Banks meet all quantitative capital adequacy requirements to which they are subject. The capital amounts and classifications are also subject to qualitative judgments by the regulators. As a result of these qualitative judgments, Citizens Deposit Bank (Citizens) entered into an agreement with the Federal Reserve Bank (FRB) on December 14, 1999 restricting Citizens from declaring or paying dividends if its Tier 1 capital to average assets falls below 8%. This agreement, in effect until terminated by the FRB, is more restrictive than the quantitative measures governing a bank's ability to pay dividends. Citizens Tier I capital to average assets was 9.2% at December 31, 1999. As of December 31, 1999, 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) 26. PREMIER FINANCIAL BANCORP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1999, 1998 and 1997 - -------------------------------------------------------------------------------- NOTE 19 - STOCKHOLDERS' EQUITY (Continued) The Company's and the four and three largest subsidiary Banks' capital amounts and ratios as of December 31, 1999 and 1998 are presented in the table below.
To Be Well Capitalized Under Prompt For Capital Corrective Actual Adequacy Purposes Action Provisions 1999 Amount Ratio Amount Ratio Amount Ratio ---- (Dollars In Thousands) Total Capital (to Risk-Weighted Assets): Consolidated $ 67,273 11.9% $ 45,331 8% $ 56,663 10% Farmers Deposit Bank 14,759 14.4 8,181 8 10,227 10 Boone County Bank 12,800 18.3 5,603 8 7,004 10 Citizens Deposit Bank 12,608 13.5 7,468 8 9,335 10 The Bank of Mt. Vernon 11,400 11.9 7,652 8 9,565 10 Tier I Capital (to Risk-Weighted Assets): Consolidated $ 50,394 8.9% $ 22,665 4% $ 33,998 6% Farmers Deposit Bank 13,481 13.2 4,091 4 6,136 6 Boone County Bank 12,005 17.1 2,802 4 4,202 6 Citizens Deposit Bank 11,468 12.3 3,734 4 5,601 6 The Bank of Mt. Vernon 10,422 10.9 3,826 4 5,739 6 Tier I Capital (to Average Assets): Consolidated $ 50,394 6.2% $ 32,372 4% $ 40,465 5% Farmers Deposit Bank 13,481 9.8 5,505 4 6,881 5 Boone County Bank 12,005 9.6 5,018 4 6,272 5 Citizens Deposit Bank1 11,468 9.2 4,980 4 6,224 5 The Bank of Mt. Vernon 10,422 8.3 5,040 4 6,300 5 1998 Total Capital (to Risk-Weighted Assets): Consolidated $ 66,188 16.2% $ 32,660 8% $ 40,825 10% Farmers Deposit Bank 15,297 15.6 7,833 8 9,792 10 Boone County Bank 10,975 17.3 5,068 8 6,336 10 Citizens Deposit Bank 11,730 13.5 6,948 8 8,685 10 Tier I Capital (to Risk-Weighted Assets): Consolidated $ 51,288 12.6% $ 16,330 4% $ 24,495 6% Farmers Deposit Bank 14,075 14.4 3,917 4 5,875 6 Boone County Bank 10,817 17.1 2,534 4 3,801 6 Citizens Deposit Bank 10,800 12.4 3,474 4 5,211 6 Tier I Capital (to Average Assets): Consolidated $ 51,288 8.1% $ 25,483 4% $ 31,854 5% Farmers Deposit Bank 14,075 10.5 5,350 4 6,687 5 Boone County Bank 10,817 9.3 4,649 4 5,812 5 Citizens Deposit Bank 10,800 9.0 4,775 4 5,969 5
1Subject to additional limitations as discussed above. - -------------------------------------------------------------------------------- (Continued) 27. PREMIER FINANCIAL BANCORP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1999, 1998 and 1997 - -------------------------------------------------------------------------------- NOTE 20 - PARENT COMPANY FINANCIAL STATEMENTS Condensed Balance Sheets December 31
1999 1998 ---- ---- (In Thousands) ASSETS Cash $ 616 $ 317 Investment in subsidiaries 95,175 83,297 Investment securities available for sale 2,005 2,000 Premises and equipment 1,653 3,594 Other real estate acquired through foreclosure 490 - Other assets 1,507 2,080 --------- --------- Total assets $ 101,446 $ 91,288 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY Other liabilities $ 569 $ 139 Other borrowed funds 20,000 8,000 --------- --------- Total liabilities 20,569 8,139 Guaranteed preferred beneficial interests in Company's debentures 28,750 28,750 Stockholders' equity Preferred stock - - Common stock 1,103 1,103 Surplus 43,445 43,445 Retained earnings 11,601 10,151 Accumulated other comprehensive income (4,022) (300) ---------- --------- Total stockholders' equity 52,127 54,399 ---------- --------- Total liabilities and stockholders' equity $ 101,446 $ 91,288 ========== =========
- -------------------------------------------------------------------------------- (Continued) 28. PREMIER FINANCIAL BANCORP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1999, 1998 and 1997 - -------------------------------------------------------------------------------- NOTE 20 - PARENT COMPANY FINANCIAL STATEMENTS (Continued) Condensed Statements of Income Years Ended December 31
1999 1998 1997 ---- ---- ---- (In Thousands) Income Dividends from subsidiary banks $ 6,300 $ - $ - Interest and dividend income 203 1,748 4,049 Gain on sale of investment securities - 136 2,183 Other income 93 1,620 16 ------- ------- ------- Total income 6,596 3,504 6,248 Expenses Interest expense 4,111 3,593 4,037 Salaries and employee benefits 921 461 465 Other expenses 708 684 804 ------- ------- ------- Total expenses 5,740 4,738 5,306 Income (loss) before income taxes and equity in undistributed income of subsidiaries 856 (1,234) 942 Income tax expense (benefit) (1,899) (516) 326 ------- ------- ------- Income (loss) before equity in undistributed income of subsidiaries 2,755 (718) 616 Equity in undistributed income of subsidiaries 1,835 6,422 5,168 ------- ------- ------- Net income $ 4,590 $ 5,704 $ 5,784 ======= ======= =======
- -------------------------------------------------------------------------------- (Continued) 29. PREMIER FINANCIAL BANCORP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1999, 1998 and 1997 - -------------------------------------------------------------------------------- NOTE 20 - PARENT COMPANY FINANCIAL STATEMENTS (Continued) Condensed Statements of Cash Flows Years Ended December 31
1999 1998 1997 ---- ---- ---- (In Thousands) Cash flows from operating activities Net income $ 4,590 $ 5,704 $ 5,784 Adjustments to reconcile net income to net cash from operating activities Depreciation 169 134 74 Investment securities gains - (136) (2,183) Equity in undistributed income of subsidiaries (1,835) (6,422) (5,168) Change in other assets 573 (534) (1,453) Change in other liabilities 430 (28) 41 --------- --------- --------- Net cash from operating activities 3,927 (1,282) (2,905) Cash flows from investing activities Purchase of subsidiary banks (13,677) (15,168) - Capital contributed to subsidiaries (88) (14,908) (2,100) Purchase of securities available for sale (5) (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 (490) 5,621 (5,621) Purchase of premises and equipment (269) (1,309) (1,307) Proceeds from sale of fixed assets 2,041 - - --------- --------- --------- Net cash from investing activities (12,488) (9,288) (23,185) Cash flows from financing activities Dividends paid (3,140) (3,068) (2,406) Proceeds from issuance of guaranteed preferred beneficial interests in Company's debentures - - 28,750 Proceeds from other borrowed funds 12,000 8,000 - --------- --------- --------- Net cash from financing activities 8,860 4,932 26,344 Net change in cash and cash equivalents 299 (5,638) 254 Cash and cash equivalents at beginning of year 317 5,955 5,701 --------- --------- --------- Cash and cash equivalents at end of year $ 616 $ 317 $ 5,955 ========= ========= ========= Supplemental disclosure of cash flow information: Loans transferred to real estate acquired through foreclosure $ 490 $ - $ -
- -------------------------------------------------------------------------------- 30. 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, 1999 and 1998 Statement of Income - Years Ended December 31, 1999, 1998 and 1997 Statements of Changes in Stockholders' Equity - Years Ended December 31, 1999, 1998 and 1997 Statements of Cash Flows - Years Ended December 31, 1999, 1998 and 1997 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). 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, Hammond, 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 (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. Form 8-K dated January 25, 1999 reporting consummation of the Company's acquisition of Mt. Vernon Bancshares, Inc. located in Somerset, Kentucky. 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 27th day of March, 2000. 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 27, 2000 /s/ J. Howell Kelly Principal Executive -------------------- and Director J. Howell Kelly March 27, 2000 /s/ Toney K. Adkins Director -------------------- Toney K. Adkins March 27, 2000 /s/ Gardner E. Daniel Director --------------------- Gardner E. Daniel March 27, 2000 /s/ E. V. Holder, Jr. Director --------------------- E. V. Holder, Jr. March 27, 2000 /s/ Jeanne D. Hubbard Director --------------------- Jeanne D. Hubbard March 27, 2000 /s/ Wilbur M. Jenkins Director --------------------- Wilbur M. Jenkins March 27, 2000 /s/ Keith F. Molihan Director -------------------- Keith F. Molihan March 27, 2000 /s/ Benjamin T. Pugh Director -------------------- Benjamin T. Pugh March 27, 2000 /s/ Marshall T. Reynolds Director ------------------------ Marshall T. Reynolds March 27, 2000 /s/ Neal Scaggs Director ----------------------- Neal Scaggs 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 Exhibit 23.1 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the inclusion of our report dated February 18, 2000 in the annual report on Form 10-K of Premier Financial Bancorp, Inc. as of December 31, 1999 and 1998 and for each of years in the three year period ended December 31, 1999. /s/ Crowe, Chizek and Company, LLP Crowe, Chizek and Company, LLP Lexington, Kentucky March 27, 2000 EX-27 2 FDS --
9 0000887919 Premier Financial Bancorp, Inc. 1000 12-mos Dec-31-1999 Jan-01-1999 Dec-31-1999 28,227 1,634 25,197 0 151,787 18,633 18,585 570,106 6,812 852,468 692,843 32,507 4,819 70,172 0 0 1,103 51,024 852,468 50,649 10,984 1,239 62,872 27,808 34,207 28,665 3,294 17 22,630 6,517 4,590 0 0 4,590 .88 .88 4.04 4,540 1,721 666 0 5,673 2,556 401 6,812 6,812 0 0 Computed as tax-equivalent basis Includes allowance through acquisition
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