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, 2001
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. [X]
The aggregate market value of voting stock held by non-affiliates of the
Registrant as of March 1, 2002 was $36,191,823. The number of shares outstanding
of the Registrant's Common Stock as of March 1, 2002 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 2002 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 16, 2002, operates sixteen banking
offices in Kentucky, four banking offices in Ohio, and six banking offices in
West Virginia. At December 31, 2001, Premier had total consolidated assets of
$711.8 million, total consolidated deposits of $570.5 million and total
consolidated shareholders' equity of $59.9 million. The banking subsidiaries
(the "Banks" or "Affiliate Banks") consist of Citizens Deposit Bank & Trust,
Vanceburg, Kentucky; Bank of Germantown, Germantown, Kentucky, Citizens Bank
(Kentucky), Inc., Georgetown, Kentucky; Farmers Deposit Bank, Eminence,
Kentucky; Ohio River Bank, Ironton, Ohio; First Central Bank, Inc., Philippi,
West Virginia; and Boone County Bank, Inc., Madison, West Virginia.
In 2000 Premier suspended its acquisition strategy in order to focus on
improving operations, strengthening capital and management oversight and
improving profitability at the banks previously acquired. As part of this change
in strategy Premier elected to dispose of two of its subsidiary banks, the Bank
of Mt. Vernon and The Sabina Bank. These disposals were completed in 2001. While
Premier remains committed to its core strategy of rural banking with community
oriented and named institutions, the Company may dispose of additional corporate
assets that no longer meet Premier's geographic or operational performance
goals.
During October 2001, the Company appointed Robert Walker to the
position of President and Chief Executive Officer to replace the retiring
Gardner Daniel. During February 2002, the Company's CFO left the Company. A
search is underway for a replacement.
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 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, 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 six 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.
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 which have
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 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.
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 four Affiliate Banks chartered in Kentucky are supervised,
regulated and examined by the Kentucky Department of Financial Institutions, the
Affiliate Bank chartered in Ohio is 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 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, 2001, Premier met
both requirements, with Tier I and total capital equal to 13.4% and 16.6% 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, 2001, Premier's leverage ratio was 8.5%.
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.
Regulatory Agreements - On September 29, 2000, the Company entered into an
agreement with the Federal Reserve that prohibits the company from paying
dividends or incurring any additional debt without the prior written approval of
the Federal Reserve. Additionally, the agreement requires the company to develop
and monitor compliance with certain operational policies designed to strengthen
Board of Director oversight including credit administration, liquidity, internal
audit and loan review.
Two of the Banks, Citizens Deposit Bank & Trust and Bank of
Germantown, have entered into similar agreements with their respective primary
regulator which, among other things, prohibits the payment of dividends without
prior written approval and requires significant changes in their lending and
credit administration policies.
These agreements, which require periodic reporting, will remain in
force until the regulators are satisfied that the company and the banks have
fully complied with the terms of the agreement.
Dividend Restrictions - Premier is dependent on dividends from its Affiliate
Banks for its revenues. Various federal and state regulatory provisions limit
the amount of dividends the Affiliate Banks can pay to Premier without
regulatory approval. At December 31, 2001, approximately $3.2 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 20 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 as 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, eliminating many of the remaining barriers to full
convergence of the banking, securities, and insurance industries. The major
provisions of the Act took effect 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. 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 acquisitions, 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 acquisition.
Number of Employees - The Company and its subsidiaries collectively had
approximately 274 full-time equivalent employees as of December 31, 2001. 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. Except as noted each of the Banks owns the real
property and improvements on which their banking activities are conducted.
Citizens Deposit Bank & Trust, in addition to its main office at 400
Second Street in Vanceburg, Kentucky, has four 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 two branches located
in Bracken County, Kentucky. Citizens Bank (Kentucky), Inc., in addition to its
main office at 120 North Hamilton Street in Georgetown, Kentucky, has two
branches in Scott County, Kentucky, and two branches in Bath County, 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. 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. First
Central Bank, 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
three branches, one each located in Boone, Logan and Lincoln Counties, West
Virginia.
Item 3. Legal Proceedings
The Banks are respectively parties to legal actions that are ordinary
routine litigation incidental to a commercial banking business. In management's
opinion, the outcome of these matters, individually or in the aggregate, will
not have a material adverse impact on the results of operations or financial
position of the Company.
Item 4. Submission of Matters to a Vote of Security Holders
There were no matters submitted to a vote of security holders, through
solicitation of proxies or otherwise during the fourth quarter of the fiscal
year covered by this report.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
---------------------------------------------------------------------
The Company's common stock is listed on the NASDAQ under the symbol
PFBI. At December 31, 2001, the Company had approximately 733 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
-------------- ---- ---
2000:
First Quarter $ 0.15 $10.25 $7.50
Second Quarter - 8.38 6.00
Third Quarter - 6.75 4.63
Fourth Quarter - 6.50 5.06
---------
$ 0.15
=========
2001:
First Quarter $ - $7.38 $5.13
Second Quarter - 7.90 6.30
Third Quarter - 9.40 7.55
Fourth Quarter - 8.95 8.10
---------
$ -
=========
2002:
First Quarter (through March 11, 2002) $ - $ 8.75 $ 8.11
The Board of Directors suspended the payment of dividends during the
second quarter of 2000. In September 2000 as a result of an agreement entered
into with the Federal Reserve, the Company agreed not to declare additional
dividends without the prior approval of the Federal Reserve. The Board of
Directors anticipates paying dividends at some future date when, in its
discretion, financial prudence allows and the Federal Reserve concurs in the
payment of such dividends. Even if the Company is able to resume the payment of
dividends, there can be no assurance that the amount of the dividends will be
what the Company paid before the payment of dividends was suspended.
The payment of dividends by the Company depends 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,
2001, approximately $3.2 million was available for payment as dividends from the
Banks to the Company without the need for regulatory approval. In considering
the payment of dividends, the Board of Directors will take into account the
Company's financial condition, results of operations, tax considerations, costs
of expansion, industry standards, economic conditions and need for funds, as
well as governmental policies and regulations applicable to the Company and the
Banks. See "REGULATORY MATTERS - Capital Requirements" for discussion on capital
guidelines.
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,
2001 2000 1999 1998 1997
---- ---- ---- ---- ----
Earnings
Net interest income $ 25,274 $ 28,676 $ 28,665 $ 20,107 $ 17,458
Provision for loan losses 8,921 4,932 3,294 1,742 1,399
Non-interest income 13,336 4,012 3,776 4,673 4,562
Non-interest expense 23,985 26,105 22,630 15,337 12,232
Income taxes 3,385 316 1,927 1,997 2,605
Net income $ 2,319 $ 1,335 $ 4,590 $ 5,704 $ 5,784
Financial Position
Total assets $ 771,850 $ 889,932 $ 852,468 $ 657,744 $ 464,890
Loans, net of unearned
income 458,741 595,576 570,106 395,620 312,102
Allowance for loan losses 8,946 7,821 6,812 4,363 3,479
Goodwill and other intangibles 16,044 22,856 24,339 21,555 7,262
Securities 155,566 194,400 170,420 177,192 73,409
Deposits 570,531 728,412 692,843 523,193 358,605
Other borrowings 49,315 71,240 73,929 47,670 21,842
Debt 28,750 28,750 28,750 28,750 28,750
Stockholders' equity 59,875 55,830 52,127 54,399 52,007
Share Data
Net income - basic $ .44 $ .26 $ .88 $ 1.09 $ 1.11
Net income - diluted .44 .26 .88 1.09 1.10
Book value 11.44 10.67 9.96 10.40 9.94
Cash dividend 0.00 0.15 0.60 0.60 0.55
Ratios
Return on average assets .30% .15% .57% .97% 1.29%
Return on average equity 4.01% 2.53% 8.54% 10.80% 11.51%
Dividend payout 0% 58.80% 68.41% 53.79% 41.60%
Stockholders' equity to total
assets at period-end 8.41% 6.27% 6.11% 8.27% 11.19%
Average stockholders' equity
to average total assets 7.47% 6.07% 6.72% 9.02% 11.21%
Capital Ratios
Equity to assets 8.4% 6.3% 6.1% 8.3% 11.2%
Leverage ratio 8.5% 6.1% 6.2% 8.1% 13.6%
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 2001, Premier continued efforts to make stronger its network of independently
managed community banks by way of a more centralized corporate structure. In
doing so, Premier suspended its acquisition strategy in order to focus on
improving operations, strengthening capital and management oversight and
improving profitability at the banks previously acquired. As part of this change
in strategy Premier elected to dispose of two of its subsidiary banks, the Bank
of Mt. Vernon and The Sabina Bank. While Premier remains committed to its core
strategy of rural banking with community oriented and named institutions, the
Company may dispose of additional corporate assets that no longer meet Premier's
geographic or operational performance goals.
For 2001, net income was $2,319 compared to $1,335 for 2000; total assets
decreased to $711,850 from the $889,932 in 2000, and shareholders' equity
increased to $59,875 from $55,830 in 2000.
Quarterly unaudited financial information for the Company for the years ended
December 31, 2001 and 2000, is summarized as follows:
Quarterly Financial Information
(Dollars in thousands except per share amounts)
Full
First Second Third Fourth Year
----- ------ ----- ------ ----
2001
----
Interest Income $15,796 $14,999 $14,243 $13,004 $58,042
Interest Expense 9,442 8,589 8,003 6,734 32,768
Net Interest Income 6,354 6,410 6,240 6,270 25,274
Provision for Loan Losses 632 3,015 1,793 3,481 8,921
Securities Gains 180 60 195 81 516
Gain on Sale Of Subsidiary
Banking Operations 3,418 - - 5,295 8,713
Net Overhead 5,121 4,599 4,638 5,520 19,878
Income before Income Taxes 4,199 (1,144) 4 2,645 5,704
Net Income 1,224 (705) 46 1,754 2,319
Basic Net Income per share 0.23 (0.13) 0.01 0.33 0.44
Diluted Net Income per share 0.23 (0.13) 0.01 0.33 0.44
Dividends Paid per share - - - - -
2000
----
Interest Income $16,611 $17,033 $17,605 $17,985 $69,234
Interest Expense 9,525 9,792 10,474 10,767 40,558
Net Interest Income 7,086 7,241 7,131 7,218 28,676
Provision for Loan Losses 1,385 1,505 1,125 917 4,932
Securities Gains (Losses) 1 (281) 1 - (279)
Net Overhead 5,135 5,136 5,564 5,979 21,814
Income before Income Taxes 567 319 443 322 1,651
Net Income 447 262 371 255 1,335
Basic Net Income per share 0.09 0.05 0.07 0.05 0.26
Diluted Net Income per share 0.09 0.05 0.07 0.05 0.26
Dividends Paid per share 0.15 - - - 0.15
BUSINESS COMBINATIONS
- ---------------------
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.
On January 26, 2001, the company disposed of all the deposits (approximately
$110 million), the majority of loans (approximately $92 million) and the
premises and equipment (approximately $1.6 million) of the Bank of Mt. Vernon
under the terms of a Purchase and Assumption Agreement. As a result of this
transaction, the banking charter of the Bank of Mt. Vernon was relinquished and
the Company agreed to not compete in the markets previously served by the Bank
of Mt. Vernon.
On December 10, 2001, the Company disposed of certain assets and liabilities of
The Sabina Bank. The sale included all the loans (approximately 31 million) and
all the deposits (approximately 41 million), as well as the premises and
equipment (approximately 1.2 million). Certain assets, of the bank, were
retained by Premier pending liquidation of the bank. The operating results of
both the Bank of Mount Vernon and The Sabina Bank were included in the Company's
operating results through the respective dates of the sale. The results relating
to the assets retained by the Company continue to be included in the Company's
operating results.
RESULTS OF OPERATIONS
- ---------------------
Earnings Summary
Premier recorded net income for 2001 of $2,319, versus $1,335 and $4,590 for
2000 and 1999. Basic and diluted earnings per common share were $0.44 in 2001
compared to $0.26 in 2000 and $0.88 in 1999. The increase for 2001 versus 2000
was primarily attributable to net gains of $8,713 on the disposals of two
affiliate banking operations. These gains more than offset a $3,989 increase to
loan loss provision that the company experienced in 2001 as it worked to
strengthen credit risk identification and monitoring. Non interest income
improved from $4,012 in 2000 to $13,336 in 2001 due to these gains. Non interest
expense was down $2,120 at $23,985 for 2001 versus $26,105 in 2000. The net
improvements to income noted above were partially offset by added income taxes
which increased from $316 in 2000 to $3,385 in 2001.
Net income of $1,335 in 2000 represented a 70.9% decrease from the 1999 amount
of $4,590. This decrease in 2000 was primarily attributed to an increase in the
provision for loan losses from $3,294 in 1999 to $4,932 in 2000 and an increase
in noninterest expense of $3,475 from $22,630 in 1999 to $26,105 in 2000.
Partially offsetting these decreases to net income were an increase in
noninterest income from $3,776 in 1999 to $4,012 in 2000, an increase of $236 or
6.3%, and a decrease in provision for income taxes from $1,927 in 1999 to $316
in 2000, a decrease of $1,611 or 83.6%.
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)
2001 2000 1999
---- ---- ----
Interest income.......................................... $ 58,042 $ 69,234 $ 62,872
Tax equivalent adjustment................................ 543 723 726
------------- ------------- -------------
Interest income...................................... 58,585 69,957 63,598
Interest expense......................................... 32,768 40,558 34,207
------------- ------------- -------------
Net interest income.................................. $ 25,817 $ 29,399 $ 29,391
============= ============= =============
The following table shows, for the three year period ended December 31, 2001,
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 2001, tax equivalent
net income was $25,817, which reflected a decrease of $3,587 from $29,399 in
2000. The larger portion of the decrease related to $84,380 in lower average
earning assets and $94,853 in lower interest bearing liabilities. The primary
drivers of these lower volumes were of course the sale of the banking operations
that occurred during 2001. The lower volumes resulted in $3,582 of lower net
interest income. The yield on earning assets in 2001 of 8.21% was 56 basis
points lower than the 8.77% earned in 2000, and the cost of interest bearing
liabilities decreased 40 basis points to 5.08% in 2001 from 5.49% in 2000.
Consequently, Premier's net interest spread decreased from 3.28% in 2000 to
3.13% in 2001 and the net interest margin decreased from 3.68% in 2000 to 3.62%
in 2001. While a portion of the decrease in net interest spread was the result
of changes in the portfolio makeup from the sales of two subsidiary banking
operations, a lower overall interest rate environment in 2001 lead to shrinkage
in the pricing of interest earning assets that were added or repriced during
2001. While similar changes occurred on the liability side, the impact was
smaller and the net result was the margin shrinkage discussed above. In terms of
dollars the decrease in margin relating to lower rates in 2001 versus 2000 was
$931.
In 2000, tax equivalent net interest income was $29,399, an amount essentially
unchanged from the $29,391 in 1999. The 2000 net interest income is the result
of an increase of $70,486 or 9.7% in average earning assets and an increase of
$66,317 or 9.9% in average interest bearing liabilities. The yield on earning
assets in 2000 of 8.77% was 3 basis points higher than the 8.74% earned in 1999,
and the cost of interest bearing liabilities increased 40 basis points to 5.49%
in 2000 from 5.09% in 1999. Consequently, Premier's net interest spread
decreased from 3.65% in 1999 to 3.28% in 2000 and the net interest margin
decreased from 4.04% in 1999 to 3.68% in 2000. The decrease in net interest
spread and net interest margin is primarily attributable to the 40 basis point
increase in the rising rate environment experienced in 2000 and the 22 basis
point decrease in yield on loans. The reduction in yield on loans can be
attributed to the liquidations of the higher yielding subprime real estate
portfolio, the increase in the average balance of nonaccrual loans, and the
increased level of competition experienced with the growth in the volume of
loans.
The following table presents average balances and interest rates for the
three-year period ended December 31, 2001.
Average Consolidated Balance Sheets and Net Interest
Analysis
(Dollars in thousands)
2001 2000 1999
---- ---- ----
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 $ 122,058 $ 7,323 6.00% $ 152,479 $ 9,674 6.34% $ 152,454 $ 9,213 6.04%
States and municipal obligations(1) 20,277 1,589 7.84 24,156 1,885 7.80 23,906 1,920 8.03
Other securities (1) 12,760 709 5.56 7,215 688 9.54 6,839 577 8.44
--------- ---------- ------- --------- --------- ------- --------- --------- -------
Total investment securities $ 155,095 $ 9,621 6.20 $ 183,850 $ 12,247 6.66 $ 183,199 $ 11,710 6.39
Federal funds sold 40,247 1,529 3.80 22,714 1,398 6.15 20,909 1,047 5.01
Interest-bearing deposits with
Banks 504 20 3.97 1,052 67 6.37 3,273 192 5.87
Loans, net of unearned income
(3) (4)
Commercial 210,923 18,997 9.01 228,760 22,090 9.66 211,948 20,200 9.53
Real estate mortgage 224,428 19,532 8.70 287,713 26,197 9.11 241,708 23,065 9.54
Installment 76,889 8,886 11.56 74,045 7,958 10.75 66,611 7,384 11.09
--------- ---------- ------- --------- --------- ------- --------- --------- -------
Total loans $ 512,240 $ 47,415 9.26 $ 590,518 $ 56,245 9.52 $ 520,267 $ 50,649 9.74
Total interest-earning assets $ 713,754 $ 58,585 8.21% $ 798,134 $ 69,957 8.77% $ 727,648 $ 63,598 8.74%
Allowance for loan losses (8,744) (7,626) (6,084)
Cash and due from banks 20,938 20,580 21,794
Premises and equipment 13,593 15,143 14,120
Other assets 34,509 42,386 41,395
--------- --------- ---------
Total assets $ 774,050 $ 868,617 $ 798,873
Liabilities:
Interest bearing deposits:
NOW and money market $ 178,501 $ 5,723 3.21% $ 175,166 $ 7,272 4.15% $ 150,165 $ 5,475 3.65%
Savings 63,287 1,567 2.48 63,850 1,929 3.02 63,227 1,961 3.10
Certificates of deposit and
other time deposits 322,309 19,260 5.98 394,763 23,302 5.90 368,720 20,372 5.53
--------- ---------- ------- --------- --------- ------- --------- --------- -------
Total interest-bearing
deposits $ 564,097 $ 26,550 4.71 $ 633,779 $ 32,503 5.13 $ 582,112 $ 27,808 4.78
Other borrowings 25,455 1,677 6.59 44,382 3,212 7.24 28,977 1,754 6.05
FHLB advances 26,827 1,687 6.29 32,071 1,991 6.21 32,826 1,793 5.46
Debt 28,750 2,854 9.93 28,750 2,852 9.92 28,750 2,852 9.92
--------- ---------- ------- --------- --------- ------- --------- --------- -------
Total interest-bearing
liabilities $ 645,129 $ 32,768 5.08% $ 738,982 $ 40,558 5.49% $ 672,665 $ 34,207 5.09%
Non-interest bearing demand
deposits 65,795 72,392 66,483
Other liabilities 5,797 4,482 6,005
--------- --------- ---------
Total liabilities $ 716,721 $ 815,856 $ 745,153
Shareholders' Equity: 57,853 52,761 53,720
Total liabilities and shareholders' --------- ---------
equity $ 774,574 $ 868,617 $ 798,873
Net interest income (1) 25,817 29,399 29,391
Net interest spread (1) 3.13% 3.28% 3.65%
Net interest margin (1) 3.62% 3.68% 4.04%
(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
2001 and 2000.
Analysis of Changes in Net
Interest Income
(Dollars in thousands on a taxable equivalent basis)
2001 vs. 2000 2000 vs. 1999
Increase (decrease) due to change in Increase (decrease) due to change in
Net Net
Volume Rate Change Volume Rate Change
Interest Income:
Loans $ (7,283) $ (1,547) $ (8,830) $ 6,734 $ (1,138) $ 5,596
Investment securities (1,824) (802) (2,626) 42 495 537
Federal funds sold 260 (129) 131 96 255 351
Deposits with banks (27) (20) (47) (140) 15 (125)
------------ ------------ ------------ ------------ ----------- ------------
Total interest income $ (8,874) $ (2,498) $ (11,372) $ 6,732 $ (373) $ 6,359
Interest Expense:
Deposits -
NOW and money market $ 98 $ (1,647) $ (1,549) $ 980 $ 817 $ 1,797
Savings (17) (345) (362) 19 (51) (32)
Certificates of deposit (4,333) 291 (4,042) 1,489 1,441 2,930
Other borrowings (1,268) (267) (1,535) 1,066 392 1,458
FHLB borrowings (330) 26 (304) (42) 240 198
Debt - 2 2 - - -
----------- ----------- ----------- ----------- ----------- -----------
Total interest expense $ (5,850) $ (1,940) $ (7,790) $ 3,512 $ 2,839 $ 6,351
Net interest income $ (3,024) $ (558) $ (3,582) $ 3,220 $ (3,212) $ 8
The change in interest income and expense due to both rate and volume has been
allocated to changes in average volume and changes in average rate in proportion
to the relationship of the absolute dollar amounts of change in each category.
PROVISION AND ALLOWANCE FOR LOAN LOSSES
- ---------------------------------------
The company maintains its allowance for loan losses (allowance) at a level that
is considered sufficient to absorb probable incurred credit losses existing in
the loan portfolio. The allowance is increased by the provision for probable
loan losses as well as recoveries of previously charged-off loans, and is
decreased by loan charge-offs. The provision is the necessary charge to expense
to provide for current loan losses and to maintain the allowance at an adequate
level commensurate with management's evaluation of the risks inherent in the
loan portfolio. Various factors are taken into consideration when the Company
determines the amount of the provision and the adequacy of the allowance. Some
of the factors include:
* Past due and nonperforming assets;
* Specific internal analyses of loans requiring special attention;
* The current level of regulatory classified and criticized assets and the
associated risk factors with each;
* Examinations and reviews by the Company's independent accountants, external
and internal loan review personnel; and
* Examinations of the loan portfolio by federal and state regulatory agencies.
The data collected from these sources is evaluated with regard to current
national and local economic trends, prior loss history, underlying collateral
values, credit concentrations, and industry risks. An estimate of potential
future loss on specific loans is developed in conjunction with an overall risk
evaluation of the total loan portfolio.
The following table is a summary of the Company's loan loss experience for each
of the past five years.
Summary of Loan Loss Experience
(Dollars in Thousands)
Years Ended December 31,
-----------------------------------------------------------------------
2001 2000 1999 1998 1997
---- ---- ---- ---- ----
Balance at beginning of year $ 7,821 $ 6,812 $ 4,363 $ 3,479 $ 3,127
Balance of allowance for loan losses of
acquired or disposed subsidiaries at (266) - 1,310 115 -
acquisition date
Amounts charged off:
Commercial 4,766 3,298 1,380 500 532
Real estate mortgage 1,267 125 381 60 139
Consumer 2,117 959 795 629 634
------------ ----------- ----------- ------------ -----------
Total loans charged off $ 8,150 $ 4,382 $ 2,556 $ 1,189 $ 1,305
Recoveries on amounts previously charged off:
Commercial 203 257 158 45 48
Real estate mortgage 9 4 12 1 -
Consumer 408 198 231 170 210
------------ ---------- ----------- ------------ -----------
Total recoveries 620 459 401 216 258
Net charge-offs 7,530 3,923 2,155 973 1,047
Provision for loan losses 8,921 4,932 3,294 1,742 1,399
------------ ---------- ----------- ------------ -----------
Balance at end of year $ 8,946 $ 7,821 $ 6,812 $ 4,363 $ 3,479
Total loans, net of unearned income:
Average 512,240 590,518 520,267 340,089 285,208
At December 31 458,741 595,576 570,106 395,620 312,102
As a percentage of average loans:
Net charge-offs 1.47% .66% .41% .29% .37%
Provision for loan losses 1.74% .84% .63% .51% .49%
Allowance as a percentage of year-end net loans 1.95% 1.31% 1.19% 1.10% 1.11%
Allowance as a multiple of net charge-offs 1 2 3 4 3
The provision for loan losses for 2001 was $8,921 compared to $4,932 in 2000, an
increase of $3,989. This increase can be mainly attributed to additional
charge-offs and an increase in nonperforming assets. In 2001, net charge-offs
were $7,530 compared to $3,923 in 2000, an increase of $3,607. The increase in
2001 net charge-offs is primarily attributed to the deterioration in the loan
portfolios in certain markets served by the subsidiary banks. At December 31,
2001, Premier's allowance for loan losses was 1.95% of period-end loans compared
to 1.31% at December 31, 2000.
Net charge-offs to average loans were 1.47% for the year 2001 compared to .66%
for the year 2000. At December 31, 2001, Premier's allowance for loan losses
totaled $8,946, representing an increase of $1,125 over the amount for December
31, 2000. The allowance for loan losses was 57% of nonperforming loans on
December 31, 2001, compared to 73% at December 31, 2000. At year end 2001,
nonperforming loans represented 3.40% of total outstanding loans, up from 1.80%
on December 31, 2000.
The following table sets forth an allocation for the allowance for loan losses
by category of loan and a percentage of loans in that category. In making the
allocation, consideration was given primarily to management's best estimates as
to the current losses in the portfolio. The components considered in arriving at
these amounts included identified specific risks in the portfolio, along with
current trends in losses and non performing in the specific loan categories. An
allocation for the allowance for 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. The loan loss
reserve represents managements best estimate of the actual losses anticipated in
the portfolio that are reasonably likely and probable to occur.
Allocation of the Allowance for Loan Losses and
Percent of Loans to Total Loans
(Dollars in thousands)
At December 31,
-----------------------------------------------------------------------------------------------------------
2001 2000 1999 1998 1997
---- ---- ---- ---- ----
Amount % Amount % Amount % Amount % Amount %
----- ---- ------ ---- ------ ---- ------ ---- ------ ----
Commercial $ 2,680 17.8% $ 2,535 17.0% $ 2,123 20.6% $ 1,695 22.5% $ 1,226 27.0%
Real estate mortgage 4,447 64.9 3,417 64.8 2,490 61.9 1,728 57.8 732 51.1
Consumer 1,819 17.3 1,261 18.2 948 17.5 738 19.7 965 21.9
Unallocated -- -- 608 -- 1,251 -- 202 -- 556 --
------- ---- ------- ---- ------- ---- ------- ---- ------- ----
Total $ 8,946 100.0% $ 7,821 100.0% $ 6,812 100.0% $ 4,363 100.0% $ 3,479 100.0%
Any reallocation to the allowance is primarily indicative of changes in loan
portfolio mix, not changes in loan concentrations or terms. The Company does
consider quality in regards to specific loans when determining an adequate
allowance allocation. The level of increase in nonperforming loans, which is
more specifically addressed in the nonperforming loan section, is largely
attributable to deterioration in loan quality as well as the company's efforts
at improving risk identification and monitoring.
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 2001 decreased $184 or 4.3% to $4,107 from $4,291
in 2000. Service charges on deposit accounts decreased 2.0% or $44 to $2,191
from $2,235 in 2000. Insurance commissions decreased 38.1% and other income
increased 1.8%. The service charge and insurance commission decreases were in
large part due to the result of the sales of the subsidiary banking operations
during 2001.
Total fees and other income increased $532 or 14.2% in 2000 to $4,291 from
$3,759 in 1999. Service charges on deposit accounts increased 13.7% and all
other income increased 14.6%.
Gains on the sale of investment securities in 2001 were $516, an increase of
$795 from the losses of $(279) in investment securities in 2000. Investment
securities losses in 2000 were $(279) versus gains of $17 in 1999, a decrease of
$296.
Premier recognized gains of $8,713 in 2001 from the sale of two of its
subsidiary banking operations.
Premier recognized a gain of $289 during the second quarter of 2000 as the
result of the sale of an affiliate's Federal Home Loan Bank advance. This gain
was substantially offset by losses on securities of $281, which was also
recognized in the second quarter of 2000.
Noninterest expenses decreased $2,120 or 8.1% in 2001, from $26,105 in 2000 to
$23,985 in 2001, and increased $3,475 or 15.4% in 2000 from $22,630 in 1999. The
primary factor resulting in the 2001 decrease in expenses was the sale during
the year of two subsidiary banking operations.
Salaries and employee benefits, the largest component of noninterest expense,
decreased 11.6% in 2001 and increased 14.2% in 2000. The changes include salary
increases and reflect changes in the number of full time equivalent employees
from 351 at December 31, 1999 to 361 at December 31, 2000 and 274 at December
31, 2001. The decrease for 2001 reflects the sales of two subsidiary banking
operations during the year. The 2000 increase can be primarily attributed to the
addition of three banking locations, the expensing of severance costs and annual
salary increases.
Occupancy and equipment expense for 2001 of $2,941 was $246 or 7.7% lower than
the $3,187 for 2000. The increase in 2000 was $302, or 10.5%, more than the
$2,885 expensed in 1999. The 2001 decrease was the result of the sale of two
subsidiary banking operations during the year. The increase in 2000 is primarily
attributable to the expansion in the number of banking locations.
Other noninterest expense, which is the second largest category, decreased $532
or 8.1% in 2001 and increased $1,461 or 28.6% in 2000. The 2001 decrease was the
result of the sale of two subsidiary banking operations during the year. The
2000 increases are primarily attributed to write-downs of other real estate
owned of approximately $617 and increased costs associated with heightened
levels of risk identification and controls.
Amortization of intangibles decreased $242 or 15.4% to $1,329 for 2001 from the
2000 amount of $1,571. The 2000 amortization was a decrease of $54 from the 1999
amount of $1,625. The significant 2001 decrease was the result of the reduction
in intangibles related to the sale of the two subsidiary banking operations
during 2001.
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 2001, total net noninterest expenses (excluding
investment securities gains, gain on FHLB advance sale and gain on sales of
subsidiary banking operations) as a percent of average total assets were 2.69%,
compared to 2.54% in 2000 and 2.36% in 1999.
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)
2001 vs. 2000 vs.
2001 2000 2000 2000 1999 1999
------------ ------------ ------------ ------------- ------------ ------------
Non-Interest Income:
Service charges on deposit accounts $ 2,191 $ 2,235 $ (44) $ 2,235 $ 1,965 $ 270
Insurance income 274 443 (169) 443 565 (122)
Other 1,642 1,324 318 1,324 1,229 95
--------- --------- ----------- --------- --------- -----------
Total fees and other income $ 4,107 $ 4,002 $ 105 $ 4,002 $ 3,759 $ 243
Investment securities gains(losses) 516 (279) 795 (279) 17 (296)
Gain on FHLB advance sale - 289 (28) 289 - 289
Gain on sale of banking operations 8,713 - - - - -
--------- --------- ----------- --------- --------- -----------
Total non-interest income $ 13,336 $ 4,012 $ 872 $ 4,012 $ 3,776 $ 236
Non-Interest Expense:
Salaries and employee benefits 11,785 13,332 (1,547) 13,332 11,679 1,653
Occupancy and equipment expense 2,941 3,187 (246) 3,187 2,885 302
Professional fees 1,065 705 360 705 547 158
Taxes, other than payroll, property
and income 836 749 87 749 794 (45)
Amortization of intangibles 1,329 1,571 (242) 1,571 1,625 (54)
Other expenses 6,029 6,561 (532) 6,561 5,100 1,461
--------- --------- ----------- --------- --------- -----------
Total non-interest expenses $ 23,985 $ 26,105 $ (2,120) $ 26,105 $ 22,630 $ 3,475
Net non-interest expenses as a percent
of average assets 1.44% 2.54% 2.54% 2.36%
Net non-interest expenses as a percent
of average assets (excluding investment
securities gains, gain on
FHLB advance sale and gain on sale of
banking operations) 2.69% 2.54% 2.54% 2.36%
INCOME TAXES
- ------------
The Company's provision for income taxes was $3,385 in 2001, which represented
59.3% of pre-tax income versus $316 in 2000 or 19.1% and $1,927 or 29.6% of
pre-tax income in 1999. The increase in taxes as well as the increased tax
percentage for 2001 versus 2000 was due to the sale during 2001 of two
subsidiary banking operations and the taxability of the gains relating to those
sales.
An analysis of the difference between the effective tax rates and the statutory
U.S. federal income tax rate is contained in Note 13 to the consolidated
financial statements.
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 and the Board of Directors in determining
the adequacy of the allowance for possible loan losses. During 2001,the Company
continued its efforts to strengthen its procedures and policies relating to
credit risk identification and monitoring. Those efforts should enhance the
scope, breadth, and depth of the Company's credit risk identification processes.
Total loans, net of unearned income, averaged $512,240 in 2001 compared with
$590,518 in 2000. At year end 2001, loans net of unearned income totaled
$458,741 compared to $595,576 at December 31, 2000, a decrease of $136,835 or
23%. The decrease in loan balances was primarily the result of the sales of two
of the affiliate banking operations in 2001.
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
2001 % 2000 % 1999 % 1998 % 1997 %
-------- ---- -------- ---- -------- ---- -------- ---- -------- ----
Commercial, secured by real
estate $117,692 25.6% $149,733 25.1% $135,078 23.7% $ 86,010 21.6% $ 71,818 22.8%
Commercial, other 70,315 15.3 86,069 14.5 98,543 17.3 73,982 18.6 48,309 15.4
Real estate construction 15,751 3.4 24,774 4.2 26,092 4.6 13,374 3.4 8,352 2.6
Real estate mortgage 164,810 35.9 211,662 35.5 192,088 33.6 131,212 33.0 103,664 33.0
Agricultural 9,613 2.1 13,817 2.3 17,525 3.1 15,433 3.9 13,232 4.2
Consumer 79,571 17.3 108,646 18.2 100,075 17.5 73,100 18.4 68,461 21.8
Other 1,081 0.4 1,246 0.2 1,352 0.2 4,502 1.1 674 0.2
-------- ---- -------- ---- -------- ---- -------- ---- -------- ----
Total loans $458,833 100.0% $595,947 100.0% $570,753 100.0% $397,613 100.0% $314,510 100.0%
Less unearned income (92) (371) (647) (1,993) (2,408)
-------- -------- -------- -------- --------
Total loans net of
unearned income $458,741 $595,576 $570,106 $395,620 $312,102
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 increasing over the past five years,
with net charge-offs being 1.47% of loans in 2001 and .66% in 2000. With respect
to consumer loans in particular, net charge-offs for the year ended December 31,
2001 were $1,709, or 2.15% of total consumer loans outstanding at December 31,
2001, and $761 in 2000, or .70% of total consumer loans outstanding at December
31, 2000.
The following table sets forth the maturity distribution and interest
sensitivity of selected loan categories at December 31, 2001. 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, 2001
(Dollars in thousands)
One Year One Through Over Total
or Less Five Years Five Years Loans
-------- ----------- ---------- -----
Commercial, secured by real estate $ 63,314 $ 51,184 $ 3,194 $ 117,692
Commercial, other 32,545 30,295 7,475 70,315
Real estate construction 3,605 4,279 7,867 15,751
Agricultural 4,633 4,237 743 9,613
------------ ------------ ------------ ------------
Total $ 104,097 $ 89,995 $ 19,279 $ 213,371
============ ============ ============ ============
Fixed rate loans $ 60,951 $ 89,995 $ 19,279 $ 170,225
Floating rate loans 43,146 - - 43,146
------------ ------------ ------------ ------------
Total $ 104,097 $ 89,995 $ 19,279 $ 213,371
============ ============ ============ ============
Nonperforming assets
Nonperforming assets consist of loans on which interest is no longer accrued,
certain restructured loans where interest rate or other terms have been
renegotiated, accruing loans past due 90 days or more and real estate acquired
through foreclosure. All loans considered impaired under SFAS 114 are included
in nonperforming loans.
The Company discontinues the accrual of interest on loans 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. 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
----------------------------------------------------------------------------------
2001 2000 1999 1998 1997
---- ---- ---- ---- ----
Nonaccrual loans $ 9,307 $ 7,840 $ 4,540 $ 3,500 $ 562
Accruing loans which are contractually
past due 90 days or more 5,948 2,196 1,721 1,322 522
Restructured loans 338 689 666 105 356
----------- ---------- ----------- --------- ----------
Total nonperforming and restructured
loans $ 15,593 $ 10,725 $ 6,927 $ 4,927 $ 1,440
Other real estate acquired through
foreclosures 5,831 3,116 3,009 961 836
------------ ---------- ----------- --------- ----------
Total nonperforming and restructured
loans and other real estate $ 21,424 $ 13,841 $ 9,936 $ 5,888 $ 2,276
Nonperforming and restructured loans
as a percentage of net loans 3.40% 1.80% 1.22% 1.25% .46%
Nonperforming and restructured loans
and other real estate as a percentage
of total assets 4.67% 1.56% 1.17% .90% .49%
Nonaccrual loans increased from $7,840 at December 31, 2000 to 9,307 at December
31, 2001. Total nonperforming assets increased from $13,841 at December 31, 2000
to $21,424 at December 31, 2001. The percentage of nonperforming loans to total
loans increased from 1.80% to 3.40%.
The increase in total nonperforming loans and other real estate owned of $7,583
is largely attributable to the deterioration in loan quality as well as a result
of the Company's efforts at improving risk identification and monitoring.
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, some 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)
2001 2000 1999 1998 1997
---- ---- ---- ---- ----
Contractual interest 831 673 272 135 77
Interest recognized 190 89 6 6 62
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. All of the company's securities at
December 31, 2001 were classified as available for sale.
Securities as a percentage of average interest-earning assets decreased to 21.7%
in 2001 versus 23.0% in 2000 and 25.2% in 1999. The 2000 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, 2000 and 1999, 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, 2000 and 1999. The dividend rate on the preferred stock is 2% in
excess of the prime rate as in effect from time to time. This stock was disposed
of in 2001.
The following tables present the carrying values and maturity distribution of
investment securities.
Carrying Value of Securities
(Dollars in thousands)
December 31
2001 2000 1999
---- ---- ----
U.S. Treasury and Federal agencies:
Available for sale $ 118,092 $ 157,245 $ 128,101
Held to maturity - 1,233 1,733
State and municipal obligations:
Available for sale 19,225 7,132 7,354
Held to maturity - 16,656 16,876
Equity securities:
Available for sale 802 2,798 2,775
Held to maturity - - -
Corporate securities:
Available for sale 9,196 - -
Held to maturity - - -
Mortgage-backed securities:
Available for sale 8,251 9,319 13,557
Held to maturity - 17 24
Total securities:
Available for sale 155,566 176,494 151,787
Held to maturity - 17,906 18,633
----------------- ----------------- -----------------
Total $ 155,566 $ 194,400 $ 170,420
Maturity Distribution of Securities
December 31, 2001
(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 $ 31,980 $ 75,209 $ 5,929 $ 4,974 $ - $ 118,092 $ 118,092
Held to maturity - - - - - - -
State and municipal obligations:
Available for sale 1,331 6,832 7,191 3,871 - 19,225 19,225
Held to maturity - - - - - - -
Corporate securities:
Available for sale - 9,196 - - - 9,196 9,196
Held to maturity - - - - - - -
Other securities:
Available for sale - - - - 9,053 9,053 9,053
Held to maturity - - - - - - -
Total securities:
Available for sale 33,311 91,237 13,120 8,845 9,053 155,566 155,566
Held to maturity - - - - - - -
--------- --------- ---------- -------- -------- ---------- ----------
Total $ 33,311 $ 91,237 $ 13,120 $ 8,845 $ 9,053 $ 155,566 $ 155,566
========= ========= ========== ======= ======== ========== ==========
Percent of total 21.41% 58.65% 8.43% 5.69% 5.82% 100.00%
Weighted average yield* 4.29% 4.69% 5.93% 6.08% 5.77% 4.86%
*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 $629,892 in 2001, an 10.8% decrease from 2000. Total
deposits averaged $706,171 in 2000, an increase of $57,576 or 8.9% over 1999.
Noninterest bearing deposits averaged 10.4% of total deposits in 2001, compared
to 10.3% in 2000 and 10.3% in 1999.
At December 31, 2001, deposits totaled $570,531, compared to $728,412 at
December 31, 2000, a decrease of $157,881, or 21.7%. The primary driver of the
decrease in deposits was the sale of two affiliate banking operations during
2001.
The table below provides information on the maturities of time deposits of
$100,000 or more at December 31, 2001.
Maturity of Time
Deposits of $100,000 or More
December 31, 2001
(In thousands)
Maturing 3 months or less $ 17,924
Maturing over 3 months through 6 months 25,489
Maturing over 6 months through 12 months 28,885
Maturing over 12 months 16,851
----------------
Total $ 89,149
================
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)
2001 2000 1999
Category Amount Rate (%) Amount Rate (%) Amount Rate (%)
Demand $ 65,795 0% $ 72,392 0% $ 66,483 0%
NOW and money
market accounts 178,501 3.21% 175,166 4.15% 150,165 3.65%
Savings 63,287 2.48% 63,850 3.02% 63,227 3.10%
Certificates of deposit
and other time 322,309 5.98% 394,763 5.90% 368,720 5.53%
----------- --------- ----------- --------- ----------- ---------
Total $ 629,892 4.22% $ 706,171 4.60% $ 648,595 4.29%
Capital
Stockholders' equity increased $4,045 in 2001 to $59.9 million or 8.4% of total
assets at December 31, 2001. This compares to $55.8 million, or 6.3% of total
assets at December 31, 2000. The primary reason for the 2001 increase in
stockholders' equity was the 2001 retained earnings of $2,319 as well as an
increase in unrealized gains on securities of $1,726 from ($869) on December 31,
2000, to $857 on December 31, 2001. This is a component of accumulated other
comprehensive income. Stockholders' equity increased $3,703 or 7.1% in 2000 from
$52.2 million at December 31, 1999 to $55.8 million for 2000. The primary reason
for the 2000 increase in stockholders' equity was the decrease in unrealized
loss on securities of $3,153 from ($4,022) on December 31, 1999, to ($869) on
December 31, 2000. The decrease was partially offset by the retention of net
earnings of $550 in 2000. 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. The adjustment resulted in an
increase of stockholders' equity of $857 at December 31, 2001 versus a reduction
of $869 at December 31, 2000. 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 requirements
and additional restrictions as more fully described in Note 20 to the
consolidated financial statements. During 2002, the Banks could, without prior
approval, declare dividends to the Company of approximately $3.2 million plus
any 2002 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.
Selected Capital Information
(Dollars in thousands)
December 31
2001 2000 Change
---- ---- ------
Stockholders' Equity $ 59,875 $ 55,830 $ 4,045
Qualifying capital securities of subsidiary
trust 19,646 18,872 774
Disallowed amounts of goodwill and other
intangibles (16,044) (22,856) 6,812
Unrealized loss (gains) on securities
available for sale (857) 869 (1,726)
---------------- ---------------- ----------------
Tier I capital $ 62,620 $ 52,715 $ 9,905
Tier II capital adjustments:
Qualifying capital securities of subsidiary
trust 9,104 9,878
Allowance for loan losses 5,830 7,298
---------------- ----------------
Total capital $ 77,554 $ 69,891
Total risk-weighted assets $ 466,409 $ 583,259
Ratios
Tier I capital to risk-weighted assets 13.4% 9.0%
Total capital to risk-weighted assets 16.6% 12.0%
Leverage at year-end 8.5% 6.1%
The capital ratios were dramatically improved in 2001 over 2000 as a result of
the sales of two affiliated banking operations during 2001. These sales were the
primary reason for the large decrease in Goodwill (6.8 million).
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.
The Company's principal source of funds to meet the cash requirements of the
holding company is dividends received from its subsidiaries and the cash flows
provided by intercompany tax payments. Additional funds have been provided in
prior years from the borrowings on the Company's credit facilities. The Company
expects the cash flows from its subsidiaries to be sufficient to meet its cash
requirements, however the Company has identified certain assets that could be
sold to generate additional funds as needed.
Cash, cash equivalents, Federal funds sold, and the securities portfolio
provides an important source of liquidity to the subsidiary banks. 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 $87.4 million as of December 31, 2001. 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 $122.2 million at December 31, 2001. These securities represent a
secondary source available to meet liquidity needs on a continuing basis.
To maintain a desired level of liquidity, the Banks have 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
15.6% and 14.5% of total deposits at December 31, 2001 and 2000. 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
2001 2000 1999
---- ---- ----
Total loans/total deposits............................... 81.3% 83.6% 80.2%
Total loans/total deposits less float.................... 82.4% 84.8% 81.0%
This analysis shows that the Company's loan to deposit ratio has increased in
both 1999 and 2000. The increases are primarily the result of funds moving from
lower yielding assets into higher yielding loans, principally in the West
Virginia markets. The change for 2001 was the result of the changes in loan and
deposit mix as a result of the disposal of two Affiliate Banks during 2001.
Information regarding short-term borrowings for the past three years is
presented below.
Short-Term Borrowings
(Dollars in thousands)
2001 2000 1999
---- ---- ----
Repurchase Agreements:
Balance at year end $ 5,520 $ 20,553 $ 21,282
Weighted average rate at year end 1.76% 6.67% 5.80%
Average balance during the year $ 7,518 $ 23,580 $ 8,640
Weighted average rate during the year 4.44% 6.40% 5.14%
Maximum month-end balance $ 11,135 $ 28,009 $ 21,282
Other short-term borrowings:
Balance at year end $ 30,795 $ 19,825 $ 11,225
Weighted average rate at year end 4.68% 6.62% 5.93%
Average balance during the year $ 27,257 $ 17,418 $ 12,184
Weighted average rate during the year 6.41% 6.58% 5.61%
Maximum month-end balance $ 32,071 $ 24,493 $ 15,788
Total short-term borrowings:
Balance at year end $ 36,315 $ 40,378 $ 32,507
Weighted average rate at year end 4.23% 6.65% 5.84%
Average balance during the year $ 34,775 $ 40,998 $ 20,824
Weighted average rate during the year 5.98% 6.48% 5.41%
Maximum month-end balance $ 43,206 $ 52,502 $ 32,507
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, 2001, the
cumulative amount of the Company's interest earning assets repricing during the
first year is lower than the total amount of its interest bearing liabilities
repricing during this period. This position, which is normally termed a negative
interest sensitivity gap, generally allows for enhanced net interest income
during periods of falling interest rates. This negative gap is within the
Company's internal policy guidelines and is not expected to impact significantly
the Company's net interest income during a period of rising interest rates.
The following table provides an analysis of the Company's interest rate
sensitivity at December 31, 2001.
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 $ 83,891 $ 126,401 $ 205,964 $ 42,485 $ 458,741
Investment securities 29,989 53,759 61,586 10,232 155,566
Interest-earning balances - - - - -
Federal funds sold 33,517 - - - 33,517
------------ ----------- ------------ ----------- ------------
Total earning assets $ 147,397 $ 180,160 $ 267,550 $ 52,717 $ 647,824
Sources of Funds
NOW, money market and
savings $ 63,891 $ 50,768 $ 75,378 $ 34,349 $ 224,386
Time deposits 64,923 160,030 63,276 - 288,229
Borrowings 15,027 14,456 7,309 12,523 49,315
------------ ----------- ------------ ----------- ------------
Total interest bearing liabilities $ 143,841 $ 225,254 $ 145,963 $ 46,872 $ 561,930
Interest Sensitivity Gap
For the period $ 3,556 $ (45,094) $ 121,587 $ 5,845 $ 85,894
Cumulative 3,556 (41,538) 80,049 85,894 -
Cumulative as a percent of
earning assets