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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
- ----- EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended December 31, 1997
OR
_____ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from to
Commission file number 0-20908
PREMIER FINANCIAL BANCORP, INC.
(Exact name of registrant as specified in its charter)
KENTUCKY 61-1206757
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
120 N. HAMILTON STREET
GEORGETOWN, KENTUCKY 40324
(Address of principal executive offices) (Zip Code)
Registrants' telephone number: (502) 863-7500
Securities registered pursuant to Section 12 (b) of the Act:
NONE
Securities registered pursuant to Section 12 (g) of the Act:
COMMON STOCK
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to
filing requirements for the past 90 days. Yes X No
--- ----
Indicate by check mark if the disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of the registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this 10-K or
any amendment to this Form 10-K. [ ]
The aggregate market value of voting stock held by non-affiliates of the
Registrant as of March 24, 1998 was $107,497,472. The number of shares
outstanding of the Registrant's Common Stock as of March 24, 1998 was
4,985,390.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the following documents are incorporated by reference into the
Form 10-K part indicated:
Document Form 10-K
-------- ---------
(1) Proxy statement for the 1998 annual meeting of Part III
shareholders
PART I
ITEM 1. DESCRIPTION OF BUSINESS
THE COMPANY
Premier is a multi-bank holding company that, as of March 24,
1998, operated fourteen banking offices in Kentucky and three banking offices
in Ohio through its seven bank subsidiaries (the "Affiliate Banks"), the
seventh of which was acquired on March 20, 1998. At December 31, 1997,
Premier had total consolidated assets of $425.4 million, total consolidated
deposits of $324.6 million and total consolidated shareholders' equity of
$47.8 million.
Premier began an acquisition program in 1993 and has acquired five
commercial banks and two branches of another commercial bank since that time.
Premier also owns nonbank subsidiaries that provide consumer lending and data
processing services.
Premier continues to explore opportunities to acquire banks,
savings associations, branches of either and nonbank companies as permitted
by the Bank Holding Company Act of 1956, as amended (the "BHC Act"). Premier
regularly reviews, analyzes and engages in discussions regarding possible
additional acquisitions. It is not presently known whether, or on what terms,
such discussions will result in further acquisitions, if any. Premier
generally does not announce an acquisition until after the execution of a
definitive agreement.
Premier is a legal entity separate and distinct from its Affiliate
Banks and nonbank subsidiaries. Accordingly, the right of Premier, and thus
the right of Premier's creditors and shareholders, to participate in any
distribution of the assets or earnings of any of the Affiliate Banks or
nonbank subsidiaries is necessarily subject to the prior claims of creditors
of such subsidiaries, except to the extent that claims of Premier, in its
capacity as a creditor, may be recognized. The principal sources of Premier's
revenues are dividends and fees from its Affiliate Banks and nonbank
subsidiaries. See "REGULATORY MATTERS -- Dividend Restrictions" for
discussion of the restrictions on the Affiliate Banks' ability to pay
dividends to Premier.
Premier was incorporated as a Kentucky corporation in 1991 and has
functioned as a bank holding company since its formation. Premier's principal
executive offices are located at 120 N. Hamilton Street, Georgetown, Kentucky
40324, and its telephone number is (502) 863-7500.
BUSINESS
GENERAL
Through the Banks and its data processing subsidiary, the Company
focuses on providing quality, community banking services to individuals and
small-to medium sized businesses primarily in non-urban areas. By seeking to
provide such banking services in non-urban areas, the Company believes that
it can minimize the competitive effect of larger financial institutions that
typically are focused on large metropolitan areas. Through its experiences in
acquiring its Banks, the Company has successfully developed and implemented a
strategy of joining together community banks that retain their commitment to
local orientation and direction, while having the benefit of the Company's
capital for growth and staff assistance to promote safety, soundness and
regulatory compliance. Each Bank is managed on a decentralized basis that
offers customers direct access to the Bank's president and other officers in
an environment conducive to friendly, informed and courteous service. This
decentralized approach also enables each Bank to offer local and timely
decision-making, and flexible and reasonable operating procedures and credit
policies limited only by a framework of centralized risk controls provided by
the Company to promote prudent banking practices. Each Bank maintains its
community orientation by, among other things, having selected members of its
community as members of its board of directors, who assist in the
introduction of prospective customers to the Bank and in the development or
modification of products and services to meet customer needs. As a result of
the development of personal banking relationships with its customers and the
convenience and service offered by the Banks, the Banks' lending and
investing activities are funded primarily by core deposits.
When appropriate and economically advantageous, the Company
centralizes certain of the Banks' back office, support and investment
functions in order to achieve consistency and cost efficiency in the delivery
of products and services. The Company centrally provides services such as
data processing, operations support, accounting, loan review and compliance
and internal auditing to the Banks to enhance their ability to compete
effectively. The Company also provides overall direction in the areas of
credit policy and administration, strategic planning, marketing, investment
portfolio management and other financial and administrative services. Each
Bank participates in product development by advising management of new
products and service needed by their customers and desirable changes to
existing products and services.
Each of the Banks provides a wide range of retail and commercial
banking services, including commercial, real estate, agricultural and
consumer lending; depository and funds transfer services; collections; safe
deposit boxes; cash management services; and other services tailored for both
individuals and businesses. The Georgetown Bank, the Eminence Bank, and the
Vanceburg Bank also offer limited trust services and act as executor,
administrator, trustee and in various other fiduciary capacities. Through
Premier Data Services, Inc., the Company's data processing subsidiary, the
Company currently provides centralized data processing services to three of
the Banks as well as two non-affiliated banks.
The Banks' residential mortgage lending activities consist
primarily of loans for purchasing personal residences, or loans for
commercial or consumer purposes secured by residential mortgages. Consumer
lending activities consist of traditional forms of financing for automobile
and personal loans.
The Banks' range of deposit services include checking accounts,
NOW accounts, savings accounts, money market accounts, club accounts,
individual retirement accounts, certificates of deposit and overdraft
protection. Deposits of the Banks are insured by the Bank Insurance Fund
administered by the FDIC.
County Finance, Inc., a subsidiary of the Vanceburg Bank, is a
consumer loan company that provides secured and unsecured loans to customers
who would generally not qualify, due to credit experience or other factors,
for loans at that Bank. The Company anticipates expanding the business of
this consumer loan company, both in markets served by the Company's other
Banks as well as potentially in other as yet unidentified market in Kentucky
where business prospects appear favorable.
COMPETITION
The Banks encounter strong competition both in making loans and
attracting deposits. The deregulation of the banking industry and the
widespread enactment of state laws that permit multi-bank holding companies
as well as the availability of nationwide interstate banking has created a
highly competitive environment for financial services providers. In one or
more aspects of its business, each Bank competes with other commercial banks,
savings and loan associations, credit unions, finance companies, mutual
funds, insurance companies, brokerage and investment banking companies and
other financial intermediaries operating in its market and elsewhere, many of
whom has substantially greater financial and managerial resources. With
respect to the Georgetown Bank and the Germantown Bank, primary competitors
include large bank holding companies having substantially greater resources
that offer certain services that these two Banks do not currently provide.
Each Bank seeks to minimize the competitive effect of larger financial
institutions through a community banking approach that emphasizes direct
customer access to the Bank's president and other officers in an environment
conducive to friendly, informed and courteous service.
Management believes that each Bank is well positioned to compete
successfully in its respective primary market area, although no assurances
can be given. Competition among financial institutions is based upon interest
rates offered on deposit accounts, interest rates charged on loans and other
credit and service charges, the quality and scope of the services rendered,
the convenience of the banking facilities and, in the case of loans to
commercial borrowers, relative lending limits. Management believes that the
commitment of its Banks to personal service, innovation and involvement in
their respective communities and primary market areas, as well as their
commitment to quality community banking service, are factors that contribute
to their competitiveness.
REGULATORY MATTERS
The following discussion sets forth certain elements of the
regulatory framework applicable to bank holding companies and their
subsidiaries and provides certain specific information relevant to Premier.
This regulatory framework is intended primarily for the protection of
depositors and the federal deposit insurance funds and not for the protection
of the holders of securities, including Premier Common Shares. To the extent
that the following information describes statutory or regulatory provisions,
it is qualified in its entirety by reference to those provisions. A change in
the statutes, regulations or regulatory policies applicable to Premier or its
subsidiaries may have a material effect on the business of Premier.
GENERAL - As a bank holding company, Premier is subject to regulation under
the Bank Holding Company Act ("BHC Act"), and to inspection, examination and
supervision by the Board of Governors of the Federal Reserve System ("Federal
Reserve"). Under the BHC Act, bank holding companies generally may not
acquire ownership or control of more than 5% of the voting shares or
substantially all the assets of any company, including a bank, without the
Federal Reserve's prior approval. Similarly, bank holding companies generally
may not acquire ownership or control of a savings association without the
prior approval of the Federal Reserve. Further, branching by the Affiliate
Banks is subject to the jurisdiction, and requires the approval, of each
Affiliate Bank's primary federal banking regulator and, if the Affiliate Bank
is a state-chartered bank, the appropriate state banking regulator. In
addition, bank holding companies generally may engage, directly or
indirectly, only in banking and such other activities as are determined by
the Federal Reserve to be closely related to banking.
Under the BHC Act, the Federal Reserve has the authority to
require a bank holding company to terminate any activity or relinquish
control of the nonbank subsidiary (other than a nonbank subsidiary of a bank)
upon the Federal Reserve's determination that such activity or control
constitutes a risk to the financial soundness and stability of any bank
subsidiary of the bank holding company. Premier and the Affiliate Banks are
subject to the Federal Reserve Act, which limits borrowings by Premier and
its nonbank subsidiaries from the Affiliate Banks and also limits various
other transactions between Premier and its nonbank subsidiaries with the
Affiliate Banks.
The five Affiliate Banks chartered in Kentucky are supervised,
regulated and examined by the Kentucky Department of Financial Institutions,
and the two Affiliate Banks chartered in Ohio are supervised, regulated and
examined by the Ohio Division of Financial Institutions. In addition, those
Affiliate Banks that are state banks and members of the Federal Reserve
System are supervised and regulated by the Federal Reserve, and those state
banks that are not members of the Federal Reserve System are supervised and
regulated by the Federal Deposit Insurance Corporation ("FDIC"). Each banking
regulator has the authority to issue cease-and-desist orders if it determines
that the activities of a bank regularly represent an unsafe and unsound
banking practice or a violation of law.
Both federal and state law extensively regulates various aspects
of the banking business, such as, for example, reserve and capital
requirements, truth-in-lending and truth-in-savings disclosure, equal credit
opportunity, fair credit reporting, trading in securities and other aspects
of banking operations. Premier, the Affiliate Banks and Premier's nonbank
subsidiaries are also affected by the fiscal and monetary policies of the
federal government and the Federal Reserve and by various other governmental
laws, regulations and requirements. Further, the earnings of Premier and
Affiliate Banks are affected by general economic conditions and prevailing
interest rates. Legislation and administrative actions affecting the banking
industry are frequently considered by the United States Congress, state
legislatures and various regulatory agencies. It is not possible to predict
with certainty whether such legislation or administrative actions will be
enacted or the extent to which the banking industry, in general, or Premier
and the Affiliate Banks, in particular, would be affected.
LIABILITY FOR BANK SUBSIDIARIES - The Federal Reserve has a policy to the
effect that a bank holding company is expected to act as a source of
financial and managerial strength to each of its subsidiary banks and to
maintain resources adequate to support each such subsidiary bank. This
support may be required at times when Premier may not have the resources to
provide it. In the event of a bank holding company's bankruptcy, any
commitment by the bank holding company to a federal bank regulatory agency to
maintain the capital of a subsidiary bank would be assumed by the bankruptcy
trustee and entitled to priority of payment.
Any depository institution insured by the FDIC may be held liable
for any loss incurred, or reasonably expected to be incurred, by the FDIC in
connection with (i) the default of a commonly controlled FDIC-insured
depository institution, or (ii) any assistance provided by the FDIC to a
commonly controlled FDIC-insured depository institution in danger of default.
"Default" is defined generally as the appointment of a conservator or
receiver and "in danger of default" is defined generally as the existence of
certain conditions indicating that a "default" is likely to occur in the
absence of regulatory assistance. In the event that such a default occurred
with respect to a bank, any loans to the bank from its parent holding company
will be subordinate in right of payment to payment of the bank's depositors
and certain of its other obligations.
CAPITAL REQUIREMENTS - Premier is subject to capital ratios, requirements and
guidelines imposed by the Federal Reserve, which are substantially similar to
the ratios, requirements and guidelines imposed by the Federal Reserve and
the FDIC on the banks within their respective jurisdictions. These capital
requirements establish higher capital standards for banks and bank holding
companies that assume greater credit risks. For this purpose, a bank's or
holding company's assets and certain specified off-balance sheet commitments
are assigned to four risk categories, each weighted differently based on the
level of credit risk that is ascribed to such assets or commitments. A bank's
or holding company's capital is divided into two tiers: "Tier I" capital,
which includes common shareholders' equity, noncumulative perpetual preferred
stock and related surplus (excluding auction rate issues), minority interests
in equity accounts of consolidated subsidiaries, less goodwill, certain
identifiable intangible assets and certain other assets; and "Tier 2"
capital, which includes, among other items, perpetual preferred stock not
meeting the Tier I definition, mandatory convertible securities, subordinated
debt and allowances for loan and lease losses, subject to certain
limitations, less certain required deductions.
Bank holding companies currently are required to maintain Tier I
and total capital (the sum of Tier 1 and Tier 2 capital) equal to at least 4%
and 8% of total risk-weighted assets, respectively. At December 31, 1997,
Premier met both requirements, with Tier I and total capital equal to 19.82%
and 25.43% of its total risk-weighted assets, respectively.
In addition to the risk-based capital guidelines, the Federal
Reserve requires bank holding companies to maintain a minimum "leverage
ratio" (Tier I capital to adjusted total assets) of 3%, if the holding
company has the highest regulatory ratings for risk-based capital purposes
and, accordingly, is required to maintain a minimum "leverage ratio" of 3%.
All other bank holding companies are required to maintain a leverage ratio of
3% plus at least 100 to 200 basis points. At December 31, 1997, Premier's
leverage ratio was 13.52%.
The foregoing capital requirements are minimum requirements. The
Federal Reserve may set capital requirements higher than the minimums
described above for holding companies whose circumstances warrant it. For
example, holding companies experiencing or anticipating significant growth
may be expected to maintain capital ratios, including tangible capital
positions, well above the minimum levels. The Federal Reserve has not,
however, imposed any such special capital requirements on Premier.
Additionally, the Federal Deposit Insurance Corporation
Improvement Act of 1991 ("FDICIA"), among other things, identifies five
capital categories for insured depository institutions (well capitalized,
adequately capitalized, undercapitalized, significantly undercapitalized and
critically undercapitalized) and requires the respective federal regulatory
agencies to implement systems for "prompt corrective action" for insured
depository institutions that do not meet minimum capital requirements within
such categories. FDICIA imposes progressively more restrictive constraints on
operations, management and capital distributions, depending on the category
in which an institution is classified. Failure to meet the capital guidelines
could also
subject a banking institution to capital raising requirements. An
"undercapitalized" bank must develop a capital restoration plan and its
parent holding company must guarantee the bank's compliance with the plan.
The liability of the parent holding company under any such guarantee is
limited to the lesser of 5% of the Bank's assets at the time it became
"undercapitalized" or the amount needed to comply with the plan. Furthermore,
in the event of the bankruptcy of the parent holding company, such guarantee
would take priority over the parent's general unsecured creditors. In
addition, FDICIA requires the various regulatory agencies to prescribe
certain non-capital standards for safety and executive compensation and
permits regulatory action against a financial institution that does not meet
such standards.
DIVIDEND RESTRICTIONS - Premier is dependent to a large extent on dividends
from its Affiliate Banks for its revenues. Various federal and state
regulatory provisions limit the amount of dividends the Affiliate Bank can
pay to Premier without regulatory approval. At December 31, 1997, $7.7
million of the total shareholders' equity of the Affiliate Banks was
available for payment of dividends to Premier without approval by the
applicable regulatory authority.
In addition, federal bank regulatory authorities have authority to
prohibit Premier's Affiliate Banks from engaging in an unsafe or unsound
practice in conducting their business. The payment of dividends, depending
upon the financial condition of the bank in question, could be deemed to
constitute such an unsafe or unsound practice. The ability of the Affiliate
Banks to pay dividends in the future is presently, and could be further,
influenced by bank regulatory policies and capital guidelines as well as each
Affiliate Bank's earnings and financial condition.
INTERSTATE BANKING - Under the Riegle-Neal Interstate Banking and Branching
Efficiency Act of 1994 (the "Riegle-Neal Act"), subject to certain
concentration limits, (i) bank holding companies, such a Premier, are
permitted to acquire banks and bank holding companies located in any state of
the United States, subject to certain restrictions, and (ii) banks are
permitted to acquire branch offices outside their home state by merging with
out-of-state banks, purchasing branches in other states or establishing de
novo branch offices in other states; provided that, in the case of any such
purchase or opening of individual branches, the host state has adopted
legislation "opting in" to the relevant provisions of the Riegle-Neal Act;
and provided further, that, in the case of a merger with a bank located in
another state, the host state has not adopted legislation "opting out" of the
relevant provisions of the Riegle-Neal Act.
NUMBER OF EMPLOYEES
The Company and its subsidiaries collectively had approximately
193.5 full-time equivalent employees as of March 24, 1998. Its executive
offices are located at 120 N. Hamilton Street, Georgetown, Kentucky,
telephone number (502) 863-7500 (facsimile number (502) 863-7503).
ITEM 2. PROPERTIES
The Company owns the banking office of the Georgetown Bank at 120
North Hamilton Street, Georgetown, Kentucky, at which the Company's executive
offices are located. In addition, the Company owns a building at 115 North
Hamilton Street, Georgetown, Kentucky which is being remodeled for future
offices, a branch banking office of the Georgetown Bank located at 103 Finley
Drive, Georgetown, Kentucky and property at 812 South Broadway, Georgetown
Kentucky where the Georgetown Bank has a temporary branch facility. In
Sharpsburg, Kentucky, the Company owns the main banking office of the
Sharpsburg bank at 648 Main Street and a building at 652 Main Street which is
being remodeled for future offices. The Company also owns property located at
237 Frankfort Street, Brooksville, Kentucky, which was purchased as a
possible future branch site for the Germantown Bank. Except as noted, each of
the Banks owns the real property and improvements on where their banking
activities are conducted.
The Vanceburg Bank, in addition to its main office at 400 Second
Street, Vanceburg, Kentucky has five branch offices in Lewis County,
Kentucky, including one leased facility. The Germantown Bank, with its main
office on Highway 10, Germantown, Kentucky, has no other offices in Bracken
County, Kentucky. The Georgetown Bank, in addition to its main office has two
branches in Scott County, Kentucky. The Sharpsburg Bank has, in addition to
its main office, one branch located in Bath County, Kentucky. The Eminence
Bank has its main office on Main Street, Eminence, Kentucky, and two branches
in Henry County, Kentucky. The Sabina Bank has its main office at 135 North
Howard Street, Sabina, Ohio, and two branches, one each located in Hardin and
Auglaize Counties, Ohio.
ITEM 3. LEGAL PROCEEDINGS
The Banks are respectively parties to legal actions that are
ordinary routine litigation incidental to a commercial banking business. In
management's opinion, the outcome of these matters, individually or in the
aggregate, will not have a material adverse impact on the results of
operations or financial position of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders,
through solicitation of proxies or otherwise during the fourth quarter of the
fiscal year covered by this report.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Prior to the Company's public offering in May, 1996, there had
been no established public trading market for the common shares of the
Company, with trading in common shares being limited and infrequent. During
the 120 days prior to the offering, the Company was aware of certain trading
transactions involving common shares at a sales price of $12.50 per share.
Sales of common shares may have occurred in private transactions at prices
that are not known to the Company. Further, these sale prices may not have
been representative of prices that might have been realized in trading
transactions in common shares following the offering. The Company's common
stock is listed on the NASDAQ under the symbol PFBI. At March 24, 1998, the
Company had approximately 608 record holders of its common shares.
The following table sets forth on a quarterly basis cash dividends
paid and the range of high and low sales prices on a per share basis during
the quarters indicated. Cash dividends paid per share shown below have been
adjusted retroactively to reflect prior stock splits effected in the form of
share dividends.
CASH SALES PRICE
DIVIDENDS PAID HIGH LOW
-------------- ----- ------
1995:
First Quarter $ 0.10 $ * $ *
Second Quarter 0.10 * *
Third Quarter 0.125 * *
Fourth Quarter 0.125 * *
------
$ 0.45
======
1996:
First Quarter $0.125 $ * $ *
Second Quarter 0.125 14.25 13.50
Third Quarter 0.125 14.00 12.25
Fourth Quarter 0.125 14.12 12.00
------
$0.50
======
CASH SALES PRICE
DIVIDENDS PAID HIGH LOW
-------------- ----- ------
1997:
First Quarter $ 0.125 $15.62 $13.50
Second Quarter 0.125 18.75 14.25
Third Quarter 0.15 21.25 17.00
Fourth Quarter 0.15 27.50 20.12
------
$ 0.55
======
1998:
First Quarter **$0.15 $25.75 $21.56
* No established public trading market.
** Dividend declared March 10, 1998 to shareholders of record as of
March 20, 1998, payable March 31, 1998.
The Company has paid consecutive quarterly cash dividends since
its organization. The Company's annual cash dividend has increased 7
consecutive years, from $0.12 per share in 1991 to $0.55 per share in 1997.
While the Company currently expects to declare comparable cash dividends in
the future, there can be no assurance that it will do so. The determination
whether to pay cash dividends and the amount of such dividends is at the
discretion of the Company's Board of Directors.
The payment of dividends by the Company depends largely upon the
ability of the Banks to declare and pay dividends to the Company because the
principal source of the Company's revenue will be dividends paid by the
Banks. At December 31, 1997, approximately $7.7 million was available for
payment as dividends from the Banks to the Company without the need for
approval from the FDIC or the state banking regulators. In considering the
payment of dividends, the Board of Directors will take into account the
Company's financial condition, results of operations, tax considerations,
costs of expansion, industry standards, economic conditions and need for
funds, as well as governmental policies and regulations applicable to the
Company and the Banks.
ITEM 6. SELECTED FINANCIAL DATA
The following table presents consolidated selected financial data for the
Company, it does not purport to be complete and is qualified in its entirety
by more detailed financial information and the audited consolidated financial
statements contained elsewhere in this annual report. The consolidated
selected financial data presented below has been retroactively adjusted to
reflect all prior stock splits effected in the form of share dividends and
has been restated to give the effect of acquisitions accounted for as a
pooling of interests.
AT OR FOR THE YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------------------
1997 1996 1995 1994 1993
-------- -------- ------- ------- -------
EARNINGS
Net interest income $ 16,100 $ 12,426 $ 7,697 $ 7,319 $ 6,974
Provision for loan losses 1,232 760 196 335 389
Non-interest income 4,367 1,721 1,018 870 936
Non-interest expense 11,022 8,075 5,943 5,464 5,304
Income taxes 2,605 1,588 146 567 582
Net income $ 5,608 $ 3,724 $ 2,430 $ 1,823 $ 1,635
FINANCIAL POSITION
Total assets $ 425,436 $ 329,127 $ 192,273 $ 154,653 $ 151,975
Loans, net of unearned
income 283,390 242,625 137,550 106,431 97,521
Allowance for loan losses 3,144 2,854 1,997 1,172 1,192
Goodwill and other intangibles 7,262 5,490 248 8 16
Securities 69,211 52,660 33,919 30,619 35,582
Deposits 324,554 267,208 168,170 136,613 137,538
Other borrowings 20,897 14,977 1,502 0 0
Debt 28,750 0 5,000 1,500 0
Stockholders equity 47,797 44,625 15,603 13,617 12,767
SHARE DATA
Net income - basic $ 1.20 $ 0.99 $ 1.02 $ 0.77 $ 0.69
Net income - diluted 1.19 0.99 1.02 0.77 0.69
Book value 10.20 9.52 6.54 5.77 5.42
Cash dividend 0.55 0.50 0.45 0.36 0.28
RATIOS
Return on average assets 1.37% 1.42% 1.48% 1.19% 1.06%
Return on average equity 12.17% 11.39% 16.49% 13.70% 13.02%
Dividend payout 44.38% 53.22% 41.01% 33.60% 36.24%
Stockholders' equity to total
assets at period-end 11.23% 13.56% 8.12% 8.80% 8.40%
Average stockholders' equity
to average total assets 11.22% 12.48% 8.90% 8.69% 8.14%
CAPITAL RATIOS
Equity to assets 11.23% 13.56% 8.12% 8.80% 8.40%
Leverage ratio 13.52% 12.11% 8.13% 8.84% 8.39%
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
This discussion presents Management's analysis of the primary factors
affecting Premier Financial Bancorp, Inc.'s (the "Company" or "Premier")
performance and financial condition. It should be read in conjunction with
the accompanying audited consolidated financial statements beginning on page
36 of this report. Unless otherwise noted, all amounts and per share data
have been restated to give the effect of acquisitions accounted for as a
pooling of interests. All dollar amounts (except per share data) are
presented in thousands unless otherwise noted.
FORWARD-LOOKING STATEMENTS
Management's discussion and analysis contains forward-looking statements that
are provided to assist in the understanding of anticipated future financial
performance. However, such performance involves risks and uncertainties, and
there are certain important factors that may cause actual results to differ
materially from those anticipated. These important factors include, but are
not limited to, economic conditions (both generally and more specifically in
the markets in which Premier operates), competition for Premier's customers
from other providers of financial services, government legislation and
regulation (which changes from time to time), changes in interest rates,
Premier's ability to originate quality loans and attract and retain deposits,
the impact of Premier's rapid growth, Premier's ability to control costs, and
new accounting pronouncements, all of which are difficult to predict and many
of which are beyond the control of Premier.
OVERVIEW
In 1997, Premier continued to pursue its strategic plan to build a network of
independently managed community banks into a strongly capitalized, risk
controlled bank holding company with high quality earnings and shareholder
liquidity. Premier continued to post record results in three key financial
areas: earnings, total assets and shareholders' equity. For 1997, net income
rose 50.6% to $5,608 from $3,723, as restated, in 1996; total assets
increased to $425,436 from the $292,565 reported in 1996, and shareholders'
equity increased to $47,797 from the $39,863 reported in 1996.
During 1997, a number of larger financial institutions announced plans to
divest of branches. In order to take advantage of these potential
opportunities and to provide additional capital for other expansion
opportunities, Premier issued $28.75 million of capital securities of
subsidiary trust (capital securities) in June. A portion of these funds were
used in December in connection with the purchase of two branches with $23.3
million in deposits and the balance will be used to complete the acquisition
of three branches with total deposits of $148 million expected to be
completed in June 1998. In the third and fourth quarters of 1997, Premier
invested the proceeds of the capital securities in temporary investments
realizing gross investment gains of $2.2 million which were added to
earnings. At year end 1997, Premier had Tier I capital totaling $56.5 million
which will provide sufficient capital to complete the proposed acquisitions
as well as additional acquisitions which may become available.
Highlights of Premier's 1997 performance and financial condition include:
- Return on Average Assets of 1.37%
- Return on Average Equity of 12.17%
- Net Interest Margin 4.32%
- Efficiency Ratio 57.3%
- Allowance for Loan Losses to Non-Performing Loans 167%
ACQUISITIONS
Premier's acquisition philosophy is to seek community bank candidates in
primarily non-urban areas that can become a part of Premier on a non-dilutive
basis within a two year timeframe. In evaluating acquisition opportunities,
Premier conducts a due diligence review to determine both risks and earnings
potential. Desirable candidates have an established base of community
involvement, strong local directors, a history of earnings and readily
identifiable asset risks. Acquisition transactions are structured to make a
fair return on investment while meeting the needs of the shareholders of
banks joining Premier.
In 1997, Premier completed one acquisition and also acquired the deposits and
banking facilities of two branches. On November, 13, 1997, Premier acquired
The Sabina Bank, Sabina, Ohio, in a share exchange accounted for as a pooling
of interests.
On December 11, 1997, two branch offices of the Fifth Third Bank of Western
Ohio located in Waynesfield and Ada, Ohio, were acquired for cash and
accounted for as a purchase.
Also in 1997, Premier announced its intention to acquire Ohio River Bank,
Ironton, Ohio, in the first quarter of 1998, in a business combination
anticipated to be accounted for as a pooling of interests and also announced
its planned purchase of three branch offices of Banc One Corporation located
in Madison, Phillippi and Van, West Virginia, expected to be completed in the
second quarter of 1998.
In 1996, Premier completed one acquisition. On July 1, 1996, Farmers Deposit
Bancorp of Eminence, Kentucky, and its wholly owned subsidiary, Farmers
Deposit Bank, were acquired in a cash transaction that was accounted for as a
purchase.
In 1995, Premier completed two acquisitions. On March 24, 1995, the Company
acquired Georgetown Bancorp, Inc. and its wholly owned subsidiary, Georgetown
Bank & Trust, Georgetown, Kentucky, in a business combination accounted for
as a pooling of interests.
On October 31, 1995, Premier acquired all of the outstanding shares of
Citizens Bank of Sharpsburg, Kentucky, for cash. This combination was
accounted for as a purchase.
The significant financial data relative to these acquisitions is set forth in
Note 2 to the financial statements.
CAPITAL SECURITIES OF SUBSIDIARY TRUST
On June 9, 1997, Premier completed its public offering of $28.75 million of
mandatorily redeemable capital securities of a subsidiary trust (capital
securities). These securities qualify as Tier I capital up to an amount not
to exceed 25% of Tier I capital and the portion that exceeds the 25%
limitation qualifies as Tier 2 capital. The issuance of these securities and
resultant increase in capital has allowed the Company to pursue larger
financial institutions as potential acquisitions and to bid for branches
offered for sale by other financial institutions.
RESULTS OF OPERATIONS
Earnings Summary
Premier recorded net income for 1997 of $5,608, versus $3,723 and $2,431,
respectively, in 1996 and 1995. Basic earnings per common share were $1.20 in
1997 compared to $.99 in 1996 and $1.02 in 1995. Net income increased $1,885
or 50.6% in 1997 compared to 1996. The primary factors contributing to the
higher earnings in 1997 were a 29.6% increase in net interest income from
$12,426 in 1996 to $16,100 in 1997 and an increase in the gain on the sale of
investment securities of $2,202. Offsetting these increases was an increase
in the provision for loan losses from $760 in 1996 to $1,232 in 1997, an
increase in noninterest expense of $2,947 from $8,075 in 1996 to $11,022 in
1997 and an increase of $1,016 in income taxes from $1,589 in 1996 to $2,605
in 1997. Fully diluted earnings per share increased 20.2% in 1997 compared to
1996 despite the increase in the weighted average number of shares from 3.8
million in 1996 to 4.7 million in 1997.
Net income of $3,723 in 1996 represented a 53.2% increase over the 1995
amount of $2,431. Net interest income increased 61.4% to $12,426 in 1996
versus $7,697 in 1995. Offsetting this increase was a $564 increase in the
provision for loan losses and a $1,443 increase in income taxes from $146 in
1995 to $1,589 in 1996.
In 1995, income taxes were substantially reduced as a result of the
elimination of a $504 valuation allowance related to the deferred tax assets
at Georgetown Bancorp, Inc. Per share earnings in 1996 of $0.99 were down
$0.03 or 2.9% from the $1.02 recorded in 1995. The reduced level of per share
earnings was primarily attributable to the increase in outstanding shares of
2,300,000 as a result of the Company's initial public offering in May of 1996.
NET INTEREST INCOME
Premier's primary source of revenue is its net interest income, which is the
difference between the interest received on its earning assets and the
interest paid on the funds acquired to support those assets. Loans made to
businesses and individuals are the primary interest earning assets, followed
by investment securities and federal funds sold in the inter-bank market.
Deposits are the primary interest bearing liabilities used to support the
interest earning assets. The level of net interest income is affected by both
the balances and mix of interest earning assets and interest bearing
liabilities, the changes in their corresponding yields and costs, by the
volume of interest earning assets funded by noninterest bearing deposits, and
the level of capital. Premier's long term objective is to manage this income
to provide the largest possible amount of income while balancing interest
rate, credit and liquidity risks.
Nontaxable income from loans and investment securities is presented on a
tax-equivalent basis whereby income exempt from tax has been adjusted upward
by an amount equivalent to the prevailing federal income taxes that would
have been paid if the income had been fully taxable. The discussion of
factors influencing net interest income that follows is based on taxable
equivalent data. In each of the three years, this adjustment is based on an
assumed federal income tax rate of 34%.
SUMMARY OF NET INTEREST INCOME.
(Dollars in thousands on a taxable equivalent basis)
1997 1996 1995
--------- --------- ---------
Interest income.................. $ 33,995 $ 22,401 $ 13,990
Tax equivalent adjustment........ 516 420 279
--------- --------- ---------
Interest income.............. 34,511 22,821 14,269
Interest expense................. 17,894 9,975 6,294
--------- --------- ---------
Net interest income.......... $ 16,617 $ 12,846 $ 7,975
========= ========= =========
The table below shows, for the three year period ended December 31, 1997, the
average distribution of assets, liabilities and the interest earned or paid
on those items, together with the level of shareholders' equity, as well as
Premier's net interest spread and net interest margin on interest earning
assets (net interest income divided by average earning assets). In 1997, tax
equivalent net interest income increased to $16,617 from $12,846 in 1996, an
increase of $3,771 or 29.4%. This increase was due to an increase of $141,028
or 57.8% in average earning assets and an increase of $130,897 or 65.7% in
average interest bearing liabilities. The yield on earning assets in 1997 of
8.96% was 39 basis points lower than the 9.35% earned in 1996 while the cost
of interest bearing liabilities increased 41 basis points from 5.01% in 1996
to 5.42% in 1997. Consequently, Premier's net interest spread decreased from
4.34% in 1996 to 3.54% in 1997 and the net interest margin decreased from
5.26% in 1996 to 4.32% in 1997. The decrease in net interest spread and net
interest margin is primarily attributable to the issuance of $28.75 million
of mandatorily redeemable capital securities (capital securities) at an
interest rate of 9.75% and the Company's implementation of an arbitrage
investment strategy as described below.
In an effort to minimize the adverse impact on net income until a permanent
investment can be made of the funds from the issuance of the capital
securities, the Company initiated an investment strategy at the end of the
second quarter of 1997 of selling approximately $110 million of short-term
(60 days) repurchase agreements and investing the proceeds in 2 to 5 year
U.S. Treasury and agency securities with a weighted average interest rate of
approximately 1% higher than the weighted average rate paid on the repurchase
agreements. The Company's policy is to unwind its position whenever the
spread between the weighted average interest rate of the repurchase
agreements and the weighted average rate on the underlying securities falls
below 50 basis points. During the third quarter of 1997 and again during the
fourth quarter of 1997, the spread fell below 50 basis points, the Company
unwound its positions and recognized net gains of $2.2 million on the sale of
the underlying securities in the arbitrage portfolio. Although the Company's
investment strategy to minimize the adverse impact on net income has been
successful, the Company's net interest spread and net interest margin have
been significantly reduced by its implementation. Excluding the effects of
the capital securities and the Company's investment strategy, net interest
spread would have been 4.28% in 1997 compared to 4.34% in 1996 and net
interest margin would have been 5.20% in 1997 versus the 5.26% achieved in
1996.
The net interest spread declined 12 basis points from 4.46% in 1995 to 4.34%
in 1996, while the net interest margin, which measure net interest income as
a percent of average earning assets, increased from 5.24% in 1995 to 5.26% in
1996. The increase in net interest margin is attributable to the higher
levels of noninterest bearing deposits and capital supporting interest
earning assets which rose from 22.5% in 1995 to 24.6% in 1996.
The following table presents average balances and interest rates for the three
year period ended December 31, 1997.
AVERAGE CONSOLIDATED BALANCE SHEETS AND NET INTEREST
ANALYSIS
(Dollars in thousands.)
1997 1996 1995
------------------------- ---------------------------- ---------------------------
AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE INTEREST RATE BALANCE INTEREST RATE BALANCE INTEREST RATE
------------------------- ---------------------------- ---------------------------
ASSETS:
Interest earning assets
U.S. Treasury and federal
agency securities $ 85,670 $ 5,288 6.17% $ 30,559 $ 1,772 5.80% $ 21,038 $ 1,186 5.64%
States and municipal
obligations(1) 18,027 1,455 8.07 12,783 1,017 7.96 8,088 667 8.25
Other securities (1) 5,155 507 9.84 3,716 395 10.63 2,556 280 10.95
-------- ------- ----- --------- ------- ----- -------- ------- -----
Total investment
securities $108,852 $ 7,250 6.66 $ 47,058 $ 3,184 6.77 $ 31,682 $ 2,133 6.73
Federal funds sold 16,694 937 5.61 7,662 415 5.42 5,222 292 5.59
Interest-bearing deposits
with banks 0 0 0 376 19 5.05 436 34 7.80
Loans, net of unearned
income (3) (4)
Commercial 111,448 11,260 10.10 88,161 8,923 10.12 59,650 6,138 10.29
Real estate mortgage 110,519 10,778 9.75 72,026 7,135 9.91 33,918 3,436 10.13
Installment 37,545 4,286 11.42 28,747 3,145 10.94 21,428 2,236 10.43
-------- ------- ----- --------- ------- ----- -------- ------- -----
Total loans $259,512 $26,324 10.14 $ 188,934 19,203 10.16 $114,996 $11,810 10.27
Total interest-earning assets $385,058 $34,511 8.96% $ 244,030 $22,821 9.35% $152,336 $14,269 9.37%
Allowance for loan losses (2,975) (2,427) (1,299)
Cash and due from banks 8,961 7,431 5,744
Premises and equipment 5,451 3,526 2,341
Other assets 14,200 8,921 4,800
-------- ---------- --------
Total assets $410,695 $ 261,481 $163,922
LIABILITIES:
Interest bearing deposits:
NOW and money market $ 45,135 $ 1,521 3.37% $ 32,532 $ 1,073 3.30% $ 19,828 $ 510 2.57
Savings 29,499 869 2.95 23,598 682 2.89 19,302 547 2.83
Certificates of deposit
and other time deposits 175,302 10,342 5.90 133,356 7,630 5.72 84,486 4,877 5.77
-------- ------- ----- --------- ------- ----- -------- ------- ----
Total interest-
bearing deposits $249,936 $12,732 5.09 $ 189,486 $ 9,385 4.95 $123,616 $ 5,934 4.80
Other borrowings 49,358 2,721 5.51 3,983 214 5.37 994 63 6.34
FHLB advances 14,301 810 5.66 3,660 208 5.68 713 44 6.17
Debt 16,460 1,631 9.91 2,029 168 8.28 2,891 253 8.75
-------- ------- ----- --------- ------- ----- -------- ------- ----
Total interest-bearing
liabilities $330,055 $17,894 5.42% $ 199,158 $ 9,975 5.01% $128,214 $ 6,294 4.91%
Non-interest bearing demand
deposits 31,263 27,250 19,617
Other liabilities 3,279 2,373 1,372
-------- --------- --------
Total liabilities $364,597 $ 228,781 $149,203
SHAREHOLDERS' EQUITY: 46,098 32,700 14,719
-------- --------- --------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $410,695 $ 261,481 $163,922
NET INTEREST INCOME (1) 16,617 12,846 7,975
NET INTEREST SPREAD (1) 3.54% 4.34% 4.46%
NET INTEREST MARGIN (1) 4.32% 5.26% 5.24%
(1) Taxable - equivalent yields are calculated assuming a 34% federal income
tax rate.
(2) Yields are calculated on historical cost except for yields on marketable
equity securities which are calculated using fair value.
(3) Includes loan fees, immaterial in amount, in both interest income and
the calculation of yield on loans.
(4) Includes loans on nonaccrual status.
The accompanying analysis of changes in net interest income in the following
table shows the relationship of the volume and rate portions of these changes
in 1997 and 1996.
ANALYSIS OF CHANGES IN NET
INTEREST INCOME
(Dollars in thousands on a taxable equivalent basis)
1997 VS. 1996 1996 VS. 1995
INCREASE (DECREASE) DUE INCREASE (DECREASE) DUE
TO CHANGE IN TO CHANGE IN
---------------------------- ----------------------------
VOLUME RATE NET CHANGE VOLUME RATE NET CHANGE
Interest Income:
Loans $ 7,166 $ (45) $ 7,121 $ 7,520 $ (127) $ 7,393
Investment securities 4,144 (78) 4,066 1,038 14 1,052
Federal funds sold 506 16 522 133 (10) 123
Deposits with banks (19) (19) (4) (12) (16)
-------- ------ -------- ------- ------ -------
Total interest income $ 11,797 $ (107) $ 11,690 $ 8,687 $ (135) $ 8,552
Interest Expense:
Deposits -
NOW and money market $ 424 $ 24 $ 448 $ 390 $ 173 $ 563
Savings 173 14 187 124 11 135
Certificates of deposit 2,467 245 2,712 2,796 (43) 2,753
Other borrowings 2,501 6 2,507 159 (8) 151
FHLB borrowings 603 (1) 602 168 (4) 164
Debt 1,424 39 1,463 (72) (13) (85)
-------- ------ -------- ------- ------ -------
Total interest expense $ 7,592 $ 327 $ 7,919 $ 3,565 $ 116 $ 3,681
Net interest income $ 4,205 $ (434) $ 3,771 $ 5,122 $ (251) $ 4,871
PROVISION AND ALLOWANCE FOR POSSIBLE LOAN LOSSES
The company maintains its allowance for possible loan losses (allowance) at a
level that is considered sufficient to absorb potential losses in the loan
portfolio. The allowance is increased by the provision for possible loan
losses as well as recoveries of previously charged-off loans, and is
decreased by loan charge-offs. The provision is the necessary charge to
expense to provide for current loan losses and to maintain the allowance at
an adequate level commensurate with management's evaluation of the risks
inherent in the loan portfolio. Various factors are taken into consideration
when the Company determines the amount of the provision and the adequacy of
the allowance. Some of the factors include:
- Past due and nonperforming assets;
- Specific internal analyses of loans requiring special attention;
- The current level of regulatory classified and criticized assets
and the associated risk factors with each;
- Examinations and reviews by the Company's independent accountants
and internal loan review personnel; and
- Examinations of the loan portfolio by federal and state regulatory
agencies.
The data collected from these sources is evaluated with regard to current
national and local economic trends, prior loss history, underlying collateral
values, credit concentrations, and industry risks. An estimate of potential
future loss on specific loans is developed in conjunction with an overall
risk evaluation of the total loan portfolio.
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,
---------------------------------------------------------
1997 1996 1995 1994 1993
-------- -------- -------- -------- -------
Balance at beginning of year $ 2,854 $ 1,996 $ 1,172 $ 1,192 $ 1,349
Balance of allowance for loan losses of
acquired subsidiaries at acquisition date 0 812 803 0 0
Amounts charged off:
Commercial 532 250 74 312 372
Real estate mortgage 139 68 19 5 47
Consumer 513 619 180 200 279
-------- -------- -------- -------- -------
Total loans charged off $ 1,184 $ 937 $ 273 $ 517 $ 698
Recoveries on amounts previously charged off:
Commercial 48 89 32 94 76
Real estate mortgage 0 4 2 5 64
Consumer 194 130 64 63 12
-------- -------- -------- -------- -------
Total recoveries 242 223 98 $ 162 $ 152
Net charge-offs 942 714 175 355 546
Provision for loan losses 1,232 760 196 335 389
-------- -------- -------- -------- -------
Balance at end of year $ 3,144 $ 2,854 $ 1,996 $ 1,172 $ 1,192
Total loans, net of unearned income:
Average 259,512 188,934 114,996 102,515 99,464
At December 31 283,390 242,625 137,550 106,431 97,521
As a percentage of average loans:
Net charge-offs .36% .38% .15% .35% .55%
Provision for possible loan losses .47% .40% .17% .33% .39%
Allowance as a percentage of year-end net loans 1.11% 1.18% 1.45% 1.10% 1.22%
Allowance as a multiple of net charge-offs 3 4 11 3 2
The provision for possible loan losses for 1997 was $1,232 compared to $760
in 1996, an increase of $472. This increase resulted from loan growth, the
inclusion of Farmers Deposit Bancorp for a full year, and provisions made for
possible loan losses for certain indirect consumer loans at the consumer
finance subsidiary operated by Citizens Deposit Bank. In 1997, net
charge-offs were $942 compared to $714 in 1996, an increase of $228. This
increase was primarily attributable to the charge-off of loans acquired in
the acquisition of Farmers Deposit Bancorp. At December 31, 1997, Premier's
allowance for possible loan losses was 1.11% of period-end loans compared to
1.18% at December 31, 1996.
Net charge-offs to average loans were .36% for the year 1997 compared to .38%
for the year 1996. At December 31, 1997, Premier's allowance for possible
loan losses totaled $3,144, representing an increase of $290 over the amount
reported at December 31, 1996. The allowance for possible loan losses was
167% of nonperforming loans on December 31, 1997, compared to 155% at
December 31, 1996. At year end 1997, nonperforming loans represented .50% of
total outstanding loans, down from .56% on December 31, 1996.
The provision for possible loan losses for 1996 was $760, an increase of $564
over the $196 in 1995. Net charge-offs in 1996 were $714, versus $175
charged-off in 1995.
The following table sets forth an allocation for the allowance for possible
loan losses by category of loan and a percentage distribution of the
allowance allocation. In making the allocation, consideration was given to
such factors as management's evaluation of risk in each category, current
economic conditions and charge-off experience. An allocation for the
allowance for possible loan losses is an estimate of the portion of the
allowance that will be used to cover future charge-offs in each major loan
category, but it does not preclude any portion of the allowance allocated to
one type of loan being used to absorb losses of another loan type.
ALLOCATION OF ALLOWANCE FOR LOAN LOSSES
(Dollars in thousands)
At December 31,
---------------------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
Amount % Amount % Amount % Amount % Amount %
---------------- ---------------- -------------- --------------- --------------
Commercial $1,186 37.7% $1,038 36.4% $ 675 33.8% $ 560 47.8% $ 566 47.5%
Real estate 550 17.5 1,097 38.4 575 28.8 175 14.9 159 13.3
mortgage
Consumer 852 27.1 626 21.9 573 28.7 292 24.9 304 25.5
Unallocated 556 17.7 93 3.3 173 8.7 145 12.4 163 13.7
------ ---- ------ ------ ------ ----- ------ ------ ------ ----
Total $3,144 100.0% $2,854 100.0% $1,996 100.0% $1,172 100.0% $1,192 100.0%
NONINTEREST INCOME AND EXPENSES
Noninterest income is a significant component of the Company's total income.
The Company continues to develop and enhance existing products and to create
new products in order to augment fee income as trends in the financial
services industry and the economic environment continue to put pressure on
the Company's ability to increase its net interest income. Noninterest income
includes deposit service charges, fees from data processing and trust
services, fees and commissions from many other corporate and retail products
and gains and losses from the sale of investment securities.
The discussion that follows considers the impact for comparative purposes of
the acquisition of Farmers Deposit Bancorp (Farmers Deposit) on July 1, 1996.
Since the acquisition was accounted for as a purchase, only amounts from that
date through December 31, 1996 are included in the consolidated financial
statements for 1996, whereas the 1997 consolidated financial statements
include Farmers Deposit for the full year.
Total fees and other income increased $444 or 25.8% in 1997 to $2,163 from
$1,719 in 1996. Excluding Farmers Deposit, fees and other income increased
$164 or 11.3%. All categories increased in 1997, with service charges on
deposit accounts increasing 15.4%, insurance commissions increasing 32.4% and
all other income increasing 46.5%.
Total fees and other income in 1996 increased $695 or 67.9% over 1995.
Excluding Farmers Deposit, the increase would have been $427 for a 41.7%
increase. In 1996, service charges on deposit accounts increased 54.0%,
insurance commissions increased 88.4% and other income increased 94.8% over
the amounts recorded in 1995.
Investment securities gains in 1997 were $2,204 versus $1 in 1996 and losses
in 1995 of $6. The significant increase in 1997 was due to the unwinding of
an arbitrage investment portfolio established to maximize the utilization of
the proceeds received from the issuance of capital securities.
Noninterest expenses increased $2,947 or 36.5% in 1997, from $8,075 in 1996
to $11,022 in 1997, and increased $2,132 or 35.9% in 1996 from $5,943 in
1995. Excluding Farmers Deposit, noninterest expense increased 25.6% in 1997
and 16.3% in 1996.
Salaries and employee benefits, the largest component of noninterest expense,
increased 27.8% in 1997 and 43.6% in 1996. Excluding Farmers Deposit, the
increases were 16.7% in 1997 and 19.4% in 1996. The increases include salary
increases and reflect increases in the number of full time equivalent
employees from 111 at December 31, 1995 to 150 at December 31, 1996 and 161
at December 31, 1997, due to acquisitions and expansion of the Company's
business activity.
Occupancy and equipment expense for 1997 of $1,421 was $224 or 18.7% higher
than the $1,197 for 1996. Excluding Farmers Deposit, the increase was $122 or
11.2%. The increase in 1996 was $208 or 21.0% from $989 in 1995. The increase
in 1996 and 1997 are primarily attributable to the expansion in the number of
banking locations from 9 at December 31, 1995 up to 16 at December 31, 1997.
Other noninterest expense, which is the second largest category, increased
$540 or 30.6% in 1997 and $384 or 27.9% in 1996. Excluding Farmers Deposit,
the increase in 1997 would have been 36.0% and the increase in 1996 would
have been 2.7%.
The Company incurred expenses relating to the acquisition of The Sabina Bank
of $467 in 1997. No acquisition expenses were incurred in 1996, while
acquisition expenses of $110 were incurred in 1995. Expenses related to
acquisitions are charged to expense for acquisitions accounted for as pooling
of interests while expense related to acquisitions accounted for as purchases
are capitalized as a component of the purchase price and ultimately increase
the amount of goodwill included with the purchase.
Goodwill amortization increased in 1997 primarily due to the inclusion of
Farmers Deposit for the full year versus half the year in 1996.
The Company continually seeks to develop fees and other income for services
provided while holding operating expenses to the minimum amount required to
provide quality service. In 1997, total net noninterest expenses (excluding
investment securities gains and acquisition expenses) as a percent of average
total assets were reduced to 2.04% from 2.43% in 1996 and 2.93% in 1995.
The following table is a summary of non-interest income and expense for the
three year period indicated.
NON-INTEREST INCOME AND EXPENSE
(Dollars in thousands)
INCREASE INCREASE
(DECREASE) (DECREASE)
1997 VS. 1996 VS.
1997 1996 1996 1996 1995 1995
------- ------ ------ ------ ------ ------
Non-Interest Income:
Service charges on deposit accounts $ 1,155 $1,001 $ 154 $1,001 $ 650 $ 351
Insurance income 409 309 100 309 164 145
Other 599 409 190 409 210 199
------- ------ ------ ------ ------ ------
Total fees and other income $ 2,163 $1,719 $ 444 $1,719 $1,024 $ 695
Investment securities gains (losses) 2,204 1 2,203 2 (6) 8
------- ------ ------ ------ ------- ------
Total non-interest income $ 4,367 $1,720 $2,647 $1,721 $1,018 $ 703
Non-Interest Expense:
Salaries and employee benefits 5,587 4,372 1,215 4,372 3,044 1,328
Occupancy and equipment expense 1,421 1,197 224 1,197 989 208
Professional fees 472 259 213 259 209 50
Taxes, other than payroll, property
and income 387 288 99 288 210 78
Acquisition related expenses 467 0 467 0 110 (110)
Amortization of intangibles 386 197 189 197 3 194
Other expenses 2,302 1,762 540 1,762 1,378 384
------- ------ ------ ------ ------ ------
Total non-interest expenses $11,022 $8,075 $2,947 $8,075 $5,943 $2,132
Net non-interest expenses as a percent
of average assets 1.62% 2.43% 2.43% 3.00%
Net non-interest expenses as a percent
of average assets (excluding
investment securities gains and
losses and acquisition related
expenses) 2.04% 2.43% 2.43% 2.93%
INCOME TAXES
Premier's provision for income taxes was $2,605 in 1997, which represented
31.7% of pre-tax income versus $1,589 or 29.9% of pre-tax income in 1996. The
increase is primarily due to the lower percentage of tax-exempt income in
relation to total pre-tax income and the increase in nondeductible
amortization expense. Income tax expense for 1995 was $146 or 5.7% of pre-tax
income. The lower income tax for 1995 was attributable primarily to the
elimination of the valuation allowance of $504 for deferred tax assets at
Georgetown Bank & Trust.
FINANCIAL CONDITION
LENDING ACTIVITIES
Loans are the Company's primary use of financial resources and represent the
largest component of earning assets. The Company's loans are made
predominantly within the Banks' market areas and the portfolio is
diversified. Credit risk is inherent in each financial institution's loan and
investment portfolio. In an effort to minimize credit risk, the Company
utilizes a credit administration network, including specific lending
authorities for each loan officer, a system of loan committees to review and
approve loans, and a loan review and credit quality rating system. This
network assists in the evaluation of the quality of new loans and in the
identification of problem or potential problem credits and provides
information to aid management in determining the adequacy of the allowance
for possible loan losses.
Total loans, net of unearned income, averaged $259,512 in 1997 compared with
$188,934 in 1996. At year end 1997, loans net of unearned income totaled
$283,390 compared to $242,625 at December 31, 1996, an increase of $40,765 or
16.8%.
The following table presents a summary of the Company's loan portfolio by
category for each of the last five years. Other than the categories noted,
there is no concentration of loans in any industry greater than 5% in the
portfolio. The Company has no foreign loans or highly leveraged transactions
in its loan portfolio.
LOAN PORTFOLIO COMPOSITION
LOANS OUTSTANDING
(Dollars in thousands)
December 31
-------------------------------------------------------------------------------------------------
1997 % 1996 % 1995 % 1994 % 1993 %
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Commercial, secured by real
estate $ 66,893 23.41% $ 60,018 24.52% $ 39,568 28.57% $ 30,643 28.55% $ 29,274 29.46%
Commercial, other 45,024 15.75 35,393 14.46 19,702 14.23 18,850 17.56 16,587 16.69
Real estate construction 7,857 2.75 4,138 1.69 2,377 1.72 1,822 1.70 881 .89
Real estate mortgage 93,789 32.82 87,335 35.69 41,096 29.67 30,067 28.01 27,557 27.73
Agricultural 13,208 4.62 11,731 4.79 6,924 5.00 3,271 3.05 3,226 3.25
Consumer 58,523 20.47 44,753 18.29 28,397 20.50 22,397 20.87 21,581 21.72
Other 504 .18 1,363 .56 435 0.31 279 0.26 254 .26
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Total loans $285,798 100.00% $244,731 100.00% $138,499 100.00% $107,329 100.00% $ 99,360 100.00%
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Less unearned income (2,408) (2,106) (949) (898) (1,839)
Total loans net of
unearned income $283,390 $242,625 $137,550 $106,431 $ 97,521
Commercial loans generally are made to small-to-medium size businesses
located within a Bank's defined market area and typically are secured by
business assets and guarantees of the principal owners. Collateral for real
estate mortgage loans include residential properties and the loans generally
do not exceed 80% of the value of the real property securing the loan, based
on recent independent appraisals. The Company's real estate mortgage loan
portfolio primarily consists of adjustable rate residential mortgage loans.
The origination of these mortgage loans can be more difficult in a low
interest rate environment where there is a significant demand for fixed rate
mortgages. Consumer loans generally are made to individuals living in a
Bank's defined market area who are known to the Bank's staff. Consumer loans
are made for terms of up to seven years on a secured or unsecured basis.
While consumer loans generally provide the Company with increased interest
income, consumer loans may involve a greater risk of default. Loss experience
in all categories has remained low over the past five years, with net charge
offs being .36% of loans in 1997 and .38% in 1996. With respect to consumer
loans in particular, net charge offs for the year ended December 31, 1997
were $319, or .55% of total consumer loans outstanding at December 31, 1997,
and $489 in 1996, or 1.09% of total consumer loans outstanding at December
31, 1996.
The following table sets forth the maturity distribution and interest
sensitivity of selected loan categories at December 31, 1997. Maturities are
based upon contractual terms. The Company's policy is to specifically review
and approve any loan renewed; no loans are automatically rolled over.
LOAN MATURITIES AND INTEREST SENSITIVITY
DECEMBER 31, 1997
(Dollars in thousands)
One Year One Through Over Total
or Less Five Years Five Years Loans
Commercial, secured by real estate $ 10,670 $ 12,595 $ 43,628 $ 66,893
Commercial, other 23,535 12,596 8,893 45,024
Real estate construction 6,856 301 700 7,857
Agricultural 7,024 3,595 2,589 13,208
-------- -------- -------- --------
Total $ 48,085 $ 29,087 $ 55,810 $132,982
Fixed rate loans $ 29,997 $ 21,446 $ 29,384 $ 80,827
Floating rate loans 18,088 7,641 26,426 52,155
-------- -------- -------- --------
Total $ 48,085 $ 29,087 $ 55,810 $132,982
NONPERFORMING ASSETS
Nonperforming assets consist of loans on which interest is no longer accrued,
certain restructured loans where interest rate or other terms have been
renegotiated, accruing loans past due 90 days or more and real estate acquired
through foreclosure. All loans considered impaired under SFAS 114 are included
in nonperforming loans.
The Company discontinues the accrual of interest on loans that become 90 days
past due as to principal or interest unless they are adequately secured and in
the process of collection. A loan remains in a nonaccrual status until doubts
concerning the collectibility no longer exist. A loan is classified as a
restructured loan when the interest rate is materially reduced or the term is
extended beyond the original maturity date because of the inability of the
borrower to service the loan under the original terms. Other real estate is
recorded at the lower of cost or fair value less estimated costs to sell.
A summary of the components of nonperforming assets, including several ratios
using period-end data, is shown below:
NONPERFORMING ASSETS
(Dollars in Thousands)
DECEMBER 31
----------------------------------------------------
1997 1996 1995 1994 1993
Nonaccrual loans $ 562 $ 768 $ 693 $ 203 $ 1,028
Accruing loans which are contractually
past due 90 days or more 490 588 480 261 543
Restructured loans 356 0 0 0 0
------- ------- ------- ----- -------
Total nonperforming and restructured
loans $ 1,408 $ 1,356 $ 1,173 $ 464 $ 1,571
Other real estate acquired through
foreclosures 836 485 132 427 110
------- ------- ------- ----- -------
Total nonperforming and restructured
loans and other real estate $ 2,244 $ 1,841 $ 1,305 $ 891 $ 1,681
Nonperforming and restructured loans
as a percentage of net loans .50% .56% .85% .44% 1.61%
Nonperforming and restructured loans
and other real estate as a percentage
of total assets .53% .56% .44% .58% 1.11%
Nonaccrual loans decreased from $768 at December 31, 1996 to $562 at December
31, 1997. Total nonperforming assets increased from $1,841 at December 31, 1996
to $2,244 at December 31, 1997, however the percentage of nonperforming loans to
total loans decreased from .56% to .50%
The Company continues to follow its long-standing policy of not engaging in
international lending and not concentrating lending activity in any one
industry.
Although loans may be classified as nonperforming, many continue to pay interest
irregularly or at less than original contractual rates. A summary of actual
income recognized on nonperforming loans versus their full contractual yields
for each of the past five years is presented below.
INTEREST INCOME ON NON-ACCRUAL AND RESTRUCTURED LOANS
YEAR ENDED DECEMBER 31
(Dollars in thousands)
1997 1996 1995 1994 1993
Contractual interest 77 73 32 15 49
Interest recognized 61 2 22 0 6
INVESTMENT ACTIVITIES
The securities portfolio consists of debt and equity securities which provide
the Company with a relatively stable source of income. Additionally, the
investment portfolio provides a balance to interest rate and credit risks in
other categories of the balance sheet. The securities portfolio is also used
as a secondary source of liquidity by the Company. The Company has classified
all municipal securities and certain U. S. Treasury and Agency securities as
held to maturity based on management's positive intent and ability to hold
such securities to maturity. These municipal securities provide tax-free
income and are within management's guidelines with respect to credit risk and
market risk. The municipal securities have been issued principally by
Kentucky municipalities. The U. S. Treasury and Agency securities are held as
a source of stable, long-term income which can be used as collateral to
secure municipal deposits and repurchase agreements. All other investment
securities are classified as available for sale. The securities portfolio
does not contain significant holdings in mortgage-backed securities,
collateralized mortgage obligations or other mortgage-related derivative
products and/or structured notes.
Securities, exclusive of the arbitrage portfolio, as a percentage of average
interest-earning assets decreased to 15.1% in 1997 versus 19.3% in 1996 and
20.8% in 1995.. These decreases in securities reflect management's emphasis
on originating higher yielding loans and placing a lesser reliance on the
securities portfolio for sources of income.
At December 31, 1997 and 1996, the Company had an investment in noncumulative
perpetual preferred stock of First Guaranty Bank, Hammond, Louisiana. The
market value of this investment approximated its book value which totaled $2
million at December 31, 1997 and 1996. The dividend rate on the preferred
stock is 2% in excess of the prime rate as in effect from time to time.
The following tables present the carrying values and maturity
distribution of investment securities.
CARRYING VALUE OF SECURITIES
(Dollars in thousands)
DECEMBER 31
1997 1996 1995
U.S. Treasury and Federal agencies:
Available for sale $ 35,967 $ 22,720 $ 19,163
Held to maturity 5,588 8,387 2,300
State and municipal obligations:
Available for sale 3,564 4,464 2,864
Held to maturity 14,625 12,190 6,347
Equity securities:
Available for sale 2,795 2,788 2,819
Held to maturity 0 0 0
Other securities:
Available for sale 3,600 0 0
Held to maturity 149 416 18
Total securities:
Available for sale 45,926 29,972 24,846
Held to maturity 20,362 20,993 8,665
-------- -------- --------
Total $ 66,288 $ 50,965 $ 33,511
MATURITY DISTRIBUTION OF SECURITIES
December 31, 1997
(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 $20,869 $ 9,315 $ 4,403 $1,380 $ 0 $35,967 $35,967
Held to maturity 2,300 2,986 301 0 0 5,587 5,603
State and municipal obligations:
Available for sale 414 2,160 613 377 0 3,564 3,564
Held to maturity 732 5,321 5,657 2,916 0 14,626 15,110
Other securities:
Available for sale 0 0 0 0 6,395 6,395 6,395
Held to maturity 0 0 0 0 149 149 149
Total securities:
Available for sale 21,283 11,475 5,016 1,757 6,395 45,926 45,926
Held to maturity 3,032 8,307 5,958 2,916 149 20,362 20,862
------- ------- ------- ------ ------ ------- -------
Total $24,315 $19,782 $10,974 $4,673 $6,544 $66,288 $66,788
======= ======= ======= ====== ====== ======= =======
Percent of total 36.68% 29.84% 16.56% 7.05% 9.87% 100.00% 100.75%
Weighted average yield* 4.85% 4.61% 5.11% 4.55% 8.52% 5.17%
*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 $281,199 in 1997, a 29.7% increase over 1996. Total
deposits averaged $216,736 in 1996, an increase of $73,503 or 51.37% over 1995.
Noninterest bearing deposits averaged 12.5% of total deposits in 1997, compared
to 14.4% in 1996 and 15.9% in 1995.
At December 31, 1997, deposits totaled $324,554, compared to $267,208 at
December 31, 1996, an increase of $57,346, or 21.5%. Of this increase,
approximately $23,300 is attributable to the acquisition of two branches during
1997. Exclusive of the acquisition, deposits increased $34,046 from December 31,
1996 to December 31, 1997, representing a 12.7% increase.
The table below provides information on the maturities of time deposits of
$100,000 or more at December 31, 1997.
MATURITY OF TIME
DEPOSITS OF $100,000 OR MORE
December 31, 1997
-----------------
(in thousands)
Maturing 3 months or less $ 9,200
Maturing over 3 months through 6 months 8,459
Maturing over 6 months through 12 months 12,510
Maturing over 12 months 16,936
--------
Total $ 47,105
========
The following table sets forth the average amount of and average rate paid on
selected deposit categories during the past three full years.
1997 1996 1995
CATEGORY AMOUNT RATE (%) AMOUNT RATE (%) AMOUNT RATE (%)
(Dollars in thousands)
Demand $ 31,263 0% $ 27,250 0% $ 19,617 0%
NOW and money
market accounts 45,135 3.37% 32,532 3.30% 19,828 2.57%
Savings 29,499 2.95% 23,598 2.89% 19,302 2.83%
Certificates of deposit
and other time 175,302 5.90% 133,356 5.72% 84,486 5.57%
-------- ----- -------- ----- -------- -----
Total $281,199 4.53% $216,736 4.33% $143,233 4.14%
CAPITAL
Stockholders' equity increased $3,172 in 1997 to $47.8 million or 11.2% of total
assets at December 31, 1997. This compares to $44.6 million, or 13.6% of total
assets at December 31, 1996. The primary source of growth in stockholders'
equity in 1997 was the retention of net earnings of $3,119. The primary sources
of growth in 1996 were the issuance of common stock in the Company's initial
public offering of $27.1 million and retention of net earnings of $1,741. The
consolidated statements of changes in stockholders' equity details the changes
in equity for the last three years.
The fair value adjustment of the Company's available for sale securities
portfolio, which is recorded as a component of stockholders' equity, may change
significantly as market conditions change. At December 31, 1997 and 1996, the
adjustment resulted in a reduction of stockholders' equity of $65 and $118,
respectively. Further volatility in stockholders' equity may occur in the future
as market conditions change.
The Company's principal source of funds for dividend payments to stockholders is
dividends received from the subsidiary Banks. Banking regulations limit the
amount of dividends that may be paid without prior approval of regulatory
agencies. Under these regulations, the amount of dividends that may be paid
without prior approval of regulatory agencies in any calendar year is limited to
the current year's net profits, as defined, combined with the retained net
profits of the preceding two years, subject to regulatory capital requirement
limitations. During 1998, the Banks could, without prior approval, declare
dividends to the Company of approximately $7,656 plus any 1998 net profits
retained to the date of the dividend declaration.
The various regulatory agencies having supervisory authority over financial
institutions have adopted risk-based capital guidelines which define the
adequacy of the capital levels of regulated institutions. These risk-based
capital guidelines require minimum levels of capital based upon the risk rating
of assets and certain off-balance-sheet items. Assets and off-balance-sheet
items are assigned regulatory-risk weights ranging from 0% to 100% depending on
their level of credit risk. The guidelines classify capital in two tiers, Tier I
and Tier 2, the sum of which is total capital. Tier I capital is essentially
common equity, less intangible assets. Tier 2 capital is essentially qualifying
long-term debt and a portion of the allowance for possible loan losses.
During 1997, the Company completed its public offering of $28.75 million of
mandatorily redeemable capital securities of a subsidiary trust. These
securities qualify as Tier I capital up to an amount not to exceed 25% of Tier I
capital and the portion that exceeds the 25% limitation qualifies as Tier 2
capital. Consequently, the Company's capital ratios as of December 31, 1997
increased significantly over the ratios at December 31, 1996 as noted in the
following table:
SELECTED CAPITAL INFORMATION
(Dollars in thousands)
DECEMBER 31
1997 1996 CHANGE
Stockholders' Equity $ 47,797 $ 44,625 $ 3,172
Qualifying capital securities of subsidiary
trust 15,931 0 15,931
Disallowed amounts of goodwill and other
intangibles (7,262) (5,490) (1,772)
Unrealized loss on securities available
for sale (5) 6 (11)
-------- -------- -------
Tier I capital $ 56,461 $ 39,141 $17,320
DECEMBER 31
1997 1996 CHANGE
Tier II capital adjustments:
Qualifying capital securities of subsidiary
trust 12,819 0 12,819
Allowance for loan losses 3,144 2,854 290
-------- -------- --------
Total capital $ 72,424 $ 41,995 $ 30,429
Total risk-weighted assets $284,846 $238,210
Ratios
Tier I capital to risk-weighted assets 19.82% 16.43%
Total capital to risk-weighted assets 25.43% 17.63%
Leverage at year-end 13.52% 12.10%
The Company believes that its capital, together with existing credit facilities
and its ability to obtain future credit facilities, provides funds sufficient to
support the Company's current operations.
LIQUIDITY
Liquidity for a financial institution can be expressed in terms of maintaining
sufficient cash flows to meet both existing and unplanned obligations in a cost
effective manner. Adequate liquidity allows the Company to meet the demands of
both the borrower and the depositor on a timely basis, as well as pursuing other
business opportunities as they arise. Thus, liquidity management embodies both
an asset and liability aspect. Liquidity is maintained through the Company's
ability to convert assets into cash, manage the maturities of liabilities and
generate funds through the attraction of local deposits.
As part of its liquidity management, the Company maintains funding relationships
with the Federal Home Loan Bank and other financial institutions, including a
$20 million revolving line of credit available for both general corporate
purposes and future acquisitions. The Company prefers to manage its liquidity
requirements generally through the matching of maturities of assets and
liabilities.
The consolidated statements of cash flows for the periods presented in the
financial statements provide an indication of the Company's sources and uses of
cash as well as an indication of the ability of the Company to maintain an
adequate level of liquidity.
Liquidity risk is the possibility that the Company may not be able to meet its
cash requirements. Management of liquidity risk includes maintenance of adequate
cash and sources of cash to fund operations and meet the needs of borrowers,
depositors and creditors. Liquidity must be maintained at a level which is
adequate but not excessive. Excess liquidity has a negative impact on earnings
resulting from the lower yields on short-term assets.
In addition to cash, cash equivalents and Federal funds sold, the securities
portfolio provides an important source of liquidity. The total of securities
maturing within one year along with cash, due from banks and Federal funds sold
totaled $76.7 million as of December 31, 1997. Additionally, securities
available-for-sale with maturities greater than one year and equity securities
totaled $24.7 million at December 31, 1997. These securities represent a
secondary source available to meet liquidity needs on a continuing basis.
To maintain a desired level of liquidity, the Company has several sources of
funds available. One is the cash flow generated daily from the Banks' various
loan portfolios in the form of principal and interest payments. Another source
is its deposit base. The Company maintains a relatively stable base of customer
deposits which has historically exhibited steady growth. This growth, when
combined with other sources, is expected to be adequate to meet its demand for
funds. Due to the nature of the markets served by the Company's subsidiary
banks, management believes that the majority of certificates of deposit of
$100,000 or more are no more volatile than its core deposits. During a period of
relatively stable interest rates, these balances as a percentage of total
deposits have remained relatively the same for 1997 and 1996. Certificates of
deposits and other time deposits of $100,000 or more represented approximately
14.5% and 15.0% of total deposits at December 31, 1997 and 1996, respectively. A
number of techniques are used to measure the liquidity position, including the
utilization of several ratios that are presented below. These ratios are
calculated based on annual averages for each year.
LIQUIDITY RATIOS
1997 1996 1995
Total loans/total deposits..................... 92.29% 87.17% 80.29%
Total loans/total deposits less float.......... 93.28% 88.81% 81.41%
Net short-term borrowings/total assets......... 13.67% 2.82% .87%
This analysis shows that the Company's loan to deposit ratios increased in 1997
and 1996 compared to the prior year due to an increase in loan demand that
exceeded the increase in deposit activity.
Information regarding short-term borrowings for the past three years is
presented in the following table.
SHORT-TERM BORROWINGS
(Dollars in thousands)
1997 1996 1995
Federal funds purchased and repurchase
agreements:
Balance at year end $ 5,634 $ 5,599 $ 747
Weighted average rate at year end 5.38% 5.05% 3.25%
Average balance during the year $ 49,227 $ 3,702 $ 721
Weighted average rate during the year 5.51% 5.10% 4.91%
Maximum month-end balance $120,257 $ 6,696 $1,547
Other short-term borrowings:
Balance at year end $ 4,082 $ 7,055 $ 755
Weighted average rate at year end 6.17% 5.57% 6.05%
Average balance during the year $ 6,914 $ 3,660 $ 713
Weighted average rate during the year 6.04% 5.68% 6.17%
Maximum month-end balance $ 9,396 $ 8,555 $ 755
Total short-term borrowings:
Balance at year end $ 9,716 $12,654 $1,502
Weighted average rate at year end 5.71% 5.34% 4.88%
Average balance during the year $ 56,141 $ 7,362 $1,434
Weighted average rate during the year 5.57% 5.39% 5.54%
Maximum month-end balance $129,653 $ 15,251 $2,302
Substantially all federal funds purchased and repurchase agreements mature in
one business day. Other short-term borrowings principally represent Federal Home
Loan Bank (FHLB) advances to Georgetown Bank (with varying maturity dates),
which are funding residential mortgage and commercial loans.
INTEREST RATE SENSITIVITY
The interest spread and liability funding discussed above are directly related
to changes in asset and liability mixes, volumes, maturities and repricing
opportunities of interest-earning assets and interest-bearing liabilities.
Interest-sensitive assets and liabilities are those which are subject to being
repriced in the near term, including both floating or adjustable rate
instruments and instruments approaching maturity. The interest sensitivity gap
is the difference between total interest-sensitive assets and total
interest-sensitive liabilities. Interest rates on the Company's various asset
and liability categories do not respond uniformly to changing market conditions.
Interest rate risk is the degree to which interest rate fluctuations in the
marketplace can affect net interest income.
The need for interest sensitivity gap management is most critical in times of a
significant change in overall interest rates. Management generally seeks to
limit the exposure of the Company to interest rate fluctuations by maintaining a
relatively balanced mix of rate sensitive assets and liabilities on a one-year
time horizon. This mix is altered periodically depending upon management's
assessment of current business conditions and the interest rate outlook.
One tool which is used to monitor interest rate risk is the interest sensitivity
analysis as shown in the table below. This analysis reflects the repricing
characteristics of assets and liabilities over various time periods. The gap
indicates the level of assets and liabilities that are subject to repricing over
a given time period.
As shown by the interest rate sensitivity analysis as of December 31, 1997, the
cumulative amount of the Company's interest earning assets repricing during the
first year is higher than the total amount of its interest bearing liabilities
repricing during this period. This position, which is normally termed a positive
interest sensitivity gap, generally allows for enhanced net interest income
during periods of rising interest rates. This positive gap is within the
Company's internal policy guidelines and is not expected to impact significantly
the Company's net interest income during a period of declining interest rates.
The following table provides an analysis of the Company's interest rate
sensitivity at December 31, 1997.
INTEREST RATE SENSITIVITY ANALYSIS
(Dollars in Thousands)
0 - 90 91 DAYS - 1 - 5 OVER 5
DAYS 1 YEAR YEARS YEARS TOTAL
Assets
Loans, net of unearned income $ 73,646 $ 75,375 $ 75,742 $58,627 $283,390
Investment securities 10,393 19,852 22,732 16,234 69,211
Federal funds sold 40,771 0 0 0 40,771
-------- -------- -------- ------- --------
Total earning assets $124,810 $ 95,227 $ 98,474 $74,861 $393,372
Sources of Funds
NOW, money market and
savings $ 22,438 $ 22,713 $ 28,841 $ 1,291 $ 75,283
Time deposits 43,186 95,267 72,989 127 211,569
Other 9,716 0 11,086 95 20,897
-------- -------- -------- ------- --------
Total interest bearing liabilities $ 75,340 $117,980 $112,916 $ 1,513 $307,719
Interest Sensitivity Gap
For the period $ 49,470 $(22,753) $(14,442) $73,348 $ 85,623
Cumulative 49,470 26,717 12,275 85,623
Cumulative as a percent of
earning assets 12.58% 6.79% 3.12% 21.77%
MARKET RISK MANAGEMENT
Market risk is the risk of gain or loss from changes in the fair value of
financial instruments due to changes in interest rates, exchange rates and
equity prices. Premier's market risk is composed almost exclusively with
interest rate risk. This exposure is managed primarily through the strategy of
selecting the types and terms of interest earning assets and interest bearing
liabilities which generate favorable earnings, while limiting the potential
negative effects of changes in market interest rates. Since Premier's primary
source of interest bearing liabilities is customer deposits, the ability to
manage the types and terms of such deposits may be somewhat limited by customer
preferences in the market areas in which it operates. Borrowings, which include
Federal Home Loan Bank advances, short-term borrowings and long-term borrowings,
are generally structured with specific terms which in management's judgment,
when aggregated with the terms for outstanding deposits and matched with
interest earning assets, mitigate our exposure to interest rate risk.
The Company's Asset/Liability Committee (ALCO) is responsible for reviewing the
interest rate sensitivity of the Company and establishing policies to monitor
and limit exposure to interest rate risk. Interest rate risk is monitored
through the use of three complementary measures: static gap analysis, earnings
simulation modeling and net present value estimation. While each of the interest
rate risk measurements has limitations, taken together they represent a
reasonably comprehensive view of the magnitude of interest rate risk in the
Company, the distribution of risk along the yield curve, the level of risk
through time, and the amount of exposure to changes in certain interest rate
relationships.
STATIC GAP ANALYSIS
Premier uses interest rate sensitivity gap analysis to monitor the relationship
between the maturity and repricing of its interest earning assets and interest
bearing liabilities, while maintaining an acceptable interest spread rate
spread. Gap is defined as the difference between the amount of interest earnings
assets maturing or repricing within a specific time period and the amount of
interest bearing liabilities maturing or repricing within that time period. A
gap is considered positive when the amount of interest rate sensitive assets
exceeds the amount of interest rate sensitive liabilities, and is considered
negative when the amount of interest rate sensitive liabilities exceeds the
amount of interest rate sensitive assets. Generally, during a period of rising
interest rates, a negative gap would adversely affect net interest income, while
a positive gap would result in an increase in net interest income. Conversely,
during a period of falling interest rates, a negative gap would result in an
increase in net interest income, while a positive gap would negatively affect
net interest income. It is management's goal to maintain a reasonable balance
between exposure to interest rate fluctuations and earnings.
EARNINGS SIMULATION MODELING
The earnings simulation model forecasts net interest income under different
scenarios that incorporate changes in the level of interest rates and their
relationships with each other. The most recent earnings simulation model
projects net interest income would decrease by approximately 3.5% of stable rate
net interest income if rates fall by two percentage points over the next year.
It projects an increase of 3.4% if the rates rise by two percentage points.
Management believes this reflects a slight asset sensitive rate risk position
for the one year horizon. Within the same time frame, but assuming an additional
one percentage point move in rates, the model forecasts that net interest income
would fall below that earned in a stable rate environment by 5.3% in a falling
rate scenario and increase by 5.1% in a rising rate scenario.
This simulation model includes assumptions about how the balance sheet is likely
to evolve through time. Loan prepayments are developed from industry median
estimates for prepayment speeds. Noncontractual deposit pricing and sensitivity
are assumed to follow historical patterns.
NET PRESENT VALUE
The Net Present Value (NPV) of the balance sheet, at a point in time, is defined
as the discounted present value of asset cash flows minus the discounted value
of liability cash flows. The resulting percentage change in NPV is an indication
of the longer term repricing risk imbedded in the balance sheet. At year end, a
200 basis point increase in rates is estimated to reduce NPV by 8.0%.
Additionally, NPV is projected to decrease by 7.0% if rates fall by 200 basis
points. The calculations of present value have certain shortcomings. The
discount rates utilized are based on estimated market interest rate levels for
similar loans and securities nationwide. The unique characteristics of Premier's
loans and securities may not necessarily parallel those assumed in this
calculation, and therefore, would likely result in different discount rates,
prepayment experiences and present values. The discount rates utilized for
deposits and borrowings are based upon available alternative types and sources
of funds which are not necessarily indicative of the present value of deposits
and FHLB advances since such deposits and advances are unique to, and have
certain price and customer relationship advantages for, depository institutions.
A higher or lower interest rate environment will most likely result in different
investment and borrowing strategies by Premier designed to further mitigate the
effect on the value of, and the net earnings generated from, the Company's net
assets from any change in interest rates.
Summary information about each of the three interest rate risk measures is
presented below:
Year-End Year-End ALCO
1997 1996 Guidelines
Static 1-Year Cumulative Gap 6.8% 3.1% +10%
-
1-Year Net Interest Income Simulation Project
-200 bp change vs. Stable Rate -3.5 -4.4 +10%
-
+200 bp change vs. Stable Rate 3.4 4.4 +10%
-
1-Year Net Interest Income Simulation Project
-300 bp change vs. Stable Rate -5.3 -6.7 +10%
-
+300 bp change vs. Stable Rate 5.1 6.6 +10%
-
Static Net Present Value Change
-200 bp Shock vs. Stable Rate -7.0 -1.7 +10%
-
+200 bp Shock vs. Stable Rate -8.0 3.0 +10%
-
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, w