pfbis4062009v01.htm
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As
filed with the Securities and Exchange Commission on July 8,
2008
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Registration
No. 333-160051
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SECURITIES AND EXCHANGE
COMMISSION
WASHINGTON, DC
20549
PRE-EFFECTIVE AMENDMENT NO. 1 TO THE
FORM S-4
REGISTRATION
STATEMENT
UNDER
THE SECURITIES ACT OF
1933
PREMIER FINANCIAL BANCORP,
INC.
(Exact
Name of Registrant as Specified in Its Charter)
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Kentucky
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6022
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61-1206757
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(State
or Other Jurisdiction
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(Primary
Standard Industrial
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(I.
R. S. Employer
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of
Incorporation or Organization)
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Classification
Code Number)
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Identification
Number)
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2883
Fifth Avenue
Huntington,
West Virginia 25702
(304) 525-1600
(Address,
Including Zip Code, and Telephone Number, Including Area Code, of Registrant’s
Principal Executive Offices)
Robert
W. Walker
Premier
Financial Bancorp, Inc.
2883
Fifth Avenue
Huntington,
West Virginia 25702
(304) 525-1600
(Name,
Address, Including Zip Code, and Telephone Number, Including Area Code, of Agent
for Service)
with copies to:
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Thomas
J. Murray, Esq.
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Alan
Schick, Esq.
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Daniel
J. Konrad, Esq.
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Marc
P. Levy, Esq.
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Huddleston
Bolen LLP
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Luse
Gorman Pomerenk & Schick, P.C.
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611
Third Avenue
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5335
Wisconsin Avenue, N.W., Suite 400
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P.O.
Box 2185
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Washington,
D.C. 20015
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Huntington,
West Virginia 25722-2185
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(202)
274-2000
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(304)
691-8398
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Approximate
date of commencement of proposed sale to the public: as soon as practicable
after this registration statement becomes effective.
If
the securities being registered on this Form are being offered in connection
with the formation of a holding company and there is compliance with General
Instruction G, check the following box. o
If
this Form is filed to register additional securities for an offering pursuant to
Rule 462(b) under the Securities Act, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. o
If
this Form is a post-effective amendment filed pursuant to
Rule 462(d) under the Securities Act, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. o
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company. See the definitions of “large accelerated filer”,
“accelerated filer” and “smaller reporting company” in Rule 12b-2 of the
Exchange Act. (Check one):
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Large accelerated
filer o.
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Accelerated
filer o.
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Non-accelerated
filer o.
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Smaller reporting
company þ
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If
applicable, place an X in the box to designate the appropriate rule provision
relied upon in conducting this transaction:
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Exchange Act Rule
13e-4(i) (Cross-Border Issuer Tender Offer)
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o
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| Exchange Act Rule 14d-1(d) (Cross-Border Third-Party Tender
Offer) |
o
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CALCULATION
OF REGISTRATION FEE
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Title
of Each Class of
Securities
to Be Registered
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Amount
to Be
Registered (1)
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Proposed
Maximum
Offering
Price Per
Unit
(2)
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Proposed
Maximum
Aggregate
Offering
Price(2)
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Amount
of
Registration
Fee
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Common
Stock, no par value per share
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1,545,099
shares
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$5.81
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$
8,970,644
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$
501.00(3)
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(1)
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The number of shares of common
stock, no
par value per share of Premier Financial
Bancorp, Inc. to be registered pursuant to this Registration Statement
represents the maximum number of shares issuable by Premier Financial
Bancorp, Inc. upon consummation of the merger of a wholly owned subsidiary of
Premier Financial Bancorp, Inc. and Abigail Adams National Bancorp,
Inc.
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(2)
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The proposed maximum aggregate
offering price is estimated solely to determine the registration fee and
reflects the market price of Abigail Adams National Bancorp, Inc. common
stock to be received in connection with the merger, computed in accordance with Rule
457(c) and Rule 457(f) under the Securities Act of 1933, as amended, based
upon the average of the high and low sales prices ($ 2.71
and $
2.47) of Abigail
Adams National Bancorp, Inc. common stock as reported on The Nasdaq
Global Market on June 12, 2009.
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Previously
paid |
THE REGISTRANT HEREBY AMENDS THIS
REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS
EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH
SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME
EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE SECURITIES ACT OF 1933, AS
AMENDED, OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH
DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING PURSUANT TO SAID SECTION
8(A), MAY DETERMINE.
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Premier
Financial Bancorp, Inc.
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Abigail
Adams National Bancorp, Inc.
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Joint
Proxy Statement/Prospectus
Merger
Proposed - Your Vote is Very Important
The board of directors of
Premier Financial Bancorp, Inc. and the board of directors of Abigail Adams
National Bancorp, Inc. have agreed to a strategic combination of the two
companies under the terms of an Agreement of Merger, dated as of December 30,
2008, as amended. Upon completion of the merger of a wholly
owned subsidiary of Premier Financial Bancorp, Inc. with and into Abigail Adams
National Bancorp, Inc., Premier Financial Bancorp, Inc. will acquire Abigail
Adams National Bancorp, Inc., and Abigail Adams National Bancorp, Inc. will
become a wholly owned subsidiary of Premier Financial Bancorp,
Inc.
If the
merger is completed, Abigail Adams National Bancorp, Inc. stockholders will have
the right to receive 0.4461 shares of Premier Financial Bancorp, Inc. common
stock for each share of Abigail Adams National Bancorp, Inc. common stock, with
cash paid in lieu of fractional shares. This exchange ratio is fixed
and will not be adjusted to reflect stock price changes prior to closing of the
merger. Premier Financial Bancorp, Inc. shareholders will continue to own
their existing shares of Premier Financial Bancorp, Inc. common stock.
Premier
Financial Bancorp, Inc. common stock and Abigail Adams National Bancorp, Inc.
common stock are both traded on the NASDAQ Global Market under the symbols
PFBI and AANB, respectively.
At the
special meeting of Abigail Adams National Bancorp, Inc. stockholders, those
stockholders will be asked to vote on the approval and adoption of the merger
agreement. At the special meeting of Premier Financial Bancorp, Inc.
shareholders, those shareholders will be asked to vote on the issuance of
Premier Financial Bancorp, Inc. common stock to Abigail Adams National Bancorp,
Inc. stockholders, which is necessary to effect the merger, and also on an
amendment
to the articles of incorporation of Premier Financial Bancorp, Inc. to increase
the number of shares of authorized Premier Financial Bancorp, Inc. common stock
from 10,000,000 to 20,000,000.
We cannot
complete the merger unless we obtain the approval of the merger agreement by the
stockholders of Abigail Adams National Bancorp, Inc. and the approval to issue
Premier Financial Bancorp, Inc. shares in the merger by the shareholders of
Premier Financial Bancorp, Inc. The merger proposal must be approved by a
majority of outstanding shares held by stockholders of Abigail Adams National
Bancorp, Inc.
The
Board of Directors of Abigail Adams National Bancorp, Inc. recommends that you
vote “FOR” adoption of the merger agreement. The Board of Directors
of Premier Financial Bancorp, Inc. recommends
that you vote “FOR” the issuance of Premier Financial Bancorp, Inc. common stock
in the merger and “FOR” the amendment to the articles of incorporation
increasing authorized common stock. Whether or not you plan to attend the
special meeting of stockholders, please take the time to vote by submitting a
valid proxy, completing the enclosed proxy card and mailing it in the enclosed
envelope. If
you sign, date and mail your proxy card without indicating how you want to vote,
your proxy will be counted as a vote “FOR” adoption of the merger agreement or
issuance of Premier Financial Bancorp, Inc. common stock and “FOR” the amendment
of the articles of incorporation, as the case may be. If you fail to vote, or
you do not instruct your broker how to vote any shares held for you in “street
name,” it will have the same effect as voting “AGAINST” the merger or the
issuance of Premier Financial Bancorp, Inc. common stock in the merger but will
have no effect on the proposed amendment of Premier Financial Bancorp, Inc.’s
articles of incorporation (assuming a quorum is present at Premier Financial
Bancorp, Inc.’s special meeting), as the case may be.
You
should read this document and all annexes carefully. Before you make a decision
on how to vote, you should consider the “Risk Factors” beginning on page 19 of
this document.
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Abigail
Adams National Bancorp, Inc.
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Premier
Financial Bancorp, Inc.
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Neither
the Securities and Exchange Commission, nor any bank regulatory agency, nor any
state securities commission has approved or disapproved of these securities or
passed upon the adequacy or accuracy of this document. Any representation to the
contrary is a criminal offense. The securities offered through this document are
not savings accounts, deposits or other obligations of a bank or savings
association and are not insured by the Federal Deposit Insurance Corporation or
any other government agency.
This
joint proxy statement/prospectus is dated July 29, 2009 and is first being
mailed to Premier Financial Bancorp, Inc. shareholders and Abigail Adams
National Bancorp, Inc. stockholders on or about July 29, 2009.
ABIGAIL
ADAMS NATIONAL BANCORP, INC.
1130
Connecticut Avenue, NW, Suite 200
Washington,
D.C. 20036
NOTICE
OF SPECIAL MEETING OF STOCKHOLDERS
To Be Held On September 1,
2009
Dear
Stockholders of Abigail Adams National Bancorp, Inc.
We
are pleased to invite you to attend the special meeting of stockholders of
Abigail Adams National Bancorp, Inc. (“Adams”), a Delaware corporation, which
will be held at the offices of Adams National Bank, 1130 Connecticut Avenue, NW,
Suite 200, Washington, D.C. 20036, on Tuesday, September 1, 2009 at 10:00 a.m.
for the purpose of considering and voting upon the following:
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1.
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A
proposal to approve and adopt the Agreement of Merger dated as of December
30, 2008 and First Amendment to Agreement of Merger dated June 16, 2009,
by and among Premier Financial Bancorp, Inc. (“Premier”), Adams and AANB
Acquisition Corp., a wholly owned subsidiary of Premier (hereinafter the
“merger agreement”) and the transactions contemplated thereby. The merger
agreement provides that Adams will merge with the subsidiary of Premier,
upon the terms and subject to the conditions set forth in the merger
agreement, copies of which are jointly attached as Annex I to the
joint proxy statement/prospectus accompanying this
notice.
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2.
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A
proposal to adjourn the meeting to a later date or dates, if necessary, to
permit further solicitation of additional proxies in the event there are
not sufficient votes at the time of the meeting to approve the matters to
be considered by the stockholders at the meeting, as more fully described
in the accompanying joint proxy statement/prospectus.
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3.
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Such
other matters as may properly come before the special
meeting.
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Our
board of directors has determined that the terms of the merger are fair to and
in the best interests of Adams and our stockholders, has approved and adopted
the merger agreement, and recommends that Adams’ stockholders vote “FOR” the approval and adoption of
the merger agreement and the transactions contemplated thereby and “FOR” the proposal to adjourn the
special meeting.
Our
board of directors has fixed the close of business on July 15, 2009 as the
record date for determination of our stockholders entitled to receive notice of
and to vote at the special meeting. The special meeting may be adjourned or
postponed from time to time upon approval of our stockholders without any notice
other than by announcement at the special meeting of the adjournment or
postponement thereof, and any and all business for which notice is hereby given
may be transacted at such adjourned or postponed special meeting.
The
presence of a majority of the outstanding shares of Adams common stock, in
person or by proxy, is necessary to constitute a quorum in order to have a
special meeting. The affirmative
vote of the holders of a majority of the outstanding shares of our common stock
on the record date is required to approve and adopt the merger agreement. Please
complete, date, sign and promptly return the enclosed proxy card, which is
solicited by your board of directors, in the enclosed envelope, whether or not
you expect to attend the special meeting. You may revoke the proxy at any time
before its exercise by delivering to us a written notice of revocation, by
delivering to us a duly executed proxy card bearing a later date or by voting in
person at the special meeting. Failure to return a properly executed proxy card,
or to vote at the special meeting, will have the same effect as a vote against
the merger agreement and the transactions contemplated thereby.
July
29,
2009 By
Order of the Board of Directors
PREMIER
FINANCIAL BANCORP, INC.
2883
Fifth Avenue
Huntington,
WV 25702
(304)
525-1600
NOTICE
OF SPECIAL MEETING OF SHAREHOLDERS
To
Be Held On September 1, 2009
Dear
Shareholders of Premier Financial Bancorp, Inc.:
We
are pleased to invite you to attend the special meeting of the shareholders of
Premier Financial Bancorp, Inc. (“Premier”), a Kentucky corporation, which will
be held at the Pullman Plaza Hotel, 1001 Third Avenue, Huntington, West
Virginia, on Tuesday, September 1, 2009, at 10:00 a.m., local time, for the
purpose of considering and voting upon the following:
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1.
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A
proposal to approve the issuance of Premier common stock, no par value per
share, in connection with the merger contemplated by the Agreement of
Merger, dated as of December 30, 2008 and First Amendment to Agreement of
Merger dated June 16, 2009, by and among Premier, Abigail Adams National
Bancorp, Inc. (“Adams”) and AANB Acquisition Corp., a wholly owned
subsidiary of Premier (hereinafter the “merger agreement”), copies of
which are jointly attached as Annex I to the joint proxy
statement/prospectus accompanying this
notice;
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2.
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A
proposal to amend the articles of incorporation of Premier to increase the
authorized number of shares of Premier common stock from 10,000,000 to
20,000,000; and
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3.
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A
proposal to adjourn the meeting to a later date or dates, if necessary, to
permit further solicitation of additional proxies in the event there are
not sufficient votes at the time of the meeting to approve the matters to
be considered at the meeting, as more fully described in the accompanying
joint proxy statement/prospectus.
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4.
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Such
other matters as may properly come before the special
meeting.
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Please
refer to the attached joint proxy statement/prospectus for further information
with respect to the business to be transacted at the Premier special
meeting.
Holders
of record of shares of Premier common stock at the close of business on July 15,
2009, are entitled to vote at the special meeting and any adjournment or
postponement of the special meeting. A list of these shareholders will be
available at the special meeting for inspection by any Premier shareholder, for
any purpose germane to such meeting.
Your
board recommends that you vote “FOR” the proposals listed
above. We need your vote for
the issuance of Premier common stock to complete the merger. Whether or
not you plan to attend the special meeting, please complete, sign and date the
enclosed proxy card and return it promptly in the enclosed envelope. If you
neither return your card nor vote in person, the effect will be to vote against
the issuance of Premier common stock in the merger. The presence of a
majority of the outstanding shares of Premier common stock, in person or by
proxy,
is necessary to constitute a quorum in order to have a special
meeting. The issuance of common stock must be approved by a majority
of outstanding shares held by the shareholders of Premier (excluding the shares
held by Marshall T. Reynolds, Chairman of the Board of Directors of Premier,
Robert W. Walker, President and Chief Executive Officer of Premier and Neal W.
Scaggs, a director of Premier, each of whom are stockholders or an executive
officer of Adams). The amendment to Premier’s articles of
incorporation to increase the number of shares of authorized common stock must
be approved by a majority of shares voting at the special meeting, assuming a
quorum is present.
July
29,
2009 By
Order of the Board of Directors
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67
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67
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| DESCRIPTION OF PREMIER |
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| BUSINESS |
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103
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FOR
THE SPECIAL MEETINGS
The
following are some questions that you, as a shareholder of Premier or
stockholder of Adams, may have regarding the merger and the other matters being
considered at the special meetings and the answers to those questions. Premier
and Adams urge you to read carefully the remainder of this document because the
information in this section does not provide all the information that might be
important to you with respect to the merger and the other matters being
considered at the special meetings. Additional important information is also
contained in the annexes to and the documents incorporated by reference into
this document.
Q: Why
am I receiving this document?
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A:
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Premier
and Adams have agreed to combine under the terms of a merger agreement
that is described in this document. A copy of the merger agreement and
amendment thereto is attached to this document as Annex
I.
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In
order to complete the merger, Premier shareholders must vote to approve the
issuance of shares of Premier common stock in connection with the merger, and
Adams stockholders must vote to adopt the merger agreement.
In
addition, Premier shareholders are being asked to vote on a proposal to amend
the Premier articles of incorporation, which we refer to as the Premier articles
of incorporation. The amendment proposal is to increase the authorized number of
shares of Premier common stock from 10,000,000 to 20,000,000. The amendment is
not required to complete the merger.
In
addition, both Premier and Adams shareholders will be asked to vote on a
proposal to adjourn their special meetings to a later date or dates, if
necessary, to permit further solicitation of proxies in the event there are not
sufficient votes at the time of the meetings to approve the matters to be
considered by the shareholders.
Premier
and Adams will hold separate special meetings to obtain these approvals. This
document contains important information about the merger and the meetings of the
shareholders of Premier and stockholders of Adams, and you should read it
carefully. The enclosed voting materials allow you to vote your shares without
actually attending your respective shareholder meeting.
Your vote is important. We encourage
you to vote as soon as possible.
Q: When
and where will the shareholder meetings be held?
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A:
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The
Premier special meeting will be held at 2883 5th
Avenue, Huntington, West Virginia on September 1, 2009, at 10:00 a.m.,
local time. The Adams special meeting will be held at the Adams National
Bank, 1130 Connecticut Avenue, NW, Suite 200, Washington, D.C., on
September 1, 2009, at 10:00 a.m., local
time.
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Q: How
do I vote?
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A:
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If
you are a shareholder of record of Premier as of the record date for the
Premier special meeting or a stockholder of record of Adams as of the
record date for the Adams special meeting, you may vote in person by
attending your special meeting or, to ensure your shares are represented
at the meeting, you may vote by signing and returning the enclosed proxy
card in the postage-paid envelope
provided.
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If
you hold Premier shares or Adams shares in the name of a bank, broker or other
nominee, please follow the voting instructions provided by your bank, broker or
other nominee to ensure that your shares are represented at your shareholder
meeting.
Q: What
vote is required to approve each proposal?
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A:
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Premier. The
proposal at the Premier special meeting to approve the issuance of shares
of Premier common stock in the merger requires the affirmative vote of
holders of a majority of outstanding shares of Premier (excluding the
shares held by Marshall T. Reynolds, Chairman of the Board of Directors of
Premier, Robert W. Walker, President and Chief Executive Officer of
Premier and Neal W. Scaggs, a director of Premier, each of whom
beneficially owns significant amounts of Adams common stock or are
employed by Adams).
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The
Premier articles of incorporation amendment proposal requires the affirmative
vote of holders of a majority of shares voting at the special meeting, assuming
a quorum is present.
Adams. The
proposal at the Adams special meeting to adopt the merger agreement requires the
affirmative vote of holders of a majority of the outstanding shares of Adams
common stock entitled to vote on the proposal.
Each
of the special meetings may be adjourned, if necessary, to solicit additional
proxies in the event there are not sufficient votes at the time of the special
meeting to approve the proposals. The affirmative vote of the holders
of a majority of the common shares represented, in person or by proxy, at these
special meetings is required to adjourn such special meeting.
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Q:
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Why
are Premier shareholders voting to approve the issuance of shares of
Premier common stock in the merger?
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A:
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Premier
shares are traded on the NASDAQ Global Market. NASDAQ rules
require Premier shareholders to approve the issuance of Premier shares in
connection with (i) the acquisition of stock of Adams if any director,
officer or substantial shareholder of Premier has a 5% or greater interest
in Adams or the consideration to be paid in the merger and the issuance of
common stock could result in an increase in outstanding shares of Premier
common stock of 5% or more, or (ii) Premier will issue common stock equal
to or in excess of 20% of the number of shares of Premier common stock
outstanding before the issuance.
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Marshall
T. Reynolds, Chairman of the Board of Directors and beneficial owner of 8.8% of
outstanding Premier common stock, is the beneficial owner of 17.3% of Adams
common stock outstanding. Furthermore, the number of shares of
Premier common stock to be issued in the merger is in excess of 20% of the
number of such shares outstanding before the issuance. The NASDAQ
rules accordingly require approval of the issuance of Premier shares in the
merger by Premier shareholders.
Additionally,
the Kentucky Business Corporation Act governing conflicts of interest (a
transaction in which a director of the corporation has an interest in the
transaction) provides that such a transaction is not voidable by the corporation
if any one of the following apply:
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(a)
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The
material facts of the transaction and the director’s interest were
disclosed to the board of directors and the board of directors approved
the transaction; or
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(b)
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The
material facts of the transaction and the director’s interest were
disclosed to the shareholders and the shareholders approved the
transaction; or
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(c)
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The
transaction was fair to the
corporation.
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Marshall
T. Reynolds’, Robert W. Walker’s and Neal W. Scaggs’ beneficial ownership of
Adams common stock, Marshall T. Reynolds’ position as a director of Adams and
Robert W. Walker’s position as an Adams director and executive officer were
disclosed to the Premier board, which approved the transaction by unanimous vote
of the disinterested directors. Baxter Fentriss and Company,
financial advisor to Premier, has determined that the merger is fair to
Premier. However, Premier’s board of directors determined that
Premier’s shareholders should be apprised of the interests of Messrs. Reynolds,
Scaggs and Walker in connection with the proposal to issue Premier shares in the
merger and be afforded the opportunity to vote on the matter without including
Messrs. Reynolds’, Walker’s and Scaggs’ shares in the vote.
Under
the Kentucky Business Corporation Act, the parties to the merger are Adams and
AANB Acquisition Corp., a wholly owned subsidiary of Premier incorporated solely
to effectuate the acquisition of Adams. Only shareholders of the
parties to the merger are entitled to vote on the
merger. Accordingly, only Adams’ stockholders and Premier, as the
sole shareholder of AANB Acquisition Corp., are entitled to vote on the
merger.
Q: How
many votes do I have?
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A:
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Premier. You
are entitled to one vote for each share of Premier common stock that you
owned as of the record date.
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As
of the close of business on July 15, 2009, there were approximately 6,392,772
outstanding shares of Premier common stock. As of that date,
approximately 11.6% of the outstanding shares of Premier common stock were
beneficially owned by directors and executive officers of
Premier. Marshall T. Reynolds, Robert W. Walker and Neal W. Scaggs
beneficially own a total of 613,822 shares of Premier common stock, or 9.6% of
all outstanding shares and 83% of the outstanding shares owned by directors and
executive officers. These shares will not be counted in the vote to
approve the issuance of Premier shares in the merger.
Adams. You are
entitled to one vote for each share of Adams common stock that you owned as of
the record date.
As
of the close of business on July 15, 2009, there were approximately 3,463,569
outstanding Adams common shares. As of that date, 19.8% of the outstanding
common stock of Adams entitled to vote was owned by its directors and executive
officers and their affiliates.
Q: What
will happen if I fail to vote or I abstain from voting?
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A:
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Premier. If
you are a Premier shareholder and fail to vote, fail to instruct your
bank, broker or other nominee to vote or abstain from voting, it will have
the same effect as a vote against the proposal to approve the issuance of
shares of Premier common stock in the merger and the proposal to amend
Premier’s articles of
incorporation.
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Adams. If you are
an Adams stockholder and fail to vote, fail to instruct your bank, broker or
other nominee to vote or abstain from voting, it will have the same effect as a
vote against the proposal to adopt the merger agreement.
Premier and
Adams. Assuming a quorum is present, the failure to vote,
however, will have no effect on the proposal to approve the adjournment of the
respective special meetings, if necessary, to solicit additional
proxies.
Q: What
constitutes a quorum?
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A:
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Premier. Shareholders
who hold at least a majority of the outstanding shares of Premier common
stock as of the close of business on the record date and who are entitled
to vote must be present or represented by proxy in order to constitute a
quorum to conduct the Premier special
meeting.
|
For
purposes of determining a quorum on the proposal to issue Premier shares in the
merger, shares held by Messrs. Reynolds, Walker and Scaggs are not counted in
determining a quorum, as they are not counted in determining the vote on that
proposal. Such shares can be voted on the proposal to amend Premier’s
articles of incorporation and therefore are counted in determining a quorum with
respect to that proposal.
Adams. Stockholders
who hold at least a majority of the outstanding shares of Adams common stock as
of the close of business on the record date and who are entitled to vote must be
present or represented by proxy in order to constitute a quorum to conduct the
Adams special meeting.
|
Q:
|
If
my shares are held in street name by my broker, will my broker vote my
shares for me?
|
|
A:
|
If
you hold your shares in a stock brokerage account or if your shares are
held by a bank or nominee (that is, in street name), you should provide
the record holder of your shares with instructions on how to vote your
shares. Please follow the voting instructions provided by your bank or
broker. Please note that you may not vote shares held in street name by
returning a proxy card directly to Premier or Adams or by voting in person
at your special meeting unless you provide a “legal proxy,” which you must
obtain from your bank or broker. Further, brokers who hold shares of
Premier common stock or Adams common stock on behalf of their customers
may not give a proxy to Premier or Adams to vote those shares without
specific instructions from their
customers.
|
If
you are a Premier shareholder and you do not instruct your broker on how to vote
your shares, your broker may not vote your shares on the proposal to approve the
issuance of shares of Premier common stock in the merger or the proposal to
amend Premier’s articles of incorporation, which will have the same effect as a
vote against the proposal to approve the issuance of shares of Premier common
stock in the merger and the proposal to amend the articles of
incorporation.
If
you are an Adams stockholder and you do not instruct your broker on how to vote
your shares, your broker may not vote your shares on the proposal to adopt the
merger agreement, which will have the same effect as a vote against the proposal
to adopt the merger agreement.
Q: What
will happen if I return my proxy card without indicating how to
vote?
|
A:
|
If
you sign and return your proxy card without indicating how to vote on any
particular proposal, the Premier common stock or Adams common stock
represented by your proxy will be voted in favor of that
proposal.
|
Q: Can
I change my vote after I have returned a proxy or voting instruction
card?
|
A:
|
Yes.
You can change your vote at any time before your proxy is voted at your
special meeting. You can do this in one of three
ways:
|
· you
can send a signed notice of revocation;
· you
can grant a new, valid proxy bearing a later date; or
|
|
·
|
if
you are a holder of record, you can attend your special meeting and vote
in person, which will automatically cancel any proxy previously given, or
you may revoke your proxy in person, but your attendance alone will not
revoke any proxy that you have previously
given.
|
If
you choose either of the first two methods, you must submit your notice of
revocation or your new proxy to the Secretary of Premier or Secretary of Adams,
as appropriate, no later than the beginning of the applicable special meeting.
If your shares are held in street name by your bank or broker, you should
contact your broker to change your vote.
Q: Do
I have the appraisal rights with respect to the merger?
|
A.
|
No,
Adams stockholders do not have appraisal rights with respect to the
merger, nor do Premier shareholders have appraisal rights with respect to
the proposal to issue Premier common stock in the merger or the proposal
to amend Premier’s charter.
|
|
Q:
|
What
are the material United States federal income tax consequences of the
merger to U.S. holders of Adams common
shares?
|
|
A:
|
The
merger is intended to be treated for U.S. federal income tax purposes as a
reorganization within the meaning of Section 368(a) of the Internal
Revenue Code of 1986, as amended, which we refer to as the Code. Assuming
the merger qualifies as such a reorganization, a U.S. holder of Adams
common shares generally will not recognize any gain or loss upon receipt
of shares of Premier common stock solely in exchange for Adams common
shares in the merger, except with respect to any cash received in lieu of
a fractional share of Premier common stock. Premier
shareholders will have no income tax consequences. See “The
Issuance of Premier Shares and the Merger — Certain Federal Income Tax
Consequences of the Merger” beginning on page
98.
|
Q: When
do you expect the merger to be completed?
|
A:
|
Premier
and Adams are working to complete the merger in the third quarter of 2009.
However, the merger is subject to various federal and state regulatory
approvals and other conditions, and it is possible that factors outside
the control of both companies could result in the merger being completed
at a later time, or not at all. There may be a substantial amount of time
between the respective Premier and Adams special meetings and the
completion of the merger. Premier and Adams hope to complete the merger as
soon as reasonably practicable.
|
Q: What
do I need to do now?
|
A:
|
Carefully
read and consider the information contained in and incorporated by
reference into this document, including its
annexes.
|
In order for your shares to be
represented at your special meeting:
|
|
·
|
you
can indicate on the enclosed proxy card how you would like to vote and
return the proxy card in the accompanying pre-addressed postage paid
envelope.
|
|
|
·
|
you
can follow the voting instructions provided by your bank, broker or other
nominee directing it how to vote your
shares
|
|
|
·
|
you
can attend your special meeting and vote in
person.
|
Q: Do
I need to do anything with my shares of Adams or Premier common stock
now?
|
A:
|
No.
Please do not send in your Adams share certificates with your proxy
card. Should the merger be approved, at a later date, Premier’s
exchange agent will mail to you a Transmittal Form that you should use to
surrender your Adams share certificates. You should not
surrender your Adams share certificates for exchange until you receive the
Transmittal Form from the exchange
agent.
|
If
you are a Premier shareholder, you are not required to take any action with
respect to your Premier stock certificates.
Q: Who
can help answer my questions?
|
A:
|
Premier
shareholders or Adams stockholders who have questions about the merger or
the other matters to be voted on at the shareholder meetings or desire
additional copies of this document or additional proxy cards should
contact:
|
|
if
you are a Premier shareholder:
Brien
M. Chase, Senior Vice
President
and Chief Financial Officer
Premier
Financial Bancorp, Inc.
2883
Fifth Avenue
Huntington,
WV 25702
Phone:
(304) 525-1600
Fax:
(304) 525-9701
|
if
you are an Adams stockholder:
Karen
E. Troutman
Senior
Vice President and Chief Financial Officer
Abigail
Adams National Bancorp, Inc.
1130
Connecticut Avenue, NW, Suite 200
Washington,
DC 20036
Phone:
(202) 772-3600
Fax: (202)
659-4980
|
This
summary highlights information contained elsewhere in this document and may not
contain all the information that is important to you. Premier and Adams urge you
to read carefully the remainder of this document, including the attached
annexes, and the other documents to which we have referred you because this
section does not provide all the information that might be important to you with
respect to the merger and the other matters being considered at each special
meeting. See also the section entitled “Where You Can Find More Information” on
page 234. We have included page references to direct you to a more complete
description of the topics presented in this summary.
The
Companies
Premier
(See page 102)
Premier
Financial Bancorp, Inc.
2883
Fifth Avenue
Huntington,
West Virginia 25702
(304)
525-1600
Premier
is a multi-bank holding company that, as of December 31, 2008, operated nine
banking offices in Kentucky, three banking offices in Ohio and 13 banking
offices in West Virginia. At December 31, 2008, Premier had total
consolidated assets of $724.5 million, net loans of $458.6 million, total
consolidated deposits of $589.2 million and total consolidated shareholders’
equity of $89.4 million. The banking subsidiaries of Premier consist
of Citizens Deposit Bank & Trust, Vanceburg, Kentucky; Farmers Deposit Bank,
Eminence, Kentucky; Ohio River Bank, Ironton, Ohio; First Central Bank, Inc.,
Philippi, West Virginia; Boone County Bank, Inc., Madison, West Virginia; and
Traders Bank, Inc., Ravenswood, West Virginia (hereinafter the “Premier
Banks”).
The
headquarters of Premier is located at 2883 Fifth Avenue, Huntington, West
Virginia.
Adams
(See page 166)
Abigail
Adams National Bancorp, Inc.
1130
Connecticut Avenue, N.W.
Suite
200
Washington,
DC 20036
Telephone:
(202) 772-3600
Adams
is a Delaware-chartered corporation and bank holding company that conducts
business through its two wholly-owned bank subsidiaries, The Adams National Bank
(“ANB”) and Consolidated Bank & Trust Company (“CBT”) (collectively, the
“Adams Banks”). ANB serves the nation’s capital through six
full-service offices located in Washington, D.C. and Maryland. CBT serves the
Richmond and Hampton, Virginia market areas through two full-service
offices.
AANB
Acquisition Corp. (See page 67)
AANB
Acquisition Corp., a wholly owned subsidiary of Premier, is a Delaware
corporation formed on January 26, 2009 for the purpose of effecting the merger.
Upon completion of the merger, AANB Acquisition Corp. will be merged with and
into Adams and the name of the resulting company will be Abigail Adams National
Bancorp, Inc.
AANB
Acquisition Corp. has not conducted any activities other than those incidental
to its formation and the matters contemplated by the merger agreement, including
the preparation of applicable regulatory filings in connection with the
merger.
The
Merger and the Merger Agreement (See Annex I)
A
copy of the merger agreement is attached as Annex I to this document.
Premier and Adams encourage you to read the entire merger agreement carefully
because it is the principal document governing the merger.
Form
of Merger (See page 67)
Subject
to the terms and conditions of the merger agreement, at the effective time of
the merger, AANB Acquisition Corp., a direct, wholly owned subsidiary of Premier
formed for the purposes of the merger, will be merged with and into Adams. Adams
will survive the merger as a direct, wholly owned subsidiary of
Premier.
Consideration
to be Received in the Merger; Treatment of Stock Options and Other Equity-Based
Awards (See pages 67 and 84)
Upon
completion of the merger, Adams stockholders will receive 0.4461 shares of
Premier common stock for each share of Adams common stock they hold, with cash
paid in lieu of fractional shares. The exchange ratio is fixed and will not be
adjusted for changes in the market value of the common stock of Adams or
Premier. Because of this, the implied value of the consideration to Adams
stockholders will fluctuate between now and the completion of the merger. Based
on the closing price of Premier common stock on the NASDAQ Global Market, of
$6.97 on December 30, 2008, the last trading day before public announcement of
the merger, the 0.4461 exchange ratio represented approximately $3.11 in value
for each share of Adams common stock. Based on the closing price of Premier
common stock on the NASDAQ Global Market on July 6, 2009, the latest
practicable date before the date of this document, the 0.4461 exchange ratio
represented approximately $2.81 in value for each share of Adams common
stock.
Upon
completion of the merger, outstanding stock options to purchase Adams common
stock granted pursuant to Adams’ equity plans will be converted into stock
options to acquire shares of Premier common stock. The number of
shares of Adams common stock to be subject to the continuing options shall be
equal to the product of the number of shares of Adams common stock subject to
the Adams options and 0.4461, provided that any fractional shares of Premier
common stock resulting from such multiplication shall be rounded down to the
nearest share. The exercise price per share of Premier common stock
under the options shall be equal to the exercise price per share of Adams common
stock under the Adams options divided by 0.4461, provided that such exercise
price shall be rounded up to the nearest cent.
Material
U.S. Federal Income Tax Consequences of the Merger (See page 98)
The
merger is intended to be treated for U.S. federal income tax purposes as a
reorganization within the meaning of Section 368(a) of the Code. Assuming the
merger qualifies as such a reorganization, a U.S. holder of Adams common shares
generally will not recognize any gain or loss upon receipt of shares of Premier
common stock solely in exchange for Adams common shares in the merger, but will
recognize gain or loss with respect to cash received in lieu of a fractional
share of Premier common stock. It is a condition to the completion of the merger
that Premier and Adams receive written opinions from their respective counsel to
the effect that the merger will qualify as a reorganization within the meaning
of Section 368(a) of the Code. Premier shareholders will have no
income tax consequences in the merger.
Tax
matters are very complicated and the tax consequences of the merger to each
Adams stockholder will depend on such stockholder’s particular facts and
circumstances. Adams stockholders are urged to consult their tax advisors to
understand fully the tax consequences to them of the merger.
Recommendations
of the Premier Board of Directors (See pages 72 and 73)
After
careful consideration, the Premier board of directors, on December 23, 2008,
with Chairman of the Board Marshall T. Reynolds, President and Chief Executive
Officer Robert W. Walker and director Neal W. Scaggs abstaining, unanimously
approved the merger agreement. For the factors considered by the Premier board
of directors in reaching its decision to approve the merger agreement, see the
section entitled “The Issuance of Premier Shares and the Merger — Premier’s
Reasons for the Merger; Recommendation of the Premier Board of
Directors.” The
Premier board of directors, with Chairman of the Board Marshall T. Reynolds,
President and Chief Executive Officer Robert W. Walker and director Neal W.
Scaggs abstaining, unanimously recommends that the Premier shareholders vote
“FOR” the proposal to issue shares of Premier common stock in the merger, and,
without abstention by Messrs. Reynolds, Walker and Scaggs, “FOR” the proposal to
amend the Premier articles of incorporation to increase the number of shares of
authorized Premier common stock.
Recommendation
of the Adams Board of Directors (See pages 70-72)
After
careful consideration, the Adams board of directors, on December 29, 2008, with
director Marshall T. Reynolds and President and Chief Executive Officer Robert
W. Walker abstaining, approved and adopted the merger agreement by unanimous
vote of the directors present and voting at the meeting. For the factors
considered by the Adams board of directors in reaching its decision to adopt the
merger agreement, see the section entitled “The Issuance of Premier Shares and
the Merger — Adams’ Reasons for the Merger; Recommendation of the Adams Board of
Directors” beginning on page 70. The Adams board of directors, with
director Marshall T. Reynolds and President and Chief Executive Officer Robert
W. Walker abstaining, by a unanimous vote of the directors present and voting,
recommends that the Adams stockholders vote “FOR” the proposal to adopt the
merger agreement at the Adams special meeting.
Opinion
of Baxter Fentriss as Premier’s Financial Advisor (See page 78)
In
connection with the merger, the Premier board of directors received the written
opinion, dated December 30, 2008, of Premier’s financial advisor, Baxter
Fentriss and Company (“Baxter Fentriss”), as to the fairness, from a financial
point of view and as of the date of such opinion, to Premier of the 0.4461
exchange ratio provided for in the merger. The full text of Baxter Fentriss’
written opinion is attached as Annex II to this joint proxy
statement/prospectus and is incorporated herein by reference. Baxter Fentriss’
written opinion sets forth, among other things, the assumptions made, procedures
followed, factors considered and limitations on the review undertaken by Baxter
Fentriss in rendering its opinion. You are encouraged to read the opinion
carefully in its entirety. Baxter Fentriss’ opinion is addressed to the Premier
board of directors, relates only to the fairness, from a financial point of
view, to Premier of the exchange ratio provided for in the merger and does not
constitute a recommendation to any shareholder as to how such shareholder should
vote or act with respect to the proposed merger or any other
matter.
Opinion
of RP Financial as Adams’ Financial Advisor (See page 74)
In
connection with the merger, the Adams board of directors received the written
opinion, dated December 29, 2008, of Adams’ financial advisor, RP Financial, LC
(“RP Financial”), as to the fairness, from a financial point of view and as of
the date of such opinion, to Adams of the 0.4461 exchange ratio provided for in
the merger. The full text of RP Financial’s written opinion is attached as
Annex III to this joint proxy statement/prospectus and is incorporated
herein by reference. RP Financial’s written opinion sets forth, among other
things, the assumptions made, procedures followed, factors considered and
limitations on the review undertaken by RP Financial in rendering its opinion.
You are encouraged to read the opinion carefully in its entirety. RP Financial’s
opinion is addressed to the Adams board of directors, relates only to the
fairness, from a financial point of view, to Adams of the exchange ratio
provided for in the merger and does not constitute a recommendation to any
stockholder of Adams’ stock as to how such stockholder of Adams should vote or
act with respect to the proposed merger or any other matter.
Certain of
Premier’s Officers and Directors Have Financial Interests in the Merger That
Differ from Your Interests (Page 84)
Certain
of Premier’s executive officers and directors have substantial financial
interests in the merger that are different from, or in addition to, their
interests as Premier shareholders. The Premier board of directors was aware of
and considered these financial interests, among other matters, in evaluating and
negotiating the merger agreement and the merger, in approving the merger
agreement, and in recommending to the shareholders that the issuance of common
stock in connection with the merger be approved.
|
|
·
|
Marshall
T. Reynolds, Chairman of the Board of Directors of Premier and beneficial
owner of 563,425 shares of Premier common stock, constituting 8.8% of
outstanding shares of Premier common stock, also serves as a director of
Adams. Together with his wife Shirley A. Reynolds, Mr. Reynolds
is the beneficial owner of 600,024 shares of Adams common stock,
constituting 17.3% of the outstanding Adams shares as of July 15,
2009.
|
|
|
·
|
On
November 6, 2008, Adams received a $3.4 million loan from Marshall T.
Reynolds, of which $3.2 million was passed to its subsidiary ANB as a
capital infusion in accordance with the Written Agreement between ANB and
The Office of the Comptroller of the Currency (“OCC”) dated October 1,
2008. The Written Agreement requires ANB to achieve certain
regulatory capital levels, which are greater than the regulatory
requirements to be “well capitalized” under bank regulatory
requirements. The capital infusion was undertaken by a demand
note between Marshall T. Reynolds and Adams. The loan bears
interest at the Prime Rate with interest payable
quarterly.
|
|
|
·
|
Since
September 16, 2008, Robert W. Walker, President and Chief Executive
Officer of Premier, has served as Chairman, President and Chief Executive
Officer of Adams and as a director of ANB. Mr. Walker was also
appointed as Acting Interim President and Chief Executive Officer of
ANB. Mr. Walker beneficially owns 43,572 shares of Premier
common stock and 9,398 shares of Adams common
stock.
|
|
|
·
|
Neal
W. Scaggs, a director of Premier and beneficial owner of 6,825 shares of
Premier common stock, beneficially owns 60,000 shares of Adams common
stock.
|
Certain
Adams’ Officers and Directors Have Financial Interests in the Merger That Differ
from Your Interests (Page 82)
Certain
Adams’ directors and executive officers have substantial financial interests in
the merger that are different from, or in addition to, their interests as Adams
stockholders. The Adams board of directors was aware of and considered these
interests, among other matters, in evaluating and negotiating the merger
agreement and the merger, and in recommending to Adams stockholders that the
merger agreement be approved and adopted.
|
|
·
|
Marshall
T. Reynolds, Chairman of the Board of Directors of Premier and beneficial
owner of 563,425 shares of Premier common stock, constituting 8.8% of
outstanding shares of Premier common stock, also serves as a director of
Adams. Together with his wife Shirley A. Reynolds, Mr. Reynolds
is the beneficial owner of 600,024 shares of Adams common stock,
constituting 17.3% of the outstanding Adams shares as of July 15,
2009.
|
|
|
·
|
Since
September 16, 2008, Robert W. Walker, President and Chief Executive
Officer of Premier, has served as Chairman, President and Chief Executive
Officer of Adams and as a director of ANB. Mr. Walker was also
appointed as Acting Interim President and Chief Executive Office of
ANB. Mr. Walker beneficially owns 43,572 shares of Premier
common stock and 9,398 shares of Adams common
stock.
|
|
|
·
|
On
November 6, 2008, Adams received a $3.4 million loan from Marshall T.
Reynolds of which $3.2 million was passed to its subsidiary ANB as a
capital infusion in accordance with the Written Agreement between ANB and
The Office of the Comptroller of the Currency dated October 1, 2008, which
requires ANB to achieve certain regulatory capital levels, which are
greater than the regulatory requirements to be “well capitalized” under
bank regulatory requirements. The capital infusion was
undertaken by a demand note between Marshall T. Reynolds and
Adams. The loan bears interest at the Prime Rate with interest
payable quarterly.
|
| |
·
|
Adams
is indebted to First Guaranty Bank (“First Guaranty”), of Hammond
Louisiana pursuant to (a) a $5,000,000 promissory note due August 1, 2009
and (b) a $4,000,000 line of credit, of which $3,482,000 was outstanding
as of December 31, 2008. Marshall T. Reynolds is a director and
beneficially owns approximately 30% of the outstanding common stock of
First Guaranty. Premier proposes to repay both of these loans
with proceeds from the sale of Premier preferred stock to the U.S.
Treasury under the Troubled Asset Relief Program ("TARP") Capital Purchase
Program ("CPP").
|
|
|
·
|
Karen
E. Troutman, Senior Vice President and Chief Financial Officer of Adams is
party to a Change of Control Agreement with Adams and ANB pursuant to
which she will receive $110,000 severance pay if her employment is
terminated after consummation of the merger. Additionally, Ms.
Troutman is the holder of options to purchase 3,025 shares of Adams common
stock, which will be converted into options to acquire Premier common
stock if the merger is consummated.
|
|
|
·
|
Adams
directors and executive officers beneficially own 686,514 shares of Adams
common stock, constituting 19.8% of all outstanding Adams common
stock.
|
Directors
and Management Following the Merger (See page 97)
Following
the merger, the board of directors of Adams prior to the merger will continue as
directors of the merged entity, which will then be a wholly-owned subsidiary of
Premier. The directors of Premier will remain unchanged after the
merger.
Conditions
to Completion of the Merger (page 86)
The
obligations of Premier and Adams to complete the merger depend on a number of
conditions being met. These include:
|
|
·
|
Adams’
stockholders’ approval of the merger
agreement;
|
|
|
·
|
Premier’s
shareholders’ approval of issuance of Premier common stock in the merger
(however it is not a condition that Premier shareholders approve the
charter amendment increasing authorized shares from 10,000,000 to
20,000,000);
|
|
|
·
|
approval
of the merger by the necessary federal and state regulatory
authorities;
|
|
|
·
|
absence
of any law or court order prohibiting the
merger;
|
|
|
·
|
receipt
of opinions from counsel to Adams and Premier that the merger will qualify
as a reorganization within the meaning of Section 368(a) of the Internal
Revenue Code;
|
|
|
·
|
issuance
to the U.S. Treasury of Premier preferred stock in the amount of at least
$20,000,000 and attendant warrants for the purchase of Premier common
stock pursuant to the TARP CPP;
|
|
|
·
|
ANB’s
substantial compliance with the provisions of the written Agreement by and
between ANB and The Office of the Comptroller of the Currency dated
October 1, 2008; and
|
|
|
·
|
the
continued accuracy of certain representations and
warranties.
|
Where
the law permits, Adams or Premier could choose to waive a condition to an
obligation to complete the merger although that condition has not been
satisfied. We cannot be certain when, or if, the conditions to the merger will
be satisfied or waived, or that the merger will be completed.
Regulatory
Approvals (page 90)
We
cannot complete the merger unless it is approved by the Board of Governors of
the Federal Reserve System (“Federal Reserve Board”) and the Bureau of Financial
Institutions of the Commonwealth of Virginia, State Corporation Commission. Once
the Federal Reserve Board approves the merger, we have to wait from 15 to 30
days before we can complete it. During that time, the Department of Justice may
challenge the merger.
As
of the date of this proxy statement/prospectus all necessary applications have
been filed, but we have not yet received the required approvals. While we do not
know of any reason why we would not be able to obtain the necessary approvals in
a timely manner, we cannot be certain when or if we will receive
them.
Termination
of the Merger Agreement (page 89)
Adams
and Premier may mutually agree to terminate the merger at any time.
Either
Adams or Premier may terminate the merger agreement if any of the following
occurs:
|
|
·
|
there
has been a material adverse change in the financial condition of Premier,
any of the Premier Banks, or Adams or either of the Adams
Banks;
|
|
|
·
|
either
party breaches any of its representations or obligations under the merger
agreement, and does not cure the breach within 30 days if such breach
individually or in the aggregate with other breaches results in a material
adverse effect;
|
|
|
·
|
the
approval of any governmental entity required for consummation of the
merger is denied;
|
|
|
·
|
the
stockholders of Adams do not approve the merger
agreement;
|
|
|
·
|
the
shareholders of Premier do not approve the issuance of Premier common
stock in the merger; or
|
|
|
·
|
if
the Closing does not occur on or before September 30, 2009 unless extended
by mutual agreement in writing.
|
Premier
may terminate the merger agreement:
|
|
·
|
if
the issuance of Premier preferred stock in the amount of at least
$20,000,000 and attendant warrants for Premier common stock to the U.S.
Treasury has not occurred; or
|
|
|
·
|
if
ANB is not in substantial compliance with the written Agreement between
ANB and the Office of the Comptroller of the
Currency.
|
Accounting
Treatment (page 97)
The merger will be accounted for under
the purchase method of accounting.
Material
Differences in the Rights of Premier Shareholders and Adams Stockholders (page
229)
The
rights of Premier’s shareholders are governed by Kentucky law and by Premier’s
articles of incorporation and bylaws. The rights of Adams’ stockholders are
governed by Delaware law and by Adams’ articles of incorporation and bylaws.
Upon completion of the merger, the rights of Premier’s shareholders, including
former stockholders of Adams, will continue to be governed by Kentucky law and
the articles of incorporation and bylaws of Premier.
Agreement
Not to Solicit Other Proposals (page 96)
Adams
has agreed not to solicit, initiate, encourage or authorize any person to
solicit from any third parties any inquiries or proposals relating to the
acquisition of Adams, unless required by Adams’ or the Adams Banks primary
banking regulators. However, this does not limit or affect the
fiduciary obligation of Adams’ directors to consider unsolicited inquiries or
offers.
Amendment;
Waiver (page 90)
The
merger agreement provides that Adams and Premier, by mutual agreement, may amend
the merger agreement at any time, except that the merger agreement may not be
amended in any material respect after shareholder approval without further
approval by such shareholders. The merger agreement also provides
that Adams and Premier may at any time, whether before or after shareholder
approval, waive any inaccuracies of the other party in representations and
warranties contained in the merger agreement, compliance with any of the
covenants or undertakings of the other party contained in the merger agreement,
or the performance of the other party of any of its obligations set out in the
merger agreement.
No
Appraisal Rights (See page 100)
Under
Delaware law, the holders of Adams common stock are not entitled to appraisal
rights in connection with the merger.
Under
Kentucky law, the holders of Premier common stock are not entitled to appraisal
rights in connection with the share issuance proposal or the charter amendment
proposal.
The
Special Meetings
The
Premier Special Meeting (See page 55)
The
special meeting of Premier shareholders will be held at the Pullman Plaza Hotel,
1001 Third Avenue, Huntington, West Virginia 25701, at 10:00 a.m., local time,
on September 1, 2009. At the Premier special meeting, Premier shareholders will
be asked:
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to
vote on a proposal to approve the issuance of Premier common stock in
connection with the merger;
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to
vote on a proposal to amend the Premier articles of incorporation to
increase the authorized number of shares of Premier common stock from
10,000,000 to 20,000,000; and
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to
vote upon an adjournment of the Premier special meeting, if necessary, to
solicit additional proxies if there are not sufficient votes to approve
the proposal to issue Premier common stock in connection with the
merger.
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to
transact any other business that may properly be brought before the
Premier special meeting or any adjournments or postponements
thereof.
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You
may vote at the Premier special meeting if you owned shares of Premier common
stock at the close of business on July 15, 2009. On that date, there
were 6,392,772 shares of common stock of Premier outstanding and entitled to
vote.
The
Premier articles of incorporation generally provide that you can cast one vote
for each Premier share that you owned as of the record date. The following votes
are required to approve each of the listed proposals:
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The
issuance of Premier common stock to Adams stockholders requires approval
by the affirmative vote of a majority of outstanding shares held by the
shareholders of Premier (excluding the shares held by Marshall T.
Reynolds, Chairman of the Board of Directors of Premier, Robert W. Walker,
President and Chief Executive Officer of Premier and Neal W. Scaggs, a
director of Premier).
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The
proposal to amend the Premier articles of incorporation requires approval
by the affirmative vote of holders of a majority of shares voting at the
special meeting, assuming a quorum is
present.
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Approval
of any proposal to adjourn the Premier special meeting, if necessary, for
the purpose of soliciting additional proxies requires the affirmative vote
of holders of a majority of the total voting power present or represented
by proxy at the Premier special
meeting.
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On
the record date, approximately 2% of the outstanding shares of Premier common
stock were held by Premier directors and executive officers and their affiliates
(excluding the Premier shares held by Mr. Reynolds, Mr. Walker and Mr. Scaggs).
We currently expect that Premier’s directors and executive officers (other than
Mr. Reynolds, Mr. Walker and Mr. Scaggs with respect to the proposal to issue
Premier common stock in the merger) will vote their shares in favor of the
above-listed proposals, although none of them has entered into any agreements
obligating him or her to do so.
The
Adams Special Meeting (See page 60)
The
special meeting of Adams stockholders will take place on September 1, 2009,
10:00 a.m. (local time), at the offices of Adams National Bank, 1130 Connecticut
Avenue, NW, Suite 200, Washington, DC 20036. At the special
meeting, stockholders of Adams will be asked:
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to
adopt the Agreement of Merger, dated as of December 30, 2008, among
Premier, AANB Acquisition Corp., a wholly owned subsidiary of Premier, and
Adams pursuant to which AANB Acquisition Corp. will be merged with and
into Adams and each outstanding share of Adams common stock will be
converted into the right to receive 0.4461 shares of Premier common stock,
with cash paid in lieu of fractional shares;
and
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to
vote upon an adjournment of the Adams special meeting, if necessary, to
solicit additional proxies if there are not sufficient votes to approve
the proposal to adopt the merger
agreement.
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to
transact any other business that may properly be brought before the Adams
special meeting or any adjournments or postponements
thereof.
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You
may vote at the Adams special meeting if you owned common stock of Adams at the
close of business on the record date, July 15, 2009. On that date there were
3,463,569 shares of common stock of Adams outstanding and entitled to vote. You
may cast one vote for each share of common stock of Adams that you owned on the
record date.
As
of the record date, 19.8% of the outstanding common stock of Adams entitled to
vote was owned by its directors and executive officers and their affiliates. We
currently expect that Adams’ directors and executive officers will vote their
shares in favor of the merger, although none of them has entered into any
agreements obligating them to do so.
The
affirmative vote of the holders of at least a majority of the shares of
outstanding common stock of Adams as of the record date is required to adopt the
merger agreement.
Approval
of any proposal to adjourn the Adams special meeting, if necessary, for the
purpose of soliciting additional proxies requires the affirmative vote of
holders of a majority of the total voting power present or represented by proxy
at the Adams special meeting.
In
addition to the other information included and incorporated by reference into
this document, including the matters addressed in the section entitled
“Cautionary Statement Regarding Forward-Looking Statements,” you should
carefully consider the following risks before deciding whether to vote for
adoption and approval of the merger agreement, in the case of Adams
stockholders, or for the issuance of shares of Premier common stock in the
merger and the Premier articles of incorporation amendment, in the case of
Premier shareholders. In addition, you should read and consider the risks
associated with each of the businesses of Premier and Adams because these risks
will also affect the combined company. You should also read and consider the
other information in this document and the other documents incorporated by
reference into this document. See the section entitled “Where You Can Find More
Information” beginning on page 234.
The
exchange ratio is fixed and will not be adjusted in the event of any change in
either Premier’s or Adams’ stock price.
Upon
closing of the merger, each share of Adams common stock will be converted into
the right to receive 0.4461 shares of Premier common stock with cash paid in
lieu of fractional shares. This exchange ratio was fixed in the merger agreement
and will not be adjusted for changes in the market price of either Premier
common stock or Adams common stock. Changes in the price of Premier common stock
prior to the merger will affect the market value that Adams stockholders will
receive on the date of the merger. Stock price changes may result from a variety
of factors (many of which are beyond Adams’ or Premier’s control), including the
following factors:
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changes
in Adams’ or Premier’s respective businesses, operations and
prospects;
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changes
in market assessments of the business, operations and prospects of either
company;
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market
assessments of the likelihood that the merger will be completed, including
related considerations regarding regulatory approvals of the
merger;
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interest
rates, general market and economic conditions and other factors generally
affecting the price of Premier’s and Adams’ common stock;
and
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federal,
state and local legislation, governmental regulation and legal
developments in the businesses in which Adams and Premier
operate.
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The
price of Premier common stock at the closing of the merger may vary from its
price on the date the merger agreement was executed, on the date of this
document and on the date of the shareholder meetings of Premier and Adams. As a
result, the market value represented by the exchange ratio will also vary. For
example, based on the range of closing prices of Premier common stock during the
period from December 31, 2008, the last trading day before public announcement
of the merger, through July 6, 2009, the latest practicable date before the date
of this document, the exchange ratio represented a market value ranging from a
low of $1.78 to a high of $4.01 for each share of Adams common
stock.
Because the date that the merger is
completed is expected to be later than the date of the shareholder meetings, at
the time of your shareholder meeting, you may not know the exact market value of
the Premier common stock that Adams stockholders will receive upon completion of
the merger.
You
should consider the following aspects of a fixed exchange ratio:
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If
the price of Premier common stock increases between the date the merger
agreement was signed or the date of the Premier special meeting and the
effective time of the merger, Adams stockholders will receive shares of
Premier common stock that have a market value that is greater than the
market value of such shares when the merger agreement was signed or the
date of the Premier special meeting, respectively, and Premier will issue
shares of its common stock with a market value greater than the market
value calculated pursuant to the exchange ratio on those earlier dates.
Therefore, while the exchange ratio is fixed, Premier shareholders cannot
be sure of the market value of the consideration that will be paid to
Adams stockholders upon completion of the
merger.
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If
the price of Premier common stock declines between the date the merger
agreement was signed or the date of the Adams special meeting and the
effective time of the merger, including for any of the reasons described
above, Adams stockholders will receive shares of Premier common stock that
have a market value upon completion of the merger that is less than the
market value calculated pursuant to the exchange ratio on the date the
merger agreement was signed or on the date of the Adams special meeting,
respectively. Therefore, while the number of Premier shares to be issued
in the merger is fixed, Adams stockholders cannot be sure of the market
value of the Premier common stock they will receive upon completion of the
merger or the market value of Premier common stock at any time after the
completion of the merger.
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The
ability to complete the merger is subject to the receipt of consents and
approvals from government entities, which may impose conditions that could have
an adverse effect on Premier or Adams or could cause them to abandon the
merger.
We
are unable to complete the merger until after we receive approvals from the
Federal Reserve Board and the Bureau of Financial Institutions of the
Commonwealth of Virginia, State Corporation Commission. In deciding whether to
grant some of these approvals, the relevant governmental entity will make a
determination of whether, among other things, the merger is in the public
interest. Regulatory entities may impose requirements or obligations as
conditions for their approval.
The
merger agreement may require us to accept conditions from these regulators that
could adversely impact the combined company without either of us having the
right to refuse to close the merger on the basis of those regulatory conditions.
We can provide no assurance that we will obtain the necessary approvals or that
any required conditions will not have a material adverse effect on Premier
following the merger. In addition, we can provide no assurance that these
conditions will not result in the abandonment of the merger. See “The Issuance
of Premier Shares and the Merger — Regulatory Approvals Required for the Merger”
beginning on page 90 and “The Issuance of Premier Shares and the Merger —
Conditions to Completion of the Merger” beginning on page 86.
Failure
to complete the merger could negatively impact the stock prices and the future
business and financial results of Adams and Premier.
If
the merger is not completed, the ongoing businesses of Adams or Premier may be
adversely affected and Adams and Premier will be subject to several risks,
including the following:
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having
to pay certain costs relating to the proposed merger, such as legal,
accounting, financial advisor, filing, printing and mailing fees;
and
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diverting
the focus of management of each of the companies from pursuing other
opportunities that could be beneficial to the
companies,
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in
each case, without realizing any of the benefits of having the merger completed.
If the merger is not completed, Adams and Premier cannot assure their
shareholders that these risks will not materialize and will not materially
affect the business, financial results and stock prices of Adams or
Premier.
The
integration of the operations of Premier and Adams may be more difficult than
anticipated.
The
success of the merger will depend on a number of factors, including (but not
limited to) Premier’s ability to:
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successfully
compete in the Washington, D.C. and Richmond, Virginia markets, markets
not previously served by Premier;
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timely
and successfully integrate the operations of Premier and
Adams;
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maintain
existing relationships with depositors in the Adams Banks, to minimize
withdrawals of deposits subsequent to the
merger;
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maintain
and enhance existing relationships with borrowers to limit potential
losses from loans made by the Adams
Banks;
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control
the incremental non-interest expense from Premier to maintain overall
operating efficiencies;
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retain
and attract qualified personnel at Premier and the Adams Banks;
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compete
effectively in the communities served by Premier and the Adams Banks;
and
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effectively
recapitalize ANB.
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Adams’
stockholders will have less influence as shareholders of Premier than as
stockholders of Adams.
Adams
stockholders currently have the right to vote in the election of the board of
directors of Adams and on other matters affecting Adams. The stockholders of
Adams as a group will own approximately 19.5% of the combined organization
(Premier and Adams). When the merger occurs, each stockholder that receives
shares of Premier common stock will become a shareholder of Premier with a
percentage ownership of the combined organization much smaller than such
stockholder’s percentage ownership of Adams. Because of this, stockholders of
Adams will have less influence on the management and policies of Premier than
they now have on the management and policies of Adams.
Issuance
of Premier preferred stock to the U.S. Treasury will affect all holders of
Premier common stock.
It is a condition to completion of the
merger that Premier complete the sale of Premier preferred stock in the amount
of at least $20,000,000 to the U.S. Treasury under the Troubled Asset Relief
Program (“TARP”) Capital Purchase Program (“CPP”).
Premier’s participation in the CPP will
affect the shareholders of Premier common stock, and, if the merger is
completed, Adams stockholders who become Premier shareholders and their rights
as shareholders, as described below.
Upon
Premier’s participation in the U.S. Treasury’s CPP, the U.S. Treasury would
purchase from Premier cumulative perpetual preferred shares, with a liquidation
preference of at least $1,000 per share (the “Senior Preferred
Shares”). The Senior Preferred Shares would constitute Tier 1 capital
and would rank senior to Premier’s common shares. The Senior
Preferred Shares would pay cumulative dividends at a rate of 5% per annum for
the first five years and would reset to a rate of 9% per annum after five
years. Dividends would be payable quarterly in
arrears. The U.S. Treasury’s investment will be based upon the
combined pro forma risk-weighted assets of Premier and Adams at the end of the
quarter immediately preceding issuance of the shares. Based on the
pro forma combined risk-weighted assets of Premier and Adams at March 31, 2009,
Premier would issue 22,000 Senior Preferred Shares.
The
Senior Preferred Shares would be non-voting shares, but would have class voting
rights on (i) any authorization or issuance of shares ranking senior to the
Senior Preferred Shares; (ii) any amendment to the rights of the Senior
Preferred Shares; or (iii) any merger, consolidation, share exchange,
reclassification or similar transaction which would adversely affect the rights
of the Senior Preferred Shares. In the event that the cumulative
dividends described above were not paid in full for an aggregate of six dividend
periods or more, whether or not consecutive, the authorized number of directors
of Premier would automatically be increased by two and the holders of the Senior
Preferred Shares would have the right to elect two directors. The
right to elect directors would end when dividends have been paid in full for
four consecutive dividend periods.
Public
companies, such as Premier, participating in the CPP must also issue warrants
(the “Warrants”) to the U.S. Treasury to purchase a number of common shares
having a total market value equal to 15% of the aggregate amount of the Senior
Preferred Shares purchased by the U.S. Treasury.
As
long as the Senior Preferred Shares remain outstanding, unless all accrued and
unpaid dividends for all past dividend periods on the Senior Preferred Shares
are fully paid, Premier would not be permitted to declare or pay dividends on
any common shares, any junior preferred shares or any preferred shares ranking
pari passu with the
Senior Preferred Shares (other than in the case of pari passu preferred shares,
dividends on a pro rata basis with the Senior Preferred Shares), nor would
Premier be permitted to repurchase or redeem any common shares or preferred
shares other than the Senior Preferred Shares. Unless the Senior
Preferred Shares have been transferred or redeemed in whole, until the third
anniversary of the U.S. Treasury’s investment, any increase in common share
dividends would be prohibited without the prior approval of the U.S.
Treasury. In addition, unless the Senior Preferred Shares have been
transferred or redeemed in whole, until the third anniversary of the U.S.
Treasury’s investment, the U.S. Treasury’s consent would be required for any
share repurchases other than repurchases of the Senior Preferred Shares and
repurchases of junior preferred shares or common shares in connection with the
administration of any employee benefit plan in the ordinary course of business
and consistent with past practice.
To
participate in the CPP, Premier will be required to adopt the U.S. Treasury’s
standards and restrictions for executive compensation and corporate governance,
for the period during which the U.S. Treasury holds equity issued under the
CPP. These standards generally apply to the chief executive officer,
chief financial officer, plus the next three most highly compensated executive
officers. These standards may change in the future as a result of
legislative or regulatory initiatives.
Premier’s
and Adams’ expenses will increase as a result of increases in FDIC insurance
premiums.
The Federal Deposit Insurance
Corporation imposes an assessment against institutions for deposit
insurance. This assessment is based on the risk category of the
institution and ranges from 5 to 43 basis points of the institution’s
deposits. Federal law requires that the designated reserve ratio for
the deposit insurance fund be established by the FDIC at 1.15% to 1.50% of
estimated insured deposits. If this reserve ratio drops below 1.15%
or the FDIC expects that it will do so within six months, the FDIC must, within
90 days, establish and implement a plan to restore the designated reserve ratio
to 1.15% of estimated insured deposits within five years (absent extraordinary
circumstances).
Recent bank failures coupled with
deteriorating economic conditions have significantly reduced the deposit
insurance fund’s reserve ratio. As of June 30, 2008, the designated reserve
ratio was 1.01% of estimated insured deposits at March 31, 2008. As a
result of this reduced reserve ratio, on October 16, 2008, the FDIC published a
proposed rule that would restore the reserve ratios to its required
level. The proposed rule would raise the current deposit insurance
assessment rates uniformly for all institutions by 7 basis points (to a range
from 12 to 50 basis points) for the first quarter of 2009. The
proposed rule would also alter the way the FDIC calculates federal deposit
insurance assessment rates beginning in the second quarter of 2009 and
thereafter.
On May 22, 2009, the FDIC issued a
final rule imposing a special assessment of 5 basis points on total assets less
tier 1 capital on June 30, 2009, which would be collected on September 30,
2009. The FDIC expects this assessment to be booked as a second
quarter 2009 expense. The rule also provides the FDIC with authority
to impose up to two additional assessments of up to 5 basis points each on total
assets less tier 1 capital.
In addition, the Emergency Economic
Stabilization Act of 2008 (EESA) temporarily increased the limit on FDIC
insurance coverage for deposits to $250,000 through December 31, 2009, and the
FDIC took action to provide coverage for newly-issued senior unsecured debt and
non-interest bearing transaction and for unsecured debt and non-interest bearing
transaction and certain NOW accounts in excess of the $250,000 limit, for which
institutions will be assessed additional premiums. These actions will
increase Premier’s and Adams’ non-interest expense in 2009 and in future years
as long as the increased premiums are in place.
Changes
in Interest Rates Could Negatively Impact Premier’s Results of
Operations
The earnings of Premier are primarily
dependent on net interest income, which is the difference between interest
earned on loans and investments, and interest paid on interest-bearing
liabilities such as deposits and borrowings. Interest rates are highly sensitive
to many factors, including government monetary and fiscal policies; domestic and
international economic and political conditions; and, in particular, changes in
the discount rate by the Board of Governors of the Federal Reserve System.
Conditions such as inflation, recession, unemployment, money supply, government
borrowing and other factors beyond management’s control may also affect interest
rates. If Premier’s interest-earning assets mature, reprice or prepay more
quickly than interest-bearing liabilities in a given period, a decrease in
market interest rates could adversely affect net interest income. Likewise, if
interest-bearing liabilities mature or reprice, or, in the case of deposits, are
withdrawn by the accountholder, more quickly than interest-earning assets in a
given period, an increase in market interest rates could adversely affect net
interest income. Given Premier’s current mix of assets and liabilities, a
declining interest rate environment would negatively impact Premier’s results of
operations.
Fixed rate loans increase Premier’s
exposure to interest rate risk in a rising rate environment because
interest-bearing liabilities would be subject to repricing before assets become
subject to repricing. Adjustable rate loans decrease the risks to a lender
associated with changes in interest rates but involve other risks. As interest
rates rise, the periodic payment by the borrower rises to the extent permitted
by the terms of the loan, and the increased periodic payment increases the
potential for default. At the same time, for secured loans, the marketability of
the underlying collateral may be adversely affected by higher interest rates. In
a declining interest rate environment, there is likely to be an increase in
prepayment activity on loans as the borrowers refinance their loans at lower
interest rates. Under these circumstances, Premier’s results of operations could
be negatively impacted.
Changes in interest rates also can
affect the value of loans, investments and other interest-rate sensitive assets
and Premier’s ability to realize gains on the sale or resolution of assets. This
type of income can vary significantly from quarter-to-quarter and year-to-year
based on a number of different factors, including the interest rate environment.
An increase in interest rates that adversely affects the ability of borrowers to
pay the principal or interest on loans may lead to an increase in non-performing
assets and increased loan loss reserve requirements that could have a material
adverse effect on Premier’s results of operations.
Regional
Economic Changes in Premier’s Markets Could Adversely Impact Results From
Operations
Like all banks, Premier is subject to
the effects of any economic downturn, and in particular a significant decline in
home values or reduced commercial development in Premier’s markets could have a
negative effect on results of operations. Premier’s success depends primarily on
the general economic conditions in the counties in which Premier conducts
business, and in the West Virginia, southern Ohio and northern Kentucky areas in
general. Unlike larger banks that are more geographically diversified, Premier
provides banking and financial services to customers primarily in the West
Virginia counties of Barbour, Boone, Harrison, Lewis, Lincoln, Logan, Kanawha,
Upshur, Roane, Jackson and Wood, as well as the southern Ohio counties of
Gallia, Lawrence and Scioto and the northern Kentucky counties of Bracken,
Fleming, Greenup, Lewis, Mason, and Robertson. The local economic conditions in
these market areas have a significant impact on Premier’s ability to originate
loans, the ability of the borrowers to repay these loans and the value of the
collateral securing these loans. A significant decline in the general economic
conditions caused by inflation, recession, unemployment or other factors beyond
Premier’s control would affect these local economic conditions and could
adversely affect Premier’s financial condition and results of operations.
Additionally, a significant decline in home values would likely lead to
increased delinquencies and defaults in both the consumer home equity loan and
residential real estate loan portfolios and result in increased losses in these
portfolios.
New
or Revised Tax, Accounting and Other Laws, Regulations, Rules and Standards
Could Significantly Impact Strategic Initiatives, Results of Operations and
Financial Condition
The
financial services industry is highly regulated and laws and regulations may
sometimes impose significant limitations on operations. These limitations, and
sources of potential liability for the violation of such laws and regulations,
are described under the heading “Business — Regulatory Matters.” These
regulations, along with the currently existing tax and accounting laws,
regulations, rules and standards, control the methods by which financial
institutions conduct business; implement strategic initiatives, as well as past,
present, and contemplated tax planning; and govern financial disclosures. These
laws, regulations, rules, and standards are constantly evolving and may change
significantly over time. The nature, extent, and timing of the adoption of
significant new laws, changes in existing laws, or repeal of existing laws may
have a material impact on Premier’s results of operations and financial
condition, the effects of which are impossible to predict at this
time.
The
Extended Disruption of Vital Infrastructure Could Negatively Impact Premier’s
Results of Operations and Financial Condition
Premier’s operations depend upon, among
other things, its technological and physical infrastructure, including its
equipment and facilities. While disaster recovery procedures are in
place, an extended disruption of its vital infrastructure by fire, power loss,
natural disaster, telecommunications failure, computer hacking and viruses,
terrorist activity or the domestic and foreign response to such activity, or
other events outside of Premier’s control, could have a material adverse impact
either on the financial services industry as a whole, or on Premier’s business,
results of operations, and financial condition.
Strong
Competition Within Premier’s Market Area May Limit Profitability
Premier faces significant competition
both in attracting deposits and in the origination of loans, as described under
the heading “Business — Competition”, page 104. Mortgage bankers, commercial
banks, credit unions and other savings institutions, which have offices in the
market areas of Premier Banks, have historically provided most of the
competition for the Premier Banks for deposits; however, each Premier Bank also
competes with financial institutions that operate through Internet banking
operations throughout the continental United States. In addition, and
particularly in times of high interest rates, each Premier Bank faces additional
and significant competition for funds from money market and mutual funds,
securities firms, commercial banks, credit unions and other savings institutions
located in the same communities and those that operate through Internet banking
operations throughout the continental United States. Many competitors have
substantially greater financial and other resources than Premier and the Premier
Banks. Moreover, credit unions do not pay federal or state income taxes and are
subject to fewer regulatory constraints than community banks and as a result,
they may enjoy a competitive advantage over Premier. The Premier Banks compete
for loans principally on the basis of the interest rates and loan fees they
charge, the types of loans they originate and the quality of services they
provide to borrowers. This advantage places significant competitive pressure on
the prices of loans and deposits.
Loss
of Large Checking and Money Market Deposit Customers Could Increase Cost of
Funds and Have a Negative Effect on Results of Operations
Premier has a number of large deposit
customers that maintain balances in checking, money market and repurchase
agreement accounts at the Premier Banks. The ability to attract these types of
deposits has a positive effect on Premier’s net interest margin as they provide
a relatively low cost of funds to Premier compared to certificates of deposits
or advances. If these depositors were to withdraw these funds and the Premier
Banks were not able to replace them with similar types of deposits, the cost of
funds would increase and Premier’s results of operation would be negatively
impacted.
Extensive
Regulation and Supervision
Premier, primarily through the Premier
Banks, is subject to extensive federal and state regulation and supervision.
Banking regulations are primarily intended to protect depositors’ funds, federal
deposit insurance funds and the banking system as a whole, not shareholders.
These regulations affect Premier’s lending practices, capital structure,
investment practices, dividend policy and growth, among other things. Premier is
also subject to a number of federal laws, which, among other things, require it
to lend to various sectors of the economy and population, and establish and
maintain comprehensive programs relating to anti-money laundering and customer
identification. Congress and federal regulatory agencies continually review
banking laws, regulations and policies for possible changes. Changes to
statutes, regulations or regulatory policies, including changes in
interpretation or implementation of statutes, regulations or policies, could
affect Premier in substantial and unpredictable ways. Such changes could subject
Premier to additional costs, limit the types of financial services and products
it may offer and/or increase the ability of non-banks to offer competing
financial services and products, among other things. Failure to comply with
laws, regulations or policies could result in sanctions by regulatory agencies,
civil money penalties and/or reputation damage, along with corrective action
plans required by regulatory agencies, any of which could have a material
adverse effect on Premier’s business, financial condition and results of
operations. Premier and certain of the Premier Banks have in the past
been subject to such corrective action plans, and therefore there may be some
residual reputation damage within the regulatory agencies. While
Premier has policies and procedures designed to prevent any such violations,
there can be no assurance that such violations will not occur. See “Business -
Regulatory Matters”.
Dividend
payments by subsidiaries to Premier and by Premier to its shareholders can be
restricted.
Premier’s
principal source of funds for dividend payments and its debt service obligations
is dividends received from the Premier Banks. Banking regulations
limit the amount of dividends that may be paid without prior approval of
regulatory agencies. Under these regulations, the amount of dividends
that may be paid in any calendar year is limited to the current year’s net
profits, as defined, combined with the retained net profits of the preceding two
years, subject to the capital requirements and additional restrictions as
discussed in Note 18 to Premier’s Consolidated Financial
Statements. During 2009 the Premier Banks could, without prior
approval, declare dividends of approximately $2.4 million plus any 2009 net
profits retained to the date of the dividend declaration.
As
explained in “Risk Factors Relating to the Merger”, completion of the merger is
conditioned upon Premier’s receipt of at least $20,000,000 from the sale of
Premier preferred stock to the U.S. Treasury under the TARP CPP. If
Premier preferred stock is issued, as long as it remains outstanding, unless all
accrued and unpaid dividends thereon are fully paid, Premier would not be
permitted to declare or pay dividends on Premier common stock. Unless
the Premier preferred stock is transferred or redeemed in whole, until the third
anniversary of the U.S. Treasury’s investment, any increase in dividends on
Premier common stock is prohibited without the prior approval of the U.S.
Treasury.
Allowance
for Loan Losses May Be Insufficient
Premier, through the Premier Banks,
maintains an allowance for loan losses based on, among other things, national
and regional economic conditions, historical loss experience, evaluations of
potential losses on identified problem loans and delinquency
trends. Premier believes that its allowance for loan losses is
maintained at a level adequate to absorb any probable losses in its loan
portfolio given the current information known to management. These
determinations are based upon estimates that are inherently subjective, and
their accuracy depends on the outcome of future events. Therefore,
Premier cannot predict loan losses with certainty and ultimate losses may differ
from current estimates. Depending on changes in economic, operating
and other conditions, including changes in interest rates, which are generally
beyond its control, Premier’s actual losses could exceed its current allowance
estimates. Premier’s allowance may not be sufficient to cover all
charge-offs in future periods. If charge-offs exceed Premier’s
allowance, its earnings would decrease. In addition, regulatory
agencies review Premier’s allowance for loan losses and may require additions to
the allowance based upon their judgment about information available to them at
the time of their examination. A required increase in Premier’s
allowance for loan losses could reduce its earnings.
Claims
and Litigation Pertaining to Fiduciary Responsibility
From time to time, shareholders or
customers may make claims and take legal action pertaining to Premier’s and
Premier Banks’ performance of their fiduciary responsibilities. Defending such
claims can impose a material expense on Premier. If such claims and
legal actions are not resolved in a manner favorable to the Premier Banks they
may result in financial liability and/or adversely affect the market perception
of the Premier Banks and their products and services as well as impact customer
demand for those products and services. Any financial liability or reputation
damage could have a material adverse effect on Premier’s business, which, in
turn, could have a material adverse effect on its financial condition and
results of operations
Inability
to Hire and Retain Qualified Employees
Premier’s performance is largely
dependent on the talents and efforts of highly skilled individuals and their
ability to attract and retain customer relationships in a community bank
environment. There is intense competition in the financial services industry for
qualified employees. In addition, Premier faces increasing competition with
businesses outside the financial services industry for the most highly skilled
individuals. Premier’s business could be adversely affected if it were unable to
retain and motivate its existing key employees and management
team. Furthermore, Premier’s success may be impacted if it were
unable to recruit replacement management and key employees in a reasonable
amount of time.
Recent
Legislative and Regulatory Initiatives to Address Difficult Market and Economic
Conditions May Not Stabilize the United States Banking System and the Enactment
of These Initiatives May Significantly Impact Premier’s Financial Condition,
Results of Operations, Liquidity or Stock Price.
The Emergency Economic Stabilization
Act (EESA), which established TARP, was signed into law in October 2008. As part
of TARP, the Treasury established the CPP to provide up to $700 billion of
funding to eligible financial institutions through the purchase of capital stock
and other financial instruments for the purpose of stabilizing and providing
liquidity to the U.S. financial markets. Then, on February 17, 2009, President
Obama signed the American Recovery and Reinvestment Act (ARRA), as a sweeping
economic recovery package intended to stimulate the economy and provide for
broad infrastructure, energy, health, and education needs. It is unclear what
the actual impact that EESA or its programs, including the CPP, and ARRA or its
programs, will have on the national economy or financial markets. The failure of
these significant legislative measures to help stabilize the financial markets
and a continuation or worsening of current financial market conditions could
materially and adversely affect Premier’s business, financial condition, results
of operations, access to credit or the trading price of its common
shares.
There have been numerous actions
undertaken in connection with or following EESA and ARRA by the Federal Reserve
Board, Congress, the Treasury, the FDIC, the SEC and others in efforts to
address the current liquidity and credit crisis in the financial industry that
followed the sub-prime mortgage market meltdown which began in 2007. These
measures include homeowner relief that encourages loan restructuring and
modification; the establishment of significant liquidity and credit facilities
for financial institutions and investment banks; the lowering of the federal
funds rate; emergency action against short selling practices; a temporary
guaranty program for money market funds; the establishment of a commercial paper
funding facility to provide back-stop liquidity to commercial paper issuers; and
coordinated international efforts to address illiquidity and other weaknesses in
the banking sector. The purpose of these legislative and regulatory actions is
to help stabilize the U.S. banking system. EESA, ARRA and the other regulatory
initiatives described above may not have their desired effects. If the
volatility in the markets continues and economic conditions fail to improve or
worsen, Premier’s business, financial condition and results of operations could
be materially and adversely affected.
Defaults
by Another Larger Financial Institution Could Adversely Affect Financial Markets
Generally
The commercial soundness of many
financial institutions may be closely interrelated as a result of relationships
between the institutions. As a result, concerns about, or a default or
threatened default by, one institution could lead to significant market-wide
liquidity and credit problems, losses or defaults by other institutions. This is
sometimes referred to as “systemic risk”. Premier’s business could be
adversely affected directly by the default of another institution or if the
financial services industry experiences significant market-wide liquidity and
credit problems.
Current
Levels of Market Volatility are Unprecedented and May Adversely Affect Market
Price of Common Stock or Investment Security Values
The capital and credit markets have
been experiencing volatility and disruption for more than a year. In recent
months, the volatility and disruption has reached unprecedented levels. In some
cases, the markets have produced downward pressure on stock prices and credit
availability for certain issuers seemingly without regard to those issuers’
underlying financial strength. The current market volatility could contribute to
a further decline in the market value of certain security investments and other
assets of Premier. If current levels of market disruption and
volatility continue or worsen, Premier may experience an adverse effect, which
may be material, on results of operations, capital or financial
position.
Additional
Capital May Not Be Available When Needed or Required by Regulatory
Authorities
Premier and the Premier Banks are
required by federal and state regulatory authorities to maintain adequate levels
of capital to support its operations. In addition, Premier may elect to raise
additional capital to support its business or to finance acquisitions, if any,
or it may otherwise elect or be required to raise additional
capital. Premier’s ability to raise additional capital, if needed,
will depend on conditions in the capital markets, economic conditions and a
number of other factors, many of which are outside Premier’s control and its
financial performance. Accordingly, Premier may not be able to raise additional
capital if needed or on acceptable terms. If Premier cannot raise additional
capital when needed, it may have a material adverse effect on its financial
condition, results of operations and prospects.
Future
Issuances of Common Shares or Other Securities May Dilute the Value of
Outstanding Common Shares, Which May Also Adversely Affect their Market
Price
In many situations, Premier’s Board of
Directors has the authority, without any vote of its shareholders, to issue
shares of authorized but unissued securities, including common shares authorized
and unissued under Premier’s stock option plans and shares of Premier preferred
stock. In the future, Premier may issue additional securities, through public or
private offerings, in order to raise additional capital, complete acquisitions,
or compensate key employees. Any such issuance would dilute the percentage of
ownership interest of existing shareholders and may dilute the per share value
of the common stock.
Integration
of Recent and Pending Acquisitions May Be More Difficult Than
Anticipated
The success of Premier’s recent
acquisitions of Citizens First and Traders Bank and the planned acquisition of
Adams will depend on a number of factors, including (but not limited to)
Premier’s ability to:
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timely
and successfully integrate the operations of Premier and each of the
acquisitions;
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maintain
the existing relationships with the depositors of Citizens First and/or
Traders and/or Adams to minimize the withdrawal of deposits subsequent to
the merger(s);
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maintain
and enhance the existing relationships with the borrowers of Citizens
First and/or Traders and/or Adams to limit potential losses from loans
made by the them;
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control
the incremental non-interest expense of the integrated operations to
maintain overall operating
efficiencies;
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retain
and attract qualified personnel at Citizens First and/or Traders
and/or Adams; and
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compete
effectively in the communities served by Citizens First, Traders
and Adams and in nearby
communities.
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Unauthorized
Disclosure of Sensitive or Confidential Customer Information Could Severely Harm
Premier’s Business
In the normal course of business, the
Premier Banks collect, process and retain sensitive and confidential customer
information to both open deposit accounts and determine whether to approve a
customer’s request for a loan. Premier also relies upon a variety of computing
platforms and networks over the internet for the purposes of data processing,
communication and information exchange, including a variety of services provided
by third-party vendors. Despite the security measures in place,
Premier’s facilities and systems, and those of Premier’s third-party service
providers, may be vulnerable to security breaches, acts of vandalism, computer
viruses, misplaced or lost data, programming and/or human errors or other
similar events. If information security is breached, information can be lost or
misappropriated, resulting in financial loss or costs to Premier or damages to
others. Any security breach involving the misappropriation, loss or other
unauthorized disclosure of confidential customer information, whether by Premier
or by its vendors, could severely damage Premier’s reputation, expose it to the
risks of litigation and liability or disrupt the business operations of Premier
which in turn, could have a material adverse effect on its financial condition
and results of operations.
Adams
experienced a net loss for the quarter ended March 31, 2009 and the
year ended December 31, 2008, the first net loss in the history of
Adams
Adams
realized a net loss of $805,000 for the quarter ended March 31, 2009 and a net
loss of $5.8 million for the year 2008, compared to net income of $3.1 million
for the year 2007. The net loss reflected deteriorating asset quality which
resulted in an $11.8 million provision for loan losses for 2008. The loan
loss provision is the amount required to maintain the allowance for loan losses
at an adequate level to absorb probable loan losses. The increase in the
provision for loan losses is primarily attributable to Adams’ condominium and
condo tenant association construction and multi-family residential real estate
loan portfolios, which continue to experience deterioration in estimated
collateral values and repayment abilities, where repayment is dependent upon the
sale of condominium units. Other reasons for the increase in the provision for
loan losses are attributable to an overall increase in nonperforming assets and
the continuing general weakening of the economic conditions and decline in real
estate values in the markets served by Adams.
ANB
has entered into a written agreement with the OCC which may result in adverse
results to Adams’ operations
On
October 1, 2008, Adams’ wholly owned subsidiary ANB, entered into a written
agreement with its primary regulator, the OCC. Under the terms of the
written agreement, ANB has agreed to take certain actions relating to ANB’s
lending operations and capital compliance. Specifically, the OCC is
requiring ANB to take the following actions:
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a)
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conduct
a review of senior management to ensure that these individuals can perform
the duties required under ANB’s policies and procedures and the
requirements of the written agreement, and where necessary, ANB must
provide a written program to address the training of ANB’s senior
officers;
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b)
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achieve
certain regulatory capital levels, which are greater than the regulatory
requirements to be “well capitalized” under bank regulatory
requirements. In particular, ANB must achieve a: 12% total
risk-based capital to total risk-weighted assets ratio; 11% Tier 1 capital
to risk-weighted assets ratio; and 9% Tier 1 capital to adjusted total
assets ratio;
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c)
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develop
and implement a three-year capital
program;
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d)
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make
additions to the allowance for loan and lease losses and adopt and
implement written policies and procedures for establishing and maintaining
the allowance in a manner consistent with the written
agreement;
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e)
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adopt
and implement an asset diversification program consistent with OCC
guidelines and to perform an analysis of ANB’s concentrations of
credit;
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f)
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take
all necessary actions to protect ANB’s interest in criticized assets,
adopt and implement a program to eliminate regulatory criticism of these
assets, engage in an ongoing review of ANB’s criticized assets and develop
and implement procedures for the effective monitoring of the loan
portfolio;
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g)
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hire
an independent appraiser to provide a written or updated appraisal of
certain assets;
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h)
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develop
and implement a program to improve the management of the loan portfolio
and to provide the ANB Board with monthly written reports on credit
quality;
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i)
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employ
a loan review consultant acceptable to the OCC to perform a quarterly
quality review of ANB’s assets;
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j)
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revise
ANB’s lending policy in accordance with OCC requirements;
and
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k)
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maintain
acceptable liquidity levels.
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The
written agreement includes time frames to implement the foregoing and on-going
compliance requirements for ANB, including requirements to report to the
OCC. The written agreement also requires ANB to establish a committee
of the Board of Directors which will be responsible for overseeing compliance
with the written agreement.
ANB
has taken steps to comply with the requirements of the written agreement and
expects that it will address all areas of concern.
Following
the public announcement of the written agreement, Adams became restricted in
Adams’ ability to renew or access deposits through brokers. Moreover,
a number of Adams’ depositors sought to reduce their deposits at
ANB. The impact of the written Agreement on Adams’ operations as well
as deteriorating credit markets may have an adverse impact on the financial
condition and operations including maintaining acceptable liquidity
levels.
Adams’
Commercial Real Estate and Commercial Business Loans Expose it to Increased
Lending Risks
Adams’
financial condition may be affected by a decline in the value of the real estate
securing Adams’ loans. Real estate values have recently been declining in Adams’
market, which may affect Adams’ financial condition. If Adams continues to
receive updated appraisals revealing significant additional weakness in its
collateral, it will likely result in further losses. At December 31, 2008,
Adams’ portfolio of commercial real estate loans totaled $163.2 million, and
commercial business loans totaled $43.7 million. These two categories
of loans represent 63.7% of Adams’ loan portfolio. Adams has curtailed its
emphasis on the origination of these types of loans at December 31,
2008. At March 31, 2009, Adams’ portfolio of commercial real estate
loans totaled $150 million, and commercial business loans totaled $36.1
million. These two categories of loans represent 61.3% of Adams’ loan
portfolio at March 31, 2009. These types of loans generally expose a
lender to greater risk of non-payment and loss than one- to four-family
residential mortgage loans because repayment of the loans often depends on the
successful operations and the income stream of the borrowers. Such
loans typically involve larger loan balances to single borrowers or groups of
related borrowers compared to one- to four-family residential mortgage
loans. Also, many of Adams’ borrowers have more than one commercial
real estate or commercial business loan outstanding with
Adams. Consequently, an adverse development with respect to one loan
or one credit relationship can expose Adams to a significantly greater risk of
loss compared to an adverse development with respect to a one- to four-family
residential mortgage loan.
Adams’
Current Concentration of Loans in its Primary Market Area May Increase its
Risk
Adams’
success depends primarily on the general economic conditions in Washington, D.C.
and to a lesser extent the Richmond and Hampton, Virginia market
areas. Unlike larger banks that are more geographically diversified,
Adams provides banking and financial services to customers primarily in
Washington, D.C. The local economic conditions in the Washington,
D.C. metropolitan area have a significant impact on its loans, the ability of
the borrowers to repay these loans and the value of the collateral securing
these loans. A significant decline in general economic conditions
caused by inflation, recession, unemployment or other factors beyond Adams’
control would impact these local economic conditions and could negatively affect
the financial results of its banking operations.
During
2008, there has been a decline in the housing market and real estate markets and
in the general economy, both nationally and locally, due to the recession that
began in December 2007. Housing markets have deteriorated throughout 2008 and
through the present day, as evidenced by reduced levels of sale, increasing
inventories of houses and condominiums on the market, declining house prices and
an increase in the length of time houses remain on the market. It is possible
that these conditions will not improve or will worsen or that such conditions
will result in a decrease in Adams’ interest income, an increase in Adams’
non-performing loans, and an increase in Adams’ provision for loan
losses.
Adams
targets its business lending and marketing strategy for loans to serve primarily
the banking and financial services needs of small to medium size
businesses. These small to medium size businesses generally have
fewer financial resources in terms of capital or borrowing capacity than larger
entities. If general economic conditions negatively impact these
businesses, Adams’ results of operations and financial condition may be
adversely affected.
If
Adams’ Allowance for Credit Losses is Not Sufficient to Cover Actual Loan
Losses, its operating results will be adversely affected
Adams’
loan customers may not repay their loans according to the terms of the loans,
and the collateral securing the payment of these loans may be insufficient to
pay any remaining loan balance. Adams may experience significant loan
losses, which could have a material adverse effect on its operating
results. Adams makes various assumptions and judgments about the
collectibility of its loan portfolio, including the creditworthiness of its
borrowers and the value of the real estate and other assets serving as
collateral for the repayment of many of its loans. In determining the
amount of the allowance for credit losses, Adams relies on its loan quality
reviews, its experience and its evaluation of economic conditions, among other
factors. If Adams’ assumptions and judgments prove to be incorrect,
its allowance for credit losses may not be sufficient to cover losses in its
loan portfolio, resulting in additions to its allowance. Material
additions to its allowance would materially decrease its net
income.
Adams’
emphasis on continued diversification of its loan portfolio through the
origination of commercial real estate and commercial business loans is one of
the more significant factors it takes into account in evaluating its allowance
for credit losses and provision for credit losses. As Adams further
increases the amount of such types of loans in its portfolio, Adams may
determine to make additional or increased provisions for credit losses, which
could adversely affect its earnings.
In
addition, bank regulators periodically review Adams’ loan portfolio and credit
underwriting procedures as well as its allowance for credit losses and may
require Adams to increase its provision for credit losses or recognize further
loan charge-offs. Any increase in its allowance for credit losses or
loan charge-offs as required by these regulatory authorities could have a
material adverse effect on Adams’ results of operations and financial
condition.
Changes
in Interest Rates Could Adversely Affect Adams’ Results of Operations and
Financial Condition
Adams’
results of operations and financial condition are significantly affected by
changes in interest rates. Adams’ results of operations depend
substantially on its net interest income, which is the difference between the
interest income earned on its interest-earning assets and the interest expense
paid on its interest-bearing liabilities. At December 31, 2008,
Adams’ interest rate risk profile indicated that net interest income would
increase in a rising interest rate environment, but would decrease in a
declining interest rate environment.
Changes
in interest rates also affect the value of Adams’ interest-earning assets, and
in particular Adams’ securities portfolio. Generally, the value of
securities fluctuates inversely with changes in interest rates. At December 31,
2008, Adams’ available for sale securities totaled $62.8 million, and at March
31, 2009 totaled $60.9 million. Decreases in the fair value of
securities available for sale could have an adverse effect on shareholders’
equity or earnings.
Adams
also is subject to reinvestment risk associated with changes in interest rates.
Changes in interest rates may affect the average life of loans and
mortgage-related securities. Decreases in interest rates can result in increased
prepayments of loans and mortgage-related securities, as borrowers refinance to
reduce borrowing costs. Under these circumstances, Adams is subject to
reinvestment risk to the extent that it is unable to reinvest the cash received
from such prepayments at rates that are comparable to the rates on existing
loans and securities. Additionally, increases in interest rates may
decrease loan demand and make it more difficult for borrowers to repay
adjustable rate loans.
Strong
Competition Within Adams’ Market Area May Limit its Growth and
Profitability
Competition
in the banking and financial services industry is intense. In Adams’ market
area, Adams competes with commercial banks, savings institutions, mortgage
brokerage firms, credit unions, finance companies, mutual funds, insurance
companies, and brokerage and investment banking firms operating locally and
elsewhere. Many of these competitors (whether regional or national
institutions) have substantially greater resources and lending limits than Adams
does and may offer certain services that Adams does not or cannot
provide. Adams’ profitability depends upon its continued ability to
successfully compete in its market area.
Adams
Operates in a Highly Regulated Environment and May Be Adversely Affected By
Changes in Laws and Regulations and the ANB Written Agreement with the
OCC
Adams
is subject to regulation, supervision and examination by the Federal Reserve
Board. ANB is subject to regulation by the OCC and by the FDIC, as insurer of
its deposits. CBT is subject to regulation by the Federal Reserve
Board, the Bureau of Financial Institutions and by the FDIC, as insurer of its
deposits. Such regulation and supervision govern the activities in
which a bank and its holding company may engage and are intended primarily for
the protection of the deposit insurance funds and depositors. These
regulatory authorities have extensive discretion in connection with their
supervisory and enforcement activities, including the imposition of restrictions
on the operation of a bank, the classification of assets by a bank and the
evaluation of the adequacy of a bank’s allowance for loan losses. Any
change in such regulation and oversight, whether in the form of regulatory
policy, regulations, or legislation, could have a material impact on Adams and
its operations.
Adams’
operations are also subject to extensive regulation by other federal, state and
local governmental authorities and are subject to various laws and judicial and
administrative decisions imposing requirements and restrictions on part or all
of its operations. Adams believes that it is in substantial
compliance in all material respects with applicable federal, state and local
laws, rules and regulations. Because its business is highly
regulated, the laws, rules and regulations applicable to Adams are subject to
regular modification and change. There are currently proposed various
laws, rules and regulations that, if adopted, would impact its operations,
including, among other things, matters pertaining to corporate governance,
requirements for listing and maintenance on national securities exchanges and
over the counter markets, and Securities and Exchange Commission rules
pertaining to public reporting disclosures. There can be no assurance
that these proposed laws, rules and regulations, or any other laws, rules or
regulations, will not be adopted in the future, which could make compliance more
difficult or expensive or otherwise adversely affect Adams’ business, financial
condition or prospects.
If
the Adams Banks’ current capital ratios decline below the regulatory threshold
for an “adequately capitalized” institution, the Adams Banks’ will be considered
“undercapitalized” which will have a material and adverse effect on
Adams
CBT
has met the requisite capital ratios to be considered “well capitalized”. ANB
can not be considered “well capitalized” while under the Written Agreement dated
October 1, 2008, and must maintain the following capital levels: total risk
based capital equal to 12% of risk-weighted assets; tier 1 capital at least
equal to 11% of risk-weighted assets; and tier 1 capital at least equal to 9% of
adjusted total assets. At December 31, 2008, ANB was considered to be
adequately capitalized, however ANB’s capital ratio levels did not comply with
those required by the Written Agreement. For the capital ratios of the Adams
Banks and that of the consolidated Adams at December 31, 2008 and 2007 see
tables in Note 16 to Adams’ Consolidated Financial Statements included
herein. At March 31, 2009, ANB’s “total capital to risked weighted
assets ratio” and “tier I capital to risk weighted assets ratio” did comply with
the Written Agreement; however, the Tier I capital to average assets ratio did
not comply with the requirement in the Written Agreement and was short by
$469,000. ANB has taken steps to comply with the capital ratio requirements as
stipulated in the Written Agreement.
The
Federal Deposit Insurance Act (FDIA) requires each federal banking agency to
take prompt corrective action with respect to banks that do no meet the minimum
capital requirements. Once a bank becomes undercapitalized, it is subject to
various requirements and restrictions, including a prohibition of the payment of
capital distributions and management fees, restrictions on growth of the bank’s
assets, and a requirement for prior regulatory approval of certain expansion
proposals. In addition, an undercapitalized bank must file a capital restoration
plan with its principal federal regulator.
If
an undercapitalized bank fails in any material aspect to implement a plan
approved by its regulator, the agency may impose additional restrictions on the
bank. These include, among others, requiring the recapitalization or sale of the
bank, restrictions with affiliates, and limiting the interest rates the bank my
pay on deposits. Further, even after the bank has attained adequately
capitalized status, the appropriate federal agency may, if it determines, after
notice and hearing, that the bank is in an unsafe or unsound condition or has
not corrected a deficiency from its most recent examination, treat the bank as
if it were undercapitalized and subject the bank to the regulatory restrictions
of such lower classification.
In
addition to measures taken under the prompt corrective action provisions with
respect to undercapitalized institutions, insured banks and their holding
companies may be subject to potential enforcement actions by their regulators
for unsafe and unsound practices in conducting their business or the violations
of law or regulation, including the filing of false or misleading regulatory
reports. Enforcement actions under this authority may include the issuance of
cease and desist orders, the imposition of civil money penalties, the issuance
of directives to increase capital, formal and informal agreements, or the
removal and prohibition orders against “institution-affiliates parties”.
Further, the Federal Reserve may bring an enforcement action against the bank
holding company either to address the undercapitalization in the holding company
or to require the holding company to implement measures to remediate
undercapitalization in a subsidiary. It is possible that if ANB realizes losses
over the next few quarters, ANB may fall into the “undercapitalized” regulatory
classification, which would have a material and adverse effect on ANB and
Adams.
Adams’
Expenses Will Increase As A Result Of Increases in FDIC Insurance
Premiums
On
December 22, 2008, the FDIC published a final rule raising the current deposit
insurance assessment rates uniformly for all institutions by seven basis points
(to a range from 12 to 50 basis points) for the first quarter of 2009. On
February 27, 2009, the FDIC issued a final rule changing the way that the FDIC
calculates federal deposit insurance assessment rates beginning in the second
quarter of 2009. On May 22, 2009, the FDIC issued a final rule
imposing a special assessment of 5 basis points on total assets less tier 1
capital on June 30, 2009, which would be collected on September 30,
2009. The FDIC expects this assessment to be booked as a second
quarter 2009 expense. The rule also provides the FDIC with authority
to impose up to two additional assessments of up to 5 basis points each on total
assets less tier 1 capital.
ANB is no longer considered “well
capitalized” for regulatory capital purposes, which will cause ANB to incur
increased premiums for deposit insurance and require FDIC approval to gather
brokered deposits including CDARS reciprocal deposits
As
of the date of the Written Agreement with the OCC, October 1, 2008, ANB was not
considered “well capitalized” for regulatory purposes. As a result, the FDIC
will assess higher deposit insurance premiums on ANB, which will negatively
impact earnings. In addition, ANB will be required to obtain FDIC approval to
gather or renew brokered deposits including CDARS reciprocal deposits, during
such time as ANB remains “adequately capitalized” for regulatory purposes.
Requiring ANB to obtain regulatory approval prior to accepting or renewing
brokered deposits will affect ANB’s ability to improve ANB’s liquidity
position.
ANB’s capital ratios will likely
restrict Adams’ ability to grow Adams’ balance sheet as Adams has in the past,
which could adversely affect Adams’ results of operations, financial condition,
and liquidity
The
net loss in 2008 has reduced Adams’ stockholders’ equity. If Adams’ experiences
additional losses in the future, it will likely restrict Adams’ ability to grow
the balance sheet as Adams has in the past. Accordingly, ANB’s short-term
strategy is to manage its credit quality and strengthen, rather than grow, its
balance sheet. If ANB’s credit quality continues to deteriorate, additional
decreases to stockholders’ equity may occur. Any future growth may subject ANB
to risk that such growth, absent an increase in ANB regulatory capital, would
cause ANB to remain below the minimum requirements to be considered adequately
capitalized. If Adams is not able to grow its assets, Adams’ results of
operations, financial condition and liquidity may be adversely
affected.
Adams’
business is subject to liquidity risk, and changes in Adams’ source of funds may
adversely affect Adams’ performance and financial condition by increasing cost
of funds
Adams’
ability to make loans is directly related to Adams’ ability to secure funding.
Core deposits are Adams’ primary source of liquidity. Adams relies on advances
from the FHLB of Atlanta as a funding source. Beginning in the third quarter of
2008, ANB did not have access to purchase federal funds under agreements from
other correspondent banks and it is possible that ANB will continue to not have
access to purchase federal funds while under the Written Agreement with the
OCC.
Claims
and Litigation Pertaining to Fiduciary Responsibility
From time to time, shareholders or
customers may make claims and take legal action pertaining to Adams’ and Adams
Banks’ performance of their fiduciary responsibilities. Defending such claims
can impose a material expense on Adams. If such claims and legal
actions are not resolved in a manner favorable to the Adams Banks they may
result in financial liability and/or adversely affect the market perception of
the Adams Banks and their products and services as well as impact customer
demand for those products and services. Any financial liability or reputation
damage could have a material adverse effect on Adams’ business, which, in turn,
could have a material adverse effect on its financial condition and results of
operations.
This
document, which forms part of a registration statement on Form S-4 filed with
the Securities and Exchange Commission (“SEC”) by Premier, constitutes a
prospectus of Premier under the Securities Act of 1933, as amended, which we
refer to as the Securities Act, with respect to the shares of Premier common
stock to be issued to Adams stockholders as required by the merger agreement.
This document also constitutes a joint proxy statement under Section 14(a) of
the Securities Exchange Act of 1934, as amended, which we refer to as the
Exchange Act. It also constitutes a notice of meeting with respect to the
special meeting of Premier shareholders, at which Premier shareholders will be
asked to vote (i) upon a proposal to authorize the issuance of shares of Premier
common stock required to be issued to Adams stockholders pursuant to the merger
agreement and (ii) a proposal to amend the Premier articles of incorporation to
increase the number of shares of authorized Premier common stock, and a notice
of meeting with respect to the special meeting of Adams stockholders, at which
Adams stockholders will be asked to vote upon a proposal to adopt the merger
agreement.
You
should rely only on the information contained in this document. No one has been
authorized to provide you with information that is different from the
information contained in this document. This document is dated July 29, 2009.
You should not assume that the information contained in this document is
accurate as of any date other than that date. Neither the mailing of this
document to Premier shareholders or Adams stockholders nor the issuance by
Premier of common stock in connection with the merger will create any
implication to the contrary.
This
document does not constitute an offer to sell, or a solicitation of an offer to
buy, any securities, or the solicitation of a proxy, in any jurisdiction to or
from any person to whom it is unlawful to make any such offer or solicitation in
such jurisdiction. Information contained in this document regarding Premier has
been provided by Premier and information contained in this document regarding
Adams has been provided by Adams.
This
proxy statement/prospectus contains data and information that constitute
forward-looking statements (within the meaning of the Private Securities
Litigation Reform Act of 1995) regarding, among other things, the anticipated
closing date of the merger, the expected pro forma effect of the merger, and
plans and objectives of Premier’s management for future operations of the
combined organization following consummation of the merger. You can identify
these forward-looking statements because they may include terms such as
“believes,” “anticipates,” “intends,” “expects,” or similar expressions and may
include discussions of future strategy. Each of Premier and Adams caution you
not to rely unduly on any forward-looking statements in this proxy
statement/prospectus. These forward-looking statements are based on current
expectations that involve a number of risks and uncertainties. Actual results
may differ materially from the results expressed in these forward-looking
statements.
Factors
that might cause such a difference include the following:
|
|
·
|
|
the
ability of Adams to obtain the required stockholder
approval;
|
|
|
|
|
|
|
|
·
|
|
the
ability of Premier to obtain the required shareholder approval of the
issuance of Premier common stock in the merger;
|
|
|
|
|
|
|
|
·
|
|
the
ability of the companies to obtain the required regulatory approvals for
the merger;
|
|
|
|
|
|
|
|
·
|
|
the
ability of the companies to consummate the merger;
|
|
|
|
|
|
|
|
·
|
|
the
ability to successfully integrate Adams into Premier following the
merger;
|
|
|
|
|
|
|
|
·
|
|
a
material adverse change in the financial condition, results of operations
or prospects of either Adams or Premier;
|
|
|
|
|
|
|
|
·
|
|
the
ability to fully realize any cost savings and/or revenue enhancements or
the ability to realize them on a timely basis;
|
|
|
|
|
|
|
|
·
|
|
the
risk of borrower, depositor and other customer attrition after the
transaction is completed;
|
|
|
|
|
|
|
|
·
|
|
a
change in general business and economic conditions;
|
|
|
|
|
|
|
|
·
|
|
changes
in the interest rate environment, deposit flows, loan demand, real estate
values, and competition;
|
|
|
|
|
|
|
|
·
|
|
changes
in accounting principles, policies or guidelines;
|
|
|
|
|
|
|
|
·
|
|
changes
in legislation and regulation;
|
|
|
|
|
|
|
|
·
|
|
other
economic, competitive, governmental, regulatory, geopolitical, and
technological factors affecting the companies’ operations, pricing, and
services; and
|
|
|
|
|
|
|
|
·
|
|
other
risk factors described on pages 19 to 30 of this proxy
statement/prospectus.
|
Premier
and Adams undertake no obligation to update or clarify these forward-looking
statements, whether as a result of new information, future events or
otherwise.
Premier
common stock and Adams common stock are both traded on the National Association
of Securities Dealers, Inc. Automated Quotation System (“NASDAQ”) Global Market
under the trading symbols “PFBI” and “AANB”. The closing sale price reported for
Premier common stock on December 31 2008, the last trading date preceding the
public announcement of the merger agreement, was $7.03, while the closing price
of Adams common stock was $2.51.
The
following table sets forth for the periods indicated the high and low prices per
share of Premier common stock and Adams common stock as reported on NASDAQ
Global Market, along with the quarterly cash dividends per share declared. The
per share prices do not include adjustments for markups, markdowns or
commissions.
|
|
|
Premier
|
|
Adams
|
|
|
|
|
|
|
|
|
|
|
|
Cash
|
|
|
|
|
|
|
|
|
|
Cash
|
|
|
|
Sales
Price
|
|
Dividend
|
|
Sales
Price
|
|
Dividend
|
|
|
|
High
|
|
Low
|
|
Paid
|
|
High
|
|
Low
|
|
Paid
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First
Quarter
|
|
$
|
16.49
|
|
|
$
|
13.36
|
|
|
$
|
0.10
|
|
|
$
|
14.39
|
|
|
$
|
13.31
|
|
|
$
|
0.125
|
|
|
Second
Quarter
|
|
|
16.50
|
|
|
|
15.03
|
|
|
|
0.10
|
|
|
|
14.34
|
|
|
|
13.50
|
|
|
|
0.125
|
|
|
Third
Quarter
|
|
|
16.45
|
|
|
|
13.23
|
|
|
|
0.10
|
|
|
|
14.00
|
|
|
|
13.42
|
|
|
|
0.125
|
|
|
Fourth
Quarter
|
|
|
14.77
|
|
|
|
12.10
|
|
|
|
0.10
|
|
|
|
13.91
|
|
|
|
10.37
|
|
|
|
0.125
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First
Quarter
|
|
$
|
13.59
|
|
|
$
|
11.01
|
|
|
$
|
0.10
|
|
|
$
|
11.85
|
|
|
$
|
10.15
|
|
|
$
|
0.125
|
|
|
Second
Quarter
|
|
|
13.15
|
|
|
|
10.05
|
|
|
|
0.11
|
|
|
|
11.50
|
|
|
|
9.20
|
|
|
|
0.125
|
|
|
Third
Quarter
|
|
|
11.63
|
|
|
|
8.50
|
|
|
|
0.11
|
|
|
|
8.95
|
|
|
|
5.29
|
|
|
|
-----
|
|
|
Fourth
Quarter
|
|
|
9.80
|
|
|
|
5.98
|
|
|
|
0.11
|
|
|
|
6.28
|
|
|
|
2.51
|
|
|
|
-----
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First
Quarter
|
|
$
|
9.00
|
|
|
$
|
4.00
|
|
|
$
|
0.11
|
|
|
$ |
3.50
|
|
|
$ |
1.30
|
|
|
|
-----
|
|
| Second
Quarter |
|
|
7.19 |
|
|
|
4.82 |
|
|
|
0.11
|
|
|
|
2.88
|
|
|
|
1.62
|
|
|
|
-----
|
|
|
Third
Quarter
(through July
6, 2009)
|
|
|
6.69
|
|
|
|
6.26
|
|
|
|
|
|
|
|
2.75
|
|
|
|
2.52
|
|
|
|
|
|
The
shareholders of Premier are entitled to receive dividends when and as declared
by its board of directors. Dividends have been paid quarterly. The
payment of dividends is subject to the restrictions set forth in the Kentucky
corporate and banking laws and the limitations imposed by the Federal Reserve
Board.
Premier is dependent on dividends from
the Premier Banks for its revenues. Various federal and state regulatory
provisions limit the amount of dividends the Premier Banks can pay to Premier
without regulatory approval. At December 31, 2008, approximately $2.4 million of
the total shareholders' equity of the Premier 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 the Premier 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
Premier 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 of
the Premier Banks’ earnings and financial condition.
As
explained in “Risk Factors Relating to the Merger”, completion of the merger is
conditioned upon Premier’s receipt of at least $20,000,000 from the sale of
Premier preferred stock to the U.S. Treasury under the TARP CPP. If
Premier preferred stock is issued, as long as it remains outstanding, unless all
accrued and unpaid dividends thereon are fully paid, Premier would not be
permitted to declare or pay dividends on Premier common stock. Unless
the Premier preferred stock is transferred or redeemed in whole, until the third
anniversary of the U.S. Treasury’s investment, any increase in dividends on
Premier common stock is prohibited without the prior approval of the U.S.
Treasury.
The
following table sets forth certain summary historical consolidated financial
information for Premier and Adams. The balance sheet data and income statement
data of each of Premier and Adams as of and for the five years in the period
ended December 31, 2008 are taken from the audited Consolidated Financial
Statements of Premier and Adams, respectively.
The
following information should be read in conjunction with the audited
Consolidated Financial Statements of each of Premier and Adams, and the related
footnotes.
PREMIER
Summary
Consolidated Financial Data
|
(Dollars
in thousands, except per share amounts)
|
|
At
or for the Quarter Ended
|
|
At
or for the Quarter Ended
|
|
|
At
or for the Year Ended December 31
|
|
|
|
|
March
31, 2009
|
|
March
31, 2008
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Earnings
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest
income
|
|
$ |
6,558 |
|
$ |
5,594
|
|
|
$ |
26,035 |
|
|
$ |
22,296 |
|
|
$ |
21,395 |
|
|
$ |
19,852 |
|
|
$ |
18,064 |
|
|
Provision for
loan losses
|
|
|
102 |
|
|
(135
|
) |
|
|
147 |
|
|
|
(78 |
) |
|
|
(1,161 |
) |
|
|
4 |
|
|
|
1,026 |
|
|
Non-interest
income
|
|
|
1,170 |
|
|
1,066
|
|
|
|
5,291 |
|
|
|
4,623 |
|
|
|
4,165 |
|
|
|
3,920 |
|
|
|
3,606 |
|
|
Non-interest
expense
|
|
|
5,764 |
|
|
4,122
|
|
|
|
19,894 |
|
|
|
16,408 |
|
|
|
16,937 |
|
|
|
17,305 |
|
|
|
17,782 |
|
|
Income taxes
|
|
|
633 |
|
|
899
|
|
|
|
3,749 |
|
|
|
3,470 |
|
|
|
3,283 |
|
|
|
2,029 |
|
|
|
899 |
|
|
Income from continuing
operations
|
|
|
1,229 |
|
|
1,774
|
|
|
|
7,536 |
|
|
|
7,119 |
|
|
|
6,501 |
|
|
|
4,434 |
|
|
|
1,963 |
|
|
Income from discontinued
operations
(1)
|
|
|
- |
|
|
-
|
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
4,734 |
|
|
Net income
|
|
$ |
1,229 |
|
$ |
1,774
|
|
|
$ |
7,536 |
|
|
$ |
7,119 |
|
|
$ |
6,501 |
|
|
$ |
4,434 |
|
|
$ |
6,697 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial
Position
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$ |
734,141 |
|
$ |
563,768
|
|
|
$ |
724,465 |
|
|
$ |
549,255 |
|
|
$ |
535,452 |
|
|
$ |
528,324 |
|
|
$ |
537,255 |
|
|
Loans, net of
unearned income
|
|
|
466,874 |
|
|
335,947
|
|
|
|
467,111 |
|
|
|
346,570 |
|
|
|
343,797 |
|
|
|
328,717 |
|
|
|
324,937 |
|
|
Allowance for
loan losses
|
|
|
8,587 |
|
|
6,407
|
|
|
|
8,544 |
|
|
|
6,497 |
|
|
|
6,661 |
|
|
|
7,892 |
|
|
|
9,384 |
|
|
Goodwill and
other intangibles
|
|
|
30,078 |
|
|
15,816
|
|
|
|
29,974 |
|
|
|
15,816 |
|
|
|
15,816 |
|
|
|
15,816 |
|
|
|
15,816 |
|
|
Securities
|
|
|
155,581 |
|
|
144,541
|
|
|
|
175,741 |
|
|
|
124,242 |
|
|
|
121,367 |
|
|
|
137,419 |
|
|
|
153,892 |
|
|
Deposits
|
|
|
604,892 |
|
|
464,279
|
|
|
|
589,182 |
|
|
|
449,033 |
|
|
|
438,950 |
|
|
|
435,843 |
|
|
|
437,798 |
|
|
Other
borrowings
|
|
|
34,968 |
|
|
25,565
|
|
|
|
41,518 |
|
|
|
26,124 |
|
|
|
33,091 |
|
|
|
19,053 |
|
|
|
20,536 |
|
|
Subordinated debentures
|
|
|
- |
|
|
-
|
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
15,722 |
|
|
|
20,876 |
|
|
Stockholders’
equity
|
|
|
90,030 |
|
|
69,789
|
|
|
|
89,422 |
|
|
|
67,389 |
|
|
|
61,002 |
|
|
|
54,287 |
|
|
|
51,029 |
|
Selected
Financial Data (Continued)
| (Dollars in
thousands, except per share amounts) |
|
At
or for the Quarter Ended
|
|
At
or for the Quarter Ended
|
|
|
At
or for the Year Ended December 31
|
|
|
|
|
March
31, 2009
|
|
March
31, 2008
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Share
Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
from continuing
operations
– basic
|
|
$ |
0.19 |
|
$ |
0.34
|
|
|
$ |
1.25 |
|
|
$ |
1.36 |
|
|
$ |
1.24 |
|
|
$ |
0.85 |
|
|
$ |
0.37 |
|
|
Income
from continuing
operations
- diluted
|
|
|
0.19 |
|
|
0.34
|
|
|
|
1.25 |
|
|
|
1.35 |
|
|
|
1.24 |
|
|
|
0.84 |
|
|
|
0.37 |
|
|
Net income –
basic
|
|
|
0.19 |
|
|
0.34
|
|
|
|
1.25 |
|
|
|
1.36 |
|
|
|
1.24 |
|
|
|
0.85 |
|
|
|
1.28 |
|
|
Net income -
diluted
|
|
|
0.19 |
|
|
0.34
|
|
|
|
1.25 |
|
|
|
1.35 |
|
|
|
1.24 |
|
|
|
0.84 |
|
|
|
1.28 |
|
|
Book value
|
|
|
14.08 |
|
|
13.32
|
|
|
|
13.99 |
|
|
|
12.87 |
|
|
|
11.65 |
|
|
|
10.37 |
|
|
|
9.75 |
|
|
Tangible book
value
|
|
|
9.38 |
|
|
10.30
|
|
|
|
9.30 |
|
|
|
9.85 |
|
|
|
8.63 |
|
|
|
7.35 |
|
|
|
6.73 |
|
|
Cash dividends
|
|
|
0.11 |
|
|
0.10
|
|
|
|
0.43 |
|
|
|
0.40 |
|
|
|
0.10 |
|
|
|
0.00 |
|
|
|
0.00 |
|
|
Return
on average assets
(2),
(3)
|
|
|
0.68 |
% |
|
1.28
|
% |
|
|
1.12 |
% |
|
|
1.31 |
% |
|
|
1.21 |
% |
|
|
0.82 |
% |
|
|
0.36 |
% |
|
Return
on average equity
(3)
|
|
|
5.44 |
% |
|
10.20
|
% |
|
|
9.38 |
% |
|
|
11.13 |
% |
|
|
11.31 |
% |
|
|
8.42 |
% |
|
|
4.06 |
% |
|
Dividend
payout (3)
|
|
|
57.89 |
% |
|
29.41
|
% |
|
|
34.40 |
% |
|
|
29.41 |
% |
|
|
8.06 |
% |
|
|
0.00 |
% |
|
|
0.00 |
% |
|
Stockholders’
equity to total
assets at period-end
|
|
|
12.26 |
% |
|
12.38
|
% |
|
|
12.34 |
% |
|
|
12.27 |
% |
|
|
11.39 |
% |
|
|
10.28 |
% |
|
|
9.50 |
% |
|
Average
stockholders’ equity
to average total
assets (2)
|
|
|
12.43 |
% |
|
12.53
|
% |
|
|
11.94 |
% |
|
|
11.74 |
% |
|
|
10.74 |
% |
|
|
9.77 |
% |
|
|
8.23 |
% |
|
(1)
|
In
the fourth quarter of 2003, Premier adopted and began to implement a plan
to sell its subsidiary Citizens Bank (Kentucky), Inc. (“Citizens Bank”)
located in Georgetown, Kentucky. The sale was completed on July
1, 2004. In accordance with Financial Accounting Standard 144,
the financial position and results of operations of Citizens Bank are
removed from the detail line items in the table and presented separately
as “discontinued operations.”
|
| (2) |
Computed
based on average assets from continuing operations |
| (3) |
Computed
based on income (loss) from continuing
operations |
ADAMS
Summary
Consolidated Financial Data
(Dollars
in thousands, except per share data)
|
|
|
At
or for the Quarter Ended
|
|
At
or for the Quarter Ended
|
|
|
At
or for the Year Ended December 31,
|
|
|
|
|
March
31, 2009 |
|
March
31, 2008
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005 (1)
|
|
|
2004(1)
|
|
|
Income
Statement Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
interest income
|
|
$ |
5,035 |
|
$
|
6,705 |
|
|
$ |
25,302 |
|
|
$ |
30,251 |
|
|
$ |
26,145 |
|
|
$ |
18,461 |
|
|
$ |
13,829 |
|
|
Total
interest expense
|
|
|
1,764 |
|
|
2,865 |
|
|
|
9,801 |
|
|
|
13,599 |
|
|
|
9,408 |
|
|
|
4,307 |
|
|
|
1,986 |
|
|
Net
interest income
|
|
|
3,271 |
|
|
3,840 |
|
|
|
15,501 |
|
|
|
16,652 |
|
|
|
16,737 |
|
|
|
14,154 |
|
|
|
11,843 |
|
|
Provision
(credit) for loan losses
|
|
|
965 |
|
|
105 |
|
|
|
11,822 |
|
|
|
260 |
|
|
|
(232 |
) |
|
|
310 |
|
|
|
420 |
|
|
Total
noninterest income
|
|
|
370 |
|
|
407 |
|
|
|
966 |
|
|
|
1,625 |
|
|
|
2,130 |
|
|
|
1,911 |
|
|
|
1,975 |
|
|
Total
noninterest expense
|
|
|
4,018 |
|
|
3,223 |
|
|
|
14,549 |
|
|
|
13,862 |
|
|
|
13,107 |
|
|
|
10,240 |
|
|
|
7,415 |
|
|
(Benefit)
provision for income taxes
|
|
|
(537 |
) |
|
355 |
|
|
|
(4,125 |
) |
|
|
1,096 |
|
|
|
2,296 |
|
|
|
2,195 |
|
|
|
2,381 |
|
|
Net
(loss) income
|
|
|
(805 |
) |
|
564 |
|
|
|
(5,779 |
) |
|
|
3,059 |
|
|
|
3,696 |
|
|
|
3,320 |
|
|
|
3,602 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per
Common Share Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
net (loss) income per share
|
|
$ |
(0.23 |
) |
$ |
0.16 |
|
|
$ |
(1.67 |
) |
|
$ |
0.88 |
|
|
$ |
1.07 |
|
|
$ |
0.98 |
|
|
$ |
1.09 |
|
|
Diluted
net (loss) income per share
|
|
$ |
(0.23 |
) |
$ |
0.16 |
|
|
$ |
(1.67 |
) |
|
$ |
0.88 |
|
|
$ |
1.07 |
|
|
$ |
0.98 |
|
|
$ |
1.08 |
|
|
Cash
dividends
|
|
$ |
-- |
|
$ |
0.125 |
|
|
$ |
0.25 |
|
|
$ |
0.50 |
|
|
$ |
0.50 |
|
|
$ |
0.50 |
|
|
$ |
0.45 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selected
Balance Sheet Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
$ |
395,769 |
|
$ |
429,157 |
|
|
$ |
423,681 |
|
|
$ |
445,875 |
|
|
$ |
405,502 |
|
|
$ |
343,030 |
|
|
$ |
251,192 |
|
|
Investment
securities
|
|
|
64,021 |
|
|
75,722 |
|
|
|
65,989 |
|
|
|
79,701 |
|
|
|
63,069 |
|
|
|
70,116 |
|
|
|
50,835 |
|
|
Loans
|
|
|
303,112 |
|
|
318,216 |
|
|
|
324,764 |
|
|
|
307,483 |
|
|
|
307,957 |
|
|
|
248,287 |
|
|
|
180,272 |
|
|
Allowance
for loan losses
|
|
|
13,292 |
|
|
4,414 |
|
|
|
12,514 |
|
|
|
4,202 |
|
|
|
4,432 |
|
|
|
4,345 |
|
|
|
2,558 |
|
|
Deposits
|
|
|
323,344 |
|
|
371,737 |
|
|
|
346,961 |
|
|
|
386,942 |
|
|
|
363,590 |
|
|
|
292,032 |
|
|
|
215,367 |
|
|
Long-term
debt
|
|
|
26,332 |
|
|
15,115 |
|
|
|
26,132 |
|
|
|
15,120 |
|
|
|
6,288 |
|
|
|
11,213 |
|
|
|
7,127 |
|
|
Stockholders'
equity
|
|
|
22,754 |
|
|
32,022 |
|
|
|
24,281 |
|
|
|
31,439 |
|
|
|
30,182 |
|
|
|
28,053 |
|
|
|
24,760 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selected
Ratios
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Return
on average assets
|
|
|
(0.79 |
%) |
|
0.52 |
%
|
|
|
(1.32 |
%) |
|
|
0.69 |
% |
|
|
0.99 |
% |
|
|
1.15 |
% |
|
|
1.55 |
% |
|
Return
on average stockholders' equity
|
|
|
(13.75 |
%) |
|
7.06 |
%
|
|
|
(19.14 |
%) |
|
|
9.92 |
% |
|
|
12.78 |
% |
|
|
12.49 |
% |
|
|
15.21 |
% |
|
Average
equity to average assets
|
|
|
5.78 |
% |
|
7.36 |
%
|
|
|
6.89 |
% |
|
|
6.95 |
% |
|
|
7.77 |
% |
|
|
9.17 |
% |
|
|
10.18 |
% |
|
Dividend
payout ratio
|
|
|
0.00 |
% |
|
78.13 |
%
|
|
|
(14.97 |
%) |
|
|
56.82 |
% |
|
|
46.89 |
% |
|
|
51.02 |
% |
|
|
41.28 |
% |
|
Net
charge-offs (recoveries) to average loans
|
|
|
0.06 |
% |
|
(0.03 |
%)
|
|
|
1.07 |
% |
|
|
0.16 |
% |
|
|
(0.12 |
%) |
|
|
(0.02 |
%) |
|
|
(0.01 |
%) |
|
Nonperforming
assets to total loans
|
|
|
20.29 |
% |
|
4.46 |
%
|
|
|
11.67 |
% |
|
|
3.98 |
% |
|
|
1.16 |
% |
|
|
0.23 |
% |
|
|
1.04 |
% |
|
Allowance
for loan losses to loans
|
|
|
4.11 |
% |
|
1.39 |
%
|
|
|
3.85 |
% |
|
|
1.37 |
% |
|
|
1.44 |
% |
|
|
1.75 |
% |
|
|
1.42 |
% |
(1)
2005 includes CBT results from July 30, 2005. Prior historical
periods do not reflect CBT results.
Unaudited
Pro Forma Condensed Combined Financial Information
The following unaudited pro forma
condensed combined balance sheet at March 31, 2009 and unaudited pro forma
condensed combined statements of income for the year ended December 31, 2008 and
the three months ended March 31, 2009, give effect to the proposed
merger. The unaudited pro forma condensed combined financial
statements are based on the audited consolidated financial statements of Premier
and Adams for the year ended December 31, 2008 and the unaudited consolidated
financial statements of Premier and Adams as of, and for the three months ended,
March 31, 2009.
The unaudited pro forma condensed
combined financial statements give effect to the merger using the purchase
method of accounting under GAAP. The acquired assets and liabilities
of Adams have been adjusted to “fair value” under SFAS 141r as of the balance
sheet date. Also included in the pro forma combined balance sheet are
adjustments related to the anticipated issuance of Premier preferred stock under
the U.S. Treasury’s CPP and the usage of those funds to 1.) eliminate
intercompany debt resulting from the merger; 2.) payoff debt at Adams to
strengthen the combined entity’s regulatory capital ratios; and 3.) to
recapitalize ANB to meet the minimum regulatory capital ratios required by the
written agreement between ANB and the Office of the Comptroller of the
Currency. To the extent any of the balance sheet pro forma
adjustments will have a direct determinable impact on future operations, the pro
forma income statements include adjustments simulating the
impact(s). These adjustments are preliminary and are subject to
change. The final adjustments will be calculated when the merger is
effective and may be materially different from those presented.
The unaudited pro forma information is
provided for information purposes only. The pro forma financial
information presented is not necessarily indicative of the actual results that
would have been achieved had the merger been consummated on the dates or at the
beginning of the periods presented, and is not necessarily indicative of future
results. The unaudited pro forma financial information should be read
in conjunction with the audited and unaudited consolidated financial statements
and the notes thereto of Premier contained in this joint proxy
statement/prospectus and the audited and unaudited financial statements of Adams
contained in this joint proxy statement/prospectus.
The
unaudited pro forma stockholders’ equity and net income derived from the above
assumptions are qualified by the statements set forth under this caption and
should not be considered indicative of the market value of Premier common stock
or the actual or future results of operations of Premier for any
periods. Actual results may be materially different than the pro
forma data presented.
Unaudited
Pro Forma Condensed Combined Balance Sheet at of March 31, 2009
(Dollars
in thousands)
|
|
|
Premier
|
|
|
Adams
|
|
|
Pro
Forma Fair Value Adjustments
|
|
|
|
Pro
Forma TARP CPP Proceeds Adjustments
|
|
|
|
Pro
Forma Stock Issuance Adjustments
|
|
|
|
Pro
Forma Combined Company
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and due from banks
|
|
$ |
29,933 |
|
|
$ |
11,924 |
|
|
$ |
|
|
|
|
$ |
|
|
|
|
$ |
|
|
|
|
$ |
41,857 |
|
|
Federal
funds sold
|
|
|
40,152 |
|
|
|
7,033 |
|
|
|
|
|
|
|
|
7,218 |
|
n,p,r
|
|
|
|
|
|
|
|
54,403 |
|
|
Securities
available-for-sale
|
|
|
155,581 |
|
|
|
60,905 |
|
|
|
3,192 |
|
a,m |
|
|
|
|
|
|
|
|
|
|
|
|
219,678 |
|
|
Securities
held-to-maturity
|
|
|
- |
|
|
|
3,116 |
|
|
|
(3,116 |
) |
a |
|
|
|
|
|
|
|
|
|
|
|
|
- |
|
|
Loans
|
|
|
466,874 |
|
|
|
303,112 |
|
|
|
(19,861 |
) |
b,c |
|
|
(4,250 |
) |
q
|
|
|
|
|
|
|
|
745,875 |
|
|
Allowance for loan
losses
|
|
|
(8,587 |
) |
|
|
(13,292 |
) |
|
|
13,292 |
|
b |
|
|
|
|
|
|
|
|
|
|
|
|
(8,587 |
) |
|
Net
loans
|
|
|
458,287 |
|
|
|
289,820 |
|
|
|
(6,569 |
) |
c |
|
|
(4,250 |
) |
|
|
|
|
|
|
|
|
737,288 |
|
|
FHLB
and FRB stock
|
|
|
3,788 |
|
|
|
3,051 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,839 |
|
|
Premises
and equipment, net
|
|
|
11,596 |
|
|
|
4,908 |
|
|
|
100 |
|
d
|
|
|
|
|
|
|
|
|
|
|
|
|
16,604 |
|
|
Other
real estate owned
|
|
|
981 |
|
|
|
3,876 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,857 |
|
|
Goodwill
|
|
|
28,724 |
|
|
|
- |
|
|
|
|
|
e
|
|
|
|
|
|
|
|
|
|
|
|
|
28,724 |
|
|
Other
intangible assets
|
|
|
1,354 |
|
|
|
- |
|
|
|
3,669 |
|
f
|
|
|
|
|
|
|
|
|
|
|
|
|
5,023 |
|
|
Other
assets
|
|
|
3,745 |
|
|
|
11,136 |
|
|
|
1,825 |
|
g
|
|
|
|
|
|
|
|
(3,506 |
) |
u
|
|
|
13,200 |
|
|
Total
assets
|
|
$ |
734,141 |
|
|
$ |
395,769 |
|
|
$ |
(899 |
) |
|
|
$ |
2,968 |
|
|
|
$ |
(3,506 |
) |
|
|
$ |
1,128,473 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest bearing
deposits
|
|
$ |
106,092 |
|
|
$ |
57,537 |
|
|
$ |
|
|
|
|
$ |
|
|
|
|
$ |
|
|
|
|
$ |
163,629 |
|
|
Time deposits,
$100,000
and over
|
|
|
77,472 |
|
|
|
59,029 |
|
|
|
437 |
|
h
|
|
|
|
|
|
|
|
|
|
|
|
|
136,938 |
|
|
Other interest
bearing deposits
|
|
|
421,328 |
|
|
|
206,778 |
|
|
|
1,399 |
|
h
|
|
|
|
|
|
|
|
|
|
|
|
|
629,505 |
|
|
Total
deposits
|
|
|
604,892 |
|
|
|
323,344 |
|
|
|
1,836 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
930,072 |
|
|
Federal
funds purchased and securities
sold under
agreements to
repurchase
|
|
|
13,327 |
|
|
|
4,663 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17,990 |
|
|
Short-term
FHLB advances
|
|
|
2,000 |
|
|
|
17,000 |
|
|
|
|
|
|
|
|
(6,100 |
) |
r
|
|
|
|
|
|
|
|
12,900 |
|
|
Other
FHLB advances
|
|
|
4,563 |
|
|
|
10,000 |
|
|
|
532 |
|
j
|
|
|
|
|
|
|
|
|
|
|
|
|
15,095 |
|
|
Other
borrowed funds
|
|
|
15,078 |
|
|
|
16,332 |
|
|
|
122 |
|
j
|
|
|
(12,932 |
) |
p,q
|
|
|
|
|
|
|
|
18,600 |
|
|
Other
liabilities
|
|
|
4,251 |
|
|
|
1,676 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,927 |
|
|
Total
liabilities
|
|
|
644,111 |
|
|
|
373,015 |
|
|
|
2,490 |
|
|
|
|
(19,032 |
) |
|
|
|
|
|
|
|
|
1,000,584 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS’
EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred
stock
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
|
21,800 |
|
n
|
|
|
|
|
|
|
|
21,800 |
|
|
Common
stock warrants
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
|
200 |
|
n
|
|
|
|
|
|
|
|
200 |
|
|
Common
stock
|
|
|
2,264 |
|
|
|
35 |
|
|
|
|
|
|
|
|
|
|
|
|
|
1,510 |
|
s
|
|
|
3,809 |
|
|
Additional
paid-in capital
|
|
|
58,279 |
|
|
|
24,877 |
|
|
|
(5,547 |
) |
e,k
|
|
|
|
|
|
|
|
(11,528 |
) |
e,s
|
|
|
66,081 |
|
|
Retained
earnings
|
|
|
27,872 |
|
|
|
(254 |
) |
|
|
254 |
|
k
|
|
|
|
|
|
|
|
6,512 |
|
t,u
|
|
|
34,384 |
|
|
Accumulated
other comprehensive
income
|
|
|
1,615 |
|
|
|
(1,904 |
) |
|
|
1,904 |
|
m
|
|
|
|
|
|
|
|
|
|
|
|
|
1,615 |
|
|
Total stockholders’
equity
|
|
|
90,030 |
|
|
|
22,754 |
|
|
|
(3,389 |
) |
|
|
|
22,000 |
|
|
|
|
(3,506 |
) |
|
|
|
127,889 |
|
|
Total liabilities and
stockholders’
equity
|
|
$ |
734,141 |
|
|
$ |
395,769 |
|
|
$ |
(899 |
) |
|
|
$ |
2,968 |
|
|
|
$ |
(3,506 |
) |
|
|
$ |
1,128,473 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unaudited
Pro Forma Condensed Combined Statement of Income for the Three Months Ended
March
31, 2009
(In
thousands, except per share data)
|
|
|
Premier
|
|
|
Adams
|
|
|
Pro
Forma Adjustments
|
|
|
|
Pro
Forma Combined Company
|
|
|
Interest
Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans, including
fees
|
|
$ |
7,425 |
|
|
$ |
4,229 |
|
|
$ |
(53 |
) |
aa
|
|
$ |
11,601 |
|
|
Investment
securities
|
|
|
1,693 |
|
|
|
802 |
|
|
|
|
|
|
|
|
2,495 |
|
|
Federal funds sold
and other
|
|
|
18 |
|
|
|
4 |
|
|
|
5 |
|
bb
|
|
|
27 |
|
|
Total interest
income
|
|
|
9,136 |
|
|
|
5,035 |
|
|
|
(49 |
) |
|
|
|
14,122 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
2,353 |
|
|
|
1,459 |
|
|
|
(474 |
) |
cc
|
|
|
3,338 |
|
|
Repurchase agreements
and other
|
|
|
33 |
|
|
|
15 |
|
|
|
|
|
|
|
|
48 |
|
|
FHLB advances and
other borrowings
|
|
|
192 |
|
|
|
290 |
|
|
|
(193 |
) |
aa,dd,ee,ff
|
|
|
289 |
|
|
Total interest
expense
|
|
|
2,578 |
|
|
|
1,764 |
|
|
|
(667 |
) |
|
|
|
3,675 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
interest income
|
|
|
6,558 |
|
|
|
3,271 |
|
|
|
618 |
|
|
|
|
10,447 |
|
|
Provision
for loan losses
|
|
|
102 |
|
|
|
965 |
|
|
|
|
|
|
|
|
1,067 |
|
|
Net interest income
after provision
for loan losses
|
|
|
6,456 |
|
|
|
2,306 |
|
|
|
618 |
|
|
|
|
9,380 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest
Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service charges on
deposit accounts
|
|
|
725 |
|
|
|
223 |
|
|
|
|
|
|
|
|
948 |
|
|
Electronic banking
income
|
|
|
236 |
|
|
|
130 |
|
|
|
|
|
|
|
|
366 |
|
|
Secondary market
mortgage income
|
|
|
83 |
|
|
|
|
|
|
|
|
|
|
|
|
83 |
|
|
Other-than-temporary
impairment of
AFS securities
|
|
|
- |
|
|
|
(32 |
) |
|
|
|
|
|
|
|
(32 |
) |
|
Other
|
|
|
126 |
|
|
|
64 |
|
|
|
|
|
|
|
|
175 |
|
|
|
|
|
1,170 |
|
|
|
370 |
|
|
|
- |
|
|
|
|
1,540 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest
Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and employee
benefits
|
|
|
2,794 |
|
|
|
1,783 |
|
|
|
|
|
|
|
|
4,577 |
|
|
Occupancy and
equipment
|
|
|
712 |
|
|
|
573 |
|
|
|
|
|
|
|
|
1,285 |
|
|
Outside data
processing
|
|
|
755 |
|
|
|
215 |
|
|
|
|
|
|
|
|
970 |
|
|
Professional
fees
|
|
|
341 |
|
|
|
409 |
|
|
|
|
|
|
|
|
750 |
|
|
Amortization of
intangibles
|
|
|
77 |
|
|
|
- |
|
|
|
115 |
|
gg
|
|
|
192 |
|
|
Other
expenses
|
|
|
1,085 |
|
|
|
1,038 |
|
|
|
|
|
|
|
|
2,123 |
|
|
|
|
|
5,764 |
|
|
|
4,018 |
|
|
|
115 |
|
|
|
|
9,897 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
before income taxes
|
|
|
1,862 |
|
|
|
(1,342 |
) |
|
|
503 |
|
|
|
|
1,023 |
|
|
Income
tax expense (benefit)
|
|
|
633 |
|
|
|
(537 |
) |
|
|
176 |
|
hh
|
|
|
272 |
|
|
Net income
(loss)
|
|
|
1,229 |
|
|
|
(805 |
) |
|
|
327 |
|
|
|
|
751 |
|
|
Dividends
on preferred stock and accretion
|
|
|
- |
|
|
|
- |
|
|
|
285 |
|
jj
|
|
|
285 |
|
|
Net
income available to common shareholders
|
|
$ |
1,229 |
|
|
$ |
(805 |
) |
|
$ |
42 |
|
|
|
|
466 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Income Per Common Share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$ |
0.19 |
|
|
$ |
(0.23 |
) |
|
|
|
|
|
|
$ |
0.06 |
|
|
Diluted
|
|
|
0.19 |
|
|
|
(0.23 |
) |
|
|
|
|
|
|
|
0.06 |
|
|
Weighted
Average Shares Outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
6,393 |
|
|
|
3,464 |
|
|
|
(1,919 |
) |
kk
|
|
|
7,938 |
|
|
Diluted
|
|
|
6,393 |
|
|
|
3,464 |
|
|
|
(1,919 |
) |
kk
|
|
|
7,938 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unaudited
Pro Forma Condensed Combined Statement of Income for the Year Ended
December
31, 2008
(In
thousands, except per share data)
|
|
|
Premier
|
|
|
Adams
|
|
|
Pro
Forma Adjustments
|
|
|
|
Pro
Forma Combined Company
|
|
|
Interest
Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans, including
fees
|
|
$ |
29,692 |
|
|
$ |
21,238 |
|
|
$ |
- |
|
|
|
$ |
50,930 |
|
|
Investment
securities
|
|
|
7,359 |
|
|
|
3,705 |
|
|
|
|
|
|
|
|
11,064 |
|
|
Federal funds sold
and other
|
|
|
793 |
|
|
|
359 |
|
|
|
172 |
|
bb
|
|
|
1,324 |
|
|
Total interest
income
|
|
|
37,844 |
|
|
|
25,302 |
|
|
|
172 |
|
|
|
|
63,318 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
10,676 |
|
|
|
8,638 |
|
|
|
(1,326 |
) |
cc
|
|
|
17,988 |
|
|
Repurchase agreements
and other
|
|
|
251 |
|
|
|
176 |
|
|
|
|
|
|
|
|
427 |
|
|
FHLB advances and
other borrowings
|
|
|
882 |
|
|
|
987 |
|
|
|
(673 |
) |
dd,ee,ff
|
|
|
1,196 |
|
|
Total interest
expense
|
|
|
11,809 |
|
|
|
9,801 |
|
|
|
(1,999 |
) |
|
|
|
19,611 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
interest income
|
|
|
26,035 |
|
|
|
15,501 |
|
|
|
2,171 |
|
|
|
|
43,707 |
|
|
Provision
for loan losses
|
|
|
147 |
|
|
|
11,822 |
|
|
|
|
|
|
|
|
11,969 |
|
|
Net interest income
after provision for loan
losses
|
|
|
25,888 |
|
|
|
3,679 |
|
|
|
2,171 |
|
|
|
|
31,738 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest
Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service charges on
deposit accounts
|
|
|
3,249 |
|
|
|
862 |
|
|
|
|
|
|
|
|
4,111 |
|
|
Electronic banking
income
|
|
|
824 |
|
|
$ |
548 |
|
|
|
|
|
|
|
|
1,372 |
|
|
Secondary market
mortgage income
|
|
|
458 |
|
|
|
39 |
|
|
|
|
|
|
|
|
497 |
|
|
Securities
gains
|
|
|
93 |
|
|
|
- |
|
|
|
|
|
|
|
|
93 |
|
|
Other-than-temporary
impairment of AFS
securities
|
|
|
- |
|
|
|
(655 |
) |
|
|
|
|
|
|
|
(655 |
) |
|
Other
|
|
|
667 |
|
|
|
172 |
|
|
|
|
|
|
|
|
839 |
|
|
|
|
|
5,291 |
|
|
|
966 |
|
|
|
- |
|
|
|
|
6,257 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest
Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and employee
benefits
|
|
|
10,229 |
|
|
|
6,801 |
|
|
|
|
|
|
|
|
17,030 |
|
|
Occupancy and
equipment
|
|
|
2,546 |
|
|
|
2,366 |
|
|
|
|
|
|
|
|
4,912 |
|
|
Outside data
processing
|
|
|
2,587 |
|
|
|
1,017 |
|
|
|
|
|
|
|
|
3,604 |
|
|
Professional
fees
|
|
|
840 |
|
|
|
1,138 |
|
|
|
|
|
|
|
|
1,978 |
|
|
Amortization of
intangibles
|
|
|
204 |
|
|
|
- |
|
|
|
459 |
|
gg
|
|
|
663 |
|
|
Other
expenses
|
|
|
3,488 |
|
|
|
3,227 |
|
|
|
|
|
|
|
|
6,715 |
|
|
|
|
|
19,894 |
|
|
|
14,549 |
|
|
|
459 |
|
|
|
|
34,902 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
before income taxes
|
|
|
11,285 |
|
|
|
(9,904 |
) |
|
|
1,712 |
|
|
|
|
3,093 |
|
|
Income
tax expense (benefit)
|
|
|
3,749 |
|
|
|
(4,125 |
) |
|
|
599 |
|
hh
|
|
|
223 |
|
|
Net income
(loss)
|
|
|
7,536 |
|
|
|
(5,779 |
) |
|
|
1,113 |
|
|
|
|
2,870 |
|
|
Dividends
on preferred stock and accretion
|
|
|
- |
|
|
|
- |
|
|
|
1,140 |
|
jj
|
|
|
1,140 |
|
|
Net
income available to common shareholders
|
|
$ |
7,536 |
|
|
$ |
(5,779 |
) |
|
$ |
(27 |
) |
|
|
|
1,730 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Income Per Common Share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$ |
1.25 |
|
|
$ |
(1.67 |
) |
|
|
|
|
|
|
$ |
0.23 |
|
|
Diluted
|
|
|
1.25 |
|
|
|
(1.67 |
) |
|
|
|
|
|
|
|
0.23 |
|
|
Weighted
Average Shares Outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
6,011 |
|
|
|
3,463 |
|
|
|
(1,918 |
) |
kk
|
|
|
7,556 |
|
|
Diluted
|
|
|
6,019 |
|
|
|
3,463 |
|
|
|
(1,918 |
) |
kk
|
|
|
7,564 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes
to Unaudited Pro Forma Condensed Combined Balance Sheets and Statements of
Income
(In
thousands, except per share data)
The unaudited pro forma condensed
combined balance sheet of Premier and Adams at March 31, 2009 has been prepared
as if the merger had been consummated on that date. The unaudited pro
forma condensed combined statements of income for the three months ended March
31, 2009 and the year ended December 31, 2008 were prepared as if the merger had
been consummated at the beginning of the period presented. The
unaudited pro forma condensed combined financial statements are based on the
historical financial statements of Premier and Adams and give effect to the
merger under the purchase method of accounting and the assumptions and
adjustments in the notes that follow. Fair value adjustments are
estimates that are subject to change based upon circumstances at the closing
date to the acquisition. Certain reclassifications have been made to
Adams’ financial information in order to conform to the presentation of
Premier’s financial information.
|
a.
|
Reclassify
Securities Held-to-Maturity as Securities Available-for-Sale and adjust
securities to market value.
|
|
b.
|
Allocate
Adams’ $13,292 allowance for loan losses to the loan portfolio to record
loans acquired at fair value.
|
|
c.
|
Additional
$6,569 discount on loan portfolio to record loans at their estimated fair
value. The fair value of the loan portfolio will be reassessed
as of the closing date of the acquisition and is subject to
change.
|
|
d.
|
Adjust
premises to fair value
|
|
e.
|
Negative
goodwill resulting from other purchase accounting adjustments reclassified
to reduce additional
paid-in-capital.
|
|
f.
|
Record
estimated core deposit intangible asset. The core deposit
intangible is being amortized on an accelerated basis over a period of 8
years.
|
|
g.
|
Record
net deferred income tax asset, established at a rate of 35% of the other
purchase accounting adjustments.
|
|
h.
|
Record
fixed rate certificates of deposit at fair value using market interest
rates. The fair value of fixed rate certificates of deposits
will be reassessed as of the closing date of the acquisition and is
subject to change.
|
|
j.
|
Adjust
long-term FHLB advances and other borrowed funds to fair value using
market interest rates. The fair value of long-term FHLB
advances and other borrowed funds will be reassessed as of the closing
date of the acquisition and is subject to
change.
|
|
k.
|
Reclassify
Adams’ accumulated deficit to additional paid-in
capital.
|
Notes
to Unaudited Pro Forma Condensed Combined Balance Sheets and Statements of
Income (continued)
|
|
m.
|
Adjust
cost basis of securities available-for-sale to fair
value.
|
|
|
n.
|
In
connection with the purchase of Adams, Premier will issue approximately
$22,000 of Premier cumulative preferred stock to the U.S. Treasury as part
of the TARP CPP. This issuance includes warrants for $3,300 of
Premier common stock which have an estimated fair value of $200 using the
Black-Sholes model to determine fair value. Any unused funds
will be held by Premier in deposit account(s) at its subsidiary banks
which, for this analysis, will hold the funds in Federal funds
sold.
|
|
|
p.
|
Utilize
$4,250 of the TARP CPP funds to payoff Adams parent company borrowing from
the Bankers’ Bank of Kentucky which was participated to Premier subsidiary
banks.
|
|
|
q.
|
Utilize
$8,682 of the TARP CPP funds to payoff Adams parent company borrowings
from First Guaranty Bank, Hammond, Louisiana to reduce the combined
company’s borrowings from First Guaranty Bank. Prior to the
merger with Adams, Premier had $10,634 in borrowings from First Guaranty
Bank.
|
|
|
r.
|
Utilize
$6,100 of the TARP CPP funds to recapitalize ANB to meet prescribed
capital ratios required by the written agreement between ANB and the
Office of the Comptroller of the Currency. These proceeds are
assumed to be used by the bank to reduce short-term FHLB
borrowings.
|
|
|
s.
|
Adjust
consolidated equity to reflect the purchase of Adams. Premier
will issue approximately 0.4461 shares of its common stock for each of the
3,464 shares of Adams common stock, or a total of approximately 1,545
shares. Assuming a closing price of $6.05 for Premier common
stock at the date of acquisition, the value assigned to the acquisition of
Adams would total approximately
$9,347.
|
|
|
t.
|
Under
SFAS 141r, bargain purchase of Adams would result in a gain on the
acquisition as follows:
|
|
Estimated
value of stock issued to Adams’ stockholders
|
|
$ |
9,347 |
|
|
Net
assets of Adams at March 31, 2009
|
|
|
(22,754 |
) |
|
Adjustments
to fair value:
|
|
|
|
|
|
Securities
|
|
|
(76 |
) |
|
Loans
|
|
|
6,569 |
|
|
Fixed
assets
|
|
|
(100 |
) |
|
Core deposit
intangibles
|
|
|
(3,669 |
) |
|
Fixed rate
certificates of deposit
|
|
|
1,836 |
|
|
FHLB advances and
other borrowed funds
|
|
|
654 |
|
|
Deferred taxes on
fair value adjustments
|
|
|
(1,825 |
) |
|
Negative goodwill
recognized as gain on acquisition
|
|
$ |
(10,018 |
) |
|
|
|
|
|
|
This gain is not reflected in the pro
forma income statements.
Notes
to Unaudited Pro Forma Condensed Combined Balance Sheets and Statements of
Income (continued)
|
|
The
fair value adjustments to the balance sheet of Adams and its subsidiaries
are estimates and will be reassessed as of the closing date of the
acquisition. As such, the projected gain on the acquisition
detailed above is subject to
change.
|
|
u.
|
Deferred
tax on gain on acquisition at 35%
|
|
aa.
|
As
a result of the use of $4,250 of the TARP CPP funds to payoff Adams parent
company borrowing from the Bankers’ Bank of Kentucky which was
participated to Premier subsidiary banks (see note p above), pro forma
loan income at the Premier subsidiary banks was reduced by approximately
$53 and interest expense on borrowings at Adams was reduced by $53 during
the first three months of 2009.
|
|
|
Since
this borrowing was originated on December 31, 2008 and therefore was not
outstanding during the calendar year 2008, no loan income or borrowing
expense adjustment was made to the pro forma income statement for the year
ended December 31, 2008. The $4,250 of TARP CPP funds are
assumed to be included in the balance of Federal funds sold for the
year.
|
|
bb.
|
Remaining
funds from the $22,000 of TARP CPP funds are assumed to be held by Premier
in deposit account(s) at its subsidiary banks which, for this analysis,
will hold the funds in Federal funds sold (see note n
above). For the quarter ended March 31, 2009, a pro forma
adjustment is made for the interest income that would have been earned on
the average balance of those Federal funds sold using an average yield of
0.25%
|
|
|
For
the year ended December 31, 2008, the pro forma adjustment for income that
would have been earned on the average balance of those Federal funds sold
is based on the following usage of funds prorated for the number of days
outstanding during 2008.
|
|
Total
TARP CPP funds available
|
|
$ |
22,000 |
|
|
Less
funds used to:
|
|
|
|
|
|
Payoff $5,000 loan from First
Guaranty Bank
|
|
|
(5,000 |
) |
|
Payoff $3,682 line from First
Guaranty Bank (pro rated for 214 days)
|
|
|
(2,153 |
) |
|
Capital injection into
ANB
|
|
|
(6,100 |
) |
|
Investable
proceeds
|
|
|
8,747 |
|
|
Average
yield on Federal funds sold
|
|
|
1.97 |
% |
|
Interest income adjustment on pro
forma
|
|
$ |
172 |
|
|
|
|
|
|
|
|
cc.
|
Amortization
of fair value adjustment on fixed rate certificates of deposit (see note h
above). Amortization is based upon the maturity pattern of the
acquired certificates of deposit which is irregular. The
following table estimates the projected amortization by
period.
|
Notes
to Unaudited Pro Forma Condensed Combined Balance Sheets and Statements of
Income (continued)
| |
|
Certificates
of Deposit
|
|
|
|
|
|
|
|
$100,000
and over
|
|
|
Under
$100,000
|
|
|
Total
|
|
|
0
to 3 months
|
|
$ |
136 |
|
|
$ |
338 |
|
|
$ |
474 |
|
|
4
to 12 months
|
|
|
220 |
|
|
|
632 |
|
|
|
852 |
|
|
13
to 24 months
|
|
|
41 |
|
|
|
200 |
|
|
|
241 |
|
|
25
to 36 months
|
|
|
41 |
|
|
|
199 |
|
|
|
240 |
|
|
37
to 48 months
|
|
|
(1 |
) |
|
|
15 |
|
|
|
14 |
|
|
Over
48 months
|
|
|
- |
|
|
|
15 |
|
|
|
15 |
|
|
Total
|
|
$ |
437 |
|
|
$ |
1,399 |
|
|
$ |
1,836 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
dd.
|
As
a result of the use of $8,862 of the TARP CPP funds to payoff Adams parent
company borrowings from First Guaranty Bank (see note q above), pro forma
interest expense on borrowings at Adams was reduced by $78 for the first
three months of 2009.
|
|
|
Not
all of these borrowings were outstanding for the full year ended December
31, 2008. The pro forma interest expense on borrowings at Adams
was reduced by $340 for the year ended December 31, 2008 based upon each
borrowings average outstanding balance during the
year.
|
|
ee.
|
As
a result of the use of $6,100 of the TARP CPP funds to recapitalize ANB to
meet certain minimum capital ratios (see note r above), it is assumed that
the bank would use these funds to reduce short-term FHLB
borrowings. Pro forma interest expense on FHLB advances is
reduced by $9 during the first three months of 2009 based upon an average
short-term borrowing rate of 0.59% during that
time.
|
|
|
Pro
forma interest expense on FHLB advances is reduced by $120 during the year
ended December 31, 2008 based upon an average short-term borrowing rate of
1.97% during the year.
|
|
ff.
|
Amortization
of fair value adjustment on fixed rate long-term FHLB borrowings (see note
j above). Amortization is estimated using the straight-line
method over the remaining 30 month period to
maturity.
|
|
gg.
|
Amortization
of core deposit intangible asset (see note f above). The core
deposit intangible is being amortized on an accelerated basis over a
period of 8 years.
|
|
hh.
|
Income
tax expense at the assumed rate of
35%.
|
Notes
to Unaudited Pro Forma Condensed Combined Balance Sheets and Statements of
Income (continued)
|
jj.
|
In
connection with the purchase of Adams, Premier will issue approximately
$22,000 of Premier cumulative preferred stock to the U.S. Treasury as part
of the TARP CPP and $3,300 of Premier common stock
warrants. The cumulative preferred dividend rate is 5% on an
annual basis for the first five years and then increases to 9%
thereafter. The estimated fair value of the warrants is being
amortized on a level yield basis over 5 years. The pro forma
income statements include the effect of the preferred stock dividend and
related accretion of the common stock warrant fair value for the three and
twelve month periods, respectively.
|
|
kk.
|
To
adjust weighted average shares outstanding to reflect the 1,545 estimated
shares of Premier common stock to be issued to the stockholders of
Adams.
|
Unaudited
Comparative Historical and Pro Forma Per Share Data
The table below summarizes selected per
share information about Premier and Adams. The per share information
is presented both historically and on a pro forma basis to reflect the
merger.
The data in the tables should be read
together with the financial information and the financial statements of Premier
and Adams included in this proxy statement-prospectus. The pro
forma per share common stock data is presented as an illustration only. The data
does not necessarily indicate the combined position per share or combined
results of operations per share that would have been reported if the merger had
occurred when indicated, nor is the data a forecast of the combined financial
position or combined results of operations for any future period. No
pro forma adjustments have been included herein which reflect the potential
effects of cost savings or synergies, which may be obtained by integrating the
operations of Adams and Premier.
The data in the tables assumes that at
the time of closing there are 3,463,569 shares of Adams common stock
outstanding.
|
At
and for the three months ended March 31, 2009
|
|
|
|
|
Premier
Historical
|
|
|
Adams
Historical
|
|
|
Unaudited
Combined Pro Forma Amounts for Premier and Adams
|
|
|
Unaudited
Pro Forma Equivalent Adams
|
|
|
Shares
(thousands) outstanding at March 31, 2009
|
|
|
6,393 |
|
|
|
3,463 |
|
|
|
7,938 |
|
|
|
1,545 |
|
|
Book
value per share at March 31, 2009
|
|
$ |
14.08 |
|
|
$ |
6.57 |
|
|
$ |
13.34 |
|
|
$ |
5.95 |
|
|
Cash
dividends paid per common share for the three months ended March 31,
2009
|
|
$ |
0.11 |
|
|
$ |
- |
|
|
$ |
0.11 |
|
|
$ |
0.05 |
|
|
Basic
earnings per share available to common shareholders for the three months
ended March 31, 2009
|
|
$ |
0.19 |
|
|
$ |
(0.23 |
)- |
|
$ |
0.06 |
|
|
$ |
0.03 |
|
|
Diluted
earnings per share available to common shareholders for the three months
ended March 31, 2009
|
|
$ |
0.19 |
|
|
$ |
(0.23 |
)- |
|
$ |
0.06 |
|
|
$ |
0.03 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At
and for year ended December 31, 2008
|
|
|
|
|
Premier
Historical
|
|
|
Adams
Historical
|
|
|
Unaudited
Combined Pro Forma Amounts for Premier and Adams
|
|
|
Unaudited
Pro Forma Equivalent Adams
|
|
|
Shares
(thousands) outstanding at December 31, 2008
|
|
|
6,393 |
|
|
|
3,463 |
|
|
|
7,938 |
|
|
|
1,545 |
|
|
Book
value per share at December 31, 2008
|
|
$ |
13.99 |
|
|
$ |
7.01 |
|
|
$ |
13.46 |
|
|
$ |
6.00 |
|
|
Cash
dividends paid per common share for the year ended December 31,
2008
|
|
$ |
0.43 |
|
|
$ |
0.25 |
|
|
$ |
0.43 |
|
|
$ |
0.19 |
|
|
Basic
earnings per share available to common shareholders for the year ended
December 31, 2008
|
|
$ |
1.25 |
|
|
$ |
(1.67 |
)- |
|
$ |
0.23 |
|
|
$ |
0.10 |
|
|
Diluted
earnings per share available to common shareholders for the year ended
December 31, 2008
|
|
$ |
1.25 |
|
|
$ |
(1.67 |
)- |
|
$ |
0.23 |
|
|
$ |
0.10 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Date,
Time and Place
The
special meeting of Premier shareholders will be held at the Pullman Plaza Hotel,
1001 Third Avenue, Huntington, West Virginia 25701, on September 1, 2009 at
10:00 a.m., local time.
Purpose
of the Premier Special Meeting
At
the Premier special meeting, Premier shareholders will be asked:
|
|
·
|
to
vote on a proposal to approve the issuance of Premier common stock in
connection with the merger;
|
|
|
·
|
to
vote on a proposal to amend the Premier articles of incorporation to
increase the authorized number of shares of Premier common stock from
10,000,000 to 20,000,000; and
|
|
|
·
|
to
vote upon an adjournment of the Premier special meeting, if necessary, to
solicit additional proxies if there are not sufficient votes to approve
the proposal to issue Premier common stock in connection with the
merger.
|
|
|
·
|
to
transact any other business that may properly be brought before the
Premier special meeting or any adjournments or postponements
thereof.
|
The
Premier board of directors unanimously, with Messrs Reynolds, Walker and Scaggs
abstaining, has determined that the merger, the merger agreement and the
transactions contemplated by the merger agreement, including the stock issuance,
are advisable and in the best interests of Premier and its shareholders and has
unanimously, Messrs Reynolds, Walker and Scaggs abstaining, approved the merger
agreement and recommends that Premier shareholders vote “FOR” the proposal to issue shares
of Premier common stock in the merger and “FOR” the
proposal to adjourn the Premier special meeting, if necessary.
The
Premier board of directors unanimously recommends that the Premier shareholders
vote “FOR” the proposal to amend
Premier’s articles of incorporation.
Only
holders of record of shares of Premier common stock at the close of business on
July 15, 2009, the record date for the Premier special meeting, will be entitled
to notice of, and to vote at, the Premier special meeting or any adjournments or
postponements thereof.
On
the record date, there were outstanding a total of 6,392,772 shares of Premier
common stock entitled to vote at the Premier special meeting.
The
following Premier executive officers and directors have substantial financial
interests in Adams:
|
|
·
|
Marshall
T. Reynolds, Chairman of the Board of Directors of Premier and beneficial
owner of 563,425 shares of Premier common stock, constituting 8.8% of
outstanding shares of Premier common stock, also serves as a director of
Adams. Together with his wife Shirley A. Reynolds, Mr. Reynolds is the
beneficial owner of 600,024 shares of Adams common stock, constituting
17.3% of the outstanding Adams shares as of July 15,
2009.
|
|
|
·
|
Since
September 16, 2008, Robert W. Walker, President and Chief Executive
Officer of Premier, has served as Chairman, President and Chief Executive
Officer of Adams and as a director of ANB. Mr. Walker was also
appointed as Acting Interim President and Chief Executive Officer of
ANB. Mr. Walker beneficially owns 43,572 shares of Premier
common stock and 9,398 shares of Adams common
stock.
|
|
|
·
|
Neal
W. Scaggs, a director of Premier and beneficial owner of 6,825 shares of
Premier common stock, beneficially owns 60,000 shares of Adams common
stock.
|
The
Kentucky Business Corporation Act governing conflicts of interest (a transaction
in which a director of the corporation has an interest in the transaction)
provides that such a transaction is not voidable by the corporation if any one
of the following apply:
|
|
(a)
|
The
material facts of the transaction and the director’s interest were
disclosed to the board of directors and the board of directors approved
the transaction; or
|
|
|
(b)
|
The
material facts of the transaction and the director’s interest were
disclosed to the shareholders and the shareholders approved the
transaction; or
|
|
|
(c)
|
The
transaction was fair to the
corporation.
|
Marshall
T. Reynolds’, Robert W. Walker’s and Neal W. Scaggs’ beneficial ownership of
Adams common stock, Marshall T. Reynolds’ position as a director of Adams and
Robert W. Walker’s position as an Adams director and executive officer were
disclosed to the Premier board, which approved the transaction by unanimous vote
of the disinterested directors. Baxter Fentriss and Company,
financial advisor to Premier, has determined that the merger is fair to
Premier. However, Premier’s board of directors determined that
Premier’s shareholders should be apprised of the interests of Messrs. Reynolds,
Scaggs and Walker in connection with the proposal to issue Premier shares in the
merger and be afforded the opportunity to vote on the matter without including
Messrs. Reynolds’, Walker’s and Scaggs’ shares in the vote.
Accordingly, the aggregate 613,822
Premier shares beneficially owned by Messrs. Reynolds, Walker and Scaggs will
not be voted for the proposal to approve the issuance of Premier common stock in
connection with the merger, nor will they be counted in determining a quorum on
that proposal. They will be voted, and will be counted in
constituting a quorum on the proposals to amend the Premier articles of
incorporation to increase authorized common shares and any adjournment of the
Premier special meeting.
Premier
shareholders may exercise their votes by voting in person or by a properly
executed and delivered proxy with respect to the Premier special
meeting.
On
the record date, approximately 126,158 shares, or 2% of the outstanding shares
of Premier common stock were held by Premier directors and executive officers
other than Messrs. Reynolds, Scaggs and Walker and their affiliates. We
currently expect that Premier’s directors and executive officers will vote their
shares in favor of the issuance of Premier common stock in connection with the
merger (except for the shares beneficially owned by Messrs. Reynolds, Scaggs and
Walker) and in favor of the Premier articles of incorporation amendment
proposal, although none of them has entered into any agreements obligating them
to do so.
The
presence of a majority of the outstanding shares of Premier common stock, by
person or by proxy is necessary to constitute a quorum for the transaction of
business at the special meeting. All shares of Premier common stock represented
at the Premier special meeting will be treated as present for purposes of
determining the presence or absence of a quorum for all matters to be considered
at the Premier special meeting, except that, for purposes of determining a
quorum on the proposal to issue Premier shares in the merger, shares held by
Messrs. Reynolds, Walker and Scaggs are not counted in determining a quorum, as
they are not counted in determining the vote on that proposal. Such
shares can be voted and therefore are counted in determining a quorum on the
proposed amendment to Premier’s articles of incorporation.
The
proposals require different percentages of votes in order to approve
them:
|
|
·
|
The
issuance of Premier common stock to Adams stockholders requires approval
by the affirmative vote of a majority of the outstanding shares of Premier
(excluding the shares held by Marshall T. Reynolds, Robert W. Walker and
Neal W. Scaggs).
|
|
|
·
|
The
Premier articles of incorporation amendment proposal requires approval by
the affirmative vote of a majority of shares voting at the special
meeting.
|
|
|
·
|
Approval
of any proposal to adjourn the Premier special meeting, if necessary, for
the purpose of soliciting additional proxies requires that the affirmative
vote of holders of a majority of the total voting power present or
represented by proxy at the Premier special
meeting.
|
Because
approval of the proposal to issue Premier common stock in the merger requires
the affirmative vote of the holders of more than 50% of the outstanding shares
of Premier common stock entitled to vote at the special meeting (excluding the
shares held by Marshall T. Reynolds, Robert W. Walker and Neal W. Scaggs),
abstentions and broker non-votes will have the same effect as votes against this matter.
Accordingly, the Premier board of directors urges you to complete, date and sign
the accompanying proxy and return it promptly in the enclosed, postage-paid
envelope.
If
you are a Premier shareholder and fail to vote, fail to instruct your broker or
nominee to vote, or vote to abstain, it will have the effect of a vote against
the proposal to issue Premier common stock in the merger and the proposal to
amend Premier’s articles of incorporation.
A
proxy card is enclosed for your use. Premier requests that you sign the
accompanying proxy and return it promptly in the enclosed postage-paid envelope.
When the accompanying proxy is returned properly executed, the shares of Premier
common stock represented by it will be voted at the Premier special meeting or
any adjournment thereof in accordance with the instructions contained in the
proxy.
If
a proxy is signed and returned without an indication as to how the shares of
Premier common stock represented are to be voted with regard to a particular
proposal, the Premier common stock represented by the proxy will be voted in
favor of each such proposal. At the date hereof, management has no knowledge of
any business that will be presented for consideration at the special meeting and
which would be required to be set forth in this joint proxy statement/prospectus
or the related Premier proxy card other than the matters set forth in Premier’s
Notice of Special Meeting of Shareholders. In accordance with Kentucky law,
business transacted at the Premier special meeting will be limited to those
matters set forth in such notice. Nonetheless, if any other matter is properly
presented at the Premier special meeting for consideration, it is intended that
the persons named in the enclosed proxy and acting thereunder will vote in
accordance with their best judgment on such matter.
Your
vote is important. Accordingly, please sign and return the enclosed proxy card
whether or not you plan to attend the Premier special meeting in
person.
If
you hold your shares in a stock brokerage account or if your shares are held by
a bank or nominee (that is, in street name), you must provide the record holder
of your shares with instructions on how to vote your shares if you wish them to
be counted. Please follow the voting instructions provided by your bank or
broker. Please note that you may not vote shares held in street name by
returning a proxy card directly to Premier or by voting in person at your
shareholder meeting unless you provide a “legal proxy,” which you must obtain
from your bank or broker. Further, brokers who hold shares of Premier common
stock on behalf of their customers may not give a proxy to Premier to vote those
shares without specific instructions from their customers.
If
you are a Premier shareholder and you do not instruct your broker on how to vote
your shares, your broker may not vote your shares.
Your
vote is important. Accordingly, please sign and return your broker’s
instructions whether or not you plan to attend the Premier special meeting in
person.
You
have the power to revoke your proxy at any time before your proxy is voted at
the Premier special meeting. You can revoke your proxy in one of three
ways:
|
|
·
|
you
can send a signed notice of
revocation;
|
|
|
·
|
you
can grant a new, valid proxy bearing a later date;
or
|
|
|
·
|
if
you are a holder of record, you can attend the Premier special meeting and
vote in person, which will automatically cancel any proxy previously
given, or you can revoke your proxy in person, but your attendance alone
will not revoke any proxy that you have previously
given.
|
If
you choose either of the first two methods, your notice of revocation or your
new proxy must be received by Premier’s Secretary at 2883 Fifth Avenue,
Huntington, West Virginia 25701, no later than the beginning of the Premier
special meeting.
In
accordance with the merger agreement, the cost of proxy solicitation for the
Premier special meeting will be borne by Premier. In addition to the use of the
mail, proxies may be solicited by officers and directors and regular employees
of Premier, without additional remuneration, by personal interview, telephone,
facsimile or otherwise. Premier will also request brokerage firms, nominees,
custodians and fiduciaries to forward proxy materials to the beneficial owners
of shares held of record on the record date and will provide customary
reimbursement to such firms for the cost of forwarding these materials.
Premier has engaged Morrow & Co., LLC to assist in the solicitation of
proxies for a fee of $5,000 plus reimbursement of reasonable out of pocket
expenses.
Date,
Time and Place
The
special meeting is scheduled to be held at the offices of Adams National Bank,
1130 Connecticut Avenue, NW, Suite 200, Washington, DC 20036, on September 1,
2009 at 10:00 a.m., local time.
Purpose
of the Adams Special Meeting
The
special meeting of Adams stockholders is being held:
|
|
·
|
to
adopt the Agreement of Merger, dated as of December 30, 2008, among
Premier, AANB Acquisition Corp., a wholly owned subsidiary of Premier, and
Adams, pursuant to which AANB Acquisition Corp. will be merged with and
into Adams and each outstanding share of common stock of Adams will be
converted into the right to receive 0.4461 shares of common stock of
Premier, with cash paid in lieu of fractional
shares;
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·
|
to
vote upon an adjournment to the special meeting, if necessary, to solicit
additional proxies if there are not sufficient votes to approve the
proposal to adopt the Agreement of Merger;
and
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·
|
to
transact any other business that may properly be brought before the Adams
special meeting or any adjournments or postponements
thereof.
|
The
board of directors of Adams has determined that the merger agreement is
advisable and in the best interests of Adams and its stockholders, and has
approved the merger agreement and the merger.
The
Adams board of directors, by a unanimous vote of the directors present (Marshall
T. Reynolds and Robert W. Walker abstaining), recommends that you vote “FOR” the
adoption of the merger agreement.
Only
stockholders of record at the close of business on July 15, 2009 are entitled to
notice of, and to vote at, the Adams special meeting and at any adjournment of
the meeting. A complete list of stockholders of record of Adams entitled to vote
at the special meeting will be available for the 10 days before the special
meeting at Adams’ executive offices and principal place of business at 1130
Connecticut Avenue, NW, Suite 200, Washington, DC 20036 for inspection by
stockholders during ordinary business hours for any purpose germane to the
special meeting. The list will also be available at the special meeting for
examination by any stockholder of record present at the special
meeting.
As
of the record date for Adams’ special meeting, the directors and officers of
Adams as a group owned and were entitled to vote 686,514 shares of the common
stock of Adams, constituting 19.8% of the outstanding shares of the common stock
of Adams on that date. We currently expect that Adams’ directors and executive
officers will vote their shares in favor of the merger, although none of them
has entered into any agreements obligating them to do so.
A
quorum is necessary to hold a valid special meeting. A quorum will be present at
the Adams special meeting if the holders of a majority of the outstanding shares
of the common stock of Adams entitled to vote on the record date are present, in
person or by proxy. If a quorum is not present at the special meeting, we expect
the presiding officer to adjourn the special meeting in order to solicit
additional proxies. Abstentions and broker non-votes will be counted as present
for purposes of determining whether a quorum is present.
The
adoption of the merger agreement requires the affirmative vote of the holders of
at least a majority of the shares of outstanding common stock of Adams entitled
to vote at the special meeting, either in person or by proxy.
Because
adoption of the merger agreement requires the affirmative vote of the holders of
more than 50% of the outstanding shares of Adams common stock entitled to vote
at the special meeting, abstentions and broker non-votes will have the same
effect as votes against this matter.
Accordingly, the Adams board of directors urges you to complete, date and sign
the accompanying proxy and return it promptly in the enclosed, postage-paid
envelope.
If
you are an Adams stockholder and fail to vote, fail to instruct your broker or
nominee to vote, or vote to abstain, it will have the same effect as a vote
against the proposal to adopt the merger agreement.
Whether
or not you plan to attend the Adams special meeting, please vote your shares. If
your shares are held in your name, you may vote in person at the special meeting
or by proxy.
Voting
in Person
If
you plan to attend the Adams special meeting and wish to vote in person, you
will be given a ballot at the special meeting. Please note, however, that if
your shares are held in “street name,” which means your shares are held of
record by a broker, bank or other nominee, and you wish to vote at the special
meeting, you must bring to the special meeting a proxy from the record holder
(your broker, bank or nominee) of the shares authorizing you to vote at the
special meeting.
You
should vote your proxy even if you plan to attend the Adams special meeting. You
can always change your vote at the special meeting.
Your
enclosed proxy card includes specific instructions for voting your shares. When
the accompanying proxy is returned properly executed, the shares of Adams common
stock represented by it will be voted at the Adams special meeting or any
adjournment thereof in accordance with the instructions contained in the
proxy.
If
you return your signed proxy card without indicating how you want your shares to
be voted, your shares will be voted “FOR” the proposal. Proxy cards
that are returned without a signature will not be counted as present at the
Adams special meeting and cannot be voted.
If
your shares are held in an account with a broker, bank or other nominee, you
must follow the instructions from your broker, bank or nominee in order to vote.
If you are an Adams stockholder and you do not instruct your broker on how to
vote your shares, your broker may not vote your shares, which will have the same
effect as a vote against the proposal to approve and adopt the merger
agreement.
You
have the power to revoke your proxy at any time before your proxy is voted at
the Adams special meeting. You can revoke your proxy in one of three
ways:
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·
|
you
can send a signed notice of
revocation;
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|
·
|
you
can grant a new, valid proxy bearing a later date;
or
|
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·
|
if
you are a holder of record, you can attend the Adams special meeting and
vote in person, which will automatically cancel any proxy previously
given, or you can revoke your proxy in person, but your attendance alone
will not revoke any proxy that you have previously
given.
|
If
you choose either of the first two methods, your notice of revocation or your
new proxy must be received by Adams’ Corporate Secretary at 1130 Connecticut
Avenue, NW, Suite 200, Washington, DC 20036 no later than the beginning of the
Adams special meeting.
In
accordance with the merger agreement, the cost of proxy solicitation for the
Adams special meeting will be borne by Adams. In addition to the use of the
mail, proxies may be solicited by officers and directors and regular employees
of Adams, without additional remuneration, by personal interview, telephone,
facsimile or otherwise. Adams will also request brokerage firms, nominees,
custodians and fiduciaries to forward proxy materials to the beneficial owners
of shares held of record on the record date and will provide customary
reimbursement to such firms for the cost of forwarding these
materials.
The
following table provides certain information as of the record date, July 15,
2009 with respect to persons known to Premier to be the beneficial owners of
more than 5% of Premier’s outstanding common stock. For purposes of the table
below, a person is deemed to be the beneficial owner of any shares of common
stock over which the person has or shares, directly or indirectly, voting or
investment power or of which person has the right to acquire beneficial
ownership at any time within 60 days after July 15, 2009.
|
Name and Address
|
Number
of
Shares Owned (1)
|
Percent
of Common
Stock Outstanding
|
|
|
|
|
|
Marshall
T. Reynolds
P.O.
Box 4040
Huntington,
West Virginia 25729
|
563,425
|
8.8%
|
|
John
Sheldon Clark
1633
Broadway, 30th
Floor
New
York, New York 10019
|
506,095
|
7.9%
|
|
|
|
|
|
(1) The
information contained in this column is based upon information furnished
to Premier by the named individuals and the shareholder records of
Premier. Except where otherwise indicated, this column
represents the number of shares beneficially owned, which includes shares
as to which a person has sole or shared voting and/or investment
power.
|
|
|
The
following table provides information about the shares of Premier common stock
beneficially owned by each director and executive officer, and by all directors
and executive officers of Premier as a group as of July 15, 2009.
|
Name
of Beneficial Owner
|
|
Common
Stock
Beneficially
Owned
as of
7/15/2009(1)
|
|
|
Exercisable
Options
to
Acquire
Additional
Common
Stock
as of
7/15/2009(2)
|
|
|
Percentage
Of
Outstanding
Shares
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Toney
K. Adkins, Director
|
|
|
6,180 |
|
|
|
|
|
|
*
|
|
|
Hosmer
A. Brown, III, Director
|
|
|
59,451 |
|
|
|
|
|
|
*
|
|
|
Edsel R. Burns, Director (3)
|
|
|
787 |
|
|
|
|
|
|
*
|
|
|
E.V.
Holder, Jr., Director
|
|
|
16,720 |
|
|
|
|
|
|
*
|
|
|
Keith
F. Molihan, Director
|
|
|
5,826 |
|
|
|
|
|
|
*
|
|
|
Marshall T. Reynolds, Chairman of the
Board (4)
|
|
|
563,425 |
|
|
|
|
|
|
8.8%
|
|
|
Neal
W. Scaggs, Director
|
|
|
6,825 |
|
|
|
|
|
|
*
|
|
|
Robert W. Walker, Director &
Chief Executive Officer (5)
|
|
|
43,572 |
|
|
|
24,418 |
|
|
|
1.1%
|
|
|
Thomas
W. Wright, Director
|
|
|
33,134 |
|
|
|
|
|
|
|
*
|
|
|
Brien M. Chase, Chief Financial
Officer (6)
|
|
|
661 |
|
|
|
12,334 |
|
|
|
*
|
|
|
Dennis
J. Klingensmith, Senior Vice President
|
|
|
2,758 |
|
|
|
14,000 |
|
|
|
*
|
|
|
Scot
A. Kelley, Vice President, Credit Administration
|
|
|
641 |
|
|
|
3,500 |
|
|
|
*
|
|
|
Katrina
Whitt, Vice President, Human Resources
|
|
|
0 |
|
|
|
3,500 |
|
|
|
*
|
|
|
All
directors and executive officers as a group (13
in number)
|
|
|
739,980 |
|
|
|
57,752 |
|
|
|
12.5%
|
|
* The
percentage of outstanding shares beneficially owned is less than
1%.
|
(1)
|
The
information contained in this column is based upon information furnished
to the Company by the named individuals and the shareholder records of the
Company. Except where otherwise indicated, this column
represents the number of shares beneficially owned, which includes shares
as to which a person has sole or shared voting and/or investment
power.
|
|
(2)
|
Includes
options that are exercisable or will become exercisable within 60 days of
July 15, 2009.
|
|
(3)
|
Joint
voting and investment power shared with
spouse.
|
|
(4)
|
Includes
34,255 shares owned by a controlled corporation and 2,310 shares owned by
spouse, with respect to which reporting person has no voting or investment
power. Mr. Reynolds has pledged 406,870 shares as
collateral.
|
|
(5)
|
Includes
6,041 shares owned by spouse, with respect to which reporting person has
no voting or investment power.
|
|
(6)
|
Includes
194 shares owned by spouse, with respect to which reporting person has no
voting or investment power.
|
The
following table provides certain information as of the record date, July 15,
2009 with respect to persons known to Adams to be the beneficial owners of more
than 5% of Adams’s outstanding common stock. For purposes of the table below, a
person is deemed to be the beneficial owner of any shares of common stock over
which the person has or shares, directly or indirectly, voting or investment
power or of which person has the right to acquire beneficial ownership at any
time within 60 days after July 15, 2009.
|
Name and Address
|
Number
of
Shares
Owned
|
Percent
of Common
Stock Outstanding
|
|
Marshall
T. and Shirley A. Reynolds
PO
Box 4040
Huntington,
WV 25729
|
600,024
(1)
|
17.3%
|
|
|
|
|
|
P.S.
D’Iberville Limited Partnership
1720
Harrison Street
Hollywood,
FL 33020
|
262,400
(2)
|
7.6%
|
|
|
|
|
|
(1)This
is comprised of 3,543 shares held by Marshall T. Reynolds,
369,606 shares held jointly by Marshall T. Reynolds and Shirley A.
Reynolds and 226,875 shares held by Shirley A. Reynolds.
(2)Based
upon the amended Schedule 13D dated August 19, 2008 filed on behalf of
P.S. D’I'berville Limited Partnership which consists of P.S. Development,
Inc., the general partner and limited partners who consist of Fred and
Sara Chikovsky, Lakota Group Limited Partnership, Ronald and Maria Temkin,
Mark J. Temkin Revocable Trust No. 1, and Temkin Investments, L.P.P.S.
Development, Inc. has sole voting and dispositive power over all the
shares.
|
|
|
The
following table provides information about the shares of Adams common stock
beneficially owned by each director and executive officer, and by all directors
and executive officers of Adams as a group as of July 15, 2009.
|
Name
of Beneficial Owner
|
|
Number of Shares of Common Stock Beneficially Owned
|
|
|
Percentage of
All Common Stock Outstanding
|
|
|
|
|
|
|
|
|
|
|
Directors
and Executive Officers:
|
|
|
|
|
|
|
|
|
|
A.
George Cook
|
|
|
4,766 |
|
|
|
*
|
|
|
Sandra
C. Ramsey
|
|
|
4,142 |
|
|
|
*
|
|
|
Douglas V.
Reynolds
|
|
|
56,718 |
|
|
|
1.6%
|
|
|
Marshall
T. Reynolds
|
|
|
600,024 |
(1) |
|
|
17.3%
|
|
|
Karen
E. Troutman
|
|
|
3,328 |
(2) |
|
|
*
|
|
|
Joseph
L. Williams
|
|
|
2,327 |
|
|
|
*
|
|
|
Todd
Shell
|
|
|
5,511 |
|
|
|
*
|
|
|
David
Bradley
|
|
|
300 |
|
|
|
*
|
|
|
Robert
Walker
|
|
|
9,398 |
|
|
|
*
|
|
|
All
directors and executive officers as a group (9
in number)
|
|
|
686,514 |
|
|
|
19.8%
|
|
*
Less than 1%.
|
(1)
|
This
is comprised of 3,543 shares held by Marshall T. Reynolds, 369,606 shares
held jointly by Marshall T. Reynolds and Shirley A. Reynolds and 226,875
shares held by Shirley A. Reynolds.
|
| (2) |
Reflects
vested options to purchase 3,025 shares of common stock granted to Ms.
Troutman under the 2000 Stock Option
Plan. |
Effects
of the Merger
Upon
completion of the merger, AANB Acquisition Corp., a wholly owned subsidiary of
Premier newly organized to effect the merger, will merge with and into Adams.
Adams will be the surviving corporation in the merger and will thereby become a
wholly owned subsidiary of Premier.
In
the merger, each outstanding share of Adams common stock will be converted into
the right to receive 0.4461 shares of Premier common stock, with cash paid in
lieu of fractional shares. This exchange ratio is fixed and will not be adjusted
to reflect stock price changes prior to closing of the merger. Premier
shareholders will continue to hold their existing Premier shares.
Beginning
in 2007 and continuing into 2008, the market for residential real estate loans,
construction loans and commercial loans experienced severe disruption
nationally, resulting in a sudden and significant deterioration in the asset
quality of loan and investment portfolios of financial
institutions. This deterioration began affecting the Washington, D.C.
area during the second quarter of 2008.
During
2008, ANB experienced significant deterioration in asset quality, primarily as a
result of a deterioration in the quality of ANB’s construction and commercial
real estate loan portfolio. In particular, non-performing loans,
delinquencies and levels of other real estate owned increased sharply during the
third and fourth quarter of 2008. Concurrently, the Office of the
Comptroller of the Currency (the “OCC”) conducted a safety and soundness
examination of ANB during the spring and early summer of 2008. As a
consequence of the examination, the OCC noted a number of violations in ANB’s
lending practices, which when considered together with the deterioration of
ANB’s asset quality, resulted in the OCC advising the ANB by letter dated August
1, 2008, that ANB was deemed to be in “troubled condition” as defined under the
Financial Institutions Reform, Recovery and Enforcement Act of
1989.
During
the period of June through August 2008, the Board of Directors of ANB began an
evaluation of the bank’s operations in light of the OCC criticisms of
ANB. As a result of ANB’s weakened financial condition, the Adams’
board decided to suspend its quarterly dividend on August 12, 2008.
By
letter dated August 19, 2008, an investor group, P.S. D’Iberville Limited
Partnership, sent a letter to Adams expressing concern over the recent stock
price performance of Adams common stock and asking to meet with representatives
of Adams to explore ways to maximize shareholder value, which would include a
capital infusion or an acquisition of all the shares of Adams. The
Board of Directors, after considering the investor group’s letter, the fact that
the investor group did not represent that it included anyone with banking or
bank regulatory experience, the ability of its largest shareholder to provide
capital infusion that would not be dilutive to existing shareholders, and the
need to devote managerial resources to addressing concerns raised by the OCC,
concluded that discussions with the investor group relating to a change in the
capital structure or change of control of Adams would not be advisable at the
time.
On
August 29, 2008, Jeanne D. Hubbard, the President, Chief Executive Officer and
Chairwoman of the Board of Adams resigned her positions effective September 4,
2008. With the public announcement of Ms. Hubbard’s resignation and
the disclosure of ANB being deemed a “troubled institution”, ANB experienced a
meaningful increase in deposit outflows and reductions of liquidity lines
extended by financial counter parties, further pressuring ANB’s operations.
Subsequently, the Board sought a replacement for Ms. Hubbard and hired Robert
Walker as Interim President and Chief Executive Officer on September 16, 2008 to
run the day-to-day operations of ANB until a permanent successor is
hired. Mr. Walker is the President and Chief Executive Officer of
Premier, a West Virginia based holding company. Mr. Marshall T.
Reynolds is a shareholder and the Chairman of the Board of Premier.
As
a result of the OCC’s safety and soundness examination, the OCC became
increasingly concerned with the deteriorating conditions at ANB, particularly
the deterioration in credit quality and the impact it was having on the bank’s
capital position. On October 1, 2008, ANB entered into a formal
written agreement with the OCC. As part of the written agreement, ANB
was required to, among other actions, complete a detailed third-party loan
review, ensure that certain management positions satisfy OCC standards for
competence, and maintain its regulatory capital at levels in excess of
regulatory minimums.
Throughout
the third quarter ANB’s asset quality significantly deteriorated, and on
November 3, 2008, ANB received a capital infusion of $3.2 million from a $3.4
million loan to Adams from Mr. Marshall T. Reynolds, a director and shareholder
of Adams. The capital infusion was intended to ensure that the bank
was in compliance with the capital requirements of the written
agreement. By early November, based upon increasing delinquencies and
the deterioration in the capital markets conditions that limited its ability to
raise capital from outside sources with severe dilution resulting to
stockholders, it became apparent to the Adams’ board of directors that ANB would
have difficulty surviving as an independent entity. Consequently,
senior management, with the concurrence of the board, decided to advise the OCC
of ANB’s intent to consider a merger of either Adams or ANB with Premier or
another financial institution. The OCC concurred, and at a meeting on
November 4, 2008, the board authorized management to interview investment
bankers to explore Adams’ strategic options and possible merger
options. At that time the board appointed a committee consisting of
the board’s disinterested directors and chaired by director A. George Cook to
act on behalf of the board in working with Adams’ senior management in the
review and negotiation of the merger agreement. In addition, the
board authorized Mr. Cook to be Adams’ director representative in the merger
negotiations. In early November, Adams retained RP Financial to
assist in the valuation of Adams in the event it pursued a transaction with
Premier and to assess potential sale of control opportunities. RP
Financial provided its valuation and advisory services directly to the board of
directors of Adams and ANB.
The
board of directors of Premier met on November 10, 2008 to consider the potential
acquisition of Adams and an application to participate in the U.S. Treasury’s
TARP Capital Purchase Plan. At the commencement of the meeting,
Premier directors Marshall T. Reynolds, a director and significant shareholder
of Adams, Robert W. Walker, Interim President and a shareholder of Adams, and
Neal W. Scaggs, a significant shareholder of Adams, disclosed their
interests. Mr. Walker then outlined the current financial and
regulatory situation of Adams and its subsidiary banks, and his assessment that
an opportunity to acquire Adams was nonetheless attractive given the potential
in its currently undervalued loan portfolio and the entry into its subsidiary
banks’ markets.
The
opportunity to obtain U.S. Treasury TARP Capital Purchase Plan funds was
discussed, both in the context of a potential acquisition of Adams and in the
absence of such transaction, for general corporate purposes.
The
Premier board of directors determined to apply for TARP funds in both
alternative situations (Messrs. Reynolds, Walker and Scaggs abstained from the
vote on the TARP application contemplating an acquisition of Adams) and, with
Messrs. Reynolds, Walker and Scaggs again abstaining, voted to retain the
investment banking firm of Baxter Fentriss and Company to assist Premier in its
examination of the potential acquisition of Adams.
In
providing its valuation and financial advisory services to Adams, RP Financial
considered as potential acquirors both Premier and another financial institution
that had previously expressed an interest in pursuing an acquisition of
Adams. Both Premier and the other financial institution and their
respective financial advisors conducted a due diligence review of Adams and
subsidiary banks, including on-site management interviews, during the weeks of
November 21, 2008 and November 28, 2008. Both Premier and the other
financial institution were provided with the results of the third-party loan
review when they became available on December 1, 2008 as well as an updated
listing of non-performing assets through November 30, 2008. Both
Premier and the other financial institution were advised that any proposal to
acquire Adams should include a provision for a short-term infusion of capital
into ANB in order to meet the capital directives of the written
agreement. Following due diligence, Premier reaffirmed its
desire to pursue an acquisition of Adams and provide a short-term infusion of
capital. The other financial institution advised RP Financial that
while it retained an interest in Adams, the terms of an acquisition would not
include a short-term infusion of capital and would leave responsibility for
resolving non-performing assets solely to the stockholders of
Adams. Based on the foregoing, at the December 12, 2008 meeting of
directors, the board authorized counsel and RP Financial to negotiate the terms
of a definitive agreement with Premier’s counsel and financial
advisor. Messrs. Walker and Marshall T. Reynolds did not participate
in the decision to proceed with a potential transaction with Premier, and they
abstained from voting. During this period, Adams’ financial advisor
and counsel conducted a due diligence examination of Premier.
On
December 17, 2008, Premier’s board of directors discussed with Baxter Fentriss
and Company that firm’s analysis of Adams.
On
December 23, 2008, Premier’s board, with Messrs. Reynolds, Walker and Scaggs
recusing themselves, reviewed the terms of the definitive merger agreement and
authorized Premier’s chief financial officer to enter into the agreement when
fully negotiated to his satisfaction as outlined by the board.
During
the period of December 15th through
December 28th the
parties negotiated the terms of the definitive agreement.
On
December 29, 2008, the board of directors, with Messrs. Walker and Marshall T.
Reynolds recusing themselves from the discussions reviewed the terms of the
definitive agreement and authorized Adams’ Chief Financial Officer to enter into
the agreement on behalf of Adams with Messrs. Walker and Marshall T. Reynolds
abstaining.
Subsequent
to the parties entering into the agreement, by letter dated January 29, 2009,
the investor group, P.S. D’Iberville Limited Partnership, indicated their
non-binding interest in acquiring all of the shares of Adams for $3.45 in
cash. The Board of Directors, after considering (i) the terms of the
definitive agreement with Premier, (ii) Premier’s future prospects and the
ability of Adams’ shareholders to participate in the growth of Premier following
the completion of the merger, (iii) the lack of banking experience of the
investor group, and (iv) the fact that the investor group had not indicated that
as a non-financial institution they would be able to obtain a timely regulatory
approval of such a transaction, determined that it was in the best interests of
Adams and its shareholders to proceed with the transaction with
Premier. In reaching its conclusion, the Board also considered the
higher likelihood that Premier would obtain regulatory approval in a timely
manner and Premier’s ability to participate in the CPP program.
After careful consideration, the Adams
board of directors determined that the merger agreement and the transactions
contemplated by the merger agreement were advisable and in the best interests of
Adams and its stockholders and approved the merger agreement and the
transactions contemplated by the merger agreement, including the
merger. Accordingly, Adams’ board recommends that Adams stockholders
vote “FOR” adoption of the merger agreement at the Adams special
meeting.
In
reaching its decision, the board of directors, with advice from its financial
and legal advisors, considered a number of factors, including the
following:
|
·
|
The
limited strategic alternatives available to Adams, notwithstanding an
evaluation of strategic alternatives conducted by Adams management with
the assistance of its legal and financial
advisors.
|
|
·
|
The
likely unavailability to Adams of the TARP which could jeopardize Adams’
viability as an independent institution going
forward.
|
|
·
|
The
likelihood of more severe regulatory action in the absence of a
transaction and the consequences of such regulatory action to Adams
stockholders.
|
|
·
|
Adams’
and Premier’s respective businesses, operations, financial conditions,
asset quality, earnings and prospects. In reviewing these
factors, Adams’ board concluded that Premier’s financial condition and
asset quality appeared to be relatively sound, and that Premier’s earnings
and prospects should result in the combined company having superior future
earnings and prospects compared to Adams earnings and prospects on a
stand-alone basis.
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·
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The
current and prospective environment in which Adams’ operates, which
reflects challenging and uncertain banking industry conditions and risks
that are likely to persist. The board also considered the
effect these factors could have on Adams’ liquidity position
and funding capabilities.
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·
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The
likelihood that Adams’ non-performing, classified and criticized loans
would increase and the resulting impact of such increases on the views and
actions of the regulators, rating agencies and liquidity sources, as well
as the impact of such asset deterioration on ANB’s capital
levels.
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The
inability of Adams to withstand a loss of confidence of its liquidity
sources and the speed with which such a loss can cause regulators to
declare a financial institution
insolvent.
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The
impact on stockholders, depositors, debtholders, employees and other
constituencies if a depository institution experiences a loss of liquidity
that leads to an FDIC receivership.
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The
prior recent occasions in which Adams experienced significant deposit
outflows (and the risk that Adams could experience, and the potential
impact on Adams of, additional significant deposit
outflows).
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The
reputation and business practices and experience of Premier and its
management as they might affect the business of Adams and its
subsidiaries.
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·
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The
“all stock” and fixed exchange ratio aspects of the merger consideration,
which would allow Adams stockholders to participate in a portion of the
future performance of the combined Adams and Premier business and
synergies resulting from the merger, and the value to Adams stockholders
represented by that consideration. The board of directors also
considered the adequacy of the merger consideration, not only in relation
to the current market price of Adams’ common stock, but also in relation
to the historical, present and anticipated future operating results and
financial position of Adams and the value of Adams in a liquidation
scenario.
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Closing
certainty, price certainty, and time to closing, along with management’s
belief that Adams’ regulators would view the transaction
favorably.
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·
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The
opinion, analyses and presentations of RP Financial, including the oral
opinion of RP Financial (which subsequently was confirmed in writing), as
described above. For more information, see “—Opinion of Adams
Financial Advisor” beginning on page
74.
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In
addition, Adams’ board of directors considered the following in connection with
its decision to adopt the merger agreement:
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The
fact that Premier’s shareholders would be required to vote on the issuance
of shares in the merger;
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·
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That
the exchange ratio represented a discount relative to the historic trading
levels of Adams common stock; and
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·
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The
relationships between certain members of Adams’ and Premier’s respective
boards and management.
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Adams’
board concluded that the anticipated benefits of the merger would outweigh the
preceding considerations. Marshall T. Reynolds and Robert Walker did
not participate in the discussions related to the transaction, nor did they vote
to approve entering into the merger agreement.
The
reasons set forth above are not intended to be exhaustive, but include material
facts considered by the board of directors in approving the merger
agreement. Although each member of Adams’ board individually
considered these and other factors, the board did not collectively assign any
specific or relative weights to the factors considered and did not make any
determination with respect to any individual factor. The board
collectively made its determination with respect to the merger based on the
conclusion reached by its members, in light of the factors that each of them
considered appropriate, that the merger is in the best interest of Adams and its
stockholders.
Adams’
board of directors realized there can be no assurance about future results,
including results expected or considered in the factors listed
above. However, the board concluded the potential positive factors
outweighed the potential risks of completing the merger.
After careful consideration, the
Premier board of directors determined that the merger agreement and the
transactions contemplated by the merger agreement, including the issuance of
Premier stock, were advisable and in the best interests of Premier and its
shareholders and approved the merger agreement and the transactions contemplated
thereby, including the issuance of Premier common stock in the
merger. Accordingly, Premier’s board recommends that Premier
shareholders vote “FOR” issuance of Premier common stock in the merger at the
Premier special meeting.
In reaching its decision, the board of
directors, with advice from its financial and legal advisors, considered a
number of factors, including the following:
Strategic
considerations. The Premier board believes the merger will
provide a number of significant strategic opportunities, including the
following:
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Opportunity
to gain entry to the Washington, D.C. and Richmond and Hampton, Virginia
banking markets.
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Providing
Premier an opportunity to increase its core deposit
base.
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Other factors considered by the
Premier board. In addition to considering the strategic
factors described above, the Premier board considered the following additional
factors, all of which are viewed as supporting its decision to approve the
merger and issuance of Premier stock:
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Its
knowledge of Adams’ business, operations, financial condition, earnings
and prospects, taking into account the results of Premier’s due diligence
review of Adams.
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The
third party external loan review of ANB dated December 15,
2008.
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The
opinion of Baxter Fentriss & Company, dated December 30, 2009, to the
Premier board of directors to the effect that, as of that date and based
upon the factors and subject to the assumptions set forth in such opinion,
the 0.4461 exchange ratio was fair, from a financial point of view, to
Premier, as more fully described under the caption “Opinion of Premier
Financial Advisor” beginning on page
78.
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Premier’s
history of successfully working through regulatory agreements with its
subsidiary banks and returning those banks to well performing status in
subsequent regulatory examinations.
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The
terms and conditions of the merger
agreement.
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The Premier board of directors weighed
these advantages and opportunities against a number of other factors weighing
negatively against the merger, including:
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The
financial and regulatory status of Adams and its subsidiary
banks;
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The
challenges inherent in the combination of two businesses of the size and
scope of Premier and Adams;
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The
risk of not capturing all anticipated cost savings and operational
synergies between Premier and Adams and the risks that other anticipated
benefits might not be realized;
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The
risks of the type described under “Risk
Factors”.
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Premier’s board concluded that the
anticipated benefits of the merger would outweigh the preceding
considerations. Marshall T. Reynolds, Robert W. Walker and Neal W.
Scaggs did not participate in the vote to approve entering into the merger
agreement and issuing Premier common stock in the merger.
The
reasons set forth above are not intended to be exhaustive, but include material
facts considered by the board of directors in approving the merger
agreement. Although each member of Premier’s board individually
considered these and other factors, the board did not collectively assign any
specific or relative weights to the factors considered and did not make any
determination with respect to any individual factor. The board
collectively made its determination with respect to the merger based on the
conclusion reached by its members, in light of the factors that each of them
considered appropriate, that the merger is in the best interest of Premier and
its shareholders.
Premier’s
board of directors realized there can be no assurance about future results,
including results expected or considered in the factors listed
above. However, the board concluded the potential positive factors
outweighed the potential risks of completing the merger.
Adams
retained RP®
Financial, LC. (“RP Financial”) in November 2008 to provide certain financial
advisory services with respect to: (1) determining the value of
Adams’ common stock pursuant to a change of control; (2) evaluating prospective
merger proposals that may be received by Adams, including the prospective
acquirer’s ability to pay and the financial and market impact (including pro
forma analyses) and evaluating the pro forma business plan and outlook of the
merged company; and, (3) should Adams enter into an agreement to merge or be
acquired, rendering a fairness opinion with respect to the merger consideration
to be received by Adams shareholders in such transaction. In engaging
RP Financial for these services and requesting RP Financial’s opinion as to the
fairness of the merger consideration to be received, the Adams Board did not
give any special instructions to RP Financial, nor did it impose any limitations
upon the scope of the investigation that RP Financial wished to conduct to
enable it to give its opinion. RP Financial has delivered to Adams
its written opinion, dated December 29, 2008, to the effect that, based upon and
subject to the matters set forth therein, as of that date, the merger
consideration to be received in connection with the merger with Premier was fair
to the Adams shareholders from a financial point of view. The opinion
of RP Financial is directed toward the consideration to be received by Adams
shareholders and does not constitute a recommendation to any Adams stockholder
to vote in favor of approval of the merger agreement. A copy of the
RP Financial opinion is set forth as Annex III to this proxy
statement/prospectus, and Adams shareholders should read it in its
entirety. RP Financial has consented to the inclusion and description
of its written opinion in this proxy statement/prospectus.
Prior
to its November 2008 engagement, RP Financial had not rendered any professional
services to Adams.
RP
Financial was selected by Adams to provide financial advisory services because
of RP Financial’s expertise in the valuation of businesses and their securities
for a variety of purposes, including its expertise in connection with mergers
and acquisitions of financial institutions and their holding companies,
including such transactions in the Mid-Atlantic region of the United
States. Pursuant to a letter agreement dated November 5, 2008 and
executed by Adams on November 13, 2008 (the “RP Engagement Letter”), RP
Financial estimates that it will receive from Adams total professional fees of
approximately $242,000, of which $100,000 has been paid to date, plus
reimbursement of certain out-of-pocket expenses, for its fairness opinion
services in connection with the merger.
In
addition, Adams has agreed to indemnify and hold harmless RP Financial, any
affiliates of RP Financial, and the respective directors, officers, agents and
employees of RP Financial or their successors and assigns who act for or on
behalf of RP Financial in connection with the services called for under the RP
Engagement Letter, from and against any and all losses, claims, damages and
liabilities, including, but not limited to, all losses and expenses in
connection with claims under the federal securities laws, actually incurred by
RP Financial and attributable to: (i) any untrue statement of a material fact
contained in the financial statements or other information furnished or
otherwise provided by an authorized officer of Adams to RP Financial; (ii) the
omission of a material fact from the financial statements or other information
furnished or otherwise made available by an authorized officer of Adams to RP
Financial, or (iii) any action or omission to act by Adams, or Adams’ respective
officers, directors, employees or agents, which action or omission is
willful. Notwithstanding the foregoing, Adams will be under no
obligation to indemnify RP Financial hereunder if a court determines that RP
Financial was negligent or acted in bad faith or willfully with respect to any
actions or omissions of RP Financial related to a matter for which
indemnification is sought.
In
addition, if RP Financial is entitled to indemnification from Adams under the
Engagement Letter, and in connection therewith incurs legal expenses in
defending any legal action challenging the opinion of RP Financial where RP
Financial is not negligent or otherwise at fault or is found by a court of law
to be not negligent or otherwise at fault, Adams will indemnify RP Financial for
all reasonable expenses.
In
rendering its opinion, RP Financial reviewed the following material and/or
conducted the following analyses:
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the
merger agreement, as reviewed and approved by the Adams Board and executed
by Adams on December 31, 2008, including
exhibits;
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·
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the
following information for Adams and/or ANB – (1) the annual audited
financial statements for the fiscal years ended December 31, 2005, 2006
and 2007 included in the Annual Reports for the respective years; (2) the
annual shareholder proxy statements for the last three fiscal years; (3)
other securities filings; (4) shareholder, regulatory and internal
financial and other reports through November 30, 2008; (5) the detailed
third party loan review prepared pursuant to the ANB Written Agreement
with the OCC; and (6) the stock price history for the last three years and
the current market pricing
characteristics;
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the
following information for Premier, including its subsidiaries – (1) the
annual audited financial statements for the fiscal years ended December
31, 2005, 2006 and 2007, included in the Annual Reports for the respective
years; (2) the annual shareholder proxy statements for the last three
fiscal years; (3) other securities filings; (4) shareholder, regulatory
and internal financial and other reports through September 30, 2008; and,
(5) the stock price history for the last three years and the current
market pricing characteristics;
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·
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discussions
with management of Adams and Premier regarding the past and current
business, operations, financial condition, and future prospects for both
institutions individually and on a merged
basis;
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·
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the
financial and market pricing characteristics of Adams and Premier relative
to other regionally-based financial institutions that are publicly
traded;
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·
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the
competitive, economic and demographic characteristics nationally,
regionally and in the local market
area;
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·
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the
potential impact of regulatory and legislative changes on financial
institutions;
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·
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the
financial terms of other recently completed and pending acquisitions of
regionally-based banks and thrifts with similar characteristics as
Adams;
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·
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Premier’s
financial condition as of September 30, 2008 relative to its expected
financial ability to complete the merger from a cash and capital
perspective;
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the
estimated pro forma financial impact of the merger to Premier, including
the pro forma per share data and the pro forma pricing ratios based on
Premier’s recent market prices, taking into consideration the potential
merger adjustments and synergies as determined by Premier and discussed
with Adams;
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the
prospective strategic benefits of the merger to Adams, including, but not
limited to, avoidance of potentially more severe regulatory sanctions,
expanded market area, increased stock liquidity, restoration of cash
dividends, expanded management team, the opportunity to realize cost
reductions and increased platform for future expansion;
and,
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·
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the
termination and walk-away provisions of the merger
agreement.
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In
rendering its opinion, RP Financial relied, without independent verification, on
the accuracy and completeness of the information concerning Adams and Premier
furnished by the respective institutions to RP Financial for review for purposes
of its opinion, as well as publicly-available information regarding other
financial institutions and competitive, economic and demographic
data. RP Financial further relied on the assurances of management of
Adams and Premier that they were not aware of any facts or circumstances that
would make any of such information inaccurate or misleading. RP
Financial was not asked to, and did not, undertake an independent verification
of any of such information and did not assume any such responsibility or
liability for the accuracy or completeness thereof. Adams and Premier
did not restrict RP Financial as to the material it was permitted to
review. RP Financial did not perform or obtain any independent
appraisals or evaluations of the assets and liabilities, the collateral securing
the assets or the liabilities (contingent or otherwise) of Adams or Premier or
the collectability of any such assets, nor was RP Financial furnished with any
such evaluations or appraisals. RP Financial did not make an
independent evaluation of the adequacy of the allowance for loan losses of Adams
or Premier nor did RP Financial review any individual credit files relating to
Adams or Premier. RP Financial assumed, with Adams’ and Premier’s
consent, that the respective allowances for loan losses for both Adams and
Premier were adequate to cover such losses and would be adequate on a pro forma
basis for the combined entity.
With
respect to such estimates and projections of transaction costs, purchase
accounting adjustments, expected cost savings and other synergies and other
information prepared by and/or reviewed with Premier’s management and used
by RP Financial in its analyses, RP Financial assumed, with Premier’s consent,
that such estimates reflected the best currently available estimates and
judgments of Premier’s management of the respective future financial
performances of Premier and Adams and RP Financial assumed that such
performances would be achieved. RP Financial expresses no opinion as
to such estimates or projections or the assumptions on which they are
based.
RP
Financial, with Adams’ consent, has relied upon the advice Adams received from
its legal, accounting and tax advisors as to all legal, accounting and tax
matters relating to the merger and other transactions contemplated by the merger
agreement. In rendering its opinion, RP Financial assumed that, in
the course of obtaining the necessary regulatory and governmental approvals for
the proposed merger, no restriction would be imposed on Premier that would have
a material adverse effect on the ability of the merger to be consummated as set
forth in the merger agreement. RP Financial also assumed that there
was no material change in Adams’ or Premier’s assets, financial condition,
results of operations, business or prospects since the date of the most recent
financial statements made available to RP Financial. RP Financial
assumed in all respects material to the analyses, that all of the
representations and warranties contained in the merger agreement and all related
agreements are true and correct, that each party to such agreements will perform
all of the covenants required to be performed by such party under such
agreements and that the conditions precedent in the merger agreement are not
waived.
RP
Financial’s opinion was based solely upon the information available to it and
the economic, market and other circumstances as they existed as of December 29,
2008. Events occurring after December 29, 2008 could materially
affect the assumptions used in preparing the opinion. In connection
with rendering its opinion dated December 29, 2008, RP Financial performed a
variety of financial analyses that are summarized below. Although the
evaluation of the fairness, from a financial point of view, of the merger
consideration was to some extent subjective based on the experience and judgment
of RP Financial and not merely the result of mathematical analyses of financial
data, RP Financial relied, in part, on the financial analyses summarized below
in its determinations. The preparation of a fairness opinion is a
complex process and is not necessarily susceptible to partial analyses or
summary description. RP Financial believes its analyses must be
considered as a whole and that selecting portions of such analyses and factors
considered by RP Financial without considering all such analyses and factors
could create an incomplete view of the process underlying RP Financial’s
opinion. In its analyses, RP Financial took into account its
assessment of general business, market, monetary, financial and economic
conditions, industry performance and other matters, many of which are beyond the
control of Adams and Premier, as well as RP Financial’s experience in securities
valuation, its knowledge of financial institutions, and its experience in
similar transactions. With respect to the comparable transactions
analysis described below, no public company utilized as a comparison is
identical to Adams and such analyses necessarily involve complex considerations
and judgments concerning the differences in financial and operating
characteristics of the companies and other factors that could affect the
acquisition values of the companies concerned. The analyses were
prepared solely for purposes of RP Financial providing its opinion as to the
fairness of the merger consideration, and they do not purport to be appraisals
or necessarily reflect the prices at which businesses or securities actually may
be sold. Any estimates contained in RP Financial’s analyses are not
necessarily indicative of future results of values, which may be significantly
more or less favorable than such estimates. None of the analyses
performed by RP Financial was assigned a greater significance by RP Financial
than any other.
Comparable Transactions
Analysis. RP Financial compared the merger on the basis of the
multiples or ratios of reported earnings, book value, tangible book value,
assets and tangible book premium to core deposits with the same multiples or
ratios to a selected comparable group of completed and pending bank and/or
thrift mergers and acquisitions. This comparable group consisted of
all acquisitions of commercial banks and commercial bank holding companies and
savings institutions and thrift holding companies in the United States that were
announced in 2008, with assets between $50 million and $1.0 billion and
non-performing assets greater than 3.0% of assets.
RP
Financial evaluated selected financial data immediately prior to the acquisition
announcement and acquisition pricing multiples or ratios at announcement for the
acquisition targets included in the selected comparable group and compared that
data relative to the Adams financial data and pricing multiples or ratios at
acquisition announcement based on the proposed merger with
Premier. In conducting these comparative analyses, RP Financial
considered the average, median, high and low data points of the comparable group
to Adams.
In
comparison to the comparable group, Adams: maintained a higher level
of assets than the average and median; maintained a lower ratio of equity to
assets than the average and median; maintained a lower loss relative to average
assets than the average and median; maintained a lower loss relative to average
equity than the average and median; and maintained a lower ratio of
non-performing assets to assets relative to the average and a higher ratio of
non-performing assets to assets relative to the median.
In
each case, Adams’ financial ratios fell within the range of ratios of each of
the banks and thrifts included in the comparable group. Adams’ merger
pricing ratio relative to trailing 12 month earnings through September 30, 2008
was not meaningful due to the net loss recorded during the
period. Adams’ merger pricing ratios relative to book value, tangible
book value, assets and tangible book value premium/core deposits basis similarly
fell within the range of ratios of each of the banks and thrifts included in the
comparable group. RP Financial’s fairness analysis under the
comparable transaction approach took into consideration Adams’ low and
decreasing capital position due to operating losses resulting from increasing
its allowance for credit losses and ANB’s viability without a capital infusion
as required by the ANB Written Agreement with the OCC. These
considerations and the resulting comparative ratios supported RP Financial’s
fairness conclusion.
Pro Forma Impact
Analysis. Since the merger consideration consists entirely of
stock, RP Financial considered the estimated pro forma impact of the merger on
Premier’s financial condition, operating results and stock pricing
ratios. Specifically, RP Financial considered that the merger is
anticipated to: be accretive to Premier’s pro forma earnings per
share within the first year of completing the merger, incorporating certain
anticipated merger synergies and core earnings estimates for Adams; increase
Premier’s market capitalization and shares outstanding; and increase Premier’s
stock liquidity. Furthermore, RP Financial considered the increased
size and competitive profile of Premier on a pro forma basis, as well as the
expanded geographic footprint of Premier. RP Financial considered the
pro forma impact of the merger on Premier’s per share data and pricing ratios
based on Premier’s pre-announcement trading price. RP Financial also
took into account Premier’s strategic objectives following the merger, including
additional growth and the potential capital to be raised through participation
in the U.S. Treasury Department’s Capital Purchase Program. RP
Financial also considered other benefits of the merger, including the potential
for increased liquidity of the stock for Adams shareholders given Premier’s
larger size, greater market capitalization and higher shares outstanding, the
enhanced ability to pursue growth within the expanded market area and expanded
management team. In comparing the pro forma impact of the merger, RP
Financial also took into consideration that following the merger, Adams
shareholders will hold stock in a larger, more actively traded commercial bank
holding company; and, on a pro forma basis, Adams shareholders will own
approximately 19% of the common stock in Premier. Based on these
considerations, RP Financial concluded that the impact analysis supported the
fairness conclusion.
As
described above, RP Financial’s opinion and presentation to the Adams Board was
one of many factors taken into consideration by the Adams Board in making its
determination to approve the merger agreement. Although the foregoing
summary describes the material components of the analyses presented by RP
Financial to the board of directors of Adams on December 29, 2008, in connection
with its opinion as of that date, it does not purport to be a complete
description of all the analyses performed by RP Financial and is qualified by
reference to the written opinion of RP Financial set forth as Annex C, which
Adams shareholders are urged to read in its entirety.
Baxter Fentriss has acted as financial
advisor to Premier in connection with the merger. On December 30,
2008, Baxter Fentriss delivered to Premier its opinion that as of such date, and
on the basis of matters referred to herein, the merger consideration is fair,
from a financial point of view, to the holders of Premier common
stock. In rendering its opinion, Baxter Fentriss consulted with the
management of Premier and Adams; reviewed the merger agreement and certain
publicly-available information on the parties; and reviewed certain additional
materials made available by the management of the respective banks.
In addition, Baxter Fentriss discussed
with the management of Premier and Adams their respective businesses and
outlooks. No limitations were imposed by Premier’s or Adams’s Board
of Directors upon Baxter Fentriss with respect to the investigation made or
procedures followed by it in rendering its opinion. The full text of
Baxter Fentriss' written opinion is attached as Annex II to this joint proxy
statement/prospectus and should be read in its entirety with respect to the
procedures followed, assumptions made, matters considered, and qualifications
and limitations on the review undertaken by Baxter Fentriss in connection
therewith.
Baxter Fentriss’ opinion is directed to
the Premier’s Board of Directors and is directed only to the fairness, from a
financial point of view, of the merger to the shareholders of
Premier. It does not address Premier’s underlying business decision
to effect the proposed merger, nor does it constitute a recommendation to any
Premier shareholder as to how such shareholder should vote with respect to the
merger at the meeting or as to any other matter.
Baxter Fentriss’ opinion was one of
many factors taken into consideration by Premier’s Board of Directors in making
its determination to approve the merger agreement, and the receipt of Baxter
Fentriss’ opinion is a condition precedent to Premier consummating the
merger. The opinion of Baxter Fentriss does not address the relative
merits of the merger as compared to any alternative business strategies that
might exist for Premier or the effect of any other business combination in which
Premier might engage.
Baxter Fentriss, as part of its
investment banking business, is continually engaged in the valuation of
financial institutions and their securities in connection with mergers and
acquisitions and valuations for estate, corporate and other
purposes. Baxter Fentriss is a nationally recognized advisor to firms
in the financial services industry on mergers and
acquisitions. Premier’s Board of Directors selected Baxter Fentriss
as its financial advisor because Baxter Fentriss is an investment banking firm
focusing on bank and thrift transactions, and because of the firm's extensive
experience and expertise in transactions similar to the
merger. Baxter Fentriss is not affiliated with Premier or
Adams.
In connection with rendering its
opinion to Premier, Baxter Fentriss performed a variety of financial
analyses. In conducting its analyses and arriving at its opinion as
expressed herein, Baxter Fentriss considered such financial and other factors as
it deemed appropriate under the circumstances including the
following:
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the
historical and current financial condition and results of operations of
Premier and Adams including interest income, interest
expense, noninterest income, noninterest expense, earnings,
book value, returns on assets and equity, capitalization, the reserve for
loan losses and possible tax consequences resulting from the
transaction;
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the
business prospects of Premier and
Adams;
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the
economies of Premier’s and Adams ’s respective market
areas;
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the
historical and current market for Premier’s common stock;
and,
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the
nature and terms of certain other merger transactions that it believed to
be relevant.
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Baxter Fentriss also considered its
assessment of general economic, market, financial and regulatory conditions and
trends, as well as its knowledge of the financial institutions industry, its
experience in connection with similar transactions, its knowledge of securities
valuation generally, and its knowledge of merger transactions in the
Mid-Atlantic region and throughout the United States.
In connection with rendering its
opinion, Baxter Fentriss reviewed:
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the
Annual Reports to shareholders of Premier including the audited financial
statements for the years ended December 31, 2005, 2006 and 2007, Premier’s
September 30 2008 Form 10-Q, as well as certain interim reports to
shareholders and regulatory
agencies;
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the
Annual Reports to shareholders of Adams including the audited financial
statements for the years ended December 31, 2005, 2006 and 2007, Adams’
September 30 2008 Form 10-Q, internal unaudited financial statements as of
November 30, 2008, as well as certain interim reports to shareholders and
regulatory agencies;
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pro
forma combined unaudited balance sheets and income statements as of
September 30, 2008;
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A
third party external loan review of ANB dated December 15, 2008;
and
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certain
additional financial and operating information with respect to the
business, operations and prospects of Premier and Adams as it deemed
appropriate.
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Baxter Fentriss also:
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held
discussions with members of the senior management of Premier and Adams
regarding the historical and current business operation, financial
condition and future prospects of their respective
companies;
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compared
the results of operations of Premier and Adams with those of certain
banking companies that it deemed to be
relevant;
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analyzed
the pro forma financial impact of the merger on
Premier,
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reviewed
the summary of terms of the United States Department of the Treasury’s
TARP Capital Purchase Program Senior Preferred Stock and Warrants;
and
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conducted
such other studies, analyses, inquiries and examinations as Baxter
Fentriss deemed appropriate.
|
The preparation of a fairness opinion
involves various determinations as to the most appropriate and relevant methods
of financial analysis and the application of those methods to the particular
circumstances and, therefore, such an opinion is not readily susceptible to
partial analysis or summary description. Moreover, the evaluation of fairness,
from a financial point of view, of the merger to holders of Premier common stock
was to some extent a subjective one based on the experience and judgment of
Baxter Fentriss and not merely the result of mathematical analysis of financial
data. Accordingly, notwithstanding the separate factors summarized
below, Baxter Fentriss believes that its analyses must be considered as a whole
and that selecting portions of its analyses and of the factors considered by it,
without considering all analyses and factors, could create an incomplete view of
the evaluation process underlying its opinion. The ranges of
valuations resulting from any particular analysis described below should not be
taken to be Baxter Fentriss' view of the actual value of Premier or
Adams.
In performing its analyses, Baxter
Fentriss made numerous assumptions with respect to industry performance,
business and economic conditions and other matters, many of which are beyond the
control of Premier or Adams. The analyses performed by Baxter Fentriss are not
necessarily indicative of actual values or future results, which may be
significantly more or less favorable than suggested by such
analyses. Additionally, analyses relating to the values of businesses
do not purport to be appraisals or to reflect the prices at which businesses
actually may be sold. In rendering its opinion, Baxter Fentriss
assumed that, in the course of obtaining the necessary regulatory approvals for
the merger, no conditions will be imposed that will have a material adverse
effect on the contemplated benefits of the merger, on a pro-forma basis, to
Premier or Adams.
The following is a summary of selected
analyses performed by Baxter Fentriss in connection with its
opinion.
1. Pro Forma Merger
Analysis. Baxter Fentriss used forecasts for each institution
to evaluate the pro forma impact on book value and earnings within a range of
relative ownership levels. Baxter Fentriss considered a range of
potential future loan losses, potential costs savings, and growth rates that
might be reasonably considered or achieved in the merger. Based on
this analysis, Baxter Fentriss concluded that the transaction should have a
positive long term impact to the shareholders of Premier. The actual
results achieved by Premier, Adams and the combined entity following the merger
may vary from the estimated results and the variations may be material based on
events beyond the control of both Premier and Adams.
2. Discounted Cash
Flow. Baxter Fentriss performed a discounted cash flow
analysis to determine hypothetical present values for Adams as a long term
investment. Long term income forecasts for Adams were developed which
included; one time merger related costs, normalized loan loss provisioning,
expected merger synergies, and related tax expenses. From these
forecasts appropriate free cash flows and a projected terminal value were
estimated. These cash flows were then discounted using a range of
appropriate discount rates and the present value of these cash flows were added
together to determine the net present value of Adams. Baxter Fentriss
concluded that the net present value of the future stream of projected cash
flows exceeded the price to be paid by Premier in all scenarios
considered.
3. Comparable Transaction
Analysis. Baxter Fentriss analyzed and compared the
price-to-book and price-to-tangible book multiples, price-to-earnings multiples,
price-to-assets, and price-to-deposits of Premier’s offer to other whole bank
transactions occurring since January 1, 2006 in Washington D.C., Maryland,
Virginia, and West Virginia. The comparative group included 31 whole
bank and thrift transactions.
The Acquisition pricing multiples paid
for Adams were: price-to-book and price-to-tangible book of .44X;
price-to-assets of 2.66%; and price-to-deposits of 3.28%. The rank
for each of the four aforementioned ratios showed that the purchase price ranks
as the lowest of all thirty-one transactions reviewed. The
price-to-earnings Acquisition multiple did not produce a meaningful comparable
number due to the losses resulting from increases in Adams allowance for credit
losses. Additionally, Baxter Fentriss noted the rankings and pricing
ratios reflect the decreased capital position of Adams. The price
paid as a result of the merger was the lowest level for each category which
recognized the stress of loan loss provisions occurring at
Adams. Comparable pricing analysis confirmed that the pricing
reflected a valuation level consistent with the metrics anticipated for this
type of transaction. Below is a summary of the comparable thirty-one
transactions review by Baxter Fentriss, as well as, values for the Adams
transaction.
|
|
|
Price/
Book
|
|
|
Price/
Tangible Book
|
|
|
Price/
LTM Earnings
|
|
|
Deal
Value/ Assets
|
|
|
Deal
Value/ Deposits
|
|
|
TA:
Equity/ Assets
|
|
|
|
|
(x)
|
|
|
(x)
|
|
|
(x)
|
|
|
(%)
|
|
|
(%)
|
|
|
(%)
|
|
|
Rank
of 31:
|
|
Lowest
|
|
|
Lowest
|
|
|
Lowest
|
|
|
Lowest
|
|
|
Lowest
|
|
|
|
|
|
Group
Mean:
|
|
|
1.88 |
|
|
|
2.01 |
|
|
|
35.3 |
|
|
|
18.2 |
|
|
|
22.2 |
|
|
|
9.43 |
|
|
Adams
Ratios:
|
|
|
0.44 |
|
|
|
0.44 |
|
|
NM
|
|
|
|
2.66 |
|
|
|
3.28 |
|
|
|
6.03 |
|
No company or transaction used as a
comparison in the above analysis is identical to Premier, Adams, or the
merger. Accordingly, an analysis of the results of the foregoing
necessarily involves complex considerations and judgments concerning differences
in financial and operating characteristics of the companies and other factors
that could affect the public trading value of the companies used for comparison
in the above analysis.
Baxter Fentriss has relied, without any
independent verification, upon the accuracy and completeness of all financial
and other information reviewed. Baxter Fentriss has assumed that any
and all estimates made by management were reasonably prepared and reflect their
best current judgments. Baxter Fentriss did not make an independent
appraisal of the assets or liabilities of either Premier or Adams, and has not
been furnished such an appraisal.
Baxter Fentriss has been, or will be,
paid an initial advisory fee of $7,500, a merger related fee of $225,000 if this
transaction is consummated, a fairness opinion fee of $35,000 for issuance of
its opinion, and reasonable out-of-pocket expenses for its
services. The fairness opinion fee will be an offset to the merger
fee. Premier has agreed to indemnify Baxter Fentriss against certain
liabilities, including certain liabilities under federal securities
laws.
Certain
members of Adams’ management have interests in the merger in addition to their
interests as stockholders of Adams. These interests are described below. In each
case, the Adams board of directors was aware of these interests, and considered
them, among other matters in approving the merger agreement and the transactions
contemplated thereby.
Management Following the
Merger
The
merger agreement provides that the directors and officers of the surviving
company at the effective time of the merger shall be those persons who are
directors and officers respectively of Adams immediately before the effective
time. The committees of the board of directors of the surviving
company at the effective time shall be the same as and shall be composed of the
same persons who are serving on committees appointed by the board of directors
of Adams as they exist immediately before the effective time. The
committees of officers of the surviving company at the effective time shall be
the same as and shall be composed of the same officers who are serving on the
committees of officers of Adams as they exist immediately before the effective
time. The directors of Premier will remain unchanged after the
merger.
Shareholders
in Both Premier and Adams
Marshall
T. Reynolds, Chairman of the Board of Directors of Premier and beneficial owner
of 563,425 shares of Premier common stock, constituting 8.8% of outstanding
shares of Premier common stock, also serves as a director of
Adams. Together with his wife Shirley A. Reynolds, Mr. Reynolds is
the beneficial owner of 600,024 shares of Adams common stock, constituting 17.3%
of outstanding Adams shares.
Since
September 16, 2008, Robert W. Walker, President and Chief Executive Officer of
Premier, has served as Chairman, President and Chief Executive Officer of Adams
and as a director of ANB. Mr. Walker was also appointed as Acting
Interim President and Chief Executive Officer of ANB. Mr. Walker
beneficially owns 43,572 shares of Premier common stock and 9,398 shares of
Adams common stock.
On
November 6, 2008, Adams received a $3.4 million loan from Marshall T. Reynolds
of which $3.2 million was passed to its subsidiary ANB as a capital infusion in
accordance with the Written Agreement between ANB and The Office of the
Comptroller of the Currency dated October 1, 2008, which requires ANB to achieve
certain regulatory capital levels, which are greater than the regulatory
requirements to be “well capitalized” under bank regulatory
requirements. The capital infusion was undertaken by a demand note
between Marshall T. Reynolds and Adams. The loan bears interest at
the Prime Rate with interest payable quarterly.
Adams
is indebted to First Guaranty Bank (“First Guaranty”), of Hammond Louisiana
pursuant to (a) a $5,000,000 promissory note due August 1, 2009 and (b) a
$4,000,000 line of credit, of which $3,482,000 was outstanding as of December
31, 2008. Marshall T. Reynolds is a director and beneficially owns
approximately 30% of the outstanding common stock of First
Guaranty. Premier proposes to repay both of these loans with proceeds
from the sale of Premier preferred stock to the U.S. Treasury under the TARP
CPP.
Change
in Control Agreement
Karen
E. Troutman, Senior Vice President and Chief Financial Officer of Adams is party
to a Change of Control Agreement with Adams and ANB pursuant to which she will
receive $110,000 severance pay if her employment is terminated after
consummation of the merger. Ms. Troutman is the holder of options to
purchase 3,025 shares of Adams common stock, which will be converted into
options to acquire Premier common stock if the merger is
consummated.
Under
the terms of the merger agreement, all Adams options outstanding and unexercised
immediately prior to the effective time will be converted into options to
purchase shares of Premier common stock in an amount equal to the product of the
number of shares subject to Adams options and the merger exchange ratio of
..4461, with the exercise price determined by dividing the exercise price of the
Adams options by .4461.
Certain
of Premier’s executive officers and directors have substantial financial
interests in the merger that are different from, or in addition to, their
interests as Premier shareholders. The Premier board of directors was aware of
and considered these interests, among other matters, in evaluating and
negotiating the merger agreement and the merger, in approving the merger
agreement, and in recommending to the shareholders that the issuance of common
stock in connection with the merger be approved.
Shareholders
in Both Premier and Adams
Marshall
T. Reynolds, Chairman of the Board of Directors of Premier and beneficial owner
of 563,425 shares of Premier common stock, constituting 8.8% of outstanding
shares of Premier common stock, also serves as a director of
Adams. Together with his wife Shirley A. Reynolds, Mr. Reynolds is
the beneficial owner of 600,024 shares of Adams common stock, constituting 17.3%
of outstanding Adams shares.
On
November 6, 2008, Adams received a $3.4 million loan from Marshall T. Reynolds,
of which $3.2 million was passed to its subsidiary ANB as a capital infusion in
accordance with the Written Agreement between ANB and The Office of the
Comptroller of the Currency dated October 1, 2008, which requires ANB to achieve
certain regulatory capital levels, which are greater than the regulatory
requirements to be “well capitalized” under bank regulatory
requirements. The capital infusion was undertaken by a demand note
between Marshall T. Reynolds and Adams. The loan bears interest at
the Prime Rate with interest payable quarterly.
Since
September 16, 2008, Robert W. Walker, President and Chief Executive Officer of
Premier, has served as Chairman, President and Chief Executive Officer of Adams
and as director of ANB. Mr. Walker was also appointed as Acting
Interim President and Chief Executive Officer of ANB. Mr. Walker
beneficially owns 43,572 shares of Premier common stock and 9,398 shares of
Adams common stock.
Neal
W. Scaggs, a director of Premier and beneficial owner of 6,825 shares of Premier
common stock, beneficially owns 60,000 shares of Adams common
stock.
Pursuant to a Draw Note dated December
31, 2008, Adams obtained a line of credit of up to a maximum amount of
$6,000,000 from The Bankers’ Bank of Kentucky, Inc., and on such date drew down
and borrowed the sum of $4,250,000, which was also the amount outstanding at
December 31, 2008. The obligation matures on June 30, 2009 and bears
interest at the Prime Rate announced by JPMorgan Chase from time to time, with a
floor of 5%, payable quarterly. Repayment of the loan is secured by a
pledge and security agreement granting a security interest in 100% of the
outstanding common stock of Adams subsidiary CBT and 20% of the outstanding
common stock of Adams subsidiary ANB. Premier has guaranteed payment
of the Draw Note.
Several Premier Banks have purchased
participations up to a $4,500,000 portion of this line of credit.
Adams used the proceeds of this
borrowing to supplement the capital of ANB as required by the terms of the
written Agreement with the OCC discussed below.
On
October 1, 2008, Adams’ wholly owned subsidiary ANB, entered into a written
agreement with its primary regulator, the OCC. Under the terms of the
written agreement, ANB has agreed to take certain actions relating to ANB’s
lending operations and capital compliance. Specifically, the OCC is
requiring ANB to take the following actions:
|
|
a)
|
conduct
a review of senior management to ensure that these individuals can perform
the duties required under ANB’s policies and procedures and the
requirements of the written agreement, and where necessary, ANB must
provide a written program to address the training of ANB’s senior
officers;
|
|
|
b)
|
achieve
certain regulatory capital levels, which are greater than the regulatory
requirements to be “well capitalized” under bank regulatory
requirements. In particular, ANB must achieve a: 12% total
risk-based capital to total risk-weighted assets ratio; 11% Tier 1 capital
to risk-weighted assets ratio; and 9% Tier 1 capital to adjusted total
assets ratio;
|
|
|
c)
|
develop
and implement a three-year capital
program;
|
|
|
d)
|
make
additions to the allowances for loan and lease losses and adopt and
implement written policies and procedures for establishing and maintaining
the allowance in a manner consistent with the written
agreement;
|
|
|
e)
|
adopt
and implement an asset diversification program consistent with OCC
guidelines and to perform an analysis of ANB’s concentrations of
credit;
|
|
|
f)
|
take
all necessary actions to protect ANB’s interest in criticized assets,
adopt and implement a program to eliminate regulatory criticism of these
assets, engage in an ongoing review of ANB’s criticized assets and develop
and implement procedures for the effective monitoring of the loan
portfolio;
|
|
|
g)
|
hire
an independent appraiser to provide a written or updated appraisal of
certain assets;
|
|
|
h)
|
develop
and implement a program to improve the management of the loan portfolio
and to provide the ANB Board with monthly written reports on credit
quality;
|
|
|
i)
|
employ
a loan review consultant acceptable to the OCC to perform a quarterly
quality review of ANB’s assets;
|
|
|
j
|
revise
ANB’s lending policy in accordance with OCC requirements;
and
|
|
|
k
|
maintain
acceptable liquidity levels.
|
The
written agreement includes time frames to implement the foregoing and on-going
compliance requirements for ANB, including requirements to report to the
OCC. The written agreement also requires ANB to establish a committee
of the Board of Directors which will be responsible for overseeing compliance
with the written agreement.
ANB
has taken steps to comply with the requirements of the written agreement and
expects that it will address all areas of concern.
Following
the public announcement of the written agreement, Adams became restricted in its
ability to renew or access deposits through brokers. Moreover, a
number of Adams’ depositors have sought to reduce their deposits at
ANB. The impact of the written agreement on Adams’ operations as well
as deteriorating credit markets may have an adverse impact on the financial
condition and operations including maintaining acceptable liquidity
levels.
The
respective obligations of Premier and Adams to consummate the merger are subject
to the satisfaction of certain mutual conditions, including the
following:
|
|
·
|
The
stockholders of Adams approve the merger agreement and the transactions
contemplated thereby, described in this proxy statement/prospectus at the
special meeting of stockholders of
Adams;
|
|
|
·
|
The
shareholders of Premier approve the issuance of Premier common stock in
the merger at the special meeting of shareholders of
Premier;
|
|
|
·
|
All
regulatory approvals required by law to consummate the transactions
contemplated by the merger agreement are obtained from the Federal Reserve
Board and the Bureau of Financial Institutions of the Commonwealth of
Virginia, State Corporation Commission and any other appropriate federal
and/or state regulatory agencies without unreasonable conditions, and all
waiting periods after such approvals required by law or regulation
expire;
|
|
|
·
|
The
registration statement (of which this joint proxy statement/prospectus is
a part) registering shares of Premier common stock to be issued in the
merger is declared effective and not subject to a stop order or any
threatened stop order;
|
|
|
·
|
There
shall be no actual or threatened litigation, investigations or proceedings
challenging the validity of, or damages in connection with, the merger
that would have a material adverse effect with respect to the interests of
Premier or Adams or impose a term or condition that shall be deemed to
materially adversely impact the economic or business benefits of the
merger;
|
|
|
·
|
The
absence of any statute, rule, regulation, judgment, decree, injunction or
other order being enacted, issued, promulgated, enforced or entered by a
governmental authority effectively prohibiting consummation of the
merger;
|
|
|
·
|
All
permits or other authorizations under state securities laws necessary to
consummate the merger and to issue the shares of Premier common stock to
be issued in the merger being obtained and remaining in full force and
effect.
|
In
addition to the mutual conditions described above, the obligation of Premier to
consummate the merger is subject to the satisfaction, unless waived, of the
following other conditions:
|
|
·
|
The
representations and warranties of Adams made in the merger agreement are
true and correct as of the date of the merger agreement and as of the
effective time of the merger and Premier receives a certificate of the
Chief Executive Officer and the chief financial officer of Adams to that
effect;
|
|
|
·
|
Adams
performs in all material respects all obligations required to be performed
under the merger agreement prior to the effective time of the merger and
delivers to Premier a certificate of its Chief Executive Officer and chief
financial officer to that effect;
|
|
|
·
|
Premier
shall have received an opinion of Huddleston Bolen LLP, counsel to
Premier, dated as of the effective time of the merger, that the merger
constitutes a “reorganization” under Section 368 of the Internal Revenue
Code;
|
|
|
·
|
The
issuance of at least $20,000,000 Premier preferred stock and attendant
warrants for the purchase of Premier common stock to the U.S. Treasury
pursuant to the Troubled Asset Relief Program Capital Purchase
Program;
|
|
|
·
|
ANB’s
substantial compliance with the provisions of the written Agreement by and
between ANB and The Office of the Comptroller of the Currency dated
October 1, 2008; and
|
|
|
·
|
Premier
shall have received an opinion of Luse Gorman Pomerenk & Schick, PC,
counsel to Adams, as to various legal matters regarding Adams and the
merger;
|
In
addition to the mutual conditions described above, Adams’ obligation to complete
the merger is subject to the satisfaction, unless waived, of the following other
conditions:
|
|
·
|
The
representations and warranties of Premier made in the merger agreement are
true and correct as of the date of the merger agreement and as of the
effective time of the merger and Adams receives a certificate of the Chief
Executive Officer and chief financial officer of Premier to that
effect;
|
|
|
·
|
Premier
performs in all material respects all obligations required to be performed
under the merger agreement prior to the effective time of the merger and
delivers to Adams a certificate of its Chief Executive Officer and chief
financial officer to that effect;
and
|
|
|
·
|
Adams
shall have received an opinion of Luse Gorman Pomerenk & Schick, PC,
counsel to Adams, stating that, among other things, as of the effective
time of the merger, the merger constitutes a “reorganization” under
Section 368 of the Internal Revenue Code and that no gain or loss will be
recognized by the stockholders of Adams to the extent that they receive
Premier common stock in exchange for their Adams common stock in the
merger.
|
|
|
·
|
Adams
shall have received an opinion of Huddleston Bolen LLP, counsel for
Premier as to various legal matters regarding Premier and the
merger.
|
The
merger agreement contains representations and warranties by Premier and Adams.
These representations and warranties are qualified by a materiality standard,
which means that Premier or Adams is not in breach of a representation or
warranty unless the existence of any fact, event or circumstance, individually,
or taken together with other facts, events or circumstances has had or is
reasonably likely to have a material adverse effect on Premier or Adams. These
include, among other things, representations and warranties by Premier and Adams
to each other as to:
|
|
·
|
organization
and good standing of each entity and its
subsidiaries;
|
|
|
·
|
each
entity’s capital structure;
|
|
|
·
|
each
entity’s authority relative to the execution and delivery of, and
performance of its obligations under, the reorganization
agreement;
|
|
|
·
|
absence
of material adverse changes since December 31,
2007;
|
|
|
·
|
consents
and approvals required;
|
|
|
·
|
accuracy
of documents, including financial statements and other reports, filed with
the SEC;
|
|
|
·
|
absence
of defaults under contracts and
agreements;
|
|
|
·
|
absence
of environmental problems;
|
|
|
·
|
absence
of conflicts between each entity’s obligations under the merger agreement
and its charter documents and contracts to which it is a party or by which
it is bound;
|
|
|
·
|
litigation
and related matters;
|
|
|
·
|
taxes
and tax regulatory matters;
|
|
|
·
|
employee
benefit matters; and
|
|
|
·
|
books
and records fully and accurately maintained and fairly present events and
transactions.
|
The
merger agreement may be terminated at any time prior to the closing in any of
the following ways:
|
|
·
|
By
mutual consent in writing of Adams and Premier;
or
|
|
|
·
|
By
Adams by giving written notice thereof to Premier if (i) a material
adverse change shall have occurred in the financial condition, results of
operations or business of Premier or any Premier Banking Subsidiary since
December 31, 2007, or (ii) Premier has in any material respect breached
any covenant, undertaking, representation or warranty contained in the
merger agreement and such breach has not been cured within 30 days after
the giving of such notice; or
|
|
|
·
|
By
Premier by giving written notice thereof to Adams if (i) a material
adverse change shall have occurred in the financial condition, results of
operations or business of Adams since December 31, 2007 or (ii) Adams has
breached any covenant, undertaking, representation or warranty contained
in the merger agreement and such breach has not been cured within 30 days
after the giving of such notice; or
|
|
|
·
|
By
either Adams or Premier upon written notice to the other if any regulatory
agency whose approval of the transactions contemplated by the merger
agreement is required denies such application for approval by final order
or ruling (which order or ruling shall not be considered final until
expiration or waiver of all periods for review or appeal);
or
|
|
|
·
|
By
either Adams or Premier upon written notice to the other if any condition
precedent to either party’s performance under the merger agreement is not
satisfied or fulfilled; or
|
|
|
·
|
By
either Adams or Premier if the merger shall violate any non-appealable
final order, decree or judgment of any court or governmental body having
competent jurisdiction; or
|
|
|
·
|
By
either Adams or Premier upon the bankruptcy, insolvency or assignment for
the benefit of creditors of Adams, Premier or of any of the Premier Banks;
or
|
|
|
·
|
By
either Adams or Premier, if the stockholders of Adams shall fail to
approve the merger by the vote required under the Delaware General
Corporation Law and the Certificate of Incorporation and Bylaws of Adams;
or
|
|
|
·
|
By
either Adams or Premier if the shareholders of Premier shall fail to
approve the issuance of Premier common stock in the merger by the vote
required under the Kentucky Business Corporation Act and the Articles of
Incorporation and Bylaws of Premier;
or
|
|
|
·
|
By
either Adams or Premier, if the Closing does not occur on or before
September 30, 2009 unless extended by mutual agreement in writing;
or
|
|
|
·
|
By
Premier if the issuance of Premier preferred stock in the amount of at
least $20,000,000 and attendant warrants for Premier common stock to the
U.S. Treasury under the TARP CPP has not occurred;
or
|
|
|
·
|
By
Premier if ANB is not in substantial compliance with the written Agreement
between ANB and the OCC.
|
Prior
to the effective time of the merger, any provision of the merger agreement may
be waived by the party benefiting by the provision or amended or modified by an
agreement in writing between the parties, except that, after the special
meetings, the merger agreement may not be amended in any material respect
without further shareholder approval.
The
merger will be consummated and become effective upon the issuance of a
certificate of merger by the Delaware Secretary of State (or on such other date
as may be specified in the articles of merger to be filed with the Delaware
Secretary of State). Unless otherwise agreed to by Premier or Adams, the closing
of the merger will take place no later than 45 days following the day when all
of the conditions to the merger have been satisfied or waived.
The
merger and the other transactions contemplated by the merger agreement require
the approval of the Federal Reserve Board and the Bureau of Financial
Institutions, Commonwealth of Virginia, State Corporation Commission. As bank
holding companies, Premier and Adams are subject to regulation under the Bank
Holding Company Act of 1956. Premier and Adams have filed all
required applications seeking approval of the merger with both agencies on March
3, 2009.
Under
the Bank Holding Company Act, the Federal Reserve Board is required to examine
the financial and managerial resources and future prospects of the combined
organization and analyze the capital structure and soundness of the resulting
entity. The Federal Reserve Board has the authority to deny an application if it
concludes that the combined organization would have inadequate capital. In
addition, the Federal Reserve Board can withhold approval of the merger if,
among other things, it determines that the effect of the merger would be to
substantially
lessen competition in the relevant market. Further, the Federal Reserve must
consider whether the combined organization meets the requirements of the
Community Reinvestment Act of 1977 by assessing the involved entities’ records
of meeting the credit needs of the local communities in which they operate,
consistent with the safe and sound operation of such institutions. The Virginia
Bureau of Financial Institutions will review the merger under similar
standards.
In
addition, a period of 15 to 30 days must expire following approval by the
Federal Reserve Board before completion of the merger is allowed, within which
period the United States Department of Justice may file objections to the merger
under the federal antitrust laws.
The
merger cannot be consummated prior to receipt of all required approvals. There
can be no assurance that required regulatory approvals for the merger will be
obtained and, if the merger is approved, as to the date of such approvals or
whether the approvals will contain any unacceptable conditions. There can
likewise be no assurance that the United States Department of Justice will not
challenge the merger during the waiting period set aside for such challenges
after receipt of approval from the Federal Reserve Board.
In
its application to the Federal Reserve Board, Premier stated that it intended to
use the proceeds from the sale of preferred stock in the CPP to substantially
reduce Adams’ borrowings of (a) $5,000,000 from First Guaranty Bank of Hammond,
Louisiana pursuant to a promissory note due August 1, 2009, (b) $4,000,000 line
of credit, of which $3,482,000 was outstanding as of December 31, 2008 also from
First Guaranty Bank of Hammond Louisiana, (c) $3,400,000 from Marshall T.
Reynolds, and (d) $4,250,000 from Bankers Bank of Kentucky. As a
condition to approval of the application, the Federal Reserve Board requested,
and Premier delivered a written commitment that CPP funds received from the U.S.
Treasury will not be used to service the $3,400,000 loan from Marshall T.
Reynolds.
Premier
and Adams are not aware of any governmental approvals or actions that may be
required for consummation of the merger other than as described above. Should
any other approval or action be required, it is presently contemplated that such
approval or action would be sought. There can be no assurance that any necessary
regulatory approvals or actions will be timely received or taken, that no action
will be brought challenging such approval or action or, if such a challenge is
brought, as to the result thereof, or that any such approval or action will not
be conditioned in a manner that would cause the parties to abandon the
merger.
The
approval of any application merely implies the satisfaction of regulatory
criteria for approval, which does not include review of the merger from the
standpoint of the adequacy of the cash consideration or the exchange ratio for
converting Adams common stock to Premier common stock. Furthermore, regulatory
approvals do not constitute an endorsement or recommendation of the
merger.
The merger is expected to be completed
promptly after receipt of all regulatory and shareholder approvals and receipt
by Premier of TARP CPP funds. In the event the merger cannot be
completed before the end of the calendar year the Adams Board of Directors
intend to hold the Adams 2009 Annual Meeting of Stockholders. It is currently
anticipated that the Annual Meeting, if held, will be held on or about December
15, 2009.
On
November 14, 2008, Premier applied to participate in the TARP CPP. Premier
initially applied under two alternatives. One application was based
upon a pro forma combined amount of Premier’s and Adams’ total risk-weighted
assets, which would have resulted in Premier issuing to the U.S. Treasury
approximately 24,000 shares of its preferred stock at $1,000 per share, for a
total capital investment of $24,000,000, a portion of which Premier would have
infused into ANB to maintain the capital standards mandated by the OCC if the
merger is consummated. The original merger agreement provided that
Premier’s receipt of this $24,000,000 was a condition to consummation of the
merger. Pursuant to a First Amendment to Merger Agreement dated June
16, 2009 Premier and Adams agreed to reduce the amount required to be received
from the TARP CPP to an amount of at least $20,000,000 to more accurately
reflect the amount actually likely to be received from the U.S.
Treasury. The amount to be received from the U.S. Treasury is based
upon Premier’s and Adams’ total risk-weighted assets and since November 14, 2008
the pro-forma combined amount of total risk weighted assets of Premier and Adams
decreased thus requiring the reduction from $24,000,000 to an amount of at least
$20,000,000.
The other application was based only
upon Premier’s total risk-weighted assets, which would result in Premier issuing
approximately 12,974 shares of its preferred stock at $1,000 per share, for
total capital of approximately $12,974,000.
Premier’s participation in the CPP
program will affect the shareholders of Premier common stock and their rights as
shareholders, as described below.
The
CPP was announced by the U.S. Treasury on October 14, 2008, as part of the
TARP. Pursuant to the CPP, the U.S. Treasury will purchase up to $250
billion of senior preferred shares on standardized terms from qualifying
financial institutions. Under the CPP, eligible financial
institutions can generally apply to issue senior preferred shares to the U.S.
Treasury in aggregate amounts between 1% and 3% of the institution’s
risk-weighted assets.
On
March 18, 2009, Premier was granted preliminary approval to participate in
the CPP for a sum up to approximately $24,000,000. Under the
conditions announced by the U.S. Treasury for participation in the CPP, a
participating financial institution is given a limited period of time following
preliminary approval of its application to satisfy all requirements for
participation and to complete the issuance of the senior preferred shares to the
U. S. Treasury.
If
Premier participates in the U.S. Treasury’s CPP, the U.S. Treasury would
purchase from Premier cumulative perpetual preferred shares, with a liquidation
preference of at least $1,000 per share (the “Senior Preferred
Shares”). Based upon the investment of $20,000,000 Premier would
issue 20,000 Senior Preferred Shares, each with a liquidation preference of
$1,000 per share. The Senior Preferred Shares would constitute Tier 1
capital and would rank senior to Premier’s common shares. The Senior
Preferred Shares would pay cumulative dividends at a rate of 5% per annum for
the first five years and would reset to a rate of 9% per annum after year
five. Dividends would be payable quarterly in arrears. The
U.S. Treasury’s investment will be based upon the combined pro forma
risk-weighted assets of Premier and Adams at the end of the quarter immediately
preceding issuance of the shares. Based on the pro forma combined
risk-weighted assets of Premier and Adams at March 31, 2009, Premier would issue
22,000 Senior Preferred Shares.
The
Senior Preferred Shares would be non-voting shares, but would have class voting
rights on (i) any authorization or issuance of shares ranking senior to the
Senior Preferred Shares; (ii) any amendment to the rights of the Senior
Preferred Shares; or (iii) any merger, consolidation, share exchange,
reclassification or similar transaction which would adversely affect the rights
of the Senior Preferred Shares. In the event that the cumulative
dividends described above were not paid in full for an aggregate of six dividend
periods or more, whether or not consecutive, the authorized number of directors
of Premier would automatically be increased by two and the holders of the Senior
Preferred Shares would have the right to elect two directors. The
right to elect directors would end when dividends have been paid in full for
four consecutive dividend periods.
The
Senior Preferred Shares would be redeemable at their issue price, plus any
accrued and unpaid dividends. Any such redemption must be approved by
Premier’s primary federal bank regulator – the Federal Reserve
Board. The U.S. Treasury would be permitted to transfer the Senior
Preferred Shares to a third party at any time.
Publicly
traded financial institutions such as Premier participating in the CPP must also
issue a warrant (the “Warrant”) to the U.S. Treasury to purchase a number of
common shares having a market price equal to 15% of the aggregate amount of the
Senior Preferred Shares purchased
by the U.S. Treasury. The initial exercise price for the Warrant, and
the market price for determining the number of common shares subject to the
Warrant, will be calculated based on the average of the closing prices of
Premier’s common shares on the 20 trading days ending on the last trading day
prior to March 18, 2009, which is the date Premier’s application for
participation in the CPP was preliminarily approved by the U.S.
Treasury. Based on an investment of $22,000,000, and the average of
the closing prices of Premier’s common shares on the 20 trading days ended March
17, 2009 ($5.31), the number of shares of Premier common stock subject to the
Warrant will be approximately 621,468, or 9.7%, of the common shares outstanding
on July 15, 2009. The Warrant will have a term of 10
years. If Premier completes one or more offerings of other Tier 1
qualifying perpetual preferred shares or common shares on or before December 31,
2009, that result in Premier receiving aggregate gross proceeds of not less than
100% of the aggregate liquidation preference of the Senior Preferred Shares, the
number of common shares underlying the Warrant held by the U.S. Treasury will be
reduced by a number of common shares equal to the product of (i) the number of
common shares originally underlying the Warrant (taking into account all
anti-dilution adjustments) and (ii) 0.5. Issuance and exercise of the
Warrant would dilute the interests of existing Premier common
shareholders.
If
Premier participates in the CPP, it will be required to prepare and file with
the Securities and Exchange Commission (the “SEC”) a registration statement
under the Securities Act of 1933, as amended, to register for resale the Senior
Preferred Shares and the Warrant and the underlying common shares purchasable
upon exercise of the Warrant. The registration statement must be filed as soon
as practicable, and in any event within 30 days, after the closing of the U.S.
Treasury’s investment.
As
long as the Senior Preferred Shares remain outstanding, unless all accrued and
unpaid dividends for all past dividend periods on the Senior Preferred Shares
are fully paid, Premier would not be permitted to declare or pay dividends on
any common shares, any junior preferred shares or any preferred shares ranking
pari passu with the
Senior Preferred Shares (other than in the case of pari passu preferred shares,
dividends on a pro rata basis with the Senior Preferred Shares), nor would
Premier be permitted to repurchase or redeem any common shares or preferred
shares other than the Senior Preferred Shares. Unless the Senior
Preferred Shares have been transferred or redeemed in whole, until the third
anniversary of the U.S. Treasury’s investment, any increase in common share
dividends would be prohibited without the prior approval of the U.S.
Treasury. In addition, unless the Senior Preferred Shares have been
transferred or redeemed in whole, until the third anniversary of the U.S.
Treasury’s investment, the U.S. Treasury’s consent would be required for any
share repurchases other than repurchases of the Senior Preferred Shares and
repurchases of junior preferred shares or common shares in connection with the
administration of any employee benefit plan in the ordinary course of business
and consistent with past practice.
To
participate in the CPP, Premier will be required to adopt the U.S. Treasury’s
standards for executive compensation and corporate governance, for the period
during which the U.S. Treasury holds equity issued under the
CPP. These standards generally apply to the chief executive officer,
chief financial officer, plus the next three most highly compensated executive
officers. Premier would be required to meet certain standards,
including: (1) ensuring that incentive compensation for senior executives does
not encourage unnecessary and excessive risks that threaten the value of the
financial institution; (2) requiring a clawback of any bonus or incentive
compensation paid to a senior executive based on statements of earnings, gains
or other criteria that are later proven to be materially inaccurate; (3)
prohibiting certain severance payments to a senior executive, generally referred
to as “golden parachute” payments, above specified limits set forth in the U.S.
Internal Revenue Code; and (4) agreeing not to deduct for tax purposes executive
compensation in excess of $500,000 for each senior executive – for this purpose,
all compensation paid to the senior executive for the applicable tax year is
taken into account, including certain qualified performance-based compensation
normally deductible under Section 162(m) of the U.S. Internal Revenue
Code.
The
TARP executive compensation requirements were modified or supplemented by
provisions of the American Recovery and Reinvestment Act of 2009. For
institutions receiving TARP assistance, the U.S. Treasury will establish
standards (1) prohibiting (in the case of Premier, which is receiving less than
$25,000,000 in assistance) the most highly compensated employee from receiving
any bonus or incentive compensation while TARP funds are outstanding that has a
value greater than one-third of the total amount of such employee’s
compensation, which may only be made by long-term restricted stock awards that
cannot vest until TARP assistance is repaid; (2) excluding incentives for senior
executive officers that would cause them to take unnecessary and excessive risks
that threaten the value of the TARP recipient; (3) requiring recovery of any
bonus or incentive compensation paid based on statements of earnings that are
later found to be materially inaccurate; (4) requiring the TARP recipient’s
board compensation committee to meet at least semiannually to evaluate employee
compensation plans in light of any risk posed to the recipient by such plans;
(5) requiring the board of directors to adopt a company-wide policy regarding
excessive or luxury expenditures (including entertainment, office renovations,
aviation services, or other activities that are not reasonable expenditures);
(6) requiring a separate proxy vote by the shareholders at the annual
shareholders meeting (on a non-binding basis) to approve executive compensation
of the TARP recipient; and (7) requiring the TARP recipient’s chief executive
officer and chief financial officer to annually certify the recipient’s
compliance with these requirements.
The
foregoing requirements will preclude future payments of cash bonuses to
Premier’s Chief Executive Officer while TARP funds are
outstanding. Otherwise, the Premier Board of Directors does not
anticipate that any material changes would need to be made to Premier’s existing
compensation plans and arrangements to comply with the U.S. Treasury’s current
standards for executive compensation and corporate governance. These
standards may change in the future as a result of legislative or regulatory
initiatives.
The
foregoing description of the CPP is based on the information currently available
regarding the CPP and does not purport to be complete in all
respects. The terms of the CPP, including the terms of the Senior
Preferred Shares and of the Warrant, are set forth in the form of Securities
Purchase Agreement--Standard Terms, form of Letter Agreement, form of Standard
Provisions of the Senior Preferred Shares, form of Warrant and related
documentation made publicly available by the U.S. Treasury and to be executed by
the U.S. Treasury and each participating institution.
The
merger agreement contains certain forbearances and affirmative covenants made by
Adams. Adams has agreed that, until the effective time of the merger, without
the prior written consent of Premier, that Adams will not:
(a) Make
any change in its authorized capital stock.
(b) Issue
any shares of its capital stock, securities convertible into its capital stock,
or any long term debt securities.
(c) Issue
or grant any options, warrants, or other rights to purchase shares of its common
stock.
(d) Declare
or pay any dividends or other distributions on any shares of common
stock.
(e) Purchase
or otherwise acquire or agree to acquire for a consideration any share of its
common stock (other than in a fiduciary capacity).
(f) Enter
into or amend any employment, pension, retirement, stock option, profit sharing,
deferred compensation, consultant, bonus, group insurance, or similar plan in
respect of any of its directors, officers, or other employees, or increase the
current level of contributions to any such plan now in effect, except as
contemplated by the merger agreement.
(g) Take
any action materially and adversely affecting the merger agreement or the
transactions contemplated by the merger agreement or the financial condition
(present or prospective), businesses, properties, or operations of
Adams.
(h) Acquire,
consolidate or merge with any other company, corporation, bank or banking
association, or acquire, other than in the ordinary course of business, any
assets of any other company, corporation, bank, or banking
association.
(i) Mortgage,
pledge, or subject to a lien or any other encumbrance, any of its assets,
dispose of any of its assets, incur or cancel any debts or claims, or increase
the current level of compensation or benefits payable to its officers, employees
or directors except in the ordinary course of business as heretofore conducted
or take any other action not in the ordinary course of their business as
heretofore conducted or incur any material obligation or enter into any material
contract.
(j) Amend
its Articles of Incorporation or Association, By-laws or Charter.
(k) Unless
required to be taken by the Federal Reserve Board, the OCC or the FDIC, take any
action to solicit, initiate, encourage, or authorize any person, including
directors, officers and other employees, to solicit from any third party any
inquiries or proposals relating to the disposition of the business or assets of
Adams, or the acquisition of their Adams common stock, or the merger of Adams
with any person other than Premier, and Adams shall promptly notify Premier
orally of all the relevant details relating to all inquiries and proposals which
it may receive relating to any of such matters.
Adams
has also agreed that, it will:
(a) Operate
its business only in the normal course and manner.
(b) Make
available to Premier for review prior to Adams’ or either ANB’s or CBT’s final
loan approval, any loan documentation, credit memorandums or other related
documentation requested or received by Adams or such bank in its decision making
process in determining whether to extend credit to any borrower
for:
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(1)
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Any
new loan, or renewal of an existing loan, that totals $250,000 or greater;
or
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(2)
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Any
new loan, or renewal of an existing loan, which, when included with all
other loans from Adams to any such borrower and their related interests,
would cause such borrower’s total loans from Adams, including loans from
Adams to their related interests, to exceed
$400,000.
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(c) Promptly
advise Premier of any material adverse change in the financial condition,
assets, business operations or key personnel of Adams and of any material breach
of any representation or warranty made by Adams in the merger
agreement.
(d) Direct
its accountants to give Premier access to all information, documents and working
papers pertaining to Adams.
(e) Maintain
in full force and effect adequate fire, casualty, public liability, employee
fidelity and other insurance coverage in effect on the date of the merger
agreement.
(f) Furnish
to Premier a list containing the names and addresses of all holders of Adams
common stock.
(g) Use
its best efforts in good faith to take or cause to be taken all action required
under the merger agreement on its part to be taken as promptly as practicable so
as to permit the consummation of the merger and the transactions contemplated
thereby at the earliest possible date and cooperate fully with Premier to that
end.
(h) Terminate:
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(1)
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Any
and all employment contracts to which either Adams, ANB or CBT is a
party.
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(2)
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Any
defined benefit plan to which either Adams or ANB or CBT is a party; provided, however, that
if all appropriate steps are taken for termination and the defined benefit
plan is frozen, the actual termination of any defined benefit plan need
not be accomplished prior to, or at,
Closing.
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The
merger will be accounted for under the “purchase” method of accounting. Under
the purchase method of accounting, the assets and liabilities of Adams, as of
the completion of the merger, will be recorded at their fair values as well as
any identifiable intangible assets. Any remaining excess purchase price will be
allocated to goodwill and will not be amortized. Instead, goodwill is evaluated
for impairment annually. Financial statements of Premier issued after the
consummation of the merger will reflect such values and will not be restated
retroactively to reflect the historical position or results of operations of
Adams. The operating results of Adams will be reflected in Premier Consolidated
Financial Statements from and after the date the merger is
consummated. Under SFAS 141r, effective for acquisitions completed
after December 31, 2008, bargain purchases no longer result in the recording of
negative goodwill but rather result in the acquirer recording a gain on the
transaction. Also under SFAS 141r, expenses for professional fees and
other services are no longer capitalized as part of the purchase price, but are
now expensed as incurred.
Board of
Directors.
The
present directors of Adams will become the directors of the surviving
company. No Adams director will become a Premier
director.
Management.
The
present officers of Adams will become the officers of the surviving
company. No Adams officer will become an officer of
Premier.
The
shares of Premier common stock to be issued to stockholders of Adams under the
merger agreement have been registered under the Securities Act of 1933 and may
be freely traded without restriction by holders who will not be affiliates of
Premier after the merger and who were not affiliates of Adams on the date of the
Adams special meeting.
General
The
following summary sets forth the material U.S. federal income tax consequences
of the merger to the holders of Adams common stock. The tax consequences under
state, local and foreign laws are not addressed in this summary. The following
summary is based upon the Internal Revenue Code of 1986, as amended, Treasury
regulations, administrative rulings and court decisions in effect as of the date
hereof, all of which are subject to change, possibly with retroactive effect.
Such a change could affect the continuing validity of this summary. No assurance
can be given that the Internal Revenue Service would not assert, or that a court
would not sustain, a position contrary to any of the tax consequences set forth
below.
The
following summary addresses only stockholders who are citizens or residents of
the United States who hold their Adams common stock as a capital asset. It does
not address all the tax consequences that may be relevant to particular
shareholders in light of their individual circumstances or to shareholders that
are subject to special rules, including, without limitation: financial
institutions; tax-exempt organizations; S corporations, partnerships or other
pass-through entities (or an investor in an S corporation, partnership or other
pass-through entities); insurance companies; mutual funds; dealers in stocks or
securities, or foreign currencies; foreign holders; a trader in securities who
elects the mark-to-market method of accounting for the securities; persons that
hold shares as a hedge against currency risk, a straddle or a constructive sale
or conversion transaction; holders who acquired their shares pursuant to the
exercise of employee stock options or otherwise as compensation or through a
tax-qualified retirement plan; and holders subject to the alternative minimum
tax.
No
ruling has been, or will be, sought from the Internal Revenue Service as to the
U.S. federal income tax consequences of the merger. Consummation of the merger
is conditioned upon Premier receiving an opinion from Huddleston Bolen LLP and
upon Adams receiving an opinion from Luse Gorman Pomerenk & Schick, PC, both
to the effect that, based upon facts, representations and assumptions set forth
in such opinions, the merger constitutes a reorganization within the meaning of
Section 368 of the Internal Revenue Code. The issuance of the opinions is
conditioned on, among other things, such tax counsel’s receipt of representation
letters from each of Adams and Premier, in each case in form and substance
reasonably satisfactory to such counsel. Opinions of counsel are not binding on
the Internal Revenue Service.
Based
upon the above qualifications, for U.S. federal income tax purposes, it is
expected that the merger will constitute a reorganization within the meaning of
Section 368 of the Internal Revenue Code. Each of Adams and Premier will be
a party to the merger within the meaning of Section 368(b) of the Internal
Revenue Code, and neither of Adams or Premier will recognize any gain or loss as
a result of the merger.
Cash in Lieu of Fractional Shares.
Holders of Adams common stock who receive cash in lieu of fractional
shares of Premier common stock in the merger generally will be treated as if the
fractional shares of Premier common stock had been distributed to them as part
of the merger, and then redeemed by Premier in exchange for the cash actually
distributed in lieu of the fractional shares, with the redemption generally
qualifying as an “exchange” under Section 302 of the Internal Revenue Code.
Consequently, those holders generally will recognize capital gain or loss with
respect to the cash payments they receive in lieu of fractional shares measured
by the difference between the amount of cash received and the tax basis
allocated to the fractional shares.
Taxation of Capital Gain. Any
capital gain recognized by any holder of Adams common stock under the above
discussion will be long-term capital gain if the holder has held the Adams
common stock for more than 12 months at the time of the exchange. In the case of
a non-corporate holder, that long-term capital gain may be subject to a maximum
federal income tax of 15%. The deductibility of capital losses by the
shareholders may be limited.
Basis in Premier Common Stock.
Each holder’s aggregate tax basis in Premier common stock received in the
merger will be the same as the holder’s aggregate tax basis in the Adams common
stock exchanged, decreased by the amount of any tax basis allocable to any
fractional share interest for which cash is received and increased by any gain
recognized in the exchange. The holding period of Premier common stock received
by a holder in the merger will include the holding period of the Adams common
stock exchanged in the merger to the extent the Adams common stock exchanged is
held as a capital asset at the time of the merger.
Constructive Ownership. In
applying the constructive ownership provisions of Section 318 of the
Internal Revenue Code, a holder of Adams common stock may be deemed to own stock
that is owned directly or indirectly by other persons, such as certain family
members and entities such as trusts, corporations, partnerships or other
entities in which the holder has an interest. Since the constructive ownership
provisions are complex, holders should consult their tax advisors as to the
applicability of these provisions.
Holders
of Adams common stock, other than certain exempt recipients, may be subject to
backup withholding at a rate of 28% with respect to any cash payment received in
the merger. However, backup withholding will not apply to any holder who either
(a) furnishes a correct taxpayer identification number and certifies that
he or she is not subject to backup withholding by completing the substitute Form
W-9 that will be included as part of the transmittal letter, or
(b) otherwise proves to Premier and its exchange agent that the holder is
exempt from backup withholding.
Shareholders
will also be required to file certain information with their federal income tax
returns and to retain certain records with regard to the merger.
The discussion of U.S. federal income
tax consequences set forth above is for general information only and does not
purport to be a complete analysis or listing of all potential tax effects that
may apply to a holder of Adams common stock. We strongly encourage stockholders
of Adams to consult their tax advisors to determine the particular tax
consequences to them of the merger, including the application and effect of
federal, state, local, foreign and other tax laws.
It
is a condition to the completion of the merger that the Premier common stock
issuable in the merger or upon exercise of options to purchase Premier common
stock issued in substitution for Adams options be approved for listing on the
NASDAQ Global Stock Market, subject to official notice of issuance.
When
the merger is completed, the Adams common stock currently listed on the NASDAQ
Global Market will cease to be quoted on the NASDAQ Global Market and will be
deregistered under the Exchange Act.
Under
the General Corporation Law of the State of Delaware, holders of Adams common
stock are not entitled to appraisal rights in connection with the merger. Under
the Kentucky Business Corporation Act, holders of Premier common stock are not
entitled to appraisal rights in connection with the share issuance proposal or
the charter amendment proposal.
IF
YOU ARE A PREMIER SHAREHOLDER, THE PREMIER BOARD (WITH MESSRS. REYNOLDS, WALKER
AND SCAGGS ABSTAINING) RECOMMENDS
THAT
YOU VOTE “FOR” PREMIER PROPOSAL 1.
IF
YOU ARE AN ADAMS STOCKHOLDER, THE ADAMS BOARD (WITH MESSRS. REYNOLDS AND WALKER
ABSTAINING)RECOMMENDS
THAT
YOU VOTE “FOR” ADAMS PROPOSAL 1.
INCORPORATION
TO INCREASE AUTHORIZED SHARES
The Premier board of directors has
adopted, subject to shareholder approval, an amendment to the Premier articles
of incorporation to provide for an increase in the number of shares of Premier
common stock authorized for issuance from 10,000,000 to
20,000,000. The approval of this amendment is not a condition to the
merger. In the event this proposal is adopted by Premier
shareholders, but the merger agreement is terminated (without the merger being
completed) prior to the filing of articles of amendment with the Secretary of
State of the Commonwealth of Kentucky giving effect to the amendment, Premier
will file articles of amendment effectuating the amendment increasing the number
of authorized shares.
As of July 15, 2009, Premier had
approximately 6,392,772 shares of common stock issued and
outstanding. As of July 15, 2009, there were 3,607,228 shares of
Premier common stock authorized but unissued, of which 494,331 shares were
reserved for issuance under Premier’s stock option plan. Based on the
number of shares of Adams common stock outstanding as of July 15, 2009, if the
merger is completed, Premier would be required to issue approximately 1,545,099
additional shares of Premier common stock to the Adams
stockholders. Based on the options, other equity-based awards and
arrangements to purchase or issue Adams common stock, if the merger is
completed, Premier would reserve for issuance approximately 3,597 additional
shares of Premier common stock. For a description of the rights of
holders of Premier common stock, please see “Comparison Of Rights of Premier
Shareholders and Adams Stockholders” beginning on page 230.
Although the amount of common stock
currently authorized under the Premier articles of incorporation will be
sufficient to complete the merger and Premier’s management currently has no
definitive plans for the issuance of any additional authorized shares, the
authorization of additional shares would permit the issuance of shares for
future stock dividends, stock splits, possible acquisitions, stock option plans,
and other appropriate corporate purposes. Under some circumstances,
it is also possible to use unissued shares of common stock for anti-takeover
purposes, but Premier has no present intention to take this
action. The additional shares of Premier common stock will not be
entitled to preemptive rights nor will existing shareholders have any preemptive
right to acquire any of those shares when issued.
Adoption of the above-described
amendment will require the affirmative vote of a majority of the shares of
Premier common stock present or represented at the Premier special meeting,
assuming a quorum is present.
The adoption of Premier Proposal 2 is
not conditioned upon the adoption of Premier Proposal 1 set forth in this joint
proxy statement/prospectus, and the adoption of none of the other proposals set
forth in this joint proxy statement/prospectus are conditioned upon the adoption
of Premier Proposal 2.
THE PREMIER BOARD RECOMMENDS THAT YOU
VOTE “FOR”
PREMIER
PROPOSAL 2.
ADJOURNMENT
OF THE MEETING
In
the event that there are not sufficient votes to constitute a quorum, the merger
agreement and the proposal to issue Premier common stock in the merger cannot be
approved unless the special meetings were adjourned to a later date or dates in
order to permit further solicitation of proxies. In order to allow proxies that
have been received at the time of the meeting to be voted for an adjournment, if
necessary, Premier and Adams have submitted the question of adjournment to their
respective shareholders as a separate matter for their consideration. The boards
of directors of each of Premier and Adams recommends that its shareholders vote
“FOR” the adjournment
proposal. If it is necessary to adjourn a meeting, no notice of such adjourned
meeting is required to be given to the respective company’s shareholders, other
than an announcement at the special meeting of the place, date and time to which
the meeting is adjourned, if the meeting is adjourned for 30 days or
less.
The
affirmative vote of the holders of a majority of the common shares represented
in person or by proxy is required to adjourn either of the special
meetings.
The board of directors of Premier and
Adams each recommends that you vote “FOR” approval of this
proposal.
AND
ABIGAIL ADAMS NATIONAL BANCORP, INC.
DESCRIPTION
OF PREMIER
Description
of Business
Premier is a multi-bank holding company
that, as of March 15, 2009 operates nine banking offices in Kentucky, three
banking offices in Ohio, and 13 banking offices in West Virginia. At December
31, 2008, Premier had total consolidated assets of $724.5 million, total
consolidated deposits of $589.2 million and total consolidated shareholders'
equity of $89.4 million. The banking subsidiaries (the "Premier Banks") consist
of Citizens Deposit Bank & Trust, Vanceburg, Kentucky; Farmers Deposit Bank,
Eminence, Kentucky; Ohio River Bank, Ironton, Ohio; First Central Bank, Inc.,
Philippi, West Virginia; Boone County Bank, Inc., Madison, West Virginia; and
Traders Bank, Inc., Ravenswood, West Virginia.
Premier was incorporated as a Kentucky
corporation in 1991 and has functioned as a bank holding company since its
formation. During 2002, Premier moved its principal executive offices from
Georgetown, Kentucky to its present location at 2883 5th Avenue, Huntington,
West Virginia, 25702. The purpose of the move was to be more centrally located
among Premier Banks and its directorship.
Premier is a legal entity separate and
distinct from its Premier Banks and non-bank 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 Premier
Banks or non-bank subsidiaries is necessarily subject to the prior claims of
creditors of such subsidiaries, except to the extent that claims of Premier, in
its capacity as a creditor, may be recognized. The principal source of Premier's
revenue is dividends from its Premier Banks and non-bank
subsidiary. See "REGULATORY MATTERS -- Dividend Restrictions" for
discussion of the restrictions on the Premier Banks' ability to pay dividends to
Premier.
In late 2007 Premier resumed a strategy
of franchise expansion by acquiring and owning community banks. This
decision followed a five–year period whereby Premier suspended its acquisition
strategy in order to focus on improving operations, strengthening capital and
management oversight and improving the profitability of the banks previously
acquired. On October 24, 2007, Premier entered into a material definitive
agreement with Citizens First Bank, Inc. (Citizens First), a bank with $60
million of total assets located in Ravenswood, West Virginia. Under
terms of the definitive agreement, Premier agreed to purchase Citizens First for
up to $11,700,000 in stock and cash. Each share of Citizens First
common stock was entitled to merger consideration of cash and stock that
generally totaled $29.25, subject to certain limitations. Premier
issued 480,000 shares of its common stock plus Premier paid $5.3 million in cash
to the shareholders of Citizens First.
On November 27, 2007, Premier entered
into a material definitive agreement with Traders Bankshares, Inc. (Traders), a
single bank holding company with $105 million of total assets located in
Spencer, West Virginia. Under terms of the definitive agreement,
Premier agreed to purchase Traders for approximately $18,140,000 in stock and
cash. Each share of Traders common stock was entitled to merger
consideration of $50.00 cash and 3.75 shares of Premier common
stock. Premier issued approximately 675,000 shares of its common
stock plus Premier paid $9.0 million in cash to the shareholders of
Traders.
On April 30, 2008, Premier closed the
acquisitions of Citizens First and Traders. On October 25, 2008,
Premier merged these two new subsidiary banks together to form Traders Bank,
Inc. headquartered in Ravenswood, West Virginia. The merger was
designed to consolidate management and operations of two subsidiaries in
overlapping or contiguous markets. Similarly, effective January 3,
2005, Premier merged two of its subsidiary banks, Citizens Deposit Bank &
Trust in Vanceburg, Kentucky and Bank of Germantown, in Germantown, Kentucky.
Bank of Germantown was merged into Citizens Deposit Bank, with its facilities
continuing to operate as branches of Citizens Deposit Bank.
Beginning in April 2005 and concluding
in July 2005, Premier converted each of its then Premier Banks from an in-house
system administered by a wholly-owned subsidiary to an outsourced system
administered by FiServ for their data and item processing
functions. Subsequent to the conversion, the operations of Premier’s
data processing subsidiary, Premier Data Services, Inc. were suspended and the
subsidiary was merged into Premier on June 27, 2006.
General
Through the Premier Banks, Premier
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, Premier believes that it can
minimize the competitive effect of larger financial institutions that typically
are focused on large metropolitan areas. Each bank retains its local management
structure which offers customers direct access to the bank's president and other
officers in an environment conducive to friendly, informed and courteous
service. This 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
Premier to promote prudent banking practices. See additional discussion under
"Regulatory Matters" below.
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 Premier Banks, the Premier Banks' lending and investing activities are
funded primarily by core deposits.
When appropriate and economically
advantageous, Premier centralizes certain of the Premier Banks' back office,
support and investment functions in order to achieve consistency and cost
efficiency in the delivery of products and services. Premier centrally provides
services such as accounting, loan review, operations and network support, human
resources, compliance and internal auditing to the Premier Banks to enhance
their ability to compete effectively. Premier 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 Premier Bank participates in product development by advising management of
new products and services needed by its customers and desirable changes to
existing products and services.
Prior to the conversions in mid 2005,
Premier's data processing subsidiary, Premier Data Services, Inc., provided
centralized data processing services to four of the Premier Banks. Beginning in
late 2004 and continuing through the middle of 2005, Premier converted its data
processing system to an external third-party provider. Through the conversion
process, Premier senior management along with each Premier Bank's management
reviewed and standardized their offering of products and services, although
pricing decisions remain at the local Premier Bank level. Furthermore, as a
result of conversion, Premier through the Premier Banks is able offer more
modern products, such as internet banking and check imaging, and is able to take
advantage of emerging technologies such as image exchange to remit and clear
items with its exchange agents.
Each of the Premier 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 Premier Banks' residential mortgage
lending activities consist primarily of loans for purchasing personal residences
or loans for commercial or consumer purposes secured by residential
mortgages. The Premier Banks also originate residential mortgage
loans that are sold in the secondary mortgage market. The Premier
Banks’ mortgage originators are salaried employees who do not receive a
commission or other incentive compensation for the number or type of mortgages
they originate. Consumer lending activities consist of traditional
forms of financing for automobile and personal loans including unsecured lines
of credit. Commercial lending activities include loans to small businesses
located primarily in the communities in which the Premier Banks are located and
surrounding areas. Commercial loans are secured by business assets including
real estate, equipment, inventory, and accounts receivable. Some commercial
loans are unsecured.
The Premier Banks' range of deposit
services includes checking accounts, NOW accounts, savings accounts, money
market accounts, club accounts, individual retirement accounts, certificates of
deposit and overdraft protection. Customers can access their accounts via
traditional bank branch locations as well as Automated Teller Machines (ATMs)
and the internet. The Premier Banks also offer bill payment and
telephone banking services. Deposits of the Premier Banks are insured
by the Bank Insurance Fund administered by the FDIC to the maximum amounts
offered by the FDIC.
The Premier Banks encounter strong
competition both in making loans and attracting deposits. The deregulation of
the banking industry and the widespread enactment of state laws that permit
multi-bank holding companies as well as the availability of nationwide
interstate banking have created a highly competitive environment for financial
services providers. In one or more aspects of its business, each Premier Bank
competes with other commercial banks, savings and loan associations, credit
unions, finance companies, mutual funds, insurance companies, brokerage and
investment banking companies and other financial intermediaries operating in its
market and elsewhere, many of which have substantially greater financial and
managerial resources. While the Premier Banks are smaller financial
institutions, each of the Premier Banks' competitors include large bank holding
companies having substantially greater resources and offering certain services
that Premier Banks may not currently provide. Each Premier Bank seeks to
minimize the competitive effect of larger financial institutions through a
community banking approach that emphasizes direct customer access to the Premier
Bank's president and other officers in an environment conducive to friendly,
informed and courteous service. Furthermore, via Premier’s credit
administration department, the Premier Banks can also minimize the competitive
effects of larger institutions by tailoring their lending criteria to the
individual circumstances of the small-to-medium sized business
owner.
Management believes that each Premier
Bank is positioned to compete successfully in its respective primary market
area, although no assurances as to ongoing competitiveness can be given.
Competition among financial institutions is based upon interest rates offered on
deposit accounts, service charges on deposit accounts for various services
related to customer convenience, interest rates charged on loans and other
credit, 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 Premier 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.
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 shares of Premier common
stock. 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 Premier
Banks is subject to the jurisdiction, and requires the approval of each Premier
Banks’ primary federal banking regulator and, if the Premier Bank is a
state-chartered bank, the appropriate state banking regulator.
Under the BHC Act, the Federal Reserve
has the authority to require a bank holding company to terminate any activity or
relinquish control of the nonbank subsidiary (other than a nonbank subsidiary of
a bank) upon the Federal Reserve's determination that such activity or control
constitutes a risk to the financial soundness and stability of any bank
subsidiary of the bank holding company. Premier and the Premier Banks are
subject to the Federal Reserve Act, which limits borrowings by Premier and its
nonbank subsidiaries from the Premier Banks and also limits various other
transactions between Premier and its nonbank subsidiaries with the Premier
Banks.
The two Premier Banks chartered in
Kentucky are supervised, regulated and examined by the Kentucky Department of
Financial Institutions, the Premier Bank chartered in Ohio is supervised,
regulated and examined by the Ohio Division of Financial Institutions, and the
three Premier Banks chartered in West Virginia are supervised, regulated and
examined by the West Virginia Division of Banking. In addition, those Premier
Banks that are members of the Federal Reserve System are supervised and
regulated by the Federal Reserve, and those banks that are not members of the
Federal Reserve System are supervised and regulated by the Federal Deposit
Insurance Corporation ("FDIC"). Each banking regulator has the authority to
issue cease-and-desist orders if it determines that the activities of a bank
regularly represent an unsafe and unsound banking practice or a violation of
law.
Both federal and state law extensively
regulates various aspects of the banking business, such as reserve and capital
requirements, truth-in-lending and truth-in-savings disclosure, equal credit
opportunity, fair credit reporting, trading in securities and other aspects of
banking operations. Premier, the Premier Banks and Premier's nonbank subsidiary
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 Premier 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 Premier Banks, in particular, would be
affected.
Liability
for Bank Subsidiaries - The Federal Reserve has a policy to the effect
that a bank holding company is expected to act as a source of financial and
managerial strength to each of its subsidiary banks and to maintain resources
adequate to support each such subsidiary bank. This support may be required at
times when Premier may not have the resources to provide it. In the event of a
bank holding company's bankruptcy, any commitment by the bank holding company to
a federal bank regulatory agency to maintain the capital of a subsidiary bank
would be assumed by the bankruptcy trustee and entitled to priority of
payment.
Any depository institution insured by
the FDIC may be held liable for any loss incurred, or reasonably expected to be
incurred, by the FDIC in connection with (i) the default of a commonly
controlled FDIC-insured depository institution, or (ii) any assistance provided
by the FDIC to a commonly controlled FDIC-insured depository institution in
danger of default. "Default" is defined generally as the appointment of a
conservator or receiver and "in danger of default" is defined generally as the
existence of certain conditions indicating that a "default" is likely to occur
in the absence of regulatory assistance. In the event that such a default
occurred with respect to a bank, any loans to the bank from its parent holding
company will be subordinate in right of payment of the bank's depositors and
certain of its other obligations.
Capital
Requirements - Premier is subject to capital ratios, requirements and
guidelines imposed by the Federal Reserve, which are substantially similar to
the ratios, requirements and guidelines imposed by the Federal Reserve and the
FDIC on the Premier 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 and "Tier
II" capital. "Tier I" capital includes common shareholders' equity,
non-cumulative perpetual preferred stock, and related surplus (excluding auction
rate issues), minority interests in equity accounts of consolidated subsidiaries
and Trust Preferred Securities (subject to certain limitations.) Goodwill,
certain identifiable intangible assets and certain other assets are subtracted
from these sources of capital to calculate Tier I capital. "Tier II" capital
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 I and Tier II
capital) equal to at least 4% and 8% of total risk-weighted assets,
respectively. At December 31, 2008, Premier met both requirements, with Tier I
and total capital equal to 14.0% and 15.3% 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. 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, 2008,
Premier's leverage ratio was 8.7%.
The foregoing capital requirements are
minimum requirements. The Federal Reserve may set capital requirements higher
than the minimums described above for holding companies whose circumstances
warrant it. For example, holding companies experiencing or anticipating
significant growth may be expected to maintain capital ratios, including
tangible capital positions, well above the minimum levels.
Additionally,
the Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA"),
among other things, identifies five capital categories for insured depository
institutions (well capitalized, adequately capitalized, undercapitalized,
significantly undercapitalized and critically undercapitalized) and requires the
respective federal regulatory agencies to implement systems for "prompt
corrective action" for insured depository institutions that do not meet minimum
capital requirements within such categories. FDICIA imposes progressively more
restrictive constraints on operations, management and capital distributions,
depending on the category in which an institution is classified. Failure to meet
the capital guidelines could also subject a banking institution to capital
raising requirements.
An "undercapitalized" bank must develop
a capital restoration plan and its parent holding company must guarantee the
bank's compliance with the plan. The liability of the parent holding company
under any such guarantee is limited to the lesser of 5% of the Bank's assets at
the time it became "undercapitalized" or the amount needed to comply with the
plan. Furthermore, in the event of the bankruptcy of the parent holding company,
such guarantee would take priority over the parent's general unsecured
creditors. In addition, FDICIA requires the various regulatory agencies to
prescribe certain non-capital standards for safety and executive compensation
and permits regulatory action against a financial institution that does not meet
such standards.
Regulatory
Agreements - As previously disclosed in earlier reports, Premier and some
of the subsidiary Premier Banks have, in the past, been subject to regulatory
agreements. On January 29, 2003, Premier entered into a written
agreement with the Federal Reserve Bank of Cleveland (FRB). In, 2006,
the FRB determined that Premier had fully satisfied all of the provisions of the
written agreement and, accordingly, the FRB terminated the agreement effective
April 18, 2006.
Before they were merged together into
one entity, two of Premier's subsidiaries, Citizens Deposit Bank & Trust and
the Bank of Germantown, entered into similar agreements with their respective
primary regulators which, among other things, prohibited the payment of
dividends without prior written approval and required significant changes in
their credit administration policies. The banks fully complied with the terms of
the agreements in 2004 and the agreements were accordingly rescinded by their
regulators.
As a result of a 2003 investigation
into the conduct of the former president of Farmers Deposit Bank by Premier and
the FDIC, on December 24, 2003, Premier announced that Farmers Deposit Bank had
reached an agreement with the FDIC and the Kentucky Department of Financial
Institutions ("KDFI") [collectively referred to as "Supervisory Authorities"] to
consent to the issuance of a cease & desist order ("Order") from its
Supervisory Authorities. The Order also outlined a number of steps to
be taken by Farmers Deposit which were designed to remedy and/or prevent the
reoccurrence of events that gave rise to the investigation during the latter
half of 2003. Having found that Farmers Deposit had fully complied
with the Order, the Supervisory Authorities rescinded the Order on December 13,
2005.
Dividend
Restrictions - Premier is dependent on dividends from its Premier Banks
for its revenues. Various federal and state regulatory provisions limit the
amount of dividends the Premier Banks can pay to Premier without regulatory
approval. At December 31, 2008, approximately $2.4 million of the total
shareholders' equity of the Premier 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 Premier 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
Premier Banks to pay dividends in the future is presently, and could be further,
influenced by bank regulatory policies and capital guidelines as well as each
Affiliate Bank's earnings and financial condition. Additional
information regarding dividend limitations can be found in Note 20 of the
accompanying audited Consolidated Financial Statements.
Interstate
Banking - Under the Riegle-Neal Interstate Banking and Branching
Efficiency Act of 1994 (the "Riegle-Neal Act"), subject to certain concentration
limits, (i) bank holding companies, such as Premier, are permitted to acquire
banks and bank holding companies located in any state of the United States,
subject to certain restrictions, and (ii) banks are permitted to acquire branch
offices outside their home state by merging with out-of-state banks, purchasing
branches in other states or establishing de novo branch offices in other states;
provided that, in the case of any such purchase or opening of individual
branches, the host state has adopted legislation "opting in" to the relevant
provisions of the Riegle-Neal Act; and provided further, that, in the case of a
merger with a bank located in another state, the host state has not adopted
legislation "opting out" of the relevant provisions of the Riegle-Neal
Act.
Gramm-Leach-Bliley
Act - On November 12, 1999, the Gramm-Leach-Bliley Act (the "Act") was
signed into law, eliminating many of the remaining barriers to full convergence
of the banking, securities, and insurance industries. The major provisions of
the Act took effect March 12, 2000.
The Act enables a broad-scale
consolidation among banks, securities firms, and insurance companies by creating
a new type of financial services company called a "financial holding company," a
bank holding company with dramatically expanded powers. Financial holding
companies can offer virtually any type of financial service, including banking,
securities underwriting, insurance (both agency and underwriting), and merchant
banking. In addition, the Act permits the Federal Reserve and the Treasury
Department to authorize additional activities for financial holding companies,
but only if they jointly determine that such activities are "financial in
nature" or "complementary to financial activities." Premier does not presently
qualify to elect financial holding company status.
The Federal Reserve serves as the
primary "umbrella" regulator of financial holding companies, with jurisdiction
over the parent company and more limited oversight over its subsidiaries. The
primary regulator of each subsidiary of a financial holding company depends on
the activities conducted by the subsidiary. A financial holding company need not
obtain Federal Reserve approval prior to engaging, either de novo or through
acquisitions, in financial activities previously determined to be permissible by
the Federal Reserve. Instead, a financial holding company need only provide
notice to the Federal Reserve within 30 days after commencing the new activity
or consummating the acquisition.
Premier and its subsidiaries
collectively had approximately 270 full-time equivalent employees as of December
31, 2008.
Properties
Premier leases its principal executive
offices located in Huntington, West Virginia. Premier also owns property located
at 104 Jefferson Street, Brooksville, Kentucky, which serves as a branch for
Citizen's Deposit Bank. Except as noted, each of the Premier Banks owns the real
property and improvements on which their banking activities are
conducted.
Citizens Deposit Bank & Trust, in
addition to its main office at 400 Second Street in Vanceburg, Kentucky, has
four branch offices in Lewis County, Kentucky, (including one leased facility),
one leased branch office in Mason County, Kentucky, one branch located on
Highway 10 in Germantown, Kentucky, and one branch located in Bracken County,
Kentucky. Farmers Deposit Bank, in addition to its main office at 5230 South
Main Street in Eminence, Kentucky, has one branches in Henry County, Kentucky
and closed a second branch in Henry County effective January 31, 2008. Ohio
River Bank, in addition to its main office at 221 Railroad Street in Ironton,
Ohio, has two branches, one leased facility in Lawrence County, Ohio and one in
Scioto County, Ohio. First Central Bank, in addition to its main office at 2
South Main Street in Philippi, West Virginia, has a branch located in
Buckhannon, West Virginia and a leased branch office located in Upshur County,
West Virginia. Boone County Bank, in addition to its main office at 300 State
Street, Madison, West Virginia, has one leased branch located in Lincoln County,
West Virginia and two other branches, one each located in Boone and Logan
Counties, West Virginia. Traders Bank, Inc., in addition to its main
office at 601 Washington Street, Ravenswood, West Virginia, has two other branch
locations in Jackson County, two branch locations in Roane County, and one
location in Wood County, West Virginia.
The Premier 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
Premier.
Introduction
Premier is a multi-bank holding company
headquartered in Huntington, West Virginia. It operates six community
bank subsidiaries ranging in size from $66 million to $170 million, each with a
local community name and orientation. The banks operate in twenty-four
communities within the states of West Virginia, Ohio and Kentucky and provide
their customers with a full range of banking services. At the close of business
on April 30, 2008, Premier completed its acquisitions of Traders Bankshares,
Inc. (“Traders”), a $108 million single bank holding company headquartered in
Spencer, West Virginia, and Citizens First Bank, Inc. (“Citizens First”), a $62
million bank headquartered in Ravenswood, West Virginia. The results
of operations of Citizens First and Traders are included in Premier’s
consolidated statements of income beginning only from the acquisition
date. On October 25, 2008, Premier merged these two banks,
named the resulting bank, Traders Bank, Inc. and moved its headquarters to
Ravenswood, West Virginia. As of December 31, 2007, Premier had
approximately $724 million in total assets, $467 million in total loans, $589
million in total deposits and $18 million in customer repurchase
agreements.
The accompanying Consolidated Financial
Statements have been prepared by the management of Premier in conformity with
accounting principles generally accepted in the United States of America. The
audit committee of the Board of Directors engaged Crowe Horwath LLP (Crowe) as
independent auditors to audit the Consolidated Financial Statements, and their
report is included elsewhere herein. Financial information appearing throughout
this annual report is consistent with that reported in the Consolidated
Financial Statements. The following discussion is designed to assist readers of
the Consolidated Financial Statements in understanding significant changes in
Premier's financial condition and results of operations.
Management's objective of a fair
presentation of financial information is achieved through a system of internal
accounting controls. The financial control system of Premier is designed to
provide reasonable assurance that assets are safeguarded from loss and that
transactions are properly authorized and recorded in the financial records. As
an integral part of that financial control system, the holding company employs a
staff of internal auditors to perform internal audits of the financial records
of each of the subsidiaries on a periodic basis. The internal audit
staff reports their findings and recommendations to Premier’s audit committee as
well as the audit committees of the subsidiaries. Also, on a regular
periodic basis, the subsidiary banks are examined by Federal and State banking
authorities for safety and soundness as well as compliance with applicable
banking laws and regulations. The activities of both the internal and external
audit functions are reviewed by the audit committee of the Board of
Directors.
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, collect
delinquent loans and attract and retain deposits, the impact of Premier's growth
or lack thereof, 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. The words “may,” “could,” “should,”
“would,” “will,” “believe,” “anticipate,” “estimate,” “expect,” “intend,”
“plan,” “project,” “predict,” “continue” and similar expressions are intended to
identify forward-looking statements.
General
The financial condition and results of
operations presented in the Consolidated Financial Statements, accompanying
Notes to the Consolidated Financial Statements and management's discussion and
analysis are, to a large degree, dependent upon Premier’s accounting policies.
The selection and application of these accounting policies involve judgments,
estimates, and uncertainties that are susceptible to change.
Presented below is a discussion of
those accounting policies that management believes are the most important to the
presentation and understanding of Premier’s financial condition and results of
operations. These critical accounting policies require management's most
difficult, subjective and complex judgments about matters that are inherently
uncertain. In the event that different assumptions or conditions were to
prevail, and depending upon the severity of such changes, the possibility of
materially different financial condition or results of operations is a
reasonable likelihood. See also Note 1 of the accompanying Consolidated
Financial Statements presented elsewhere in this annual report.
Premier monitors and maintains an
allowance for loan losses to absorb an estimate of probable incurred losses
inherent in the loan portfolio. Premier maintains policies and procedures that
address the systems of control over the following areas of maintenance of the
allowance: the systematic methodology used to determine the appropriate level of
the allowance to provide assurance that the allowance for loan losses is
maintained in accordance with accounting principles generally accepted in the
United States of America; the accounting policies for loan charge-offs and
recoveries; the assessment and measurement of impairment in the loan portfolio;
and the loan grading system.
Premier evaluates various loans
individually for impairment as required by Statement of Financial Accounting
Standards (“SFAS”) No. 114, Accounting by Creditors for Impairment of a Loan,
and SFAS No. 118, Accounting by Creditors for Impairment of a Loan - Income
Recognition and Disclosures. Loans evaluated individually for impairment include
non-performing loans, such as loans on non-accrual, loans past due 90 days or
more, restructured loans and other loans selected by management including loans
graded as substandard or doubtful by the internal credit review process. The
evaluations are based upon discounted expected cash flows or collateral
valuations. If the evaluation shows that a loan is individually impaired, then a
specific reserve is established for the amount of impairment. If a loan
evaluated individually is not impaired, then the loan is assessed for impairment
under SFAS No. 5, Accounting for Contingencies (SFAS 5), with a group of loans
that have similar characteristics.
For loans without individual measures
of impairment, Premier makes estimates of losses for groups of loans as required
by SFAS 5. Loans are grouped by similar characteristics, including the type of
loan, the assigned loan grade and the general collateral type. A loss rate
reflecting the expected loss inherent in a group of loans is derived based upon
estimates of default rates for a given loan grade, the predominant collateral
type for the group and the terms of the loan. The resulting estimate of losses
for groups of loans is adjusted for relevant environmental factors and other
conditions of the portfolio of loans, including: borrower and industry
concentrations; levels and trends in delinquencies, charge-offs and recoveries;
changes in underwriting standards and risk selection; level of experience,
ability and depth of lending management; and national and local economic
conditions.
The amount of estimated impairment for
individually evaluated loans and groups of loans is added together for a total
estimate of probable incurred loan losses. This estimate of losses is compared
to the allowance for loan losses of Premier as of the evaluation date and, if
the estimate of losses exceeds the allowance, an additional provision to the
allowance would be made. If the estimate of losses is less than the allowance,
the degree to which the allowance exceeds the estimate is evaluated to determine
whether the allowance falls outside a range of estimates. If the estimate of
losses were below the range of reasonable estimates, the allowance would be
reduced by way of a credit to the provision for loan losses. Premier recognizes
the inherent imprecision in estimates of losses due to various uncertainties and
variability related to the factors used, and therefore a reasonable range around
the estimate of losses is derived and used to ascertain whether the allowance is
too high. If different assumptions or conditions were to prevail and it is
determined that the allowance is not adequate to absorb the new estimate of
probable incurred losses, an additional provision for loan losses would be made,
which amount may be material to the Consolidated Financial
Statements.
For
acquisitions, Premier is required to record the assets acquired, including
identified intangible assets, and the liabilities assumed at their fair value.
These often involve estimates based on third-party valuations, such as
appraisals, or internal valuations based on discounted cash flow analyses or
other valuation techniques that may include estimates of attrition, inflation,
asset growth rates or other relevant factors. In addition, the determination of
the useful lives over which an intangible asset will be amortized is
subjective.
Under SFAS No. 142 Goodwill and Other
Intangible Assets, goodwill is evaluated at least annually to determine if the
amount recorded on Premier's balance sheet is impaired. If goodwill is
determined to be impaired, the recorded amount would be reduced to estimated
fair value by a charge to expense in the period in which impairment is
determined. Impairment is evaluated in the aggregate for all of Premier's
banking operations. Operating characteristics of the aggregate banking
operations are derived and compared to a database of peer group banks that have
been sold. Pricing valuation factors that are considered in estimating the fair
value of Premier's aggregate banking operations include price-to-total assets,
price-to-total book value, price-to-deposits and price-to-earnings. Unusual
events that have impacted the operating characteristics of Premier's aggregate
banking operations are considered to assess the likelihood of recurrence and
adjustments to historical performance may be made. Changes in assumptions
regarding the likelihood of unusual historical events recurring or the use of
different pricing valuation factors could have a material impact on management's
impairment analysis.
Premier had net income of $7.536
million in 2008 compared to $7.119 million of net income reported for the year
2007. Net income increased in 2008 as a result of higher interest
income and non-interest income as well as lower interest expense all of which
was partially offset by higher non-interest expense. The increases in
each of these categories was primarily the result of the increase in operations
from the acquisitions of Citizens First Bank (“Citizens First) and Traders
Bankshares, Inc. (“Traders”), both of which occurred at the close of business on
April 30, 2008. The operating results of Citizens First and Traders
are included in the Consolidated Financial Statements of Premier only from the
date of acquisition. Net income in 2006 was $6.501
million. The increase in 2007 over 2006 was the result of an increase
in interest income due to a greater average volume of loans outstanding; a
greater volume of average federal funds sold outstanding; higher yields on all
earning assets; an increase in secondary market mortgage income; and a reduction
in the operating costs of Premier. Net income in 2006 was the result
of an increase in interest income due to a greater volume of loans outstanding;
higher yields on all earning assets; a negative provision for loan losses; and a
reduction in the net operating costs of Premier. Basic earnings per
share were $1.25 in 2008 compared to $1.36 in 2007 and to $1.24 in
2006. The decrease in earnings per share in 2008 resulted from the
increase in the average shares outstanding related to the common stock issued as
part of the merger consideration of Citizens First and Traders as more fully
described in Note 23 to the Consolidated Financial Statements.
The following table comparatively
illustrates the components of ROA and ROE over the previous five years. Return
on average assets (ROA) measures how effectively Premier utilizes its assets to
produce net income. It also facilitates the analysis of earnings
performance of different sized organizations. In 2008, Premier
increased the size its balance sheet from $549.3 million in total assets at the
end of 2007 to $724.5 million at the end of 2008, largely due to the
acquisitions of Traders and Citizens First. The increase in asset
size will generally result in higher dollars of income earned and expenses
incurred. A detailed review of the components of ROA will help
analyze Premier’s performance without regard to changes in its
size.
Premier’s net income in 2008 resulting
in an ROA of 1.12%, a decrease from the 1.31% ROA in 2007 and the 1.21% ROA in
2006. As shown in the table, fully taxable equivalent net interest
income (as a percent of average earning assets) reached its highest level in
five years in 2007 at 4.42%. In 2008, this percentage decreased to
4.21% as the increase in average earning assets from Traders and Citizens First
did not result in a similar percentage increase in net interest
income. In 2004, net credit income was 3.41% of average earning
assets and continued to increase in both 2005 and again in 2006. In
2005, minimal provisions for loan losses were recorded and thus there was little
reduction from the increase in net interest income. In 2006, negative
provisions for loan losses were recorded which served to help increase net
credit income to 4.55%. This increase in net credit income (as a
percent of average earning assets) was complemented by an increase in
non-interest income (as a percent of average earning assets) and a reduction in
non-interest expenses (as a percent of average earning assets) when compared to
the previous two years. In 2007, while net interest income continued to
increase, net credit income was lower than 2006 as a result of minimal negative
provisions for loan losses recorded in 2007. However, in 2007,
non-interest income (as a percent of average earning assets) reached its highest
level in the past five years while non-interest expense (as a percent of average
earning assets) continued to decline.
In
2008, minimal provisions for loan losses reduced an already lower net interest
income (as a percent of average earning assets), resulting in net credit income
of 4.19% of average earning assets. In 2008, non-interest income (as
a percent of average earning assets) declined somewhat, returning to the level
achieved in 2006. However, non-interest income (as a percent of
average earning assets) continued to decline in 2008 resulting in the lowest
ratio over the past five years. As illustrated in the table, the overall result
was to decrease Premier's 2008 return on average earning assets to 1.21% and
decrease its return on average total assets (ROA) to 1.12%.
|
ANALYSIS
of RETURN ON ASSETS and EQUITY
|
|
|
From
continuing operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
As
a percent of average earning assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fully taxable-equivalent net
interest income
|
|
|
4.21 |
% |
|
|
4.42 |
% |
|
|
4.32 |
% |
|
|
4.00 |
% |
|
|
3.61 |
% |
|
Provision for loan
losses
|
|
|
(0.02 |
) |
|
|
0.02 |
|
|
|
0.23 |
|
|
|
(0.00 |
) |
|
|
(0.20 |
) |
|
Net credit income
|
|
|
4.19 |
|
|
|
4.44 |
|
|
|
4.55 |
|
|
|
4.00 |
|
|
|
3.41 |
|
|
Gains on the sales of assets
& subsidiaries
|
|
|
0.01 |
|
|
|
0.00 |
|
|
|
0.00 |
|
|
|
0.00 |
|
|
|
0.02 |
|
|
Non-interest
income
|
|
|
0.84 |
|
|
|
0.91 |
|
|
|
0.84 |
|
|
|
0.78 |
|
|
|
0.69 |
|
|
Non-interest
expense
|
|
|
(3.20 |
) |
|
|
(3.23 |
) |
|
|
(3.40 |
) |
|
|
(3.46 |
) |
|
|
(3.52 |
) |
|
Tax equivalent
adjustment
|
|
|
(0.03 |
) |
|
|
(0.04 |
) |
|
|
(0.03 |
) |
|
|
(0.03 |
) |
|
|
(0.03 |
) |
|
Applicable income
taxes
|
|
|
(0.60 |
) |
|
|
(0.68 |
) |
|
|
(0.66 |
) |
|
|
(0.41 |
) |
|
|
(0.18 |
) |
|
Return
on average earning assets
|
|
|
1.21 |
|
|
|
1.40 |
|
|
|
1.30 |
|
|
|
0.88 |
|
|
|
0.39 |
|
|
Multiplied by average earning
assets to
average total
assets
|
|
|
92.48 |
|
|
|
93.34 |
|
|
|
93.07 |
|
|
|
92.84 |
|
|
|
92.39 |
|
|
Return
on average assets
|
|
|
1.12 |
% |
|
|
1.31 |
% |
|
|
1.21 |
% |
|
|
0.82 |
% |
|
|
0.36 |
% |
|
Multiplied by average assets
to
average equity
|
|
|
8.37 |
X |
|
|
8.52 |
X |
|
|
9.31 |
X |
|
|
10.23 |
X |
|
|
11.33 |
X |
|
Return
on average equity
|
|
|
9.38 |
% |
|
|
11.13 |
% |
|
|
11.31 |
% |
|
|
8.42 |
% |
|
|
4.06 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The net overhead ratio (non-interest
expense less non-interest income as a percent of average earning assets)
increased slightly in 2008 to 2.36%. This ratio compares to 2.32% in
2007, the lowest ratio reported in the last five years, 2.56% in 2006, 2.68% in
2005, and 2.83% in 2004. The increase in 2008 net overhead was
largely the result of a lower ratio of non-interest income to average earning
assets due to lower secondary market mortgage commissions overall and the 0.66%
non-interest income ratio of the acquired banks. The decrease in 2007
net overhead was the result of increases in Premier’s non-interest income
related to electronic banking income and secondary market mortgage commissions,
plus decreases in non-interest expenses related to staff costs and the
accelerated amortization of trust preferred issuance costs recorded in 2006 but
not 2007.
Return on average equity (ROE), another
measure of earnings performance, indicates the amount of net income earned in
relation to the total equity invested. Premier's 2008 ROE was 9.38% compared to
11.13% in 2007 and 11.31% realized in 2006. ROE decreased in 2008 due
to an increase in average equity as a result of the common stock issued to
acquire Traders and Citizens First. ROE decreased slightly in 2007 as
average equity increased at a faster pace than average assets resulting in a
decrease in the multiplier of average assets to average equity.
A
breakdown of Premier's financial results by quarter for the years ended December
31, 2008 and 2007 is summarized below.
|
QUARTERLY
FINANCIAL INFORMATION
|
|
|
(Dollars
in thousands, except per share amounts)
|
|
|
|
|
First
|
|
|
Second
|
|
|
Third
|
|
|
Fourth
|
|
|
Full
Year
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
$ |
8,427 |
|
|
$ |
9,433 |
|
|
$ |
10,276 |
|
|
$ |
9,708 |
|
|
$ |
37,844 |
|
|
Interest
expense
|
|
|
2,833 |
|
|
|
2,984 |
|
|
|
3,099 |
|
|
|
2,893 |
|
|
|
11,809 |
|
|
Net interest
income
|
|
|
5,594 |
|
|
|
6,449 |
|
|
|
7,177 |
|
|
|
6,815 |
|
|
|
26,035 |
|
|
Provision for loan
losses
|
|
|
(135 |
) |
|
|
91 |
|
|
|
85 |
|
|
|
106 |
|
|
|
147 |
|
|
Securities
gains
|
|
|
0 |
|
|
|
93 |
|
|
|
0 |
|
|
|
0 |
|
|
|
93 |
|
|
Net overhead
|
|
|
3,056 |
|
|
|
3,545 |
|
|
|
4,197 |
|
|
|
3,898 |
|
|
|
14,696 |
|
|
Income before income
taxes
|
|
|
2,673 |
|
|
|
2,906 |
|
|
|
2,895 |
|
|
|
2,811 |
|
|
|
11,285 |
|
|
Net income
|
|
|
1,774 |
|
|
|
1,930 |
|
|
|
1,930 |
|
|
|
1,902 |
|
|
|
7,536 |
|
|
Basic net income per
share
|
|
|
0.34 |
|
|
|
0.32 |
|
|
|
0.30 |
|
|
|
0.30 |
|
|
|
1.25 |
|
|
Diluted net income per
share
|
|
|
0.34 |
|
|
|
0.32 |
|
|
|
0.30 |
|
|
|
0.30 |
|
|
|
1.25 |
|
|
Dividends paid per
share
|
|
|
0.10 |
|
|
|
0.11 |
|
|
|
0.11 |
|
|
|
0.11 |
|
|
|
0.43 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
$ |
8,612 |
|
|
$ |
8,712 |
|
|
$ |
8,738 |
|
|
$ |
8,690 |
|
|
$ |
34,752 |
|
|
Interest
expense
|
|
|
3,101 |
|
|
|
3,161 |
|
|
|
3,148 |
|
|
|
3,046 |
|
|
|
12,456 |
|
|
Net interest
income
|
|
|
5,511 |
|
|
|
5,551 |
|
|
|
5,590 |
|
|
|
5,644 |
|
|
|
22,296 |
|
|
Provision for loan
losses
|
|
|
36 |
|
|
|
(164 |
) |
|
|
25 |
|
|
|
25 |
|
|
|
(78 |
) |
|
Net overhead
|
|
|
2,902 |
|
|
|
3,022 |
|
|
|
2,847 |
|
|
|
3,014 |
|
|
|
11,785 |
|
|
Income before income
taxes
|
|
|
2,573 |
|
|
|
2,693 |
|
|
|
2,718 |
|
|
|
2,605 |
|
|
|
10,589 |
|
|
Net income
|
|
|
1,786 |
|
|
|
1,790 |
|
|
|
1,807 |
|
|
|
1,736 |
|
|
|
7,119 |
|
|
Basic net income per
share
|
|
|
0.34 |
|
|
|
0.34 |
|
|
|
0.35 |
|
|
|
0.33 |
|
|
|
1.36 |
|
|
Diluted net income per
share
|
|
|
0.34 |
|
|
|
0.34 |
|
|
|
0.34 |
|
|
|
0.33 |
|
|
|
1.35 |
|
|
Dividends paid per
share
|
|
|
0.10 |
|
|
|
0.10 |
|
|
|
0.10 |
|
|
|
0.10 |
|
|
|
0.40 |
|
Summary
A financial institution's primary
sources of revenue are generated by its earning assets, while its major expenses
are produced by the funding of these assets with interest bearing liabilities.
Effective management of these sources and uses of funds is essential in
attaining a financial institution's optimal profitability while maintaining a
minimum amount of interest rate risk and credit risk. Information on
rate-related sources and uses of funds for each of the three years in the period
ended December 31, 2008, is provided in the table below.
|
AVERAGE
CONSOLIDATED BALANCE SHEETS AND NET INTEREST INCOME
ANALYSIS
|
|
|
(Dollars
in thousands)
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
|
Average
Balance
|
|
|
Interest
|
|
|
Yield/
Rate
(2)
|
|
|
Average
Balance
|
|
|
Interest
|
|
|
Yield/
Rate
(2)
|
|
|
Average
Balance
|
|
|
Interest
|
|
|
Yield/
Rate
(2)
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
earning assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury and federal
agency
securities
|
|
$ |
102,758 |
|
|
$ |
4,457 |
|
|
|
4.34 |
% |
|
$ |
82,177 |
|
|
$ |
3,496 |
|
|
|
4.25 |
% |
|
$ |
95,705 |
|
|
$ |
3,398 |
|
|
|
3.55 |
% |
|
States and municipal
obligations
(1)
|
|
|
6,098 |
|
|
|
320 |
|
|
|
5.25 |
|
|
|
4,067 |
|
|
|
241 |
|
|
|
5.93 |
|
|
|
2,342 |
|
|
|
138 |
|
|
|
5.89 |
|
|
Mortgage backed
securities
|
|
|
53,069 |
|
|
|
2,517 |
|
|
|
4.74 |
|
|
|
37,017 |
|
|
|
1,799 |
|
|
|
4.86 |
|
|
|
33,953 |
|
|
|
1,564 |
|
|
|
4.61 |
|
|
Other
securities
|
|
|
3,723 |
|
|
|
180 |
|
|
|
4.83 |
|
|
|
3,307 |
|
|
|
212 |
|
|
|
6.41 |
|
|
|
3,179 |
|
|
|
182 |
|
|
|
5.73 |
|
|
Total investment
securities
|
|
|
165,648 |
|
|
|
7,474 |
|
|
|
4.51 |
|
|
|
126,568 |
|
|
|
5,748 |
|
|
|
4.54 |
|
|
|
135,179 |
|
|
|
5,282 |
|
|
|
3.91 |
|
|
Federal funds
sold
|
|
|
37,885 |
|
|
|
748 |
|
|
|
1.97 |
|
|
|
36,088 |
|
|
|
1,829 |
|
|
|
5.07 |
|
|
|
24,365 |
|
|
|
1,215 |
|
|
|
4.99 |
|
|
Interest-bearing deposits
with
banks
|
|
|
1,614 |
|
|
|
39 |
|
|
|
2.42 |
|
|
|
1,273 |
|
|
|
56 |
|
|
|
4.40 |
|
|
|
486 |
|
|
|
24 |
|
|
|
4.94 |
|
|
Loans, net of unearned
income
(3)(4)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
207,939 |
|
|
|
14,044 |
|
|
|
6.75 |
|
|
|
169,217 |
|
|
|
13,591 |
|
|
|
8.03 |
|
|
|
161,898 |
|
|
|
12,424 |
|
|
|
7.67 |
|
|
Real estate
mortgage
|
|
|
155,324 |
|
|
|
11,074 |
|
|
|
7.13 |
|
|
|
129,072 |
|
|
|
9,474 |
|
|
|
7.34 |
|
|
|
129,944 |
|
|
|
9,271 |
|
|
|
7.13 |
|
|
Installment
|
|
|
53,802 |
|
|
|
4,626 |
|
|
|
8.60 |
|
|
|
46,399 |
|
|
|
4,244 |
|
|
|
9.15 |
|
|
|
46,494 |
|
|
|
4,334 |
|
|
|
9.32 |
|
|
Total loans
|
|
|
417,065 |
|
|
|
29,744 |
|
|
|
7.13 |
|
|
|
344,688 |
|
|
|
27,309 |
|
|
|
7.92 |
|
|
|
338,336 |
|
|
|
26,029 |
|
|
|
7.69 |
|
|
Total interest earning
assets
|
|
|
622,212 |
|
|
|
38,005 |
|
|
|
6.11 |
|
|
|
508,617 |
|
|
|
34,942 |
|
|
|
6.87 |
|
|
|
498,366 |
|
|
|
32,550 |
|
|
|
6.53 |
|
|
Allowance
for loan losses
|
|
|
(8,020 |
) |
|
|
|
|
|
|
|
|
|
|
(6,615 |
) |
|
|
|
|
|
|
|
|
|
|
(7,465 |
) |
|
|
|
|
|
|
|
|
|
Cash
and due from banks
|
|
|
17,025 |
|
|
|
|
|
|
|
|
|
|
|
13,853 |
|
|
|
|
|
|
|
|
|
|
|
13,824 |
|
|
|
|
|
|
|
|
|
|
Premises
and equipment
|
|
|
9,759 |
|
|
|
|
|
|
|
|
|
|
|
6,378 |
|
|
|
|
|
|
|
|
|
|
|
7,055 |
|
|
|
|
|
|
|
|
|
|
Other
assets
|
|
|
31,802 |
|
|
|
|
|
|
|
|
|
|
|
22,653 |
|
|
|
|
|
|
|
|
|
|
|
23,688 |
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$ |
672,778 |
|
|
|
|
|
|
|
|
|
|
$ |
544,886 |
|
|
|
|
|
|
|
|
|
|
$ |
535,468 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
and Equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
bearing liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOW and money
market
|
|
$ |
136,878 |
|
|
|
1,136 |
|
|
|
0.83 |
% |
|
$ |
119,849 |
|
|
|
1,780 |
|
|
|
1.49 |
% |
|
$ |
129,080 |
|
|
|
1,766 |
|
|
|
1.37 |
% |
|
Savings
deposits
|
|
|
66,978 |
|
|
|
381 |
|
|
|
0.57 |
|
|
|
53,000 |
|
|
|
384 |
|
|
|
0.72 |
|
|
|
52,295 |
|
|
|
321 |
|
|
|
0.61 |
|
|
Certificates of deposit and
other
time deposits
|
|
|
254,802 |
|
|
|
9,159 |
|
|
|
3.59 |
|
|
|
202,183 |
|
|
|
8,855 |
|
|
|
4.38 |
|
|
|
188,044 |
|
|
|
6,896 |
|
|
|
3.67 |
|
|
Total interest bearing
deposits
|
|
|
458,658 |
|
|
|
10,676 |
|
|
|
2.33 |
|
|
|
375,032 |
|
|
|
11,019 |
|
|
|
2.94 |
|
|
|
369,419 |
|
|
|
8,983 |
|
|
|
2.43 |
|
|
Short-term
borrowings
|
|
|
17,325 |
|
|
|
251 |
|
|
|
1.45 |
|
|
|
13,200 |
|
|
|
321 |
|
|
|
2.43 |
|
|
|
9,591 |
|
|
|
234 |
|
|
|
2.44 |
|
|
Other
borrowings
|
|
|
12,658 |
|
|
|
590 |
|
|
|
4.66 |
|
|
|
10,047 |
|
|
|
769 |
|
|
|
7.65 |
|
|
|
7,765 |
|
|
|
574 |
|
|
|
7.39 |
|
|
FHLB advances
|
|
|
4,723 |
|
|
|
292 |
|
|
|
6.18 |
|
|
|
5,363 |
|
|
|
347 |
|
|
|
6.47 |
|
|
|
7,815 |
|
|
|
453 |
|
|
|
5.80 |
|
|
Debentures
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
7,887 |
|
|
|
760 |
|
|
|
9.64 |
|
|
Total interest-bearing
liabilities
|
|
|
493,364 |
|
|
|
11,809 |
|
|
|
2.39 |
% |
|
|
403,642 |
|
|
|
12,456 |
|
|
|
3.09 |
% |
|
|
402,477 |
|
|
|
11,004 |
|
|
|
2.73 |
% |
|
Non-interest
bearing deposits
|
|
|
94,155 |
|
|
|
|
|
|
|
|
|
|
|
74,522 |
|
|
|
|
|
|
|
|
|
|
|
72,781 |
|
|
|
|
|
|
|
|
|
|
Other
liabilities
|
|
|
4,903 |
|
|
|
|
|
|
|
|
|
|
|
2,743 |
|
|
|
|
|
|
|
|
|
|
|
2,721 |
|
|
|
|
|
|
|
|
|
|
Shareholders’
equity
|
|
|
80,356 |
|
|
|
|
|
|
|
|
|
|
|
63,979 |
|
|
|
|
|
|
|
|
|
|
|
57,489 |
|
|
|
|
|
|
|
|
|
|
Total liabilities and
equity
|
|
$ |
672,778 |
|
|
|
|
|
|
|
|
|
|
$ |
544,886 |
|
|
|
|
|
|
|
|
|
|
$ |
535,468 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
interest earnings (1)
|
|
|
|
|
|
$ |
26,196 |
|
|
|
|
|
|
|
|
|
|
$ |
22,486 |
|
|
|
|
|
|
|
|
|
|
$ |
21,546 |
|
|
|
|
|
|
Net
interest spread (1)
|
|
|
|
|
|
|
|
|
|
|
3.72 |
% |
|
|
|
|
|
|
|
|
|
|
3.78 |
% |
|
|
|
|
|
|
|
|
|
|
3.80 |
% |
|
Net
interest margin (1)
|
|
|
|
|
|
|
|
|
|
|
4.21 |
% |
|
|
|
|
|
|
|
|
|
|
4.42 |
% |
|
|
|
|
|
|
|
|
|
|
4.32 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) Taxable
– equivalent yields are calculated assuming a 34% federal income tax
rate
(2) Yields
are calculated on historical cost except for yields on marketable equity
securities that are calculated used fair value
(3) Includes
loan fees, immaterial in amount, in both interest income and the
calculation of yield on loans
(4) Includes
loans on non-accrual status
|
|
In 2008, average earning assets
increased by 22.3% or $113.6 million from 2007, following a 2.1% or $10.3
million increase in 2007 from 2006. Average interest bearing
liabilities, the primary source of funds supporting the earning assets,
increased by 22.2% or $89.7 million in 2008 from 2007, which follows a 0.3% or
$1.2 million increase in 2007 over 2006. The 2008 increase in average
earning assets was primarily the result of adding Traders and Citizens First to
the organization at the end of April, 2008. The acquisition of these
two banks added $102.3 million in average earnings assets at $80.6 in average
interest bearing liabilities in 2008. Excluding the acquisitions of
Traders and Citizens First, the remaining $11.3 million increase in average
earning assets in 2008 was primarily the result of a $7.5 million increase in
average total loans and an $11.1 million increase in average total investment
securities outstanding. These increases more than offset the $6.9
million decrease in average federal funds sold, as surplus liquid funds were
used to fund loans and invest in higher yielding investment
securities. Excluding the acquisitions of Traders and Citizens First,
average interest bearing liabilities increased by $9.1 million or 2.3% in 2008
from 2007. This increase in average interest bearing liabilities in
2008 was the result of a $3.0 million increase in average interest bearing
deposits, a $4.1 million increase in average short-term borrowings, primarily
customer repurchase agreements, and a $2.0 million increase in other long-term
borrowings and Federal Home Loan Bank (FHLB) advances. Furthermore,
the increase in average interest bearing deposits was complemented by a $19.6 or
26.3% increase in average non-interest bearing deposits, $17.3 million from the
acquisitions of Traders and Citizens First and $2.3 million from internal
growth.
In 2007, average earning assets
increased by 2.1% or $10.3 million from 2006, following a 0.3% or $1.8 million
decline in 2006 from 2005. Average interest bearing liabilities, the
primary source of funds supporting the earning assets, increased by only 0.3% or
$1.2 million in 2007 from 2006, which follows a 3.1% or $12.8 million decline in
2006 from 2005. The 2007 increase in average earnings assets was
primarily the result of a $6.4 million increase in average total loans and an
$11.7 million increase in average federal funds sold
outstanding. These increases more than offset the $8.6 million
decline in average total investment securities, as investment funds were used to
fund loans and surplus investable proceeds were held in shorter-term but higher
yielding federal funds sold during the early part of 2007. The slight
increase in 2007 average interest bearing liabilities was the result of a $5.6
million increase in average interest bearing deposits and a $3.6 million
increase in average short-term borrowings, primarily customer repurchase
agreements, nearly completely offset by an $8.1 million decrease in average high
cost debt and Federal Home Loan Bank (FHLB) advances. Furthermore,
the increase in average interest bearing deposits was complemented by a $1.7
million increase in average non-interest bearing deposits. Additional
information on each of the components of earning assets and interest bearing
liabilities is contained in the following sections of this report.
Premier's loan portfolio is its largest
and highest yielding component of average earning assets, totaling 67.0% of
average earning assets during 2008. Average loans increased in 2008
by $72.4 million or 21.0% over 2007 following a $6.4 million or 1.9% increase in
2007 over 2006. The 2008 increase is largely attributable to the
acquisitions of Traders and Citizens First, which added $64.9 million in average
total loans during the year. Excluding the acquisitions, average
total loans increased by $7.5 million or 2.2% in 2008 from 2007. This
increase is the result of growth in Premier’s Ohio and West Virginia loan
markets. In 2008, Premier realized a $1.9 million or 3.7% increase in
average outstanding loans in its Ohio markets, and a $5.8 million or 3.5%
increase in its West Virginia market (excluding Traders and Citizens
First). These increases more than offset the slight $212,000 or 0.2%
decrease in average total loans in Premier’s Kentucky markets. The
2008 increases follow a $2.6 million or 5.3% increase in average outstanding
loans in its Ohio markets, a $1.9 million or 1.5% increase in its Kentucky
markets and a $1.9 million or 1.1% increase in its West Virginia markets in
2007.
Total loans at December 31, 2008
increased by $120.5 million or 34.8% from the total at December 31,
2007. This increase follows a $2.8 million or 0.8% increase in 2007
from total loans at December 31, 2006. The significant increase in
2008 is primarily due to the $102.8 million of period end loans from the
acquisitions of Traders and Citizens First. The remaining $17.8
million or 5.1% increase in 2008 was the result of significant increase in loan
demand in Premier’s markets. The modest increase in 2007 is primarily
the result of sluggish loan demand coupled with a higher level of loan
payoffs.
Loans secured by real estate, which in
total constituted approximately 74% of Premier's loan portfolio at December 31,
2007, consist of a diverse portfolio of predominantly single family residential
loans and loans for commercial purposes where real estate is part of the
collateral, not the primary source of repayment. Residential real estate
mortgage loans generally do not exceed 80% of the value of the real property
securing the loan at the time of origination. The residential 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. Premier also originates mortgage loans to be sold in the
secondary market and recognizes non-interest income upon the sale of those
mortgages in the form of commissions and servicing release
fees. Premier has not engaged in the solicitation of so-called
“sub-prime” or “interest only” mortgages. Premier uses an experienced
staff underwriter to ensure the completeness of the borrowers’ loan application
and documentation and to ensure that the loans meet the standards required by
prospective loan purchasers. Additional information regarding the
volume of mortgage loans originated and sold is contained in Premier’s
consolidated statements of cash flows presented elsewhere in this annual
report.
Commercial
loans are generally made to small-to-medium size businesses located within a
defined market area and typically are secured by business assets and guarantees
of the principal owners. Additional risks of loss are associated with commercial
lending, such as the potential for adverse changes in economic conditions or the
borrowers' ability to successfully execute their business plan. Consumer loans
generally are made to individuals living in Premier's defined market area who
are known to the local bank's staff. Consumer loans are generally
made for terms of up to seven years on a secured or unsecured basis; however
longer terms may be approved in certain circumstances and for revolving credit
lines. While consumer loans generally provide Premier with increased interest
income, consumer loans may involve a greater risk of default.
The
following table presents a five year comparison of loans by type. With the
exception of those categories included in the comparison, there are no loan
concentrations which exceed 10% of total loans. Additionally, Premier's loan
portfolio contains no loans to foreign borrowers nor does it have a material
volume of highly leveraged transaction lending.
|
LOAN
SUMMARY
|
|
|
(Dollars
in thousands)
|
|
|
|
|
As
of December 31,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Summary
of Loans by Type
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial, secured by real
estate
|
|
$ |
133,742 |
|
28.7 |
% |
|
$ |
100,278 |
|
28.9 |
% |
|
$ |
101,786 |
|
29.6 |
% |
|
$ |
85,989 |
|
26.2 |
% |
|
$ |
101,567 |
|
31.3 |
% |
|
Commercial,
other
|
|
|
61,655 |
|
13.2 |
|
|
|
40,438 |
|
11.7 |
|
|
|
43,981 |
|
12.8 |
|
|
|
49,362 |
|
15.0 |
|
|
|
40,923 |
|
12.6 |
|
|
Real estate
construction
|
|
|
26,182 |
|
5.6 |
|
|
|
24,035 |
|
6.9 |
|
|
|
11,303 |
|
3.3 |
|
|
|
11,070 |
|
3.4 |
|
|
|
5,906 |
|
1.8 |
|
|
Real estate
mortgage
|
|
|
185,536 |
|
39.7 |
|
|
|
133,776 |
|
38.6 |
|
|
|
138,795 |
|
40.4 |
|
|
|
134,570 |
|
40.9 |
|
|
|
128,243 |
|
39.5 |
|
|
Agricultural
|
|
|
2,446 |
|
0.5 |
|
|
|
1,845 |
|
0.5 |
|
|
|
1,930 |
|
0.5 |
|
|
|
1,670 |
|
0.5 |
|
|
|
2,380 |
|
0.7 |
|
|
Consumer
|
|
|
51,793 |
|
11.1 |
|
|
|
41,893 |
|
12.1 |
|
|
|
42,188 |
|
12.3 |
|
|
|
42,096 |
|
12.8 |
|
|
|
44,470 |
|
13.7 |
|
|
Other
|
|
|
5,757 |
|
1.2 |
|
|
|
4,305 |
|
1.3 |
|
|
|
3,814 |
|
1.1 |
|
|
|
3,960 |
|
1.2 |
|
|
|
1,438 |
|
0.4 |
|
|
Total loans
|
|
$ |
467,111 |
|
100.0 |
% |
|
$ |
346,570 |
|
100.0 |
% |
|
$ |
343,797 |
|
100.0 |
% |
|
$ |
328,717 |
|
100.0 |
% |
|
$ |
324,927 |
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-performing
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-accrual
loans
|
|
$ |
6,943 |
|
|
|
|
$ |
3,157 |
|
|
|
|
$ |
4,698 |
|
|
|
|
$ |
3,751 |
|
|
|
|
$ |
6,847 |
|
|
|
|
Accruing loans which are
contractually past due 90 days or more
|
|
|
625 |
|
|
|
|
|
987 |
|
|
|
|
|
992 |
|
|
|
|
|
853 |
|
|
|
|
|
739 |
|
|
|
|
Restructured
loans
|
|
|
1,203 |
|
|
|
|
|
1,489 |
|
|
|
|
|
1,268 |
|
|
|
|
|
1,540 |
|
|
|
|
|
238 |
|
|
|
|
Total non-performing and restructured
loans
|
|
|
8,771 |
|
|
|
|
|
5,633 |
|
|
|
|
|
6,958 |
|
|
|
|
|
6,144 |
|
|
|
|
|
7,824 |
|
|
|
|
Other
real estate acquired through foreclosures
|
|
|
1,056 |
|
|
|
|
|
174 |
|
|
|
|
|
495 |
|
|
|
|
|
2,049 |
|
|
|
|
|
2,247 |
|
|
|
|
Total non-performing and restructured
loans and other real estate
|
|
$ |
9,827 |
|
|
|
|
$ |
5,807 |
|
|
|
|
$ |
7,453 |
|
|
|
|
$ |
8,193 |
|
|
|
|
$ |
10,071 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-performing
and restructured loans as a % of total loans
|
|
|
1.88 |
% |
|
|
|
|
1.63 |
% |
|
|
|
|
2.02 |
% |
|
|
|
|
1.87 |
% |
|
|
|
|
2.41 |
% |
|
|
|
Non-performing
and restructured loans and other real estate as a % of total
assets
|
|
|
1.36 |
% |
|
|
|
|
1.06 |
% |
|
|
|
|
1.39 |
% |
|
|
|
|
1.55 |
% |
|
|
|
|
1.87 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allocation
of Allowance for Loan Losses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial,
other
|
|
$ |
1,197 |
|
14.9 |
% |
|
$ |
689 |
|
13.5 |
% |
|
$ |
839 |
|
14.4 |
% |
|
$ |
1,071 |
|
16.7 |
% |
|
$ |
1,734 |
|
13.7 |
% |
|
Real estate,
construction
|
|
|
283 |
|
5.6 |
|
|
|
237 |
|
6.9 |
|
|
|
117 |
|
3.3 |
|
|
|
134 |
|
3.4 |
|
|
|
83 |
|
1.8 |
|
|
Real estate,
other
|
|
|
4,564 |
|
68.4 |
|
|
|
3,092 |
|
67.5 |
|
|
|
3,395 |
|
70.0 |
|
|
|
3,810 |
|
67.1 |
|
|
|
4,276 |
|
70.8 |
|
|
Consumer
installment
|
|
|
345 |
|
11.1 |
|
|
|
259 |
|
12.1 |
|
|
|
521 |
|
12.3 |
|
|
|
772 |
|
12.8 |
|
|
|
1,255 |
|
13.7 |
|
|
Unallocated
|
|
|
2,155 |
|
|
|
|
|
2,220 |
|
|
|
|
|
1,789 |
|
|
|
|
|
2,105 |
|
|
|
|
|
2,036 |
|
|
|
|
Total
|
|
$ |
8,544 |
|
100.0 |
% |
|
$ |
6,497 |
|
100.0 |
% |
|
$ |
6,661 |
|
100.0 |
% |
|
$ |
7,892 |
|
100.0 |
% |
|
$ |
9,384 |
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In addition to the loans presented in
the loan summary table, Premier also offers certain off-balance sheet products
such as letters of credit, revolving credit agreements, and other loan
commitments. These products are offered under the same credit standards as the
loan portfolio and are included in the risk-based capital ratios used by the
Federal Reserve to evaluate capital adequacy. Additional information on
off-balance sheet commitments is contained in Note 18 to the Consolidated
Financial Statements.
Total non-performing assets, which
consist of past-due loans on which interest is not being accrued ("non accrual
loans"), foreclosed properties in the process of liquidation ("OREO"), loans
with restructured terms to enable a delinquent borrower to repay and accruing
loans past due 90 days or more, were $9.8 million or 1.36% of total assets at
year-end 2008. These amounts compare to $5.8 million of total
non-performing assets or 1.06% of total assets at year-end 2007, the lowest
levels over the past five years.
The
increase from end of 2007 is largely due to the $4.2 million of non-performing
assets at December 31, 2008 at the acquired Traders Bank. In addition
to the non-accrual loans at Traders Bank, in 2008 a $0.7 million increase in
non-accrual loans was largely offset by decreases in loans past due 90 days or
more and restructured loans. While the ratio of non-performing assets
to total assets at the end of 2008 was higher than the end of 2007, it was still
lower than any of the previous three years presented in the table
above. The decrease in total non-performing assets in 2007 was
largely due a $1.5 million decrease in non-accrual loans and a continued
decrease in OREO property. These decreases offset the increase in
restructured loans, while loans past due 90 days or more and still accruing
remained virtually unchanged. The decrease in 2006 was largely due to
the $1.6 million reduction in OREO property, which was partially offset by an
increase in non-accrual loans. As the collection or rehabilitation of
previously delinquent loans and charge-offs of loans determined to be
uncollectible continued in 2006, these efforts were offset by other loans newly
placed on non-accrual status. In 2007, the level of non-accrual loans
declined primarily as a result of loan payoffs as well as partial or complete
loan charge-offs. Management believes the estimated potential losses
related to delinquent loans to be adequately provided for in the allowance for
loan losses. These non-performing assets were included in the
analyses that supported the recording of provisions for loan loss during the
second, third and fourth quarters of 2008. As management's efforts to
collect the non-performing assets at Traders Bank continue, matured loans are
only renewed using Premier's strengthened credit policies. Otherwise, loans may
be placed on non-accrual status and foreclosure proceedings begun to obtain and
liquidate any collateral securing the past due or matured loans. As previously
demonstrated by Premier’s history, management is committed to continuing to
reduce its level of non-performing assets and maintaining strong underwriting
standards to help maintain a lower level of non-performing assets in the future.
This effort is revealed in the decline in non-performing assets from the end of
2004 to the end of 2007, primarily related to the sale of OREO properties and
the decline in non-accrual loans and loans 90+ days past due. Premier's efforts
at its other affiliate banks in 2003 and 2004 were masked by the high level of
non-performing assets at Farmers Deposit Bank, which alone totaled $12.5 million
at December 31, 2003. At December 31, 2004, the non-performing assets at Farmers
Deposit Bank had declined to $6.8 million, leaving $3.3 million of total
non-performing assets at the other Premier Banks combined. By
December 31, 2008, total non-performing assets at Farmers Deposit Bank had
declined to $1.1 million.
The Loan Summary table presents five
years of comparative non-performing asset information. Other than these loans
and the impaired loans discussed in Note 4 to the Consolidated Financial
Statements, Premier does not have a significant volume of loans where management
has serious doubts about the borrowers’ ability to comply with the present
repayment terms of the loan.
It is Premier's policy to place loans
that are past due over 90 days on non-accrual status, unless the loans are
adequately secured and in the process of collection. Premier had no commitments
to provide additional funds on non-accrual loans at December 31, 2008. For real
estate loans, upon repossession, the balance of the loan is transferred to
"Other Real Estate Owned" (OREO) and carried at the lower of the outstanding
loan balance or the fair value of the property based on current appraisals and
other current market trends, less estimated disposal costs. If a writedown of
the OREO property is necessary at the time of foreclosure, the amount is charged
against the allowance for loan losses. A periodic review of the recorded
property value is performed in conjunction with normal loan reviews, and if
market conditions indicate that the recorded value exceeds the fair market value
less estimated disposal costs, additional writedowns of the property value are
charged directly to operations.
During 2008 Premier recorded $20,000 of
writedowns and losses on the disposition of OREO properties, net of gains, while
in 2007 Premier recognized a $20,000 net profit on the disposition of OREO
properties, net of writedowns. During 2006 Premier realized $105,000
net profit on the disposition of OREO properties. Although loans may
be classified as non-performing, some continue to pay interest irregularly or at
less than originally contracted terms. During 2008, approximately $56,000 of
interest was recognized on non-accrual and restructured loans, while
approximately $324,000 would have been recognized in accordance with their
original terms.
The allowance for loan losses is
maintained to absorb probable incurred losses associated with lending
activities. Actual losses are charged against the allowance ("charge-offs")
while collections on loans previously charged off ("recoveries") are added back
to the allowance. Since actual losses within a given loan portfolio are
difficult to predict, management uses a significant amount of estimation and
judgment to determine the adequacy of the allowance for loan losses. Factors
considered in determining the adequacy of the allowance include an individual
assessment of risk on certain loans and total creditor relationships, historical
charge-off experience, the type of loan, levels of non-performing and past due
loans, and an evaluation of current economic conditions. Loans are evaluated for
credit risk and assigned a risk grade. Premier's risk grading criteria are based
upon Federal Reserve guidelines and definitions. In evaluating the adequacy of
the allowance for loan losses, loans that are assigned passing grades are
grouped together and multiplied by historical charge-off percentages to
determine an estimated amount of potential losses and a corresponding amount of
allowance. Loans that are assigned marginally passing grades are grouped
together and allocated slightly higher percentages to determine the estimated
amount of potential losses due to the identification of increased risk(s). Loans
that are assigned a grade of "substandard" or "doubtful" are usually determined
to be impaired.
A loan is categorized and reported as
impaired when it is probable that the borrower will be unable to pay all of the
principal and interest amounts according to the contractual terms of the loan
agreement. In determining whether a loan is impaired, management considers such
factors as past payment history, recent economic events, current and projected
financial conditions and other relevant information that is available at the
time. Impairment is evaluated in total for smaller-balance loans of similar
nature such as residential mortgage, consumer, and credit card loans, and on an
individual basis for other loans. If a loan is deemed to be impaired, an
evaluation of the amount of estimated loss is performed assessing the present
value of estimated future cashflows using the loan's existing rate or assessing
the fair and realizable value of the loan collateral if repayment is expected
solely from the collateral. The estimation of loss is assigned to the impaired
loan and is used in determining the adequacy of the allowance for loan losses.
For impaired loans, this estimation of loss is reevaluated quarterly and, if
necessary, adjusted based upon the current known facts and circumstances related
to the loan and the borrower. Additional information on Premier's impaired loans
is contained in Note 4 to the Consolidated Financial Statements. The sum of the
calculations and estimations of the risk of loss in a given loan portfolio is
compared to the recorded balance of the allowance for loan losses. If the total
allowance is deemed to be inadequate a charge to earnings is recorded to
increase the allowance. In 2008, Premier recorded $147,000 of additional
provisions for loan losses. Conversely, should an evaluation of the
allowance result in a lower estimate of the risk of loss in the loan portfolio
and the allowance is deemed to be more than adequate, a reversal of previous
charges to earnings ("a negative provision") may be warranted in the current
period. Events that may lead to negative provisions include greater than
anticipated recoveries, a reduction in the historical loss ratios, securing more
collateral on an impaired loan during the collection process, or receiving
payment in full on an impaired loan. All of these events occurred in
varying degrees during 2007 and 2006 and resulted in $78,000 of negative
provisions during 2007 and $1,161,000 of negative provisions during
2006.
At December 31, 2008, the allowance for
loan losses was $8.5 million, or 1.83% of total year-end loans. While
the total allowance increased by $2.0 million from the $6.5 million allowance at
the end of 2007, the ratio to total loans decreased slightly from the 1.87% of
total year-end loans at December 31, 2007. The increase in the
allowance in 2008 is largely due to the $2.3 million allowance for loan losses
acquired via the purchase of Traders and Citizens First Banks. The
slight decrease in the ratio to total year-end loans is largely the result of
lower estimates of required allocations of the allowance to impaired loans due
to a combination of collections of previously impaired loans and improved loan
to collateral values on existing impaired loans. The allowance for
loan losses was also reduced by the $400,000 of net charge-offs in 2008 which
was only partially offset by the $147,000 of additional provisions for loan
losses during the year. The decrease in the allowance in 2007
compared to 2006 was primarily the result of the $78,000 of negative provisions
for loan losses coupled with $86,000 of net charge-offs recorded during the
year. The decrease in the allowance in 2006 was primarily the result
of the $1.2 million of negative provisions for loan losses recorded during the
year, as charge-offs in 2006 were nearly offset by recoveries. In
management's opinion, the allowance for loan losses is adequate to absorb the
current estimated risk of loss in the existing loan portfolio. The summary of
the allowance for loan losses allocated by loan type is presented in the Loan
Summary Table above.
The following table provides a detailed
history of the allowance for loan losses, illustrating charge-offs and
recoveries by loan type, and the annual provision for loan losses over the past
five years. In 2008, due to the deterioration in the national economy and its
impact on the local economy in its markets, Premier experienced increases in
past due loans and non-performing assets. As such, management’s
estimate of the current estimated risk of loss in the existing loan portfolio
began to increase in the second quarter of 2008 and provisions for loan losses
were charged to earnings in the second, third and fourth quarters which more
than offset a negative provision for losses in the first quarter. In
2007, a negative provision was recorded during the second quarter which exceeded
the quarterly provisions recorded during the other three quarters of the
year. In 2006, negative provisions were recorded in each of the four
quarters of the year. The negative provisions were recorded primarily
as result of realized collections of previously impaired loans whereby estimated
losses were not realized as previously estimated and assigned to the
loan. In addition, Premier has been successful in recovering some of
its previously charged-off loans. These positive events as well as
the ongoing reduction in Premier’s historical loss ratios resulted in a lower
estimate of the risk of loss in the loan portfolio and, thus, negative
provisions were warranted. The negative provisions for loan losses
totaled $78,000 in 2007 and $1,161,000 in 2006. Future provisions to
the allowance for loan losses, positive or negative, will depend on future
improvement or deterioration in estimated credit risk in the loan portfolio as
well as whether additional payments are received on loans having significant
credit risk. Premier continually evaluates the adequacy of its
allowance for loan losses, and changes in the provision are based on the
estimated probable incurred losses in the loan portfolio.
|
SUMMARY
OF LOAN LOSS EXPERIENCE
|
|
|
(Dollars
in thousands)
|
|
|
|
|
For
the Year Ended December 31
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Allowance
for loan losses, beginning
of period
|
|
$ |
6,497 |
|
|
$ |
6,661 |
|
|
$ |
7,892 |
|
|
$ |
9,384 |
|
|
$ |
14,300 |
|
|
Amounts
charged off:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial, financial and
agricultural loans
|
|
|
547 |
|
|
|
83 |
|
|
|
154 |
|
|
|
736 |
|
|
|
1,520 |
|
|
Real estate construction
loans
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
5 |
|
|
Real estate loans –
other
|
|
|
369 |
|
|
|
239 |
|
|
|
863 |
|
|
|
549 |
|
|
|
2,413 |
|
|
Consumer installment
loans
|
|
|
316 |
|
|
|
436 |
|
|
|
393 |
|
|
|
930 |
|
|
|
3,054 |
|
|
Total
charge-offs
|
|
|
1,232 |
|
|
|
758 |
|
|
|
1,410 |
|
|
|
2,215 |
|
|
|
6,992 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recoveries
on amounts previously charged-off:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial, financial and
agricultural loans
|
|
|
113 |
|
|
|
66 |
|
|
|
266 |
|
|
|
91 |
|
|
|
264 |
|
|
Real estate construction
loans
|
|
|
33 |
|
|
|
14 |
|
|
|
8 |
|
|
|
1 |
|
|
|
1 |
|
|
Real estate loans –
other
|
|
|
459 |
|
|
|
302 |
|
|
|
340 |
|
|
|
84 |
|
|
|
87 |
|
|
Consumer installment
loans
|
|
|
227 |
|
|
|
290 |
|
|
|
726 |
|
|
|
543 |
|
|
|
698 |
|
|
Total
recoveries
|
|
|
832 |
|
|
|
672 |
|
|
|
1,340 |
|
|
|
719 |
|
|
|
1,050 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
charge-offs
|
|
|
400 |
|
|
|
86 |
|
|
|
70 |
|
|
|
1,496 |
|
|
|
5,942 |
|
|
Balance
of acquired subsidiaries
|
|
|
2,300 |
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
Provision
for loan losses
|
|
|
147 |
|
|
|
(78 |
) |
|
|
(1,161 |
) |
|
|
4 |
|
|
|
1,026 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance
for loan losses, end of period
|
|
$ |
8,544 |
|
|
$ |
6,497 |
|
|
$ |
6,661 |
|
|
$ |
7,892 |
|
|
$ |
9,384 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
total loans
|
|
$ |
417,065 |
|
|
$ |
344,688 |
|
|
$ |
338,336 |
|
|
$ |
326,615 |
|
|
$ |
325,610 |
|
|
Total
loans at year-end
|
|
|
467,111 |
|
|
|
346,570 |
|
|
|
343,797 |
|
|
|
328,717 |
|
|
|
324,927 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As
a percent of average loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
charge-offs
|
|
|
0.10 |
% |
|
|
0.02 |
% |
|
|
0.02 |
% |
|
|
0.46 |
% |
|
|
1.82 |
% |
|
Provision for loan
losses
|
|
|
0.04 |
% |
|
|
(0.02 |
)% |
|
|
(0.34 |
)% |
|
|
0.00 |
% |
|
|
0.32 |
% |
|
Allowance for loan
losses
|
|
|
2.05 |
% |
|
|
1.88 |
% |
|
|
1.97 |
% |
|
|
2.42 |
% |
|
|
2.88 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As
a percent of total loans at year-end
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan
losses
|
|
|
1.83 |
% |
|
|
1.87 |
% |
|
|
1.94 |
% |
|
|
2.40 |
% |
|
|
2.89 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As
a multiple of net charge-offs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan
losses
|
|
|
21.36 |
X |
|
|
75.55 |
X |
|
|
95.16 |
X |
|
|
5.28 |
X |
|
|
1.58 |
X |
|
Income before tax and provision for
loan losses
|
|
|
28.66 |
X |
|
|
122.22 |
X |
|
|
123.19 |
X |
|
|
4.32 |
X |
|
|
0.65 |
X |
| |
|
Net charge-offs in 2008 totaled
$400,000, as $1,232,000 of loans charged–off were partially offset by $832,000
of recoveries of loans previously charged-off. Net charge-offs in
2007 totaled $86,000, as $758,000 of loans charged-off were nearly offset by
$672,000 of recoveries of loans previously charged-off. Net
charge-offs in 2006 decreased to just $70,000, as $1,340,000 of recoveries
nearly offset $1,410,000 of charge-offs recorded during the year. In
2008, Farmers Deposit Bank recorded $42,000 of net recoveries and provided over
32% of Premier’s total recoveries for 2008. In 2007, Farmers Deposit
Bank recorded $296,000 of net recoveries and provided over 70% of Premier’s
total recoveries for 2007. In 2006, Farmers Deposit Bank recorded
$249,000 of net recoveries and provided nearly 70% of Premier’s total recoveries
for 2006. These recoveries are primarily the result of continued
collection efforts of the significant number and amount of loans charged-off at
Farmers Deposit Bank in 2003 through 2005. Approximately $641,000, or
43% of the 2005 net charge-offs and $4.8 million, or 81% of the Premier’s 2004
net charge-offs were at Farmers Deposit Bank. The level of future
recoveries is likely to decrease as the level of past charge-offs has
decreased.
In 2008, total charge-offs increased
for the first time in the previous four years, but still constituted a
relatively low 0.10% of average total loans. In 2008, charge-offs on
commercial and real estate loans increased while consumer loan charge-offs
decreased to their lowest dollar volume in five years. In 2007,
charge-offs on consumer installment loans increased by $43,000 or
10.9%. However, the increase was more than offset by decreases in the
level of charge-offs of commercial loans and loans secured by real
estate. While total charge-offs decreased in 2006, the level of loans
secured by real estate that were charged-off increased by $314,000 or 57.2% as
collection efforts on a few real estate secured borrowers came to their ultimate
conclusion. Although management believes it has identified the
significant remaining credit risk in the loan portfolio, additional charge-offs
may be recorded in the coming months due to the level of non-performing loans
and the resolution of collection efforts on those loans. Premier continues to
make a significant effort to reduce its past due and non-performing loans by
reviewing loan files, using the courts to bring borrowers current with the terms
of their loan agreements and/or the foreclosure and sale of OREO
properties. As in the past, when these plans are executed, Premier
may experience increases in non-performing loans and non-performing assets.
Furthermore, any resulting increases in loans placed on non-accrual status will
have a negative impact on future loan interest income. Also, as these
plans are executed, other loans may be identified that would necessitate
additional charge-offs and potentially additional provisions for loan
losses. Premier continues to monitor and evaluate the impact that
national housing market price declines may have on its local markets and
collateral valuations as management evaluates the adequacy of the allowance for
loan losses. While some price deterioration is expected, it is not
currently anticipated that Premier’s markets will be impacted as severely as
other areas of the country due to the historically modest increases in real
estate values in Premier’s markets. These factors are
considered in determining the adequacy of the allowance for loan losses, which
at December 31, 2008 was 1.83% of total loans outstanding and 97% of
non-performing loans.
The following table presents the
maturity distribution and interest sensitivity of selected loan categories at
December 31, 2008. Maturities are based upon contractual terms.
|
LOAN
MATURITIES and INTEREST SENSITIVITY
|
|
|
December
31, 2008
|
|
|
(Dollars
in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Projected
Maturities*
|
|
|
|
|
|
|
|
One
Year or Less
|
|
|
One
Through Five Years
|
|
|
Over
Five
Years
|
|
|
Total
|
|
|
Commercial,
secured by real estate
|
|
$ |
39,238 |
|
|
$ |
67,862 |
|
|
$ |
26,642 |
|
|
$ |
133,742 |
|
|
Commercial,
other
|
|
|
35,927 |
|
|
|
21,247 |
|
|
|
4,481 |
|
|
|
61,655 |
|
|
Real
estate construction
|
|
|
16,925 |
|
|
|
5,099 |
|
|
|
4,158 |
|
|
|
26,182 |
|
|
Agricultural
|
|
|
1,148 |
|
|
|
1,237 |
|
|
|
61 |
|
|
|
2,446 |
|
|
Total
|
|
$ |
93,238 |
|
|
$ |
95,445 |
|
|
$ |
35,342 |
|
|
$ |
224,025 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed
rate loans
|
|
$ |
21,362 |
|
|
$ |
28,371 |
|
|
$ |
7,392 |
|
|
$ |
57,125 |
|
|
Floating
rate loans
|
|
|
71,876 |
|
|
|
67,074 |
|
|
|
27,950 |
|
|
|
166,900 |
|
|
Total
|
|
$ |
93,238 |
|
|
$ |
95,445 |
|
|
$ |
35,342 |
|
|
$ |
224,025 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed
rate loans projected to mature after one year
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
35,763 |
|
|
Floating
rate loans projected to mature after one year
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
95,024 |
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
130,187 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(*)
Based on scheduled or approximate repayments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment securities averaged $165.6
million in 2008, up $39.1 million or 30.9% from the $126.6 million averaged in
2007. This increase follows an $8.6 million or 6.4% decrease in 2007
from the $135.2 million averaged in 2006. The significant increase in
2008 is largely due to the $27.9 million of average investment securities from
the acquisitions of Traders and Citizens First. The remaining $11.1
million or 8.8% increase is largely due the declining interest rate environment
during the 2008 year. As rates began falling, investable funds held
in federal funds sold were used to purchase high quality investment securities
to achieve a greater yield over a longer period of maturity. Yields
on federal funds sold rise and fall in direct correlation with interest rate
changes made by the Federal Reserve Board in establishing national economic
policy. Investment security yields are based on a number of pricing
factors including but not limited to coupon rate, time to maturity and issuer
credit quality. Generally, in 2008 investment security yields were
higher than the yield that could be earned on federal funds
sold. During 2007, as investments matured, not all funds were
reinvested in the investment portfolio. Some funds were used to
satisfy loan growth, deposit withdrawals and debt
payments. Furthermore, in contrast to 2008, during the first half of
2007, bond reinvestment yields were not as attractive as the yield on highly
liquid federal funds sold. Consequently, funds from maturing
investments were less likely to be reinvested in bonds. At December
31, 2008, the amount of investments totaled $175.7 million, up $51.5 million or
41.5% from December 31, 2007. The significant increase in investments
is largely due to the $39.0 million of investments at December 31, 2008 from the
acquisitions of Traders and Citizens First, leaving $12.5 million of the
increase from internal growth. This increase follows a $2.9 million
increase in 2007 from the balance at December 31, 2006. As the
Federal Reserve Board began lowering the federal funds rate in the latter
portion of 2007 and continued to do so at various times throughout 2008, bond
yields have become more attractive than the yield on federal funds
sold. Thus, to optimize interest income, Premier has begun increasing
the amount of funds it has invested in high-quality debt
securities.
The following table presents the
carrying values of investment securities.
|
FAIR
VALUE OF SECURITIES AVAILABLE FOR SALE
|
|
|
(Dollars
in thousands)
|
|
|
|
|
As
of December 31
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
Treasury securities
|
|
$ |
1,544 |
|
|
$ |
5,574 |
|
|
$ |
6,401 |
|
|
U.S.
Agency securities
|
|
|
97,105 |
|
|
|
74,859 |
|
|
|
76,911 |
|
|
States
and political subdivisions
|
|
|
7,130 |
|
|
|
3,816 |
|
|
|
3,413 |
|
|
Mortgage-backed
securities from government sponsored entities
|
|
|
69,962 |
|
|
|
39,993 |
|
|
|
34,617 |
|
|
Corporate
securities
|
|
|
- |
|
|
|
- |
|
|
|
25 |
|
|
Total
securities
|
|
$ |
175,741 |
|
|
$ |
124,242 |
|
|
$ |
121,367 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As sources of funds (deposits, federal
funds purchased, and repurchase agreements with corporate customers) fluctuate,
excess funds are initially invested in federal funds sold and other short-term
investments. Based upon analyses of asset/liability repricing, interest rate
forecasts, and liquidity requirements, funds are periodically reinvested in
high-quality debt securities, which typically mature over a longer period of
time. At the time of purchase, management determines whether the securities will
be classified as trading, available-for-sale, or held-to-maturity. At December
31, 2008 all of Premier's investments were classified as available-for-sale and
carried on the books at fair value.
As shown in the following Securities
Maturity and Yield Analysis table, the average maturity period of the securities
available-for-sale at December 31, 2008 was 4 years 10 months. The table uses a
weighted average life method to report the average maturity of mortgage-backed
securities, which includes the estimated effect of monthly payments and
prepayments. The average maturity of the investment portfolio is managed at a
level to maintain a proper matching with interest rate risk guidelines. Premier
does not have any securities classified as trading or held-to-maturity and it
has no plans to establish such classifications at the present time. Other
information regarding investment securities may be found in the following table
and in Note 3 to the Consolidated Financial Statements.
|
SECURITIES
MATURITY AND YIELD ANALYSIS
|
|
|
December
31, 2008
|
|
|
(Dollars
in thousands)
|
|
|
|
|
Market
Value
|
|
|
Average
Maturity (yrs/mos)
|
|
|
Taxable
Equivalent Yield*
|
|
|
U.S.
Treasury securities
|
|
|
|
|
|
|
|
|
|
|
Within one
year
|
|
$ |
509 |
|
|
|
|
|
|
4.68 |
% |
|
After one but within five
years
|
|
|
1,035 |
|
|
|
|
|
|
3.97 |
|
|
Total U.S. Treasury
Securities
|
|
|
1,544 |
|
|
|
0/11
|
|
|
|
4.20 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
Government Agencies securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Within one
year
|
|
|
18,002 |
|
|
|
|
|
|
|
4.13 |
|
|
After one but within five
years
|
|
|
43,336 |
|
|
|
|
|
|
|
4.21 |
|
|
After five but within ten
years
|
|
|
35,767 |
|
|
|
|
|
|
|
4.33 |
|
|
Total U.S. Government Agencies
securities
|
|
$ |
97,105 |
|
|
|
4/3
|
|
|
|
4.24 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
States
and political subdivisions
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Within one
year
|
|
|
146 |
|
|
|
|
|
|
|
5.82 |
|
|
After one but within five
years
|
|
|
2,325 |
|
|
|
|
|
|
|
4.18 |
|
|
After five but within ten
years
|
|
|
4,659 |
|
|
|
|
|
|
|
5.26 |
|
|
Total states and political
subdivisions securities
|
|
$ |
7,130 |
|
|
|
5/11
|
|
|
|
4.92 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed
securities**
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Within one
year
|
|
|
269 |
|
|
|
|
|
|
|
4.50 |
|
|
After one but within five
years
|
|
|
55,519 |
|
|
|
|
|
|
|
4.64 |
|
|
After five but within ten
years
|
|
|
7,600 |
|
|
|
|
|
|
|
5.15 |
|
|
Over ten years
|
|
|
6,574 |
|
|
|
|
|
|
|
5.29 |
|
|
Total mortgage-backed
securities
|
|
$ |
69,962 |
|
|
|
5/8
|
|
|
|
4.76 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
securities available-for-sale
|
|
$ |
175,741 |
|
|
|
4/10
|
|
|
|
4.47 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(*) Fully
tax-equivalent using the rate of 34%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(**) Maturities
for mortgage-backed securities are based on weighted average
life
|
|
|
|
|
|
|
|
|
|
|
|
|
Premier’s average investment in federal
funds sold and other short-term investments increased by 4.9% in
2008. This follows a 48.1% increase in 2007. Averaging
$37.9 million in 2008, federal funds sold and other short-term investments
increased $1.8 million from the $36.1 million averaged in 2007. The
increase in average federal funds sold in 2008 was largely due to the
acquisitions of Traders and Citizens First which added $8.6 million in average
federal funds sold during the year. This increase more than offset
the $6.9 million or 19.0% decrease in average federal funds sold of Premier’s
other affiliate banks. This decrease was the result of using some of
the available federal funds sold to fund loans and purchase higher yielding
investment securities.
As
shown in the Consolidated Average Balance Sheets and Net Interest Income
Analysis above, on average, the yield on federal funds sold dropped to 1.97% in
2008, significantly less than the 4.51% average yield on total investment
securities in 2008. In contrast, during the latter part of 2006 and
first part of 2007, bond yields were not as attractive as the yield on highly
liquid federal funds sold and funds from maturing investments were less likely
to be invested in bonds. Thus, average federal funds sold increased
by $11.8 million or 48.1% in 2007 from the $24.4 million averaged in
2006. As shown in the Consolidated Average Balance Sheets and Net
Interest Income Analysis above, on average, federal funds sold yielded 5.07% in
2007 and 4.99% in 2006. In each year, this yield was higher than the
yield earned on U.S. Treasury and Agency securities as well as mortgage backed
securities. Fluctuations in federal funds sold and other short-term
investments reflect management's goal to maximize asset yields while maintaining
proper asset/liability structure, as discussed in greater detail above and in
other sections of this report.
In response to the Federal Reserve
policy to reduce market interest rates by lowering the target federal funds
rate, in 2008 Premier began cutting its rates paid on its interest bearing
deposits. This change follows a three-year period during which
Premier was raising the rates paid on its interest bearing deposits in response
to the increase in market interest rates. As a result, the average
rate paid on interest bearing liabilities decreased to 2.39% in 2007, down from
the 3.09% paid in 2007, and the 2.73% paid in 2006. The 70 basis
point decrease in 2008 was primarily the result of a 79 basis point decrease in
the average rate paid on certificates of deposit and other time deposits, which
made up 51.6% of the total average interest bearing liabilities in
2008. Other rate decreases on deposits in 2008 include a 66 basis
point decrease on NOW and money market accounts and a 15 basis point decrease in
savings deposits. Likewise, in 2008 Premier decreased the rate paid
on its short-term borrowings, primarily repurchase agreements with deposit
customers, 98 basis points. Also in response to the decrease in
market interest rates initiated by the Federal Reserve, the rate paid on
Premier’s long-term borrowings decreased as a result of the floating rate terms
of the borrowings. In 2008, the average rate paid on other borrowings
decreased 299 basis points to 4.66%. Premier’s FHLB advances are
fixed rate debt and thus decreased only as a result of payments and maturities
of higher rate advances.
The
36 basis point increase in the average rate paid on deposits in 2007 was
primarily the result of a 71 basis point increase in the average rate paid on
certificates of deposit and other time deposits, which made up 50.1% of the
total average interest bearing liabilities in 2007. During 2007,
Premier was able to offset some of the increase in rates paid on deposits by
long-term debt refinancing actions taken in 2006 and prepaying approximately
$2.1 million of amortizing FHLB advances in the first quarter of
2007. Also in 2006, Premier refinanced the remaining $15.5 million of
its 9.75% Trust Preferred Securities with variable rate bank borrowings as
discussed in more detail below. Due to alternative sources of
investment and an ever increasing sophistication of customers in funds
management techniques to maximize return on their money, competition for funds
has become more intense. Other financial institutions that compete in
local markets with Premier that have a need to increase liquidity offer special
above market rate deposit products to attract additional
funds. Premier's banks periodically offer special rate products to
retain their deposit base or attract additional deposits.
Premier’s deposits, on average,
increased by $103.3 million or 23.0% in 2008 following a $7.4 million or 1.7%
increase in 2007 from 2006 average deposits. The increase in 2008
average deposits was largely due to the $97.9 million of average deposits from
the acquisitions of Traders and Citizens First. The remaining $5.3
million or 1.2% increase in average deposits was largely due to a $2.3 million
or 3.1% increase in non-interest bearing deposits, a $1.5 million or 2.9%
increase in savings deposits and a $1.2 million increase in money market and
other interest bearing transaction oriented deposits. The increase in
2007 average deposits was from a combination of a $14.1 million increase in
average certificates of deposit and other time deposits plus a $1.7 million
increase in non-interest bearing deposits. These increases more than
offset a $9.2 million decrease in average NOW and money market
deposits. During 2007, as rates paid on certificates of deposits
increased, particularly short-term certificates of deposit, customers
reallocated their funds from lower yielding transactional deposits such as NOW
and money market accounts to these short-term certificates of
deposit.
In
addition, some public fund and tax-exempt organization deposits were
reestablished as repurchase agreements in 2006 and again in
2008. Average repurchase agreements increased by $4.0
million or 30.5% in 2008 following a $3.6 million or 37.5% increase in 2007 over
2006 average repurchase agreements. Also, in both 2007 and 2008, the
growth in deposits has been dampened by a decline in deposits at Farmers Deposit
Bank. In 2007, average deposits at Farmers Deposit Bank declined by
$3.3 million, while in Premier’s other markets, deposits, on average, increased
by $10.8 million or 2.8%. In 2008, average deposits at Farmers
Deposit Bank declined by $1.7 million, while in Premier other markets, deposits,
on average, increased by $7.0 million or 1.8% in 2008, excluding the
acquisitions of Traders and Citizens First. Farmers Deposit Bank faces stiff
competition for funds from local competitors who have paid higher than market
rates for the certificates of deposit.
In 2008, average non-interest bearing
deposits continued to increase, surpassing 2007 average non-interest bearing
deposits by $19.6 million or 26.3%. The increase in 2008 includes the
$17.3 million of average non-interest bearing deposits from the acquisitions of
Traders and Citizens First. Excluding these deposits, average
non-interest bearing deposits still increased by $2.3 million or 3.1% in
2008. This follows a $1.7 million or 2.4% increase in average
non-interest bearing deposits in 2007 when compared to 2006. Since no
interest is paid on these deposits, an increase in non-interest bearing deposits
helps to increase Premier's net interest margin and its profitability.
Non-interest bearing deposits are more susceptible to withdrawal and therefore
may provide challenges to maintaining adequate liquidity. (See the additional
discussion on liquidity below.) However, Premier’s approach to
community banking and friendly customer service has resulted in increases in
average non-interest bearing deposits in each of the past six
years.
In 2008, average interest bearing
deposits increased by $83.6 million or 22.3%. The increase was
largely due to the $80.6 million of average interest bearing deposits from the
acquisitions of Traders and Citizens First. The remaining $3.0
million increase in average interest-bearing deposits in 2008 was primarily from
an increase in average savings deposits and average money market and other
transaction oriented deposits. Due to the significant decrease in
rates paid on certificates of deposit during 2008, customers are taking a
“wait-and-see” approach and are not willing to commit their funds for a
longer-term low-yielding certificate of deposit. Instead the trend
has been to keep their deposits readily accessible by placing the funds in
savings accounts and transaction oriented interest-bearing
accounts. In 2007, average interest bearing deposits increased by
$5.6 million or 1.5%. The increase was primarily from an increase in
average certificates of deposit and other time deposits as customers sought out
higher yielding short-term “special “rates. While offering some
“special” certificate of deposit rates, in 2007 Premier continued to focus on
building its base of customer relationships by offering more convenient
electronic banking products to its non-interest bearing deposit
customers. Premier did realize a shift in its interest bearing
deposits from lower cost interest bearing transaction accounts to certificates
of deposit as customers moved their funds to take advantage of the rising
interest rates paid on these certificates. The result was a 51 basis
point increase in the average rate paid on interest bearing deposits in
2007. However, Premier also realized an increase in its average
savings deposits in 2007.
The following table provides
information on the maturities of time deposits of $100,000 or more at December
31, 2008.
|
MATURITY
OF TIME DEPOSITS $100,000 OR MORE
|
|
|
December
31, 2008
|
|
|
(Dollars
in thousands)
|
|
|
|
|
|
|
|
Maturing
3 months or less
|
|
$ |
12,493 |
|
|
Maturing
over 3 months
|
|
|
13,109 |
|
|
Maturing
over 6 months
|
|
|
21,739 |
|
|
Maturing
over 12 months
|
|
|
23,804 |
|
|
Total
|
|
$ |
71,145 |
|
|
|
|
|
|
|
Other funding sources for Premier
include short and long-term borrowings. Premier's short-term borrowings
primarily consist of securities sold under agreements to repurchase with
commercial, public entity and tax exempt organization
customers. These are short-term non-FDIC insured deposit-like
products that are secured by the pledging of investment securities in Premier’s
investment portfolio or by purchasing insurance through the Federal Home Loan
Bank (FHLB). Also included in short-term borrowings are federal funds
purchased from other banks and overnight borrowings from the FHLB or the Federal
Reserve Bank (FRB) discount window. These short-term borrowings fluctuate
depending on near term funding needs and as part of Premier's management of its
asset/liability mix. In 2008, short-term borrowings averaged $17.3
million, up $4.1 million or 31.3% from the average in 2007. In 2007,
short-term borrowings averaged $13.2 million, up $3.6 million or 37.6% from the
average in 2006. The increase in both years is largely due to an
increase in repurchase agreements which were newly offered by two of Premier’s
subsidiary banks late in 2006.
Long-term borrowings consist of FHLB
borrowings by Premier's banks, other borrowings by the parent holding company
and, prior to 2007, debt issued in the form of subordinated debentures to an
unconsolidated trust subsidiary. FHLB advances, on average, declined
by 11.9% or $640,000 in 2008, following a 31.4% or $2.5 million decrease in
2007. The decrease in 2008 is largely due to regularly scheduled
principal payments plus additional penalty free prepayments as permitted to be
made by the FHLB. The decrease in 2007 was the result of a first
quarter 2007 prepayment of $2.1 million of amortizing FHLB advances in an effort
to reduce Premier’s cost of funds rate. These advances had
contractual fixed rates between 5.30% and 5.60%, averaging 5.46%. In
addition to the prepayment in the first quarter of 2007, Premier made all of its
scheduled principal payments in 2007 and took advantage of penalty free
prepayment opportunities as they became available. Premier uses fixed rate FHLB
advances from time-to-time to fund certain residential and commercial loans as
well to maximize investment opportunities as part of its interest rate risk
management. At December 31, 2008, FHLB advances totaled $7.6 million
which included $3.0 million borrowed on an overnight basis. The
remaining $4.6 million of amortizing FHLB advances had repayment schedules from
seventeen to forty-two months with $4.0 million maturing in 2010.
In
2006, Premier refinanced the remaining $15.7 million of its 9.75% Junior
Subordinated Deferrable Interest Debentures ("Subordinated Debentures") that
were due in 2027. The refinancing was accomplished using two separate bank
borrowings at the parent company and $2.2 million of cash held by the parent in
its subsidiary banks. On January 31, 2006, Premier borrowed $7.0
million from First Guaranty Bank in Hammond, Louisiana under a promissory note
bearing interest floating daily at the “Wall Street Journal” prime rate and
requiring monthly principal payments of $50,000 until maturity on September 28,
2017. The note is secured by a pledge of Premier’s 100% interest in
Boone County Bank. The proceeds of this note were used to redeem $7.0
million of the Subordinated Debentures as of January 31, 2006. On
April 30, 2008, Premier refinanced the remaining $2.6 million of this note and
borrowed an additional $9.0 million which was used to fund the cash needed to
purchase Traders. The $11.6 million note, dated April 30, 2008, bears
interest floating daily at the “Wall Street Journal” prime rate (the “Index”)
minus 1.00% and requiring 59 monthly principal payments of $50,000 and one final
payment of $8.6 million due at maturity on April 30, 2013. If the
Index is between 5.00% and 6.00%, the interest on the note will be
5.00%. If the Index falls below 5.00%, then the interest on the note
will float with the Index. The note is secured by a pledge of
Premier’s 100% interest in Boone County Bank (a wholly owned subsidiary) under a
Commercial Pledge Agreement dated April 30, 2008.
On
November 10, 2006, Premier borrowed $6.5 million from The Bankers’ Bank of
Kentucky, Inc. of Frankfort, Kentucky (“Bankers’ Bank”) under a term note
bearing interest floating daily at the “Wall Street Journal” prime rate minus
1.00% and requiring 83 monthly principal and interest payments of $100,000 and a
final payment of any balance due at maturity on November 9, 2013. The note is
secured by a pledge of Premier’s 100% interest in Citizens Deposit Bank and
Trust, Inc. and Premier’s 100% interest in Farmers-Deposit Bank, Eminence,
Kentucky. On December 22, 2008, Premier executed and delivered to
Bankers’ Bank a modification agreement whereby the interest rate would not fall
below 3.00% or exceed 6.00% for the remaining term of the Note. The
current interest rate on the Term Note is 3.00%. In 2008 and 2007,
Premier made all scheduled principal and interest payments on both notes as well
as limited prepayments on the borrowing from First Guaranty Bank. For
more information on other borrowings, see Note 10 to the Consolidated Financial
Statements.
|
PAYMENTS
DUE ON CONTRACTUAL OBLIGATIONS
|
|
|
December
31, 2008
|
|
|
(Dollars
in thousands)
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
Less
than one year
|
|
|
1-3
years
|
|
|
3-5
years
|
|
|
More
than five years
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
Home Loan Bank advances
|
|
$ |
7,607 |
|
|
$ |
3,178 |
|
|
$ |
4,372 |
|
|
$ |
57 |
|
|
$ |
0 |
|
|
Other
borrowed funds
|
|
|
15,560 |
|
|
|
1,674 |
|
|
|
3,447 |
|
|
|
10,439 |
|
|
|
0 |
|
|
Operating
lease obligations
|
|
|
608 |
|
|
|
157 |
|
|
|
252 |
|
|
|
181 |
|
|
|
18 |
|
|
Data
and item processing contracts*
|
|
|
4,587 |
|
|
|
2,527 |
|
|
|
2,060 |
|
|
|
0 |
|
|
|
0 |
|
|
Total
|
|
$ |
28,362 |
|
|
$ |
7,536 |
|
|
$ |
10,131 |
|
|
$ |
10,677 |
|
|
$ |
18 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
*
Data and item processing contractual obligations are estimated using the
average billing for the last three months of 2008.
|
|
On December 20, 2004, Premier entered
into a 63 month contract with Fiserv Solutions, Inc. (Fiserv) whereby Fiserv
will provide data processing and item processing services to Premier.
Conversions by Traders and Citizens First bank to Fiserv systems began in early
August, 2008 and were completed by the end of October, 2008. Based upon the
average billings of the last three months of 2008 the estimated payments to
Fiserv for these services will be approximately $1,845,000 per year beginning in
2009. Actual results may vary depending upon the number and type of accounts
actually processed and future customer activity.
Asset/liability management is a means
of maximizing net interest income while minimizing interest rate risk by
planning and controlling the mix and maturities of interest related assets and
liabilities. Premier has established an Asset/Liability Management Committee
(ALCO) for the purpose of monitoring and managing interest rate risk and to
evaluate investment portfolio strategies. Interest rate risk is the earnings
variation that could occur due to changes in market interest rates. The Board of
Directors has established policies to monitor and limit exposure to interest
rate risk. Premier monitors its interest rate risk through the use of an
earnings simulation model developed by an independent third party to analyze net
interest income sensitivity.
The earnings simulation model uses
assumptions, maturity patterns, and reinvestment rates provided by Premier and
forecasts the effect of instantaneous movements in interest rates of both 100
(1.00%) and 200 (2.00%) basis points, but never below zero. The most
recent earnings simulation model projects that net interest income would
increase by approximately 1.3% over the projected stable rate net interest
income if interest rates rise by 100 basis points over the next year.
Conversely, the simulation projects an approximate 1.7% decrease in net interest
income if interest rates fall by 100 basis points over the next year. Within the
same time frame, but assuming a 200 basis point movement in interest rates, the
simulation projects that net interest income would increase by 2.5% over the
projected stable rate net interest income in a rising rate scenario and would
decrease by 3.8% in a falling rate scenario. Under both the 100 and 200 basis
point simulations, the percentage changes in net interest income are within
Premier's ALCO guidelines.
The model simulation calculations of
present value have certain acceptable shortcomings. The discount rates and
prepayment assumptions 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
the model simulations, and therefore, actual results could likely result in
different discount rates, prepayment experiences and present values. The
discount rates used for deposits and borrowings are based upon available
alternative types and sources of funds which may not necessarily be indicative
of the present value of Premier's deposits and borrowings. Premier's deposits
have customer relationship advantages that are difficult to simulate. A higher
or lower interest rate environment will most likely result in different
investment and borrowing strategies by Premier which would be designed to
further mitigate any negative effects on the value of, and the net interest
earnings generated on Premier's net assets.
The following table presents summary
information about the simulation model's interest rate risk measures and
results.
|
|
|
Year-end
2008
|
|
|
Year-end
2007
|
|
|
ALCO
Guidelines
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Projected
1-year net interest income
|
|
|
|
|
|
|
|
|
|
|
-100 bp change vs.
base rate
|
|
|
-1.7 |
% |
|
|
-2.6 |
% |
|
|
5 |
% |
|
+100 bp change vs.
base rate
|
|
|
1.3 |
% |
|
|
2.5 |
% |
|
|
5 |
% |
|
Projected
1-year net interest income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-200 bp change vs.
base rate
|
|
|
-3.8 |
% |
|
|
-2.7 |
% |
|
|
10 |
% |
|
+200 bp change vs.
base rate
|
|
|
2.5 |
% |
|
|
4.7 |
% |
|
|
10 |
% |
Liquidity is the ability to satisfy
demands for deposit withdrawals, lending commitments, and other corporate needs.
Premier's liquidity is based on the stable nature of consumer core deposits held
by the banking subsidiaries. Likewise, additional liquidity is available from
holdings of investment securities and short-term investments which can be
readily converted into cash. Furthermore, Premier's banks continue to have the
ability to attract short-term sources of funds such as federal funds and
repurchase agreements.
Premier generated $10.0 million of cash
from operations in 2008, which compares to $9.4 million in 2007 and $5.4 million
in 2006. The increase in 2008 was primarily the result of an increase
in net income and a higher amount of cash received from the sale of mortgage
loans in the secondary market. The increase in 2007 over 2006 was
primarily the result of an increase in net income over 2006, a decrease in
negative provisions for loan losses and cash received from the sale of mortgage
loans in the secondary market. Total cash from operations along with
proceeds from the sale and maturity of securities and the repayment of loans
were used to purchase securities, satisfy deposit withdrawals, fund new loans
and reduce outstanding debt during those years. In 2006, $5.9 million of cash
was used in investing activities primarily to fund loan growth and in 2007 $5.0
million of cash was used in investing activities, again to fund loan growth but
to also increase federal funds sold. In 2008, $15.0 million of cash
was used in investing activities funding loan growth, purchasing participation
loans from other banks, and purchasing the Traders and Citizens First
subsidiaries. In addition to the $10.0 million of cash from
operations in 2008, Premier generated $4.7 million in additional cash from
financing activities, primarily due to new long-term borrowings and increases in
short-term borrowings and repurchase agreements with customers. Some
of these funds were used to satisfy deposit withdrawals, pay dividends to
shareholders and make principal payments on borrowings. In addition
to the $9.4 million of cash from operations in 2007, Premier generated $1.0
million in additional cash from financing activities, primarily due to the
increase in deposits. The increase in cash from deposits was also
used to satisfy the repayment of FHLB advances and other borrowed funds as well
as pay dividends to shareholders. In 2006, Premier generated $1.4
million in additional cash from financing activities, primarily due to increases
in deposits and repurchase agreements. Details on the sources and
uses of cash can be found in the Consolidated Statements of Cash Flows in the
Consolidated Financial Statements.
At December 31, 2008, the parent
company had nearly $4.7 million in cash held with its subsidiary
banks. This balance along with cash dividends expected to be received
from its subsidiaries is sufficient to cover the operating costs of the parent,
service its existing other debt and pay dividends to common
shareholders. During 2008, the parent company generated $6.3 million
of cash from operations and borrowed an additional $11.6 million. The
proceeds were used fund the $14.3 million of cash paid to acquire Citizens First
Bank and Traders Bankshares, Inc., to make $4.1 million in principal payments on
its outstanding debt and pay $2.6 million in dividends to
shareholders. During 2007, the parent company generated $10.3 million
of cash from operations and used $5.9 million to make principal payments on its
outstanding debt and pay dividends to shareholders. During 2006, the
parent company generated $5.1 million of cash from operations and used $4.9
million to redeem a portion of the Trust Preferred Securities outstanding, make
principal payments on its outstanding other debt and pay dividends to
shareholders. Also during 2006, the parent company borrowed $13.5
million which was used to redeem the remainder of the Trust Preferred
Securities. Additional information on parent company cash flows and
financial statements is contained in Note 21 to the Consolidated Financial
Statements.
Premier’s consolidated average
equity-to-asset ratio increased to 11.94% during 2008, up from 11.74% in 2007
and 10.74% in 2006. The ratios for all three years are considered
adequate for a company of Premier’s size. The increase in 2008 was
largely due to the increase in equity from net income plus a general rise in the
market value of investments from a $73,000 net unrealized gain at the end of
2007 to a $1.5 million net unrealized gain at the end of 2008. Also
supporting the average equity-to-assets ratio were the combined acquisitions of
Traders and Citizens First. The equity issued to acquire these two
banks amounted to 11.62% of the total assets acquired which approximates
Premier’s average equity-to-asset ratio over the past three
years. The increase in 2007 was largely due to the increase in net
income, plus a general rise in the market value of investments from an overall
unrealized loss at the end of 2006 to an overall unrealized gain at the end of
2007. The Federal Reserve's risk-based capital guidelines and
leverage ratio measure the capital adequacy of banking institutions. The
risk-based capital guidelines weight balance sheet assets and off-balance sheet
commitments by prescribed factors relative to credit risk, thus eliminating
disincentives for holding low risk assets and requiring more capital for holding
higher risk assets. At year-end 2008, Premier’s risk adjusted
capital-to-assets ratio was 15.3% compared to 17.3% at December 31,
2007. Both of these ratios are well above the minimum level of 8.0%
prescribed for bank holding companies of Premier’s size. The leverage
ratio is a measure of total tangible equity to total tangible assets, net of any
related deferred taxes as permitted. Premier’s leverage ratio at
December 31, 2008 was 8.7% compared to 9.8% at December 31,
2007. Both of these ratios are above the 4.0% to 5.0% ratios
recommended by the Federal Reserve. The decrease in the 2008 ratios
was primarily the result of the acquisitions of Traders and Citizens
First. Their individual bank risk adjusted capital-to-asset ratios
and leverage ratios were lower than Premier’s prior to the acquisition
date. Furthermore, the goodwill and core deposit intangible assets
recorded as part of the purchases, net of any related deferred taxes as
permitted, are subtracted from Premier’s total capital to calculate the leverage
ratio. The increase in the 2007 ratios was primarily the result of
the net income recorded in 2007, partially offset by dividends paid to
shareholders. The net result was an increase in shareholders’
equity. Premier's capital ratios are the direct result of
management's desire to maintain a strong capital position. Additional
information on Premier's capital ratios and the capital ratios of its banks may
be found in Note 20 to the Consolidated Financial Statements.
The primary source of funds for
dividends paid by Premier is the dividends received from its subsidiary banks.
Banking regulations limit the amount of dividends that may be paid without prior
approval of the regulatory agencies. Under these regulations, the amount of
dividends that may be paid without prior approval in any calendar year is
limited to the current year's net profits, as defined, combined with the
retained net profits of the preceding two years, subject to regulatory capital
requirements and additional restrictions more fully described in Note 20 to the
Consolidated Financial Statements. During 2009, Premier's banks could, without
prior approval, declare and pay to Premier dividends of approximately $2.4
million plus any 2009 net profits retained through the date of declaration by
Ohio River Bank, Boone County Bank, First Central Bank, Traders Bank, Inc. and
Citizens Deposit Bank. In 2007, Farmers Deposit Bank requested and
received approval from its primary regulators to pay a $2.5 million dividend in
December 2007. This amount was substantially higher than the bank’s
prior two years of reported net income. As such, Farmers Deposit Bank
must continue to request approval for up to two years beyond December 31, 2007
to pay any future dividends to the parent company out of its current
earnings.
Additional information on the capital
position of Premier is included in the following table.
|
SELECTED
CAPITAL INFORMATION
|
|
|
(Dollars
in thousands)
|
|
|
|
|
As
of December 31
|
|
|
|
|
2008
|
|
|
2007
|
|
|
Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders’
Equity
|
|
$ |
89,422 |
|
|
$ |
67,389 |
|
|
$ |
22,033 |
|
|
Disallowed amounts of goodwill and
other intangibles
|
|
|
(26,805 |
) |
|
|
(15,816 |
) |
|
|
(10,989 |
) |
|
Other comprehensive loss related to
pension plan
|
|
|
87 |
|
|
|
0 |
|
|
|
87 |
|
|
Unrealized (gain) loss on securities
available for sale
|
|
|
(1,634 |
) |
|
|
(73 |
) |
|
|
(1,561 |
) |
|
Tier
I capital
|
|
$ |
61,070 |
|
|
$ |
51,500 |
|
|
$ |
9,570 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tier
II capital adjustments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowable amount of the allowance for
loan losses
|
|
|
5,486 |
|
|
|
4,038 |
|
|
|
|
|
|
Total
capital
|
|
$ |
66,556 |
|
|
$ |
55,538 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
risk-weighted assets
|
|
$ |
436,023 |
|
|
$ |
320,581 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ratios
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tier I capital to risk-weighted
assets
|
|
|
14.01 |
% |
|
|
16.06 |
% |
|
|
|
|
|
Total capital to risk-weighted
assets
|
|
|
15.26 |
% |
|
|
17.32 |
% |
|
|
|
|
|
Leverage at
year-end
|
|
|
8.69 |
% |
|
|
9.77 |
% |
|
|
|
|
Net
Interest Income
Net interest income, the amount by
which interest generated from earning assets exceeds the expense associated with
funding those assets, is Premier's most significant component of
earnings. Net interest income on a fully tax-equivalent basis was
$26.2 million in 2008, up 16.5% from the $22.5 million earned in 2007 which
follows a 4.4% increase in 2007 from 2006. When net interest income
is presented on a fully tax-equivalent basis, interest income from tax-exempt
earning assets is increased by the amount equivalent to the federal income taxes
which would have been paid if this income were taxable at the statutory federal
tax rate of 34% for companies of Premier's size.
The
increase in net interest income in 2008 is largely due to the $4.2 million of
fully tax-equivalent net interest income from the acquisitions of Traders and
Citizens First. The remaining Premier affiliate banks realized a
$513,000 or 2.3% decrease in net interest income in 2008. This
decrease in net interest income in 2008 is largely due to a decrease in interest
income from loans and federal funds sold partially offset by an increase in
interest income on investments. The decrease in interest income was
significantly offset, however, by decreases in interest expense on deposits,
short-term debt and long-term debt.
As shown in the Rate Volume Analysis
table below, increases in the volume of earning assets such as loans,
investments and federal funds sold primarily due to the acquisitions of Traders
and Citizens First increased Premier’s interest income by $6.5
million. This increase was offset by a $3.5 million decrease in
interest income on those earning assets largely due to the decline in yields
earned on the loan portfolio and federal fund sold. Also shown in the
table below, interest expense on deposits increased by $1.3 million in 2008 due
to a higher volume of NOW and money market deposit accounts plus certificates of
deposit. This increase in volume interest bearing deposits is largely
due to deposits from the acquisitions of Traders and Citizens
First. Interest expense in 2008 increased further still due to higher
average volumes of short-term borrowings and other borrowings. The
$1.8 million of additional interest expense in 2008 from the increase in the
volume of average interest bearing liabilities was more than offset by the $2.5
million decrease in interest expense due to decreases in the rates paid on
deposits, short-term borrowings and long-term borrowings. The
combined effect was to increase net interest income by $3,710,000 for the
year.
The increase in net interest income in
2007 is largely due to an increase in interest income from loans, investments
and federal funds sold partially offset by an increase in interest expense on
deposits. As shown in the Rate Volume Analysis table below, increases
in the yields on loans, investments, and other earnings assets increased
Premier’s interest income by $1.6 million in 2007. This increase was
complemented by a $494,000 increase in interest income due to the higher volume
of average loans outstanding and a $594,000 increase in interest income due to
the higher volume of average federal funds sold outstanding in
2007. Interest income was decreased by $301,000, however, due to a
lower volume of average investment securities outstanding. Also shown
in the table below, interest expense on deposits increased by $2.0 million, $1.5
million due to higher rates paid, primarily on certificates of deposit, and $0.5
million due to a higher volume of average certificates of
deposit. Also increasing interest expense was the higher average
volume of short-term and other borrowings. This interest expense
increase was more than offset, however, by the decrease in average FHLB
borrowings and the repayment of the trust preferred securities in late
2006.
|
RATE
VOLUME ANALYSIS OF CHANGES IN NET INTEREST INCOME
|
|
|
(Dollars
in thousands on a tax equivalent basis)
|
|
|
|
|
2008
vs 2007
|
|
|
2007
vs 2006
|
|
|
|
|
Increase
(decrease) due to change in
|
|
|
Increase
(decrease) due to change in
|
|
|
|
|
Volume
|
|
|
Rate
|
|
|
Net Change
|
|
|
Volume
|
|
|
Rate
|
|
|
Net Change
|
|
|
Interest
income*:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
|
|
$ |
4,643 |
|
|
$ |
(2,208 |
) |
|
$ |
2,435 |
|
|
$ |
494 |
|
|
$ |
786 |
|
|
$ |
1,280 |
|
|
Investment
securities
|
|
|
1,763 |
|
|
|
(37 |
) |
|
|
1,726 |
|
|
|
(301 |
) |
|
|
767 |
|
|
|
466 |
|
|
Federal funds
sold
|
|
|
96 |
|
|
|
(1,177 |
) |
|
|
(1,081 |
) |
|
|
594 |
|
|
|
20 |
|
|
|
614 |
|
|
Deposits with
banks
|
|
|
25 |
|
|
|
(42 |
) |
|
|
(17 |
) |
|
|
34 |
|
|
|
(2 |
) |
|
|
32 |
|
|
Total interest
income
|
|
$ |
6,527 |
|
|
$ |
(3,464 |
) |
|
$ |
3,063 |
|
|
$ |
821 |
|
|
$ |
1,571 |
|
|
$ |
2,392 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOW and money
market
|
|
$ |
306 |
|
|
$ |
(950 |
) |
|
$ |
(644 |
) |
|
$ |
(71 |
) |
|
$ |
85 |
|
|
$ |
14 |
|
|
Savings
|
|
|
(16 |
) |
|
|
13 |
|
|
|
(3 |
) |
|
|
4 |
|
|
|
59 |
|
|
|
63 |
|
|
Certificates of
deposit
|
|
|
977 |
|
|
|
(673 |
) |
|
|
304 |
|
|
|
547 |
|
|
|
1,412 |
|
|
|
1,959 |
|
|
Short-term
borrowings
|
|
|
238 |
|
|
|
(308 |
) |
|
|
(70 |
) |
|
|
88 |
|
|
|
(1 |
) |
|
|
87 |
|
|
Other
borrowings
|
|
|
355 |
|
|
|
(534 |
) |
|
|
(179 |
) |
|
|
174 |
|
|
|
21 |
|
|
|
195 |
|
|
FHLB
borrowings
|
|
|
(40 |
) |
|
|
(15 |
) |
|
|
(55 |
) |
|
|
(168 |
) |
|
|
62 |
|
|
|
(106 |
) |
|
Debt
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
(380 |
) |
|
|
(380 |
) |
|
|
(760 |
) |
|
Total interest
expense
|
|
$ |
1,820 |
|
|
$ |
(2,467 |
) |
|
$ |
(647 |
) |
|
$ |
193 |
|
|
$ |
1,259 |
|
|
$ |
1,452 |
|
|
Net
interest income*
|
|
$ |
4,707 |
|
|
$ |
(997 |
) |
|
$ |
3,710 |
|
|
$ |
628 |
|
|
$ |
312 |
|
|
$ |
940 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(*)
Fully taxable equivalent using the rate of 34%
Note
– Changes to rate/volume are allocated to both rate and volume on a
proportional dollar basis
|
|
Although net interest income dollars
increased in 2008, Premier’s net interest margin decreased as the yield on
earning assets decreased more than the decrease in rates paid on interest
bearing liabilities. In 2008, the yield earned on Premier’s loan
portfolio decreased 79 basis points to 7.13% while the yield on federal funds
sold decreased 310 basis points to 1.97%. In 2008, the yield earning
on the investment portfolio only decreased by 3 basis points to
4.51%. The net result on all earnings assets was to decrease the
yield 76 basis points to 6.11% in 2008, down from the 6.87% earned in 2007 and
the 6.53% earned in 2006. Similarly, in 2008 Premier decreased the
average rate paid on its deposits by 61 basis points as market deposit rates
fell during the year. The average rate paid on certificates of
deposit decreased the most at 79 basis points, while interest bearing
transaction accounts decreased on average by 66 basis points and savings
accounts decreased by 15 basis points. Just as deposit rates fell
during 2008, the rates Premier paid on its short- and long-term borrowings also
fell. Premier was able to lower the rates paid on its short-term
borrowings, primarily customer based repurchase agreements, by 98 basis points
to 1.45%. Due to declines in the “prime” lending rate during 2008,
the rate Premier paid on its long-term borrowings from other banks decreased 299
basis points to 4.66%. The overall result of decreasing rates paid on
deposits and rate decreases on short- and long-term borrowings was to decrease
the overall cost of funds by 70 basis points to 2.39%, down from 3.09% in 2007,
and 2.73% in 2006. As a result, Premier’s net interest spread
decreased by 6 basis points. However, due the larger volume of
Premier’s interest earning assets when compared to its volume of interest
bearing liabilities, the net interest margin decreased by 21 basis points to
4.21% in 2008, down from 4.42% in 2007, and 4.32% in 2006.
In contrast to 2008, as net interest
income dollars increased in 2007, Premier’s net interest margin also
increased. In 2007, the yield earned on investment securities
increased 63 basis points to 4.54% while the average yield on the loan portfolio
increased 23 basis points to 7.92%. The yield on federal funds sold
increased 8 basis points to 5.07%. The net result on all earning
assets was to increase the yield 34 basis points to 6.87% in 2007, up from the
6.53% earned in 2006 and the 5.90% earned in 2005. Similarly, in 2007
Premier increased the average rate paid on its deposits by 51 basis points to
remain competitive with local and national markets. The average rate
paid on certificates of deposit increased the most at 71 basis points, while
interest bearing transaction accounts increased on average by only 12 basis
points in 2007 and savings accounts by increased 11 basis
points. While the rates paid on Premier’s short-term borrowings
remained virtually unchanged at 2.43%, the rates paid on other borrowings
increased by 26 basis points to 7.65% and the rates paid on FHLB advances
increased by 67 basis points to 6.47%. The rates paid on other
borrowings increased as Premier refinanced its subordinated debt with floating
prime rate and below prime rate loans in 2006 resulting in significant interest
expense savings. The rates paid on FHLB advances increased as a
result of the prepayment of certain amortizing advances at one affiliate bank
while leaving higher rate fixed maturity advances at another
bank. The overall result of increasing rates paid on deposits and
rate decreases resulting from debt refinancing was to increase the overall cost
of funds by 36 basis points to 3.09%, up from 2.73% in 2006 and 2.30% in
2005. As a result, Premier’s net interest spread decreased by 2 basis
points, but the net interest margin increased by 10 basis points to 4.42% in
2007, up from 4.32% in 2006. Further discussion of interest income is included
in the section of this report entitled "Balance Sheet Analysis."
Non-interest income has been and will
continue to be an important factor for improving profitability. Recognizing this
importance, management continues to evaluate areas where non-interest income can
be enhanced. As shown in the table of Non-interest Income and Expense
below, total fees and other income increased by $575,000 or 12.4% in
2008. The increase in 2008 was largely due to increases service
charges on deposit accounts, electronic banking income and other income
resulting from the acquisitions of Traders and Citizens First. In
2008, service charges on deposit accounts increased by $511,000 or 18.7% to
$3,249,000. Approximately $427,000 of this increase was the result of
adding the operations of Traders and Citizens First. The remaining
$84,000 or 3.1% increase was largely due to incremental increase in fee rates
and growth in the number of deposit customers. Electronic banking
income, which consists of debit and credit card transaction fees, ATM fees and
internet banking fees, increased $216,000 or 35.5% to $824,000 in
2008. Approximately $99,000 of this increase was the result of adding
the operations of Traders and Citizens First. The remaining $117,000
or 19.2% increase was largely due to Premier’s conversion to a more modern
banking software system in 2005. This banking software system has
allowed Premier to offer more electronic banking services and made it easier for
customers to conduct their banking electronically. In 2008, secondary
market mortgage income (commissions and fees earned from originating and selling
mortgage loans to third parties in the secondary market) decreased by $192,000
or 29.5% to $458,000. Traders and Citizens First had virtually no
revenue of this type in 2008. The decrease in secondary market
mortgage income in 2008 is primarily due to a significant decrease in the
appetite of secondary market mortgage loan purchasers as brokers have either
tightened their credit standards or have ceased buying new mortgages in an
effort to avoid further exposure to sub-prime lending. Premier
concentrates its efforts on selling high quality mortgage loans and routinely
searches for new buyers for these loans; however, the volume of future sales may
depend on factors beyond the control of Premier. Other non-interest
income increased by $40,000, or 6.4%, in 2008. Included in this
increase is $142,000 of other non-interest income from the operations of Traders
and Citizens First. The remaining $102,000 decrease is largely due to
$212,000 of life insurance benefits on the death of a former officer of a
subsidiary that was recognized in the prior year. Excluding this
benefit, other non-interest income increased $110,000 in 2008, which includes
$150,000 of income received for extending Premier’s ATM processing
contract.
In
2007, total fees and other income increased by $458,000 or 11.0%. The
increase in 2007 was largely due to increases in secondary market mortgage
income and electronic banking income. In 2007, secondary market
mortgage income (commissions and fees earned for originating and selling
mortgage loans to third parties in the secondary market) increased by $347,000
or 114.5% to $650,000. In 2005, Premier changed its approach to
secondary market mortgage originations in an effort to expedite the loan
approval process. The increased income in 2007 reflects an expansion
of the program to all of Premier’s affiliate banks which generated a greater
number of customers taking advantage of this process. Electronic
banking income, increased $110,000 or 22.1% to $608,000 in 2007, largely due to
the modernization of the ways Premier’s customers can access their deposit
accounts. Service charges on deposit accounts decreased in 2007 by
$66,000 or 2.4% to $2,738,000. A new required disclosure of
year-to-date NSF charges on customers’ deposit account statements is believed to
be resulting in lower overdraft activity by customers. Other
non-interest income increased by $67,000, or 12.0%, in 2007. In 2007,
other non-interest income includes $212,000 of life insurance benefits on the
death of a former officer of a subsidiary. Excluding this benefit,
other non-interest income decreased $145,000 in 2007 as Premier discontinued
offering trust services in 2006, realized fewer loan extension and late fees in
2007, ceased recording an increase in the cash surrender value of the officer’s
life insurance policy in 2007 and recorded lower other miscellaneous income in
2007.
In 2008, Premier realized $93,000 in
gains on the sale of investment securities. In 2007 and 2006, Premier
did not execute any sales of investment securities.
The following table is a summary of
non-interest income and expense for each of the years in the three-year period
ending December 31, 2008.
|
NON-INTEREST
INCOME AND EXPENSE
|
|
|
(Dollars
in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase
(Decrease) Over Prior Year
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Amount
|
|
|
Percent
|
|
|
Amount
|
|
|
Percent
|
|
|
Non-interest
income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service charges on deposit
accounts
|
|
$ |
3,249 |
|
|
$ |
2,738 |
|
|
$ |
2,804 |
|
|
$ |
511 |
|
|
|
18.66 |
|
|
$ |
(66 |
) |
|
|
(2.35 |
) |
|
Electronic banking
income
|
|
|
824 |
|
|
|
608 |
|
|
|
498 |
|
|
|
216 |
|
|
|
35.53 |
|
|
|
110 |
|
|
|
22.09 |
|
|
Secondary market mortgage
income
|
|
|
458 |
|
|
|
650 |
|
|
|
303 |
|
|
|
(192 |
) |
|
|
(29.54 |
) |
|
|
347 |
|
|
|
114.52 |
|
|
Other
|
|
|
667 |
|
|
|
627 |
|
|
|
560 |
|
|
|
40 |
|
|
|
6.38 |
|
|
|
67 |
|
|
|
11.96 |
|
|
Total fees and other
income
|
|
$ |
5,198 |
|
|
$ |
4,623 |
|
|
$ |
4,165 |
|
|
|
575 |
|
|
|
12.44 |
|
|
|
458 |
|
|
|
11.00 |
|
|
Investment securities
gains
|
|
|
93 |
|
|
|
0 |
|
|
|
0 |
|
|
|
93 |
|
|
|
|
|
|
|
0 |
|
|
|
|
|
|
Total non-interest
income
|
|
$ |
5,291 |
|
|
$ |
4,623 |
|
|
$ |
4,165 |
|
|
$ |
668 |
|
|
|
14.45 |
|
|
$ |
458 |
|
|
|
11.00 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest
expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and
wages
|
|
$ |
8,389 |
|
|
$ |
7,211 |
|
|
$ |
7,540 |
|
|
$ |
1,178 |
|
|
|
16.34 |
|
|
$ |
(329 |
) |
|
|
(4.36 |
) |
|
Employee
benefits
|
|
|
1,840 |
|
|
|
1,560 |
|
|
|
1,590 |
|
|
|
280 |
|
|
|
17.95 |
|
|
|
(30 |
) |
|
|
(1.89 |
) |
|
Total staff
costs
|
|
|
10,229 |
|
|
|
8,771 |
|
|
|
9,130 |
|
|
|
1,458 |
|
|
|
16.62 |
|
|
|
(359 |
) |
|
|
(3.93 |
) |
|
Occupancy and
equipment
|
|
|
2,546 |
|
|
|
1,947 |
|
|
|
1,907 |
|
|
|
599 |
|
|
|
30.77 |
|
|
|
40 |
|
|
|
2.10 |
|
|
Outside data
processing
|
|
|
2,587 |
|
|
|
2,132 |
|
|
|
2,036 |
|
|
|
455 |
|
|
|
21.34 |
|
|
|
96 |
|
|
|
4.72 |
|
|
Professional
fees
|
|
|
840 |
|
|
|
461 |
|
|
|
496 |
|
|
|
379 |
|
|
|
82.21 |
|
|
|
(35 |
) |
|
|
(7.06 |
) |
|
Taxes, other than payroll,
property
and income
|
|
|
603 |
|
|
|
580 |
|
|
|
598 |
|
|
|
23 |
|
|
|
3.97 |
|
|
|
(18 |
) |
|
|
(3.01 |
) |
|
Amortization of
intangibles
|
|
|
204 |
|
|
|
0 |
|
|
|
0 |
|
|
|
204 |
|
|
|
100.00 |
|
|
|
41 |
|
|
|
45.05 |
|
|
OREO (gains) losses and expenses,
net
|
|
|
59 |
|
|
|
(50 |
) |
|
|
(91 |
) |
|
|
109 |
|
|
|
(218.00 |
) |
|
|
41 |
|
|
|
45.05 |
|
|
Supplies
|
|
|
406 |
|
|
|
315 |
|
|
|
333 |
|
|
|
91 |
|
|
|
28.89 |
|
|
|
(18 |
) |
|
|
(5.41 |
) |
|
Accelerated amortization of
subordinated
debt
issuance costs
|
|
|
0 |
|
|
|
0 |
|
|
|
548 |
|
|
|
0 |
|
|
|
0.00 |
|
|
|
(548 |
) |
|
|
(100.00 |
) |
|
Other expenses
|
|
|
2,420 |
|
|
|
2,252 |
|
|
|
1,980 |
|
|
|
168 |
|
|
|
7.46 |
|
|
|
156 |
|
|
|
7.58 |
|
|
Total non-interest
expenses
|
|
$ |
19,894 |
|
|
$ |
16,408 |
|
|
$ |
16,937 |
|
|
$ |
3,486 |
|
|
|
21.25 |
|
|
$ |
(529 |
) |
|
|
(3.12 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Just as management continues to
evaluate areas where non-interest income can be enhanced, it strives to find
ways to improve the efficiency of its operations and utilize the economies of
scale of the consolidated entity to reduce its operating
costs. Premier’s 2008 net overhead ratio, or non-interest expense
less non-interest income excluding securities transactions and other similar
non-operating transactions to average earnings assets was 2.39%, only a slight
increase from the 2.36% realized in 2007 and a decrease from the 2.56% ratio
realized in 2006. The actual dollars of net overhead increased by
23.7% or $2,849,000 in 2008, however, average earning assets increased by a
similar 22.3% in 2008. Both of these increases were largely the
result of the acquisitions of Traders and Citizens First. In fact,
the net overhead of Traders and Citizens First comprise all but $57,000 or 0.5%
of Premier’s increase in net overhead expense in 2008. The 2008 net
overhead ratio and actual dollars of net overhead expense excludes the $93,000
of gains on the sales of securities and the $150,000 of income received for
extending Premier’s ATM processing contract. The 2007 net overhead
ratio and actual dollars of net overhead expense excludes the $212,000 of life
insurance benefits as a non-operating income transaction. For the
year 2008, net overhead was $14.8 million, an increase from the $12.0 million of
net overhead in 2007. In 2007, the net overhead ratio, decreased by
20 basis points as the actual dollars of net overhead expense decreased by 6.1%
or $775,000 from the $12.8 million of net overhead in 2006.
Total non-interest expense in 2008
increased by $3,486,000, or 21.2% from 2007 largely due to the increase in all
categories of costs from adding the operations of Traders and Citizens
First. The 2008 operations of Traders and Citizens First added
$3,463,000 of total non-interest expenses leaving only a $23,000 or 0.1%
increase resulting from Premier’s other operations. Total
non-interest expense in 2007 decreased by $529,000, or 3.1% from 2006 as
decreases in staff costs, professional fees, and accelerated trust preferred
issuance cost amortization were only partially offset by higher occupancy and
equipment costs, data processing fees, and other expenses plus the absence of
bad check loss recoveries and lower net gains on the disposition of
OREO.
Staff costs increased by $1,458,000 or
16.6% in 2008 versus 2007 as $1,407,000 of the increase was due to the
operations of Traders and Citizens First. The remaining $51,000 or
0.6% increase was largely the result of increased employer payroll taxes and
normal salary and wage increases partially offset by decreases related to staff
turnover and greater deferred loan originations costs related to SFAS
91. Staff costs decreased by $359,000 or 3.9% in 2007 versus 2006 as
normal salary and wage increases were more than offset by an increase in
deferred loan origination costs related to SFAS 91.
Occupancy and equipment expenses
increased by $529,000 or 26.2% in 2008. The operations of Traders and
Citizens First added approximately $629,000 of occupancy and equipment expenses
in 2008 leaving a $100,000 or 5.0% decrease in these expenses from Premier’s
other operations. The $100,000 decrease in 2008 is largely due to the
$70,000 2007 writedown of branch property that was scheduled to be closed at the
end of January 2008. The decision to close the branch was made in
2007, and in accordance with SFAS 144, the branch property was written down to
its estimated realizable value. Furthermore, occupancy and equipment
expenses were less in 2008 due to lower real estate taxes, building repairs,
equipment maintenance and equipment depreciation partially offset by increase in
utility costs, and other building cleaning and maintenance costs. In
2007, occupancy and equipment expenses increased by $40,000 or 2.1%, largely due
to the $70,000 writedown of branch property. Excluding this
writedown, occupancy and equipment expenses decreased by $30,000 in 2007,
largely due to decreases in equipment depreciation.
Outside data processing expense
increased by $455,000 or 21.3% in 2008. The operations of Traders and
Citizens First added approximately $294,000 of outside data processing expenses
in 2008 leaving a $161,000 or 7.6% increase in these expenses from Premier’s
other operations. The $161,000 increase in 2008 is largely due to
increases in item processing charges due to Premier’s conversion to exchange
electronic images instead of processing paper checks to settle customer deposit
account activity plus higher communication costs and contractual inflationary
fee adjustments for data processing and internet banking expenses. In
2007, outside data processing expense increased by $96,000 or 4.7%, largely due
to increases in ATM processing costs, internet banking charges and contractual
inflationary fee adjustments, partially offset by a decrease in customer
overdraft privilege program costs. Outside data processing expense increased by
$531,000 or 35.3% in 2006, as 2006 represents the first full year of expense
since Premier converted to an outsourced provider in early-to-mid
2005.
Professional fees increased by $379,000
or 82.2% in 2008. The operations of Traders and Citizens First added
approximately $81,000 of professional fees in 2008 leaving a $298,000 or 64.6%
increase in these expenses from Premier’s other operations. The
$298,000 increase in 2008 is largely due to additional legal and other
professional fees incurred during the early part of the year to help in the
completion of the acquisitions Traders and Citizens First and also due to fees
associated with hiring outside internal auditors in the fourth quarter to help
complete Premier’s internal audit schedule. In 2007, professional
fees decreased by $35,000 or 7.1%, largely due to lower internal and external
audit costs and lower consulting fees. Professional fees decreased by
$58,000 or 10.5% in 2006 largely due to lower internal audit costs, tax
preparation fees and consulting expenses.
Taxes not on income increased by
$23,000, or 4.0% in 2008. The operations of Traders and Citizens
First added approximately $83,000 of taxes not on income in 2008 leaving a
$60,000 or 10.3% decrease in these expenses from Premier’s other
operations. The $60,000 decrease in 2008 is largely due to decreases
in the tax rate on equity based franchised taxes. In 2007, taxes not
on income decreased by $18,000, or 3.0%. The decrease in 2007 is
largely due to a decrease in the amount of expense related to equity based
franchise taxes.
OREO gains, losses and expenses
resulted in net expenses of $59,000 in 2008 versus $50,000 of net gains in 2007,
a $109,000 increase in non-interest expense. OREO expense represents
the costs to operate, maintain and liquidate Other Real Estate acquired through
foreclosure in satisfaction of unpaid loans. The operations of
Traders and Citizens First added approximately $13,000 of OREO expenses in 2008
leaving a $96,000 increase in these expenses from Premier’s other
operations. The $96,000 increase in 2008 is largely due to $20,000 of
net gains realized on the disposition or OREO in 2007 compared to $21,000 of net
losses in 2008 as well as $30,000 of expense recoveries in 2007 that were not
repeated in 2008. In 2007, as Premier sold most of its remaining
inventory of OREO properties, it realized $20,000 of net gains on their
disposition as well as $30,000 of expense recoveries. OREO gains,
losses and expenses resulted in net gains of $91,000 in 2006. In 2006, Premier
sold a substantial portion of its inventory of OREO properties, realizing
$105,000 of net gains on their disposition as well as a reduction in the
expenses needed to maintain the properties. A majority of the gains
on the disposition of OREO in 2007 and 2006 were on properties from which no
previous writedowns had occurred.
Accelerated Trust Preferred issuance
costs were recognized in 2006. At the time of issuance, the costs to
originate the Trust Preferred Securities were capitalized. The costs were being
amortized over the 30 year life of the securities which were scheduled to mature
in 2027 and were recorded as an adjustment to interest expense. In March 2003,
Premier began redeeming its Trust Preferred Securities in accordance with the
terms of the instrument. At time of redemption an amount of the remaining
unamortized issuance costs proportional to the size of the redemption was
expensed to non-interest expense. In 2006, as a result of the $7.0 million early
redemption on January 31, 2006 and the final $8.25 million redeemed on November
10, 2006, Premier expensed the final $548,000 of the issuance
costs.
Other expenses totaled $2.4 million in
2008, a $168,000, or 7.5% increase from the $2.2 million recorded in
2007. The operations of Traders and Citizens First added
approximately $661,000 of other expenses in 2008 leaving a $493,000, or 21.9%
decrease in these expenses from Premier’s other operations. The
$493,000 decrease in 2008 is primarily the result of a $439,000 reduction in
collection expenses due to a $285,000 restitution payment made to Farmers
Deposit Bank by the bank’s former president who plead guilty to bank fraud and
to $32,000 of net reimbursements from settlements with customers compared to
$120,000 of collection expenses in 2007. Other expense savings
include a $74,000 reduction in courier costs in 2008 due to Premier’s conversion
to exchange electronic images instead of transporting and processing paper
checks to settle customer deposit account activity, as well as reductions in
advertising expenditures, postage, correspondent bank charges and insurance
costs. These expense reductions were partially offset by increases in
regulatory expenses such as FDIC insurance and state examination costs,
shareholder expenses such as NASDAQ expenses and stock transfer fees, losses due
to forged checks and fictitious electronic payment transactions, as well as
increases in bank director fees and employee travel
costs. Other expenses totaled $2.2 million in 2007, a $156,000,
or 7.6% increase from the $2.1 million recorded in 2006. The increase
in 2007 is largely due to significantly higher regulatory expenses, such as FDIC
insurance and state examination costs, higher postage costs, travel expenses,
employee development and secondary market mortgage underwriting
expenses. These increases were partially offset by lower stationery
and supplies costs, advertising expenditures, correspondent bank charges and
insurance expense.
Because the FDIC’s deposit insurance
fund fell below prescribed levels in 2008, the FDIC has announced increased
premiums for all insured depository institutions, including Premier’s subsidiary
banks, in order to begin recapitalizing the fund. In addition, the
FDIC has proposed an additional 20 basis point emergency assessment on insured
depository institutions to be paid on September 30, 2009, which could be
decreased by the FDIC in certain events occur prior to the assessment
date. These changes (and proposed changed if enacted) will result in
potentially significant increases in deposit insurance expense for Premier in
2009.
Amortization of intangibles began in
2008 as a result of the core deposit intangible asset from the acquisitions of
Traders and Citizens First.
An analysis of the allowance for loan
losses and related provision for loan losses is included in the Loan Portfolio
section of the Balance Sheet Analysis of this report.
Premier recognized $3.7 million of
income tax expense in 2008. This amount compares to $3.5 million of
income tax expense recorded in 2007 and $3.3 million of income tax expense
recorded in 2006. Premier’s effective tax rate was 33.2% in 2008, up
slightly from the 32.8% in 2007 but down from the 33.6% in
2006. Premier’s effective tax rate in 2007 decreased primarily as a
results of death benefits received from a former officer’s life insurance policy
which were not subject to income tax. Premier realizes the tax saving
benefits of holding tax-exempt investments and other tax savings instruments as
well as making tax-exempt loans. These activities help to reduce
Premier’s tax rate from the 34.0% statutory rate. Additional
information regarding income taxes is contained in Note 11 to the Consolidated
Financial Statements.
The results of operations and financial
condition presented in this report are based on historical cost, unadjusted for
the effects of inflation. Inflation affects Premier in two ways. One effect is
that inflation can result in increased operating costs which must be absorbed or
recovered through increased prices for services. The second effect is on the
purchasing power of the corporation. Virtually all of a bank's assets and
liabilities are monetary in nature. Regardless of changes in prices, most assets
and liabilities of the banking subsidiaries will be converted into a fixed
number of dollars. Non-earning assets, such as premises and equipment, do not
comprise a major portion of Premier's assets; therefore, most assets are subject
to repricing on a more frequent basis than in other industries.
Premier's ability to offset the effects
of inflation and potential reductions in future purchasing power depends
primarily on its ability to maintain capital levels by adjusting prices for its
services and to improve net interest income by maintaining an effective
asset/liability mix. Management's efforts to meet these goals are
described in other sections of this report.
Recently
Issued Accounting Standards Not Yet Adopted
In December 2007, the FASB issued SFAS
No. 141 (revised 2007), Business Combinations (“SFAS 141(R)”), which establishes
principles and requirements for how an acquirer recognizes and measures in its
financial statements the identifiable assets acquired, the liabilities assumed,
and any noncontrolling interest in an acquiree, including the recognition and
measurement of goodwill acquired in a business combination. SFAS No.
141(R) is effective for fiscal years beginning on or after December 15,
2008. Earlier adoption is prohibited. There was no impact
to Premier upon adoption of this standard, but the accounting for future
business combinations will be different from prior practice. See Note
24 to the Consolidated Financial Statements.
In December 2007, the FASB issued SFAS
No. 160, “Noncontrolling Interest in Consolidated Financial Statements, an
amendment of ARB No. 51” (“SFAS No. 160”), which will change the
accounting and reporting for minority interests, which will be recharacterized
as noncontrolling interests and classified as a component of equity within the
consolidated balance sheets. SFAS No. 160 is effective as of the beginning of
the first fiscal year beginning on or after December 15,
2008. Earlier adoption is prohibited and the Corporation does not
expect the adoption of SFAS No. 160 to have a significant impact on its results
of operations or financial position.
In March 2008, the FASB issued SFAS No.
161, “Disclosures about Derivative Instruments and Hedging Activities, an
amendment of SFAS No. 133”. SFAS No. 161 amends and expands the disclosure
requirements of SFAS No. 133 for derivative instruments and hedging activities.
SFAS No. 161 requires qualitative disclosure about objectives and strategies for
using derivative and hedging instruments, quantitative disclosures about fair
value amounts of the instruments and gains and losses on such instruments, as
well as disclosures about credit-risk features in derivative agreements. SFAS
No. 161 is effective for financial statements issued for fiscal years and
interim periods beginning after November 15, 2008, with early application
encouraged. The adoption of this standard is not expected to have a
material effect on the Corporation’s results of operations or financial
position.
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,
collect delinquent loans and attract and retain deposits, the impact of
Premier's growth, Premier's ability to control costs, and new accounting
pronouncements, all of which are difficult to predict and many of which are
beyond the control of Premier. The words “may,” “could,” “should,”
“would,” “will,” “believe,” “anticipate,” “estimate,” “expect,” “intend,”
“plan,” “project,” “predict,” “continue” and similar expressions are intended to
identify forward-looking statements.
A
financial institution’s primary sources of revenue are generated by interest
income on loans, investments and other earning assets, while its major expenses
are produced by the funding of these assets with interest bearing
liabilities. Effective management of these sources and uses of funds
is essential in attaining a financial institution’s optimal profitability while
maintaining a minimum amount of interest rate risk and credit risk.
Net
income for the three months ended March 31, 2009 was $1,229,000, or $0.19 per
share, compared to net income of $1,774,000, or $0.34 per share for the three
months ended March 31, 2008. The decrease in income in 2009 is largely due to
decreasing yields on earning assets, particularly federal funds sold, and
increases in non-interest expenses as well as the existence of benefits to 2008
net income, such as negative provisions for loan losses and reimbursed
collection expenses, which did not reoccur in 2009. The
annualized returns on shareholders’ equity and average assets were approximately
5.44% and 0.68% for the three months ended March 31, 2009 compared to 10.20% and
1.28% for the same period in 2008.
Net
interest income for the three months ending March 31, 2009 totaled $6.56
million, up $964,000 or 17.2% from the $5.59 million of net interest income
earned in the first three months of 2008, as the $1.349 million of additional
net interest income of the combined Traders Bank more than offset the 6.9%
decrease in net interest income of Premier’s other five banks. The
operations from the acquisitions of Citizens First Bank (“Citizens First) and
Traders Bankshares, Inc. (“Traders”), (now merged together as Traders Bank),
both of which occurred at the close of business on April 30, 2008 are included
in the consolidated financial statements of Premier only from the date of
acquisition and thus are not included in the comparison first quarter of 2008
results. Interest income in 2009 increased by $709,000 or 8.4%, as a
result of the $1.95 million of interest income added by the operations of
Traders Bank. Excluding the operations of Traders Bank, interest
income decreased by $1.24 million or 14.7% in 2009. Interest income
on loans decreased by $798,000, due to lower loan yields even though on a higher
average volume of loans outstanding. Interest earned on investments
decreased $151,000, due to lower average yields on a lower average volume of
investments. Interest earned on federal funds sold decreased by
$288,000, largely due lower yields earned resulting from the Federal Reserve
Board of Governors’ policy to stimulate the economy by maintaining the federal
funds sold rate near 0.25%.
Partially
offsetting the decrease in interest income, interest expense decreased in total
by $255,000 or 9.0% in 2009 compared to 2008, which includes the $602,000 of
increase in interest expense in 2009 from the Traders Bank
operations. Excluding the Traders Bank operations, interest expense
decreased by $857,000 or 30.3% in 2009 compared to the first quarter of
2008. Interest expense on deposits decreased by $837,000 or 32.3%,
largely due to lower rates paid, although on a slightly higher average balance
outstanding. Interest expense on repurchase agreements and other
short-term borrowings decreased $20,000, largely due to lower rates paid even
though on a larger average balance. Interest expense on FHLB advances
and other borrowings remained unchanged as the increase in interest expense from
higher average balance of these borrowings was offset by the lower rates paid on
the variable rate portion of the other borrowings. The decreases in
all sources of interest income and expense (excluding the operations of Traders
Bank) in 2009 are largely the result of the decrease in market interest rates
following the Federal Reserve Bank Board of Governors’ monetary policy changes
in 2008. The Board of Governors’ policy to reduce the federal funds
rate to nearly zero coupled with the U.S. Treasury actively buying investment
securities has significantly reduced the yield on much of Premier’s earning
assets including investments, federal funds sold and variable rate
loans. Premier has tried to offset some of the lower interest income
by lowering the rates paid on its deposits and repurchase agreements with
customers. The overall result has been a decrease in Premier’s net
interest margin in the first three months of 2009 to 4.01% compared to 4.38% for
the same period in 2008.
Additional
information on Premier’s net interest income for the first quarter of 2009 and
first quarter of 2008 is contained in the following table.
|
PREMIER
FINANCIAL BANCORP, INC.
|
|
|
AVERAGE
CONSOLIDATED BALANCE SHEETS
|
|
|
AND
NET INTEREST INCOME ANALYSIS
|
|
| |
|
|
|
|
Three Months Ended
March 31, 2009
|
|
|
Three Months Ended
March 31, 2008
|
|
|
|
|
Balance
|
|
|
Interest
|
|
|
Yield/Rate
|
|
|
Balance
|
|
|
Interest
|
|
|
Yield/Rate
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
Earning Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal funds sold and
other
|
|
$ |
41,113 |
|
|
$ |
18 |
|
|
|
0.18 |
% |
|
$ |
39,118 |
|
|
$ |
308 |
|
|
|
3.16 |
% |
|
Securities available for
sale
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable
|
|
|
151,572 |
|
|
|
1,636 |
|
|
|
4.32 |
|
|
|
132,485 |
|
|
|
1,530 |
|
|
|
4.62 |
|
|
Tax-exempt
|
|
|
7,241 |
|
|
|
57 |
|
|
|
4.77 |
|
|
|
3,809 |
|
|
|
36 |
|
|
|
5.73 |
|
|
Total investment
securities
|
|
|
158,813 |
|
|
|
1,693 |
|
|
|
4.34 |
|
|
|
136,294 |
|
|
|
1,566 |
|
|
|
4.65 |
|
|
Total loans
|
|
|
464,705 |
|
|
|
7,425 |
|
|
|
6.48 |
|
|
|
338,610 |
|
|
|
6,553 |
|
|
|
7.76 |
|
|
Total interest-earning
assets
|
|
|
664,631 |
|
|
|
9,136 |
|
|
|
5.58 |
% |
|
|
514,022 |
|
|
|
8,427 |
|
|
|
6.59 |
% |
|
Allowance
for loan losses
|
|
|
(8,569 |
) |
|
|
|
|
|
|
|
|
|
|
(6,560 |
) |
|
|
|
|
|
|
|
|
|
Cash
and due from banks
|
|
|
24,380 |
|
|
|
|
|
|
|
|
|
|
|
14,222 |
|
|
|
|
|
|
|
|
|
|
Other
assets
|
|
|
47,084 |
|
|
|
|
|
|
|
|
|
|
|
27,234 |
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$ |
727,526 |
|
|
|
|
|
|
|
|
|
|
$ |
548,918 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
and Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing
liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing
deposits
|
|
$ |
493,293 |
|
|
|
2,353 |
|
|
|
1.93 |
|
|
$ |
377,448 |
|
|
|
2,588 |
|
|
|
2.75 |
|
|
Short-term
borrowings
|
|
|
15,690 |
|
|
|
33 |
|
|
|
0.85 |
|
|
|
12,768 |
|
|
|
53 |
|
|
|
1.66 |
|
|
FHLB advances
|
|
|
5,658 |
|
|
|
72 |
|
|
|
5.16 |
|
|
|
4,814 |
|
|
|
74 |
|
|
|
6.17 |
|
|
Other
borrowings
|
|
|
15,300 |
|
|
|
120 |
|
|
|
3.18 |
|
|
|
8,208 |
|
|
|
118 |
|
|
|
5.77 |
|
|
Total interest-bearing
liabilities
|
|
|
529,941 |
|
|
|
2,578 |
|
|
|
1.97 |
% |
|
|
403,238 |
|
|
|
2,833 |
|
|
|
2.82 |
% |
|
Non-interest
bearing deposits
|
|
|
103,380 |
|
|
|
|
|
|
|
|
|
|
|
74,141 |
|
|
|
|
|
|
|
|
|
|
Other
liabilities
|
|
|
3,762 |
|
|
|
|
|
|
|
|
|
|
|
2,735 |
|
|
|
|
|
|
|
|
|
|
Shareholders’
equity
|
|
|
90,443 |
|
|
|
|
|
|
|
|
|
|
|
68,804 |
|
|
|
|
|
|
|
|
|
|
Total liabilities and
equity
|
|
$ |
727,526 |
|
|
|
|
|
|
|
|
|
|
$ |
548,918 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
interest earnings
|
|
|
|
|
|
$ |
6,558 |
|
|
|
|
|
|
|
|
|
|
$ |
5,594 |
|
|
|
|
|
|
Net
interest spread
|
|
|
|
|
|
|
|
|
|
|
3.61 |
% |
|
|
|
|
|
|
|
|
|
|
3.77 |
% |
|
Net
interest margin
|
|
|
|
|
|
|
|
|
|
|
4.01 |
% |
|
|
|
|
|
|
|
|
|
|
4.38 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest income increased $104,000
to $1,170,000 for the first three months of 2009. Included in this
increase is $228,000 of non-interest income from the operations of Traders Bank.
Excluding their operations, service charges on deposit accounts decreased by
$58,000 or 9.1%, secondary market mortgage income decreased by $78,000 or 48.4%,
while electronic banking income (income from debit/credit cards, ATM fees and
internet banking charges) increased by $18,000 or 11.0%. The decrease
in service charges on deposit accounts is largely due to lower total NSF fees as
Premier believes that deposit customers seem to keep a closer watch on their
available deposit balances as economic conditions tighten. Secondary
market mortgage income decreased significantly as the number of mortgage buyers
in the private sector has decreased substantially and government agency buyers
have increased their requirements to approve the purchase of mortgage
loans. Premier concentrates its efforts on selling high quality
mortgage loans and routinely searches for new buyers for these loans; however,
the volume of future sales may depend on factors beyond the control of
Premier. Electronic banking income increased largely due to continued
increases in Premier’s deposit customer base and customers’ greater propensity
to use electronic means to conduct their banking business. Premier’s
conversion to a more modern banking software system in 2005 has allowed Premier
to offer more electronic banking services and made it easier for customers to
conduct their banking electronically.
Non-interest expenses for the first
quarter of 2009 totaled $5,764,000 or 3.21% of average assets on an annualized
basis compared to $4,122,000 or 3.01% of average assets for the same period of
2008. The $1,642,000 increase in non-interest expenses in 2009 when
compared to the first quarter of 2008 is largely due to the $1,371,000 of
additional non-interest expenses from the operations of Traders
Bank. Excluding their operations, non-interest expense in the first
quarter of 2009 increased by $271,000 or 6.6%. Excluding the
operations of Traders Bank, staff costs increased by $70,000 or 3.1%, in 2009,
professional fees increased by $109,000 or 60.9%, and other operating expenses
increased by $129,000 or 33.2%. These increases were partially offset
by a $39,000 decrease in write-downs, expenses and sales of other real estate
owned (OREO) and a $10,000 decrease in taxes other than payroll, property and
income. The increase in staff costs in 2009 was largely due to normal
salary and benefit increases. Occupancy and equipment expenses
increased by only $3,000, or 0.6% in the first quarter of 2009, while outside
data processing costs remained unchanged from the first quarter of
2008. Professional fees increased largely due to legal expenses
incurred in connection with the proposed acquisition of Adams and other legal
fees incurred to settle outstanding lawsuits. Other operating expenses were
higher in the first quarter of 2009 largely due to $125,000 of collections
expenses that were reimbursed to Premier in the first quarter 2008 reducing the
amount of reported expenses in 2008. Other operating expense also
includes a $23,000 or 47.9% increase in FDIC insurance premiums in the first
quarter of 2009 compared to the same quarter in 2008.
Income tax expense was $633,000 for the
first three months of 2009 compared to $899,000 for the first three months of
2008. The effective tax rate for the three months ended March 31,
2009 increased slightly to 34.0% compared to the 33.6% effective tax rate for
the same period in 2008. The decrease in income tax expense can be
primarily attributed to the decrease in pre-tax income detailed
above. The increase in the effective tax rate is largely due to
certain expenses incurred in connection with the planned acquisition of Adams
that are not deductible for income tax purposes.
Total assets at March 31, 2009
increased $9.6 million to $734.1 million from the $724.5 million at December 31,
2008. Earning assets increased to $667.7 million at March 31, 2009
from the $664.1 million at December 31, 2008, an increase of $3.6 million, or
0.5%. The increase in earnings assets was largely due to an increase
in federal funds sold and cash and due from banks, with a partially offsetting
decrease in securities available-for-sale (see below).
Cash and due from banks at March 31,
2009 was $29.9 million, a $7.8 million increase from the $22.1 million at
December 31, 2008. Federal funds sold increased $24.3 million from
the $15.9 million reported at December 31, 2008. Changes in these two
highly liquid assets are generally in response to increases in deposits, the
demand for deposit withdrawals or the funding of loans and are part of Premier’s
management of its liquidity and interest rate risks. The increase in
federal funds sold during the first three months of 2009 is in response to
proceeds from increases in total deposits plus funds from the early redemption
of investment securities by the issuers. Premier has been reluctant
to reinvest these funds as investment yields on seasoned securities have been
suppressed by the U.S. Treasury’s program to purchase investment securities in
the open market. Similarly, yields on newly issued high quality
securities are also very low due to the low interest rate environment resulting
from the U.S. Treasury’s program and the Federal Reserve’s policy on interest
rates. The increase in cash and due from banks is a result of keeping
additional funds on deposit with the Federal Reserve which is paying a higher
rate of interest than most yields on Federal Funds Sold.
Securities available for sale totaled
$155.6 million at March 31, 2009, a $20.2 million decrease from the $175.7
million at December 31, 2008. The decrease was largely due to $54.4
million of investment calls at maturities that occurred during the first three
months of 2009 versus the $34.2 million of new investment purchases during the
same period. The investment portfolio is predominately high quality
interest-bearing bonds with defined maturity dates backed by the U.S. Government
or Government sponsored agencies. The unrealized gains at March 31,
2009 and December 31, 2008 are price changes resulting from changes in the
interest rate environment. Additional details on investment
activities can be found in the Consolidated Statements of Cash
Flows.
Total loans at March 31, 2009 were
$466.9 million compared to $467.1 million at December 31, 2008, a decrease of
approximately $237,000. The slight decrease in loans is largely due
to new loan production which substantially offset loan payoffs and principal
payments during the first quarter of 2009.
Deposits totaled $604.9 million as of
March 31, 2009, a $15.7 million increase from the $589.2 million in deposits at
December 31, 2008. The overall increase in deposits is due an across
the board increase in deposit balances at the Premier
Banks. Non-interest bearing deposits increased by $4.5 million or
4.4%, from December 31, 2008 to March 31, 2009. Likewise, other
interest bearing deposits (CD’s under $100,000, savings accounts and interest
bearing transaction accounts) increased by $4.9 million or 1.2% during the same
time frame. Time deposits $100,000 and over increased by $6.3 million
or 8.9%, from December 31, 2008 to March 31, 2009. Contrary to the
trend in total deposits, repurchase agreements with corporate and public entity
customers decreased during the first quarter of 2009, declining by $5.0 million
to $13.3 million as of March 31, 2009.
Federal Home Loan Bank (FHLB)
advances declined by $44,000 in the first three months of 2009, and other
borrowed funds decreased by $482,000 during that time due to regularly scheduled
principal payments. FHLB advances also decreased by $1.0 million as
the $3.0 million of overnight borrowings from the FHLB at December 31, 2008 was
reduced to $2.0 million at March 31, 2009. See Note 5 to the
consolidated financial statements for additional information on Premier’s
outstanding FHLB advances.
The
following table sets forth information with respect to Premier’s nonperforming
assets at March 31, 2009 and December 31, 2008.
|
|
|
(In
Thousands)
|
|
|
|
|
2009
|
|
|
2008
|
|
|
Non-accrual
loans
|
|
$ |
7,377 |
|
|
$ |
6,943 |
|
|
Accruing
loans which are contractually past
due 90 days or more
|
|
|
702 |
|
|
|
625 |
|
|
Restructured
|
|
|
1,410 |
|
|
|
1,203 |
|
|
Total non-performing
loans
|
|
|
9,489 |
|
|
|
8,771 |
|
|
Other
real estate acquired through foreclosure (OREO)
|
|
|
981 |
|
|
|
1,056 |
|
|
Total non-performing
assets
|
|
$ |
10,470 |
|
|
$ |
9,827 |
|
|
|
|
|
|
|
|
|
|
|
|
Non-performing
loans as a percentage of total loans
|
|
|
2.03 |
% |
|
|
1.88 |
% |
|
|
|
|
|
|
|
|
|
|
|
Non-performing
assets as a percentage of total assets
|
|
|
1.43 |
% |
|
|
1.36 |
% |
Total non-performing loans have
increased since year-end, due to increases on non-accrual loans, loans past due
90 days or more and loans restructured in an effort help borrowers meet their
obligation to repay their loans. These increases were partially
offset by a decrease in other real estate acquired through
foreclosure. The increase in non-accrual loans was largely due to
three commercial credits going past due at the newly acquired Traders
Bank. Premier continues to make a significant effort to reduce its
past due and non-performing loans by reviewing loan files, using the courts to
bring borrowers current with the terms of their loan agreements and/or the
foreclosure and sale of OREO properties. As in the past, when these
plans are executed, Premier may experience increases in non-performing loans and
non-performing assets. Furthermore, any resulting increases in loans
placed on non-accrual status will have a negative impact on future loan interest
income. Also, as these plans are executed, other loans may be
identified that would necessitate additional charge-offs and potentially
additional provisions for loan losses.
During the first quarter of 2009,
Premier recorded $102,000 of additional provisions for loan
losses. This compares to the reversal $135,000 of previously recorded
provisions for loan losses, commonly referred to as “negative provisions”,
during the first quarter of 2008. Any increases or decreases in the
provision for loan losses are made in accordance with Premier’s policies
regarding management’s estimation of probable incurred losses in the loan
portfolio and the adequacy of the allowance for loan losses, which are in
accordance with accounting principles generally accepted in the United States of
America. The additional provisions recorded during the first quarter
of 2009 were in response to Premier’s estimation of increased credit risk in the
loan portfolio due to uncertainties related to the ability of borrowers’ to
repay loans in a declining economy, Premier’s increase in non-accrual and loans
past due more than 90 days and the level of charge-offs recorded during the
first three months of 2009. The negative provisions in the first
quarter of 2008 were the combined result of continued improvement in the
estimated credit risk at banks formerly subject to regulatory agreements,
payments on loans previously identified as having significant credit risk, net
recoveries recorded during the quarter and the $10.6 million decline in loans
outstanding. In the coming months, as management evaluates the
adequacy of the allowance for loan losses,
Premier
will continue to monitor the impact that national housing market price declines
may have on its local markets and local collateral valuations and also the
impact that the downturn in the national economy will have on local businesses
and individual borrowers, potentially affecting their repayment
patterns. While some price deterioration is expected, it is not
currently anticipated that Premier’s markets will be impacted as severely as
other areas of the country due to the historically modest increases in real
estate values in Premier’s markets. Future provisions to the
allowance for loan losses, positive or negative, will depend on future
improvement or deterioration in estimated credit risk in the loan portfolio as
well as whether additional payments are received on loans having significant
credit risk.
Gross charge-offs totaled $165,000
during the first three months of 2009. Any collections on these loans
would be presented in future financial statements as recoveries of the amounts
charged against the allowance. Recoveries recorded during the first
three months of 2009 totaled $106,000, resulting in net charge-offs for the
first quarter of 2009 of $59,000. This compares to $45,000 of net
recoveries recorded in the first quarter of 2008. The allowance for
loan losses at March 31, 2009 was 1.84% of total loans as compared to 1.83% at
December 31, 2008. The slightly increasing percentage of allowance
for loan losses to total loans is largely due to $102,000 of additional
provisions for loan losses exceeding the $59,000 of net charge-offs recorded in
the first quarter of 2009 as there was very little change in total loans
outstanding during that time.
Premier follows financial accounting
and reporting policies that are in accordance with generally accepted accounting
principles in the United States of America. These policies are
presented in Note 1 to the consolidated audited financial statements in
Premier's annual report on Form 10-K for the year ended December 31,
2008. Some of these accounting policies, as discussed below, are
considered to be critical accounting policies. Critical accounting
policies are those policies that require management’s most difficult, subjective
or complex judgments, often as a result of the need to make estimates about the
effect of matters that are inherently uncertain. Premier has
identified two accounting policies that are critical accounting policies, and an
understanding of these policies is necessary to understand the financial
statements. These policies relate to determining the adequacy of the
allowance for loan losses and the impairment of goodwill. A detailed
description of these accounting policies is contained in Premier’s annual report
on Form 10-K for the year ended December 31, 2008. There have been no
significant changes in the application of these accounting policies since
December 31, 2008.
Management
believes that the judgments, estimates and assumptions used in the preparation
of the consolidated financial statements are appropriate given the factual
circumstances at the time.
Liquidity objectives for Premier 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 Premier 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 while attempting to maximize profitability. In order to provide
for funds on a current and long-term basis, the Premier Banks rely primarily on
the following sources:
|
|
1.
|
Core
deposits consisting of both consumer and commercial deposits and
certificates of deposit of $100,000 or more. Management
believes that the majority of its $100,000 or more certificates of deposit
are no more volatile than its other deposits. This is due to
the nature of the markets in which the subsidiaries
operate.
|
|
|
2.
|
Cash
flow generated by repayment of loans and
interest.
|
|
|
3.
|
Arrangements
with correspondent banks for purchase of unsecured federal
funds.
|
|
|
4.
|
The
sale of securities under repurchase agreements and borrowing from the
Federal Home Loan Bank.
|
|
|
5.
|
Maintenance
of an adequate available-for-sale security portfolio. Premier
owns $155.6 million of securities at market value as of March 31,
2009.
|
The cash flow statements for the
periods presented in the financial statements provide an indication of Premier’s
sources and uses of cash as well as an indication of the ability of Premier to
maintain an adequate level of liquidity.
At March 31, 2009, total shareholders’
equity of $90.0 million was 12.3% of total assets. This compares to
total shareholders’ equity of $89.4 million or 12.3% of total assets on December
31, 2008.
Tier I capital totaled $61.1 million at March 31,
2009, which represents a Tier I leverage ratio of 8.7%. This ratio is
unchanged from the 8.7% at December 31, 2008 as the growth in Tier I capital
kept pace with the growth in total assets during the first quarter of
2009.
Book value per share was $14.08 at
March 31, 2009, and $13.99 at December 31, 2008. The increase in book
value per share was the result of the $0.19 per share earned during the quarter
less the $0.11 per share common dividend. Also increasing the book
value per share was $68,000 of other comprehensive income for the first three
months of 2009 related to the after tax increase in the market value of
investment securities available for sale.
|
Nominee
|
Principal
Occupation or Employment(1)
|
|
Age
|
|
Director
of
Premier
Continuously
Since
|
|
|
|
|
|
|
|
|
Toney
K. Adkins
|
President
and Chief Operating Officer, Champion Industries, Inc. (commercial
printing and office supplies)
(2)
|
|
|
59
|
|
7/12/91
|
|
Hosmer
A. Brown, III
|
Attorney-at-Law
|
|
|
88
|
|
4/18/01
|
|
Edsel
R. Burns
|
President,
Energy Services of America Corporation(3)
|
|
|
58
|
|
7/19/00
|
|
E.V.
Holder, Jr.
|
Attorney-at-law
|
|
|
77
|
|
7/12/91
|
|
Keith
F. Molihan
|
Retired
Executive Director, Ironton/Lawrence County Area Community Action
Organization
|
|
|
66
|
|
9/14/99
|
|
Marshall
T. Reynolds
|
Chairman
and Chief Executive Officer, Champion Industries, Inc. (4)
|
|
|
72
|
|
1/19/96
|
|
Neal
W. Scaggs
|
President,
Baisden Brothers, Inc.
|
|
|
73
|
|
9/8/98
|
|
Robert
W. Walker
|
President
and Chief Executive Officer of Premier(5)
|
|
|
62
|
|
10/17/01
|
|
Thomas
W. Wright
|
Owner
and Chairman, NexQuest, Inc. (management company)
|
|
|
57
|
|
4/18/01
|
|
(1)
|
Except
where otherwise indicated, this principal occupation or employment has
continued during the past five
years.
|
|
(2)
|
Prior
to becoming President and Chief Operating Officer of Champion Industries
on January 25, 2005, Mr. Adkins served as its Vice President -
Administration since 1996.
|
|
(3)
|
Prior
to becoming President of Energy Services of America Corporation on October
1, 2008, Mr. Burns served as President of C. J. Hughes Construction
Company since September, 2002. He served as Chief Financial
Officer of Genesis Health Systems from June 2001 until December 31,
2001. He served as Chief Financial Officer of Central City
Online from March 2000 to April 2001. From January 1999 to
March 2000 he was on the audit staff of Arnett and Foster,
PLLC. Prior to that, he worked in various financial positions
with Banc One Corporation.
|
|
(4)
|
Mr.
Reynolds serves as Premier's Chairman of the Board. From 1985
to November 1993, Mr. Reynolds also served as Chairman of the Board of
Directors of Bank One West Virginia, N.A. (and its predecessor, Key
Centurion Bancshares, Inc.).
|
|
(5)
|
Prior
to becoming the President and Chief Executive Officer of Premier, Mr.
Walker was President of Boone County Bank, Inc. from September 1998 to
October 2001. Prior to that, Mr. Walker was a regional
president at Bank One West Virginia
N.A.
|
Premier's Chairman of the Board,
Marshall T. Reynolds, serves as a director of the following publicly held
companies or banks whose shares are registered under the Securities Exchange Act
of 1934: Abigail Adams Bancorp, Inc., Washington, D.C.; Champion Industries,
Inc., Huntington, West Virginia; First Guaranty Bank, Hammond, Louisiana; First
State Financial Corporation, Sarasota, Florida; Portec Rail Products, Inc.
Pittsburgh, Pennsylvania, and Energy Services of America Corporation.,
Huntington, West Virginia. Directors Neal W. Scaggs and Thomas W.
Wright also serve as directors of First State Financial Corporation and Portec
Rail Products, Inc. Directors Scaggs, Keith F. Molihan and Edsel R.
Burns also serve as directors of Energy Services of America
Corporation. In addition, director Scaggs is also a director of
Champion Industries, Inc.
Board
Meetings and Committees
During 2008, the full Board of
Directors met 16 times, the Compensation Committee and the Information
Technology Committee each met three times, the Nominating Committee met once,
and the Audit Committee met ten times. Each director attended
seventy-five percent or more of all meetings of the Board of Directors and
committees of the Board on which he serves. Premier strongly
encourages all members of the Board of Directors to attend the annual meeting of
shareholders each year. At the prior year's annual shareholder
meeting, all directors were in attendance.
The Board of Directors consists of a
majority of "independent directors" as such term is defined in the Nasdaq Stock
Market Marketplace Rules. The Board of Directors has determined that
Hosmer A. Brown, III, E.V. Holder, Jr., Keith F. Molihan, Neal W. Scaggs and
Thomas W. Wright are independent directors. The independent directors
met twice in executive session during 2008.
The Board of Directors has three
standing committees: a Compensation Committee, a Nominating Committee and an
Audit Committee.
Directors who are not full time
employees of Premier or any subsidiary receive fees of $1,000 a month for their
services. Board members are also reimbursed for expenses incurred in
connection with their services as directors. Directors receive no
compensation for attending committee meetings.
The Nominating Committee nominates
individuals to serve on Premier’s Board of Directors, to serve on other
committees of the Board of Directors, and to serve on the boards of directors of
Premier’s subsidiaries. The Nominating Committee currently consists
of Messrs. Wright, Molihan and Scaggs, all of whom are independent directors as
defined in the Nasdaq Stock Market Marketplace Rules. A copy of the
Nominating Committee charter was attached as Exhibit A to the 2007 annual
meeting proxy statement which was filed with the SEC on April 24,
2007.
When
considering a potential director candidate, the Nominating Committee looks for
personal and professional integrity, demonstrated ability and judgment and
business experience. The Nominating Committee will review and
consider director nominees recommended by the shareholders. There are
no differences in the manner in which the Nominating Committee evaluates
director nominees based on whether the nominee is recommended by a
shareholder.
The Audit Committee meets with
Premier’s financial management, internal auditors and independent auditors and
reviews the accounting principles and the scope and control of Premier’s
financial reporting practices. The Audit Committee makes reports and
recommendations to the Board with respect to audit matters and oversees the
internal audit function, reviews the internal audit reports, and provides
direction for the resolution of internal audit findings and
recommendations. The Audit Committee also recommends to the Board the
appointment of the firm selected to be independent certified public accountants
for Premier and monitors the performance of such firm; reviews and approves the
scope of the annual audit and evaluates with the independent certified public
accountants Premier's annual audit and annual Consolidated Financial Statements;
and reviews with management the status of internal accounting controls and
internal audit procedures and results. The Audit Committee consists
of Messrs. Brown, Scaggs, Wright and Molihan. The Audit Committee is
required to have and will continue to have at least three members, all of whom
must be "independent directors" as defined in the Marketplace Rules of the
Nasdaq Stock Market.
The Board determined that Messrs.
Brown, Scaggs, Molihan, and Wright are financially literate in the areas that
are of concern to Premier, and are able to read and understand fundamental
financial statements. The Board has also determined that Messrs.
Brown, Scaggs, Molihan, and Wright each meet the independence requirements set
forth in the Marketplace Rules of the Nasdaq Stock Market.
The
Securities and Exchange Commission ("SEC") has adopted rules to implement
certain requirements of the Sarbanes-Oxley Act of 2002 pertaining to public
company audit committees. One of the rules adopted by the SEC
requires a company to disclose whether it has an "audit committee financial
expert" serving on its audit committee.
From May 1, 2005 to October 1, 2008,
Director Edsel R. Burns served as the audit committee financial expert under the
rules adopted by the SEC. During that time, the Board also determined
that Mr. Burns met the independence requirements set forth in the Marketplace
Rules of the Nasdaq Stock Market. However, on October 1, 2008,
Director Burns became President of Energy Services of America Corporation, a
publicly traded company of which Marshall T. Reynolds is Chairman and Chief
Executive Officer. Premier’s Board of Directors believes that in his
capacity as President of Energy Services of America Corporation, Director Burns
is no longer an independent director of Premier. As such, Mr. Burns
resigned from the Audit Committee. Based on its review of the
criteria of an audit committee financial expert under the rule adopted by the
SEC the Board of Directors does not believe that any other member of the Board
of Directors' Audit Committee could be described as an audit committee financial
expert. The Board has not yet determined whether to search for an
audit committee financial expert to replace Mr. Burns or the appropriate process
for such search.
The Compensation Committee consists of
Messrs. Wright, Scaggs and Molihan, all of whom are independent directors as
defined in the Nasdaq Stock Market Marketplace Rules. The Committee reviews and
determines salaries and other benefits for executive and senior management of
Premier and its subsidiaries, reviews and determines the employees to whom stock
options are to be granted and the terms of such grants, and reviews the
selection of officers who participate in incentive and other compensation plans
and arrangements. The Committee establishes the management compensation policy
and the general compensation policies of Premier.
The
individuals named in the following table are the executive officers of Premier
under applicable SEC disclosure rules. Except as otherwise indicated,
each executive officer has held the position indicated for the last five
years.
|
Name
|
|
Age
|
|
Position
|
|
Marshall
T. Reynolds
|
|
|
72
|
|
Chairman
of the Board
|
|
Robert
W. Walker
|
|
|
62
|
|
President
and Chief Executive Officer
|
|
Brien
M. Chase
|
|
|
44
|
|
Senior
Vice President and Chief Financial Officer
(Principal
Accounting Officer)
|
|
Dennis
Klingensmith
|
|
|
55
|
|
Senior
Vice President, Premier
(Chief
Executive Officer, First Central Bank)
|
|
Scot
A. Kelley
|
|
|
52
|
|
Vice
President, Credit Administration
|
|
Katrina
Whitt
|
|
|
34
|
|
Vice
President, Human Resources
|
Mr.
Walker has held his current position since October, 2001. From
September, 1998 until October, 2001 Mr. Walker was President, Boone County Bank,
Inc. Prior to that time, Mr. Walker was a Regional Vice President at
Bank One, West Virginia, N.A. Mr. Walker also serves on Premier’s
asset/liability management committee.
Mr.
Chase began his duties as CFO of Premier in April, 2002. From June
1994 to January 2001, Mr. Chase was corporate accounting manager for One Valley
Bancorp, Inc. He also served as controller for four of the One Valley
Bancorp subsidiaries. Prior to that time, Mr. Chase was the senior
accountant for One Valley Bancorp for six years. Mr. Chase also
serves on Premier’s asset/liability management committee.
Mr.
Klingensmith has held his current position since June, 1998 and has served as
Chief Executive Officer of First Central Bank since November
2001. Prior to that time, Mr. Klingensmith was an area Chief
Executive Officer for Bank One, West Virginia, N. A. Mr. Klingensmith
was also acting Chief Executive Officer of Citizens’ Bank (Kentucky), Inc. from
November 2002 to February 2003 and acting Chief Executive Officer of Farmers
Deposit Bank from June 2003 to October 2003. Mr. Klingensmith also
serves on Premier’s asset/liability management committee.
Mr.
Kelley began his duties in charge of Credit Administration in August,
2003. Prior to that time, Mr. Kelley served Bank One, West Virginia,
N.A in several capacities including Manager of Credit Analysis, Internal Auditor
and Branch Manager from 1991 to 2003. Mr. Kelley was appointed as
Vice President of Premier in March, 2008.
Ms.
Whitt began her duties in charge of Human Resources in July,
2003. From October 1998 to July 2003, Ms. Whitt was Human Resources
Generalist for Applied Card Systems. Ms. Whitt was appointed as Vice
President of Premier in March, 2008.
Premier
has identified only three executives that meet the definition of a “named
executive officer” to be discussed in the Compensation Discussion and Analysis;
the Chief Executive Officer, Robert W. Walker, the Chief Financial Officer,
Brien M. Chase and Senior Vice President, Dennis J. Klingensmith. The
following discussion details Premier’s goals in how it compensates these named
executive officers, analyzes how the elements in Premier’s compensation programs
meet these goals, discusses how Premier determines the actual amounts paid to
the named executive officers and finally presents, in tabular form, the amounts
of compensation paid to each named executive officer in 2008.
The
objectives of Premier’s compensation program are to attract and retain qualified
individuals of high integrity, to motivate them to achieve the goals set forth
in Premier’s business plan; to link executive and stockholder interests through
incentive-based compensation; and to enhance Premier’s performance, measured by
both short-term and long-term achievements. Premier believes these
goals will provide consistent, long-term shareholder value as well as build a
vibrant franchise that will attract locally well known community bankers and
customers.
To
achieve these goals, Premier compensates its named executive officers using a
base salary, a performance based annual bonus, and stock option
awards. Premier believes the interests of Premier and its
shareholders are served by this three-part approach. Under this
approach the compensation of executive officers involves a part of their pay
that is “at risk”--namely, the annual bonus and any stock option
awards. The variable annual bonus permits individual performance to
be recognized on an annual basis, and is based, in significant part, on the
performance of the respective executive officer, whereas stock option grants
typically only have value to the executive officer if there is a rise in
Premier’s stock price beyond the grant date.
To
attract and retain qualified individuals of high integrity, Premier pays a
competitive base salary to its executive officers and offers the option to
participate in customary benefits such as medical insurance and a 401(k)
retirement plan. Salaries are commensurate with an individual’s
experience; ability to lead, implement and achieve Premier’s strategic goals;
capability in enhancing Premier’s performance in light of potentially adverse
changes in banking regulation, interest rates, the local and/or national
economy, and other factors beyond the influence of management; and the
executive’s level of integrity in dealing with customers, employees,
shareholders and the directorship.
To
reward short-term performance, Premier pays a discretionary annual bonus to the
named executive officers as well as other key employees of
Premier. The bonus rewards better than anticipated financial
performance, such as asset growth, income enhancing strategies, expense
reduction strategies, and non-performing asset resolution. The bonus
also rewards other events such as successful regulatory examinations, the
ability to recruit replacement management, quality financial disclosures and
controls, strategic acquisitions or dispositions and other events Premier may
consider from time-to-time.
To
reward long-term performance and enhancements to long-term shareholder value,
Premier offers stock options to the named executive officers as well as other
key employees of Premier. Options are typically granted once a year,
near the beginning of the year, in conjunction with a regularly scheduled board
of directors meeting. Scheduling decisions are made without regard to
anticipated earnings or other major announcements by Premier. As a
matter of practice, Premier does not reprice stock options. To reward
long-term performance, the options typically vest in three equal annual
installments beginning on the grant date and have a maximum ten-year
term. Premier believes the vesting schedule also provides incentive
for the named executive officers to continue their employment with
Premier.
The
annual bonus, number of stock options and salary increase, if any, are
determined annually. Premier uses surveys conducted by local state
banking associations to assess competitive market place compensation for its
executive officers and uses ranges of compensation rather than specific
targets. The named executive officers do not have employment,
severance or change-of-control agreements. They serve at the will of the Board
of Directors, which enables Premier to terminate their employment with
discretion as to the terms of any severance arrangement.
For
any annual bonus, the Chief Executive Officer reviews the estimated full year
financial results with the Board of Directors and, if appropriate, an annual
bonus pool is determined. Allocations from the pool are made to
Premier’s subsidiary banks whose senior management make individual award
recommendations. Premier does not use rigid incentive formulas to
determine the annual bonus, as simple formulas may tend to improperly favor one
aspect of financial performance to the detriment of others, while complex
formulas provide no real focus or are inevitably adjusted for unforeseen
events. A recommendation as to the bonus to be paid to each executive
officer is based on an evaluation by the Chief Executive Officer of their
individual performance for the prior year and their contribution toward
Premier’s performance as a whole. After reviewing the final full year results,
the Compensation Committee, with input from the Chief Executive Officer with
respect to the other named executive officers and affiliate bank presidents,
uses discretion in evaluating the individual award recommendations and
determining the actual bonus amount to be awarded. Premier believes
that the annual bonus rewards those high-performing individuals who drive the
financial results and long-term performance of Premier.
Similar
to the annual bonus, the number of stock options granted to individuals is
determined, with input from the Chief Executive Officer, by the Compensation
Committee. The number of stock options granted annually is modest so
as not to dilute earnings per share either through the increase in the number of
shares outstanding or through recorded stock compensation
expense. Stock options are granted with an exercise price equal to
the closing price on the grant date and therefore only have value to the
optionee if there is a rise in Premier’s stock price beyond the grant
date. Premier believes it is the accumulation of options over time
that provides the real incentive for the named executive officers to propel
Premier’s value to ever higher levels.
On
November 14, 2008, Premier applied to participate in the U.S. Treasury Troubled
Asset Relief Program (“TARP”) Capital Purchase Program (“CPP”). To
participate in the CPP, Premier will be required to adopt the U.S. Treasury’s
standards for executive compensation and corporate governance, for the period
during which the U.S. Treasury holds equity issued under the CPP. The
foregoing requirements will preclude future payment of cash bonuses to Mr.
Walker while TARP funds are outstanding. Otherwise, the Premier Board
of Directors does not anticipate that any material changes would need to be made
to Premier’s existing compensation plans and arrangements to comply with the
U.S. Treasury’s standards for executive compensation and corporate
governance
The
specific compensation amounts for each of Premier’s named executive officers for
2008 reflect the continued improvement in Premier’s financial
performance. A more detailed analysis of Premier’s 2008 financial
results is contained in the Management Discussion and Analysis section contained
in the annual report to shareholders and Premier’s Form 10-K filed with the
Securities and Exchange Commission.
In
determining the named executive officers’ compensation for 2008, the
Compensation Committee considered Premier’s performance during
2007. Net income increased from $6,501,000 in 2006 to $7,119,000 for
2007. Earnings per share increased from $1.24 in 2006 to $1.36 in
2007. The net interest margin improved from 4.32% in 2006 to 4.42% in
2007. Net overhead costs decreased from 2.56% of average earning
assets in 2006 to 2.32% of average earning assets in
2007. Non-performing assets decreased from $7,453,000 at December 31,
2006 to $5,807,000 at December 31, 2007. Net loan charge-offs
remained low at $86,000 in 2007 and $70,000 in 2006. Loans
outstanding increased from $343,797,000 at December 31, 2006 to $346,570,000 at
December 31, 2007. On October 24, 2007, Premier entered into a merger
agreement with Citizens First Bank, Inc., a $60 million bank located in
Ravenswood, West Virginia. On November 27, 2007, Premier entered into
a merger agreement with Traders Bankshares, Inc., a $105 million single bank
holding company located in Spencer, West Virginia. Premier continued
paying quarterly cash dividends to shareholders during 2007, increasing the
quarterly dividend to $0.10 per share in March 2007. Both Citizens
First Bank, Inc. and Traders Bankshares, Inc. were acquired by Premier on April
30, 2008.
Based
upon an evaluation of his contributions toward these and other events in 2007,
his leadership performance and his potential to improve long-term shareholder
value, the Compensation Committee granted Mr. Walker a salary increase of
$10,500 in 2008 to $220,500 annually. Considering the specific
accomplishments achieved by Premier in 2007 and Mr. Walker’s integral part in
negotiating and executing the merger agreements with Citizens First Bank, Inc.
and Traders Bankshares, Inc., the Compensation Committee awarded Mr. Walker a
$25,000 cash bonus which was paid in February 2008. To continue to
incent Mr. Walker to continue with his successful turnaround of Premier’s
financial performance, to complete and facilitate the successful acquisitions of
Citizens First Bank, Inc. and Traders Bankshares, Inc. and to reward him for
long-term improvements in the stock’s value, the Compensation Committee granted
him 10,000 options to buy Premier stock at $12.92 per share (the closing price
on the February 20, 2008 grant date.) This grant increased Mr.
Walker’s total options to buy Premier stock to 32,750. Additional
information on Mr. Walker’s 2008 compensation is detailed in the tables
below.
Based
upon an evaluation of his contributions toward achieving Premier’s performance
in 2007 as summarized above, his leadership in providing clear, concise and
quality financial disclosures to the Board of Directors and shareholders through
Premier’s annual and quarterly reports and this proxy statement, and his
potential to improve long-term shareholder value, the Compensation Committee
granted Mr. Chase a salary increase of $5,137 in 2008 to $96,863
annually. Considering the specific accomplishments achieved by
Premier in 2007 and Mr. Chase’s integral part in negotiating and executing the
merger agreements with Citizens First Bank, Inc. and Traders Bankshares, Inc.
and his preparation of the regulatory filings to facilitate the required
approvals for the mergers, the Compensation Committee awarded Mr. Chase a
$16,500 cash bonus which was paid in February 2008. To continue to
incent Mr. Chase to continue improve Premier’s financial performance, to
complete and facilitate the successful acquisitions of Citizens First Bank and
Traders Bankshares, Inc., and to reward him for long-term improvements in the
stock’s value, the Compensation Committee granted him 5,000 options to buy
Premier stock at $12.92 per share (the closing price on the February 20, 2008
grant date.) This grant increased Mr. Chase’s total options to buy
Premier stock to 16,500. Additional information on Mr. Chase’s 2008
compensation is detailed in the tables below.
Based
upon an evaluation of his contributions toward achieving Premier’s performance
in 2007 as summarized above; his banking insight as Chief Executive Officer of
First Central Bank located in Premier’s fastest growing market; his leadership
at First Central which brought in over $11.0 million of new net loan volume to
Premier and his potential to improve long-term shareholder value, the
Compensation Committee granted Mr. Klingensmith a salary increase of $4,900 in
2008 to $127,100 annually. Considering the specific accomplishments
achieved by Premier in 2007, the Compensation Committee awarded Mr. Klingensmith
a $9,000 cash bonus which was paid in February 2008. To continue to
incent Mr. Klingensmith to continue improve Premier’s financial performance and
to reward him for long-term improvements in the stock’s value, the Compensation
Committee granted him 3,000 options to buy Premier stock at $12.92 per share
(the closing price on the February 20, 2008 grant date.) This grant
increased Mr. Klingensmith’s total options to buy Premier stock to
17,000. Additional information on Mr. Klingensmith’s 2008
compensation is detailed in the tables below.
The following table summarizes
compensation earned in each of the three years ended December 31, 2008 by
Premier's named executive officers.
|
Name
and principal position
|
Year
|
Salary
($)
|
Bonus
($)
|
Stock
Awards
($)
|
Option
Awards (1)
($)
|
Non-Equity
Incentive
Plan
Compensation
($)
|
Change
in
Pension
Value
And
Nonqualified
Deferred
Compensation
Earnings
($)
|
All
Other
Compensation
(2)
(3)
($)
|
Total
($)
|
|
Robert
W. Walker
|
2008
|
220,500
|
25,000
|
---
|
22,832
|
---
|
---
|
11,018
|
279,350
|
|
President
and CEO
|
2007
|
210,000
|
20,000
|
---
|
21,633
|
---
|
---
|
9,820
|
261,453
|
|
|
2006
|
200,000
|
20,000
|
---
|
20,747
|
---
|
---
|
9,030
|
249,777
|
|
Brien
M. Chase
|
2008
|
102,000
|
16,500
|
---
|
11,415
|
---
|
---
|
4,411
|
134,326
|
|
Senior
Vice President
|
2007
|
96,863
|
10,000
|
---
|
10,679
|
---
|
---
|
3,818
|
121,360
|
|
and
CFO
|
2006
|
92,500
|
10,000
|
---
|
10,373
|
---
|
---
|
3,346
|
116,219
|
|
Dennis
Klingensmith
|
2008
|
127,100
|
9,000
|
---
|
9,414
|
---
|
---
|
6,507
|
152,021
|
|
Sr.
Vice President and
|
2007
|
122,200
|
10,000
|
---
|
12,982
|
---
|
---
|
5,975
|
151,157
|
|
CEO
First Central Bank
|
2006
|
117,500
|
12,500
|
---
|
12,480
|
---
|
---
|
5,432
|
147,912
|
________________________
|
(1)
|
The
amounts reported in this column represent the dollar amount recognized as
expense for financial statement reporting purposes for the years ended
December 31, 2008, 2007 and 2006 for the fair value of stock options
granted to each of the named executive officers in accordance with SFAS
123R. Premier's option grants vest in three equal annual
installments and therefore the amount expensed in 2008 includes the first
vesting year of the 2008 option grant, the second vesting year of the 2007
option grant and the third vesting year of the 2006 option
grant. Similarly, the amount expensed in 2007 includes the
first vesting year of the 2007 option grant, the second vesting year of
the 2006 option grant and the third vesting year of the 2005 option grant
and the amount expensed in 2006 includes the first vesting year of the
2006 option grant, the second vesting year of the 2005 option grant and
the third vesting year of the 2004 option grant. Pursuant to
SEC rules, the amounts shown exclude the impact of estimated forfeitures
related to service-based vesting conditions. More information
about stock compensation expense, including the assumptions used in the
calculation of these amounts, is included in footnote 13 to Premier’s
audited financial statements for the fiscal year ended December 31, 2008
included in Premier’s Annual Report on Form 10-K filed with the Securities
and Exchange Commission. These amounts reflect Premier's
accounting expense for these awards and do not necessarily correspond to
the actual value that may be ultimately recognized by the named executive
officers.
|
|
(2)
|
Premier
provides automobiles to Mr. Walker and Mr. Klingensmith due to their
extensive travel for business purposes. Premier's expense for
providing the vehicle for the executive's personal use along with all
other perquisites does not exceed $10,000 and therefore is not included in
this table.
|
|
(3)
|
All
other compensation consists of Premier's matching contributions to the
executive's 401k plan account and amounts paid by Premier for the
executive's participation in Premier’s benefit
programs.
|
The following table provides
information about options granted to the named executive officers in
2008.
| |
|
Estimated
Future Payouts
Under
Non-Equity Incentive
Plan
Awards
|
|
Estimated
Future Payouts
Under
Equity Incentive Plan
Awards
|
All
Other
Stock
Awards:
|
All
Other
Option
Awards:
|
|
|
|
Name
|
Grant
Date
|
Threshold
($)
|
Target
($)
|
Maximum
($)
|
|
Threshold
($)
|
Target
($)
|
Maximum
($)
|
Number
of
Shares
of
Stock
or
Units
(#)
|
Number
of
Securities
Underlying
Options
(#)
|
Exercise
or
Base
Price
of
Option
Awards
($/Sh)
|
Grant
Date
Fair
Value
of
Stock and
Option
Awards
($)
|
|
Robert
W. Walker
|
Feb-20-2008
|
n/a
|
n/a
|
n/a
|
|
n/a
|
n/a
|
n/a
|
n/a
|
10,000
|
12.92
|
25,500
|
|
Brien
M. Chase
|
Feb-20-2008
|
n/a
|
n/a
|
n/a
|
|
n/a
|
n/a
|
n/a
|
n/a
|
5,000
|
12.92
|
12,750
|
|
Dennis
J. Klingensmith
|
Feb-20-2008
|
n/a
|
n/a
|
n/a
|
|
n/a
|
n/a
|
n/a
|
n/a
|
3,000
|
12.92
|
7,650
|
________________________
|
(1)
|
Options
awarded in 2008 vest in three equal annual installments beginning on
February 20, 2009. The exercise price of the options awarded in
2008 was the closing price on February 20, 2008, the date of
grant. The $2.55 per share grant date fair value of each option
awarded was determined using SFAS 123R as more fully described in footnote
13 to Premier's December 31, 2008 Financial
Statements.
|
The following table provides
information on the current holdings of stock options by the name executive
officers. This table includes unexercised and unvested option
awards. Each option grant is shown separately for each named
executive officer.
| |
Option
Awards
|
Stock
Awards
|
|
Name
|
Number
of
Securities
Underlying
Options
(#)
|
Number
of
Securities
Underlying Unexercised
Options
(#)
|
Equity
Incentive
Plan
Awards:
Number
of
Securities
Underlying
Unexercised
Unearned
Options
|
Option
Exercise
Price
|
Option
Expiration
|
Number
of
Shares
or
Units
of
Stock
That
Have
Not
Vested
|
Market
Value
of
Shares
or
Units
of
Stock
That
Have
Not
Vested
|
Equity
Incentive
Plan
Awards:
Number
of
Unearned
Shares,
Units
or
Other Rights
That
Have Not
Vested
|
Equity
Incentive
Plan
Awards:
Market
or
Payout
Value of
Unearned
Shares,
Units
or
Other Rights
That
Have Not
Vested
|
| |
Exercisable
|
Unexercisable
|
(#)
|
($)
|
Date
|
(#)
|
($)
|
(#)
|
($)
|
|
Robert
W. Walker
|
0
|
10,000
|
n/a
|
12.92
|
Feb-20-2018
|
n/a
|
n/a
|
n/a
|
n/a
|
| |
1,667
|
3,333
|
n/a
|
14.22
|
|
n/a
|
n/a
|
n/a
|
n/a
|
| |
3,334
|
1,666
|
n/a
|
16.00
|
|
n/a
|
n/a
|
n/a
|
n/a
|
| |
5,000
|
0
|
n/a
|
11.62
|
|
n/a
|
n/a
|
n/a
|
n/a
|
| |
4,000
|
0
|
n/a
|
9.30
|
|
n/a
|
n/a
|
n/a
|
n/a
|
| |
3,750
|
0
|
n/a
|
7.96
|
|
n/a
|
n/a
|
n/a
|
n/a
|
|
Brien
M. Chase
|
0
|
5,000
|
n/a
|
12.92
|
Feb-20-2018
|
n/a
|
n/a
|
n/a
|
n/a
|
| |
834
|
1,666
|
n/a
|
14.22
|
Jan-17-2017
|
n/a
|
n/a
|
n/a
|
n/a
|
| |
1,667
|
833
|
n/a
|
16.00
|
Feb-16-2016
|
n/a
|
n/a
|
n/a
|
n/a
|
| |
2,000
|
0
|
n/a
|
11.62
|
Jan-19-2015
|
n/a
|
n/a
|
n/a
|
n/a
|
| |
2,000
|
0
|
n/a
|
9.30
|
Feb-18-2014
|
n/a
|
n/a
|
n/a
|
n/a
|
| |
2,000
|
0
|
n/a
|
7.96
|
Jan-15-2013
|
n/a
|
n/a
|
n/a
|
n/a
|
|
Dennis
J. Klingensmith
|
0
|
3,000
|
n/a
|
12.92
|
|
n/a
|
n/a
|
n/a
|
n/a
|
| |
1,000
|
2,000
|
n/a
|
14.22
|
|
n/a
|
n/a
|
n/a
|
n/a
|
| |
2,000
|
1,000
|
n/a
|
16.00
|
|
n/a
|
n/a
|
n/a
|
n/a
|
| |
3,000
|
0
|
n/a
|
11.62
|
|
n/a
|
n/a
|
n/a
|
n/a
|
| |
2,500
|
0
|
n/a
|
9.30
|
|
n/a
|
n/a
|
n/a
|
n/a
|
| |
2,500
|
0
|
n/a
|
7.96
|
|
n/a
|
n/a
|
n/a
|
n/a
|
The following table summarizes
compensation earned in 2008 by Premier's directors.
|
Name
|
Fees
Earned
or
Paid
in
Cash
($)
|
Stock
Awards
($)
|
Option
Awards
($)
|
Non-Equity
Incentive
Plan
Compensation
($)
|
Change
in
Pension
Value
and
Nonqualified
Deferred
Compensation
Earnings
($)
|
All
Other
Compensation
($)
|
Total
($)
|
|
Toney
K. Adkins
|
10,500
|
n/a
|
n/a
|
n/a
|
n/a
|
n/a
|
10,500
|
|
Hosmer
A. Brown, III
|
10,500
|
n/a
|
n/a
|
n/a
|
n/a
|
n/a
|
10,500
|
|
Edsel
R. Burns
|
10,500
|
n/a
|
n/a
|
n/a
|
n/a
|
n/a
|
10,500
|
|
E.V.
Holder, Jr.
|
10,500
|
n/a
|
n/a
|
n/a
|
n/a
|
n/a
|
10,500
|
|
Keith
F. Molihan
|
10,500
|
n/a
|
n/a
|
n/a
|
n/a
|
n/a
|
10,500
|
|
Marshall
T. Reynolds
|
10,500
|
n/a
|
n/a
|
n/a
|
n/a
|
n/a
|
10,500
|
|
Neal
W. Scaggs
|
10,500
|
n/a
|
n/a
|
n/a
|
n/a
|
n/a
|
10,500
|
|
Robert
W. Walker
|
(1)
|
n/a
|
n/a
|
n/a
|
n/a
|
n/a
|
0
|
|
Thomas
W. Wright
|
10,500
|
n/a
|
n/a
|
n/a
|
n/a
|
n/a
|
10,500
|
|
(1)
|
In
accordance with Premier policy, as an employee of Premier, Mr. Walker does
not receive any director
compensation.
|
The following table gives information
about Premier’s common stock that may be issued upon the exercise of options,
warrants and rights under its equity compensation plan, the 2002 Stock Option
Plan, as of December 31, 2008.
|
Plan
Category
|
|
Number
of securities to be issued upon exercise of outstanding options, warrants
and rights
(a)
|
|
|
Weighted-average
exercise price of outstanding options, warrants and rights
(b)
|
|
|
Number
of securities remaining available for future issuance under equity
compensation plans (Excluding securities reflected in column
(a))
(c)
|
|
|
Equity
compensation plans approved by shareholders
|
|
|
|
|
|
|
|
|
|
|
2002 Stock Option
Plan
|
|
|
181,916 |
|
|
|
12.47 |
|
|
|
312,415 |
|
|
Equity
compensation plans not
approved by shareholders
|
|
|
|
|
|
|
|
|
|
|
|
|
|
None
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
181,916 |
|
|
$ |
12.47 |
|
|
|
312,415 |
|
Premier's subsidiaries have made, and
expect to make in the future to the extent permitted by applicable federal and
state banking laws, bank loans in the ordinary course of business to directors
and officers of Premier and its subsidiaries and their affiliates and associates
on substantially the same terms, including interest rates and collateral, as
those prevailing at the time for comparable transactions with other
persons. In the opinion of Premier, such loans do not involve more
than a normal risk of collectibility or present other unfavorable
features. In addition, Premier's banking subsidiaries have engaged,
and in the future may engage, in transactions with such persons and their
affiliates and associates as a depositary of funds, transfer agent, registrar,
fiduciary and provider of other similar services.
Premier has adopted a policy to conduct
an appropriate review of all related party transactions on an ongoing basis,
pursuant to which all material or related transactions with any director,
officer or employee or other person or entity with which such director, officer,
or employee is affiliated must be on terms no less favorable to the corporation
than those that are generally available from unaffiliated third parties and must
be approved and ratified by the audit committee by majority vote of its members
who do not have an interest in the transaction.
During the years ended December 31,
2008, 2007, and 2006, Premier or its subsidiaries have paid approximately
$218,000, $231,000, and $228,000, respectively, for commercial printing services
and office supplies and furniture from Champion Industries, Inc., Huntington,
West Virginia, of which Premier's Chairman of the Board, Marshall T. Reynolds,
is its Chief Executive Officer and a principal shareholder and Premier’s
director Toney K. Adkins is President and Chief Operating Officer.
Premier
or its subsidiaries have paid The Harrah and Reynolds Corporation, a corporation
controlled by Marshall T. Reynolds, approximately $533,000, $459,000, and
$468,000 in 2008, 2007, and 2006, respectively, to permit employees of Premier
and its subsidiaries to participate in a medical benefit plan sponsored and
administered by The Harrah and Reynolds Corporation.
Premier leases its headquarters
facility at 2883 Fifth Avenue, Huntington, West Virginia from River City
Properties, LLC, an entity 12.5% owned by Chairman of the Board of Directors
Marshall T. Reynolds. The lease, for 5,900 square feet, had a
five-year term commencing in September 2002 and was renewed for an additional
five-year term in September 2007 with annual rent of $8.50 per square foot the
first year and thereafter inflation adjusted. Premier believes that
the terms of this lease, which were approved by the Board of Directors, are no
less favorable to Premier than those available from unrelated third parties.
Annual lease payments totaled approximately $52,000, $52,000 and $52,000 in
2008, 2007 and 2006, respectively.
On April 30, 2008, Premier executed and
delivered to First Guaranty Bank of Hammond, Louisiana a Promissory Note and
Business Loan Agreement dated April 30, 2008 for the principal amount of
$11,550,000, bearing interest floating daily at the “Wall Street Journal” prime
rate (3.25% as of March 31, 2009) (the “Index”) minus 1.00% and requiring 59
monthly principal payments of $50,000 and one final payment of $8,600,000 due at
maturity on April 30, 2013. If the Index is between 5.00% and 6.00%,
the interest on the note will be 5.00%. If the Index falls below
5.00%, then the interest on the note will float with the Index. The
note is secured by a pledge of Premier’s 100% interest in Boone County Bank (a
wholly owned subsidiary) under Commercial Pledge Agreement dated April 30,
2008. The proceeds of this note were used to fund the $9,000,000 of
cash needed to purchase Traders Bankshares, Inc. and to refinance the remaining
$2,550,000 balance of Premier’s outstanding note with First Guaranty Bank dated
January 31, 2006.
Premier’s chairman owns approximately
30% of the voting stock of First Guaranty Bank. However, Premier’s
board of directors determined during its vote to authorize Premier to enter into
the loan transaction that the terms of the financing, including the interest
rate and collateral, were no less favorable than those which could be obtained
from other financial institutions.
On December 31, 2008, Premier
guaranteed a $6.0 million line of credit from the Bankers Bank of Kentucky to
Adams. Premier’s subsidiary banks bought loan participations up to
$4.5 million of this line of credit on a first-in last-out basis. The
line is secured by 100% of the stock of Adams’ subsidiary bank, CBT, and 20% of
the stock of Adams’ subsidiary bank, ANB. The line of credit bears an
interest rate floating daily with the J. P. Morgan Chase Prime Rate with a
minimum interest rate of 5.00%. Premier’s chairman owns approximately
17.3% of Adams and Premier’s Chief Executive Officer is interim Chief Executive
Officer of Adams. However, Premier’s board of directors determined
during its vote to authorize Premier to purchase the loan participations that
the terms of the financing, including the interest rate and collateral, were no
more favorable than those which could be obtained by Adams from other financial
institutions.
General
Adams
is a Delaware-chartered bank holding company which conducts business through its
two wholly-owned bank subsidiaries, The Adams National Bank (“ANB”) and
Consolidated Bank & Trust Company (“CBT”) (collectively, the “Adams
Banks”). ANB serves the nation’s capital through six full-service
offices located in Washington, D.C. and Maryland. CBT serves the Richmond and
Hampton, Virginia market areas through two full service offices. Adams is
subject to regulation by the Board of Governors of the Federal Reserve System
(the “Federal Reserve Board”) and ANB is regulated by the Office of the
Comptroller of the Currency. CBT is regulated by the Federal Reserve Board and
the Bureau of Financial Institutions of the Commonwealth of Virginia (“Bureau of
Financial Institutions”). Adams’ assets consist primarily of its
ownership in the shares of the Adams Banks’ common stock and cash it receives
from the Adams Banks in the form of dividends or other capital distributions. At
December 31, 2008, Adams had consolidated assets of $423.7 million, deposits of
$347.0 million and shareholders’ equity of $24.3 million.
ANB
was founded in 1977 as a national bank. CBT was founded in 1903 as a
Virginia chartered commercial bank that is a member of the Federal Reserve
System. Both Adams Banks’ deposits are federally insured to the maximum amount
permitted by law.
On
July 29, 2005, Adams acquired CBT as a wholly-owned subsidiary by an Agreement
and Plan of Merger, dated February 10, 2005 for approximately $3.0
million. Pursuant to the agreement, CBT shareholders received 0.534
shares of Adams common stock for each of their CBT shares.
Adams
reports two operating segments comprised of its subsidiaries, ANB and CBT, for
which there is discrete financial information available. Both segments are
engaged in providing financial services in their respective market areas and are
similar in each of the following: the nature of their products, services; and
processes; type or class of customer for their products and services; methods
used to distribute their products or provide their services; and the nature of
the banking regulatory environment. Adams is deemed to represent an overhead
function rather than an operating segment. For additional information on segment
reporting, see Note 22 of the Notes to Adams’ Consolidated Financial Statements
included herein.
The
executive office of Adams is located at 1130 Connecticut Avenue, N.W.,
Washington, D.C. 20036. The telephone number is (202) 772-3600.
On December 31, 2008, Adams entered
into a definitive agreement to be acquired by Premier. Pursuant to
the agreement, each shareholder of Adams will receive 0.4461 shares of Premier
common stock. The entire transaction was valued
at approximately $10.9 million based upon Premier’s closing price on
December 31, 2008. The transaction is subject to regulatory and
shareholder approval and is expected to be completed during the third quarter of
2009.
On October 1, 2008, Adams’ wholly owned
subsidiary, ANB entered into a written agreement with its primary regulator, The
Office of the Comptroller of the Currency (the “OCC”). Under the
terms of the written agreement, ANB has agreed to take certain actions relating
to the Bank’s lending operations and capital
compliance. Specifically, the OCC is requiring ANB to take certain
enumerated actions. See “Supervision and Regulation—Written
Agreement” for further information.
In
response to the financial crises affecting the banking system and financial
markets and going concern threats to investment banks and other financial
institutions, on October 3, 2008, the Emergency Economic Stabilization Act of
2008 (the “EESA”) was signed into law. EESA provides, among other
things, for a Troubled Assets Relief Program (“TARP”), under which the U.S.
Department of the Treasury has the authority to purchase up to $700 billion of
securities and certain other financial instruments from financial institutions
for the purpose of stabilizing and providing liquidity to the U.S. financial
markets.
On
October 14, 2008, the Treasury Department announced a Capital Purchase Program
(“CPP”) under the TARP pursuant to which it would acquire equity investments,
usually preferred stock, in banks and thrifts and their holding
companies. Participating financial institutions also were required to
adopt the Treasury Department’s standards for executive compensation and
corporate governance for the period during which the department holds equity
issued under the CPP. Adams has not applied to receive an investment
under the CPP.
On
February 10, 2009, Treasury announced its Capital Assistance Program (“CAP”)
under which Treasury will make capital available to financial institutions
through Treasury’s purchase of cumulative mandatorily convertible preferred
stock. The preferred shares will mandatorily convert to common stock after seven
years. Prior to that time, the preferred shares are convertible in whole or in
part at the option of the institution, subject to the approval of the
institution’s primary federal regulator. Institutions that have
received an investment from Treasury under the CPP may use proceeds from the CAP
to redeem preferred shares issued in the CPP, effectively exchanging the
preferred stock sold under the CPP for CAP convertible preferred
stock.
On
December 22, 2008, the FDIC published a final rule that raises the current
deposit insurance assessment rates uniformly for all institutions by 7 basis
points (to a range from 12 to 50 basis points) effective for the first quarter
of 2009. On February 27, 2009, the FDIC also issued a final rule that
revises the way the FDIC calculates federal deposit insurance assessment rates
beginning in the second quarter of 2009. Under the new rule, the
total base assessment rate will range from 7 to 77.5 basis points of the
institution’s deposits, depending on the risk category of the institution and
the institution’s levels of unsecured debt, secured liabilities, and brokered
deposits. Additionally, the FDIC issued an interim rule that would
impose a special 20 basis points assessment on June 30, 2009, which would be
collected on September 30, 2009. However, the FDIC has indicated a willingness
to decrease the special assessment to 10 basis points under certain
circumstances concerning the overall financial health of the insurance fund.
Special assessments of 10 and 20 basis points would result in additional expense
of approximately $293,000 to $586,000, respectively. The interim rule also
allows for additional special assessments.
On
October 14, 2008, the FDIC announced the Temporary Liquidity Guarantee Program
(“TLGP”). This program has two components. One guarantees newly
issued senior unsecured debt of the participating organizations, up to certain
limits established for each institution, issued between October 14, 2008 and
June 30, 2009. Adams has opted not to participate in this component of the
TLGP. The other component of the program provides full FDIC
insurance coverage for non-interest bearing transaction deposit accounts,
regardless of dollar amount, until December 31, 2009. An annualized 10 basis
point assessment on balances in noninterest-bearing transaction accounts that
exceed the existing deposit insurance limit of $250,000 will be assessed on a
quarterly basis to insured depository institutions participating in this
component of the TLGP. Adams has chosen to participate in this
component of the TLGP.
The
American Recovery and Reinvestment Act of 2009 (“ARRA”), more commonly known as
the economic stimulus or economic recovery package, was signed into law on
February 17, 2009, by President Obama. ARRA includes a wide variety
of programs intended to stimulate the economy and provide for extensive
infrastructure, energy, health, and education needs. In addition,
ARRA imposes certain new executive compensation and corporate expenditure limits
on all current and future TARP recipients until the recipient has repaid the
Treasury, which is now permitted under ARRA without penalty and without the need
to raise new capital, subject to the Treasury’s consultation with the
recipient’s appropriate regulatory agency.
The
Adams Banks draw most of their customer deposits and conduct most of their
lending activities from and within the Washington, D.C. metropolitan region,
including suburban Virginia and Maryland along with Richmond and Hampton,
Virginia. The Washington, D.C. and Richmond metropolitan markets
attract a significant number of businesses of all sizes, professional
corporations and national nonprofit organizations. The Adams Banks
actively solicit banking relationships with these firms and organizations, as
well as their professional staff, and with the significant population of high
net worth individuals who live and work in these regions.
The
Adams Banks are community-oriented financial institutions offering a full range
of banking services to their customers. The Adams Banks attract
deposits from the general public and historically have used such deposits,
together with other funds to provide a broad level of commercial and retail
banking services in Washington, D.C., Richmond, Hampton and the surrounding
communities.
The
services offered by the Adams Banks can be broadly characterized as being
commercial or retail in nature. Commercial services offered by the
Adams Banks include offering a variety of commercial real estate, construction,
and commercial business loans, cash management services, letters of credit and
collateralized repurchase agreements. Commercial business loans are
typically made on a secured basis to corporations, partnerships and individual
businesses. To a lesser extent, the Adams Banks offer consumer loans
to their retail customers. The Adams Banks’ retail banking services also include
a variety of deposit account products including transaction accounts, money
market accounts, certificates of deposit and Individual Retirement
Accounts. The Adams Banks use funds they have on hand, as well as
borrowings, in order to fund their lending and investment
activities.
The
Adams Banks have automated teller machine access to the STAR, AMEX, PLUS and
CIRRUS systems. The Adams Banks offer their customers traditional
on-line banking services and 24 hour telephone banking.
The
Adams Banks provide a range of commercial and retail lending services to
individuals, small to medium-sized businesses, professional corporations,
nonprofit organizations and other organizations. These services
include, but are not limited to, commercial business loans, commercial real
estate loans, construction and development loans, renovation and mortgage loans,
SBA loans, loan participations, consumer loans, revolving lines of credit and
letters of credit. Consumer lending primarily consists of personal loans made on
a direct, secured basis. Real estate loans are originated primarily for
commercial purposes. To a lesser extent, the Adams Banks originate construction
loans. The Adams Banks offer loans which have fixed rates, as well as
loans with rates which adjust periodically. At December 31, 2008, approximately
$101.0 million or 31.1% of the Adams Banks’ total loan portfolio consisted of
loans with adjustable rates.
The
Adams Banks provide financing to nonprofit organizations for construction and
renovation of local headquarters, working capital lines of credit and equipment
financing. Current nonprofit customers of the Adams Banks include organizations
which focus on issues relating to children’s rights, community housing,
religion, education and health care.
Commercial
and real estate lending is performed by the ANB and CBT Lending Divisions, which
are comprised of 13 loan officers, 9 of which are ANB loan officers. The loan
support staff includes the Loan Operations and Administration staff of 15, who
are responsible for preparing loan documents, recording and processing new loans
and loan payments, ensuring compliance with regulatory requirements, and working
with the Lending Divisions, in order to ensure the timely receipt of all initial
and ongoing loan documentation and the prompt reporting of any exceptions.
Credit analysis on loans is performed by the individual loan officers, using a
credit analysis computer program, which provides not only the flexibility
necessary to analyze loans but also the structure to ensure that all
documentation requirements are appropriately met.
Policies
and procedures have been established by the Adams Banks to promote safe and
sound lending. ANB’s loan officers have individual lending authorities based on
the individual’s seniority and experience. Loans in excess of individual
officers’ lending limits are presented to the Officers’ Loan Committee (“OLC”),
which meets weekly, and is comprised of all loan officers and the President. The
President of ANB has authority to approve unsecured loans up to $1.0 million and
secured loans up to $2.0 million. The OLC of ANB has authority to approve
unsecured loans up to $1.0 million and secured loans up to $2.0 million. Loans
over $1.0 million on an unsecured basis and over $2.0 million on a secured basis
are brought to the Directors’ Loan Committee (“DLC”) of ANB, which meets
approximately twice per month. The DLC of ANB is comprised of six outside
directors. In addition to approving new loans, these Committees
approve renewals, modifications and extensions of existing loans and reviews
past due problem loans.
The
DLC of CBT is comprised of four out of seven outside directors and has authority
to approve unsecured and secured loans greater than $500,000, up to the legal
lending limit. The OLC has the authority to approve unsecured and secured loans
up to $500,000. Additionally, the Vice President of Credit Administration has
authority to approve unsecured and secured loans up to $100,000. The DLC of CBT
meets approximately twice per month.
Loan Portfolio
Composition. The following information concerning the
composition of the Adams Banks’ loan portfolio on a consolidated basis in dollar
amounts is presented (before deductions for allowances for losses) as of the
dates indicated.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
and industrial
|
|
$ |
43,733 |
|
|
$ |
38,606 |
|
|
$ |
39,323 |
|
|
$ |
39,876 |
|
|
$ |
28,756 |
|
|
Real
estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
mortgage
|
|
|
163,228 |
|
|
|
128,320 |
|
|
|
136,540 |
|
|
|
124,578 |
|
|
|
90,477 |
|
|
Residential
mortgage
|
|
|
54,887 |
|
|
|
67,375 |
|
|
|
55,860 |
|
|
|
48,489 |
|
|
|
49,737 |
|
|
Construction
and development
|
|
|
61,485 |
|
|
|
70,798 |
|
|
|
73,986 |
|
|
|
33,844 |
|
|
|
10,676 |
|
|
Installment
to individuals
|
|
|
1,648 |
|
|
|
2,716 |
|
|
|
2,714 |
|
|
|
2,057 |
|
|
|
958 |
|
|
Total
loans
|
|
|
324,981 |
|
|
|
307,815 |
|
|
|
308,423 |
|
|
|
248,844 |
|
|
|
180,604 |
|
|
Less:
net deferred loan fees
|
|
|
(217 |
) |
|
|
(332 |
) |
|
|
(466 |
) |
|
|
(557 |
) |
|
|
(332 |
) |
|
Total,
net
|
|
$ |
324,764 |
|
|
$ |
307,483 |
|
|
$ |
307,957 |
|
|
$ |
248,287 |
|
|
$ |
180,272 |
|
For
further information regarding the Adams Banks’ loan portfolio composition, See
“Management’s Discussion and Analysis of Financial Condition and Results of
Operations - Financial Condition” on Page 195 and Note 7 to the Notes to the
Adams Consolidated Financial Statements included herein.
The
Adams Banks provide a wide range of commercial business loans, including lines
of credit for working capital purposes and term loans for the acquisition of
equipment and other purposes. In most cases, the Adams Banks have
collateralized these loans and/or taken personal guarantees to help assure
repayment. Collateral for these loans generally includes accounts
receivable, inventory, equipment and real estate. Terms of commercial
business loans generally range from one year to five years. These
loans often require that borrowers maintain deposits with the Adams Banks as
compensating balances. Commercial business lending generally involves
greater risk than residential mortgage lending and involves risks that are
different from those associated with residential, commercial and multi-family
real estate lending. Although commercial business loans are often collateralized
by real estate, equipment, inventory, accounts receivable or other business
assets, the liquidation of collateral in the event of a borrower default is
often not a sufficient source of repayment, because accounts receivable may be
uncollectible and inventories and equipment may be obsolete or of limited use.
The primary repayment risk for commercial loans is the failure of the business
due to economic or financial factors. As of December 31, 2008, commercial loans
(including SBA guaranteed loans) totaled $43.7 million, the largest of which had
a principal balance of $3.2 million, and at December 31, 2008 was performing in
accordance with its terms.
The
Adams Banks also offer Small Business Administration (“SBA”) guaranteed loans,
which provide better terms and more flexible repayment schedules than
conventional financing. SBA loans are guaranteed up to a maximum of
85% of the loan’s balance. As lending requirements of small
businesses grow to exceed either Bank’s lending limit, the Adams Banks have the
ability to sell participations in these larger loans to other financial
institutions on a servicing retained basis. The Adams Banks believe that such
participations will help to preserve lending relationships while providing a
high level of customer service. At December 31, 2008, SBA-guaranteed loans
totaled $3.8 million.
At
December 31, 2008, the Adams Banks’ real estate loan portfolio consisted of
commercial real estate mortgages totaling $163.2 million, and residential real
estate mortgages totaling $54.9 million. Commercial real estate loans
are generally for terms of five years and amortize over a 15- and 25-year
period. Commercial real estate loans are generally originated in
amounts up to 80% loan to value of the underlying collateral. In
underwriting commercial real estate loans, the Adams Banks consider the
borrower’s overall creditworthiness and capacity to service debt, secondary
sources of repayment and any additional collateral or credit
enhancements. Adams’ largest commercial real estate loan had a
principal balance of $4.5 million at December 31, 2008 and was secured by a
first deed of trust. At December 31, 2008 this loan was performing in
accordance with its terms.
Residential
real estate loans are generally originated for terms of five years, amortize
over a 25 year period, with a balloon payment at the term
end. Residential real estate loans are generally originated in
amounts up to 80% loan to value of the underlying collateral. Adams’ largest
residential real estate loan had a principal balance of $4.3 million at December
31, 2008. The underwriting for a residential real estate loan is the same as for
a commercial real estate loan.
The
majority of the $61.5 million in construction and land development loans at
December 31, 2008 are primarily for construction and renovation of commercial
real estate properties. Construction financing
generally is considered to involve a higher degree of risk of loss than
long-term financing on improved, occupied real estate. Multi-family and
commercial real estate lending involves significant additional risks, as
compared to one- to four-family residential lending. For example, such loans
typically involve large loans to single borrowers or related
borrowers. The payment experience on such loans is typically
dependent on the successful completion and subsequent operation of the project,
and these risks can be significantly affected by the supply and demand
conditions in the market for commercial property and multi-family residential
units. To minimize these risks, the Adams Banks limit the aggregate amount of
outstanding construction loans to one borrower, and generally make such loans
only in their market area and to borrowers with which the Adams Banks have
substantial experience or who are otherwise well known to the Adams Banks. It is
the Adams Banks’ current practice to obtain personal guarantees and current
financial statements from all principals obtaining commercial real estate loans.
The Adams Banks also obtain appraisals on each property in accordance with
applicable regulations.
The
Adams Banks’ consumer lending includes loans for motor vehicles, and small
personal credit lines. Consumer loans generally involve more risk than
residential real estate mortgage and commercial real estate loans. Repossessed
collateral for a defaulted loan may not provide an adequate source of repayment
of the outstanding loan balance as a result of damage, loss or depreciation, and
the remaining deficiency often does not warrant further substantial collection
efforts against the borrower. In addition, loan collections are dependent on the
borrower’s continuing financial stability. Further, the application of various
federal and state laws, including federal and state bankruptcy and insolvency
laws, may limit the amount which can be recovered. In underwriting consumer
loans, the Adams Banks consider the borrower’s credit history, an analysis of
the borrower’s income, expenses and ability to repay the loan and the value of
the collateral. At December 31, 2008, consumer loans totaled $1.6
million.
Collection
Procedures. Delinquent loans are reviewed on a weekly basis.
When a loan becomes 10 days past due, loan officers attempt to contact the
borrower. Generally, loans that are 30 days delinquent will receive a
default notice from the Adams Banks. With respect to consumer loans,
the Adams Banks will commence efforts to repossess the collateral after the loan
becomes 30 days delinquent. Generally, after 90 days the Adams Banks
will commence legal action.
Loans Past Due and Nonperforming
Assets. Loans are reviewed on a regular basis and are placed
on nonaccrual status when, in the opinion of management, the collection of
additional interest is doubtful. Loans are placed on nonaccrual
status when either principal or interest is 90 days or more past
due. Interest accrued and unpaid at the time a loan is placed on a
nonaccrual status is reversed from interest income. Nonperforming assets consist
of nonaccrual loans, loans past due 90 days or more, and other real estate
owned. At December 31, 2008, the Adams Banks had nonperforming assets
of $37.9 million and a ratio of nonperforming assets to total assets of
8.95%. The increase in nonperforming assets is due to the general
weakening of the economic conditions and decline in real estate values in the
markets served by Adams. The increase in nonperforming loans is primarily
attributable to Adams’ condominium and condo tenant association construction and
multi-family residential real estate loan portfolios, which experienced
deterioration in estimated collateral values and repayment abilities, where
repayment is dependent upon the sale of condominium units. To assist in
identifying weakness in the real estate loan portfolio, updated appraisals were
ordered in the fourth quarter of 2008, and these appraisals have shown a
decrease in market values of real estate secured properties. In addition, an
independent loan review was conducted in the fourth quarter of 2008, to review
all loans with balances greater than $150,000. The results of the appraisal
updates and the results of the independent loan review were taken into account
in increasing Adams’ provision for loan losses. The loan loss reserve is the
amount required to maintain the allowance for loan losses at an adequate level
to absorb probable loan losses. To address the increase in the nonperforming
loans, the provision for loan losses was $11.8 million for the year ended
December 31, 2008.
Allowance for Loan
Losses. The allowance for loan losses is established through a
provision for loan losses based on management’s evaluation of the risk inherent
in the loan portfolio and current economic conditions. Such
evaluation also includes a review of all loans on which full collectibility may
not be reasonably assured, including among other matters, the estimated net
realizable value or the fair value of the underlying collateral, economic
conditions, historical loan loss experience, geographic concentrations and other
factors that warrant recognition in providing for an adequate loan loss
allowance. In addition, various regulatory agencies, as an integral
part of their examination process, periodically review the Adams Banks’
allowance for loan losses and valuation of other real estate
owned. Such agencies may require us to recognize additions to the
allowance based on their judgment about information available to them at the
time of their examination. At December 31, 2008, the total allowance
was $12.5 million, which amounted to 3.85% of total loans and 33.01% of
nonperforming assets. Management considers whether the allowance
should be adjusted to protect against risks in the loan
portfolio. Management will continue to monitor and modify the level
of the allowance for loan losses in order to maintain it at a level which
management considers adequate to provide for probable loan losses.
Allocation of Allowance for Loan
Losses. The following table sets forth the allocation of
allowance for loan losses by loan category for the periods
indicated. Management believes that the allowance can be allocated by
category only on an approximate basis. The allocation of the
allowance by category is not necessarily indicative of future losses and does
not restrict the use of the allowance to absorb losses in any
category.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
%
of Loans in Each Category to total Loans
|
|
|
|
|
|
%
of Loans in Each Category to total Loans
|
|
|
|
|
|
%
of Loans in Each Category to total Loans
|
|
|
|
|
|
%
of Loans in Each Category to total Loans
|
|
|
|
|
|
%
of Loans in Each Category to total Loans
|
|
|
|
|
(Dollars
in thousands)
|
|
|
Balance
at end of period applicable to:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and
industrial
|
|
$ |
1,587 |
|
|
|
12.7 |
% |
|
$ |
952 |
|
|
|
12.5 |
% |
|
$ |
1,078 |
|
|
|
12.7 |
% |
|
$ |
1,799 |
|
|
|
16.0 |
% |
|
$ |
720 |
|
|
|
15.9 |
% |
|
Commercial-mortgages
|
|
|
1,762 |
|
|
|
14.1 |
|
|
(a)
|
|
|
|
|
|
|
(a)
|
|
|
|
|
|
|
(a)
|
|
|
|
|
|
|
(a)
|
|
|
|
|
|
|
Residential
–mortgages
|
|
|
1,212 |
|
|
|
9.7 |
|
|
(a)
|
|
|
|
|
|
|
(a)
|
|
|
|
|
|
|
(a)
|
|
|
|
|
|
|
(a)
|
|
|
|
|
|
|
Construction
|
|
|
7,922 |
|
|
|
63.3 |
|
|
(a)
|
|
|
|
|
|
|
(a)
|
|
|
|
|
|
|
(a)
|
|
|
|
|
|
|
(a)
|
|
|
|
|
|
|
Total
real estate
|
|
|
10,896 |
|
|
|
|
|
|
|
3,235 |
|
|
|
86.4 |
|
|
|
3,334 |
|
|
|
86.4 |
|
|
|
2,418 |
|
|
|
83.2 |
|
|
|
1,826 |
|
|
|
83.6 |
|
|
Installment
|
|
|
31 |
|
|
|
0.2 |
|
|
|
15 |
|
|
|
0.9 |
|
|
|
20 |
|
|
|
0.9 |
|
|
|
60 |
|
|
|
0.8 |
|
|
|
12 |
|
|
|
0.5 |
|
|
Unallocated
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
|
|
68 |
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
|
Total
allowance for loan losses
|
|
$ |
12,514 |
|
|
|
100.0 |
% |
|
$ |
4,202 |
|
|
|
100.0 |
% |
|
$ |
4,432 |
|
|
|
100.0 |
% |
|
$ |
4,345 |
|
|
|
100.0 |
% |
|
$ |
2,558 |
|
|
|
100.0 |
% |
(a)
Information is not available by category for these years.
For
the year ended December 31, 2008, gross interest income which would have been
recorded had the nonaccruing loans of $33.8 million been current in accordance
with their original terms amounted to $1.2 million. Adams did not
include any interest income on such loans for the year ended December 31, 2008.
For further information regarding the Adams Banks’ allowance for loan losses and
asset quality see “Management’s Discussion and Analysis of Financial Condition
and Results of Operations—Asset Quality” on Page 201 and Note 7 to the
Notes to the Adams Consolidated Financial Statements included
herein.
The
Adams Banks’ investment portfolio consists of obligations of U.S. Government
sponsored agencies and corporations, U.S. Treasuries, mortgage-backed
securities, corporate debt securities, and marketable equity
securities. At December 31, 2008, investment securities totaled $66.0
million of which $62.8 million were classified as available for
sale. Total investment securities classified as held to maturity were
$3.2 million at December 31, 2008. For further information regarding
the Adams Banks’ investments see “Management’s Discussion and Analysis of
Financial Condition and Results of Operations—Analysis of Investment Securities”
on Page 197 and Note 6 to the Notes to the Adams Consolidated Financial
Statements, included herein.
Investment
Portfolio. At December 31, 2008, the carrying value of Adams’
investment securities and interest earning deposits was approximately $68.7
million. The following table sets forth the carrying value of Adams’
investments at the dates indicated.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
Government and agency
obligations
|
|
$ |
47,669 |
|
|
$ |
64,481 |
|
|
$ |
48,911 |
|
|
Mortgage-backed
securities
|
|
|
12,699 |
|
|
|
8,902 |
|
|
|
6,517 |
|
|
Municipal
securities
|
|
|
898 |
|
|
|
-- |
|
|
|
-- |
|
|
Corporate
debt
securities
|
|
|
4,404 |
|
|
|
5,600 |
|
|
|
6,634 |
|
|
Marketable
equity
securities
|
|
|
319 |
|
|
|
718 |
|
|
|
1,007 |
|
|
Interest-earning
deposits
|
|
|
2,659 |
|
|
|
20,380 |
|
|
|
5,823 |
|
|
Total
investments
|
|
$ |
68,648 |
|
|
$ |
100,081 |
|
|
$ |
68,892 |
|
The
Adams Banks offer a variety of deposit accounts with a range of interest rates
and terms. The flow of deposits is influenced by a variety of factors
including general economic conditions, changes in market rates, prevailing
interest rates and competition. The Adams Banks rely on competitive
pricing of its deposit products and customer service to attract and retain
deposits, however market interest rates and rates offered by competing financial
institutions significantly affect the Adams Banks’ ability to attract and retain
deposits.
The
Adams Banks’ deposits totaled $347.0 million at December 31,
2008. Demand deposits totaled $67.2 million and comprised 19.4% of
total deposits. Savings, NOW, and money market accounts totaled
$107.2 million and comprised 30.9% of total deposits. Certificates of
deposit were 49.7% of the total deposits for a balance of $172.6 million.
Certificates of deposit include brokered deposits totaling $79.7 million, of
which $67.0 million or 84.0% are CDARS (Certificate of Deposit
Account Registry Service) deposits. CDARS is a deposit placement service that
allows us to place Adams’ customers’ funds in FDIC-insured certificates of
deposits at other banks and to simultaneously receive an equal sum of funds from
the customers of other banks in the CDARS Network. The majority of CDARS
deposits are gathered within Adams’ geographic footprint through established
customer relationships. For further information regarding the Adams Banks’
deposits see “Management’s Discussion and Analysis of Financial Condition and
Results of Operations-Deposits” and Note 9 to the Notes to the Adams
Consolidated Financial Statements included herein.
As
of December 31, 2008, the aggregate amount of outstanding certificates of
deposit in amounts greater than or equal to $100,000 was approximately $47.3
million. The following table indicates the amount of Adams’ certificates of
deposit of $100,000 or more by time remaining until maturity as of December 31,
2008. These deposits represented 13.6% of Adams’ total deposits at
December 31, 2008.
|
Remaining
Maturity
|
|
Amount
|
|
|
|
|
(In
thousands)
|
|
|
Three
months or less
|
|
$ |
18.8 |
|
|
Three
through six months
|
|
|
12.9 |
|
|
Six
through twelve months
|
|
|
11.2 |
|
|
Over
twelve months
|
|
|
4.4 |
|
|
Total
|
|
$ |
47.3 |
|
|
|
|
|
|
|
Adams’
short-term borrowings consist of securities sold under repurchase agreements and
FHLB advances totaling $24.5 million at December 31, 2008. Long-term
debt consists of a FHLB advance and various corporate term notes and lines of
credit totaling $26.1 million at an average rate of 4.53% at December 31, 2008.
For further information regarding the Adams Banks’ borrowed funds see
“Management’s Discussion and Analysis of Financial Condition and Results of
Operations-Borrowed Funds, and Contractual Commitments” and Notes 12 and 13 in
the Notes to the Adams Consolidated Financial Statements included
herein.
The
Adams Banks face strong competition among financial institutions in Washington,
D.C., Northern Virginia, Richmond and Hampton, Virginia and suburban Maryland
for both deposits and loans. Principal competitors include other community
commercial banks and larger financial institutions with branches in the Adams
Banks’ service area. Intense competition is expected to continue as bank mergers
and acquisitions of smaller banks by larger institutions in the Washington,
D.C., Richmond and Hampton, Virginia metropolitan regions may be expected to
continue for the foreseeable future.
The
primary factors in competing for deposits are interest rates, personalized
services, the quality and range of financial services, convenience of office
locations and office hours. Competition for deposits comes primarily from other
commercial banks, savings associations, credit unions, money market funds and
other investment alternatives. The primary factors in competing for loans are
interest rates, loan origination fees, the quality and range of lending services
and personalized services. Competition for loans comes primarily from other
commercial banks, savings associations, mortgage banking firms, credit unions
and other financial intermediaries. The Adams Banks face competition for
deposits and loans throughout their market areas not only from local
institutions but also from out-of-state financial intermediaries which have
opened loan production offices or which solicit deposits in its market areas.
Many of the financial intermediaries operating in the Adams Banks’ market areas
offer certain services, such as trust, investment and international
banking services, which the Adams Banks do not offer. Additionally, banks with
larger capitalization and financial intermediaries not subject to bank
regulatory restrictions have larger lending limits and are thereby able to serve
the needs of larger customers.
In
order to compete with other financial services providers, the Adams Banks
principally rely upon local promotional activities, personal relationships
established by officers, directors and employees with its customers, and
specialized services tailored to meet its customers’ needs.
At
December 31, 2008, Adams employed 102 people on a full time
basis. The employees are not represented by a union and management
believes that its relations with its employees are good.
The
commercial banking business is not only affected by general economic conditions
but is also influenced by the monetary and fiscal policies of the federal
government and the policies of regulatory agencies, particularly the Federal
Reserve Board. The Federal Reserve Board implements national monetary
policies by its open-market operations in U.S. Government securities, by
adjusting the required level of reserves for financial institutions subject to
its reserve requirements and by varying the discount rates applicable to
borrowings by depository institutions. The actions of the Federal
Reserve Board in these areas influence the growth of bank loans, investments and
deposits and also affect interest rates charged on loans and paid on
deposits. The nature and impact of any future changes in monetary
policies cannot be predicted.
Bank
holding companies and banks are extensively regulated under both federal and
state law. Set forth below is a summary description of certain provisions of
certain laws which relate to the regulation of Adams and the Adams Banks. The
description does not purport to be complete and is qualified in its entirety by
reference to the applicable laws and regulations.
Adams,
as a registered bank holding company, is subject to regulation under the Bank
Holding Company Act of 1956, as amended (the “BHCA”). Such regulations include
prior approval of Company affiliates and subsidiaries. Adams is
required to file quarterly reports and annual reports with the Federal Reserve
Board and such additional information as the Federal Reserve Board may require
pursuant to the BHCA. The Federal Reserve Board may conduct
examinations of Adams and its subsidiaries.
The
Federal Reserve Board may require that Adams terminate an activity or terminate
control of or liquidate or divest certain subsidiaries or affiliates when the
Federal Reserve Board believes the activity or the control of the subsidiary or
affiliate constitutes a significant risk to the financial safety, soundness or
stability of any of its banking subsidiaries. The Federal Reserve Board also has
the authority to regulate provisions of certain bank holding company debt,
including authority to impose interest ceilings and reserve requirements on such
debt. Under certain circumstances, Adams must file written notice and obtain
approval from the Federal Reserve Board prior to purchasing or redeeming its
equity securities.
Under
the BHCA and regulations adopted by the Federal Reserve Board, a bank holding
company and its nonbanking subsidiaries are prohibited from requiring certain
tie-in arrangements in connection with any extension of credit, lease or sale of
property or furnishing of services. Further, Adams is required by the Federal
Reserve Board to maintain certain levels of capital.
Adams
is required to obtain the prior approval of the Federal Reserve Board for the
acquisition of more than 5% of the outstanding shares of any class of voting
securities, or substantially all of the assets, of any bank or bank holding
company. Prior approval of the Federal Reserve Board is also required for the
merger or consolidation of Adams and another bank holding company.
Adams
is prohibited by the BHCA, except in certain statutorily prescribed instances,
from acquiring direct or indirect ownership or control of more than 5% of the
outstanding voting shares of any company that is not a bank or bank holding
company and from engaging directly or indirectly in activities other than those
of banking, managing or controlling banks or furnishing services to its
subsidiaries. However, Adams, subject to the prior approval of the Federal
Reserve Board, may engage in any activities, or acquire shares of companies
engaged in activities, that are deemed by the Federal Reserve Board to be so
closely related to banking or managing or controlling banks as to be a proper
incident thereto. Additionally, bank holding companies that elect to
be treated as financial holding companies may engage in insurance, securities
and, under certain circumstances, merchant banking activities. Adams
has not made the financial holding company election with the Federal Reserve
Board.
Under
Federal Reserve Board policy, a bank holding company is required to serve as a
source of financial and managerial strength to its subsidiary banks and may not
conduct its operations in an unsafe or unsound manner. In addition, it is the
Federal Reserve Board’s policy that in serving as a source of strength to its
subsidiary banks, a bank holding company should stand ready to use available
resources to provide adequate capital funds to its subsidiary banks during
periods of financial stress or adversity and should maintain the financial
flexibility and capital-raising capacity to obtain additional resources for
assisting its subsidiary banks. A bank holding company’s failure to meet its
obligations to serve as a source of strength to its subsidiary banks will
generally be considered by the Federal Reserve Board to be an unsafe and unsound
banking practice or a violation of the Federal Reserve Board’s regulations or
both. This doctrine has become known as the “source of strength” doctrine. The
validity of the source of strength doctrine has been and is likely to continue
to be the subject of litigation-until definitively resolved by the courts or by
Congress.
ANB,
as a national banking association, is subject to primary supervision,
examination and regulation by the Office of the Comptroller of the Currency (the
“OCC”). If, as a result of an examination of ANB, the OCC should determine that
the financial condition, capital resources, asset quality, earnings prospects,
management, liquidity or other aspects of the ANB’s operations are
unsatisfactory or that ANB or its management is violating or has violated any
law or regulation, various remedies are available to the OCC. Such
remedies include the power to enjoin “unsafe or unsound practices,” to require
affirmative action to correct any conditions resulting from any violation of law
or unsafe or unsound practice, to issue an administrative order that can be
judicially enforced, to direct an increase in capital, to restrict the growth of
ANB, to assess civil monetary penalties, and to remove officers and
directors. The FDIC has similar enforcement authority, in addition to
its authority to terminate a bank’s deposit insurance, in the absence of action
by the OCC and upon a finding that a bank is in an unsafe or unsound condition,
is engaging in unsafe or unsound activities, or that its conduct poses a risk to
the deposit insurance fund or may prejudice the interest of its
depositors. On October 1, 2008, ANB entered into a written
agreement with the OCC. The written agreement was filed with the SEC as an
exhibit to a current report on Form 8-K dated October 2, 2008. Under the terms
of the written agreement, ANB has agreed to take certain actions relating to its
lending operations and capital compliance. For details, see ANB’s
disclosure below in section “Written Agreement” and in Note 4 in the Notes to
the Adams Consolidated Financial Statements included herein.
CBT
is a Virginia chartered bank and a member of the Federal Reserve System, and its
depositors are insured by the FDIC. The Federal Reserve and the Virginia State
Corporation Commission and its Bureau of Financial Institutions regulate and
monitor CBT’s operations. CBT is required to file with the Federal Reserve
quarterly financial reports on the financial condition and performance of the
organization. The Federal Reserve and State conduct periodic onsite and offsite
examinations of CBT. CBT must comply with a wide variety of reporting
requirements and banking regulations. The laws and regulations governing CBT
generally have been promulgated to protect depositors and the deposit insurance
funds and not to protect various shareholders.
Adams’ deposit accounts are insured by
the Federal Deposit Insurance Corporation, generally up to a maximum of $100,000
per separately insured depositor and up to a maximum of $250,000 for
self-directed retirement accounts. However, pursuant to its statutory
authority, the Board of the Federal Deposit Insurance Corporation recently
increased the deposit insurance available on deposit accounts to $250,000
effective until December 31, 2009. Adams’ deposits are subject to
Federal Deposit Insurance Corporation deposit insurance assessments. The Federal
Deposit Insurance Corporation has adopted a risk-based system for determining
deposit insurance assessments.
On
December 22, 2008, the FDIC published a final rule that raises the current
deposit insurance assessment rates uniformly for all institutions by 7 basis
points (to a range from 12 to 50 basis points) effective for the first quarter
of 2009. On February 27, 2009, the FDIC also issued a final rule that
revises the way the FDIC calculates federal deposit insurance assessment rates
beginning in the second quarter of 2009. Under the new rule, the FDIC
will first establish an institution’s initial base assessment
rate. This initial base assessment rate will range, depending on the
risk category of the institution, from 12 to 45 basis points. The
FDIC will then adjust the initial base assessment (higher or lower) to obtain
the total base assessment rate. The adjustments to the initial base
assessment rate will be based upon an institution’s levels of unsecured debt,
secured liabilities, and brokered deposits. The total base assessment
rate will range from 7 to 77.5 basis points of the institution’s deposits.
Additionally, the FDIC issued an interim rule that would impose a special 20
basis points assessment on June 30, 2009, which would be collected on September
30, 2009. However, the FDIC has indicated a willingness to decrease the special
assessment to 10 basis points under certain circumstances concerning the overall
financial health of the insurance fund. Special assessments of 10 and 20 basis
points would result in additional expense to Adams of approximately $293,000 to
$586,000, respectively. The interim rule also allows for additional special
assessments.
On
October 14, 2008, the FDIC announced a new program – the Temporary Liquidity
Guarantee Program (“TLGP”). This program has two components. One
guarantees newly issued senior unsecured debt of the participating
organizations, up to certain limits established for each institution, issued
between October 14, 2008 and June 30, 2009. The FDIC will pay the unpaid
principal and interest on an FDIC-guaranteed debt instrument upon the uncured
failure of the participating entity to make a timely payment of principal or
interest in accordance with the terms of the instrument. The
guarantee will remain in effect until June 30, 2012. On February 27, 2009, the
FDIC issued an interim rule allowing participants to apply to have the FDIC
guarantee newly issued senior unsecured debt that mandatorily converts into
common shares on a specified date that is on or before June 30,
2012. In return for the FDIC’s guarantee, participating institutions
will pay the FDIC a fee based on the amount and maturity of the
debt. Adams has opted not to participate in this component of the
TLGP. The other component of the program provides full FDIC insurance
coverage for non-interest bearing transaction deposit accounts, regardless of
dollar amount, until December 31, 2009. An annualized 10 basis point assessment
on balances in noninterest-bearing transaction accounts that exceed the existing
deposit insurance limit of $250,000 will be assessed on a quarterly basis to
insured depository institutions participating in this component of the
TLGP. Adams has chosen to participate in this component of the
TLGP. The additional expense related to this coverage is not expected
to be significant for either of the Adams Banks.
On
February 10, 2009, Treasury announced its Capital Assistance Program (“CAP”)
under which Treasury will make capital available to financial institutions
through Treasury’s purchase of cumulative mandatorily convertible preferred
stock. The preferred shares will mandatorily convert to common stock after seven
years. Prior to that time, the preferred shares are convertible in whole or in
part at the option of the institution, subject to the approval of the
institution’s primary federal regulator. Institutions that have
received an investment from Treasury under the CPP may use proceeds from the CAP
to redeem preferred shares issued in the CPP, effectively exchanging the
preferred stock sold under the CPP for CAP convertible preferred
stock.
The
American Recovery and Reinvestment Act of 2009 (“ARRA”), more commonly known as
the economic stimulus or economic recovery package, was signed into law on
February 17, 2009, by President Obama. ARRA includes a wide variety
of programs intended to stimulate the economy and provide for extensive
infrastructure, energy, health, and education needs. In addition,
ARRA imposes certain new executive compensation and corporate expenditure limits
on all current and future TARP recipients until the recipient has repaid the
Treasury, which is now permitted under ARRA without penalty and without the need
to raise new capital, subject to the Treasury’s consultation with the
recipient’s appropriate regulatory agency.
In
addition to the Federal Deposit Insurance Corporation assessments, the Financing
Corporation (“FICO”) is authorized to impose and collect, with the approval of
the Federal Deposit Insurance Corporation, assessments for anticipated payments,
issuance costs and custodial fees on bonds issued by the FICO in the 1980s to
recapitalize the former Federal Savings and Loan Insurance
Corporation. The bonds issued by the FICO are due to mature in 2017
through 2019. For the quarter ended September 30, 2008, the
annualized FICO assessment was equal to 1.12 basis points for each $100 in
domestic deposits maintained at an institution.
Various
other requirements and restrictions under the laws of the United States affect
the operations of the Banks. Federal statutes and regulations relate to many
aspects of the Adams Banks’ operations, including reserves against deposits,
interest rates payable on deposits, loans, investments, mergers and
acquisitions, borrowings, dividends, locations of branch offices, capital
requirements and disclosure obligations to depositors and borrowers. Further,
the Adams Banks are required to maintain certain levels of capital.
On October 1, 2008, Adams’ wholly owned
subsidiary, The ANB, entered into a written agreement with its primary
regulator, The Office of the Comptroller of the Currency (the
“OCC”). Under the terms of the written agreement, ANB agreed to take
certain actions relating to ANB’s lending operations and capital
compliance. Specifically, the OCC is requiring ANB to take the
following actions:
a) conduct
a review of senior management to ensure that these individuals can perform the
duties required under ANB’s policies and procedures and the requirements of the
written agreement, and where necessary, the Bank must provide a written program
to address the training of the Bank’s senior officers;
b) achieve
certain regulatory capital levels, which are greater than the regulatory
requirements to be “well capitalized” under bank regulatory requirements by
October 31, 2008. In particular, ANB must achieve a: 12% total
risk-based capital to total risk-weighted assets ratio; 11% Tier 1 capital to
risk-weighted assets ratio; and 9% Tier 1 capital to adjusted total assets
ratio;
c) develop
and implement a three-year capital program;
d) make
additions to the allowances for loan and lease losses and adopt and implement
written policies and procedures for establishing and maintaining the allowance
in a manner consistent with the written agreement;
e) adopt
and implement an asset diversification program consistent with OCC guidelines
and to perform an analysis of the ANB’s concentrations of credit;
f) take
all necessary actions to protect ANB’s interest in criticized assets, adopt and
implement a program to eliminate regulatory criticism of these assets, engage in
an ongoing review of ANB’s criticized assets and develop and implement
procedures for the effective monitoring of the loan portfolio;
g) hire
an independent appraiser to provide a written or updated appraisal of certain
assets;
h) develop
and implement a program to improve the management of the loan portfolio and to
provide the Board with monthly written reports on credit quality;
i) employ
a consultant to perform a quarterly quality review of ANB’s assets;
j) revise
ANB’s lending policy in accordance with OCC requirements; and
k) maintain
acceptable liquidity levels.
The written agreement includes time
frames to implement the foregoing and on-going compliance requirements for ANB,
including requirements to report to the OCC. The written agreement
also requires ANB to establish a committee of the Board of Directors which will
be responsible for overseeing compliance with the written
agreement.
ANB
has taken steps to comply with the requirements of the written
agreement. At December 31, 2008, ANB’s capital ratios did not conform
to the Written Agreement. See Note 16 in the Notes to the Adams
Consolidated Financial Statements included herein.
Adams
is a legal entity separate and distinct from the Adams Banks. Adams’
ability to pay cash dividends is limited by Delaware corporate law. In addition,
the prior approval of the Adams Banks’ primary regulator is required if the
total of all dividends declared by the individual Adams Banks in any calendar
year exceeds that bank’s net income for the year combined with its retained net
profits for the preceding two years, less any transfers to surplus, that is
still available for dividends.
The
Adams Banks’ regulators have authority to prohibit the Adams Banks from engaging
in activities that, in the regulators opinion, constitute unsafe or unsound
practices in conducting its business. It is possible, depending upon
the financial condition of the bank in question and other factors, that the
regulator could assert that the payment of dividends or other payments might,
under some circumstances, be such an unsafe or unsound practice. Further, the
OCC and the Federal Reserve Board have established guidelines with respect to
the maintenance of appropriate levels of capital by banks or bank holding
companies under their jurisdiction. Compliance with the standards set
forth in such guidelines and the restrictions that are or may be imposed under
the prompt corrective action provisions of federal law could limit the amount of
dividends which the Adams Banks or Adams may pay. Pursuant to the terms of the
Written Agreement, ANB may not make any capital distributions to Adams without
written approval from the OCC.
The
Adams Banks are subject to certain restrictions imposed by federal law on any
extensions of credit to, or the issuance of a guarantee or letter of credit on
behalf of, Adams or other affiliates, the purchase of or investments in stock or
other securities thereof, the taking of such securities as collateral for loans
and the purchase of assets of Adams or other affiliates. Such
restrictions prevent Adams and such other affiliates from borrowing from the
Adams Banks, unless the loans are secured by marketable obligations of
designated amounts. Further, such secured loans and investments by
the Adams Banks to or in Adams or to or in any other affiliate is limited to 10%
of the individual Adams Bank’s capital and surplus (as defined by federal
regulations) and such secured loans and investments are limited, in the
aggregate, to 20% of the Adams Bank’s capital and surplus (as defined by federal
regulations). Additional restrictions on transactions with affiliates may be
imposed on the Adams Banks under the prompt corrective action provisions of
federal law.
The
Federal Reserve Board and the OCC have adopted risk-based minimum capital rules
intended to provide a measure of capital that reflects the degree of risk
associated with a banking organization’s operations for both transactions
reported on the balance sheet as assets and transactions, and those which are
recorded as off balance sheet items. Under these rules, nominal
dollar amounts of assets and credit equivalent amounts of off balance sheet
items are multiplied by one of several risk adjustment percentages, which range
from 0% for assets with low credit risk, such as certain U.S. Treasury
securities, to 100% for assets with relatively high credit risk, such as
business loans.
A
banking organization’s risk-based capital ratios are obtained by dividing its
qualifying capital by its total risk adjusted assets. The regulators measure
risk-adjusted assets, which include off balance sheet items, against both total
qualifying capital (the sum of Tier 1 capital and limited amounts of Tier 2
capital) and Tier 1 capital. Tier 1 capital consists primarily of
common stock, retained earnings, noncumulative perpetual preferred stock
(cumulative perpetual preferred stock for bank holding companies) and minority
interests in certain subsidiaries, less most intangible assets. Tier
2 capital may consist of a limited amount of the allowance for possible loan and
lease losses, cumulative preferred stock, long-term preferred stock, eligible
term subordinated debt and certain other instruments with some characteristics
of equity. The inclusion of elements of Tier 2 capital is subject to
certain other requirements and limitations of the federal banking
agencies. The federal banking agencies require a minimum ratio of
qualifying total capital to risk-adjusted assets of 8% and a minimum ratio of
Tier 1 capital to risk-adjusted assets of 4%. In addition to the risk-based
guidelines, federal banking regulators require banking organizations to maintain
a minimum amount of Tier 1 capital to total assets, referred to as the leverage
ratio.
Under
federal regulations, an institution is generally considered “well capitalized”
if it has a total risk-based capital ratio of at least 10%, a Tier I risk-based
capital ratio of at least 6%, and a Tier I capital (leverage) ratio of at least
5%. Federal law generally requires full-scope on-site annual examinations of all
insured depository institutions by the appropriate federal bank regulatory
agency, although the examination may occur at longer intervals for small
well-capitalized or state chartered banks. Pursuant to the terms of
the Written Agreement, ANB is required to maintain a total risk-based capital
ratio of 12%, a Tier 1 risk-based capital ratio of 11%, and a
leverage ratio of at least 9% in order to be considered “adequately
capitalized”.
The
current risk-based capital ratio analysis establishes minimum supervisory
guidelines and standards. It does not evaluate all factors affecting an
organization’s financial condition. Factors which are not evaluated include
(i) overall interest rate exposure; (ii) quality and level of earnings;
(iii) investment or loan portfolio concentrations; (iv) quality of loans
and investments; (v) the effectiveness of loan and investment policies; (vi)
certain risks arising from nontraditional activities and (vii) management’s
overall ability to monitor and control other financial and operating risks,
including the risks presented by concentrations of credit and nontraditional
activities. The capital adequacy assessment of federal bank regulators will,
however, continue to include analyses of the foregoing considerations and in
particular, the level and severity of problem and classified assets. Market risk
of a banking organization—risk of loss stemming from movements in market
prices—is not evaluated under the current risk-based capital ratio analysis (and
is therefore analyzed by the bank regulators through a general assessment of an
organization’s capital adequacy) unless trading activities constitute 10% of $1
billion or more of the assets of such organization. Such an organization (unless
exempted by the banking regulators) and certain other banking organization
designated by the banking regulators must include in their risk-based capital
ratio analysis charges for, and hold capital against, general market risk of all
positions held in their trading account and of foreign exchange and commodity
positions wherever located, as well as against specific risk of debt and equity
positions located in their trading account. Currently, Adams does not calculate
a risk-based capital charge for its market risk.
Future
changes in regulations or practices could further reduce the amount of capital
recognized for purposes of capital adequacy. Such a change could
affect the ability of the Adams Banks to grow and could restrict the amount of
profits, if any, available for the payment of dividends.
Federal
law requires each federal banking agency to take prompt corrective action to
resolve the problems of insured depository institutions, including but not
limited to those that fall below one or more prescribed minimum capital
ratios. The law requires each federal banking agency to promulgate
regulations defining the following five categories in which an insured
depository institution will be placed, based on the level of its capital ratios:
well capitalized, adequately capitalized, undercapitalized, significantly
undercapitalized and critically undercapitalized.
An
institution that, based upon its capital levels, is classified as “well
capitalized,” “adequately capitalized” or “undercapitalized” may be treated as
though it were in the next lower capital category if the appropriate federal
banking agency, after notice and opportunity for hearing, determines that an
unsafe or unsound condition or an unsafe or unsound practice warrants such
treatment. At each successive lower capital category, an insured
depository institution is subject to more restrictions. The federal
banking agencies, however, may not treat an institution as “critically
undercapitalized” unless its capital ratio actually warrants such
treatment.
In
addition to restrictions and sanctions imposed under the prompt corrective
action provisions, commercial banking organizations may be subject to potential
enforcement actions by the federal regulators for unsafe or unsound practices in
conducting their businesses or for violations of any law, rule, regulation or
any condition imposed in writing by the agency or any written agreement with the
agency. Enforcement actions may include the imposition of a
conservator or receiver, the issuance of a cease and desist order that can be
judicially enforced, the termination of insurance of deposits (in the case of a
depository institution), the imposition of civil money penalties, the issuance
of directives to increase capital, the issuance of formal and informal
agreements, the issuance of removal and prohibition orders against
institution-affiliated parties and the enforcement of such actions through
injunctions or restraining orders based upon a judicial determination that the
agency would be harmed if such equitable relief was not granted.
The
Adams Banks are subject to the provisions of the Community Reinvestment Act
(“CRA”) which requires banks to assess and help meet the credit needs of the
community in which the bank operates. The OCC examines the Adams Bank
to determine its level of compliance with CRA and the Federal Reserve Board
examines CBT to determine its level of compliance with CRA. The OCC
and the Federal Reserve Board are required to consider the level of CRA
compliance when their regulatory applications are reviewed. The Adams
Banks each received a satisfactory Community Reinvestment
Act rating in its most recent federal examination.
Under
the Riegel-Neal Interstate Banking and Branching Efficiency Act of 1994, as
amended (the “Interstate Act”), a bank holding company that is adequately
capitalized and managed may obtain approval under the BHCA to acquire an
existing bank located in another state generally without regard to state law
prohibitions on such acquisitions. A bank holding company, however, can not be
permitted to make such an acquisition if, upon consummation, it would control
(a) more than 10% of the total amount of deposits of insured depository
institutions in the United States or (b) 30% or more of the deposits in the
state in which the bank is located. A state may limit the percentage of total
deposits that may be held in that state by any one bank or bank holding company
if application of such limitation does not discriminate against out of state
banks. An out of state bank holding company may not acquire a state bank in
existence for less than a minimum length of time that may be prescribed by state
law except that a state may not impose more than a five year existence
requirement. Since June 1, 1997 (and prior to that date in some
instances), banks have been able to expand across state lines where qualifying
legislation adopted by certain states prior to that date prohibits such
interstate expansion. Adams Banks may also expand across state lines through the
acquisition of an individual branch of a bank located in another state or
through the establishment of a de novo branch in
another state where the law of the state in which the branch is to be acquired
or established specifically authorizes such acquisition or de novo branch
establishment.
The
USA PATRIOT Act, which was signed into law on October 26, 2001, gave the federal
government new powers to address terrorist threats through enhanced domestic
security measures, expanded surveillance powers, increased information sharing
and broadened anti-money laundering requirements. Financial institutions, such
as the Adams Bank, have been subject to a federal anti-money laundering
obligation for years. The USA PATRIOT Act has no material adverse
impact on the Adams Banks’ operations.
The
Sarbanes-Oxley Act of 2002 (“Sarbanes-Oxley”), which implemented legislative
reforms intended to address corporate and accounting fraud. In
addition to the establishment of a new accounting oversight board that will
enforce auditing, quality control and independence standards and will be funded
by fees from all publicly traded companies, Sarbanes-Oxley places certain
restrictions on the scope of services that may be provided by accounting firms
to their public company audit clients. Any non-audit service being
provided to a public company audit client will require preapproval by Adams’
audit committee. In addition, Sarbanes-Oxley makes certain changes to
the requirements for audit partner rotation after a period of
time. Sarbanes-Oxley requires chief executive officers and chief
financial officers, or their equivalent, to certify to the accuracy of periodic
reports filed with the Securities and Exchange Commission (“SEC”), subject to
civil and criminal penalties if they knowingly or willingly violate this
certification requirement.
Sarbanes-Oxley
also increases the oversight of, and codifies certain requirements relating to
audit committees of public companies and how they interact with Adams’
“registered public accounting firm.” Audit Committee members must be
independent and are absolutely barred from accepting consulting, advisory or
other compensatory fees from the issuer. In addition, companies must
disclose whether at least one member of the committee is a “financial expert”
(as such term is defined by the Securities and Exchange Commission) and if not,
why not. Under Sarbanes-Oxley, a company’s registered public
accounting firm is prohibited from performing statutorily mandated audit
services for a company if such company’s chief executive officer, chief
financial officer, comptroller, chief accounting officer or any person serving
in equivalent positions had been employed by such firm and participated in the
audit of such company during the one-year period preceding the audit initiation
date. Sarbanes-Oxley also prohibits any officer or director of a
company or any other person acting under their direction from taking any action
to fraudulently influence, coerce, manipulate or mislead any independent
accountant engaged in the audit of Adams’ financial statements for the purpose
of rendering the financial statements materially misleading.
Although
we have incurred additional expense in complying with the provisions of the
Sarbanes-Oxley Act and the resulting regulations, such compliance has not had a
material impact on Adams’ results of operations or financial condition to
date. However, Adams expects audit costs will increase in the future
as it complies with the SEC’s requirement that auditors must provide an
attestation of management’s report on internal control over financial reporting.
On January 31, 2008, the SEC proposed a one-year extension of the auditor
attestation requirement for smaller public companies. Under the
extension, Adams would be required to have the auditor attestation beginning
with the year ending December 31, 2009.
The
principal executive office of Adams is located in leased space at 1130
Connecticut Avenue, N.W., Washington, D.C. 20036. The Banks lease seven branch
offices, located at: 1) 1501 K Street, N.W., Washington, D.C. 20006; 2) 1729
Wisconsin Avenue, N.W., Washington, D.C. 20007; 3) Union Station, 50
Massachusetts Avenue, N.E., Washington, D.C. 20002; 4) 1604 17th Street,
N.W., Washington, D.C. 20009; 5) 8121 Georgia Avenue, Silver Spring, Maryland,
20910; 6) 802 7th Street, N.W., Washington, D.C. 20001, and 7) 5214 Chamberlayne
Avenue, Richmond, Virginia, 23227. The Adams Banks owns two branch office
buildings at 320 North First Street, Richmond, Virginia, 23227 and at 101 North
Armistead Avenue, Hampton, Virginia, 23669. Adams leases space for Deposit
Operations at 1627 K Street, N.W., Washington, D.C.. The Union
Station branch has two additional ATM’s located in Union
Station. Leases for these facilities expire as follows:
| Location |
Expiration
of Lease |
| 1501
K Street, N.W. |
2012 |
| 50
Massachusetts Avenue, N.E. |
2014 |
| Union
Station ATM |
2009 |
| Union
Station ATM |
2009 |
| 802
7th Street, N.W. |
2012 |
|
1729
Wisconsin Avenue, N.W.
|
2013
|
| 1604
17th Street, N.W. |
2016 |
| 1130
Connecticut Avenue, N.W. |
2012 |
| 8121
Georgia Avenue |
2013 |
| 1627
K Street, N.W. |
2012 |
| 5214
Chamberlayne Avenue |
2009 |
In
2008, Adams and the Adams Banks incurred rental expense on leased real estate of
approximately $1.2 million. Adams considers all of the properties
leased by the ANB and CBT to be suitable and adequate for their intended
purposes. At December 31, 2008, the book value of the Adams Banks’ premises and
equipment was $5.0 million.
Although
the Adams Banks, from time to time, are involved in various legal proceedings in
the normal course of business, there are no material legal proceedings (other
than the Written Agreement) to which Adams , ANB and CBT are a party or to which
any of their property is subject.
Adams
is the parent of ANB, a national bank with six full-service branches located in
the greater metropolitan Washington, D.C. area and, CBT, a Virginia chartered
commercial bank, with two branches in Richmond and one in Hampton,
Virginia. Adams reports its financial results on a consolidated basis
with ANB and CBT.
When
used in this Annual Report the words or phrases "will likely result," "are
expected to," "will continue," "is anticipated," "estimate," "project" or
similar expressions are intended to identify "forward-looking statements" within
the meaning of the Private Securities Litigation Reform Act of 1995. Such
statements are subject to certain risks and uncertainties, including among other
things, changes in economic conditions in Adams' market area, changes in
policies by regulatory agencies, fluctuations in interest rates, demand for
loans in Adams’ market area and competition that could cause actual results to
differ materially from historical earnings and those presently anticipated or
projected. Adams wishes to caution readers not to place undue reliance on any
such forward-looking statements, which speak only as of the date made. Adams
wishes to advise readers that the factors listed above could affect Adams'
financial performance and could cause Adams' actual results for future periods
to differ materially from any opinions or statements expressed with respect to
future periods in any current statements.
Adams
does not undertake, and specifically declines any obligation, to publicly
release the results of any revisions which may be made to any forward-looking
statements to reflect events or circumstances after the date of such statements
or to reflect the occurrence of anticipated or unanticipated
events.
The
following analysis of financial condition and results of operations should be
read in conjunction with Adams’ Consolidated Financial Statements and Notes
thereto. For a discussion of risk factors that could affect Adams’
performance, see pages 30 through 37.
General
The
discussion and analysis of Adams’ consolidated results of operations and
financial condition are based upon Adams’ Consolidated Financial Statements
which have been prepared in accordance with accounting principles generally
accepted in the United States of America. The preparation of these
Consolidated Financial Statements requires management to make estimates and
judgments that affect the reported amounts of assets and liabilities, income and
expense, and the related disclosures of contingent assets and liabilities at the
date of these Consolidated Financial Statements. Accounting estimates
are deemed critical when a different estimate could have reasonably been used or
where changes in the estimate are reasonably likely to occur from period to
period and would materially affect Adams’ Consolidated Financial Statements as
of or for the periods presented. Management believes that the
estimates and assumptions contained in Adams’ Consolidated Financial Statements
are reasonable; however, actual results may differ significantly from these
estimates and assumptions which could have a material affect on the carrying
value of Adams’ assets and liabilities at the balance sheet dates and on the
results of operations for the reporting periods. Critical accounting
policies are considered to be those accounting policies that involve significant
estimates and assumptions by management, which may have a material affect on the
carrying value of certain assets and liabilities. Management has
identified Adams’ critical accounting policies to be those related to the
allowance for loan losses, deferred tax assets, fair value of securities, and
other-than-temporary impairment. For a description of Adams’
significant accounting policies see Note 1 to Adams’ Consolidated Financial
Statements
Allowance
for loan losses
The
provision for loan losses is based upon management’s evaluation of the adequacy
of the allowance for loan losses. The evaluation process includes an
assessment of known and inherent risks in the portfolio which considers the size
and composition of the loan portfolio, actual loan loss experience, level of
delinquencies, detailed analysis of individual loans for which full
collectability may not be assured, the existence and estimated net realizable
value of any underlying collateral and guarantees securing the loans, and
current economic and market conditions. Although management uses the
best information available, the level of the allowance for loan losses remains
an estimate, which is subject to significant judgment and short-term
change. Various regulatory agencies periodically review Adams’
allowance for loan losses. Such agencies may require Adams to make
additional provisions for loan losses based upon information available to them
at the time of their examination. A majority of Adams’ loans are
secured by real estate and accordingly, the ability to collect a substantial
portion of the carrying value of Adams’ loan portfolio is susceptible to changes
in local real estate market conditions and may be adversely affected should real
estate values continue to decline. Future adjustments to the
allowance for loan losses may be necessary due to economic, operating,
regulatory and other conditions beyond Adams’ control. For further
discussion of the allowance for loan losses see the Asset Quality section of
management’s discussion and analysis.
Deferred
Tax Assets
Adams
accounts for income taxes according to the asset and liability
method. Under this method, deferred tax assets and liabilities are
recognized for the future tax consequences attributable to differences between
the financial statement carrying amounts of existing assets and liabilities and
their respective tax basis. Deferred tax assets and liabilities are
measured using the enacted tax rates applicable to taxable income for the years
in which those temporary differences are expected to be recovered or
settled. Deferred tax assets are recognized subject to management’s
judgment that realization is more-likely-than-not. An estimate of
probable income tax benefits that will not be realized in future years is
required in determining the necessity for a valuation allowance for deferred tax
assets. There was no deferred tax asset valuation allowance at
December 31, 2008 or 2007. The information used by management to make
this estimate is described later in management’s discussion and analysis under
“Income
Taxes”. A summary of the tax effects of temporary differences
that give rise to significant portions of the deferred tax assets and deferred
tax liabilities at December 31, 2008 and 2007 can be found in Note 11 to Adams’
Consolidated Financial Statements.
Fair
Value of Securities
Adams
carries its available for sale investment securities at fair value on a
recurring basis. On January 1, 2008, Adams adopted SFAS 157, which
established a three-level valuation hierarchy for disclosure of fair value
measurements. The categorization of a security within the hierarchy
is based upon the lowest level of input that is significant to the fair value
measurement. Therefore, securities classified in levels 1 and 2 of
the hierarchy, where inputs are principally based on observable market data,
there is less judgment applied in arriving at a fair value
measurement. For securities classified within level 3 of the
hierarchy, judgements are more significant. Adams reviews and updates
the fair value hierarchy classifications on a quarterly
basis. Changes from one quarter to the next related to the
observability in inputs to a fair value measurement may result in a
reclassification between hierarchy levels.
The following table summarizes Adams’
balances of investment securities measured at fair value on a recurring basis as
of December 31, 2008, segregated by the level of the valuation inputs within the
fair value hierarchy utilized to measure fair value.
|
(In thousands)
|
|
Quoted
Prices in Active Markets for Identical Assets
(Level
1)
|
|
Significant
Other Observable Inputs
(Level
2)
|
|
Significant
Unobservable Inputs
(Level
3)
|
|
Total
|
|
Investment
securities available for sale
|
|
$998
|
|
$61,816
|
|
$--
|
|
$62,814
|
For
further discussion of available for sale securities and fair value measurement
under SFAS 157 see Note 6 and Note 20 to Adams’ Consolidated Financial
Statements.
Other-Than–Temporary
Impairment
Management evaluates Adams’ available
for sale securities for other-than-temporary impairment at least on a quarterly
basis, and more frequently when economic or market concerns warrant such
evaluation. Analysis of the available for sale securities for
potential other-than-temporary impairment is considered under the SFAS No. 115,
Accounting for Certain
Investments in Debt and Equity Securities impairment model and includes
the following factors: the length of time and extent to which the market value
has been less than cost; the financial condition and near-term prospects of the
issuer including specific events; Adams’ intent and ability to hold the
investment to the earlier of maturity or recovery in market value, the credit
rating of the security; the implied and historical volatility of the security;
whether market decline was affected by macroeconomic conditions or by specific
information pertaining to an individual security; and any downgrades by rating
agencies. As applicable under SFAS No. 115, Adams considers a decline in fair
value to be other-than-temporary if it is probable that Adams will not recover
its recorded investment, including as applicable under the Emerging Issues Task
Force (EITF) Issue 99-20, Recognition of Interest Income and
Impairment on Purchased Beneficial Interests and Beneficial Interests That
Continue to Be Held by a Transferor in Securitized Financial Assets, when
an adverse change in cash flows has occurred. For further discussion
of management’s evaluation of available for sale for other-than-temporary
impairment see Note 6 to Adams’ Consolidated Financial Statements.
Overview
Adams
recorded a net loss of $5.8 million in 2008, as compared to net income of $3.1
million in 2007 and $3.7 million in 2006. The net loss in 2008 is
primarily due to a charge of $11.8 million to the loan loss provision compared
to a charge of $260,000 in 2007 and a credit of $232,000 in 2006. The
increase in the provision is intended to address increased loan charge-offs
during 2008, the overall deterioration in the national and local economy, and
specific weaknesses within segments of Adams’ loan portfolio. For a
detailed discussion of Adams’ asset quality, see the Asset Quality section of
Management’s Discussion and Analysis. Net interest income decreased $1.2 million
or 6.9% from 2007 compared to an $85,000 decrease or 0.5% between the years
ending 2007 and 2006. The net interest income decrease in 2008 reflected the
decline in the loan portfolio yield to 6.47% from 7.96% in 2007 and 8.24% in
2006 as well as the increase in nonaccrual loans to $33.8 million from $8.8
million in 2007 and $1.5 million in 2006. Noninterest income for 2008
decreased to $966,000 from $1.6 million in 2007 reflecting a $655,000 impairment
charge due to other-than-temporary losses resulting from a write-down of two
corporate debt securities to fair value. The $637,000 or 17.3%
decrease in net income in 2007 compared to 2006 was primarily attributable to a
$492,000 increase in the provision for loan losses and a $505,000 decrease in
noninterest income primarily reflecting a decrease in loan
sales. Book value per share was $7.01, $9.08 and $8.72 at December
31, 2008, 2007 and 2006, respectively. Basic and diluted loss per
share was $1.67 for 2008, compared to basic and diluted earnings per share of
$0.88 for 2007 and $1.07 for 2006. Dividends paid per common share
were $0.25 in 2008 and $0.50 in 2007 and 2006. The key components
of revenue and expense are discussed in the following
paragraphs.
Analysis
of Net Interest Income
Net
interest income, which is the sum of interest earned and certain fees generated
by earning assets minus interest paid on deposits and other funding sources, is
the principal source of Adams’ earnings. In 2008, net interest income totaled
$15.5 million, a decline of $1.2 million from $16.7 million in 2007.
Interest income decreased $5.0 million reflecting a 108 basis point decline in
the average yield on earning assets to 6.08% in 2008 from 7.16% in 2007. The
decrease in interest income was partially offset by a $3.8 million decrease in
interest expense reflecting a 117 basis point decrease in the average cost of
funds to 2.91% in 2008 from 4.08% in 2007. Average earning assets
decreased $6.2 million or 1.46% in 2008 reflecting a $20.1 million decrease in
average investment balances partially offset by a $13.9 million increase in
average loans. Net interest income remained relatively flat at $16.7
million in 2007 and 2006. Interest income increased $4.1 million which was
offset by a $4.2 million increase in the cost of funds. Average earning assets
increased $68.6 million or 19.4% in 2007 compared to 2006.
Loans,
the highest yielding component of earning assets, represented 78.8% of average
earning assets in 2008, 74.4% in 2007 and 77.3% in 2006. The average yield on
loans declined 149 basis points to 6.47% from 7.96% in 2007 compared to a
decline of 28 basis points in 2007 from 2006. The primary factor for the decline
in the loan yield between 2008 and 2007 was the 290 basis point decrease in the
average prime rate and to a lesser extent the reversal of $551,000 in nonaccrual
loan interest resulting from a $8.0 million increase in average nonaccrual
loans. Prime rate, a key index to which a substantial portion of
Adams’ loan rates are tied, averaged 5.1% in 2008 and 8.0% in 2007 and
2006. Nonaccrual loan interest totaled $1.2 million in 2008, $629,000
in 2007 and $180,000 in 2006. The primary factor contributing to the
decrease in the average loan yield to 7.96% in 2007 from 8.24% in 2006 was
the $3.2 million increase in average nonaccrual loans as well as
competitive pricing pressures for loans in Adams’ market area.
Average
investments, consisting of investment securities, federal funds and other
short-term investments, decreased $20.1 million or 18.57% in 2008 from 2007,
compared to increasing $28.0 million or 34.9% in 2007 from 2006. The
decrease in average investments in 2008, primarily in the federal funds sold and
interest earning bank balances, was to fund loan growth and the deposit outflow.
The average yield on investments declined 20 basis points in 2008 from 2007
after increasing 34 basis points in 2007 from 2006 reflecting the decrease in
federal funds and other short-term investments and the decrease in short and
medium term interest rates in 2008 compared to generally higher market rates in
2007 and 2006.
Funding
for earning assets comes from interest-bearing liabilities, non-interest-bearing
liabilities and stockholders' equity. The percentage of average earning assets
funded by average interest-bearing liabilities increased to 81.0% in 2008,
compared to 79.0% in 2007 and 74.4% in 2006. Deposits, which represent 89.2% of
average interest bearing liabilities in 2008, decreased $13.6 million compared
to increasing $77.1 million in 2007. Average borrowings increased $17.2 million
in 2008 compared to decreasing $6.7 million in 2007. The cost of
interest-bearing funds decreased 117 basis points to 2.91% in 2008 from 4.08% in
2007, compared to a 51 basis points increase in 2007 from a cost of 3.57% in
2006. The decrease in the cost of funds reflects deposits and
borrowings bearing lower interest rates as shorter and medium term interest
rates in 2008 were significantly lower than those in 2007. The increases in the
cost of deposits in 2007 reflected the increase in short-term interest rates,
which are used to price Adams’ deposits, and the competitive pricing pressure
for deposits in the local markets.
The
net interest margin, which is net interest income as a percentage of average
interest-earning assets, was 3.72%, 3.94% and 4.73% in 2008, 2007 and 2006
respectively. The compression in the net interest margin reflects the
decline in the average earning asset yield and the increase in nonaccrual
loans. The net interest spread, which is the difference between the
average interest rate earned on interest-earning assets and the average interest
paid on interest-bearing liabilities, was 3.17%, 3.08% and 3.82% in 2008, 2007
and 2006 respectively. The improvement in the net interest spread in
2008 reflects the significant decrease in the cost of funds compared to
2007.
The
following tables present the average balances, net interest income and interest
yields/rates for 2008, 2007 and 2006 and an analysis of the dollar changes in
interest income and interest expense.
Distribution
of Assets, Liabilities and Stockholders' Equity Yields and Rates
For
the Years Ended December 31, 2008, 2007, and 2006
(Dollars
in thousands)
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
|
Average
Balances
|
|
|
Interest
Income/
Expense
|
|
|
Average
Rates
|
|
|
Average
Balances
|
|
|
Interest
Income/
Expense
|
|
|
Average
Rates
|
|
|
Average
Balances
|
|
|
Interest
Income/
Expense
|
|
|
Average
Rates
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
(1)
|
|
$ |
328,372 |
|
|
$ |
21,238 |
|
|
|
6.47 |
% |
|
$ |
314,430 |
|
|
$ |
25,044 |
|
|
|
7.96 |
% |
|
$ |
273,803 |
|
|
$ |
22,558 |
|
|
|
8.24 |
% |
|
Investment
securities
|
|
|
76,703 |
|
|
|
3,705 |
|
|
|
4.83 |
% |
|
|
72,835 |
|
|
|
3,408 |
|
|
|
4.68 |
% |
|
|
68,431 |
|
|
|
3,012 |
|
|
|
4.40 |
% |
|
Federal
funds sold
|
|
|
4,754 |
|
|
|
104 |
|
|
|
2.19 |
% |
|
|
18,260 |
|
|
|
916 |
|
|
|
5.02 |
% |
|
|
9,506 |
|
|
|
464 |
|
|
|
4.88 |
% |
|
Interest-earning
bank balances
|
|
|
6,636 |
|
|
|
255 |
|
|
|
3.84 |
% |
|
|
17,091 |
|
|
|
883 |
|
|
|
5.17 |
% |
|
|
2,275 |
|
|
|
111 |
|
|
|
4.88 |
% |
|
Total
earning assets
|
|
|
416,465 |
|
|
|
25,302 |
|
|
|
6.08 |
% |
|
|
422,616 |
|
|
|
30,251 |
|
|
|
7.16 |
% |
|
|
354,015 |
|
|
|
26,145 |
|
|
|
7.39 |
% |
|
Allowance
for loan losses
|
|
|
(5,558 |
) |
|
|
|
|
|
|
|
|
|
|
(4,573 |
) |
|
|
|
|
|
|
|
|
|
|
(4,609 |
) |
|
|
|
|
|
|
|
|
|
Cash
and due from banks
|
|
|
12,576 |
|
|
|
|
|
|
|
|
|
|
|
14,177 |
|
|
|
|
|
|
|
|
|
|
|
12,424 |
|
|
|
|
|
|
|
|
|
|
Other
assets
|
|
|
14,567 |
|
|
|
|
|
|
|
|
|
|
|
11,361 |
|
|
|
|
|
|
|
|
|
|
|
10,497 |
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
$ |
438,050 |
|
|
|
|
|
|
|
|
|
|
$ |
443,581 |
|
|
|
|
|
|
|
|
|
|
$ |
372,327 |
|
|
|
|
|
|
|
|
|
|
Liabilities
and Stockholders' Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Savings,
NOW and money market accounts
|
|
$ |
121,671 |
|
|
|
1,601 |
|
|
|
1.32 |
% |
|
$ |
146,287 |
|
|
|
4,314 |
|
|
|
2.95 |
% |
|
$ |
136,251 |
|
|
|
3,623 |
|
|
|
2.66 |
% |
|
Certificates
of deposit
|
|
|
179,232 |
|
|
|
7,037 |
|
|
|
3.93 |
% |
|
|
168,252 |
|
|
|
8,358 |
|
|
|
4.97 |
% |
|
|
101,236 |
|
|
|
4,387 |
|
|
|
4.33 |
% |
|
Short-term
borrowings
|
|
|
18,867 |
|
|
|
372 |
|
|
|
1.97 |
% |
|
|
5,175 |
|
|
|
144 |
|
|
|
2.78 |
% |
|
|
16,216 |
|
|
|
765 |
|
|
|
4.72 |
% |
|
Long-term
debt
|
|
|
17,455 |
|
|
|
791 |
|
|
|
4.53 |
% |
|
|
13,942 |
|
|
|
783 |
|
|
|
5.62 |
% |
|
|
9,638 |
|
|
|
633 |
|
|
|
6.57 |
% |
|
Total
interest-bearing liabilities
|
|
|
337,225 |
|
|
|
9,801 |
|
|
|
2.91 |
% |
|
|
333,656 |
|
|
|
13,599 |
|
|
|
4.08 |
% |
|
|
263,341 |
|
|
|
9,408 |
|
|
|
3.57 |
% |
|
Noninterest-bearing
deposits
|
|
|
66,804 |
|
|
|
|
|
|
|
|
|
|
|
74,087 |
|
|
|
|
|
|
|
|
|
|
|
76,415 |
|
|
|
|
|
|
|
|
|
|
Other
liabilities
|
|
|
3,835 |
|
|
|
|
|
|
|
|
|
|
|
5,001 |
|
|
|
|
|
|
|
|
|
|
|
3,653 |
|
|
|
|
|
|
|
|
|
|
Stockholders'
equity
|
|
|
30,186 |
|
|
|
|
|
|
|
|
|
|
|
30,837 |
|
|
|
|
|
|
|
|
|
|
|
28,918 |
|
|
|
|
|
|
|
|
|
|
Total
liabilities and stockholders' equity
|
|
$ |
438,050 |
|
|
|
|
|
|
|
|
|
|
$ |
443,581 |
|
|
|
|
|
|
|
|
|
|
$ |
372,327 |
|
|
|
|
|
|
|
|
|
|
Net
interest income
|
|
|
|
|
|
$ |
15,501 |
|
|
|
|
|
|
|
|
|
|
$ |
16,652 |
|
|
|
|
|
|
|
|
|
|
$ |
16,737 |
|
|
|
|
|
|
Net
interest spread
|
|
|
|
|
|
|
|
|
|
|
3.17 |
% |
|
|
|
|
|
|
|
|
|
|
3.08 |
% |
|
|
|
|
|
|
|
|
|
|
3.82 |
% |
|
Net
interest margin
|
|
|
|
|
|
|
|
|
|
|
3.72 |
% |
|
|
|
|
|
|
|
|
|
|
3.94 |
% |
|
|
|
|
|
|
|
|
|
|
4.73 |
% |
|
|
(1) The loan averages
are stated net of unearned income, and the averages include loans on which
the accrual of interest has been discontinued. Net loan fees included in
interest income were $447,000, $630,000, and $1.3 million for 2008, 2007
and 2006, respectively.
|
Interest
Rates and Interest Differential
Analysis
of Changes in Consolidated Net Interest Income
(In thousands)
|
|
|
For
the years ended December 31,
2008
versus 2007
|
|
|
For
the years ended December 31,
2007
versus 2006
|
|
|
|
|
Net
Increase
|
|
|
Change
per (1)
|
|
|
Net
Increase
|
|
|
Change
per (1)
|
|
|
|
|
(Decrease)
|
|
|
Rate
|
|
|
Volume
|
|
|
(Decrease)
|
|
|
Rate
|
|
|
Volume
|
|
|
Interest
income from:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
|
|
$ |
(3,806 |
) |
|
$ |
(4,916 |
) |
|
$ |
1,110 |
|
|
$ |
2,486 |
|
|
$ |
(862 |
) |
|
$ |
3,348 |
|
|
Investment
securities
|
|
|
297 |
|
|
|
116 |
|
|
|
181 |
|
|
|
396 |
|
|
|
202 |
|
|
|
194 |
|
|
Federal
funds sold
|
|
|
(812 |
) |
|
|
(134 |
) |
|
|
(678 |
) |
|
|
452 |
|
|
|
25 |
|
|
|
427 |
|
|
Interest-earning
bank balances
|
|
|
(628 |
) |
|
|
(87 |
) |
|
|
(541 |
) |
|
|
772 |
|
|
|
49 |
|
|
|
723 |
|
|
Total
interest income
|
|
|
(4,949 |
) |
|
|
(5,021 |
) |
|
|
72 |
|
|
|
4,106 |
|
|
|
(586 |
) |
|
|
4,692 |
|
|
Interest
expense on:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Savings,
NOW and money market
|
|
|
(2,713 |
) |
|
|
(1,924 |
) |
|
|
(789 |
) |
|
|
(691 |
) |
|
|
(488 |
) |
|
|
(203 |
) |
|
Certificates
of deposit
|
|
|
(1,321 |
) |
|
|
(1,850 |
) |
|
|
529 |
|
|
|
(3,971 |
) |
|
|
(1,150 |
) |
|
|
(2,821 |
) |
|
Short-term
borrowings
|
|
|
228 |
|
|
|
(153 |
) |
|
|
381 |
|
|
|
621 |
|
|
|
100 |
|
|
|
521 |
|
|
Long-term
debt
|
|
|
8 |
|
|
|
(189 |
) |
|
|
197 |
|
|
|
(150 |
) |
|
|
133 |
|
|
|
(283 |
) |
|
Total
interest expense
|
|
|
(3,798 |
) |
|
|
(4,116 |
) |
|
|
318 |
|
|
|
(4,191 |
) |
|
|
(1,405 |
) |
|
|
(2,786 |
) |
|
Change
in net interest income
|
|
$ |
(1,151 |
) |
|
$ |
(905 |
) |
|
$ |
(246 |
) |
|
$ |
(85 |
) |
|
$ |
(1,991 |
) |
|
$ |
1,906 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
(1)
The change in interest due to both rate and volume has been allocated to
change due to rate.
|
|
Noninterest
Income
Noninterest
income consists primarily of service charges on deposits and other fee-based
services, as well as gains on the sales of investment securities and
loans. Noninterest income decreased $659,000 in 2008 primarily due to
a $655,000 other-than-temporary impairment charge resulting from the write down
of two corporate debt securities to fair value. In 2007, other income decreased
$525,000 reflecting fewer loan sales and nonrecurring miscellaneous other income
related to the acquisition of CBT in 2006. The gain on sale of the
guaranteed portion of SBA loans was $39,000 in 2008, $43,000 in 2007, and
$386,000 in 2006. There were no sales of investment securities in 2008, 2007, or
2006.
Noninterest
Expense
Noninterest
expense totaled $14.5 million in 2008, an increase of $687,000 compared to an
increase of $755,000 in 2007. Professional fees increased $442,000 in 2008
compared to 2007 reflecting a $146,000 increase in audit fees, a $123,000
increase in legal fees and a $173,000 increase in consulting
fees. The most significant fluctuations in other expenses in 2008
were; a $418,000 reduction in advertising expense, a $340,000 increase in
expenses related to other real estate owned, and a $191,000 increase in the FDIC
deposit insurance charge. The most significant noninterest expense fluctuations
in 2007 compared to 2006 were; professional fees which increased $141,000, and
other operating expense which increased $493,000 primarily due to increases in
advertising, employee recruitment, and loan expense. The increase in
noninterest expense in combination with the decreases in net interest income and
noninterest income resulted in a higher efficiency ratio in 2008; Adams’
efficiency ratio increased to 88.4% from 75.8% in 2007 and 69.5% in
2006. An increasing efficiency ratio means we have to spend more
money in order to make $1.00 of net income.
Income
Taxes
When
tax returns are filed, it is highly certain that some positions taken would be
sustained upon examination by the taxing authorities, while others are subject
to uncertainty about the merits of the position taken or the amount of the
position that ultimately would be sustained. The benefit of a tax position is
recognized in the financial statements in the period during which, based on all
available evidence, management believes it is more likely than not that the
position will be sustained upon examination, including the resolution of appeals
or litigation processes, if any. The evaluation of a tax position taken is
considered by itself and not offset or aggregated with other positions. Tax
positions that meet the more likely than not recognition threshold are measured
as the largest amount of tax benefit that is more than 50 percent likely of
being realized upon settlement with the applicable taxing authority. The portion
of benefits associated with tax positions taken that exceeds the amount measured
as described above is reflected as a liability for unrecognized tax benefits in
the accompanying balance sheet along with any associated interest and penalties
that would be payable to the taxing authorities upon examination. Interest and
penalties associated with unrecognized tax benefits are recognized in
noninterest expense on the statements of operations.
Adams
accounts for income taxes according to the asset and liability method. Under
this method, deferred tax assets and liabilities are recognized for the future
tax consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
basis. Deferred tax assets and liabilities are measured using the enacted tax
rates applicable to taxable income for the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date. Valuation allowances are established
against certain deferred tax assets when it is more likely than not that the
deferred tax assets will not be realized. Increases or decreases in the
valuation allowances are charged or credited to the income tax
provision. Application of this "critical accounting policy" involves
judgments, estimates, and uncertainties that are susceptible to
change.
There
was no deferred tax valuation allowance at December 31,2008 and
2007. Adams has had a strong earnings history, no cumulative losses
prior to 2008 and no history of operating losses or tax credit carryforwards
expiring unused. In 2008, earnings were severely impacted by
significant charges to the provision for loan losses due to the deterioration in
the economy and the sudden steep decline in real estate values. These
unsettled economic circumstances are not considered to adversely affect future
profit levels on a continuing basis in the future years. Management
has determined that it is more likely than not the deferred tax assets recorded
at December 31, 2008 will be realized as their related temporary differences
reverse in future periods as Adams returns to profitability. A
summary of the tax effects of temporary differences that give rise to
significant portions of the deferred tax assets and deferred tax liabilities at
December 31, 2008 and 2007 can be found in Note 11 to Adams’ Consolidated
Financial Statements.
Adams
recorded an income tax benefit for the year ended December 31, 2008 in the
amount of $4.1 million based on a pretax net loss of $9.9 million. In
2007 and 2006, Adams incurred income tax expense of $1.1 million and $2.3
million, respectively. Income tax expense decreased $1.2 million in
2007 compared to 2006, reflecting the $1.8 million decrease in net income before
taxes and the $525,000 tax effect of a reversal in a deferred tax asset
valuation allowance related to a net operating loss carryforward. In
2008, Adams’ effective tax rate was 41.6% compared to 26.4% in 2007 and 38.3% in
2006. The increase in the 2008 effective tax rate compared to 2007 is the
nonrecurring reversal of the net operating loss valuation
allowance. The reduction in the 2007 effective tax rate compared to
2006 reflects a reversal of the aforementioned valuation allowance related to
the CBT acquisition. The reversal occurred because management
determined that it was more likely than not that CBT will have sustainable
future taxable earnings. In accordance with the Statement of
Financial Accounting Standards No. 109, Accounting for Income Taxes,
this resulted in a reduction of the remaining goodwill and core deposit
intangible from the acquisition, with the excess credit of $525,000 to income
tax expense in 2007.
Overview
Total
assets were $423.7 million at December 31, 2008, a decrease of $22.2 million or
5.0%, compared to $445.9 million at December 31, 2007. The decrease
in Adams’ assets reflects a $38.9 decrease in cash, cash equivalents and
investment securities offset by a $9.0 million net increase in loans and a $7.8
million increase in other assets. Total liabilities were $399.4 million at
December 31, 2008, a decrease of $15.0 million or 3.6%, compared to $414.4
million at December 31, 2007, primarily due to a decrease of $40.0 million in
deposits partially offset by a $27.0 million increase in
borrowings. Total stockholders’ equity was $24.3 million at December
31, 2008, a decrease of $7.2 million or 22.8%, compared to December 31,
2007. The book value per share of common stock issued and outstanding
at December 31, 2008 decreased to $7.01 per share from $9.08 per share at
December 31, 2007.
Analysis
of Loans
Gross
loans at December 31, 2008 increased $17.3 million to a balance of $324.8
million, compared to $307.5 million at December 31, 2007. Commercial real estate
loans totaling $163.2 million increased $34.9 million or 27.2% from the prior
year, as a result of increased demand during the first half of 2008. Adams’
residential real estate loans totaling $54.9 million decreased $12.5 million or
18.5%, due to repayments and a slowing in demand in the Washington, DC market.
Construction loans totaling $61.5 million decreased $9.3 million or 13.2%,
compared to 2007, primarily due to completion and sales in excess of new loan
originations. Commercial loan balances totaling $43.7 million increased by $5.1
million or 13.3%, and installment loans decreased $1.1 million to a balance of
$1.6 million. Average loans decreased 4.4% in 2008, compared to 2007. The
following table presents the percentage composition of the loan
portfolio.
|
|
December
31,
|
|
Composition
of loan portfolio:
|
2008
|
|
2007
|
|
2006
|
|
2005
|
|
2004
|
|
Commercial
|
13.5%
|
|
12.5%
|
|
12.7%
|
|
16.0%
|
|
15.9%
|
|
Real
Estate- commercial
|
50.2%
|
|
41.7%
|
|
44.3%
|
|
50.1%
|
|
50.1%
|
|
Real
Estate- residential
|
16.9%
|
|
21.9%
|
|
18.1%
|
|
19.5%
|
|
27.6%
|
|
Real
Estate- construction
|
18.9%
|
|
23.0%
|
|
24.0%
|
|
13.6%
|
|
5.9%
|
|
Installment
|
0.5%
|
|
0.9%
|
|
0.9%
|
|
0.8%
|
|
0.5%
|
|
Total
|
100.0%
|
|
100.0%
|
|
100.0%
|
|
100.0%
|
|
100.0%
|
Adams’
loan portfolio does not include concentrations of credit risk in loan products
that permit the deferral of principal payments or payments that are smaller than
normal interest accruals (negative amortization); loans with high loan-to-value
ratios; or loans, such as option adjustable-rate mortgages, that may expose the
borrower to future increases in repayments that are in excess of increases that
would result solely from increases in market interest rates.
Adams
allows interest reserves on construction loans to fund the interest payments
during the construction phase and are funded from loan proceeds. The
interest reserve is part of the overall construction budget and must be
sufficient to satisfy the interest costs through the sale of the units, or
through occupancy and permanent financing if investment property.
In
the underwriting process, the lenders must determine that the reserve is
appropriately based on the feasibility of the project, the creditworthiness of
the borrower and guarantors, and the protection provided by the real estate and
other collateral. The reserve amount must be used and within
loan-to-cost and loan-to-value ratios. If the borrower has
substantial secondary income sources and an abundance of liquidity, the bank may
move forward without an interest reserve.
Adams
monitors all interest reserves using a construction loan
spreadsheet. The spreadsheet discloses the full amount of the
reserve, the individual payments made from the reserve, total amount funded and
total amount remaining in the reserve. The construction loan
spreadsheet is reviewed not less than monthly.
Adams
is not replenishing interest reserve accounts from extensions, modifications and
restructurings. Once the interest reserve is depleted the borrower
must begin making the monthly payments. In no case shall there be an
interest reserve advance made on a non accrual loan. Loans with
interest reserves total $15.6 million at December 31, 2008.
According
to Adams’ policy, loans that are past due over 90 days are placed on nonaccrual
status unless the loans are adequately secured and in the process of
collection.
The
following table summarizes the maturity distribution and interest sensitivity of
Adams’ loan portfolio at December 31, 2008. The balances exclude any adjustments
for net deferred fees and unearned income. Included in the “Within 1 year”
category are overdrafts, demand loans, loans having no stated maturity, and
loans with no stated schedule of repayment.
Analysis
of Loan Maturity and Interest Sensitivity
At
December 31, 2008
|
(In
thousands)
|
|
Within
1 Year
|
|
|
1
to 5 Years
|
|
|
After
5 Years
|
|
|
Total
|
|
|
Maturity
of Loan
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
$ |
19,891 |
|
|
$ |
13,763 |
|
|
$ |
10,079 |
|
|
$ |
43,733 |
|
|
Real
estate – commercial
|
|
|
25,697 |
|
|
|
80,495 |
|
|
|
57,036 |
|
|
|
163,228 |
|
|
Real
estate – residential
|
|
|
11,759 |
|
|
|
36,908 |
|
|
|
6,220 |
|
|
|
54,887 |
|
|
Real
estate – construction
|
|
|
49,074 |
|
|
|
8,789 |
|
|
|
3,622 |
|
|
|
61,485 |
|
|
Installment
|
|
|
379 |
|
|
|
883 |
|
|
|
386 |
|
|
|
1,648 |
|
|
Total
loans
|
|
$ |
106,800 |
|
|
$ |
140,838 |
|
|
$ |
77,343 |
|
|
$ |
324,981 |
|
|
Interest-Rate
Sensitivity of Loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Predetermined
rates
|
|
$ |
42,231 |
|
|
$ |
129,450 |
|
|
$ |
52,304 |
|
|
$ |
223,985 |
|
|
Variable
rates
|
|
|
91,899 |
|
|
|
5,637 |
|
|
|
3,460 |
|
|
|
100,996 |
|
|
Total
loans
|
|
$ |
134,130 |
|
|
$ |
135,087 |
|
|
$ |
55,764 |
|
|
$ |
324,981 |
|
At
December 31, 2008, loans due after December 31, 2009 with fixed rates totaled
$181,754 and those with variable rates totaled $9,097. For additional
information about loans, see Note 7 of the Consolidated Financial
Statements.
Analysis
of Investment Securities
Management
evaluates securities for other-than-temporary impairment at least on a quarterly
basis, and more frequently when economic or market concern warrants such
evaluation. Consideration is given to (1) the length of time and the extent to
which the fair value has been less than cost, (2) the financial condition and
near-term prospects of the issuer, and (3) the intent and ability of Adams to
retain its investment in the issuer for a period of time sufficient to allow for
any anticipated recovery in fair value. Application of this "critical accounting
policy" involves judgments, estimates, and uncertainties that are susceptible to
change. During 2008, Adams incurred an other-than-temporary impairment charge of
$655,000 on two corporate debt securities. For additional information
on other-than-temporary impairment, see Note 6 to the Consolidated Financial
Statements.
The
aggregate fair value of the investment securities portfolio was $66.0 million at
December 31, 2008, a decrease of $13.7 million or 17.3% compared to the prior
year end total of $79.7 million. The weighted average maturity of the portfolio
at December 31, 2008 was 6.24 years.
Investment
securities classified as available for sale are used to maintain adequate
liquidity and to provide a base for executing management's asset/liability
strategy. These securities are carried at estimated fair value and totaled $62.8
million at December 31, 2008, a decrease of $3.6 million or 5.4% from the
balance at December 31, 2007. The decrease in the available for sale portfolio
was due to matured and call investment securities that were not replaced due to
liquidity demands. Investment securities classified as available for sale
consisted of U.S. government sponsored agencies, mortgage-backed securities,
corporate securities, marketable equity securities and municipal
securities.
Investment
securities classified as held to maturity decreased $10.1 million or 75.9% at
December 31, 2008 from $13.3 million at December 31, 2007. The
decrease reflects maturities in US government sponsored agencies and repayments
of mortgage-backed securities.
The
table entitled "Analysis of Investment Securities Portfolio," sets forth by
major categories, the amortized cost basis, approximate market values and the
weighted-average yields of investment securities held to maturity and available
for sale at December 31, 2008. Expected maturities may differ from contractual
maturities in mortgage-backed securities; therefore, these securities are not
included in maturity categories in the following table.
Analysis
of Investment Securities Portfolio
At
December 31, 2008
(Dollars
in thousands)
|
|
|
Held
to Maturity
|
|
|
Available
for Sale
|
|
|
|
|
Amortized
Cost
Basis
|
|
|
Market
Value
|
|
|
Average
Yield
|
|
|
Amortized
Cost Basis
|
|
|
Market
Value
|
|
|
Average
Yield
|
|
|
U.S.
government sponsored agencies:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One
year or less
|
|
$ |
-- |
|
|
$ |
-- |
|
|
|
-- |
|
|
$ |
5,000 |
|
|
$ |
5,062 |
|
|
|
5.13 |
% |
|
After
one, but within five years
|
|
|
2,007 |
|
|
|
2,034 |
|
|
|
3.40 |
% |
|
|
27,090 |
|
|
|
27,497 |
|
|
|
4.46 |
% |
|
After
five, but within ten years
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
|
|
11,982 |
|
|
|
12,098 |
|
|
|
4.70 |
% |
|
After
ten years
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
|
|
1,000 |
|
|
|
1,005 |
|
|
|
6.00 |
% |
|
Total
federal agency securities
|
|
|
2,007 |
|
|
|
2,034 |
|
|
|
3.40 |
% |
|
|
45,072 |
|
|
|
45,662 |
|
|
|
4.63 |
% |
|
Mortgage-backed
securities
|
|
|
1,168 |
|
|
|
1,192 |
|
|
|
5.50 |
% |
|
|
11,243 |
|
|
|
11,531 |
|
|
|
4.69 |
% |
|
Corporate
securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
After
five, but within ten years
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
|
|
400 |
|
|
|
438 |
|
|
|
7.03 |
% |
|
After
ten years
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
|
|
5,684 |
|
|
|
3,966 |
|
|
|
6.29 |
% |
|
Municipal
securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
After
ten years
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
|
|
953 |
|
|
|
898 |
|
|
|
5.03 |
% |
|
Marketable
equity securities
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
|
|
1,002 |
|
|
|
319 |
|
|
|
5.45 |
% |
|
Total
investment securities
|
|
$ |
3,175 |
|
|
$ |
3,226 |
|
|
|
4.17 |
% |
|
$ |
64,354 |
|
|
$ |
62,814 |
|
|
|
4.82 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Management
evaluates the portfolio for other-than-temporary impairment on a quarterly
basis. For additional information about investment securities, see
Note 1 (c) and Note 6 of the Notes to Consolidated Financial
Statements.
|
|
Short-term
investments
Short-term
investments, consisting of federal funds and interest earning deposits in banks,
decreased $23.8 million to $9.4 million at December 31, 2008 from the total of
$33.2 million at December 31, 2007. Interest-earning deposits in other banks
decreased $17.7 million and federal funds sold decreased $6.1 million reflecting
the decrease in Adams’ liquidity.
Other
Assets
Other
assets increased $7.8 million or 85.7% to $16.9 million at December 31, 2008
from $9.1 million at December 31, 2007. The most significant
increases in other assets in 2008 were; a $2.7 million increase in foreclosed
assets, a $3.6 million increase in deferred tax assets, a $1.0 million increase
in income taxes receivable, and a $775,000 increase in FHLB
stock. The most significant decrease in other assets was a $549,000
decrease in accrued interest receivable reflecting the decrease in average
investment balances and the decline in the yield on average interest earning
assets.
Deposits
Deposits
are Adams’ primary source of funds, providing funding for 88.3% of average
earning assets in 2008 and 92.0% in 2007. Average interest-bearing deposits
decreased 4.3% to $300.9 million in 2008 from $314.5 million in
2007. Total deposits decreased $39.9 million or 10.3% to $347.0
million at December 31, 2008 from $386.9 million at December 31, 2007. Money
market accounts led the decline in deposits with a decrease of $28.5
million followed by a decrease of $7.6 million in noninterest bearing
demand accounts, a $7.0 million decrease in NOW accounts and a $36,000 decrease
in savings accounts. Certificates of deposit increased by
$3.2 million from the balance at December 31, 2007.
The
following table sets forth the dollar amounts in the various types of deposit
programs.
|
|
|
December
31,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
(Dollars
in thousands)
|
|
Amount
|
|
|
Percent
|
|
|
Amount
|
|
|
Percent
|
|
|
Amount
|
|
|
Percent
|
|
|
Demand
deposits
|
|
$ |
67,193 |
|
|
|
19.4 |
% |
|
$ |
74,833 |
|
|
|
19.3 |
% |
|
$ |
76,887 |
|
|
|
21.1 |
% |
|
Savings
accounts
|
|
|
15,054 |
|
|
|
4.3 |
% |
|
|
15,090 |
|
|
|
3.9 |
% |
|
|
16,311 |
|
|
|
4.5 |
% |
|
NOW
accounts
|
|
|
71,823 |
|
|
|
20.7 |
% |
|
|
78,829 |
|
|
|
20.4 |
% |
|
|
64,391 |
|
|
|
17.7 |
% |
|
Money
market accounts
|
|
|
20,323 |
|
|
|
5.9 |
% |
|
|
48,845 |
|
|
|
12.6 |
% |
|
|
55,031 |
|
|
|
15.1 |
% |
|
Total
non-certificates
|
|
|
174,393 |
|
|
|
50.3 |
% |
|
|
217,597 |
|
|
|
56.2 |
% |
|
|
212,620 |
|
|
|
58.4 |
% |
|
Total
certificates
|
|
|
172,568 |
|
|
|
49.7 |
% |
|
|
169,345 |
|
|
|
43.8 |
% |
|
|
150,970 |
|
|
|
41.6 |
% |
|
Total
deposits
|
|
$ |
346,961 |
|
|
|
100.0 |
% |
|
$ |
386,942 |
|
|
|
100.0 |
% |
|
$ |
363,590 |
|
|
|
100.0 |
% |
The
following table summarizes certificates of deposit at December 31, 2008 by time
remaining until maturity.
|
|
|
Maturity
|
|
|
(In
thousands)
|
|
3
Months
or
Less
|
|
|
Over
3 to 6 Months
|
|
|
Over
6 to
12
Months
|
|
|
Over
12
Months
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Certificates
of deposit less than $100,000
|
|
$ |
41,518 |
|
|
$ |
23,061 |
|
|
$ |
42,765 |
|
|
$ |
17,967 |
|
|
$ |
125,311 |
|
|
Certificates
of deposit of $100,000 or more
|
|
|
18,816 |
|
|
|
12,860 |
|
|
|
11,187 |
|
|
|
4,394 |
|
|
|
47,257 |
|
|
Total
certificates of deposit
|
|
$ |
60,334 |
|
|
$ |
35,921 |
|
|
$ |
53,952 |
|
|
$ |
22,361 |
|
|
$ |
172,568 |
|
Certificates
of deposit include brokered deposits totaling $79.7 million of which $67.0
million or 84.0% are CDARS (Certificate of Deposit Account Registry Service)
deposits. CDARS is a deposit placement service that allows Adams to
place its customers’ funds in FDIC-insured certificates of deposit at other
banks and to simultaneously receive an equal sum of funds from the customers of
other banks in the CDARS network. The majority of CDARS deposits are
gathered within Adams’ geographic footprint through established customer
relationships.
Borrowed
Funds
Short-term
borrowings, consisting of FHLB advances and customer repurchase agreements,
totaled $24.5 million at December 31, 2008, compared to $8.5 million at December
31, 2007. Average short-term borrowings for 2008 were $18.9 million, compared to
$5.2 million for 2007. For additional information on short-term borrowings, see
Note 12 of the Notes to Consolidated Financial Statements.
Long-term
debt was $26.1 million at December 31, 2008, a net increase of $11.0 million
from December 31, 2007. The increase reflects loans acquired by the
parent company to provide a $7.7 million capital infusion to ANB and to fund a
loan participation in the amount of $3.5 million partially offset by principal
payments of $351,000 on FHLB advances. For additional information on
long-term debt, see Note 13 of the Notes to Consolidated Financial
Statements.
Borrowed
funds average balances and interest rates are presented in the following
schedule:
|
|
|
Years
Ended December 31,
|
|
|
(Dollars
in thousands)
|
|
Maximum
Outstanding at Any Month End
|
|
|
Average
Balance
|
|
|
Average
Interest
Rate
|
|
|
Ending
Balance
|
|
|
Average
Interest
Rate
at
Year
End
|
|
|
2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term
debt
|
|
$ |
26,132 |
|
|
$ |
17,455 |
|
|
|
4.53 |
% |
|
$ |
26,132 |
|
|
|
3.84 |
% |
|
Short-term
borrowings
|
|
$ |
35,957 |
|
|
$ |
18,867 |
|
|
|
1.97 |
% |
|
$ |
24,477 |
|
|
|
0.64 |
% |
|
2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term
debt
|
|
$ |
16,055 |
|
|
$ |
13,942 |
|
|
|
5.62 |
% |
|
$ |
15,120 |
|
|
|
5.07 |
% |
|
Short-term
borrowings
|
|
$ |
12,578 |
|
|
$ |
5,175 |
|
|
|
2.78 |
% |
|
$ |
8,494 |
|
|
|
3.32 |
% |
|
2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term
debt
|
|
$ |
11,136 |
|
|
$ |
9,638 |
|
|
|
6.57 |
% |
|
$ |
6,288 |
|
|
|
7.71 |
% |
|
Short-term
borrowings
|
|
$ |
30,026 |
|
|
$ |
16,216 |
|
|
|
4.72 |
% |
|
$ |
2,378 |
|
|
|
1.32 |
% |
Contractual
Commitments
In
the normal course of business, Adams enters into certain contractual
obligations. Such obligations include obligations to make future payments on
debt and lease arrangements. See Notes 9, 10, 12 and 13 of the Notes to
Consolidated Financial Statements. The following table summarizes Adams’
significant contractual obligations at December 31, 2008.
|
|
|
Payments
due by period
|
|
|
(In
thousands)
|
|
Total
|
|
|
Less
than 1 year
|
|
|
1-3
years
|
|
|
3-5
years
|
|
|
More
than 5 years
|
|
|
Time
deposit maturities
|
|
$ |
172,568 |
|
|
$ |
150,207 |
|
|
$ |
19,353 |
|
|
$ |
3,008 |
|
|
$ |
-- |
|
|
Short-term
borrowings
|
|
|
24,477 |
|
|
|
24,477 |
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
|
Long-term
debt
|
|
|
26,132 |
|
|
|
-- |
|
|
|
16,132 |
|
|
|
10,000 |
|
|
|
-- |
|
|
Operating
lease obligations
|
|
|
4,759 |
|
|
|
1,151 |
|
|
|
2,245 |
|
|
|
1,202 |
|
|
|
161 |
|
|
Purchase
obligations (1)
|
|
|
1,660 |
|
|
|
417 |
|
|
|
733 |
|
|
|
510 |
|
|
|
-- |
|
|
Total
|
|
$ |
229,596 |
|
|
$ |
176,252 |
|
|
$ |
38,463 |
|
|
$ |
14,720 |
|
|
$ |
161 |
|
|
(1)
|
Purchase
obligations consist primarily of a data processing service center contract
in the amount of $1.5 million
|
See
Note 14 of the Notes to the Consolidated Financial Statements for a summary of
off balance sheet commitments.
Stockholders'
Equity
Stockholders'
equity at December 31, 2008 was $24.3 million, a decrease of $7.2 million from
December 31, 2007 due to the net loss of $5.8 million, a $518,000 increase in
unrealized losses on investment securities and payment of $866,000 in cash
dividends. The ratio of average stockholders' equity to average
assets for 2008 was 6.89%, as compared to 6.95% for 2007. For a discussion of
Adams’ capital, see “Capital Resources” in this section and Note 16 to Adams’
Consolidated Financial Statements.
Adequacy
of the Allowance for Loan Losses
Adams
continuously monitors the quality of its loan portfolio and maintains an
allowance for loan and lease losses (“ALLL”) sufficient to absorb probable
losses inherent in its total loan portfolio. The ALLL policy is critical to the
portrayal and understanding of Adams’ financial condition and results of
operations. As such, selection and application of this "critical accounting
policy" involves judgments, estimates, and uncertainties that are susceptible to
change. In the event that different assumptions or conditions were to prevail,
and depending upon the severity of such changes, the possibility of materially
different financial condition or results of operations is a reasonable
likelihood. Although credit policies are designed to minimize risk, management
recognizes that loan losses will occur and that the amount of these losses will
fluctuate depending on the risk characteristics of the loan
portfolio.
Adams’
ALLL framework has three basic components: a formula-based component for pools
of homogeneous loans (i.e. groups of loans with similar risk characteristics); a
specific allowance for loans reviewed for individual impairment; and a pool
specific allowance based upon other inherent risk factors and imprecision
associated with the modeling and estimation process. The first component, the
general allocation to homogenous loans, is determined by applying allowance
factors to pools of loans that have similar characteristics in terms of business
and product type. The general factors are determined by using an analysis of
historical charge-off experience by loan pools. The second component of the ALLL
analysis involves the estimation of allowances specific to impaired loans. The
third component of the ALLL addresses inherent losses that are not otherwise
captured in the other components and is applied to homogenous pools of loans.
The qualitative factors are subjective and require a high degree of management
judgment. These factors consider changes in nonperforming and past-due loans,
concentrations of loans to specific borrowers and industries, and general and
regional economic conditions, as well as other factors existing at the
determination date.
The
allowance for loan losses is established through provisions for loan losses as a
charge to earnings based upon management's ongoing evaluation. Loans deemed
uncollectible are charged against the allowance for loan losses and any
subsequent recoveries are credited to the allowance. The provision for loan
losses increased in 2008 to $11.8 million, compared to a provision expense
totaling $260,000 in 2007 and a recovery of $232,000 in 2006. The increase in
the provision was to address the weaknesses primarily in the construction and
commercial real estate portfolios, due to the softening in the economy and the
deterioration in property values primarily in the Washington DC metropolitan
area. To assist in identifying weakness in the real estate loan
portfolio, updated appraisals were ordered in the fourth quarter of
2008, and these appraisals have shown a decrease in market values of real estate
secured properties. In addition, an independent loan review was conducted in the
fourth quarter of 2008 to review all loans with balances greater than $150,000.
The results of the appraisal updates and the results of the independent loan
review were taken into account in increasing Adams’ provision for loan losses.
The balance of the allowance for loan losses was $12.5 million or 3.85% of loans
at December 31, 2008, $4.2 million or 1.37% of loans at December 31, 2007, and
$4.4 million or 1.44% of loans at December 31, 2006. Net loan charge-offs were
$3.5 million or 1.07% of average loans, compared to net charge-offs totaling
$490,000 or 0.16% of average loans for 2007, and net recoveries totaling
$319,000 or 0.12% of average loans in 2006. Of the charge-off loans in 2008,
three construction loans comprised 85.3% of the balance. The current level of
the ALLL is intended to address known and inherent losses that are both probable
and estimable at December 31, 2008. For additional information on the analysis
of loan losses, see Note 7 of the Notes to Consolidated Financial
Statements.
The
following table presents the allocation of the allowance for loan losses by
categories.
|
|
|
December
31,
|
|
|
(In
thousands)
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Allowance
amount allocated to:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
and industrial
|
|
$ |
1,587 |
|
|
$ |
952 |
|
|
$ |
1,078 |
|
|
$ |
1,799 |
|
|
$ |
720 |
|
|
Real
estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
mortgages
|
|
|
1,762 |
|
|
(a)
|
|
|
(a)
|
|
|
(a)
|
|
|
(a)
|
|
|
Residential
mortgages
|
|
|
1,212 |
|
|
(a)
|
|
|
(a)
|
|
|
(a)
|
|
|
(a)
|
|
|
Construction
and development
|
|
|
7,922 |
|
|
(a)
|
|
|
(a)
|
|
|
(a)
|
|
|
(a)
|
|
|
Total
real estate
|
|
|
10,896 |
|
|
|
3,235 |
|
|
|
3,334 |
|
|
|
2,418 |
|
|
|
1,826 |
|
|
Installment
|
|
|
31 |
|
|
|
15 |
|
|
|
20 |
|
|
|
60 |
|
|
|
12 |
|
|
Unallocated
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
|
|
68 |
|
|
|
-- |
|
|
Total
allowance for loan losses
|
|
$ |
12,514 |
|
|
$ |
4,202 |
|
|
$ |
4,432 |
|
|
$ |
4,345 |
|
|
$ |
2,558 |
|
(a) Information is not
available by category for these years.
Nonperforming
Assets
Nonperforming
assets include nonaccrual loans, restructured loans, past-due loans and other
real estate owned (i.e. real estate acquired in foreclosure or in lieu of
foreclosure). Past-due loans are loans that are 90 days or more delinquent and
still accruing interest. There were no past-due loans at December 31, 2008 that
were still accruing interest, compared to $2.1 million at December 31, 2007.
Nonperforming assets at December 31, 2008 represented 8.95% of total assets and
totaled $37.9 million, with balances of $306,000 guaranteed by the Small
Business Association. In comparison, nonperforming assets at December 31, 2007
were 2.76% of total assets and totaled $12.3 million with balances of $1.2
million guaranteed by the SBA. Other real estate owned (“OREO”) increased this
year due to three properties totaling $4.1 million, compared to $1.4 million in
2007. The significant increase in nonperforming loans since last year was due to
the construction and commercial real estate portfolio. See Note 7 of the Notes
to Consolidated Financial Statements.
The
following table presents nonperforming assets by category for the last five
years.
|
|
|
|
|
|
|
|
December
31,
|
|
|
(Dollars
in thousands)
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Nonaccrual
loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
$ |
2,003 |
|
|
$ |
1,379 |
|
|
$ |
1,508 |
|
|
$ |
432 |
|
|
$ |
1,353 |
|
|
Real
Estate
|
|
|
31,774 |
|
|
|
7,384 |
|
|
|
-- |
|
|
|
11 |
|
|
|
524 |
|
|
Installment
– individuals
|
|
|
11 |
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
|
Total
nonaccrual loans
|
|
|
33,788 |
|
|
|
8,763 |
|
|
|
1,508 |
|
|
|
443 |
|
|
|
1,877 |
|
|
Past-due
loans
|
|
|
-- |
|
|
|
2,123 |
|
|
|
1,919 |
|
|
|
-- |
|
|
|
-- |
|
|
Other
real estate owned
|
|
|
4,124 |
|
|
|
1,410 |
|
|
|
137 |
|
|
|
137 |
|
|
|
-- |
|
|
Total
nonperforming assets
|
|
$ |
37,912 |
|
|
$ |
12,296 |
|
|
$ |
3,564 |
|
|
$ |
580 |
|
|
$ |
1,877 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonperforming
assets exclusive of SBA guarantee
|
|
$ |
37,606 |
|
|
$ |
11,080 |
|
|
$ |
2,544 |
|
|
$ |
263 |
|
|
$ |
871 |
|
|
Ratio
of nonperforming assets to gross loans & OREO
|
|
|
11.53 |
% |
|
|
3.98 |
% |
|
|
1.16 |
% |
|
|
0.23 |
% |
|
|
1.04 |
% |
|
Ratio
of nonperforming assets to total assets
|
|
|
8.95 |
% |
|
|
2.76 |
% |
|
|
0.88 |
% |
|
|
0.17 |
% |
|
|
0.75 |
% |
|
Allowance
for loan losses to nonperforming assets
|
|
|
33.0 |
% |
|
|
34.17 |
% |
|
|
124 |
% |
|
|
759 |
% |
|
|
136 |
% |
Loans
totaling $29.1 million and $7.2 million at December 31, 2008 and 2007,
respectively, were classified as monitored credits subject to management's
attention (i.e. potential problem loans) and are not reported in the preceding
table. The increase in monitored credits, compared to 2007, was due largely to
the deterioration in the economy that is affecting the market prices of real
estate properties and putting pressure on the borrowers’ ability to repay loans.
The classification of monitored credits is reviewed on a monthly basis. The
balances of the monitored credits guaranteed by the SBA totaled $865,000 and
$386,000 as of December 31, 2008 and 2007, respectively.
The
following table sets forth an analysis of the allowance for loan losses for the
periods indicated.
|
(Dollars
in thousands)
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
|
|
|
|
Balance
at beginning of period
|
|
$ |
4,202 |
|
|
$ |
4,432 |
|
|
$ |
4,345 |
|
|
$ |
2,558 |
|
|
$ |
2,119 |
|
|
Allowance
of acquired bank
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
|
|
1,430 |
|
|
|
-- |
|
|
Loans
charged off:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
275 |
|
|
|
192 |
|
|
|
345 |
|
|
|
338 |
|
|
|
80 |
|
|
Real
estate – commercial
|
|
|
18 |
|
|
|
481 |
|
|
|
-- |
|
|
|
47 |
|
|
|
-- |
|
|
Real
estate – residential
|
|
|
38 |
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
|
Real
estate – construction
|
|
|
3,400 |
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
|
Installment
– individuals
|
|
|
39 |
|
|
|
15 |
|
|
|
12 |
|
|
|
14 |
|
|
|
22 |
|
|
Total
charge-offs
|
|
|
3,770 |
|
|
|
688 |
|
|
|
357 |
|
|
|
399 |
|
|
|
102 |
|
|
Recoveries:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
147 |
|
|
|
133 |
|
|
|
594 |
|
|
|
415 |
|
|
|
120 |
|
|
Real
estate – commercial
|
|
|
94 |
|
|
|
11 |
|
|
|
36 |
|
|
|
15 |
|
|
|
-- |
|
|
Real
estate – residential
|
|
|
1 |
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
|
Installment
– individuals
|
|
|
18 |
|
|
|
54 |
|
|
|
46 |
|
|
|
16 |
|
|
|
1 |
|
|
Total
recoveries
|
|
|
260 |
|
|
|
198 |
|
|
|
676 |
|
|
|
446 |
|
|
|
121 |
|
|
Net
charge-offs (recoveries)
|
|
|
3,510 |
|
|
|
490 |
|
|
|
(319 |
) |
|
|
(47 |
) |
|
|
(19 |
) |
|
Provision
for loan losses
|
|
|
11,822 |
|
|
|
260 |
|
|
|
(232 |
) |
|
|
310 |
|
|
|
420 |
|
|
Balance
at end of period
|
|
$ |
12,514 |
|
|
$ |
4,202 |
|
|
$ |
4,432 |
|
|
$ |
4,345 |
|
|
$ |
2,558 |
|
|
Ratio
of net charge-offs (recoveries) to average loans
|
|
|
1.07 |
% |
|
|
0.16 |
% |
|
|
(0.12 |
%) |
|
|
(0.02 |
%) |
|
|
(0.01 |
%) |
Liquidity
Liquidity
is a product of Adams’ operating, investing, and financing activities and is
represented by cash and cash equivalents. Principal sources of funds are from
deposits, short and long-term debt, principal and interest payments on
outstanding loans, maturity of investment securities, and funds provided from
operations. The impact of the Written Agreement on Adams’ operations
as well as deteriorating credit markets have had an adverse impact on Adams’
financial condition and operations including maintaining acceptable liquidity
levels. Following the public announcement of the Written Agreement with the OCC
in the fourth quarter of 2008, ANB has become restricted in its ability to renew
or access deposits through brokers. Moreover, a number of Adams’ depositors have
sought to reduce their deposits at Adams National Bank.
Cash
and cash equivalents decreased $25.2 million for the period ended December 31,
2008 compared to increasing $21.2 million in 2007 and $9.0 million in
2006. Liquid assets represented 5.6% of total assets at December 31,
2008, compared to 10.9% in 2007 and 6.8% in 2006. Cash flow from
operations totaled $1.0 million in 2008 compared to $4.0 million in 2007 and
$1.9 million in 2006. The decrease in 2008 operating cash flow was
primarily due to the net loss of $5.8 million compared to net income of $3.1
million in 2007 and $3.7 million in 2006.
In
2008, the primary source of cash from investing activities was from maturing and
called investment securities and was used primarily to fund loan growth and to
help partially offset the outflow in deposits. Borrowings were the main source
of cash from financing activities and provided $32.1 million of cash used to
partially offset the $40.0 million decrease in deposits. In 2007, the
proceeds from maturing investment securities was used primarily for reinvestment
in other securities. The majority of cash from financing activities
in 2007 and 2006 resulted from deposit growth of $23.4 million and $71.5
million, respectively. Borrowings provided an additional $16.1
million in 2007, which was used to replace higher costing certificates of
deposit. In 2006, cash from financing activities was used to paydown long-term
debt and to provide funding for loans. Cash dividends decreased by
$865,000 in 2008, reflecting Adams’ strategy to preserve capital.
In
the first quarter of 2009, Adams experienced deposit out flows, due to the
matured brokered deposits and CDARs. ANB was not allowed to renew existing
brokered deposits per the Written Agreement. The primary sources of cash to fund
deposit out flows was from principal and interest payments on loans and the sale
of loan participations. Borrowings from the FHLB remained flat compared to
December 31, 2008. The FHLB increased the collateral requirement to 125% of
advances effective February 1, 2009.
Adams has additional sources of
liquidity available through unpledged investment securities with a market value
totaling $4.3 million and unsecured lines of credit available from correspondent
banks, which can provide up to $5.0 million, as well as available credit of
$48.9 million through its membership in the FHLB at December 31,
2008. See Note 12 and Note 13 of the Notes to the Consolidated
Financial Statements.
Capital
Resources
Capital
levels are monitored by management on a quarterly basis in relation to
regulatory requirements and financial forecasts for the year. At
December 31, 2008, CBT was considered to be “well capitalized” under the
regulatory framework for prompt corrective action. ANB can not be
considered “well capitalized” while under the Written Agreement dated October 1,
2008, and must maintain the following capital levels: total risk based capital
equal to 12% of risk-weighted assets; tier 1 capital at least equal to 11% of
risk-weighted assets; and tier 1 capital at least equal to 9% of adjusted total
assets. At December 31, 2008, ANB’s capital ratio levels did not
comply with those required in the Written Agreement. ANB has taken
steps to comply with the capital ratio requirements as stipulated in the Written
Agreement. Adams provided a capital infusion to ANB of $7.7 million
as of December 31, 2008. Adams has $1.75 million remaining on a credit facility
to dividend to ANB in the future. ANB is not growing the balance sheet until the
capital ratios are in compliance. ANB has also sold participations in loans
during the first quarter of 2009 to shrink its assets and has also curtailed
lines of credit on national credit facilities in which ANB participated.
Additionally, ANB has reduced its operating expenses and is continuing to
monitor spending. For the capital ratios of each Bank and that of the
consolidated Company at December 31, 2008 and 2007 see tables in Note 16 to
Adams’ Consolidated Financial Statements.
Adams
has established control processes and uses various methods to manage risk
throughout its organization. Although various controls, policies,
personnel and committees establish limits for and monitor various aspects of the
Banks’ risk profile, it remains exposed to risks, many of which are beyond its
control and that could adversely impact its performance.
Market
Risk
Adams
is exposed to various market risks in the normal course of conducting business.
Market risk is the potential loss arising from adverse changes in interest
rates, prices, and liquidity. Adams has established the Asset/Liability
Committee (ALCO) to monitor and manage those risks. ALCO meets periodically and
is responsible for approving asset/liability policies, formulating and
implementing strategies to improve balance sheet and income statement
positioning, and monitoring interest rate sensitivity. Adams manages its
interest-rate risk sensitivity through the use of a simulation model that
projects the impact of rate shocks, rate cycles, and rate forecast estimates on
the net interest income and economic value of equity (the net present value of
expected cash flows from assets and liabilities). These simulations provide a
test for embedded interest-rate risk and take into consideration factors such as
maturities, reinvestment rates, prepayment speeds, repricing limits, decay rates
and other factors. The results are compared to risk tolerance limits set by ALCO
policy. The rate-shock risk simulation projects the impact of instantaneous
parallel shifts in the yield curve. At December 31, 2008, an instantaneous rate
increase of 100 basis points indicates a 4.2% increase in net interest income
and a 1.80% increase in the economic value of equity. Likewise, an instantaneous
decrease in rates of 100 basis points indicates a decrease of 3.7% in net
interest income and a decrease of 1.95% in the economic value of
equity.
The
table below sets forth, as of December 31, 2008 and 2007, the estimated changes
in Adams’ net interest income and economic value of equity, which would result
from the designated instantaneous changes in the yield curve over the next
twelve months. These results are not necessarily indicative of future actual
results, nor do they take into account certain actions that management may
undertake in response to future changes in interest rates.
|
As
of December 31,
|
|
2008
|
|
2007
|
|
Change
in interest rates
(basis
points)
|
|
Net
interest income
|
|
Economic
value of equity
|
|
Net
interest income
|
|
Economic
value of equity
|
|
+100
|
|
4.21%
|
|
1.80%
|
|
0.92%
|
|
(4.70)%
|
|
-100
|
|
(3.71)%
|
|
(1.95)%
|
|
(1.44)%
|
|
3.95%
|
Interest
Rate Fluctuation
Adams’
earnings are affected by the fiscal and monetary policies of the Federal
government and its agencies. The Board of Governors of the Federal
Reserve System regulates the supply of money and credit in the United States.
Their policies significantly impact the Banks’ cost of funds for deposits and
borrowings and the return earned on loans and investments. Changes in the
Federal Reserve Board policies are difficult to predict or anticipate. During
2007, the Federal Reserve board lowered interest rates 100 basis points. The
yield curve environment shifted from a predominately inverted yield curve
environment at December 31, 2006 to a flat/inverted yield curve throughout 2007.
Management evaluated rate changes that included the inversion of the yield curve
throughout 2007. See discussion of Market Risk above.
Regulations
Extensive
regulation by Federal banking authorities and various legislative bodies imposes
requirements and restrictions which can impact Adams’ operations, as well as
change its competitive environment. Periodic examinations conducted
by regulatory authorities could result in various requirements or
sanctions.
Economic
Downturn
A
significant majority of the Adams Banks’ assets, deposits and fee income is
generated in the Washington, D.C. metropolitan area and Richmond
Virginia. As a result, deterioration of local economic conditions in
these areas could expose Adams to losses associated with higher loan default
rates and lower asset collateral values, deposit withdrawals and other factors
that could adversely impact its financial condition and results of
operations.
Business
Disruption
Operations
could be disrupted by various circumstances including damage or interruption
from natural disasters, fire, terrorist attack, power loss, network failure,
security breaches, computer viruses or intentional sabotage. Adams
has controls and procedures in place to minimize its vulnerability and has
developed a business recovery plan; however, any disruption in operations could
affect its ability to conduct business and adversely impact its results from
operations.
Competition
Banking
is a highly competitive industry. Although the Adams Banks compete on the basis
of interest rates, convenient locations, quality of customer service, customized
products and community involvement, they face strong competition from
institutions that are larger and have greater financial resources. In addition,
customers could bypass banks and other traditional financial institutions in
favor of other financial intermediaries and thus cause a decrease in
revenue.
Stock
Price Volatility
Adams’
stock price can be volatile due to a variety of factors including: actual or
anticipated variations in its quarterly operating results; recommendations by
security analysts; acquisitions and mergers involving Adams or its competitors;
news reports of trends, concerns, and other issues in the financial services
industry; and changes in regulations. General market conditions,
industry factors and economic trends, interest rate changes, or credit loss
trends, could cause Adams’ stock price to decrease regardless of its operating
results.
Dividend
Payment Limitations
Adams
receives substantially all of its revenue from dividends paid by its bank
subsidiaries, ANB and CBT. These dividends are the principal source
of funds used to pay dividends on Adams’ common stock. Federal
regulations limit the dividend amounts that subsidiary banks can pay to their
holding company. See Note 15 of the Notes to Consolidated Financial
Statements for further details of this limitation.
Credit
Risk
Adams
is exposed to credit risk on its loan portfolio. Even though the
portfolio is closely monitored and evaluation of this risk is performed,
unexpected credit losses may subsequently be identified as a result of
additional analysis performed by Adams or comments received from regulatory
examiners. Loss exposure could develop if collateral values were to
deteriorate after the loan has been made. See asset quality
discussion.
Liquidity
Risk
Changes
in the stability of the economic environment or deterioration of the public’s
confidence in the banking system could cause significant withdrawals by the
Banks’ depositors and adversely impact Adams’ liquidity position. In
addition, liquidating securities available for sale could result in the
recognition of a loss. Adams closely monitors its liquidity position
including its sources of funding and commitments to fund assets or deposit
withdrawals and believes it has sufficient liquidity to fund its
commitments.
Reputation
Adams
could suffer damage to its reputation if employees act unprofessionally or
illegally. To mitigate this risk, Adams has instituted an employee
code of conduct and implemented various personnel policies and procedures to
ensure integrity and adherence to policies and procedures within its
operations.
Adams
has adopted a Code of Ethics that applies to Adams’ principal executive officer,
principal financial officer, principal accounting officer or controller or
persons performing similar functions. The Code of Ethics may be
accessed on Adams’ website at www.adamsbank.com.
Adams’
Board of Directors is currently composed of eight members. Adams’
bylaws provide that all directors are elected annually.
The table below sets forth certain
information regarding the composition of Adams’ Board of Directors.
|
Name
|
|
Age (1) |
|
Positions
Held
|
|
Since
|
|
A. George
Cook
|
|
75
|
|
Director |
|
1998 |
|
Marshall T.
Reynolds
|
|
72 |
|
Director |
|
1995 |
|
Joseph L.
Williams
|
|
64 |
|
Director |
|
1998 |
|
Douglas V.
Reynolds
|
|
33 |
|
Director |
|
2002 |
|
Sandra C.
Ramsey
|
|
48 |
|
Director |
|
2006 |
|
Todd
Shell
|
|
40 |
|
Director |
|
2008 |
|
David
Bradley
|
|
58 |
|
Director |
|
2008 |
|
Robert W.
Walker
|
|
62 |
|
President and
Chief
Executive Officer
|
|
2008 |
| |
|
|
|
|
|
|
|
(1) As of December 31,
2008.
|
|
|
|
|
|
|
The principal occupation during the
past five years of each director and executive officer is set forth
below. All directors and executive officers have held their present
positions for five years unless otherwise stated.
A. George Cook is the
Principal of George Cook & Co., Senior Fellow of the School of Public Policy
at George Mason University, and Chairman Emeritus and retired Chief Executive
Officer of Colonial Parking, Inc. Mr. Cook is currently a director of
the Classica-Seneca Theater Company and a regional Board Member of the Sorenson
Institute, University of Virginia. Mr. Cook is a former Chair of the
National Policy Council of the Urban Land Institute, director and past Executive
Committee member of the Greater Washington Board of Trade and member and past
Chairman of the Board of the National Parking Association. He is a
past Board Member of the Girl Scouts of the USA, a former member of the City
Council of the City of Alexandria and a former Chairman of the Commission of
Local Government for the Commonwealth of Virginia. Mr. Cook is a former member
of the Board of Visitors of George Mason University and a former Vice Chairman
of the Virginia State Electoral Board. He is a graduate of the George Washington
University.
Sandra C. Ramsey is the Senior
Vice President of Finance and Treasurer for Acosta, Inc., a sales, service and
marketing company for major consumer product manufacturers and
retailers. Mrs. Ramsey joined Acosta as Corporate Controller in
February 1998. Mrs. Ramsey is a Certified Public Accountant with over
20 years of experience in accounting and finance. Mrs. Ramsey is a
Member of the Board of Directors and President of Leadership Jacksonville and
Treasurer of the Early Learning Coalition of Duval County. Mrs.
Ramsey is a graduate of West Virginia University.
Marshall T. Reynolds is the
Chairman of the Board, President and Chief Executive Officer of Champion
Industries, Inc., a holding company for commercial printing and office products
companies, a position he has held since 1992. Mr. Reynolds became
Chairman of the Board of Premier Financial Bancorp in Huntington, West Virginia
in 1996. In addition, Mr. Reynolds is Chairman of the Board of First
Guaranty Bancshares, Inc. in Hammond, Louisiana, and Portec Rail Products, Inc.
in Pittsburgh, Pennsylvania and a director of Summit State Bank. He
also is the Chairman of the Board of Energy Services of America
Corp. From 1964 to 1993, Mr. Reynolds was President and Manager of
The Harrah and Reynolds Corporation (predecessor to Champion Industries,
Inc.). From 1983 to 1993, he was Chairman of the Board of Banc One,
West Virginia Corporation (formerly Key Centurion Bancshares,
Inc.). Mr. Reynolds has served as Chairman of The United Way of the
River Cities, Inc. and Boys and Girls Club of Huntington. Mr. Reynolds is the
father of Director Douglas V. Reynolds.
Douglas V. Reynolds is an
attorney for Reynolds & Brown, PLLC. Mr. Reynolds is the
President of the Transylvania Corporation and is Chairman of C. J. Hughes
Construction Company, and a director of The Harrah and Reynolds Corporation, and
Portec Rail Products, Inc. Mr. Reynolds is a graduate of Duke
University and holds a law degree from West Virginia University. Mr. Reynolds is
the son of Director Marshall T. Reynolds.
Joseph L. Williams is a
director of Adams and The Adams National Bank since 1995 and the Chairman,
President and Chief Executive Officer of Consolidated Bank & Trust Company
since February 2007. He is the Chairman and Chief Executive Officer of Basic
Supply Company, Inc., which he founded in 1977. Mr. Williams was one
of the organizers and is a director of First Sentry Bank, Huntington, West
Virginia. Mr. Williams is a member of the West Virginia Governor’s Workforce
Investment Council. He is a former director of Unlimited Future, Inc., a small
business incubator, and a former Member of the National Advisory Council of the
United States Small Business Administration. Mr. Williams is a former
Mayor and City Councilman of the City of Huntington, West
Virginia. He is a graduate of Marshall University with a degree in
finance and is a former member of its Institutional Board of
Governors.
Philip Todd Shell is the Chief
Investment Officer of Guyan Machinery Rebuilders and Caspian Holdings of
Delaware, and is a director of Guyan Machinery Company, Portec Rail Products,
Inc., St. Mary’s Medical Foundation, Consolidated Bank & Trust Company,
Hospice of Huntington, Huntington Museum of Art, West Virginia Education
Alliance, Marshall University Business Scholl, and United Way of the River
Cities. Mr. Shell became a director of Adams in 2008 and is a member
of the Audit Committee of Adams. He beneficially owns 2,320 shares of
Adams common stock.
David Bradley has served as a
director of The Adams National Bank since June of 2002, and as Director of Adams
since November 2008. Mr. Bradley is the Founder and Executive
Director of the National Community Action Foundation, a private, non-profit
advocacy organization that represents a network of 1,100 community action
agencies. Mr. Bradley is also the Chief Executive Officer of each of
the National Workforce Association and USAWorks!, organizations that advocate
for, and assist in the development of, job training systems in the United
states. Mr. Bradley beneficially owns over 300 shares of Adams common
stock.
Robert W. Walker is Chairman,
President and Chief Executive Officer of Adams and is a Director of Adams and
ANB, positions he has held since September 2008. Mr. Walker serves as
the President, Chief Executive Officer and Director of Premier Financial
Bancorp, Inc. in Huntington, West Virginia and is a director of its wholly owned
subsidiaries. Mr. Walker has held that position since October
2001. From September 1998 until October 2001, Mr. Walker was
President of Boone County Bank, Inc. Prior to that time, Mr. Walker
was a Regional Vice President at Bank One, West Virginia, N.A. Mr.
Walker was also appointed as Acting Interim President and Chief Executive
Officer of ANB. The appointment was made subject to the authority of
the Comptroller of the Currency to issue a notice of disapproval.
Executive
Officers who are not Directors:
Karen E. Troutman, age 61, is Adams’ Senior Vice
President and Chief Financial Officer of Adams and ANB since
1998. Mrs. Troutman has over 30 years of experience in the financial
services industry in the areas of financial management and accounting. Mrs.
Troutman’s prior work experience included over twenty years at Household
International (now HSBC) in the capacity of Division Controller for Household
Bank and at the corporate headquarters in the Treasury Department serving in
various management positions. Mrs. Troutman holds a Masters Degree
from The Johns Hopkins University.
Executive
Compensation
Personnel
Committee
The
Personnel Committee reviews the performance of named executive officers, as well
as other officers and employees, and determines the compensation programs of
these individuals. Directors Cook and Shell comprise the Personnel
Committee. Mr. Cook and Mr. Shell are independent and neither has ever been an
officer or employee of Adams or any of Adams’ subsidiaries. The
Personnel Committee met two times during 2008 to determine compensation and to
review compensation programs.
The Board of Directors has appointed a
Personnel Committee which administers the compensation program. The Committee
strives to offer a fair and competitive policy to govern named executive
officers’ base salaries and an incentive plan and to attract and retain
competent, dedicated, and ambitious managers whose efforts will enhance Adams’
products and services and Adams’ subsidiary banks, resulting in higher
profitability, increased dividends to Adams’ stockholders and
appreciation in Adams’ common stock.
The elements of the compensation are
base salary and a bonus plan. As each element of compensation is intended to
accomplish a specific goal, payments under one element are not taken into
account when determining the amount paid under a different element.
The compensation of the named executive
officers is reviewed and approved annually by the Board of Directors upon the
recommendation of the Personnel Committee. The Personnel Committee considers the
views and recommendations of Adams’ Chief Executive Officer in making the
compensation decisions affecting the executive officers who report to him. The
Chief Executive Officer’s role in recommending compensation programs is to
develop and recommend appropriate performance measures and targets for
individual compensation levels and compile competitive benchmark data to assess
the competitive labor market. The Chief Executive Officer does not participate
in the decisions regarding changes in his compensation.
Summary
Compensation Table
Adams does not provide any monetary
compensation directly to its executive officers. Instead, the executive officers
are paid by the lead bank, ANB, for services rendered in their capacity as
executive officers of Adams and ANB. The following table shows the compensation
of Jeanne D. Hubbard, Adams’ principal executive officer until September 4,
2008, Robert Walker, Adams’ principal executive officer from September 4, 2008
through year end, and Adams’ two highest compensated executive
officers who received total compensation of $100,000 for services to Adams or
any of Adams’ subsidiaries during the years ended December 31, 2008, 2007 and
2006.
|
Summary
Compensation Table
|
|
Name
and
Principal
Position
|
Year
|
Salary
($)
|
Bonus
($)
|
Stock
awards
($)
|
Option
awards
($)
|
Non-equity
incentive plan compensation ($)
|
Change
in pension value and non-qualified deferred compensation
earnings
($)
|
All
other compensation ($)
(1)(2)(3)
|
Total
($)
|
|
Jeanne
D. Hubbard
Chairwoman
of the Board, President and Chief Executive Officer
through
September 4, 2008
|
2008
2007
2006
|
146,667
218,333
205,500
|
--
25,000
--
|
--
--
--
|
--
--
--
|
--
--
--
|
--
--
--
|
21,717
30,883
24,020
|
168,383
274,216
229,520
|
|
Robert
Walker
President,
Chief Executive Officer and Director
|
2008
|
52,500
|
--
|
--
|
--
|
--
|
--
|
5,867
|
57,846
|
|
Karen
E. Troutman
Senior
Vice President and Chief Financial Officer
|
2008
2007
2006
|
176,021
168,333
155,000
|
15,000
25,000
20,000
|
--
--
--
|
--
--
--
|
--
--
--
|
--
--
--
|
18,446
18,178
17,185
|
209,467
211,511
192,185
|
|
John
P. Shroads, Jr.
Senior
Vice President
|
2008
2007
2006
|
136,000
134,333
123,500
|
--
20,000
15,000
|
--
--
--
|
--
--
--
|
--
--
--
|
--
--
--
|
16,815
15,107
5,195
|
152,815
169,440
143,695
|
|
|
| |
(1) |
Includes
Board of Director fees of $10,250 paid in 2008, $13,750 paid in 2007 and
$13,000 in 2006 to Ms. Hubbard. |
|
|
(2)
|
Includes
ANB’s matching contribution to the 401(k) plan accounts for Ms. Hubbard of
$5,867 in 2008, $8,733 in 2007 and $8,220 in 2006; for Ms. Troutman of
$7,041 in 2008, $6,733 in 2007 and $5,950 in 2006; and for Mr. Shroads of
$5,440 in 2008, $5,107 in 2007 and $2,495 in
2006.
|
|
|
(3)
|
Includes
parking and automobile allowances of $5,600 in 2008, $8,400 in 2007 and
$2,800 in 2006 for Ms. Hubbard; and $11,405 in 2008, $11,445 in 2007 and
$11,235 in 2006 for Ms. Troutman, and $11,375 in 2008, $10,000 in 2007 and
$2,700 in 2006 for Mr. Shroads. Includes apartment rent of $5,867 in
2008 for Mr. Walker.
|
Benefit
Plans
The
Adams Banks offers a KSOP, an employee stock ownership plan with 401(k)
provisions to all eligible employees. Participants may make pre-tax and
after-tax contributions to the 401(k) up to the maximum allowable under Federal
regulations. Adams matches the pre-tax employee participant’s contributions at a
rate of 100% of the first 3% of the employee’s qualifying salary and 50% up to
the next 2% of salary. The employee stock ownership plan is a non-leveraged
employee stock ownership plan and is a profit sharing plan based upon the
earning performance of Adams. In addition, the Board of Directors may
elect to pay a discretionary contribution on an annual basis. The employee stock
ownership plan awards vest at the end of the third year. There were no awards in
2008, 2007 or 2006. At December 31, 2008, the employee stock ownership plan held
53,760 shares of Adams common stock.
Health
insurance, group life insurance, and group disability insurance are available to
all eligible employees and executive officers. All employees may elect to
participate in voluntary dental and vision plans. Such plans are standard in the
banking industry. These plans are not tied to Adams’ performance or individual
performance. The cost of providing such plans to all eligible employees and
executive officers is not taken into account when determining specific salaries
of the named executive officers and is seen as a cost of doing
business.
Pension
Benefits
Adams
assumed the obligations of Consolidated Bank & Trust Company’s
noncontributory defined pension plan, as a result of the acquisition of
Consolidated Bank & Trust Company on July 29, 2005. Pension benefits vest
after five years of service, and were based on years of service and average
final salary. During 1997, Consolidated Bank & Trust Company
froze the accrual of future service benefits; however, benefits continued to
accrue for future compensation adjustments. In 2003, the compensation levels
were frozen for benefit calculation purposes. The defined benefit plan
maintained a September 30 year end for computing benefit obligations. The
Consolidated Bank & Trust Company Pension Plan terminated effective March
31, 2007 and was fully distributed in 2008. Adams has no other pension plans.
The named executive officers do not participate in this plan.
Deferred
Compensation
Adams
does not offer a nonqualified deferred compensation plan.
Plan-Based
Awards
Adams
has two stock option plans for directors and key employees. A Nonqualified Stock
Option Plan was originally adopted in 1987, and amended in 1989, pursuant to
which non-statutory stock options for up to 170,156 shares, as adjusted, of
Adams’ common stock can be awarded to Adams’ officers. Since its
inception in 1987, no awards have been made under this Nonqualified Stock Option
Plan. The 2000 Stock Option Plan, originally adopted in February 2000, is a
nonqualified stock option plan that was awarded to directors and key officers,
and has 8,062 shares under option outstanding. The options in the 2000 Plan were
awarded at 90% of the fair market value of Adams’ common stock at the date of
the grant and vested over three years. No options may be exercised beyond ten
years from the date of the grant. There were no plan-based awards in
2008.
Outstanding
Equity Awards at Year End
The
following table sets forth information with respect to Adams’ outstanding equity
awards for the 2000 Stock Option Plan as of December 31, 2008 for Adams’ named
executive officers. No awards were made to Mr. Walker in
2008.
|
Outstanding
Equity Awards at Fiscal Year-End
|
|
Name
|
Option
awards
|
|
Number
of securities underlying unexercised options (#) exercisable
(i)
|
Number
of securities underlying unexercised options (#)
unexercisable
|
Equity
incentive plan awards: number of securities underlying
unexercised earned options (#)
|
Option
exercise price ($)
(i)
|
Option
expiration
date
(i)
|
|
Jeanne
D. Hubbard
Chairwoman
of the Board,
President
and Chief Executive Officer,
through
Sept. 4, 2008
|
--
|
--
|
--
|
--
|
--
|
|
Robert
W. Walker
Chairman
of the Board,
President
and Chief Executive Officer
|
--
|
--
|
--
|
--
|
--
|
|
Karen
E. Troutman
Senior
Vice President and
Chief
Financial Officer
|
3,025
|
--
|
--
|
$5.21
|
2/15/2010
|
|
John
P. Shroads, Jr.
Senior
Vice President
|
--
|
--
|
--
|
--
|
--
|
(i) Includes options
outstanding from the 2000 Directors and Officers Stock Option Plan. All options
were fully vested onFebruary 15, 2003. No options were exercised during 2008 by
the named executive officers listed in the table above.
Payments
Made Upon a Change of Control
Adams
and the ANB entered into Change of Control Agreements with Ms. Troutman on
September 19, 2000. This agreement was amended in 2008 to comply with
the requirements of Internal Revenue Code Section 409A. Pursuant to
this agreement, if an executive officer’s employment is terminated following a
change in control, the executive officer will receive severance pay in addition
to regular pay, vacation pay and retirement benefits accrued through the date of
termination and in addition to the continuation of health and pension benefits
to the extent required by law:
Generally,
pursuant to this agreement, the term “change in control” shall
mean:
|
|
(i)
|
any
transaction or series of related transactions by which either Abigail
Adams National Bancorp, Inc. or the Adams National Bank merge or are
consolidated with another company, unless the stockholders of Abigail
Adams National Bancorp, Inc. and the Adams National Bank, as the case may
be, immediately before such event hold at least 80% of the outstanding
voting stock of the surviving entity thereafter;
or
|
|
|
(ii)
|
the
sale or other transfer of more than 50% of Abigail Adams National Bancorp,
Inc. and the Adams National Bank assets in a single transaction or series
or related transactions out of the ordinary course of business;
or
|
|
|
(iii)
|
any
change in the membership of the Board of Directors in any two-year period
such that those who constitute the Board at the beginning of such period
are now less than a majority of the Board;
or
|
|
|
(iv)
|
any
person shall become the beneficial owner of more than 50% of the voting
stock of Abigail Adams National Bancorp, Inc. as a result of a
tender or exchange offer, open market purchases, privately negotiated
purchases or otherwise; or
|
|
|
(v)
|
the
occurrence of any other event that either Abigail Adams National Bancorp,
Inc. or the Adams National Bank is or would be, if subject to Securities
and Exchange Commission regulation, required to report as a change in
control pursuant to Item 6 of Schedule 14A of Securities and Exchange
Commission Regulation 14A.
|
As
of December 31, 2008, the potential payment upon a Change in Control for the
Chief Financial Officer, Ms. Troutman, would be $104,250.
Payments
Made Upon Termination
Other
than discussed above for payments under a change in control, the named executive
officers would not receive any payments of any kind upon termination, except for
accrued vacation, from Adams or ANB at December 31, 2008. The accrued
vacation payments due the executive officers at December 31, 2008 are as
follows: Mr. Walker $3,750, Ms. Troutman $3,719 and Mr. Shroads
$2,833.
Directors’
Summary Compensation Table
The
following table summarizes the total non-employee director compensation earned
for services in 2008. Fees paid are for Adams’ and the subsidiary banks’ board
and committee meetings.
|
Director
Compensation
|
|
Name
|
Fees
earned or paid in cash ($)
|
Stock
awards
($)
|
Option
awards
($)
|
Non-equity
incentive plan compensation ($)
|
Change
in pension value and non-qualified deferred compensation
earnings
($)
|
All
other compensation ($)
|
Total
($)
|
|
A.
George Cook
|
30,900
|
--
|
--
|
--
|
--
|
--
|
30,900
|
|
Sandra
C. Ramsey
|
15,750
|
--
|
--
|
--
|
--
|
--
|
15,750
|
|
Marshall
T. Reynolds
|
18,650
|
--
|
--
|
--
|
--
|
--
|
18,650
|
|
Douglas
V. Reynolds
|
20,100
|
--
|
--
|
--
|
--
|
--
|
20,100
|
|
Patricia
G. Shannon (1)
|
18,150
|
--
|
--
|
--
|
--
|
--
|
18,150
|
|
Marianne
Steiner (1)
|
8,450
|
--
|
--
|
--
|
--
|
--
|
8,450
|
|
Bonita
A. Wilson (1)
|
6,150
|
--
|
--
|
--
|
--
|
--
|
6,150
|
|
Todd
Shell
|
25,350
|
--
|
--
|
--
|
--
|
--
|
25,350
|
|
David
Bradley
|
19,450
|
--
|
--
|
--
|
--
|
--
|
19,450
|
(1) Ms.
Shannon, Ms. Steiner, and Ms. Wilson resigned from the Board of Directors on
November 4, 2008, June 30, 2008, and June 1, 2008, respectively
During
2008, each director received $250 for each meeting of the Board of Directors,
$1,000 for each meeting of the ANB’s Board of Directors, $350 for each meeting
of CBT’s Board of Directors, $200 for each Executive Committee meeting and $100
for all other committee meetings attended by such director.
Equity
Compensation Plan Information
|
|
Number
of securities to be issued upon exercise of outstanding options, warrants
and rights.
(a)
|
Weighted-average
exercise price of outstanding options, warrants and rights.
(b)
|
Number
of securities remaining available for future issuance under equity
compensation plans (excluding securities reflected in column
(a)).
(c)
|
|
Equity
compensation plans approved
by security holders
|
--
|
$ --
|
170,156
|
|
Equity
compensation plans not approved
by security holders
|
8,062
|
$5.21
|
--
|
|
Total
|
8,062
|
$5.21
|
178,218
|
Adams
adopted a non-statutory stock option plan (2000 Stock Option Plan) on February
15, 2000 that was not submitted for approval to the shareholders. A total of
30,250 shares of Adams’ common stock were authorized for issuance to key
employees and non-employee directors. All options were granted at an
exercise price of $5.21 per share, representing 90% of the fair market value of
Adams’ common stock at the date of the grant. The options vested over
three years and expire after ten years from the date of grant. As of
December 31, 2008, 20,676 options have been exercised and 1,512 options have
been forfeited in the 2000 Stock Option Plan.
Adams
sponsors a Nonqualified Stock Option Plan, originally adopted in 1987, and
amended in 1989, pursuant to which non-statutory stock options for up to 170,156
shares, as adjusted, of Adams’ common stock can be awarded to officers of Adams.
Since its inception in 1987, no awards have been made under the Nonqualified
Stock Option Plan.
Affirmative
Determinations Regarding Director Independence and Other Matters
The
Board of Directors has reviewed each director’s relationships, both direct and
indirect, with Adams and its subsidiaries, the ANB and CBT, and the compensation
and other payments, if any, each director has received from or made to Adams and
its subsidiaries in order to determine whether such director qualifies as
independent under Rule 4200(a)(15) of the Marketplace Rules of The NASDAQ Stock
Market, Inc. The Board of Directors has determined that the Board of Directors
has at least a majority of independent directors, and that each of the following
directors has no financial or personal ties, either directly or indirectly, with
Abigail Adams National Bancorp, Inc. or its subsidiaries other than compensation
as a director of Adams and its subsidiaries, banking relationships in the
ordinary course of business with the subsidiary banks and ownership of Adams’
common shares and thus qualifies as independent under the NASDAQ Marketplace
Rules: A. George Cook, David Bradley, Todd Shell, Sandra Ramsey and Douglas V.
Reynolds. There were no transactions required to be reported under
“Transactions with Certain Related Persons” that were considered in determining
the independence of Adams’ directors.
These five directors are referred to
individually as an “Independent Director” and collectively as the “Independent
Directors.” The Independent Directors constitute a majority of the Board of
Directors.
The
Board of Directors has also determined that each member of the Audit Committee
of the Board meets the independence requirements applicable to that committee
prescribed by the NASDAQ Marketplace Rules, the Securities and Exchange
Commission and the Internal Revenue Service.
Certain
Relationships and Related Transactions, and Director Independence.
The
ANB and CBT intend that all transactions between the banks and their executive
officers, directors, holders of 10% or more of the shares of any class of Adams’
common stock and affiliates thereof, will contain terms no less favorable to the
banks than could have been obtained by them in arm’s-length negotiations with
unaffiliated persons and will be approved by a majority of independent outside
directors of the banks not having any interest in the
transaction. Adams and its subsidiary banks have had and expect to
have in the future, banking transactions in the ordinary course of business with
certain directors of Adams and its subsidiary banks and their associates, as
well as with corporations or organizations with which they are connected as
directors, officers, stockholders, owners or partners. These banking
transactions are made in the ordinary course of business, are made on
substantially the same terms as those prevailing at Adams and its subsidiary
banks for comparable transactions with other persons, and do not involve more
than the normal risk of collectibility or present other unfavorable features.
During the year ended December 31, 2008, the Adams Banks had no loans
outstanding to directors and one to an executive officer totaling
$69,000.
Related party transactions must be
approved by the Board of Directors prior to any commitment by Adams and its
subsidiary banks to any such transactions. Directors do not participate in the
discussions and are not present for voting on their own related party
transaction. All of the material terms, conditions, and purpose of the
transaction shall be in writing and provided to the Board of Directors, together
with the written request for approval of any such transaction. The transaction
shall be approved by the appropriate senior officer before being submitted to
the Board for approval. Related party transactions for ongoing or continuing
services can be reviewed and pre-approved within reasonable parameters by the
Board of Directors on an as-needed basis. If the terms, pricing, or conditions
change so as to go outside the parameters cited in the request, the transaction
shall be resubmitted for review and approval after the fact.
Section 402
of the Sarbanes-Oxley Act of 2002 generally prohibits an issuer from:
(1) extending or maintaining credit; (2) arranging for the extension
of credit; or (3) renewing an extension of credit in the form of a personal
loan for an officer or director. There are several exceptions to this
general prohibition, one of which is applicable to
Adams. Sarbanes-Oxley does not apply to loans made by a depository
institution that is insured by the FDIC and is subject to the insider lending
restrictions of the Federal Reserve Act. All loans to the Adams
Banks’ directors and officers are made in conformity with Federal Reserve Act
regulations.
Adams
is the parent of ANB with six full-service branches located in the greater
metropolitan Washington, D.C. area and CBT, a Virginia chartered commercial
bank, with two branches in Richmond and one in Hampton, Virginia. The
Company reports its financial results on a consolidated basis with ANB and
CBT. ANB is currently subject to a Written Agreement with the OCC
under which it is subject to certain operating instructions. To management’s
knowledge, at March 31, 2009 ANB has operated in compliance with the
requirements of the Written Agreement except for meeting the Tier I capital to
average assets ratio (see capital resources section of this management’
discussion and analysis).
The
following analysis of financial condition and results of operations should be
read in conjunction with Adams’ Consolidated Financial Statements and Notes
thereto for the year ended December 31, 2008.
Results
of Operations
Overview
Adams
recorded a $1.3 million net loss before taxes for the first quarter of 2009
compared to net income before taxes of $919,000 in the first quarter of 2008.
The loss during the first three months of 2009 compared to earnings for the same
period in 2008 was due to a combination of an $860,000 increase in the provision
for loan losses, a $569,000 decrease in net interest income and a $795,000
increase in noninterest expense. The increase in the provision is intended to
address increased loan charge-offs during the three month period and the
declining portfolio performance reflective of the overall deterioration in the
national and local economy. For a detailed discussion of Adams’ asset quality,
see the “Asset Quality” section of the Management’s Discussion and
Analysis. Book value per share was $6.57 at March 31, 2009, as
compared to $9.24 at March 31, 2008. The return (loss) on average assets was
-0.79% and the return (loss) on average equity was -13.75% for the first quarter
of 2009, compared to a return on average assets of 0.52% and a return on average
equity of 7.06% for the same period last year. Basic and diluted loss per share
was $0.23 for the first quarter of 2009 compared to basic and diluted earnings
per share of $0.16 for the first quarter of 2008.
Analysis
of Net Interest Income
Net
interest income, which is the sum of interest and certain fees generated by
interest-earning assets minus interest paid on deposits and other funding
sources, is the principal source of Adams’ earnings. Net interest income for the
quarter ended March 31, 2009 decreased $569,000 or 14.8% to $3.3 million from
$3.8 million in the first quarter of 2008. The decrease in net interest income
was attributable, for the most part, to the decline in the average yield on
loans and, to a lesser extent, the decrease in the average investment balances,
partially offset by a decline in the cost of liabilities.
Loans,
the highest yielding component of earning assets, represented 80.9% of average
earning assets at March 31, 2009 compared to 75.1% at March 31,
2008. The average yield on loans declined 172 basis points to 5.44%
in the first quarter of 2009 from 7.16% in first quarter of 2008, primarily as a
result of a decrease in Prime Rate, a key index to which a substantial portion
of our loan rates are tied. During the first quarter of 2009, average Prime Rate
was 3.25% compared to 6.22% during the same time last year. The
increase in nonaccrual loans has had a negative impact on the average loan
yield.
During
the first quarter of 2009, average investments, consisting of investment
securities, federal funds and other short-term investments, decreased $28.4
million to $74.7 million from $103.1 million in the same period of 2008.
Investments were used to fund loan growth and deposit outflow. The
2009 first quarter yield on average investments was 4.38%, a decrease of 19
basis points from the 2008 first quarter yield of 4.57% reflecting the decrease
in short and medium term interest rates during the first quarter of 2009
compared to generally higher market rates during the first quarter of
2008.
The
percentage of average interest-earning assets funded by average interest-bearing
liabilities increased to 84.0% during the first quarter of 2009, compared to
80.7% for the same period in 2008. Deposits, which represented 83.1%
of average interest bearing liabilities at March 31, 2009, decreased $37.7
million or 12.2% to $272.2 million from $309.9 million at March 31,
2008. Average borrowings increased $31.6 million in the first quarter
of 2009 to $55.5 million from $23.9 million in the first quarter of
2008. The cost of interest-bearing funds for the quarter ended March
31, 2009, decreased 127 basis points to 2.18% from 3.45% during the same period
last year. The decrease in the cost of interest-bearing liabilities reflects
deposits and short-term borrowings bearing lower interest rates as shorter and
medium term interest rates in the first quarter of 2009 were significantly lower
than during the same quarter in 2008.
The
net interest margin, which is net interest income as a percentage of average
interest-earning assets, decreased 33 basis points to 3.40% in the first quarter
of 2009 from 3.73% in the first quarter of 2008. The compression in
the net interest margin reflects the decline in the average earning asset yield,
the decrease in the average investment balance and the increase in nonaccrual
loans. The net interest spread, which is the difference between the
average interest rate earned on interest-earning assets and interest paid on
interest-bearing liabilities, was 3.05% for 2009, reflecting a decrease of two
basis points from the 3.07% reported in the first quarter of 2008.
The
following table presents the average balances, net interest income and interest
yields/rates for the first three months of 2009 and 2008.
Distribution
of Assets, Liabilities and Stockholders' Equity Yields and Rates
For
the Three Months Ended March 31, 2009 and 2008
(Dollars
in thousands)
|
|
|
2009
|
|
|
2008
|
|
|
|
|
Average
Balances
|
|
|
Interest
Income/
Expense
|
|
|
Average
Rates
|
|
|
Average
Balances
|
|
|
Interest
Income/
Expense
|
|
|
Average
Rates
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
(1)
|
|
$ |
315,421 |
|
|
$ |
4,229 |
|
|
|
5.44 |
% |
|
$ |
310,641 |
|
|
$ |
5,533 |
|
|
|
7.16 |
% |
|
Investment
securities
|
|
|
68,089 |
|
|
|
802 |
|
|
|
4.78 |
% |
|
|
80,333 |
|
|
|
963 |
|
|
|
4.82 |
% |
|
Federal
funds sold
|
|
|
5,775 |
|
|
|
3 |
|
|
|
0.21 |
% |
|
|
8,716 |
|
|
|
74 |
|
|
|
3.41 |
% |
|
Interest-earning
bank balances
|
|
|
788 |
|
|
|
1 |
|
|
|
0.51 |
% |
|
|
14,020 |
|
|
|
135 |
|
|
|
3.87 |
% |
|
Total
interest-earning assets
|
|
|
390,073 |
|
|
$ |
5,035 |
|
|
|
5.23 |
% |
|
|
413,710 |
|
|
$ |
6,705 |
|
|
|
6.52 |
% |
|
Allowance
for loan losses
|
|
|
(12,517 |
) |
|
|
|
|
|
|
|
|
|
|
(4,259 |
) |
|
|
|
|
|
|
|
|
|
Cash
and due from banks
|
|
|
13,829 |
|
|
|
|
|
|
|
|
|
|
|
14,296 |
|
|
|
|
|
|
|
|
|
|
Other
assets
|
|
|
19,588 |
|
|
|
|
|
|
|
|
|
|
|
12,728 |
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
$ |
410,973 |
|
|
|
|
|
|
|
|
|
|
$ |
436,475 |
|
|
|
|
|
|
|
|
|
|
Liabilities
and Stockholders' Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Savings,
NOW and money market accounts
|
|
$ |
101,512 |
|
|
$ |
91 |
|
|
|
0.36 |
% |
|
$ |
140,804 |
|
|
$ |
666 |
|
|
|
1.90 |
% |
|
Certificates
of deposit
|
|
|
170,721 |
|
|
|
1,368 |
|
|
|
3.25 |
% |
|
|
169,051 |
|
|
|
1,954 |
|
|
|
4.65 |
% |
|
Short-
term borrowings
|
|
|
29,323 |
|
|
|
43 |
|
|
|
0.59 |
% |
|
|
8,816 |
|
|
|
63 |
|
|
|
2.87 |
% |
|
Long-term
debt
|
|
|
26,199 |
|
|
|
262 |
|
|
|
4.06 |
% |
|
|
15,104 |
|
|
|
182 |
|
|
|
4.85 |
% |
|
Total
interest-bearing liabilities
|
|
|
327,755 |
|
|
|
1,764 |
|
|
|
2.18 |
% |
|
|
333,775 |
|
|
|
2,865 |
|
|
|
3.45 |
% |
|
Noninterest-bearing
deposits
|
|
|
57,538 |
|
|
|
|
|
|
|
|
|
|
|
66,075 |
|
|
|
|
|
|
|
|
|
|
Other
liabilities
|
|
|
1,928 |
|
|
|
|
|
|
|
|
|
|
|
4,507 |
|
|
|
|
|
|
|
|
|
|
Stockholders'
equity
|
|
|
23,752 |
|
|
|
|
|
|
|
|
|
|
|
32,118 |
|
|
|
|
|
|
|
|
|
|
Total
liabilities and stockholders' equity
|
|
$ |
410,973 |
|
|
|
|
|
|
|
|
|
|
$ |
436,475 |
|
|
|
|
|
|
|
|
|
|
Net
interest income
|
|
|
|
|
|
$ |
3,271 |
|
|
|
|
|
|
|
|
|
|
$ |
3,840 |
|
|
|
|
|
|
Net
interest spread
|
|
|
|
|
|
|
|
|
|
|
3.05 |
% |
|
|
|
|
|
|
|
|
|
|
3.07 |
% |
|
Net
interest margin
|
|
|
|
|
|
|
|
|
|
|
3.40 |
% |
|
|
|
|
|
|
|
|
|
|
3.73 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
The loan averages are stated net of unearned income and include loans on
which the accrual of interest has been discontinued.
|
|
Noninterest
Income
Total
noninterest income consists primarily of service charges on deposits and other
fee-based services, as well as gains on the sales of investment securities and
loans. Noninterest income totaled $370,000 for the first quarter of 2009, a
decrease of $37,000 from $407,000 in the first quarter of 2008. The
decrease was primarily due to a $32,000 other-than-temporary impairment charge
resulting from the write down of two corporate debt securities to fair
value. Service charges on deposit accounts and other fee income
totaled $402,000, reflecting a modest decrease from the $407,000 in the first
quarter of 2008. Adams had no gain from sales of the guaranteed
portion of SBA loans during the first quarter ended March 31, 2009 compared to a
gain of $19,000 during the first quarter ended March 31, 2008. There were no
sales of investment securities during the first three months of 2009 or
2008.
Noninterest
Expense
Noninterest
expense in the first quarter of 2009 totaled $4.0 million, an increase of
$795,000 or 24.7% compared to the first quarter of 2008 primarily due to
increases in professional fees and other operating
expense. Professional fees increased $244,000 compared to the first
quarter of 2008 reflecting increases in audit and legal fees. Other
operating expense increased $459,000 compared to the first quarter of 2008
primarily reflecting increases in OREO related expense.
Income
Tax Expense
Adams
recorded an income tax benefit of $537,000 based on a pre-tax net loss of $1.3
million for the first quarter of 2009 compared to tax expense of $355,000 in the
first quarter of 2008 based on pre-tax income of $919,000. The
effective tax rate for 2009 was 40.0%, compared to 38.6% for the first quarter
of 2008 reflecting the impact of tax exempt income.
Financial
Condition
Overview
Total
assets decreased $27.9 million or 6.6% to $395.8 million at March 31, 2009, from
$423.7 million at December 31, 2008. Total liabilities decreased
$26.4 million or 6.6% to $373.0 million from $399.4 million at December 31,
2008.
Short-term
investments
Short-term
investments, consisting of federal funds and interest-earning deposits in banks,
decreased a total of $2.1 million or 22.0% to $7.3 million at March 31, 2009
from $9.4 million at December 31, 2008. Short-term investments were
used to fund operations and the outflow in deposits.
Investment
securities
Investment
securities available for sale are carried at fair value and totaled $60.9
million at March 31, 2009, an increase of $1.9 million or 3.0% from $62.8
million at December 31, 2008. Investment securities classified as held to
maturity were $3.1 million at March 31, 2009, a decrease of $59,000 from
December 31, 2008.
Loans
Total
loans outstanding at March 31, 2009 decreased $21.7 million or 6.7% to $303.1
million from $324.8 million at December 31, 2008. The decrease since
year end reflects Adams’ strategy to limit balance sheet growth by curtailing
lending and increasing sales of loan participations in order to maintain the
higher capital ratio requirements under the OCC Written Agreement. See Note 3 to
the unaudited condensed consolidated financial statements.
Deposits
Deposits
decreased $23.7 million to $323.3 million at March 31, 2009 from $347.0 million
at December 31, 2008, reflecting a $9.7 million decrease in demand deposits and
a $14.0 million decrease in interest bearing accounts.
Short-term
borrowings
Short-term
borrowings, consisting of repurchase agreements and short-term FHLB borrowings,
decreased a total of $2.8 million to $21.7 million at March 31, 2009 from $24.5
million at year end.
Stockholders'
equity
Stockholders'
equity at March 31, 2009 decreased $1.5 million to $22.8 million since year-end.
The decrease reflects the 2009 first quarter net loss of $805,000 and the
increase of $722,000 in unrealized net loss on available for sale investment
securities.
Asset
Quality
Adequacy
of the Allowance for Loan Losses
Adams
continuously monitors the quality of its loan portfolio and maintains an
allowance for loan and lease losses (“ALLL”) sufficient to absorb probable
losses inherent in its total loan portfolio. The ALLL policy is critical to the
portrayal and understanding of Adams’ financial condition and results of
operations. As such, selection and application of this "critical accounting
policy" involves judgments, estimates, and uncertainties that are susceptible to
change. In the event that different assumptions or conditions were to prevail,
and depending upon the severity of such changes, the possibility of materially
different financial condition or results of operations is a reasonable
likelihood. Although credit policies are designed to minimize risk, management
recognizes that loan losses will occur and that the amount of these losses will
fluctuate depending on the risk characteristics of the loan
portfolio.
Adams’
ALLL framework has three basic components: a formula-based component for pools
of homogeneous loans; a specific allowance for loans reviewed for individual
impairment; and a pool specific allowance based upon other inherent risk factors
and imprecision associated with the modeling and estimation process. The first
component, the general allocation to homogenous loans, is determined by applying
allowance factors to pools of loans that have similar characteristics in terms
of business and product type. The general factors are determined by using an
analysis of historical charge-off experience by loan pools. The second component
of the ALLL analysis involves the estimation of allowances specific to impaired
loans. The third component of the ALLL addresses inherent losses that are not
otherwise captured in the other components and is applied to homogenous pools of
loans. The qualitative factors are subjective and require a high degree of
management judgment. These factors consider changes in nonperforming and
past-due loans, concentrations of loans to specific borrowers and industries,
and general and regional economic conditions, as well as other factors existing
at the determination date.
The
allowance for loan losses is established through provisions for loan losses as a
charge to earnings based upon management's ongoing evaluation. Loans deemed
uncollectible are charged against the allowance for loan losses and any
subsequent recoveries are credited to the allowance. The provision for loan
losses increased in the first quarter of 2009 to $965,000, compared to a
provision expense totaling $105,000 for the same period in 2008. The increase in
the provision was to address the weaknesses primarily in the construction and
commercial real estate portfolios, due to the softening in the economy and the
deterioration in property values primarily in the Washington DC metropolitan
area. To assist in identifying weakness in the real estate loan portfolio,
updated appraisals were ordered in the fourth quarter of 2008 and the first
quarter of 2009, and these appraisals have shown a decrease in market values of
real estate secured properties. In addition, an independent loan review was
conducted in the fourth quarter of 2008 to review all loans with balances
greater than $150,000 and a subsequent loan review was conducted in the first
quarter of 2009. The results of the appraisal updates and the results of the
independent loan reviews were taken into account in increasing our provision for
loan losses. The balance of the allowance for loan losses was $13.3 million or
4.39% of loans at March 31, 2009 and $12.5 million or 3.85% of loans at December
31, 2008. Net loan charge-offs were $187,000 or 0.06% of average loans, compared
to net recoveries totaling $107,000 or 0.03% of average loans for the same
period in 2008. The current level of the ALLL is intended to address known and
inherent losses that are both probable and estimable at March 31,
2009.
The following table presents an
analysis of the ALLL for the three months ended March 31, 2009 and
2008.
|
|
|
For
the three months ended
|
|
|
(Dollars
in thousands)
|
|
March
31,
|
|
|
|
|
2009
|
|
|
2008
|
|
|
Balance
at beginning of period
|
|
$ |
12,514 |
|
|
$ |
4,202 |
|
|
Loans
charged-off:
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
15 |
|
|
|
-- |
|
|
Real
estate – commercial
|
|
|
10 |
|
|
|
-- |
|
|
Real
estate – residential
|
|
|
82 |
|
|
|
-- |
|
|
Construction
and development
|
|
|
85 |
|
|
|
-- |
|
|
Installment
– individuals
|
|
|
13 |
|
|
|
3 |
|
|
Total
charge-offs
|
|
|
205 |
|
|
|
3 |
|
|
Recoveries:
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
16 |
|
|
|
29 |
|
|
Real
estate – commercial
|
|
|
-- |
|
|
|
-- |
|
|
Real
estate – residential
|
|
|
-- |
|
|
|
77 |
|
|
Construction
and development
|
|
|
-- |
|
|
|
-- |
|
|
Installment
– individuals
|
|
|
2 |
|
|
|
4 |
|
|
Total
recoveries
|
|
|
18 |
|
|
|
110 |
|
|
Net
charge-offs (recoveries)
|
|
|
187 |
|
|
|
(107 |
) |
|
Provision
for loan losses
|
|
|
965 |
|
|
|
105 |
|
|
Balance
at end of period
|
|
$ |
13,292 |
|
|
$ |
4,414 |
|
|
|
|
|
|
|
|
|
|
|
|
Ratio
of net charge-offs (recoveries) to average loans
|
|
|
0.06 |
% |
|
|
(0.03 |
)% |
Nonperforming
Assets
Nonperforming assets include nonaccrual
loans, restructured loans, past-due loans and other real estate owned. Past due
loans are loans that are 90 days or more delinquent and still accruing interest.
Total nonperforming assets at March 31, 2009 were $61.5 million with balances of
$915,000 guaranteed by the Small Business Association (SBA), and represented
15.5% of total assets. In comparison, nonperforming assets at December 31, 2008
represented 8.95% of total assets and totaled $37.9 million, with balances of
$306,000 guaranteed by the SBA. Past-due loans that were still accruing interest
at March 31, 2009 totaled $462,000 that were in the process of renewal, compared
to no past due loans at December 31, 2008. Other real estate owned totaled $3.9
million at March 31, 2009, compared to $4.1 million at December 31, 2008, and
consisted of three properties. The significant increase in nonperforming assets
since December 31, 2008 was due to the construction and commercial real estate
loan portfolios at both banks. Loans totaling $17.3 million that were considered
impaired at December 31, 2008 were moved to nonaccrual status in the first
quarter of 2009.
The
following table presents nonperforming assets by category at March 31, 2009 and
December 31, 2008.
|
|
|
2009
|
|
|
2008
|
|
|
|
|
(Dollars
in thousands)
|
|
|
Nonaccrual
loans:
|
|
|
|
|
|
|
|
Commercial
|
|
$ |
3,737 |
|
|
$ |
2,003 |
|
|
Real
estate
|
|
|
53,390 |
|
|
|
31,774 |
|
|
Installment
to individuals
|
|
|
45 |
|
|
|
-- |
|
|
Total
nonaccrual loans
|
|
|
57,172 |
|
|
|
33,788 |
|
|
Past-due
loans
|
|
|
462 |
|
|
|
-- |
|
|
Other
real estate owned
|
|
|
3,876 |
|
|
|
4,124 |
|
|
Total
nonperforming assets
|
|
$ |
61,510 |
|
|
$ |
37,912 |
|
|
|
|
|
|
|
|
|
|
|
|
Nonperforming
assets exclusive of SBA guarantee
|
|
$ |
60,595 |
|
|
$ |
37,606 |
|
|
Ratio
of nonperforming assets to gross loans
|
|
|
20.29 |
% |
|
|
11.53 |
% |
|
Ratio
of nonperforming assets to total assets
|
|
|
15.54 |
% |
|
|
8.95 |
% |
|
Allowance
for loan losses to nonperforming assets
|
|
|
21.61 |
% |
|
|
33.00 |
% |
Assets
totaling $14.0 million and $29.1 million at March 31, 2009 and December 31,
2008, respectively, were classified as monitored credits subject to management's
attention (i.e. potential problem loans) and are not reported in the preceding
table. The decrease in monitored credits, compared to December 31, 2008, was due
to the movement of nonperforming loans into nonaccrual loan status. The
deterioration in the loan portfolio is due to the economic recession that is
affecting the market prices of real estate properties and putting pressure on
the borrowers ability to repay loans. The classification of monitored credits is
reviewed on a monthly basis. The balances of the monitored credits guaranteed by
the SBA totaled $539,000 and $865,000 as of March 31, 2009 and December 31,
2008, respectively.
Liquidity
and Capital Resources
Liquidity
Liquidity is a product of Adams’
operating, investing, and financing activities and is represented by cash and
cash equivalents. Principal sources of funds are from deposits, short and
long-term debt, principal and interest payments on outstanding loans, maturity
of investment securities, and funds provided from operations. Overall, net cash
and cash equivalents decreased for the quarter ended March 31, 2009 by $4.5
million, to a balance of $19.0 million from $23.5 million at December 31, 2008.
Liquid assets decreased to 4.8% of total assets at March 31, 2009, as compared
to 5.6% of total assets at December 31, 2008.
Adams has additional sources of
liquidity available through unpledged investment securities available for sale
totaling $1.0 million, and unsecured lines of credit available from
correspondent banks, which can provide up to $5.0 million, as well as a credit
facility of $45 million through its membership in the FHLB.
Capital
Resources
Adams (on a consolidated basis) and the
Adams Banks are subject to various regulatory capital requirements administered
by the Federal banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory and possibly additional
discretionary actions by regulators that, if undertaken, could have a direct
material effect on Adams’ financial statements. Under capital
adequacy guidelines and the regulatory framework for prompt corrective action,
Adams and the Adams Banks must meet specific capital guidelines that involve
quantitative measures of Adams’ and the Adams Banks’ assets, liabilities, and
certain off-balance-sheet items as calculated under regulatory accounting
practices. Adams’ and the Adams Banks’ capital amounts and
classification are also subject to qualitative judgments by the regulators about
components, risk weightings, and other factors. Prompt corrective
action provisions are not applicable to bank holding companies.
Quantitative measures established by
regulation to ensure capital adequacy require Adams and the Adams Banks to
maintain minimum amounts and ratios (set forth in the table below) of total and
Tier 1 capital (as defined in the regulations) to risk-weighted assets (as
defined), and of Tier 1 capital (as defined) to average assets (as defined). The
most recent notification from the primary regulators for each of Adams’
affiliated banking institutions categorized CBT as “well capitalized” under the
regulatory framework for prompt corrective action and ANB as “adequately
capitalized”. ANB can not be considered “well capitalized” while
under the Written Agreement dated October 1, 2008, and must maintain the
following capital levels: total risk based capital equal to 12% of risk-weighted
assets; tier 1 capital at least equal to 11% of risk-weighted assets; and tier 1
capital at least equal to 9% of adjusted total assets. At March 31,
2009, ANB’s “total capital to risked weighted assets ratio” and “tier I capital
to risk weighted assets ratio” did comply with the Written Agreement; however,
the Tier I capital to average assets ratio did not comply with the requirement
in the Written Agreement and was short by $469,000. ANB has taken steps to
comply with the capital ratio requirements as stipulated in the Written
Agreement. During 2008, Adams provided capital infusions into ANB totaling $7.7
million. Adams has $1.75 million remaining on a credit facility to invest in ANB
in the future and to meet other obligations. ANB will not increase the size of
its balance sheet until the capital ratios are in compliance. ANB has also sold
participations in loans during the first quarter of 2009 to shrink its assets
and has also curtailed lines of credit on national credit facilities in which
ANB participated. Additionally, ANB has reduced its operating expenses and it is
continuing to monitor its spending. ANB expects to be in compliance with all of
the capital ratios in the second quarter of 2009.
The
following table presents the capital position of Adams and the Adams Banks
relative to their various minimum statutory and regulatory capital requirements
at March 31, 2009.
|
|
|
Actual
|
|
|
Minimum
Capital Requirements
|
|
|
Minimum
To Be Well Capitalized Under Prompt Corrective Action Provisions or
Adequately Capitalized under terms of the Written
Agreement
|
|
|
(Dollars
in thousands)
|
|
Amount
|
|
|
Ratio
|
|
|
Amount
|
|
|
Ratio
|
|
|
Amount
|
|
|
Ratio
|
|
|
March
31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
capital to risk weighted assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adams
Consolidated
|
|
$ |
26,379 |
|
|
|
8.29 |
% |
|
$ |
25,451 |
|
|
|
8.00 |
% |
|
|
(1) |
|
|
|
|
|
ANB
|
|
|
31,010 |
|
|
|
12.52 |
% |
|
|
19,820 |
|
|
|
8.00 |
% |
|
|
29,730 |
|
|
|
12.00 |
% |
|
CBT
|
|
|
9,150 |
|
|
|
13.51 |
% |
|
|
5,418 |
|
|
|
8.00 |
% |
|
|
6,772 |
|
|
|
10.00 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tier
1 capital to risk weighted assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adams
Consolidated
|
|
|
22,287 |
|
|
|
7.01 |
% |
|
|
12,725 |
|
|
|
4.00 |
% |
|
|
(1) |
|
|
|
|
|
|
ANB
|
|
|
27,833 |
|
|
|
11.23 |
% |
|
|
9,910 |
|
|
|
4.00 |
% |
|
|
27,253 |
|
|
|
11.00 |
% |
|
CBT
|
|
|
8,293 |
|
|
|
12.25 |
% |
|
|
2,709 |
|
|
|
4.00 |
% |
|
|
4,063 |
|
|
|
6.00 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tier
I capital to average assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adams
Consolidated
|
|
|
22,287 |
|
|
|
5.45 |
% |
|
|
16,344 |
|
|
|
4.00 |
% |
|
|
(1) |
|
|
|
|
|
|
ANB
|
|
|
27,833 |
|
|
|
8.85 |
% |
|
|
12,579 |
|
|
|
4.00 |
% |
|
|
28,302 |
|
|
|
9.00 |
% |
|
CBT
|
|
|
8,293 |
|
|
|
9.09 |
% |
|
|
3,651 |
|
|
|
4.00 |
% |
|
|
4,563 |
|
|
|
5.00 |
% |
(1)
The Company is not subject to this requirement
Forward
Looking Statements
When
used in this Management’s Discussion and Analysis of Financial Condition and
Results of Operations – March 31, 2009, the words or phrases “will likely
result,” “are expected to”, “will continue”, “is anticipated,” “estimate,”
“project” or similar expressions are intended to identify “forward-looking
statements” within the meaning of the Private Securities Litigation Reform Act
of 1995. Such statements are subject to certain risks and uncertainties,
including, among other things, changes in economic conditions in Adams’ market
area, changes in policies by regulatory agencies, fluctuations in interest
rates, demand for loans in Adams’ market areas and competition, that could cause
actual results to differ materially from historical earnings and those presently
anticipated or projected. Adams wishes to caution readers not to place undue
reliance on any such forward-looking statements, which speak only as of the date
made. Adams wishes to advise readers that the factors listed above could affect
Adams’ financial performance and could cause Adams’ actual results for future
periods to differ materially from any opinions or statements expressed with
respect to future periods in any current statements.
Adams
does not undertake and specifically declines any obligation to publicly release
the results of any revisions, which may be made to any forward-looking
statements to reflect events or circumstances after the date of such statements
or to reflect the occurrence of anticipated or unanticipated
events.
General
The
authorized capital stock of Premier consists of 10,000,000 shares of common
stock, no par value per share of which 6,392,772 shares are currently
outstanding and 1,000,000 preferred shares, no par value per share, none of
which are currently outstanding. The outstanding common shares are
held by approximately 939 shareholders of record. All outstanding
shares of Premier common stock are fully paid and nonassessable. The unissued
portion of Premier’s authorized common stock is available for issuance as the
board of directors of Premier determines advisable.
Premier
has also established stock option plans as incentive for certain eligible
officers. As of March 31, 2009 Premier had 217,449 stock options issued and
outstanding.
Voting Rights. Premier has
only one outstanding class of common stock and all voting rights are vested in
the holders of Premier’s common stock. On all matters subject to a vote of
shareholders, the shareholders of Premier will be entitled to one vote for each
share of common stock owned. Shareholders of Premier have cumulative voting
rights with regard to election of directors. At the present time, no senior
securities of Premier are outstanding and no shares of preferred stock are
outstanding. In connection with the merger the board of directors presently
contemplates issuing 22,000 shares of preferred stock to the U.S.
Treasury.
Dividend Rights. The
shareholders of Premier are entitled to receive dividends when and as declared
by its board of directors. Dividends have been paid quarterly since September
2006. Dividends were $.43 per share in 2008, $.40 per share in 2007 and $.10 per
share in 2006. The payment of dividends is subject to the restrictions set forth
in the Kentucky Business Corporation Act, Kentucky banking laws and the
limitations imposed by federal banking regulators.
Dividend Restrictions.
Premier is dependent on dividends from the Premier Banks for its revenues.
Various federal and state regulatory provisions limit the amount of dividends
the Premier Banks can pay to Premier without regulatory approval. At December
31, 2008, approximately $2.4 million of the total shareholders' equity of the
Premier 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 the Premier 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
Premier 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 of
the Premier Banks earnings and financial condition.
Liquidation Rights. Upon any
liquidation, dissolution or winding up of its affairs, the holders of Premier
common stock are entitled to receive pro rata all of the assets of Premier
available for distribution to shareholders. There are no redemption or sinking
fund provisions applicable to the common stock.
Assessment and Redemption.
Shares of Premier common stock presently outstanding are validly issued, fully
paid and nonassessable. There is no provision for any voluntary redemption of
Premier common stock.
Transfer Agent and Registrar.
The transfer agent and registrar for Premier’s common stock is Registrar and
Transfer Company.
No
holder of any share of the capital stock of Premier has any preemptive right to
subscribe to an additional issue of its capital stock or to any security
convertible into such stock.
Indemnification and Limitations on
Liability of Officers and Directors
As
permitted by the Kentucky Business Corporation Act, the articles of
incorporation of Premier contain provisions that indemnify its directors and
officers to the fullest extent permitted by the Kentucky Business Corporation
Act. These provisions do not limit or eliminate the rights of Premier or any
shareholder to seek an injunction or any other non-monetary relief in the event
of a breach of a director’s or officer’s fiduciary duty. In addition, these
provisions apply only to claims against a director or officer arising out of his
role as a director or officer and do not relieve a director or officer from
liability if he engaged in willful misconduct or a knowing violation of the
criminal law or any federal or state securities law.
In
addition, the articles of incorporation of Premier provide for the
indemnification of both directors and officers for expenses that they incur in
connection with the defense or settlement of claims asserted against them in
their capacities as directors and officers. This right of indemnification
extends to judgments or penalties assessed against them. Premier has limited its
exposure to liability for indemnification of directors and officers by
purchasing directors and officers liability insurance coverage.
The
rights of indemnification provided in the articles of incorporation of Premier
are not exclusive of any other rights that may be available under any insurance
or other agreement, by vote of shareholders or disinterested directors or
otherwise.
Insofar
as indemnification for liabilities arising under the Securities Act of 1933 may
be permitted to directors, officers or persons controlling Premier pursuant to
the foregoing provisions, Premier has been informed that in the opinion of the
Securities and Exchange Commission this type of indemnification is against
public policy as expressed in the Securities Act and is therefore
unenforceable.
All
of the shares that will be exchanged for shares of Premier common stock upon
consummation of the merger will be freely tradable without restriction or
registration under the Securities Act, except for shares owned by “affiliates”
as described under “Resales of Premier Financial Common Stock” on page
97.
Premier
cannot predict the effect, if any, that future sales of shares of its common
stock, or the availability of shares for future sales, will have on the market
price prevailing from time to time. Sales of substantial amounts of shares of
Adams’ common stock, or the perception that such sales could occur, could
adversely affect the prevailing market price of the shares.
The
rights of Premier’s shareholders are governed by the Kentucky Business
Corporation Act and the rights of Adams’ stockholders are governed by the
Delaware General Corporation Law. The rights of shareholders under both
corporations are also governed by their respective articles and certificate of
incorporation and bylaws. Following the merger, the rights of Adams’
stockholders that receive Premier common stock will be governed by the articles
and bylaws of Premier. This summary does not purport to be a complete discussion
of, and is qualified in its entirety by reference to, Adams’ articles of
incorporation and bylaws, Premier’s articles of incorporation and bylaws and
Kentucky and Delaware law.
Authorized Capital
Stock
|
|
|
|
|
Premier
|
|
Adams
|
| 10,000,000
shares of common stock, no par value per share and 1,000,000 shares of
preferred stock, without par value. |
|
5,000,000
shares of common stock, $.01 par value per share. |
|
Authority
is given in Premier’s articles of incorporation for its board of directors
to issue, without shareholder approval, up to 1,000,000 shares of
preferred stock, to divide the shares of preferred stock into series and,
within the limitations of laws of the Commonwealth of Kentucky, to vary,
as between series, dividend rates, voting rights, redemption provisions,
voluntary and involuntary liquidation prices, sinking fund provisions and
conversion privileges. Any preferred stock issued could be
granted priority and preference over Premier common stock in payment of
dividends and upon liquidation or dissolution of
Premier. Premier currently plans to issue up to
22,000 authorized shares of preferred stock to the U.S. Treasury
under the TARP CPP.
|
|
Adams
is not authorized to issue preferred
stock.
|
Size
of Board of Directors
|
|
|
|
|
Premier
|
|
Adams
|
|
Premier’s
bylaws provide that the number of directors of Premier shall be fixed by
the board of directors from time to time. Presently the board
of directors of Premier consists of nine individuals.
|
|
Adams’
bylaws provide that the number of directors of Adams shall be not less
than 5 nor more than 25 as fixed by the board of directors from time to
time. Presently the board of directors of Adams consists of
eight individuals.
|
Cumulative Voting for
Directors
Premier
shareholders have cumulative voting rights. Cumulative voting
entitles each shareholder to cast an aggregate number of votes equal to the
number of voting shares held, multiplied by the number of directors to be
elected. Each shareholder may cast all of his or her votes for one nominee or
distribute them among two or more nominees, thus permitting holders of less than
a majority of the outstanding shares of voting stock to achieve board
representation.
Adams
stockholders do not have cumulative voting rights; in the election of directors,
they are entitled to one vote for each Adams share held.
Classes of
Directors
|
|
|
|
|
Premier
|
|
Adams
|
|
Premier
has one class of directors.
|
|
Adams
has one class of directors.
|
Filling Vacancies on the
Board
|
|
|
|
|
Premier
|
|
Adams
|
|
Newly
created directorships resulting from any increase in the authorized number
of directors or any vacancies in the board of directors resulting from
death, resignation, retirement, disqualification, removal from office or
other cause shall be filled by action of a majority of the remaining
directors then in office, and directors so chosen shall hold office for a
term expiring at the next annual meeting of shareholders.
|
|
Newly
created directorships resulting from any increase in the authorized number
of directors or any vacancies in the board of directors resulting from
death, resignation, retirement, disqualification, removal from office or
other cause shall be filled by action of a majority of the remaining
directors then in office, and directors so chosen shall hold office for a
term expiring at the next annual meeting of
stockholders.
|
Removal of
Directors
|
|
|
|
|
Premier
|
|
Adams
|
|
At
a meeting of shareholders called expressly for the purpose of removing one
or more directors, any director or the entire board of directors may be
removed, with or without cause, by a vote of the holders of a majority of
the shares then entitled to vote at any election of
directors. If less than the entire board is to be removed, no
one of the directors may be removed if the votes cast against his removal
are sufficient to elect him if such votes had been cumulatively voted at
an election of the entire board of directors or, if there are classes of
directors, at an election of the class of directors of which he is a
part.
|
|
Any
director or the entire board of directors may be removed, with or without
cause, by the holders of a majority of shares entitled to vote at an
election of directors.
|
Director
Nominations
|
|
|
|
|
Premier
|
|
Adams
|
|
Nominations
for election to the board of directors may be made by the board of
directors or by any shareholder entitled to vote for election of
directors. Nominations other than those made by or on behalf of
the existing management shall be made in writing and be delivered or
mailed to the President of Premier not less than 14 days nor more than 50
days prior to any meeting of shareholders called for the election of
directors; provided, however, that if less than 21 days notice of the
meeting is given to shareholders, such nomination shall be mailed or
delivered to the President of Premier not later than the close of business
on the 7th
day following the day on which the notice of the meeting was
mailed. Such notification shall contain specified information
to the extent known to the notifying shareholder.
|
|
Nominations
for election to the board of directors may be made by the board of
directors or by any stockholder entitled to vote for election of
directors. Stockholders can submit information regarding
qualified candidates to Adams’ corporate secretary, which must be received
not less than 90 days prior to the date of Adams’ proxy materials for the
preceding years annual meeting.
|
Anti-Takeover Provisions — Business
Combinations
Calling Annual Meetings of
Shareholders
|
|
|
|
|
Premier
|
|
Adams
|
|
The
annual meeting of the shareholders of Premier shall be held at such time,
place and on such date as the chief executive officer may designate, said
date to be no later than six months following the end of Premier’s fiscal
year. The purpose of such meetings shall be the election of
directors and the transaction of such other business as may properly come
before it. If the election of directors shall not be held on
the day designated for an annual meeting, or at any adjournment thereof,
the board of directors shall cause the election to be held at a special
meeting of the shareholders to be held as soon thereafter as may be
practicable.
|
|
The
annual meeting of the stockholders of Adams shall be held on the second
Wednesday in the month of March in each year, or at such other date
designated by the board of directors, for the purpose of electing
directors and for the transaction of such other business as may come
before the meeting.
|
Vote
Required for Amendments to Articles
of Incorporation and Certain
Transactions
|
|
|
|
|
Premier
|
|
Adams
|
|
To
authorize a (i) merger of Premier, (ii) the sale of substantially all
Premier’s assets, or (iii) amendment of Premier’s articles of
incorporation, Kentucky law requires a majority vote of shares voting at a
shareholder meeting called for such purpose at which a quorum is
present.
|
|
To
authorize a (i) merger or consolidation, (ii) sale, lease or exchange of
all or substantially all of a corporation’s assets, or (iii) amendments to
the certificate of incorporation of a corporation, Delaware law requires,
subject to certain limited exceptions, the affirmative vote of the holders
of a majority of the outstanding shares of voting stock.
|
Amendment of
Bylaws
|
|
|
|
|
Premier
|
|
Adams
|
|
The
board of directors shall have the power and authority to alter, amend or
repeal the bylaws by the vote of a majority of the entire board of
directors, subject always to the power of the shareholders to change or
repeal such bylaws.
|
|
The
bylaws may be altered, amended or repealed and new bylaws may be adopted
by the board of directors at any regular or special meeting of the board
of directors, provided notice is given but any bylaws or amendments to
bylaws made by the directors may be amended, altered or repealed by a
majority vote of the stockholders.
|
Appraisal Rights
|
|
|
|
|
Premier
|
|
Adams
|
|
In
certain mergers, shareholders of Premier have appraisal rights in
accordance with Kentucky law.
|
|
Section
262 of the Delaware General Corporation Law provides that stockholders
have the right, in some circumstances, to dissent from certain corporate
actions and to instead demand payment of the fair value of their shares.
Stockholders do not have appraisal rights with respect to shares of any
class or series of stock if such shares of stock are either (i) listed on
a national securities exchange or (ii) held of record by more than 2,000
holders, unless the stockholders receive in exchange for their shares
anything other than shares of stock of the surviving or resulting
corporation (or depositary receipts in respect thereof), or of any other
corporation that is publicly listed or held by more than 2,000 holders of
record, cash in lieu of fractional shares described above or any
combination of the foregoing. Therefore, because Adams’ common stock is
listed on the NASDAQ Global Stock Market, and will receive in the merger
only shares of Premier common stock, which will be publicly listed on the
NASDAQ Global Stock Market, and cash in lieu of fractional shares, holders
of Adams common stock will not be entitled to appraisal rights in the
merger with respect to their shares of Adams common stock.
|
Dividends
|
|
|
|
|
Premier
|
|
Adams
|
|
A
Kentucky corporation generally may pay dividends in cash, property or its
own shares except when the corporation is unable to pay its debts as they
become due in the usual course of business or the corporation’s total
assets would be less than the sum of its total liabilities plus the amount
that would be needed, if the corporation were to be dissolved at the time
of the dividend, to satisfy any stockholders who have rights superior to
those receiving the dividend.
|
|
Under
Delaware law, dividends may be declared by the board of directors and paid
out of surplus, and, if no surplus is available, out of any net profits
for the then current fiscal year or the preceding fiscal year, or both,
provided that such payment would not reduce capital below the amount of
capital represented by all classes of outstanding stock having a
preference as to the distribution of assets upon liquidation of a
corporation.
|
|
|
|
|
Discharge of Duties; Exculpation and
Indemnification
|
|
|
|
|
Premier
|
|
Adams
|
|
Premier
bylaws provide that Premier shall, to the fullest extent permitted by, and
in accordance with the provisions of, the Kentucky Business Corporation
Act, indemnify each director and officer of Premier against expenses
(including attorneys’ fees), judgments, taxes, fines, and amounts paid in
settlement, incurred in connection with, and shall advance expenses
(including attorneys’ fees) incurred in defending, any threatened, pending
or completed action, suit or proceeding (whether civil, criminal,
administrative or investigative) to which he is, or is threatened to be
made, a party by reason of the fact that he is or was a director or
officer of Premier, or is or was serving at the request of Premier as a
director, officer, partner, employee, or agent of another domestic or
foreign corporation, partnership, joint venture, trust or other
enterprise.
|
|
The
Adams certificate of incorporation includes a provision that eliminates
the personal liability of a director to Adams and its stockholders for
monetary damages resulting from breaches of the duty of care to the full
extent permitted by Delaware law and further provides that any amendment
or repeal of this provision will not affect the elimination of liability
accorded to any director for acts or omissions occurring prior to such
amendment or repeal.
Under
Delaware law, corporations are permitted, and in some circumstances
required, to indemnify, among others, current and prior officers,
directors, employees or agents of the corporation for expenses and
liabilities incurred by such parties in connection with defending pending
or threatened suits instituted against them in their corporate capacities,
provided certain specified standards of conduct are determined to have
been met. These corporate statutes further permit corporations to purchase
insurance for indemnifiable parties against liability asserted against or
incurred by such parties in their corporate capacities.
The
Adams articles of incorporation provide for mandatory indemnification for
current and former directors and officers of Adams to the fullest extent
permitted by Delaware law.
|
Huddleston
Bolen LLP and Luse Gorman Pomerenk & Schick PC will opine as to the
qualification of the merger as a reorganization and the tax treatment of the
consideration paid in connection with the merger under the Internal Revenue
Code. Huddleston Bolen LLP will opine as to the legality of the common stock of
Premier offered by this proxy statement/prospectus.
The
Consolidated Financial Statements of Premier appearing herein for the years
ended December 31, 2008 and 2007 and for the three years in the period ended
December 31, 2008 have been audited by Crowe Horwath LLP, independent registered
public accounting firm, as set forth in their report thereon. These
financial statements are included herein in reliance upon such report given on
the authority of such firm as experts in accounting and auditing.
The
Consolidated Financial Statements of Adams appearing herein for the years ended
December 31, 2008 and 2007 and for the three years in the period ended December
31, 2008 have been audited by McGladrey & Pullen, LLP, independent
registered public accounting firm, as set forth in their report
thereon. These financial statements are included herein in reliance
upon such report given on the authority of such firm as experts in accounting
and auditing.
Premier
filed with the SEC under the Securities Act a registration statement on Form S-4
to register the shares of Premier common stock to be issued to Adams
stockholders in connection with the merger. The registration statement,
including the exhibits and schedules thereto, contains additional relevant
information about Premier and its common stock. The rules and regulations of the
SEC allow Premier and Adams to omit certain information included in the
registration statement from this joint proxy statement/prospectus. This joint
proxy statement/prospectus is part of the registration statement and is a
prospectus of Premier in addition to being Adams’ and Premier’s proxy statement
for their respective special meetings.
Premier
(File No. 0-20908) and Adams (File No. 000-10971) file reports, proxy statements
and other information with the SEC under the Securities Exchange Act of 1934.
You may read and copy this information at the Public Reference Room of the SEC
at 100 F Street, N.E., Washington, D.C. 20549. You may obtain information on the
operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The
SEC also maintains an Internet web site that contains reports, proxy statements
and other information about issuers, like Premier and Adams, who file
electronically with the SEC. The address of that site is
www.sec.gov. You can also inspect reports, proxy statements and other
information that Premier and Adams have filed with the SEC at the Financial
Industry Regulatory Authority, 1735 K Street, Washington, D.C.
20096.
Neither
Premier nor Adams has authorized anyone to give any information or make any
representation about the merger or the companies that is different from, or in
addition to, that contained in this joint proxy statement/prospectus or in any
of the materials that we have incorporated into this joint proxy
statement/prospectus. Therefore, if anyone does give you information of this
sort, you should not rely on it. Information in this joint proxy
statement/prospectus about Premier has been supplied by Premier and information
about Adams has been supplied by Adams. The information contained in this joint
proxy statement/prospectus speaks only as of the date of this proxy
statement/prospectus unless the information specifically indicates that another
date applies.
The
boards of directors of Premier and Adams know of no other matters that may come
before the special meetings. If any matters other than those referred to should
properly come before the meeting, it is the intention of the persons named in
the enclosed proxies to vote such proxies in accordance with their best
judgment.
|
Premier
Financial Bancorp, Inc.
By
Order of the Board of Directors
Marshall
T. Reynolds,
Chairman
of the Board
|
Abigail
Adams National Bancorp, Inc.
By
Order of the Board of Directors
Karen
E. Troutman
Senior
Vice President and Chief Financial
Officer
|
PREMIER
| |
PAGE |
|
|
F-3
|
|
|
F-4
|
|
|
F-5
|
|
|
F-6
|
|
|
F-7
|
|
|
F-8
|
|
|
F-10
|
|
Financial
Statements
|
F-51
|
|
|
F-52
|
|
|
F-53
|
|
|
F-54
|
|
|
F-55
|
|
|
F-57
|
ADAMS
|
|
F-70
|
|
|
F-71
|
|
|
F-72
|
|
|
F-73
|
|
|
F-74
|
|
|
F-76
|
PUBLIC
ACCOUNTING FIRM
Board
of Directors and Stockholders
Premier
Financial Bancorp, Inc.
Huntington,
West Virginia
We
have audited the accompanying consolidated balance sheets of Premier Financial
Bancorp, Inc. as of December 31, 2008 and 2007, and the related consolidated
statements of income, comprehensive income, changes in stockholders' equity, and
cash flows for each of the three years in the period ended December 31,
2008. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The Company is not
required to have, nor were we engaged to perform, an audit of its internal
control over financial reporting. Our audit included consideration of
internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the Company's internal control
over financial reporting. Accordingly, we express no such
opinion. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In
our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Premier Financial
Bancorp, Inc. as of December 31, 2008 and 2007, and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 2008, in conformity with U.S. generally accepted accounting
principles.
Crowe Horwath LLP
Columbus,
Ohio
March
25, 2009
PREMIER
FINANCIAL BANCORP, INC.
December
31, 2008 and 2007
(Dollars
in Thousands, Except Per Share Data)
|
|
|
2008
|
|
|
2007
|
|
|
ASSETS
|
|
|
|
|
|
|
|
Cash
and due from banks
|
|
$ |
22,148 |
|
|
$ |
22,365 |
|
|
Federal
funds sold
|
|
|
15,899 |
|
|
|
32,035 |
|
|
Securities
available for sale
|
|
|
175,741 |
|
|
|
124,242 |
|
|
Loans
held for sale
|
|
|
1,193 |
|
|
|
1,891 |
|
|
Loans
|
|
|
467,111 |
|
|
|
346,570 |
|
|
Allowance for loan
losses
|
|
|
(8,544 |
) |
|
|
(6,497 |
) |
|
Net loans
|
|
|
458,567 |
|
|
|
340,073 |
|
|
Federal
Home Loan Bank and Federal Reserve Bank stock
|
|
|
3,931 |
|
|
|
3,314 |
|
|
Premises
and equipment, net
|
|
|
11,367 |
|
|
|
6,200 |
|
|
Real
estate and other property acquired through foreclosure
|
|
|
1,056 |
|
|
|
174 |
|
|
Interest
receivable
|
|
|
3,720 |
|
|
|
2,768 |
|
|
Goodwill
|
|
|
28,543 |
|
|
|
15,816 |
|
|
Other
intangible assets
|
|
|
1,431 |
|
|
|
- |
|
|
Other
assets
|
|
|
869 |
|
|
|
377 |
|
|
Total assets
|
|
$ |
724,465 |
|
|
$ |
549,255 |
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
|
|
|
|
|
|
|
Non-interest
bearing
|
|
$ |
101,588 |
|
|
$ |
75,271 |
|
|
Time deposits, $100,000 and
over
|
|
|
71,145 |
|
|
|
55,345 |
|
|
Other interest
bearing
|
|
|
416,449 |
|
|
|
318,417 |
|
|
Total deposits
|
|
|
589,182 |
|
|
|
449,033 |
|
|
Federal
funds purchased
|
|
|
- |
|
|
|
392 |
|
|
Securities
sold under agreements to repurchase
|
|
|
18,351 |
|
|
|
12,477 |
|
|
Federal
Home Loan Bank advances
|
|
|
7,607 |
|
|
|
4,843 |
|
|
Other
borrowed funds
|
|
|
15,560 |
|
|
|
8,412 |
|
|
Interest
payable
|
|
|
1,054 |
|
|
|
1,064 |
|
|
Other
liabilities
|
|
|
3,289 |
|
|
|
5,645 |
|
|
Total liabilities
|
|
|
635,043 |
|
|
|
481,866 |
|
|
Commitments
and contingent liabilities
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders'
equity
|
|
|
|
|
|
|
|
|
|
Preferred stock, no par value;
1,000,000 shares authorized;
|
|
|
|
|
|
|
|
|
|
none issued or
outstanding
|
|
|
- |
|
|
|
- |
|
|
Common stock, no par value;
10,000,000 shares authorized;
|
|
|
|
|
|
|
|
|
|
6,392,772 in 2008 and 5,237,899
in 2007 shares
issued and outstanding
|
|
|
2,264 |
|
|
|
1,109 |
|
|
Additional paid-in
capital
|
|
|
58,265 |
|
|
|
43,763 |
|
|
Retained earnings
|
|
|
27,346 |
|
|
|
22,444 |
|
|
Accumulated other comprehensive
income
|
|
|
1,547 |
|
|
|
73 |
|
|
Total stockholders'
equity
|
|
|
89,422 |
|
|
|
67,389 |
|
|
Total liabilities and
stockholders' equity
|
|
$ |
724,465 |
|
|
$ |
549,255 |
|
PREMIER
FINANCIAL BANCORP, INC.
Years
Ended December 31
(In
Thousands, Except Per Share Data)
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Interest
income
|
|
|
|
|
|
|
|
|
|
|
Loans, including
fees
|
|
$ |
29,692 |
|
|
$ |
27,201 |
|
|
$ |
25,926 |
|
|
Investment
securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable
|
|
|
7,148 |
|
|
|
5,509 |
|
|
|
5,148 |
|
|
Tax-exempt
|
|
|
211 |
|
|
|
157 |
|
|
|
88 |
|
|
Federal funds sold
|
|
|
748 |
|
|
|
1,829 |
|
|
|
1,215 |
|
|
Other interest
income
|
|
|
45 |
|
|
|
56 |
|
|
|
23 |
|
|
Total interest
income
|
|
|
37,844 |
|
|
|
34,752 |
|
|
|
32,400 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
10,676 |
|
|
|
11,019 |
|
|
|
8,984 |
|
|
Repurchase agreements and
other
|
|
|
251 |
|
|
|
321 |
|
|
|
234 |
|
|
FHLB advances and other
borrowings
|
|
|
882 |
|
|
|
1,116 |
|
|
|
1,027 |
|
|
Debentures
|
|
|
- |
|
|
|
- |
|
|
|
760 |
|
|
Total interest
expense
|
|
|
11,809 |
|
|
|
12,456 |
|
|
|
11,005 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
interest income
|
|
|
26,035 |
|
|
|
22,296 |
|
|
|
21,395 |
|
|
Provision
for loan losses
|
|
|
147 |
|
|
|
(78 |
) |
|
|
(1,161 |
) |
|
Net interest income after
provision for loan losses
|
|
|
25,888 |
|
|
|
22,374 |
|
|
|
22,556 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest
income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service charges
|
|
|
3,249 |
|
|
|
2,738 |
|
|
|
2,804 |
|
|
Electronic banking
income
|
|
|
824 |
|
|
|
608 |
|
|
|
498 |
|
|
Secondary market mortgage
income
|
|
|
458 |
|
|
|
650 |
|
|
|
303 |
|
|
Securities gains
|
|
|
93 |
|
|
|
- |
|
|
|
- |
|
|
Other
|
|
|
667 |
|
|
|
627 |
|
|
|
560 |
|
|
|
|
|
5,291 |
|
|
|
4,623 |
|
|
|
4,165 |
|
|
Non-interest
expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and employee
benefits
|
|
|
10,229 |
|
|
|
8,771 |
|
|
|
9,130 |
|
|
Occupancy and equipment
expenses
|
|
|
2,546 |
|
|
|
2,017 |
|
|
|
1,907 |
|
|
Outside data
processing
|
|
|
2,587 |
|
|
|
2,132 |
|
|
|
2,036 |
|
|
Professional fees
|
|
|
840 |
|
|
|
461 |
|
|
|
496 |
|
|
Taxes, other than payroll,
property and income
|
|
|
603 |
|
|
|
580 |
|
|
|
598 |
|
|
Write-downs, expenses, sales of
other real
estate owned, net of gains
|
|
|
59 |
|
|
|
(50 |
) |
|
|
(91 |
) |
|
Supplies
|
|
|
406 |
|
|
|
315 |
|
|
|
333 |
|
|
Other expenses
|
|
|
2,624 |
|
|
|
2,182 |
|
|
|
2,528 |
|
|
|
|
|
19,894 |
|
|
|
16,408 |
|
|
|
16,937 |
|
|
Income
before income taxes
|
|
|
11,285 |
|
|
|
10,589 |
|
|
|
9,784 |
|
|
Provision
for income taxes
|
|
|
3,749 |
|
|
|
3,470 |
|
|
|
3,283 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$ |
7,536 |
|
|
$ |
7,119 |
|
|
$ |
6,501 |
|
|
Weighted
average shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
6,011 |
|
|
|
5,237 |
|
|
|
5,236 |
|
|
Diluted
|
|
|
6,019 |
|
|
|
5,263 |
|
|
|
5,264 |
|
|
Earnings
per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$ |
1.25 |
|
|
$ |
1.36 |
|
|
$ |
1.24 |
|
|
Diluted
|
|
|
1.25 |
|
|
|
1.35 |
|
|
|
1.24 |
|
PREMIER
FINANCIAL BANCORP, INC.
Years
Ended December 31
(In
Thousands, Except Per Share Data)
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$ |
7,536 |
|
|
$ |
7,119 |
|
|
$ |
6,501 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive
income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gains on securities
arising during the period
|
|
|
2,457 |
|
|
|
1,853 |
|
|
|
861 |
|
|
Reclassification of realized
amount
|
|
|
(93 |
) |
|
|
- |
|
|
|
- |
|
|
Net change in unrealized gain on
securities
|
|
|
2,364 |
|
|
|
1,853 |
|
|
|
861 |
|
|
Change in funded status of pension
plan
|
|
|
(132 |
) |
|
|
- |
|
|
|
- |
|
|
Less tax impact
|
|
|
758 |
|
|
|
630 |
|
|
|
293 |
|
|
Other comprehensive
income:
|
|
|
1,474 |
|
|
|
1,223 |
|
|
|
568 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive
income
|
|
$ |
9,010 |
|
|
$ |
8,342 |
|
|
$ |
7,069 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PREMIER
FINANCIAL BANCORP, INC.
Years
Ended December 31, 2008, 2007 and 2006
(In
Thousands, Except Per Share Data)
|
|
|
Common
Stock
|
|
|
Additional
Paid-in
Capital
|
|
|
Retained
Earnings
|
|
|
Accumulated
Other
Comprehensive
Income (Loss)
|
|
|
Total
|
|
|
Balances,
January 1, 2006
|
|
$ |
1,105 |
|
|
$ |
43,458 |
|
|
$ |
11,442 |
|
|
$ |
(1,718 |
) |
|
$ |
54,287 |
|
|
Net
income
|
|
|
- |
|
|
|
- |
|
|
|
6,501 |
|
|
|
- |
|
|
|
6,501 |
|
|
Other
comprehensive income
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
568 |
|
|
|
568 |
|
|
Cash
dividends paid ($0.10 per share)
|
|
|
- |
|
|
|
- |
|
|
|
(523 |
) |
|
|
- |
|
|
|
(523 |
) |
|
Stock
options exercised, 3,002 shares
|
|
|
3 |
|
|
|
24 |
|
|
|
- |
|
|
|
- |
|
|
|
27 |
|
|
Stock
based compensation expense
|
|
|
- |
|
|
|
142 |
|
|
|
- |
|
|
|
- |
|
|
|
142 |
|
|
Balances,
December 31, 2006
|
|
|
1,108 |
|
|
|
43,624 |
|
|
|
17,420 |
|
|
|
(1,150 |
) |
|
|
61,002 |
|
|
Net
income
|
|
|
- |
|
|
|
- |
|
|
|
7,119 |
|
|
|
- |
|
|
|
7,119 |
|
|
Other
comprehensive income
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
1,223 |
|
|
|
1,223 |
|
|
Cash
dividends paid ($0.40 per share)
|
|
|
- |
|
|
|
- |
|
|
|
(2,095 |
) |
|
|
- |
|
|
|
(2,095 |
) |
|
Stock
options exercised, 1,000 shares
|
|
|
1 |
|
|
|
9 |
|
|
|
- |
|
|
|
- |
|
|
|
10 |
|
|
Stock
based compensation expense
|
|
|
- |
|
|
|
130 |
|
|
|
- |
|
|
|
- |
|
|
|
130 |
|
|
Balances,
December 31, 2007
|
|
|
1,109 |
|
|
|
43,763 |
|
|
|
22,444 |
|
|
|
73 |
|
|
|
67,389 |
|
|
Net
income
|
|
|
- |
|
|
|
- |
|
|
|
7,536 |
|
|
|
- |
|
|
|
7,536 |
|
|
Other
comprehensive income
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
1,474 |
|
|
|
1,474 |
|
|
Cash
dividends paid ($0.43 per share)
|
|
|
- |
|
|
|
- |
|
|
|
(2,634 |
) |
|
|
- |
|
|
|
(2,634 |
) |
|
Stock
issued to acquire subsidiaries
|
|
|
1,155 |
|
|
|
14,382 |
|
|
|
- |
|
|
|
- |
|
|
|
15,537 |
|
|
Stock
based compensation expense
|
|
|
- |
|
|
|
120 |
|
|
|
- |
|
|
|
- |
|
|
|
120 |
|
|
Balances,
December 31, 2008
|
|
$ |
2,264 |
|
|
$ |
58,265 |
|
|
$ |
27,346 |
|
|
$ |
1,547 |
|
|
$ |
89,422 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PREMIER
FINANCIAL BANCORP, INC.
Years
Ended December 31
(In
Thousands, Except Per Share Data)
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Cash
flows from operating activities
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$ |
7,536 |
|
|
$ |
7,119 |
|
|
$ |
6,501 |
|
|
Adjustments to reconcile net
income to net cash from
operating activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and impairment of
real estate
|
|
|
1,001 |
|
|
|
833 |
|
|
|
868 |
|
|
Provision for loan
losses
|
|
|
147 |
|
|
|
(78 |
) |
|
|
(1,161 |
) |
|
Amortization (accretion),
net
|
|
|
290 |
|
|
|
(40 |
) |
|
|
187 |
|
|
FHLB stock
dividends
|
|
|
(102 |
) |
|
|
- |
|
|
|
(145 |
) |
|
Writedowns (gains) on other real
estate owned, net
|
|
|
21 |
|
|
|
(20 |
) |
|
|
(105 |
) |
|
Stock compensation
expense
|
|
|
120 |
|
|
|
130 |
|
|
|
142 |
|
|
Loans originated for
sale
|
|
|
(23,066 |
) |
|
|
(27,461 |
) |
|
|
(14,616 |
) |
|
Secondary market loans
sold
|
|
|
24,222 |
|
|
|
28,198 |
|
|
|
13,809 |
|
|
Secondary market
income
|
|
|
(458 |
) |
|
|
(650 |
) |
|
|
(303 |
) |
|
Gain on the sale of securities
available for sale
|
|
|
(93 |
) |
|
|
- |
|
|
|
- |
|
|
Changes in :
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
receivable
|
|
|
6 |
|
|
|
53 |
|
|
|
(160 |
) |
|
Deferred income
taxes
|
|
|
1,002 |
|
|
|
648 |
|
|
|
1,071 |
|
|
Other assets
|
|
|
(142 |
) |
|
|
558 |
|
|
|
288 |
|
|
Interest payable
|
|
|
(395 |
) |
|
|
3 |
|
|
|
337 |
|
|
Other liabilities
|
|
|
(69 |
) |
|
|
68 |
|
|
|
(1,347 |
) |
|
Net cash from operating
activities
|
|
|
10,020 |
|
|
|
9,361 |
|
|
|
5,366 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of securities available
for sale
|
|
|
(90,616 |
) |
|
|
(41,078 |
) |
|
|
(23,248 |
) |
|
Proceeds from sales of securities
available for sale
|
|
|
2,088 |
|
|
|
25 |
|
|
|
- |
|
|
Proceeds from maturities and calls
of securities available
for sale
|
|
|
80,314 |
|
|
|
43,571 |
|
|
|
39,974 |
|
|
Purchase of FHLB stock,
net of redemptions
|
|
|
(130 |
) |
|
|
(49 |
) |
|
|
(60 |
) |
|
Purchases of subsidiaries, net of
cash received
|
|
|
(8,717 |
) |
|
|
- |
|
|
|
- |
|
|
Net change in federal funds
sold
|
|
|
26,978 |
|
|
|
(4,452 |
) |
|
|
(8,771 |
) |
|
Net change in
loans
|
|
|
(12,002 |
) |
|
|
(4,361 |
) |
|
|
(20,284 |
) |
|
Purchases of loan participations
from other banks
|
|
|
(15,595 |
) |
|
|
(4,825 |
) |
|
|
(1,605 |
) |
|
Payments on loan participations
with other banks
|
|
|
3,601 |
|
|
|
6,045 |
|
|
|
6,067 |
|
|
Purchases of premises and
equipment, net
|
|
|
(1,221 |
) |
|
|
(500 |
) |
|
|
(361 |
) |
|
Proceeds from sale of other real
estate acquired through
foreclosure
|
|
|
326 |
|
|
|
623 |
|
|
|
2,417 |
|
|
Net cash from investing
activities
|
|
|
(14,974 |
) |
|
|
(5,001 |
) |
|
|
(5,871 |
) |
PREMIER
FINANCIAL BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Continued)
Years
Ended December 31
(In
Thousands, Except Per Share Data)
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Cash
flows from financing activities
|
|
|
|
|
|
|
|
|
|
|
Net change in
deposits
|
|
|
(8,351 |
) |
|
|
10,083 |
|
|
|
3,107 |
|
|
Net change in short-term Federal
Home Loan Bank advances
|
|
|
3,000 |
|
|
|
- |
|
|
|
- |
|
|
Net change in federal funds
purchased
|
|
|
(392 |
) |
|
|
(584 |
) |
|
|
976 |
|
|
Net change in agreements to
repurchase securities
|
|
|
5,874 |
|
|
|
(78 |
) |
|
|
3,238 |
|
|
Repayment of Federal Home Loan
Bank advances
|
|
|
(236 |
) |
|
|
(2,442 |
) |
|
|
(1,049 |
) |
|
Early redemption of debentures,
net
|
|
|
- |
|
|
|
- |
|
|
|
(15,250 |
) |
|
Repayment of other borrowed
funds
|
|
|
(4,074 |
) |
|
|
(3,863 |
) |
|
|
(2,627 |
) |
|
Proceeds from other
borrowings
|
|
|
11,550 |
|
|
|
- |
|
|
|
13,500 |
|
|
Cash dividends
paid
|
|
|
(2,634 |
) |
|
|
(2,095 |
) |
|
|
(523 |
) |
|
Proceeds from stock option
exercises
|
|
|
- |
|
|
|
10 |
|
|
|
27 |
|
|
Net cash from financing
activities
|
|
|
4,737 |
|
|
|
1,031 |
|
|
|
1,399 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
change in cash and cash equivalents
|
|
|
(217 |
) |
|
|
5,391 |
|
|
|
894 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents at beginning of year
|
|
|
22,365 |
|
|
|
16,974 |
|
|
|
16,080 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents at end of year
|
|
$ |
22,148 |
|
|
$ |
22,365 |
|
|
$ |
16,974 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental
disclosures of cash flow information:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid during year for
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
|
|
$ |
12,204 |
|
|
$ |
12,453 |
|
|
$ |
10,667 |
|
|
Income taxes paid
|
|
|
3,082 |
|
|
|
3,066 |
|
|
|
2,285 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-cash
transactions
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans transferred to real estate
acquired through
foreclosure
|
|
$ |
679 |
|
|
$ |
282 |
|
|
$ |
672 |
|
|
Purchases of securities available
for sale not yet settled
|
|
|
- |
|
|
|
3,500 |
|
|
|
- |
|
|
Fixed assets transferred to other
real estate owned
|
|
|
- |
|
|
|
- |
|
|
|
141 |
|
|
Subsidiaries
acquired:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of assets acquired
from Citizens First Bank, Inc.
|
|
$ |
68,048 |
|
|
|
|
|
|
|
|
|
|
Common stock issued to acquire
Citizens First Bank, Inc.
|
|
|
6,400 |
|
|
|
|
|
|
|
|
|
|
Cash paid for capital stock of
Citizens First Bank, Inc.
|
|
|
5,300 |
|
|
|
|
|
|
|
|
|
|
Liabilities assumed of Citizens
First Bank, Inc.
|
|
$ |
56,348 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of assets acquired
from Traders Bankshares, Inc.
|
|
$ |
112,488 |
|
|
|
|
|
|
|
|
|
|
Common stock issued to acquire
Traders Bankshares, Inc.
|
|
|
9,138 |
|
|
|
|
|
|
|
|
|
|
Cash paid for capital stock of
Traders Bankshares, Inc.
|
|
|
9,002 |
|
|
|
|
|
|
|
|
|
|
Liabilities assumed of Traders
Bankshares, Inc.
|
|
$ |
94,348 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PREMIER
FINANCIAL BANCORP, INC.
December
31, 2008, 2007, and 2006
(Dollars
in Thousands, Except Per Share Data)
The
consolidated financial statements include the accounts of Premier Financial
Bancorp, Inc. (the Company) and its wholly-owned subsidiaries:
|
|
|
|
|
Unaudited
|
|
|
|
|
|
|
December
31, 2008
|
|
|
Subsidiary
|
Location
|
Year
Acquired
|
|
Total
Assets
|
|
|
Net
Income
|
|
|
Citizens
Deposit Bank & Trust
|
Vanceburg,
Kentucky
|
1991
|
|
$ |
125,236 |
|
|
$ |
1,968 |
|
|
Farmers
Deposit Bank
|
Eminence,
Kentucky
|
1996
|
|
|
66,225 |
|
|
|
1,173 |
|
|
Ohio
River Bank
|
Ironton,
Ohio
|
1998
|
|
|
91,186 |
|
|
|
1,218 |
|
|
First
Central Bank, Inc.
|
Philippi,
West Virginia
|
1998
|
|
|
114,524 |
|
|
|
1,244 |
|
|
Boone
County Bank, Inc.
|
Madison,
West Virginia
|
1998
|
|
|
158,123 |
|
|
|
2,201 |
|
|
Traders
Bank, Inc.
|
Ravenswood,
West Virginia
|
2008
|
|
|
170,209 |
|
|
|
891 |
|
|
Mt.
Vernon Financial Holdings, Inc.
|
Huntington,
West Virginia
|
1999
|
|
|
378 |
|
|
|
193 |
|
|
Parent
and Intercompany Eliminations
|
|
|
|
|
(1,416 |
) |
|
|
(1,352 |
) |
|
Consolidated
total
|
|
|
|
$ |
724,465 |
|
|
$ |
7,536 |
|
All
material intercompany transactions and balances have been
eliminated.
Nature of
Operations: The subsidiary banks (Banks) operate under state
bank charters and provide traditional banking services to customers primarily
located in the counties and adjoining counties in Kentucky, Ohio, and West
Virginia in which the Banks operate. Chartered as state banks, the
Banks are subject to regulation by their respective state banking regulators and
the Federal Deposit Insurance Corporation (FDIC) or the Federal Reserve Bank for
member banks. The Company is also subject to regulation by the Federal Reserve
Bank.
Estimates in the Financial
Statements: The preparation of financial statements in
conformity with accounting principles generally accepted in the United States of
America requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities, disclosure of contingent assets and
liabilities at the date of the financial statements, and the reported amounts of
revenues and expenses during the reporting period. Actual results
could differ from those estimates. The allowance for loan losses, the
identification and evaluation of impaired loans, impairment of goodwill, and
fair values of financial instruments are particularly subject to
change.
Cash
Flows: For purposes of reporting cash flows, cash and cash
equivalents include cash on hand, amounts due from banks and interest-earning
balances with banks with an original maturity less than ninety
days. Net cash flows are reported for loans, federal funds sold,
deposits, and other borrowing transactions.
PREMIER
FINANCIAL BANCORP, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
December
31, 2008, 2007, and 2006
(Dollars
in Thousands, Except Per Share Data)
NOTE 1 - SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES (Continued)
Securities: The
Company classifies its securities portfolio as either securities available for
sale or securities held to maturity. Securities held to maturity are
carried at amortized cost.
Securities
available for sale might be sold before maturity and are carried at fair
value. Adjustments from amortized cost to fair value are recorded in
other comprehensive income, net of related income tax. Other securities such as
Federal Home Loan Bank stock are carried at cost.
Interest
income includes amortization of purchase premium or discount computed using the
level yield method. Gains or losses on dispositions are based on the
net proceeds and adjusted carrying amount of the securities sold using the
specific identification method. Securities are written down to fair
value when a decline in fair value is not temporary.
Declines
in the fair value of securities below their cost that are other than temporary
are reflected as realized losses. In estimating other-than-temporary
losses, management considers: (1) the length of time and extent that fair value
has been less than cost, (2) the financial condition and near term prospects of
the issuer, and (3) the Company’s ability and intent to hold the security for a
period sufficient to allow for any anticipated recovery in fair
value.
Loans Held for
Sale: Mortgage loans originated and intended for sale in the
secondary market are carried at the lower of aggregate cost or market, as
determined by outstanding commitments from investors. Net unrealized
losses, if any, are recorded as a valuation allowance and charged to
earnings. Loans are generally sold with servicing
released.
Loans: Net
loans are stated at the amount of unpaid principal, reduced by unearned income
and an allowance for loan losses. Interest income on loans is
recognized on the accrual basis except for those loans in a non-accrual of
income status. The accrual of interest on impaired loans is
discontinued when management believes, after consideration of economic and
business conditions and collection efforts, that the borrowers’ financial
condition is such that collection of interest is doubtful.
All
interest accrued but not received for loans placed on non-accrual is reversed
against interest income. Interest received on such loans is accounted
for on the cash-basis or cost-recovery method, until qualifying for return to
accrual. Loans are returned to accrual status when all the principal
and interest amounts contractually due are brought current and future payments
are reasonably assured.
PREMIER
FINANCIAL BANCORP, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
December
31, 2008, 2007, and 2006
(Dollars
in Thousands, Except Per Share Data)
NOTE 1 - SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES (Continued)
The
allowance for loan losses is a valuation allowance for probable incurred credit
losses increased by a provision for loan losses charged to
expense. The allowance is an amount that management believes will be
adequate to absorb probable incurred losses on existing loans based on
evaluations of the collectability of loans and prior loan loss
experience. The evaluations take into consideration such factors as
changes in the nature and volume of the loan portfolio, overall portfolio
quality, review of specific problem loans, and current economic conditions that
may affect the borrowers’ ability to pay. Allocations of the
allowance may be made for specific loans, but the entire allowance is available
for any loan that, in management’s judgment, should be
charged-off. Loans are charged against the allowance for loan losses
when management believes that the collection of principal is
unlikely. Subsequent recoveries, if any, are credited to the
allowance.
A
loan is impaired when full payment under the loan terms is not
expected. Impairment is evaluated in total for smaller-balance loans
of similar nature such as residential mortgage, consumer, and credit card loans,
and accordingly, they are not separately identified for impairment
disclosures. All other loans are evaluated for impairment on an
individual basis. If a loan is impaired, a portion of the allowance
is allocated so that the loan is reported, net, at the present value of
estimated future cash flows using the loan’s existing rate or at the fair value
of collateral if repayment is expected solely from the collateral.
Premises and
Equipment: Land is carried at cost. Premises and
equipment are stated at cost less accumulated
depreciation. Depreciation is recorded principally by the
straight-line method with useful lives ranging from 7 to 40 years for premises
and from 3 to 15 years for equipment.
Real Estate Acquired Through
Foreclosure: Real estate acquired through foreclosure is
carried at the lower of the recorded investment in the property or its fair
value less estimated costs to sell. Upon repossession, the value of
the underlying loan is written down to the fair value of the real estate less
estimated costs to sell by a charge to the allowance for loan losses, if
necessary. Any subsequent write-downs are charged to operating
expenses. Parcels of real estate maybe leased to third parties to offset holding
period costs. Operating expenses of such properties, net of related income, and
gains and losses on their disposition are included in other
expenses.
Federal Home Loan Bank
(FHLB) stock: The Banks are members of the FHLB
system. Members are required to own a certain amount of stock based
on the level of borrowings and other factors, and may invest in additional
amounts. FHLB stock is carried at cost, classified as a restricted
security, and periodically evaluated for impairment based on ultimate recovery
of par value. Both cash and stock dividends are reported as
income.
PREMIER
FINANCIAL BANCORP, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
December
31, 2008, 2007, and 2006
(Dollars
in Thousands, Except Per Share Data)
NOTE 1 - SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES (Continued)
Long-term Assets:
Premises and equipment and other long-term assets are reviewed for impairment
when events indicate that the carrying amount may not be recoverable from future
undiscounted cash flows. If impaired, the assets are recorded at fair
value.
Repurchase
Agreements: Substantially all repurchase agreement liabilities
represent amounts advanced by various customers. Securities are
pledged to cover these liabilities, which are not covered by federal deposit
insurance.
Goodwill and Other
Intangible Assets: Goodwill results from business acquisitions
and represents the excess of the purchase price over the fair value of acquired
tangible assets and liabilities and identifiable intangible
assets. Goodwill is assessed at least annually for impairment
and any such impairment will be recognized in the period
identified. Impairment is evaluated using the aggregate of all
banking operations. To evaluate impairment, management uses pricing
valuation factors such as price-to-total assets and price-to-total deposits from
databases of actual peer group bank sales. These valuation factors
are applied to the comparable factors of the Company’s aggregate banking
operations to arrive at estimated fair value.
Other
intangible assets consist of core deposit intangible assets arising from the
whole bank acquisitions. They are initially measured at fair value
and then are amortized on an accelerated method over their estimated useful
lives of approximately 8 years.
Stock Based
Compensation: Compensation cost is recognized for stock
options granted to employees based on the fair value of these awards at the date
of grant. A Black-Scholes model is utilized to estimate the fair value of stock
options. Compensation cost is recognized on a straight-line basis
over the required service period, generally defined as the vesting
period.
PREMIER
FINANCIAL BANCORP, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
December
31, 2008, 2007, and 2006
(Dollars
in Thousands, Except Per Share Data)
NOTE 1 - SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES (Continued)
Income
Taxes: Income tax expense is the total of the current year
income tax due or refundable and the change in deferred tax assets and
liabilities. Deferred tax assets and liabilities are the expected
future tax amounts for the temporary differences between carrying amounts and
tax bases of assets and liabilities, computed using enacted tax
rates. A valuation allowance, if needed, reduces deferred tax assets
to the amount expected to be realized.
The
Company adopted FASB Interpretation 48, Accounting for Uncertainty in Income
Taxes ("FIN 48"), as of January 1, 2007. A tax position is recognized as a
benefit only if it is more likely than not that the tax position would be
sustained in a tax examination, with a tax examination being presumed to occur.
The amount recognized is the largest amount of tax benefit that is greater than
50% likely of being realized on examination. For tax positions not meeting the
"more likely than not" test, no tax benefit is recorded. The adoption had no
effect on the Company's financial statements.
The
Company recognizes interest related to income tax matters as other interest
expense and penalties related to income tax matters as other noninterest
expense.
Off Balance Sheet Financial
Instruments: Financial instruments include off-balance sheet
credit instruments, such as commitments to make loans and commercial letters of
credit, issued to meet customer financing needs. The face amount for
these items represents the exposure to loss, before considering customer
collateral or ability to repay. Such financial instruments are
recorded when they are funded.
PREMIER
FINANCIAL BANCORP, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
December
31, 2008, 2007, and 2006
(Dollars
in Thousands, Except Per Share Data)
NOTE 1 - SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES (Continued)
Earnings Per Common
Share: Basic earnings per common share is net income divided
by the weighted average number of common shares outstanding during the
period. Diluted earnings per common share includes the dilutive
effect of additional potential common shares issuable under stock
options. Earnings and dividends per share are restated for all stock
splits and dividends through the date of issuance of the financial
statements.
Comprehensive
Income: Comprehensive income consists of net income and other
comprehensive income. Other comprehensive income includes unrealized
gains and losses on securities available for sale which are also recognized as a
separate component of equity.
Loss
Contingencies: Loss contingencies, including claims and legal
actions arising in the ordinary course of business, are recorded as liabilities
when the likelihood of loss is probable and an amount or range of loss can be
reasonably estimated. Management does not believe there now are such
matters that will have a material effect on the financial
statements.
Fair Value of Financial
Instruments: Fair values of financial instruments are
estimated using relevant market information and other assumptions, as more fully
disclosed in a separate note. Fair value estimates involve
uncertainties and matters of significant judgment regarding interest rates,
credit risk, prepayments, and other factors, especially in the absence of broad
markets for particular items. Changes in assumptions or in market
conditions could significantly affect the estimates.
Operating
Segments: All of the Company’s operations are considered by
management to be aggregated into one reportable operating
segment. While the chief decision-makers monitor the revenue streams
of the various products and services, the identifiable segments are not
material. Operations are managed and financial performance is
evaluated on a Company-wide basis.
Reclassifications: Some
items in the prior year financial statements were reclassified to conform to the
current presentation.
PREMIER
FINANCIAL BANCORP, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
December
31, 2008, 2007, and 2006
(Dollars
in Thousands, Except Per Share Data)
NOTE 1 - SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES (Continued)
Adoption of New Accounting
Standards: In September 2006, the FASB issued Statement No.
157, Fair Value
Measurements. This Statement defines fair value, establishes a
framework for measuring fair value and expands disclosures about fair value
measurements. This Statement establishes a fair value hierarchy about
the assumptions used to measure fair value and clarifies assumptions about risk
and the effect of a restriction on the sale or use of an asset. The
standard was effective for fiscal years beginning after November 15,
2007. In February 2008, the FASB issued Staff Position (FSP) 157-2,
Effective Date of FASB Statement No. 157. This FSP delayed the
effective date of FAS 157 for all nonfinancial assets and nonfinancial
liabilities, except those that are recognized or disclosed at fair value on a
recurring basis (at least annually) to fiscal years beginning after November 15,
2008, and interim periods within those fiscal years. In October 2008,
the FASB issued Staff Position (FSP) 157-3, Determining the Fair Value of a
Financial Asset when the Market for That Asset Is Not Active. This
FSP clarifies the application of FAS 157 in a market that is not
active. The impact of adoption was not material.
In
February 2007, the FASB issued Statement No. 159 – The Fair Value Option for Financial
Assets and Financial Liabilities. The standard provides
companies with an option to report selected financial assets and liabilities at
fair value and establishes presentation and disclosure requirements designed to
facilitate comparisons between companies that choose different measurement
attributes for similar types of assets and liabilities. The new
standard was effective for the Company on January 1, 2008. The
Company did not elect the fair value option for any financial assets or
financial liabilities as of January 1, 2008.
On
November 5, 2007, the SEC issued Staff Accounting Bulletin No. 109, Written Loan
Commitments Recorded at Fair Value through Earnings (“SAB 109”). Previously, SAB
105, Application of Accounting Principles to Loan Commitments, stated that in
measuring the fair value of a derivative loan commitment, a company should not
incorporate the expected net future cash flows related to the associated
servicing of the loan. SAB 109 supersedes SAB 105 and indicates that the
expected net future cash flows related to the associated servicing of the loan
should be included in measuring fair value for all written loan commitments that
are accounted for at fair value through earnings. SAB 105 also
indicated that internally-developed intangible assets should not be recorded as
part of the fair value of a derivative loan commitment, and SAB 109 retains that
view. SAB 109 was effective for derivative loan commitments issued or
modified in fiscal quarters beginning after December 15, 2007. The
impact of adoption was not material.
PREMIER
FINANCIAL BANCORP, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
December
31, 2008, 2007, and 2006
(Dollars
in Thousands, Except Per Share Data)
NOTE 1 - SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES (Continued)
In
December 2007, the SEC issued Staff Accounting Bulleting (SAB) No. 110, which
expresses the views of the SEC regarding the use of a “simplified” method, as
discussed in SAB No. 107, in developing an estimate of expected term of “plain
vanilla” share options in accordance with SFAS No. 123(R), Share-Based
Payment. The SEC concluded that a company could, under certain
circumstances, continue to use the simplified method for share option grants
after December 31, 2007. The Company does not use the simplified
method for share options and therefore SAB No. 110 has no impact on the
Company’s consolidated financial statements.
Recently Issued Accounting
Standards Not Yet Adopted: In December 2007, the FASB issued
FAS No. 141 (revised 2007), Business Combinations (“FAS 141(R)”), which
establishes principles and requirements for how an acquirer recognizes and
measures in its financial statements the identifiable assets acquired, the
liabilities assumed, and any noncontrolling interest in an acquiree, including
the recognition and measurement of goodwill acquired in a business
combination. FAS No. 141(R) is effective for fiscal years beginning
on or after December 15, 2008. Earlier adoption is
prohibited. There was no impact to the Company upon adoption of this
standard, but the accounting for future business combinations will be different
from prior practice. See Note 24
below.
In
December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interest in
Consolidated Financial Statements, an amendment of ARB No. 51” (“SFAS
No. 160”), which will change the accounting and reporting for minority
interests, which will be recharacterized as noncontrolling interests and
classified as a component of equity within the consolidated balance sheets. FAS
No. 160 is effective as of the beginning of the first fiscal year beginning on
or after December 15, 2008. Earlier adoption is prohibited and the
Corporation does not expect the adoption of FAS No. 160 to have a significant
impact on its results of operations or financial position.
In
March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative
Instruments and Hedging Activities, an amendment of SFAS No. 133”. FAS No. 161
amends and expands the disclosure requirements of SFAS No. 133 for derivative
instruments and hedging activities. FAS No. 161 requires qualitative disclosure
about objectives and strategies for using derivative and hedging instruments,
quantitative disclosures about fair value amounts of the instruments and gains
and losses on such instruments, as well as disclosures about credit-risk
features in derivative agreements. FAS No. 161 is effective for financial
statements issued for fiscal years and interim periods beginning after November
15, 2008, with early application encouraged. The adoption of this
standard is not expected to have a material effect on the Corporation’s results
of operations or financial position.
PREMIER
FINANCIAL BANCORP, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
December
31, 2008, 2007, and 2006
(Dollars
in Thousands, Except Per Share Data)
Included
in cash and due from banks are certain non-interest bearing deposits that are
held at the Federal Reserve or maintained in vault cash in accordance with
average balance requirements specified by the Federal Reserve Board of
Governors. The balance requirement at December 31, 2008 and 2007 was
approximately $5,548 and $3,426.
Amortized
cost and fair value of securities available for sale and the related gross
unrealized gains and losses recognized in accumulated other comprehensive income
(loss) were as follows:
|
2008
|
|
Amortized
Cost
|
|
|
Unrealized
Gains
|
|
|
Unrealized
Losses
|
|
|
Fair
Value
|
|
|
Available
for sale
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U. S. Treasury
securities
|
|
$ |
1,494 |
|
|
$ |
50 |
|
|
$ |
- |
|
|
$ |
1,544 |
|
|
U. S. agency
securities
|
|
|
96,154 |
|
|
|
1,018 |
|
|
|
(67 |
) |
|
|
97,105 |
|
|
Obligations of states and
political subdivisions
|
|
|
7,065 |
|
|
|
75 |
|
|
|
(10 |
) |
|
|
7,130 |
|
|
Mortgage-backed securities of
government
sponsored agencies
|
|
|
68,553 |
|
|
|
1,479 |
|
|
|
(70 |
) |
|
|
69,962 |
|
|
Total available for
sale
|
|
$ |
173,266 |
|
|
$ |
2,622 |
|
|
$ |
(147 |
) |
|
$ |
175,741 |
|
|
2007
|
|
Amortized
Cost
|
|
|
Unrealized
Gains
|
|
|
Unrealized
Losses
|
|
|
Fair
Value
|
|
|
Available
for sale
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U. S. Treasury
securities
|
|
$ |
5,477 |
|
|
$ |
97 |
|
|
$ |
- |
|
|
$ |
5,574 |
|
|
U. S. agency
securities
|
|
|
74,515 |
|
|
|
427 |
|
|
|
(83 |
) |
|
|
74,859 |
|
|
Obligations of states and
political subdivisions
|
|
|
3,789 |
|
|
|
31 |
|
|
|
(4 |
) |
|
|
3,816 |
|
|
Mortgage-backed securities of
government
sponsored agencies
|
|
|
40,350 |
|
|
|
131 |
|
|
|
(488 |
) |
|
|
39,993 |
|
|
Total available for
sale
|
|
$ |
124,131 |
|
|
$ |
686 |
|
|
$ |
(575 |
) |
|
$ |
124,242 |
|
PREMIER
FINANCIAL BANCORP, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
December
31, 2008, 2007, and 2006
(Dollars
in Thousands, Except Per Share Data)
NOTE 3 –SECURITIES
(Continued)
The
amortized cost and fair value of securities at December 31, 2008 by contractual
maturity are shown below. Expected maturities will differ from
contractual maturities because borrowers may have the right to call or prepay
obligations with or without call or prepayment penalties.
|
|
|
Amortized
Cost
|
|
|
Fair
Value
|
|
|
Available
for sale
|
|
|
|
|
|
|
|
Due in one year or
less
|
|
$ |
18,397 |
|
|
$ |
18,657 |
|
|
Due after one year through five
years
|
|
|
46,078 |
|
|
|
46,696 |
|
|
Due after five years through ten
years
|
|
|
40,238 |
|
|
|
40,426 |
|
|
Mortgage-backed securities of
government sponsored agencies
|
|
|
68,553 |
|
|
|
69,962 |
|
|
Total available for
sale
|
|
$ |
173,266 |
|
|
$ |
175,741 |
|
|
|
|
|
|
|
|
|
|
|
Proceeds
from sale of securities during 2008 and 2007 were $1,995 and $25. A
$93 gain was recognized from sales of securities in 2008 while no gain or loss
was realized on the sale in 2007. There were no sales of securities
in 2006.
Securities
with an approximate carrying value of $90,324 and $84,116 at December 31, 2008
and 2007 were pledged to secure public deposits, trust funds, securities sold
under agreements to repurchase and for other purposes as required or permitted
by law.
Securities
with unrealized losses at year-end 2008 aggregated by investment category and
length of time that individual securities have been in a continuous unrealized
loss position are as follows:
|
|
|
Less
than 12 Months
|
|
|
12
Months or More
|
|
|
Total
|
|
|
Description
of Securities
|
|
Fair
Value
|
|
|
Unrealized
Loss
|
|
|
Fair
Value
|
|
|
Unrealized
Loss
|
|
|
Fair
Value
|
|
|
Unrealized
Loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
agency securities
|
|
$ |
12,475 |
|
|
$ |
(67 |
) |
|
$ |
- |
|
|
$ |
- |
|
|
$ |
12,475 |
|
|
$ |
(67 |
) |
|
Obligations
of states and
political
subdivisions
|
|
|
871 |
|
|
|
(10 |
) |
|
|
- |
|
|
|
- |
|
|
|
871 |
|
|
|
(10 |
) |
|
Mortgage-backed
securities of
government
sponsored agencies
|
|
|
5,714 |
|
|
|
(70 |
) |
|
|
- |
|
|
|
- |
|
|
|
5,714 |
|
|
|
(70 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
temporarily impaired
|
|
$ |
19,060 |
|
|
$ |
(147 |
) |
|
$ |
- |
|
|
$ |
- |
|
|
$ |
19,060 |
|
|
$ |
(147 |
) |
PREMIER
FINANCIAL BANCORP, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
December
31, 2008, 2007, and 2006
(Dollars
in Thousands, Except Per Share Data)
NOTE 3 –SECURITIES
(Continued)
Securities
with unrealized losses at year-end 2007 aggregated by investment category and
length of time that individual securities have been in a continuous unrealized
loss position, are as follows:
|
|
|
Less
than 12 Months
|
|
|
12
Months or More
|
|
|
Total
|
|
|
Description
of Securities
|
|
Fair
Value
|
|
|
Unrealized
Loss
|
|
|
Fair
Value
|
|
|
Unrealized
Loss
|
|
|
Fair
Value
|
|
|
Unrealized
Loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
agency securities
|
|
$ |
1,997 |
|
|
$ |
(3 |
) |
|
$ |
24,712 |
|
|
$ |
(80 |
) |
|
$ |
26,709 |
|
|
$ |
(83 |
) |
|
Obligations
of states and
political
subdivisions
|
|
|
245 |
|
|
|
(3 |
) |
|
|
210 |
|
|
|
(1 |
) |
|
|
455 |
|
|
|
(4 |
) |
|
Mortgage-backed
securities of
government
sponsored agencies
|
|
|
4,404 |
|
|
|
(49 |
) |
|
|
21,198 |
|
|
|
(439 |
) |
|
|
25,602 |
|
|
|
(488 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
temporarily impaired
|
|
$ |
6,646 |
|
|
$ |
(55 |
) |
|
$ |
46,120 |
|
|
$ |
(520 |
) |
|
$ |
52,766 |
|
|
$ |
(575 |
) |
The
investment portfolio is predominately high quality interest-bearing bonds with
defined maturity dates backed by the U.S. Government or Government sponsored
entities. The
unrealized losses at December
31, 2008 and December 31, 2007 are price changes resulting from changes
in the interest rate environment
and are considered to be temporary declines in the value of the
securities. Their
fair value is expected to recover as the bonds approach their maturity date
and/or market conditions improve.
Loans
at year-end were as follows:
|
|
|
2008
|
|
|
2007
|
|
|
Commercial,
secured by real estate
|
|
$ |
133,742 |
|
|
$ |
100,278 |
|
|
Commercial,
other
|
|
|
61,655 |
|
|
|
40,438 |
|
|
Real
estate construction
|
|
|
26,182 |
|
|
|
24,035 |
|
|
Residential
real estate
|
|
|
185,536 |
|
|
|
133,776 |
|
|
Agricultural
|
|
|
2,446 |
|
|
|
1,845 |
|
|
Consumer
and home equity
|
|
|
51,793 |
|
|
|
41,893 |
|
|
Other
|
|
|
5,757 |
|
|
|
4,305 |
|
|
|
|
$ |
467,111 |
|
|
$ |
346,570 |
|
PREMIER
FINANCIAL BANCORP, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
December
31, 2008, 2007, and 2006
(Dollars
in Thousands, Except Per Share Data)
NOTE 4 – LOANS
(Continued)
Certain
directors and executive officers of the Banks and companies in which they have
beneficial ownership, were loan customers of the Banks during 2008 and
2007. Such related party loans are governed by federal banking
regulations which require such loans to be made in the ordinary course of
business.
An
analysis of the 2008 activity with respect to all director and executive officer
loans is as follows (in thousands):
|
Balance,
December 31, 2007
|
|
$ |
15,262 |
|
|
Additions,
including loans now meeting disclosure requirements
|
|
|
18,904 |
|
|
Amounts
collected and loans no longer meeting disclosure
requirements
|
|
|
(11,685 |
) |
|
Balance,
December 31, 2008
|
|
$ |
22,481 |
|
Activity
in the allowance for loan losses was as follows:
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Balance,
beginning of year
|
|
$ |
6,497 |
|
|
$ |
6,661 |
|
|
$ |
7,892 |
|
|
Balance
of acquired subsidiaries
|
|
|
2,300 |
|
|
|
- |
|
|
|
- |
|
|
Loans
charged off
|
|
|
(1,232 |
) |
|
|
(758 |
) |
|
|
(1,410 |
) |
|
Recoveries
|
|
|
832 |
|
|
|
672 |
|
|
|
1,340 |
|
|
Provision
for loan losses
|
|
|
147 |
|
|
|
(78 |
) |
|
|
(1,161 |
) |
|
Balance,
end of year
|
|
$ |
8,544 |
|
|
$ |
6,497 |
|
|
$ |
6,661 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impaired
loans were as follows:
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Impaired
loans at year-end with an allowance
|
|
$ |
11,610 |
|
|
$ |
4,761 |
|
|
$ |
7,766 |
|
|
Impaired
loans at year-end with no allowance
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
Amount
of the allowance for loan losses allocated
|
|
|
2,208 |
|
|
|
1,482 |
|
|
|
1,774 |
|
|
Average
of impaired loans during the year
|
|
|
8,506 |
|
|
|
5,926 |
|
|
|
8,258 |
|
|
Interest
income recognized during impairment
|
|
|
795 |
|
|
|
495 |
|
|
|
480 |
|
|
Cash-basis
interest income recognized
|
|
|
793 |
|
|
|
495 |
|
|
|
480 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PREMIER
FINANCIAL BANCORP, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
December
31, 2008, 2007, and 2006
(Dollars
in Thousands, Except Per Share Data)
NOTE 4 – LOANS
(Continued)
Nonperforming
loans at year end were as follows:
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Loans
past due over 90 days still on accrual
|
|
$ |
625 |
|
|
$ |
987 |
|
|
$ |
992 |
|
|
Non-accrual
loans
|
|
|
6,943 |
|
|
|
3,157 |
|
|
|
4,698 |
|
|
Restructured
loans
|
|
|
1,203 |
|
|
|
1,489 |
|
|
|
1,268 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonperforming
loans include some impaired loans and smaller balance homogeneous loans, such as
residential mortgage and consumer loans, that are collectively evaluated for
impairment. Loan impairment is reported when full payment under the
loan terms is not anticipated, which can include loans that are current or less
than 90 days past due.
Year-end
premises and equipment were as follows:
|
|
|
2008
|
|
|
2007
|
|
|
Land
and improvements
|
|
$ |
2,497 |
|
|
$ |
1,522 |
|
|
Buildings
and leasehold improvements
|
|
|
9,536 |
|
|
|
5,673 |
|
|
Construction
in progress
|
|
|
77 |
|
|
|
193 |
|
|
Furniture
and equipment
|
|
|
8,705 |
|
|
|
7,357 |
|
|
|
|
|
20,815 |
|
|
|
14,745 |
|
|
Less:
accumulated depreciation
|
|
|
(9,448 |
) |
|
|
(8,545 |
) |
|
|
|
$ |
11,367 |
|
|
$ |
6,200 |
|
|
|
|
|
|
|
|
|
|
|
Operating Leases: The
Company leases certain branch and other properties as well as some equipment
under operating leases. Rent expense, net of rental income, was $230,
$213, and $204 for 2008, 2007, and 2006. Rent commitments, before
considering renewal options that generally are present, were as
follows:
|
2009
|
|
$ |
157 |
|
|
2010
|
|
|
126 |
|
|
2011
|
|
|
126 |
|
|
2012
|
|
|
109 |
|
|
2013
and thereafter
|
|
|
90 |
|
|
|
|
$ |
608 |
|
PREMIER
FINANCIAL BANCORP, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
December
31, 2008, 2007, and 2006
(Dollars
in Thousands, Except Per Share Data)
The
change in the balance for goodwill during the year is as follows:
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Beginning
of year
|
|
$ |
15,816 |
|
|
$ |
15,816 |
|
|
$ |
15,816 |
|
|
Acquired
goodwill
|
|
|
12,727 |
|
|
|
- |
|
|
|
- |
|
|
Impairment
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
End
of year
|
|
$ |
28,543 |
|
|
$ |
15,816 |
|
|
$ |
15,816 |
|
Acquired
intangible assets at December 31, 2008 were as follows. There were no
such intangibles at December 31, 2007.
|
|
|
Gross
Carrying Amount
|
|
|
Accumulated
Amortization
|
|
|
Core
deposit intangible
|
|
$ |
1,635 |
|
|
$ |
(204 |
) |
Aggregate
intangible amortization expense was $204 for 2008 while none was recorded for
the years 2007 and 2006.
Estimated
amortization expense for each of the next five years:
|
2009
|
|
$ |
268 |
|
|
2010
|
|
|
218 |
|
|
2011
|
|
|
184 |
|
|
2012
|
|
|
175 |
|
|
2013
and thereafter
|
|
|
586 |
|
|
|
|
$ |
1,431 |
|
PREMIER
FINANCIAL BANCORP, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
December
31, 2008, 2007, and 2006
(Dollars
in Thousands, Except Per Share Data)
At
December 31, 2008 the scheduled maturities of time deposits are as
follows:
|
2009
|
|
$ |
186,598 |
|
|
2010
|
|
|
55,924 |
|
|
2011
|
|
|
12,440 |
|
|
2012
|
|
|
9,146 |
|
|
2013
and thereafter
|
|
|
7,091 |
|
|
|
|
$ |
271,199 |
|
Certain
directors and executive officers of the Banks and companies in which they have
beneficial ownership were deposit customers of the Banks during 2008 and
2007. The balance of such deposits at December 31, 2008 and 2007 were
approximately $18,013 and $10,011.
Securities
sold under agreements to repurchase generally mature within one to ninety days
from the transaction date. Information concerning securities sold
under agreements to repurchase is summarized as follows:
|
|
|
2008
|
|
|
2007
|
|
|
Year-end
balance
|
|
$ |
18,351 |
|
|
$ |
12,477 |
|
|
Average
balance during the year
|
|
$ |
17,133 |
|
|
$ |
13,124 |
|
|
Average
interest rate during the year
|
|
|
1.44 |
% |
|
|
2.41 |
% |
|
Maximum
month-end balance during the year
|
|
$ |
23,805 |
|
|
$ |
13,672 |
|
|
Weighted
average interest rate at year-end
|
|
|
0.83 |
% |
|
|
1.96 |
% |
|
|
|
|
|
|
|
|
|
|
PREMIER
FINANCIAL BANCORP, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
December
31, 2008, 2007, and 2006
(Dollars
in Thousands, Except Per Share Data)
The
Banks own stock of the Federal Home Loan Bank of Cincinnati, Ohio (FHLB-Cin) or
the Federal Home Loan Bank of Pittsburgh, Pennsylvania (FHLB-Pitt). This stock
allows the Banks to borrow advances from the FHLB.
At
year-end, advances from the FHLB-Cin were as follows:
|
|
|
2008
|
|
|
2007
|
|
|
Payments
due at maturity in May 2010, fixed rate at rates from 6.25% to
6.64%, averaging 6.45%
|
|
$ |
4,000 |
|
|
$ |
4,000 |
|
|
Payments
due monthly with maturities from November 2011 to July 2012, fixed rates
from 4.10% to 4.40%, averaging 4.26%
|
|
|
607 |
|
|
|
843 |
|
|
Overnight
borrowed funds
|
|
|
3,000 |
|
|
|
- |
|
|
|
|
$ |
7,607 |
|
|
$ |
4,843 |
|
|
|
|
|
|
|
|
|
|
|
Advances
are secured by the FHLB stock, certain pledged investment securities and
substantially all single family first mortgage loans of the participating
Banks. Scheduled principal payments due on advances during the five
years subsequent to December 31, 2008 are as follows:
|
2009
|
|
$ |
3,178 |
|
|
2010
|
|
|
4,186 |
|
|
2011
|
|
|
186 |
|
|
2012
|
|
|
57 |
|
|
2013
|
|
|
- |
|
|
Thereafter
|
|
|
- |
|
|
|
|
$ |
7,607 |
|
|
|
|
|
|
|
PREMIER
FINANCIAL BANCORP, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
December
31, 2008, 2007, and 2006
(Dollars
in Thousands, Except Per Share Data)
On
April 30, 2008, the Company executed and delivered to First Guaranty Bank of
Hammond, Louisiana a Promissory Note and Business Loan Agreement dated April 30,
2008 for the principal amount of $11,550, bearing interest floating daily at the
“Wall Street Journal” prime rate (the “Index”) minus 1.00% and requiring 59
monthly principal payments of $50 and one final payment of $8.6 million due at
maturity on April 30, 2013. If the Index is between 5.00% and 6.00%,
the interest on the note will be 5.00%. If the Index falls below
5.00%, then the interest on the note will float with the Index. The
note is secured by a pledge of Premier’s 100% interest in Boone County Bank (a
wholly owned subsidiary) under Commercial Pledge Agreement dated April 30,
2008. The proceeds of this note were used to fund the $9,000 of cash
needed to purchase Traders Bankshares, Inc. and to refinance the remaining
$2,550 balance of Premier’s outstanding note with First Guaranty Bank dated
January 31, 2006. Premier’s chairman owns approximately 27.6% of the voting
stock of First Guaranty Bank and is the chairman of its board of
directors. Premier’s board of directors reviewed the loan and
authorized the Company to enter into the loan transaction.
On
November 10, 2006, the Company executed and delivered to The Bankers’ Bank of
Kentucky, Inc. of Frankfort, Kentucky (“Bankers’ Bank”) a Term Note and Business
Loan Agreement dated November 10, 2006 in the principal amount of $6,500,
bearing interest floating daily at the “JP Morgan Chase” prime rate minus 1.00%
and requiring 83 monthly principal and interest payments of $100 and a final
payment of any balance due at maturity on November 9, 2013. The note is secured
by a pledge of Premier’s 100% interest in Citizens Deposit Bank and Trust, Inc.
(a wholly owned subsidiary) and Premier’s 100% interest in Farmers-Deposit Bank,
Eminence, Kentucky (a wholly owned subsidiary) under a Stock Pledge and Security
Agreement dated November 10, 2006. On December 22, 2008, the Company
executed and delivered to Bankers’ Bank a modification agreement whereby the
interest rate would not fall below 3.00% or exceed 6.00% for the remaining term
of the Note. The current interest rate on the Term Note is
3.00%.
Scheduled
principal payments due on the two bank borrowings subsequent to December 31,
2008 are as follows:
|
2009
|
|
$ |
1,674 |
|
|
2010
|
|
|
1,707 |
|
|
2011
|
|
|
1,740 |
|
|
2012
|
|
|
1,775 |
|
|
2013
|
|
|
8,664 |
|
|
Thereafter
|
|
|
- |
|
|
|
|
$ |
15,560 |
|
|
|
|
|
|
|
PREMIER
FINANCIAL BANCORP, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
December
31, 2008, 2007, and 2006
(Dollars
in Thousands, Except Per Share Data)
NOTE 10 – NOTES PAYABLE AND OTHER
BORROWED FUNDS (Continued)
In
addition to the $6,500 Term Note, Premier executed and delivered to the Bankers’
Bank a Promissory Note whereby Premier may request and receive monies from
Bankers’ Bank from time to time, but the aggregate outstanding principal balance
under the Promissory Note at any time shall not exceed $3,000, and the right to
request and receive monies from Bankers’ Bank expires on November 9, 2009. The
outstanding principal balance under this Promissory Note shall bear annual
interest floating daily at the “JP Morgan Chase” prime rate minus
1.00%. The Promissory Note is subject to the same 3.00% minimum and
6.00% maximum interest rate as the $6,500 Term Note (currently 3.00%). Interest
on this Promissory Note shall be due and payable on the 5th day of each,
January, April, July and October during the term of this Promissory Note, and at
the maturity date hereof. Any outstanding principal amount loaned to Premier
under this Promissory Note, and not previously repaid, shall be due on November
9, 2009. The Promissory Note is secured by the same collateral as the
$6,500 Term Note. At December 31, 2008, there was no outstanding principal
balance on the Promissory Note.
PREMIER
FINANCIAL BANCORP, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
December
31, 2008, 2007, and 2006
(Dollars
in Thousands, Except Per Share Data)
The
components of the provision (benefit) for income taxes are as
follows:
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Current
|
|
$ |
2,747 |
|
|
$ |
2,822 |
|
|
$ |
2,212 |
|
|
Deferred
|
|
|
1,002 |
|
|
|
648 |
|
|
|
1,071 |
|
|
Provision for income
taxes
|
|
$ |
3,749 |
|
|
$ |
3,470 |
|
|
$ |
3,283 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
Company’s deferred tax assets and liabilities at December 31 are shown
below. No valuation allowance for the realization of deferred tax
assets is considered necessary.
|
|
|
2008
|
|
|
2007
|
|
|
Deferred
tax assets
|
|
|
|
|
|
|
|
Allowance for loan
losses
|
|
$ |
2,569 |
|
|
$ |
2,209 |
|
|
Net operating loss
carryforward
|
|
|
1,584 |
|
|
|
- |
|
|
Write-downs of other real estate
owned
|
|
|
21 |
|
|
|
15 |
|
|
Taxable income on non-accrual
loans
|
|
|
59 |
|
|
|
103 |
|
|
Defined benefit pension
plan
|
|
|
398 |
|
|
|
- |
|
|
Other
|
|
|
1 |
|
|
|
2 |
|
|
Total deferred tax
assets
|
|
|
4,632 |
|
|
|
2,329 |
|
|
|
|
|
|
|
|
|
|
|
|
Deferred
tax liabilities
|
|
|
|
|
|
|
|
|
|
Amortization of
intangibles
|
|
$ |
2,682 |
|
|
$ |
2,342 |
|
|
Depreciation
|
|
|
375 |
|
|
|
34 |
|
|
Federal Home Loan Bank
dividends
|
|
|
354 |
|
|
|
319 |
|
|
Deferred loan
fees
|
|
|
236 |
|
|
|
170 |
|
|
Purchase accounting
adjustments
|
|
|
145 |
|
|
|
- |
|
|
Unrealized gain on investment
securities
|
|
|
842 |
|
|
|
38 |
|
|
Other
|
|
|
185 |
|
|
|
155 |
|
|
Total deferred tax
liabilities
|
|
|
4,819 |
|
|
|
3,058 |
|
|
|
|
|
|
|
|
|
|
|
|
Net
deferred taxes
|
|
$ |
(187 |
) |
|
$ |
(729 |
) |
|
|
|
|
|
|
|
|
|
|
At
December 31, 2008 the Company had net operating loss carryforwards of
approximately $4,659 which expire at various dates from 2025 to
2028. The deductibility of these net operating losses are limited
under IRC Sec 382. No valuation allowance is considered necessary
based on management's estimate that the net operating losses will be utilized
prior to the time that they expire.
PREMIER
FINANCIAL BANCORP, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
December
31, 2008, 2007, and 2006
(Dollars
in Thousands, Except Per Share Data)
NOTE 11 – INCOME TAXES
(Continued)
An
analysis of the differences between the effective tax rates and the statutory
U.S. federal income tax rate is as follows:
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
U.S.
federal income tax rate
|
|
$ |
3,837 |
|
|
|
34.0 |
% |
|
$ |
3,600 |
|
|
|
34.0 |
% |
|
$ |
3,327 |
|
|
|
34.0 |
% |
|
Changes
from the statutory rate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax-exempt interest
income
|
|
|
(120 |
) |
|
|
(1.1 |
) |
|
|
(124 |
) |
|
|
(1.2 |
) |
|
|
(97 |
) |
|
|
(1.0 |
) |
|
Non-deductible interest expense
related
to carrying tax-exempt
interest earning
assets
|
|
|
11 |
|
|
|
0.1 |
|
|
|
11 |
|
|
|
0.1 |
|
|
|
8 |
|
|
|
0.1 |
|
|
Non-deductible stock compensation
expense
|
|
|
41 |
|
|
|
0.4 |
|
|
|
44 |
|
|
|
0.4 |
|
|
|
46 |
|
|
|
0.5 |
|
|
Tax credits, net
|
|
|
(49 |
) |
|
|
(0.4 |
) |
|
|
(2 |
) |
|
|
(0.0 |
) |
|
|
(10 |
) |
|
|
(0.1 |
) |
|
Officer’s life insurance death
benefit
|
|
|
- |
|
|
|
- |
|
|
|
(73 |
) |
|
|
(0.6 |
) |
|
|
- |
|
|
|
- |
|
|
Other
|
|
|
29 |
|
|
|
0.2 |
|
|
|
14 |
|
|
|
0.1 |
|
|
|
9 |
|
|
|
0.1 |
|
|
|
|
$ |
3,749 |
|
|
|
33.2 |
% |
|
$ |
3,470 |
|
|
|
32.8 |
% |
|
$ |
3,283 |
|
|
|
33.6 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrecognized Tax
Benefits: The Company does not have any beginning or ending unrecognized
tax benefits. The Company does not expect the total amount of unrecognized tax
benefits to significantly increase in the next twelve months. There
were no interest and penalties recorded in the income statement or accrued for
the year ended December 31, 2008 related to unrecognized tax
benefits.
The
Company and its subsidiaries file a consolidated U.S. Corporation income tax
return and a combined return in the state of West Virginia. The Company files a
corporate income tax return in the state of Kentucky. The Company is no longer
subject to examination by taxing authorities for years before 2005. A
federal examination of the tax years 2001 - 2003 was completed in 2005 with no
material adjustments.
NOTE
12 – EMPLOYEE BENEFIT PLANS
The
Company has qualified profit sharing plans that cover substantially all
employees. Contributions to the plans consist of a Company match and additional
amounts at the discretion of the Company’s Board of Directors. Total
contributions to the plans were $266, $245 and $236 in 2008, 2007 and
2006.
PREMIER
FINANCIAL BANCORP, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
December
31, 2008, 2007, and 2006
(Dollars
in Thousands, Except Per Share Data)
NOTE
13 – STOCK COMPENSATION EXPENSE
In
2002, the Company registered 200,000 shares of its common stock to be reserved
stock based incentive programs (“the 2002 Plan”). From time to time
the Company grants stock options to its employees. The Company
accounts for these option grants using SFAS No. 123R, “Share-Based Payments,”
which establishes accounting requirements for share-based compensation to
employees. Under SFAS 123R, the Company estimates the fair value of
the options at the time they are granted to employees and expenses that fair
value over the vesting period of the option grant.
On
February 20, 2008, 45,300 incentive stock options were granted out of the 2002
Plan at an exercise price of $12.92, the closing market price of Premier on the
grant date. These options vest in three equal annual installments
ending on February 20, 2011. On January 17, 2007, 37,000 incentive
stock options were granted out of the 2002 Plan at an exercise price of
$14.22. These options vest in three equal annual installments ending
on January 17, 2010. On February 15, 2006, 35,250 incentive stock
options were granted out of the 2002 Plan at an exercise price of
$16.00. These options vest in three equal annual installments ending
on February 15, 2009.
The
fair value of the Company's employee stock options granted is estimated at the
date of grant using the Black-Scholes option-pricing model. This model requires
the input of highly subjective assumptions, changes to which can materially
affect the fair value estimate. Additionally, there may be other factors that
would otherwise have a significant effect on the value of employee stock options
granted but are not considered by the model. The assumptions used in the
Black-Scholes option-pricing model are as follows:
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Risk-free
interest rate
|
|
|
3.50 |
% |
|
|
4.78 |
% |
|
|
4.62 |
% |
|
Expected
option life (yrs)
|
|
|
7.00 |
|
|
|
5.00 |
|
|
|
5.00 |
|
|
Expected
stock price volatility
|
|
|
23.00 |
% |
|
|
25.00 |
% |
|
|
26.00 |
% |
|
Dividend
yield
|
|
|
3.10 |
% |
|
|
1.41 |
% |
|
|
0.00 |
% |
|
Weighted
average fair value of options
granted during the year
|
|
$ |
2.55 |
|
|
$ |
3.81 |
|
|
$ |
5.21 |
|
The
risk-free interest rate for the expected term of the option is based on the U.S.
Treasury yield in effect at the time of the grant. The expected
option life was estimated since there has been little option exercise
history. The expected stock price volatility is based on historical
volatilities of the Company’s common stock. The dividend yield is
estimated at the time of the option grant based upon Premier’s dividend rate and
stock price at that time.
PREMIER
FINANCIAL BANCORP, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
December
31, 2008, 2007, and 2006
(Dollars
in Thousands, Except Per Share Data)
NOTE 13 – STOCK COMPENSATION EXPENSE
(Continued)
Compensation
expense of $120, $130 and $142 was recorded for the years ended December 31,
2008, 2007 and 2006, respectively.
Stock-based
compensation expense is recognized ratably over the requisite service period for
all awards. Unrecognized stock-based compensation expense related to stock
options totaled $67 at December 31, 2008. This unrecognized expense is expected
to be recognized over the next 25 months based on the vesting periods of the
options.
Information
related to the stock option plan during each year follows:
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Intrinsic
value of options exercised
|
|
$ |
- |
|
|
$ |
3 |
|
|
$ |
9 |
|
|
Cash
received from option exercises
|
|
|
- |
|
|
|
10 |
|
|
|
27 |
|
|
Tax
benefit realized from option exercises
|
|
|
- |
|
|
|
1 |
|
|
|
2 |
|
PREMIER
FINANCIAL BANCORP, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
December
31, 2008, 2007, and 2006
(Dollars
in Thousands, Except Per Share Data)
NOTE 13 – STOCK COMPENSATION EXPENSE
(Continued)
A
summary of the Company’s stock option activity is as follows:
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
Weighted
Average
Exercise
|
|
|
|
|
|
Weighted
Average
Exercise
|
|
|
|
|
|
Weighted
Average
Exercise
|
|
|
|
|
Options
|
|
|
Price
|
|
|
Options
|
|
|
Price
|
|
|
Options
|
|
|
Price
|
|
|
Outstanding
at beginning of year
|
|
|
150,249 |
|
|
$ |
12.65 |
|
|
|
120,248 |
|
|
$ |
12.25 |
|
|
|
111,750 |
|
|
$ |
11.05 |
|
|
Grants
|
|
|
45,300 |
|
|
|
12.92 |
|
|
|
37,000 |
|
|
|
14.22 |
|
|
|
35,250 |
|
|
|
16.00 |
|
|
Exercises
|
|
|
- |
|
|
|
- |
|
|
|
(1,000 |
) |
|
|
10.85 |
|
|
|
(3,002 |
) |
|
|
9.02 |
|
|
Forfeitures
or expired
|
|
|
(13,633 |
) |
|
|
15.89 |
|
|
|
(5,999 |
) |
|
|
14.60 |
|
|
|
(23,750 |
) |
|
|
13.11 |
|
|
Outstanding
at year-end
|
|
|
181,916 |
|
|
$ |
12.47 |
|
|
|
150,249 |
|
|
$ |
12.65 |
|
|
|
120,248 |
|
|
$ |
12.25 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable
at year-end
|
|
|
106,433 |
|
|
$ |
11.59 |
|
|
|
84,096 |
|
|
$ |
11.31 |
|
|
|
55,931 |
|
|
$ |
10.68 |
|
|
Weighted
average remaining life
|
|
|
7.0 |
|
|
|
|
|
|
|
6.9 |
|
|
|
|
|
|
|
7.3 |
|
|
|
|
|
|
Weighted
average fair value of
options granted during the
year
|
|
$ |
2.55 |
|
|
|
|
|
|
$ |
3.81 |
|
|
|
|
|
|
$ |
5.21 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options
outstanding at year-end are expected to fully vest.
Additional
information regarding stock options outstanding and exercisable at December 31,
2008 is provided in the following table:
| |
|
|
- - - - - - - - Outstanding - - - - - - -
-
|
|
|
- - - - - - - - Currently Exercisable - - - - - -
- -
|
|
|
Range
of Exercise Prices
|
|
|
Number
|
|
|
Weighted
Average Exercise Price
|
|
|
Aggregate
Intrinsic Value
|
|
|
Number
|
|
|
Weighted
Average Remaining Contractual Life
|
|
|
Weighted
Average Exercise Price
|
|
|
Aggregate
Intrinsic Value
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| $
7.50
to $10.00 |
|
|
|
42,416 |
|
|
$ |
8.69 |
|
|
$ |
- |
|
|
|
42,416 |
|
|
|
4.6 |
|
|
$ |
8.69 |
|
|
$ |
- |
|
| $
10.01
to $12.50 |
|
|
|
31,833 |
|
|
|
11.62 |
|
|
|
- |
|
|
|
31,833 |
|
|
|
6.1 |
|
|
|
11.62 |
|
|
|
- |
|
| $
12.51
to $15.00 |
|
|
|
76,167 |
|
|
|
13.48 |
|
|
|
- |
|
|
|
11,175 |
|
|
|
8.1 |
|
|
|
14.22 |
|
|
|
- |
|
| $
15.01
to $17.50 |
|
|
|
31,500 |
|
|
|
16.00 |
|
|
|
- |
|
|
|
21,009 |
|
|
|
7.1 |
|
|
|
16.00 |
|
|
|
- |
|
|
Outstanding
at Dec 31, 2008
|
|
|
|
181,916 |
|
|
|
12.47 |
|
|
$ |
- |
|
|
|
106,433 |
|
|
|
5.9 |
|
|
|
11.59 |
|
|
$ |
- |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PREMIER
FINANCIAL BANCORP, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
December
31, 2008, 2007, and 2006
(Dollars
in Thousands, Except Per Share Data)
NOTE
14 – ACQUIRED PENSION PLAN IN PROCESS OF LIQUIDATION
As
part of the acquisition of Traders Bankshares, Inc. on April 30, 2008, Premier
assumed the assets and liabilities of the Traders employee defined benefit
pension plan. The plan provides defined benefits based on years of
service and final average salary. Prior to the acquisition by
Premier, the plan benefits were frozen and a plan of termination had been
submitted to the Internal Revenue Service (IRS). Also, all the plan
assets were reinvested into a money market account to preserve the principal
balance for distribution upon termination. As of December 31, 2008
the pension plan is still waiting for final approval for termination from the
IRS.
The
following table sets forth changes in obligations and plan assets of the defined
benefit pension plan from the April 30, 2008 acquisition date through December
31, 2008:
|
|
|
|
|
|
Change
in Benefit Obligation
|
|
|
|
|
Benefit Obligation acquired on
April 30, 2008
|
|
$ |
(3,723 |
) |
|
Interest cost
|
|
|
(119 |
) |
|
Amendments
|
|
|
(6 |
) |
|
Actuarial loss
|
|
|
(132 |
) |
|
Actual
distributions
|
|
|
69 |
|
|
Settlement
|
|
|
498 |
|
|
Benefit Obligation at December
31, 2008
|
|
$ |
(3,413 |
) |
|
|
|
|
|
|
|
Change
in Plan Assets
|
|
|
|
|
|
Plan Assets at fair value
acquired on April 30, 2008
|
|
$ |
2,685 |
|
|
Actual return on Plan
Assets
|
|
|
37 |
|
|
Settlement
|
|
|
(498 |
) |
|
Actual
distributions
|
|
|
(69 |
) |
|
Plan Assets at fair value at
December 31, 2008
|
|
$ |
2,155 |
|
|
|
|
|
|
|
|
Funded
status at December 31, 2008
|
|
$ |
(1,258 |
) |
The
$87 loss recognized in accumulated other comprehensive income at December 31,
2008 consists of the net actuarial loss from May 1, 2008 through December 31,
2008. It is estimated that this loss will be recognized into net
periodic pension benefit expense during the next fiscal year when the pension
benefit plan is approved for termination and the pension plan assets are
distributed to the participants.
The
accumulated benefit obligation (ABO) was $3,413 at year-end 2008.
The
assumptions used to determine the pension benefit obligation at April 30, 2008
and December 31, 2008 follow:
|
|
|
Dec. 31, 2008
|
|
|
April 30, 2008
|
|
|
Discount
rate
|
|
|
4.27 |
% |
|
|
4.27 |
% |
|
Rate
of compensation increase
|
|
|
3.00 |
% |
|
|
3.00 |
% |
PREMIER
FINANCIAL BANCORP, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
December
31, 2008, 2007, and 2006
(Dollars
in Thousands, Except Per Share Data)
NOTE
15 – RELATED PARTY TRANSACTIONS
During
2008, 2007 and 2006, the Company paid approximately $218, $231, and $228 for
printing, supplies, furniture, and equipment to a company affiliated by common
ownership. The Company also paid another affiliate approximately
$533, $459, and $468 in 2008, 2007 and 2006 to permit the Company’s employees to
participate in that entity’s employee medical benefit plan.
During
2008, 2007 and 2006, the Company paid approximately $52, $52, and $52 to lease
its headquarters facility at 2883 Fifth Avenue, Huntington, West Virginia from
River City Properties, LLC, an entity 12.5% owned by the Company’s Chairman of
the Board.
NOTE
16 – EARNINGS PER SHARE
A
reconciliation of the numerators and denominators of the earnings per common
share and earnings per common share assuming dilution computations for 2008,
2007 and 2006 is presented below:
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Basic
earnings per share
|
|
|
|
|
|
|
|
|
|
|
Income available to common
stockholders
|
|
$ |
7,536 |
|
|
$ |
7,119 |
|
|
$ |
6,501 |
|
|
Weighted average common shares
outstanding
|
|
|
6,011 |
|
|
|
5,237 |
|
|
|
5,236 |
|
|
Earnings per share
|
|
$ |
1.25 |
|
|
$ |
1.36 |
|
|
$ |
1.24 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
earnings per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income available to common
stockholders
|
|
$ |
7,536 |
|
|
$ |
7,119 |
|
|
$ |
6,501 |
|
|
Weighted average common shares
outstanding
|
|
|
6,011 |
|
|
|
5,237 |
|
|
|
5,236 |
|
|
Add dilutive effects of assumed
exercise of stock options
|
|
|
8 |
|
|
|
26 |
|
|
|
28 |
|
|
Weighted average common and
dilutive potential
Common shares
outstanding
|
|
|
6,019 |
|
|
|
5,263 |
|
|
|
5,264 |
|
|
Earnings per share assuming
dilution
|
|
$ |
1.25 |
|
|
$ |
1.35 |
|
|
$ |
1.24 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock
options for 153,133, 42,500 and 46,250 shares of common stock were not
considered in computing diluted earnings per share for 2008, 2007 and 2006
because they were antidilutive.
PREMIER
FINANCIAL BANCORP, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
December
31, 2008, 2007, and 2006
(Dollars
in Thousands, Except Per Share Data)
NOTE 17
– FAIR VALUE
Financial
Accounting Standards Board (FASB) Statement 157 defines fair value as the
exchange price that would be received for an asset or paid to transfer a
liability (an exit price) in the principal or most advantageous market for the
asset or liability in an orderly transaction between market participants on the
measurement date. Statement 157 also establishes a fair value hierarchy which
requires an entity to maximize the use of observable inputs and minimize the use
of unobservable inputs when measuring fair value. The standard describes three
levels of inputs that may be used to measure fair value:
Level
1: Quoted prices (unadjusted) for identical assets or liabilities in active
markets that the entity has the ability to access as of the measurement
date.
Level
2: Significant other observable inputs other than Level 1 prices such as quoted
prices for similar assets or liabilities; quoted prices in markets that are not
active; or other inputs that are observable or can be corroborated by observable
market data.
Level
3: Significant unobservable inputs that reflect a company’s own assumptions
about the assumptions that market participants would use in pricing an asset or
liability.
When
possible, the Company looks to active and observable markets to price identical
assets or liabilities. When identical assets and liabilities are not traded in
active markets, the Company looks to observable market data for similar assets
and liabilities. However, certain assets and liabilities are not traded in
observable markets and the Company must use other valuation methods to develop a
fair value.
Premier’s
reported fair values of securities available for sale are determined by matrix
pricing, which is a mathematical technique widely used in the industry to value
debt securities without relying exclusively on quoted prices for the specific
securities, but rather by relying on the securities’ relationship to other
benchmark quoted securities (Level 2 inputs). The fair value of
impaired loans is based on the fair value of the underlying collateral, which is
estimated through third party appraisals or internal estimates of collateral
values (Level 3 inputs).
PREMIER
FINANCIAL BANCORP, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
December
31, 2008, 2007, and 2006
(Dollars
in Thousands, Except Per Share Data)
NOTE 17 – FAIR VALUE
(Continued)
Assets and Liabilities
Measured on a Recurring Basis
Assets
and liabilities measured at fair value on a recurring basis are summarized
below:
|
|
|
|
|
|
Fair
Value Measurements at December 31, 2008 Using
|
|
|
|
|
Dec.
31, 2008
|
|
|
Quoted
Prices in Active Markets for Identical Assets
(Level
1)
|
|
|
Significant
Other Observable Inputs (Level 2)
|
|
|
Significant
Unobservable Inputs
(Level
3)
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available
for sale securities
|
|
$ |
175,741 |
|
|
$ |
- |
|
|
$ |
175,741 |
|
|
$ |
- |
|
Assets and Liabilities
Measured on a Non-Recurring Basis
Assets
and liabilities measured at fair value on a non-recurring basis are summarized
below:
|
|
|
|
|
|
Fair
Value Measurements at December 31, 2008 Using
|
|
|
|
|
Dec.
31, 2008
|
|
|
Quoted
Prices in Active Markets for Identical Assets
(Level
1)
|
|
|
Significant
Other Observable Inputs (Level 2)
|
|
|
Significant
Unobservable Inputs
(Level
3)
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impaired
Loans
|
|
$ |
9,402 |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
9,402 |
|
Impaired
loans, which are measured for impairment using the fair value of the collateral
for collateral dependent loans, had a carrying amount of $11,610 with a
valuation allowance of $2,208. Approximately $5,418 of the carrying
amount and $384 of the valuation allowance were added as a result of the
acquisitions of Citizens First and Traders. The remaining change
since year-end 2007 resulted in a provision for loan losses of $342 for the
twelve month period.
PREMIER
FINANCIAL BANCORP, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
December
31, 2008, 2007, and 2006
(Dollars
in Thousands, Except Per Share Data)
NOTE 17 – FAIR VALUE
(Continued)
The
carrying amount and estimated fair values of financial instruments at year end
were as follows:
|
|
|
2008
|
|
|
2007
|
|
|
|
|
Carrying
Amount
|
|
|
Fair
Value
|
|
|
Carrying
Amount
|
|
|
Fair
Value
|
|
|
Financial
assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and due from
banks
|
|
$ |
22,148 |
|
|
$ |
22,148 |
|
|
$ |
22,365 |
|
|
$ |
22,365 |
|
|
Federal funds sold
|
|
|
15,899 |
|
|
|
15,899 |
|
|
|
32,035 |
|
|
|
32,035 |
|
|
Securities available for
sale
|
|
|
175,741 |
|
|
|
175,741 |
|
|
|
124,242 |
|
|
|
124,242 |
|
|
Loans held for
sale
|
|
|
1,193 |
|
|
|
1,193 |
|
|
|
1,891 |
|
|
|
1,891 |
|
|
Loans, net
|
|
|
458,567 |
|
|
|
465,488 |
|
|
|
340,073 |
|
|
|
344,158 |
|
|
Federal Home Loan Bank and
Federal
Reserve Bank stock
|
|
|
3,931 |
|
|
|
n/a |
|
|
|
3,314 |
|
|
|
n/a |
|
|
Interest
receivable
|
|
|
3,720 |
|
|
|
3,720 |
|
|
|
2,768 |
|
|
|
2,768 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial
liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
$ |
(589,182 |
) |
|
$ |
(592,658 |
) |
|
$ |
(449,033 |
) |
|
$ |
(448,648 |
) |
|
Federal funds
purchased
|
|
|
- |
|
|
|
- |
|
|
|
(392 |
) |
|
|
(392 |
) |
|
Securities sold under agreements
to
repurchase
|
|
|
(18,351 |
) |
|
|
(18,351 |
) |
|
|
(12,477 |
) |
|
|
(12,477 |
) |
|
Federal Home Loan Bank
advances
|
|
|
(7,607 |
) |
|
|
(7,860 |
) |
|
|
(4,843 |
) |
|
|
(5,051 |
) |
|
Other borrowed
funds
|
|
|
(15,560 |
) |
|
|
(15,660 |
) |
|
|
(8,412 |
) |
|
|
(8,367 |
) |
|
Interest payable
|
|
|
(1,054 |
) |
|
|
(1,054 |
) |
|
|
(1,064 |
) |
|
|
(1,064 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Carrying
amount is the estimated fair value for cash and due from banks, Federal funds
sold, accrued interest receivable and payable, demand deposits, short-term debt,
and variable rate loans or deposits that reprice frequently and
fully. It was not practicable to determine the fair value of Federal
Home Loan Bank and Federal Reserve Bank stock due to the restrictions placed on
its transferability. For fixed rate loans or deposits and for
variable rate loans or deposits with infrequent repricing or repricing limits,
fair value is based on discounted cash flows using current market rates applied
to the estimated life and credit risk. Fair values for impaired loans
are estimated using discounted cash flow analysis or underlying collateral
values. Fair value of debt is based on current rates for similar
financing. The fair value of commitments to extend credit and standby letters of
credit is not material.
PREMIER
FINANCIAL BANCORP, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
December
31, 2008, 2007, and 2006
(Dollars
in Thousands, Except Per Share Data)
The
Banks are parties to financial instruments with off-balance sheet risk in the
normal course of business to meet the financing needs of their
customers. These financial instruments include standby letters of
credit and commitments to extend credit in the form of unused lines of credit.
The Banks use the same credit policies in making commitments and conditional
obligations as they do for on-balance sheet instruments. In addition,
the Banks offer a service whereby deposit customers for a fee are permitted to
overdraw their accounts up to a certain deminimus amount, also known as “bounce
protection” or “overdraft protection”. The aggregate unused portion
of “bounce protection” was $7,742 and $5,003 at December 31, 2008 and
2007.
At
December 31, 2008 and 2007, the Banks had the following financial instruments
whose approximate contract amounts represent credit risk:
|
|
|
2008
|
|
|
2007
|
|
|
Standby
letters of credit
|
|
$ |
1,411 |
|
|
$ |
977 |
|
|
|
|
|
|
|
|
|
|
|
|
Commitments
to extend credit
|
|
|
|
|
|
|
|
|
|
Fixed
|
|
$ |
12,674 |
|
|
$ |
6,100 |
|
|
Variable
|
|
|
41,167 |
|
|
|
33,112 |
|
|
|
|
|
|
|
|
|
|
|
Standby
letters of credit represent conditional commitments issued by the Banks to
guarantee the performance of a third party. The credit risk involved
in issuing these letters of credit is essentially the same as the risk involved
in extending loans to customers. Collateral held varies but primarily
includes real estate and certificates of deposit. Some letters of
credit are unsecured.
Commitments
to extend credit are agreements to lend to a customer as long as there is no
violation of any condition established in the contract. Outstanding commitments
are at current market rates. Fixed rate loan commitments have
interest rates ranging from 4.00% to 18.00%. Commitments generally have fixed
expiration dates or other termination clauses and may require payment of a fee.
The Banks evaluate each customer’s creditworthiness on a case-by-case basis.
Since some of the commitments are expected to expire without being drawn upon,
the total commitment amounts do not necessarily represent future cash
requirements. Collateral held varies but may include accounts receivable,
inventory, property and equipment, and income producing properties.
PREMIER
FINANCIAL BANCORP, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
December
31, 2008, 2007, and 2006
(Dollars
in Thousands, Except Per Share Data)
NOTE
19 - LEGAL PROCEEDINGS
Legal
proceedings involving the Company and its subsidiaries periodically arise in the
ordinary course of business, including claims by debtors and their related
interests against the Company’s subsidiaries following initial collection
proceedings. These legal proceedings sometimes can involve claims for
substantial damages. At December 31, 2008 management is unaware of
any legal proceedings for which the expected outcome would have a material
adverse effect upon the consolidated financial statements of the
Company.
The
Company’s principal source of funds for dividend payments is dividends received
from the subsidiary Banks. Banking regulations limit the amount of
dividends that may be paid without prior approval of regulatory
agencies. Under these regulations, the amount of dividends that may
be paid in any calendar year is limited to the current year’s net profits, as
defined, combined with the retained net profits of the preceding two years,
subject to the capital requirements and additional restrictions as discussed
below. During 2009 the Banks could, without prior approval, declare
dividends to Premier of approximately $2.4 million plus any 2009 net profits
retained to the date of the dividend declaration.
The
Company and the subsidiary Banks are subject to various regulatory capital
requirements administered by the federal banking agencies. Failure to
meet minimum capital requirements can initiate certain mandatory and possibly
additional discretionary actions by regulators that, if undertaken, could have a
direct material effect on the Company’s financial statements. Under capital
adequacy guidelines and the regulatory framework for prompt corrective action,
the Banks must meet specific guidelines that involve quantitative measures of
their assets, liabilities, and certain off-balance sheet items as calculated
under regulatory accounting practices.
These
quantitative measures established by regulation to ensure capital adequacy
require the Company and Banks to maintain minimum amounts and ratios (set forth
in the following table) of Total and Tier I capital (as defined in the
regulations) to risk-weighted assets (as defined), and of Tier I capital (as
defined) to average assets (as defined). Management believes, as of
December 31, 2008 the Company and the Banks meet all quantitative capital
adequacy requirements to which they are subject.
PREMIER
FINANCIAL BANCORP, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
December
31, 2008, 2007, and 2006
(Dollars
in Thousands, Except Per Share Data)
NOTE 20 - STOCKHOLDERS’ EQUITY
(Continued)
The
Company’s and the subsidiary Banks’ capital amounts and ratios as of December
31, 2008 are presented in the table below. As of December 31, 2008,
the most recent notification from each of the Banks’ primary Federal regulators
categorized the subsidiary Banks as well capitalized under the regulatory
framework for prompt corrective action. To be categorized as well
capitalized, the Banks must maintain minimum Total risk-based, Tier I risk-based
and Tier I leverage ratios as set forth in the following table. There
are no conditions or events since that notification that management believes
have changed the Banks’ categories.
|
|
|
|
|
|
|
|
|
To
Be Well Capitalized
|
|
|
|
|
|
|
|
For
Capital
|
|
|
Under
Prompt Corrective
|
|
|
|
|
Actual
|
|
|
Adequacy
Purposes
|
|
|
Action
Provisions
|
|
|
2008
|
|
Amount
|
|
|
Ratio
|
|
|
Amount
|
|
|
Ratio
|
|
|
Amount
|
|
|
Ratio
|
|
|
Total
Capital (to Risk-Weighted Assets):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated (1)
|
|
$ |
66,556 |
|
|
|
15.3 |
% |
|
$ |
34,882 |
|
|
|
8 |
% |
|
$ |
43,602 |
|
|
|
10 |
% |
|
Boone County Bank
|
|
|
18,546 |
|
|
|
22.3 |
|
|
|
6,647 |
|
|
|
8 |
|
|
|
8,309 |
|
|
|
10 |
|
|
Citizens Deposit
Bank
|
|
|
13,487 |
|
|
|
17.5 |
|
|
|
6,157 |
|
|
|
8 |
|
|
|
7,697 |
|
|
|
10 |
|
|
Farmers Deposit
Bank
|
|
|
8,441 |
|
|
|
18.6 |
|
|
|
3,627 |
|
|
|
8 |
|
|
|
4,534 |
|
|
|
10 |
|
|
Ohio River Bank
|
|
|
7,943 |
|
|
|
15.5 |
|
|
|
4,111 |
|
|
|
8 |
|
|
|
5,139 |
|
|
|
10 |
|
|
First Central Bank
|
|
|
10,663 |
|
|
|
13.0 |
|
|
|
6,544 |
|
|
|
8 |
|
|
|
8,180 |
|
|
|
10 |
|
|
Traders Bank
|
|
|
15,584 |
|
|
|
16.1 |
|
|
|
7,763 |
|
|
|
8 |
|
|
|
9,704 |
|
|
|
10 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tier
I Capital (to Risk-Weighted Assets):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated (1)
|
|
$ |
61,070 |
|
|
|
14.0 |
% |
|
$ |
17,441 |
|
|
|
4 |
% |
|
$ |
26,161 |
|
|
|
6 |
% |
|
Boone County Bank
|
|
|
17,503 |
|
|
|
21.1 |
|
|
|
3,323 |
|
|
|
4 |
|
|
|
4,985 |
|
|
|
6 |
|
|
Citizens Deposit
Bank
|
|
|
12,526 |
|
|
|
16.3 |
|
|
|
3,079 |
|
|
|
4 |
|
|
|
4,618 |
|
|
|
6 |
|
|
Farmers Deposit
Bank
|
|
|
7,856 |
|
|
|
17.3 |
|
|
|
1,813 |
|
|
|
4 |
|
|
|
2,720 |
|
|
|
6 |
|
|
Ohio River Bank
|
|
|
7,419 |
|
|
|
14.4 |
|
|
|
2,056 |
|
|
|
4 |
|
|
|
3,083 |
|
|
|
6 |
|
|
First Central Bank
|
|
|
9,773 |
|
|
|
12.0 |
|
|
|
3,272 |
|
|
|
4 |
|
|
|
4,908 |
|
|
|
6 |
|
|
Traders Bank
|
|
|
14,357 |
|
|
|
14.8 |
|
|
|
3,882 |
|
|
|
4 |
|
|
|
5,822 |
|
|
|
6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tier
I Capital (to Average Assets):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated (1)
|
|
$ |
61,070 |
|
|
|
8.7 |
% |
|
$ |
28,114 |
|
|
|
4 |
% |
|
$ |
35,143 |
|
|
|
5 |
% |
|
Boone County Bank
|
|
|
17,503 |
|
|
|
11.4 |
|
|
|
6,163 |
|
|
|
4 |
|
|
|
7,703 |
|
|
|
5 |
|
|
Citizens Deposit
Bank
|
|
|
12,526 |
|
|
|
10.1 |
|
|
|
4,983 |
|
|
|
4 |
|
|
|
6,229 |
|
|
|
5 |
|
|
Farmers Deposit
Bank
|
|
|
7,856 |
|
|
|
12.6 |
|
|
|
2,496 |
|
|
|
4 |
|
|
|
3,120 |
|
|
|
5 |
|
|
Ohio River Bank
|
|
|
7,419 |
|
|
|
8.1 |
|
|
|
3,687 |
|
|
|
4 |
|
|
|
4,609 |
|
|
|
5 |
|
|
First Central Bank
|
|
|
9,773 |
|
|
|
8.8 |
|
|
|
4,432 |
|
|
|
4 |
|
|
|
5,540 |
|
|
|
5 |
|
|
Traders Bank
|
|
|
14,357 |
|
|
|
9.1 |
|
|
|
6,318 |
|
|
|
4 |
|
|
|
7,897 |
|
|
|
5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
Consolidated company is not subject to Prompt Corrective Action
Provisions
|
|
PREMIER
FINANCIAL BANCORP, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
December
31, 2008, 2007, and 2006
(Dollars
in Thousands, Except Per Share Data)
NOTE 20 - STOCKHOLDERS’ EQUITY
(Continued)
The
Company’s and the subsidiary Banks’ capital amounts and ratios as of December
31, 2007 are presented in the table below:
|
|
|
|
|
|
|
|
|
To
Be Well Capitalized
|
|
|
|
|
|
|
|
For
Capital
|
|
|
Under
Prompt Corrective
|
|
|
|
|
Actual
|
|
|
Adequacy
Purposes
|
|
|
Action
Provisions
|
|
|
2007
|
|
Amount
|
|
|
Ratio
|
|
|
Amount
|
|
|
Ratio
|
|
|
Amount
|
|
|
Ratio
|
|
|
Total
Capital (to Risk-Weighted Assets):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated (1)
|
|
$ |
55,538 |
|
|
|
17.3 |
% |
|
$ |
25,646 |
|
|
|
8 |
% |
|
$ |
32,058 |
|
|
|
10 |
% |
|
Boone County Bank
|
|
|
16,492 |
|
|
|
20.9 |
|
|
|
6,319 |
|
|
|
8 |
|
|
|
7,898 |
|
|
|
10 |
|
|
Citizens Deposit
Bank
|
|
|
13,253 |
|
|
|
18.3 |
|
|
|
5,805 |
|
|
|
8 |
|
|
|
7,256 |
|
|
|
10 |
|
|
Farmers Deposit
Bank
|
|
|
8,179 |
|
|
|
18.4 |
|
|
|
3,555 |
|
|
|
8 |
|
|
|
4,443 |
|
|
|
10 |
|
|
Ohio River Bank
|
|
|
7,537 |
|
|
|
16.5 |
|
|
|
3,653 |
|
|
|
8 |
|
|
|
4,566 |
|
|
|
10 |
|
|
First Central Bank
|
|
|
9,509 |
|
|
|
11.8 |
|
|
|
6,434 |
|
|
|
8 |
|
|
|
8,043 |
|
|
|
10 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tier
I Capital (to Risk-Weighted Assets):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated (1)
|
|
$ |
51,500 |
|
|
|
16.1 |
% |
|
$ |
12,823 |
|
|
|
4 |
% |
|
$ |
19,235 |
|
|
|
6 |
% |
|
Boone County Bank
|
|
|
15,500 |
|
|
|
19.6 |
|
|
|
3,159 |
|
|
|
4 |
|
|
|
4,739 |
|
|
|
6 |
|
|
Citizens Deposit
Bank
|
|
|
12,342 |
|
|
|
17.0 |
|
|
|
2,902 |
|
|
|
4 |
|
|
|
4,354 |
|
|
|
6 |
|
|
Farmers Deposit
Bank
|
|
|
7,603 |
|
|
|
17.1 |
|
|
|
1,777 |
|
|
|
4 |
|
|
|
2,666 |
|
|
|
6 |
|
|
Ohio River Bank
|
|
|
7,016 |
|
|
|
15.4 |
|
|
|
1,826 |
|
|
|
4 |
|
|
|
2,740 |
|
|
|
6 |
|
|
First Central Bank
|
|
|
8,594 |
|
|
|
10.7 |
|
|
|
3,217 |
|
|
|
4 |
|
|
|
4,826 |
|
|
|
6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tier
I Capital (to Average Assets):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated (1)
|
|
$ |
51,500 |
|
|
|
9.8 |
% |
|
$ |
21,081 |
|
|
|
4 |
% |
|
$ |
26,351 |
|
|
|
5 |
% |
|
Boone County Bank
|
|
|
15,500 |
|
|
|
10.6 |
|
|
|
5,864 |
|
|
|
4 |
|
|
|
7,330 |
|
|
|
5 |
|
|
Citizens Deposit
Bank
|
|
|
12,342 |
|
|
|
10.0 |
|
|
|
4,927 |
|
|
|
4 |
|
|
|
6,159 |
|
|
|
5 |
|
|
Farmers Deposit
Bank
|
|
|
7,603 |
|
|
|
11.2 |
|
|
|
2,728 |
|
|
|
4 |
|
|
|
3,410 |
|
|
|
5 |
|
|
Ohio River Bank
|
|
|
7,016 |
|
|
|
8.4 |
|
|
|
3,324 |
|
|
|
4 |
|
|
|
4,155 |
|
|
|
5 |
|
|
First Central Bank
|
|
|
8,594 |
|
|
|
8.1 |
|
|
|
4,269 |
|
|
|
4 |
|
|
|
5,336 |
|
|
|
5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
Consolidated company is not subject to Prompt Corrective Action
Provisions
|
|
PREMIER
FINANCIAL BANCORP, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
December
31, 2008, 2007, and 2006
(Dollars
in Thousands, Except Per Share Data)
|
CONDENSED
BALANCE SHEETS
|
|
|
December
31
|
|
|
|
|
2008
|
|
|
2007
|
|
|
ASSETS
|
|
|
|
|
|
|
|
Cash
|
|
$ |
4,659 |
|
|
$ |
7,858 |
|
|
Investment
in subsidiaries
|
|
|
100,494 |
|
|
|
67,688 |
|
|
Premises
and equipment
|
|
|
437 |
|
|
|
501 |
|
|
Other
assets
|
|
|
231 |
|
|
|
51 |
|
|
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
$ |
105,821 |
|
|
$ |
76,098 |
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
|
Other
liabilities
|
|
$ |
839 |
|
|
$ |
297 |
|
|
Other
borrowed funds
|
|
|
15,560 |
|
|
|
8,412 |
|
|
Total liabilities
|
|
|
16,399 |
|
|
|
8,709 |
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders’
equity
|
|
|
|
|
|
|
|
|
|
Preferred stock
|
|
|
- |
|
|
|
- |
|
|
Common stock
|
|
|
2,264 |
|
|
|
1,109 |
|
|
Additional paid-in
capital
|
|
|
58,265 |
|
|
|
43,763 |
|
|
Retained earnings
|
|
|
27,346 |
|
|
|
22,444 |
|
|
Accumulated other comprehensive
income
|
|
|
1,547 |
|
|
|
73 |
|
|
Total stockholders’
equity
|
|
|
89,422 |
|
|
|
67,389 |
|
|
|
|
|
|
|
|
|
|
|
|
Total
liabilities and stockholders’ equity
|
|
$ |
105,821 |
|
|
$ |
76,098 |
|
|
|
|
|
|
|
|
|
|
|
PREMIER
FINANCIAL BANCORP, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
December
31, 2008, 2007, and 2006
(Dollars
in Thousands, Except Per Share Data)
NOTE 21 - PARENT COMPANY FINANCIAL
STATEMENTS (Continued)
|
Condensed
Statement of Operations
|
|
|
Years
Ended December 31
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Income
|
|
|
|
|
|
|
|
|
|
|
Dividends from
subsidiaries
|
|
$ |
7,395 |
|
|
$ |
11,085 |
|
|
$ |
6,440 |
|
|
Interest and dividend
income
|
|
|
62 |
|
|
|
41 |
|
|
|
37 |
|
|
Other income
|
|
|
648 |
|
|
|
648 |
|
|
|
615 |
|
|
Total income
|
|
|
8,105 |
|
|
|
11,774 |
|
|
|
7,092 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
590 |
|
|
|
769 |
|
|
|
1,334 |
|
|
Salaries and employee
benefits
|
|
|
1,448 |
|
|
|
1,337 |
|
|
|
1,199 |
|
|
Professional fees
|
|
|
362 |
|
|
|
136 |
|
|
|
165 |
|
|
Accelerated subordinated debenture
issuance costs
|
|
|
- |
|
|
|
- |
|
|
|
548 |
|
|
Other expenses
|
|
|
569 |
|
|
|
497 |
|
|
|
420 |
|
|
Total expenses
|
|
|
2,969 |
|
|
|
2,739 |
|
|
|
3,666 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
before income taxes
and equity in undistributed income
of subsidiaries
|
|
|
5,136 |
|
|
|
9,035 |
|
|
|
3,426 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
tax (benefit)
|
|
|
(907 |
) |
|
|
(837 |
) |
|
|
(1,160 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
before equity in undistributed income of subsidiaries
|
|
|
6,043 |
|
|
|
9,872 |
|
|
|
4,586 |
|
|
Equity
in undistributed income (excess distributions)
of subsidiaries
|
|
|
1,493 |
|
|
|
(2,753 |
) |
|
|
1,915 |
|
|
Net
income
|
|
$ |
7,536 |
|
|
$ |
7,119 |
|
|
$ |
6,501 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PREMIER
FINANCIAL BANCORP, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
December
31, 2008, 2007, and 2006
(Dollars
in Thousands, Except Per Share Data)
NOTE 21 - PARENT COMPANY FINANCIAL
STATEMENTS (Continued)
|
Condensed
Statement of Cash Flows
|
|
|
Years
Ended December 31
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Cash
flows from operating activities
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$ |
7,536 |
|
|
$ |
7,119 |
|
|
$ |
6,501 |
|
|
Adjustments to reconcile net
income to
net cash from operating
activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
95 |
|
|
|
97 |
|
|
|
101 |
|
|
Stock compensation
expense
|
|
|
120 |
|
|
|
130 |
|
|
|
142 |
|
|
(Gain) loss from sales of
assets
|
|
|
- |
|
|
|
(5 |
) |
|
|
(4 |
) |
|
Dividends in excess of net income
of subsidiaries
|
|
|
- |
|
|
|
2,753 |
|
|
|
- |
|
|
Equity in undistributed earnings
of subsidiaries
|
|
|
(1,493 |
) |
|
|
- |
|
|
|
(1,915 |
) |
|
Change in other
assets
|
|
|
(52 |
) |
|
|
324 |
|
|
|
258 |
|
|
Change in other
liabilities
|
|
|
85 |
|
|
|
(141 |
) |
|
|
17 |
|
|
Net cash from operating
activities
|
|
|
6,291 |
|
|
|
10,277 |
|
|
|
5,100 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from liquidation of
subsidiary
|
|
|
- |
|
|
|
- |
|
|
|
203 |
|
|
Purchases of
subsidiaries
|
|
|
(14,300 |
) |
|
|
- |
|
|
|
- |
|
|
Proceeds from sales of assets, net
of purchases
|
|
|
(31 |
) |
|
|
(33 |
) |
|
|
(116 |
) |
|
Net cash from investing
activities
|
|
|
(14,331 |
) |
|
|
(33 |
) |
|
|
87 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Early redemption of subordinated
note
|
|
|
- |
|
|
|
- |
|
|
|
(15,250 |
) |
|
Cash dividends paid to
shareholders
|
|
|
(2,634 |
) |
|
|
(2,095 |
) |
|
|
(523 |
) |
|
Issuance of common
stock
|
|
|
- |
|
|
|
10 |
|
|
|
27 |
|
|
Proceeds from
borrowings
|
|
|
11,550 |
|
|
|
- |
|
|
|
13,500 |
|
|
Payments on other borrowed
funds
|
|
|
(4,075 |
) |
|
|
(3,863 |
) |
|
|
(2,627 |
) |
|
Net cash from financing
activities
|
|
|
4,841 |
|
|
|
(5,948 |
) |
|
|
(4,873 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
change in cash and cash equivalents
|
|
|
(3,199 |
) |
|
|
4,296 |
|
|
|
314 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents at beginning of year
|
|
|
7,858 |
|
|
|
3,562 |
|
|
|
3,248 |
|
|
Cash
and cash equivalents at end of year
|
|
$ |
4,659 |
|
|
$ |
7,858 |
|
|
$ |
3,562 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PREMIER
FINANCIAL BANCORP, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
December
31, 2008, 2007, and 2006
(Dollars
in Thousands, Except Per Share Data)
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
Per Share
|
|
| |
|
Interest
Income
|
|
|
Net
Interest Income
|
|
|
Net
Income
|
|
|
Basic
|
|
|
Diluted
|
|
| 2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First
Quarter
|
|
$ |
8,427 |
|
|
$ |
5,594 |
|
|
$ |
1,774 |
|
|
$ |
0.34 |
|
|
$ |
0.34 |
|
|
Second
Quarter
|
|
|
9,433 |
|
|
|
6,449 |
|
|
|
1,930 |
|
|
|
0.32 |
|
|
|
0.32 |
|
|
Third
Quarter
|
|
|
10,276 |
|
|
|
7,177 |
|
|
|
1,930 |
|
|
|
0.30 |
|
|
|
0.30 |
|
|
Fourth
Quarter
|
|
|
9,708 |
|
|
|
6,815 |
|
|
|
1,902 |
|
|
|
0.30 |
|
|
|
0.30 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First
Quarter
|
|
$ |
8,612 |
|
|
$ |
5,511 |
|
|
$ |
1,786 |
|
|
$ |
0.34 |
|
|
$ |
0.34 |
|
|
Second
Quarter
|
|
|
8,712 |
|
|
|
5,551 |
|
|
|
1,790 |
|
|
|
0.34 |
|
|
|
0.34 |
|
|
Third
Quarter
|
|
|
8,738 |
|
|
|
5,590 |
|
|
|
1,807 |
|
|
|
0.35 |
|
|
|
0.34 |
|
|
Fourth
Quarter
|
|
|
8,690 |
|
|
|
5,644 |
|
|
|
1,736 |
|
|
|
0.33 |
|
|
|
0.33 |
|
In
2008, interest income increased significantly in the second quarter and further
still in the third quarter largely due to the additional earning assets acquired
via the purchases of Citizens First and Traders on April 30,
2008. The increase in interest income was tempered somewhat in the
fourth quarter due to declining yields on loans and federal funds
sold. The increases in interest income resulted in increases in net
interest income and net income in 2008. In contrast to the increases
in net income, earnings per share decreased in the second and third quarters of
2008 due to the additional shares issued to acquire Citizens First and Traders
on April 30, 2008.
In
2007, interest income improved in each of the first three quarters as yields on
investments securities increased and the outstanding balance of federal funds
sold increased. In the fourth quarter, as the Federal Reserve began
reducing its targeted federal funds rate, the Company’s interest income also
began to decline. The improvement in interest income resulted in the
improvement in net interest income, but was tempered by a rising trend in the
rates paid on deposits. During the first two quarters of 2007, the
Company aggressively reduced its FHLB and bank borrowings as funds became
available. This debt reduction also served to improve net interest
income. Fourth quarter net interest income also benefitted from the
decline in the floating interest rate on bank borrowings.
PREMIER
FINANCIAL BANCORP, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
December
31, 2008, 2007, and 2006
(Dollars
in Thousands, Except Per Share Data)
At
the close of business on April 30, 2008, the Company completed its acquisition
of Traders Bankshares, Inc. (“Traders”), a $108 million bank holding company
headquartered in Spencer, West Virginia. Under terms of the
definitive agreement of merger dated November 27, 2007, each share of Traders
common stock was entitled to merger consideration of $50.00 cash and 3.75 shares
of Premier common stock. Premier issued approximately 675,000 shares
of its common stock and paid in total $9.0 million in cash to the shareholders
of Traders. The cash portion of the merger consideration was funded
by proceeds from a borrowing from First Guaranty Bank more fully described in Note 10. The value of the transaction is estimated
at $18.1 million. The acquisition of Traders afforded Premier the
opportunity to expand its presence in Jackson County, West Virginia and enter
new adjoining markets in Roane and Wood Counties, West Virginia. The
purchase price resulted in approximately $7.3 million in goodwill and $1.5
million in core deposit intangible, none of which is deductible for tax
purposes. The purchase price resulted in goodwill as the Company
believes there are cost saving synergies to be obtained and long-term expansion
opportunities in the acquired markets beyond the existing customer
base. The core deposit intangible will be amortized using an
accelerated method. Purchase accounting adjustments are subject to
refinement as management finalizes the calculations.
Also
at the close of business on April 30, 2008, the Company completed its
acquisition of Citizens First Bank, Inc. (“Citizens First”) a $62 million bank
headquartered in Ravenswood, West Virginia. Under terms of the
definitive agreement of merger dated October 24, 2007, each share of Citizens
First common stock was entitled to merger consideration of $13.25 cash and 1.20
shares of Premier common stock. Premier issued approximately 480,000
shares of its common stock and paid in total $5.3 million in cash to the
shareholders of Citizens First. The cash portion of the merger
consideration was funded from cash on hand of Premier. The value of
the transaction is estimated at $11.7 million. The acquisition of
Citizens First afforded Premier the opportunity to enter new markets in Jackson
County, West Virginia. The purchase price resulted in approximately
$5.4 million in goodwill and $169,000 in core deposit intangible, none of which
is deductible for tax purposes. The purchase price resulted in
goodwill as the Company believes there are long-term expansion opportunities in
the acquired markets beyond the existing customer base. The core
deposit intangible will be amortized using an accelerated
method. Purchase accounting adjustments are subject to refinement as
management finalizes the calculations. On October 24, 2008, Citizens
First Bank was merged into Traders Bank, Inc.
PREMIER
FINANCIAL BANCORP, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
December
31, 2008, 2007, and 2006
(Dollars
in Thousands, Except Per Share Data)
NOTE 23- ACQUISITIONS
(Continued)
Net
assets acquired via each transaction are shown in the table below:
|
|
|
Citizens
First
|
|
|
Traders
|
|
|
Cash
and due from banks
|
|
$ |
2,300 |
|
|
$ |
3,285 |
|
|
Federal
funds sold
|
|
|
8,394 |
|
|
|
2,448 |
|
|
Securities
available for sale
|
|
|
4,097 |
|
|
|
40,643 |
|
|
Loans,
net
|
|
|
44,773 |
|
|
|
50,551 |
|
|
Goodwill
and other intangible assets
|
|
|
5,580 |
|
|
|
8,752 |
|
|
Other
assets
|
|
|
2,904 |
|
|
|
6,809 |
|
|
Total assets
acquired
|
|
|
68,048 |
|
|
|
112,488 |
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
(56,020 |
) |
|
|
(92,807 |
) |
|
Other
liabilities
|
|
|
(328 |
) |
|
|
(1,541 |
) |
|
Total liabilities
assumed
|
|
|
(56,348 |
) |
|
|
(94,348 |
) |
|
Net assets
acquired
|
|
$ |
11,700 |
|
|
$ |
18,140 |
|
The
results of operations of Citizens First and Traders are included in Premier’s
consolidated statements of income beginning as of the acquisition
date. The following table presents pro forma condensed income
statements as if the mergers had occurred at the beginning of each period
presented:
|
|
|
(Unaudited)
|
|
|
|
|
2008
|
|
|
2007
|
|
|
Interest
income
|
|
$ |
41,266 |
|
|
$ |
45,625 |
|
|
Interest
expense
|
|
|
13,118 |
|
|
|
16,555 |
|
|
Net interest
income
|
|
|
28,148 |
|
|
|
29,070 |
|
|
Provision
for loan losses
|
|
|
147 |
|
|
|
(76 |
) |
|
Net interest income after
provision
|
|
|
28,001 |
|
|
|
29,146 |
|
|
Non-interest
income
|
|
|
5,564 |
|
|
|
5,488 |
|
|
Non-interest
expense
|
|
|
24,112 |
|
|
|
22,714 |
|
|
Income before income
taxes
|
|
|
9,453 |
|
|
|
11,920 |
|
|
Income
tax expense
|
|
|
3,088 |
|
|
|
3,938 |
|
|
Net income
|
|
$ |
6,365 |
|
|
$ |
7,982 |
|
|
|
|
|
|
|
|
|
|
|
|
Basic
earnings per share
|
|
$ |
1.00 |
|
|
$ |
1.25 |
|
|
Diluted
earnings per share
|
|
|
0.99 |
|
|
|
1.24 |
|
PREMIER
FINANCIAL BANCORP, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
December
31, 2008, 2007, and 2006
(Dollars
in Thousands, Except Per Share Data)
On
December 31, 2008, the Company entered into a material definitive agreement with
Abigail Adams National Bancorp, Inc. (Abigail Adams), a two bank holding company
with $436 million of total assets at December 31, 2008 with locations in and
around Washington, DC and Richmond, Virginia. Under terms of the
definitive agreement, Premier agreed to purchase Abigail Adams for approximately
$10.8 million in stock. Each share of Abigail Adams common stock will
be entitled to merger consideration of 0.4461 shares of Premier common
stock. Premier will issue approximately 1,545,000 shares of its
common stock to the stockholders of Abigail Adams. The transaction,
which is subject to certain conditions precedent, still requires approval by
Abigail Adams’ stockholders and bank regulatory authorities, and the issuance of
Premier common stock in the merger requires Premier stockholder
approval. It is anticipated to close sometime in the second quarter
of 2009. Premier is also guarantor of a $6.0 million line of credit
that Abigail Adams has from the Bankers’ Bank of which $4.2 million was
outstanding at December 31, 2008.
It is
a condition to the completion of the merger with Abigail Adams that Premier
complete the sale of $24.0 million of Premier preferred stock to the U.S.
Treasury under the Troubled Asset Relief Program (“TARP”) Capital Purchase
Program (“CPP”). Premier has applied for approval to participate in
the CPP but has yet to receive any approval from the U.S.
Treasury. Premier’s participation in the CPP program will affect the
stockholders of Premier common stock in the following ways. Upon
Premier’s participation in the U.S. Treasury’s CPP, the U.S. Treasury would
purchase from Premier cumulative perpetual preferred shares, with a liquidation
preference of at least one thousand dollars per share (the “Senior Preferred
Shares”). Based upon an investment of $24.0 million, Premier would
issue 24,000 Senior Preferred Shares, each with a liquidation preference of one
thousand dollars per share. The Senior Preferred Shares would
constitute Tier 1 capital and would rank senior to Premier’s common
shares. The Senior Preferred Shares would pay cumulative dividends at
a rate of 5% per annum for the first five years and would reset to a rate of 9%
per annum after year five. Dividends would be payable quarterly in
arrears.
PREMIER
FINANCIAL BANCORP, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
December
31, 2008, 2007, and 2006
(Dollars
in Thousands, Except Per Share Data)
NOTE 25- CAPITAL PURCHASE PROGRAM
(Continued)
The
Senior Preferred Shares would be non-voting shares, but would have class voting
rights on (i) any authorization or issuance of shares ranking senior to the
Senior Preferred Shares; (ii) any amendment to the rights of the Senior
Preferred Shares; or (iii) any merger, consolidation, share exchange,
reclassification or similar transaction which would adversely affect the rights
of the Senior Preferred Shares. In the event that the cumulative
dividends described above were not paid in full for an aggregate of six dividend
periods or more, whether or not consecutive, the authorized number of directors
of Premier would automatically be increased by two and the holders of the Senior
Preferred Shares would have the right to elect two directors. The
right to elect directors would end when dividends have been paid in full for
four consecutive dividend periods.
Each
financial institution participating in the CPP must also issue a warrant (the
“Warrant”) to the U.S. Treasury to purchase a number of common shares having a
market price equal to 15% of the aggregate amount of the Senior Preferred Shares
purchased by the U.S. Treasury. The market price for determining the
number of common shares subject to the Warrant will be calculated based on the
average of the closing prices of Premier’s common shares on the 20 trading days
prior to preliminary approval to participate in the CPP by the U.S. Treasury.
The Warrant will have a 10 year term. Issuance and exercise of the
Warrant would dilute the interests of existing Premier common
shareholders.
To
participate in the CPP, Premier would also be required to adopt the U.S.
Treasury’s standards for executive compensation and corporate governance, as
amended from time-to-time, for the period during which the U.S. Treasury holds
equity issued under the CPP.
Financial
Statements
The
accompanying information has not been audited by independent public accountants;
however, in the opinion of management such information reflects all adjustments
necessary for a fair presentation of the results for the interim
period. All such adjustments are of a normal and recurring
nature. Premier Financial Bancorp, Inc.’s (“Premier’s”) accounting
and reporting policies are in accordance with accounting principles generally
accepted in the United States of America. Certain accounting
principles used by Premier involve a significant amount of judgment about future
events and require the use of estimates in their application. The
following policies are particularly sensitive in terms of judgments and the
extent to which estimates are used: allowance for loan losses, the
identification and evaluation of impaired loans, the impairment of goodwill, the
realization of deferred tax assets and stock based compensation
disclosures. These estimates are based on assumptions that may
involve significant uncertainty at the time of their use. However,
the policies, the estimates and the estimation process as well as the resulting
disclosures are periodically reviewed by the Audit Committee of the Board of
Directors and material estimates are subject to review as part of the external
audit by the independent public accountants.
The
accompanying financial statements are presented in accordance with the
requirements of Form 10-Q and consequently do not include all of the disclosures
normally required by accounting principles generally accepted in the United
States of America or those normally made in the registrant’s annual report on
Form 10-K. Accordingly, the reader of the Form 10-Q may wish to refer
to the registrant’s Form 10-K
for the year ended December 31, 2008 for further information in this
regard.
Index
to consolidated financial statements:
PREMIER
FINANCIAL BANCORP, INC.
MARCH
31, 2009 AND DECEMBER 31, 2008
(DOLLARS
IN THOUSANDS, EXCEPT PER SHARE DATA)
|
|
|
(UNAUDITED)
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
ASSETS
|
|
|
|
|
|
|
|
Cash
and due from banks
|
|
$ |
29,933 |
|
|
$ |
22,148 |
|
|
Federal
funds sold
|
|
|
40,152 |
|
|
|
15,899 |
|
|
Securities
available for sale
|
|
|
155,581 |
|
|
|
175,741 |
|
|
Loans
held for sale
|
|
|
342 |
|
|
|
1,193 |
|
|
Loans
|
|
|
466,874 |
|
|
|
467,111 |
|
|
Allowance for loan
losses
|
|
|
(8,587 |
) |
|
|
(8,544 |
) |
|
Net loans
|
|
|
458,287 |
|
|
|
458,567 |
|
|
Federal
Home Loan Bank and Federal Reserve Bank stock
|
|
|
3,788 |
|
|
|
3,931 |
|
|
Premises
and equipment, net
|
|
|
11,596 |
|
|
|
11,367 |
|
|
Real
estate and other property acquired through foreclosure
|
|
|
981 |
|
|
|
1,056 |
|
|
Interest
receivable
|
|
|
2,843 |
|
|
|
3,720 |
|
|
Goodwill
|
|
|
28,724 |
|
|
|
28,543 |
|
|
Other
intangible assets
|
|
|
1,354 |
|
|
|
1,431 |
|
|
Other
assets
|
|
|
560 |
|
|
|
869 |
|
|
Total assets
|
|
$ |
734,141 |
|
|
$ |
724,465 |
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
|
|
|
|
|
|
|
Non-interest
bearing
|
|
$ |
106,092 |
|
|
$ |
101,588 |
|
|
Time deposits, $100,000 and
over
|
|
|
77,472 |
|
|
|
71,145 |
|
|
Other interest
bearing
|
|
|
421,328 |
|
|
|
416,449 |
|
|
Total deposits
|
|
|
604,892 |
|
|
|
589,182 |
|
|
Federal
funds purchased
|
|
|
77 |
|
|
|
- |
|
|
Securities
sold under agreements to repurchase
|
|
|
13,250 |
|
|
|
18,351 |
|
|
Federal
Home Loan Bank advances
|
|
|
6,563 |
|
|
|
7,607 |
|
|
Other
borrowed funds
|
|
|
15,078 |
|
|
|
15,560 |
|
|
Interest
payable
|
|
|
984 |
|
|
|
1,054 |
|
|
Other
liabilities
|
|
|
3,267 |
|
|
|
3,289 |
|
|
Total liabilities
|
|
|
644,111 |
|
|
|
635,043 |
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders'
equity
|
|
|
|
|
|
|
|
|
|
Preferred stock, no par value;
1,000,000 shares authorized;
|
|
|
|
|
|
|
|
|
|
none issued or
outstanding
|
|
|
- |
|
|
|
- |
|
|
Common stock, no par value;
10,000,000 shares authorized;
|
|
|
|
|
|
|
|
|
|
6,392,772 shares issued and
outstanding
|
|
|
2,264 |
|
|
|
2,264 |
|
|
Additional paid in
capital
|
|
|
58,279 |
|
|
|
58,265 |
|
|
Retained earnings
|
|
|
27,872 |
|
|
|
27,346 |
|
|
Accumulated other comprehensive
income
|
|
|
1,615 |
|
|
|
1,547 |
|
|
Total stockholders'
equity
|
|
|
90,030 |
|
|
|
89,422 |
|
|
Total liabilities and
stockholders' equity
|
|
$ |
734,141 |
|
|
$ |
724,465 |
|
PREMIER
FINANCIAL BANCORP, INC.
THREE
MONTHS ENDED MARCH 31, 2009 AND 2008
(UNAUDITED,
DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
|
|
|
Three
Months Ended
March
31,
|
|
|
|
|
2009
|
|
|
2008
|
|
|
Interest
income
|
|
|
|
|
|
|
|
Loans, including
fees
|
|
$ |
7,425 |
|
|
$ |
6,553 |
|
|
Securities available for
sale
|
|
|
|
|
|
|
|
|
|
Taxable
|
|
|
1,636 |
|
|
|
1,530 |
|
|
Tax-exempt
|
|
|
57 |
|
|
|
36 |
|
|
Federal funds sold and
other
|
|
|
18 |
|
|
|
308 |
|
|
Total interest
income
|
|
|
9,136 |
|
|
|
8,427 |
|
|
|
|
|
|
|
|
|
|
|
|
Interest
expense
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
2,353 |
|
|
|
2,588 |
|
|
Repurchase agreements and
other
|
|
|
33 |
|
|
|
53 |
|
|
FHLB advances and other
borrowings
|
|
|
192 |
|
|
|
192 |
|
|
Total interest
expense
|
|
|
2,578 |
|
|
|
2,833 |
|
|
|
|
|
|
|
|
|
|
|
|
Net
interest income
|
|
|
6,558 |
|
|
|
5,594 |
|
|
Provision
for loan losses
|
|
|
102 |
|
|
|
(135 |
) |
|
Net interest income after
provision for loan losses
|
|
|
6,456 |
|
|
|
5,729 |
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest
income
|
|
|
|
|
|
|
|
|
|
Service charges on deposit
accounts
|
|
|
725 |
|
|
|
638 |
|
|
Electronic banking
income
|
|
|
236 |
|
|
|
163 |
|
|
Secondary market mortgage
income
|
|
|
83 |
|
|
|
161 |
|
|
Other
|
|
|
126 |
|
|
|
104 |
|
|
|
|
|
1,170 |
|
|
|
1,066 |
|
|
Non-interest
expenses
|
|
|
|
|
|
|
|
|
|
Salaries and employee
benefits
|
|
|
2,794 |
|
|
|
2,225 |
|
|
Occupancy and equipment
expenses
|
|
|
712 |
|
|
|
500 |
|
|
Outside data
processing
|
|
|
755 |
|
|
|
584 |
|
|
Professional fees
|
|
|
341 |
|
|
|
179 |
|
|
Taxes, other than payroll,
property and income
|
|
|
178 |
|
|
|
154 |
|
|
Write-downs, expenses, sales
of
other real estate owned,
net
|
|
|
77 |
|
|
|
10 |
|
|
Amortization of
intangibles
|
|
|
77 |
|
|
|
- |
|
|
Supplies
|
|
|
108 |
|
|
|
82 |
|
|
Other expenses
|
|
|
722 |
|
|
|
388 |
|
|
|
|
|
5,764 |
|
|
|
4,122 |
|
|
Income
before income taxes
|
|
|
1,862 |
|
|
|
2,673 |
|
|
Provision
for income taxes
|
|
|
633 |
|
|
|
899 |
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$ |
1,229 |
|
|
$ |
1,774 |
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average shares outstanding:
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
6,393 |
|
|
|
5,238 |
|
|
Diluted
|
|
|
6,393 |
|
|
|
5,253 |
|
|
|
|
|
|
|
|
|
|
|
|
Net
income per share:
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$ |
0.19 |
|
|
$ |
0.34 |
|
|
Diluted
|
|
|
0.19 |
|
|
|
0.34 |
|
PREMIER
FINANCIAL BANCORP, INC.
THREE
MONTHS ENDED MARCH 31, 2009 AND 2008
(UNAUDITED,
DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
|
|
|
Three
Months Ended
March
31,
|
|
|
|
|
2009
|
|
|
2008
|
|
|
Net
income
|
|
$ |
1,229 |
|
|
$ |
1,774 |
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive
income:
|
|
|
|
|
|
|
|
|
|
Unrealized gains arising during
the period
|
|
|
103 |
|
|
|
1,703 |
|
|
Reclassification of realized
amount
|
|
|
- |
|
|
|
- |
|
|
Net change in unrealized gain
(loss) on securities
|
|
|
103 |
|
|
|
1,703 |
|
|
Less tax impact
|
|
|
35 |
|
|
|
579 |
|
|
Other comprehensive
income:
|
|
|
68 |
|
|
|
1,124 |
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive
income
|
|
$ |
1,297 |
|
|
$ |
2,898 |
|
|
|
|
|
|
|
|
|
|
|
PREMIER
FINANCIAL BANCORP, INC.
THREE
MONTHS ENDED MARCH 31, 2009 AND 2008
(UNAUDITED,
DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
|
|
|
2009
|
|
|
2008
|
|
|
Cash
flows from operating activities
|
|
|
|
|
|
|
|
Net income
|
|
$ |
1,229 |
|
|
$ |
1,774 |
|
|
Adjustments to reconcile net
income to net cash from
operating
activities
|
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
270 |
|
|
|
189 |
|
|
Provision for loan
losses
|
|
|
102 |
|
|
|
(135 |
) |
|
Amortization (accretion),
net
|
|
|
98 |
|
|
|
(7 |
) |
|
FHLB stock
dividends
|
|
|
- |
|
|
|
(33 |
) |
|
OREO writedowns (gains on sales),
net
|
|
|
94 |
|
|
|
5 |
|
|
Stock compensation
expense
|
|
|
14 |
|
|
|
26 |
|
|
Loans originated for
sale
|
|
|
(4,213 |
) |
|
|
(7,020 |
) |
|
Secondary market loans
sold
|
|
|
5,147 |
|
|
|
5,654 |
|
|
Secondary market
income
|
|
|
(83 |
) |
|
|
(161 |
) |
|
Changes in :
|
|
|
|
|
|
|
|
|
|
Interest
receivable
|
|
|
877 |
|
|
|
(83 |
) |
|
Other assets
|
|
|
93 |
|
|
|
(61 |
) |
|
Interest payable
|
|
|
(70 |
) |
|
|
(23 |
) |
|
Other liabilities
|
|
|
(22 |
) |
|
|
370 |
|
|
Net cash from operating
activities
|
|
|
3,536 |
|
|
|
495 |
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities
|
|
|
|
|
|
|
|
|
|
Purchases of securities available
for sale
|
|
|
(34,215 |
) |
|
|
(44,059 |
) |
|
Proceeds from maturities and calls
of securities available for sale
|
|
|
54,428 |
|
|
|
21,970 |
|
|
Redemption of FRB and
FHLB stock, (net of purchases)
|
|
|
143 |
|
|
|
9 |
|
|
Net change in federal funds
sold
|
|
|
(24,253 |
) |
|
|
(5,270 |
) |
|
Net change in
loans
|
|
|
15 |
|
|
|
10,483 |
|
|
Purchases of premises and
equipment, net
|
|
|
(499 |
) |
|
|
(401 |
) |
|
Proceeds from sales of other real
estate acquired through foreclosure
|
|
|
144 |
|
|
|
- |
|
|
Net cash from investing
activities
|
|
|
(4,237 |
) |
|
|
(17,268 |
) |
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities
|
|
|
|
|
|
|
|
|
|
Net change in
deposits
|
|
|
15,739 |
|
|
|
15,246 |
|
|
Cash dividends
paid
|
|
|
(703 |
) |
|
|
(524 |
) |
|
Net change in short-term Federal
Home Loan Bank advances
|
|
|
(1,000 |
) |
|
|
- |
|
|
Repayment of Federal Home Loan
Bank advances
|
|
|
(44 |
) |
|
|
(45 |
) |
|
Repayment of other borrowed
funds
|
|
|
(482 |
) |
|
|
(371 |
) |
|
Net change in federal funds
purchased
|
|
|
77 |
|
|
|
(392 |
) |
|
Net change in agreements to
repurchase securities
|
|
|
(5,101 |
) |
|
|
249 |
|
|
Net cash from financing
activities
|
|
|
8,486 |
|
|
|
14,163 |
|
|
|
|
|
|
|
|
|
|
|
|
Net
change in cash and cash equivalents
|
|
|
7,785 |
|
|
|
(2,610 |
) |
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents at beginning of period
|
|
|
22,148 |
|
|
|
22,365 |
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents at end of period
|
|
$ |
29,933 |
|
|
$ |
19,755 |
|
PREMIER
FINANCIAL BANCORP, INC.
CONSOLIDATED
STATEMENTS OF CASH FLOWS (continued)
THREE
MONTHS ENDED MARCH 31, 2009 AND 2008
(UNAUDITED,
DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
|
|
|
2009
|
|
|
2008
|
|
|
Supplemental
disclosures of cash flow information:
|
|
|
|
|
|
|
|
Cash paid during period for
interest
|
|
$ |
2,648 |
|
|
$ |
2,856 |
|
|
|
|
|
|
|
|
|
|
|
|
Loans transferred to real estate
acquired through foreclosure
|
|
|
163 |
|
|
|
185 |
|
|
|
|
|
|
|
|
|
|
|
PREMIER
FINANCIAL BANCORP, INC.
(UNAUDITED,
DOLLARS IN TABLES IN THOUSANDS, EXCEPT PER SHARE DATA)
The
consolidated financial statements include the accounts of Premier Financial
Bancorp, Inc. (the Company) and its wholly owned subsidiaries:
|
|
|
|
|
|
|
|
March
31, 2009
|
|
|
|
|
Year
|
|
Total
|
|
|
Net
Income
|
|
|
Subsidiary
|
Location
|
Acquired
|
|
Assets
|
|
|
Quarter
|
|
|
Citizens
Deposit Bank & Trust
|
Vanceburg,
Kentucky
|
1991
|
|
$ |
125,069 |
|
|
$ |
399 |
|
|
Farmers
Deposit Bank
|
Eminence,
Kentucky
|
1996
|
|
|
65,023 |
|
|
|
153 |
|
|
Ohio
River Bank
|
Ironton,
Ohio
|
1998
|
|
|
87,653 |
|
|
|
321 |
|
|
First
Central Bank, Inc.
|
Philippi,
West Virginia
|
1998
|
|
|
114,900 |
|
|
|
155 |
|
|
Boone
County Bank, Inc.
|
Madison,
West Virginia
|
1998
|
|
|
172,164 |
|
|
|
473 |
|
|
Traders
Bank, Inc.
|
Ravenswood,
West Virginia
|
2008
|
|
|
168,645 |
|
|
|
141 |
|
|
Mt.
Vernon Financial Holdings, Inc.
|
Huntington,
West Virginia
|
1999
|
|
|
300 |
|
|
|
(8 |
) |
|
Parent
and Intercompany Eliminations
|
|
|
|
|
387 |
|
|
|
(405 |
) |
|
Consolidated
Total
|
|
|
|
$ |
734,141 |
|
|
$ |
1,229 |
|
All
significant intercompany transactions and balances have been
eliminated.
In
December 2007, the FASB issued SFAS No. 141 (revised 2007), Business
Combinations (“FAS 141(R)”), which establishes principles and requirements for
how an acquirer recognizes and measures in its financial statements the
identifiable assets acquired, the liabilities assumed, and any noncontrolling
interest in an acquiree, including the recognition and measurement of goodwill
acquired in a business combination. FAS 141(R) is effective for
fiscal years beginning on or after December 15, 2008. Earlier
adoption is prohibited. There was no impact to the Company upon
adoption of this standard, but the accounting for future business combinations
will be different from prior practice.
In
December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interest in
Consolidated Financial Statements, an amendment of ARB No. 51” (“FAS
160”), which changes the accounting and reporting for minority interests, which
will be recharacterized as noncontrolling interests and classified as a
component of equity within the consolidated balance sheets. FAS 160 is effective
as of the beginning of the first fiscal year beginning on or after December 15,
2008. Earlier adoption is prohibited. The Company currently does not
have any noncontrolling interests in its subsidiaries and therefore the adoption
of FAS 160 did not have a significant impact on its results of operations or
financial position.
In
March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative
Instruments and Hedging Activities, an amendment of SFAS No. 133” (“FAS
161”). FAS 161 amends and expands the disclosure requirements of SFAS
No. 133 for derivative instruments and hedging activities. FAS 161 requires
qualitative disclosure about objectives and strategies for using derivative and
hedging instruments, quantitative disclosures about fair value amounts of the
instruments and gains and losses on such instruments, as well as disclosures
about credit-risk features in derivative agreements. FAS 161 is effective for
financial statements issued for fiscal years and interim periods beginning after
November 15, 2008, with early application encouraged. The Company currently does
not engage in hedging activities and therefore the adoption of this standard did
not have a material effect on the Corporation’s financial statements or
disclosure requirements.
PREMIER
FINANCIAL BANCORP, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED,
DOLLARS IN TABLES IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 1
- BASIS OF PRESENTATION – continued
In
February 2008, the FASB issued FASB Staff Position (FSP) SFAS No. 157-2,
“Effective Date of FASB Statement No. 157.” The Corporation adopted
this FSP for non-financial assets and liabilities that are not recognized or
disclosed at fair value in the financial statements, effective January 1,
2009. The adoption of this FSP did not have a material impact on the
Corporation’s financial statements or disclosure requirements.
In
April 2009, the FASB issued FSP SFAS No. 157-4, “Determining Fair Value When the
Volume and Level of Activity for the Asset or Liability Have Significantly
Decreased and Identifying Transactions That Are Not Orderly.” FSP
SFAS No. 157-4 provides factors to determine whether there has been a
significant decrease in the volume and level of activity for the asset or
liability and circumstances that may indicate that a transaction is not
orderly. In those instances, adjustments to the transactions or
quoted prices may be necessary to estimate fair value with SFAS No.
157. This FSP does not apply to Level 1 inputs. FSP SFAS
No. 157-4 also requires additional disclosures, including inputs and valuation
techniques used, and changes thereof, to measure the fair value. FSP
SFAS No. 157-4 is effective for interim and annual reporting periods ending
after June 15, 2009. Early adoption is permitted for periods ending
after March 15, 2009. This FSP amends SFAS No. 157 and supersedes FSP
SFAS No. 157-3. FSP SFAS No. 157-4 is not expected to have a material
impact on the Corporation’s financial position or results of
operation.
In
April 2009, the FASB issued FSP SFAS No. 115-2 and SFAS No. 124-2, “Recognition
and Presentation of Other-Than-Temporary Impairments.” FSP SFAS No.
115-2 and SFAS No. 124-2 applies to debt securities classified as
available-for-sale and held-to-maturity and makes other-than-temporary
impairment guidance more operational and improves related presentation and
disclosure requirements. This FSP requires that impairment losses
related to credit losses will be included in earnings. Impairments related to
other factors will be included in other comprehensive income, when management
asserts it does not have the intent to sell the security and it is not more
likely than not that it will have to sell the security before its
recovery.
For
debt securities held at the beginning of the interim period of adoption for
which an other-than-temporary impairment was previously recognized, if the
entity does not intend to sell and it is not more likely than not that it will
be required to sell the security before recovery of its amortized cost basis,
the entity will recognize the cumulative-effect adjustment, including related
tax effects, to the beginning balance of retained earnings and corresponding
adjustment to accumulated other comprehensive income. FSP SFAS No.
115-2 and SFAS No. 124-2 is effective for interim and annual periods ending
after June 15, 2009. This FSP amends SFAS No. 115 and other related
guidance. Early adoption is permitted for periods ending after March
15, 2009. This FSP amends SFAS No. 157 and supersedes FSP SFAS No.
157-3. The adoption of these FSP’s is not expected to have a
material impact on the Corporation’s financial statements.
PREMIER
FINANCIAL BANCORP, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED,
DOLLARS IN TABLES IN THOUSANDS, EXCEPT PER SHARE DATA)
Amortized
cost and fair value of investment securities, by category, at March 31, 2009 are
summarized as follows:
|
|
|
Amortized
Cost
|
|
|
Unrealized
Gains
|
|
|
Unrealized
Losses
|
|
|
Fair
Value
|
|
|
Available
for sale
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U. S. Treasury
securities
|
|
$ |
1,495 |
|
|
$ |
34 |
|
|
$ |
- |
|
|
$ |
1,529 |
|
|
U. S. agency
securities
|
|
|
72,882 |
|
|
|
581 |
|
|
|
(75 |
) |
|
|
73,388 |
|
|
Obligations of states and
political subdivisions
|
|
|
7,563 |
|
|
|
96 |
|
|
|
(70 |
) |
|
|
7,589 |
|
|
Mortgage-backed securities of
government
sponsored agencies
|
|
|
71,062 |
|
|
|
2,019 |
|
|
|
(6 |
) |
|
|
73,075 |
|
|
Total available for
sale
|
|
$ |
153,002 |
|
|
$ |
2,730 |
|
|
$ |
(151 |
) |
|
$ |
155,581 |
|
Amortized
cost and fair value of investment securities, by category, at December 31, 2008
are summarized as follows:
|
|
|
Amortized
Cost
|
|
|
Unrealized
Gains
|
|
|
Unrealized
Losses
|
|
|
Fair
Value
|
|
|
Available
for sale
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U. S. Treasury
securities
|
|
$ |
1,494 |
|
|
$ |
50 |
|
|
$ |
- |
|
|
$ |
1,544 |
|
|
U. S. agency
securities
|
|
|
96,154 |
|
|
|
1,018 |
|
|
|
(67 |
) |
|
|
97,105 |
|
|
Obligations of states and
political subdivisions
|
|
|
7,065 |
|
|
|
75 |
|
|
|
(10 |
) |
|
|
7,130 |
|
|
Mortgage-backed securities of
government
sponsored agencies
|
|
|
68,553 |
|
|
|
1,479 |
|
|
|
(70 |
) |
|
|
69,962 |
|
|
Total available for
sale
|
|
$ |
173,266 |
|
|
$ |
2,622 |
|
|
$ |
(147 |
) |
|
$ |
175,741 |
|
Securities
with unrealized losses at March 31, 2009 aggregated by investment category and
length of time that individual securities have been in a continuous unrealized
loss position are as follows:
|
|
|
Less
than 12 Months
|
|
|
12
Months or More
|
|
|
Total
|
|
|
Description
of Securities
|
|
Fair
Value
|
|
|
Unrealized
Loss
|
|
|
Fair
Value
|
|
|
Unrealized
Loss
|
|
|
Fair
Value
|
|
|
Unrealized
Loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
agency securities
|
|
$ |
18,539 |
|
|
$ |
(75 |
) |
|
$ |
- |
|
|
$ |
- |
|
|
$ |
18,539 |
|
|
$ |
(75 |
) |
|
Obligations
of states and
political
subdivisions
|
|
|
1,415 |
|
|
|
(70 |
) |
|
|
- |
|
|
|
- |
|
|
|
1,415 |
|
|
|
(70 |
) |
|
Mortgage-backed
securities
of government
sponsored
agencies
|
|
|
932 |
|
|
|
(6 |
) |
|
|
- |
|
|
|
- |
|
|
|
932 |
|
|
|
(6 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
temporarily impaired
|
|
$ |
20,886 |
|
|
$ |
(151 |
) |
|
$ |
- |
|
|
$ |
- |
|
|
$ |
20,886 |
|
|
$ |
(151 |
) |
PREMIER
FINANCIAL BANCORP, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED,
DOLLARS IN TABLES IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 2–SECURITIES
- continued
Securities
with unrealized losses at December 31, 2008 aggregated by investment category
and length of time that individual securities have been in a continuous
unrealized loss position are as follows:
|
|
|
Less
than 12 Months
|
|
|
12
Months or More
|
|
|
Total
|
|
|
Description
of Securities
|
|
Fair
Value
|
|
|
Unrealized
Loss
|
|
|
Fair
Value
|
|
|
Unrealized
Loss
|
|
|
Fair
Value
|
|
|
Unrealized
Loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
agency securities
|
|
$ |
12,475 |
|
|
$ |
(67 |
) |
|
$ |
- |
|
|
$ |
- |
|
|
$ |
12,475 |
|
|
$ |
(67 |
) |
|
Obligations
of states and
political
subdivisions
|
|
|
871 |
|
|
|
(10 |
) |
|
|
- |
|
|
|
- |
|
|
|
871 |
|
|
|
(10 |
) |
|
Mortgage-backed
securities
of government
sponsored
agencies
|
|
|
5,714 |
|
|
|
(70 |
) |
|
|
- |
|
|
|
- |
|
|
|
5,714 |
|
|
|
(70 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
temporarily impaired
|
|
$ |
19,060 |
|
|
$ |
(147 |
) |
|
$ |
- |
|
|
$ |
- |
|
|
$ |
19,060 |
|
|
$ |
(147 |
) |
The
investment portfolio is predominately high quality interest-bearing bonds with
defined maturity dates backed by the U.S. Government or Government sponsored
agencies. The unrealized losses at March 31, 2009 and December 31,
2008 are price changes resulting from changes in the interest rate environment
and are not considered to be other than temporary declines in the value of the
securities. Their fair value is expected to recover as the bonds
approach their maturity date and/or market conditions improve.
Major
classifications of loans at March 31, 2009 and December 31, 2008 are summarized
as follows:
|
|
|
2009
|
|
|
2008
|
|
|
Commercial,
secured by real estate
|
|
$ |
133,966 |
|
|
$ |
133,742 |
|
|
Commercial,
other
|
|
|
64,660 |
|
|
|
61,655 |
|
|
Real
estate construction
|
|
|
25,690 |
|
|
|
26,182 |
|
|
Residential
real estate
|
|
|
185,899 |
|
|
|
185,536 |
|
|
Agricultural
|
|
|
2,217 |
|
|
|
2,446 |
|
|
Consumer
and home equity
|
|
|
49,001 |
|
|
|
51,793 |
|
|
Other
|
|
|
5,441 |
|
|
|
5,757 |
|
|
|
|
$ |
466,874 |
|
|
$ |
467,111 |
|
PREMIER
FINANCIAL BANCORP, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED,
DOLLARS IN TABLES IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 3
– LOANS - continued
The
following table sets forth information with respect to the Company’s impaired
loans at March 31, 2009 and December 31, 2008.
|
|
|
2009
|
|
|
2008
|
|
|
Impaired
loans at period end with an allowance
|
|
$ |
10,981 |
|
|
$ |
11,610 |
|
|
Impaired
loan at period end with no allowance
|
|
|
- |
|
|
|
- |
|
|
Amount
of allowance for loan losses allocated
|
|
|
1,989 |
|
|
|
2,208 |
|
The
following table sets forth information with respect to the Company’s
nonperforming loans at March 31, 2009 and December 31, 2008.
|
|
|
2009
|
|
|
2008
|
|
|
Non-accrual
loans
|
|
$ |
7,377 |
|
|
$ |
6,943 |
|
|
Accruing
loans which are contractually past due 90 days or more
|
|
|
702 |
|
|
|
625 |
|
|
Restructured
loans
|
|
|
1,410 |
|
|
|
1,203 |
|
|
Total
|
|
$ |
9,489 |
|
|
$ |
8,771 |
|
Changes
in the allowance for loan losses for the three months ended March 31, 2009 and
2008 are as follows:
|
|
|
Three
Months Ended
|
|
|
|
|
March
31,
|
|
|
|
|
2009
|
|
|
2008
|
|
|
Balance,
beginning of period
|
|
$ |
8,544 |
|
|
$ |
6,497 |
|
|
Gross
charge-offs
|
|
|
(165 |
) |
|
|
(79 |
) |
|
Recoveries
|
|
|
106 |
|
|
|
124 |
|
|
Provision
for loan losses
|
|
|
102 |
|
|
|
(135 |
) |
|
Balance,
end of period
|
|
$ |
8,587 |
|
|
$ |
6,407 |
|
PREMIER
FINANCIAL BANCORP, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED,
DOLLARS IN TABLES IN THOUSANDS, EXCEPT PER SHARE DATA)
The
Banks own stock of the Federal Home Loan Bank (FHLB) of Cincinnati, Ohio and the
FHLB of Pittsburgh, Pennsylvainia. This stock allows the Banks to borrow
advances from the FHLB.
Advances
from the FHLB at March 31, 2009 and December 31, 2008 were as
follows:
|
|
|
2009
|
|
|
2008
|
|
|
Payments
due at maturity in May 2010, fixed rate at rates from 6.25% to
6.64%, averaging 6.45%
|
|
$ |
4,000 |
|
|
$ |
4,000 |
|
|
Payments
due monthly with maturities from November 2011 to July 2012, fixed rates
from 4.10% to 4.40%, averaging 4.26%
|
|
|
563 |
|
|
|
607 |
|
|
Overnight
borrowed funds
|
|
|
2,000 |
|
|
|
3,000 |
|
|
|
|
$ |
6,563 |
|
|
$ |
7,607 |
|
|
|
|
|
|
|
|
|
|
|
Advances
are secured by the FHLB stock, certain pledged investment securities and
substantially all single family first mortgage loans of the participating
Banks. Scheduled principal payments due on advances during the five
years subsequent to March 31, 2009 are as follows:
|
2009
(remaining nine months)
|
|
$ |
2,134 |
|
|
2010
|
|
|
4,186 |
|
|
2011
|
|
|
186 |
|
|
2012
|
|
|
57 |
|
|
2013
|
|
|
- |
|
|
Thereafter
|
|
|
- |
|
|
|
|
$ |
6,563 |
|
|
|
|
|
|
|
PREMIER
FINANCIAL BANCORP, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED,
DOLLARS IN TABLES IN THOUSANDS, EXCEPT PER SHARE DATA)
The
Company’s principal source of funds for dividend payments to shareholders is
dividends received from the subsidiary Banks. Banking regulations
limit the amount of dividends that may be paid without prior approval of
regulatory agencies. Under these regulations, the amount of dividends
that may be paid in any calendar year is limited to the current year’s net
profits, as defined, combined with the retained net profits of the preceding two
years, subject to the capital requirements and additional restrictions as
discussed below. During 2009 the Banks could, without prior approval,
declare dividends of approximately $2.4 million plus any 2009 net profits
retained to the date of the dividend declaration.
The
Company and the subsidiary Banks are subject to various regulatory capital
requirements administered by the federal banking agencies. Failure to
meet minimum capital requirements can initiate certain mandatory and possibly
additional discretionary actions by regulators that, if undertaken, could have a
direct material effect on the Company’s financial statements. Under capital
adequacy guidelines and the regulatory framework for prompt corrective action,
the Banks must meet specific guidelines that involve quantitative measures of
their assets, liabilities, and certain off-balance sheet items as calculated
under regulatory accounting practices.
These
quantitative measures established by regulation to ensure capital adequacy
require the Company and Banks to maintain minimum amounts and ratios (set forth
in the following table) of Total and Tier I capital (as defined in the
regulations) to risk-weighted assets (as defined), and of Tier I capital (as
defined) to average assets (as defined). Management believes, as of March 31,
2009, that the Company and the Banks meet all quantitative capital adequacy
requirements to which they are subject.
Shown
below is a summary of regulatory capital ratios for the Company:
|
|
|
Mar
31,
2009
|
|
|
December
31,
2008
|
|
|
Regulatory
Minimum
Requirements
|
|
|
To
Be Considered
Well
Capitalized
|
|
|
Tier
I Capital (to Risk-Weighted Assets)
|
|
|
14.0%
|
|
|
|
14.0% |
|
|
|
4.0% |
|
|
|
6.0% |
|
|
Total
Capital (to Risk-Weighted Assets)
|
|
|
15.3% |
|
|
|
15.3% |
|
|
|
8.0% |
|
|
|
10.0% |
|
|
Tier
I Capital (to Average Assets)
|
|
|
8.7% |
|
|
|
8.7% |
|
|
|
4.0% |
|
|
|
5.0% |
|
As of
March 31, 2009, the most recent notification from the FRB categorized the
Company and its subsidiary Banks as well capitalized under the regulatory
framework for prompt corrective action. To be categorized as well capitalized,
the Company must maintain minimum Total risk-based, Tier I risk-based and Tier I
leverage ratios as set forth in the preceding table. There are no
conditions or events since that notification that management believes have
changed the Company’s category.
PREMIER
FINANCIAL BANCORP, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED,
DOLLARS IN TABLES IN THOUSANDS, EXCEPT PER SHARE DATA)
From
time to time the Company grants stock options to its employees. The
Company accounts for these option grants using SFAS No. 123R, “Share-Based
Payments,” which establishes accounting requirements for share-based
compensation to employees. Under SFAS 123R, the Company estimates the
fair value of the options at the time they are granted to employees and expenses
that fair value over the vesting period of the option grant.
On
February 18, 2009, 47,100 incentive stock options were granted out of the 2002
Plan at an exercise price of $6.55. These options vest in three equal
annual installments ending on February 18, 2012. February 20,
2008, 45,300 incentive stock options were granted out of the 2002 Plan at an
exercise price of $12.92, the closing market price of Premier on the grant
date. These options vest in three equal annual installments ending on
February 20, 2011. On January 17, 2007, 37,000 incentive stock
options were granted out of the 2002 Plan at an exercise price of
$14.22. These options vest in three equal annual installments ending
on January 17, 2010. On February 15, 2006, 35,250 incentive stock
options were granted out of the 2002 Plan at an exercise price of
$16.00. These options vested in three equal annual installments and
were fully vested on February 15, 2009.
The
fair value of the Company's employee stock options granted is estimated at the
date of grant using the Black-Scholes option-pricing model. This model requires
the input of highly subjective assumptions, changes to which can materially
affect the fair value estimate. Additionally, there may be other factors that
would otherwise have a significant effect on the value of employee stock options
granted but are not considered by the model. The assumptions used in the
Black-Scholes option-pricing model are as follows
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Risk-free
interest rate
|
|
|
2.74 |
% |
|
|
3.50 |
% |
|
|
4.78 |
% |
|
Expected
option life (yrs)
|
|
|
10.00 |
|
|
|
7.00 |
|
|
|
5.00 |
|
|
Expected
stock price volatility
|
|
|
19.26 |
% |
|
|
23.00 |
% |
|
|
25.00 |
% |
|
Dividend
yield
|
|
|
6.72 |
% |
|
|
3.10 |
% |
|
|
1.41 |
% |
|
Weighted
average fair value of
options
granted during the year
|
|
$ |
0.37 |
|
|
$ |
2.55 |
|
|
$ |
3.81 |
|
The
risk-free interest rate for the expected term of the option is based on the U.S.
Treasury yield in effect at the time of the grant. The expected
option life was estimated since there has been little option exercise
history. The expected stock price volatility is based on historical
volatilities of the Company’s common stock. The estimated dividend
yield is the dividend yield at the time of the option grant.
PREMIER
FINANCIAL BANCORP, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED,
DOLLARS IN TABLES IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 7
– STOCK COMPENSATION EXPENSE - continued
Compensation
expense of $14,000 was recorded for the first three months of 2009 while $26,000
was recorded for the first three months of 2008. Stock-based
compensation expense is recognized ratably over the requisite service period for
all awards. Unrecognized stock-based compensation expense related to stock
options totaled $63,000 at March 31, 2009. This unrecognized expense is expected
to be recognized over the next 34 months based on the vesting periods of the
options.
A
summary of the Company’s stock option activity and related information is
presented below for the three months ended March 31:
| |
|
- - - - - - -
2009 - - - - - - - -
|
|
|
- - - - - - -
2008 - - - - - - - -
|
|
|
|
|
|
|
|
Weighted
Average
Exercise
|
|
|
|
|
|
Weighted
Average
Exercise
|
|
|
|
|
Options
|
|
|
Price
|
|
|
Options
|
|
|
Price
|
|
|
Outstanding
at beginning of year
|
|
|
181,916 |
|
|
$ |
12.47 |
|
|
|
150,249 |
|
|
$ |
12.65 |
|
|
Grants
|
|
|
47,100 |
|
|
|
6.55 |
|
|
|
45,300 |
|
|
|
12.92 |
|
|
Exercises
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
Forfeitures
or expired
|
|
|
(11,567 |
) |
|
|
12.01 |
|
|
|
- |
|
|
|
- |
|
|
Outstanding
at March 31,
|
|
|
217,449 |
|
|
$ |
8.68 |
|
|
|
195,549 |
|
|
$ |
12.71 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable
at March 31,
|
|
|
131,631 |
|
|
|
|
|
|
|
117,433 |
|
|
|
|
|
|
Weighted
average remaining life of options
outstanding
|
|
|
5.7 |
|
|
|
|
|
|
|
7.4 |
|
|
|
|
|
|
Weighted
average fair value of options granted
during the year
|
|
$ |
0.37 |
|
|
|
|
|
|
$ |
2.55 |
|
|
|
|
|
Additional
information regarding stock options outstanding and exercisable at March 31,
2009, is provided in the following table:
| |
|
|
- - - - - - - - Outstanding - - - - - - -
-
|
|
|
- - - - - - - - Currently Exercisable - - - - - -
- -
|
|
|
Range
of Exercise Prices
|
|
|
Number
|
|
|
Weighted
Average Exercise Price
|
|
|
Aggregate
Intrinsic Value
|
|
|
Number
|
|
|
Weighted
Average Remaining Contractual Life
|
|
|
Weighted
Average Exercise Price
|
|
|
Aggregate
Intrinsic Value
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| $6.50
to $10.00 |
|
|
|
85,516 |
|
|
$ |
7.52 |
|
|
$ |
- |
|
|
|
38,416 |
|
|
|
4.4 |
|
|
$ |
8.70 |
|
|
$ |
- |
|
|
$10.01
to $12.50
|
|
|
|
29,333 |
|
|
|
11.62 |
|
|
|
- |
|
|
|
29,333 |
|
|
|
5.8 |
|
|
|
11.62 |
|
|
|
- |
|
|
$12.51
to $15.00
|
|
|
|
73,600 |
|
|
|
13.47 |
|
|
|
- |
|
|
|
34,882 |
|
|
|
8.2 |
|
|
|
13.69 |
|
|
|
- |
|
|
$15.01
to $17.50
|
|
|
|
29,000 |
|
|
|
16.00 |
|
|
|
- |
|
|
|
29,000 |
|
|
|
6.9 |
|
|
|
16.00 |
|
|
|
- |
|
|
Outstanding
- Mar 31, 2009
|
|
|
|
214,449 |
|
|
|
11.22 |
|
|
$ |
- |
|
|
|
131,631 |
|
|
|
6.3 |
|
|
|
12.28 |
|
|
$ |
- |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PREMIER
FINANCIAL BANCORP, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED,
DOLLARS IN TABLES IN THOUSANDS, EXCEPT PER SHARE DATA)
Financial
Accounting Standards Board (FASB) Statement 157 defines fair value as the
exchange price that would be received for an asset or paid to transfer a
liability (an exit price) in the principal or most advantageous market for the
asset or liability in an orderly transaction between market participants on the
measurement date. Statement 157 also establishes a fair value hierarchy which
requires an entity to maximize the use of observable inputs and minimize the use
of unobservable inputs when measuring fair value. The standard describes three
levels of inputs that may be used to measure fair value:
Level
1: Quoted prices (unadjusted) for identical assets or liabilities in active
markets that the entity has the ability to access as of the measurement
date.
Level
2: Significant other observable inputs other than Level 1 prices such as quoted
prices for similar assets or liabilities; quoted prices in markets that are not
active; or other inputs that are observable or can be corroborated by observable
market data.
Level
3: Significant unobservable inputs that reflect a company’s own assumptions
about the assumptions that market participants would use in pricing an asset or
liability.
When
possible, the Company looks to active and observable markets to price identical
assets or liabilities. When identical assets and liabilities are not traded in
active markets, the Company looks to observable market data for similar assets
and liabilities. However, certain assets and liabilities are not traded in
observable markets and the Company must use other valuation methods to develop a
fair value.
Premier’s
reported fair values of securities available for sale are determined by
obtaining quoted prices on nationally recognized securities exchanges (Level 1
inputs) or matrix pricing, which is a mathematical technique widely used in the
industry to value debt securities without relying exclusively on quoted prices
for the specific securities, but rather by relying on the securities’
relationship to other benchmark quoted securities (Level 2
inputs). The fair value of impaired loans is based on the fair value
of the underlying collateral, which is estimated through third party appraisals
or internal estimates of collateral values (Level 3 inputs).
Assets and Liabilities
Measured on a Recurring Basis
Assets
and liabilities measured at fair value on a recurring basis are summarized
below:
|
|
|
|
|
|
Fair
Value Measurements at March 31, 2009 Using
|
|
|
|
|
March
31, 2009
|
|
|
Quoted
Prices in Active Markets for Identical Assets
(Level
1)
|
|
|
Significant
Other Observable Inputs
(Level
2)
|
|
|
Significant
Unobservable Inputs
(Level
3)
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available
for sale securities
|
|
$ |
155,581 |
|
|
$ |
- |
|
|
$ |
155,581 |
|
|
$ |
- |
|
PREMIER
FINANCIAL BANCORP, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED,
DOLLARS IN TABLES IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 8
– FAIR VALUE - continued
|
|
|
|
|
|
Fair
Value Measurements at December 31, 2008 Using
|
|
|
|
|
Dec.
31, 2008
|
|
|
Quoted
Prices in Active Markets for Identical Assets
(Level
1)
|
|
|
Significant
Other Observable Inputs (Level 2)
|
|
|
Significant
Unobservable Inputs
(Level
3)
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available
for sale securities
|
|
$ |
175,741 |
|
|
$ |
- |
|
|
$ |
175,741 |
|
|
$ |
- |
|
Assets and Liabilities
Measured on a Non-Recurring Basis
Assets
and liabilities measured at fair value on a non-recurring basis are summarized
below:
|
|
|
|
|
|
Fair
Value Measurements at March 31, 2009 Using
|
|
|
|
|
March
31, 2009
|
|
|
Quoted
Prices in Active Markets for Identical Assets
(Level
1)
|
|
|
Significant
Other Observable Inputs (Level 2)
|
|
|
Significant
Unobservable Inputs
(Level
3)
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impaired
Loans
|
|
$ |
8,992 |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
8,992 |
|
|
|
|
|
|
|
Fair
Value Measurements at December 31, 2008 Using
|
|
|
|
|
Dec
31, 2008
|
|
|
Quoted
Prices in Active Markets for Identical Assets
(Level
1)
|
|
|
Significant
Other Observable Inputs (Level 2)
|
|
|
Significant
Unobservable Inputs
(Level
3)
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impaired
Loans
|
|
$ |
9,402 |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
9,402 |
|
Impaired
loans, which are measured for impairment using the fair value of the collateral
for collateral dependent loans, had a carrying amount of $10,981,000 at March
31, 2009 with a valuation allowance of $1,989,000 and a carrying amount of
$11,610,000 at December 31, 2008 with a valuation allowance of $2,208,000,
resulting in a negative provision for loan losses of $219,000 for the
period.
PREMIER
FINANCIAL BANCORP, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED,
DOLLARS IN TABLES IN THOUSANDS, EXCEPT PER SHARE DATA)
On
April 21, 2009, Premier received preliminary approval for the sale of up to
$24.1 million of preferred stock and related common warrants under the U.S.
Treasury Department’s Capital Purchase Program. This approval is
subject to satisfaction of standard closing conditions and the execution of
definitive agreements and closing documents. The amount is subject to
change based upon confirmation by the U.S. Treasury Department of Premier’s
eligible risk-weighted assets as of the latest calendar quarter prior to
closing. Issuance of Premier Preferred Stock Pursuant the U.S.
Treasury Department’s Capital Purchase Program is a condition precedent to
completing the acquisition of Abigail Adams National Bancorp announced on
December 31, 2008.
Under
the Capital Purchase Program, which is part of the Emergency Economic
Stabilization Act, the Treasury Department has agreed to buy preferred stock and
related common warrants in qualifying U.S. controlled banks, savings
associations, and certain bank and savings and loan holding companies engaged
only in financial activities.
Report
of Independent Registered Public Accounting Firm
To
the Board of Directors
Abigail
Adams National Bancorp, Inc.
We
have audited the accompanying consolidated balance sheets of Abigail Adams
National Bancorp, Inc. and subsidiaries (the “Company”) as of December 31, 2008
and 2007, and the related consolidated statements of operations, changes in
stockholders’ equity and cash flows for each of the three years in the period
ended December 31, 2008. These financial statements are the
responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our
audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis
for our opinion.
In
our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Abigail Adams
National Bancorp, Inc. and subsidiaries as of December 31, 2008 and 2007, and
the results of their operations and their cash flows for each of the three years
in the period ended December 31, 2008, in conformity with U.S. generally
accepted accounting principles.
As
discussed in Note 1 to the consolidated financial statements, effective January
1, 2008, the Company adopted Statement of Financial Accounting Standards No.
157, “Fair Value Measurements.”
We
were not engaged to examine management’s assessment of the effectiveness of the
Company’s internal control over financial reporting as of December 31, 2008
included in the accompanying Management’s Report on Internal Control Over
Financial Reporting and, accordingly, we do not express an opinion
thereon.
Frederick,
Maryland
April
15, 2009
ABIGAIL
ADAMS NATIONAL BANCORP, INC. AND SUBSIDIARIES
December
31, 2008 and 2007
(Dollars
in thousands)
|
|
|
2008
|
|
|
2007
|
|
|
Assets
|
|
|
|
|
|
|
|
Cash
and due from banks
|
|
$ |
14,166 |
|
|
$ |
15,567 |
|
|
Federal
funds sold
|
|
|
6,722 |
|
|
|
12,816 |
|
|
Interest-earning
deposits in other banks
|
|
|
2,659 |
|
|
|
20,380 |
|
|
Total
cash and cash equivalents
|
|
|
23,547 |
|
|
|
48,763 |
|
|
|
|
|
|
|
|
|
|
|
|
Investment
securities available for sale, at fair value
|
|
|
62,814 |
|
|
|
66,392 |
|
|
Investment
securities held to maturity, at amortized cost (market values of $3,226
and $13,269 for 2008 and 2007, respectively)
|
|
|
3,175 |
|
|
|
13,309 |
|
|
Loans
|
|
|
324,764 |
|
|
|
307,483 |
|
|
Less:
allowance for loan losses
|
|
|
(12,514 |
) |
|
|
(4,202 |
) |
|
Loans,
net
|
|
|
312,250 |
|
|
|
303,281 |
|
|
Premises
and equipment, net
|
|
|
4,994 |
|
|
|
4,985 |
|
|
Other
assets
|
|
|
16,901 |
|
|
|
9,145 |
|
|
Total
assets
|
|
$ |
423,681 |
|
|
$ |
445,875 |
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
and Stockholders' Equity
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
|
|
|
|
|
|
|
Noninterest-bearing
deposits
|
|
$ |
67,193 |
|
|
$ |
74,833 |
|
|
Interest-bearing
deposits
|
|
|
279,768 |
|
|
|
312,109 |
|
|
Total
deposits
|
|
|
346,961 |
|
|
|
386,942 |
|
|
Short-term
borrowings
|
|
|
24,477 |
|
|
|
8,494 |
|
|
Long-term
debt
|
|
|
26,132 |
|
|
|
15,120 |
|
|
Other
liabilities
|
|
|
1,830 |
|
|
|
3,880 |
|
|
Total
liabilities
|
|
|
399,400 |
|
|
|
414,436 |
|
|
Commitments
and contingencies (Notes 10, 12 and 14)
|
|
|
|
|
|
|
|
|
|
Stockholders'
equity:
|
|
|
|
|
|
|
|
|
|
Common
stock, $0.01 par value, authorized 5,000,000 shares; issued 3,492,633
shares in 2008 and 3,491,633 shares in 2007; outstanding 3,463,569 shares
in 2008 and 3,462,569 shares in 2007
|
|
|
35 |
|
|
|
35 |
|
|
Additional
paid-in capital
|
|
|
25,132 |
|
|
|
25,127 |
|
|
Retained
earnings
|
|
|
551 |
|
|
|
7,196 |
|
|
Treasury
stock, 29,064 shares in 2008 and 2007, at cost
|
|
|
(255 |
) |
|
|
(255 |
) |
|
Accumulated
other comprehensive loss
|
|
|
(1,182 |
) |
|
|
(664 |
) |
|
Total
stockholders’ equity
|
|
|
24,281 |
|
|
|
31,439 |
|
|
Total
liabilities and stockholders’ equity
|
|
$ |
423,681 |
|
|
$ |
445,875 |
|
ABIGAIL
ADAMS NATIONAL BANCORP, INC. AND SUBSIDIARIES
Years
Ended December 31, 2008, 2007 and 2006
(Dollars
in thousands except per share data)
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Interest
Income
|
|
|
|
|
|
|
|
|
|
|
Interest
and fees on loans
|
|
$ |
21,238 |
|
|
$ |
25,044 |
|
|
$ |
22,558 |
|
|
Interest
and dividends on investment securities – taxable
|
|
|
3,705 |
|
|
|
3,408 |
|
|
|
3,012 |
|
|
Other
interest income
|
|
|
359 |
|
|
|
1,799 |
|
|
|
575 |
|
|
Total
interest income
|
|
|
25,302 |
|
|
|
30,251 |
|
|
|
26,145 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
on deposits
|
|
|
8,638 |
|
|
|
12,672 |
|
|
|
8,010 |
|
|
Interest
on short-term borrowings
|
|
|
372 |
|
|
|
144 |
|
|
|
765 |
|
|
Interest
on long-term debt
|
|
|
791 |
|
|
|
783 |
|
|
|
633 |
|
|
Total
interest expense
|
|
|
9,801 |
|
|
|
13,599 |
|
|
|
9,408 |
|
|
Net
interest income
|
|
|
15,501 |
|
|
|
16,652 |
|
|
|
16,737 |
|
|
Provision
(credit) for loan losses
|
|
|
11,822 |
|
|
|
260 |
|
|
|
(232 |
) |
|
Net
interest income after provision (credit) for loan losses
|
|
|
3,679 |
|
|
|
16,392 |
|
|
|
16,969 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest
Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service
charges on deposit accounts
|
|
|
1,360 |
|
|
|
1,387 |
|
|
|
1,367 |
|
|
Other-than-temporary
impairment of available for sale securities
|
|
|
(655 |
) |
|
|
-- |
|
|
|
-- |
|
|
Other
income
|
|
|
261 |
|
|
|
238 |
|
|
|
763 |
|
|
Total
noninterest income
|
|
|
966 |
|
|
|
1,625 |
|
|
|
2,130 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest
Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries
and employee benefits
|
|
|
6,801 |
|
|
|
6,692 |
|
|
|
6,650 |
|
|
Occupancy
and equipment expense
|
|
|
2,366 |
|
|
|
2,289 |
|
|
|
2,235 |
|
|
Professional
fees
|
|
|
1,138 |
|
|
|
696 |
|
|
|
555 |
|
|
Data
processing fees
|
|
|
843 |
|
|
|
971 |
|
|
|
946 |
|
|
Other
operating expense
|
|
|
3,401 |
|
|
|
3,214 |
|
|
|
2,721 |
|
|
Total
noninterest expense
|
|
|
14,549 |
|
|
|
13,862 |
|
|
|
13,107 |
|
|
(Loss)
income before provision for income taxes
|
|
|
(9,904 |
) |
|
|
4,155 |
|
|
|
5,992 |
|
|
Income
tax (benefit) provision
|
|
|
(4,125 |
) |
|
|
1,096 |
|
|
|
2,296 |
|
|
Net
(loss) income
|
|
$ |
(5,779 |
) |
|
$ |
3,059 |
|
|
$ |
3,696 |
|
|
(Loss)
Earnings per Share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
and diluted
|
|
$ |
(1.67 |
) |
|
$ |
0.88 |
|
|
$ |
1.07 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ABIGAIL
ADAMS NATIONAL BANCORP, INC. AND SUBSIDIARIES
Years
Ended December 31, 2008, 2007 and 2006
|
(Dollars
in thousands except per share data)
|
|
Common
Stock
|
|
|
Additional
Paid-in
Capital
|
|
|
Retained
Earnings
|
|
|
Treasury
Stock
|
|
|
Accumulated
Other
Comprehensive
Income
(Loss)
|
|
|
Total
|
|
|
Balance
at December 31, 2005
|
|
$ |
35 |
|
|
$ |
24,865 |
|
|
$ |
3,903 |
|
|
$ |
(98 |
) |
|
$ |
(652 |
) |
|
$ |
28,053 |
|
|
Comprehensive
income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
|
-- |
|
|
|
-- |
|
|
|
3,696 |
|
|
|
-- |
|
|
|
-- |
|
|
|
3,696 |
|
|
Unrealized
gains during the period of $152 on investment securities available for
sale, net of tax expense of $69
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
|
|
83 |
|
|
|
83 |
|
|
Unrealized
net actuarial losses during the period of ($99) on pension plan, net of
tax benefit of ($34)
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
|
|
(65 |
) |
|
|
(65 |
) |
|
Total
comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,714 |
|
|
Acquisition
and issuance of shares for ESOP
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
|
|
(112 |
) |
|
|
-- |
|
|
|
(112 |
) |
|
Retired
shares
|
|
|
-- |
|
|
|
(12 |
) |
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
|
|
(12 |
) |
|
Dividends
declared ($0.50 per share)
|
|
|
-- |
|
|
|
-- |
|
|
|
(1,731 |
) |
|
|
-- |
|
|
|
-- |
|
|
|
(1,731 |
) |
|
Final
purchase price adjustments related to Consolidated Bank and Trust
acquisition
|
|
|
-- |
|
|
|
270 |
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
|
|
270 |
|
|
Balance
at December 31, 2006
|
|
$ |
35 |
|
|
$ |
25,123 |
|
|
$ |
5,868 |
|
|
$ |
(210 |
) |
|
$ |
(634 |
) |
|
$ |
30,182 |
|
|
Comprehensive
income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
|
-- |
|
|
|
-- |
|
|
|
3,059 |
|
|
|
-- |
|
|
|
-- |
|
|
|
3,059 |
|
|
Unrealized
losses during the period of ($336) on investment securities available for
sale, net of tax benefit of ($147)
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
|
|
(189 |
) |
|
|
(189 |
) |
|
Unrealized
net actuarial gain during the period of $241 on pension plan, net of tax
expense of $82
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
|
|
159 |
|
|
|
159 |
|
|
Total
comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,029 |
|
|
Issuance
of shares under stock option program
|
|
|
-- |
|
|
|
4 |
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
|
|
4 |
|
|
Acquisition
and issuance of shares for ESOP
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
|
|
(45 |
) |
|
|
-- |
|
|
|
(45 |
) |
|
Dividends
declared ($0.50 per share)
|
|
|
-- |
|
|
|
-- |
|
|
|
(1,731 |
) |
|
|
-- |
|
|
|
-- |
|
|
|
(1,731 |
) |
|
Balance
at December 31, 2007
|
|
$ |
35 |
|
|
$ |
25,127 |
|
|
$ |
7,196 |
|
|
$ |
(255 |
) |
|
$ |
(664 |
) |
|
$ |
31,439 |
|
|
Comprehensive
loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
|
-- |
|
|
|
-- |
|
|
|
(5,779 |
) |
|
|
-- |
|
|
|
-- |
|
|
|
(5,779 |
) |
|
Unrealized
losses during the period of ($363) on investment securities available for
sale and a tax benefit decrease of ($126)
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
|
|
(489 |
) |
|
|
(489 |
) |
|
Reclassification
adjustment for settlement loss of $43 during the period on pension plan
termination recognized in loss, net of tax benefit
of $14
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
|
|
(29 |
) |
|
|
(29 |
) |
|
Total
comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(6,297 |
) |
|
Issuance
of shares under stock option program
|
|
|
-- |
|
|
|
5 |
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
|
|
5 |
|
|
Dividends
declared at $0.25 per share
|
|
|
-- |
|
|
|
-- |
|
|
|
(866 |
) |
|
|
-- |
|
|
|
-- |
|
|
|
(866 |
) |
|
Balance
at December 31, 2008
|
|
$ |
35 |
|
|
$ |
25,132 |
|
|
$ |
551 |
|
|
$ |
(255 |
) |
|
$ |
(1,182 |
) |
|
$ |
24,281 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ABIGAIL
ADAMS NATIONAL BANCORP, INC. AND SUBSIDIARIES
Years
Ended December 31, 2008, 2007 and 2006
(In
thousands)
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
|
|
|
|
Net
(loss) income
|
|
$ |
(5,779 |
) |
|
$ |
3,059 |
|
|
$ |
3,696 |
|
|
Adjustments
to reconcile net (loss) income to net cash provided by operating
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision
(credit) for loan losses
|
|
|
11,822 |
|
|
|
260 |
|
|
|
(232 |
) |
|
Depreciation
|
|
|
611 |
|
|
|
589 |
|
|
|
541 |
|
|
Accretion
and amortization of deferred loan fees and costs, net
|
|
|
113 |
|
|
|
(21 |
) |
|
|
(560 |
) |
|
Accretion
and amortization of purchase accounting adjustments, net
|
|
|
(107 |
) |
|
|
(102 |
) |
|
|
(34 |
) |
|
Gain
on sale of guaranteed portion of SBA loans
|
|
|
(39 |
) |
|
|
(43 |
) |
|
|
(386 |
) |
|
Net
premium amortization (discount accretion) on investment
securities
|
|
|
20 |
|
|
|
2 |
|
|
|
(185 |
) |
|
Other-than-temporary
impairment of available for sale securities
|
|
|
655 |
|
|
|
-- |
|
|
|
-- |
|
|
Other
real estate owned valuation adjustment
|
|
|
131 |
|
|
|
-- |
|
|
|
-- |
|
|
Loss
on the sale of foreclosed and other assets
|
|
|
19 |
|
|
|
29 |
|
|
|
-- |
|
|
Deferred
income tax benefits
|
|
|
(3,697 |
) |
|
|
(732 |
) |
|
|
(91 |
) |
|
Increase
in other assets
|
|
|
(693 |
) |
|
|
(144 |
) |
|
|
(301 |
) |
|
Contribution
to pension plan
|
|
|
-- |
|
|
|
-- |
|
|
|
(700 |
) |
|
(Decrease)
increase in other liabilities
|
|
|
(2,050 |
) |
|
|
1,056 |
|
|
|
190 |
|
|
Net
cash provided by operating activities
|
|
|
1,006 |
|
|
|
3,953 |
|
|
|
1,938 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds
from maturities of investment securities held to maturity
|
|
|
11,500 |
|
|
|
4,000 |
|
|
|
1,000 |
|
|
Proceeds
from maturities of investment securities available for
sale
|
|
|
46,615 |
|
|
|
16,500 |
|
|
|
11,780 |
|
|
Proceeds
from repayment of mortgage-backed securities held to
maturity
|
|
|
642 |
|
|
|
418 |
|
|
|
227 |
|
|
Proceeds
from repayment of mortgage-backed securities available for
sale
|
|
|
1,805 |
|
|
|
1,062 |
|
|
|
822 |
|
|
Proceeds
from the sale of foreclosed and other assets
|
|
|
264 |
|
|
|
282 |
|
|
|
-- |
|
|
Purchase
of investment securities held to maturity
|
|
|
(2,011 |
) |
|
|
(3,734 |
) |
|
|
(1,455 |
) |
|
Purchase
of investment securities available for sale
|
|
|
(45,876 |
) |
|
|
(35,218 |
) |
|
|
(4,995 |
) |
|
Purchase
of FHLB and FRB stock
|
|
|
(18,456 |
) |
|
|
(1,534 |
) |
|
|
(2,532 |
) |
|
Redemption
of FHLB stock
|
|
|
17,689 |
|
|
|
892 |
|
|
|
2,760 |
|
|
Net
increase in loans
|
|
|
(23,250 |
) |
|
|
(1,279 |
) |
|
|
(58,667 |
) |
|
Purchase
of collateral and build out cost on foreclosed assets
|
|
|
(676 |
) |
|
|
-- |
|
|
|
-- |
|
|
Purchase
of premises and equipment, net
|
|
|
(621 |
) |
|
|
(670 |
) |
|
|
(700 |
) |
|
Net
cash used in investing activities
|
|
|
(12,375 |
) |
|
|
(19,281 |
) |
|
|
(51,760 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
(decrease) increase in transaction and savings deposits
|
|
|
(43,203 |
) |
|
|
4,977 |
|
|
|
(524 |
) |
|
Net
increase in time deposits
|
|
|
3,222 |
|
|
|
18,375 |
|
|
|
72,018 |
|
|
Net
increase (decrease) in short-term borrowings
|
|
|
15,983 |
|
|
|
6,116 |
|
|
|
(5,878 |
) |
|
Proceeds
from long-term debt
|
|
|
16,132 |
|
|
|
10,000 |
|
|
|
-- |
|
|
Repayment
of long-term debt
|
|
|
(5,120 |
) |
|
|
(1,168 |
) |
|
|
(4,925 |
) |
|
Proceeds
from issuance of common stock for stock option programs
|
|
|
5 |
|
|
|
4 |
|
|
|
-- |
|
|
Retired
common stock
|
|
|
-- |
|
|
|
-- |
|
|
|
(12 |
) |
|
Purchased
treasury stock
|
|
|
-- |
|
|
|
(45 |
) |
|
|
(112 |
) |
|
Cash
dividends paid to common stockholders
|
|
|
(866 |
) |
|
|
(1,731 |
) |
|
|
(1,731 |
) |
|
Net
cash (used) provided by financing activities
|
|
|
(13,847 |
) |
|
|
36,528 |
|
|
|
58,836 |
|
|
Net
(decrease) increase in cash and cash equivalents
|
|
|
(25,216 |
) |
|
|
21,200 |
|
|
|
9,014 |
|
|
Cash
and cash equivalents at beginning of year
|
|
|
48,763 |
|
|
|
27,563 |
|
|
|
18,549 |
|
|
Cash
and cash equivalents at end of year
|
|
$ |
23,547 |
|
|
$ |
48,763 |
|
|
$ |
27,563 |
|
ABIGAIL
ADAMS NATIONAL BANCORP, INC. AND SUBSIDIARIES
Consolidated
Statements of Cash Flows
Years
Ended December 31, 2008, 2007 and 2006
(In
thousands)
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Supplemental
disclosures:
|
|
|
|
|
|
|
|
|
|
|
Interest
paid on deposits and borrowings
|
|
$ |
11,064 |
|
|
$ |
13,279 |
|
|
$ |
8,727 |
|
|
Income
taxes paid
|
|
|
1,078 |
|
|
|
1,662 |
|
|
|
2,203 |
|
|
Non-cash
transfer of loans to foreclosed assets
|
|
|
2,406 |
|
|
|
1,410 |
|
|
|
-- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ABIGAIL
ADAMS NATIONAL BANCORP, INC. AND SUBSIDIARIES
Note
1 Summary of Significant Accounting Policies
Abigail
Adams National Bancorp, Inc. (the “Company”) is a two-bank holding company that
provides its customers with banking and non-banking financial services through
its principal wholly-owned subsidiaries, The Adams National Bank (“ANB”) and
Consolidated Bank and Trust (“CB&T”) and together the “Banks”. The Banks
offer various loan, deposit, and other financial service products to their
customers. The Banks’ customers include individuals, not-for-profit, and
commercial enterprises. Their principal market areas encompass the cities of
Washington, D.C., Richmond and Hampton, Virginia, and their surrounding
metropolitan areas.
The
Company prepares its consolidated financial statements on the accrual basis and
in conformity with accounting principles generally accepted in the United States
of America. The more significant accounting policies are explained
below. As used herein, the term the Company includes the Banks,
unless the context otherwise requires.
(a) Principles
of Consolidation
The
consolidated financial statements include the accounts of the Company and the
Banks. All significant intercompany accounts and transactions have been
eliminated in consolidation.
(b) Cash
and Cash Equivalents
The
Company has defined cash and cash equivalents as those amounts included in “Cash
and due from banks,” “Federal funds sold,” and “Interest-earning deposits in
other banks.” Federal funds sold generally mature in one day. Cash flows from
loans and deposits are reported net. The Company maintains amounts due from
banks and Federal funds sold which, at times, may exceed Federally insured
limits. The Company has not experienced any losses from such
concentrations.
(c) Securities
Management
determines the appropriate classification of securities at the time of
purchase. Securities which the Company has the ability and the intent
to hold until maturity are classified as investment securities held to maturity
and are reported at amortized cost. Investment securities which are not
classified as held to maturity or trading account assets are classified as
available for sale and are reported at fair value with unrealized gains and
losses reported in accumulated other comprehensive income (loss). Unrealized
gains and losses reflect the difference between fair market value and amortized
cost of the individual securities as of the reporting date. The market value of
securities is generally based on quoted market prices or dealer quotes. The
Company does not maintain a trading account. Declines in the fair value of held
to maturity and available for sale securities below their cost that are deemed
to be other than temporary are reflected in earnings as realized losses. In
estimating other-than-temporary impairment losses, management considers (1) the
length of time and the extent to which the fair value has been less than cost,
(2) the financial condition and near-term prospects of the issuer, and (3) the
intent and ability of the Company to retain its investment in the issuer for a
period of time sufficient to allow for any anticipated recovery in fair
value. Gains and losses on the sale of securities are recorded on the
trade date and are
determined
using the specific identification method. Premiums and discounts are
amortized using a method which approximates the effective interest method over
the term of the security.
The
investment securities portfolio is evaluated for other-than-temporary impairment
(“OTTI”) by segregating the portfolio into two general segments and applying the
appropriate OTTI model. Investment securities classified as available for sale
or held-to-maturity are generally evaluated for OTTI under Statement of
Financial Accounting Standards (“SFAS”) No. 115, Accounting for Certain Investments
in Debt and Equity Securities. However, certain purchased
beneficial interests, including non-agency mortgage-backed securities,
asset-backed securities, and collateralized debt obligations, that had credit
ratings at the time of purchase of below AA are evaluated using the model
outlined in EITF Issue No. 99-20, Recognition of Interest Income and
Impairment on Purchased Beneficial Interests and Beneficial Interests that
Continue to be Held by a Transfer in Securitized Financial
Assets. Securities determined to not have OTTI under EITF
99-20 are required to be evaluated using the guidance of SFAS No.
115.
In
determining other than temporary losses under the SFAS No. 115 model, management
considers many factors, including: (1) the length of time and the extent to
which the fair value has been less than cost, (2) the financial condition and
near-term prospects of the issuer, (3) whether the market decline was affected
by macroeconomic conditions, and (4) the intent and ability of the Company to
retain its investment in the issuer for a period of time sufficient to allow for
any anticipated recovery in fair value. The assessment of whether an
other-than-temporary decline exists involves a high degree of subjectivity and
judgment and is based on the information available to management at a point in
time.
The
second segment of the portfolio uses the OTTI guidance provided by EITF 99-20
that is specific to purchased beneficial interests that, on the purchase date,
were rated below AA or those purchased at a significant premium (generally 10%
or more) which might result in the Company not recovering substantially all of
its investment. Under the EITF 99-20 model, the Company compares the present
value of the remaining cash flows as estimated at the purchase date to the
current expected remaining cash flows. An OTTI is deemed to have occurred if
there has been an adverse change in the remaining expected future cash
flows.
After
a debt security classified as available for sale has been written down for
other-than-temporary impairment, the Company accretes the resulting discount
over the remaining life of the debt security based on the amount and timing of
future estimated cash flows. In each period subsequent to the write-down, an
unrealized holding gain or loss is determined by comparing the available for
sale security’s fair value with its new amortized cost basis. Any recovery in
fair value is recorded in earnings when the security is sold.
(d) Loans
The
Company originates commercial, commercial real estate and consumer loans in the
Washington D.C. and Richmond and Hampton, Virginia metropolitan areas. Loans
that management has the intent and ability to hold for the foreseeable future or
until maturity or pay-off are stated at the amount of unpaid principal, adjusted
for deferred loan fees and origination costs, and reduced by an allowance for
loan losses. Interest income is accrued
on
the unpaid principal balance. Loan origination fees, net of certain direct
origination costs, are deferred and recognized as an adjustment of the related
loan yield using the interest method.
The
accrual of interest is discontinued at the time a loan becomes 90 days
delinquent, unless the credit is well-secured and in the process of collection.
In all cases, loans are placed on nonaccrual or charged-off at an earlier date
if collection of principal or interest is considered doubtful. All interest
accrued but not collected for loans placed on nonaccrual or charged-off is
reversed against interest income. The interest on these loans is accounted for
on the cash-basis or cost-recovery method, until qualifying for the return to
accrual status. Loans are returned to accrual status when all the principal and
interest amounts contractually due are brought current and future payments are
reasonably assured.
(e) Allowance
for Loan Losses
The
allowance for loan losses, a material estimate susceptible to significant change
in the near-term, is maintained at a level that management determines is
adequate to absorb inherent losses in the loan portfolio. The allowance for loan
losses is evaluated on a regular basis by management and is based upon
management’s periodic review of the collectibility of the loans in light of
historical experience, the nature and volume of the loan portfolio, adverse
situations that may affect the borrower’s ability to repay, estimated value of
any underlying collateral and prevailing economic conditions. This evaluation is
inherently subjective as it requires estimates that are susceptible to
significant revision as more information becomes available. In addition, various
regulatory agencies, as an integral part of their examination process,
periodically review the Banks’ allowance for loan losses and may require the
Banks to make changes to the allowance based on their judgments about
information available to them at the time of their examinations.
The
allowance for loan losses is established through a provision for loan losses
charged to operating expense. Loans are charged against the allowance for loan
losses, when management believes that collectibility of the principal is
unlikely. Subsequent recoveries, if any, are credited to the
allowance.
A
loan is impaired when it is probable, based upon current information and events,
the Company will be unable to collect all contractual principal and interest
payments due in accordance with the terms of the loan agreement. Impaired loans
are valued based on the fair value of the related collateral, if the loans are
collateral dependent. For all other impaired loans, the specific reserves
approximate the present values of expected future cash flows discounted at the
loan’s effective interest rate. The amount of the impairment, if any, and any
subsequent changes are included in the allowance for loan losses.
The allowance consists of specific, general and
unallocated components. The specific component relates to loans identified for
impairment testing and generally meeting the Company’s internal criteria for
classification such as doubtful, substandard or special mention. For such loans
that are classified as impaired, an allowance is established when the discounted
cash flows (or collateral value or observable market price) of the impaired loan
is lower than the carrying value of that loan. The general component covers
non-classified
loans
and those loans classified as not impaired and is based on historical loss
experience adjusted for qualitative factors. These factors consider changes in
nonperforming and past-due loans, concentrations of loans to specific borrowers
and industries, general and regional economic conditions, as well as other
factors existing at the determination date. The qualitative factors are
subjective and require a high degree of management judgment. An unallocated
component is maintained to cover uncertainties that could affect management’s
estimate of probable losses. The unallocated component of the allowance reflects
the margin of imprecision inherent in the underlying assumptions used in the
methodologies for estimating specific and general losses in the
portfolio.
(f) Loan
Origination Fees and Costs
Loan
origination fees, net of costs directly attributable to loan originations, are
deferred and recognized over the estimated lives of the loans using the interest
method as an adjustment to the related loan’s yield. Deferred fees and costs are
not amortized during periods in which interest income is not being recognized
because of concerns about the realization of loan principal or
interest.
(g) Foreclosed
Assets
Assets
acquired through, or in lieu of, loan foreclosure are held for sale and are
initially recorded at fair value less cost to sell at the date of foreclosure,
establishing a new cost basis. Subsequent to foreclosure, valuations
are periodically performed by management and the assets are carried at the lower
of carrying amount or fair value less cost to sell. Revenue and
expenses from operations and changes in the valuation allowance are included in
net expenses from foreclosed assets. Foreclosed assets net of a valuation
allowance totaled $4.1 million at December 31, 2008 and $1.4 million at December
31, 2007.
(h) Transfers
of Financial Assets
Transfers
of financial assets are accounted for as sales when control over the assets has
been surrendered. Control over transferred assets is deemed to be
surrendered when (1) the assets have been isolated from the Company, (2) the
transferee obtains the right to pledge or exchange the transferred assets and no
condition both constrains the transferee from taking advantage of that right and
provides more than a trivial benefit for the transferor, and (3) the transferor
does not maintain effective control over the transferred assets through either
(a) an agreement that both entitles and obligates the transferor to repurchase
or redeem the assets before maturity or (b) the ability to unilaterally cause
the holder to return specific assets, other than through a cleanup
call.
(i) Premises
and Equipment
Premises
and equipment are carried at cost less accumulated depreciation and include
additions that materially extend the useful lives of existing premises and
equipment. All other maintenance and repair expenditures are expensed as
incurred. Depreciation of equipment is computed using the estimated useful lives
of the respective assets on the straight-line basis. Amortization of leasehold
improvements is amortized on a straight-line basis over the estimated useful
lives of the respective assets or the terms of the respective leases, whichever
is shorter.
(j) Impairment
of Assets
Long-lived
assets, which are held and used by the Company, are reviewed for impairment
whenever events or changes in circumstances indicate that the carrying amount of
an asset may not be recoverable. If impairment is indicated by that
review, the asset is written down to its estimated fair value through a charge
to noninterest expense.
(k) Federal
Home Loan Bank Stock
The
Banks, as members of the Federal Home Loan Bank (FHLB) system, are required to
maintain an investment in capital stock of the FHLB in an amount equal to the
greater of 1% of their outstanding home loans or 5% of advances from the
FHLB. No ready market exists for the FHLB stock, and it has no quoted
market value. The FHLB stock is included in other assets and is
carried at cost which equals the redemption value. At December 31,
2008, ANB owned 18,462 shares recorded at a cost of $1,846,200 and CB&T
owned 1,597 shares recorded at a cost of $159,700. The Company views
its investment in the FHLB stock as a long-term
investment. Accordingly, when evaluating for impairment, the value is
determined based on the ultimate recovery of the par value rather than
recognizing temporary declines in value. The determination of whether
a decline affects the ultimate recovery is influenced by criteria such as: 1)
the significance of the decline in net assets of the Atlanta FHLB as compared to
the capital stock amount and length of time a decline has persisted; 2) impact
of legislative and regulatory changes on the Atlanta FHLB and 3) the liquidity
position of the Atlanta FHLB. At December 31, 2008 and 2007, the
Atlanta FHLB had retained earnings of $434.9 million and $468.8 million,
respectively. The Atlanta FHLB did not pay dividends in the fourth
quarter of 2008 primarily because of an other-than-temporary impairment loss of
$186.1 million on their MBS portfolio. They expect to make future dividend
determinations at each quarter end after quarterly results are
known. The Atlanta FHLB was in compliance with the Finance Agency’s
regulatory capital rules and requirements at December 31, 2008 and we did not
consider our investment in FHLB stock to be impaired as of this
date.
(l) Earnings
(Loss) Per Share
Basic
earnings per share computations are based upon the weighted average number of
shares outstanding during the periods. Diluted earnings per share computations
in 2007 and 2006 were determined using the treasury stock method and based upon
the weighted average number of shares outstanding during the period plus the
dilutive effect of outstanding stock options. The following table provides a
reconciliation of the number of shares between the computation of basic EPS and
diluted EPS for the periods ended December 31, 2007 and 2006. For the
period ending December 31, 2008, the dilutive effects of options are excluded
from the computation of the loss per share because the inclusion is
antidilutive.
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Weighted
average shares
|
|
|
3,463,323 |
|
|
|
3,462,274 |
|
|
|
3,462,126 |
|
|
Effect
of dilutive stock options
|
|
|
-- |
|
|
|
3,684 |
|
|
|
3,950 |
|
|
Dilutive
potential average common shares
|
|
|
3,463,323 |
|
|
|
3,465,958 |
|
|
|
3,466,076 |
|
(m) Stock-Based
Compensation Plans
The
Company accounts for its stock-based compensation awards in accordance with
Statement of Financial Accounting Standards (“SFAS”) No. 123R, Share-Based Payment
(“Statement 123R”). Statement 123R requires public companies to recognize
compensation expense related to stock-based
compensation
awards over the period during which an employee is required to provide service
for the award. Compensation expense is equal to the fair value of the award, net
of estimated forfeitures, and is recognized over the vesting period of such
awards. For additional information on the Company’s stock-based compensation,
see Note 17 to the consolidated financial statements.
(n) Comprehensive
Income
Accounting
principles generally require that recognized revenue, expenses, gains, and
losses be included in income. Certain changes in assets and
liabilities, such as unrealized gains and losses on available for sale
securities or pension plan unfunded liabilities, are reported as a separate
component of the equity section of the balance sheet. Such items,
along with net income, are components of comprehensive income.
(o) Risks
and Uncertainties
The
Company is subject to competition from other financial institutions, and is also
subject to the regulations of certain Federal agencies and undergoes periodic
examination by those regulatory authorities.
Most
of the Company’s activities are with customers located within Washington, DC,
Richmond, Virginia and their surrounding metropolitan areas. Note 6
discusses the types of securities in which the Company invests. Note
7 discusses the types of lending in which the Company engages. The
Company does not have any significant concentrations to any one industry or
customer.
In
preparing the consolidated financial statements, management is required to make
estimates and assumptions that affect the reported amounts of assets and
liabilities, and disclosure of contingent assets and liabilities, as of the date
of the balance sheet and revenues and expenses for the reporting period. Actual
results could differ significantly from these estimates.
Material
estimates that are particularly susceptible to significant change in the
near-term relate to the determination of the allowance for loan losses, the
valuation of deferred tax assets, the valuation of real estate acquired in
connection with foreclosures or in satisfaction of loans, the determination of
other-than-temporary impairment for securities, and the fair value disclosures
of financial instruments. In connection with the determination of the allowances
for loan losses and other real estate owned, management periodically obtains
independent appraisals for significant properties owned or serving as collateral
for loans.
(p) Income
Taxes
The
Company records a provision for income taxes based upon the amounts of current
taxes payable (or refundable) and the change in net deferred tax assets or
liabilities during the year. Deferred tax assets and liabilities are recognized
for the tax effects of differing carrying values of assets and liabilities for
tax and financial statement reporting purposes that will reverse in future
periods. Deferred tax assets and liabilities are included in the consolidated
financial statements at currently enacted income tax rates applicable to the
period in which the deferred tax assets and liabilities are expected to be
realized or settled. As changes in tax laws or rates are enacted, deferred tax
assets and liabilities are adjusted through the provision for income taxes.
Valuation allowances are established when necessary to reduce deferred tax
assets to the amount expected to be realized. It is the Company’s
policy to recognize interest and penalties related to unrecognized tax
liabilities within noninterest expense in the statements of
operations.
As
changes in tax laws or rates are enacted, deferred tax assets and liabilities
are adjusted through the provision for income taxes. Valuation allowances are
established when necessary to reduce deferred tax assets to the amount expected
to be realized. It is the Company’s policy to recognize interest and
penalties related to unrecognized tax liabilities within noninterest expense in
the statements of operations.
(q) Fair
Value
Effective
January 1, 2008, the Company adopted SFAS 157, Fair Value Measurements,
which provides a framework for measuring fair value under generally accepted
accounting principles. SFAS 157 applies to all financial instruments
that are being measured and reported on a fair value basis. The Company also
adopted SFAS 159, The Fair
Value Option for Financial Assets and Financial Liabilities, on January
1, 2008. SFAS 159 allows an entity the irrevocable option to elect
fair value for the initial and subsequent measurement of certain financial
assets on a contract-by-contract basis. SFAS 159 requires that the
difference between the carrying value before election of the fair value option
and the fair value of these instruments be recorded as an adjustment to
beginning retained earnings in the period of adoption. The Company
presently elected not to report any of its existing financial assets
or liabilities at fair value and consequently did not have any adoption related
adjustments.
For
additional information on the fair value of financial instruments, see Note 20
to the Consolidated Financial Statements.
(r) Recent
Accounting Pronouncements
SFAS
Statement No. 157, Fair Value
Measurements, became effective for fiscal years beginning after November
15, 2007. However, the Financial Accounting Standards Board (“FASB”) has
deferred the effective date in SFAS 157 for nonfinancial assets and nonfinancial
liabilities (except for items that are recognized or disclosed at fair value in
the financial statements on a recurring basis - at least annually) with the
issuance of FASB Staff Position (“FSP”) FAS 157-2, Effective Date of FASB Statement No.
157, to fiscal years beginning after November 15, 2008. This deferral
does not apply to entities that have issued interim or annual financial
statements that include application of the measurement and disclosure provisions
of Statement 157. This FSP lists examples of items for which deferral would
apply, including nonfinancial assets and nonfinancial liabilities initially
measured at fair value in a business combination or other new basis event, but
not measured at fair value in subsequent periods (nonrecurring fair value
measures). Financial Assets and Financial Liabilities are defined in FASB
Statement No. 107, Disclosures
About Fair Value of Financial Instruments. The Company does not expect
that adoption of the FSP will have a material impact on its financial condition
or results of operations.
FSP
157-3, Determining the Fair
Value of a Financial Asset When the Market for That Asset Is Not Active,
was issued on October 10, 2008, and became effective upon issuance. This FSP
applies to financial assets within the scope of accounting pronouncements that
require or permit fair value measurements in accordance with Statement 157 and
clarifies the application of Statement 157 in a market that is not active. This
FSP was effective upon issuance, including prior periods for which
financial
statements have not been issued. Revisions resulting from a change in the
valuation technique or its application are accounted for as a change in
accounting estimate (FASB Statement No. 154, Accounting Changes and Error
Corrections). The disclosure provisions of Statement 154 for a change in
accounting estimate are not required for revisions resulting from a change in
valuation technique or its application. The adoption of this FSP did not have a
material impact on the Company’s financial condition or results of
operations.
FSP
No. EITF 99-20-1 amends the impairment guidance in EITF Issue No. 99-20, Recognition of Interest Income and
Impairment on Purchased Beneficial Interests and Beneficial Interests That
Continue to Be Held by a Transferor in Securitized Financial Assets, to
achieve more consistent determination of whether an other-than-temporary
impairment has occurred. The FSP also retains and emphasizes the objective of an
other-than-temporary impairment assessment and the related disclosure
requirements in FASB statement No. 115, Accounting for Certain Investments
in Debt and Equity Securities, and other related guidance. The objective
of an other-than-temporary impairment analysis is to determine whether it is
probable that the holder will realize some portion of the unrealized loss on an
impaired security. U.S. GAAP indicates that the holder may ultimately realize
the unrealized loss on the impaired security because, for example, (a) it is
probable that the holder will not collect all of the contractual or estimated
cash flows, considering both the timing and amount or (b) the holder lacks the
intent and ability to hold the security to recovery. In making its
other-than-temporary impairment assessment, the holder should consider all
available information relevant to the ability to collect the security, including
information about past events, current conditions, and the value of underlying
collateral. The EITF is effective for interim and annual reporting periods
ending after December 15, 2008, and shall be applied prospectively.
Retrospective application to a prior interim or annual reporting period is not
permitted. The Company evaluates securities for other-than-temporary impairment
(“OTTI”) at least on a quarterly basis, and more frequently when economic or
market concern warrants such evaluation. OTTI charges amounted to $655,000
during 2008. Additional OTTI charges may be realized in the future as the result
of changes in the financial condition and near-term prospects of the issuer or
the inability of the Company to retain its investment in the issuer for a period
of time sufficient to allow for any anticipated recovery in fair
value.
In
December 2007, FASB issued SFAS No. 141 (R), Business Combinations, and
SFAS No. 160, Noncontrolling
Interests in Consolidated Financial Statements. SFAS No. 141 revises the
previous statement on business combinations and requires the acquiring entity in
a business combination to recognize all (and only) the assets acquired and
liabilities assumed in the transaction; establishes the acquisition-date fair
value as the measurement objective for all assets acquired and liabilities
assumed; and requires the acquirer to disclose to investors and other users all
of the financial effect of the business combination. As these Statements applies
prospectively to business combinations for which the acquisition date is on or
after the beginning of the first annual reporting period beginning on or after
December 15, 2008, this Statement was not applicable to the Company for the year
ended December 31, 2008. SFAS No. 160 requires all entities to report
noncontrolling (minority) interests in subsidiaries in the same way – as equity
in the consolidated financial statements.
On
April 9, 2009, the Financial Accounting Standards Board (FASB) recently issued
three amendments to the fair value measurement, disclosure and
other-than-temporary impairment standards:
· FASB
Staff Position (FSP) No. FAS 157-4, Determining Fair Value When the
Volume and Level of Activity for the Asset or Liability Have Significantly
Decreased and Identifying Transactions That Are Not Orderly
· FSP
No. FAS 115-2 and FAS 124-2, Recognition and Presentation of
Other-Than-Temporary Impairments
· FSP
No. FAS 107-1 and APB 28-1, Interim Disclosures about Fair Value
of Financial Instruments
FASB
Statement 157, Fair Value
Measurements, defines fair value as the price that would be received to
sell the asset or transfer the liability in an orderly transaction (that is, not
a forced liquidation or distressed sale) between market participants at the
measurement date under current market conditions. FSP FAS 157-4
provides additional guidance on determining when the volume and level of
activity for the asset or liability has significantly decreased. The
FSP also includes guidance on identifying circumstances when a transaction may
not be considered orderly.
FSP
FAS 157-4 provides a list of factors that a reporting entity should evaluate to
determine whether there has been a significant decrease in the volume and level
of activity for the asset or liability in relation to normal market activity for
the asset or liability. When the reporting entity concludes there has
been a significant decrease in the volume and level of activity for the asset or
liability, further analysis of the information from that market is needed and
significant adjustments to the related prices may be necessary to estimate fair
value in accordance with Statement 157.
This
FSP clarifies that when there has been a significant decrease in the volume and
level of activity for the asset or liability, some transactions may not be
orderly. In those situations, the entity must evaluate the weight of
the evidence to determine whether the transaction is orderly. The FSP provides a
list of circumstances that may indicate that a transaction is not
orderly. A transaction price that is not associated with an orderly
transaction is given little, if any, weight when estimating fair
value.
FSP
FAS 115-2 and FAS 124-2 clarifies the interaction of the factors that should be
considered when determining whether a debt security is other-than-temporarily
impaired. For debt securities, management must assess whether (a) it
has the intent to sell the security and (b) it is more likely than not that it
will be required to sell the security prior to its anticipated recovery. These
steps are done before assessing whether the entity will recover the cost basis
of the investment. Previously, this assessment required management to
assert it has both the intent and the ability to hold a security for a period of
time sufficient to allow for an anticipated recovery in fair value to avoid
recognizing an other-than-temporary impairment. This change does not affect the
need to forecast recovery of the value of the security through either cash flows
or market price.
In
instances when a determination is made that an other-than-temporary impairment
exists but the investor does not intend to sell the debt security and it is not
more likely than not that it will be required to sell the debt security prior to
its anticipated recovery, FSP FAS 115-2 and FAS 124-2 changes the presentation
and amount of the other-than-temporary impairment recognized in the income
statement. The other-than-temporary impairment is separated into (a)
the amount of the total other-than-temporary impairment related to a decrease in
cash flows expected to be collected from the debt security (the credit loss) and
(b) the amount of the total other-than-temporary impairment related to all other
factors. The amount of the total other-than-temporary impairment related to the
credit loss is recognized in earnings. The amount of the total
other-than-temporary impairment related to all other factors is recognized in
other comprehensive income.
FSP
FAS 107-1 and APB 28-1 amends FASB Statement No. 107, Disclosures about Fair Value of
Financial Instruments, to require disclosures about fair value of
financial instruments for interim reporting periods of publicly traded companies
as well as in annual financial statements. This FSP also amends APB Opinion No.
28, Interim Financial Reporting, to require those disclosures in summarized
financial information at interim reporting periods.
All
three FSPs discussed herein include substantial additional disclosure
requirements. The effective date for these new standards is the same: interim
and annual reporting periods ending after June 15, 2009, with early adoption
permitted for periods ending after March 15, 2009. However, early
adoption is allowed only if certain FSPs are early adopted
together. The Company is evaluating the effect of these
amendments.
(s) Reclassifications
Certain
reclassifications have been made to amounts previously reported to conform with
the 2008 presentation with no effect on net income, earnings per share, or
stockholders equity.
Note
2 Restrictions on Cash Balances
Included
in cash and due from banks are balances maintained within the Company to satisfy
legally required reserves and to compensate for services provided from
correspondent banks. Restricted balances maintained totaled $7.5 million and
$7.6 million at December 31, 2008 and 2007, respectively. There were
no other withdrawal usage restrictions or legally required compensating balances
at December 31, 2008 or 2007.
Note
3 Operational Developments
In
the second half of 2008, several events occurred that could have an adverse
impact on our ongoing operations. On October 1, 2008, the Company’s
wholly owned subsidiary, ANB, entered into a Written Agreement (see note 4) with
its primary regulator, The Office of the Comptroller of the Currency (the
“OCC”). Under the agreement, ANB is required to achieve and maintain
significantly higher capital ratio levels. At December 31, 2008, ANB did not
maintain the higher capital ratio levels required under the Written Agreement
(see note 16). The Written Agreement also restricts the ability of
ANB to pay dividends, the primary source of income for the Company (see note
15). Failure to meet regulatory capital requirements or the terms of
the Written Agreement exposes ANB to regulatory sanctions that may include
further restrictions on operations and growth, mandatory asset dispositions and
seizure.
In
order for ANB to comply with these increased capital ratio requirements, the
Company obtained $7.7 million in borrowings (see note 13) and provided a capital
infusion into ANB during the fourth quarter of 2008. ANB recorded a
$5.8 million net loss in 2008 primarily due to a $11.8 million charge to the
provision for loan losses as a result of the declining housing values and
worsening local economic conditions. Given the rising unemployment, the
continued downward pressure on housing prices and the elevated national
inventory of unsold homes, management does not expect there to be a significant
improvement in the Company’s business during 2009. These factors are
likely to continue to adversely impact the Company’s revenue, credit costs,
business volume and earnings.
At
December 31, 2008, the Company has debt obligations totaling $16.1 million
maturing in 2009. However, the Company has requested and received from the
lenders forbearance agreements from enforcing their rights to demand repayment
of the principal or any portion thereof until January 31, 2010. The
accompanying consolidated financial statements do not include any adjustments to
reflect the possible future effects on the recoverability and classification of
assets, or the amounts and classification of liabilities that may result from
the outcome of the Company’s inability to renew the outstanding principal of its
debt or from any extraordinary regulatory action, either of which could affect
our operations.
In
an effort to maintain safe and sound banking practices, on December 31, 2008,
the Company entered into a definitive agreement (see note 5) to be acquired by
Premier Financial Bancorp, Inc. (Premier) of Huntington, West Virginia
(NASDAQ/GM-PFBI) which is expected to be completed in the second quarter of
2009. The Company has restricted growth and is improving liquidity
through selling loan participations.
Note
4 Written Agreement
On
October 1, 2008, the Company’s wholly owned subsidiary, The Adams National Bank
(the “Bank”), entered into a Written Agreement with its primary regulator, The
Office of the Comptroller of the Currency (the “OCC”). The Written
Agreement was filed with the SEC as an exhibit to a Current Report on Form 8-K,
dated October 2, 2008. Under the terms of the Written Agreement, the Bank has
agreed to take certain actions relating to the Bank’s lending operations and
capital compliance. Specifically, the OCC is requiring the Bank to
take the following actions:
a) conduct
a review of senior management to ensure that these individuals can perform the
duties required under the Bank’s policies and procedures and the requirements of
the Written Agreement, and where necessary, the Bank must provide a written
program to address the training of the Bank’s senior officers;
b) achieve
certain regulatory capital levels, which are greater than the regulatory
requirements to be “well capitalized” under bank regulatory
requirements. In particular, the Bank must achieve a: 12% total
risk-based capital to total risk-weighted assets ratio; 11% Tier 1 capital to
risk-weighted assets ratio; and 9% Tier 1 capital to adjusted total assets
ratio;
c) develop
and implement a three-year capital program;
d) make
additions to the allowances for loan and lease losses and adopt and implement
written policies and procedures for establishing and maintaining the allowance
in a manner consistent with the Written Agreement;
e)
adopt and implement an asset diversification program consistent with OCC
guidelines and to perform an analysis of the Bank’s concentrations of
credit;
f)
take all necessary actions to protect the Bank’s interest in criticized assets,
adopt and implement a program to eliminate regulatory criticism of these assets,
engage in an ongoing review of the Bank’s criticized assets and develop and
implement procedures for the effective monitoring of the loan
portfolio;
g) hire
an independent appraiser to provide a written or updated appraisal of certain
assets;
h) develop
and implement a program to improve the management of the loan portfolio and to
provide the Board with monthly written reports on credit quality;
i) employ
a loan review consultant acceptable to the OCC to perform a quarterly quality
review of the Bank’s assets;
j) revise
the Bank’s lending policy in accordance with OCC requirements; and
k) maintain
acceptable liquidity levels.
The
Written Agreement includes time frames to implement the foregoing and on-going
compliance requirements for the Bank, including requirements to report to the
OCC. The Written Agreement also requires the Bank to establish a
committee of the Board of Directors which will be responsible for overseeing
compliance with the Written Agreement. The Bank has taken steps to
comply with the requirements of the Written Agreement. At December
31, 2008, ANB’s capital ratio levels did not conform to the
regulatory capital levels required in the Written Agreement. For
further details see Note 16 “Regulatory
Capital Requirements”.
Note
5 Merger Agreement
On
December 31, 2008, the Company entered into a definitive agreement whereby
Premier Financial Bancorp, Inc. (Premier) of Huntington, West Virginia
(NASDAQ/GM-PFBI), will acquire it in a 100% stock exchange valued at
approximately $10.9 million based on Premier’s closing stock price on December
31, 2008 of $7.03. Under terms of the definitive agreement, each share of the
Company’s common stock will be converted into 0.4461 shares of Premier common
stock. Premier anticipates that it will issue approximately 1,545,000
shares of its common stock. The transaction, which is subject to
satisfaction of various contractual conditions and requires approval by
regulatory agencies and the shareholders of the Company and Premier, is
anticipated to close sometime in the second quarter of 2009.
Note
6 Securities
The
amortized cost and estimated fair value of investment securities held to
maturity and investment securities available for sale at December 31, 2008, and
2007 are as follows:
|
(In
thousands)
|
|
Amortized
Cost
Basis
|
|
|
Gross
Unrealized
Gains
|
|
|
Gross
Unrealized
Losses
|
|
|
Estimated
Fair
Value
|
|
|
December
31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment
Securities – available for sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
US
government sponsored agencies and corporations
|
|
$ |
45,072 |
|
|
$ |
608 |
|
|
$ |
18 |
|
|
$ |
45,662 |
|
|
Mortgage-backed
securities
|
|
|
11,243 |
|
|
|
288 |
|
|
|
-- |
|
|
|
11,531 |
|
|
Municipal
securities
|
|
|
953 |
|
|
|
-- |
|
|
|
55 |
|
|
|
898 |
|
|
Corporate
debt securities
|
|
|
6,084 |
|
|
|
38 |
|
|
|
1,718 |
|
|
|
4,404 |
|
|
Marketable
equity securities
|
|
|
1,002 |
|
|
|
-- |
|
|
|
683 |
|
|
|
319 |
|
|
Total
|
|
$ |
64,354 |
|
|
$ |
934 |
|
|
$ |
2,474 |
|
|
$ |
62,814 |
|
|
Investment
Securities – held to maturity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
government sponsored agencies and corporations
|
|
$ |
2,007 |
|
|
$ |
27 |
|
|
$ |
-- |
|
|
$ |
2,034 |
|
|
Mortgage-backed
securities
|
|
|
1,168 |
|
|
|
25 |
|
|
|
1 |
|
|
|
1,192 |
|
|
Total
|
|
$ |
3,175 |
|
|
$ |
52 |
|
|
$ |
1 |
|
|
$ |
3,226 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December
31, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment
Securities – available for sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
government sponsored agencies and corporations
|
|
$ |
52,709 |
|
|
$ |
308 |
|
|
$ |
34 |
|
|
$ |
52,983 |
|
|
Mortgage-backed
securities
|
|
|
7,105 |
|
|
|
50 |
|
|
|
64 |
|
|
|
7,091 |
|
|
Corporate
debt securities
|
|
|
6,750 |
|
|
|
29 |
|
|
|
1,179 |
|
|
|
5,600 |
|
|
Marketable
equity securities
|
|
|
1,005 |
|
|
|
-- |
|
|
|
287 |
|
|
|
718 |
|
|
Total
|
|
$ |
67,569 |
|
|
$ |
387 |
|
|
$ |
1,564 |
|
|
$ |
66,392 |
|
|
Investment
Securities – held to maturity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
government sponsored agencies and corporations
|
|
$ |
11,498 |
|
|
$ |
-- |
|
|
$ |
57 |
|
|
$ |
11,441 |
|
|
Mortgage-backed
securities
|
|
|
1,811 |
|
|
|
20 |
|
|
|
3 |
|
|
|
1,828 |
|
|
Total
|
|
$ |
13,309 |
|
|
$ |
20 |
|
|
$ |
60 |
|
|
$ |
13,269 |
|
For
years ended December 31, 2008, 2007, and 2006, the Company had no gains or
losses on sales of securities.
The
fair value of securities with unrealized losses by length of time that the
individual securities have been in a continuous unrealized loss position at
December 31, 2008 and 2007, are as follows:
|
|
|
Continuous
unrealized losses existing for less than 12 months
|
|
|
Continuous
unrealized losses existing 12 months or more
|
|
|
Total
|
|
|
(In
thousands)
|
|
Fair
Value
|
|
|
Unrealized
Losses
|
|
|
Fair
Value
|
|
|
Unrealized
Losses
|
|
|
Fair
Value
|
|
|
Unrealized
Losses
|
|
| December
31, 2008: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
government sponsored agencies and corporations
|
|
$ |
1,983 |
|
|
$ |
18 |
|
|
$ |
-- |
|
|
$ |
-- |
|
|
$ |
1,983 |
|
|
$ |
18 |
|
|
Mortgage-backed
securities
|
|
|
188 |
|
|
|
1 |
|
|
|
-- |
|
|
|
-- |
|
|
|
188 |
|
|
|
1 |
|
|
Municipal
securities
|
|
|
898 |
|
|
|
55 |
|
|
|
-- |
|
|
|
-- |
|
|
|
898 |
|
|
|
55 |
|
|
Corporate
debt securities
|
|
|
1,246 |
|
|
|
200 |
|
|
|
2,719 |
|
|
|
1,518 |
|
|
|
3,965 |
|
|
|
1,718 |
|
|
Marketable
equity securities
|
|
|
-- |
|
|
|
-- |
|
|
|
319 |
|
|
|
683 |
|
|
|
319 |
|
|
|
683 |
|
|
Total
|
|
$ |
4,315 |
|
|
$ |
274 |
|
|
$ |
3,038 |
|
|
$ |
2,201 |
|
|
$ |
7,353 |
|
|
$ |
2,475 |
|
|
December 31, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
government sponsored agencies and corporations
|
|
$ |
999 |
|
|
$ |
1 |
|
|
$ |
19,407 |
|
|
$ |
90 |
|
|
$ |
20,406 |
|
|
$ |
91 |
|
|
Mortgage-backed
securities
|
|
|
-- |
|
|
|
-- |
|
|
|
4,046 |
|
|
|
67 |
|
|
|
4,046 |
|
|
|
67 |
|
|
Corporate
debt securities
|
|
|
2,981 |
|
|
|
697 |
|
|
|
1,580 |
|
|
|
482 |
|
|
|
4,561 |
|
|
|
1,179 |
|
|
Marketable
equity securities
|
|
|
718 |
|
|
|
287 |
|
|
|
-- |
|
|
|
-- |
|
|
|
718 |
|
|
|
287 |
|
|
Total
|
|
$ |
4,698 |
|
|
$ |
985 |
|
|
$ |
25,033 |
|
|
$ |
639 |
|
|
$ |
29,731 |
|
|
$ |
1,624 |
|
Management
evaluates securities for other-than-temporary impairment at least on a quarterly
basis, and more frequently when economic or market concerns warrant such
evaluation. Analysis of the available for sale securities for
potential other-than-temporary impairment was considered under the SFAS No. 115,
Accounting for Certain
Investments in Debt and Equity Securities impairment model and included
the following factors: the length of time and extent to which the market value
has been less than cost; the financial condition and near-term prospects of the
issuer including specific events; the Company’s intent and ability to hold the
investment to the earlier of maturity or recovery in market value, the credit
rating of the security; the implied and historical volatility of the security;
whether the market decline was affected by macroeconomic conditions or by
specific information pertaining to an individual security; and any downgrades by
rating agencies. As applicable under SFAS No. 115, the Company considers a
decline in fair value to be other-than-temporary if it is probable that the
Company will not recover its recorded investment, including as applicable under
the Emerging Issues Task Force (EITF) Issue 99-20, Recognition of Interest Income and
Impairment on Purchased Beneficial Interests and Beneficial Interests That
Continue to Be Held by a Transferor in Securitized Financial Assets, when
an adverse change in cash flows has occurred.
At
December 31, 2008, the available for sale investment classified as marketable
equity securities consists of perpetual preferred securities which have been
valued below cost for more than 22 months. These securities, carried
at fair value of $319,000 with an unrealized loss of $683,000. The
securities are not required to be redeemed by the issuer, nor are they
redeemable at the option of the investor and are therefore classified as equity
securities under SFAS 115. Based on the results of the analysis of these
perpetual securities using the SFAS No.115 impairment model, we concluded that
the decline in fair value has been the result of the liquidity conditions in the
current market environment due to the sub-prime mortgage crisis and housing
market recession and not from concerns regarding the credit quality or financial
condition of the issuer. We continue to receive interest at 5.75% as scheduled
and we have the intent and ability to hold the perpetual preferred securities
until their expected recovery in fair value. The Company does not consider it
probable that it will not recover its investment and recorded no
other-than-temporary impairment on the marketable equity securities at December
31, 2008 or December 31, 2007.
The
Company has two corporate debt securities which were purchased in 2004 and have
been rated below investment grade since 2005. At December 31, 2007,
these corporate debt securities were being carried at a combined fair value of
$851,000 with an unrealized loss of $210,000. During 2008, based on
the SFAS No. 115 impairment model, management determined that it is probable
that the Company will be unable to collect all amounts due according to the
contractual terms of the debt securities and that an other-than-temporary
impairment had occurred even though the issuers were not in default and were
paying interest at 7.0% and 7.125% as scheduled and the Company has the intent
and ability to hold the investments until their maturity in 2013. The
unamortized cost of the two debt securities was written down to $400,000 and an
other-than-temporary impairment of $655,000 was recorded in noninterest income
during 2008. At December 31, 2008, the two corporate debt securities
were carried at an aggregate fair value of $438,000 with an unrealized gain of
$38,000.
The
Company also has five other corporate debt securities which have been valued
below cost for more than 12 months. At December 31, 2008, these were carried at
a combined fair value of $2.7 million with an unrealized loss of $1.5 million
and currently have Moody ratings in the range of A1 to A3 and Standard and Poors
ratings ranging from A+ to BB+. Interest payments ranging from 5.625%
to 6.100% continue to be received as scheduled. Based on the analysis
performed by applying the SFAS No. 115 impairment model and where applicable,
EITF Issue 99-20, the Company does not consider it probable that it
will not recover the full contractual cost of these investments. Based on our
analysis, we concluded that the decline in fair value has been the result of the
liquidity conditions in the current market environment due to the sub-prime
mortgage crisis and housing market recession and not from concerns regarding the
credit quality or financial condition of the issuers. Further, the Company has
not experienced any adverse change in cash flows from holding the investments
and has the intent and ability to hold the investments to the earlier of
maturity or recovery in fair value and, therefore did not record any
other-than-temporary impairment charge at December 31, 2008 or at December 31,
2007 on these five corporate debt securities.
The
remaining unrealized losses that existed as of December 31, 2008 and December
31, 2007, are a result of market changes in interest rates since the securities’
purchase. This factor, coupled with the fact the Company has both the intent and
the ability to hold these securities for a period
of
time sufficient to allow for recovery in fair value substantiates that the
remaining unrealized losses in the held to maturity and available for sale
portfolios are temporary.
Securities
with market values of $62.0 million and $61.7 million at December 31, 2008 and
2007, respectively, were pledged to collateralize public deposits and repurchase
agreements.
The
cost and estimated fair value of investment securities held to maturity and
investment securities available for sale at December 31, 2008, by contractual
maturity are shown on the following table. Expected maturities may differ from
contractual maturities in mortgage-backed securities, because borrowers may have
the right to call or prepay obligations with or without call or prepayment
penalties; therefore, these securities are not included in maturity categories
in the following table.
|
|
|
December
31, 2008
|
|
|
(In
thousands)
|
|
Amortized
Cost
|
|
|
Estimated
Fair Value
|
|
|
Investment
Securities – available for sale:
|
|
|
|
|
|
|
|
Due
in one year or less
|
|
$ |
5,000 |
|
|
$ |
5,062 |
|
|
Due
after one year through five years
|
|
|
27,490 |
|
|
|
27,935 |
|
|
Due
after five years through ten years
|
|
|
11,982 |
|
|
|
12,098 |
|
|
Due
after ten years
|
|
|
7,637 |
|
|
|
5,869 |
|
|
Mortgage-backed
securities
|
|
|
11,243 |
|
|
|
11,531 |
|
|
Marketable
equity securities
|
|
|
1,002 |
|
|
|
319 |
|
|
Total
|
|
|
64,354 |
|
|
|
62,814 |
|
|
Investment
Securities – held to maturity:
|
|
|
|
|
|
|
|
|
|
Due
in one year or less
|
|
|
-- |
|
|
|
-- |
|
|
Due
after one year through five years
|
|
|
2,007 |
|
|
|
2,034 |
|
|
Mortgage-backed
securities
|
|
|
1,168 |
|
|
|
1,192 |
|
|
Total
|
|
$ |
3,175 |
|
|
$ |
3,226 |
|
Note
7 Loans
Loans
at December 31, 2008 and 2007 were as follows:
| (In
thousands) |
|
2008
|
|
|
2007
|
|
|
Commercial
and industrial
|
|
$ |
43,733 |
|
|
$ |
38,606 |
|
|
Real
estate:
|
|
|
|
|
|
|
|
|
|
Commercial
mortgage
|
|
|
163,228 |
|
|
|
128,320 |
|
|
Residential
mortgage
|
|
|
54,887 |
|
|
|
67,375 |
|
|
Construction
and development
|
|
|
61,485 |
|
|
|
70,798 |
|
|
Installment
to individuals
|
|
|
1,648 |
|
|
|
2,716 |
|
|
Subtotal
|
|
|
324,981 |
|
|
|
307,815 |
|
|
Less:
net deferred loan fees
|
|
|
(217 |
) |
|
|
(332 |
) |
|
Total
|
|
$ |
324,764 |
|
|
$ |
307,483 |
|
At
December 31, 2008, 2007 and 2006, $33.8 million, $8.8 million and $1.5 million,
respectively, were considered nonaccrual loans (loans for which the accrual of
interest has been discontinued). Interest income on nonaccrual loans that would
have been recorded if accruing was $1.2 million, $649,000 and $180,000 in 2008,
2007 and 2006, respectively. There was no
interest
income recognized on a cash basis on nonaccrual loans in 2008 or 2007, and there
was $21,000 recognized in 2006. At December 31, 2008, the Company had
no loans that were greater than 90 days delinquent and still accruing interest,
compared to one loan totaling $2.1 million at December 31, 2007, and two loans
totaling $1.9 million at December 31, 2006 that were 90 days delinquent and
accruing interest.
The
activity in the allowance for loan losses follows:
|
(In
thousands)
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Balance
at beginning of the year
|
|
$ |
4,202 |
|
|
$ |
4,432 |
|
|
$ |
4,345 |
|
|
Provision
(credit) for loan losses
|
|
|
11,822 |
|
|
|
260 |
|
|
|
(232 |
) |
|
Recoveries
|
|
|
260 |
|
|
|
198 |
|
|
|
676 |
|
|
Charge-offs
|
|
|
(3,770 |
) |
|
|
(688 |
) |
|
|
(357 |
) |
|
Balance
at end of year
|
|
$ |
12,514 |
|
|
$ |
4,202 |
|
|
$ |
4,432 |
|
The
following is a summary of information pertaining to impaired loans:
|
(In
thousands)
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Impaired
loans without a valuation allowance
|
|
$ |
17,284 |
|
|
$ |
454 |
|
|
$ |
1,508 |
|
|
Impaired
loans with a valuation allowance
|
|
|
30,720 |
|
|
|
8,309 |
|
|
|
-- |
|
|
Total
impaired loans
|
|
$ |
48,004 |
|
|
$ |
8,763 |
|
|
$ |
1,508 |
|
|
Valuation
allowance related to impaired loans
|
|
$ |
8,343 |
|
|
$ |
1,518 |
|
|
$ |
-- |
|
|
Average
investment in impaired loans
|
|
$ |
12,959 |
|
|
$ |
4,351 |
|
|
$ |
1,109 |
|
|
Interest
income recognized on impaired loans on cash basis
|
|
$ |
0 |
|
|
$ |
0 |
|
|
$ |
21 |
|
|
Interest
income recognized on impaired loans on accrual
basis
|
|
$ |
119 |
|
|
|
-0- |
|
|
|
-0- |
|
The
Company is currently committed to lend approximately $784,000 in additional
funds on these impaired loans in accordance with the original terms of these
loans; however, the Company is not legally obligated to, and will not, disburse
additional funds on any loans while in nonaccrual status. Of the $784,000 in
committed funds on impaired loans, $595,000 is applicable to nonaccrual loans.
The Company will continue to monitor its portfolio on a regular basis and will
lend additional funds as warranted on these impaired loans.
Approximately
92.3% of the impaired loans as of December 31, 2008 relate to commercial real
estate and construction and development loans. As of December 31, 2008, $17.3
million of impaired loans do not have any specific valuation allowance under
SFAS 114. Pursuant to SFAS 114, a loan is impaired when both the contractual
interest payments and the contractual principal payments of a loan are not
expected to be collected as scheduled in the loan agreement. The $17.3 million
of impaired loans without a specific valuation allowance as of December 31, 2008
are generally impaired due to delays or anticipated delays in receiving payments
pursuant to the contractual terms of the loan agreements.
The
Company has experienced declines in the current valuations for real estate
collateral supporting portions of its loan portfolio, primarily construction and
development loans, throughout calendar year 2008, as reflected in recently
received appraisals. Currently, $45.6 million, or approximately 93.7%,
of
impaired loans have recent appraisals (dated within two months of the balance
date). If real estate values continue to decline and as updated appraisals are
received, the Company may have to increase its allowance for loan losses
appropriately.
Loan
impairment is reported when full payment under the loan terms is not
anticipated, which can include loans that are current or less than 90 days past
due.
The
Company has engaged in banking transactions in the ordinary course of business
with some of its directors, officers, principal shareholders and their
associates. Such loans are at normal credit terms, including interest rates and
collateral, and do not represent more than the normal risk of collection. At
December 31, 2008 and 2007, none of these loans were reported as nonaccrual,
restructured or classified. The aggregate amount of loans to related parties for
the years ended December 31, 2008 and 2007 were $1.4 million and $79,000,
respectively.
Note
8 Bank Premises and Equipment
Bank
premises and equipment at December 31, 2008 and 2007 are summarized as
follows:
|
(Dollars in
thousands)
|
|
2008
|
|
|
2007
|
|
Useful
Life
|
|
Land
|
|
$ |
854 |
|
|
$ |
854 |
|
|
|
Building
and leasehold improvements
|
|
|
4,279 |
|
|
|
4,237 |
|
3-20
years
|
|
Furniture
and equipment
|
|
|
3,480 |
|
|
|
2,959 |
|
3-10
years
|
|
Subtotal,
at cost
|
|
|
8,613 |
|
|
|
8,050 |
|
|
|
Accumulated
depreciation and amortization
|
|
|
(3,619 |
) |
|
|
(3,065 |
) |
|
|
Total,
net
|
|
$ |
4,994 |
|
|
$ |
4,985 |
|
|
Amounts
charged to operating expenses for depreciation expense aggregated $611,000,
$589,000 and $541,000 in 2008, 2007 and 2006, respectively.
Note
9 Deposits
The
following table sets forth the dollar amounts in the various types of deposit
programs.
|
(In
thousands)
|
|
December 31,
2008
|
|
|
|
|
|
Demand
deposits
|
|
$ |
67,193 |
|
|
$ |
74,833 |
|
|
Savings
accounts
|
|
|
15,054 |
|
|
|
15,090 |
|
|
NOW
accounts
|
|
|
71,823 |
|
|
|
78,829 |
|
|
Money
market accounts
|
|
|
20,323 |
|
|
|
48,845 |
|
|
Total
non-certificate deposits
|
|
|
174,393 |
|
|
|
217,597 |
|
|
Certificates
of deposit
|
|
|
172,568 |
|
|
|
169,345 |
|
|
Total
deposits
|
|
$ |
346,961 |
|
|
$ |
386,942 |
|
The
following table summarizes certificates of deposit at December 31, 2008 by time
remaining until maturity.
|
|
|
Maturity
|
|
|
(In
thousands)
|
|
3
Months or Less
|
|
|
Over
3 to 6 Months
|
|
|
Over
6 to 12 Months
|
|
|
Over
12 Months
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Certificates
of deposit less than $100,000
|
|
$ |
41,518 |
|
|
$ |
23,061 |
|
|
$ |
42,765 |
|
|
$ |
17,967 |
|
|
$ |
125,311 |
|
|
Certificates
of deposit of $100,000 or more
|
|
|
18,816 |
|
|
|
12,860 |
|
|
|
11,187 |
|
|
|
4,394 |
|
|
|
47,257 |
|
|
Total
certificates of deposit
|
|
$ |
60,334 |
|
|
$ |
35,921 |
|
|
$ |
53,952 |
|
|
$ |
22,361 |
|
|
$ |
172,568 |
|
At
December 31, 2008, the scheduled maturities on all time deposits are as
follows:
|
Year
|
|
<
$100,000
|
|
|
>
$100,000
|
|
|
Total
|
|
|
|
|
(In
thousands)
|
|
|
2009
|
|
$ |
107,344 |
|
|
$ |
42,863 |
|
|
$ |
150,207 |
|
|
2010
|
|
|
7,323 |
|
|
|
2,775 |
|
|
|
10,098 |
|
|
2011
|
|
|
8,013 |
|
|
|
1,242 |
|
|
|
9,255 |
|
|
2012
|
|
|
1,810 |
|
|
|
277 |
|
|
|
2,087 |
|
|
2013
|
|
|
821 |
|
|
|
100 |
|
|
|
921 |
|
|
|
|
$ |
125,311 |
|
|
$ |
47,257 |
|
|
$ |
172,568 |
|
Certificates
of deposit include brokered deposits totaling $79.7 million of which $67.0
million or 84.0% are CDARS (Certificate of Deposit Account Registry Service)
deposits. CDARS is a deposit placement service that allows us to
place our customers’ funds in FDIC-insured certificates of deposit at other
banks and to simultaneously receive an equal sum of funds from the customers of
other banks in the CDARS network. The majority of CDARS deposits are
gathered within our geographic footprint through established customer
relationships.
Related
party deposits totaled approximately $1.1 million and $1.3 million at December
31, 2008 and 2007, respectively. In management's opinion, interest rates paid on
these deposits, where applicable, are available to others at the same
terms.
Note
10 Leasing Arrangements
The
Company and banking subsidiaries have entered into various noncancelable
operating leases for office and branch locations. These noncancelable operating
leases are subject to renewal options under various terms. Some leases provide
for periodic rate adjustments based on cost-of-living index changes. Rental
expense in 2008, 2007 and 2006 was approximately $1.2 million, $1.1 million, and
$1.1 million, respectively. Future minimum payments under
noncancelable operating leases that have initial or remaining lease terms in
excess of one year are as follows:
|
Years
ending December 31,
(In
thousands)
|
|
Amount
|
|
|
2009
|
|
$ |
1,151 |
|
|
2010
|
|
|
1,114 |
|
|
2011
|
|
|
1,131 |
|
|
2012
|
|
|
933 |
|
|
2013
|
|
|
269 |
|
|
2014
and thereafter
|
|
|
161 |
|
| Total |
|
$ |
4,759 |
|
Note
11 Income Taxes
Income
tax expense for 2008, 2007 and 2006 consists of:
|
(In
thousands)
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Current
income tax (benefit) expense:
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$ |
(428 |
) |
|
$ |
1,415 |
|
|
$ |
1,925 |
|
|
District
of Columbia
|
|
|
-- |
|
|
|
413 |
|
|
|
462 |
|
|
|
|
|
(428 |
) |
|
|
1,828 |
|
|
|
2,387 |
|
|
Deferred
tax benefit:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
(2,619 |
) |
|
|
(653 |
) |
|
|
(76 |
) |
|
District
of Columbia
|
|
|
(1,078 |
) |
|
|
(79 |
) |
|
|
(15 |
) |
|
|
|
|
(3,697 |
) |
|
|
(732 |
) |
|
|
(91 |
) |
|
Total
tax (benefit) expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
(3,047 |
) |
|
|
762 |
|
|
|
1,849 |
|
|
District
of Columbia
|
|
|
(1,078 |
) |
|
|
334 |
|
|
|
447 |
|
|
|
|
$ |
(4,125 |
) |
|
$ |
1,096 |
|
|
$ |
2,296 |
|
Income
tax (benefit) expense differed from the amounts computed by applying the
statutory Federal income tax rate of 34 % to pretax income, as a result of the
following:
| |
|
2008 |
|
|
2007
|
|
|
2006
|
|
| (Dollars
in thousands) |
|
Amount
|
|
|
%
|
|
|
Amount
|
|
|
%
|
|
|
Amount
|
|
|
%
|
|
|
Tax
(benefit) expense at statutory rate
|
|
$ |
(3,367 |
) |
|
|
34.0 |
% |
|
$ |
1,413 |
|
|
|
34.0 |
% |
|
$ |
2,037 |
|
|
|
34.0 |
% |
|
State
and local taxes based on income, net of Federal tax effect
|
|
|
(712 |
) |
|
|
7.2 |
% |
|
|
220 |
|
|
|
5.3 |
% |
|
|
295 |
|
|
|
4.9 |
% |
|
Reversal
of NOL valuation allowance
|
|
|
-- |
|
|
|
-- |
% |
|
|
(525 |
) |
|
|
-12.6 |
% |
|
|
-- |
|
|
|
-- |
|
|
Other,
net
|
|
|
(46 |
) |
|
|
0.4 |
% |
|
|
(12 |
) |
|
|
-0.3 |
% |
|
|
(36 |
) |
|
|
-0.6 |
% |
|
Total
|
|
$ |
(4,125 |
) |
|
|
41.6 |
% |
|
$ |
1,096 |
|
|
|
26.4 |
% |
|
$ |
2,296 |
|
|
|
38.3 |
% |
The
following is a summary of the tax effects of temporary differences that give
rise to significant portions of the deferred tax assets and deferred tax
liabilities at December 31, 2008 and 2007:
|
(In
thousands)
|
|
2008
|
|
|
2007
|
|
|
Deferred
tax assets:
|
|
|
|
|
|
|
|
Allowance
for loan losses
|
|
$ |
4,661 |
|
|
$ |
1,548 |
|
|
Other
real estate owned valuation
|
|
|
53 |
|
|
|
-- |
|
|
Purchase
fair market value adjustments on loans
|
|
|
68 |
|
|
|
104 |
|
|
Other
than temporary write down of investment securities
|
|
|
266 |
|
|
|
-- |
|
|
Unrealized
loss on investment securities
|
|
|
358 |
|
|
|
485 |
|
|
Unrealized
net actuarial gains - pension plan
|
|
|
-- |
|
|
|
(14 |
) |
|
Compensated
absences
|
|
|
24 |
|
|
|
27 |
|
|
Deferred
rent
|
|
|
133 |
|
|
|
156 |
|
|
Interest
on nonaccrual loans
|
|
|
468 |
|
|
|
262 |
|
|
Net
operating loss carryforward
|
|
|
760 |
|
|
|
632 |
|
|
Other
|
|
|
44 |
|
|
|
49 |
|
|
Total
deferred tax assets
|
|
$ |
6,835 |
|
|
$ |
3,249 |
|
|
Deferred
tax liabilities:
|
|
|
|
|
|
|
|
|
|
Fixed
assets
|
|
$ |
809 |
|
|
$ |
807 |
|
|
Total
deferred tax liabilities
|
|
$ |
809 |
|
|
$ |
807 |
|
|
Net
deferred tax assets
|
|
$ |
6,026 |
|
|
$ |
2,422 |
|
FASB
Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (FIN 48)
requires the Company to review outstanding tax positions and establish a
liability in its balance sheet for those positions that more likely than not,
based on technical merits, would not be sustained upon examination by taxing
authorities. The Company files U.S. federal income tax returns and
state income tax returns in Maryland and the District of Columbia. Based on the
statute of limitations, the Company is no longer subject to U.S. federal and
state examinations by tax authorities for years before 2005. Based on
the review of the tax returns filed for the years 2005 through 2007 and the tax
benefits accrued
in
the 2008 annual financial statements, management determined that 100% of the
benefits accrued were expected to be realized and has a high confidence level in
the technical merits of the positions. It believes that the
deductions taken and benefits accrued are based on widely understood
administrative practices and procedures and are based on clear and unambiguous
tax law. As a result of this evaluation, management did not record a
liability for unrecognized tax benefits in 2008 or 2007.
At
December 31, 2008, the Company had a total of $1.9 million of federal net
operating loss (NOL) carryforwards that expire in 2022 through
2024. Utilization of this NOL is limited under IRC Section 382 to
approximately $109,000 per year. The Company also has a District of
Columbia NOL carryforward of $1.9 million that expires in 2028.
Note
12 Short-term Borrowings
Short-term
borrowings consist of securities sold under repurchase agreements, Federal funds
purchased, and FHLB advances. Federal funds purchased represent funds borrowed
overnight, and FHLB advances include overnight borrowings or advances with terms
of three months or less. Unused Federal fund lines of credit at December 31,
2008 were $5.0 million. There were no outstanding Federal funds purchased at
December 31, 2008 or December 31, 2007. FHLB advances totaled $16.8 million at
December 31, 2008 and $0 at December 31, 2007. Outstanding repurchase agreements
at December 31, 2008 were $7.7 million and $8.5 million at December 31, 2007.
Securities sold under repurchase agreements generally involve the receipt of
immediately available funds which mature in one business day or roll over under
a continuing contract. In accordance with these contracts, the underlying
securities sold are segregated from the Company's other investment
securities.
Short-term
borrowings for 2008 and 2007 are summarized below:
|
(Dollars in
thousands)
|
|
2008
|
|
|
2007
|
|
|
Year
end balance
|
|
$ |
24,477 |
|
|
$ |
8,494 |
|
|
Average
balance
|
|
|
18,867 |
|
|
|
5,175 |
|
|
Maximum
month-end outstanding
|
|
|
35,957 |
|
|
|
12,578 |
|
|
Average
interest rate for the year
|
|
|
1.97 |
% |
|
|
2.78 |
% |
|
Average
interest rate at year end
|
|
|
0.64 |
% |
|
|
3.32 |
% |
Note
13 Long-term Debt
The
Banks maintain a line of credit with the Federal Home Loan Bank of Atlanta
(FHLB) for advances collateralized with a blanket floating lien on first
mortgages and commercial real estate. Additional FHLB advances are available up
to 20% of assets and would require the pledging of additional qualifying assets.
ANB is required by the FHLB to provide collateral at 125% of advances. Unused
borrowing capacity at December 31, 2008 is approximately $48.9
million.
Long-term
debt at December 31, 2008 and 2007 consisted of the following:
|
(Dollars
in thousands)
|
|
Rate
|
|
|
2008
|
|
|
2007
|
|
|
FHLB
borrowings due on
March
21, 2008
|
|
|
2.990%
|
|
|
$ |
-- |
|
|
$ |
200 |
|
|
FHLB
borrowings due on
December
1, 2008
|
|
|
6.950%
|
|
|
|
-- |
|
|
|
151 |
|
|
FHLB
borrowings due on
March
9, 2012
|
|
|
4.286%
|
|
|
|
10,000 |
|
|
|
10,000 |
|
|
Term
note due July 27, 2014
|
|
Daily
WSJ Prime rate less .50%
|
|
|
|
-- |
|
|
|
4,769 |
|
|
Corporate
loan due on
January
28, 2009
|
|
Daily
WSJ prime rate less 1%
|
|
|
|
5,000 |
|
|
|
-- |
|
|
Revolving
line of credit due on
May
2, 2009
|
|
Daily
WSJ prime rate less .25% with a floor of 4.00%
|
|
|
|
3,482 |
|
|
|
-- |
|
|
Demand
note
|
|
Daily
WSJ prime rate
|
|
|
|
3,400 |
|
|
|
-- |
|
|
Draw
note due on June 30, 2009
|
|
Daily
JP Morgan Chase Bank NY prime rate with a floor of 5.00%
|
|
|
|
4,250 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
$ |
26,132 |
|
|
$ |
15,120 |
|
In
March of 2007, the Company obtained a convertible advance from the FHLB in the
amount of $10.0 million at a fixed rate of 4.286% with a maturity date of March
9, 2012. Interest only payments are due quarterly. The FHLB has the option on
any interest payment date to convert the interest rate on this advance from a
fixed rate to a variable rate based on the three month Libor rate.
On
July 27, 2007, the Company converted a $5.0 million term note from interest only
payments due monthly at variable Prime rate to a variable Prime rate less 50
basis points with principal and interest payments due monthly and maturing on
July 27, 2014. The interest rate at December 31, 2007 was 6.75%. The
proceeds of the loan were used to fund a capital infusion to CB&T at
acquisition on July 29, 2005 as required by its regulators. In
February of 2008, this loan was replaced with a promissory note due on January
28, 2009 which is secured by 80,000 shares or 80% of ANB capital
stock. The interest rate on this note at December 31, 2008 was
2.25%. The Company renewed the loan on January 28, 2009 with a
maturity date of August 1, 2009 at a variable rate of 1% below Prime rate and an
interest rate floor of 6.00%.
In
May of 2008, the Company obtained a $4.0 million line of credit from the same
institution holding the promissory note discussed above to fund a loan that
exceeded the legal lending limit at its subsidiary bank, ANB. This
line of credit is also secured by 80,000 shares or 80% of ANB capital stock, as
noted above. At December 31, 2008, the line of credit balance was
$3.5 million at an interest rate of 4.00%.
In
November and December of 2008, the Company obtained a demand note and a $6.0
million line of credit, respectively, to provide for a capital infusion into its
subsidiary bank, ANB in the amount of $7.7 million as required by a Written
Agreement with ANB’s primary regulator, The Office of the Comptroller of the
Currency (the “OCC”). The line of credit, with a balance of $4.3
million at December 31, 2008, is secured by 20,000 shares (20%) of ANB capital
stock and 134,000 shares (100%) of CB&T capital stock and is guaranteed by
Premier Financial Bancorp. At December 31, 2008, the unsecured demand
note interest rate was 3.25% with interest only payments due quarterly and the
draw note interest rate was 5.00% with interest only payments due on the 15th of each
quarter month.
In
March of 2009, the Company requested and received from the lenders forbearance
agreements from enforcing their rights to demand repayment of the principal or
any portion thereof until January 31, 2010. Therefore, the amounts
pertaining to these loans are included in 2010 for purposes of the table
below.
Annual
principal payments for the debt as of December 31, 2008 are as
follows:
|
|
|
Amount
|
|
|
Year
ending December 31,
|
|
(In
thousands)
|
|
|
2009
|
|
|
-- |
|
|
2010
|
|
$ |
16,132 |
|
|
2011
|
|
|
-- |
|
|
2012
|
|
|
10,000 |
|
|
2013
|
|
|
-- |
|
|
After
2013
|
|
|
-- |
|
|
Total
|
|
$ |
26,132 |
|
Note
14 Commitments and Contingent Liabilities
The
Company is party to credit related financial instruments with off-balance-sheet
risk in the ordinary course of business to meet the financing needs of its
customers. These commitments include revolving credit agreements, term loan
commitments, short-term borrowing agreements, and standby letters of credit.
Such commitments involve, to varying degrees, elements of credit and interest
rate risk in excess of the amounts recognized in the consolidated balance
sheets. The Company’s exposure to credit loss is represented by the contractual
amount of these commitments. Both loan commitments and standby letters of credit
have credit risk essentially the same as that involved in extending loans to
customers and are subject to the normal credit approval procedures and
policies.
Commitments
to extend credit are agreements to lend to a customer as long as there is no
violation of any condition established in the contract. Commitments generally
have fixed expiration dates or other termination clauses and may require payment
of a fee. Since many of the commitments are expected to expire without being
funded, the total commitment amounts do not necessarily represent future
liquidity requirements. Collateral is obtained based on management’s assessment
of the customer’s credit. Unfunded commitments under commercial lines of credit,
revolving credit lines, and overdraft protection agreements are commitments for
possible future extension of credit to existing customers. These lines of credit
are uncollateralized and usually do not contain a specific maturity date and may
ultimately be drawn upon to the total extent to which the Company is
committed.
Letters
of credit are conditional commitments issued to guarantee the performance of a
customer to a third party and are primarily issued to support public and private
borrowing arrangements. The majority of letters of credit issued have expiration
dates of one year or less. The credit risk involved in issuing letters of credit
is essentially the same as that involved in extending loan facilities to
customers. The Company generally holds collateral supporting those commitments,
and at December 31, 2008 and 2007, such collateral amounted to $3.5 million and
$3.6 million, respectively. The fair value of the standby letter of credit
guarantees was nominal and the liability recorded at December 31, 2008 was
$48,000, compared to $42,000 in 2007.
At
December 31, 2008 and 2007, the following financial instruments were outstanding
whose contracts represent credit risk:
|
(Dollars
in thousands)
|
|
2008
|
|
|
2007
|
|
|
Commitment
to originate loans
|
|
$ |
4,933 |
|
|
$ |
10,187 |
|
|
Unfunded
commitments under lines of credit
|
|
|
76,401 |
|
|
|
104,134 |
|
|
Commercial
and standby letters of credit
|
|
|
3,637 |
|
|
|
3,754 |
|
|
Portion
of letters of credit collateralized
|
|
|
96.5 |
% |
|
|
95.0 |
% |
The
Company and the Banks are defendants in litigation and claims arising from the
normal course of business. Based upon consultation with legal counsel,
management is of the opinion that the outcome of any claims and pending or
threatened litigation will not have a material adverse impact on the Company’s
financial position, results of operations or liquidity.
Note
15 Restrictions on Dividend Payments and Loans by Affiliated
Banks
The
primary source of dividends paid by the Company to its shareholders is dividends
received from the Banks. Federal regulations restrict the total dividend
payments that a banking association may make during any calendar year to the
total net income of the banks for the current year plus retained net income for
the preceding two years, without prior regulatory approval. Restrictions are
also imposed upon the ability of the Banks to make loans to the Company,
purchase stock in the Company or use the Company's securities as collateral for
indebtedness of the Banks. Due to the Written Agreement with the OCC dated
October 1, 2008, the Bank must be in compliance with its approved capital plan
and maintain the required capital level determined by the OCC and receive prior
written determination of no supervisory objection, before a dividend is paid to
the Company. ANB will not pay dividends to the Company for the
foreseeable future due to the restrictions imposed by the Written
Agreement. At December 31, 2008, approximately $646,000 of retained
earnings of CB&T was available for dividend declarations.
Note
16 Regulatory Capital Requirements
The
Company (on a consolidated basis) and the Banks are subject to various
regulatory capital requirements administered by the Federal banking
agencies. Failure to meet minimum capital requirements can initiate
certain mandatory and possibly additional discretionary actions by regulators
that, if undertaken, could have a direct material effect on the Company’s
financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Company and the Banks
must meet specific capital guidelines that involve quantitative measures of the
Company’s and the Banks’ assets, liabilities, and certain off-balance-sheet
items as calculated under regulatory accounting practices. The
Company’s and the Banks’ capital amounts and classification are also subject to
qualitative judgments by the regulators about components, risk weightings, and
other factors. Prompt corrective action provisions are not applicable
to bank holding companies.
Quantitative
measures established by regulation to ensure capital adequacy require the
Company and the Banks to maintain minimum amounts and ratios (set forth in the
table below) of total and Tier 1 capital (as defined in the regulations) to
risk-weighted assets (as defined), and of Tier 1 capital (as defined) to average
assets (as defined). The most recent notification from the primary regulators
for each of the Company’s affiliated banking institutions categorized CB&T
as “well capitalized” under the regulatory framework for prompt corrective
action and ANB as “adequately capitalized”. ANB can not be considered
“well capitalized” while under the Written Agreement dated October 1, 2008, and
must maintain the following capital levels: total risk based capital equal to
12% of risk-weighted assets; tier 1 capital at least equal to 11% of
risk-weighted assets; and tier 1 capital at least equal to 9% of adjusted total
assets. At December 31, 2008, ANB’s capital ratio levels did not
comply with those required in the Written Agreement. ANB has taken steps to
comply with the capital ratio requirements as stipulated in the Written
Agreement. At December 31, 2008, the Company provided a capital infusion into
ANB of $7.7 million. The Company has $1.75 million remaining on the credit
facility to dividend to ANB in the future. ANB is not growing the balance sheet
until the capital ratios are in compliance. ANB has also sold participations in
loans during the first quarter of 2009 to shrink its assets and has also
curtailed lines of credit on national credit facilities in which ANB
participated. Additionally, ANB has reduced its operating expenses and is
continuing to monitor spending.
The
following table presents the capital position of the Company and the Banks
relative to their various minimum statutory and regulatory capital requirements
at December 31, 2008 and 2007.
|
|
|
Actual
|
|
|
Minimum
Capital Requirements
|
|
|
Minimum
To Be Well Capitalized Under Prompt Corrective Action Provisions or
Adequately Capitalized under terms of the Written
Agreement
|
|
|
(Dollars in
thousands)
|
|
Amount
|
|
|
Ratio
|
|
|
Amount
|
|
|
Ratio
|
|
|
Amount
|
|
|
Ratio
|
|
|
December
31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
capital to risk weighted assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
$ |
27,637 |
|
|
|
8.03 |
% |
|
$ |
27,527 |
|
|
|
8.00 |
% |
|
|
(1) |
|
|
|
|
|
ANB
|
|
|
31,694 |
|
|
|
11.67 |
% |
|
|
21,724 |
|
|
|
8.00 |
% |
|
|
32,587 |
|
|
|
12.00 |
% |
|
CB&T
|
|
|
9.532 |
|
|
|
13.64 |
% |
|
|
5,591 |
|
|
|
8.00 |
% |
|
|
6,988 |
|
|
|
10.00 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tier
1 capital to risk weighted assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
|
23,234 |
|
|
|
6.75 |
% |
|
|
13,764 |
|
|
|
4.00 |
% |
|
|
(1) |
|
|
|
|
|
|
ANB
|
|
|
28,226 |
|
|
|
10.39 |
% |
|
|
10,862 |
|
|
|
4.00 |
% |
|
|
29,871 |
|
|
|
11.00 |
% |
|
CB&T
|
|
|
8,655 |
|
|
|
12.38 |
% |
|
|
2,795 |
|
|
|
4.00 |
% |
|
|
4,193 |
|
|
|
6.00 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tier
I capital to average assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
|
23,234 |
|
|
|
5.47 |
% |
|
|
16,981 |
|
|
|
4.00 |
% |
|
|
(1) |
|
|
|
|
|
|
ANB
|
|
|
28,226 |
|
|
|
8.63 |
% |
|
|
13,083 |
|
|
|
4.00 |
% |
|
|
24,440 |
|
|
|
9.00 |
% |
|
CB&T
|
|
|
8,655 |
|
|
|
9.18 |
% |
|
|
3,769 |
|
|
|
4.00 |
% |
|
|
4,712 |
|
|
|
5.00 |
% |
|
(1)
|
The
Company is not subject to this
requirement.
|
|
|
|
Actual
|
|
|
Minimum
Capital Requirements
|
|
|
Minimum
To Be Well Capitalized Under Prompt Corrective Action
Provisions
|
|
|
(Dollars
in thousands)
|
|
Amount
|
|
|
Ratio
|
|
|
Amount
|
|
|
Ratio
|
|
|
Amount
|
|
|
Ratio
|
|
|
December
31, 2007
|
|
|
|
|
Total
capital to risk weighted assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
$ |
36,305 |
|
|
|
10.42 |
% |
|
$ |
27,875 |
|
|
|
8.00 |
% |
|
|
(1) |
|
|
|
|
|
ANB
|
|
|
30,648 |
|
|
|
10.75 |
% |
|
|
22,799 |
|
|
|
8.00 |
% |
|
|
28,498 |
|
|
|
10.00 |
% |
|
CB&T
|
|
|
9,724 |
|
|
|
15.49 |
% |
|
|
5,023 |
|
|
|
8.00 |
% |
|
|
6,279 |
|
|
|
10.00 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tier
1 capital to risk weighted
assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
|
32,103 |
|
|
|
9.21 |
% |
|
|
13,937 |
|
|
|
4.00 |
% |
|
|
(1) |
|
|
|
|
|
|
ANB
|
|
|
27,481 |
|
|
|
9.64 |
% |
|
|
11,399 |
|
|
|
4.00 |
% |
|
|
17,099 |
|
|
|
6.00 |
% |
|
CB&T
|
|
|
8,936 |
|
|
|
14.23 |
% |
|
|
2,512 |
|
|
|
4.00 |
% |
|
|
3,767 |
|
|
|
6.00 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tier
I capital to average assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
|
32,103 |
|
|
|
7.21 |
% |
|
|
17,807 |
|
|
|
4.00 |
% |
|
|
(1) |
|
|
|
|
|
|
ANB
|
|
|
27,481 |
|
|
|
7.77 |
% |
|
|
14,150 |
|
|
|
4.00 |
% |
|
|
17,688 |
|
|
|
5.00 |
% |
|
CB&T
|
|
|
8,936 |
|
|
|
9.81 |
% |
|
|
3,643 |
|
|
|
4.00 |
% |
|
|
4,554 |
|
|
|
5.00 |
% |
|
(1)
The Company is not subject to this requirement.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note
17 Benefit Plans
The
Company has various stock option plans for directors and certain key employees.
At December 31, 2008, there were 178,218 shares of common stock reserved for
future issuance under the stock option plans of which there were 8,062 shares
under option outstanding. The terms of the options are determined by
the Board of Directors. Options vest over three years, and no options may be
exercised beyond ten years from the grant date. The option price for the 2000
Stock Option Plan was 90% of the fair market value at the date of the
grant.
The
fair value of each option grant is estimated on the date of the grant using a
Black-Scholes option pricing model. At December 31, 2008, the options
outstanding have a weighted remaining average contractual life of 1.1 years.
Compensation expense for stock options was recorded in salary expense over the
vesting period. There were no options granted and no compensation expense for
stock option plans was recorded for the years 2008, 2007, and 2006. The 8,062
options outstanding had no aggregate intrinsic value at December 31, 2008 since
the exercise price of the options exceeded the market value of the underlying
stock. The aggregate intrinsic value of the options exercised in 2008 and 2007
was $6,000 and $7,000, respectively.
The
following is a summary of activity of the Company’s stock option plans for 2008,
2007 and 2006:
|
|
|
December
31,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
|
Shares
Under Option
|
|
|
Weighted
Average Exercise Price
|
|
|
Shares
Under Option
|
|
|
Weighted
Average Exercise Price
|
|
|
Shares
Under Option
|
|
|
Weighted
Average Exercise Price
|
|
|
Outstanding
at beginning
of year
|
|
|
9,818 |
|
|
$ |
5.21 |
|
|
|
10,588 |
|
|
$ |
5.21 |
|
|
|
10,588 |
|
|
$ |
5.21 |
|
|
Granted
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
|
Exercised
|
|
|
(1,000 |
) |
|
$ |
5.21 |
|
|
|
(770 |
) |
|
$ |
5.21 |
|
|
|
-- |
|
|
|
-- |
|
|
Forfeited/expired
|
|
|
(756 |
) |
|
$ |
5.21 |
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
|
Outstanding
at end of
year
|
|
|
8,062 |
|
|
$ |
5.21 |
|
|
|
9,818 |
|
|
$ |
5.21 |
|
|
|
10,588 |
|
|
$ |
5.21 |
|
|
Exercisable
at end of
year
|
|
|
8,062 |
|
|
$ |
5.21 |
|
|
|
9,818 |
|
|
$ |
5.21 |
|
|
|
10,588 |
|
|
$ |
5.21 |
|
|
Weighted
average fair
value of
options
granted
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
The
Company offers an Employee Stock Ownership Plan ("ESOP") with 401(k) provisions.
Participants may make pre-tax and after-tax contributions to the 401(k) up to
the maximum allowable under Federal regulations. The Company matches the pre-tax
employee participant’s contributions at a rate of 100% of the first 3% of the
employee’s qualifying salary and 50% up to the next 2% of salary. The Company’s
401(k) contribution expense was $167,000, $156,000 and $136,000 for the years
ended December 31, 2008, 2007 and 2006, respectively, which is included in
"Salaries and Benefits" in the accompanying consolidated statements of
operations. Employees participate in a nonleveraged ESOP through which common
stock of the Company is purchased at its market price for the benefit of the
employees. The Board of Directors may elect to pay a discretionary contribution
on an annual basis, which vests at the end of the third year. There was no ESOP
expense in 2008 and 2007 and
$25,000
for 2006. At December 31, 2008, the ESOP held 53,760 shares of the Company’s
common stock. The ESOP is accounted for in accordance with Statement of Position
93-6, Employers’
Accounting for Employee Stock Ownership Plans. Shares held by the ESOP
are treated as outstanding in computing earnings per share.
Note
18 Pension Plan
On
January 10, 2007, the CB&T Board of Directors adopted a resolution to
terminate its noncontributory defined benefit pension plan effective March 31,
2007. All participants became 100% vested on that date and all
benefits were distributed by June 30, 2008. The Company recognized a
settlement expense of $43,000 in 2008 and $79,000 in 2007 which was accounted
for under SFAS No. 88. The plan maintained a September 30 year-end
for computing plan assets and benefit obligations.
Obligations
and funded status of pension plan at plan termination and prior year measurement
date:
| (In
thousands) |
|
Plan
termination
June 30,
2008
|
|
|
Plan
year ending September 30, 2007
|
|
|
Change
in benefit obligation:
|
|
|
|
|
|
|
|
Benefit
obligation, beginning
|
|
$ |
730 |
|
|
$ |
4,859 |
|
|
Interest
cost
|
|
|
16 |
|
|
|
270 |
|
|
Actuarial
(gain) loss
|
|
|
41 |
|
|
|
(71 |
) |
|
Benefits
paid
|
|
|
(787 |
) |
|
|
(4,328 |
) |
|
Benefit
obligation, ending
|
|
$ |
-- |
|
|
$ |
730 |
|
|
|
|
|
|
|
|
|
|
|
|
Change
in plan assets:
|
|
|
|
|
|
|
|
|
|
Fair
value of plan assets, beginning
|
|
$ |
850 |
|
|
$ |
4,755 |
|
|
Actual
return on plan assets
|
|
|
(19 |
) |
|
|
423 |
|
|
Employer
contribution
|
|
|
-- |
|
|
|
-- |
|
|
Benefits
paid
|
|
|
(787 |
) |
|
|
(4,328 |
) |
|
Reversion
to employer
|
|
|
(44 |
) |
|
|
-- |
|
|
Fair
value of plan assets, ending
|
|
$ |
-- |
|
|
$ |
850 |
|
|
|
|
|
|
|
|
|
|
|
|
Funded
status, ending
|
|
$ |
-- |
|
|
$ |
120 |
|
Assumed
discount rate of 6.75% was used to determine the benefit obligation at September
30, 2007.
The
amount recognized in accumulated other comprehensive income was $0 at December
31, 2008 and a net gain of $43,000 at December 31, 2007. The net gain
was recorded net of a deferred tax expense of $14,000. Amounts
recognized in the balance sheet consist of:
|
|
|
Years
ended December 31,
|
|
|
(In
thousands)
|
|
2008
|
|
|
2007
|
|
|
Noncurrent
assets
|
|
$ |
-- |
|
|
$ |
120 |
|
|
Accumulated
other comprehensive (gain) loss
- net
of deferred tax (expense) benefit
|
|
|
-- |
|
|
|
(29 |
) |
The
accumulated benefit obligation for the pension plan was $0 as of the termination
date of June 30, 2008 and $730,000 as of September 30, 2007.
Components
of net periodic costs were as follows:
|
|
|
Years
ended December 31,
|
|
|
(In
thousands)
|
|
2008
|
|
|
2007
|
|
|
Interest
cost
|
|
$ |
16 |
|
|
$ |
270 |
|
|
Expected
return on plan assets
|
|
|
(27 |
) |
|
|
(331 |
) |
|
Net
periodic benefit cost
|
|
$ |
(11 |
) |
|
$ |
(61 |
) |
Assumptions
used to determine net periodic pension cost were as follows:
|
|
|
Years ended December
31, |
|
|
Weighted-average
assumptions
|
|
2008
|
|
|
2007
|
|
|
Discount
rate
|
|
|
6.25 |
% |
|
|
5.75 |
% |
|
Expected
long-term return on plan
assets
|
|
|
7.00 |
% |
|
|
7.00 |
% |
The
expected long-term rate of return on plan assets reflects the average rate of
earnings expected on the funds invested or to be invested to provide for the
benefits included in the projected benefit obligation. In estimating
that rate, consideration was given to both historical returns and returns
expected to be available for reinvestment.
The
percentages of fair value of total plan assets held at June 30, 2008 and
September 30, 2007 by asset category were as follows:
| Asset
Allocation |
|
June
30, 2008 |
|
|
September
30, 2007 |
|
|
Cash
and equivalents
|
|
|
0.0 |
% |
|
|
100.0 |
% |
There
are no estimated future benefit payments.
Note
19 Other Operating Expense
The
following is a summary of the significant components of noninterest expense
“other operating expense.”
|
(In
thousands)
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Advertising
|
|
$ |
299 |
|
|
$ |
717 |
|
|
$ |
642 |
|
|
Bank
security
|
|
|
178 |
|
|
|
186 |
|
|
|
194 |
|
|
Director
and committee fees
|
|
|
275 |
|
|
|
241 |
|
|
|
228 |
|
|
Insurance
|
|
|
339 |
|
|
|
193 |
|
|
|
172 |
|
|
OREO
expense
|
|
|
340 |
|
|
|
-- |
|
|
|
-- |
|
|
Loan
expense
|
|
|
212 |
|
|
|
214 |
|
|
|
76 |
|
|
Stationery
and office supplies
|
|
|
190 |
|
|
|
188 |
|
|
|
183 |
|
|
Taxes,
other
|
|
|
131 |
|
|
|
123 |
|
|
|
134 |
|
|
Telephone
|
|
|
174 |
|
|
|
168 |
|
|
|
149 |
|
|
Travel
|
|
|
228 |
|
|
|
190 |
|
|
|
158 |
|
|
Other
|
|
|
1,035 |
|
|
|
994 |
|
|
|
785 |
|
|
Total
other operating expense
|
|
$ |
3,401 |
|
|
$ |
3,214 |
|
|
$ |
2,721 |
|
Note
20 Fair Value of Financial Instruments
Effective
January 1, 2008, the Company adopted the provisions of SFAS No. 157, Fair Value Measurements, for
financial assets and financial liabilities. In accordance with
Financial Accounting Standards Board Staff Position (FSP) No. SFAS 157-2, Effective Date of FASB Statement No.
157, the Company will delay application of SFAS 157 for non-financial
assets and non-financial liabilities, until January 1, 2009. SFAS 157
defines fair value, establishes a framework for measuring fair value in
generally accepted accounting principals and expands disclosures about fair
value measurements. The application of SFAS 157 in situations were
the market for a financial asset is not active was clarified by the issuance of
FSP No. SFAS 157-3, Determining the Fair Value of a
Financial Asset When the Market for that Asset Is Not Active, in October
2008. FSP No. SFAS 157-3 became effective immediately and did not
significantly impact the methods by which the Company determines the fair value
of its financial assets.
SFAS
157 defines fair value as the price that would be received to sell an asset or
paid to transfer a liability in an orderly transaction between market
participants. A fair value measurement assumes that the transaction
to sell the asset or transfer the liability occurs in the principal market for
the asset or liability or, in the absence of a principal market, the most
advantageous market for the asset or liability. The price in the
principal (or most advantageous) market used to measure the fair value of the
asset or liability shall not be adjusted for transaction costs. An
orderly transaction is a transaction that assumes exposure to the market for a
period prior to the measurement date to allow for marketing activities that are
usual and customary for transactions involving such assets and liabilities; it
is not a forced transaction. Market participants are buyers and
sellers in the principal market that are independent, knowledgeable, able to
transact and willing to transact.
SFAS
157 requires the use of valuation techniques that are consistent with the market
approach, the income approach and/or the cost approach. The market
approach uses prices and other relevant information generated by market
transactions involving identical or comparable assets and
liabilities. The income approach uses valuation techniques to convert
future amounts, such as cash flows or earnings, to a single present amount on a
discounted basis. The cost approach is based on the amount that
currently would be required to replace the service capacity of an asset
(replacement cost). Valuation techniques should be consistently
applied. Inputs to valuation techniques refer to the assumptions that
market participants would use in pricing the asset or
liability. Inputs may be observable, meaning those that reflect the
assumptions market participants would use in pricing the asset or liability
developed based on market data obtained from independent sources, or
unobservable, meaning those that reflect the reporting entity’s own assumptions
about the assumptions market participants would use in pricing the asset or
liability developed based on the best information available in the
circumstances. In that regard, SFAS 157 establishes a fair value
hierarchy for valuation inputs that gives the highest priority to quoted prices
in active markets for identical assets or liabilities and the lowest priority to
unobservable inputs. The fair value hierarchy is as
follows:
|
Level 1
inputs
|
Unadjusted
quoted prices in active markets for identical assets or liabilities that
the Company has the ability to access at the measurement
date.
|
|
Level 2
inputs
|
Inputs
other than quoted prices included in Level 1 that are observable for the
asset or liability, either directly or indirectly. These might
include quoted prices for similar assets or liabilities in active markets,
quoted prices for identical or similar assets or liabilities in markets
that are not active, inputs other than quoted prices that are observable
for the asset or liability (such as interest rates, volatilities,
prepayment speed, credit risks, etc.) or inputs that are derived
principally from or corroborated by market data by correlation or other
means.
|
|
Level
3 inputs
|
Unobservable
inputs for determining the fair values of assets or liabilities that
reflect the Company’s own assumptions about the assumptions that market
participants would use in pricing the assets or
liabilities.
|
The
following table summarizes the Company’s balances of financial instruments
measured at fair value on a recurring basis as of December 31, 2008, segregated
by the level of the valuation inputs within the fair value hierarchy utilized to
measure fair value:
|
(In thousands)
|
|
Quoted
Prices in Active Markets for Identical Assets
(Level
1)
|
|
|
Significant
Other Observable Inputs
(Level
2)
|
|
|
Significant
Unobservable Inputs
(Level
3)
|
|
|
Total
|
|
|
Investment
securities available for sale
|
|
$ |
998 |
|
|
$ |
61,816 |
|
|
$ |
-- |
|
|
$ |
62,814 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
Company outsources the recordkeeping for investment securities held by ANB to
FTN Financial and for those held by CB&T to Suntrust Robinson Humphrey. The
security grouped in Level 1 was based on the actual trade price. For 40 of the
53 securities categorized in Level 2 in the table above, FTN used the
Interactive Data Corporation (“IDC”) as a pricing source. IDC’s
evaluations are based on market data. IDC utilizes evaluated pricing
models that vary based by asset class and include available trade, bid, and
other market information. Generally, the methodology includes broker
quotes, proprietary modes, vast descriptive terms and conditions databases, as
well as extensive quality control programs. FTN also used, as a
valuation source, the FTN proprietary valuation Matrices model for the one
municipal security included in Level 2. The FTN Matrices model is
used for valuing municipals. The model includes a separate curve
structure for the Bank-Qualified versus general market
municipals. The grouping of municipals are further broken down
according to insurer, credit support, state of issuance, and rating to
incorporate additional spreads and municipal curves. Suntrust used
the R Reuters DataScope for Fixed Income as the pricing source for the remaining
12 securities included in Level 2 in the table above.
The
following table summarizes the Company’s balances of financial instruments
measured at fair value on a nonrecurring basis by level within the hierarchy at
December 31, 2008:
|
(In thousands)
|
|
Balance
at
December
31, 2008
|
|
|
Quoted
Prices in Active Markets for Identical Assets
(Level
1)
|
|
|
Significant
Other Observable Inputs
(Level
2)
|
|
|
Significant
Unobservable Inputs
(Level
3)
|
|
|
Impaired
loans
|
|
$ |
22,377 |
|
|
$ |
-- |
|
|
$ |
21,266 |
|
|
$ |
1,111 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
fair value of impaired collateral dependent loans is derived in accordance with
SFAS No. 114, Accounting by
Creditors for Impairment of a Loan. Fair value is determined
based on the loan’s observable market price or the fair value of the collateral
if the loan is collateral dependent. The value of real estate collateral is
determined based on appraisal by qualified licensed appraisers hired by the
Company. The valuation allowance for impaired loans is included in the allowance
for loan losses in the consolidated balance sheets. The valuation allowance for
impaired loans at December 31, 2008 was $8.3 million. During the
twelve months ended December 31, 2008, the valuation allowance for impaired
loans increased $6.8 million from $1.5 million at December 31,
2007.
SFAS
107, Disclosures about Fair
Value of Financial Instruments, requires disclosure of the fair value of
financial assets and financial liabilities, including those financial assets and
financial liabilities that are not measured and reported at fair value on a
recurring basis or non-recurring basis.
The
following table presents the estimated fair values of the Company’s financial
instruments at December 31, 2008 and 2007 and is followed by a general
description of the methods and assumptions used to estimate such fair
values.
|
|
|
December
31, 2008
|
|
|
December
31, 2007
|
|
|
(In
thousands)
|
|
Carrying
Amount
|
|
|
Estimated
Fair Value
|
|
|
Carrying
Amount
|
|
|
Estimated
Fair Value
|
|
|
Financial
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and due from banks
|
|
$ |
14,166 |
|
|
$ |
14,166 |
|
|
$ |
15,567 |
|
|
$ |
15,567 |
|
|
Federal
funds sold and interest-earning deposits in other banks
|
|
|
9,381 |
|
|
|
9,381 |
|
|
|
33,196 |
|
|
|
33,196 |
|
|
Investment
securities available for sale
|
|
|
62,814 |
|
|
|
62,814 |
|
|
|
66,392 |
|
|
|
66,392 |
|
|
Investment
securities held to maturity
|
|
|
3,175 |
|
|
|
3,226 |
|
|
|
13,309 |
|
|
|
13,269 |
|
|
Loans,
net
|
|
|
312,250 |
|
|
|
315,879 |
|
|
|
303,281 |
|
|
|
318,408 |
|
|
Accrued
interest receivable
|
|
|
1,683 |
|
|
|
1,683 |
|
|
|
2,231 |
|
|
|
2,231 |
|
|
Financial
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
346,961 |
|
|
|
338,707 |
|
|
|
386,942 |
|
|
|
378,717 |
|
|
Short-term
borrowings
|
|
|
24,477 |
|
|
|
24,477 |
|
|
|
8,494 |
|
|
|
8,494 |
|
|
Long-term
debt
|
|
|
26,132 |
|
|
|
27,041 |
|
|
|
15,120 |
|
|
|
16,952 |
|
|
Accrued
interest payable
|
|
|
697 |
|
|
|
697 |
|
|
|
1,960 |
|
|
|
1,960 |
|
The
following methods and assumptions were used by the Company in estimating the
fair value of its financial instruments.
Cash and due from
banks. The carrying amounts reported in the balance sheet approximate
fair value due to the short-term nature of these assets.
Federal funds
sold and interest-bearing deposits in other banks. The
carrying amounts of short-term investments on the balance sheet approximate fair
value.
Investments
securities available for sale and investment securities held to
maturity. For fair value methodologies used see discussion
above.
Loans.
Estimated fair values for variable rate loans, which reprice frequently
and have no significant credit risk, are based on carrying value. Estimated fair
value for all other loans are estimated using discounted cash flow analyses,
based on current market interest rates offered on loans with similar terms to
borrowers of similar credit quality.
Deposits.
The fair value of deposits with no stated maturity, such as
noninterest-bearing deposits, NOW accounts, savings and money market deposit
accounts, is the amount payable on demand as of year end. Fair values
for time deposits are estimated using discounted cash flow analyses, based on
the current market interest rates offered for deposits of similar
maturities.
Short-term
borrowings. The carrying values of Federal funds purchased,
securities sold under agreements to repurchase and other short-term borrowings
approximate fair values.
Long-term debt.
The fair value of the long-term debt is estimated by using discounted
cash flow analyses, based on the current market rates offered for similar
borrowing arrangements.
Accrued interest
receivable and accrued interest payable. The carrying value
of accrued interest receivable and payable is deemed to approximate
fair value.
Off-balance sheet
credit-related instruments. Loan commitments on which the
committed interest rate is less than the current market rate were insignificant
at December 31, 2008 and 2007. The estimated fair value of fee income
on letters of credit at December 31, 2008 and 2007 was
insignificant.
Note
21 Parent Company Only Financial Statements
The
Parent Company’s condensed balance sheets at December 31, 2008 and 2007, and
related condensed statements of operations and cash flows for years ended 2008,
2007, and 2006 are as follows:
|
Condensed
Balance Sheets
(In
thousands)
|
|
|
|
|
December
31,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
Assets:
|
|
|
|
|
|
|
|
Cash
in bank
|
|
$ |
151 |
|
|
$ |
78 |
|
|
Investment
in subsidiary banks
|
|
|
37,929 |
|
|
|
35,753 |
|
|
Loans
|
|
|
3,496 |
|
|
|
-- |
|
|
Less:
allowance for loan losses
|
|
|
(2,049 |
) |
|
|
-- |
|
|
Loans,
net
|
|
|
1,447 |
|
|
|
-- |
|
|
Other
assets
|
|
|
1,145 |
|
|
|
414 |
|
|
Total
assets
|
|
$ |
40,672 |
|
|
$ |
36,245 |
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
and Stockholders' Equity
|
|
|
|
|
|
|
|
|
|
Long-term
debt
|
|
$ |
16,132 |
|
|
$ |
4,769 |
|
|
Other
liabilities
|
|
|
259 |
|
|
|
37 |
|
|
Stockholders'
equity
|
|
|
24,281 |
|
|
|
31,439 |
|
|
Total
liabilities and stockholders' equity
|
|
$ |
40,672 |
|
|
$ |
36,245 |
|
|
Condensed
Statements of Operations
(In
thousands)
|
|
| |
|
Years Ended December
31,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Income
|
|
|
|
|
|
|
|
|
|
|
Dividends
from subsidiary banks
|
|
$ |
950 |
|
|
$ |
2,325 |
|
|
$ |
3,000 |
|
|
Total
income
|
|
|
950 |
|
|
|
2,325 |
|
|
|
3,000 |
|
|
Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Professional
fees
|
|
|
397 |
|
|
|
79 |
|
|
|
47 |
|
|
Interest
expense
|
|
|
348 |
|
|
|
394 |
|
|
|
435 |
|
|
Loan
loss provision
|
|
|
2,049 |
|
|
|
-- |
|
|
|
-- |
|
|
Other
|
|
|
527 |
|
|
|
512 |
|
|
|
619 |
|
|
Total
expenses
|
|
|
3,321 |
|
|
|
985 |
|
|
|
1,101 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss)
income before taxes and
equity
in undistributed net (loss)
income
of subsidiaries
|
|
|
(2,371 |
) |
|
|
1,340 |
|
|
|
1,899 |
|
|
Income
tax benefit
|
|
|
(1,348 |
) |
|
|
(400 |
) |
|
|
(447 |
) |
|
(Loss)
income before equity in
undistributed
(loss) earnings of
subsidiaries
|
|
|
(1,023 |
) |
|
|
1,740 |
|
|
|
2,346 |
|
|
Equity
in undistributed net (loss)
income
of subsidiaries
|
|
|
(4,756 |
) |
|
|
1,319 |
|
|
|
1,350 |
|
|
Net
(Loss) Income
|
|
$ |
(5,779 |
) |
|
$ |
3,059 |
|
|
$ |
3,696 |
|
|
Condensed
Statement of Cash Flows
(In
thousands)
|
| |
|
Years
Ended December 31,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Operating
Activities:
|
|
|
|
|
|
|
|
|
|
|
Net
(loss) income
|
|
$ |
( 5,779 |
) |
|
$ |
3,059 |
|
|
$ |
3,696 |
|
|
Adjustments
to reconcile net(loss) income to net cash provided
by
operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity
in undistributed net loss (income) of subsidiaries
|
|
|
4,756 |
|
|
|
(1,319 |
) |
|
|
(1,350 |
) |
|
Provision
for loan losses
|
|
|
2,049 |
|
|
|
|
|
|
|
|
|
|
Other,
net
|
|
|
(509 |
) |
|
|
56 |
|
|
|
(215 |
) |
|
Net
cash provided by operating activities
|
|
|
517 |
|
|
|
1,796 |
|
|
|
2,131 |
|
|
Investing
Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital
infusion in subsidiary
|
|
|
(7,450 |
) |
|
|
-- |
|
|
|
-- |
|
|
Increase
in loans
|
|
|
(3,496 |
) |
|
|
-- |
|
|
|
-- |
|
|
Net
cash used by investing activities
|
|
|
(10,946 |
) |
|
|
-- |
|
|
|
-- |
|
|
Financing
Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds
from issuance of common stock, net
|
|
|
5 |
|
|
|
4 |
|
|
|
-- |
|
|
Retired
shares of common stock
|
|
|
-- |
|
|
|
-- |
|
|
|
(12 |
) |
|
Purchased
treasury stock
|
|
|
-- |
|
|
|
(45 |
) |
|
|
(112 |
) |
|
Proceeds
from long-term debt
|
|
|
16,132 |
|
|
|
-- |
|
|
|
-- |
|
|
Repayment
of long-term debt
|
|
|
(4,769 |
) |
|
|
(231 |
) |
|
|
-- |
|
|
Cash
dividends paid to stockholders
|
|
|
(866 |
) |
|
|
(1,731 |
) |
|
|
(1,731 |
) |
|
Net
cash provided (used) in financing activities
|
|
|
10,502 |
|
|
|
(2,003 |
) |
|
|
(1,855 |
) |
|
Net
increase (decrease) in cash and cash equivalents
|
|
|
73 |
|
|
|
(207 |
) |
|
|
276 |
|
|
Cash
and cash equivalents at beginning of year
|
|
|
78 |
|
|
|
285 |
|
|
|
9 |
|
|
Cash
and cash equivalents at end of year
|
|
$ |
151 |
|
|
$ |
78 |
|
|
$ |
285 |
|
Note
22 Segment Reporting
Management
regularly reviews the performance of the Company’s operations on a reporting
basis by legal entity. The Company has two operating segments
comprised of its subsidiaries, ANB and CB&T, for which there is discrete
financial information available. Both segments are engaged in
providing financial services in their respective market areas and are similar in
each of the following: the nature of their products, services; and processes;
type or class of customer for their products and services; methods used to
distribute their products or provide their services; and the nature of the
banking regulatory environment. The parent company is deemed to
represent an overhead function rather than an operating segment and its
financial information is presented as the Other category in the schedule
below. The accounting policies of the segments are the same as those
described in the summary of significant accounting policies in Note 1 of the
Notes to the Consolidated Financial Statements. The Company does not have a
single external customer from which it derives 10 percent or more of its
revenues.
Information
about the reportable segments and reconciliation of such information to the
consolidated financial statements as of and for the years ended December 31,
follows:
| (Dollars
in thousands) |
|
The
Adams
National
Bank
|
|
|
Consolidated
Bank
& Trust
|
|
|
Other
(1) |
|
|
Intercompany
Eliminations
|
|
|
Consolidated
Totals
|
|
| 2008: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income
|
|
$ |
19,973 |
|
|
$ |
5,329 |
|
|
$ |
-- |
|
|
$ |
-- |
|
|
$ |
25,302 |
|
|
Interest
expense
|
|
|
8,112 |
|
|
|
1,341 |
|
|
|
348 |
|
|
|
-- |
|
|
|
9,801 |
|
|
Net
interest income (expense)
|
|
|
11,861 |
|
|
|
3,988 |
|
|
|
(348 |
) |
|
|
-- |
|
|
|
15,501 |
|
|
Provision
for loan losses
|
|
|
9,478 |
|
|
|
295 |
|
|
|
2,049 |
|
|
|
-- |
|
|
|
11,822 |
|
|
Noninterest
income (loss)
|
|
|
665 |
|
|
|
401 |
|
|
|
(3,806 |
) |
|
|
3,706 |
|
|
|
966 |
|
|
Noninterest
expense
|
|
|
9,653 |
|
|
|
4,072 |
|
|
|
924 |
|
|
|
(100 |
) |
|
|
14,549 |
|
|
Net
(loss) income
|
|
|
(3,825 |
) |
|
|
19 |
|
|
|
(5,779 |
|
|
|
3,806 |
|
|
|
(5,779 |
) |
|
Assets
|
|
|
330,010 |
|
|
|
91,172 |
|
|
|
40,672 |
|
|
|
(38,173 |
) |
|
|
423,681 |
|
|
Return
on average assets (annualized)
|
|
|
-1.11 |
% |
|
|
0.02 |
% |
|
NM(2)
|
|
|
|
-- |
|
|
|
-1.32 |
% |
|
Return
on average equity (annualized)
|
|
|
-14.40 |
% |
|
|
0.21 |
% |
|
NM(2)
|
|
|
|
-- |
|
|
|
-19.14 |
% |
|
2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income
|
|
$ |
24,483 |
|
|
$ |
5,768 |
|
|
$ |
-- |
|
|
$ |
-- |
|
|
$ |
30,251 |
|
|
Interest
expense
|
|
|
11,531 |
|
|
|
1,674 |
|
|
|
394 |
|
|
|
-- |
|
|
|
13,599 |
|
|
Net
interest income (expense)
|
|
|
12,952 |
|
|
|
4,094 |
|
|
|
(394 |
|
|
|
-- |
|
|
|
16,652 |
|
|
Provision
(credit)for loan losses
|
|
|
300 |
|
|
|
(40 |
) |
|
|
-- |
|
|
|
-- |
|
|
|
260 |
|
|
Noninterest
income
|
|
|
1,311 |
|
|
|
414 |
|
|
|
3,644 |
|
|
|
(3,744 |
) |
|
|
1,625 |
|
|
Noninterest
expense
|
|
|
9,254 |
|
|
|
4,117 |
|
|
|
591 |
|
|
|
(100 |
) |
|
|
13,862 |
|
|
Net
income
|
|
|
2,823 |
|
|
|
821 |
|
|
|
3,059 |
|
|
|
(3,644 |
) |
|
|
3,059 |
|
|
Assets
|
|
|
356,879 |
|
|
|
88,582 |
|
|
|
36,245 |
|
|
|
(35,831 |
) |
|
|
445,875 |
|
|
Return
on average assets (annualized)
|
|
|
0.80 |
% |
|
|
0.91 |
% |
|
NM(2)
|
|
|
|
-- |
|
|
|
0.69 |
% |
|
Return
on average equity (annualized)
|
|
|
10.39 |
% |
|
|
10.01 |
% |
|
NM(2)
|
|
|
|
-- |
|
|
|
9.92 |
% |
|
2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income
|
|
$ |
21,225 |
|
|
|
4,920 |
|
|
$ |
-- |
|
|
|
-- |
|
|
$ |
26,145 |
|
|
Interest
expense
|
|
|
7,935 |
|
|
|
1,038 |
|
|
|
435 |
|
|
|
-- |
|
|
|
9,408 |
|
|
Net
interest income (expense)
|
|
|
13,290 |
|
|
|
3,882 |
|
|
|
(435 |
|
|
|
-- |
|
|
|
16,737 |
|
|
Provision
for loan losses
|
|
|
250 |
|
|
|
(482 |
) |
|
|
-- |
|
|
|
-- |
|
|
|
(232 |
) |
|
Noninterest
income
|
|
|
1,694 |
|
|
|
536 |
|
|
|
4,350 |
|
|
|
(4,450 |
) |
|
|
2,130 |
|
|
Noninterest
expense
|
|
|
8,774 |
|
|
|
3,767 |
|
|
|
666 |
|
|
|
(100 |
) |
|
|
13,107 |
|
|
Net
income
|
|
|
3,565 |
|
|
|
785 |
|
|
|
3,696 |
|
|
|
(4,350 |
) |
|
|
3,696 |
|
|
Assets
|
|
|
322,828 |
|
|
|
82,218 |
|
|
|
35,203 |
|
|
|
(34,747 |
) |
|
|
405,502 |
|
|
Return
on average assets (annualized)
|
|
|
1.22 |
% |
|
|
0.99 |
% |
|
NM(2)
|
|
|
|
-- |
|
|
|
0.99 |
% |
|
Return
on average equity (annualized)
|
|
|
13.68 |
% |
|
|
9.96 |
% |
|
NM(2)
|
|
|
|
-- |
|
|
|
12.78 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) Amounts represent parent
company before intercompany eliminations. See Note 21 of the Notes to
Consolidated Financial Statements.
(2) Not considered a
meaningful performance ratio for parent company.
Description
of significant amounts included in the intercompany eliminations column in the
segment report schedule are as follows:
|
(In
thousands)
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Noninterest
income- elimination of parent company’s undistributed loss (earnings) from
subsidiaries
|
|
$ |
3,806 |
|
|
$ |
(3,644 |
) |
|
$ |
(4,350 |
) |
|
Net
(loss) income- elimination of parent company’s (loss) earnings from
subsidiaries
|
|
$ |
3,806 |
|
|
$ |
(3,644 |
) |
|
$ |
(4,350 |
) |
|
Assets-
elimination of parent company’s investment in subsidiaries
|
|
$ |
(37,929 |
) |
|
$ |
(35,753 |
) |
|
$ |
(34,462 |
) |
Note
23 Comprehensive Income (loss)
Comprehensive
income (loss) consists of net income (loss) and other comprehensive income
(loss). Other comprehensive income (loss) includes unrealized gains
and losses on securities available for sale and unrealized gains and losses on
pension plan assets and benefit obligations. There were two reclassification
adjustments realized in income for losses from components of other comprehensive
loss in the year ended December 31, 2008 and none in the year ended
December 31, 2007. In 2008, the Company
recorded an other-than-temporary impairment charge on two corporate debt
securities in the amount of $655,000 with a deferred tax benefit of $266,000 and
a settlement loss in the amount of $43,000 with a deferred tax benefit of
$14,000 on the termination of the CB&T pension plan.
The
components of comprehensive income (loss) are as follows:
|
|
|
December
31,
|
|
|
(In thousands)
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
Net
(loss) income
|
|
$ |
( 5,779 |
) |
|
$ |
3,059 |
|
|
Available
for sale securities:
|
|
|
|
|
|
|
|
|
|
Net
unrealized losses on securities
|
|
|
(1,018 |
) |
|
|
(336 |
) |
|
Reclassification
adjustment for other-than-
temporary
impairment losses realized in
noninterest
income
|
|
|
655 |
|
|
|
-- |
|
|
Income
tax (expense) benefit
|
|
|
(126 |
) |
|
|
147 |
|
|
|
|
|
(489 |
) |
|
|
(189 |
) |
|
Pension
plan assets and benefit obligations:
|
|
|
|
|
|
|
|
|
|
Net
unrealized gains
|
|
|
-- |
|
|
|
241 |
|
|
Realized
loss on pension termination
|
|
|
(43 |
) |
|
|
-- |
|
|
Income
tax benefit (expense)
|
|
|
14 |
|
|
|
(82 |
) |
|
|
|
|
(29 |
|
|
|
159 |
|
|
Total
comprehensive (loss) income
|
|
$ |
(6,297 |
) |
|
$ |
3,029 |
|
CONSOLIDATED
INTERIM FINANCIAL STATEMENTS
March
31, 2009
(UNAUDITED)
ABIGAIL
ADAMS NATIONAL BANCORP, INC. AND SUBSIDIARIES
March
31, 2009 (unaudited) and December 31, 2008
(Dollars
in thousands)
|
|
|
March
31, 2009
|
|
|
December
31, 2008
|
|
|
Assets
|
|
|
|
|
|
|
|
Cash
and due from banks
|
|
$ |
11,636 |
|
|
$ |
14,166 |
|
|
Federal
funds sold
|
|
|
7,033 |
|
|
|
6,722 |
|
|
Interest-earning
deposits in other banks
|
|
|
288 |
|
|
|
2,659 |
|
|
Total
cash and cash equivalents
|
|
|
18,957 |
|
|
|
23,547 |
|
|
Investment
securities available for sale, at fair value
|
|
|
60,905 |
|
|
|
62,814 |
|
|
Investment
securities held to maturity, at amortized cost (fair value of
$3,192
and $3,226 for 2009 and 2008, respectively)
|
|
|
3,116 |
|
|
|
3,175 |
|
|
Loans
|
|
|
303,112 |
|
|
|
324,764 |
|
|
Less:
allowance for loan losses
|
|
|
(13,292 |
) |
|
|
(12,514 |
) |
|
Loans,
net
|
|
|
289,820 |
|
|
|
312,250 |
|
|
Premises
and equipment, net
|
|
|
4,908 |
|
|
|
4,994 |
|
|
Other
assets
|
|
|
18,063 |
|
|
|
16,901 |
|
|
Total
assets
|
|
$ |
395,769 |
|
|
$ |
423,681 |
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
and Stockholders' Equity
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
|
|
|
|
|
|
|
Noninterest-bearing
deposits
|
|
$ |
57,537 |
|
|
$ |
67,193 |
|
|
Interest-bearing
deposits
|
|
|
265,807 |
|
|
|
279,768 |
|
|
Total
deposits
|
|
|
323,344 |
|
|
|
346,961 |
|
|
Short-term
borrowings
|
|
|
21,663 |
|
|
|
24,477 |
|
|
Long-term
debt
|
|
|
26,332 |
|
|
|
26,132 |
|
|
Other
liabilities
|
|
|
1,676 |
|
|
|
1,830 |
|
|
Total
liabilities
|
|
|
373,015 |
|
|
|
399,400 |
|
|
Commitments
and contingencies (Note 2)
|
|
|
|
|
|
|
|
|
|
Stockholders'
equity:
|
|
|
|
|
|
|
|
|
|
Common
stock, $0.01 par value, authorized 5,000,000 shares; issued
3,492,633
shares in 2009 and 2008; outstanding 3,463,569 shares in 2009 and
2008
|
|
|
35 |
|
|
|
35 |
|
|
Additional
paid-in capital
|
|
|
25,132 |
|
|
|
25,132 |
|
|
Retained
earnings (accumulated deficit)
|
|
|
(254 |
) |
|
|
551 |
|
|
Treasury
stock, 29,064 shares in 2009 and 2008, at cost
|
|
|
(255 |
) |
|
|
(255 |
) |
|
Accumulated
other comprehensive loss
|
|
|
(1,904 |
) |
|
|
(1,182 |
) |
|
Total
stockholders' equity
|
|
|
22,754 |
|
|
|
24,281 |
|
|
Total
liabilities and stockholders' equity
|
|
$ |
395,769 |
|
|
$ |
423,681 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ABIGAIL
ADAMS NATIONAL BANCORP, INC. AND SUBSIDIARIES
For
the Three Months Ended March 31, 2009 and 2008
(Dollars
in thousands except per share data)
|
|
|
2009
|
|
|
2008
|
|
|
Interest
Income
|
|
|
|
|
|
|
|
Interest
and fees on loans
|
|
$ |
4,229 |
|
|
$ |
5,533 |
|
|
Interest
and dividends on investment securities, taxable
|
|
|
802 |
|
|
|
963 |
|
|
Other
interest income
|
|
|
4 |
|
|
|
209 |
|
|
Total
interest income
|
|
|
5,035 |
|
|
|
6,705 |
|
|
Interest
Expense
|
|
|
|
|
|
|
|
|
|
Interest
on deposits
|
|
|
1,459 |
|
|
|
2,620 |
|
|
Interest
on short-term borrowings
|
|
|
43 |
|
|
|
63 |
|
|
Interest
on long-term debt
|
|
|
262 |
|
|
|
182 |
|
|
Total
interest expense
|
|
|
1,764 |
|
|
|
2,865 |
|
|
Net
interest income
|
|
|
3,271 |
|
|
|
3,840 |
|
|
Provision
for loan losses
|
|
|
965 |
|
|
|
105 |
|
|
Net
interest income after provision for loan losses
|
|
|
2,306 |
|
|
|
3,735 |
|
|
Noninterest
Income
|
|
|
|
|
|
|
|
|
|
Service
charges on deposit accounts
|
|
|
338 |
|
|
|
332 |
|
|
Other
fees
|
|
|
64 |
|
|
|
75 |
|
|
Other-than-temporary
impairment of available for sale securities
|
|
|
(32 |
) |
|
|
-- |
|
|
Total
noninterest income
|
|
|
370 |
|
|
|
407 |
|
|
Noninterest
Expense
|
|
|
|
|
|
|
|
|
|
Salaries
and employee benefits
|
|
|
1,783 |
|
|
|
1,692 |
|
|
Occupancy
and equipment expense
|
|
|
573 |
|
|
|
610 |
|
|
Professional
fees
|
|
|
409 |
|
|
|
165 |
|
|
Data
processing fees
|
|
|
215 |
|
|
|
177 |
|
|
Other
operating expense
|
|
|
1,038 |
|
|
|
579 |
|
|
Total
noninterest expense
|
|
|
4,018 |
|
|
|
3,223 |
|
|
(Loss)
income before income taxes
|
|
|
(1,342 |
) |
|
|
919 |
|
|
Income
tax (benefit) provision
|
|
|
(537 |
) |
|
|
355 |
|
|
Net
(loss) income
|
|
$ |
( 805 |
) |
|
$ |
564 |
|
|
|
|
|
|
|
|
|
|
|
|
(Loss)
Earnings per share:
|
|
|
|
|
|
|
|
|
|
Basic
and diluted
|
|
$ |
( 0.23 |
) |
|
$ |
0.16 |
|
ABIGAIL
ADAMS NATIONAL BANCORP, INC. AND SUBSIDIARIES
Three
Months Ended March 31, 2008 and 2009
(In
thousands except per share data)
| |
|
Common
Stock
|
|
|
Additional
Paid-in
Capital
|
|
|
Retained
Earnings
(Accumulated
Deficit)
|
|
|
Treasury
Stock
|
|
|
Accumulated
Other
Comprehensive
Loss
|
|
|
Total
|
|
|
Balance
at December 31, 2007
|
|
$ |
35 |
|
|
$ |
25,127 |
|
|
$ |
7,196 |
|
|
$ |
(255 |
) |
|
$ |
(664 |
|
|
$ |
31,439 |
|
|
Comprehensive
income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
|
-- |
|
|
|
-- |
|
|
|
564 |
|
|
|
-- |
|
|
|
-- |
|
|
|
564 |
|
|
Unrealized
gains during the period of $734 on investment
securities
available for sale, net of tax expense of $287
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
|
|
447 |
|
|
|
447 |
|
|
Total
comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,011 |
|
|
Dividends
declared ($0.125 per share)
|
|
|
-- |
|
|
|
-- |
|
|
|
(433 |
) |
|
|
-- |
|
|
|
-- |
|
|
|
(433 |
) |
|
Issuance
of shares under stock option program
|
|
|
-- |
|
|
|
5 |
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
|
|
5 |
|
|
Balance
at March 31, 2008
|
|
$ |
35 |
|
|
$ |
25,132 |
|
|
$ |
7,327 |
|
|
$ |
(255 |
) |
|
$ |
(217 |
) |
|
$ |
32,022 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at December 31, 2008
|
|
$ |
35 |
|
|
$ |
25,132 |
|
|
$ |
551 |
|
|
$ |
(255 |
) |
|
$ |
(1,182 |
|
|
$ |
24,281 |
|
|
Comprehensive
loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
|
-- |
|
|
|
-- |
|
|
|
(805 |
) |
|
|
-- |
|
|
|
-- |
|
|
|
(805 |
) |
|
Unrealized
loss during the period of $1,184 on investment
securities
available for sale, net of tax benefit of $443
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
|
|
(741 |
|
|
|
(741 |
) |
|
Reclassification
adjustment for OTTI on investment
securities
available for sale of $32, net of tax benefit of $13
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
19 |
|
|
|
19 |
|
|
Total
comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,527 |
) |
|
Balance
at March 31, 2009
|
|
$ |
35 |
|
|
$ |
25,132 |
|
|
$ |
(254 |
) |
|
$ |
(255 |
) |
|
$ |
(1,904 |
|
|
$ |
22,754 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ABIGAIL
ADAMS NATIONAL BANCORP, INC. AND SUBSIDIARIES
For
the Three Months Ended March 31, 2009 and 2008
(In
thousands)
|
|
|
2009
|
|
|
2008
|
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
|
Net
(loss) income
|
|
$ |
( 805 |
) |
|
$ |
564 |
|
|
Adjustments
to reconcile net (loss) income to net cash provided by
operating
activities:
|
|
|
|
|
|
|
|
|
|
Provision
for loan losses
|
|
|
965 |
|
|
|
105 |
|
|
Depreciation
|
|
|
150 |
|
|
|
153 |
|
|
Accretion
and amortization of deferred loan costs/fees, net
|
|
|
9 |
|
|
|
25 |
|
|
Accretion
and amortization of discounts/premiums on investment securities,
net
|
|
|
3 |
|
|
|
-- |
|
|
Accretion
of purchase accounting adjustment
|
|
|
(26 |
) |
|
|
(31 |
) |
|
Gain
on sale of guaranteed portion of SBA loans
|
|
|
-- |
|
|
|
(19 |
) |
|
Other-than-temporary
impairment of available for sale securities
|
|
|
32 |
|
|
|
-- |
|
|
Other
real estate owned valuation adjustment
|
|
|
354 |
|
|
|
-- |
|
|
Increase
in other assets
|
|
|
(422 |
) |
|
|
(124 |
) |
|
Decrease
in other liabilities
|
|
|
(154 |
) |
|
|
(169 |
) |
|
Net
cash provided by operating activities
|
|
|
106 |
|
|
|
504 |
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
|
Proceeds
from maturities of investment securities held to maturity
|
|
|
-- |
|
|
|
7,500 |
|
|
Proceeds
from maturities of investment securities available for
sale
|
|
|
15,000 |
|
|
|
22,500 |
|
|
Proceeds
from repayment of mortgage-backed securities held to
maturity
|
|
|
58 |
|
|
|
432 |
|
|
Proceeds
from repayment of mortgage-backed securities available for
sale
|
|
|
733 |
|
|
|
184 |
|
|
Purchase
of investment securities held to maturity
|
|
|
-- |
|
|
|
(2,011 |
) |
|
Purchase
of investment securities available for sale
|
|
|
(14,999 |
) |
|
|
(23,892 |
) |
|
Purchase
of FHLB and FRB stock
|
|
|
(2,241 |
) |
|
|
(1,006 |
) |
|
Redemption
of FHLB stock
|
|
|
1,672 |
|
|
|
939 |
|
|
Net
decrease (increase) in loans
|
|
|
21,483 |
|
|
|
(10,697 |
) |
|
Purchase
of collateral and build out costs of foreclosed assets
|
|
|
(107 |
) |
|
|
(294 |
) |
|
Purchase
of premises and equipment, net
|
|
|
(64 |
) |
|
|
(302 |
) |
|
Net
cash provided by (used in) investing activities
|
|
|
21,535 |
|
|
|
(6,647 |
) |
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
|
|
Net
decrease in transaction and savings deposits
|
|
|
(11,282 |
|
|
|
(14,320 |
) |
|
Net
decrease in time deposits
|
|
|
(12,335 |
|
|
|
(885 |
) |
|
Net
decrease in short-term borrowings
|
|
|
(2,814 |
|
|
|
(1,922 |
) |
|
Proceeds
from long-term debt
|
|
|
200 |
|
|
|
5,000 |
|
|
Repayment
of long-term debt
|
|
|
-- |
|
|
|
(5,005 |
) |
|
Proceeds
from issuance of stock under stock option plan
|
|
|
-- |
|
|
|
5 |
|
|
Cash
dividends paid to common stockholders
|
|
|
-- |
|
|
|
(433 |
) |
|
Net
cash used in financing activities
|
|
|
(26,231 |
) |
|
|
(17,560 |
) |
|
Net
decrease in cash and cash equivalents
|
|
|
(4,590 |
) |
|
|
(23,703 |
) |
|
Cash
and cash equivalents at beginning of period
|
|
|
23,547 |
|
|
|
48,763 |
|
|
Cash
and cash equivalents at end of period
|
|
$ |
18,957 |
|
|
$ |
25,060 |
|
|
|
|
|
|
|
|
|
|
|
|
Supplementary
disclosures:
|
|
|
|
|
|
|
|
|
|
Interest
paid on deposits and borrowings
|
|
$ |
1,733 |
|
|
$ |
2,712 |
|
|
Income
taxes paid
|
|
|
-- |
|
|
|
450 |
|
|
|
|
|
|
|
|
|
|
|
ABIGAIL
ADAMS NATIONAL BANCORP, INC. AND SUBSIDIARIES
Note
1 Basis of Presentation
Abigail
Adams National Bancorp, Inc. (the “Company”) is the parent company of The Adams
National Bank (“ANB”) and Consolidated Bank and Trust (“CB&T”). As used
herein, the term Company includes ANB and CB&T, unless the context otherwise
requires.
The
Company prepares its condensed consolidated financial statements on the accrual
basis and in conformity with accounting principles generally accepted in the
United States for interim financial information, the instructions for Form 10-Q,
and Regulation S-X. The accompanying financial statements are unaudited except
for the balance sheet at December 31, 2008, which was derived from the audited
consolidated financial statements as of that date. The unaudited information
furnished herein reflects all adjustments (consisting of normal recurring
accruals) which are, in the opinion of management, necessary for a fair
statement of the results for the interim periods presented. These statements
should be read in conjunction with the consolidated financial statements and
accompanying notes included with the Company’s 2008 Annual Report to
Stockholders, since they do not include all of the information and footnotes
required by accounting principles generally accepted in the United States of
America. Operating results for the three months ended March 31, 2009 (unaudited)
are not necessarily indicative of the results that may be expected for the year
ending December 31, 2009. Certain reclassifications may have been made to
amounts previously reported for 2008 to conform with the 2009
presentation.
Note
2 Contingent Liabilities
In
the normal course of business, there are various outstanding commitments and
contingent liabilities, such as commitments to extend credit and standby letters
of credit that are not reflected in the accompanying consolidated financial
statements. No material losses are anticipated as a result of these
transactions. There were no material changes since December 31,
2008.
Note
3 Written Agreement
On
October 1, 2008, the Company’s wholly owned subsidiary, The Adams National Bank
(the “Bank”), entered into a Written Agreement with its primary regulator, The
Office of the Comptroller of the Currency (the “OCC”). The Written
Agreement was filed with the SEC as an exhibit to a Current Report on Form 8-K,
dated October 2, 2008. Under the terms of the Written Agreement, the Bank has
agreed to take certain actions relating to the Bank’s lending operations and
capital compliance. Specifically, the OCC is requiring the Bank to
take the following actions:
a) conduct
a review of senior management to ensure that these individuals can perform the
duties required under the Bank’s policies and procedures and the requirements of
the Written Agreement, and where necessary, the Bank must provide a written
program to address the training of the Bank’s senior officers;
b) achieve
certain regulatory capital levels, which are greater than the regulatory
requirements to be “well capitalized” under bank regulatory
requirements. In particular, the Bank must achieve a: 12% total
risk-based capital to total risk-weighted assets ratio; 11% Tier 1 capital to
risk-weighted assets ratio; and 9% Tier 1 capital to adjusted total assets
ratio;
c) develop
and implement a three-year capital program;
d) make
additions to the allowances for loan and lease losses and adopt and implement
written policies and procedures for establishing and maintaining the allowance
in a manner consistent with the Written Agreement;
e) adopt
and implement an asset diversification program consistent with OCC guidelines
and to perform an analysis of the Bank’s concentrations of credit;
f) take
all necessary actions to protect the Bank’s interest in criticized assets, adopt
and implement a program to eliminate regulatory criticism of these assets,
engage in an ongoing review of the Bank’s criticized assets and develop and
implement procedures for the effective monitoring of the loan
portfolio;
g) hire
an independent appraiser to provide a written or updated appraisal of certain
assets;
h) develop
and implement a program to improve the management of the loan portfolio and to
provide the Board with monthly written reports on credit quality;
i) employ
a loan review consultant acceptable to the OCC to perform a quarterly quality
review of the Bank’s assets;
j) revise
the Bank’s lending policy in accordance with OCC requirements; and
k) maintain
acceptable liquidity levels.
The
Written Agreement includes time frames to implement the foregoing and on-going
compliance requirements for the Bank, including requirements to report to the
OCC. The Written Agreement also requires the Bank to establish a
committee of the Board of Directors which will be responsible for overseeing
compliance with the Written Agreement. The Bank has taken steps to
comply with the requirements of the Written Agreement. At March 31,
2009, one out of three of ANB’s capital ratio levels did not conform to the
regulatory capital levels required in the Written Agreement. For
further details see Item 2- Managements Discussion and Analysis of Financial
Condition and Results of Operations “Capital Resources”.
Note
4 Operational Developments
In
the second half of 2008, several events occurred that could have an adverse
impact on our ongoing operations. On October 1, 2008, the Company’s
wholly owned subsidiary, ANB, entered into a Written Agreement (see note 3) with
its primary regulator, The Office of the Comptroller of the Currency (the
“OCC”). Under the agreement, ANB is required to achieve and maintain
significantly higher capital ratio levels. In order for ANB to comply
with these increased capital ratio requirements, the Company obtained $7.7
million in borrowings and provided a capital infusion into ANB during the fourth
quarter of 2008. However, at December 31, 2008, ANB did not maintain the higher
capital ratio levels required under the Written Agreement and at March 31, 2009,
ANB did meet two out of three of the capital ratio requirements. ANB expects to
be fully compliant with the capital requirements in the second quarter of 2009.
The Written Agreement also restricts the ability of ANB to pay dividends, the
primary source of income for the Company. Failure to meet regulatory
capital requirements or the terms of the Written Agreement exposes ANB to
regulatory sanctions that may include further restrictions on operations and
growth, mandatory asset dispositions and seizure.
ANB
recorded a net loss of $251,000 for the quarter ended March 31, 2009 after
reporting a $5.8 million net loss for 2008 primarily due to charges to the
provision for loans losses of $965,000 in the first quarter of 2009 and $11.8
million in 2008. The charges to the provision for loan losses reflect
the declining housing values and worsening local economic
conditions. Given the rising unemployment, the continued downward
pressure on housing prices and the elevated national inventory of unsold homes,
management does not expect there to be a significant improvement in the
Company’s business during 2009. These factors are likely to continue
to adversely impact the Company’s revenue, credit costs, business volume and
earnings.
During
the first quarter of 2009, the Company requested and received from its lenders
forbearance agreements from enforcing their rights to demand repayment of debt
principal or any portion thereof until January 31, 2010. At March 31,
2009, the Company has debt obligations totaling $16.3 million maturing in 2010.
The accompanying consolidated financial statements do not include any
adjustments to reflect the possible future effects on the recoverability and
classification of assets, or the amounts and classification of liabilities that
may result from the outcome of the Company’s inability to renew the outstanding
principal of its debt or from any extraordinary regulatory action, either of
which could affect our operations.
In
an effort to maintain safe and sound banking practices, on December 31, 2008,
the Company entered into a definitive agreement (see note 5) to be acquired by
Premier Financial Bancorp, Inc. (Premier) of Huntington, West Virginia
(NASDAQ/GM-PFBI) which is expected to be completed in the third quarter of
2009. The Company has restricted growth and is improving liquidity
through selling loan participations.
Note
5 Merger Agreement
On
December 31, 2008, the Company entered into a definitive agreement whereby
Premier Financial Bancorp, Inc. (Premier) of Huntington, West Virginia
(NASDAQ/GM-PFBI), will acquire it in a 100% stock exchange valued at
approximately $10.9 million based on Premier’s closing stock price on December
31, 2008 of $7.03. Under terms of the definitive agreement, each share of the
Company’s common stock will be converted into 0.4461 shares of Premier common
stock. Premier anticipates that it will issue approximately 1,545,000
shares of its common stock. The transaction, which is subject to
satisfaction of various contractual conditions and requires approval by
regulatory agencies and the shareholders of the Company and Premier, is
anticipated to close sometime in the third quarter of 2009.
Note
6 Earnings per Share
Basic
earnings per share computations are based upon the weighted average number of
shares outstanding during the periods. Diluted earnings per share computations
for the three months ending March 31, 2009 and 2008 were determined using the
treasury stock method and based upon the weighted average number of shares
outstanding during the period plus the dilutive effect of outstanding stock
options. The following table provides a reconciliation of the number of shares
between the computation of basic EPS and diluted EPS for the period ended March
31, 2009 and 2008. For the period ending March 31, 2009, the dilutive
effects of options are excluded from the computation of the loss per share
because the inclusion is antidilutive.
|
|
|
For
the three months ended March 31,
|
|
|
|
|
2009
|
|
|
2008
|
|
|
Weighted
average shares
|
|
|
3,463,569 |
|
|
|
3,462,580 |
|
|
Effect
of dilutive stock options
|
|
|
-- |
|
|
|
3,035 |
|
|
Dilutive
potential average common shares
|
|
|
3,463,569 |
|
|
|
3,465,615 |
|
Note
7 Securities
The
amortized cost and estimated fair value of investment securities held to
maturity and investment securities available for sale at March 31, 2009 and
December 31, 2008 are as follows:
|
(In
thousands)
|
|
Amortized
Cost
Basis
|
|
|
Gross
Unrealized
Gains
|
|
|
Gross
Unrealized
Losses
|
|
|
Estimated
Fair
Value
|
|
|
March
31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment
Securities – available for sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
government sponsored agencies and corporations
|
|
$ |
45,077 |
|
|
$ |
442 |
|
|
$ |
31 |
|
|
$ |
45,488 |
|
|
Mortgage-backed
securities
|
|
|
10,504 |
|
|
|
334 |
|
|
|
-- |
|
|
|
10,838 |
|
|
Municipal
securities
|
|
|
952 |
|
|
|
-- |
|
|
|
22 |
|
|
|
930 |
|
|
Corporate
debt securities
|
|
|
6,063 |
|
|
|
27 |
|
|
|
2,657 |
|
|
|
3,433 |
|
|
Marketable
equity securities
|
|
|
1,001 |
|
|
|
-- |
|
|
|
785 |
|
|
|
216 |
|
|
Total
|
|
$ |
63,597 |
|
|
$ |
803 |
|
|
$ |
3,495 |
|
|
$ |
60,905 |
|
|
Investment
Securities – held to maturity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
government sponsored agencies and corporations
|
|
$ |
2,006 |
|
|
$ |
39 |
|
|
$ |
-- |
|
|
$ |
2,045 |
|
|
Mortgage-backed
securities
|
|
|
1,110 |
|
|
|
38 |
|
|
|
1 |
|
|
|
1,147 |
|
|
Total
|
|
$ |
3,116 |
|
|
$ |
77 |
|
|
$ |
1 |
|
|
$ |
3,192 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December
31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment
Securities – available for sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
government sponsored agencies and corporations
|
|
$ |
45,072 |
|
|
$ |
608 |
|
|
$ |
18 |
|
|
$ |
45,662 |
|
|
Mortgage-backed
securities
|
|
|
11,243 |
|
|
|
288 |
|
|
|
-- |
|
|
|
11,531 |
|
|
Municipal
securities
|
|
|
953 |
|
|
|
-- |
|
|
|
55 |
|
|
|
898 |
|
|
Corporate
debt securities
|
|
|
6,084 |
|
|
|
38 |
|
|
|
1,718 |
|
|
|
4,404 |
|
|
Marketable
equity securities
|
|
|
1,002 |
|
|
|
-- |
|
|
|
683 |
|
|
|
319 |
|
|
Total
|
|
$ |
64,354 |
|
|
$ |
934 |
|
|
$ |
2,474 |
|
|
$ |
62,814 |
|
|
Investment
Securities – held to maturity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
government sponsored agencies and corporations
|
|
$ |
2,007 |
|
|
$ |
27 |
|
|
$ |
-- |
|
|
$ |
2,034 |
|
|
Mortgage-backed
securities
|
|
|
1,168 |
|
|
|
25 |
|
|
|
1 |
|
|
|
1,192 |
|
|
Total
|
|
$ |
3,175 |
|
|
$ |
52 |
|
|
$ |
1 |
|
|
$ |
3,226 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
Company had no sales of securities in the periods ended March 31, 2009 or March
31, 2008.
At
March 31, 2009 a portion of our investment securities portfolio had unrealized
losses. The fair value of investment securities with unrealized
losses by length of time that the individual securities have been in a
continuous loss position at March 31, 2009 and December 31, 2008, are presented
in the following table:
|
|
|
Continuous
unrealized losses existing for less than 12 months
|
|
|
Continuous
unrealized losses existing 12 months or more
|
|
|
Total
|
|
|
(In
thousands)
|
|
Fair
Value
|
|
|
Unrealized
Losses
|
|
|
Fair
Value
|
|
|
Unrealized
Losses
|
|
|
Fair
Value
|
|
|
Unrealized
Losses
|
|
|
March
31, 2009:
U.S.
government sponsored agencies and corporations
|
|
$ |
5,967 |
|
|
$ |
31 |
|
|
$ |
-- |
|
|
$ |
-- |
|
|
$ |
5,967 |
|
|
$ |
31 |
|
|
Mortgage-backed
securities
|
|
|
160 |
|
|
|
1 |
|
|
|
-- |
|
|
|
-- |
|
|
|
160 |
|
|
|
1 |
|
|
Municipal
securities
|
|
|
930 |
|
|
|
22 |
|
|
|
-- |
|
|
|
-- |
|
|
|
930 |
|
|
|
22 |
|
|
Corporate
debt securities
|
|
|
1,201 |
|
|
|
245 |
|
|
|
1,826 |
|
|
|
2,412 |
|
|
|
3,027 |
|
|
|
2,657 |
|
|
Marketable
equity securities
|
|
|
-- |
|
|
|
-- |
|
|
|
216 |
|
|
|
785 |
|
|
|
216 |
|
|
|
785 |
|
|
Total
|
|
$ |
8,258 |
|
|
$ |
299 |
|
|
$ |
2,042 |
|
|
$ |
3,197 |
|
|
$ |
10,300 |
|
|
$ |
3,496 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December
31, 2008:
U.S.
government sponsored agencies and corporations
|
|
$ |
1,983 |
|
|
$ |
18 |
|
|
$ |
-- |
|
|
$ |
-- |
|
|
$ |
1,983 |
|
|
$ |
18 |
|
| Mortgage-backed securities |
|
|
188 |
|
|
|
1 |
|
|
|
-- |
|
|
|
-- |
|
|
|
188 |
|
|
|
1 |
|
| Municipal
securities |
|
|
898 |
|
|
|
55 |
|
|
|
-- |
|
|
|
-- |
|
|
|
898 |
|
|
|
55 |
|
| Corporate
debt securities |
|
|
1,246 |
|
|
|
200 |
|
|
|
2,719 |
|
|
|
1,518 |
|
|
|
3,965 |
|
|
|
1,718 |
|
| Marketable
equity securities |
|
|
-- |
|
|
|
-- |
|
|
|
319 |
|
|
|
683 |
|
|
|
319 |
|
|
|
683 |
|
|
Total
|
|
$ |
4,315 |
|
|
$ |
274 |
|
|
$ |
3,038 |
|
|
$ |
2,201 |
|
|
$ |
7,353 |
|
|
$ |
2,475 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Management
evaluates securities for other-than-temporary impairment at least on a quarterly
basis, and more frequently when economic or market concerns warrant such
evaluation. Analysis of the available for sale securities for
potential other-than-temporary impairment was considered under the Statement of
Financial Accounting Standard (“SFAS”) No. 115, Accounting for Certain Investments
in Debt and Equity Securities impairment model and included the following
factors: the length of time and extent to which the market value has been less
than cost; the financial condition and near-term prospects of the issuer
including specific events; the Company’s intent and ability to hold the
investment to the earlier of maturity or recovery in market value, the credit
rating of the security; the implied and historical volatility of the security;
whether the market decline was affected by macroeconomic conditions or by
specific information pertaining to an individual security; and any downgrades by
rating agencies. As applicable under SFAS No. 115, the Company considers a
decline in fair value to be other-than-temporary if it is probable that the
Company will not recover its recorded investment, including as applicable under
the Emerging Issues Task Force (EITF) Issue 99-20, Recognition of Interest Income and
Impairment on Purchased Beneficial Interests and Beneficial Interests That
Continue to Be Held by a Transferor in Securitized Financial Assets, when
an adverse change in cash flows has occurred.
At
March 31, 2009, the available for sale investment classified as marketable
equity securities consists of a perpetual preferred security which has been
valued below cost for more than 25 months. This security, carried at
fair value of $216,000 with an unrealized loss of $785,000, is not required to
be redeemed by the issuer, nor is it redeemable at the option of the investor
and is therefore classified as equity securities under SFAS 115. Based on the
results of the analysis of this perpetual security using the SFAS No.115
impairment model, we concluded that the decline in fair value has been the
result of the liquidity conditions in the current market environment due to the
sub-prime mortgage crisis and housing market recession and not from concerns
regarding the credit quality or financial condition of the issuer. We continue
to receive interest at 5.75% as scheduled and we have the intent and ability to
hold the perpetual preferred security until its expected recovery in fair value.
The Company does not consider it probable that it will not recover its
investment and recorded no other-than-temporary impairment on the marketable
equity security at March 31, 2009 or December 31, 2008.
The
Company also has five other corporate debt securities which have been valued
below cost for more than 12 months. At March 31, 2009, these were carried at a
combined fair value of $1.8 million with an unrealized loss of $2.4 million.
Interest payments ranging from 5.625% to 6.100% continue to be received as
scheduled. Based on the analysis performed by applying the SFAS No.
115 impairment model and where applicable, EITF Issue 99-20, the Company does
not consider it probable that it will not recover the full contractual cost of
these investments. Based on our analysis, we concluded that the decline in fair
value has been the result of the liquidity conditions in the current market
environment due to the sub-prime mortgage crisis and housing market recession
and not from concerns regarding the credit quality or financial condition of the
issuers. Further, the Company has not experienced any adverse change in cash
flows from holding the investments and has the intent and ability to hold the
investments to the earlier of maturity or recovery in fair value and, therefore
did not record any other-than-temporary impairment charge at March 31, 2009 or
at December 31, 2008 on these five corporate debt securities.
The
remaining unrealized losses that existed as of March 31, 2009 and December 31,
2008, are a result of market changes in interest rates since the securities’
purchase. This factor, coupled with the fact the Company has both the intent and
the ability to hold these securities for a period of time sufficient to allow
for recovery in fair value substantiates that the remaining unrealized losses in
the held to maturity and available for sale portfolios are
temporary.
Securities
with market values of $63.1 million at March 31, 2009 and $62.0 million at
December 31, 2008 were pledged to collateralize public deposits and repurchase
agreements.
Note
8 Comprehensive Income (Loss)
Comprehensive
income (loss) consists of net income (loss) and other comprehensive income
(loss). Other comprehensive income (loss) includes unrealized gains
and losses on securities available for sale. There was one reclassification
adjustment realized in income for realized losses on available for sale
securities in the first quarter of 2009 and none in the first quarter
of 2008. In the first quarter of 2009, the Company recorded an
other-than-temporary impairment charge on two corporate debt securities in the
amount of $32,000 with a deferred tax benefit of $13,000.
The
components of other comprehensive income (loss) are as follows:
| |
|
March
31, |
|
| (In
thousands) |
|
|
2009 |
|
|
|
2008 |
|
| |
|
|
|
|
|
|
|
|
|
Net
(loss) income
|
|
$ |
( 805 |
) |
|
$ |
564 |
|
|
Available
for sale securities:
|
|
|
|
|
|
|
|
|
|
Net
unrealized (losses) gains on securities
|
|
|
(1,184 |
) |
|
|
734 |
|
|
Reclassification
adjustment for other-than-temporary
impairment
losses realized in noninterest income
|
|
|
32 |
|
|
|
-- |
|
|
Income
tax benefit (expense)
|
|
|
430 |
|
|
|
(287 |
) |
|
|
|
|
(722 |
) |
|
|
447 |
|
|
|
|
|
|
|
|
|
|
|
|
Total
comprehensive (loss) income
|
|
$ |
(
1,527 |
) |
|
$ |
1,011 |
|
Note
9 Segments
Management
regularly reviews the performance of the Company's operations on a reporting
basis by legal entity. The Company has two operating segments
comprised of its subsidiaries, ANB and CB&T, for which there is discrete
financial information available. Both segments are engaged in
providing financial services in their respective market areas and are similar in
each of the following: the nature of their products, services, and processes;
type or class of customer for their products and services; methods used to
distribute their products or provide their services; and the nature of the
banking regulatory environment. The parent company is deemed to
represent an overhead function rather than an operating segment and its
financial information is presented as the "Other" category in the schedule
below.
|
|
|
Segment
Results and Reconciliation
|
|
|
(Dollars
in thousands)
|
|
The
Adams National Bank
|
|
|
Consolidated
Bank & Trust
|
|
|
Other
(1)
|
|
|
Intercompany
Eliminations
|
|
|
Consolidated
Totals
|
|
|
For
three months ended March 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income
|
|
$ |
3,925 |
|
|
$ |
1,110 |
|
|
$ |
-- |
|
|
$ |
-- |
|
|
$ |
5,035 |
|
|
Interest
expense
|
|
|
1,381 |
|
|
|
229 |
|
|
|
154 |
|
|
|
-- |
|
|
|
1,764 |
|
|
Net
interest income (expense)
|
|
|
2,544 |
|
|
|
881 |
|
|
|
(154 |
) |
|
|
-- |
|
|
|
3,271 |
|
|
Provision
for loan losses
|
|
|
350 |
|
|
|
615 |
|
|
|
-- |
|
|
|
-- |
|
|
|
965 |
|
|
Noninterest
income (loss)
|
|
|
292 |
|
|
|
103 |
|
|
|
(613 |
) |
|
|
588 |
|
|
|
370 |
|
|
Noninterest
expense
|
|
|
2,957 |
|
|
|
918 |
|
|
|
168 |
|
|
|
(25 |
) |
|
|
4,018 |
|
|
Net
(loss) income
|
|
|
(251 |
) |
|
|
(362 |
) |
|
|
(805 |
) |
|
|
613 |
|
|
|
(805 |
) |
|
Assets
|
|
|
303,201 |
|
|
|
89,964 |
|
|
|
39,165 |
|
|
|
(36,561 |
) |
|
|
395,769 |
|
|
Return
(loss) on average assets - annualized
|
|
|
-0.32 |
% |
|
|
-1.62 |
% |
|
NM(2)
|
|
|
|
-- |
|
|
|
-0.79 |
% |
|
Return
(loss) on average equity - annualized
|
|
|
-3.55 |
% |
|
|
-16.71 |
% |
|
NM(2)
|
|
|
|
-- |
|
|
|
-13.75 |
% |
(1) Amounts
represent parent company before intercompany eliminations.
(2) Not
considered a meaningful performance ratio for parent company.
|
|
|
Segment
Results and Reconciliation
|
|
|
(Dollars
in thousands)
|
|
The
Adams National Bank
|
|
|
Consolidated
Bank & Trust
|
|
|
Other
(1)
|
|
|
Intercompany
Eliminations
|
|
|
Consolidated
Totals
|
|
|
For
three months ended March 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income
|
|
$ |
5,364 |
|
|
$ |
1,341 |
|
|
$ |
-- |
|
|
$ |
-- |
|
|
$ |
6,705 |
|
|
Interest
expense
|
|
|
2,409 |
|
|
|
386 |
|
|
|
70 |
|
|
|
-- |
|
|
|
2,865 |
|
|
Net
interest income (expense)
|
|
|
2,955 |
|
|
|
955 |
|
|
|
(70 |
) |
|
|
-- |
|
|
|
3,840 |
|
|
Provision
for loan losses
|
|
|
90 |
|
|
|
15 |
|
|
|
-- |
|
|
|
-- |
|
|
|
105 |
|
|
Noninterest
income
|
|
|
330 |
|
|
|
103 |
|
|
|
689 |
|
|
|
(715 |
) |
|
|
407 |
|
|
Noninterest
expense
|
|
|
2,148 |
|
|
|
959 |
|
|
|
141 |
|
|
|
(25 |
) |
|
|
3,223 |
|
|
Net
income
|
|
|
632 |
|
|
|
57 |
|
|
|
564 |
|
|
|
(689 |
) |
|
|
564 |
|
|
Assets
|
|
|
341,164 |
|
|
|
87,582 |
|
|
|
37,057 |
|
|
|
(36,646 |
) |
|
|
429,157 |
|
|
Return
on average assets - annualized
|
|
|
0.73 |
% |
|
|
0.26 |
% |
|
NM(2)
|
|
|
|
-- |
|
|
|
0.52 |
% |
|
Return
on average equity - annualized
|
|
|
9.29 |
% |
|
|
2.52 |
% |
|
NM(2)
|
|
|
|
-- |
|
|
|
7.06 |
% |
(1) Amounts
represent parent company before intercompany eliminations.
(2) Not
considered a meaningful performance ratio for parent company.
Description
of significant amounts included in the "Intercompany Eliminations" column in the
segment report schedule are as follows:
|
(In
thousands)
|
|
Three
months ended March 31, 2009
|
|
|
Three
months ended March 31, 2008
|
|
|
Noninterest
income - elimination of
parent
company's undistributed loss (earnings) from subsidiaries
|
|
$ |
613 |
|
|
$ |
(689 |
) |
|
Net
income - elimination of parent company's loss (earnings) from
subsidiaries
|
|
$ |
613 |
|
|
$ |
(689 |
) |
|
Assets
- elimination of parent company's investment in
subsidiaries
|
|
$ |
(36,594 |
) |
|
$ |
(36,339 |
) |
Note
10 Fair Value Disclosures
Effective
January 1, 2008, the Company adopted SFAS No. 157, Fair Value Measurement, which
provides a framework for measuring fair value under generally accepted
accounting principles. SFAS No. 157 applies to all financial
instruments that are being measured and reported on a fair value
basis. Nonfinancial assets and nonfinancial liabilities that are
recognized and disclosed at fair value on a nonrecurring basis under SFAS No.
157 were delayed under FASB Staff Position (FSP) No. 157-2, Effective date of FASB Statement No.
157, to fiscal years beginning after November 15,
2008. Accordingly, effective January 1, 2009, the Company began
disclosing the fair value of Other Real Estate Owned (OREO) previously deferred
under the provisions of this FSP.
SFAS
No. 157 defines fair value as the price that would be received to sell an asset
or paid to transfer a liability in an orderly transaction between market
participants. A fair value measurement assumes that the transaction
to sell the asset or transfer the liability occurs in the principal market for
the asset or liability or, in the absence of a principal market, the most
advantageous market for the asset or liability. The price in the
principal (or most advantageous) market used to measure the fair value of the
asset or liability shall not be adjusted for transaction costs. An
orderly transaction is a transaction that assumes exposure to the market for a
period prior to the measurement date to allow for marketing activities that are
usual and customary for transactions involving such assets and liabilities; it
is not a forced transaction. Market participants are buyers and
sellers in the principal market that are independent, knowledgeable, able to
transact and willing to transact.
SFAS
No. 157 requires the use of valuation techniques that are consistent with the
market approach, the income approach and/or the cost approach. The
market approach uses prices and other relevant information generated by market
transactions involving identical or comparable assets and
liabilities. The income approach uses valuation techniques to convert
future amounts, such as cash flows or earnings, to a single present amount on a
discounted basis. The cost approach is based on the amount that
currently would be required to replace the service capacity of an asset
(replacement cost). Valuation techniques should be consistently
applied. Inputs to valuation techniques refer to the assumptions that
market participants would use in pricing the asset or
liability. Inputs may be observable, meaning those that reflect the
assumptions market participants would use in pricing the asset or liability
developed based on market data obtained from independent sources, or
unobservable, meaning those that reflect the reporting entity’s own assumptions
about the assumptions market participants would use in pricing the asset or
liability developed based on the best information available in the
circumstances. In that regard, SFAS No. 157 establishes a fair value
hierarchy for valuation inputs that gives the highest priority to quoted prices
in active markets for identical assets or liabilities and the lowest priority to
unobservable inputs. The fair value hierarchy is as
follows:
|
Level 1
inputs
|
Unadjusted
quoted prices in active markets for identical assets or liabilities that
the Company has the ability to access at the measurement
date.
|
|
Level
2 inputs
|
Inputs
other than quoted prices included in Level 1 that are observable for the
asset or liability, either directly or indirectly. These might
include quoted prices for similar assets or liabilities in active markets,
quoted prices for identical or similar assets or liabilities in markets
that are not active, inputs other than quoted prices that are observable
for the asset or liability (such as interest rates, volatilities,
prepayment speed, credit risks, etc.) or inputs that are derived
principally from or corroborated by market data by correlation or other
means.
|
|
Level
3 inputs
|
Unobservable
inputs for determining the fair values of assets or liabilities that
reflect the Company’s own assumptions about the assumptions that market
participants would use in pricing the assets or
liabilities.
|
The
table below presents the Company’s balances of financial instruments measured at
fair value on a recurring basis by level within the hierarchy at March 31, 2009
and December 31, 2008.
|
In thousands
|
|
Quoted
Prices in Active Markets for Identical Assets
(Level
1)
|
|
|
Significant
Other Observable Inputs
(Level
2)
|
|
|
Significant
Unobservable Inputs
(Level
3)
|
|
|
Total
|
|
|
March
31, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment
securities available for sale
|
|
$ |
-- |
|
|
$ |
60,905 |
|
|
$ |
-- |
|
|
$ |
60,905 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December
31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment
securities available for sale
|
|
$ |
998 |
|
|
$ |
61,816 |
|
|
$ |
-- |
|
|
$ |
62,814 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
Company outsources the recordkeeping for investment securities held by ANB to
FTN Financial and for those held by CB&T to Suntrust Robinson Humphrey. The
fair value of securities grouped in Level 1 is based on the actual trade price.
For securities categorized in Level 2, FTN used the Interactive Data Corporation
(“IDC”) as a pricing source. IDC’s evaluations are based on market
data. IDC utilizes evaluated pricing models that vary based by asset
class and include available trade, bid, and other market
information. Generally, the methodology includes broker quotes,
proprietary modes, vast descriptive terms and conditions databases, as well as
extensive quality control programs. FTN also used, as a valuation
source, the FTN proprietary valuation Matrices model for the one municipal
security included in Level 2. The FTN Matrices model is used for
valuing municipals. The model includes a separate curve structure for
the Bank-Qualified versus general market municipals. The grouping of
municipals are further broken down according to insurer, credit support, state
of issuance, and rating to incorporate additional spreads and municipal
curves. Suntrust used the R Reuters DataScope for Fixed Income as the
pricing source for CBT securities included in Level 2 in the table
above.
The
table below presents the Company’s balances of financial and non-financial
instruments measured at fair value on a nonrecurring basis by level within the
hierarchy at March 31, 2009 and December 31, 2008.
|
In thousands
|
|
Balance
|
|
|
Quoted
Prices in Active Markets for Identical Assets
(Level
1)
|
|
|
Significant
Other Observable Inputs
(Level
2)
|
|
|
Significant
Unobservable Inputs
(Level
3)
|
|
|
March
31, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impaired
loans
|
|
$ |
28,625 |
|
|
$ |
-- |
|
|
$ |
22,527 |
|
|
$ |
6,098 |
|
|
Other
real estate owned
|
|
|
3,876 |
|
|
|
-- |
|
|
|
3,876 |
|
|
|
-- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December
31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impaired
loans
|
|
$ |
22,377 |
|
|
$ |
-- |
|
|
$ |
21,266 |
|
|
$ |
1,111 |
|
The
fair value of impaired collateral dependent loans is derived in accordance with
SFAS No. 114, Accounting by
Creditors for Impairment of a Loan. Fair value is determined
based on the loan’s observable market price or the fair value of the collateral
if the loan is collateral dependent. The value of real estate collateral is
determined based on appraisal by qualified licensed appraisers hired by the
Company. The valuation allowance for impaired loans is included in the allowance
for loan losses in the consolidated balance sheets. The valuation allowance for
impaired loans at March 31, 2009 was $9.8 million and $8.3 million at December
31, 2008. During the three months ended March 31, 2009, the valuation
allowance for impaired loans increased $1.5 million from $8.3 million at
December 31, 2008. The valuation allowance for the three months
ended March 31, 2008 decreased $190,000 from $1.5 million at December 31,
2007.
Note
11 Recent Accounting Pronouncements
On
April 9, 2009, the Financial Accounting Standards Board (FASB) issued three
amendments to the fair value measurement, disclosure and other-than-temporary
impairment standards:
· FASB
Staff Position (FSP) No. FAS 157-4, Determining Fair Value When the
Volume and Level of Activity for the Asset or Liability Have Significantly
Decreased and Identifying Transactions That Are Not Orderly
· FSP
No. FAS 115-2 and FAS 124-2, Recognition and Presentation of
Other-Than-Temporary Impairments
· FSP
No. FAS 107-1 and APB 28-1, Interim Disclosures about Fair Value
of Financial Instruments
FSP
FAS 157-4 provides additional guidance on determining when the volume and level
of activity for the asset or liability has significantly
decreased. The FSP also includes guidance on identifying
circumstances when a transaction may not be considered orderly. FSP
FAS 157-4 provides a list of factors that a reporting entity should evaluate to
determine whether there has been a significant decrease in the volume and level
of activity for the asset or liability in relation to normal market activity for
the asset or liability. When the reporting entity concludes there has
been a significant decrease in the volume and level of activity for the asset or
liability, further analysis of the information from that market is needed and
significant adjustments to the related prices may be necessary to estimate fair
value in accordance with SFAS No. 157.
This
FSP clarifies that when there has been a significant decrease in the volume and
level of activity for the asset or liability, some transactions may not be
orderly. In those situations, the entity must evaluate the weight of
the evidence to determine whether the transaction is orderly. The FSP provides a
list of circumstances that may indicate that a transaction is not
orderly. A transaction price that is not associated with an orderly
transaction is given little, if any, weight when estimating fair
value.
FSP
FAS 115-2 and FAS 124-2 clarifies the interaction of the factors that should be
considered when determining whether a debt security is other-than-temporarily
impaired. For debt securities, management must assess whether (a) it
has the intent to sell the security and (b) it is more likely than not that it
will be required to sell the security prior to its anticipated recovery. These
steps are done before assessing whether the entity will recover the cost basis
of the investment. Previously, this assessment required management to
assert it has both the intent and the ability to hold a security for a period of
time sufficient to allow for an anticipated recovery in fair value to avoid
recognizing an other-than-temporary impairment. This change does not affect the
need to forecast recovery of the value of the security through either cash flows
or market price.
In
instances when a determination is made that an other-than-temporary impairment
exists but the investor does not intend to sell the debt security and it is not
more likely than not that it will be required to sell the debt security prior to
its anticipated recovery, FSP FAS 115-2 and FAS 124-2 changes the presentation
and amount of the other-than-temporary impairment recognized in the income
statement. The other-than-temporary impairment is separated into (a)
the amount of the total other-than-temporary impairment related to a decrease in
cash flows expected to be collected from the debt security (the credit loss) and
(b) the amount of the total other-than-temporary impairment related to all other
factors. The amount of the total other-than-temporary impairment related to the
credit loss is recognized in earnings. The amount of the total
other-than-temporary impairment related to all other factors is recognized in
other comprehensive income.
FSP
FAS 107-1 and APB 28-1 amends FASB Statement No. 107, Disclosures about Fair Value of
Financial Instruments, to require disclosures about fair value of
financial instruments for interim reporting periods of publicly traded companies
as well as in annual financial statements. This FSP also amends APB Opinion No.
28, Interim Financial Reporting, to require those disclosures in summarized
financial information at interim reporting periods.
All
three FSPs discussed herein include substantial additional disclosure
requirements. The effective date for these new standards is the same: interim
and annual reporting periods ending after June 15, 2009, with early adoption
permitted for periods ending after March 15, 2009. However, early
adoption is allowed only if certain FSPs are early adopted
together. The Company has chosen not to early
adopt. Management is currently evaluating the effect the adoption of
these FSPs will have on the financial condition and results of operations of the
Company.
Annex I
THIS AGREEMENT OF MERGER (hereinafter
sometimes referred to as the "Agreement”), made and entered into as of the
30th
day of December, 2008, by and between PREMIER FINANCIAL BANCORP INC. (“Premier”)
and ABIGAIL ADAMS NATIONAL BANCORP, INC. (“Adams”);
W
I T N E S S E T H:
WHEREAS, Premier is a corporation duly
organized and validly existing under the laws of the Commonwealth of Kentucky
and a registered bank holding company, with its principal executive office and
place of business located in the City of Huntington, County of Cabell and State
of West Virginia, with authorized capital stock consisting of 10,000,000 common
shares, no par value per share (“Premier Common Stock”), of which 6,392,772
shares are currently outstanding and 1,000,000 preferred shares, no par value
per share, none of which are currently outstanding (“Premier Preferred Stock”);
and
WHEREAS, Adams is a corporation duly
organized and validly existing under the laws of the State of Delaware and a
registered bank holding company, with its principal executive office and place
of business located in Washington, D.C., with authorized capital stock
consisting of 5,000,000 common shares, par value $0.01 per share (“Adams Common
Stock”), of which 3,463,569 shares are currently outstanding; and
WHEREAS, Premier and Adams have agreed
to the merger of Adams with Interim Company (defined below) so that upon
consummation of the merger Adams will be a wholly-owned subsidiary of Premier;
and
WHEREAS, the Board of Directors of
Premier has approved this Agreement, authorized the execution hereof in
counterparts, and directed that it be submitted to its shareholders for
approval, ratification and confirmation; and
WHEREAS, the Board of Directors of
Adams has approved this Agreement, authorized the execution hereof in
counterparts, and directed that it be submitted to its shareholders for
approval, ratification and confirmation; and
WHEREAS, Premier has agreed to cause a
new Delaware corporation to be organized which shall be named Adams Acquisition
Company, or such other name as Premier may determine (“Interim Company”), with
its initial principal office and place of business to be located in Washington,
D.C., and all shares of its capital stock to be owned by Premier;
and
WHEREAS, Premier has agreed to cause
Interim Company to approve this Agreement and authorize the execution of an
Adoption Agreement substantially in the form attached hereto as “Exhibit A”
which is incorporated herein by reference.
NOW, THEREFORE, in consideration of the
foregoing premises, which are not mere recitals but an integral part hereof, and
in consideration of the mutual agreements hereinafter set forth, the parties
hereto agree as follows:
Section
1. Merger
1.1 General Effect of Merger;
Assets. At the Effective Time (hereinafter defined in Section
7.2), Interim Company shall merge with and into Adams (the “Merger”) under the
charter of Adams pursuant to the provisions of and with the effect provided in
the Delaware General Corporation Law. Adams shall be (and is
hereinafter called when reference is made to it at and after the consummation of
the Merger) the “Surviving Company”. At the Effective Time of the
Merger, the corporate existence of Interim Company shall cease. The
Surviving Company shall thereupon and thereafter possess all of the rights,
privileges, immunities and franchises, of a public as well as of a private
nature, of the Interim Company and Adams; and all property, real, personal and
mixed, and all debts due on whatever account, including subscriptions to shares,
if any, and all other choses in action, and all and every other interest of or
belonging to or due to the Interim Company and Adams, and each of them, shall be
deemed to be transferred to and vested in the Surviving Company without further
act or deed; and the title to any real estate, or any interest therein, vested
in the Interim Company and Adams and each of them, before the Merger, shall not
revert or in any way be impaired by reason of the Merger.
1.2 Liabilities of Surviving
Company. From and after the Effective Time of the Merger, the
Surviving Company shall be liable for all liabilities of Adams and Interim
Company and all deposits, debts, liabilities, obligations and contracts of Adams
and Interim Company, respectively, matured or unmatured, whether accrued,
absolute, contingent or otherwise, and whether or not reflected or reserved
against on balance sheets, books of account or records of Adams or Interim
Company, as the case may be, shall be those of and are hereby expressly assumed
by the Surviving Company and shall not be released or impaired by the Merger,
and all rights of creditors and other obligees and all liens on property of
either Adams or Interim Company shall be preserved unimpaired, and the Surviving
Company shall have all rights and shall be liable for all obligations of Adams
under all employee benefit plans and arrangements of Adams and such plans and
related trusts shall continue in effect without any interruption or termination
unless and until changed as therein or by law provided or permitted or as
mutually agreed to by the parties hereto.
1.3 Name, Directors and Officers
of Surviving Company. The Articles of Incorporation and the
By-laws of Adams in effect immediately prior to the Effective Time shall be the
Articles of Incorporation and By-laws of the Surviving Company until changed as
therein or by law provided. Until changed by the shareholder or Board
of Directors of Surviving Company, as the case may be, the directors and
officers of the Surviving Company at the Effective Time shall be those persons
who are directors and officers respectively of Adams immediately before the
Effective Time. The committees of the Board of Directors of the
Surviving Company at the Effective Time shall be the same as and shall be
composed of the same persons who are serving on committees appointed by the
Board of Directors of Adams as they exist immediately before the Effective
Time. The committees of officers of the Surviving Company at the
Effective Time shall be the same as and shall be composed of the same officers
who are serving on the committees of officers of Adams as they exist immediately
before the Effective Time.
1.4 Offices, Policies of
Surviving Company. Until changed by the Board of Directors of
the Surviving Company, from and after the Effective Time, the business and
location of the Surviving Company shall be the same as that of
Adams. Unless contrary to law, all corporate acts, plans, policies,
applications, agreements, loan commitments, orders, registrations, licenses,
approvals and authorizations of Adams and Interim Company, their respective
shareholders, boards of directors, committees elected or appointed by their
boards of directors, officers and agents, which were valid and effective
immediately before the Effective Time shall be taken for all purposes at and
after the Effective Time as the acts, plans, policies, applications, agreements,
orders, registrations, licenses, approvals, and authorizations of Surviving
Company and shall be effective and binding thereon as the same were with respect
to Adams and Interim Company immediately before the Effective Time.
1.5 Capital Structure of
Surviving Company. The capital structure of the Surviving
Company shall be the same as the capital structure of Adams.
1.6 Change in Method of
Effecting Acquisition. Premier may at any time prior to the
Effective Time change the method of effecting the combination with Adams
(including, without limitation, the provisions of this Section 1 if and to the
extent it deems such change to be necessary, appropriate or desirable; however,
that no such change shall (i) alter or change the amount or kind of Merger
Consideration (as hereinafter defined), (ii) adversely affect the tax treatment
of Adams’ stockholders as a result of receiving the Merger Consideration or
(iii) materially impede or delay consummation of the transactions contemplated
by this Agreement; and provided further, that Premier shall provide Adams prior
written notice of such change and the reasons therefore.
Section
2. Conversion, Exchange and
Cancellation of Shares
2.1 General. The
manner of converting and exchanging Adams Common Stock, all of which is
represented by outstanding share certificates, into Premier Common Stock shall
be as hereinafter provided in this Section 2.
2.2 Stock Consideration and
Payment for Fractional Shares.
(a) Each
holder of a share of Adams Common Stock (other than those shares of Adams Common
Stock for which appraisal rights are available and which have been perfected
pursuant to the Delaware General Corporation Law), shall receive in respect
thereof, subject to the limitations set forth in this Agreement, 0.4461 shares
of Premier Common Stock (the “Merger Consideration”) for each share of Adams
Common Stock.
(b) Outstanding Premier
Stock. Each share of Premier Common Stock issued and
outstanding immediately prior to the Effective Time shall remain issued and
outstanding and unaffected by the Merger.
(c) Treasury
Shares. Each share of Adams Common Stock held as Treasury
Stock immediately prior to the Effective Time shall be canceled and retired at
the Effective Time and no consideration shall be issued in exchange
therefore.
2.3 Manner of
Exchange. After the Effective Time of the Merger, except for
persons who may have dissenters’ rights pursuant to Delaware General Corporation
Law and who exercise any rights they may have as dissenting shareholders of
Adams, if any, each holder of a certificate theretofore evidencing outstanding
shares of Adams Common Stock, upon surrender of such certificate, accompanied by
a Letter of Transmittal, to Premier shall be entitled to receive in exchange
therefor a certificate or certificates representing the number of full shares of
Premier Common Stock for which shares of Adams Common Stock theretofore
represented by the certificate or certificates so surrendered shall have been
exchanged as provided in this Section 2. Premier, or its Exchange
Agent shall mail such Letter of Transmittal to Adams Stockholders no later than
three (3) business days after the Effective Time. Until so
surrendered, each outstanding certificate which, prior to the Effective Time of
the Merger, represented Adams Common Stock will be deemed to evidence the right
to receive the number of full shares of Premier Common Stock into which the
shares of Adams Common Stock represented thereby may be converted, and will be
deemed for all corporate purposes of Premier to evidence ownership of the number
of full shares of Premier Common Stock into which the shares of Adams Common
Stock represented thereby were converted. Until such outstanding
certificates formerly representing Adams Common Stock are surrendered, no
dividend payable to holders of record of Premier Common Stock for any period as
of any date subsequent to the Effective Time of the Merger shall be paid to the
holder of such outstanding certificates in respect thereof. After the
Effective Time of the Merger there shall be no further registry of transfers on
the records of Adams of shares of Adams Common Stock. Upon surrender
of certificates of Adams Common Stock for exchange for Premier Common Stock,
there shall be paid to the record holder of the certificates of Premier Common
Stock issued in exchange therefor (i) the amount of dividends theretofore paid
with respect to such full shares of Premier Common Stock as of any record date
subsequent to the Effective Time of the Merger which have not yet been paid to a
public official pursuant to abandoned property laws and (ii) at the appropriate
payment date the amount of dividends with a record date after the Effective Time
of the Merger, but prior to surrender and a payment date subsequent to
surrender. No interest shall be payable with respect to such
dividends upon surrender of outstanding certificates.
2.4 Fractional
Shares. Premier will not issue fractional shares or fractional
share certificates, but in lieu of the issuance of fractional shares will pay
cash, without interest, to any Adams shareholder otherwise entitled to receive
such fractional shares. The amount of such cash payment will be
determined by multiplying the fractional share interest to which an Adams
shareholder would otherwise be entitled by Eight and 07/100 Dollars
($8.07). Payment for fractional shares will be made with respect to
each shareholder at the time such shareholder’s certificates of Adams Common
Stock are exchanged.
2.5 Lost
Certificates. If a certificate evidencing outstanding shares
of Adams Common Stock is lost, stolen or destroyed, the registered owner thereof
shall be entitled to receive the Premier certificate and cash,
without interest, to which he would otherwise be entitled on exchange of such
certificate, by notifying Premier in writing of such lost, stolen or destroyed
certificate and giving Premier evidence of loss and a bond sufficient to
indemnify Premier against any claim that may be made against it on account of
the alleged lost, stolen and destroyed certificate and the issuance of the
certificate and cash.
2.6 Stock
Options.
(a) At
the Effective Time, all options granted by Adams ("Adams Options") to purchase
shares of Adams Common Stock which are outstanding and unexercised immediately
prior thereto shall be converted, in their entirety, automatically into options
to purchase shares of Premier Common Stock (the "Continuing Options") in an
amount and at an exercise price determined as provided below (and otherwise
subject to the terms of Adams’ 2003 Stock Based Incentive Plan (the "Adams Stock
Plan")):
|
|
(1)
|
The
number of shares of Adams Common Stock to be subject to the Continuing
Options shall be equal to the product of the number of shares of Adams
Common Stock subject to the Adams Options and .4461, provided that any
fractional shares of Premier Common Stock resulting from such
multiplication shall be rounded down to the nearest share;
and
|
|
|
(2)
|
The
exercise price per share of Premier Common Stock under the Continuing
Options shall be equal to the exercise price per share of Adams Common
Stock under the Adams Options divided by .4461, provided that such
exercise price shall be rounded up to the nearest
cent.
|
The
adjustment provided herein with respect to any options which are "incentive
stock options" (as defined in Section 422 of the Internal Revenue Code of 1986,
as amended (the "Code")) shall be and is intended to be effected in a manner
which is consistent with Section 424(a) of the Code. The duration and other
terms of the Continuing Options shall be the same as the Adams Options, except
that all references to Adams shall be deemed to be references to
Premier.
(b) At
all times after the Effective Time, Premier shall reserve for issuance such
number of shares of Premier Common Stock as necessary so as to permit the
exercise of Continuing Options in the manner contemplated by this Agreement and
in the instruments pursuant to which such options were
granted. Shares of Premier Common Stock issuable upon exercise of
Continuing Options shall be covered by an effective registration statement on
Form S-8, and Premier shall file a registration statement on Form S-8 covering
such shares as soon as practicable after the Effective Time, but in no event
later than 30 days after the Effective Time.
(c) Continuing
Options may be exercised in accordance with the terms of the Adams Options in
effect immediately prior to the Effective Time, subject to applicable law and
regulation.
Section
3. Representations, Warranties
and Covenants of Premier
Standard. No
representation or warranty of Premier contained in Section 3 or of Adams
contained in Section 4 shall be deemed untrue, inaccurate or incorrect for any
purpose under this Agreement, and no party hereto shall be deemed to have
breached a representation or warranty for any purpose under this Agreement, in
any case as a consequence of the existence or absence of any fact, circumstance
or event unless such fact, circumstance or event, individually or when taken
together with all other facts, circumstances or events inconsistent with any
representations or warranties contained in Section 3, in the case of Premier, or
Section 4, in the case of Adams, has had or would reasonable by expected to have
a Material Adverse Effect with respect to Premier or a Material Adverse Effect
with respect to Adams, (disregarding for purposes of Section 3 and Section 4 all
qualifications or limitations set forth in any representations or warranties as
to “materiality,” “Material Adverse Effect,” and words of similar
import). Notwithstanding the immediately preceding sentence, the
representations and warranties contained in Section 3.2 and Section 4.2 shall be
deemed untrue and incorrect if not true and correct except to a de minimis
extent.
Except as disclosed in the Disclosure
Letter (as defined in Section 12.15), Premier hereby represents and warrants to
and covenants with Adams that:
3.1 Organization, Standing and
Authority. Premier is a corporation validly existing and in
good standing under the laws of the Commonwealth of Kentucky, and is a duly
registered bank holding company under the provisions of the Bank Holding Company
Act of 1956, as amended. Premier has the corporate power to execute
and deliver this Agreement, and has taken all action required by law, its
Articles of Incorporation, its By-laws or otherwise, to authorize such execution
and delivery, the Merger and the consummation of the transactions contemplated
hereby, and this Agreement is a valid and binding agreement of Premier in
accordance with its terms, subject only to the requirement of ratification,
confirmation and approval by Premier’s shareholders. At the Effective
Time, Premier will have corporate power to carry on its business as then to be
conducted and will be qualified to do business in every jurisdiction in which
the character and location of the assets to be owned by it or the nature of the
business to be transacted by it require qualification.
3.2 Capital
Structure. The authorized capital stock of Premier consists of
10,000,000 shares of Premier Common Stock, of which 6,392,772 shares are
currently issued and outstanding and 1,000,000 shares of Premier Preferred
Stock, none of which are currently issued and outstanding. All of
such shares are fully paid and non-assessable. Premier does not have
any other shares of Premier Common Stock or Premier Preferred Stock or any other
capital stock issued or outstanding. Premier does not have any
outstanding subscriptions, options or other agreements or commitments obligating
it to issue shares of its capital stock except that (i) Premier has
reserved 511,000 shares of Premier Common Stock to be issued upon the exercise
of stock options granted to certain Premier employees and (ii) Premier has
applied to participate in the Capital Purchase Program (“CPP”) of the U.S.
Department of the Treasury, which application, if approved and consummated, will
result in the issuance of up to $24,087,000 of Premier Preferred Stock and
warrants for the purchase of Premier Common Stock with an aggregate market price
equal to 15% of such Premier Preferred Stock.
As
of September 30, 2008, 195,549 option grants for Premier Common Stock were
outstanding, of which 117,433 were immediately exercisable. Neither
the holders of Premier Common Stock or Premier Preferred Stock have any
preemptive rights with respect to the issuance of additional authorized shares
of Premier Common Stock. Nothing in this Agreement shall prohibit or
impair the ability and right of Premier to increase its authorized capital
stock, or issue or agree to commit to issue additional shares of its capital
stock, and any increase in authorized capital stock, or issuance, or agreement
or commitment to issue, additional shares of Premier Common Stock (other than an
issuance, or agreement or commitment to issue, resulting from a stock dividend,
stock split, or reverse stock split) shall not alter or affect the Merger
Consideration set forth in Section 2.2 hereof.
3.3 Premier
Subsidiaries. At the date of this Agreement, Premier has six
(6) state bank subsidiaries, and one (1) non-banking/non-holding company
subsidiary, as follows:
(a) Premier State
Banks:
Citizens Deposit Bank and Trust,
Inc.;
Farmers Deposit Bank, Eminence,
Kentucky;
Ohio River Bank, Inc.;
First Central Bank, Inc.;
Boone County Bank, Inc.;
and
Traders Bank, Inc.
hereinafter
referred to as “Premier State Banks”.
(b) Premier has one (1)
non-bank/non-bank holding company subsidiary:
Mt. Vernon Financial Holdings,
Inc.
hereinafter
referred to as the “Premier Non-Bank Subsidiary”.
The Premier State Banks and Premier
Non-Bank Subsidiary are hereinafter jointly referred to as the “Premier
Subsidiaries”.
Except for the Premier State Banks and
Premier Non-Bank Subsidiary, Premier has no subsidiaries.
Each of the Premier State Banks is a
banking corporation, duly organized, validly existing under the laws of either
the State of West Virginia or Ohio, or the Commonwealth of Kentucky, and has the
corporate power and is duly authorized to own all of its properties and assets
and to carry on its business as is now being conducted. The Premier
Non-Bank Subsidiary is a corporation, validly existing under the laws of the
Commonwealth of Kentucky, and has the corporate power and is duly authorized to
own all of its properties and assets and to carry on its business as is now
being conducted. Premier owns all of the issued and outstanding
capital stock of each of the Premier Subsidiaries, free and clear of any liens,
claims, security interest, encumbrances, charges or rights of third parties of
any kind whatsoever, except that (i) all of Premier’s 100% interest in Boone
County Bank is pledged as collateral for a $11,550,000 loan from First Guaranty
Bank of Hammond, Louisiana and (ii) all of Premier’s 100% interest in Farmers
Deposit Bank and Citizens Deposit Bank are pledged as collateral for a
$6,500,000 loan and a $3,000,000 line of credit from The Bankers’ Bank of
Kentucky, Inc. of Frankfort, Kentucky.
Nothing
in this Agreement shall prohibit or impair the ability and right of Premier or
any Premier Subsidiary to create or acquire, or agree to create or acquire, any
other subsidiaries or entities or to acquire, consolidate or merge with any
other company, corporation, bank or banking association, or to acquire or
establish any branch prior to the Effective Time, provided however that none of
the transactions described in this paragraph shall adversely affect Premier’s
ability to fulfill its obligations under this Agreement or result in the
imposition of a burdensome condition by a regulatory authority.
3.4 Authority. The
execution and delivery of this Agreement do not, and the consummation of the
Merger and transactions contemplated hereby will not, violate any provision of
the Articles of Incorporation or By-laws of Premier, or any provision of, or
result in the acceleration of any obligation under, any material mortgage, deed
of trust, note, lien, lease, franchise, license, permit, agreement, instrument,
order, arbitration award, judgment, injunction or decree, or result in the
termination of any material license, franchise, lease, or permit to which
Premier is a party or by which it is bound, and will not violate or conflict
with any other material restriction of any kind or character to which Premier is
subject.
3.5 Premier Financial
Statements. Premier has delivered to Adams prior to the
execution of this Agreement copies of the following financial statements of
Premier (which, together with all future financial statements to be furnished
are collectively referred to herein as the “Premier Financial Statements”): the
audited Consolidated Balance Sheets of Premier as of December 31, 2007, December
31, 2006 and December 31, 2005, and the related Consolidated Statements of
Income, Consolidated Statements of Cash Flows and of Consolidated Statements of
Changes in Shareholders’ Equity for the years then ended, and the notes
thereto. The Premier Financial Statements (as of the dates thereof
and for the periods covered thereby):
(a) are
in accordance with the books and records of Premier, which are complete and
correct in all material respects that are required by generally accepted
accounting principles (except as otherwise required or approved by applicable
regulatory authorities or by applicable law) and which have been maintained in
accordance with good business practices; and
(b) present
fairly, in all material respects, the financial position and results of
operations and cash flows of Premier as of the dates and for the periods
indicated, in accordance with generally accepted accounting principles (except
as otherwise required or approved by applicable regulatory authorities or by
applicable law), applied on a basis consistent with prior years, and do not fail
to disclose any material extraordinary or out-of-period items.
Premier’s unaudited Balance Sheet and
the related unaudited Statements of Income and Statements of Changes in Cash
Flows, for the calendar quarter and year-to-date periods ended September 30,
2008, and for each calendar quarter thereafter until the Effective Time, all of
which Premier shall deliver to Adams as soon as practicable, will be prepared in
accordance with accounting principals consistently applied and will fairly
present Premier’s financial condition and results of operations as of such date
and for such periods, except for footnote disclosures, which generally do not
include all of the disclosures normally required for annual financial
statements.
3.6 Allowance for Possible Loan
Losses. The allowance for possible loan losses shown on the
Consolidated Balance Sheet of Premier as of December 31, 2007, and
September 30, 2008, has been established and is adequate in all material
respects under the requirements of generally accepted accounting principles to
provide for possible losses, net of recoveries relating to loans previously
charged off, on loans outstanding (including accrued interest receivable) as of
December 31, 2007 and September 30, 2008 respectively.
3.7 Accuracy of Annual
Reports. The annual reports of Premier to its shareholders for
the years 2007, 2006 and 2005 heretofore delivered to Adams do not contain as of
the dates thereof any untrue statement of material fact or omit to state any
material fact necessary to make the statements therein not
misleading.
3.8 Absence of Undisclosed
Liabilities. At December 31, 2007 and September 30, 2008, none
of Premier or the Premier Subsidiaries had any obligation or liability
(contingent or otherwise) which was material, or which when combined with all
similar obligations or liabilities would have been material, to Premier (i)
except as disclosed in the Premier Financial Statements and (ii) except, in the
case of any of the Premier State Banks, for unfunded loan commitments made in
the ordinary course of their respective businesses and consistent with generally
accepted banking practices; nor does there exist a set of circumstances
resulting from transactions effected or events occurring on or prior to December
31, 2007, or from any action omitted to be taken during such period that, to the
knowledge of Premier, could reasonably be expected to result in any such
material obligation or liability, except as disclosed or provided for in the
Premier Financial Statements. The amounts set up as liabilities for
taxes in the Premier Financial Statements are sufficient for the payment of all
respective taxes (including, without limitation, federal, state, local and
foreign excise, franchise, property, payroll, income, capital stock and sales
and use taxes) accrued in accordance with generally accepted accounting
principles and unpaid at December 31, 2007. Since December 31, 2007,
none of Premier or the Premier Subsidiaries has incurred or paid any obligation
or liability which would be material (on a consolidated basis) to Premier,
except for obligations incurred or paid in connection with transactions by it in
the ordinary course of its business consistent with generally accepted banking
practices and except as disclosed herein.
3.9 Tax
Matters.
(a) All
federal, state, local and foreign tax returns, (including, without limitation,
estimated tax returns, withholding tax returns with respect to employees, and
FICA and FUTA returns) required to be filed by or on behalf of any of Premier or
the Premier Subsidiaries have been timely filed or requests for extensions have
been timely filed, granted and have not expired and all returns filed are
complete and accurate to the best information and belief of Premier
management. All taxes shown on filed returns have been
paid. As of the date hereof, and as of the Effective Time, there is
no audit examination, deficiency or refund litigation or matter in controversy
with respect to any taxes that might result in a determination adverse to any of
Premier or the Premier Subsidiaries, except as reserved against in the Premier
Financial Statements, or as previously disclosed to Adams in
writing. All taxes, interest, additions and penalties due with
respect to completed and settled examinations or concluded litigation have been
paid.
(b) None
of Premier or the Premier Subsidiaries has executed an extension or waiver of
any statute of limitations on the assessment or collection of any tax due that
is currently in effect.
(c) To
the extent any federal, state, local or foreign taxes are due from any of
Premier or the Premier Subsidiaries for the period or periods beginning January
1, 2008, or thereafter through and including the Effective Time, adequate
provision on an estimated basis has been or will be made for the payment of such
taxes by establishment of appropriate tax liability accounts on the last monthly
financial statements of Premier or the Premier Subsidiaries prepared before the
Effective Time.
(d) Deferred
taxes of Premier or the Premier Subsidiaries have been provided for in
accordance with generally accepted accounting principles.
3.10 Loans. Except
as disclosed or provided for in the Premier Financial Statements, to the best
knowledge and belief of its management, each loan reflected as an asset of any
Premier State Bank in the Premier Financial Statements as of December 31, 2007,
or acquired since that date, is the legal, valid and binding obligation of the
obligor named therein, enforceable in accordance with its terms, was made in the
ordinary course of business, was not known to be uncollectible at the time it
was made and was made in accordance with the standard loan policies of such
lending bank, and no loan having an unpaid balance (principal and accrued
interest) in excess of $500,000.00 is subject to any asserted defense, offset or
counterclaim known to Premier.
3.11 Properties. Except
as disclosed in the Premier Financial Statements, Premier and the Premier
Subsidiaries have good and marketable title, free and clear of all material
liens, encumbrances, charges, defaults or equities of whatever character, to all
of the respective properties and assets, tangible or intangible, whether real,
personal or mixed, reflected in the Premier Financial Statements as being owned
by them at December 31, 2007 or acquired by them after December 31,
2007. To the best knowledge and belief of Premier management, all
buildings, and all fixtures, equipment and other property and assets which in
the opinion of management are material to its business on a consolidated basis,
held under leases or subleases by any of Premier and the Premier Subsidiaries,
as the case may be, are held under valid instruments enforceable in accordance
with their respective terms (except as previously disclosed in writing to Adams
and except as enforceability may be limited by applicable bankruptcy,
insolvency, reorganization, moratorium or other similar laws affecting the
enforcement of creditors’ rights generally and except that the availability of
the equitable remedy of specific performance or injunctive relief is subject to
the discretion of the court before which any proceedings may be
brought).
3.12 Compliance with
Laws. Premier and each of the respective Premier
Subsidiaries:
(a) is
in compliance with all laws, regulations, reporting and licensing requirements
and orders applicable to its business or any of its employees (because of such
employee’s activities on behalf of it), the breach or violation of which could
have a material adverse effect on such business; and
(b) has
received no notification from any agency or department of federal, state or
local government or regulatory authorities or the staff thereof asserting that
any such entity is not in compliance with any of the statutes, regulations,
rules or ordinances which such governmental authority or regulatory authority
enforces, or threatening to revoke any license, franchise, permit or
governmental authorization, and is subject to no agreement with any regulatory
authorities with respect to its assets or business.
3.13 Employee Benefit
Plans. With respect to any plan or arrangement of Premier or
any Premier Subsidiary which constitutes an employee benefit within the meaning
of Section 3(3) of the Employee Retirement Income Security Act of 1974, as
amended (“ERISA”):
(a) All
“employee benefit plans”, as defined in Section 3(3) of ERISA, which cover one
or more employees employed by any of Premier or any Premier Subsidiary (each
individually, a “Plan”, and collectively, the “Plans”) comply in all material
respects with ERISA and, where applicable for tax-qualified or tax-favored
treatment, with the Internal Revenue Code of 1986. As of December 31,
2007, none of Premier or any Premier Subsidiary had any material liability under
any Plan that is not reflected on the audited statements of financial condition
of Premier or the unaudited balance sheets of the Premier Subsidiaries, as of
such date, or in the notes thereto (other than such normally unrecorded
liabilities under the Plans for sick leave, holiday, education, bonus, vacation,
incentive compensation and anniversary awards, provided that such liabilities
are not in any event material). Neither the Plans nor any trustee or
administrator thereof has engaged in a “prohibited transaction” within the
meaning of Section 406 of ERISA or, where applicable, Section 4975 of the
Internal Revenue Code of 1986 for which no exemption is applicable, nor have
there been any “reportable events” within the meaning of Section 4043 of ERISA
for which the 30-day notice therefor has not been waived.
(b) No
litigation is pending against any Plan or plan fiduciary seeking the payment of
benefits or alleging a breach of trust or fiduciary duty by any plan
fiduciary.
(c) Neither
Premier nor any Premier Subsidiary is a party to any multiemployer pension plan
as defined in Section 414(f) of the Internal Revenue Code of 1986 and Section
3(37) of ERISA.
3.14 Commitments and
Contracts. Neither Premier nor any Premier Subsidiary is
a party or subject to any of the following (whether written or oral, express or
implied):
(i) any
employment contract or understanding (including any understandings or
obligations with respect to severance or termination pay liabilities or fringe
benefits) with any present or former officer, director, employee or
consultant;
(ii) any
plan, contract or understanding providing for bonuses, pensions, options,
deferred compensation, retirement payments, profit sharing or similar
understandings with respect to any present or former officer, director or
consultant;
(iii) any
contract or agreement with any labor union;
(iv) any
contract not made in the ordinary course of business containing covenants
limiting the freedom of Premier or any Premier Subsidiary to compete in any line
of business or with any person or involving any restriction of the area in
which, or method by which, Premier or any Premier Subsidiary will carry on its
business (other than as may be required by law or applicable regulatory
authorities).
3.15 Labor. No
work stoppage involving Premier or any Premier Subsidiary is pending or, to the
best Premier’s knowledge, threatened. Neither Premier nor any Premier
Subsidiary is involved in, or threatened with or affected by, any labor dispute,
arbitration, lawsuit or administrative proceeding which could materially and
adversely affect the business of Premier or any Premier
Subsidiary. Employees of Premier or any Premier Subsidiary are not
represented by any labor union nor are any collective bargaining agreements
otherwise in effect with respect to such employees.
3.16 Material Contracts
Furnished. Premier has made available to Adams true and
complete copies of all material contracts, leases and other agreements to which
Premier or any Premier Subsidiary are parties or by which they are bound and of
all employment, pension, retirement, stock option, profit sharing and deferred
compensation, consultant, bonus, group insurance or similar plans with respect
to any of the directors, officers, or other employees of Premier or any Premier
Subsidiary.
3.17 Material
Contracts. Except as is otherwise provided in this Agreement,
none of Premier or the Premier Subsidiaries, nor any of their respective assets,
businesses or operations is, as of the date hereof, a party to, or is bound or
affected by, or receives benefits under, (i) any material agreement, arrangement
or commitment not cancellable by it without penalty, other than agreements,
arrangements or commitments entered into in the ordinary course of its business
and negotiated on an arms-length basis, or (ii) any material agreement,
arrangement or commitment relating to the employment, election or retention in
office of any director or officer other than agreements, arrangements or
commitments entered into in the ordinary course of its business and negotiated
on an arms-length basis.
3.18 Material Contract
Defaults. None of Premier or the Premier Subsidiaries is in
default in any material respect under any material contract, agreement,
commitment, arrangement, lease, insurance policy or other instrument to which it
is a party or by which its respective assets, business or operations may be
bound or affected or under which it or its respective assets, business or
operations receive benefits, and there has not occurred any event which with the
lapse of time or the giving of notice or both would constitute such a
default.
3.19 Legal
Proceedings. There are no actions, suits or proceedings
instituted or pending, or to the best knowledge of Premier, threatened (or
unasserted but considered probable of assertion and which if asserted would have
at least a reasonable probability of an unfavorable outcome), including eminent
domain proceedings, against or relating to any of Premier or the Premier
Subsidiaries, respectively, or against any property, asset, interest or right of
any of them, that could have a material and adverse effect on the condition
(financial or other, present or prospective), business, properties, assets,
operations, liabilities or prospects of Premier or any of the Premier
Subsidiaries, respectively, or that threaten or would impede the consummation of
the transactions contemplated by this Agreement. None of Premier or
the Premier Subsidiaries is a party to any agreement or instrument or is subject
to any charter or other corporate restriction or any judgment, order, writ,
injunction, stay, decree, rule, regulation, code or ordinance that threatens or
might impede the consummation of the transactions contemplated by this
Agreement.
3.20 Absence of Certain Changes
or Events. Since December 31, 2007, none of Premier or the
Premier Subsidiaries has: (i) incurred any material liability, except
in the ordinary course of its business, and except as permitted pursuant to this
Agreement; (ii) suffered any material adverse change in its business,
operations, assets or condition (financial or other); or (iii) failed to operate
its business consistent with generally acceptable banking practice.
3.21 Reports. Since
January 1, 2008, each of Premier and the Premier Subsidiaries has filed all
reports and statements, together with any amendments required to be made with
respect thereto, which they were required to file with: (i) the
Securities and Exchange Commission, including, but not limited to, Forms 10-K,
Forms 10-Q, Forms 8-K and proxy statements; (ii) the Board of Governors of the
Federal Reserve System; (iii) the Office of the Comptroller of the Currency;
(iv) the Federal Deposit Insurance Corporation; (v) the West Virginia Department
of Banking; (vi) the Kentucky Office of Financial Institutions; (vii) the Ohio
Department of Banking; and (viii) any other governmental agency or regulatory
authority having jurisdiction over its operations. Each of such
reports and documents, including the financial statements, exhibits and
schedules thereto, and each other document delivered to Adams by Premier does
not contain any statement which, at the time and in the light of the
circumstances under which it was made, is false or misleading with respect to
any material fact or which omits to state any material fact necessary in order
to make the statements contained therein not false or misleading.
3.22 Investments. Except
as incurred in the ordinary course of business as heretofore conducted all
securities owned by Premier and the Premier Subsidiaries of record and
beneficially are free and clear of all mortgages, liens, pledges and
encumbrances. Any securities owned of record by Premier and the
Premier Subsidiaries in an amount equal to 5% or more of the issued and
outstanding voting securities of the issuer have been previously disclosed to
Adams in writing. There are no voting trusts or other agreements or
undertakings with respect to the voting of such securities.
3.23 Securities
Portfolio. Since December 31, 2007, there have been no
material changes in the quality of Premier’s or any of the Premier Banks’
portfolios of securities.
3.24 Environmental
Matters. To the knowledge of Premier, neither Premier nor any
Premier Subsidiary nor any properties owned or operated by Premier or any
Premier Subsidiary has been or is in violation of or liable under any
Environmental Law (as hereinafter defined). There are no actions,
suits or proceedings, or demands, claims, notices or investigations (including,
without limitation notices, demand letters or requests for information from any
environmental agency) instituted or pending, or to the best knowledge of
Premier’s management, threatened relating to the liability of any properties
owned or operated by Premier or any Premier Subsidiary under any Environmental
Law. “Environmental Law” means any federal, state, local or foreign
law, statute, ordinance, rule, regulation, code, license, permit, authorization,
approval, consent, order, judgment, decree, injunction or agreement with any
regulatory authority relating to (i) the protection, preservation or restoration
of the environment (including, without limitation, air, water vapor, surface
water, ground water, drinking water supply, surface soil, sub-surface soil,
plant and animal life or any other natural resource) and/or (ii) the use,
storage, recycling, treatment, generation, transportation, processing, handling,
labeling, production, release or disposal of any substance presently listed,
defined, designated or classified as hazardous, toxic, radioactive or dangerous,
or otherwise regulated, whether by type or by quantity, including any material
containing any such substance as a component.
3.25 Preparation of Registration
Statement on Form S-4/Accuracy of Proxy Statement. Premier at
its sole cost and expense shall prepare and file with the Securities and
Exchange Commission a Registration Statement on Form S-4 relating to the shares
of Premier Common Stock to be issued to Adams shareholders and the shares
underlying the Adams options. The material which refers to Premier
and which will be submitted by Premier for inclusion in the proxy statement
referred to in Section 10 hereof, or in any amendment or supplement thereto,
mailed to the holders of Adams Common Stock and Premier Common Stock will not
contain any untrue statements of material fact or omit to state any material
fact required to be stated therein or necessary to make the statements contained
therein not misleading.
3.26 Interim Company Formation;
Adoption Agreement. Premier at its sole cost and expense shall
cause to be organized Interim Company as a Delaware corporation and shall cause
Interim Company to execute and enter into an Adoption Agreement in substantially
the form attached hereto as “Exhibit A” and a Plan of Merger in substantially
the form annexed hereto as “Exhibit B” and cause Interim Company to take such
action as is provided in this Agreement or in said Adoption Agreement or Plan of
Merger upon Interim Company’s part to be taken. Immediately prior to
the Effective Time, Premier will own all of the issued and outstanding shares of
Interim Company’s capital stock.
3.27 Filing of Application to
Merge. Premier at its sole cost and expense shall cause to be
filed with the Federal Reserve Board, Office of the Comptroller of the Currency,
West Virginia Board of Banking and Financial Institutions and the Bureau of
Financial Institutions of the Commonwealth of Virginia, State Corporation
Commission an application to merge Adams and Interim Company, and shall cause
Interim Company to take such action as is provided in this Agreement upon
Interim Company’s part to be taken.
3.28 Best
Efforts. On or prior to the Closing Date (hereinafter defined
in Section 7.1 hereof), Premier will, to the extent permitted by applicable
laws, rules and regulations, take such actions, and execute and deliver all such
agreements, documents, certificates or amendments to this Agreement as may be
necessary or desirable to effectuate the provisions and intent of this
Agreement.
3.29 Conduct of Business -
Acquisitions. Premier and Adams have agreed in principle that
continued growth of Premier through the acquisition of, or consolidation or
merger with, one or more banks or bank holding companies, and the payment of
cash, the issuance of additional shares of Premier, or both, as consideration
therefor, and the issuance of Premier Preferred Stock and warrants to purchase
Premier Common Stock pursuant to the CPP all upon proper terms and conditions,
will inure to the benefit of Premier and to Adams in the event the Merger is
effected. Adams has agreed that in the event the Merger is effected,
such contemplated actions will inure to the benefit of Adams as well as to
Premier, and has generally approved, in principle, such acts. Adams hereby
consents to, and agrees that Premier, without obtaining any further consent or
approval of Adams, may acquire, consolidate or merge with any other company,
corporation, bank or banking association, or acquire any assets of any other
company, corporation, bank or banking association, or issue Premier Preferred
Stock and warrants to purchase Premier Common Stock pursuant to the CPP;
provided however that no such enumerated action may (i) result in Premier
abrogating or modifying its obligations under this Agreement or (ii) impair
Premier’s ability to obtain regulatory or shareholder approval of the
transactions contemplated by this Agreement or (iii) result in any regulatory
approval containing an unreasonable regulatory condition and no agreement to
issue Premier Common Stock or issuance thereof in connection with any such act
shall alter or affect the Merger Consideration set forth in Section 2.2
hereof.
3.30 Conduct of Business -
Affirmative Covenants of Premier. Premier covenants and agrees
that:
(a) Subsequent
to the date of this Agreement and prior to the Effective Time, Premier and the
Premier Subsidiaries will operate their respective businesses only in the normal
course and manner;
(b) Immediately
upon the execution of this Agreement, Premier will direct its accountants to
give Adams access to all information, documents and working papers pertaining to
Premier;
(c) From
and after the execution of this Agreement, Premier will promptly advise Adams of
any material adverse change in its or any Premier Subsidiary’s respective
financial conditions, assets, business operations or key personnel and of any
material breach of any representation or warranty made by Premier in this
Agreement;
(d) Subsequent
to the date of this Agreement and prior to the Effective Time Premier shall
maintain in full force and effect adequate fire, casualty, public liability,
employee fidelity and other insurance coverage in effect on the date of this
Agreement in order to protect Premier against losses for which insurance
protection can reasonably be obtained; and
(e) Premier
will use its best efforts in good faith to take or cause to be taken all actions
required under this Agreement on its part to be taken as promptly as practicable
so as to permit the consummation of the Merger and the transactions contemplated
hereby at the earliest possible date and cooperate fully with Adams to that
end.
3.31 Directors and Officers
Indemnification and Insurance.
(a) Except
for any Claim, cause of action or demand of any kind brought by a regulatory or
governmental authority, for a period of three years after the Effective Time,
Premier shall indemnify, defend and hold harmless each person who is now, or who
has been at any time before the date hereof or who becomes before the Effective
Time, an officer, director or employee of Adams or a Adams Subsidiary Bank (the
“Indemnified Parties”) against all losses, claims, damages, costs, expenses
(including attorney’s fees), liabilities or judgments or amounts that are paid
in settlement (which settlement shall require the prior written consent of
Premier, which consent shall not be unreasonably withheld) of or in connection
with any claim, action, suit, proceeding or investigation (each a “Claim”), in
which an Indemnified Party is, or is threatened to be made, a party or witness
in whole or in part on or arising in whole or in part out of the fact that such
person is or was a director, officer or employee of Adams or a Adams Subsidiary
Banks if such Claim pertains to any matter of fact arising, existing or
occurring at or before the Effective Time (including, without limitation, the
Merger and the other transactions contemplated hereby), regardless of whether
such Claim is asserted or claimed before, or after, the Effective Time (the
“Indemnified Liabilities”), to the fullest extent that such Indemnified Parties
were entitled to indemnification under applicable Delaware and federal law and
under Adams’s Certificate of Incorporation and Bylaws. This right of
indemnification shall include the right to be paid expenses in advance of the
final disposition of any such action or proceeding upon receipt of an
undertaking to repay such advance payments if it shall be adjudicated or
determined that such Indemnified Party is not entitled to
indemnification. Any Indemnified Party wishing to claim
indemnification under this Section 3.31 upon learning of any Claim, shall notify
Premier (but the failure so to notify Premier shall not relieve it from any
liability which it may have under this Section 3.31, except to the extent such
failure materially prejudices Premier) and shall deliver to Premier the
undertaking referred to in the previous sentence.
(b) In
the event that either Premier or any of its successors or assigns
(i) consolidates with or merges into any other person and shall not be the
continuing or surviving bank or entity of such consolidation or merger or (ii)
transfers all or substantially all of its properties and assets to any person,
then, and in each such case, proper provision shall be made so that the
successors and assigns of Premier shall assume the obligations set forth in this
Section 3.31.
(c) To
the extent it is reasonably available, Premier shall maintain, or shall cause
Premier State Banks to maintain, in effect for three years following the
Effective Time, the current directors’ and officers’ liability insurance
policies covering the officers and directors of Adams (provided, that Premier
may substitute therefor policies of at least the same coverage containing terms
and conditions which are not materially less favorable) with respect to matters
occurring at or prior to the Effective Time; provided, however, that in no event
shall Premier be required to expend pursuant to this Section 3.31(c) more than
150% of the annual cost currently expended by Adams with respect to such
insurance (the “Maximum Amount”); provided, further, that if
the amount of the premium necessary to maintain or procure such insurance
coverage exceeds the Maximum Amount, Premier shall maintain the most
advantageous policies of directors’ and officers’ insurance obtainable for a
premium equal to the Maximum Amount. In connection with the foregoing, Adams
agrees in order for Premier to fulfill its agreement to provide directors and
officers liability insurance policies for three years to provide such insurer or
substitute insurer with such reasonable and customary representations as such
insurer may request with respect to the reporting of any prior
claims.
(d) The
obligations of Premier provided under this Section 3.31 are intended to be
enforceable against Premier directly by the Indemnified Parties and shall be
binding on all respective successors and permitted assigns of
Premier.
3.32 Stock
Listing.
Premier
agrees to list on the Nasdaq (or such other national securities exchange on
which the shares of the Premier Common Stock shall be listed as of the date of
consummation of the Merger), subject to official notice of issuance, the shares
of Premier Common Stock to be issued in the Merger.
Section
4. Representations, Warranties
and Covenants of Adams.
Except as disclosed in a Disclosure
Letter (as defined in Section 12.15) Adams hereby represents and warrants to and
covenants with Premier that:
4.1 Organization, Standing and
Authority. Adams is a corporation validly existing and in good
standing under the laws of the State of Delaware, and is a duly registered, and
is a duly registered bank holding company under the provisions of the Bank
Holding Company Act of 1956, as amended. Adams has the corporate
power to execute and deliver this Agreement, and has taken all action required
by law, its Articles of Incorporation, its By-laws or otherwise, to authorize
such execution and delivery, the Merger and the consummation of the transactions
contemplated hereby, and this Agreement is a valid and binding agreement of
Adams in accordance with its terms, subject only to the requirement of
ratification, confirmation and approval by Adams’ shareholders. At
the Effective Time, Adams and its subsidiary banks will have corporate power to
carry on its business as then to be conducted and will be qualified to do
business in every jurisdiction in which the character and location of the assets
to be owned by it or the nature of the business to be transacted by it require
qualification.
4.2 Capital
Structure. The authorized capital stock of Adams consists of
5,000,000 shares of Adams Common Stock, par value of $.01 per share, of which
3,463,569 shares are issued and outstanding. Adams does not have any
subscriptions, options, warrants, calls, or other agreements or commitments, of
any kind relating to or obligating it to issue any shares of its capital stock,
except that Adams has reserved 178,218 shares of Adams Common Stock to be issued
upon the exercise of stock options granted to certain Adams employees; as of
September 30, 2008 8,062 option grants for Adams Common Stock were outstanding,
of which 8,062 were immediately exercisable. Further, there are no
securities outstanding which are convertible into capital stock of
Adams. None of the shares of Adams Common Stock has been issued in
violation of any preemptive rights of shareholders.
4.3 Subsidiaries. Adams
has two subsidiaries: (i) The Adams National Bank (“Adams National”), a national
bank, and Consolidated Bank & Trust Company (“CB&T”), a Virginia
chartered bank (Adams National and CB&T being sometimes collectively
referred to as the “Adams Subsidiary Banks”). Adams will not organize
or acquire any other subsidiaries prior to the Effective Time of the Merger
without the written consent of the President of Premier.
The Adams Subsidiary Banks validly
exist under the laws of the United States of America and the Commonwealth of
Virginia, respectively, and have the corporate power and are duly authorized to
own all of their properties and assets and to carry on their business as is now
being conducted. Adams owns all of the issued and outstanding capital
stock of the Adams Subsidiary Banks, free and clear of any liens, claims,
security interest, encumbrances, charges or rights of third parties of any kind
whatsoever, except 80% of Adams National stock is pledged as collateral for a
term note dated July 27, 2007 for $5.0 million and a revolving line of credit
dated May 2, 2008 for $4.0 million, and it is expected that the remaining 20% of
Adams National stock and 100% of CB&T stock will be pledged as collateral
for additional borrowings.
4.4 Authority. The
execution and delivery of this Agreement do not, and the consummation of the
Merger and transactions contemplated hereby will not, violate any provision of
the Articles of Incorporation or By-laws of Adams, or any provision of, or
result in the acceleration of any obligation under, any material mortgage, deed
of trust, note, lien, lease, franchise, license, permit, agreement, instrument,
order, arbitration award, judgment, injunction or decree, or result in the
termination of any material license, franchise, lease, or permit to which Adams
is a party or by which it is bound, and will not violate or conflict with any
other material restriction of any kind or character to which Adams is
subject.
4.5 Adams Financial
Statements. Adams has delivered to Premier prior to the
execution of this Agreement copies of the following financial statements of
Adams (which, together with all future financial statements to be furnished are
collectively referred to herein as the “Adams Financial
Statements”): the audited Consolidated Balance Sheets of Adams as of
December 31, 2007, December 31, 2006 and December 31, 2005, and the related
Consolidated Statements of Income, Consolidated Statements of Cash Flows and
Consolidated Statements of Changes in Shareholders’ Equity for the years then
ended, and the notes thereto. The Adams Financial Statements (as of
the dates thereof and for the periods covered thereby):
(a) are
in accordance with the books and records of Adams, which are complete and
correct in all material respects that are required by generally accepted
accounting principles (except as otherwise required or approved by applicable
regulatory authorities or by applicable law) and which have been maintained in
accordance with good business practices; and
(b) present
fairly the financial position and results of operations and cash flows of Adams
as of the dates and for the periods indicated, in accordance with generally
accepted accounting principles (except as otherwise required or approved by
applicable regulatory authorities or by applicable law), applied on a basis
consistent with prior years, and do not fail to disclose any material
extraordinary or out-of-period items.
Adams’ unaudited Consolidated Balance
Sheet and the related unaudited Consolidated Statements of Income and
Consolidated Statement of Changes in Shareholders’ Equity, for the calendar
quarter and year to date periods ending September 30, 2008, and for each
calendar quarter thereafter until the Effective Time, all of which Adams shall
deliver to Premier as soon as practicable, will be prepared in accordance with
accounting principles consistently applied and will fairly present Adams’
financial condition and results of operations as of such date and for such
periods, except for footnote disclosures, which generally do not include all of
the disclosures normally required for annual financial statements.
4.6 Accuracy of Annual
Reports. Adams’ annual reports to its shareholders for the
years 2007 and 2006 heretofore delivered to Premier do not contain as of the
dates thereof any untrue statement of material fact or omit to state any
material fact necessary to make the statements therein not
misleading.
4.7 Allowance for Possible Loan
Losses. The allowances for possible loan losses shown on the
Consolidated Balance Sheet of Adams and the Adams Subsidiary Banks as of
December 31, 2007 and September 30, 2008, have been established and are adequate
in all material respects under the requirements of generally accepted accounting
principles to provide for possible losses, net of recoveries relating to loans
previously charged off, on loans outstanding (including accrued interest
receivable) as of December 31, 2007 and September 30, 2008,
respectively. Premier acknowledges that Adams National may make
additional provisions to its allowance for loan losses as a result of the loan
review conducted by an independent third party.
4.8 Absence of Undisclosed
Liabilities. At December 31, 2007 and September 30, 2008,
neither Adams nor either of the Adams Bank Subsidiaries had any obligation or
liability (contingent or otherwise) which was material, or which when combined
with all similar obligations or liabilities would have been material, to Adams
(i) except as disclosed in the Adams Financial Statements; and (ii) except, in
the case of Adams Subsidiary Banks for unfunded loan commitments made in the
ordinary course of their businesses and consistent with generally accepted
banking practices; nor does there exist a set of circumstances resulting from
transactions effected or events occurring on or prior to December 31, 2007, or
from any action omitted to be taken during such period that, to the knowledge of
Adams, could reasonably be expected to result in any such material obligation or
liability, except as disclosed or provided for in the Adams Financial
Statements. The amounts set up as liabilities for taxes in the Adams
Financial Statements are sufficient for the payment of all respective taxes
(including, without limitation, federal, state, local and foreign excise,
franchise, property, payroll, income, capital stock and sales and use taxes)
accrued in accordance with generally accepted accounting principles and unpaid
at December 31, 2007 and September 30, 2008. Since December 31, 2007,
neither Adams nor any Adams Subsidiary Bank has incurred or paid any obligation
or liability which would be material to Adams, except for obligations incurred
or paid in connection with transactions by it in the ordinary course of its
business consistent with generally accepted banking practices and except as
disclosed herein. Notwithstanding the foregoing, Premier acknowledges
that Adams has pledged the common stock it owns in its subsidiary banks in
connection with Adams’ borrowings.
4.9 Tax Matters.
(a) All
federal, state, local and foreign tax returns, (including, without limitation,
estimated tax returns, withholding tax returns with respect to employees, and
FICA and FUTA returns) required to be filed by or on behalf of Adams or Adams
Subsidiary Banks have been timely filed or requests for extensions have been
timely filed, granted and have not expired and all returns filed are complete
and accurate to the best information and belief of Adams
management. All taxes shown on filed returns have been
paid. As of the date hereof, and as of the Effective Time, there is
no audit examination, deficiency or refund litigation or matter in controversy
with respect to any taxes that might result in a determination adverse to Adams
or the Adams Subsidiary Banks, except as reserved against in the Adams Financial
Statements. All taxes, interest, additions and penalties due with
respect to completed and settled examinations or concluded litigation have been
paid.
(b) Neither
Adams nor either of the Adams Subsidiary Banks has executed an extension or
waiver of any statute of limitations on the assessment or collection of any tax
due that is currently in effect.
(c) To
the extent any federal, state, local or foreign taxes are due from Adams or the
Adams Subsidiary Banks for the period or periods beginning January 1, 2008, or
thereafter through and including the Effective Time, adequate provision on an
estimated basis has been or will be made for the payment of such taxes by
establishment of appropriate tax liability accounts on the last monthly
financial statements of Adams or the Adams Subsidiary Banks, prepared before the
Effective Time.
(d) Deferred
taxes of Adams and the Adams Subsidiary Banks have been provided for in
accordance with generally accepted accounting principles.
4.10 Loans. Except
as disclosed or provided for in Adams’ Financial Statements, to the best
knowledge and belief of its management, each loan reflected as an asset of Adams
or the Adams Subsidiary Banks in the Adams Financial Statements as of December
31, 2007, or acquired since that date, is the legal, valid and binding
obligation of the obligor named therein, enforceable in accordance with its
terms, was made in the ordinary course of business, was not known to be
uncollectible at the time it was made and was made in accordance with the
standard loan policies of such lending bank, and no loan having an unpaid
balance (principal and accrued interest) in excess of $350,000.00 is subject to
any asserted defense, offset or counterclaim known to Adams or Adams Subsidiary
Banks.
4.11 Properties. Except
as disclosed in the Adams Financial Statements, Adams and the Adams Subsidiary
Banks have good and marketable title, free and clear of all material liens,
encumbrances, charges, defaults or equities of whatever character, to all of the
respective properties and assets, tangible or intangible, whether real, personal
or mixed, reflected in the Adams Financial Statements as being owned by it at
December 31, 2007 or acquired by it after December 31, 2007. To the
best knowledge and belief of Adams, all buildings, and all fixtures, equipment
and other property and assets which in the opinion of management are material to
its business, held under leases or subleases by Adams or the Adams Subsidiary
Banks are held under valid instruments enforceable in accordance with their
respective terms (except as previously disclosed in writing to Premier and
except as enforceability may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium or other similar laws affecting the enforcement of
creditors’ rights generally and except that the availability of the equitable
remedy of specific performance or injunctive relief is subject to the discretion
of the court before which any proceedings may be brought).
4.12 Compliance with
Laws. Adams and the Adams Subsidiary Banks, to Adams’s best
knowledge and belief:
(a) is
in compliance with all laws, regulations, reporting and licensing requirements
and orders applicable to its business or any of its employees (because of such
employee’s activities on behalf of it), the breach or violation of which could
have a material adverse effect on such business; and
(b) has
received no notification (not previously disclosed to Premier in writing) from
any agency or department of federal, state or local government or regulatory
authorities or the staff thereof asserting that any such entity is not in
compliance with any of the statutes, regulations, rules or ordinances which such
governmental authority or regulatory authority enforces, or threatening to
revoke any license, franchise, permit or governmental authorization, and is
subject to no agreement with any regulatory authorities with respect to its
assets or business.
4.13 Employee Benefit
Plans. With respect to any plan or arrangement of Adams or
Adams Subsidiary Banks which constitutes an employee benefit plan within the
meaning of Section 3(3) of ERISA:
(a) Except
for liabilities to the Pension Benefit Guaranty Corporation pursuant to Section
4007 of ERISA, all of which have been fully paid, and except for liabilities to
the Internal Revenue Service under Section 4971 of the Internal Revenue Code of
1986, if any, all of which have been fully paid, neither Adams nor either Adams
Subsidiary Bank has any liability to the Pension Benefit Guaranty Corporation or
to the Internal Revenue Service with respect to any pension plan qualified under
Section 401 of the Internal Revenue Code of 1986.
(b) All
“employee benefit plans”, as defined in Section 3(3) of ERISA, which cover one
or more employees employed by Adams or Adams Subsidiary Banks (each
individually, a “Plan”, and collectively, the “Plan”) comply in all material
respects with ERISA and, where applicable for tax-qualified or tax-favored
treatment, with the Internal Revenue Code of 1986. As of December 31,
2007, no material liability under any Plan that is not reflected in the Adams
Financial Statements (other than such normally unrecorded liabilities under the
Plans for sick leave, holiday, education, bonus, vacation, incentive
compensation and anniversary awards, provided that such liabilities are not in
any event material). Other than remedial measures under any IRS
voluntary correction program, neither the Plans nor any trustee or administrator
thereof has engaged in a “prohibited transaction” within the meaning of Section
406 of ERISA or, where applicable, Section 4975 of the Internal Revenue Code of
1986 for which no exemption is applicable, nor have there been any “reportable
events” within the meaning of Section 4043 of ERISA for which the 30-day notice
therefor has not been waived.
(c) No
litigation is pending against any plan or plan fiduciary seeking the payment of
benefits or alleging a breach of trust or fiduciary duty by any plan
fiduciary.
(d) Neither
Adams nor either Adams Subsidiary Bank is a party to any multiemployer pension
plan as defined in Section 414(f) of the Internal Revenue Code of 1986 and
Section 3(37) of ERISA.
4.14 Commitments and
Contracts. Neither Adams nor either Adams Subsidiary Bank is a
party or subject to any of the following (whether written or oral, express or
implied):
(i) any
employment contract or understanding (including any understandings or
obligations with respect to severance or termination pay liabilities or fringe
benefits) with any present or former officer, director, employee or consultant
(other than those which are terminable at will not involve in excess of $25,000
per year);
(ii) any
plan, contract or understanding providing for bonuses, pensions, options,
deferred compensation, retirement payments, profit sharing or similar
understandings with respect to any present or former officer, director or
consultant involving in excess of $25,000 per year;
(iii) any
contract or agreement with any labor union;
(iv) any
contract not made in the ordinary course of business containing covenants
limiting the freedom of Adams to compete in any line of business or with any
person or involving any restriction of the area in which, or method by which,
Adams will carry on its business (other than as may be required by law or
applicable regulatory authorities);
(v) any
lease with annual rental payments aggregating $50,000 or more.
4.15 Labor. No
work stoppage involving Adams or the Adams Subsidiary Banks is pending or, to
the best of Adams’s knowledge, threatened. Neither Adams nor either
Adams Subsidiary Bank is involved in, or threatened with or affected by, any
labor dispute, arbitration, lawsuit or administrative proceeding which could
materially and adversely affect the business of Adams or the Adams Subsidiary
Banks. Employees of Adams or the Adams Subsidiary Banks are not
represented by any labor union nor are any collective bargaining agreements
otherwise in effect with respect to such employees.
4.16 Material Contracts
Furnished. Adams has made available to Premier true and
complete copies of all material contracts, leases and other agreements to which
Adams or the Adams Subsidiary Banks is a party or by which it is bound and of
all employment, pension, retirement, stock option, profit sharing, deferred
compensation, consultant, bonus, group insurance, or similar plans with respect
to any of the directors, officers, or other employees of Adams or the Adams
Subsidiary Banks.
4.17 Material
Contracts. Except as is otherwise provided in this Agreement,
neither Adams nor either Adams Subsidiary Banks or any of their respective
assets, businesses or operations is, as of the date hereof, a party to, or is
bound or affected by, or receives benefits under, (i) any material agreement,
arrangement or commitment not cancellable by it without penalty, other than
agreements, arrangements or commitments entered into in the ordinary course of
its business and negotiated on an arms-length basis, or (ii) any material
agreement, arrangement or commitment relating to the employment, election or
retention in office of any director or officer other than agreements,
arrangements or commitments entered into in the ordinary course of its business
and negotiated on an arms-length basis.
4.18 Material Contract
Defaults. Neither Adams nor the Adams Subsidiary Banks are in
default in any material respect under any material contract, agreement,
commitment, arrangement, lease, insurance policy or other instrument to which it
is a party or by which its respective assets, business or operations may be
bound or affected or under which it or its respective assets, business or
operations receive benefits, and there has not occurred any event which with the
lapse of time or the giving of notice or both would constitute such a default,
except as previously disclosed to Premier in writing.
4.19 Legal
Proceedings. There are no actions, suits or proceedings
instituted or pending, or to the best knowledge of Adams threatened (or
unasserted but considered probable of assertion and which if asserted would have
at least a reasonable probability of an unfavorable outcome), including eminent
domain proceedings, against or relating to Adams or the Adams Subsidiary Banks,
or against any property, asset, interest or right of Adams or the Adams
Subsidiary Banks, that could have a material and adverse effect on the condition
(financial or other, present or prospective), business, properties, assets,
operations, liabilities or prospects of Adams or the Adams Subsidiary Banks, or
that threaten or would impede the consummation of the transactions contemplated
by this Agreement. Neither Adams nor either of the Adams Subsidiary
Banks is a party to any agreement or instrument or subject to any charter or
other corporate restriction or any judgment, order, writ, injunction, stay,
decree, rule, regulation, code or ordinance that threatens or might impede the
consummation of the transactions contemplated by this Agreement.
4.20 Absence of Certain Changes
or Events. Since December 31, 2007, except as acknowledged by
Premier in Section 6(s) neither Adams nor either of the Adams Subsidiary Banks
has: (i) incurred any material liability, except in the ordinary
course of its business, consistent with generally acceptable banking practice
and except as permitted pursuant to this Agreement; (ii) suffered any material
adverse change in its business, operations, assets or condition (financial or
other); or (iii) failed to operate its business consistent with generally
acceptable banking practice.
4.21 Reports. Since
January 1, 2008, Adams and the Adams Subsidiary Banks have filed all reports and
statements, together with any amendments required to be made with respect
thereto, which it was required to file with: (i) the Securities and Exchange
Commission, including but not limited to, Forms 10-K, Forms 10-Q, Forms 8-K and
proxy statements, (ii) the Board of Governors of the Federal Reserve System;
(iii) the Office of the Comptroller of the Currency; (iv) the Federal Deposit
Insurance Corporation; (v) the Bureau of Financial Institution of the
Commonwealth of Virginia, State Corporation Commission; and (vi) any other
governmental agency or regulatory authority having jurisdiction over its
operations. Each of such reports and documents, including the
financial statements, exhibits and schedules thereto, and each other document
delivered to Premier by Adams does not contain any statement which, at the time
and in the light of the circumstances under which it was made, is false or
misleading with respect to any material fact or which omits to state any
material fact necessary in order to make the statements contained therein not
false or misleading.
4.22 Accuracy of Proxy
Statement. The material which refers to Adams and the Adams
Subsidiary Banks and which will be submitted by Adams for inclusion in the proxy
statement referred to in Section 10 hereof, or in any amendment or supplement
thereto, mailed to the holders of Adams Common Stock and Premier Common Stock
will not contain any untrue statements of material fact or omit to state any
material fact required to be stated therein or necessary to make the statements
contained therein not misleading.
4.23 Investments. Except
as incurred in the ordinary course of business as heretofore conducted, all
securities owned by Adams and the Adams Subsidiary Banks of record and
beneficially are free and clear of all mortgages, liens, pledges and
encumbrances. Any securities owned of record by Adams or the Adams
Subsidiary Banks in an amount equal to 5% or more of the issued and outstanding
voting securities of the issuer have been previously disclosed to Premier in
writing. There are no voting trusts or other agreements or
undertakings with respect to the voting of such securities.
4.24 Securities
Portfolio. Since December 31, 2007, there have been no
material changes in the quality of the Adams Subsidiary Banks’ portfolios of
securities except as previously disclosed to Premier in writing.
4.25 Environmental
Matters. To the knowledge of Adams, neither Adams nor the
Adams Subsidiary Banks nor any properties owned or operated by Adams or the
Adams Subsidiary Banks has been or is in violation of or liable under any
Environmental Law (as hereinafter defined). There are no actions,
suits or proceedings, or demands, claims, notices or investigations (including,
without limitation notices, demand letters or requests for information from any
environmental agency) instituted or pending, or the best knowledge of Adams’
management, threatened relating to the liability of any properties owned or
operated by Adams’ or the Adams Subsidiary Banks under any Environmental
Law. “Environmental Law” means any federal, state, local or foreign
law, statute, ordinance, rule, regulation, code, license, permit, authorization,
approval, consent, order, judgment, decree, injunction or agreement with any
regulatory authority relating to (i) the protection, preservation or restoration
of the environment (including, without limitation, air, water vapor, surface
water, ground water, drinking water supply, surface soil, subsurface soil, plant
and animal life or any other natural resource) and/or (ii) the use, storage,
recycling, treatment, generation, transportation, processing, handling,
labeling, production, release or disposal of any substance presently listed,
defined, designated or classified as hazardous, toxic, radioactive or dangerous,
or otherwise regulated, whether by type or by quantity, including any material
containing any such substance as a component.
4.26 Best
Efforts. On or prior to the Closing Date (hereinafter
defined), Adams will, to the extent permitted by applicable laws, rules and
regulations, take such actions and execute and deliver all such agreements,
documents, certificates or amendments to this Agreement as may be necessary or
desirable to effectuate the provisions and intent of this
Agreement.
4.27 Conduct of Business -
Negative Covenants of Adams. Except as otherwise contemplated
hereby, between the date hereof and the Effective Time, or the time when this
Agreement terminates as provided herein, Adams will not, without the prior
written approval of Premier, which approval will not be unreasonably
withheld:
(a) Make
any change in its authorized capital stock.
(b) Issue
any shares of its capital stock, securities convertible into its capital stock,
or any long term debt securities.
(c) Issue
or grant any options, warrants, or other rights to purchase shares of its common
stock.
(d) Declare
or pay any dividends or other distributions on any shares of common
stock.
(e) Purchase
or otherwise acquire or agree to acquire for a consideration any share of Adams
Common Stock (other than in a fiduciary capacity).
(f) Except
as otherwise contemplated herein or the ordinary course of business, enter into
or amend any employment, pension, retirement, stock option, profit sharing,
deferred compensation, consultant, bonus, group insurance, or similar plan in
respect of any of its directors, officers, or other employees, or increase the
current level of contributions to any such plan now in effect.
(g) Take
any action materially and adversely affecting this Agreement or the transactions
contemplated hereby or the financial condition (present or prospective),
businesses, properties, or operations of Adams or the Adams Subsidiary
Banks.
(h) Acquire,
consolidate or merge with any other company, corporation, bank or banking
association, or acquire, other than in the ordinary course of business, any
assets of any other company, corporation, bank, or banking
association.
(i) Mortgage,
pledge, or subject to a lien or any other encumbrance, any of its assets,
dispose of any of its assets, incur or cancel any debts or claims, or increase
the current level of compensation or benefits payable to its officers, employees
or directors except in the ordinary course of business as heretofore conducted
or take any other action not in the ordinary course of their business as
heretofore conducted or incur any material obligation or enter into any material
contract.
(j) Amend
its Articles of Incorporation or Association, By-laws or Charter.
(k) Unless
required to be taken by Adams’ primary banking regulator, the primary banking
regulator of its subsidiary banks or the FDIC take any action to solicit,
initiate, encourage, or authorize any person, including directors, officers and
other employees, to solicit from any third party any inquiries or proposals
relating to the disposition of the business or assets of Adams, or the
acquisition of their Adams Common Stock, or the merger of Adams with any person
other than Premier, and Adams shall promptly notify Premier orally of all the
relevant details relating to all inquiries and proposals which it may receive
relating to any of such matters. Nothing herein shall be construed to
limit or affect the fiduciary obligation of Adams’ officers and directors to
Adams shareholders.
4.28 Conduct of Business -
Affirmative Covenants of Adams. Adams covenants and agrees
that:
(a) It
will promptly advise Premier in writing of the name and address of and number of
shares of Adams Common Stock held by each shareholder who elects to exercise
his, her or its rights to dissenters’ appraisal in connection with the Merger
pursuant to the Delaware General Corporation Law, if any.
(b) Except
as specifically required herein, subsequent to the date of this Agreement and
prior to the Effective Time it will operate its business only in the normal
course and manner.
(c) It
will make available to Premier for review prior to Adams or either Adams
Subsidiary Banks’ final loan approval, any loan documentation, credit memoranda
or other related documentation requested or received by Adams or Adams
Subsidiary Banks in its decision making process in determining whether to extend
credit to any borrower for:
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(1)
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Any
new loan, or renewal of an existing loan, that totals $250,000 or greater;
or
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(2)
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Any
new loan, or renewal of an existing loan, which, when included with all
other loans from Adams or Adams Subsidiary Banks to any such borrower and
their related interests, would cause such borrower’s total loans from
Adams or Adams Subsidiary Banks, including loans from Adams or Adams
Subsidiary Banks to their related interests, to exceed
$400,000.
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Any
objections by Premier to proposed loans reviewed hereunder will be made in
writing to the Adams Subsidiary Banks within forty-eight (48) hours of receipt
by Premier of the information provided hereunder.
(d) From
and after the execution of this Agreement, Adams will promptly advise Premier of
any material adverse change in the financial condition, assets, business
operations or key personnel of Adams or the Adams Subsidiary Banks and of any
material breach of any representation or warranty made by Adams or the Adams
Subsidiary Banks in this Agreement.
(e) Immediately
upon the execution of this Agreement, it will direct its accountants to give
Premier access to all information, documents and working papers pertaining to
Adams or the Adams Subsidiary Banks.
(f) Subsequent
to the date of this Agreement and prior to the Effective Time, Adams and the
Adams Subsidiary Banks shall maintain in full force and effect adequate fire,
casualty, public liability, employee fidelity and other insurance coverage in
effect on the date of this Agreement in order to protect Adams and the Adams
Subsidiary Banks against losses for which insurance protection can reasonably be
obtained.
(g) Within
ten days from the execution of this Agreement, Adams shall furnish to Premier a
list, accurate as of the close of business on a date not more than ten (10) days
prior to the date on which such list is furnished, containing the names and
addresses of all holders of Adams Common Stock as the same appear on the stock
registration books of Adams and the number of shares held by each. At
the Effective Time, Adams shall furnish to Premier a list, true, correct and
complete as of the close of business on the preceding day, containing the names
and addresses of all holders of Adams Common Stock as the same appear on Adams’
stock registration books and the number of shares held by each.
(h) It
will use its best efforts in good faith to take or cause to be taken all action
required under this Agreement on its part to be taken as promptly as practicable
so as to permit the consummation of the Merger and the transactions contemplated
hereby at the earliest possible date and cooperate fully with Premier to that
end.
(i) Subsequent
to the date of this Agreement and prior to the Effective Time, Adams and the
Adams Subsidiary Banks shall take all steps necessary and appropriate and
authorized by relevant law or regulation and as permitted by the relevant
primary bank regulator to:
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(1)
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Terminate
pursuant to the terms thereof any and all employment contracts to which
either Adams or the Adams Subsidiary Banks is a
party.
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(2)
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Terminate
any defined benefit plan to which either Adams or the Adams Subsidiary
Banks is a party; provided, however, that
if all appropriate steps are taken for termination and the defined benefit
plan is frozen, the actual termination of any defined benefit plan need
not be accomplished prior to, or at,
Closing.
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Premier
acknowledges and agrees that termination of the employee benefit plans, as
required by this section, may require the payment of cash and/or other
consideration to affected employees, in accordance with the terms thereof and
applicable law. Premier also acknowledges that in the event Adams or
any Adams Subsidiary Bank is unable to terminate such plan or agreements as set
forth in (i) (1) through (2) above, Premier shall honor any such payments due
and owing.
Section
5. Indemnification and
Confidentiality
5.1 Access and
Information. Adams and Premier shall each upon reasonable
notice afford to the other, and to the other’s accountants, counsel and other
representatives, full access during normal business hours throughout the period
prior to the Closing Date to all of its properties, books, contracts,
commitments and records (including but not limited to tax returns), and, during
such period, each shall furnish promptly to the other (i) a copy of each report,
schedule and other document filed or received by it pursuant to the requirements
of federal or state securities and banking laws and (ii) all other information
concerning its business, properties and personnel as such other party may
reasonably request, provided that no investigation pursuant to this Section 5.1
shall affect any representations or warranties or the conditions to the
obligations of the parties to consummate the Merger.
5.2 Furnishing Information and
Indemnification. Premier and the Premier Subsidiaries, on the
one hand, and Adams and the Adams Subsidiary Banks, on the other hand, have
furnished or will furnish as soon as practicable after the date of this
Agreement, to each other all the information (including financial statements,
information and schedules) concerning themselves required for inclusion
in:
(a) any
applications to be filed by any of Premier or Adams with the Federal Reserve
Board, the Office of the Comptroller of the Currency, the Federal Deposit
Insurance Corporation, the Kentucky Office of Financial Institutions, the Bureau
of Financial Institutions of the Commonwealth of Virginia, State Corporation
Commission and the West Virginia Board of Banking and Financial
Institutions;
(b) the
registration statement to be filed with the Securities and Exchange Commission
on behalf of under the Securities Act of 1933 in connection with the Merger and
the proxy statement to solicit the approval of Adams and Premier shareholders to
the Merger, and any documents to be filed with the Securities and Exchange
Commission in connection therewith;
(c) any
filings to be made by Premier with state securities authorities in connection
with the transactions contemplated hereunder; and
(d) any
other request, application, statement, report or material to be made or filed by
any party to or with any regulatory authority or any governmental agency,
department or instrumentality in connection with the transactions contemplated
hereunder.
Premier represents and warrants to
Adams, and Adams represents and warrants to Premier, that all information so
furnished for such requests, statements, applications, reports and materials
shall be true and correct in all material respects without omission of any
material fact required to be stated to make the information therein not false or
misleading. Premier will indemnify and hold harmless Adams and Adams
Subsidiary Banks, and Adams will indemnify and hold harmless Premier and each of
the Premier Subsidiaries, and each of their respective directors and officers,
and each person, if any, who controls such entities within the meaning of the
Securities Act of 1933, from and against any and all losses, damages, expenses
or liabilities to which such entity, or any such director, officer or
controlling person may become subject under applicable laws (including the
Securities Act of 1933 and the Securities Exchange Act of 1934) and rules and
regulations thereunder and will reimburse the other, and any such director,
officer or controlling person, for any legal or other expenses reasonably
incurred in connection with investigating or defending any actions, whether or
not resulting in liability, insofar as such losses, damages, expenses,
liabilities or actions arise out of or are based upon any untrue statement or
alleged untrue statement of a material fact contained in any such request,
statement, application, report or material or arise out of or are based upon the
omission or alleged omission to state therein a material fact required to be
stated therein or necessary in order to make the statements therein not
misleading, but only insofar as any such statement or omission was made in
reliance upon and in conformity with information furnished in writing in
connection therewith by such indemnifying party for use therein.
5.3 Confidentiality. It
is hereby agreed that, except (i) as otherwise required in the performance by
the parties of their respective obligations hereunder or under the Merger and
(ii) as otherwise required by law or regulation, or as otherwise may be
required by the primary banking regulators of each party (including
subsidiaries), any non-public information received from the other party during
the course of the investigation contemplated pursuant hereto shall remain and be
kept as confidential information by it and all copies thereof will be returned
promptly at the request of the party furnishing such information in the event of
the termination of this Agreement and the Merger. Each of the parties
may disclose such information to its respective employees, affiliates, counsel,
accountants, representatives, professional advisors and consultants, and shall
require each of them to agree to keep all such information
confidential.
5.4 Updates to
Information. At the reasonable request of any party hereto,
any other party will update by amendment or supplement the Disclosure Letter and
each party hereby represents and warrants that the Disclosure Letter, as so
amended or supplemented, shall be true, correct and complete as of the date or
dates thereof.
Section
6. Conditions
Precedent
The consummation of the Merger is
conditioned upon the following:
(a) Governmental
Approvals. The approval of and consent to the Merger and the
transactions contemplated hereby (other than the merger of Adams National and
CB&T) shall have been given prior to the Effective Time by the regulatory
agencies whose approval or consent is required, including, without limitation,
to the extent provided by applicable laws, rules and regulations, the Board of
Governors of the Federal Reserve System, the Office of the Comptroller of the
Currency, the Federal Deposit Insurance Corporation, the Kentucky Office of
Financial Institutions, the West Virginia Board of Banking and Financial
Institutions, the Bureau of Financial Institutions of the Commonwealth of
Virginia, State Corporation Commission and the Securities and Exchange
Commission, and all notice periods, waiting periods delay periods and all
periods for review, objection or appeal of or to any of the consents, approvals,
or permissions required by law with respect to the consummation of the Merger
and this Agreement shall have expired. Such approvals shall not be
conditioned or restricted in a manner which, in the judgment of the Board of
Directors of Premier, materially and adversely affects the consolidated
business, operations, financial condition, property or assets of Premier and
Adams or materially impair the value of Adams to Premier.
(b) Shareholder
Approval. The shareholders of Adams, Interim Company and
Premier shall have ratified, confirmed and approved this Agreement and the terms
and conditions herein contained by the affirmative vote of shareholders of each
such corporation, owning at least a majority of its capital stock outstanding,
and final approval of this Agreement shall have taken place as provided in
Section 10 hereof, and all provisions of Section 10 shall have been fully
complied with.
(c) Registration
Statement. Premier at its sole cost and expense shall have
prepared and filed a registration statement on Form S-4 or on such other
appropriate form as may be prescribed by the Securities and Exchange Commission
and as Premier may reasonably be able to prepare and file, providing timely
registration under the provisions of the Securities Act of 1933, as amended, of
the Premier Common Stock to be exchanged in connection with the Merger, such
Registration Statement shall have been declared effective by the SEC and a
prospectus shall have been delivered to shareholders of Adams and Premier prior
to obtaining the approval of this Agreement by such shareholders as provided in
Section 10. The Registration Statement shall be effective and all
post-effective amendments filed by Premier with respect to such registration
statement shall have been declared effective or shall have been withdrawn and no
stop orders suspending the effectiveness thereof shall have been issued and no
proceedings for that purpose shall, before the Effective Time, have been
initiated nor, to the knowledge of Premier, threatened by the Securities and
Exchange Commission.
(d) Issuance of Premier
Preferred Stock Pursuant to CPP. Premier shall have completed
the issuance to the United States Treasury of $24,000,000 of Premier Preferred
Stock and warrants for the purchase of Premier Common Stock with an aggregate
market price equal to 15% of such Premier Preferred Stock pursuant to the CPP
upon terms and conditions set forth in the CPP purchase documents.
(e) No Divestiture or Adverse
Condition. The approvals, consents and permissions referred to
in subparagraphs (a), (b) and (c) hereof shall not have required the divestiture
or cessation of any significant part of the present operations conducted by
Premier, Adams or any Premier Subsidiary, and shall not have imposed any other
condition, which divestiture, cessation or condition Premier reasonably deems to
be materially burdensome.
(f) Accuracy of Representations
and Warranties; Performance of Obligations and Covenants -
Premier. Unless waived by Adams, the representations and
warranties of Premier contained in this Agreement shall be correct on and as of
the Closing Date and thereafter until the Effective Time in all material
respects with the same effect as though made on and as of such Effective Time
except for changes which are not in the aggregate material and adverse to the
financial condition, businesses, properties, or operations of Premier and
Premier shall have performed in all material respects all of its obligations and
agreements hereunder theretofore to be performed by it and Adams shall have
received on the Closing Date an appropriate certificate to the foregoing effect
dated as of the Closing Date and executed on behalf of Premier by one or more
appropriate executive officers of Premier.
(g) Accuracy of Representations
and Warranties; Performance of Obligations and Covenants -
Adams. Unless waived by Premier, the representations and
warranties of Adams contained in this Agreement shall be correct on and as of
the Closing Date and thereafter until the Effective Time with the same effect as
though made on and as of such Effective Time except for changes which are not in
the aggregate material and adverse to the financial condition, businesses,
properties or operations of Adams, and Adams shall have performed in all
material respects all of its obligations and agreements hereunder theretofore to
be performed by it and Premier shall have received on the Closing Date an
appropriate certificate to the foregoing effect dated as of the Closing Date and
executed on behalf of Adams by one or more appropriate executive officers of
Adams.
(h) Opinion of Counsel for
Adams. Premier shall have received an opinion of Luse Gorman
Pomerenk & Schick, P.C., counsel for Adams, dated the Closing Date, to the
effect that:
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(1)
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Adams
is a corporation validly existing and in good standing under the laws of
the State of Delaware, is a bank holding company under the Bank Holding
Company Act of 1956 and is duly authorized to own its properties and to
conduct its business as then being
conducted.
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(2)
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Adams
National is a national banking association validly existing and in good
standing under the laws of the United States of America and is duly
authorized to own its properties and to conduct its business as then being
conducted.
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(3)
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CB&T
is a banking corporation validly existing and in good standing under the
laws of the Commonwealth of Virginia and is duly authorized to own its
properties and to conduct its business as then being
conducted.
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(4)
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The
authorized capitalization of Adams is as set forth in such opinion and to
counsel’s knowledge the shares of Adams Common Stock issued and
outstanding (as of a date specified in such opinion not more than 5 days
prior to the date of such opinion) are as stated in such
opinion. Such issued and outstanding shares of stock are to
counsel’s knowledge validly issued, fully paid and were not issued in
violation of any preemptive rights of the shareholders of
Adams. As of such date, there are, to the best of such
counsel’s knowledge, no options, warrants, rights, commitments or
convertible securities outstanding or authorized on behalf of Adams or
either Adams Subsidiary Banks, calling for the purchase from it of shares
of unissued capital stock or capital stock held as treasury shares, except
as otherwise permitted by the Agreement or for those shares of stock
issued pursuant to any employee stock option plan of Adams. All
of the issued and outstanding shares of each of the Adams Subsidiary Banks
are held of record by Adams.
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(5)
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Adams
had the corporate power and authority to execute, deliver and perform its
obligations under this Agreement. This Agreement has been duly
authorized, executed and delivered by Adams and constitutes the legal,
valid and binding obligation of Adams, enforceable in accordance with its
terms.
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(6)
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All
necessary corporate proceedings of the board of directors and the
shareholders of Adams, to the extent required by law, its Articles of
Incorporation and Bylaws or otherwise, to authorize the execution and
delivery of this Agreement by Adams and the consummation of the Merger by
Adams pursuant to this Agreement have been duly and validly
taken.
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(7)
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Such
counsel has reviewed the registration statement filed by Premier as
described in Section 6(c), and with respect to all information relating to
Adams and the Adams Subsidiary Banks contained therein. To such counsel’s
knowledge counsel does not know of any respect in which the registration
statement contained any false or misleading statement of any material fact
or failed to state a material fact which was necessary to be stated to
prevent the statements made from being false or misleading in any material
respect (except as to the financial statements and related notes and
schedules and other financial and pro forma data, as to which such counsel
need express no opinion).
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(8)
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To
counsel’s knowledge the consummation of the Merger will not violate or
result in a breach of, or constitute a default under, the Articles of
Incorporation or By-Laws of Adams or constitute a breach or termination
of, or default under, any agreement or instrument of which such counsel
has knowledge and which would have a Material Adverse Effect on the
business of Adams and its subsidiaries taken as a whole, and to which
Adams is a party or by which it or any of its property is
bound.
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(9)
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To
such counsel’s knowledge there has been no material breach of any warranty
contained in this Agreement on the part of Adams or any failure on the
part of Adams to materially perform any of the conditions precedent to the
consummation of the Merger imposed upon it
herein.
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(i) Opinion of Counsel for
Premier. Adams shall have received the opinion of Huddleston
Bolen LLP, counsel for Premier, dated the Closing Date, to the effect
that:
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(1)
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Premier
is a corporation validly existing and in good standing under the laws of
the Commonwealth of Kentucky, is a bank holding company under the Bank
Holding Company Act of 1956, and is duly authorized to own its properties
and to conduct its business as then being
conducted.
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(2)
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Each
of the Premier State Banks are banking corporations duly organized,
validly existing and in good standing under the laws of the States of Ohio
or West Virginia or the Commonwealth of Kentucky, as the case may be, and
each is duly authorized to own its properties and to conduct its business
as then being conducted.
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(3)
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The
authorized capitalization of Premier is as set forth in such opinion and
the shares of Premier Common Stock issued and outstanding (as of a date
specified in such opinion not more than 5 days prior to the date of such
opinion) are as stated in such opinion. Such issued and
outstanding shares of stock are to counsel’s knowledge validly issued,
fully paid and non-assessable, and were not issued in violation of any
preemptive rights of the shareholders of Premier or any Premier
Subsidiary. As of such date, there are, to the best of such
counsel’s knowledge, no options, warrants, rights, commitments or
convertible securities outstanding or authorized on behalf of Premier or
any Premier Subsidiary, calling for the purchase from any of them of
shares of unissued capital stock or capital stock held as treasury shares,
except as otherwise permitted by the Agreement or for those shares of
stock issued pursuant to any employee stock option plan of
Premier. All of the issued and outstanding shares of each of
the Premier Subsidiaries are held of record by
Premier.
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(4)
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All
necessary corporate proceedings of the Boards of Directors and the
shareholders of Premier and Interim Company to the extent required by law,
their Articles of Incorporation or Association or By-Laws or otherwise, to
authorize the execution and delivery of this Agreement or the Adoption
Agreement and the consummation of the Merger pursuant to this Agreement
have been duly and validly taken. Premier and Interim Company
have the corporate power and authority to execute, deliver and perform
this Agreement or the Adoption Agreement. This Agreement has
been duly authorized, executed and delivered by Premier and Interim
Company (by virtue of the Adoption Agreement) and constitutes the legal,
valid and binding obligation of Premier and Interim Company in accordance
with its terms.
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(5)
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The
consummation of the Merger will not violate or result in a breach of, or
constitute a default under the Articles of Incorporation or By-Laws of
Premier or constitute a breach or termination of, or default under, any
agreement or instrument of which such counsel has knowledge and to which
Premier is a party or by which it or its property is
bound.
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(6)
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To
the best of such counsel’s knowledge, all approvals of public authorities,
federal, state or local, the granting of which is necessary for the
consummation of the Merger by Premier have been
obtained.
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(7)
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The
shares of Premier Common Stock into which shares of Adams Common Stock are
to be converted upon the Effective Time will upon the Effective Time be
duly authorized, and such shares, when transferred to holders of Adams
Common Stock pursuant to the terms of the Merger, will be validly issued,
fully paid and nonassessable shares of Premier Common
Stock.
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(8)
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Such
counsel has reviewed the registration statement described in Section 6(c),
and with respect to all information relating to the Merger and to Premier
and the Premier Subsidiaries contained therein. To such counsel’s
knowledge counsel does not know of any respect in which the registration
statement contained any false or misleading statement of any material fact
or failed to state a material fact which was necessary to be stated to
prevent the statements made from being false or misleading in any material
respect (except as to the financial statements and related notes and
schedules and other financial or pro forma data, as to which such counsel
need express no opinion).
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(9)
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The
registration statement has been filed on the proper form under the rules
and regulations of the Securities and Exchange Commission, notice of
effectiveness of the registration statement has been received, and, to the
best of such counsel’s knowledge, no stop order suspending the
effectiveness of the registration statement has been issued and no
proceeding for that purpose has been
instituted.
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(j) Less than 20%
Dissenters. Unless waived by Premier, the holders of no more
than 20% of the outstanding shares of Adams Common Stock shall have elected to
exercise their statutory rights to appraisal, if any, in connection with the
transactions contemplated hereby, pursuant to the Delaware General Corporation
Law.
(k) Tax Ruling or Opinion
Letter. Premier and Adams shall have received a ruling from
the Internal Revenue Service, or at their option, Adams shall have received an
opinion of tax counsel acceptable to it and Premier shall have received an
opinion of tax counsel acceptable to it, to the effect that:
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(1)
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The
Merger will constitute and qualify as a reorganization within the meaning
of Sections 368 of the Internal Revenue Code and Adams, Surviving Company
and Premier will each qualify as “a party to a reorganization” as that
term is defined in the Internal Revenue
Code;
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(2)
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No
gain or loss will be recognized by the shareholders of Adams who exchange
their Adams Common Stock for Premier Common Stock pursuant to the Merger,
except that gain or loss may be recognized as to cash received in lieu of
fractional share interests;
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(3)
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No
gain or loss will be recognized by Premier, Adams, or Surviving Company by
reason of the Merger; and
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(4)
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The
holding period of Premier Common Stock received by Adams shareholders in
exchange for Adams Common Stock will include the holding period of the
shares of Adams Common Stock so exchanged, provided that the Adams Common
Stock is held as a capital asset at the Effective
Time.
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(l) Absence of Material Adverse
Changes - Premier. Unless waived by Adams at or before the
Effective Time, there shall have been no material adverse change resulting in a
material adverse effect in the financial condition, business or assets of
Premier since December 31, 2007, and there shall be no suit, action or
proceeding pending or threatened against Premier or any Premier Subsidiary
which, if successful, would have a material adverse effect on Premier or the
Surviving Company after the consummation of the Merger. “Material Adverse Effect”
means, with respect to Adams or Premier, any effect that (i) is material and
adverse to the financial position, results of operations or business of Adams
and the Adams Subsidiary Banks taken as a whole or Premier and the Premier
Subsidiary Banks taken as a whole, respectively, or (ii) would materially
threaten or materially impede the consummation of the Merger and the other
transactions contemplated by this Agreement; provided, however, that Material
Adverse Effect shall not be deemed to include the impact of (a) changes in
banking and similar laws of general applicability or interpretations thereof by
courts or governmental authorities, except to the extent such changes have a
disproportionate impact on Adams (except in the case of FDIC insurance
assessments or FHLB borrowing costs) or Premier, as the case may be, relative to
the overall effects on the banking industry, (b) changes in generally accepted
accounting principles or regulatory accounting requirements applicable to banks
and their holding companies generally, except to the extent changes have a
disproportionate impact on Adams or Premier, as the case may be, relative to the
overall effect on the banking industry, (c) modifications or changes to
valuation policies and practices in connection with the Merger or restructuring
charges taken in connection with the Merger, in each case in accordance with
generally accepted accounting principles, (d) actions and omissions of Adams or
Premier taken with the prior written consent of the other in contemplation of
the transactions contemplated hereby, (e) changes in economic conditions
affecting financial institutions generally, including, without limitations,
changes in market interest rates or the projected future interest rate
environment, except to the extent that such changes have a disproportionate
impact on Adams or Premier, as the case may be, relative to the overall effect
on the banking industry or (f) direct effects of compliance with this Agreement
on the financial condition and operating performance of the parties, including,
without limitation, expenses incurred by the parties in consummating the
transactions contemplated by this Agreement.
(m) Absence of Material Adverse
Changes - Adams. Unless waived by Premier at or before the
Effective Time, there shall have been no material adverse change resulting in a
material adverse effect in the financial condition, business or assets of Adams
since December 31, 2007, and there shall be no suit, action or proceeding
pending or threatened against Adams which if successful would have a Material
Adverse Effect on Adams or the Surviving Company after the consummation of the
Merger.
(n) Consent of Premier
Lenders. Premier shall have received the consents of
First Guaranty Bank of Hammond, Louisiana and The Bankers’ Bank of Kentucky,
Inc. of Frankfort, Kentucky as may be required by those loan agreements entered
into by Premier with First Guaranty Bank and The Bankers’ Bank of Kentucky, as
identified in Section 3.3 on or before midnight on the forty-fifth (45th) day
following the date of this Agreement. Premier shall use its best
efforts to obtain such consents.
(o) Consent of Adams
Lender. Adams shall have received the consent of First
Guaranty Bank of Hammond, Louisiana as may be required by those loan agreements
entered into by Adams with First Guaranty Bank, on or before midnight on the
forty-fifth (45th) day
following the date of this Agreement. Adams shall use its best
efforts to obtain such consents.
(p) No Excess Parachute
Payment. As a result, directly or indirectly, of the
transactions contemplated by this Agreement (including, without limitation, as a
result of any termination of employment prior to or following the Effective
Time), neither Premier, Adams nor the Adams Subsidiary Banks will be obligated
to make a payment that would be characterized as an “excess parachute payment”
to an individual who is a “disqualified individual” (as such terms are defined
in Section 280G of the Internal Revenue Code), without regard to whether such
payment is reasonable compensation for personal services performed or to be
performed in the future.
(q) Fairness Opinion -
Adams. Adams shall have received an opinion from its financial
advisor, RP Financial L.C., that the Merger Consideration is fair, from a
financial point of view, to the shareholders of Adams.
(r) Fairness Opinion –
Premier. Premier shall have received an opinion from its
financial advisor, Baxter Fentriss and Company, that the Merger Consideration is
fair, from a financial point of view, to Premier.
(s) Compliance with Written
Agreement. Adams National shall be in substantial compliance
with the provisions of the written Agreement by and between Adams National and
The Comptroller of the Currency dated October 1, 2008, including, without
limitation, the provisions of Article IV and Article XII thereof.
Section
7. Closing Date and Effective
Time
7.1 Closing
Date. The closing shall be effected as soon as practicable
after all of the conditions contained herein shall have been
satisfied. The closing shall be held at the offices of Premier in
Huntington, West Virginia, and the closing date (“Closing Date”) shall be a
mutually agreeable date following the date of final approval by such regulatory
agencies whose approval is required of the Merger and the transactions
contemplated hereby but, in no event, later than forty-five (45) days following
the date of such final approval and/or the date when all such conditions are
satisfied, whichever date shall last occur.
7.2 Effective
Time. Subject to the terms and upon satisfaction on or before
the Closing Date of all conditions specified in this Agreement, the Merger shall
be effective at the time specified in the certificate of merger to be issued by
the Secretary of State of Delaware (such time herein called “Effective
Time”).
Section
8. Termination of
Agreement
8.1 Grounds for
Termination. This Agreement and the transactions contemplated
hereby may be terminated at any time prior to the Closing Date, either before or
after the meetings of the shareholders of Adams or Premier:
(a) By
mutual consent in writing of Adams and Premier; or
(b) By
Adams by giving written notice thereof to Premier if (i) a Material Adverse
Effect (as defined in Section 6(l) shall have occurred in the financial
condition, results of operations or business of Premier or any Premier Bank
since the date of this Agreement, or (ii) Premier has in any material respect
breached any covenant, undertaking, representation or warranty contained in this
Agreement and such breach has not been cured within thirty (30) days after the
giving of such notice; or
(c) By
Premier by giving written notice thereof to Adams if (i) a Material Adverse
Effect (as defined in Section 6(l) shall have occurred in the financial
condition, results of operations or business of Adams or any Adams Surviving
Bank since the date of this Agreement or (ii) Adams has breached any covenant,
undertaking, representation or warranty contained in this Agreement and such
breach has not been cured within thirty (30) days after the giving of such
notice; or
(d) By
either Adams or Premier upon written notice to the other if any regulatory
agency whose approval of the transactions contemplated by this Agreement is
required denies such application for approval by final order or ruling (which
order or ruling shall not be considered final until expiration or waiver of all
periods for review or appeal); or
(e) By
either Adams or Premier upon written notice to the other if any condition
precedent to either party’s performance hereunder is not satisfied or fulfilled;
or
(f) By
either Adams or Premier if the Merger shall violate any non-appealable final
order, decree or judgment of any court or governmental body having competent
jurisdiction; or
(g) By
either Adams or Premier upon the bankruptcy, insolvency or assignment for the
benefit of creditors of Adams or of either of the Adams Subsidiary Banks,
Premier or of any of the Premier State Banks; or
(h) By
either Adams or Premier, if the shareholders of Adams shall fail to approve the
Merger by the vote required under the Delaware General Corporation Law and the
Certificate of Incorporation and Bylaws of Adams; or
(i) By
either Adams or Premier, if the shareholders of Premier shall fail to approve
the Merger by the vote required under the Kentucky Business Corporation Act or
NASDAQ Rule 4350(i)(1)(C); or
(j) By
either Adams or Premier, if the Closing does not occur on or before June 30,
2009 unless extended by mutual agreement in writing; or
(k) By
Premier, if the issuance of at least $24,000,000 of Premier Preferred Stock and
attendant warrants for Premier Common Stock to the U.S. Treasury has not
occurred.
(l) By
Premier if Adams National is not in substantial compliance with the provisions
of the written Agreement by and between Adams National and The Comptroller of
the Currency dated October 1, 2008, including, without limitation, the
provisions of Article IV and Article XII thereof.
8.2 Effect of
Termination. In the event of termination of this Agreement for
any reason other than a breach thereof, neither party hereto shall have any
liability to the other of any nature whatsoever, including any liability for
loss, damages, or expenses suffered or claimed to be suffered by reason thereof,
except as provided in Section 8.3.
8.3 Return of
Information. In the event of the termination of this Agreement
for any reason, each party shall deliver to the other party, and shall require
each of its officers, agents, employees and independent advisers (including
legal, financial and accounting advisers) to deliver to the other party all
documents, work papers, and other material obtained from such other party
relating to the transactions contemplated hereby, whether obtained before or
after the execution hereof, including information obtained pursuant to Section 5
hereof. Each party agrees that notwithstanding any other provision
contained in this Agreement, the undertakings and covenants regarding
confidentiality contained in Section 5 shall survive termination of this
Agreement.
Section
9. Waiver and
Amendment
Except with respect to required
approvals of the applicable governmental authorities and shareholders, Premier
or Adams by written instrument signed by its authorized officers at any time
(whether before or after approval of the Agreement or the Merger by the
shareholders of Adams), may extend the time for the performance of any of the
obligations or other acts of the other and may waive, with respect to the
other: (i) any inaccuracies in the representations or warranties
contained in this Agreement or in any document delivered pursuant hereto,
(ii) compliance with any of the covenants, undertakings or agreements, or
satisfaction of any of the conditions to its obligations, contained in this
Agreement, and/or (iii) the performance (including performance to the
satisfaction of a party or its counsel) of any obligations set out
herein. This Agreement may be amended or supplemented at any time by
mutual agreement of the parties (except that they may not be amended in any
material respect after approval by the shareholders of the parties without
further approval by such shareholders). Any waiver, amendment or
supplement hereof shall be in writing. Any waiver by Premier or Adams
of a condition to its obligation to perform this Agreement and the subsequent
Closing hereunder shall be without prejudice to the rights or remedies it may
have arising out of any breach of any representation, warranty, covenant or
other agreement hereunder.
Section
10. Meetings of Shareholders of
Adams and Premier
Each of Adams and Premier shall take
all steps necessary to call and hold a meeting of its respective shareholders in
accordance with applicable law and the Certificate of Incorporation and By-laws
of Adams or Premier as soon as practicable for the purpose of submitting this
Agreement to its shareholders for their ratification, approval and confirmation,
and each of Adams and Premier will send to its respective shareholders for
purposes of such meeting a joint proxy statement which will not contain any
untrue statement of material fact or omit to state any material fact required to
be stated therein or necessary to make the statements contained therein not
misleading and which will otherwise comply with all applicable laws, rules and
regulations. Adams agrees to assist Premier in the preparation of
such joint proxy statement/prospectus which will adequately disclose all
information relevant and material to the Merger and which will comply with all
such laws, rules and regulations. Premier agrees that the material
included in the joint proxy statement/prospectus which refers to the Merger and
to Premier and the Premier Subsidiaries will not contain any untrue statement of
material fact or omit to state any material fact required to be stated therein
or necessary to make the statements contained therein not misleading and which
will otherwise comply with all applicable laws, rules and
regulations. Adams agrees that the material submitted by it to
Premier for inclusion in the proxy statement which refers to Adams and the Adams
Subsidiaries will not contain any untrue statement of material fact or omit to
state any material fact required to be stated therein or necessary to make the
statements contained therein not misleading and which will otherwise comply with
all applicable laws, rules and regulations. Each of Adams and Premier will cause
such joint proxy statement/prospectus to be mailed by First Class mail postage
prepaid to all of its shareholders at the last known address of each such
shareholder contained in its records and in the joint proxy statement/prospectus
and at such meeting of its shareholders each of Adams and Premier will recommend
that all shareholders vote in favor of this Agreement and the
Merger. Notwithstanding the foregoing, Adams may disclose to any or
all of its shareholders any facts with respect to Premier which Adams reasonably
deems to be material to such shareholders’ consideration of this Agreement and
the Merger.
Section
11. Rights of Dissenting
Shareholders
Any shareholder of Adams who has and
who properly exercises his right to dissent and perfect his appraisal rights
under Delaware law, if any, shall be entitled, with respect to any shares as to
which he or she shall so dissent, to the fair value of such shares as of the day
prior to the date on which the shareholders of Adams voted to approve the
Merger, excluding any appreciation or depreciation in anticipation of the
Merger. The procedures to be followed and the rights of such
dissenting shareholders shall be those set forth in the Delaware General
Corporation Law.
Section
12. Miscellaneous
12.1 Public
Announcements. Prior to the Closing Date, each party shall use
its best efforts to consult with the other party with respect to any prepared
public announcement, statement or release to the press, or statement to a
competitor, customer or other third party (except to its consultants or to the
regulatory authorities in connection with applications for governmental
approvals or filings) with respect to this Agreement or the Merger or the
transactions contemplated hereby or thereby, except as may be necessary, in the
opinion of counsel, to comply with any law, governmental order or
regulation.
12.2 Brokers and
Finders. Adams and Premier represent each to the other that
this Agreement and the Merger contemplated hereby are the result of direct
negotiations between them and further, except for fees due Baxter Fentriss and
Company by Premier and due RP Financial L.C. by Adams, that neither Adams nor
Premier has incurred any liability for any broker’s, finder’s or similar fees in
connection with this Agreement or the Merger.
12.3 Disclosed In
Writing. As used in this Agreement, the phrase “disclosed in
writing” shall mean disclosed or delivered prior to or within 20 days after, the
date of this Agreement by means of a writing describing in reasonable detail the
matters contained therein and delivered in accordance with Section 14.7
hereof. For purposes of this Agreement, anything appearing,
contained, disclosed or described (i) in any Premier Financial Statement or
Adams Financial Statement (including the notes thereto), (ii) in any call report
or similar periodic report furnished to the Federal Deposit Insurance
Corporation, the Office of the Comptroller of the Currency, the Federal Reserve
Board, Bureau of Financial Institutions of the Commonwealth of Virginia, State
Corporation Commission or the West Virginia Department of Banking, or (iii) in
any periodic report or other document filed with the Securities and Exchange
Commission (including, but not limited to, Forms 8-K, Forms 10-K, Forms 10-Q,
Annual Reports, and proxy statements) by either of Premier or Adams, shall be
deemed to be previously disclosed.
12.4 Entire
Agreement. This Agreement embodies the entire agreement among
the parties and there have been no agreements, representations, or warranties
among the parties other than those set forth herein or those provided for
herein.
12.5 Counterparts. This
Agreement has been executed in a number of identical counterparts, and each such
counterpart shall be deemed to be an original instrument, but in making proof of
this Agreement, it shall not be necessary to produce or account for more than
one such counterpart.
12.6 Invalid
Provisions. The invalidity or unenforceability of any
particular provision of this Agreement shall not affect the other provisions
hereof, and this Agreement shall be construed in all respects as if such invalid
or unenforceable provision were omitted.
12.7 Notices. Any
notices or other communication required or permitted hereunder shall be
sufficiently given if sent by registered or certified mail, postage prepaid,
addressed as follows:
TO
ADAMS: Abigail
Adams National Bancorp, Inc.
1130 Connecticut Avenue,
NW
Washington, DC 20036
Attention: Lou Akers, Executive Vice
President
with
a copy
to: Alan
Schick
Luse Gorman Pomerenk & Schick,
P.C.
5335 Wisconsin Avenue, NW, Suite
400
Washington, DC 20015
TO
PREMIER: Brien
M. Chase, Senior Vice President and Chief Financial Officer
Premier Financial Bancorp,
Inc.
2883 Fifth Avenue
Huntington, West Virginia
25301
with a copy
to: Thomas
J. Murray, Esquire
Daniel J. Konrad, Esquire
Huddleston Bolen LLP
P. O. Box 2185
Huntington, West
Virginia 25722
or
such other addresses as shall be furnished in writing by either party to the
other party. Any such notice or communication shall be deemed to have
been given as of the date so mailed.
12.8 Headings. The
captions contained in this Agreement are inserted solely for convenience of
reference and shall not affect the meaning or interpretation of this
Agreement.
12.9 Expenses. Each
of the parties hereto will pay its own fees and expenses incurred in connection
with the transactions contemplated by this Agreement, except as otherwise
specifically provided herein.
12.10 Governing
Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of Delaware applicable to contracts made
and performed within the state and the United States of America.
12.11 No
Assignment. This Agreement shall be binding upon and shall
inure to the benefit of the parties hereto and their respective successors and
assigns; provided, however, that this Agreement may not be assigned by either
party without the written consent of the other party.
12.12 Effectiveness of
Agreement. This Agreement shall become effective and binding
as to Premier and Adams when one or more counterparts shall have been signed and
delivered by Premier and Adams, and shall become effective and binding as to
Interim Company when Interim Company has executed an Adoption Agreement in
substantially the form attached hereto as Exhibit “A”.
12.13 Further
Acts. Premier and Adams each agree to execute and deliver on
or before the Closing Date such other documents, certificates, agreements, or
other writings and to take such other actions as may be necessary or desirable
in order to consummate or implement expeditiously the transactions contemplated
by this Agreement.
12.14 Representations and
Warranties Not to Survive. Except for the representations and
warranties contained in Sections 5, 8.3, 12.9 and 12.15, the representations and
warranties included or provided in this Agreement shall not survive the
Effective Time.
12.15 Disclosure
Letter. Disclosure Letter means a letter delivered by
Premier/Adams, Adams/Premier on or before the execution and delivery of this
Agreement setting forth, among other things, items the disclosure of which is
required under this Agreement, either in response to an express disclosure
requirement contained in a provision of this Agreement or as an exception to one
or more of the representations, warranties or covenants contained in this
Agreement. The Disclosure Letter is arranged in a format in which the
disclosures made therein are arranged in paragraphs or sections corresponding to
the numbered and lettered sections and subsections of this
Agreement. The matters expressly disclosed in the Disclosure Letter
shall be deemed to be disclosed for all purposes thereunder, so long as such
disclosure contains sufficient factual detail to render its relevance to such
other purposes readily apparent. The inclusion of any matter in the
Disclosure Letter shall not be deemed an admission or otherwise to imply that
any such matter is material for purposes of this Agreement.
IN WITNESS WHEREOF, Premier and Adams
have caused this Agreement to be executed by their duly authorized officers and
their corporate seals to be hereunto affixed as of the date first above written,
pursuant to resolutions adopted by the boards of directors of Premier and Adams,
acting by a majority thereof, and WITNESS also the signatures hereto of a
majority of the board of directors of Adams.
PREMIER FINANCIAL BANCORP,
INC.
By _/s/ Brien M.
Chase__12-31-2008___________
Brien M.
Chase
Its: Senior Vice President and
Chief Financial
Officer
ATTEST:
_/s/ Toney K.
Adkins______________
Toney
K. Adkins,
Assistant
Secretary
ABIGAIL ADAMS NATIONAL BANCORP,
INC.
By _/s/ Karen E.
Troutman__________________
Karen E. Troutman
Its: Senior Vice President
and
Chief Financial Officer
ATTEST:
/s/ Lorel D.
Scott_________________
Lorel
D. Scott, VP and Secretary
EXHIBIT
A
ADOPTION
AGREEMENT
THIS ADOPTION AGREEMENT, made and
entered into as of this 7th day of January, 2009, by and among ADAMS
ACQUISITION, INC. ("Interim Company"), PREMIER FINANCIAL BANCORP, INC.
("Premier"), and ABIGAIL ADAMS NATIONAL BANCORP, INC. (“Adams”);
WHEREAS, Premier and Adams have entered
into an Agreement of Merger dated as of the 30th day of December, 2008
("Agreement"), to which this Adoption Agreement is attached, and which Agreement
is incorporated herein by reference; and
WHEREAS, it is provided in Section 3.26
of the Agreement that Premier shall cause Interim Company to be organized and
shall cause Interim Company to execute and enter into an Adoption Agreement in
substantially the form of this Adoption Agreement so as to cause Interim Company
to be bound by the applicable terms and provisions of the Agreement;
and
WHEREAS, Interim Company has been
organized;
NOW, THEREFORE, in consideration of the
foregoing premises which are not mere recitals but an integral part hereof and
in consideration of the mutual agreements hereinafter set forth, the parties
hereto agree as follows:
1. Interim
Company hereby joins in and agrees to be bound by the terms and conditions of
the Agreement applicable to it to the same extent as if Interim Company were an
original party thereto.
2. Interim
Company agrees that it shall use its best efforts in good faith to take or cause
to be taken as promptly as practicable all actions on its part to be taken so as
to permit the consummation of the Agreement and the Merger (as defined in the
Agreement) at the earliest possible date, and that it shall cooperate fully with
Premier and Adams to that end.
3. Interim
Company represents and warrants to and covenants with Premier and Adams
that:
3.1 Interim
Company is a corporation, duly organized, validly existing and in good standing
under the laws of the State of Delaware.
3.2 Interim
Company has the corporate power to execute and deliver this Adoption Agreement
and to merge with Adams pursuant to the Agreement and has taken or will have
taken at the Effective Time of the Merger all action required by law, its
Articles of Incorporation, its By-laws or otherwise, to authorize such execution
and delivery, the Merger and the consummation of the transactions contemplated
hereby; and this Adoption Agreement and the Agreement are or at the Effective
Time of the Merger will be valid and binding agreements of Interim Company in
accordance with their terms.
IN WITNESS WHEREOF, Premier, Adams and
Interim Company have caused this Agreement to be executed by their duly
authorized officers, and their corporate seals to be hereunto affixed as of the
date first above written, pursuant to resolutions adopted by the boards of
directors of Premier, Adams and Interim Company, acting by a majority
thereof.
PREMIER FINANICAL BANCORP,
INC.
By _/s/ Brien M.
Chase______________________
Brien M. Chase, Senior Vice
President
and Chief Financial
Officer
ATTEST
_/s/ Toney K.
Adkins______________
Its
Assistant Secretary
ABIGAIL ADAMS NATIONAL BANCORP,
INC.
By _/s/ Robert W.
Walker___________________
President and CEO
ATTEST
/s/
Lorel D. Scott_________________
Its
Secretary
ADAMS ACQUISITION, INC.
By _/s/ Brien M.
Chase_____________________
Brien M. Chase, President
ATTEST
_/s/
Arlene Napier________________
Its
Secretary
The
undersigned, being all of the Directors of Interim Company, do hereby join in
the foregoing Agreement to evidence their consent and agreement
thereto:
EXHIBIT
B
PLAN
OF MERGER
OF
ABIGAIL
ADAMS NATIONAL BANCORP, INC.
AND
ADAMS
ACQUISITION, INC.
1. The
Parties. Adams Acquisition, Inc., a Delaware corporation
(“Interim Company”) shall merge with and into Abigail Adams National Bancorp,
Inc., a Delaware corporation ("Adams") (both corporations are sometimes
collectively referred to herein as the "Constituent Corporations") under the
charter of Adams. Adams shall be (and is hereinafter called when
reference is made to it at and after the consummation of the Merger) the
Surviving Company. The Merger shall become effective at the time
specified in a certificate of merger to be filed with the Secretary of State of
Delaware (the "Effective Time of the Merger").
2. Articles of Incorporation;
Bylaws. At the Effective Time of the Merger, the Articles of
Incorporation and Bylaws of Adams in effect at the Effective Time of the Merger
shall be the Articles of Incorporation and Bylaws of the Surviving Company until
altered, amended or repealed in accordance with applicable law.
3. Assets and
Rights. At the Effective Time of the Merger, the corporate
existence of Interim Company shall, as provided in the Delaware General
Corporation Law, be merged with and into Adams and continued in the Surviving
Company. The Surviving Company shall thereupon and thereafter possess
all of the rights, privileges, immunities and franchises, of a public as well as
of a private nature, of the Constituent Corporations; and all property, real,
personal and mixed, and all debts due on whatever account, including
subscriptions to shares, if any, and all other choses in action, and all and
every other interest of or belonging to or due to the Constituent Corporations,
and each of them, shall be deemed to be transferred to and vested in the
Surviving Company without further act or deed; and the title to any real estate,
or any interest therein, vested in the Constituent Corporations, and each of
them, before the Merger, shall not revert or in any way be impaired by reason of
the Merger.
4. Liabilities and Obligations.
At the Effective Time of the Merger, Adams as the Surviving Company shall
henceforth be and remain responsible and liable for all the liabilities and
obligations of the Constituent Corporations; and neither the rights of creditors
nor any liens upon the property of either of the Constituent Corporations shall
be impaired by the Merger.
5. Conversion, Exchange and
Cancellation of Shares
(a) Conversion
Rate. At the Effective Time of the Merger each outstanding
share of Adams Common Stock shall ipso facto, without any action on the part of
the holder thereof, become and be converted into (i) 0.4461 shares of Premier
Financial Bancorp, Inc. (“Premier”) Common Stock (the “Merger
Consideration”). All shares of Premier Common Stock into which the
aforesaid Adams Common Stock is so converted shall be fully paid and
non-assessable.
(b) Manner of
Exchange. After the Effective Time of the Merger, except for
persons exercising their rights as dissenting shareholders of Adams, each
shareholder of Adams, upon surrender to Premier of certificates representing
Adams Common Stock, accompanied by a Letter of Transmittal, shall be entitled to
receive in exchange therefor a certificate or certificates representing the
number of full shares of Premier Common Stock for which shares of Adams Common
Stock theretofore represented by the certificate or certificates so surrendered
shall have been exchanged as provided in this Section 5. After the
Effective Time of the Merger, each outstanding certificate which, prior to the
Effective Time of the Merger, represented Adams Common Stock, will be deemed for
all corporate purposes of Premier to evidence ownership of the number of full
shares of Premier Common Stock into which the shares of Adams Common Stock
represented thereby were converted. Until such outstanding
certificates formerly representing Adams Common Stock are surrendered, no
dividend payable to holders of record of Premier Common Stock for any period as
of any date subsequent to the Effective Time of the Merger shall be paid to the
holder of such outstanding certificates in respect thereof. After the
Effective Time of the Merger there shall be no further registry of transfers on
the records of Adams of shares of Adams Common Stock. Upon surrender
of certificates of Adams Common Stock for exchange for Premier Common Stock,
there shall be paid to the record holder of the certificates of Premier Common
Stock issued in exchange therefor the amount of dividends theretofore paid with
respect to such full shares of Premier Common Stock as of any date subsequent to
the Effective Time of the Merger which have not yet been paid to a public
official pursuant to abandoned property laws and at the appropriate payment date
the amount of dividends with a record date after the Effective Time of the
Merger, but prior to surrender and a payment date subsequent to
surrender. No interest shall be payable with respect to such
dividends upon surrender of outstanding certificates.
(c) Fractional
Shares. Premier will not issue fractional shares or fractional
share certificates, but in lieu of the issuance of fractional shares will pay
cash, without interest, to any Adams shareholder otherwise entitled to receive
such fractional shares. The amount of such cash payment will be
determined by multiplying the fractional share interest to which an Adams
shareholder would otherwise be entitled by Eight and 07/100 Dollars
($8.07). Payment for fractional shares will be made with respect to
each shareholder at the time such shareholder's certificates of Adams Common
Stock are exchanged.
(d) Lost
Certificates. If a certificate evidencing outstanding shares
of Adams Common Stock is lost, stolen or destroyed, the registered owner thereof
shall be entitled to receive the Premier certificate to which the shareholder
would otherwise be entitled on surrender of such certificate, by notifying
Premier in writing of such lost, stolen or destroyed certificate and giving
Premier evidence of loss and a bond sufficient to indemnify Premier against any
claim that may be made against it on account of the alleged lost, stolen and
destroyed certificate and the issuance of the certificate and cash.
6. Further
Assurances. If at any time the Surviving Company shall
consider or be advised that any further assignments, conveyances or assurances
are necessary or desirable to vest, perfect or confirm in the Surviving Company
the title to any property or rights of Interim Company or Adams or any
subsidiary thereof, or otherwise to carry out the provisions hereof, the proper
officers and directors of Interim Company or Adams, as the case may be, as of
the Effective Time of the Merger, and thereafter the officers of the Surviving
Company acting on behalf of Interim Company or Adams, as the case may be, shall
execute and deliver any and all proper assignments, conveyances and assurances,
and do all things necessary or desirable to vest, perfect or confirm title to
such property or rights in the Surviving Company and otherwise carry out the
provisions hereof.
7. Termination and
Abandonment. This Plan of Merger may be terminated and the
Merger abandoned as provided in the Agreement of Merger.
8. Other Terms and
Conditions. All other terms and conditions to the Merger are
as provided in the Agreement of Merger.
IN WITNESS WHEREOF, each of the parties
hereto has caused this Plan of Merger to be executed on its behalf and its
corporate seal to be hereunto affixed and attested by its corporate officers
thereunto duly authorized, all as of the day and year first above
written.
ABIGAIL ADAMS NATIONAL BANCORP,
INC.
a corporation
By _/s/ Robert W.
Walker____________________
President
and Chief Executive Officer
ATTEST:
_/s/
Lorel D. Scott___________________
Its
Secretary
ADAMS ACQUISITION, INC., a
corporation
By _/s/ Brien M.
Chase______________________
President and Chief Executive Officer
ATTEST:
_/s/
Arlene Napier__________________
Its
Secretary
FIRST
AMENDMENT TO
AGREEMENT
OF MERGER
THIS FIRST AMENDMENT TO AGREEMENT OF
MERGER (hereinafter sometimes referred to as the “Amendatory Agreement”), dated
as of the 16th day of June, 2009, by and among PREMIER FINANCIAL BANCORP, INC.
(“Premier”), ABIGAIL ADAMS NATIONAL BANCORP, INC. (“Adams”) and AANB ACQUISITION
CORP. (“Interim Company”);
W
I T N E S S E T H:
WHEREAS, Premier and Adams have entered
into an Agreement of Merger dated as of December 30, 2008 (the “Agreement”)
which has been adopted by Interim Company by Adoption Agreement dated as of
January 27, 2009 (the “Adoption Agreement’); and
WHEREAS, Section 8.1 of the Agreement,
captioned “Grounds for Termination”, provides that the Agreement and
the transactions contemplated thereby may be terminated at any time prior to the
Closing Date (as defined in the Agreement) upon occurrence of various events,
including, as set forth in Subsection (j) of Section 8.1, by either Adams or
Premier if the Closing does not occur on or before June 30, 2009 unless extended
by mutual agreement in writing; and
WHEREAS, Adams, Premier and Interim
Company wish to extend the date by which Closing must occur to September 30,
2009; and
WHEREAS, Section 6(d) of the Agreement,
captioned “Conditions Precedent”, provides that consummation of the merger is
conditioned upon certain conditions, including, as set forth in Subsection (d)
of Section 6, that Premier shall have completed the issuance to the United
States Treasury of $24,000,000 of Premier Preferred Stock and warrants related
thereto pursuant to the CPP, and Section 8.1 of the Agreement, captioned
“Grounds for Termination”, provides that the Agreement and the transactions
contemplated thereby may be terminated at any time prior to the Closing Date
upon the occurrence of various events, including, as set forth in Subsection (k)
of Section 8.1, by Premier if the issuance of at least $24,000,000 of Premier
Preferred Stock and attendant warrants to the U.S. Treasury has not occurred;
and
WHEREAS, the $24,000,000 amount of
Premier Preferred Stock was determined based upon the pro forma combined amount
of Premier’s and Adams total risk-weighted assets, which amount has and may in
the future decrease, and the parties hereto wish to amend the Agreement to
provide for such decreases; and
WHEREAS, the Agreement provides in
Section 9 that it may be amended or modified as therein provided.
NOW, THERFORE, in consideration of the
foregoing premises, which are not mere recitals but are an integral part hereof,
and in consideration of the mutual agreements hereinafter provided for, the
parties hereto agree as follows:
1. Subsection
(j) of Section 8.1 of the Agreement is hereby amended to read as
follows:
|
|
(j)
|
By
either Adams or Premier, if the Closing does not occur on or before
September 30, 2009 unless extended by mutual agreement in writing;
or
|
2. Subsection
(d) of Section 6 of the Agreement is hereby amended to read as
follows:
|
|
(d)
|
Issuance of Premier
Preferred Stock Pursuant to CPP. Premier shall have
completed the issuance to the United States Treasury of (i) Premier
Preferred Stock in an amount of at least $20,000,000 and (ii) warrants for
the purchase of Premier Common Stock with an aggregate market price equal
to 15% of such Premier Preferred Stock pursuant to the CPP upon terms and
conditions set forth in the CPP purchase
documents.
|
3. Subsection
(k) of Section 8.1 of the Agreement is hereby amended to read as
follows:
|
|
(k)
|
By
Premier, if the issuance of (i) Premier Preferred Stock in an amount at
least $20,000,000 and (ii) attendant warrants for Premier Common Stock to
the U.S. Treasury has not occurred.
|
4. Except
as herein amended, the Agreement and the Adoption Agreement shall remain in full
force and effect in accordance with their respective terms, which are hereby
reaffirmed.
PREMIER FINANCIAL BANCORP,
INC.
By _/s/ Brien M.
Chase_____________________
Brien M. Chase, Senior Vice
President
and Chief Financial
Officer
ATTEST
_/s/ Toney K.
Adkins_____________
Its
Assistant Secretary
ABIGAIL ADAMS NATIONAL BANCORP,
INC.
By _/s/ Karen E.
Troutman__________________
Karen E. Troutman, Senior Vice
President
and
Chief Financial Officer
ATTEST
_/s/ Lorel D.
Scott_______________
Its
Secretary
AANB ACQUISITION CORP.
By _/s/ Brien M.
Chase_____________________
Brien M. Chase, President
ATTEST
_/s/ Arlene
Napier_______________
Its
Secretary
December
30, 2008
The
Board of Directors
Premier
Financial Bancorp, Inc.
2883
Fifth Avenue
Huntington,
West Virginia 25702
Dear
Members of the Board:
Premier
Financial Bancorp, Inc., Huntington, West Virginia (“Premier”) and Abigail Adams
National Bancorp, Inc., Washington D.C. (“Adams”) have entered into an agreement
providing for the merger of Adams with and into Premier (the
“Merger”). The terms of the Merger are set forth in the Agreement of
Merger dated December 30, 2008 (the “Agreement”).
The
terms of the Merger provide that, with possible exception of those shares as to
which dissenter’s rights may be perfected, each outstanding share of $.01 Par
value Common Stock of Adams will be converted into the right to receive 0.4461
shares of no par value common stock of Premier (the “Consideration”) provided,
however, that no fractional shares of Premier common stock will be issued as a
result of the Merger.
You
have asked our opinion as to whether the Consideration is fair to the respective
shareholders of Premier from a financial point of view.
In
rendering our opinion, we have reviewed certain publicly available business and
financial information relating to Premier and Adams, as well the drafts of the
Agreement. We have also reviewed certain other information, including
financial forecasts provided to us by Premier and/or Adams, and have discussed
the business and prospects of Premier and Adams with management, as well as
other matters that may be relevant.
In
addition, we have, among other things: (a) to the extent deemed relevant,
analyzed selected public information of certain other financial institutions and
compared Premier and Adams from a financial point of view to the other financial
institutions; (b) compared the terms of the Merger with the terms of certain
other comparable transactions to the extent information concerning such
acquisitions was publicly available; (c) made such other analyses and
examinations as we deemed necessary.
We
have not independently verified the financial and other information concerning
Premier or Adams. We have assumed the accuracy and completeness of
all such information; however, we have no reason to believe that such
information is not accurate and complete. Our conclusion is rendered
on the basis of securities market conditions prevailing as of the date hereof
and on the conditions and prospects, financial and otherwise, of Premier and
Adams as they exist and are known to us as of December 30, 2008.
We
have acted as financial advisor to the Board of Directors of Premier in
connection with the Merger and will receive, from Premier, a fee for our
services; a portion of which is contingent upon the consummation of the Merger,
however, fees for rendering our Opinion are not contingent upon the opinion
expressed herein.
It
is understood that this opinion may be included in its entirety in any
communication by Premier or the Board of Directors to the stockholders of
Premier. The opinion may not, however, be summarized, excerpted from
or otherwise publicly referred to without our prior written
consent.
Based
on the foregoing, and subject to the limitations described above, we are of the
opinion that the Consideration is fair to the shareholders of Premier from a
financial point of view.
Sincerely,
/s/
Baxter Fentriss and Company
Baxter
Fentriss and Company
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Financial
Services Industry Consultants
|
December
29, 2008
Board
of Directors
Abigail
Adams National Bancorp, Inc.
1130
Connecticut Avenue, N.W., Suite 200
Washington,
DC 20036
Members
of the Board:
You
have requested that RP®
Financial, LC. (“RP Financial”) provide you with its opinion as to the fairness
from a financial point of view to the shareholders of Abigail Adams National
Bancorp, Inc., Washington, D.C. (“Adams”), the bank holding company for Adams
National Bank and Consolidated Bank & Trust Company, of the Agreement of
Merger (“Agreement”) between Adams and Premier Financial Bancorp, Inc.,
Huntington, West Virginia (“Premier”), the bank holding company for six
subsidiary banks. Unless otherwise defined, all capitalized terms
incorporated herein have the meanings ascribed to them in the
Agreement.
Summary Description of the
Merger Consideration
Pursuant
to the Agreement, Premier will acquire Adams in a stock transaction (the
“Merger”). Each share of Premier Common Stock issued and outstanding
immediately prior to the Effective Time shall remain issued and outstanding and
unaffected by the Merger. At the Effective Time, each holder of
Adams Common Stock (other than those shares of Adams Common Stock for which
appraisal rights have been perfected pursuant to the Delaware General
Corporation Law), shall receive in respect thereof, subject to the limitations
set forth in the Agreement, 0.4461 shares of Premier Common Stock (the “Merger
Consideration”) for each share of Adams Common Stock and each Adams Stock Option
shall be converted into an option to purchase 0.4461 shares of Premier Common
Stock. The exercise price of the converted Adams Stock Option shall
be the existing exercise price multiplied by 0.4461. As of the date
hereof, there were 3,463,569 common shares of Adams issued and outstanding and
8,062 granted stock options outstanding. The terms and conditions of
the Merger are more fully set forth in the Agreement.
RP Financial Background and
Experience
RP
Financial, as part of its financial institution valuation, merger advisory and
consulting practice, is regularly engaged in the valuation of the securities of
insured financial institutions and financial service companies including
mortgage banking companies (residential and commercial), title companies, trust
companies, asset managers, real estate brokerages and insurance agencies in
connection with mergers and acquisitions, initial and secondary stock offerings,
mutual-to-stock conversions of thrift institutions, and business
valuations for other purposes. As specialists in the securities of
financial institutions, RP Financial has experience in, and knowledge of, the
markets for the securities of such institutions, including institutions
operating in Washington, D.C. and the Mid-Atlantic region of the
U.S.
Materials
Reviewed
In
rendering this opinion, RP Financial reviewed the following
material:
|
·
|
the
Agreement dated December 29, 2008, including
attachments;
|
Washington
Headquarters
Rosslyn
Center Telephone: (703) 528-1700
1700
North Moore Street, Suite 2210 Fax No.: (703)
528-1788
Arlington,
VA 22209 Toll-Free No.: (866) 723-0594
www.rpfinancial.com E-Mail: mail@rpfinancial.com
Board
of Directors
December
29, 2008
Page
2
|
·
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the
following information from Adams –
|
|
o
|
audited
consolidated financial statements included in the annual reports and Form
10-K for the fiscal years ended December 31, 2005 through
2007;
|
|
o
|
unaudited
consolidated financial data, including shareholder reports, securities
filings and financial statements filed on Form 10-Q through September 30,
2008;
|
|
o
|
quarterly
financial reports submitted to regulatory agencies for Adams and the two
subsidiary banks through September 30,
2008;
|
|
o
|
internal
financial and other reports through October 31, 2008 with regard to
current and projected balance sheet and off-balance sheet composition,
profitability, interest rates, volumes, maturities, market values, trends,
credit risk, interest rate risk, liquidity risk and
operations;
|
|
o
|
the
shareholder proxy statements for the last three fiscal years;
and,
|
|
o
|
the
written agreement by and between Adams National Bank and The Office of the
Comptroller of the Currency (“OCC”), dated October 1,
2008;
|
|
·
|
the
following information for Premier –
|
|
o
|
audited
consolidated financial statements included in the annual reports and Form
10-K for the fiscal years ended December 31, 2005 through
2007;
|
|
o
|
unaudited
consolidated financial data, including shareholder reports, securities
filings and financial statements filed on Form 10-Q through September 30,
2008;
|
|
o
|
quarterly
financial reports submitted to regulatory agencies for Premier and the
subsidiary banks through September 30,
2008;
|
|
o
|
internal
financial and other reports through September 30, 2008 with regard to
current and projected balance sheet and off-balance sheet composition,
profitability, interest rates, volumes, maturities, market values, trends,
credit risk, interest rate risk, liquidity risk and operations;
and
|
|
o
|
the
shareholder proxy statements for the last three fiscal years;
and,
|
|
·
|
discussions
with Adams’ executive management regarding the past and current
operations, financial condition, future prospects, and compliance with the
existing agreement between the OCC and Adams National
Bank;
|
|
·
|
that
80% of the stock of Adams National Bank is pledged as collateral for
borrowings, and that it is expected that the remaining 20% of Adams
National Bank stock and 100% of Consolidated Bank & Trust Company
stock will be pledged as stock for additional
borrowings;
|
|
·
|
discussions
with Adams’ executive management and Board of Directors regarding their
assessment of the rationale for the
Merger;
|
|
·
|
the
comparative financial performance and market pricing of the common stock
of Adams with that of certain publicly-traded companies which we believe
to be generally relevant;
|
Board
of Directors
December
29, 2008
Page
3
|
·
|
the
reported price and trading activity for the shares of common stock of
Adams;
|
|
·
|
an
analysis of the financial terms outlined in the Agreement, including the
ratios of the purchase price to Adams’ per share financial
measures;
|
|
·
|
an
analysis of the pricing ratios paid to Adams compared to the average,
median, high and low pricing ratios indicated by bank merger transactions
involving selling banks with credit and financial characteristics similar
to Adams;
|
|
·
|
the
expectation that Premier will inject up to $6.5 million of capital so that
Adams National Bank is meeting its capital requirements as of December 31,
2008;
|
|
·
|
an
impact analysis of the effect of the merger, including issuance of the
Merger Consideration, on the balance sheet and earnings of
Premier;
|
|
·
|
the
termination provisions of the Agreement, including the termination
provisions by Premier, if –
|
|
o
|
Premier
shall not have completed the issuance to the United States Treasury of
$24.0 million of Premier Preferred Stock pursuant to the Capital Purchase
Program and warrants for the purchase of Premier Common Stock with an
aggregate market price equal to 15% of such Premier Preferred
Stock;
|
|
o
|
Adams
National Bank is not in substantial compliance with the provisions of the
written agreement by and between Adams National Bank and the OCC, dated
October 1, 2008, including, without limitation, the provisions
of Article IV and Article XII thereof;
and
|
|
·
|
the
competitive, economic and demographic characteristics nationally,
regionally and in the local market
area;
|
|
·
|
the
potential impact of regulatory and legislative changes financial
institutions, including Adams and
Premier;
|
|
·
|
the
nature of interest by other interested
parties;
|
|
·
|
the
prospective strategic benefits of the Merger to Premier as well as to
Adams; and
|
|
·
|
other
considerations, including regulatory
considerations.
|
In
rendering its opinion, RP Financial relied, without independent verification, on
the accuracy and completeness of the information concerning Adams, Premier and
their related subsidiaries furnished by the respective institutions to RP
Financial for review for purposes of its opinion, as well as publicly-available
information regarding other financial institutions and competitive, economic and
demographic data. We have further relied on the assurances of
management of Adams and Premier that they are not aware of any facts or
circumstances that would make any of such information inaccurate or
misleading. We have not been asked to and have not undertaken an
independent verification of any of such information and we do not assume any
such responsibility or liability for the accuracy or completeness
thereof. Adams and Premier did not restrict RP Financial as to the
material it was permitted to review. RP Financial did not perform or
obtain any independent appraisals or evaluations of the assets and liabilities,
the collateral securing the assets or the liabilities (contingent or otherwise)
of Adams or Premier or the collectability of any such assets, nor have we been
furnished with any such evaluations or appraisals. We did not make an
independent evaluation of the adequacy of the allowance for loan losses of Adams
or Premier nor have we reviewed any individual credit files relating to Adams or
Premier.
Board
of Directors
December
29, 2008
Page
4
We have
assumed that, with your consent, the respective allowances for loan losses for
both Adams and Premier are adequate to cover such losses and will be adequate on
a pro forma basis for the combined entity, except that Adams National Bank may
make additional provisions to its allowance for loan losses as a result of the
loan review conducted by an independent third party.
With
respect to such estimates and projections of transaction costs, purchase
accounting adjustments, expected cost savings and other synergies and other
information prepared by and/or reviewed by Adams’ and/or Premier’s executive
management and used by RP Financial in its analyses, RP Financial assumed, with
your consent, that they reflected the best currently available estimates and
judgments of Adams and/or Premier’s executive management of the respective
future financial performances of Adams and/or Premier and we assumed that such
performances would be achieved. We express no opinion as to such
estimates or projections or the assumptions on which they are
based.
RP
Financial, with your consent, has relied upon the advice Adams has received from
its legal, accounting and tax advisors as to all legal, accounting and tax
matters relating to the Merger and other transactions contemplated by the
Agreement. In rendering its opinion, RP Financial assumed that, in
the course of obtaining the necessary regulatory and governmental approvals for
the proposed Merger, no restriction will be imposed on Premier that would have a
material adverse effect on the ability of the Merger to be consummated as set
forth in the Agreement. We have also assumed that there has been no
material change in Adams’ or Premier’s assets, financial condition, results of
operations, business or prospects since the date of the most recent financial
statement made available to us. We have assumed in all respects
material to our analyses, that all of the representations and warranties
contained in the Agreement and all related agreements are true and correct, that
each party to such agreements will perform all of the covenants required to be
performed by such party under such agreements and that the conditions precedent
in the Agreement are not waived.
Opinion
It is
understood that this letter is directed to the Board of Directors of Adams in
its consideration of the Agreement. It is understood that this
opinion may be included in its entirety in any communication by Adams or its
Board of Directors to the shareholders of Adams. It is also
understood that this opinion may be included in its entirety in any regulatory
filing by Adams or Premier and that RP Financial consents to the summary of this
opinion in the proxy materials and any amendments
thereto.
Board
of Directors
December
29, 2008
Page
5
Except
as described above, this opinion may not be summarized, excerpted from or
otherwise publicly referred to without RP Financial’s prior written
consent.
It is
understood that this opinion is based on market conditions and other
circumstances existing on the date hereof. Events occurring after the
date hereof could materially affect this opinion. We are expressing
no opinion herein as to what the value of Premier’s common stock will be when
issued to Adams’ shareholders pursuant to the Agreement or the prices at which
Premier’s or Adams’ common stock may trade at any time.
We will
receive a fee for our financial advisory services, including this fairness
opinion, a portion of which will be received upon consummation of the
Merger. Adams has agreed to indemnify us against certain liabilities
arising out of our engagement. We have previously provided certain
other valuation, planning and financial advisory services to Adams.
It is
understood that this opinion may be included in its entirety in any
communication by Adams or its Board of Directors to the stockholders of
Adams. It is also understood that this opinion may be included in its
entirety in any regulatory filing by Adams or Premier, and that RP Financial
consents to the summary of this opinion in the proxy materials of Adams, and any
amendments thereto. Except as described above, this opinion may not
be summarized, excerpted from or otherwise publicly referred to without RP
Financial’s prior written consent.
Based
upon and subject to the foregoing, and other such matters we consider relevant,
it is RP Financial’s opinion that, as of the date hereof, the Merger
Consideration to be received by the holders of Adams Common Stock, as described
in the Agreement, is fair to such shareholders from a financial point of
view.
Respectfully
submitted,
RP®
FINANCIAL, LC.
/s/ RP
Financial, LC.
PART
II
INFORMATION
NOT REQUIRED IN PROSPECTUS
ITEM
20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 271B.2-020(2)(d) of Kentucky
Business Corporation Act (the "Act") enables a Kentucky corporation to provide
in its articles of incorporation, and the Registrant has so provided in its
Articles of Incorporation, for the elimination or limitation of the personal
liability of a director to the corporation or its shareholders for
monetary damages for breach of his fiduciary duty as a director; provided,
however, that a director's liability is not eliminated or
limited: (1) for any transaction in which the director's personal
financial interest is in conflict with the financial interests of the
corporation or its shareholders; (2) for acts or omissions not in good faith or
which involve intentional misconduct or are known to the director to be a
violation of law; (3) for any vote or assent to an unlawful distribution to
shareholders as prohibited under Section 271B.8-330 of the Act (which imposes
liability on directors for payments of dividends, purchases, redemptions or
other acquisitions of shares, and distributions of indebtedness that are
unlawful); or (4) for any transaction from which the director derived an
improper personal benefit.
Section 271B.8-510 of the Act permits
the indemnification by a corporation of any director who is made party to a
threatened, pending or completed action, suit or proceeding because he is or was
a director of such corporation. To be eligible for indemnification, such person
must have conducted himself in good faith and reasonably believed that his
conduct, if undertaken in his official capacity with the corporation, was in the
corporation's best interests, and, if not in his official capacity, was at least
not opposed to the corporation's best interests. In the case of a criminal
proceeding, the director must also not have reasonable cause to believe his
conduct was unlawful. A director may not be indemnified under the
above-referenced section in connection with a proceeding by or in the right of
the corporation in which the director was adjudged liable to the corporation or
in connection with any other proceeding charging improper personal benefit by
him, whether or not involving action in his official capacity, in which he was
adjudged liable on the basis that personal benefit was improperly received by
him. Indemnification permitted under Section 271B.8-510 of the Act in connection
with a proceeding by or in the right of the corporation shall be limited to
reasonable expenses incurred in connection with the proceeding. Section
271B.8-560 of the Act provides that a Kentucky corporation may indemnify its
officers, employees and agents to the same extent as
directors. Mandatory indemnification against reasonable expenses
incurred in connection with a proceeding is provided for by the Act, unless
otherwise limited by the corporation's articles of incorporation, where a
director or officer has been wholly successful on the merits or otherwise, in
the defense of any proceeding to which he was a party because he is or was a
director or officer of the corporation. A court of competent
jurisdiction may also order indemnification if the director is fairly and
reasonably entitled thereto in view of all relevant circumstances, whether or
not he met the applicable standard of conduct or was adjudged liable to the
corporation.
The Act provides that indemnification
pursuant to its provisions is not exclusive of other rights of indemnification
to which a person may be entitled under any bylaw, agreement, vote of
shareholders or disinterested directors, or otherwise. Additionally,
the Act provides that a corporation may purchase and maintain insurance on
behalf of directors, officers, employees and agents of the corporation against
liability asserted against or incurred by such party in their respective
capacity with the corporation.
Articles X of the Registrant's
Articles of Incorporation and Article VIII of the Registrant's By-Laws require
Registrant to indemnify its directors and officers to the fullest extent
permitted by the Act.
ITEM
21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) The Exhibit
Index appearing on the page following the signature page of this Registration
Statement is hereby incorporated by reference.
(b) The financial
statement schedules are being furnished as part of the prospectus.
(c) The Opinions of
RP Financial, LC and Baxter Fentriss and Company are being furnished as part of
the joint proxy statement/prospectus.
ITEM
22. UNDERTAKINGS
1. (a) The
undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are
being made, a post-effective amendment to this registration
statement; (i) to include any prospectus required by Section 10(a)(3)
of the Securities Act of 1933; (ii) to reflect in the prospectus any facts or
events arising after the effective date of the registration statement (or the
most recent post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth in the
registration statement; (iii) to include any material information with respect
to the plan of distribution not previously disclosed in the registration
statement or any material change to such information in the registration
statement.
(b) That for
the purpose of determining any liability under the Securities Act of 1933, each
such post-effective amendment shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering
thereof.
(c) To remove
from registration by means of post-effective amendment any of the securities
being registered which remain unsold at the termination of the
offering.
2. The
undersigned registrant hereby undertakes as follows: that prior to
any public reoffering of the securities registered hereunder through use of a
prospectus which is a part of this registration statement, by any person or
party who is deemed to be an underwriter within the meaning of Rule 145(c), the
issuer undertakes that such reoffering prospectus will contain the information
called for by the applicable registration form with respect to reofferings by
persons who may be deemed underwriters in addition to the information called for
by the other Items of the applicable form.
3. The
registrant undertakes that every prospectus (i) that is filed pursuant to
paragraph (1) immediately preceding, or (ii) that purports to meet the
requirements of section 10(a)(3) of the Act and is used in connection with an
offering of securities subject to Rule 415 (230.415 of this chapter), will be
filed as a part of an amendment to the registration statement and will not be
used until such amendment is effective, and that, for purposes of determining
any liability under the Securities Act of 1933, each such post-effective
amendment shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at that time
shall be deemed to be the initial bona fide offering thereof.
4. Insofar as
indemnification for liabilities under the Securities Act of 1933 may be
permitted to directors, officers and controlling persons of the registrant
pursuant to the foregoing provisions, or otherwise, the registrant has been
advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Securities Act of
1933 and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Securities
Act of 1933 and will be governed by the final adjudication of such
issue.
5. The
undersigned registrant hereby undertakes to respond to requests for information
that is incorporated by reference into the prospectus pursuant to Items 4,
10(b), 11 or 13 of this Form, within one business day of receipt of such
request, and to send the incorporated documents by first class mail or other
equally prompt means. This includes information contained in
documents filed subsequent to the effective date of the registration statement
through the date of responding to the request.
6. The
undersigned registrant hereby undertakes to supply by means of a post-effective
amendment all information concerning a transaction, and the company being
acquired involved therein, that was not the subject of and included in the
registration when it became effective.
7. The
undersigned registrant hereby undertakes that, for purposes of determining any
liability under the Securities Act of 1933, each filing of the registrant’s
annual report pursuant to section 13(a) or section 15(d) of the Securities
Exchange Act of 1934 (and, where applicable, each filing of an employee benefit
plan’s annual report pursuant to Section 15(d) of the Securities Exchange Act of
1934) that is incorporated by reference in the registration statement shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
SIGNATURES
Pursuant to the requirements of the
Securities Act of 1933, the Registrant has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Huntington, State of West Virginia, on the 6th day of
July, 2009.
PREMIER FINANCIAL BANCORP,
INC.
By: /s/ Robert W.
Walker
Robert W. Walker – President and Chief Executive
Officer
Pursuant to the requirements of the
Securities Act of 1933, this Registration Statement has been signed by the
following persons in the capacities and on the dates indicated. Know
all men by these presents, that each person whose signature appears below
constitutes and appoints Robert W. Walker and Brien M. Chase, and each of them,
his true and lawful attorneys-in-fact and agents with full power of substitution
and resubstitution, for him or her and in his name, place and stead, in any and
all capacities, to sign any or all amendments to this registration statement and
to file the same, with all exhibits thereto, and other documents in connection
therewith, with the Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents full power and authority to do and perform each and
every act and thing requisite and necessary to be done in the about the
premises, as fully to all intents and purposes as he or she might do in person,
hereby ratifying and confirming all that said attorneys-in-fact and agents, or
their substitutes, may lawfully do or cause to be done by virtue
hereof.
|
Signature
|
Title
|
Date
|
|
|
|
|
|
/s/
Robert W. Walker
|
Director,
President and Chief Executive Officer
|
July
6, 2009
|
|
Robert
W. Walker
|
|
|
|
/s/
Brien M. Chase
|
Chief
Financial Officer and Chief Accounting Officer
|
July
6, 2009
|
|
Brien
M. Chase
|
|
|
|
/s/
Toney K. Adkins
|
Director
|
July
6, 2009
|
|
Toney
K. Adkins
|
|
|
|
/s/
Hosmer A. Brown, III
|
Director
|
July
6, 2009
|
|
Hosmer
A. Brown, III
|
|
|
|
/s/
Edsel R. Burns
|
Director
|
July
6, 2009
|
|
Edsel
R. Burns
|
|
|
|
/s/
E. V. Holder, Jr.
|
Director
|
July
6, 2009
|
|
E.V.
Holder, Jr.
|
|
|
|
/s/
Keith F. Molihan
|
Director
|
July
6, 2009
|
|
Keith
F. Molihan
|
|
|
|
/s/
Marshall T. Reynolds
|
Chairman
of the Board
|
July
6, 2009
|
|
Marshall
T. Reynolds
|
|
|
|
/s/
Neal W. Scaggs
|
Director
|
July
6, 2009
|
|
Neal
W. Scaggs
|
|
|
|
/s/
Thomas W. Wright
|
Director
|
July
6, 2009
|
|
Thomas
W. Wright
|
|
|
EXHIBIT
INDEX
EXHIBIT DESCRIPTION
OF DOCUMENT
|
2.1
|
Agreement
of Merger dated December 30, 2009 between Premier Financial Bancorp, Inc.
and Abigail Adams National Bancorp, Inc. and AANB Acquisition Corp. as
amended by First Amendment to Agreement of Merger dated June 16, 2009
(included as Annex I to Joint Proxy Statement) *
|
| |
|
| 3.1.1 |
Form
of Articles of Incorporation of Premier included as Exhibit 3.1 to
Premier's Registration Statement of Form S-1, Registration No.
333-1702, filed on February 28, 1996 is incorporated herein by
reference. |
| |
|
| 3.1.2 |
Form
of Articles of Amendment to Premier Articles of Incorporation, included as
Exhibit 3.2 to Premier's Amendment No. 1 Registration Statement of Form
S-1, Registration No. 333-1702, filed on March 25, 1996
is incorporated herein by reference. |
| |
|
| 3.2 |
By-laws
of Premier, as amended, filed as Exhibit 3.1 to Form 10-Q filed on
November 13, 2007 are incorporated herein by reference. |
| |
|
| 5.1 |
Opinion
of Huddleston Bolen LLP, including
consent. * |
|
8.1
|
Tax
Opinion of Huddleston Bolen LLP, including
consent.
|
|
8.2
|
Tax
Opinion of Luse Gorman Pomerenk & Schick
PC.
|
|
21
|
Subsidiaries
of Registrant (Incorporated herein by reference to Premier Financial
Bancorp, Inc.’s Form 10-K for the year ended December 31,
2008).
|
|
23.1
|
Consent
of Huddleston Bolen LLP (to be included in Legal Opinion Exhibit 5.1).
*
|
|
23.2
|
Consent
of Luse Gorman Pomerenk & Schick PC (to be included in Tax Opinion
Exhibit 8.2).
|
23.3 Consent
of Baxter Fentriss and Company. *
23.4 Consent
of RP Financial. *
23.5 Consent
of Crowe Horwath LLP *
23.6 Consent
of McGladrey & Pullen, LLP *
24
Powers of Attorney (included on Pages II-5 and II-6)
99.1 Form
of Proxy for Abigail Adams National Bancorp, Inc.
99.2 Form
of Proxy for Premier Financial Bancorp, Inc.
* Previously Filed