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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2002
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ___________ to ___________
Commission file number 0-20908
PREMIER FINANCIAL BANCORP, INC.
(Exact name of registrant as specified in its charter)
Kentucky 61-1206757
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2883 Fifth Avenue
Huntington, West Virginia 25702
(address of principal executive officer) (Zip Code)
Registrant's telephone number (304) 525-1600
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to filing
requirements for the past 90 days. Yes X No
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practical date.
Common stock - 5,232,230 shares outstanding at July 31, 2002.
PART I - FINANCIAL INFORMATION
Item 1. 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.
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 generally accepted accounting principles or those normally
made in the registrant's annual Form 10-K filing. 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, 2001 for further information in this regard.
Index to consolidated financial statements:
Consolidated Balance Sheets...................................... 3
Consolidated Statements of Income ............................... 4
Consolidated Statements of Comprehensive Income.................. 5
Consolidated Statements of Cash Flows............................ 6
Notes to Consolidated Financial Statements....................... 7
PREMIER FINANCIAL BANCORP, INC.
CONSOLIDATED BALANCE SHEETS
JUNE 30, 2002 AND DECEMBER 31, 2001
(DOLLARS IN THOUSANDS)
- -------------------------------------------------------------------------------------------------------------------
(UNAUDITED)
2002 2001
---- ----
ASSETS
Cash and due from banks $ 20,784 $ 20,628
Federal funds sold 36,720 33,517
Investment securities available for sale 148,529 155,566
Loans 451,041 458,833
Unearned interest ( 39) ( 92)
Allowance for loan losses (9,126) (8,946)
------------- --------------
Net loans 441,876 449,795
Federal Home Loan Bank and Federal Reserve Bank stock 4,384 4,261
Premises and equipment, net 11,846 12,035
Real estate and other property acquired through foreclosure 2,991 5,831
Interest receivable 6,837 7,842
Goodwill and other intangibles 15,670 16,044
Other assets 6,567 6,331
------------- --------------
Total assets $ 696,204 $ 711,850
============= ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits
Non-interest bearing $ 64,842 $ 57,916
Time deposits, $100 and over 71,591 89,149
Other interest bearing 428,445 423,466
------------- --------------
Total deposits 564,878 570,531
Securities sold under agreements to repurchase 5,611 5,520
Federal Home Loan Bank advances 23,951 30,795
Other borrowed funds 10,401 13,000
Interest payable 2,450 1,903
Other liabilities 939 1,476
------------- --------------
Total liabilities 608,230 623,225
Guaranteed preferred beneficial interests in Company's debentures 28,750 28,750
Stockholders' equity
Preferred stock, no par value; 1,000,000 shares authorized;
none issued or outstanding - -
Common stock, no par value; 10,000,000 shares authorized;
5,232,230 shares issued and outstanding 1,103 1,103
Surplus 43,445 43,445
Retained earnings 13,489 14,470
Accumulated other comprehensive income 1,187 857
------------- --------------
Total stockholders' equity 59,224 59,875
------------- --------------
Total liabilities and stockholders' equity $ 696,204 $ 711,850
============= ==============
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See Accompanying Notes to Consolidated Financial Statements
PREMIER FINANCIAL BANCORP, INC.
CONSOLIDATED STATEMENTS OF INCOME
THREE MONTHS ENDED JUNE 30, 2002 AND 2001
(IN THOUSANDS EXCEPT PER SHARE DATA)
(UNAUDITED)
- -------------------------------------------------------------------------------------------------------------------
Three Months Ended Six Months Ended
June 30, June 30,
2002 2001 2002 2001
---- ---- ---- ----
Interest income
Loans, including fees $ 9,495 $ 12,285 $ 19,074 $ 24,865
Investment securities
Taxable 1,493 1,986 3,048 4,428
Tax-exempt 202 251 410 553
Federal funds sold and other 155 477 359 949
----------- ----------- ----------- -----------
Total interest income 11,345 14,999 22,891 30,795
Interest expense
Deposits 4,044 7,002 8,413 14,647
Debt and other borrowings 1,151 1,587 2,354 3,384
----------- ----------- ----------- -----------
Total interest expense 5,195 8,589 10,767 18,031
Net interest income 6,150 6,410 12,124 12,764
Provision for loan losses 3,200 3,015 4,186 3,647
----------- ----------- ----------- -----------
Net interest income after
provision for loan losses 2,950 3,395 7,938 9,117
Non-interest income
Service charges 625 590 1,119 1,116
Insurance commissions 79 98 119 137
Investment securities gains (losses) (103) 60 (59) 240
Gain on the sale of subsidiary's banking
operations - - - 3,418
Other 224 424 504 823
----------- ----------- ----------- -----------
825 1,172 1,683 5,734
Non-interest expenses
Salaries and employee benefits 2,592 2,893 5,299 5,925
Occupancy and equipment expenses 681 717 1,363 1,489
Amortization of intangibles 187 337 374 674
Other expenses 2,671 1,764 4,224 3,708
----------- ----------- ----------- -----------
6,131 5,711 11,260 11,796
----------- ----------- ----------- -----------
Income (loss) before income taxes (2,356) (1,144) (1,639) 3,055
Provision for income taxes (benefit) (853) (439) (657) 2,536
------------ ------------ ------------ -----------
Net income (loss) $ (1,503) $ (705) $ (982) $ 519
============ ============ ============ ===========
Earnings per share $ (0.29) $ (0.13) $ (0.19) $ 0.10
Earnings per share assuming dilution $ (0.29) $ (0.13) $ (0.19) $ 0.10
Weighted average shares outstanding 5,232 5,232 5,232 5,232
Weighted average shares assuming dilution 5,232 5,232 5,232 5,232
- -------------------------------------------------------------------------------------------------------------------
See Accompanying Notes to Consolidated Financial Statements
PREMIER FINANCIAL BANCORP, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
THREE MONTHS ENDED JUNE 30, 2002 AND 2001
(IN THOUSANDS)
(UNAUDITED)
- -------------------------------------------------------------------------------------------------------------------
Three Months Ended Six Months Ended
June 30, June 30,
2002 2001 2002 2001
---- ---- ---- ----
Net income (loss) $ (1,503) $ (705) $ (982) $ 519
Other comprehensive income (loss), net of tax:
Unrealized gains and (losses) arising during
the period 953 (92) 291 $ 1,496
Reclassification of realized amount 68 (39) 39 (158)
---------- ---------- ---------- ---------
Net change in unrealized gain (loss) on
securities 1,021 (131) 330 1,338
---------- ---------- ---------- ---------
Comprehensive income (loss) $ ( 482) $ ( 836) $ (652) $ 1,857
========== ========== ========== =========
- -------------------------------------------------------------------------------------------------------------------
See Accompanying Notes to Consolidated Financial Statements
PREMIER FINANCIAL BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 2002 AND 2001
(IN THOUSANDS)
(UNAUDITED)
- -------------------------------------------------------------------------------------------------------------------
2002 2001
---- ----
Cash flows from operating activities
Net (loss) income $ (982) $ 519
Adjustments to reconcile net income (loss) to net
Cash from operating activities
Depreciation 520 652
Provision for loan losses 4,186 3,647
Amortization, net 511 431
FHLB stock dividends (73) (139)
Investment securities losses (gains), net 59 (240)
Gain on the sale of subsidiary's banking operations - (3,418)
Write downs of OREO 655 -
Changes in
Interest Receivable 1,005 35
Other assets (139) (317)
Interest Payable 547 (620)
Other liabilities (537) 573
-------------- -------------
Net cash from operating activities 5,752 1,123
Cash flows from investing activities
Purchases of securities available for sale (54,315) (114,579)
Proceeds from sales of securities available for sale 4,061 12,234
Proceeds from maturities and calls of securities available
for sale 57,596 122,450
Purchases of FHLB stock (50) (175)
Redemption of FHLB stock - 451
Net change in federal funds sold (3,203) (4,175)
Net change in loans 3,267 (10,975)
Purchases of premises and equipment, net (331) 96
Proceeds from sale of other real estate acquired
through foreclosure 2,384 630
Net cash received (paid) related to acquisitions - (7,178)
------------- -------------
Net cash from investing activities 9,409 (1,221)
Cash flows from financing activities
Net change in deposits (5,653) 18,698
Advances from Federal Home Loan Bank 10,395 35,819
Repayment of Federal Home Loan Bank advances (17,239) (39,471)
Repayment of Other Borrowed Funds (3,300) -
Proceeds from Other Borrowings 701 -
Net change in agreements to repurchase securities 91 (14,462)
------------- -------------
Net cash from financing activities (15,005) 584
-------------- -------------
Net change in cash and cash equivalents 156 486
Cash and cash equivalents at beginning of period 20,628 24,076
------------- -------------
Cash and cash equivalents at end of period $ 20,784 $ 24,562
============= =============
- -------------------------------------------------------------------------------------------------------------------
See Accompanying Notes to Consolidated Financial Statements
PREMIER FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED, IN THOUSANDS)
- --------------------------------------------------------------------------------
NOTE 1 - BASIS OF PRESENTATION
The consolidated financial statements include the accounts of Premier Financial
Bancorp, Inc. (the Company) and its wholly owned subsidiaries:
Year June 30, 2002
Acquired Assets
Citizens Deposit Bank & Trust Vanceburg, Kentucky 1991 $ 95,614
Bank of Germantown Germantown, Kentucky 1992 26,687
Citizens Bank (Kentucky), Inc. Georgetown, Kentucky 1995 96,511
Farmers Deposit Bank Eminence, Kentucky 1996 149,214
Ohio River Bank Ironton, Ohio 1998 72,519
First Central Bank, Inc. Philippi, West Virginia 1998 85,363
Boone County Bank, Inc. Madison, West Virginia 1998 158,849
Mt. Vernon Financial Holdings, Inc. Georgetown, Kentucky 1999 8,964
The Company also has a data processing subsidiary, Premier Data Services, Inc.,
the PFBI Capital Trust subsidiary as discussed in Note 7, and a former bank, The
Sabina Bank, in the process of liquidation. All intercompany transactions and
balances have been eliminated.
NOTE 2 - GOODWILL AND OTHER INTANGIBLE ASSETS
Intangible assets subject to amortization are as follows:
Original Accumulated
Amount Amortization
Core deposit intangible $14,977 $2,951
Amortization expense for the first six months of 2002 was $374.
Estimated amortization expense for the next five years is: 2002 - $749; 2003 -
$749; 2004 - $749; 2005 - $749; and 2006 - $749.
Intangible assets not subject to amortization because they have indefinite lives
are as follows:
Original Accumulated
Amount Amortization
Goodwill $5,177 $1,533
The Company completed its impairment testing of goodwill during the second
quarter and concluded there was no impairment.
- --------------------------------------------------------------------------------
CONTINUED
PREMIER FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED, IN THOUSANDS)
- --------------------------------------------------------------------------------
NOTE 3 - NEW ACCOUNTING PRONOUNCEMENTS
A new accounting standard dealing with asset retirement obligations will apply
for 2003. The Company does not believe this standard will have a material affect
on its financial position or results of operations.
Effective January 1, 2002, the Company adopted a new standard issued by the FASB
on impairment and disposal of long-lived assets. The effect of adopting this
standard on the financial position and results of operations of the Company was
not considered material.
NOTE 4 - SECURITIES
Amortized cost and fair value of investment securities, by category, at June 30, 2002 are summarized as follows:
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
Available for sale
U. S. Treasury securities $ 1,447 $ 10 $ - $ 1,457
U. S. agency securities 110,588 1,077 (15) 111,650
Obligations of states and political
Subdivisions 17,575 637 (3) 18,209
Mortgage-backed securities 8,018 174 (2) 8,190
Corporate securities 9,102 13 (92) 9,023
-------------- -------------- -------------- ---------------
Total available for sale $ 146,730 $ 1,911 $ (112) $ 148,529
============== ============== ============== ===============
Amortized cost and fair value of investment securities, by category, at December 31, 2001 are summarized as follows:
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
Available for sale
U. S. Treasury securities $ 1,151 $ 21 $ - $ 1,172
U. S. agency securities 115,954 1,029 (63) 116,920
Obligations of states and political
Subdivisions 18,884 411 (70) 19,225
Mortgage-backed securities 8,223 37 (9) 8,251
Corporate securities 9,128 94 (26) 9,196
Other securities 927 - (125) 802
-------------- -------------- -------------- ---------------
Total available for sale $ 154,267 $ 1,592 $ (293) $ 155,566
============== ============== ============== ===============
- --------------------------------------------------------------------------------
CONTINUED
PREMIER FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED, IN THOUSANDS)
- --------------------------------------------------------------------------------
NOTE 5 - LOANS
Major classifications of loans at June 30, 2002 and December 31, 2001 are
summarized as follows:
2002 2001
---- ----
Commercial, secured by real estate $ 122,759 $ 117,692
Commercial, other 65,834 70,315
Real estate construction 12,342 15,751
Residential real estate 163,494 164,810
Agricultural 8,805 9,613
Consumer and home equity 75,137 79,571
Other 2,670 1,081
------------ ------------
$ 451,041 $ 458,833
============ ============
NOTE 6 - ALLOWANCE FOR LOAN LOSSES
Changes in the allowance for loan losses for the three months and six months
ended June 30, 2002 and 2001 are as follows:
Three Months Ended Six Months Ended
June 30, June 30,
2002 2001 2002 2001
---- ---- ---- ----
Balance, beginning of period $ 8,747 $ 7,953 $ 8,946 $ 7,821
Gross charge-offs (3,039) (1,675) (4,582) (2,333)
Recoveries 218 110 576 268
Provision for loan losses 3,200 3,015 4,186 3,647
------- ------- ------- -------
Balance, end of period $ 9,126 $ 9,403 $ 9,126 $ 9,403
======= ======= ======= =======
NOTE 7 - GUARANTEED PREFERRED BENEFICIAL INTERESTS IN COMPANY'S
SUBORDINATED DEBENTURES
Guaranteed preferred beneficial interests in Company's debentures (Preferred
Securities) represent preferred beneficial interests in the assets of PFBI
Capital Trust (Trust). The Trust holds certain 9.75% junior subordinated
debentures due June 30, 2027 issued by the Company on June 9, 1997.
Distributions on the Preferred Securities is payable at an annual rate of 9.75%
of the stated liquidation amount of $25 per Capital Security, payable quarterly
(see Note 8). Cash distributions on the Preferred Securities are made to the
extent interest on the debentures is received by the Trust. In the event of
certain changes or amendments to regulatory requirements or federal tax rules,
the Preferred Securities are redeemable in whole. Otherwise, the Preferred
Securities are generally redeemable by the Company in whole or in part on or
after June 30, 2002 at 100% of the liquidation amount. The Trust's obligations
under the Preferred Securities are fully and unconditionally guaranteed by the
Company.
- --------------------------------------------------------------------------------
CONTINUED
PREMIER FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED, IN THOUSANDS)
- --------------------------------------------------------------------------------
NOTE 8 - STOCKHOLDERS' EQUITY AND REGULATORY MATTERS
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 2002, the
Banks could, without prior approval, declare dividends of approximately $3.2
million plus any 2002 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 Company and the Banks must meet specific guidelines that involve
quantitative measures of their assets, liabilities, and certain off-balance
sheet items as calculated under regulatory accounting practices.
These quantitative measures established by regulation to ensure capital adequacy
require the Company and Banks to maintain minimum amounts and ratios (set forth
in the following table) of Total and Tier I capital (as defined in the
regulations) to risk-weighted assets (as defined), and of Tier I capital (as
defined) to average assets (as defined). Management believes, as of June 30,
2002, 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:
Regulatory
June 30, December 31, Minimum
2002 2001 Requirements
---- ---- ------------
Tier I Capital (to Risk-Weighted Assets) 13.7% 13.4% 4.0%
Total Capital (to Risk-Weighted Assets) 17.0% 16.6% 8.0%
Tier I Capital (to Average Assets) 9.0% 8.5% 4.0%
The capital amounts and classifications are also subject to qualitative
judgments by the regulators. As a result of these qualitative judgments, the
Company and two of the Company's subsidiaries have entered into agreements with
the applicable regulatory authorities which provide for additional restrictions
on their respective capital levels and the payment of dividends. The Company
entered into an agreement with the Federal Reserve Bank (FRB) on September 29,
2000 restricting the Company from declaring or paying dividends without prior
approval from the FRB. An additional provision of this agreement requires prior
approval from the FRB before the Company increases its borrowings or incurs any
debt. This agreement is in effect until terminated by the FRB.
- --------------------------------------------------------------------------------
CONTINUED
PREMIER FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED, IN THOUSANDS)
- --------------------------------------------------------------------------------
NOTE 8 - STOCKHOLDERS' EQUITY AND REGULATORY MATTERS (continued)
During the quarter ended June 30, 2002, the Company was notified by the FRB that
due to the deterioration of core earnings of the Company, among other issues,
the FRB would not allow the payment of the distribution due June 30, 2002 on the
Company's Trust Preferred Securities (see Note 7). In response, the Company
reached agreement with the FRB whereby, the Company's Chairman of the Board, who
is also the Company's largest shareholder, agreed to loan the Company the amount
of the distribution, $701 thousand, so that the Company, with the FRB's
approval, could make the distribution. The loan is unsecured at a zero interest
rate with no defined maturity date. The loan cannot be repaid without the prior
approval of the FRB.
The FRB has indicated that they would review the Company's performance before
allowing the Company to make its September 30, 2002 distribution and any future
distributions on the Trust Preferred Securities. The Company can make no
assurances that its Chairman will make additional loans in the future to cover
the amount of the distributions in the event the FRB does disallow them.
In the event the FRB does disallow any future distributions, under the terms of
the Trust, the Company has the right, at any time, to defer payments of interest
on the Trust Preferred Securities for a period not exceeding 20 consecutive
quarters. As a consequence of the Company's extension of the interest payment
period, quarterly distributions on the Trust Preferred Securities will be
deferred (though such distribution would continue to accrue with interest
thereon compounded quarterly). During the deferment period, the Company will be
prohibited, subject to certain exceptions, from declaring or paying any cash
distributions with respect to its capital stock.
Citizens Deposit Bank (Citizens) entered into a Written Agreement with the FRB
on September 29, 2000 restricting Citizens from declaring or paying dividends
without prior approval. This agreement is in effect until terminated by the FRB.
Citizens' Tier I capital to average assets was 10.3% at June 30, 2002.
Bank of Germantown (Germantown) entered into an agreement with the Kentucky
Department of Financial Institutions (KDFI) and the Federal Deposit Insurance
Corporation (FDIC) on June 13, 2000 restricting Germantown from declaring or
paying dividends, without prior approval, if its Tier I capital to average
assets falls below 8%. This agreement is in effect until terminated by the KDFI
and FDIC. Germantown's Tier I capital to average assets was 7.1% at June 30,
2002.
As of June 30, 2002, the most recent notification from the Federal Reserve Bank
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.
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations
A. Results of Operations
Premier realized a net loss for the six months ended June 30, 2002, of
$982,000, or 19 cents per share, compared to net income of $519,000 or $0.10 per
share for the six months ended June 30, 2001. The net income and earnings per
share comparisons are impacted by two significant events affecting the
comparability of financial results of the first six months of 2002 to 2001.
During the first quarter of 2001, Premier recognized a $625,000 net
gain (after tax) on the sale of certain assets and the assumption of certain
liabilities of its subsidiary the Bank of Mt. Vernon. Furthermore, during the
fourth quarter of 2001, Premier recognized the sale of certain assets and the
assumption of certain liabilities of its subsidiary The Sabina Bank. As a
result, the operations of the Bank of Mt. Vernon and The Sabina Bank are NOT
included in Premier's 2002 financial results. An equivalent 2001 comparison
should exclude the net gain on the sale and the 2001 operations of the Bank of
Mt. Vernon while also excluding the 2001 operations of The Sabina Bank. On an
equivalent basis, Premier realized a net loss for the first six months of 2001
of $372,000 or 7 cents per share.
The year-to-date loss is largely due to $3.2 million of provisions for
loan losses and $655,000 of OREO writedowns during the second quarter as more
fully explained below. For the quarter ending June 30, 2002, Premier recorded a
net loss of $1,503,000, or 29 cents per share, compared to a $705,000, or 13
cents per share, loss reported for the second quarter of 2001. An operationally
equivalent quarterly comparison would exclude the results of The Sabina Bank,
sold during the fourth quarter of 2001, from the 2001 second quarter loss. On an
equivalent basis, Premier realized a net loss for the second quarter of 2001 of
$825,000 or 16 cents per share.
Net interest income for the six months ending June 30, 2002 totaled
$12.12 million, an 8.7% increase over the $11.16 million of net interest income
earned in the first six months of 2001, (excluding the operations of The Sabina
Bank and the Bank of Mt. Vernon.) The increase was largely due to a lower cost
of funds resulting from the decline in market interest rates over the past year
and a reduction in FHLB advances and other borrowings. As a result, the net
interest margin for the six months ending June 30, 2002 was approximately 3.82%
compared to 3.59% for the same period in 2001. For the quarter ending June 30,
2002, net interest income totaled $6.15 million, a 3.0% increase over the $5.97
million reported for the first quarter of 2002, and a 5.9% increase over the
$5.81 million of net interest income earned in the second quarter of 2001,
(excluding the operations of The Sabina Bank). The increase was also largely due
to a lower cost of funds resulting from the decline in market interest rates and
a reduction in FHLB advances and other borrowings.
Non-interest income decreased $4,051,000 to $1,683,000 for the first
six months of 2002 compared to $5,734,000 for the first six months of 2001.
Excluding the gain on sale of the Mt. Vernon banking operations of $3,418,000
and The Sabina Bank's non-interest income of $146,000 for the first six months
2001, non-interest income would have decreased $487,000 or 22.4%, for the six
months ending June 30, 2002 compared to the same period for 2001. The decline is
largely due to a planned lower volume of secondary market mortgage loan activity
resulting in a reduction in secondary market fee income and gains on the sales
of loans, plus a $299,000 reduction in gains on investment security
transactions. These were partially offset by a $125,000 (12.6%) increase in
service charges on deposit accounts. For the quarter ending June 30, 2002,
non-interest income decreased $347,000 to $825,000 compared to the $1,172,000
reported for the same quarter of 2001. The decline is largely due to a $163,000
reduction in gains on investment security transactions, the elimination of the
Sabina Bank's operations and the lower volume of secondary market mortgage loan
activity.
Non-interest expenses for the first six months of 2002 totaled
$11,260,000 or 3.2% of average assets on an annualized basis compared to
$11,796,000 or 3.0% of average assets for the same period of 2001. The decrease
in non-interest expense is largely due to the exclusion of the Bank of Mt.
Vernon's and The Sabina Bank's operations for the first six months of 2002
versus their inclusion in 2001. After excluding operating costs of the Bank of
Mt. Vernon and The Sabina Bank from 2001, non-interest expense totaled
$10,305,000 for the first six months of 2001, resulting in a $955,000 or 9.3%
increase year-to-date in 2002. This increase is largely due to $655,000 in
writedowns of Other Real Estate Owned (OREO) to estimated realizable values in
the second quarter and a $139,000 increase in professional fees primarily due to
increased legal fees related to loan collections. These increases were partially
offset by lower amortization of intangibles.
For the quarter ending June 30, 2002, non-interest expense increased
$903,000 over the quarter ending June 30, 2001 (excluding the operations of The
Sabina Bank), largely due to the OREO writedowns and the increase in
professional fees detailed above. In addition, staff costs decreased by $76,000
or 2.8%, occupancy expense increased by $19,000 or 2.9%, and amortization of
intangibles decreased by $96,000.
Income tax benefit was $657,000 for the first six months of 2002
compared to income tax expense of $2,536,000 for the first six months of 2001.
The decrease in income tax expense can be primarily attributed to the $2,792,000
tax effect associated with the gain on sale of subsidiary's banking operations
in 2001. The income tax benefit for the quarter ending June 30, 2002 was
$853,000 compared to a tax benefit of $439,000 during the same period of 2001.
The annualized effective tax rate for the year-to-date period ended June 30,
2002 was 40.0%, compared to the 83.0% effective tax rate for the same period in
2001. The high rate in 2001 was primarily due to the elimination of intangibles
associated with the Company's acquisition of the Bank of Mt. Vernon. The
expensing of this intangible was a non-deductible event thereby raising the
annualized effective tax rate for the six months ended June 30, 2001.
The annualized returns on stockholders' equity and on average assets
were approximately (10.07)% and (0.86)% for the three months ended June 30, 2002
compared to (4.83)% and (0.36)% for the same period in 2001.
B. Financial Position
Total assets at June 30, 2002 decreased $15.6 million or 2.2% to $696.2
million from the $711.9 million at December 31, 2001. This decrease is largely
due to the planned pay down of $9.0 million of borrowed funds and the
non-renewal of some high rate certificates of deposit.
Earning assets decreased to $640.6 at June 30, 2002 from the $652.1
million at December 31, 2001, a decrease of $11.5 million, or 1.8%. The decrease
is largely due to a $7.8 million decline in total loans (see below).
Cash and cash equivalents at June 30, 2002 were $20.8 million, a $0.2
million increase from $20.6 million on December 31, 2001. Fed funds sold
increased to $36.7 million from the $33.5 million reported at December 31, 2001,
an increase of $3.2 million.
Total loans at June 30, 2002 were $451.0 million compared to $458.8
million at December 31, 2001, a decrease of $7.8 million. This decrease can
primarily be attributed to the collection of $3.7 million in loans owned by Mt.
Vernon Financial Holdings and the $4.6 million in loan charge-offs recorded
during the first six months of 2002.
Deposits totaled $564.9 million as of June 30, 2002, a $5.6 million
decrease from the $570.5 million in deposits at December 31, 2001. The decrease
is largely due to non-renewal of some high rate certificates of deposit over
$100,000. The reduction in time deposits $100,000 and over was partially offset
by the increase in non-interest bearing deposits and other interest bearing
deposits.
The following table sets forth information with respect to the
Company's nonperforming assets at June 30, 2002 and December 31, 2001.
(In Thousands)
2002 2001
---- ----
Non-accrual loans $ 7,572 $ 9,307
Accruing loans which are contractually
past due 90 days or more 1,756 5,948
Restructured 161 275
------- -------
Total non-performing loans 9,489 15,530
Other real estate acquired through
foreclosure 2,991 5,831
------- -------
Total non-performing assets $12,480 $21,361
Non-performing loans as a percentage
of total loans 2.10% 3.38%
Non-performing assets as a percentage
of total assets 1.79% 3.00%
Total non-performing loans and non-performing assets have declined
since year-end due to senior management directives that emphasized the reduction
of the level of delinquency, non-accrual loans and OREO. A large portion of the
decline was due to charge-offs, but a significant portion was also due to
collection efforts by lenders to bring borrowers current with the terms of their
loan agreement and the sale of certain OREO properties. A result of this
continuing process was the discovery of loan collateral deterioration or
weakening cash flows on a certain number of loans which warranted a downgrade in
the risk rating of the loan. Additional provisions for loan losses were made as
a result of these downgrades.
The provision for loan losses was $3.2 million for the second quarter
of 2002 compared to $3.0 million for the second quarter of 2001. This addition
brings the year-to-date provision to $4.2 million compared to $3.6 million for
the same period in 2001. During the second quarter, three of Premier's banks had
their regularly scheduled regulatory bank examination. During the examination,
regulators required that certain loans be downgraded or charged against the
allowance for loan losses. While management has not yet exhausted all efforts
and means available to collect these loans, the additional provisions were made
in accordance with Premier's policies regarding the adequacy of the allowance
for loan losses which are in accordance with generally accepted accounting
principles. Any collections on these loans would be presented in future
financial statements as recoveries of the amounts charged against the allowance.
The allowance for loan losses at June 30, 2002 was 2.02% of total loans as
compared to 1.95% at December 31, 2001. The increase in the percentage of
allowance for loan losses to total loans is largely due to the higher provision
for loan losses required versus the level of net charge-offs actually taken
during the first six months of 2002.
Nonperforming loans decreased to $8.6 million as of June 30, 2002, when
compared to the $15.5 million on December 31, 2001, due to the high level of
charge-offs and to a corporate-wide emphasis to reduce the level of
non-performing loans. This decrease resulted in the decrease of the ratio of
nonperforming loans to total loans to 1.91% at June 30, 2002 from the 3.38% at
December 31, 2001. Similarly, non-performing assets declined to 1.67% of total
assets at June 30, 2002, from 3.00% of total assets at December 31, 2001, due to
sales of OREO properties and writedowns of existing properties to estimated
realizable values.
C. Liquidity
Liquidity objectives for the Company can be expressed in terms of
maintaining sufficient cash flows to meet both existing and unplanned
obligations in a cost effective manner. Adequate liquidity allows the Company to
meet the demands of both the borrower and the depositor on a timely basis, as
well as pursuing other business opportunities as they arise. Thus, liquidity
management embodies both an asset and liability aspect while attempting to
maximize profitability. In order to provide for funds on a current and long-term
basis, the Company's subsidiary 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. The Company owns $148.5 million of securities at
market value as of June 30 2002.
The cash flow statements for the periods presented in the financial
statements provide an indication of the Company's sources and uses of cash as
well as an indication of the ability of the Company to maintain an adequate
level of liquidity.
D. Capital
At June 30, 2002, total shareholders' equity of $59.2 million was 8.5%
of total consolidated assets. This compares to total shareholders' equity of
$59.8 million or 8.4% of total consolidated assets on December 31, 2001.
Tier I capital totaled $61.7 million at June 30, 2002, which represents
a Tier I leverage ratio of 9.0%.
Book value per share was $11.32 at June 30, 2002, and $11.44 at
December 31, 2001. The $1.5 million loss in the second quarter was primarily
responsible for the decrease in comprehensive income and corresponding decrease
in book value per share. Partially offsetting this decrease was an increase in
the market value of investment securities available for sale.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Company currently does not engage in any derivative or hedging
activity. Refer to the Company's 2001 10-K for analysis of the interest rate
sensitivity. The Company believes there have been no significant changes in the
interest rate sensitivity since previously reported on the Company's 2001 10-K.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings None
Item 2. Changes in Securities None
Item 3. Defaults Upon Senior Securities None
Item 4. Submission of Matters to a vote of Security Holders
(a) Annual meeting of the Shareholders was held June 19, 2002.
(b) All director nominees were elected.
(c) Certain matters voted upon at the meeting and the votes cast
with respect to such matters are as follows:
(i) The following were elected as directors of the Corporation
for a term of one year.
Director Votes Received Votes Withheld
1. Toney K. Adkins 4,630,884 40,540
2. Hosmer A. Brown, III 4,637,671 33,753
3. Edsel R. Burns 4,635,138 36,286
4. Gardner E. Daniel 4,628,702 42,722
5. E. V. Holder, Jr. 4,636,566 34,858
6. Wilbur M. Jenkins 4,636,978 34,446
7. Keith F. Molihan 4,635,652 35,772
8. Marshall T. Reynolds 4,627,522 43,902
9. Neal Scaggs 4,635,828 35,596
10. Robert W. Walker 4,528,111 143,313
11. Thomas W. Wright 4,634,984 36,440
(ii) Approval of the Premier Financial Bancorp, Inc. 2002 Employee
Stock Ownership Incentive Plan. Votes for 3,415,671; votes
against 118,345; votes abstaining 14,635; broker non-votes
1,122,773.
(iii) Ratification of Crowe, Chizek and Company, LLP as independent
auditors of the Corporation for 2002. Votes for 4,648,970;
votes against 11,860; votes abstaining 10,594.
Item 5. Other Information None
Item 6. Exhibits and Reports on Form 8-K
(a) No exhibits are furnished in accordance with the provisions of Item
601 of Regulation S-K.
The following exhibits accompany this periodic report pursuant to
18 U.S.C ss.1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002 (the "2002 Act"). These exhibits shall be deemed only to accompany this
periodic report and are not part of this periodic report, shall not be deemed
filed for purposes of the Securities Exchange Act of 1934, and may not be used
for any purpose other than compliance with the 2002 Act.
99.1 Certification Pursuant to 18 U.S.C ss.1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, by Chief Executive
Officer
99.2 Certification Pursuant to 18 U.S.C ss.1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, by Chief Financial
Officer
(b) No Current Reports on Form 8-K were filed in the second quarter of
the Company's year.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Corporation has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PREMIER FINANCIAL BANCORP, INC.
Date: August 14, 2002 /s/ Robert W. Walker
-------------------------------------
Robert W. Walker
President & Chief Executive Officer
Date: August 14, 2002 /s/ Brien M. Chase
-------------------------------------
Brien M. Chase
Vice President &
Chief Financial Officer