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 September 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 October 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 accounting principles generally accepted in the United
States of Americaor 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
SEPTEMBER 30, 2002 AND DECEMBER 31, 2001
(DOLLARS IN THOUSANDS)
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(UNAUDITED)
2002 2001
------------- --------------
ASSETS
Cash and due from banks $ 19,416 $ 20,628
Federal funds sold 41,920 33,517
Investment securities available for sale 148,009 155,566
Loans 446,808 458,833
Unearned interest ( 29) ( 92)
Allowance for loan losses (11,130) (8,946)
------------- --------------
Net loans 435,649 449,795
Federal Home Loan Bank and Federal Reserve Bank stock 4,452 4,261
Premises and equipment, net 11,839 12,035
Real estate and other property acquired through foreclosure 3,449 5,831
Interest receivable 6,635 7,842
Goodwill and other intangibles 16,044 16,044
Other assets 6,409 6,331
------------- --------------
Total assets $ 693,822 $ 711,850
============= ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits
Non-interest bearing $ 60,608 $ 57,916
Time deposits, $100 and over 68,506 89,149
Other interest bearing 435,863 423,466
------------- --------------
Total deposits 564,977 570,531
Securities sold under agreements to repurchase 5,696 5,520
Federal Home Loan Bank advances 23,592 30,795
Other borrowed funds 9,102 13,000
Interest payable 1,578 1,903
Other liabilities 1,086 1,476
------------- --------------
Total liabilities 606,031 623,225
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 12,895 14,470
Accumulated other comprehensive income 1,598 857
------------- --------------
Total stockholders' equity 59,041 59,875
------------- --------------
Total liabilities and stockholders' equity $ 693,822 $ 711,850
============= ==============
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See Accompanying Notes to Consolidated Financial Statements
3
PREMIER FINANCIAL BANCORP, INC.
CONSOLIDATED STATEMENTS OF INCOME
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2002 AND 2001
(IN THOUSANDS EXCEPT PER SHARE DATA)
(UNAUDITED)
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Three Months Ended Nine Months Ended
September 30, September 30,
2002 2001 2002 2001
----------- ----------- ----------- -----------
Interest income
Loans, including fees $ 9,181 $ 11,723 $ 28,255 $ 36,588
Investment securities
Taxable 1,360 1,916 4,408 6,344
Tax-exempt 203 255 613 808
Federal funds sold and other 181 349 540 1,298
----------- ----------- ----------- -----------
Total interest income 10,925 14,243 33,816 45,038
Interest expense
Deposits 3,746 6,501 12,159 21,148
Debt and other borrowings 1,133 1,502 3,487 4,886
----------- ----------- ----------- -----------
Total interest expense 4,879 8,003 15,646 26,034
Net interest income 6,046 6,240 18,170 19,004
Provision for loan losses 3,094 1,793 7,280 5,440
----------- ----------- ----------- -----------
Net interest income after
provision for loan losses 2,952 4,447 10,890 13,564
Non-interest income
Service charges 619 550 1,738 1,666
Insurance commissions 52 78 171 215
Investment securities gains (losses) 1 195 (58) 435
Gain on the sale of subsidiary's banking
operations - - - 3,418
Other 221 440 725 1,263
----------- ----------- ----------- -----------
893 1,263 2,576 6,997
Non-interest expenses
Salaries and employee benefits 2,603 2,902 7,902 8,827
Occupancy and equipment expenses 701 714 2,064 2,203
Amortization of intangibles - 337 - 1,011
Other expenses 1,972 1,753 6,196 5,461
----------- ----------- ----------- -----------
5,276 5,706 16,162 17,502
----------- ----------- ----------- -----------
Income (loss) before income taxes (1,431) 4 (2,696) 3,059
Provision for income taxes (benefit) (592) (42) (1,121) 2,494
----------- ----------- ----------- -----------
Net income (loss) $ (839) $ 46 $ (1,575) $ 565
=========== =========== =========== ===========
Basic earnings (loss) per share $ (0.16) $ 0.01 $ (0.30) $ 0.11
Earnings (loss) per share assuming dilution $ (0.16) $ 0.01 $ (0.30) $ 0.11
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
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See Accompanying Notes to Consolidated Financial Statements
4
PREMIER FINANCIAL BANCORP, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2002 AND 2001
(IN THOUSANDS)
(UNAUDITED)
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Three Months Ended Nine Months Ended
September 30, September 30,
2002 2001 2002 2001
---------- ---------- ---------- ---------
Net income (loss) $ (839) $ 46 $ (1,575) $ 565
Other comprehensive income (loss), net of tax:
Unrealized gains and (losses) arising during
the period 412 1,239 703 $ 2,735
Reclassification of realized amount (1) (129) 38 (287)
----------- ---------- ---------- ---------
Net change in unrealized gain (loss) on
securities 411 1,110 741 2,448
---------- ---------- ---------- ---------
Comprehensive income (loss) $ ( 428) $ 1,156 $ (834) $ 3,013
========== ========== ========== =========
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See Accompanying Notes to Consolidated Financial Statements
5
PREMIER FINANCIAL BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 2002 AND 2001
(IN THOUSANDS)
(UNAUDITED)
- -------------------------------------------------------------------------------------------------------------------
2002 2001
------------- -------------
Cash flows from operating activities
Net (loss) income $ (1,575) $ 565
Adjustments to reconcile net income (loss) to net
Cash from operating activities
Depreciation 1,013 975
Provision for loan losses 7,280 5,440
Amortization, net 221 693
FHLB stock dividends (141) (207)
Investment securities losses (gains), net 58 (435)
Gain on the sale of subsidiary's banking operations - (3,418)
Write downs of OREO 990 -
Changes in
Interest Receivable 1,207 (210)
Other assets (460) (3,033)
Interest Payable (325) (676)
Other liabilities (390) (80)
------------- -------------
Net cash from operating activities 7,878 (386)
Cash flows from investing activities
Purchases of securities available for sale (94,804) (151,242)
Proceeds from sales of securities available for sale 4,063 12,429
Proceeds from maturities and calls of securities available
for sale 99,142 167,958
Purchases of FHLB stock (50) (176)
Redemption of FHLB stock - 451
Net change in federal funds sold (8,403) (15,608)
Net change in loans 6,779 (299)
Purchases of premises and equipment, net (817) (223)
Proceeds from sale of other real estate acquired
through foreclosure 2,813 921
Net cash received (paid) related to acquisitions - (7,178)
------------- -------------
Net cash from investing activities 8,723 7,033
Cash flows from financing activities
Net change in deposits (6,888) 7,917
Advances from Federal Home Loan Bank 10,395 40,385
Repayment of Federal Home Loan Bank advances (17,598) (44,277)
Repayment of Other Borrowed Funds (5,300) -
Proceeds from Other Borrowings 1,402 -
Net change in agreements to repurchase securities 176 (14,339)
------------- -------------
Net cash from financing activities (17,813) (10,314)
------------- -------------
Net change in cash and cash equivalents (1,212) (3,667)
Cash and cash equivalents at beginning of period 20,628 24,076
------------- -------------
Cash and cash equivalents at end of period $ 19,416 $ 20,409
============= =============
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See Accompanying Notes to Consolidated Financial Statements
6
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 September 30, 2002
Acquired Assets
Citizens Deposit Bank & Trust Vanceburg, Kentucky 1991 $ 92,487
Bank of Germantown Germantown, Kentucky 1992 26,715
Citizens Bank (Kentucky), Inc. Georgetown, Kentucky 1995 87,328
Farmers Deposit Bank Eminence, Kentucky 1996 152,390
Ohio River Bank Ironton, Ohio 1998 73,169
First Central Bank, Inc. Philippi, West Virginia 1998 88,248
Boone County Bank, Inc. Madison, West Virginia 1998 164,658
Mt. Vernon Financial Holdings, Inc. Georgetown, Kentucky 1999 8,712
The Company also has a data processing subsidiary, Premier Data Services, Inc.,
and the PFBI Capital Trust subsidiary as discussed in Note 7. All intercompany
transactions and balances have been eliminated.
NOTE 2 - GOODWILL
On October 1, 2002, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards ("SFAS") No. 147,
"Acquisitions of Certain Financial Institutions." SFAS No. 147 is effective
October 1, 2002, and may be early applied. SFAS No. 147 supersedes SFAS No. 72,
"Accounting for Certain Acquisitions of Banking or Thrift Institutions." SFAS
No. 147 provides guidance on the accounting for the acquisition of a financial
institution, and applies to all such acquisitions except those between two or
more mutual enterprises. Under SFAS No. 147, the excess of the fair value of
liabilities assumed over the fair value of tangible and identifiable intangible
assets acquired in a financial institution business combination represents
goodwill that should be accounted for under SFAS No. 142, "Goodwill and Other
Intangible Assets." If certain criteria are met, the amount of the
unidentifiable intangible asset resulting from prior financial institution
acquisitions is to be reclassified to goodwill upon adoption of this Statement.
Financial institutions meeting conditions outlined in SFAS No. 147 are required
to restate previously issued financial statements. The objective of the
restatement is to present the balance sheet and income statement as if the
amount accounted for under SFAS No. 72 as an unidentifiable intangible asset had
been reclassified to goodwill as of January 1, 2002, the date the Company
adopted SFAS No. 142. Adoption of SFAS No. 147 on October 1, 2002 resulted in
the reclassification of $12.4 million of previously recognized unidentifiable
intangible assets to goodwill. Additionally, the effect of the retroactive
adoption was to reverse any intangible asset
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CONTINUED
PREMIER FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED, IN THOUSANDS)
- --------------------------------------------------------------------------------
NOTE 2 - GOODWILL AND OTHER INTANGIBLE ASSETS (continued)
amortization recorded during the prior periods of 2002. A reconciliation of the
impact of adoption on net income for the first and second quarters of 2002
follows:
Quarter Ended
March 31 June 30
2002 2002
Net income (loss) as reported $521 $(1,503)
Impact of retroactive adoption 119 119
-------- ---------
Restated net income (loss) $640 $(1,384)
======== =========
The Company completed its impairment testing of goodwill during the second
quarter and concluded there was no impairment.
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 effect
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
September 30, 2002 are summarized as follows:
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
Available for sale
U. S. Treasury securities $ 650 $ 9 $ - $ 659
U. S. agency securities 109,670 1,314 - 110,984
Obligations of states and political
Subdivisions 17,612 969 - 18,581
Mortgage-backed securities 8,448 231 (5) 8,674
Corporate securities 9,208 18 (115) 9,111
-------------- -------------- -------------- ---------------
Total available for sale $ 145,588 $ 2,541 $ (120) $ 148,009
============== ============== ============== ===============
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CONTINUED
PREMIER FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED, IN THOUSANDS)
- --------------------------------------------------------------------------------
NOTE 4 - SECURITIES (continued)
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
============== ============== ============== ===============
NOTE 5 - LOANS
Major classifications of loans at September 30, 2002 and December 31, 2001 are
summarized as follows:
2002 2001
---- ----
Commercial, secured by real estate $ 122,638 $ 117,692
Commercial, other 61,927 70,315
Real estate construction 12,258 15,751
Residential real estate 162,954 164,810
Agricultural 9,176 9,613
Consumer and home equity 73,624 79,571
Other 4,231 1,081
------------ ------------
$ 446,808 $ 458,833
============ ============
The following table sets forth information with respect to the Company's
nonperforming loans at September 30, 2002 and December 31, 2001.
2002 2001
---- ----
Non-accrual loans $ 10,636 $ 9,307
Accruing loans which are contractually
past due 90 days or more 1,326 5,948
Restructured loans 294 275
------------ ------------
$ 12,256 $ 15,530
============ ============
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CONTINUED
PREMIER FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED, IN THOUSANDS)
- --------------------------------------------------------------------------------
NOTE 6 - ALLOWANCE FOR LOAN LOSSES
Changes in the allowance for loan losses for the three months and nine months
ended September 30, 2002 and 2001 are as follows:
Three Months Ended Nine Months Ended
September 30, September 30,
2002 2001 2002 2001
---- ---- ---- ----
Balance, beginning of period $ 9,126 $ 9,403 $ 8,946 $ 7,821
Gross charge-offs (1,342) (1,182) (5,924) (3,515)
Recoveries 252 133 828 401
Provision for loan losses 3,094 1,793 7,280 5,440
------------ ------------- ------------ ------------
Balance, end of period $ 11,130 $ 10,147 $ 11,130 $ 10,147
============ ============= ============ ============
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 are 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.
NOTE 8 - STOCKHOLDERS' EQUITY AND REGULATORY MATTERS
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
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
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CONTINUED
PREMIER FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED, IN THOUSANDS)
- --------------------------------------------------------------------------------
NOTE 8 - STOCKHOLDERS' EQUITY AND REGULATORY MATTERS (continued)
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 September
30, 2002, 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:
Regulatory
September 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) 17.1% 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 three 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 of Cleveland
(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.
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. A similar agreement was reached with the FRB for the
payment of the distribution due September 30, 2002. The Company's President, who
is also a director, agreed to loan the Company the amount of the distribution,
$701 thousand. This loan is also unsecured at a zero interest rate with no
defined maturity date. The loan also cannot be repaid without the prior approval
of the FRB.
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CONTINUED
PREMIER FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED, IN THOUSANDS)
- --------------------------------------------------------------------------------
NOTE 8 - STOCKHOLDERS' EQUITY AND REGULATORY MATTERS (continued)
The FRB has indicated that it would review the Company's performance before
allowing the Company to make its December 31, 2002 distribution and any future
distributions on the Trust Preferred Securities. The Company can make no
assurances that its Chairman, President, or any director or group of directors
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 ratio was 10.5% at September 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 ratio was 7.4% at
September 30, 2002.
Citizens Bank (Kentucky), Inc. (Citizens, KY) entered into an agreement with the
Kentucky Department of Financial Institutions (KDFI) and the Federal Deposit
Insurance Corporation (FDIC) on September 11, 2002 restricting Citizens, KY from
declaring or paying dividends, without prior approval. This the agreement is in
effect until terminated by the KDFI and FDIC. Citizens KY's Tier I capital to
average assets ratio was 8.1% at September 30, 2002.
As of September 30, 2002, 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.
MANAGEMENT'S DISCUSSION AND ANALYSIS
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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 nine months ended September 30,
2002, of $1,575,000, or 30 cents per share, compared to net income of $565,000
or 11 cents per share for the nine months ended September 30, 2001. The net
income (loss) and earnings per share comparisons are impacted by two significant
events affecting the operations of Premier and thus the comparability of
financial results of the first nine 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 nine months of 2001
of $307,000 or 6 cents per share.
Another event affecting the comparison of 2002 to 2001 is Premier's
adoption of FAS 142 and FAS 147. The effect of adopting these new accounting
standards has been the elimination of the monthly amortization of intangible
assets effective January 2002. Through September 2001, Premier expensed
$1,011,000 of intangible amortization versus none for the same period of 2002.
The year-to-date 2002 loss is largely due to $7.3 million of provisions
for loan losses and $990,000 of OREO writedowns. For the quarter ending
September 30, 2002, Premier recorded a net loss of $839,000, or 16 cents per
share, compared to $46,000, or 1 cent per share, of net income reported for the
third 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 third quarter income. On an equivalent basis, Premier realized a
net loss for the third quarter of 2001 of $41,000 or 1 cent per share.
Net interest income for the nine months ending September 30, 2002
totaled $18.17 million, a 7.8% increase over the $16.85 million of net interest
income earned in the first nine 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 nine months ending September 30, 2002 was approximately
3.83% compared to 3.57% for the same period in 2001. For the quarter ending
September 30, 2002, net interest income totaled $6.05 million, a 1.7% decrease
from the $6.15 million reported for the second quarter of 2002, but a 6.4%
increase over the $5.68 million of net interest income earned in the third
quarter of 2001, (excluding the operations of The Sabina Bank). The decrease
compared to the second quarter of 2002 was largely due to a lower reinvestment
rates on maturing investments and the reversal of accrued loan interest on loans
placed on non-accrual during the third quarter. The increase compared to the
prior year quarter, however, was primarily 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 $4,421,000 to $2,576,000 for the first
nine months of 2002 compared to $6,997,000 for the first nine 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 $251,000 for the first nine months
2001, non-interest income would have decreased $745,000 or 22.4%, for the nine
months ending September 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 $493,000 reduction in gains on investment security
transactions. These were partially offset by a $243,000 (16.3%) increase in
revenue from service charges on deposit accounts. For the quarter ending
September 30, 2002, non-interest income decreased $370,000 to $893,000 compared
to the $1,263,000 reported for the same quarter of 2001. The decline is largely
due to a $194,000 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. These were partially offset by an $118,000
(23.6%) increase in revenue from service charges on deposit accounts.
Non-interest expenses for the first nine months of 2002 totaled
$16,162,000 or 3.1% of average assets on an annualized basis compared to
$17,502,000 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 nine 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
$15,577,000 for the first nine months of 2001, resulting in a $585,000 or 3.8%
increase year-to-date in 2002. This increase is largely due to $990,000 in
writedowns of Other Real Estate Owned (OREO) to estimated realizable values in
the second and third quarters as Premier continues to aggressively market its
OREO properties; and a $283,000 increase in professional fees primarily due to
increased legal fees related to loan collections. These increases were partially
offset by the elimination of amortization of intangibles.
For the quarter ending September 30, 2002, non-interest expense
increased $76,000 over the quarter ending September 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 $50,000 or 1.9%, occupancy expense increased by $44,000 or 6.7%, and
amortization of intangibles decreased by $283,000.
Income tax benefit was $1,121,000 for the first nine months of 2002
compared to income tax expense of $2,494,000 for the first nine 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 and the decline in pre-tax income detailed above. The income tax benefit
for the quarter ending September 30, 2002 was $592,000 compared to a tax benefit
of $42,000 during the same period of 2001. The annualized effective tax rate for
the year-to-date period ended September 30, 2002 was 41.6%, compared to the
81.5% effective tax rate for the same period in 2001. The high rate in 2001 was
primarily due to the elimination of intangibles associated with Premier'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
nine months ended June 30, 2001.
The annualized returns on stockholders' equity and on average assets
were approximately (5.66)% and (0.48)% for the three months ended September 30,
2002 compared to 0.32% and 0.02% for the same period in 2001.
B. Financial Position
Total assets at September 30, 2002 decreased $18.0 million or 2.5% to
$693.8 million from the $711.9 million at December 31, 2001. This decrease is
largely due to the planned pay down of $11.1 million of borrowed funds and the
non-renewal of some high rate certificates of deposit.
Earning assets decreased to $641.2 at September 30, 2002 from the
$652.1 million at December 31, 2001, a decrease of $10.9 million, or 1.7%. The
decrease is largely due to a $12.0 million decline in total loans (see below).
Cash and cash equivalents at September 30, 2002 were $19.4 million, a
$1.2 million decrease from $20.6 million on December 31, 2001. Federal funds
sold increased to $41.9 million from the $33.5 million reported at December 31,
2001, an increase of $8.4 million. The increase in federal funds sold is the
result of retaining the liquidity from maturing investments as part of Premier's
interest rate management strategy.
Total loans at September 30, 2002 were $446.8 million compared to
$458.8 million at December 31, 2001, a decrease of $12.0 million. This decrease
can primarily be attributed to the collection of $5.1 million in loans owned by
Mt. Vernon Financial Holdings and the $5.9 million in loan charge-offs recorded
during the first nine months of 2002.
Deposits totaled $565.0 million as of September 30, 2002, a $5.5
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 September 30, 2002 and December 31, 2001.
(In Thousands)
2002 2001
-------------- -----------
Non-accrual loans $ 10,636 $ 9,307
Accruing loans which are contractually
past due 90 days or more 1,326 5,948
Restructured 294 275
-------------- ------------
Total non-performing loans 12,256 15,530
Other real estate acquired through
foreclosure 3,449 5,831
-------------- ------------
Total non-performing assets $ 15,705 $ 21,361
Non-performing loans as a percentage
of total loans 2.74% 3.38%
Non-performing assets as a percentage
of total assets 2.26% 3.00%
Total non-performing loans and non-performing assets have declined
since year-end due to loan charge-offs and senior management directives that
emphasized the reduction of the level of delinquency, non-accrual loans and
OREO. A significant effort has been placed on reviews of loan files, efforts by
lenders to bring borrowers current with the terms of their loan agreement and
the sale of certain OREO properties. However, while total non-performing loans
have declined, non-accrual loans have increased. A result of this continuing
loan review and collection 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 and/or placing the loan on
non-accrual status. Additional provisions for loan losses were made as a result
of these downgrades and accrual status changes.
The provision for loan losses was $3.1 million for the third quarter of
2002 compared to $1.8 million for the third quarter of 2001. This addition
brings the year-to-date provision to $7.3 million compared to $5.4 million for
the same period in 2001. 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 accounting principles generally
accepted in the United States of America. 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 September 30, 2002 was
2.49% 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 nine months of 2002 plus the effect of the
decline in total loans outstanding.
Nonperforming loans decreased to $12.3 million as of September 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 2.74% at September 30, 2002 from the 3.38%
at December 31, 2001. Similarly, non-performing assets declined to 2.26% of
total assets at September 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 $148.0 million of securities at
market value as of September 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 September 30, 2002, total shareholders' equity of $59.0 million was
8.5% of total consolidated assets. This compares to total shareholders' equity
of $59.9 million or 8.4% of total consolidated assets on December 31, 2001.
Tier I capital totaled $60.5 million at September 30, 2002, which
represents a Tier I leverage ratio of 9.0%.
Book value per share was $11.29 at September 30, 2002, and $11.44 at
December 31, 2001. The $1.6 million loss for the year was primarily responsible
for the decrease in comprehensive income and corresponding decrease in book
value per share. Partially offsetting this decrease was the after tax increase
in the market value of investment securities available for sale of $741,000.
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.
Item 4. Controls and Procedures
Premier management, including the Chief Executive Officer and Chief
Financial Officer, has conducted an evaluation of the effectiveness of
disclosure controls and procedures pursuant to Exchange Act Rule 13a-14. Based
on that evaluation, the Chief Executive Officer and Chief Financial Officer
concluded that the disclosure controls and procedures are effective in ensuring
that all material information required to be filed in this quarterly report has
been made known to them in a timely fashion. There have been no significant
changes in internal controls, or in factors that could significantly affect
internal controls, subsequent to the date the Chief Executive Officer and Chief
Financial Officer completed their evaluation.
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 None
- --------------------------------------------------------------
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 third 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: November 14, 2002 /s/ Robert W. Walker
----------------------------------------
Robert W. Walker
President & Chief Executive Officer
Date: November 14, 2002 /s/ Brien M. Chase
----------------------------------------
Brien M. Chase
Vice President & Chief Financial Officer
PRINCIPAL EXECUTIVE OFFICER CERTIFICATION
PURSUANT TO SECTION 302 OF
THE SARBANES-OXLEY ACT OF 2002
I, Robert W. Walker, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Premier
Financial Bancorp, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report
is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: November 14, 2002
/s/ Robert W. Walker
- ---------------------------
Robert W. Walker
President & Chief Executive Officer
PRINCIPAL FINANCIAL OFFICER CERTIFICATION
PURSUANT TO SECTION 302 OF
THE SARBANES-OXLEY ACT OF 2002
I, Brien M. Chase, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Premier
Financial Bancorp, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report
is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: November 14, 2002
/s/ Brien M. Chase
- ------------------------------------
Brien M. Chase
Vice President & Chief Financial Officer