UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended DECEMBER 31, 2002
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from __________ to __________.
Commission file number 0-20908
PREMIER FINANCIAL BANCORP, INC.
(Exact name of registrant as specified in its charter)
KENTUCKY 61-1206757
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2883 5TH AVENUE
HUNTINGTON, WEST VIRGINIA 25702
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (304) 525-1600
Securities registered pursuant to Section 12(b) of the Act:
NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK WITHOUT PAR VALUE
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to filing requirements
for the past 90 days. YES [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this 10-K or any amendment to this
Form 10-K. [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act) Yes [ ] No [X]
State the aggregate market value of voting stock held by non-affiliates of the
registrant. The aggregate market value shall be computed by reference to the
price at which stock was sold, or the average bid and asked prices of such
stock, as of a specified date within 60 days prior to the date of filing:
Aggregate Market Value of Voting Stock Based upon closing price on
- -------------------------------------- ---------------------------
$39,845,670 March 10, 2003
Indicate the number of shares outstanding of each of the registrant's classes of
common stock as of the latest practicable date.
Class Outstanding at March 10, 2003
----- ----------------------------
COMMON STOCK (no par value) 5,232,230
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the following documents are incorporated by reference into the Form
10-K part indicated:
Document Form 10-K
(1) Proxy statement for the 2003 annual meeting of Part III
shareholders
PART I
Item 1. Description of Business
THE COMPANY
Premier Financial Bancorp, Inc. (the "Company" or "Premier") is a
multi-bank holding company that, as of March 16, 2003, operates fourteen banking
offices in Kentucky, three banking offices in Ohio, and six banking offices in
West Virginia. At December 31, 2002, Premier had total consolidated assets of
$677.6 million, total consolidated deposits of $548.0 million and total
consolidated shareholders' equity of $59.4 million. The banking subsidiaries
(the "Banks" or "Affiliate Banks") consist of Citizens Deposit Bank & Trust,
Vanceburg, Kentucky; Bank of Germantown, Germantown, Kentucky; Citizens Bank
(Kentucky), Inc., Georgetown, Kentucky; Farmers Deposit Bank, Eminence,
Kentucky; Ohio River Bank, Ironton, Ohio; First Central Bank, Inc., Philippi,
West Virginia; and Boone County Bank, Inc., Madison, West Virginia.
In 2000 Premier suspended its acquisition strategy in order to focus on
improving operations, strengthening capital and management oversight and
improving the profitability of the banks previously acquired. As part of this
change in strategy Premier elected to dispose of two of its subsidiary banks,
the Bank of Mt. Vernon and The Sabina Bank. These disposals were completed in
2001. While Premier remains committed to its core strategy of rural banking with
community oriented and locally named institutions, the Company may dispose of
additional corporate assets that no longer meet Premier's geographic or
operational performance goals.
During October 2001, the Company appointed Robert W. Walker to the
position of President and Chief Executive Officer to replace the retiring
Gardner Daniel. In April 2002, the Company hired Brien M. Chase as Chief
Financial Officer to replace the former CFO who left the Company in February
2002.
Premier is a legal entity separate and distinct from its Affiliate
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 Affiliate 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 Affiliate Banks and non-bank subsidiaries. See "REGULATORY
MATTERS -- Dividend Restrictions" for discussion of the restrictions on the
Affiliate Banks' ability to pay dividends to Premier.
Premier was incorporated as a Kentucky corporation in 1991 and has
functioned as a bank holding company since its formation. 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's Affilate Banks and its
directorship. Premier's telephone number is (304) 525-1600.
BUSINESS
General
Through the Banks and its data processing subsidiary, the Company
focuses on providing quality, community banking services to individuals and
small-to-medium sized businesses primarily in non-urban areas. By seeking to
provide such banking services in non-urban areas, the Company believes that it
can minimize the competitive effect of larger financial institutions that
typically are focused on large metropolitan areas. Through its experiences in
acquiring its Banks, the Company is developing and implementing a strategy of
joining together community banks that retain their commitment to local
orientation and direction, while having the benefit of the Company's capital for
growth and staff assistance to promote safety, soundness and regulatory
compliance. Each Bank 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 the Company 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 Banks, the Banks' lending and
investing activities are funded primarily by core deposits.
When appropriate and economically advantageous, the Company centralizes
certain of the Banks' back office, support and investment functions in order to
achieve consistency and cost efficiency in the delivery of products and
services. The Company centrally provides services such as data processing,
operations support, accounting, loan review, compliance and internal auditing to
the Banks to enhance their ability to compete effectively. The Company also
provides overall direction in the areas of credit policy and administration,
strategic planning, marketing, investment portfolio management and other
financial and administrative services. Each Bank participates in product
development by advising management of new products and services needed by their
customers and desirable changes to existing products and services.
Each of the Banks provides a wide range of retail and commercial
banking services, including commercial, real estate, agricultural and consumer
lending; depository and funds transfer services; collections; safe deposit
boxes; cash management services; and other services tailored for both
individuals and businesses. Farmers Deposit Bank in Eminence, Kentucky, also
offers limited trust services and acts as executor, administrator, trustee and
in various other fiduciary capacities. Through Premier Data Services, Inc., the
Company's data processing subsidiary, the Company currently provides centralized
data processing services to six of the Banks as well as one non-affiliated bank.
The Banks' residential mortgage lending activities consist primarily of
loans for purchasing personal residences or loans for commercial or consumer
purposes secured by residential mortgages. Consumer lending activities consist
of traditional forms of financing for automobile and personal loans.
The Banks' range of deposit services includes checking accounts, NOW
accounts, savings accounts, money market accounts, club accounts, individual
retirement accounts, certificates of deposit and overdraft protection. Deposits
of the Banks are insured by the Bank Insurance Fund administered by the FDIC.
Competition
The Banks encounter strong competition both in making loans and
attracting deposits. The deregulation of the banking industry and the widespread
enactment of state laws that permit multi-bank holding companies as well as the
availability of nationwide interstate banking have created a highly competitive
environment for financial services providers. In one or more aspects of its
business, each Bank competes with other commercial banks, savings and loan
associations, credit unions, finance companies, mutual funds, insurance
companies, brokerage and investment banking companies and other financial
intermediaries operating in its market and elsewhere, many of which have
substantially greater financial and managerial resources. While the Banks are
smaller financial institutions, each of the Banks' competitors include large
bank holding companies having substantially greater resources and offering
certain services that Premier Banks may not currently provide. Each Bank seeks
to minimize the competitive effect of larger financial institutions through a
community banking approach that emphasizes direct customer access to the Bank's
president and other officers in an environment conducive to friendly, informed
and courteous service.
Management believes that each Bank is positioned to compete
successfully in its respective primary market area, although no assurances as to
ongoing competitiveness can be given. Competition among financial institutions
is based upon interest rates offered on deposit accounts, interest rates
charged on loans and other credit and service charges, the quality and scope
of the services rendered, the convenience of the banking facilities and, in
the case of loans to commercial borrowers, relative lending limits. Management
believes that the commitment of its Banks to personal service, innovation and
involvement in their respective communities and primary market areas, as well
as their commitment to quality community banking service, are factors that
contribute to their competitiveness.
Regulatory Matters
The following discussion sets forth certain elements of the regulatory
framework applicable to bank holding companies and their subsidiaries and
provides certain specific information relevant to Premier. This regulatory
framework is intended primarily for the protection of depositors and the federal
deposit insurance funds and not for the protection of the holders of securities,
including Premier common shares or PFBI Capital Trust preferred shares. To the
extent that the following information describes statutory or regulatory
provisions, it is qualified in its entirety by reference to those provisions.
A change in the statutes, regulations or regulatory policies applicable to
Premier or its subsidiaries may have a material effect on the business of
Premier.
General - As a bank holding company, Premier is subject to regulation under the
Bank Holding Company Act ("BHC Act"), and to inspection, examination and
supervision by the Board of Governors of the Federal Reserve System ("Federal
Reserve"). Under the BHC Act, bank holding companies generally may not acquire
ownership or control of more than 5% of the voting shares or substantially all
the assets of any company, including a bank, without the Federal Reserve's prior
approval. Similarly, bank holding companies generally may not acquire ownership
or control of a savings association without the prior approval of the Federal
Reserve. Further, branching by the Affiliate Banks is subject to the
jurisdiction, and requires the approval, of each Affiliate Bank's primary
federal banking regulator and, if the Affiliate Bank is a state-chartered bank,
the appropriate state banking regulator.
Under the BHC Act, the Federal Reserve has the authority to require a
bank holding company to terminate any activity or relinquish control of the
nonbank subsidiary (other than a nonbank subsidiary of a bank) upon the Federal
Reserve's determination that such activity or control constitutes a risk to the
financial soundness and stability of any bank subsidiary of the bank holding
company. Premier and the Affiliate Banks are subject to the Federal Reserve Act,
which limits borrowings by Premier and its nonbank subsidiaries from the
Affiliate Banks and also limits various other transactions between Premier and
its nonbank subsidiaries with the Affiliate Banks.
The four Affiliate Banks chartered in Kentucky are supervised,
regulated and examined by the Kentucky Department of Financial Institutions, the
Affiliate Bank chartered in Ohio is supervised, regulated and examined by the
Ohio Division of Financial Institutions, and the two Affiliate Banks chartered
in West Virginia are supervised, regulated and examined by the West Virginia
Division of Banking. In addition, those Affiliate Banks that are state banks and
members of the Federal Reserve System are supervised and regulated by the
Federal Reserve, and those state banks that are not members of the Federal
Reserve System are supervised and regulated by the Federal Deposit Insurance
Corporation ("FDIC"). Each banking regulator has the authority to issue
cease-and-desist orders if it determines that the activities of a bank regularly
represent an unsafe and unsound banking practice or a violation of law.
Both federal and state law extensively regulates various aspects of the
banking business, such as reserve and capital requirements, truth-in-lending and
truth-in-savings disclosure, equal credit opportunity, fair credit reporting,
trading in securities and other aspects of banking operations. Premier, the
Affiliate Banks and Premier's nonbank subsidiaries are also affected by the
fiscal and monetary policies of the federal government and the Federal Reserve
and by various other governmental laws, regulations and requirements. Further,
the earnings of Premier and Affiliate Banks are affected by general economic
conditions and prevailing interest rates. Legislation and administrative actions
affecting the banking industry are frequently considered by the United States
Congress, state legislatures and various regulatory agencies. It is not possible
to predict with certainty whether such legislation or administrative actions
will be enacted or the extent to which the banking industry, in general, or
Premier and the Affiliate Banks, in particular, would be affected.
Liability for Bank Subsidiaries - The Federal Reserve has a policy to the effect
that a bank holding company is expected to act as a source of financial and
managerial strength to each of its subsidiary banks and to maintain resources
adequate to support each such subsidiary bank. This support may be required at
times when Premier may not have the resources to provide it. In the event of a
bank holding company's bankruptcy, any commitment by the bank holding company to
a federal bank regulatory agency to maintain the capital of a subsidiary bank
would be assumed by the bankruptcy trustee and entitled to priority of payment.
Any depository institution insured by the FDIC may be held liable for
any loss incurred, or reasonably expected to be incurred, by the FDIC in
connection with (i) the default of a commonly controlled FDIC-insured depository
institution, or (ii) any assistance provided by the FDIC to a commonly
controlled FDIC-insured depository institution in danger of default. "Default"
is defined generally as the appointment of a conservator or receiver and "in
danger of default" is defined generally as the existence of certain conditions
indicating that a "default" is likely to occur in the absence of regulatory
assistance. In the event that such a default occurred with respect to a bank,
any loans to the bank from its parent holding company will be subordinate in
right of payment of the bank's depositors and certain of its other obligations.
Capital Requirements - Premier is subject to capital ratios, requirements and
guidelines imposed by the Federal Reserve, which are substantially similar to
the ratios, requirements and guidelines imposed by the Federal Reserve and the
FDIC on the banks within their respective jurisdictions. These capital
requirements establish higher capital standards for banks and bank holding
companies that assume greater credit risks. For this purpose, a bank's or
holding company's assets and certain specified off-balance sheet commitments are
assigned to four risk categories, each weighted differently based on the level
of credit risk that is ascribed to such assets or commitments. A bank's or
holding company's capital is divided into two tiers: "Tier I" capital, which
includes common shareholders' equity, noncumulative perpetual preferred stock
and related surplus (excluding auction rate issues), minority interests in
equity accounts of consolidated subsidiaries, less goodwill, certain
identifiable intangible assets and certain other assets; and "Tier 2" capital,
which includes, among other items, perpetual preferred stock not meeting the
Tier I definition, mandatory convertible securities, subordinated debt and
allowances for loan and lease losses, subject to certain limitations, less
certain required deductions.
Bank holding companies currently are required to maintain Tier I and
total capital (the sum of Tier 1 and Tier 2 capital) equal to at least 4% and 8%
of total risk-weighted assets, respectively. At December 31, 2002, Premier met
both requirements, with Tier I and total capital equal to 14.1% and 17.5% of its
total risk-weighted assets, respectively.
In addition to the risk-based capital guidelines, the Federal Reserve
requires bank holding companies to maintain a minimum "leverage ratio" (Tier I
capital to adjusted total assets) of 3%, if the holding company has the highest
regulatory ratings for risk-based capital purposes and, accordingly, is required
to maintain a minimum "leverage ratio" of 3%. All other bank holding companies
are required to maintain a leverage ratio of 3% plus at least 100 to 200 basis
points. At December 31, 2002, Premier's leverage ratio was 9.1%.
The foregoing capital requirements are minimum requirements. The
Federal Reserve may set capital requirements higher than the minimums described
above for holding companies whose circumstances warrant it. For example, holding
companies experiencing or anticipating significant growth may be expected to
maintain capital ratios, including tangible capital positions, well above the
minimum levels.
Additionally, the Federal Deposit Insurance Corporation Improvement Act
of 1991 ("FDICIA"), among other things, identifies five capital categories for
insured depository institutions (well capitalized, adequately capitalized,
undercapitalized, significantly undercapitalized and critically
undercapitalized) and requires the respective federal regulatory agencies to
implement systems for "prompt corrective action" for insured depository
institutions that do not meet minimum capital requirements within such
categories. FDICIA imposes progressively more restrictive constraints on
operations, management and capital distributions, depending on the category in
which an institution is classified. Failure to meet the capital guidelines could
also subject a banking institution to capital raising requirements.
An "undercapitalized" bank must develop a capital restoration plan and
its parent holding company must guarantee the bank's compliance with the plan.
The liability of the parent holding company under any such guarantee is limited
to the lesser of 5% of the Bank's assets at the time it became
"undercapitalized" or the amount needed to comply with the plan. Furthermore, in
the event of the bankruptcy of the parent holding company, such guarantee would
take priority over the parent's general unsecured creditors. In addition, FDICIA
requires the various regulatory agencies to prescribe certain non-capital
standards for safety and executive compensation and permits regulatory action
against a financial institution that does not meet such standards.
Regulatory Agreements - On September 29, 2000, the Company entered into an
agreement with the Federal Reserve that prohibited the Company from paying
dividends or incurring any additional debt without the prior written approval of
the Federal Reserve. Additionally, the agreement required the Company to develop
and monitor compliance with certain operational policies designed to strengthen
Board of Director oversight including credit administration, liquidity, internal
audit and loan review.
On January 29, 2003, Premier Financial Bancorp, Inc. (Premier) entered
into a written agreement with the Federal Reserve Bank of Cleveland in
recognition of their common goal to restore the financial soundness of Premier.
Among the provisons of the agreement was the continuation of the restriction on
Premier's payment of dividends on its common stock (PFBI) without the express
written consent of the Federal Reserve Bank of Cleveland and the continuation of
the restriction on Premier's payment of quarterly distributions on its Trust
Preferred Securities (PFBIP) without the express written consent of the Federal
Reserve Bank of Cleveland. The written agreement supercedes and rescinds all
previous agreements between Premier and the Federal Reserve Bank of Cleveland.
Among other provisions, the agreement requires Premier to (i) retain an
independent consultant to review its management, directorate and organizational
structure, (ii) adopt a management plan responsive to such consultant's report,
(iii) update its management succession plan in accordance with any
recommendations in such consultant's report, (iv) monitor its subsidiary banks'
compliance with bank policies and loan review programs, (v) conduct formal
quarterly reviews of its subsidiary banks' allowances for loan losses,
(vi) maintain sufficent capital, (vii) submit a plan to the Federal Reserve Bank
of Cleveland for improving consolidated earnings over a three-year period, and
(viii) submit to the Federal Reserve Bank of Cleveland annual projections of
planned sources and uses of the parent company's cash, including a plan to
service its outstanding debt and trust preferred securities. Premier's
compliance with the written agreement is to be monitored by a committee, to be
organized, consisting of at least three of its outside directors.
Three of the Banks; Citizens Deposit Bank & Trust, Citizens' Bank
(Kentucky), and Bank of Germantown, have entered into similar agreements with
their respective primary regulator which, among other things, prohibits the
payment of dividends without prior written approval and requires significant
changes in their lending and credit administration policies.
These agreements, which require periodic reporting, will remain in
force until the regulators are satisfied that the company and the banks have
fully complied with the terms of the agreement.
Dividend Restrictions - Premier is dependent on dividends from its Affiliate
Banks for its revenues. Various federal and state regulatory provisions limit
the amount of dividends the Affiliate Banks can pay to Premier without
regulatory approval. At December 31, 2002, approximately $3.1 million of the
total shareholders' equity of the Affiliate Banks was available for payment of
dividends to Premier without approval by the applicable regulatory authority.
In addition, federal bank regulatory authorities have authority to
prohibit Premier's Affiliate Banks from engaging in an unsafe or unsound
practice in conducting their business. The payment of dividends, depending upon
the financial condition of the bank in question, could be deemed to constitute
such an unsafe or unsound practice. The ability of the Affiliate Banks to pay
dividends in the future is presently, and could be further, influenced by bank
regulatory policies and capital guidelines as well as each Affiliate Bank's
earnings and financial condition. Additional information regarding dividend
limitations can be found in Note 21 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 FRB serves as the primary "umbrella" regulator of financial holding
companies, with jurisdiction over the parent company and more limited oversight
over its subsidiaries. The primary regulator of each subsidiary of a financial
holding company depends on the activities conducted by the subsidiary. A
financial holding company need not obtain FRB approval prior to engaging, either
de novo or through acquisitions, in financial activities previously determined
to be permissible by the FRB. Instead, a financial holding company need only
provide notice to the FRB within 30 days after commencing the new activity or
consummating the acquisition.
Number of Employees - The Company and its subsidiaries collectively had
approximately 278 full-time equivalent employees as of December 31, 2002. Its
executive offices are located at 2883 5th Avenue, Huntington, West Virginia
25702, telephone number (304) 525-1600 (facsimile number (304) 525-9701).
Item 2. Properties
The Company leases is principal executive offices located in
Huntington, West Virginia. The Company also owns property located at 115 North
Hamilton Street in Georgetown, Kentucky, which serves as a location for
Citizens' Bank (Kentucky), and property located at 104 Jefferson Street,
Brooksville, Kentucky, which serves as a branch for Bank of Germantown. Except
as noted each of the Banks owns the real property and improvements on which
their banking activities are conducted.
Citizens Deposit Bank & Trust, in addition to its main office at 400
Second Street in Vanceburg, Kentucky, has four branch offices in Lewis County,
Kentucky, including one leased facility. The Bank of Germantown, with its main
office located on Highway 10 in Germantown, Kentucky, has one branch located
in Bracken County, Kentucky. Citizens Bank (Kentucky), Inc., in addition to its
main office at 120 North Hamilton Street in Georgetown, Kentucky, has two
branches in Scott County, Kentucky, and two branches in Bath County, Kentucky.
Farmers Deposit Bank, in addition to its main office at 5230 South Main Street
in Eminence, Kentucky, has two branches in Henry County, Kentucky. Ohio River
Bank, in addition to its main office at 221 Railroad Street in Ironton, Ohio,
has two branches, one each located in Lawrence and Scioto Counties, Ohio. First
Central Bank, in addition to its main office at 2 South Main Street in Philippi,
West Virginia, has a branch located in Buchannon, West Virginia. Boone County
Bank, in addition to its main office at 300 State Street, Madison, West
Virginia, has three branches, one each located in Boone, Logan and Lincoln
Counties, West Virginia.
Item 3. Legal Proceedings
The Banks are respectively parties to legal actions that are ordinary
routine litigation incidental to a commercial banking business. In management's
opinion, the outcome of these matters, individually or in the aggregate, will
not have a material adverse impact on the results of operations or financial
position of the Company.
Item 4. Submission of Matters to a Vote of Security Holders
There were no matters submitted to a vote of security holders, through
solicitation of proxies or otherwise during the fourth quarter of the fiscal
year covered by this report.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
---------------------------------------------------------------------
The Company's common stock is listed on the NASDAQ National Market
System under the symbol PFBI. At December 31, 2002, the Company had
approximately 681 record holders of its common shares.
The following table sets forth on a quarterly basis cash dividends paid
and the range of high and low sales prices on a per share basis during the
quarters indicated. Cash dividends paid per share shown below have been adjusted
retroactively to reflect prior stock splits effected in the form of share
dividends.
Cash Sales Price
Dividends Paid High Low
-------------- ---- ---
2001:
First Quarter $ - $ 7.38 $5.13
Second Quarter - 7.90 6.30
Third Quarter - 9.40 7.55
Fourth Quarter - 8.95 8.10
---------
$ -
=========
2002:
First Quarter $ - $10.24 $8.11
Second Quarter - 10.49 8.40
Third Quarter - 8.55 6.50
Fourth Quarter - 7.82 6.00
---------
$ -
=========
2003:
First Quarter
(through March 10, 2003) $ - $ 9.50 $7.58
The Board of Directors suspended the payment of dividends during the
second quarter of 2000. In September 2000 as a result of an agreement entered
into with the Federal Reserve, the Company agreed not to declare additional
dividends without the prior approval of the Federal Reserve. The September 2000
agreement was superceded by a January 29, 2003 written agreement between Premier
and the Federal Reserve which continued the restriction on dividends. The
Board of Directors anticipates paying dividends at some future date when, in
its discretion, financial prudence allows and the Federal Reserve concurs in the
payment of such dividends. Furthermore, the January 29, 2003 agreement restricts
Premier's payments of dividends on its PFBI Capital Trust preferred securities.
These dividends are cumulative and all deferred distributions must be paid
before dividends may be paid to holders of common shares. Even if the Company
is able to resume the payment of dividends, there can be no assurance that the
amount of the dividends will be what the Company paid before the payment of
dividends was suspended.
The payment of dividends by the Company depends upon the ability of the
Banks to declare and pay dividends to the Company because the principal source
of the Company's revenue will be dividends paid by the Banks. At December 31,
2002, approximately $3.1 million was available for payment as dividends from the
Banks to the Company without the need for regulatory approval. In considering
the payment of dividends, the Board of Directors will take into account the
Company's financial condition, results of operations, tax considerations, costs
of expansion, industry standards, economic conditions and need for funds, as
well as governmental policies and regulations applicable to the Company and the
Banks. See "REGULATORY MATTERS - Capital Requirements" for discussion on capital
guidelines.
Item 6. Selected Financial Data
The following table presents consolidated selected financial data for the
Company, it does not purport to be complete and is qualified in its entirety by
more detailed financial information and the audited consolidated financial
statements contained elsewhere in this annual report. The consolidated selected
financial data presented below has been retroactively adjusted to reflect all
prior stock dividends and splits effected in the form of share dividends and has
been restated to give the effect of acquisitions accounted for as a pooling of
interests.
At or for the Year Ended December 31,
2002 2001 2000 1999 1998
-------- -------- -------- -------- --------
Earnings
Net interest income $ 24,290 $ 25,274 $ 28,676 $ 28,665 $ 20,107
Provision for loan losses 8,796 8,921 4,932 3,294 1,742
Non-interest income 3,553 13,336 4,012 3,776 4,673
Non-interest expense 21,291 23,985 26,105 22,630 15,337
Income taxes (benefit) (1,024) 3,385 316 1,927 1,997
-------- -------- -------- -------- --------
Net income (loss) $ (1,220) $ 2,319 $ 1,335 $ 4,590 $ 5,704
======== ======== ======== ======== ========
Financial Position
Total assets $677,628 $771,850 $889,932 $852,468 $657,744
Loans, net of unearned
income 435,137 458,741 595,576 570,106 395,620
Allowance for loan losses 11,360 8,946 7,821 6,812 4,363
Goodwill and other intangibles 16,044 16,044 22,856 24,339 21,555
Securities 157,633 155,566 194,400 170,420 177,192
Deposits 547,974 570,531 728,412 692,843 523,193
Other borrowings 38,486 49,315 71,240 73,929 47,670
Debt 28,750 28,750 28,750 28,750 28,750
Stockholders' equity 59,366 59,875 55,830 52,127 54,399
Share Data
Net income - basic $ (0.23) $ 0.44 $ 0.26 $ 0.88 $ 1.09
Net income - diluted (0.23) 0.44 0.26 0.88 1.09
Book value 11.35 11.44 10.67 9.96 10.40
Cash dividend 0.00 0.00 0.15 0.60 0.60
Ratios
Return on average assets (0.18)% 0.30% 0.15% 0.57% 0.97%
Return on average equity (2.03)% 4.01% 2.53% 8.54% 10.80%
Dividend payout 0.00% 0.00% 58.80% 68.41% 53.79%
Stockholders' equity to total
assets at period-end 8.76% 8.41% 6.27% 6.11% 8.27%
Average stockholders' equity
to average total assets 8.65% 7.47% 6.07% 6.72% 9.02%
Tier I Leverage ratio 9.13% 8.47% 6.11% 6.23% 8.05%
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
INTRODUCTION
Premier Financial Bancorp, Inc. ("Premier") is a multi-bank holding
company headquartered in Huntington, West Virginia. It operates seven community
bank subsidiaries ranging in size from $26 million to $159 million, each with a
local community name and orientation. These banks operate in twenty communities
within the states of West Virginia, Ohio and Kentucky and provide their
customers with a full range of banking services. Premier is also the parent of
a data processing subsidiary which provides the data processing and management
services for six of Premier's affiliate banks and another non-affiliated bank.
As of December 31, 2002, Premier had approximately $678 million in total assets,
$435 million in total loans and $548 million in total deposits.
The accompanying consolidated financial statements have been prepared by
the management of Premier in conformity with accounting principals generally
accepted in the Unites States of America. The audit committee of the Board of
Directors engaged Crowe, Chizek and Company, LLP, independent auditors, to audit
the consolidated financial statements, and their report is included 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 audit committee of the Board of Directors engaged Arnett &
Foster, CPA's to perform internal audits of the financial records of each of the
subsidiaries on a periodic basis. Their findings and recommendations are
reported 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.
FORWARD-LOOKING STATEMENTS
Management's discussion and analysis contains forward-looking statements
that are provided to assist in the understanding of anticipated future financial
performance. However, such performance involves risks and uncertainties, and
there are certain important factors that may cause actual results to differ
materially from those anticipated. These important factors include, but are not
limited to, economic conditions (both generally and more specifically in the
markets in which Premier operates), competition for Premier's customers from
other providers of financial services, government legislation and regulation
(which changes from time to time), changes in interest rates, Premier's ability
to originate quality loans and attract and retain deposits, the impact of
Premier's growth, Premier's ability to control costs, and new accounting
pronouncements, all of which are difficult to predict and many of which are
beyond the control of Premier.
SUMMARY FINANCIAL RESULTS
Premier net results for 2002 were a loss of $1.2 million, compared to
net income of $2.3 million reported for the year 2001. The loss for 2002 is
primarily due to large provisions for loan losses, writedowns of repossessed
real estate to realizable values, and higher collection costs. The $2.3 million
earned in 2001 was due in large part to gains on the sale of two subsidiary
banks. The earnings in 2001 follow $1.3 million of net income reported for the
year ending December 31, 2000. Basic earnings per share was a loss of ($0.23)
in 2002, compared to income of $0.44 in 2001 and $0.26 in 2000.
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. Premier's net
loss for 2002 resulted in a ROA of (0.18%), a decrease from the 0.30% ROA
reported in 2001 and the 0.15% ROA in 2000. As shown in the table, the decrease
in ROA from 2001 is attributed primarily to a decrease in gains on sales of
assets and subsidiaries. The decrease in ROA versus the years 2000 and earlier
is primarily due to a decline in net credit income resulting from the high
provisions for loan losses in 2002. As illustrated in the table, Premier's 2002
fully taxable net interest income as a percent of average earning assets was the
highest in the past three years. During the same time, Premier's net overhead
ratio (non-interest expense less non-interest income as a percent of average
earning assets) declined slightly to 2.75% in 2002, down from 2.78% in 2001 and
2.77% in 2000.
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 2002 ROE was (2.03%), compared to 4.01% earned in 2001 and
2.53% reported in 2000. ROE decrease primarily due the net loss reported for
2002.
ANALYSIS OF RETURN ON ASSETS AND EQUITY
2002 2001 2000 1999 1998
---- ---- ---- ---- ----
As a percent of average earning assets:
Fully taxable-equivalent net interest income 3.85% 3.62% 3.68% 4.04% 3.85%
Provision for loan losses (1.37) (1.25) (0.62) (0.45) (0.32)
----- ----- ----- ----- -----
Net credit income 2.48 2.37 3.07 3.59 3.52
Gains on the sales of assets & subsidiaries* (0.01) 1.29 0.00 0.00 0.29
Non-interest income 0.56 0.58 0.50 0.52 0.58
Non-interest expense (3.31) (3.36) (3.27) (3.11) (2.85)
Tax equivalent adjustment (0.07) (0.08) (0.09) (0.10) (0.11)
Applicable income taxes 0.16 (0.47) (0.04) (0.26) (0.37)
----- ----- ----- ----- -----
Return on average earning assets (0.19) 0.32 0.17 0.63 1.06
Multiplied by average earning assets to
average total assets 92.43 92.15 91.89 91.08 92.00
----- ----- ----- ----- -----
Return on average assets (0.18)% 0.30% 0.15% 0.57% 0.97%
Multiplied by average assets to average equity 11.56X 13.39X 16.46X 14.87X 11.09X
----- ----- ----- ----- -----
Return on average equity (2.03)% 4.01% 2.53% 8.54% 10.80%
===== ===== ===== ===== =====
(*) 1998 includes non-recurring other income.
A breakdown of Premier's financial results by quarter for the years
ended December 31, 2002 and 2001 is summarized below.
QUARTERLY FINANCIAL INFORMATION
(Dollars in thousands except per share amounts)
Full
First Second Third Fourth Year
------- ------- ------- ------- -------
2002
Interest Income $11,546 $11,345 $10,925 $10,624 $44,440
Interest Expense 5,572 5,195 4,879 4,504 20,150
Net Interest Income 5,974 6,150 6,046 6,120 24,290
Provision for Loan Losses 986 3,200 3,094 1,516 8,796
Securities Gains 44 (103) 1 13 (45)
Net Overhead 4,128 5,016 4,384 4,165 17,693
Income before Income Taxes 904 (2,169) (1,431) 452 (2,244)
Net Income 644 (1,380) (839) 355 (1,220)
Basic Net Income per share 0.12 (0.26) (0.16) 0.07 (0.23)
Diluted Net Income per share 0.12 (0.26) (0.16) 0.07 (0.23)
Dividends Paid per share 0.00 0.00 0.00 0.00 0.00
2001
Interest Income $15,796 $14,999 $14,243 $13,004 $58,042
Interest Expense 9,442 8,589 8,003 6,734 32,768
Net Interest Income 6,354 6,410 6,240 6,270 25,274
Provision for Loan Losses 632 3,015 1,793 3,481 8,921
Securities Gains 180 60 195 81 516
Gain on Sale Of Subsidiary
Banking Operations 3,418 0 0 5,295 8,713
Net Overhead 5,121 4,599 4,638 5,520 19,878
Income before Income Taxes 4,199 (1,144) 4 2,645 5,704
Net Income 1,224 (705) 46 1,754 2,319
Basic Net Income per share 0.23 (0.13) 0.01 0.33 0.44
Diluted Net Income per share 0.23 (0.13) 0.01 0.33 0.44
Dividends Paid per share 0.00 0.00 0.00 0.00 0.00
BUSINESS COMBINATIONS
In 2001, Premier suspended its acquisition strategy in order to focus on
improving its subsidiary bank operations by strengthening its management
oversight. As part of this change in strategy, Premier elected to dispose of
two of its subsidiary banks in 2001.
On January 26, 2001, the company disposed of all the deposits
(approximately $110 million), the majority of loans (approximately $92 million)
and the premises and equipment (approximately $1.6 million) of the Bank of Mt.
Vernon under the terms of a Purchase and Assumption Agreement. As a result of
this transaction, the banking charter of the Bank of Mt. Vernon was relinquished
and Premier agreed not to compete in the markets previously served by the Bank
of Mt. Vernon.
Also, on December 10, 2001, the Company disposed of certain assets and
liabilities of The Sabina Bank. The sale included all the loans (approximately
$31 million) and all the deposits (approximately $41 million), as well as the
premises and equipment (approximately $1.2 million). Certain assets of the bank
were retained by Premier pending liquidation of the bank, which occurred in
2002. The operating results of both the Bank of Mount Vernon and The Sabina
Bank were included in Premier's 2000 and 2001 operating results through the
respective dates of the sale. However, 2002's operating results do not include
any of the operations of these two banks. Comparisons of average balances and
income statement categories are all affected by the disposition of these two
subsidiaries.
BALANCE SHEET ANALYSIS
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. In formation on rate-related sources and uses of funds for
each of the three years in the period ended December 31, 2002, is provided in
the table below.
AVERAGE CONSOLIDATED BALANCE SHEETS AND NET INTEREST INCOME ANALYSIS
(Dollars in thousands)
2002 2001 2000
Average Yield/ Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate Balance Interest Rate
---------------------------- ---------------------------- -----------------------------
Assets:
Interest earning assets
U.S. Treasury and federal agency
securities $117,952 $ 4,988 4.23% $127,726 $ 7,323 5.73% $152,479 $ 9,674 6.34%
States and municipal obligations(1) 17,973 1,236 6.88 20,277 1,589 7.84 24,156 1,885 7.80
Other securities (1) 14,414 675 4.68 12,760 709 5.56 7,215 688 9.54
-------- ------- ----- -------- ------- ----- -------- ------- -----
Total investment securities 150,339 6,899 4.59 160,763 9,621 5.98 183,850 12,247 6.66
Federal funds sold 42,023 691 1.64 40,247 1,529 3.80 22,714 1,398 6.15
Interest-bearing deposits with
banks 564 8 1.42 504 20 3.97 1,052 67 6.37
Loans, net of unearned income(3)(4)
Commercial 184,974 14,475 7.83 210,923 18,997 9.01 228,760 22,090 9.66
Real estate mortgage 198,636 16,055 8.08 224,428 19,532 8.70 287,713 26,197 9.11
Installment 65,890 6,777 10.29 76,889 8,886 11.56 74,045 7,958 10.75
-------- ------- ----- -------- ------- ----- -------- ------- -----
Total loans 449,500 37,307 8.30 512,240 47,415 9.26 590,518 56,245 9.52
-------- ------- ----- -------- ------- ----- -------- ------- -----
Total interest-earning assets 642,426 44,905 6.99 713,754 58,585 8.21 798,134 69,957 8.77
Allowance for loan losses (9,562) (8,744) (7,626)
Cash and due from banks 17,199 20,938 20,580
Premises and equipment 11,913 13,593 15,143
Other assets 33,072 35,033 42,386
-------- -------- --------
Total assets $695,048 $774,574 $868,617
======== ======== ========
Liabilities and Equity:
Interest bearing liabilities
NOW and money market $183,589 3,617 1.97% $178,501 5,723 3.21% $175,166 7,272 4.15%
Savings 58,239 989 1.70 63,287 1,567 2.48 63,850 1,929 3.02
Certificates of deposit and
other time deposits 258,603 10,934 4.23 322,309 19,260 5.98 394,763 23,302 5.90
-------- ------- ----- -------- ------- ----- -------- ------- -----
Total interest bearing deposits 500,431 15,540 3.11 564,097 26,550 4.71 633,779 32,503 5.13
Short-term borrowings 5,788 105 1.81 8,955 393 4.39 24,382 1,557 6.39
Other borrowings 10,678 412 3.86 16,500 1,285 7.79 20,000 1,655 8.28
FHLB advances 25,135 1,241 4.94 26,827 1,688 6.29 32,071 1,991 6.21
Debt 28,750 2,852 9.92 28,750 2,852 9.92 28,750 2,852 9.92
-------- ------- ----- -------- ------- ----- -------- ------- -----
Total interest-bearing
liabilities $570,782 20,150 3.53% $645,129 32,768 5.08% $738,982 40,558 5.49%
Non-interest bearing deposits 61,072 65,795 72,392
Other liabilities 3,064 5,797 4,482
Shareholders' equity: 60,130 57,853 52,761
--------- -------- --------
Total liabilities and equity $695,048 $774,574 $868,617
======== ======== ========
Net interest earnings (1) $24,755 $25,817 $29,399
======= ======= =======
Net interest spread (1) 3.46% 3.13% 3.28%
Net interest margin (1) 3.85% 3.62% 4.68%
(1) Taxable - equivalent yields are calculated assuming a 34% federal income tax rate.
(2) Yields are calculated on historical cost except for yields on marketable equity securities that are
calculated using fair value.
(3) Includes loan fees, immaterial in amount, in both interest income and the calculation of yield on loans.
(4) Includes loans on non-accrual status.
In 2002, average earning assets declined by 10.0% or $71.3 million from
2001, following a 10.6% or $84.4 million decline in 2001 from 2000. Average
interest bearing liabilities, the primary source of funds supporting the earning
assets, decreased 11.5% or $74.3 million from 2001, which follows a 12.7% or
$93.9 million decline in 2001 from 2000. Approximately two-thirds of the
decrease in 2002 average earning assets and half of the decrease in 2002 average
interest bearing liabilities was due to the sale of the Sabina Bank late in
2001. The sale of the Bank of Mt. Vernon early in 2001, more than offset the
2001 operational increases in average earning assets and interest bearing
liabilities. Additional information on each of the components of earning assets
and interest bearing liabilities is contained in the following sections of this
report.
Loan Portfolio
Premier's loan portfolio is its largest and most profitable component of
average earning assets, totaling 70.0% of average earning assets during 2002.
Average loans declined by $62.7 million or 12.2% in 2002. Approximately 60% of
the decline was the result of the sale of the Sabina Bank in late 2001. Of the
remaining decline, Premier realized an 8.1% increase in loans in its West
Virginia markets and a 3.7% increase in loans in its Ohio markets, both
primarily in real estate mortgage loans. These were more than offset by a 10.2%
decline in loans in Premier's Kentucky markets, which were equally split between
commercial loans and real estate mortgage loans. The 2002 decrease follows a
13.3% or $78.3 million decrease in 2001 average total loans from 2000. The sale
of the Bank of Mt. Vernon in January 2001, more than offset the 1.6% increase in
average loans resulting from internal growth.
Total loans at December 31, 2002, decreased by $23.6 million or 5.1%
over the total at December 31, 2001. This decrease follows a $136.8 million or
23.0% decrease in 2001 from total loans at December 31, 2000. As mentioned
above, Premier sold approximately $123 million in loans in 2001 through the
sales of the Bank of Mt. Vernon and the Sabina Bank. The decrease in 2002 was
the result of planned collections of loans retained from the Bank of Mt. Vernon
sale as well as declines in period-end loans at Premier's Kentucky affiliates.
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
2002 % 2001 % 2000 % 1999 % 1998 %
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Summary of Loans by Type
Commercial, secured by real
estate $120,306 27.7% $117,692 25.6% $149,733 25.1% $135,078 23.7% $ 86,010 21.6%
Commercial, other 64,014 14.7 70,315 15.3 86,069 14.5 98,543 17.3 73,982 18.6
Real estate construction 11,924 2.8 15,751 3.4 24,774 4.2 26,092 4.6 13,374 3.4
Real estate mortgage 156,215 35.9 164,810 35.9 211,662 35.5 192,088 33.6 131,212 33.0
Agricultural 8,862 2.0 9,613 2.1 13,817 2.3 17,525 3.1 15,433 3.9
Consumer 71 075 16.3 79,571 17.3 108,646 18.2 100,075 17.5 73,100 18.4
Other 2,741 0.6 989 0.4 1,246 0.2 1,352 0.2 4,502 1.1
-------- ---- -------- ---- -------- ---- -------- ---- -------- ----
Total loans $435,137 100.0% $458,741 100.0% $595,947 100.0% $570,753 100.0% $397,613 100.0%
Less unearned income (371) (647) (1,993)
-------- -------- -------- -------- --------
Total loans net of
unearned income $435,137 $458,741 $595,576 $570,106 $395,620
======== ======== ======== ======== ========
Non-Performing Assets
Non-accrual loans $ 10,588 $ 9,307 $ 7,840 $ 4,540 $ 3,500
Accruing loans which are
contractually past due
90 days or more 1,399 5,948 2,196 1,721 1,322
Restructured loans 293 338 689 666 105
-------- -------- -------- -------- --------
Total nonperforming and
restructured loans 12,280 15,593 10,725 6,927 4,927
Other real estate acquired
through foreclosures 3,939 5,831 3,116 3,009 961
-------- -------- -------- -------- --------
Total nonperforming and
restructured loans and
other real estate $ 16,219 $ 21,424 $ 13,841 $ 9,936 $ 5,888
======== ======== ======== ======== ========
Nonperforming and restructured
loans as a % of total loans 2.82% 3.40% 1.80% 1.22% 1.25%
Nonperforming and restructured
loans and other real estate
as a % of total assets 2.39% 4.67% 1.56% 1.17% .90%
Allocation of Allowance
For Loan Losses
Commercial, other $ 2,493 $ 1,674 $ 2,535 $ 2,123 $ 1,695
Real estate, construction 827 592 450 375 200
Real estate, other 4,932 3,925 2,967 2,115 1,528
Consumer installment 1,204 1,430 1,261 948 738
Unallocated 1,904 1,324 608 1,251 202
-------- -------- -------- -------- --------
Total $ 11,360 $ 8,946 $ 7,821 $ 6,812 $ 4,363
======== ======== ======== ======== ========
Loans secured by real estate, which in total constituted approximately
66% of Premier's loan portfolio at December 31, 2002, consist of a diverse
portfolio of predominately single family residential loans and loans for
commercial purposes where real estate is merely collateral, not the primary
source of repayment. Collateral for real estate mortgage loans includes
residential properties and the loans generally do not exceed 80% of the value of
the real property securing the loan based on recent independent appraisals. The
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 participates in the origination of loans
into the secondary market and recognizes the referral fees in non-interest
income. 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. 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 made for terms of up to seven years on a
secured or unsecured basis. While consumer loans generally provide the Company
with increased interest income, consumer loans may involve a greater risk of
default.
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 19 to the consolidated financial statements.
Total non-performing assets, which consist of past-due loans on which
interest is not being accrued, 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 $16.2
million or 2.39% of total assets at year-end 2002. The amount is down from the
$21.4 million of non-performing assets (3.01% of total assets) at year-end 2001
but up from the $13.8 million of non-performing assets (1.56% of total assets)
at year-end 2000. The decline since year-end 2001 was due to a focusing by
Premier on reducing its high level of non-performing assets. While the level of
non-performing asset is still high compared to years prior to 2001, the amount
of loans past due 90 days or more, restructured loans and OREO each declined
during 2002. The level of non-accrual loans increased due to the deterioration
of certain credits in the process of collection. The Loan Summary table
presents five years of comparative non-performing asset information.
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, 2002. 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. If a
writedown of the OREO property is necessary at the time of foreclosure, the
amount is charged off 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 2002 Premier
recognized $1.1 million of OREO writedowns compared to $258,000 in 2001 and
$617,000 in 2000. Although loans may be classified as non-performing, some
continue to pay interest irregularly or at less than original contracted terms.
During 2002, approximately $205,000 of interest was recognized on non-accrual
and restructured loans, while approximately $800,000 would have been recognized
in accordance with their original terms.
A loan is categorized and reported as impaired when it is probable that
the creditor 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 condition and
other relevant information that is available. 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 impaired, a portion of the allowance for loan losses is allocated to
the loan so that the loan is reported, net, at the present value of estimated
future cashflows using the loan's existing rate or at the fair value of
collateral if repayment is expected solely from the collateral. Additional
information on Premier's impaired loans is contained in Note 6 to the
consolidated financial statements.
The allowance for loan losses is maintained to absorb probable incurred
losses associated with lending activities. 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, levels of non-performing and
past due loans, and an evaluation of current economic conditions. At December
31, 2002, the allowance for loan losses was $11.4 million or 2.61% of total
year-end loans. This ratio is an increase from the prior year's 1.95% and the
1.31% at the end of 2000. 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. The provision for
loan losses in 2002 was $8.8 million, down only slightly from the $8.9 million
provision in 2001 but up significantly from the $4.9 million provision in 2000.
The high level of provision in 2002 was in response to management efforts to
identify the level of probable incurred losses throughout Premier's troubled
institutions using the best practices of its higher performing institutions.
The large provision in 2001 was in response to the higher risk in certain loans
retained by Premier as part of the sale of the Bank of Mt. Vernon and a higher
level of net charge-off experience. Premier continually evaluates the adequacy
of its allowance for loan losses, and changes in the provision are based on the
estimated probable incurred loss of the loan portfolio.
SUMMARY OF LOAN LOSS EXPERIENCE
(Dollars in Thousands)
For the Year Ended December 31,
2002 2001 2000 1999 1998
------- ------- ------- ------- -------
Allowance for Loan Losses, Beginning of Period $ 8,946 $ 7,821 $ 6,812 $ 4,363 $ 3,479
Amounts charged off:
Commercial, financial and agricultural loans 2,582 1,721 3,298 1,380 500
Real estate construction loans 899 1,384 0 0 0
Real estate loans - other 1,538 2,928 125 381 60
Consumer installment loans 2,432 2,117 959 795 629
------- ------- ------- ------- -------
Total charge-offs 7,451 8,150 4,382 2,556 1,189
Recoveries on amounts previously charged off:
Commercial, financial and agricultural loans 248 166 257 158 45
Real estate construction loans 38 36 0 0 0
Real estate loans - other 197 10 4 12 1
Consumer installment loans 586 408 198 231 170
------- ------- ------- ------- -------
Total recoveries 1,069 620 459 401 216
------- ------- ------- ------- -------
Net charge-offs 6,382 7,530 3,923 2,155 973
Provision for loan losses 8,796 8,921 4,932 3,294 1,742
Balance of acquired or disposed subsidiaries 0 (266) 0 1,310 115
------- ------- ------- ------- -------
Allowance for Loan Losses, End of Period $11,360 $ 8,946 $ 7,821 $ 6,812 $ 4,363
======= ======= ======= ======= =======
Average total loans 449,500 512,240 590,518 520,267 340,089
Total loans at year-end 435,137 458,741 595,576 570,106 395,620
As a Percent of Average Loans:
Net charge-offs 1.42% 1.47% 0.66% 0.41% 0.29%
Provision for loan losses 1.96% 1.74% 0.84% 0.63% 0.51%
Allowance for loan losses 2.53% 1.75% 1.32% 1.31% 1.28%
As a Percent of Total Loans at Year-end:
Allowance as a percentage of year-end net loans 2.61% 1.95% 1.31% 1.19% 1.10%
As a Multiple of Net Charge-offs:
Allowance as a multiple of net charge-offs 1.78X 1.19X 1.99X 3.16X 4.48X
Income before tax and provision for loan losses 1.03X 1.94X 1.68X 4.55X 9.71X
Net charge-offs in 2002 decreased to $6.4 million, down $1.1 million or
15.2% from the $7.5 million of net charge-offs experienced in 2001. While
consumer and commercial charge-offs increased in 2002, these were more than
offset by the lower level of real estate loan charge-offs and the 72% increase
in recoveries. The $7.5 million of net charge-offs in 2001 was a record high as
Premier experienced significant increases in consumer and real estate loan
charge-offs versus the prior year. Although the dollar amount of net charge-
offs declined in 2002, charge-offs could increase in the coming months due to
increases in the total level of non-accrual loans outstanding or continuing
weakness in economic conditions. These factors are considered in determining
the adequacy of the allowance for loan losses, which at December 31, 2002 was
sufficient to absorb over one and three-quarter times the amount of net charge-
offs experienced in 2002.
The following table presents the maturity distribution and interest
sensitivity of selected loan categories at December 31, 2002. Maturities are
based upon contractual terms. It is Premier's policy to specifically review and
approve any loan renewed; no loans are automatically rolled over.
LOAN MATURITIES AND INTEREST SENSITIVITY
December 31, 2002
(Dollars in thousands)
Projected Maturities*
One Year One Through Over Total
or Less Five Years Five Years Loans
-------- ---------- ---------- --------
Commercial, secured by real estate $ 16,267 $ 28,114 $ 75,925 $120,306
Commercial, other 35,645 19,136 9,233 64,014
Real estate construction 9,971 682 1,271 11,924
Agricultural 4,003 3,699 1,160 8,862
-------- -------- -------- --------
Total $ 65,886 $ 51,631 $ 87,589 $205,106
======== ======== ======== ========
Fixed rate loans $ 46,417 $ 32,466 $ 32,845 $111,728
Floating rate loans 19,469 19,165 54,744 93,378
-------- -------- -------- --------
Total $ 65,886 $ 51,631 $ 87,589 $205,106
======== ======== ======== ========
(*) Based on scheduled or approximate repayments.
Investment Portfolio and
Other Earning Assets
Investment securities averaged $150.3 million in 2002, a $10.5 million
or 6.5% decrease from the $160.8 million averaged in 2001. This decrease
follows a 12.6% decrease in from the $183.9 million averaged in 2000. Over
three quarters of the decrease in 2002 was a result of the sale of the Sabina
Bank late in 2001, while approximately 70% of the decrease in 2001 was a result
of the sale of the Bank of Mt Vernon. The remaining decrease in both years was
the result of placing funds from maturing investments in federal funds sold to
maintain adequate liquidity for planned maturities of high rate certificates of
deposit.
The following table presents the carrying values of investment securities.
Carrying Value of Securities
(Dollars in thousands)
As of December 31
2002 2001 2000
--------- --------- ---------
U.S. Treasury Securities:
Available for sale $ 407 $ 1,172 $ 3,357
Held to maturity - - -
U.S. Agency Securities:
Available for sale 121,916 116,920 153,888
Held to maturity - - 1,233
States and Political Subdivisions Securities
Available for sale 18,610 19,225 7,132
Held to maturity - - 16,656
Mortgage-backed securities:
Available for sale 7,648 8,251 9,319
Held to maturity - - 17
Corporate securities:
Available for sale 9,052 9,196 -
Held to maturity - - -
Other securities:
Available for sale - 802 2,798
Held to maturity - - -
Total securities:
Available for sale $ 157,633 155,566 176,494
Held to maturity - - 17,906
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, 2002, all of Premier's
investments were classified as available-for-sale and carried on the books at
market 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,
2002 was 3 years 5 months, lengthened somewhat by the 22 year 11 month average
final maturity of the mortgage-backed securities portfolio. The table uses a
final maturity method to report the average maturity of mortgage-backed
securities, which excludes the effect of monthly payments and prepayments.
Approximately 75% of Premier's investment securities are U.S. Government agency
or Treasury securities that have an average maturity of 2 years 1 month. The
average maturity of the investment portfolio is managed at a level to maintain a
proper matching with interest rate risk guidelines. During 2002, Premier sold a
portion of the securities classified as available-for-sale as part of its
management of interest rate risk, as shown in the Statements of Cash Flows.
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 5 to the consolidated financial statements.
SECURITIES MATURITY AND YIELD ANALYSIS
December 31, 2002
(Dollars in thousands)
Average Taxable
Market Maturity Equivalent
Value (yrs/mos) Yield*
-------- -------- ---------
U.S. Treasury Securities
After one but within five years $ 407 3.08%
--------
Total U.S. Treasury Securities 407 1/1 3.08
U.S. Government Agencies Securities
Within one year 27,077 2.57
After one but within five years 92,287 3.28
After five but within ten years 2,552 4.90
--------
Total U.S. Government Agencies Securities $121,916 2/1 3.16
States and Political Subdivisions Securities
Within one year 2,162 5.73
After one but within five years 7,162 5.85
After five but within ten years 7,072 6.03
Over ten years 2,214 5.88
--------
Total States and Political Subdivisions Securities $ 18,610 5/6 5.91
Mortgage-Backed Securities**
Within one year 72 5.88
After one but within five years 1,038 4.85
Over ten years 6,538 6.44
--------
Total Mortgage-Backed Securities $ 7,648 22/11 6.22
Corporate Securities
Within one year 6,322 4.90
After one but within five years 2,730 5.03
--------
Total Corporate Securities $ 9,052 0/10 4.94
--------
Total Securities Available-for-Sale $157,633 3/5 3.73%
========
(*) Fully tax-equivalent using the rate of 34%.
(**) Maturities for Mortgage-Backed Securities are based on final maturity.
Premier's average investment in federal funds sold and other short-term
investments increased by 4.5% in 2002. This follows a 71.5% increase in 2001.
Averaging $42.6 million in 2002, federal funds sold and other short-term
investments increased $1.8 million from the $40.8 million averaged in 2001, and
were significantly higher than the $23.8 million averaged during 2000.
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.
Funding Sources
In 2002, Premier once again decreased the rates paid on its interest
bearing deposits in response to the declining market interest rate environment.
The average rate paid on interest bearing liabilities decreased to 3.53% in
2002, down from the 5.08% paid in 2001 and the 5.49% paid in 2000. The decrease
is largely due to declines in rates paid on time deposits as higher rate
certificates of deposits have either not renewed at maturity or were redeposited
at significantly lower rates in conjunction with the sharp decline in the market
interest rates. 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. Premier's banks
periodically offer special rate products to attract additional deposits.
Premier's deposits, on average, decreased by 10.9% or $68.4 million in
2002. $45.1 million or two-thirds of this decrease was the result of the sale
of the Sabina Bank late in 2001. The 2002 decrease compares to a 10.8% or $76.3
million decrease in 2001 from the average in 2000. The approximately $110
million of deposits sold through the Bank of Mount Vernon sale in early 2001
more than offset the 5.2% increase in average deposits from internal growth
during 2001. Non-interest bearing deposits decreased by 7.2% or $4.7 million on
average when compared to 2001. The non-interest bearing deposits sold through
the sale of the Sabina Bank late in 2001 more than offset the 9.9% increase in
average non-interest bearing deposits from internal growth during 2002.
Interest bearing deposits decreased by 11.3% or $63.7 million on average when
compared to 2001. Approximately half of the decrease was the result of the sale
of the Sabina Bank late in 2001. The remaining $29.8 million decrease was the
result of planned non renewals of high rate time deposits which more than offset
increases in average interest bearing transaction deposits and savings deposits.
The following table provides information on the maturities of time
deposits of $100,000 or more at December 31, 2002.
MATURITY OF TIME DEPOSITS $100,000 OR MORE
December 31, 2002
(In thousands)
Maturing 3 months or less $ 15,363
Maturing over 3 months through 6 months 10,480
Maturing over 6 months through 12 months 17,161
Maturing over 12 months 23,029
--------
Total $ 66,033
========
Other funding sources for Premier include short and long-term
borrowings. Premier's short-term borrowings primarily consist of federal funds
purchased from other banks, and securities sold under agreements to repurchase
with commercial customers. These short-term borrowings fluctuate depending on
near term funding needs and as part of Premier's management of its
asset/liability mix. In 2002, short-term borrowings averaged $5.8 million, down
$3.1 million from the average in 2001. Only about one-eighth of the decline was
the result of the Sabina Bank sale. The remaining decline was due to reduced
short-term funding needs at the affiliate banks. The decline in 2002 follows a
63.3% or $15.4 million decline in average short-term borrowings during 2001.
This decline was largely due to strong deposit growth in Premier's West Virginia
markets reducing the need for short-term funding.
Long-term borrowings consist of Federal Home Loan Bank (FHLB) borrowings
by Premier's banks, other borrowings by the parent holding company and debt
issued in the form of Trust Preferred Securities. FHLB advances, on average,
declined by 6.3% or $1.7 million in 2002, following a 16.4% or $5.2 million
decrease in 2001. 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,
2002, FHLB advances totaled $23.5 million and had repayment schedules from one
to thirteen years. Other borrowings, on average, declined by 35.2% or $5.8
million in 2002 as the parent company began using available funds to
aggressively pay down its outstanding debt late in 2001. At December 31, 2002,
other borrowings totaled $7.7 million with repayment schedules up to five years.
Premier's Trust Preferred Securities represent beneficial interests in
the assets of PFBI Capital Trust (NASDAQ/NMS-PFBIP). The trust holds $28.8
million of 9.75% Junior Subordinated Deferrable Interest Debentures
("Subordinated Debentures") due in 2027. Quarterly cash distributions on the
Preferred Securities are made to the extent interest on the debentures is
received by the trust.
As previously disclosed, pursuant to an agreement entered into with the
Federal Reserve Bank of Cleveland on September 29, 2000 as superceded by an
agreement with the Federal Reserve Bank of Cleveland dated January 29, 2003,
Premier is required to request approval for the payment of distributions due on
the Trust Preferred Securities. During the quarter ended June 30, 2002, Premier
was notified by the Federal Reserve Bank of Cleveland 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 Premier's Trust
Preferred Securities. In response, Premier reached an agreement with the
Federal Reserve Bank of Cleveland whereby Premier's Chairman of the Board, who
is also its largest shareholder, agreed to loan the company the amount of the
distribution, $701,000, so that Premier, with the Federal Reserve Bank'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 Federal Reserve Bank. A similar agreement was reached with for
the payment of the distribution due September 30, 2002. Premier's President and
Chief Executive Officer, who is also a director, agreed to loan the Company the
amount of the distribution, $701,000. 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 Federal Reserve Bank of Cleveland.
In December 2002, The Federal Reserve Bank of Cleveland denied Premier's
request to make the fourth quarter distribution. Accordingly, Premier exercised
its right to defer the payment of interest on the Subordinated Debentures
related to the Trust Preferred Securities for an indefinite period (which can be
no longer than 20 consecutive quarterly periods). This and any future deferred
distributions will begin to accrue interest at an annual rate of 9.75% which
will be paid when the deferred distributions are ultimately paid.
As part of a Debt Reduction and Profitability plan presented on January
6, 2003 to the Federal Reserve Bank of Cleveland ("Federal Reserve"), Premier
requested and received approval from the Federal Reserve to redeem $3,000,000 of
the $28,750,000 outstanding Trust Preferred Securities. The goal of the
redemption is to use a portion of Premier's outstanding cash on hand to reduce
its total interest cost and thus improve profitability. The redemption will
reduce Premier's interest cost by approximately $292,000 per year. Future early
redemptions, if any, will also require Federal Reserve approval, pursuant to a
previously disclosed Written Agreement entered into with the Federal Reserve
Bank of Cleveland on January 29, 2003,
Under that same agreement, Premier is required to request approval for
the payment of quarterly distributions and any accumulated deferrals due on the
Trust Preferred Securities. In response to a separate letter, The Federal
Reserve Bank of Cleveland denied Premier's request to make the first quarter
2003 distribution (including the accumulated deferral) on the remaining Trust
Preferred Securities outstanding.
Management of Premier does not expect to resume payments on the
Subordinated Debentures or the Trust Preferred until the Federal Reserve Bank of
Cleveland determines that Premier has achieved adequate and sustained levels of
profitability to support such payments and approves such payments. The Trust
Preferred Securities have a cumulative provision. Therefore, in accordance with
accounting principles generally accepted in the United States of America,
Premier intends to continue to accrue the monthly cost of the Trust Preferred
Securities as it has since issuance. Premier's management also intends to
continue to seek approval of the Federal Reserve Bank of Cleveland for payment
of the regularly scheduled quarterly distributions on the Trust Preferred
Securities and any accumulated deferrals.
Asset/Liability Management and Market Risk
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. 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 prepared by an independent third party to analyze net interest
income sensitivity.
The earnings simulation model forecasts the effect of instantaneous
movements in interest rates of both 100 (1.00%) and 200 (2.00%) basis points.
The most recent earnings simulation model projects net interest income would
increase by approximately 3.3% 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 3.5% decrease 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 6.5% over the projected
stable rate net interest income in a rising rate scenario and would decrease by
6.6% 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.
Another measure of a company's interest sensitivity is the measure of
Economic Value at Risk (EVR). The EVR of a company's balance sheet at a given
point in time is the discounted present value of asset cash flows minus the
discounted present value of liability cash flows. Similar to net interest
income, EVR can be simulated assuming changes in market interest rates. The
resulting percentage change versus the stable rate EVR is an indication of the
longer term repricing risk imbedded in the balance sheet. At December 31, 2002,
a 200 basis point increase in rates is estimated to increase Premier's EVR by
12.8% while a 200 basis point decrease would also increase Premier's EVR by
4.0%. The percentage changes in EVR are within Premier's ALOC 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 Year-End ALCO
2002 2001 Guidelines
-------- -------- ----------
Projected 1-Year Net Interest Income
-100 bp change vs. Base Rate -3.5% -1.0% +/-10%
+100 bp change vs. Base Rate 3.3% -0.5% +/-10%
Projected 1-Year Net Interest Income
-200 bp change vs. Base Rate -6.6% -2.4% +/-10%
+200 bp change vs. Base Rate 6.5% -2.9% +/-10%
Economic Value Change
-200 bp Change vs. Base Rate 4.0% -26.2% +/-20%
+200 bp Change vs. Base Rate 12.8% 3.5% +/-20%
The improvement in the 2002 simulated change in EVR for a 200 basis
point decline in interest rates is due to the current low interest rate
environment. The low interest rate environment in 2002 limits the change in the
market value of liabilities in a declining rate simulation because rates paid on
liabilities cannot fall below zero.
Liquidity
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 $11.4 million of cash from operations in 2002, which
compares to $2.0 million in 2001 and $9.4 million in 2000. These proceeds along
with the proceeds from the sale and maturity of securities and the repayment of
loans were used to purchase securities, satisfy deposit withdrawals, and reduce
outstanding debt during the year. Net cash provided by liquidating investing
activities totaled $19.4 million in 2002 and $24.0 million in 2001. In 2000,
Premier used surplus funds to increase loans and purchase investments. Net cash
used to satisfy deposit withdrawals and reduce debt totaled $33.4 million in
2002 and $28.7 million in 2001. In 2000, Premier received $32.1 million in
funds from financing activities. 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, 2002, the parent company had nearly $8.0 million in cash
held with its subsidiary banks. This balance along with cash dividends received
from its subsidiaries is sufficient to cover the operating costs of the parent,
service its existing other debt and satisfy the funding for the $3.0 million
Trust Preferred calling on March 31, 2003. Additional information on parent
company cash flows and financial statements is contained in Note 22 to the
consolidated financial statements.
Capital Resources
Premier's consolidated average equity-to-asset ratio remained strong at
8.65% during 2002, up from the 7.47% during 2001 and the 6.07% in 2000. The
increase in 2002 primarily resulted from a decrease in total assets resulting
from the sale of the Sabina Bank in late 2001 without a corresponding decrease
in equity. 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 2002, Premier's risk adjusted capital-to-assets ratio was
17.5% compared to 16.6% at December 31, 2001. 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. Premier's leverage ratio at December 31, 2002 was 9.1%
compared to 8.5% at December 31, 2001. Both of these ratios are well above the
recommended 4.0% to 5.0% recommended by the Federal Reserve. These healthy
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 larger banks may be found in Note 21 to the consolidated financial
statements.
The primary source of funds for dividends paid by Premier to its
shareholders 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 21 to the
consolidated financial statements. During 2003, Premier's banks could, without
prior approval, declare and pay to Premier dividends of approximately $3.1
million plus any 2003 net profits retained through the date of declaration.
Additional information on the capital position of Premier is included in
the following table.
SELECTED CAPITAL INFORMATION
(Dollars in thousands)
As of December 31
2002 2001 Change
-------- -------- --------
Stockholders' Equity $ 59,366 $ 59,875 $ (509)
Qualifying capital securities of subsidiary trust 19,266 19,646 (380)
Disallowed amounts of goodwill and other intangibles (16,044) (16,044) 0
Unrealized loss (gains) on securities
available for sale (1,568) (857) (711)
-------- -------- --------
Tier I capital $ 61,020 $ 62,620 $ (1,600)
Tier II capital adjustments:
Qualifying capital securities of subsidiary trust 9,484 9,104
Allowance for loan losses 5,490 5,830
-------- --------
Total capital $ 75,994 $ 77,554
======== ========
Total risk-weighted assets $433,298 $466,409
Ratios
Tier I capital to risk-weighted assets 14.08% 13.43%
Total capital to risk-weighted assets 17.54% 16.63%
Leverage at year-end 9.13% 8.48%
INCOME STATEMENT ANALYSIS
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 $24.8 million in 2002, down 4.1% from the amount earned in
2001 which follows a 12.2% decrease in 2001 from 2000. 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 decrease in net interest
income in 2002 is largely due to the decrease in the volume of assets and
liabilities resulting from the sales of the Bank of Mt. Vernon and the Sabina
Bank in 2001. As shown in the Rate Volume Analysis table below, decreases in
the volume of earning assets in 2002 reduced Premier's interest income by $6.0
million. This decrease was partially offset by the lower volume of interest
bearing liabilities in 2002 resulting in a $3.9 million decline in interest
expense. The net effect was to reduce net interest income by $2.1 million for
the year. Similarly, the lower interest rate environment in 2002 resulted in
reducing interest income of $7.7 million and reduced interest expense of $8.7
million. However, Premier's management of changes in interest rates risk and
its ability to lower the rates paid on its interest bearing liabilities more
rapidly than the declines in yields on interest earning assets resulted in an
increase in net interest income from rate movements of $1.1 million for the year
2002. This increase only partially offset the $2.1 million decline in net
interest income due to lower volumes resulting in the overall $1.1 decline in
net interest income.
Similarly, in 2001, a reduction in Premier's volume of earning assets
reduced interest income by $8.9 million which was only partially offset by a
$5.6 million decrease in interest expense due to a lower volume of interest
bearing liabilities. The net result was a $3.2 million decrease in net interest
income from volume activity. The lower volumes in 2001 were primarily the
result of the sale of the Bank of Mount Vernon in January 2001. In contrast to
2002 however, in 2001, the decline in the yields on earning assets was greater
than the decline in rates paid on interest bearing liabilities. This resulted
in an additional reduction in net interest income of $0.3 million for a total
decline in 2001 of $3.6 million.
RATE VOLUME ANALYSIS OF CHANGES IN NET INTEREST INCOME
(Dollars in thousands on a taxable equivalent basis)
2002 vs 2001 2001 vs 2000
Increase (decrease) due to change in Increase (decrease) due to change in
Net Net
Volume Rate Change Volume Rate Change
--------- --------- --------- --------- --------- ---------
Interest Income*:
Loans $ (5,482) $ (4,626) $ (10,108) $ (7,283) $ (1,547) $ (8,830)
Investment securities (592) (2,130) (2,722) (1,824) (802) (2,626)
Federal funds sold 71 (909) (838) 260 (129) 131
Deposits with banks 3 (15) (12) (27) (20) (47)
--------- --------- --------- --------- --------- ---------
Total interest income $ (6,000) $ (7,680) $ (13,680) $ (8,874) $ (2,498) $ (11,372)
--------- --------- --------- --------- --------- ---------
Interest Expense:
Deposits
NOW and money market $ 168 $ (2,274) $ (2,106) $ 98 $ (1,647) $ (1,549)
Savings (117) (461) (578) (17) (345) (362)
Certificates of deposit (3,358) (4,968) (8,326) (4,333) 291 (4,042)
Short-term borrowings (108) (180) (288) (779) (385) (1,164)
Other borrowings (359) (514) (873) (277) (93) (370)
FHLB borrowings (101) (346) (447) (330) 27 (303)
Debt 0 0 0 0 0 0
--------- --------- --------- --------- --------- ---------
Total interest expense $ (3,875) $ (8,743) $ (12,618) $ (5,638) $ (2,152) $ (7,790)
--------- --------- --------- --------- --------- ---------
Net interest income* $ (2,125) $ 1,063 $ (1,062) $ (3,236) $ (346) $ (3,582)
========= ========= ========= ========= ========= =========
(*) 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.
While net interest income dollars declined in 2002, Premier's net
interest margin increased. In 2002, the yield earned on investment securities
declined 139 basis points to 4.59% while the yield on the loan portfolio
declined 96 basis points to 8.30%. The net result on all earning assets was to
reduce the yield 122 basis points to 6.99% in 2002, down from 8.21% earned in
2001 and 8.77% earned in 2000. Similarly, in 2002 Premier reduced the average
rate paid on its deposits by 160 basis points by not renewing a significant
amount of high rate certificates of deposit and by keeping the rates paid on
other deposit products competitive with national and local market rates. The
net result on all interest bearing liabilities was to reduce the cost of funds
155 basis points to 3.53%, down from 5.08% in 2001 and 5.49% in 2000. As a
result, Premier's net interest spread increased by 33 basis points and its net
interest margin increased by 23 basis points to 3.85% in 2002, up from 3.62% in
2001 and 3.68% in 2000. Further discussion of net interest income is included
in the section of this report entitled "Balance Sheet Analysis."
Non-interest Income and Expense
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
decreased by 12.4% or $509,000 in 2002. Approximately 56% of the decline was
due sale of the operations of the Bank of Mount Vernon and the Sabina Bank in
2001. The remaining decrease was due to declines in other income which was only
partially offset by increases in revenue from service charges on deposit
accounts. Service charges on deposit accounts increased to $2,337,000 in 2002,
a 6.7% or $146,000 increase over 2001. After factoring out the services charges
earned by the two banks that were sold in 2001, service charges in 2002
increased by 17.8% or $353,000 over 2001. This increase follows a 2.0% or
$44,000 decrease in 2001 from 2000. Other income declined by $604,000 in 2002
largely due the other income reported by the two banks that were sold in 2001
and reduced income from origination and sales of mortgage loans in the secondary
market.
In 2002, Premier realized $45,000 in losses on securities sales. This
compares to $516,000 in gains realized in 2001 and $279,000 in losses realized
in 2000. These securities were sold as part of Premier's management of its
asset/liability position. In 2001, Premier recognized gains of $8.7 million on
the sale of two subsidiary banking operations. In 2000, Premier recognized a
gain of $289,000 during the second quarter as a result of the sale of a Federal
Home Loan Bank advance. This gain was substantially offset by losses on
securities of $281,000 which also occurred in the second quarter of 2000.
The following table is a summary of non-interest income and expense
for each of the years the three-year period ending December 31, 2002.
NON-INTEREST INCOME AND EXPENSE
(Dollars in thousands)
Increase (Decrease) Over Prior Year
2002 2001
---------------- ----------------
2002 2001 2000 Amount Pct Amount Pct
-------- -------- -------- ------- ----- ------- -----
Non-Interest Income:
Service charges on deposit accounts $ 2,337 $ 2,191 $ 2,235 $ 146 6.66 $ (44) (1.97)
Insurance income 223 274 443 (51) (18.61) (169) (38.15)
Other 1,038 1,642 1,324 (604) (36.78) 318 24.02
-------- -------- -------- ------- ----- ------- -----
Total fees and other income 3,598 4,107 4,002 $ (509) (12.39) $ 105 2.62
Investment securities gains(losses) (45) 516 (279) (561) - 795 -
Gain on FHLB advance sale 0 0 289 0 - (289) -
Gain on sale of banking operations 0 8,713 0 (8,713) - 8,713 -
-------- -------- -------- ------- ----- ------- -----
Total non-interest income $ 3,553 $ 13,336 $ 4,012 $(9,783) (73.36) $ 9,324 234.40
======== ======== ======== ======= ===== ======= =====
Non-Interest Expense:
Salaries and wages $ 7,867 $ 9,214 $ 10,149 $(1,347) (14.62) $ (935) (9.21)
Employee benefits 2,630 2,571 3,183 59 2.29 (612) (19.23)
-------- -------- -------- ------- ----- ------- -----
Total staff costs 10,497 11,785 13,332 (1,288) (10.93) (1,547) (11.60)
-------- -------- -------- ------- ----- ------- -----
Occupancy and equipment expense 2,789 2,941 3,187 (152) (5.17) (246) (7.72)
Professional fees 1,404 1,065 705 339 31.83 360 51.06
Taxes, other than payroll, property
and income 812 836 749 (24) (2.87) 87 11.62
Amortization of intangibles 0 1,329 1,571 (1,329) - (242) (15.40)
OREO losses and expenses 1,317 540 726 777 143.89 (186) (25.62)
Other expenses 4,472 5,489 5,835 (1,017) (18.53) (346) (5.93)
-------- -------- -------- ------- ----- ------- -----
Total non-interest expenses $ 21,291 $ 23,985 $ 26,105 $(2,694) (11.23) $(2,120) (8.12)
======== ======== ======== ======= ===== ======= =====
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 2002 net overhead ratio, or non-interest
expense less non-interest income excluding securities transactions and other
similar non-operating transactions to average earning assets was 2.75%, a slight
decrease from the 2.79% realized in 2001 and the 2.77% ratio realized in 2000.
For the year 2002, net overhead was $17.7 million, a decrease of $2.2 million or
11.0% below the 2001 overhead of $19.9 million. Approximately $2.0 million of
this decrease was the net overhead of the Bank of Mount Vernon and the Sabina
Bank recognized in 2001 whose operations were not included in Premier's results
for 2002. The current year decrease follows a decrease in 2001 of 10.1% or $2.2
million from the 2000 overhead of $22.1 million. The sale of the Bank of Mount
Vernon in early 2001 resulted in a decline in 2001 net overhead of $2.7 million,
while the remaining 2001 banking operations increased net overhead by $477,000
over 2000. A lower net overhead ratio means more of the net interest margin
flows through as net income.
Total non-interest expense in 2002 decreased by $2.7 million, or 11.2%
from 2001. Approximately $2.3 million of the decline was due sale of the
operations of the Bank of Mount Vernon and the Sabina Bank in 2001. The
remainder was due to a $386,000 or 1.8% decline in the non-interest expenses of
the remaining operations as described in more detail below. This year's
decrease compares to a $2.1 million or 8.1% decrease in 2001 versus 2000. The
sale of the Bank of Mount Vernon in early 2001 resulted in a decline in 2001
non-interest expense of $3.2 million, while the remaining 2001 banking
operations increased non-interest expense by $1.0 million over 2000.
Staff costs decreased by $1.3 million or 10.9% in 2002 versus 2001.
Approximately $1.1 million of the reduction was due to the sale of the banking
operations in 2001. The remaining $151,000 was largely due to a $479,000
decrease in staff costs at the parent holding company, partially offset by
normal salary adjustments at the subsidiary banks. Staff costs in 2001
decreased $1.5 million or 11.6% from 2000. The sale of the Bank of Mount Vernon
in early 2001 resulted in a decline in 2001 staff costs of $1.7 million, while
the remaining $127,000 increase was due to normal salary and benefit increases.
Occupancy and equipment expenses decreased by $152,000 or 5.2% in 2002
from 2001. Approximately $262,000 of occupancy and equipment expenses was
eliminated due to the sale of the banking operations in 2001. The remaining
$110,000 or 4.1% increase was largely due to increases in property taxes and
maintenance costs on buildings and equipment. Occupancy and equipment expenses
in 2001 decreased by $246,000 or 7.7% versus 2002. The sale of the Bank of
Mount Vernon in early 2001 resulted in a decline in 2001 occupancy and equipment
expenses of $344,000, while the remaining $98,000 or 3.0% increase was due to
normal increases in costs.
Professional fees increased by $339,000 or 31.8% in 2002 versus 2001.
Approximately $31,000 of professional fees was eliminated due to the sale of the
banking operation in 2001. The remaining $370,000 increase was largely due to
increased legal fees related to collections, regulatory and compliance matters,
other legal matters, and fees related to external audits and Premier's efforts
to strengthen its internal control processes. In 2001, professional fees
increased $360,000 or 51% over 2000, also largely due to increased legal fees
related to collections and other matters and internal and external audit costs.
OREO writedowns and expenses totaled $1.3 million in 2002, an increase
of $777,000 over 2001. The increase in 2002 was largely due to writedowns of
OREO property to net realizable values as management emphasized efforts to
liquidate the properties.
In 2002, Premier adopted Financial Accounting Statements (FAS) 142 and
147. The effect of adopting these new accounting standards has been the
elimination of the amortization of goodwill effective January 2002. In 2001,
Premier recognized $1.3 million of goodwill amortization compared to $1.6
million in 2000. Additional information concerning Premier's adoption of FAS
142 and 147 is discussed in Note 1 to the consolidated financial statements.
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.
Applicable Income Taxes
Premier recognized a $1.0 million income tax benefit in 2002 compared to
$3.4 million of income tax expense in 2001 and $316,000 of income tax expense in
2000. Premier's effective tax rate was (45.6%) in 2002, down from 59.3% in 2001
but up from 19.1% in 2000. The benefit in 2002 was due to the pretax loss
realized by Premier. Premier's effective tax rate in 2002 was increased by the
benefits of holding tax-exempt investments and other tax saving instruments.
The increase in 2001 taxes as well as the increased effective tax rate was due
to the gains on the sales of the two banking subsidiaries and the taxability of
those transactions. Additional information regarding income taxes is contained
in Note 14 to the consolidated financial statements.
Effects of Changing Prices
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 is that inflation can results 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.
SUMMARY RESULTS OF OPERATIONS
FOURTH QUARTER 2002
Net income for the three months ended December 31, 2002 was $355,000, a
$1.4 million decrease from the $1,754,000 of net income earned during the fourth
quarter of 2001. However, the fourth quarter of 2001 includes a $3.5 million
gain (net of tax) on the sale of the Sabina bank. Excluding this gain, fourth
quarter 2001 results reflected a loss of $1,741,000 primarily due to $3.5
million of provisions for loan losses. On a per share basis, Premier's income
for the fourth quarter of 2002 was 7 cents per share, compared to a loss of 33
cents per share for the same quarter last year (excluding the gain on the sale
of the subsidiary).
Net interest income totaled $6,120,000 for the fourth quarter of 2002, a
decrease of $150,000 or 2.4% from the net interest income earning in the same
quarter of 2001. The provision for loan losses decreased by $1,965,000 when
compared to the fourth quarter of 2001. Non-interest income excluding
securities transactions and the gain on the sale of the Sabina Bank was
relatively flat compared to the same quarter in 2001. Non-interest expense
decreased by $1,354,000 due to lower staff costs, other operating expenses and
the cessation of the amortization of intangible assets. Additional quarterly
financial data is provided in Note 23 to the consolidated financial statements.
Item 8. Financial Statements and Supplementary Data
- ----------------------------------------------------
The Company's Financial Statements and related Independent Auditors'
Report are presented in the following pages. The financial statements filed in
this Item 8 are as follows:
Independent Auditors' Report
Financial Statements:
Consolidated Balance Sheets - December 31, 2002 and 2001
Consolidated Statements of Income - Years Ended December 31, 2002, 2001
and 2000
Consolidated Statements of Comprehensive Income - Years Ended
December 31, 2002, 2001 and 2000
Consolidated Statements of Changes in Stockholders' Equity - Years
ended December 31, 2002, 2001 and 2000
Consolidated Statements of Cash Flows - Years ended December 31, 2002,
2001 and 2000
Notes to Consolidated Financial Statements
PREMIER FINANCIAL BANCORP, INC.
CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002, 2001 and 2000
REPORT OF INDEPENDENT AUDITORS
Board of Directors
Premier Financial Bancorp, Inc.
Huntington, West Virginia
We have audited the accompanying consolidated balance sheets of Premier
Financial Bancorp, Inc. as of December 31, 2002 and 2001, and the related
consolidated statements of operations and comprehensive income, changes in
stockholders' equity and cash flows for each of the three years in the period
ended December 31, 2002. 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 auditing standards generally accepted
in the United States of America. 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 Premier Financial
Bancorp, Inc. as of December 31, 2002 and 2001 and the results of its operations
and its cash flows for each of the three years in the period ended December 31,
2002 in conformity with accounting principles generally accepted in the United
States of America.
As disclosed in Note 1, during 2002 the Company adopted new accounting guidance
for goodwill.
Crowe, Chizek and Company LLP
Columbus, Ohio
February 25, 2003
PREMIER FINANCIAL BANCORP, INC.
CONSOLIDATED BALANCE SHEETS
December 31, 2002 and 2001
(In Thousands, Except Per Share Data)
- --------------------------------------------------------------------------------
2002 2001
------------ ------------
ASSETS
Cash and due from banks $ 18,044 $ 20,628
Federal funds sold 29,827 33,517
Securities available for sale 157,633 155,566
Loans 435,137 458,741
Allowance for loan losses (11,360) (8,946)
------------ ------------
Net loans 423,777 449,795
Federal Home Loan Bank and
Federal Reserve Bank stock 4,395 4,261
Premises and equipment, net 11,685 12,035
Real estate and other property
acquired through foreclosure 3,939 5,831
Interest receivable 6,485 7,842
Goodwill 16,044 16,044
Other assets 5,799 6,331
------------ ------------
Total assets $ 677,628 $ 711,850
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits
Non-interest bearing $ 62,874 $ 57,916
Time deposits, $100,000 and over 66,033 89,149
Other interest bearing 419,067 423,466
------------ ------------
Total deposits 547,974 570,531
Securities sold under
agreements to repurchase 5,851 5,520
Federal Home Loan Bank advances 23,533 30,795
Other borrowed funds 7,700 13,000
Notes payable 1,402 -
Guaranteed preferred beneficial interests in
Company's debentures 28,750 28,750
Interest payable 1,818 1,903
Other liabilities 1,234 1,476
------------ ------------
Total liabilities 618,262 651,975
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 13,250 14,470
Accumulated other comprehensive income 1,568 857
------------ ------------
Total stockholders' equity 59,366 59,875
------------ ------------
Total liabilities and stockholders' equity $ 677,628 $ 711,850
============ ============
- --------------------------------------------------------------------------------
See accompanying notes.
PREMIER FINANCIAL BANCORP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended December 31
(In Thousands, Except Per Share Data)
- --------------------------------------------------------------------------------
2002 2001 2000
---- ---- ----
Interest income
Loans, including fees $ 37,262 $ 47,413 $ 56,245
Investment securities -
Taxable 5,670 8,029 10,120
Tax-exempt 809 1,051 1,404
Federal funds sold 691 1,529 1,398
Other interest income 8 20 67
----------- ----------- -----------
Total interest income 44,440 58,042 69,234
Interest expense
Deposits 15,540 26,550 32,503
Other borrowings 1,758 3,366 5,203
Debentures 2,852 2,852 2,852
----------- ----------- -----------
Total interest expense 20,150 32,768 40,558
Net interest income 24,290 25,274 28,676
Provision for loan losses 8,796 8,921 4,932
----------- ----------- -----------
Net interest income after provision for loan losses 15,494 16,353 23,744
Non-interest income
Service charges 2,337 2,191 2,235
Insurance commissions 223 274 443
Securities gains (losses) (45) 516 (279)
Gain on sale of subsidiaries' banking operations - 8,713 -
Other income 1,038 1,642 1,613
----------- ----------- -----------
3,553 13,336 4,012
Non-interest expenses
Salaries and employee benefits 10,497 11,785 13,332
Occupancy and equipment expenses 2,789 2,941 3,187
Professional fees 1,404 1,065 705
Taxes, other than payroll, property and income 812 836 749
Amortization of goodwill - 1,329 1,571
Write-downs, expenses, sales of other real estate owned 1,317 540 726
Other expenses 4,472 5,489 5,835
----------- ----------- -----------
21,291 23,985 26,105
(Loss) income before income taxes (2,244) 5,704 1,651
Provision for income taxes (benefit) (1,024) 3,385 316
----------- ----------- -----------
Net (loss) income $ (1,220) $ 2,319 $ 1,335
=========== =========== ===========
Weighted average common shares outstanding:
Basic 5,232 5,232 5,232
Diluted 5,232 5,232 5,232
Earnings per share:
Basic $ (0.23) $ 0.44 $ 0.26
Diluted (0.23) 0.44 0.26
- --------------------------------------------------------------------------------
See accompanying notes.
PREMIER FINANCIAL BANCORP, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Years Ended December 31
(In Thousands, Except Per Share Data)
- --------------------------------------------------------------------------------
2002 2001 2000
---- ---- ----
Net (loss) income $ (1,220) $ 2,319 $ 1,335
Other comprehensive income (loss), net of tax:
Unrealized gains and (losses) arising during
the period 681 2,067 2,969
Reclassification of realized amount 30 (341) 184
----------- ----------- -----------
Net change in unrealized gain (loss) on
securities 711 1,726 3,153
----------- ----------- -----------
Comprehensive (loss) income $ (509) $ 4,045 $ 4,488
=========== =========== ===========
- --------------------------------------------------------------------------------
See accompanying notes.
PREMIER FINANCIAL BANCORP, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Years Ended December 31, 2002, 2001 and 2000
(In Thousands, Except Per Share Data)
- --------------------------------------------------------------------------------
Accumulated
Other
Common Retained Comprehensive
Stock Surplus Earnings Income Total
Balances, January 1, 2000 $ 1,103 $ 43,445 $ 11,601 $ (4,022) $ 52,127
Net change in unrealized gains (losses)
on securities available for sale - - - 3,153 3,153
Net income - - 1,335 - 1,335
Dividends paid - $.15 per share - - (785) - (785)
-------- --------- --------- ---------- ----------
Balances, December 31, 2000 1,103 43,445 12,151 (869) 55,830
Net change in unrealized gains (losses)
on securities available for sale - - - 1,726 1,726
Net income - - 2,319 - 2,319
-------- --------- --------- ---------- ----------
Balances, December 31, 2001 1,103 43,445 14,470 857 59,875
Net change in unrealized gains (losses)
on securities available for sale - - - 711 711
Net loss - - (1,220) - (1,220)
-------- --------- --------- ---------- ----------
Balances, December 31, 2002 $ 1,103 $ 43,445 $ 13,250 $ 1,568 $ 59,366
======== ========= ========= ========== ==========
- --------------------------------------------------------------------------------
See accompanying notes.
PREMIER FINANCIAL BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31
(In Thousands)
- --------------------------------------------------------------------------------
2002 2001 2000
---- ---- ----
Cash flows from operating activities
Net (loss) income $ (1,220) $ 2,319 $ 1,335
Adjustments to reconcile net (loss) income
to net cash from operating activities
Depreciation 1,320 1,232 1,436
Provision for loan losses 8,796 8,921 4,932
Amortization, net 314 1,034 1,228
FHLB stock dividends (188) (266) (311)
Write-downs of other real estate owned 1,114 258 617
Securities (gains) losses, net 45 (516) 279
Gain on the sale of subsidiaries' banking
operations - (8,713) -
Changes in
Interest receivable 1,357 417 (330)
Other assets 166 (833) (705)
Interest payable (85) (1,494) 636
Other liabilities (242) (321) 245
------------ ----------- -----------
Net cash from operating activities 11,377 2,038 9,362
Cash flows from investing activities
Purchases of securities available for sale (147,256) (197,441) (61,664)
Proceeds from sales of securities available for sale 6,480 15,438 19,727
Proceeds from maturities and calls of securities
available for sale 139,427 207,595 21,985
Purchases of securities held to maturity - - (1,571)
Proceeds from maturities and calls of securities
held to maturity - - 2,296
Purchases of FHLB stock (50) (208) (42)
Redemption of FHLB stock 104 451 -
Net change in interest-earning balances with banks - 737 897
Net change in federal funds sold 3,690 (21,130) 4,110
Net change in loans 14,852 14,133 (30,692)
Purchases of premises and equipment, net (970) (607) (1,975)
Proceeds from sale of other real estate acquired
through foreclosure 3,148 1,747 584
Net cash received (paid) related to acquisitions - 3,255 -
------------ ----------- -----------
Net cash from investing activities 19,425 23,970 (46,345)
- --------------------------------------------------------------------------------
(Continued)
PREMIER FINANCIAL BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31
(In Thousands)
- --------------------------------------------------------------------------------
2002 2001 2000
---- ---- ----
Cash flows from financing activities
Net change in deposits $ (22,557) $ (7,595) $ 35,569
Advances from Federal Home Loan Bank 14,420 60,361 62,783
Repayment of Federal Home Loan Bank advances (21,682) (60,252) (64,743)
Repayment of other borrowed funds (5,300) (7,000) -
Proceeds from notes payable 1,402 - -
Net change in agreements to repurchase securities 331 (14,233) (729)
Dividends paid - - (785)
------------ ----------- -----------
Net cash from financing activities (33,386) (28,719) 32,095
------------ ----------- -----------
Net change in cash and cash equivalents (2,584) (2,711) (4,888)
Cash and cash equivalents at beginning of year 20,628 23,339 28,227
------------ ----------- -----------
Cash and cash equivalents at end of year $ 18,044 $ 20,628 $ 23,339
============ =========== ===========
Supplemental disclosures of cash flow information:
Cash paid during the year for -
Interest $ 20,251 $ 34,261 $ 39,922
Income taxes paid (refunded) (280) 4,279 1,115
Loans transferred to real estate acquired
through foreclosure $ 2,370 $ 4,785 $ 1,298
Transfer of securities from held to maturity
to available for sale $ - $ 18,249 $ -
- --------------------------------------------------------------------------------
See accompanying notes.
PREMIER FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002, 2001 and 2000
- --------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The consolidated financial statements include the accounts of Premier Financial
Bancorp, Inc. (the Company) and its wholly-owned subsidiaries:
December 31, 2002
Year Net Income
Acquired Assets (Loss)
-------- ------ ----------
(In Thousands)
Citizens Deposit Bank & Trust Vanceburg, Kentucky 1991 $ 89,118 $ (994)
Bank of Germantown Germantown, Kentucky 1992 26,384 (136)
Citizens Bank (Kentucky), Inc. Georgetown, Kentucky 1995 84,406 (1,130)
Farmers Deposit Bank Eminence, Kentucky 1996 144,788 975
Ohio River Bank Ironton, Ohio 1998 76,265 743
First Central Bank, Inc. Philippi, West Virginia 1998 88,581 692
Boone County Bank, Inc. Madison, West Virginia 1998 159,459 1,871
Mt. Vernon Financial Holdings, Inc. Georgetown, Kentucky 1999 8,092 (51)
The Company also has a data processing subsidiary, Premier Data Services, Inc.,
and PFBI Capital Trust subsidiary as discussed in Note 13. All intercompany
transactions and balances have been eliminated.
Prior period consolidated financial statements have been restated to include the
accounts of significant acquisitions. Business combinations are included in the
consolidated financial statements from the respective dates of acquisition.
Assets and liabilities of financial institutions accounted for as purchases are
adjusted to their fair values as of their dates of acquisition. Certain prior
amounts have been reclassified to conform with the current year presentation.
Nature of Operations: The Banks operate under state bank charters and provide
traditional banking services, including trust 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.
- --------------------------------------------------------------------------------
(Continued)
PREMIER FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002, 2001 and 2000
- --------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
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, 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.
Securities: The Company classifies its securities portfolio into three
categories: trading, securities available for sale and securities held to
maturity. Fair value adjustments are made to the securities based on their
classification with the exception of the held to maturity category. The Company
has no investments classified as trading or held to maturity.
Securities available for sale are carried at fair value. Adjustments from
amortized cost to fair value are recorded in stockholders' equity, net of
related income tax, under accumulated other comprehensive income on securities
available for sale. The adjustment is computed on the difference between fair
value and cost adjusted for amortization of premiums and accretion of discounts
which are recorded as adjustments to interest income using the constant yield
method. Other securities such as Federal Home Loan Bank stock are carried at
cost.
Interest income includes amortization of purchase premium or discount. 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.
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 nonaccrual 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.
- --------------------------------------------------------------------------------
(Continued)
PREMIER FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002, 2001 and 2000
- --------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
All interest accrued but not received for loans placed on nonaccrual 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.
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
collectibility 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. Loans
are charged against the allowance for loan losses when management believes that
the collection of principal is unlikely.
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 on an
individual loan basis for other loans. 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 3 to 40
years.
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. The value of the underlying loan is written down to the fair
value of the real estate to be acquired by a charge to the allowance for loan
losses, if necessary. Any subsequent write-downs are charged to operating
expenses. Certain parcels of real estate are being 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.
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 discounted amounts.
- --------------------------------------------------------------------------------
(Continued)
PREMIER FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002, 2001 and 2000
- --------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
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: Goodwill results from prior business acquisitions and represents the
excess of the purchase price over the fair value of acquired tangible assets and
liabilities and identifiable intangible assets. Upon adopting new accounting
guidance on January 1, 2002, the Company ceased amortizing goodwill. Goodwill is
assessed at least annually for impairment and any such impairment will be
recognized in the period identified. The Company does not have any identifiable
intangible assets such as core deposit intangibles. The effect on net income of
ceasing goodwill amortization in 2002 was $746,000, net of tax.
Stock Compensation: Employee compensation expense under stock options is
reported using the intrinsic value method. No stock-based compensation cost is
reflected in net income, as all options granted had an exercise price equal to
or greater than the market price of the underlying common stock at the date of
grant. The following table illustrates the effect on net income and earnings per
share if expense was measured using the fair value recognition provisions of
FASB Statement No. 123, Accounting for Stock-Based Compensation.
2002 2001 2000
--------- --------- ---------
Net income (loss) as reported $ (1,220) $ 2,319 $ 1,335
Deduct: Stock-based compensation
expense determined under fair
value based method - (17) (40)
--------- --------- ---------
Pro forma net income $ (1,220) $ 2,302 $ 1,295
Basic earnings per share as reported $ (0.23) $ 0.44 $ 0.26
Pro forma basic earnings per share (0.23) 0.44 0.25
Diluted earnings per share as reported $ (0.23) $ 0.44 $ 0.26
Pro forma diluted earnings per share (0.23) 0.44 0.25
There were no options granted during 2002, 2001, or 2000. Future pro forma net
income will be negatively impacted should the Company choose to grant additional
options.
- --------------------------------------------------------------------------------
(Continued)
PREMIER FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002, 2001 and 2000
- --------------------------------------------------------------------------------
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.
Off Balance Sheet Financial Instruments: Financial instruments include
off-balance sheet credit instruments, such as commitments to make loans and
standby 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.
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.
Newly Issued But Not Yet Effective Accounting Standards: New accounting
standards on asset retirement obligations, restructuring activities and exit
costs, operating leases, and early extinguishment of debt were issued in 2002.
Management determined that when the new accounting standards are adopted in 2003
they will not have a material impact on the Company's financial condition or
results of operations.
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.
- --------------------------------------------------------------------------------
(Continued)
PREMIER FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002, 2001 and 2000
- --------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Industry Segments: All of the Company's operations are considered by management
to be aggregated into one reportable operating segment.
Reclassifications: Some items in the prior year financial statements were
reclassified to conform to the current presentation.
NOTE 2 - BUSINESS COMBINATIONS
On January 26, 2001, the Company disposed of all the deposits (approximately
$110,000,000), the majority of loans (approximately $92,000,000) and the
premises and equipment (approximately $1,600,000) of the Bank of Mt. Vernon
under the terms of a Purchase and Assumption Agreement. The net cash paid by the
Company relating to this transaction was approximately $9,700,000. The Company
realized a gain of $3,418,000 on the sale. As part of the transaction, the
Company retained certain assets previously held by the Bank of Mt. Vernon, which
are held in a subsidiary called Mt. Vernon Financial Holdings, Inc.
On December 10, 2001, the Company disposed of the deposits (approximately
$49,000,000), the loans (approximately $40,000,000), and the premises and
equipment (approximately $1,300,000) of The Sabina Bank under the terms of a
Purchase and Assumption Agreement. The proceeds to the Company and the gain
realized from this transaction were $12,954,000 and $5,295,000, respectively.
The operating results of both the Bank of Mt. Vernon and The Sabina Bank were
included in the Company's operating results through the respective dates of the
sales. The results relating to the assets retained by the Company continue to be
included in the Company's operating results.
NOTE 3 - REGULATORY MATTERS
On September 29, 2000, the Company entered into an agreement with the Federal
Reserve Bank (FRB) that prohibits the Company from paying dividends or incurring
any additional debt without the prior written approval of the FRB. Additionally,
the agreement requires the Company to develop and monitor compliance with
certain operational policies designed to strengthen Board of Director oversight
including credit administration, liquidity, internal audit and loan review.
- --------------------------------------------------------------------------------
(Continued)
PREMIER FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002, 2001 and 2000
- --------------------------------------------------------------------------------
NOTE 3 - REGULATORY MATTERS (Continued)
Subsequently, on January 29, 2003, the Company entered into a written agreement
with the FRB which supercedes and rescinds all previous agreements between the
Company and the FRB. Among the provisions of the agreement was the continuation
of the restriction on the Company's payment of dividends on its common stock
without the express written consent of the FRB and the continuation of the
restriction on the Company's payment of quarterly distributions on its Trust
Preferred Securities without the express written consent of the FRB. Among other
provisions, the agreement requires the Company to retain an independent
consultant to review its management, directorate and organizational structure,
adopt a management plan responsive to such consultant's report, update its
management succession plan in accordance with any recommendations in such
consultant's report, monitor its subsidiary banks' compliance with bank policies
and loan review programs, conduct formal quarterly reviews of its subsidiary
Banks' allowances for loan losses, maintain sufficient capital, submit a plan to
the FRB for improving consolidated earnings over a three-year period, and submit
to the FRB annual projections of planned sources and uses of the Company's cash,
including a plan to service its outstanding debt and trust preferred securities.
The Company's compliance with the written agreement is to be monitored by a
committee, to be organized, consisting of at least three of its outside
directors.
Three of the Company's subsidiaries, Citizens Deposit Bank & Trust, Bank of
Germantown and Citizens Bank (Kentucky), Inc. have entered into similar
agreements with their respective primary regulators which, among other things,
prohibit the payment of dividends without prior written approval and requires
significant changes in their credit administration policies.
These agreements, which require periodic reporting, will remain in force until
the regulators are satisfied that the Company and the banks have fully complied
with the terms of the agreement.
NOTE 4 - RESTRICTIONS ON CASH AND DUE FROM BANKS
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, 2002 and 2001 was $3.6
million and $2.5 million.
- --------------------------------------------------------------------------------
(Continued)
PREMIER FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002, 2001 and 2000
- --------------------------------------------------------------------------------
NOTE 5 -SECURITIES
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 (in thousands):
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
----------- -------- --------- -----------
2002
U. S. Treasury securities $ 399 $ 8 $ - $ 407
U. S. agency securities 120,660 1,256 - 121,916
Obligations of states and political
subdivisions 17,794 827 (11) 18,610
Mortgage-backed securities 7,369 279 - 7,648
Corporate securities 9,036 16 - 9,052
----------- -------- --------- -----------
Total available for sale $ 155,258 $ 2,386 $ (11) $ 157,633
=========== ======== ========= ===========
2001
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
=========== ======== ========= ===========
Upon adoption of Financial Accounting Standards Board Statement 133 on January
1, 2001, all of the Company's securities classified as held to maturity were
reclassified as available for sale.
- --------------------------------------------------------------------------------
(Continued)
PREMIER FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002, 2001 and 2000
- --------------------------------------------------------------------------------
NOTE 5 -SECURITIES (Continued)
The amortized cost and fair value of securities at December 31, 2002 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 Fair
Cost Value
(In Thousands)
Available for sale
Due in one year or less $ 34,487 $ 34,623
Due after one year through five years 101,598 103,042
Due after five years through ten years 9,663 10,110
Due after ten years 2,141 2,210
Mortgage-backed securities 7,369 7,648
----------- -----------
Total available for sale $ 155,258 $ 157,633
=========== ===========
Proceeds from sales of securities during 2002, 2001 and 2000 were $6.5 million,
$15.4 million and $19.7 million. Gross gains of $68,000, $545,000 and $7,000,
and gross losses of $113,000, $29,000 and $286,000 were realized on those sales.
Securities with an approximate carrying value of $90.0 million and $87.5 million
at December 31, 2002 and 2001 were pledged to secure public deposits, trust
funds, securities sold under agreements to repurchase and for other purposes as
required or permitted by law.
NOTE 6 - LOANS
Loans at year-end were as follows (in thousands):
2002 2001
------------ ------------
Commercial, secured by real estate $ 120,306 $ 117,692
Commercial, other 64,014 70,315
Real estate construction 11,924 15,751
Residential real estate 156,215 164,810
Agricultural 8,862 9,613
Consumer and home equity 71,075 79,571
Other 2,741 989
------------ ------------
$ 435,137 $ 458,741
============ ============
- --------------------------------------------------------------------------------
(Continued)
PREMIER FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002, 2001 and 2000
- --------------------------------------------------------------------------------
NOTE 6 - 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 2002 and
2001. Such loans were made in the ordinary course of business at the Banks'
normal credit terms and interest rates.
An analysis of the 2002 activity with respect to all director and executive
officer loans is as follows (in thousands):
Balance, December 31, 2001 $ 11,685
Additions, including loans now meeting disclosure
requirements 9,562
Amounts collected, including loans no longer meeting
disclosure requirements (5,149)
------------
Balance, December 31, 2002 $ 16,098
============
Activity in the allowance for loan losses was as follows (in thousands):
2002 2001 2000
-------- -------- --------
Balance, beginning of year $ 8,946 $ 7,821 $ 6,812
Allowance related to acquired
or disposed subsidiaries - (266) -
Loans charged off (7,451) (8,150) (4,382)
Recoveries 1,069 620 459
Provision for loan losses 8,796 8,921 4,932
-------- -------- --------
Balance, end of year $ 11,360 $ 8,946 $ 7,821
======== ======== ========
Impaired loans were as follows. There were no impaired loans without an
allowance allocation for the periods presented.
2002 2001 2000
-------- -------- --------
(In Thousands)
Impaired loans at year end $ 8,949 $ 5,114 $ 4,661
Amount of the allowance for
loan losses allocated 3,016 1,724 742
Average of impaired loans during the year 5,215 5,481 3,993
Interest income recognized during impairment 205 236 89
Cash-basis interest income recognized 189 190 34
- --------------------------------------------------------------------------------
(Continued)
PREMIER FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002, 2001 and 2000
- --------------------------------------------------------------------------------
NOTE 6 - LOANS (Continued)
Nonperforming loans at year end were as follows:
2002 2001 2000
-------- -------- --------
(In Thousands)
Loans past due over 90 days
still on accrual $ 1,399 $ 5,948 $ 2,196
Nonaccrual loans 10,588 9,307 7,840
Restructured loans 293 275 689
Nonperforming loans include impaired loans and smaller balance homogeneous
loans, such as residential mortgage and consumer loans, that are collectively
evaluated for impairment.
NOTE 7 - PREMISES AND EQUIPMENT
Year-end premises and equipment were as follows (in thousands):
2002 2001
------------ ------------
Land and improvements $ 2,421 $ 2,402
Buildings and leasehold improvements 8,749 8,494
Furniture and equipment 8,828 8,239
------------ ------------
19,998 19,135
Less: accumulated depreciation (8,313) (7,100)
------------ ------------
$ 11,685 $ 12,035
============ ============
NOTE 8 - GOODWILL
The balance of goodwill as of December 31, 2002 and 2001 was $16,044,000.
Goodwill is no longer amortized starting in 2002. The effect of not amortizing
goodwill is summarized as follows (in thousands, except per share data):
2002 2001 2000
-------- -------- --------
Reported net income (loss) $ (1,220) $ 2,319 $ 1,335
Add back: goodwill amortization, net of tax - 877 1,037
-------- -------- --------
Adjusted net income (loss) $ (1,220) $ 3,196 $ 2,372
======== ======== ========
Basic earnings per share:
Reported net income (loss) $ (0.23) $ 0.44 $ 0.26
Add back: goodwill amortization, net of tax - 0.17 0.19
-------- -------- --------
Adjusted net income (loss) $ (0.23) $ 0.61 $ 0.45
======== ======== ========
- --------------------------------------------------------------------------------
(Continued)
PREMIER FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002, 2001 and 2000
- --------------------------------------------------------------------------------
NOTE 8 - GOODWILL (Continued)
2002 2001 2000
-------- -------- --------
Diluted earnings per share:
Reported net income (loss) $ (0.23) $ 0.44 $ 0.26
Add back: goodwill amortization, net of tax - 0.17 0.19
-------- -------- --------
Adjusted net income (loss) $ (0.23) $ 0.61 $ 0.45
======== ======== ========
NOTE 9 - DEPOSITS
At December 31, 2002, the scheduled maturities of time deposits are as follows
(in thousands):
2003 $ 150,621
2004 46,618
2005 23,653
2006 6,847
2007 and thereafter 8,858
------------
$ 236,597
============
Certain directors and executive officers of the Banks and companies, in which
they have beneficial ownership, were deposit customers of the Banks during 2002
and 2001. The balance of such deposits at December 31, 2002 and 2001 were
approximately $14,813,000 and $9,926,000.
NOTE 10 - SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
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 (in thousands):
2002 2001
------------ ------------
Year-end balance $ 5,851 $ 5,520
Average balance during the year $ 5,607 $ 7,518
Average interest rate during the year 1.76% 4.44%
Maximum month-end balance during the year $ 5,851 $ 11,135
Weighted average interest rate at year-end 1.43% 1.76%
- --------------------------------------------------------------------------------
(Continued)
PREMIER FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002, 2001 and 2000
- --------------------------------------------------------------------------------
NOTE 11 - FEDERAL HOME LOAN BANK ADVANCES
The Banks own stock of the Federal Home Loan Bank (FHLB) of Cincinnati, Ohio.
This stock allows the Banks to borrow advances from the FHLB.
All advances are paid either on a monthly basis or at maturity, over remaining
terms of one to thirteen years, with interest rates ranging from 1.51% to 8.45%.
Advances are secured by the FHLB stock 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, 2002 are as follows
(in thousands):
2003 $ 6,571
2004 1,272
2005 866
2006 912
2007 937
Thereafter 12,975
----------
$ 23,533
==========
NOTE 12 - NOTES PAYABLE AND OTHER BORROWED FUNDS
In 2001, the Company entered into a promissory note with a commercial bank which
is secured by Boone County Bank common stock. The interest rate is prime rate,
and all accrued interest and principal are due at maturity on March 27, 2003.
The outstanding balance at December 31, 2002 was $1.7 million and the interest
rate was 4.25%.
At December 31, 2001, The Company had a line of credit with a commercial bank of
$20 million. The balance on this line of credit at year-end 2001 was $8 million.
During 2002, the line of credit expired, and the Company now has a note payable
with the same commercial bank. The collateral for the note is the common stock
of all of the Company's subsidiary banks except for Boone County Bank and a
second lien on the common stock of Boone County Bank. The interest rate is prime
rate plus 0.75% and the note matures on October 15, 2004. Accrued interest and
principal payments of $300,000 are due each quarter with the remaining principal
and accrued interest due at maturity, thus principal payments of $1.2 million
are due in 2003 and the remaining principal is due in 2004. The outstanding
balance at December 31, 2002 was $6 million and the interest rate was 5.00%.
- --------------------------------------------------------------------------------
(Continued)
PREMIER FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002, 2001 and 2000
- --------------------------------------------------------------------------------
NOTE 12 - NOTES PAYABLE AND OTHER BORROWED FUNDS (Continued)
In addition to the notes with commercial banks described above, during 2002, the
Company also entered into notes payable with the Company's Chairman of the Board
and President. Due to the restriction on the Company to pay its Trust Preferred
distributions as discussed in Note 13, the Company reached an 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,
$701,000, so that the Company, with the FRB's approval, could make their second
quarter 2002 distribution. A similar agreement was reached with the FRB for the
payment of the distribution due for the third quarter 2002. The Company's
President, who is also a director, agreed to loan the Company the amount of the
distribution, $701,000. Thus, the balance of notes payable at December 31, 2002,
was $1,402,000. Both loans are unsecured at a zero percent interest rate with no
defined maturity date. The loans cannot be repaid without the prior approval of
the FRB.
NOTE 13 - GUARANTEED PREFERRED BENEFICIAL INTERESTS IN COMPANY'S
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.
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.
As previously disclosed, pursuant to an agreement entered into with the Federal
Reserve Bank (FRB) described in Note 3, the Company is required to request
approval for the payment of distributions due on the Trust Preferred Securities.
As part of a Debt Reduction and Profitability plan presented on January 6, 2003,
the Company requested and received approval from the FRB to redeem $3,000,000 of
the $28,750,000 outstanding Trust Preferred Securities. Thus, on February 24,
2003, the Company announced its plans to redeem $3,000,000 (120,000 shares) of
its 9.75% Trust Preferred Securities as of March 31, 2003; however, the FRB
denied the Company's request to make distributions on the remaining Trust
Preferred Securities for the first quarter of 2003.
- --------------------------------------------------------------------------------
(Continued)
PREMIER FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002, 2001 and 2000
- --------------------------------------------------------------------------------
NOTE 13 - GUARANTEED PREFERRED BENEFICIAL INTERESTS IN COMPANY'S
DEBENTURES (Continued)
Premier exercised its right to defer the payment of interest on its 9.75% Trust
Preferred Securities for December 31, 2002, March 31, 2003, and for an
indefinite period, which can be no longer than 20 consecutive quarterly periods.
This and any future deferred distributions will begin to accrue interest at an
annual rate of 9.75% which will be paid when the deferred distributions are
ultimately paid. Management of Premier does not expect to resume payments on the
Subordinated Debentures or the Trust Preferred until the Federal Reserve Bank of
Cleveland determines that Premier has achieved adequate and sustained levels of
profitability to support such payments and approves such payments.
NOTE 14 - INCOME TAXES
The components of the provision (benefit) for income taxes are
as follows (in thousands):
2002 2001 2000
-------- -------- --------
Current $ (407) $ 4,298 $ 794
Deferred (617) (913) (478)
-------- -------- --------
$ (1,024) $ 3,385 $ 316
======== ======== ========
The Company's deferred tax assets and liabilities at December 31 are shown below
(in thousands). No valuation allowance for the realization of deferred tax
assets is considered necessary.
2002 2001
--------- ---------
Deferred tax assets
Allowance for loan losses $ 3,862 $ 3,132
Write-downs of other real estate owned 468 265
Other 166 152
--------- ---------
Total deferred tax assets 4,496 3,549
Deferred tax liabilities
Depreciation $ 315 $ 391
Federal Home Loan Bank dividends 478 442
Unrealized gain on investment securities 808 442
Amortization of intangibles 638 202
Other 51 117
--------- ---------
Total deferred tax liabilities 2,290 1,594
--------- ---------
Net deferred tax asset, included in other assets $ 2,206 $ 1,955
========= =========
- --------------------------------------------------------------------------------
(Continued)
PREMIER FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002, 2001 and 2000
- --------------------------------------------------------------------------------
NOTE 14 - 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 (in thousands):
2002 2001 2000
------------------- ------------------ ------------------
U. S. federal income tax rate $ (763) 34.0% $ 1,939 34.0% $ 561 34.0%
Changes from the statutory rate
Tax-exempt investment income (309) (13.8) (394) (6.9) (445) (27.0)
Non-deductible interest expense
related to carrying tax-exempt
investments 39 1.7 60 1.0 73 4.4
Tax credits (71) (3.2) (71) (1.3) (71) (4.3)
Goodwill amortization and
disposal - - 1,758 30.8 206 12.5
Other 80 3.6 93 1.7 (8) (0.5)
--------- ----- -------- ----- --------- -----
$ (1,024) (45.7)% $ 3,385 59.3% $ 316 19.1%
========= ===== ======== ===== ========= =====
NOTE 15 - 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 are at the discretion of the Company's Board of Directors. Total
contributions to the plans were $215,000, $264,000 and $276,000 in 2002, 2001
and 2000.
The Company also maintains the Premier Financial Bancorp, Inc. 1996 Employee
Stock Ownership incentive Plan (the Plan), whereby certain employees of the
Company are eligible to receive incentive stock options. The Plan is accounted
for in accordance with Accounting Principles Board Opinion (APB) No. 25,
"Accounting for Stock Issued to Employees", and related interpretations. Under
the Plan, a maximum of 100,000 shares of the Company's common stock may be
issued through the exercise of these incentive stock options. The option price
is the fair market value of the Company's shares at the date of the grant. The
options are exercisable ten years from the date of grant.
- --------------------------------------------------------------------------------
(Continued)
PREMIER FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002, 2001 and 2000
- --------------------------------------------------------------------------------
NOTE 15 - EMPLOYEE BENEFIT PLANS (Continued)
A summary of the Company's stock option activity is as follows:
---------2002--------- ---------2001--------- ----------2000----------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Options Price Options Price Options Price
Outstanding at beginning of year 62,000 $ 13.71 62,000 $ 13.71 62,000 $ 13.71
Forfeitures (27,000) 13.30 - - - -
------- ------- ------
Outstanding at year end 35,000 $ 14.03 62,000 $ 13.71 62,000 $ 13.71
======= ======= ======
Exercisable at year end 35,000 62,000 58,000
Weighted average remaining life 4.4 5.3 6.3
NOTE 16 - RELATED PARTY TRANSACTIONS
During 2002, 2001, and 2000, the Company paid approximately $418,000, $437,000,
and $391,000 for printing, supplies, furniture, and equipment to a company
affiliated by common ownership. The Company also paid this affiliate
approximately $1,452,000, $1,199,000, and $1,066,000 in 2002, 2001, and 2000 to
permit the Company's employees to participate in its employee medical benefit
plan.
- --------------------------------------------------------------------------------
(Continued)
PREMIER FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002, 2001 and 2000
- --------------------------------------------------------------------------------
NOTE 17 - 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 2002,
2001 and 2000 is presented below (in thousands, except per share data):
2002 2001 2000
-------- -------- --------
Basic earnings per share
Net (loss) income available to common
stockholders $ (1,220) $ 2,319 $ 1,335
Weighted average common shares
outstanding 5,232 5,232 5,232
-------- -------- --------
Earnings per share $ (0.23) $ 0.44 $ 0.26
======== ======== ========
Diluted earnings per share
Net (loss) income available to common
stockholders $ (1,220) $ 2,319 $ 1,335
Weighted average common shares
outstanding 5,232 5,232 5,232
Add dilutive effects of assumed exercise
of stock options - - -
-------- -------- --------
Weighted average common and dilutive
potential common shares outstanding 5,232 5,232 5,232
-------- -------- --------
Earnings per share assuming dilution $ (0.23) $ 0.44 $ 0.26
======== ======== ========
Stock options for 35,000 shares of common stock for 2002, and 62,000 shares for
2001 and 2000 were not included in the computation of earnings per share
assuming dilution because their impact was anti-dilutive.
- --------------------------------------------------------------------------------
(Continued)
PREMIER FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002, 2001 and 2000
- --------------------------------------------------------------------------------
NOTE 18 - DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair values of the Company's financial instruments at year-end are as
follows (in thousands):
--------------2002------------- -------------2001--------------
Carrying Fair Carrying Fair
Amount Value Amount Value
Financial assets
Cash and due from banks $ 18,044 $ 18,044 $ 20,628 $ 20,628
Federal funds sold 29,827 29,827 33,517 33,517
Securities available for sale 157,633 157,633 155,566 155,566
Loans, net 423,777 424,558 449,795 453,897
Federal Home Loan Bank and
Federal Reserve Bank stock 4,395 4,395 4,261 4,261
Interest receivable 6,485 6,485 7,842 7,842
Financial liabilities
Deposits $ (547,974) $ (558,974) $ (570,531) $ (575,252)
Securities sold under agreements
to repurchase (5,851) (5,851) (5,520) (6,005)
Federal Home Loan Bank advances (23,533) (25,322) (30,795) (32,492)
Other borrowed funds (7,700) (7,700) (13,000) (13,000)
Notes payable (1,402) (1,345) - -
Guaranteed preferred beneficial
interests in Company's debentures (28,750) (25,417) (28,750) (27,888)
Interest payable (1,818) (1,818) (1,903) (1,903)
Carrying amount is the estimated fair value for cash and cash equivalents,
short-term borrowings, Federal Home Loan Bank and Federal Reserve Bank stock,
accrued interest receivable and payable, demand deposits, short-term debt, and
variable rate loans or deposits that reprice frequently and fully. Security fair
values are based on market prices or dealer quotes, and if no such information
is available, on the rate and term of the security and information about the
issuer. 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 considered material.
- --------------------------------------------------------------------------------
(Continued)
PREMIER FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002, 2001 and 2000
- --------------------------------------------------------------------------------
NOTE 19 - FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
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.
At December 31, 2002 and 2001, the Banks had the following financial instruments
whose approximate contract amounts represent credit risk (in thousands):
2002 2001
--------- ---------
Standby letters of credit $ 702 $ 890
Commitments to extend credit:
Fixed $ 9,833 $ 17,021
Variable 15,108 7,038
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 3% to 18%. 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.
- --------------------------------------------------------------------------------
(Continued)
PREMIER FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002, 2001 and 2000
- --------------------------------------------------------------------------------
NOTE 20 - 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, 2002, management is unaware of any legal
proceedings, of which the ultimate result would have a material adverse effect
upon the consolidated financial statements of the Company.
NOTE 21 - STOCKHOLDERS' EQUITY
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 2003, the
Banks could, without prior approval, declare dividends of approximately $3.1
million plus any 2003 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 December 31,
2002, the Company and the Banks meet all quantitative capital adequacy
requirements to which they are subject.
- --------------------------------------------------------------------------------
(Continued)
PREMIER FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002, 2001 and 2000
- --------------------------------------------------------------------------------
NOTE 21 - STOCKHOLDERS' EQUITY (Continued)
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 (FRB), as
discussed in Note 3, 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.
Citizens Deposit Bank (Citizens Deposit) 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 Deposit's Tier I capital to average assets was 10.9% at
December 31, 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 7.6% at December 31,
2002.
Citizens Bank of Kentucky (Citizens) entered into an agreement with the Kentucky
Department of Financial Institutions (KDFI) and the Federal Deposit Insurance
Corporation (FDIC) on September 11, 2002. Among other things, the agreement
restricts the Company from paying dividends without prior approval and requires
that the Bank maintain a Tier I capital to average assets ratio of not less than
7.5%. This agreement will remain in effect until terminated by the KDFI and
FDIC. Citizen's Tier I capital to average assets was 8.7% as of December 31,
2002.
As of December 31, 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 following table. There
are no conditions or events since that notification that management believes
have changed the Company's category.
- --------------------------------------------------------------------------------
(Continued)
PREMIER FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002, 2001 and 2000
- --------------------------------------------------------------------------------
NOTE 21 - STOCKHOLDERS' EQUITY (Continued)
The Company's and the four largest subsidiary Banks' capital amounts and ratios
as of December 31, 2002 and 2001 are presented in the table below (in
thousands):
To Be Well Capitalized
For Capital Under Prompt Corrective
Actual Adequacy Purposes Action Provisions
2002 Amount Ratio Amount Ratio Amount Ratio
----
Total Capital (to Risk-Weighted Assets):
Consolidated $ 75,994 17.5% $ 34,664 8% $ 43,330 10%
Boone County Bank 15,635 17.6 7,112 8 8,890 10
Farmers Deposit Bank 16,862 16.2 8,350 8 10,438 10
Citizens Deposit Bank 10,766 16.7 5,167 8 6,458 10
Citizens Bank (Kentucky), Inc. 8,218 14.7 4,487 8 5,609 10
Tier I Capital (to Risk-Weighted Assets):
Consolidated $ 61,020 14.1% $ 17,332 4% $ 25,998 6%
Boone County Bank 14,556 16.4 3,556 4 5,334 6
Farmers Deposit Bank 15,552 14.9 4,175 4 6,263 6
Citizens Deposit Bank 9,932 15.4 2,583 4 3,875 6
Citizens Bank (Kentucky), Inc. 7,492 13.4 2,243 4 3,365 6
Tier I Capital (to Average Assets):
Consolidated $ 61,020 9.1% $ 26,731 4% $ 33,414 5%
Boone County Bank 14,556 9.5 6,102 4 7,628 5
Farmers Deposit Bank 15,552 10.9 5,710 4 7,137 5
Citizens Deposit Bank 9,932 10.9 3,662 4 4,577 5
Citizens Bank (Kentucky), Inc. 7,492 8.7 3,431 4 4,289 5
2001
Total Capital (to Risk-Weighted Assets):
Consolidated $ 77,554 16.6% $ 37,313 8% $ 46,641 10%
Boone County Bank 14,463 16.5 7,021 8 8,776 10
Farmers Deposit Bank 16,751 15.5 8,655 8 10,819 10
Citizens Deposit Bank 11,809 15.4 6,118 8 7,648 10
Citizens Bank (Kentucky), Inc. 9,522 13.4 5,703 8 7,129 10
Tier I Capital (to Risk-Weighted Assets):
Consolidated $ 62,620 13.4% $ 18,656 4% $ 27,985 6%
Boone County Bank 13,485 15.4 3,510 4 5,266 6
Farmers Deposit Bank 15,577 14.4 4,327 4 6,491 6
Citizens Deposit Bank 10,845 14.2 3,059 4 4,589 6
Citizens Bank (Kentucky), Inc. 8,622 12.1 2,851 4 4,277 6
Tier I Capital (to Average Assets):
Consolidated $ 62,620 8.5% $ 29,468 4% $ 36,835 5%
Boone County Bank 13,485 9.0 5,999 4 7,499 5
Farmers Deposit Bank 15,577 10.9 5,703 4 7,129 5
Citizens Deposit Bank 10,845 9.9 4,395 4 5,494 5
Citizens Bank (Kentucky), Inc. 8,622 8.2 4,184 4 5,230 5
- --------------------------------------------------------------------------------
(Continued)
PREMIER FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002, 2001 and 2000
- --------------------------------------------------------------------------------
NOTE 22 - PARENT COMPANY FINANCIAL STATEMENTS
Condensed Balance Sheets
December 31
(In Thousands)
2002 2001
--------- ---------
ASSETS
Cash $ 7,961 $ 711
Investment in subsidiaries 88,219 98,429
Securities available for sale - 5
Premises and equipment 1,049 1,080
Real estate acquired through foreclosure 225 380
Other assets 1,242 1,348
--------- ---------
Total assets $ 98,696 $ 101,953
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Other liabilities $ 1,478 $ 328
Notes payable 1,402 -
Guaranteed preferred beneficial interests in
Company's debentures 28,750 28,750
Other borrowed funds 7,700 13,000
--------- ---------
Total liabilities 39,330 42,078
Stockholders' equity
Preferred stock - -
Common stock 1,103 1,103
Surplus 43,445 43,445
Retained earnings 13,250 14,470
Accumulated other comprehensive income 1,568 857
--------- ---------
Total stockholders' equity 59,366 59,875
--------- ---------
Total liabilities and stockholders' equity $ 98,696 $ 101,953
========= =========
- --------------------------------------------------------------------------------
(Continued)
PREMIER FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002, 2001 and 2000
- --------------------------------------------------------------------------------
NOTE 22 - PARENT COMPANY FINANCIAL STATEMENTS (Continued)
Condensed Statements of Operations
Years Ended December 31
(In Thousands)
2002 2001 2000
-------- -------- --------
Income
Dividends from subsidiaries $ 8,025 $ 10,538 $ 3,775
Interest and dividend income - 58 229
Other income 5 70 15
-------- -------- --------
Total income 8,030 10,666 4,019
Expenses
Interest expense 3,313 4,137 4,507
Salaries and employee benefits 552 914 1,459
Other expenses 1,226 852 927
-------- -------- --------
Total expenses 5,091 5,903 6,893
Income (loss) before income taxes and equity
in undistributed income of subsidiaries 2,939 4,763 (2,874)
Income tax expense (benefit) (1,729) (1,976) (2,315)
-------- -------- --------
Income (loss) before equity in undistributed
income of subsidiaries 4,668 6,739 (559)
Equity in undistributed income of subsidiaries (5,888) (4,420) 1,894
-------- -------- --------
Net income (loss) $ (1,220) $ 2,319 $ 1,335
======== ======== ========
- --------------------------------------------------------------------------------
(Continued)
PREMIER FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002, 2001 and 2000
- --------------------------------------------------------------------------------
NOTE 22 - PARENT COMPANY FINANCIAL STATEMENTS (Continued)
Condensed Statements of Cash Flows
Years Ended December 31
(In Thousands)
2002 2001 2000
-------- -------- --------
Cash flows from operating activities
Net income (loss) $ (1,220) $ 2,319 $ 1,335
Adjustments to reconcile net (loss)
income to net cash from operating
activities
Depreciation 83 83 76
Write-down of other real estate owned 155 - 110
Securities (gains) losses, net 1 (60) -
Equity in undistributed
income of subsidiaries 5,888 4,420 (1,894)
Change in other assets 106 139 20
Change in other liabilities 1,151 (999) 758
-------- -------- --------
Net cash from operating activities 6,164 5,902 405
Cash flows from investing activities
Capital contributed to subsidiaries (128) (880) (21)
Proceeds from liquidation of subsidiary 5,160 - -
Proceeds from sale of securities 4 2,060 -
Purchase of premises and equipment (52) (284) (80)
Proceeds from sale of fixed assets - 96 682
-------- -------- --------
Net cash from investing activities 4,984 992 581
Cash flows from financing activities
Dividends paid - - (785)
Proceeds from notes payable 1,402 - -
Payments of other borrowed funds (5,300) (7,000) -
-------- -------- --------
Net cash from financing activities (3,898) (7,000) (785)
Net change in cash and cash equivalents 7,250 (106) 201
Cash and cash equivalents at beginning of year 711 817 616
-------- -------- --------
Cash and cash equivalents at end of year $ 7,961 $ 711 $ 817
======== ======== ========
- --------------------------------------------------------------------------------
(Continued)
PREMIER FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002, 2001 and 2000
- --------------------------------------------------------------------------------
NOTE 23 - QUARTERLY FINANCIAL DATA (UNAUDITED)
Interest Net Interest Net Earnings per Share
Income Income Income Basic Fully Diluted
2002
First Quarter $ 11,546 $ 5,974 $ 644 $ .12 $ .12
Second Quarter 11,345 6,150 (1,380) (.26) (.26)
Third Quarter 10,925 6,046 (839) (.16) (.16)
Fourth Quarter 10,624 6,120 355 .07 .07
2001
First Quarter $ 15,796 $ 6,354 $ 1,224 $ .23 $ .23
Second Quarter 14,999 6,410 (705) (.13) (.13)
Third Quarter 14,243 6,240 46 .01 .01
Fourth Quarter 13,004 6,270 1,754 .33 .33
PART III
Item 9. Changes In and Disagreements with Accountants on Accounting and
- ------------------------------------------------------------------------
Financial Disclosure
--------------------
There have been no changes in or disagreements with accountants on
accounting or financial disclosure matters.
Item 10, 11, 12 and 13. Directors and Executive Officers of the Registrant;
- ----------------------------------------------------------------------------
Executive Compensation; Security Ownership of Certain Beneficial Owners
-----------------------------------------------------------------------
and Management; and Certain Relationships and Related Transactions
------------------------------------------------------------------
The information required by these Items is omitted because the
Company is filing a definitive proxy statement pursuant to Regulation 14A
not later than 120 days after the end of the fiscal year covered by this report
which includes the required information. The required information contained in
the Company's proxy statement is incorporated herein by reference.
Item 14. 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 annual 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 IV
Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K
- -------------------------------------------------------------------------
(a) The following documents are filed as part of this report:
1. Financial Statement Schedules:
No financial statement schedules have been included as part of this
report because they are either not required or the information is
otherwise included.
2. List of Exhibits:
The following is a list of exhibits required by Item 601 of
Regulation S-K and by paragraph (c) of this Item 14.
Exhibit
Number Description of Document
------- -----------------------
3.1 Form of Articles of Incorporation of registrant (included as Exhibit 3.1 to
registrant's Registration Statement on Form S-1, Registration No. 333-1702, filed on February
28, 1996 with the Commission and incorporated herein by reference).
3.2 Form of Articles of Amendment to Articles of Incorporation effective March 15, 1996 re: amendment
to Article IV (included as Exhibit 3.2 to registrant's Amendment No. 1 to Registration
Statement on Form S-1, Registration No. 333-1702, filed on March 25, 1996 with the Commission
and incorporated herein by reference).
3.3 Bylaws of registrant (included as Exhibit 3.2 to registrant's Registration Statement on Form
S-1, Registration No. 333-1702, filed on February 28, 1996 with the Commission and incorporated
herein by reference).
4.1 Form of Junior Subordinated Indenture dated as of June 6, 1997 between Registrant and Bankers
Trust Company, as Trustee, with respect to 9.75% Junior Subordinated Deferrable Interest
Debentures due June 30, 2027 (incorporated by reference to Exhibit 4.1 to the Registration
Statement on Form S-1 of Registrant filed May 28, 1997 with the Commission (Registration No.
333-27943)).
4.2 Form of 9.75% Junior Subordinated Deferrable Interest Debenture Certificate (incorporated
by reference to Exhibit 4.2 to the Registration Statement on Form S-1 of Registrant filed May
28, 1997 with the Commission (Registration No. 333-27943)).
4.3 Form of Amended and Restated Trust Agreement dated as of June 6, 1997 among Registrant,
as Depositor, Bankers Trust Company, as Property Trustee, and Bankers Trust (Delaware), as
Delaware Trustee (incorporated by reference to Exhibit 4.4 to the Registration Statement
on Form S-1 of Registrant filed May 28, 1997 with the Commission (Registration No. 333-27943)).
4.4 Form of Guarantee Agreement dated as of June 6, 1997 between Registrant and Bankers Trust
Company (incorporated by reference to Exhibit 4.6 to the Registration Statement on Form S-1 of
Registrant filed May 28, 1997 with the Commission (Registration No. 333-27943)).
10.1 Deferred Compensation Agreement dated December 17, 1992, between Georgetown Bank & Trust
Company and Gardner E. Daniel (included as Exhibit 10.5 to registrant's Registration
Statement on Form S-1, Registration No. 333-1702, filed on February 28, 1996 with the
Commission and incorporated herein by reference).
10.2 Premier Financial Bancorp, Inc. 1996 Employee Stock Ownership Incentive Plan (included as
Exhibit 10.6 to registrant's Registration Statement on Form S-1, Registration No. 333-1702,
filed on February 28, 1996 with the Commission and incorporated herein by reference).
10.3 Premier Financial Bancorp, Inc.'s 2002 Employee Stock Ownership Incentive Plan, filed as Annex A to
definitive proxy statement dated May 17, 2002, filed on April 30, 2002 with the Commission, is
incorporated herein by reference.
10.4 Premier Financial Bancorp, Inc. written agreement with the Federal Reserve Bank of Cleveland
dated January 29, 2003.
21 Subsidiaries of registrant
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) Reports on Form 8-K
On December 5, 2002 an 8-K was filed relating to Premier exercising its
right to defer the payment of interest on its 9.75% Junior Subordinated
Deferrable Interest Debentures related to the Trust Preferred Securities, for
an indefinite period (which can be no longer than 20 consecutive quarterly
periods)
On January 29, 2003 an 8-K was filed relating to a written agreement
Between Premier and the Federal Reserve Bank of Cleveland. The agreement was
entered into in recognition of their common goal to restore the financial
soundness of Premier. Among the provisons of the agreement was the
continuation of the restriction on Premier's payment of dividends on its
common stock (PFBI) without the express written consent of the Federal
Reserve Bank of Cleveland and the continuation of the restriction on Premier's
payment of quarterly distributions on its Trust Preferred Securities (PFBIP)
without the express written consent of the Federal Reserve Bank of Cleveland.
On February 24, 2003 an 8-K was filed relating to Premier issuing a
news release announcing that it intend to redeem $3,000,000 (120,000 shares)
of its PFBI Capital Trust 9.75% Preferred Securities ("Trust Preferred
Securities") as of March 31, 2003. Premier also announced that the first
quarter distribution on the remaining Trust Preferred Securities scheduled for
March 31, 2003, as well as future distributions on the Trust Preferred
Securities, will be deferred.
PRINCIPAL EXECUTIVE OFFICER CERTIFICATION
PURSUANT TO SECTION 302 OF
THE SARBANES-OXLEY ACT OF 2002
I, Robert W. Walker, President and CEO of Premier Financial Bancorp, Inc.
certify that:
1. I have reviewed this annual report on Form 10-K of Premier Financial
Bancorp, Inc.;
2. Based on my knowledge, this annual 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 annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual 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
annual 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 annual
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 annual report (the "Evaluation Date"); and
c) presented in this annual 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
annual 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: March 27, 2003
/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, Vice President and CFO of Premier Financial Bancorp, Inc.
certify that:
1. I have reviewed this annual report on Form 10-K of Premier Financial
Bancorp, Inc.;
2. Based on my knowledge, this annual 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 annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual 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
annual 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 annual
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 annual report (the "Evaluation Date"); and
c) presented in this annual 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
annual 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: March 27, 2003
/s/ Brien M. Chase
Brien M. Chase
Vice President & Chief Financial Officer
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
registrant has duly caused this Annual Report on Form 10-K to be signed on its
behalf by the undersigned thereunto duly authorized, in the City of Huntington,
State of West Virginia, on the 27th day of March, 2003.
PREMIER FINANCIAL BANCORP, INC.
By: /s/ Robert W. Walker, President
-------------------------------
Robert W. Walker, President
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Annual Report on Form 10-K has been signed below by the following persons on
behalf of the registrant in the capacities and on the dates indicated.
March 19, 2003 /s/ Robert W. Walker Principal Executive and Director
------------------------
Robert W. Walker
March 19, 2003 /s/ Brien M. Chase Principal Financial and
------------------------ Accounting Officer
Brien M. Chase
March 19, 2003 /s/ Toney K. Adkins Director
------------------------
Toney K. Adkins
March 19, 2003 /s/ Hosmer A. Brown, III Director
------------------------
Hosmer A. Brown, III
March 19, 2003 /s/ Edsel Burns Director
------------------------
Edsel Burns
March __, 2003 Director
------------------------
Charles R. Hooten, Jr.
March 19, 2003 /s/ E. V. Holder, Jr. Director
-------------------------
E. V. Holder, Jr.
March 19, 2003 /s/ Wilbur M. Jenkins Director
-------------------------
Wilbur M. Jenkins
March 19, 2003 /s/ Keith F. Molihan Director
-------------------------
Keith F. Molihan
March 19, 2003 /s/ Marshall T. Reynolds Chairman of the Board
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Marshall T. Reynolds
March 19, 2003 /s/ Neal Scaggs Director
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Neal Scaggs
March 19, 2003 /s/ Thomas W. Wright Director
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Thomas W. Wright