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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2003
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ___________ to ___________
Commission file number 0-20908
PREMIER FINANCIAL BANCORP, INC.
(Exact name of registrant as specified in its charter)
Kentucky 61-1206757
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2883 Fifth Avenue
Huntington, West Virginia 25702
(address of principal executive officer) (Zip Code)
Registrant's telephone number (304) 525-1600
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to filing
requirements for the past 90 days. Yes [X] No [ ].
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Securities Exchange Act of 1934). Yes [ ] No [X].
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practical date.
Common stock - 5,232,230 shares outstanding at April 30, 2003
PREMIER FINANCIAL BANCORP, INC.
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
The accompanying information has not been audited by independent public
accountants; however, in the opinion of management such information reflects all
adjustments necessary for a fair presentation of the results for the interim
period. All such adjustments are of a normal and recurring nature. Premier's
accounting and reporting policies are in accordance with accounting principles
generally accepted in the United States of America. Certain accounting
principles used by Premier involve a significant amount of judgment about future
events and require the use of estimates in their application. The following
policies are particularly sensitive in terms of judgments and the extent to
which estimates are used: allowance for loan losses, goodwill impairment, and
stock based compensation. These estimates are based on assumptions that may
involve significant uncertainty at the time of their use. However, the policies,
the estimates and the estimation process as well as the resulting disclosures
are periodically reviewed by the Audit Committee of the Board of Directors and
material estimates are subject to review as part of the external audit by the
independent public accountants.
The accompanying financial statements are presented in accordance with the
requirements of Form 10-Q and consequently do not include all of the disclosures
normally required by accounting principles generally accepted in the United
States of America or those normally made in the registrant's annual Form 10-K
filing. Accordingly, the reader of the Form 10-Q may wish to refer to the
registrant's Form 10-K for the year ended December 31, 2002 for further
information in this regard.
Index to consolidated financial statements:
Consolidated Balance Sheets....................................... 3
Consolidated Statements of Income ................................ 4
Consolidated Statements of Comprehensive Income .................. 5
Consolidated Statements of Cash Flows............................. 6
Notes to Consolidated Financial Statements........................ 7
PREMIER FINANCIAL BANCORP, INC.
CONSOLIDATED BALANCE SHEETS
MARCH 31, 2003 AND DECEMBER 31, 2002
(DOLLARS IN THOUSANDS)
- ------------------------------------------------------------------------------
(UNAUDITED)
2003 2002
ASSETS
Cash and due from banks $ 19,948 $ 18,044
Federal funds sold 52,465 29,827
Securities available for sale 155,078 157,633
Loans 420,978 435,137
Allowance for loan losses (11,617) (11,360)
---------- ---------
Net loans 409,361 423,777
Federal Home Loan Bank and
Federal Reserve Bank stock 4,487 4,395
Premises and equipment, net 11,569 11,685
Real estate and other property
acquired through foreclosure 3,094 3,939
Interest receivable 5,680 6,485
Goodwill 16,044 16,044
Other assets 5,606 5,799
--------- ---------
Total assets $ 683,332 $ 677,628
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits
Non-interest bearing $ 61,115 $ 62,874
Time deposits, $100,000 over 65,380 66,033
Other interest bearing 429,639 419,067
--------- ---------
Total deposits 556,134 547,974
Securities sold under agreements to repurchase 6,668 5,851
Federal Home Loan Bank advances 23,312 23,533
Other borrowed funds 7,400 7,700
Notes payable 1,402 1,402
Guaranteed preferred beneficial
interests in Company's debentures 25,750 28,750
Interest payable 2,321 1,818
Other liabilities 922 1,234
--------- ---------
Total liabilities 623,909 618,262
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 13,603 13,250
Accumulated other comprehensive income 1,272 1,568
--------- ---------
Total stockholders' equity 59,423 59,366
--------- ---------
Total liabilities and stockholders' equity $ 683,332 $ 677,628
========= =========
- ------------------------------------------------------------------------------
See Accompanying Notes to Consolidated Financial Statements
PREMIER FINANCIAL BANCORP, INC.
CONSOLIDATED STATEMENTS OF INCOME
THREE MONTHS ENDED MARCH 31, 2003AND 2002
(IN THOUSANDS EXCEPT PER SHARE DATA)
(UNAUDITED)
- ------------------------------------------------------------------------------
Three Months Ended
March 31,
2003 2002
Interest income
Loans, including fees $ 8,523 $ 9,579
Securities available for sale
Taxable 1,111 1,555
Tax-exempt 203 208
Federal funds sold and other 156 204
-------- --------
Total interest income 9,993 11,546
Interest expense
Deposits 2,880 4,369
Other borrowings 402 490
Debentures 730 713
-------- --------
Total interest expense 4,012 5,572
Net interest income 5,981 5,974
Provision for loan losses 1,397 986
-------- --------
Net interest income after
provision for loan losses 4,584 4,988
Non-interest income
Service charges 550 494
Insurance commissions 41 40
Securities gains 189 44
Other 345 280
-------- --------
1,125 858
Non-interest expenses
Salaries and employee benefits 2,818 2,707
Occupancy and equipment expenses 704 682
Professional fees 262 251
Taxes, other than payroll, property and income 152 172
Write-downs, expenses, sales of
other real estate owned 77 68
Other expenses 1,214 1,062
-------- --------
5,227 4,942
Income before income taxes 482 904
Provision for income taxes 129 260
-------- --------
Net income $ 353 $ 644
======== ========
Basic earnings per share $ 0.07 $ 0.12
Earnings per share assuming dilution $ 0.07 $ 0.12
Weighted average shares outstanding 5,232 5,232
Weighted average shares assuming dilution 5,234 5,232
- ------------------------------------------------------------------------------
See Accompanying Notes to Consolidated Financial Statements
PREMIER FINANCIAL BANCORP, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
THREE ENDED MARCH 31, 2003 AND 2002
(IN THOUSANDS)
(UNAUDITED)
- ------------------------------------------------------------------------------
Three Months Ended
March 31,
2003 2002
Net income $ 353 $ 644
Other comprehensive income (loss), net of tax:
Unrealized gains and (losses) arising during
the period (171) (662)
Reclassification of realized amount (125) (29)
-------- --------
Net change in unrealized gain (loss) on
securities (296) (691)
-------- --------
Comprehensive income (loss) $ 57 $ (47)
======== ========
- ------------------------------------------------------------------------------
See Accompanying Notes to Consolidated Financial Statements
PREMIER FINANCIAL BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 2003 AND 2002
(IN THOUSANDS)
(UNAUDITED)
- ------------------------------------------------------------------------------
2003 2002
Cash flows from operating activities
Net income $ 353 $ 644
Adjustments to reconcile net income to net
cash from operating activities
Depreciation 290 273
Provision for loan losses 1,397 986
Amortization, net 112 75
FHLB stock dividends (49) (20)
Investment securities losses (gains), net (189) (44)
Write downs of OREO 28 -
Changes in
Interest Receivable 805 754
Other assets 368 (305)
Interest Payable 503 645
Other liabilities (312) (183)
---------- ----------
Net cash from operating activities 3,306 2,825
Cash flows from investing activities
Purchases of securities available for sale (49,197) (26,230)
Proceeds from sales of securities
available for sale 13,074 3,264
Proceeds from maturities and calls of
securities available for sale 38,284 29,407
Purchases of FHLB stock (43) (24)
Net change in federal funds sold (22,638) (6,132)
Net change in loans 12,748 3,257
Purchases of premises and equipment, net (174) (352)
Proceeds from sale of other real estate acquired
through foreclosure 1,088 215
--------- ---------
Net cash from investing activities (6,858) 3,405
Cash flows from financing activities
Net change in deposits 8,160 (2,434)
Advances from Federal Home Loan Bank 1,500 10,395
Repayment of Federal Home Loan Bank advances (1,721) (13,229)
Early redemption of guaranteed debentures (3,000) -
Repayment of Other Borrowed Funds (300) (1,500)
Net change in agreements to repurchase securities 817 180
--------- ---------
Net cash from financing activities 5,456 (6,588)
--------- ----------
Net change in cash and cash equivalents 1,904 (358)
Cash and cash equivalents at beginning of period 18,044 20,628
--------- ---------
Cash and cash equivalents at end of period $ 19,948 $ 20,270
========= =========
- ------------------------------------------------------------------------------
See Accompanying Notes to Consolidated Financial Statements
PREMIER FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED, IN THOUSANDS)
- ------------------------------------------------------------------------------
NOTE 1 - BASIS OF PRESENTATION
The consolidated financial statements include the accounts of Premier Financial
Bancorp, Inc. (the Company) and its wholly owned subsidiaries:
Year March 31, 2003
Acquired Assets
Citizens Deposit Bank & Trust Vanceburg, Kentucky 1991 $ 87,946
Bank of Germantown Germantown, Kentucky 1992 24,935
Citizens Bank (Kentucky), Inc. Georgetown, Kentucky 1995 82,659
Farmers Deposit Bank Eminence, Kentucky 1996 145,402
Ohio River Bank Ironton, Ohio 1998 77,327
First Central Bank, Inc. Philippi, West Virginia 1998 88,934
Boone County Bank, Inc. Madison, West Virginia 1998 166,711
Mt. Vernon Financial
Holdings, Inc. Huntington, West Virginia 1999 7,390
The Company also has a data processing subsidiary, Premier Data Services, Inc.,
and the PFBI Capital Trust subsidiary as discussed in Note 7. All intercompany
transactions and balances have been eliminated.
NOTE 2 - REGULATORY MATTERS
On January 29, 2003, the Company entered into a written agreement with the
Federal Reserve Bank of Cleveland (FRB) which supercedes and rescinds all
previous agreements between the Company and the FRB. Among the provisions of the
agreement were 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 being monitored by a committee which consists of three of its
outside directors.
- ------------------------------------------------------------------------------
CONTINUED
PREMIER FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED, IN THOUSANDS)
- ------------------------------------------------------------------------------
NOTE 2 - REGULATORY MATTERS (continued)
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 3 - NEW ACCOUNTING PRONOUNCEMENTS
A new accounting standard dealing with asset retirement obligations will apply
for 2003. The Company does not believe this standard will have a material effect
on its financial position or results of operations.
NOTE 4 - SECURITIES
Amortized cost and fair value of investment securities, by category, at
March 31, 2003 are summarized as follows:
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
Available for sale
U. S. Treasury securities $ 650 $ 6 $ (1) $ 655
U. S. agency securities 118,169 976 (2) 119,143
Obligations of states and
political subdivisions 17,238 805 (13) 18,030
Mortgage-backed securities 13,293 102 (41) 13,354
Corporate securities 3,823 72 - 3,895
---------- ---------- ---------- ----------
Total available for sale $ 153,173 $ 1,962 $ (57) $ 155,078
========== ========== =========== ==========
- ------------------------------------------------------------------------------
CONTINUED
PREMIER FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED, IN THOUSANDS)
- ------------------------------------------------------------------------------
NOTE 4 - SECURITIES (continued)
Amortized cost and fair value of investment securities, by category, at
December 31, 2002 are summarized as follows:
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
Available for sale
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
========== ========== ========== ==========
NOTE 5 - LOANS
Major classifications of loans at March 31, 2003 and December 31, 2002 are
summarized as follows:
2003 2002
Commercial, secured by real estate $115,898 $120,306
Commercial, other 56,256 64,014
Real estate construction 11,341 11,924
Residential real estate 153,070 156,215
Agricultural 8,111 8,862
Consumer and home equity 74,508 71,075
Other 1,794 2,741
-------- --------
$420,978 $435,137
======== ========
The following table sets forth information with respect to the Company's
nonperforming loans at March 31, 2003 and December 31, 2002.
2003 2002
Non-accrual loans $ 8,974 $ 10,588
Accruing loans which are contractually
past due 90 days or more 1,522 1,399
Restructured loans 291 293
-------- --------
$ 10,787 $ 12,280
======== ========
- ------------------------------------------------------------------------------
CONTINUED
PREMIER FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED, IN THOUSANDS)
- ------------------------------------------------------------------------------
NOTE 6 - ALLOWANCE FOR LOAN LOSSES
Changes in the allowance for loan losses for the three months ended March 31,
2003 and 2002 are as follows:
Three Months Ended
March 31,
2003 2002
Balance, beginning of period $ 11,360 $ 8,946
Gross charge-offs (1,352) (1,543)
Recoveries 212 358
Provision for loan losses 1,397 986
-------- --------
Balance, end of period $ 11,617 $ 8,747
======== ========
NOTE 7 - GUARANTEED PREFERRED BENEFICIAL INTERESTS IN COMPANY'S
SUBORDINATED DEBENTURES
Guaranteed preferred beneficial interests in Company's debentures (Preferred
Securities) represent preferred beneficial interests in the assets of PFBI
Capital Trust (Trust). The Trust holds certain 9.75% junior subordinated
debentures due June 30, 2027 issued by the Company on June 9, 1997.
Distributions on the Preferred Securities are payable at an annual rate of 9.75%
of the stated liquidation amount of $25 per Capital Security, payable quarterly
(see Note 8). Cash distributions on the Preferred Securities are made to the
extent interest on the debentures is received by the Trust. In the event of
certain changes or amendments to regulatory requirements or federal tax rules,
the Preferred Securities are redeemable in whole. Otherwise, the Preferred
Securities are generally redeemable by the Company in whole or in part on or
after June 30, 2002 at 100% of the liquidation amount. The Trust's obligations
under the Preferred Securities are fully and unconditionally guaranteed by the
Company.
As previously disclosed, pursuant to an agreement entered into with the Federal
Reserve Bank (FRB) described in Note 2, 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 which occurred on 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.
In December 2002, 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 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.
- ------------------------------------------------------------------------------
CONTINUED
PREMIER FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED, IN THOUSANDS)
- ------------------------------------------------------------------------------
NOTE 8 - STOCKHOLDERS' EQUITY AND REGULATORY MATTERS
The Company's principal source of funds for dividend payments to shareholders is
dividends received from the subsidiary Banks. Banking regulations limit the
amount of dividends that may be paid without prior approval of regulatory
agencies. Under these regulations, the amount of dividends that may be paid in
any calendar year is limited to the current year's net profits, as defined,
combined with the retained net profits of the preceding two years, subject to
the capital requirements and additional restrictions as discussed below. During
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 March 31,
2003, that the Company and the Banks meet all quantitative capital adequacy
requirements to which they are subject.
Shown below is a summary of regulatory capital ratios for the Company:
Regulatory
March 31, December 31, Minimum
2003 2002 Requirements
------ ------ ------------
Tier I Capital (to Risk-Weighted Assets) 14.7% 14.1% 4.0%
Total Capital (to Risk-Weighted Assets) 17.5% 17.5% 8.0%
Tier I Capital (to Average Assets) 9.3% 9.1% 4.0%
The capital amounts and classifications are also subject to qualitative
judgments by the regulators. As a result of these qualitative judgments, the
Company and three of the Company's subsidiaries have entered into agreements
with the applicable regulatory authorities which provide for additional
restrictions on their respective capital levels and the payment of dividends.
The Company entered into an agreement with the Federal Reserve Bank of Cleveland
(FRB), as discussed in Note 2, restricting the Company from declaring or paying
dividends without prior approval from the FRB. An additional provision of this
agreement requires prior approval from the FRB before the Company increases its
borrowings or incurs any debt. This agreement is in effect until terminated by
the FRB.
- ------------------------------------------------------------------------------
CONTINUED
PREMIER FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED, IN THOUSANDS)
- ------------------------------------------------------------------------------
NOTE 8 - STOCKHOLDERS' EQUITY AND REGULATORY MATTERS (continued)
Citizens Deposit Bank (Citizens) entered into a Written Agreement with the FRB
on September 29, 2000 restricting Citizens from declaring or paying dividends
without prior approval. This agreement is in effect until terminated by the FRB.
Citizens' Tier I capital to average assets ratio was 11.3% at March 31, 2003.
Bank of Germantown (Germantown) entered into an agreement with the Kentucky
Department of Financial Institutions (KDFI) and the Federal Deposit Insurance
Corporation (FDIC) on June 13, 2000 restricting Germantown from declaring or
paying dividends, without prior approval, if its Tier I capital to average
assets falls below 8%. This agreement is in effect until terminated by the KDFI
and FDIC. Germantown's Tier I capital to average assets ratio was 7.9% at March
31, 2003.
Citizens Bank (Kentucky), Inc. (Citizens, KY) entered into an agreement with the
Kentucky Department of Financial Institutions (KDFI) and the Federal Deposit
Insurance Corporation (FDIC) on September 11, 2002 restricting Citizens, KY from
declaring or paying dividends, without prior approval. This agreement is in
effect until terminated by the KDFI and FDIC. Citizens KY's Tier I capital to
average assets ratio was 8.8% at March 31, 2003.
As of March 31, 2003, the most recent notification from the FRB categorized the
Company and its subsidiary banks as well capitalized under the regulatory
framework for prompt corrective action. To be categorized as well capitalized,
the Company must maintain minimum Total risk-based, Tier I risk-based and Tier I
leverage ratios as set forth in the preceding table. There are no conditions or
events since that notification that management believes have changed the
Company's category.
NOTE 9 - NOTES PAYABLE
During 2002, the Company also entered into notes payable with the Company's
Chairman of the Board and President. Due to the regulatory restriction on the
Company's payment of its Trust Preferred distributions as discussed in Note 7,
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 second quarter distribution, $701,000, so that the
Company, with the FRB's approval, could make such 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 that distribution, $701,000. Thus, the balance
of notes payable at March 31, 2003, 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.
- ------------------------------------------------------------------------------
CONTINUED
PREMIER FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS EXCEPT PER SHARE DATA)
(UNAUDITED)
- ------------------------------------------------------------------------------
NOTE 10 - STOCK BASED COMPENSATION
The Company 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. 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. In January, 2003, the Company
granted 28,650 options under this plan at $7.96 per share which will be fully
vested in three years.
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.
2003 2002
Net income as reported $ 353 $ 644
Deduct: Stock-based compensation
expense determined under fair
value based method (21) -
--------- --------
Pro forma net income $ 332 $ 644
Basic earnings per share as reported $ 0.07 $ 0.12
Pro forma basic earnings per share 0.06 0.12
Diluted earnings per share as reported $ 0.07 $ 0.12
Pro forma diluted earnings per share 0.06 0.12
The fair value of the options granted are estimated as of the measurement date
using the Black-Scholes option pricing model with the following weighted average
assumptions used for grants in 2003: dividend yield of 0.0%, expected volatility
of 42.4%, risk-free interest rate of 3.1%, and expected life of five years. The
weighted average fair value of options granted in 2003 was $3.30.
- ------------------------------------------------------------------------------
PREMIER FINANCIAL BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
- ------------------------------------------------------------------------------
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations
A. Results of Operations
Net income for the three months ended March 31, 2003 was $353,000, or 7
cents per share, compared to net income of $644,000 or 12 cents per share for
the three months ended March 31, 2002.
Net interest income for the quarter ending March 31, 2003 totaled $5.98
million, virtually unchanged from the $5.97 million of net interest income
earned in the first quarter of 2002. Both interest income and interest expense
decreased by $1.6 million as loan and deposit volumes have declined and the
interest rate environment has remained near historical lows. As a result, the
net interest margin for the three months ending March 31, 2003 was approximately
3.86% compared to 3.75% for the same period in 2002.
Non-interest income increased $267,000 to $1,125,000 for the first three
months of 2003 compared to $858,000 for the first three months of 2002, largely
due to $189,000 of gains on the sales of securities. Excluding the investment
securities gains, non-interest income increased 15.0% or $122,000. The increase
is largely due to a 11.3% or $56,000 increase in revenue from service charges on
deposit accounts, and an increase in the volume of secondary market mortgage
loan activity resulting in an increase secondary market fee income.
Non-interest expenses for the first quarter of 2003 totaled $5,227,000 or
3.1% of average assets on an annualized basis compared to $4,942,000 or 2.8% of
average assets for the same period of 2002. The increase in non-interest expense
is largely due to $124,000 of accelerated amortization of issuance costs related
to the early redemption of $3.0 million of the Company's Trust Preferred
Securities (NASDAQ/NMS-PFBIP). After excluding these costs, non-interest expense
increased $161,000 (3.3%) in the first quarter of 2003 compared to the same
period in 2002. The increase is largely due to a 4.1% or $111,000 increase in
staff costs from normal cost of living increases; a 3.2% or $22,000 increase in
occupancy and equipment expenses; and a 4.3% or $11,000 increase in professional
fees.
Income tax expense was $129,000 for the first quarter of 2003 compared to
$260,000 for the first quarter of 2002. The increase in income tax expense can
be primarily attributed to the decline in pre-tax income detailed above. The
annualized effective tax rate for the three months ended March 31, 2002 was
26.8%, compared to the 28.8% effective tax rate for the same period in 2002.
The annualized returns on stockholders' equity and on average assets were
approximately 2.37% and 0.21% for the three months ended March 31, 2003 compared
to 4.28% and 0.36% for the same period in 2002.
- ------------------------------------------------------------------------------
CONTINUED
PREMIER FINANCIAL BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
- ------------------------------------------------------------------------------
B. Financial Position
Total assets at March 31, 2003 increased $5.7 million or 0.8% to $683.3
million from the $677.6 million at December 31, 2002. This increase was largely
due to an $8.2 million increase in deposits partially offset by the $3.0 million
early redemption of the Company's preferred debentures.
Earning assets increased to $633.0 at March 31, 2003 from the $627.0
million at December 31, 2002, an increase of $6.0 million, or 1.0%. The increase
was largely due to a $22.6 million increase in federal funds sold partially
offset by declines in investments and total loans (see below).
Cash and due from banks at March 31, 2003 were $19.9 million, a $1.9
million increase from $18.0 million on December 31, 2002. Federal funds sold
increased to $52.5 million from the $29.8 million reported at December 31, 2002.
The increase in federal funds sold was the result of retaining the liquidity
from loan payoffs and deposit growth as part of Premier's interest rate
management strategy.
Total loans at March 31, 2003 were $421.0 million compared to $435.1
million at December 31, 2002, a decrease of $14.1 million. This decrease can
primarily be attributed to commercial loan pay offs, the collection of $0.5
million in loans owned by Mt. Vernon Financial Holdings and the $1.4 million in
loan charge-offs recorded during the first quarter of 2003.
Securities available for sale totaled $155.1 million at March 31, 203, a
$2.5 million decrease from the $157.6 million at December 31, 2002. The decline
was largely due to a slightly lower volume of purchases versus the volume of
sales and maturities that occurred during the quarter. Additional details on
investment activities can be found in the Statements of Cash Flows.
Deposits totaled $556.1 million as of March 31, 2003, an $8.2 million
increase from the $548.0 million in deposits at December 31, 2002. The increase
is largely due to a $7.8 million increase in interest bearing transaction
accounts and a $5.2 million increase in savings and money market accounts. These
were partially offset by non-renewal of some high rate certificates of deposit
and a reduction in non-interest bearing deposits.
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CONTINUED
PREMIER FINANCIAL BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
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The following table sets forth information with respect to the Company's
nonperforming assets at March 31, 2003 and December 31, 2002.
(In Thousands)
2003 2002
---- ----
Non-accrual loans $ 8,974 $ 10,588
Accruing loans which are contractually
past due 90 days or more 1,522 1,399
Restructured 291 293
--------- ---------
Total non-performing loans 10,787 12,280
Other real estate acquired through
foreclosure 3,094 3,939
--------- ---------
Total non-performing assets $ 13,881 $ 16,219
Non-performing loans as a percentage
of total loans 2.56% 2.82%
Non-performing assets as a percentage
of total assets 2.03% 2.39%
Total non-performing loans and non-performing assets have declined since
year-end due to loan charge-offs and the continuation of senior management
directives that have emphasized the reduction of the level of delinquency,
non-accrual loans and OREO. A significant effort has been placed on reviews of
loan files, efforts by lenders to bring borrowers current with the terms of
their loan agreement and the sale of certain OREO properties. However, while
total non-performing loans have declined, accruing loans at least 90 days past
due have increased.
The provision for loan losses was $1.4 million for the first quarter of
2003 compared to $1.0 million for the first quarter of 2002. The additional
provisions were made in accordance with Premier's policies regarding
management's estimation of probable incurred losses in the loan portfolio and
the adequacy of the allowance for loan losses which are in accordance with
accounting principles generally accepted in the United States of America. Gross
charge-offs totaled $1.4 million during the first quarter of 2003. Any
collections on these loans would be presented in future financial statements as
recoveries of the amounts charged against the allowance. The allowance for loan
losses at March 31, 2003 was 2.76% of total loans as compared to 2.61% at
December 31, 2002. The increase in the percentage of allowance for loan losses
to total loans is largely due to the decline in total loans outstanding plus the
effect of the higher provision for loan losses required versus the level of net
charge-offs actually taken during the first three months of 2003.
Nonperforming loans decreased to $10.8 million as of March 31, 2003, when
compared to the $12.3 million on December 31, 2002, due to charge-offs and a
corporate-wide emphasis to reduce the level of non-performing loans. This
decrease resulted in the decrease of the ratio of nonperforming loans to total
loans to 2.56% at March 31, 2003 from the 2.82% at December 31, 2002. Similarly,
non-performing assets declined to 2.03% of total assets at March 31, 2003, from
2.39% of total assets at December 31, 2002, due to sales of OREO properties.
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CONTINUED
PREMIER FINANCIAL BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
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C. Liquidity
Liquidity objectives for the Company can be expressed in terms of
maintaining sufficient cash flows to meet both existing and unplanned
obligations in a cost effective manner. Adequate liquidity allows the Company to
meet the demands of both the borrower and the depositor on a timely basis, as
well as pursuing other business opportunities as they arise. Thus, liquidity
management embodies both an asset and liability aspect while attempting to
maximize profitability. In order to provide for funds on a current and long-term
basis, the Company's subsidiary banks rely primarily on the following sources:
1. Core deposits consisting of both consumer and commercial deposits and
certificates of deposit of $100,000 or more. Management believes that
the majority of its $100,000 or more certificates of deposit are no
more volatile than its other deposits. This is due to the nature of
the markets in which the subsidiaries operate.
2. Cash flow generated by repayment of loans and interest.
3. Arrangements with correspondent banks for purchase of unsecured
federal funds.
4. The sale of securities under repurchase agreements and borrowing from
the Federal Home Loan Bank.
5. Maintenance of an adequate available-for-sale security portfolio. The
Company owns $155.1 million of securities at market value as of March
31, 2003.
The cash flow statements for the periods presented in the financial
statements provide an indication of the Company's sources and uses of cash as
well as an indication of the ability of the Company to maintain an adequate
level of liquidity.
As a condition of their permission to allow the Company to redeem $3.0
million of its Trust Preferred Securities, the Federal Reserve Bank of Cleveland
required to parent company to retain cash balances in excess of $4.0 million
following the redemption. As of March 31, 2003, the parent company had $5.4
million in cash and due from banks following the redemption.
D. Capital
At March 31, 2003, total shareholders' equity of $59.4 million was 8.7% of
total consolidated assets. This compares to total shareholders' equity of $59.4
million or 8.8% of total consolidated assets on December 31, 2002.
Tier I capital totaled $61.5 million at March 31, 2003, which represents a
Tier I leverage ratio of 9.3%.
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CONTINUED
PREMIER FINANCIAL BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
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Book value per share was $11.36 at March 31, 2003, and $11.35 at December
31, 2002. The increase in book value per share was the result of $57,000 of
comprehensive income for the first quarter of 2003 as net income was largely
offset by the after tax decrease in the market value of investment securities
available for sale.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Company currently does not engage in any derivative or hedging
activity. Refer to the Company's 2002 10-K for analysis of the interest rate
sensitivity. The Company believes there have been no significant changes in the
interest rate sensitivity since previously reported on the Company's 2002 10-K.
Item 4. Controls and Procedures
Premier management, including the Chief Executive Officer and Chief
Financial Officer, has conducted an evaluation of the effectiveness of
disclosure controls and procedures pursuant to Exchange Act Rule 13a-14. Based
on that evaluation, the Chief Executive Officer and Chief Financial Officer
concluded that the disclosure controls and procedures are effective in ensuring
that all material information required to be filed in this quarterly report has
been made known to them in a timely fashion. There have been no significant
changes in internal controls, or in factors that could significantly affect
internal controls, subsequent to the date the Chief Executive Officer and Chief
Financial Officer completed their evaluation.
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PREMIER FINANCIAL BANCORP, INC.
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PART II - OTHER INFORMATION
Item 1. Legal Proceedings None
- --------------------------
Item 2. Changes in Securities None
- ------------------------------
Item 3. Defaults Upon Senior Securities None
- ----------------------------------------
Item 4. Submission of Matters to a vote of Security Holders None
- ------------------------------------------------------------
Item 5. Other Information None
- --------------------------
Item 6. Exhibits and Reports on Form 8-K
- -----------------------------------------
(a) No exhibits are furnished in accordance with the provisions of Item 601
of Regulation S-K.
The following exhibits accompany this periodic report pursuant to 18 U.S.C
ss.1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(the "2002 Act"). These exhibits shall be deemed only to accompany this periodic
report and are not part of this periodic report, shall not be deemed filed for
purposes of the Securities Exchange Act of 1934, and may not be used for any
purpose other than compliance with the 2002 Act.
99.1 Certification Pursuant to 18 U.S.C ss.1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002, by Chief Executive Officer
99.2 Certification Pursuant to 18 U.S.C ss.1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002, by Chief Financial Officer
(b) The following Current Reports on Form 8-K were filed in the first quarter
of the Company's year.
January 29, 2003 - Press release regarding Written Agreement with the
Federal Reserve Bank of Cleveland.
February 24, 2003 - Press release regarding the early redemption of $3.0
million of Trust Preferred Certificates on March 31, 2003, and the denial of
permission by the Federal Reserve Bank of Cleveland to pay the quarterly
distributions on the remaining Trust Preferred Certificates outstanding.
- ------------------------------------------------------------------------------
PREMIER FINANCIAL BANCORP, INC.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Corporation has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PREMIER FINANCIAL BANCORP, INC.
Date: May 14, 2003 /s/ Robert W. Walker
---------------------------------
Robert W. Walker
President & Chief Executive Officer
Date: May 14, 2003 /s/ Brien M. Chase
---------------------------------
Brien M. Chase
Vice President & Chief Financial Officer
- ------------------------------------------------------------------------------
PREMIER FINANCIAL BANCORP, INC.
- ------------------------------------------------------------------------------
PRINCIPAL EXECUTIVE OFFICER CERTIFICATION
PURSUANT TO SECTION 302 OF
THE SARBANES-OXLEY ACT OF 2002
I, Robert W. Walker, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Premier Financial
Bancorp, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of
the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee
of registrant's board of directors (or persons performing the equivalent
function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
Date: May 14, 2003
/s/ Robert W. Walker
Robert W. Walker
President & Chief Executive Officer
- ------------------------------------------------------------------------------
PREMIER FINANCIAL BANCORP, INC.
- ------------------------------------------------------------------------------
PRINCIPAL FINANCIAL OFFICER CERTIFICATION
PURSUANT TO SECTION 302 OF
THE SARBANES-OXLEY ACT OF 2002
I, Brien M. Chase, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Premier Financial
Bancorp, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of
the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee
of registrant's board of directors (or persons performing the equivalent
function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
Date: May 14, 2003
/s/ Brien M. Chase
Brien M. Chase
Vice President & Chief Financial Officer
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