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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 September 30, 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 October 31, 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,
realization of deferred tax assets 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
SEPTEMBER 30, 2003 AND DECEMBER 31, 2002
(DOLLARS IN THOUSANDS)
- ------------------------------------------------------------------------------------------------------------------
(UNAUDITED)
2003 2002
---- ----
ASSETS
Cash and due from banks $ 19,278 $ 18,044
Federal funds sold 47,183 29,827
Securities available for sale 156,454 157,633
Loans 393,309 435,137
Allowance for loan losses (15,753) (11,360)
-------------- -------
Net loans 377,556 423,777
Federal Home Loan Bank and Federal Reserve Bank stock 4,594 4,395
Premises and equipment, net 11,172 11,685
Real estate and other property acquired through foreclosure 3,693 3,939
Interest receivable 4,369 6,485
Goodwill 16,044 16,044
Other assets 12,067 5,799
------------- --------------
Total assets $ 652,410 $ 677,628
============= ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits
Non-interest bearing $ 63,645 $ 62,874
Time deposits, $100,000 and over 60,758 66,033
Other interest bearing 410,649 419,067
------------- --------------
Total deposits 535,052 547,974
Securities sold under agreements to repurchase 5,408 5,851
Federal Home Loan Bank advances 18,989 23,533
Other borrowed funds 6,650 7,700
Notes payable 1,402 1,402
Guaranteed preferred beneficial interests in Company's debentures 25,750 28,750
Interest payable 3,699 1,818
Other liabilities 8,411 1,234
------------- --------------
Total liabilities 605,361 618,262
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 1,332 13,250
Accumulated other comprehensive income 1,169 1,568
------------- --------------
Total stockholders' equity 47,049 59,366
------------- --------------
Total liabilities and stockholders' equity $ 652,410 $ 677,628
============= ==============
- ------------------------------------------------------------------------------------------------------------------
See Accompanying Notes to Consolidated Financial Statements
PREMIER FINANCIAL BANCORP, INC.
CONSOLIDATED STATEMENTS OF INCOME
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2003 AND 2002
(IN THOUSANDS EXCEPT PER SHARE DATA)
(UNAUDITED)
- ------------------------------------------------------------------------------------------------------------------
Three Months Ended Nine Months Ended
September 30, September 30,
2003 2002 2003 2002
---- ---- ---- ----
Interest income
Loans, including fees $ 7,406 $ 9,181 $ 23,785 $ 28,255
Securities available-for-sale
Taxable 976 1,360 3,143 4,408
Tax-exempt 160 203 540 613
Federal funds sold and other 113 181 436 540
----------- ----------- ----------- -----------
Total interest income 8,655 10,925 27,904 33,816
Interest expense
Deposits 2,377 3,746 7,938 12,159
Other borrowings 382 420 1,186 1,348
Debentures 689 713 2,089 2,139
----------- ----------------------------- -----------
Total interest expense 3,448 4,879 11,213 15,646
Net interest income 5,207 6,046 16,691 18,170
Provision for loan losses 8,015 3,094 22,798 7,280
----------- ----------- ----------- -----------
Net interest income after
provision for loan losses (2,808) 2,952 (6,107) 10,890
Non-interest income
Service charges 814 619 2,055 1,738
Insurance commissions 33 52 107 171
Securities gains (losses) 2 1 206 (58)
Other 285 221 958 725
----------- ----------- ----------- -----------
1,134 893 3,326 2,576
Non-interest expenses
Salaries and employee benefits 2,531 2,603 8,002 7,902
Occupancy and equipment expenses 693 701 2,070 2,064
Professional fees 373 307 952 865
Taxes, other than payroll,
property and income 174 246 478 633
Write-downs, expenses, sales of
other real estate owned 46 322 312 1,315
Other expenses 1,281 1,097 3,748 3,383
----------- ----------- ----------- -----------
5,098 5,276 15,562 16,162
----------- ----------- ----------- -----------
Income (loss) before income taxes (6,772) (1,431) (18,343) (2,696)
Provision for income taxes (benefit) (2,397) (592) (6,425) (1,121)
------------ ------------ ------------ ------------
Net income (loss) $ (4,375) $ (839) $ (11,918) $ (1,575)
============ ============ ============ ============
Basic earnings (loss) per share $ (0.84) $ (0.16) $ (2.28) $ (0.30)
Earnings (loss) per share assuming dilution $ (0.84) $ (0.16) $ (2.28) $ (0.30)
Weighted average shares outstanding 5,232 5,232 5,232 5,232
Weighted average shares assuming dilution 5,232 5,232 5,232 5,232
- ------------------------------------------------------------------------------------------------------------------
See Accompanying Notes to Consolidated Financial Statements
PREMIER FINANCIAL BANCORP, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2003 AND 2002
(IN THOUSANDS)
(UNAUDITED)
- ------------------------------------------------------------------------------------------------------------------
Three Months Ended Nine Months Ended
September 30, September 30,
2003 2002 2003 2002
---- ---- ---- ----
Net income (loss) $ (4,375) $ (839) $ (11,918) $ (1,575)
Other comprehensive income (loss), net of tax:
Unrealized gains and (losses) arising during
the period (652) 412 (263) 703
Reclassification of realized amount (2) (1) (136) 38
----------- ----------- ----------- ---------
Net change in unrealized gain (loss) on
securities (654) 411 (399) 741
----------- ---------- ----------- ---------
Comprehensive income (loss) $ (5,029) $ (428) $ (12,317) $ (834)
========== =========== ========== ==========
- ------------------------------------------------------------------------------------------------------------------
See Accompanying Notes to Consolidated Financial Statements
PREMIER FINANCIAL BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 2003 AND 2002
(IN THOUSANDS)
(UNAUDITED)
- ------------------------------------------------------------------------------------------------------------------
2003 2002
---- ----
Cash flows from operating activities
Net (loss) income $ (11,918) $ (1,575)
Adjustments to reconcile net income (loss) to net
cash from operating activities
Depreciation 883 1,013
Provision for loan losses 22,798 7,280
Amortization, net 472 221
FHLB stock dividends (127) (141)
Investment securities losses (gains), net (206) 58
Write downs of OREO 221 990
Changes in
Interest Receivable 2,116 1,207
Other assets (6,062) (460)
Interest Payable 1,881 (325)
Other liabilities 75 (390)
------------- --------------
Net cash from operating activities 10,133 7,878
Cash flows from investing activities
Purchases of securities available for sale (107,567) (94,804)
Proceeds from sales of securities available for sale 13,294 4,063
Proceeds from maturities and calls of securities available
for sale 101,683 99,142
Purchases of FHLB stock (72) (50)
Net change in federal funds sold (17,356) (8,403)
Net change in loans 21,140 6,779
Purchases of premises and equipment, net (370) (817)
Proceeds from sale of other real estate acquired
through foreclosure 2,308 2,813
------------- -------------
Net cash from investing activities 13,060 8,723
Cash flows from financing activities
Net change in deposits (12,922) (6,888)
Advances from Federal Home Loan Bank 2,750 10,395
Repayment of Federal Home Loan Bank advances (7,294) (17,598)
Early redemption of Trust Preferred Securities (3,000) -
Repayment of Other Borrowed Funds (1,050) (5,300)
Proceeds from Notes Payable - 1,402
Net change in agreements to repurchase securities (443) 176
-------------- -------------
Net cash from financing activities (21,959) (17,813)
-------------- --------------
Net change in cash and cash equivalents 1,234 (1,212)
Cash and cash equivalents at beginning of period 18,044 20,628
------------- -------------
Cash and cash equivalents at end of period $ 19,278 $ 19,416
============= =============
Supplemental non-cash disclosure
Purchase of securities available for sale not yet settled $ 7,102 -
Loans transferred to real estate acquired through foreclosure 2,283 $ 1,421
- ------------------------------------------------------------------------------------------------------------------
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:
Sept 30, 2003
Net Income
Year ------------------
Acquired Assets Qtr Year
Citizens Deposit Bank & Trust Vanceburg, Kentucky 1991 $ 87,855 $ 300 $ 659
Bank of Germantown Germantown, Kentucky 1992 23,470 (21) 11
Citizens Bank (Kentucky), Inc. Georgetown, Kentucky 1995 80,042 21 (82)
Farmers Deposit Bank Eminence, Kentucky 1996 121,411 (5,220) (13,666)
Ohio River Bank Ironton, Ohio 1998 76,209 253 709
First Central Bank, Inc. Philippi, West Virginia 1998 86,207 317 768
Boone County Bank, Inc. Madison, West Virginia 1998 172,463 475 1,460
Mt. Vernon Financial Holdings, Inc. Huntington, West Virginia 1999 6,175 (10) (23)
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.
The Company maintains the Premier Financial Bancorp, Inc. 1996 Employee Stock
Ownership Incentive Plan (the 1996 Plan) and the 2002 Employee Stock Ownership
Incentive Plan (the 2002 Plan), whereby certain employees of the Company are
eligible to receive incentive stock options. Under the 1996 Plan, a maximum of
100,000 shares of the Company's common stock may be issued through the exercise
of these incentive stock options. Under the 2002 Plan, a maximum of 500,000
shares of the Company's common stock may be issued through the exercise of these
incentive stock options. The option price under both plans 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 the 2002 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.
- --------------------------------------------------------------------------------
CONTINUED
PREMIER FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED, IN THOUSANDS)
- --------------------------------------------------------------------------------
NOTE 1 - BASIS OF PRESENTATION (continued)
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.
Three Months Ended Nine Months Ended
September 30, September 30
2003 2002 2003 2002
---- ---- ---- ----
Net (loss) income as reported $ (4,375) $ (839) $ (11,918) $ (1,575)
Deduct: Stock-based compensation
expense determined under fair
value based method - - (21) -
---------- ---------- ----------- ----------
Pro forma net (loss) income $ (4,375) $ (839) $ (11,939) $ (1,575)
Basic loss per share as reported $ (0.84) $ (0.16) $ (2.28) $ (0.30)
Pro forma basic loss per share (0.84) (0.16) (2.28) (0.30)
Diluted loss per share as reported $ (0.84) $ (0.16) $ (2.28) $ (0.30)
Pro forma diluted loss per share (0.84) (0.16) (2.28) (0.30)
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.
For all periods presented, stock options were not considered in the above
computation because they were antidilutive.
NOTE 2 - REGULATORY MATTERS
On January 29, 2003, the Company entered into a written agreement with the
Federal Reserve Bank of Cleveland (FRB) which supersedes 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
- --------------------------------------------------------------------------------
CONTINUED
PREMIER FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED, IN THOUSANDS)
- --------------------------------------------------------------------------------
NOTE 2 - REGULATORY MATTERS (continued)
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 has received a "Management, Directorate, and Organizational Review"
(the "Review") from the independent consultant it retained pursuant to the
written agreement with the FRB. Management has submitted to the FRB its
management plan that addresses the findings and recommendations in the Review
and is in the process of implementing the recommended changes to the Company's
loan review and loan underwriting processes. Management has also submitted to
the FRB a revised management succession plan that incorporated the
recommendations made in the Review. Management has submitted its written capital
maintenance plan and its parent-only cash flow analysis. These plans are updated
on a regular basis and submitted to the FRB. The Company's compliance with the
written agreement is being monitored by a committee which consists of 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 require
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. For further discussion on regulatory matters,
including Farmers Deposit Bank, see Note 8 as well.
- --------------------------------------------------------------------------------
CONTINUED
PREMIER FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED, IN THOUSANDS)
- --------------------------------------------------------------------------------
NOTE 3 - NEW ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board (FASB) recently issued two new
accounting standards, Statement 149, Amendment of Statement 133 on Derivative
Instruments and Hedging Activities, and Statement 150, Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equities,
both of which generally become effective in the quarter beginning July 1, 2003.
Because the Company does not have any derivative instruments, Statement 149 will
not materially affect the Company's operating results or financial condition.
Under the new standard for certain liabilities and equity instruments, Statement
150, the Company's trust preferred securities are considered liabilities and not
part of mezzanine (or temporary) equity. As of December 31, 2002 the Company
opted for early adoption of Statement 150. Accordingly, as part of its year-end
2002 financial reporting, the Company included its trust preferred securities in
total liabilities.
In January 2003, the Financial Accounting Standards Board ("FASB") issued
Interpretation No. 46, Consolidation of Variable Interest Entities, an
Interpretation of ARB No. 51. This Interpretation provides new guidance for the
consolidation of variable interest entities ("VIEs") and requires such entities
to be consolidated by their primary beneficiaries if the entities do not
effectively disperse risk among parties involved. The Interpretation also adds
disclosure requirements for investors that are involved with unconsolidated
VIEs. The consolidation requirements apply immediately to VIEs created after
January 31, 2003 and are effective for the first fiscal year or interim period
ending after December 15, 2003 for VIEs acquired before February 1, 2003. The
adoption of this interpretation is not expected have a significant impact on the
Company's financial condition of results of operations.
A new accounting standard dealing with asset retirement obligations applies for
2003. This standard did not have a material effect on the Company's financial
position or results of operations.
- --------------------------------------------------------------------------------
CONTINUED
PREMIER FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED, IN THOUSANDS)
- --------------------------------------------------------------------------------
NOTE 4 - SECURITIES
Amortized cost and fair value of investment securities, by category, at
September 30, 2003 are summarized as follows:
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
Available for sale
U. S. Treasury securities $ 650 $ 3 $ - $ 653
U. S. agency securities 105,405 817 (5) 106,217
Obligations of states and political
Subdivisions 15,186 830 (14) 16,002
Mortgage-backed securities 30,776 103 (13) 30,866
Corporate securities 2,665 51 - 2,716
-------------- -------------- -------------- ---------------
Total available for sale $ 154,682 $ 1,804 $ (32) $ 156,454
============== ============== ============== ===============
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 September 30, 2003 and December 31, 2002 are
summarized as follows:
2003 2002
---- ----
Commercial, secured by real estate $ 111,079 $ 120,306
Commercial, other 50,796 64,014
Real estate construction 10,607 11,924
Residential real estate 143,322 156,215
Agricultural 8,448 8,862
Consumer and home equity 67,385 71,075
Other 1,672 2,741
------------ ------------
$ 393,309 $ 435,137
============ ============
- --------------------------------------------------------------------------------
CONTINUED
PREMIER FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED, IN THOUSANDS)
- --------------------------------------------------------------------------------
NOTE 5 - LOANS (continued)
The following table sets forth information with respect to the Company's
impaired loans at September 30, 2003 and December 31, 2002.
2003 2002
---- ----
Impaired loans at period end $ 13,782 $ 8,949
Amount of allowance for loan losses allocated 5,624 3,016
The following table sets forth information with respect to the Company's
nonperforming loans at September 30, 2003 and December 31, 2002.
2003 2002
---- ----
Non-accrual loans $ 15,467 $ 10,588
Accruing loans which are contractually
past due 90 days or more 4,099 1,399
Restructured loans 305 293
------------ ------------
$ 19,871 $ 12,280
============ ============
NOTE 6 - ALLOWANCE FOR LOAN LOSSES
Changes in the allowance for loan losses for the three months and nine months
ended September 30, 2003 and 2002 are as follows:
Three Months Ended Nine Months Ended
September 30, September 30,
2003 2002 2003 2002
---- ---- ---- ----
Balance, beginning of period $ 18,057 $ 9,126 $ 11,360 $ 8,946
Gross charge-offs (10,504) (1,342) (18,993) (5,924)
Recoveries 185 252 588 828
Provision for loan losses 8,015 3,094 22,798 7,280
-------- -------- -------- --------
Balance, end of period $ 15,753 $ 11,130 $ 15,753 $ 11,130
======== ======== ======== ========
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.
- --------------------------------------------------------------------------------
CONTINUED
PREMIER FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED, IN THOUSANDS)
- --------------------------------------------------------------------------------
NOTE 7 - GUARANTEED PREFERRED BENEFICIAL INTERESTS IN COMPANY'S
SUBORDINATED DEBENTURES (continued)
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, the Company exercised its right to defer the payment of
interest on its 9.75% Trust Preferred Securities for December 31, 2002 and for
an indefinite period, which can be no longer than 20 consecutive quarterly
periods. That deferment has continued for consecutive quarters through September
30, 2003. These 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 Securities until the Federal
Reserve Bank of Cleveland determines that the Company has achieved adequate and
sustained levels of profitability to support such payments and approves such
payments.
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
the remainder of 2003, the Banks could, without prior approval, declare
dividends payable to the Company of approximately $2.4 million plus any
remaining 2003 net profits retained by the Banks 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.
- --------------------------------------------------------------------------------
CONTINUED
PREMIER FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED, IN THOUSANDS)
- --------------------------------------------------------------------------------
NOTE 8 - STOCKHOLDERS' EQUITY AND REGULATORY MATTERS (continued)
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). Except for Farmers Deposit Bank (see
below) management believes, as of September 30, 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
Sept 30, December 31, Minimum
2003 2002 Requirements
---- ---- ------------
Tier I Capital (to Risk-Weighted Assets) 10.6% 14.1% 4.0%
Total Capital (to Risk-Weighted Assets) 14.6% 17.5% 8.0%
Tier I Capital (to Average Assets) 6.4% 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 four 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.
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 11.8% at September 30,
2003, an increase from 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 7%. This agreement is in effect until terminated by the KDFI
and FDIC. Germantown's Tier I capital to average assets ratio was 8.1% at
September 30, 2003, an increase from 7.6% at December 31, 2002.
Citizens Bank (Kentucky), Inc. (Citizens, KY) entered into an agreement with the
Kentucky Department of Financial Institutions (KDFI) and the Federal Deposit
Insurance Corporation (FDIC) on September 11, 2002 restricting Citizens, KY from
declaring or paying dividends, without prior approval. This agreement is in
effect until terminated by the KDFI and FDIC. Citizens KY's Tier I capital to
average assets ratio was 9.2% at September 30, 2003, an increase from 8.7% at
December 31, 2002.
- --------------------------------------------------------------------------------
CONTINUED
PREMIER FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED, IN THOUSANDS)
- --------------------------------------------------------------------------------
NOTE 8 - STOCKHOLDERS' EQUITY AND REGULATORY MATTERS (continued)
Due to the negative effects of the reported losses at Farmers Deposit Bank
(Farmers) on its capital, the Company developed a plan in conjunction with the
Federal Deposit Insurance Corporation (FDIC) to inject capital at Farmers as
needed to maintain the bank's well capitalized designation. Although through
October 2003, the Company has injected $7.5 million of capital as part of this
plan, the capital ratios of Farmers Deposit Bank have fallen below the well
capitalized thresholds. The FDIC recently notified management concerning
Farmers' key capital ratios falling within the "undercapitalized" capital
category for purposes of prompt corrective action. An "undercapitalized" bank is
one that does not meet prescribed minimum capital ratios. FDIC rules require
"undercapitalized" banks to file a written capital restoration plan with the
FDIC within 45 days of the notice and also restrict "undercapitalized" banks
from paying capital distributions or growing the size of the bank without prior
written approval from the FDIC. On Farmers' September 30, 2003 call report filed
with the FDIC on October 29, 2003, the capital ratios were calculated to be
above the prescribed minimum capital ratios which would designate Farmers as
"adequately capitalized". In that call report, Farmers Tier I capital to average
assets ratio was 5.18%. Although no time frame has yet been given to Farmers to
restore its capital, the Company has submitted a proposal to the FDIC and KDFI
which would increase Farmers Tier I to average assets ratio to approximately
8.7%. The proposal, which requires approval from both the FDIC and KDFI, has
been approved by KDFI and is being evaluated by the FDIC.
As of September 30, 2003, the most recent notification from the FRB categorized
the Company and its subsidiary banks (except Farmers) 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 capital ratio of
10.0%, a minimum Tier I risk-based capital ratio of 6.0% and a Tier I leverage
ratio if 5.0%. There are no conditions or events since that notification that
management believes have changed the Company's category.
The Securities and Exchange Commission ("SEC") is also investigating the
information disclosed in Premier's June 19 and July 31, 2003 Forms 8-K regarding
Farmers and has requested information about Premier's ongoing investigation.
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 and a
shareholder, agreed to loan the Company the amount of that distribution,
$701,000. Thus, the balance of notes payable at September 30 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.
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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
Premier realized a net loss for the nine months ended September 30,
2003, of $11,918,000, or $2.28 per share, compared to a net loss of $1,575,000
or 28 cents per share for the nine months ended September 30, 2002. The net loss
and loss per share for 2003 was primarily the result of a $20.0 million of
provisions for loan losses at Farmers Deposit Bank (Farmers), a wholly owned
subsidiary of Premier.
On June 16, 2003, Premier announced that as a result of an ongoing
internal investigation it had uncovered a systematic disregard for its loan
approval and credit administration policies at Farmers and had accepted the
resignation of the Farmers Deposit Bank's president. On July 31, 2003, Premier
announced that as a result of the investigation to date, Premier had charged-off
approximately $6.2 million of loans at Farmers in the month of June and had
recorded a $12.1 million provision for loan losses. During the third quarter of
2003, in conjunction with investigation findings, Premier charged-off an
additional $9.6 million of loans at Farmers Deposit Bank and recorded an
additional $7.9 million provision. In addition to the provision for loan losses,
$441,000 of interest income reversals and $200,000 of additional expenses were
also recorded in the third quarter.
Premier's initial investigation indicates that Farmers' former
president had engaged in conduct which subverted the bank's internal controls
and credit administration policies, conduct which appears to have been designed
to avoid detection by management and those entities employed by Premier to
perform independent reviews of its subsidiaries' accounting records, internal
controls, and credit risk. While the investigation is still on-going, management
at Premier has implemented a number of actions since the Farmers Deposit Bank's
president's resignation including recruiting and hiring a new President and CEO,
hiring a Chief Financial Officer for Farmers, reviewed all loan relationship
exceeding $25,000 and hired experienced collectors and retained attorneys to
pursue collections.
The impact of the transactions related to the Farmers investigation
(the Transactions) on the Company's financial results for the nine months
ended September 30, 2003 was to reduce net income by approximately $14.0
million. For the quarter ending September 30, 2003, Premier recorded a net loss
of $4,375,000, or 84 cents per share. The impact of the Transactions on the
Company's financial results for the quarter ended September 30, 2003 was to
reduce net income by approximately $5.6 million. The following table summarizes
the effects of the Transactions on the Company's financial results.
For the For the
Quarter Nine Months
Ended Ended
Sept 30 Sept 30
Dollars in thousands 2003 2003
-------- --------
Impact on net income of transactions related to
Farmers investigation
Interest income reversal $ (441) $ (744)
Additional provision for loan losses (7,900) (20,000)
Additional non-interest expenses (200) (455)
Income tax benefit 2,904 7,208
-------- --------
Effect on net income $ (5,637) $(13,991)
======== ========
The year-to-date 2002 loss was largely due to $7.3 million of
provisions for loan losses and $1.3 million of Other Real Estate Owned (OREO)
writedowns, sales and expenses. For the quarter ending September 30, 2002,
Premier recorded a net loss of $839,000, or 16 cents per share.
The total provision for loan losses was $8.0 million for the third
quarter of 2003 (largely due to the $7.9 million provision resulting from
Farmers investigation) compared to $3.1 million for the third quarter of 2002.
This addition brings the year-to-date provision to $22.8 million compared to
$7.3 million for the same year-to-date period in 2002. While management has not
yet exhausted all efforts and means available to collect the identified problem
loans, the additional provisions were made in accordance with Premier's policies
regarding the adequacy of the allowance for loan losses which are in accordance
with accounting principles generally accepted in the United States of America.
Any collections on these loans would be presented in future financial statements
as recoveries of the amounts charged against the allowance. The allowance for
loan losses at September 30, 2003 was 4.00% 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 large provision for loan losses
required versus the level of net charge-offs actually taken during the first
nine months of 2003 plus the effect of the decline in total loans outstanding.
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. The individual
risk assessments are used to classify loans based upon regulatory definitions
and guidelines. These risk assessments are tested for reasonableness by outside
loan review consultants and bank regulatory agencies.
Net interest income for the nine months ending September 30, 2003
totaled $16.69 million, an 8.1% decrease from the $18.17 million of net interest
income earned in the first nine months of 2002. Approximately one-half of the
decrease was due to interest income reversals at Farmers. The remainder was due
to an overall decline in loans outstanding across the remainder of Premier's
affiliates and lower reinvestment yields on maturing investments. This decline
in interest income more than offset the lower cost of funds resulting from the
decline in market interest rates over the past year and the reduction in trust
preferred obligations, FHLB advances and other borrowings. As a result, the net
interest margin for the nine months ending September 30, 2003 was approximately
3.65% compared to 3.83% for the same period in 2002. For the quarter ending
September 30, 2003, net interest income totaled $5.21 million, a 5.4% decrease
from the $5.50 million reported for the second quarter of 2003, and a 13.9%
decrease from the $6.05 million of net interest income earned in the third
quarter of 2002. The decrease compared to the second quarter of 2003 was
partially due the interest income reversals at Farmers as well as the lower
rates earned on floating rate loans and reinvestments of maturing securities in
the low interest rate environment. These declines more than offset the $305,000
of interest expense savings resulting from debt reduction and lower rates paid
on deposits. The decrease compared to the prior year third quarter was also
primarily the result of the interest income reversals and the lower reinvestment
rate on maturing securities as well as a decline in overall loans outstanding
and the lower rates earned on floating rate loans.
Non-interest income increased $750,000 to $3,326,000 for the first nine
months of 2003 compared to $2,576,000 for the first nine months of 2002,
partially due to a $264,000 increase in gains on the sale of securities. The
remaining increase was largely due to a 18.2% or $317,000 increase in service
charges and fees and an increased volume of secondary market mortgage loan
activity resulting in secondary market fee income. These were partially offset
by a $64,000 decrease in insurance commissions. For the quarter ended September
30, 2003, non-interest income increased $67,000 to $1,134,000 compared to the
$1,067,000 reported for the second quarter of 2003. The increase was largely due
to a $123,000 (17.8%) increase in revenue from service charges on deposit
accounts. This was partially offset by a decline in secondary market fee income
as well as a decline in gains on securities transactions. When compared to the
third quarter of 2002, the $1,134,000 of non-interest income was a $241,000 or
27.0% increase over the $893,000 reported last year. Approximately $195,000 of
the increase was due to an increase in service charges on deposit accounts. The
remainder was due to various increase in other operating income items such as
secondary market fee income and checkbook sales.
Non-interest expenses for the first nine months of 2003 totaled
$15,562,000 or 3.1% of average assets on an annualized basis compared to
$16,162,000 or 3.1% of average assets for the same period of 2002. The decrease
in non-interest expense is largely due to a $1.0 million decrease in expenses to
maintain, sell or writedown to estimated realizable values various OREO
properties, as well as a decline in taxes other than payroll, property and
income taxes. These were partially offset by a $100,000 or 1.3% increase in
staff costs, a $6,000 or 0.3% increase in occupancy & equipment expense and the
$455,000 of expenses related to Farmers investigation.
For the quarter ending September 30, 2003, non-interest expense totaled
$5,098,000, a 3.4% or $178,000 decrease from the same quarter of 2002. The
decrease is again largely due to a $276,000 decrease in OREO expenses and
writedowns, coupled with a $72,000 decrease in taxes other than payroll,
property and income taxes and a $72,000 decrease in staff costs as employees
began participating in the cost of their medical insurance premiums in the
second quarter of 2003. These positive variances were partially offset by the
$200,000 of expenses related to Farmers investigation. When compared to the
second quarter of 2003, non-interest expense decreased by $139,000 or 2.7%. A
$122,000 or 4.6% decline in staff costs largely due to the employee
participation in the cost of medical insurance and a planned reduction in staff
and a $144,000 decline in OREO expenses and writedowns. These were partially
offset by a $56,000 increase in legal and professional fees, an increase in
occupancy costs primarily related to property taxes, and an increase in
marketing and business development expenses.
The income tax benefit was $6,425,000 for the first nine months of 2003
compared to an income tax benefit of $1,121,000 for the first nine months of
2002. The decrease in income tax expense can be primarily attributed to the
decrease in pretax net income resulting from the additional provision for loan
losses. The income tax benefit for the quarter ending September 30, 2003 was
$2,397,000 compared to a tax benefit of $592,000 during the same period of 2002.
The annualized returns on stockholders' equity and on average assets
were approximately (28.49)% and (2.37)% for the nine months ended September 30,
2003 compared to (3.51)% and (0.30)% for the same period in 2002.
B. Financial Position
Total assets at September 30, 2003 decreased $25.2 million or 3.7% to
$652.4 million from the $677.6 million at December 31, 2002. This decrease is
largely due to the year-to-date loss resulting from the $22.8 million provision
for loan losses, a $12.9 million decrease in deposits, a $5.6 million decrease
in borrowings and the $3.0 million early redemption of the Company's preferred
debentures in March 2003.
Earning assets decreased to $601.8 million at September 30, 2003 from
the $627.3 million at December 31, 2002, a decrease of $25.5 million, or 4.1%.
The decrease is largely due to a $41.8 million decline in total loans (see
below), partially offset by a $17.4 million increase in federal funds sold.
Cash and due from banks at September 30, 2003 was $19.3 million, a $1.3
million increase from $18.0 million on December 31, 2002. Likewise, federal
funds sold increased to $47.2 million from the $29.8 million reported at
December 31, 2002, an increase of $17.4 million. Approximately, $7.8 million of
the increase in these liquid assets was at Farmers to satisfy some scheduled
maturities of short-term deposits and FHLB debt as well as to provide increased
liquidity for deposit withdrawals. Another $7.1 million of federal funds sold
are being held to fund investment purchases made in September that will not
settle until October. The remaining increase in these liquid assets was
primarily the result of retaining the liquidity from maturing investments and
loan payoffs as part of Premier's interest rate risk management strategy.
As investments have matured and loan principal balances have paid down,
Premier has increased its purchases of higher-yielding mortgage-backed
securities in an effort to maximize its yield opportunities. Since December 31,
2002, mortgage-backed securities have increased by $23.2 million to $30.9
million at September 30, 2003. Mortgage-backed securities totaled approximately
19.7% of the $156.5 million investment portfolio at September 30, 2003 compared
to 4.9% of the $157.6 million investment portfolio at December 31, 2003.
Total loans at September 30, 2003 were $393.3 million compared to
$435.1 million at December 31, 2002, a decrease of $41.8 million. This decrease
is due to various factors. During the first nine months of 2003, Premier
charged-off $19.0 million of loans, $15.8 million as a result of Farmers
investigation. Premier has continued its efforts to collect the loans retained
from the sale of the Bank of Mt Vernon, reducing their outstanding balances by
approximately $2.0 million during the first nine months of 2003. Most of
Premier's other affiliate banks have experienced a significant level of
commercial loan and residential real estate loan payoffs as interest rates have
declined and opportunities for customers to refinance at lower rates have
expanded. Furthermore, the sluggish economy has reduced the consumer demand for
new loans and the resulting competition for new loan volume has increased.
However, two of Premier's banks have continued to increase their loans
outstanding during the year-to-date time frame by a combined $6.0 million.
While total loans outstanding have decreased by $41.8 million, the
allowance for loan losses has increased by $4.4 million since December 31, 2003,
largely due to the $20.0 million provision resulting from Farmers investigation.
The combined effect of these two factors was a reduction in net loans of
approximately $46.2 million.
The following table sets forth information with respect to the
Company's nonperforming assets at September 30, 2003 and December 31, 2002.
(In Thousands)
2003 2002
---- ----
Non-accrual loans $ 15,467 $ 10,588
Accruing loans which are contractually
past due 90 days or more 4,099 1,399
Restructured 305 293
-------- --------
Total non-performing loans 19,871 12,280
Other real estate acquired through
foreclosure 3,693 3,939
-------- --------
Total non-performing assets $ 23,564 $ 16,219
Non-performing loans as a percentage
of total loans 5.05% 2.82%
Non-performing assets as a percentage
of total assets 3.61% 2.39%
The following table sets forth information with respect to the
Company's impaired loans at September 30, 2003 and December 31, 2002.
(In Thousands)
2003 2002
---- ----
Impaired loans $ 13,782 $ 8,949
Amount of the allowance for loan
losses allocated 5,624 3,016
Total non-performing loans and non-performing assets have increased
significantly since year-end largely due to the identification of problem loans
at Farmers Deposit Bank. Since June 30, 2003, loans on non-accrual status at
Farmers have increased by $7.6 million as a result of the investigation.
Furthermore, Farmers has realized a $2.8 million increase in loans past due over
90 days, largely due to single payment maturities that have yet to be renewed or
are in the process of collection. Excluding the non-performing loans at Farmers
Deposit Bank, loans on non-accrual status have declined by $3.0 million or 30%
since year-end while loans over 90 days past due have declined by $820,000 or
67% since year-end. The declines are the result of 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 agreements and the sale of certain OREO
properties. It was during the course of this effort that facts arose that led to
the Farmers investigation and the resulting charge-offs and increase in the
provision for loan losses at Farmers. The decrease in impaired loans is
primarily a result of charge-offs as a result of the Farmers investigation. As
Premier's other Kentucky institutions are in various stages of producing
positive results toward improved credit quality, senior management plans include
developing and executing similar action plans on the troubled loans identified
at Farmers. As in the past, when these plans are executed, Premier may
experience increases in non-performing loans and non-performing assets.
Furthermore, any resulting increases in loans placed on non-accrual status will
have a negative impact on future loan interest income. Also, as these plans are
executed, other loans may be identified that would necessitate additional
charge-offs and potentially additional provisions for loan losses.
Deposits totaled $535.1 million as of September 30, 2003, a $12.9
million decrease from the $548.0 million in deposits at December 31, 2002. The
decrease is due to several factors. Time deposits have declined by $16.6 million
since year-end, largely due to non-renewal of high rate certificates of deposit
and a $7.5 million planned reduction in time deposits at Farmers. Interest
bearing money market accounts have declined by $11.3 million since year-end,
partially due to the non-renewal of a contract for approximately $5.5 million of
interest bearing public funds. These declines have been partially offset by an
approximately $10.0 million increase in transaction based interest bearing
deposit accounts, a $4.2 million increase in traditional savings accounts and a
$0.8 million increase in demand deposits.
Outstanding debt, including the Company's outstanding trust preferred
debentures, has declined by $8.6 million since December 31, 2002. Federal Home
Loan Bank advances have declined by $4.5 million due to maturities and principal
payments. Other borrowed funds have declined by $1,050,000 due to scheduled
principal payments. Additionally, the Company's outstanding trust preferred
debentures have declined by $3.0 million due to a one-time call executed on
March 31, 2003 (see note 7 to the consolidated financial statements.)
C. Critical Accounting Policies
The Company follows financial accounting and reporting policies that
are in accordance with generally accepted accounting principles in the United
States of America. These policies are presented in Note 1 to the consolidated
audited financial statements in the Company's annual report on Form 10-K for the
year ended December 31, 2002. Some of these accounting policies, as discussed
below, are considered to be critical accounting policies. Critical accounting
policies are those policies that require management's most difficult, subjective
or complex judgments, often as a result of the need to make estimates about the
effect of matters that are inherently uncertain. The Company has identified
three accounting policies that are critical accounting policies and an
understanding of these policies is necessary to understand the financial
statements. These policies relate to determining the adequacy of the allowance
for loan losses, the impairment of goodwill, and the valuation of deferred tax
assets. There have been no significant changes in the application of accounting
policies since December 31, 2002.
Management believes that the judgments, estimates and assumptions used
in the preparation of the consolidated financial statements are appropriate
given the factual circumstances at the time.
D. 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 $156.5 million of securities at
market value as of September 30, 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.
E. Capital
At September 30, 2003, total shareholders' equity of $47.0 million was
7.2% 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 $40.6 million at September 30, 2003, which
represents a Tier I leverage ratio of 6.4%.
Book value per share was $8.99 at September 30, 2003, and $11.35 at
December 31, 2002. The $11.9 million loss for the year-to-date was primarily
responsible for the decrease in comprehensive income and corresponding decrease
in book value per share. Adding to this decrease was the after tax decrease in
the market value of investment securities available for sale of $399,000.
Additional information on the Company's capital and the capital of some of its
subsidiary banks can be found in notes 2 and 8 to the financial statements.
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.
A rise in the interest rate environment is estimated to have a positive impact
on net interest income while a decline in interest rates would have a negative
impact on net interest income.
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.
PREMIER FINANCIAL BANCORP, INC.
- --------------------------------------------------------------------------------
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
- --------------------------
See information regarding regulatory matters in note 2 and note 8 to the
consolidated financial statements.
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) The following exhibits are furnished in accordance with the
provisions of Item 601 of Regulation S-K.
31.1 Certification Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002
31.2 Certification Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002
32 Certification Pursuant to 18 U.S.Css.1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(b) The following Current Reports on Form 8-K were filed in the third
quarter of the Company's year.
July 31, 2003 - Press release regarding charge-offs and
additional provision for loan losses at
Farmers Deposit Bank.
August 8, 2003 - Press release reporting second quarter 2003
earnings.
September 9, 2003 - Press release regarding the continuation of the
deferral to pay the quarterly distributions on
Premier's Trust Preferred Certificates
outstanding.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Corporation has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PREMIER FINANCIAL BANCORP, INC.
Date: November 14, 2003 /s/ Robert W. Walker
----------------------------------------
Robert W. Walker
President & Chief Executive Officer
Date: November 14, 2003 /s/ Brien M. Chase
----------------------------------------
Brien M. Chase
Vice President & Chief Financial Officer