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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2004
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, no par value, - 5,232,230 shares outstanding
at October 31, 2004.
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
Financial Bancorp, Inc.'s ("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,
the identification and evaluation of impaired loans, the impairment of goodwill,
the realization of deferred tax assets and stock based compensation disclosures.
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 report on
Form 10-K. 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, 2003 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 ............. 6
Consolidated Statements of Cash Flows........................ 7
Notes to Consolidated Financial Statements................... 9
PREMIER FINANCIAL BANCORP, INC.
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 2004 AND DECEMBER 31, 2003
(DOLLARS IN THOUSANDS)
- --------------------------------------------------------------------------------------------------------------------
(UNAUDITED)
2004 2003
-------------- --------------
ASSETS
Cash and due from banks $ 14,536 $ 16,422
Federal funds sold 30,104 17,051
Securities available for sale 155,035 147,646
Loans 324,464 331,794
Allowance for loan losses (9,186) (14,300)
-------------- --------------
Net loans 315,278 317,494
Federal Home Loan Bank and Federal Reserve Bank stock 2,571 2,490
Premises and equipment, net 7,509 7,956
Real estate and other property acquired through foreclosure 1,431 3,187
Interest receivable 2,939 3,448
Goodwill 15,816 15,816
Current year tax receivable 1,411 3,695
Other assets 4,830 8,024
Assets of discontinued operation - 79,163
------------- --------------
Total assets $ 551,460 $ 622,392
============= ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits
Non-interest bearing $ 63,260 $ 59,001
Time deposits, $100,000 over 40,052 42,780
Other interest bearing 343,231 353,693
------------- --------------
Total deposits 446,543 455,474
Securities sold under agreements to repurchase 7,187 -
Federal Home Loan Bank advances 9,495 10,705
Other borrowed funds 950 6,200
Notes payable 1,402 1,402
Guaranteed junior subordinated interest debentures 26,546 26,546
Interest payable 6,223 3,902
Other liabilities 1,961 1,227
Liabilities of discontinued operation - 71,396
------------- --------------
Total liabilities 500,307 576,852
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 6,449 311
Accumulated other comprehensive income 156 681
------------- --------------
Total stockholders' equity 51,153 45,540
------------- --------------
Total liabilities and stockholders' equity $ 551,460 $ 622,392
============= ==============
- --------------------------------------------------------------------------------------------------------------------
See Accompanying Notes to Consolidated Financial Statements
PREMIER FINANCIAL BANCORP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2004 AND 2003
(IN THOUSANDS EXCEPT PER SHARE DATA)
(UNAUDITED)
- --------------------------------------------------------------------------------------------------------------------
Three Months Ended Nine Months Ended
September 30, September 30,
2004 2003 2004 2003
----------- ----------- ----------- -----------
(Restated) (Restated)
Interest income
Loans, including fees $ 5,658 $ 6,522 $ 17,249 $ 20,692
Securities available for sale
Taxable 1,134 878 3,250 2,821
Tax-exempt 48 160 182 540
Federal funds sold and other 111 105 251 396
----------- ----------- ----------- -----------
Total interest income 6,951 7,665 20,932 24,449
Interest expense
Deposits 1,554 2,000 4,730 6,702
Other borrowings 225 305 731 956
Debentures 754 689 2,209 2,089
----------- ----------- ----------- -----------
Total interest expense 2,533 2,994 7,670 9,747
----------- ----------- ----------- -----------
Net interest income 4,418 4,671 13,262 14,702
Provision for loan losses 162 4,343 671 18,388
----------- ----------- ----------- -----------
Net interest income after
provision for loan losses 4,256 328 12,591 (3,686)
Non-interest income
Service charges 647 628 1,866 1,516
Insurance commissions 9 31 45 102
Securities gains - 2 10 206
Other 228 264 725 855
----------- ----------- ----------- -----------
884 925 2,646 2,679
Non-interest expenses
Salaries and employee benefits 2,211 2,090 6,604 6,650
Occupancy and equipment expenses 711 571 1,726 1,711
Professional fees 485 318 1,551 776
Taxes, other than payroll, property and income 146 144 436 388
Write-downs, expenses, and (gains) or losses
on sales of other real estate owned, net (35) 29 15 287
Supplies 99 102 277 281
Bad check losses 27 206 73 395
Other expenses 839 778 2,516 2,452
----------- ----------- ----------- -----------
4,483 4,238 13,198 12,940
----------- ----------- ----------- -----------
Income (loss) from continuing operations
before income taxes 657 (2,985) 2,039 (13,947)
Provision (benefit) for income taxes 209 (1,108) 635 (4,926)
----------- ----------- ----------- -----------
Income (loss) from continuing operations 448 (1,877) 1,404 (9,021)
----------- ----------- ----------- -----------
Discontinued operation
Income (loss) from operation of
discontinued component - 30 4 (130)
Gain on sale of discontinued operation 6,664 - 6,664 -
Provison (benefit) for income taxes 1,934 9 1,934 (48)
----------- ----------- ----------- -----------
Income (loss) from discontinued operation 4,730 21 4,734 (82)
----------- ----------- ----------- -----------
Net income (loss) $ 5,178 $ (1,856) $ 6,138 $ (9,103)
=========== =========== =========== ===========
- --------------------------------------------------------------------------------------------------------------------
See Accompanying Notes to Consolidated Financial Statements
PREMIER FINANCIAL BANCORP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS (continued)
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2004 AND 2003
(IN THOUSANDS EXCEPT PER SHARE DATA)
(UNAUDITED)
- --------------------------------------------------------------------------------------------------------------------
Three Months Ended Nine Months Ended
September 30, September 30,
2004 2003 2004 2003
----------- ----------- ----------- -----------
(Restated) (Restated)
Weighted average shares outstanding:
Basic 5,232 5,232 5,232 5,232
Diluted 5,237 5,232 5,235 5,232
Earnings (loss) per share from continuing operations:
Basic $ 0.09 $ (0.36) $ 0.27 $ (1.72)
Diluted 0.09 (0.36) 0.27 (1.72)
Earnings (loss) per share from discontinued operation:
Basic $ 0.90 $ 0.00 $ 0.90 $ (0.02)
Diluted 0.90 0.00 0.90 (0.02)
Net earnings (loss) per share:
Basic $ 0.99 $ (0.36) $ 1.17 $ (1.74)
Diluted 0.99 (0.36) 1.17 (1.74)
- --------------------------------------------------------------------------------------------------------------------
See Accompanying Notes to Consolidated Financial Statements
PREMIER FINANCIAL BANCORP, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2004 AND 2003
(IN THOUSANDS)
(UNAUDITED)
- --------------------------------------------------------------------------------------------------------------------
Three Months Ended Nine Months Ended
September 30, September 30,
2004 2003 2004 2003
---------- ---------- ---------- ---------
(Restated) (Restated)
Net income (loss) $ 5,178 $ (1,856) $ 6,138 $ (9,103)
Other comprehensive income (loss):
Unrealized gains and (losses) arising during
the period 2,067 625 (785) 1,329
Reclassification of realized amount - (2) (10) (206)
---------- ---------- ---------- ---------
Net change in unrealized gain (loss) on
securities 2,067 623 (795) 1,123
Less: Tax impact 703 212 (270) 382
---------- ---------- ---------- ---------
Other comprehensive income (loss) 1,364 411 (525) 741
---------- ---------- ---------- ---------
Comprehensive income (loss) $ 6,542 $ (1,445) $ 5,613 $ (8,362)
========== ========== ========== =========
- --------------------------------------------------------------------------------------------------------------------
See Accompanying Notes to Consolidated Financial Statements
PREMIER FINANCIAL BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 2004 AND 2003
(IN THOUSANDS)
(UNAUDITED)
- --------------------------------------------------------------------------------------------------------------------
2004 2003
------------- -------------
(Restated)
Cash flows from continuing operating activities
Income (loss) from continuing operations $ 1,404 $ (9,021)
Adjustments to reconcile income (loss) to net
cash from continuing operating activities
Depreciation and impairment of real estate 846 723
Provision for loan losses 671 18,388
Amortization, net 396 401
FHLB stock dividends (67) (109)
Investment securities losses (gains), net (10) (206)
OREO (gains on sales) writedowns, net (76) 214
Changes in
Interest Receivable 509 1,837
Other assets 3,743 (4,929)
Interest Payable 2,321 1,927
Other liabilities 734 106
------------- -------------
Net cash from continuing operating activities 10,471 9,331
Cash flows from continuing investing activities
Purchases of securities available for sale (56,712) (98,833)
Proceeds from sales of securities available for sale 414 13,294
Proceeds from maturities and calls of securities available
for sale 47,923 92,674
Purchases of FHLB stock, net of redemptions (14) (72)
Proceeds from sale of subsidiary 14,311 -
Net change in federal funds sold (13,053) (22,073)
Net change in loans (790) 22,320
Purchases of premises and equipment, net (399) (346)
Proceeds from sale of other real estate acquired
through foreclosure 4,167 2,061
------------- -------------
Net cash from continuing investing activities (4,153) 9,025
Cash flows from continuing financing activities
Net change in deposits (8,931) (8,953)
Advances from Federal Home Loan Bank - 2,750
Repayment of Federal Home Loan Bank advances (1,210) (7,265)
Early redemption of guaranteed debentures - (3,000)
Repayment of Other Borrowed Funds (5,250) (1,050)
Net change in agreements to repurchase securities 7,187 (255)
------------- --------------
Net cash (used in) continuing financing activities (8,204) (17,773)
-------------- --------------
Net change in cash and cash equivalents
from continuing activities (1,886) 583
Cash and cash equivalents of continuing operations
at beginning of period 16,422 14,334
------------- -------------
Cash and cash equivalents of continuing operations at end of period $ 14,536 $ 14,917
============= =============
- --------------------------------------------------------------------------------------------------------------------
See Accompanying Notes to Consolidated Financial Statements
PREMIER FINANCIAL BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
NINE MONTHS ENDED SEPTEMBER 30, 2004 AND 2003
(IN THOUSANDS)
(UNAUDITED)
- --------------------------------------------------------------------------------------------------------------------
2004 2003
------------- -------------
(Restated)
Supplemental disclosures of cash flow information:
Cash paid during period for interest $ 5,349 $ 7,820
Loans transferred to real estate acquired through foreclosure 2,335 1,663
Net change in cash and cash equivalents of discontinued operations (5,306) 651
Tax refunds received 3,132 -
- --------------------------------------------------------------------------------------------------------------------
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, 2004
Net Income
Year ------------------
Acquired Assets Qtr Nine Mo.
-------- ------ ------ -------
Citizens Deposit Bank & Trust Vanceburg, Kentucky 1991 $ 89,301 $ 316 $ 984
Bank of Germantown Germantown, Kentucky 1992 23,070 60 137
Farmers Deposit Bank Eminence, Kentucky 1996 95,003 (113) (297)
Ohio River Bank Ironton, Ohio 1998 84,441 220 679
First Central Bank, Inc. Philippi, West Virginia 1998 86,871 297 842
Boone County Bank, Inc. Madison, West Virginia 1998 167,437 531 1,592
Mt. Vernon Financial Holdings, Inc. Huntington, West Virginia 1999 3,628 23 22
The Company also has a data processing subsidiary, Premier Data Services, Inc.,
and the PFBI Capital Trust unconsolidated subsidiary as discussed in Note 8. In
accordance with FASB Interpretation No. 46, the Trust is no longer consolidated
with the Company. All other intercompany transactions and balances have been
eliminated.
The Company maintains Employee Stock Ownership incentive Plans (the Plans)
whereby certain employees of the Company are eligible to receive incentive stock
options. The Plans are accounted for in accordance with Accounting Principles
Board Opinion (APB) No. 25, "Accounting for Stock Issued to Employees", and
related interpretations. Pursuant to the Plans, a maximum of 600,000 shares of
the Company's common stock may be issued through the exercise of these incentive
stock options. The option price is the fair market value of the Company's shares
at the date of the grant. The options are exercisable within ten years from the
date of grant.
- --------------------------------------------------------------------------------
CONTINUED
PREMIER FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED, IN THOUSANDS)
- --------------------------------------------------------------------------------
NOTE 1 - BASIS OF PRESENTATION - (continued)
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.
2004 2003
------------ -----------
(Restated)
Income (loss) from continuing operations $ 1,404 $ (9,021)
Deduct: Stock-based compensation
expense determined under fair
value based method (36) (23)
------------ ------------
Pro forma income (loss) $ 1,368 $ (9,044)
Basic earnings (loss) per share
from continuing operations $ 0.27 $ (1.72)
Pro forma basic earnings (loss) per share 0.26 (1.73)
Diluted earnings (loss) per share
from continuing operations $ 0.27 $ (1.72)
Pro forma diluted earnings (loss) per share 0.26 (1.73)
For the period ended September 30, 2003, stock options were not considered in
the computation of diluted loss per share because they were antidilutive.
On February 18, 2004, 28,200 incentive stock options were granted out of the
2002 Stock Option Plan at an exercise price of $9.30. These options vest in
three equal annual installments ending on February 18, 2007. On January 15,
2003, 28,650 incentive stock options were granted out of the 2002 Stock Option
Plan at an exercise price of $7.96. These options vest in three equal annual
installments ending on January 15, 2006. Proforma stock-compensation expense is
being amortized over each of the three-year vesting periods. There were no
options granted during 2002. Future pro forma net income will be negatively
impacted should the Company choose to grant additional options.
- --------------------------------------------------------------------------------
CONTINUED
PREMIER FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED, IN THOUSANDS)
- --------------------------------------------------------------------------------
NOTE 1 - BASIS OF PRESENTATION - (continued)
The pro forma effects are computed using option pricing models, using the
following weighted-average assumptions as of grant date.
2004 2003
---- ----
Risk-free interest rate 3.15% 3.10%
Expected option life (yrs) 5.00 5.00
Expected stock price volatility 0.34 0.42
Dividend yield 0.00% 0.00%
Weighted average fair value of
options granted during the year $3.29 $3.30
NOTE 2 - RESTATEMENT
On June 16, 2003 Premier announced that as a result of an ongoing internal
investigation, it had uncovered a systemic disregard for its loan approval and
credit administration policies at its Farmers Deposit Bank subsidiary and had
accepted the resignation of the bank's former president. On November 7, 2003
Premier disclosed that the Securities and Exchange Commission had requested
information about Premier's internal investigation. As the internal
investigation progressed, many loans were charged off and additional provisions
for loan losses were recorded. Premier's management, with the assistance of
outside independent professionals, has conducted a further review of those loans
for which significant charge offs or additional provisions were required in
2003. The purpose of this review was to determine if the facts or circumstances
that gave rise to additional charge offs or provisions had been improperly
concealed from senior management or improperly considered in applying
management's estimates and judgments as to the adequacy of the allowance for
loan losses in prior financial statement periods. The review did identify
instances in which collateral securing loans had been released without proper
support or notation in loan files, instances in which obligors on notes had been
released from their repayment obligation without proper support or notation in
loan files and instances in which delinquent loan reporting systems had been
manipulated to prevent problem loans from being identified on a timely basis.
Premier's senior management determined that if these circumstances had been
considered in evaluating the adequacy of the allowance for loan losses in prior
periods then some of the loan charge offs and additional provisions for loan
losses recorded in 2003 should have been reflected in prior periods. Therefore
the financial statements for the periods ended September 30, 2003 have been
restated to reflect the financial statement effect of the matters that occurred
in the prior periods but which were improperly concealed by subsidiary
management.
- --------------------------------------------------------------------------------
CONTINUED
PREMIER FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED, IN THOUSANDS)
- --------------------------------------------------------------------------------
NOTE 2 - RESTATEMENT (continued)
Effect on operating results for the three and nine months ended (in thousands
except per share data):
Three Months Nine Months
Sept 2003 Sept 2003
Increase Increase
Operating statement caption (Decrease) (Decrease)
- --------------------------- ---------- ----------
Interest income, loans $ 145 $ 96
Provision for loan losses (3,672) (4,170)
Net interest income after
provision for loan losses 3,817 4,266
Income (loss) from continuing
operations before income taxes 3,817 4,266
Provision (benefit) for income taxes 1,298 1,451
Income (loss) from
continuing operations 2,519 2,815
Net (loss) income 2,519 2,815
Net (loss) income per share,
basic and diluted 0.48 0.54
- --------------------------------------------------------------------------------
CONTINUED
PREMIER FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED, IN THOUSANDS)
- --------------------------------------------------------------------------------
NOTE 3 - DISCONTINUED OPERATION
In the fourth quarter of 2003, the Company adopted and began to implement a plan
to sell its subsidiary Citizens Bank (Kentucky), Inc. ("Citizens Bank") located
in Georgetown, Kentucky. On February 13, 2004, the Company announced that it had
signed a definitive agreement to sell Citizens Bank in a cash transaction valued
at approximately $14,500,000. In accordance with Financial Accounting Standard
144, "Accounting for the Impairment or Disposal of Long-lived Assets", which
became effective for the Company on January 1, 2002, the financial position and
results of operations of Citizens Bank are removed from the detail line items in
the Company's financial statements and presented separately as "discontinued
operations." The sale was completed on July 1, 2004. The $6,664,000 gain on the
sale and $1,934,000 of income taxes accrued on the gain is reported on the
income statement in the section titled discontinued operation for the three
months and nine months ended September 30, 2004.
A condensed balance sheet and statement of operations for Citizens Bank follows
(in thousands):
Sold on As of
July 1 December 31
2004 2003
----------- -----------
Assets
Cash and federal funds sold $ 8,774 $ 6,473
Securities available for sale 11,600 12,082
Loans, net 49,141 53,886
Premises and equipment, net 3,006 3,026
Other assets 3,352 3,696
----------- -----------
Total assets $ 75,873 $ 79,163
=========== ===========
Liabilities
Deposits $ 62,440 $ 65,486
Federal Home Loan Bank advances 5,242 5,255
Other liabilities 543 655
----------- -----------
Total liabilities 68,225 71,396
Equity 7,648 7,767
----------- -----------
Total liabilities and equity $ 75,873 $ 79,163
=========== ===========
For the Three For the Nine
Months Ended Months Ended
Sept 30 Sept 30 Sept 30 Sept 30
2004 2003 2004 2003
--------- --------- --------- ---------
Interest income $ - $ 1,135 $ 2,021 $ 3,551
Interest expense - 454 732 1,466
--------- --------- --------- ---------
Net interest income - 681 1,289 2,085
Provision for loan losses - - - 240
Non-interest income - 233 434 713
Gain on the sale of discontinued operation 6,664 - 6,664 -
Non-interest expense - 884 1,719 2,688
Income tax (benefit) 1,934 9 1,934 (48)
--------- --------- --------- ----------
Net income (loss) $ 4,730 $ 21 $ 4,734 $ (82)
========= ========= ========= ==========
- --------------------------------------------------------------------------------
CONTINUED
PREMIER FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED, IN THOUSANDS)
- --------------------------------------------------------------------------------
NOTE 3 - DISCONTINUED OPERATION (continued)
The parent company leased a building to Citizens Bank to be used in its
operations. The purchaser of the subsidiary chose not to continue the lease. As
a result, the building was placed on the market to be sold. The market value was
less than the carrying value of the building and therefore, in accordance with
FAS 144, Accounting for Long-lived Assets, a $165,000 charge to operating
earnings was recorded. This expense is included on the income statement in the
caption "Occupancy and equipment expenses" for the three and nine month periods
ended September 30, 2004. The building was sold in October 2004.
NOTE 4 - REGULATORY MATTERS
On September 29, 2000, the Company entered into an agreement with the Federal
Reserve Bank (FRB) that prohibits the Company from paying dividends or incurring
any additional debt without the prior written approval of the FRB. Additionally,
the agreement required the Company to develop and monitor compliance with
certain operational policies designed to strengthen Board of Director oversight
including credit administration, liquidity, internal audit and loan review.
Subsequently, 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 required 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. As of September 30,
2004, management believes the Company is operating in compliance with the
provisions of the written agreement.
- --------------------------------------------------------------------------------
CONTINUED
PREMIER FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED, IN THOUSANDS)
- --------------------------------------------------------------------------------
NOTE 4 - REGULATORY MATTERS (continued)
On December 22, 2003, the Company's subsidiary Farmers Deposit Bank - Eminence,
Kentucky (the Bank), was issued a Cease and Desist order (Order) by the Federal
Deposit Insurance Corporation (FDIC) and the Kentucky Office of Financial
Institutions (KOFI) [collectively referred to as "Supervisory Authorities"]
related to activities of the bank's former president. The Order, effective
January 1, 2004, requires the Bank to cease and desist from the following:
(a) Operating with management whose policies and procedures are detrimental
to the Bank and jeopardize the safety of its deposits;
(b) Operating with an inadequate level of capital protection for the kind
and quality of assets held by the Bank;
(c) Operating with a large volume of adversely classified loans or assets
and/or delinquent loans and/or non-accrual loans;
(d) Operating with an inadequate allowance for loan and lease losses for
the volume, kind and quality of loans and leases held by the Bank;
(e) Engaging in hazardous lending and lax collection practices;
(f) Operating with inadequate provisions for liquidity and funds management;
(g) Operating with disregard of routine and controls policies;
(h) Operating in such a manner as to produce operating losses; and
(i) Violating laws and/or regulations cited in the most recent Report of
Examination issued by the FDIC ("Report").
The Order also outlined a number of steps to be taken by the Bank which are
designed to remedy and/or prevent the reoccurrence of the items listed in the
Order. These include 1) retaining qualified management and increasing the
involvement of the Bank's Board of Directors ("Board"); 2) developing and
submitting to the Supervisory Authorities a capital plan that maintains the
Bank's Tier I Leverage Ratio above a minimum 5.0% and increases that ratio to
8.0% by December 31, 2004; 3) restricting the payment of cash dividends; 4)
requiring the Board to review the adequacy of the allowance for loan losses at
least quarterly; 5) requiring the Bank to charge-off certain loans listed in the
Report; 6) reviewing the system of internal loan review and system for assigning
loan risk grades as well as revising the Bank's lending policies to address
items of criticism contained in the Report; 7) developing written plans for
reducing and/or improving the level of adversely classified loans and correcting
documentation exceptions on certain loans detailed in the Report; 8) generally
prohibiting additional lending to borrowers who currently have uncollected
adversely classified loans; 9) submitting an annual budget to the Supervisory
Authorities outlining goals and strategies for improving and sustaining the
earnings of the Bank; 10) adopting and implementing a policy for operating the
Bank with adequate internal controls consistent with safe and sound banking
practices and developing an internal audit program to ensure the integrity of
these controls; 11) adopting and implementing a liquidity and funds management
policy; and 12) providing this notice to shareholders. The Bank is required to
provide quarterly progress updates to the Supervisory Authorities.
The full text of the Order is available on the FDIC website at www.fdic.gov or
by calling the FDIC Public Information Center at (877) 275-3342.
- --------------------------------------------------------------------------------
CONTINUED
PREMIER FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED, IN THOUSANDS)
- --------------------------------------------------------------------------------
NOTE 4 - REGULATORY MATTERS (continued)
In accordance with the Order, the Company contributed additional capital to
Farmers to ensure a 5.00% leverage ratio at December 31, 2003. The Company also
submitted to the Supervisory Authorities a written capital restoration plan that
incrementally increases the Bank's Tier I Leverage Ratio to 5.50% at March 31,
2004; 6.00% at June 30, 2004; 7.00% at September 30, 2004 and 8.00% at December
31, 2004. At September 30, 2004, the Bank's Tier I Leverage Ratio was 9.00%.
NOTE 5- SECURITIES
Amortized cost and fair value of securities available for sale, at
September 30, 2004 are summarized as follows:
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
U. S. Treasury securities $ 250 $ - $ - $ 250
U. S. agency securities 122,481 252 (434) 122,299
Obligations of states and political
subdivisions 4,338 232 - 4,570
Mortgage-backed securities 27,299 259 (83) 27,475
Corporate securities 429 12 - 441
-------------- -------------- -------------- ---------------
Total available for sale $ 154,797 $ 755 $ (517) $ 155,035
============== ============== =============== ===============
Amortized cost and fair value of securities available for sale at
December 31, 2003 are summarized as follows:
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
U. S. Treasury securities $ 650 $ 2 $ - $ 652
U. S. agency securities 106,413 573 (141) 106,845
Obligations of states and political
subdivisions 6,540 328 - 6,868
Mortgage-backed securities 31,766 186 (142) 31,810
Corporate securities 1,439 32 - 1,471
-------------- -------------- -------------- ---------------
Total available for sale $ 146,808 $ 1,121 $ (283) $ 147,646
============== ============== =============== ===============
The investment portfolio is predominately high quality interest-bearing bonds
with defined maturity dates backed by the U.S. Government or Government
sponsored agencies. The unrealized losses at September 30, 2004 and December 31,
2003 are price changes resulting from changes in the interest rate environment.
The unrealized losses as of both periods have occurred within the last twelve
months and are not considered to be other than temporary declines in the value
of the securities.
- --------------------------------------------------------------------------------
CONTINUED
PREMIER FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED, IN THOUSANDS)
- --------------------------------------------------------------------------------
NOTE 6 - LOANS
Major classifications of loans at September 30, 2004 and December 31, 2003 are
summarized as follows:
2004 2003
------------ ------------
Commercial, secured by real estate $ 100,565 $ 101,325
Commercial, other 41,279 38,063
Real estate construction 7,438 5,414
Residential real estate 124,748 126,134
Agricultural 2,950 3,032
Consumer and home equity 46,084 56,216
Other 1,400 1,610
------------ ------------
$ 324,464 $ 331,794
============ ============
The following table sets forth information with respect to the Company's
impaired loans at September 30, 2004 and December 31, 2003.
2004 2003
------------ ------------
Impaired loans at period end with an allowance $ 16,541 $ 17,071
Impaired loan at period end with no allowance 268 3,849
Amount of allowance for loan losses allocated 3,328 8,418
The following table sets forth information with respect to the Company's
nonperforming loans at September 30, 2004 and December 31, 2003.
2004 2003
------------ ------------
Non-accrual loans $ 9,467 $ 11,958
Accruing loans which are contractually
past due 90 days or more 1,020 4,137
Restructured loans 252 104
------------ ------------
$ 10,739 $ 16,199
============ ============
Nonperforming loans include some impaired loans and smaller balance homogeneous
loans, such as residential mortgage and consumer loans, that are collectively
evaluated for impairment. Loan impairment is reported when full payment under
the loan terms is not anticipated, which can include loans that are current or
less than 90 days past due.
- --------------------------------------------------------------------------------
CONTINUED
PREMIER FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED, IN THOUSANDS)
- --------------------------------------------------------------------------------
NOTE 7 - ALLOWANCE FOR LOAN LOSSES
Changes in the allowance for loan losses for the three and nine months ended
September 30, 2004 and 2003 are as follows:
Three Months Ended Nine Months Ended
September 30, September 30,
2004 2003 2004 2003
-------- -------- -------- --------
(Restated) (Restated)
Balance, beginning of period $ 9,550 $ 16,185 $ 14,300 $ 9,698
Gross charge-offs (791) (7,637) (6,576) (15,455)
Recoveries 265 130 791 390
Provision for loan losses 162 4,343 671 18,388
-------- -------- -------- --------
Balance, end of period $ 9,186 $ 13,021 $ 9,186 $ 13,021
======== ======== ======== ========
NOTE 8 - GUARANTEED JUNIOR SUBORDINATED INTEREST DEBENTURES
On June 9, 1997, PFBI Capital Trust (Trust), a statutory business trust created
under Delaware law, issued $28,750,000 of 9.750% Preferred Securities
("Preferred Securities" or "Trust Preferred Securities") with a stated value and
liquidation preference of $25 per share. The Trust's obligations under the
Preferred Securities issued are fully and unconditionally guaranteed by the
Company. The proceeds from the sale of the Preferred Securities of the Trust, as
well as the proceeds from the issuance of common securities to the Company, were
utilized by the Trust to invest in $29,639,000 of 9.750% Junior Subordinated
Deferrable Interest Debentures (the "Debentures") of the Company. The
Debentures, which mature on June 30, 2027 are unsecured obligations and rank
subordinate and junior to the right of payment to all senior indebtedness,
liabilities and obligations of the Company. The Debentures represent the sole
assets of the Trust. Distributions on the Preferred Securities are payable at an
annual rate of 9.750% of the stated liquidation amount of $25 per Preferred
Security, payable quarterly. Cash distributions on the Preferred Securities are
made to the extent interest on the Debentures is received by the Trust. In the
event of certain changes or amendments to regulatory requirements or federal tax
rules, the Debentures are redeemable in whole. Otherwise, the Debentures are
generally redeemable by the Company in whole or in part on or after June 30,
2002 at 100% of the liquidation amount. Proceeds from any redemption of the
Debentures would cause a mandatory redemption of the Preferred Securities and
the common securities having an aggregate liquidation amount equal to the
principal amount of the Debentures redeemed. Debt issuance costs of $1,478,000
have been capitalized by the Trust and are being amortized.
- --------------------------------------------------------------------------------
CONTINUED
PREMIER FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED, IN THOUSANDS)
- --------------------------------------------------------------------------------
NOTE 8 - GUARANTEED JUNIOR SUBORDINATED INTEREST DEBENTURES (continued)
As previously disclosed, pursuant to an agreement entered into with the Federal
Reserve Bank (FRB) described in Note 4, the Company is required to request
approval for the payment of distributions due on the Debentures and 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 Debentures and Trust
Preferred Securities which occurred on March 31, 2003. However, the FRB denied
the Company's request to make distributions on the remaining Debentures and
Trust Preferred Securities.
The Company exercised its right to defer the payment of interest on the 9.75%
Trust Preferred Securities for the quarter ending December 31, 2002 and all
subsequent quarters through September 30, 2004, and for an indefinite period,
which can be no longer than 20 consecutive quarterly periods. These and any
future deferred distributions 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 Debentures or the Trust
Preferred Securities 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.
In a letter dated June 22, 2004, Premier requested permission from the FRB to
pay all of the current and accumulated deferred distributions on its Trust
Preferred Securities as of and through the quarter ending September 30, 2004.
The FRB subsequently asked management to analyze a partial redemption of the
$25,750,000 (1,030,000 shares) outstanding. The analysis determined that
approximately $4,500,000 of the Trust Preferred Securities could be redeemed
using an equivalent total cash outlay quantified in Premier's original June 22nd
request. After evaluating both alternatives, the FRB granted Premier permission
to redeem $4,500,000 of the outstanding Trust Preferred Securities and denied
Premier's original request to pay all of the accumulated deferred distributions
through September 30, 2004. A partial early redemption requires Premier to pay
all of the current and deferred distributions owed on the amount to be redeemed.
Accordingly, Premier will continue to exercise its right to defer distributions
on the remaining $21,250,000 Trust Preferred Securities outstanding after the
partial redemption. The $4,500,000 early redemption was completed on October 15,
2004.
NOTE 9 - STOCKHOLDERS' EQUITY AND REGULATORY MATTERS
The Company entered into an agreement with the Federal Reserve Bank of Cleveland
(FRB), as discussed in Note 4, restricting the Company from declaring or paying
dividends to shareholders without prior approval from the FRB. 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 2004, the
Banks could, without prior approval, declare dividends of approximately $1.4
million plus any 2004 net profits retained to the date of the dividend
declaration.
- --------------------------------------------------------------------------------
CONTINUED
PREMIER FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED, IN THOUSANDS)
- --------------------------------------------------------------------------------
NOTE 9 - STOCKHOLDERS' EQUITY AND REGULATORY MATTERS (continued)
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 September
30, 2004, 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 To Be Considered
September 3 December 31, Minimum Well
2004 2003 Requirements Capitalized
---------- ------------ ------------ ----------------
Tier I Capital (to Risk-Weighted Assets) 16.1% 10.6% 4.0% 6.0%
Total Capital (to Risk-Weighted Assets) 20.1% 14.8% 8.0% 10.0%
Tier I Capital (to Average Assets) 9.5% 6.4% 4.0% 5.0%
The capital amounts and classifications are also subject to qualitative
judgments by the regulators. As a result of these qualitative judgments, the
Company and one 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 4, 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 9 - 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 was in effect until terminated by the
FRB. The FRB found that Citizens had met all of the objectives of the agreement
and, accordingly, terminated the agreement on October 25, 2004.
Bank of Germantown (Germantown) entered into an agreement with the Kentucky
Office of Financial Institutions (KOFI) 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%. The KOFI and FDIC found that Germantown had met all of
the objectives of the agreement and, accordingly, terminated the agreement on
August 9, 2004.
Effective January 1, 2004, Farmers Deposit Bank (Farmers Deposit) was issued a
Cease and Desist order by the FDIC and KOFI restricting Farmers Deposit from
declaring or paying dividends, without prior approval, if its Tier I capital to
average assets falls below 8.00%. The order also required Farmers Deposit to
maintain a minimum 5.0% Tier I capital to average assets ratio and submit a
written capital restoration plan to increase the ratio to 8.0% by December 31,
2004. This order is in effect until terminated by the KOFI and FDIC. Farmers
Deposit's Tier I capital to average assets was 9.0% at September 30, 2004.
As of September 30, 2004, the most recent notification from the FRB categorized
the Company and its subsidiary banks as well capitalized under the regulatory
framework for prompt corrective action. To be categorized as well capitalized,
the Company must maintain minimum Total risk-based, Tier I risk-based and Tier I
leverage ratios as set forth in the preceding table. There are no conditions or
events since that notification that management believes have changed the
Company's category.
- --------------------------------------------------------------------------------
PREMIER FINANCIAL BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
- --------------------------------------------------------------------------------
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations
FORWARD-LOOKING STATEMENTS
Management's discussion and analysis contains forward-looking statements that
are provided to assist in the understanding of anticipated future financial
performance. However, such performance involves risks and uncertainties, and
there are certain important factors that may cause actual results to differ
materially from those anticipated. These important factors include, but are not
limited to, economic conditions (both generally and more specifically in the
markets in which Premier operates), competition for Premier's customers from
other providers of financial services, government legislation and regulation
(which changes from time to time), changes in interest rates, Premier's ability
to originate quality loans, collect delinquent loans and attract and retain
deposits, the impact of Premier's growth, Premier's ability to control costs,
and new accounting pronouncements, all of which are difficult to predict and
many of which are beyond the control of Premier.
A. Results of Operations
A financial institution's primary sources of revenue are generated by
interest income on loans, investments and other earning assets, while its major
expenses are produced by the funding of these assets with interest bearing
liabilities. Effective management of these sources and uses of funds is
essential in attaining a financial institution's optimal profitability while
maintaining a minimum amount of interest rate risk and credit risk.
The following narrative discusses the continuing operations of the
Company. As more fully explained in Note 3 to the consolidated financial
statements above, the narrative excludes the discontinued operations of
Premier's subsidiary Citizens Bank (Kentucky), Inc. On February 13, 2004,
Premier signed a definitive agreement to sell the subsidiary for $14,500,000 in
cash. The transaction, which was completed on July 1, 2004, restored the cash
reserves used by Premier in 2003 to recapitalize one of its affiliate banks;
strengthened Premier's balance sheet by reducing the company's total assets
while increasing its total capital, and generated taxable income to be used as a
partial offset to Premier's tax loss carryforward.
Furthermore, comparative information for the quarter and nine months
ended September 30, 2003 reflect the restatement of charge-offs, provision for
loan losses, interest income and income taxes as more fully explained in Note 2
of the consolidated financial statements above.
Income from continuing operations for the nine months ended September
30, 2004 was $1,404,000, or 27 cents per share, compared to a loss from
continuing operations of ($9,021,000), or ($1.72) per share for the nine months
ended September 30, 2003. The profitability recorded in the first nine months of
2004 was largely due to lower provisions for loan losses versus the same period
of 2003, partially offset by lower net interest income and slightly higher
non-interest expense realized in 2004. For the three months ended September 30,
2004, income from continuing operations was $448,000, or 9 cents per share,
compared to a loss from continuing operations of ($1,877,000) or ($0.36) per
share for the three months ended September 30, 2003. The profitability recorded
in the third quarter of 2004 was largely due to lower provisions for loan losses
versus the third quarter of 2003, partially offset by lower net interest income
and higher non-interest expenses realized in 2004.
Net interest income for the nine months ending September 30, 2004
totaled $13.26 million, down from the $14.7 million of net interest income
earned in the first nine months of 2003. Both interest income and interest
expense decreased in the comparisons. Interest income declined by $3.5 million
due to lower loans outstanding due to the charge-offs at Farmers Deposit Bank
and other loan paydowns across the company during 2003 compounded by the higher
volume of non-accrual loans at Farmers Deposit Bank during the nine months of
2004. Interest expense declined by $2.0 million largely due to lower interest
costs on deposits as interest bearing deposits have declined and maturing
certificates of deposit have renewed at significantly lower rates due to the low
interest rate environment. Interest expense savings were also realized due to
the paydown of other borrowings. These savings have been partially offset by
interest expense accrued on the deferred trust preferred distributions (see Note
8 to the consolidated financial statements.) As a result, the net interest
margin for the nine months ending September 30, 2004 was approximately 3.55%
compared to 3.69% for the same period in 2003.
Net interest income for the quarter ending September 30, 2004 totaled
$4.42 million, down from the $4.67 million of net interest income earned in the
third quarter of 2003. Again, both interest income and interest expense
decreased in the comparisons. Interest income declined by $714,000 due to lower
loans outstanding due to the charge-offs at Farmers Deposit Bank and other loan
paydowns across the company during 2003 and early 2004 compounded by the higher
volume of non-accrual loans at Farmers Deposit Bank during the three months of
2004. Interest expense declined by $461,000 largely due to lower interest costs
on deposits due to lower interest bearing deposits and as maturing certificates
of deposit have renewed at significantly lower rates due to the low interest
rate environment. Interest expense savings from the paydown of other borrowings
have been offset by interest expense accrued on the deferred trust preferred
distributions (see Note 8 to the consolidated financial statements.)
Non-interest income remained relatively unchanged at $2,646,000 for the
first nine months of 2004 compared to $2,679,000 for the first nine months of
2003, as non-recurring gains on the sales of securities in 2003 have been
replaced by recurring revenue from service charges on deposit accounts in 2004.
Securities gains totaled $206,000 in the first nine months of 2003 compared to
$10,000 in the same period of 2004. Excluding the securities gains, non-interest
income increased by $163,000 or 6.6% in the first nine months of 2004. Service
charges on deposit accounts increased by $350,000 or 23.1% due to a new fee
structure. This increase was partially offset by a $57,000 decrease in insurance
commissions and a $130,000 decrease in other types of non-interest income
including fees from the origination of secondary market mortgages.
For the quarter ending September 30, 2004, non-interest income
decreased by $41,000 to $884,000 compared to $925,000 for the third quarter of
2003. Excluding the $2,000 of investment securities gains realized in the third
quarter of 2003, non-interest income decreased 4.2% in the third quarter of
2004. The decrease is largely due to decreases in income from insurance
commissions and a decrease in other income, partially offset by a 3.0% or
$19,000 increase in revenue from service charges on deposit accounts due to a
change in fee structure during 2003.
Non-interest expenses for the first nine months of 2004 totaled
$13,198,000 or 3.2% of average assets of continuing operations on an annualized
basis compared to $12,940,000 or 3.0% of average assets of continuing operations
for the same period of 2003. The slight increase in non-interest expense is
largely due to a $775,000 increase in professional fees related to audit costs
and legal fees associated with the SEC investigation disclosed in the Company's
annual report on Form 10-K for the year ended December 31, 2003 and a $165,000
impairment writedown on facilities listed for sale included in occupancy
expense. These increases are partially offset by lower staff costs due to
savings from employee participation in the cost of medical insurance premiums
more than offsetting increased salary and wages expense; lower depreciation
expense on equipment, lower bad check losses and lower writedowns and expenses
on the liquidation of other real estate owned (OREO). Taxes not on income
increased by $48,000 in the first nine months of 2004 due to an increase in the
expense for equity based taxes. Other expenses increased by $64,000 in total, as
lower collection expenses in 2004 and $124,000 of accelerated amortization of
issuance costs related to the early redemption of $3.0 million of the Trust
Preferred Securities (NASDAQ/NMS-PFBIP) in the first quarter of 2003 have been
offset by higher FDIC insurance, communications expenses and corporate insurance
costs in 2004.
Non-interest expenses for the third quarter of 2004 totaled $4,483,000
or 3.3% of average assets of continuing operations on an annualized basis
compared to $4,238,000 or 3.0% of average assets of continuing operations for
the same period of 2003. The increase in non-interest expense is largely due to
a $165,000 impairment writedown on facilities listed for sale included in
occupancy expense, a $167,000 increase in professional fees related to legal
fees associated with the SEC investigation, and a $121,000 increase in salary
costs and related employment taxes. These increases were partially offset by
employee participation in the cost of medical insurance premiums, lower bad
check losses, and a net gain on the liquidation of OREO in the third quarter of
2004. Other expenses increased $61,000 largely due to increased FDIC insurance,
communications expenses, ATM & credit card processing costs, postage and
corporate insurance costs.
Income tax expense was $635,000 for the first nine months of 2004
compared to a tax benefit of $4.93 million for the first nine months of 2003.
The increase in income tax expense can be primarily attributed to the increase
in pre-tax income detailed above. The annualized effective tax rate for the nine
months ended September 30, 2004 was 31.2%, compared to the 35.3% effective tax
rate for the same period in 2003. The higher benefit rate in 2003 was the result
of reduced tax expense resulting from tax exempt income. The income tax expense
for the quarter ending June 30, 2004 was $209,000 compared to a tax benefit of
$1.1 million during the same period of 2003.
The annualized returns from continuing operations on shareholders'
equity and on average assets were approximately 3.97% and 0.34% for the nine
months ended September 30, 2004 compared to a negative (22.83%) and (2.06%) for
the same period in 2003.
B. Financial Position
Total assets of continuing operations at September 30, 2004 increased
$8.2 million or 1.5% to $551.5 million from the $543.2 million at December 31,
2003. This increase was largely due to the proceeds from the sale of one of the
Company's subsidiary banks on July 1, 2004.
Earning assets of continuing operations increased to $512.5 million at
September 30, 2004 from the $499.2 million at December 31, 2003, an increase of
$13.3 million, or 2.7%. The increase was largely due to a $13.1 million increase
in federal funds sold and a $7.4 million increase in investments. Partially
offsetting the increase was the $7.3 million decline in loans outstanding since
year-end.
Cash and due from banks at September 30, 2004 was $14.5 million, a $1.9
million decrease from $16.4 million on December 31, 2003, as surplus funds were
employed in short-term interest-bearing federal funds sold. Federal funds sold
increased to $30.1 million from the $17.1 million reported at December 31, 2003.
The increase in federal funds sold was the result of retaining liquidity from
the sale of the bank subsidiary in July to be used for the early redemption of
trust preferred securities on October 15, 2004. Also, as loan principal balances
have paid down, Premier has used the funds to satisfy deposit withdrawals and
retained the surplus in federal funds sold to maintain its liquidity position
and to fund future loan growth.
Securities available for sale totaled $155.0 million at September 30,
2004, a $7.4 million increase from the $147.6 million at December 31, 2003. The
increase was largely due to the investment of proceeds from income tax refunds
and the reinvestment of loan collection proceeds at Farmers Deposit bank, as
management continues the process of restoring the financial condition of the
bank. Also impacting the investment portfolio was a $600,000 decline in the
market value of the investment portfolio since year-end 2003. During the third
quarter, market values of the investment portfolio rebounded from the $1.8
million net unrealized loss at June 30, 2004 to a net $238,000 unrealized gain
at September 30, 2004. Fluctuations in the market value of the investment
portfolio is in response to the changes in the interest rate environment. Since
Premier primarily holds interest-bearing bonds with a specific maturity date,
changes in interest rates will affect the market value of the bond portfolio.
However, as bonds approach maturity, differences in the book and market value of
bonds, positive or negative, tend to decrease. At maturity, Premier fully
anticipates receiving the face value of the bonds as Premier primarily invests
in instruments either backed by the U.S. Government or agencies sponsored by the
U.S. Government. Premier holds no equity based investments. Additional details
on investment activities can be found in the Consolidated Statements of Cash
Flows.
Total loans at September 30, 2004 were $324.5 million compared to
$331.8 million at December 31, 2003, a decrease of $7.3 million. This decrease
can primarily be attributed to net loan pay offs and the $6.6 million in loan
charge-offs recorded during the first nine months of 2004. The majority of the
loan paydowns and charge-offs occurred at Farmers Deposit Bank as management
continues to focus on loan collections or charging off loans that were fully
reserved and deemed uncollectible. Most of Premier's other affiliate banks are
either experiencing loan growth or are generating new loans at a rate similar to
or slightly less than the scheduled principal payments and early payoffs by
borrowers.
Deposits totaled $446.5 million as of September 30, 2004, an $8.9
million decrease from the $455.5 million in deposits at December 31, 2003. The
decrease is largely due to $6.0 million of public deposits withdrawn and placed
by the depositor into repurchase agreements. Excluding this transaction,
deposits decreased by $2.9 million. Modest deposit growth at most of the
company's affiliate banks has been offset by planned declines in deposits at
Farmers Deposit Bank. Maturing out of area deposits at that bank have generally
not been renewed in an effort to restructure that bank's balance sheet.
Outstanding debt, including the Company's outstanding subordinated
debentures, has decreased by $6.5 million since December 31, 2003, as increases
in short-term FHLB advances earlier in 2004 have been paid off and selected
long-term borrowings have been paid off. Federal Home Loan Bank advances have
decreased by $1,211,000 due to scheduled and accelerated principal payments at
Farmers Deposit bank in an effort to restructure that bank's balance sheet.
Other borrowed funds have declined by $5,250,000 due to scheduled principal
payments plus the full payoff of one loan in the third quarter of 2004 out of
the proceeds from the subsidiary bank sale. See note 9 to the consolidated
financial statements for additional information on the outstanding subordinated
debentures.
The following table sets forth information with respect to the
Company's nonperforming assets of continuing operations at September 30, 2004
and December 31, 2003.
(In Thousands)
2004 2003
-------------- ------------
Non-accrual loans $ 9,467 $ 11,958
Accruing loans which are contractually
past due 90 days or more 1,020 4,137
Restructured 252 104
-------------- ------------
Total non-performing loans 10,739 16,199
Other real estate acquired through
foreclosure 1,431 3,187
-------------- ------------
Total non-performing assets $ 12,170 $ 19,386
============== ============
Non-performing loans as a percentage
of total loans 3.31% 4.88%
Non-performing assets as a percentage
of total assets (of continuing operations) 2.21% 3.57%
Total non-performing loans and non-performing assets have declined
since year-end due to loan charge-offs and the development and execution of
action plans for the troubled loans identified at Farmers Deposit Bank. 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 OREO properties. However, when plans are executed, Premier may experience
increases in non-performing loans and non-performing assets as a result of the
normal collection process. 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.
The provision for loan losses was $671,000 for the first nine months of
2004 compared to $18.4 million for the first nine months of 2003. The
significant provision for losses in the prior year was primarily the result of
loan problems identified at Farmers Deposit Bank as more fully discussed in
previous filings. The provision for loan losses is 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. The provision in 2004 was the result of loan growth and the
estimation of probable losses in the loan portfolio. Gross charge-offs totaled
$6.6 million during the first nine months of 2004. Most of these charge-offs
were loans identified during the 2003 investigation (see Note 2 to the
consolidated financial statements) with an allowance for losses provided for at
that time. Collection efforts on these loans are continuing and any collections
on these loans would be presented in future financial statements as recoveries
of the amounts charged against the allowance. During the first nine months of
2004, $791,000 of recoveries were recorded. For the quarter ended September 30,
2004, the provision for loan losses was $162,000 compared to $4.3 million for
the same period of 2003. As a result, the allowance for loan losses at September
30, 2004 was 2.83% of total loans as compared to 4.31% at December 31, 2003. The
decrease in the percentage of allowance for loan losses to total loans is
largely due to sufficient loan loss reserves allocated to the loans actually
charged off during the first nine months of 2004.
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, 2003. 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. A detailed description of these accounting policies is contained in the
Company's annual report on Form 10-K for the year ended December 31, 2003. There
have been no significant changes in the application of these accounting policies
since December 31, 2003.
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 $155.0 million of securities at
market value as of September 30, 2004.
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, 2004, total shareholders' equity of $51.2 million was
9.3% of total assets of continuing operations. This compares to total
shareholders' equity of $45.5 million or 8.4% of total assets of continuing
operations on December 31, 2003. The increase in total shareholders' equity is
primarily the result of operating profits, the net gain on the sale of the bank
subsidiary partially offset by declines in the market value of securities
available for sale since year-end, net of any tax benefits. See additional
discussion on the decline in the market value of securities available for sale
above.
Tier I capital totaled $50.4 million at September 30, 2004, which
represents a Tier I leverage ratio of 9.5%.
Book value per share was $9.78 at September 30, 2004, and $8.70 at
December 31, 2003. The increase in book value per share was primarily the result
of the net gain on the sale of the bank subsidiary.
PREMIER FINANCIAL BANCORP, INC.
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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 2003 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 2003 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-15c as of
the end of the period covered by this quarterly report. 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.
"Internal controls" are procedures, which are designed with the
objective of providing reasonable assurance that (1) transactions are properly
authorized; (2) assets are safeguarded against unauthorized or improper use; and
(3) transactions are properly recorded and reported, all so as to permit the
preparation of reports and financial statements in conformity with generally
accepted accounting principles. Premier management uses the financial reports of
its subsidiaries to make decisions about the allocation of the Company's
resources, to implement strategies to improve the Company's performance, and to
prepare the consolidated financial statements of the Company for its
shareholders and regulatory authorities. However, a control system, no matter
how well conceived and operated, can provide only reasonable, not absolute,
assurance that the objectives of the control system are met. Further, the design
of a control system must reflect the fact that there are resource constraints,
and the benefits of controls must be considered relative to their cost. Because
of the inherent limitations in all control systems, no evaluation of controls
can provide absolute assurance that all control issues and instances of fraud,
if any, within a company have been detected. These inherent limitations include
the realities that judgments in decision-making can be faulty, and that
breakdowns can occur because of simple error or mistake. The design of any
system of controls is also based, in part, upon certain assumptions about the
likelihood of future events, and there can be no assurance that any design will
succeed in achieving its stated goals under all potential future conditions.
Over time, a control may become inadequate because of changes in conditions, or
the degree of compliance with the policies or procedures may deteriorate.
Because of the inherent limitations in a cost-effective control system,
misstatements due to error or fraud may occur and not be detected. Finally,
controls can be circumvented by the individual acts of some persons, by
collusion of two or more people, or by management override of the control.
It is this "management override of controls" that led to the
significant charge-offs and provisions for loan losses at Farmers Deposit Bank
in 2003 and the financial statement restatement for years 2002 and 2001.
Premier's policies and procedures related to the evaluation of a borrower's
creditworthiness prior to making or renewing a loan, the reporting of new loan
activity and delinquent loans to the bank's board of directors, and the
guidelines for assessing the credit risk of existing loans were overridden by
local management. The systematic disregard for these controls was sophisticated
enough to avoid detection during routine reviews of that bank's records as
directed by the Company and the regulatory authorities of the banking industry.
Premier management has implemented or is in the process of implementing
additional processes and procedures throughout its network of banking
subsidiaries in an effort to minimize the likelihood that improper management
overrides go undetected. These include:
* hiring a credit analyst at the holding company level to review all
loan requests over $400,000,
* forming loan approval committees made up of the bank presidents and
the President and Director of Risk Management of Premier to review
all loan requests over $750,000,
* incorporating "whistleblower" provisions into the employee code of
ethics and conduct,
* dispatching members of the Audit Committee of the Company's board of
directors, at their request, to conduct employee meetings emphasizing
the importance of each employee's responsibilities in maintaining the
financial integrity of the Company's books and records, that
overriding of internal controls will not be tolerated, and the
employees' obligation to report improprieties to senior management
or the Audit Committee in accordance with the employee code of
ethics,
* hiring an internal auditor at the holding company level to, among
other duties assigned, conduct various tests for data integrity and
compliance with internal control procedures, and
* evaluating the internal audit program to incorporate tests designed
to specifically detect the abuses uncovered during the Farmers
Deposit investigation.
Other than the continuing evaluation of the internal audit program
identified above, there were no changes in internal controls over financial
reporting during the third fiscal quarter that have materially affected or are
reasonably likely to materially affect Premier's internal controls over
financial reporting.
PREMIER FINANCIAL BANCORP, INC.
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PART II - OTHER INFORMATION
Item 1. Legal Proceedings
See information regarding regulatory matters in note 4 and note 9 to the
consolidated financial statements
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds None
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Item 3. Defaults Upon Senior Securities None
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Item 4. Submission of Matters to a vote of Security Holders None
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Item 5. Other Information None
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Item 6. Exhibits
(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
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 12, 2004 /s/ Robert W. Walker
-----------------------------------------
Robert W. Walker
President & Chief Executive Officer
Date: November 12, 2004 /s/ Brien M. Chase
-----------------------------------------
Brien M. Chase
Vice President & Chief Financial Officer