UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended DECEMBER 31, 2004
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from __________ to __________.
Commission file number 0-20908
PREMIER FINANCIAL BANCORP, INC.
(Exact name of registrant as specified in its charter)
KENTUCKY 61-1206757
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2883 5TH AVENUE
HUNTINGTON, WEST VIRGINIA 25702
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (304) 525-1600
Securities registered pursuant to Section 12(b) of the Act:
NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK WITHOUT PAR VALUE
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to filing requirements
for the past 90 days. YES [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this 10-K or any amendment to this Form
10-K. [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act) Yes [ ] No [X]
The aggregate market value of common stock held by non-affiliates of the Company
as of June 30, 2004 was $44,204,914.
Indicate the number of shares outstanding of each of the registrant's classes of
common stock as of the latest practicable date.
Class Outstanding at March 16, 2005
----- ----------------------------
COMMON STOCK (no par value) 5,232,230
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the following documents are incorporated by reference into the Form
10-K part indicated:
Document Form 10-K
(1) Proxy statement for the 2005 annual meeting of Part III
shareholders
PART I
Item 1. Description of Business
THE COMPANY
Premier Financial Bancorp, Inc. (the "Company" or "Premier") is a
multi-bank holding company that, as of March 15, 2005, operates ten banking
offices in Kentucky, three banking offices in Ohio, and six banking offices in
West Virginia. At December 31, 2004, Premier had total consolidated assets of
$537.3 million, total consolidated deposits of $437.8 million and total
consolidated shareholders' equity of $51.0 million. The banking subsidiaries
(the "Banks" or "Affiliate Banks") consist of Citizens Deposit Bank & Trust,
Vanceburg, Kentucky; Farmers Deposit Bank, Eminence, Kentucky; Ohio River Bank,
Ironton, Ohio; First Central Bank, Inc., Philippi, West Virginia; and Boone
County Bank, Inc., Madison, West Virginia.
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 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, conducted a further review of
those loans for which significant charge offs or additional provisions were
required in 2003. The purpose of the review was to determine if the facts or
circumstances that gave rise to additional charge offs or provisions had been
improperly withheld from senior management or improperly considered in applying
management's estimates and judgments as to the adequacy of the allowance for
loan losses in financial statement periods prior to 2003. 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 2002 were restated, as reported in the
2003 Annual Report to Shareholders, to reflect the financial statement effect of
the matters that occurred in those periods but which were improperly concealed
by subsidiary management.
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, and on July 1,
2004 the sale transaction closed. 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." See Note 2 to the consolidated financial statements
included later in this report for a more detailed discussion of discontinued
operations.
In 2000 Premier suspended its acquisition strategy in order to focus on
improving operations, strengthening capital and management oversight and
improving the profitability of the banks previously acquired. While Premier
remains committed to its core strategy of rural banking with community oriented
and locally named institutions, the Company may dispose of additional corporate
assets that no longer meet Premier's geographic or operational performance
goals. Effective January 3, 2005, Premier merged two of its subsidiary banks,
Citizens Deposit Bank & Trust in Vanceburg, Kentucky and Bank of Germantown, in
Germantown, Kentucky. Bank of Germantown was merged into Citizens Deposit Bank,
with its facilities contining to operate as branches of Citizens Deposit Bank.
Premier is a legal entity separate and distinct from its Affiliate
Banks and non-bank subsidiaries. Accordingly, the right of Premier, and thus the
right of Premier's creditors and shareholders, to participate in any
distribution of the assets or earnings of any of the Affiliate Banks or non-bank
subsidiaries is necessarily subject to the prior claims of creditors of such
subsidiaries, except to the extent that claims of Premier, in its capacity as a
creditor, may be recognized. The principal source of Premier's revenue is
dividends from its Affiliate Banks and non-bank subsidiaries. See "REGULATORY
MATTERS -- Dividend Restrictions" for discussion of the restrictions on the
Affiliate Banks' ability to pay dividends to Premier.
Premier was incorporated as a Kentucky corporation in 1991 and has
functioned as a bank holding company since its formation. During 2002, Premier
moved its principal executive offices from Georgetown, Kentucky to its present
location at 2883 5th Avenue, Huntington, West Virginia, 25702. The purpose of
the move was to be more centrally located among Premier's Affiliate Banks and
its directorship. Premier's telephone number is (304) 525-1600.
BUSINESS
General
Through the Banks and its data processing subsidiary, the Company
focuses on providing quality, community banking services to individuals and
small-to-medium sized businesses primarily in non-urban areas. By seeking to
provide such banking services in non-urban areas, the Company believes that it
can minimize the competitive effect of larger financial institutions that
typically are focused on large metropolitan areas. Each Bank retains its local
management structure which offers customers direct access to the Bank's
president and other officers in an environment conducive to friendly, informed
and courteous service. This approach also enables each Bank to offer local and
timely decision-making, and flexible and reasonable operating procedures and
credit policies limited only by a framework of centralized risk controls
provided by the Company to promote prudent banking practices. See additional
discussion under "Regulatory Matters" below.
Each Bank maintains its community orientation by, among other things,
having selected members of its community as members of its board of directors,
who assist in the introduction of prospective customers to the Bank and in the
development or modification of products and services to meet customer needs. As
a result of the development of personal banking relationships with its customers
and the convenience and service offered by the Banks, the Banks' lending and
investing activities are funded primarily by core deposits.
When appropriate and economically advantageous, the Company centralizes
certain of the Banks' back office, support and investment functions in order to
achieve consistency and cost efficiency in the delivery of products and
services. The Company centrally provides services such as data processing,
operations support, accounting, loan review, compliance and internal auditing to
the Banks to enhance their ability to compete effectively. The Company also
provides overall direction in the areas of credit policy and administration,
strategic planning, marketing, investment portfolio management and other
financial and administrative services. Each Bank participates in product
development by advising management of new products and services needed by their
customers and desirable changes to existing products and services.
Through Premier Data Services, Inc., the Company's data processing
subsidiary, the Company currently provides centralized data processing services
to four of the Banks. Beginning in late 2004 and continuing through the middle
of 2005, the Company is converting its data processing system to an external
third-party provider. Through the conversion process, Company senior management
along with each Bank's management is reviewing and standardizing its offering of
products and services, although pricing decisions will remain at the local Bank
level. Furthermore, upon conversion, the Company through the Banks will offer
more modern products, such as internet banking and check imaging, and will be
well positioned to take advantage of emerging technologies such as image
exchange to clear items.
Each of the Banks provides a wide range of retail and commercial
banking services, including commercial, real estate, agricultural and consumer
lending; depository and funds transfer services; collections; safe deposit
boxes; cash management services; and other services tailored for both
individuals and businesses. Farmers Deposit Bank in Eminence, Kentucky, also
offers limited trust services and acts as executor, administrator, trustee and
in various other fiduciary capacities.
The Banks' residential mortgage lending activities consist primarily of
loans for purchasing personal residences or loans for commercial or consumer
purposes secured by residential mortgages. Consumer lending activities consist
of traditional forms of financing for automobile and personal loans. Commercial
lending activities include loans to small businesses located primarily in the
communities in which the Banks are located and surrounding areas. Commercial
loans are secured by business assets including real estate, equipment,
inventory, and accounts receivable. Some commercial loans are unsecured. Farmers
Deposit Bank has previously extended loans to professional athletes and their
agents and advisors. This lending activity was curtailed in 2003.
The Banks' range of deposit services includes checking accounts, NOW
accounts, savings accounts, money market accounts, club accounts, individual
retirement accounts, certificates of deposit and overdraft protection. Deposits
of the Banks are insured by the Bank Insurance Fund administered by the FDIC.
Competition
The Banks encounter strong competition both in making loans and
attracting deposits. The deregulation of the banking industry and the widespread
enactment of state laws that permit multi-bank holding companies as well as the
availability of nationwide interstate banking have created a highly competitive
environment for financial services providers. In one or more aspects of its
business, each Bank competes with other commercial banks, savings and loan
associations, credit unions, finance companies, mutual funds, insurance
companies, brokerage and investment banking companies and other financial
intermediaries operating in its market and elsewhere, many of which have
substantially greater financial and managerial resources. While the Banks are
smaller financial institutions, each of the Banks' competitors include large
bank holding companies having substantially greater resources and offering
certain services that Premier Banks may not currently provide. Each Bank seeks
to minimize the competitive effect of larger financial institutions through a
community banking approach that emphasizes direct customer access to the Bank's
president and other officers in an environment conducive to friendly, informed
and courteous service.
Management believes that each Bank is positioned to compete
successfully in its respective primary market area, although no assurances as to
ongoing competitiveness can be given. Competition among financial institutions
is based upon interest rates offered on deposit accounts, interest rates charged
on loans and other credit and service charges, the quality and scope of the
services rendered, the convenience of the banking facilities and, in the case of
loans to commercial borrowers, relative lending limits. Management believes that
the commitment of its Banks to personal service, innovation and involvement in
their respective communities and primary market areas, as well as their
commitment to quality community banking service, are factors that contribute to
their competitiveness.
Regulatory Matters
The following discussion sets forth certain elements of the regulatory
framework applicable to bank holding companies and their subsidiaries and
provides certain specific information relevant to Premier. This regulatory
framework is intended primarily for the protection of depositors and the federal
deposit insurance funds and not for the protection of the holders of securities,
including Premier common shares or PFBI Capital Trust preferred shares. To the
extent that the following information describes statutory or regulatory
provisions, it is qualified in its entirety by reference to those provisions. A
change in the statutes, regulations or regulatory policies applicable to Premier
or its subsidiaries may have a material effect on the business of Premier.
General - As a bank holding company, Premier is subject to regulation
under the Bank Holding Company Act ("BHC Act"), and to inspection, examination
and supervision by the Board of Governors of the Federal Reserve System
("Federal Reserve"). Under the BHC Act, bank holding companies generally may not
acquire ownership or control of more than 5% of the voting shares or
substantially all the assets of any company, including a bank, without the
Federal Reserve's prior approval. Similarly, bank holding companies generally
may not acquire ownership or control of a savings association without the prior
approval of the Federal Reserve. Further, branching by the Affiliate Banks is
subject to the jurisdiction, and requires the approval, of each Affiliate Bank's
primary federal banking regulator and, if the Affiliate Bank is a
state-chartered bank, the appropriate state banking regulator.
Under the BHC Act, the Federal Reserve has the authority to require a
bank holding company to terminate any activity or relinquish control of the
nonbank subsidiary (other than a nonbank subsidiary of a bank) upon the Federal
Reserve's determination that such activity or control constitutes a risk to the
financial soundness and stability of any bank subsidiary of the bank holding
company. Premier and the Affiliate Banks are subject to the Federal Reserve Act,
which limits borrowings by Premier and its nonbank subsidiaries from the
Affiliate Banks and also limits various other transactions between Premier and
its nonbank subsidiaries with the Affiliate Banks.
The two Affiliate Banks chartered in Kentucky are supervised, regulated
and examined by the Kentucky Department of Financial Institutions, the Affiliate
Bank chartered in Ohio is supervised, regulated and examined by the Ohio
Division of Financial Institutions, and the two Affiliate Banks chartered in
West Virginia are supervised, regulated and examined by the West Virginia
Division of Banking. In addition, those Affiliate Banks that are state banks and
members of the Federal Reserve System are supervised and regulated by the
Federal Reserve, and those state banks that are not members of the Federal
Reserve System are supervised and regulated by the Federal Deposit Insurance
Corporation ("FDIC"). Each banking regulator has the authority to issue
cease-and-desist orders if it determines that the activities of a bank regularly
represent an unsafe and unsound banking practice or a violation of law.
Both federal and state law extensively regulates various aspects of the
banking business, such as reserve and capital requirements, truth-in-lending and
truth-in-savings disclosure, equal credit opportunity, fair credit reporting,
trading in securities and other aspects of banking operations. Premier, the
Affiliate Banks and Premier's nonbank subsidiaries are also affected by the
fiscal and monetary policies of the federal government and the Federal Reserve
and by various other governmental laws, regulations and requirements. Further,
the earnings of Premier and Affiliate Banks are affected by general economic
conditions and prevailing interest rates. Legislation and administrative actions
affecting the banking industry are frequently considered by the United States
Congress, state legislatures and various regulatory agencies. It is not possible
to predict with certainty whether such legislation or administrative actions
will be enacted or the extent to which the banking industry, in general, or
Premier and the Affiliate Banks, in particular, would be affected.
Liability for Bank Subsidiaries - The Federal Reserve has a policy to
the effect that a bank holding company is expected to act as a source of
financial and managerial strength to each of its subsidiary banks and to
maintain resources adequate to support each such subsidiary bank. This support
may be required at times when Premier may not have the resources to provide it.
In the event of a bank holding company's bankruptcy, any commitment by the bank
holding company to a federal bank regulatory agency to maintain the capital of a
subsidiary bank would be assumed by the bankruptcy trustee and entitled to
priority of payment.
Any depository institution insured by the FDIC may be held liable for
any loss incurred, or reasonably expected to be incurred, by the FDIC in
connection with (i) the default of a commonly controlled FDIC-insured depository
institution, or (ii) any assistance provided by the FDIC to a commonly
controlled FDIC-insured depository institution in danger of default. "Default"
is defined generally as the appointment of a conservator or receiver and "in
danger of default" is defined generally as the existence of certain conditions
indicating that a "default" is likely to occur in the absence of regulatory
assistance. In the event that such a default occurred with respect to a bank,
any loans to the bank from its parent holding company will be subordinate in
right of payment of the bank's depositors and certain of its other obligations.
Capital Requirements - Premier is subject to capital ratios,
requirements and guidelines imposed by the Federal Reserve, which are
substantially similar to the ratios, requirements and guidelines imposed by the
Federal Reserve and the FDIC on the banks within their respective jurisdictions.
These capital requirements establish higher capital standards for banks and bank
holding companies that assume greater credit risks. For this purpose, a bank's
or holding company's assets and certain specified off-balance sheet commitments
are assigned to four risk categories, each weighted differently based on the
level of credit risk that is ascribed to such assets or commitments. A bank's or
holding company's capital is divided into two tiers: "Tier I" capital and "Tier
II" capital. "Tier I" capital includes common shareholders' equity,
noncumulative perpetual preferred stock, and related surplus (excluding auction
rate issues), minority interests in equity accounts of consolidated subsidiaries
and Trust Preferred Securities (subject to certain limitations.) Goodwill,
certain identifiable intangible assets and certain other assets are subtracted
from these sources of capital to calculate Tier I capital. "Tier 2" capital,
which includes, among other items, perpetual preferred stock not meeting the
Tier I definition, mandatory convertible securities, subordinated debt and
allowances for loan and lease losses, subject to certain limitations, less
certain required deductions.
Bank holding companies currently are required to maintain Tier I and
total capital (the sum of Tier 1 and Tier 2 capital) equal to at least 4% and 8%
of total risk-weighted assets, respectively. At December 31, 2004, Premier met
both requirements, with Tier I and total capital equal to 16.6% and 18.9% of its
total risk-weighted assets, respectively.
In addition to the risk-based capital guidelines, the Federal Reserve
requires bank holding companies to maintain a minimum "leverage ratio" (Tier I
capital to adjusted total assets) of 3%, if the holding company has the highest
regulatory ratings for risk-based capital purposes. All other bank holding
companies are required to maintain a leverage ratio of 3% plus at least 100 to
200 basis points. At December 31, 2004, Premier's leverage ratio was 9.7%.
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. A portion of the Preferred Securities
issued by the Trust qualify as Tier 1 capital for the Company under the Federal
Reserve Board's regulatory framework. The Federal Reserve Board recently
re-evaluated whether trust preferred securities, in general, would continue to
qualify as Tier 1 capital due to deconsolidation of the related trust preferred
entity required by FASB Interpretation No. 46, . Its conclusion, issued in a
report released on March 1 2005, was to continue to permit trust preferred
securities to qualify as Tier I capital with certain restrictions phased in over
five-years. Once completely phased-in, the dollar amount of trust preferred
securities that will qualify as Tier I capital for bank holding companies of
Premier's size will be limited to 25% of equity based Tier I capital net of
goodwill. See Note 12 to the consolidated financial statements for additional
details regarding the Company's Trust Preferred Securities.
The foregoing capital requirements are minimum requirements. The
Federal Reserve may set capital requirements higher than the minimums described
above for holding companies whose circumstances warrant it. For example, holding
companies experiencing or anticipating significant growth may be expected to
maintain capital ratios, including tangible capital positions, well above the
minimum levels.
Additionally, the Federal Deposit Insurance Corporation Improvement Act
of 1991 ("FDICIA"), among other things, identifies five capital categories for
insured depository institutions (well capitalized, adequately capitalized,
undercapitalized, significantly undercapitalized and critically
undercapitalized) and requires the respective federal regulatory agencies to
implement systems for "prompt corrective action" for insured depository
institutions that do not meet minimum capital requirements within such
categories. FDICIA imposes progressively more restrictive constraints on
operations, management and capital distributions, depending on the category in
which an institution is classified. Failure to meet the capital guidelines could
also subject a banking institution to capital raising requirements.
An "undercapitalized" bank must develop a capital restoration plan and
its parent holding company must guarantee the bank's compliance with the plan.
The liability of the parent holding company under any such guarantee is limited
to the lesser of 5% of the Bank's assets at the time it became
"undercapitalized" or the amount needed to comply with the plan. Furthermore, in
the event of the bankruptcy of the parent holding company, such guarantee would
take priority over the parent's general unsecured creditors. In addition, FDICIA
requires the various regulatory agencies to prescribe certain non-capital
standards for safety and executive compensation and permits regulatory action
against a financial institution that does not meet such standards.
Regulatory Agreements - On September 29, 2000, the Company entered into
an agreement with the Federal Reserve that prohibited the Company from paying
dividends or incurring any additional debt without the prior written approval of
the Federal Reserve. Additionally, the agreement required the Company to develop
and monitor compliance with certain operational policies designed to strengthen
Board of Director oversight including credit administration, liquidity, internal
audit and loan review.
On January 29, 2003, Premier entered into a written agreement with the
Federal Reserve Bank of Cleveland in recognition of their common goal to restore
the financial soundness of Premier. Among the provisions of the agreement was
the continuation of the restriction on Premier's payment of dividends on its
common stock (PFBI) without the express written consent of the Federal Reserve
Bank of Cleveland and the continuation of the restriction on Premier's payment
of quarterly distributions on its Trust Preferred Securities (PFBIP) without the
express written consent of the Federal Reserve Bank of Cleveland. The written
agreement supersedes and rescinds all previous agreements between Premier and
the Federal Reserve Bank of Cleveland. Among other provisions, the agreement
required(s) Premier to (i) retain an independent consultant to review its
management, directorate and organizational structure, (ii) adopt a management
plan responsive to such consultant's report, (iii) update its management
succession plan in accordance with any recommendations in such consultant's
report, (iv) monitor its subsidiary banks' compliance with bank policies and
loan review programs, (v) conduct formal quarterly reviews of its subsidiary
banks' allowances for loan losses, (vi) maintain sufficient capital, (vii)
submit a plan to the Federal Reserve Bank of Cleveland for improving
consolidated earnings over a three-year period, and (viii) submit to the Federal
Reserve Bank of Cleveland annual projections of planned sources and uses of the
parent company's cash, including a plan to service its outstanding debt and
trust preferred securities. Premier's compliance with the written agreement is
monitored by a committee consisting of at least three of its outside directors.
Two of the Company's subsidiaries, Citizens Deposit Bank & Trust and
the Bank of Germantown, entered into similar agreements with their respective
primary regulators which, among other things, prohibited the payment of
dividends without prior written approval and required significant changes in
their credit administration policies. The banks fully complied with the terms of
the agreements in 2004 and the agreements were accordingly rescinded by the
regulators.
On December 24, 2003, Premier announced that Farmers Deposit Bank had
reached an agreement with the Federal Deposit Insurance Corporation ("FDIC") and
the Kentucky Department of Financial Institutions ("KDFI") [collectively
referred to as "Supervisory Authorities"] to consent to the issuance of a cease
& desist order ("Order") from its Supervisory Authorities. 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 Farmers Deposit 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 Farmers Deposit;
(c) Operating with a large volume of adversely classified loans or assets
and/or delinquent loans and/or non-accrued loans;
(d) Operating with an inadequate allowance for loan and lease losses for
the volume, kind and quality of loans and leases held by
Farmers Deposit;
(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 [prior to the Order]("Report").
The Order also outlines a number of steps to be taken by Farmers
Deposit 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 Board of Directors of Farmers Deposit
("Board"); 2) developing and submitting to the Supervisory Authorities a capital
plan that maintains the Farmers Deposit 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 Farmers Deposit 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 lending policies of Farmers Deposit 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
Farmers Deposit; 10) adopting and implementing a policy for operating Farmers
Deposit 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 notice of the Order to shareholders. Farmers Deposit
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.
Farmers Deposit, under new management and with the assistance of
Premier, has already completed most of the required steps, including hiring a
Chief Executive Officer and a Chief Financial Officer, increasing the number of
local directors, developing a capital plan and fulfilling its requirements by
December 31, 2004, charging-off the loans listed in the Report, and developing
action plans on the remaining classified loans. Bank management has also
established a separate collections department which is actively working on
reducing the level of classified and delinquent loans as well as trying to
recover losses on the loans previously charged-off. Bank management and the
Board worked with Premier to develop or revise the Bank's policies and
procedures as required by the Order. As of February 28, 2005, Bank management
has developed and submitted the required plans and updates due as a result of
the Order. As of December 31, 2004, the Tier I Leverage Ratio of Farmers Deposit
was 9.5% which exceeded the Order requirement of 8.0%
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.
The Securities and Exchange Commission ("SEC") is investigating the
information disclosed in Premier's June 16 and July 31, 2003 Forms 8-K and the
June 30, and September 30, 2003 Forms 10-Q regarding Farmers Deposit and has
requested information about Premier's investigation. Premier is cooperating with
the SEC.
Dividend Restrictions - Premier is dependent on dividends from its
Affiliate Banks for its revenues. Various federal and state regulatory
provisions limit the amount of dividends the Affiliate Banks can pay to Premier
without regulatory approval. At December 31, 2004, approximately $2.5 million of
the total shareholders' equity of the Affiliate Banks was available for payment
of dividends to Premier without approval by the applicable regulatory authority.
On January 29, 2003, Premier entered into a written agreement with the
Federal Reserve Bank of Cleveland in recognition of their common goal to restore
the financial soundness of Premier. Among the provisions of the agreement was
the continuation of the restriction on Premier's payment of dividends on its
common stock (PFBI) without the express written consent of the Federal Reserve
Bank of Cleveland and the continuation of the restriction on Premier's payment
of quarterly distributions on its Trust Preferred Securities (PFBIP) without the
express written consent of the Federal Reserve Bank of Cleveland.
In addition, federal bank regulatory authorities have authority to
prohibit Premier's Affiliate Banks from engaging in an unsafe or unsound
practice in conducting their business. The payment of dividends, depending upon
the financial condition of the bank in question, could be deemed to constitute
such an unsafe or unsound practice. The ability of the Affiliate Banks to pay
dividends in the future is presently, and could be further, influenced by bank
regulatory policies and capital guidelines as well as each Affiliate Bank's
earnings and financial condition. Additional information regarding dividend
limitations can be found in Note 20 of the accompanying audited consolidated
financial statements.
Interstate Banking - Under the Riegle-Neal Interstate Banking and
Branching Efficiency Act of 1994 (the "Riegle-Neal Act"), subject to certain
concentration limits, (i) bank holding companies, such as Premier, are permitted
to acquire banks and bank holding companies located in any state of the United
States, subject to certain restrictions, and (ii) banks are permitted to acquire
branch offices outside their home state by merging with out-of-state banks,
purchasing branches in other states or establishing de novo branch offices in
other states; provided that, in the case of any such purchase or opening of
individual branches, the host state has adopted legislation "opting in" to the
relevant provisions of the Riegle-Neal Act; and provided further, that, in the
case of a merger with a bank located in another state, the host state has not
adopted legislation "opting out" of the relevant provisions of the Riegle-Neal
Act.
Gramm-Leach-Bliley Act - On November 12, 1999, the Gramm-Leach-Bliley
Act (the "Act") was signed into law, eliminating many of the remaining barriers
to full convergence of the banking, securities, and insurance industries. The
major provisions of the Act took effect March 12, 2000.
The Act enables a broad-scale consolidation among banks, securities
firms, and insurance companies by creating a new type of financial services
company called a "financial holding company," a bank holding company with
dramatically expanded powers. Financial holding companies can offer virtually
any type of financial service, including banking, securities underwriting,
insurance (both agency and underwriting), and merchant banking. In addition, the
Act permits the Federal Reserve and the Treasury Department to authorize
additional activities for financial holding companies, but only if they jointly
determine that such activities are "financial in nature" or "complementary to
financial activities." Premier does not presently qualify to elect financial
holding company status.
The Federal Reserve serves as the primary "umbrella" regulator of
financial holding companies, with jurisdiction over the parent company and more
limited oversight over its subsidiaries. The primary regulator of each
subsidiary of a financial holding company depends on the activities conducted by
the subsidiary. A financial holding company need not obtain Federal Reserve
approval prior to engaging, either de novo or through acquisitions, in financial
activities previously determined to be permissible by the Federal Reserve.
Instead, a financial holding company need only provide notice to the Federal
Reserve within 30 days after commencing the new activity or consummating the
acquisition.
Number of Employees - The Company and its subsidiaries collectively had
approximately 223 full-time equivalent employees as of December 31, 2004. Its
executive offices are located at 2883 5th Avenue, Huntington, West Virginia
25702, telephone number (304) 525-1600 (facsimile number (304) 525-9701).
Item 2. Properties
The Company leases its principal executive offices located in
Huntington, West Virginia. The Company also owns property located at 104
Jefferson Street, Brooksville, Kentucky, which serves as a branch for Citizen's
Deposit Bank (formerly the Bank of Germantown). Except as noted, each of the
Banks owns the real property and improvements on which their banking activities
are conducted.
Citizens Deposit Bank & Trust, in addition to its main office at 400
Second Street in Vanceburg, Kentucky, has four branch offices in Lewis County,
Kentucky, (including one leased facility), one leased branch office in Mason
County, Kentucky and the two former locations of the Bank of Germantown, one
branch located on Highway 10 in Germantown, Kentucky, and one branch located in
Bracken County, Kentucky. Farmers Deposit Bank, in addition to its main office
at 5230 South Main Street in Eminence, Kentucky, has two branches in Henry
County, Kentucky. Ohio River Bank, in addition to its main office at 221
Railroad Street in Ironton, Ohio, has two branches, one leased facility in
Lawrence County, Ohio and one in Scioto County, Ohio. First Central Bank, in
addition to its main office at 2 South Main Street in Philippi, West Virginia,
has a branch located in Buckhannon, West Virginia. Boone County Bank, in
addition to its main office at 300 State Street, Madison, West Virginia, has one
leased branch located in Lincoln County, West Virginia and two other branches,
one each located in Boone and Logan Counties, West Virginia.
Item 3. Legal Proceedings
The Banks are respectively parties to legal actions that are ordinary
routine litigation incidental to a commercial banking business. In management's
opinion, the outcome of these matters, individually or in the aggregate, will
not have a material adverse impact on the results of operations or financial
position of the Company.
The Securities and Exchange Commission ("SEC") is investigating the
information disclosed in Premier's June 16 and July 31, 2003 Forms 8-K and the
June 30, and September 30, 2003 Forms 10-Q regarding Farmers Deposit Bank and
has requested information about Premier's investigation. Premier is cooperating
with the SEC.
Item 4. Submission of Matters to a Vote of Security Holders
There were no matters submitted to a vote of security holders, through
solicitation of proxies or otherwise during the fourth quarter of the fiscal
year covered by this report.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
---------------------------------------------------------------------
The Company's common stock is listed on the NASDAQ National Market
System under the symbol PFBI. At December 31, 2004, the Company had
approximately 718 record holders of its common shares.
The following table sets forth on a quarterly basis cash dividends paid
and the range of high and low sales prices on a per share basis during the
quarters indicated.
Cash Sales Price
Dividends Paid High Low
-------------- ---- ---
2003:
First Quarter $ - $ 9.50 $ 7.58
Second Quarter - 10.25 8.91
Third Quarter - 9.45 8.50
Fourth Quarter - 8.94 7.50
---------
$ -
=========
2004
First Quarter $ - $ 9.49 $ 8.31
Second Quarter - 10.20 8.41
Third Quarter - 10.28 8.50
Fourth Quarter - 13.35 8.80
---------
$ -
=========
2005
First Quarter
(through March 16, 2005 $ - $12.75 $10.78
The Board of Directors suspended the payment of dividends during the
second quarter of 2000. In September 2000, as a result of an agreement entered
into with the Federal Reserve, the Company agreed not to declare additional
dividends without the prior approval of the Federal Reserve. The September 2000
agreement was superceded by a January 29, 2003 written agreement between Premier
and the Federal Reserve which continued the restriction on dividends. The Board
of Directors anticipates paying dividends at some future date when, in its
discretion, financial prudence allows and the Federal Reserve concurs in the
payment of such dividends. The January 29, 2003 agreement also restricts
Premier's payments of dividends on its PFBI Capital Trust preferred securities.
These dividends are cumulative and all deferred distributions must be paid
before dividends may be paid to holders of common shares. Even if the Company is
able to resume the payment of dividends, there can be no assurance that the
amount of the dividends will be what the Company paid before the payment of
dividends was suspended.
The payment of dividends by the Company depends upon the ability of the
Banks to declare and pay dividends to the Company because the principal source
of the Company's revenue will be dividends paid by the Banks. At December 31,
2004, approximately $2.5 million was available for payment as dividends from the
Banks to the Company without the need for regulatory approval. In considering
the payment of dividends, the Board of Directors will take into account the
Company's financial condition, results of operations, tax considerations, costs
of expansion, industry standards, economic conditions and need for funds, as
well as governmental policies and regulations applicable to the Company and the
Banks. See "REGULATORY MATTERS - Capital Requirements" for discussion on capital
guidelines.
Item 6. Selected Financial Data
The following table presents consolidated selected financial data for the
Company. It does not purport to be complete and is qualified in its entirety by
more detailed financial information and the audited consolidated financial
statements contained elsewhere in this annual report. The data presented below
reflects separately the impact of discontinued operations as more fully
described in Note 2 to the consolidated financial statements.
At or for the Year Ended December 31,
2004 2003 2002 2001 2000
-------- -------- -------- -------- --------
Earnings
Net interest income $ 18,064 $ 19,182 $ 20,838 $ 20,931 $ 24,121
Provision for loan losses 1,026 20,513 9,453 8,350 4,615
Non-interest income 3,606 4,064 2,717 12,178 3,192
Non-interest expense 17,782 17,632 17,831 20,200 22,720
Income taxes (benefit) 899 (5,282) (1,522) 2,985 (237)
Income (loss) from
continuing operations 1,963 (9,617) (2,207) 1,574 215
Income (loss) from
discontinued operations 4,734 (80) (1,130) (380) 1,120
-------- -------- -------- -------- --------
Net income (loss) $ 6,697 $ (9,697) $ (3,337) $ 1,194 $ 1,335
======== ======== ======== ======== ========
Financial Position
Total assets of continuing
operations $537,255 $543,229 $590,869 $606,961 $780,659
Total assets of discontinued
Operations 0 79,163 84,406 104,653 110,162
Loans, net of unearned
income 324,937 331,794 373,099 384,940 505,567
Allowance for loan losses 9,384 14,300 9,698 7,371 6,617
Goodwill and other intangibles 15,816 15,816 15,816 15,816 22,615
Securities 153,892 147,646 144,698 143,516 185,282
Deposits 437,798 455,474 477,724 480,991 635,533
Other borrowings 20,536 18,307 32,600 43,724 64,503
Subordinated debentures 20,876 26,546 29,639 29,639 29,639
Stockholders' equity 51,029 45,540 56,124 58,750 55,830
Share Data
Income (loss) from continuing
operations - basic $ 0.37 $ (1.84) $ (0.42) $ 0.30 $ 0.04
Income (loss )from continuing
operations - diluted 0.37 (1.84) (0.42) 0.30 0.04
Net income - basic 1.28 (1.85) (0.64) 0.23 0.26
Net income - diluted 1.28 (1.85) (0.64) 0.23 0.26
Book value 9.75 8.70 10.73 11.23 10.67
Cash dividend 0.00 0.00 0.00 0.00 0.15
Ratios
Return on average assets (1) 0.36% (1.66)% (0.37)% 0.24% 0.03%
Return on average equity (1) 4.06% (18.46)% (3.77)% 2.76% 0.41%
Dividend payout (2) 0.00% 0.00% 0.00% 0.00% 375.00%
Stockholders' equity to total
assets at period-end (3) 9.50% 8.38% 9.50% 9.68% 7.15%
Average stockholders' equity
to average total assets (1) 8.23% 7.88% 8.44% 7.37% 6.07%
Notes (1) Computed based on average assets from continuing operations
(2) Computed based on income (loss) from continuing operations
(3) Shareholders' equity at period end divided by assets from continuing
operations
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
INTRODUCTION
Premier Financial Bancorp, Inc. ("Premier") is a multi-bank holding
company headquartered in Huntington, West Virginia. It operates five community
bank subsidiaries ranging in size from $80 million to $158 million, each with a
local community name and orientation. On July 1, 2004, Premier sold one bank
subsidiary, Citizens Bank (Kentucky), Inc. ("Citizens Bank"). As such, and 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
consolidated financial statements and this Management's Discussion and Analysis,
and are presented separately as "discontinued operations." Premier realized a
net profit on the sale Citizens Bank of $4.7 million which is included in the
income from discontinued operations. See Note 2 to the consolidated financial
statements presented separately in this annual report for additional information
concerning discontinued operations. The remaining banks operate in twenty
communities within the states of West Virginia, Ohio and Kentucky and provide
their customers with a full range of banking services. On January 3, 2005,
Premier merged two of its banks, Citizen's Deposit Bank and Bank of Germantown.
Premier is also the parent of a data processing subsidiary which currently
provides the data processing and management services for four of Premier's
affiliate banks and one other non-affiliated bank. As of December 31, 2004,
Premier had approximately $537 million in total assets, $325 million in total
loans and $438 million in total deposits.
The accompanying consolidated financial statements have been prepared by
the management of Premier in conformity with accounting principals generally
accepted in the United States of America. The audit committee of the Board of
Directors engaged Crowe Chizek and Company LLC independent auditors, to audit
the consolidated financial statements, and their report is included elsewhere
herein. Financial information appearing throughout this annual report is
consistent with that reported in the consolidated financial statements. The
following discussion is designed to assist readers of the consolidated financial
statements in understanding significant changes in Premier's financial condition
and results of operations.
Management's objective of a fair presentation of financial information
is achieved through a system of internal accounting controls. The financial
control system of Premier is designed to provide reasonable assurance that
assets are safeguarded from loss and that transactions are properly authorized
and recorded in the financial records. As an integral part of that financial
control system, the audit committee of the Board of Directors engaged Arnett &
Foster, CPA's in 2004, 2003 and 2002 to perform internal audits of the financial
records of each of the subsidiaries on a periodic basis. Their findings and
recommendations were reported to Premier's audit committee as well as the audit
committees of the subsidiaries. In 2005, Premier reduced its reliance on
third-party internal audit and loan review providers and expanded its internal
audit staff at the holding company level. Likewise, their findings and
recommendations are reported to Premier's audit committee as well as the audit
committees of the subsidiaries. Also, on a regular periodic basis, the
subsidiary banks are examined by Federal and State banking authorities for
safety and soundness as well as compliance with applicable banking laws and
regulations. The activities of both the internal and external audit functions
are reviewed by the audit committee of the Board of Directors.
FORWARD-LOOKING STATEMENTS
Management's discussion and analysis contains forward-looking statements
that are provided to assist in the understanding of anticipated future financial
performance. However, such performance involves risks and uncertainties, and
there are certain important factors that may cause actual results to differ
materially from those anticipated. These important factors include, but are not
limited to, economic conditions (both generally and more specifically in the
markets in which Premier operates), competition for Premier's customers from
other providers of financial services, government legislation and regulation
(which changes from time to time), changes in interest rates, Premier's ability
to originate quality loans, collect delinquent loans and attract and retain
deposits, the impact of Premier's growth or lack thereof, 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.
CRITICAL ACCOUNTING POLICIES
General
The financial condition and results of operations presented in the
Consolidated Financial Statements, accompanying Notes to the Consolidated
Financial Statements and management's discussion and analysis are, to a large
degree, dependent upon our accounting policies. The selection and application of
these accounting policies involve judgments, estimates, and uncertainties that
are susceptible to change.
Presented below is discussion of those accounting policies that
management believes are the most important to the presentation and understanding
of our financial condition and results of operations. These critical accounting
policies require management's most difficult, subjective and complex judgments
about matters that are inherently uncertain. In the event that different
assumptions or conditions were to prevail, and depending upon the severity of
such changes, the possibility of materially different financial condition or
results of operations is a reasonable likelihood. See also Note 1 of the
accompanying consolidated financial statements presented elsewhere in this
annual report.
Allowance for Loan Losses
The Company monitors and maintains an allowance for loan losses to
absorb an estimate of probable incurred losses inherent in the loan portfolio.
The Company maintains policies and procedures that address the systems of
control over the following areas of maintenance of the allowance: the systematic
methodology used to determine the appropriate level of the allowance to provide
assurance that the allowance for loan losses is maintained in accordance with
accounting principles generally accepted in the United States of America; the
accounting policies for loan charge-offs and recoveries; the assessment and
measurement of impairment in the loan portfolio; and the loan grading system.
The Company evaluates various loans individually for impairment as
required by Statement of Financial Accounting Standard (SFAS) No. 114,
Accounting by Creditors for Impairment of a Loan, and SFAS No. 118, Accounting
by Creditors for Impairment of a Loan - Income Recognition and Disclosures.
Loans evaluated individually for impairment include non-performing loans, such
as loans on non-accrual, loans past due 90 days or more, restructured loans and
other loans selected by management including loans graded as substandard or
doubtful by the internal credit review process. The evaluations are based upon
discounted expected cash flows or collateral valuations. If the evaluation shows
that a loan is individually impaired, then a specific reserve is established for
the amount of impairment. If a loan evaluated individually is not impaired, then
the loan is assessed for impairment under SFAS No. 5, Accounting for
Contingencies (SFAS 5), with a group of loans that have similar characteristics.
For loans without individual measures of impairment, the Company makes
estimates of losses for groups of loans as required by SFAS 5. Loans are grouped
by similar characteristics, including the type of loan, the assigned loan grade
and the general collateral type. A loss rate reflecting the expected loss
inherent in a group of loans is derived based upon estimates of default rates
for a given loan grade, the predominant collateral type for the group and the
terms of the loan. The resulting estimate of losses for groups of loans are
adjusted for relevant environmental factors and other conditions of the
portfolio of loans, including: borrower and industry concentrations; levels and
trends in delinquencies, charge-offs and recoveries; changes in underwriting
standards and risk selection; level of experience, ability and depth of lending
management; and national and local economic conditions.
The amount of estimated impairment for individually evaluated loans and
groups of loans is added together for a total estimate of probable incurred loan
losses. This estimate of losses is compared to the allowance for loan losses of
the Company as of the evaluation date and, if the estimate of losses exceeds the
allowance, an additional provision to the allowance would be made. If the
estimate of losses is less than the allowance, the degree to which the allowance
exceeds the estimate is evaluated to determine whether the allowance falls
outside a range of estimates. If the estimate of losses were below the range of
reasonable estimates, the allowance would be reduced by way of a credit to the
provision for loan losses. The Company recognizes the inherent imprecision in
estimates of losses due to various uncertainties and variability related to the
factors used, and therefore a reasonable range around the estimate of losses is
derived and used to ascertain whether the allowance is too high. If different
assumptions or conditions were to prevail and it is determined that the
allowance is not adequate to absorb the new estimate of probable incurred
losses, an additional provision for loan losses would be made, which amount may
be material to the Consolidated Financial Statements.
Impairment of Goodwill
As required by applicable accounting guidance, goodwill is evaluated at
least annually to determine if the amount recorded on the Company's balance
sheet is impaired. If goodwill is determined to be impaired, the recorded amount
would be reduced to estimated fair value by a charge to expense in the period in
which impairment is determined. Impairment is evaluated in the aggregate for all
of the Company's banking operations. Operating characteristics of the aggregate
banking operations are derived and compared to a database of peer group banks
that have been sold. Pricing valuation factors that are considered in estimating
the fair value of the Company's aggregate banking operations include
price-to-total assets, price-to-total book value, price-to-deposits and price-to
earnings. Unusual events that have impacted the operating characteristics of the
Company's aggregate banking operations are considered to assess the likelihood
of recurrence and adjustments to historical performance may be made. Changes in
assumptions regarding the likelihood of unusual historical events recurring or
the use of different pricing valuation factors could have a material impact on
management's impairment analysis.
Realization of Deferred Tax Assets
Deferred tax assets and liabilities are the expected future tax amounts
for the temporary differences between carrying amounts and tax bases of assets
and liabilities, computed using enacted tax rates. A valuation allowance, if
needed, reduces deferred tax assets to the amount expected to be realized.
Deferred tax assets for the Company primarily relate to the allowance for loan
losses and net operating loss carryforwards. In considering the need for a
valuation allowance to reduce deferred tax assets to the amount expected to be
realized, management considers the amount of previously paid taxes that may be
recoverable and the likelihood of generating sufficient future taxable income to
fully utilize expected future tax deductions. At December 31, 2004 management's
consideration of the need for a valuation allowance focused on the generation of
future taxable income as all available previously paid taxes were recovered from
the operating loss reported in 2003. In determining the likelihood of generating
future taxable income management considered unusual events that have impacted
the Company's historical earnings and whether these events will recur, the
Company's operating budget and likely operating results in the near term.
Changes in these assumptions could impact the carrying value of deferred tax
assets and require a charge to tax expense.
SIGNIFICANT EVENT ARISING IN 2003
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 its wholly owned subsidiary
Farmers Deposit Bank and had accepted the resignation of the bank's president.
On June 4, 2003, senior management of Premier received from the bank's former
president a request to charge-off over $2.0 million in loans. Concerned about
the magnitude of the request and the impact on Premier's financial results,
Premier management promptly notified the Federal Reserve Bank of Cleveland and
the Federal Deposit Insurance Corporation ("FDIC") about the request. Premier's
initial investigation indicated that the former president of Farmers Deposit 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.
As a result of the ongoing investigation into the conduct of the former
president of Farmers Deposit by Premier and the FDIC, Premier charged-off over
$17.2 million of loans. The resulting depletion of the allowance for loan losses
together with the current analysis of additional risk in the loan portfolio
warranted significant additional provisions for loan losses at the Bank. In
addition to the provision for loan losses, interest income reversals and other
non-interest expenses, including bad check write-offs and loan review expenses,
were recorded.
Premier's management, with the assistance of outside independent
professionals, conducted a further review of those loans for which significant
charge offs or additional provisions were required in 2003. The purpose of the
review was to determine if the facts or circumstances that gave rise to the
additional charge offs or provisions had been improperly withheld 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, in 2003, the
financial statements for 2002 and 2001 were restated to reflect the financial
statement effect of the matters that occurred in those periods but which were
improperly concealed by subsidiary management.
The Securities and Exchange Commission ("SEC") is investigating the
information disclosed in Premier's June 16 and July 31, 2003 Forms 8-K and the
June 30, and September 30, 2003 Forms 10-Q regarding Farmers Deposit and has
requested information about Premier's investigation. Premier is cooperating with
the SEC.
SUMMARY FINANCIAL RESULTS
Premier had net income from continuing operations of $1.963 million in
2004 compared to a $9.6 million net loss from continuing operations reported for
the year 2003. Net income in 2004 is primarily the result of the continued
earnings of Premier's profitable banks partially offset by expenses associated
with rehabilitating its subsidiary, Farmers Deposit Bank, conducting Premier's
own investigation, cooperating with the SEC investigation, and reducing debt at
the holding company. The loss for 2003 is primarily due to large provisions for
loan losses and bad check losses at Farmers Deposit Bank. The loss in 2003
follows a $2.2 million loss in 2002 which was due to large provisions for loan
losses, writedowns of repossessed real estate to realizable values, and higher
collection costs. Basic earnings per share from continuing operations was $0.37
in 2004, compared to a loss of ($1.84) in 2003, and a loss
of ($0.42) in 2002.
The following table comparatively illustrates the components of ROA and
ROE over the previous five years. Return on average assets (ROA) measures how
effectively Premier utilizes its assets to produce net income. Premier's net
income in 2004 resulted in an ROA of 0.36%, an increase over the (1.66%) net
loss ROA in 2003 and the (0.37)% net loss ROA reported in 2002. As shown in the
table, fully taxable equivalent net interest income (as a percent of average
earning assets) has remained fairly consistent over the past five years with a
high of 3.84% in 2002. The net losses in 2003 and 2002 were primarily the result
of an increase in the provision for loan losses, resulting in negative net
credit income for those years. In 2004, net credit income was once again
positive, achieving the highest level over the five year period. This increase
in net credit income (as a percent of average earning assets) was dampened
somewhat by higher non-interest expenses (as a percent of average earning
assets) when compared to the previous four years. As illustrated in the table,
Premier's 2004 fully taxable net interest income as a percent of average earning
assets was down slightly to 3.61% from the 3.63% recorded in 2003 as interest
earned on loans declined slightly due to a lower balance of loans outstanding
and lower yields on loans due to the interest rate environment. However, during
the same time, net credit income increased as the provision for loan losses was
0.20% of average earning assets in 2004 compared to 3.81% in 2003. The net
overhead ratio (non-interest expense less non-interest income as a percent of
average earning assets) increased in 2004 to 2.83% compared to 2.64% in 2003,
the lowest ratio reported in the five years presented in the table. The 2003
ratio declined from a 2.71% net overhead ratio reported in 2002. The increase in
2004 net overhead was the result of increases in non-interest expense related to
the investigation of Farmers Deposit Bank, the loss on the sale of facilities
formerly leased to Citizens Bank (which was sold in 2004), and accelerated
amortization costs related to the early redemption of Premier's Trust Preferred
Securities. The decline in 2003 compared to 2002 was the result of increases in
non-interest income related to service charges on deposit accounts. In 2004,
this trend continued, as non-interest income increased again due to revenue from
service charges on deposit accounts.
Return on average equity (ROE), another measure of earnings performance,
indicates the amount of net income earned in relation to the total equity
invested. Premier's 2004 ROE was 4.06%, compared to (18.46%) realized in 2003
and (3.77%) reported for 2002. ROE increased primarily due the net income
reported in 2004 versus the operating losses reported for 2003 and 2002.
ANALYSIS OF RETURN ON ASSETS AND EQUITY
from continuing operations
2004 2003 2002 2001 2000
---- ---- ---- ---- ----
As a percent of average earning assets:
Fully taxable-equivalent net interest income 3.61% 3.63% 3.84% 3.50% 3.56%
Provision for loan losses (0.20) (3.81) (1.70) (1.37) (0.66)
----- ----- ----- ----- -----
Net credit income 3.40 (0.18) 2.14 2.13 2.90
Gains on the sales of assets & subsidiaries* 0.02 0.11 (0.01) 1.48 (0.04)
Non-interest income 0.69 0.62 0.50 0.52 0.50
Non-interest expense (3.52) (3.26) (3.21) (3.30) (3.26)
Tax equivalent adjustment (0.03) (0.07) (0.08) (0.08) (0.10)
Applicable income taxes (0.18) 0.98 0.27 (0.49) 0.03
----- ----- ----- ----- -----
Return on average earning assets 0.39 (1.79) (0.40) 0.26 0.03
Multiplied by average earning assets to
average total assets 92.39 92.86 92.34 91.98 91.58
----- ----- ----- ----- -----
Return on average assets 0.36% (1.66)% (0.37)% 0.24% 0.03%
Multiplied by average assets to average equity 11.33X 11.13X 10.26X 11.68X 14.43X
----- ----- ----- ----- -----
Return on average equity 4.06% (18.46)% (3.77)% 2.76% 0.41%
===== ===== ===== ===== =====
A breakdown of Premier's financial results by quarter for the years
ended December 31, 2004 and 2003 is summarized below.
QUARTERLY FINANCIAL INFORMATION
(Dollars in thousands except per share amounts)
Full
First Second Third Fourth Year
------- ------- ------- ------- -------
2004
Interest Income $ 7,055 $ 6,926 $ 6,951 $ 7,189 $28,121
Interest Expense 2,609 2,528 2,553 2,387 10,057
Net Interest Income 4,446 4,398 4,418 4,802 18,064
Provision for Loan Losses 135 374 162 355 1,026
Securities Gains 10 0 0 90 100
Net Overhead 3,626 3,337 3,599 3,714 14,276
Income before Income Taxes 695 687 657 823 2,862
Income from Continuing Operations 485 474 448 559 1,963
Income (Loss) from Discontinued Operations 29 (25) 4,730 0 4,734
Net Income 514 449 5,178 559 6,697
Basic and Diluted Loss per share from
Continuing Operations 0.09 0.09 0.08 0.11 0.37
Basic and Diluted Net Loss per share 0.09 0.09 0.98 0.11 1.28
Dividends Paid per share 0.00 0.00 0.00 0.00 0.00
2003
Interest Income $ 8,606 $ 8,178 $ 7,665 $ 7,280 $31,729
Interest Expense 3,505 3,248 2,994 2,800 12,547
Net Interest Income 5,101 4,930 4,671 4,480 19,182
Provision for Loan Losses 2,267 11,778 4,343 2,125 20,513
Securities Gains 189 15 2 410 616
Net Overhead 3,628 3,524 3,315 3,717 14,184
Income before Income Taxes (605) (10,357) (2,985) (952) (14,899)
Loss from Continuing Operations (365) (6,779) (1,877) (596) (9,617)
Income (Loss) from Discontinued Operations (27) (76) 21 2 (80)
Net Loss (393) (6,855) (1,856) (594) (9,697)
Basic and Diluted Loss per share from
Continuing Operations (0.07) (1.30) (0.36) (0.11) (1.84)
Basic and Diluted Net Loss per share (0.08) (1.31) (0.35) (0.11) (1.85)
Dividends Paid per share 0.00 0.00 0.00 0.00 0.00
SALE OF SUBSIDIARIES
In the fourth quarter of 2003, Premier 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, which was completed on July 1,
2004.. The sale of this subsidiary helped to restore the financial position of
Premier after the impact of the losses sustained at Farmers Deposit Bank during
the second and third quarters of 2003. As a result of the sale, regulatory
capital ratios of Premier were restored to the stronger levels management wishes
to maintain; cash reserves of the holding company were replenished; a portion of
the cash reserves were used to reduce outstanding debt by $9.4 million; and the
profit from the sale allowed Premier to utilize a substantial portion of its
Federal income tax net operating loss carryforward.
In 2000 Premier suspended its acquisition strategy in order to focus on
improving its subsidiary bank operations by strengthening its management
oversight. As part of this change in strategy, Premier elected to dispose of two
of its subsidiary banks in 2001.
On January 26, 2001, the company disposed of all the deposits
(approximately $110 million), the majority of loans (approximately $92 million)
and the premises and equipment (approximately $1.6 million) of the Bank of Mt.
Vernon under the terms of a Purchase and Assumption Agreement. As a result of
this transaction, the banking charter of the Bank of Mt. Vernon was relinquished
and Premier agreed not to compete in the markets previously served by the Bank
of Mt. Vernon.
Also, on December 10, 2001, the Company disposed of certain assets and
liabilities of The Sabina Bank. The sale included all the loans (approximately
$31 million) and all the deposits (approximately $41 million), as well as the
premises and equipment (approximately $1.2 million). Certain assets of the bank
were retained by Premier pending liquidation of the bank, which occurred in
2002. The operating results of both the Bank of Mount Vernon and The Sabina Bank
were included in Premier's 2001 operating results through the respective dates
of the sale. However, the operating results subsequent to 2001 do not include
any of the operations of these two banks. Comparisons of average balances and
income statement categories to 2001 are all affected by the disposition of these
two subsidiaries.
BALANCE SHEET ANALYSIS
Summary
A financial institution's primary sources of revenue are generated by
its earning assets, while its major expenses are produced by the funding of
these assets with interest bearing liabilities. Effective management of these
sources and uses of funds is essential in attaining a financial institution's
optimal profitability while maintaining a minimum amount of interest rate risk
and credit risk. Information on rate-related sources and uses of funds for each
of the three years in the period ended December 31, 2004, is provided in the
table below.
AVERAGE CONSOLIDATED BALANCE SHEETS AND NET INTEREST INCOME ANALYSIS
(Dollars in thousands)
2004 2003 2002
Average Yield/ Average Yield/ Average Yield/
Balance Interest(2) Rate(3) Balance Interest(2) Rate(3) Balance Interest(2) Rate(3)
---------------------------- ---------------------------- -----------------------------
Assets:
Interest earning assets
U.S. Treasury and federal agency
securities $112,260 $3,117 2.78% $102,856 $ 3,924 2.84% $105,045 $ 4,429 4.22%
States and municipal obligations(1) 4,941 338 6.84 15,589 1,015 6.51 17,936 1,233 6.88
Mortgage Backed Securities 29,803 1,183 3.97 16,757 585 3.49 5,562 302 5.43
Other securities 3,216 138 4.29 7,613 342 4.49 8,169 347 4.25
-------- ------- ----- -------- ------- ----- -------- ------- -----
Total investment securities 150,220 4,776 3.18 142,815 4,866 3.41 136,712 6,311 4.62
Federal funds sold 29,369 380 1.29 42,844 469 1.09 34,600 567 1.64
Interest-bearing deposits with
banks 256 6 2.57 568 7 1.23 564 8 1.42
Loans, net of unearned income(4)(5)
Commercial(1) 132,785 8,913 6.71 142,768 9,944 6.97 161,226 12,653 7.85
Real estate mortgage 145,387 10,182 7.00 151,210 11,538 7.63 160,532 12,989 8.09
Installment 47,438 4,029 8.49 58,178 5,293 9.10 61,005 6,238 10.23
-------- ------- ----- -------- ------- ----- -------- ------- -----
Total loans 325,610 23,124 7.10 352,156 26,775 7.60 382,763 31,880 8.33
-------- ------- ----- -------- ------- ----- -------- ------- -----
Total interest-earning assets 505,455 28,286 5.60 538,383 32,117 5.97 554,639 38,766 6.99
Allowance for loan losses (11,413) (12,704) (8,108)
Cash and due from banks 13,837 13,400 13,334
Premises and equipment 7,738 8,233 8,725
Other assets 31,490 32,474 32,073
Assets of discontinued operations 39,762 81,821 93,702
-------- -------- --------
Total assets $586,869 $661,607 $694,365
======== ======== ========
Liabilities and Equity:
Interest bearing liabilities
NOW and money market $158,169 1,290 0.82% 180,763 2,045 1.13% $171,801 3,468 2.02%
Savings 62,518 521 0.83 57,327 781 1.36 53,352 942 1.77
Certificates of deposit and
other time deposits 164,932 4,455 2.70 182,542 5,677 3.11 209,593 8,754 4.18
-------- ------- ----- -------- ------- ----- -------- ------- -----
Total interest bearing deposits 385,619 6,266 1.62 420,632 8,503 2.02 434,746 13,164 3.03
Short-term borrowings 6,539 118 1.80 4,675 51 1.09 5,436 94 1.73
Other borrowings 5,306 248 4.67 8,350 379 4.54 10,678 412 3.86
FHLB advances 9,955 556 5.59 15,852 826 5.21 19,824 943 4.76
Debentures 25,397 2,869 11.30 27,253 2,788 10.23 29,639 2,852 9.62
-------- ------- ----- -------- ------- ----- -------- ------- -----
Total interest-bearing
liabilities 432,816 10,057 2.32 476,762 12,547 2.63% 500,323 17,465 3.49%
Non-interest bearing deposits 62,486 53,824 47,327
Other liabilities 7,393 4,903 3,064
Liabilities of
discontinued operations 35,876 74,021 85,093
Shareholders' equity: 48,298 52,097 58,558
--------- -------- --------
Total liabilities and equity $586,869 $661,607 $694,365
======== ======== ========
Net interest earnings (1) $18,229 $19,570 $21,301
======= ======= =======
Net interest spread (1) 3.27% 3.33% 3.50%
Net interest margin (1) 3.61% 3.63% 3.84%
(1) Taxable - equivalent yields are calculated assuming a 34% federal income tax rate.
(2) Excludes the interest income and interest expense of discontinued operations.
(3) Yields are calculated on historical cost except for yields on marketable equity securities that are
calculated using fair value.
(4) Includes loan fees, immaterial in amount, in both interest income and the calculation of yield on loans.
(5) Includes loans on non-accrual status.
In 2004, average earning assets declined by 6.1% or $32.9 million from
2003, following a 2.9% or $16.3 million decline in 2003 from 2002. Average
interest bearing liabilities, the primary source of funds supporting the earning
assets, decreased 9.1% or $43.1 million from 2003, which follows a 4.7% or $23.5
million decline in 2003 from 2002. The decline in 2004 average earning assets
was the result of the residual effect of the $16.5 million of loan charge-offs
in 2003, the $7.0 million of loan charge-offs in 2004 (primarily at Farmers
Deposit in both years), coupled with loan maturities and principal pay downs
that were not renewed and the redeployment of other available funds to reduce
debt. The decline in interest bearing liabilities was largely due to debt
reduction strategies, a continued shift in customer deposits from interest
bearing to non-interest bearing, and the non-renewal of certain certificates of
deposit at Farmers Deposit Bank in conjunction with Premier's capital
restoration plan for that Bank. Other than the effects of the capital
restoration plan, the same factors were the result of the decline in average
earning assets and average interest bearing liabilities in 2003 compared to
2002. Additional information on each of the components of earning assets and
interest bearing liabilities is contained in the following sections of this
report.
Loan Portfolio
Premier's loan portfolio is its largest and highest yielding component
of average earning assets, totaling 64.4% of average earning assets during 2004.
Average loans declined by $26.5 million or 7.5% in 2004. The decline is largely
attributable to the high level of charge-offs and loan collections at Farmers
Deposit. The average loans outstanding at Farmers Deposit declined by $30.5
million in 2004, $4.0 million more than Premier's total decline of $26.5
million. Of the remaining increase, Premier realized a 6.0% increase in loans in
its West Virginia markets and an 11.1% increase in loans in its Ohio markets.
These increases were partially offset by a 10.0% decline in average loans in
Premier's other Kentucky markets. Due to the low interest rate environment, many
borrowers sought to refinance their loans to reduce their interest costs. Due to
the lackluster economy and the resulting lower demand for loans during much of
2003 and 2004, larger banks began competing more strongly by enticing borrowers
with prime rate or below prime rate loans. Therefore, scheduled loan maturities
were not necessarily renewed with Premier. In 2003, average loans outstanding
decreased by $30.6 million or 8.0% compared to 2002. Again, the decline is
partially attributed to the high level of charge-offs, primarily at Farmers
Deposit (down $13.9 million on average), but also to stiffer competition from
larger banks competing in Premier's markets and a general decline in economic
growth. Of the total decline in 2003, Premier realized a 1.8% increase in loans
in its West Virginia markets and a 3.3% increase in loans in its Ohio markets.
These were more than offset by a 19.2% decline in loans in Premier's other
Kentucky markets.
Total loans at December 31, 2004 decreased by $6.9 million or 2.1% from
the total at December 31, 2003. This decrease follows a $41.3 million or 11.1%
decrease in 2003 from total loans at December 31, 2002. The decline in 2004
period-end loans was the result of the $7.0 million of loan charge-offs recorded
during the year, primarily at Farmers Deposit ($5.5 million). The decline in
2003 period-end loans was the result of the $16.5 million of loan charge-off
recorded during the year, primarily at Farmers Deposit, and declines due to low
loan demand resulting from the poor economy and heavy refinancing activity by
borrowers to obtain lower interest rates.
The following table presents a five year comparison of loans by type.
With the exception of those categories included in the comparison, there are no
loan concentrations which exceed 10% of total loans. Additionally, Premier's
loan portfolio contains no loans to foreign borrowers nor does it have a
material volume of highly leveraged transaction lending.
LOAN SUMMARY
(Dollars in thousands)
As of December 31
2004 % 2003 % 2002 % 2001 % 2000 %
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Summary of Loans by Type
Commercial, secured by real
estate $101,567 31.3% $101,325 30.5% $109,571 29.3% $106,726 27.7% $138,960 27.5%
Commercial, other 40,923 12.6 38,063 11.5 51,347 13.8 59,364 15.4 72,197 14.3
Real estate construction 5,906 1.8 5,414 1.6 7,318 2.0 8,245 2.1 14,142 2.8
Real estate mortgage 128,243 39.5 126,134 38.0 134,271 36.0 135,937 35.4 178,558 35.3
Agricultural 2,380 0.7 3,032 0.9 4,381 1.2 5,402 1.4 8,878 1.7
Consumer 44,470 13.7 56,216 17.0 63,534 17.0 68,300 17.7 92,564 18.3
Other 1,438 0.4 1,610 0.5 2,677 0.7 966 0.3 598 0.1
-------- ---- -------- ---- -------- ---- -------- ---- -------- ----
Total loans $324,927 100.0% $331,794 100.0% $373,099 100.0% $385,019 100.0% $505,897 100.0%
Less unearned income (330) (504)
-------- -------- -------- -------- --------
Total loans net of
unearned income $324,927 $331,794 $373,099 $385,019 $505,567
======== ======== ======== ======== ========
Non-Performing Assets
Non-accrual loans $ 6,847 $ 11,958 $ 8,197 $ 6,302 $ 5,864
Accruing loans which are
contractually past due
90 days or more 739 4,137 1,238 5,612 1,563
Restructured loans 238 104 129 338 689
-------- -------- -------- -------- --------
Total nonperforming and
restructured loans 7,824 16,199 9,564 12,252 8,116
Other real estate acquired
through foreclosures 2,247 3,187 3,505 5,508 2,844
-------- -------- -------- -------- --------
Total nonperforming and
restructured loans and
other real estate $ 10,071 $ 19,386 $ 13,069 $ 17,760 $ 10,960
======== ======== ======== ======== ========
Nonperforming and restructured
loans as a % of total loans 2.41% 4.88% 2.56% 3.18% 1.60%
Nonperforming and restructured
loans and other real estate
as a % of total assets (1) 1.87 3.57% 2.21% 2.93% 1.40%
Allocation of Allowance
For Loan Losses
Commercial, other $ 1,734 13.7% $ 4,166 12.9% $ 2,294 15.7% $ 1,379 17.1% $ 2,145 16.1%
Real estate, construction 83 1.8 662 1.6 632 2.0 488 2.1 381 2.8
Real estate, other 4,276 70.8 4,886 68.5 4,341 65.3 3,235 63.1 2,510 62.8
Consumer installment 1,255 13.7 2,478 17.0 977 17.0 1,178 17.7 1,067 18.3
Unallocated 2,036 2,108 1,454 1,091 514
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Total $ 9,384 100.0% $ 14,300 100.0% $ 9,698 100.0% $ 7,371 100.0% $ 6,617 100.0%
======== ===== ======== ===== ======== ===== ======== ===== ======== =====
(1) From continuing operations
Loans secured by real estate, which in total constituted approximately
73% of Premier's loan portfolio at December 31, 2004, consist of a diverse
portfolio of predominately single family residential loans and loans for
commercial purposes where real estate is part of the collateral, not the primary
source of repayment. Residential real estate mortgage loans generally do not
exceed 80% of the value of the real property securing the loan. The residential
real estate mortgage loan portfolio primarily consists of adjustable rate
residential mortgage loans. The origination of these mortgage loans can be more
difficult in a low interest rate environment where there is a significant demand
for fixed rate mortgages. Premier also participates in the solicitation of loans
for the secondary market and recognizes the referral fees in non-interest
income. Commercial loans are generally made to small-to-medium size businesses
located within a defined market area and typically are secured by business
assets and guarantees of the principal owners. Additional risks of loss are
associated with commercial lending such as the potential for adverse changes in
economic conditions or the borrowers' ability to successfully execute their
business plan. Consumer loans generally are made to individuals living in
Premier's defined market area who are known to the local bank's staff. Consumer
loans are generally made for terms of up to seven years on a secured or
unsecured basis; however longer terms may be approved in certain circumstances
and for revolving credit lines. While consumer loans generally provide the
Company with increased interest income, consumer loans may involve a greater
risk of default.
In addition to the loans presented in the loan summary table, Premier
also offers certain off-balance sheet products such as letters of credit,
revolving credit agreements, and other loan commitments. These products are
offered under the same credit standards as the loan portfolio and are included
in the risk-based capital ratios used by the Federal Reserve to evaluate capital
adequacy. Additional information on off-balance sheet commitments is contained
in Note 18 to the consolidated financial statements.
Total non-performing assets, which consist of past-due loans on which
interest is not being accrued ("non accrual loans"), foreclosed properties in
the process of liquidation ("OREO"), loans with restructured terms to enable a
delinquent borrower to repay and accruing loans past due 90 days or more, were
$10.1 million, or 1.87% of total assets of continuing operations at year-end
2004. The amount is down significantly from the $19.4 million of non-performing
assets (3.57% of total assets of continuing operations) at year-end 2003 and the
$13.1 million of non-performing assets (2.21% of total assets of continuing
operations) at year-end 2002. The decrease in 2004 was due to charge-offs of
loans determined to be uncollectible, the sale of $4.5 million of OREO property,
and the collection or rehabilitation of previously delinquent loans. The
increase in 2003 was due to the loan underwriting issues uncovered at Farmers
Deposit Bank. As management's efforts to collect these loans upon maturity
continues, loans are only renewed using Premier's strengthened credit policies.
Otherwise, loans may be placed on non-accrual status and foreclosure proceedings
begun to obtain and liquidate any collateral securing the past due or matured
loans. Premier is committed to continuing to reduce its high level of
non-performing assets and implementing strong underwriting standards to help
maintain a lower level of non-performing assets in the future. This effort is
revealed in the decline in non-performing assets from the end of 2001 to the end
of 2002, primarily related to the sale of OREO properties and the decline in
loans 90+ days past due. Premier's efforts at its other affiliate banks in 2003
and 2004 are masked by the high level of non-performing assets at Farmers
Deposit Bank, which alone totaled $12.5 million at December 31, 2003. At
December 31, 2004, the non-performing assets at Farmers Deposit Bank had
declined to $6.8 million, leaving $3.3 million of total non-performing assets at
the other Affiliate Banks combined.
The Loan Summary table presents five years of comparative non-performing
asset information. Other than these loans and the impaired loans discussed in
Note 6 to the consolidated financial statements, Premier does not have a
significant volume of loans whereby management has serious doubts about the
borrowers ability to comply with the present repayment terms of the loan.
It is Premier's policy to place loans that are past due over 90 days on
non-accrual status, unless the loans are adequately secured and in the process
of collection. Premier had no commitments to provide additional funds on non-
accrual loans at December 31, 2004. For real estate loans, upon repossession,
the balance of the loan is transferred to "Other Real Estate Owned" (OREO) and
carried at the lower of the outstanding loan balance or the fair value of the
property based on current appraisals and other current market trends less
estimated disposal costs. If a writedown of the OREO property is necessary at
the time of foreclosure, the amount is charged against the allowance for loan
losses. A periodic review of the recorded property value is performed in
conjunction with normal loan reviews, and if market conditions indicate that the
recorded value exceeds the fair market value less estimated disposal costs,
additional writedowns of the property value are charged directly to operations.
During 2003 Premier recognized $466,000 of OREO writedowns compared to
$1.0 million in 2002. During 2004, Premier realized a $125,000 net profit on the
disposition of OREO properties, net of writedowns. Although loans may be
classified as non-performing, some continue to pay interest irregularly or at
less than original contracted terms. During 2004, approximately $159,000 of
interest was recognized on non-accrual and restructured loans, while
approximately $694,000 would have been recognized in accordance with their
original terms.
The allowance for loan losses is maintained to absorb probable incurred
losses associated with lending activities. Actual losses are charged against the
allowance ("charge-offs") while collections on loans previously charged off
("recoveries") are added back to the allowance. 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, the type of loan, levels of
non-performing and past due loans, and an evaluation of current economic
conditions. Loans are evaluated for credit risk and assigned a risk grade.
Premier's risk grading criteria are based upon Federal Reserve guidelines and
definitions. In evaluating the adequacy of the allowance for loan losses, loans
that are assigned passing grades are grouped together and multiplied by
historical charge-off percentages to determine an estimated amount of potential
losses and a corresponding amount of allowance. Loans that are assigned
marginally passing grades are grouped together and allocated slightly higher
percentages to determine the estimated amount of potential losses due to the
identification of increased risk(s). Loans that are assigned a grade of
"substandard" or "doubtful" are usually determined to be impaired.
A loan is categorized and reported as impaired when it is probable that
the creditor will be unable to pay all of the principal and interest amounts
according to the contractual terms of the loan agreement. In determining whether
a loan is impaired, management considers such factors as past payment history,
recent economic events, current and projected financial condition and other
relevant information that is available at the time. Impairment is evaluated in
total for smaller-balance loans of similar nature such as residential mortgage,
consumer, and credit card loans, and on an individual basis for other loans. If
a loan is deemed to be impaired an evaluation of the amount of estimated loss is
performed assessing the present value of estimated future cashflows using the
loan's existing rate or assessing the fair and realizable value of the loan
collateral if repayment is expected solely from the collateral. The estimation
of loss is assigned to the impaired loan and is used in determining the adequacy
of the allowance for loan losses. For impaired loans, this estimation of loss is
reevaluated quarterly and, if necessary, adjusted based upon the current known
facts and circumstances related to the loan and the borrower. Additional
information on Premier's impaired loans is contained in Note 6 to the
consolidated financial statements. The sum of the calculations and estimations
of the risk of loss in a given loan portfolio is compared to the recorded
balance of the allowance for loan losses. If the total allowance is deemed to be
inadequate a charge to earnings is recorded to increase the allowance.
Conversely, should an evaluation of the allowance result in a lower estimate of
the risk of loss in the loan portfolio and the allowance is deemed to be more
than adequate, a reversal of previous charges to earnings ("a negative
provision") may be warranted in the current period. Events that may lead to
negative provisions included greater than anticipated recoveries, securing more
collateral on an impaired loan during the collection process, or receiving
payment in full on an impaired loan.
At December 31, 2004, the allowance for loan losses was $9.4 million or
2.89% to total year-end loans. This ratio is a decrease from the prior year's
4.31% but still higher than the 2.60% at the end of 2002. The decrease in the
allowance in 2004 was the result of charge-offs of loans previously identified
as impaired partially offset by $1.1 million of recoveries and $1.0 million of
additional provisions for loan losses during 2004. The increase at year-end 2003
was the result of the significant allowance attributed to the loans at Farmers
Deposit Bank. In management's opinion, the allowance for loan losses is adequate
to absorb the current estimated risk of loss in the existing loan portfolio. The
summary of the allowance for loan losses allocated by loan type is presented in
the Loan Summary Table above.
The following table provides a detailed history of the allowance for
loan losses, illustrating charge-offs and recoveries by loan type, and the
annual provision for loan losses over the past five years. The provision for
loan losses in 2004 was $1.0 million, down significantly from the $20.5 million
provision in 2003 and the $9.5 million provision in 2002. The provision in 2004
was the result of newly identified impaired loans and increases in the volume of
loans outstanding at the banks located in West Virginia. The high level of
provision in 2003 was the result of the net charge-offs and increase in impaired
loans at Farmers Deposit. The relatively high provision in 2002 was in response
to management efforts to identify the level of probable incurred losses
throughout Premier's troubled institutions using the best practices of its
higher performing institutions. These efforts were circumvented or rendered
ineffective by the disregard for controls by the former president of Farmers
Deposit. Premier continually evaluates the adequacy of its allowance for loan
losses, and changes in the provision are based on the estimated probable
incurred loss of the loan portfolio.
SUMMARY OF LOAN LOSS EXPERIENCE
(Dollars in Thousands)
For the Year Ended December 31,
2004 2003 2002 2001 2000
------- ------- ------- ------- -------
Allowance for Loan Losses, Beginning of Period $14,300 $ 9,698 $ 7,371 $ 6,617 $ 5,755
Amounts charged off:
Commercial, financial and agricultural loans 1,520 4,417 4,080 2,585 3,152
Real estate construction loans 5 0 833 480 0
Real estate loans - other 2,413 6,427 1,072 3,013 105
Consumer installment loans 3,054 5,669 1,904 1,725 850
------- ------- ------- ------- -------
Total charge-offs 6,992 16,513 7,889 7,803 4,107
Recoveries on amounts previously charged off:
Commercial, financial and agricultural loans 264 145 138 163 182
Real estate construction loans 1 37 16 1 0
Real estate loans - other 87 74 163 10 1
Consumer installment loans 698 346 446 299 171
------- ------- ------- ------- -------
Total recoveries 1,050 602 763 473 354
------- ------- ------- ------- -------
Net charge-offs 5,942 15,911 7,126 7,330 3,753
Provision for loan losses 1,026 20,513 9,453 8,350 4,615
Balance of acquired or disposed subsidiaries 0 0 0 (266) 0
------- ------- ------- ------- -------
Allowance for Loan Losses, End of Period $ 9,384 $14,300 $ 9,698 $ 7,371 $ 6,617
======= ======= ======= ======= =======
Average total loans 325,610 352,156 382,763 424,903 503,776
Total loans at year-end 324,927 331,794 373,099 384,940 505,567
As a Percent of Average Loans:
Net charge-offs 1.82% 4.52% 1.86% 1.73% 0.74%
Provision for loan losses 0.32% 5.83% 2.47% 1.97% 0.92%
Allowance for loan losses 2.88% 4.06% 2.53% 1.73% 1.31%
As a Percent of Total Loans at Year-end:
Allowance as a percentage of year-end net loans 2.89% 4.31% 2.60% 1.91% 1.31%
As a Multiple of Net Charge-offs:
Allowance as a multiple of net charge-offs 1.58X 0.90X 1.36X 1.01X 1.76X
Income before tax and provision for loan losses 0.65X 0.35X 0.80X 1.76X 1.22X
Net charge-offs in 2004 decreased to $5.9 million, down $9.9 million or
more than half of the $15.9 million of net charge-offs experienced in 2003.
Approximately $4.8 million or 81% of the 2004 net charge-offs were at Farmers
Deposit Bank. This level of net charge-offs compares to the $15.9 million of net
charge-offs in 2003, up $8.8 million or more than double the $7.1 million of net
charge-offs experienced in 2002. Approximately $14.3 million or 90% of the 2003
net charge-offs were at Farmers Deposit Bank. While all categories of loan
charge-offs were down in 2004, consumer and real estate loan charge-offs
continued to be higher than commercial loan charge-offs. Although management
believes it has identified the significant remaining credit risk in the loan
portfolio, additional charge-offs may be recorded in the coming months due to
the high level of non-performing loans and the resolution of collection efforts
on those loans. These factors are considered in determining the adequacy of the
allowance for loan losses, which at December 31, 2004 was 2.89% of total loans
outstanding and 120% of non-performing loans.
The following table presents the maturity distribution and interest
sensitivity of selected loan categories at December 31, 2004. Maturities are
based upon contractual terms.
LOAN MATURITIES AND INTEREST SENSITIVITY
December 31, 2004
(Dollars in thousands)
Projected Maturities*
One Year One Through Over Total
or Less Five Years Five Years Loans
-------- ---------- ---------- --------
Commercial, secured by real estate $ 8,206 $ 30,523 $ 62,839 $101,568
Commercial, other 14,159 15,965 10,799 40,923
Real estate construction 2,841 1,036 2,029 5,906
Agricultural 815 1,033 532 2,380
-------- -------- -------- --------
Total $ 26,021 $ 48,557 $ 76,199 $150,777
======== ======== ======== ========
Fixed rate loans $ 10,263 $ 28,654 $ 8,699 $ 47,616
Floating rate loans 15,758 19,903 67,500 103,161
-------- -------- -------- --------
Total $ 26,021 $ 48,557 $ 76,199 $150,777
======== ======== ======== ========
Fixed rate loans projected to mature* after one year $ 37,353
Floating rate loans projected to mature* after one year 87,403
--------
Total $124,756
========
(*) Based on scheduled or approximate repayments.
Investment Portfolio and
Other Earning Assets
Investment securities averaged $150.2 million in 2004, a $7.4 million or
5.2% increase from the $142.8 million averaged in 2003. This increase follows a
4.5% increase from the $136.7 million averaged in 2002. The increase in average
investments in 2004 was the result of weak loan demand and funds from loan
paydowns and payoffs at Farmers Deposit Bank. These funds were not used to fund
new loans but were instead invested in high-quality debt and mortgage- backed
securities. The increase in 2003 was the result of weak loan demand across the
Company and stiffer competition from large banks in Premier's markets. Again,
funds from loan payoffs and maturities were not used to fund new loans but were
invested in high-quality debt securities.
The following table presents the carrying values of investment securities.
Fair Value of Securities Available for Sale
(Dollars in thousands)
As of December 31
2004 2003 2002
--------- --------- ---------
U.S. Treasury Securities: $ 250 $ 652 $ 407
U.S. Agency Securities: 115,514 106,845 111,259
States and Political Subdivisions Securities 2,751 6,868 18,610
Mortgage-backed securities: 34,942 31,810 5,370
Corporate securities: 435 1,471 9,052
Total securities: $ 153,892 $ 147,646 $ 144,698
As sources of funds (deposits, federal funds purchased, and repurchase
agreements with corporate customers) fluctuate, excess funds are initially
invested in federal funds sold and other short-term investments. Based upon
analyses of asset/liability repricing, interest rate forecasts, and liquidity
requirements, funds are periodically reinvested in high-quality debt securities,
which typically mature over a longer period of time. At the time of purchase,
management determines whether the securities will be classified as trading,
available-for-sale, or held-to-maturity. At December 31, 2004, all of Premier's
investments were classified as available-for-sale and carried on the books at
market value.
As shown in the following Securities Maturity and Yield Analysis table,
the average maturity period of the securities available-for-sale at December 31,
2004 was 4 years 3 months, lengthened somewhat by the 11 year 1 month average
final maturity of the mortgage-backed securities portfolio. The table uses a
final maturity method to report the average maturity of mortgage-backed
securities, which excludes the effect of monthly payments and prepayments.
Approximately 75% of Premier's investment securities are U.S. Government agency
or Treasury securities that have an average maturity of 2 years 3 months. The
average maturity of the investment portfolio is managed at a level to maintain a
proper matching with interest rate risk guidelines. During 2004, Premier sold a
portion of the securities classified as available-for-sale as part of its
management of interest rate risk, as shown in the Statements of Cash Flows.
Premier does not have any securities classified as trading or held-to-maturity
and it has no plans to establish such classifications at the present time. Other
information regarding investment securities may be found in the following table
and in Note 5 to the consolidated financial statements.
SECURITIES MATURITY AND YIELD ANALYSIS
December 31, 2004
(Dollars in thousands)
Average Taxable
Market Maturity Equivalent
Value (yrs/mos) Yield*
-------- -------- ---------
U.S. Treasury Securities
Within one year $ 250 1.40%
--------
Total U.S. Treasury Securities 250 0/2 1.40
U.S. Government Agencies Securities
Within one year 24,580 2.24
After one but within five years 90,934 3.08
--------
Total U.S. Government Agencies Securities $115,514 2/3 2.90
States and Political Subdivisions Securities
Within one year 272 4.52
After one but within five years 1,933 4.60
After five but within ten years 406 4.83
Over ten years 140 6.75
--------
Total States and Political Subdivisions Securities $ 2,751 3/4 4.74
Mortgage-Backed Securities**
Within one year 1,077 3.01
After one but within five years 5,508 3.69
After five but within ten years 2,267 4.05
Over ten years 26,089 4.54
--------
Total Mortgage-Backed Securities $ 34,941 11/1 4.33
Corporate Securities
Within one year 435 6.20
--------
Total Corporate Securities $ 435 0/7 6.20
--------
Total Securities Available-for-Sale $153,892 4/3 3.27
========
(*) Fully tax-equivalent using the rate of 34%.
(**) Maturities for Mortgage-Backed Securities are based on final maturity.
Premier's average investment in federal funds sold and other short-term
investments decreased by 31.5% in 2004. This follows a 23.8% increase in 2003.
Averaging $29.4 million in 2004, federal funds sold and other short-term
investments decreased $13.5 million from the $42.8 million averaged in 2003, and
were lower than the $34.6 million averaged during 2002. The decrease in average
federal funds sold in 2004 was the result of investing more of Premier's
available funds into higher yielding investments and using a portion of the
funds to reduce outstanding debt. The increase in average federal funds sold in
2003 was the result of maintaining additional liquidity at Farmers Deposit Bank
and the desire to keep more liquid funds on hand to take advantage of any
potential rising interest rates. Fluctuations in federal funds sold and other
short-term investments reflect management's goal to maximize asset yields while
maintaining proper asset/liability structure, as discussed in greater detail
above and in other sections of this report.
Funding Sources
In 2004, Premier once again decreased the rates paid on its interest
bearing deposits in response to the decline in market interest rates. The
average rate paid on interest bearing liabilities decreased to 2.32% in 2004,
down from the 2.63% paid in 2003 and the 3.49% paid in 2002. The decrease is
largely due to declines in rates paid on time deposits as higher rate
certificates of deposits have either not renewed at maturity or were redeposited
at lower rates in conjunction with the decline in market interest rates.
Similarly, rates paid on NOW and money market transactional deposit accounts
also declined. Due to alternative sources of investment and an ever increasing
sophistication of customers in funds management techniques to maximize return on
their money, competition for funds has become more intense. Premier's banks
periodically offer special rate products to attract additional deposits.
Premier's deposits, on average, decreased by 5.6% or $26.4 million in
2004. The 2004 decrease follows a 1.6% or $7.6 million decrease in 2003 from the
average in 2002. In 2004, $20.8 million of the decline in deposits was at
Farmers Deposit Bank, partially due to Premier's capital restoration plan as
certain deposits were not renewed as part of the plan to reduce the size of the
Bank. The remaining $5.6 million decline in average deposits was largely due to
the withdrawal of some public fund deposits which were reestablished as
repurchase agreements. Average repurchase agreements at Affiliate Banks other
than Farmers Deposit increased by $5.8 million during 2004 offsetting the
remaining decline in average deposits in 2004.
In 2004, non-interest bearing deposits increased by 16.1% or $8.7
million on average when compared to 2003. In 2003, non-interest bearing deposits
increased by 13.7% or $6.5 million on average when compared to 2002. Since no
interest is paid on these deposits, an increase in non-interest bearing deposits
helps to increase Premier's net interest margin and its profitability.
Non-interest bearing deposits are more susceptible to withdrawal and therefore
may provide challenges to maintaining adequate liquidity. (See the additional
discussion on liquidity below.) In 2004, interest bearing deposits decreased by
8.3% or $35.0 million on average when compared to 2003. The decrease was
primarily due to a $21.6 million decrease in average interest bearing deposits
at Farmers Deposit Bank. The remaining decrease was the result of the
non-renewal of certain high rate time deposits in 2003 that had a carryover
effect on 2004 and a decrease in average interest bearing transaction deposits.
In 2003, interest bearing deposits decreased by 3.2% or $14.1 million on average
when compared to 2002. The decrease was primarily the result of planned non
renewals of high rate time deposits which more than offset increases in average
interest bearing transaction deposits and savings deposits.
The following table provides information on the maturities of time
deposits of $100,000 or more at December 31, 2004
MATURITY OF TIME DEPOSITS $100,000 OR MORE
December 31, 2004
(In thousands)
Maturing 3 months or less $ 6,723
Maturing over 3 months through 6 months 6,267
Maturing over 6 months through 12 months 10,369
Maturing over 12 months 16,854
--------
Total $ 40,213
========
Other funding sources for Premier include short and long-term
borrowings. Premier's short-term borrowings primarily consist of federal funds
purchased from other banks, and securities sold under agreements to repurchase
with commercial customers. These short-term borrowings fluctuate depending on
near term funding needs and as part of Premier's management of its
asset/liability mix. In 2004, short-term borrowings averaged $6.5 million, up
$1.9 million from the average in 2003. Near the end of 2003, Farmers Deposit
Bank reduced its short-term borrowings to zero as part of Premier's
recapitalization plan. This event had the effect of reducing Premier's average
short-term borrowings in 2004 by approximately $4.3 million. This decline in
short-term borrowings was more than offset by the public fund repurchase
agreements established at the Affiliate Banks in 2004 as discussed above. In
2003, short-term borrowings averaged $4.7 million, down $761,000 from the
average in 2002. The decline in 2003 was largely the result of terminating the
repurchase agreements at Farmers Deposit Bank in an effort to reduce the size of
the bank.
Long-term borrowings consist of Federal Home Loan Bank (FHLB) borrowings
by Premier's banks, other borrowings by the parent holding company and debt
issued in the form of subordinated debentures to an unconsolidated trust
subsidiary. FHLB advances, on average, declined by 37.2% or $5.9 million in
2004, following a 20.0% or $4.0 million decrease in 2003. Premier uses fixed
rate FHLB advances from time-to-time to fund certain residential and commercial
loans as well to maximize investment opportunities as part of its interest rate
risk management. In 2003 and 2004, Premier elected not to renew most of its
maturing FHLB advances and prepaid a limited number of other FHLB advances in
order to reduce its outstanding debt. At December 31, 2004, FHLB advances
totaled $9.3 million and had repayment schedules from five to eight years. Other
borrowings, on average, declined by 36.5% or $3.0 million in 2004 and 21.8% or
$2.3 million in 2003 as the parent company began using available funds to
aggressively pay down its outstanding debt in late 2001. At December 31, 2004,
other borrowings totaled $800,000 with a scheduled maturity in 2005. Premier
fully repaid this borrowing in the first quarter of 2005. For more information
on other borrowings, see Note 11 to the consolidated financial statements.
PAYMENTS DUE ON CONTRACTUAL OBLIGATIONS
December 31, 2004
(In thousands)
Less More
than 1 1-3 3-5 than 5
Contractual Obligations Total Year Years Years Years
-------- -------- -------- -------- --------
FHLB Advances $ 9,288 $ 681 $ 1,471 $ 1,628 $ 5,508
Other borrowed funds 800 800 - - -
Notes payable 1,402 1,402 - - -
Guaranteed subordinated debentures 20,876 - - - 20,876
Operating Lease Obligations 245 97 142 6 -
-------- -------- -------- -------- --------
Total $ 32,611 $ 2,980 $ 1,613 $ 1,634 $ 26,384
======== ======== ======== ======== ========
On December 20, 2004, Premier entered into a sixty-three month contract
with Fiserv Solutions, Inc. (Fiserv) whereby Fiserve will provide data
processing and item processing services to Premier. Conversions by Premier's
subsidiary banks to Fiserv systems will begin on April 15, 2005 with a targeted
completion by June 30, 2005. Based upon statistical data provided to Fiserv by
Premier for proposal purposes, the estimated payments to Fiserv for these
services will be approximately $412,000 in 2005, and $708,000 per year beginning
in 2006. Actual results may vary depending upon the number and type of accounts
actually converted and future customer activity.
Premier's Trust Preferred Securities represent beneficial interests in
the assets of PFBI Capital Trust (NASDAQ/NMS-PFBIP). The trust holds $20.9
million of 9.75% Junior Subordinated Deferrable Interest Debentures
("Subordinated Debentures") due in 2027. This total is down from the $26.6
million outstanding at December 31, 2003 due to $5.7 million of early
redemptions during the fourth quarter of 2004. Quarterly cash distributions on
the Preferred Securities are made to the extent interest on the debentures is
received by the trust.
As previously disclosed, pursuant to an agreement entered into with the
Federal Reserve Bank of Cleveland on September 29, 2000, as superseded by an
agreement with the Federal Reserve Bank of Cleveland dated January 29, 2003,
Premier is required to request approval for the payment of distributions due on
the Trust Preferred Securities. During the quarter ended June 30, 2002, Premier
was notified by the Federal Reserve Bank of Cleveland that due to the
deterioration of core earnings of the Company, among other issues, the FRB would
not allow the payment of the distribution due June 30, 2002 on Premier's Trust
Preferred Securities. In response, Premier reached an agreement with the Federal
Reserve Bank of Cleveland whereby Premier's Chairman of the Board, who is also
its largest shareholder, agreed to loan the company the amount of the
distribution, $701,000, so that Premier, with the Federal Reserve Bank's
approval, could make the distribution. The loan is unsecured at a zero interest
rate with no defined maturity date. The loan cannot be repaid without the prior
approval of the Federal Reserve Bank. A similar agreement was reached for the
payment of the distribution due September 30, 2002. Premier's President and
Chief Executive Officer, who is also a director, agreed to loan the Company the
amount of the September 30 distribution, $701,000. This loan is also unsecured
at a zero interest rate with no defined maturity date. The loan also cannot be
repaid without the prior approval of the Federal Reserve Bank of Cleveland.
In December 2002, The Federal Reserve Bank of Cleveland ("FRB") denied
Premier's request to make the fourth quarter distribution. Accordingly, Premier
exercised its right to defer the payment of interest on the Subordinated
Debentures related to the Trust Preferred Securities for an indefinite period
(which can be no longer than 20 consecutive quarterly periods). Premier
continued to defer the payment of interest throughout 2003 and 2004. In the
first quarter of 2005, Premier sought and received approval from the FRB to make
the first quarter 2005 distribution and all nine previously deferred quarterly
distributions. During the deferral period, the deferred distributions also
accrued interest at an annual rate of 9.75%. This interest, the deferred
distributions, and the current quarterly distribution are all scheduled to be
paid on March 31, 2005 to holders of record on March 15, 2005. Although the FRB
approved the payment of the deferred and current distributions through March 31
,2005, Premier is still bound by the Written Agreement and will be required to
request the FRB's approval to pay future distributions. No assurance can be
given that the FRB will grant such approval.
As part of a Debt Reduction and Profitability plan presented on January
6, 2003 to the Federal Reserve Bank of Cleveland ("Federal Reserve"), Premier
requested and received approval from the Federal Reserve to redeem $3,000,000 of
the then outstanding $28,750,000 Trust Preferred Securities. The goal of the
redemption was to use a portion of Premier's cash on hand to reduce its total
interest cost and thus improve profitability. The redemption reduced Premier's
interest cost by approximately $292,000 per year. However, this benefit was
partially offset due to the interest accrued in 2003 on the deferred quarterly
distributions. In 2004, Premier requested and received approval from the Federal
Reserve to redeem $4.5 million of Trust Preferred Securities on October 15, 2004
and another $1.0 million on December 31, 2004. These two redemptions will reduce
Premier's future interest cost by approximately $536,000 per year. Future early
redemptions, if any, will also require Federal Reserve approval, pursuant to a
previously disclosed Written Agreement entered into with the Federal Reserve
Bank of Cleveland on January 29, 2003.
Asset/Liability Management and Market Risk
Asset/liability management is a means of maximizing net interest income
while minimizing interest rate risk by planning and controlling the mix and
maturities of interest related assets and liabilities. Premier has established
an Asset/Liability Management Committee (ALCO) for the purpose of monitoring and
managing interest rate risk and to evaluate investment portfolio strategies.
Interest rate risk is the earnings variation that could occur due to changes in
market interest rates. The Board of Directors has established policies to
monitor and limit exposure to interest rate risk. Premier monitors its interest
rate risk through the use of an earnings simulation model prepared by an
independent third party to analyze net interest income sensitivity.
The earnings simulation model uses assumptions, maturity patterns, and
reinvestment rates provided by Premier and forecasts the effect of instantaneous
movements in interest rates of both 100 (1.00%) and 200 (2.00%) basis points.
The most recent earnings simulation model projects net interest income would
increase by approximately 0.4% over the projected stable rate net interest
income if interest rates rise by 100 basis points over the next year.
Conversely, the simulation projects an approximate 0.9% decrease in net interest
income if interest rates fall by 100 basis points over the next year. Within the
same time frame, but assuming a 200 basis point movement in interest rates, the
simulation projects that net interest income would increase by 0.8% over the
projected stable rate net interest income in a rising rate scenario and would
decrease by 1.9% in a falling rate scenario. Under both the 100 and 200 basis
point simulations, the percentage changes in net interest income are within
Premier's ALCO guidelines.
Another measure of a company's interest sensitivity is the measure of
Economic Value at Risk (EVR). The EVR of a company's balance sheet at a given
point in time is the discounted present value of asset cash flows minus the
discounted present value of liability cash flows. Similar to net interest
income, EVR can be simulated assuming changes in market interest rates. The
resulting percentage change versus the stable rate EVR is an indication of the
longer term repricing risk imbedded in the balance sheet. At December 31, 2004,
a 200 basis point increase in rates is estimated to decrease Premier's EVR by
15.5% while a 200 basis point decrease would increase Premier's EVR by 25.7%.
The percentage changes in EVR for the 200 basis point decrease are outside
Premier's ALCO guidelines. However, the with market interest rates already at
relatively low levels, the likelihood of an additional 200 basis point decrease
is believed to be remote. Furthermore, the low interest rate environment in 2004
limits the change in the market value of liabilities in a declining rate
simulation because rates paid on liabilities cannot fall below zero.
The model simulation calculations of present value have certain
acceptable shortcomings. The discount rates and prepayment assumptions utilized
are based on estimated market interest rate levels for similar loans and
securities nationwide. The unique characteristics of Premier's loans and
securities may not necessarily parallel those assumed in the model simulations,
and therefore, actual results could likely result in different discount rates,
prepayment experiences and present values. The discount rates used for deposits
and borrowings are based upon available alternative types and sources of funds
which may not necessarily be indicative of the present value of Premier's
deposits and borrowings. Premier's deposits have customer relationship
advantages that are difficult to simulate. A higher or lower interest rate
environment will most likely result in different investment and borrowing
strategies by Premier which would be designed to further mitigate any negative
effects on the value of, and the net interest earnings generated on Premier's
net assets.
The following table presents summary information about the simulation
model's interest rate risk measures and results.
Year-End Year-End ALCO
2004 2003 Guidelines
-------- -------- ----------
Projected 1-Year Net Interest Income
-100 bp change vs. Base Rate -0.9% -1.5% 10%
+100 bp change vs. Base Rate 0.4% 1.0% 10%
Projected 1-Year Net Interest Income
-200 bp change vs. Base Rate -1.9% -2.9% 10%
+200 bp change vs. Base Rate 0.8% 2.0% 10%
Economic Value Change
-200 bp Change vs. Base Rate 25.7% 28.9% 20%
+200 bp Change vs. Base Rate -15.5% -16.3% 20%
The improvement in the 2004 simulated change in EVR for a 200 basis
point decline in interest rates is due to the current low interest rate
environment. The low interest rate environment in 2004 limits the change in the
market value of liabilities in a declining rate simulation because rates paid on
liabilities cannot fall below zero.
Liquidity
Liquidity is the ability to satisfy demands for deposit withdrawals,
lending commitments, and other corporate needs. Premier's liquidity is based on
the stable nature of consumer core deposits held by the banking subsidiaries.
Likewise, additional liquidity is available from holdings of investment
securities and short-term investments which can be readily converted into cash.
Furthermore, Premier's banks continue to have the ability to attract short-term
sources of funds such as federal funds and repurchase agreements.
Premier generated $11.5 million of cash from operations in 2004, which
compares to $12.2 million in 2003 and $10.3 million in 2002. These proceeds
along with the proceeds from the sale and maturity of securities and the
repayment of loans were used to purchase securities, satisfy deposit
withdrawals, and reduce outstanding debt during those years. Net cash provided
by liquidating investing activities totaled $7.5 million in 2004, $29.5 million
in 2003 and $5.3 million in 2002. Net cash used to satisfy deposit withdrawals
and reduce debt totaled $20.9 million in 2004, $39.5 million in 2003 and $17.4
million in 2002. Details on the sources and uses of cash can be found in the
Consolidated Statements of Cash Flows in the consolidated financial statements.
At December 31, 2004, the parent company had nearly $7.7 million in cash
held with its subsidiary banks. This balance along with cash dividends expected
to be received from its subsidiaries is sufficient to cover the operating costs
of the parent, service its existing other debt and to pay the deferred Trust
Preferred distributions approved by the Federal Reserve in the first quarter of
2005. During 2004, the parent company received $14.3 million from the sale of
its subsidiary, Citizens Bank and generated $2.3 million from operations.
Premier used a portion of these proceeds to complete the necessary capital
injections into Farmers Deposit Bank to maintain the Bank's capital ratios
required by the FDIC in accordance with the Order. Premier used a substantial
portion of the proceeds to reduce its borrowed funds and redeem a portion of the
Trust Preferred Securities outstanding. The remainder was held for future use.
Additional information on parent company cash flows and financial statements is
contained in Note 21 to the consolidated financial statements.
Capital Resources
Premier's consolidated average equity-to-asset ratio increased to 8.23%
during 2004, up from 7.87% in 2003 but down slightly from the 8.43% during 2002.
The ratios for all three years are considered adequate for a company of
Premier's size . The increase in 2004 was largely due to the decline in average
total assets due to the sale of Citizen's Bank Kentucky on July 1, 2004. The
decrease in 2003 was largely the result of the losses sustained during the year
resulting from the operations of Farmers Deposit Bank The Federal Reserve's
risk-based capital guidelines and leverage ratio measure the capital adequacy of
banking institutions. The risk-based capital guidelines weight balance sheet
assets and off-balance sheet commitments by prescribed factors relative to
credit risk, thus eliminating disincentives for holding low risk assets and
requiring more capital for holding higher risk assets. At year-end 2004,
Premier's risk adjusted capital-to-assets ratio was 18.9% compared to 14.8% at
December 31, 2003. Both of these ratios are well above the minimum level of 8.0%
prescribed for bank holding companies of Premier's size. The leverage ratio is a
measure of total tangible equity to total tangible assets. Premier's leverage
ratio at December 31, 2004 was 9.7% compared to 6.4% at December 31, 2003. Both
of these ratios are above the recommended 4.0% to 5.0% recommended by the
Federal Reserve. The increase in the 2004 ratios was the result of the increase
in total capital and decline in total assets resulting from the sale of Citizens
Bank, coupled with a decrease in disallowed deferred tax assets. In accordance
with Federal Reserve guidelines for all banks and bank holding companies,
deferred tax assets are subtracted from Premier's available total equity
("disallowed") if they generally cannot be realized through available tax
refunds in a next twelve month timeframe. Premier's capital ratios are the
direct result of management's desire to maintain a strong capital position.
Additional information on Premier's capital ratios and the capital ratios of its
larger banks may be found in Note 20 to the consolidated financial statements.
The primary source of funds for dividends paid by Premier to its
shareholders is the dividends received from its subsidiary banks. Banking
regulations limit the amount of dividends that may be paid without prior
approval of the regulatory agencies. Under these regulations, the amount of
dividends that may be paid without prior approval in any calendar year is
limited to the current year's net profits, as defined, combined with the
retained net profits of the preceding two years, subject to regulatory capital
requirements and additional restrictions more fully described in Note 20 to the
consolidated financial statements. During 2005, Premier's banks could, without
prior approval, declare and pay to Premier dividends of approximately $2.5
million plus any 2005 net profits retained through the date of declaration by
Ohio River Bank, Citizens Deposit Bank, Boone County Bank and First Central
Bank.
Additional information on the capital position of Premier is included in
the following table.
SELECTED CAPITAL INFORMATION
(Dollars in thousands)
As of December 31
2004 2003 Change
-------- -------- --------
Stockholders' Equity $ 51,029 $ 45,540 $ 5,489
Qualifying capital securities of subsidiary trust 17,185 14,953 2,232
Disallowed amounts of goodwill and other intangibles (15,816) (16,044) 228
Disallowed deferred tax assets (1,743) (4,248) 2,505
Unrealized loss (gains) on securities
available for sale 527 (681) 1,208
-------- -------- --------
Tier I capital $ 51,182 $ 39,520 $ 11,662
Tier II capital adjustments:
Qualifying capital securities of subsidiary trust 3,065 10,797
Allowable amount of the allowance for loan losses 3,916 4,790
-------- --------
Total capital $ 58,163 $ 55,107
======== ========
Total risk-weighted assets $307,805 $371,491
Ratios
Tier I capital to risk-weighted assets 16.63% 10.64%
Total capital to risk-weighted assets 18.90% 14.83%
Leverage at year-end 9.74% 6.42%
INCOME STATEMENT ANALYSIS
Net Interest Income
Net interest income, the amount by which interest generated from earning
assets exceeds the expense associated with funding those assets, is Premier's
most significant component of earnings. Net interest income on a fully tax-
equivalent basis was $18.3 million in 2004, down 6.9% from the amount earned in
2003 which follows a 8.1% decrease in 2003 from 2002. When net interest income
is presented on a fully tax-equivalent basis, interest income from tax-exempt
earning assets is increased by the amount equivalent to the federal income taxes
which would have been paid if this income were taxable at the statutory federal
tax rate of 34% for companies of Premier's size. The decrease in net interest
income in 2004 is largely due to a decrease in the volume of loans outstanding
coupled with a decline in loan interest income resulting from the high level of
non-accrual loans at Farmers Deposit. As shown in the Rate Volume Analysis table
below, decreases in the volume of earning assets (primarily loans) in 2004
reduced Premier's interest income by $1.8 million. This decrease was partially
offset by the lower volume of interest bearing liabilities in 2004 resulting in
a $1.3 million decline in interest expense. The net effect was to reduce net
interest income by $571,000 for the year. Similarly, the lower interest rate
environment in 2004, coupled with the decline in interest income for loans
placed on non-accrual resulted in reduced interest income of $2.0 million. This
decline was partially offset by reduced interest expense of $1.2 million which
resulted primarily from the lower interest rate environment and the resulting
lower rate paid on deposits. During the latter half of 2004, interest rates
began to rise, which resulted in increases in the interest paid on Premier's
long and short term borrowings. The overall effect of declining volumes and
declining rates was a decrease in net interest income of $1.3 million in 2004
when compared to 2003.
Similarly, in 2003, a reduction in Premier's volume of earning assets
reduced interest income by $1.9 million which was only partially offset by a
$1.5 million decrease in interest expense due to a lower volume of interest
bearing liabilities. The net result was a $429,000 decrease in net interest
income from volume activity. Likewise, in 2003, the declining interest rate
environment coupled with loan interest income reversals due to loans placed on
non-accrual reduced Premier's interest income by $4.8 million. This decline was
only partially offset by the decline in the rates paid on deposits in 2003. As a
result of the lower interest rate environment, Premier's interest expense
declined by $3.5 million in 2003 versus 2002. The overall effect of declining
volumes and declining rates was a decrease in net interest income of $1.7
million in 2003 when compared to 2002.
RATE VOLUME ANALYSIS OF CHANGES IN NET INTEREST INCOME
(Dollars in thousands on a taxable equivalent basis)
2004 vs 2003 2003 vs 2002
Increase (decrease) due to change in Increase (decrease) due to change in
Net Net
Volume Rate Change Volume Rate Change
--------- --------- --------- --------- --------- ---------
Interest Income*:
Loans $ (1,947) $ (1,704) $ (3,651) $ (2,443) $ (2,662) $ (5,105)
Investment securities 311 (401) (90) 297 (1,742) (1,445)
Federal funds sold (211) 122 (89) 249 (347) (98)
Deposits with banks 0 (1) (1) 0 (1) (1)
--------- --------- --------- --------- --------- ---------
Total interest income $ (1,847) $ (1,984) $ (3,831) $ (1,897) $ (4,752) $ (6,649)
--------- --------- --------- --------- --------- ---------
Interest Expense:
Deposits
NOW and money market $ (234) $ (521) $ (755) $ 192 $ (1,615) $ (1,423)
Savings 79 (339) (260) 78 (239) (161)
Certificates of deposit (517) (705) (1,222) (1,033) (2,044) (3,077)
Short-term borrowings 25 42 67 (12) (31) (43)
Other borrowings (143) 12 (131) (173) 140 (33)
FHLB borrowings (335) 65 (270) (223) 106 (117)
Debt (100) 181 81 (297) 233 (64)
--------- --------- --------- --------- --------- ---------
Total interest expense $ (1,225) $ (1,265) $ (2,490) $ (1,468) $ (3,450) $ (4,918)
--------- --------- --------- --------- --------- ---------
Net interest income* $ (622) $ (719) $ (1,341) $ (429) $ (1,302) $ (1,731)
========= ========= ========= ========= ========= =========
(*) Fully taxable equivalent using the rate of 34%.
Note - Changes to rate/volume are allocated to both rate and volume on a proportional dollar basis.
As net interest income dollars declined in 2004, Premier's net interest
margin also decreased. In 2004, the yield earned on investment securities
declined 23 basis points to 3.18% while the yield on the loan portfolio declined
50 basis points to 7.10%. The net result on all earning assets was to reduce the
yield 37 basis points to 5.60% in 2004, down from 5.97% earned in 2003 and 6.99%
earned in 2001. Similarly, in 2004 Premier reduced the average rate paid on its
deposits by 40 basis points by not renewing high rate certificates of deposit
and by keeping the rates paid on other deposit products competitive with
national and local market rates. As the interest rate began to increase late in
2004, the rates paid on Premier's variable rate borrowings also increased. The
rate paid on short-term borrowings increased 71 basis points to 1.80% and the
rate paid on other borrowings increased 13 basis points on average to 4.67%.
Furthermore, due to the interest required to be accrued on the deferred Trust
Preferred distributions, the effective rate on the outstanding principal balance
of the debt increased by 107 basis points to 11.30%. The rate increase is
magnified by the decline in the average balance outstanding due to Premier's
early redemptions in 2003 and 2004. The net result on all interest bearing
liabilities was to reduce the cost of funds 31 basis points to 2.32% in 2004,
down from 2.63% in 2003 and 3.49% in 2002. As a result Premier's net interest
spread decreased by only 6 basis points and its net interest margin decreased by
only 2 basis points to 3.61% in 2004, down from 3.63% in 2003 and 3.84% in 2002.
Further discussion of interest income is included in the section of this report
entitled "Balance Sheet Analysis."
Non-interest Income and Expense
Non-interest income has been and will continue to be an important factor
for improving profitability. Recognizing this importance, management continues
to evaluate areas where non-interest income can be enhanced. As shown in the
table of Non-interest Income and Expense below, total fees and other income
increased by 1.7% or $58,000 in 2004. The increase in 2004 is largely due to an
increase in service charges on deposit accounts, substantially offset by
declines in insurance commissions and other sources of non-interest income. In
2003, total fees and other income increased by 23.6% or $658,000 from 2002. The
increase in 2003 is also largely due to increases in service charges on deposit
accounts. Service charges on deposit accounts increased to $2,513,000 in 2004,
an increase of 16.0% or $346,000. This increase follows a 28.2% or $476,000
increase in 2003 over 2002. The increases are the result of changes in the way
Premier charges customers for over drawing their checking accounts and a general
increase in customers and activity. These increases were partially offset by
declining insurance commissions. Insurance commissions declined by 56.5% or
$70,000 in 2004 and 40.9% or $86,000 in 2003 largely due to lower new loan
generations resulting from lower loan demand and stiffer competition from larger
banks. Other income decreased 18.8% or $218,000 in 2004 from the high amount of
other income reported in 2003. This is primarily the result of a lower volume of
commissions from originating secondary market mortgage loans, lower data
processing revenue from non-affiliate banks, and a high level of 2003
collections of loans retained from the Bank of Mt. Vernon and Sabina Bank sales.
Other income increased by 30.2% or $268,000 in 2003. This is a result of
increases in various other sources of income such as debit card fees,
commissions from originating secondary market mortgage loans and collections of
loans retained from the Bank of Mt. Vernon and Sabina Bank sales.
In 2004, Premier realized $100,000 in net gains on securities sales.
These securities were sold as part of Premier's management of its
asset/liability position and to liquidate certain tax exempt investments in
order to generate future taxable income. In 2003, Premier realized $616,000 in
net gains on securities sales. Again, these securities were sold as part of
Premier's management of its asset/liability position and to liquidate the
tax-exempt investments at Farmers Deposit Bank in order to generate taxable
income in the future. In 2002, Premier realized $73,000 in net losses on
securities sales.
The following table is a summary of non-interest income and expense
for each of the years the three-year period ending December 31, 2004.
NON-INTEREST INCOME AND EXPENSE
(Dollars in thousands)
Increase (Decrease) Over Prior Year
2004 2003
---------------- ----------------
2004 2003 2002 Amount Pct Amount Pct
-------- -------- -------- ------- ----- ------- -----
Non-Interest Income:
Service charges on deposit accounts $ 2,513 $ 2,167 $ 1,691 $ 346 15.97 $ 476 28.15
Insurance income 54 124 210 (70) (56.45) (86) (40.95)
Other 939 1,157 889 (218) (18.84) 268 30.15
-------- -------- -------- ------- ----- ------- -----
Total fees and other income 3,506 3,448 2,790 $ 58 1.68 $ 658 23.58
Investment securities gains(losses) 100 616 (73) (516) - 689 -
-------- -------- -------- ------- ----- ------- -----
Total non-interest income $ 3,606 $ 4,064 $ 2,717 $ (458) (11.27) $ 1,347 49.58
======== ======== ======== ======= ===== ======= =====
Non-Interest Expense:
Salaries and wages $ 7,103 $ 6,768 $ 6,665 $ 335 4.95 $ 103 1.55
Employee benefits 1,633 1,955 2,251 (322) (16.47) (296) (13.15)
-------- -------- -------- ------- ----- ------- -----
Total staff costs 8,736 8,723 8,916 13 0.15 (193) (2.16)
-------- -------- -------- ------- ----- ------- -----
Occupancy and equipment expense 2,141 2,260 2,283 (119) (5.27) (23) (1.01)
Professional fees 2,271 1,338 1,086 933 69.73 252 23.20
Taxes, other than payroll, property
and income 589 534 688 55 10.30 (154) (24.38)
OREO losses and expenses (45) 540 1,160 (585) (108.33) (620) (53.45)
Bad check losses 94 461 29 (367) (79.61) 432 1489.66
Supplies 365 379 385 (14) (3.69) (6) (1.56)
Accelerated amortization of
Trust Preferred issuance costs 214 124 0 90 72.58 124 -
Other expenses 3,417 3,273 3,284 144 4.40 (11) (0.33)
-------- -------- -------- ------- ----- ------- -----
Total non-interest expenses $ 17,782 $ 17,632 $ 17,831 $ 150 0.85 $ (199) (1.12)
======== ======== ======== ======= ===== ======= =====
Just as management continues to evaluate areas where non-interest income
can be enhanced, it strives to find ways to improve the efficiency of its
operations and utilize the economies of scale of the consolidated entity to
reduce its operating costs. Premier's 2004 net overhead ratio, or non-interest
expense less non-interest income excluding securities transactions and other
similar non-operating transactions to average earning assets was 2.82%, an
increase from the 2.62% realized in 2003 and the 2.70% ratio realized in 2002.
While the 2004 ratio increased by 20 basis points, the actual dollars of net
overhead expense increased by only 0.7% or $95,000. The primary reason for the
increase in the net overhead ratio is the 6.1% decrease in average earning
assets without a corresponding decrease in operating costs. For the year 2004,
net overhead was $14.3 million, up $95,000 from the $14.2 million of 2003 net
overhead. The current year increase follows an $860,000 or 5.7% decrease in 2003
from the $15.0 million of net overhead in 2002.
Total non-interest expense in 2004 increased by $150,000, or 0.9% from
2003 as decreases in OREO losses, bad check losses and occupancy and equipment
expenses were essentially offset by increased professional fees, taxes not on
income and other operating expenses. This year's increase compares to a $199,000
or 1.1% decrease in 2003 versus 2002. The decrease in 2003 was generally the
result of decreases in staff costs, OREO losses and expenses and taxes not on
income which were only partially offset by increases in professional fees, bad
check losses and other expenses.
Staff costs increased by only $13,000 or 0.2% in 2004 versus 2003.
Increases in salaries and wages were essentially offset by reductions in medical
insurance and other benefit costs. In 2003, staff costs decreased by $193,000 or
2.2% compared to 2002. Likewise, increases in salaries and wages were more than
offset by reductions in medical insurance and other benefit costs. In the second
quarter of 2003, employees were required to contribute a percentage of the
overall medical insurance premium as Premier changed its benefit structure to be
more in-line with its competitors. The percentage of employee contribution was
phased in over the two year period.
Occupancy and equipment expenses decreased by $119,000 or 5.3% in 2004
as lower equipment depreciation and maintenance costs were complemented by lower
occupancy costs. In 2003, occupancy and equipment expenses decreased by $23,000
or 1.0% as decreases in equipment expenses were substantially offset by an
increase in occupancy costs.
Professional fees increased by $933,000 or 69.7% in 2004 versus 2003
primarily due to increased audit costs as well as legal fees and other
professional fees associated with Premier's investigation of Farmers Deposit
Bank and the related SEC investigation as disclosed in previous filings.
Professional fees increased by $252,000 or 23.2% in 2003 versus 2002. The
increase in 2003 was largely due to legal and audit costs related to the Farmers
Deposit Bank investigation.
Taxes not on income increased by $55,000 or 10.3% in 2004 versus 2003.
The increase in 2004 is due to an increase in franchise taxes imposed by the
states in which the Banks operate. Taxes not on income decreased by $154,000 or
22.4% in 2003 versus 2002 largely due to employment of tax saving strategies
resulting from the moving of the company headquarters to West Virginia.
OREO writedowns and expenses netted to a $45,000 benefit in 2004 as
Premier realized $123,000 of net profit from the disposition of OREO properties
in 2004. A majority of the gains on the disposition of OREO were on properties
from which no previous writedowns had occurred. This profit more than offset the
costs of maintaining the remaining OREO property held in 2004. The net benefit
in 2004 is a $585,000 decrease from the $540,000 of OREO writedowns and expenses
recorded in 2003. The decrease from 2003 follows a $620,000 or 53.5% decrease
from the $1.2 million of these expenses in 2002. The high level in 2002 was
largely due to writedowns of OREO property to net realizable values as
management emphasized efforts to liquidate the properties.
Bad check losses totaled $94,000 in 2004, a $367,000 decrease from the
$461,000 recorded in 2003. The 2003 losses were a $432,000 increase from the
$29,000 of bad check losses recorded in 2002. The increase in 2003 was primarily
the result of bad checks losses at Farmers Deposit Bank related to dishonored
checks discovered during investigation. The collection of these checks is still
being pursued by the bank.
Accelerated Trust Preferred issuance costs were recognized in 2003 and
2004. At the time of issuance, the costs to originate the Trust Preferred
Securities were capitalized. The costs are being amortized over the 30 year life
of the securities which mature in 2027 and are recorded as an adjustment to
interest expense. In March 2003, Premier redeemed $3.0 million of the Trust
Preferred Securities in accordance with the terms of the instrument. At that
time an amount of the remaining unamortized issuance costs proportional to the
$3.0 million of the then $28.8 million of Trust Preferred Securities outstanding
was expensed to non-interest expense. This amount totaled $124,000 in 2003.
Likewise, as a result of the $4.5 million early redemption on October 15, 2004
and the additional $1.0 million redeemed on December 31, 2004, Premier expensed
$214,000 of the issuance costs. Additional information on the Trust Preferred
Securities is contained in Note 12 to the consolidated financial statements.
Other expenses totaled $3.4 million in 2004, a 4.4% or $144,000 increase
from the $3.3 million recorded in 2003. The increase in 2004 is largely due to a
$165,000 writedown of the former headquarters of Premier located in Georgetown
Kentucky prior to its sale. Other operating expenses in 2003 were approximately
the same amount recorded in 2002.
An analysis of the allowance for loan losses and related provision for
loan losses is included in the Loan Portfolio section of the Balance Sheet
Analysis of this report.
Applicable Income Taxes
Premier recognized $899,000 of income tax expense related to continuing
operations. This amount compares to the $5.3 million income tax benefit
recognized in 2003 and the $1.5 million income tax benefit recognized in 2002.
The benefit in 2003 and 2002 was due to the pretax losses realized by Premier.
Premier's effective tax rate was 31.4% in 2004, down from the negative (35.5%)
in 2003 and the negative (40.8%) in 2002. Premier's effective tax rates in 2003
and 2002 were increased by the benefits of holding tax-exempt investments and
other tax saving instruments. These tax saving benefits helped to reduce
Premier's positive tax rate in 2004 to 31.4% from the 34.0% statutory rate.
Additional information regarding income taxes is contained in Note 13 to the
consolidated financial statements.
Effects of Changing Prices
The results of operations and financial condition presented in this
report are based on historical cost, unadjusted for the effects of inflation.
Inflation affects Premier in two ways. One is that inflation can result in
increased operating costs which must be absorbed or recovered through increased
prices for services. The second effect is on the purchasing power of the
corporation. Virtually all of a bank's assets and liabilities are monetary in
nature. Regardless of changes in prices, most assets and liabilities of the
banking subsidiaries will be converted into a fixed number of dollars. Non-
earning assets, such as premises and equipment, do not comprise a major portion
of Premier's assets; therefore, most assets are subject to repricing on a more
frequent basis than in other industries.
Premier's ability to offset the effects of inflation and potential
reductions in future purchasing power depends primarily on its ability to
maintain capital levels by adjusting prices for its services and to improve net
interest income by maintaining an effective asset/liability mix. Management's
efforts to meet these goals are described in other sections of this report.
SUMMARY RESULTS OF OPERATIONS
FOURTH QUARTER 2004
Income from continuing operations for the three months ended December
31, 2004 totaled $559,000, a $1.2 million improvement from the $596,000 loss
from continuing operations reported for the fourth quarter of 2003. On a per
share basis, Premier's income from continuing operations for the fourth quarter
of 2004 was 11 cents per share, compared to a loss of 11 cents per share for the
same quarter last year.
Net interest income totaled $4,802,000 for the fourth quarter of 2004,
an increase of $322,000 or 7.2% from the net interest income earned in the same
quarter of 2003. The increase is the result of lower interest expense on
deposits and borrowings, primarily due to lower outstanding balances of both.
The provision for loan losses was $355,000 in the fourth quarter of 2004, a
decrease of $1.8 million or 83.3% when compared to the fourth quarter of 2003.
The large provision in 2003 was primarily the result of additional credit risk
identified in the loan portfolio as a result of the on-going investigation at
Farmers Deposit Bank. Non-interest income excluding securities transactions
totaled $870,000 in the fourth quarter of 2004, a decrease of $105,000 or 10.8%
from the $975,000 in the fourth quarter of 2003. The decrease was largely due to
decreased insurance commissions, secondary market fees and other income.
Non-interest expense totaled $4,584,000 in the fourth quarter of 2004, a
$108,000 or 2.3% decrease from the $4,692,000 reported for the fourth quarter of
2002. Increases in staff costs, professional fees and accelerated amortization
of trust preferred issuance costs were more than offset by lower OREO expenses
and writedowns, bad check losses, and collection expense. Additional quarterly
financial data is provided in Note 21 to the consolidated financial statements.
ADOPTION OF NEW ACCOUNTING STANDARDS
Recently Issued Accounting Standards Not Yet Adopted - FAS 123, Revised,
requires all public companies to record compensation cost for stock options
provided to employees in return for employee service. As discussed in the Stock
Compensation Expense disclosure above, the cost of stock options is measured at
the fair value of the options when granted. This cost will be required to be
expensed over the employee service period, which is normally the vesting period
of the options. This Standard will apply to stock option awards granted or
modified after the first quarter or year following June 15, 2005. Compensation
cost will also be recorded for options already granted that have a vesting
period beyond the date of adoption. The effect on results of operations will
depend on the level of future option grants and the calculation of the fair
value of the options granted. The effect of existing options that will continue
to vest after the adoption date is anticipated to be immaterial. There will also
be no significant effect on the financial position of the Company as total
equity will not change as a result of the required recording of compensation
cost.
Item 8. Financial Statements and Supplementary Data
- ----------------------------------------------------
The Company's Financial Statements and related Independent Auditors'
Report are presented in the following pages. The financial statements filed in
this Item 8 are as follows:
Report of Independent Registered Public Accounting Firm
Financial Statements:
Consolidated Balance Sheets - December 31, 2004 and 2003
Consolidated Statements of Operations - Years Ended December 31, 2004,
2003, and 2002
Consolidated Statements of Comprehensive Income - Years Ended
December 31, 2004, 2003, and 2002
Consolidated Statements of Changes in Stockholders' Equity - Years
ended December 31, 2004, 2003, and 2002
Consolidated Statements of Cash Flows - Years ended December 31, 2004,
2003, and 2002
Notes to Consolidated Financial Statements
PREMIER FINANCIAL BANCORP, INC.
CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004, 2003 and 2002
REPORT OF INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM
Board of Directors
Premier Financial Bancorp, Inc.
Huntington, West Virginia
We have audited the accompanying consolidated balance sheets of Premier
Financial Bancorp, Inc. as of December 31, 2004 and 2003, and the related
consolidated statements of operations, comprehensive income, changes in
stockholders' equity, and cash flows for each of the three years in the period
ended December 31, 2004. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Premier Financial
Bancorp, Inc. as of December 31, 2004 and 2003, and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 2004, in conformity with U.S. generally accepted accounting
principles.
Crowe Chizek and Company LLC
Columbus, Ohio
March 23, 2005
PREMIER FINANCIAL BANCORP, INC.
CONSOLIDATED BALANCE SHEETS
December 31, 2004 and 2003
(In Thousands, Except Per Share Data)
- --------------------------------------------------------------------------------
2004 2003
---------- ----------
ASSETS
Cash and due from banks $ 14,474 $ 16,422
Federal funds sold 17,342 17,051
Securities available for sale 153,892 147,646
Loans 324,927 331,794
Allowance for loan losses (9,384) (14,300)
---------- ----------
Net loans 315,543 317,494
Federal Home Loan Bank and
Federal Reserve Bank stock 2,611 2,490
Premises and equipment, net 7,257 7,956
Real estate and other property acquired
through foreclosure 2,247 3,187
Interest receivable 2,740 3,448
Goodwill 15,816 15,816
Current year tax receivable 597 3,695
Other assets 4,736 8,024
Assets of discontinued operation - 79,163
---------- ----------
Total assets $ 537,255 $ 622,392
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits
Non-interest bearing $ 68,380 $ 59,001
Time deposits, $100,000 and over 40,213 42,780
Other interest bearing 329,205 353,693
---------- ----------
Total deposits 437,798 455,474
Federal funds purchased 1,838 -
Securities sold under
agreements to repurchase 7,208 -
Federal Home Loan Bank advances 9,288 10,705
Other borrowed funds 800 6,200
Notes payable 1,402 1,402
Guaranteed junior subordinated
interest debentures 20,876 26,546
Interest payable 5,532 3,902
Other liabilities 1,484 1,227
Liabilities of discontinued operation - 71,396
---------- ----------
Total liabilities 486,226 576,852
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
Additional paid in capital 43,445 43,445
Retained earnings 7,008 311
Accumulated other comprehensive income (loss) (527) 681
---------- ----------
Total stockholders' equity 51,029 45,540
---------- ----------
Total liabilities and stockholders' equity $ 537,255 $ 622,392
========== ==========
- --------------------------------------------------------------------------------
See accompanying notes.
PREMIER FINANCIAL BANCORP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended December 31
(In Thousands, Except Per Share Data)
- --------------------------------------------------------------------------------
2004 2003 2002
----------- ----------- -----------
Interest income
Loans, including fees $ 23,073 $ 26,731 $ 31,835
Securities -
Taxable 4,444 3,871 5,086
Tax-exempt 217 651 807
Federal funds sold 380 469 567
Other interest income 7 7 8
----------- ----------- -----------
Total interest income 28,121 31,729 38,303
Interest expense
Deposits 6,267 8,503 13,164
Other borrowings 922 1,256 1,449
Debentures 2,868 2,788 2,852
----------- ----------- -----------
Total interest expense 10,057 12,547 17,465
----------- ----------- -----------
Net interest income 18,064 19,182 20,838
Provision for loan losses 1,026 20,513 9,453
----------- ----------- -----------
Net interest income after provision for loan losses 17,038 (1,331) 11,385
Non-interest income
Service charges 2,513 2,167 1,691
Insurance commissions 54 124 210
Securities gains (losses) 100 616 (73)
Other income 939 1,157 889
----------- ----------- -----------
3,606 4,064 2,717
Non-interest expenses
Salaries and employee benefits 8,736 8,723 8,916
Occupancy and equipment expenses 2,141 2,260 2,283
Professional fees 2,271 1,338 1,086
Taxes, other than payroll, property and income 589 534 688
Write-downs, expenses, sales of other real estate owned (45) 540 1,160
Supplies 365 379 385
Bad check losses 94 461 29
Other expenses 3,631 3,397 3,284
----------- ----------- -----------
17,782 17,632 17,831
Income (loss) from continuing operations
before income taxes 2,862 (14,899) (3,729)
Provision (benefit) for income taxes 899 (5,282) (1,522)
----------- ----------- -----------
Income (loss) from continuing operations 1,963 (9,617) (2,207)
----------- ----------- -----------
Discontinued operations
Income (loss) from operations of discontinued component 4 (127) (1,722)
Gain on sale of discontinued component 6,664 - -
Provision (benefit) for income taxes 1,934 (47) (592)
----------- ----------- -----------
Income (loss) from discontinued operations 4,734 (80) (1,130)
----------- ----------- -----------
Net (loss) income $ 6,697 $ (9,697) $ (3,337)
=========== =========== ===========
- --------------------------------------------------------------------------------
See accompanying notes.
PREMIER FINANCIAL BANCORP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS (Continued)
Years Ended December 31
(In Thousands, Except Per Share Data)
- --------------------------------------------------------------------------------
2004 2003 2002
----------- ----------- -----------
Weighted average common shares outstanding:
Basic 5,232 5,232 5,232
Diluted 5,237 5,232 5,232
Earnings (loss) per share from continuing operations:
Basic and diluted $ 0.37 $ (1.84) $ (0.42)
Earnings (loss) per share from discontinued operations:
Basic and diluted $ 0.90 $ (0.01) $ (0.22)
Net earnings (loss) per share:
Basic and diluted $ 1.28 $ (1.85) $ (0.64)
- --------------------------------------------------------------------------------
See accompanying notes.
PREMIER FINANCIAL BANCORP, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Years Ended December 31
(In Thousands, Except Per Share Data)
- --------------------------------------------------------------------------------
2004 2003 2002
----------- ----------- -----------
Net income (loss) $ 6,697 $ (9,697) $ (3,337)
Other comprehensive income (loss):
Unrealized gains and (losses) on securities
arising during the period (1,730) (726) 1,032
Reclassification of realized amount (including
from discontinued operations) (100) (618) 45
----------- ----------- -----------
Net change in unrealized gain (loss) on
securities (1,830) (1,344) 1,077
Less: Tax impact (622) (457) 366
----------- ----------- -----------
Other comprehensive income (loss) (1,208) (887) 711
----------- ----------- -----------
Comprehensive income (loss) $ 5,489 $ (10,584) $ (2,626)
=========== =========== ===========
- --------------------------------------------------------------------------------
See accompanying notes.
PREMIER FINANCIAL BANCORP, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Years Ended December 31, 2004, 2003 and 2002
(In Thousands, Except Per Share Data)
- --------------------------------------------------------------------------------
Accumulated
Additional Other
Common Paid-in Retained Comprehensive
Stock Capital Earnings Income (Loss) Total
Balances, January 1, 2002 $ 1,103 $ 43,445 $ 13,345 $ 857 $ 58,750
Net change in unrealized gains (losses)
on securities available for sale - - - 711 711
Net loss - - (3,337) - (3,337)
-------- --------- --------- ---------- ----------
Balances, December 31, 2002 1,103 43,445 10,008 1,568 56,124
Net change in unrealized gains (losses)
on securities available for sale - - - (887) (887)
Net loss - - (9,697) - (9,697)
-------- --------- --------- ---------- ----------
Balances, December 31, 2003 1,103 43,445 311 681 45,540
Net change in unrealized gains (losses)
on securities available for sale (1,208) (1,208)
Net income - - 6,697 6,697
-------- --------- --------- ---------- ----------
Balances, December 31, 2004 $ 1,103 $ 43,445 $ 7,008 $ (527) $ 51,029
======== ========= ========= ========== ==========
- --------------------------------------------------------------------------------
See accompanying notes.
PREMIER FINANCIAL BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31
(In Thousands)
- --------------------------------------------------------------------------------
2004 2003 2002
------------ ----------- -----------
Cash flows from continuing operating activities
Net income (loss) from continuing operations $ 1,963 $ (9,617) $ (2,207)
Adjustments to reconcile net income (loss)
to net cash from continuing operating activities
Depreciation 904 989 1,090
Provision for loan losses 1,026 20,513 9,453
Amortization, net 496 567 303
FHLB stock dividends (90) (139) (162)
Losses (gains) on other real estate owned (123) 466 1,037
Securities (gains) losses, net (100) (616) 73
Changes in
Interest receivable 708 1,806 1,263
Deferred income taxes 3,351 (1,693) (1,329)
Other assets 1,757 (2,862) 870
Interest payable 1,630 2,347 135
Other liabilities (20) 398 (229)
------------ ----------- -----------
Net cash from continuing operating activities 11,502 12,159 10,297
Cash flows from continuing investing activities
Purchases of securities available for sale (76,861) (141,891) (128,956)
Proceeds from sales of securities available for sale 1,911 21,926 5,814
Proceeds from maturities, paydowns and
calls of securities available for sale 66,675 115,770 126,679
Purchases of FHLB stock (31) (76) (50)
Redemption of FHLB stock - 1,542 104
Proceeds from sale of subsidiary 14,311 - -
Net change in federal funds sold (291) 7,696 (3,280)
Net change in loans 311 22,788 2,859
Purchases of loan participations from other banks (2,943) - -
Payments on loan participations with other banks 10 - -
Purchases of premises and equipment (205) (473) (742)
Proceeds from sale of other real estate acquired
through foreclosure 4,610 2,190 2,822
------------ ----------- -----------
Net cash from continuing investing activities 7,497 29,472 5,250
- --------------------------------------------------------------------------------
See accompanying notes.
PREMIER FINANCIAL BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
Years Ended December 31
(In Thousands)
- --------------------------------------------------------------------------------
2004 2003 2002
------------ ----------- -----------
Cash flows from continuing financing activities
Net change in deposits $ (17,676) $ (22,250) $ (6,267)
Advances from Federal Home Loan Bank - 2,750 14,420
Repayment of Federal Home Loan Bank advances (1,417) (10,288) (21,646)
Early redemption of debentures, net (5,500) (3,000) -
Repayment of other borrowed funds (5,400) (1,500) (5,300)
Proceeds from notes payable - - 1,402
Net change in federal funds purchased 1,838 - -
Net change in agreements to repurchase securities 7,208 (5,255) -
------------ ------------ -----------
Net cash used in continuing financing activities (20,947) (39,543) (17,391)
------------- ------------ -----------
Net change in cash and cash equivalents
from continuing activities (1,948) 2,088 (1,844)
Cash and cash equivalents of continuing operations
at beginning of year 16,422 14,334 16,178
------------ ----------- -----------
Cash and cash equivalents of continuing operations
at end of year $ 14,474 $ 16,422 $ 14,334
============ =========== ===========
Supplemental disclosures of cash flow information:
Cash paid during the year for -
Interest $ 8,427 $ 10,201 $ 17,314
Income taxes paid (refunded) (3,946) (549) (280)
Loans transferred to real estate acquired
through foreclosure $ 3,547 $ 2,338 $ 1,856
Net change in cash and cash equivalents of
discontinued operations $ (5,306) $ 1,596 $ (740)
- --------------------------------------------------------------------------------
See accompanying notes.
PREMIER FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004, 2003 and 2002
- --------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The consolidated financial statements include the accounts of Premier Financial
Bancorp, Inc. (the Company) and its wholly-owned subsidiaries:
Unaudited
--------------------------------------
December 31, 2004
Year Net Income
Acquired Assets (Loss)
-------- ------ ----
(In Thousands)
Citizens Deposit Bank & Trust ** Vanceburg, Kentucky 1991 $ 90,154 $ 1,364
Bank of Germantown ** Germantown, Kentucky 1992 22,868 196
Farmers Deposit Bank Eminence, Kentucky 1996 91,605 (250)
Ohio River Bank Ironton, Ohio 1998 80,685 876
First Central Bank, Inc. Philippi, West Virginia 1998 89,940 1,120
Boone County Bank, Inc. Madison, West Virginia 1998 158,412 2,114
Mt. Vernon Financial Holdings, Inc. Huntington, West Virginia 1999 2,974 179
** Bank of Germantown merged into Citizens Deposit Bank & Trust on January 3, 2005.
The Company also has a data processing subsidiary, Premier Data Services, Inc.
All material intercompany transactions and balances have been eliminated.
Nature of Operations: The subsidiary banks (Banks) operate under state bank
charters and provide traditional banking services, including trust services, to
customers primarily located in the counties and adjoining counties in Kentucky,
Ohio, and West Virginia in which the Banks operate. Chartered as state banks,
the Banks are subject to regulation by their respective state banking regulators
and the Federal Deposit Insurance Corporation (FDIC) or the Federal Reserve Bank
for member banks. The Company is also subject to regulation by the Federal
Reserve Bank.
Estimates in the Financial Statements: The preparation of financial statements
in conformity with accounting principles generally accepted in the United States
of America requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities, disclosure of contingent assets and
liabilities at the date of the financial statements, and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates. The allowance for loan losses, the identification and
evaluation of impaired loans, impairment of goodwill, realizability of deferred
tax assets, and fair values of financial instruments are particularly subject to
change.
- --------------------------------------------------------------------------------
(Continued)
PREMIER FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004, 2003 and 2002
- --------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Cash Flows: For purposes of reporting cash flows, cash and cash equivalents
include cash on hand, amounts due from banks and interest-earning balances with
banks with an original maturity less than ninety days. Net cash flows are
reported for loans, federal funds sold, deposits, and other borrowing
transactions.
Securities: The Company classifies its securities portfolio as either securities
available for sale or securities held to maturity. Securities held to maturity
are carried at amortized cost.
Securities available for sale are carried at fair value. Adjustments from
amortized cost to fair value are recorded in stockholders' equity, net of
related income tax, under accumulated other comprehensive income on securities
available for sale. Other securities such as Federal Home Loan Bank stock are
carried at cost.
Interest income includes amortization of purchase premium or discount computed
using the level yield method. Gains or losses on dispositions are based on the
net proceeds and adjusted carrying amount of the securities sold using the
specific identification method. Securities are written down to fair value when a
decline in fair value is not temporary.
Loans: Net loans are stated at the amount of unpaid principal, reduced by
unearned income and an allowance for loan losses. Interest income on loans is
recognized on the accrual basis except for those loans in a non-accrual of
income status. The accrual of interest on impaired loans is discontinued when
management believes, after consideration of economic and business conditions and
collection efforts, that the borrowers' financial condition is such that
collection of interest is doubtful.
All interest accrued but not received for loans placed on nonaccrual is reversed
against interest income. Interest received on such loans is accounted for on the
cash-basis or cost-recovery method, until qualifying for return to accrual.
Loans are returned to accrual status when all the principal and interest amounts
contractually due are brought current and future payments are reasonably
assured.
The allowance for loan losses is a valuation allowance for probable incurred
credit losses increased by a provision for loan losses charged to expense. The
allowance is an amount that management believes will be adequate to absorb
probable incurred losses on existing loans based on evaluations of the
collectibility of loans and prior loan loss experience. The evaluations take
into consideration such factors as changes in the nature and volume of the loan
portfolio, overall portfolio quality, review of specific problem loans, and
current economic conditions that may affect the borrowers' ability to pay. Loans
are charged against the allowance for loan losses when management believes that
the collection of principal is unlikely. Subsequent recoveries, if any, are
credited to the allowance.
- --------------------------------------------------------------------------------
(Continued)
PREMIER FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004, 2003 and 2002
- --------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
A loan is impaired when full payment under the loan terms is not expected.
Impairment is evaluated in total for smaller-balance loans of similar nature
such as residential mortgage, consumer, and credit card loans, and on an
individual loan basis for other loans. If a loan is impaired, a portion of the
allowance is allocated so that the loan is reported, net, at the present value
of estimated future cash flows using the loan's existing rate or at the fair
value of collateral if repayment is expected solely from the collateral.
Premises and Equipment: Land is carried at cost. Premises and equipment are
stated at cost less accumulated depreciation. Depreciation is recorded
principally by the straight-line method with useful lives ranging from 7 to 40
years for premises and from 3 to 15 years for equipment.
Real Estate Acquired Through Foreclosure: Real estate acquired through
foreclosure is carried at the lower of the recorded investment in the property
or its fair value. The value of the underlying loan is written down to the fair
value of the real estate to be acquired by a charge to the allowance for loan
losses, if necessary. Any subsequent write-downs are charged to operating
expenses. Certain parcels of real estate are being leased to third parties to
offset holding period costs. Operating expenses of such properties, net of
related income, and gains and losses on their disposition are included in other
expenses.
Long-term Assets: Premises and equipment and other long-term assets are reviewed
for impairment when events indicate that the carrying amount may not be
recoverable from future undiscounted cash flows. If impaired, the assets are
recorded at fair value.
Repurchase Agreements: Substantially all repurchase agreement liabilities
represent amounts advanced by various customers. Securities are pledged to cover
these liabilities, which are not covered by federal deposit insurance.
Goodwill: Goodwill results from prior business acquisitions and represents the
excess of the purchase price over the fair value of acquired tangible assets and
liabilities and identifiable intangible assets. Goodwill is assessed at least
annually for impairment and any such impairment will be recognized in the period
identified. Impairment is evaluated using the aggregate of all banking
operations. To evaluate impairment, management uses pricing valuation factors
such as price-to-total assets and price-to-total deposits from databases of
actual peer group bank sales. These valuation factors are applied to the
comparable factors of the Company's aggregate banking operations to arrive at
estimated fair value. The Company does not have any identifiable intangible
assets such as core deposit intangibles.
- --------------------------------------------------------------------------------
(Continued)
PREMIER FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004, 2003 and 2002
- --------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Stock Compensation: Employee compensation expense under stock options is
reported using the intrinsic value method. No stock-based compensation cost is
reflected in net income, as all options granted had an exercise price equal to
or greater than the market price of the underlying common stock at the date of
grant. The following table illustrates the effect on net income and earnings per
share if expense was measured using the fair value recognition provisions of
FASB Statement No. 123, Accounting for Stock-Based Compensation.
2004 2003 2002
-------- -------- --------
Income (loss) from continuing operations $ 1,963 $ (9,617) $ (2,207)
Deduct: Stock-based compensation
expense determined under fair
value based method (33) (18) 98
-------- -------- --------
Pro forma income (loss) $ 1,930 $ (9,635) $ (2,109)
Basic earnings (loss) per share
from continuing operations $ 0.37 $ (1.84) $ (0.42)
Pro forma basic earnings (loss) per share 0.37 (1.84) (0.40)
Diluted earnings (loss) per share
from continuing operations $ 0.37 $ (1.84) $ (0.42)
Pro forma diluted earnings (loss) per share 0.37 (1.84) (0.40)
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 the three-year vesting period for each of these grants.
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
December 31, 2004, 2003 and 2002
- --------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
The pro forma effects are computed using option pricing models, using the
following weighted-average assumptions as of grant date.
2004 2003 2002
---- ---- ----
Risk-free interest rate 3.15% 3.10% -
Expected option life (yrs) 5.00 5.00 -
Expected stock price volatility 0.25 0.42 -
Dividend yield 0.00% 0.00% -
Weighted average fair value of
options granted during the year $2.64 $3.30 -
Income Taxes: Income tax expense is the total of the current year income tax due
or refundable and the change in deferred tax assets and liabilities. Deferred
tax assets and liabilities are the expected future tax amounts for the temporary
differences between carrying amounts and tax bases of assets and liabilities,
computed using enacted tax rates. A valuation allowance, if needed, reduces
deferred tax assets to the amount expected to be realized.
Off Balance Sheet Financial Instruments: Financial instruments include
off-balance sheet credit instruments, such as commitments to make loans and
standby letters of credit, issued to meet customer financing needs. The face
amount for these items represents the exposure to loss, before considering
customer collateral or ability to repay. Such financial instruments are recorded
when they are funded.
Earnings Per Common Share: Basic earnings per common share is net income divided
by the weighted average number of common shares outstanding during the period.
Diluted earnings per common share includes the dilutive effect of additional
potential common shares issuable under stock options. Earnings and dividends per
share are restated for all stock splits and dividends through the date of
issuance of the financial statements.
Comprehensive Income: Comprehensive income consists of net income and other
comprehensive income. Other comprehensive income includes unrealized gains and
losses on securities available for sale which are also recognized as a separate
component of equity.
Fair Value of Financial Instruments: Fair values of financial instruments are
estimated using relevant market information and other assumptions, as more fully
disclosed in a separate note. Fair value estimates involve uncertainties and
matters of significant judgment regarding interest rates, credit risk,
prepayments, and other factors, especially in the absence of broad markets for
particular items. Changes in assumptions or in market conditions could
significantly affect the estimates.
- --------------------------------------------------------------------------------
(Continued)
PREMIER FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004, 2003 and 2002
- --------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Business Segments: All of the Company's operations are considered by management
to be aggregated into one reportable operating segment.
Reclassifications: Some items in the prior year financial statements were
reclassified to conform to the current presentation.
Recently Issued Accounting Standards Not Yet Adopted: FAS 123, Revised, requires
all public companies to record compensation cost for stock options provided to
employees in return for employee service. As discussed in the Stock Compensation
Expense disclosure above, the cost of stock options is measured at the fair
value of the options when granted. This cost will be required to be expensed
over the employee service period, which is normally the vesting period of the
options. This Standard will apply to stock option awards granted or modified
after the first quarter or year following June 15, 2005. Compensation cost will
also be recorded for options already granted that have a vesting period beyond
the date of adoption. The effect on results of operations will depend on the
level of future option grants and the calculation of the fair value of the
options granted. The effect of existing options that will continue to vest after
the adoption date is anticipated to be immaterial. There will also be no
significant effect on the financial position of the Company as total equity will
not change as a result of the required recording of compensation cost.
NOTE 2 - DISCONTINUED OPERATIONS
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. The sale was completed on July 1, 2004 and
resulted in a gain of $6,664,000. 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."
- --------------------------------------------------------------------------------
(Continued)
PREMIER FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004, 2003 and 2002
- --------------------------------------------------------------------------------
NOTE 2 - DISCONTINUED OPERATIONS (Continued)
A condensed balance sheet and statement of operations for Citizens Bank follows
(in thousands):
As of
June 30 December 31
2004 2003
----------- -----------
(unaudited)
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 six months For the years ended
ended June 30 December 31
2004 2003 2002
--------- --------- ---------
(unaudited)
Interest income $ 2,021 $ 4,643 $ 5,927
Interest expense 732 1,873 2,701
--------- --------- ---------
Net interest income 1,289 2,770 3,226
Provision for loan losses - 240 2,324
Non-interest income 434 938 836
Non-interest expense 1,718 3,595 3,460
Income tax (benefit) (1) 47) (592)
--------- --------- ----------
Net income (loss) $ 4 $ (80) $ (1,130)
========= ========= ==========
- --------------------------------------------------------------------------------
(Continued)
PREMIER FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004, 2003 and 2002
- --------------------------------------------------------------------------------
NOTE 2 - DISCONTINUED OPERATIONS (Continued)
Activity in the allowance for loan losses for Citizens Bank follows (in
thousands):
2004 2003 2002
--------- --------- ---------
Balance, beginning of year $ 2,164 $ 2,685 $ 1,575
Loans charged off (283) (1,012) (1,520)
Recoveries 124 251 306
Provision for loan losses - 240 2,324
Sale of subsidiary (2,005) - -
--------- --------- ---------
Balance, end of year $ - $ 2,164 $ 2,685
========= ========= =========
Nonperforming loans of Citizens Bank at year end were as follows (in thousands):
2003 2002
--------- ---------
Loans past due over 90
days still on accrual $ - $ 161
Nonaccrual loans 2,399 4,320
Restructured loans 46 164
- --------------------------------------------------------------------------------
(Continued)
PREMIER FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004, 2003 and 2002
- --------------------------------------------------------------------------------
NOTE 3 - REGULATORY MATTERS
On September 29, 2000, the Company entered into an agreement with the Federal
Reserve Bank (FRB) that prohibits the Company from paying dividends or incurring
any additional debt without the prior written approval of the FRB. Additionally,
the agreement 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 FRB which supersedes and rescinds all previous agreements between the
Company and the FRB. Among the provisions of the agreement was the continuation
of the restriction on the Company's payment of dividends on its common stock
without the express written consent of the FRB and the continuation of the
restriction on the Company's payment of quarterly distributions on its Trust
Preferred Securities without the express written consent of the FRB. Among other
provisions, the agreement required(s) 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 monitored by a committee
consisting of three of its outside directors. As of December 31, 2004,
management believes the Company is operating in compliance with the provisions
of the written agreement.
Two of the Company's subsidiaries, Citizens Deposit Bank & Trust and the Bank of
Germantown, entered into similar agreements with their respective primary
regulators which, among other things, prohibited the payment of dividends
without prior written approval and required significant changes in their credit
administration policies. The banks fully complied with the terms of the
agreements in 2004 and, accordingly, the agreement with the Bank of Germantown
was terminated in August 2004 and the agreement with Citizens Deposit Bank &
Trust was terminated in October 2004.
The Securities and Exchange Commission ("SEC") is investigating the information
disclosed in Premier's June 16 and July 31, 2003 Forms 8-K and the June 30, and
September 30, 2003 Forms 10-Q regarding Farmers Deposit Bank and has requested
information about Premier's investigation. Premier is cooperating with the SEC.
- --------------------------------------------------------------------------------
(Continued)
PREMIER FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004, 2003 and 2002
- --------------------------------------------------------------------------------
NOTE 3 - 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 Department of
Financial Institutions (KDFI) [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 notice of the Order to shareholders. The Bank is
required to provide quarterly progress updates to the Supervisory Authorities.
- --------------------------------------------------------------------------------
(Continued)
PREMIER FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004, 2003 and 2002
- --------------------------------------------------------------------------------
NOTE 3 - 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 (see Note 20). The
Company also submitted to the Supervisory Authorities a written capital
restoration plan that incrementally increased the Bank's Tier I Leverage Ratio
to 8.00% by December 31, 2004 as required. The Company met all of the targets
specified in the capital restoration plan and at December 31, 2004, the Tier I
Leverage Ratio of the Bank was 9.45%. The Company also believes the Bank is in
compliance with all of the other provisions of the Order.
NOTE 4 - RESTRICTIONS ON CASH AND DUE FROM BANKS
Included in cash and due from banks are certain non-interest bearing deposits
that are held at the Federal Reserve or maintained in vault cash in accordance
with average balance requirements specified by the Federal Reserve Board of
Governors. The balance requirement at December 31, 2004 and 2003 was $3.0
million and $2.6 million.
NOTE 5 -SECURITIES
The amortized cost and fair value of securities available for sale and the
related gross unrealized gains and losses recognized in accumulated other
comprehensive income (loss) were as follows (in thousands):
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
2004
U. S. Treasury securities $ 250 $ - $ - $ 250
U. S. agency securities 116,427 127 (1,040) 115,514
Obligations of states and political
subdivisions 2,661 90 - 2,751
Mortgage-backed securities 34,921 171 (150) 34,942
Corporate securities 428 7 - 435
----------- -------- --------- -----------
Total available for sale $ 154,687 $ 395 $ (1,190) $ 153,892
=========== ======== ========== ===========
2003
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
=========== ======== ========= ===========
- --------------------------------------------------------------------------------
(Continued)
PREMIER FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004, 2003 and 2002
- --------------------------------------------------------------------------------
NOTE 5 -SECURITIES (Continued)
The amortized cost and fair value of securities at December 31, 2004 by
contractual maturity are shown below. Expected maturities will differ from
contractual maturities because borrowers may have the right to call or prepay
obligations with or without call or prepayment penalties.
Amortized Fair
Cost Value
----------- -----------
(In Thousands)
Available for sale
Due in one year or less $ 25,588 $ 25,512
Due after one year through five years 93,622 92,867
Due after five years through ten years 391 406
Due after ten years 165 165
Mortgage-backed securities 34,921 34,942
----------- -----------
Total available for sale $ 154,687 $ 153,892
=========== ===========
Proceeds from sales of securities during 2004, 2003 and 2002 were $1.9 million,
$21.9 million and $5.8 million. Gross gains of $101,000, $653,000 and $40,000,
and gross losses of $1,000, $37,000 and $113,000 were realized on those sales.
Securities with an approximate carrying value of $78.3 million and $76.1 million
at December 31, 2004 and 2003 were pledged to secure public deposits, trust
funds, securities sold under agreements to repurchase and for other purposes as
required or permitted by law.
Securities with unrealized losses at year-end 2004, aggregated by investment
category and length of time that individual securities have been in a continuous
unrealized loss position, are as follows:
Less than 12 Months 12 Months or More Total
------------------- ----------------- -----
Fair Unrealized Fair Unrealized Fair Unrealized
Description of Securities Value Loss Value Loss Value Loss
- ------------------------- ----- ---- ----- ---- ----- ----
U.S. agency securities $ 93,557 $ (959) $ 3,928 $ (82) $ 97,485 $(1,040)
Mortgage-backed securities 13,099 (54) 5,284 (96) 18,383 (150)
---------- -------- -------- ------- -------- -------
Total temporarily impaired $ 106,656 $(1,013) $ 9,212 $ (178) $ 115,868 $(1,190)
========= ======== ======== ======= ========= ========
- --------------------------------------------------------------------------------
(Continued)
PREMIER FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004, 2003 and 2002
- --------------------------------------------------------------------------------
NOTE 5 -SECURITIES (Continued)
Securities with unrealized losses at year-end 2003, aggregated by investment
category and length of time that individual securities have been in a continuous
unrealized loss position, are as follows:
Less than 12 Months 12 Months or More Total
------------------- ----------------- -----
Fair Unrealized Fair Unrealized Fair Unrealized
Description of Securities Value Loss Value Loss Value Loss
- ------------------------- ----- ---- ----- ---- ----- ----
U.S. agency securities $ 20,803 $(141) - - $ 20,803 $(141)
Mortgage-backed securities 14,551 (142) - - 14,551 (142)
-------- ------ -------- ------
Total temporarily impaired $35,354 $(283) - - $ 35,354 $(283)
======= ====== ======== ======
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 December 31, 2004 and December 31,
2003 are price changes resulting from changes in the interest rate environment
and are not considered to be other than temporary declines in the value of the
securities. Their fair value is expected to recover as the bonds approach their
maturity date and/or market conditions improve.
NOTE 6 - LOANS
Loans at year-end were as follows (in thousands):
2004 2003
------------ ------------
Commercial and agricultural,
secured by real estate $ 101,567 $ 101,325
Commercial, other 40,923 38,063
Real estate construction 5,906 5,414
Residential real estate 128,243 126,134
Agricultural, other 2,380 3,032
Consumer and home equity 44,470 56,216
Other 1,438 1,610
------------ ------------
$ 324,927 $ 331,794
============ ============
Certain directors and executive officers of the Banks and companies in which
they have beneficial ownership, were loan customers of the Banks during 2004 and
2003. Such loans were made in the ordinary course of business at the Banks'
normal credit terms and interest rates.
- --------------------------------------------------------------------------------
(Continued)
PREMIER FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004, 2003 and 2002
- --------------------------------------------------------------------------------
NOTE 6 - LOANS (Continued)
An analysis of the 2004 activity with respect to all director and executive
officer loans is as follows (in thousands):
Balance, December 31, 2003 $ 13,766
Additions, including loans now meeting disclosure
requirements 6,062
Amounts collected, including loans no longer meeting
disclosure requirements (4,714)
------------
Balance, December 31, 2004 $ 15,114
============
Activity in the allowance for loan losses was as follows (in thousands):
2004 2003 2002
--------- --------- ---------
Balance, beginning of year $ 14,300 $ 9,698 $ 7,371
Loans charged off (6,992) (16,513) (7,889)
Recoveries 1,050 602 763
Provision for loan losses 1,026 20,513 9,453
--------- --------- ---------
Balance, end of year $ 9,384 $ 14,300 $ 9,698
========= ========= =========
Impaired loans were as follows (in thousands):
2004 2003 2002
--------- --------- ---------
Impaired loans at year-end with an allowance $ 12,918 $ 17,071 $ 10,878
Impaired loans at year-end with no allowance 263 3,849 -
Amount of the allowance for loan losses allocated 2,915 8,418 3,980
Average of impaired loans during the year 16,069 12,756 5,697
Interest income recognized during impairment 640 444 205
Cash-basis interest income recognized 620 515 189
- --------------------------------------------------------------------------------
(Continued)
PREMIER FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004, 2003 and 2002
- --------------------------------------------------------------------------------
NOTE 6 - LOANS (Continued)
Nonperforming loans at year end were as follows (in thousands):
2004 2003 2002
--------- --------- ---------
Loans past due over 90 days still on accrual $ 739 $ 4,137 $ 1,238
Nonaccrual loans 6,847 11,958 8,197
Restructured loans 238 104 129
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.
NOTE 7 - PREMISES AND EQUIPMENT
Year-end premises and equipment were as follows (in thousands):
2004 2003
---------- ----------
Land and improvements $ 1,583 $ 1,567
Buildings and leasehold improvements 6,077 6,573
Furniture and equipment 7,402 7,836
---------- ----------
15,062 15,976
Less: accumulated depreciation (7,805) (8,020)
---------- ----------
$ 7,257 $ 7,956
========== ==========
NOTE 8 - DEPOSITS
At December 31, 2004 the scheduled maturities of time deposits are as follows
(in thousands):
2005 $ 100,269
2006 36,993
2007 21,069
2008 5,483
2009 2,675
Thereafter 956
------------
$ 167,445
============
Certain directors and executive officers of the Banks and companies, in which
they have beneficial ownership, were deposit customers of the Banks during 2004
and 2003. The balance of such deposits at December 31, 2004 and 2003 were
approximately $9,189,000 and $10,958,000.
- --------------------------------------------------------------------------------
(Continued)
PREMIER FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004, 2003 and 2002
- --------------------------------------------------------------------------------
NOTE 9 - SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
Securities sold under agreements to repurchase generally mature within one to
ninety days from the transaction date. Information concerning securities sold
under agreements to repurchase is summarized as follows (in thousands):
2004 2003
---- ----
Year-end balance $ 7,208 $ -
Average balance during the year $ 6,186 $ 4,674
Average interest rate during the year 1.82% 1.08%
Maximum month-end balance during the year $ 7,334 $ 6,255
Weighted average interest rate at year-end 2.66% -
NOTE 10 - FEDERAL HOME LOAN BANK ADVANCES
The Banks own stock of the Federal Home Loan Bank (FHLB) of Cincinnati, Ohio.
This stock allows the Banks to borrow advances from the FHLB.
All advances are paid either on a monthly basis or at maturity, over remaining
terms of six to eight years, with interest rates ranging from 4.10% to 6.64%,
primarily at fixed rates with prepayment penalties for early repayment.
Advances are secured by the FHLB stock, certain pledged investment securities
and substantially all single family first mortgage loans of the participating
Banks. Scheduled principal payments due on advances during the five years
subsequent to December 31, 2004 are as follows (in thousands):
2005 $ 681
2006 717
2007 754
2008 793
2009 835
Thereafter 5,508
----------
$ 9,288
==========
- --------------------------------------------------------------------------------
(Continued)
PREMIER FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004, 2003 and 2002
- --------------------------------------------------------------------------------
NOTE 11 - NOTES PAYABLE AND OTHER BORROWED FUNDS
In 2001, the Company entered into a promissory note with a commercial bank which
is secured by Boone County Bank common stock. During 2004 the note was renewed
for a period of one year. The interest rate is prime rate plus 1.00%. Accrued
interest is due quarterly along with quarterly principal payments of $150,000
that began on September 27, 2003. Any remaining unpaid principal is due at
maturity on April 27, 2005. The outstanding balance at December 31, 2004 was
$800,000 and the interest rate was 6.25%.
The Company previously had a line of credit with a commercial bank of $20
million. During 2002, the line of credit expired, and the Company entered into a
promissory note payable with the same commercial bank. The collateral for the
note was the common stock of all of the Company's subsidiary banks except for
Boone County Bank and a second lien on the common stock of Boone County Bank.
The interest rate was prime rate plus 1.00%. The note matured on October 15,
2004 and was satisfied in full by the Company in September 2004.
In 2002, the Company also entered into notes payable with the Company's Chairman
of the Board and President. Due to the restriction on the Company to pay its
Trust Preferred distributions as discussed in Note 12, the Company reached an
agreement with the FRB whereby the Company's Chairman of the Board, who is also
the Company's largest shareholder, agreed to loan the Company the amount of the
distribution, $701,000, so that the Company, with the FRB's approval, could make
their second quarter 2002 distribution. A similar agreement was reached with the
FRB for the payment of the distribution due for the third quarter 2002. The
Company's President, who is also a director, agreed to loan the Company the
amount of the distribution, $701,000. Thus, the balance of notes payable at
December 31, 2004, was $1,402,000. Both loans are unsecured at a zero percent
interest rate with no defined maturity date. The loans cannot be repaid without
the prior approval of the FRB.
- --------------------------------------------------------------------------------
(Continued)
PREMIER FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004, 2003 and 2002
- --------------------------------------------------------------------------------
NOTE 12 - 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 over the life of the
debenture.
Prior to 2003, the Trust was consolidated in the Company's financial statements,
with the Trust Preferred Securities issued by the Trust reported in liabilities
as "guaranteed preferred beneficial interests in Company's debentures" and the
subordinated debentures eliminated in consolidation. New accounting guidance,
FASB Interpretation No. 46, as revised in December 2003, requires that
subsidiaries defined as variable interest entities be consolidated by the
enterprise that will absorb the majority of the entities' expected losses if
they occur, receive a majority of the variable interest entities' residual
returns if they occur, or both. The Company determined that the Trust meets the
definition of a variable interest entity and that the Company is not the primary
beneficiary of the Trust's activities. Accordingly, as of December 31, 2003, the
Trust is no longer consolidated with the Company. The Company does not report
the Preferred Securities issued by the Trust as liabilities, and instead reports
as liabilities the Debentures issued by the Company and held by the Trust, as
these are no longer eliminated in consolidation. The amounts previously reported
as "guaranteed preferred beneficial interests in Company's debenture" in
liabilities have been recaptioned "Guaranteed junior subordinated interest
debentures" and continue to be presented in liabilities on the balance sheet.
The deconsolidation of the Trust increased the Company's balance sheet by
$796,000 at December 31, 2003, the difference representing the Company's common
ownership
- --------------------------------------------------------------------------------
(Continued)
PREMIER FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004, 2003 and 2002
- --------------------------------------------------------------------------------
NOTE 12 - GUARANTEED JUNIOR SUBORDINATED INTEREST
DEBENTURES (Continued)
in the Trust. The deconsolidation has no impact on the Company's liquidity
position since it continues to be obligated to repay the Debentures held by the
Trust and guarantees repayment of the Preferred Securities issued by the Trust.
A portion of the Preferred Securities issued by the Trust qualify as Tier 1
capital for the Company under the Federal Reserve Board's regulatory framework.
The Federal Reserve Board recently re-evaluated whether trust preferred
securities would continue to qualify as Tier 1 capital due to deconsolidation of
the related trust preferred entity. Its conclusion, issued in a press release on
March 1, 2005, was to continue to permit trust preferred securities to qualify
as Tier I capital with certain restrictions phased in over five-years. Once
completely phased-in, the dollar amount of trust preferred securities that will
qualify as Tier I capital will be limited to 25% of equity based Tier I capital
net of goodwill. As of December 31, 2004, $17,185,000 of the Preferred
Securities was included in the Company's Tier I capital. Had the Federal Reserve
Board's new limitations been completely phased in at December 31, 2004, the
amount of Preferred Securities includable in the Company's Tier I capital would
have been limited to $11,913,000.
As previously disclosed, pursuant to an agreement entered into with the Federal
Reserve Bank (FRB) described in Note 3 the Company is required to request
approval for the payment of distributions due on the 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. Thus, on February 24, 2003, the Company announced its
plans to redeem $3,000,000 (120,000 shares) of the 9.75% Trust Preferred
Securities as of March 31, 2003. The FRB denied the Company's requests to make
further distributions on the remaining Debentures and Trust Preferred
Securities. During 2004, the Company requested and received approval from the
FRB to redeem $4,500,000 (180,000 shares) on October 15, 2004 and an additional
$1,000,000 (40,000 shares) on December 31, 2004. In conjunction with the fourth
quarter 2004 redemptions, an additional $170,000 of the junior subordinated
debenture was redeemed. The amount represents an equivalent percentage
redemption of the Company's equity investment in the Trust.
Premier 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 December 31, 2004, and for an indefinite period, which can be
no longer than 20 consecutive quarterly periods. These deferred distributions
accrued interest at an annual rate of 9.75%. In March 2005, Premier received
approval from the FRB to pay the first quarter 2005 current distribution and all
prior deferred distributions. The payment will be disbursed on March 31, 2005 to
shareholders of record on March 15, 2005. The accrued interest on the deferred
- --------------------------------------------------------------------------------
(Continued)
PREMIER FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004, 2003 and 2002
- --------------------------------------------------------------------------------
NOTE 12 - GUARANTEED JUNIOR SUBORDINATED INTEREST
DEBENTURES (Continued)
distributions will be paid when the deferred distributions are ultimately paid
on March 31, 2005. Although the FRB approved the payment of the deferred and
current distributions through March 31, 2005, Premier is still bound by the
Written Agreement and will be required to request the FRB's approval to pay
future distributions. No assurance can be given that the FRB will grant such
approval.
NOTE 13 - INCOME TAXES
The components of the provision (benefit) for income taxes are as follows (in
thousands):
2004 2003 2002
-------- ------- --------
Current (2,452) $(3,589) $ (193)
Deferred 3,351 (1,693) (1,329)
-------- ------- --------
$ 899 $(5,282) $ (1,522)
======== ======= ========
The Company's deferred tax assets and liabilities at December 31 are shown below
(in thousands). No valuation allowance for the realization of deferred tax
assets is considered necessary.
2004 2003
--------- ---------
Deferred tax assets
Allowance for loan losses $ 3,191 $ 4,862
Net operating loss carryforward 250 1,486
AMT credit carryforward 442 469
Write-downs of other real estate owned 19 126
Unrealized loss on investment securities 268 -
Other 119 95
--------- ---------
Total deferred tax assets 4,289 7,038
Deferred tax liabilities
Amortization of intangibles $ 1,320 $ 979
Depreciation 236 232
Federal Home Loan Bank dividends 206 201
Unrealized gain on investment securities - 284
Other 129 145
--------- ---------
Total deferred tax liabilities 1,891 1,841
--------- ---------
Net deferred tax asset, included in other assets $ 2,398 $ 5,197
========= =========
- --------------------------------------------------------------------------------
(Continued)
PREMIER FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004, 2003 and 2002
- --------------------------------------------------------------------------------
NOTE 13 - INCOME TAXES (Continued)
An analysis of the differences between the effective tax rates and the
statutory U.S. federal income tax rate is as follows (in thousands):
2004 2003 2002
---- ---- ----
U. S. federal income tax rate $ 973 34.0% $ (5,066) (34.0)% $ (1,268) (34.0)%
Changes from the statutory rate
Tax-exempt investment income (131) (4.6) (221) (1.5) (304) (8.2)
Non-deductible interest expense
related to carrying tax-exempt
investments 5 0.2 11 0.1 38 1.0
Tax credits (62) (2.2) (71) (0.5) (71) (1.9)
Other 114 4.0 65 0.4 83 2.3
--------- ----- -------- ----- --------- ----
$ 899 31.4% $ (5,282) (35.5)% $ (1,522) (40.8)%
========= ===== ======== ===== ========= ====
NOTE 14 - EMPLOYEE BENEFIT PLANS
The Company has qualified profit sharing plans that cover substantially all
employees. Contributions to the plans consist of a Company match and additional
amounts at the discretion of the Company's Board of Directors. Total
contributions to the plans were $197,000, $197,000 and $177,000 in 2004, 2003
and 2002.
The Company also 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 ten years from the date of
grant. As of December 31, 2004, 516,350 shares were available for future grants
under the terms of the Plans.
- --------------------------------------------------------------------------------
(Continued)
PREMIER FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004, 2003 and 2002
- --------------------------------------------------------------------------------
NOTE 14 - EMPLOYEE BENEFIT PLANS (Continued)
A summary of the Company's stock option activity is as follows:
---------2004--------- ---------2003--------- ----------2002----------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Options Price Options Price Options Price
Outstanding at beginning of year 55,450 $ 11.33 35,000 $ 14.03 62,000 $ 13.71
Grants 28,200 9.30 28,650 7.96 - -
Forfeitures - 0.00 (8,200) 11.08 (27,000) 13.30
--------- --------- --------
Outstanding at year end 83,650 $ 10.65 55,450 $ 11.33 35,000 $ 14.03
========= ========= ========
Exercisable at year end 39,821 $ 12.65 32,000 $ 13.80 35,000 $ 14.03
Weighted average remaining life 6.2 5.7 4.4
Weighted average fair value of
options granted during the year $2.64 $3.30 -
Options outstanding at year-end 2004 were as follows:
Outstanding Exercisable
-------------------------------- --------------------
Weighted
Average Weighted Weighted
Remaining Average Average
Range of Contractual Exercise Exercise
Exercise Prices Number Life Price Number Price
- --------------- ------ ---- ------- ------- -------
$7.50 to $10.00 51,650 8.6 $ 8.69 7,821 $ 7.96
$12.00 to $16.50 32,000 2.3 13.80 32,000 13.80
------- -------
Outstanding at year end 83,650 6.2 $ 10.65 39,821 $ 12.65
======= =======
- --------------------------------------------------------------------------------
(Continued)
PREMIER FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004, 2003 and 2002
- --------------------------------------------------------------------------------
NOTE 15 - RELATED PARTY TRANSACTIONS
During 2004, 2003, and 2002, the Company paid approximately $358,000, $272,000,
and $373,000 for printing, supplies, furniture, and equipment to a company
affiliated by common ownership. The Company also paid another affiliate
approximately $489,000, $892,000, and $1,200,000 in 2004, 2003, and 2002 to
permit the Company's employees to participate in that entity's employee medical
benefit plan.
During 2004, 2003 and 2002, the Company paid approximately $52,000, $51,000 and
$17,000 to lease its headquarters facility at 2883 Fifth Avenue, Huntington,
West Virginia from River City Properties, LLC, an entity 12.5% owned by Chairman
of the Board of Directors Marshall T. Reynolds.
- --------------------------------------------------------------------------------
(Continued)
PREMIER FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004, 2003 and 2002
- --------------------------------------------------------------------------------
NOTE 16 - EARNINGS PER SHARE
A reconciliation of the numerators and denominators of the earnings per common
share and earnings per common share assuming dilution computations for 2004,
2003 and 2002 is presented below (in thousands, except per share data):
2004 2003 2002
---------- --------- ---------
Basic earnings per share from continuing operations
Income (loss) available to common stockholders $ 1,963 $ (9,617) $ (2,207)
Weighted average common shares outstanding 5,232 5,232 5,232
---------- --------- ---------
Earnings (loss) per share from continuing operations $ 0.37 $ (1.84) $ (0.42)
========== ========= =========
Diluted earnings per share from continuing operations
Income (loss) available to common stockholders $ 1,963 $ (9,617) $ (2,207)
Weighted average common shares outstanding 5,232 5,232 5,232
Add dilutive effects of assumed exercise
of stock options 5 - -
---------- --------- ---------
Weighted average common and dilutive
potential common shares outstanding 5,237 5,232 5,232
---------- --------- ---------
Diluted earnings (loss) per share from
continuing operations $ 0.37 $ (1.84) $ (0.42)
========== ========= =========
Basic earnings per share
Income (loss) available to common stockholders $ 6,697 $ (9,697) $ (3,337)
Weighted average common shares outstanding 5,232 5,232 5,232
---------- --------- ---------
Earnings (loss) per share $ 1.28 $ (1.85) $ (0.64)
========== ========= =========
Diluted earnings per share
Income (loss) available to common stockholders $ 6,697 $ (9,697) $ (3,337)
Weighted average common shares outstanding 5,232 5,232 5,232
Add dilutive effects of assumed exercise
of stock options 5 - -
---------- --------- ---------
Weighted average common and dilutive
potential common shares outstanding 5,237 5,232 5,232
---------- --------- ---------
Diluted earnings (loss) per share $ 1.28 $ (1.85) $ (0.64)
========== ========= =========
Stock options for 32,000 shares of common stock for 2004, 55,450 for 2003, and
35,000 for 2002 were not included in the computation of earnings per share
assuming dilution because their impact was anti-dilutive.
- --------------------------------------------------------------------------------
(Continued)
PREMIER FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004, 2003 and 2002
- --------------------------------------------------------------------------------
NOTE 17 - DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair values of the Company's financial instruments at year-end are as
follows (in thousands):
--------------2004------------- -------------2003--------------
Carrying Fair Carrying Fair
Amount Value Amount Value
Financial assets
Cash and due from banks $ 14,474 $ 14,474 $ 16,422 $ 16,422
Federal funds sold 17,342 17,342 17,051 17,051
Securities available for sale 153,892 153,892 147,646 147,646
Loans, net 315,543 312,496 317,494 317,978
Federal Home Loan Bank and
Federal Reserve Bank stock 2,611 2,611 2,490 2,490
Interest receivable 2,740 2,740 3,448 3,448
Financial liabilities
Deposits $ (437,798) $ (438,440) $ (455,474) $ (457,415)
Federal funds purchased (1,838) (1,838) - -
Securities sold under agreements
to repurchase (7,208) (7,208) - -
Federal Home Loan Bank advances (9,288) (8,636) (10,705) (11,833)
Other borrowed funds (800) (803) (6,200) (6,200)
Notes payable (1,402) (1,332) (1,402) (1,335)
Guaranteed junior subordinated
interest debentures (20,876) (21,655) (26,546) (27,130)
Interest payable (5,532) (5,532) (3,902) (3,902)
Carrying amount is the estimated fair value for cash and cash equivalents,
Federal Home Loan Bank and Federal Reserve Bank stock, accrued interest
receivable and payable, demand deposits, short-term debt, and variable rate
loans or deposits that reprice frequently and fully. Security fair values are
based on market prices or dealer quotes, and if no such information is
available, on the rate and term of the security and information about the
issuer. For fixed rate loans or deposits and for variable rate loans or deposits
with infrequent repricing or repricing limits, fair value is based on discounted
cash flows using current market rates applied to the estimated life and credit
risk. Fair values for impaired loans are estimated using discounted cash flow
analysis or underlying collateral values. Fair value of debt is based on current
rates for similar financing. The fair value of commitments to extend credit and
standby letters of credit is not considered material.
- --------------------------------------------------------------------------------
(Continued)
PREMIER FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004, 2003 and 2002
- --------------------------------------------------------------------------------
NOTE 18 - FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
The Banks are parties to financial instruments with off-balance sheet risk in
the normal course of business to meet the financing needs of their customers.
These financial instruments include standby letters of credit and commitments to
extend credit in the form of unused lines of credit. The Banks use the same
credit policies in making commitments and conditional obligations as they do for
on-balance sheet instruments.
At December 31, 2004 and 2003, the Banks had the following financial instruments
whose approximate contract amounts represent credit risk (in thousands):
2004 2003
----------- -----------
Standby letters of credit $ 896 $ 671
Commitments to extend credit:
Fixed $ 5,694 $ 4,988
Variable 17,118 13,284
Standby letters of credit represent conditional commitments issued by the Banks
to guarantee the performance of a third party. The credit risk involved in
issuing these letters of credit is essentially the same as the risk involved in
extending loans to customers. Collateral held varies but primarily includes real
estate and certificates of deposit. Some letters of credit are unsecured.
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Outstanding
commitments are at current market rates. Fixed rate loan commitments have
interest rates ranging from 4.0% to 18.0%. Commitments generally have fixed
expiration dates or other termination clauses and may require payment of a fee.
The Banks evaluate each customer's creditworthiness on a case-by-case basis.
Since some of the commitments are expected to expire without being drawn upon,
the total commitment amounts do not necessarily represent future cash
requirements. Collateral held varies but may include accounts receivable,
inventory, property and equipment, and income producing properties.
- --------------------------------------------------------------------------------
(Continued)
PREMIER FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004, 2003 and 2002
- --------------------------------------------------------------------------------
NOTE 19 - LEGAL PROCEEDINGS
Legal proceedings involving the Company and its subsidiaries periodically arise
in the ordinary course of business, including claims by debtors and their
related interests against the Company's subsidiaries following initial
collection proceedings. These legal proceedings sometimes can involve claims for
substantial damages. At December 31, 2004 management is unaware of any legal
proceedings for which the expected outcome would have a material adverse effect
upon the consolidated financial statements of the Company.
NOTE 20 - STOCKHOLDERS' EQUITY
The Company's principal source of funds for dividend payments is dividends
received from the subsidiary Banks. Banking regulations limit the amount of
dividends that may be paid without prior approval of regulatory agencies. Under
these regulations, the amount of dividends that may be paid in any calendar year
is limited to the current year's net profits, as defined, combined with the
retained net profits of the preceding two years, subject to the capital
requirements and additional restrictions as discussed below. During 2005, the
Banks could, without prior approval, declare dividends of approximately $2.5
million plus any 2005 net profits retained to the date of the dividend
declaration.
The Company and the subsidiary Banks are subject to various regulatory capital
requirements administered by the federal banking agencies. Failure to meet
minimum capital requirements can initiate certain mandatory and possibly
additional discretionary actions by regulators that, if undertaken, could have a
direct material effect on the Company's financial statements. Under capital
adequacy guidelines and the regulatory framework for prompt corrective action,
the Company and the Banks must meet specific guidelines that involve
quantitative measures of their assets, liabilities, and certain off-balance
sheet items as calculated under regulatory accounting practices.
These quantitative measures established by regulation to ensure capital adequacy
require the Company and Banks to maintain minimum amounts and ratios (set forth
in the following table) of Total and Tier I capital (as defined in the
regulations) to risk-weighted assets (as defined), and of Tier I capital (as
defined) to average assets (as defined). Management believes, as of December 31,
2004, the Company and the Banks meet all quantitative capital adequacy
requirements to which they are subject.
- --------------------------------------------------------------------------------
(Continued)
PREMIER FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004, 2003 and 2002
- --------------------------------------------------------------------------------
NOTE 20 - STOCKHOLDERS' EQUITY (Continued)
The capital amounts and classifications are also subject to qualitative
judgments by the regulators. As a result of these qualitative judgments, the
Company and 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 (FRB), as discussed in
Note 3, restricting the Company from declaring or paying dividends without prior
approval from the FRB. An additional provision of this agreement requires prior
approval from the FRB before the Company increases its borrowings or incurs any
debt. This agreement is in effect until terminated by the FRB.
Citizens Deposit Bank (Citizens Deposit) entered into a Written Agreement with
the FRB on September 29, 2000 restricting Citizens from declaring or paying
dividends without prior approval. Having fully satisfied the provisions of the
Written Agreement, the FRB terminated the agreement on October 29, 2004.
Bank of Germantown (Germantown) entered into an agreement with the Kentucky
Department of Financial Institutions (KDFI) and the Federal Deposit Insurance
Corporation (FDIC) on June 13, 2000 restricting Germantown from declaring or
paying dividends, without prior approval, if its Tier I capital to average
assets falls below 8%. Having complied with the terms of the agreement to the
satisfaction of the KDFI and FDIC, the agreement was terminated on August 9,
2004.
Effective January 1, 2004, Farmers Deposit Bank (Farmers Deposit) was issued a
C&D order by the FDIC and KDFI 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 KDFI and FDIC. Farmers Deposit's Tier I
capital to average assets was 9.5% at December 31, 2004.
As of December 31, 2004, the most recent notification from the Federal Reserve
Bank categorized the Company and its subsidiary banks as well capitalized under
the regulatory framework for prompt corrective action. To be categorized as well
capitalized, the Company must maintain minimum Total risk-based, Tier I
risk-based and Tier I leverage ratios as set forth in the following table. There
are no conditions or events since that notification that management believes
have changed the Company's category.
- --------------------------------------------------------------------------------
(Continued)
PREMIER FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004, 2003 and 2002
- --------------------------------------------------------------------------------
NOTE 20 - STOCKHOLDERS' EQUITY (Continued)
The Company's and the four largest subsidiary Banks' capital amounts and ratios
as of December 31, 2004 and 2003 are presented in the table below (in
thousands):
To Be Well Capitalized
For Capital Under Prompt Corrective
Actual Adequacy Purposes Action Provisions
2004 Amount Ratio Amount Ratio Amount Ratio
----
Total Capital (to Risk-Weighted Assets):
Consolidated $ 58,163 18.9% $ 24,624 8% $ 30,781 10%
Boone County Bank 15,270 19.7 6,208 8 7,761 10
Farmers Deposit Bank 9,056 18.6 3,906 8 4,882 10
Citizens Deposit Bank 12,016 21.6 4,442 8 5,553 10
First Central Bank 8,007 12.6 5,099 8 6,374 10
Tier I Capital (to Risk-Weighted Assets):
Consolidated $ 51,182 16.6% $ 12,312 4% $ 18,468 6%
Boone County Bank 14,299 18.4 3,104 4 4,656 6
Farmers Deposit Bank 8,406 17.2 1,953 4 2,929 6
Citizens Deposit Bank 11,303 20.4 2,221 4 3,332 6
First Central Bank 7,271 11.4 2,549 4 3,824 6
Tier I Capital (to Average Assets):
Consolidated $ 51,182 9.7% $ 21,009 4% $ 26,261 5%
Boone County Bank 14,299 9.2 6,212 4 7,765 5
Farmers Deposit Bank 8,406 9.5 3,560 4 4,450 5
Citizens Deposit Bank 11,303 12.5 3,606 4 4,507 5
First Central Bank 7,271 8.6 3,366 4 4,208 5
2003
----
Total Capital (to Risk-Weighted Assets):
Consolidated $ 55,107 14.8% $ 29,719 8% $ 37,149 10%
Boone County Bank 14,576 19.0 6,153 8 7,691 10
Farmers Deposit Bank 6,423 9.4 5,458 8 6,822 10
Citizens Deposit Bank 11,622 21.2 4,392 8 5,491 10
First Central Bank 7,653 13.9 4,410 8 5,513 10
Tier I Capital (to Risk-Weighted Assets):
Consolidated $ 39,520 10.6% $ 14,860 4% $ 22,289 6%
Boone County Bank 13,680 17.8 3,076 4 4,614 6
Farmers Deposit Bank 5,477 8.0 2,729 4 4,093 6
Citizens Deposit Bank 10,914 19.9 2,196 4 3,294 6
First Central Bank 6,975 12.7 2,205 4 3,308 6
Tier I Capital (to Average Assets):
Consolidated $ 39,520 6.4% $ 24,638 4% $ 30,797 5%
Boone County Bank 13,680 9.0 6,106 4 7,632 5
Farmers Deposit Bank 5,477 5.1 4,289 4 5,361 5
Citizens Deposit Bank 10,914 12.3 3,560 4 4,450 5
First Central Bank 6,975 8.4 3,304 4 4,130 5
- --------------------------------------------------------------------------------
(Continued)
PREMIER FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004, 2003 and 2002
- --------------------------------------------------------------------------------
NOTE 21 - PARENT COMPANY FINANCIAL STATEMENTS
Condensed Balance Sheets
December 31
(In Thousands)
2004 2003
--------- ---------
ASSETS
Cash $ 7,666 $ 3,568
Investment in subsidiaries of continuing operations 70,683 70,248
Investment in subsidiary of discontinued operations - 7,767
Premises and equipment 514 956
Other assets 599 1,097
--------- ---------
Total assets $ 79,462 $ 83,636
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Other liabilities $ 5,355 $ 3,948
Notes payable 1,402 1,402
Subordinated debentures issued to trust 20,876 26,546
Other borrowed funds 800 6,200
--------- ---------
Total liabilities 28,433 38,096
Stockholders' equity
Preferred stock - -
Common stock 1,103 1,103
Additional paid-in capital 43,445 43,445
Retained earnings 7,008 311
Accumulated other comprehensive income (527) 681
--------- ---------
Total stockholders' equity 51,029 45,540
--------- ---------
Total liabilities and stockholders' equity $ 79,462 $ 83,636
========= =========
- --------------------------------------------------------------------------------
(Continued)
PREMIER FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004, 2003 and 2002
- --------------------------------------------------------------------------------
NOTE 21 - PARENT COMPANY FINANCIAL STATEMENTS (Continued)
Condensed Statements of Operations
Years Ended December 31
(In Thousands)
2004 2003 2002
-------- -------- --------
Income
Dividends from continuing subsidiaries $ 5,800 $ 7,853 $ 8,025
Interest and dividend income 46 14 -
Other income 367 472 5
-------- -------- --------
Total income 6,213 8,339 8,030
Expenses
Interest expense 3,117 3,121 3,313
Salaries and employee benefits 726 597 552
Professional fees 1,607 550 394
Accelerated trust preferred issuance costs 214 124 -
Other expenses 514 295 832
-------- -------- --------
Total expenses 6,178 4,687 5,091
-------- -------- --------
Income from continuing operations before
income taxes and equity in undistributed
income of subsidiaries 35 3,652 2,939
Income tax benefit (2,071) (1,631) (1,729)
-------- -------- --------
Income from continuing operations before
equity in undistributed income of
subsidiaries 2,106 5,283 4,668
Dividends in excess of net income
of subsidiaries continuing in operation (143) (14,900) (6,875)
-------- -------- --------
Net income (loss) from continuing operations 1,963 (9,617) (2,207)
Net income (loss) from discontinued operations 4,734 (80) (1,130)
-------- -------- --------
Net income (loss) $ 6,697 $ (9,697) $ (3,337)
======== ======== ========
- --------------------------------------------------------------------------------
(Continued)
PREMIER FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004, 2003 and 2002
- --------------------------------------------------------------------------------
NOTE 21 - PARENT COMPANY FINANCIAL STATEMENTS (Continued)
Condensed Statements of Cash Flows
Years Ended December 31
(In Thousands)
2004 2003 2002
-------- -------- --------
Cash flows from operating activities
Net income (loss) from continuing operations $ 1,963 $ (9,617) $ (2,207)
Adjustments to reconcile net (loss) income to
net cash from operating activities
Depreciation 91 71 83
Write-down of other real estate owned - - 155
Securities losses, net - - 1
Losses from sales of assets 159 21 -
Dividends in excess of net income of
subsidiaries continuing in operation 143 14,900 6,875
Change in other assets (1,436) 144 106
Change in other liabilities 1,406 2,470 1,151
-------- -------- --------
Net cash from operating activities 2,326 7,989 6,164
Cash flows from investing activities
Capital contributed to subsidiaries
continuing in operation (1,831) (8,108) (128)
Proceeds from liquidation of subsidiary 14,311 - 5,160
Proceeds from sale of securities - - 4
Purchase of premises and equipment - (5) (52)
Proceeds from sales of assets, net 192 221 -
-------- -------- --------
Net cash from investing activities 12,672 (7,882) 4,984
Cash flows from financing activities
Proceeds from notes payable - - 1,402
Early redemption of subordinated note (5,500) (3,000) -
Payments of other borrowed funds (5,400) (1,500) (5,300)
-------- -------- --------
Net cash from financing activities (10,900) (4,500) (3,898)
-------- -------- --------
Net change in cash and cash equivalents 4,098 (4,393) 7,250
Cash and cash equivalents at beginning of year 3,568 7,961 711
-------- -------- --------
Cash and cash equivalents at end of year $ 7,666 $ 3,568 $ 7,961
======== ======== ========
- --------------------------------------------------------------------------------
(Continued)
PREMIER FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004, 2003 and 2002
- --------------------------------------------------------------------------------
NOTE 21 - PARENT COMPANY FINANCIAL STATEMENTS (Continued)
The ability of the Company to fund its normal operating expenses, debt service
requirements and subsidiary capital needs is dependent on its ability to raise
cash through dividends from subsidiaries or sale of assets. As further discussed
in Note 3, the Company's ability to obtain cash dividends from Farmers Deposit
Bank is limited by formal regulatory agreement. Also as further described in
Note 3, as a result of the Order issued to the Farmers Deposit Bank subsidiary,
the Company has committed to maintain certain regulatory capital ratio
thresholds by contributing additional capital to the bank as needed. Management
plans for funding the additional capital contributions and other cash
requirements consider projected dividends received in the normal course of
business and special return of capital dividends that may require regulatory
approval.
NOTE 22 - QUARTERLY FINANCIAL DATA (UNAUDITED)
Earnings (Loss) per Share
From Continuing Operations on Continuing Operations
Interest Net Interest Net ------------------------
Income Income Income Basic Fully Diluted
----------- ---------- ---------- ------- -------------
2004
First Quarter $ 7,055 $ 4,446 $ 482 $ 0.09 $ 0.09
Second Quarter 6,926 4,398 474 0.09 0.09
Third Quarter 6,951 4,418 448 0.08 0.08
Fourth Quarter 7,189 4,802 559 0.11 0.11
2003
First Quarter $ 8,606 $ 5,101 $ (365) $ (0.07) $ (0.07)
Second Quarter 8,178 4,930 (6,779) (1.30) (1.30)
Third Quarter 7,665 4,671 (1,877) (0.36) (0.36)
Fourth Quarter 7,280 4,480 (596) (0.11) (0.11)
In 2004, interest income continued to be negatively impacted by the level of
non-accrual loans at Farmers Deposit Bank. However, due to interest expense
savings, net interest income began a gradual resurgence beginning with the
second quarter. Net income was impacted positively in the fourth quarter by the
improvement in the net interest margin and gains on the disposition of other
real estate owned.
In 2003, interest income, net interest income and net income were all negatively
impacted in all four quarters by the financial results of Farmers Deposit Bank.
This included lower interest income and sharply higher provisions for loan
losses due to loans charged-off and lower interest income from loans placed on
non-accrual status.
- --------------------------------------------------------------------------------
PART III
Item 9. Changes In and Disagreements with Accountants on Accounting and
- ------------------------------------------------------------------------
Financial Disclosure
--------------------
There have been no changes in or disagreements with accountants on
accounting or financial disclosure matters.
Item 9A. 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 annual 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 annual 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 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.
During late 2003 and throughout 2004, Premier management implemented
corrective actions to remedy the deficiencies identified at Farmers Deposit. In
addition to the steps identified in the cease and desist order of the FDIC and
KDFI, Premier
* hired a new President and CEO of Farmers Deposit in 2003 who has
experience restoring troubled banks to safe and sound banking
practices,
* hired a Chief Financial Officer for the bank in 2003, a new position,
to segregate the lending and accounting functions of the bank,
* formed a collections department to pursue delinquent borrowers and,
when possible, to collect on loans previously charged-off, and
* begun using system generated reports to the bank's board of directors
rather than manually generated reports whenever possible.
Premier management also implemented additional processes and procedures
throughout its network of banking subsidiaries in an effort to minimize the
likelihood that improper management overrides go undetected. These included:
* 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.
In 2005, Premier reduced its reliance on third-party internal audit and
loan review providers and expanded its internal audit staff at the holding
company level. Management believes a full-time internal audit and loan review
staff will be able to provide more specific and more thorough testing of the
books and records of the company and the effectiveness of its internal controls.
Management also believes that having internal auditors on staff will provide
more immediate reporting of findings to management, a source of on-location
training of best practices for employees at the Affiliate Banks during the
conduct of an audit and a rapid response team to address issues raised by
employees under the "whistleblower" provisions of the employee code of ethics
and conduct.
Beginning in late 2004 and continuing through June 2005, Premier's
affiliate banks are converting to a third-party data processing and item
processing provider. As part of the conversion process, system processes,
workflows and procedures are being reviewed and potentially revised in an effort
to standardize the way the Banks conduct business and record transactions in the
various modules of the software. No significant changes to Premier's key
controls are anticipated as a result of these reviews.
Other than the steps identified above, which are in various stages of
implementation, there were no changes in internal controls over financial
reporting during the fourth fiscal quarter that have materially affected or are
reasonably likely to materially affect Premier's internal controls over
financial reporting.
Item 10, 11, 12, 13 and 14. Directors and Executive Officers of the Registrant;
- --------------------------------------------------------------------------------
Executive Compensation; Security Ownership of Certain Beneficial Owners
-----------------------------------------------------------------------
and Management and Related Stockholder Matters; Certain Relationships
-----------------------------------------------------------------------
and Related Transactions; and
-----------------------------------------------------------------------
Principal Accountant Fees and Services
-----------------------------------------------------------------------
The information required by these Items is omitted because the Company
is filing a definitive proxy statement pursuant to Regulation 14A not later than
120 days after the end of the fiscal year covered by this report which includes
the required information. The required information contained in the Company's
proxy statement is incorporated herein by reference.
PART IV
Item 15. Exhibits and Financial Statement Schedules
- -------------------------------------------------------------------------
(a) The following documents are filed as part of this report:
1. Financial Statements:
2. Financial Statement Schedules:
No financial statement schedules have been included as part of this
report because they are either not required or the information is
otherwise included.
3. List of Exhibits:
The following is a list of exhibits required by Item 601 of
Regulation S-K and by paragraph (c) of this Item 14.
Exhibit
Number Description of Document
------- -----------------------
2.1 Stock Purchase Agreement dated February 13, 2004 among Citizens Bank (Kentucky), Inc.,
Premier Financial Bancorp, Inc. and Farmers Capital Bank Corporation is incorporated herein
by reference to Form 8-K filed by Registrant on February 19, 2004.
3.1 Form of Articles of Incorporation of registrant (included as Exhibit 3.1 to
registrant's Registration Statement on Form S-1, Registration No. 333-1702, filed on February
28, 1996 with the Commission and incorporated herein by reference).
3.2 Form of Articles of Amendment to Articles of Incorporation effective March 15, 1996 re: amendment
to Article IV (included as Exhibit 3.2 to registrant's Amendment No. 1 to Registration
Statement on Form S-1, Registration No. 333-1702, filed on March 25, 1996 with the Commission
and incorporated herein by reference).
3.3 Bylaws of registrant (included as Exhibit 3.2 to registrant's Registration Statement on Form
S-1, Registration No. 333-1702, filed on February 28, 1996 with the Commission and incorporated
herein by reference).
4.1 Form of Junior Subordinated Indenture dated as of June 6, 1997 between Registrant and Bankers
Trust Company, as Trustee, with respect to 9.75% Junior Subordinated Deferrable Interest
Debentures due June 30, 2027 (incorporated by reference to Exhibit 4.1 to the Registration
Statement on Form S-1 of Registrant filed May 28, 1997 with the Commission (Registration No.
333-27943)).
4.2 Form of 9.75% Junior Subordinated Deferrable Interest Debenture Certificate (incorporated
by reference to Exhibit 4.2 to the Registration Statement on Form S-1 of Registrant filed May
28, 1997 with the Commission (Registration No. 333-27943)).
4.3 Form of Amended and Restated Trust Agreement dated as of June 6, 1997 among Registrant,
as Depositor, Bankers Trust Company, as Property Trustee, and Bankers Trust (Delaware), as
Delaware Trustee (incorporated by reference to Exhibit 4.4 to the Registration Statement
on Form S-1 of Registrant filed May 28, 1997 with the Commission (Registration No. 333-27943)).
4.4 Form of Guarantee Agreement dated as of June 6, 1997 between Registrant and Bankers Trust
Company (incorporated by reference to Exhibit 4.6 to the Registration Statement on Form S-1 of
Registrant filed May 28, 1997 with the Commission (Registration No. 333-27943)).
*** 10.1 Deferred Compensation Agreement dated December 17, 1992, between Georgetown Bank & Trust
Company and Gardner E. Daniel (included as Exhibit 10.5 to registrant's Registration
Statement on Form S-1, Registration No. 333-1702, filed on February 28, 1996 with the
Commission and incorporated herein by reference).
*** 10.2 Premier Financial Bancorp, Inc. 1996 Employee Stock Ownership Incentive Plan (included as
Exhibit 10.6 to registrant's Registration Statement on Form S-1, Registration No. 333-1702,
filed on February 28, 1996 with the Commission and incorporated herein by reference).
*** 10.3 Premier Financial Bancorp, Inc.'s 2002 Employee Stock Ownership Incentive Plan, filed as Annex A to
definitive proxy statement dated May 17, 2002, filed on April 30, 2002 with the Commission, is
incorporated herein by reference.
*** 10.4 Form of Stock Option Agreement pursuant to 2002 Employee Stock Ownership Incentive Plan, filed as
Exhibit 10.1 to form 8-K filed January 24, 2005, is incorporated herein by reference.
10.5 Premier Financial Bancorp, Inc. written agreement with the Federal Reserve Bank of Cleveland
dated January 29, 2003, filed as Exhibit 10.4 to form 10-K filed on March 27, 2003, is incorporated
herein by reference.
10.6 Premier Financial Bancorp, Inc. contract with Fiserv Solutions, Inc. dated December 20, 2004, filed
as Exhibit 10 to form 8-K filed December 23, 2004, is incorporated herein by reference.
14.1 Premier Financial Bancorp, Inc. Code of Ethics for the Chief Executive Officer, Chief Financial
Officer and Chief Accounting Officer, filed as Exhibit 14.1 to form 10-K filed on April 14, 2004,
is incorporated herein by reference.
14.2 Premier Financial Bancorp, Inc. Code of Business Conduct and Ethics, filed as Exhibit 14.2 to
form 10-K filed on April 14, 2004, is incorporated herein by reference.
21 Subsidiaries of registrant
23 Consent of Independent Registered Public Accounting Firm
31.1 Principal Executive Officer Certification Pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002 - Robert W. Walker
31.2 Principal Executive Officer Certification Pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002 - Brien M. Chase
32 Robert W. Walker and Brien M. Chase Certification Pursuant to 18 U.S.C. Section 1350 as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act 2002.
*** Denotes executive compensation plans and arrangements.
SIGNATURES
Pursuant to the requirements of the Section 13 or 15(d) of the Securities
Exchange Act of 1934, registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
PREMIER FINANCIAL BANCORP, INC.
By: /s/ Robert W. Walker, President
-------------------------------
Robert W. Walker, President
Date: March 29, 2005
-------------------------------
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant in the capacities and on the dates indicated.
/s/ Robert W. Walker Principal Executive and Director March 29, 2005
- ------------------------ ----------------
Robert W. Walker
/s/ Brien M. Chase Principal Financial and March 29, 2005
- ------------------------ Accounting Officer ----------------
Brien M. Chase
/s/ Toney K. Adkins Director March 16, 2005
- ------------------------ ----------------
Toney K. Adkins
Director
- ------------------------ ----------------
Hosmer A. Brown, III
/s/ Edsel Burns Director March 16, 2005
- ------------------------ ----------------
Edsel Burns
/s/ E. V. Holder, Jr. Director March 16, 2005
- ------------------------ ----------------
E. V. Holder, Jr.
/s/ Keith F. Molihan Director March 16, 2005
- ------------------------ ----------------
Keith F. Molihan
/s/ Marshall T. Reynolds Chairman of the Board March 16, 2005
- ------------------------ ----------------
Marshall T. Reynolds
/s/ Neal Scaggs Director March 16, 2005
- ------------------------ ----------------
Neal Scaggs
/s/ Thomas W. Wright Director March 16, 2005
- ------------------------ ----------------
Thomas W. Wright