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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2005
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ___________ to ___________
Commission file number 0-20908
PREMIER FINANCIAL BANCORP, INC.
(Exact name of registrant as specified in its charter)
Kentucky 61-1206757
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2883 Fifth Avenue
Huntington, West Virginia 25702
(address of principal executive officer) (Zip Code)
Registrant's telephone number (304) 525-1600
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to filing
requirements for the past 90 days. Yes X No .
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Securities Exchange Act of 1934). Yes___ No X .
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practical date.
Common stock, no par value, - 5,232,230 shares outstanding at
April 30, 2005
PREMIER FINANCIAL BANCORP, INC.
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
The accompanying information has not been audited by independent public
accountants; however, in the opinion of management such information reflects all
adjustments necessary for a fair presentation of the results for the interim
period. All such adjustments are of a normal and recurring nature. Premier
Financial Bancorp, Inc.'s ("Premier's") accounting and reporting policies are in
accordance with accounting principles generally accepted in the United States of
America. Certain accounting principles used by Premier involve a significant
amount of judgment about future events and require the use of estimates in their
application. The following policies are particularly sensitive in terms of
judgments and the extent to which estimates are used: allowance for loan losses,
the identification and evaluation of impaired loans, the impairment of goodwill,
the realization of deferred tax assets and stock based compensation disclosures.
These estimates are based on assumptions that may involve significant
uncertainty at the time of their use. However, the policies, the estimates and
the estimation process as well as the resulting disclosures are periodically
reviewed by the Audit Committee of the Board of Directors and material estimates
are subject to review as part of the external audit by the independent public
accountants.
The accompanying financial statements are presented in accordance with the
requirements of Form 10-Q and consequently do not include all of the disclosures
normally required by accounting principles generally accepted in the United
States of America or those normally made in the registrant's annual report on
Form 10-K. Accordingly, the reader of the Form 10-Q may wish to refer to the
registrant's Form 10-K for the year ended December 31, 2004 for further
information in this regard.
Index to consolidated financial statements:
Consolidated Balance Sheets.................................. 3
Consolidated Statements of Operations........................ 4
Consolidated Statements of Comprehensive Income ............. 6
Consolidated Statements of Cash Flows........................ 7
Notes to Consolidated Financial Statements................... 9
PREMIER FINANCIAL BANCORP, INC.
CONSOLIDATED BALANCE SHEETS
MARCH 31, 2005 AND DECEMBER 31, 2004
(DOLLARS IN THOUSANDS)
- --------------------------------------------------------------------------------------------------------------------
(UNAUDITED)
2005 2004
---- ----
ASSETS
Cash and due from banks $ 15,442 $ 14,474
Federal funds sold 23,427 17,342
Securities available for sale 148,757 153,892
Loans 322,246 324,927
Allowance for loan losses (9,267) (9,384)
------------- --------------
Net loans 312,979 315,543
Federal Home Loan Bank and Federal Reserve Bank stock 2,578 2,611
Premises and equipment, net 7,203 7,257
Real estate and other property acquired through foreclosure 2,444 2,247
Interest receivable 2,701 2,740
Goodwill 15,816 15,816
Current year tax receivable 597 597
Other assets 5,814 4,736
------------- --------------
Total assets $ 537,758 $ 537,255
============= ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits
Non-interest bearing $ 67,963 $ 68,380
Time deposits, $100,000 and over 41,557 40,213
Other interest bearing 335,522 329,205
------------- --------------
Total deposits 445,042 437,798
Federal funds purchased - 1,838
Securities sold under agreements to repurchase 7,293 7,208
Federal Home Loan Bank advances 9,121 9,288
Other borrowed funds - 800
Notes payable 1,402 1,402
Guaranteed junior subordinated interest debentures 20,876 20,876
Interest payable 624 5,532
Other liabilities 2,788 1,484
------------- --------------
Total liabilities 487,146 486,226
Stockholders' equity
Preferred stock, no par value; 1,000,000 shares authorized;
none issued or outstanding - -
Common stock, no par value; 10,000,000 shares authorized;
5,232,230 shares issued and outstanding 1,103 1,103
Surplus 43,445 43,445
Retained earnings 7,811 7,008
Accumulated other comprehensive income (1,747) (527)
------------- --------------
Total stockholders' equity 50,612 51,029
------------- --------------
Total liabilities and stockholders' equity $ 537,758 $ 537,255
============= ==============
- --------------------------------------------------------------------------------------------------------------------
See Accompanying Notes to Consolidated Financial Statements
PREMIER FINANCIAL BANCORP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2005 AND 2004
(IN THOUSANDS EXCEPT PER SHARE DATA)
(UNAUDITED)
- --------------------------------------------------------------------------------------------------------------------
Three Months Ended
March 31,
2005 2004
---- ----
Interest income
Loans, including fees $ 5,636 $ 5,845
Securities available for sale
Taxable 1,219 1,065
Tax-exempt 25 80
Federal funds sold and other 165 65
----------- -----------
Total interest income 7,045 7,055
Interest expense
Deposits 1,517 1,632
Repurchase agreements 36 11
FHLB advances and other borrowings 143 247
Debentures 622 719
----------- -----------
Total interest expense 2,318 2,609
Net interest income 4,727 4,446
Provision for loan losses 243 135
----------- -----------
Net interest income after
provision for loan losses 4,484 4,311
Non-interest income
Service charges 581 584
Insurance commissions 11 17
Securities gains - 10
Other 315 245
----------- -----------
907 856
Non-interest expenses
Salaries and employee benefits 2,327 2,230
Occupancy and equipment expenses 602 505
Professional fees 134 560
Taxes, other than payroll, property and income 82 134
Write-downs, expenses, sales of
other real estate owned 12 61
Supplies 83 88
Other expenses 994 894
----------- -----------
4,234 4,472
----------- -----------
Income from continuing operations
before income taxes 1,157 695
Provision for income taxes 354 213
----------- -----------
Income from continuing operations 803 482
----------- -----------
Discontinued operation
Income from operation of
discontinued component - 41
Provison for income taxes - 12
----------- -----------
Income from discontinued operation - 29
----------- -----------
Net income $ 803 $ 511
=========== ===========
- --------------------------------------------------------------------------------------------------------------------
See Accompanying Notes to Consolidated Financial Statements
PREMIER FINANCIAL BANCORP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS (continued)
THREE MONTHS ENDED MARCH 31, 2005 AND 2004
(IN THOUSANDS EXCEPT PER SHARE DATA)
(UNAUDITED)
- --------------------------------------------------------------------------------------------------------------------
Three Months Ended
March 31,
2005 2004
---- ----
Weighted average shares outstanding:
Basic 5,232 5,232
Diluted 5,244 5,235
Earnings per share from continuing operations:
Basic $ 0.15 $ 0.09
Diluted 0.15 0.09
Earnings per share from discontinued operation:
Basic $ - $ 0.01
Diluted - 0.01
Net earnings per share:
Basic $ 0.15 $ 0.10
Diluted $ 0.15 $ 0.10
- --------------------------------------------------------------------------------------------------------------------
See Accompanying Notes to Consolidated Financial Statements
PREMIER FINANCIAL BANCORP, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
THREE ENDED MARCH 31, 2005 AND 2004
(IN THOUSANDS)
(UNAUDITED)
- --------------------------------------------------------------------------------------------------------------------
Three Months Ended
March 31,
2005 2004
---- ----
Net income $ 803 $ 511
Other comprehensive income (loss):
Unrealized gains and (losses) arising during
the period (1,848) 621
Reclassification of realized amount - (10)
---------- ---------
Net change in unrealized gain (loss) on
securities (1,848) 611
Less: Tax impact (628) 208
---------- ---------
Other comprehensive income (loss) (1,220) 403
Comprehensive income (loss) $ (417) $ 914
========== =========
- --------------------------------------------------------------------------------------------------------------------
See Accompanying Notes to Consolidated Financial Statements
PREMIER FINANCIAL BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 2005 AND 2004
(IN THOUSANDS)
(UNAUDITED)
- --------------------------------------------------------------------------------------------------------------------
2005 2004
---- ----
Cash flows from continuing operating activities
Income (loss) from continuing operations $ 803 $ 482
Adjustments to reconcile income (loss) to net
cash from continuing operating activities
Depreciation 221 229
Provision for loan losses 243 135
Amortization, net 77 135
FHLB stock dividends (25) (23)
Investment securities losses (gains), net - (10)
Write downs of OREO 10 16
Changes in
Interest Receivable 39 502
Other assets (445) 221
Interest Payable (4,908) 756
Other liabilities 1,304 391
------------- -------------
Net cash from continuing operating activities (2,681) 2,834
Cash flows from continuing investing activities
Purchases of securities available for sale (5,536) (21,487)
Proceeds from sales of securities available for sale - 414
Proceeds from maturities and calls of securities available
for sale 8,741 29,460
Redemption of FHLB stock, net of purchases 58 (8)
Net change in federal funds sold (6,085) (17,960)
Net change in loans 1,863 1,139
Purchases of premises and equipment, net (167) (200)
Proceeds from sale of other real estate acquired
through foreclosure 251 1,301
------------- -------------
Net cash from continuing investing activities (875) (7,341)
Cash flows from continuing financing activities
Net change in deposits 7,244 (5,152)
Net change in short-term borrowings - 1,476
Repayment of Federal Home Loan Bank advances (167) (113)
Repayment of Other Borrowed Funds (800) (450)
Net change in federal funds purchased (1,838) -
Net change in agreements to repurchase securities 85 6,000
------------- -------------
Net cash from continuing financing activities 4,524 1,761
------------- -------------
Net change in cash and cash equivalents
from continuing activities 968 (2,746)
Cash and cash equivalents of continuing operations
at beginning of period 14,474 16,422
------------- -------------
Cash and cash equivalents of continuing operations
at end of period $ 15,442 $ 13,676
============= =============
- --------------------------------------------------------------------------------------------------------------------
See Accompanying Notes to Consolidated Financial Statements
PREMIER FINANCIAL BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
THREE MONTHS ENDED MARCH 31, 2005AND 2004
(IN THOUSANDS)
(UNAUDITED)
- --------------------------------------------------------------------------------------------------------------------
2005 2004
---- ----
Supplemental disclosures of cash flow information:
Cash paid during period for interest $ 7,226 $ 1,853
Loans transferred to real estate acquired through foreclosure 458 1,791
Net change in cash and cash equivalents of discontinued operations - (836)
- --------------------------------------------------------------------------------------------------------------------
See Accompanying Notes to Consolidated Financial Statements
PREMIER FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED, IN THOUSANDS)
- --------------------------------------------------------------------------------
NOTE 1 - BASIS OF PRESENTATION
The consolidated financial statements include the accounts of Premier Financial
Bancorp, Inc. (the Company) and its wholly owned subsidiaries:
March 31, 2005
Net Income
Year ------------------
Acquired Assets Qtr
Citizens Deposit Bank & Trust Vanceburg, Kentucky 1991 $ 112,335 $ 349
Farmers Deposit Bank Eminence, Kentucky 1996 86,448 (64)
Ohio River Bank Ironton, Ohio 1998 82,063 210
First Central Bank, Inc. Philippi, West Virginia 1998 91,831 282
Boone County Bank, Inc. Madison, West Virginia 1998 159,933 550
Mt. Vernon Financial Holdings, Inc. Huntington, West Virginia 1999 2,959 (13)
The Company also has a data processing subsidiary, Premier Data Services, Inc.,
and the PFBI Capital Trust subsidiary as discussed in Note 9. In accordance with
FASB Interpretation No. 46, the Trust is no longer consolidated with the
Company. All other significant intercompany transactions and balances have been
eliminated.
The Company maintains Employee Stock Ownership Incentive Plans (the Plans)
whereby certain employees of the Company are eligible to receive incentive stock
options. The Plans are accounted for in accordance with Accounting Principles
Board Opinion (APB) No. 25, "Accounting for Stock Issued to Employees", and
related interpretations. Pursuant to the Plans, a maximum of 600,000 shares of
the Company's common stock may be issued through the exercise of these incentive
stock options. The option price is the fair market value of the Company's shares
at the date of the grant. The options are exercisable within ten years from the
date of grant.
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.
- --------------------------------------------------------------------------------
CONTINUED
PREMIER FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED, IN THOUSANDS)
- --------------------------------------------------------------------------------
NOTE 1 - BASIS OF PRESENTATION - (continued)
2005 2004
----------- -----------
Income from continuing operations $ 803 $ 482
Deduct: Stock-based compensation
expense determined under fair
value based method, net of forfeitures (15) (10)
----------- -----------
Pro forma income $ 788 $ 472
Basic earnings per share
from continuing operations $ 0.15 $ 0.09
Pro forma basic earnings per share 0.15 0.09
Diluted earnings per share
from continuing operations $ 0.15 $ 0.09
Pro forma diluted earnings per share 0.15 0.09
On January 19, 2005, 35,000 incentive stock options were granted out of the 2002
Plan at an exercise price of $11.62. These options vest in three equal annual
installments ending on January 19, 2008. On February 18, 2004, 28,200 incentive
stock options were granted out of the 2002 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 Plan at an exercise price of $7.96. These options vest in three equal
annual installments ending on January 15, 2006. Proforma stock-compensation
expense is being amortized over each of the three-year vesting periods. There
were no options granted during 2002. Future pro forma net income will be
negatively impacted should the Company choose to grant additional options.
The pro forma effects are computed using option pricing models, using the
following weighted-average assumptions as of grant date.
2005 2004
---- ----
Risk-free interest rate 3.70% 3.15%
Expected option life (yrs) 5.00 5.00
Expected stock price volatility 0.25 0.25
Dividend yield 0.00% 0.00%
Weighted average fair value of
options granted during the year $3.48 $2.64
- --------------------------------------------------------------------------------
CONTINUED
PREMIER FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED, IN THOUSANDS)
- --------------------------------------------------------------------------------
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."
A condensed statement of operations for Citizens Bank follows (in thousands):
For the Three
Months Ended
March 31
2004
Interest income $ 1,075
Interest expense 374
----------
Net interest income 701
Provision for loan losses -
Non-interest income 217
Non-interest expense 877
Income tax (benefit) 12
----------
Net (loss) $ 29
==========
- --------------------------------------------------------------------------------
CONTINUED
PREMIER FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED, IN THOUSANDS)
- --------------------------------------------------------------------------------
NOTE 3 - REGULATORY MATTERS
On September 29, 2000, the Company entered into an agreement with the Federal
Reserve Bank of Cleveland (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 supercedes and rescinds all previous agreements between the
Company and the FRB. Among the provisions of the agreement were the continuation
of the restriction on the Company's payment of dividends on its common stock
without the express written consent of the FRB and the continuation of the
restriction on the Company's payment of quarterly distributions on its Trust
Preferred Securities without the express written consent of the FRB. Among other
provisions, the agreement required the Company to retain an independent
consultant to review its management, directorate and organizational structure,
adopt a management plan responsive to such consultant's report, update its
management succession plan in accordance with any recommendations in such
consultant's report, monitor its subsidiary banks' compliance with bank policies
and loan review programs, conduct formal quarterly reviews of its subsidiary
Banks' allowances for loan losses, maintain sufficient capital, submit a plan to
the FRB for improving consolidated earnings over a three-year period, and submit
to the FRB annual projections of planned sources and uses of the Company's cash,
including a plan to service its outstanding debt and trust preferred securities.
The Company's compliance with the written agreement is being monitored by a
committee which consists of three of its outside directors. As of March 31,
2005, management believes the Company is operating in compliance with the
provisions of the written agreement.
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;
- --------------------------------------------------------------------------------
CONTINUED
PREMIER FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED, IN THOUSANDS)
- --------------------------------------------------------------------------------
NOTE 3 - REGULATORY MATTERS (continued)
(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.
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.
In accordance with the Order, the Company contributed additional capital to
Farmers to ensure a 5.00% leverage ratio at December 31, 2003. The Company also
submitted to the Supervisory Authorities a written capital restoration plan that
incrementally increased the Bank's Tier I Leverage Ratio to 8.00% at 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%. At March 31, 2005, the Bank's Tier I Leverage Ratio was
9.95%. The Company also believes the Bank is in compliance with all of the other
provisions of the Order
- --------------------------------------------------------------------------------
CONTINUED
PREMIER FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED, IN THOUSANDS)
- --------------------------------------------------------------------------------
NOTE 4- SECURITIES
Amortized cost and fair value of investment securities, by category, at
March 31, 2005 are summarized as follows:
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
Available for sale
U. S. Treasury securities $ 980 $ - $ (14) $ 966
U. S. agency securities 109,443 23 (2,122) 107,344
Obligations of states and political
subdivisions 2,510 59 (2) 2,567
Mortgage-backed securities 38,044 8 (602) 37,450
Corporate securities 427 3 - 430
-------------- -------------- -------------- ---------------
Total available for sale $ 151,404 $ 93 $ (2,740) $ 148,757
============== ============== =============== ===============
Amortized cost and fair value of investment securities, by category, at
December 31, 2004 are summarized as follows:
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
Available for sale
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
============== ============== =============== ===============
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 March 31, 2005 and December 31,
2004 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.
- --------------------------------------------------------------------------------
CONTINUED
PREMIER FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED, IN THOUSANDS)
- --------------------------------------------------------------------------------
NOTE 4- SECURITIES (continued)
Securities with unrealized losses at March 31, 2005 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. Treasury securities $ 966 $ (14) $ - $ - $ 966 $ (14)
U.S. agency securities 95,410 (1,802) 9,913 (320) 105,323 (2,122)
Obligations of states and
political subdivisions 349 (2) - - 349 (2)
Mortgage-backed securities 30,442 (440) 4,946 (162) 35,388 (602)
---------- -------- -------- ------- -------- -------
Total temporarily impaired $ 127,167 $(2,258) $ 14,859 $ (482) $ 142,026 $(2,740)
========= ======== ======== ======= ========= ========
Securities with unrealized losses at December 31, 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 $ (81) $ 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 $ (177) $ 115,868 $(1,190)
========= ======== ======== ======= ========= ========
NOTE 5 - LOANS
Major classifications of loans at March 31, 2005 and December 31, 2004 are
summarized as follows:
2005 2004
------------ ------------
Commercial, secured by real estate $ 101,692 $ 101,567
Commercial, other 41,051 40,923
Real estate construction 6,601 5,906
Residential real estate 126,257 128,243
Agricultural 2,697 2,380
Consumer and home equity 42,158 44,470
Other 1,790 1,438
------------ ------------
$ 322,246 $ 324,927
============ ============
- --------------------------------------------------------------------------------
CONTINUED
PREMIER FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED, IN THOUSANDS)
- --------------------------------------------------------------------------------
NOTE 5- LOANS (continued)
The following table sets forth information with respect to the Company's
impaired loans at March 31, 2005 and December 31, 2004.
2005 2004
------------ ------------
Impaired loans at period end with an allowance $ 11,952 $ 12,918
Impaired loan at period end with no allowance 259 263
Amount of allowance for loan losses allocated 3,054 2,915
The following table sets forth information with respect to the Company's
nonperforming loans at March 31, 2005 and December 31, 2004.
2005 2004
------------ ------------
Non-accrual loans $ 7,028 $ 6,847
Accruing loans which are contractually
past due 90 days or more 620 739
Restructured loans 226 238
------------ ------------
$ 7,874 $ 7,824
============ ============
NOTE 6 - ALLOWANCE FOR LOAN LOSSES
Changes in the allowance for loan losses for the three months ended March 31,
2005 and 2004 are as follows:
Three Months Ended
March 31,
2005 2004
------------ ------------
Balance, beginning of period $ 9,384 $ 14,300
Gross charge-offs (550) (1,067)
Recoveries 190 383
Provision for loan losses 243 135
------------ ------------
Balance, end of period $ 9,267 $ 13,751
============ ============
- --------------------------------------------------------------------------------
CONTINUED
PREMIER FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED, IN THOUSANDS)
- --------------------------------------------------------------------------------
NOTE 7 - 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.
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 March 31, 2005, $17,453,000 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 March 31, 2005, the amount of
Preferred Securities includable in the Company's Tier I capital would have been
limited to $12,181,000.
As previously disclosed, pursuant to an agreement entered into with the Federal
Reserve Bank of Cleveland (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.
- --------------------------------------------------------------------------------
CONTINUED
PREMIER FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED, IN THOUSANDS)
- --------------------------------------------------------------------------------
NOTE 7 - GUARANTEED JUNIOR SUBORDINATED INTEREST DEBENTURES (continued)
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 could 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 was disbursed on March 31, 2005 to
shareholders of record on March 15, 2005. The accrued interest on the deferred
distributions was also paid when the deferred distributions were 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 8 - STOCKHOLDERS' EQUITY AND REGULATORY MATTERS
The Company's principal source of funds for dividend payments to shareholders is
dividends received from the subsidiary Banks. Banking regulations limit the
amount of dividends that may be paid without prior approval of regulatory
agencies. Under these regulations, the amount of dividends that may be paid in
any calendar year is limited to the current year's net profits, as defined,
combined with the retained net profits of the preceding two years, subject to
the capital requirements and additional restrictions as discussed below. During
2005, the Banks could, without prior approval, declare dividends of
approximately $956,000 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.
- --------------------------------------------------------------------------------
CONTINUED
PREMIER FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED, IN THOUSANDS)
- --------------------------------------------------------------------------------
NOTE 8 - STOCKHOLDERS' EQUITY AND REGULATORY MATTERS (continued)
These quantitative measures established by regulation to ensure capital adequacy
require the Company and Banks to maintain minimum amounts and ratios (set forth
in the following table) of Total and Tier I capital (as defined in the
regulations) to risk-weighted assets (as defined), and of Tier I capital (as
defined) to average assets (as defined). Management believes, as of March 31,
2005, that the Company and the Banks meet all quantitative capital adequacy
requirements to which they are subject.
Shown below is a summary of regulatory capital ratios for the Company:
Regulatory To Be Considered
March 31, December 31, Minimum Well
2005 2004 Requirements Capitalized
---------- ------------ ------------ ----------------
Tier I Capital (to Risk-Weighted Assets) 17.0% 16.6% 4.0% 6.0%
Total Capital (to Risk-Weighted Assets) 19.2% 18.9% 8.0% 10.0%
Tier I Capital (to Average Assets) 10.1% 9.7% 4.0% 5.0%
The capital amounts and classifications are also subject to qualitative
judgments by the regulators. As a result of these qualitative judgments, the
Company and one of the Company's subsidiaries have entered into agreements with
the applicable regulatory authorities which provide for additional restrictions
on their respective capital levels and the payment of dividends. The Company
entered into an agreement with the Federal Reserve Bank of Cleveland (FRB), as
discussed in Note 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.
Effective January 1, 2004, Farmers Deposit Bank (Farmers Deposit) was issued a
C&D order by the FDIC and the Kentucky Deptarment of Financial Institutions
(KDFI), as discussed in Note 3, 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 9.95% at March 31, 2005.
As of March 31, 2005, the most recent notification from the FRB categorized the
Company and its subsidiary banks as well capitalized under the regulatory
framework for prompt corrective action. To be categorized as well capitalized,
the Company must maintain minimum Total risk-based, Tier I risk-based and Tier I
leverage ratios as set forth in the preceding table. There are no conditions or
events since that notification that management believes have changed the
Company's category.
- --------------------------------------------------------------------------------
CONTINUED
PREMIER FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED, IN THOUSANDS)
- --------------------------------------------------------------------------------
NOTE 9 - 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 in Note 1 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 was originally to
apply to stock option awards granted or modified after the first quarter or year
following June 15, 2005. However, this requirement has been postponed until the
first quarter or year following December 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.
- --------------------------------------------------------------------------------
CONTINUED
PREMIER FINANCIAL BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
- --------------------------------------------------------------------------------
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations
FORWARD-LOOKING STATEMENTS
Management's discussion and analysis contains forward-looking
statements that are provided to assist in the understanding of anticipated
future financial performance. However, such performance involves risks and
uncertainties, and there are certain important factors that may cause actual
results to differ materially from those anticipated. These important factors
include, but are not limited to, economic conditions (both generally and more
specifically in the markets in which Premier operates), competition for
Premier's customers from other providers of financial services, government
legislation and regulation (which changes from time to time), changes in
interest rates, Premier's ability to originate quality loans, collect delinquent
loans and attract and retain deposits, the impact of Premier's growth, Premier's
ability to control costs, and new accounting pronouncements, all of which are
difficult to predict and many of which are beyond the control of Premier.
A. Results of Operations
A financial institution's primary sources of revenue are generated by
interest income on loans, investments and other earning assets, while its major
expenses are produced by the funding of these assets with interest bearing
liabilities. Effective management of these sources and uses of funds is
essential in attaining a financial institution's optimal profitability while
maintaining a minimum amount of interest rate risk and credit risk.
The following narrative discusses the continuing operations of the
Company. As more fully explained in Note 2 to the consolidated financial
statements above, the narrative excludes the discontinued operations of
Premier's subsidiary Citizens Bank (Kentucky), Inc. On February 13, 2004,
Premier signed a definitive agreement to sell the subsidiary for $14,500,000 in
cash. The sale was completed on July 1, 2004.
Income from continuing operations for the three months ended March 31,
2005 was $803,000, or 15 cents per share, compared to income from continuing
operations of $482,000 or 9 cents per share for the three months ended March 31,
2004. The increase in net income reported for 2005 was primarily the result of
lower interest expense and lower professional fees. These expense savings were
only partially offset by a higher provision for loan losses.
Net interest income for the quarter ending March 31, 2005 totaled $4.73
million, up from the $4.45 million of net interest income earned in the first
quarter of 2004. Interest income in 2005 remained relatively unchanged when
compared to the first quarter of 2004. Interest income on loans declined by
$209,000 due to lower average loans outstanding compounded by the negative
effect of placing additional loans on non-accrual status during the quarter.
This decline in loan interest income was nearly offset by increases in interest
income from investments and the increase in interest rates earned on federal
funds sold. Interest expense declined in total by $291,000. Savings of $115,000
were realized due to lower interest costs on deposits as maturing certificates
of deposit continue to renew at lower interest rates due to the low interest
rate environment. Interest expense savings of $104,000 were realized due to the
paydown and payoff of other borrowings. Additional interest savings of $97,000
were realized due to the early redemption of $5.5 million of Premier's trust
preferred securities in the fourth quarter of 2004. As a result of the interest
savings, the net interest margin for the three months ending March 31, 2005
improved to approximately 3.81% compared to 3.58% for the same period in 2004.
Non-interest income increased to $907,000 for the first three months of
2005 compared to $856,000 for the first three months of 2004. Excluding the
$10,000 of securities gains realized in the first quarter of 2004, non-interest
income increased by $61,000 or 7.2%, largely due to increases in other sources
of banking income such as revenue from checkbook sales and ATM/debit card fees.
Non-interest expenses for the first quarter of 2005 totaled $4,234,000
or 3.2% of average assets of continuing operations on an annualized basis
compared to $4,472,000 or 3.3% of average assets of continuing operations for
the same period of 2004. Non-interest expense in the first quarter of 2005
includes two one-time events that are nearly offsetting. Professional fee
expense includes $148,000 of reimbursed legal fees from an insurance settlement.
Other expenses include a $140,000 loss on the disposition of a bond servicing
department at one of the Company's affiliate banks. The decrease in non-interest
expense is largely due to a $426,000 decrease in professional fees, a $52,000
decrease in taxes not on income, property or payroll and a $49,000 decrease in
OREO related expenses. In addition to the legal fee reimbursement, professional
fees declined due to reduced activity in the first quarter of 2005 related to
the previously announced SEC investigation as disclosed in the Company's annual
report on Form 10-K for the year ended December 31, 2004. These decreases in
non-interest expenses were partially offset by normal increases in staff and
benefit costs, increased occupancy costs due to the opening of a new location in
2005 and the $140,000 loss on disposition in other expenses described above.
Also included in other non-interest expenses is $50,000 of conversion
expense. Beginning in late 2004 and continuing through July 2005, Premier's
affiliate banks are converting to a third-party data processing and item
processing provider. Expenses related to training and data conversion will be
expensed as incurred, primarily in the second quarter of 2005. Expenditures for
software licenses and new equipment will be capitalized and expensed over time
in accordance with the Company's fixed asset policy. While there will be some
short-term costs to convert in the second quarter, the Company believes the
long-term operating synergies should more than offset these costs as it will be
able to take advantage of emerging technologies in information and item
processing, now and in the years to come.
Income tax expense was $354,000 for the first quarter of 2005 compared
to $213,000 for the first quarter of 2004. The increase in income tax expense
can be primarily attributed to the increase in pre-tax income detailed above.
The effective tax rate for the three months ended March 31, 2005 was 30.6%,
compared to the 30.6% effective tax rate for the same period in 2004.
The annualized returns from continuing operations on stockholders'
equity and on average assets were approximately 6.30% and 0.60% for the three
months ended March 31, 2005 compared to 4.19% and 0.35% for the same period in
2004.
B. Financial Position
Total assets at March 31, 2005 increased $0.5 million or 0.1% to $537.8
million from the $537.3 million at December 31, 2004. While total assets
remained relatively unchanged, the changes in the detailed components of the
balance sheet are described below.
Earning assets decreased to $497.5 million at March 31, 2005 from the
$499.0 million at December 31, 2004, a decrease of $1.5 million, or 0.3%. The
decrease was largely due to a decrease in the securities portfolio and total
loans outstanding partially offset by an increase in federal funds sold (see
below).
Cash and due from banks at March 31, 2005 was $15.4 million, a $0.9
million increase from $14.5 million on December 31, 2004. Federal funds sold
increased to $23.4 million from the $17.3 million reported at December 31, 2004.
The increases in cash and federal funds sold was the result of retaining the
liquidity to be used to settle March investment purchases in April and to
satisfy short-term deposit withdrawal requirements.
Securities available for sale totaled $148.8 million at March 31, 2005,
a $5.1 million decrease from the $153.9 million at December 31, 2004. The
decline was largely due to a slightly lower volume of purchases versus the
volume calls and maturities that occurred during the quarter coupled with a $1.8
million decline in the market value of the total portfolio. 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 March 31, 2005 and December 31, 2004 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. Additional details on investment activities can be
found in the Consolidated Statements of Cash Flows.
Total loans at March 31, 2005 were $322.2 million compared to $324.9
million at December 31, 2004, a decrease of nearly $2.7 million. This decrease
can primarily be attributed to net loan pay-offs and continuing collections at
Farmers Deposit Bank which were partially offset by loan growth in the Company's
West Virginia market.
Deposits totaled $445.0 million as of March 31, 2005, a $7.2 million
increase from the $437.8 million in deposits at December 31, 2004. The increase
is largely due to interest bearing deposit growth at all of the Company's
affiliate banks except Farmers Deposit. Some of the growth is due to seasonal
tax collections by local governments. Partially offsetting this increase in
deposits was a $1.8 million decline in federal funds purchased. These short-term
overnight borrowings were no longer needed for funding purposes due to the
growth in deposit balances.
Federal Home Loan Bank advances declined by $167,000 in the first
quarter of 2005 due to regularly scheduled principal payments. Other borrowed
funds decreased by $800,000 since December 31, 2004, as the Company fully repaid
its bank debt in March 2005. See Note 8 to the consolidated financial statements
for additional information on the Company's outstanding subordinated debentures.
The following table sets forth information with respect to the
Company's nonperforming assets at March 31, 2005 and December 31, 2004.
(In Thousands)
2005 2004
---- ----
Non-accrual loans $ 7,028 $ 6,847
Accruing loans which are contractually
past due 90 days or more 620 739
Restructured 226 238
-------------- ------------
Total non-performing loans 7,874 7,824
Other real estate acquired through
foreclosure 2,444 2,247
-------------- ------------
Total non-performing assets $ 10,318 $ 10,071
============== ============
Non-performing loans as a percentage
of total loans 2.44% 2.41%
Non-performing assets as a percentage
of total assets (of continuing operations) 1.92% 1.87%
Total non-performing loans and non-performing assets have increased
since year-end due to the deterioration of a few loans in the normal course of
the Company's operations. Non-accrual loans increased by $181,000 as
rehabilitated loans and loans transferred to OREO were more than offset by loans
placed on non-accrual. While non-accrual loans increased, accruing loans past
due 90 days or more decreased by $119,000. A significant effort has been placed
on reviews of loan files, efforts by lenders to bring borrowers current with the
terms of their loan agreements and the sale of OREO properties. As in the past,
when these plans are executed, Premier may experience increases in
non-performing loans and non-performing assets. Furthermore, any resulting
increases in loans placed on non-accrual status will have a negative impact on
future loan interest income. Also, as these plans are executed, other loans may
be identified that would necessitate additional charge-offs and potentially
additional provisions for loan losses.
The provision for loan losses was $243,000 for the first quarter of
2005 compared to $135,000 for the first quarter of 2004. The increase in the
provision was made in accordance with Premier's policies regarding management's
estimation of probable incurred losses in the loan portfolio and the adequacy of
the allowance for loan losses, which are in accordance with accounting
principles generally accepted in the United States of America. Management's
estimation process indicated that due to loan growth and to the newly
deteriorating loans identified in the normal course of business an increase in
the provisions for loan losses was warranted. Gross charge-offs totaled $550,000
during the first quarter of 2005. Any collections on these loans would be
presented in future financial statements as recoveries of the amounts charged
against the allowance. Recoveries recorded during the first quarter of 2005
totaled $190,000. The allowance for loan losses at March 31, 2005 was 2.88% of
total loans as compared to 2.89% at December 31, 2004. The stable percentage of
allowance for loan losses to total loans is largely due to the lower level of
charge-offs and to the sufficient loan loss reserves allocated to those loans
actually charged off during the first quarter.
C. Critical Accounting Policies
The Company follows financial accounting and reporting policies that
are in accordance with generally accepted accounting principles in the United
States of America. These policies are presented in Note 1 to the consolidated
audited financial statements in the Company's annual report on Form 10-K for the
year ended December 31, 2004 Some of these accounting policies, as discussed
below, are considered to be critical accounting policies. Critical accounting
policies are those policies that require management's most difficult, subjective
or complex judgments, often as a result of the need to make estimates about the
effect of matters that are inherently uncertain. The Company has identified
three accounting policies that are critical accounting policies and an
understanding of these policies is necessary to understand the financial
statements. These policies relate to determining the adequacy of the allowance
for loan losses, the impairment of goodwill, and the valuation of deferred tax
assets. A detailed description of these accounting policies is contained in the
Company's annual report on Form 10-K for the year ended December 31, 2004 There
have been no significant changes in the application of these accounting policies
since December 31, 2004.
Management believes that the judgments, estimates and assumptions used
in the preparation of the consolidated financial statements are appropriate
given the factual circumstances at the time.
D. Liquidity
Liquidity objectives for the Company can be expressed in terms of
maintaining sufficient cash flows to meet both existing and unplanned
obligations in a cost effective manner. Adequate liquidity allows the Company to
meet the demands of both the borrower and the depositor on a timely basis, as
well as pursuing other business opportunities as they arise. Thus, liquidity
management embodies both an asset and liability aspect while attempting to
maximize profitability. In order to provide for funds on a current and long-term
basis, the Company's subsidiary banks rely primarily on the following sources:
1. Core deposits consisting of both consumer and commercial
deposits and certificates of deposit of $100,000 or more.
Management believes that the majority of its $100,000 or more
certificates of deposit are no more volatile than its other
deposits. This is due to the nature of the markets in which the
subsidiaries operate.
2. Cash flow generated by repayment of loans and interest.
3. Arrangements with correspondent banks for purchase of unsecured
federal funds.
4. The sale of securities under repurchase agreements and borrowing
from the Federal Home Loan Bank.
5. Maintenance of an adequate available-for-sale security
portfolio. The Company owns $148.8 million of securities at
market value as of March 31, 2005.
The cash flow statements for the periods presented in the financial
statements provide an indication of the Company's sources and uses of cash as
well as an indication of the ability of the Company to maintain an adequate
level of liquidity.
E. Capital
At March 31, 2005, total shareholders' equity of $50.6 million was 9.4%
of total assets of continuing operations. This compares to total shareholders'
equity of $51.0 million or 9.5% of total assets of continuing operations on
December 31, 2004.
Tier I capital totaled $52.4 million at March 31, 2005, which
represents a Tier I leverage ratio of 10.1%.
Book value per share was $9.67 at March 31, 2005, and $9.75 at December
31, 2004. The decrease in book value per share was the result of $417,000 of
comprehensive net loss for the first quarter of 2005 as net income was decreased
by the $1,202,000 after tax decrease in the market value of investment
securities available for sale during the quarter.
PREMIER FINANCIAL BANCORP, INC.
- --------------------------------------------------------------------------------
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Company currently does not engage in any derivative or hedging
activity. Refer to the Company's 2004 10-K for analysis of the interest rate
sensitivity. The Company believes there have been no significant changes in the
interest rate sensitivity since previously reported on the Company's 2004 10-K.
Item 4. Controls and Procedures
Premier management, including the Chief Executive Officer and Chief
Financial Officer, has conducted an evaluation of the effectiveness of
disclosure controls and procedures pursuant to Exchange Act Rule 13a-15c as of
the end of the period covered by this quarterly report. Based on that
evaluation, the Chief Executive Officer and Chief Financial Officer concluded
that the disclosure controls and procedures are effective in ensuring that all
material information required to be filed in this quarterly report has been made
known to them in a timely fashion.
"Internal controls" are procedures, which are designed with the
objective of providing reasonable assurance that (1) transactions are properly
authorized; (2) assets are safeguarded against unauthorized or improper use; and
(3) transactions are properly recorded and reported, all so as to permit the
preparation of reports and financial statements in conformity with generally
accepted accounting principles. Premier management uses the financial reports of
its subsidiaries to make decisions about the allocation of the Company's
resources, to implement strategies to improve the Company's performance, and to
prepare the consolidated financial statements of the Company for its
shareholders and regulatory authorities. However, a control system, no matter
how well conceived and operated, can provide only reasonable, not absolute,
assurance that the objectives of the control system are met. Further, the design
of a control system must reflect the fact that there are resource constraints,
and the benefits of controls must be considered relative to their cost. Because
of the inherent limitations in all control systems, no evaluation of controls
can provide absolute assurance that all control issues and instances of fraud,
if any, within a company have been detected. These inherent limitations include
the realities that judgments in decision-making can be faulty, and that
breakdowns can occur because of simple error or mistake. The design of any
system of controls is also based, in part, upon certain assumptions about the
likelihood of future events, and there can be no assurance that any design will
succeed in achieving its stated goals under all potential future conditions.
Over time, a control may become inadequate because of changes in conditions, or
the degree of compliance with the policies or procedures may deteriorate.
Because of the inherent limitations in a cost-effective control system,
misstatements due to error or fraud may occur and not be detected. Finally,
controls can be circumvented by the individual acts of some persons, by
collusion of two or more people, or by management override of the control.
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 July 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. One of the goals of the
new system is to provide more of the Company's financial reports and disclosures
through automated reports rather than manually prepared reports and thus reduce
the risk of human error in report preparation.
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 first fiscal quarter that have materially affected or are
reasonably likely to materially affect Premier's internal controls over
financial reporting.
PREMIER FINANCIAL BANCORP, INC.
- --------------------------------------------------------------------------------
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
See information regarding regulatory matters in Note 3 and Note 8 to the
consolidated financial statements
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds None
- ----------------------------------------------------------------------
Item 3. Defaults Upon Senior Securities None
- ------------------------------------------
Item 4. Submission of Matters to a vote of Security Holders None
- --------------------------------------------------------------
Item 5. Other Information None
- ----------------------------
Item 6. Exhibits
(a) The following exhibits are furnished in accordance with the
provisions of Item 601 of Regulation S-K.
31.1 Certification Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002
31.2 Certification Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002
32 Certification Pursuant to 18 U.S.Css.1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Corporation has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PREMIER FINANCIAL BANCORP, INC.
Date: May 16, 2005 /s/ Robert W. Walker
----------------------------------------
Robert W. Walker
President & Chief Executive Officer
Date: May 16, 2005 /s/ Brien M. Chase
----------------------------------------
Brien M. Chase
Vice President & Chief Financial Officer