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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
__X__QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2003
_____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: 0-18868
PREMIER COMMUNITY BANKSHARES, INC.
----------------------------------
(Exact name of registrant as specified in its charter)
Virginia 54-1560968
------------------------------- -----------------------------------
(State or Other Jurisdiction (I.R.S. Employer Identification No.)
Of Incorporation or Organization)
4095 Valley Pike
Winchester, Virginia 22602
-------------------------------- ----------
(Address of Principal Executive Offices) (Zip Code)
(540) 869-6600
(Registrant's telephone number, including area code)
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 such
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 Exchange Act.) YES______ NO___X___
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date: 4,590,584, $1.00 par value,
as of November 12, 2003.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
The following financial statements are provided at the page numbers
indicated.
Consolidated Balance Sheets as of
September 30, 2003 and December 31, 2002...........................3
Consolidated Statements of Income for
the Three Months Ended and Nine Months Ended
September 30, 2003 and 2002........................................4
Consolidated Statements of Changes in
Shareholders' Equity for the Nine Months
Ended September 30, 2003 and 2002..................................5
Consolidated Statements of Cash Flows for the
Nine Months Ended September 30, 2003 and 2002......................6
Notes to Consolidated Financial Statements......................7-11
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations...........................11-16
Item 3. Quantitative and Qualitative
Disclosures about Market Risk.....................................16-17
Item 4. Controls and Procedures..............................................18
Part II. OTHER INFORMATION...................................................19
Signatures....................................................................20
2
PART I. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
PREMIER COMMUNITY BANKSHARES, INCORPORATED
Consolidated Balance Sheets
(In Thousands, Except for Share Data)
(Unaudited)
September 30, December 31,
2003 2002
Assets: -------------------------------------
Cash and due from banks $22,057 $22,719
Interest-bearing deposits in other banks 285 2,049
Federal funds sold 30,888 19,017
Securities available for sale, at fair value 15,075 15,276
Securities held to maturity (fair value: September 30, 2003,
$9,032; December 31, 2002, $10,033) 9,296 10,020
Loans, net of allowance for loan losses of $3,965,
September 30, 2003; $3,340, December 31, 2002 359,290 312,554
Bank premises and equipment, net 9,955 7,660
Accrued interest receivable 1,662 1,645
Other real estate 67 67
Other assets 3,212 2,748
-------------------------------------
$451,787 $393,755
=====================================
Liabilities and Shareholders' Equity:
Liabilities:
Deposits:
Non-interest bearing demand deposits $57,339 $48,536
Savings and interest-bearing demand deposits 124,106 100,969
Time deposits 209,900 195,557
-------------------------------------
Total deposits 391,345 345,062
Federal Home Loan Bank advances 11,000 9,000
Short-term borrowings 315 535
Accounts payable and accrued expenses 1,960 2,138
Capital lease payable 190 196
Trust Preferred Capital Notes 13,000 7,000
-------------------------------------
$417,810 $363,931
-------------------------------------
Shareholders' Equity:
Preferred stock, Series A, 5% noncumulative, no par
value; 1,000,000 shares authorized and unissued $0 $0
Common stock, $1 par value, 20,000,000 shares authorized
Sept 30, 2003, 4,590,584 shares issued and outstanding;
December 31, 2002, 4,555,484 shares issued and outstanding 4,590 4,555
Capital surplus 15,150 14,977
Retained earnings 14,029 10,023
Accumulated other comprehensive income 208 269
-------------------------------------
Total shareholders' equity 33,977 29,824
$451,787 $393,755
=====================================
See Accompanying Notes to Consolidated Financial Statements
3
PREMIER COMMUNITY BANKSHARES, INCORPORATED
Consolidated Statements of Income
(In Thousands, Except for Share Data)
(Unaudited) (Unaudited)
For the Quarter Ended For the Nine Months Ended
September 30, September 30,
2003 2002 2003 2002
----------------------------------------------------------
Interest and dividend income:
Interest and fees on loans $ 6,368 $ 5,638 $ 18,529 $ 15,696
Interest on investment securities
Nontaxable (3) 56 163 139
Taxable 139 73 250 286
Interest and dividends on securities available for sale:
Nontaxable (2) 29 163 69
Taxable 140 137 239 378
Dividends 13 14 50 59
Interest on deposits in banks 0 7 3 11
Interest on federal funds sold 61 51 181 217
----------------------------------------------------------
Total interest and dividend income $ 6,716 $ 6,005 $ 19,578 $ 16,855
----------------------------------------------------------
Interest expense:
Interest on deposits $ 1,857 $ 1,969 $ 5,759 $ 5,747
Interest on capital lease obligations 4 4 0 12
Interest on borrowings 179 171 518 498
----------------------------------------------------------
Total interest expense $ 2,040 $ 2,144 $ 6,277 $ 6,257
----------------------------------------------------------
Net interest income $ 4,676 $ 3,861 $ 13,289 $ 10,598
Provision for loan losses 225 385 715 805
----------------------------------------------------------
Net interest income after provision for loan losses $ 4,451 $ 3,476 $ 12,574 $ 9,793
----------------------------------------------------------
Noninterest income
Service charges on deposit accounts $ 739 $ 397 $ 1,832 $ 1,069
Commissions and fees 188 171 633 481
Other 65 90 188 184
----------------------------------------------------------
Total noninterest income $ 992 $ 658 $ 2,653 $ 1,734
----------------------------------------------------------
Noninterest expense
Salaries and employee benefits $ 1,726 $ 1,327 $ 4,850 $ 3,729
Net occupancy expense of premises 180 143 484 400
Furniture and equipment 223 154 604 415
Other 1,169 809 3,388 2,267
----------------------------------------------------------
Total noninterest expenses $ 3,298 $ 2,433 $ 9,326 $ 6,811
----------------------------------------------------------
Income before income taxes $ 2,145 $ 1,701 $ 5,901 $ 4,716
Provision for income taxes 689 554 1,895 1,543
----------------------------------------------------------
Net income $ 1,456 $ 1,147 $ 4,006 $ 3,173
==========================================================
Average shares:
Basic 4,578,258 4,536,506 4,567,275 4,534,579
Assuming dilution 4,731,853 4,700,779 4,702,414 4,629,033
Earnings per common share:
Basic 0.32 0.25 0.88 0.70
Assuming dilution 0.31 0.24 0.85 0.69
See Accompanying Notes to Consolidated Financial Statements
4
PREMIER COMMUNITY BANKSHARES, INCORPORATED
Consolidated Statement of Changes in Shareholders' Equity
For the Nine Months Ended September 30, 2003 and 2002
(In Thousands)
(Unaudited)
Accumulated
Other Total
Common Capital Retained Comprehensive Comprehensive Shareholders'
Stock Surplus Earnings Income Income Equity
-----------------------------------------------------------------------------------
Balance December 31, 2001 $4,527 $ 14,808 $ 6,342 $ 68 $ 25,745
Comprehensive Income
Net income 3,173 3,173 3,173
Other Comprehensive Income, unrealized
gain on available for sale securities
(net of tax $38) 200 200 200
-------
Total comprehensive income $ 3,373
=======
Issuance of Common Stock-exercise
of stock options (11,000 shares) 11 49 60
--------------------------------------------------- ----------
Balances - September 30, 2002 $4,538 $ 14,857 $ 9,515 $ 268 $ 29,178
=================================================== ==========
Accumulated
Other Total
Common Capital Retained Comprehensive Comprehensive Shareholders'
Stock Surplus Earnings Income Income Equity
-----------------------------------------------------------------------------------
Balance December 31, 2002 $4,555 $ 14,977 $10,023 $ 269 $ 29,824
Comprehensive Income
Net income 4,006 $ 4,006 4,006
Other Comprehensive Income, unrealized
loss on available for sale securities
(net of tax -$31) (61) (61) (61)
-------
Total comprehensive income $ 3,945
=======
Issuance of common stock-
exercise of stock options
(35,000 shares) 35 173 208
--------------------------------------------------- ----------
Balances - September 30, 2003 $4,590 $ 15,150 $14,029 $ 208 $ 33,977
=================================================== ==========
See Accompanying Notes to Consolidated Financial Statements
5
PREMIER COMMUNITY BANKSHARES
Consolidated Statements of Cash Flows
For the Nine Months Ended September 30, 2003 and 2002
(In Thousands)
(Unaudited)
2003 2002
---------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 4,006 $ 3,173
Adjustments to reconcile net income
to net cash provided by operating activities:
Amortization -- 23
Depreciation 430 290
Net amortization and (accretion) on securities 12 40
Provision for loan loss 715 805
Change in loans held for sale -- 471
Changes in assets and liabilities:
(Increase) in other assets (139) (836)
(Increase) Decrease in accrued interest receivable 17 (264)
Increase in accounts payable and accrued expenses 79 94
Increase in interest expense payable 99 184
-------- --------
Net cash provided by operating activities $ 5,219 3,980
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from maturities, calls and principal payments
on securities held to maturity $ 4,485 $ 1,540
Proceeds from maturities, calls and principal payments
on securities available for sale 1,186 4,805
Purchase of securities available for sale (1,836) (7,070)
Purchase of securities held to maturity (3,040) (2,274)
Net (increase) in loans (47,451) (68,857)
Purchase of bank premises and equipment (2,699) (1,421)
-------- --------
Net cash used in investing activities $(49,355) $(73,277)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in demand and interest bearing deposits $ 31,940 $ 27,436
Net increase in certificates of deposits 14,343 39,825
Net increase (decrease) in borrowings 7,780 (47)
Principal payments on capital lease obligation (6) (5)
Cash dividends paid (683) (543)
Proceeds from issuance (repurchase) of common stock 208 60
-------- --------
Net cash provided by financing activities $ 53,582 $ 66,726
-------- --------
Increase (decrease) in cash and cash equivalents $ 9,446 $ (2,571)
Beginning 43,784 39,865
-------- --------
Ending $ 53,230 $ 37,294
======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash payments for:
Interest $ 6,280 $ 6,522
======== ========
Income taxes $ 1,650 $ 1,785
======== ========
Unrealized gain (loss) on securities available for sale $ (93) $ 238
======== ========
See Accompanying Notes to Consolidated Financial Statements
6
PREMIER COMMUNITY BANKSHARES, INC.
Notes to Consolidated Financial Statements
(Unaudited)
Note 1. General
In the opinion of management, the accompanying unaudited consolidated financial
statements contain all adjustments (consisting of only normal recurring
accruals) necessary to present fairly the financial position of Premier
Community Bankshares, Inc. ("Premier" or the "Corporation") for the periods
ending September 30, 2003 and December 31, 2002, and the results of operations
for the quarters and nine months ended September 30, 2003 and 2002 and cash
flows for the nine months ended September 30, 2003 and 2002. The statements
should be read in conjunction with the Notes to Financial Statements included in
Premier's Annual Report on Form 10-KSB for the year ended December 31, 2002.
The results of operations for the three-month and nine-month periods ended
September 30, 2003 and 2002 are not necessarily indicative of the results to be
expected for the full year.
Note 2. Stock Compensation Plan
The Corporation accounts for the plan under the recognition and measurement
principles of APB Opinion No. 25, Accounting for Stock Issued to Employees, and
related Interpretations. No stock-based compensation cost is reflected in net
income, as all options granted under the plan have an exercise price equal to
the market value of the underlying common stock on the date of grant. The
following table illustrates the effect on net income and earnings per share if
the Corporation had applied the fair value recognition provision of FASB
Statement No. 123, Accounting for Stock-Based Compensation, to stock-based
compensation (dollars in thousands except per share amounts):
Nine Months Ended:
September
2003 2002
---------------------
(In Thousands)
---------------------
Net income, as reported $ 4,006 $ 3,173
Total stock-based compensation expense
determined under fair value based method
for all rewards (133) (95)
-------- -------
Pro forma net income $ 3,873 $ 3,078
======== =======
Basic earnings per share
As reported $ 0.88 $ 0.70
======= =======
Pro forma $ 0.85 $ 0.67
======= =======
Diluted earnings per share
As reported $ 0.85 $ 0.69
======= =======
Pro forma $ 0.84 $ 0.65
======= =======
7
Note 3. Securities
Securities held to maturity as of September 30, 2003 are summarized as follows
(in thousands):
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains (Losses) Value
------------------------------------------------------------------
September 30, 2003
(In Thousands)
------------------------------------------------------------------
U.S. Government and
federal agencies $1,397 $0 ($22) $1,375
Obligations of state and
political subdivisions 5,187 122 (242) 5,067
Mortgage-backed securities 0 0 0 0
Other 2,712 17 (139) 2,590
------------------------------------------------------------------
$9,296 $139 ($403) $9,032
==================================================================
Securities available for sale as of September 30, 2003 are
summarized as follows (in thousands):
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains (Losses) Value
------------------------------------------------------------------
September 30, 2003
(In Thousands)
------------------------------------------------------------------
U.S. Government and
federal agencies $5,588 $148 $0 $5,736
Obligations of state and 0
political subdivisions 6,348 81 0 6,429
Corporate Bonds 250 62 0 312
Mortgage-backed securities 741 24 0 765
Restricted Securities 1,833 0 0 1,833
------------------------------------------------------------------
$14,760 $315 $0 $15,075
==================================================================
8
Note 4. Loans.
The consolidated loan portfolio consists of the following:
September 30 December 31,
2003 2002
------------------------------------
(In Thousands)
------------------------------------
Loans secured by real estate:
Construction and land development 64,256 38,063
Secured by farmland 4,983 2,774
Secured by 1-4 family residential 91,882 70,773
Multi-family residential 12,559 6,258
Nonfarm, nonresidential 116,707 123,478
Loans to farmers (except those secured by real estate) 188 42
Commercial loans (except those secured by real estate) 47,537 52,970
Loans to individuals (except those secured by real estate) 22,027 19,699
All other loans 3,116 1,838
------------------------------------
Total loans $ 363,255 $ 315,895
Less: Unearned income - 1
Allowance for loan losses 3,965 3,340
------------------------------------
Loans, net $ 359,290 $ 312,554
====================================
Impaired loans totaled $517 thousand and $1.1 million at September 30, 2003 and
December 31, 2002, respectively. Non-accrual loans excluded from impaired loans
disclosure under FASB 114 amounted to $44 thousand and $114 thousand at
September 30, 2003 and December 31, 2002, respectively.
Note 5. Reserve for Loan Losses.
The Corporation maintains the allowance for loan losses at a sufficient level to
provide for potential losses in the loan portfolio. Loan losses are charged
directly to the allowance when they occur, while recoveries are credited to the
allowance. The adequacy of the provision for loan losses is reviewed
periodically by management through consideration of several factors including
changes in the character and size of the loan portfolio and related loan
experience, a review and examination of overall loan quality which includes the
assessment of problem loans and an analysis of anticipated economic condition in
the market area. An analysis of the allowance for loan loss, including
charge-off activity, is presented below for the nine months ended September 30,
2003 and 2002.
9
September 30,
(In Thousands) 2003 2002
--------------------
Balance, beginning of period $3,340 $2,459
Less Charge-off's:
Commercial 27 20
Real estate-mortgage 0 1
Real estate-construction 0 0
Consumer installment loans 120 220
--------------------
Total $147 $241
Plus Recoveries:
Commercial $8 $12
Real estate-mortgage 0 0
Real estate-construction 0 0
Consumer installment loans 49 34
--------------------
Total $57 $46
Additions charged to operating expense $715 $805
Balance, end of period $3,965 $3,069
--------------------
The following is a summary of information pertaining to risk elements and
impaired loans for the periods ended September 30, 2003 and December 31, 2002.
September 30, December 31,
2003 2002
-----------------------------------
(In Thousands)
-----------------------------------
Non-accrual loans $561 $631
Loans past due 90 days or
more and still accruing
interest 1,364 223
Restructured loans 0 0
-----------------------------------
$1,925 $854
-----------------------------------
The accrual of interest on mortgage and commercial loans is discontinued at the
time the loan is 90 days delinquent unless the credit is well-secured and in
process of collection. Loans are placed on non-accrual at an earlier date or
charged off if collection of principal or interest is considered doubtful.
All interest accrued but not collected for loans that are placed on non-accrual
or charged off is reversed against interest income. The interest on these 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.
10
Note 6. Earnings Per Share
For the Nine Months Ended:
September 30, September 30
2003 2002
------------------------------------------------------
Shares Amount Shares Amount
------------------------------------------------------
Basic earnings per share 4,567,275 $0.88 4,534,579 $0.70
Effect of dilutive securities:
Stock options 134,028 94,454
Diluted earnings per share 4,701,303 $0.85 4,629,033 $0.69
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Financial Summary
General
Premier Community Bankshares, Incorporated ("Premier" or the "Corporation")
is a Virginia multi-bank holding company headquartered in Winchester, Virginia.
The Corporation owns The Marathon Bank and Rockingham Heritage Bank and its
subsidiary, RHB Services, Inc. Rockingham Heritage Bank and its subsidiary were
merged into Premier in a pooling of interests transaction consummated on
November 20, 2000. Concurrent with the merger, the Corporation changed its name
from Marathon Financial Corporation to Premier Community Bankshares, Inc. The
consolidated statements include the accounts of Premier and its wholly-owned
subsidiaries. All significant inter-company accounts have been eliminated.
The Corporation and its subsidiaries, The Marathon Bank and Rockingham
Heritage Bank, are engaged in the business of offering banking services to the
general public. Premier offers checking accounts, savings and time deposits, and
commercial, real estate, personal, home improvement, automobile and other
installment and term loans. The Corporation also offers financial services,
travelers checks, safe deposit boxes, collection, notary public and other
customary bank services (with the exception of trust services) to its customers.
The three principal types of loans made by Premier are: (1) commercial and
industrial loans; (2) real estate loans; and (3) loans to individuals for
household, family and other consumer expenditures.
The Corporation intends to organize a third bank in West Virginia, which
will be named Premier Bank. The Corporation plans to locate Premier Bank's
headquarters in Martinsburg and its initial branch office in Shepherdstown in
West Virginia. It is expected that Premier Bank will open in the third quarter
of 2004, after it receives a banking charter from West Virginia and insurance of
accounts from the FDIC. Premier Bank will offer a wide variety of deposits and
loans, including residential loans, commercial loans and commercial construction
and development loans.
11
Critical Accounting Policies
The allowance for loan losses is an estimate of the losses that may be
sustained in our loan portfolio. The allowance is based on two basic principles
of accounting: (i) SFAS 5, Accounting for Contingences, which requires that
losses be accrued when they are probable of occurring and estimatable and (ii)
SFAS 114, Accounting by Creditors for Impairment of a Loan, which requires that
losses be accrued based on the differences between the value of collateral,
present value of future cash flows or values that are observable in the
secondary market and the loan balance.
Premier's allowance for loan losses is determined by evaluating its loan
portfolio on a periodic basis. Marathon Bank evaluates its allowance monthly,
while Rockingham Heritage Bank evaluates its allowance quarterly. Particular
attention is paid to individual loan performance, collateral values, borrower
financial condition and overall economic conditions. The evaluation includes a
close review of the internal watch list and other non-performing loans.
Management uses three steps in calculating the balance of the reserve. The first
step is the specific classification which examines problem loans and applies a
weight factor to each category. The weight factor is based upon historical data
and the loans within each category are reviewed on a monthly basis to determine
changes in their status. The second step applies a predetermined rate against
total loans with unspecified reserves. Again, this rate is based upon experience
and can change over time. The third step is an unallocated allowance which is
determined by economic events and conditions that may have a real, but as yet
undetermined, impact upon the portfolio. Each of these steps is based on data
that can be subjective and the actual losses may be greater or less than the
amount of the allowance. However, management feels that the allowance represents
a reasonable assessment of the risk imbedded in the portfolio.
Net Income
Net income for the quarter ended September 30, 2003 was $1.5 million
compared to $1.1 million for the same period in 2002. This is an increase of
$309 thousand or 26.9% over the same period in 2002. The provision for income
tax expense increased $135 thousand from $554 thousand in 2002 to $689 thousand
in 2003. The annualized return on assets was 1.31% for the third quarter of 2003
as compared to 1.27% for the same period in 2002. Annualized return on equity
was 17.37% and 15.83% for the third quarters of 2003 and 2002, respectively.
Net income for the nine months ended September 30, 2003 was $4.0 million
compared to $3.2 million for the same period in 2002. This is an increase of
$833 thousand or 26.3% over the same period 2002. The provision for income tax
expense increased $352 thousand from $1.5 million in 2002 to $1.9 million in
2003. The annualized return on assets was 1.27% for the first nine months of
2003 as compared to 1.28% for the same period in 2002. For the first nine months
of 2003 the annualized return on equity was 16.83% up from 15.51% for the same
period in 2002.
Total Assets
Total assets of Premier increased to $451.8 million at September 30, 2003
compared to $393.8 million at December 31, 2002 representing an increase of
$58.0 million or 14.7%. Total loans at September 30, 2003, were $363.3 million,
of which $290.4 million were loans secured by real estate. (Of the loans secured
by real estate, $64.3 million were construction and land development loans.) The
remaining
12
loans consisted of $47.5 million in commercial loans, $22.0 million in consumer
installment loans and $3 million in all other loans. Net loans at September 30,
2003, were $359.3 million, an increase of $46.7 million or 14.9% from the
December 31, 2002 balance of $312.6 million. The loan to deposit ratio was 92.8%
as of September 30, 2003 and 91.5% as of December 31, 2002. Steady loan demand
in an expanding market generated the loan growth experienced for the first nine
months of 2003.
The investment portfolio decreased 3.7% to $24.4 million at September 30,
2003 compared to $25.3 million at December 31, 2002. Federal funds sold
increased $11.9 million to $30.9 million at September 30, 2003 compared to $19.0
million at December 31, 2002. Total interest earning assets increased $56.5
million or 15.6% from December 31, 2002 to September 30, 2003. This increase was
primarily the result of the increase in outstanding loan balances.
Allowance for Loan Losses
The allowance for loan losses, as of September 30, 2003, was $4.0 million.
This is an increase of $625 thousand or 18.7% from December 31, 2002. This gives
the Corporation a 1.09% allowance for loan losses to total loans. Management has
completed an analysis on the reserve and feels the reserve is adequate.
Liabilities
Total deposits increased to $391.3 million at September 30, 2003, from a
balance of $345.1 million at December 31, 2002, which is an increase of $46.3
million or 13.4%. Non-interest bearing deposits have increased to $57.3 million
as of September 30, 2003, an increase of $8.8 million or 18.1% from December 31,
2002. During this period, interest bearing checking and savings accounts
increased $23.1 million or 22.9% to $124.1 million. The balance in time deposits
was $209.9 million at the end of the third quarter, reflecting an increase of
$14.3 million or 7.3% over the end of 2002. As of September 30, 2003,
non-interest bearing deposits represented 14.7% of total deposits as compared to
14.1% at year-end 2002. Low cost interest bearing deposits, including savings
and interest bearing checking, were 31.7% of total deposits, compared to 29.3%
at December 31, 2002. Time deposits represented 53.6% of total deposits at
September 30, 2003, a decrease from 56.7% at year-end 2002.
Shareholders' Equity
Total equity has increased by $4.2 million or 13.9% since December 31,
2002. The increase was due to a $4.0 million net profit for the first nine
months plus exercised stock options of $208 thousand and a decrease of $61
thousand in accumulated other comprehensive income. The primary capital to
assets ratio is 7.5%.
Interest Income
Interest income totaled $19.6 million for the nine months ended September
30, 2003, $2.7 million or 16.2% higher than the nine months ended September 30,
2002. Interest and fees on loans of $18.5 million comprise the vast majority of
interest income. Interest income from investment securities was $865 thousand
for the first nine month of 2003, basically unchanged from the same period in
2002. Interest income on federal funds, the third major component of Premier's
investments, decreased $36 thousand or 16.6%. The decline in interest earned on
federal funds balance was the result of lower interest rates and decreased fed
funds balances, as those funds were converted to meet loan demand.
13
Interest Expense
Total interest expense for the nine months ended September 30, 2003 was
$6.3 million, $32 thousand or 0.5% lower than the nine months ended September
31, 2002. Interest on deposits for the nine-month period increased by $12
thousand or 0.2% over the same period in 2002. The impact of declining interest
rates from September 2002 through September 2003 nearly offset the additional
expense generated by an increase of $46.3 million in total deposits during the
same period. Interest on borrowings increased by $20 thousand or 4.0% over the
same period last year. Borrowings are obtained from the Federal Home Loan Bank.
Net Interest Income
Net interest income for the nine months ended September 30, 2003 was $13.3
million, $2.7 million or 25.4% higher than the nine months ended September 30,
2002. This increase is the result of the growth in earning assets of $56.5
million from September 30, 2002. The combination of growth and rate changes had
the effect of decreasing the net interest margin from 4.62% on a tax-equivalent
basis for the nine months ending September 30, 2002 to 4.57% for the same period
of 2003. Premier is liability sensitive for interest bearing balances repricing
or maturing within one year.
Other Income
Total other income for the nine months ended September 30, 2003 was $2.7
million, an increase of $919 thousand or 53.0% over the 2002 balance of $1.7
million. This was the result of service charges and fees for overdraft charges,
check fees and ATM fees due to an increasing number of customer accounts.
Other Expenses
Total other expenses for the nine months ended September 30, 2003 were $9.3
million, $2.5 million or 36.9% higher than the nine months ended September 30,
2002. Salary expense increased $1.1 million or 30.1%, and advertising and
marketing expenses increased by $152 thousand over the same period in 2002.
Advertising and marketing expenses were impacted by the publicity for a new
branch opened by The Marathon Bank in Winchester, Virginia in April 2003, as
well as a campaign to increase market share due to the change in the local
banking environment. The net increase in other expenses is in part a result of
additional staffing to handle the growth of the bank and the costs involved in
processing an increasing number of accounts and transactions. The Marathon Bank
also incurred additional salary and occupancy expenses related to the opening of
the new branch. The Corporation's efficiency ratio was 57.9% through September
30, 2003 compared to 54.8% for the same period in 2002. The Efficiency Ratio is
a non-GAAP financial measure, which we believe provides investors with important
information regarding our operational efficiency. We compute our Efficiency
Ratio by dividing non-interest expense by the sum of the net interest income on
a tax-equivalent basis and non-interest income, net of securities gains or
losses.
Liquidity
Premier's liquidity requirements are measured by the need to meet deposit
withdrawals, fund loans, meet reserve requirements and maintain cash levels
necessary for daily operations. To meet liquidity requirements, Premier
maintains cash reserves and has an adequate flow of funds from maturing loans,
securities,
14
and short-term investments. In addition, Premier's affiliate banks have the
ability to borrow additional funds from various sources. Short-term borrowings
are available from federal funds facilities at correspondent banks and from the
discount window of the Federal Reserve Bank. Borrowings are available from the
Federal Home Loan Bank. The Corporation considers its sources of liquidity to be
ample to meet its estimated needs. Capital Resources
The Corporation's risk-based capital position at September 30, 2003 was
$45.0 million, or 12.48% of risk-weighted assets, for Tier I capital and $50.7
million, or 14.07% for total risk based capital. Tier I capital consists
primarily of common shareholders' equity and Trust Preferred Capital Notes.
Total risk-based capital includes the allowance for loan losses in addition to
Tier 1 Capital. Risk-weighted assets are determined by assigning various levels
of risk to different categories of assets and off-balance sheet items. Under
current risk-based capital standards, all banks are required to have Tier I
capital of at least 4% and a total capital ratio of 8%. The Corporation's
issuance of $7.0 million in Trust Preferred Capital Notes in the fourth quarter
of 2001, and the issuance of an additional $6.0 million in the third quarter of
2003, of which $4.3 million is allowable in Tier 1 capital and the additional
$1.7 million is allocated to Tier 2 capital, are included in the capital base
and will serve as a long-term source of funding.
Recent Accounting Pronouncements
In November 2002, the FASB issued FASB Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others" ("FIN 45"). The Interpretation elaborates
on the disclosures to be made by a guarantor in its financial statements under
certain guarantees that it has issued. It also clarifies that a guarantor is
required to recognize, at the inception of a guarantee, a liability for the fair
value of the obligation undertaken in issuing the guarantee. The Interpretation
requires disclosure of the nature of the guarantee, the maximum potential amount
of future payments that the guarantor could be required to make under the
guarantee, and the current amount of the liability, if any, for the guarantor's
obligations under the guarantee. The recognition requirements of the
Interpretation were effective beginning January 1, 2003. Management does not
anticipate that the recognition requirements of this Interpretation will have a
material impact on the Corporation's consolidated financial statements.
In January 2003, the FASB issued FASB Interpretation No. 46, "Consolidation
of Variable Interest Entities" ("FIN 46"). This Interpretation provides guidance
with respect to the identification of variable interest entities and when the
assets, liabilities, noncontrolling interests, and results of operations of a
variable interest entity need to be included in a corporation's consolidated
financial statements. The Interpretation requires consolidation by business
enterprises of variable interest entities in cases where the equity investment
at risk is not sufficient to permit the entity to finance its activities without
additional subordinated financial support from other parties, which is provided
through other interests that will absorb some or all of the expected losses of
the entity, or in cases where the equity investors lack one or more of the
essential characteristics of a controlling financial interest, which include the
ability to make decisions about the entity's activities through voting rights,
the obligations to absorb the expected losses of the entity if they occur, or
the right to receive the expected residual returns of the entity if they occur.
The Interpretation applies immediately to variable interest entities created
after January 31, 2003, and applies to previously existing entities beginning in
the
15
fourth quarter of 2003. Management is currently evaluating the applicability of
FIN 46 but the adoption of this Interpretation is not expected to have a
material impact on the Corporation's consolidated financial statements.
In April 2003, the Financial Accounting Standards Board issued Statement
No. 149, Amendment of Statement 133 on Derivative Instruments and Hedging
Activities. This Statement amends and clarifies financial accounting and
reporting for derivative instruments, including certain derivative instruments
embedded in other contracts(collectively referred to as derivatives) and for
hedging activities under FASB Statement No. 133, Accounting for Derivative
Instruments and Hedging Activities. This Statement is effective for contracts
entered into or modified after June 30, 2003 and is not expected to have an
impact on the Corporation's consolidated financial statements.
In May 2003, the Financial Accounting Standards Board issued Statement No.
150, Accounting for Certain Financial Instruments with Characteristics of both
Liabilities and Equity. This Statement establishes standards for how an issuer
classifies and measures certain financial instruments with characteristics of
both liabilities and equity. It requires that an issuer classify a financial
instrument that is within its scope as a liability (or an asset in some
circumstances). Many of those instruments were previously classified as equity.
This Statement is effective for financial instruments entered into or modified
after May 31, 2003, and otherwise is effective at the beginning of the first
interim period beginning after June 15, 2003, except for mandatory redeemable
financial instruments of nonpublic entities. Adoption of the Statement did not
result in an impact on the Corporation's consolidated financial statements.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk is the risk of loss arising from adverse changes in the fair value
of financial instruments due to changes in interest rates, exchange rates and
equity prices. The Corporation's market risk is composed primarily of interest
rate risk. The Corporation's Asset and Liability Management Committee (ALCO) is
responsible for reviewing the interest rate sensitivity position and
establishing policies to monitor and limit exposure to this risk. The Board of
Directors reviews the guidelines established by ALCO.
Interest rate risk is monitored through the use of three complimentary modeling
tools: static gap analysis, earnings simulation modeling and economic value
simulation (net present value estimation). Each of these models measures changes
in a variety of interest rate scenarios. While each of the interest rate risk
measures has limitations, taken together they represent a reasonably
comprehensive view of the magnitude of interest rate risk to the Corporation,
the distribution of risk along the yield curve, the level of risk through time,
and the amount of exposure to changes in certain interest rate relationships.
Static gap, which measures aggregate repricing values, is less utilized since it
does not effectively measure the earnings impact on the Corporation and is not
addressed here. Earnings simulation and economic value models, however, which
more effectively reflect the earnings impact, are utilized by management on a
regular basis and are explained below.
16
Earnings Simulation Analysis
Management uses simulation analysis to measure the sensitivity of net income to
changes in interest rates. The model calculates an earnings estimate based on
current and projected balances and rates. This method is subject to the accuracy
of the assumptions that underlie the process, but it provides a better analysis
of the sensitivity of earnings to changes in interest rates than other analysis
such as the static gap analysis.
Assumptions used in the model, including loan and deposit growth rates, are
derived from seasonal trends and management's outlook, as are the assumptions
used to project the yields and rates for new loans and deposits. All maturities,
calls and prepayments in the securities portfolio are assumed to be reinvested
in like instruments. Mortgage loans and mortgage backed securities prepayment
assumptions are based on industry estimates of prepayment speeds for portfolios
with similar coupon ranges and seasoning. Different interest rate scenarios and
yield curves are used to measure the sensitivity of earnings to changing
interest rates. Interest rates on different asset and liability accounts move
differently when the prime rate changes and are accounted for in the different
rate scenarios.
The following table represents the interest rate sensitivity on net income for
the Corporation using different rate scenarios as of June 30, 2003, the most
recent date for which an analysis is available. There have been no material
changes in qualitative and qualitative disclosures about market risk since this
information was developed using June 30, 2003 data.
% Change in
Change in Prime Rate Net Income
----------------------------- ---------------------
+300 basis points +8.1%
+200 basis points +9.9%
+100 basis points +9.3%
Most Likely 0
-100 basis points +0.9%
-200 basis points -6.2%
-300 basis points -20.6%
Economic Value Simulation
Economic value simulation is used to calculate the estimated fair value of
assets and liabilities over different interest rate environments. Economic
values are calculated based on discounted cash flow analysis. The economic value
of equity is the economic value of all assets minus the economic value of all
liabilities. The change in economic value of equity over different rate
environments is an indication of the longer term repricing risk in the balance
sheet. The same assumptions are used in the economic value simulation as in the
earnings simulation.
The following chart reflects the change in net market value by using June 30,
2003 data, over different rate environments with a one-year horizon.
Change in Economic Value of Equity
Change in Prime Rate (dollars in thousands)
-------------------------- -----------------------------------
+300 basis points 3,250
+200 basis points 3,557
+100 basis points 3,681
Most Likely 4,214
-100 basis points 4,419
-200 basis points 2,769
-300 basis points (-930)
17
Item 4. Controls and Procedures
The Corporation maintains disclosure controls and procedures that are designed
to provide assurance that information required to be disclosed by the
Corporation in the reports that it files or submits under the Securities
Exchange Act of 1934 is recorded, processed, summarized and reported within the
time periods required by the Securities and Exchange Commission. An evaluation
of the effectiveness of the design and operation of the Corporation's disclosure
controls and procedures as of September 30, 2003 was carried out under the
supervision and with the participation of management, including the
Corporation's Chief Executive Officer and Chief Financial Officer. Based on and
as of the date of such evaluation, the aforementioned officers concluded that
the Corporation's disclosure controls and procedures were effective.
The Corporation's management is also responsible for establishing and
maintaining adequate internal control over financial reporting. There were no
changes in the Corporation's internal control over financial reporting
identified in connection with the evaluation of it that occurred during the
Corporation's last fiscal quarter that materially affected, or are reasonably
likely to materially affect, internal control over financial reporting.
18
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
None
Item 2. Change in 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 and Reports on Form 8-K.
(a) Exhibits
31.1 Rule 13(a)-14(a) Certification of Chief Executive Officer
31.2 Rule 13(a)-14(a) Certification of Chief Financial Officer
32.1 Statement of Chief Executive Officer and Chief
Financial Officer Pursuant to 18 U.S.C. Section 1350
(b) Reports on Form 8-K - None
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SIGNATURES:
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PREMIER COMMUNITY BANKSHARES, INC.
DATE: 11/13/03 /s/ John K. Stephens
- -------------------- -------------------------------------------
JOHN K. STEPHENS
CHAIRMAN
DATE: 11/13/03 /s/ Donald L. Unger
- -------------------- -------------------------------------------
DONALD L. UNGER
PRESIDENT & CEO
DATE: 11/13/03 /s/ Frederick A. Board
- -------------------- -------------------------------------------
FREDERICK A. BOARD
CHIEF FINANCIAL OFFICER
20
EXHIBIT INDEX
31.1 Rule 13(a)-14(a) Certification of Chief Executive Officer
31.2 Rule 13(a)-14(a) Certification of Chief Financial Officer
32.1 Statement of Chief Executive Officer and Chief Financial Officer
Pursuant to 18 U.S.C. Section 1350
21