UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
| þ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
| | For the fiscal year ended December 31, 20082009 |
| o | 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 incorporation organization) | | (I.R.S. Employer Identification No.) |
| | | |
2883 Fifth Avenue Huntington, West Virginia | | 25702 |
| (Address of principal executive offices) | | (Zip Code) |
| | | |
Registrant’s telephone number (304) 525-1600 |
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | | Name of exchange on which registered |
| Common Stock without par value | | NASDAQ:GMS |
Securities registered pursuant to Section 12(g) of the Act: NONE
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No þ.
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act Yes o No þ.
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 þ No o.
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes o No o.
PREMIER FINANCIAL BANCORP, INC.
FORM 10-K
December 31, 2009
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this 10-K or any amendment to this Form 10-K. o
PREMIER FINANCIAL BANCORP, INC.
FORM 10-K
December 31, 2008
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer o. | Accelerated filer o. | Non-accelerated filer o. | Smaller reporting company þ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ.
As of June 30, 2008,2009, the aggregate market value of the registrant’s common stock held by non-affiliates of the registrant was $61,872,402$35,770,197 based on the closing sale price as reported on the National Association of Securities Dealers Automated Quotation System National Market System.
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
| Title of each class | | Outstanding at March 15, 20092010 |
| Common Stock without par value | | 6,392,7707,937,143 |
DOCUMENTS INCORPORATED BY REFERENCE
| Document | | Parts Into Which Incorporated |
Proxy Statement for the Annual Meeting of Shareholders to be held on June 17, 2009.16, 2010. | | Part III |
PREMIER FINANCIAL BANCORP, INC.
December 31, 20082009
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| PART I | | | | |
| | | | | 4 | |
| | | 4 | 20 | |
| | | | 14 |
| | | | | 35 | |
| | | 22 | 35 | |
| | | | 35 | | 22 |
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| | | | 22 | 35 | |
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| PART II | | | | | |
| | | | 23 | 36 | |
| | | | 26 | 39 | |
| | | | 28 | 40 | |
| | | | 55 | 73 | |
| | | | 70 | 91 | |
| | | | | 72 | 93 | |
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| | | | | 77 | 98 | |
| | | | | 79 | 100 | |
| | | | 119 | 149 | |
| | | | | 149 | |
| | | 119 | 150 | |
| | | | 120 |
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| PART III | | | | | |
| | | | 121 | 151 | |
| | | | 151 | | 121 |
| | | | 121 | 151 | |
| | | | 121 | 151 | |
| | | | 121 | 151 | |
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| PART IV | | | | | |
| | | | | 152 | |
| | | 122 | 156 | |
| | | | | 125 |
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PREMIER FINANCIAL BANCORP, INC.
FORM 10-K
December 31, 20082009
PART I
THE COMPANY
Premier Financial Bancorp, Inc. (the "Company" or "Premier") is a multi-bank holding company that, as of March 15, 20092010 operates nine banking offices in Kentucky, three banking offices in Ohio, and thirteen banking offices in West Virginia, five banking offices in Washington, DC, one banking office in Maryland and two banking offices in Virginia. At December 31, 2008,2009, Premier had total consolidated assets of $724.5$1,101.8 million, total consolidated deposits of $589.2$913.8 million and total consolidated shareholders' equity of $89.4$128.6 million. The banking subsidiaries (the "Banks" or "Affiliate Banks") consist of Citizens Deposit Bank & Trust, Vanceburg, Kentucky; Farmers Deposit Bank, Eminence, Kentucky; Ohio River Bank, Ironton, Ohio; First Central Bank, Inc., Philippi, West Virginia; Boone County Bank, Inc., Madison, West Virginia; and Traders Bank, Inc., Ravenswood, West Virginia; Adams National Bank, Washington, DC; and Consolidated Bank & Trust Company, Richmond, Virginia.
Premier was incorporated as a Kentucky corporation in 1991 and has functioned as a bank holding company since its formation. During 2002, Premier moved its principal executive offices from Georgetown, Kentucky to its present location at 2883 5th Avenue, Huntington, West Virginia, 25702. The purpose of the move was to be more centrally located among Premier's Affiliate Banks and its directorship. Premier's telephone number is (304) 525-1600.
Premier is a legal entity separate and distinct from its Affiliate Banks and non-bank subsidiaries. Accordingly, the right of Premier, and thus the right of Premier's creditors and shareholders, to participate in any distribution of the assets or earnings of any of the Affiliate Banks or non-bank subsidiaries is necessarily subject to the prior claims of creditors of such subsidiaries, except to the extent that claims of Premier, in its capacity as a creditor, may be recognized. The principal source of Premier's revenue is dividends from its Affiliate Banks and non-bank subsidiary. See "REGULATORY MATTERS -- Dividend Restrictions" for discussion of the restrictions on the Affiliate Banks' ability to pay dividends to Premier.
In late 2007 Premier resumed a strategy of franchise expansion by acquiring and owning community banks. This decision follows a five –year period whereby Premier suspended its acquisition strategy in order to focus on improving operations, strengthening capital and management oversight and improving the profitability of the banks previously acquired. On October 24, 2007, the Company entered into a material definitive agreement with Citizens First Bank, Inc. (Citizens First)(“Citizens First”), a bank with $60 million of total assets located in Ravenswood, West Virginia. Under terms of the definitive agreement, Premier agreed to purchase Citizens First for up to $11,700,000 in stock and cash. Each share of Citizens First common stock was entitled to merger consideration of cash and stock that generally totaled $29.25, subject to certain limitations. Premier issued 480,000 shares of its common stock plus Premier paid $5.3 million in cash to the shareholders of Citizens First.
PREMIER FINANCIAL BANCORP, INC.
FORM 10-K
December 31, 20082009
On November 27, 2007, the Company entered into a material definitive agreement with Traders Bankshares, Inc. (Traders), a single bank holding company with $105 million of total assets located in Spencer, West Virginia. Under terms of the definitive agreement, Premier agreed to purchase Traders for approximately $18,140,000 in stock and cash. Each share of Traders common stock was entitled to merger consideration of $50.00 cash and 3.75 shares of Premier common stock. Premier issued approximately 675,000 shares of its common stock plus Premier paid $9.0 million in cash to the shareholders of Traders.
On April 30, 2008, Premier closed the acquisitions of Citizens First and Traders. On October 25, 2008, Premier merged these two new subsidiary banks together to form Traders Bank, Inc. headquartered in Ravenswood, West Virginia. The merger was designed to consolidate management and operations of two subsidiaries in overlapping or contiguous markets. Similarly, effective January 3, 2005, Premier merged two of its subsidiary banks, Citizens Deposit Bank & Trust in Vanceburg, Kentucky and Bank of Germantown, in Germantown, Kentucky. Bank of Germantown was merged into Citizens Deposit Bank, with its facilities continuing to operate as branches of Citizens Deposit Bank.
Recent Corporate Developments
On December 31, 2008, the Company entered into a material definitive agreement with Abigail Adams National Bancorp, Inc. (Abigail Adams)(“Abigail Adams”), a two bank holding company (Adams National Bank and Consolidated Bank & Trust Company) with $436 million of total assets at December 31, 2008 with locations in and around Washington, DC and Richmond, Virginia. Under terms of the definitive agreement, Premier agreed to purchase Abigail Adams for approximately $10.8 million in stock. The acquisition closed on October 1, 2009. Each share of Abigail Adams common stock will bewas entitled to merger consideration of 0.4461 shares of Premier common stock. Premier will issueissued approximately 1,545,000 shares of its common stock to the shareholders of Abigail Adams.
At the time Premier entered into the definitive agreement with Abigail Adams, its subsidiary, Adams National Bank (“Adams National”) had recently entered into a written agreement with its primary regulatory authority, the Office of the Comptroller of the Currency (“OCC”). See “Regulatory Matters” below. Premier’s prior experience in successfully working through regulatory agreements with some of its own subsidiary banks was an attractive component for Abigail Adams to merge with the Company. Likewise, while Adams National did not necessarily fit the community bank model of Premier’s other subsidiary banks (see the “General” subsection of the Company’s “Business” section below), Premier’s perceived advantages in purchasing and rehabilitating a poorly performing bank while simultaneously changing the bank’s business culture to more closely mirror that of its rural community “sister” banks. As part of this strategy, Premier sought to participate in the U.S. Treasury’s Troubled Asset Relief Program (“TARP”) to help fund the rehabilitation of Adams National and provide the additional capital needed to maintain the Company’s healthy capital ratios after consummating the merger with Abigail Adams.
PREMIER FINANCIAL BANCORP, INC.
FORM 10-K
December 31, 2009
TARP was established under the authority granted by the Emergency Economic Stabilization Act of 2008 (the “EESA”), which appropriated $700 billion for the purpose of restoring liquidity and stability in the U.S. financial system. EESA was amended by The transaction,American Recovery and Reinvestment Act of 2009 (the “ARRA”) signed into law on February 17, 2009. Under the TARP Capital Purchase Program, the U.S. Treasury made $250 billion of capital available to U.S. financial institutions in the form of senior preferred stock investments and a warrant entitling the U.S. Treasury to buy the participating institution’s common stock with a market price equal to 15% of the senior preferred stock.
On October 2, 2009, Premier issued and sold to the U.S. Treasury (i) 22,252 of Premier’s Fixed Rate Cumulative Perpetual Preferred Shares, Series A, each without par value and having a liquidation preference of $1,000 per share (the “Series A Preferred Shares”), and (ii) a ten-year warrant (the “Warrant”) to purchase 628,588 Premier common shares, each without par value (the “Common Shares”), at an exercise price of $5.31 per share (subject to certain anti-dilution and other adjustments), for an aggregate purchase price of $22,252,000 in cash. This issuance and sale was a private placement exempt from the registration requirements of the Securities Act of 1933, as amended, pursuant to Section 4(2) thereof. Additional information regarding the Series A Preferred Shares and the Warrant can be found in Note 25 of the Notes to the Consolidated Financial Statements. To finalize Premier’s participation in the TARP Capital Purchase Program, Premier and the U.S. Treasury entered into a Letter Agreement, dated October 2, 2009 (the “Letter Agreement”), including a Securities Purchase Agreement – Standard Terms which is subject to certain conditions precedent, still requires approval by Abigail Adams’ shareholdersattached thereto (the “Securities Purchase Agreement” and bank regulatory authorities,together with the Letter Agreement, the “UST Agreement”). Additional information regarding the TARP Capital Purchase Program and the issuance ofrestrictions imposed on Premier common stockcan be found under the “TARP Capital Purchase Program” heading in the merger requires Premier shareholder approval. It is anticipated to close sometime“Regulatory Matters” section included later in the second quarter of 2009.this item.
While Premier remains committed to its core strategy of rural banking with community oriented and locally named institutions, the Company may, as it has in the past, dispose of additional corporate assets that no longer meet Premier's geographic or operational performance goals. InFor example, in the fourth quarter of 2003, the Company adopted and began to implement a plan to sell its subsidiary Citizens Bank (Kentucky), Inc. ("Citizens Bank") located in Georgetown, Kentucky. On February 13, 2004, the Company announced that it had signed a definitive agreement to sell Citizens Bank in a cash transaction valued at approximately $14,500,000, and on July 1, 2004 the sale transaction closed. In accordance with Financial Accounting Standard 144, "Accounting for the Impairment or Disposal of Long-lived Assets", which became effective for the Company on January 1, 2002, the financial position and results of operations of Citizens Bank are removed from the detail line items in the Company's financial statements and presented separately as "discontinued operations."
PREMIER FINANCIAL BANCORP, INC.
FORM 10-K
December 31, 20082009
Beginning in April 2005 and concluding in July 2005, the Company converted each of its Affiliate Banks from an in-house system administered by a wholly-owned subsidiary to an outsourced system administered by FiServ for their data and item processing functions. Subsequent to the conversion, the operations of the Company’s data processing subsidiary, Premier Data Services, Inc. were suspended and the subsidiary was merged into the Company on June 27, 2006.
PREMIER FINANCIAL BANCORP, INC.
FORM 10-K
December 31, 2009
BUSINESS
General
Through the Banks the Company focuses on providing quality, community banking services to individuals and small-to-medium sized businesses primarily in non-urban areas. By seeking to provide such banking services in non-urban areas, the Company believes that it can minimize the competitive effect of larger financial institutions that typically are focused on large metropolitan areas. Each Bank retains its local management structure which offers customers direct access to the Bank's president and other officers in an environment conducive to friendly, informed and courteous service. This approach also enables each Bank to offer local and timely decision-making, and flexible and reasonable operating procedures and credit policies limited only by a framework of centralized risk controls provided by the Company to promote prudent banking practices. See additional discussion under "Regulatory Matters" below.
Each Bank maintains its community orientation by, among other things, having selected members of its community as members of its board of directors, who assist in the introduction of prospective customers to the Bank and in the development or modification of products and services to meet customer needs. As a result of the development of personal banking relationships with its customers and the convenience and service offered by the Banks, the Banks' lending and investing activities are funded primarily by core deposits.
When appropriate and economically advantageous, the Company centralizes certain of the Banks' back office, support and investment functions in order to achieve consistency and cost efficiency in the delivery of products and services. The Company centrally provides services such as accounting, loan review, operations and network support, human resources, compliance and internal auditing to the Banks to enhance their ability to compete effectively. The Company also provides overall direction in the areas of credit policy and administration, strategic planning, marketing, investment portfolio management and other financial and administrative services. Each Bank participates in product development by advising management of new products and services needed by its customers and desirable changes to existing products and services.
Prior to the conversions in mid 2005, the Company's data processing subsidiary, Premier Data Services, Inc., provided centralized data processing services to four of the Banks. Beginning in late 2004 and continuing through the middle of 2005, the Company converted its data processing system to an external third-party provider. Through the conversion process,
PREMIER FINANCIAL BANCORP, INC.
FORM 10-K
December 31, 2008
Company senior management along with each Bank's management reviewed and standardized their offering of products and services, although pricing decisions remain at the local Bank level. Furthermore, as a result of conversion, the Company through the Banks is able offer more modern products, such as internet banking and check imaging, and is able to take advantage of emerging technologies such as image exchange to remit and clear items with its exchange agents.
PREMIER FINANCIAL BANCORP, INC.
FORM 10-K
December 31, 2009
Each of the Banks provides a wide range of retail and commercial banking services, including commercial, real estate, agricultural and consumer lending; depository and funds transfer services; collections; safe deposit boxes; cash management services; and other services tailored for both individuals and businesses.
The Banks' residential mortgage lending activities consist primarily of loans for purchasing personal residences or loans for commercial or consumer purposes secured by residential mortgages. The Banks also originate residential mortgage loans that are sold in the secondary mortgage market. The Banks’ mortgage originators are salaried employees who do not receive a commission or other incentive compensation for the number or type of mortgages they originate. Consumer lending activities consist of traditional forms of financing for automobile and personal loans including unsecured lines of credit. Commercial lending activities include loans to small businesses located primarily in the communities in which the Banks are located and surrounding areas. Commercial loans are secured by business assets including real estate, equipment, inventory, and accounts receivable. Some commercial loans are unsecured. Through the acquisition of Abigail Adams, the Company inherited a concentration in commercial real estate development loans. Many of these loans are for the revitalization of apartment buildings in and around the Washington, DC metro area, some of which will result in the apartment complex converting into individually owned condominiums. Premier plans to reduce these concentrations by providing funding only during the construction phase.
The Banks' range of deposit services includes checking accounts, NOW accounts, savings accounts, money market accounts, club accounts, individual retirement accounts, certificates of deposit and overdraft protection. Customers can access their accounts via traditional bank branch locations as well as Automated Teller Machines (ATM’s) and the internet. The Banks also offer bill payment and telephone banking services. Deposits of the Banks are insured by the Bank Insurance Fund administered by the FDIC to the maximum amounts offered by the FDIC.
Competition
The Banks encounter strong competition both in making loans and attracting deposits. The deregulation of the banking industry and the widespread enactment of state laws that permit multi-bank holding companies as well as the availability of nationwide interstate banking have created a highly competitive environment for financial services providers. In one or more aspects of its business, each Bank competes with other commercial banks, savings and loan associations, credit unions, finance companies, mutual funds, insurance companies, brokerage and investment banking companies and other financial intermediaries operating in its market and elsewhere, many of which have substantially greater financial and managerial resources. While the Banks are smaller financial institutions, each of the Banks' competitors include large bank holding companies having substantially greater resources and offering
PREMIER FINANCIAL BANCORP, INC.
FORM 10-K
December 31, 20082009
certain services that Premier Banks may not currently provide. Each Bank seeks to minimize the competitive effect of larger financial institutions through a community banking approach that emphasizes direct customer access to the Bank's president and other officers in an environment conducive to friendly, informed and courteous service. Furthermore, via the Company’s credit administration department, the Banks can also minimize the competitive effects of larger institutions by tailoring their lending criteria to the individual circumstances of the small-to-medium sized business owner.
Management believes that each Bank is positioned to compete successfully in its respective primary market area, although no assurances as to ongoing competitiveness can be given. Competition among financial institutions is based upon interest rates offered on deposit accounts, service charges on deposit accounts for various services related to customer convenience, interest rates charged on loans and other credit, the quality and scope of the services rendered, the convenience of the banking facilities and, in the case of loans to commercial borrowers, relative lending limits. Management believes that the commitment of its Banks to personal service, innovation and involvement in their respective communities and primary market areas, as well as their commitment to quality community banking service, are factors that contribute to their competitiveness.
Regulatory Matters
The following discussion sets forth certain elements of the regulatory framework applicable to bank holding companies and their subsidiaries and provides certain specific information relevant to Premier. This regulatory framework is intended primarily for the protection of depositors and the federal deposit insurance funds and not for the protection of the holders of securities, including Premier common shares. To the extent that the following information describes statutory or regulatory provisions, it is qualified in its entirety by reference to those provisions. A change in the statutes, regulations or regulatory policies applicable to Premier or its subsidiaries may have a material effect on the business of Premier.
General - - As a bank holding company, Premier is subject to regulation under the Bank Holding Company Act ("BHC Act"), and to inspection, examination and supervision by the Board of Governors of the Federal Reserve System ("Federal Reserve"). Under the BHC Act, bank holding companies generally may not acquire ownership or control of more than 5% of the voting shares or substantially all the assets of any company, including a bank, without the Federal Reserve's prior approval. Similarly, bank holding companies generally may not acquire ownership or control of a savings association without the prior approval of the Federal Reserve. Further, branching by the Affiliate Banks is subject to the jurisdiction, and requires the approval of each Affiliate Bank's primary federal banking regulator and, if the Affiliate Bank is a state-chartered bank, the appropriate state banking regulator.
PREMIER FINANCIAL BANCORP, INC.
FORM 10-K
December 31, 20082009
Under the BHC Act, the Federal Reserve has the authority to require a bank holding company to terminate any activity or relinquish control of the nonbank subsidiary (other than a nonbank subsidiary of a bank) upon the Federal Reserve's determination that such activity or control constitutes a risk to the financial soundness and stability of any bank subsidiary of the bank holding company. Premier and the Affiliate Banks are subject to the Federal Reserve Act, which limits borrowings by Premier and its nonbank subsidiaries from the Affiliate Banks and also limits various other transactions between Premier and its nonbank subsidiaries with the Affiliate Banks.
The two Affiliate Banks chartered in Kentucky are supervised, regulated and examined by the Kentucky Department of Financial Institutions, the Affiliate Bank chartered in Ohio is supervised, regulated and examined by the Ohio Division of Financial Institutions, and the three Affiliate Banks chartered in West Virginia are supervised, regulated and examined by the West Virginia Division of Banking.Banking, and the Affiliate Bank chartered in Virginia is supervised, regulated and examined by the Bureau of Financial Institutions of the Commonwealth of Virginia. The Washington DC Affiliate Bank is a national bank and therefore is supervised, regulated and examined by the OCC. In addition, those Affiliate Banks that are members of the Federal Reserve System are supervised and regulated by the Federal Reserve, and those banks that are not members of the Federal Reserve System are supervised and regulated by the Federal Deposit Insurance Corporation ("FDIC"). Each banking regulator has the authority to issue cease-and-desist orders if it determines that the activities of a bank regularly represent an unsafe and unsound banking practice or a violation of law.
Both federal and state law extensively regulates various aspects of the banking business, such as reserve and capital requirements, truth-in-lending and truth-in-savings disclosure, equal credit opportunity, fair credit reporting, trading in securities and other aspects of banking operations. Premier, the Affiliate Banks and Premier's nonbank subsidiary are also affected by the fiscal and monetary policies of the federal government and the Federal Reserve and by various other governmental laws, regulations and requirements. Further, the earnings of Premier and Affiliate Banks are affected by general economic conditions and prevailing interest rates. Legislation and administrative actions affecting the banking industry are frequently considered by the United States Congress, state legislatures and various regulatory agencies. It is not possible to predict with certainty whether such legislation or administrative actions will be enacted or the extent to which the banking industry, in general, or Premier and the Affiliate Banks, in particular, would be affected.
Liability for Bank Subsidiaries - The Federal Reserve has a policy to the effect that a bank holding company is expected to act as a source of financial and managerial strength to each of its subsidiary banks and to maintain resources adequate to support each such subsidiary bank. This support may be required at times when Premier may not have the resources to provide it. In the event of a bank holding company's bankruptcy, any commitment by the bank holding company to a federal bank regulatory agency to maintain the capital of a subsidiary bank would be assumed by the bankruptcy trustee and entitled to priority of payment.
PREMIER FINANCIAL BANCORP, INC.
FORM 10-K
December 31, 20082009
Any depository institution insured by the FDIC may be held liable for any loss incurred, or reasonably expected to be incurred, by the FDIC in connection with (i) the default of a commonly controlled FDIC-insured depository institution, or (ii) any assistance provided by the FDIC to a commonly controlled FDIC-insured depository institution in danger of default. "Default" is defined generally as the appointment of a conservator or receiver and "in danger of default" is defined generally as the existence of certain conditions indicating that a "default" is likely to occur in the absence of regulatory assistance. In the event that such a default occurred with respect to a bank, any loans to the bank from its parent holding company will be subordinate in right of payment of the bank's depositors and certain of its other obligations.
Capital Requirements - Premier is subject to capital ratios, requirements and guidelines imposed by the Federal Reserve, which are substantially similar to the ratios, requirements and guidelines imposed by the Federal Reserve, the OCC and the FDIC on the Banks within their respective jurisdictions. These capital requirements establish higher capital standards for banks and bank holding companies that assume greater credit risks. For this purpose, a bank's or holding company's assets and certain specified off-balance sheet commitments are assigned to four risk categories, each weighted differently based on the level of credit risk that is ascribed to such assets or commitments. A bank's or holding company's capital is divided into two tiers: "Tier I" capital and "Tier II" capital. "Tier I" capital includes common shareholders' equity, non-cumulative perpetual preferred stock, and related surplus (excluding auction rate issues), minority interests in equity accounts of consolidated subsidiaries plus cumulative perpetual preferred stock and Trust Preferred Securities (subjectboth of which are subject to certain limitations.) Goodwill, certain identifiable intangible assets and certain other assets are subtracted from these sources of capital to calculate Tier I capital. "Tier II" capital includes, among other items, perpetual preferred stock not meeting the Tier I definition, mandatory convertible securities, subordinated debt and allowances for loan and lease losses, subject to certain limitations, less certain required deductions.
Bank holding companies currently are required to maintain Tier I and total capital (the sum of Tier I and Tier II capital) equal to at least 4% and 8% of total risk-weighted assets, respectively. At December 31, 2008,2009, Premier met both requirements, with Tier I and total capital equal to 14.0%13.6% and 15.3%14.6% of its total risk-weighted assets, respectively.
In addition to the risk-based capital guidelines, the Federal Reserve requires bank holding companies to maintain a minimum "leverage ratio" (Tier I capital to adjusted total assets) of 3%, if the holding company has the highest regulatory ratings for risk-based capital purposes. All other bank holding companies are required to maintain a leverage ratio of 3% plus at least 100 to 200 basis points. At December 31, 2008,2009, Premier's leverage ratio was 8.7%8.9%.
The foregoing capital requirements are minimum requirements. The Federal Reserve may set capital requirements higher than the minimums described above for holding companies whose circumstances warrant it. For example, holding companies experiencing or anticipating significant growth may be expected to maintain capital ratios, including tangible capital positions, well above the minimum levels.
PREMIER FINANCIAL BANCORP, INC.
FORM 10-K
December 31, 20082009
Additionally, the Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA"), among other things, identifies five capital categories for insured depository institutions (well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized) and requires the respective federal regulatory agencies to implement systems for "prompt corrective action" for insured depository institutions that do not meet minimum capital requirements within such categories. FDICIA imposes progressively more restrictive constraints on operations, management and capital distributions, depending on the category in which an institution is classified. Failure to meet the capital guidelines could also subject a banking institution to capital raising requirements.
An "undercapitalized" bank must develop a capital restoration plan and its parent holding company must guarantee the bank's compliance with the plan. The liability of the parent holding company under any such guarantee is limited to the lesser of 5% of the Bank's assets at the time it became "undercapitalized" or the amount needed to comply with the plan. Furthermore, in the event of the bankruptcy of the parent holding company, such guarantee would take priority over the parent's general unsecured creditors. In addition, FDICIA requires the various regulatory agencies to prescribe certain non-capital standards for safety and executive compensation and permits regulatory action against a financial institution that does not meet such standards.
Regulatory Agreements - As previously disclosed in earlier reports, the Company and some of the subsidiary Banks have, in the past, been subject to regulatory agreements. On January 29, 2003, the Company entered into a written agreement with the Federal Reserve Bank of Cleveland (FRB)(“FRB”). In, 2006, the FRB determined that Premier had fully satisfied all of the provisions of the written agreement and, accordingly, the FRB terminated the agreement effective April 18, 2006.
Before they were merged together into one entity, two of the Company's subsidiaries, Citizens Deposit Bank & Trust and the Bank of Germantown, entered into similar agreements with their respective primary regulators which, among other things, prohibited the payment of dividends without prior written approval and required significant changes in their credit administration policies. The banks fully complied with the terms of the agreements in 2004 and the agreements were accordingly rescinded by their regulators.
As a result of a 2003 investigation into the conduct of the former president of Farmers Deposit Bank by Premier and the FDIC, on December 24, 2003, Premier announced that Farmers Deposit Bank had reached an agreement with the FDIC and the Kentucky Department of Financial Institutions ("KDFI") [collectively referred to as "Supervisory Authorities"] to consent to the issuance of a cease & desist order ("Order") from its Supervisory Authorities. The Order also outlined a number of steps to be taken by Farmers Deposit Bank which were designed to remedy and/or prevent the reoccurrence of events that gave rise to the investigation during the latter half of 2003. Having found that Farmers Deposit Bank had fully complied with the Order, the Supervisory Authorities rescinded the Order on December 13, 2005.
PREMIER FINANCIAL BANCORP, INC.
FORM 10-K
December 31, 20082009
On October 1, 2008, the Company’s newly acquired subsidiary Adams National, entered into a written agreement with its primary regulator, the OCC. The written agreement outlined a number of steps to be taken by Adams National to remedy unsafe and unsound banking practices relating to the level of credit risk and the administration of the loan portfolio, and violations of credit-related laws and regulations at the bank. These include 1) ensuring that Adams National has competent management and that senior management can perform the duties required under the Bank’s policies and procedures and the requirements of the Written Agreement; 2) maintaining a 12% total risk-based capital to total risk-weighted assets ratio; an 11% Tier 1 capital to risk-weighted assets ratio; and a 9% Tier 1 capital to adjusted total assets ratio, which are greater than the regulatory requirements to be “well capitalized” under bank regulatory requirements; 3) developing and implementing a three-year capital program; 4) adopt and implement written policies and procedures for establishing and maintaining the allowance in a manner consistent with the Written Agreement; 5) requiring the Board to review the adequacy of the allowance for loan losses at least quarterly; 6) implementing an asset diversification program consistent with OCC guidelines on concentrations in commercial real estate lending and sound risk management practices and reducing Adam’s exposure to concentrations of credit risk accordingly; 7) taking all necessary actions to protect the Adam’s interest in its criticized assets and implementing a program to eliminate regulatory criticism of these assets; 8) engaging in an ongoing review of the bank’s criticized assets and implementing procedures for the effective monitoring of the loan portfolio; 9) implementing a program to improve the management of the loan portfolio and to provide the Board with monthly written reports on credit quality; 10) employing a loan review consultant acceptable to the OCC to perform quarterly quality reviews of the bank’s assets; 11) revising the bank’s lending policy in accordance with OCC requirements; and 12) maintaining acceptable liquidity levels.
The written agreement includes time frames to implement the foregoing and on-going compliance requirements for Adams National, including quarterly progress reports to the OCC. The written agreement also requires the bank to establish a committee of the Board of Directors which will be responsible for overseeing compliance with the written agreement. The Bank has taken steps to comply with the requirements of the written agreement, including hiring a new chief executive officer. At December 31, 2009, Adams National’s capital ratio levels met the regulatory capital levels required in the written agreement.
TARP Capital Purchase Program - As discussed above under the caption “Recent Corporate Developments,” Premier elected to participate in the TARP Capital Purchase Program and received $22.25 million of new equity capital from the U.S. Treasury on October 2, 2009. As part of its participation in the TARP Capital Purchase Program, Premier agreed to various requirements and restrictions imposed on all participants in the TARP Capital Purchase Program. Those restrictions include certain executive compensation and corporate expenditure limits on all current and future recipients of funds under the TARP Capital Purchase Program, including Premier, as long as any obligation arising from the financial assistance provided to the recipient under the TARP Capital Purchase Program remains outstanding, excluding any period during which the U.S. Treasury holds only warrants to purchase common stock of a
PREMIER FINANCIAL BANCORP, INC.
FORM 10-K
December 31, 2009
TARP participant (the “Covered Period”). On June 10, 2009, the U.S. Treasury issued an interim final rule describing how participating institutions are to comply with the executive compensation and corporate governance standards imposed by the EESA, as amended by the ARRA. On December 7, 2009, the U.S. Treasury published technical amendments to the interim final rule (collectively, the interim final rule published on June 15, 2009 and the amendments published on December 7, 2009 are referred to as the “Interim Final Rule”).
The current terms of participation in the TARP Capital Purchase Program include the following:
As soon as it is eligible to do so, Premier must file with the SEC a registration statement on Form S-3 under the Securities Act registering for resale the Series A Preferred Shares or, in the event the Series A Preferred Shares are deposited with a depository at the request of the U.S. Treasury, depository shares evidencing fractional interests in the Series A Preferred Shares; the Warrant to purchase 628,588 Common Shares; and any Common Shares issued from time to time upon exercise of the Warrant. Premier is not currently eligible to file a Form S-3, but could become eligible in the future.
As long as the Series A Preferred Shares remain outstanding, unless all accrued and unpaid dividends for all past dividend periods on the Series A Preferred Shares are fully paid, Premier will not be permitted to declare or pay dividends on any Common Shares, any junior preferred shares or, generally, any preferred shares ranking pari passu with the Series A Preferred Shares (other than in the case of pari passu preferred shares, dividends on a pro rata basis with the Series A Preferred Shares), nor will Premier be permitted to repurchase or redeem any Common Shares or preferred shares other than the Series A Preferred Shares.
Unless the Series A Preferred Shares have been transferred to unaffiliated third parties or redeemed in whole, until October 2, 2012, the U.S. Treasury’s approval is required for any increase in Common Share dividends from $0.11 per share or any share repurchases other than repurchases of the Series A Preferred Shares, repurchases of junior preferred shares, or repurchases of Common Shares in connection with the administration of any employee benefit plan in the ordinary course of business and consistent with past practice and purchases under certain other limited circumstances specified in the Securities Purchase Agreement with the U.S. Treasury.
PREMIER FINANCIAL BANCORP, INC.
FORM 10-K
December 31, 2009
Premier must comply with the U.S. Treasury’s standards for executive compensation and corporate governance during the Covered Period. The current standards include the following:
compensation plans and arrangements for Senior Executive Officers (as defined in the Interim Final Rule, to include the Principal Executive Officer, the Principal Financial Officer and the next 3 most highly compensated named executive officers in Premier’s annual meeting proxy statement) must not encourage unnecessary and excessive risks that threaten the value of the financial institution;
any bonus, retention award or incentive compensation paid (or under a legally binding obligation to pay) to a Senior Executive Officer or any of Premier’s next 20 most highly-compensated employees based on materially inaccurate financial statements or other materially inaccurate performance metric criteria must be subject to recovery, or “clawback”, by Premier;
Premier is prohibited from paying or accruing any bonus, retention award or incentive compensation (including stock options) with respect to its most highly compensated employee (currently its President and Chief Executive Officer), except for grants of long-term restricted stock that do not fully vest during the Covered Period and do not have a value which exceeds one-third of such employee’s total annual compensation;
severance payments to a Senior Executive Officer and the next five most highly-compensated employees, generally referred to as “golden parachute” payments are prohibited, except for payments for services performed or benefits accrued;
compensation plans that encourage manipulation of reported earnings to enhance the compensation of any employees are prohibited;
The U.S. Treasury may retroactively review bonuses, retention awards and other compensation previously paid to a Senior Executive Officer or any of Premier’s next 20 most highly-compensated employees to determine whether such payments were inconsistent with the purposes of TARP or otherwise contrary to the public interest;
Premier’s compensation committee consisting of independent directors must engage in risk analysis of Senior Executive Officer and all other employee compensation plans;
Premier’s Board of Directors must establish a company-wide policy regarding excessive or luxury expenditures (which was adopted on December 16, 2009) and post this policy on Premier’s subsidiary bank websites;
PREMIER FINANCIAL BANCORP, INC.
FORM 10-K
December 31, 2009
Premier’s proxy statements for annual shareholder meetings must permit a non-binding “say on pay” shareholder vote on the compensation of executives, as disclosed pursuant to the compensation disclosure rules of the SEC;
executive compensation in excess of $500,000 for each Senior Executive Officer must not be deducted for federal income tax purposes;
Premier must disclose to the U.S. Treasury and Premier’s primary regulator whether Premier’s Board of Directors or the Compensation Committee engaged a compensation consultant and the service performed by that compensation consult and any of its affiliates;
Premier must disclose to the U.S. Treasury the identify of Premier’s Senior Executive Officers and next 20 most highly-compensated employees, identified by name and title and ranked in descending order of annual compensation;
Premier must limit any Employee Compensation Plan (as defined in the Interim Final Rule) that unnecessarily exposes Premier to risk; and
Premier must comply with the executive compensation reporting and recordkeeping requirements established by the U.S. Treasury.
The ARRA permits TARP recipients, subject to consultation with the appropriate federal banking agency, to repay to the U.S. Treasury any financial assistance received under the TARP Capital Purchase Program without penalty, delay or the need to raise additional replacement capital.
Detailed information regarding the Series A Preferred Shares and the Warrant can be found in Note 25 of the Notes to the Consolidated Financial Statements. Dividend Restrictions - Premier is dependent on dividends from its Affiliate Banks for its revenues. Various federal and state regulatory provisions limit the amount of dividends the Affiliate Banks can pay to Premier without regulatory approval. At December 31, 2008,2009, approximately $2.4$2.5 million of the total shareholders' equity of the Affiliate Banks was available for payment of dividends to Premier without approval by the applicable regulatory authority.
In addition, federal bank regulatory authorities have authority to prohibit Premier's Affiliate Banks from engaging in an unsafe or unsound practice in conducting their business. The payment of dividends, depending upon the financial condition of the bank in question, could be deemed to constitute such an unsafe or unsound practice. The ability of the Affiliate Banks to pay dividends in the future is presently, and could be further, influenced by bank regulatory policies and capital guidelines as well as each Affiliate Bank's earnings and financial condition. Additional information regarding dividend limitations can be found in Note 2021 of the accompanying audited consolidated financial statements.
PREMIER FINANCIAL BANCORP, INC.
FORM 10-K
December 31, 2009
The dividend rights of holders of Premier’s common shares are also qualified and subject to the dividend rights of holders of Premier’s Series A Preferred Shares described above under the caption “Regulatory Matters – TARP Capital Purchase Program.”
Interstate Banking - Under the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (the "Riegle-Neal Act"), subject to certain concentration limits, (i) bank holding companies, such as Premier, are permitted to acquire banks and bank holding companies located in any state of the United States, subject to certain restrictions, and (ii) banks are permitted to acquire branch offices outside their home state by merging with out-of-state banks, purchasing branches in other states or establishing de novo branch offices in other states; provided that, in the case of any such purchase or opening of individual branches, the host state has adopted legislation "opting in" to the relevant provisions of the Riegle-Neal Act; and provided further, that, in the case of a merger with a bank located in another state, the host state has not adopted legislation "opting out" of the relevant provisions of the Riegle-Neal Act.
Gramm-Leach-Bliley Act - On November 12, 1999, the Gramm-Leach-Bliley Act (the "Act") was signed into law, eliminating many of the remaining barriers to full convergence of the banking, securities, and insurance industries. The major provisions of the Act took effect March 12, 2000.
The Act enables a broad-scale consolidation among banks, securities firms, and insurance companies by creating a new type of financial services company called a "financial holding company," a bank holding company with dramatically expanded powers. Financial holding companies can offer virtually any type of financial service, including banking, securities underwriting, insurance (both agency and underwriting), and merchant banking. In addition, the Act permits the Federal Reserve and the Treasury Department to authorize additional activities for financial holding companies, but only if they jointly determine that such activities are "financial in nature" or "complementary to financial activities." Premier does not presently qualify to elect financial holding company status.
PREMIER FINANCIAL BANCORP, INC.
FORM 10-K
December 31, 2008
The Federal Reserve serves as the primary "umbrella" regulator of financial holding companies, with jurisdiction over the parent company and more limited oversight over its subsidiaries. The primary regulator of each subsidiary of a financial holding company depends on the activities conducted by the subsidiary. A financial holding company need not obtain Federal Reserve approval prior to engaging, either de novo or through acquisitions, in financial activities previously determined to be permissible by the Federal Reserve. Instead, a financial holding company need only provide notice to the Federal Reserve within 30 days after commencing the new activity or consummating the acquisition.
PREMIER FINANCIAL BANCORP, INC.
FORM 10-K
December 31, 2009
Number of Employees
The Company and its subsidiaries collectively had approximately 270369 full-time equivalent employees as of December 31, 20082009 Its executive offices are located at 2883 5th Avenue, Huntington, West Virginia 25702, telephone number (304) 525-1600 (facsimile number (304) 525-9701).
PREMIER FINANCIAL BANCORP, INC.
FORM 10-K
December 31, 20082009
Like all financial companies, the Company’s business and results of operations are subject to a number of risks, many of which are outside of the Company’s control. In addition to the other information in this report, readers should carefully consider that the following important factors, among others, could materially impact the Company’s business and future results of operations.
Changes in Interest Rates Could Negatively Impact the Company’s Results of Operations
The earnings of the CompanyPremier are primarily dependent on net interest income, which is the difference between interest earned on loans and investments, and interest paid on interest-bearing liabilities such as deposits and borrowings. Interest rates are highly sensitive to many factors, including government monetary and fiscal policies; domestic and international economic and political conditions; and, in particular, changes in the discount rate by the Board of Governors of the Federal Reserve System. Conditions such as inflation, recession, unemployment, money supply, government borrowing and other factors beyond management’s control may also affect interest rates. If the Company’sPremier’s interest-earning assets mature, reprice or prepay more quickly than interest-bearing liabilities in a given period, a decrease in market interest rates could adversely affect net interest income. Likewise, if interest-bearing liabilities mature or reprice, or, in the case of deposits, are withdrawn by the accountholder more quickly than interest-earning assets in a given period, an increase in market interest rates could adversely affect net interest income. Given the Company’sPremier’s current mix of assets and liabilities, a declining interest rate environment would negatively impact the Company’sPremier’s results of operations.
Fixed rate loans increase the Company’sPremier’s exposure to interest rate risk in a rising rate environment because interest-bearing liabilities would be subject to repricing before assets become subject to repricing. Adjustable rate loans decrease the risks to a lender associated with changes in interest rates but involve other risks. As interest rates rise, the periodic payment by the borrower rises to the extent permitted by the terms of the loan, and the increased periodic payment increases the potential for default. At the same time, for secured loans, the marketability of the underlying collateral may be adversely affected by higher interest rates. In a declining interest rate environment, there is likely to be an increase in prepayment activity on loans as the borrowers refinance their loans at lower interest rates. Under these circumstances, the Company’sPremier’s results of operations could be negatively impacted.
Changes in interest rates also can affect the value of loans, investments and other interest-rate sensitive assets and the Company’sPremier’s ability to realize gains on the sale or resolution of assets. This type of income can vary significantly from quarter-to-quarterquarter to quarter and year-to-yearyear to year based on a number of different factors, including the interest rate environment. An increase in interest rates that adversely affects the ability of borrowers to pay the principal or interest on loans may lead to an increase in non-performing assets and increased loan loss reserve requirements that could have a material adverse effect on the Company’sPremier’s results of operations.
PREMIER FINANCIAL BANCORP, INC.
FORM 10-K
December 31, 20082009
Regional Economic Changes in the Company’s Markets Could Adversely Impact Results From Operations
Like all banks, the CompanyPremier is subject to the effects of any economic downturn, and in particular a significant decline in home values or reduced commercial development in the Company’sPremier’s markets could have a negative effect on results of operations. The Company’sPremier’s success depends primarily on the general economic conditions in the counties in which the CompanyPremier conducts business, and in the West Virginia, southern Ohio, and northern Kentucky, northern and south central Virginia and the metro Washington DC and Richmond Virginia areas in general. Unlike larger banks that are more geographically diversified, the CompanyPremier provides banking and financial services to customers primarily in the West Virginia counties of Barbour, Boone, Harrison, Jackson, Lewis, Lincoln, Logan, Kanawha, Upshur, Roane, UpshurJackson and Wood, as well as the southern Ohio counties of Gallia, Lawrence and Scioto, and the northern Kentucky counties of Bracken, Fleming, Greenup, Henry, Lewis, Mason, Robertson and Robertson.Shelby, the metro Washington DC area including the surrounding portions of Virginia and Maryland and the Richmond and Hampton metro areas of Virginia. The local economic conditions in these market areas have a significant impact on the Company’sPremier’s ability to originate loans, the ability of the borrowers to repay these loans and the value of the collateral securing these loans. A significant decline in the general economic conditions caused by inflation, recession, unemployment or other factors beyond the Company’sPremier’s control would affect these local economic conditions and could adversely affect the Company’sPremier’s financial condition and results of operations. Additionally, a significant decline in home values would likely lead to increased delinquencies and defaults in both the consumer home equity loan and residential real estate loan portfolios and result in increased losses in these portfolios.
There has been a decline in the housing market and real estate markets and in the general economy, both nationally and locally, due to the recession that began in December 2007. Housing markets have deteriorated as evidenced by reduced levels of sale, increasing inventories of houses and condominiums on the market, declining house prices and an increase in the length of time houses remain on the market. It is possible that these conditions will not improve or will worsen or that such conditions will result in a decrease in Premier’s interest income, an increase in Premier’s non-performing loans, and an increase in Premier’s provision for loan losses.
Premier targets its business lending and marketing strategy for loans to serve primarily the banking and financial services needs of small to medium size businesses. These small to medium size businesses generally have fewer financial resources in terms of capital or borrowing capacity than larger entities. If general economic conditions negatively impact these businesses, Premier’s results of operations and financial condition may be adversely affected.
PREMIER FINANCIAL BANCORP, INC.
FORM 10-K
December 31, 2009
Extensive Regulation and Supervision
The Company,Premier, primarily through its Affiliatethe Premier Banks, is subject to extensive federal and state regulation and supervision. Banking regulations are primarily intended to protect depositors’ funds, federal deposit insurance funds and the banking system as a whole, not shareholders. These regulations affect Premier’s lending practices, capital structure, investment practices, dividend policy and growth, among other things. The CompanyPremier is also subject to a number of federal laws, which, among other things, require it to lend to various sectors of the economy and population, and establish and maintain comprehensive programs relating to anti-money laundering and customer identification. Congress and federal regulatory agencies continually review banking laws, regulations and policies for possible changes. Changes to statutes, regulations or regulatory policies, including changes in interpretation or implementation of statutes, regulations or policies, could affect Premier in substantial and unpredictable ways. Such changes could subject the CompanyPremier to additional costs, limit the types of financial services and products it may offer limit the ability of the Company and its Banks to foreclose on collateral as a result of non-payment by the borrower and/or increase the ability of non-banks to offer competing financial services and products, among other things. Failure to comply with laws, regulations or policies could result in sanctions by regulatory agencies, civil money penalties and/or reputation damage, along with corrective action plans required by regulatory agencies, any of which could have a material adverse effect on the Company’sPremier’s business, financial condition and results of operations. Premier and certain of its Affiliatethe Premier Banks have in the past been subject to such corrective action plans, and therefore there
PREMIER FINANCIAL BANCORP, INC.
FORM 10-K
December 31, 2008
may be some residual reputation damage within the regulatory agencies. While Premier has policies and procedures designed to prevent any such violations, there can be no assurance that such violations will not occur. See the “Regulatory Matters” section in Item 1, “Business”.
Dividend payments by subsidiaries to Premier and by Premier to its shareholders can be restricted.
The Company’s principal source of funds for dividend payments and its debt service obligations 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 in Note 1821 to the consolidated financial statements. During 20092010 the Banks could, without prior approval, declare dividends of approximately $2.4$2.5 million plus any 20092010 net profits retained to the date of the dividend declaration.
Premier is a separate and distinct legal entity from Premier’s subsidiaries. Premier receives nearly all of its revenue from dividends from is subsidiary banks, which are limited by federal banking laws and regulations. These dividends also serve as the primary source of funds to pay dividends on Premier’s common shares. The inability of Premier’s subsidiary banks to pay sufficient dividends to Premier could have a material, adverse effect on its business. In addition, Premier’s participation in the U.S. Treasury’s TARP Capital Purchase Program
PREMIER FINANCIAL BANCORP, INC.
FORM 10-K
December 31, 2009
currently restricts the ability to increase the dividend payable to holders of common shares above $0.11 per share without prior approval of the U.S. Treasury. Further discussion of Premier’s ability to pay dividends can be found under the captions “Regulatory Matters – TARP Capital Purchase Program” and “Regulatory Matters – Dividend Restrictions” in Item 1 of this Form 10-K and Note 21 of the Notes to the Consolidated Financial Statements.
The Extended Disruption of Vital Infrastructure Could Negatively Impact the Company’s Results of Operations and Financial Condition
The Company’sPremier’s operations depend upon, among other things, its technological and physical infrastructure, including its equipment and facilities. While disaster recovery procedures are in place, an extended disruption of its vital infrastructure by fire, power loss, natural disaster, telecommunications failure, computer hacking and viruses, terrorist activity or the domestic and foreign response to such activity, or other events outside of the Company’sPremier’s control, could have a material adverse impact either on the financial services industry as a whole, or on the Company’sPremier’s business, results of operations, and financial condition.
New or Revised Tax, Accounting and Other Laws, Regulations, Rules and Standards Could Significantly Impact Strategic Initiatives, Results of Operations and Financial Condition
The financial services industry is highly regulated and laws and regulations may sometimes impose significant limitations on operations. These limitations, and sources of potential liability for the violation of such laws and regulations, are described in Item 1 of Part I of this report under the heading “Business — Regulatory Matters.”Matters” above. These regulations, along with the currently existing tax and accounting laws, regulations, rules and standards, control the methods by which financial institutions conduct business; implement strategic initiatives, as well as past, present, and contemplated tax planning; and govern financial disclosures. These laws, regulations, rules, and standards are constantly evolving and may change significantly over time. The nature, extent, and timing of the adoption of significant new laws, changes in existing laws, or repeal of existing laws may have a material impact on the Company’sPremier’s results of operations and financial condition, the effects of which are impossible to predict at this time.
Market Volatility May Adversely Affect Market Price of Common Stock or Investment Security Values
The capital and credit markets have been experiencing volatility and disruption for more than a year. In some cases, the markets have produced downward pressure on stock prices and credit availability for certain issuers seemingly without regard to those issuers’ underlying financial strength. Market volatility could contribute to a further decline in the market value of certain security investments and other assets of Premier. If market disruption and volatility continue or worsen, Premier may experience an adverse effect, which may be material, on results of operations, capital or financial position.
PREMIER FINANCIAL BANCORP, INC.
FORM 10-K
December 31, 20082009
There Can Be No Assurance That Recent Legislative andAnd Regulatory Initiatives toTo Address Difficult Market andAnd Economic Conditions May NotWill Stabilize the United StatesThe U.S. Banking System and the Enactment of These Initiatives May Significantly Impact Premier’s Financial Condition, Results of Operations, Liquidity or Stock Price.System.
The Emergency Economic Stabilization Act (EESA),EESA, which established the Troubled Assets Relief Program (TARP),TARP, was signed into law inon October 3, 2008. The purpose of TARP is to restore confidence and stability to the U.S. banking system and to encourage financial institutions to increase their lending to customers and to each other. As part of TARP, the U.S. Treasury established the Capital Purchase Program (CPP) to provide up to $700 billion of funding to eligible financial institutions through the purchase of capital stock and other financial instruments for the purpose of stabilizing and providing liquidity to the U.S. financial markets. Then,Under the Capital Purchase Program, the U.S. Treasury is purchasing equity securities from participating institutions. On October 2, 2009, we entered into the UST Agreement with the U.S. Treasury providing for our issuance of the Series A Preferred Shares and the Warrant, pursuant to the Capital Purchase Program. The EESA also increased federal deposit insurance on most deposit accounts from $100,000 to $250,000. This increase is in place until the end of 2009 and is not covered by deposit insurance premiums paid by the banking industry.
On February 17, 2009, President Obama signed the American Recovery and Reinvestment Act (ARRA),ARRA, as a sweeping economic recovery package intended to stimulate the economy and provide for broad infrastructure, energy, health, and education needs. There can be no assurance as to the actual impact that EESA or its programs, including the CPP, and ARRA or its programs, will have on the national economy or financial markets. The failure of these significant legislative measures to help stabilize the financial markets and a continuation or worsening of current financial market conditions could materially and adversely affect Premier’sour business, financial condition, results of operations, access to credit or the trading price of its common shares.our Common Shares.
There have been numerous actions undertaken in connection with or following EESA and ARRA by the Federal Reserve Board, the U.S. Congress, the U.S. Treasury, the FDIC, the SEC and others in efforts to address the current liquidity and credit crisis in the financial industry that followed the sub-prime mortgage market meltdown whichthat began in late 2007. These measures includeinclude: (i) homeowner relief that encourages loan restructuring and modification; (ii) the establishment of significant liquidity and credit facilities for financial institutions and investment banks; (iii) the lowering of the federal funds rate; (iv) emergency action against short selling practices; (v) a temporary guaranty program for money market funds; (vi) the establishment of a commercial paper funding facility to provide back-stop liquidity to commercial paper issuers; and (vii) coordinated international efforts to address illiquidity and other weaknesses in the banking sector. The purpose of these legislative and regulatory actions is to help stabilize the U.S. banking system. EESA, ARRA and the other regulatory initiatives described above may not have their desired effects. If the volatility in the markets continues and economic conditions fail to improve or worsen, Premier’sour business, financial condition and results of operations could be materially and adversely affected.
PREMIER FINANCIAL BANCORP, INC.
FORM 10-K
December 31, 2009
Because Of Our Participation In The Capital Purchase Program, We Are Subject To Several Restrictions Including Restrictions On Our Ability To Declare Or Pay Dividends And Repurchase Our Shares As Well As Restrictions On Compensation Paid To Our Executive Officers.
Pursuant to the terms of the UST Agreement, our ability to declare or pay dividends on any of our shares is limited. Specifically, we are unable to declare dividend payments on Common Shares, junior preferred shares or pari passu preferred shares if we are in arrears on the payment of dividends on the Series A Preferred Shares. Further, we are not permitted to increase dividends on our Common Shares above the amount of the last quarterly cash dividend per share declared prior to October 14, 2008 ($0.11 per share) without the U.S. Treasury’s approval until October 2, 2012, unless all of the Series A Preferred Shares have been redeemed or transferred by the U.S. Treasury to unaffiliated third parties. In addition, our ability to repurchase our shares is restricted. The consent of the U.S. Treasury generally is required for us to make any stock repurchase (other than in connection with the administration of any employee benefit plan in the ordinary course of business and consistent with past practice) until October 2, 2012, unless all of the Series A Preferred Shares have been redeemed or transferred by the U.S. Treasury to unaffiliated third parties. Further, Common Shares, junior preferred shares or pari passu preferred shares may not be repurchased if we are in arrears on the payment of Series A Preferred Share dividends. Finally, the terms of the UST Agreement allow the U.S. Treasury to impose additional restrictions, including those on dividends and including unilateral amendments required to comply with changes in applicable federal law.
Pursuant to the terms of the UST Agreement, we adopted the U.S. Treasury’s current standards for executive compensation and corporate governance for the period during which the Treasury holds the equity securities issued pursuant to the UST Agreement, including the Common Shares that may be issued upon exercise of the Warrant. These standards generally apply to our Chief Executive Officer, Chief Financial Officer, the three next most highly compensated senior executive officers and, with respect to certain aspects of executive compensation, the next 5 most highly compensated employees. The standards include: (i) ensuring that incentive compensation plans and arrangements for senior executive officers do not encourage unnecessary and excessive risks that threaten our value; (ii) required clawback of any bonus or incentive compensation paid (or under a legally binding obligation to be paid) to a senior executive officer based on materially inaccurate financial statements or other materially inaccurate performance metric criteria; (iii) prohibition on making “golden parachute payments” to senior executive officers and the next 5 most highly compensated employees; and (iv) agreement not to claim a deduction, for federal income tax purposes, for compensation paid to any of the senior executive officers in excess of $500,000 per year.
PREMIER FINANCIAL BANCORP, INC.
FORM 10-K
December 31, 2009
The adoption of ARRA on February 17, 2009 imposed certain new executive compensation and corporate expenditure limits on all TARP recipients, including the Company, until the institution has repaid the U.S. Treasury. The executive compensation standards are more stringent than those previously in effect under the Capital Purchase Program. On June 10, 2009, the U.S. Treasury issued Interim Final Rules on TARP compensation standards pursuant to ARRA: (1) prohibiting (in the case of Premier, which is receiving less than $25,000,000 in assistance) the most highly compensated employee from receiving any bonus or incentive compensation while TARP funds are outstanding that has a value greater than one-third of the total amount of such employee’s compensation, which may only be made by long-term restricted stock awards that cannot vest until TARP assistance is repaid; (2) excluding incentives for senior executive officers that would cause them to take unnecessary and excessive risks that threaten the value of the TARP recipient; (3) requiring recovery of any bonus or incentive compensation paid based on statements of earnings that are later found to be materially inaccurate; (4) requiring the TARP recipient’s board compensation committee to meet at least semiannually to evaluate employee compensation plans in light of any risk posed to the recipient by such plans; (5) requiring the board of directors to adopt a company-wide policy regarding excessive or luxury expenditures (including entertainment, office renovations, aviation services, or other activities that are not reasonable expenditures); (6) requiring a separate proxy vote by the shareholders at the annual shareholders meeting (on a non-binding basis) to approve executive compensation of the TARP recipient; and (7) requiring the TARP recipient’s chief executive officer and chief financial officer to annually certify the recipient’s compliance with these requirements.
Strong Competition Within the Company’s Market Area May Limit Profitability
Premier faces significant competition both in attracting deposits and in the origination of loans. Mortgage bankers, commercial banks, credit unions and other savings institutions, which have offices in the market areas of Premier Banks, have historically provided most of the competition for the Premier Banks for deposits; however, each Premier Bank also competes with financial institutions that operate through Internet banking operations throughout the continental United States. In addition, and particularly in times of high interest rates, each Premier Bank faces additional and significant competition for funds from money market and mutual funds, securities firms, commercial banks, credit unions and other savings institutions located in the same communities and those that operate through Internet banking operations throughout the continental United States. Many competitors have substantially greater financial and other resources than Premier and the Premier Banks. Moreover, credit unions do not pay federal or state income taxes and are subject to fewer regulatory constraints than community banks and as a result, they may enjoy a competitive advantage over Premier. The Premier Banks compete for loans principally on the basis of the interest rates and loan fees they charge, the types of loans they originate and the quality of services they provide to borrowers. This advantage places significant competitive pressure on the prices of loans and deposits.
PREMIER FINANCIAL BANCORP, INC.
FORM 10-K
December 31, 2009
Defaults by Another Larger Financial Institution Could Adversely Affect Financial Markets Generally.
The commercial soundness of many financial institutions may be closely interrelated as a result of relationships between the institutions. As a result, concerns about, or a default or threatened default by, one institution could lead to significant market-wide liquidity and credit problems, losses or defaults by other institutions. This is sometimes referred to as “systemic risk”. The Company’sPremier’s business could be adversely affected directly by the default of another institution or if the financial services industry experiences significant market-wide liquidity and credit problems.
Current Levels of Market Volatility are Unprecedented and May Adversely Affect Market Price of Common Stock or Investment Security Values
The capital and credit markets have been experiencing volatility and disruption for more than a year. In recent months, the volatility and disruption has reached unprecedented levels. In some cases, the markets have produced downward pressure on stock prices and credit availability for certain issuers seemingly without regard to those issuers’ underlying financial strength. The current market volatility could contribute to a further decline in the market value of certain security investments and other assets of Premier. If current levels of market disruption and volatility continue or worsen, there can be no assurance that Premier will not experience an adverse effect, which may be material, on results of operations, capital or financial position.
Additional Capital May Not Be Available When Needed or Required by Regulatory Authorities.
Premier and its Affiliatethe Premier Banks are required by federal and state regulatory authorities to maintain adequate levels of capital to support its operations. In addition, the CompanyPremier may elect to raise additional capital to support its business or to finance acquisitions, if any, or it may otherwise elect or be required to raise additional capital. Premier’s ability to raise additional capital, if needed, will depend on conditions in the capital markets, economic conditions and a number of other factors, many of which are outside the Company’sPremier’s control and its financial performance. Accordingly, there canPremier may not be no assurance that Premier will be able to raise additional capital if needed or on acceptable terms. If Premier cannot raise additional capital when needed, it may have a material adverse effect on its financial condition, results of operations and prospects.
PREMIER FINANCIAL BANCORP, INC.
FORM 10-K
December 31, 2008
Allowance for Loan Losses May Be Insufficient
Premier, through the AffiliatePremier Banks, maintains an allowance for loan losses based on, among other things, national and regional economic conditions, historical loss experience, evaluations of potential losses on identified problem loans and delinquency trends. Premier believes that its allowance for loan losses is maintained at a level adequate to absorb any probable losses in its loan portfolio given the current information known to Management.management. These determinations are based upon estimates that are inherently subjective, and their accuracy depends on the outcome of future events. Therefore, Premier cannot predict loan losses with certainty and ultimate losses may differ from current estimates. Depending on changes in economic, operating and other conditions, including changes in interest rates, which are generally beyond its control, Premier’s actual losses could exceed its current allowance estimates. Premier can provide no assurance that itsPremier’s allowance ismay not be sufficient to cover all charge-offs in future periods. If charge-offs exceed Premier’s allowance, its earnings would decrease. In addition, regulatory agencies review Premier’s allowance for loan losses and may require additions to the allowance based upon their judgment about information available to them at the time of their examination. A required increase in Premier’s allowance for loan losses could reduce its earnings.
Strong Competition Within the Company’s Market Area May Limit Profitability
The Company faces significant competition both in attracting deposits and in the origination of loans, as described under the heading “Business — Competition.” Mortgage bankers, commercial banks, credit unions and other savings institutions, which have offices in the Bank’s market area have historically provided most of the Company’s competition for deposits; however, the Company also competes with financial institutions that operate through Internet banking operations throughout the continental United States. In addition, and particularly in times of high interest rates, the Company faces additional and significant competition for funds from money market and mutual funds, securities firms, commercial banks, credit unions and other savings institutions located in the same communities and those that operate through Internet banking operations throughout the continental United States. Many competitors have substantially greater financial and other resources than the Company. Moreover, credit unions do not pay federal or state income taxes and are subject to fewer regulatory constraints than community banks and as a result, they may enjoy a competitive advantage over the Company. The Banks compete for loans principally on the basis of the interest rates and loan fees they charge, the types of loans they originate and the quality of services they provide to borrowers. This advantage places significant competitive pressure on the prices of loans and deposits.
PREMIER FINANCIAL BANCORP, INC.
FORM 10-K
December 31, 20082009
Acquired subsidiary Adams National has entered into a written agreement with the OCC which may cause adverse results to Adams National’s operations
On October 1, 2008, Adams National entered into a written agreement with its primary regulator, the Office of the Comptroller of the Currency (“OCC”). Under the terms of the written agreement, Adams National agreed to take certain actions relating to its lending operations and capital compliance. Specifically, the OCC is requiring Adams National to take the following actions:
| a) | conduct a review of senior management to ensure that these individuals can perform the duties required under the bank’s policies and procedures and the requirements of the written agreement, and where necessary, provide a written program to address the training of its senior officers; |
| b) | achieve certain regulatory capital levels, which are greater than the regulatory requirements to be “well capitalized” under bank regulatory requirements. In particular, Adams National must achieve a: 12% total risk-based capital to total risk-weighted assets ratio; 11% Tier 1 capital to risk-weighted assets ratio; and 9% Tier 1 capital to adjusted total assets ratio; |
| d) | make additions to the allowance for loan and lease losses and adopt and implement written policies and procedures for establishing and maintaining the allowance in a manner consistent with the written agreement; |
| e) | adopt and implement an asset diversification program consistent with OCC guidelines and to perform an analysis of the bank’s concentrations of credit; |
| f) | take all necessary actions to protect the bank’s interest in criticized assets, adopt and implement a program to eliminate regulatory criticism of these assets, engage in an ongoing review of its criticized assets and develop and implement procedures for the effective monitoring of the loan portfolio; |
| g) | hire an independent appraiser to provide a written or updated appraisal of certain assets; |
| h) | develop and implement a program to improve the management of the loan portfolio and to provide the Adams National Board with monthly written reports on credit quality; |
| i) | employ a loan review consultant acceptable to the OCC to perform a quarterly quality review of Adams National’s assets; |
PREMIER FINANCIAL BANCORP, INC.
FORM 10-K
December 31, 2009
| j) | revise the bank's lending policy in accordance with OCC requirements; and |
| k) | maintain acceptable liquidity levels. |
The written agreement includes time frames to implement the foregoing and on-going compliance requirements for Adams National, including requirements to report to the OCC. The written agreement also requires Adams National to establish a committee of the Board of Directors which will be responsible for overseeing compliance with the written agreement.
Adams National has taken steps to comply with the requirements of the written agreement and expects that it will address all areas of concern.
Following the public announcement of the written agreement, Adams National became restricted in the bank’s ability to renew or access deposits through brokers. Moreover, a number of Adams National’s depositors sought to reduce their deposits at the bank. The impact of the written Agreement on Adams National’s operations as well as a deterioration in credit markets may have an adverse impact on the financial condition and operations of Premier including maintaining acceptable liquidity levels at the bank.
Adams National is no longer considered “well capitalized” for regulatory capital purposes, which will cause the bank to incur increased premiums for deposit insurance and require FDIC approval to gather brokered deposits including CDARS reciprocal deposits
As of the date of the Written Agreement with the OCC, October 1, 2008, Adams National was not considered “well capitalized” for regulatory purposes. As a result, the FDIC will assess higher deposit insurance premiums on the bank, which will negatively impact earnings. In addition, Adams National will be required to obtain FDIC approval to gather or renew brokered deposits including CDARS reciprocal deposits, during such time as the bank remains “adequately capitalized” for regulatory purposes. This status requires Adams National to obtain regulatory approval prior to accepting or renewing brokered deposits which will affect the bank’s ability to improve and maintain its liquidity position.
Loss of Large Checking and Money Market Deposit Customers Could Increase Cost of Funds and Have a Negative Effect on Results of Operations
The CompanyPremier has a number of large deposit customers that maintain balances in checking, money market and repurchase agreement accounts at the AffiliatePremier Banks. The ability to attract these types of deposits has a positive effect on the Company’sPremier’s net interest margin as they provide a relatively low cost of funds to the CompanyPremier compared to certificates of deposits or advances. If these depositors were to withdraw these funds and the AffiliatePremier Banks were not able to replace them with similar types of deposits, the cost of funds would increase and the Company’sPremier’s results of operation would be negatively impacted.
PREMIER FINANCIAL BANCORP, INC.
FORM 10-K
December 31, 2009
Integration of Recent and Pending Acquisitions May Be More Difficult Than Anticipated
The success of Premier’s recent acquisitions of Citizens First Bank, Inc., Traders Bankshares, Inc. and Abigail Adams will depend on a number of factors, including (but not limited to) Premier’s ability to:
| • | timely and successfully integrate the operations of Premier and each of the acquisitions; |
| • | maintain the existing relationships with the depositors of each acquisition to minimize the withdrawal of deposits subsequent to the merger(s); |
| • | maintain and enhance the existing relationships with the borrowers of each acquisition to limit potential losses from loans made by the them;; |
| • | control the incremental non-interest expense of the integrated operations to maintain overall operating efficiencies; |
| • | retain and attract qualified personnel at each acquisition; and |
| • | compete effectively in the communities served by each acquisition and in nearby communities. |
Adams National Commercial Real Estate and Commercial Business Loans Expose it to Increased Lending Risks
These types of loans generally expose a lender to greater risk of non-payment and loss than one- to four-family residential mortgage loans because repayment of the loans often depends on the successful operations and the income stream of the borrowers. Such loans typically involve larger loan balances to single borrowers or groups of related borrowers compared to one- to four-family residential mortgage loans. Adams National’s financial condition may be affected by a decline in the value of the real estate securing Adams National’s loans. Real estate values have suffered from declines in Adams National’s market, which may affect the bank’s financial condition. If Adams National continues to receive updated appraisals revealing significant additional weakness in its collateral, it will likely result in further losses. Also, many of Adams National’s borrowers have more than one commercial real estate or commercial business loan outstanding with the bank. Consequently, an adverse development with respect to one loan or one credit relationship can expose the bank to a significantly greater risk of loss compared to an adverse development with respect to a one- to four-family residential mortgage loan. Any impact on Adams National’s financial condition may affect the performance and results of operations of Premier.
PREMIER FINANCIAL BANCORP, INC.
FORM 10-K
December 31, 2009
Adams National’s Current Concentration of Loans in its Primary Market Area May Increase its Risk
Adams National’s success depends primarily on the general economic conditions in the metro Washington, D.C. market area. Unlike larger banks that are more geographically diversified, Adams National provides banking and financial services to customers primarily in Washington, D.C. The local economic conditions in the Washington, D.C. metropolitan area have a significant impact on its loans, the ability of the borrowers to repay these loans and the value of the collateral securing these loans. A significant decline in general economic conditions caused by inflation, recession, unemployment or other factors beyond Premier’s control would impact these local economic conditions and could negatively affect the financial results of its banking operations.
Premier’s expenses will increase as a result of increases in FDIC insurance premiums.
The Federal Deposit Insurance Corporation imposes an assessment against institutions for deposit insurance. This assessment is based on the risk category of the institution and ranges from 5 to 43 basis points of the institution’s deposits. Federal law requires that the designated reserve ratio for the deposit insurance fund be established by the FDIC at 1.15% to 1.50% of estimated insured deposits. If this reserve ratio drops below 1.15% or the FDIC expects that it will do so within six months, the FDIC must, within 90 days, establish and implement a plan to restore the designated reserve ratio to 1.15% of estimated insured deposits within five years (absent extraordinary circumstances).
Recent bank failures coupled with deteriorating economic conditions have significantly reduced the deposit insurance fund’s reserve ratio. On May 22, 2009, the FDIC issued a final rule imposing a special assessment of 5 basis points on total assets less tier 1 capital on June 30, 2009, which was collected on September 30, 2009. For Premier this assessment was booked as a second quarter 2009 expense. The rule also provides the FDIC with authority to impose up to two additional assessments of up to 5 basis points each on total assets less tier 1 capital.
In addition, EESA temporarily increased the limit on FDIC insurance coverage for deposits to $250,000 through December 31, 2009, and the FDIC took action to provide coverage for newly-issued senior unsecured debt and non-interest bearing transaction and for unsecured debt and non-interest bearing transaction and certain NOW accounts in excess of the $250,000 limit, for which institutions will be assessed additional premiums. In 2009, the temporary increase in FDIC insurance coverage was extended through December 31, 2013. These actions will increase Premier’s combined non-interest expense in 2009 and in future years as long as the increased premiums and coverages are in place.
PREMIER FINANCIAL BANCORP, INC.
FORM 10-K
December 31, 2009
Claims and Litigation Pertaining to Fiduciary Responsibility
From time to time, shareholders or customers may make claims and take legal action pertaining to the Company’sPremier’s and AffiliatePremier Banks’ performance of their fiduciary responsibilities. Defending such claims can impose a material expense on Premier. If such claims and legal actions are not resolved in a manner favorable to the Premier Banks they may result in financial liability and/or adversely affect the market perception of the Premier Banks and their products and services as well as impact customer demand for those products and services. Any financial liability or reputation damage could have a material adverse effect on the Company’sPremier’s business, which, in turn, could have a material adverse effect on its financial condition and results of operations.operations
Unauthorized Disclosure of Sensitive or Confidential Customer Information Could Severely Harm Our Business.
In the normal course of business, the Premier Banks collects, processescollect, process and retainsretain sensitive and confidential customer information to both open deposit accounts and determine whether to approve a customer’s request for a loan. Premier also relies upon a variety of computing platforms and networks over the internet for the purposes of data processing, communication and information exchange, including a variety of services provided by third-party vendors. Despite the security measures in place, Premier’s facilities and systems, and those of the Company’sPremier’s third-party service providers, may be vulnerable to security breaches, acts of vandalism, computer viruses, misplaced or lost data, programming and/or human errors or other similar events. If information security is breached, information can be lost or misappropriated, resulting in financial loss or costs to Premier or damages to others. Any security breach involving the misappropriation, loss or other unauthorized disclosure of confidential customer information, whether by Premier or by its vendors, could severely damage the Company’sPremier’s reputation, expose it to the risks of litigation and liability or disrupt the business operations of the CompanyPremier which in turn, could have a material adverse effect on its financial condition and results of operations.
PREMIER FINANCIAL BANCORP, INC.
FORM 10-K
December 31, 2008
Inability to Hire and Retain Qualified Employees
The Company’sPremier’s performance is largely dependent on the talents and efforts of highly skilled individuals and their ability to attract and retain customer relationships in a community bank environment. There is intense competition in the financial services industry for qualified employees. In addition, the CompanyPremier faces increasing competition with businesses outside the financial services industry for the most highly skilled individuals. The Company’sPremier’s business could be adversely affected if it were unable to retain and motivate its existing key employees and management team. Furthermore, the Company’sPremier’s success may be impacted if it were unable to recruit replacement management and key employees in a reasonable amount of time.
Premier is subject to several restrictions on compensation paid to Premier’s executive officers because of its participation in the TARP Capital Purchase Program. As a recipient of government funding under the TARP Capital Purchase Program, Premier must comply with
PREMIER FINANCIAL BANCORP, INC.
FORM 10-K
December 31, 2009
the executive compensation and corporate governance standards imposed by the ARRA and the standards established by the Secretary of the Treasury under the ARRA. The restrictions on executive compensation under these standards are more fully described in Item 1 of this Form 10-K under the caption “Regulatory Matters – TARP Capital Purchase Program”. These standards could impact Premier’s ability to hire or retain key executives or cause Premier to make material changes to its current compensation plans and philosophy that could result in higher compensation costs in future periods.
Future Issuances of Common Shares or Other Securities May Dilute the Value of Outstanding Common Shares, Which May Also Adversely Affect their Market Price
In many situations, Premier’s Board of Directors has the authority, without any vote of its shareholders, to issue shares of authorized but unissued securities, including Common Sharescommon shares authorized and unissued under the Company’sPremier’s stock option plans and shares of the Company’sPremier preferred stock. In the future, Premier may issue additional securities, through public or private offerings, in order to raise additional capital, complete acquisitions, or compensate key employees. Any such issuance would dilute the percentage of ownership interest of existing shareholders and may dilute the per share value of the Common Shares.common stock.
Integration of RecentThe Series A Preferred Shares Impact Net Income Available to Common Shareholders, and Pending Acquisitionsthe Warrant May Be More Difficult Than AnticipatedDilutive to Premier’s Common Shareholders.
The successadditional capital Premier raised through its participation in the TARP Capital Purchase Program has increased Premier’s equity and the number of dilutive outstanding common shares. In addition, the dividends declared and the accretion of discount on the Series A Preferred Shares reduces the net income available to Premier’s common shareholders and earning per common share. The Series A Preferred Shares will also receive preferential treatment in the event of Premier’s liquidation, dissolution or winding up. Additionally, the ownership interest of Premier’s existing common shareholders will be diluted to the extent the Warrant Premier issued to the U.S. Treasury is exercised. Although the U.S. Treasury has agreed not to vote any of the Company’s acquisitionscommon shares it receives upon exercise of Citizens First and Traders Bank and the planned acquisitionWarrant, a transferee of Abigail Adams will depend on a numberany portion of factors, including (butthe Warrant or of any common shares acquired upon exercise of the Warrant is not limited to) Premier’s ability to:bound by this agreement.
• | timely and successfully integrate the operations of Premier and each of the acquisitions; |
• | maintain the existing relationships with the depositors of Citizens First and/or Traders and/or Abigail Adams to minimize the withdrawal of deposits subsequent to the merger(s); |
• | maintain and enhance the existing relationships with the borrowers of Citizens First and/or Traders and/or Abigail Adams to limit potential losses from loans made by the them; |
• | control the incremental non-interest expense of the integrated operations to maintain overall operating efficiencies; |
• | retain and attract qualified personnel at Citizens First and/or Traders and/or Abigail Adams; and |
• | compete effectively in the communities served by Citizens First, Traders and Abigail Adams and in nearby communities. |
If Premier is Unable to Redeem the Series A Preferred Shares After Five Years, the Cost of This Capital Will Increase Substantially.If Premier is unable to redeem the Series A Preferred Shares prior to November 15, 2014, the cost of this capital will increase substantially on that date, from 5.0% per annum to 9.0% per annum. Depending on Premier’s financial condition at the time, this increase in the annual dividend rate on the Series A Preferred Shares could have a material negative effect on Premier’s liquidity.
PREMIER FINANCIAL BANCORP, INC.
FORM 10-K
December 31, 20082009
If a Subsidiary Bank’s Current Capital Ratios Decline Below the Regulatory Threshold for an “Adequately Capitalized” Institution, the Bank Will Be Considered “Undercapitalized” Which May Have a Material and Adverse Effect on Premier.
The Federal Deposit Insurance Act (FDIA) requires each federal banking agency to take prompt corrective action with respect to banks that do no meet the minimum capital requirements. Once a bank becomes undercapitalized, it is subject to various requirements and restrictions, including a prohibition of the payment of capital distributions and management fees, restrictions on growth of the bank’s assets, and a requirement for prior regulatory approval of certain expansion proposals. In addition, an undercapitalized bank must file a capital restoration plan with its principal federal regulator.
If an undercapitalized bank fails in any material aspect to implement a plan approved by its regulator, the agency may impose additional restrictions on the bank. These include, among others, requiring the recapitalization or sale of the bank, restrictions with affiliates, and limiting the interest rates the bank my pay on deposits. Further, even after the bank has attained adequately capitalized status, the appropriate federal agency may, if it determines, after notice and hearing, that the bank is in an unsafe or unsound condition or has not corrected a deficiency from its most recent examination, treat the bank as if it were undercapitalized and subject the bank to the regulatory restrictions of such lower classification.
In addition to measures taken under the prompt corrective action provisions with respect to undercapitalized institutions, insured banks and their holding companies may be subject to potential enforcement actions by their regulators for unsafe and unsound practices in conducting their business or the violations of law or regulation, including the filing of false or misleading regulatory reports. Enforcement actions under this authority may include the issuance of cease and desist orders, the imposition of civil money penalties, the issuance of directives to increase capital, formal and informal agreements, or the removal and prohibition orders against “institution-affiliates parties”. Further, the Federal Reserve may bring an enforcement action against the bank holding company either to address the undercapitalization in the holding company or to require the holding company to implement measures to remediate undercapitalization in a subsidiary.
PREMIER FINANCIAL BANCORP, INC.
FORM 10-K
December 31, 2009
None.
The Company leases its principal executive offices located in Huntington, West Virginia. The Company also owns property located at 104 Jefferson Street, Brooksville, Kentucky, which serves as a branch for Citizen's Deposit Bank. Except as noted, each of the Banks owns the real property and improvements on which their banking activities are conducted.
Citizens Deposit Bank & Trust, in addition to its main office at 400 Second Street in Vanceburg, Kentucky, has four branch offices in Lewis County, Kentucky, (including one leased facility), one leased branch office in Mason County, Kentucky, one branch located on Highway 10 in Germantown, Kentucky, and one branch located in Bracken County, Kentucky. Farmers Deposit Bank, in addition to its main office at 5230 South Main Street in Eminence, Kentucky, has one branches in Henry County, Kentucky and closed a secondother branch in Henry County, effective January 31, 2008.Kentucky. Ohio River Bank, in addition to its main office at 221 Railroad Street in Ironton, Ohio, has two branches, one leased facility in Lawrence County, Ohio and one in Scioto County, Ohio. First Central Bank, in addition to its main office at 2 South Main Street in Philippi, West Virginia, has a branch located in Buckhannon, West Virginia and a leased branch office located in Upshur County, West Virginia. Boone County Bank, in addition to its main office at 300 State Street, Madison, West Virginia, has one leased branch located in Lincoln County, West Virginia and two other branches, one each located in Boone and Logan Counties, West Virginia. Traders Bank, Inc., in addition to its main office at 601 Washington Street, Ravenswood, West Virginia, has two other branch locations in Jackson County, two branch locations in Roane County, and one location in Wood County, West Virginia. Adams National, leases its main office location at 1130 Connecticut Avenue, N.W., Washington, DC, and leases five other branch offices located at Washington, DC and one branch office located in Silver Springs Maryland. Adams National also leases space for its deposit operations in Washington, DC. Consolidated Bank & Trust, in addition to its main office at 320 North First Street, Richmond, Virginia, has one branch located in Hampton, Virginia.
The Banks are respectively parties to legal actions that are ordinary routine litigation incidental to a commercial banking business. In management's opinion, the outcome of these matters, individually or in the aggregate, will not have a material adverse impact on the results of operations or financial position of the Company.
There were no matters submitted to a vote of security holders, through solicitation of proxies or otherwise during the fourth quarter of the fiscal year covered by this report.
PREMIER FINANCIAL BANCORP, INC.
FORM 10-K
December 31, 20082009
PART II
Issuer Purchase of Equity Securities
The Company's common stock is listed on the NASDAQ Global Market System under the symbol PFBI. At December 31, 2008,2009, the Company had approximately 938 record holders4,993 shareholders of its common shares.
The following table sets forth on a quarterly basis cash dividends paid and the range of high and low sales prices on a per share basis during the quarters indicated.
| | | Cash Dividends | | | Sales Price | | |
| | | Paid | | | High | | | Low | | |
| 2007 | | | | | | | | | | |
First Quarter | | $ | 0.10 | | | $ | 16.49 | | | $ | 13.36 | | |
Second Quarter | | 0.10 | | | 16.50 | | | 15.03 | | |
Third Quarter | | 0.10 | | | 16.45 | | | 13.23 | | |
Fourth Quarter | | | 0.10 | | | | 14.77 | | | | 12.10 | | |
| | | | 0.40 | | | | | | | | | | | Cash | | | Sales Price | |
| | | | | | | | | | | | | | | Dividends Paid | | | High | | | Low | |
| 2008 | | | | | | | | | | | | | | | | | | | | | |
First Quarter | | $ | 0.10 | | | $ | 13.59 | | | $ | 11.01 | | | $ | 0.10 | | | $ | 13.59 | | | $ | 11.01 | |
Second Quarter | | 0.11 | | | 13.15 | | | 10.05 | | | | 0.11 | | | | 13.15 | | | | 10.05 | |
Third Quarter | | 0.11 | | | 11.63 | | | 8.50 | | | | 0.11 | | | | 11.63 | | | | 8.50 | |
Fourth Quarter | | | 0.11 | | | | 9.80 | | | | 5.98 | | | | 0.11 | | | | 9.80 | | | | 5.98 | |
| | | | 0.43 | | | | | | | | | | | | 0.43 | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| 2009 | | | | | | | | | | | | | | | | | | | | | | | | |
First Quarter (through March 15, 2009) | | $ | 0.11 | | | $ | 9.00 | | | $ | 4.00 | | |
First Quarter | | | $ | 0.11 | | | $ | 9.00 | | | $ | 4.00 | |
Second Quarter | | | | 0.11 | | | | 7.19 | | | | 4.82 | |
Third Quarter | | | | 0.11 | | | | 7.50 | | | | 5.78 | |
Fourth Quarter | | | | 0.11 | | | | 6.92 | | | | 4.00 | |
| | | | | 0.44 | | | | | | | | | |
| | | | | | | | | | | | | | |
| 2010 | | | | | | | | | | | | | |
First Quarter (through March 15, 2010) | | | $ | 0.11 | | | $ | 8.90 | | | $ | 6.32 | |
The payment of dividends by the Company depends upon the ability of the Banks to declare and pay dividends to the Company because the principal source of the Company's revenue will be dividends paid by the Banks. At December 31, 20082009 approximately $2.4$2.5 million was available for payment as dividends from the Banks to the Company without the need for regulatory approval. In considering the payment of dividends, the Board of Directors will take into account the Company's financial condition, the cumulative provisions of the Series A Preferred Shares, results of operations, tax considerations, costs of expansion, industry standards, economic conditions and need for funds, as well as governmental policies and regulations applicable to the Company and the Banks. See "REGULATORY MATTERS - Capital Requirements" for discussion on capital guidelines.
PREMIER FINANCIAL BANCORP, INC.
FORM 10-K
December 31, 20082009
Stock Performance Graph
The following Stock Performance Graph and related information shall not be deemed “soliciting material” or to be “filed” with the Securities and Exchange Commission, nor shall such information be incorporated by reference into any future filing under the Securities Act of 1933 or Securities Exchange Act of 1934, each as amended, except to the extent that Premier specifically incorporates it by reference into such filing.
The following graph shows a comparison of cumulative total stockholder return on the Common Stock since December 31, 20032004 with the cumulative total returns of both a broad equity market index and a published industry index. The broad equity market index chosen was the Russell 3000 and the published industry index chosen was the SNL ($500M-$1B) Bank Asset-Size Index. The graph reflects historical performance only, which is not indicative of possible future performance of the Common Stock.
Premier Financial Bancorp, Inc.
| | | Period Ending | | | Period Ending |
| Index | | | 12/31/03 | | 12/31/04 | | 12/31/05 | | 12/31/06 | | 12/31/07 | | 12/31/08 | | | 12/31/04 | | 12/31/05 | | 12/31/06 | | 12/31/07 | | 12/31/08 | | 12/31/09 |
| Premier Financial Bancorp, Inc. | | | 100.00 | | 145.47 | | 188.22 | | 166.88 | | 155.81 | | 89.62 | | | 100.00 | | 129.39 | | 114.72 | | 107.11 | | 61.61 | | 63.16 |
| Russell 3000 | | | 100.00 | | 111.95 | | 118.80 | | 137.47 | | 144.54 | | 90.61 | | | 100.00 | | 106.12 | | 122.80 | | 129.11 | | 80.94 | | 103.88 |
| SNL $500M-$1B Bank Index | | | 100.00 | | 113.32 | | 118.18 | | 134.41 | | 107.71 | | 69.02 | | | 100.00 | | 104.29 | | 118.61 | | 95.04 | | 60.90 | | 58.00 |
| *Source: SNL Financial LC, Charlottesville, VA | *Source: SNL Financial LC, Charlottesville, VA | | *Source: SNL Financial LC, Charlottesville, VA |
PREMIER FINANCIAL BANCORP, INC.
FORM 10-K
December 31, 20082009
Equity Compensation Plan Information
The following table gives information about the Company’s common stock that may be issued upon the exercise of options, warrants and rights under its equity compensation plan, the 2002 Stock Option Plan, as of December 31, 2008.2009.
Plan Category | | Number of securities to be issued upon exercise of outstanding options, warrants and rights (a) | | | Weighted-average exercise price of outstanding options, warrants and rights (b) | | | Number of securities remaining available for future issuance under equity compensation plans (Excluding securities reflected in column (a)) (c) | | | Number of securities to be issued upon exercise of outstanding options, warrants and rights (a) | | | Weighted-average exercise price of outstanding options, warrants and rights (b) | | | Number of securities remaining available for future issuance under equity compensation plans (Excluding securities reflected in column (a)) (c) | |
| Equity compensation plans approved by shareholders | | | | | | | | | | | | | | | | | | |
2002 Stock Option Plan | | | 181,916 | | | | 12.47 | | | | 312,415 | | | | 212,449 | | | $ | 11.18 | | | | 281,882 | |
Equity compensation plans not approved by shareholders | | | | | | | | | | | | | | | | | | | | | | | | |
None | | | | | | | | | | | | | | | | | | | | | | | | |
| Total | | | 181,916 | | | $ | 12.47 | | | | 312,415 | | | | 212,449 | | | $ | 11.18 | | | | 281,882 | |
PREMIER FINANCIAL BANCORP, INC.
FORM 10-K
December 31, 20082009
The following table presents consolidated selected financial data for the Company. It does not purport to be complete and is qualified in its entirety by more detailed financial information and the audited consolidated financial statements contained elsewhere in this annual report. The data presented below reflects separately the impact of discontinued operations as more fully described in Item 1 – “The Company”.
| (Dollars in thousands, except per share amounts) | | At or for the Year Ended December 31 | | | At or for the Year Ended December 31 | |
| | | 2008 | | | 2007 | | | 2006 | | | 2005 | | | 2004 | | | 2009 | | | 2008 | | | 2007 | | | 2006 | | | 2005 | |
| Earnings | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Net interest income | | $ | 26,035 | | | $ | 22,296 | | | $ | 21,395 | | | $ | 19,852 | | | $ | 18,064 | | | $ | 31,083 | | | $ | 26,035 | | | $ | 22,296 | | | $ | 21,395 | | | $ | 19,852 | |
Provision for loan losses | | 147 | | | (78 | ) | | (1,161 | ) | | 4 | | | 1,026 | | | | 1,052 | | | | 147 | | | | (78 | ) | | | (1,161 | ) | | | 4 | |
Non-interest income | | 5,291 | | | 4,623 | | | 4,165 | | | 3,920 | | | 3,606 | | | | 9,136 | | | | 5,291 | | | | 4,623 | | | | 4,165 | | | | 3,920 | |
Non-interest expense | | 19,894 | | | 16,408 | | | 16,937 | | | 17,305 | | | 17,782 | | | | 27,115 | | | | 19,894 | | | | 16,408 | | | | 16,937 | | | | 17,305 | |
Income taxes (benefit) | | | 3,749 | | | | 3,470 | | | | 3,283 | | | | 2,029 | | | | 899 | | |
Income (loss) from continuing operations | | 7,536 | | | 7,119 | | | 6,501 | | | 4,434 | | | 1,963 | | |
Income (loss) from discontinued operations (1) | | | - | | | | - | | | | - | | | | - | | | | 4,734 | | |
Net income (loss) | | $ | 7,536 | | | $ | 7,119 | | | $ | 6,501 | | | $ | 4,434 | | | $ | 6,697 | | |
Income taxes | | | | 2,934 | | | | 3,749 | | | | 3,470 | | | | 3,283 | | | | 2,029 | |
Net income | | | | 9,118 | | | | 7,536 | | | | 7,119 | | | | 6,501 | | | | 4,434 | |
Preferred stock dividends | | | | 133 | | | | - | | | | - | | | | - | | | | - | |
Net income available to common shareholders | | | $ | 8,985 | | | $ | 7,536 | | | $ | 7,119 | | | $ | 6,501 | | | $ | 4,434 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Financial Position | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total assets | | $ | 724,465 | | | $ | 549,255 | | | $ | 535,452 | | | $ | 528,324 | | | $ | 537,255 | | | $ | 1,101,750 | | | $ | 724,465 | | | $ | 549,255 | | | $ | 535,452 | | | $ | 528,324 | |
Loans, net of unearned income | | 467,111 | | | 346,570 | | | 343,797 | | | 328,717 | | | 324,937 | | |
Loans | | | | 699,133 | | | | 467,111 | | | | 346,570 | | | | 343,797 | | | | 328,717 | |
Allowance for loan losses | | 8,544 | | | 6,497 | | | 6,661 | | | 7,892 | | | 9,384 | | | | 7,569 | | | | 8,544 | | | | 6,497 | | | | 6,661 | | | | 7,892 | |
Goodwill and other intangibles | | 29,974 | | | 15,816 | | | 15,816 | | | 15,816 | | | 15,816 | | | | 31,595 | | | | 29,974 | | | | 15,816 | | | | 15,816 | | | | 15,816 | |
Securities | | 175,741 | | | 124,242 | | | 121,367 | | | 137,419 | | | 153,892 | | | | 240,970 | | | | 175,741 | | | | 124,242 | | | | 121,367 | | | | 137,419 | |
Deposits | | 589,182 | | | 449,033 | | | 438,950 | | | 435,843 | | | 437,798 | | | | 913,784 | | | | 589,182 | | | | 449,033 | | | | 438,950 | | | | 435,843 | |
Other borrowings | | 41,518 | | | 26,124 | | | 33,091 | | | 19,053 | | | 20,536 | | | | 55,564 | | | | 41,518 | | | | 26,124 | | | | 33,091 | | | | 19,053 | |
Subordinated debentures | | - | | | - | | | - | | | 15,722 | | | 20,876 | | | | - | | | | - | | | | - | | | | - | | | | 15,722 | |
Stockholders’ equity | | 89,422 | | | 67,389 | | | 61,002 | | | 54,287 | | | 51,029 | | |
Preferred equity | | | | 21,705 | | | | - | | | | - | | | | - | | | | - | |
Common equity | | | | 106,851 | | | | 89,422 | | | | 67,389 | | | | 61,002 | | | | 54,287 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Share Data | | | | | | | | | | | | | | | | | | | | | |
Income (loss) from continuing operations – basic | | $ | 1.25 | | | $ | 1.36 | | | $ | 1.24 | | | $ | 0.85 | | | $ | 0.37 | | |
Income (loss) from continuing operations - diluted | | 1.25 | | | 1.35 | | | 1.24 | | | 0.84 | | | 0.37 | | |
| Per Common Share Data | | | | | | | | | | | | | | | | | | | | | |
Net income – basic | | 1.25 | | | 1.36 | | | 1.24 | | | 0.85 | | | 1.28 | | | | 1.32 | | | | 1.25 | | | | 1.36 | | | | 1.24 | | | | 0.85 | |
Net income - diluted | | 1.25 | | | 1.35 | | | 1.24 | | | 0.84 | | | 1.28 | | | | 1.32 | | | | 1.25 | | | | 1.35 | | | | 1.24 | | | | 0.84 | |
Book value | | 13.99 | | | 12.87 | | | 11.65 | | | 10.37 | | | 9.75 | | | | 13.46 | | | | 13.99 | | | | 12.87 | | | | 11.65 | | | | 10.37 | |
Tangible book value | | 9.30 | | | 9.85 | | | 8.63 | | | 7.35 | | | 6.73 | | | | 9.41 | | | | 9.30 | | | | 9.85 | | | | 8.63 | | | | 7.35 | |
Cash dividends | | 0.43 | | | 0.40 | | | 0.10 | | | 0.00 | | | 0.00 | | | | 0.44 | | | | 0.43 | | | | 0.40 | | | | 0.10 | | | | 0.00 | |
| | | | | | | | | | | | | | | | | | | | | | |
| Financial Ratios | | | | | | | | | | | | | | | | | | | | | |
Return on average assets | | | | 1.09 | % | | | 1.12 | % | | | 1.31 | % | | | 1.21 | % | | | 0.82 | % |
Return on average common equity | | | | 9.47 | % | | | 9.38 | % | | | 11.13 | % | | | 11.31 | % | | | 8.42 | % |
Dividend payout | | | | 33.33 | % | | | 34.40 | % | | | 29.41 | % | | | 8.06 | % | | | 0.00 | % |
Stockholders’ equity to total assets at period-end | | | | 11.67 | % | | | 12.34 | % | | | 12.27 | % | | | 11.39 | % | | | 10.28 | % |
Average stockholders’ equity to average total assets | | | | 12.19 | % | | | 11.94 | % | | | 11.74 | % | | | 10.74 | % | | | 9.77 | % |
PREMIER FINANCIAL BANCORP, INC.
FORM 10-K
December 31, 2008
Item 6. Selected Financial Data (continued)
| (Dollars in thousands, except per share amounts) | | At or for the Year Ended December 31 | |
| | | 2008 | | | 2007 | | | 2006 | | | 2005 | | | 2004 | |
Return on average assets (2), (3) | | | 1.12 | % | | | 1.31 | % | | | 1.21 | % | | | 0.82 | % | | | 0.36 | % |
Return on average equity (3) | | | 9.38 | % | | | 11.13 | % | | | 11.31 | % | | | 8.42 | % | | | 4.06 | % |
Dividend payout (3) | | | 34.40 | % | | | 29.41 | % | | | 8.06 | % | | | 0.00 | % | | | 0.00 | % |
Stockholders’ equity to total assets at period-end | | | 12.34 | % | | | 12.27 | % | | | 11.39 | % | | | 10.28 | % | | | 9.50 | % |
Average stockholders’ equity to average total assets (2) | | | 11.94 | % | | | 11.74 | % | | | 10.74 | % | | | 9.77 | % | | | 8.23 | % |
| | | | | | | | | | | | | | | | | | | | | |
(1) 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. The sale was completed on July 1, 2004. In accordance with Financial Accounting Standard 144, the financial position and results of operations of Citizens Bank are removed from the detail line items in the table and presented separately as “discontinued operations.” (2) Computed based on average assets from continuing operations (3) Computed based on income (loss) from continuing operations | |
| | | | | | | | | | | | | | | | | | | | | |
PREMIER FINANCIAL BANCORP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
December 31, 20082009
of Operations.
INTRODUCTION
Premier Financial Bancorp, Inc. ("Premier”) is a multi-bank holding company headquartered in Huntington, West Virginia. It operates sixeight community bank subsidiaries ranging in size from $66$63 million to $170$290 million, each with a local community name and orientation. The banks operate in twenty-fourtwenty-six communities within the states of West Virginia, Virginia, Ohio, Maryland and Kentucky plus the cities of Washington, DC and Richmond, Virginia. Through these locations the banks provide their customers with a full range of banking services. At the open of business on October 1, 2009, Premier completed its acquisition of Abigail Adams National Bancorp, Inc. (“Abigail Adams”), a $363 million two bank holding company. The two banks now owned by Premier as a result of the acquisition of Abigail Adams were Adams National Bank (“Adams National”) with six locations in and around Washington, DC and Consolidated Bank & Trust Company (“CB&T”) headquartered in Richmond, Virginia with one branch location in Hampton, Virginia. At the close of business on April 30, 2008, Premier completed its acquisitions of Traders Bankshares, Inc. (“Traders”), a $108 million single bank holding company headquartered in Spencer, West Virginia, and Citizens First Bank, Inc. (“Citizens First”), a $62 million bank headquartered in Ravenswood, West Virginia. The results of operations of Abigail Adams, Citizens First and Traders are included in Premier’s consolidated statements of income beginning only from thetheir respective acquisition date.dates. On October 25, 2008, Premier merged these two banks,Citizens First and Traders, named the resulting bank Traders Bank, Inc. and moved its headquarters to Ravenswood, West Virginia. As of December 31, 2007,2009, Premier had approximately $724 million$1.1 billion in total assets, $467$699 million in total loans, $589$914 million in total deposits and $18$25 million in customer repurchase agreements.
The accompanying consolidated financial statements have been prepared by the management of Premier in conformity with accounting principles generally accepted in the United States of America. The audit committee of the Board of Directors engaged Crowe Horwath LLP (Crowe)("Crowe") as independent auditors to audit the consolidated financial statements, and their report is included elsewhere herein. Financial information appearing throughout this annual report is consistent with that reported in the consolidated financial statements. The following discussion is designed to assist readers of the consolidated financial statements in understanding significant changes in Premier's financial condition and results of operations.
Management's objective of a fair presentation of financial information is achieved through a system of internal accounting controls. The financial control system of Premier is designed to provide reasonable assurance that assets are safeguarded from loss and that transactions are properly authorized and recorded in the financial records. As an integral part of that financial control system, the holding company employs a staff of internal auditors and contracts with professional accounting firms to perform internal audits of the financial records of each of the subsidiaries on a periodic basis. The internal audit staffmanager reports theirthe findings and recommendations highlighted by the internal audits to Premier’s audit committee as well
PREMIER FINANCIAL BANCORP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
December 31, 2009
as the audit committees of the subsidiaries. Also, on a regular periodic basis, the subsidiary banks are examined by Federal and State banking authorities for safety and soundness as well as compliance with applicable banking laws and regulations. The activities of both the internal and external audit functions are reviewed by the audit committee of the Board of Directors.
PREMIER FINANCIAL BANCORP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
December 31, 2008
FORWARD-LOOKING STATEMENTS
Management's discussion and analysis contains forward-looking statements that are provided to assist in the understanding of anticipated future financial performance. However, such performance involves risks and uncertainties, and there are certain important factors that may cause actual results to differ materially from those anticipated. These important factors include, but are not limited to, economic conditions (both generally and more specifically in the markets in which Premier operates), competition for Premier's customers from other providers of financial services, government legislation and regulation (which changes from time to time), changes in interest rates, Premier's ability to originate quality loans, collect delinquent loans and attract and retain deposits, the impact of Premier's growth or lack thereof, Premier's ability to control costs, and new accounting pronouncements, all of which are difficult to predict and many of which are beyond the control of Premier. The words “may,” “could,” “should,” “would,” “will,” “believe,” “anticipate,” “estimate,” “expect,” “intend,” “plan,” “project,” “predict,” “continue” and similar expressions are intended to identify forward-looking statements.
CRITICAL ACCOUNTING POLICIES
General
Presented below is a discussion of those accounting policies that management believes are the most important to the presentation and understanding of our financial condition and results of operations. These critical accounting policies require management's most difficult, subjective and complex judgments about matters that are inherently uncertain. In the event that different assumptions or conditions were to prevail, and depending upon the severity of such changes, the possibility of materially different financial condition or results of operations is a reasonable likelihood. See also Note 1 of the accompanying consolidated financial statements presented elsewhere in this annual report.
PREMIER FINANCIAL BANCORP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
December 31, 20082009
Allowance for Loan Losses
The Company monitors and maintains an allowance for loan losses to absorb an estimate of probable incurred losses inherent in the loan portfolio. The Company maintains policies and procedures that address the systems of control over the following areas of maintenance of the allowance: the systematic methodology used to determine the appropriate level of the allowance to provide assurance that the allowance for loan losses is maintained in accordance with accounting principles generally accepted in the United States of America; the accounting policies for loan charge-offs and recoveries; the assessment and measurement of impairment in the loan portfolio; and the loan grading system.
The Company evaluates various loans individually for impairment as requiredusing accounting guidance issued by Statement of Financial Accounting Standard (SFAS) No. 114, Accounting by Creditors for Impairment of a Loan, and SFAS No. 118, Accounting by Creditors for Impairment of a Loan - Income Recognition and Disclosures.Standards Board (“FASB”). Loans evaluated individually for impairment include non-performing loans, such as loans on non-accrual, loans past due 90 days or more, restructured loans and other loans selected by management including loans graded as substandard or doubtful by the internal credit review process. The evaluations are based upon discounted expected cash flows or collateral valuations. If the evaluation shows that a loan is individually impaired, then a specific reserve is established for the amount of impairment. If a loan evaluated individually is not impaired, then the loan is assessed for impairment under SFAS No. 5, Accounting for Contingencies (SFAS 5), with a group of loans that have similar characteristics.
For loans without individual measures of impairment, the Company makes estimates of losses for groups of loans as required by SFAS 5.accounting guidance. Loans are grouped by similar characteristics, including the type of loan, the assigned loan grade and the general collateral type. A loss rate reflecting the expected loss inherent in a group of loans is derived based upon estimates of default rates for a given loan grade, the predominant collateral type for the group and the terms of the loan. The resulting estimate of losses for groups of loans is adjusted for relevant environmental factors and other conditions of the portfolio of loans, including: borrower and industry concentrations; levels and trends in delinquencies, charge-offs and recoveries; changes in underwriting standards and risk selection; level of experience, ability and depth of lending management; and national and local economic conditions.
The amount of estimated impairment for individually evaluated loans and groups of loans is added together for a total estimate of probable incurred loan losses. This estimate of losses is compared to the allowance for loan losses of the Company as of the evaluation date and, if the estimate of losses exceeds the allowance, an additional provision to the allowance would be made. If the estimate of losses is less than the allowance, the degree to which the allowance exceeds the estimate is evaluated to determine whether the allowance falls outside a range of estimates. If the estimate of losses were below the range of reasonable estimates, the
PREMIER FINANCIAL BANCORP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
December 31, 2008
allowance would be reduced by way of a credit to the provision for loan losses. The Company recognizes the inherent imprecision in estimates of losses due to various uncertainties and variability related to the factors used, and therefore a reasonable range around the estimate of losses is derived and used to ascertain whether the allowance is too high. If different assumptions or conditions were to prevail and it is determined that the allowance is not
PREMIER FINANCIAL BANCORP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
December 31, 2009
adequate to absorb the new estimate of probable incurred losses, an additional provision for loan losses would be made, which amount may be material to the Consolidated Financial Statements.
Business Acquisitions and Impairment of Goodwill
For acquisitions, Premier is required to record the assets acquired, including identified intangible assets, and the liabilities assumed at their fair value. These often involve estimates based on third-party valuations, such as appraisals, or internal valuations based on discounted cash flow analyses or other valuation techniques that may include estimates of attrition, inflation, asset growth rates or other relevant factors. In addition, the determination of the useful lives over which an intangible asset will be amortized is subjective.
The loans acquired via the purchase of Abigail Adams were recorded on the books of Premier at their estimated fair value. The estimate of fair value included factors for the measurement of credit risk, interest rate risk and re-salability in the most advantageous market for the loans in an orderly transaction between market participants. These estimates required management's most difficult, subjective and complex judgments and are inherently uncertain. Since the estimated fair value of these loans were believed to have accounted for the reasonably estimable credit risk in the loans, consistent with new accounting guidance for acquisitions after 2008, no allowance for loan losses for these loans was recorded by Premier at the date of acquisition. However, in the event that different assumptions or conditions were to prevail due to uncertainties in the economy, the borrower’s ability to repay or other factors, and depending upon the severity of such changes, the possibility of materially different financial condition or results of operations is a reasonable likelihood.
Under Statement of Financial Accounting Standards (“SFAS”) No. 142 Goodwillaccounting guidance issued by the FASB related to accounting for goodwill and Other Intangible Assets,other intangible assets, goodwill is evaluated at least annually to determine if the amount recorded on the Company's balance sheet is impaired. If goodwill is determined to be impaired, the recorded amount would be reduced to estimated fair value by a charge to expense in the period in which impairment is determined. Impairment is evaluated in the aggregate for all of the Company's banking operations. Operating characteristics of the aggregate banking operations are derived and compared to a database of peer group banks that have been sold. Pricing valuation factors that are considered in estimating the fair value of the Company's aggregate banking operations include price-to-total assets, price-to-total book value, price-to-deposits and price-to-earnings. Unusual events that have impacted the operating characteristics of the Company's aggregate banking operations are considered to assess the likelihood of recurrence and adjustments to historical performance may be made. Changes in assumptions regarding the likelihood of unusual historical events recurring or the use of different pricing valuation factors could have a material impact on management's impairment analysis.
PREMIER FINANCIAL BANCORP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
December 31, 20082009
SUMMARY FINANCIAL RESULTS
Premier had net income available to common shareholders of $7.536$8.985 million in 20082009 compared to $7.119$7.536 million of net income reported for the year 2008 and $7.119 reported for 2007. Net income increased in 2009 largely due to acquisition activity in 2008 as a result ofand 2009. In 2009, higher interest income and non-interest income as well as lower interest expense all of which waswere partially offset by higher non-interest expense. The increases in each of these categories was primarily the result of the increase in operations from the acquisitions of Abigail Adams on October 1, 2009, and Citizens First Bank (“Citizens First) and Traders, Bankshares, Inc. (“Traders”), both of which occurred at the close of business on April 30, 2008. The operating results of Abigail Adams, Citizens First and Traders are included in the consolidated financial statements of Premier only from the date of their respective acquisition. Net incomeWhen comparing 2009 operating results to 2008 operating results, the operations of Abigail Adams are included only for the last three months of 2009 and none at all in 2006 was $6.501 million.2008. Similarly, the operations of Citizens First and Traders are included for the full twelve months of 2009 but only for the last eight months of 2008. The increase in 2008 net income available to shareholders over 2007 over 2006 was theagain a result of an increase inhigher interest income and non-interest income as well as lower interest expense all of which was partially offset by higher non-interest expense. These results were largely due to a greater average volumethe acquisitions of loans outstanding; a greater volumeCitizens First and Traders. When comparing 2008 operating results to 2007 operating results, the operations of average federal funds sold outstanding; higher yields onCitizens First and Traders are included only for the last eight months of 2008 and none at all earning assets; an increase in secondary market mortgage income; and a reduction in the operating costs of the company. Net income in 2006 was the result of an increase in interest income due to a greater volume of loans outstanding; higher yields on all earning assets; a negative provision for loan losses; and a reduction in the net operating costs of the company.2007. Basic earnings per share were $1.32 in 2009 compared to $1.25 in 2008 comparedand to $1.36 in 2007 and2007. The increase in earnings per share in 2009 resulted from a proportionately greater increase in net income available to $1.24common shareholders from the acquisition of Abigail Adams versus the increase in 2006.average shares outstanding issued to acquire the entity. The decrease in earnings per share in 2008 resulted from the increase in the average shares outstanding related to the common stock issued as part of the merger consideration of Citizens First and Traders asTraders. The terms of the acquisitions are more fully described in Note 2324 to the consolidated financial statements.
The following table comparatively illustrates the components of ROA and ROE over the previous five years. Return on average assets (ROA)(“ROA”) measures how effectively Premier utilizes its assets to produce net income. It also facilitates the analysis of earnings performance of different sized organizations. In 2007, 2008 and 2009, Premier increased the size its balance sheet from $549.3 million in total assets at the end of 2007 to $724.5 million at the end of 2008 to $1,101.8 million at the end of 2009 largely due to the acquisitions of Traders and Citizens First.acquisitions. The increase in asset size will generally result in higher dollars of income earned and expenses incurred. A detailed review of the components of ROA will help analyze Premier’s performance without regard to changes in its size.
Premier’s net income in 2008 resulting2009 resulted in an ROA of 1.12%1.09%, a decrease from the 1.31%1.12% ROA in 20072008 and the 1.21% ROA1.31% in 2006.2007. As shown in the table, fully taxable equivalent net interest income (as a percent of average earningearnings assets) reached its highest level induring the last five years in 2007 at 4.42%. In 2008, this percentage decreased to 4.21% and decreased again in 2009 to 4.12%, as the increase in averageyields on earning assets from Traders and Citizens First did nothave been declining as a result inof a similar percentage increase in netlower overall interest income.rate environment due to Federal Reserve policies designed to stimulate national
PREMIER FINANCIAL BANCORP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
December 31, 2009
economic growth. In 2004,2005, net credit income was 3.41%4.00% of average earning assets and continuedincreased to increaseits highest level in both 2005 and againthe last five years in 2006. In 2005, minimal provisions for loan losses were recorded and thus there was little reduction from the increase in net interest income. In 2006, negative provisions for loan losses were recorded which served to help increase net credit income to 4.55%. This increase in net credit income (as a percent of average earning assets) was complemented by an increase in non-interest income (as a percent of average earning assets) and a reduction in non-interest expenses (as a percent of average earning assets) when compared to the previous two years.year. In 2007, while net interest income continuedincreased to increase,
PREMIER FINANCIAL BANCORP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
December 31, 2008
its highest level, net credit income was lower than 2006 as a result of minimal negative provisions for loan losses recorded in 2007. However, in 2007, non-interest income (as a percent of average earning assets) also reached its highest level in the past five years while non-interest expense (as a percent of average earning assets) continued to decline. In 2008, minimal provisions for loan losses reduced an already lower net interest income (as a percent of average earning assets), resulting in net credit income of 4.19% of average earning assets. In 2008, non-interest income (as a percent of average earning assets) declined somewhat, returning to the level achieved in 2006. However, non-interest incomeexpense (as a percent of average earning assets) continued to decline in 2008 resulting in the lowest ratio over in the last five years. In 2009, net credit income (as a percent of average earning assets) declined to 3.98%, the lowest level in the last five years, as the lower net interest income (described above) was lowered even further by the highest provision for loan losses (as a percent of average earning assets) over the past five-year period. Further lowering Premier’s return on average assets in 2009 was the lowest non-interest income and highest non-interest expense (as a percent of average earning assets) in the last five years.years largely due to acquisition related expenses, a special FDIC insurance assessment, write downs on the value of other real estate owned (“OREO”) and lower deposit customer fee income in relation to the total deposits outstanding. Adding to Premier’s return on average assets in 2009 was a gain recognized on the acquisition of Abigail Adams and lower income tax expense. As illustrated in the table, the overall result was to decrease Premier's 20082009 return on average earning assets to 1.21%1.18% and decrease its return on average total assets (ROA) to 1.12%1.09%.
| ANALYSIS of RETURN ON ASSETS and EQUITY | |
| from continuing operations | |
| | | | | | | | | | | | | | | | |
| | | 2008 | | | 2007 | | | 2006 | | | 2005 | | | 2004 | |
| As a percent of average earning assets | | | | | | | | | | | | | | | |
Fully taxable-equivalent net interest income | | | 4.21 | % | | | 4.42 | % | | | 4.32 | % | | | 4.00 | % | | | 3.61 | % |
Provision for loan losses | | | (0.02 | ) | | | 0.02 | | | | 0.23 | | | | (0.00 | ) | | | (0.20 | ) |
Net credit income | | | 4.19 | | | | 4.44 | | | | 4.55 | | | | 4.00 | | | | 3.41 | |
Gains on the sales of assets & subsidiaries | | | 0.01 | | | | 0.00 | | | | 0.00 | | | | 0.00 | | | | 0.02 | |
Non-interest income | | | 0.84 | | | | 0.91 | | | | 0.84 | | | | 0.78 | | | | 0.69 | |
Non-interest expense | | | (3.20 | ) | | | (3.23 | ) | | | (3.40 | ) | | | (3.46 | ) | | | (3.52 | ) |
Tax equivalent adjustment | | | (0.03 | ) | | | (0.04 | ) | | | (0.03 | ) | | | (0.03 | ) | | | (0.03 | ) |
Applicable income taxes | | | (0.60 | ) | | | (0.68 | ) | | | (0.66 | ) | | | (0.41 | ) | | | (0.18 | ) |
| Return on average earning assets | | | 1.21 | | | | 1.40 | | | | 1.30 | | | | 0.88 | | | | 0.39 | |
Multiplied by average earning assets to average total assets | | | 92.48 | | | | 93.34 | | | | 93.07 | | | | 92.84 | | | | 92.39 | |
| Return on average assets | | | 1.12 | % | | | 1.31 | % | | | 1.21 | % | | | 0.82 | % | | | 0.36 | % |
Multiplied by average assets to average equity | | | 8.37 | X | | | 8.52 | X | | | 9.31 | X | | | 10.23 | X | | | 11.33 | X |
| Return on average equity | | | 9.38 | % | | | 11.13 | % | | | 11.31 | % | | | 8.42 | % | | | 4.06 | % |
| | | | | | | | | | | | | | | | | | | | | |
PREMIER FINANCIAL BANCORP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
December 31, 2009
| ANALYSIS of RETURN ON ASSETS and EQUITY | |
| | | | | | | | | | | | | | | | |
| | | 2009 | | | 2008 | | | 2007 | | | 2006 | | | 2005 | |
| As a percent of average earning assets | | | | | | | | | | | | | | | |
Fully taxable-equivalent net interest income | | | 4.12 | % | | | 4.21 | % | | | 4.42 | % | | | 4.32 | % | | | 4.00 | % |
Provision for loan losses | | | (0.14 | ) | | | (0.02 | ) | | | 0.02 | | | | 0.23 | | | | (0.00 | ) |
Net credit income | | | 3.98 | | | | 4.19 | | | | 4.44 | | | | 4.55 | | | | 4.00 | |
Gains on acquisition of subsidiary and sales of assets | | | 0.47 | | | | 0.01 | | | | 0.00 | | | | 0.00 | | | | 0.00 | |
Non-interest income | | | 0.74 | | | | 0.84 | | | | 0.91 | | | | 0.84 | | | | 0.78 | |
Non-interest expense | | | (3.57 | ) | | | (3.20 | ) | | | (3.23 | ) | | | (3.40 | ) | | | (3.46 | ) |
Tax equivalent adjustment | | | (0.03 | ) | | | (0.03 | ) | | | (0.04 | ) | | | (0.03 | ) | | | (0.03 | ) |
Applicable income taxes | | | (0.39 | ) | | | (0.60 | ) | | | (0.68 | ) | | | (0.66 | ) | | | (0.41 | ) |
Preferred stock dividends | | | (0.02 | ) | | | (0.00 | ) | | | (0.00 | ) | | | (0.00 | ) | | | (0.00 | ) |
| Return on average earning assets | | | 1.18 | | | | 1.21 | | | | 1.40 | | | | 1.30 | | | | 0.88 | |
Multiplied by average earning assets to average total assets | | | 92.20 | | | | 92.48 | | | | 93.34 | | | | 93.07 | | | | 92.84 | |
| Return on average assets | | | 1.09 | % | | | 1.12 | % | | | 1.31 | % | | | 1.21 | % | | | 0.82 | % |
Multiplied by average assets to average common stockholders’ equity | | | 8.68 | X | | | 8.37 | X | | | 8.52 | X | | | 9.31 | X | | | 10.23 | X |
| Return on average common equity | | | 9.47 | % | | | 9.38 | % | | | 11.13 | % | | | 11.31 | % | | | 8.42 | % |
| | | | | | | | | | | | | | | | | | | | | |
The net overhead ratio (non-interest expense less non-interest income as a percent of average earning assets) increased slightlysignificantly in 20082009 to 2.36%2.83%. This ratio compares to 2.36% in 2008, 2.32% in 2007, the lowest ratio reported in the last five years, 2.56% in 2006 and 2.68% in 2005,2005. The increases in 2009 net overhead was largely the result of a higher ratio of non-interest expense to average earning assets due to acquisition related expenses, significantly higher FDIC insurance costs, higher OREO costs and 2.83%generally less efficient operations of the acquired Abigail Adams’ subsidiary banks. Also negatively affecting the 2009 net overhead ratio was a lower ratio of non-interest income to average earning assets largely due to the 0.41% non-interest income ratio of the acquired Abigail Adams’ banks and a slight decrease in 2004.secondary market mortgage commissions despite the increase in the size of the Company. The increase in 2008 net overhead when compared to 2007 was largely the result of a lower ratio of non-interest income to average earning assets due to lower secondary market mortgage commissions overall and the 0.66% non-interest income ratio of the acquired banks. The decrease in the 2007 net overhead ratio when compared to 2006 was the result of increases in Premier’s non-interest income related to electronic banking income and secondary market mortgage commissions, plus decreases in non-interest expenses related to staff costs and the accelerated amortization of trust preferred issuance costs recorded in 2006 but not 2007.
PREMIER FINANCIAL BANCORP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
December 31, 20082009
Return on average common equity (ROE)(“ROE”), another measure of earnings performance, indicates the amount of net income earned in relation to the total equity invested. Premier's 2008invested by holders of common stock. Premier’s 2009 ROE was 9.38%9.47% compared to 11.13%9.38% in 20072008 and 11.31%11.13% realized in 2006.2007. ROE increased in 2009 due to a higher ratio of average assets to average equity resulting from the Abigail Adams acquisition. ROE decreased in 2008 compared to 2007 due to an increase in average equity as a result of the common stock issued to acquire Traders and Citizens First. ROE decreased slightly in 2007 as average equity increased at a faster pace than average assets resulting in a decrease in the multiplier of average assets to average equity.
A breakdown of Premier's financial results by quarter for the years ended December 31, 20082009 and 20072008 is summarized below.
| QUARTERLY FINANCIAL INFORMATION | QUARTERLY FINANCIAL INFORMATION | | QUARTERLY FINANCIAL INFORMATION | |
| (Dollars in thousands, except per share amounts) | (Dollars in thousands, except per share amounts) | | (Dollars in thousands, except per share amounts) | |
| | | | First | | | Second | | | Third | | | Fourth | | | Full Year | |
| 2009 | | | | | | | | | | | | | | | | |
Interest income | | | $ | 9,136 | | | $ | 9,120 | | | $ | 9,114 | | | $ | 13,857 | | | $ | 41,227 | |
Interest expense | | | | 2,578 | | | | 2,458 | | | | 2,346 | | | | 2,762 | | | | 10,144 | |
Net interest income | | | | 6,558 | | | | 6,662 | | | | 6,768 | | | | 11,095 | | | | 31,083 | |
Provision for loan losses | | | | 102 | | | | 110 | | | | 127 | | | | 713 | | | | 1,052 | |
Gain on acquisition of subsidiary | | | | 0 | | | | 0 | | | | 0 | | | | 3,552 | | | | 3,552 | |
Net overhead | | | | 4,594 | | | | 4,559 | | | | 4,349 | | | | 8,029 | | | | 21,531 | |
Income before income taxes | | | | 1,862 | | | | 1,993 | | | | 2,292 | | | | 5,905 | | | | 12,052 | |
Net income | | | | 1,229 | | | | 1,355 | | | | 1,502 | | | | 5,032 | | | | 9,118 | |
Dividends on preferred stock | | | | 0 | | | | 0 | | | | 0 | | | | 133 | | | | 133 | |
Net income available to common stockholders | | | | 1,229 | | | | 1,355 | | | | 1,502 | | | | 4,899 | | | | 8,985 | |
Basic net income per share | | | | 0.19 | | | | 0.21 | | | | 0.23 | | | | 0.62 | | | | 1.32 | |
Diluted net income per share | | | | 0.19 | | | | 0.21 | | | | 0.23 | | | | 0.61 | | | | 1.32 | |
Dividends paid per share | | | | 0.11 | | | | 0.11 | | | | 0.11 | | | | 0.11 | | | | 0.44 | |
| | | First | | | Second | | | Third | | | Fourth | | | Full Year | | | | | | | | | | | | | | | | | | | | | |
| 2008 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Interest income | | $ | 8,427 | | | $ | 9,433 | | | $ | 10,276 | | | $ | 9,708 | | | $ | 37,844 | | | $ | 8,427 | | | $ | 9,433 | | | $ | 10,276 | | | $ | 9,708 | | | $ | 37,844 | |
Interest expense | | 2,833 | | | 2,984 | | | 3,099 | | | 2,893 | | | 11,809 | | | | 2,833 | | | | 2,984 | | | | 3,099 | | | | 2,893 | | | | 11,809 | |
Net interest income | | 5,594 | | | 6,449 | | | 7,177 | | | 6,815 | | | 26,035 | | | | 5,594 | | | | 6,449 | | | | 7,177 | | | | 6,815 | | | | 26,035 | |
Provision for loan losses | | (135 | ) | | 91 | | | 85 | | | 106 | | | 147 | | | | (135 | ) | | | 91 | | | | 85 | | | | 106 | | | | 147 | |
Securities gains | | 0 | | | 93 | | | 0 | | | 0 | | | 93 | | | | 0 | | | | 93 | | | | 0 | | | | 0 | | | | 93 | |
Net overhead | | 3,056 | | | 3,545 | | | 4,197 | | | 3,898 | | | 14,696 | | | | 3,056 | | | | 3,545 | | | | 4,197 | | | | 3,898 | | | | 14,696 | |
Income before income taxes | | 2,673 | | | 2,906 | | | 2,895 | | | 2,811 | | | 11,285 | | | | 2,673 | | | | 2,906 | | | | 2,895 | | | | 2,811 | | | | 11,285 | |
Net income | | 1,774 | | | 1,930 | | | 1,930 | | | 1,902 | | | 7,536 | | | | 1,774 | | | | 1,930 | | | | 1,930 | | | | 1,902 | | | | 7,536 | |
Basic net income per share | | 0.34 | | | 0.32 | | | 0.30 | | | 0.30 | | | 1.25 | | | | 0.34 | | | | 0.32 | | | | 0.30 | | | | 0.30 | | | | 1.25 | |
Diluted net income per share | | 0.34 | | | 0.32 | | | 0.30 | | | 0.30 | | | 1.25 | | | | 0.34 | | | | 0.32 | | | | 0.30 | | | | 0.30 | | | | 1.25 | |
Dividends paid per share | | 0.10 | | | 0.11 | | | 0.11 | | | 0.11 | | | 0.43 | | | | 0.10 | | | | 0.11 | | | | 0.11 | | | | 0.11 | | | | 0.43 | |
| | | | | | | | | | | | | | | | | | | | | | |
| 2007 | | | | | | | | | | | | | | | | | | | | | |
Interest income | | $ | 8,612 | | | $ | 8,712 | | | $ | 8,738 | | | $ | 8,690 | | | $ | 34,752 | | |
Interest expense | | 3,101 | | | 3,161 | | | 3,148 | | | 3,046 | | | 12,456 | | |
Net interest income | | 5,511 | | | 5,551 | | | 5,590 | | | 5,644 | | | 22,296 | | |
Provision for loan losses | | 36 | | | (164 | ) | | 25 | | | 25 | | | (78 | ) | |
Securities gains | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | |
Net overhead | | 2,902 | | | 3,022 | | | 2,847 | | | 3,014 | | | 11,785 | | |
Income before income taxes | | 2,573 | | | 2,693 | | | 2,718 | | | 2,605 | | | 10,589 | | |
Net income | | 1,786 | | | 1,790 | | | 1,807 | | | 1,736 | | | 7,119 | | |
Basic net income per share | | 0.34 | | | 0.34 | | | 0.35 | | | 0.33 | | | 1.36 | | |
Diluted net income per share | | 0.34 | | | 0.34 | | | 0.34 | | | 0.33 | | | 1.35 | | |
Dividends paid per share | | 0.10 | | | 0.10 | | | 0.10 | | | 0.10 | | | 0.40 | | |
PREMIER FINANCIAL BANCORP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
December 31, 20082009
BALANCE SHEET ANALYSIS
Summary
A financial institution's primary sources of revenue are generated by its earning assets, while its major expenses are produced by the funding of these assets with interest bearing liabilities. Effective management of these sources and uses of funds is essential in attaining a financial institution's optimal profitability while maintaining a minimum amount of interest rate risk and credit risk. Information on rate-related sources and uses of funds for each of the three years in the period ended December 31, 2008,2009, is provided in the table below.
PREMIER FINANCIAL BANCORP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
December 31, 20082009
| AVERAGE CONSOLIDATED BALANCE SHEETS AND NET INTEREST INCOME ANALYSIS | AVERAGE CONSOLIDATED BALANCE SHEETS AND NET INTEREST INCOME ANALYSIS | | AVERAGE CONSOLIDATED BALANCE SHEETS AND NET INTEREST INCOME ANALYSIS | |
| (Dollars in thousands) | (Dollars in thousands) | | (Dollars in thousands) | |
| | | 2008 | | | 2007 | | | 2006 | | | 2009 | | | 2008 | | | 2007 | |
| | | Average Balance | | | Interest | | | Yield/ Rate (2) | | | Average Balance | | | Interest | | | Yield/ Rate (2) | | | Average Balance | | | Interest | | | Yield/ Rate (2) | | | Average Balance | | | Interest | | | Yield/ Rate (2) | | | Average Balance | | | Interest | | | Yield/ Rate (2) | | | Average Balance | | | Interest | | | Yield/ Rate (2) | |
| Assets: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Interest earning assets | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
U.S. Treasury and federal agency securities | | $ | 102,758 | | | $ | 4,457 | | | | 4.34 | % | | $ | 82,177 | | | $ | 3,496 | | | | 4.25 | % | | $ | 95,705 | | | $ | 3,398 | | | | 3.55 | % | | $ | 102,904 | | | $ | 3,393 | | | | 3.30 | % | | $ | 102,758 | | | $ | 4,457 | | | | 4.34 | % | | $ | 82,177 | | | $ | 3,496 | | | | 4.25 | % |
States and municipal obligations (1) | | | 6,098 | | | | 320 | | | | 5.25 | | | | 4,067 | | | | 241 | | | | 5.93 | | | | 2,342 | | | | 138 | | | | 5.89 | | | | 8,210 | | | | 398 | | | | 4.85 | | | | 6,098 | | | | 320 | | | | 5.25 | | | | 4,067 | | | | 241 | | | | 5.93 | |
Mortgage backed securities | | | 53,069 | | | | 2,517 | | | | 4.74 | | | | 37,017 | | | | 1,799 | | | | 4.86 | | | | 33,953 | | | | 1,564 | | | | 4.61 | | | | 72,121 | | | | 3,069 | | | | 4.26 | | | | 53,069 | | | | 2,517 | | | | 4.74 | | | | 37,017 | | | | 1,799 | | | | 4.86 | |
Other securities | | | 3,723 | | | | 180 | | | | 4.83 | | | | 3,307 | | | | 212 | | | | 6.41 | | | | 3,179 | | | | 182 | | | | 5.73 | | | | 6,012 | | | | 250 | | | | 4.16 | | | | 3,723 | | | | 180 | | | | 4.83 | | | | 3,307 | | | | 212 | | | | 6.41 | |
Total investment securities | | | 165,648 | | | | 7,474 | | | | 4.51 | | | | 126,568 | | | | 5,748 | | | | 4.54 | | | | 135,179 | | | | 5,282 | | | | 3.91 | | | | 189,247 | | | | 7,110 | | | | 3.76 | | | | 165,648 | | | | 7,474 | | | | 4.51 | | | | 126,568 | | | | 5,748 | | | | 4.54 | |
Federal funds sold | | | 37,885 | | | | 748 | | | | 1.97 | | | | 36,088 | | | | 1,829 | | | | 5.07 | | | | 24,365 | | | | 1,215 | | | | 4.99 | | | | 28,912 | | | | 24 | | | | 0.08 | | | | 37,885 | | | | 748 | | | | 1.97 | | | | 36,088 | | | | 1,829 | | | | 5.07 | |
Interest-bearing deposits with banks | | | 1,614 | | | | 39 | | | | 2.42 | | | | 1,273 | | | | 56 | | | | 4.40 | | | | 486 | | | | 24 | | | | 4.94 | | | | 14,815 | | | | 57 | | | | 0.38 | | | | 1,614 | | | | 39 | | | | 2.42 | | | | 1,273 | | | | 56 | | | | 4.40 | |
Loans, net of unearned income (3)(4) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Commercial | | | 207,939 | | | | 14,044 | | | | 6.75 | | | | 169,217 | | | | 13,591 | | | | 8.03 | | | | 161,898 | | | | 12,424 | | | | 7.67 | | | | 303,514 | | | | 18,467 | | | | 6.08 | | | | 207,939 | | | | 14,044 | | | | 6.75 | | | | 169,217 | | | | 13,591 | | | | 8.03 | |
Real estate mortgage | | | 155,324 | | | | 11,074 | | | | 7.13 | | | | 129,072 | | | | 9,474 | | | | 7.34 | | | | 129,944 | | | | 9,271 | | | | 7.13 | | | | 168,643 | | | | 11,434 | | | | 6.78 | | | | 155,324 | | | | 11,074 | | | | 7.13 | | | | 129,072 | | | | 9,474 | | | | 7.34 | |
Installment | | | 53,802 | | | | 4,626 | | | | 8.60 | | | | 46,399 | | | | 4,244 | | | | 9.15 | | | | 46,494 | | | | 4,334 | | | | 9.32 | | | | 54,316 | | | | 4,337 | | | | 7.98 | | | | 53,802 | | | | 4,626 | | | | 8.60 | | | | 46,399 | | | | 4,244 | | | | 9.15 | |
Total loans | | | 417,065 | | | | 29,744 | | | | 7.13 | | | | 344,688 | | | | 27,309 | | | | 7.92 | | | | 338,336 | | | | 26,029 | | | | 7.69 | | | | 526,473 | | | | 34,238 | | | | 6.50 | | | | 417,065 | | | | 29,744 | | | | 7.13 | | | | 344,688 | | | | 27,309 | | | | 7.92 | |
Total interest earning assets | | | 622,212 | | | | 38,005 | | | | 6.11 | | | | 508,617 | | | | 34,942 | | | | 6.87 | | | | 498,366 | | | | 32,550 | | | | 6.53 | | | | 759,447 | | | | 41,429 | | | | 5.46 | | | | 622,212 | | | | 38,005 | | | | 6.11 | | | | 508,617 | | | | 34,942 | | | | 6.87 | |
| Allowance for loan losses | | | (8,020 | ) | | | | | | | | | | | (6,615 | ) | | | | | | | | | | | (7,465 | ) | | | | | | | | | | | (8,218 | ) | | | | | | | | | | | (8,020 | ) | | | | | | | | | | | (6,615 | ) | | | | | | | | |
| Cash and due from banks | | | 17,025 | | | | | | | | | | | | 13,853 | | | | | | | | | | | | 13,824 | | | | | | | | | | | | 18,095 | | | | | | | | | | | | 17,025 | | | | | | | | | | | | 13,853 | | | | | | | | | |
| Premises and equipment | | | 9,759 | | | | | | | | | | | | 6,378 | | | | | | | | | | | | 7,055 | | | | | | | | | | | | 12,439 | | | | | | | | | | | | 9,759 | | | | | | | | | | | | 6,378 | | | | | | | | | |
| Other assets | | | 31,802 | | | | | | | | | | | | 22,653 | | | | | | | | | | | | 23,688 | | | | | | | | | | | | 41,922 | | | | | | | | | | | | 31,802 | | | | | | | | | | | | 22,653 | | | | | | | | | |
Total assets | | $ | 672,778 | | | | | | | | | | | $ | 544,886 | | | | | | | | | | | $ | 535,468 | | | | | | | | | | | $ | 823,685 | | | | | | | | | | | $ | 672,778 | | | | | | | | | | | $ | 544,886 | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Liabilities and Equity: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Interest bearing liabilities | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
NOW and money market | | $ | 136,878 | | | | 1,136 | | | | 0.83 | % | | $ | 119,849 | | | | 1,780 | | | | 1.49 | % | | $ | 129,080 | | | | 1,766 | | | | 1.37 | % | | $ | 162,870 | | | | 637 | | | | 0.39 | % | | $ | 136,878 | | | | 1,136 | | | | 0.83 | % | | $ | 119,849 | | | | 1,780 | | | | 1.49 | % |
Savings deposits | | | 66,978 | | | | 381 | | | | 0.57 | | | | 53,000 | | | | 384 | | | | 0.72 | | | | 52,295 | | | | 321 | | | | 0.61 | | | | 78,240 | | | | 250 | | | | 0.32 | | | | 66,978 | | | | 381 | | | | 0.57 | | | | 53,000 | | | | 384 | | | | 0.72 | |
Certificates of deposit and other time deposits | | | 254,802 | | | | 9,159 | | | | 3.59 | | | | 202,183 | | | | 8,855 | | | | 4.38 | | | | 188,044 | | | | 6,896 | | | | 3.67 | | | | 316,016 | | | | 8,234 | | | | 2.61 | | | | 254,802 | | | | 9,159 | | | | 3.59 | | | | 202,183 | | | | 8,855 | | | | 4.38 | |
Total interest bearing deposits | | | 458,658 | | | | 10,676 | | | | 2.33 | | | | 375,032 | | | | 11,019 | | | | 2.94 | | | | 369,419 | | | | 8,983 | | | | 2.43 | | | | 557,126 | | | | 9,121 | | | | 1.64 | | | | 458,658 | | | | 10,676 | | | | 2.33 | | | | 375,032 | | | | 11,019 | | | | 2.94 | |
Short-term borrowings | | | 17,325 | | | | 251 | | | | 1.45 | | | | 13,200 | | | | 321 | | | | 2.43 | | | | 9,591 | | | | 234 | | | | 2.44 | | | | 16,730 | | | | 139 | | | | 0.83 | | | | 17,325 | | | | 251 | | | | 1.45 | | | | 13,200 | | | | 321 | | | | 2.43 | |
Other borrowings | | | 12,658 | | | | 590 | | | | 4.66 | | | | 10,047 | | | | 769 | | | | 7.65 | | | | 7,765 | | | | 574 | | | | 7.39 | | | | 16,626 | | | | 581 | | | | 3.49 | | | | 12,658 | | | | 590 | | | | 4.66 | | | | 10,047 | | | | 769 | | | | 7.65 | |
FHLB advances | | | 4,723 | | | | 292 | | | | 6.18 | | | | 5,363 | | | | 347 | | | | 6.47 | | | | 7,815 | | | | 453 | | | | 5.80 | | | | 7,179 | | | | 303 | | | | 4.22 | | | | 4,723 | | | | 292 | | | | 6.18 | | | | 5,363 | | | | 347 | | | | 6.47 | |
Debentures | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 7,887 | | | | 760 | | | | 9.64 | | |
Total interest-bearing liabilities | | | 493,364 | | | | 11,809 | | | | 2.39 | % | | | 403,642 | | | | 12,456 | | | | 3.09 | % | | | 402,477 | | | | 11,004 | | | | 2.73 | % | | | 597,661 | | | | 10,144 | | | | 1.70 | % | | | 493,364 | | | | 11,809 | | | | 2.39 | % | | | 403,642 | | | | 12,456 | | | | 3.09 | % |
| Non-interest bearing deposits | | | 94,155 | | | | | | | | | | | | 74,522 | | | | | | | | | | | | 72,781 | | | | | | | | | | | | 121,029 | | | | | | | | | | | | 94,155 | | | | | | | | | | | | 74,522 | | | | | | | | | |
| Other liabilities | | | 4,903 | | | | | | | | | | | | 2,743 | | | | | | | | | | | | 2,721 | | | | | | | | | | | | 4,593 | | | | | | | | | | | | 4,903 | | | | | | | | | | | | 2,743 | | | | | | | | | |
| Shareholders’ equity | | | 80,356 | | | | | | | | | | | | 63,979 | | | | | | | | | | | | 57,489 | | | | | | | | | | |
| Preferred equity | | | | 5,548 | | | | | | | | | | | | - | | | | | | | | | | | | - | | | | | | | | | |
| Common equity | | | | 94,854 | | | | | | | | | | | | 80,356 | | | | | | | | | | | | 63,979 | | | | | | | | | |
Total liabilities and equity | | $ | 672,778 | | | | | | | | | | | $ | 544,886 | | | | | | | | | | | $ | 535,468 | | | | | | | | | | | $ | 823,685 | | | | | | | | | | | $ | 672,778 | | | | | | | | | | | $ | 544,886 | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Net interest earnings (1) | | | | | | $ | 26,196 | | | | | | | | | | | $ | 22,486 | | | | | | | | | | | $ | 21,546 | | | | | | | | | | | $ | 31,285 | | | | | | | | | | | $ | 26,196 | | | | | | | | | | | $ | 22,486 | | | | | |
Net interest spread (1) | | | | | | | | | | | 3.72 | % | | | | | | | | | | | 3.78 | % | | | | | | | | | | | 3.80 | % | | | | | | | | | | | 3.76 | % | | | | | | | | | | | 3.72 | % | | | | | | | | | | | 3.78 | % |
Net interest margin (1) | | | | | | | | | | | 4.21 | % | | | | | | | | | | | 4.42 | % | | | | | | | | | | | 4.32 | % | | | | | | | | | | | 4.12 | % | | | | | | | | | | | 4.21 | % | | | | | | | | | | | 4.42 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(1) Taxable – equivalent yields are calculated assuming a 34% federal income tax rate (2) Yields are calculated on historical cost except for yields on marketable equity securities that are calculated used fair value (3) Includes loan fees, immaterial in amount, in both interest income and the calculation of yield on loans (4) Includes loans on non-accrual status | (1) Taxable – equivalent yields are calculated assuming a 34% federal income tax rate (2) Yields are calculated on historical cost except for yields on marketable equity securities that are calculated used fair value (3) Includes loan fees, immaterial in amount, in both interest income and the calculation of yield on loans (4) Includes loans on non-accrual status | | (1) Taxable – equivalent yields are calculated assuming a 34% federal income tax rate (2) Yields are calculated on historical cost except for yields on marketable equity securities that are calculated used fair value (3) Includes loan fees, immaterial in amount, in both interest income and the calculation of yield on loans (4) Includes loans on non-accrual status | |
PREMIER FINANCIAL BANCORP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
December 31, 20082009
In 2009, average earning assets increased by 22.1% or $137.2 million from 2008, following a 22.3% or $113.6 million increase in 2008 from 2007. Average interest-bearing liabilities, the primary source of funds supporting the earning assets, increased by 21.1% or $104.3 million in 2009 from 2008, which follows a 22.2% or $89.7 million increase in 2008 over 2007. The 2009 increase in average earning assets was primarily the result of acquisition activity. The acquisition of Abigail Adams in October 2009 added $83.7 million in average earning assets and $69.7 million in average interest bearing liabilities in 2009, while the full year impact of including Traders and Citizens First in the organization since the end of April 2008 added $41.4 million to 2009 average earning assets and $29.6 million to 2009 interest bearing liabilities. Excluding the impact of acquisition activity, the remaining $12.2 million increase in average earning assets in 2009 was primarily the result of a $12.2 million increase in average total loans as a $10.0 million increase in average interest bearing bank balances was offset by a $2.6 million decrease in average investment securities outstanding and a $7.4 million decrease in average federal funds sold. Excluding the impact of acquisition activity, average interest bearing liabilities increased by $5.0 million or 1.0% in 2009 from 2008. This increase in average interest bearing liabilities in 2009 was the result of a $7.1 million increase in average interest bearing deposits and a $1.7 million increase in average other long-term borrowings partially offset by a $3.8 million decrease in average short-term borrowings, primarily customer repurchase agreements. Furthermore, the increase in average interest bearing deposits was complemented by a $26.9 million or 28.5% increase in average non-interest bearing deposits, $23.2 million resulting from acquisition activity and $3.7 million from internal growth.
In 2008, average earning assets increased by 22.3% or $113.6 million from 2007, following a 2.1% or $10.3 million increase in 2007 from 2006. Average interest bearing liabilities, the primary source of funds supporting the earning assets, increased by 22.2% or $89.7 million in 2008 from 2007, which follows a 0.3% or $1.2 million increase in 2007 over 2006. The 2008 increase in average earning assets was primarily the result of adding Traders and Citizens First to the organization at the end of April, 2008. The acquisition of these two banks added $102.3 million in average earnings assets at $80.6 in average interest bearing liabilities in 2008. Excluding the acquisitions of Traders and Citizens First, the remaining $11.3 million increase in average earning assets in 2008 was primarily the result of a $7.5 million increase in average total loans and an $11.1 million increase in average total investment securities outstanding. These increases more than offset the $6.9 million decrease in average federal funds sold, as surplus liquid funds were used to fund loans and invest in higher yielding investment securities. Excluding the acquisitions of Traders and Citizens First, average interest bearing liabilities increased by $9.1 million or 2.3% in 2008 from 2007. This increase in average interest bearing liabilities in 2008 was the result of a $3.0 million increase in average interest bearing deposits, a $4.1 million increase in average short-term borrowings, primarily customer repurchase agreements, and a $2.0 million increase in other long-term borrowings and Federal Home Loan Bank (FHLB) advances. Furthermore, the increase in average interest bearing deposits was complemented by a $19.6 or 26.3% increase in average non-interest bearing deposits, $17.3 million from the acquisitions of Traders and Citizens First and $2.3 million from internal growth.
In 2007, average earning assets increased by 2.1% or $10.3 million from 2006, following a 0.3% or $1.8 million decline in 2006 from 2005. Average interest bearing liabilities, the primary source of funds supporting the earning assets, increased by only 0.3% or $1.2 million in 2007 from 2006, which follows a 3.1% or $12.8 million decline in 2006 from 2005. The 2007 increase in average earnings assets was primarily the result of a $6.4 million increase in average total loans and an $11.7 million increase in average federal funds sold outstanding. These increases more than offset the $8.6 million decline in average total investment securities, as investment funds were used to fund loans and surplus investable proceeds were held in shorter-term but higher yielding federal funds sold during the early part of 2007. The slight increase in 2007 average interest bearing liabilities was the result of a $5.6 million increase in average interest bearing deposits and a $3.6 million increase in average short-term borrowings, primarily customer repurchase agreements, nearly completely offset by an $8.1 million decrease in average high cost debt and Federal Home Loan Bank (FHLB) advances. Furthermore, the increase in average interest bearing deposits was complemented by a $1.7 million increase in average non-interest bearing deposits. Additional information on each of the components of earning assets and interest bearing liabilities is contained in the following sections of this report.
PREMIER FINANCIAL BANCORP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
December 31, 20082009
Loan Portfolio
Premier's loan portfolio is its largest and highest yielding component of average earning assets, totaling 67.0%69.3% of average earning assets during 2008.2009. Average loans increased in 2009 by $109.4 million or 26.2% over 2008 byfollowing a $72.4 million or 21.0% increase in 2008 over 2007 following a $6.42007. The 2009 increase is largely attributable to the acquisition activity in 2008 and 2009 which added $97.2 million in average total loans during the year. Excluding the acquisitions, average total loans increased by $12.2 million or 1.9%2.9% in 2009 from 2008. This increase is the result of growth in Premier’s Ohio and West Virginia loan markets. In 2009, Premier realized a $4.3 million or 8.1% increase in 2007 over 2006.average outstanding loans in its Ohio markets, and a $7.9 million or 3.3% increase in its West Virginia markets (excluding Traders and Citizens First). Average total loans in Premier’s Kentucky markets were relatively the same from 2008 to 2009. The 2008 increase is largely attributable to the acquisitions of Traders and Citizens First, which added $64.9 million in average total loans during the year. Excluding the acquisitions, average total loans increased by $7.5 million or 2.2% in 2008 from 2007. This increase is the result of growth in Premier’s Ohio and West Virginia loan markets. In 2008, Premier realized a $1.9 million or 3.7% increase in average outstanding loans in its Ohio markets, and a $5.8 million or 3.5% increase in its West Virginia market (excluding Traders and Citizens First). These increases more than offset the slight $212,000 or 0.2% decrease in average total loans in Premier’s Kentucky markets. The 2008 increases follow a $2.6 million or 5.3% increase in average outstanding loans in its Ohio markets, a $1.9 million or 1.5% increase in its Kentucky markets and a $1.9 million or 1.1% increase in its West Virginia markets in 2007.
Total loans at December 31, 20082009 increased by $232.0 million or 49.7% from the total at December 31, 2008. This increase follows a $120.5 million or 34.8% from the total at December 31, 2007. ThisThe significant increase followsin 2009 is due to the $235.6 million of period end loans from the acquisition of Abigail Adams. The remaining banks collectively had a $2.8$3.5 million or 0.8% increase0.7% decrease in 2007 fromtheir total period end loans as increases in total loans at December 31, 2006.the West Virginia and Ohio banks were more than offset by decreases at the Kentucky banks. The significant increase in 2008 is primarily due to the $102.8 million of period end loans from the acquisitions of Traders and Citizens First. The remaining $17.8 million or 5.1% increase in 2008 was the result of significant increase in loan demand in Premier’s markets. The modest increase in 2007 is primarily the result of sluggish loan demand coupled with a higher level of loan payoffs.
Loans secured by real estate which in total constitutedincreased from 74.0% of Premier’s loan portfolio at December 31, 2008 to approximately 74%81.3% of Premier's loan portfolio at December 31, 2007,2009 due to the loans acquired from Abigail Adams. The mix of loans acquired from Abigail Adams was significantly different from Premier’s other affiliate bank loan portfolios, which consist of a diverse portfolio of predominantly single family residential loans and loans for commercial purposes where real estate is part of the collateral, not the primary source of repayment. ResidentialThe December 31, 2009 balances of the loans acquired from Adams National were predominantly (84.1%) commercial real estate loans and real estate construction loans, including $67.0 million of loans secured by non-owner occupied commercial property, $39.1 million of loans secured by owner occupied commercial property, $29.5 million of multi-family residential real estate loans and $19.6 million of commercial real estate construction and land development loans. The concentrations in these kinds of loans was one of the factors motivating the OCC to require Adams National to enter into a formal written agreement to reduce these concentrations. The mix of December 31, 2009 balances of the loans acquired from CB&T were closer to the ratios of
PREMIER FINANCIAL BANCORP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
December 31, 2009
Premier’s other affiliate banks but were still predominantly (61.5%) commercial real estate loans and real estate construction loans due in part to loan participations with Adams National. While there are generally additional risks of loss associated with commercial real estate lending, such as the potential for adverse changes in economic conditions, the borrowers' inability to successfully execute their business plan and/or deterioration in the value of the commercial real estate collateral; the loans acquired from Adams National and CB&T were recorded at fair value as of the acquisition date taking into account credit risks in the loans acquired. See additional discussion below on the impaired loans acquired from Adams National and CB&T.
Premier’s residential real estate mortgage loans generally do not exceed 80% of the value of the real property securing the loan at the time of origination. The residential real estate mortgage loan portfolio primarily consists of adjustable rate residential mortgage loans. The origination of these mortgage loans can be more difficult in a low interest rate environment where there is a significant demand for fixed rate mortgages. Premier also originates mortgage loans to be sold in the secondary market and recognizes non-interest income upon the sale of those mortgages in the form of commissions and servicing release fees. Premier has not engaged in the solicitation of so-called “sub-prime” or “interest only” mortgages. Premier uses an experienced staff underwriter to ensure the completeness of the borrowers’ loan application and documentation and to ensure that the loans meet the standards required by prospective loan purchasers. Additional information regarding the volume of mortgage loans originated and sold is contained in Premier’s consolidated statements of cash flows presented elsewhere in this annual report.
PREMIER FINANCIAL BANCORP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
December 31, 2008
Commercial loans are generally made to small-to-medium size businesses located within a defined market area and typically are secured by business assets and guarantees of the principal owners. Additional risks of loss are associated with commercial lending, such as the potential for adverse changes in economic conditions or the borrowers' ability to successfully execute their business plan. Consumer loans generally are made to individuals living in Premier's defined market area who are known to the local bank's staff. Consumer loans are generally made for terms of up to seven years on a secured or unsecured basis; however longer terms may be approved in certain circumstances and for revolving credit lines. While consumer loans generally provide the Company with increased interest income, consumer loans may involve a greater risk of default.
PREMIER FINANCIAL BANCORP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
December 31, 20082009
The following table presents a five year comparison of loans by type. With the exception of those categories included in the comparison, there are no loan concentrations which exceed 10% of total loans. Additionally, Premier's loan portfolio contains no loans to foreign borrowers nor does it have a material volume of highly leveraged transaction lending.
| LOAN SUMMARY | LOAN SUMMARY | | LOAN SUMMARY | |
| (Dollars in thousands) | (Dollars in thousands) | | (Dollars in thousands) | |
| | | As of December 31, | | | As of December 31, | |
| | | 2008 | | | 2007 | | | 2006 | | | 2005 | | | 2004 | | | 2009 | | % | | | 2008 | | % | | | 2007 | | % | | | 2006 | | % | | | 2005 | | % | |
| Summary of Loans by Type | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Commercial, secured by real estate | | $ | 133,742 | | 28.7 | % | | $ | 100,278 | | 28.9 | % | | $ | 101,786 | | 29.6 | % | | $ | 85,989 | | 26.2 | % | | $ | 101,567 | | 31.3 | % | | $ | 304,607 | | 43.6 | % | | $ | 133,742 | | 28.7 | % | | $ | 100,278 | | 28.9 | % | | $ | 101,786 | | 29.6 | % | | $ | 85,989 | | 26.2 | % |
Commercial, other | | | 61,655 | | 13.2 | | | | 40,438 | | 11.7 | | | | 43,981 | | 12.8 | | | | 49,362 | | 15.0 | | | | 40,923 | | 12.6 | | | | 76,140 | | 10.9 | | | | 61,655 | | 13.2 | | | | 40,438 | | 11.7 | | | | 43,981 | | 12.8 | | | | 49,362 | | 15.0 | |
Real estate construction | | | 26,182 | | 5.6 | | | | 24,035 | | 6.9 | | | | 11,303 | | 3.3 | | | | 11,070 | | 3.4 | | | | 5,906 | | 1.8 | | | | 51,637 | | 7.4 | | | | 26,182 | | 5.6 | | | | 24,035 | | 6.9 | | | | 11,303 | | 3.3 | | | | 11,070 | | 3.4 | |
Real estate mortgage | | | 185,536 | | 39.7 | | | | 133,776 | | 38.6 | | | | 138,795 | | 40.4 | | | | 134,570 | | 40.9 | | | | 128,243 | | 39.5 | | | | 211,552 | | 30.3 | | | | 185,536 | | 39.7 | | | | 133,776 | | 38.6 | | | | 138,795 | | 40.4 | | | | 134,570 | | 40.9 | |
Agricultural | | | 2,446 | | 0.5 | | | | 1,845 | | 0.5 | | | | 1,930 | | 0.5 | | | | 1,670 | | 0.5 | | | | 2,380 | | 0.7 | | | | 2,710 | | 0.4 | | | | 2,446 | | 0.5 | | | | 1,845 | | 0.5 | | | | 1,930 | | 0.5 | | | | 1,670 | | 0.5 | |
Consumer | | | 51,793 | | 11.1 | | | | 41,893 | | 12.1 | | | | 42,188 | | 12.3 | | | | 42,096 | | 12.8 | | | | 44,470 | | 13.7 | | | | 49,312 | | 7.0 | | | | 51,793 | | 11.1 | | | | 41,893 | | 12.1 | | | | 42,188 | | 12.3 | | | | 42,096 | | 12.8 | |
Other | | | 5,757 | | 1.2 | | | | 4,305 | | 1.3 | | | | 3,814 | | 1.1 | | | | 3,960 | | 1.2 | | | | 1,438 | | 0.4 | | | | 3,175 | | 0.4 | | | | 5,757 | | 1.2 | | | | 4,305 | | 1.3 | | | | 3,814 | | 1.1 | | | | 3,960 | | 1.2 | |
Total loans | | $ | 467,111 | | 100.0 | % | | $ | 346,570 | | 100.0 | % | | $ | 343,797 | | 100.0 | % | | $ | 328,717 | | 100.0 | % | | $ | 324,927 | | 100.0 | % | | $ | 699,133 | | 100.0 | % | | $ | 467,111 | | 100.0 | % | | $ | 346,570 | | 100.0 | % | | $ | 343,797 | | 100.0 | % | | $ | 328,717 | | 100.0 | % |
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| Non-performing Assets | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Non-accrual loans | | $ | 6,943 | | | | | $ | 3,157 | | | | | $ | 4,698 | | | | | $ | 3,751 | | | | | $ | 6,847 | | | | | $ | 46,299 | | | | | $ | 6,943 | | | | | $ | 3,157 | | | | | $ | 4,698 | | | | | $ | 3,751 | | | |
Accruing loans which are contractually past due 90 days or more | | | 625 | | | | | | 987 | | | | | | 992 | | | | | | 853 | | | | | | 739 | | | | | | 489 | | | | | | 625 | | | | | | 987 | | | | | | 992 | | | | | | 853 | | | |
Restructured loans | | | 1,203 | | | | | | 1,489 | | | | | | 1,268 | | | | | | 1,540 | | | | | | 238 | | | | |
Troubled debt restucturings | | | | 11,974 | | | | | | 1,203 | | | | | | 1,489 | | | | | | 1,268 | | | | | | 1,540 | | | |
Total non-performing and restructured loans | | | 8,771 | | | | | | 5,633 | | | | | | 6,958 | | | | | | 6,144 | | | | | | 7,824 | | | | | | 58,762 | | | | | | 8,771 | | | | | | 5,633 | | | | | | 6,958 | | | | | | 6,144 | | | |
| Other real estate acquired through foreclosures | | | 1,056 | | | | | | 174 | | | | | | 495 | | | | | | 2,049 | | | | | | 2,247 | | | | | | 9,251 | | | | | | 1,056 | | | | | | 174 | | | | | | 495 | | | | | | 2,049 | | | |
Total non-performing and restructured loans and other real estate | | $ | 9,827 | | | | | $ | 5,807 | | | | | $ | 7,453 | | | | | $ | 8,193 | | | | | $ | 10,071 | | | | | $ | 68,013 | | | | | $ | 9,827 | | | | | $ | 5,807 | | | | | $ | 7,453 | | | | | $ | 8,193 | | | |
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| Non-performing and restructured loans as a % of total loans | | | 1.88 | % | | | | | 1.63 | % | | | | | 2.02 | % | | | | | 1.87 | % | | | | | 2.41 | % | | | | | 8.40 | % | | | | | 1.88 | % | | | | | 1.63 | % | | | | | 2.02 | % | | | | | 1.87 | % | | |
| Non-performing and restructured loans and other real estate as a % of total assets | | | 1.36 | % | | | | | 1.06 | % | | | | | 1.39 | % | | | | | 1.55 | % | | | | | 1.87 | % | | | | | 6.17 | % | | | | | 1.36 | % | | | | | 1.06 | % | | | | | 1.39 | % | | | | | 1.55 | % | | |
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| Allocation of Allowance for Loan Losses | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Commercial, other | | $ | 1,197 | | 14.9 | % | | $ | 689 | | 13.5 | % | | $ | 839 | | 14.4 | % | | $ | 1,071 | | 16.7 | % | | $ | 1,734 | | 13.7 | % | | $ | 810 | | 11.7 | % | | $ | 1,197 | | 14.9 | % | | $ | 689 | | 13.5 | % | | $ | 839 | | 14.4 | % | | $ | 1,071 | | 16.7 | % |
Real estate, construction | | | 283 | | 5.6 | | | | 237 | | 6.9 | | | | 117 | | 3.3 | | | | 134 | | 3.4 | | | | 83 | | 1.8 | | | | 261 | | 7.4 | | | | 283 | | 5.6 | | | | 237 | | 6.9 | | | | 117 | | 3.3 | | | | 134 | | 3.4 | |
Real estate, other | | | 4,564 | | 68.4 | | | | 3,092 | | 67.5 | | | | 3,395 | | 70.0 | | | | 3,810 | | 67.1 | | | | 4,276 | | 70.8 | | | | 3,998 | | 73.9 | | | | 4,564 | | 68.4 | | | | 3,092 | | 67.5 | | | | 3,395 | | 70.0 | | | | 3,810 | | 67.1 | |
Consumer installment | | | 345 | | 11.1 | | | | 259 | | 12.1 | | | | 521 | | 12.3 | | | | 772 | | 12.8 | | | | 1,255 | | 13.7 | | | | 363 | | 7.0 | | | | 345 | | 11.1 | | | | 259 | | 12.1 | | | | 521 | | 12.3 | | | | 772 | | 12.8 | |
Unallocated | | | 2,155 | | | | | | 2,220 | | | | | | 1,789 | | | | | | 2,105 | | | | | | 2,036 | | | | | | 2,137 | | | | | | 2,155 | | | | | | 2,220 | | | | | | 1,789 | | | | | | 2,105 | | | |
Total | | $ | 8,544 | | 100.0 | % | | $ | 6,497 | | 100.0 | % | | $ | 6,661 | | 100.0 | % | | $ | 7,892 | | 100.0 | % | | $ | 9,384 | | 100.0 | % | | $ | 7,569 | | 100.0 | % | | $ | 8,544 | | 100.0 | % | | $ | 6,497 | | 100.0 | % | | $ | 6,661 | | 100.0 | % | | $ | 7,892 | | 100.0 | % |
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PREMIER FINANCIAL BANCORP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
December 31, 20082009
In addition to the loans presented in the loan summary table, Premier also offers certain off-balance sheet products such as letters of credit, revolving credit agreements, and other loan commitments. These products are offered under the same credit standards as the loan portfolio and are included in the risk-based capital ratios used by the Federal Reserve to evaluate capital adequacy. Additional information on off-balance sheet commitments is contained in Note 1819 to the consolidated financial statements.
Total non-performing assets, which consist of past-due loans on which interest is not being accrued ("non accrual loans"), foreclosed properties in the process of liquidation ("OREO"), loans with restructured terms to enable a delinquent borrower to repay and accruing loans past due 90 days or more, were $68.0 million or 6.17% of total assets at year-end 2009. These amounts compare to $9.8 million of total non-performing assets or 1.36% of total assets at year-end 2008. These amounts compare to2008 and $5.8 million of total non-performing assets or 1.06% of total assets at year-end 2007, the lowest levels over the past five years. The significant increase in 2009 from end of 2007year-end 2008 is largely due to the non-performing assets that came with the acquisition of Abigail Adams and its two subsidiary banks. At December 31, 2009, these two banks accounted for $48.0 million or 70.5% of Premier’s non-performing assets. However, since these assets were recorded at an estimated fair value on the date of acquisition, the amount of credit risk assumed by Premier is not nearly as great as the volume of non-performing assets suggests taken at face value. The estimate of fair value on all loans, but particularly on non-performing assets, included factors for the measurement of credit risk, interest rate risk and re-salability in the most advantageous market for the loans in an orderly transaction between market participants. These estimates included significant discounts on the non-accrual loans. Since the estimated fair value of these loans were believed to have accounted for the reasonably estimable credit risk in the loans, consistent with new accounting guidance for acquisitions after 2008, no allowance for loan losses for these loans was recorded at the date of acquisition. Under previous accounting standards, the loan loss allowance of acquired banks would have carried over to Premier’s books and records, as was the case for Traders and Citizens First. The following table illustrates the December 31, 2009 face value of the non-performing assets of the two subsidiary banks from the acquisition of Abigail Adams and the discounted net carrying value of those non-performing assets.
| NON-PERFORMING ASSETS AT ACQUIRED SUBSIDIARY BANKS | |
| (Dollars in thousands) | |
| | | December 31, 2009 | |
| | | Face Value | | | Discounted Net Carrying Value | |
| Non-performing Assets | | | | | | |
Non-accrual loans | | $ | 48,430 | | | $ | 39,306 | |
Loans 90+ days past due | | | 119 | | | | 115 | |
Other real estate owned | | | 9,830 | | | | 8,535 | |
Total non-performing assets | | $ | 58,379 | | | $ | 47,956 | |
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| (1) Face value includes reductions for interest payments received on loans while on non-accrual status in accordance with the cost recovery method of accounting for non-accrual loans. | |
PREMIER FINANCIAL BANCORP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
December 31, 2009
The remaining $10.2 million increase in non-performing assets in 2009 is largely due to a $10.8 million increase in restructured loans. These loans were performing in accordance with their modified terms at December 31, 2009, but because the loan terms were modified to assist the borrower to repay the loan, the loans are included with total non-performing assets. Most of Premier’s restructured loans are loans that have been modified to allow the borrower to pay interest only for a limited amount of time. Also included in the remaining $10.2 million increase in non-performing assets in 2009 is a $50,000 increase in non-accrual loans offset by a $251,000 decrease in loans 90+ days past due and a $340,000 decrease in other real estate owned (OREO). The increase in total non-performing assets in 2008 was largely due to the $4.2 million of non-performing assets at December 31, 2008 at the acquired Traders Bank. In addition to the non-accrual loans at Traders Bank, in 2008 a $0.7 million increase in non-accrual loans was largely offset by decreases in loans past due 90 days or more and restructured loans. While the ratio of non-performing assets to total assets at the end of 2008 was higher than the end of 2007, it was still lower than anyeither of the previous threetwo years presented in the table above. The decrease in total non-performing assets in 2007 was largely due a $1.5 million decrease in non-accrual loans and a continued decrease in OREO property. These decreases offset the increase in restructured loans, while loans past due 90 days or more and still accruing remained virtually unchanged. The decrease in 2006 was largely due to the $1.6 million reduction in OREO property, which was partially offset by an increase in non-accrual loans. As the collection or rehabilitation of previously delinquent loans and charge-offs of loans determined to be uncollectible continued in 2006, these efforts were offset by other loans newly placed on non-accrual status. In 2007, the level of non-accrual loans declined primarily as a result of loan payoffs as well as partial or complete loan charge-offs.
Management believes the estimated potential losses related to delinquent loans to be adequately provided for in the allowance for loan losses. These non-performing assets were included in the analyses that supported the recording of provisions for loan loss during the second, third2009 and fourth quarters of 2008. As management's efforts to collect on all of the Company’s non-performing assets at Traders Bank continue, matured loans are only renewed using Premier's strengthened credit policies. Otherwise, loans may be placed on non-accrual status and foreclosure proceedings begun to obtain and liquidate any collateral securing the past due or matured loans. As previously demonstrated by Premier’s history, management is committed to continuing to reduce its level of non-performing assets and maintaining strong underwriting standards to help maintain a lower level of non-performing assets in the future. This effort is revealed in the decline in non-performing assets from the end of 20042005 to the end of 2007, primarily related to the sale of OREO properties and the decline in non-accrual loans and loans 90+ days past due. Premier's efforts at its other affiliate banks in 2003 and 2004 were masked by the high level of non-performing assets at Farmers Deposit Bank, which alone totaled $12.5 million at December 31, 2003. At December 31, 2004, the non-performing assets at Farmers Deposit Bank had declined to $6.8 million, leaving $3.3 million of total non-performing assets at the other Affiliate Banks combined. By December 31, 2008, total non-performing assets at Farmers Deposit Bank had declined to $1.1 million. This experience and performance in pursuing the collection of non-performing assets was a factor in management’s decision to pursue the acquisition of Abigail Adams and its high level of non-performing assets. While the circumstances related to the collection of every non-performing loan is different, with the benefit of the additional capital provided by Premier’s participation in the TARP Capital Purchase Program and the requirement to record the non-performing assets at their estimated fair value at acquisition date, management believes it will be successful in resolving a majority of the non-performing assets acquired from Abigail Adams.
PREMIER FINANCIAL BANCORP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
December 31, 20082009
The Loan Summary table presents five years of comparative non-performing asset information. Other than these loans and the impaired loans discussed in Note 45 to the consolidated financial statements, Premier does not have a significant volume of loans where management has serious doubts about the borrowers’ ability to comply with the present repayment terms of the loan.
It is Premier's policy to place loans that are past due over 90 days on non-accrual status, unless the loans are adequately secured and in the process of collection. Through its acquisition of Abigail Adams, Premier had no commitments to provide additional fundsnow has $13.9 million of construction loans on non-accrual loansstatus at December 31, 2008.2009 whereby additional funds may be needed by the borrower to complete the project. For real estate loans, upon repossession, the balance of the loan is transferred to "Other Real Estate Owned" (OREO) and carried at the lower of the outstanding loan balance or the fair value of the property based on current appraisals and other current market trends, less estimated disposal costs. If a writedown of the OREO property is necessary at the time of foreclosure, the amount is charged against the allowance for loan losses. A periodic review of the recorded property value is performed in conjunction with normal loan reviews, and if market conditions indicate that the recorded value exceeds the fair market value less estimated disposal costs, additional writedowns of the property value are charged directly to operations.
During 20082009, Premier recorded $20,000$561,000 of writedowns and losses on the disposition of OREO properties, net of gains, whilecompared to $21,000 of such writedowns and losses in 2008. In 2007 Premier recognized a $20,000 net profit on the disposition of OREO properties. The significant increase in OREO writedowns and losses in 2009 primarily relates to properties net of writedowns. During 2006 Premier realized $105,000 net profit onheld at the dispositionnewly acquired Traders Bank. Carrying values of OREO properties.properties were compared to updated appraisals and additional writedowns of the property value were charged directly to operations based upon the updated net realizable value. The properties were primarily undeveloped vacant land. Although loans may be classified as non-performing, some continue to pay interest irregularly or at less than originally contracted terms. During 2008,2009, approximately $56,000$587,000 of interest was recognized on non-accrual and restructured loans, while approximately $324,000$1.2 million would have been recognized in accordance with their original terms.
The allowance for loan losses is maintained to absorb probable incurred losses associated with lending activities. Actual losses are charged against the allowance ("charge-offs") while collections on loans previously charged off ("recoveries") are added back to the allowance. Since actual losses within a given loan portfolio are difficult to predict, management uses a significant amount of estimation and judgment to determine the adequacy of the allowance for loan losses. Factors considered in determining the adequacy of the allowance include an individual assessment of risk on certain loans and total creditor relationships, historical charge-off experience, the type of loan, levels of non-performing and past due loans, and an evaluation of current economic conditions. Loans are evaluated for credit risk and assigned a risk grade. Premier's risk grading criteria are based upon Federal Reserve guidelines and definitions. In evaluating the adequacy of the allowance for loan losses, loans that are assigned passing grades are grouped together and multiplied by historical charge-off percentages to determine an estimated amount of potential losses and a corresponding amount
PREMIER FINANCIAL BANCORP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
December 31, 2009
of allowance. Loans that are assigned marginally passing grades are grouped together and allocated slightly higher percentages to determine the estimated amount of potential losses due to the identification of increased risk(s). Loans that are assigned a grade of "substandard" or "doubtful" are usually determined to be impaired.
PREMIER FINANCIAL BANCORP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
December 31, 2008
A loan is categorized and reported as impaired when it is probable that the borrower will be unable to pay all of the principal and interest amounts according to the contractual terms of the loan agreement. In determining whether a loan is impaired, management considers such factors as past payment history, recent economic events, current and projected financial conditions and other relevant information that is available at the time. Impairment is evaluated in total for smaller-balance loans of similar nature such as residential mortgage, consumer, and credit card loans, and on an individual basis for other loans. If a loan is deemed to be impaired, an evaluation of the amount of estimated loss is performed assessing the present value of estimated future cashflows using the loan's existing rate or assessing the fair and realizable value of the loan collateral if repayment is expected solely from the collateral. The estimation of loss is assigned to the impaired loan and is used in determining the adequacy of the allowance for loan losses. For impaired loans, this estimation of loss is reevaluated quarterly and, if necessary, adjusted based upon the current known facts and circumstances related to the loan and the borrower. Additional information on Premier's impaired loans is contained in Note 45 to the consolidated financial statements. The sum of the calculations and estimations of the risk of loss in a giventhe loan portfolio is compared to the recorded balance of the allowance for loan losses. If the total allowance is deemed to be inadequate a charge to earnings is recorded to increase the allowance. In 2009, Premier recorded $1,052,000 of additional provisions for loan losses, while in 2008, Premier recorded $147,000 of additional provisions for loan losses. Conversely, should an evaluation of the allowance result in a lower estimate of the risk of loss in the loan portfolio and the allowance is deemed to be more than adequate, a reversal of previous charges to earnings ("a negative provision") may be warranted in the current period. Events that may lead to negative provisions include greater than anticipated recoveries, a reduction in the historical loss ratios, securing more collateral on an impaired loan during the collection process, or receiving payment in full on an impaired loan. All of these events occurred in varying degrees during 2007 and 2006 and resulted in $78,000 of negative provisions during 2007the year.
At December 31, 2009, the allowance for loan losses was $7.6 million, or 1.08% of total year-end loans, compared to an allowance for loan losses of $8.5 million, or 1.83% of total loans at December 31, 2008. The significant decrease in the ratio of allowance to total loans was directly the result of adding the $235.6 million of loans from the acquisition of Abigail Adams without adding any allowance for loan losses. New accounting guidance adopted by Premier at the beginning of 2009 does not permit an acquirer to carryover the purchased entity’s allowance for loan losses. Instead, under the new accounting guidance, all acquired loans are to be recorded at their net estimated fair value. The estimate of fair value included factors for the measurement of credit risk, interest rate risk and $1,161,000re-salability in the most advantageous market for the loans in an orderly transaction between market participants. These estimates required
PREMIER FINANCIAL BANCORP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
December 31, 2009
management's most difficult, subjective and complex judgments and are inherently uncertain. However, since the estimated fair value of these loans were believed to have accounted for the reasonably estimable credit risk in the loans, no allowance for loan losses for these loans was recorded at the date of acquisition. At September 30, 2009, just prior to Premier’s acquisition, Abigail Adams reported a collective allowance for loan losses of approximately $12.8 million. In contrast, Premier recorded the estimated fair value of the combined loan portfolios at an estimated $25.5 million discount to the contractual amounts receivable on the loans at acquisition. These discounts, allocated per loan, will be used to offset any charge-offs of the uncollectible portion of the contractual amount due on non-performing assets, or accreted into interest income using a level yield method on performing loans. Should Premier collect the full contractual amount due, any fair value discount would be recognized as interest income. Excluding the loans acquired from Abigail Adams, the remaining allowance for loan losses was 1.60% of total year-end loans. The 2009 decrease in the ratio is largely due to the charge-off of loans to one borrower that had been identified and carried as an impaired loan for more than three years. Premier finally received permission from the bankruptcy court to foreclose upon and liquidate the collateral. The actual charge-off was approximately the amount of allowance allocated to the loan during its classification as an impaired loan. The allowance for loan losses was also reduced by the $2.0 million of net charge-offs in 2009 which was only partially offset by the $1.1 million of additional provisions for loan losses during 2006.the year.
At December 31, 2008, the allowance for loan losses was $8.5 million, or 1.83% of total year-end loans. While the total allowance increased by $2.0 million from the $6.5 million allowance at the end of 2007, the ratio to total loans decreased slightly from the 1.87% of total year-end loans at December 31, 2007. The increase in the allowance in 2008 is largely due to the $2.3 million allowance for loan losses acquired via the purchase of Traders and Citizens First Banks.Banks, as permitted by the accounting guidance in-place in 2008. The slight decrease in the ratio to total year-end loans is largely the result of lower estimates of required allocations of the allowance to impaired loans due to a combination of collections of previously impaired loans and improved loan to collateral values on existing impaired loans. The allowance for loan losses was also reduced by the $400,000 of net charge-offs in 2008 which was only partially offset by the $147,000 of additional provisions for loan losses during the year. The decrease in the allowance in 2007 compared to 2006 was primarily the result of the $78,000 of negative provisions for loan losses coupled with $86,000 of net charge-offs recorded during the year. The decrease in the allowance in 2006 was primarily the result of the $1.2 million of negative provisions for loan losses recorded during the year, as charge-offs in 2006 were nearly offset by recoveries. In management's opinion, the allowance for loan losses is adequate to absorb the current estimated risk of loss in the existing loan portfolio. The summary of the allowance for loan losses allocated by loan type is presented in the Loan Summary Table above.
PREMIER FINANCIAL BANCORP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
December 31, 2008
The following table provides a more detailed history of the allowance for loan losses, illustrating charge-offs and recoveries by loan type, and the annual provision for loan losses over the past five years. In 2008, due to the deterioration in the national economy and its impact on the local economy in its markets, Premier experienced increases in past due loans and non-performing assets. As such, management’s estimate of the current estimated risk of loss in the existing loan portfolio began to increase in the second quarter of 2008 and provisions for loan losses were charged to earnings in the second, third and fourth quarters which more than
| SUMMARY OF LOAN LOSS EXPERIENCE | |
| (Dollars in thousands) | |
| | | For the Year Ended December 31 | |
| | | 2008 | | | 2007 | | | 2006 | | | 2005 | | | 2004 | |
| Allowance for loan losses, beginning of period | | $ | 6,497 | | | $ | 6,661 | | | $ | 7,892 | | | $ | 9,384 | | | $ | 14,300 | |
| Amounts charged off: | | | | | | | | | | | | | | | | | | | | |
Commercial, financial and agricultural loans | | | 547 | | | | 83 | | | | 154 | | | | 736 | | | | 1,520 | |
Real estate construction loans | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | 5 | |
Real estate loans – other | | | 369 | | | | 239 | | | | 863 | | | | 549 | | | | 2,413 | |
Consumer installment loans | | | 316 | | | | 436 | | | | 393 | | | | 930 | | | | 3,054 | |
Total charge-offs | | | 1,232 | | | | 758 | | | | 1,410 | | | | 2,215 | | | | 6,992 | |
| | | | | | | | | | | | | | | | | | | | | |
| Recoveries on amounts previously charged-off: | | | | | | | | | | | | | | | | | | | | |
Commercial, financial and agricultural loans | | | 113 | | | | 66 | | | | 266 | | | | 91 | | | | 264 | |
Real estate construction loans | | | 33 | | | | 14 | | | | 8 | | | | 1 | | | | 1 | |
Real estate loans – other | | | 459 | | | | 302 | | | | 340 | | | | 84 | | | | 87 | |
Consumer installment loans | | | 227 | | | | 290 | | | | 726 | | | | 543 | | | | 698 | |
Total recoveries | | | 832 | | | | 672 | | | | 1,340 | | | | 719 | | | | 1,050 | |
| | | | | | | | | | | | | | | | | | | | | |
| Net charge-offs | | | 400 | | | | 86 | | | | 70 | | | | 1,496 | | | | 5,942 | |
| Balance of acquired subsidiaries | | | 2,300 | | | | 0 | | | | 0 | | | | 0 | | | | 0 | |
| Provision for loan losses | | | 147 | | | | (78 | ) | | | (1,161 | ) | | | 4 | | | | 1,026 | |
| | | | | | | | | | | | | | | | | | | | | |
| Allowance for loan losses, end of period | | $ | 8,544 | | | $ | 6,497 | | | $ | 6,661 | | | $ | 7,892 | | | $ | 9,384 | |
| | | | | | | | | | | | | | | | | | | | | |
| Average total loans | | $ | 417,065 | | | $ | 344,688 | | | $ | 338,336 | | | $ | 326,615 | | | $ | 325,610 | |
| Total loans at year-end | | | 467,111 | | | | 346,570 | | | | 343,797 | | | | 328,717 | | | | 324,927 | |
| | | | | | | | | | | | | | | | | | | | | |
| As a percent of average loans | | | | | | | | | | | | | | | | | | | | |
Net charge-offs | | | 0.10 | % | | | 0.02 | % | | | 0.02 | % | | | 0.46 | % | | | 1.82 | % |
Provision for loan losses | | | 0.04 | % | | | (0.02 | )% | | | (0.34 | )% | | | 0.00 | % | | | 0.32 | % |
Allowance for loan losses | | | 2.05 | % | | | 1.88 | % | | | 1.97 | % | | | 2.42 | % | | | 2.88 | % |
| | | | | | | | | | | | | | | | | | | | | |
| As a percent of total loans at year-end | | | | | | | | | | | | | | | | | | | | |
Allowance for loan losses | | | 1.83 | % | | | 1.87 | % | | | 1.94 | % | | | 2.40 | % | | | 2.89 | % |
| | | | | | | | | | | | | | | | | | | | | |
| As a multiple of net charge-offs | | | | | | | | | | | | | | | | | | | | |
Allowance for loan losses | | | 21.36 | X | | | 75.55 | X | | | 95.16 | X | | | 5.28 | X | | | 1.58 | X |
Income before tax and provision for loan losses | | | 28.66 | X | | | 122.22 | X | | | 123.19 | X | | | 4.32 | X | | | 0.65 | X |
| | |
PREMIER FINANCIAL BANCORP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
December 31, 20082009
losses were charged to earnings in the second, third and fourth quarters which more than offset a negative provision for losses in the first quarter. As the deterioration in the national economy and its impact on Premier’s local economies continued in 2009, some of the increases in past due loans and non-performing assets in 2008 became charged-off loans in 2009. Additional provisions for loan losses were recorded in 2009 as the estimated credit risk in the remaining loan portfolio was evaluated. As noted in the non-performing asset discussion above, excluding the impact of the acquisition of the non-performing loans of Abigail Adams, Premier’s remaining banks experienced only a slight increase in non-accrual loans and decreases in the loans carried as 90+ days past due or in OREO indicating similar credit risk in the portfolio at the end of 2009 as compared to the end of 2008. Premier aggressively pursues past due loans in an effort to bring those loans back to current status. If these efforts fail and a past due loan becomes a non-performing loan, Premier’s policies for determining the adequacy of the allowance for loan losses are used to determine the estimated potential loss on the loan.
PREMIER FINANCIAL BANCORP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
December 31, 2009
| SUMMARY OF LOAN LOSS EXPERIENCE | |
| (Dollars in thousands) | |
| | | For the Year Ended December 31 | |
| | | 2009 | | | 2008 | | | 2007 | | | 2006 | | | 2005 | |
| Allowance for loan losses, beginning of period | | $ | 8,544 | | | $ | 6,497 | | | $ | 6,661 | | | $ | 7,892 | | | $ | 9,384 | |
| Amounts charged off: | | | | | | | | | | | | | | | | | | | | |
Commercial, financial and agricultural loans | | | 777 | | | | 547 | | | | 83 | | | | 154 | | | | 736 | |
Real estate construction loans | | | 37 | | | | 0 | | | | 0 | | | | 0 | | | | 0 | |
Real estate loans – other | | | 1,171 | | | | 369 | | | | 239 | | | | 863 | | | | 549 | |
Consumer installment loans | | | 452 | | | | 316 | | | | 436 | | | | 393 | | | | 930 | |
Total charge-offs | | | 2,437 | | | | 1,232 | | | | 758 | | | | 1,410 | | | | 2,215 | |
| | | | | | | | | | | | | | | | | | | | | |
| Recoveries on amounts previously charged-off: | | | | | | | | | | | | | | | | | | | | |
Commercial, financial and agricultural loans | | | 82 | | | | 113 | | | | 66 | | | | 266 | | | | 91 | |
Real estate construction loans | | | - | | | | 33 | | | | 14 | | | | 8 | | | | 1 | |
Real estate loans – other | | | 208 | | | | 459 | | | | 302 | | | | 340 | | | | 84 | |
Consumer installment loans | | | 120 | | | | 227 | | | | 290 | | | | 726 | | | | 543 | |
Total recoveries | | | 410 | | | | 832 | | | | 672 | | | | 1,340 | | | | 719 | |
| | | | | | | | | | | | | | | | | | | | | |
| Net charge-offs | | | 2,027 | | | | 400 | | | | 86 | | | | 70 | | | | 1,496 | |
| Balance of acquired subsidiaries | | | 0 | | | | 2,300 | | | | 0 | | | | 0 | | | | 0 | |
| Provision for loan losses | | | 1,052 | | | | 147 | | | | (78 | ) | | | (1,161 | ) | | | 4 | |
| | | | | | | | | | | | | | | | | | | | | |
| Allowance for loan losses, end of period | | $ | 7,569 | | | $ | 8,544 | | | $ | 6,497 | | | $ | 6,661 | | | $ | 7,892 | |
| | | | | | | | | | | | | | | | | | | | | |
| Average total loans | | $ | 526,473 | | | $ | 417,065 | | | $ | 344,688 | | | $ | 338,336 | | | $ | 326,615 | |
| Total loans at year-end | | | 699,133 | | | | 467,111 | | | | 346,570 | | | | 343,797 | | | | 328,717 | |
| | | | | | | | | | | | | | | | | | | | | |
| As a percent of average loans | | | | | | | | | | | | | | | | | | | | |
Net charge-offs | | | 0.39 | % | | | 0.10 | % | | | 0.02 | % | | | 0.02 | % | | | 0.46 | % |
Provision for loan losses | | | 0.20 | % | | | 0.04 | % | | | (0.02 | )% | | | (0.34 | )% | | | 0.00 | % |
Allowance for loan losses | | | 1.44 | % | | | 2.05 | % | | | 1.88 | % | | | 1.97 | % | | | 2.42 | % |
| | | | | | | | | | | | | | | | | | | | | |
| As a percent of total loans at year-end | | | | | | | | | | | | | | | | | | | | |
Allowance for loan losses | | | 1.08 | % | | | 1.83 | % | | | 1.87 | % | | | 1.94 | % | | | 2.40 | % |
| | | | | | | | | | | | | | | | | | | | | |
| As a multiple of net charge-offs | | | | | | | | | | | | | | | | | | | | |
Allowance for loan losses | | | 3.73 | X | | | 21.36 | X | | | 75.55 | X | | | 95.16 | X | | | 5.28 | X |
Income before tax and provision for loan losses | | | 6.46 | X | | | 28.66 | X | | | 122.22 | X | | | 123.19 | X | | | 4.32 | X |
| | |
PREMIER FINANCIAL BANCORP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
December 31, 2009
In 2009, provisions for loan losses totaled $1.1 million compared to $147,000 of provision expense in 2008. In 2007, a negative provision was recorded during the second quarter which exceeded the quarterly provisions recorded during the other three quarters of the year. In 2006, negative provisions were recorded in each of the four quarters of the year. The negative provisions wereprovision was recorded primarily as result of realized collections of previously impaired loans whereby estimated losses were not realized as previously estimated and assigned to the loan. In addition, Premier has been successful in recovering some of its previously charged-off loans. These positive events as well as the ongoing reduction in Premier’s historical loss ratios resulted in a lower estimate of the risk of loss in the loan portfolio during the second quarter of 2007, and thus,a negative provisions wereprovision was warranted. The negative provisionsprovision for loan losses totaled $78,000 in 2007 and $1,161,000 in 2006.2007. Future provisions to the allowance for loan losses, positive or negative, will depend on future improvement or deterioration in estimated credit risk in the loan portfolio as well as whether additional payments are received on loans having significant credit risk. Premier continually evaluates the adequacy of its allowance for loan losses, and changes in the provision are based on the estimated probable incurred losses in the loan portfolio.
Net charge-offs in 2009 totaled $2,027,000, as $2,437,000 of loans charged-off were partially offset by $410,000 of recoveries of loans previously charged-off. Net charge-offs in 2008 totaled $400,000, as $1,232,000 of loans charged–off were partially offset by $832,000 of recoveries of loans previously charged-off. Net charge-offs in 2007 totaled only $86,000, as $758,000 of loans charged-off were nearly offset by $672,000 of recoveries of loans previously charged-off. Net charge-offs in 2006 decreased to just $70,000, as $1,340,000 of recoveries nearly offset $1,410,000 of charge-offs recorded during the year. In 2008, Farmers Deposit Bank recorded $42,000 of net recoveries and provided over 32% of the Company’s total recoveries for 2008. In 2007, Farmers Deposit Bank recorded $296,000 of net recoveries and provided over 70% of the Company’s total recoveries for 2007. In 2006,However, in 2009, while Farmers Deposit Bank recorded $249,000still accounted for approximately 37% of netPremier’s total recoveries, and provided nearly 70%most of the Company’s totalopportunities for recoveries for 2006. Thesehave been exhausted and the bank once again recorded net charge-offs in 2009. The recoveries at Farmers Deposit Bank are primarily the result of continued collection efforts of the significant number and amount of loans charged-off at Farmers Deposit Bank in 2003 through 2005. Approximately $641,000, or 43% of the 2005 net charge-offs and $4.8 million, or 81% of the Premier’s 2004 net charge-offs were at Farmers Deposit Bank. The level of future recoveries is likely to decrease as the level of past charge-offs has decreased.
In 2009, total charge-offs increased to $2.4 million as the national economic downturn has negatively affected some commercial borrowers’ ability to service their loans from Premier. Charge-offs of commercial loans and loans secured by commercial real estate totaled $1.3 million or approximately 53% of the total charge-offs recorded in 2009, the highest level recorded over the past five years. Consumer charge-offs increased by $136,000. Even with the increases, 2009 net charge-offs were still only 0.39% of average outstanding loans in 2009. In 2008, total charge-offs increased for the first time in the previous four years, butyears. However, net charge-offs still constituted a relatively low 0.10% of average total loans. In 2008, charge-offs on commercial and real estate loans increased while consumer loan charge-offs decreased to their lowest dollar volume inover the past five years. In 2007, charge-offs on consumer installment loans increased by $43,000 or 10.9%. However, the increase was more than offset by decreases
PREMIER FINANCIAL BANCORP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
December 31, 2009
in the level of charge-offs of commercial loans and loans secured by real estate. While total charge-offs decreased in 2006, the level of loans secured by real estate that were charged-off increased by $314,000 or 57.2% as collection efforts on a few real estate secured borrowers came to their ultimate conclusion. Although management believes it has identified the significant remaining credit risk in the loan portfolio, additional charge-offs may be recorded in the coming months due to the level of non-performing loans and the resolution of collection efforts on those loans. Premier continues to make
PREMIER FINANCIAL BANCORP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
December 31, 2008
a significant effort to reduce its past due and non-performing loans by reviewing loan files, using the courts to bring borrowers current with the terms of their loan agreements and/or the foreclosure and 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. Premier continues to monitor and evaluate the impact that national housing market price declines may have on its local markets and collateral valuations as management evaluates the adequacy of the allowance for loan losses. While some price deterioration is expected, it is not currently anticipated that Premier’s markets will be impacted as severely as other areas of the country due to the historically modest increases in real estate values in the Company’s markets.markets in West Virginia, Ohio and Kentucky. With the concentrations of commercial real estate loans acquired in the Washington, DC and Richmond, Virginia markets, fluctuations in commercial real estate value will also be monitored. These factors are considered in determining the adequacy of the allowance for loan losses, which at December 31, 2008 was 1.83% of total loans outstanding and 97% of non-performing loans.losses.
The following table presents the maturity distribution and interest sensitivity of selected loan categories at December 31, 2008.2009. Maturities are based upon contractual terms.
| LOAN MATURITIES and INTEREST SENSITIVITY | LOAN MATURITIES and INTEREST SENSITIVITY | | LOAN MATURITIES and INTEREST SENSITIVITY | |
| December 31, 2008 | | |
| December 31, 2009 | | December 31, 2009 | |
| (Dollars in thousands) | (Dollars in thousands) | | (Dollars in thousands) | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Projected Maturities* | | | | | | Projected Maturities* | | | | |
| | | One Year or Less | | | One Through Five Years | | | Over Five Years | | | Total | | | One Year or Less | | | One Through Five Years | | | Over Five Years | | | Total | |
| Commercial, secured by real estate | | $ | 39,238 | | | $ | 67,862 | | | $ | 26,642 | | | $ | 133,742 | | | $ | 64,629 | | | $ | 116,652 | | | $ | 123,326 | | | $ | 304,607 | |
| Commercial, other | | 35,927 | | | 21,247 | | | 4,481 | | | 61,655 | | | | 33,274 | | | | 25,999 | | | | 16,867 | | | | 76,140 | |
| Real estate construction | | 16,925 | | | 5,099 | | | 4,158 | | | 26,182 | | | | 35,100 | | | | 5,533 | | | | 11,004 | | | | 51,637 | |
| Agricultural | | | 1,148 | | | | 1,237 | | | | 61 | | | | 2,446 | | | | 280 | | | | 1,863 | | | | 567 | | | | 2,710 | |
Total | | $ | 93,238 | | | $ | 95,445 | | | $ | 35,342 | | | $ | 224,025 | | | $ | 133,283 | | | $ | 150,047 | | | $ | 151,764 | | | $ | 435,094 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Fixed rate loans | | $ | 21,362 | | | $ | 28,371 | | | $ | 7,392 | | | $ | 57,125 | | | $ | 60,481 | | | $ | 107,980 | | | $ | 30,391 | | | $ | 198,852 | |
| Floating rate loans | | | 71,876 | | | | 67,074 | | | | 27,950 | | | | 166,900 | | | | 72,802 | | | | 42,067 | | | | 121,373 | | | | 236,242 | |
Total | | $ | 93,238 | | | $ | 95,445 | | | $ | 35,342 | | | $ | 224,025 | | | $ | 133,283 | | | $ | 150,047 | | | $ | 151,764 | | | $ | 435,094 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Fixed rate loans projected to mature after one year | | | | | | | | | | | | | | $ | 35,763 | | | | | | | | | | | | | | | $ | 138,371 | |
| Floating rate loans projected to mature after one year | | | | | | | | | | | | | | | 95,024 | | | | | | | | | | | | | | | | 163,440 | |
Total | | | | | | | | | | | | | | $ | 130,187 | | | | | | | | | | | | | | | $ | 301,811 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (*) Based on scheduled or approximate repayments | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
PREMIER FINANCIAL BANCORP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
December 31, 20082009
Investment Portfolio and
Other Earning Assets
Investment securities averaged $189.3 million in 2009, up $23.6 million or 14.2% from the $165.6 million averaged in 2008, up2008. This increase follows a $39.1 million or 30.9% increase in 2008 from the $126.6 million averaged in 2007. ThisThe increase follows an $8.6in 2009 is largely the result of acquisition activity. The acquisition of Abigail Adams in October 2009 added $17.1 million in average investment securities in 2009, while the full year impact of including Traders and Citizens First in the organization since the end of April 2008 added $9.1 million to 2009 average investment securities. Excluding the acquisitions, average investment securities decreased by $2.6 million or 6.4% decrease1.6% in 20072009 from 2008. Due to the $135.2low interest rate environment during 2009, issuers were routinely invoking call features within their securities and reissuing new bonds at lower coupon rates. During 2009, $149.2 million averagedof Premier’s investment securities were either called or matured compared to $80.3 million during 2008 and only $43.6 million during 2007. During 2009, not all maturing funds were reinvested in 2006.securities as a result of funding average loan growth. The significant increase in 2008 is largely due to the $27.9 million of average investment securities from the acquisitions of Traders and Citizens First. The remaining $11.1 million or 8.8% increase is largely due the declining interest rate environment during the 2008 year. As rates began falling, investable funds held in federal funds sold were used to purchase high quality investment securities to achieve a greater yield over a longer period of maturity. Yields on federal funds sold rise and fall in direct correlation with interest rate changes made by the Federal Reserve Board in establishing national economic policy. Investment security yields are based on a number of pricing factors including but not limited to coupon rate, time to maturity and issuer credit quality. Generally, in 2008 investment security yields were higher than the yield that could be earned on federal funds sold. During 2007, as investments matured, not all funds were reinvested in the investment portfolio. Some funds were used to satisfy loan growth, deposit withdrawals and debt payments. Furthermore, in contrast to 2008, during the first half of 2007, bond reinvestment yields were not as attractive as the yield on highly liquid federal funds sold. Consequently, funds from maturing investments were less likely to be reinvested in bonds. At December 31, 2008,2009, the amount of investments totaled $175.7$241.0 million, up $65.2 million or 37.1% from December 31, 2008. The significant increase in investments is largely due to the $64.7 million of investments at December 31, 2009 from the acquisition of Abigail Adams, leaving only $485,000 of the increase from internal growth. This increase follows a $51.5 million or 41.5% increase in 2008 from the balance at December 31, 2007. The significant increase in investments is largely due to the $39.0 million of investments at December 31, 2008 from the acquisitions of Traders and Citizens First, leaving $12.5 million of the increase from internal growth. This increase follows a $2.9 million increase in 2007 from the balance at December 31, 2006. As the Federal Reserve Board began lowering the federal funds rate in the latter portion of 2007 and continued to do so at various times throughout 2008, bond yields have becomebecame more attractive than the yield on federal funds sold. Thus, to optimize interest income, Premier has begunbegan increasing the amount of funds it has invested in high-quality debt securities.
The following table presents the carrying values of investment securities.
| FAIR VALUE OF SECURITIES AVAILABLE FOR SALE | |
| (Dollars in thousands) | |
| | | As of December 31 | |
| | | 2008 | | | 2007 | | | 2006 | |
| | | | | | | | | | |
| U.S. Treasury securities | | $ | 1,544 | | | $ | 5,574 | | | $ | 6,401 | |
| U.S. Agency securities | | | 97,105 | | | | 74,859 | | | | 76,911 | |
| States and political subdivisions | | | 7,130 | | | | 3,816 | | | | 3,413 | |
| Mortgage-backed securities from government sponsored entities | | | 69,962 | | | | 39,993 | | | | 34,617 | |
| Corporate securities | | | - | | | | - | | | | 25 | |
Total securities | | $ | 175,741 | | | $ | 124,242 | | | $ | 121,367 | |
| | | | | | | | | | | | | |
PREMIER FINANCIAL BANCORP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
December 31, 20082009
The following table presents the carrying values of investment securities.
| FAIR VALUE OF SECURITIES AVAILABLE FOR SALE | |
| (Dollars in thousands) | |
| | | As of December 31 | |
| | | 2009 | | | 2008 | | | 2007 | |
| | | | | | | | | | |
| U.S. Treasury securities | | $ | 1,005 | | | $ | 1,544 | | | $ | 5,574 | |
| U.S. government sponsored entity securities | | | 150,067 | | | | 97,105 | | | | 74,859 | |
| States and political subdivisions | | | 10,247 | | | | 7,130 | | | | 3,816 | |
| Mortgage-backed securities issued by government sponsored entities | | | 74,042 | | | | 69,962 | | | | 39,993 | |
| Corporate securities | | | 5,609 | | | | - | | | | - | |
Total securities | | $ | 240,970 | | | $ | 175,741 | | | $ | 124,242 | |
| | | | | | | | | | | | | |
As sources of funds (deposits, federal funds purchased, and repurchase agreements with corporate customers) fluctuate, excess funds are initially invested in federal funds sold and other short-term investments. Based upon analyses of asset/liability repricing, interest rate forecasts, and liquidity requirements, funds are periodically reinvested in high-quality debt securities, which typically mature over a longer period of time. At the time of purchase, management determines whether the securities will be classified as trading, available-for-sale, or held-to-maturity. At December 31, 20082009 all of Premier's investments were classified as available-for-sale and carried on the books at fair value.
PREMIER FINANCIAL BANCORP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
December 31, 2008
As shown in the following Securities Maturity and Yield Analysis table, the average maturity period of the securities available-for-sale at December 31, 20082009 was 4 years 104 months. The table uses a weighted estimated average life method to report the average maturity of mortgage-backed securities, which includes the estimated effect of monthly payments and prepayments. The average maturity of the investment portfolio is managed at a level to maintain a proper matching with interest rate risk guidelines. Premier does not have any securities classified as trading or held-to-maturity and it has no plans to establish such classifications at the present time. Other information regarding investment securities may be found in the following table and in Note 34 to the consolidated financial statements.
| SECURITIES MATURITY AND YIELD ANALYSIS | |
| December 31, 2008 | |
| (Dollars in thousands) | |
| | | Market Value | | | Average Maturity (yrs/mos) | | | Taxable Equivalent Yield* | |
| U.S. Treasury securities | | | | | | | | | |
Within one year | | $ | 509 | | | | | | | 4.68 | % |
After one but within five years | | | 1,035 | | | | | | | 3.97 | |
Total U.S. Treasury Securities | | | 1,544 | | | | 0/11 | | | | 4.20 | |
| | | | | | | | | | | | | |
| U.S. Government Agencies securities | | | | | | | | | | | | |
Within one year | | | 18,002 | | | | | | | | 4.13 | |
After one but within five years | | | 43,336 | | | | | | | | 4.21 | |
After five but within ten years | | | 35,767 | | | | | | | | 4.33 | |
Total U.S. Government Agencies securities | | $ | 97,105 | | | | 4/3 | | | | 4.24 | |
| | | | | | | | | | | | | |
| States and political subdivisions | | | | | | | | | | | | |
Within one year | | | 146 | | | | | | | | 5.82 | |
After one but within five years | | | 2,325 | | | | | | | | 4.18 | |
After five but within ten years | | | 4,659 | | | | | | | | 5.26 | |
Total states and political subdivisions securities | | $ | 7,130 | | | | 5/11 | | | | 4.92 | |
| | | | | | | | | | | | | |
| Mortgage-backed securities** | | | | | | | | | | | | |
Within one year | | | 269 | | | | | | | | 4.50 | |
After one but within five years | | | 55,519 | | | | | | | | 4.64 | |
After five but within ten years | | | 7,600 | | | | | | | | 5.15 | |
Over ten years | | | 6,574 | | | | | | | | 5.29 | |
Total mortgage-backed securities | | $ | 69,962 | | | | 5/8 | | | | 4.76 | |
| | | | | | | | | | | | | |
| Total securities available-for-sale | | $ | 175,741 | | | | 4/10 | | | | 4.47 | |
| | | | | | | | | | | | | |
| (*) Fully tax-equivalent using the rate of 34% | | | | | | | | | | | | |
| (**) Maturities for mortgage-backed securities are based on weighted average life | | | | | | | | | | | | |
PREMIER FINANCIAL BANCORP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
December 31, 20082009
| SECURITIES MATURITY AND YIELD ANALYSIS | |
| December 31, 2009 | |
| (Dollars in thousands) | |
| | | Market Value | | | Average Maturity (yrs/mos) | | | Taxable Equivalent Yield* | |
| U.S. Treasury securities | | | | | | | | | |
Within one year | | $ | 1,005 | | | | | | 3.97 | % |
Total U.S. Treasury Securities | | | 1,005 | | | 0/2 | | | 3.97 | |
| | | | | | | | | | | |
| U.S. government sponsored entity securities | | | | | | | | | | |
Within one year | | | 2,031 | | | | | | 3.83 | |
After one but within five years | | | 114,090 | | | | | | 2.72 | |
After five but within ten years | | | 33,946 | | | | | | 3.15 | |
Total U.S. government sponsored entity securities | | $ | 150,067 | | | 4/4 | | | 2.83 | |
| | | | | | | | | | | |
| States and political subdivisions | | | | | | | | | | |
Within one year | | | 110 | | | | | | 8.31 | |
After one but within five years | | | 3,785 | | | | | | 4.39 | |
After five but within ten years | | | 6,352 | | | | | | 4.72 | |
Total states and political subdivisions securities | | $ | 10,247 | | | 5/9 | | | 4.64 | |
| | | | | | | | | | | |
| Mortgage-backed securities** | | | | | | | | | | |
Within one year | | | 2,737 | | | | | | 4.97 | |
After one but within five years | | | 71,257 | | | | | | 4.37 | |
After five but within ten years | | | 45 | | | | | | 3.09 | |
Over ten years | | | 3 | | | | | | 4.43 | |
Total mortgage-backed securities | | $ | 74,042 | | | 2/5 | | | 4.40 | |
| | | | | | | | | | | |
| Other securities** | | | | | | | | | | |
After one but within five years | | | 631 | | | | | | 38.63 | |
Over ten years | | | 3,791 | | | | | | 8.57 | |
Total other securities | | $ | 4,422 | | | 33/6 | | | 12.86 | |
| | | | | | | | | | | |
| Corporate preferred securities | | | 1,188 | | | n/a | | | 9.76 | |
| | | | | | | | | | | |
| Total securities available-for-sale | | $ | 240,970 | | | 4/4 | | | 3.61 | |
| | | | | | | | | | | |
| (*) Fully tax-equivalent using the rate of 34% | | | | | | | | | | |
| (**) Maturities for mortgage-backed securities are based on expected average life | | | | | | | | | | |
PREMIER FINANCIAL BANCORP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
December 31, 2009
Premier’s average investment in federal funds sold and other short-term investmentsinterest-bearing bank balances increased by 4.9%10.8% in 2008.2009. This follows a 48.1%5.6% increase in 2007.2008. Averaging $37.9$43.7 million in 2008,2009, federal funds sold and other short-term investmentsinterest-bearing balances increased $1.8$4.3 million from the $36.1$39.5 million averaged in 2008. The increase in 2009 is largely the result of acquisition activity. The acquisition of Abigail Adams in October 2009 added $4.1 million in average federal funds sold and interest-bearing bank balances in 2009, while the full year impact of including Traders and Citizens First in the organization since the end of April 2008 reduced the 2009 average by $2.5 million. Excluding the acquisitions, average federal funds sold and interest bearing bank balances increased by $2.6 million or 6.7% in 2009 from 2008. As shown in the Consolidated Average Balance Sheets and Net Interest Income Analysis above, on average, the yield on federal funds sold dropped to 0.08% in 2009 in accordance with the Federal Reserve’s Board of Governors’ policy to maintain the federal funds rate between 0.00% and 0.25%. To obtain higher yields on its most highly liquid funds, Premier began shifting some of its federal funds sold to certificates of deposits with other banks and other interest-bearing bank balances, primarily with the Federal Reserve Bank, which yielded, on average, 0.38% in 2009. The average balance of federal funds sold decreased by $8.9 million in 2009 to $28.9 million, while average interest-bearing bank balances increased by $13.2 million in 2009 to $14.8 million. In 2008, Premier’s federal funds sold and interest-bearing bank balances averaged $39.5 million, a 5.6% increase from the $37.4 million averaged in 2007. The increase in average federal funds sold and interest-bearing bank balances in 2008 was largely due to the acquisitions of Traders and Citizens First which added $8.6$9.4 million in average federal funds soldbalances during the year. This increase more than offset the $6.9$7.3 million or 19.0%19.6% decrease in average federal funds sold and interest-bearing bank balances of Premier’s other affiliate banks. This decrease was the result of using some of the available federal funds sold to fund loans and purchase higher yielding investment securities. As shown in the Consolidated Average Balance Sheets and Net Interest Income Analysis above, on average, the yield on federal funds sold dropped to 1.97% in 2008, significantly less than the 4.51% average yield on total investment securities in 2008. In contrast, during the latter part of 2006 and first part of 2007, bond yields were not as attractive as the yield on highly liquid federal funds sold and funds from maturing investments were less likely to be invested in bonds. Thus, average federal funds sold increased by $11.8 million or 48.1% in 2007 from the $24.4 million averaged in 2006. As shown in the Consolidated Average Balance Sheets and Net Interest Income Analysis above, on average, federal funds sold yielded 5.07% in 2007 and 4.99% in 2006. In each year, this yield was higher than the yield earned on U.S. Treasury and Agency securities as well as mortgage backed securities. Fluctuations in federal funds sold and other short-term investments reflect management's goal to maximize asset yields while maintaining proper asset/liability structure, as discussed in greater detail above and in other sections of this report.
Funding Sources
In response to the Federal Reserve policy to reduce market interest rates by lowering the target federal funds rate, in 2008 Premier began cutting its rates paid on its interest bearing deposits. This change follows a three-year period during which Premier was raising the rates paid on its interest bearing deposits in response to the increase in market interest rates. As a result, the average rate paid on interest bearing liabilities decreased to 2.39%1.70% in 2007,2009, down from 2.39% paid in 2008, and the 3.09% paid in 2007,2007. The 69 basis point decrease in 2009 was primarily the result of a 98 basis point decrease in the average rate paid on certificates of deposit and other time deposits, which made up 52.9% of the 2.73%total average interest bearing liabilities in 2009. Other rate decreases on deposits in 2009 include a 44 basis point decrease on NOW and
PREMIER FINANCIAL BANCORP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
December 31, 2009
money market accounts and a 25 basis point decrease in savings deposits. Likewise, in 2009 Premier decreased the rate paid on its short-term borrowings, primarily repurchase agreements with deposits customers, by 62 basis points. Also in response to the decrease in market interest rates initiated by the Federal Reserve, the rate paid on Premier’s long-term borrowings decreased as a result of the floating rate terms of the borrowings. In 2009, the average rate paid on other borrowings decreased 117 basis points to 3.49%. At the end of 2009, Premier converted its largest dollar borrowing, the $10.0 million owed to First Guaranty Bank, to a fixed rate of interest of 3.96% through its remaining maturity date on April 30, 2013. The Company’s FHLB advances are fixed rate debt and thus decrease usually as a result of payments and maturities of higher rate advances. However, as part of the Abigail Adams acquisition, Premier assumed $10.6 million of long-term FHLB advances with a market interest rate of 1.81%. This addition caused the average rate paid in 2006. 2009 on the FHLB advances to decrease 196 basis points to 4.22%. Furthermore, in the first half of 2010, $4.0 million of Premier’s highest rate FHLB advances, averaging 6.45%, will mature further reducing the future rate paid on its long-term FHLB advances.
The 70 basis point decrease in the average rate paid on interest bearing liabilities in 2008 was primarily the result of a 79 basis point decrease in the average rate paid on certificates of deposit and other time deposits, which made up 51.6% of the total average interest bearing liabilities in 2008. Other rate decreases on deposits in 2008 include a 66 basis point decrease on NOW and money market accounts and a 15 basis point decrease in savings deposits. Likewise, in 2008 Premier decreased the rate paid on its short-term borrowings, primarily repurchase agreements with deposit customers, 98 basis points. Also in response to the decrease in market interest rates, initiated by the Federal Reserve, the rate paid on Premier’s long-term borrowings decreased as a result of the floating rate terms of the borrowings. In 2008, the average rate paid on other borrowings decreased 299 basis points to 4.66%. The Company’s FHLB advances arein 2008 were fixed rate debt and thus decreased only as a result of payments and maturities of higher rate advances.
PREMIER FINANCIAL BANCORP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
December 31, 2008
The 36 basis point increase in the average rate paid on deposits in 2007 was primarily the result of a 71 basis point increase in the average rate paid on certificates of deposit and other time deposits, which made up 50.1% of the total average interest bearing liabilities in 2007. During 2007, Premier was able to offset some of the increase in rates paid on deposits by long-term debt refinancing actions taken in 2006 and prepaying approximately $2.1 million of amortizing FHLB advances in the first quarter of 2007. Also in 2006, Premier refinanced the remaining $15.5 million of its 9.75% Trust Preferred Securities with variable rate bank borrowings as discussed in more detail below. Due to alternative sources of investment and an ever increasing sophistication of customers in funds management techniques to maximize return on their money, competition for funds has become more intense. Other financial institutions that compete in local markets with Premier that have a need to increase liquidity offer special above market rate deposit products to attract additional funds. Premier's banks periodically offer special rate products to retain their deposit base or attract additional deposits.
Premier’s deposits, on average, increased by $125.3 million or 22.7% in 2009 following a $103.3 million or 23.0% increase in 2008 following a $7.4from 2007 average deposits. The increase in 2009 average deposits is largely the result of acquisition activity. The acquisition of Abigail Adams in October 2009 added $76.4 million in average deposits in 2009, while the full year impact of including Traders and Citizens First in the organization since the end of April 2008 added another $37.9 million to 2009 average deposits. The remaining $11.1 million or 1.7%2.0% increase in 2007 from 2006 average deposits was largely due to a $7.3 million or 2.9% increase in average certificates of deposit and other time deposits, a $2.2 million or 3.3% increase in average savings deposits and a $3.7 million or 3.9% increase in average non-interest bearing deposits. These increases more
PREMIER FINANCIAL BANCORP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
December 31, 2009
than offset the $2.1 million or 1.5% decrease in average money market and other interest bearing transaction oriented deposits. Even as Premier reduced the rates paid on its deposit products, the West Virginia and Ohio banks were successful in marketing their services to local customers and increased their average deposits outstanding. The increase in 2008 average deposits was largely due to the $97.9 million of average deposits from the acquisitions of Traders and Citizens First. The remaining $5.3 million or 1.2% increase in average deposits was largely due to a $2.3 million or 3.1% increase in non-interest bearing deposits, a $1.5 million or 2.9% increase in savings deposits and a $1.2 million increase in money market and other interest bearing transaction oriented deposits.
In 2009, average non-interest bearing deposits increased largely due to acquisition activity. In 2009, average non-interest bearing deposits totaled $121.0 million, a $26.9 million or 28.5% increase from the average in 2008. This follows a $19.6 million or 26.3% increase in average non-interest bearing deposits in 2008 when compared to 2007. The increase in 20072009 includes $14.9 million of average non-interest bearing deposits was from a combinationthe acquisition of a $14.1Abigail Adams and an additional $8.3 million increase in average certificatesfrom the full year impact of deposit and other time deposits plus a $1.7 million increase in non-interest bearing deposits. These increases more than offset a $9.2 million decrease in average NOW and money market deposits. During 2007, as rates paid on certificates of deposits increased, particularly short-term certificates of deposit, customers reallocated their funds from lower yielding transactional deposits such as NOW and money market accounts to these short-term certificates of deposit.
In addition, some public fund and tax-exempt organization deposits were reestablished as repurchase agreements in 2006 and again in 2008. Average repurchase agreements increased by $4.0 million or 30.5% in 2008 following a $3.6 million or 37.5% increase in 2007 over 2006 average repurchase agreements. Also, in both 2007 and 2008, the growth in deposits has been dampened by a decline in deposits at Farmers Deposit Bank. In 2007, average deposits at Farmers Deposit Bank declined by $3.3 million, while in Premier’s other markets, deposits, on average, increased by $10.8 million or 2.8%. In 2008, average deposits at Farmers Deposit Bank declined by $1.7 million, while in Premier other markets, deposits, on average, increased by $7.0 million or 1.8% in 2008, excluding the acquisitions ofincluding Traders and Citizens First. Farmers Deposit Bank faces stiff competition for funds from local competitors who have paid higher than market rates forExcluding the certificates of deposit.
In 2008,acquisitions, average non-interest bearing deposits continued to increase, surpassing 2007 average non-interest bearing depositsincreased by $19.6$3.7 million or 26.3%.3.9% in 2009 as increases were recorded at each of the affiliate banks except Farmers Deposit Bank. The increase in 2008 includes the $17.3 million of average non-interest bearing deposits from the acquisitions of Traders and Citizens First. Excluding these deposits, average non-interest bearing deposits still increased by
PREMIER FINANCIAL BANCORP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
December 31, 2008
$2.3 $2.3 million or 3.1% in 2008. This follows a $1.7 million or 2.4% increase in average non-interest bearing deposits in 2007 when compared to 2006. Since no interest is paid on these deposits, an increase in non-interest bearing deposits helps to increase Premier's net interest margin and its profitability. Non-interest bearing deposits are more susceptible to withdrawal and therefore may provide challenges to maintaining adequate liquidity. (See the additional discussion on liquidity below.) However, Premier’s approach to community banking and friendly customer service has resulted in increases in average non-interest bearing deposits in each of the past sixseven years.
In 2009, average interest bearing deposits increased by $98.5 million or 21.5%. The increase was largely due to the $61.5 million of average interest bearing deposits from the acquisition of Abigail Adams, and an additional $29.6 million increase from the full year impact of including Traders and Citizens First. Excluding the acquisitions, average interest bearing deposits increased by $7.4 million or 1.6% in 2009, as increases in average savings deposits and average certificates of deposit and other time deposits more than offset a decrease in average money market and other transaction oriented deposits. In 2008, average interest bearing deposits increased by $83.6 million or 22.3%. The increase was largely due to the $80.6 million of average interest bearing deposits from the acquisitions of Traders and Citizens First. The remaining $3.0 million increase in average interest-bearing deposits in 2008 was primarily from an increase in average savings deposits and average money market and other transaction oriented deposits. Due to the significant decrease in rates paid on certificates of deposit during 2008, customers are takingseemed to take a “wait-and-see” approach and arewere not willing to commit their funds for a longer-term low-yielding certificate of deposit. Instead, the trend has beenin 2008 was to keep their deposits readily accessible by placing the funds in savings accounts and transaction oriented interest-bearing accounts. In 2007, averageDuring 2009, customers seemed to resign themselves to the
PREMIER FINANCIAL BANCORP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
December 31, 2009
long-term nature of the low interest bearing deposits increased by $5.6 million or 1.5%. The increase was primarilyrate environment resulting from an increase in averagethe Federal Reserve’s national monetary policy and moved funds back into certificates of deposit andto gain some yield over other time deposits asdeposit products. Most customers sought outare still keeping their maturity choices short in order to take advantage of possible higher yielding short-term “special “rates.interest rates in the future. While offering some “special” certificate of deposit rates in 20072009 to remain competitive, Premier continued to focus on building its base of customer relationships by offering more convenient electronic banking products to its non-interest bearing deposit customers.
In order to help maintain their liquidity and reduce their reliance on short-term borrowings, prior to their acquisition by Premier did realizethe two subsidiary banks of Abigail Adams participated in a shift in its interest bearing deposits from lower cost interest bearing transaction accounts tonetwork of approved banks that exchange customer certificates of deposit called the Certificate of Deposit Account Registry Service program, also known as CDARS. This program allows local customers movedto open certificates of deposit in amounts greater than the standard FDIC insurance coverage limits at their local bank and still maintain FDIC insurance coverage on the deposits as the local bank enters the certificates of deposit into a national exchange network which provides FDIC insurance coverage by opening accounts in the customer’s name at other participating banks in the network in increments less than the standard FDIC coverage limits. Other network members do the same thing with their customers’ funds, and a sophisticated matching system enables network members to take advantageexchange funds with each other on a dollar-for-dollar basis. To participate in the program, banks subject to a written agreement with their primary regulator, such as Adams National, are required to get permission from the FDIC. While Adams National was a participant in the network and currently has deposits from the CDARS network, the bank has been denied permission by the FDIC to continue to open new or renew existing CDARS deposits while it is subject to its written agreement with the OCC, its primary regulator. As the CDARS deposits mature, local customers may or may not renew their certificates of deposit with Adams National. Under long existing FDIC rules for banks owned by the same holding company (under “common control”), such as each of Premier’s Affiliate Banks, each bank under common control is obligated to guarantee the liquidity of deposit funds over and above the FDIC coverage limits at each of the rising interest rates paid on these certificates. Theother banks under the same common control. In other words, each of Premier’s Affiliate Banks are obligated to provide liquidity for each of the other Premier Affiliate Banks to the extent it may be needed for deposit withdrawals. Premier believes that knowledge of this guarantee may result was a 51 basis point increasein some of the maturing CDARS related deposits at Adams National to renew their certificate of deposit outside of the CDARS program until Adams National once again obtains permission to actively participate in the average rate paid on interest bearing deposits in 2007. However, Premier also realized an increase in its average savings deposits in 2007.CDARS network.
The following table provides information on the maturities of time deposits of $100,000 or more at December 31, 2008.
| MATURITY OF TIME DEPOSITS $100,000 OR MORE | |
| December 31, 2008 | |
| (Dollars in thousands) | |
| | | | |
| Maturing 3 months or less | | $ | 12,493 | |
| Maturing over 3 months | | | 13,109 | |
| Maturing over 6 months | | | 21,739 | |
| Maturing over 12 months | | | 23,804 | |
Total | | $ | 71,145 | |
| | | | | |
PREMIER FINANCIAL BANCORP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
December 31, 20082009
The following table provides information on the maturities of time deposits of $100,000 or more at December 31, 2009.
| MATURITY OF TIME DEPOSITS $100,000 OR MORE | |
| December 31, 2009 | |
| (Dollars in thousands) | |
| Maturing 3 months or less | | $ | 33,225 | |
| Maturing over 3 months | | | 31,604 | |
| Maturing over 6 months | | | 53,154 | |
| Maturing over 12 months | | | 31,907 | |
Total | | $ | 149,890 | |
| | | | | |
Other funding sources for Premier include short and long-term borrowings. Premier's short-term borrowings primarily consist of securities sold under agreements to repurchase with commercial, public entity and tax exempt organization customers. These are short-term non-FDIC insured deposit-like products that are secured by the pledging of investment securities in Premier’s investment portfolio or by purchasing insurance through the Federal Home Loan Bank (FHLB). Also included in short-term borrowings are federal funds purchased from other banks and overnight borrowings from the FHLB or the Federal Reserve Bank (FRB) discount window. These short-term borrowings fluctuate depending on near term funding needs and as part of Premier's management of its asset/liability mix. In 2009, average short-term borrowings decreased by $595,000 or 3.4%, even as the acquisition of Abigail Adams added $3.2 million of short-term borrowings in the form of repurchase agreements. Excluding the acquisition of Abigail Adams, average short-term borrowings decreased by $3.8 million or 21.9% in 2009 as public entity customers withdrew a portion of their funds in repurchase agreements to spend them on designated public projects. In 2008, short-term borrowings averaged $17.3 million, up $4.1 million or 31.3% from the average in 2007. In 2007, short-term borrowings averaged $13.2 million, up $3.6 million or 37.6% from the average in 2006. The increase in both years2008 is largely due to an increase in repurchase agreements which were newly offered by two of Premier’s subsidiary banks late in 2006.
Long-term borrowings consist of FHLB borrowings by Premier's banks and other borrowings by the parent holding company and, prior to 2007, debt issued in the form of subordinated debentures to an unconsolidated trust subsidiary.company. FHLB advances, on average, increased by $2.5 million or 52.0% in 2009 as the acquisition of Abigail Adams added $2.7 million of average FHLB advances. Excluding that acquisition, FHLB advances declined by 11.9%$226,000 or $640,0004.8% in 2008, following a 31.4% or $2.5 million decrease in 2007. The decrease in 2008 is2009, largely due to regularly scheduled principal payments plus additional penalty free prepayments as permitted to be made by the FHLB. In 2008, average FHLB advances declined by 11.9% or $640,000 compared to 2007. The decrease in 2007 was the result of a first quarter 2007 prepayment of $2.1 million of amortizing FHLB advances in an effort2008 is again largely due to reduce Premier’s cost of funds rate. These advances had contractual fixed rates between 5.30% and 5.60%, averaging 5.46%. In addition to the prepayment in the first quarter of 2007, Premier made all of itsregularly scheduled principal payments in 2007 and took advantage ofplus additional penalty free prepayment opportunitiesprepayments as they became available.permitted to be made by the FHLB. Premier uses fixed rate FHLB advances from time-to-time to fund certain residential and commercial loans as well to maximize investment opportunities as part of its interest rate risk management. At December 31, 2008,2009, FHLB advances totaled $7.6$14.9 million which included $3.0$10.5 million borrowed on an overnight basis.of long-term FHLB borrowing acquired from the purchase of Abigail Adams. This borrowing matures in the first quarter of 2012. The remaining $4.6$4.4 million of amortizing FHLB advances had repayment schedules from seventeenfive to forty-twothirty-one months with $4.0 million maturing in May 2010.
PREMIER FINANCIAL BANCORP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
December 31, 2009
In 2006, Premier refinanced the remaining $15.7 million of its 9.75% Junior Subordinated Deferrable Interest Debentures ("Subordinated Debentures") that were due in 2027. The refinancing was accomplished using two separate bank borrowings at the parent company and $2.2 million of cash held by the parent in its subsidiary banks.
On January 31, 2006, Premier borrowed $7.0 million from First Guaranty Bank in Hammond, Louisiana under a promissory note bearing interest floating daily at the “Wall Street Journal” prime rate and requiring monthly principal payments of $50,000 until maturity on September 28, 2017. The note is secured by a pledge of Premier’s 100% interest in Boone County Bank. The proceeds of this note were used to redeem $7.0 million of the Subordinated Debentures as of January 31, 2006.Louisiana. On April 30, 2008, Premier refinanced the remaining $2.6 million of this note and borrowed an additional $9.0 million which was used to fund the cash needed to purchase Traders. The $11.6 million note, dated April 30, 2008, bearsbore interest floating daily at the “Wall Street Journal” prime rate (the “Index”) minus 1.00% and requiring 59 monthly principal payments of $50,000 and one
PREMIER FINANCIAL BANCORP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
December 31, 2008
final payment of $8.6 million due at maturity on April 30, 2013. If the Index isfell between 5.00% and 6.00%, the interest on the note will bewas 5.00%. If the Index fallsfell below 5.00%, then the interest on the note willwould float with the Index. On December 31, 2009, Premier converted the borrowing to a fixed rate of interest of 3.96% per annum through its remaining maturity date on April 30, 2013. The note is secured by a pledge of Premier’s 100% interest in Boone County Bank (a wholly owned subsidiary) under Commercial Pledge Agreement dated April 30, 2008.
On November 10, 2006, Premier borrowed $6.5 million from The Bankers’ Bank of Kentucky, Inc. of Frankfort, Kentucky (“Bankers’ Bank”) under a term note bearing interest floating daily at the “Wall Street Journal”JP Morgan Chase Co. prime rate minus 1.00% and requiring 83 monthly principal and interest payments of $100,000 and a final payment of any balance due at maturity on November 9, 2013. The note is secured by a pledge of Premier’s 100% interest in Citizens Deposit Bank and Trust, Inc. and Premier’s 100% interest in Farmers-Deposit Bank, Eminence, Kentucky.Kentucky ("Farmers Deposit Bank"). On December 22, 2008, the Company executed and delivered to Bankers’ Bank a modification agreement whereby the interest rate would not fall below 3.00% or exceed 6.00% for the remaining term of the Note. The current interest rate on the Term Note is 3.00%.
On October 30, 2009, Premier received $2.4 million from the Bankers’ Bank as a draw on the Company’s $4.5 million line of credit under a Promissory Note whereby Premier may request and receive monies from Bankers’ Bank from time to time. The proceeds were used to refinance a portion of the long-term debt assumed from the Abigail Adams holding company. The right to request and receive monies from Bankers’ Bank under the Promissory Note terminates on December 11, 2010. Any outstanding principal balance under this Promissory Note bears an annual interest rate floating daily at the JP Morgan Chase Co. prime rate, with an interest rate floor of 4.00%. Interest on the Promissory Note is payable quarterly and at maturity. Any outstanding principal amount loaned to Premier under this Promissory Note, and not previously repaid, is due on December 11, 2010. The Promissory Note is secured by the same collateral as the $6.5 million Term Note. At December 31, 2009, the $2.4 million was still outstanding on the Promissory Note. In 20082009 and 2007,2008, Premier made all scheduled principal and interest payments on both notes as well as limited prepayments on the borrowing from First Guaranty Bank. For more information on other borrowings, see Note 1011 to the consolidated financial statements. | PAYMENTS DUE ON CONTRACTUAL OBLIGATIONS | |
| December 31, 2008 | |
| (Dollars in thousands) | |
| | | | |
| | | Total | | | Less than one year | | | 1-3 years | | | 3-5 years | | | More than five years | |
| | | | | | | | | | | | | | | | |
| Federal Home Loan Bank advances | | $ | 7,607 | | | $ | 3,178 | | | $ | 4,372 | | | $ | 57 | | | $ | 0 | |
| Other borrowed funds | | | 15,560 | | | | 1,674 | | | | 3,447 | | | | 10,439 | | | | 0 | |
| Operating lease obligations | | | 608 | | | | 157 | | | | 252 | | | | 181 | | | | 18 | |
| Data and item processing contracts* | | | 4,587 | | | | 2,527 | | | | 2,060 | | | | 0 | | | | 0 | |
Total | | $ | 28,362 | | | $ | 7,536 | | | $ | 10,131 | | | $ | 10,677 | | | $ | 18 | |
| | | | | | | | | | | | | | | | | | | | | |
| * Data and item processing contractual obligations are estimated using the average billing for the last three months of 2008. | |
71
MANAGEMENT’S DISCUSSION AND ANALYSIS
December 31, 2009
On December 20, 2004, Premier entered into a sixty-three month contract with Fiserv Solutions, Inc. (Fiserv) whereby Fiserv will provide data processing and item processing services to Premier. Conversions by Traders and Citizens First bank to Fiserv systems began in early August, 2008 and were completed by the end of October, 2008. The contract is scheduled to end in October 2010. The two subsidiary banks acquired with Abigail Adams have contracts with Fiserv for data processing and item processing services through mid-2012. Based upon the average billings of the last three months of 20082009, the estimated payments to Fiserv for these services under existing contracts will be approximately $1,845,000$2.4 million per year beginning in 2009.2010. Actual results may vary depending upon the number and type of accounts actually processed and future customer activity.
The main office and branch locations of Adams National in and around the Washington DC metro area are all leased under various noncancelable operating leases. These noncancelable operating leases are subject to renewal options under various terms. Some leases provide for periodic rate adjustments based on cost-of-living index changes. The leases have terms ranging from 2012 through 2016. Future minimum payments under the operating leases are included in the table below.
| PAYMENTS DUE ON CONTRACTUAL OBLIGATIONS | |
| December 31, 2009 | |
| (Dollars in thousands) | |
| | | | |
| | | Total | | | Less than one year | | | 1-3 years | | | 3-5 years | | | More than five years | |
| | | | | | | | | | | | | | | | |
| Federal Home Loan Bank advances | | $ | 14,937 | | | $ | 4,422 | | | $ | 10,515 | | | $ | 0 | | | $ | 0 | |
| Other borrowed funds | | | 16,027 | | | | 4,107 | | | | 3,515 | | | | 8,405 | | | | 0 | |
| Operating lease obligations | | | 4,051 | | | | 1,265 | | | | 2,284 | | | | 415 | | | | 87 | |
| Data and item processing contracts* | | | 3,860 | | | | 2,556 | | | | 1,304 | | | | 0 | | | | 0 | |
Total | | $ | 38,875 | | | $ | 12,350 | | | $ | 17,618 | | | $ | 8,820 | | | $ | 87 | |
| | | | | | | | | | | | | | | | | | | | | |
| * Data and item processing contractual obligations are estimated using the average billing for the last three months of 2009. | |
PREMIER FINANCIAL BANCORP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
December 31, 20082009
Asset/liability management is a means of maximizing net interest income while minimizing interest rate risk by planning and controlling the mix and maturities of interest related assets and liabilities. Premier has established an Asset/Liability Management Committee (ALCO) for the purpose of monitoring and managing interest rate risk and to evaluate investment portfolio strategies. Interest rate risk is the earnings variation that could occur due to changes in market interest rates. The Board of Directors has established policies to monitor and limit exposure to interest rate risk. Premier monitors its interest rate risk through the use of an earnings simulation model developed by an independent third party to analyze net interest income sensitivity.
The earnings simulation model uses assumptions, maturity patterns, and reinvestment rates provided by Premier and forecasts the effect of instantaneous movements in interest rates of both 100 (1.00%) and 200 (2.00%) basis points, but never below zero. The most recent earnings simulation model projects that net interest income would increase by approximately 1.3%1.9% over the projected stable rate net interest income if interest rates rise by 100 basis points over the next year. Conversely, the simulation projects an approximate 1.7%0.1% decrease in net interest income if interest rates fall by 100 basis points over the next year. Within the same time frame, but assuming a 200 basis point movement in interest rates, the simulation projects that net interest income would increase by 2.5%3.1% over the projected stable rate net interest income in a rising rate scenario and would decrease by 3.8%0.8% in a falling rate scenario. Under both the 100 and 200 basis point simulations, the percentage changes in net interest income are within Premier's ALCO guidelines.
The model simulation calculations of present value have certain acceptable shortcomings. The discount rates and prepayment assumptions utilized are based on estimated market interest rate levels for similar loans and securities nationwide. The unique characteristics of Premier's loans and securities may not necessarily parallel those assumed in the model simulations, and therefore, actual results could likely result in different discount rates, prepayment experiences and present values. The discount rates used for deposits and borrowings are based upon available alternative types and sources of funds which may not necessarily be indicative of the present value of Premier's deposits and borrowings. Premier's deposits have customer relationship advantages that are difficult to simulate. A higher or lower interest rate environment will most likely result in different investment and borrowing strategies by Premier which would be designed to further mitigate any negative effects on the value of, and the net interest earnings generated on Premier's net assets.
PREMIER FINANCIAL BANCORP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
December 31, 20082009
The following table presents summary information about the simulation model's interest rate risk measures and results.
| | | Year-end 2008 | | | Year-end 2007 | | | ALCO Guidelines | | |
| | | | | | | | | | | | Year-end 2009 | | | Year-end 2008 | | | ALCO Guidelines | |
| Projected 1-year net interest income | | | | | | | | | | | | | | | | | | |
-100 bp change vs. base rate | | -1.7 | % | | -2.6 | % | | 5 | % | | | -0.1 | % | | | -1.7 | % | | | 5 | % |
+100 bp change vs. base rate | | 1.3 | % | | 2.5 | % | | 5 | % | | | 1.9 | % | | | 1.3 | % | | | 5 | % |
| Projected 1-year net interest income | | | | | | | | | | | | | | | | | | | | | | | | |
-200 bp change vs. base rate | | -3.8 | % | | -2.7 | % | | 10 | % | | | -0.8 | % | | | -3.8 | % | | | 10 | % |
+200 bp change vs. base rate | | 2.5 | % | | 4.7 | % | | 10 | % | | | 3.1 | % | | | 2.5 | % | | | 10 | % |
Liquidity
Liquidity is the ability to satisfy demands for deposit withdrawals, lending commitments, and other corporate needs. Premier's liquidity is based on the stable nature of consumer core deposits held by the banking subsidiaries. Likewise, additional liquidity is available from holdings of investment securities and short-term investments which can be readily converted into cash. Furthermore, Premier's banks continue to have the ability to attract short-term sources of funds such as federal funds and repurchase agreements.
Premier generated $10.0$5.1 million of cash from operations in 2008,2009, which compares to $10.0 million in 2008 and $9.4 million in 20072007. As illustrated in the Consolidated Statement of Cash Flows, the decrease in 2009 cash from operations was primarily the result of non-cash generating income from the gain on the acquisition of subsidiary and $5.4 millionchanges in 2006.other assets and liabilities. The increase in 2008 over 2007 was primarily the result of an increase in net income and a higher amount of cash received from the sale of mortgage loans in the secondary market. The increase in 2007 over 2006 was primarily the result of an increase in net income over 2006, a decrease in negative provisions for loan losses and cash received from the sale of mortgage loans in the secondary market. Total cash from operations along with proceeds from the sale and maturity of securities and the repayment of loans were used to purchase securities, satisfy deposit withdrawals, fund new loans and reduce outstanding debt during those years. In 2006, $5.9 million of cash was used in investing activities primarily to fund loan growth and in 2007, $5.0 million of cash was used in investing activities, again to fund loan growth but to also increase federal funds sold. In 2008, $15.0 million of cash was used in investing activities, again funding loan growth, purchasing participation loans from other banks, and purchasing the Traders and Citizens First subsidiaries. In 2009, $23.1 million of additional cash was generated from investing activities largely from the cash acquired via the acquisition of Abigail Adams and the net repayment of loans during the year. In addition to the $5.1 million of cash from operations in 2009, Premier generated $11.3 million in additional cash from financing activities, primarily due the net increase in deposits, the sale of Series A Preferred Stock to the U.S. Treasury under the TARP Capital Purchase Program and from additional borrowings. Some of these funds were used to repay short- and long-term borrowings, pay dividends to shareholders, and satisfy withdrawals of repurchase agreements with customers. In addition to the $10.0 million of cash from operations in 2008, Premier generated $4.7 million in additional cash from financing activities, primarily due to new long-term borrowings and increases in short-term borrowings and repurchase agreements with customers. Some of these funds were used to satisfy deposit withdrawals, pay dividends to shareholders and make
PREMIER FINANCIAL BANCORP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
December 31, 2009
principal payments on borrowings. In addition to the $9.4 million of cash from operations in 2007, Premier generated $1.0 million in additional cash from financing activities, primarily due to the increase in deposits. The increase in cash from deposits was also used to satisfy the repayment of FHLB advances and other borrowed funds as well as pay dividends to shareholders. In 2006, Premier generated $1.4 million in additional cash from financing activities, primarily due to increases in deposits and
PREMIER FINANCIAL BANCORP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
December 31, 2008
repurchase agreements. Details on the sources and uses of cash can be found in the Consolidated Statements of Cash Flows in the consolidated financial statements.
At December 31, 2008,2009, the parent company had nearly $4.7$6.8 million in cash held with its subsidiary banks. This balance, along with cash dividends expected to be received from its subsidiaries, is sufficient to cover the operating costs of the parent, service its existing other debt and pay dividends to common and preferred shareholders. During 2009, the parent company generated $5.5 million of cash from operations and borrowed an additional $2.4 million. The parent company also generated $22.3 million by selling its Series A Preferred Stock to the U.S. Treasury under the TARP Capital Purchase Program. The proceeds were used to make additional capital investments in Premier’s subsidiaries to strengthen the subsidiary’s balance sheet and capital ratios and/or reduce the subsidiary’s debt. Operating cash was also used to pay $3.1 million in dividends to shareholders and to make $1.9 million in principal payments on its outstanding debt. During 2008, the parent company generated $6.3 million of cash from operations and borrowed an additional $11.6 million. The proceeds were used to fund the $14.3 million of cash paid to acquire Citizens First Bank and Traders, Bankshares, Inc., to make $4.1 million in principal payments on its outstanding debt and pay $2.6 million in dividends to shareholders. During 2007, the parent company generated $10.3 million of cash from operations and used $5.9 million to make principal payments on its outstanding debt and pay dividends to shareholders. During 2006, the parent company generated $5.1 million of cash from operations and used $4.9 million to redeem a portion of the Trust Preferred Securities outstanding, make principal payments on its outstanding other debt and pay dividends to shareholders. Also during 2006, the parent company borrowed $13.5 million which was used to redeem the remainder of the Trust Preferred Securities. Additional information on parent company cash flows and financial statements is contained in Note 2122 to the consolidated financial statements.
Capital Resources
Premier’s consolidated average equity-to-asset ratio increased to 11.94%12.19% during 2008,2009, up from 11.74%11.94% in 20072008 and 10.74%11.74% in 2006. The ratios for all three years are considered adequate for a company of Premier’s size. The increase in 2009 was largely due to the additional equity added from the sale of Series A Preferred Stock to the U.S. Treasury under the TARP Capital Purchase Program. Without this additional equity, Premier’s average equity-to-asset ratio would have still have been 11.52%, down from prior years due to the acquisition of Abigail Adams, but strengthened by additional capital from the $6.0 million retained net income generated in 2009. Also adding to capital in 2009 was a general rise in the market value of investments from a $1.5 million net unrealized gain at the end of 2008 to a $2.1 million net unrealized gain at the end of 2009. The increase in 2008 was largely due to the increase in equity from net income plus a general rise in the market value of investments from a $73,000 net unrealized gain at the end of 2007 to a $1.5 million net unrealized gain at the end of 2008. Also supporting the average equity-to-assets ratio were the combined acquisitions of Traders and Citizens First. The equity issued to acquire these two banks amounted to 11.62% of the total assets acquired, which approximates Premier’s average equity-to-asset ratio over the past three years. The increase in 2007 was largely due to the increase in net income, plus a general rise in the market value
PREMIER FINANCIAL BANCORP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
December 31, 2009
The Federal Reserve's risk-based capital guidelines and leverage ratio measure the capital adequacy of banking institutions. The risk-based capital guidelines weight balance sheet assets and off-balance sheet commitments by prescribed factors relative to credit risk, thus eliminating disincentives for holding low risk assets and requiring more capital for holding higher risk assets. At year-end 2008,2009, Premier’s risk adjusted capital-to-assets ratio was 15.3%14.6%, compared to 17.3%15.3% at December 31, 2007.2008. Both of these ratios are well above the minimum level of 8.0% prescribed for bank holding companies of Premier’s size. The leverage ratio is a measure of total tangible equity to total tangible assets, net of any related deferred taxes as permitted. Premier’s leverage ratio at December 31, 20082009 was 8.7%8.9%, compared to 9.8%8.7% at December 31, 2007.2008. Both of these ratios are above the 4.0% to 5.0% ratios recommended by the Federal Reserve. The increase in the 2009 leverage ratio was largely the result of the additional regulatory capital obtained via the sale of Series A Preferred Stock to the U.S. Treasury under the TARP Capital Purchase Program. The decrease in the risk adjusted capital-to-assets ratio is largely the result of a higher level of risk adjusted assets to total assets acquired from Abigail Adams versus Premier’s historical risk-adjusted assets to total assets. The decrease in the 2008 ratios from the prior year was primarily the result of the acquisitions of Traders and Citizens First. Their individual bank risk adjusted capital-to-asset ratios and leverage
PREMIER FINANCIAL BANCORP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
December 31, 2008
ratios were lower than Premier’s prior to the acquisition date. Furthermore, the goodwill and core deposit intangible assets recorded as part of the purchases, net of any related deferred taxes as permitted, are subtracted from Premier’s total capital to calculate the leverage ratio. The increase in the 2007 ratios was primarily the result of the net income recorded in 2007, partially offset by dividends paid to shareholders. The net result was an increase in shareholders’ equity.these ratios. Premier's capital ratios are the direct result of management's desire to maintain a strong capital position. Additional information on Premier's capital ratios and the capital ratios of its banks may be found in Note 2021 to the consolidated financial statements.
Additional information on the capital position of Premier is included in the following table.
| SELECTED CAPITAL INFORMATION | |
| (Dollars in thousands) | |
| | | As of December 31 | |
| | | 2009 | | | 2008 | | | Change | |
| | | | | | | | | | |
| Stockholders’ Equity | | $ | 128,556 | | | $ | 89,422 | | | $ | 39,134 | |
Disallowed amounts of goodwill and other intangibles | | | (31,595 | ) | | | (26,805 | ) | | | (4,790 | ) |
Other comprehensive loss related to pension plan | | | - | | | | 87 | | | | (87 | ) |
Unrealized (gain) loss on securities available for sale | | | (2,090 | ) | | | (1,634 | ) | | | (456 | ) |
| Tier I capital | | $ | 94,871 | | | $ | 61,070 | | | $ | 33,801 | |
| | | | | | | | | | | | | |
| Tier II capital adjustments | | | | | | | | | | | | |
Allowable amount of the allowance for loan losses | | | 7,569 | | | | 5,486 | | | | | |
| Total capital | | $ | 102,440 | | | $ | 66,556 | | | | | |
| | | | | | | | | | | | | |
| Total risk-weighted assets | | $ | 699,622 | | | $ | 436,023 | | | | | |
| | | | | | | | | | | | | |
| Ratios | | | | | | | | | | | | |
Tier I capital to risk-weighted assets | | | 13.56 | % | | | 14.01 | % | | | | |
Total capital to risk-weighted assets | | | 14.64 | % | | | 15.26 | % | | | | |
Leverage at year-end | | | 8.90 | % | | | 8.69 | % | | | | |
PREMIER FINANCIAL BANCORP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
December 31, 2009
The primary source of funds for dividends paid by Premier is the dividends received from its subsidiary banks. Banking regulations limit the amount of dividends that may be paid without prior approval of the regulatory agencies. Under these regulations, the amount of dividends that may be paid without prior approval in any calendar year is limited to the current year's net profits, as defined, combined with the retained net profits of the preceding two years, subject to regulatory capital requirements and additional restrictions more fully described in Note 2021 to the consolidated financial statements. During 2009,2010, Premier's banks could, without prior approval, declare and pay to Premier dividends of approximately $2.4$2.5 million plus any 20092010 net profits retained through the date of declaration by Ohio River Bank, Boone County Bank, First Central Bank, TradersConsolidated Bank Inc.& Trust and Citizens Deposit Bank. In 2007,2009, Farmers Deposit Bank requested and received approval from its primary regulators to pay a $2.5 million dividend in December 2007.March 2009. This amount was substantially higher than the bank’s prior two years of reported net income. As such, Farmers Deposit Bank must continue to request approval for up to two years beyond DecemberMarch 31, 20072009 to pay any future dividends to the parent company out of its current earnings. Similarly, Traders will be required to request approval to pay any dividends for up to two years depending upon its future net income performance. Adams National is required to obtain regulatory approval to pay dividends to Premier as part of its written agreement with the OCC.
Additional informationPursuant to the terms of Premier’s participation in the TARP Capital Purchase Program, Premier’s ability to declare or pay dividends on any of its common shares is limited. Specifically, Premier is unable to declare dividend payments on common shares if we are in arrears on the capital positionpayment of dividends on the Series A Preferred Shares. Further, Premier is included innot permitted to increase dividends on its common shares above the following table.amount of the last quarterly cash dividend per share declared prior to October 14, 2008 ($0.11 per share) without the U.S. Treasury’s approval until October 2, 2012, unless all of the Series A Preferred Shares have been redeemed or transferred by the U.S. Treasury to unaffiliated third parties.
| SELECTED CAPITAL INFORMATION | |
| (Dollars in thousands) | |
| | | As of December 31 | |
| | | 2008 | | | 2007 | | | Change | |
| | | | | | | | | | |
| Stockholders’ Equity | | $ | 89,422 | | | $ | 67,389 | | | $ | 22,033 | |
Disallowed amounts of goodwill and other intangibles | | | (26,805 | ) | | | (15,816 | ) | | | (10,989 | ) |
Other comprehensive loss related to pension plan | | | 87 | | | | 0 | | | | 87 | |
Unrealized (gain) loss on securities available for sale | | | (1,634 | ) | | | (73 | ) | | | (1,561 | ) |
| Tier I capital | | $ | 61,070 | | | $ | 51,500 | | | $ | 9,570 | |
| | | | | | | | | | | | | |
| Tier II capital adjustments | | | | | | | | | | | | |
Allowable amount of the allowance for loan losses | | | 5,486 | | | | 4,038 | | | | | |
| Total capital | | $ | 66,556 | | | $ | 55,538 | | | | | |
| | | | | | | | | | | | | |
| Total risk-weighted assets | | $ | 436,023 | | | $ | 320,581 | | | | | |
| | | | | | | | | | | | | |
| Ratios | | | | | | | | | | | | |
Tier I capital to risk-weighted assets | | | 14.01 | % | | | 16.06 | % | | | | |
Total capital to risk-weighted assets | | | 15.26 | % | | | 17.32 | % | | | | |
Leverage at year-end | | | 8.69 | % | | | 9.77 | % | | | | |
PREMIER FINANCIAL BANCORP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
December 31, 20082009
INCOME STATEMENT ANALYSIS
Net Interest Income
Net interest income, the amount by which interest generated from earning assets exceeds the expense associated with funding those assets, is Premier's most significant component of earnings. Net interest income on a fully tax-equivalent basis was $26.2$31.3 million in 2008,2009, up 16.5%19.4% from the $22.5$26.2 million earned in 20072008 which follows a 4.4%16.5% increase in 20072008 from 2006.2007. When net interest income is presented on a fully tax-equivalent basis, interest income from tax-exempt earning assets is increased by the amount equivalent to the federal income taxes which would have been paid if this income were taxable at the statutory federal tax rate of 34% for companies of Premier's size. The increase in net interest income in 2009 is largely due to the $4.4 million of fully tax-equivalent net interest income from the acquisition of Abigail Adams and the $1.8 million of additional fully tax-equivalent net interest income from the inclusion of Traders and Citizens First during the first four months in 2009 versus only since April 30, in 2008. The remaining Premier affiliate banks realized a $1.1 million or 4.4% decrease in net interest income in 2009, largely due to decreases in interest income from loans, investments and federal funds sold. The decrease in interest income was partially offset by decreases in interest expense on deposits, short-term borrowings and long-term debt.
As shown in the Rate Volume Analysis table below, increases in the volume of earning assets such as loans, investments and federal funds sold primarily due to the acquisitions of Abigail Adams, Traders and Citizens First increased Premier’s interest income by $8.7 million. This increase was offset by a $5.3 million decrease in interest income on those earning assets, largely due to the decline in yields earned on the loan portfolio, investment securities and federal fund sold. Also shown in the table below, interest expense on deposits increased by $6.7 million in 2009, due to a higher volume of certificates of deposit, as well as NOW and money market deposit accounts plus savings accounts. This increase in the volume of interest bearing deposits is largely due to deposits from the acquisitions of Abigail Adams, Traders and Citizens First. Interest expense in 2009 decreased slightly due to lower average volumes of short-term borrowings and other borrowings. The $6.7 million of additional interest expense in 2009 from the increase in the volume of average interest bearing liabilities was more than offset by the $8.4 million decrease in interest expense due to decreases in the rates paid on deposits, and short-term borrowings and long-term borrowings. The combined effect was to increase net interest income by $5.1 million for the year.
The increase in net interest income in 2008 is largely due to the $4.2 million of fully tax-equivalent net interest income from the acquisitions of Traders and Citizens First. The remaining Premier affiliate banks realized a $513,000, or 2.3% decrease in net interest income in 2008. This decrease in net interest income in 2008 is largely due to a decrease in interest income from loans and federal funds sold partially offset by an increase in interest income on investments. The decrease in interest income was significantly offset, however, by decreases in interest expense on deposits, short-term debt and long-term debt.
As shown in the Rate
PREMIER FINANCIAL BANCORP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
December 31, 2009
Volume Analysis table below, increases in the volume of earning assets such as loans, investments and federal funds sold primarily due to the acquisitions of Traders and Citizens First increased Premier’s interest income by $6.5 million. This increase was offset by a $3.5 million decrease in interest income on those earning assets largely due to the decline in yields earned on the loan portfolio and federal fund sold. Also shown in the table below, interest expense on deposits increased by $1.3 million in 2008 due to a higher volume of NOW and money market deposit accounts plus certificates of deposit. This increase in volume interest bearing deposits is largely due to deposits from the acquisitions of Traders and Citizens First. Interest expense in 2008 increased further still due to higher average volumes of short-term borrowings and other borrowings. The $1.8 million of additional interest expense in 2008 from the increase in the volume of average interest bearing liabilities was more than offset by the $2.5 million decrease in interest expense due to decreases in the rates paid on deposits, short-term borrowings and long-term borrowings. The combined effect was to increase net interest income by $3,710,000 for the year.
| RATE VOLUME ANALYSIS OF CHANGES IN NET INTEREST INCOME | |
| (Dollars in thousands on a tax equivalent basis) | |
| | | 2009 vs 2008 | | | 2008 vs 2007 | |
| | | Increase (decrease) due to change in | | | Increase (decrease) due to change in | |
| | | Volume | | | Rate | | | Net Change | | | Volume | | | Rate | | | Net Change | |
| Interest income*: | | | | | | | | | | | | | | | | | | |
Loans | | $ | 6,767 | | | $ | (2,273 | ) | | $ | 4,494 | | | $ | 4,643 | | | $ | (2,208 | ) | | $ | 2,435 | |
Investment securities | | | 2,086 | | | | (2,450 | ) | | | (364 | ) | | | 1,763 | | | | (37 | ) | | | 1,726 | |
Federal funds sold | | | (144 | ) | | | (580 | ) | | | (724 | ) | | | 96 | | | | (1,177 | ) | | | (1,081 | ) |
Deposits with banks | | | 20 | | | | (2 | ) | | | 18 | | | | 25 | | | | (42 | ) | | | (17 | ) |
Total interest income | | $ | 8,729 | | | $ | (5,305 | ) | | $ | 3,424 | | | $ | 6,527 | | | $ | (3,464 | ) | | $ | 3,063 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Interest expense: | | | | | | | | | | | | | | | | | | | | | | | | |
Deposits | | | | | | | | | | | | | | | | | | | | | | | | |
NOW and money market | | $ | 280 | | | $ | (779 | ) | | $ | (499 | ) | | $ | 306 | | | $ | (950 | ) | | $ | (644 | ) |
Savings | | | 82 | | | | (213 | ) | | | (131 | ) | | | (16 | ) | | | 13 | | | | (3 | ) |
Certificates of deposit | | | 6,368 | | | | (7,293 | ) | | | (925 | ) | | | 977 | | | | (673 | ) | | | 304 | |
Short-term borrowings | | | (8 | ) | | | (104 | ) | | | (112 | ) | | | 238 | | | | (308 | ) | | | (70 | ) |
Other borrowings | | | (45 | ) | | | 36 | | | | (9 | ) | | | 355 | | | | (534 | ) | | | (179 | ) |
FHLB borrowings | | | 28 | | | | (17 | ) | | | 11 | | | | (40 | ) | | | (15 | ) | | | (55 | ) |
Total interest expense | | $ | 6,705 | | | $ | (8,370 | ) | | $ | (1,665 | ) | | $ | 1,820 | | | $ | (2,467 | ) | | $ | (647 | ) |
| Net interest income* | | $ | 2,025 | | | $ | 3,064 | | | $ | 5,089 | | | $ | 4,707 | | | $ | (997 | ) | | $ | 3,710 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
(*) Fully taxable equivalent using the rate of 34% Note – Changes to rate/volume are allocated to both rate and volume on a proportional dollar basis | |
The increase inAlthough net interest income dollars increased in 2007 is largely due2009, Premier’s net interest margin decreased as the yield on earning assets decreased more than the decrease in rates paid on interest bearing liabilities. In 2009, the yield earning on Premier’s loan portfolio decreased 63 basis points to an increase in interest income from loans, investments and6.50% while the yield on federal funds sold partially offset by an increase in interest expensedecreased 189 basis points to 0.08% and the yield earned on deposits. As shown in the Rate Volume Analysis table below, increases in the yields on loans, investments, and other earnings assets increased Premier’s interest income by $1.6 million in 2007. This increase was complemented by a $494,000 increase in interest income due to the higher volume of average loans outstanding and a $594,000 increase in interest income due to the higher volume of average federal funds sold outstanding in 2007. Interest income wasinvestment portfolio decreased by $301,000, however, due75 basis points to a lower volume of average investment securities outstanding. Also shown in the table below, interest expense on deposits increased by $2.0 million, $1.5 million due to higher rates paid, primarily on certificates of deposit, and $0.53.76%. The net
PREMIER FINANCIAL BANCORP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
December 31, 20082009
millionresult on all earning assets was to decrease the yield by 65 basis points to 5.46% in 2009, down from the 6.11% earned in 2008 and the 6.87% earned in 2007. Similarly, in 2009 Premier decreased the average rate paid on its deposits by 69 basis points as market deposit rates continued to fall throughout the year. The average rate paid on certificates of deposit decreased the most, at 98 basis points, while interest bearing transaction accounts decreased on average by 44 basis points and savings accounts decreased by 25 basis points. Just as deposits rates fell during 2009, the rates Premier paid on its short- and long-term borrowings also fell. Premier was able to lower the rates paid on its short-term borrowings, primarily customer based repurchase agreements, by 62 basis points to 0.83%. Due to the relatively low 3.25% “prime” lending rate during 2009, the rate Premier paid on its long-term borrowings from other banks decreased 117 basis points to 3.49%, while the rates paid on the long-term FHLB borrowings at the banks decreased by 196 basis points due to the significantly lower rate on the FHLB borrowings assumed via the acquisition of Abigail Adams. The overall result of decreasing rates paid on deposits and rate decreases on short- and long-term borrowings was to decrease the overall cost of funds by 69 basis points to 1.70%, down from 2.39% in 2008 and 3.09% in 2007. As a higherresult, Premier’s net interest spread increased by 4 basis points. However, due to the larger volume of average certificates of deposit. Also increasingPremier’s interest expense was the higher averageearning assets when compared to its volume of short-terminterest bearing liabilities, the net interest margin decreased by 9 basis points to 4.12% in 2009, down from 4.21% in 2008 and other borrowings. This interest expense increase was more than offset, however, by the decrease4.42% in average FHLB borrowings and the repayment of the trust preferred securities in late 2006.
| RATE VOLUME ANALYSIS OF CHANGES IN NET INTEREST INCOME | |
| (Dollars in thousands on a tax equivalent basis) | |
| | | 2008 vs 2007 | | | 2007 vs 2006 | |
| | | Increase (decrease) due to change in | | | Increase (decrease) due to change in | |
| | | Volume | | | Rate | | | Net Change | | | Volume | | | Rate | | | Net Change | |
| Interest income*: | | | | | | | | | | | | | | | | | | |
Loans | | $ | 4,643 | | | $ | (2,208 | ) | | $ | 2,435 | | | $ | 494 | | | $ | 786 | | | $ | 1,280 | |
Investment securities | | | 1,763 | | | | (37 | ) | | | 1,726 | | | | (301 | ) | | | 767 | | | | 466 | |
Federal funds sold | | | 96 | | | | (1,177 | ) | | | (1,081 | ) | | | 594 | | | | 20 | | | | 614 | |
Deposits with banks | | | 25 | | | | (42 | ) | | | (17 | ) | | | 34 | | | | (2 | ) | | | 32 | |
Total interest income | | $ | 6,527 | | | $ | (3,464 | ) | | $ | 3,063 | | | $ | 821 | | | $ | 1,571 | | | $ | 2,392 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Interest expense: | | | | | | | | | | | | | | | | | | | | | | | | |
Deposits | | | | | | | | | | | | | | | | | | | | | | | | |
NOW and money market | | $ | 306 | | | $ | (950 | ) | | $ | (644 | ) | | $ | (71 | ) | | $ | 85 | | | $ | 14 | |
Savings | | | (16 | ) | | | 13 | | | | (3 | ) | | | 4 | | | | 59 | | | | 63 | |
Certificates of deposit | | | 977 | | | | (673 | ) | | | 304 | | | | 547 | | | | 1,412 | | | | 1,959 | |
Short-term borrowings | | | 238 | | | | (308 | ) | | | (70 | ) | | | 88 | | | | (1 | ) | | | 87 | |
Other borrowings | | | 355 | | | | (534 | ) | | | (179 | ) | | | 174 | | | | 21 | | | | 195 | |
FHLB borrowings | | | (40 | ) | | | (15 | ) | | | (55 | ) | | | (168 | ) | | | 62 | | | | (106 | ) |
Debt | | | 0 | | | | 0 | | | | 0 | | | | (380 | ) | | | (380 | ) | | | (760 | ) |
Total interest expense | | $ | 1,820 | | | $ | (2,467 | ) | | $ | (647 | ) | | $ | 193 | | | $ | 1,259 | | | $ | 1,452 | |
| Net interest income* | | $ | 4,707 | | | $ | (997 | ) | | $ | 3,710 | | | $ | 628 | | | $ | 312 | | | $ | 940 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
(*) Fully taxable equivalent using the rate of 34% Note – Changes to rate/volume are allocated to both rate and volume on a proportional dollar basis | |
AlthoughSimilarly, while net interest income dollars increased in 2008, Premier’s net interest margin decreased as the yield on earning assets decreased more than the decrease in rates paid on interest bearing liabilities. In 2008, the yield earned on Premier’s loan portfolio decreased 79 basis points to 7.13% while the yield on federal funds sold decreased 310 basis points to 1.97%. In 2008, the yield earning on the investment portfolio only decreased by 3 basis points to 4.51%. The net result on all earnings assets was to decrease the yield by 76 basis points to 6.11% in 2008, down from the 6.87% earned in 2007 and the 6.53% earned in 2006. Similarly, in 2008 Premier decreased the average rate paid on its deposits by 61 basis points as market deposit rates fell during the year. The average rate paid on certificates of deposit decreased the most, atby 79 basis points, while interest bearing transaction accounts decreased on average by 66 basis points and savings accounts decreased by 15 basis points. Just as deposit rates fell during 2008, the rates Premier paid on its short- and long-term borrowings also fell. Premier was able to lower the rates paid on its short-term borrowings, primarily customer based repurchase agreements, by
PREMIER FINANCIAL BANCORP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
December 31, 2008
98 basis points to 1.45%. Due to declines in the “prime” lending rate during 2008, the rate Premier paid on its long-term borrowings from other banks decreased 299 basis points to 4.66%. The overall result of decreasing rates paid on deposits and rate decreases on short- and long-term borrowings was to decrease the overall cost of funds by 70 basis points to 2.39%, down from 3.09% in 2007, and 2.73% in 2006.2007. As a result, Premier’s net interest spread decreased by 6 basis points. However, due to the larger volume of Premier’s interest earning assets when compared to its volume of interest bearing liabilities, the net interest margin decreased by 21 basis points, to 4.21% in 2008, down from 4.42% in 2007, and 4.32% in 2006.
In contrast to 2008, as net interest income dollars increased in 2007, Premier’s net interest margin also increased. In 2007, the yield earned on investment securities increased 63 basis points to 4.54% while the average yield on the loan portfolio increased 23 basis points to 7.92%. The yield on federal funds sold increased 8 basis points to 5.07%. The net result on all earning assets was to increase the yield 34 basis points to 6.87% in 2007, up from the 6.53% earned in 2006 and the 5.90% earned in 2005. Similarly, in 2007 Premier increased the average rate paid on its deposits by 51 basis points to remain competitive with local and national markets. The average rate paid on certificates of deposit increased the most at 71 basis points, while interest bearing transaction accounts increased on average by only 12 basis points in 2007 and savings accounts by increased 11 basis points. While the rates paid on Premier’s short-term borrowings remained virtually unchanged at 2.43%, the rates paid on other borrowings increased by 26 basis points to 7.65% and the rates paid on FHLB advances increased by 67 basis points to 6.47%. The rates paid on other borrowings increased as Premier refinanced its subordinated debt with floating prime rate and below prime rate loans in 2006 resulting in significant interest expense savings. The rates paid on FHLB advances increased as a result of the prepayment of certain amortizing advances at one affiliate bank while leaving higher rate fixed maturity advances at another bank. The overall result of increasing rates paid on deposits and rate decreases resulting from debt refinancing was to increase the overall cost of funds by 36 basis points to 3.09%, up from 2.73% in 2006 and 2.30% in 2005. As a result, Premier’s net interest spread decreased by 2 basis points, but the net interest margin increased by 10 basis points to 4.42% in 2007, up from 4.32% in 2006.2007. Further discussion of interest income is included in the section of this report entitled "Balance Sheet Analysis."
PREMIER FINANCIAL BANCORP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
December 31, 2009
Non-interest Income and Expense
Non-interest income has been and will continue to be an important factor for improving profitability. Recognizing this importance, management continues to evaluate areas where non-interest income can be enhanced. As shown in the table of Non-interest Income and Expense below, total fees and other income increased by $386,000 or 7.4% in 2009. The increase in 2009 was largely due to increases in service charges on deposit accounts and electronic banking income resulting from the acquisition of Abigail Adams and the inclusion of Traders and Citizens First for an additional first four months in 2009 versus only the eight months since their April 30, 2008 acquisition. In 2009, service charges on deposit accounts increased by $272,000 or 8.4% to $3,521,000. Approximately $191,000 of this increase was the result of adding the operations of Abigail Adams while another $185,000 was added from the inclusion of Traders and Citizens First for an additional four months in 2009. The remaining $104,000, or 3.2% decrease at the remaining affiliate banks was largely due to customers’ lower propensity to overdraft their deposit accounts. Management believes that the downturn in the economy has caused customers to more closely manage their deposit funds to find ways to save money and thus reduce their number of overdrafts. Electronic banking income, which consists of debit and credit card transaction fees, ATM fees and internet banking fees, increased $260,000, or 31.6% to $1,084,000 in 2009. Approximately $73,000 of this increase was the result of adding the operations of Abigail Adams while another $75,000 was added from the inclusion of Traders and Citizens First for an additional four months in 2009. The remaining $112,000, or 13.6% increase is due to an increasing number of customers who conduct their banking and purchasing electronically, primarily via the use of debit and ATM cards. In 2009, secondary market mortgage income (commissions and fees earned from originating and selling mortgage loans to third parties in the secondary market) decreased by $15,000, or 3.3% to $443,000. The acquisitions of Abigail Adams, Traders and Citizens First added virtually no revenue of this type in 2009. The decrease in secondary market mortgage income in 2009 reflects an industry in extreme change through-out the year. Many mortgage loan purchasers ceased buying new mortgages in 2009 or went out of business completely. Premier concentrates its efforts on selling high quality mortgage loans and routinely searches for new buyers for these loans; however, the volume of future sales may depend on factors beyond the control of the Company. The federal government, via government sponsored agencies, began buying the surplus in available secondary market mortgages but significantly increased the required documentation from the home buyers, thus complicating the process in comparison to years past. The perceived difficultly from the home buyer’s perspective had a negative impact on Premier’s secondary market business during 2009. Other non-interest income decreased by $131,000, or 19.6%, in 2009. The operations of Abigail Adams added approximately $65,000 of other non-interest income, while another $42,000 was added from the inclusion of Traders and Citizens First for an additional four months in 2009. The remaining $238,000 decrease is largely due to $150,000 of income received in 2008 for extending Premier’s ATM processing contract and lower sources of other income, such as commissions on selling credit life insurance, check cashing fees and extension and other miscellaneous loan fees.
PREMIER FINANCIAL BANCORP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
December 31, 2009
In 2008, total fees and other income increased by $575,000 or 12.4% in 2008.. The increase in 2008 was largely due to increases in service charges on deposit accounts, electronic banking income and other income resulting from the acquisitions of Traders and Citizens First. In 2008, service charges on deposit accounts increased by $511,000 or 18.7% to $3,249,000. Approximately $427,000 of this increase was the result of adding the operations of Traders and Citizens First. The remaining $84,000 or 3.1% increase was largely due to incremental increaseincreases in fee rates and growth in the number of deposit customers. Electronic banking income which consists of debit
PREMIER FINANCIAL BANCORP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
December 31, 2008
and credit card transaction fees, ATM fees and internet banking fees, increased $216,000 or 35.5% to $824,000 in 2008. Approximately $99,000 of this increase was the result of adding the operations of Traders and Citizens First. The remaining $117,000 or 19.2% increase was largely due to Premier’s conversion to a more modern banking software system in 2005. This banking software system has allowed Premier to offer more electronic banking services and made it easier for customers to conduct their banking electronically. In 2008, secondary market mortgage income (commissions and fees earned from originating and selling mortgage loans to third parties in the secondary market) decreased by $192,000 or 29.5% to $458,000. Traders and Citizens First had virtually no revenue of this type in 2008. The decrease in secondary market mortgage income in 2008 is primarily due to a significant decrease in the appetite of secondary market mortgage loan purchasers as brokers have either tightened their credit standards or have ceased buying new mortgages in an effort to avoid further exposure to sub-prime lending. Premier concentrates its efforts on selling high quality mortgage loans, and routinely searches for new buyers for these loans; however, the volume of future sales may depend on factors beyond the controlbut still experienced some of the Company.negative effects from the decrease in the interest in buying mortgages as an investment. Other non-interest income increased by $40,000, or 6.4%, in 2008. Included in this increase is $142,000 of other non-interest income from the operations of Traders and Citizens First. The remaining $102,000 decrease is largely due to $212,000 of life insurance benefits on the death of a former officer of a subsidiary that was recognized in the prior year.2007. Excluding this benefit, other non-interest income increased $110,000 in 2008, which includes $150,000 of income received for extending Premier’s ATM processing contract.
In 2007, total fees and other income increased by $458,000 or 11.0%. The increase in 2007 was largely due to increases in secondary market mortgage income and electronic banking income. In 2007, secondary market mortgage income (commissions and fees earned for originating and selling mortgage loans to third parties in the secondary market) increased by $347,000 or 114.5% to $650,000. In 2005, Premier changed its approach to secondary market mortgage originations in an effort to expedite the loan approval process. The increased income in 2007 reflects an expansion of the program to all of Premier’s affiliate banks which generated a greater number of customers taking advantage of this process. Electronic banking income, increased $110,000 or 22.1% to $608,000 in 2007, largely due to the modernization of the ways Premier’s customers can access their deposit accounts. Service charges on deposit accounts decreased in 2007 by $66,000 or 2.4% to $2,738,000. A new required disclosure of year-to-date NSF charges on customers’ deposit account statements is believed to be resulting in lower overdraft activity by customers. Other non-interest income increased by $67,000, or 12.0%, in 2007. In 2007, other non-interest income includes $212,000 of life insurance benefits on the death of a former officer of a subsidiary. Excluding this benefit, other non-interest income decreased $145,000 in 2007 as Premier discontinued offering trust services in 2006, realized fewer loan extension and late fees in 2007, ceased recording an increase in the cash surrender value of the officer’s life insurance policy in 2007 and recorded lower other miscellaneous income in 2007.
In 2008, Premier realized $93,000 in gains on the sale of investment securities. In 20072009 and 2006,2007, Premier did not execute any sales of investment securities. In 2009, Premier recorded a $3,552,000 gain on the acquisition of Abigail Adams. New accounting guidance adopted by Premier at the beginning of 2009, changed the way negative goodwill is calculated and recorded on the books of an acquiring organization. Prior to 2009, negative goodwill resulted when the fair value of the net assets acquired exceeded the purchase price paid for a subsidiary. This negative goodwill was recorded on the balance sheet and accreted into income over a designated period of time. Under current accounting guidance, negative goodwill is no longer recorded on the balance sheet and any negative difference in fair value of the net assets acquired versus the purchase price paid for those net assets is immediately recognized in non-interest income. Also, prior to 2009, the purchase price paid for a subsidiary involving an exchange of the Company’s stock was determined using the Company’s stock price on the day prior to public announcement of the acquisition agreement. Under current accounting guidance, the purchase price paid is determined using the stock price on the day prior to the effective date of the acquisition. Since the consideration paid by Premier to the shareholders of Abigail Adams was a fixed exchange ratio of its common stock, several factors contributed to Premier realizing a gain on the acquisition, including but not limited to a decrease in the calculation of the purchase price paid by Premier due to a decline in Premier’s stock price from the date the fixed exchange ratio was agreed upon to the day before the effective date of the
PREMIER FINANCIAL BANCORP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
December 31, 20082009
acquisition, increases in the fair value of the investment portfolio acquired, improvements in the credit quality of some of the loans acquired, and a decrease in the fair value of fixed rate certificates of deposit acquired due to declining market interest rates.
The following table is a summary of non-interest income and expense for each of the years in the three-year period ending December 31, 2008.2009.
| NON-INTEREST INCOME AND EXPENSE | NON-INTEREST INCOME AND EXPENSE | | NON-INTEREST INCOME AND EXPENSE | |
| (Dollars in thousands) | (Dollars in thousands) | | (Dollars in thousands) | |
| | | | | | | | | | | | Increase (Decrease) Over Prior Year | | | | | | | | | | | | Increase (Decrease) Over Prior Year | |
| | | | | | | | | | | | 2008 | | | 2007 | | | | | | | | | | | | 2009 | | | 2008 | |
| | | 2008 | | | 2007 | | | 2006 | | | Amount | | | Percent | | | Amount | | | Percent | | | 2009 | | | 2008 | | | 2007 | | | Amount | | | Percent | | | Amount | | | Percent | |
| Non-interest income: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Service charges on deposit accounts | | $ | 3,249 | | | $ | 2,738 | | | $ | 2,804 | | | $ | 511 | | | 18.66 | | | $ | (66 | ) | | (2.35 | ) | | $ | 3,521 | | | $ | 3,249 | | | $ | 2,738 | | | $ | 272 | | | | 8.37 | | | $ | 511 | | | | 18.66 | |
Electronic banking income | | 824 | | | 608 | | | 498 | | | 216 | | | 35.53 | | | 110 | | | 22.09 | | | | 1,084 | | | | 824 | | | | 608 | | | | 260 | | | | 31.55 | | | | 216 | | | | 35.53 | |
Secondary market mortgage income | | 458 | | | 650 | | | 303 | | | (192 | ) | | (29.54 | ) | | 347 | | | 114.52 | | | | 443 | | | | 458 | | | | 650 | | | | (15 | ) | | | (3.28 | ) | | | (192 | ) | | | (29.54 | ) |
Other | | | 667 | | | | 627 | | | | 560 | | | | 40 | | | | 6.38 | | | | 67 | | | | 11.96 | | | | 536 | | | | 667 | | | | 627 | | | | (131 | ) | | | (19.64 | ) | | | 40 | | | | 6.38 | |
Total fees and other income | | $ | 5,198 | | | $ | 4,623 | | | $ | 4,165 | | | 575 | | | 12.44 | | | 458 | | | 11.00 | | | $ | 5,584 | | | $ | 5,198 | | | $ | 4,623 | | | | 386 | | | | 7.43 | | | | 575 | | | | 12.44 | |
Gain on acquisition of subsidiary | | | | 3,552 | | | | 0 | | | | 0 | | | | 3,552 | | | | | | | | 0 | | | | | |
Investment securities gains | | | 93 | | | | 0 | | | | 0 | | | | 93 | | | | | | | | 0 | | | | | | | | 0 | | | | 93 | | | | 0 | | | | (93 | ) | | | | | | | 93 | | | | | |
Total non-interest income | | $ | 5,291 | | | $ | 4,623 | | | $ | 4,165 | | | $ | 668 | | | | 14.45 | | | $ | 458 | | | | 11.00 | | | $ | 9,136 | | | $ | 5,291 | | | $ | 4,623 | | | $ | 3,845 | | | | 72.67 | | | $ | 668 | | | | 14.45 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Non-interest expense: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Salaries and wages | | $ | 8,389 | | | $ | 7,211 | | | $ | 7,540 | | | $ | 1,178 | | | 16.34 | | | $ | (329 | ) | | (4.36 | ) | | $ | 9,987 | | | $ | 8,389 | | | $ | 7,211 | | | $ | 1,598 | | | | 19.05 | | | $ | 1,178 | | | | 16.34 | |
Employee benefits | | | 1,840 | | | | 1,560 | | | | 1,590 | | | | 280 | | | | 17.95 | | | | (30 | ) | | | (1.89 | ) | | | 2,522 | | | | 1,840 | | | | 1,560 | | | | 682 | | | | 37.07 | | | | 280 | | | | 17.95 | |
Total staff costs | | 10,229 | | | 8,771 | | | 9,130 | | | 1,458 | | | 16.62 | | | (359 | ) | | (3.93 | ) | | | 12,509 | | | | 10,229 | | | | 8,771 | | | | 2,280 | | | | 22.29 | | | | 1,458 | | | | 16.62 | |
Occupancy and equipment | | 2,546 | | | 1,947 | | | 1,907 | | | 599 | | | 30.77 | | | 40 | | | 2.10 | | | | 3,261 | | | | 2,546 | | | | 2,017 | | | | 715 | | | | 28.08 | | | | 529 | | | | 26.23 | |
Outside data processing | | 2,587 | | | 2,132 | | | 2,036 | | | 455 | | | 21.34 | | | 96 | | | 4.72 | | | | 3,312 | | | | 2,587 | | | | 2,132 | | | | 725 | | | | 28.02 | | | | 455 | | | | 21.34 | |
Professional fees | | 840 | | | 461 | | | 496 | | | 379 | | | 82.21 | | | (35 | ) | | (7.06 | ) | | | 1,492 | | | | 840 | | | | 461 | | | | 652 | | | | 77.62 | | | | 379 | | | | 82.21 | |
Taxes, other than payroll, property and income | | 603 | | | 580 | | | 598 | | | 23 | | | 3.97 | | | (18 | ) | | (3.01 | ) | | | 766 | | | | 603 | | | | 580 | | | | 163 | | | | 27.03 | | | | 23 | | | | 3.97 | |
Amortization of intangibles | | 204 | | | 0 | | | 0 | | | 204 | | | 100.00 | | | 41 | | | 45.05 | | | | 348 | | | | 204 | | | | 0 | | | | 144 | | | | 70.59 | | | | 204 | | | | 100.00 | |
OREO (gains) losses and expenses, net | | 59 | | | (50 | ) | | (91 | ) | | 109 | | | (218.00 | ) | | 41 | | | 45.05 | | | | 758 | | | | 59 | | | | (50 | ) | | | 699 | | | | 1184.75 | | | | 109 | | | | 218.00 | |
Supplies | | 406 | | | 315 | | | 333 | | | 91 | | | 28.89 | | | (18 | ) | | (5.41 | ) | | | 406 | | | | 406 | | | | 315 | | | | 0 | | | | 0.00 | | | | 91 | | | | 28.89 | |
Accelerated amortization of subordinated debt issuance costs | | 0 | | | 0 | | | 548 | | | 0 | | | 0.00 | | | (548 | ) | | (100.00 | ) | |
FDIC insurance | | | | 1,292 | | | | 273 | | | | 182 | | | | 1,019 | | | | 373.26 | | | | 91 | | | | 50.00 | |
Other expenses | | | 2,420 | | | | 2,252 | | | | 1,980 | | | | 168 | | | | 7.46 | | | | 156 | | | | 7.58 | | | | 2,971 | | | | 2,147 | | | | 2,000 | | | | 824 | | | | 38.38 | | | | 147 | | | | 7.35 | |
Total non-interest expenses | | $ | 19,894 | | | $ | 16,408 | | | $ | 16,937 | | | $ | 3,486 | | | | 21.25 | | | $ | (529 | ) | | | (3.12 | ) | | $ | 27,115 | | | $ | 19,894 | | | $ | 16,408 | | | $ | 7,221 | | | | 36.30 | | | $ | 3,486 | | | | 21.25 | |
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PREMIER FINANCIAL BANCORP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
December 31, 20082009
Just as management continues to evaluate areas where non-interest income can be enhanced, it strives to find ways to improve the efficiency of its operations and utilize the economies of scale of the consolidated entity to reduce its operating costs. Sometimes the expenses associated with acquisitions, as well as the inefficiency of the operations of acquired organizations, cloud these goals. Premier’s 20082009 net overhead ratio, or non-interest expense less non-interest income excluding securities transactions and other similar non-operating transactions to average earningsearning assets was 2.39%2.84%, only a slightan increase from the 2.39% realized in 2008 and the 2.36% realized in 20072007. The actual dollars of net overhead increased by 45.0% or $6,685,000 in 2009; however, average earning assets increased by only 22.1% in 2009 resulting in a higher overhead ratio in 2009. The increases in actual dollars of net overhead and a decrease fromaverage earning assets were largely the 2.56% ratio realizedresult of the acquisition of Abigail Adams in 2006. The2009 and the inclusion of Traders and Citizens First for an additional four months in 2009 which added $4,428,000 or two-thirds of the increase in net overhead expense in 2009. In 2008, the actual dollars of net overhead increased by 23.7% or $2,849,000 in 2008, however, average earning assets increased by a similar 22.3% in 2008.2008, resulting in only a slight increase in the net overhead ratio when compared to 2007. Both of these increases were largely the result of the acquisitions of Traders and Citizens First. In fact, the net overhead of Traders and Citizens First comprise all but $57,000 or 0.5% of Premier’s increase in net overhead expense in 2008. The 2009 net overhead ratio and actual dollars of net overhead expense excludes the $3,552,000 gain on the subsidiary acquisition. The 2008 net overhead ratio and actual dollars of net overhead expense excludes the $93,000 of gains on the sales of securities and the $150,000 of income received for extending Premier’s ATM processing contract. Thecontract, while the 2007 net overhead ratio and actual dollars of net overhead expense excludes the $212,000 of life insurance benefits as a non-operating income transaction. For the year 2008,2009, net overhead was $21.5 million compared to $14.8 million an increase from thein 2008 and $12.0 million of net overhead in 2007. In 2007, the net overhead ratio, decreased by 20 basis points as the actual dollars of net overhead expense decreased by 6.1% or $775,000 from the $12.8 million of net overhead in 2006.
Total non-interest expense in 2009 increased by $7,221,000, or 36.3% from 2008 largely due to the increase in all categories of costs from adding the operations of Abigail Adams and including the operations of Traders and Citizens First for a full twelve months in 2009 compared to only eight months in 2008. The 2009 operations of Abigail Adams added approximately $3,275,000 of total non-interest expense ,while the first four months of operations of Traders and Citizens First added another $1,784,000 to total non-interest expense, leaving a $2,162,000 or 10.9% increase resulting from Premier’s other operations. Total non-interest expense in 2008 increased by $3,486,000, or 21.2% from 2007 largely due to the increase in all categories of costs from adding the operations of Traders and Citizens First. The 2008 operations of Traders and Citizens First added $3,463,000 of total non-interest expenses leaving only a $23,000 or 0.1% increase resulting from Premier’s other operations. Total non-interest expense in 2007 decreased by $529,000, or 3.1% from 2006 as decreases in staff costs, professional fees, and accelerated trust preferred issuance cost amortization were only partially offset by higher occupancy and equipment costs, data processing fees, and other expenses plus the absence
PREMIER FINANCIAL BANCORP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
December 31, 2009
Staff costs increased by $2,280,000 or 22.3% in 2009 versus 2008, as $1,977,000 of the increase was due to the operations of Abigail Adams plus including the additional four months of Traders and Citizens First. The remaining $303,000 or 3.0% increase was largely the result of expenses related to funding of the Traders defined benefit pension plan payout upon plan termination and higher payroll taxes. In 2008, staff costs increased by $1,458,000 or 16.6% in 2008 versus 2007 as $1,407,000 of the increase was due to the operations of Traders and Citizens First. The remaining $51,000 or 0.6% increase was largely the result of increased employer payroll taxes and normal salary and wage increases partially offset by decreases related to staff turnover and greater deferred loan originations costs related to FAS 91. Staff costs decreased by $359,000 or 3.9% in 2007 versus 2006 as normal salary and wage increases were more than offset by an increase in deferred loan origination costs related to FAS 91.costs.
Occupancy and equipment expenses increased by $715,000 or 28.1% in 2009. The operations of Abigail Adams plus the additional four months of Traders and Citizens First added approximately $878,000 of occupancy and equipment expenses in 2009 leaving a $163,000 or 6.4% decrease in these expense from Premier’s other operations. The $163,000 decrease in 2009 is largely due to lower equipment maintenance costs and lower depreciation expense on furniture and fixtures as well as information technology equipment as these fixed assets become fully depreciated partially offset by increases in real estate taxes, building depreciation and electricity costs. In 2008, occupancy and equipment expenses increased by $529,000 or 26.2% in 2008.. The operations of Traders and Citizens First added approximately $629,000 of occupancy and equipment expenses in 2008, leaving a $100,000 or 5.0% decrease in these expenses from Premier’s other operations. The $100,000 decrease in 2008 is largely due to thea $70,000 2007 writedown of branch property in 2007 that was scheduled to be closed at the end of January 2008. The decision to close the branch was made in 2007, and in accordance with FAS 144, the branch property was written down to its estimated realizable value. Furthermore, occupancy and
PREMIER FINANCIAL BANCORP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
December 31, 2008
equipment expenses were less in 2008 due to lower real estate taxes, building repairs, equipment maintenance and equipment depreciation partially offset by increase in utility costs, and other building cleaning and maintenance costs. In 2007, occupancy and equipment expenses increased by $40,000 or 2.1%, largely due to the $70,000 writedown of branch property. Excluding this writedown, occupancy and equipment expenses decreased by $30,000 in 2007, largely due to decreases in equipment depreciation.
Outside data processing expense increased by $725,000 or 28.0% in 2009. The operations of Abigail Adams plus the additional four months of Traders and Citizens First added approximately $463,000 of outside processing expenses in 2009 leaving a $262,000 or 10.1% increase in these expenses from Premier’s other operations. The $262,000 increase in 2009 is largely due to increases in ATM processing costs, new costs related to outsourcing the data and item processing functions of the newly acquired Traders and Citizens First banks, and costs related to outsourcing the statement rendering function of all the banks. In 2008, outside data processing expense increased by $455,000 or 21.3% in 2008.. The operations of Traders and Citizens First added approximately $294,000 of outside data processing expenses in 2008 leaving a $161,000 or 7.6% increase in these expenses from Premier’s other operations. The $161,000 increase in 2008 is largely due to increases in item processing charges due to Premier’s conversion to exchange electronic images instead of processing paper checks to settle customer deposit account activity plus higher communication costs and contractual inflationary fee adjustments for data processing and internet banking expenses. In 2007, outside data processing expense increased by $96,000 or 4.7%, largely due to increases in ATM processing costs, internet banking charges and contractual inflationary fee adjustments, partially offset by a decrease in customer overdraft privilege program costs. Outside data processing expense increased by $531,000 or 35.3% in 2006, as 2006 represents the first full year
PREMIER FINANCIAL BANCORP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
December 31, 2009
Professional fees increased by $652,000 or 77.6% in 2009. The operations of Abigail Adams plus the additional four months of Traders and Citizens First added approximately $347,000 of professional fees in 2009 leaving a $305,000 or 36.3% increase in these expenses from Premier’s other operations. The $305,000 increase in 2009 is largely due to legal and investment banker fees incurred during the year to acquire Abigail Adams, higher external audit fees related to the expanding size of the organization and an increase in other various consulting fees. These increases were partially offset by lower internal audit costs due to the hiring of outside internal auditors in the fourth quarter of 2008 to help complete the Company’s internal audit schedule. In 2008, professional fees increased by $379,000 or 82.2% in 2008.. The operations of Traders and Citizens First added approximately $81,000 of professional fees in 2008 leaving a $298,000 or 64.6% increase in these expenses from Premier’s other operations. The $298,000 increase in 2008 is largely due to additional legal and other professional fees incurred during the early part of the year to help in the completion of the acquisitions Traders and Citizens First and also due to fees associated with hiring outside internal auditors in the fourth quarter to help complete the Company’s internal audit schedule. In 2007, professional fees decreased by $35,000 or 7.1%, largely due to lower internal and external audit costs and lower consulting fees. Professional fees decreased by $58,000 or 10.5% in 2006 largely due to lower internal audit costs, tax preparation fees and consulting expenses.
Taxes not on income increased by $163,000, or 27.0% in 2009. The operations of Abigail Adams plus the additional four months of Traders and Citizens First added approximately $64,000 of taxes non on income in 2009 leaving a $99,000 or 16.4% increase in these expenses from Premier’s other operations. The $99,000 increase in 2009 is largely due to an increase in equity based franchised taxes due to the additional capital added from the acquisitions of Traders, Citizens First and Abigail Adams plus the addition of preferred equity from the TARP funds. In 2008, taxes not on income increased by $23,000, or 4.0% in 2008.. The operations of Traders and Citizens First added approximately $83,000 of taxes not on income in 2008 leaving a $60,000 or 10.3% decrease in these expenses from Premier’s other operations. The $60,000 decrease in 2008 is largely due to decreases in the tax rate on equity based franchised taxes. In 2007, taxes not on income decreased
Amortization of intangibles increased by $18,000,$144,000 or 3.0%.70.1% in 2009. The decreaseincrease in 20072009 is largely due to a decreaseresult of the amortization of the core deposit intangible from the acquisition of Abigail Adams plus the additional four months of core deposit intangible amortization from the acquisitions of Traders and Citizens First. Amortization of intangibles began in 2008 as a result of the amountcore deposit intangible asset from the acquisitions of expense related to equity based franchise taxes.Traders and Citizens First.
OREO gains, losses and expenses resulted in net expenses of $758,000 in 2009 versus $59,000 of net expenses in 2008, versus $50,000 of net gains in 2007, a $109,000$700,000 increase in non-interest expense. OREO expense represents the costs to operate, maintain and liquidate Other Real Estate acquired through foreclosure in satisfaction of unpaid loans. The operations of Traders and Citizens FirstAbigail Adams added approximately $13,000$110,000 of OREO expenses in 20082009 leaving a $96,000$590,000 increase in these expenses from Premier’s other operations (including a full year of Traders and Citizens First). The $590,000 increase in 2009 is largely due to $471,000 of expenses recorded to writedown the value of OREO properties to estimated realizable values and another $90,000 of losses on the sales of OREO in 2009 recorded mostly at Traders. These amounts compare to $21,000 of net losses recorded in 2008. OREO gains, losses and expenses resulted in net expenses of $59,000 in 2008 versus $50,000 of net gains in 2007, a $109,000 increase in non-interest expense. The operations
PREMIER FINANCIAL BANCORP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
December 31, 20082009
of Traders and Citizens First added approximately $13,000 of OREO expenses in 2008 leaving a $96,000 increase in these expenses from Premier’s other operations. The $96,000 increase in 2008 is largely due to $20,000 of net gains realized on the disposition or OREO in 2007 compared to $21,000 of net losses in 2008 as well as $30,000 of expense recoveries in 2007 that were not repeated in 2008. In 2007, as Premier sold most of its remaining inventory of OREO properties, it realized $20,000 of net gains on their disposition as well as $30,000 of expense recoveries. OREO gains, losses and expenses resulted in net gains of $91,000 in 2006. In 2006, Premier sold a substantial portion of its inventory of OREO properties, realizing $105,000 of net gains on their disposition as well as a reduction in the expenses needed to maintain the properties. A majority of the gains on the disposition of OREO in 2007 and 2006 were on properties from which no previous writedowns had occurred.
Accelerated Trust Preferred issuance costs were recognizedSupplies expense remained unchanged in 2006. At2009 at $406,000. The operations of Abigail Adams plus the timeadditional four months of issuance, the costs to originate the Trust Preferred Securities were capitalized. The costs were being amortized over the 30 year lifeTraders and Citizens First added approximately $62,000 of the securities which were scheduled to maturesupplies expense in 2027 and were recorded as an adjustment to interest expense.2009 leaving a $62,000 or 15.3% decrease in these expenses from Premier’s other operations. In March 2003, Premier began redeeming its Trust Preferred Securities in accordance with the terms of the instrument. At time of redemption an amount of the remaining unamortized issuance costs proportional2008, supplies expense increased by $91,000 or 28.9% largely due to the sizeadditional operations of Traders and Citizens First.
FDIC insurance expense increased by $1,019,000 or 373.3% in 2009. The operations of Abigail Adams plus the redemption was expensedadditional four months of Traders and Citizens First added approximately $298,000 of FDIC insurance expense in 2009 leaving a $721,000 or 264.1% increase in this expense from Premier’s other operations. The $721,000 increase in 2009 is largely due to non-interest expense.the FDIC’s special assessment on all banks in the United States during the second quarter of 2009. The special assessment, designed to shore-up the FDIC’s Bank Insurance Fund, cost Premier approximately $319,000 during the second quarter of 2009. The additional $402,000 of FDIC insurance expense is due to the expiration of FDIC insurance credits that had previously been used to offset normal FDIC premiums in 2008. In 2006, as2008, FDIC insurance expense increased by $91,000 or 50.0%. The operations of Traders and Citizens First added approximately $44,000 of FDIC insurance in 2008 leaving a result of the $7.0 million early redemption on January 31, 2006 and the final $8.25 million redeemed on November 10, 2006, Premier expensed the final $548,000 of the issuance costs.$47,000 or 25.8% increase in these expenses from Premier’s other operations. The $47,000 increase in 2008 is largely due to an increase in FDIC insurance rates substantially offset by FDIC insurance credits offered to banks organized before 1998.
Other expenses totaled $2.4 million$2,971,000 in 2008, a $168,000,2009, an $824,000 or 7.5%38.4% increase from the $2.2 million$2,147,000 recorded in 2008. The operations of Abigail Adams plus the additional four months of Traders and Citizens First added approximately $606,000 of other expenses in 2009 leaving a $218,000 or 10.2% increase in this expense from Premier’s other operations. The $218,000 increase in 2009 is largely due to $120,000 of collection expense reimbursements received in the first quarter of 2008 and a $285,000 restitution payment made in 2008 to Farmers Deposit Bank by the bank’s former president who plead guilty to bank fraud partially offset by $133,000 of conversion expenses incurred in 2008. Other expenses that increased in 2009 include a $65,000 increase in fraud and other losses plus higher correspondent bank charges. Lower expenses in 2009 include travel costs, appraisal fees, and teller outages. In 2008, other expenses totaled $2,147,000, a $147,000, or 7.4% increase from the $2,000,000 recorded in 2007. The operations of Traders and Citizens First added approximately $661,000$413,000 of other expenses in 2008 leaving a $493,000,$266,000, or 21.9%13.3% decrease in these expenses from Premier’s other operations. The $493,000$266,000 decrease in 2008 is primarily the result of a $439,000 reduction in collection expenses due to a $285,000 restitution payment made to Farmers Deposit Bank by the bank’s former president who plead guilty to bank fraud and to $32,000 of net reimbursements from settlements with customers compared to $120,000 of collection expenses in 2007. Other expense savings include a $74,000 reduction in courier costs in 2008 due to Premier’s conversion to exchange electronic
PREMIER FINANCIAL BANCORP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
December 31, 2009
images instead of transporting and processing paper checks to settle customer deposit account activity, as well as reductions in advertising expenditures, postage, correspondent bank charges and insurance costs. These expense reductions were partially offset by increases in regulatory expenses such as FDIC insurance and state examination costs, shareholder expenses such as NASDAQ expenses and stock transfer fees, losses due to forged checks and fictitious electronic payment transactions, as well as increases in bank director fees and employee travel costs. Other expenses totaled $2.2 million in 2007, a $156,000, or 7.6% increase from the $2.1 million recorded in 2006. The increase in 2007 is largely due to significantly higher regulatory expenses, such as FDIC insurance and state examination costs, higher postage costs, travel expenses, employee development and secondary market mortgage underwriting expenses. These increases were partially offset by lower stationery and supplies costs, advertising expenditures, correspondent bank charges and insurance expense.
PREMIER FINANCIAL BANCORP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
December 31, 2008
Because the FDIC’s deposit insurance fund fell below prescribed levels in 2008, the FDIC has announced increased premiums for all insured depository institutions, including Premier’s subsidiary banks, in order to begin recapitalizing the fund. In addition, the FDIC has proposed an additional 20 basis point emergency assessment on insured depository institutions to be paid on September 30, 2009, which could be decreased by the FDIC in certain events occur prior to the assessment date. These changes (and proposed changed if enacted) will result in potentially significant increases in deposit insurance expense for Premier in 2009.
Amortization of intangibles began in 2008 as a result of the core deposit intangible asset from the acquisitions of Traders and Citizens First.
An analysis of the allowance for loan losses and related provision for loan losses is included in the Loan Portfolio section of the Balance Sheet Analysis of this report.
Applicable Income Taxes
Premier recognized $2.9 million of income tax expense in 2009. This amount compares to $3.7 million of income tax expense recorded in 2008. This amount compares to2008 and $3.5 million of income tax expense recorded in 2007 and $3.3 million of income tax expense recorded in 2006.2007. Premier’s effective tax rate was 24.3% in 2009, down substantially from the 33.2% in 2008 up slightly fromand the 32.8% in 2007 but down2007. Premier’s effective tax rate was substantially lower in 2009 primarily because the acquisition of Abigail Adams was a tax free reorganization under the Internal Revenue Code and therefore the accounting gain on the acquisition was a non-taxable event. Excluding the gain from pretax income in 2009 would result in an effective tax rate of approximately 34.5%. The increase in this effective tax rate when compared to the 33.6%33.2% realized in 2006.2008 is largely due to non-deductible expenses associated with the acquisition of Abigail Adams. Premier’s effective tax rate in 2007 decreased primarily as a results ofwas lower than 2008 due to death benefits received from a former officer’s life insurance policy which were not subject to income tax. Premier realizes the tax saving benefits of holding tax-exempt investments and other tax savings instruments as well as making tax-exempt loans. These activities help to reduce Premier’s tax rate from the 34.0% statutory rate. Additional information regarding income taxes is contained in Note 1112 to the consolidated financial statements.
Effects of Changing Prices
The results of operations and financial condition presented in this report are based on historical cost, unadjusted for the effects of inflation. Inflation affects Premier in two ways. One effect is that inflation can result in increased operating costs which must be absorbed or recovered through increased prices for services. The second effect is on the purchasing power of the corporation. Virtually all of a bank's assets and liabilities are monetary in nature. Regardless of changes in prices, most assets and liabilities of the banking subsidiaries will be converted into a fixed number of dollars. Non-earning assets, such as premises and equipment, do not comprise a major portion of Premier's assets; therefore, most assets are subject to repricing on a more frequent basis than in other industries.
Premier's ability to offset the effects of inflation and potential reductions in future purchasing power depends primarily on its ability to maintain capital levels by adjusting prices for its services and to improve net interest income by maintaining an effective asset/liability mix. Management's efforts to meet these goals are described in other sections of this report.
PREMIER FINANCIAL BANCORP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
December 31, 20082009
SUMMARY RESULTS OF OPERATIONS
FOURTH QUARTER 20082009
Net income available to common shareholders for the three months ended December 31, 20082009 totaled $1,902,000,$4,899,000, a $166,000$2,997,000 or 9.6%157.6% increase from the $1,736,000$1,902,000 of net income available to common shareholders reported for the fourth quarter of 2007.2008. On a per share basis, Premier’s net income available to common shareholders for the fourth quarter of 20082009 was 3062 cents per share compared to 33 cents30 per share for the same quarter last year. The decreaseincrease in net income and earnings per share is largely due to a $3,552,000 gain on the additional shares ofsubsidiary acquisition. Excluding this gain, net income available to common stock issued to acquire Traders and Citizens First.shareholders totaled $1,347,000 or 17 cents per share.
Net interest income totaled $6,815,000$11,095,000 for the fourth quarter of 2008, an2009, and increase of $1,171,000$4,280,000 or 20.7%62.8% from the net interest income earned in the same quarter of 2007.2008. Approximately $1,497,000$4,350,000 of net interest income was earned by Traders and Citizens Firstvia the acquisition of Abigail Adams in the fourth quarter of 2008.2009. The remaining $326,000$70,000 decrease in net interest income when compared to the same quarter of 20072008 is the result of lower interest on loans, investment securities and federal funds sold primarily due to lower yields earned on those assets and a lower outstanding balance of federal funds sold.assets. This $1,109,000$651,000 decrease in interest income was partiallysubstantially offset by a $783,000$581,000 decrease in interest expense primarily due to lower rates paid on deposits and short-term borrowings.borrowings and a reduction in long-term debt outstanding. During the fourth quarter of 2008,2009, Premier recorded a $106,000$713,000 provision for loan losses compared to a $25,000$106,000 provision for loan losses in the fourth quarter of 2007.2008. The increase in provision expense was the result of a higher estimation of the credit risk in the loan portfolio.
Non-interest income, excluding securities transactions,the gain on subsidiary acquisition, totaled $1,289,000$1,714,000 in the fourth quarter of 2008,2009, an increase of $127,000$425,000 or 10.9%33.0% from the $1,162,000$1,289,000 reported in the fourth quarter of 2008. Approximately $232,000$329,000 of non-interest income was generated by the operations of Traders and Citizens FirstAbigail Adams in the fourth quarter of 2008.2009. The remaining $105,000 decrease$96,000 increase in non-interest income when compared to the same quarter of 20072008 is the primarily the result of lowera $55,000 or 26.6% increase in electronic banking income and a $44,000 or 61.1% increase in secondary market mortgage income partially offset by higher electronic banking income. Non-interest expense totaled $5,187,000$9,743,000 in the fourth quarter of 2008,2009, a $1,011,000$4,556,000 or 24.2%87.8% increase from the $4,176,000$5,187,000 reported for the fourth quarter of 2007.2008. The operations of Traders and Citizens FirstAbigail Adams generated approximately $1,280,000$3,275,000 of non-interest expensesexpense in the fourth quarter of 2008.2009. The remaining $269,000 decrease$1,281,000 increase in non-interest expense when compared to the same quarter of 20072008 is primarily due to the $285,000 restitution payment made to Farmers Deposit Bank by the bank’s former president who plead guilty to bank fraud.a $484,000 increase in OREO writedowns and expenses, a $149,000 increase in FDIC insurance costs, a $152,000 increase in professional fees and a $156,000 increase in staff costs. Other decreasesincreases in non-interest expenses include lowerhigher taxes not on income supplies, postage, courier costs, travel expenditure, correspondent bank fees, collection costs and OREO expenses.outside data processing costs. These savingsincreases were offset by increasessavings in staffoccupancy and equipment costs professional fees, director fees, and shareholder expenses.supplies expense. Additional quarterly financial data is provided in Note 2223 to the consolidated financial statements.
PREMIER FINANCIAL BANCORP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
December 31, 20082009
ADOPTION OF NEW ACCOUNTING STANDARDS
Recently Issued Accounting Standards Not Yet Adopted
In December 2007,June 2009, the FASB issued FAS No. 141 (revised 2007), Business Combinations (“FAS 141(R)”), which establishes principlesamended previous guidance relating to transfers of financial assets and requirementseliminates the concept of a qualifying special purpose entity. This guidance must be applied as of the beginning of each reporting entity’s first annual reporting period that begins after November 15, 2009, for how an acquirer recognizesinterim periods within that first annual reporting period and measures in its financial statements the identifiable assets acquired, the liabilities assumed,for interim and any noncontrolling interest in an acquiree, including the recognition and measurement of goodwill acquired in a business combination. FAS No. 141(R) is effective for fiscal years beginningannual reporting periods thereafter. This guidance must be applied to transfers occurring on or after December 15, 2008. Earlier adoptionthe effective date. Additionally, on and after the effective date, the concept of a qualifying special-purpose entity is prohibited. There was no impactlonger relevant for accounting purposes. Therefore, formerly qualifying special-purpose entities should be evaluated for consolidation by reporting entities on and after the effective date in accordance with the applicable consolidation guidance. The disclosure provisions were also amended and apply to transfers that occurred both before and after the Company upon adoptioneffective date of this standard, but the accounting for future business combinations will be different from prior practice. See Note 24guidance. The Company does not expect this guidance to thehave a material impact on its consolidated results of operations or financial statements.position upon adoption.
In December 2007,June 2009, the FASB issued SFAS No. 160, “Noncontrolling Interestamended guidance for consolidation of variable interest entity guidance by replacing the quantitative-based risks and rewards calculation for determining which enterprise, if any, has a controlling financial interest in Consolidated Financial Statements,a variable interest entity with an amendmentapproach focused on identifying which enterprise has the power to direct the activities of ARB No. 51” (“SFAS No. 160”), which will changea variable interest entity that most significantly impact the accountingentity’s economic performance and reporting for minority interests, which will be recharacterized as noncontrolling interests and classified as a component(1) the obligation to absorb losses of equity within the consolidated balance sheets. FAS No. 160entity or (2) the right to receive benefits from the entity. Additional disclosures about an enterprise’s involvement in variable interest entities are also required. This guidance is effective as of the beginning of theeach reporting entity’s first fiscal year beginning on orannual reporting period that begins after DecemberNovember 15, 2008. Earlier2009, for interim periods within that first annual reporting period, and for interim and annual reporting periods thereafter. Early adoption is prohibited and the Corporationprohibited. The Company does not expect the adoption of FAS No. 160this guidance to have a significantmaterial impact on its consolidated results of operations or financial position.position upon adoption.
In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities, an amendment of SFAS No. 133”. FAS No. 161 amends and expands the disclosure requirements of SFAS No. 133 for derivative instruments and hedging activities. FAS No. 161 requires qualitative disclosure about objectives and strategies for using derivative and hedging instruments, quantitative disclosures about fair value amounts of the instruments and gains and losses on such instruments, as well as disclosures about credit-risk features in derivative agreements. FAS No. 161 is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008, with early application encouraged. The adoption of this standard is not expected to have a material effect on the Corporation’s results of operations or financial position
PREMIER FINANCIAL BANCORP, INC.
FORM 10-K
December 31, 20082009
The Company's Financial Statements and related Independent Auditors' Report are presented in the following pages. The financial statements filed in this Item 8 are as follows:
Financial Statements:
PREMIER FINANCIAL BANCORP, INC.
CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2009, 2008, 2007, and 20062007
PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders
Premier Financial Bancorp, Inc.
Huntington, West Virginia
We have audited the accompanying consolidated balance sheets of Premier Financial Bancorp, Inc. as of December 31, 20082009 and 2007,2008, and the related consolidated statements of income, comprehensive income, changes in stockholders' equity, and cash flows for each of the three years in the period ended December 31, 2008.2009. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Premier Financial Bancorp, Inc. as of December 31, 20082009 and 2007,2008, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2008,2009, in conformity with U.S. generally accepted accounting principles.
Crowe Horwath LLP
Columbus, OhioBrentwood, Tennessee
March 25, 200930, 2010
PREMIER FINANCIAL BANCORP, INC.
December 31, 20082009 and 20072008
(Dollars in Thousands, Except Per Share Data)
| | | 2008 | | | 2007 | | | 2009 | | | 2008 | |
| ASSETS | | | | | | | | | | | | |
| Cash and due from banks | | $ | 22,148 | | | $ | 22,365 | | | $ | 61,611 | | | $ | 22,148 | |
| Federal funds sold | | | 15,899 | | | | 32,035 | | | | 22,985 | | | | 15,899 | |
| Securities available for sale | | | 175,741 | | | | 124,242 | | | | 240,970 | | | | 175,741 | |
| Loans held for sale | | | 1,193 | | | | 1,891 | | | | 897 | | | | 1,193 | |
| Loans | | | 467,111 | | | | 346,570 | | | | 699,133 | | | | 467,111 | |
Allowance for loan losses | | | (8,544 | ) | | | (6,497 | ) | | | (7,569 | ) | | | (8,544 | ) |
Net loans | | | 458,567 | | | | 340,073 | | | | 691,564 | | | | 458,567 | |
| Federal Home Loan Bank and Federal Reserve Bank stock | | | 3,931 | | | | 3,314 | | | | 7,005 | | | | 3,931 | |
| Premises and equipment, net | | | 11,367 | | | | 6,200 | | | | 15,200 | | | | 11,367 | |
| Real estate and other property acquired through foreclosure | | | 1,056 | | | | 174 | | | | 9,251 | | | | 1,056 | |
| Interest receivable | | | 3,720 | | | | 2,768 | | | | 4,250 | | | | 3,720 | |
| Goodwill | | | 28,543 | | | | 15,816 | | | | 28,724 | | | | 28,543 | |
| Other intangible assets | | | 1,431 | | | | - | | | | 2,795 | | | | 1,431 | |
| Prepaid FDIC insurance premiums | | | | 2,900 | | | | - | |
| | | | 10,713 | | | | - | |
| Other assets | | | 869 | | | | 377 | | | | 2,885 | | | | 869 | |
Total assets | | $ | 724,465 | | | $ | 549,255 | | | $ | 1,101,750 | | | $ | 724,465 | |
| | | | | | | | | | | | | | | | | |
| LIABILITIES AND STOCKHOLDERS' EQUITY | | | | | | | | | | | | | | | | |
| Deposits | | | | | | | | | | | | | | | | |
Non-interest bearing | | $ | 101,588 | | | $ | 75,271 | | | $ | 172,182 | | | $ | 101,588 | |
Time deposits, $100,000 and over | | | 71,145 | | | | 55,345 | | | | 149,890 | | | | 71,145 | |
Other interest bearing | | | 416,449 | | | | 318,417 | | | | 591,712 | | | | 416,449 | |
Total deposits | | | 589,182 | | | | 449,033 | | | | 913,784 | | | | 589,182 | |
| Federal funds purchased | | | - | | | | 392 | | |
| Securities sold under agreements to repurchase | | | 18,351 | | | | 12,477 | | | | 24,600 | | | | 18,351 | |
| Federal Home Loan Bank advances | | | 7,607 | | | | 4,843 | | | | 14,937 | | | | 7,607 | |
| Other borrowed funds | | | 15,560 | | | | 8,412 | | | | 16,027 | | | | 15,560 | |
| Interest payable | | | 1,054 | | | | 1,064 | | | | 1,037 | | | | 1,054 | |
| Other liabilities | | | 3,289 | | | | 5,645 | | | | 2,809 | | | | 3,289 | |
Total liabilities | | | 635,043 | | | | 481,866 | | | | 973,194 | | | | 635,043 | |
| | | | | | | | | | |
| Commitments and contingent liabilities | | | - | | | | - | | | | - | | | | - | |
| | | | | | | | | | | | | | | | | |
| 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; | | | | | | | | | |
6,392,772 in 2008 and 5,237,899 in 2007 shares issued and outstanding | | | 2,264 | | | | 1,109 | | |
Additional paid-in capital | | | 58,265 | | | | 43,763 | | |
| | | | 21,705 | | | | - | |
Common stock, no par value; 20,000,000 shares authorized; 7,937,143 in 2009 and 6,392,772 in 2008 shares issued and outstanding | | | | 71,412 | | | | 60,259 | |
Retained earnings | | | 27,346 | | | | 22,444 | | | | 33,349 | | | | 27,346 | |
Accumulated other comprehensive income | | | 1,547 | | | | 73 | | | | 2,090 | | | | 1,547 | |
Total stockholders' equity | | | 89,422 | | | | 67,389 | | | | 128,556 | | | | 89,422 | |
Total liabilities and stockholders' equity | | $ | 724,465 | | | $ | 549,255 | | | $ | 1,101,750 | | | $ | 724,465 | |
PREMIER FINANCIAL BANCORP, INC.
Years Ended December 31
(In Thousands, Except Per Share Data)
| | | 2008 | | | 2007 | | | 2006 | | | 2009 | | | 2008 | | | 2007 | |
| Interest income | | | | | | | | | | | | | | | | | | |
Loans, including fees | | $ | 29,692 | | | $ | 27,201 | | | $ | 25,926 | | | $ | 34,171 | | | $ | 29,692 | | | $ | 27,201 | |
Investment securities | | | | | | | | | | | | | | | | | | | | | | | | |
Taxable | | | 7,148 | | | | 5,509 | | | | 5,148 | | | | 6,730 | | | | 7,148 | | | | 5,509 | |
Tax-exempt | | | 211 | | | | 157 | | | | 88 | | | | 245 | | | | 211 | | | | 157 | |
Federal funds sold | | | 748 | | | | 1,829 | | | | 1,215 | | | | 24 | | | | 748 | | | | 1,829 | |
Other interest income | | | 45 | | | | 56 | | | | 23 | | | | 57 | | | | 45 | | | | 56 | |
Total interest income | | | 37,844 | | | | 34,752 | | | | 32,400 | | | | 41,227 | | | | 37,844 | | | | 34,752 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Interest expense | | | | | | | | | | | | | | | | | | | | | | | | |
Deposits | | | 10,676 | | | | 11,019 | | | | 8,984 | | | | 9,121 | | | | 10,676 | | | | 11,019 | |
Repurchase agreements and other | | | 251 | | | | 321 | | | | 234 | | | | 138 | | | | 251 | | | | 321 | |
FHLB advances and other borrowings | | | 882 | | | | 1,116 | | | | 1,027 | | | | 885 | | | | 882 | | | | 1,116 | |
Debentures | | | - | | | | - | | | | 760 | | |
Total interest expense | | | 11,809 | | | | 12,456 | | | | 11,005 | | | | 10,144 | | | | 11,809 | | | | 12,456 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Net interest income | | | 26,035 | | | | 22,296 | | | | 21,395 | | | | 31,083 | | | | 26,035 | | | | 22,296 | |
| Provision for loan losses | | | 147 | | | | (78 | ) | | | (1,161 | ) | | | 1,052 | | | | 147 | | | | (78 | ) |
Net interest income after provision for loan losses | | | 25,888 | | | | 22,374 | | | | 22,556 | | | | 30,031 | | | | 25,888 | | | | 22,374 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Non-interest income | | | | | | | | | | | | | | | | | | | | | | | | |
Service charges | | | 3,249 | | | | 2,738 | | | | 2,804 | | | | 3,521 | | | | 3,249 | | | | 2,738 | |
Electronic banking income | | | 824 | | | | 608 | | | | 498 | | | | 1,084 | | | | 824 | | | | 608 | |
Secondary market mortgage income | | | 458 | | | | 650 | | | | 303 | | | | 443 | | | | 458 | | | | 650 | |
Securities gains | | | 93 | | | | - | | | | - | | | | - | | | | 93 | | | | - | |
Gain on acquisition of subsidiary | | | | 3,552 | | | | - | | | | - | |
Other | | | 667 | | | | 627 | | | | 560 | | | | 536 | | | | 667 | | | | 627 | |
| | | | 5,291 | | | | 4,623 | | | | 4,165 | | | | 9,136 | | | | 5,291 | | | | 4,623 | |
| Non-interest expenses | | | | | | | | | | | | | | | | | | | | | | | | |
Salaries and employee benefits | | | 10,229 | | | | 8,771 | | | | 9,130 | | | | 12,509 | | | | 10,229 | | | | 8,771 | |
Occupancy and equipment expenses | | | 2,546 | | | | 2,017 | | | | 1,907 | | | | 3,261 | | | | 2,546 | | | | 2,017 | |
Outside data processing | | | 2,587 | | | | 2,132 | | | | 2,036 | | | | 3,312 | | | | 2,587 | | | | 2,132 | |
Professional fees | | | 840 | | | | 461 | | | | 496 | | | | 1,492 | | | | 840 | | | | 461 | |
Taxes, other than payroll, property and income | | | 603 | | | | 580 | | | | 598 | | | | 766 | | | | 603 | | | | 580 | |
Write-downs, expenses, sales of other real estate owned, net of gains | | | 59 | | | | (50 | ) | | | (91 | ) | |
Write-downs, expenses, and losses on sales of other real estate owned, net of gains | | | | 758 | | | | 59 | | | | (50 | ) |
Supplies | | | 406 | | | | 315 | | | | 333 | | | | 406 | | | | 406 | | | | 315 | |
FDIC insurance | | | | 1,292 | | | | 273 | | | | 182 | |
Amortization of intangibles | | | | 348 | | | | 204 | | | | - | |
Other expenses | | | 2,624 | | | | 2,182 | | | | 2,528 | | | | 2,971 | | | | 2,147 | | | | 2,000 | |
| | | | 19,894 | | | | 16,408 | | | | 16,937 | | | | 27,115 | | | | 19,894 | | | | 16,408 | |
| Income before income taxes | | | 11,285 | | | | 10,589 | | | | 9,784 | | | | 12,052 | | | | 11,285 | | | | 10,589 | |
| Provision for income taxes | | | 3,749 | | | | 3,470 | | | | 3,283 | | | | 2,934 | | | | 3,749 | | | | 3,470 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Net income | | $ | 7,536 | | | $ | 7,119 | | | $ | 6,501 | | | $ | 9,118 | | | $ | 7,536 | | | $ | 7,119 | |
| Weighted average shares outstanding: | | | | | | | | | | | | | |
Basic | | | 6,011 | | | | 5,237 | | | | 5,236 | | |
Diluted | | | 6,019 | | | | 5,263 | | | | 5,264 | | |
| | | | 133 | | | | - | | | | - | |
| Net income available to common stockholders | | | $ | 8,985 | | | $ | 7,536 | | | $ | 7,119 | |
| | | | | | | | | | | | | | |
| Earnings per share: | | | | | | | | | | | | | | | | | | | | | | | | |
Basic | | $ | 1.25 | | | $ | 1.36 | | | $ | 1.24 | | | $ | 1.32 | | | $ | 1.25 | | | $ | 1.36 | |
Diluted | | | 1.25 | | | | 1.35 | | | | 1.24 | | | | 1.32 | | | | 1.25 | | | | 1.35 | |
PREMIER FINANCIAL BANCORP, INC.
Years Ended December 31
(In Thousands, Except Per Share Data)
| | | 2008 | | | 2007 | | | 2006 | | | 2009 | | | 2008 | | | 2007 | |
| | | | | | | | | | | | | | | | | | | |
| Net income | | $ | 7,536 | | | $ | 7,119 | | | $ | 6,501 | | |
| Net income available to common shareholders | | | $ | 8,985 | | | $ | 7,536 | | | $ | 7,119 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
Other comprehensive income: | | | | | | | | | | | | | | | | | | | | | | | | |
Unrealized gains on securities arising during the period | | | 2,457 | | | | 1,853 | | | | 861 | | | | 691 | | | | 2,457 | | | | 1,853 | |
Reclassification of realized amount | | | (93 | ) | | | - | | | | - | | | | - | | | | (93 | ) | | | - | |
Net change in unrealized gain on securities | | | 2,364 | | | | 1,853 | | | | 861 | | | | 691 | | | | 2,364 | | | | 1,853 | |
Change in funded status of pension plan | | | (132 | ) | | | - | | | | - | | | | 132 | | | | (132 | ) | | | - | |
Less tax impact | | | 758 | | | | 630 | | | | 293 | | | | 280 | | | | 758 | | | | 630 | |
Other comprehensive income: | | | 1,474 | | | | 1,223 | | | | 568 | | | | 543 | | | | 1,474 | | | | 1,223 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Comprehensive income | | $ | 9,010 | | | $ | 8,342 | | | $ | 7,069 | | | $ | 9,528 | | | $ | 9,010 | | | $ | 8,342 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
PREMIER FINANCIAL BANCORP, INC.
Years Ended December 31, 2009, 2008 2007 and 20062007
(Dollars In Thousands, Except Per Share Data)
| | | Common Stock | | | Additional Paid-in Capital | | | Retained Earnings | | | Accumulated Other Comprehensive Income (Loss) | | | Total | | | Preferred Stock | | | Common Stock | | | Retained Earnings | | | Accumulated Other Comprehensive Income (Loss) | | | Total | |
| Balances, January 1, 2006 | | $ | 1,105 | | | $ | 43,458 | | | $ | 11,442 | | | $ | (1,718 | ) | | $ | 54,287 | | |
| Balances, January 1, 2007 | | | $ | - | | | $ | 44,732 | | | $ | 17,420 | | | $ | (1,150 | ) | | $ | 61,002 | |
Net income | | | - | | | | - | | | | 6,501 | | | | - | | | | 6,501 | | | | - | | | | - | | | | 7,119 | | | | - | | | | 7,119 | |
| Other comprehensive income | | | - | | | | - | | | | - | | | | 568 | | | | 568 | | | | - | | | | - | | | | - | | | | 1,223 | | | | 1,223 | |
| Cash dividends paid ($0.10 per share) | | | - | | | | - | | | | (523 | ) | | | - | | | | (523 | ) | |
| Stock options exercised, 3,002 shares | | | 3 | | | | 24 | | | | - | | | | - | | | | 27 | | |
| Stock based compensation expense | | | - | | | | 142 | | | | - | | | | - | | | | 142 | | |
| Balances, December 31, 2006 | | | 1,108 | | | | 43,624 | | | | 17,420 | | | | (1,150 | ) | | | 61,002 | | |
Net income | | | - | | | | - | | | | 7,119 | | | | - | | | | 7,119 | | |
| Other comprehensive income | | | - | | | | - | | | | - | | | | 1,223 | | | | 1,223 | | |
| Cash dividends paid ($0.40 per share) | | | - | | | | - | | | | (2,095 | ) | | | - | | | | (2,095 | ) | |
| Stock options exercised, 1,000 shares | | | 1 | | | | 9 | | | | - | | | | - | | | | 10 | | |
| Cash dividends paid ($0.40 per common share) | | | | - | | | | - | | | | (2,095 | ) | | | - | | | | (2,095 | ) |
| Stock options exercised | | | | - | | | | 10 | | | | - | | | | - | | | | 10 | |
| Stock based compensation expense | | | - | | | | 130 | | | | - | | | | - | | | | 130 | | | | - | | | | 130 | | | | - | | | | - | | | | 130 | |
| Balances, December 31, 2007 | | | 1,109 | | | | 43,763 | | | | 22,444 | | | | 73 | | | | 67,389 | | | | - | | | | 44,872 | | | | 22,444 | | | | 73 | | | | 67,389 | |
Net income | | | - | | | | - | | | | 7,536 | | | | - | | | | 7,536 | | | | - | | | | - | | | | 7,536 | | | | - | | | | 7,536 | |
| Other comprehensive income | | | - | | | | - | | | | - | | | | 1,474 | | | | 1,474 | | | | - | | | | - | | | | - | | | | 1,474 | | | | 1,474 | |
| Cash dividends paid ($0.43 per share) | | | - | | | | - | | | | (2,634 | ) | | | - | | | | (2,634 | ) | |
| Cash dividends paid ($0.43 per common share) | | | | - | | | | - | | | | (2,634 | ) | | | - | | | | (2,634 | ) |
| Stock issued to acquire subsidiaries | | | 1,155 | | | | 14,382 | | | | - | | | | - | | | | 15,537 | | | | - | | | | 15,537 | | | | - | | | | - | | | | 15,537 | |
| Stock based compensation expense | | | - | | | | 120 | | | | - | | | | - | | | | 120 | | | | - | | | | 120 | | | | - | | | | - | | | | 120 | |
| Balances, December 31, 2008 | | $ | 2,264 | | | $ | 58,265 | | | $ | 27,346 | | | $ | 1,547 | | | $ | 89,422 | | | | - | | | | 60,529 | | | | 27,346 | | | | 1,547 | | | | 89,422 | |
| | | | - | | | | - | | | | 9,118 | | | | - | | | | 9,118 | |
| | | | - | | | | - | | | | - | | | | 543 | | | | 543 | |
| | | | 21,705 | | | | 547 | | | | - | | | | - | | | | 22,252 | |
| Cash dividends paid ($0.44 per common share) | | | | - | | | | - | | | | (2,982 | ) | | | - | | | | (2,982 | ) |
| Dividend paid on preferred stock | | | | - | | | | - | | | | (133 | ) | | | - | | | | (133 | ) |
| | | | - | | | | 10,285 | | | | - | | | | - | | | | 10,285 | |
| | | | - | | | | 51 | | | | - | | | | - | | | | 51 | |
| Balances, December 31, 2009 | | | $ | 21,705 | | | $ | 71,412 | | | $ | 33,349 | | | $ | 2,090 | | | $ | 128,556 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
PREMIER FINANCIAL BANCORP, INC.
Years Ended December 31
(In Thousands, Except Per Share Data)
| | | 2008 | | | 2007 | | | 2006 | | | 2009 | | | 2008 | | | 2007 | |
| Cash flows from operating activities | | | | | | | | | | | | | | | | | | |
Net income | | $ | 7,536 | | | $ | 7,119 | | | $ | 6,501 | | | $ | 9,118 | | | $ | 7,536 | | | $ | 7,119 | |
Adjustments to reconcile net income to net cash from operating activities | | | | | | | | | | | | | | | | | | | | | | | | |
Depreciation and impairment of real estate | | | 1,001 | | | | 833 | | | | 868 | | | | 1,135 | | | | 1,001 | | | | 833 | |
Provision for loan losses | | | 147 | | | | (78 | ) | | | (1,161 | ) | | | 1,052 | | | | 147 | | | | (78 | ) |
Amortization (accretion), net | | | 290 | | | | (40 | ) | | | 187 | | | | (410 | ) | | | 290 | | | | (40 | ) |
FHLB stock dividends | | | (102 | ) | | | - | | | | (145 | ) | | | - | | | | (102 | ) | | | - | |
Writedowns (gains) on other real estate owned, net | | | 21 | | | | (20 | ) | | | (105 | ) | | | 561 | | | | 21 | | | | (20 | ) |
Stock compensation expense | | | 120 | | | | 130 | | | | 142 | | | | 51 | | | | 120 | | | | 130 | |
| Deferred income taxes | | | | 1,327 | | | | 1,002 | | | | 648 | |
Loans originated for sale | | | (23,066 | ) | | | (27,461 | ) | | | (14,616 | ) | | | (28,329 | ) | | | (23,066 | ) | | | (27,461 | ) |
Secondary market loans sold | | | 24,222 | | | | 28,198 | | | | 13,809 | | | | 29,068 | | | | 24,222 | | | | 28,198 | |
Secondary market income | | | (458 | ) | | | (650 | ) | | | (303 | ) | | | (443 | ) | | | (458 | ) | | | (650 | ) |
Bargain purchase gain on acquisition | | | | (3,552 | ) | | | - | | | | - | |
Gain on the sale of securities available for sale | | | (93 | ) | | | - | | | | - | | | | - | | | | (93 | ) | | | - | |
Changes in : | | | | | | | | | | | | | | | | | | | | | | | | |
Interest receivable | | | 6 | | | | 53 | | | | (160 | ) | | | 898 | | | | 6 | | | | 53 | |
Deferred income taxes | | | 1,002 | | | | 648 | | | | 1,071 | | |
Other assets | | | (142 | ) | | | 558 | | | | 288 | | | | (2,983 | ) | | | (142 | ) | | | 558 | |
Interest payable | | | (395 | ) | | | 3 | | | | 337 | | | | (556 | ) | | | (395 | ) | | | 3 | |
Other liabilities | | | (69 | ) | | | 68 | | | | (1,347 | ) | | | (1,851 | ) | | | (69 | ) | | | 68 | |
Net cash from operating activities | | | 10,020 | | | | 9,361 | | | | 5,366 | | | | 5,086 | | | | 10,020 | | | | 9,361 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Cash flows from investing activities | | | | | | | | | | | | | | | | | | | | | | | | |
Purchases of securities available for sale | | | (90,616 | ) | | | (41,078 | ) | | | (23,248 | ) | | | (148,533 | ) | | | (90,616 | ) | | | (41,078 | ) |
Proceeds from sales of securities available for sale | | | 2,088 | | | | 25 | | | | - | | | | - | | | | 2,088 | | | | 25 | |
Proceeds from maturities and calls of securities available for sale | | | 80,314 | | | | 43,571 | | | | 39,974 | | | | 149,221 | | | | 80,314 | | | | 43,571 | |
Purchase of FHLB stock, net of redemptions | | | (130 | ) | | | (49 | ) | | | (60 | ) | | | 83 | | | | (130 | ) | | | (49 | ) |
Purchases of subsidiaries, net of cash received | | | (8,717 | ) | | | - | | | | - | | | | 12,579 | | | | (8,717 | ) | | | - | |
Net change in federal funds sold | | | 26,978 | | | | (4,452 | ) | | | (8,771 | ) | | | (5,148 | ) | | | 26,978 | | | | (4,452 | ) |
Net change in loans | | | (12,002 | ) | | | (4,361 | ) | | | (20,284 | ) | | | 14,148 | | | | (23,996 | ) | | | (3,141 | ) |
Purchases of loan participations from other banks | | | (15,595 | ) | | | (4,825 | ) | | | (1,605 | ) | |
Payments on loan participations with other banks | | | 3,601 | | | | 6,045 | | | | 6,067 | | |
Purchases of premises and equipment, net | | | (1,221 | ) | | | (500 | ) | | | (361 | ) | | | (898 | ) | | | (1,221 | ) | | | (500 | ) |
Proceeds from sale of other real estate acquired through foreclosure | | | 326 | | | | 623 | | | | 2,417 | | | | 1,602 | | | | 326 | | | | 623 | |
Net cash from investing activities | | | (14,974 | ) | | | (5,001 | ) | | | (5,871 | ) | | | 23,054 | | | | (14,974 | ) | | | (5,001 | ) |
PREMIER FINANCIAL BANCORP, INC.
Years Ended December 31
(In Thousands, Except Per Share Data)
| | | 2008 | | | 2007 | | | 2006 | | | 2009 | | | 2008 | | | 2007 | |
| Cash flows from financing activities | | | | | | | | | | | | | | | | | | |
Net change in deposits | | | (8,351 | ) | | | 10,083 | | | | 3,107 | | | | 26,215 | | | | (8,351 | ) | | | 10,083 | |
Net change in short-term Federal Home Loan Bank advances | | | 3,000 | | | | - | | | | - | | | | (6,450 | ) | | | 3,000 | | | | - | |
Net change in federal funds purchased | | | (392 | ) | | | (584 | ) | | | 976 | | | | - | | | | (392 | ) | | | (584 | ) |
Net change in agreements to repurchase securities | | | 5,874 | | | | (78 | ) | | | 3,238 | | | | (10,184 | ) | | | 5,874 | | | | (78 | ) |
Repayment of Federal Home Loan Bank advances | | | (236 | ) | | | (2,442 | ) | | | (1,049 | ) | | | (212 | ) | | | (236 | ) | | | (2,442 | ) |
Early redemption of debentures, net | | | - | | | | - | | | | (15,250 | ) | |
Repayment of other borrowed funds | | | (4,074 | ) | | | (3,863 | ) | | | (2,627 | ) | | | (19,583 | ) | | | (4,074 | ) | | | (3,863 | ) |
Proceeds from other borrowings | | | 11,550 | | | | - | | | | 13,500 | | | | 2,400 | | | | 11,550 | | | | - | |
Proceeds from issuance of preferred stock | | | | 22,252 | | | | - | | | | - | |
Cash dividends paid | | | (2,634 | ) | | | (2,095 | ) | | | (523 | ) | | | (3,115 | ) | | | (2,634 | ) | | | (2,095 | ) |
Proceeds from stock option exercises | | | - | | | | 10 | | | | 27 | | | | - | | | | - | | | | 10 | |
Net cash from financing activities | | | 4,737 | | | | 1,031 | | | | 1,399 | | | | 11,323 | | | | 4,737 | | | | 1,031 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Net change in cash and cash equivalents | | | (217 | ) | | | 5,391 | | | | 894 | | | | 39,463 | | | | (217 | ) | | | 5,391 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Cash and cash equivalents at beginning of year | | | 22,365 | | | | 16,974 | | | | 16,080 | | | | 22,148 | | | | 22,365 | | | | 16,974 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Cash and cash equivalents at end of year | | $ | 22,148 | | | $ | 22,365 | | | $ | 16,974 | | | $ | 61,611 | | | $ | 22,148 | | | $ | 22,365 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Supplemental disclosures of cash flow information: | | | | | | | | | | | | | | | | | | | | | | | | |
Cash paid during year for - | | | | | | | | | | | | | | | | | | | | | | | | |
Interest | | $ | 12,204 | | | $ | 12,453 | | | $ | 10,667 | | | $ | 10,700 | | | $ | 12,204 | | | $ | 12,453 | |
Income taxes paid | | | 3,082 | | | | 3,066 | | | | 2,285 | | | | 1,630 | | | | 3,082 | | | | 3,066 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
Non-cash transactions | | | | | | | | | | | | | | | | | | | | | | | | |
Loans transferred to real estate acquired through foreclosure | | $ | 679 | | | $ | 282 | | | $ | 672 | | | $ | 7,182 | | | $ | 679 | | | $ | 282 | |
Purchases of securities available for sale not yet settled | | | - | | | | 3,500 | | | | - | | | | - | | | | - | | | | 3,500 | |
Fixed assets transferred to other real estate owned | | | - | | | | - | | | | 141 | | |
Subsidiaries acquired: | | | | | | | | | | | | | | | | | | | | | | | | |
Fair value of assets acquired from Abigail Adams | | | $ | 363,057 | | | | | | | | | |
Common stock issued to acquire Abigail Adams | | | | 10,290 | | | | | | | | | |
Gain on bargain purchase | | | | 3,552 | | | | | | | | | |
Liabilities assumed of Abigail Adams | | | $ | 349,215 | | | | | | | | | |
| | | | | | | | | | | | | | |
Fair value of assets acquired from Citizens First Bank, Inc. | | $ | 68,048 | | | | | | | | | | | | | | | $ | 68,048 | | | | | |
Common stock issued to acquire Citizens First Bank, Inc. | | | 6,400 | | | | | | | | | | | | | | | | 6,400 | | | | | |
Cash paid for capital stock of Citizens First Bank, Inc. | | | 5,300 | | | | | | | | | | | | | | | | 5,300 | | | | | |
Liabilities assumed of Citizens First Bank, Inc. | | $ | 56,348 | | | | | | | | | | | | | | | $ | 56,348 | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
Fair value of assets acquired from Traders Bankshares, Inc. | | $ | 112,488 | | | | | | | | | | | | | | | $ | 112,488 | | | | | |
Common stock issued to acquire Traders Bankshares, Inc. | | | 9,138 | | | | | | | | | | | | | | | | 9,138 | | | | | |
Cash paid for capital stock of Traders Bankshares, Inc. | | | 9,002 | | | | | | | | | | | | | | | | 9,002 | | | | | |
Liabilities assumed of Traders Bankshares, Inc. | | $ | 94,348 | | | | | | | | | | | | | | | $ | 94,348 | | | | | |
| | | | | | | | | | | | | | |
PREMIER FINANCIAL BANCORP, INC.
December 31, 2009, 2008, 2007, and 20062007
(Dollars in Thousands, Except Per Share Data)
NOTE 1 - - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The consolidated financial statements include the accounts of Premier Financial Bancorp, Inc. (the Company) and its wholly-owned subsidiaries:
| | | | Unaudited | | | | Unaudited | |
| | | | December 31, 2008 | | | | December 31, 2009 | |
Subsidiary | Location | Year Acquired | | Total Assets | | | Net Income | | Location | Year Acquired | | Total Assets | | | Net Income | |
| Citizens Deposit Bank & Trust | Vanceburg, Kentucky | 1991 | | $ | 125,236 | | | $ | 1,968 | | Vanceburg, Kentucky | 1991 | | $ | 123,007 | | | $ | 1,557 | |
| Farmers Deposit Bank | Eminence, Kentucky | 1996 | | | 66,225 | | | | 1,173 | | Eminence, Kentucky | 1996 | | | 63,324 | | | | 705 | |
| Ohio River Bank | Ironton, Ohio | 1998 | | | 91,186 | | | | 1,218 | | Ironton, Ohio | 1998 | | | 91,747 | | | | 1,176 | |
| First Central Bank, Inc. | Philippi, West Virginia | 1998 | | | 114,524 | | | | 1,244 | | Philippi, West Virginia | 1998 | | | 125,742 | | | | 1,175 | |
| Boone County Bank, Inc. | Madison, West Virginia | 1998 | | | 158,123 | | | | 2,201 | | Madison, West Virginia | 1998 | | | 167,746 | | | | 1,818 | |
| Traders Bank, Inc. | Ravenswood, West Virginia | 2008 | | | 170,209 | | | | 891 | | Ravenswood, West Virginia | 2008 | | | 158,223 | | | | 262 | |
| Adams National Bank | | Washington, DC | 2009 | | | 289,897 | | | | 475 | |
| Consolidated Bank & Trust | | Richmond, Virginia | 2009 | | | 76,861 | | | | 294 | |
| Mt. Vernon Financial Holdings, Inc. | Huntington, West Virginia | 1999 | | | 378 | | | | 193 | | Huntington, West Virginia | 1999 | | | 216 | | | | (19 | ) |
| Parent and Intercompany Eliminations | | | | | (1,416 | ) | | | (1,352 | ) | | | | | 4,987 | | | | 1,675 | |
| Consolidated total | | | | $ | 724,465 | | | $ | 7,536 | | | | | $ | 1,101,750 | | | $ | 9,118 | |
All material intercompany transactions and balances have been eliminated.
Nature of Operations: The subsidiary banks (Banks) operate under state bank charters andexcept for Adams National Bank which operates under a national bank charter. The Banks provide traditional banking services to customers primarily located in the counties and adjoining counties in Kentucky, Ohio, West Virginia, Maryland, Washington DC and West Virginia in which the Banks operate. Chartered asThe state chartered banks the Banks are subject to regulation by their respective state banking regulators and the Federal Deposit Insurance Corporation (FDIC)(“FDIC”) or the Federal Reserve BankBoard for member banks. Adams National Bank is subject to regulation by the Office of the Comptroller of the Currency (“OCC”). The Company is also subject to regulation by the Federal Reserve Bank.Board.
Estimates in the Financial Statements: The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The allowance for loan losses, the identification and evaluation of impaired loans, the fair value of assets and liabilities acquired, impairment of goodwill, and fair values of financial instruments are particularly subject to change.
PREMIER FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2009, 2008, and 2007
(Dollars in Thousands, Except Per Share Data)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Cash Flows: For purposes of reporting cash flows, cash and cash equivalents include cash on hand, amounts due from banks and interest-earning balances with banks with an original maturity less than ninety days. Net cash flows are reported for loans, federal funds sold, deposits, and othershort-term borrowing transactions.
PREMIER FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2008, 2007, and 2006
(Dollars in Thousands, Except Per Share Data)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Securities: The Company classifies its securities portfolio as either securities available for sale or securities held to maturity. Securities held to maturity are carried at amortized cost.
Securities available for sale might be sold before maturity and are carried at fair value. Adjustments from amortized cost to fair value are recorded in other comprehensive income, net of related income tax. Other securities such as Federal Home Loan Bank stock and Federal Reserve Bank stock are carried at cost.
Interest income includes amortization of purchase premium or discount computed using the level yield method. Gains or losses on dispositions are recorded on the trade date and are based on the net proceeds and adjusted carrying amount of the securities sold using the specific identification method. Securities are written down to fair value when a decline in fair value is not temporary.
Management evaluates securities for other-than-temporary impairment (“OTTI”) at least on a quarterly basis, and more frequently when economic or market conditions warrant such an evaluation. Declines in the fair value of securities below their cost that are other than temporaryother-than-temporary are reflected as realized losses. In estimating other-than-temporary losses, management considers: (1)considers the length of time and extent that fair value has been less than cost (2)and the financial condition and near term prospects of the issuer, and (3) the Company’s ability and intent to hold the security for a period sufficient to allow for any anticipated recovery in fair value.issuer.
Loans Held for Sale: Mortgage loans originated and intended for sale in the secondary market are carried at the lower of aggregate cost or market, as determined by outstanding commitments from investors. Net unrealized losses, if any, are recorded as a valuation allowance and charged to earnings. Loans are generally sold with servicing released.
Loans: Net loans are stated at the amount of unpaid principal, reduced by purchase discounts, unearned income and an allowance for loan losses. Interest income on loans is recognized on the unpaid principal balance on the accrual basis except for those loans in a non-accrual of income status. The accrual of interest on impaired loans is discontinued when management believes, after consideration of economic and business conditions and collection efforts, that the borrowers’ financial condition is such that collection of interest is doubtful. Loan origination fees, net of certain direct origination costs, are deferred and recognized in interest income using the level yield method without anticipating prepayments.
PREMIER FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2009, 2008, and 2007
(Dollars in Thousands, Except Per Share Data)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Interest income on mortgage and commercial loans is discontinued at the time the loan is 90 days delinquent unless the loan is well-secured and in process of collection. Consumer loans are typically charged off no later than 120 days past due. Past due status is based on the contractual terms of the loan. In all cases, loans are placed on nonaccrual or charged-off at an earlier date if collection of principal or interest is considered doubtful. Non-accrual loans and loans past due 90 days still on accrual include both smaller balance homogeneous loans that are collectively evaluated for impairment and individually classified impaired loans. A loan is moved to non-accrual status in accordance with the Company’s policy, typically after 90 days of non-payment.
All interest accrued but not received for loans placed on non-accrual is reversed against interest income. Interest received on such loans is accounted for on the cash-basis or cost-recovery method, until qualifying for return to accrual. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.
Certain Purchased Loans: The Company purchased groups of loans in conjunction with the acquisitions described in Note 24, some of which have shown evidence of credit deterioration since origination. These purchased loans are recorded at the amount paid, such that there is no carryover of the seller’s allowance for loan losses. After acquisition, losses are recognized by an increase in the allowance for loan losses.
Such purchased loans are accounted for individually or aggregated into pools of loans based on common risk characteristics such as, credit score, loan type, and date of origination. The Company estimates the amount and timing of expected cash flows for each purchased loan or pool, and the expected cash flows in excess of amount paid is recorded as interest income over the remaining life of the loan or pool (accretable yield). The excess of the loan’s or pool’s contractual principal and interest over expected cash flows is not recorded (nonaccretable difference).
Over the life of the loan or pool, expected cash flows continue to be estimated. If the present value of expected cash flows is less than the carrying amount, a loss is recorded. If the present value of expected cash flows is greater than the carrying amount, it is recognized as part of future interest income.
Concentration of Credit Risk: Most of the Company’s loans located in the Washington, DC metro area are commercial real estate loans. Therefore, the Company’s exposure to credit risk is significantly affected by changes in the economy and commercial real estate collateral values in the Washington, DC metro area.
PREMIER FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2009, 2008, 2007, and 20062007
(Dollars in Thousands, Except Per Share Data)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Allowance for Loan Losses: The allowance for loan losses is a valuation allowance for probable incurred credit losses increased by a provision for loan losses charged to expense. The allowance is an amount that management believes will be adequate to absorb probable incurred losses on existing loans based on evaluations of the collectability of the loans and prior loan loss experience. The evaluations take into consideration such factors as changes in the nature and volume of the loan portfolio, overall portfolio quality, review of specific problem loans, and current economic conditions that may affect the borrowers’ ability to pay. Allocations of the allowance may be made for specific loans, but the entire allowance is available for any loan that, in management’s judgment, should be charged-off. Loans are charged against the allowance for loan losses when management believes that the collection of principal is unlikely. Subsequent recoveries, if any, are credited to the allowance.
A loan is impaired when full payment under the loan terms is not expected. Impairment is evaluated in total for smaller-balance loans of similar nature such as residential mortgage, consumer, and credit card loans, and accordingly, they are not separately identified for impairment disclosures. All other loans are evaluated for impairment on an individual basis. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed. If a loan is impaired, a portion of the allowance is allocated so that the loan is reported, net, at the present value of estimated future cash flows using the loan’s existing rate or at the fair value of collateral if repayment is expected solely from the collateral. Loans with restructured terms to enable a delinquent borrower to repay (Trouble Debt Restructurings) are measured at the present value of estimated future cash flows using the loan’s effective rate at inception.
Transfers of Financial Assets: Transfers of financial assets are accounted for as sales, when control over the assets has been relinquished. Control over transferred assets is deemed to be surrendered when the assets have been isolated from the Company, the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets, and the Company does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity.
PREMIER FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2009, 2008, and 2007
(Dollars in Thousands, Except Per Share Data)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Premises and Equipment: Land is carried at cost. Premises and equipment are stated at cost less accumulated depreciation. Depreciation is recorded principally by the straight-line method with useful lives ranging from 7 to 40 years for premises and from 3 to 15 years for equipment.
Real Estate Acquired Through Foreclosure: Real estate acquired through foreclosure is carried at the lower of the recorded investment in the property or its fair value less estimated costs to sell. Upon repossession, the value of the underlying loan is written down to the fair value of the real estate less estimated costs to sell by a charge to the allowance for loan losses, if necessary. Any subsequent write-downs are charged to operating expenses. Parcels of real estate maybe leased to third parties to offset holding period costs. Operating expenses of such properties, net of related income, and gains and losses on their disposition are included in other expenses.
Federal Home Loan Bank (FHLB) stock: The Banks are members of the FHLB system. Members are required to own a certain amount of stock based on the level of borrowings and other factors, and may invest in additional amounts. FHLB stock is carried at cost, classified as a restricted security, and periodically evaluated for impairment based on ultimate recovery of par value. Both cash and stock dividends are reported as income.
PREMIER FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2008, 2007, and 2006
(Dollars in Thousands, Except Per Share Data)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Long-term Assets: Premises and equipment and other long-term assets are reviewed for impairment when events indicate that the carrying amount may not be recoverable from future undiscounted cash flows. If impaired, the assets are recorded at fair value.
Repurchase Agreements: Substantially all repurchase agreement liabilities represent amounts advanced by various customers. Securities are pledged to cover these liabilities, which are not covered by federal deposit insurance.
Goodwill and Other Intangible Assets: Goodwill resultsresulting from business acquisitions andcombinations prior to January 1, 2009 represents the excess of the purchase price over the fair value of the net assets of businesses acquired. Goodwill resulting from business combinations after January 1, 2009, is generally determined as the excess of the fair value of the consideration transferred, plus the fair value of any non-controlling interests in the acquired tangiblecompany, over the fair value of the net assets acquired and liabilities and identifiable intangible assets.assumed as of the acquisition date. Goodwill is not amortized but is assessed at least annually for impairment and any such impairment will be recognized in the period identified. Impairment is evaluated using the aggregate of all banking operations. To evaluate impairment, management uses pricing valuation factors such as price-to-total assets and price-to-total deposits from databases of actual peer group bank sales. These valuation factors are applied to the comparable factors of the Company’s aggregate banking operations to arrive at estimated fair value.
PREMIER FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2009, 2008, and 2007
(Dollars in Thousands, Except Per Share Data)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Other intangible assets consist of core deposit intangible assets arising from the whole bank acquisitions. They are initially measured at fair value and then are amortized on an accelerated method over their estimated useful lives of approximately 8 years.
Stock Based Compensation: Compensation cost is recognized for stock options granted to employees based on the fair value of these awards at the date of grant. A Black-Scholes model is utilized to estimate the fair value of stock options. Compensation cost is recognized on a straight-line basis over the required service period, generally defined as the vesting period.
PREMIER FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2008, 2007, and 2006
(Dollars in Thousands, Except Per Share Data)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Income Taxes: Income tax expense is the total of the current year income tax due or refundable and the change in deferred tax assets and liabilities. Deferred tax assets and liabilities are the expected future tax amounts for the temporary differences between carrying amounts and tax bases of assets and liabilities, computed using enacted tax rates. A valuation allowance, if needed, reduces deferred tax assets to the amount expected to be realized.
The Company adopted FASB Interpretation 48,guidance issued by the Financial Accounting for Uncertainty in Income Taxes ("FIN 48"Standards Board (“FASB”), as of January 1, 2007. A tax position is recognized as a benefit only if it is more likely than not that the tax position would be sustained in a tax examination, with a tax examination being presumed to occur. The amount recognized is the largest amount of tax benefit that is greater than 50% likely of being realized on examination. For tax positions not meeting the "more likely than not" test, no tax benefit is recorded. The adoption had no effect on the Company's financial statements.
The Company recognizes interest related to income tax matters as other interest expense and penalties related to income tax matters as other noninterest expense.
Off Balance Sheet Financial Instruments: Financial instruments include off-balance sheet credit instruments, such as commitments to make loans and commercial letters of credit, issued to meet customer financing needs. The face amount for these items represents the exposure to loss, before considering customer collateral or ability to repay. Such financial instruments are recorded when they are funded.
PREMIER FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2008, 2007, and 2006
(Dollars in Thousands, Except Per Share Data)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Earnings Per Common Share: Basic earnings per common share is net income (available to common shareholders) divided by the weighted average number of common shares outstanding during the period. Diluted earnings per common share includes the dilutive effect of additional potential common shares issuable under stock options.options and warrants. Earnings and dividends per share are restated for all stock splits and dividends through the date of issuance of the financial statements.
Reclassifications: Some items in the prior year financial statements were reclassified to conform to the current presentation.
PREMIER FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2009, 2008, and 2007
(Dollars in Thousands, Except Per Share Data)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Comprehensive Income: Comprehensive income consists of net income and other comprehensive income. Other comprehensive income includes unrealized gains and losses on securities available for sale and changes in the funded status of the pension plan prior to its termination which are also recognized as a separate component of equity.
Loss Contingencies: Loss contingencies, including claims and legal actions arising in the ordinary course of business, are recorded as liabilities when the likelihood of loss is probable and an amount or range of loss can be reasonably estimated. Management does not believe there now are such matters that will have a material effect on the financial statements.
Fair Value of Financial Instruments: Fair values of financial instruments are estimated using relevant market information and other assumptions, as more fully disclosed in a separate note. Fair value estimates involve uncertainties and matters of significant judgment regarding interest rates, credit risk, prepayments, and other factors, especially in the absence of broad markets for particular items. Changes in assumptions or in market conditions could significantly affect the estimates.
Operating Segments: All of the Company’s operations are considered by management to be aggregated into one reportable operating segment. While the chief decision-makers monitor the revenue streams of the various products and services, the identifiable segments are not material. Operations are managed and financial performance is evaluated on a Company-wide basis.
Reclassifications: Some items in the prior year financial statements were reclassified to conform to the current presentation.
PREMIER FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2008, 2007, and 2006
(Dollars in Thousands, Except Per Share Data)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Adoption of New Accounting Standards: In September 2006, the FASB issued Statement No. 157, Fair Value Measurements. This Statementguidance that defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. This Statementguidance establishes a fair value hierarchy about the assumptions used to measure fair value and clarifies assumptions about risk and the effect of a restriction on the sale or use of an asset. The standardguidance was effective for fiscal years beginning after November 15, 2007. In February 2008, the FASB issued Staff Position (FSP) 157-2, Effective Date of FASB Statement No. 157. This FSPguidance that delayed the effective date of FAS 157this fair value guidance for all nonfinancial assets and nonfinancial liabilities, except those that are recognized or disclosed at fair value on a recurring basis (at least annually) to fiscal years beginning after November 15, 2008, and interim periods within those fiscal years. In October 2008, the FASB issued Staff Position (FSP) 157-3, Determining the Fair Value of a Financial Asset when the Market for That Asset Is Not Active. This FSP clarifiesguidance clarifying the application of FAS 157the fair value guidance in a market that is not active. The impact of adoption was not material.
In February 2007, the FASB issued Statement No. 159 – The Fair Value Option for Financial Assets and Financial Liabilities. The standard provides companies with an option to report selected financial assets and liabilities at fair value and establishes presentation and disclosure requirements designed to facilitate comparisons between companies that choose different measurement attributes for similar types of assets and liabilities. The new standard was effective for the Company on January 1, 2008. The Company did not elect the fair value option for any financial assets or financial liabilities as of January 1, 2008.
On November 5, 2007, the SEC issued Staff Accounting Bulletin No. 109, Written Loan Commitments Recorded at Fair Value through Earnings (“SAB 109”). Previously, SAB 105, Application of Accounting Principles to Loan Commitments, stated that in measuring the fair value of a derivative loan commitment, a company should not incorporate the expected net future cash flows related to the associated servicing of the loan. SAB 109 supersedes SAB 105 and indicates that the expected net future cash flows related to the associated servicing of the loan should be included in measuring fair value for all written loan commitments that are accounted for at fair value through earnings. SAB 105 also indicated that internally-developed intangible assets should not be recorded as part of the fair value of a derivative loan commitment, and SAB 109 retains that view. SAB 109 was effective for derivative loan commitments issued or modified in fiscal quarters beginning after December 15, 2007. The impact of adoption was not material.
PREMIER FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2008, 2007, and 2006
(Dollars in Thousands, Except Per Share Data)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
In December 2007, the SEC issued Staff Accounting Bulleting (SAB) No. 110, which expresses the views of the SEC regarding the use of a “simplified” method, as discussed in SAB No. 107, in developing an estimate of expected term of “plain vanilla” share options in accordance with SFAS No. 123(R), Share-Based Payment. The SEC concluded that a company could, under certain circumstances, continue to use the simplified method for share option grants after December 31, 2007. The Company does not use the simplified method for share options and therefore SAB No. 110 has no impact on the Company’s consolidated financial statements.
Recently Issued Accounting Standards Not Yet Adopted: In December 2007, the FASB issued FAS No. 141 (revised 2007), Business Combinations (“FAS 141(R)”), whichguidance that establishes principles and requirements for how an acquirer recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in an acquiree, including the recognition and measurement of goodwill acquired in a business combination. FAS No. 141(R)The guidance is effective for
PREMIER FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2009, 2008, and 2007
(Dollars in Thousands, Except Per Share Data)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
fiscal years beginning on or after December 15, 2008. Earlier adoption is prohibited. There was no immediate impact to the Company upon adoption of this standard, butguidance. However, the accounting for future business combinations will be different from prior practice.the acquisition of Abigail Adams National Bancorp, Inc. was determined using this guidance. See Note 24 below.
In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interest in Consolidated Financial Statements, an amendment of ARB No. 51” (“SFAS No. 160”), which will changeguidance that changes the accounting and reporting for minority interests, which will beis recharacterized as noncontrolling interests and classified as a component of equity within the consolidated balance sheets. FAS No. 160 isThe guidance was effective for the Company as of the beginning of the first fiscal year beginning on or after December 15, 2008. Earlier adoption is prohibited2009 and the Corporation does not expect the adoption of FAS No. 160 to have a significanthad no impact on its results of operations or financial position.
In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities, an amendment of SFAS No. 133”. FAS No. 161guidance that amends and expands the disclosure requirements of SFAS No. 133 for derivative instruments and hedging activities. FAS No. 161The guidance requires qualitative disclosure about objectives and strategies for using derivative and hedging instruments, quantitative disclosures about fair value amounts of the instruments and gains and losses on such instruments, as well as disclosures about credit-risk features in derivative agreements. FAS No. 161 isThe guidance was effective for financial statements issued for fiscal yearsthe Company as of the beginning of 2009 and interim periods beginning after November 15, 2008, with early application encouraged. The adoption of this standard is not expected to have a material effecthad no impact on the Corporation’sCompany’s results of operations or financial position.
In May 2009, the FASB issued guidance which requires the effects of events that occur subsequent to the balance-sheet date be evaluated through the date the financial statements are either issued or available to be issued. Companies are required to reflect in their financial statements the effects of subsequent events that provide additional evidence about conditions at the balance-sheet date (recognized subsequent events). Companies are also prohibited from reflecting in their financial statements the effects of subsequent events that provide evidence about conditions that arose after the balance-sheet date (nonrecognized subsequent events), but requires information about those events to be disclosed if the financial statements would otherwise be misleading. This guidance was effective for the Company beginning with the second quarter 2009 interim financial statements.
In June 2009, the FASB replaced The Hierarchy of Generally Accepted Accounting Principles, with the FASB Accounting Standards CodificationTM (“The Codification”) as the source of authoritative accounting principles recognized by the FASB to be applied by nongovernmental entities in the preparation of financial statements in conformity with accounting principals generally accepted in the United States (“GAAP”). Rules and interpretive releases of the Securities and Exchange Commission (“SEC”) under authority of federal securities laws are also sources of authoritative GAAP for SEC registrants. The Codification was effective for financial statements issued by the Company for periods ending after September 15, 2009.
PREMIER FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2009, 2008, 2007, and 20062007
(Dollars in Thousands, Except Per Share Data)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
In June 2008, the FASB issued guidance which addresses whether instruments granted in share-based payment transactions are participating securities prior to vesting and, therefore, included in the earnings allocation in computing earnings per share (EPS) under the two-class method. Unvested share-based payment awards that contain non-forfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are participating securities and shall be included in the computation of EPS pursuant to the two-class method. This guidance was effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those years. All prior-period EPS data presented were to be adjusted retrospectively (including interim financial statements, summaries of earnings, and selected financial data) to conform to the provisions of this guidance. The guidance had no material impact of the Company’s financial statements.
In April 2009, the FASB amended existing guidance for determining whether impairment is other-than-temporary for debt securities. The guidance requires an entity to assess whether it intends to sell, or it is more likely than not that it will be required to sell, a security in an unrealized loss position before recovery of its amortized cost basis. If either of these criteria is met, the entire difference between amortized cost and fair value is recognized as impairment through earnings. For securities that do not meet the aforementioned criteria, the amount of impairment is split into two components as follows: 1) other-than-temporary impairment (OTTI) related to other factors, which is recognized in other comprehensive income and 2) OTTI related to credit loss, which must be recognized in the income statement. The credit loss is defined as the difference between the present value of the cash flows expected to be collected and the amortized cost basis. Additionally, disclosures about other-than-temporary impairments for debt and equity securities were expanded. This guidance was effective the Company beginning with the June 30, 2009 interim financial statements and had no impact on the Company’s results of operations or financial position.
In April 2009, the FASB issued guidance that emphasizes that the objective of a fair value measurement does not change even when market activity for the asset or liability has decreased significantly. Fair value is the price that would be received for an asset sold or paid to transfer a liability in an orderly transaction (that is, not a forced liquidation or distressed sale) between market participants at the measurement date under current market conditions. When observable transactions or quoted prices are not considered orderly, then little, if any, weight should be assigned to the indication of the asset or liability’s fair value. Adjustments to those transactions or prices should be applied to determine the appropriate fair value. This guidance was effective the Company beginning with the June 30, 2009 interim financial statements and had no impact on the Company’s results of operations or financial position.
PREMIER FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2009, 2008, and 2007
(Dollars in Thousands, Except Per Share Data)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
In August 2009, the FASB amended existing guidance for the fair value measurement of liabilities by clarifying that in circumstances in which a quoted price in an active market for the identical liability is not available, a reporting entity is required to measure fair value using a valuation technique that uses the quoted price of the identical liability when traded as an asset, quoted prices for similar liabilities or similar liabilities when traded as assets, or that is consistent with existing fair value guidance. The amendments in this guidance also clarify that both a quoted price in an active market for the identical liability at the measurement date and the quoted price for the identical liability when traded as an asset in an active market when no adjustments to the quoted price of the asset are required are Level 1 fair value measurements. The guidance was effective for the Company beginning on October 1, 2009 and had no impact on the Company’s results of operations or financial position.
Recently Issued Accounting Standards Not Yet Adopted: In June 2009, the FASB amended previous guidance relating to transfers of financial assets and eliminated the concept of a qualifying special purpose entity. This guidance must be applied as of the beginning of each reporting entity’s first annual reporting period that begins after November 15, 2009, for interim periods within that first annual reporting period and for interim and annual reporting periods thereafter. This guidance must be applied to transfers occurring on or after the effective date. Additionally, on and after the effective date, the concept of a qualifying special-purpose entity is no longer relevant for accounting purposes. Therefore, formerly qualifying special-purpose entities should be evaluated for consolidation by reporting entities on and after the effective date in accordance with the applicable consolidation guidance. The disclosure provisions were also amended and apply to transfers that occurred both before and after the effective date of this guidance. The Company does not expect this guidance to have a material impact on its consolidated results of operations or financial position upon adoption.
In June 2009, the FASB amended guidance for consolidation of variable interest entity guidance by replacing the quantitative-based risks and rewards calculation for determining which enterprise, if any, has a controlling financial interest in a variable interest entity with an approach focused on identifying which enterprise has the power to direct the activities of a variable interest entity that most significantly impact the entity’s economic performance and (1) the obligation to absorb losses of the entity or (2) the right to receive benefits from the entity. Additional disclosures about an enterprise’s involvement in variable interest entities are also required. This guidance is effective as of the beginning of each reporting entity’s first annual reporting period that begins after November 15, 2009, for interim periods within that first annual reporting period, and for interim and annual reporting periods thereafter. Early adoption is prohibited. The Company does not expect this guidance to have a material impact on its consolidated results of operations or financial position upon adoption.
PREMIER FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2009, 2008, and 2007
(Dollars in Thousands, Except Per Share Data)
On October 1, 2008, the Company’s newly acquired subsidiary Adams National Bank (“Adams National”), entered into a written agreement with its primary regulator, the OCC. The written agreement outlined a number of steps to be taken by Adams National to remedy unsafe and unsound banking practices relating to the level of credit risk and the administration of the loan portfolio, and violations of credit-related laws and regulations at the bank. These include 1) ensuring that Adams National has competent management and that senior management can perform the duties required under the Bank’s policies and procedures and the requirements of the written agreement; 2) maintaining a 12% total risk-based capital to total risk-weighted assets ratio; an 11% Tier 1 capital to risk-weighted assets ratio; and a 9% Tier 1 capital to adjusted total assets ratio, which are greater than the regulatory requirements to be “well capitalized” under the framework for prompt corrective action; 3) developing and implementing a three-year capital program; 4) adopt and implement written policies and procedures for establishing and maintaining the allowance in a manner consistent with the written agreement; 5) requiring the Board to review the adequacy of the allowance for loan losses at least quarterly; 6) implementing an asset diversification program consistent with OCC guidelines on concentrations in commercial real estate lending and sound risk management practices and reducing Adams National’s exposure to concentrations of credit risk accordingly; 7) taking all necessary actions to protect the Adams National’s interest in its criticized assets and implementing a program to eliminate regulatory criticism of these assets; 8) engaging in an ongoing review of the bank’s criticized assets and implementing procedures for the effective monitoring of the loan portfolio; 9) implementing a program to improve the management of the loan portfolio and to provide the Board with monthly written reports on credit quality; 10) employing a loan review consultant acceptable to the OCC to perform quarterly quality reviews of the bank’s assets; 11) revising the bank’s lending policy in accordance with OCC requirements; and 12) maintaining acceptable liquidity levels.
The written agreement includes time frames to implement the foregoing and on-going compliance requirements for Adams National, including quarterly progress reports to the OCC. The written agreement also requires the bank to establish a committee of the Board of Directors which will be responsible for overseeing compliance with the written agreement. The Bank has taken steps to comply with the requirements of the written agreement, including hiring a new chief executive officer. The written agreement with the OCC requires Adams National to maintain minimum capital ratios in excess of the ratios needed to be defined as well capitalized. This requirement means that the bank may not be deemed to be well capitalized while the written agreement is in effect. At December 31, 2009, Adams National’s capital ratio levels met the regulatory capital levels required in the written agreement. For further details see Note 21 “Stockholders Equity”.
PREMIER FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2009, 2008, and 2007
(Dollars in Thousands, Except Per Share Data)
Included in cash and due from banks are certain interest bearing and non-interest bearing deposits that are held at the Federal Reserve or maintained in vault cash in accordance with average balance reserve requirements specified by the Federal Reserve Board of Governors. The balance requirement at December 31, 20082009 and 20072008 was approximately $5,548$10,935 and $3,426.$5,548.
Amortized cost and fair value of securities available for sale and the related gross unrealized gains and losses recognized in accumulated other comprehensive income (loss) were as follows:
| 2008 | | Amortized Cost | | | Unrealized Gains | | | Unrealized Losses | | | Fair Value | | |
| 2009 | | | Amortized Cost | | | Unrealized Gains | | | Unrealized Losses | | | Fair Value | |
| Available for sale | | | | | | | | | | | | | | | | | | | | | | | | |
Mortgage-backed securities | | | | | | | | | | | | | |
U. S. agency MBS - residential | | | $ | 52,563 | | | $ | 1,934 | | | $ | (15 | ) | | $ | 54,482 | |
U. S. agency CMO’s | | | | 18,771 | | | | 789 | | | | - | | | | 19,560 | |
Total mortgage-backed securities of government sponsored agencies | | | | 71,334 | | | | 2,723 | | | | (15 | ) | | | 74,042 | |
U. S. Treasury securities | | $ | 1,494 | | | $ | 50 | | | $ | - | | | $ | 1,544 | | | | 1,000 | | | | 5 | | | | - | | | | 1,005 | |
U. S. agency securities | | | 96,154 | | | | 1,018 | | | | (67 | ) | | | 97,105 | | |
U. S. government sponsored entity securities | | | | 149,951 | | | | 407 | | | | (291 | ) | | | 150,067 | |
Obligations of states and political subdivisions | | | 7,065 | | | | 75 | | | | (10 | ) | | | 7,130 | | | | 10,195 | | | | 175 | | | | (123 | ) | | | 10,247 | |
Mortgage-backed securities of government sponsored agencies | | | 68,553 | | | | 1,479 | | | | (70 | ) | | | 69,962 | | |
Other securitiessubdivisions | | | | 5,323 | | | | 322 | | | | (36 | ) | | | 5,609 | |
Total available for sale | | $ | 173,266 | | | $ | 2,622 | | | $ | (147 | ) | | $ | 175,741 | | | $ | 237,803 | | | $ | 3,632 | | | $ | (465 | ) | | $ | 240,970 | |
| 2007 | | Amortized Cost | | | Unrealized Gains | | | Unrealized Losses | | | Fair Value | | |
| 2008 | | | Amortized Cost | | | Unrealized Gains | | | Unrealized Losses | | | Fair Value | |
| Available for sale | | | | | | | | | | | | | | | | | | | | | | | | |
U. S. Treasury securities | | $ | 5,477 | | | $ | 97 | | | $ | - | | | $ | 5,574 | | | $ | 1,494 | | | $ | 50 | | | $ | - | | | $ | 1,544 | |
U. S. agency securities | | | 74,515 | | | | 427 | | | | (83 | ) | | | 74,859 | | |
U. S. government sponsored entity securities | | | | 96,154 | | | | 1,018 | | | | (67 | ) | | | 97,105 | |
Obligations of states and political subdivisions | | | 3,789 | | | | 31 | | | | (4 | ) | | | 3,816 | | | | 7,065 | | | | 75 | | | | (10 | ) | | | 7,130 | |
Mortgage-backed securities of government sponsored agencies | | | 40,350 | | | | 131 | | | | (488 | ) | | | 39,993 | | | | 68,553 | | | | 1,479 | | | | (70 | ) | | | 69,962 | |
Total available for sale | | $ | 124,131 | | | $ | 686 | | | $ | (575 | ) | | $ | 124,242 | | | $ | 173,266 | | | $ | 2,622 | | | $ | (147 | ) | | $ | 175,741 | |
PREMIER FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2009, 2008, 2007, and 20062007
(Dollars in Thousands, Except Per Share Data)
NOTE 34 –SECURITIES (Continued)
The amortized cost and fair value of securities at December 31, 20082009 by contractual maturity are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
| | | Amortized Cost | | | Fair Value | | | Amortized Cost | | | Fair Value | |
| Available for sale | | | | | | | | | | | | |
Due in one year or less | | $ | 18,397 | | | $ | 18,657 | | | $ | 3,107 | | | $ | 3,146 | |
Due after one year through five years | | | 46,078 | | | | 46,696 | | | | 118,091 | | | | 118,505 | |
Due after five years through ten years | | | 40,238 | | | | 40,426 | | | | 40,495 | | | | 40,298 | |
Due after ten years | | | | 3,684 | | | | 3,791 | |
Corporate preferred securities | | | | 1,092 | | | | 1,188 | |
Mortgage-backed securities of government sponsored agencies | | | 68,553 | | | | 69,962 | | | | 71,334 | | | | 74,042 | |
Total available for sale | | $ | 173,266 | | | $ | 175,741 | | | $ | 237,803 | | | $ | 240,970 | |
| | | | | | | | | | | | | | | | | |
There were no sales of securities in 2009. Proceeds from sale of securities during 2008 and 2007 were $1,995$2,008 and $25. A $93 gain was recognized from sales of securities in 2008 while no gain or loss was realized on the sale in 2007. There were no sales of securities in 2006.
Securities with an approximate carrying value of $90,324$124,685 and $84,116$90,324 at December 31, 20082009 and 20072008 were pledged to secure public deposits, trust funds, securities sold under agreements to repurchase and for other purposes as required or permitted by law.
Securities with unrealized losses at year-end 2009 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 | |
| Description of Securities | | Fair Value | | | Unrealized Loss | | | Fair Value | | | Unrealized Loss | | | Fair Value | | | Unrealized Loss | |
| | | | | | | | | | | | | | | | | | | |
| U.S. government sponsored entity securities | | $ | 52,300 | | | $ | (291 | ) | | $ | - | | | $ | - | | | $ | 52,300 | | | $ | (291 | ) |
| Obligations of states and political subdivisions | | | 3,439 | | | | (123 | ) | | | - | | | | - | | | | 3,439 | | | | (123 | ) |
| U.S agency MBS – residential | | | 5,197 | | | | (15 | ) | | | - | | | | - | | | | 5,197 | | | | (15 | ) |
| Other securities | | | 964 | | | | (36 | ) | | | - | | | | - | | | | 964 | | | | (36 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Total temporarily impaired | | $ | 61,900 | | | $ | (465 | ) | | $ | - | | | $ | - | | | $ | 61,900 | | | $ | (465 | ) |
PREMIER FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2009, 2008, and 2007
(Dollars in Thousands, Except Per Share Data)
NOTE 4 –SECURITIES (Continued)
Securities with unrealized losses at year-end 2008 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 | |
| Description of Securities | | Fair Value | | | Unrealized Loss | | | Fair Value | | | Unrealized Loss | | | Fair Value | | | Unrealized Loss | |
| | | | | | | | | | | | | | | | | | | |
| U.S. agency securities | | $ | 12,475 | | | $ | (67 | ) | | $ | - | | | $ | - | | | $ | 12,475 | | | $ | (67 | ) |
Obligations of states and political subdivisions | | | 871 | | | | (10 | ) | | | - | | | | - | | | | 871 | | | | (10 | ) |
Mortgage-backed securities of government sponsored agencies | | | 5,714 | | | | (70 | ) | | | - | | | | - | | | | 5,714 | | | | (70 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Total temporarily impaired | | $ | 19,060 | | | $ | (147 | ) | | $ | - | | | $ | - | | | $ | 19,060 | | | $ | (147 | ) |
PREMIER FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2008, 2007, and 2006
(Dollars in Thousands, Except Per Share Data)
NOTE 3 –SECURITIES (Continued)
Securities with unrealized losses at year-end 2007 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 | |
| Description of Securities | | Fair Value | | | Unrealized Loss | | | Fair Value | | | Unrealized Loss | | | Fair Value | | | Unrealized Loss | |
| | | | | | | | | | | | | | | | | | | |
| U.S. agency securities | | $ | 1,997 | | | $ | (3 | ) | | $ | 24,712 | | | $ | (80 | ) | | $ | 26,709 | | | $ | (83 | ) |
Obligations of states and political subdivisions | | | 245 | | | | (3 | ) | | | 210 | | | | (1 | ) | | | 455 | | | | (4 | ) |
Mortgage-backed securities of government sponsored agencies | | | 4,404 | | | | (49 | ) | | | 21,198 | | | | (439 | ) | | | 25,602 | | | | (488 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Total temporarily impaired | | $ | 6,646 | | | $ | (55 | ) | | $ | 46,120 | | | $ | (520 | ) | | $ | 52,766 | | | $ | (575 | ) |
| | | Less than 12 Months | | | 12 Months or More | | | Total | |
| Description of Securities | | Fair Value | | | Unrealized Loss | | | Fair Value | | | Unrealized Loss | | | Fair Value | | | Unrealized Loss | |
| | | | | | | | | | | | | | | | | | | |
| U.S. government sponsored entity securities | | $ | 12,475 | | | $ | (67 | ) | | $ | - | | | $ | - | | | $ | 12,475 | | | $ | (67 | ) |
| Obligations of states and political subdivisions | | | 871 | | | | (10 | ) | | | - | | | | - | | | | 871 | | | | (10 | ) |
| Mortgage-backed securities of government sponsored agencies | | | 5,714 | | | | (70 | ) | | | - | | | | - | | | | 5,714 | | | | (70 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Total temporarily impaired | | $ | 19,060 | | | $ | (147 | ) | | $ | - | | | $ | - | | | $ | 19,060 | | | $ | (147 | ) |
The investment portfolio is predominately high quality interest-bearing bonds with defined maturity dates backed by the U.S. Government or Government sponsored entities. The unrealized losses at December 31, 20082009 and December 31, 20072008 are price changes resulting from changes in the interest rate environment and are considered to be 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.
Loans at year-end were as follows:
| | | 2008 | | | 2007 | | | 2009 | | | 2008 | |
| Commercial, secured by real estate | | $ | 133,742 | | | $ | 100,278 | | | $ | 304,607 | | | $ | 133,742 | |
| Commercial, other | | | 61,655 | | | | 40,438 | | | | 76,140 | | | | 61,655 | |
| Real estate construction | | | 26,182 | | | | 24,035 | | | | 51,637 | | | | 26,182 | |
| Residential real estate | | | 185,536 | | | | 133,776 | | | | 211,552 | | | | 185,536 | |
| Agricultural | | | 2,446 | | | | 1,845 | | | | 2,710 | | | | 2,446 | |
| Consumer and home equity | | | 51,793 | | | | 41,893 | | | | 49,312 | | | | 51,793 | |
| Other | | | 5,757 | | | | 4,305 | | | | 3,175 | | | | 5,757 | |
| | | $ | 467,111 | | | $ | 346,570 | | | $ | 699,133 | | | $ | 467,111 | |
PREMIER FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2009, 2008, 2007, and 20062007
(Dollars in Thousands, Except Per Share Data)
NOTE 45 – LOANS (Continued)
Certain directors and executive officers of the Banks and companies in which they have beneficial ownership, were loan customers of the Banks during 20082009 and 2007.2008. Such related party loans are governed by federal banking regulations which require such loans to be made in the ordinary course of business.
An analysis of the 20082009 activity with respect to all director and executive officer loans is as follows (in thousands):
| Balance, December 31, 2007 | | $ | 15,262 | | |
| Balance, December 31, 2008 | | | $ | 22,481 | |
| Additions, including loans now meeting disclosure requirements | | | 18,904 | | | | 10,979 | |
| Amounts collected and loans no longer meeting disclosure requirements | | | (11,685 | ) | | | (17,407 | ) |
| Balance, December 31, 2008 | | $ | 22,481 | | |
| Balance, December 31, 2009 | | | $ | 16,053 | |
Activity in the allowance for loan losses was as follows:
| | | 2008 | | | 2007 | | | 2006 | | | 2009 | | | 2008 | | | 2007 | |
| Balance, beginning of year | | $ | 6,497 | | | $ | 6,661 | | | $ | 7,892 | | | $ | 8,544 | | | $ | 6,497 | | | $ | 6,661 | |
| Balance of acquired subsidiaries | | | 2,300 | | | | - | | | | - | | | | - | | | | 2,300 | | | | - | |
| Loans charged off | | | (1,232 | ) | | | (758 | ) | | | (1,410 | ) | | | (2,437 | ) | | | (1,232 | ) | | | (758 | ) |
| Recoveries | | | 832 | | | | 672 | | | | 1,340 | | | | 410 | | | | 832 | | | | 672 | |
| Provision for loan losses | | | 147 | | | | (78 | ) | | | (1,161 | ) | | | 1,052 | | | | 147 | | | | (78 | ) |
| Balance, end of year | | $ | 8,544 | | | $ | 6,497 | | | $ | 6,661 | | | $ | 7,569 | | | $ | 8,544 | | | $ | 6,497 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
Impaired loans were as follows:
| | | 2008 | | | 2007 | | | 2006 | | | 2009 | | | 2008 | | | 2007 | |
| Impaired loans at year-end with an allowance | | $ | 11,610 | | | $ | 4,761 | | | $ | 7,766 | | | $ | 14,494 | | | $ | 11,610 | | | $ | 4,761 | |
| Impaired loans at year-end with no allowance | | | 0 | | | | 0 | | | | 0 | | | | 49,370 | | | | 0 | | | | 0 | |
| Amount of the allowance for loan losses allocated | | | 2,208 | | | | 1,482 | | | | 1,774 | | | | 1,279 | | | | 2,208 | | | | 1,482 | |
| Average of impaired loans during the year | | | 8,506 | | | | 5,926 | | | | 8,258 | | | | 21,236 | | | | 8,506 | | | | 5,926 | |
| Interest income recognized during impairment | | | 795 | | | | 495 | | | | 480 | | | | 1,339 | | | | 795 | | | | 495 | |
| Cash-basis interest income recognized | | | 793 | | | | 495 | | | | 480 | | | | 1,305 | | | | 793 | | | | 495 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
PREMIER FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2009, 2008, 2007, and 20062007
(Dollars in Thousands, Except Per Share Data)
NOTE 45 – LOANS (Continued)
Nonperforming loans at year end were as follows:
| | | 2008 | | | 2007 | | | 2006 | | | 2009 | | | 2008 | | | 2007 | |
| Loans past due over 90 days still on accrual | | $ | 625 | | | $ | 987 | | | $ | 992 | | | $ | 489 | | | $ | 625 | | | $ | 987 | |
| Non-accrual loans | | | 6,943 | | | | 3,157 | | | | 4,698 | | | | 46,299 | | | | 6,943 | | | | 3,157 | |
| Restructured loans | | | 1,203 | | | | 1,489 | | | | 1,268 | | | | 11,974 | | | | 1,203 | | | | 1,489 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
Nonperforming loans include some impaired loans and smaller balance homogeneous loans, such as residential mortgage and consumer loans, that are collectively evaluated for impairment. Loan impairment is reported when full payment under the loan terms is not anticipated, which can include loans that are current or less than 90 days past due.
Year-end premises and equipment were as follows:
| | | 2008 | | | 2007 | | | 2009 | | | 2008 | |
| Land and improvements | | $ | 2,497 | | | $ | 1,522 | | | $ | 3,496 | | | $ | 2,497 | |
| Buildings and leasehold improvements | | | 9,536 | | | | 5,673 | | | | 11,816 | | | | 9,536 | |
| Construction in progress | | | 77 | | | | 193 | | | | - | | | | 77 | |
| Furniture and equipment | | | 8,705 | | | | 7,357 | | | | 7,302 | | | | 8,705 | |
| | | | 20,815 | | | | 14,745 | | | | 22,614 | | | | 20,815 | |
| Less: accumulated depreciation | | | (9,448 | ) | | | (8,545 | ) | | | (7,414 | ) | | | (9,448 | ) |
| | | $ | 11,367 | | | $ | 6,200 | | | $ | 15,200 | | | $ | 11,367 | |
| | | | | | | | | | | | | | | | | |
Operating Leases: The Company leases certain branch and other properties as well as some equipment under operating leases. Some leases provide for periodic rate adjustments based on cost-of-living index changes. Rent expense, net of rental income, was $506, $230, and $213 for 2009, 2008, and $204 for 2008, 2007, and 2006.2007. Rent commitments, before considering renewal options that generally are present, were as follows:
| 2009 | | $ | 157 | | |
| 2010 | | | 126 | | | $ | 1,265 | |
| 2011 | | | 126 | | | | 1,249 | |
| 2012 | | | 109 | | | | 1,034 | |
| 2013 and thereafter | | | 90 | | |
| 2013 | | | | 316 | |
| 2014 and thereafter | | | | 186 | |
| | | $ | 608 | | | $ | 4,050 | |
PREMIER FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2009, 2008, 2007, and 20062007
(Dollars in Thousands, Except Per Share Data)
The change in the balance for goodwill during the year is as follows:
| | | 2008 | | | 2007 | | | 2006 | | | 2009 | | | 2008 | | | 2007 | |
| Beginning of year | | $ | 15,816 | | | $ | 15,816 | | | $ | 15,816 | | | $ | 28,543 | | | $ | 15,816 | | | $ | 15,816 | |
| Acquired goodwill | | | 12,727 | | | | - | | | | - | | |
| Acquired goodwill and other adjustments | | | | 181 | | | | 12,727 | | | | - | |
| Impairment | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | |
| End of year | | $ | 28,543 | | | $ | 15,816 | | | $ | 15,816 | | | $ | 28,724 | | | $ | 28,543 | | | $ | 15,816 | |
Acquired intangible assets at December 31, 2009 and 2008 were as follows. There were no such intangibles at December 31, 2007.
| | | Gross Carrying Amount | | | Accumulated Amortization | |
| Core deposit intangible | | $ | 1,635 | | | $ | (204 | ) |
| | | 2009 | | | 2008 | |
| | | Gross Carrying Amount | | | Accumulated Amortization | | | Gross Carrying Amount | | | Accumulated Amortization | |
| Core deposit intangible | | $ | 3,347 | | | $ | (552 | ) | | $ | 1,635 | | | $ | (204 | ) |
Aggregate intangible amortization expense was $348 for 2009 and $204 for 2008 while none was recorded for the years 2007 and 2006.year 2007.
Estimated amortization expense for each of the next five years:
| 2009 | | $ | 268 | | |
| 2010 | | | 218 | | | $ | 524 | |
| 2011 | | | 184 | | | | 433 | |
| 2012 | | | 175 | | | | 380 | |
| 2013 and thereafter | | | 586 | | |
| 2013 | | | | 359 | |
| 2014 and thereafter | | | | 1,099 | |
| | | $ | 1,431 | | | $ | 2,795 | |
PREMIER FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2009, 2008, 2007, and 20062007
(Dollars in Thousands, Except Per Share Data)
At December 31, 20082009 the scheduled maturities of time deposits are as follows:
| 2009 | | $ | 186,598 | | |
| 2010 | | | 55,924 | | | $ | 308,549 | |
| 2011 | | | 12,440 | | | | 64,758 | |
| 2012 | | | 9,146 | | | | 16,695 | |
| 2013 and thereafter | | | 7,091 | | |
| 2013 | | | | 13,001 | |
| 2014 and thereafter | | | | 9,928 | |
| | | $ | 271,199 | | | $ | 412,931 | |
Certain directors and executive officers of the Banks and companies in which they have beneficial ownership were deposit customers of the Banks during 20082009 and 2007.2008. The balance of such deposits at December 31, 20082009 and 20072008 were approximately $18,013$16,427 and $10,011.$18,013.
Securities sold under agreements to repurchase generally mature within one to ninety days from the transaction date. Information concerning securities sold under agreements to repurchase is summarized as follows:
| | | 2008 | | | 2007 | | | 2009 | | | 2008 | |
| Year-end balance | | $ | 18,351 | | | $ | 12,477 | | | $ | 24,600 | | | $ | 18,351 | |
| Average balance during the year | | $ | 17,133 | | | $ | 13,124 | | | $ | 15,714 | | | $ | 17,133 | |
| Average interest rate during the year | | | 1.44 | % | | | 2.41 | % | | | 0.87 | % | | | 1.44 | % |
| Maximum month-end balance during the year | | $ | 23,805 | | | $ | 13,672 | | | $ | 27,331 | | | $ | 23,805 | |
| Weighted average interest rate at year-end | | | 0.83 | % | | | 1.96 | % | | | 0.72 | % | | | 0.83 | % |
| | | | | | | | | | | | | | | | | |
PREMIER FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2009, 2008, 2007, and 20062007
(Dollars in Thousands, Except Per Share Data)
The Banks own stock of the Federal Home Loan Bank of Cincinnati, Ohio (FHLB-Cin) or, the Federal Home Loan Bank of Pittsburgh, Pennsylvania (FHLB-Pitt) or the Federal Home Loan Bank of Atlanta, Georgia (FHLB-Atl). This stock allows the Banks to borrow advances from the FHLB.
At year-end, advances from the FHLB-Cinthese Federal Home Loan Banks were as follows:
| | | 2008 | | | 2007 | | | 2009 | | | 2008 | |
| Payments due at maturity in May 2010, fixed rate at rates from 6.25% to 6.64%, averaging 6.45% | | $ | 4,000 | | | $ | 4,000 | | |
| Payments due at maturity in May 2010 and March 2012, fixed rate at rates from 1.81% to 6.64%, averaging 3.12% | | | $ | 14,542 | | | $ | 4,000 | |
| Payments due monthly with maturities from November 2011 to July 2012, fixed rates from 4.10% to 4.40%, averaging 4.26% | | | 607 | | | | 843 | | | | 395 | | | | 607 | |
| Overnight borrowed funds | | | 3,000 | | | | - | | | | - | | | | 3,000 | |
| | | $ | 7,607 | | | $ | 4,843 | | | $ | 14,937 | | | $ | 7,607 | |
| | | | | | | | | | | | | | | | | |
Advances are secured by the FHLB stock, certain pledged investment securities and substantially all single family first mortgage loans of the participating Banks. Scheduled principal payments due on advances during the five years subsequent to December 31, 20082009 are as follows:
| 2009 | | $ | 3,178 | | |
| 2010 | | | 4,186 | | | $ | 4,422 | |
| 2011 | | | 186 | | | | 422 | |
| 2012 | | | 57 | | | | 10,093 | |
| 2013 | | - | | | | - | |
| 2014 | | | | - | |
| Thereafter | | | - | | | | - | |
| | | $ | 7,607 | | | $ | 14,937 | |
| | | | | | | | | |
PREMIER FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2009, 2008, 2007, and 20062007
(Dollars in Thousands, Except Per Share Data)
On April 30, 2008, the Company executed and delivered to First Guaranty Bank of Hammond, Louisiana a Promissory Note and Business Loan Agreement dated April 30, 2008 for the principal amount of $11,550, bearing interest floating daily at the “Wall Street Journal” prime rate (the “Index”) minus 1.00% and requiring 59 monthly principal payments of $50 and one final payment of $8.6 million due at maturity on April 30, 2013. IfOn December 31, 2009, the Index is between 5.00%Company executed and 6.00%,delivered to First Guaranty Bank a modification agreement whereby the interest onrate would be fixed at 3.96% through the note will be 5.00%. Ifremaining maturity of the Index falls below 5.00%, then the interest on the note will float with the Index.note. The note is secured by a pledge of Premier’s 100% interest in Boone County Bank (a wholly owned subsidiary) under a Commercial Pledge Agreement dated April 30, 2008. The proceeds of this note were used to fund the $9,000 of cash needed to purchase Traders Bankshares, Inc. and to refinance the remaining $2,550 balance of Premier’s outstanding note with First Guaranty Bank dated January 31, 2006. Premier’s chairman owns approximately 27.6% of the voting stock of First Guaranty Bank and is the chairman of its board of directors. Premier’s board of directors reviewed the loan and authorized the Company to enter into the loan transaction.
On November 10, 2006, the Company executed and delivered to The Bankers’ Bank of Kentucky, Inc. of Frankfort, Kentucky (“Bankers’ Bank”) a Term Note and Business Loan Agreement dated November 10, 2006 in the principal amount of $6,500, bearing interest floating daily at the “JP Morgan Chase” prime rate minus 1.00% and requiring 83 monthly principal and interest payments of $100 and a final payment of any balance due at maturity on November 9, 2013. The note is secured by a pledge of Premier’s 100% interest in Citizens Deposit Bank and Trust, Inc. (a wholly owned subsidiary) and Premier’s 100% interest in Farmers-Deposit Bank, Eminence, Kentucky (a wholly owned subsidiary) under a Stock Pledge and Security Agreement dated November 10, 2006. On December 22, 2008, the Company executed and delivered to Bankers’ Bank a modification agreement whereby the interest rate would not fall below 3.00% or exceed 6.00% for the remaining term of the Note. The current interest rate on the Term Note is 3.00%.
Scheduled principal payments due on the two bank borrowings subsequent to December 31, 2008 are as follows:
| 2009 | | $ | 1,674 | |
| 2010 | | | 1,707 | |
| 2011 | | | 1,740 | |
| 2012 | | | 1,775 | |
| 2013 | | | 8,664 | |
| Thereafter | | | - | |
| | | $ | 15,560 | |
| | | | | |
PREMIER FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2009, 2008, 2007, and 20062007
(Dollars in Thousands, Except Per Share Data)
NOTE 1011 – NOTES PAYABLE AND OTHER BORROWED FUNDS (Continued)
In addition to the $6,500 Term Note, Premier executed and delivered to the Bankers’ Bank a Promissory Note whereby Premier may request and receive monies from Bankers’ Bank from time to time. On December 11, 2009, Premier executed and delivered to the Bankers’ Bank a Modification and Extension Agreement and a fully revised Promissory Note whereby Premier may request and receive monies from Bankers’ Bank from time to time, but the aggregate outstanding principal balance under the Promissory Note at any time shall not exceed $3,000, and the$4,500 principal amount. The right to request and receive monies from Bankers’ Bank expiresunder the Promissory Note shall cease and terminate on November 9, 2009. TheDecember 11, 2010. Any outstanding principal balance under this Promissory Note shall bear an annual interest rate floating daily at the “JPJP Morgan Chase”Chase Co. prime rate minus 1.00%. The Promissory Note is subject to the same 3.00% minimum and 6.00% maximumwith an interest rate as the $6,500 Term Note (currently 3.00%)floor of 4.00%. Interest on thisthe Promissory Note shall be due and payable on the 5th11th day of each, January, April, JulyMarch, June, September and OctoberDecember during the term of this Promissory Note, and at the maturity date hereof.thereof. Any outstanding principal amount loaned to Premier under this Promissory Note, and not previously repaid, shall beis due on November 9, 2009.December 11, 2010. The Promissory Note is secured by the same collateral as the $6,500 Term Note. At December 31, 2008,2009, there was no$2,400 outstanding principal balance on the Promissory Note.
Scheduled principal payments due on the borrowings subsequent to December 31, 2009 are as follows:
| 2010 | | $ | 4,107 | |
| 2011 | | | 1,740 | |
| 2012 | | | 1,775 | |
| 2013 | | | 8,405 | |
| 2014 | | | - | |
| Thereafter | | | - | |
| | | $ | 16,027 | |
| | | | | |
PREMIER FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2009, 2008, 2007, and 20062007
(Dollars in Thousands, Except Per Share Data)
The components of the provision (benefit) for income taxes are as follows:
| | | 2008 | | | 2007 | | | 2006 | | | 2009 | | | 2008 | | | 2007 | |
| Current | | $ | 2,747 | | | $ | 2,822 | | | $ | 2,212 | | | $ | 1,727 | | | $ | 2,747 | | | $ | 2,822 | |
| Deferred | | | 1,002 | | | | 648 | | | | 1,071 | | | | 1,327 | | | | 718 | | | | 746 | |
| Change in valuation allowance | | | | (120 | ) | | | 284 | | | | (98 | ) |
Provision for income taxes | | $ | 3,749 | | | $ | 3,470 | | | $ | 3,283 | | | $ | 2,934 | | | $ | 3,749 | | | $ | 3,470 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
The Company’s deferred tax assets and liabilities at December 31 are shown below. No valuation allowance for the realization of deferred tax assets is considered necessary.
| | | 2008 | | | 2007 | | | 2009 | | | 2008 | |
| Deferred tax assets | | | | | | | | | | | | |
Allowance for loan losses | | $ | 2,569 | | | $ | 2,209 | | | $ | 6,869 | | | $ | 2,782 | |
Purchase accounting adjustments | | | | 5,065 | | | | - | |
Net operating loss carryforward | | | 1,584 | | | | - | | | | 4,307 | | | | 2,584 | |
Write-downs of other real estate owned | | | 21 | | | | 15 | | | | 555 | | | | 23 | |
Taxable income on non-accrual loans | | | 59 | | | | 103 | | | | 2,119 | | | | 63 | |
Defined benefit pension plan | | | 398 | | | | - | | | | - | | | | 456 | |
Security writedown | | | | 266 | | | | - | |
Accrued expenses | | | | 168 | | | | - | |
Other | | | 1 | | | | 2 | | | | - | | | | 1 | |
Total deferred tax assets | | | 4,632 | | | | 2,329 | | | | 19,349 | | | | 5,909 | |
| | | | | | | | | | | | | | | | | |
| Deferred tax liabilities | | | | | | | | | | | | | | | | |
Amortization of intangibles | | $ | 2,682 | | | $ | 2,342 | | | $ | (3,522 | ) | | $ | (3,125 | ) |
Depreciation | | | 375 | | | | 34 | | | | (1,015 | ) | | | (435 | ) |
Federal Home Loan Bank dividends | | | 354 | | | | 319 | | | | (354 | ) | | | (355 | ) |
Deferred loan fees | | | 236 | | | | 170 | | | | (282 | ) | | | (255 | ) |
Purchase accounting adjustments | | | 145 | | | | - | | | | - | | | | (169 | ) |
Unrealized gain on investment securities | | | 842 | | | | 38 | | | | (1,077 | ) | | | (842 | ) |
Other | | | 185 | | | | 155 | | | | (211 | ) | | | (194 | ) |
Total deferred tax liabilities | | | 4,819 | | | | 3,058 | | | | (6,461 | ) | | | (5,375 | ) |
| | | | | | | | | | | | | | | | | |
| Valuation allowance on deferred tax assets | | | | (2,175 | ) | | | (721 | ) |
| Net deferred taxes | | $ | (187 | ) | | $ | (729 | ) | | $ | 10,713 | | | $ | (187 | ) |
| | | | | | | | | | | | | | | | | |
At December 31, 2008 the Company had net operating loss carryforwards of approximately $4,659 which expire at various dates from 2025 to 2028. The deductibility of these net operating losses are limited under IRC Sec 382. No valuation allowance is considered necessary based on management's estimate that the net operating losses will be utilized prior to the time that they expire.
PREMIER FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2009, 2008, 2007, and 20062007
(Dollars in Thousands, Except Per Share Data)
NOTE 1112 – INCOME TAXES (Continued)
At December 31, 2009 the Company has federal net operating loss carryforwards of $9,246 and various state net operating loss carryforwards of $19,870 which begin to expire in 2022. The deductibility of these net operating losses is limited under Internal Revenue Code Section 382.
A valuation allowance for deferred tax assets is recorded when it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of the deferred tax assets depends on the ability of the Company to generate sufficient taxable income of the appropriate character in the future and in the appropriate taxing jurisdictions. The Company considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment.
The Company maintains a valuation allowance on the West Virginia deferred tax assets, including the West Virginia state net operating loss carryforward of $15,307, as it does not anticipate generating enough taxable income in West Virginia to utilize the deferred tax assets.
An analysis of the differences between the effective tax rates and the statutory U.S. federal income tax rate is as follows:
| | | 2008 | | | 2007 | | | 2006 | | | 2009 | | | 2008 | | | 2007 | |
| U.S. federal income tax rate | | $ | 3,837 | | | | 34.0 | % | | $ | 3,600 | | | | 34.0 | % | | $ | 3,327 | | | | 34.0 | % | | $ | 4,098 | | | | 34.0 | % | | $ | 3,837 | | | | 34.0 | % | | $ | 3,600 | | | | 34.0 | % |
| Changes from the statutory rate | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Bargain purchase gain recorded on tax-exempt acquisition | | | | (1,208 | ) | | | (10.0 | ) | | | - | | | | - | | | | - | | | | - | |
Tax-exempt interest income | | | (120 | ) | | | (1.1 | ) | | | (124 | ) | | | (1.2 | ) | | | (97 | ) | | | (1.0 | ) | | | (165 | ) | | | (1.4 | ) | | | (120 | ) | | | (1.1 | ) | | | (124 | ) | | | (1.2 | ) |
Non-deductible interest expense related to carrying tax-exempt interest earning assets | | | 11 | | | | 0.1 | | | | 11 | | | | 0.1 | | | | 8 | | | | 0.1 | | | | 12 | | | | 0.1 | | | | 11 | | | | 0.1 | | | | 11 | | | | 0.1 | |
Non-deductible stock compensation expense | | | 41 | | | | 0.4 | | | | 44 | | | | 0.4 | | | | 46 | | | | 0.5 | | | | 17 | | | | 0.1 | | | | 41 | | | | 0.4 | | | | 44 | | | | 0.4 | |
Non-deductible acquisition expenses | | | | 172 | | | | 1.4 | | | | - | | | | - | | | | - | | | | - | |
Tax credits, net | | | (49 | ) | | | (0.4 | ) | | | (2 | ) | | | (0.0 | ) | | | (10 | ) | | | (0.1 | ) | | | (49 | ) | | | (0.4 | ) | | | (49 | ) | | | (0.4 | ) | | | (2 | ) | | | (0.0 | ) |
Officer’s life insurance death benefit | | | - | | | | - | | | | (73 | ) | | | (0.6 | ) | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | (73 | ) | | | (0.6 | ) |
Other | | | 29 | | | | 0.2 | | | | 14 | | | | 0.1 | | | | 9 | | | | 0.1 | | | | 57 | | | | 0.5 | | | | 29 | | | | 0.2 | | | | 14 | | | | 0.1 | |
| | | $ | 3,749 | | | | 33.2 | % | | $ | 3,470 | | | | 32.8 | % | | $ | 3,283 | | | | 33.6 | % | | $ | 2,934 | | | | 24.3 | % | | $ | 3,749 | | | | 33.2 | % | | $ | 3,470 | | | | 32.8 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
PREMIER FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2009, 2008, and 2007
(Dollars in Thousands, Except Per Share Data)
NOTE 12 – INCOME TAXES (Continued)
Unrecognized Tax Benefits: The Company does not have any beginning or ending unrecognized tax benefits. The Company does not expect the total amount of unrecognized tax benefits to significantly increase in the next twelve months. There were no interest and penalties recorded in the income statement or accrued for the year ended December 31, 2009, 2008 and 2007 related to unrecognized tax benefits.
The Company and its subsidiaries file a consolidated U.S. Corporation income tax return and a combined return in the state of West Virginia. The Company also files a corporate income tax return in the statestates of Kentucky.Kentucky and Maryland and the District of Columbia. The Company is no longer subject to examination by taxing authorities for years before 2005. A federal examination of the tax years 2001 - 2003 was completed in 2005 with no material adjustments.
2006.
The Company has qualified profit sharing plans that cover substantially all employees. Contributions to the plans consist of a Company match and additional amounts at the discretion of the Company’s Board of Directors. Total contributions to the plans were $320, $266 and $245 in 2009, 2008, and $236 in 2008, 2007 and 2006.2007.
PREMIER FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2009, 2008, 2007, and 20062007
(Dollars in Thousands, Except Per Share Data)
In 2002, the Company registered 200,000 shares of its common stock to be reserved for stock based incentive programs (“the 2002 Plan”). From time to time the Company grants stock options to its employees. The Company accounts for these option grants using SFAS No. 123R, “Share-Based Payments,” which establishes accounting requirements for share-based compensation to employees. Under SFAS 123R, the Company estimates the fair value of the options at the time they are granted to employees and expenses that fair value over the vesting period of the option grant.
On February 18, 2009, 47,100 incentive stock options were granted out of the 2002 Plan at an exercise price of $6.55. These options vest in three equal annual installments ending on February 18, 2012. On February 20, 2008, 45,300 incentive stock options were granted out of the 2002 Plan at an exercise price of $12.92, the closing market price of Premier on the grant date. These options vest in three equal annual installments ending on February 20, 2011. On January 17, 2007, 37,000 incentive stock options were granted out of the 2002 Plan at an exercise price of $14.22. These options vest in three equal annual installments ending on January 17, 2010. On February 15, 2006, 35,250 incentive stock options were granted out of the 2002 Plan at an exercise price of $16.00. These options vestvested in three equal annual installments endingand were fully vested on February 15, 2009.
The fair value of the Company's employee stock options granted is estimated at the date of grant using the Black-Scholes option-pricing model. This model requires the input of highly subjective assumptions, changes to which can materially affect the fair value estimate. Additionally, there may be other factors that would otherwise have a significant effect on the value of employee stock options granted but are not considered by the model. The assumptions used in the Black-Scholes option-pricing model are as follows:
| | | 2008 | | | 2007 | | | 2006 | | | 2009 | | | 2008 | | | 2007 | |
| Risk-free interest rate | | | 3.50 | % | | | 4.78 | % | | | 4.62 | % | | | 2.74 | % | | | 3.50 | % | | | 4.78 | % |
| Expected option life (yrs) | | | 7.00 | | | | 5.00 | | | | 5.00 | | | | 10.00 | | | | 7.00 | | | | 5.00 | |
| Expected stock price volatility | | | 23.00 | % | | | 25.00 | % | | | 26.00 | % | | | 19.26 | % | | | 23.00 | % | | | 25.00 | % |
| Dividend yield | | | 3.10 | % | | | 1.41 | % | | | 0.00 | % | | | 6.72 | % | | | 3.10 | % | | | 1.41 | % |
| Weighted average fair value of options granted during the year | | $ | 2.55 | | | $ | 3.81 | | | $ | 5.21 | | | $ | 0.37 | | | $ | 2.55 | | | $ | 3.81 | |
The risk-free interest rate for the expected term of the option is based on the U.S. Treasury yield in effect at the time of the grant. The expected option life was estimated since there has been little option exercise history. The expected stock price volatility is based on historical volatilities of the Company’s common stock. The dividend yield is estimated at the time of the option grant based upon Premier’s dividend rate and stock price at that time.
PREMIER FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2009, 2008, 2007, and 20062007
(Dollars in Thousands, Except Per Share Data)
NOTE 1314 – STOCK COMPENSATION EXPENSE (Continued)
Compensation expense of $51, $120, $130 and $142$130 was recorded for the years ended December 31, 2009, 2008, 2007 and 2006,2007, respectively.
Stock-based compensation expense is recognized ratably over the requisite service period for all awards. Unrecognized stock-based compensation expense related to stock options totaled $67$22 at December 31, 2008.2009. This unrecognized expense is expected to be recognized over the next 25 months based on the vesting periods of the options.
Information related to the stock option plan during each year follows:
| | | 2008 | | | 2007 | | | 2006 | | | 2009 | | | 2008 | | | 2007 | |
| Intrinsic value of options exercised | | $ | - | | | $ | 3 | | | $ | 9 | | | $ | - | | | $ | - | | | $ | 3 | |
| Cash received from option exercises | | | - | | | | 10 | | | | 27 | | | | - | | | | - | | | | 10 | |
| Tax benefit realized from option exercises | | | - | | | | 1 | | | | 2 | | | | - | | | | - | | | | 1 | |
A summary of the Company’s stock option activity is as follows:
| | | ----------2009---------- | | ----------2008---------- | | ----------2007---------- | |
| | | | | | Weighted Average Exercise | | | | | | Weighted Average Exercise | | | | | | Weighted Average Exercise | |
| | | Options | | | Price | | | Options | | | Price | | | Options | | | Price | |
| Outstanding at beginning of year | | | 181,916 | | | $ | 12.47 | | | | 150,249 | | | $ | 12.65 | | | | 120,248 | | | $ | 12.25 | |
| Grants | | | 47,100 | | | | 6.55 | | | | 45,300 | | | | 12.92 | | | | 37,000 | | | | 14.22 | |
| Exercises | | | - | | | | - | | | | - | | | | - | | | | (1,000 | ) | | | 10.85 | |
| Forfeitures or expired | | | (16,567 | ) | | | 12.25 | | | | (13,633 | ) | | | 15.89 | | | | (5,999 | ) | | | 14.60 | |
| Outstanding at year-end | | | 212,449 | | | $ | 11.18 | | | | 181,916 | | | $ | 12.47 | | | | 150,249 | | | $ | 12.65 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Exercisable at year-end | | | 127,630 | | | $ | 12.27 | | | | 106,433 | | | $ | 11.59 | | | | 84,096 | | | $ | 11.31 | |
| Weighted average remaining life | | | 6.7 | | | | | | | | 7.0 | | | | | | | | 6.9 | | | | | |
Weighted average fair value of options granted during the year | | $ | 0.37 | | | | | | | $ | 2.55 | | | | | | | $ | 3.81 | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
Options outstanding at year-end are expected to fully vest.
PREMIER FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2009, 2008, 2007, and 20062007
(Dollars in Thousands, Except Per Share Data)
NOTE 1314 – STOCK COMPENSATION EXPENSE (Continued)
A summary of the Company’s stock option activity is as follows:
| | | 2008 | | | 2007 | | | 2006 | |
| | | | | | Weighted Average Exercise | | | | | | Weighted Average Exercise | | | | | | Weighted Average Exercise | |
| | | Options | | | Price | | | Options | | | Price | | | Options | | | Price | |
| Outstanding at beginning of year | | | 150,249 | | | $ | 12.65 | | | | 120,248 | | | $ | 12.25 | | | | 111,750 | | | $ | 11.05 | |
| Grants | | | 45,300 | | | | 12.92 | | | | 37,000 | | | | 14.22 | | | | 35,250 | | | | 16.00 | |
| Exercises | | | - | | | | - | | | | (1,000 | ) | | | 10.85 | | | | (3,002 | ) | | | 9.02 | |
| Forfeitures or expired | | | (13,633 | ) | | | 15.89 | | | | (5,999 | ) | | | 14.60 | | | | (23,750 | ) | | | 13.11 | |
| Outstanding at year-end | | | 181,916 | | | $ | 12.47 | | | | 150,249 | | | $ | 12.65 | | | | 120,248 | | | $ | 12.25 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Exercisable at year-end | | | 106,433 | | | $ | 11.59 | | | | 84,096 | | | $ | 11.31 | | | | 55,931 | | | $ | 10.68 | |
| Weighted average remaining life | | | 7.0 | | | | | | | | 6.9 | | | | | | | | 7.3 | | | | | |
Weighted average fair value of options granted during the year | | $ | 2.55 | | | | | | | $ | 3.81 | | | | | | | $ | 5.21 | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
Options outstanding at year-end are expected to fully vest.
Additional information regarding stock options outstanding and exercisable at December 31, 20082009 is provided in the following table:
| | | | - - - - - - - - Outstanding - - - - - - - - | | | - - - - - - - - Currently Exercisable - - - - - - - - | |
| Range of Exercise Prices | | | Number | | | Weighted Average Exercise Price | | | Aggregate Intrinsic Value | | | Number | | | Weighted Average Remaining Contractual Life | | | Weighted Average Exercise Price | | | Aggregate Intrinsic Value | |
| | | | | | | | | | | | | | | | | | | | | | | |
| $ 7.50 to $10.00 | | | | 42,416 | | | $ | 8.69 | | | $ | - | | | | 42,416 | | | | 4.6 | | | $ | 8.69 | | | $ | - | |
| $ 10.01 to $12.50 | | | | 31,833 | | | | 11.62 | | | | - | | | | 31,833 | | | | 6.1 | | | | 11.62 | | | | - | |
| $ 12.51 to $15.00 | | | | 76,167 | | | | 13.48 | | | | - | | | | 11,175 | | | | 8.1 | | | | 14.22 | | | | - | |
| $ 15.01 to $17.50 | | | | 31,500 | | | | 16.00 | | | | - | | | | 21,009 | | | | 7.1 | | | | 16.00 | | | | - | |
| Outstanding at Dec 31, 2008 | | | | 181,916 | | | | 12.47 | | | $ | - | | | | 106,433 | | | | 5.9 | | | | 11.59 | | | $ | - | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | - - - - - - - - Outstanding - - - - - - - - | | | - - - - - - - - Currently Exercisable - - - - - - - - | |
| Range of Exercise Prices | | | Number | | | Weighted Average Exercise Price | | | Aggregate Intrinsic Value | | | Number | | | Weighted Average Remaining Contractual Life | | | Weighted Average Exercise Price | | | Aggregate Intrinsic Value | |
| | | | | | | | | | | | | | | | | | | | | | | |
| $6.50 to $10.00 | | | | 84,516 | | | $ | 7.49 | | | $ | 7 | | | | 37,416 | | | | 3.6 | | | $ | 8.69 | | | $ | - | |
| $10.01 to $12.50 | | | | 28,333 | | | | 11.62 | | | | - | | | | 28,333 | | | | 5.1 | | | | 11.62 | | | | - | |
| $12.51 to $15.00 | | | | 71,600 | | | | 13.47 | | | | - | | | | 33,881 | | | | 7.5 | | | | 13.69 | | | | - | |
| $15.01 to $17.50 | | | | 28,000 | | | | 16.00 | | | | - | | | | 28,000 | | | | 6.1 | | | | 16.00 | | | | - | |
| Outstanding at Dec 31, 2009 | | | | 212,449 | | | | 11.18 | | | $ | 7 | | | | 127,630 | | | | 5.5 | | | | 12.27 | | | $ | - | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
PREMIER FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2008, 2007, and 2006
(Dollars in Thousands, Except Per Share Data)
As part of the acquisition of Traders Bankshares, Inc. on April 30, 2008, Premier assumed the assets and liabilities of the Traders employee defined benefit pension plan. The plan providesprovided defined benefits based on years of service and final average salary. Prior to the acquisition by Premier, the plan benefits were frozen and a plan of termination had been submitted to the Internal Revenue Service (IRS)(“IRS”). Also, all the plan assets were reinvested into a money market account to preserve the principal balance for distribution upon termination. AsThe plan received termination approval in 2009. All plan assets have been paid out to participants.
PREMIER FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2009, 2008, the pension plan is still waiting for final approval for termination from the IRS.and 2007
(Dollars in Thousands, Except Per Share Data)
NOTE 15 – ACQUIRED PENSION PLAN IN PROCESS OF LIQUIDATION (Continued)
The following table sets forth changes in obligations and plan assets of the defined benefit pension plan from the April 30, 2008 acquisition date through December 31, 2008:2008 and for the year ended December 31, 2009:
| | | | | | 2009 | | | 2008 | |
| Change in Benefit Obligation | | | | | | | | | |
Benefit Obligation acquired on April 30, 2008 | | $ | (3,723 | ) | |
Benefit Obligation, beginning of period | | | $ | (3,413 | ) | | $ | (3,723 | ) |
Interest cost | | | (119 | ) | | | - | | | | (119 | ) |
Amendments | | | (6 | ) | | | - | | | | (6 | ) |
Actuarial loss | | | (132 | ) | | | (139 | ) | | | (132 | ) |
Actual distributions | | | 69 | | | | 102 | | | | 69 | |
Settlement | | | 498 | | | | 3,450 | | | | 498 | |
Benefit Obligation at December 31, 2008 | | $ | (3,413 | ) | |
Benefit Obligation , end of period | | | $ | - | | | $ | (3,413 | ) |
| | | | | | | | | | | | | |
| Change in Plan Assets | | | | | | | | | | | | |
Plan Assets at fair value acquired on April 30, 2008 | | $ | 2,685 | | |
Plan Assets at fair value, beginning of period | | | $ | 2,155 | | | $ | 2,685 | |
Actual return on Plan Assets | | | 37 | | | | 45 | | | | 37 | |
Employer contribution | | | | 1,352 | | | | - | |
Settlement | | | (498 | ) | | | (3,450 | ) | | | (498 | ) |
Actual distributions | | | (69 | ) | | | (102 | ) | | | (69 | ) |
Plan Assets at fair value at December 31, 2008 | | $ | 2,155 | | |
Plan Assets at fair value, end of period | | | $ | - | | | $ | 2,155 | |
| | | | | | | | | | | | | |
| Funded status at December 31, 2008 | | $ | (1,258 | ) | |
| Funded status at end of period | | | $ | - | | | $ | (1,258 | ) |
The $87 loss recognized in accumulated other comprehensive income at December 31, 2008 consists of the net actuarial loss from May 1, 2008 through December 31, 2008. It is estimated that this loss will be recognized intoThis amount was included in the net periodic pension benefit expense during the next2009 fiscal year whenyear. Since the pension benefit plan is approved for termination and the pension plan assetswas terminated before December 31, 2009, there are distributed to the participants.no longer any amounts included in accumulated other comprehensive income at December 31, 2009.
The accumulated benefit obligation (ABO) was $3,413 at year-end 2008.
The actuarial assumptions used to determine the pension benefit obligation at April 30, 2008 and December 31, 2008 follow:
| | | Dec. 31, 2008 | | | April 30, 2008 | |
| Discount rate | | | 4.27 | % | | | 4.27 | % |
| Rate of compensation increase | | | 3.00 | % | | | 3.00 | % |
PREMIER FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2009, 2008, 2007, and 20062007
(Dollars in Thousands, Except Per Share Data)
During 2009, 2008 2007 and 2006,2007, the Company paid approximately $439, $218, $231, and $228$231 for printing, supplies, statement rendering, furniture, and equipment to a company affiliated by common ownership. The Company also paid another affiliate approximately $632, $533, and $459 in 2009, 2008 and $468 in 2008, 2007 and 2006 to permit the Company’s employees to participate in that entity’s employee medical benefit plan.
During 2009, 2008 2007 and 2006,2007, the Company paid approximately $52, $52, and $52 to lease its headquarters facility at 2883 Fifth Avenue, Huntington, West Virginia from River City Properties, LLC, an entity 12.5% owned by the Company’s Chairman of the Board.
A reconciliation of the numerators and denominators of the earnings per common share and earnings per common share assuming dilution computations for 2009, 2008 2007 and 20062007 is presented below:
| | | 2008 | | | 2007 | | | 2006 | | | 2009 | | | 2008 | | | 2007 | |
| Basic earnings per share | | | | | | | | | | | | | | | | | | |
Income available to common stockholders | | $ | 7,536 | | | $ | 7,119 | | | $ | 6,501 | | | $ | 8,985 | | | $ | 7,536 | | | $ | 7,119 | |
Weighted average common shares outstanding | | | 6,011 | | | | 5,237 | | | | 5,236 | | | | 6,782 | | | | 6,011 | | | | 5,237 | |
Earnings per share | | $ | 1.25 | | | $ | 1.36 | | | $ | 1.24 | | | $ | 1.32 | | | $ | 1.25 | | | $ | 1.36 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Diluted earnings per share | | | | | | | | | | | | | | | | | | | | | | | | |
Income available to common stockholders | | $ | 7,536 | | | $ | 7,119 | | | $ | 6,501 | | | $ | 8,985 | | | $ | 7,536 | | | $ | 7,119 | |
Weighted average common shares outstanding | | | 6,011 | | | | 5,237 | | | | 5,236 | | | | 6,782 | | | | 6,011 | | | | 5,237 | |
Add dilutive effects of assumed exercise of stock options | | | 8 | | | | 26 | | | | 28 | | |
Add dilutive effects of potential additional common stock | | | | 20 | | | | 8 | | | | 26 | |
Weighted average common and dilutive potential Common shares outstanding | | | 6,019 | | | | 5,263 | | | | 5,264 | | | | 6,802 | | | | 6,019 | | | | 5,263 | |
Earnings per share assuming dilution | | $ | 1.25 | | | $ | 1.35 | | | $ | 1.24 | | | $ | 1.32 | | | $ | 1.25 | | | $ | 1.35 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
Stock options for 212,449, 153,133 42,500 and 46,25042,500 shares of common stock were not considered in computing diluted earnings per share for 2009, 2008 2007 and 20062007 because they were antidilutive.
PREMIER FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2009, 2008, 2007, and 20062007
(Dollars in Thousands, Except Per Share Data)
Financial Accounting Standards Board (FASB) Statement 157 defines fairFair value asis the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Statement 157 also establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describesThere are three levels of inputs that may be used to measure fair value:values:
Level 1: Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.
Level 2: Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.
Level 3: Significant unobservable inputs that reflect a company’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.
When possible,The Company used the Company looksfollowing methods and significant assumptions to active and observable markets to price identical assets or liabilities. When identical assets and liabilities are not traded in active markets,estimate the Company looks to observable market data for similar assets and liabilities. However, certain assets and liabilities are not traded in observable markets and the Company must use other valuation methods to develop a fair value.value of each type of financial instrument:
Premier’s reportedInvestment Securities: The fair values offor investment securities available for sale are determined by matrix pricing, which is a mathematical technique widely used in the industry to value debtquoted market prices, if available (Level 1). For securities without relying exclusively onwhere quoted prices for the specific securities, but rather by relyingare not available, fair values are calculated based on the securities’ relationship to other benchmark quotedmarket prices of similar securities (Level 2 inputs)2). For securities where quoted prices or market prices of similar securities are not available, fair values are calculated using discounted cash flows or other market indicators (Level 3). Discounted cash flows are calculated using spread to swap and LIBOR curves that are updated to incorporate loss severities, volatility, credit spread and optionality. During times when trading is more liquid, broker quotes are used (if available) to validate the model. Rating agency and industry research reports as well as defaults and deferrals on individual securities are reviewed and incorporated into the calculations.
Impaired Loans: The fair value of impaired loans with specific allocations of the allowance for loan losses is generally based on recent real estate appraisals. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the fair valueincome approach. Adjustments are routinely made in the appraisal process by the appraisers to adjust for differences between the comparable sales and income data available. Such adjustments are typically significant and result in a Level 3 classification of the underlying collateral, which is estimated through third party appraisals or internal estimates of collateral values (Level 3 inputs).
inputs for determining fair value.
PREMIER FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2009, 2008, 2007, and 20062007
(Dollars in Thousands, Except Per Share Data)
NOTE 1718 – FAIR VALUE (Continued)
Assets and Liabilities Measured on a Recurring Basis
Assets and liabilities measured at fair value on a recurring basis are summarized below:
| | | | | | Fair Value Measurements at December 31, 2008 Using | |
| | | Dec. 31, 2008 | | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | | Significant Other Observable Inputs (Level 2) | | | Significant Unobservable Inputs (Level 3) | |
| Assets: | | | | | | | | | | | | |
| Available for sale securities | | $ | 175,741 | | | $ | - | | | $ | 175,741 | | | $ | - | |
| | | | | | Fair Value Measurements at December 31, 2009 Using: | |
| | | Carrying Value | | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | | Significant Other Observable Inputs (Level 2) | | | Significant Unobservable Inputs (Level 3) | |
| Available for sale | | | | | | | | | | | | |
Mortgage-backed securities | | | | | | | | | | | | |
U. S. agency MBS - residential | | $ | 54,482 | | | $ | - | | | $ | 54,482 | | | $ | - | |
U. S. agency CMO’s | | | 19,560 | | | | - | | | | 19,560 | | | | - | |
Total mortgage-backed securities of government sponsored agencies | | | 74,042 | | | | - | | | | 74,042 | | | | - | |
U. S. Treasury securities | | | 1,005 | | | | - | | | | 1,005 | | | | - | |
U. S. government sponsored entity securities | | | 150,067 | | | | - | | | | 150,067 | | | | - | |
Obligations of states and political subdivisions | | | 10,247 | | | | - | | | | 10,107 | | | | 140 | |
Other securities | | | 5,609 | | | | - | | | | 5,609 | | | | - | |
Total available for sale | | $ | 240,970 | | | $ | - | | | $ | 240,830 | | | $ | 140 | |
| | | | | | Fair Value Measurements at December 31, 2008 Using: | |
| | | Carrying Value | | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | | Significant Other Observable Inputs (Level 2) | | | Significant Unobservable Inputs (Level 3) | |
| Available for sale | | | | | | | | | | | | |
U. S. Treasury securities | | $ | 1,544 | | | $ | - | | | $ | 1,544 | | | $ | - | |
U. S. government sponsored entity securities | | | 97,105 | | | | - | | | | 97,105 | | | | - | |
Mortgage-backed securities of government sponsored agencies | | | 69,962 | | | | - | | | | 69,962 | | | | - | |
Obligations of states and political subdivisions | | | 7,130 | | | | - | | | | 7,130 | | | | - | |
Total available for sale | | $ | 175,741 | | | $ | - | | | $ | 175,741 | | | $ | - | |
PREMIER FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2009, 2008, and 2007
(Dollars in Thousands, Except Per Share Data)
NOTE 18 – FAIR VALUE (Continued)
The table below presents a reconciliation of all assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the year ended December 31, 2009:
| | | Securities Available-for-sale | |
| | | Year Ended Dec. 31, 2009 | |
| Balance of recurring Level 3 assets at beginning of period | | $ | - | |
Total gains or losses (realized/unrealized): | | | | |
Included in earnings – realized | | | - | |
Included in earnings – unrealized | | | - | |
Included in other comprehensive income | | | - | |
Purchases, sales, issuances and settlements, net | | | - | |
Transfers in and/or out of Level 3 | | | 140 | |
Balance of recurring Level 3 assets at December 31, 2009 | | $ | 140 | |
Assets and Liabilities Measured on a Non-Recurring Basis
Assets and liabilities measured at fair value on a non-recurring basis are summarized below:
| | | | | | Fair Value Measurements at December 31, 2008 Using | | | | | | Fair Value Measurements at December 31, 2009 Using | |
| | | Dec. 31, 2008 | | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | | Significant Other Observable Inputs (Level 2) | | | Significant Unobservable Inputs (Level 3) | | | Dec 31, 2009 | | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | | Significant Other Observable Inputs (Level 2) | | | Significant Unobservable Inputs (Level 3) | |
| Assets: | | | | | | | | | | | | | | | | | | | | | | | | |
| Impaired Loans | | $ | 9,402 | | | $ | - | | | $ | - | | | $ | 9,402 | | |
| Impaired loans | | | $ | 13,215 | | | $ | - | | | $ | - | | | $ | 13,215 | |
| Other real estate owned | | | | 9,251 | | | | - | | | | - | | | | 9,251 | |
| | | | | | Fair Value Measurements at December 31, 2008 Using | |
| | | Dec. 31, 2008 | | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | | Significant Other Observable Inputs (Level 2) | | | Significant Unobservable Inputs (Level 3) | |
| Assets: | | | | | | | | | | | | |
| Impaired Loans | | $ | 9,402 | | | $ | - | | | $ | - | | | $ | 9,402 | |
| Other real estate owned | | | 1,056 | | | | - | | | | - | | | | 1,056 | |
PREMIER FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2009, 2008, and 2007
(Dollars in Thousands, Except Per Share Data)
NOTE 18 – FAIR VALUE (Continued)
Impaired loans, which are measured for impairment using the fair value of the collateral for collateral dependent loans, had a carrying amount of $11,610$14,494 with a valuation allowance of $2,208. Approximately $5,418 of the carrying amount and $384 of the valuation allowance were added as a result of the acquisitions of Citizens First and Traders.$1,279. The remaining change since year-end 20072008 resulted in a net negative provision for loan losses of $342$929 for the twelve month period.
PREMIER FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2008, 2007, and 2006
(Dollars in Thousands, Except Per Share Data)
NOTE 17 – FAIR VALUE (Continued)
The carrying amount and estimated fair values of financial instruments at year end were as follows:
| | | 2008 | | | 2007 | | | 2009 | | | 2008 | |
| | | Carrying Amount | | | Fair Value | | | Carrying Amount | | | Fair Value | | | Carrying Amount | | | Fair Value | | | Carrying Amount | | | Fair Value | |
| Financial assets | | | | | | | | | | | | | | | | | | | | | | | | |
Cash and due from banks | | $ | 22,148 | | | $ | 22,148 | | | $ | 22,365 | | | $ | 22,365 | | | $ | 61,611 | | | $ | 61,611 | | | $ | 22,148 | | | $ | 22,148 | |
Federal funds sold | | | 15,899 | | | | 15,899 | | | | 32,035 | | | | 32,035 | | | | 22,985 | | | | 22,985 | | | | 15,899 | | | | 15,899 | |
Securities available for sale | | | 175,741 | | | | 175,741 | | | | 124,242 | | | | 124,242 | | | | 240,970 | | | | 240,970 | | | | 175,741 | | | | 175,741 | |
Loans held for sale | | | 1,193 | | | | 1,193 | | | | 1,891 | | | | 1,891 | | | | 897 | | | | 897 | | | | 1,193 | | | | 1,193 | |
Loans, net | | | 458,567 | | | | 465,488 | | | | 340,073 | | | | 344,158 | | | | 691,564 | | | | 691,708 | | | | 458,567 | | | | 465,488 | |
Federal Home Loan Bank and Federal Reserve Bank stock | | | 3,931 | | | | n/a | | | | 3,314 | | | | n/a | | | | 7,005 | | | | n/a | | | | 3,931 | | | | n/a | |
Interest receivable | | | 3,720 | | | | 3,720 | | | | 2,768 | | | | 2,768 | | | | 4,250 | | | | 4,250 | | | | 3,720 | | | | 3,720 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Financial liabilities | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Deposits | | $ | (589,182 | ) | | $ | (592,658 | ) | | $ | (449,033 | ) | | $ | (448,648 | ) | | $ | (913,784 | ) | | $ | (917,859 | ) | | $ | (589,182 | ) | | $ | (592,658 | ) |
Federal funds purchased | | | - | | | | - | | | | (392 | ) | | | (392 | ) | |
Securities sold under agreements to repurchase | | | (18,351 | ) | | | (18,351 | ) | | | (12,477 | ) | | | (12,477 | ) | | | (24,600 | ) | | | (24,600 | ) | | | (18,351 | ) | | | (18,351 | ) |
Federal Home Loan Bank advances | | | (7,607 | ) | | | (7,860 | ) | | | (4,843 | ) | | | (5,051 | ) | | | (14,937 | ) | | | (15,028 | ) | | | (7,607 | ) | | | (7,860 | ) |
Other borrowed funds | | | (15,560 | ) | | | (15,660 | ) | | | (8,412 | ) | | | (8,367 | ) | | | (16,027 | ) | | | (15,984 | ) | | | (15,560 | ) | | | (15,660 | ) |
Interest payable | | | (1,054 | ) | | | (1,054 | ) | | | (1,064 | ) | | | (1,064 | ) | | | (1,037 | ) | | | (1,037 | ) | | | (1,054 | ) | | | (1,054 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Carrying amount is the estimated fair value for cash and due from banks, Federal funds sold, accrued interest receivable and payable, demand deposits, short-term debt, and variable rate loans or deposits that reprice frequently and fully. It was not practicable to determine the fair value of Federal Home Loan Bank and Federal Reserve Bank stock due to the restrictions placed on its transferability. For fixed rate loans or deposits and for variable rate loans or deposits with infrequent repricing or repricing limits, fair value is based on discounted cash flows using current market rates applied to the estimated life and credit risk. Fair values for impaired loans are estimated using discounted cash flow analysis or underlying collateral values. Fair value of debt is based on current rates for similar financing. The fair value of commitments to extend credit and standby letters of credit is not material.
PREMIER FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2009, 2008, 2007, and 20062007
(Dollars in Thousands, Except Per Share Data)
The Banks are parties to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of their customers. These financial instruments include standby letters of credit and commitments to extend credit in the form of unused lines of credit. The Banks use the same credit policies in making commitments and conditional obligations as they do for on-balance sheet instruments. In addition, the Banks offer a service whereby deposit customers for a fee are permitted to overdraw their accounts up to a certain deminimus amount, also known as “bounce protection” or “overdraft protection”. The aggregate unused portion of “bounce“overdraft protection” was $7,742$9,008 and $5,003$7,742 at December 31, 20082009 and 2007.2008.
At December 31, 20082009 and 2007,2008, the Banks had the following financial instruments whose approximate contract amounts represent credit risk:
| | | 2008 | | | 2007 | | | 2009 | | | 2008 | |
| Standby letters of credit | | $ | 1,411 | | | $ | 977 | | | $ | 5,890 | | | $ | 1,411 | |
| | | | | | | | | | | | | | | | | |
| Commitments to extend credit | | | | | | | | | | | | | | | | |
Fixed | | $ | 12,674 | | | $ | 6,100 | | | $ | 23,865 | | | $ | 12,674 | |
Variable | | | 41,167 | | | | 33,112 | | | | 48,931 | | | | 41,167 | |
| | | | | | | | | | | | | | | | | |
Standby letters of credit represent conditional commitments issued by the Banks to guarantee the performance of a third party. The credit risk involved in issuing these letters of credit is essentially the same as the risk involved in extending loans to customers. Collateral held varies but primarily includes real estate and certificates of deposit. Some letters of credit are unsecured.
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Outstanding commitments are at current market rates. Fixed rate loan commitments have interest rates ranging from 4.00%3.25% to 18.00%. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. The Banks evaluate each customer’s creditworthiness on a case-by-case basis. Since some of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. Collateral held varies but may include accounts receivable, inventory, property and equipment, and income producing properties.
PREMIER FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2009, 2008, 2007, and 20062007
(Dollars in Thousands, Except Per Share Data)
Legal proceedings involving the Company and its subsidiaries periodically arise in the ordinary course of business, including claims by debtors and their related interests against the Company’s subsidiaries following initial collection proceedings. These legal proceedings sometimes can involve claims for substantial damages. At December 31, 20082009 management is unaware of any legal proceedings for which the expected outcome would have a material adverse effect upon the consolidated financial statements of the Company.
The Company’s principal source of funds for dividend payments is dividends received from the subsidiary Banks. Banking regulations limit the amount of dividends that may be paid without prior approval of regulatory agencies. Under these regulations, the amount of dividends that may be paid in any calendar year is limited to the current year’s net profits, as defined, combined with the retained net profits of the preceding two years, subject to the capital requirements and additional restrictions as discussed below. During 20092010 the Banks could, without prior approval, declare dividends to Premier of approximately $2.4$2.5 million plus any 20092010 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 Banks must meet specific guidelines that involve quantitative measures of their assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices.
These quantitative measures established by regulation to ensure capital adequacy require the Company and Banks to maintain minimum amounts and ratios (set forth in the following table) of Total and Tier I capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier I capital (as defined) to average assets (as defined). Management believes, as of December 31, 20082009 the Company and the Banks meet all quantitative capital adequacy requirements to which they are subject.
PREMIER FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2009, 2008, 2007, and 20062007
(Dollars in Thousands, Except Per Share Data)
NOTE 2021 - STOCKHOLDERS’ EQUITY (Continued)
The Company’sAdams entered into an agreement with the OCC on October 1, 2008 restricting Adams from declaring or paying dividends, without prior approval from the OCC (See Note 2 above). During 2009, Farmers Deposit Bank requested and received approval from its primary regulatory authority to make a dividend payment to the subsidiary Banks’ capital amounts and ratios asCompany in an amount that exceeded the retained net profits of December 31, 2008 are presented in the table below. preceding two years. As such, Farmers Deposit will be required to continue to request permission to pay any additional dividends to the Company for up to two years.
As of December 31, 2008,2009, the most recent notification from each of the Banks’ primary Federal regulators categorized the subsidiary Banks as well capitalized under the regulatory framework for prompt corrective action.action, except Adams. To be categorized as well capitalized, the Banks must maintain minimum Total risk-based, Tier I risk-based and Tier I leverage ratios as set forth in the following table. There are no conditions or events since that notification that management believes have changed the Banks’ categories.
| | | | | | | | | To Be Well Capitalized | |
| | | | | | For Capital | | | Under Prompt Corrective | |
| | | Actual | | | Adequacy Purposes | | | Action Provisions | |
| 2008 | | Amount | | | Ratio | | | Amount | | | Ratio | | | Amount | | | Ratio | |
| Total Capital (to Risk-Weighted Assets): | | | | | | | | | | | | | | | | | | |
Consolidated (1) | | $ | 66,556 | | | | 15.3 | % | | $ | 34,882 | | | | 8 | % | | $ | 43,602 | | | | 10 | % |
Boone County Bank | | | 18,546 | | | | 22.3 | | | | 6,647 | | | | 8 | | | | 8,309 | | | | 10 | |
Citizens Deposit Bank | | | 13,487 | | | | 17.5 | | | | 6,157 | | | | 8 | | | | 7,697 | | | | 10 | |
Farmers Deposit Bank | | | 8,441 | | | | 18.6 | | | | 3,627 | | | | 8 | | | | 4,534 | | | | 10 | |
Ohio River Bank | | | 7,943 | | | | 15.5 | | | | 4,111 | | | | 8 | | | | 5,139 | | | | 10 | |
First Central Bank | | | 10,663 | | | | 13.0 | | | | 6,544 | | | | 8 | | | | 8,180 | | | | 10 | |
Traders Bank | | | 15,584 | | | | 16.1 | | | | 7,763 | | | | 8 | | | | 9,704 | | | | 10 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Tier I Capital (to Risk-Weighted Assets): | | | | | | | | | | | | | | | | | | | | | | | | |
Consolidated (1) | | $ | 61,070 | | | | 14.0 | % | | $ | 17,441 | | | | 4 | % | | $ | 26,161 | | | | 6 | % |
Boone County Bank | | | 17,503 | | | | 21.1 | | | | 3,323 | | | | 4 | | | | 4,985 | | | | 6 | |
Citizens Deposit Bank | | | 12,526 | | | | 16.3 | | | | 3,079 | | | | 4 | | | | 4,618 | | | | 6 | |
Farmers Deposit Bank | | | 7,856 | | | | 17.3 | | | | 1,813 | | | | 4 | | | | 2,720 | | | | 6 | |
Ohio River Bank | | | 7,419 | | | | 14.4 | | | | 2,056 | | | | 4 | | | | 3,083 | | | | 6 | |
First Central Bank | | | 9,773 | | | | 12.0 | | | | 3,272 | | | | 4 | | | | 4,908 | | | | 6 | |
Traders Bank | | | 14,357 | | | | 14.8 | | | | 3,882 | | | | 4 | | | | 5,822 | | | | 6 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Tier I Capital (to Average Assets): | | | | | | | | | | | | | | | | | | | | | | | | |
Consolidated (1) | | $ | 61,070 | | | | 8.7 | % | | $ | 28,114 | | | | 4 | % | | $ | 35,143 | | | | 5 | % |
Boone County Bank | | | 17,503 | | | | 11.4 | | | | 6,163 | | | | 4 | | | | 7,703 | | | | 5 | |
Citizens Deposit Bank | | | 12,526 | | | | 10.1 | | | | 4,983 | | | | 4 | | | | 6,229 | | | | 5 | |
Farmers Deposit Bank | | | 7,856 | | | | 12.6 | | | | 2,496 | | | | 4 | | | | 3,120 | | | | 5 | |
Ohio River Bank | | | 7,419 | | | | 8.1 | | | | 3,687 | | | | 4 | | | | 4,609 | | | | 5 | |
First Central Bank | | | 9,773 | | | | 8.8 | | | | 4,432 | | | | 4 | | | | 5,540 | | | | 5 | |
Traders Bank | | | 14,357 | | | | 9.1 | | | | 6,318 | | | | 4 | | | | 7,897 | | | | 5 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| (1) Consolidated company is not subject to Prompt Corrective Action Provisions | |
PREMIER FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2009, 2008, 2007, and 20062007
(Dollars in Thousands, Except Per Share Data)
NOTE 2021 - STOCKHOLDERS’ EQUITY (Continued)
The Company’s and the subsidiary Banks’ capital amounts and ratios as of December 31, 20072009 are presented in the table below:below.
| | | | | | | | | To Be Well Capitalized | | | | | | | | | To Be Well Capitalized | |
| | | | | | For Capital | | | Under Prompt Corrective | | | | | | For Capital | | | Under Prompt Corrective | |
| | | Actual | | | Adequacy Purposes | | | Action Provisions | | | Actual | | | Adequacy Purposes | | | Action Provisions | |
| 2007 | | Amount | | | Ratio | | | Amount | | | Ratio | | | Amount | | | Ratio | | |
| 2009 | | | Amount | | | Ratio | | | Amount | | | Ratio | | | Amount | | | Ratio | |
| Total Capital (to Risk-Weighted Assets): | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Consolidated (1) | | $ | 55,538 | | | | 17.3 | % | | $ | 25,646 | | | | 8 | % | | $ | 32,058 | | | | 10 | % | | $ | 102,440 | | | | 14.6 | % | | $ | 55,970 | | | | 8 | % | | $ | 69,962 | | | | 10 | % |
Boone County Bank | | | 16,492 | | | | 20.9 | | | | 6,319 | | | | 8 | | | | 7,898 | | | | 10 | | | | 19,358 | | | | 23.6 | | | | 6,568 | | | | 8 | | | | 8,211 | | | | 10 | |
Citizens Deposit Bank | | | 13,253 | | | | 18.3 | | | | 5,805 | | | | 8 | | | | 7,256 | | | | 10 | | | | 13,463 | | | | 17.4 | | | | 6,192 | | | | 8 | | | | 7,740 | | | | 10 | |
Farmers Deposit Bank | | | 8,179 | | | | 18.4 | | | | 3,555 | | | | 8 | | | | 4,443 | | | | 10 | | | | 6,594 | | | | 15.9 | | | | 3,321 | | | | 8 | | | | 4,151 | | | | 10 | |
Ohio River Bank | | | 7,537 | | | | 16.5 | | | | 3,653 | | | | 8 | | | | 4,566 | | | | 10 | | | | 8,142 | | | | 15.6 | | | | 4,172 | | | | 8 | | | | 5,215 | | | | 10 | |
First Central Bank | | | 9,509 | | | | 11.8 | | | | 6,434 | | | | 8 | | | | 8,043 | | | | 10 | | | | 11,464 | | | | 12.4 | | | | 7,403 | | | | 8 | | | | 9,254 | | | | 10 | |
Traders Bank | | | | 15,534 | | | | 16.6 | | | | 7,472 | | | | 8 | | | | 9,340 | | | | 10 | |
Adams National Bank (2) | | | | 25,195 | | | | 12.3 | | | | 16,436 | | | | 8 | | | | 20,545 | | | | 10 | |
Consolidated Bank & Trust | | | | 6,571 | | | | 11.9 | | | | 4,432 | | | | 8 | | | | 5,539 | | | | 10 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Tier I Capital (to Risk-Weighted Assets): | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Consolidated (1) | | $ | 51,500 | | | | 16.1 | % | | $ | 12,823 | | | | 4 | % | | $ | 19,235 | | | | 6 | % | | $ | 94,871 | | | | 13.6 | % | | $ | 27,985 | | | | 4 | % | | $ | 41,977 | | | | 6 | % |
Boone County Bank | | | 15,500 | | | | 19.6 | | | | 3,159 | | | | 4 | | | | 4,739 | | | | 6 | | | | 18,327 | | | | 22.3 | | | | 3,284 | | | | 4 | | | | 4,926 | | | | 6 | |
Citizens Deposit Bank | | | 12,342 | | | | 17.0 | | | | 2,902 | | | | 4 | | | | 4,354 | | | | 6 | | | | 12,583 | | | | 16.3 | | | | 3,096 | | | | 4 | | | | 4,644 | | | | 6 | |
Farmers Deposit Bank | | | 7,603 | | | | 17.1 | | | | 1,777 | | | | 4 | | | | 2,666 | | | | 6 | | | | 6,061 | | | | 14.6 | | | | 1,660 | | | | 4 | | | | 2,491 | | | | 6 | |
Ohio River Bank | | | 7,016 | | | | 15.4 | | | | 1,826 | | | | 4 | | | | 2,740 | | | | 6 | | | | 7,585 | | | | 14.6 | | | | 2,086 | | | | 4 | | | | 3,129 | | | | 6 | |
First Central Bank | | | 8,594 | | | | 10.7 | | | | 3,217 | | | | 4 | | | | 4,826 | | | | 6 | | | | 10,432 | | | | 11.3 | | | | 3,702 | | | | 4 | | | | 5,553 | | | | 6 | |
Traders Bank | | | | 14,356 | | | | 15.4 | | | | 3,736 | | | | 4 | | | | 5,604 | | | | 6 | |
Adams National Bank (2) | | | | 25,097 | | | | 12.2 | | | | 8,218 | | | | 4 | | | | 12,327 | | | | 6 | |
Consolidated Bank & Trust | | | | 6,518 | | | | 11.8 | | | | 2,216 | | | | 4 | | | | 3,324 | | | | 6 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Tier I Capital (to Average Assets): | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Consolidated (1) | | $ | 51,500 | | | | 9.8 | % | | $ | 21,081 | | | | 4 | % | | $ | 26,351 | | | | 5 | % | | $ | 94,871 | | | | 8.9 | % | | $ | 42,651 | | | | 4 | % | | $ | 53,314 | | | | 5 | % |
Boone County Bank | | | 15,500 | | | | 10.6 | | | | 5,864 | | | | 4 | | | | 7,330 | | | | 5 | | | | 18,327 | | | | 11.2 | | | | 6,552 | | | | 4 | | | | 8,190 | | | | 5 | |
Citizens Deposit Bank | | | 12,342 | | | | 10.0 | | | | 4,927 | | | | 4 | | | | 6,159 | | | | 5 | | | | 12,583 | | | | 10.4 | | | | 4,865 | | | | 4 | | | | 6,082 | | | | 5 | |
Farmers Deposit Bank | | | 7,603 | | | | 11.2 | | | | 2,728 | | | | 4 | | | | 3,410 | | | | 5 | | | | 6,061 | | | | 10.1 | | | | 2,402 | | | | 4 | | | | 3,003 | | | | 5 | |
Ohio River Bank | | | 7,016 | | | | 8.4 | | | | 3,324 | | | | 4 | | | | 4,155 | | | | 5 | | | | 7,585 | | | | 8.3 | | | | 3,675 | | | | 4 | | | | 4,594 | | | | 5 | |
First Central Bank | | | 8,594 | | | | 8.1 | | | | 4,269 | | | | 4 | | | | 5,336 | | | | 5 | | | | 10,432 | | | | 8.7 | | | | 4,819 | | | | 4 | | | | 6,024 | | | | 5 | |
Traders Bank | | | | 14,356 | | | | 9.4 | | | | 6,117 | | | | 4 | | | | 7,647 | | | | 5 | |
Adams National Bank (2) | | | | 25,097 | | | | 9.0 | | | | 11,131 | | | | 4 | | | | 13,914 | | | | 5 | |
Consolidated Bank & Trust | | | | 6,518 | | | | 7.9 | | | | 3,283 | | | | 4 | | | | 4,104 | | | | 5 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (1) Consolidated company is not subject to Prompt Corrective Action Provisions | (1) Consolidated company is not subject to Prompt Corrective Action Provisions | | (1) Consolidated company is not subject to Prompt Corrective Action Provisions | |
| (2) Adams National Bank is not designated as well capitalized by its primary regulatory authority the OCC. | | (2) Adams National Bank is not designated as well capitalized by its primary regulatory authority the OCC. | |
PREMIER FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2009, 2008, 2007, and 20062007
(Dollars in Thousands, Except Per Share Data)
NOTE 21 - STOCKHOLDERS’ EQUITY (Continued)
The Company’s and the subsidiary Banks’ capital amounts and ratios as of December 31, 2008 are presented in the table below:
| | | | | | | | | To Be Well Capitalized | |
| | | | | | For Capital | | | Under Prompt Corrective | |
| | | Actual | | | Adequacy Purposes | | | Action Provisions | |
| 2008 | | Amount | | | Ratio | | | Amount | | | Ratio | | | Amount | | | Ratio | |
| Total Capital (to Risk-Weighted Assets): | | | | | | | | | | | | | | | | | | |
Consolidated (1) | | $ | 66,556 | | | | 15.3 | % | | $ | 34,882 | | | | 8 | % | | $ | 43,602 | | | | 10 | % |
Boone County Bank | | | 18,546 | | | | 22.3 | | | | 6,647 | | | | 8 | | | | 8,309 | | | | 10 | |
Citizens Deposit Bank | | | 13,487 | | | | 17.5 | | | | 6,157 | | | | 8 | | | | 7,697 | | | | 10 | |
Farmers Deposit Bank | | | 8,441 | | | | 18.6 | | | | 3,627 | | | | 8 | | | | 4,534 | | | | 10 | |
Ohio River Bank | | | 7,943 | | | | 15.5 | | | | 4,111 | | | | 8 | | | | 5,139 | | | | 10 | |
First Central Bank | | | 10,663 | | | | 13.0 | | | | 6,544 | | | | 8 | | | | 8,180 | | | | 10 | |
Traders Bank | | | 15,584 | | | | 16.1 | | | | 7,763 | | | | 8 | | | | 9,704 | | | | 10 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Tier I Capital (to Risk-Weighted Assets): | | | | | | | | | | | | | | | | | | | | | | | | |
Consolidated (1) | | $ | 61,070 | | | | 14.0 | % | | $ | 17,441 | | | | 4 | % | | $ | 26,161 | | | | 6 | % |
Boone County Bank | | | 17,503 | | | | 21.1 | | | | 3,323 | | | | 4 | | | | 4,985 | | | | 6 | |
Citizens Deposit Bank | | | 12,526 | | | | 16.3 | | | | 3,079 | | | | 4 | | | | 4,618 | | | | 6 | |
Farmers Deposit Bank | | | 7,856 | | | | 17.3 | | | | 1,813 | | | | 4 | | | | 2,720 | | | | 6 | |
Ohio River Bank | | | 7,419 | | | | 14.4 | | | | 2,056 | | | | 4 | | | | 3,083 | | | | 6 | |
First Central Bank | | | 9,773 | | | | 12.0 | | | | 3,272 | | | | 4 | | | | 4,908 | | | | 6 | |
Traders Bank | | | 14,357 | | | | 14.8 | | | | 3,882 | | | | 4 | | | | 5,822 | | | | 6 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Tier I Capital (to Average Assets): | | | | | | | | | | | | | | | | | | | | | | | | |
Consolidated (1) | | $ | 61,070 | | | | 8.7 | % | | $ | 28,114 | | | | 4 | % | | $ | 35,143 | | | | 5 | % |
Boone County Bank | | | 17,503 | | | | 11.4 | | | | 6,163 | | | | 4 | | | | 7,703 | | | | 5 | |
Citizens Deposit Bank | | | 12,526 | | | | 10.1 | | | | 4,983 | | | | 4 | | | | 6,229 | | | | 5 | |
Farmers Deposit Bank | | | 7,856 | | | | 12.6 | | | | 2,496 | | | | 4 | | | | 3,120 | | | | 5 | |
Ohio River Bank | | | 7,419 | | | | 8.1 | | | | 3,687 | | | | 4 | | | | 4,609 | | | | 5 | |
First Central Bank | | | 9,773 | | | | 8.8 | | | | 4,432 | | | | 4 | | | | 5,540 | | | | 5 | |
Traders Bank | | | 14,357 | | | | 9.1 | | | | 6,318 | | | | 4 | | | | 7,897 | | | | 5 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| (1) Consolidated company is not subject to Prompt Corrective Action Provisions | |
PREMIER FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2009, 2008, and 2007
(Dollars in Thousands, Except Per Share Data)
| CONDENSED BALANCE SHEETS | CONDENSED BALANCE SHEETS | | CONDENSED BALANCE SHEETS | |
| December 31 | December 31 | | December 31 | |
| | | 2008 | | | 2007 | | | 2009 | | | 2008 | |
| ASSETS | | | | | | | | | | | | |
| Cash | | $ | 4,659 | | | $ | 7,858 | | | $ | 6,829 | | | $ | 4,659 | |
| Investment in subsidiaries | | | 100,494 | | | | 67,688 | | | | 137,369 | | | | 100,494 | |
| Premises and equipment | | | 437 | | | | 501 | | | | 384 | | | | 437 | |
| Other assets | | | 231 | | | | 51 | | | | 433 | | | | 231 | |
| | | | | | | | | | | | | | | | | |
| Total assets | | $ | 105,821 | | | $ | 76,098 | | | $ | 145,015 | | | $ | 105,821 | |
| | | | | | | | | | | | | | | | | |
| LIABILITIES AND STOCKHOLDERS’ EQUITY | | | | | | | | | | | | | | | | |
| Other liabilities | | $ | 839 | | | $ | 297 | | | $ | 432 | | | $ | 839 | |
| Other borrowed funds | | | 15,560 | | | | 8,412 | | | | 16,027 | | | | 15,560 | |
Total liabilities | | | 16,399 | | | | 8,709 | | | | 16,459 | | | | 16,399 | |
| | | | | | | | | | | | | | | | | |
| Stockholders’ equity | | | | | | | | | | | | | | | | |
Preferred stock | | | - | | | | - | | | | 21,705 | | | | - | |
Common stock | | | 2,264 | | | | 1,109 | | | | 71,412 | | | | 60,259 | |
Additional paid-in capital | | | 58,265 | | | | 43,763 | | |
Retained earnings | | | 27,346 | | | | 22,444 | | | | 33,349 | | | | 27,346 | |
Accumulated other comprehensive income | | | 1,547 | | | | 73 | | | | 2,090 | | | | 1,547 | |
Total stockholders’ equity | | | 89,422 | | | | 67,389 | | | | 128,556 | | | | 89,422 | |
| | | | | | | | | | | | | | | | | |
| Total liabilities and stockholders’ equity | | $ | 105,821 | | | $ | 76,098 | | | $ | 145,015 | | | $ | 105,821 | |
| | | | | | | | | | | | | | | | | |
PREMIER FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2009, 2008, 2007, and 20062007
(Dollars in Thousands, Except Per Share Data)
| Condensed Statement of Operations | Condensed Statement of Operations | | Condensed Statement of Operations | |
| Years Ended December 31 | Years Ended December 31 | | Years Ended December 31 | |
| | | 2008 | | | 2007 | | | 2006 | | | 2009 | | | 2008 | | | 2007 | |
| Income | | | | | | | | | | | | | | | | | | |
Dividends from subsidiaries | | $ | 7,395 | | | $ | 11,085 | | | $ | 6,440 | | | $ | 7,730 | | | $ | 7,395 | | | $ | 11,085 | |
Interest and dividend income | | | 62 | | | | 41 | | | | 37 | | | | 47 | | | | 62 | | | | 41 | |
Gain on bargain purchase of subsidiary | | | | 3,552 | | | | - | | | | - | |
Other income | | | 648 | | | | 648 | | | | 615 | | | | 801 | | | | 648 | | | | 648 | |
Total income | | | 8,105 | | | | 11,774 | | | | 7,092 | | | | 12,130 | | | | 8,105 | | | | 11,774 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Expenses | | | | | | | | | | | | | | | | | | | | | | | | |
Interest expense | | | 590 | | | | 769 | | | | 1,334 | | | | 488 | | | | 590 | | | | 769 | |
Salaries and employee benefits | | | 1,448 | | | | 1,337 | | | | 1,199 | | | | 1,558 | | | | 1,448 | | | | 1,337 | |
Professional fees | | | 362 | | | | 136 | | | | 165 | | | | 563 | | | | 362 | | | | 136 | |
Accelerated subordinated debenture issuance costs | | | - | | | | - | | | | 548 | | |
Other expenses | | | 569 | | | | 497 | | | | 420 | | | | 855 | | | | 569 | | | | 497 | |
Total expenses | | | 2,969 | | | | 2,739 | | | | 3,666 | | | | 3,464 | | | | 2,969 | | | | 2,739 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
Income before income taxes and equity in undistributed income of subsidiaries | | | 5,136 | | | | 9,035 | | | | 3,426 | | | | 8,666 | | | | 5,136 | | | | 9,035 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Income tax (benefit) | | | (907 | ) | | | (837 | ) | | | (1,160 | ) | | | (838 | ) | | | (907 | ) | | | (837 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Income before equity in undistributed income of subsidiaries | | | 6,043 | | | | 9,872 | | | | 4,586 | | | | 9,504 | | | | 6,043 | | | | 9,872 | |
Equity in undistributed income (excess distributions) of subsidiaries | | | 1,493 | | | | (2,753 | ) | | | 1,915 | | | | (386 | ) | | | 1,493 | | | | (2,753 | ) |
| Net income | | $ | 7,536 | | | $ | 7,119 | | | $ | 6,501 | | | $ | 9,118 | | | $ | 7,536 | | | $ | 7,119 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
PREMIER FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2009, 2008, 2007, and 20062007
(Dollars in Thousands, Except Per Share Data)
| Condensed Statement of Cash Flows | Condensed Statement of Cash Flows | | Condensed Statement of Cash Flows | |
| Years Ended December 31 | Years Ended December 31 | | Years Ended December 31 | |
| | | 2008 | | | 2007 | | | 2006 | | | 2009 | | | 2008 | | | 2007 | |
| Cash flows from operating activities | | | | | | | | | | | | | | | | | | |
Net income | | $ | 7,536 | | | $ | 7,119 | | | $ | 6,501 | | | $ | 9,118 | | | $ | 7,536 | | | $ | 7,119 | |
Adjustments to reconcile net income to net cash from operating activities | | | | | | | | | | | | | | | | | | | | | | | | |
Depreciation | | | 95 | | | | 97 | | | | 101 | | | | 71 | | | | 95 | | | | 97 | |
Stock compensation expense | | | 120 | | | | 130 | | | | 142 | | | | 51 | | | | 120 | | | | 130 | |
(Gain) loss from sales of assets | | | - | | | | (5 | ) | | | (4 | ) | |
Gain from sales of assets | | | | - | | | | - | | | | (5 | ) |
Gain on bargain purchase | | | | (3,552 | ) | | | - | | | | - | |
Dividends in excess of net income of subsidiaries | | | - | | | | 2,753 | | | | - | | | | 386 | | | | - | | | | 2,753 | |
Equity in undistributed earnings of subsidiaries | | | (1,493 | ) | | | - | | | | (1,915 | ) | | | - | | | | (1,493 | ) | | | - | |
Change in other assets | | | (52 | ) | | | 324 | | | | 258 | | | | (203 | ) | | | (52 | ) | | | 324 | |
Change in other liabilities | | | 85 | | | | (141 | ) | | | 17 | | | | (406 | ) | | | 85 | | | | (141 | ) |
Net cash from operating activities | | | 6,291 | | | | 10,277 | | | | 5,100 | | | | 5,465 | | | | 6,291 | | | | 10,277 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Cash flows from investing activities | | | | | | | | | | | | | | | | | | | | | | | | |
Proceeds from liquidation of subsidiary | | | - | | | | - | | | | 203 | | |
Purchases of subsidiaries | | | (14,300 | ) | | | - | | | | - | | | | - | | | | (14,300 | ) | | | - | |
Additional investments in subsidiaries | | | | (22,876 | ) | | | - | | | | - | |
Proceeds from sales of assets, net of purchases | | | (31 | ) | | | (33 | ) | | | (116 | ) | | | (23 | ) | | | (31 | ) | | | (33 | ) |
Net cash from investing activities | | | (14,331 | ) | | | (33 | ) | | | 87 | | | | (22,899 | ) | | | (14,331 | ) | | | (33 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Cash flows from financing activities | | | | | | | | | | | | | | | | | | | | | | | | |
Early redemption of subordinated note | | | - | | | | - | | | | (15,250 | ) | |
Cash dividends on preferred stock | | | | (133 | ) | | | - | | | | - | |
Cash dividends paid to shareholders | | | (2,634 | ) | | | (2,095 | ) | | | (523 | ) | | | (2,982 | ) | | | (2,634 | ) | | | (2,095 | ) |
Issuance of common stock | | | - | | | | 10 | | | | 27 | | | | - | | | | - | | | | 10 | |
Issuance of preferred stock | | | | 22,252 | | | | - | | | | - | |
Proceeds from borrowings | | | 11,550 | | | | - | | | | 13,500 | | | | 2,400 | | | | 11,550 | | | | - | |
Payments on other borrowed funds | | | (4,075 | ) | | | (3,863 | ) | | | (2,627 | ) | | | (1,933 | ) | | | (4,075 | ) | | | (3,863 | ) |
Net cash from financing activities | | | 4,841 | | | | (5,948 | ) | | | (4,873 | ) | | | 19,604 | | | | 4,841 | | | | (5,948 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Net change in cash and cash equivalents | | | (3,199 | ) | | | 4,296 | | | | 314 | | | | 2,170 | | | | (3,199 | ) | | | 4,296 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Cash and cash equivalents at beginning of year | | | 7,858 | | | | 3,562 | | | | 3,248 | | | | 4,659 | | | | 7,858 | | | | 3,562 | |
| Cash and cash equivalents at end of year | | $ | 4,659 | | | $ | 7,858 | | | $ | 3,562 | | | $ | 6,829 | | | $ | 4,659 | | | $ | 7,858 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
PREMIER FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2009, 2008, 2007, and 20062007
(Dollars in Thousands, Except Per Share Data)
| | | Interest | | | Net Interest | | | Net | | | Earnings Per Share | |
| | | Income | | | Income | | | Income | | | Basic | | | Diluted | |
| 2009 | | | | | | | | | | | | | | | |
First Quarter | | $ | 9,136 | | | $ | 6,558 | | | $ | 1,229 | | | $ | 0.19 | | | $ | 0.19 | |
Second Quarter | | | 9,120 | | | | 6,662 | | | | 1,355 | | | | 0.21 | | | | 0.21 | |
Third Quarter | | | 9,114 | | | | 6,768 | | | | 1,502 | | | | 0.23 | | | | 0.23 | |
Fourth Quarter | | | 13,857 | | | | 11,095 | | | | 5,032 | | | | 0.62 | | | | 0.61 | |
| | | | | | | | | | | | | | | | | | | | | |
| 2008 | | | | | | | | | | | | | | | | | | | | |
First Quarter | | $ | 8,427 | | | $ | 5,594 | | | $ | 1,774 | | | $ | 0.34 | | | $ | 0.34 | |
Second Quarter | | | 9,433 | | | | 6,449 | | | | 1,930 | | | | 0.32 | | | | 0.32 | |
Third Quarter | | | 10,276 | | | | 7,177 | | | | 1,930 | | | | 0.30 | | | | 0.30 | |
Fourth Quarter | | | 9,708 | | | | 6,815 | | | | 1,902 | | | | 0.30 | | | | 0.30 | |
| | | | | | | | | | | | Earnings Per Share | |
| | | Interest Income | | | Net Interest Income | | | Net Income | | | Basic | | | Diluted | |
| 2008 | | | | | | | | | | | | | | | |
First Quarter | | $ | 8,427 | | | $ | 5,594 | | | $ | 1,774 | | | $ | 0.34 | | | $ | 0.34 | |
Second Quarter | | | 9,433 | | | | 6,449 | | | | 1,930 | | | | 0.32 | | | | 0.32 | |
Third Quarter | | | 10,276 | | | | 7,177 | | | | 1,930 | | | | 0.30 | | | | 0.30 | |
Fourth Quarter | | | 9,708 | | | | 6,815 | | | | 1,902 | | | | 0.30 | | | | 0.30 | |
| | | | | | | | | | | | | | | | | | | | | |
| 2007 | | | | | | | | | | | | | | | | | | | | |
First Quarter | | $ | 8,612 | | | $ | 5,511 | | | $ | 1,786 | | | $ | 0.34 | | | $ | 0.34 | |
Second Quarter | | | 8,712 | | | | 5,551 | | | | 1,790 | | | | 0.34 | | | | 0.34 | |
Third Quarter | | | 8,738 | | | | 5,590 | | | | 1,807 | | | | 0.35 | | | | 0.34 | |
Fourth Quarter | | | 8,690 | | | | 5,644 | | | | 1,736 | | | | 0.33 | | | | 0.33 | |
In 2008, interest income increased significantly in the second quarter and further still in the third quarter largely due to the additional earning assets acquired via the purchases of Citizens First and Traders on April 30, 2008. The increase in interest income was tempered somewhat in the fourth quarter due to declining yields on loans and federal funds sold. The increases in interest income resulted in increases in net interest income and net income in 2008. In contrast to the increases in net income, earnings per share decreased in the second and third quarters of 2008 due to the additional shares issued to acquire Citizens First and Traders on April 30, 2008.
In 2007, interest income improved in each of the first three quarters as yields on investments securities increased and the outstanding balance of federal funds sold increased. In the fourth quarter, as the Federal Reserve began reducing its targeted federal funds rate, the Company’s interest income also began to decline. The improvement in interest income resulted in the improvement in net interest income, but was tempered by a rising trend in the rates paid on deposits. During the first two quarters of 2007, the Company aggressively reduced its FHLB and bank borrowings as funds became available. This debt reduction also served to improve net interest income. Fourth quarter net interest income also benefitted from the decline in the floating interest rate on bank borrowings.
PREMIER FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2009, 2008, 2007, and 20062007
(Dollars in Thousands, Except Per Share Data)
At the close of business on April 30, 2008, the Company completed its acquisition of Traders Bankshares, Inc. (“Traders”), a $108 million bank holding company headquartered in Spencer, West Virginia. Under terms of the definitive agreement of merger dated November 27, 2007, each share of Traders common stock was entitled to merger consideration of $50.00 cash and 3.75 shares of Premier common stock. Premier issued approximately 675,000 shares of its common stock and paid in total $9.0 million in cash to the shareholders of Traders. The cash portion of the merger consideration was funded by proceeds from a borrowing from First Guaranty Bank more fully described in Note 1011. The value of the transaction is estimated atapproximately $18.1 million. The acquisition of Traders afforded Premier the opportunity to expand its presence in Jackson County, West Virginia and enter new adjoining markets in Roane and Wood Counties, West Virginia. The purchase price resulted in approximately $7.3 million in goodwill and $1.5 million in core deposit intangible, none of which is deductible for tax purposes. The purchase price resulted in goodwill as the Company believes there are cost saving synergies to be obtained and long-term expansion opportunities in the acquired markets beyond the existing customer base. The core deposit intangible will beis amortized using an accelerated method. Purchase accounting adjustments are subject to refinement as management finalizes the calculations.
Also at the close of business on April 30, 2008, the Company completed its acquisition of Citizens First Bank, Inc. (“Citizens First”) a $62 million bank headquartered in Ravenswood, West Virginia. Under terms of the definitive agreement of merger dated October 24, 2007, each share of Citizens First common stock was entitled to merger consideration of $13.25 cash and 1.20 shares of Premier common stock. Premier issued approximately 480,000 shares of its common stock and paid in total $5.3 million in cash to the shareholders of Citizens First. The cash portion of the merger consideration was funded from cash on hand of Premier. The value of the transaction is estimated atapproximately $11.7 million. The acquisition of Citizens First afforded Premier the opportunity to enter new markets in Jackson County, West Virginia. The purchase price resulted in approximately $5.4 million in goodwill and $169,000 in core deposit intangible, none of which is deductible for tax purposes. The purchase price resulted in goodwill as the Company believes there are long-term expansion opportunities in the acquired markets beyond the existing customer base. The core deposit intangible will beis amortized using an accelerated method. Purchase accounting adjustments are subject to refinement as management finalizes the calculations. On October 24, 2008, Citizens First Bank was merged into Traders Bank, Inc.
PREMIER FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2009, 2008, 2007, and 20062007
(Dollars in Thousands, Except Per Share Data)
NOTE 23-24- ACQUISITIONS (Continued)
NetAt the open of business on October 1, 2009, the Company completed its acquisition of Abigail Adams National Bancorp, Inc. (“Abigail Adams”), a two bank holding company with $369 million of total assets with locations in and around Washington, DC and Richmond, Virginia. Under terms of the definitive agreement of merger dated December 31, 2008, each share of Abigail Adams common stock was entitled to merger consideration of 0.4461 shares of Premier common stock. Premier issued approximately 1,545,000 shares of its common stock to the shareholders of Abigail Adams. The value of the transaction totaled $10,290 based upon the closing price of Premier common stock on the day before closing the acquisition. The estimated fair value of the net assets acquired via each transaction are showntotaled $13,842. Under new accounting guidance for business combinations adopted by the Premier on January 1, 2009, the difference between the value of the stock issued and the fair value of the net assets acquired resulted in a bargain purchase gain of $3,552. The acquisition of Abigail Adams afforded Premier the opportunity to utilize its management’s experience in rehabilitating troubled financial institutions and expand the franchise into new markets in and around Washington, DC and Richmond, Virginia. Furthermore, the increase in the table below:
| | | Citizens First | | | Traders | |
| Cash and due from banks | | $ | 2,300 | | | $ | 3,285 | |
| Federal funds sold | | | 8,394 | | | | 2,448 | |
| Securities available for sale | | | 4,097 | | | | 40,643 | |
| Loans, net | | | 44,773 | | | | 50,551 | |
| Goodwill and other intangible assets | | | 5,580 | | | | 8,752 | |
| Other assets | | | 2,904 | | | | 6,809 | |
Total assets acquired | | | 68,048 | | | | 112,488 | |
| | | | | | | | | |
| Deposits | | | (56,020 | ) | | | (92,807 | ) |
| Other liabilities | | | (328 | ) | | | (1,541 | ) |
Total liabilities assumed | | | (56,348 | ) | | | (94,348 | ) |
Net assets acquired | | $ | 11,700 | | | $ | 18,140 | |
The results of operations of Citizens First and Traders are included in Premier’s consolidated statements of income beginning assize of the acquisition date.total franchise will allow Premier to market its community style banking to attract larger commercial customers within its existing markets via expanded internal loan participations. The following table presents pro forma condensed income statementspurchase price resulted in approximately $1,172 in core deposit intangible, none of which is deductible for tax purposes. The core deposit intangible will be amortized using an accelerated method. Purchase accounting adjustments to the fair value of the net assets acquired are subject to refinement as ifmanagement finalizes the mergers had occurred at the beginning of each period presented:
| | | (Unaudited) | |
| | | 2008 | | | 2007 | |
| Interest income | | $ | 41,266 | | | $ | 45,625 | |
| Interest expense | | | 13,118 | | | | 16,555 | |
Net interest income | | | 28,148 | | | | 29,070 | |
| Provision for loan losses | | | 147 | | | | (76 | ) |
Net interest income after provision | | | 28,001 | | | | 29,146 | |
| Non-interest income | | | 5,564 | | | | 5,488 | |
| Non-interest expense | | | 24,112 | | | | 22,714 | |
Income before income taxes | | | 9,453 | | | | 11,920 | |
| Income tax expense | | | 3,088 | | | | 3,938 | |
Net income | | $ | 6,365 | | | $ | 7,982 | |
| | | | | | | | | |
| Basic earnings per share | | $ | 1.00 | | | $ | 1.25 | |
| Diluted earnings per share | | | 0.99 | | | | 1.24 | |
calculations.
PREMIER FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2009, 2008, 2007, and 20062007
(Dollars in Thousands, Except Per Share Data)
On December 31, 2008, the Company entered into a material definitive agreement with Abigail Adams National Bancorp, Inc. (Abigail Adams), a two bank holding company with $436 million of totalNet assets at December 31, 2008 with locations in and around Washington, DC and Richmond, Virginia. Under terms of the definitive agreement, Premier agreed to purchase Abigail Adams for approximately $10.8 million in stock. Each share of Abigail Adams common stock will be entitled to merger consideration of 0.4461 shares of Premier common stock. Premier will issue approximately 1,545,000 shares of its common stock to the stockholders of Abigail Adams. Theacquired via each transaction which is subject to certain conditions precedent, still requires approval by Abigail Adams’ stockholders and bank regulatory authorities, and the issuance of Premier common stockare shown in the merger requires Premier stockholder approval. It is anticipated to close sometime in the second quarter of 2009. Premier is also guarantor of a $6.0 million line of credit that Abigail Adams has from the Bankers’ Bank of which $4.2 million was outstanding at December 31, 2008.table below:
It is a condition to the completion of the merger with Abigail Adams that Premier complete the sale of $24.0 million of Premier preferred stock to the U.S. Treasury under the Troubled Asset Relief Program (“TARP”) Capital Purchase Program (“CPP”). Premier has applied for approval to participate in the CPP but has yet to receive any approval from the U.S. Treasury. Premier’s participation in the CPP program will affect the stockholders of Premier common stock in the following ways. Upon Premier’s participation in the U.S. Treasury’s CPP, the U.S. Treasury would purchase from Premier cumulative perpetual preferred shares, with a liquidation preference of at least one thousand dollars per share (the “Senior Preferred Shares”). Based upon an investment of $24.0 million, Premier would issue 24,000 Senior Preferred Shares, each with a liquidation preference of one thousand dollars per share. The Senior Preferred Shares would constitute Tier 1 capital and would rank senior to Premier’s common shares. The Senior Preferred Shares would pay cumulative dividends at a rate of 5% per annum for the first five years and would reset to a rate of 9% per annum after year five. Dividends would be payable quarterly in arrears.
| | | Abigail Adams | | | Citizens First | | | Traders | |
| Cash and due from banks | | $ | 12,584 | | | $ | 2,300 | | | $ | 3,285 | |
| Federal funds sold | | | 1,938 | | | | 8,394 | | | | 2,448 | |
| Securities available for sale | | | 65,706 | | | | 4,097 | | | | 40,643 | |
| Loans, net | | | 254,664 | | | | 44,773 | | | | 50,551 | |
| Goodwill and other intangible assets | | | 1,712 | | | | 5,580 | | | | 8,752 | |
| Other assets | | | 26,453 | | | | 2,904 | | | | 6,809 | |
Total assets acquired | | | 363,057 | | | | 68,048 | | | | 112,488 | |
| | | | | | | | | | | | | |
| Deposits | | | (298,849 | ) | | | (56,020 | ) | | | (92,807 | ) |
| Repurchase agreements | | | (16,433 | ) | | | - | | | | - | |
| FHLB borrowings | | | (14,054 | ) | | | - | | | | - | |
| Other borrowings | | | (17,650 | ) | | | - | | | | - | |
| Other liabilities | | | (2,229 | ) | | | (328 | ) | | | (1,541 | ) |
Total liabilities assumed | | | (349,215 | ) | | | (56,348 | ) | | | (94,348 | ) |
Net assets acquired | | $ | 13,842 | | | $ | 11,700 | | | $ | 18,140 | |
PREMIER FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2009, 2008, 2007, and 20062007
(Dollars in Thousands, Except Per Share Data)
NOTE 24- ACQUISITIONS (Continued)
The results of operations of Citizens First and Traders are included in Premier’s consolidated statements of income beginning as of the April 30, 2008 acquisition date. The results of operations of Abigail Adams are included in Premier’s consolidated statements of income beginning as of the October 1, 2009 acquisition date. The following table presents pro forma condensed income statements as if all three mergers had occurred at the beginning of each of the two periods presented. Since participation in the TARP Capital Purchase Program (see Note 25 below) was a condition precedent to the completion of the Abigail Adams merger, pro forma Series A Preferred Stock dividends are included for each of the two periods presented. | | | (Unaudited) | |
| | | 2009 | | | 2008 | |
| Interest income | | $ | 57,507 | | | $ | 68,604 | |
| Interest expense | | | 13,600 | | | | 21,706 | |
Net interest income | | | 43,907 | | | | 46,898 | |
| Provision for loan losses | | | 2,347 | | | | 11,969 | |
Net interest income after provision | | | 41,560 | | | | 34,929 | |
| Non-interest income | | | 10,419 | | | | 6,530 | |
| Non-interest expense | | | 41,007 | | | | 38,982 | |
Income before income taxes | | | 10,972 | | | | 2,477 | |
| Income tax expense | | | 2,404 | | | | 104 | |
Net income | | | 8,568 | | | | 2,373 | |
| Dividends and discount on preferred stock | | | 1,211 | | | | 1,211 | |
Net income allocable to common stockholders | | $ | 7,357 | | | $ | 1,162 | |
| | | | | | | | | |
| Basic earnings per share | | $ | 0.99 | | | $ | 0.14 | |
| Diluted earnings per share | | | 0.99 | | | | 0.14 | |
PREMIER FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2009, 2008, and 2007
(Dollars in Thousands, Except Per Share Data)
On October 2, 2009, as part of the Troubled Asset Relief Program (“TARP”) Capital Purchase Program, the Company entered into a Letter Agreement and Securities Purchase Agreement (collectively, the “Purchase Agreement”) with the United States Department of the Treasury (“U.S. Treasury”). Pursuant to the Purchase Agreement, the Company issued and sold to the U.S. Treasury 22,252 shares of Fixed Rate Cumulative Perpetual Preferred Stock, Series A, no par value, with a liquidation preference of one thousand dollars per share (the “Series A Preferred Stock”) and a ten-year warrant (the “Warrant”) to purchase 628,587 shares of the Company’s common stock, no par value, at an exercise price of $5.31 per share, for an aggregate purchase price of $22,252 in cash.
Under standardized TARP Capital Purchase Program terms, cumulative dividends on the Series A Preferred Stock will accrue on the liquidation preference at a rate of 5% per annum until November 14, 2014, and at a rate of 9% per annum thereafter. These dividends will be paid only if, as and when declared by Premier’s Board of Directors. The Series A Preferred Stock has no maturity date and ranks senior to the Company’s common stock with respect to the payment of dividends and distributions and amounts payable upon liquidation, dissolution and winding up of Premier. Subject to the approval of the Appropriate Federal Banking Agency (as defined in the Securities Purchase Agreement, which for Premier is the Board of Governors of the Federal Reserve System), the Series A Preferred Stock is redeemable at the option of Premier at 100% of its liquidation preference plus accrued and unpaid dividends, without penalty, delay or the need to raise additional replacement capital.
PREMIER FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2009, 2008, and 2007
(Dollars in Thousands, Except Per Share Data)
NOTE 25- CAPITAL PURCHASE PROGRAMPREFERRED STOCK (Continued)
The SeniorSeries A Preferred Shares would beStock is non-voting, shares, but would havehas class voting rights on (i) any authorization or issuance of shares ranking senior to the SeniorSeries A Preferred Shares;Stock; (ii) any amendment to the rights of the SeniorSeries A Preferred Shares;Stock; or (iii) any merger, consolidation, share exchange, reclassification or similar transaction which would adversely affect the rights of the SeniorSeries A Preferred Shares.Stock. In the event that the cumulative dividends described above wereare not paid in full for an aggregate of six dividend periods or more, whether or not consecutive, the authorized number of directors of Premier would automatically be increased by two and the holders of the SeniorSeries A Preferred SharesStock would have the right to elect two directors. The right to elect directors would end when dividends have been paid in full for four consecutive dividend periods.
Each financial institution participating in the CPP must also issue a warrant (the “Warrant”) to theThe U.S. Treasury has agreed not to purchase a number ofexercise voting power with respect to any common shares having a market price equalstock issued to 15% of the aggregate amount of the Senior Preferred Shares purchased by the U.S. Treasury. The market price for determining the number of common shares subject to the Warrant will be calculated based on the average of the closing prices of Premier’s common shares on the 20 trading days prior to preliminary approval to participate in the CPP by the U.S. Treasury. The Warrant will have a 10 year term. Issuance andit upon exercise of the Warrant wouldWarrant. The common stock will be issued from authorized but unissued common stock and thus will dilute the interests of existing Premier common shareholders. As of December 31, 2009, the Warrant has not yet been exercised.
To participatePursuant to the terms of the Purchase Agreement, the ability of the Company to declare or pay dividends or distributions on, or purchase, redeem or otherwise acquire for consideration, shares of its common stock will be subject to restrictions, including a restriction against increasing dividends from the last quarterly cash dividend per share ($0.11) declared on the common stock prior to October 2, 2009.
The Purchase Agreement also subjects the Company to certain of the executive compensation limitations included in the CPP, Premier would also be requiredEmergency Economic Stabilization Act of 2008 (the “EESA”). In this connection, as a condition to adopt the U.S. Treasury’s standards for executive compensation and corporate governance, as amended from time-to-time, forclosing of the period during whichtransaction, the Company’s Senior Executive Officers (as defined in the Purchase Agreement) (the “Senior Executive Officers”), (i) voluntarily waived any claim against the U.S. Treasury holds equityor the Company for any changes to such officer’s compensation or benefits that are required to comply with the regulation issued by the U.S. Treasury under the CPP.TARP Capital Purchase Program and acknowledged that the regulation may require modification of the compensation, bonus, incentive and other benefit plans, arrangements and policies and agreements as they relate to the period the U.S. Treasury owns the Preferred Stock of the Company; and (ii) entered into a letter with the Company amending the Benefit Plans with respect to such Senior Executive Officers as may be necessary, during the period that the Treasury owns the Preferred Stock of the Company, as necessary to comply with Section 111(b) of the EESA.
PREMIER FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2009, 2008, and 2007
(Dollars in Thousands, Except Per Share Data)
NOTE 25- PREFERRED STOCK (Continued)
The American Recovery and Reinvestment Act of 2009 (“ARRA”) passed by the United States Congress and signed by the President on February 17, 2009, provides that the U.S. Treasury, subject to consultation with the Appropriate Federal Banking Agency, must permit a TARP recipient to repay any assistance previously provided under TARP, without regard to whether the TARP recipient has replaced those funds from any other source or to any waiting period. As a result, subject to consultation with the Federal Reserve Board, the U.S. Treasury must permit Premier to redeem the Series A Preferred Stock at the appropriate redemption price without regard to whether the redemption price is to be paid from proceeds of a qualified equity offering or any other source or when the redemption date occurs. If the Series A Preferred Stock were redeemed, Premier has the right to repurchase the Warrant at its appraised value. If Premier chooses not to repurchase the Warrant, the U.S. Treasury must liquidate the related Warrant at the current market price.
PREMIER FINANCIAL BANCORP, INC.
FORM 10-K
December 31, 20082009
There have been no changes in or disagreements with accountants on accounting or financial disclosure matters.
A. Disclosure Controls & Procedures
A. | Disclosure Controls & 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 the Securities and Exchange Act of 1934 Rule 13a-15c as of the end of the period covered by this annual report. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the disclosure controls and procedures are effective in ensuring that all material information required to be filed in this annual report has been made known to them in a timely fashion.
B. Management's Report on Internal Control Over Financial Reporting
B. | Management’s Report on Internal Control Over Financial Reporting |
Management of the Company is responsible for establishing and maintaining effective internal control over financial reporting as defined in Rules 13a-15(f) under the Securities Exchange Act of 1934. The Company’s internal control over financial reporting is designed to provide reasonable assurance to the Company’s management and board of directors regarding the preparation and fair presentation of published financial statements.
Management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2008.2009. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control — Integrated Framework. Based on our assessment, we believe that, as of December 31, 2008,2009, the Company’s internal control over financial reporting is effective based on those criteria.
This annual report does not include an attestation report of the Company’s registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’s registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit the Company to provide only management’s report in this annual report.
PREMIER FINANCIAL BANCORP, INC.
FORM 10-K
December 31, 20082009
| | | |
| /s/ Robert W. Walker | | /s/ Brien M. Chase |
| Robert W. Walker, President and | | Brien M. Chase, Senior Vice President |
| Chief Executive Officer | | and Chief Financial Officer |
| | | |
Date: March 27, 20092010 | | Date: March 27, 20092010 |
| | | |
C. Changes in Internal Controls over Financial Reporting
There were no changes in internal controls over financial reporting during the fourth fiscal quarter that have materially affected or are reasonably likely to materially affect Premier's internal controls over financial reporting.
D. Inherent Limitations on Internal Control
"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. 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.
None
PREMIER FINANCIAL BANCORP, INC.
FORM 10-K
December 31, 20082009
The information required by these Items is omitted because the Company is filing a definitive proxy statement pursuant to Regulation 14A not later than 120 days after the end of the fiscal year covered by this report which includes the required information. The required information contained in the Company's proxy statement is incorporated herein by reference.
PREMIER FINANCIAL BANCORP, INC.
FORM 10-K
December 31, 20082009
PART IV
(a) The following documents are filed as part of this report:
1. Financial Statements:
2. Financial Statement Schedules:
No financial statement schedules have been included as part of this report because they are either not required or the information is otherwise included.
3. List of Exhibits:
The following is a list of exhibits required by Item 601 of Regulation S-K and by paragraph (c) of this Item 14.
Exhibit Number | | Description of Document |
| 2.1 | | Definitive Merger Agreement between Premier Financial Bancorp, Inc. and Citizens First Bank, Inc. dated October 24, 2007, filed as Exhibit 10.1 to form 8-K filed on October 25, 2007 is incorporated herein by reference. |
| 2.2 | | Definitive Merger Agreement between Premier Financial Bancorp, Inc. and Traders Bankshares, Inc. dated November 27, 2007, filed as Exhibit 10.1 to form 8-K filed on November 28, 2007 is incorporated herein by reference. |
| 2.3 | | Definitive Merger Agreement between Premier Financial Bancorp, Inc. and Abigail Adams National Bancorp, Inc. dated December 30, 2008, filed as Exhibit 2.1 to form 8-K filed on January 2, 2009 is incorporated herein by reference. |
3.13.1(a) | | Form of Articles of Incorporation of registrant (included as Exhibit 3.1 to registrant'sregistrant’s Registration Statement on Form S-1, Registration No. 333-1702, filed on February 28, 1996 with the Commission and incorporated herein by reference). |
3.23.1(b) | | Form of Articles of Amendment to Articles of Incorporation effective March 15, 1996 re: amendment to Article IV (included as Exhibit 3.2 to registrant'sregistrant’s Amendment No. 1 to Registration Statement on Form S-1, Registration No. 333-1702, filed on March 25, 1996 with the Commission and incorporated herein by reference).reference. |
3.33.1(c) | By-Laws | Articles of Premier Financial Bancorp, Inc., as amended, filedAmendment to Articles of Incorporation effective September 3, 2009 re: increase in authorized common shares (included as Exhibit 3.1 to Form 10-Q8-K filed on November 13, 2007September 9, 2009) is incorporated herein by reference. |
*** 10.1 | Premier Financial Bancorp, Inc. 1996 Employee Stock Ownership Incentive Plan (included as Exhibit 10.6 to registrant's Registration Statement on Form S-1, Registration No. 333-1702, filed on February 28, 1996 with the Commission and incorporated herein by reference). |
PREMIER FINANCIAL BANCORP, INC.
FORM 10-K
December 31, 20082009
Exhibit Number | | Description of Document |
*** 10.2 3.1(d) | | Articles of Amendment to Articles of Incorporation effective September 29, 2009 evidencing adoption of amendments by the Board of Directors of registrant to Article IV of Articles of Incorporation to establish express terms of Fixed Rate Cumulative Perpetual Preferred Shares, Series A, each without par value, of registrant (included as Exhibit 3.1(i) to Form 8-K filed on October 2, 2009) is incorporated herein by reference. |
| 3.1(e) | | |
| 3.2 | | Bylaws of registrant, as amended through September 23, 2009 (filed as Exhibit 3.1(ii)) to Form 8-K filed September 23, 2009 is incorporated herein by reference. |
| 4.1 | | Letter Agreement, dated October 2, 2009, including Securities Purchase Agreement Standard Terms attached thereto as Exhibit A, between registrant and the United States Department of the Treasury (filed as Exhibit 10.1 to Form 8-K filed October 7, 2009) is incorporated herein by reference. [NOTE: Annex A to Securities Purchase Agreement is not included herewith; filed as Exhibit 3.1(i) to Current Report on Form 8-K filed by registrant on October 2, 2009 and incorporated herein by reference.] |
| 4.2 | | Warrant to purchase 628,588 Shares of Common Stock (common shares) of registrant issued to the United States Department of the Treasury on October 2, 2009 (filed as Exhibit 4.1 to Form 8-K filed October 7, 2009) is incorporated herein by reference. |
| *** 10.1 | | Premier Financial Bancorp, Inc.'s 2002 Employee Stock Ownership Incentive Plan, filed as Annex A to definitive proxy statement dated May 17, 2002, filed on April 30, 2002 with the Commission, is incorporated herein by reference. |
*** 10.310.2 | | Form of Stock Option Agreement pursuant to 2002 Employee Stock Ownership Incentive Plan, filed as Exhibit 10.1 to form 8-K filed January 24, 2005, is incorporated herein by reference. |
10.410.3 | | Premier Financial Bancorp, Inc. written agreement with the Federal Reserve Bank of Cleveland dated January 29, 2003, filed as Exhibit 10.4 to form 10-K filed on March 27, 2003, is incorporated herein by reference. |
10.510.4 | | Premier Financial Bancorp, Inc. contract with Fiserv Solutions, Inc. dated December 20, 2004, filed as Exhibit 10 to form 8-K filed December 23, 2004, is incorporated herein by reference. |
10.610.5 | | Loan Agreement between Premier Financial Bancorp, Inc. and The Kentucky Bankers’ Bank, Inc. filed as Exhibit 10.1 to form 8-K filed on November 10, 2006, is incorporated herein by reference. |
10.710.6 | | Term Note to The Kentucky Bankers’ Bank, Inc. filed as Exhibit 10.2 to form 8-K filed on November 10, 2006, is incorporated herein by reference. |
PREMIER FINANCIAL BANCORP, INC.
FORM 10-K
December 31, 2009
Exhibit Number | | Description of Document |
10.810.7 | | Promissory Note to The Kentucky Bankers’ Bank, Inc. filed as Exhibit 10.3 to10.3to form 8-K filed on November 10, 2006, is incorporated herein by reference. |
10.910.8 | | Stock Pledge and Security Agreement between Premier Financial Bancorp, Inc. and The Kentucky Bankers’ Bank, Inc. filed as Exhibit 10.4 to form 8-K filed on November 10, 2006, is incorporated herein by reference. |
10.1010.9 | | Loan Agreement between Premier Financial Bancorp, Inc. and First Guaranty Bank, Hammond, Louisiana, filed as Exhibit 10.1 to form 8-K filed May 1, 2008, is incorporated herein by reference. |
10.1110.10 | | Promissory Note to First Guaranty Bank, Hammond, Louisiana, filed as Exhibit 10.2 to form 8-K filed May 1, 2008, is incorporated herein by reference. |
10.1210.11 | | Collateral Agreement with First Guaranty Bank, Hammond Louisiana, filed as Exhibit 10.8 to form 10-K filed March 30, 2006, is incorporated herein by reference. |
10.1310.12 | | Loan Modification and Extension Agreement with The Kentucky Bankers’ Bank, Inc. filed as Exhibit 10.1 to form 8-K filed November 10, 2008, is incorporated herein by reference. |
10.1410.13 | | Loan Modification and Extension Agreement with The Kentucky Bankers’ Bank, Inc. filed as Exhibit 10.1 to form 8-K filed December 23, 2008, is incorporated herein by reference. |
| *** 10.14 | | Letter Agreement between registrant and Robert W. Walker, executed on September 22, 2009 and effective October 2, 2009 (filed as Exhibit 10.2(a) to Form 8-K filed October 7, 2009) is incorporated herein by reference. |
| *** 10.15 | | Letter Agreement between registrant and Brien M. Chase, executed on September 22, 2009 and effective October 2, 2009 (filed as Exhibit 10.2(b) to Form 8-K filed October 7, 2009) is incorporated herein by reference. |
| *** 10.16 | | Letter Agreement between registrant and Dennis J. Klingensmith, executed on September 25, 2009 and effective October 2, 2009 (filed as Exhibit 10.2(c) to Form 8-K filed October 7, 2009) is incorporated herein by reference. |
| *** 10.17 | | Letter Agreement between registrant and Michael R. Mineer, executed on September 25, 2009 and effective October 2, 2009 (filed as Exhibit 10.2(d) to Form 8-K filed October 7, 2009) is incorporated herein by reference. |
| *** 10.18 | | Letter Agreement between registrant and Duane K. Bickings, executed on September 22, 2009 and effective October 2, 2009 (filed as Exhibit 10.2(e) to Form 8-K filed October 7, 2009) is incorporated herein by reference. |
| 10.19 | | Loan Modification and Extension Agreement with The Kentucky Bankers’ Bank, Inc. filed as Exhibit 10.1 to form 8-K filed December 15, 2009, is incorporated herein by reference. |
| 10.20 | | Promissory Note to The Kentucky Bankers’ Bank, Inc. filed as Exhibit 10.2 to form 8-K filed on December 15, 2009, is incorporated herein by reference. |
PREMIER FINANCIAL BANCORP, INC.
FORM 10-K
December 31, 2009
Exhibit Number | | Description of Document |
| 10.21 | | Change in Terms Agreement with First Guaranty Bank, Hammond, Louisiana, filed as Exhibit 10.1 to form 8-K filed January 4, 2010, is incorporated herein by reference. |
| 10.22 | | Loan Agreement between Premier Financial Bancorp, Inc. and First Sentry Bank, Huntington, West Virginia, filed as Exhibit 10.1 to form 8-K filed January 6, 2010, is incorporated herein by reference. |
| 10.23 | | Promissory Note to First Sentry Bank filed as Exhibit 10.2 to form 8-K filed January 6, 2010, is incorporated herein by reference. |
| 10.24 | | Commercial Pledge Agreement between Premier Financial Bancorp, Inc. and First Sentry Bank, Huntington, West Virginia filed as Exhibit 10.3 to form 8-K filed January 6, 2010, is incorporated herein by reference. |
| 10.25 | | Loan Agreement between Premier Financial Bancorp, Inc. and First Guaranty Bank, Hammond, Louisiana, filed as Exhibit 10.1 to form 8-K filed January 7, 2010, is incorporated herein by reference. |
| 10.26 | | Promissory Note to First Guaranty Bank, Hammond, Louisiana, filed as Exhibit 10.2 to form 8-K filed January 7, 2010, is incorporated herein by reference. |
| 10.27 | | Commercial Pledge Agreement between Premier Financial Bancorp, Inc. and First Guaranty Bank, Hammond, Louisiana filed as Exhibit 10.3 to form 8-K filed January 7, 2010, is incorporated herein by reference. |
| 14.1 | | Premier Financial Bancorp, Inc. Code of Ethics for the Chief Executive Officer, Chief Financial Officer and Chief Accounting Officer, filed as Exhibit 14.1 to form 10-K filed on April 14, 2004, is incorporated herein by reference. |
| 14.2 | | Premier Financial Bancorp, Inc. Code of Business Conduct and Ethics, filed as Exhibit 14.2 to form 10-K filed on April 14, 2004, is incorporated herein by reference. |
PREMIER FINANCIAL BANCORP, INC.
FORM 10-K
December 31, 2008
Exhibit
Number
| Description of Document
|
| | |
| | |
| | |
| | |
| | |
| 99.1 | | |
| 99.2 | | |
| | |
| *** Denotes executive compensation plans and arrangements. |
PREMIER FINANCIAL BANCORP, INC.
FORM 10-K
December 31, 20082009
Pursuant to the requirements of the Section 13 or 15(d) of the Securities Exchange Act of 1934, registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| | PREMIER FINANCIAL BANCORP, INC. |
| | |
| | By: /s/ Robert W. Walker, President |
| | Robert W. Walker, President |
| | |
| | Date: March 27, 200930, 2010 |
| | |
PREMIER FINANCIAL BANCORP, INC.
FORM 10-K
December 31, 20082009
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant in the capacities and on the dates indicated.
| /s/ Robert W. Walker | Principal Executive and Director | March 27, 2009 30, 2010 |
| Robert W. Walker | | |
| | | |
| /s/ Brien M. Chase | Principal Financial and Accounting | March 27, 2009 30, 2010 |
| Brien M. Chase | Officer | |
| | | |
| /s/ Toney K. Adkins | Director | March 18, 200917, 2010 |
| Toney K. Adkins | | |
| | | |
/s/ Hosmer A. Brown, III | Director | March 18, 200929, 2010 |
| Hosmer A. Brown, III | | |
| | | |
| /s/ Edsel Burns | Director | March 20, 200917, 2010 |
| Edsel Burns | | |
| | | |
| /s/ E. V. Holder, Jr. | Director | March 18, 200917, 2010 |
| E. V. Holder, Jr. | | |
| | | |
| /s/ Keith F. Molihan | Director | March 18, 200917, 2010 |
| Keith F. Molihan | | |
| | | |
| /s/ Marshall T. Reynolds | Chairman of the Board | March 18, 200917, 2010 |
| Marshall T. Reynolds | | |
| | | |
| /s/ Neal Scaggs | Director | March 18, 200917, 2010 |
| Neal Scaggs | | |
| | | |
| /s/ Thomas W. Wright | Director | March 18, 200917, 2010 |
| Thomas W. Wright | | |
| | | |
