UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended DECEMBER 31, 2003
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from __________ to __________.
Commission file number 0-20908
PREMIER FINANCIAL BANCORP, INC.
(Exact name of registrant as specified in its charter)
KENTUCKY 61-1206757
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2883 5TH AVENUE
HUNTINGTON, WEST VIRGINIA 25702
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (304) 525-1600
Securities registered pursuant to Section 12(b) of the Act:
NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK WITHOUT PAR VALUE
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to filing requirements
for the past 90 days. YES [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this 10-K or any amendment to this
Form 10-K. [X]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act) Yes [ ] No [X]
State the aggregate market value of voting stock held by non-affiliates of the
registrant. The aggregate market value shall be computed by reference to the
price at which stock was sold, or the average bid and asked prices of such
stock, as of a specified date within 60 days prior to the date of filing:
Aggregate Market Value of Voting Stock Based upon closing price on
- -------------------------------------- ---------------------------
$38,030,574 March 26, 2004
Indicate the number of shares outstanding of each of the registrant's classes of
common stock as of the latest practicable date.
Class Outstanding at March 26, 2004
----- ----------------------------
COMMON STOCK (no par value) 5,232,230
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the following documents are incorporated by reference into the Form
10-K part indicated:
Document Form 10-K
(1) Proxy statement for the 2004 annual meeting of Part III
shareholders
PART I
Item 1. Description of Business
THE COMPANY
Premier Financial Bancorp, Inc. (the "Company" or "Premier") is a
multi-bank holding company that, as of March 16, 2003, operates fourteen banking
offices in Kentucky, three banking offices in Ohio, and six banking offices in
West Virginia. At December 31, 2003, Premier had total consolidated assets of
$622.7 million, total consolidated deposits from continuing operations of
$455.5 million and total consolidated shareholders' equity of $45.5 million.
The banking subsidiaries (the "Banks" or "Affiliate Banks") consist of
Citizens Deposit Bank & Trust, Vanceburg, Kentucky; Bank of Germantown,
Germantown, Kentucky; Citizens Bank (Kentucky), Inc., Georgetown, Kentucky;
Farmers Deposit Bank, Eminence, Kentucky; Ohio River Bank, Ironton, Ohio;
First Central Bank, Inc., Philippi, West Virginia; and Boone County Bank, Inc.,
Madison, West Virginia.
On June 16, 2003 Premier announced that as a result of an ongoing internal
investigation, it had uncovered a systematic disregard for its loan approval and
credit administration policies at its Farmers Deposit Bank subsidiary and had
accepted the resignation of the bank's former president. On November 7, 2003
Premier disclosed that the Securities and Exchange Commission had requested
information about Premier's internal investigation. As the internal
investigation progressed, many loans were charged off and additional provisions
for loan losses were recorded. Premier's management, with the assistance of
outside independent professionals, has conducted a further review of those loans
for which significant charge offs or additional provisions were required in
2003. The purpose of this review was to determine if the facts or circumstances
that gave rise to additional charge offs or provisions had been improperly
withheld from senior management or improperly considered in applying
management's estimates and judgments as to the adequacy of the allowance for
loan losses in prior financial statement periods. The review did identify
instances in which collateral securing loans had been released without proper
support or notation in loan files, instances in which obligors on notes had been
released from their repayment obligation without proper support or notation in
loan files and instances in which delinquent loan reporting systems had been
manipulated to prevent problem loans from being identified on a timely basis.
Premier's senior management determined that if these circumstances had been
considered in evaluating the adequacy of the allowance for loan losses in prior
periods then some of the loan charge offs and additional provisions for loan
losses recorded in 2003 should have been reflected in prior periods. Therefore
the financial statements for 2002 and 2001 have been restated to reflect the
financial statement effect of the matters that occurred in those periods but
which were improperly concealed by subsidiary management. See Note 2 to the
consolidated financial statements included later in this report for a more
detailed discussion of the restatement impact.
In the fourth quarter of 2003, the Company adopted and began to implement a plan
to sell its subsidiary Citizens Bank (Kentucky), Inc. ("Citizens Bank") located
in Georgetown, Kentucky. On February 13, 2004, the Company announced that it had
signed a definitive agreement to sell Citizens Bank in a cash transaction valued
at approximately $14,500,000. In accordance with Financial Accounting Standard
144, "Accounting for the Impairment or Disposal of Long-lived Assets", which
became effective for the Company on January 1, 2002, the financial position and
results of operations of Citizens Bank are removed from the detail line items in
the Company's financial statements and presented separately as "discontinued
operations." See Note 3 to the consolidated financial statements included later
in this report for a more detailed discussion of discontinued operations.
In 2000 Premier suspended its acquisition strategy in order to focus on
improving operations, strengthening capital and management oversight and
improving the profitability of the banks previously acquired. While Premier
remains committed to its core strategy of rural banking with community oriented
and locally named institutions, the Company may dispose of additional corporate
assets that no longer meet Premier's geographic or operational performance
goals.
During October 2001, the Company appointed Robert W. Walker to the
position of President and Chief Executive Officer to replace the retiring
Gardner Daniel. In April 2002, the Company hired Brien M. Chase as Chief
Financial Officer to replace the former CFO who left the Company in February
2002.
Premier is a legal entity separate and distinct from its Affiliate
Banks and non-bank subsidiaries. Accordingly, the right of Premier, and thus the
right of Premier's creditors and shareholders, to participate in any
distribution of the assets or earnings of any of the Affiliate Banks or non-bank
subsidiaries is necessarily subject to the prior claims of creditors of such
subsidiaries, except to the extent that claims of Premier, in its capacity as a
creditor, may be recognized. The principal source of Premier's revenue is
dividends from its Affiliate Banks and non-bank subsidiaries. See "REGULATORY
MATTERS -- Dividend Restrictions" for discussion of the restrictions on the
Affiliate Banks' ability to pay dividends to Premier.
Premier was incorporated as a Kentucky corporation in 1991 and has
functioned as a bank holding company since its formation. During 2002, Premier
moved its principal executive offices from Georgetown, Kentucky to its present
location at 2883 5th Avenue, Huntington, West Virginia, 25702. The purpose of
the move was to be more centrally located among Premier's Affiliate Banks and
its directorship. Premier's telephone number is (304) 525-1600.
BUSINESS
General
Through the Banks and its data processing subsidiary, the Company
focuses on providing quality, community banking services to individuals and
small-to-medium sized businesses primarily in non-urban areas. By seeking to
provide such banking services in non-urban areas, the Company believes that it
can minimize the competitive effect of larger financial institutions that
typically are focused on large metropolitan areas. Each Bank retains its local
management structure which offers customers direct access to the Bank's
president and other officers in an environment conducive to friendly, informed
and courteous service. This approach also enables each Bank to offer local and
timely decision-making, and flexible and reasonable operating procedures and
credit policies limited only by a framework of centralized risk controls
provided by the Company to promote prudent banking practices. See additional
discussion under "Regulatory Matters" below.
Each Bank maintains its community orientation by, among other things,
having selected members of its community as members of its board of directors,
who assist in the introduction of prospective customers to the Bank and in the
development or modification of products and services to meet customer needs. As
a result of the development of personal banking relationships with its customers
and the convenience and service offered by the Banks, the Banks' lending and
investing activities are funded primarily by core deposits.
When appropriate and economically advantageous, the Company centralizes
certain of the Banks' back office, support and investment functions in order to
achieve consistency and cost efficiency in the delivery of products and
services. The Company centrally provides services such as data processing,
operations support, accounting, loan review, compliance and internal auditing to
the Banks to enhance their ability to compete effectively. The Company also
provides overall direction in the areas of credit policy and administration,
strategic planning, marketing, investment portfolio management and other
financial and administrative services. Each Bank participates in product
development by advising management of new products and services needed by their
customers and desirable changes to existing products and services.
Each of the Banks provides a wide range of retail and commercial
banking services, including commercial, real estate, agricultural and consumer
lending; depository and funds transfer services; collections; safe deposit
boxes; cash management services; and other services tailored for both
individuals and businesses. Farmers Deposit Bank in Eminence, Kentucky, also
offers limited trust services and acts as executor, administrator, trustee and
in various other fiduciary capacities. Through Premier Data Services, Inc., the
Company's data processing subsidiary, the Company currently provides centralized
data processing services to six of the Banks as well as two non-affiliated
banks.
The Banks' residential mortgage lending activities consist primarily of
loans for purchasing personal residences or loans for commercial or consumer
purposes secured by residential mortgages. Consumer lending activities consist
of traditional forms of financing for automobile and personal loans. Commercial
lending activities include loans to small businesses located primarily in the
communities in which the Banks are located and surrounding areas. Commercial
loans are secured business assets including real estate, equipment, inventory,
and accounts receivable. Some commercial loans are unsecured. Farmers Deposit
Bank has previously extended loans to professional athletes and their agents and
advisors. This lending activity has been curtailed in 2003.
The Banks' range of deposit services includes checking accounts, NOW
accounts, savings accounts, money market accounts, club accounts, individual
retirement accounts, certificates of deposit and overdraft protection. Deposits
of the Banks are insured by the Bank Insurance Fund administered by the FDIC.
Competition
The Banks encounter strong competition both in making loans and
attracting deposits. The deregulation of the banking industry and the widespread
enactment of state laws that permit multi-bank holding companies as well as the
availability of nationwide interstate banking have created a highly competitive
environment for financial services providers. In one or more aspects of its
business, each Bank competes with other commercial banks, savings and loan
associations, credit unions, finance companies, mutual funds, insurance
companies, brokerage and investment banking companies and other financial
intermediaries operating in its market and elsewhere, many of which have
substantially greater financial and managerial resources. While the Banks are
smaller financial institutions, each of the Banks' competitors include large
bank holding companies having substantially greater resources and offering
certain services that Premier Banks may not currently provide. Each Bank seeks
to minimize the competitive effect of larger financial institutions through a
community banking approach that emphasizes direct customer access to the Bank's
president and other officers in an environment conducive to friendly, informed
and courteous service.
Management believes that each Bank is positioned to compete
successfully in its respective primary market area, although no assurances as to
ongoing competitiveness can be given. Competition among financial institutions
is based upon interest rates offered on deposit accounts, interest rates
charged on loans and other credit and service charges, the quality and scope
of the services rendered, the convenience of the banking facilities and, in
the case of loans to commercial borrowers, relative lending limits. Management
believes that the commitment of its Banks to personal service, innovation and
involvement in their respective communities and primary market areas, as well
as their commitment to quality community banking service, are factors that
contribute to their competitiveness.
Regulatory Matters
The following discussion sets forth certain elements of the regulatory
framework applicable to bank holding companies and their subsidiaries and
provides certain specific information relevant to Premier. This regulatory
framework is intended primarily for the protection of depositors and the federal
deposit insurance funds and not for the protection of the holders of securities,
including Premier common shares or PFBI Capital Trust preferred shares. To the
extent that the following information describes statutory or regulatory
provisions, it is qualified in its entirety by reference to those provisions.
A change in the statutes, regulations or regulatory policies applicable to
Premier or its subsidiaries may have a material effect on the business of
Premier.
General - As a bank holding company, Premier is subject to regulation under the
Bank Holding Company Act ("BHC Act"), and to inspection, examination and
supervision by the Board of Governors of the Federal Reserve System ("Federal
Reserve"). Under the BHC Act, bank holding companies generally may not acquire
ownership or control of more than 5% of the voting shares or substantially all
the assets of any company, including a bank, without the Federal Reserve's prior
approval. Similarly, bank holding companies generally may not acquire ownership
or control of a savings association without the prior approval of the Federal
Reserve. Further, branching by the Affiliate Banks is subject to the
jurisdiction, and requires the approval, of each Affiliate Bank's primary
federal banking regulator and, if the Affiliate Bank is a state-chartered bank,
the appropriate state banking regulator.
Under the BHC Act, the Federal Reserve has the authority to require a
bank holding company to terminate any activity or relinquish control of the
nonbank subsidiary (other than a nonbank subsidiary of a bank) upon the Federal
Reserve's determination that such activity or control constitutes a risk to the
financial soundness and stability of any bank subsidiary of the bank holding
company. Premier and the Affiliate Banks are subject to the Federal Reserve Act,
which limits borrowings by Premier and its nonbank subsidiaries from the
Affiliate Banks and also limits various other transactions between Premier and
its nonbank subsidiaries with the Affiliate Banks.
The four Affiliate Banks chartered in Kentucky are supervised,
regulated and examined by the Kentucky Department of Financial Institutions, the
Affiliate Bank chartered in Ohio is supervised, regulated and examined by the
Ohio Division of Financial Institutions, and the two Affiliate Banks chartered
in West Virginia are supervised, regulated and examined by the West Virginia
Division of Banking. In addition, those Affiliate Banks that are state banks and
members of the Federal Reserve System are supervised and regulated by the
Federal Reserve, and those state banks that are not members of the Federal
Reserve System are supervised and regulated by the Federal Deposit Insurance
Corporation ("FDIC"). Each banking regulator has the authority to issue
cease-and-desist orders if it determines that the activities of a bank regularly
represent an unsafe and unsound banking practice or a violation of law.
Both federal and state law extensively regulates various aspects of the
banking business, such as reserve and capital requirements, truth-in-lending and
truth-in-savings disclosure, equal credit opportunity, fair credit reporting,
trading in securities and other aspects of banking operations. Premier, the
Affiliate Banks and Premier's nonbank subsidiaries are also affected by the
fiscal and monetary policies of the federal government and the Federal Reserve
and by various other governmental laws, regulations and requirements. Further,
the earnings of Premier and Affiliate Banks are affected by general economic
conditions and prevailing interest rates. Legislation and administrative actions
affecting the banking industry are frequently considered by the United States
Congress, state legislatures and various regulatory agencies. It is not possible
to predict with certainty whether such legislation or administrative actions
will be enacted or the extent to which the banking industry, in general, or
Premier and the Affiliate Banks, in particular, would be affected.
Liability for Bank Subsidiaries - The Federal Reserve has a policy to the effect
that a bank holding company is expected to act as a source of financial and
managerial strength to each of its subsidiary banks and to maintain resources
adequate to support each such subsidiary bank. This support may be required at
times when Premier may not have the resources to provide it. In the event of a
bank holding company's bankruptcy, any commitment by the bank holding company to
a federal bank regulatory agency to maintain the capital of a subsidiary bank
would be assumed by the bankruptcy trustee and entitled to priority of payment.
Any depository institution insured by the FDIC may be held liable for
any loss incurred, or reasonably expected to be incurred, by the FDIC in
connection with (i) the default of a commonly controlled FDIC-insured depository
institution, or (ii) any assistance provided by the FDIC to a commonly
controlled FDIC-insured depository institution in danger of default. "Default"
is defined generally as the appointment of a conservator or receiver and "in
danger of default" is defined generally as the existence of certain conditions
indicating that a "default" is likely to occur in the absence of regulatory
assistance. In the event that such a default occurred with respect to a bank,
any loans to the bank from its parent holding company will be subordinate in
right of payment of the bank's depositors and certain of its other obligations.
Capital Requirements - Premier is subject to capital ratios, requirements and
guidelines imposed by the Federal Reserve, which are substantially similar to
the ratios, requirements and guidelines imposed by the Federal Reserve and the
FDIC on the banks within their respective jurisdictions. These capital
requirements establish higher capital standards for banks and bank holding
companies that assume greater credit risks. For this purpose, a bank's or
holding company's assets and certain specified off-balance sheet commitments are
assigned to four risk categories, each weighted differently based on the level
of credit risk that is ascribed to such assets or commitments. A bank's or
holding company's capital is divided into two tiers: "Tier I" capital, which
includes common shareholders' equity, noncumulative perpetual preferred stock
and related surplus (excluding auction rate issues), minority interests in
equity accounts of consolidated subsidiaries, less goodwill, certain
identifiable intangible assets and certain other assets; and "Tier 2" capital,
which includes, among other items, perpetual preferred stock not meeting the
Tier I definition, mandatory convertible securities, subordinated debt and
allowances for loan and lease losses, subject to certain limitations, less
certain required deductions.
Bank holding companies currently are required to maintain Tier I and
total capital (the sum of Tier 1 and Tier 2 capital) equal to at least 4% and 8%
of total risk-weighted assets, respectively. At December 31, 2003, Premier met
both requirements, with Tier I and total capital equal to 10.6% and 14.8% 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, 2003, Premier's leverage ratio was 6.4%.
On June 9, 1997, PFBI Capital Trust (Trust), a statutory business trust
created under Delaware law, issued $28,750,000 of 9.750% Preferred Securities
("Preferred Securities" or "Trust Preferred Securities") with a stated value and
liquidation preference of $25 per share. A portion of the Preferred Securities
issued by the Trust qualify as Tier 1 capital for the Company under the Federal
Reserve Board's regulatory framework. The Federal Reserve Board is currently
evaluating whether trust preferred securities, in general, will continue to
qualify as Tier 1 capital due to deconsolidation of the related trust preferred
entity required by FASB Interpretation No. 46, . If the Federal Reserve Board
disqualifies the Trust Preferred Securities as Tier 1 capital, the effect of
such a change could have a material impact on the Company's regulatory capital
ratios. See Note 14 to the consolidated financial statements for additional
details regarding the Company's Trust Preferred Securities.
The foregoing capital requirements are minimum requirements. The
Federal Reserve may set capital requirements higher than the minimums described
above for holding companies whose circumstances warrant it. For example, holding
companies experiencing or anticipating significant growth may be expected to
maintain capital ratios, including tangible capital positions, well above the
minimum levels.
Additionally, the Federal Deposit Insurance Corporation Improvement Act
of 1991 ("FDICIA"), among other things, identifies five capital categories for
insured depository institutions (well capitalized, adequately capitalized,
undercapitalized, significantly undercapitalized and critically
undercapitalized) and requires the respective federal regulatory agencies to
implement systems for "prompt corrective action" for insured depository
institutions that do not meet minimum capital requirements within such
categories. FDICIA imposes progressively more restrictive constraints on
operations, management and capital distributions, depending on the category in
which an institution is classified. Failure to meet the capital guidelines could
also subject a banking institution to capital raising requirements.
An "undercapitalized" bank must develop a capital restoration plan and
its parent holding company must guarantee the bank's compliance with the plan.
The liability of the parent holding company under any such guarantee is limited
to the lesser of 5% of the Bank's assets at the time it became
"undercapitalized" or the amount needed to comply with the plan. Furthermore, in
the event of the bankruptcy of the parent holding company, such guarantee would
take priority over the parent's general unsecured creditors. In addition, FDICIA
requires the various regulatory agencies to prescribe certain non-capital
standards for safety and executive compensation and permits regulatory action
against a financial institution that does not meet such standards.
Regulatory Agreements - On September 29, 2000, the Company entered into an
agreement with the Federal Reserve that prohibited the Company from paying
dividends or incurring any additional debt without the prior written approval of
the Federal Reserve. Additionally, the agreement required the Company to develop
and monitor compliance with certain operational policies designed to strengthen
Board of Director oversight including credit administration, liquidity, internal
audit and loan review.
On January 29, 2003, Premier entered into a written agreement with the
Federal Reserve Bank of Cleveland in recognition of their common goal to restore
the financial soundness of Premier. Among the provisions of the agreement was
the continuation of the restriction on Premier's payment of dividends on its
common stock (PFBI) without the express written consent of the Federal Reserve
Bank of Cleveland and the continuation of the restriction on Premier's payment
of quarterly distributions on its Trust Preferred Securities (PFBIP) without the
express written consent of the Federal Reserve Bank of Cleveland. The written
agreement supercedes and rescinds all previous agreements between Premier and
the Federal Reserve Bank of Cleveland. Among other provisions, the agreement
requires Premier to (i) retain an independent consultant to review its
management, directorate and organizational structure, (ii) adopt a management
plan responsive to such consultant's report, (iii) update its management
succession plan in accordance with any recommendations in such consultant's
report, (iv) monitor its subsidiary banks' compliance with bank policies and
loan review programs, (v) conduct formal quarterly reviews of its subsidiary
banks' allowances for loan losses, (vi) maintain sufficient capital, (vii)
submit a plan to the Federal Reserve Bank of Cleveland for improving
consolidated earnings over a three-year period, and (viii) submit to the Federal
Reserve Bank of Cleveland annual projections of planned sources and uses of the
parent company's cash, including a plan to service its outstanding debt and
trust preferred securities. Premier's compliance with the written agreement is
to be monitored by a committee, to be organized, consisting of at least three
of its outside directors.
Three of the Banks; Citizens Deposit Bank & Trust, Citizens' Bank
(Kentucky), and Bank of Germantown, have entered into similar agreements with
their respective primary regulator which, among other things, prohibits the
payment of dividends without prior written approval and requires significant
changes in their lending and credit administration policies.
On December 24, 2003, Premier announced that Farmers Deposit had
reached an agreement with the Federal Deposit Insurance Corporation ("FDIC") and
the Kentucky Department of Financial Institutions ("KDFI") [collectively
referred to as "Supervisory Authorities"] to consent to the issuance of a cease
& desist order ("Order") from its Supervisory Authorities. The Order, effective
January 1, 2004, requires the Bank to cease and desist from the following:
(a) Operating with management whose policies and procedures are detrimental
to Farmers Deposit and jeopardize the safety of its deposits;
(b) Operating with an inadequate level of capital protection for the kind
and quality of assets held by Farmers Deposit;
(c) Operating with a large volume of adversely classified loans or assets
and/or delinquent loans and/or non-accrued loans;
(d) Operating with an inadequate allowance for loan and lease losses for
the volume, kind and quality of loans and leases held by
Farmers Deposit;
(e) Engaging in hazardous lending and lax collection practices;
(f) Operating with inadequate provisions for liquidity and funds
management;
(g) Operating with disregard of routine and controls policies;
(h) Operating in such a manner as to produce operating losses; and
(i) Violating laws and/or regulations cited in the most recent Report of
Examination issued by the FDIC ("Report").
The Order also outlines a number of steps to be taken by Farmers
Deposit which are designed to remedy and/or prevent the reoccurrence of the
items listed in the Order. These include 1) retaining qualified management and
increasing the involvement of the Board of Directors of Farmers Deposit
("Board"); 2) developing and submitting to the Supervisory Authorities a capital
plan that maintains the Farmers Deposit Tier I Leverage Ratio above a minimum
5.0% and increases that ratio to 8.0% by December 31, 2004; 3) restricting the
payment of cash dividends; 4) requiring the Board to review the adequacy of the
allowance for loan losses at least quarterly; 5) requiring Farmers Deposit to
charge-off certain loans listed in the Report; 6) reviewing the system of
internal loan review and system for assigning loan risk grades as well as
revising the lending policies of Farmers Deposit to address items of criticism
contained in the Report; 7) developing written plans for reducing and/or
improving the level of adversely classified loans and correcting documentation
exceptions on certain loans detailed in the Report; 8) generally prohibiting
additional lending to borrowers who currently have uncollected adversely
classified loans; 9) submitting an annual budget to the Supervisory Authorities
outlining goals and strategies for improving and sustaining the earnings of
Farmers Deposit; 10) adopting and implementing a policy for operating Farmers
Deposit with adequate internal controls consistent with safe and sound banking
practices and developing an internal audit program to ensure the integrity of
these controls; 11) adopting and implementing a liquidity and funds management
policy; and 12) providing this notice to shareholders. Farmers Deposit is
required to provide quarterly progress updates to the Supervisory Authorities.
The full text of the Order is available on the FDIC website at
www.fdic.gov or by calling the FDIC Public Information Center at (877) 275-3342.
Farmers Deposit, under new management and with the assistance of
Premier, has already completed some of the required steps including hiring a
Chief Executive Officer and a Chief Financial Officer, increasing the number of
local directors, developing a capital plan, charging-off the loans listed in the
Report, and developing action plans on the remaining classified loans. Bank
management has also established a separate collections department which is
actively working on reducing the level of classified and delinquent loans as
well as trying to recover losses on the loans previously charged-off. Bank
management and the Board are working with Premier to develop or revise the
bank's policies and procedures as required by the Order. As of March 31, 2004,
Bank management has developed and submitted the required plans and updates due
within 30 days and 90 days of the effective date of the Order. As of March 31,
2004, the Tier I Leverage Ratio of Farmers Deposit was 6.0% which exceeded the
written capital plan threshold of 5.5%
These agreements, which require periodic reporting, will remain in
force until the regulators are satisfied that the company and the banks have
fully complied with the terms of the agreement.
The Securities and Exchange Commission ("SEC") is investigating the
information disclosed in Premier's June 16 and July 31, 2003 Forms 8-K and the
June 30, and September 30, 2003 Forms 10-Q regarding its wholly owned
subsidiary, Farmers Deposit Bank, Eminence, Kentucky ("Farmers Deposit") and has
requested information about Premier's investigation. Premier is cooperating with
the SEC.
Dividend Restrictions - Premier is dependent on dividends from its Affiliate
Banks for its revenues. Various federal and state regulatory provisions limit
the amount of dividends the Affiliate Banks can pay to Premier without
regulatory approval. At December 31, 2003, approximately $1.4 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 22 of the accompanying audited consolidated
financial statements.
Interstate Banking - Under the Riegle-Neal Interstate Banking and Branching
Efficiency Act of 1994 (the "Riegle-Neal Act"), subject to certain concentration
limits, (i) bank holding companies, such as Premier, are permitted to acquire
banks and bank holding companies located in any state of the United States,
subject to certain restrictions, and (ii) banks are permitted to acquire branch
offices outside their home state by merging with out-of-state banks, purchasing
branches in other states or establishing de novo branch offices in other states;
provided that, in the case of any such purchase or opening of individual
branches, the host state has adopted legislation "opting in" to the relevant
provisions of the Riegle-Neal Act; and provided further, that, in the case of a
merger with a bank located in another state, the host state has not adopted
legislation "opting out" of the relevant provisions of the Riegle-Neal Act.
Gramm-Leach-Bliley Act - On November 12, 1999, the Gramm-Leach-Bliley Act (the
"Act") was signed into law, eliminating many of the remaining barriers to full
convergence of the banking, securities, and insurance industries. The major
provisions of the Act took effect March 12, 2000.
The Act enables a broad-scale consolidation among banks, securities
firms, and insurance companies by creating a new type of financial services
company called a "financial holding company," a bank holding company with
dramatically expanded powers. Financial holding companies can offer virtually
any type of financial service, including banking, securities underwriting,
insurance (both agency and underwriting), and merchant banking. In addition, the
Act permits the Federal Reserve and the Treasury Department to authorize
additional activities for financial holding companies, but only if they jointly
determine that such activities are "financial in nature" or "complementary to
financial activities." Premier does not presently qualify to elect financial
holding company status.
<page>
The FRB 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 FRB approval prior to engaging, either
de novo or through acquisitions, in financial activities previously determined
to be permissible by the FRB. Instead, a financial holding company need only
provide notice to the FRB within 30 days after commencing the new activity or
consummating the acquisition.
Number of Employees - The Company and its subsidiaries collectively had
approximately 268 full-time equivalent employees as of December 31, 2003. Its
executive offices are located at 2883 5th Avenue, Huntington, West Virginia
25702, telephone number (304) 525-1600 (facsimile number (304) 525-9701).
Item 2. Properties
The Company leases its principal executive offices located in
Huntington, West Virginia. The Company also owns property located at 115 North
Hamilton Street in Georgetown, Kentucky, which serves as a location for
Citizens' Bank (Kentucky), and property located at 104 Jefferson Street,
Brooksville, Kentucky, which serves as a branch for Bank of Germantown. Except
as noted each of the Banks owns the real property and improvements on which
their banking activities are conducted.
Citizens Deposit Bank & Trust, in addition to its main office at 400
Second Street in Vanceburg, Kentucky, has four branch offices in Lewis County,
Kentucky, including one leased facility. The Bank of Germantown, with its main
office located on Highway 10 in Germantown, Kentucky, has one branch located
in Bracken County, Kentucky. Citizens Bank (Kentucky), Inc., in addition to its
main office at 120 North Hamilton Street in Georgetown, Kentucky, has two
branches in Scott County, Kentucky, and two branches in Bath County, Kentucky.
Farmers Deposit Bank, in addition to its main office at 5230 South Main Street
in Eminence, Kentucky, has two branches in Henry County, Kentucky. Ohio River
Bank, in addition to its main office at 221 Railroad Street in Ironton, Ohio,
has two branches, one each located in Lawrence and Scioto Counties, Ohio. First
Central Bank, in addition to its main office at 2 South Main Street in Philippi,
West Virginia, has a branch located in Buchannon, West Virginia. Boone County
Bank, in addition to its main office at 300 State Street, Madison, West
Virginia, has three branches, one each located in Boone, Logan and Lincoln
Counties, West Virginia.
Item 3. Legal Proceedings
The Banks are respectively parties to legal actions that are ordinary
routine litigation incidental to a commercial banking business. In management's
opinion, the outcome of these matters, individually or in the aggregate, will
not have a material adverse impact on the results of operations or financial
position of the Company.
The Securities and Exchange Commission ("SEC") is investigating the
information disclosed in Premier's June 16 and July 31, 2003 Forms 8-K and
the June 30, and September 30, 2003 Forms 10-Q regarding Farmers Deposit Bank
and has requested information about Premier's investigation. Premier is
cooperating with the SEC.
Item 4. Submission of Matters to a Vote of Security Holders
There were no matters submitted to a vote of security holders, through
solicitation of proxies or otherwise during the fourth quarter of the fiscal
year covered by this report.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
---------------------------------------------------------------------
The Company's common stock is listed on the NASDAQ National Market
System under the symbol PFBI. At December 31, 2002, the Company had
approximately 766 record holders of its common shares.
The following table sets forth on a quarterly basis cash dividends paid
and the range of high and low sales prices on a per share basis during the
quarters indicated.
Cash Sales Price
Dividends Paid High Low
-------------- ---- ---
2002:
First Quarter $ - $10.24 $8.11
Second Quarter - 10.49 8.40
Third Quarter - 8.55 6.50
Fourth Quarter - 7.82 6.00
---------
$ -
=========
2003
First Quarter $ - $ 9.50 $7.58
Second Quarter - 10.25 8.91
Third Quarter - 9.45 8.50
Fourth Quarter - 8.94 7.50
---------
$ -
=========
2004:
First Quarter
(through March 26, 2004 $ - $ 9.49 $8.31
The Board of Directors suspended the payment of dividends during the
second quarter of 2000. In September 2000 as a result of an agreement entered
into with the Federal Reserve, the Company agreed not to declare additional
dividends without the prior approval of the Federal Reserve. The September 2000
agreement was superceded by a January 29, 2003 written agreement between Premier
and the Federal Reserve which continued the restriction on dividends. The
Board of Directors anticipates paying dividends at some future date when, in
its discretion, financial prudence allows and the Federal Reserve concurs in the
payment of such dividends. Furthermore, the January 29, 2003 agreement restricts
Premier's payments of dividends on its PFBI Capital Trust preferred securities.
These dividends are cumulative and all deferred distributions must be paid
before dividends may be paid to holders of common shares. Even if the Company
is able to resume the payment of dividends, there can be no assurance that the
amount of the dividends will be what the Company paid before the payment of
dividends was suspended.
The payment of dividends by the Company depends upon the ability of the
Banks to declare and pay dividends to the Company because the principal source
of the Company's revenue will be dividends paid by the Banks. At December 31,
2003, approximately $1.4 million was available for payment as dividends from the
Banks to the Company without the need for regulatory approval. In considering
the payment of dividends, the Board of Directors will take into account the
Company's financial condition, results of operations, tax considerations, costs
of expansion, industry standards, economic conditions and need for funds, as
well as governmental policies and regulations applicable to the Company and the
Banks. See "REGULATORY MATTERS - Capital Requirements" for discussion on capital
guidelines.
Item 6. Selected Financial Data
The following table presents consolidated selected financial data for the
Company, it does not purport to be complete and is qualified in its entirety by
more detailed financial information and the audited consolidated financial
statements contained elsewhere in this annual report. The consolidated selected
financial data presented below has been restated as of December 31, 2002 and
2001 and for the years then ended to reflect the effects of actions taken by
subsidiary management that were concealed from others in the Company, as more
fully described in Note 2 to the consolidated financial statements. Further,
the data presented below reflects separately the impact of discontinued
operations as more fully described in Note 3 to the consolidated financial
statements.
At or for the Year Ended December 31,
2003 2002 2001 2000 1999
-------- -------- -------- -------- --------
(Restated) (Restated)
Earnings
Net interest income $ 19,182 $ 20,838 $ 20,931 $ 24,121 $ 24,007
Provision for loan losses 20,513 9,453 8,350 4,615 2,985
Non-interest income 4,064 2,717 12,178 3,192 2,937
Non-interest expense 17,632 17,831 20,200 22,720 19,922
Income taxes (benefit) (5,282) (1,522) 2,985 (237) 1,085
Income (loss) from
continuing operations (9,617) (2,207) 1,574 215 2,952
Income (loss) from
discontinued operations (80) (1,130) (380) 1,120 1,638
-------- -------- -------- -------- --------
Net income (loss) $ (9,697) $ (3,337) $ 1,194 $ 1,335 $ 4,590
======== ======== ======== ======== ========
Financial Position
Total assets of continuing
operations $543,229 $590,869 $606,961 $780,659 $746,652
Total assets of discontinued
Operations 79,163 84,406 104,653 110,162 106,705
Loans, net of unearned
income 331,794 373,099 384,940 505,567 485,404
Allowance for loan losses 14,300 9,698 7,371 6,617 5,574
Goodwill and other intangibles 15,816 15,816 15,816 22,615 24,092
Securities 147,646 144,698 143,516 185,282 161,938
Deposits 455,474 477,724 480,991 635,533 603,080
Other borrowings 18,307 32,600 43,724 64,503 67,272
Subordinated debentures 26,546 29,639 29,639 29,639 29,639
Stockholders' equity 45,540 56,124 58,750 55,830 52,127
Share Data
Income (loss) from continuing
operations - basic $ (1.84) $ (0.42) $ 0.30 $ 0.04 $ 0.56
Income (loss )from continuing
operations - diluted (1.84) (0.42) 0.30 0.04 0.56
Net income - basic (1.85) (0.64) 0.23 0.26 0.88
Net income - diluted (1.85) (0.64) 0.23 0.26 0.88
Book value 8.70 10.73 11.23 10.67 9.96
Cash dividend 0.00 0.00 0.00 0.15 0.60
Ratios
Return on average assets (1) (1.66) (0.37) 0.24% 0.03% 0.42%
Return on average equity (1) (18.46) (3.77)% 2.76% 0.41% 5.50%
Dividend payout (2) 0.00% 0.00% 0.00% 375.00% 107.14%
Stockholders' equity to total
assets at period-end (3) 8.38% 9.50% 9.68% 7.15% 6.98%
Average stockholders' equity
to average total assets (1) 7.88% 8.44% 7.37% 6.07% 6.72%
Notes (1) Computed based on average assets from continuing operations
(2) Computed based on income (loss) from continuing operations
(3) Shareholders' equity at period end divided by assets from continuing operations
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
INTRODUCTION
Premier Financial Bancorp, Inc. ("Premier") is a multi-bank holding
company headquartered in Huntington, West Virginia. It operates seven community
bank subsidiaries ranging in size from $24 million to $157 million, each with a
local community name and orientation. One bank subsidiary, Citizens Bank
(Kentucky), Inc. ("Citizens Bank")is in the process of being sold. As such, and
in accordance with Financial Accounting Standard 144, "Accounting for the
Impairment or Disposal of Long-lived Assets", which became effective for the
Company on January 1, 2002, the financial position and results of operations of
Citizens Bank are removed from the detail line items in the Company's
consolidated financial statements, and this Management's Discussion and
Analysis, and are presented separately as "discontinued operations." See Note 3
to the consolidated financial statements presented separately in this annual
report for additional information concerning discontinued operations. The
remaining banks operate in twenty communities within the states of West
Virginia, Ohio and Kentucky and provide their customers with a full range of
banking services. Premier is also the parent of a data processing subsidiary
which provides the data processing and management services for six of Premier's
affiliate banks and two other non-affiliated banks. As of December 31, 2003,
Premier had approximately $62 million in total assets, $332 million in total
loans and $455 million in total deposits.
The accompanying consolidated financial statements have been prepared by
the management of Premier in conformity with accounting principals generally
accepted in the United States of America. The audit committee of the Board of
Directors engaged Crowe Chizek and Company LLC independent auditors, to audit
the consolidated financial statements, and their report is included elsewhere
herein. Financial information appearing throughout this annual report is
consistent with that reported in the consolidated financial statements. The
following discussion is designed to assist readers of the consolidated financial
statements in understanding significant changes in Premier's financial condition
and results of operations.
Management's objective of a fair presentation of financial information
is achieved through a system of internal accounting controls. The financial
control system of Premier is designed to provide reasonable assurance that
assets are safeguarded from loss and that transactions are properly authorized
and recorded in the financial records. As an integral part of that financial
control system, the audit committee of the Board of Directors engaged Arnett &
Foster, CPA's to perform internal audits of the financial records of each of the
subsidiaries on a periodic basis. Their findings and recommendations are
reported to Premier's audit committee as well as the audit committees of the
subsidiaries. Also, on a regular periodic basis, the subsidiary banks are
examined by Federal and State banking authorities for safety and soundness as
well as compliance with applicable banking laws and regulations. The activities
of both the internal and external audit functions are reviewed by the audit
committee of the Board of Directors.
FORWARD-LOOKING STATEMENTS
Management's discussion and analysis contains forward-looking statements
that are provided to assist in the understanding of anticipated future financial
performance. However, such performance involves risks and uncertainties, and
there are certain important factors that may cause actual results to differ
materially from those anticipated. These important factors include, but are not
limited to, economic conditions (both generally and more specifically in the
markets in which Premier operates), competition for Premier's customers from
other providers of financial services, government legislation and regulation
(which changes from time to time), changes in interest rates, Premier's ability
to originate quality loans, collect delinquent loans and attract and retain
deposits, the impact of Premier's growth, Premier's ability to control costs,
and new accounting pronouncements, all of which are difficult to predict and
many of which are beyond the control of Premier.
CRITICAL ACCOUNTING POLICIES
General
The financial condition and results of operations presented in the
Consolidated Financial Statements, accompanying Notes to the Consolidated
Financial Statements and management's discussion and analysis are, to a large
degree, dependent upon our accounting policies. The selection and application of
these accounting policies involve judgments, estimates, and uncertainties that
are susceptible to change.
Presented below is discussion of those accounting policies that
management believes are the most important to the portrayal and understanding of
our financial condition and results of operations. These critical accounting
policies require management's most difficult, subjective and complex judgments
about matters that are inherently uncertain. In the event that different
assumptions or conditions were to prevail, and depending upon the severity of
such changes, the possibility of materially different financial condition or
results of operations is a reasonable likelihood. See also Note 1 of the
accompanying consolidated financial statements presented elsewhere in this
annual report.
Allowance for Loan Losses
The Company monitors and maintains an allowance for loan losses to
absorb an estimate of probable incurred losses inherent in the loan portfolio.
The Company maintains policies and procedures that address the systems of
control over the following areas of maintenance of the allowance: the systematic
methodology used to determine the appropriate level of the allowance to provide
assurance that the allowance for loan losses is maintained in accordance with
accounting principles generally accepted in the United States of America; the
accounting policies for loan charge-offs and recoveries; the assessment and
measurement of impairment in the loan portfolio; and the loan grading system.
The Company evaluates various loans individually for impairment as
required by Statement of Financial Accounting Standard (SFAS) No. 114,
Accounting by Creditors for Impairment of a Loan, and SFAS No. 118, Accounting
by Creditors for Impairment of a Loan - Income Recognition and Disclosures.
Loans evaluated individually for impairment include non-performing loans, such
as loans on non-accrual, loans past due 90 days or more, restructured loans and
other loans selected by management including loans graded as substandard or
doubtful by the internal credit review process. The evaluations are based upon
discounted expected cash flows or collateral valuations. If the evaluation shows
that a loan is individually impaired, then a specific reserve is established for
the amount of impairment. If a loan evaluated individually is not impaired, then
the loan is assessed for impairment under SFAS No. 5, Accounting for
Contingencies (SFAS 5), with a group of loans that have similar characteristics.
For loans without individual measures of impairment, the Company makes
estimates of losses for groups of loans as required by SFAS 5. Loans are grouped
by similar characteristics, including the type of loan, the assigned loan grade
and the general collateral type. A loss rate reflecting the expected loss
inherent in a group of loans is derived based upon estimates of default rates
for a given loan grade, the predominant collateral type for the group and the
terms of the loan. The resulting estimate of losses for groups of loans are
adjusted for relevant environmental factors and other conditions of the
portfolio of loans, including: borrower and industry concentrations; levels and
trends in delinquencies, charge-offs and recoveries; changes in underwriting
standards and risk selection; level of experience, ability and depth of lending
management; and national and local economic conditions.
The amount of estimated impairment for individually evaluated loans
and groups of loans is added together for a total estimate of probable incurred
loan losses. This estimate of losses is compared to the allowance for loan
losses of the Company as of the evaluation date and, if the estimate of losses
exceeds the allowance, an additional provision to the allowance would be made.
If the estimate of losses is less than the allowance, the degree to which the
allowance exceeds the estimate is evaluated to determine whether the allowance
falls outside a range of estimates. If the estimate of losses were below the
range of reasonable estimates, the allowance would be reduced by way of a credit
to the provision for loan losses. The Company recognizes the inherent
imprecision in estimates of losses due to various uncertainties and variability
related to the factors used, and therefore a reasonable range around the
estimate of losses is derived and used to ascertain whether the allowance is too
high. If different assumptions or conditions were to prevail and it is
determined that the allowance is not adequate to absorb the new estimate of
probable incurred losses, an additional provision for loan losses would be made,
which amount may be material to the Consolidated Financial Statements.
Impairment of Goodwill
As required by applicable accounting guidance, goodwill is evaluated
at least annually to determine if the amount recorded on the Company's balance
sheet is impaired. If goodwill is determined to be impaired, the recorded amount
would be reduced to estimated fair value by a charge to expense in the period in
which impairment is determined. Impairment is evaluated in the aggregate for all
of the Company's banking operations. Operating characteristics of the aggregate
banking operations are derived and compared to a database of peer group banks
that have been sold. Pricing valuation factors that are considered in estimating
the fair value of the Company's aggregate banking operations include
price-to-total assets, price-to-total book value, price-to-deposits and price-to
earnings. Unusual events that have impacted the operating characteristics of the
Company's aggregate banking operations are considered to assess the likelihood
of recurrence and adjustments to historical performance may be made. Changes in
assumptions regarding the likelihood of unusual historical events recurring or
the use of different pricing valuation factors could have a material impact on
management's impairment analysis.
Realization of Deferred Tax Assets
Deferred tax assets and liabilities are the expected future tax
amounts for the temporary differences between carrying amounts and tax bases of
assets and liabilities, computed using enacted tax rates. A valuation allowance,
if needed, reduces deferred tax assets to the amount expected to be realized.
Deferred tax assets for the Company primarily relate to the allowance for loan
losses and net operating loss carryforwards. In considering the need for a
valuation allowance to reduce deferred tax assets to the amount expected to be
realized, management considers the amount of previously paid taxes that may be
recoverable and the likelihood of generating sufficient future taxable income to
fully utilized expected future tax deductions. At December 31, 2003 management's
consideration of the need for a valuation allowance focused on the generation of
future taxable income as all available previously paid taxes are expected to be
recovered from the operating loss reported in 2003. In determining the
likelihood of generating future taxable income management considered unusual
events that have impacted the Company's historical earnings and whether these
events will recur, the Company's operating budget and likely operating results
in the near term and the taxable gain expected to be realized from the sale of
the discontinued operation. Changes in these assumptions could impact the
carrying value of deferred tax assets and require a charge to tax expense.
SIGNIFICANT EVENT ARISING IN 2003
On June 16, 2003, Premier announced that as a result of an ongoing
internal investigation it had uncovered a systematic disregard for its loan
approval and credit administration policies at its wholly owned subsidiary
Farmers Deposit Bank and had accepted the resignation of the bank's president.
On June 4, 2003, senior management of Premier received from the bank's former
president a request to charge-off over $2.0 million in loans. Concerned about
the magnitude of the request and the impact of Premier's financial results,
Premier management promptly notified the Federal Reserve Bank of Cleveland
and the Federal Deposit Insurance Corporation ("FDIC") about the request.
Premier's initial investigation indicated that the former president of Farmers
Deposit had engaged in conduct which subverted the bank's internal controls and
credit administration policies, conduct which appears to have been designed to
avoid detection by management and those entities employed by Premier to perform
independent reviews of its subsidiaries' accounting records, internal controls,
and credit risk.
As a result of the ongoing investigation into the conduct of the former
president of Farmers Deposit by Premier and the FDIC, Premier charged-off over
$17.2 million of loans. The resulting depletion of the allowance for loan losses
together with the current analysis of additional risk in the loan portfolio
warranted significant additional provisions for loan losses at the Bank. In
addition to the provision for loan losses, interest income reversals and other
non-interest expenses including bad check write-offs and loan review expenses
were recorded.
Premier's management, with the assistance of outside independent
professionals, has conducted a further review of those loans for which
significant charge offs or additional provisions were required in 2003. The
purpose of this review was to determine if the facts or circumstances that gave
rise to additional charge offs or provisions had been improperly withheld from
senior management or improperly considered in applying management's estimates
and judgments as to the adequacy of the allowance for loan losses in prior
financial statement periods. The review did identify instances in which
collateral securing loans had been released without proper support or notation
in loan files, instances in which obligors on notes had been released from their
repayment obligation without proper support or notation in loan files and
instances in which delinquent loan reporting systems had been manipulated to
prevent problem loans from being identified on a timely basis. Premier's senior
management determined that if these circumstances had been considered in
evaluating the adequacy of the allowance for loan losses in prior periods then
some of the loan charge offs and additional provisions for loan losses recorded
in 2003 should have been reflected in prior periods. Therefore the financial
statements for 2002 and 2001 have been restated to reflect the financial
statement effect of the matters that occurred in those periods but which were
improperly concealed by subsidiary management. See Note 2 to the consolidated
financial statements for further discussion regarding the impact of the
restatement of 2002 and 2001. The tables and discussion below reflect the effect
of this restatement.
SUMMARY FINANCIAL RESULTS
Premier net results from continuing operations for 2003 were a loss of
$9.6 million, compared to a loss from continuing operations of $2.2 million
reported for the year 2002. The loss for 2003 is primarily due to large
provisions for loan losses and bad check losses at its subsidiary, Farmers
Deposit Bank. The $2.2 million loss in 2002 was due to large provisions for loan
losses, writedowns of repossessed real estate to realizable values, and higher
collection costs. The loss in 2002 follows $1.6 million of income from
continuing operations reported for the year ending December 31, 2001. Basic
earnings per share from continuing operations was a loss of ($1.84) in 2003,
compared to a loss of $0.42 per share in 2002 and income of $0.30 in 2001.
The following table comparatively illustrates the components of ROA and
ROE over the previous five years. Return on average assets (ROA) measures how
effectively Premier utilizes its assets to produce net income. Premier's
operating loss for 2003 resulted in a ROA of (1.66%), a decrease from the
(0.37)% ROA reported in 2002 and the 0.24% ROA in 2001. As shown in the table,
the decrease in ROA from years 2002 and earlier is attributed primarily to an
increase in the provision for loan losses, resulting in negative net credit
income. The decrease in ROA in 2002 versus the years 2001 and earlier is
primarily due to a decline in net credit income again resulting from the high
provisions for loan losses in 2002. A portion of the decline in 2001 net credit
income was offset by the gain on the sale of banking subsidiaries reported in
2001. As illustrated in the table, Premier's 2003 fully taxable net interest
income as a percent of average earning assets was down slightly to 3.63% from
the 3.84% recorded in 2002 and interest earned on loans declined due to a lower
balance of loans outstanding. During the same time of declining net credit
income, Premier has reduced its operating costs. The net overhead ratio
(non-interest expense less non-interest income as a percent of average earning
assets) declined to 2.64% in 2003, the lowest ratio reported in the five years
presented in the table. The 2003 net overhead ratio compares to 2.71% in 2002
and 2.78% in 2001. The decline in 2003 net overhead was the result increases in
non-interest income related to service charges on deposit accounts. The decline
in 2002 compared to 2001 was the result of Premier's efforts to reduce expenses
as a percentage of earning assets.
Return on average equity (ROE), another measure of earnings performance,
indicates the amount of net income earned in relation to the total equity
invested. Premier's 2003 ROE was (18.46%), compared to (3.77%) realized in 2002
and the 2.76% reported for 2001. ROE decreased primarily due the operating
losses reported for 2003 and 2002.
ANALYSIS OF RETURN ON ASSETS AND EQUITY
from continuing operations
2003 2002 2001 2000 1999
---- ---- ---- ---- ----
As a percent of average earning assets:
Fully taxable-equivalent net interest income 3.63% 3.84% 3.50% 3.56% 3.91%
Provision for loan losses (3.81) (1.70) (1.37) (0.66) (0.47)
----- ----- ----- ----- -----
Net credit income (0.18) 2.14 2.13 2.90 3.44
Gains on the sales of assets & subsidiaries* 0.11 (0.01) 1.48 (0.04) 0.00
Non-interest income 0.62 0.50 0.52 0.50 0.46
Non-interest expense (3.26) (3.21) (3.30) (3.26) (3.15)
Tax equivalent adjustment (0.07) (0.08) (0.08) (0.10) (0.11)
Applicable income taxes 0.98 0.27 (0.49) 0.03 (0.17)
----- ----- ----- ----- -----
Return on average earning assets (1.79) (0.40) 0.26 0.03 0.47
Multiplied by average earning assets to
average total assets 92.86 92.34 91.98 91.58 90.46
----- ----- ----- ----- -----
Return on average assets (1.66)% (0.37)% 0.24% 0.03% 0.42%
Multiplied by average assets to average equity 11.13X 10.26X 11.68X 14.43X 13.02X
----- ----- ----- ----- -----
Return on average equity (18.46)% (3.77)% 2.76% 0.41% 5.50%
===== ===== ===== ===== =====
A breakdown of Premier's financial results by quarter for the years
ended December 31, 2003 and 2002 is summarized below.
QUARTERLY FINANCIAL INFORMATION
(Dollars in thousands except per share amounts)
Full
First Second Third Fourth Year
------- ------- ------- ------- -------
2003
Interest Income $ 8,606 $ 8,178 $ 7,665 $ 7,280 $31,729
Interest Expense 3,505 3,248 2,994 2,800 12,547
Net Interest Income 5,101 4,930 4,671 4,480 19,182
Provision for Loan Losses 2,267 11,778 4,343 2,125 20,513
Securities Gains 189 15 2 410 616
Net Overhead 3,628 3,524 3,315 3,717 14,184
Income before Income Taxes (605) (10,357) (2,985) (952) (14,899)
Loss from Continuing Operations (365) (6,779) (1,877) (596) (9,617)
Income (Loss) from Discontinued Operations (27) (76) 21 2 (80)
Net Loss (393) (6,855) (1,856) (594) (9,697)
Basic and Diluted Loss per share from
Continuing Operations (0.07) (1.30) (0.36) (0.11) (1.84)
Basic and Diluted Net Loss per share (0.08) (1.31) (0.35) (0.11) (1.85)
Dividends Paid per share 0.00 0.00 0.00 0.00 0.00
2002
Interest Income $ 9,821 $ 9,773 $ 9,486 $ 9,223 $38,303
Interest Expense 4,772 4,478 4,251 3,964 17,465
Net Interest Income 5,049 5,295 5,235 5,259 20,838
Provision for Loan Losses 940 2,488 3,214 2,811 9,453
Securities Gains (Losses) 16 (103) 1 13 (73)
Net Overhead 3,466 4,361 3,734 3,480 15,041
Income before Income Taxes 651 (1,657) (1,712) (1,019) (3,729)
Income (Loss) from Continuing Operations 481 (1,019) (1,032) (637) (2,207)
Income (Loss) from Discontinued Operations 114 (437) (775) (32) (1,130)
Net Income (Loss) 595 (1,456) (1,807) (669) (3,337)
Basic and Diluted Income (Loss) per share
from Continuing Operations 0.09 (0.19) (0.20) (0.12) (0.42)
Basic and Diluted Net Income (Loss) per share 0.11 (0.29) (0.34) (0.12) (0.64)
Dividends Paid per share 0.00 0.00 0.00 0.00 0.00
SALE OF SUBSIDIARIES
In the fourth quarter of 2003, the Premier adopted and began to
implement a plan to sell its subsidiary Citizens Bank (Kentucky), Inc.
("Citizens Bank") located in Georgetown, Kentucky. On February 13, 2004, the
Company announced that it had signed a definitive agreement to sell Citizens
Bank in a cash transaction valued at approximately $14,500,000. The sale of this
subsidiary would help to restore the financial position of Premier after the
impact of the losses sustained at Farmers Deposit Bank during the second and
third quarters of 2003. Management anticipates that the sale, if affected, will
restore the regulatory capital ratios of Premier to the stronger levels it
wishes to maintain; will more than replenish the cash reserves of the holding
company used to recapitalize Farmers Deposit Bank, and will allow Premier to
utilize its Federal income tax net operating loss carryforwards in a more timely
manner. The sale is anticipated to close early in the third quarter of 2004.
In 2000 Premier suspended its acquisition strategy in order to focus on
improving its subsidiary bank operations by strengthening its management
oversight. As part of this change in strategy, Premier elected to dispose of two
of its subsidiary banks in 2001.
On January 26, 2001, the company disposed of all the deposits
(approximately $110 million), the majority of loans (approximately $92 million)
and the premises and equipment (approximately $1.6 million) of the Bank of Mt.
Vernon under the terms of a Purchase and Assumption Agreement. As a result of
this transaction, the banking charter of the Bank of Mt. Vernon was relinquished
and Premier agreed not to compete in the markets previously served by the Bank
of Mt. Vernon.
Also, on December 10, 2001, the Company disposed of certain assets and
liabilities of The Sabina Bank. The sale included all the loans (approximately
$31 million) and all the deposits (approximately $41 million), as well as the
premises and equipment (approximately $1.2 million). Certain assets of the bank
were retained by Premier pending liquidation of the bank, which occurred in
2002. The operating results of both the Bank of Mount Vernon and The Sabina Bank
were included in Premier's 2001 operating results through the respective dates
of the sale. However, the 2002 and 2003 operating results do not include any of
the operations of these two banks. Comparisons of average balances and income
statement categories to 2001 are all affected by the disposition of these two
subsidiaries.
BALANCE SHEET ANALYSIS
Summary
A financial institution's primary sources of revenue are generated by
its earning assets, while its major expenses are produced by the funding of
these assets with interest bearing liabilities. Effective management of these
sources and uses of funds is essential in attaining a financial institution's
optimal profitability while maintaining a minimum amount of interest rate risk
and credit risk. Information on rate-related sources and uses of funds for
each of the three years in the period ended December 31, 2003, is provided in
the table below.
AVERAGE CONSOLIDATED BALANCE SHEETS AND NET INTEREST INCOME ANALYSIS
(Dollars in thousands)
2003 2002 2001
Average Yield/ Average Yield/ Average Yield/
Balance Interest(2) Rate(3) Balance Interest(2) Rate(3) Balance Interest(2) Rate(3)
---------------------------- ---------------------------- -----------------------------
Assets:
Interest earning assets
U.S. Treasury and federal agency
securities $110,616 $ 3,196 2.89% $105,045 $ 4,429 4.22% $123,896 $ 7,117 5.74%
States and municipal obligations(1) 15,589 1,015 6.51 17,936 1,233 6.88 19,580 1,537 7.85
Other securities (1) 16,610 655 3.94 13,731 649 4.73 8,429 438 5.20
-------- ------- ----- -------- ------- ----- -------- ------- -----
Total investment securities 142,815 4,866 3.41 136,712 6,311 4.62 151,905 9,092 5.99
Federal funds sold 42,884 469 1.09 34,600 567 1.64 35,118 1,351 3.85
Interest-bearing deposits with
banks 568 7 1.23 564 8 1.42 496 20 4.03
Loans, net of unearned income(4)(5)
Commercial(1) 142,768 9,944 6.97 161,226 12,653 7.85 183,593 16,370 8.92
Real estate mortgage 151,210 11,538 7.63 160,532 12,989 8.09 171,810 14,770 8.60
Installment 58,178 5,293 9.10 61,005 6,238 10.23 69,500 7,833 11.27
-------- ------- ----- -------- ------- ----- -------- ------- -----
Total loans 352,156 26,775 7.60 382,763 31,880 8.33 424,903 38,973 9.17
-------- ------- ----- -------- ------- ----- -------- ------- -----
Total interest-earning assets 538,383 32,117 5.97 554,639 38,766 6.99 612,422 49,436 8.07
Allowance for loan losses (12,704) (8,108) (7,524)
Cash and due from banks 13,400 13,334 17,402
Premises and equipment 8,233 8,725 10,286
Other assets 32,474 32,073 33,230
Assets of discontinued operations 81,821 93,702 108,822
-------- -------- --------
Total assets $661,607 $694,365 $774,638
======== ======== ========
Liabilities and Equity:
Interest bearing liabilities
NOW and money market $180,763 2,045 1.13% $171,801 3,468 2.02% $167,398 5,453 3.26%
Savings 57,327 781 1.36 53,352 942 1.77 58,620 1,466 2.50
Certificates of deposit and
other time deposits 182,542 5,677 3.11 209,593 8,754 4.18 256,070 15,181 5.93
-------- ------- ----- -------- ------- ----- -------- ------- -----
Total interest bearing deposits 420,632 8,503 2.02 434,746 13,164 3.03 482,088 22,100 4.58
Short-term borrowings 4,675 51 1.09 5,436 94 1.73 8,617 382 4.43
Other borrowings 8,350 379 4.54 10,678 412 3.86 16,500 1,285 7.79
FHLB advances 15,852 826 5.21 19,824 943 4.76 21,085 1,360 6.45
Debentures 27,253 2,788 10.23 29,639 2,852 9.62 29,639 2,852 9.62
-------- ------- ----- -------- ------- ----- -------- ------- -----
Total interest-bearing
liabilities 476,763 12,547 2.63% 500,323 17,465 3.49% 557,929 27,979 5.01%
Non-interest bearing deposits 53,824 47,327 55,459
Other liabilities 4,903 3,064 5,249
Liabilities of
discontinued operations 74,021 85,093 98,973
Shareholders' equity: 52,097 58,558 57,028
--------- -------- --------
Total liabilities and equity $661,607 $694,365 $774,638
======== ======== ========
Net interest earnings (1) $19,570 $21,301 $21,457
======= ======= =======
Net interest spread (1) 3.33% 3.50% 3.06%
Net interest margin (1) 3.63% 3.84% 3.50%
(1) Taxable - equivalent yields are calculated assuming a 34% federal income tax rate.
(2) Excludes the interest income and interest expense of discontinued operations.
(3) Yields are calculated on historical cost except for yields on marketable equity securities that are
calculated using fair value.
(4) Includes loan fees, immaterial in amount, in both interest income and the calculation of yield on loans.
(5) Includes loans on non-accrual status.
In 2003, average earning assets declined by 2.9% or $16.2 million from
2002, following a 9.4% or $57.8 million decline in 2002 from 2001. Average
interest bearing liabilities, the primary source of funds supporting the earning
assets, decreased 4.7% or $23.6 million from 2002, which follows a 10.3% or
$57.6 million decline in 2002 from 2001. The decline in the 2003 average earning
assets was the result of $16.5 million of loan charge-offs, primarily at Farmers
Deposit, coupled with loan maturities and principal pay downs that were not
renewed. The decline in interest bearing liabilities was largely due to debt
reduction strategies and a shift in customer deposits from interest bearing to
non-interest bearing. Approximately three-fourths of the decrease in 2002
average earning assets and slightly less than two-thirds of the decrease in 2002
average interest bearing liabilities was due to the sale of the Sabina Bank late
in 2001. Additional information on each of the components of earning assets and
interest bearing liabilities is contained in the following sections of this
report.
Loan Portfolio
Premier's loan portfolio is its largest and highest yielding component
of average earning assets, totaling 65.4% of average earning assets during 2003.
Average loans declined by $30.6 million or 8.0% in 2003. The decline is
partially attributed to the high level of charge-offs, primarily at Farmers
Deposit but also to stiffer competition from larger banks competing in Premier's
markets and a general decline in economic growth. Of the total decline, Premier
realized a 1.8% increase in loans in its West Virginia markets and a 3.3%
increase in loans in its Ohio markets. These were more than offset by a 14.0%
decline in loans in Premier's Kentucky markets, primarily commercial loans. Due
to the low interest rate environment, many borrowers sought to refinance their
loans to reduce their interest costs. Due to the lack luster economy and the
resulting lower demand for loans, larger banks began competing more strongly by
enticing borrowers with prime rate or below prime rate loans. Therefore,
scheduled maturities were not necessarily renewed. Approximately 90% of the
decline in 2002 was the result of the sale of the Sabina Bank in late 2001. Of
the remaining decline, Premier realized an 8.1% increase in loans in its West
Virginia markets and a 3.7% increase in loans in its Ohio markets, both
primarily in real estate mortgage loans. These were offset by a 4.3% decline in
loans in Premier's Kentucky markets.
Total loans at December 31, 2003, decreased by $41.3 million or 11.1%
over the total at December 31, 2002. This decrease follows an $11.9 million or
3.1% decrease in 2002 from total loans at December 31, 2001. The decline in 2003
period-end loans was the result of the $16.5 million of loan charge-off recorded
during the year, primarily at Farmers Deposit, and declines due to low loan
demand resulting from the poor economy and heavy refinancing activity by
borrowers to obtain lower interest rates. The decrease in 2002 was the result of
planned collections of loans retained from the Bank of Mt. Vernon sale as well
as declines in period-end loans at Premier's Kentucky affiliates.
The following table presents a five year comparison of loans by type.
With the exception of those categories included in the comparison, there are no
loan concentrations which exceed 10% of total loans. Additionally, Premier's
loan portfolio contains no loans to foreign borrowers nor does it have a
material volume of highly leveraged transaction lending.
LOAN SUMMARY
(Dollars in thousands)
As of December 31
2003 % 2002 % 2001 % 2000 % 1999 %
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Summary of Loans by Type
Commercial, secured by real
estate $101,325 30.5% $109,571 29.3% $106,726 27.7% $138,960 27.5% $126,015 25.9%
Commercial, other 38,063 11.5 51,347 13.8 59,364 15.4 72,197 14.3 83,009 17.1
Real estate construction 5,414 1.6 7,318 2.0 8,245 2.1 14,142 2.8 15,680 3.2
Real estate mortgage 126,134 38.0 134,271 36.0 135,937 35.4 178,558 35.3 162,753 33.5
Agricultural 3,032 0.9 4,381 1.2 5,402 1.4 8,878 1.7 10,539 2.2
Consumer 56,216 17.0 63,534 17.0 68,300 17.7 92,564 18.3 86,833 17.9
Other 1,610 0.5 2,677 0.7 966 0.3 598 0.1 1,079 0.2
-------- ---- -------- ---- -------- ---- -------- ---- -------- ----
Total loans $331,794 100.0% $373,099 100.0% $385,019 100.0% $505,897 100.0% $485,908 100.0%
Less unearned income (330) (504)
-------- -------- -------- -------- --------
Total loans net of
unearned income $331,794 $373,099 $385,019 $505,567 $485,404
======== ======== ======== ======== ========
Non-Performing Assets
Non-accrual loans $ 11,958 $ 8,197 $ 6,302 $ 5,864 $ 3,649
Accruing loans which are
contractually past due
90 days or more 4,137 1,238 5,612 1,563 1,247
Restructured loans 104 129 338 689 666
-------- -------- -------- -------- --------
Total nonperforming and
restructured loans 16,199 9,564 12,252 8,116 5,562
Other real estate acquired
through foreclosures 3,187 3,505 5,508 2,844 2,813
-------- -------- -------- -------- --------
Total nonperforming and
restructured loans and
other real estate $ 19,386 $ 13,069 $ 17,760 $ 10,960 $ 8,375
======== ======== ======== ======== ========
Nonperforming and restructured
loans as a % of total loans 4.88% 2.56% 3.18% 1.60% 1.14%
Nonperforming and restructured
loans and other real estate
as a % of total assets (1) 3.57% 2.21% 2.93% 1.40% 1.12%
Allocation of Allowance
For Loan Losses
Commercial, other $ 4,166 $ 2,294 $ 1,379 $ 2,145 $ 1,794
Real estate, construction 662 632 488 381 317
Real estate, other 4,886 4,341 3,235 2,510 1,787
Consumer installment 2,478 977 1,178 1,067 801
Unallocated 2,108 1,454 1,091 514 1,057
-------- -------- -------- -------- --------
Total $ 14,300 $ 9,698 $ 7,371 $ 6,617 $ 5,756
======== ======== ======== ======== ========
(1) From continuing operations
Loans secured by real estate, which in total constituted approximately
70% of Premier's loan portfolio at December 31, 2003, consist of a diverse
portfolio of predominately single family residential loans and loans for
commercial purposes where real estate is part of the collateral, not the primary
source of repayment. Residential real estate mortgage loans generally do not
exceed 80% of the value of the real property securing the loan. The residential
real estate mortgage loan portfolio primarily consists of adjustable rate
residential mortgage loans. The origination of these mortgage loans can be
more difficult in a low interest rate environment where there is a significant
demand for fixed rate mortgages. Premier also participates in the solicitation
of loans for the secondary market and recognizes the referral fees in
non-interest income. Commercial loans are generally made to small-to-medium size
businesses located within a defined market area and typically are secured by
business assets and guarantees of the principal owners. Additional risks of loss
are associated with commercial lending such as the potential for adverse changes
in economic conditions or the borrowers ability to successfully execute their
business plan. Consumer loans generally are made to individuals living in
Premier's defined market area who are known to the local bank's staff. Consumer
loans are generally made for terms of up to seven years on a secured or
unsecured basis, however longer terms may be approved in certain circumstances
and for revolving credit lines. While consumer loans generally provide the
Company with increased interest income, consumer loans may involve a greater
risk of default.
In addition to the loans presented in the loan summary table, Premier
also offers certain off-balance sheet products such as letters of credit,
revolving credit agreements, and other loan commitments. These products are
offered under the same credit standards as the loan portfolio and are included
in the risk-based capital ratios used by the Federal Reserve to evaluate capital
adequacy. Additional information on off-balance sheet commitments is contained
in Note 20 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
$19.4 million or 3.57% of total assets of continuing operations at year-end
2003. The amount is up significantly from the $13.1 million of non-performing
assets (2.21% of total assets of continuing operations) at year-end 2002 and the
$17.8 million of non-performing assets (2.93% of total assets of continuing
operations)at year-end 2001. The increase in 2003 was due to the loan
underwriting issues uncovered at Farmers Deposit Bank. As management's efforts
to collect these loans upon maturity continues, loans are only renewed using
Premier's strengthened credit policies. Otherwise, loans may be placed on
non-accrual status and foreclosure proceeding begun to obtain and liquidate any
collateral securing the past due or matured loans. Premier is committed to
reducing its high level of non-performing assets and implementing strong
underwriting standards to help reduce the level of non-performing assets in the
future. This effort is revealed in the decline in non-performing assets from the
end of 2001 to the end of 2002, primarily related to the sale of OREO properties
and the decline in loans 90+ days past due. Premier's efforts at its other
affiliate banks in 2003 are masked by the high level of non-performing assets at
Farmers Deposit Bank, which alone totaled $12.5 million at December 31, 2003.
The Loan Summary table presents five years of comparative non-performing asset
information.
It is Premier's policy to place loans that are past due over 90 days on
non-accrual status, unless the loans are adequately secured and in the process
of collection. Premier had no commitments to provide additional funds on non-
accrual loans at December 31, 2003. For real estate loans, upon repossession,
the balance of the loan is transferred to "Other Real Estate Owned" (OREO) and
carried at the lower of the outstanding loan balance or the fair value of the
property based on current appraisals and other current market trends less
estimated disposal costs. If a writedown of the OREO property is necessary at
the time of foreclosure, the amount is charged against the allowance for loan
losses. A periodic review of the recorded property value is performed in
conjunction with normal loan reviews, and if market conditions indicate that the
recorded value exceeds the fair market value less estimated disposal costs,
additional writedowns of the property value are charged directly to operations.
During 2003 Premier recognized $466,000 of OREO writedowns compared to $1.0
million in 2002 and $97,000 in 2001. Although loans may be classified as
non-performing, some continue to pay interest irregularly or at less than
original contracted terms. During 2003, approximately $25,000 of interest was
recognized on non-accrual and restructured loans, while approximately $520,000
would have been recognized in accordance with their original terms.
The allowance for loan losses is maintained to absorb probable incurred
losses associated with lending activities. Actual losses are charged against the
allowance ("charge-offs") while collections on loans previously charged off
("recoveries") are added back to the allowance. Since actual losses within a
given loan portfolio are difficult to predict, management uses a significant
amount of estimation and judgment to determine the adequacy of the allowance for
loan losses. Factors considered in determining the adequacy of the allowance
include an individual assessment of risk on certain loans and total creditor
relationships, historical charge-off experience, the type of loan, levels of
non-performing and past due loans, and an evaluation of current economic
conditions. Loans are evaluated for credit risk and assigned a risk grade.
Premier's risk grading criteria are based upon Federal Reserve guidelines and
definitions. In evaluating the adequacy of the allowance for loan losses, loans
that are assigned passing grades are grouped together and multiplied by
historical charge-off percentages to determine an estimated amount of potential
losses and a corresponding amount of allowance. Loans that are assigned
marginally passing grades are grouped together and allocated slightly higher
percentages to determine the estimated amount of potential losses due to the
identification of increased risk(s). Loans that are assigned a grade of
"substandard" or "doubtful" are usually determined to be impaired.
A loan is categorized and reported as impaired when it is probable that
the creditor will be unable to pay all of the principal and interest amounts
according to the contractual terms of the loan agreement. In determining whether
a loan is impaired, management considers such factors as past payment history,
recent economic events, current and projected financial condition and other
relevant information that is available at the time. Impairment is evaluated in
total for smaller-balance loans of similar nature such as residential mortgage,
consumer, and credit card loans, and on an individual basis for other loans. If
a loan is deemed to be impaired an evaluation of the amount of estimated loss is
performed assessing the present value of estimated future cashflows using the
loan's existing rate or assessing the fair and realizable value of the loan
collateral if repayment is expected solely from the collateral. The estimation
of loss is assigned to the impaired loan and is used in determining the adequacy
of the allowance for loan losses. For impaired loans, this estimation of loss is
reevaluated quarterly and, if necessary, adjusted based upon the current known
facts and circumstances related to the loan and the borrower. Additional
information on Premier's impaired loans is contained in Note 7 to the
consolidated financial statements. The sum of the calculations and estimations
of the risk of loss in a given loan portfolio is compared to the recorded
balance of the allowance for loan losses. If the total allowance is deemed to be
inadequate a charge to earnings is recorded to increase the allowance.
Conversely, should an evaluation of the allowance result in a lower estimate of
the risk of loss in the loan portfolio and the allowance is deemed to be more
than adequate, a reversal of previous charges to earnings ("a negative
provision") may be warranted in the current period. Events that may lead to
negative provisions included greater than anticipated recoveries, securing more
collateral on an impaired loan during the collection process, or receiving
payment in full on an impaired loan.
At December 31, 2003, the allowance for loan losses was $14.3 million or
4.31% of total year-end loans. This ratio is an increase from the prior year's
2.60% and the 1.91% at the end of 2001, due to the significant allowance
attributed to the loans at Farmers Deposit Bank. In management's opinion, the
allowance for loan losses is adequate to absorb the current estimated risk of
loss in the existing loan portfolio. The summary of the allowance for loan
losses allocated by loan type is presented in the Loan Summary Table above.
The following table provides a detailed history of the allowance for
loan losses, illustrating charge-offs and recoveries by loan type, and the
annual provision for loan losses over the past five years. The provision for
loan losses in 2003 was $20.5 million, up significantly from the $9.5 million
provision in 2002 and the $8.4 million provision in 2001. The high level of
provision in 2003 was the result of the net charge-offs and increase in impaired
loans at Farmers Deposit. The relatively high provisions in 2002 was in response
to management efforts to identify the level of probable incurred losses
throughout Premier's troubled institutions using the best practices of its
higher performing institutions. These efforts were circumvented or rendered
ineffective by the disregard for controls by the former president of Farmers
Deposit. The large provision in 2001 was in response to the higher risk in
certain loans retained by Premier as part of the sale of the Bank of Mt. Vernon
and a higher level of net charge-off experience. Premier continually evaluates
the adequacy of its allowance for loan losses, and changes in the provision are
based on the estimated probable incurred loss of the loan portfolio.
SUMMARY OF LOAN LOSS EXPERIENCE
(Dollars in Thousands)
For the Year Ended December 31,
2003 2002 2001 2000 1999
------- ------- ------- ------- -------
Allowance for Loan Losses, Beginning of Period $ 9,698 $ 7,371 $ 6,617 $ 5,755 $ 3,376
Amounts charged off:
Commercial, financial and agricultural loans 4,417 4,080 2,585 3,152 1,231
Real estate construction loans 0 833 480 0 0
Real estate loans - other 6,427 1,072 3,013 105 346
Consumer installment loans 5,669 1,904 1,725 850 651
------- ------- ------- ------- -------
Total charge-offs 16,513 7,889 7,803 4,107 2,228
Recoveries on amounts previously charged off:
Commercial, financial and agricultural loans 145 138 163 182 129
Real estate construction loans 37 16 1 0 0
Real estate loans - other 74 163 10 1 0
Consumer installment loans 346 446 299 171 183
------- ------- ------- ------- -------
Total recoveries 602 763 473 354 312
------- ------- ------- ------- -------
Net charge-offs 15,911 7,126 7,330 3,753 1,916
Provision for loan losses 20,513 9,453 8,350 4,615 2,985
Balance of acquired or disposed subsidiaries 0 0 (266) 0 1,310
------- ------- ------- ------- -------
Allowance for Loan Losses, End of Period $14,300 $ 9,698 $ 7,371 $ 6,617 $ 5,755
======= ======= ======= ======= =======
Average total loans 352,156 382,763 424,903 503,776 439,224
Total loans at year-end 331,794 373,099 384,940 505,567 485,404
As a Percent of Average Loans:
Net charge-offs 4.52% 1.86% 1.73% 0.74% 0.44%
Provision for loan losses 5.83% 2.47% 1.97% 0.92% 0.68%
Allowance for loan losses 4.06% 2.53% 1.73% 1.31% 1.31%
As a Percent of Total Loans at Year-end:
Allowance as a percentage of year-end net loans 4.31% 2.60% 1.91% 1.31% 1.19%
As a Multiple of Net Charge-offs:
Allowance as a multiple of net charge-offs 0.90X 1.36X 1.01X 1.76X 3.00X
Income before tax and provision for loan losses 0.35X 0.80X 1.76X 1.22X 3.66X
Net charge-offs in 2003 increased to $15.9 million, up $8.8 million or
more than double the $7.1 million of net charge-offs experienced in 2002.
Approximately $14.3 million or 90% of the 2003 net charge-offs were at Farmers
Deposit Bank. While the level of commercial loans charged off was relatively
comparable to 2002, there were significant increases in consumer and real estate
loan charge-offs. The $7.1 million of net charge-offs in 2002 was a slight
decrease from the $7.3 million of net charge-offs in 2001. Although management
believes it has identified the significant remaining credit risk in the loan
portfolio, additional charge-offs may be recorded in the coming months due to
the high level of non-performing loans and the resolution of collection efforts
on those loans. These factors are considered in determining the adequacy of the
allowance for loan losses, which at December 31, 2003 was 4.31% of total loans
outstanding and 88.3% of non-performing loans.
The following table presents the maturity distribution and interest
sensitivity of selected loan categories at December 31, 2003. Maturities are
based upon contractual terms.
LOAN MATURITIES AND INTEREST SENSITIVITY
December 31, 2003
(Dollars in thousands)
Projected Maturities*
One Year One Through Over Total
or Less Five Years Five Years Loans
-------- ---------- ---------- --------
Commercial, secured by real estate $ 10,552 $ 24,172 $ 66,601 $101,325
Commercial, other 15,286 16,675 6,102 38,063
Real estate construction 3,850 417 1,147 5,414
Agricultural 1,306 1,243 483 3,032
-------- -------- -------- --------
Total $ 30,994 $ 42,507 $ 74,333 $147,834
======== ======== ======== ========
Fixed rate loans $ 15,313 $ 19,665 $ 16,828 $ 51,585
Floating rate loans 15,681 22,842 57,505 96,028
-------- -------- -------- --------
Total $ 30,994 $ 42,507 $ 74,333 $147,834
======== ======== ======== ========
(*) Based on scheduled or approximate repayments.
Investment Portfolio and
Other Earning Assets
Investment securities averaged $142.8 million in 2003, a $6.1 million or
4.5% increase from the $136.7 million averaged in 2002. This increase
follows a 10.0% decrease from the $151.9 million averaged in 2001. The increase
in average investments in 2003 was the result of weak loan demand and stiffer
competition from large banks in Premier's markets. In 2003, funds from loan
payoffs and maturities were therefore not used to fund new loans but were
instead invested in high-quality debt securities. Over half of the decrease in
2002 was a result of the sale of the Sabina Bank late in 2001. The remaining
decrease in 2002 was the result of placing funds from maturing investments in
federal funds sold to maintain adequate liquidity for planned maturities of high
rate certificates of deposit. As shown in the Rate Volume Analysis table below,
significant interest savings were realized on certificates of deposit in 2002
and 2003 due to declines in interest rates paid and the volume of certificates
on deposit.
The following table presents the carrying values of investment securities.
Carrying Value of Securities
(Dollars in thousands)
As of December 31
2003 2002 2001
--------- --------- ---------
U.S. Treasury Securities:
Available for sale $ 652 $ 407 $ 1,172
Held to maturity - - -
U.S. Agency Securities:
Available for sale 106,845 111,259 112,980
Held to maturity - - -
States and Political Subdivisions Securities
Available for sale 6,868 18,610 18,559
Held to maturity - - -
Mortgage-backed securities:
Available for sale 31,810 5,370 4,994
Held to maturity - - -
Corporate securities:
Available for sale 1,471 9,052 9,196
Held to maturity - - -
Other securities:
Available for sale - - 802
Held to maturity - - -
Total securities:
Available for sale $ 147,646 $ 144,698 $ 147,703
Held to maturity - - -
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, 2003, all of Premier's
investments were classified as available-for-sale and carried on the books at
market value.
As shown in the following Securities Maturity and Yield Analysis table,
the average maturity period of the securities available-for-sale at December 31,
2003 was 4 years 3 months, lengthened somewhat by the 10 year 8 month average
final maturity of the mortgage-backed securities portfolio. The table uses a
final maturity method to report the average maturity of mortgage-backed
securities, which excludes the effect of monthly payments and prepayments.
Approximately 75% of Premier's investment securities are U.S. Government agency
or Treasury securities that have an average maturity of 2 years 5 months. The
average maturity of the investment portfolio is managed at a level to maintain a
proper matching with interest rate risk guidelines. During 2003, Premier sold a
portion of the securities classified as available-for-sale as part of its
management of interest rate risk, as shown in the Statements of Cash Flows.
Premier does not have any securities classified as trading or held-to-maturity
and it has no plans to establish such classifications at the present time.
Other information regarding investment securities may be found in the following
table and in Note 6 to the consolidated financial statements.
SECURITIES MATURITY AND YIELD ANALYSIS
December 31, 2003
(Dollars in thousands)
Average Taxable
Market Maturity Equivalent
Value (yrs/mos) Yield*
-------- -------- ---------
U.S. Treasury Securities
Within one year $ 401 3.08%
After one but within five years 251 1.40
--------
Total U.S. Treasury Securities 652 0/6 2.44
U.S. Government Agencies Securities
Within one year 13,796 2.66
After one but within five years 91,539 2.73
After five but within ten years 1,510 4.00
--------
Total U.S. Government Agencies Securities $106,845 2/5 2.74
States and Political Subdivisions Securities
Within one year 990 6.14
After one but within five years 2,848 4.99
After five but within ten years 2,525 4.78
Over ten years 505 3.96
--------
Total States and Political Subdivisions Securities $ 6,868 4/11 5.13
Mortgage-Backed Securities**
Within one year 395 3.68
After one but within five years 8,387 3.47
After five but within ten years 2,778 4.03
Over ten years 20,250 4.65
--------
Total Mortgage-Backed Securities $ 31,810 10/8 4.27
Corporate Securities
Within one year 1,038 4.25
After one but within five years 432 6.20
--------
Total Corporate Securities $ 1,471 0/8 4.82
--------
Total Securities Available-for-Sale $147,646 4/3 3.20
========
(*) Fully tax-equivalent using the rate of 34%.
(**) Maturities for Mortgage-Backed Securities are based on final maturity.
Premier's average investment in federal funds sold and other short-term
investments increased by 23.8% in 2003. This follows a 1.5% decrease in 2002.
Averaging $42.8 million in 2003, federal funds sold and other short-term
investments increased $8.2 million from the $34.6 million averaged in 2002, and
were higher than the $35.1 million averaged during 2001. The increase in average
federal funds sold in 2003 was the result of maintaining additional liquidity at
Farmers Deposit Bank and the desire to keep more liquid funds on hand to take
advantage of any potential rising interest rates. Fluctuations in federal funds
sold and other short-term investments reflect management's goal to maximize
asset yields while maintaining proper asset/liability structure, as discussed in
greater detail above and in other sections of this report.
Funding Sources
In 2003, Premier once again decreased the rates paid on its interest
bearing deposits in response to the decline in market interest rates. The
average rate paid on interest bearing liabilities decreased to 2.63% in 2003,
down from the 3.51% paid in 2002 and the 5.01% paid in 2001. The decrease is
largely due to declines in rates paid on time deposits as higher rate
certificates of deposits have either not renewed at maturity or were redeposited
at significantly lower rates in conjunction with the decline in market interest
rates. Similarly, rates paid on NOW and money market transactional deposit
accounts also declined. Due to alternative sources of investment and an ever
increasing sophistication of customers in funds management techniques to
maximize return on their money, competition for funds has become more intense.
Premier's banks periodically offer special rate products to attract additional
deposits.
Premier's deposits, on average, decreased by 1.6% or $7.6 million in
2003. The 2003 decrease follows a 10.3% or $55.8 million decrease in 2002 from
the average in 2001. $45.1 million or approximately 80% of the 2002 decrease was
the result of the sale of the Sabina Bank late in 2001. In 2003, non-interest
bearing deposits increased by 13.7% or $6.5 million on average when compared to
2002. The non-interest bearing deposits sold through the sale of the Sabina Bank
late in 2001 more than offset the 5.6% increase in average non-interest bearing
deposits from internal growth during 2002. In 2003, interest bearing deposits
decreased by 3.2% or $14.1 million on average when compared to 2002. The
decrease was primarily the result of planned non renewals of high rate time
deposits which more than offset increases in average interest bearing
transaction deposits and savings deposits. In 2002, interest bearing deposits
decreased by 9.8% or $47.3 million. Approximately half of the decrease was the
result of the sale of the Sabina Bank late in 2001. Similar to 2003, the
remaining $13.5 million decrease was primarily the result of planned non
renewals of high rate time deposits which more than offset increases in average
interest bearing transaction deposits and savings deposits.
The following table provides information on the maturities of time
deposits of $100,000 or more at December 31, 2003.
MATURITY OF TIME DEPOSITS $100,000 OR MORE
December 31, 2003
(In thousands)
Maturing 3 months or less $ 7,959
Maturing over 3 months through 6 months 7,141
Maturing over 6 months through 12 months 11,328
Maturing over 12 months 16,352
--------
Total $ 42,780
========
Other funding sources for Premier include short and long-term
borrowings. Premier's short-term borrowings primarily consist of federal funds
purchased from other banks, and securities sold under agreements to repurchase
with commercial customers. These short-term borrowings fluctuate depending on
near term funding needs and as part of Premier's management of its
asset/liability mix. In 2003, short-term borrowings averaged $4.7 million, down
$761,000 from the average in 2002. The decline in 2003 was largely the result of
terminating the repurchase agreements at Farmers Deposit Bank in an effort to
reduce the size of the bank. In 2002, short-term borrowings declined by $3.2
million on average. Only about one-eighth of the decline was the result of the
Sabina Bank sale. The remaining decline was due to reduced short-term funding
needs at the affiliate banks.
Long-term borrowings consist of Federal Home Loan Bank (FHLB) borrowings
by Premier's banks, other borrowings by the parent holding company and debt
issued in the form of subordinated debentures to an unconsolidated Trust
subsidiary. FHLB advances, on average, declined by 20.0% or $4.0 million in
2003, following a 6.0% or $1.3 million decrease in 2002. Premier uses fixed rate
FHLB advances from time-to-time to fund certain residential and commercial loans
as well to maximize investment opportunities as part of its interest rate risk
management. In 2003, Premier elected not to renew most of its maturing FHLB
advances and prepaid a limited number of other FHLB advances. At December 31,
2003, FHLB advances totaled $10.7 million and had repayment schedules from one
to nine years. Other borrowings, on average, declined by 21.8% or $2.3 million
in 2003 and 35.2% or $5.8 million in 2002 as the parent company began using
available funds to aggressively pay down its outstanding debt late in 2001. At
December 31, 2003, other borrowings totaled $6.2 million with scheduled
maturities in 2004. Management anticipates that the remaining balance of these
borrowings will be renewed under similar interest and repayment terms. For more
information on other borrowings, see Note 13 to the consolidated financial
statements.
PAYMENTS DUE ON CONTRACTUAL OBLIGATIONS
December 31, 2003
(In thousands)
Less More
than 1 1-3 3-5 than 5
Contractual Obligations Total Year Years Years Years
-------- -------- -------- -------- --------
FHLB Advances $ 10,705 $ 1,082 $ 1,484 $ 1,643 $ 6,496
Other borrowed funds 6,200 6,200 - - -
Notes payable 1,402 1,402 - - -
Guaranteed subordinated debentures 26,546 - - - 26,546
Operating Lease Obligations 488 199 180 109 33
-------- -------- -------- -------- --------
Total $ 45,341 $ 8,883 $ 1,664 $ 1,752 $ 33,075
======== ======== ======== ======== ========
Premier's Trust Preferred Securities represent beneficial interests in
the assets of PFBI Capital Trust (NASDAQ/NMS-PFBIP). The trust holds $26.6
million of 9.75% Junior Subordinated Deferrable Interest Debentures
("Subordinated Debentures") due in 2027. Quarterly cash distributions on the
Preferred Securities are made to the extent interest on the debentures is
received by the trust.
As previously disclosed, pursuant to an agreement entered into with the
Federal Reserve Bank of Cleveland on September 29, 2000 as superceded by an
agreement with the Federal Reserve Bank of Cleveland dated January 29, 2003,
Premier is required to request approval for the payment of distributions due on
the Trust Preferred Securities. During the quarter ended June 30, 2002, Premier
was notified by the Federal Reserve Bank of Cleveland that due to the
deterioration of core earnings of the Company, among other issues, the FRB would
not allow the payment of the distribution due June 30, 2002 on Premier's Trust
Preferred Securities. In response, Premier reached an agreement with the
Federal Reserve Bank of Cleveland whereby Premier's Chairman of the Board, who
is also its largest shareholder, agreed to loan the company the amount of the
distribution, $701,000, so that Premier, with the Federal Reserve Bank's
approval, could make the distribution. The loan is unsecured at a zero interest
rate with no defined maturity date. The loan cannot be repaid without the prior
approval of the Federal Reserve Bank. A similar agreement was reached with for
the payment of the distribution due September 30, 2002. Premier's President and
Chief Executive Officer, who is also a director, agreed to loan the Company the
amount of the distribution, $701,000. This loan is also unsecured at a zero
interest rate with no defined maturity date. The loan also cannot be repaid
without the prior approval of the Federal Reserve Bank of Cleveland.
In December 2002, The Federal Reserve Bank of Cleveland denied Premier's
request to make the fourth quarter distribution. Accordingly, Premier exercised
its right to defer the payment of interest on the Subordinated Debentures
related to the Trust Preferred Securities for an indefinite period (which can be
no longer than 20 consecutive quarterly periods). Premier continued to defer
this payment of interest throughout 2003 and the first quarter of 2004. These
and any future deferred distributions accrue interest at an annual rate of 9.75%
which will be paid when the deferred distributions are ultimately paid.
Management of Premier does not expect to resume payments on the
Subordinated Debentures or the Trust Preferred Securities until the Federal
Reserve Bank of Cleveland determines that Premier has achieved adequate and
sustained levels of profitability to support such payments and approves such
payments. The Trust Preferred Securities have a cumulative provision. Therefore,
in accordance with accounting principles generally accepted in the United States
of America, Premier intends to continue to accrue the monthly cost of the Trust
Preferred Securities as it has since issuance. Premier's management also intends
to continue to seek approval of the Federal Reserve Bank of Cleveland for
payment of the regularly scheduled quarterly distributions on the Trust
Preferred Securities and any accumulated deferrals once it believes Premier has
achieved the adequate and sustained levels of profitability desired by the
Federal Reserve.
As part of a Debt Reduction and Profitability plan presented on January
6, 2003 to the Federal Reserve Bank of Cleveland ("Federal Reserve"), Premier
requested and received approval from the Federal Reserve to redeem $3,000,000 of
the then outstanding $28,750,000 Trust Preferred Securities. The goal of the
redemption was to use a portion of Premier's cash on hand to reduce
its total interest cost and thus improve profitability. The redemption reduced
Premier's interest cost by approximately $292,000 per year. However, this
benefit was partially offset due to the interest accrued in 2003 on the deferred
quarterly distributions. Future early redemptions, if any, will also require
Federal Reserve approval, pursuant to a previously disclosed Written Agreement
entered into with the Federal Reserve Bank of Cleveland on January 29, 2003,
Asset/Liability Management and Market Risk
Asset/liability management is a means of maximizing net interest income
while minimizing interest rate risk by planning and controlling the mix and
maturities of interest related assets and liabilities. Premier has established
an Asset/Liability Management Committee (ALCO) for the purpose of monitoring and
managing interest rate risk and to evaluate investment portfolio strategies.
Interest rate risk is the earnings variation that could occur due to changes in
market interest rates. The Board of Directors has established policies to
monitor and limit exposure to interest rate risk. Premier monitors its interest
rate risk through the use of an earnings simulation model prepared by an
independent third party to analyze net interest income sensitivity.
The earnings simulation model uses assumptions, maturity patterns, and
reinvestment rates provided by Premier and forecasts the effect of instantaneous
movements in interest rates of both 100 (1.00%) and 200 (2.00%) basis points.
The most recent earnings simulation model projects net interest income would
increase by approximately 1.0% 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 1.5% 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 2.0% over the
projected stable rate net interest income in a rising rate scenario and would
decrease by 2.9% in a falling rate scenario. Under both the 100 and 200 basis
point simulations, the percentage changes in net interest income are within
Premier's ALCO guidelines.
Another measure of a company's interest sensitivity is the measure of
Economic Value at Risk (EVR). The EVR of a company's balance sheet at a given
point in time is the discounted present value of asset cash flows minus the
discounted present value of liability cash flows. Similar to net interest
income, EVR can be simulated assuming changes in market interest rates. The
resulting percentage change versus the stable rate EVR is an indication of the
longer term repricing risk imbedded in the balance sheet. At December 31, 2003,
a 200 basis point increase in rates is estimated to decrease Premier's EVR by
16.3% while a 200 basis point decrease would increase Premier's EVR by 28.9%.
The percentage changes in EVR for the 200 basis point decrease are outside
Premier's ALCO guidelines. However, the with market interest rates already at
relatively low levels, the likelihood of an additional 200 basis point decrease
is believed to be remote. Furthermore, the low interest rate environment in 2003
limits the change in the market value of liabilities in a declining rate
simulation because rates paid on liabilities cannot fall below zero.
The model simulation calculations of present value have certain
acceptable shortcomings. The discount rates and prepayment assumptions
utilized are based on estimated market interest rate levels for similar loans
and securities nationwide. The unique characteristics of Premier's loans and
securities may not necessarily parallel those assumed in the model simulations,
and therefore, actual results could likely result in different discount rates,
prepayment experiences and present values. The discount rates used for deposits
and borrowings are based upon available alternative types and sources of funds
which may not necessarily be indicative of the present value of Premier's
deposits and borrowings. Premier's deposits have customer relationship
advantages that are difficult to simulate. A higher or lower interest rate
environment will most likely result in different investment and borrowing
strategies by Premier which would be designed to further mitigate any negative
effects on the value of, and the net interest earnings generated on Premier's
net assets.
The following table presents summary information about the simulation
model's interest rate risk measures and results.
Year-End Year-End ALCO
2003 2002 Guidelines
-------- -------- ----------
Projected 1-Year Net Interest Income
-100 bp change vs. Base Rate -1.5% -3.5% 10%
+100 bp change vs. Base Rate 1.0% 3.3% 10%
Projected 1-Year Net Interest Income
-200 bp change vs. Base Rate -2.9% -6.6% 10%
+200 bp change vs. Base Rate 2.0% 6.5% 10%
Economic Value Change
-200 bp Change vs. Base Rate 28.9% 4.0% 20%
+200 bp Change vs. Base Rate -16.3% 12.8% 20%
The improvement in the 2003 simulated change in EVR for a 200 basis
point decline in interest rates is due to the current low interest rate
environment. The low interest rate environment in 2003 limits the change in the
market value of liabilities in a declining rate simulation because rates paid on
liabilities cannot fall below zero.
Liquidity
Liquidity is the ability to satisfy demands for deposit withdrawals,
lending commitments, and other corporate needs. Premier's liquidity is based on
the stable nature of consumer core deposits held by the banking subsidiaries.
Likewise, additional liquidity is available from holdings of investment
securities and short-term investments which can be readily converted into cash.
Furthermore, Premier's banks continue to have the ability to attract short-term
sources of funds such as federal funds and repurchase agreements.
Premier generated $12.2 million of cash from operations in 2003, which
compares to $10.3 million in 2002 and $1.1 million in 2001. These proceeds along
with the proceeds from the sale and maturity of securities and the repayment of
loans were used to purchase securities, satisfy deposit withdrawals, and reduce
outstanding debt during those years. Net cash provided by liquidating investing
activities totaled $29.5 million in 2003, $5.3 million in 2002 and $16.2 million
in 2001. Net cash used to satisfy deposit withdrawals and reduce debt totaled
$39.5 million in 2003, $17.4 million in 2002 and $21.2 million in 2001. 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, 2003, the parent company had nearly $3.6 million in cash
held with its subsidiary banks. This balance along with cash dividends expected
to be received from its subsidiaries is sufficient to cover the operating costs
of the parent, service its existing other debt and to provide additional capital
to Farmers Deposit Bank as outlined in Premier's capital restoration plan
submitted to the FDIC. During 2003, the parent company used a significant
portion of its cash reserves to call $3.0 million of the Trust Preferred
Securities outstanding and to invest additional capital in Farmers Deposit Bank
to meet minimum capital ratios required by the FDIC. It is anticipated that the
sale of Citizens Bank for approximately $14.5 million in cash early in the third
quarter of 2004 will more than restore the cash reserves used during 2003.
Additional information on parent company cash flows and financial statements is
contained in Note 23 to the consolidated financial statements.
Capital Resources
Premier's consolidated average equity-to-asset ratio remained healthy at
8.25% during 2003, down slightly from the 8.65% during 2002, but up from the
7.47% during 2001. The decrease in 2003 was largely the result of the losses
sustained during the year resulting from the operations of Farmers Deposit Bank.
The increase in 2002 primarily resulted from a decrease in total assets
resulting from the sale of the Sabina Bank in late 2001 without a corresponding
decrease in equity. 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 2003, Premier's risk adjusted capital-to-assets
ratio was 14.8% compared to 16.9% at December 31, 2002. Both of these ratios are
well above the minimum level of 8.0% prescribed for bank holding companies of
Premier's size. The leverage ratio is a measure of total tangible equity to
total tangible assets. Premier's leverage ratio at December 31, 2003 was 6.4%
compared to 8.5% at December 31, 2002. Both of these ratios are above the
recommended 4.0% to 5.0% recommended by the Federal Reserve. The decline in the
2003 ratios was again the result of the reduction in total capital, a result of
the losses sustained during the year, compounded by an increase in disallowed
deferred tax assets. In accordance with Federal Reserve guidelines for all banks
and bank holding companies, deferred tax assets are subtracted from Premier's
available total equity ("disallowed") if they generally cannot be realized
through available tax refunds in a next twelve month timeframe. It is
anticipated the sale of Citizens Bank will not only reduce the overall assets of
Premier and thus improve its equity-to-asset ratios, but will also generate
taxable income that can be used to realize a portion of Premier's disallowed
deferred tax assets. Premier's healthy capital ratios are the direct result of
management's desire to maintain a strong capital position. Additional
information on Premier's capital ratios and the capital ratios of its larger
banks may be found in Note 22 to the consolidated financial statements.
The primary source of funds for dividends paid by Premier to its
shareholders is the dividends received from its subsidiary banks. Banking
regulations limit the amount of dividends that may be paid without prior
approval of the regulatory agencies. Under these regulations, the amount of
dividends that may be paid without prior approval in any calendar year is
limited to the current year's net profits, as defined, combined with the
retained net profits of the preceding two years, subject to regulatory capital
requirements and additional restrictions more fully described in Note 22 to the
consolidated financial statements. During 2004, Premier's banks could, without
prior approval, declare and pay to Premier dividends of approximately $1.4
million plus any 2004 net profits retained through the date of declaration by
Ohio River Bank, Boone County Bank and First Central Bank.
Additional information on the capital position of Premier is included in
the following table.
SELECTED CAPITAL INFORMATION
(Dollars in thousands)
As of December 31
2003 2002 Change
-------- -------- --------
Stockholders' Equity $ 45,540 $ 56,124 $(10,584)
Qualifying capital securities of subsidiary trust 14,953 18,185 (3,232)
Disallowed amounts of goodwill and other intangibles (16,044) (16,044) 0
Disallowed deferred tax assets (4,248) 0 (4,249)
Unrealized loss (gains) on securities
available for sale (681) (1,568) 887
-------- -------- --------
Tier I capital $ 39,520 $ 56,968 $(17,178)
Tier II capital adjustments:
Qualifying capital securities of subsidiary trust 10,797 10,565
Allowance for loan losses 4,790 5,462
-------- --------
Total capital $ 55,107 $ 72,724
======== ========
Total risk-weighted assets $371,491 $430,028
Ratios
Tier I capital to risk-weighted assets 10.64% 13.18%
Total capital to risk-weighted assets 14.83% 16.91%
Leverage at year-end 6.42% 8.50%
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 $19.6 million in 2003, down 8.1% from the amount earned in
2002 which follows a 0.7% decrease in 2002 from 2001. When net interest income
is presented on a fully tax-equivalent basis, interest income from tax-exempt
earning assets is increased by the amount equivalent to the federal income
taxes which would have been paid if this income were taxable at the statutory
federal tax rate of 34% for companies of Premier's size. The decrease in net
interest income in 2003 is largely due to a decrease in the volume of assets and
liabilities coupled with a decline in interest income resulting from the high
level of non-accrual loans at Farmers Deposit. As shown in the Rate Volume
Analysis table below, decreases in the volume of earning assets in 2003 reduced
Premier's interest income by $1.9 million. This decrease was partially offset by
the lower volume of interest bearing liabilities in 2003 resulting in a $1.5
million decline in interest expense. The net effect was to reduce net interest
income by $429,000 for the year. Similarly, the lower interest rate environment
in 2003, coupled with the reversal of interest income for loans placed on
non-accrual during the year resulted in reduced interest income of $4.8 million.
This decline was partially offset by reduced interest expense of $3.5 million
which resulted from the lower interest rate environment. The combined result was
an overall decrease in net interest income of $1.7 million.
However, Premier's management of changes in interest rates risk and its
ability to lower the rates paid on its interest bearing liabilities more rapidly
than the declines in yields on interest earning assets resulted in an increase
in net interest income from rate movements of $1.1 million for the year 2002.
This increase only partially offset the $2.1 million decline in net interest
income due to lower volumes resulting in the overall $1.1 decline in net
interest income.
Similarly, in 2002, a reduction in Premier's volume of earning assets
reduced interest income by $4.5 million which was only partially offset by a
$3.0 million decrease in interest expense due to a lower volume of interest
bearing liabilities. The net result was a $1.6 million decrease in net interest
income from volume activity. In contrast to 2003 however, in 2002, Premier's
management of changes in interest rates risk and its ability to lower the rates
paid on its interest bearing liabilities more rapidly than the declines in
yields on interest earning assets resulted in an increase in net interest income
from rate movements of $1.4 million for the year. This increase only partially
offset the $1.6 million decline in net interest income due to lower volumes
resulting in the overall $156,000 decline in net interest income.
RATE VOLUME ANALYSIS OF CHANGES IN NET INTEREST INCOME
(Dollars in thousands on a taxable equivalent basis)
2003 vs 2002 2002 vs 2001
Increase (decrease) due to change in Increase (decrease) due to change in
Net Net
Volume Rate Change Volume Rate Change
--------- --------- --------- --------- --------- ---------
Interest Income*:
Loans $ (2,443) $ (2,662) $ (5,105) $ (3,681) $ (3,412) $ (7,093)
Investment securities 297 (1,742) (1,445) (846) (1,935) (2,781)
Federal funds sold 249 (347) (98) (20) (764) (784)
Deposits with banks 0 (1) (1) 3 (15) (12)
--------- --------- --------- --------- --------- ---------
Total interest income $ (1,897) $ (4,752) $ (6,649) $ (4,544) $ (6,126) $ (10,670)
--------- --------- --------- --------- --------- ---------
Interest Expense:
Deposits
NOW and money market $ 192 $ (1,615) $ (1,423) $ 147 $ (2,132) $ (1,985)
Savings 78 (239) (161) (123) (401) (524)
Certificates of deposit (1,033) (2,044) (3,077) (2,446) (3,981) (6,427)
Short-term borrowings (12) (31) (43) (109) (179) (288)
Other borrowings (173) 140 (33) (359) (514) (873)
FHLB borrowings (223) 106 (117) (77) (340) (417)
Debt (297) 233 (64) 0 0 0
--------- --------- --------- --------- --------- ---------
Total interest expense $ (1,468) $ (3,450) $ (4,918) $ (2,966) $ (7,548) $ (10,514)
--------- --------- --------- --------- --------- ---------
Net interest income* $ (429) $ (1,302) $ (1,731) $ (1,578) $ 1,422 $ (156)
========= ========= ========= ========= ========= =========
(*) Fully taxable equivalent using the rate of 34%.
Note - Changes to rate/volume are allocated to both rate and volume on a proportional dollar basis.
As net interest income dollars declined in 2003, Premier's net interest
margin also decreased. In 2003, the yield earned on investment securities
declined 121 basis points to 3.41% while the yield on the loan portfolio
declined 73 basis points to 7.60%. The net result on all earning assets was to
reduce the yield 102 basis points to 5.97% in 2003, down from 6.99% earned in
2002 and 8.07% earned in 2001. Similarly, in 2003 Premier reduced the average
rate paid on its deposits by 101 basis points by not renewing a significant
amount of high rate certificates of deposit and by keeping the rates paid on
other deposit products competitive with national and local market rates. The net
result on all interest bearing liabilities was to reduce the cost of funds 86
basis points to 2.63%, down from 3.49% in 2002 and 5.01% in 2001. As a result,
Premier's net interest spread decreased by 17 basis points and its net interest
margin decreased by 21 basis points to 3.63% in 2003, down from 3.84% in 2002
and 3.50% in 2001. Further discussion of net interest income is included in the
section of this report entitled "Balance Sheet Analysis."
Non-interest Income and Expense
Non-interest income has been and will continue to be an important factor
for improving profitability. Recognizing this importance, management continues
to evaluate areas where non-interest income can be enhanced. As shown in the
table of Non-interest Income and Expense below, total fees and other income
increased by 23.6% or $658,000 in 2003. The increase in 2003 is largely due to
increases in service charges on deposit accounts. In 2002, total fees and other
income decreased by 11.3% or $354,000 from 2001. Approximately 80% of the
decline was due to the sale of the operations of the Bank of Mount Vernon and
the Sabina Bank in 2001. The remaining decrease was due to declines in other
income which were only partially offset by increases in revenue from service
charges on deposit accounts. Service charges on deposit accounts increased to
$2,167,000 in 2003, an increase of 28.2% or $476,000. The increase is a result
of changes in the way Premier charges customers for over drawing their checking
accounts and a general increase in customers and activity. The increase follows
a 1.9% or $32,000 increase over 2001. After factoring out the services charges
earned by the two banks that were sold in 2001, service charges in 2002
increased by 14.4% or $239,000 over 2001. Insurance commissions declined by
40.9% or $86,000 in 2003 largely due to lower new loan generations resulting
from lower loan demand and stiffer competition from larger banks. This decrease
follows a 4.0% increase in 2002 over 2001. Other income increased by 30.2% or
$268,000 in 2003. This is a result of increases in various other sources of
income such as debit card fees, commissions from originating secondary market
mortgage loans and collections of loans retained from the Bank of Mt. Vernon and
Sabina Bank sales. Other income declined by $394,000 in 2002 largely due to the
other income reported by the two banks that were sold in 2001 and reduced income
from origination and sales of mortgage loans in the secondary market.
In 2003, Premier realized $616,000 in net gains on securities sales.
These securities were sold as part of Premier's management of its
asset/liability position and to liquidate the tax-exempt investments at Farmers
Deposit Bank in order to generate taxable income in the future. In 2002, Premier
realized $73,000 in net losses on securities sales, which compares to $321,000
in net gains realized in 2001. In 2001, Premier recognized gains of $8.7 million
on the sale of two subsidiary banking operations.
The following table is a summary of non-interest income and expense
for each of the years the three-year period ending December 31, 2003.
NON-INTEREST INCOME AND EXPENSE
(Dollars in thousands)
Increase (Decrease) Over Prior Year
2003 2002
---------------- ----------------
2003 2002 2001 Amount Pct Amount Pct
-------- -------- -------- ------- ----- ------- -----
Non-Interest Income:
Service charges on deposit accounts $ 2,167 $ 1,691 $ 1,659 $ 476 28.15 $ 32 1.93
Insurance income 124 210 202 (86) (40.95) 8 3.96
Other 1,157 889 1,283 268 30.15 (394) (30.71)
-------- -------- -------- ------- ----- ------- -----
Total fees and other income 3,448 2,790 3,144 $ 658 23.58 $ (354) (11.26)
Investment securities gains(losses) 616 (73) 321 689 - (394) -
Gain on sale of banking operations 0 0 8,713 - - (8,713) -
-------- -------- -------- ------- ----- ------- -----
Total non-interest income $ 4,064 $ 2,717 $ 12,178 $ 1,347 49.58 $(9,461) (77.69)
======== ======== ======== ======= ===== ======= =====
Non-Interest Expense:
Salaries and wages $ 6,768 $ 6,665 $ 7,824 $ 103 1.55 $(1,159) (14.81)
Employee benefits 1,955 2,251 2,169 (296) (13.15) 82 3.78
-------- -------- -------- ------- ----- ------- -----
Total staff costs 8,723 8,916 9,993 (193) (2.16) (1,077) (10.78)
-------- -------- -------- ------- ----- ------- -----
Occupancy and equipment expense 2,260 2,283 2,448 (23) (1.01) (165) (6.74)
Professional fees 1,338 1,086 837 252 23.20) 249 29.75
Taxes, other than payroll, property
and income 534 688 717 (154) (23.38) (29) (4.04)
Amortization of intangibles 0 0 1,308 - - (1,308) -
OREO losses and expenses 540 1,160 384 (620) (53.45) 776 202.08
Bad check losses 461 29 11 432 1489.66 18 163.64
Supplies 379 385 388 (6) (1.56) (3) (0.77)
Other expenses 3,397 3,284 4,114 113 3.44 (830) (20.18)
-------- -------- -------- ------- ----- ------- -----
Total non-interest expenses $ 17,632 $ 17,831 $ 20,200 $ (199) (1.12) $(2,369) (11.73)
======== ======== ======== ======= ===== ======= =====
Just as management continues to evaluate areas where non-interest income
can be enhanced, it strives to find ways to improve the efficiency of its
operations and utilize the economies of scale of the consolidated entity to
reduce its operating costs. Premier's 2003 net overhead ratio, or non-interest
expense less non-interest income excluding securities transactions and other
similar non-operating transactions to average earning assets was 2.62%, a
decrease decrease from the 2.70% realized in 2002 and the 2.78% ratio realized
in 2001. For the year 2003, net overhead was $14.2 million, a decrease of
$860,000 or 5.7% below the 2002 overhead of $15.0 million. The decline in
Premier's 2003 net overhead ratio is a result of the increase in non-interest
income (discussed above) combined with a decrease in non-interest expense
(discussed below). The current year decrease follows a decrease in 2002 of 11.8%
or $2.0 million from the 2001 overhead of $17.0 million. Approximately $2.0
million of this decrease was the net overhead of the Bank of Mount Vernon and
the Sabina Bank recognized in 2001 whose operations were not included in
Premier's results for 2002. A lower net overhead ratio means more of the net
interest margin flows through as net income.
Total non-interest expense in 2003 decreased by $199,000, or 1.1%
from 2002 as decreases in staff costs, OREO losses and expenses and taxes not on
income were only partially offset by increases in professional fees, bad check
losses and other expenses. This year's decrease compares to a $2.4 million or
11.8% decrease in 2002 versus 2001. Approximately $2.3 million of the decline
was due to the sale of the operations of the Bank of Mount Vernon and the Sabina
Bank in 2001. The remainder was due to a $61,000 or 0.3% decline in the
non-interest expenses of the remaining operations as described in more detail
below.
Staff costs decreased by $193,000 or 2.2% in 2003 versus 2002. Increases
is salaries and wages were more than offset by reductions in medical insurance
benefit costs. In the second quarter of 2003, employees were required to
contribute a percentage of the overall premium as Premier changed its benefit
structure to be more in-line with its competitors. The percentage of employee
contribution is being phased in over a two year period. In 2002, staff costs
decreased by $1.1 million largely due to the sale of the banking operations in
2001. The remainder was largely due to a $479,000 decrease in staff costs at the
parent holding company, offset by normal salary adjustments at the subsidiary
banks.
Occupancy and equipment expenses decreased by $23,000 or 1.0% in 2003 as
decreases in equipment expenses were substantially offset by an increase in
occupancy costs. In 2002, occupancy and equipment expense decreased by $165,000
or 6.7% from 2001. Approximately $262,000 of occupancy and equipment expenses
was eliminated due to the sale of the banking operations in 2001. The remaining
$97,000 or 4.0% increase was largely due to increases in property taxes and
maintenance costs on buildings and equipment.
Professional fees increased by $252,000 or 23.2% in 2003 versus 2002.
The increase in 2003 was largely due to legal and audit costs related to the
Farmers Deposit Bank investigation. This increase follows a $249,000 or 29.8%
increase in 2002 versus 2001. Approximately $31,000 of professional fees were
eliminated due to the sale of the banking operations in 2001. The remaining
$280,000 increase was largely due to increased legal fees related to
collections, regulatory and compliance matters, other legal matters, and fees
related to external audits and Premier's efforts to strengthen its internal
control processes.
Taxes not on income decreased by $154,000 or 22.4% in 2003 versus 2002.
The decrease in 2003 is largely due to employment of tax saving strategies
resulting from the moving of the company headquarters to West Virginia. In 2002,
taxes not on income declined by $29,000 or 4.0%. Approximately $128,000 of taxes
not on income were eliminated due to the sale of the banking operations in 2001.
The remaining $99,000 increase was due to increases in the amount of equity
subject to equity based taxes.
OREO writedowns and expenses totaled $540,000 in 2003, a decrease of
$620,000 or 53.5% from the $1.2 million of these expenses in 2002. The increase
in 2002 was largely due to writedowns of OREO property to net realizable values
as management emphasized efforts to liquidate the properties.
Bad check losses totaled $461,000 in 2003, a $432,000 increase from the
$29,000 recorded in 2002. The increase in 2003 was primarily the result of bad
checks losses at Farmers Deposit Bank related to dishonored checks discovered
during investigation. The collection of these checks is still being pursued by
the bank.
In 2002, Premier adopted Financial Accounting Statements (FAS) 142 and
147. The effect of adopting these new accounting standards has been the
elimination of the amortization of goodwill effective January 2002. In 2001,
Premier recognized $1.3 million of goodwill amortization. Additional information
concerning Premier's adoption of FAS 142 and 147 is discussed in Note 1 to the
consolidated financial statements.
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 a $5.3 million income tax benefit in 2003 compared to
$1.5 million income tax benefit in 2002 and $3.0 million of income tax expense
in 2001. Premier's effective tax rate was (35.5%) in 2003, down from (40.8%) in
2002 and the 65.5% in 2001. The benefit in 2003 and 2002 was due to the pretax
losses realized by Premier. Premier's effective tax rate in 2003 and 2002 was
increased by the benefits of holding tax-exempt investments and other tax saving
instruments. The increase in 2001 taxes as well as the increased effective tax
rate was due to the gains on the sales of the two banking subsidiaries and the
taxability of those transactions. Additional information regarding income taxes
is contained in Note 15 to the consolidated financial statements.
Effects of Changing Prices
The results of operations and financial condition presented in this
report are based on historical cost, unadjusted for the effects of inflation.
Inflation affects Premier in two ways. One is that inflation can result in
increased operating costs which must be absorbed or recovered through increased
prices for services. The second effect is on the purchasing power of the
corporation. Virtually all of a bank's assets and liabilities are monetary in
nature. Regardless of changes in prices, most assets and liabilities of the
banking subsidiaries will be converted into a fixed number of dollars. Non-
earning assets, such as premises and equipment, do not comprise a major portion
of Premier's assets; therefore, most assets are subject to repricing on a more
frequent basis than in other industries.
Premier's ability to offset the effects of inflation and potential
reductions in future purchasing power depends primarily on its ability to
maintain capital levels by adjusting prices for its services and to improve net
interest income by maintaining an effective asset/liability mix. Management's
efforts to meet these goals are described in other sections of this report.
SUMMARY RESULTS OF OPERATIONS
FOURTH QUARTER 2003
Income from continuing operations for the three months ended December
31, 2003 was a loss of $596,000, a 6.4% or $41,000 improvement from the $637,000
loss from continuing operations reported for the fourth
quarter of 2002. On a per share basis, Premier's loss from continuing operations
for the fourth quarter of 2003 was 11 cents per share, compared to a loss of 12
cents per share for the same quarter last year.
Net interest income totaled $4,480,000 for the fourth quarter of 2003, a
decrease of $779,000 or 14.8% from the net interest income earning in the same
quarter of 2002. The decline is the result of a lower level of loans outstanding
which generate higher yields and the high level of non-accrual loans at Farmers
Deposit Bank. The provision for loan losses was $2,125,000 in the fourth quarter
of 2003, a decrease of $686,000 or 24.4% when compared to the fourth quarter of
2002. Non-interest income excluding securities transactions totaled $951,000 in
the fourth quarter of 2003, an increase of $208,000 or 28..0% from the $743,000
reported for the fourth quarter of 2002. The increase was largely due to
increased fees from service charges on deposit accounts. Non-interest expense
totaled $4,671,000 in the fourth quarter of 2003, a $420,000 or9.9% increase
over the $4,251,000 reported for the fourth quarter of 2002. Decreases in staff
costs and occupancy & equipment expense were more than offset by increased
professional fees, increased other operating expenses and a $246,000 writedown
on the anticipated sale of an OREO property.
Additional quarterly
financial data is provided in Note 24 to the consolidated financial statements.
ADOPTION OF NEW ACCOUNTING STANDARDS
During 2003, the Company adopted FASB
Statement 143, Accounting for Asset Retirement Obligations; FASB Statement 145,
Rescission of FASB Statements 4, 44, and 64, Amendment of FASB Statement 13, and
Technical Corrections; FASB Statement 146, Accounting for Costs Associated with
Exit or Disposal Activities; FASB Statement 149, Amendment of Statement 133 on
Derivative Instruments and Hedging Activities, FASB Statement 150, Accounting
for Certain Financial Instruments with Characteristics of both Liabilities and
Equities, FASB Interpretation 45, Guarantor's Accounting and Disclosure
Requirements for Guarantees, and FASB Interpretation 46, Consolidation of
Variable Interest Entities. Adoption of the new standards did not materially
affect the Company's operating results or financial condition.
Interpretation 46, as revised in December 2003, is discussed in Note 14 to the
consolidated financial statements included elsewhere in this report.
Item 8. Financial Statements and Supplementary Data
- ----------------------------------------------------
The Company's Financial Statements and related Independent Auditors'
Report are presented in the following pages. The financial statements filed in
this Item 8 are as follows:
Independent Auditors' Report
Financial Statements:
Consolidated Balance Sheets - December 31, 2003 and 2002, as restated
Consolidated Statements of Income - Years Ended December 31, 2003,
2002, as restated, and 2001, as restated
Consolidated Statements of Comprehensive Income - Years Ended
December 31, 2003, 2002, as restated, and 2001, as restated
Consolidated Statements of Changes in Stockholders' Equity - Years
ended December 31, 2003, 2002, as restated, and 2001, as restated
Consolidated Statements of Cash Flows - Years ended December 31, 2003,
2002, as restated, and 2001, as restated
Notes to Consolidated Financial Statements
PREMIER FINANCIAL BANCORP, INC.
CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003, 2002 and 2001
REPORT OF INDEPENDENT AUDITORS
Board of Directors
Premier Financial Bancorp, Inc.
Huntington, West Virginia
We have audited the accompanying consolidated balance sheets of Premier
Financial Bancorp, Inc. as of December 31, 2003 and 2002, and the related
consolidated statements of operations, comprehensive income, changes in
stockholders' equity and cash flows for each of the three years in the period
ended December 31, 2003. 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 auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Premier Financial
Bancorp, Inc. as of December 31, 2003 and 2002 and the results of its operations
and its cash flows for each of the three years in the period ended December 31,
2003 in conformity with accounting principles generally accepted in the United
States of America.
As disclosed in Note 1, during 2002 the Company adopted new accounting guidance
for goodwill.
As discussed in Note 2, the Company has restated its consolidated financial
statements as of December 31, 2002 and for each of the two years in the period
ended December 31, 2002 to reflect the effect of actions taken by subsidiary
management that were concealed from others in the Company.
Crowe Chizek and Company LLC
Columbus, Ohio
April 12, 2004
PREMIER FINANCIAL BANCORP, INC.
CONSOLIDATED BALANCE SHEETS
December 31, 2003 and 2002
(In Thousands, Except Per Share Data)
- --------------------------------------------------------------------------------
2003 2002
------------- ------------
(Restated)
ASSETS
Cash and due from banks $ 16,422 $ 14,334
Federal funds sold 17,051 24,747
Securities available for sale 147,646 144,698
Loans 331,794 373,099
Allowance for loan losses (14,300) (9,698)
------------- ------------
Net loans 317,494 363,401
Federal Home Loan Bank and
Federal Reserve Bank stock 2,490 3,817
Premises and equipment, net 7,956 8,472
Real estate and other property acquired
through foreclosure 3,187 3,505
Interest receivable 3,448 5,254
Goodwill 15,816 15,816
Current year tax receivable 3,695 556
Other assets 8,024 6,269
Assets of discontinued operation 79,163 84,406
------------- ------------
Total assets $ 622,392 $ 675,275
============= ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits
Non-interest bearing $ 59,001 $ 51,795
Time deposits, $100,000 and over 42,780 48,967
Other interest bearing 353,693 376,962
------------- ------------
Total deposits 455,474 477,724
Securities sold under
agreements to repurchase - 5,255
Federal Home Loan Bank advances 10,705 18,243
Other borrowed funds 6,200 7,700
Notes payable 1,402 1,402
Guaranteed junior subordinated
interest debentures 26,546 29,639
Interest payable 3,902 1,555
Other liabilities 1,227 1,107
Liabilities of discontinued operation 71,396 76,526
------------- ------------
Total liabilities 576,852 619,151
Stockholders' equity
Preferred stock, no par value;
1,000,000 shares authorized;
none issued or outstanding - -
Common stock, no par value;
10,000,000 shares authorized;
5,232,230 shares issued and outstanding 1,103 1,103
Capital Surplus 43,445 43,445
Retained earnings 311 10,008
Accumulated other comprehensive income 681 1,568
------------- ------------
Total stockholders' equity 45,540 56,124
------------- ------------
Total liabilities and stockholders' equity $ 622,392 $ 675,275
============= ============
- --------------------------------------------------------------------------------
See accompanying notes.
PREMIER FINANCIAL BANCORP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended December 31
(In Thousands, Except Per Share Data)
- --------------------------------------------------------------------------------
2003 2002 2001
---- ---- ----
(Restated) (Restated)
Interest income
Loans, including fees $ 26,731 $ 31,835 $ 38,971
Investment securities -
Taxable 3,871 5,086 7,552
Tax-exempt 651 807 1,016
Federal funds sold 469 567 1,351
Other interest income 7 8 20
----------- ----------- -----------
Total interest income 31,729 38,303 48,910
Interest expense
Deposits 8,503 13,164 22,100
Other borrowings 1,256 1,449 3,027
Debentures 2,788 2,852 2,852
----------- ----------- -----------
Total interest expense 12,547 17,465 27,979
Net interest income 19,182 20,838 20,931
Provision for loan losses 20,513 9,453 8,350
----------- ----------- -----------
Net interest income after provision for loan losses (1,331) 11,385 12,581
Non-interest income
Service charges 2,167 1,691 1,659
Insurance commissions 124 210 201
Securities gains (losses) 616 (73) 322
Gain on sale of subsidiaries' banking operations - - 8,713
Other income 1,157 889 1,283
----------- ----------- -----------
4,064 2,717 12,178
Non-interest expenses
Salaries and employee benefits 8,723 8,916 9,993
Occupancy and equipment expenses 2,260 2,283 2,448
Professional fees 1,338 1,086 837
Taxes, other than payroll, property and income 534 688 717
Amortization of goodwill - - 1,308
Write-downs, expenses, sales of other real estate owned 540 1,160 384
Supplies 379 385 388
Bad check losses 461 29 11
Other expenses 3,397 3,284 4,114
----------- ----------- -----------
17,632 17,831 20,200
(Loss) income from continuing operations
before income taxes (14,899) (3,729) 4,559
Provision (benefit) for income taxes (5,282) (1,522) 2,985
----------- ----------- -----------
(Loss) income from continuing operations (9,617) (2,207) 1,574
----------- ----------- -----------
Discontinued operations
Loss from operations of discontinued component (127) (1,722) (560)
Provision (benefit) for income taxes (47) (592) (180)
------------ ------------ ------------
Loss from discontinued operations (80) (1,130) (380)
------------ ------------ ------------
Net (loss) income $ (9,697) $ (3,337) $ 1,194
=========== =========== ===========
- --------------------------------------------------------------------------------
(Continued)
PREMIER FINANCIAL BANCORP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS (Continued)
Years Ended December 31
(In Thousands, Except Per Share Data)
- --------------------------------------------------------------------------------
2003 2002 2001
---- ---- ----
(Restated) (Restated)
Weighted average common shares outstanding:
Basic and Diluted 5,232 5,232 5,232
Earnings (loss) per share from continuing operations:
Basic and Diluted $ (1.84) $ (0.42) $ 0.30
Earnings (loss) per share from discontinued operations:
Basic and Diluted $ (0.01) $ (0.22) $ (0.07)
Net earnings (loss) per share:
Basic and Diluted $ (1.85) $ (0.64) $ 0.23
- --------------------------------------------------------------------------------
See accompanying notes.
PREMIER FINANCIAL BANCORP, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Years Ended December 31
(In Thousands, Except Per Share Data)
- --------------------------------------------------------------------------------
2003 2002 2001
---- ---- ----
(Restated) (Restated)
Net (loss) income $ (9,697) $ (3,337) $ 1,194
Other comprehensive income (loss):
Unrealized gains and (losses) on securities
arising during the period (726) 1,032 3,132
Reclassification of realized amount (including
from discontinued operations) (618) 45 (517)
----------- ----------- -----------
Net change in unrealized gain (loss) on
securities (1,344) 1,077 2,615
Less: Tax impact (457) 366 889
----------- ----------- -----------
Comprehensive (loss) income $ (10,584) $ (2,626) $ 2,920
=========== =========== ===========
- --------------------------------------------------------------------------------
See accompanying notes.
PREMIER FINANCIAL BANCORP, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Years Ended December 31, 2003, 2002 and 2001
(In Thousands, Except Per Share Data)
- --------------------------------------------------------------------------------
Accumulated
Other
Common Capital Retained Comprehensive
Stock Surplus Earnings Income Total
Balances, January 1, 2001 $ 1,103 $ 43,445 $ 12,151 $ (869) $ 55,830
Net change in unrealized gains (losses)
on securities available for sale - - - 1,726 1,726
Net income (restated) - - 1,194 - 1,194
-------- --------- --------- ---------- ----------
Balances, December 31, 2001 (restated) 1,103 43,445 13,345 857 58,750
Net change in unrealized gains (losses)
on securities available for sale - - - 711 711
Net loss (restated) - - (3,337) - (3,337)
-------- --------- --------- ---------- ----------
Balances, December 31, 2002 (restated) 1,103 43,445 10,008 1,568 56,124
Net change in unrealized gains (losses)
on securities available for sale (887) (887)
Net loss (9,697) (9,697)
-------- --------- --------- ---------- ----------
Balances, December 31, 2003 $ 1,103 $ 43,445 $ 311 $ 681 $ 45,540
======== ========= ========= ========== ==========
- --------------------------------------------------------------------------------
See accompanying notes.
PREMIER FINANCIAL BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31
(In Thousands)
- --------------------------------------------------------------------------------
2003 2002 2001
---- ---- ----
(Restated) (Restated)
Cash flows from continuing operating activities
Net (loss) income from continuing operations $ (9,617) $ (2,207) $ 1,574
Adjustments to reconcile net (loss) income
to net cash from continuing operating activities
Depreciation 989 1,090 999
Provision for loan losses 20,513 9,453 8,350
Amortization, net 567 303 1,063
FHLB stock dividends (139) (162) (231)
Write-downs of other real estate owned 466 1,037 258
Securities (gains) losses, net (616) 73 (322)
Gain on the sale of subsidiaries' banking
operations - - (8,713)
Dividends received from discontinued subsidiary - - 500
Changes in
Interest receivable 1,806 1,263 236
Deferred income taxes (1,693) (1,329) (1,284)
Other assets (2,862) 870 274
Interest payable 2,347 135 (1,313)
Other liabilities 398 (229) (254)
------------ ----------- -----------
Net cash from continuing operating activities 12,159 10,297 1,137
Cash flows from continuing investing activities
Purchases of securities available for sale (141,891) (128,956) (193,693)
Proceeds from sales of securities available for sale 21,926 5,814 15,243
Proceeds from maturities and calls of securities
available for sale 115,770 126,679 202,400
Purchases of FHLB stock (76) (50) (208)
Redemption of FHLB stock 1,542 104 451
Net change in interest-earning balances with banks - - 737
Net change in federal funds sold 7,696 (3,280) (11,414)
Net change in loans 22,788 2,859 (1,348)
Purchases of premises and equipment, net (473) (742) (483)
Proceeds from sale of other real estate acquired
through foreclosure 2,190 2,822 1,282
Net cash received (paid) related to acquisitions - - 3,255
------------ ----------- -----------
Net cash from continuing investing activities 29,472 5,250 16,222
- --------------------------------------------------------------------------------
(Continued)
PREMIER FINANCIAL BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
Years Ended December 31
(In Thousands)
- --------------------------------------------------------------------------------
2003 2002 2001
---- ---- ----
(Restated) (Restated)
Cash flows from continuing financing activities
Net change in deposits $ (22,250) $ (6,267) $ (1,256)
Advances from Federal Home Loan Bank 2,750 14,420 60,361
Repayment of Federal Home Loan Bank advances (10,288) (21,646) (59,214)
Early redemption of debentures, net (3,000) - -
Repayment of other borrowed funds (1,500) (5,300) (7,000)
Proceeds from notes payable - 1,402 -
Net change in agreements to repurchase securities (5,255) - (14,125)
------------- ----------- ------------
Net cash from continuing financing activities (39,543) (17,391) (21,234)
------------- ----------- -----------
Net change in cash and cash equivalents
from continuing activities 2,088 (1,844) (3,875)
Cash and cash equivalents of continuing operations
at beginning of year 14,334 16,178 20,053
------------ ----------- -----------
Cash and cash equivalents of continuing operations
at end of year $ 16,422 $ 14,334 $ 16,178
============ =========== ===========
Supplemental disclosures of cash flow information:
Cash paid during the year for -
Interest $ 10,201 $ 17,314 $ 29,796
Income taxes paid (refunded) (549) (280) 4,279
Loans transferred to real estate acquired
through foreclosure $ 2,338 $ 1,856 $ 4,785
Transfer of securities from held to maturity
to available for sale $ - $ - $ 17,472
Net change in cash and cash equivalents of
discontinued operations $ 1,596 $ (740) $ 1,164
- --------------------------------------------------------------------------------
See accompanying notes.
PREMIER FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003, 2002 and 2001
- --------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The consolidated financial statements include the accounts of Premier Financial
Bancorp, Inc. (the Company) and its wholly-owned subsidiaries:
Unaudited
---------------------------------------
December 31, 2003
Year Net Income
Acquired Assets (Loss)
-------- ------ ----------
(In Thousands)
Citizens Deposit Bank & Trust Vanceburg, Kentucky 1991 $ 88,647 $ 983
Bank of Germantown Germantown, Kentucky 1992 23,699 1
Citizens Bank (Kentucky), Inc. Georgetown, Kentucky 1995 79,163 (80)
Farmers Deposit Bank Eminence, Kentucky 1996 105,167 (12,014)
Ohio River Bank Ironton, Ohio 1998 76,534 975
First Central Bank, Inc. Philippi, West Virginia 1998 84,934 1,105
Boone County Bank, Inc. Madison, West Virginia 1998 157,442 1,874
Mt. Vernon Financial Holdings, Inc. Georgetown, Kentucky 1999 4,729 (49)
The Company also has a data processing subsidiary, Premier Data Services, Inc.
All material intercompany transactions and balances have been eliminated.
Nature of Operations: The subsidiary banks (Banks) operate under state bank
charters and provide traditional banking services, including trust services, to
customers primarily located in the counties and adjoining counties in Kentucky,
Ohio, and West Virginia in which the Banks operate. Chartered as state banks,
the Banks are subject to regulation by their respective state banking regulators
and the Federal Deposit Insurance Corporation (FDIC) or the Federal Reserve Bank
for member banks. The Company is also subject to regulation by the Federal
Reserve Bank.
Estimates in the Financial Statements: The preparation of financial statements
in conformity with accounting principles generally accepted in the United States
of America requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities, disclosure of contingent assets and
liabilities at the date of the financial statements, and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates. The allowance for loan losses, the identification and
evaluation of impaired loans, impairment of goodwill, realizability of deferred
tax assets, and fair values of financial instruments are particularly subject to
change.
- --------------------------------------------------------------------------------
(Continued)
PREMIER FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003, 2002 and 2001
- --------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Cash Flows: For purposes of reporting cash flows, cash and cash equivalents
include cash on hand, amounts due from banks and interest-earning balances with
banks with an original maturity less than ninety days. Net cash flows are
reported for loans, federal funds sold, deposits, and other borrowing
transactions.
Securities: The Company classifies its securities portfolio as either securities
available for sale or securities held to maturity. Securities held to maturity
are carried at amortized cost.
Securities available for sale are carried at fair value. Adjustments from
amortized cost to fair value are recorded in stockholders' equity, net of
related income tax, under accumulated other comprehensive income on securities
available for sale. Other securities such as Federal Home Loan Bank stock are
carried at cost.
Interest income includes amortization of purchase premium or discount computed
using the level yield method. Gains or losses on dispositions are based on the
net proceeds and adjusted carrying amount of the securities sold using the
specific identification method. Securities are written down to fair value when a
decline in fair value is not temporary.
Loans: Net loans are stated at the amount of unpaid principal, reduced by
unearned income and an allowance for loan losses. Interest income on loans is
recognized on the accrual basis except for those loans in a non-accrual of
income status. The accrual of interest on impaired loans is discontinued when
management believes, after consideration of economic and business conditions and
collection efforts, that the borrowers' financial condition is such that
collection of interest is doubtful.
All interest accrued but not received for loans placed on nonaccrual is reversed
against interest income. Interest received on such loans is accounted for on the
cash-basis or cost-recovery method, until qualifying for return to accrual.
Loans are returned to accrual status when all the principal and interest amounts
contractually due are brought current and future payments are reasonably
assured.
The allowance for loan losses is a valuation allowance for probable incurred
credit losses increased by a provision for loan losses charged to expense. The
allowance is an amount that management believes will be adequate to absorb
probable incurred losses on existing loans based on evaluations of the
collectibility of loans and prior loan loss experience. The evaluations take
into consideration such factors as changes in the nature and volume of the loan
portfolio, overall portfolio quality, review of specific problem loans, and
current economic conditions that may affect the borrowers' ability to pay. Loans
are charged against the allowance for loan losses when management believes that
the collection of principal is unlikely. Subsequent recoveries, if any, are
credited to the allowance.
- --------------------------------------------------------------------------------
(Continued)
PREMIER FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003, 2002 and 2001
- --------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
A loan is impaired when full payment under the loan terms is not expected.
Impairment is evaluated in total for smaller-balance loans of similar nature
such as residential mortgage, consumer, and credit card loans, and on an
individual loan basis for other loans. If a loan is impaired, a portion of the
allowance is allocated so that the loan is reported, net, at the present value
of estimated future cash flows using the loan's existing rate or at the fair
value of collateral if repayment is expected solely from the collateral.
Premises and Equipment: Land is carried at cost. Premises and equipment are
stated at cost less accumulated depreciation. Depreciation is recorded
principally by the straight-line method with useful lives ranging from 7 to 40
years for premises and from 3 to 15 years for equipment.
Real Estate Acquired Through Foreclosure: Real estate acquired through
foreclosure is carried at the lower of the recorded investment in the property
or its fair value. The value of the underlying loan is written down to the fair
value of the real estate to be acquired by a charge to the allowance for loan
losses, if necessary. Any subsequent write-downs are charged to operating
expenses. Certain parcels of real estate are being leased to third parties to
offset holding period costs. Operating expenses of such properties, net of
related income, and gains and losses on their disposition are included in other
expenses.
Long-term Assets: Premises and equipment and other long-term assets are reviewed
for impairment when events indicate that the carrying amount may not be
recoverable from future undiscounted cash flows. If impaired, the assets are
recorded at fair value.
Repurchase Agreements: Substantially all repurchase agreement liabilities
represent amounts advanced by various customers. Securities are pledged to cover
these liabilities, which are not covered by federal deposit insurance.
Goodwill: Goodwill results from prior business acquisitions and represents the
excess of the purchase price over the fair value of acquired tangible assets and
liabilities and identifiable intangible assets. Upon adopting new accounting
guidance on January 1, 2002, the Company ceased amortizing goodwill. The effect
on net income of ceasing goodwill amortization in 2002 was $746,000, net of tax.
Goodwill is assessed at least annually for impairment and any such impairment
will be recognized in the period identified. Impairment is evaluated using the
aggregate of all banking operations. To evaluate impairment, management uses
pricing valuation factors such as price-to-total assets and price-to-total
deposits from databases of actual peer group bank sales. These valuation factors
are applied to the comparable factors of the Company's aggregate banking
operations to arrive at estimated fair value. The Company does not have any
identifiable intangible assets such as core deposit intangibles.
- --------------------------------------------------------------------------------
(Continued)
PREMIER FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003, 2002 and 2001
- --------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Stock Compensation: Employee compensation expense under stock options is
reported using the intrinsic value method. No stock-based compensation cost is
reflected in net income, as all options granted had an exercise price equal to
or greater than the market price of the underlying common stock at the date of
grant. The following table illustrates the effect on net income and earnings per
share if expense was measured using the fair value recognition provisions of
FASB Statement No. 123, Accounting for Stock-Based Compensation.
2003 2002 2001
-------- -------- --------
(Restated) (Restated)
Income (loss) from continuing operations $(9,617) $(2,207) $ 1,574
Deduct: Stock-based compensation
expense determined under fair
value based method (18) 98 (17)
------- ------- -------
Pro forma income (loss) $(9,635) $(2,109) $ 1,557
Basic earnings (loss) per share
from continuing operations $ (1.84) $ (0.42) $ 0.30
Pro forma basic earnings (loss) per share (1.84) (0.40) 0.30
Diluted earnings (loss) per share
from continuing operations $ (1.84) $ (0.42) $ 0.30
Pro forma diluted earnings (loss) per share (1.84) (0.40) 0.30
On January 15, 2003, 28,650 incentive stock options were granted out of the 2002
Stock Option Plan at an exercise price of $7.96. These options vest in three
equal annual installments ending on January 15, 2006. Proforma
stock-compensation expense is being amortized over the three-year vesting
period. There were no options granted during 2002, or 2001. Future pro forma net
income will be negatively impacted should the Company choose to grant additional
options.
The pro forma effects are computed using option pricing models, using the
following weighted-average assumptions as of grant date.
2003 2002 2001
---- ---- ----
Risk-free interest rate 3.10% - -
Expected option life (yrs) 5.00 - -
Expected stock price volatility 0.42 - -
Dividend yield 0.00% - -
Weighted average fair value of
options granted during the year $3.30 - -
- --------------------------------------------------------------------------------
(Continued)
PREMIER FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003, 2002 and 2001
- --------------------------------------------------------------------------------
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.
Off Balance Sheet Financial Instruments: Financial instruments include
off-balance sheet credit instruments, such as commitments to make loans and
standby letters of credit, issued to meet customer financing needs. The face
amount for these items represents the exposure to loss, before considering
customer collateral or ability to repay. Such financial instruments are recorded
when they are funded.
Earnings Per Common Share: Basic earnings per common share is net income divided
by the weighted average number of common shares outstanding during the period.
Diluted earnings per common share includes the dilutive effect of additional
potential common shares issuable under stock options. Earnings and dividends per
share are restated for all stock splits and dividends through the date of
issuance of the financial statements.
Comprehensive Income: Comprehensive income consists of net income and other
comprehensive income. Other comprehensive income includes unrealized gains and
losses on securities available for sale which are also recognized as a separate
component of equity.
Adoption of New Accounting Standards: During 2003, the Company adopted FASB
Statement 143, Accounting for Asset Retirement Obligations; FASB Statement 145,
Rescission of FASB Statements 4, 44, and 64, Amendment of FASB Statement 13, and
Technical Corrections; FASB Statement 146, Accounting for Costs Associated with
Exit or Disposal Activities; FASB Statement 149, Amendment of Statement 133 on
Derivative Instruments and Hedging Activities, FASB Statement 150, Accounting
for Certain Financial Instruments with Characteristics of both Liabilities and
Equities, FASB Interpretation 45, Guarantor's Accounting and Disclosure
Requirements for Guarantees, and FASB Interpretation 46, Consolidation of
Variable Interest Entities. Adoption of the new standards did not materially
affect the Company's operating results or financial condition.
Interpretation 46, as revised in December 2003, is discussed in Note 14.
- --------------------------------------------------------------------------------
(Continued)
PREMIER FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003, 2002 and 2001
- --------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
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.
Industry Segments: All of the Company's operations are considered by management
to be aggregated into one reportable operating segment.
Reclassifications: Some items in the prior year financial statements were
reclassified to conform to the current presentation.
NOTE 2 - RESTATEMENT
On June 16, 2003 Premier announced that as a result of an ongoing internal
investigation, it had uncovered a systematic disregard for its loan approval and
credit administration policies at its Farmers Deposit Bank subsidiary and had
accepted the resignation of the bank's former president. On November 7, 2003
Premier disclosed that the Securities and Exchange Commission had requested
information about Premier's internal investigation. As the internal
investigation progressed, many loans were charged off and additional provisions
for loan losses were recorded. Premier's management, with the assistance of
outside independent professionals, has conducted a further review of those loans
for which significant charge offs or additional provisions were required in
2003. The purpose of this review was to determine if the facts or circumstances
that gave rise to additional charge offs or provisions had been improperly
concealed from senior management or improperly considered in applying
management's estimates and judgments as to the adequacy of the allowance for
loan losses in prior financial statement periods. The review did identify
instances in which collateral securing loans had been released without proper
support or notation in loan files, instances in which obligors on notes had been
released from their repayment obligation without proper support or notation in
loan files and instances in which delinquent loan reporting systems had been
manipulated to prevent problem loans from being identified on a timely basis.
Premier's senior management determined that if these circumstances had been
considered in evaluating the adequacy of the allowance for loan losses in prior
periods then some of the loan charge offs and additional provisions for loan
losses recorded in 2003 should have been reflected in prior periods. Therefore
the financial statements for 2002 and 2001 have been restated to reflect the
financial statement effect of the matters that occurred in those periods but
which were improperly concealed by subsidiary management.
- --------------------------------------------------------------------------------
(Continued)
PREMIER FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003, 2002 and 2001
- --------------------------------------------------------------------------------
NOTE 2 - RESTATEMENT (Continued)
The results of this restatement are reflected in the consolidated financial
statements and related notes to consolidated financial statements. The following
tables reflect the impact of this restatement by financial statement line in
Premier's balance sheet at December 31, 2002 and statements of operations for
the years 2003, 2002 and 2001. Unaudited amounts are also presented for the
impact of restatement on the first three quarters of 2003 and all of the
quarters of 2002.
Effect on December 31, 2002 balance sheet (in thousands):
Increase
Balance sheet caption (Decrease)
- --------------------- ----------
Loans $ (3,513)
Allowance for losses 1,023
Interest receivable (366)
Other assets (including tax receivable) 1,660
Total assets (3,242)
Retained earnings $ (3,242)
Total stockholders' equity (3,242)
Effect on operating results for the years ended December 31, (in thousands
except per share data):
2003 2002 2001
Increase Increase Increase
Operating statement caption (Decrease) (Decrease) (Decrease)
- --------------------------- ---------- ---------- ----------
Interest income, loans $ 108 $ (226) $ (139)
Provision for loan losses (4,804) 2,981 1,566
Net interest income after provision for loan losses 4,912 (3,207) (1,705)
Income (loss) from continuing operations
before income taxes 4,912 (3,207) (1,705)
Provision (benefit) for income taxes 1,670 (1,090) (580)
Income (loss) from continuing operations 3,242 (2,117) (1,125)
Net (loss) income 3,242 (2,117) (1,125)
Net (loss) income per share, basic and diluted 0.62 (0.40) (0.22)
- --------------------------------------------------------------------------------
(Continued)
PREMIER FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003, 2002 and 2001
- --------------------------------------------------------------------------------
NOTE 2 - RESTATEMENT (Continued)
Effect on operating results for the quarters ended (in thousands except per
share data):
(Unaudited)
---------------------------------------------
Mar 2003 June 2003 Sept 2003
Increase Increase Increase
Operating statement caption (Decrease) (Decrease) (Decrease)
- --------------------------- ---------- ---------- ----------
Interest income, loans $ (109) $ 60 $ 145
Provision for loan losses 1,020 (1,518) (3,672)
Net interest income after
provision for loan losses (1,129) 1,578 3,817
Income (loss) from continuing
operations before income taxes (1,129) 1,578 3,817
Provision (benefit) for income taxes (384) 537 1,298
Income (loss) from
continuing operations (745) 1,041 2,519
Net (loss) income (745) 1,041 2,519
Net (loss) income per share,
basic and diluted (0.14) 0.20 0.48
(Unaudited)
--------------------------------------------------------------
Mar 2002 June 2002 Sept 2002 Dec 2002
Increase Increase Increase Increase
Operating statement caption (Decrease) (Decrease) (Decrease) (Decrease)
- --------------------------- ---------- ---------- ---------- ----------
Interest income, Loans $ (37) $ (37) $ (47) $ (105)
Provision for loan losses 37 78 1,420 1,446
Net interest income after
provision for loan losses (74) (115) (1,467) (1,551)
Income (loss) from continuing
operations before income taxes (74) (115) (1,467) (1,551)
Provision (benefit) for income taxes (25) (39) (499) (527)
Income (loss) from
continuing operations (49) (76) (968) (1,024)
Net (loss) income (49) (76) (968) (1,024)
Net (loss) income per share,
basic and diluted (0.01) (0.01) (0.19) (0.20)
- --------------------------------------------------------------------------------
(Continued)
PREMIER FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003, 2002 and 2001
- --------------------------------------------------------------------------------
NOTE 2 - RESTATEMENT (Continued)
Effect on other supplemental disclosures (in thousands):
2002 2001
Increase Increase
Supplemental footnote disclosures (Decrease) (Decrease)
- --------------------------------- ---------- ----------
Net charge-offs for the year $ 1,958 $ 1,566
Non-accrual loans at year-end 1,929 -
Impaired loans at year-end with an allowance 1,929 -
Amount of allowance for loan losses allocated
to impaired loans 964 -
NOTE 3 - DISCONTINUED OPERATIONS
In the fourth quarter of 2003, the Company adopted and began to implement a plan
to sell its subsidiary Citizens Bank (Kentucky), Inc. ("Citizens Bank") located
in Georgetown, Kentucky. On February 13, 2004, the Company announced that it had
signed a definitive agreement to sell Citizens Bank in a cash transaction valued
at approximately $14,500,000. In accordance with Financial Accounting Standard
144, "Accounting for the Impairment or Disposal of Long-lived Assets", which
became effective for the Company on January 1, 2002, the financial position and
results of operations of Citizens Bank are removed from the detail line items in
the Company's financial statements and presented separately as "discontinued
operations."
- --------------------------------------------------------------------------------
(Continued)
PREMIER FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003, 2002 and 2001
- --------------------------------------------------------------------------------
NOTE 3 - DISCONTINUED OPERATIONS (Continued)
A condensed balance sheet and statement of operations for Citizens Bank follows
(in thousands):
As of December 31
2003 2002
----------- -----------
Assets
Cash and federal funds sold $ 6,473 $ 8,790
Securities available for sale 12,082 12,935
Loans, net 53,886 55,840
Premises and equipment, net 3,026 3,213
Other assets 3,696 3,628
----------- -----------
Total assets $ 79,163 $ 84,406
=========== ============
Liabilities
Deposits $ 65,486 $ 70,250
Federal Home Loan Bank advances 5,255 5,290
Other liabilities 655 986
----------- -----------
Total liabilities 71,396 76,526
Equity 7,767 7,880
----------- -----------
Total liabilities and equity $ 79,163 $ 84,406
=========== ===========
For the years ended December 31
2003 2002 2001
--------- --------- ---------
Interest income $ 4,643 $ 5,927 $ 8,993
Interest expense 1,873 2,701 4,789
--------- --------- ---------
Net interest income 2,770 3,226 4,204
Provision for loan losses 240 2,324 2,137
Non-interest income 938 836 1,158
Non-interest expense 3,595 3,460 3,785
Income tax (benefit) (47) (592) (180)
---------- ---------- ----------
Net (loss) $ (80) $ (1,130) $ (380)
========== ========== ==========
- --------------------------------------------------------------------------------
(Continued)
PREMIER FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003, 2002 and 2001
- --------------------------------------------------------------------------------
NOTE 3 - DISCONTINUED OPERATIONS (Continued)
On September 11, 2002 Citizens Bank entered into an agreement with the Kentucky
Department of Financial Institutions (KDFI) and the Federal Deposit Insurance
Corporation (FDIC) . Among other things, the agreement restricts the bank from
paying dividends without prior approval and requires that the Bank maintain a
Tier I capital to average assets ratio of not less than 7.5%. This agreement
will remain in effect until terminated by the KDFI and FDIC. Citizens Bank's
Tier I capital to average assets was 8.7% as of December 31, 2003.
Activity in the allowance for loan losses for Citizens Bank follows (in
thousands):
2003 2002 2001
--------- --------- ---------
Balance, beginning of year $ 2,685 $ 1,575 $ 1,204
Loans charged off (1,012) (1,520) (1,913)
Recoveries 251 306 147
Provision for loan losses 240 2,324 2,137
---------- ---------- ----------
Balance, end of year $ 2,164 $ 2,685 $ 1,575
========== ========== ==========
Nonperforming loans of Citizens Bank at year end were as follows (in thousands):
2003 2002 2001
--------- --------- ---------
Loans past due over 90
days still on accrual $ - $ 161 $ 336
Nonaccrual loans 2,399 4,320 3,005
Restructured loans 46 164 -
On January 26, 2001, the Company disposed of all the deposits (approximately
$110,000,000), the majority of loans (approximately $92,000,000) and the
premises and equipment (approximately $1,600,000) of the Bank of Mt. Vernon
under the terms of a Purchase and Assumption Agreement. The net cash paid by the
Company relating to this transaction was approximately $9,700,000. The Company
realized a gain of $3,418,000 on the sale. As part of the transaction, the
Company retained certain assets previously held by the Bank of Mt. Vernon, which
are held in a subsidiary called Mt. Vernon Financial Holdings, Inc.
On December 10, 2001, the Company disposed of the deposits (approximately
$49,000,000), the loans (approximately $40,000,000), and the premises and
equipment (approximately $1,300,000) of The Sabina Bank under the terms of a
Purchase and Assumption Agreement. The proceeds to the Company and the gain
realized from this transaction were $12,954,000 and $5,295,000, respectively.
The operating results of both the Bank of Mt. Vernon and The Sabina Bank were
included in the Company's operating results through the respective dates of the
sales. The results relating to the assets retained by the Company continue to be
included in the Company's operating results.
- --------------------------------------------------------------------------------
(Continued)
PREMIER FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003, 2002 and 2001
- --------------------------------------------------------------------------------
NOTE 4 - REGULATORY MATTERS
On September 29, 2000, the Company entered into an agreement with the Federal
Reserve Bank (FRB) that prohibits the Company from paying dividends or incurring
any additional debt without the prior written approval of the FRB. Additionally,
the agreement required the Company to develop and monitor compliance with
certain operational policies designed to strengthen Board of Director oversight
including credit administration, liquidity, internal audit and loan review.
Subsequently, on January 29, 2003, the Company entered into a written agreement
with the FRB which supercedes and rescinds all previous agreements between the
Company and the FRB. Among the provisions of the agreement was the continuation
of the restriction on the Company's payment of dividends on its common stock
without the express written consent of the FRB and the continuation of the
restriction on the Company's payment of quarterly distributions on its Trust
Preferred Securities without the express written consent of the FRB. Among other
provisions, the agreement required the Company to retain an independent
consultant to review its management, directorate and organizational structure,
adopt a management plan responsive to such consultant's report, update its
management succession plan in accordance with any recommendations in such
consultant's report, monitor its subsidiary banks' compliance with bank policies
and loan review programs, conduct formal quarterly reviews of its subsidiary
Banks' allowances for loan losses, maintain sufficient capital, submit a plan to
the FRB for improving consolidated earnings over a three-year period, and submit
to the FRB annual projections of planned sources and uses of the Company's cash,
including a plan to service its outstanding debt and trust preferred securities.
The Company's compliance with the written agreement is monitored by a committee
consisting of three of its outside directors. As of December 31, 2003,
management believes the Company is operating in compliance with the provisions
of the written agreement.
Three of the Company's subsidiaries, Citizens Deposit Bank & Trust, Bank of
Germantown, and Citizens Bank (Kentucky), Inc. have entered into similar
agreements with their respective primary regulators which, among other things,
prohibit the payment of dividends without prior written approval and require
significant changes in their credit administration policies. See Note 3 for
additional information regarding Citizens Bank (Kentucky), Inc. These
agreements, which require periodic reporting, will remain in force until the
regulators are satisfied that the Company and the banks have fully complied with
the terms of the agreement.
- --------------------------------------------------------------------------------
(Continued)
PREMIER FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003, 2002 and 2001
- --------------------------------------------------------------------------------
NOTE 4 - REGULATORY MATTERS (Continued)
On December 22, 2003, the Company's subsidiary Farmers Deposit Bank - Eminence,
Kentucky (the Bank), was issued a Cease and Desist order (Order) by the Federal
Deposit Insurance Corporation (FDIC) and the Kentucky Department of Financial
Institutions (KDFI) [collectively referred to as "Supervisory Authorities"]
related to activities of the bank's former president. The Order, effective
January 1, 2004, requires the Bank to cease and desist from the following:
(a) Operating with management whose policies and procedures are detrimental
to the Bank and jeopardize the safety of its deposits;
(b) Operating with an inadequate level of capital protection for the kind
and quality of assets held by the Bank;
(c) Operating with a large volume of adversely classified loans or assets
and/or delinquent loans and/or non-accrual loans;
(d) Operating with an inadequate allowance for loan and lease losses for
the volume, kind and quality of loans and leases held by the Bank;
(e) Engaging in hazardous lending and lax collection practices;
(f) Operating with inadequate provisions for liquidity and funds management;
(g) Operating with disregard of routine and controls policies;
(h) Operating in such a manner as to produce operating losses; and
(i) Violating laws and/or regulations cited in the most recent Report of
Examination issued by the FDIC ("Report").
The Order also outlined a number of steps to be taken by the Bank which are
designed to remedy and/or prevent the reoccurrence of the items listed in the
Order. These include 1) retaining qualified management and increasing the
involvement of the Bank's Board of Directors ("Board"); 2) developing and
submitting to the Supervisory Authorities a capital plan that maintains the
Bank's Tier I Leverage Ratio above a minimum 5.0% and increases that ratio to
8.0% by December 31, 2004; 3) restricting the payment of cash dividends; 4)
requiring the Board to review the adequacy of the allowance for loan losses at
least quarterly; 5) requiring the Bank to charge-off certain loans listed in the
Report; 6) reviewing the system of internal loan review and system for assigning
loan risk grades as well as revising the Bank's lending policies to address
items of criticism contained in the Report; 7) developing written plans for
reducing and/or improving the level of adversely classified loans and correcting
documentation exceptions on certain loans detailed in the Report; 8) generally
prohibiting additional lending to borrowers who currently have uncollected
adversely classified loans; 9) submitting an annual budget to the Supervisory
Authorities outlining goals and strategies for improving and sustaining the
earnings of the Bank; 10) adopting and implementing a policy for operating the
Bank with adequate internal controls consistent with safe and sound banking
practices and developing an internal audit program to ensure the integrity of
these controls; 11) adopting and implementing a liquidity and funds management
policy; and 12) providing this notice to shareholders. The Bank is required to
provide quarterly progress updates to the Supervisory Authorities.
- --------------------------------------------------------------------------------
(Continued)
PREMIER FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003, 2002 and 2001
- --------------------------------------------------------------------------------
NOTE 4 - REGULATORY MATTERS (Continued)
In accordance with the Order, the Company contributed additional capital to
Farmers to ensure a 5.00% leverage ratio at December 31, 2003 (see Note 22). The
Company also submitted to the Supervisory Authorities a written capital
restoration plan that incrementally increases the Bank's Tier I Leverage Ratio
to 5.50% at March 31, 2004; 6.00% at June 30, 2004; 7.00% at September 30, 2004
and 8.00% at December 31, 2004.
NOTE 5 - RESTRICTIONS ON CASH AND DUE FROM BANKS
Included in cash and due from banks are certain non-interest bearing deposits
that are held at the Federal Reserve or maintained in vault cash in accordance
with average balance requirements specified by the Federal Reserve Board of
Governors. The balance requirement at December 31, 2003 and 2002 was $2.6
million and $3.3 million.
NOTE 6 -SECURITIES
Amortized cost and fair value of securities available for sale and the related
gross unrealized gains and losses recognized in accumulated other comprehensive
income (loss) were as follows (in thousands):
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
2003
U. S. Treasury securities $ 650 $ 2 $ - $ 652
U. S. agency securities 106,413 573 (141) 106,845
Obligations of states and political
subdivisions 6,540 328 - 6,868
Mortgage-backed securities 31,766 186 (142) 31,810
Corporate securities 1,439 32 - 1,471
----------- -------- --------- -----------
Total available for sale $ 146,808 $ 1,121 $ (283) $ 147,646
=========== ======== ========== ===========
2002
U. S. Treasury securities $ 399 $ 8 $ - $ 407
U. S. agency securities 110,156 1,107 (4) 111,259
Obligations of states and political
subdivisions 17,794 827 (11) 18,610
Mortgage-backed securities 5,179 191 - 5,370
Corporate securities 9,036 82 (66) 9,052
----------- -------- ---------- -----------
Total available for sale $ 142,564 $ 2,215 $ (81) $ 144,698
=========== ======== ========= ===========
- --------------------------------------------------------------------------------
(Continued)
PREMIER FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003, 2002 and 2001
- --------------------------------------------------------------------------------
NOTE 6 -SECURITIES (Continued)
The amortized cost and fair value of securities at December 31, 2003 by
contractual maturity are shown below. Expected maturities will differ from
contractual maturities because borrowers may have the right to call or prepay
obligations with or without call or prepayment penalties.
Amortized Fair
Cost Value
----------- -----------
(In Thousands)
Available for sale
Due in one year or less $ 16,089 $ 16,225
Due after one year through five years 94,551 95,070
Due after five years through ten years 3,909 4,036
Due after ten years 493 505
Mortgage-backed securities 31,766 31,810
----------- -----------
Total available for sale $ 146,808 $ 147,646
=========== ===========
Proceeds from sales of securities during 2003, 2002 and 2001 were $21.9 million,
$5.8 million and $15.2 million. Gross gains of $653,000, $40,000 and $351,000,
and gross losses of $37,000, $113,000 and $29,000 were realized on those sales.
Securities with an approximate carrying value of $76.1 million and $79.9 million
at December 31, 2003 and 2002 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 2003, aggregated by investment
category and length of time that individual securities have been in a continuous
unrealized loss position, are as follows:
Less than 12 Months 12 Months or More Total
------------------- ----------------- -----
Fair Unrealized Fair Unrealized Fair Unrealized
Description of Securities Value Loss Value Loss Value Loss
- ------------------------- ----- ---- ----- ---- ----- ----
U.S. agency securities $20,803 $(141) - - $20,803 $(141)
Mortgage-backed securities 14,551 (142) - - 14,551 (142)
------- ----- ------- -----
Total temporarily impaired $35,354 $(283) - - $35,354 $(283)
======= ===== ======= =====
Unrealized losses on bonds have not been recognized into income because the
issuer's bonds are of high credit quality, management has the intent and ability
to hold for the foreseeable future, and the decline in fair value is largely due
to changes in market conditions. The fair value is expected to recover as the
bonds approach their maturity date and/or market conditions improve.
- --------------------------------------------------------------------------------
(Continued)
NOTE 7 - LOANS
Loans at year-end were as follows (in thousands):
2003 2002
---- ----
(Restated)
Commercial and agricultural,
secured by real estate $ 101,325 $ 109,571
Commercial, other 38,063 51,347
Real estate construction 5,414 7,318
Residential real estate 126,134 134,271
Agricultural, other 3,032 4,381
Consumer and home equity 56,216 63,534
Other 1,610 2,677
------------ ------------
$ 331,794 $ 373,099
============ ============
Certain directors and executive officers of the Banks and companies in which
they have beneficial ownership, were loan customers of the Banks during 2003 and
2002. Such loans were made in the ordinary course of business at the Banks'
normal credit terms and interest rates.
An analysis of the 2003 activity with respect to all director and executive
officer loans is as follows (in thousands):
Balance, December 31, 2002 $ 13,458
Additions, including loans now meeting disclosure
requirements 9,144
Amounts collected, including loans no longer meeting
disclosure requirements (8,836)
------------
Balance, December 31, 2003 $ 13,766
============
Activity in the allowance for loan losses was as follows (in thousands):
2003 2002 2001
---- ---- ----
(Restated) (Restated)
Balance, beginning of year $ 9,698 $ 7,371 $ 6,617
Allowance related to acquired or disposed subsidiaries - - (266)
Loans charged off (16,513) (7,889) (7,803)
Recoveries 602 763 473
Provision for loan losses 20,513 9,453 8,350
--------- --------- ---------
Balance, end of year $ 14,300 $ 9,698 $ 7,371
========= ========= =========
- --------------------------------------------------------------------------------
(Continued)
PREMIER FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003, 2002 and 2001
- --------------------------------------------------------------------------------
NOTE 7 - LOANS (Continued)
Impaired loans were as follows (in thousands):
2003 2002 2001
---- ---- ----
(Restated) (Restated)
Impaired loans at year-end with an allowance $ 17,071 $ 10,878 $ 5,114
Impaired loans at year-end with no allowance 3,849 - -
Amount of the allowance for loan losses allocated 8,418 3,980 1,724
Average of impaired loans during the year 12,756 5,697 5,481
Interest income recognized during impairment 444 205 236
Cash-basis interest income recognized 515 189 190
Nonperforming loans at year end were as follows (in thousands):
2003 2002 2001
---- ---- ----
(Restated) (Restated)
Loans past due over 90 days still on accrual $ 4,137 $ 1,238 $ 5,612
Nonaccrual loans 11,958 8,197 6,302
Restructured loans 104 129 338
Nonperforming loans include some impaired loans and smaller balance homogeneous
loans, such as residential mortgage and consumer loans, that are collectively
evaluated for impairment. Loan impairment is reported when full payment under
the loan terms is not anticipated, which can include loans that are current or
less than 90 days past due.
NOTE 8 - PREMISES AND EQUIPMENT
Year-end premises and equipment were as follows (in thousands):
2003 2002
---- ----
Land and improvements $ 1,567 $ 1,537
Buildings and leasehold improvements 6,573 6,517
Furniture and equipment 7,836 7,500
---------- ----------
15,976 15,554
Less: accumulated depreciation (8,020) (7,082)
---------- ----------
$ 7,956 $ 8,472
========== ==========
- --------------------------------------------------------------------------------
(Continued)
PREMIER FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003, 2002 and 2001
- --------------------------------------------------------------------------------
NOTE 9 - GOODWILL
The balance of goodwill as of December 31, 2003 and 2002 was $15,816,000.
Goodwill is no longer amortized starting in 2002. In 2001, $21,000 of goodwill
amortization was amortized related to discontinued operations. The effect of not
amortizing goodwill is summarized as follows (in thousands except per share
data):
2003 2002 2001
---- ---- ----
(Restated) (Restated)
Reported income (loss) from continuing operations $ (9,617) $ (2,207) $ 1,574
Add back: goodwill amortization, net of tax - - 856
----------- ----------- -----------
Adjusted income (loss) from continuing operations $ (9,617) $ (2,207) $ 2,430
=========== =========== ===========
Basic earnings per share:
Reported income (loss) from continuing operations $ (1.84) $ (0.42) $ 0.30
Add back: goodwill amortization, net of tax - - 0.16
----------- ----------- -----------
Adjusted income (loss) from continuing operations $ (1.84) $ (0.42) $ 0.46
=========== =========== ===========
Diluted earnings per share:
Reported income (loss) from continuing operations $ (1.84) $ (0.42) $ 0.30
Add back: goodwill amortization, net of tax - - 0.16
----------- ----------- -----------
Adjusted income (loss) from continuing operations $ (1.84) $ (0.42) $ 0.46
=========== =========== ===========
NOTE 10 - DEPOSITS
At December 31, 2003, the scheduled maturities of time deposits are as follows
(in thousands):
2004 $ 106,066
2005 41,806
2006 10,908
2007 10,917
2008 and thereafter 3,994
------------
$ 173,691
============
Certain directors and executive officers of the Banks and companies, in which
they have beneficial ownership, were deposit customers of the Banks during 2003
and 2002. The balance of such deposits at December 31, 2003 and 2002 were
approximately $10,958,000 and $13,520,000.
- --------------------------------------------------------------------------------
(Continued)
PREMIER FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003, 2002 and 2001
- --------------------------------------------------------------------------------
NOTE 11 - SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
Securities sold under agreements to repurchase generally mature within one to
ninety days from the transaction date. Information concerning securities sold
under agreements to repurchase is summarized as follows (in thousands):
2003 2002
---- ----
Year-end balance $ - $ 5,255
Average balance during the year $ 4,674 $ 5,255
Average interest rate during the year 1.08% 1.66%
Maximum month-end balance during the year $ 6,255 $ 5,255
Weighted average interest rate at year-end - 1.22%
NOTE 12 - FEDERAL HOME LOAN BANK ADVANCES
The Banks own stock of the Federal Home Loan Bank (FHLB) of Cincinnati, Ohio.
This stock allows the Banks to borrow advances from the FHLB.
All advances are paid either on a monthly basis or at maturity, over remaining
terms of one to nine years, with interest rates ranging from 3.66% to 6.64%.
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, 2003 are as follows (in thousands):
2004 $ 1,082
2005 723
2006 761
2007 801
2008 842
Thereafter 6,496
----------
$ 10,705
==========
- --------------------------------------------------------------------------------
(Continued)
PREMIER FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003, 2002 and 2001
- --------------------------------------------------------------------------------
NOTE 13 - NOTES PAYABLE AND OTHER BORROWED FUNDS
In 2001, the Company entered into a promissory note with a commercial bank which
is secured by Boone County Bank common stock. During 2003 the note was renewed
for a period of one year. The interest rate is prime rate plus 1.00%. Accrued
interest is due quarterly along with quarterly principal payments of $150,000
that began on September 27, 2003. Any remaining unpaid principal is due at
maturity on April 27, 2004. The outstanding balance at December 31, 2003 was
$1.4 million and the interest rate was 5.00%.
The Company previously had a line of credit with a commercial bank of $20
million. During 2002, the line of credit expired, and the Company now has a note
payable with the same commercial bank. The collateral for the note is the common
stock of all of the Company's subsidiary banks except for Boone County Bank and
a second lien on the common stock of Boone County Bank. The interest rate is
prime rate plus 1.00% and the note matures on October 15, 2004. The Company was
in violation of certain financial covenants regarding its non-performing loan
ratio and subsidiary bank capitalization at December 31, 2003. The Company
obtained a waiver for these covenant violations. Accrued interest and principal
payments of $300,000 are due each quarter with the remaining principal and
accrued interest due at maturity. The outstanding balance at December 31, 2003
was $4.8 million and the interest rate was 5.00%.
In addition to the notes with commercial banks described above, during 2002, the
Company also entered into notes payable with the Company's Chairman of the Board
and President. Due to the restriction on the Company to pay its Trust Preferred
distributions as discussed in Note 14, the Company reached an agreement with the
FRB whereby the Company's Chairman of the Board, who is also the Company's
largest shareholder, agreed to loan the Company the amount of the distribution,
$701,000, so that the Company, with the FRB's approval, could make their second
quarter 2002 distribution. A similar agreement was reached with the FRB for the
payment of the distribution due for the third quarter 2002. The Company's
President, who is also a director, agreed to loan the Company the amount of the
distribution, $701,000. Thus, the balance of notes payable at December 31, 2003,
was $1,402,000. Both loans are unsecured at a zero percent interest rate with no
defined maturity date. The loans cannot be repaid without the prior approval of
the FRB.
- --------------------------------------------------------------------------------
(Continued)
PREMIER FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003, 2002 and 2001
- --------------------------------------------------------------------------------
NOTE 14 - GUARANTEED JUNIOR SUBORDINATED INTEREST DEBENTURES
On June 9, 1997, PFBI Capital Trust (Trust), a statutory business trust created
under Delaware law, issued $28,750,000 of 9.750% Preferred Securities
("Preferred Securities" or "Trust Preferred Securities") with a stated value and
liquidation preference of $25 per share. The Trust's obligations under the
Preferred Securities issued are fully and unconditionally guaranteed by the
Company. The proceeds from the sale of the Preferred Securities of the Trust, as
well as the proceeds from the issuance of common securities to the Company, were
utilized by the Trust to invest in $29,639,000 of 9.750% Junior Subordinated
Deferrable Interest Debentures (the "Debentures") of the Company. The
Debentures, which mature on June 30, 2027 are unsecured obligations and rank
subordinate and junior to the right of payment to all senior indebtedness,
liabilities and obligations of the Company. The Debentures represent the sole
assets of the Trust. Distributions on the Preferred Securities are payable at an
annual rate of 9.750% of the stated liquidation amount of $25 per Preferred
Security, payable quarterly. Cash distributions on the Preferred Securities are
made to the extent interest on the Debentures is received by the Trust. In the
event of certain changes or amendments to regulatory requirements or federal tax
rules, the Debentures are redeemable in whole. Otherwise, the Debentures are
generally redeemable by the Company in whole or in part on or after June 30,
2002 at 100% of the liquidation amount. Proceeds from any redemption of the
Debentures would cause a mandatory redemption of the Preferred Securities and
the common securities having an aggregate liquidation amount equal to the
principal amount of the Debentures redeemed. Debt issuance costs of $1,478,000
have been capitalized by the Trust and are being amortized.
Prior to 2003, the Trust was consolidated in the Company's financial statements,
with the Trust Preferred Securities issued by the Trust reported in liabilities
as "guaranteed preferred beneficial interests in Company's debentures" and the
subordinated debentures eliminated in consolidation. New accounting guidance,
FASB Interpretation No. 46, as revised in December 2003, requires that
subsidiaries defined as variable interest entities be consolidated by the
enterprise that will absorb the majority of the entities expected losses if they
occur, receive a majority of the variable interest entities residual returns if
they occur, or both. The Company determined that the Trust meets the definition
of a variable interest entity and that the Company is not the primary
beneficiary of the Trust's activities. Accordingly, as of December 31, 2003, the
Trust is no longer consolidated with the Company. As permitted, prior periods
have been restated to be comparable. The Company does not report the Preferred
Securities issued by the Trust as liabilities, and instead reports as
liabilities the Debentures issued by the Company and held by the Trust, as these
are no longer eliminated in consolidation. The amounts previously reported as
"guaranteed preferred beneficial interests in Company's debenture" in
liabilities have been recaptioned "Guaranteed junior subordinated interest
debentures " and continue to be presented in liabilities on the balance sheet.
The deconsolidation of the Trust increased the Company's balance sheet by
$796,000 at December 31, 2003 and $889,000 at December 31, 2002, the difference
representing the Company's
- --------------------------------------------------------------------------------
(Continued)
PREMIER FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003, 2002 and 2001
- --------------------------------------------------------------------------------
NOTE 14 - GUARANTEED JUNIOR SUBORDINATED INTEREST
DEBENTURES (Continued)
common ownership in the Trust. The deconsolidation has no impact on the
Company's liquidity position since it continues to be obligated to repay the
Debentures held by the Trust and guarantees repayment of the Preferred
Securities issued by the Trust.
A portion of the Preferred Securities issued by the Trust qualify as Tier 1
capital for the Company under the Federal Reserve Board's regulatory framework.
The Federal Reserve Board is currently evaluating whether trust preferred
securities will continue to qualify as Tier 1 capital due to deconsolidation of
the related trust preferred entity. If the Federal Reserve Board disqualifies
the Trust Preferred Securities as Tier 1 capital, the effect of such a change
could have a material impact on the Company's regulatory capital ratios.
As previously disclosed, pursuant to an agreement entered into with the Federal
Reserve Bank (FRB) described in Note 4 the Company is required to request
approval for the payment of distributions due on the Debentures and Trust
Preferred Securities. As part of a Debt Reduction and Profitability plan
presented on January 6, 2003, the Company requested and received approval from
the FRB to redeem $3,000,000 of the $28,750,000 outstanding Debentures and Trust
Preferred Securities. Thus, on February 24, 2003, the Company announced its
plans to redeem $3,000,000 (120,000 shares) of the 9.75% Trust Preferred
Securities as of March 31, 2003. The FRB denied the Company's requests to make
further distributions on the remaining Debentures and Trust Preferred
Securities.
Premier exercised its right to defer the payment of interest on the 9.75% Trust
Preferred Securities for the quarter ending December 31, 2002 and all subsequent
quarters through March 31, 2004, and for an indefinite period, which can be no
longer than 20 consecutive quarterly periods. These and any future deferred
distributions accrue interest at an annual rate of 9.75% which will be paid when
the deferred distributions are ultimately paid. Management of Premier does not
expect to resume payments on the Debentures or the Trust Preferred Securities
until the Federal Reserve Bank of Cleveland determines that Premier has achieved
adequate and sustained levels of profitability to support such payments and
approves such payments.
- --------------------------------------------------------------------------------
(Continued)
PREMIER FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003, 2002 and 2001
- --------------------------------------------------------------------------------
NOTE 15 - INCOME TAXES
The components of the provision (benefit) for income taxes are as follows (in
thousands):
2003 2002 2001
---- ---- ----
(Restated) (Restated)
Current $ (3,589) $ (193) $ 4,269
Deferred (1,693) (1,329) (1,284)
-------- ------- --------
$ (5,282) $ 1,522) $ 2,985
======== ======= ========
The Company's deferred tax assets and liabilities at December 31 are shown below
(in thousands). No valuation allowance for the realization of deferred tax
assets is considered necessary.
2003 2002
---- ----
(Restated)
Deferred tax assets
Allowance for loan losses $ 4,862 $ 4,495
Net operating loss carryforward 1,486 -
AMT credit carryforward 469 -
Write-downs of other real estate owned 126 432
Other 95 240
--------- ---------
Total deferred tax assets 7,038 5,167
Deferred tax liabilities
Depreciation $ 232 $ 274
Federal Home Loan Bank dividends 201 418
Unrealized gain on investment securities 284 726
Amortization of intangibles 979 638
Other 145 49
--------- ---------
Total deferred tax liabilities 1,841 2,105
--------- ---------
Net deferred tax asset, included in other assets $ 5,197 $ 3,062
========= =========
- --------------------------------------------------------------------------------
(Continued)
PREMIER FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003, 2002 and 2001
- --------------------------------------------------------------------------------
NOTE 15 - INCOME TAXES (Continued)
An analysis of the differences between the effective tax rates and the
statutory U.S. federal income tax rate is as follows (in thousands):
2003 2002 2001
---- ---- ----
(Restated) (Restated)
U. S. federal income tax rate $ (5,066) (34.0)% $ (1,268) (34.0)% $ 1,549 34.0%
Changes from the statutory rate
Tax-exempt investment income (221) (1.5) (304) (8.2) (382) (8.4)
Non-deductible interest expense
related to carrying tax-exempt
investments 11 0.1 38 1.0 58 1.3
Tax credits (71) (0.5) (71) (1.9) (71) (1.6)
Goodwill amortization and
disposal - - - - 1,754 38.5
Other 65 0.4 83 2.3 77 1.7
--------- ----- -------- ----- --------- ----
$ (5,282) (35.5)% $ (1,522) (40.8)% $ 2,985 65.5%
========== ===== ======== ====== ========= ====
NOTE 16 - EMPLOYEE BENEFIT PLANS
The Company has qualified profit sharing plans that cover substantially all
employees. Contributions to the plans consist of a Company match and additional
amounts at the discretion of the Company's Board of Directors. Total
contributions to the plans were $197,000, $177,000 and $264,000 in 2003, 2002
and 2001.
The Company also maintains Employee Stock Ownership incentive Plans (the Plans)
whereby certain employees of the Company are eligible to receive incentive stock
options. The Plans are accounted for in accordance with Accounting Principles
Board Opinion (APB) No. 25, "Accounting for Stock Issued to Employees", and
related interpretations. Pursuant to the Plans, a maximum of 600,000 shares of
the Company's common stock may be issued through the exercise of these incentive
stock options. The option price is the fair market value of the Company's shares
at the date of the grant. The options are exercisable ten years from the date of
grant.
- --------------------------------------------------------------------------------
(Continued)
PREMIER FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003, 2002 and 2001
- --------------------------------------------------------------------------------
NOTE 16 - EMPLOYEE BENEFIT PLANS (Continued)
A summary of the Company's stock option activity is as follows:
---------2003--------- ---------2002--------- ----------2001----------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Options Price Options Price Options Price
Outstanding at beginning of year 35,000 $ 14.03 62,000 $ 13.71 62,000 $ 13.71
Grants 28,650 7.96 - - - -
Forfeitures (8,200) 11.08 (27,000) 13.30 - -
--------- --------- --------
Outstanding at year end 55,450 $ 11.33 35,000 $ 14.03 62,000 $ 13.71
========= ========= ========
Exercisable at year end 32,000 $ 13.80 35,000 $ 14.03 62,000 $ 13.71
Weighted average remaining life 5.7 4.4 5.3
Weighted average fair value of
options granted during the year $3.30 - -
Exercise prices for options outstanding at December 31, 2003, ranged from $7.96
to $16.50 while exercise prices for those exercisable at December 31, 2003,
ranged from $12.38 to $16.50.
NOTE 17 - RELATED PARTY TRANSACTIONS
During 2003, 2002, and 2001, the Company paid approximately $272,000, $373,000,
and $377,000 for printing, supplies, furniture, and equipment to a company
affiliated by common ownership. The Company also paid this affiliate
approximately $892,000, $1,200,000, and $1,005,000 in 2003, 2002, and 2001 to
permit the Company's employees to participate in its employee medical benefit
plan.
During 2003 and 2002, the Company paid approximately $51,000 and $17,000 to
lease its headquarters facility at 2883 Fifth Avenue, Huntington, West Virginia
from River City Properties, LLC, an entity 28.6% owned by Chairman of the Board
of Directors Marshall T. Reynolds and Director Charles R. Hooten, Jr.
- --------------------------------------------------------------------------------
(Continued)
PREMIER FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003, 2002 and 2001
- --------------------------------------------------------------------------------
NOTE 18 - EARNINGS PER SHARE
A reconciliation of the numerators and denominators of the earnings per common
share and earnings per common share assuming dilution computations for 2003,
2002 and 2001 is presented below (in thousands, except per share data):
2003 2002 2001
---- ---- ----
(Restated) (Restated)
Basic earnings per share from continuing operations
Income (loss) available to common stockholders $ (9,617) $ (2,207) $ 1,574
Weighted average common shares outstanding 5,232 5,232 5,232
---------- --------- ---------
Earnings (loss) per share $ (1.84) $ (0.42) $ 0.30
=========== ========= =========
Diluted earnings per share from continuing operations
Income (loss) available to common stockholders $ (9,617) $ (2,207) $ 1,574
Weighted average common shares outstanding 5,232 5,232 5,232
Add dilutive effects of assumed exercise
of stock options - - -
---------- --------- ---------
Weighted average common and dilutive
potential common shares outstanding 5,232 5,232 5,232
---------- --------- ---------
Earnings (loss) per share assuming dilution $ (1.84) $ (0.42) $ 0.30
=========== ========= =========
Basic earnings per share
Income (loss) available to common stockholders $ (9,697) $ (3,337) $ 1,194
Weighted average common shares outstanding 5,232 5,232 5,232
---------- --------- ---------
Earnings per share $ (1.85) $ (0.64) $ 0.23
=========== ========= =========
Diluted earnings per share
Income (loss) available to common stockholders $ (9,697) $ (3,337) $ 1,194
Weighted average common shares outstanding 5,232 5,232 5,232
Add dilutive effects of assumed exercise
of stock options - - -
---------- --------- ---------
Weighted average common and dilutive
potential common shares outstanding 5,232 5,232 5,232
---------- --------- ---------
Earnings per share assuming dilution $ (1.85) $ (0.64) $ 0.23
=========== ========= =========
Stock options for 55,450 shares of common stock for 2003, 35,000 for 2002, and
62,000 shares for 2001 were not included in the computation of earnings per
share assuming dilution because their impact was anti-dilutive.
- --------------------------------------------------------------------------------
(Continued)
PREMIER FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003, 2002 and 2001
- --------------------------------------------------------------------------------
NOTE 19 - DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair values of the Company's financial instruments at year-end are as
follows (in thousands):
--------------2003------------- -------------2002--------------
Carrying Fair Carrying Fair
Amount Value Amount Value
(Restated) (Restated)
Financial assets
Cash and due from banks $ 16,422 $ 16,422 $ 14,334 $ 14,334
Federal funds sold 17,051 17,051 24,747 24,747
Securities available for sale 147,646 147,646 144,698 144,698
Loans, net 317,494 317,978 363,401 364,183
Federal Home Loan Bank and
Federal Reserve Bank stock 2,490 2,490 3,817 3,817
Interest receivable 3,448 3,448 5,264 5,264
Financial liabilities
Deposits $ (455,474) $ (457,415) $ (477,724) $ (487,855)
Securities sold under agreements
to repurchase - - (5,255) (5,255)
Federal Home Loan Bank advances (10,705) (11,833) (18,243) (19,414)
Other borrowed funds (6,200) (6,200) (7,700) (7,700)
Notes payable (1,402) (1,335) (1,402) (1,345)
Guaranteed junior subordinated
interest debentures (26,546) (27,130) (29,639) (26,203)
Interest payable (3,902) (3,902) (1,555) (1,555)
Carrying amount is the estimated fair value for cash and cash equivalents,
Federal Home Loan Bank and Federal Reserve Bank stock, accrued interest
receivable and payable, demand deposits, short-term debt, and variable rate
loans or deposits that reprice frequently and fully. Security fair values are
based on market prices or dealer quotes, and if no such information is
available, on the rate and term of the security and information about the
issuer. For fixed rate loans or deposits and for variable rate loans or deposits
with infrequent repricing or repricing limits, fair value is based on discounted
cash flows using current market rates applied to the estimated life and credit
risk. Fair values for impaired loans are estimated using discounted cash flow
analysis or underlying collateral values. Fair value of debt is based on current
rates for similar financing. The fair value of commitments to extend credit and
standby letters of credit is not considered material.
- --------------------------------------------------------------------------------
(Continued)
PREMIER FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003, 2002 and 2001
- --------------------------------------------------------------------------------
NOTE 20 - FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
The Banks are parties to financial instruments with off-balance sheet risk in
the normal course of business to meet the financing needs of their customers.
These financial instruments include standby letters of credit and commitments to
extend credit in the form of unused lines of credit. The Banks use the same
credit policies in making commitments and conditional obligations as they do for
on-balance sheet instruments.
At December 31, 2003 and 2002, the Banks had the following financial instruments
whose approximate contract amounts represent credit risk (in thousands):
2003 2002
---- ----
Standby letters of credit $ 671 $ 639
Commitments to extend credit:
Fixed $ 4,988 $ 7,122
Variable 13,284 14,882
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 3.5% to 18.0%. Commitments generally have fixed
expiration dates or other termination clauses and may require payment of a fee.
The Banks evaluate each customer's creditworthiness on a case-by-case basis.
Since some of the commitments are expected to expire without being drawn upon,
the total commitment amounts do not necessarily represent future cash
requirements. Collateral held varies but may include accounts receivable,
inventory, property and equipment, and income producing properties.
- --------------------------------------------------------------------------------
(Continued)
PREMIER FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003, 2002 and 2001
- --------------------------------------------------------------------------------
NOTE 21 - LEGAL PROCEEDINGS
Legal proceedings involving the Company and its subsidiaries periodically arise
in the ordinary course of business, including claims by debtors and their
related interests against the Company's subsidiaries following initial
collection proceedings. These legal proceedings sometimes can involve claims for
substantial damages. At December 31, 2003, management is unaware of any legal
proceedings for which the expected outcome would have a material adverse effect
upon the consolidated financial statements of the Company.
NOTE 22 - STOCKHOLDERS' EQUITY
The Company's principal source of funds for dividend payments is dividends
received from the subsidiary Banks. Banking regulations limit the amount of
dividends that may be paid without prior approval of regulatory agencies. Under
these regulations, the amount of dividends that may be paid in any calendar year
is limited to the current year's net profits, as defined, combined with the
retained net profits of the preceding two years, subject to the capital
requirements and additional restrictions as discussed below. During 2004, the
Banks could, without prior approval, declare dividends of approximately $1.4
million plus any 2004 net profits retained to the date of the dividend
declaration.
The Company and the subsidiary Banks are subject to various regulatory capital
requirements administered by the federal banking agencies. Failure to meet
minimum capital requirements can initiate certain mandatory and possibly
additional discretionary actions by regulators that, if undertaken, could have a
direct material effect on the Company's financial statements. Under capital
adequacy guidelines and the regulatory framework for prompt corrective action,
the Company and the Banks must meet specific guidelines that involve
quantitative measures of their assets, liabilities, and certain off-balance
sheet items as calculated under regulatory accounting practices.
These quantitative measures established by regulation to ensure capital adequacy
require the Company and Banks to maintain minimum amounts and ratios (set forth
in the following table) of Total and Tier I capital (as defined in the
regulations) to risk-weighted assets (as defined), and of Tier I capital (as
defined) to average assets (as defined). Management believes, as of December 31,
2003, the Company and the Banks meet all quantitative capital adequacy
requirements to which they are subject.
- --------------------------------------------------------------------------------
(Continued)
PREMIER FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003, 2002 and 2001
- --------------------------------------------------------------------------------
NOTE 22 - STOCKHOLDERS' EQUITY (Continued)
The capital amounts and classifications are also subject to qualitative
judgments by the regulators. As a result of these qualitative judgments, the
Company and four of the Company's subsidiaries have entered into agreements with
the applicable regulatory authorities which provide for additional restrictions
on their respective capital levels and the payment of dividends. See Note 3 for
further discussion of the discontinued operation of Citizens Bank. The Company
entered into an agreement with the Federal Reserve Bank (FRB), as discussed in
Note 4, restricting the Company from declaring or paying dividends without prior
approval from the FRB. An additional provision of this agreement requires prior
approval from the FRB before the Company increases its borrowings or incurs any
debt. This agreement is in effect until terminated by the FRB.
Citizens Deposit Bank (Citizens Deposit) entered into a Written Agreement with
the FRB on September 29, 2000 restricting Citizens from declaring or paying
dividends without prior approval. This agreement is in effect until terminated
by the FRB. Citizens Deposit's Tier I capital to average assets was 12.3% at
December 31, 2003.
Bank of Germantown (Germantown) entered into an agreement with the Kentucky
Department of Financial Institutions (KDFI) and the Federal Deposit Insurance
Corporation (FDIC) on June 13, 2000 restricting Germantown from declaring or
paying dividends, without prior approval, if its Tier I capital to average
assets falls below 8%. This agreement is in effect until terminated by the KDFI
and FDIC. Germantown's Tier I capital to average assets was 8.6% at December 31,
2003.
Effective January 1, 2004, Farmers Deposit Bank (Farmers Deposit) was issued a
C&D order by the FDIC and KDFI restricting Farmers Deposit from declaring or
paying dividends, without prior approval, if its Tier I capital to average
assets falls below 8.00%. The order also required Farmers Deposit to maintain a
minimum 5.0% Tier I capital to average assets ratio and submit a written capital
restoration plan to increase the ratio to 8.0% by December 31, 2004. This order
is in effect until terminated by the KDFI and FDIC. Farmers Deposit's Tier I
capital to average assets was 5.1% at December 31, 2003.
As of December 31, 2003, the most recent notification from the Federal Reserve
Bank categorized the Company and its subsidiary banks as well capitalized under
the regulatory framework for prompt corrective action with the exception of
Farmers Deposit, which meets the criteria to be adequately capitalized. To be
categorized as well capitalized, the Company must maintain minimum Total
risk-based, Tier I risk-based and Tier I leverage ratios as set forth in the
following table. There are no conditions or events since that notification that
management believes have changed the Company's category.
- --------------------------------------------------------------------------------
(Continued)
PREMIER FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003, 2002 and 2001
- --------------------------------------------------------------------------------
NOTE 22 - STOCKHOLDERS' EQUITY (Continued)
The Company's and the four largest subsidiary Banks' capital amounts and ratios
as of December 31, 2003 and 2002 are presented in the table below (in
thousands):
To Be Well Capitalized
For Capital Under Prompt Corrective
Actual Adequacy Purposes Action Provisions
2003 Amount Ratio Amount Ratio Amount Ratio
----
Total Capital (to Risk-Weighted Assets):
Consolidated $ 55,107 14.8% $ 29,719 8% $ 37,149 10%
Boone County Bank 14,576 19.0 6,153 8 7,691 10
Farmers Deposit Bank 6,423 9.4 5,458 8 6,822 10
Citizens Deposit Bank 11,622 21.2 4,392 8 5,491 10
First Central Bank 7,653 13.9 4,410 8 5,513 10
Tier I Capital (to Risk-Weighted Assets):
Consolidated $ 39,520 10.6% $ 14,860 4% $ 22,289 6%
Boone County Bank 13,680 17.8 3,076 4 4,614 6
Farmers Deposit Bank 5,477 8.0 2,729 4 4,093 6
Citizens Deposit Bank 10,914 19.9 2,196 4 3,294 6
First Central Bank 6,975 12.7 2,205 4 3,308 6
Tier I Capital (to Average Assets):
Consolidated $ 39,520 6.4% $ 24,638 4% $ 30,797 5%
Boone County Bank 13,680 9.0 6,106 4 7,632 5
Farmers Deposit Bank 5,477 5.1 4,289 4 5,361 5
Citizens Deposit Bank 10,914 12.3 3,560 4 4,450 5
First Central Bank 6,975 8.4 3,304 4 4,130 5
2002
Total Capital (to Risk-Weighted Assets):
Consolidated (restated) $ 72,724 16.9% $ 34,484 8% $ 43,105 10%
Boone County Bank 15,635 17.6 7,112 8 8,890 10
Farmers Deposit Bank (restated) 13,592 13.3 8,170 8 10,213 10
Citizens Deposit Bank 10,766 16.7 5,167 8 6,458 10
First Central Bank 7,436 14.3 4,162 8 5,202 10
Tier I Capital (to Risk-Weighted Assets):
Consolidated (restated) $ 56,697 13.2% $ 17,242 4% $ 25,863 6%
Boone County Bank 14,556 16.4 3,556 4 5,334 6
Farmers Deposit Bank (restated) 12,310 12.0 4,085 4 6,128 6
Citizens Deposit Bank 9,932 15.4 2,583 4 3,875 6
First Central Bank 6,785 13.0 2,081 4 3,121 6
Tier I Capital (to Average Assets):
Consolidated (restated) $ 56,697 8.5% $ 26,668 4% $ 33,335 5%
Boone County Bank 14,556 9.5 6,102 4 7,628 5
Farmers Deposit Bank (restated) 12,310 8.7 5,647 4 7,059 5
Citizens Deposit Bank 9,932 10.9 3,662 4 4,577 5
First Central Bank 6,785 8.0 3,390 4 4,238 5
- --------------------------------------------------------------------------------
(Continued)
PREMIER FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003, 2002 and 2001
- --------------------------------------------------------------------------------
NOTE 23 - PARENT COMPANY FINANCIAL STATEMENTS
Condensed Balance Sheets
December 31
(In Thousands)
2003 2002
---- ----
(Restated)
ASSETS
Cash $ 3,568 $ 7,961
Investment in subsidiaries of continuing operations 70,248 77,987
Investment in subsidiary of discontinued operations 7,767 7,880
Securities available for sale - -
Premises and equipment 956 1,049
Real estate acquired through foreclosure - 225
Other assets 1,097 1,241
--------- ---------
Total assets $ 83,636 $ 96,343
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Other liabilities $ 3,948 $ 1,478
Notes payable 1,402 1,402
Subordinated debentures issued to trust 26,546 29,639
Other borrowed funds 6,200 7,700
--------- ---------
Total liabilities 38,096 40,219
Stockholders' equity
Preferred stock - -
Common stock 1,103 1,103
Surplus 43,445 43,445
Retained earnings 311 10,008
Accumulated other comprehensive income 681 1,568
---------- ---------
Total stockholders' equity 45,540 56,124
---------- ---------
Total liabilities and stockholders' equity $ 83,636 $ 96,343
========== =========
- --------------------------------------------------------------------------------
(Continued)
PREMIER FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003, 2002 and 2001
- --------------------------------------------------------------------------------
NOTE 23 - PARENT COMPANY FINANCIAL STATEMENTS (Continued)
Condensed Statements of Operations
Years Ended December 31
(In Thousands)
2003 2002 2001
---- ---- ----
(Restated) (Restated)
Income
Dividends from continuing subsidiaries $ 7,853 $ 8,025 $ 10,038
Interest and dividend income 14 - 58
Other income 472 5 70
-------- -------- --------
Total income 8,339 8,030 10,166
Expenses
Interest expense 3,121 3,313 4,137
Salaries and employee benefits 597 552 914
Other expenses 969 1,226 852
-------- -------- --------
Total expenses 4,687 5,091 5,903
Income (loss) from continuing operations
before income taxes and equity in
undistributed income of subsidiaries 3,652 2,939 4,263
Income tax expense (benefit) (1,631) (1,729) (1,976)
-------- -------- --------
Income (loss) from continuing operations
before equity in undistributed income
of subsidiaries 5,283 4,668 6,239
Equity in undistributed income of
subsidiaries continuing in operation (14,900) (6,875) (4,665)
-------- -------- --------
Net income (loss) from continuing operations (9,617) (2,207) 1,574
Net (loss) from discontinued operations (80) (1,130) (380)
-------- -------- --------
Net (loss) income $ (9,697) $ (3,337) $ 1,194
======== ======== ========
- --------------------------------------------------------------------------------
(Continued)
PREMIER FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003, 2002 and 2001
- --------------------------------------------------------------------------------
NOTE 23 - PARENT COMPANY FINANCIAL STATEMENTS (Continued)
Condensed Statements of Cash Flows
Years Ended December 31
(In Thousands)
2003 2002 2001
---- ---- ----
(Restated) (Restated)
Cash flows from operating activities
Net income (loss) from continuing operations $ (9,617) $ (2,207) $ 1,574
Adjustments to reconcile net (loss) income to
net cash from operating activities
Depreciation 71 83 83
Write-down of other real estate owned - 155 -
Securities (gains) losses, net - 1 (60)
(Gains) losses from sales of assets 21 - -
Equity in undistributed income of subsidiaries
continuing in operation 14,900 6,875 4,665
Dividend from discontinued operation - - 500
Change in other assets 144 106 139
Change in other liabilities 2,470 1,151 (999)
-------- -------- --------
Net cash from operating activities 7,989 6,164 5,902
Cash flows from investing activities
Capital contributed to subsidiaries
continuing in operation (8,108) (128) (880)
Proceeds from liquidation of subsidiary - 5,160 -
Proceeds from sale of securities - 4 2,060
Purchase of premises and equipment (52) (284)
Proceeds from sales of assets 221 - 96
-------- -------- --------
Net cash from investing activities (7,882) 4,984 992
Cash flows from financing activities
Proceeds from notes payable - 1,402 -
Early redemption of subordinated note (3,000) - -
Payments of other borrowed funds (1,500) (5,300) (7,000)
-------- -------- --------
Net cash from financing activities (4,500) (3,898) (7,000)
Net change in cash and cash equivalents (4,393) 7,250 (106)
Cash and cash equivalents at beginning of year 7,961 711 817
-------- -------- --------
Cash and cash equivalents at end of year $ 3,568 $ 7,961 $ 711
======== ======== ========
- --------------------------------------------------------------------------------
(Continued)
PREMIER FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003, 2002 and 2001
- --------------------------------------------------------------------------------
NOTE 23 - PARENT COMPANY FINANCIAL STATEMENTS (Continued)
The ability of the Company to fund its normal operating expenses, debt service
requirements and subsidiary capital needs is dependent on its ability to raise
cash through dividends from subsidiaries or sale of assets. As further discussed
in Note 4, the Company's ability to obtain cash dividends from four of its
subsidiary banks is limited by formal regulatory agreement. Also as further
described in Note 4, as a result of the Order issued to the Farmers Deposit Bank
subsidiary, the Company has submitted a written capital restoration plan to meet
certain increasing regulatory capital ratio thresholds by contributing
additional capital to the bank as needed. Management plans for funding the
additional capital contributions and other cash requirements consider projected
dividends received in the normal course of business, special return of capital
dividends that may require regulatory approval, and the cash expected to be
received from sale of the operating subsidiary discussed in Note 3. This sale,
which is subject to regulatory approval, is anticipated to close in mid-year,
2004. Should this sale not occur as planned, management intends to seek another
buyer.
NOTE 24 - QUARTERLY FINANCIAL DATA (UNAUDITED)
Earnings (Loss) per Share
From Continuing Operations on Continuing Operations
Interest Net Interest Net --------------------------
Income Income Income Basic Fully Diluted
----------- ---------- ---------- ------- -------------
2003
First Quarter (1) $ 8,606 $ 5,101 $ (365) $ (0.07) $ (0.07)
Second Quarter (1) 8,178 4,930 (6,779) (1.30) (1.30)
Third Quarter (1) 7,665 4,671 (1,877) (0.36) (0.36)
Fourth Quarter 7,280 4,480 (596) (0.11) (0.11)
2002
First Quarter (1) $ 9,821 $ 5,049 $ 481 $ 0.09 $ 0.09
Second Quarter (1) 9,773 5,295 (1,019) (0.19) (0.19)
Third Quarter (1) 9,486 5,235 (1,032) (0.20) (0.20)
Fourth Quarter (1) 9,223 5,259 (637) (0.12) (0.12)
(1) Amounts have been restated for the effect of items discussed in Note 2.
In 2003, interest income, net interest income and net income were all negatively
impacted in all four quarters by the financial results of Farmers Deposit Bank.
This included lower interest income and sharply higher provisions for loan
losses due to loans charged-off and lower interest income from loans placed on
non-accrual status.
In 2002, net income as restated was impacted in the second, third and
fourth quarters due to higher provisions for loan losses related to loans at
Farmers Deposit Bank and Citizen's Deposit Bank. Interest income in the third
and fourth quarters was negatively impacted due to a declining interest rate
environment. These declines did not carry through to net interest income as they
were offset by similar declines in interest expense.
- --------------------------------------------------------------------------------
PART III
Item 9. Changes In and Disagreements with Accountants on Accounting and
- ------------------------------------------------------------------------
Financial Disclosure
--------------------
There have been no changes in or disagreements with accountants on
accounting or financial disclosure matters.
Item 9A. Controls and Procedures
Premier management, including the Chief Executive Officer and Chief
Financial Officer, has conducted an evaluation of the effectiveness of
disclosure controls and procedures pursuant to Exchange Act Rule 13a-15c as of
the end of the period covered by this annual report. Based on that evaluation,
the Chief Executive Officer and Chief Financial Officer concluded that the
disclosure controls and procedures are effective in ensuring that all material
information required to be filed in this annual report has been made known to
them in a timely fashion.
"Internal controls" are procedures, which are designed with the
objective of providing reasonable assurance that (1) transactions are properly
authorized; (2) assets are safeguarded against unauthorized or improper use; and
(3) transactions are properly recorded and reported, all so as to permit the
preparation of reports and financial statements in conformity with generally
accepted accounting principles. Premier management uses the financial reports of
its subsidiaries to make decisions about the allocation of the Company's
resources, to implement strategies to improve the Company's performance, and to
prepare the consolidated financial statements of the Company for its
shareholders and regulatory authorities. However, a control system, no matter
how well conceived and operated, can provide only reasonable, not absolute,
assurance that the objectives of the control system are met. Further, the design
of a control system must reflect the fact that there are resource constraints,
and the benefits of controls must be considered relative to their cost. Because
of the inherent limitations in all control systems, no evaluation of controls
can provide absolute assurance that all control issues and instances of fraud,
if any, within a company have been detected. These inherent limitations include
the realities that judgments in decision-making can be faulty, and that
breakdowns can occur because of simple error or mistake. The design of any
system of controls is also based, in part, upon certain assumptions about the
likelihood of future events, and there can be no assurance that any design will
succeed in achieving its stated goals under all potential future conditions.
Over time, a control may become inadequate because of changes in conditions, or
the degree of compliance with the policies or procedures may deteriorate.
Because of the inherent limitations in a cost-effective control system,
misstatements due to error or fraud may occur and not be detected. Finally,
controls can be circumvented by the individual acts of some persons, by
collusion of two or more people, or by management override of the control.
It is this "management override of controls" that led to the significant
charge-offs and provisions for loan losses at Farmers Deposit in 2003 and the
financial statement restatement for years 2002 and 2001. Premier's policies and
procedures related to the evaluation of a borrower's creditworthiness prior to
making or renewing a loan, the reporting of new loan activity and delinquent
loans to the bank's board of directors, and the guidelines for assessing the
credit risk of existing loans were overridden by local management. The
systematic disregard for these controls was sophisticated enough to avoid
detection during routine reviews of that bank's records as directed by the
Company and the regulatory authorities of the banking industry.
Premier management is in the process of implementing corrective action
to remedy the deficiencies identified at Farmers Deposit. In addition to the
steps identified in the cease and desist order of the FDIC and KDFI, Premier has
* hired a new President and CEO of Farmers Deposit who has experience
restoring troubled banks to safe and sound banking practices,
* hired a Chief Financial Officer for the bank, a new position, to
segregate the lending and accounting functions of the bank,
* formed a collections department to pursue delinquent borrowers and,
when possible, to collect on loans previously charged-off, and
* begun using system generated reports to the bank's board of directors
rather than manually generated reports whenever possible.
Premier management is also in the process of implementing additional
processes and procedures throughout its network of banking subsidiaries in an
effort to minimize the likelihood that improper management overrides go
undetected. These include:
* hiring a credit analyst at the holding company level to review all
loan requests over $400,000,
* forming loan approval committees made up of the bank presidents and
the President and Director of Risk Management of Premier to review
all loan requests over $750,000,
* incorporating "whistleblower" provisions into the employee code of
ethics and conduct,
* dispatching members of the Audit Committee of the Company's board of
directors, at their request, to conduct employee meetings emphasizing
the importance of each employee's responsibilities in maintaining the
financial integrity of the Company's books and records, that
overriding of internal controls will not be tolerated, and the
employees' obligation to report improprieties to senior management or
the Audit Committee in accordance with the employee code of ethics,
* hiring an internal auditor at the holding company level to, among
other duties assigned, conduct various tests for data integrity and
compliance with internal control procedures, and
* evaluating the internal audit program to incorporate tests designed
to specifically detect the abuses uncovered during the Farmers
Deposit investigation.
Other than the steps identified above, which are in various stages of
implementation, there were no changes in internal controls over financial
reporting during the fourth fiscal quarter that have materially affected or are
reasonably likely to materially affect Premier's internal controls over
financial reporting.
Item 10, 11, 12, 13 and 14. Directors and Executive Officers of the Registrant;
- ----------------------------------------------------------------------------
Executive Compensation; Security Ownership of Certain Beneficial Owners
-----------------------------------------------------------------------
and Management; Certain Relationships and Related Transactions; and
-------------------------------------------------------------------
Principal Accountant Fees and Services
------------------------------------------------------------------
The information required by these Items is omitted because the
Company is filing a definitive proxy statement pursuant to Regulation 14A
not later than 120 days after the end of the fiscal year covered by this report
which includes the required information. The required information contained in
the Company's proxy statement is incorporated herein by reference.
PART IV
Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K
- -------------------------------------------------------------------------
(a) The following documents are filed as part of this report:
1. 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.
2. List of Exhibits:
The following is a list of exhibits required by Item 601 of
Regulation S-K and by paragraph (c) of this Item 14.
Exhibit
Number Description of Document
------- -----------------------
2.1 Stock Purchase Agreement dated February 13, 2004 among Citizens Bank (Kentucky), Inc.,
Premier Financial Bancorp, Inc. and Farmers Capital Bank Corporation is incorporated herein
by reference to Form 8-K filed by Registrant on February 19, 2004.
3.1 Form of Articles of Incorporation of registrant (included as Exhibit 3.1 to
registrant's Registration Statement on Form S-1, Registration No. 333-1702, filed on February
28, 1996 with the Commission and incorporated herein by reference).
3.2 Form of Articles of Amendment to Articles of Incorporation effective March 15, 1996 re: amendment
to Article IV (included as Exhibit 3.2 to registrant's Amendment No. 1 to Registration
Statement on Form S-1, Registration No. 333-1702, filed on March 25, 1996 with the Commission
and incorporated herein by reference).
3.3 Bylaws of registrant (included as Exhibit 3.2 to registrant's Registration Statement on Form
S-1, Registration No. 333-1702, filed on February 28, 1996 with the Commission and incorporated
herein by reference).
<page>
4.1 Form of Junior Subordinated Indenture dated as of June 6, 1997 between Registrant and Bankers
Trust Company, as Trustee, with respect to 9.75% Junior Subordinated Deferrable Interest
Debentures due June 30, 2027 (incorporated by reference to Exhibit 4.1 to the Registration
Statement on Form S-1 of Registrant filed May 28, 1997 with the Commission (Registration No.
333-27943)).
4.2 Form of 9.75% Junior Subordinated Deferrable Interest Debenture Certificate (incorporated
by reference to Exhibit 4.2 to the Registration Statement on Form S-1 of Registrant filed May
28, 1997 with the Commission (Registration No. 333-27943)).
4.3 Form of Amended and Restated Trust Agreement dated as of June 6, 1997 among Registrant,
as Depositor, Bankers Trust Company, as Property Trustee, and Bankers Trust (Delaware), as
Delaware Trustee (incorporated by reference to Exhibit 4.4 to the Registration Statement
on Form S-1 of Registrant filed May 28, 1997 with the Commission (Registration No. 333-27943)).
4.4 Form of Guarantee Agreement dated as of June 6, 1997 between Registrant and Bankers Trust
Company (incorporated by reference to Exhibit 4.6 to the Registration Statement on Form S-1 of
Registrant filed May 28, 1997 with the Commission (Registration No. 333-27943)).
10.1 Deferred Compensation Agreement dated December 17, 1992, between Georgetown Bank & Trust
Company and Gardner E. Daniel (included as Exhibit 10.5 to registrant's Registration
Statement on Form S-1, Registration No. 333-1702, filed on February 28, 1996 with the
Commission and incorporated herein by reference).
10.2 Premier Financial Bancorp, Inc. 1996 Employee Stock Ownership Incentive Plan (included as
Exhibit 10.6 to registrant's Registration Statement on Form S-1, Registration No. 333-1702,
filed on February 28, 1996 with the Commission and incorporated herein by reference).
10.3 Premier Financial Bancorp, Inc.'s 2002 Employee Stock Ownership Incentive Plan, filed as Annex A to
definitive proxy statement dated May 17, 2002, filed on April 30, 2002 with the Commission, is
incorporated herein by reference.
10.4 Premier Financial Bancorp, Inc. written agreement with the Federal Reserve Bank of Cleveland
dated January 29, 2003.
14.1 Premier Financial Bancorp, Inc. Code of Ethics for the Chief Executive Officer, Chief Financial
Officer and Chief Accounting Officer.
14.2 Premier Financial Bancorp, Inc. Code of Business Conduct and Ethics.
21 Subsidiaries of registrant
31.1 Principal Executive Officer Certification Pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002 - Robert W. Walker
31.2 Principal Executive Officer Certification Pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002 - Brien M. Chase
32 Robert W. Walker and Brien M. Chase Certification Pursuant to 18 U.S.C. Section 1350 as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act 2002.
(b) Reports on Form 8-K
On November 10, 2003, an 8-K was filed in connection with Premier's
press release regarding its financial results for the nine months and quarter
ended September 30, 2003.
On December 15, 2003, an 8-K was filed in connection with Premier's
press release announcing that it was deferring the quarterly payment on its
Trust Preferred Securities scheduled for December 31, 2003.
On December 24, 2003, an 8-K was filed in connection with Premier's
press release announcing that Farmers Deposit Bank, Eminence, Kentucky, a wholly
owned subsidiary of Premier, had consented to the issuance of a cease and desist
order by the FDIC.
On February 19, 2004, an 8-K was filed in connection with Premier's
press release announcing that it had executed a definitive stock purchase
agreement providing for the sale of its wholly owned subsidiary Citizens Bank
(Kentucky), Inc. to Farmers Capital Bank Corporation.
On March 10, 2004, an 8-K was filed in connection with Premier's press
release announcing that it was deferring the quarterly payment on its Trust
Preferred Securities scheduled for March 31, 2004.
On March 31, 2004, an 8-K was filed in connection with Premier's press
release announcing that it had filed a notice with the SEC on Form 12b-25 to
extend the period in which it intended to file its Annual Report on Form 10-K.
SIGNATURES
Pursuant to the requirements of the Section 13 or 15(d) of the Securities
Exchange Act of 1934, registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
PREMIER FINANCIAL BANCORP, INC.
By: /s/ Robert W. Walker, President
-------------------------------
Robert W. Walker, President
Date: April 14, 2004
-------------------------------
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 April 14, 2004
- ------------------------ ----------------
Robert W. Walker
/s/ Brien M. Chase Principal Financial and April 14, 2004
- ------------------------ Accounting Officer ----------------
Brien M. Chase
/s/ Toney K. Adkins Director March 17, 2004
- ------------------------ ----------------
Toney K. Adkins
/s/ Hosmer A. Brown, III Director March 17, 2004
- ------------------------ ----------------
Hosmer A. Brown, III
/s/ Edsel Burns Director March 17, 2004
- ------------------------ ----------------
Edsel Burns
/s/ Charles R. Hooten, Jr. Director March 17, 2004
- ------------------------ ----------------
Charles R. Hooten, Jr.
/s/ E. V. Holder, Jr. Director March 17, 2004
- ------------------------ ----------------
E. V. Holder, Jr.
/s/ Wilbur M. Jenkins Director March 17, 2004
- ------------------------ ----------------
Wilbur M. Jenkins
/s/ Keith F. Molihan Director March 17, 2004
- ------------------------ ----------------
Keith F. Molihan
/s/ Marshall T. Reynolds Chairman of the Board April 13, 2004
- ------------------------ ----------------
Marshall T. Reynolds
Director
- ------------------------ ----------------
Neal Scaggs
/s/ Thomas W. Wright Director March 17, 2004
- ------------------------ ----------------
Thomas W. Wright