SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2004
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ___________ to ___________
Commission file number 0-20908
PREMIER FINANCIAL BANCORP, INC.
(Exact name of registrant as specified in its charter)
Kentucky 61-1206757
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2883 Fifth Avenue
Huntington, West Virginia 25702
(address of principal executive officer) (Zip Code)
Registrant's telephone number (304) 525-1600
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to filing
requirements for the past 90 days. Yes X No .
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Securities Exchange Act of 1934). Yes___ No X .
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practical date.
Common stock, no par value, - 5,232,230 shares outstanding
at July 31, 2004
PREMIER FINANCIAL BANCORP, INC.
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
The accompanying information has not been audited by independent public
accountants; however, in the opinion of management such information reflects all
adjustments necessary for a fair presentation of the results for the interim
period. All such adjustments are of a normal and recurring nature. Premier
Financial Bancorp, Inc.'s ("Premier's") accounting and reporting policies are in
accordance with accounting principles generally accepted in the United States of
America. Certain accounting principles used by Premier involve a significant
amount of judgment about future events and require the use of estimates in their
application. The following policies are particularly sensitive in terms of
judgments and the extent to which estimates are used: allowance for loan losses,
the identification and evaluation of impaired loans, the impairment of goodwill,
the realization of deferred tax assets and stock based compensation disclosures.
These estimates are based on assumptions that may involve significant
uncertainty at the time of their use. However, the policies, the estimates and
the estimation process as well as the resulting disclosures are periodically
reviewed by the Audit Committee of the Board of Directors and material estimates
are subject to review as part of the external audit by the independent public
accountants.
The accompanying financial statements are presented in accordance with the
requirements of Form 10-Q and consequently do not include all of the disclosures
normally required by accounting principles generally accepted in the United
States of America or those normally made in the registrant's annual report on
Form 10-K. Accordingly, the reader of the Form 10-Q may wish to refer to the
registrant's Form 10-K for the year ended December 31, 2003 for further
information in this regard.
Index to consolidated financial statements:
Consolidated Balance Sheets.................................. 3
Consolidated Statements of Income ........................... 4
Consolidated Statements of Comprehensive Income ............. 6
Consolidated Statements of Cash Flows........................ 7
Notes to Consolidated Financial Statements................... 9
PREMIER FINANCIAL BANCORP, INC.
CONSOLIDATED BALANCE SHEETS
JUNE 30, 2004 AND DECEMBER 31, 2003
(DOLLARS IN THOUSANDS)
- --------------------------------------------------------------------------------------------------------------------
(UNAUDITED)
2004 2003
-------------- --------------
ASSETS
Cash and due from banks $ 16,451 $ 16,422
Federal funds sold 18,029 17,051
Securities available for sale 147,172 147,646
Loans 321,628 331,794
Allowance for loan losses (9,550) (14,300)
-------------- --------------
Net loans 312,078 317,494
Federal Home Loan Bank and Federal Reserve Bank stock 2,555 2,490
Premises and equipment, net 7,879 7,956
Real estate and other property acquired through foreclosure 2,431 3,187
Interest receivable 2,791 3,448
Goodwill 15,816 15,816
Current year tax receivable 4,361 3,695
Other assets 8,109 8,024
Assets of discontinued operation 75,873 79,163
------------- --------------
Total assets $ 613,545 $ 622,392
============= ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits
Non-interest bearing $ 62,056 $ 59,001
Time deposits, $100,000 over 38,700 42,780
Other interest bearing 341,176 353,693
------------- --------------
Total deposits 441,932 455,474
Securities sold under agreements to repurchase 7,214 -
Federal Home Loan Bank advances 12,404 10,705
Other borrowed funds 4,450 6,200
Notes payable 1,402 1,402
Guaranteed junior subordinated interest debentures 26,546 26,546
Interest payable 5,389 3,902
Other liabilities 1,372 1,227
Liabilities of discontinued operation 68,225 71,396
------------- --------------
Total liabilities 568,934 576,852
Stockholders' equity
Preferred stock, no par value; 1,000,000 shares authorized;
none issued or outstanding - -
Common stock, no par value; 10,000,000 shares authorized;
5,232,230 shares issued and outstanding 1,103 1,103
Surplus 43,445 43,445
Retained earnings 1,272 311
Accumulated other comprehensive (loss) income (1,209) 681
-------------- --------------
Total stockholders' equity 44,611 45,540
------------- --------------
Total liabilities and stockholders' equity $ 613,545 $ 622,392
============= ==============
- --------------------------------------------------------------------------------------------------------------------
See Accompanying Notes to Consolidated Financial Statements
PREMIER FINANCIAL BANCORP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
THREE AND SIX MONTHS ENDED JUNE 30, 2004 AND 2003
(IN THOUSANDS EXCEPT PER SHARE DATA)
(UNAUDITED)
- --------------------------------------------------------------------------------------------------------------------
Three Months Ended Six Months Ended
June 30, June 30,
2004 2003 2004 2003
----------- ----------- ----------- -----------
(Restated) (Restated)
Interest income
Loans, including fees $ 5,746 $ 6,896 $ 11,591 $ 14,170
Securities available for sale
Taxable 1,051 949 2,116 1,943
Tax-exempt 54 177 134 380
Federal funds sold and other 75 156 140 291
----------- ----------- ----------- -----------
Total interest income 6,926 8,178 13,981 16,784
Interest expense
Deposits 1,544 2,255 3,176 4,702
Other borrowings 248 323 506 651
Debentures 736 670 1,455 1,400
----------- ----------- ----------- -----------
Total interest expense 2,528 3,248 5,137 6,753
Net interest income 4,398 4,930 8,844 10,031
Provision for loan losses 374 11,778 509 14,045
----------- ----------- ----------- -----------
Net interest income after
provision for loan losses 4,024 (6,848) 8,335 (4,014)
Non-interest income
Service charges 635 505 1,219 888
Insurance commissions 19 32 36 71
Securities gains - 15 10 204
Other 252 289 497 591
----------- ----------- ----------- -----------
906 841 1,762 1,754
Non-interest expenses
Salaries and employee benefits 2,163 2,199 4,393 4,560
Occupancy and equipment expenses 510 564 1,015 1,140
Professional fees 506 251 1,066 458
Taxes, other than payroll, property and income 156 122 290 244
Write-downs, expenses, sales of
other real estate owned, net (11) 187 50 258
Supplies 90 87 178 179
Bad check losses 17 183 46 189
Other expenses 812 757 1,677 1,674
----------- ----------- ----------- -----------
4,243 4,350 8,715 8,702
----------- ----------- ----------- -----------
Income (loss) from continuing operations
before income taxes 687 (10,357) 1,382 (10,962)
Provision (benefit) for income taxes 213 (3,578) 426 (3,818)
----------- ----------- ----------- -----------
Income (loss) from continuing operations 474 (6,779) 956 (7,144)
----------- ----------- ----------- -----------
Discontinued operation
Income (loss) from operation of
discontinued component (37) (118) 4 (160)
Provison (benefit) for income taxes (12) (42) - (57)
------------ ----------- ----------- -----------
Income (loss) from discontinued operation (25) (76) 4 (103)
------------ ----------- ----------- -----------
Net income (loss) $ 449 $ (6,855) $ 960 $ (7,247)
=========== =========== =========== ===========
- --------------------------------------------------------------------------------------------------------------------
See Accompanying Notes to Consolidated Financial Statements
PREMIER FINANCIAL BANCORP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS (continued)
THREE AND SIX MONTHS ENDED JUNE 30, 2004 AND 2003
(IN THOUSANDS EXCEPT PER SHARE DATA)
(UNAUDITED)
- --------------------------------------------------------------------------------------------------------------------
Three Months Ended Six Months Ended
June 30, June 30,
2004 2003 2004 2003
----------- ----------- ----------- -----------
(Restated) (Restated)
Weighted average shares outstanding:
Basic 5,232 5,232 5,232 5,232
Diluted 5,235 5,232 5,235 5,232
Earnings (loss) per share from
continuing operations:
Basic $ 0.09 $ (1.30) $ 0.18 $ (1.37)
Diluted 0.09 (1.30) 0.18 (1.37)
Earnings (loss) per share from discontinued operation:
Basic $ 0.00 $ (0.01) $ 0.00 $ (0.02)
Diluted 0.00 (0.01) 0.00 (0.02)
Net earnings (loss) per share:
Basic $ 0.09 $ (1.31) $ 0.18 $ (1.39)
Diluted 0.09 (1.31) 0.18 (1.39)
- --------------------------------------------------------------------------------------------------------------------
See Accompanying Notes to Consolidated Financial Statements
PREMIER FINANCIAL BANCORP, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
THREE AND SIX MONTHS ENDED JUNE 30, 2004 AND 2003
(IN THOUSANDS)
(UNAUDITED)
- --------------------------------------------------------------------------------------------------------------------
Three Months Ended Six Months Ended
June 30, June 30,
2004 2003 2004 2003
---------- ----------- ----------- ----------
(Restated) (Restated)
Net income (loss) $ 449 $ (6,855) $ 960 $ (7,247)
Other comprehensive income (loss):
Unrealized gains and (losses) arising during
the period (3,473) 848 (2,853) 589
Reclassification of realized amount - (15) (10) (204)
---------- ---------- ---------- ---------
Net change in unrealized gain (loss) on
securities (3,473) 833 (2,863) 385
Less: Tax impact (1,181) 283 (973) 131
---------- ---------- ---------- ---------
Other comprehensive income (loss) (2,292) 550 (1,890) 254
Comprehensive income (loss) $ (1,843) $ (6,305) $ (930) $ (6,993)
========== ========== ========== =========
- --------------------------------------------------------------------------------------------------------------------
See Accompanying Notes to Consolidated Financial Statements
PREMIER FINANCIAL BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 2004 AND 2003
(IN THOUSANDS)
(UNAUDITED)
- --------------------------------------------------------------------------------------------------------------------
2004 2003
------------- -------------
(Restated)
Cash flows from continuing operating activities
Income (loss) from continuing operations $ 956 $ (7,144)
Adjustments to reconcile income (loss) to net
cash from continuing operating activities
Depreciation 345 497
Provision for loan losses 509 14,045
Amortization, net 275 403
FHLB stock dividends (45) (83)
Investment securities losses (gains), net (10) (204)
OREO writedowns (gains on sales), net (70) 171
Changes in
Interest Receivable 657 1,089
Other assets 153 (3,810)
Interest Payable 1,487 1,201
Other liabilities 145 7
------------- -------------
Net cash from continuing operating activities 4,402 6,172
Cash flows from continuing investing activities
Purchases of securities available for sale (45,234) (76,490)
Proceeds from sales of securities available for sale 414 13,294
Proceeds from maturities and calls of securities available for sale 42,359 67,236
Purchases of FHLB stock (20) (43)
Net change in federal funds sold (978) (8,606)
Net change in loans 2,887 10,693
Purchases of premises and equipment, net (268) (230)
Proceeds from sale of other real estate acquired through foreclosure 2,846 1,553
------------- -------------
Net cash from continuing investing activities 2,006 7,407
Cash flows from continuing financing activities
Net change in deposits (13,542) (2,512)
Net change in short-term borrowings 2,546 -
Advances from Federal Home Loan Bank - 2,750
Repayment of Federal Home Loan Bank advances (847) (3,819)
Early redemption of guaranteed debentures - (3,000)
Repayment of Other Borrowed Funds (1,750) (600)
Net change in agreements to repurchase securities 7,214 101
------------- -------------
Net cash (used in) continuing financing activities (6,379) (7,080)
------------- -------------
Net change in cash and cash equivalents from continuing activities 29 6,499
Cash and cash equivalents of continuing operations at beginning of period 16,422 14,334
------------- -------------
Cash and cash equivalents of continuing operations at end of period $ 16,451 $ 20,833
============= =============
- --------------------------------------------------------------------------------------------------------------------
See Accompanying Notes to Consolidated Financial Statements
PREMIER FINANCIAL BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
SIX MONTHS ENDED JUNE 30, 2004 AND 2003
(IN THOUSANDS)
(UNAUDITED)
- --------------------------------------------------------------------------------------------------------------------
2004 2003
------------- -------------
(Restated)
Supplemental disclosures of cash flow information:
Cash paid during period for interest $ 3,651 $ 5,552
Loans transferred to real estate acquired through foreclosure 2,020 595
Net change in cash and cash equivalents of discontinued operations (764) 33
- --------------------------------------------------------------------------------------------------------------------
See Accompanying Notes to Consolidated Financial Statements
PREMIER FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED, IN THOUSANDS)
- --------------------------------------------------------------------------------
NOTE 1 - BASIS OF PRESENTATION
The consolidated financial statements include the accounts of Premier Financial
Bancorp, Inc. (the Company) and its wholly owned subsidiaries:
June 30, 2004
r Net Income
Year ------------------
Acquired Assets Qtr Six Mo.
-------- ------ --- -------
Citizens Deposit Bank & Trust Vanceburg, Kentucky 1991 $ 86,464 $ 331 $ 668
Bank of Germantown Germantown, Kentucky 1992 23,404 65 77
Citizens Bank (Kentucky), Inc. Georgetown, Kentucky 1995 75,873 (24) 5
Farmers Deposit Bank Eminence, Kentucky 1996 100,736 (161) (184)
Ohio River Bank Ironton, Ohio 1998 78,267 200 459
First Central Bank, Inc. Philippi, West Virginia 1998 86,508 288 545
Boone County Bank, Inc. Madison, West Virginia 1998 156,014 552 1,061
Mt. Vernon Financial Holdings, Inc. Huntington, West Virginia 1999 4,245 32 (1)
The Company also has a data processing subsidiary, Premier Data Services, Inc.,
and the PFBI Capital Trust subsidiary as discussed in Note 9. In accordance with
FASB Interpretation No. 46, the Trust is no longer consolidated with the
Company. All other intercompany transactions and balances have been eliminated.
The Company maintains Employee Stock Ownership incentive Plans (the Plans)
whereby certain employees of the Company are eligible to receive incentive stock
options. The Plans are accounted for in accordance with Accounting Principles
Board Opinion (APB) No. 25, "Accounting for Stock Issued to Employees", and
related interpretations. Pursuant to the Plans, a maximum of 600,000 shares of
the Company's common stock may be issued through the exercise of these incentive
stock options. The option price is the fair market value of the Company's shares
at the date of the grant. The options are exercisable within ten years from the
date of grant.
- --------------------------------------------------------------------------------
CONTINUED
PREMIER FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED, IN THOUSANDS)
- --------------------------------------------------------------------------------
NOTE 1 - BASIS OF PRESENTATION - (continued)
Employee compensation expense under stock options is reported using the
intrinsic value method. No stock-based compensation cost is reflected in net
income, as all options granted had an exercise price equal to or greater than
the market price of the underlying common stock at the date of grant. The
following table illustrates the effect on net income and earnings per share if
expense was measured using the fair value recognition provisions of FASB
Statement No. 123, Accounting for Stock-Based Compensation.
2004 2003
------------ -----------
(Restated)
Income (loss) from continuing operations $ 956 $ (7,144)
Deduct: Stock-based compensation
expense determined under fair
value based method (23) (16)
------------ -----------
Pro forma income (loss) $ 933 $ (7,160)
Basic earnings (loss) per share
from continuing operations $ 0.18 $ (1.37)
Pro forma basic earnings (loss) per share 0.18 (1.37)
Diluted earnings (loss) per share
from continuing operations $ 0.09 $ (1.37)
Pro forma diluted earnings (loss) per share 0.09 (1.37)
For the period ended June 30, 2003, stock options were not considered
in the above computation because they were antidilutive.
On February 18, 2004, 28,200 incentive stock options were granted out of the
2002 Stock Option Plan at an exercise price of $9.30. These options vest in
three equal annual installments ending on February 18, 2007. On January 15,
2003, 28,650 incentive stock options were granted out of the 2002 Stock Option
Plan at an exercise price of $7.96. These options vest in three equal annual
installments ending on January 15, 2006. Proforma stock-compensation expense is
being amortized over each of the three-year vesting periods. There were no
options granted during 2002. Future pro forma net income will be negatively
impacted should the Company choose to grant additional options.
- --------------------------------------------------------------------------------
CONTINUED
PREMIER FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED, IN THOUSANDS)
- --------------------------------------------------------------------------------
NOTE 1 - BASIS OF PRESENTATION - (continued)
The pro forma effects are computed using option pricing models, using the
following weighted-average assumptions as of grant date.
2004 2003
---- ----
Risk-free interest rate 3.15% 3.10%
Expected option life (yrs) 5.00 5.00
Expected stock price volatility 0.34 0.42
Dividend yield 0.00% 0.00%
Weighted average fair value of
options granted during the year $3.29 $3.30
NOTE 2 - RESTATEMENT
On June 16, 2003 Premier announced that as a result of an ongoing internal
investigation, it had uncovered a systemic 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 the periods ended June 30, 2003 have been restated
to reflect the financial statement effect of the matters that occurred in the
prior periods but which were improperly concealed by subsidiary management.
- --------------------------------------------------------------------------------
CONTINUED
PREMIER FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED, IN THOUSANDS)
- --------------------------------------------------------------------------------
NOTE 2 - RESTATEMENT (continued)
Effect on operating results for the three and six months ended (in thousands
except per share data):
Three Months Six Months
June 2003 June 2003
Increase Increase
Operating statement caption (Decrease) (Decrease)
- --------------------------- ---------- ----------
Interest income, loans $ 60 $ (49)
Provision for loan losses (1,518) (498)
Net interest income after
provision for loan losses 1,578 449
Income (loss) from continuing
operations before income taxes 1,578 449
Provision (benefit) for income taxes 537 153
Income (loss) from
continuing operations 1,041 296
Net (loss) income 1,041 296
Net (loss) income per share,
basic and diluted 0.20 0.06
- --------------------------------------------------------------------------------
CONTINUED
PREMIER FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED, IN THOUSANDS)
- --------------------------------------------------------------------------------
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." The sale was completed on July 1, 2004.
A condensed balance sheet and statement of operations for Citizens Bank follows
(in thousands):
As of
June 30 December 31
2004 2003
----------- -----------
Assets
Cash and federal funds sold $ 8,774 $ 6,473
Securities available for sale 11,600 12,082
Loans, net 49,141 53,886
Premises and equipment, net 3,006 3,026
Other assets 3,352 3,696
----------- -----------
Total assets $ 75,873 $ 79,163
=========== ===========
Liabilities
Deposits $ 62,440 $ 65,486
Federal Home Loan Bank advances 5,242 5,255
Other liabilities 543 655
----------- -----------
Total liabilities 68,225 71,396
Equity 7,648 7,767
----------- -----------
Total liabilities and equity $ 75,873 $ 79,163
=========== ===========
For the Three For the Six
Months Ended Months Ended
June 30 June 30 June 30 June 30
2004 2003 2004 2003
--------- --------- --------- ---------
Interest income $ 946 $ 1,138 $ 2,021 $ 2,416
Interest expense 358 505 732 1,012
--------- --------- --------- ---------
Net interest income 588 633 1,289 1,404
Provision for loan losses - 90 - 240
Non-interest income 217 254 434 480
Non-interest expense 842 915 1,719 1,804
Income tax (benefit) (12) (42) - (57)
--------- --------- --------- ---------
Net (loss) $ (25) $ (76) $ 4 $ (103)
========= ========= ========= =========
- --------------------------------------------------------------------------------
CONTINUED
PREMIER FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED, IN THOUSANDS)
- --------------------------------------------------------------------------------
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 Federal Reserve Bank of Cleveland (FRB) which supersedes and rescinds
all previous agreements between the Company and the FRB. Among the provisions of
the agreement were the continuation of the restriction on the Company's payment
of dividends on its common stock without the express written consent of the FRB
and the continuation of the restriction on the Company's payment of quarterly
distributions on its Trust Preferred Securities without the express written
consent of the FRB. Among other provisions, the agreement required the Company
to retain an independent consultant to review its management, directorate and
organizational structure, adopt a management plan responsive to such
consultant's report, update its management succession plan in accordance with
any recommendations in such consultant's report, monitor its subsidiary banks'
compliance with bank policies and loan review programs, conduct formal quarterly
reviews of its subsidiary Banks' allowances for loan losses, maintain sufficient
capital, submit a plan to the FRB for improving consolidated earnings over a
three-year period, and submit to the FRB annual projections of planned sources
and uses of the Company's cash, including a plan to service its outstanding debt
and trust preferred securities.
The Company's compliance with the written agreement is being monitored by a
committee which consists of three of its outside directors. As of June 30, 2004,
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
(UNAUDITED, IN THOUSANDS)
- --------------------------------------------------------------------------------
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.
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.
- --------------------------------------------------------------------------------
CONTINUED
PREMIER FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED, IN THOUSANDS)
- --------------------------------------------------------------------------------
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. 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. At June 30, 2004, the Bank's Tier I Leverage Ratio was 8.35%.
NOTE 5- SECURITIES
Amortized cost and fair value of securities available for sale at June 30, 2004
are summarized as follows:
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
U. S. Treasury securities $ 250 $ - $ (1) $ 249
U. S. agency securities 114,873 88 (1,586) 113,375
Obligations of states and political
subdivisions 4,743 178 - 4,921
Mortgage-backed securities 28,708 6 (532) 28,182
Corporate securities 430 15 - 445
-------------- -------------- -------------- ---------------
Total available for sale $ 149,004 $ 287 $ (2,119) $ 147,172
============== ============== =============== ===============
Amortized cost and fair value of securities available for sale at
December 31, 2003 are summarized as follows:
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
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
============== ============== =============== ===============
The investment portfolio is predominately high quality interest-bearing bonds
with defined maturity dates backed by the U.S. Government or Government
sponsored agencies. The unrealized losses at June 30, 2004 and December 31, 2003
are price changes resulting from changes in the interest rate environment. The
unrealized losses as of both periods have occurred within the last twelve months
and are not considered to be permanent declines in the value of the securities.
- --------------------------------------------------------------------------------
CONTINUED
PREMIER FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED, IN THOUSANDS)
- --------------------------------------------------------------------------------
NOTE 6 - LOANS
Major classifications of loans at June 30, 2004 and December 31, 2003 are
summarized as follows:
2004 2003
------------ ------------
Commercial, secured by real estate $ 99,171 $ 101,325
Commercial, other 38,374 38,063
Real estate construction 6,276 5,414
Residential real estate 125,351 126,134
Agricultural 2,841 3,032
Consumer and home equity 47,569 56,216
Other 2,046 1,610
------------ ------------
$ 321,628 $ 331,794
============ ============
The following table sets forth information with respect to the Company's
impaired loans at June 30, 2004 and December 31, 2003.
2004 2003
------------ ------------
Impaired loans at period end with an allowance $ 16,150 $ 17,071
Impaired loan at period end with no allowance 498 3,849
Amount of allowance for loan losses allocated 3,767 8,418
The following table sets forth information with respect to the Company's
nonperforming loans at June 30, 2004 and December 31, 2003.
2004 2003
------------ ------------
Non-accrual loans $ 8,216 $ 11,958
Accruing loans which are contractually
past due 90 days or more 1,156 4,137
Restructured loans 452 104
------------ ------------
$ 9,824 $ 16,199
============ ============
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.
- --------------------------------------------------------------------------------
CONTINUED
PREMIER FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED, IN THOUSANDS)
- --------------------------------------------------------------------------------
NOTE 7 - ALLOWANCE FOR LOAN LOSSES
Changes in the allowance for loan losses for the three and six months ended June
30, 2004 and 2003 are as follows:
Three Months Ended Six Months Ended
June 30, June 30,
2004 2003 2004 2003
-------- -------- -------- --------
(Restated) (Restated)
Balance, beginning of period $ 13,751 $ 9,586 $ 14,300 $ 9,698
Gross charge-offs (4,717) (5,296) (5,784) (7,817)
Recoveries 142 117 525 259
Provision for loan losses 374 11,778 509 14,045
-------- -------- -------- --------
Balance, end of period $ 9,550 $ 16,185 $ 9,550 $ 16,185
======== ======== ======== ========
NOTE 8 - 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.
- --------------------------------------------------------------------------------
CONTINUED
PREMIER FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED, IN THOUSANDS)
- --------------------------------------------------------------------------------
NOTE 8 - GUARANTEED JUNIOR SUBORDINATED INTEREST DEBENTURES (continued)
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 which occurred on March 31, 2003. However, the FRB denied
the Company's request to make distributions on the remaining Debentures and
Trust Preferred Securities.
The Company 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 June 30, 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.
NOTE 9 - STOCKHOLDERS' EQUITY AND REGULATORY MATTERS
The Company entered into an agreement with the Federal Reserve Bank of Cleveland
(FRB), as discussed in Note 4, restricting the Company from declaring or paying
dividends to shareholders without prior approval from the FRB. The Company's
principal source of funds for dividend payments to shareholders is dividends
received from the subsidiary Banks. Banking regulations limit the amount of
dividends that may be paid without prior approval of regulatory agencies. Under
these regulations, the amount of dividends that may be paid in any calendar year
is limited to the current year's net profits, as defined, combined with the
retained net profits of the preceding two years, subject to the capital
requirements and additional restrictions as discussed below. During 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.
- --------------------------------------------------------------------------------
CONTINUED
PREMIER FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED, IN THOUSANDS)
- --------------------------------------------------------------------------------
NOTE 9 - STOCKHOLDERS' EQUITY AND REGULATORY MATTERS (continued)
These quantitative measures established by regulation to ensure capital adequacy
require the Company and Banks to maintain minimum amounts and ratios (set forth
in the following table) of Total and Tier I capital (as defined in the
regulations) to risk-weighted assets (as defined), and of Tier I capital (as
defined) to average assets (as defined). Management believes, as of June 30,
2004, that the Company and the Banks meet all quantitative capital adequacy
requirements to which they are subject.
Shown below is a summary of regulatory capital ratios for the Company:
Regulatory To Be Considered
June 30, December 31, Minimum Well
2004 2003 Requirements Capitalized
---------- ------------ ------------ ----------------
Tier I Capital (to Risk-Weighted Assets) 11.5% 10.6% 4.0% 6.0%
Total Capital (to Risk-Weighted Assets) 15.7% 14.8% 8.0% 10.0%
Tier I Capital (to Average Assets) 6.9% 6.4% 4.0% 5.0%
The capital amounts and classifications are also subject to qualitative
judgments by the regulators. As a result of these qualitative judgments, the
Company and 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. The Company
entered into an agreement with the Federal Reserve Bank of Cleveland (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) 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' Tier I capital to average assets ratio was 13.0% at June 30, 2004.
Bank of Germantown (Germantown) entered into an agreement with the Kentucky
Department of Financial Institutions (KDFI) and the Federal Deposit Insurance
Corporation (FDIC) on June 13, 2000 restricting Germantown from declaring or
paying dividends, without prior approval, if its Tier I capital to average
assets falls below 8%. This agreement is in effect until terminated by the KDFI
and FDIC. Germantown's Tier I capital to average assets ratio was 8.5% at
June 30, 2004.
- --------------------------------------------------------------------------------
CONTINUED
PREMIER FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED, IN THOUSANDS)
- --------------------------------------------------------------------------------
NOTE 9 - STOCKHOLDERS' EQUITY AND REGULATORY MATTERS (continued)
Citizens Bank (Kentucky), Inc. (Citizens, KY) entered into an agreement with the
Kentucky Department of Financial Institutions (KDFI) and the Federal Deposit
Insurance Corporation (FDIC) on September 11, 2002 restricting Citizens, KY from
declaring or paying dividends, without prior approval. This agreement is in
effect until terminated by the KDFI and FDIC. Citizens KY's Tier I capital to
average assets ratio was 8.7% at June 30, 2004.
Effective January 1, 2004, Farmers Deposit Bank (Farmers Deposit) was issued a
C&D order by the FDIC and KDFI restricting Farmers Deposit from declaring or
paying dividends, without prior approval, if its Tier I capital to average
assets falls below 8.00%. The order also required Farmers Deposit to maintain a
minimum 5.0% Tier I capital to average assets ratio and submit a written capital
restoration plan to increase the ratio to 8.0% by December 31, 2004. This order
is in effect until terminated by the KDFI and FDIC. Farmers Deposit's Tier I
capital to average assets was 8.4% at June 30, 2004.
As of June 30, 2004, the most recent notification from the FRB categorized the
Company and its subsidiary banks as well capitalized under the regulatory
framework for prompt corrective action. To be categorized as well capitalized,
the Company must maintain minimum Total risk-based, Tier I risk-based and Tier I
leverage ratios as set forth in the preceding table. There are no conditions or
events since that notification that management believes have changed the
Company's category.
- --------------------------------------------------------------------------------
PREMIER FINANCIAL BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
- --------------------------------------------------------------------------------
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations
FORWARD-LOOKING STATEMENTS
Management's discussion and analysis contains forward-looking
statements that are provided to assist in the understanding of anticipated
future financial performance. However, such performance involves risks and
uncertainties, and there are certain important factors that may cause actual
results to differ materially from those anticipated. These important factors
include, but are not limited to, economic conditions (both generally and more
specifically in the markets in which Premier operates), competition for
Premier's customers from other providers of financial services, government
legislation and regulation (which changes from time to time), changes in
interest rates, Premier's ability to originate quality loans, collect delinquent
loans and attract and retain deposits, the impact of Premier's growth, Premier's
ability to control costs, and new accounting pronouncements, all of which are
difficult to predict and many of which are beyond the control of Premier.
A. Results of Operations
A financial institution's primary sources of revenue are generated by
interest income on loans, investments and other earning assets, while its major
expenses are produced by the funding of these assets with interest bearing
liabilities. Effective management of these sources and uses of funds is
essential in attaining a financial institution's optimal profitability while
maintaining a minimum amount of interest rate risk and credit risk.
The following narrative discusses the continuing operations of the
Company. As more fully explained in Note 3 to the consolidated financial
statements above, the narrative excludes the discontinued operations of
Premier's subsidiary Citizens Bank (Kentucky), Inc. On February 13, 2004,
Premier signed a definitive agreement to sell the subsidiary for $14,500,000 in
cash. The transaction, which was completed on July 1, 2004, should more than
restore the cash reserves used by Premier in 2003 to recapitalize one of its
affiliate banks; should reduce the company's total assets while increasing its
total capital thus, strengthening Premier's balance sheet and should generate
taxable income to be used as an offset to Premier's tax loss carryforward.
Furthermore, comparative information for the quarter and six months
ended June 30, 2003 reflect the restatement of charge-offs, provision for loan
losses, interest income and income taxes as more fully explained in Note 2 of
the consolidated financial statements above.
Income from continuing operations for the six months ended June 30,
2004 was $956,000, or 18 cents per share, compared to a loss from continuing
operations of $7,144,000, or $1.37 per share for the six months ended June 30,
2003. The profitability recorded in the first six months of 2004 was largely due
to lower provisions for loan losses versus the same period of 2003, partially
offset by lower net interest income realized in 2004. For the three months ended
June 30, 2004, income from continuing operations was $474,000, or 9 cents per
share, compared to a loss from continuing operations of $6,779,000 or $1.30 per
share for the three months ended June 30, 2003. The profitability recorded in
the second quarter of 2004 was largely due to lower provisions for loan losses
and lower net overhead costs versus the second quarter of 2003, partially offset
by lower net interest income realized in 2004.
Net interest income for the six months ending June 30, 2004 totaled
$8.84 million, down from the $10.03 million of net interest income earned in the
first six months of 2003. Both interest income and interest expense decreased in
the comparisons. Interest income declined by $2.8 million due to lower loans
outstanding due to the charge-offs at Farmers Deposit Bank and other loan
paydowns across the company during 2003 compounded by the higher volume of
non-accrual loans at Farmers Deposit Bank. Interest expense declined by $1.6
million largely due to lower interest costs on deposits as interest bearing
deposits have declined and maturing certificates of deposit have renewed at
significantly lower rates due to the low interest rate environment. Interest
expense savings were also realized due to the paydown of other borrowings. These
savings have been partially offset by interest expense accrued on the deferred
trust preferred distributions (see Note 8 to the consolidated financial
statements.) As a result, the net interest margin for the six months ending June
30, 2004 was approximately 3.57% compared to 3.73% for the same period in 2003.
Net interest income for the quarter ending June 30, 2004 totaled $4.40
million, down from the $4.93 million of net interest income earned in the second
quarter of 2003. Again, both interest income and interest expense decreased in
the comparisons. Interest income declined by $1.3 million due to lower loans
outstanding due to the charge-offs at Farmers Deposit Bank and other loan
paydowns across the company during 2003 compounded by the higher volume of
non-accrual loans at Farmers Deposit Bank. Interest expense declined by $720,000
largely due to lower interest costs on deposits due to lower interest bearing
deposits and as maturing certificates of deposit have renewed at significantly
lower rates due to the low interest rate environment. Interest expense savings
from the paydown of other borrowings have been offset by interest expense
accrued on the deferred trust preferred distributions (see Note 8 to the
consolidated financial statements.)
Non-interest income increased only slightly to $1,762,000 for the first
six months of 2004 compared to $1,754,000 for the first six months of 2003, as
gains on the sales of securities in 2003 has been replaced by recurring revenue
from service charges on deposit accounts in 2004. Securities gains totaled
$204,000 in the first six months of 2003 compared to $10,000 in the same
period of 2004. Excluding the securities gains, non-interest income increased
$202,000 or 13.0% in the first six months of 2004. Service charges on deposit
accounts increased by $331,000 or 37.3% due to a new fee structure. This
increase was partially offset by a $35,000 decrease in insurance commissions and
a $94,000 decrease in other types of non-interest income including fees from the
origination of secondary market mortgages.
For the quarter ending June 30, 2004, non-interest income increased
$65,000 to $906,000 for the second quarter of 2004 compared to $841,000 for the
second quarter of 2003. Excluding the $15,000 of investment securities gains
realized in 2003, non-interest income increased 9.7%. The increase is largely
due to a 25.7% or $130,000 increase in revenue from service charges on deposit
accounts due to a change in fee structure during 2003, partially offset by
decreases in income from insurance commissions and a decrease in other income.
Non-interest expenses for the first six months of 2004 totaled
$8,715,000 or 3.2% of average assets of continuing operations on an annualized
basis compared to $8,702,000 or 2.9% of average assets of continuing operations
for the same period of 2003. The slight increase in non-interest expense is
largely due to a $608,000 increase in professional fees related to audit costs
and legal fees associated with the SEC investigation as disclosed in the
Company's annual report on Form 10-K for the year ended December 31, 2003. This
increase is partially offset by lower staff costs due to employee participation
in the cost of medical insurance premiums, lower occupancy and equipment costs
due to lower taxes and insurance, lower depreciation expense on equipment,
losses on the disposal of equipment in 2003, lower bad check losses and lower
writedowns and expenses on the liquidation of other real estate owned (OREO).
Taxes not on income increased by $46,000 in the first six months of 2004 due to
an increase in the expense for equity based taxes. Other expenses remained
relatively unchanged in total as $124,000 of accelerated amortization of
issuance costs related to the early redemption of $3.0 million of the Trust
Preferred Securities (NASDAQ/NMS-PFBIP) in the first quarter of 2003 have been
offset by higher FDIC insurance, communications expenses and corporate insurance
costs in 2004.
Non-interest expenses for the second quarter of 2004 totaled $4,243,000
or 3.1% of average assets of continuing operations on an annualized basis
compared to $4,350,000 or 2.9% of average assets of continuing operations for
the same period of 2003. The decrease in non-interest expense is largely due to
a decrease in staff costs due to employee participation in the cost of medical
insurance premiums, lower occupancy and equipment expenses, lower bad check
losses, and a net gain on the liquidation of OREO in the second quarter of 2004.
These decreases were partially offset by a $255,000 increase in professional
fees related to audit costs and legal fees associated with the SEC
investigation, higher expenses associated with equity based taxes and an
increase in other expenses including FDIC insurance, communications expenses and
corporate insurance costs.
Income tax expense was $426,000 for the first six months of 2004
compared to a tax benefit of $3.82 million for the first six months of 2003. The
increase in income tax expense can be primarily attributed to the increase in
pre-tax income detailed above. The annualized effective tax rate for the six
months ended June 30, 2004 was 30.8%, compared to the 34.8% effective tax rate
for the same period in 2003. The higher benefit rate in 2003 was the result of
reduced tax expense resulting from tax exempt income. The income tax expense for
the quarter ending June 30, 2004 was $213,000 compared to a tax benefit of $3.58
million during the same period of 2003.
The annualized returns from continuing operations on shareholders'
equity and on average assets were approximately 4.19% and 0.35% for the six
months ended June 30, 2004 compared to a negative (25.97%) and (2.41%) for the
same period in 2003.
B. Financial Position
Total assets of continuing operations at June 30, 2004 decreased $5.6
million or 1.0% to $537.7 million from the $543.2 million at December 31, 2003.
This decrease was largely due to declines in interest bearing deposits and loans
outstanding, primarily at Farmers Deposit Bank
Earning assets of continuing operations decreased to $489.8 million at
June 30, 2004 from the $499.2 million at December 31, 2003, a decrease of $9.4
million, or 1.9%. The decrease was largely due to a $10.2 million decrease in
loans outstanding and a $474,000 decline in investments. These declines were
partially offset by an increase in federal funds sold.
Cash and due from banks at June 30, 2004 was $16.5 million, a $29,000
increase from $16.4 million on December 31, 2003. Federal funds sold increased
to $18.0 million from the $17.1 million reported at December 31, 2003. The
increase in these liquid assets was the result of retaining liquidity from
maturing investments and loan payoffs as part of Premier's interest rate
management strategy. As loan principal balances have paid down, Premier has used
the funds to satisfy deposit withdrawals and retained the surplus in federal
funds sold to maintain its liquidity position and to fund future loan growth.
Securities available for sale totaled $147.2 million at June 30, 2004,
a $474,000 decrease from the $147.6 million at December 31, 2003. The decline
was largely due to a $2.7 million decline in the market value of the investment
portfolio since year-end partially offset by additional investment purchases.
The decline in the market value of the investment portfolio is in response to
the increase in the interest rate environment. Since Premier primarily holds
interest-bearing bonds with a specific maturity date, current declines in the
market value of the bonds due to rises in interest rates will gradually decrease
as the bonds approach maturity. At maturity, Premier fully anticipates receiving
the face value of the bonds as Premier primarily invests in instruments either
backed by the U.S. Government or agencies sponsored by the U.S. Government.
Premier holds no equity based investments. Additional details on investment
activities can be found in the Consolidated Statements of Cash Flows.
Total loans at June 30, 2004 were $321.6 million compared to $331.8
million at December 31, 2003, a decrease of $10.2 million. This decrease can
primarily be attributed to net loan pay offs and the $5.8 million in loan
charge-offs recorded during the first six months of 2004. The majority of the
loan paydowns and charge-offs occurred at Farmers Deposit Bank as management
continues to focus on loan collections or charging off loans that were fully
reserved and deemed uncollectible. Most of Premier's other affiliate banks are
either experiencing loan growth or are generating new loans at a rate similar to
or slightly less than the scheduled principal payments and early payoffs by
borrowers.
Deposits totaled $441.9 million as of June 30, 2004, a $13.6 million
decrease from the $455.5 million in deposits at December 31, 2003. The decrease
is partially due to $6.0 million of public deposits withdrawn and placed by the
depositor into repurchase agreements. Excluding this transaction, deposits
decreased by $7.6 million, primarily in interest bearing deposits at Farmers
Deposit Bank, as maturing out of area deposits have generally not been renewed
in an effort to restructure that bank's balance sheet.
Outstanding debt, including the Company's outstanding subordinated
debentures, has decreased by $51,000 since December 31, 2003, as payments on the
Company's borrowings have been substantially offset by short-term FHLB
advances. Federal Home Loan Bank advances have increased by $1,699,000 due to
short-term funding needs at the subsidiary banks. Other borrowed funds have
declined by $1,750,000 due to scheduled principal payments plus an additional
principal payment in the second quarter of 2004. See note 9 to the consolidated
financial statements for additional information on the outstanding subordinated
debentures.
The following table sets forth information with respect to the
Company's nonperforming assets of continuing operations at June 30, 2004 and
December 31, 2003.
(In Thousands)
2004 2003
-------------- ------------
Non-accrual loans $ 8,216 $ 11,958
Accruing loans which are contractually
past due 90 days or more 1,156 4,137
Restructured 452 104
-------------- ------------
Total non-performing loans 9,824 16,199
Other real estate acquired through
foreclosure 2,431 3,187
-------------- ------------
Total non-performing assets $ 12,255 $ 19,386
============== ============
Non-performing loans as a percentage
of total loans 3.05% 4.88%
Non-performing assets as a percentage
of total assets (of continuing operations) 2.28% 3.57%
Total non-performing loans and non-performing assets have declined
since year-end due to loan charge-offs and the development and execution of
action plans for the troubled loans identified at Farmers Deposit Bank. A
significant effort has been placed on reviews of loan files, efforts by lenders
to bring borrowers current with the terms of their loan agreements and the sale
of OREO properties. As in the past, when these plans are executed, Premier may
experience increases in non-performing loans and non-performing assets.
Furthermore, any resulting increases in loans placed on non-accrual status will
have a negative impact on future loan interest income. Also, as these plans are
executed, other loans may be identified that would necessitate additional
charge-offs and potentially additional provisions for loan losses.
The provision for loan losses was $509,000 for the first six months of
2004 compared to $14.0 million for the first six months of 2003. The significant
provision for losses in the prior year was primarily the result of loan problems
identified at Farmers Deposit Bank after the former president of the bank
resigned. The provision for loan losses is made in accordance with Premier's
policies regarding management's estimation of probable incurred losses in the
loan portfolio and the adequacy of the allowance for loan losses, which are in
accordance with accounting principles generally accepted in the United States of
America. The provision in 2004 was the result of loan growth and the estimation
of probable losses in the loan portfolio. Gross charge-offs totaled $5.8 million
during the first six months of 2004. Most of these charge-offs were loans
identified during the 2003 investigation (see Note 2 to the consolidated
financial statements) with an allowance for losses provided for at that time.
Collections efforts on these loans are continuing and any collections on these
loans would be presented in future financial statements as recoveries of the
amounts charged against the allowance. During the first six months of 2004,
$525,000 of recoveries were recorded. For the quarter ended June 30, 2004, the
provision for loan losses was $374,000 compared to $11.8 million for the same
period of 2003. As a result, the allowance for loan losses at June 30, 2004 was
2.97% of total loans as compared to 4.31% at December 31, 2003. The decrease in
the percentage of allowance for loan losses to total loans is largely due to
sufficient loan loss reserves allocated to the loans actually charged off during
the first six months of 2004.
C. Critical Accounting Policies
The Company follows financial accounting and reporting policies that
are in accordance with generally accepted accounting principles in the United
States of America. These policies are presented in Note 1 to the consolidated
audited financial statements in the Company's annual report on Form 10-K for the
year ended December 31, 2003. Some of these accounting policies, as discussed
below, are considered to be critical accounting policies. Critical accounting
policies are those policies that require management's most difficult, subjective
or complex judgments, often as a result of the need to make estimates about the
effect of matters that are inherently uncertain. The Company has identified
three accounting policies that are critical accounting policies and an
understanding of these policies is necessary to understand the financial
statements. These policies relate to determining the adequacy of the allowance
for loan losses, the impairment of goodwill, and the valuation of deferred tax
assets. A detailed description of these accounting policies is contained in the
Company's annual report on Form 10-K for the year ended December 31, 2003. There
have been no significant changes in the application of these accounting policies
since December 31, 2003.
Management believes that the judgments, estimates and assumptions used
in the preparation of the consolidated financial statements are appropriate
given the factual circumstances at the time.
D. Liquidity
Liquidity objectives for the Company can be expressed in terms of
maintaining sufficient cash flows to meet both existing and unplanned
obligations in a cost effective manner. Adequate liquidity allows the Company to
meet the demands of both the borrower and the depositor on a timely basis, as
well as pursuing other business opportunities as they arise. Thus, liquidity
management embodies both an asset and liability aspect while attempting to
maximize profitability. In order to provide for funds on a current and long-term
basis, the Company's subsidiary banks rely primarily on the following sources:
1. Core deposits consisting of both consumer and commercial
deposits and certificates of deposit of $100,000 or more.
Management believes that the majority of its $100,000 or more
certificates of deposit are no more volatile than its other
deposits. This is due to the nature of the markets in which the
subsidiaries operate.
2. Cash flow generated by repayment of loans and interest.
3. Arrangements with correspondent banks for purchase of unsecured
federal funds.
4. The sale of securities under repurchase agreements and borrowing
from the Federal Home Loan Bank.
5. Maintenance of an adequate available-for-sale security
portfolio. The Company owns $147.2 million of securities at
market value as of June 30, 2004.
The cash flow statements for the periods presented in the financial
statements provide an indication of the Company's sources and uses of cash as
well as an indication of the ability of the Company to maintain an adequate
level of liquidity.
E. Capital
At June 30, 2004, total shareholders' equity of $44.6 million was 8.3%
of total assets of continuing operations. This compares to total shareholders'
equity of $45.5 million or 8.4% of total assets of continuing operations on
December 31, 2003. The decline in total shareholders' equity is primarily the
result of declines in the market value of securities available for sale since
year-end, net of any tax benefits. See additional discussion on the decline in
the market value of securities available for sale above.
Tier I capital totaled $42.0 million at June 30, 2004, which represents
a Tier I leverage ratio of 6.9%.
Book value per share was $8.53 at June 30, 2004, and $8.70 at December
31, 2003. The decrease in book value per share was the result of $930,000 of
comprehensive loss for the first six months of 2004 as net income was more than
offset by the after tax decrease in the market value of investment securities
available for sale.
PREMIER FINANCIAL BANCORP, INC.
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Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Company currently does not engage in any derivative or hedging
activity. Refer to the Company's 2003 10-K for analysis of the interest rate
sensitivity. The Company believes there have been no significant changes in the
interest rate sensitivity since previously reported on the Company's 2003 10-K.
Item 4. Controls and Procedures
Premier management, including the Chief Executive Officer and Chief
Financial Officer, has conducted an evaluation of the effectiveness of
disclosure controls and procedures pursuant to Exchange Act Rule 13a-15c as of
the end of the period covered by this quarterly report. Based on that
evaluation, the Chief Executive Officer and Chief Financial Officer concluded
that the disclosure controls and procedures are effective in ensuring that all
material information required to be filed in this quarterly report has been made
known to them in a timely fashion.
"Internal controls" are procedures, which are designed with the
objective of providing reasonable assurance that (1) transactions are properly
authorized; (2) assets are safeguarded against unauthorized or improper use; and
(3) transactions are properly recorded and reported, all so as to permit the
preparation of reports and financial statements in conformity with generally
accepted accounting principles. Premier management uses the financial reports of
its subsidiaries to make decisions about the allocation of the Company's
resources, to implement strategies to improve the Company's performance, and to
prepare the consolidated financial statements of the Company for its
shareholders and regulatory authorities. However, a control system, no matter
how well conceived and operated, can provide only reasonable, not absolute,
assurance that the objectives of the control system are met. Further, the design
of a control system must reflect the fact that there are resource constraints,
and the benefits of controls must be considered relative to their cost. Because
of the inherent limitations in all control systems, no evaluation of controls
can provide absolute assurance that all control issues and instances of fraud,
if any, within a company have been detected. These inherent limitations include
the realities that judgments in decision-making can be faulty, and that
breakdowns can occur because of simple error or mistake. The design of any
system of controls is also based, in part, upon certain assumptions about the
likelihood of future events, and there can be no assurance that any design will
succeed in achieving its stated goals under all potential future conditions.
Over time, a control may become inadequate because of changes in conditions, or
the degree of compliance with the policies or procedures may deteriorate.
Because of the inherent limitations in a cost-effective control system,
misstatements due to error or fraud may occur and not be detected. Finally,
controls can be circumvented by the individual acts of some persons, by
collusion of two or more people, or by management override of the control.
It is this "management override of controls" that led to the
significant charge-offs and provisions for loan losses at Farmers Deposit Bank
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 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 second fiscal quarter that have materially affected or are
reasonably likely to materially affect Premier's internal controls over
financial reporting.
PREMIER FINANCIAL BANCORP, INC.
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PART II - OTHER INFORMATION
Item 1. Legal Proceedings
See information regarding regulatory matters in note 4 and note 9 to the
consolidated financial statements
Item 2. Changes in Securities and Use of Proceeds None
- ----------------------------------------------------
Item 3. Defaults Upon Senior Securities None
- ------------------------------------------
Item 4. Submission of Matters to a vote of Security Holders
- --------------------------------------------------------------
(a) Annual meeting of the Shareholders was held June 16, 2004.
(b) All director nominees were elected.
(c) Certain matters voted upon at the meeting and the votes cast with
respect to such matters are as follows:
(i) The following were elected as directors of the Company for a
term of one year.
Director Votes Received Votes Withheld
1. Toney K. Adkins 4,224,401 574,047
2. Hosmer A. Brown, III 4,221,711 576,737
3. Edsel R. Burns 4,221,901 576,547
4. E. V. Holder, Jr. 4,222,711 575,737
5. Charles R. Hooten, Jr. 4,221,253 577,195
6. Keith F. Molihan 4,224,065 574,383
7. Marshall T. Reynolds 4,222,401 576,047
8. Neal Scaggs 4,223,951 574,497
9. Robert W. Walker 4,224,400 574,048
10. Thomas W. Wright 4,224,401 574,047
(ii) Ratification of Crowe Chizek and Company LLC as independent
auditors of the Corporation for 2004. Votes for 4,766,234;
votes against 26,675; votes abstaining 5,539.
Item 5. Other Information None
- ----------------------------
Item 6. Exhibits and Reports on Form 8-K
- -------------------------------------------
(a) The following exhibits are furnished in accordance with the
provisions of Item 601 of Regulation S-K.
31.1 Certification Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002
31.2 Certification Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002
32 Certification Pursuant to 18 U.S.Css.1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(b) The following Current Reports on Form 8-K were filed in the
second quarter of the Company's year.
April 21, 2004 - Press release announcing the Company's 2003
annual financial results.
May 6, 2004 - Press release reporting first quarter 2004
earnings.
June 6, 2004 - Press release regarding the continuation of the
deferral to pay the quarterly distributions on
Premier's Trust Preferred Certificates
outstanding.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Corporation has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PREMIER FINANCIAL BANCORP, INC.
Date: August 16, 2004 /s/ Robert W. Walker
-----------------------------------------
Robert W. Walker
President & Chief Executive Officer
Date: August 16, 2004 /s/ Brien M. Chase
-----------------------------------------
Brien M. Chase
Vice President & Chief Financial Officer