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.
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
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.
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
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
============= ============
|
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
=========== =========== ===========
|
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
|
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
=========== =========== ===========
|
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
======== ========= ========= ========== ==========
|
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
|
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
|
PREMIER FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
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.
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.
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)
|
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.
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.
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)
|
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)
|
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."
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)
|
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.
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.
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.
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
=========== ======== ========= ===========
|
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.
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
========= ========= =========
|
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
========== ==========
|
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.
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)
|
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.
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
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.
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)
|
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.
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.
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.
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.
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.
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.
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.
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
|
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)
|
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
======== ======== ========
|
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
======== ======== ========
|
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
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.
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
(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).
|
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
|
EXHIBIT 14.1
PREMIER FINANCIAL BANCORP, INC.
CODE OF ETHICS FOR THE CHIEF EXECUTIVE OFFICER,
CHIEF FINANCIAL OFFIER, AND CHIEF ACCOUNTING OFFICER
In my role as Chief Executive Officer (CEO), Chief Financial Officer (CFO) or Chief Accounting Officer (CAO) of Premier Financial Bancorp, Inc. (the "Company"), I have adhered to and advocated to the best of my knowledge and ability the following principles and responsibilities governing professional conduct and ethics:
1. Act with honesty and integrity, avoiding actual or apparent conflicts of interest in personal and professional relationships. A "conflict of interest" exists when an individual's private interests interfere or conflict in any way (or even appear to interfere or conflict) with the interests of the Company.
2. Provide constituents with information that is accurate, complete, objective, relevant, timely and understandable. If I am the CEO or CFO I shall review the annual and quarterly reports before certifying and filing them with the SEC.
3. Comply with all applicable laws, rules, and regulations of federal, state, and local governments, and other appropriate private and public regulatory agencies.
4. Act in good faith, responsibly, with due care, competence and diligence, without misrepresenting material facts or allowing my independent judgement to be subordinated.
5. Respect the confidentiality of information acquired in the course of business except when authorized or otherwise legally obligated to disclose the information. I acknowledge that confidential information acquired in the course of business is not to be used for personal advantage.
6. Proactively promote ethical behavior among employees at the Company and as a responsible partner with industry peers and associates.
7. Maintain control over and responsibly manage all assets and resources employed or entrusted to me by the Company.
8. Report illegal or unethical conduct by any director, officer or employee that has occurred, is occurring or may occur, including any potential violations of this Code or the Code of Business and Ethics. Such report shall be made to the Chairman of the Board of Directors and the Chairman of the Audit Committee of the Board of Directors and shall include conduct of a financial or non-financial nature.
9. Comply with this Code and the Code of Business Conduct and Ethics. I understand that if I violate any part of this Code, I will be subject to disciplinary action up to and including termination.
I understand that this Code is subject to all applicable laws, rules and regulations. This Code incorporates by reference the Code of Business Conduct and Ethics that applies to all directors, officers, and employees.
I understand that if there is a conflict between this Code and a Company policy or procedure, the Code of Business Conduct and Ethics, or any applicable law, rule or regulation, then I must consult with the Chairman of the Board of Directors or the Chairman of the Audit Committee of the Board of the Directors for guidance.
I understand that there shall be no waiver of, modification of, or change to any part of this Code except by a vote of the Board of Directors or a designated Board committee. In the event that a waiver of, modification of, or a change to this Code is granted, then the notice of the waiver, modification and/or change, shall be disclosed as required by applicable law or applicable self regulatory organization or SEC rules.
/s/ Robert W. Walker April 14, 2004 ------------------------------ ------------------ Chief Executive Officer Date /s/ Brien M. Chase April 14, 2004 ------------------------------ ------------------ Chief Financial Officer Date |
EXHIBIT 14.2
PREMIER FINANCIAL BANCORP, INC.
CODE OF BUSINESS CONDUCT AND ETHICS
I. OVERVIEW
Premier Financial Bancorp, Inc.'s Code of Business Conduct and Ethics sets forth the guiding principles by which we operate our company and conduct our daily business with our shareholders, customers, vendors, and with each other. These principles apply to all of the directors, officers and employees of Premier Financial Bancorp, Inc. and all of its wholly-owned subsidiaries (referred to in this Code as the "Company" or "Premier"). The Chief Executive Officer, Chief Financial Officer and Chief Accounting Officer also are covered by a separate code of ethics for senior financial officers.
To further the Company's fundamental principles of honesty, loyalty, fairness and forthrightness, we have established this Code. Our Code strives to deter wrongdoing and promote the following five objectives:
1. Honest and ethical conduct, including handling of actual or apparent conflicts of interests;
2. Full, fair, accurate, timely and transparent disclosure;
3. Compliance with applicable government and self-regulatory organization laws, rules and regulations;
4. Prompt internal reporting of Code violations; and
5. Accountability for compliance of the Code.
Below we discuss situations that require application of our fundamental principles and promotion of our objectives. If there is a conflict between this Code and a specific procedure you should consult senior management for guidance.
ACCOUNTABILITY FOR COMPLIANCE WITH THE CODE
Each of the Company's directors, officers, and employees is expected to:
Understand. Premier expects you to comply with this Code and all applicable laws, rules and regulations.
Comply. Premier expects you to report any violation of this Code of which you become aware.
Report. Premier expects you to report any violation of this Code of which you become aware.
Accountable. Premier holds you accountable for complying with the Code.
II. PRINCIPLES
Accounting Policies
Premier and each of our subsidiaries will make and keep books, records and accounts, which in reasonable detail accurately and fairly present the transactions and disposition of the assets of our Company.
All directors, officers, employees and other persons are prohibited from directly or indirectly falsifying or causing to be false or misleading any financial or accounting book, record or account. You and others are expressly prohibited from directly or indirectly manipulating an audit, and from destroying or tampering with any record, document or tangible object with the intent to obstruct a pending or contemplated audit, review or federal investigation. The commission of, or participation in, one of these prohibited activities or other illegal conduct will subject the perpetrator to federal penalties, as well as punishment of up to and including termination of employment.
No director, officer, or employee of the Company may directly or indirectly;
>> Make or cause to be made a materially false or misleading statement, or
>> Omit to state, or cause another person to omit to state, any material fact necessary to make statements made not misleading
In connection with the audit of financial statements by independent accountants, the preparation of any required reports whether by independent or internal accountants, or any other work with involves or relates to the filing of a document with the Securities and Exchange Commission ("SEC")
Antitrust and Fair Competition Laws
The purpose of antitrust laws in the United States and most other countries is to provide a level playing field to economic competitors and to promote fair competition. No director, officer or employee, under any circumstances or in any context, may enter into any understanding or agreement, whether express or implied, formal or informal, written or oral, with an actual or potential competitor, which would illegally limit or restrict in any way either party's actions, including the offers of either party to any third party. This prohibition includes any action relating to prices, costs, profits, products, services, terms or conditions of sale, market share or customer or supplier classification or selection.
It is our policy to comply with all U.S. antitrust laws. This policy is not to be compromised or qualified by anyone acting for or on behalf of our Company. You must understand and comply with the antitrust laws as they may bear upon your activities and decisions. Anti-competitive behavior in violation of antitrust laws can result in criminal penalties, both for the individual involved and for the Company. Accordingly, any question regarding compliance with antitrust laws or your responsibilities under this policy should be directed to the President. Any director, officer, or employee found to have knowingly participated in violating the antitrust laws will be subject to disciplinary action, up to and including termination of employment.
Below are some scenarios that are prohibited and scenarios that could be prohibited for antitrust reasons. These scenarios are not an exhaustive list of all prohibited and possibly prohibited antitrust conduct. When in doubt about any situation, whether it is discussed below or not, you should consult with the President.
The following scenarios are prohibited for antitrust and anti-competition reasons:
>> Proposals or execution of any agreements or understanding - express or implied, formal or informal, written or oral - with any competitor regarding any aspect of competition between Premier and the competitor.
The following business arrangements could raise anti-competition or antitrust law issues. Before entering into them, you must consult with the President:
>> Exclusive arrangements for the purchase or sale of products or services.
>> Bundling of goods and services.
>> Technology licensing agreements that restrict the freedom of the licensee of licensor.
>> Agreements to add a Premier employee to another entity's Board of Directors.
Bribery
You are strictly forbidden from offering, promising, or giving money, gifts, loans, rewards, favors or anything of value to any customer, governmental official, employee, agent or other intermediary (either inside or outside of the United States) which is prohibited by law. Those paying a bribe may be subject the Company and themselves to civil and criminal penalties. When dealing with government customers or officials, no improper payments will be tolerated. If you receive any offer of money or gifts that is intended to influence a business decision, then it should be reported to your supervisor and the President immediately.
The Company prohibits improper payments in all of its activities, whether these activities are with governments or in the private sector.
Business and Personal Investments
In general, an officer or staff member may not have an interest in or relationship with an outside organization or individual having business dealing with Premier or its subsidiary banks if this interest or relationship might impair the ability of the officer or staff member to serve the best interest of Premier.
Business Ventures
An officer or employee or any member of his/her immediate family may not hold investments, direct or beneficial, in any of the following without disclosure to and the permission of the Board of Directors:
>> The business of a supplier or customer of Premier or a subsidiary
bank or in an enterprise to which financing accommodations are, or
may be, extended by Premier or a subsidiary bank
|
A business which is competitive with Premier or any of its subsidiaries
Investment, as defined in this paragraph, is not intended to include the ownership of securities in a publicly owned company.
As used above, direct and beneficial ownership of property, including securities, is defined as follows:
>> Direct ownership held or registered in the name of an officer or
employee or in the name of his broker or nominee.
>> Beneficial ownership for the benefit of an officer in a partnership,
trust, profit-sharing plan or other entity.
>> Ownership in the name of the spouse and/or minor children of an
officer or staff member or in the name of other relatives who
share an officer or employee's home.
|
Community and Charitable Activities, Etc.
Premier encourages community participation as beneficial for the individual, the community and the public image of Premier. Care, however, should be taken that the commitments of time are not such as to interfere with Premier duties.
Complying With Laws, Regulations, Policies, and Procedures
All directors, officers, and employees of Premier are expected to understand, respect and comply with all of the laws, regulations, policies and procedures that apply to them in their position with Premier. Employees are responsible for talking to their manager or compliance officer to determine which laws, regulations and Premier policies apply to their position and what training is necessary to understand and comply with them.
Computer and Information Systems
For business purposes, officers, and employees are provided telephones computer workstations and software, including network access to computing systems such as the Internet and e-mail, to improve personal productivity and to efficiently manage proprietary information in a secure and reliable manner. You must obtain permission from the Information Technology Department to install any software on any Company computer or connect any personal laptop to the Company network. As with other equipment and assets of the Company, we are each responsible for the appropriate use of these assets. Except for a limited personal use of the Company's telephones and computer/e-mail, such equipment may be used only for business purposes. Officers and employees should not expect a right to privacy of their e-mail. All e-mails on Company equipment are subject to monitoring by the Company.
Confidentiality
As a company in a highly competitive business, Premier follows a strict confidentiality policy. No director, officer, or employee may disclose (either during or after his/her employment with the Company) to any other person any confidential information relating to the business of the Company.
This policy applies to all confidential information, including, product specifications, production procedures, financial data, account information, personnel data, and payroll data.
>> The confidential business of Premier should be discussed only
within the Company and among those persons with whom it is
appropriate and necessary to do so.
>> The Company's confidential activities should not be discussed with
the media, suppliers, customers, vendors, competing or
non-competing financial institutions, sales, or purchasing agents
or anyone outside of the Company.
>> When the business discussions are held with suppliers and
customers, they should be restricted to only those matters
pertinent to the particular supplier or customers.
|
It is crucial to remember that the Company has invested a substantial amount of time, effort, and resources to develop the foundation and success of its operations. It is our best common interest that all members of our organization understand and practice the policy outlined above. All employees are required to sign a Secrecy Agreement.
Disclosure of all unauthorized confidential and proprietary information is subject to disciplinary action, including termination.
Confidential Information
By the very nature of our work, we have access to a great deal of confidential information concerning the financial affairs and plans of our customers and those of our subsidiaries, prospective customers, and suppliers. Premier strictly prohibits the use of this confidential information obtained through employment for your own benefit or for the benefit of your family, friends, or acquaintances.
Directors, officers, and employees should never discuss the affairs of Premier in public. Even though the subject matter may be innocent, persons overhearing the conversation might form an impression of indiscretion that could reflect unfavorably on Premier.
If directors, officers, or employees receive requests for information from any governmental authority, judicial party, or attorney this request should be forwarded to the CEO for proper handling.
Conflicts of Interest
It is the policy of Premier Financial Bancorp, Inc to prohibit employees from engaging in an activity, practice, or conduct which conflicts with, or appears to conflict with, the interests of Premier Financial Bancorp, Inc, it's affiliates, its customers, or its suppliers. It is impossible to describe all of the situations that may cause or give the appearance of a conflict of interest. You must avoid any position or interest that conflicts, or might reasonably appear to conflict, with your job responsibilities or the interests of the company.
Employees are expected to represent Premier Financial Bancorp, Inc in a positive and ethical manner. Thus, employees have an obligation to avoid conflicts of interest and to direct questions and concerns about potential conflicts to their supervisor/manager.
Employees may not engage, directly or indirectly, on or off the job, in any conduct that is disloyal, disruptive, competitive, or damaging to Premier Financial Bancorp, Inc., or any of its affiliates or customers.
Employees have an obligation to conduct business within guidelines that prohibit actual or potential conflicts of interest. The purpose of these guidelines is to provide general direction so employees can seek further clarification on issues related to the subject of acceptable standards of operation.
An actual or potential conflict of interest occurs when an employee is in a position to influence a decision that may result in a personal gain for that employee or for a relative as a result of the Company business dealings. For the purposes of this policy, a relative is any person who is related by blood or marriage, or whose relationship with the employee is similar to that of persons who are related by blood or marriage.
Employees may not, directly or indirectly, give, offer, and/or promise anything of value to any representative of a customer, potential client, and/or a financial institution that is in connection with any transaction or business that Premier Financial Bancorp, Inc, or any of its affiliated companies may have with the customer, potential customer or financial institution.
Personal gain may result not only in cases where an employee or relative has a significant ownership in a firm with which the Company does business, but also when an employee or relative receives any kickback, bribe, substantial gift, or special consideration as a result of any transaction or business dealings involving the Company.
Employees and their immediate families may not accept gifts (except those of nominal value) or any special discounts or loans from any person or firms doing, or seeking to do business with Premier Financial Bancorp, Inc. Generally, no gifts over $50.00 in value may be accepted from customer, potential customers, or suppliers. For purposes of this policy the definition of gift includes the acceptance of lavish entertainment and free travel and lodging.
No presumption of guilt is created by the mere existence of a relationship outside the Company. However, if an employee has any influence on transactions involving business purchases, contracts, or leases, it is imperative that he/she disclose to an officer of the Company as soon as possible the existence of any actual or potential conflict of interest so that safeguards can be established to protect all parties.
Any conflicts or potential conflict of interest must be disclosed to Premier Financial Bancorp, Inc. Failure to follow any of the aforementioned requirements will result in discipline, up to and including termination of employment.
Corporate Opportunity
Directors, officers, and employees are prohibited from (a) taking for themselves personally opportunities that properly belong to Premier or are discovered through the use of corporate property, information or position; (b) using corporate property, information, or position for personal gain; and (c) competing with the Company, directors, officers and employees owe a duty to Premier to advance Premier's legitimate interests when the opportunity to do so arises.
Employee Loans
As representatives of Premier, directors, officers, and employees should use discretion in handling personal finances. Staff members should be careful not to overextend their credit capacity.
Should an officer or employee find it necessary to borrow funds for personal needs from a subsidiary bank, the bank will approve credit on the same basis as other bank customers and at a market rate.
Directors and Executive Officers' loans are regulated by Federal regulations.
Fair Dealing
We seek to outperform our competition fairly and honestly. We seek competitive advantages through superior performance, never through unethical or illegal business practices. Stealing proprietary information, possessing or utilizing trade secret information that was obtained without the owner's consent or inducing such disclosures by past or present employees of other companies is prohibited. Each director, officer, and employee is expected to deal fairly with Premier's customers, suppliers, competitors, officers, and employees. No one should take unfair advantage of anyone through manipulation, concealment, abuse of privileged information, misrepresentation of material facts or any other unfair dealing.
Fidelity Coverage
Every officer and employee must be covered by the Company" fidelity bond. The Company will not continue to employ anyone who ceases to be eligible for coverage.
Coverage under the terms of the Company's fidelity bond ceases for anyone who has been found to commit a dishonest or fraudulent act. Obviously, this includes but is not limited to the misappropriation of money or other property. It also includes the mis-posting of accounts to favor oneself or another, and the marking of false entries, records and reports.
Financial Reporting
During the course of the year when any officer borrows a significant amount of money from any lending institution, it is to be reported within 30 days of the borrowing. Insiders and Executive Officers must follow all Regulation O guidelines for reporting debt at other financial institutions.
Financial Speculation
Speculation, as opposed to investment, by officers and employees may create problems for Premier. Ever present is the danger that someone will believe, rightfully or wrongly, that the officer or employee has been influenced to enter the speculation because of knowledge gained through his or her position with Premier.
Any speculation activity that would weaken public confidence in Premier or adversely affect Premier's reputation should not be entered into.
Honesty and Improper Actions
Personal honesty is an absolute essential for all directors, officers, and employees of Premier. Without it, the Company cannot succeed. Accordingly, complete integrity is required in each and every transaction a director, officer, or employee has with Premier and its subsidiaries. Section 1005 of the U.S. Criminal Code defines as a Premier and its subsidiaries. Section 1005 of the U.S. Criminal Code defines as a crime, subject to fine and/or imprisonment, any action carried out with the intent of injuring or defrauding Premier, any person, or any legal authority. Equally guilty, as an accessory after the fact, is any person who knowingly aids a guilty party in order to prevent or hinder his or her apprehension, trial or punishment. Examples are as follows:
>> Dishonest or fraudulent acts
>> Misappropriation of money or other properties
>> Deliberate misrouting of checks or delay of payments
>> Misposting of an account to favor one's self or some other party
>> False or misleading entries, records or reports
It goes without saying that the Company expects all of its staff members to be aware of, and to be guided strictly by, these regulations.
Indebtedness
Personal financial responsibility is an absolute requirement for everyone associated with the Company. Premier strictly prohibits the following forms of indebtedness:
>> Overdrafts
>> Cash items (excluding travel advances or other bank related purposes)
>> Check kiting
>> Any loan to a director, officer, or employee that violates any law or regulation governing such loans.
Efficient handling of his or her personal finances is one of the responsibilities expected of our directors, officers, and employees. The board does not condone even the "occasional" overdraft. In addition, a director, officer or employee is held personally responsible, in this connection, for an overdraft caused by one with whom the account is maintained jointly.
Insider Trading or Stock Tipping
Directors, officers, and employees who are aware of material, nonpublic information (an "insider") from or about the Company, are not permitted, directly or through family members or other persons or entities, to:
>> Buy or sell securities (or derivatives relating to such
securities) of Premier (other than pursuant to a
pre-approved trading plan that complies with the SEC Rule 10b5-1),
or
>> Pass on, tip or disclose material, nonpublic information to others
outside the Company including family and friends.
|
Such buying, selling, or trading of securities may be punished by discipline of up to and including termination of employment; civil actions, including penalties of up to three times the amount of profit gained or loss avoided by the inside trade or stock tip; or criminal actions, including jail time.
Examples of information that may be considered material, non-public information in some circumstances are:
>> Undisclosed annual, quarterly, or monthly financial results, a change in earnings or earning projections, or unexpected or unusual gains or losses in major operations.
>> Undisclosed negotiations and agreements regarding mergers, concessions, joint ventures, acquisitions, divestitures, business combinations or tender offers.
>> An undisclosed increase or decrease in dividends on the Company's common stock.
>> Undisclosed major regulatory changes.
>> Undisclosed major management changes.
>> A substantial contract award or termination that has not been publicly disclosed.
>> A major lawsuit or claim that has not been publicly disclosed.
>> The gain or loss of a significant customer or supplier that has not been publicly disclosed.
>> An undisclosed filing of a bankruptcy petition by the Company or a significant subsidiary.
>> Information that is considered confidential.
>> Any other undisclosed information that could affect our stock price.
Another Company's Securities. The same policy also applies to securities issued by another company if you have acquired material, nonpublic information relating to such company in the course of your employment or affiliation with Premier.
Trades Following Disclosure. When material information has been publicly disclosed, each insider must continue to refrain from buying or selling the securities in question until the third business day after the information has been publicly released to all the markets time to absorb the information.
Lending Relationships and Prohibited Lending Practices
Borrowing
To avoid possible conflicts of interest, loan applications submitted to Senior Managers and employees by relatives or close personal friends are to be submitted to other independent lending Senior Managers or employees of equal or higher position for processing and approval. The policy also applies to the processing and approval of overdrafts, waiver of service charges, and other free services.
Lending Relationships
It is the position of the Company that lending services be available to serve the legitimate and deserving credit needs of all customers on an equal basis. Loan terms and conditions shall be based on the borrower's credit worthiness and accompanying relationships. These same measures will be used when loans are made to employees. Any transaction between a Senior Manager and employee of the Company and a customer of the Company must be conducted on an "arms length basis", meaning the Senior Manager or employee may not received any discount or other benefit not normally granted to others.
Loan Application Procedures are as follows:
o Loans to Senior Officers (Executive Vice Presidents, Senior Vice
Presidents, Vice Presidents, Comptrollers and Cashier may be approved by
the President/C.E.O., or Board of Directors.
o Loans to Junior Officers (Assistant Vice Presidents) may be approved by the
President/C.E.O.
o Loans to regular, full-time employees may be approved by the
President/C.E.O. A loan officer may not vote to approve or disapprove a
loan request of an employee working in their department.
o Loans to regular, part-time employees may be approved by the
President/C.E.O. A loan officer may not vote to approve or disapprove a
loan request of an employee working in their department.
Senior Managers and employees may not borrow money from customers or suppliers of the Company, except from recognized lending institutions. The term "borrow" does not include a purchase from a customer or supplier resulting in an extension of credit in the normal course of business.
Lending officers are not permitted to process loan applications or to extend credit to members of their family or close personal friends. Any such loan application must be referred to another lending officer.
Obeying Laws and Regulations
The Company and its employees may be subject to penalties if they violate any laws. It is, therefore, important that employees be familiar with the laws and regulations governing the line of business in which they work and that they are careful to ensure that those laws and regulations are fully complied with. Compliance with laws and regulations is everyone's responsibility, and employees who knowingly commit illegal acts will be subjected to disciplinary action up to and including termination.
It is the responsibility of all employees to report all instances of known or suspected illegal activity on the part of any officer, employee, agent, or customer of the Company. Failure to report suspected illegal activities properly as outlined in this policy may subject that officer or employee to disciplinary action up to and including termination. The Company is required by law to report violations of criminal laws to state and/or federal enforcement agencies.
Company policy prohibits any form of retaliatory action toward a Senior Manager or employee who notifies the Company of a suspected illegal act or participates in the investigation of a complaint.
Dishonest and fraudulent acts by Company Senior Mangers and employees are crimes under federal and state law, and may be punishable by fines and/or imprisonment. Examples of activities prohibited by law include:
o Accepting anything of value in connection with the business of the Company.
o Stealing, embezzling, or misapplying corporate funds or assets.
o Using threats, physical force or other unauthorized means to collect money.
o Issuing unauthorized obligations (such as certificates of deposit, notes,
mortgages, or commitments) or making false entries.
o Unless specifically permitted by law, making a loan or giving a gift to a
regulator who has the authority to examine the Company.
o Using a computer to gain unauthorized access to the records of a customer.
o Concealing or misapplying any of the Company's assets.
Loaning funds to, or depositing funds with third parties with the understanding,
express or implied, that the party receiving such funds will make a loan or pay
any consideration to the officer or employee.
Outside Activities
Outside activities should not interfere or conflict with the interest of Premier, Acceptance of outside employment, representation of customers (Premier and its subsidiaries) in their dealing with Premier and/or its subsidiaries, and participation in the affairs of any outside organizations carry possibilities of conflict of interest.
By accepting full time employment with Premier, the employee becomes a representative of Premier and agrees to devote his or her full professional time and interests first to Premier.
Premier employees are not expected to participate in an outside activity if it interferes or conflicts with the interest of Premier, or if it in any way has an adverse effect in the performance of the individual in his or her assigned responsibilities and duties. Accordingly, outside employment or business interests should not be undertaken or engaged in by a member of the staff without approval of the immediate supervisor.
Payments to Government Personnel
The U.S. Government has a number of laws and regulations regarding business gratuities, which may be accepted by U.S. Government personnel. The promise, offer or delivery to an official or employee of the U.S. Government of a gift, favor or other gratuity in violation of these rules would not only violate Company policy but could also be criminal offense. State and local governments, as well as foreign governments, may have similar rules. The Company's Chief Financial Officer can provide guidance to you in this area.
Personal Conduct
Company employees should always be mindful of the Company's position and reputation in the community. Since the success of any Company operation depends on public trust, it is extremely important that employees conduct their personal affairs in such a way as to avoid discredit or embarrassment to himself or herself or to the Company. Company employees are expected to provide complete and truthful information in any aspect of their dealings with the Company.
While conducting Company business or representing the Company employees are expected to conduct themselves in a nondiscriminatory manner with Company customers, vendors, employees and the general public. The Company's policy prohibits discriminatory conduct due to race, age, color religion, national origin, sex, veteran status, disability, or any other basis protected by federal, state, or local law. Discriminatory behavior not only is illegal, but it also diminishes good customer, vendor, and employee relations, all of which are essential to the success of the Company.
Political Activities
Officers and employees of Premier should at all times be alert to and interested in the affairs of both their business and social communities. It is anticipated that every employee will be dedicated to the principles of an ever-improved society.
Premier expects the voluntary participation of its staff members in the activities of their chosen political parties, elections and all other matters of civic importance.
However, Premier itself shall not engage in politics or make a contribution or expenditure, which directly or indirectly is in connection wit any election to any political office, any primary election or any political office, any primary election or any political office.
Staff members should follow the following guidelines insofar as their personal participation is concerned:
>> In support of a candidate or party, an officer or employee's
political activity is solely a matter of personal choice.
>> In any political activity or support of a candidate, party or
issue, the officer or staff member must make it perfectly clear at
all times that the actions or support are those of a private
citizen and that he or she does not represent Premier in this
connection.
>> In the event that an officer or staff member wishes to file for
elective office or to accept an active position as a campaign
leader or director for a political party or candidate at the city,
county, state, or national level, the prior approval of the Board
of Directors must be obtained. Such approval shall be granted
unless the political position would interfere with the performance
of the person's duties as an officer or staff member of Premier.
>> In the event that an officer or employee of Premier engages in
outside employment with any government unit, or is being appointed
to any governmental position, the prior approval of the Board of
Directors must be obtained.
|
Political Contributions
You shall refrain from making any use of Company, personal or other funds or resources on behalf of the Company for political or other purposes which are improper or prohibited by the applicable federal, state, local, or foreign laws, rules or regulations. Company contributions or expenditures in connection with election campaigns will be permitted where allowed by federal, state, local, or foreign election laws, rules and regulations.
You are encouraged to participate actively in the political process. We believe that individual participation is a continuing responsibility of those who live in a free state.
Prohibited Substances
We have policies prohibiting the use of alcohol, illegal drugs or other prohibited items including legal drugs which affect the ability to perform one's work duties, while on Company premises. We also prohibit the possession or use of alcoholic beverages, firearms, weapons, or explosives on our property unless authorized by an Executive Officer of the Company. The Company also prohibits you from reporting to work while under the influence of alcohol or illegal drugs.
Protection and Proper Use of Premier Assets
All directors, officers, and employees should protect Premier's assets and ensure their efficient use. All Premier assets should be used for legitimate business purposes.
Public Company Reporting
As a public company, it is of critical importance that Premier's filings with the Securities and Exchange Commission be accurate and timely. Depending on their position with the Company, an employee, officer or director may be called upon to provide necessary information to assure that the Company's public reports are complete, fair and understandable. Premier expects employees, officers, and directors to take this responsibility very seriously and to provide prompt accurate answers to inquiries related to the Premier's public disclosure requirements.
Record Retention
We have detailed document retention policies to systematically establish retention periods for records created or received in the normal course of business. A record is information, regardless of physical format, which has been created or received in the transaction of the Company's business. Physical format of a record includes hard transaction of the Company's business. Physical format of a record includes hard copy, electronic, magnetic tape, disk, audio, video, optical image, etc. Each corporate department and office is responsible for the maintenance, retrieval, transfer, and destruction of its records in accordance with the established filing procedures, records retention schedules and procedures.
The alteration, destruction or falsification of corporate documents or records may constitute a criminal act. Destruction or alteration of documents with the intent to obstruct a pending or anticipated official government proceeding is a criminal act and could result in large fines and a prison sentence of up to 20 years. Document destruction or falsification in other contexts can result in a violation of the federal securities laws or the obstruction of justice laws.
Before any destruction of any documents or records, you must consult the document retention procedures. You are required to review, follow and abide by the terms of this policy and related procedures. If the policy or procedure is not clear, questions arise, or there is a pending or anticipated official proceeding, then the President must approve any document destruction.
Records and Financial Statements
All of the Company's book, records, accounts and financial statements must be maintained in reasonable detail, must appropriately reflect the Company's transactions and must conform both to applicable legal requirements and to the Company's system of internal controls. Unrecorded or "off the books" funds or assets should not be maintained unless permitted by applicable law or regulation. Records should always be retained or destroyed according to the Company's record retention policies. In accordance with those policies, in the event of litigation or governmental investigation please consult senior management.
Security Investments
Officers and employees shall not accept offers, which come to them because of their position to buy a security at terms more favorable than those available to the general public.
Officers and staff members shall be prudent in investments and not engage in unwarranted speculation in securities and commodities.
Transactions with Customers, Suppliers, Etc.
In no instance shall an officer or staff member negotiate or approve a transaction with a customer, supplier, or competition with which he or she has any investment as defined in the paragraph under "Business Ventures".
See section entitled "Conflicts of Interest" for additional data and see "Financial Reporting" for requirements regarding reporting such information to Premier's management.
Unprofessional Conduct
It is the policy of Premier Financial Bancorp, Inc. that certain rules and regulations regarding employee behavior are necessary for efficient business operations and for the benefit and safety of all employees. Employees are expected to adhere to high standards of ethical business conduct in dealings with depositors, creditors, community members, other employees, and members of the public. Premier Financial Bancorp, Inc. expects all employees to conduct themselves in a professional manner when representing our Company. This applies whenever an employee is representing our Company while at work, or other Company related activities or functions. Conduct that interferes with operations, discredits the Company, or is offensive to customers or co-workers will not be tolerated.
Unprofessional conduct is defined as personal or business conduct that interferes with Company operations or brings discredit to our Company. The following examples of unprofessional conduct are not intended to be an all-inclusive list, but lists violations, which will be subject to discipline, up to and including termination.
o Unauthorized attempt or entry into restricted areas.
o Falsification of records, time sheets, expense reports, employment
applications, etc. o Unauthorized disclosure of information containing
customer, employee, payroll, or other company business.
o Use of illegal drugs or abuse of other controlled substances or alcohol while on Premier Financial Bancorp, Inc.'s business.
o Selling, dispensing, or possessing alcohol or illegal drugs or narcotics on Company premises.
o Threatening, coercing, or intimidating others while on Company premises or business.
o Possession of dangerous or unauthorized materials in the workplace, such as explosives or firearms.
o Insubordination and/or refusal to follow instructions.
o Updating or modifying an unauthorized account.
o Leaving the job or work area without permission during regularly scheduled working hours.
o Failing to work in a safe manner, sleeping on the job and/or endangering the health of yourself or others.
o Wrongful taking, misappropriation, conversion, or damage to Company property or the property of co-workers, customers, or suppliers.
o Discrimination against or harassment of an employee based on race, sex, age, national origin, non-job related disability, etc.
o Manipulation of a customer or an employee's account or Company record.
o Abuse, destruction, theft of Company, computers or other equipment, vehicles, or the property of another employee or client.
o Unauthorized use of Company equipment and software.
o Intentional violation of a Premier Financial Bancorp, Inc. rules, internal control, regulation, or procedure.
o Collaborating with others internally or externally of Premier Financial Bancorp, Inc. causing fraudulent, dishonest activity.
o Posting both financial and non-financial transactions to your own account
o Disorderly conduct, including fighting or horseplay on Company property.
o Excessive tardiness or absenteeism or failure to report absence within a reasonable time.
o Creating unsafe or unsanitary conditions including consumption of food or beverages in prohibited areas.
o Conducting personal business during working hours and /or making excessive or unnecessary personal telephone calls.
o Smoking in unauthorized areas.
o Unethical behavior in worker-client relationship or disregard for customer relations.
o Engaging in illegal, immoral, or indecent conduct on Company premises
o Misuse of Company work time.
o Violation of safety rules and/or failure to properly use safety equipment or gear.
o Disclosing confidential company information.
o Using profanity or abusive language.
o Gambling on company property.
o Wearing inappropriate attire or having an inappropriate personal appearance.
o Disclosing your system password to anyone (employee or non-employee)
o Dishonesty in an internal investigation.
o Use of the internet to view and download inappropriate information
i.e. pornography
III. REPORTING
Employees who suspect or know of violations of this Code or illegal or unethical business or workplace conduct by employees, officers or directors have an obligation to contact either their immediate supervisor or other superiors or the appropriate member of senior management. If the individuals to whom such information is conveyed are not responsive, or if there is reason to believe that reporting to such individuals is inappropriate in particular cases, then the employee, officer or director may contact the President of the Company. Such communications will be kept confidential to the extent feasible. If the employee is still not satisfied with the response, the employee may contact the Audit Committee of the Board of Directors of the Company. If concerns or complaints require confidentiality, then this confidentiality will be protected to the extent feasible, subject to applicable law. Directors and officers should report any potential violations of the Code to the President, the Chairman of the Audit Committee of the Board of Directors or the Chairman of the Board of Directors.
Any employee of Premier Financial Bancorp, Inc. or its subsidiaries may submit a good faith complaint regarding accounting or auditing matters, or any other inappropriate financial practices to the management of the Company without fear of dismissal or retaliation of any kind. The Company is committed to achieving compliance with all applicable securities laws and regulations, accounting standards, accounting controls, and audit practices. The Company's Audit Committee will oversee treatment of employee concerns in this area.
In order to facilitate the reporting of employees complaints, the Company's Audit Committee has established the following procedures for (1) the receipt, retention and treatment of complaints regarding accounting, internal accounting controls, or auditing matters and (2) the confidential, anonymous submission by employees of concerns regarding questionable accounting or auditing matters.
Receipt Of Employee Complaints
o Employees with concerns regarding Accounting Matters may report their concerns to the President or the Audit Committee of the Company.
o Employees may forward complaints on a confidential or anonymous basis to the Audit Committee through regular mail to:
Mr. Robert Walker 2883 5th Avenue Huntington, WV 25702
Mr. E.V. Holder Holder and Lykins 407-409 2nd Street Vanceburg, KY 41179
Mr. Keith Molihan Community Action
PO Box 517
Ironton, OH 45638
Mr. Ed Burns CJ Hughes Construction, Inc. 75 West 3rd Avenue Huntington, WV 25701
o Any employee complaints received by management of the Company shall be promptly forwarded to the Audit Committee.
Complaint Procedure
All mailed complaints shall be forwarded in a sealed envelope addressed either to the Chairman of the Audit Committee or the President, containing another envelope labeled with a legend such as: "To be opened by the Audit Committee only. Being submitted pursuant to the "whistle blower policy" adopted by the Audit Committee." If an employee would like to discuss any matter with the Audit Committee, the employee should indicate this in the submission and include a telephone number at which he or she might be contacted if the Audit Committee deems it appropriate.
Scope Of Matters Covered By These Procedures
These procedures relate to employee complaints relating to any questionable accounting or auditing matters, including, without limitation, the following:
o Fraud or deliberate error in the preparation, evaluation, review or audit of any financial statement of the Company.
o Fraud or deliberate error in the recording and maintaining of financial records of the Company;
o Deficiencies in or noncompliance with the Company's internal accounting controls;
o Misrepresentation or false statement to or by a senior officer or accountant regarding a matter contained in the financial records, financial reports or audit reports of the Company; or
o Deviation from full and fair reporting of the Company's financial condition.
Treatment of Complaints
o Upon receipt of a complaint, the Audit Committee will (i) determine whether the complaint actually pertains to Accounting Matters and (ii) when possible, acknowledge receipt of the complaint to the sender.
o Complaints relating to Accounting Matters will be reviewed under Audit Committee direction and oversight by legal counsel, Internal Audit or such other persons as the Audit Committee determines to be appropriate. Confidentiality will be maintained to the fullest extent possible, consistent with the need to conduct an adequate review.
o Prompt and appropriate corrective action will be taken when and as warranted in the judgement of the Audit Committee.
o The Company will not discharge, demote, suspend, threaten, harass or in any manner discriminate against any employee in the terms and conditions of employment based upon any lawful actions of such employee with respect to good faith reporting of complaints regarding Accounting Matters or otherwise as specified in Section 806 of the Sarbanes-Oxley Act of 2002.
Reporting and Retention of Complaints and Investigations
The Audit Committee will maintain a log of all complaints, tracking their receipt, investigation and resolution and shall prepare a periodic summary report thereof for the Audit Committee. Copies of complaints and such log will be maintained in accordance with the Company's document retention policy, but in all events for a period of not less than seven (7) years.
Non-Retaliation
Premier prohibits retaliation of any kind against individuals who have made good faith reports or complaints of violations of this Code or other known or suspected illegal or unethical conduct. However, if a reporting individual was involved in improper activity the individual may be appropriately disciplined even if he or she was the one who disclosed the matter to the Company. In these circumstances, we may consider the conduct of the reporting individual in promptly reporting the information as a mitigating factor in any disciplinary decision.
IV. AMENDMENT, MODIFICATION AND WAIVER
This Code may be amended or modified by the Board of Directors of Premier. Waivers of this Code may only be granted on the recommendation of the Board of Directors or a committee of the Board with specific delegated authority. Waivers with respect to officers or directors will be disclosed to shareholders as required by the Securities Exchange Act of 1934 and the rules thereunder and any applicable rules of self- regulatory organizations.
V. CONCLUSION
This Code is an attempt to point all of us at Premier in the right direction, but no document can achieve the level of principled compliance that we are seeking. In reality, each of us must strive every day to maintain our awareness of these issues and to comply with the Code's principles to the best of our abilities. We must always ask:
Does it feel right?
Is this action ethical in every way?
Is this action in compliance with the law?
Could my actions create an appearance of impropriety?
Am I trying to fool anyone, including myself, about the propriety of this action?
We cannot expect perfection, but we do except good faith. If you act in bad faith or fail to report illegal or unethical behavior, then you will be subject to disciplinary procedures. We hope that you agree that the best course of action is to be honest, forthright and loyal at all times.
Revised November 2003
EXHIBIT 31.1
PRINCIPAL EXECUTIVE OFFICER CERTIFICATION
PURSUANT TO SECTION 302 OF
THE SARBANES-OXLEY ACT OF 2002
I, Robert W. Walker, President and CEO of Premier Financial Bancorp, Inc. certify that:
1. I have reviewed this annual report on Form 10-K of Premier Financial Bancorp, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant
and have:
a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known
to us by others within those entities, particularly during the
period in which this report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and;
c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation of internal control over financial reporting,
to the registrant's auditors and the audit committee of the registrant's
board of directors (or persons performing the equivalent functions): a)
All significant deficiencies and material weaknesses in the design
or operation of internal control over financial reporting which
are reasonably likely to adversely affect the registrant's ability
to record, process, summarize and report financial information;
and
b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal control over financial reporting.
Date: April 14, 2004 /s/ Robert W. Walker ------------------------------- Robert W. Walker President & Chief Executive Officer |
EXHIBIT 31.2
PRINCIPAL FINANCIAL OFFICER CERTIFICATION
PURSUANT TO SECTION 302 OF
THE SARBANES-OXLEY ACT OF 2002
I, Brien M. Chase, Vice President and CFO of Premier Financial Bancorp, Inc. certify that:
1. I have reviewed this annual report on Form 10-K of Premier Financial Bancorp, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant
and have:
a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known
to us by others within those entities, particularly during the
period in which this report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and;
c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation of internal control over financial reporting,
to the registrant's auditors and the audit committee of the registrant's
board of directors (or persons performing the equivalent functions): a)
All significant deficiencies and material weaknesses in the design
or operation of internal control over financial reporting which
are reasonably likely to adversely affect the registrant's ability
to record, process, summarize and report financial information;
and
b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal control over financial reporting.
Date: April 14, 2004 /s/ Brien M. Chase ---------------------------------------- Brien M. Chase Vice President & Chief Financial Officer |
EXHIBIT 32
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of Premier Financial Bancorp, Inc. (the "Company") on Form 10-K for the period ending December 31, 2003 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), we, Robert W. Walker and Brien M. Chase, Chief Executive Officer and Chief Financial Officer, respectively, of the Company, certify, pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act of 2002, that to our knowledge:
o The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934, and
o The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
By: /s/ Robert W. Walker
---------------------------------------
Robert W. Walker
President and Chief Executive Officer
By: /s/ Brien M. Chase
---------------------------------------
Brien M. Chase
Vice President and Chief Financial Officer
Date: April 14, 2004
|