-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, JxUbOGOuwwGDomTtb+OMwbEushsw2A0leu5UH2d8xzRnHb0yQuOkAZXmqxrK1wcE J/8ZyT0E+BKeKYutQiaaxA== 0000887919-03-000021.txt : 20030327 0000887919-03-000021.hdr.sgml : 20030327 20030327171329 ACCESSION NUMBER: 0000887919-03-000021 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20021231 FILED AS OF DATE: 20030327 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PREMIER FINANCIAL BANCORP INC CENTRAL INDEX KEY: 0000887919 STANDARD INDUSTRIAL CLASSIFICATION: STATE COMMERCIAL BANKS [6022] IRS NUMBER: 611206757 STATE OF INCORPORATION: KY FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-20908 FILM NUMBER: 03621790 BUSINESS ADDRESS: STREET 1: 2883 FIFTH AVENUE STREET 2: NONE CITY: HUNTINGTON STATE: WV ZIP: 25702 BUSINESS PHONE: 3045251600 10-K 1 pfbi200210-k.txt PFBI 2002 10-K BODY 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, 2002 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. [ ] 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 - -------------------------------------- --------------------------- $39,845,670 March 10, 2003 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 10, 2003 ----- ---------------------------- 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 2003 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, 2002, Premier had total consolidated assets of $677.6 million, total consolidated deposits of $548.0 million and total consolidated shareholders' equity of $59.4 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. 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. As part of this change in strategy Premier elected to dispose of two of its subsidiary banks, the Bank of Mt. Vernon and The Sabina Bank. These disposals were completed in 2001. 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 Affilate 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. Through its experiences in acquiring its Banks, the Company is developing and implementing a strategy of joining together community banks that retain their commitment to local orientation and direction, while having the benefit of the Company's capital for growth and staff assistance to promote safety, soundness and regulatory compliance. 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 one non-affiliated bank. 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. 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, 2002, Premier met both requirements, with Tier I and total capital equal to 14.1% and 17.5% 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 and, accordingly, is required to maintain a minimum "leverage ratio" of 3%. 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, 2002, Premier's leverage ratio was 9.1%. 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 Financial Bancorp, Inc. (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 provisons 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 sufficent 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. 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. 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, 2002, approximately $3.1 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 21 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 278 full-time equivalent employees as of December 31, 2002. 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 is 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. Item 4. Submission of Matters to a Vote of Security Holders There were no matters submitted to a vote of security holders, through solicitation of proxies or otherwise during the fourth quarter of the fiscal year covered by this report. PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters --------------------------------------------------------------------- The Company's common stock is listed on the NASDAQ National Market System under the symbol PFBI. At December 31, 2002, the Company had approximately 681 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 dividends paid per share shown below have been adjusted retroactively to reflect prior stock splits effected in the form of share dividends. Cash Sales Price Dividends Paid High Low -------------- ---- --- 2001: First Quarter $ - $ 7.38 $5.13 Second Quarter - 7.90 6.30 Third Quarter - 9.40 7.55 Fourth Quarter - 8.95 8.10 --------- $ - ========= 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 (through March 10, 2003) $ - $ 9.50 $7.58 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, 2002, approximately $3.1 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 retroactively adjusted to reflect all prior stock dividends and splits effected in the form of share dividends and has been restated to give the effect of acquisitions accounted for as a pooling of interests.
At or for the Year Ended December 31, 2002 2001 2000 1999 1998 -------- -------- -------- -------- -------- Earnings Net interest income $ 24,290 $ 25,274 $ 28,676 $ 28,665 $ 20,107 Provision for loan losses 8,796 8,921 4,932 3,294 1,742 Non-interest income 3,553 13,336 4,012 3,776 4,673 Non-interest expense 21,291 23,985 26,105 22,630 15,337 Income taxes (benefit) (1,024) 3,385 316 1,927 1,997 -------- -------- -------- -------- -------- Net income (loss) $ (1,220) $ 2,319 $ 1,335 $ 4,590 $ 5,704 ======== ======== ======== ======== ======== Financial Position Total assets $677,628 $771,850 $889,932 $852,468 $657,744 Loans, net of unearned income 435,137 458,741 595,576 570,106 395,620 Allowance for loan losses 11,360 8,946 7,821 6,812 4,363 Goodwill and other intangibles 16,044 16,044 22,856 24,339 21,555 Securities 157,633 155,566 194,400 170,420 177,192 Deposits 547,974 570,531 728,412 692,843 523,193 Other borrowings 38,486 49,315 71,240 73,929 47,670 Debt 28,750 28,750 28,750 28,750 28,750 Stockholders' equity 59,366 59,875 55,830 52,127 54,399 Share Data Net income - basic $ (0.23) $ 0.44 $ 0.26 $ 0.88 $ 1.09 Net income - diluted (0.23) 0.44 0.26 0.88 1.09 Book value 11.35 11.44 10.67 9.96 10.40 Cash dividend 0.00 0.00 0.15 0.60 0.60 Ratios Return on average assets (0.18)% 0.30% 0.15% 0.57% 0.97% Return on average equity (2.03)% 4.01% 2.53% 8.54% 10.80% Dividend payout 0.00% 0.00% 58.80% 68.41% 53.79% Stockholders' equity to total assets at period-end 8.76% 8.41% 6.27% 6.11% 8.27% Average stockholders' equity to average total assets 8.65% 7.47% 6.07% 6.72% 9.02% Tier I Leverage ratio 9.13% 8.47% 6.11% 6.23% 8.05%
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 $26 million to $159 million, each with a local community name and orientation. These 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 another non-affiliated bank. As of December 31, 2002, Premier had approximately $678 million in total assets, $435 million in total loans and $548 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 Unites States of America. The audit committee of the Board of Directors engaged Crowe, Chizek and Company, LLP, independent auditors, to audit the consolidated financial statements, and their report is included 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 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. SUMMARY FINANCIAL RESULTS Premier net results for 2002 were a loss of $1.2 million, compared to net income of $2.3 million reported for the year 2001. The loss for 2002 is primarily due to large provisions for loan losses, writedowns of repossessed real estate to realizable values, and higher collection costs. The $2.3 million earned in 2001 was due in large part to gains on the sale of two subsidiary banks. The earnings in 2001 follow $1.3 million of net income reported for the year ending December 31, 2000. Basic earnings per share was a loss of ($0.23) in 2002, compared to income of $0.44 in 2001 and $0.26 in 2000. 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 net loss for 2002 resulted in a ROA of (0.18%), a decrease from the 0.30% ROA reported in 2001 and the 0.15% ROA in 2000. As shown in the table, the decrease in ROA from 2001 is attributed primarily to a decrease in gains on sales of assets and subsidiaries. The decrease in ROA versus the years 2000 and earlier is primarily due to a decline in net credit income resulting from the high provisions for loan losses in 2002. As illustrated in the table, Premier's 2002 fully taxable net interest income as a percent of average earning assets was the highest in the past three years. During the same time, Premier's net overhead ratio (non-interest expense less non-interest income as a percent of average earning assets) declined slightly to 2.75% in 2002, down from 2.78% in 2001 and 2.77% in 2000. 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 2002 ROE was (2.03%), compared to 4.01% earned in 2001 and 2.53% reported in 2000. ROE decrease primarily due the net loss reported for 2002.
ANALYSIS OF RETURN ON ASSETS AND EQUITY 2002 2001 2000 1999 1998 ---- ---- ---- ---- ---- As a percent of average earning assets: Fully taxable-equivalent net interest income 3.85% 3.62% 3.68% 4.04% 3.85% Provision for loan losses (1.37) (1.25) (0.62) (0.45) (0.32) ----- ----- ----- ----- ----- Net credit income 2.48 2.37 3.07 3.59 3.52 Gains on the sales of assets & subsidiaries* (0.01) 1.29 0.00 0.00 0.29 Non-interest income 0.56 0.58 0.50 0.52 0.58 Non-interest expense (3.31) (3.36) (3.27) (3.11) (2.85) Tax equivalent adjustment (0.07) (0.08) (0.09) (0.10) (0.11) Applicable income taxes 0.16 (0.47) (0.04) (0.26) (0.37) ----- ----- ----- ----- ----- Return on average earning assets (0.19) 0.32 0.17 0.63 1.06 Multiplied by average earning assets to average total assets 92.43 92.15 91.89 91.08 92.00 ----- ----- ----- ----- ----- Return on average assets (0.18)% 0.30% 0.15% 0.57% 0.97% Multiplied by average assets to average equity 11.56X 13.39X 16.46X 14.87X 11.09X ----- ----- ----- ----- ----- Return on average equity (2.03)% 4.01% 2.53% 8.54% 10.80% ===== ===== ===== ===== ===== (*) 1998 includes non-recurring other income.
A breakdown of Premier's financial results by quarter for the years ended December 31, 2002 and 2001 is summarized below.
QUARTERLY FINANCIAL INFORMATION (Dollars in thousands except per share amounts) Full First Second Third Fourth Year ------- ------- ------- ------- ------- 2002 Interest Income $11,546 $11,345 $10,925 $10,624 $44,440 Interest Expense 5,572 5,195 4,879 4,504 20,150 Net Interest Income 5,974 6,150 6,046 6,120 24,290 Provision for Loan Losses 986 3,200 3,094 1,516 8,796 Securities Gains 44 (103) 1 13 (45) Net Overhead 4,128 5,016 4,384 4,165 17,693 Income before Income Taxes 904 (2,169) (1,431) 452 (2,244) Net Income 644 (1,380) (839) 355 (1,220) Basic Net Income per share 0.12 (0.26) (0.16) 0.07 (0.23) Diluted Net Income per share 0.12 (0.26) (0.16) 0.07 (0.23) Dividends Paid per share 0.00 0.00 0.00 0.00 0.00 2001 Interest Income $15,796 $14,999 $14,243 $13,004 $58,042 Interest Expense 9,442 8,589 8,003 6,734 32,768 Net Interest Income 6,354 6,410 6,240 6,270 25,274 Provision for Loan Losses 632 3,015 1,793 3,481 8,921 Securities Gains 180 60 195 81 516 Gain on Sale Of Subsidiary Banking Operations 3,418 0 0 5,295 8,713 Net Overhead 5,121 4,599 4,638 5,520 19,878 Income before Income Taxes 4,199 (1,144) 4 2,645 5,704 Net Income 1,224 (705) 46 1,754 2,319 Basic Net Income per share 0.23 (0.13) 0.01 0.33 0.44 Diluted Net Income per share 0.23 (0.13) 0.01 0.33 0.44 Dividends Paid per share 0.00 0.00 0.00 0.00 0.00
BUSINESS COMBINATIONS In 2001, 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 2000 and 2001 operating results through the respective dates of the sale. However, 2002's operating results do not include any of the operations of these two banks. Comparisons of average balances and income statement categories 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. In formation on rate-related sources and uses of funds for each of the three years in the period ended December 31, 2002, is provided in the table below.
AVERAGE CONSOLIDATED BALANCE SHEETS AND NET INTEREST INCOME ANALYSIS (Dollars in thousands) 2002 2001 2000 Average Yield/ Average Yield/ Average Yield/ Balance Interest Rate Balance Interest Rate Balance Interest Rate ---------------------------- ---------------------------- ----------------------------- Assets: Interest earning assets U.S. Treasury and federal agency securities $117,952 $ 4,988 4.23% $127,726 $ 7,323 5.73% $152,479 $ 9,674 6.34% States and municipal obligations(1) 17,973 1,236 6.88 20,277 1,589 7.84 24,156 1,885 7.80 Other securities (1) 14,414 675 4.68 12,760 709 5.56 7,215 688 9.54 -------- ------- ----- -------- ------- ----- -------- ------- ----- Total investment securities 150,339 6,899 4.59 160,763 9,621 5.98 183,850 12,247 6.66 Federal funds sold 42,023 691 1.64 40,247 1,529 3.80 22,714 1,398 6.15 Interest-bearing deposits with banks 564 8 1.42 504 20 3.97 1,052 67 6.37 Loans, net of unearned income(3)(4) Commercial 184,974 14,475 7.83 210,923 18,997 9.01 228,760 22,090 9.66 Real estate mortgage 198,636 16,055 8.08 224,428 19,532 8.70 287,713 26,197 9.11 Installment 65,890 6,777 10.29 76,889 8,886 11.56 74,045 7,958 10.75 -------- ------- ----- -------- ------- ----- -------- ------- ----- Total loans 449,500 37,307 8.30 512,240 47,415 9.26 590,518 56,245 9.52 -------- ------- ----- -------- ------- ----- -------- ------- ----- Total interest-earning assets 642,426 44,905 6.99 713,754 58,585 8.21 798,134 69,957 8.77 Allowance for loan losses (9,562) (8,744) (7,626) Cash and due from banks 17,199 20,938 20,580 Premises and equipment 11,913 13,593 15,143 Other assets 33,072 35,033 42,386 -------- -------- -------- Total assets $695,048 $774,574 $868,617 ======== ======== ======== Liabilities and Equity: Interest bearing liabilities NOW and money market $183,589 3,617 1.97% $178,501 5,723 3.21% $175,166 7,272 4.15% Savings 58,239 989 1.70 63,287 1,567 2.48 63,850 1,929 3.02 Certificates of deposit and other time deposits 258,603 10,934 4.23 322,309 19,260 5.98 394,763 23,302 5.90 -------- ------- ----- -------- ------- ----- -------- ------- ----- Total interest bearing deposits 500,431 15,540 3.11 564,097 26,550 4.71 633,779 32,503 5.13 Short-term borrowings 5,788 105 1.81 8,955 393 4.39 24,382 1,557 6.39 Other borrowings 10,678 412 3.86 16,500 1,285 7.79 20,000 1,655 8.28 FHLB advances 25,135 1,241 4.94 26,827 1,688 6.29 32,071 1,991 6.21 Debt 28,750 2,852 9.92 28,750 2,852 9.92 28,750 2,852 9.92 -------- ------- ----- -------- ------- ----- -------- ------- ----- Total interest-bearing liabilities $570,782 20,150 3.53% $645,129 32,768 5.08% $738,982 40,558 5.49% Non-interest bearing deposits 61,072 65,795 72,392 Other liabilities 3,064 5,797 4,482 Shareholders' equity: 60,130 57,853 52,761 --------- -------- -------- Total liabilities and equity $695,048 $774,574 $868,617 ======== ======== ======== Net interest earnings (1) $24,755 $25,817 $29,399 ======= ======= ======= Net interest spread (1) 3.46% 3.13% 3.28% Net interest margin (1) 3.85% 3.62% 4.68% (1) Taxable - equivalent yields are calculated assuming a 34% federal income tax rate. (2) Yields are calculated on historical cost except for yields on marketable equity securities that are calculated using fair value. (3) Includes loan fees, immaterial in amount, in both interest income and the calculation of yield on loans. (4) Includes loans on non-accrual status.
In 2002, average earning assets declined by 10.0% or $71.3 million from 2001, following a 10.6% or $84.4 million decline in 2001 from 2000. Average interest bearing liabilities, the primary source of funds supporting the earning assets, decreased 11.5% or $74.3 million from 2001, which follows a 12.7% or $93.9 million decline in 2001 from 2000. Approximately two-thirds of the decrease in 2002 average earning assets and half of the decrease in 2002 average interest bearing liabilities was due to the sale of the Sabina Bank late in 2001. The sale of the Bank of Mt. Vernon early in 2001, more than offset the 2001 operational increases in average earning assets and interest bearing liabilities. 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 most profitable component of average earning assets, totaling 70.0% of average earning assets during 2002. Average loans declined by $62.7 million or 12.2% in 2002. Approximately 60% of the decline 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 more than offset by a 10.2% decline in loans in Premier's Kentucky markets, which were equally split between commercial loans and real estate mortgage loans. The 2002 decrease follows a 13.3% or $78.3 million decrease in 2001 average total loans from 2000. The sale of the Bank of Mt. Vernon in January 2001, more than offset the 1.6% increase in average loans resulting from internal growth. Total loans at December 31, 2002, decreased by $23.6 million or 5.1% over the total at December 31, 2001. This decrease follows a $136.8 million or 23.0% decrease in 2001 from total loans at December 31, 2000. As mentioned above, Premier sold approximately $123 million in loans in 2001 through the sales of the Bank of Mt. Vernon and the Sabina Bank. 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 2002 % 2001 % 2000 % 1999 % 1998 % -------- ----- -------- ----- -------- ----- -------- ----- -------- ----- Summary of Loans by Type Commercial, secured by real estate $120,306 27.7% $117,692 25.6% $149,733 25.1% $135,078 23.7% $ 86,010 21.6% Commercial, other 64,014 14.7 70,315 15.3 86,069 14.5 98,543 17.3 73,982 18.6 Real estate construction 11,924 2.8 15,751 3.4 24,774 4.2 26,092 4.6 13,374 3.4 Real estate mortgage 156,215 35.9 164,810 35.9 211,662 35.5 192,088 33.6 131,212 33.0 Agricultural 8,862 2.0 9,613 2.1 13,817 2.3 17,525 3.1 15,433 3.9 Consumer 71 075 16.3 79,571 17.3 108,646 18.2 100,075 17.5 73,100 18.4 Other 2,741 0.6 989 0.4 1,246 0.2 1,352 0.2 4,502 1.1 -------- ---- -------- ---- -------- ---- -------- ---- -------- ---- Total loans $435,137 100.0% $458,741 100.0% $595,947 100.0% $570,753 100.0% $397,613 100.0% Less unearned income (371) (647) (1,993) -------- -------- -------- -------- -------- Total loans net of unearned income $435,137 $458,741 $595,576 $570,106 $395,620 ======== ======== ======== ======== ======== Non-Performing Assets Non-accrual loans $ 10,588 $ 9,307 $ 7,840 $ 4,540 $ 3,500 Accruing loans which are contractually past due 90 days or more 1,399 5,948 2,196 1,721 1,322 Restructured loans 293 338 689 666 105 -------- -------- -------- -------- -------- Total nonperforming and restructured loans 12,280 15,593 10,725 6,927 4,927 Other real estate acquired through foreclosures 3,939 5,831 3,116 3,009 961 -------- -------- -------- -------- -------- Total nonperforming and restructured loans and other real estate $ 16,219 $ 21,424 $ 13,841 $ 9,936 $ 5,888 ======== ======== ======== ======== ======== Nonperforming and restructured loans as a % of total loans 2.82% 3.40% 1.80% 1.22% 1.25% Nonperforming and restructured loans and other real estate as a % of total assets 2.39% 4.67% 1.56% 1.17% .90% Allocation of Allowance For Loan Losses Commercial, other $ 2,493 $ 1,674 $ 2,535 $ 2,123 $ 1,695 Real estate, construction 827 592 450 375 200 Real estate, other 4,932 3,925 2,967 2,115 1,528 Consumer installment 1,204 1,430 1,261 948 738 Unallocated 1,904 1,324 608 1,251 202 -------- -------- -------- -------- -------- Total $ 11,360 $ 8,946 $ 7,821 $ 6,812 $ 4,363 ======== ======== ======== ======== ========
Loans secured by real estate, which in total constituted approximately 66% of Premier's loan portfolio at December 31, 2002, consist of a diverse portfolio of predominately single family residential loans and loans for commercial purposes where real estate is merely collateral, not the primary source of repayment. Collateral for real estate mortgage loans includes residential properties and the loans generally do not exceed 80% of the value of the real property securing the loan based on recent independent appraisals. The 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 origination of loans into 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. 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 made for terms of up to seven years on a secured or unsecured basis. 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 19 to the consolidated financial statements. Total non-performing assets, which consist of past-due loans on which interest is not being accrued, 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 $16.2 million or 2.39% of total assets at year-end 2002. The amount is down from the $21.4 million of non-performing assets (3.01% of total assets) at year-end 2001 but up from the $13.8 million of non-performing assets (1.56% of total assets) at year-end 2000. The decline since year-end 2001 was due to a focusing by Premier on reducing its high level of non-performing assets. While the level of non-performing asset is still high compared to years prior to 2001, the amount of loans past due 90 days or more, restructured loans and OREO each declined during 2002. The level of non-accrual loans increased due to the deterioration of certain credits in the process of collection. 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, 2002. 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. If a writedown of the OREO property is necessary at the time of foreclosure, the amount is charged off 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 2002 Premier recognized $1.1 million of OREO writedowns compared to $258,000 in 2001 and $617,000 in 2000. Although loans may be classified as non-performing, some continue to pay interest irregularly or at less than original contracted terms. During 2002, approximately $205,000 of interest was recognized on non-accrual and restructured loans, while approximately $800,000 would have been recognized in accordance with their original terms. 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. 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 impaired, a portion of the allowance for loan losses is allocated to the loan so that the loan is reported, net, at the present value of estimated future cashflows using the loan's existing rate or at the fair value of collateral if repayment is expected solely from the collateral. Additional information on Premier's impaired loans is contained in Note 6 to the consolidated financial statements. The allowance for loan losses is maintained to absorb probable incurred losses associated with lending activities. 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, levels of non-performing and past due loans, and an evaluation of current economic conditions. At December 31, 2002, the allowance for loan losses was $11.4 million or 2.61% of total year-end loans. This ratio is an increase from the prior year's 1.95% and the 1.31% at the end of 2000. 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 2002 was $8.8 million, down only slightly from the $8.9 million provision in 2001 but up significantly from the $4.9 million provision in 2000. The high level of provision 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. 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, 2002 2001 2000 1999 1998 ------- ------- ------- ------- ------- Allowance for Loan Losses, Beginning of Period $ 8,946 $ 7,821 $ 6,812 $ 4,363 $ 3,479 Amounts charged off: Commercial, financial and agricultural loans 2,582 1,721 3,298 1,380 500 Real estate construction loans 899 1,384 0 0 0 Real estate loans - other 1,538 2,928 125 381 60 Consumer installment loans 2,432 2,117 959 795 629 ------- ------- ------- ------- ------- Total charge-offs 7,451 8,150 4,382 2,556 1,189 Recoveries on amounts previously charged off: Commercial, financial and agricultural loans 248 166 257 158 45 Real estate construction loans 38 36 0 0 0 Real estate loans - other 197 10 4 12 1 Consumer installment loans 586 408 198 231 170 ------- ------- ------- ------- ------- Total recoveries 1,069 620 459 401 216 ------- ------- ------- ------- ------- Net charge-offs 6,382 7,530 3,923 2,155 973 Provision for loan losses 8,796 8,921 4,932 3,294 1,742 Balance of acquired or disposed subsidiaries 0 (266) 0 1,310 115 ------- ------- ------- ------- ------- Allowance for Loan Losses, End of Period $11,360 $ 8,946 $ 7,821 $ 6,812 $ 4,363 ======= ======= ======= ======= ======= Average total loans 449,500 512,240 590,518 520,267 340,089 Total loans at year-end 435,137 458,741 595,576 570,106 395,620 As a Percent of Average Loans: Net charge-offs 1.42% 1.47% 0.66% 0.41% 0.29% Provision for loan losses 1.96% 1.74% 0.84% 0.63% 0.51% Allowance for loan losses 2.53% 1.75% 1.32% 1.31% 1.28% As a Percent of Total Loans at Year-end: Allowance as a percentage of year-end net loans 2.61% 1.95% 1.31% 1.19% 1.10% As a Multiple of Net Charge-offs: Allowance as a multiple of net charge-offs 1.78X 1.19X 1.99X 3.16X 4.48X Income before tax and provision for loan losses 1.03X 1.94X 1.68X 4.55X 9.71X
Net charge-offs in 2002 decreased to $6.4 million, down $1.1 million or 15.2% from the $7.5 million of net charge-offs experienced in 2001. While consumer and commercial charge-offs increased in 2002, these were more than offset by the lower level of real estate loan charge-offs and the 72% increase in recoveries. The $7.5 million of net charge-offs in 2001 was a record high as Premier experienced significant increases in consumer and real estate loan charge-offs versus the prior year. Although the dollar amount of net charge- offs declined in 2002, charge-offs could increase in the coming months due to increases in the total level of non-accrual loans outstanding or continuing weakness in economic conditions. These factors are considered in determining the adequacy of the allowance for loan losses, which at December 31, 2002 was sufficient to absorb over one and three-quarter times the amount of net charge- offs experienced in 2002. The following table presents the maturity distribution and interest sensitivity of selected loan categories at December 31, 2002. Maturities are based upon contractual terms. It is Premier's policy to specifically review and approve any loan renewed; no loans are automatically rolled over.
LOAN MATURITIES AND INTEREST SENSITIVITY December 31, 2002 (Dollars in thousands) Projected Maturities* One Year One Through Over Total or Less Five Years Five Years Loans -------- ---------- ---------- -------- Commercial, secured by real estate $ 16,267 $ 28,114 $ 75,925 $120,306 Commercial, other 35,645 19,136 9,233 64,014 Real estate construction 9,971 682 1,271 11,924 Agricultural 4,003 3,699 1,160 8,862 -------- -------- -------- -------- Total $ 65,886 $ 51,631 $ 87,589 $205,106 ======== ======== ======== ======== Fixed rate loans $ 46,417 $ 32,466 $ 32,845 $111,728 Floating rate loans 19,469 19,165 54,744 93,378 -------- -------- -------- -------- Total $ 65,886 $ 51,631 $ 87,589 $205,106 ======== ======== ======== ======== (*) Based on scheduled or approximate repayments.
Investment Portfolio and Other Earning Assets Investment securities averaged $150.3 million in 2002, a $10.5 million or 6.5% decrease from the $160.8 million averaged in 2001. This decrease follows a 12.6% decrease in from the $183.9 million averaged in 2000. Over three quarters of the decrease in 2002 was a result of the sale of the Sabina Bank late in 2001, while approximately 70% of the decrease in 2001 was a result of the sale of the Bank of Mt Vernon. The remaining decrease in both years 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. The following table presents the carrying values of investment securities.
Carrying Value of Securities (Dollars in thousands) As of December 31 2002 2001 2000 --------- --------- --------- U.S. Treasury Securities: Available for sale $ 407 $ 1,172 $ 3,357 Held to maturity - - - U.S. Agency Securities: Available for sale 121,916 116,920 153,888 Held to maturity - - 1,233 States and Political Subdivisions Securities Available for sale 18,610 19,225 7,132 Held to maturity - - 16,656 Mortgage-backed securities: Available for sale 7,648 8,251 9,319 Held to maturity - - 17 Corporate securities: Available for sale 9,052 9,196 - Held to maturity - - - Other securities: Available for sale - 802 2,798 Held to maturity - - - Total securities: Available for sale $ 157,633 155,566 176,494 Held to maturity - - 17,906
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, 2002, 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, 2002 was 3 years 5 months, lengthened somewhat by the 22 year 11 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 1 month. The average maturity of the investment portfolio is managed at a level to maintain a proper matching with interest rate risk guidelines. During 2002, 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 5 to the consolidated financial statements.
SECURITIES MATURITY AND YIELD ANALYSIS December 31, 2002 (Dollars in thousands) Average Taxable Market Maturity Equivalent Value (yrs/mos) Yield* -------- -------- --------- U.S. Treasury Securities After one but within five years $ 407 3.08% -------- Total U.S. Treasury Securities 407 1/1 3.08 U.S. Government Agencies Securities Within one year 27,077 2.57 After one but within five years 92,287 3.28 After five but within ten years 2,552 4.90 -------- Total U.S. Government Agencies Securities $121,916 2/1 3.16 States and Political Subdivisions Securities Within one year 2,162 5.73 After one but within five years 7,162 5.85 After five but within ten years 7,072 6.03 Over ten years 2,214 5.88 -------- Total States and Political Subdivisions Securities $ 18,610 5/6 5.91 Mortgage-Backed Securities** Within one year 72 5.88 After one but within five years 1,038 4.85 Over ten years 6,538 6.44 -------- Total Mortgage-Backed Securities $ 7,648 22/11 6.22 Corporate Securities Within one year 6,322 4.90 After one but within five years 2,730 5.03 -------- Total Corporate Securities $ 9,052 0/10 4.94 -------- Total Securities Available-for-Sale $157,633 3/5 3.73% ======== (*) 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 4.5% in 2002. This follows a 71.5% increase in 2001. Averaging $42.6 million in 2002, federal funds sold and other short-term investments increased $1.8 million from the $40.8 million averaged in 2001, and were significantly higher than the $23.8 million averaged during 2000. 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 2002, Premier once again decreased the rates paid on its interest bearing deposits in response to the declining market interest rate environment. The average rate paid on interest bearing liabilities decreased to 3.53% in 2002, down from the 5.08% paid in 2001 and the 5.49% paid in 2000. 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 sharp decline in the market interest rates. 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 10.9% or $68.4 million in 2002. $45.1 million or two-thirds of this decrease was the result of the sale of the Sabina Bank late in 2001. The 2002 decrease compares to a 10.8% or $76.3 million decrease in 2001 from the average in 2000. The approximately $110 million of deposits sold through the Bank of Mount Vernon sale in early 2001 more than offset the 5.2% increase in average deposits from internal growth during 2001. Non-interest bearing deposits decreased by 7.2% or $4.7 million on average when compared to 2001. The non-interest bearing deposits sold through the sale of the Sabina Bank late in 2001 more than offset the 9.9% increase in average non-interest bearing deposits from internal growth during 2002. Interest bearing deposits decreased by 11.3% or $63.7 million on average when compared to 2001. Approximately half of the decrease was the result of the sale of the Sabina Bank late in 2001. The remaining $29.8 million decrease was 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, 2002. MATURITY OF TIME DEPOSITS $100,000 OR MORE December 31, 2002 (In thousands) Maturing 3 months or less $ 15,363 Maturing over 3 months through 6 months 10,480 Maturing over 6 months through 12 months 17,161 Maturing over 12 months 23,029 -------- Total $ 66,033 ======== 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 2002, short-term borrowings averaged $5.8 million, down $3.1 million from the average in 2001. 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. The decline in 2002 follows a 63.3% or $15.4 million decline in average short-term borrowings during 2001. This decline was largely due to strong deposit growth in Premier's West Virginia markets reducing the need for short-term funding. 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 Trust Preferred Securities. FHLB advances, on average, declined by 6.3% or $1.7 million in 2002, following a 16.4% or $5.2 million decrease in 2001. Premier uses fixed rate FHLB advances from time-to-time to fund certain residential and commercial loans as well to maximize investment opportunities as part of its interest rate risk management. At December 31, 2002, FHLB advances totaled $23.5 million and had repayment schedules from one to thirteen years. Other borrowings, on average, declined by 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, 2002, other borrowings totaled $7.7 million with repayment schedules up to five years. Premier's Trust Preferred Securities represent beneficial interests in the assets of PFBI Capital Trust (NASDAQ/NMS-PFBIP). The trust holds $28.8 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). This and any future deferred distributions will begin to accrue interest at an annual rate of 9.75% which will be paid when the deferred distributions are ultimately paid. 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 $28,750,000 outstanding Trust Preferred Securities. The goal of the redemption is to use a portion of Premier's outstanding cash on hand to reduce its total interest cost and thus improve profitability. The redemption will reduce Premier's interest cost by approximately $292,000 per year. 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, Under that same agreement, Premier is required to request approval for the payment of quarterly distributions and any accumulated deferrals due on the Trust Preferred Securities. In response to a separate letter, The Federal Reserve Bank of Cleveland denied Premier's request to make the first quarter 2003 distribution (including the accumulated deferral) on the remaining Trust Preferred Securities outstanding. Management of Premier does not expect to resume payments on the Subordinated Debentures or the Trust Preferred 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. 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. 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 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 3.3% 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 3.5% decrease 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 6.5% over the projected stable rate net interest income in a rising rate scenario and would decrease by 6.6% 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, 2002, a 200 basis point increase in rates is estimated to increase Premier's EVR by 12.8% while a 200 basis point decrease would also increase Premier's EVR by 4.0%. The percentage changes in EVR are within Premier's ALOC guidelines. The model simulation calculations of present value have certain acceptable shortcomings. The discount rates and prepayment assumptions utilized are based on estimated market interest rate levels for similar loans and securities nationwide. The unique characteristics of Premier's loans and securities may not necessarily parallel those assumed in the model simulations, and therefore, actual results could likely result in different discount rates, prepayment experiences and present values. The discount rates used for deposits and borrowings are based upon available alternative types and sources of funds which may not necessarily be indicative of the present value of Premier's deposits and borrowings. Premier's deposits have customer relationship advantages that are difficult to simulate. A higher or lower interest rate environment will most likely result in different investment and borrowing strategies by Premier which would be designed to further mitigate any negative effects on the value of, and the net interest earnings generated on Premier's net assets. The following table presents summary information about the simulation model's interest rate risk measures and results. Year-End Year-End ALCO 2002 2001 Guidelines -------- -------- ---------- Projected 1-Year Net Interest Income -100 bp change vs. Base Rate -3.5% -1.0% +/-10% +100 bp change vs. Base Rate 3.3% -0.5% +/-10% Projected 1-Year Net Interest Income -200 bp change vs. Base Rate -6.6% -2.4% +/-10% +200 bp change vs. Base Rate 6.5% -2.9% +/-10% Economic Value Change -200 bp Change vs. Base Rate 4.0% -26.2% +/-20% +200 bp Change vs. Base Rate 12.8% 3.5% +/-20% The improvement in the 2002 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 2002 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 $11.4 million of cash from operations in 2002, which compares to $2.0 million in 2001 and $9.4 million in 2000. 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 the year. Net cash provided by liquidating investing activities totaled $19.4 million in 2002 and $24.0 million in 2001. In 2000, Premier used surplus funds to increase loans and purchase investments. Net cash used to satisfy deposit withdrawals and reduce debt totaled $33.4 million in 2002 and $28.7 million in 2001. In 2000, Premier received $32.1 million in funds from financing activities. 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, 2002, the parent company had nearly $8.0 million in cash held with its subsidiary banks. This balance along with cash dividends received from its subsidiaries is sufficient to cover the operating costs of the parent, service its existing other debt and satisfy the funding for the $3.0 million Trust Preferred calling on March 31, 2003. Additional information on parent company cash flows and financial statements is contained in Note 22 to the consolidated financial statements. Capital Resources Premier's consolidated average equity-to-asset ratio remained strong at 8.65% during 2002, up from the 7.47% during 2001 and the 6.07% in 2000. 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 2002, Premier's risk adjusted capital-to-assets ratio was 17.5% compared to 16.6% at December 31, 2001. 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, 2002 was 9.1% compared to 8.5% at December 31, 2001. Both of these ratios are well above the recommended 4.0% to 5.0% recommended by the Federal Reserve. These healthy 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 21 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 21 to the consolidated financial statements. During 2003, Premier's banks could, without prior approval, declare and pay to Premier dividends of approximately $3.1 million plus any 2003 net profits retained through the date of declaration. Additional information on the capital position of Premier is included in the following table.
SELECTED CAPITAL INFORMATION (Dollars in thousands) As of December 31 2002 2001 Change -------- -------- -------- Stockholders' Equity $ 59,366 $ 59,875 $ (509) Qualifying capital securities of subsidiary trust 19,266 19,646 (380) Disallowed amounts of goodwill and other intangibles (16,044) (16,044) 0 Unrealized loss (gains) on securities available for sale (1,568) (857) (711) -------- -------- -------- Tier I capital $ 61,020 $ 62,620 $ (1,600) Tier II capital adjustments: Qualifying capital securities of subsidiary trust 9,484 9,104 Allowance for loan losses 5,490 5,830 -------- -------- Total capital $ 75,994 $ 77,554 ======== ======== Total risk-weighted assets $433,298 $466,409 Ratios Tier I capital to risk-weighted assets 14.08% 13.43% Total capital to risk-weighted assets 17.54% 16.63% Leverage at year-end 9.13% 8.48%
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 $24.8 million in 2002, down 4.1% from the amount earned in 2001 which follows a 12.2% decrease in 2001 from 2000. 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 2002 is largely due to the decrease in the volume of assets and liabilities resulting from the sales of the Bank of Mt. Vernon and the Sabina Bank in 2001. As shown in the Rate Volume Analysis table below, decreases in the volume of earning assets in 2002 reduced Premier's interest income by $6.0 million. This decrease was partially offset by the lower volume of interest bearing liabilities in 2002 resulting in a $3.9 million decline in interest expense. The net effect was to reduce net interest income by $2.1 million for the year. Similarly, the lower interest rate environment in 2002 resulted in reducing interest income of $7.7 million and reduced interest expense of $8.7 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 2001, a reduction in Premier's volume of earning assets reduced interest income by $8.9 million which was only partially offset by a $5.6 million decrease in interest expense due to a lower volume of interest bearing liabilities. The net result was a $3.2 million decrease in net interest income from volume activity. The lower volumes in 2001 were primarily the result of the sale of the Bank of Mount Vernon in January 2001. In contrast to 2002 however, in 2001, the decline in the yields on earning assets was greater than the decline in rates paid on interest bearing liabilities. This resulted in an additional reduction in net interest income of $0.3 million for a total decline in 2001 of $3.6 million.
RATE VOLUME ANALYSIS OF CHANGES IN NET INTEREST INCOME (Dollars in thousands on a taxable equivalent basis) 2002 vs 2001 2001 vs 2000 Increase (decrease) due to change in Increase (decrease) due to change in Net Net Volume Rate Change Volume Rate Change --------- --------- --------- --------- --------- --------- Interest Income*: Loans $ (5,482) $ (4,626) $ (10,108) $ (7,283) $ (1,547) $ (8,830) Investment securities (592) (2,130) (2,722) (1,824) (802) (2,626) Federal funds sold 71 (909) (838) 260 (129) 131 Deposits with banks 3 (15) (12) (27) (20) (47) --------- --------- --------- --------- --------- --------- Total interest income $ (6,000) $ (7,680) $ (13,680) $ (8,874) $ (2,498) $ (11,372) --------- --------- --------- --------- --------- --------- Interest Expense: Deposits NOW and money market $ 168 $ (2,274) $ (2,106) $ 98 $ (1,647) $ (1,549) Savings (117) (461) (578) (17) (345) (362) Certificates of deposit (3,358) (4,968) (8,326) (4,333) 291 (4,042) Short-term borrowings (108) (180) (288) (779) (385) (1,164) Other borrowings (359) (514) (873) (277) (93) (370) FHLB borrowings (101) (346) (447) (330) 27 (303) Debt 0 0 0 0 0 0 --------- --------- --------- --------- --------- --------- Total interest expense $ (3,875) $ (8,743) $ (12,618) $ (5,638) $ (2,152) $ (7,790) --------- --------- --------- --------- --------- --------- Net interest income* $ (2,125) $ 1,063 $ (1,062) $ (3,236) $ (346) $ (3,582) ========= ========= ========= ========= ========= ========= (*) 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.
While net interest income dollars declined in 2002, Premier's net interest margin increased. In 2002, the yield earned on investment securities declined 139 basis points to 4.59% while the yield on the loan portfolio declined 96 basis points to 8.30%. The net result on all earning assets was to reduce the yield 122 basis points to 6.99% in 2002, down from 8.21% earned in 2001 and 8.77% earned in 2000. Similarly, in 2002 Premier reduced the average rate paid on its deposits by 160 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 155 basis points to 3.53%, down from 5.08% in 2001 and 5.49% in 2000. As a result, Premier's net interest spread increased by 33 basis points and its net interest margin increased by 23 basis points to 3.85% in 2002, up from 3.62% in 2001 and 3.68% in 2000. 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 decreased by 12.4% or $509,000 in 2002. Approximately 56% of the decline was due 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 was only partially offset by increases in revenue from service charges on deposit accounts. Service charges on deposit accounts increased to $2,337,000 in 2002, a 6.7% or $146,000 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 17.8% or $353,000 over 2001. This increase follows a 2.0% or $44,000 decrease in 2001 from 2000. Other income declined by $604,000 in 2002 largely due 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 2002, Premier realized $45,000 in losses on securities sales. This compares to $516,000 in gains realized in 2001 and $279,000 in losses realized in 2000. These securities were sold as part of Premier's management of its asset/liability position. In 2001, Premier recognized gains of $8.7 million on the sale of two subsidiary banking operations. In 2000, Premier recognized a gain of $289,000 during the second quarter as a result of the sale of a Federal Home Loan Bank advance. This gain was substantially offset by losses on securities of $281,000 which also occurred in the second quarter of 2000. The following table is a summary of non-interest income and expense for each of the years the three-year period ending December 31, 2002.
NON-INTEREST INCOME AND EXPENSE (Dollars in thousands) Increase (Decrease) Over Prior Year 2002 2001 ---------------- ---------------- 2002 2001 2000 Amount Pct Amount Pct -------- -------- -------- ------- ----- ------- ----- Non-Interest Income: Service charges on deposit accounts $ 2,337 $ 2,191 $ 2,235 $ 146 6.66 $ (44) (1.97) Insurance income 223 274 443 (51) (18.61) (169) (38.15) Other 1,038 1,642 1,324 (604) (36.78) 318 24.02 -------- -------- -------- ------- ----- ------- ----- Total fees and other income 3,598 4,107 4,002 $ (509) (12.39) $ 105 2.62 Investment securities gains(losses) (45) 516 (279) (561) - 795 - Gain on FHLB advance sale 0 0 289 0 - (289) - Gain on sale of banking operations 0 8,713 0 (8,713) - 8,713 - -------- -------- -------- ------- ----- ------- ----- Total non-interest income $ 3,553 $ 13,336 $ 4,012 $(9,783) (73.36) $ 9,324 234.40 ======== ======== ======== ======= ===== ======= ===== Non-Interest Expense: Salaries and wages $ 7,867 $ 9,214 $ 10,149 $(1,347) (14.62) $ (935) (9.21) Employee benefits 2,630 2,571 3,183 59 2.29 (612) (19.23) -------- -------- -------- ------- ----- ------- ----- Total staff costs 10,497 11,785 13,332 (1,288) (10.93) (1,547) (11.60) -------- -------- -------- ------- ----- ------- ----- Occupancy and equipment expense 2,789 2,941 3,187 (152) (5.17) (246) (7.72) Professional fees 1,404 1,065 705 339 31.83 360 51.06 Taxes, other than payroll, property and income 812 836 749 (24) (2.87) 87 11.62 Amortization of intangibles 0 1,329 1,571 (1,329) - (242) (15.40) OREO losses and expenses 1,317 540 726 777 143.89 (186) (25.62) Other expenses 4,472 5,489 5,835 (1,017) (18.53) (346) (5.93) -------- -------- -------- ------- ----- ------- ----- Total non-interest expenses $ 21,291 $ 23,985 $ 26,105 $(2,694) (11.23) $(2,120) (8.12) ======== ======== ======== ======= ===== ======= =====
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 2002 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 2.75%, a slight decrease from the 2.79% realized in 2001 and the 2.77% ratio realized in 2000. For the year 2002, net overhead was $17.7 million, a decrease of $2.2 million or 11.0% below the 2001 overhead of $19.9 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. The current year decrease follows a decrease in 2001 of 10.1% or $2.2 million from the 2000 overhead of $22.1 million. The sale of the Bank of Mount Vernon in early 2001 resulted in a decline in 2001 net overhead of $2.7 million, while the remaining 2001 banking operations increased net overhead by $477,000 over 2000. A lower net overhead ratio means more of the net interest margin flows through as net income. Total non-interest expense in 2002 decreased by $2.7 million, or 11.2% from 2001. Approximately $2.3 million of the decline was due sale of the operations of the Bank of Mount Vernon and the Sabina Bank in 2001. The remainder was due to a $386,000 or 1.8% decline in the non-interest expenses of the remaining operations as described in more detail below. This year's decrease compares to a $2.1 million or 8.1% decrease in 2001 versus 2000. The sale of the Bank of Mount Vernon in early 2001 resulted in a decline in 2001 non-interest expense of $3.2 million, while the remaining 2001 banking operations increased non-interest expense by $1.0 million over 2000. Staff costs decreased by $1.3 million or 10.9% in 2002 versus 2001. Approximately $1.1 million of the reduction was due to the sale of the banking operations in 2001. The remaining $151,000 was largely due to a $479,000 decrease in staff costs at the parent holding company, partially offset by normal salary adjustments at the subsidiary banks. Staff costs in 2001 decreased $1.5 million or 11.6% from 2000. The sale of the Bank of Mount Vernon in early 2001 resulted in a decline in 2001 staff costs of $1.7 million, while the remaining $127,000 increase was due to normal salary and benefit increases. Occupancy and equipment expenses decreased by $152,000 or 5.2% in 2002 from 2001. Approximately $262,000 of occupancy and equipment expenses was eliminated due to the sale of the banking operations in 2001. The remaining $110,000 or 4.1% increase was largely due to increases in property taxes and maintenance costs on buildings and equipment. Occupancy and equipment expenses in 2001 decreased by $246,000 or 7.7% versus 2002. The sale of the Bank of Mount Vernon in early 2001 resulted in a decline in 2001 occupancy and equipment expenses of $344,000, while the remaining $98,000 or 3.0% increase was due to normal increases in costs. Professional fees increased by $339,000 or 31.8% in 2002 versus 2001. Approximately $31,000 of professional fees was eliminated due to the sale of the banking operation in 2001. The remaining $370,000 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. In 2001, professional fees increased $360,000 or 51% over 2000, also largely due to increased legal fees related to collections and other matters and internal and external audit costs. OREO writedowns and expenses totaled $1.3 million in 2002, an increase of $777,000 over 2001. The increase in 2002 was largely due to writedowns of OREO property to net realizable values as management emphasized efforts to liquidate the properties. 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 compared to $1.6 million in 2000. 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 $1.0 million income tax benefit in 2002 compared to $3.4 million of income tax expense in 2001 and $316,000 of income tax expense in 2000. Premier's effective tax rate was (45.6%) in 2002, down from 59.3% in 2001 but up from 19.1% in 2000. The benefit in 2002 was due to the pretax loss realized by Premier. Premier's effective tax rate in 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 14 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 results 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 2002 Net income for the three months ended December 31, 2002 was $355,000, a $1.4 million decrease from the $1,754,000 of net income earned during the fourth quarter of 2001. However, the fourth quarter of 2001 includes a $3.5 million gain (net of tax) on the sale of the Sabina bank. Excluding this gain, fourth quarter 2001 results reflected a loss of $1,741,000 primarily due to $3.5 million of provisions for loan losses. On a per share basis, Premier's income for the fourth quarter of 2002 was 7 cents per share, compared to a loss of 33 cents per share for the same quarter last year (excluding the gain on the sale of the subsidiary). Net interest income totaled $6,120,000 for the fourth quarter of 2002, a decrease of $150,000 or 2.4% from the net interest income earning in the same quarter of 2001. The provision for loan losses decreased by $1,965,000 when compared to the fourth quarter of 2001. Non-interest income excluding securities transactions and the gain on the sale of the Sabina Bank was relatively flat compared to the same quarter in 2001. Non-interest expense decreased by $1,354,000 due to lower staff costs, other operating expenses and the cessation of the amortization of intangible assets. Additional quarterly financial data is provided in Note 23 to the consolidated financial statements. Item 8. Financial Statements and Supplementary Data - ---------------------------------------------------- The Company's Financial Statements and related Independent Auditors' Report are presented in the following pages. The financial statements filed in this Item 8 are as follows: Independent Auditors' Report Financial Statements: Consolidated Balance Sheets - December 31, 2002 and 2001 Consolidated Statements of Income - Years Ended December 31, 2002, 2001 and 2000 Consolidated Statements of Comprehensive Income - Years Ended December 31, 2002, 2001 and 2000 Consolidated Statements of Changes in Stockholders' Equity - Years ended December 31, 2002, 2001 and 2000 Consolidated Statements of Cash Flows - Years ended December 31, 2002, 2001 and 2000 Notes to Consolidated Financial Statements PREMIER FINANCIAL BANCORP, INC. CONSOLIDATED FINANCIAL STATEMENTS December 31, 2002, 2001 and 2000 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, 2002 and 2001, and the related consolidated statements of operations and comprehensive income, changes in stockholders' equity and cash flows for each of the three years in the period ended December 31, 2002. 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, 2002 and 2001 and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2002 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. Crowe, Chizek and Company LLP Columbus, Ohio February 25, 2003 PREMIER FINANCIAL BANCORP, INC. CONSOLIDATED BALANCE SHEETS December 31, 2002 and 2001 (In Thousands, Except Per Share Data) - -------------------------------------------------------------------------------- 2002 2001 ------------ ------------ ASSETS Cash and due from banks $ 18,044 $ 20,628 Federal funds sold 29,827 33,517 Securities available for sale 157,633 155,566 Loans 435,137 458,741 Allowance for loan losses (11,360) (8,946) ------------ ------------ Net loans 423,777 449,795 Federal Home Loan Bank and Federal Reserve Bank stock 4,395 4,261 Premises and equipment, net 11,685 12,035 Real estate and other property acquired through foreclosure 3,939 5,831 Interest receivable 6,485 7,842 Goodwill 16,044 16,044 Other assets 5,799 6,331 ------------ ------------ Total assets $ 677,628 $ 711,850 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY Deposits Non-interest bearing $ 62,874 $ 57,916 Time deposits, $100,000 and over 66,033 89,149 Other interest bearing 419,067 423,466 ------------ ------------ Total deposits 547,974 570,531 Securities sold under agreements to repurchase 5,851 5,520 Federal Home Loan Bank advances 23,533 30,795 Other borrowed funds 7,700 13,000 Notes payable 1,402 - Guaranteed preferred beneficial interests in Company's debentures 28,750 28,750 Interest payable 1,818 1,903 Other liabilities 1,234 1,476 ------------ ------------ Total liabilities 618,262 651,975 Stockholders' equity Preferred stock, no par value; 1,000,000 shares authorized; none issued or outstanding - - Common stock, no par value; 10,000,000 shares authorized; 5,232,230 shares issued and outstanding 1,103 1,103 Surplus 43,445 43,445 Retained earnings 13,250 14,470 Accumulated other comprehensive income 1,568 857 ------------ ------------ Total stockholders' equity 59,366 59,875 ------------ ------------ Total liabilities and stockholders' equity $ 677,628 $ 711,850 ============ ============ - -------------------------------------------------------------------------------- See accompanying notes. PREMIER FINANCIAL BANCORP, INC. CONSOLIDATED STATEMENTS OF OPERATIONS Years Ended December 31 (In Thousands, Except Per Share Data) - --------------------------------------------------------------------------------
2002 2001 2000 ---- ---- ---- Interest income Loans, including fees $ 37,262 $ 47,413 $ 56,245 Investment securities - Taxable 5,670 8,029 10,120 Tax-exempt 809 1,051 1,404 Federal funds sold 691 1,529 1,398 Other interest income 8 20 67 ----------- ----------- ----------- Total interest income 44,440 58,042 69,234 Interest expense Deposits 15,540 26,550 32,503 Other borrowings 1,758 3,366 5,203 Debentures 2,852 2,852 2,852 ----------- ----------- ----------- Total interest expense 20,150 32,768 40,558 Net interest income 24,290 25,274 28,676 Provision for loan losses 8,796 8,921 4,932 ----------- ----------- ----------- Net interest income after provision for loan losses 15,494 16,353 23,744 Non-interest income Service charges 2,337 2,191 2,235 Insurance commissions 223 274 443 Securities gains (losses) (45) 516 (279) Gain on sale of subsidiaries' banking operations - 8,713 - Other income 1,038 1,642 1,613 ----------- ----------- ----------- 3,553 13,336 4,012 Non-interest expenses Salaries and employee benefits 10,497 11,785 13,332 Occupancy and equipment expenses 2,789 2,941 3,187 Professional fees 1,404 1,065 705 Taxes, other than payroll, property and income 812 836 749 Amortization of goodwill - 1,329 1,571 Write-downs, expenses, sales of other real estate owned 1,317 540 726 Other expenses 4,472 5,489 5,835 ----------- ----------- ----------- 21,291 23,985 26,105 (Loss) income before income taxes (2,244) 5,704 1,651 Provision for income taxes (benefit) (1,024) 3,385 316 ----------- ----------- ----------- Net (loss) income $ (1,220) $ 2,319 $ 1,335 =========== =========== =========== Weighted average common shares outstanding: Basic 5,232 5,232 5,232 Diluted 5,232 5,232 5,232 Earnings per share: Basic $ (0.23) $ 0.44 $ 0.26 Diluted (0.23) 0.44 0.26
- -------------------------------------------------------------------------------- See accompanying notes. PREMIER FINANCIAL BANCORP, INC. CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME Years Ended December 31 (In Thousands, Except Per Share Data) - --------------------------------------------------------------------------------
2002 2001 2000 ---- ---- ---- Net (loss) income $ (1,220) $ 2,319 $ 1,335 Other comprehensive income (loss), net of tax: Unrealized gains and (losses) arising during the period 681 2,067 2,969 Reclassification of realized amount 30 (341) 184 ----------- ----------- ----------- Net change in unrealized gain (loss) on securities 711 1,726 3,153 ----------- ----------- ----------- Comprehensive (loss) income $ (509) $ 4,045 $ 4,488 =========== =========== ===========
- -------------------------------------------------------------------------------- See accompanying notes. PREMIER FINANCIAL BANCORP, INC. CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY Years Ended December 31, 2002, 2001 and 2000 (In Thousands, Except Per Share Data) - --------------------------------------------------------------------------------
Accumulated Other Common Retained Comprehensive Stock Surplus Earnings Income Total Balances, January 1, 2000 $ 1,103 $ 43,445 $ 11,601 $ (4,022) $ 52,127 Net change in unrealized gains (losses) on securities available for sale - - - 3,153 3,153 Net income - - 1,335 - 1,335 Dividends paid - $.15 per share - - (785) - (785) -------- --------- --------- ---------- ---------- Balances, December 31, 2000 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 - - 2,319 - 2,319 -------- --------- --------- ---------- ---------- Balances, December 31, 2001 1,103 43,445 14,470 857 59,875 Net change in unrealized gains (losses) on securities available for sale - - - 711 711 Net loss - - (1,220) - (1,220) -------- --------- --------- ---------- ---------- Balances, December 31, 2002 $ 1,103 $ 43,445 $ 13,250 $ 1,568 $ 59,366 ======== ========= ========= ========== ==========
- -------------------------------------------------------------------------------- See accompanying notes. PREMIER FINANCIAL BANCORP, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS Years Ended December 31 (In Thousands) - --------------------------------------------------------------------------------
2002 2001 2000 ---- ---- ---- Cash flows from operating activities Net (loss) income $ (1,220) $ 2,319 $ 1,335 Adjustments to reconcile net (loss) income to net cash from operating activities Depreciation 1,320 1,232 1,436 Provision for loan losses 8,796 8,921 4,932 Amortization, net 314 1,034 1,228 FHLB stock dividends (188) (266) (311) Write-downs of other real estate owned 1,114 258 617 Securities (gains) losses, net 45 (516) 279 Gain on the sale of subsidiaries' banking operations - (8,713) - Changes in Interest receivable 1,357 417 (330) Other assets 166 (833) (705) Interest payable (85) (1,494) 636 Other liabilities (242) (321) 245 ------------ ----------- ----------- Net cash from operating activities 11,377 2,038 9,362 Cash flows from investing activities Purchases of securities available for sale (147,256) (197,441) (61,664) Proceeds from sales of securities available for sale 6,480 15,438 19,727 Proceeds from maturities and calls of securities available for sale 139,427 207,595 21,985 Purchases of securities held to maturity - - (1,571) Proceeds from maturities and calls of securities held to maturity - - 2,296 Purchases of FHLB stock (50) (208) (42) Redemption of FHLB stock 104 451 - Net change in interest-earning balances with banks - 737 897 Net change in federal funds sold 3,690 (21,130) 4,110 Net change in loans 14,852 14,133 (30,692) Purchases of premises and equipment, net (970) (607) (1,975) Proceeds from sale of other real estate acquired through foreclosure 3,148 1,747 584 Net cash received (paid) related to acquisitions - 3,255 - ------------ ----------- ----------- Net cash from investing activities 19,425 23,970 (46,345)
- -------------------------------------------------------------------------------- (Continued) PREMIER FINANCIAL BANCORP, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS Years Ended December 31 (In Thousands) - --------------------------------------------------------------------------------
2002 2001 2000 ---- ---- ---- Cash flows from financing activities Net change in deposits $ (22,557) $ (7,595) $ 35,569 Advances from Federal Home Loan Bank 14,420 60,361 62,783 Repayment of Federal Home Loan Bank advances (21,682) (60,252) (64,743) Repayment of other borrowed funds (5,300) (7,000) - Proceeds from notes payable 1,402 - - Net change in agreements to repurchase securities 331 (14,233) (729) Dividends paid - - (785) ------------ ----------- ----------- Net cash from financing activities (33,386) (28,719) 32,095 ------------ ----------- ----------- Net change in cash and cash equivalents (2,584) (2,711) (4,888) Cash and cash equivalents at beginning of year 20,628 23,339 28,227 ------------ ----------- ----------- Cash and cash equivalents at end of year $ 18,044 $ 20,628 $ 23,339 ============ =========== =========== Supplemental disclosures of cash flow information: Cash paid during the year for - Interest $ 20,251 $ 34,261 $ 39,922 Income taxes paid (refunded) (280) 4,279 1,115 Loans transferred to real estate acquired through foreclosure $ 2,370 $ 4,785 $ 1,298 Transfer of securities from held to maturity to available for sale $ - $ 18,249 $ -
- -------------------------------------------------------------------------------- See accompanying notes. PREMIER FINANCIAL BANCORP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2002, 2001 and 2000 - -------------------------------------------------------------------------------- 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:
December 31, 2002 Year Net Income Acquired Assets (Loss) -------- ------ ---------- (In Thousands) Citizens Deposit Bank & Trust Vanceburg, Kentucky 1991 $ 89,118 $ (994) Bank of Germantown Germantown, Kentucky 1992 26,384 (136) Citizens Bank (Kentucky), Inc. Georgetown, Kentucky 1995 84,406 (1,130) Farmers Deposit Bank Eminence, Kentucky 1996 144,788 975 Ohio River Bank Ironton, Ohio 1998 76,265 743 First Central Bank, Inc. Philippi, West Virginia 1998 88,581 692 Boone County Bank, Inc. Madison, West Virginia 1998 159,459 1,871 Mt. Vernon Financial Holdings, Inc. Georgetown, Kentucky 1999 8,092 (51)
The Company also has a data processing subsidiary, Premier Data Services, Inc., and PFBI Capital Trust subsidiary as discussed in Note 13. All intercompany transactions and balances have been eliminated. Prior period consolidated financial statements have been restated to include the accounts of significant acquisitions. Business combinations are included in the consolidated financial statements from the respective dates of acquisition. Assets and liabilities of financial institutions accounted for as purchases are adjusted to their fair values as of their dates of acquisition. Certain prior amounts have been reclassified to conform with the current year presentation. Nature of Operations: The 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. - -------------------------------------------------------------------------------- (Continued) PREMIER FINANCIAL BANCORP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2002, 2001 and 2000 - -------------------------------------------------------------------------------- NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) 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, and fair values of financial instruments are particularly subject to change. 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 into three categories: trading, securities available for sale and securities held to maturity. Fair value adjustments are made to the securities based on their classification with the exception of the held to maturity category. The Company has no investments classified as trading or held to maturity. 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. The adjustment is computed on the difference between fair value and cost adjusted for amortization of premiums and accretion of discounts which are recorded as adjustments to interest income using the constant yield method. Other securities such as Federal Home Loan Bank stock are carried at cost. Interest income includes amortization of purchase premium or discount. 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 nonaccrual 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. - -------------------------------------------------------------------------------- (Continued) PREMIER FINANCIAL BANCORP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2002, 2001 and 2000 - -------------------------------------------------------------------------------- NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) 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. 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 3 to 40 years. 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 discounted amounts. - -------------------------------------------------------------------------------- (Continued) PREMIER FINANCIAL BANCORP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2002, 2001 and 2000 - -------------------------------------------------------------------------------- NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) 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. Goodwill is assessed at least annually for impairment and any such impairment will be recognized in the period identified. The Company does not have any identifiable intangible assets such as core deposit intangibles. The effect on net income of ceasing goodwill amortization in 2002 was $746,000, net of tax. 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. 2002 2001 2000 --------- --------- --------- Net income (loss) as reported $ (1,220) $ 2,319 $ 1,335 Deduct: Stock-based compensation expense determined under fair value based method - (17) (40) --------- --------- --------- Pro forma net income $ (1,220) $ 2,302 $ 1,295 Basic earnings per share as reported $ (0.23) $ 0.44 $ 0.26 Pro forma basic earnings per share (0.23) 0.44 0.25 Diluted earnings per share as reported $ (0.23) $ 0.44 $ 0.26 Pro forma diluted earnings per share (0.23) 0.44 0.25 There were no options granted during 2002, 2001, or 2000. Future pro forma net income will be negatively impacted should the Company choose to grant additional options. - -------------------------------------------------------------------------------- (Continued) PREMIER FINANCIAL BANCORP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2002, 2001 and 2000 - -------------------------------------------------------------------------------- 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. Newly Issued But Not Yet Effective Accounting Standards: New accounting standards on asset retirement obligations, restructuring activities and exit costs, operating leases, and early extinguishment of debt were issued in 2002. Management determined that when the new accounting standards are adopted in 2003 they will not have a material impact on the Company's financial condition or results of operations. 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. - -------------------------------------------------------------------------------- (Continued) PREMIER FINANCIAL BANCORP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2002, 2001 and 2000 - -------------------------------------------------------------------------------- NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) 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 - BUSINESS COMBINATIONS 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 3 - 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 requires 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. - -------------------------------------------------------------------------------- (Continued) PREMIER FINANCIAL BANCORP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2002, 2001 and 2000 - -------------------------------------------------------------------------------- NOTE 3 - REGULATORY MATTERS (Continued) 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 requires 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 to be monitored by a committee, to be organized, consisting of at least three of its outside directors. 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 requires significant changes in their credit administration policies. 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 - 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, 2002 and 2001 was $3.6 million and $2.5 million. - -------------------------------------------------------------------------------- (Continued) PREMIER FINANCIAL BANCORP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2002, 2001 and 2000 - -------------------------------------------------------------------------------- NOTE 5 -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 ----------- -------- --------- ----------- 2002 U. S. Treasury securities $ 399 $ 8 $ - $ 407 U. S. agency securities 120,660 1,256 - 121,916 Obligations of states and political subdivisions 17,794 827 (11) 18,610 Mortgage-backed securities 7,369 279 - 7,648 Corporate securities 9,036 16 - 9,052 ----------- -------- --------- ----------- Total available for sale $ 155,258 $ 2,386 $ (11) $ 157,633 =========== ======== ========= =========== 2001 U. S. Treasury securities $ 1,151 $ 21 $ - $ 1,172 U. S. agency securities 115,954 1,029 (63) 116,920 Obligations of states and political subdivisions 18,884 411 (70) 19,225 Mortgage-backed securities 8,223 37 (9) 8,251 Corporate securities 9,128 94 (26) 9,196 Other securities 927 - (125) 802 ----------- -------- --------- ----------- Total available for sale $ 154,267 $ 1,592 $ (293) $ 155,566 =========== ======== ========= ===========
Upon adoption of Financial Accounting Standards Board Statement 133 on January 1, 2001, all of the Company's securities classified as held to maturity were reclassified as available for sale. - -------------------------------------------------------------------------------- (Continued) PREMIER FINANCIAL BANCORP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2002, 2001 and 2000 - -------------------------------------------------------------------------------- NOTE 5 -SECURITIES (Continued) The amortized cost and fair value of securities at December 31, 2002 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 $ 34,487 $ 34,623 Due after one year through five years 101,598 103,042 Due after five years through ten years 9,663 10,110 Due after ten years 2,141 2,210 Mortgage-backed securities 7,369 7,648 ----------- ----------- Total available for sale $ 155,258 $ 157,633 =========== =========== Proceeds from sales of securities during 2002, 2001 and 2000 were $6.5 million, $15.4 million and $19.7 million. Gross gains of $68,000, $545,000 and $7,000, and gross losses of $113,000, $29,000 and $286,000 were realized on those sales. Securities with an approximate carrying value of $90.0 million and $87.5 million at December 31, 2002 and 2001 were pledged to secure public deposits, trust funds, securities sold under agreements to repurchase and for other purposes as required or permitted by law. NOTE 6 - LOANS Loans at year-end were as follows (in thousands): 2002 2001 ------------ ------------ Commercial, secured by real estate $ 120,306 $ 117,692 Commercial, other 64,014 70,315 Real estate construction 11,924 15,751 Residential real estate 156,215 164,810 Agricultural 8,862 9,613 Consumer and home equity 71,075 79,571 Other 2,741 989 ------------ ------------ $ 435,137 $ 458,741 ============ ============ - -------------------------------------------------------------------------------- (Continued) PREMIER FINANCIAL BANCORP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2002, 2001 and 2000 - -------------------------------------------------------------------------------- NOTE 6 - LOANS (Continued) Certain directors and executive officers of the Banks and companies, in which they have beneficial ownership, were loan customers of the Banks during 2002 and 2001. Such loans were made in the ordinary course of business at the Banks' normal credit terms and interest rates. An analysis of the 2002 activity with respect to all director and executive officer loans is as follows (in thousands): Balance, December 31, 2001 $ 11,685 Additions, including loans now meeting disclosure requirements 9,562 Amounts collected, including loans no longer meeting disclosure requirements (5,149) ------------ Balance, December 31, 2002 $ 16,098 ============ Activity in the allowance for loan losses was as follows (in thousands): 2002 2001 2000 -------- -------- -------- Balance, beginning of year $ 8,946 $ 7,821 $ 6,812 Allowance related to acquired or disposed subsidiaries - (266) - Loans charged off (7,451) (8,150) (4,382) Recoveries 1,069 620 459 Provision for loan losses 8,796 8,921 4,932 -------- -------- -------- Balance, end of year $ 11,360 $ 8,946 $ 7,821 ======== ======== ======== Impaired loans were as follows. There were no impaired loans without an allowance allocation for the periods presented. 2002 2001 2000 -------- -------- -------- (In Thousands) Impaired loans at year end $ 8,949 $ 5,114 $ 4,661 Amount of the allowance for loan losses allocated 3,016 1,724 742 Average of impaired loans during the year 5,215 5,481 3,993 Interest income recognized during impairment 205 236 89 Cash-basis interest income recognized 189 190 34 - -------------------------------------------------------------------------------- (Continued) PREMIER FINANCIAL BANCORP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2002, 2001 and 2000 - -------------------------------------------------------------------------------- NOTE 6 - LOANS (Continued) Nonperforming loans at year end were as follows: 2002 2001 2000 -------- -------- -------- (In Thousands) Loans past due over 90 days still on accrual $ 1,399 $ 5,948 $ 2,196 Nonaccrual loans 10,588 9,307 7,840 Restructured loans 293 275 689 Nonperforming loans include impaired loans and smaller balance homogeneous loans, such as residential mortgage and consumer loans, that are collectively evaluated for impairment. NOTE 7 - PREMISES AND EQUIPMENT Year-end premises and equipment were as follows (in thousands): 2002 2001 ------------ ------------ Land and improvements $ 2,421 $ 2,402 Buildings and leasehold improvements 8,749 8,494 Furniture and equipment 8,828 8,239 ------------ ------------ 19,998 19,135 Less: accumulated depreciation (8,313) (7,100) ------------ ------------ $ 11,685 $ 12,035 ============ ============ NOTE 8 - GOODWILL The balance of goodwill as of December 31, 2002 and 2001 was $16,044,000. Goodwill is no longer amortized starting in 2002. The effect of not amortizing goodwill is summarized as follows (in thousands, except per share data): 2002 2001 2000 -------- -------- -------- Reported net income (loss) $ (1,220) $ 2,319 $ 1,335 Add back: goodwill amortization, net of tax - 877 1,037 -------- -------- -------- Adjusted net income (loss) $ (1,220) $ 3,196 $ 2,372 ======== ======== ======== Basic earnings per share: Reported net income (loss) $ (0.23) $ 0.44 $ 0.26 Add back: goodwill amortization, net of tax - 0.17 0.19 -------- -------- -------- Adjusted net income (loss) $ (0.23) $ 0.61 $ 0.45 ======== ======== ======== - -------------------------------------------------------------------------------- (Continued) PREMIER FINANCIAL BANCORP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2002, 2001 and 2000 - -------------------------------------------------------------------------------- NOTE 8 - GOODWILL (Continued) 2002 2001 2000 -------- -------- -------- Diluted earnings per share: Reported net income (loss) $ (0.23) $ 0.44 $ 0.26 Add back: goodwill amortization, net of tax - 0.17 0.19 -------- -------- -------- Adjusted net income (loss) $ (0.23) $ 0.61 $ 0.45 ======== ======== ======== NOTE 9 - DEPOSITS At December 31, 2002, the scheduled maturities of time deposits are as follows (in thousands): 2003 $ 150,621 2004 46,618 2005 23,653 2006 6,847 2007 and thereafter 8,858 ------------ $ 236,597 ============ Certain directors and executive officers of the Banks and companies, in which they have beneficial ownership, were deposit customers of the Banks during 2002 and 2001. The balance of such deposits at December 31, 2002 and 2001 were approximately $14,813,000 and $9,926,000. NOTE 10 - 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): 2002 2001 ------------ ------------ Year-end balance $ 5,851 $ 5,520 Average balance during the year $ 5,607 $ 7,518 Average interest rate during the year 1.76% 4.44% Maximum month-end balance during the year $ 5,851 $ 11,135 Weighted average interest rate at year-end 1.43% 1.76% - -------------------------------------------------------------------------------- (Continued) PREMIER FINANCIAL BANCORP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2002, 2001 and 2000 - -------------------------------------------------------------------------------- NOTE 11 - 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 thirteen years, with interest rates ranging from 1.51% to 8.45%. Advances are secured by the FHLB stock 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, 2002 are as follows (in thousands): 2003 $ 6,571 2004 1,272 2005 866 2006 912 2007 937 Thereafter 12,975 ---------- $ 23,533 ========== NOTE 12 - 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. The interest rate is prime rate, and all accrued interest and principal are due at maturity on March 27, 2003. The outstanding balance at December 31, 2002 was $1.7 million and the interest rate was 4.25%. At December 31, 2001, The Company had a line of credit with a commercial bank of $20 million. The balance on this line of credit at year-end 2001 was $8 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 0.75% and the note matures on October 15, 2004. Accrued interest and principal payments of $300,000 are due each quarter with the remaining principal and accrued interest due at maturity, thus principal payments of $1.2 million are due in 2003 and the remaining principal is due in 2004. The outstanding balance at December 31, 2002 was $6 million and the interest rate was 5.00%. - -------------------------------------------------------------------------------- (Continued) PREMIER FINANCIAL BANCORP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2002, 2001 and 2000 - -------------------------------------------------------------------------------- NOTE 12 - NOTES PAYABLE AND OTHER BORROWED FUNDS (Continued) 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 13, 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, 2002, 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 13 - GUARANTEED PREFERRED BENEFICIAL INTERESTS IN COMPANY'S DEBENTURES Guaranteed preferred beneficial interests in Company's debentures (Preferred Securities) represent preferred beneficial interests in the assets of PFBI Capital Trust (Trust). The Trust holds certain 9.75% junior subordinated debentures due June 30, 2027 issued by the Company on June 9, 1997. Distributions on the Preferred Securities are payable at an annual rate of 9.75% of the stated liquidation amount of $25 per Capital 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 Preferred Securities are redeemable in whole. Otherwise, the Preferred Securities are generally redeemable by the Company in whole or in part on or after June 30, 2002 at 100% of the liquidation amount. The Trust's obligations under the Preferred Securities are fully and unconditionally guaranteed by the Company. As previously disclosed, pursuant to an agreement entered into with the Federal Reserve Bank (FRB) described in Note 3, the Company is required to request approval for the payment of distributions due on the 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 Trust Preferred Securities. Thus, on February 24, 2003, the Company announced its plans to redeem $3,000,000 (120,000 shares) of its 9.75% Trust Preferred Securities as of March 31, 2003; however, the FRB denied the Company's request to make distributions on the remaining Trust Preferred Securities for the first quarter of 2003. - -------------------------------------------------------------------------------- (Continued) PREMIER FINANCIAL BANCORP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2002, 2001 and 2000 - -------------------------------------------------------------------------------- NOTE 13 - GUARANTEED PREFERRED BENEFICIAL INTERESTS IN COMPANY'S DEBENTURES (Continued) Premier exercised its right to defer the payment of interest on its 9.75% Trust Preferred Securities for December 31, 2002, March 31, 2003, and for an indefinite period, which can be no longer than 20 consecutive quarterly periods. This and any future deferred distributions will begin to 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 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 14 - INCOME TAXES The components of the provision (benefit) for income taxes are as follows (in thousands): 2002 2001 2000 -------- -------- -------- Current $ (407) $ 4,298 $ 794 Deferred (617) (913) (478) -------- -------- -------- $ (1,024) $ 3,385 $ 316 ======== ======== ======== 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. 2002 2001 --------- --------- Deferred tax assets Allowance for loan losses $ 3,862 $ 3,132 Write-downs of other real estate owned 468 265 Other 166 152 --------- --------- Total deferred tax assets 4,496 3,549 Deferred tax liabilities Depreciation $ 315 $ 391 Federal Home Loan Bank dividends 478 442 Unrealized gain on investment securities 808 442 Amortization of intangibles 638 202 Other 51 117 --------- --------- Total deferred tax liabilities 2,290 1,594 --------- --------- Net deferred tax asset, included in other assets $ 2,206 $ 1,955 ========= ========= - -------------------------------------------------------------------------------- (Continued) PREMIER FINANCIAL BANCORP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2002, 2001 and 2000 - -------------------------------------------------------------------------------- NOTE 14 - 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):
2002 2001 2000 ------------------- ------------------ ------------------ U. S. federal income tax rate $ (763) 34.0% $ 1,939 34.0% $ 561 34.0% Changes from the statutory rate Tax-exempt investment income (309) (13.8) (394) (6.9) (445) (27.0) Non-deductible interest expense related to carrying tax-exempt investments 39 1.7 60 1.0 73 4.4 Tax credits (71) (3.2) (71) (1.3) (71) (4.3) Goodwill amortization and disposal - - 1,758 30.8 206 12.5 Other 80 3.6 93 1.7 (8) (0.5) --------- ----- -------- ----- --------- ----- $ (1,024) (45.7)% $ 3,385 59.3% $ 316 19.1% ========= ===== ======== ===== ========= =====
NOTE 15 - 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 are at the discretion of the Company's Board of Directors. Total contributions to the plans were $215,000, $264,000 and $276,000 in 2002, 2001 and 2000. The Company also maintains the Premier Financial Bancorp, Inc. 1996 Employee Stock Ownership incentive Plan (the Plan), whereby certain employees of the Company are eligible to receive incentive stock options. The Plan is accounted for in accordance with Accounting Principles Board Opinion (APB) No. 25, "Accounting for Stock Issued to Employees", and related interpretations. Under the Plan, a maximum of 100,000 shares of the Company's common stock may be issued through the exercise of these incentive stock options. The option price is the fair market value of the Company's shares at the date of the grant. The options are exercisable ten years from the date of grant. - -------------------------------------------------------------------------------- (Continued) PREMIER FINANCIAL BANCORP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2002, 2001 and 2000 - -------------------------------------------------------------------------------- NOTE 15 - EMPLOYEE BENEFIT PLANS (Continued) A summary of the Company's stock option activity is as follows:
---------2002--------- ---------2001--------- ----------2000---------- Weighted Weighted Weighted Average Average Average Exercise Exercise Exercise Options Price Options Price Options Price Outstanding at beginning of year 62,000 $ 13.71 62,000 $ 13.71 62,000 $ 13.71 Forfeitures (27,000) 13.30 - - - - ------- ------- ------ Outstanding at year end 35,000 $ 14.03 62,000 $ 13.71 62,000 $ 13.71 ======= ======= ====== Exercisable at year end 35,000 62,000 58,000 Weighted average remaining life 4.4 5.3 6.3
NOTE 16 - RELATED PARTY TRANSACTIONS During 2002, 2001, and 2000, the Company paid approximately $418,000, $437,000, and $391,000 for printing, supplies, furniture, and equipment to a company affiliated by common ownership. The Company also paid this affiliate approximately $1,452,000, $1,199,000, and $1,066,000 in 2002, 2001, and 2000 to permit the Company's employees to participate in its employee medical benefit plan. - -------------------------------------------------------------------------------- (Continued) PREMIER FINANCIAL BANCORP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2002, 2001 and 2000 - -------------------------------------------------------------------------------- NOTE 17 - 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 2002, 2001 and 2000 is presented below (in thousands, except per share data): 2002 2001 2000 -------- -------- -------- Basic earnings per share Net (loss) income available to common stockholders $ (1,220) $ 2,319 $ 1,335 Weighted average common shares outstanding 5,232 5,232 5,232 -------- -------- -------- Earnings per share $ (0.23) $ 0.44 $ 0.26 ======== ======== ======== Diluted earnings per share Net (loss) income available to common stockholders $ (1,220) $ 2,319 $ 1,335 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 $ (0.23) $ 0.44 $ 0.26 ======== ======== ======== Stock options for 35,000 shares of common stock for 2002, and 62,000 shares for 2001 and 2000 were not included in the computation of earnings per share assuming dilution because their impact was anti-dilutive. - -------------------------------------------------------------------------------- (Continued) PREMIER FINANCIAL BANCORP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2002, 2001 and 2000 - -------------------------------------------------------------------------------- NOTE 18 - DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS The fair values of the Company's financial instruments at year-end are as follows (in thousands):
--------------2002------------- -------------2001-------------- Carrying Fair Carrying Fair Amount Value Amount Value Financial assets Cash and due from banks $ 18,044 $ 18,044 $ 20,628 $ 20,628 Federal funds sold 29,827 29,827 33,517 33,517 Securities available for sale 157,633 157,633 155,566 155,566 Loans, net 423,777 424,558 449,795 453,897 Federal Home Loan Bank and Federal Reserve Bank stock 4,395 4,395 4,261 4,261 Interest receivable 6,485 6,485 7,842 7,842 Financial liabilities Deposits $ (547,974) $ (558,974) $ (570,531) $ (575,252) Securities sold under agreements to repurchase (5,851) (5,851) (5,520) (6,005) Federal Home Loan Bank advances (23,533) (25,322) (30,795) (32,492) Other borrowed funds (7,700) (7,700) (13,000) (13,000) Notes payable (1,402) (1,345) - - Guaranteed preferred beneficial interests in Company's debentures (28,750) (25,417) (28,750) (27,888) Interest payable (1,818) (1,818) (1,903) (1,903)
Carrying amount is the estimated fair value for cash and cash equivalents, short-term borrowings, Federal Home Loan Bank and Federal Reserve Bank stock, accrued interest receivable and payable, demand deposits, short-term debt, and variable rate loans or deposits that reprice frequently and fully. Security fair values are based on market prices or dealer quotes, and if no such information is available, on the rate and term of the security and information about the issuer. For fixed rate loans or deposits and for variable rate loans or deposits with infrequent repricing or repricing limits, fair value is based on discounted cash flows using current market rates applied to the estimated life and credit risk. Fair values for impaired loans are estimated using discounted cash flow analysis or underlying collateral values. Fair value of debt is based on current rates for similar financing. The fair value of commitments to extend credit and standby letters of credit is not considered material. - -------------------------------------------------------------------------------- (Continued) PREMIER FINANCIAL BANCORP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2002, 2001 and 2000 - -------------------------------------------------------------------------------- NOTE 19 - 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, 2002 and 2001, the Banks had the following financial instruments whose approximate contract amounts represent credit risk (in thousands): 2002 2001 --------- --------- Standby letters of credit $ 702 $ 890 Commitments to extend credit: Fixed $ 9,833 $ 17,021 Variable 15,108 7,038 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% to 18%. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. The Banks evaluate each customer's creditworthiness on a case-by-case basis. Since some of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. Collateral held varies but may include accounts receivable, inventory, property and equipment, and income producing properties. - -------------------------------------------------------------------------------- (Continued) PREMIER FINANCIAL BANCORP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2002, 2001 and 2000 - -------------------------------------------------------------------------------- NOTE 20 - 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, 2002, management is unaware of any legal proceedings, of which the ultimate result would have a material adverse effect upon the consolidated financial statements of the Company. NOTE 21 - 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 2003, the Banks could, without prior approval, declare dividends of approximately $3.1 million plus any 2003 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, 2002, the Company and the Banks meet all quantitative capital adequacy requirements to which they are subject. - -------------------------------------------------------------------------------- (Continued) PREMIER FINANCIAL BANCORP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2002, 2001 and 2000 - -------------------------------------------------------------------------------- NOTE 21 - 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 three of the Company's subsidiaries have entered into agreements with the applicable regulatory authorities which provide for additional restrictions on their respective capital levels and the payment of dividends. The Company entered into an agreement with the Federal Reserve Bank (FRB), as discussed in Note 3, 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 10.9% at December 31, 2002. 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 7.6% at December 31, 2002. Citizens Bank of Kentucky (Citizens) entered into an agreement with the Kentucky Department of Financial Institutions (KDFI) and the Federal Deposit Insurance Corporation (FDIC) on September 11, 2002. Among other things, the agreement restricts the Company 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. Citizen's Tier I capital to average assets was 8.7% as of December 31, 2002. As of December 31, 2002, 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. To be categorized as well capitalized, the Company must maintain minimum Total risk-based, Tier I risk-based and Tier I leverage ratios as set forth in the following table. There are no conditions or events since that notification that management believes have changed the Company's category. - -------------------------------------------------------------------------------- (Continued) PREMIER FINANCIAL BANCORP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2002, 2001 and 2000 - -------------------------------------------------------------------------------- NOTE 21 - STOCKHOLDERS' EQUITY (Continued) The Company's and the four largest subsidiary Banks' capital amounts and ratios as of December 31, 2002 and 2001 are presented in the table below (in thousands):
To Be Well Capitalized For Capital Under Prompt Corrective Actual Adequacy Purposes Action Provisions 2002 Amount Ratio Amount Ratio Amount Ratio ---- Total Capital (to Risk-Weighted Assets): Consolidated $ 75,994 17.5% $ 34,664 8% $ 43,330 10% Boone County Bank 15,635 17.6 7,112 8 8,890 10 Farmers Deposit Bank 16,862 16.2 8,350 8 10,438 10 Citizens Deposit Bank 10,766 16.7 5,167 8 6,458 10 Citizens Bank (Kentucky), Inc. 8,218 14.7 4,487 8 5,609 10 Tier I Capital (to Risk-Weighted Assets): Consolidated $ 61,020 14.1% $ 17,332 4% $ 25,998 6% Boone County Bank 14,556 16.4 3,556 4 5,334 6 Farmers Deposit Bank 15,552 14.9 4,175 4 6,263 6 Citizens Deposit Bank 9,932 15.4 2,583 4 3,875 6 Citizens Bank (Kentucky), Inc. 7,492 13.4 2,243 4 3,365 6 Tier I Capital (to Average Assets): Consolidated $ 61,020 9.1% $ 26,731 4% $ 33,414 5% Boone County Bank 14,556 9.5 6,102 4 7,628 5 Farmers Deposit Bank 15,552 10.9 5,710 4 7,137 5 Citizens Deposit Bank 9,932 10.9 3,662 4 4,577 5 Citizens Bank (Kentucky), Inc. 7,492 8.7 3,431 4 4,289 5 2001 Total Capital (to Risk-Weighted Assets): Consolidated $ 77,554 16.6% $ 37,313 8% $ 46,641 10% Boone County Bank 14,463 16.5 7,021 8 8,776 10 Farmers Deposit Bank 16,751 15.5 8,655 8 10,819 10 Citizens Deposit Bank 11,809 15.4 6,118 8 7,648 10 Citizens Bank (Kentucky), Inc. 9,522 13.4 5,703 8 7,129 10 Tier I Capital (to Risk-Weighted Assets): Consolidated $ 62,620 13.4% $ 18,656 4% $ 27,985 6% Boone County Bank 13,485 15.4 3,510 4 5,266 6 Farmers Deposit Bank 15,577 14.4 4,327 4 6,491 6 Citizens Deposit Bank 10,845 14.2 3,059 4 4,589 6 Citizens Bank (Kentucky), Inc. 8,622 12.1 2,851 4 4,277 6 Tier I Capital (to Average Assets): Consolidated $ 62,620 8.5% $ 29,468 4% $ 36,835 5% Boone County Bank 13,485 9.0 5,999 4 7,499 5 Farmers Deposit Bank 15,577 10.9 5,703 4 7,129 5 Citizens Deposit Bank 10,845 9.9 4,395 4 5,494 5 Citizens Bank (Kentucky), Inc. 8,622 8.2 4,184 4 5,230 5
- -------------------------------------------------------------------------------- (Continued) PREMIER FINANCIAL BANCORP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2002, 2001 and 2000 - -------------------------------------------------------------------------------- NOTE 22 - PARENT COMPANY FINANCIAL STATEMENTS Condensed Balance Sheets December 31 (In Thousands) 2002 2001 --------- --------- ASSETS Cash $ 7,961 $ 711 Investment in subsidiaries 88,219 98,429 Securities available for sale - 5 Premises and equipment 1,049 1,080 Real estate acquired through foreclosure 225 380 Other assets 1,242 1,348 --------- --------- Total assets $ 98,696 $ 101,953 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY Other liabilities $ 1,478 $ 328 Notes payable 1,402 - Guaranteed preferred beneficial interests in Company's debentures 28,750 28,750 Other borrowed funds 7,700 13,000 --------- --------- Total liabilities 39,330 42,078 Stockholders' equity Preferred stock - - Common stock 1,103 1,103 Surplus 43,445 43,445 Retained earnings 13,250 14,470 Accumulated other comprehensive income 1,568 857 --------- --------- Total stockholders' equity 59,366 59,875 --------- --------- Total liabilities and stockholders' equity $ 98,696 $ 101,953 ========= ========= - -------------------------------------------------------------------------------- (Continued) PREMIER FINANCIAL BANCORP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2002, 2001 and 2000 - -------------------------------------------------------------------------------- NOTE 22 - PARENT COMPANY FINANCIAL STATEMENTS (Continued) Condensed Statements of Operations Years Ended December 31 (In Thousands) 2002 2001 2000 -------- -------- -------- Income Dividends from subsidiaries $ 8,025 $ 10,538 $ 3,775 Interest and dividend income - 58 229 Other income 5 70 15 -------- -------- -------- Total income 8,030 10,666 4,019 Expenses Interest expense 3,313 4,137 4,507 Salaries and employee benefits 552 914 1,459 Other expenses 1,226 852 927 -------- -------- -------- Total expenses 5,091 5,903 6,893 Income (loss) before income taxes and equity in undistributed income of subsidiaries 2,939 4,763 (2,874) Income tax expense (benefit) (1,729) (1,976) (2,315) -------- -------- -------- Income (loss) before equity in undistributed income of subsidiaries 4,668 6,739 (559) Equity in undistributed income of subsidiaries (5,888) (4,420) 1,894 -------- -------- -------- Net income (loss) $ (1,220) $ 2,319 $ 1,335 ======== ======== ======== - -------------------------------------------------------------------------------- (Continued) PREMIER FINANCIAL BANCORP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2002, 2001 and 2000 - -------------------------------------------------------------------------------- NOTE 22 - PARENT COMPANY FINANCIAL STATEMENTS (Continued) Condensed Statements of Cash Flows Years Ended December 31 (In Thousands) 2002 2001 2000 -------- -------- -------- Cash flows from operating activities Net income (loss) $ (1,220) $ 2,319 $ 1,335 Adjustments to reconcile net (loss) income to net cash from operating activities Depreciation 83 83 76 Write-down of other real estate owned 155 - 110 Securities (gains) losses, net 1 (60) - Equity in undistributed income of subsidiaries 5,888 4,420 (1,894) Change in other assets 106 139 20 Change in other liabilities 1,151 (999) 758 -------- -------- -------- Net cash from operating activities 6,164 5,902 405 Cash flows from investing activities Capital contributed to subsidiaries (128) (880) (21) Proceeds from liquidation of subsidiary 5,160 - - Proceeds from sale of securities 4 2,060 - Purchase of premises and equipment (52) (284) (80) Proceeds from sale of fixed assets - 96 682 -------- -------- -------- Net cash from investing activities 4,984 992 581 Cash flows from financing activities Dividends paid - - (785) Proceeds from notes payable 1,402 - - Payments of other borrowed funds (5,300) (7,000) - -------- -------- -------- Net cash from financing activities (3,898) (7,000) (785) Net change in cash and cash equivalents 7,250 (106) 201 Cash and cash equivalents at beginning of year 711 817 616 -------- -------- -------- Cash and cash equivalents at end of year $ 7,961 $ 711 $ 817 ======== ======== ======== - -------------------------------------------------------------------------------- (Continued) PREMIER FINANCIAL BANCORP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2002, 2001 and 2000 - -------------------------------------------------------------------------------- NOTE 23 - QUARTERLY FINANCIAL DATA (UNAUDITED)
Interest Net Interest Net Earnings per Share Income Income Income Basic Fully Diluted 2002 First Quarter $ 11,546 $ 5,974 $ 644 $ .12 $ .12 Second Quarter 11,345 6,150 (1,380) (.26) (.26) Third Quarter 10,925 6,046 (839) (.16) (.16) Fourth Quarter 10,624 6,120 355 .07 .07 2001 First Quarter $ 15,796 $ 6,354 $ 1,224 $ .23 $ .23 Second Quarter 14,999 6,410 (705) (.13) (.13) Third Quarter 14,243 6,240 46 .01 .01 Fourth Quarter 13,004 6,270 1,754 .33 .33
PART III Item 9. Changes In and Disagreements with Accountants on Accounting and - ------------------------------------------------------------------------ Financial Disclosure -------------------- There have been no changes in or disagreements with accountants on accounting or financial disclosure matters. Item 10, 11, 12 and 13. Directors and Executive Officers of the Registrant; - ---------------------------------------------------------------------------- Executive Compensation; Security Ownership of Certain Beneficial Owners ----------------------------------------------------------------------- and Management; and Certain Relationships and Related Transactions ------------------------------------------------------------------ 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. Item 14. 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-14. 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. There have been no significant changes in internal controls, or in factors that could significantly affect internal controls, subsequent to the date the Chief Executive Officer and Chief Financial Officer completed their evaluation. PART IV Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K - ------------------------------------------------------------------------- (a) The following documents are filed as part of this report: 1. Financial Statement Schedules: No financial statement schedules have been included as part of this report because they are either not required or the information is otherwise included. 2. List of Exhibits: The following is a list of exhibits required by Item 601 of Regulation S-K and by paragraph (c) of this Item 14.
Exhibit Number Description of Document ------- ----------------------- 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. 21 Subsidiaries of registrant 99.1 Certification Pursuant to 18 U.S.C ss.1350, as adopted pursuant to Section 906 of the Sarbanes- Oxley Act of 2002, by Chief Executive Officer 99.2 Certification Pursuant to 18 U.S.C ss.1350, as adopted pursuant to Section 906 of the Sarbanes- Oxley Act of 2002, by Chief Financial Officer
(b) Reports on Form 8-K On December 5, 2002 an 8-K was filed relating to Premier exercising its right to defer the payment of interest on its 9.75% Junior Subordinated Deferrable Interest Debentures related to the Trust Preferred Securities, for an indefinite period (which can be no longer than 20 consecutive quarterly periods) On January 29, 2003 an 8-K was filed relating to a written agreement Between Premier and the Federal Reserve Bank of Cleveland. The agreement was entered into in recognition of their common goal to restore the financial soundness of Premier. Among the provisons 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. On February 24, 2003 an 8-K was filed relating to Premier issuing a news release announcing that it intend to redeem $3,000,000 (120,000 shares) of its PFBI Capital Trust 9.75% Preferred Securities ("Trust Preferred Securities") as of March 31, 2003. Premier also announced that the first quarter distribution on the remaining Trust Preferred Securities scheduled for March 31, 2003, as well as future distributions on the Trust Preferred Securities, will be deferred. 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 annual 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 annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual 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 annual 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-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures 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 annual report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: March 27, 2003 /s/ Robert W. Walker Robert W. Walker President & Chief Executive Officer 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 annual 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 annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual 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 annual 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-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures 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 annual report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: March 27, 2003 /s/ Brien M. Chase Brien M. Chase Vice President & Chief Financial Officer SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, registrant has duly caused this Annual Report on Form 10-K to be signed on its behalf by the undersigned thereunto duly authorized, in the City of Huntington, State of West Virginia, on the 27th day of March, 2003. PREMIER FINANCIAL BANCORP, INC. By: /s/ Robert W. Walker, President ------------------------------- Robert W. Walker, President Pursuant to the requirements of the Securities Exchange Act of 1934, this Annual Report on Form 10-K has been signed below by the following persons on behalf of the registrant in the capacities and on the dates indicated. March 19, 2003 /s/ Robert W. Walker Principal Executive and Director ------------------------ Robert W. Walker March 19, 2003 /s/ Brien M. Chase Principal Financial and ------------------------ Accounting Officer Brien M. Chase March 19, 2003 /s/ Toney K. Adkins Director ------------------------ Toney K. Adkins March 19, 2003 /s/ Hosmer A. Brown, III Director ------------------------ Hosmer A. Brown, III March 19, 2003 /s/ Edsel Burns Director ------------------------ Edsel Burns March __, 2003 Director ------------------------ Charles R. Hooten, Jr. March 19, 2003 /s/ E. V. Holder, Jr. Director ------------------------- E. V. Holder, Jr. March 19, 2003 /s/ Wilbur M. Jenkins Director ------------------------- Wilbur M. Jenkins March 19, 2003 /s/ Keith F. Molihan Director ------------------------- Keith F. Molihan March 19, 2003 /s/ Marshall T. Reynolds Chairman of the Board ------------------------- Marshall T. Reynolds March 19, 2003 /s/ Neal Scaggs Director ------------------------- Neal Scaggs March 19, 2003 /s/ Thomas W. Wright Director ------------------------- Thomas W. Wright EX-10 3 exhibit10-4.txt JANUARY 29, 2003 WRITTEN AGREEMENT Exhibit 10.4 UNITED STATES OF AMERICA BEFORE THE BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM WASHINGTON, D.C. - -------------------------------------- ) Written Agreement by and between ) ) PREMIER FINANCIAL BANCORP, INC. ) Docket No. 03-003-WA/RB-HC Huntington, West Virginia ) ) and ) ) FEDERAL RESERVE BANK ) OF CLEVELAND ) Cleveland, Ohio ) - --------------------------------------) WHEREAS, in recognition of their common goal to restore the financial soundness of Premier Financial Bancorp, Inc., Huntington, West Virginia ("Premier"), a registered bank holding company that owns and controls, directly or indirectly, seven subsidiary banks * (the "Subsidiary Banks"), Premier and the Federal Reserve Bank of Cleveland (the "Reserve Bank" have mutually agreed to enter into this Written Agreement (the "Agreement"); and WHEREAS, on January 29, 2003, the board of directors of Premier, at a duly constituted meeting, adopted a resolution authorizing and directing Robert W. Walker to enter into this Agreement on behalf of Premier and consenting to compliance with each and every provision of this Agreement by Premier and its institution-affiliated parties, as defined in sections 3(u) and 8(b)(3) fo the Federal Deposit Insurance Act, as amended (the "FDI Act")(12 U.S.C. 1813(u) and 1818(b)(3)). NOW, THEREFORE, Premier and the Reserve Bank hereby agree as follows: Management 1. (a) Within 30 days of this Agreement, the board of directors of Premier shall retain an independent consultant acceptable to the Reserve Bank to conduct a review of the management, directorate, and organizational structure of Premier (the "Review") and to prepare a written report of findings and recommendations (the "Consultant's Report"). The primary purpose of the Review shall be to aid in the development of a directorate and management structure suitable to Premier's needs that consists of qualified and trained personnel. The Review shall, at a minimum, address, consider, and include: (i) The identification of the type and number of officer positions needed to manage and properly supervise the affairs of Premier; (ii) the identification and establishment of committees of Premier's board of directors that are needed to provide guidance and oversight for the consolidated organization; (iii) an evaluation of each Premier officer and director to determine whether the individual possesses the ability, experience, and other qualifications required to competently perform present and anticipated duties, including the ability to adhere to established policies and procedures of Premier; to restore Premier to, and to maintain, a safe and sound condition; and to comply with the requirements of this Agreement and all applicable laws and regulations; and (iv) a plan to recruit, hire, or appoint additional or replacement personnel with the requisite ability, experience, and other qualifications required to competently perform their assigned duties. (b) Within 10 days of the engagement of the independent consultant, but prior to the commencement of the Review, Premier shall submit to the Reserve Bank for approval an engagement letter that sets forth the scope of the Review and the date of submission of the Consultant's Report, not to exceed 90 days after the date of the Reserve Bank's approval of the engagement letter. (c) Upon receipt of the Consultant's Report, Premier shall forward a copy to the Reserve Bank. 2. Within 30 days of Premier's receipt of the Consultant's Report, Premier shall submit to the Reserve Bank a written management plan that fully addresses the findings and recommendations in the Consultant's Report and describes the specific actions that the board of directors proposes to take in order to strengthen Premier's management and improve the board of directors' supervision of Premier. The plan shall, at a minimum, address, consider, and include actions to improve and strengthen: (a) The consolidated organization's risk management program; (b) the consolidated organization's liquidity and interest rate risk processes; (c) Premier's oversight of the lending policies and procedures of the Subsidiary Banks; and (d) Premier's planning process and strategic direction. 3. Within 30 days of Premier's receipt of the Consultant's Report, Premier shall submit to the Reserve Bank a written plan providing for orderly management succession. The plan shall address all relevant conclusions and recommendations of the Consultant's Report and shall, at a minimum, identify the individual(s) at Premier who are considered to have the potential for advancement or promotion, the area(s) in which such individual(s) may assume new duties or responsibilities or the position(s) to which they may be promoted, and the training to be provided such individual(s) to ensure adequate successor management. Loan Review 4. (a) Within 90 days of this Agreement, the board of directors shall establish acceptable procedures to monitor the loan review program at each Subsidiary Banks. The procedures shall provide that Premier will require each of the Subsidiary Banks to provide the board of directors or a committee thereof with, at a minimum: (i) Loan review results, determined by either an internal or external loan review function; (ii) formal management responses to loan review findings; (iii) a list of individuals at the bank who are responsible for grading loans; (iv) guidelines on will loans will be graded; (v) guidelines on the frequency of loan reviews; (vi) risk characteristics to be utilized in selecting loans to be reviewed: (vii) procedures for resolving contested loan grades; and (viii) a quarterly compliance report that measures and monitors the bank's compliance with bank loan policies, relevant laws, and regulations, including guidelines on reporting underwriting, administration, and collateral documentation exceptions, (b) Premier's board of directors or a committee thereof shall monitor the compliance by the consolidated organization and each of the Subsidiary Banks with the loan review and credit risk grading system guidelines outlined in the Interagency Policy Statement on the Allowance of Loan and Lease Losses, dated December 22, 1993, and the Interagency Policy Statement on the Allowance of Loan and Lease Losses Methodologies and Documentation for Banks and Savings Institutions, dated July 2, 2001. Allowance for Loan and Lease Losses 5. Premier shall review the adequacy of its consolidated allowance for loan and lease losses ("ALLL") at least once each quarter, taking into account the adequacy of the ALLL at each of the Subsidiary Banks. Premier shall review and revise, as necessary, the methodology for determining an adequate consolidated ALLL and ensure its effective implementation. Such methodology shall, at a minimum, address, consider, and include: (a) The results of each of the Subsidiary Banks' internal loan review and regulatory examination, including the current level of past due and nonperforming loans; (b) loan loss experience at each of the Subsidiary Banks and evaluation of the probable losses in the loan portfolios, including the potential for the existence of unidentified losses in loans adversely classified and the imprecision of loss estimates; (c) the requirements of the Interagency Policy Statement on the Allowance for Loan and Lease Losses, dated December 22, 1993, the Interagency Policy Statement on Allowance for Loan and Lease Losses Methodologies and Documentation for Banks and Savings Institutions, dated July 2, 2001, SFAS 114, and SFAS 5; (d) concentration of credit at each of the Subsidiary Banks; (e) present and prospective economic conditions that affect or could affect each Subsidiary Bank's ALLL; (f) a review of each of the Subsidiary Banks' ALLLs at least once each quarter by the Premier board of directors; (g) the remedying of any deficiency in the ALLL of the consolidated organization and any of the Subsidiary Banks in the quarter it is discovered; and (h) the maintenance of written documentation by the board of directors indicating the factors considered and the conclusions reached by the board of directors in determining the adequacy of the consolidated ALLL. Capital Plan 6. (a) Within 90 days of this Agreement, Premier shall submit to the Reserve Bank an acceptable written plan to maintain a sufficient capital position for the consolidated organization. The plan shall, at a minimum, address, consider, and include: (i) The current and future capital requirements of each of the Subsidiary Banks and the consolidated organization, including compliance with the Capital Adequacy Guidelines for Bank Holding Companies: Risk-Based Measure and Tier 1 Leverage Measure, Appendices A and D of Regulation Y of the Board of Governors (12 C.F.R. Part 225. App. A and D); (ii) the asset quality, condition, and risk profile of each Subsidiary Bank; (iii) the Subsidiary Banks' anticipated level of retained earnings and dividends of both the Subsidiary Banks and Premier; (iv) actions to be taken and the source and timing of additional funds to fulfill the consolidated organization's future capital requirements and to maintain the adequacy of the consolidated organization's ALLL and each of the Subsidiary Banks' ALLLs; and (v) projected or anticipated growth of the organization. (b) Premier shall monitor and review the sufficiency of the consolidated organization's capital position on a quarterly basis and shall reflect such reviews in the minutes of the meetings of the board of directors. Earnings and Cash Flow 7. Within 90 days of this Agreement, Premier shall submit to the Reserve Bank a written strategic plan that includes the goals and strategies for improving consolidated earnings for a minimum of three years after the date of this Agreement. The written plan shall, at a minimum, address, consider, and include: (a) Identification of the major areas and means by which the board of directors will seek to improve Premier's operating performance; (b) financial performance objectives, including plans for asset growth, earnings, liquidity, and capital supported by quarterly and annual pro forma financial statements and assumptions; and (c) a budget review process that ensures, at a minimum: (i) Timely reporting of discrepancies between budget and performance; (ii) documentation of variances from budget; and (iii) timely and appropriate revisions to budget. 8. (a) Within 90 days of this Agreement, Premier shall submit to the Reserve Bank a comprehensive parent-only cash flow analysis detailing Premier's planned sources and uses of cash for debt retirement, operating expenses, and other purposes for 2003. (b) For each year after 2003, Premier shall by January 30 of such year submit to the Reserve Bank a parent-only cash flow analysis for such year. Debt Service, Dividends, and Redemptions 9. (a) Premier shall not declare or pay any dividends without the prior written approval of the Reserve Bank and the Director of the Division of Banking Supervision and Regulation of the Board of Governors (the "Director"). (b) Premier shall not make any distribution of interest or dividends on its trust preferred securities without the prior written approval of the Reserve Bank and the Director. (c) Premier shall not, directly or indirectly, purchase or redeem any shares of its stock or other securities without the prior written approval of the Reserve Bank. (d) All requests for prior approval shall be received by the Reserve Bank at least 30 days prior to the proposed dividend declaration date, distribution date, or redemption date and shall contain, but not be limited to, current and projected information on earnings, cash flow, capital levels and asset quality of Premier. 10. Premier shall not, directly or indirectly, increase its borrowings or incur any debt, including debt to stockholders, without the prior written approval of the Reserve Bank. 11. Within 90 days of this Agreement, Premier shall submit to the Reserve Bank an acceptable written plan to service its outstanding debt and other obligations, including trust preferred securities, without incurring additional debt. The plan shall, at a minimum, address, consider, and include: (a) Appropriate earnings, growth, capital, and cash flow projections; (b) alternative sources of funds; and (c) actions to be taken by Premier to comply with the terms of all outstanding debt and other obligations. Appointment of New Officers and Directors: Severance and Indemnification Payments 12. During the term of this Agreement, or as otherwise required by law, Premier shall comply with the provisions of section 32 of the FDI Act (12 U.S.C. 1831i) and Subpart H of Regulation Y of the Board of Governors (12 C.F.R. Part 225, Subpart H) with respect to the appointment of any new directors or the hiring or promotion of any senior executive officers as defined in Regulation 0 of the Board of Governors (12 C.F.R. Part 215). 13. Premier shall comply with the restrictions on indemnification and severance payments of section 18(k) of the FBI Act (12 U.S.C. 1828(k)) and Part 359 of the Federal Deposit Insurance Corporation's regulations (12 C.F.R. Part 359). Compliance Committee 14. (a) Within 15 days of this Agreement, the board of directors of Premier shall establish a committee to monitor Premier's compliance with the provisions of this Agreement (the "Compliance Committee"). The Compliance Committee shall be comprised of three or more outside directors who are not officers or employees of Premier or any of the Subsidiary Banks and who do not directly or indirectly own more than ten percent of the outstanding shares of Premier or any of the Subsidiary Banks. At a minimum, the Compliance Committee shall keep detailed minutes of each meeting and shall report its findings to Premier's board of directors on a monthly basis. (b) Within 30 days after the end of each calendar quarter (March 31, June 30, September 30, and December 31) following the date of this Agreement, Premier shall furnish to the Reserve Bank written progress reports detailing the form and manner of all actions taken to secure compliance with this Agreement and the results thereof. A copy of all progress reports shall be forwarded to the Superintendent of the Kentucky Department of Financial Institutions and to the Director of Depository Institutions of the West Virginia Division of Banking. Progress reports may be discontinued when the corrections required by this Agreement have been accomplished and the Reserve Bank has, in writing, released Premier from making further reports. Miscellaneous 15. Acceptable plans, procedures, and an acceptable engagement letter required by paragraphs 1(b), 4(a), 6(a), and 11 hereof shall be submitted to the Reserve Bank for review and approval within the time periods set forth in this Agreement. Premier shall adopt the approved plans, procedures, and engagement letter within 10 days of receipt of approval from the Reserve Bank and then shall fully comply with them. During the term of this Agreement, the approved plans, procedures, and engagement letter shall not be amended or rescinded without prior written notification to and approval of the Reserve Bank. 16. All communications regarding this Agreement shall be sent to: (a) R. Chris Moore Senior Vice President Federal Reserve Bank of Cleveland East 6th & Superior Cleveland, Ohio 44101-1387 (b) Robert W. Walker President and Chief Executive Officer Premier Financial Bancorp, Inc. 2883 5th Avenue Huntington, West Virginia 25702 Term and Effect of Agreement 17. The provisions of this Agreement shall be binding upon Premier and its institution-affiliated parties, in their capacities as such, and their successors and assigns. 18. Each provision of this Agreement shall remain effective and enforceable until stayed, modified, terminated or suspended by the Reserve Bank. 19. Notwithstanding any provision of this Agreement to the contrary, the Reserve Bank may, in its sole discretion, grant written extensions of time to Premier to comply with any provision of this Agreement. 20. The provisions of this Agreement shall not bar, estop or otherwise prevent the Board of Governors, the Reserve Bank or any federal or state agency or department from taking any other action affecting Premier or any of its current or former institution-affiliated parties. 21. This Agreement is a "written agreement" for the purposes of, and is enforceable by the Board of Governors as an order issued under, section 8 of the FDI Act (12 U.S.C. 1818). IN WITNESS HEREOF, the parties have caused this Agreement to be executed as of the 29th day of January, 2003. Premier Financial Bancorp, Inc. Federal Reserve Bank of Cleveland By: /s/ Robert W. Walker By: /s/ R. Chris Moore ------------------------------ ----------------------------- Robert W. Walker R. Chris Moore President and Senior Vice President Chief Executive Officer EX-21 4 exhibit21.txt 2002 SUBSIDIARIES OF PREMIER Exhibit 21 SUBSIDIARIES OF THE REGISTRANT The following is a list of all subsidiaries of Premier Financial Bancorp, Inc. as of December 31, 2002 their state of incorporation. < Subsidiary State of Incorporation Citizens Deposit Bank and Trust Company Kentucky Bank of Germantown Kentucky Citizens Bank (Kentucky), Inc. Kentucky Premier Data Services, Inc. Kentucky Farmers Deposit Bank Kentucky Mt. Vernon Financial Holdings, Inc. Kentucky Ohio River Bank Ohio First Central Bank, Inc. West Virginia Boone County Bank, Inc. West Virginia EX-99 5 exhibit99-1.txt SECTION 906 CEO CERTIFICATION Exhibit 99.1 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 As an accompaniment to the Annual Report of Premier Financial Bancorp, Inc. (the "Company") on Form 10-K for the period ending December 31, 2002 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Robert W. Walker, Chief Executive Officer 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 the best of my knowledge and belief: 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 as of and for the periods presented. This certification is based on inquiries that I have made, or have caused to be made, in a good faith effort on my part to be a responsible and competent chief executive officer serving the Company and its constituencies. This certification merely accompanies and is not part of the Report, shall not be deemed filed for purposes of the Securities Exchange Act of 1934, and may not be used for any purpose other than compliance with 18 U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act of 2002. A signed original of this written statement required by Section 906 has been provided to Premier Financial Bancorp, Inc. and will be retained by Premier Financial Bancorp, Inc. and furnished to the Securities and Exchange Commission or its staff upon request. By: /s/Robert W. Walker --------------------------------------- Robert W. Walker President and Chief Executive Officer Date: March 27, 2003 EX-99 6 exhibit99-2.txt SECTION 906 CFO CERTIFICATION Exhibit 99.2 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 As an accompaniment to the Annual Report of Premier Financial Bancorp, Inc. (the "Company") on Form 10-K for the period ending December 31, 2002 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Brien M. Chase, Chief Financial Officer 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 the best of my knowledge and belief: 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 as of and for the periods presented. This certification is based on inquiries that I have made, or have caused to be made, in a good faith effort on my part to be a responsible and competent chief financial officer serving the Company and its constituencies. This certification merely accompanies and is not part of the Report, shall not be deemed filed for purposes of the Securities Exchange Act of 1934, and may not be used for any purpose other than compliance with 18 U.S.C. ss.1 350, as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act of 2002. A signed original of this written statement required by Section 906 has been provided to Premier Financial Bancorp, Inc. and will be retained by Premier Financial Bancorp, Inc. and furnished to the Securities and Exchange Commission or its staff upon request. By: /s/Brien M. Chase --------------------------------------- Brien M. Chase Vice President & Chief Financial Officer Date: March 27, 2003 -----END PRIVACY-ENHANCED MESSAGE-----