-----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, SA8lBYhgpDIFw3aMLXAO9K+eSTxdNF3pWI5LhplCcAIfpEG0fsVc13Cunt4E944x /dNhYQcahENsQ0kPgDaa/Q== 0000887919-04-000030.txt : 20040517 0000887919-04-000030.hdr.sgml : 20040517 20040517131842 ACCESSION NUMBER: 0000887919-04-000030 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20040331 FILED AS OF DATE: 20040517 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-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-20908 FILM NUMBER: 04811104 BUSINESS ADDRESS: STREET 1: 2883 FIFTH AVENUE STREET 2: NONE CITY: HUNTINGTON STATE: WV ZIP: 25702 BUSINESS PHONE: 3045251600 10-Q 1 mar0410-q.txt PREMIER FINANCIAL BANCORP, MARCH 2004 10-Q SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 2004 or [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ___________ to ___________ Commission file number 0-20908 PREMIER FINANCIAL BANCORP, INC. (Exact name of registrant as specified in its charter) Kentucky 61-1206757 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 2883 Fifth Avenue Huntington, West Virginia 25702 (address of principal executive officer) (Zip Code) Registrant's telephone number (304) 525-1600 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to filing requirements for the past 90 days. Yes X No . Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Securities Exchange Act of 1934). Yes___ No X . Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practical date. Common stock, no par value, - 5,232,230 shares outstanding at April 30, 2004 PREMIER FINANCIAL BANCORP, INC. PART I - FINANCIAL INFORMATION Item 1. Financial Statements The accompanying information has not been audited by independent public accountants; however, in the opinion of management such information reflects all adjustments necessary for a fair presentation of the results for the interim period. All such adjustments are of a normal and recurring nature. Premier Financial Bancorp, Inc.'s ("Premier's") accounting and reporting policies are in accordance with accounting principles generally accepted in the United States of America. Certain accounting principles used by Premier involve a significant amount of judgment about future events and require the use of estimates in their application. The following policies are particularly sensitive in terms of judgments and the extent to which estimates are used: allowance for loan losses, the identification and evaluation of impaired loans, the impairment of goodwill, the realization of deferred tax assets, and stock based compensation disclosures. These estimates are based on assumptions that may involve significant uncertainty at the time of their use. However, the policies, the estimates and the estimation process as well as the resulting disclosures are periodically reviewed by the Audit Committee of the Board of Directors and material estimates are subject to review as part of the external audit by the independent public accountants. The accompanying financial statements are presented in accordance with the requirements of Form 10-Q and consequently do not include all of the disclosures normally required by accounting principles generally accepted in the United States of America or those normally made in the registrant's annual report on Form 10-K. Accordingly, the reader of the Form 10-Q may wish to refer to the registrant's Form 10-K for the year ended December 31, 2003 for further information in this regard. Index to consolidated financial statements: Consolidated Balance Sheets.................................. 3 Consolidated Statements of Operations........................ 4 Consolidated Statements of Comprehensive Income ............. 6 Consolidated Statements of Cash Flows........................ 7 Notes to Consolidated Financial Statements................... 9
PREMIER FINANCIAL BANCORP, INC. CONSOLIDATED BALANCE SHEETS MARCH 31, 2004 AND DECEMBER 31, 2003 (DOLLARS IN THOUSANDS) - -------------------------------------------------------------------------------------------------------------------- (UNAUDITED) 2004 2003 ---- ---- ASSETS Cash and due from banks $ 13,676 $ 16,422 Federal funds sold 35,011 17,051 Securities available for sale 145,690 147,646 Loans 328,180 331,794 Allowance for loan losses (13,751) (14,300) -------------- -------------- Net loans 314,429 317,494 Federal Home Loan Bank and Federal Reserve Bank stock 2,521 2,490 Premises and equipment, net 7,926 7,956 Real estate and other property acquired through foreclosure 3,661 3,187 Interest receivable 2,946 3,448 Goodwill 15,816 15,816 Current year tax receivable 3,695 3,695 Other assets 7,614 8,024 Assets of discontinued operation 80,630 79,163 ------------- -------------- Total assets $ 633,615 $ 622,392 ============= ============== LIABILITIES AND STOCKHOLDERS' EQUITY Deposits Non-interest bearing $ 59,126 $ 59,001 Time deposits, $100,000 over 41,110 42,780 Other interest bearing 350,086 353,693 ------------- -------------- Total deposits 450,322 455,474 Securities sold under agreements to repurchase 6,000 - Federal Home Loan Bank advances 12,068 10,705 Other borrowed funds 5,750 6,200 Notes payable 1,402 1,402 Guaranteed junior subordinated interest debentures 26,546 26,546 Interest payable 4,658 3,902 Other liabilities 7,618 1,227 Liabilities of discontinued operation 72,797 71,396 ------------- -------------- Total liabilities 587,161 576,852 Stockholders' equity Preferred stock, no par value; 1,000,000 shares authorized; none issued or outstanding - - Common stock, no par value; 10,000,000 shares authorized; 5,232,230 shares issued and outstanding 1,103 1,103 Surplus 43,445 43,445 Retained earnings 822 311 Accumulated other comprehensive income 1,084 681 ------------- -------------- Total stockholders' equity 46,454 45,540 ------------- -------------- Total liabilities and stockholders' equity $ 633,615 $ 622,392 ============= ============== - -------------------------------------------------------------------------------------------------------------------- See Accompanying Notes to Consolidated Financial Statements
PREMIER FINANCIAL BANCORP, INC. CONSOLIDATED STATEMENTS OF OPERATIONS THREE MONTHS ENDED MARCH 31, 2004 AND 2003 (IN THOUSANDS EXCEPT PER SHARE DATA) (UNAUDITED) - -------------------------------------------------------------------------------------------------------------------- Three Months Ended March 31, 2004 2003 ---- ---- (Restated) Interest income Loans, including fees $ 5,845 $ 7,274 Securities available for sale Taxable 1,065 994 Tax-exempt 80 203 Federal funds sold and other 65 135 ----------- ----------- Total interest income 7,055 8,606 Interest expense Deposits 1,632 2,447 Other borrowings 258 328 Debentures 719 730 ----------- ----------- Total interest expense 2,609 3,505 Net interest income 4,446 5,101 Provision for loan losses 135 2,267 ----------- ----------- Net interest income after provision for loan losses 4,311 2,834 Non-interest income Service charges 584 383 Insurance commissions 17 39 Securities gains 10 189 Other 245 302 ----------- ----------- 856 913 Non-interest expenses Salaries and employee benefits 2,230 2,361 Occupancy and equipment expenses 505 576 Professional fees 560 207 Taxes, other than payroll, property and income 134 122 Write-downs, expenses, sales of other real estate owned 61 71 Supplies 88 92 Bad check losses 29 6 Other expenses 865 917 ----------- ----------- 4,472 4,352 ----------- ----------- Income (loss) from continuing operations before income taxes 695 (605) Provision (benefit) for income taxes 213 (240) ----------- ----------- Income (loss) from continuing operations 482 (365) ----------- ----------- Discontinued operation Income (loss) from operation of discontinued component 41 (42) Provison (benefit) for income taxes 12 (15) ----------- ----------- Income (loss) from discontinued operation 29 (27) ----------- ----------- Net income (loss) $ 511 $ (392) =========== =========== - -------------------------------------------------------------------------------------------------------------------- See Accompanying Notes to Consolidated Financial Statements
PREMIER FINANCIAL BANCORP, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (continued) THREE MONTHS ENDED MARCH 31, 2004 AND 2003 (IN THOUSANDS EXCEPT PER SHARE DATA) (UNAUDITED) - -------------------------------------------------------------------------------------------------------------------- Three Months Ended March 31, 2004 2003 ---- ---- (Restated) Weighted average shares outstanding: Basic 5,232 5,232 Diluted 5,235 5,232 Earnings (loss) per share from continuing operations: Basic $ 0.09 $ (0.07) Diluted 0.09 (0.07) Earnings (loss) per share from discontinued operation: Basic $ 0.01 $ (0.00) Diluted 0.01 (0.00) Net earnings (loss) per share: Basic $ 0.10 $ (0.07) Diluted 0.10 (0.07) - -------------------------------------------------------------------------------------------------------------------- See Accompanying Notes to Consolidated Financial Statements
PREMIER FINANCIAL BANCORP, INC. CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME THREE ENDED MARCH 31, 2004 AND 2003 (IN THOUSANDS) (UNAUDITED) - -------------------------------------------------------------------------------------------------------------------- Three Months Ended March 31, 2004 2003 ---- ---- (Restated) Net income $ 511 $ (392) Other comprehensive income (loss): Unrealized gains and (losses) arising during the period 621 (259) Reclassification of realized amount (10) (189) ----------- --------- Net change in unrealized gain (loss) on securities 611 (448) Less: Tax impact 208 (152) ---------- ---------- Other comprehensive income (loss) 403 (296) Comprehensive income (loss) $ 914 $ (688) ========== ========== - -------------------------------------------------------------------------------------------------------------------- See Accompanying Notes to Consolidated Financial Statements
PREMIER FINANCIAL BANCORP, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS THREE MONTHS ENDED MARCH 31, 2004 AND 2003 (IN THOUSANDS) (UNAUDITED) - -------------------------------------------------------------------------------------------------------------------- 2004 2003 ---- ---- (Restated) Cash flows from continuing operating activities Income (loss) from continuing operations $ 482 $ (365) Adjustments to reconcile income (loss) to net cash from continuing operating activities Depreciation 229 235 Provision for loan losses 135 2,267 Amortization, net 135 97 FHLB stock dividends (23) (43) Investment securities losses (gains), net (10) (189) Write downs of OREO 16 28 Changes in Interest Receivable 502 610 Other assets 221 (147) Interest Payable 756 554 Other liabilities 391 (242) ------------- -------------- Net cash from continuing operating activities 2,834 2,805 Cash flows from continuing investing activities Purchases of securities available for sale (21,487) (45,609) Proceeds from sales of securities available for sale 414 13,074 Proceeds from maturities and calls of securities available for sale 29,460 35,432 Purchases of FHLB stock (8) (43) Net change in federal funds sold (17,960) (22,503) Net change in loans 1,139 10,978 Purchases of premises and equipment, net (200) (160) Proceeds from sale of other real estate acquired through foreclosure 1,301 997 ------------- ------------- Net cash from continuing investing activities (7,341) (7,834) Cash flows from continuing financing activities Net change in deposits (5,152) 9,563 Advances from Federal Home Loan Bank 3,757 1,500 Repayment of Federal Home Loan Bank advances (2,394) (1,715) Early redemption of guaranteed debentures - (3,000) Repayment of Other Borrowed Funds (450) (300) Net change in agreements to repurchase securities 6,000 1,000 ------------- ------------- Net cash from continuing financing activities 1,761 7,048 ------------- ------------- Net change in cash and cash equivalents from continuing activities (2,746) 2,019 Cash and cash equivalents of continuing operations at beginning of period 16,422 14,334 ------------- ------------- Cash and cash equivalents of continuing operations at end of period $ 13,676 $ 16,353 ============= ============= - -------------------------------------------------------------------------------------------------------------------- See Accompanying Notes to Consolidated Financial Statements
PREMIER FINANCIAL BANCORP, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (continued) THREE MONTHS ENDED MARCH 31, 2004 AND 2003 (IN THOUSANDS) (UNAUDITED) - -------------------------------------------------------------------------------------------------------------------- 2004 2003 ---- ---- (Restated) upplemental disclosures of cash flow information: Cash paid during period for interest $ 1,853 $ 2,951 Loans transferred to real estate acquired through foreclosure 1,791 271 Net change in cash and cash equivalents of discontinued operations (836) (115) - -------------------------------------------------------------------------------------------------------------------- See Accompanying Notes to Consolidated Financial Statements
PREMIER FINANCIAL BANCORP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED, IN THOUSANDS) - -------------------------------------------------------------------------------- NOTE 1 - BASIS OF PRESENTATION The consolidated financial statements include the accounts of Premier Financial Bancorp, Inc. (the Company) and its wholly owned subsidiaries:
Mar 31, 2004 Net Income Year ------------ Acquired Assets Qtr Citizens Deposit Bank & Trust Vanceburg, Kentucky 1991 $ 88,866 $ 337 Bank of Germantown Germantown, Kentucky 1992 23,948 12 Citizens Bank (Kentucky), Inc. Georgetown, Kentucky 1995 80,630 29 Farmers Deposit Bank Eminence, Kentucky 1996 105,670 (23) Ohio River Bank Ironton, Ohio 1998 77,107 259 First Central Bank, Inc. Philippi, West Virginia 1998 85,259 257 Boone County Bank, Inc. Madison, West Virginia 1998 165,144 509 Mt. Vernon Financial Holdings, Inc. Huntington, West Virginia 1999 4,615 (33)
The Company also has a data processing subsidiary, Premier Data Services, Inc., and the PFBI Capital Trust subsidiary as discussed in Note 9. In accordance with FASB Interpretation No. 46, the Trust is no longer consolidated with the Company. All other intercompany transactions and balances have been eliminated. The Company maintains Employee Stock Ownership incentive Plans (the Plans) whereby certain employees of the Company are eligible to receive incentive stock options. The Plans are accounted for in accordance with Accounting Principles Board Opinion (APB) No. 25, "Accounting for Stock Issued to Employees", and related interpretations. Pursuant to the Plans, a maximum of 600,000 shares of the Company's common stock may be issued through the exercise of these incentive stock options. The option price is the fair market value of the Company's shares at the date of the grant. The options are exercisable within ten years from the date of grant. - -------------------------------------------------------------------------------- CONTINUED PREMIER FINANCIAL BANCORP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED, IN THOUSANDS) - -------------------------------------------------------------------------------- NOTE 1 - BASIS OF PRESENTATION (continued) Employee compensation expense under stock options is reported using the intrinsic value method. No stock-based compensation cost is reflected in net income, as all options granted had an exercise price equal to or greater than the market price of the underlying common stock at the date of grant. The following table illustrates the effect on net income and earnings per share if expense was measured using the fair value recognition provisions of FASB Statement No. 123, Accounting for Stock-Based Compensation.
2004 2003 ---- ---- (Restated) Income (loss) from continuing operations $ 482 $ (365) Deduct: Stock-based compensation expense determined under fair value based method (10) (8) ------------ ------------ Pro forma income (loss) $ 472 $ (373) Basic earnings (loss) per share from continuing operations $ 0.09 $ (0.07) Pro forma basic earnings (loss) per share 0.09 (0.07) Diluted earnings (loss) per share from continuing operations $ 0.09 $ (0.07) Pro forma diluted earnings (loss) per share 0.09 (0.07)
For the period ended March 31, 2003, stock options were not considered in the above computation because they were antidilutive. On February 18, 2004, 28,200 incentive stock options were granted out of the 2002 Stock Option Plan at an exercise price of $9.30. These options vest in three equal annual installments ending on February 18, 2007. On January 15, 2003, 28,650 incentive stock options were granted out of the 2002 Stock Option Plan at an exercise price of $7.96. These options vest in three equal annual installments ending on January 15, 2006. Proforma stock-compensation expense is being amortized over each of the three-year vesting periods. There were no options granted during 2002. Future pro forma net income will be negatively impacted should the Company choose to grant additional options. - -------------------------------------------------------------------------------- CONTINUED PREMIER FINANCIAL BANCORP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED, IN THOUSANDS) - -------------------------------------------------------------------------------- NOTE 1 - BASIS OF PRESENTATION (continued) The pro forma effects are computed using option pricing models, using the following weighted-average assumptions as of grant date. 2004 2003 ---- ---- Risk-free interest rate 3.15% 3.10% Expected option life (yrs) 5.00 5.00 Expected stock price volatility 0.34 0.42 Dividend yield 0.00% 0.00% Weighted average fair value of options granted during the year $3.29 $3.30 NOTE 2 - RESTATEMENT On June 16, 2003 Premier announced that as a result of an ongoing internal investigation, it had uncovered a systemic disregard for its loan approval and credit administration policies at its Farmers Deposit Bank subsidiary and had accepted the resignation of the bank's former president. On November 7, 2003 Premier disclosed that the Securities and Exchange Commission had requested information about Premier's internal investigation. As the internal investigation progressed, many loans were charged off and additional provisions for loan losses were recorded. Premier's management, with the assistance of outside independent professionals, has conducted a further review of those loans for which significant charge offs or additional provisions were required in 2003. The purpose of this review was to determine if the facts or circumstances that gave rise to additional charge offs or provisions had been improperly concealed from senior management or improperly considered in applying management's estimates and judgments as to the adequacy of the allowance for loan losses in prior financial statement periods. The review did identify instances in which collateral securing loans had been released without proper support or notation in loan files, instances in which obligors on notes had been released from their repayment obligation without proper support or notation in loan files and instances in which delinquent loan reporting systems had been manipulated to prevent problem loans from being identified on a timely basis. Premier's senior management determined that if these circumstances had been considered in evaluating the adequacy of the allowance for loan losses in prior periods then some of the loan charge offs and additional provisions for loan losses recorded in 2003 should have been reflected in prior periods. Therefore the financial statements for the periods ended March 31, 2003 have been restated to reflect the financial statement effect of the matters that occurred in those periods but which were improperly concealed by subsidiary management. - -------------------------------------------------------------------------------- CONTINUED PREMIER FINANCIAL BANCORP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED, IN THOUSANDS) - ------------------------------------------------------------------------------- NOTE 2 - RESTATEMENT (Continued) Effect on operating results for the quarter ended (in thousands except per share data): Mar 2003 Increase Operating statement caption (Decrease) - --------------------------- ---------- Interest income, loans $ (109) Provision for loan losses 1,020 Net interest income after provision for loan losses (1,129) Income (loss) from continuing operations before income taxes (1,129) Provision (benefit) for income taxes (384) Income (loss) from continuing operations (745) Net (loss) income (745) Net (loss) income per share, basic and diluted (0.14) - -------------------------------------------------------------------------------- CONTINUED PREMIER FINANCIAL BANCORP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED, IN THOUSANDS) - -------------------------------------------------------------------------------- NOTE 3 - DISCONTINUED OPERATIONS In the fourth quarter of 2003, the Company adopted and began to implement a plan to sell its subsidiary Citizens Bank (Kentucky), Inc. ("Citizens Bank") located in Georgetown, Kentucky. On February 13, 2004, the Company announced that it had signed a definitive agreement to sell Citizens Bank in a cash transaction valued at approximately $14,500,000. In accordance with Financial Accounting Standard 144, "Accounting for the Impairment or Disposal of Long-lived Assets", which became effective for the Company on January 1, 2002, the financial position and results of operations of Citizens Bank are removed from the detail line items in the Company's financial statements and presented separately as "discontinued operations." A condensed balance sheet and statement of operations for Citizens Bank follows (in thousands): As of March 31 December 31 2004 2003 ----------- ----------- Assets Cash and federal funds sold $ 8,937 $ 6,473 Securities available for sale 11,963 12,082 Loans, net 53,149 53,886 Premises and equipment, net 3,057 3,026 Other assets 3,524 3,696 ----------- ----------- Total assets $ 80,630 $ 79,163 =========== ============ Liabilities Deposits $ 66,869 $ 65,486 Federal Home Loan Bank advances 5,249 5,255 Other liabilities 679 655 ----------- ----------- Total liabilities 72,797 71,396 Equity 7,833 7,767 ----------- ----------- Total liabilities and equity $ 80,630 $ 79,163 =========== =========== For the Three Months Ended March 31 March 31 2004 2003 --------- --------- Interest income $ 1,075 $ 1,278 Interest expense 374 507 --------- --------- Net interest income 701 771 Provision for loan losses - 150 Non-interest income 217 226 Non-interest expense 877 889 Income tax (benefit) 12 (15) ---------- ---------- Net (loss) $ 29 $ (27) ========== ========== - -------------------------------------------------------------------------------- CONTINUED PREMIER FINANCIAL BANCORP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED, IN THOUSANDS) - -------------------------------------------------------------------------------- NOTE 4 - REGULATORY MATTERS On September 29, 2000, the Company entered into an agreement with the Federal Reserve Bank (FRB) that prohibits the Company from paying dividends or incurring any additional debt without the prior written approval of the FRB. Additionally, the agreement required the Company to develop and monitor compliance with certain operational policies designed to strengthen Board of Director oversight including credit administration, liquidity, internal audit and loan review. Subsequently, on January 29, 2003, the Company entered into a written agreement with the Federal Reserve Bank of Cleveland (FRB) which supercedes and rescinds all previous agreements between the Company and the FRB. Among the provisions of the agreement were the continuation of the restriction on the Company's payment of dividends on its common stock without the express written consent of the FRB and the continuation of the restriction on the Company's payment of quarterly distributions on its Trust Preferred Securities without the express written consent of the FRB. Among other provisions, the agreement required the Company to retain an independent consultant to review its management, directorate and organizational structure, adopt a management plan responsive to such consultant's report, update its management succession plan in accordance with any recommendations in such consultant's report, monitor its subsidiary banks' compliance with bank policies and loan review programs, conduct formal quarterly reviews of its subsidiary Banks' allowances for loan losses, maintain sufficient capital, submit a plan to the FRB for improving consolidated earnings over a three-year period, and submit to the FRB annual projections of planned sources and uses of the Company's cash, including a plan to service its outstanding debt and trust preferred securities. The Company's compliance with the written agreement is being monitored by a committee which consists of three of its outside directors. As of March 31, 2004, management believes the Company is operating in compliance with the provisions of the written agreement. Three of the Company's subsidiaries, Citizens Deposit Bank & Trust, Bank of Germantown, and Citizens Bank (Kentucky), Inc. have entered into similar agreements with their respective primary regulators which, among other things, prohibit the payment of dividends without prior written approval and require significant changes in their credit administration policies. See Note 3 for additional information regarding Citizens Bank (Kentucky), Inc. These agreements, which require periodic reporting, will remain in force until the regulators are satisfied that the Company and the banks have fully complied with the terms of the agreement. - -------------------------------------------------------------------------------- CONTINUED PREMIER FINANCIAL BANCORP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED, IN THOUSANDS) - -------------------------------------------------------------------------------- NOTE 4 - REGULATORY MATTERS (continued) On December 22, 2003, the Company's subsidiary Farmers Deposit Bank - Eminence, Kentucky (the Bank), was issued a Cease and Desist order (Order) by the Federal Deposit Insurance Corporation (FDIC) and the Kentucky Department of Financial Institutions (KDFI) [collectively referred to as "Supervisory Authorities"] related to activities of the bank's former president. The Order, effective January 1, 2004, requires the Bank to cease and desist from the following: (a) Operating with management whose policies and procedures are detrimental to the Bank and jeopardize the safety of its deposits; (b) Operating with an inadequate level of capital protection for the kind and quality of assets held by the Bank; (c) Operating with a large volume of adversely classified loans or assets and/or delinquent loans and/or non-accrual loans; (d) Operating with an inadequate allowance for loan and lease losses for the volume, kind and quality of loans and leases held by the Bank; (e) Engaging in hazardous lending and lax collection practices; (f) Operating with inadequate provisions for liquidity and funds management; (g) Operating with disregard of routine and controls policies; (h) Operating in such a manner as to produce operating losses; and (i) Violating laws and/or regulations cited in the most recent Report of Examination issued by the FDIC ("Report"). The Order also outlined a number of steps to be taken by the Bank which are designed to remedy and/or prevent the reoccurrence of the items listed in the Order. These include 1) retaining qualified management and increasing the involvement of the Bank's Board of Directors ("Board"); 2) developing and submitting to the Supervisory Authorities a capital plan that maintains the Bank's Tier I Leverage Ratio above a minimum 5.0% and increases that ratio to 8.0% by December 31, 2004; 3) restricting the payment of cash dividends; 4) requiring the Board to review the adequacy of the allowance for loan losses at least quarterly; 5) requiring the Bank to charge-off certain loans listed in the Report; 6) reviewing the system of internal loan review and system for assigning loan risk grades as well as revising the Bank's lending policies to address items of criticism contained in the Report; 7) developing written plans for reducing and/or improving the level of adversely classified loans and correcting documentation exceptions on certain loans detailed in the Report; 8) generally prohibiting additional lending to borrowers who currently have uncollected adversely classified loans; 9) submitting an annual budget to the Supervisory Authorities outlining goals and strategies for improving and sustaining the earnings of the Bank; 10) adopting and implementing a policy for operating the Bank with adequate internal controls consistent with safe and sound banking practices and developing an internal audit program to ensure the integrity of these controls; 11) adopting and implementing a liquidity and funds management policy; and 12) providing this notice to shareholders. The Bank is required to provide quarterly progress updates to the Supervisory Authorities. The full text of the Order is available on the FDIC website at www.fdic.gov or by calling the FDIC Public Information Center at (877) 275-3342. - -------------------------------------------------------------------------------- CONTINUED PREMIER FINANCIAL BANCORP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED, IN THOUSANDS) - -------------------------------------------------------------------------------- NOTE 4 - REGULATORY MATTERS (continued) In accordance with the Order, the Company contributed additional capital to Farmers to ensure a 5.00% leverage ratio at December 31, 2003. The Company also submitted to the Supervisory Authorities a written capital restoration plan that incrementally increases the Bank's Tier I Leverage Ratio to 5.50% at March 31, 2004; 6.00% at June 30, 2004; 7.00% at September 30, 2004 and 8.00% at December 31, 2004. At March 31, 2004, the Bank's Tier I Leverage Ratio was 6.18%. NOTE 5 - SECURITIES Amortized cost and fair value of investment securities, by category, at March 31, 2004 are summarized as follows:
Amortized Unrealized Unrealized Fair Cost Gains Losses Value Available for sale U. S. Treasury securities $ 250 $ 1 $ - $ 251 U. S. agency securities 106,805 824 (7) 107,622 Obligations of states and political subdivisions 5,278 296 - 5,574 Mortgage-backed securities 30,530 332 (73) 30,789 Corporate securities 1,432 22 - 1,454 -------------- -------------- -------------- --------------- Total available for sale $ 144,295 $ 1,475 $ (80) $ 145,690 ============== ============== =============== ===============
Amortized cost and fair value of investment securities, by category, at December 31, 2003 are summarized as follows:
Amortized Unrealized Unrealized Fair Cost Gains Losses Value Available for sale U. S. Treasury securities $ 650 $ 2 $ - $ 652 U. S. agency securities 106,413 573 (141) 106,845 Obligations of states and political subdivisions 6,540 328 - 6,868 Mortgage-backed securities 31,766 186 (142) 31,810 Corporate securities 1,439 32 - 1,471 -------------- -------------- -------------- --------------- Total available for sale $ 146,808 $ 1,121 $ (283) $ 147,646 ============== ============== =============== ===============
The unrealized losses at March 31, 2004 and December 31, 2003 are price changes resulting from changes in the interest rate environment. The unrealized losses as of both periods have occurred within the last twelve months and are not considered to be permanent declines in the value of the securities. - -------------------------------------------------------------------------------- CONTINUED PREMIER FINANCIAL BANCORP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED, IN THOUSANDS) - -------------------------------------------------------------------------------- NOTE 6 - LOANS Major classifications of loans at March 31, 2004 and December 31, 2003 are summarized as follows: 2004 2003 ---- ---- Commercial, secured by real estate $ 101,497 $ 101,325 Commercial, other 38,195 38,063 Real estate construction 5,491 5,414 Residential real estate 127,120 126,134 Agricultural 2,656 3,032 Consumer and home equity 51,858 56,216 Other 1,363 1,610 ------------ ------------ $ 328,180 $ 331,794 ============ ============ The following table sets forth information with respect to the Company's impaired loans at March 31, 2004 and December 31, 2003. 2004 2003 ---- ---- Impaired loans at period end with an allowance $ 12,807 $ 17,071 Impaired loan at period end with no allowance 4,104 3,849 Amount of allowance for loan losses allocated 6,998 8,418 The following table sets forth information with respect to the Company's nonperforming loans at March 31, 2004 and December 31, 2003. 2004 2003 ---- ---- Non-accrual loans $ 12,837 $ 11,958 Accruing loans which are contractually past due 90 days or more 1,144 4,137 Restructured loans 461 104 ------------ ------------ $ 14,442 $ 16,199 ============ ============ - -------------------------------------------------------------------------------- CONTINUED PREMIER FINANCIAL BANCORP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED, IN THOUSANDS) - -------------------------------------------------------------------------------- NOTE 7 - ALLOWANCE FOR LOAN LOSSES Changes in the allowance for loan losses for the three months ended March 31, 2004 and 2003 are as follows: Three Months Ended March 31, 2004 2003 ---- ---- (Restated) Balance, beginning of period $ 14,300 $ 9,698 Gross charge-offs (1,067) (2,522) Recoveries 383 143 Provision for loan losses 135 2,267 ------------ ------------ Balance, end of period $ 13,751 $ 9,586 ============ ============ NOTE 8 - GUARANTEED JUNIOR SUBORDINATED INTEREST DEBENTURES On June 9, 1997, PFBI Capital Trust (Trust), a statutory business trust created under Delaware law, issued $28,750,000 of 9.750% Preferred Securities ("Preferred Securities" or "Trust Preferred Securities") with a stated value and liquidation preference of $25 per share. The Trust's obligations under the Preferred Securities issued are fully and unconditionally guaranteed by the Company. The proceeds from the sale of the Preferred Securities of the Trust, as well as the proceeds from the issuance of common securities to the Company, were utilized by the Trust to invest in $29,639,000 of 9.750% Junior Subordinated Deferrable Interest Debentures (the "Debentures") of the Company. The Debentures, which mature on June 30, 2027 are unsecured obligations and rank subordinate and junior to the right of payment to all senior indebtedness, liabilities and obligations of the Company. The Debentures represent the sole assets of the Trust. Distributions on the Preferred Securities are payable at an annual rate of 9.750% of the stated liquidation amount of $25 per Preferred Security, payable quarterly. Cash distributions on the Preferred Securities are made to the extent interest on the Debentures is received by the Trust. In the event of certain changes or amendments to regulatory requirements or federal tax rules, the Debentures are redeemable in whole. Otherwise, the Debentures are generally redeemable by the Company in whole or in part on or after June 30, 2002 at 100% of the liquidation amount. Proceeds from any redemption of the Debentures would cause a mandatory redemption of the Preferred Securities and the common securities having an aggregate liquidation amount equal to the principal amount of the Debentures redeemed. Debt issuance costs of $1,478,000 have been capitalized by the Trust and are being amortized. - -------------------------------------------------------------------------------- CONTINUED PREMIER FINANCIAL BANCORP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED, IN THOUSANDS) - -------------------------------------------------------------------------------- NOTE 8 - GUARANTEED JUNIOR SUBORDINATED INTEREST DEBENTURES (continued) As previously disclosed, pursuant to an agreement entered into with the Federal Reserve Bank (FRB) described in Note 4, the Company is required to request approval for the payment of distributions due on the Debentures and Trust Preferred Securities. As part of a Debt Reduction and Profitability plan presented on January 6, 2003, the Company requested and received approval from the FRB to redeem $3,000,000 of the $28,750,000 outstanding Debentures and Trust Preferred Securities which occurred on March 31, 2003. However, the FRB denied the Company's request to make distributions on the remaining Debentures Trust Preferred Securities. The Company exercised its right to defer the payment of interest on the 9.75% Trust Preferred Securities for the quarter ending December 31, 2002 and all subsequent quarters through March 31, 2004, and for an indefinite period, which can be no longer than 20 consecutive quarterly periods. These and any future deferred distributions accrue interest at an annual rate of 9.75% which will be paid when the deferred distributions are ultimately paid. Management of Premier does not expect to resume payments on the Debentures or the Trust Preferred Securities until the Federal Reserve Bank of Cleveland determines that Premier has achieved adequate and sustained levels of profitability to support such payments and approves such payments. NOTE 9 - STOCKHOLDERS' EQUITY AND REGULATORY MATTERS The Company's principal source of funds for dividend payments to shareholders is dividends received from the subsidiary Banks. Banking regulations limit the amount of dividends that may be paid without prior approval of regulatory agencies. Under these regulations, the amount of dividends that may be paid in any calendar year is limited to the current year's net profits, as defined, combined with the retained net profits of the preceding two years, subject to the capital requirements and additional restrictions as discussed below. During 2004, the Banks could, without prior approval, declare dividends of approximately $1.4 million plus any 2004 net profits retained to the date of the dividend declaration. The Company and the subsidiary Banks are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and the Banks must meet specific guidelines that involve quantitative measures of their assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. - -------------------------------------------------------------------------------- CONTINUED PREMIER FINANCIAL BANCORP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED, IN THOUSANDS) - -------------------------------------------------------------------------------- NOTE 9 - STOCKHOLDERS' EQUITY AND REGULATORY MATTERS (continued) These quantitative measures established by regulation to ensure capital adequacy require the Company and Banks to maintain minimum amounts and ratios (set forth in the following table) of Total and Tier I capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier I capital (as defined) to average assets (as defined). Management believes, as of March 31, 2004, that the Company and the Banks meet all quantitative capital adequacy requirements to which they are subject. Shown below is a summary of regulatory capital ratios for the Company:
Regulatory To Be Considered March 31, December 31, Minimum Well 2004 2003 Requirements Capitalized ---------- ------------ ------------ ---------------- Tier I Capital (to Risk-Weighted Assets) 11.2% 10.6% 4.0% 6.0% Total Capital (to Risk-Weighted Assets) 15.3% 14.8% 8.0% 10.0% Tier I Capital (to Average Assets) 6.9% 6.4% 4.0% 5.0%
The capital amounts and classifications are also subject to qualitative judgments by the regulators. As a result of these qualitative judgments, the Company and four of the Company's subsidiaries have entered into agreements with the applicable regulatory authorities which provide for additional restrictions on their respective capital levels and the payment of dividends. The Company entered into an agreement with the Federal Reserve Bank of Cleveland (FRB), as discussed in Note 4, restricting the Company from declaring or paying dividends without prior approval from the FRB. An additional provision of this agreement requires prior approval from the FRB before the Company increases its borrowings or incurs any debt. This agreement is in effect until terminated by the FRB. Citizens Deposit Bank (Citizens) entered into a Written Agreement with the FRB on September 29, 2000 restricting Citizens from declaring or paying dividends without prior approval. This agreement is in effect until terminated by the FRB. Citizens' Tier I capital to average assets ratio was 12.6% at March 31, 2004. Bank of Germantown (Germantown) entered into an agreement with the Kentucky Department of Financial Institutions (KDFI) and the Federal Deposit Insurance Corporation (FDIC) on June 13, 2000 restricting Germantown from declaring or paying dividends, without prior approval, if its Tier I capital to average assets falls below 8%. This agreement is in effect until terminated by the KDFI and FDIC. Germantown's Tier I capital to average assets ratio was 8.1% at March 31, 2004. - -------------------------------------------------------------------------------- CONTINUED PREMIER FINANCIAL BANCORP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED, IN THOUSANDS) - -------------------------------------------------------------------------------- NOTE 9 - STOCKHOLDERS' EQUITY AND REGULATORY MATTERS (continued) Citizens Bank (Kentucky), Inc. (Citizens, KY) entered into an agreement with the Kentucky Department of Financial Institutions (KDFI) and the Federal Deposit Insurance Corporation (FDIC) on September 11, 2002 restricting Citizens, KY from declaring or paying dividends, without prior approval. This agreement is in effect until terminated by the KDFI and FDIC. Citizens KY's Tier I capital to average assets ratio was 8.6% at March 31, 2004. Effective January 1, 2004, Farmers Deposit Bank (Farmers Deposit) was issued a C&D order by the FDIC and KDFI restricting Farmers Deposit from declaring or paying dividends, without prior approval, if its Tier I capital to average assets falls below 8.00%. The order also required Farmers Deposit to maintain a minimum 5.0% Tier I capital to average assets ratio and submit a written capital restoration plan to increase the ratio to 8.0% by December 31, 2004. This order is in effect until terminated by the KDFI and FDIC. Farmers Deposit's Tier I capital to average assets was 6.2% at March 31, 2004. As of March 31, 2004, the most recent notification from the FRB categorized the Company and its subsidiary banks as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, the Company must maintain minimum Total risk-based, Tier I risk-based and Tier I leverage ratios as set forth in the preceding table. There are no conditions or events since that notification that management believes have changed the Company's category. - -------------------------------------------------------------------------------- PREMIER FINANCIAL BANCORP, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS - -------------------------------------------------------------------------------- Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations FORWARD-LOOKING STATEMENTS Management's discussion and analysis contains forward-looking statements that are provided to assist in the understanding of anticipated future financial performance. However, such performance involves risks and uncertainties, and there are certain important factors that may cause actual results to differ materially from those anticipated. These important factors include, but are not limited to, economic conditions (both generally and more specifically in the markets in which Premier operates), competition for Premier's customers from other providers of financial services, government legislation and regulation (which changes from time to time), changes in interest rates, Premier's ability to originate quality loans, collect delinquent loans and attract and retain deposits, the impact of Premier's growth, Premier's ability to control costs, and new accounting pronouncements, all of which are difficult to predict and many of which are beyond the control of Premier. A. Results of Operations A financial institution's primary sources of revenue are generated by interest income on loans, investments and other earning assets, while its major expenses are produced by the funding of these assets with interest bearing liabilities. Effective management of these sources and uses of funds is essential in attaining a financial institution's optimal profitability while maintaining a minimum amount of interest rate risk and credit risk. The following narrative discusses the continuing operations of the Company. As more fully explained in Note 3 to the consolidated financial statements above, the narrative excludes the discontinued operations of Premier's subsidiary Citizens Bank (Kentucky), Inc. On February 13, 2004, Premier signed a definitive agreement to sell the subsidiary for $14,500,000 in cash. The sale, which is subject to regulatory approval, is anticipated to close early in the third quarter of 2004. The transaction, if and when consummated, should more than restore the cash reserves used by Premier in 2003 to recapitalize one of its affiliate banks; should reduce the company's total assets while increasing its total capital, thus strengthening Premier's balance sheet and should generate taxable income to be used as an offset to Premier's tax loss carryforward. Furthermore, comparative information for the first quarter of 2003 reflects the restatement of charge-offs, provision for loan losses, interest income and income taxes as more fully explained in Note 2 of the consolidated financial statements above. Income from continuing operations for the three months ended March 31, 2004 was $482,000, or 9 cents per share, compared to a loss from continuing operations of $365,000 or 7 cents per share for the three months ended March 31, 2003. The profitability recorded in 2004 was largely due to lower provisions for loan losses versus the first quarter of 2003, partially offset by lower net interest income. Net interest income for the quarter ending March 31, 2004 totaled $4.45 million, down from the $5.10 million of net interest income earned in the first quarter of 2003. Both interest income and interest expense decreased in the comparisons. Interest income declined by $1.6 million due to lower loans outstanding due to the charge-offs at Farmers Deposit Bank and other loan paydowns across the company during 2003 compounded by the higher volume of non-accrual loans at Farmers Deposit Bank. Interest expense declined by $896,000 largely due to lower interest costs on deposits as maturing certificates of deposit have renewed at significantly lower rates due to the low interest rate environment. Interest expense savings were also realized due to the paydown of other borrowings. As a result, the net interest margin for the three months ending March 31, 2004 was approximately 3.58% compared to 3.79% for the same period in 2003. Non-interest income decreased $57,000 to $856,000 for the first three months of 2004 compared to $913,000 for the first three months of 2003, largely due to $189,000 of gains on the sales of securities recorded in 2003. Excluding the investment securities gains, non-interest income increased 16.9% or $122,000. The increase is largely due to a 52.5% or $201,000 increase in revenue from service charges on deposit accounts due to a change in fee structure during 2003, partially offset by decreases in income from insurance commissions and a decrease in other income. Non-interest expenses for the first quarter of 2004 totaled $4,472,000 or 3.3% of average assets of continuing operations on an annualized basis compared to $4,352,000 or 2.9% of average assets of continuing operations for the same period of 2003. The increase in non-interest expense is largely due to a $353,000 increase in professional fees related to audit costs and legal fees associated with the SEC investigation as disclosed in the Company's annual report on Form 10-K for the year ended December 31, 2003. This increase is partially offset by lower staff cost due to employee participation in the cost of medical insurance premiums, lower occupancy and equipment costs due to lower taxes and insurance on real property, lower depreciation expense on equipment and lower other operating expenses largely due to $124,000 of accelerated amortization of issuance costs related to the early redemption of $3.0 million of the Trust Preferred Securities (NASDAQ/NMS-PFBIP) in the first quarter of 2003. Income tax expense was $213,000 for the first quarter of 2004 compared to a tax benefit of $240,000 for the first quarter of 2003. The increase in income tax expense can be primarily attributed to the increase in pre-tax income detailed above. The annualized effective tax rate for the three months ended March 31, 2004 was 30.6%, compared to the 39.7% effective tax rate for the same period in 2003. The higher benefit rate in 2003 was the result of reduced tax expense resulting from tax exempt income. The annualized returns from continuing operations on stockholders' equity and on average assets were approximately 4.19% and 0.35% for the three months ended March 31, 2004 compared to a negative (2.61%) and (0.25%) for the same period in 2003. B. Financial Position Total assets of continuing operations at March 31, 2004 increased $9.8 million or 1.8% to $553.0 million from the $543.2 million at December 31, 2003. This increase was largely due to $6.0 million of investment securities that were purchased in March but did not settle until April. The remaining increase was due to an increase in short-term funding. Earning assets of continuing operations increased to $511.8 million at March 31, 2004 from the $499.2 million at December 31, 2003, an increase of $12.6 million, or 2.5%. The increase was largely due to an $18.0 million increase in federal funds sold partially offset by declines in investments and total loans (see below). Cash and due from banks at March 31, 2004 was $13.7 million, a $2.7 million decrease from $16.4 million on December 31, 2003. Federal funds sold increased to $35.0 million from the $17.1 million reported at December 31, 2003. The increase in federal funds sold was the result of retaining the liquidity to be used to settle March investment purchases in April and to satisfy short-term public deposit requirements. Securities available for sale totaled $145.7 million at March 31, 2004, a $1.9 million decrease from the $147.6 million at December 31, 2003. The decline was largely due to a slightly lower volume of purchases versus the volume calls and maturities that occurred during the quarter. Additional details on investment activities can be found in the Consolidated Statements of Cash Flows. Total loans at March 31, 2004 were $328.2 million compared to $331.8 million at December 31, 2003, a decrease of $3.6 million. This decrease can primarily be attributed to net loan pay offs and the $1.1 million in loan charge-offs recorded during the first quarter of 2004. Deposits totaled $450.3 million as of March 31, 2004, a $5.2 million decrease from the $455.5 million in deposits at December 31, 2003. The decrease is largely due to $6.0 million of public deposits withdrawn and placed by the depositor into repurchase agreements. Excluding this transaction, deposits increased by $0.8 million, primarily in interest bearing deposits, due to seasonal tax collections by local governments. Outstanding debt, including the Company's outstanding subordinated debentures, has increased by $913,000 since December 31, 2003, as payments on the Company's borrowings have been more than offset by short-term FHLB advances. Federal Home Loan Bank advances have increased by $1.4 million due to short-term funding needs. Other borrowed funds have declined by $450,000 due to scheduled principal payments. See note 9 to the consolidated financial statements for additional information on the outstanding subordinated debentures. The following table sets forth information with respect to the Company's nonperforming assets at March 31, 2004 and December 31, 2003. (In Thousands) 2004 2003 ---- ---- Non-accrual loans $ 12,837 $ 11,958 Accruing loans which are contractually past due 90 days or more 1,144 4,137 Restructured 461 104 -------------- ------------ Total non-performing loans 14,442 16,199 Other real estate acquired through foreclosure 3,661 3,187 -------------- ------------ Total non-performing assets $ 18,103 $ 19,386 ============== ============ Non-performing loans as a percentage of total loans 4.40% 4.88% Non-performing assets as a percentage of total assets (of continuing operations) 3.27% 3.57% Total non-performing loans and non-performing assets have declined since year-end due to loan charge-offs and the developing and executing action plans on the troubled loans identified at Farmers Deposit Bank. However, while total non-performing loans have declined, non-accrual loans have increased. A significant effort has been placed on reviews of loan files, efforts by lenders to bring borrowers current with the terms of their loan agreements and the sale of OREO properties. As in the past, when these plans are executed, Premier may experience increases in non-performing loans and non-performing assets. Furthermore, any resulting increases in loans placed on non-accrual status will have a negative impact on future loan interest income. Also, as these plans are executed, other loans may be identified that would necessitate additional charge-offs and potentially additional provisions for loan losses. The provision for loan losses was $135,000 for the first quarter of 2004 compared to $2.3 million for the first quarter of 2003. The decrease in the provision was made in accordance with Premier's policies regarding management's estimation of probable incurred losses in the loan portfolio and the adequacy of the allowance for loan losses, which are in accordance with accounting principles generally accepted in the United States of America. Management's estimation process indicated that little additional risk in the loan portfolio was incurred during the first quarter of 2004. Gross charge-offs totaled $1.1 million during the first quarter of 2004. Any collections on these loans would be presented in future financial statements as recoveries of the amounts charged against the allowance. The allowance for loan losses at March 31, 2004 was 4.19% of total loans as compared to 4.31% at December 31, 2003. The decrease in the percentage of allowance for loan losses to total loans is largely due to sufficient loan loss reserves allocated to the loans actually charged off during the first quarter. C. Critical Accounting Policies The Company follows financial accounting and reporting policies that are in accordance with generally accepted accounting principles in the United States of America. These policies are presented in Note 1 to the consolidated audited financial statements in the Company's annual report on Form 10-K for the year ended December 31, 2003. Some of these accounting policies, as discussed below, are considered to be critical accounting policies. Critical accounting policies are those policies that require management's most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. The Company has identified three accounting policies that are critical accounting policies and an understanding of these policies is necessary to understand the financial statements. These policies relate to determining the adequacy of the allowance for loan losses, the impairment of goodwill, and the valuation of deferred tax assets. A detailed description of these accounting policies is contained the Company's annual report on Form 10-K for the year ended December 31, 2003. There have been no significant changes in the application of these accounting policies since December 31, 2003. Management believes that the judgments, estimates and assumptions used in the preparation of the consolidated financial statements are appropriate given the factual circumstances at the time. D. Liquidity Liquidity objectives for the Company can be expressed in terms of maintaining sufficient cash flows to meet both existing and unplanned obligations in a cost effective manner. Adequate liquidity allows the Company to meet the demands of both the borrower and the depositor on a timely basis, as well as pursuing other business opportunities as they arise. Thus, liquidity management embodies both an asset and liability aspect while attempting to maximize profitability. In order to provide for funds on a current and long-term basis, the Company's subsidiary banks rely primarily on the following sources: 1. Core deposits consisting of both consumer and commercial deposits and certificates of deposit of $100,000 or more. Management believes that the majority of its $100,000 or more certificates of deposit are no more volatile than its other deposits. This is due to the nature of the markets in which the subsidiaries operate. 2. Cash flow generated by repayment of loans and interest. 3. Arrangements with correspondent banks for purchase of unsecured federal funds. 4. The sale of securities under repurchase agreements and borrowing from the Federal Home Loan Bank. 5. Maintenance of an adequate available-for-sale security portfolio. The Company owns $145.7 million of securities at market value as of March 31, 2004. The cash flow statements for the periods presented in the financial statements provide an indication of the Company's sources and uses of cash as well as an indication of the ability of the Company to maintain an adequate level of liquidity. E. Capital At March 31, 2004, total shareholders' equity of $46.5 million was 8.4% of total assets of continuing operations. This compares to total shareholders' equity of $45.5 million or 8.4% of total assets of continuing operations on December 31, 2003. Tier I capital totaled $41.7 million at March 31, 2004, which represents a Tier I leverage ratio of 6.9%. Book value per share was $8.88 at March 31, 2004, and $8.70 at December 31, 2003. The increase in book value per share was the result of $914,000 of comprehensive income for the first quarter of 2004 as net income was increased by the after tax increase in the market value of investment securities available for sale. PREMIER FINANCIAL BANCORP, INC. - -------------------------------------------------------------------------------- Item 3. Quantitative and Qualitative Disclosures About Market Risk The Company currently does not engage in any derivative or hedging activity. Refer to the Company's 2003 10-K for analysis of the interest rate sensitivity. The Company believes there have been no significant changes in the interest rate sensitivity since previously reported on the Company's 2003 10-K. Item 4. Controls and Procedures Premier management, including the Chief Executive Officer and Chief Financial Officer, has conducted an evaluation of the effectiveness of disclosure controls and procedures pursuant to Exchange Act Rule 13a-15c as of the end of the period covered by this quarterly report. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the disclosure controls and procedures are effective in ensuring that all material information required to be filed in this quarterly report has been made known to them in a timely fashion. "Internal controls" are procedures, which are designed with the objective of providing reasonable assurance that (1) transactions are properly authorized; (2) assets are safeguarded against unauthorized or improper use; and (3) transactions are properly recorded and reported, all so as to permit the preparation of reports and financial statements in conformity with generally accepted accounting principles. Premier management uses the financial reports of its subsidiaries to make decisions about the allocation of the Company's resources, to implement strategies to improve the Company's performance, and to prepare the consolidated financial statements of the Company for its shareholders and regulatory authorities. However, a control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their cost. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within a company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. The design of any system of controls is also based, in part, upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, a control may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected. Finally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control. It is this "management override of controls" that led to the significant charge-offs and provisions for loan losses at Farmers Deposit Bank in 2003 and the financial statement restatement for years 2002 and 2001. Premier's policies and procedures related to the evaluation of a borrower's creditworthiness prior to making or renewing a loan, the reporting of new loan activity and delinquent loans to the bank's board of directors, and the guidelines for assessing the credit risk of existing loans were overridden by local management. The systematic disregard for these controls was sophisticated enough to avoid detection during routine reviews of that bank's records as directed by the Company and the regulatory authorities of the banking industry. Premier management is also in the process of implementing additional processes and procedures throughout its network of banking subsidiaries in an effort to minimize the likelihood that improper management overrides go undetected. These include: * hiring a credit analyst at the holding company level to review all loan requests over $400,000, * forming loan approval committees made up of the bank presidents and the President and Director of Risk Management of Premier to review all loan requests over $750,000, * incorporating "whistleblower" provisions into the employee code of ethics and conduct, * dispatching members of the Audit Committee of the Company's board of directors, at their request, to conduct employee meetings emphasizing the importance of each employee's responsibilities in maintaining the financial integrity of the Company's books and records, that overriding of internal controls will not be tolerated, and the employees' obligation to report improprieties to senior management or the Audit Committee in accordance with the employee code of ethics, * hiring an internal auditor at the holding company level to, among other duties assigned, conduct various tests for data integrity and compliance with internal control procedures, and * evaluating the internal audit program to incorporate tests designed to specifically detect the abuses uncovered during the Farmers Deposit investigation. Other than the steps identified above, which are in various stages of implementation, there were no changes in internal controls over financial reporting during the first fiscal quarter that have materially affected or are reasonably likely to materially affect Premier's internal controls over financial reporting. PREMIER FINANCIAL BANCORP, INC. - -------------------------------------------------------------------------------- PART II - OTHER INFORMATION Item 1. Legal Proceedings See information regarding regulatory matters in note 4 and note 9 to the consolidated financial statements Item 2. Changes in Securities and Use of Proceeds None - ---------------------------------------------------- Item 3. Defaults Upon Senior Securities None - ------------------------------------------ Item 4. Submission of Matters to a vote of Security Holders None - -------------------------------------------------------------- Item 5. Other Information None - ---------------------------- Item 6. Exhibits and Reports on Form 8-K (a) The following exhibits are furnished in accordance with the provisions of Item 601 of Regulation S-K. 31.1 Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 31.2 Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 32 Certification Pursuant to 18 U.S.Css.1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (b) The following Current Reports on Form 8-K were filed in the first quarter of the Company's year. February 13, 2004 - Press release announcing the Company had executed a definitive Stock Purchase Agreement dated February 13, 2004 providing for the sale by Premier of all issued and outstanding capital stock of its wholly owned subsidiary Citizens Bank (Kentucky), Inc. to Farmers Capital Bank Corporation, a Kentucky corporation headquartered in Frankfort, Kentucky. March 10, 2004 - Press release regarding the continuation of the deferral to pay the quarterly distributions on Premier's Trust Preferred Certificates outstanding. March 31, 2004 - Press release announcing that the Company had filed a notice with the Securities and Exchange Commission on Form 12b-25 to extend the period in which it intended to file its Annual Report on Form 10-K. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Corporation has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. PREMIER FINANCIAL BANCORP, INC. Date: May 17, 2003 /s/ Robert W. Walker ---------------------------------------- Robert W. Walker President & Chief Executive Officer Date: May 17, 2003 /s/ Brien M. Chase ---------------------------------------- Brien M. Chase Vice President & Chief Financial Officer EX-31 2 exhibit31-1.txt CEO SECTION 302 CERTIFICATION, MARCH 31, 2004 Exhibit 31.1 PRINCIPAL EXECUTIVE OFFICER CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 I, Robert W. Walker, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Premier Financial Bancorp, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and we have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: May 17, 2004 /s/ Robert W. Walker - ----------------------------------- Robert W. Walker President & Chief Executive Officer EX-31 3 exhibit31-2.txt CFO SECTION 302 CERTIFICATION, MARCH 31 2004 Exhibit 31.2 PRINCIPAL FINANCIAL OFFICER CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 I, Brien M. Chase, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Premier Financial Bancorp, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and we have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: May 17, 2004 /s/ Brien M. Chase - ---------------------------------------- Brien M. Chase Vice President & Chief Financial Officer EX-32 4 exhibit32.txt CEO & CFO SECT 906 CERTIFICATION, MARCH 31 2004 Exhibit 32 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of Premier Financial Bancorp, Inc. (the "Company") on Form 10-Q for the period ending March 31, 2004 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), we, Robert W. Walker and Brien M. Chase, Chief Executive Officer and Chief Financial Officer, respectively, of the Company, certify, pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act of 2002, that to our knowledge: o The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934, and o The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. By: /s/ Robert W. Walker --------------------------------------- Robert W. Walker President and Chief Executive Officer By: /s/ Brien M. Chase --------------------------------------- Brien M. Chase Vice President and Chief Financial Officer Date: May 17, 2004 -----END PRIVACY-ENHANCED MESSAGE-----