10-Q 1 june0210q.txt PREMIER FINANCIAL BANCORP, INC. JUNE 2002 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 June 30, 2002 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 the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practical date. Common stock - 5,232,230 shares outstanding at July 31, 2002. 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. 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 generally accepted accounting principles or those normally made in the registrant's annual Form 10-K filing. 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, 2001 for further information in this regard. Index to consolidated financial statements: Consolidated Balance Sheets...................................... 3 Consolidated Statements of Income ............................... 4 Consolidated Statements of Comprehensive Income.................. 5 Consolidated Statements of Cash Flows............................ 6 Notes to Consolidated Financial Statements....................... 7 PREMIER FINANCIAL BANCORP, INC. CONSOLIDATED BALANCE SHEETS JUNE 30, 2002 AND DECEMBER 31, 2001 (DOLLARS IN THOUSANDS) ------------------------------------------------------------------------------------------------------------------- (UNAUDITED) 2002 2001 ---- ---- ASSETS Cash and due from banks $ 20,784 $ 20,628 Federal funds sold 36,720 33,517 Investment securities available for sale 148,529 155,566 Loans 451,041 458,833 Unearned interest ( 39) ( 92) Allowance for loan losses (9,126) (8,946) ------------- -------------- Net loans 441,876 449,795 Federal Home Loan Bank and Federal Reserve Bank stock 4,384 4,261 Premises and equipment, net 11,846 12,035 Real estate and other property acquired through foreclosure 2,991 5,831 Interest receivable 6,837 7,842 Goodwill and other intangibles 15,670 16,044 Other assets 6,567 6,331 ------------- -------------- Total assets $ 696,204 $ 711,850 ============= ============== LIABILITIES AND STOCKHOLDERS' EQUITY Deposits Non-interest bearing $ 64,842 $ 57,916 Time deposits, $100 and over 71,591 89,149 Other interest bearing 428,445 423,466 ------------- -------------- Total deposits 564,878 570,531 Securities sold under agreements to repurchase 5,611 5,520 Federal Home Loan Bank advances 23,951 30,795 Other borrowed funds 10,401 13,000 Interest payable 2,450 1,903 Other liabilities 939 1,476 ------------- -------------- Total liabilities 608,230 623,225 Guaranteed preferred beneficial interests in Company's debentures 28,750 28,750 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 13,489 14,470 Accumulated other comprehensive income 1,187 857 ------------- -------------- Total stockholders' equity 59,224 59,875 ------------- -------------- Total liabilities and stockholders' equity $ 696,204 $ 711,850 ============= ============== ------------------------------------------------------------------------------------------------------------------- See Accompanying Notes to Consolidated Financial Statements
PREMIER FINANCIAL BANCORP, INC. CONSOLIDATED STATEMENTS OF INCOME THREE MONTHS ENDED JUNE 30, 2002 AND 2001 (IN THOUSANDS EXCEPT PER SHARE DATA) (UNAUDITED) ------------------------------------------------------------------------------------------------------------------- Three Months Ended Six Months Ended June 30, June 30, 2002 2001 2002 2001 ---- ---- ---- ---- Interest income Loans, including fees $ 9,495 $ 12,285 $ 19,074 $ 24,865 Investment securities Taxable 1,493 1,986 3,048 4,428 Tax-exempt 202 251 410 553 Federal funds sold and other 155 477 359 949 ----------- ----------- ----------- ----------- Total interest income 11,345 14,999 22,891 30,795 Interest expense Deposits 4,044 7,002 8,413 14,647 Debt and other borrowings 1,151 1,587 2,354 3,384 ----------- ----------- ----------- ----------- Total interest expense 5,195 8,589 10,767 18,031 Net interest income 6,150 6,410 12,124 12,764 Provision for loan losses 3,200 3,015 4,186 3,647 ----------- ----------- ----------- ----------- Net interest income after provision for loan losses 2,950 3,395 7,938 9,117 Non-interest income Service charges 625 590 1,119 1,116 Insurance commissions 79 98 119 137 Investment securities gains (losses) (103) 60 (59) 240 Gain on the sale of subsidiary's banking operations - - - 3,418 Other 224 424 504 823 ----------- ----------- ----------- ----------- 825 1,172 1,683 5,734 Non-interest expenses Salaries and employee benefits 2,592 2,893 5,299 5,925 Occupancy and equipment expenses 681 717 1,363 1,489 Amortization of intangibles 187 337 374 674 Other expenses 2,671 1,764 4,224 3,708 ----------- ----------- ----------- ----------- 6,131 5,711 11,260 11,796 ----------- ----------- ----------- ----------- Income (loss) before income taxes (2,356) (1,144) (1,639) 3,055 Provision for income taxes (benefit) (853) (439) (657) 2,536 ------------ ------------ ------------ ----------- Net income (loss) $ (1,503) $ (705) $ (982) $ 519 ============ ============ ============ =========== Earnings per share $ (0.29) $ (0.13) $ (0.19) $ 0.10 Earnings per share assuming dilution $ (0.29) $ (0.13) $ (0.19) $ 0.10 Weighted average shares outstanding 5,232 5,232 5,232 5,232 Weighted average shares assuming dilution 5,232 5,232 5,232 5,232 ------------------------------------------------------------------------------------------------------------------- See Accompanying Notes to Consolidated Financial Statements
PREMIER FINANCIAL BANCORP, INC. CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME THREE MONTHS ENDED JUNE 30, 2002 AND 2001 (IN THOUSANDS) (UNAUDITED) ------------------------------------------------------------------------------------------------------------------- Three Months Ended Six Months Ended June 30, June 30, 2002 2001 2002 2001 ---- ---- ---- ---- Net income (loss) $ (1,503) $ (705) $ (982) $ 519 Other comprehensive income (loss), net of tax: Unrealized gains and (losses) arising during the period 953 (92) 291 $ 1,496 Reclassification of realized amount 68 (39) 39 (158) ---------- ---------- ---------- --------- Net change in unrealized gain (loss) on securities 1,021 (131) 330 1,338 ---------- ---------- ---------- --------- Comprehensive income (loss) $ ( 482) $ ( 836) $ (652) $ 1,857 ========== ========== ========== ========= ------------------------------------------------------------------------------------------------------------------- See Accompanying Notes to Consolidated Financial Statements
PREMIER FINANCIAL BANCORP, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS SIX MONTHS ENDED JUNE 30, 2002 AND 2001 (IN THOUSANDS) (UNAUDITED) ------------------------------------------------------------------------------------------------------------------- 2002 2001 ---- ---- Cash flows from operating activities Net (loss) income $ (982) $ 519 Adjustments to reconcile net income (loss) to net Cash from operating activities Depreciation 520 652 Provision for loan losses 4,186 3,647 Amortization, net 511 431 FHLB stock dividends (73) (139) Investment securities losses (gains), net 59 (240) Gain on the sale of subsidiary's banking operations - (3,418) Write downs of OREO 655 - Changes in Interest Receivable 1,005 35 Other assets (139) (317) Interest Payable 547 (620) Other liabilities (537) 573 -------------- ------------- Net cash from operating activities 5,752 1,123 Cash flows from investing activities Purchases of securities available for sale (54,315) (114,579) Proceeds from sales of securities available for sale 4,061 12,234 Proceeds from maturities and calls of securities available for sale 57,596 122,450 Purchases of FHLB stock (50) (175) Redemption of FHLB stock - 451 Net change in federal funds sold (3,203) (4,175) Net change in loans 3,267 (10,975) Purchases of premises and equipment, net (331) 96 Proceeds from sale of other real estate acquired through foreclosure 2,384 630 Net cash received (paid) related to acquisitions - (7,178) ------------- ------------- Net cash from investing activities 9,409 (1,221) Cash flows from financing activities Net change in deposits (5,653) 18,698 Advances from Federal Home Loan Bank 10,395 35,819 Repayment of Federal Home Loan Bank advances (17,239) (39,471) Repayment of Other Borrowed Funds (3,300) - Proceeds from Other Borrowings 701 - Net change in agreements to repurchase securities 91 (14,462) ------------- ------------- Net cash from financing activities (15,005) 584 -------------- ------------- Net change in cash and cash equivalents 156 486 Cash and cash equivalents at beginning of period 20,628 24,076 ------------- ------------- Cash and cash equivalents at end of period $ 20,784 $ 24,562 ============= ============= ------------------------------------------------------------------------------------------------------------------- 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: Year June 30, 2002 Acquired Assets Citizens Deposit Bank & Trust Vanceburg, Kentucky 1991 $ 95,614 Bank of Germantown Germantown, Kentucky 1992 26,687 Citizens Bank (Kentucky), Inc. Georgetown, Kentucky 1995 96,511 Farmers Deposit Bank Eminence, Kentucky 1996 149,214 Ohio River Bank Ironton, Ohio 1998 72,519 First Central Bank, Inc. Philippi, West Virginia 1998 85,363 Boone County Bank, Inc. Madison, West Virginia 1998 158,849 Mt. Vernon Financial Holdings, Inc. Georgetown, Kentucky 1999 8,964
The Company also has a data processing subsidiary, Premier Data Services, Inc., the PFBI Capital Trust subsidiary as discussed in Note 7, and a former bank, The Sabina Bank, in the process of liquidation. All intercompany transactions and balances have been eliminated. NOTE 2 - GOODWILL AND OTHER INTANGIBLE ASSETS Intangible assets subject to amortization are as follows: Original Accumulated Amount Amortization Core deposit intangible $14,977 $2,951 Amortization expense for the first six months of 2002 was $374. Estimated amortization expense for the next five years is: 2002 - $749; 2003 - $749; 2004 - $749; 2005 - $749; and 2006 - $749. Intangible assets not subject to amortization because they have indefinite lives are as follows: Original Accumulated Amount Amortization Goodwill $5,177 $1,533 The Company completed its impairment testing of goodwill during the second quarter and concluded there was no impairment. -------------------------------------------------------------------------------- CONTINUED PREMIER FINANCIAL BANCORP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED, IN THOUSANDS) -------------------------------------------------------------------------------- NOTE 3 - NEW ACCOUNTING PRONOUNCEMENTS A new accounting standard dealing with asset retirement obligations will apply for 2003. The Company does not believe this standard will have a material affect on its financial position or results of operations. Effective January 1, 2002, the Company adopted a new standard issued by the FASB on impairment and disposal of long-lived assets. The effect of adopting this standard on the financial position and results of operations of the Company was not considered material. NOTE 4 - SECURITIES Amortized cost and fair value of investment securities, by category, at June 30, 2002 are summarized as follows: Amortized Unrealized Unrealized Fair Cost Gains Losses Value Available for sale U. S. Treasury securities $ 1,447 $ 10 $ - $ 1,457 U. S. agency securities 110,588 1,077 (15) 111,650 Obligations of states and political Subdivisions 17,575 637 (3) 18,209 Mortgage-backed securities 8,018 174 (2) 8,190 Corporate securities 9,102 13 (92) 9,023 -------------- -------------- -------------- --------------- Total available for sale $ 146,730 $ 1,911 $ (112) $ 148,529 ============== ============== ============== ===============
Amortized cost and fair value of investment securities, by category, at December 31, 2001 are summarized as follows: Amortized Unrealized Unrealized Fair Cost Gains Losses Value Available for sale 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 ============== ============== ============== ===============
-------------------------------------------------------------------------------- CONTINUED PREMIER FINANCIAL BANCORP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED, IN THOUSANDS) -------------------------------------------------------------------------------- NOTE 5 - LOANS Major classifications of loans at June 30, 2002 and December 31, 2001 are summarized as follows: 2002 2001 ---- ---- Commercial, secured by real estate $ 122,759 $ 117,692 Commercial, other 65,834 70,315 Real estate construction 12,342 15,751 Residential real estate 163,494 164,810 Agricultural 8,805 9,613 Consumer and home equity 75,137 79,571 Other 2,670 1,081 ------------ ------------ $ 451,041 $ 458,833 ============ ============ NOTE 6 - ALLOWANCE FOR LOAN LOSSES Changes in the allowance for loan losses for the three months and six months ended June 30, 2002 and 2001 are as follows: Three Months Ended Six Months Ended June 30, June 30, 2002 2001 2002 2001 ---- ---- ---- ---- Balance, beginning of period $ 8,747 $ 7,953 $ 8,946 $ 7,821 Gross charge-offs (3,039) (1,675) (4,582) (2,333) Recoveries 218 110 576 268 Provision for loan losses 3,200 3,015 4,186 3,647 ------- ------- ------- ------- Balance, end of period $ 9,126 $ 9,403 $ 9,126 $ 9,403 ======= ======= ======= ======= NOTE 7 - GUARANTEED PREFERRED BENEFICIAL INTERESTS IN COMPANY'S SUBORDINATED 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 is payable at an annual rate of 9.75% of the stated liquidation amount of $25 per Capital Security, payable quarterly (see Note 8). 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. -------------------------------------------------------------------------------- CONTINUED PREMIER FINANCIAL BANCORP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED, IN THOUSANDS) -------------------------------------------------------------------------------- NOTE 8 - STOCKHOLDERS' EQUITY AND REGULATORY MATTERS 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 2002, the Banks could, without prior approval, declare dividends of approximately $3.2 million plus any 2002 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 June 30, 2002, 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 June 30, December 31, Minimum 2002 2001 Requirements ---- ---- ------------ Tier I Capital (to Risk-Weighted Assets) 13.7% 13.4% 4.0% Total Capital (to Risk-Weighted Assets) 17.0% 16.6% 8.0% Tier I Capital (to Average Assets) 9.0% 8.5% 4.0% The capital amounts and classifications are also subject to qualitative judgments by the regulators. As a result of these qualitative judgments, the Company and two 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) on September 29, 2000 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. -------------------------------------------------------------------------------- CONTINUED PREMIER FINANCIAL BANCORP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED, IN THOUSANDS) -------------------------------------------------------------------------------- NOTE 8 - STOCKHOLDERS' EQUITY AND REGULATORY MATTERS (continued) During the quarter ended June 30, 2002, the Company was notified by the FRB 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 the Company's Trust Preferred Securities (see Note 7). In response, the Company reached 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 thousand, so that the Company, with the FRB'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 FRB. The FRB has indicated that they would review the Company's performance before allowing the Company to make its September 30, 2002 distribution and any future distributions on the Trust Preferred Securities. The Company can make no assurances that its Chairman will make additional loans in the future to cover the amount of the distributions in the event the FRB does disallow them. In the event the FRB does disallow any future distributions, under the terms of the Trust, the Company has the right, at any time, to defer payments of interest on the Trust Preferred Securities for a period not exceeding 20 consecutive quarters. As a consequence of the Company's extension of the interest payment period, quarterly distributions on the Trust Preferred Securities will be deferred (though such distribution would continue to accrue with interest thereon compounded quarterly). During the deferment period, the Company will be prohibited, subject to certain exceptions, from declaring or paying any cash distributions with respect to its capital stock. 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 was 10.3% at June 30, 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 7.1% at June 30, 2002. As of June 30, 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 preceding table. There are no conditions or events since that notification that management believes have changed the Company's category. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations A. Results of Operations Premier realized a net loss for the six months ended June 30, 2002, of $982,000, or 19 cents per share, compared to net income of $519,000 or $0.10 per share for the six months ended June 30, 2001. The net income and earnings per share comparisons are impacted by two significant events affecting the comparability of financial results of the first six months of 2002 to 2001. During the first quarter of 2001, Premier recognized a $625,000 net gain (after tax) on the sale of certain assets and the assumption of certain liabilities of its subsidiary the Bank of Mt. Vernon. Furthermore, during the fourth quarter of 2001, Premier recognized the sale of certain assets and the assumption of certain liabilities of its subsidiary The Sabina Bank. As a result, the operations of the Bank of Mt. Vernon and The Sabina Bank are NOT included in Premier's 2002 financial results. An equivalent 2001 comparison should exclude the net gain on the sale and the 2001 operations of the Bank of Mt. Vernon while also excluding the 2001 operations of The Sabina Bank. On an equivalent basis, Premier realized a net loss for the first six months of 2001 of $372,000 or 7 cents per share. The year-to-date loss is largely due to $3.2 million of provisions for loan losses and $655,000 of OREO writedowns during the second quarter as more fully explained below. For the quarter ending June 30, 2002, Premier recorded a net loss of $1,503,000, or 29 cents per share, compared to a $705,000, or 13 cents per share, loss reported for the second quarter of 2001. An operationally equivalent quarterly comparison would exclude the results of The Sabina Bank, sold during the fourth quarter of 2001, from the 2001 second quarter loss. On an equivalent basis, Premier realized a net loss for the second quarter of 2001 of $825,000 or 16 cents per share. Net interest income for the six months ending June 30, 2002 totaled $12.12 million, an 8.7% increase over the $11.16 million of net interest income earned in the first six months of 2001, (excluding the operations of The Sabina Bank and the Bank of Mt. Vernon.) The increase was largely due to a lower cost of funds resulting from the decline in market interest rates over the past year and a reduction in FHLB advances and other borrowings. As a result, the net interest margin for the six months ending June 30, 2002 was approximately 3.82% compared to 3.59% for the same period in 2001. For the quarter ending June 30, 2002, net interest income totaled $6.15 million, a 3.0% increase over the $5.97 million reported for the first quarter of 2002, and a 5.9% increase over the $5.81 million of net interest income earned in the second quarter of 2001, (excluding the operations of The Sabina Bank). The increase was also largely due to a lower cost of funds resulting from the decline in market interest rates and a reduction in FHLB advances and other borrowings. Non-interest income decreased $4,051,000 to $1,683,000 for the first six months of 2002 compared to $5,734,000 for the first six months of 2001. Excluding the gain on sale of the Mt. Vernon banking operations of $3,418,000 and The Sabina Bank's non-interest income of $146,000 for the first six months 2001, non-interest income would have decreased $487,000 or 22.4%, for the six months ending June 30, 2002 compared to the same period for 2001. The decline is largely due to a planned lower volume of secondary market mortgage loan activity resulting in a reduction in secondary market fee income and gains on the sales of loans, plus a $299,000 reduction in gains on investment security transactions. These were partially offset by a $125,000 (12.6%) increase in service charges on deposit accounts. For the quarter ending June 30, 2002, non-interest income decreased $347,000 to $825,000 compared to the $1,172,000 reported for the same quarter of 2001. The decline is largely due to a $163,000 reduction in gains on investment security transactions, the elimination of the Sabina Bank's operations and the lower volume of secondary market mortgage loan activity. Non-interest expenses for the first six months of 2002 totaled $11,260,000 or 3.2% of average assets on an annualized basis compared to $11,796,000 or 3.0% of average assets for the same period of 2001. The decrease in non-interest expense is largely due to the exclusion of the Bank of Mt. Vernon's and The Sabina Bank's operations for the first six months of 2002 versus their inclusion in 2001. After excluding operating costs of the Bank of Mt. Vernon and The Sabina Bank from 2001, non-interest expense totaled $10,305,000 for the first six months of 2001, resulting in a $955,000 or 9.3% increase year-to-date in 2002. This increase is largely due to $655,000 in writedowns of Other Real Estate Owned (OREO) to estimated realizable values in the second quarter and a $139,000 increase in professional fees primarily due to increased legal fees related to loan collections. These increases were partially offset by lower amortization of intangibles. For the quarter ending June 30, 2002, non-interest expense increased $903,000 over the quarter ending June 30, 2001 (excluding the operations of The Sabina Bank), largely due to the OREO writedowns and the increase in professional fees detailed above. In addition, staff costs decreased by $76,000 or 2.8%, occupancy expense increased by $19,000 or 2.9%, and amortization of intangibles decreased by $96,000. Income tax benefit was $657,000 for the first six months of 2002 compared to income tax expense of $2,536,000 for the first six months of 2001. The decrease in income tax expense can be primarily attributed to the $2,792,000 tax effect associated with the gain on sale of subsidiary's banking operations in 2001. The income tax benefit for the quarter ending June 30, 2002 was $853,000 compared to a tax benefit of $439,000 during the same period of 2001. The annualized effective tax rate for the year-to-date period ended June 30, 2002 was 40.0%, compared to the 83.0% effective tax rate for the same period in 2001. The high rate in 2001 was primarily due to the elimination of intangibles associated with the Company's acquisition of the Bank of Mt. Vernon. The expensing of this intangible was a non-deductible event thereby raising the annualized effective tax rate for the six months ended June 30, 2001. The annualized returns on stockholders' equity and on average assets were approximately (10.07)% and (0.86)% for the three months ended June 30, 2002 compared to (4.83)% and (0.36)% for the same period in 2001. B. Financial Position Total assets at June 30, 2002 decreased $15.6 million or 2.2% to $696.2 million from the $711.9 million at December 31, 2001. This decrease is largely due to the planned pay down of $9.0 million of borrowed funds and the non-renewal of some high rate certificates of deposit. Earning assets decreased to $640.6 at June 30, 2002 from the $652.1 million at December 31, 2001, a decrease of $11.5 million, or 1.8%. The decrease is largely due to a $7.8 million decline in total loans (see below). Cash and cash equivalents at June 30, 2002 were $20.8 million, a $0.2 million increase from $20.6 million on December 31, 2001. Fed funds sold increased to $36.7 million from the $33.5 million reported at December 31, 2001, an increase of $3.2 million. Total loans at June 30, 2002 were $451.0 million compared to $458.8 million at December 31, 2001, a decrease of $7.8 million. This decrease can primarily be attributed to the collection of $3.7 million in loans owned by Mt. Vernon Financial Holdings and the $4.6 million in loan charge-offs recorded during the first six months of 2002. Deposits totaled $564.9 million as of June 30, 2002, a $5.6 million decrease from the $570.5 million in deposits at December 31, 2001. The decrease is largely due to non-renewal of some high rate certificates of deposit over $100,000. The reduction in time deposits $100,000 and over was partially offset by the increase in non-interest bearing deposits and other interest bearing deposits. The following table sets forth information with respect to the Company's nonperforming assets at June 30, 2002 and December 31, 2001. (In Thousands) 2002 2001 ---- ---- Non-accrual loans $ 7,572 $ 9,307 Accruing loans which are contractually past due 90 days or more 1,756 5,948 Restructured 161 275 ------- ------- Total non-performing loans 9,489 15,530 Other real estate acquired through foreclosure 2,991 5,831 ------- ------- Total non-performing assets $12,480 $21,361 Non-performing loans as a percentage of total loans 2.10% 3.38% Non-performing assets as a percentage of total assets 1.79% 3.00% Total non-performing loans and non-performing assets have declined since year-end due to senior management directives that emphasized the reduction of the level of delinquency, non-accrual loans and OREO. A large portion of the decline was due to charge-offs, but a significant portion was also due to collection efforts by lenders to bring borrowers current with the terms of their loan agreement and the sale of certain OREO properties. A result of this continuing process was the discovery of loan collateral deterioration or weakening cash flows on a certain number of loans which warranted a downgrade in the risk rating of the loan. Additional provisions for loan losses were made as a result of these downgrades. The provision for loan losses was $3.2 million for the second quarter of 2002 compared to $3.0 million for the second quarter of 2001. This addition brings the year-to-date provision to $4.2 million compared to $3.6 million for the same period in 2001. During the second quarter, three of Premier's banks had their regularly scheduled regulatory bank examination. During the examination, regulators required that certain loans be downgraded or charged against the allowance for loan losses. While management has not yet exhausted all efforts and means available to collect these loans, the additional provisions were made in accordance with Premier's policies regarding the adequacy of the allowance for loan losses which are in accordance with generally accepted accounting principles. 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 June 30, 2002 was 2.02% of total loans as compared to 1.95% at December 31, 2001. The increase in the percentage of allowance for loan losses to total loans is largely due to the higher provision for loan losses required versus the level of net charge-offs actually taken during the first six months of 2002. Nonperforming loans decreased to $8.6 million as of June 30, 2002, when compared to the $15.5 million on December 31, 2001, due to the high level of charge-offs and to a corporate-wide emphasis to reduce the level of non-performing loans. This decrease resulted in the decrease of the ratio of nonperforming loans to total loans to 1.91% at June 30, 2002 from the 3.38% at December 31, 2001. Similarly, non-performing assets declined to 1.67% of total assets at June 30, 2002, from 3.00% of total assets at December 31, 2001, due to sales of OREO properties and writedowns of existing properties to estimated realizable values. C. 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 $148.5 million of securities at market value as of June 30 2002. 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. D. Capital At June 30, 2002, total shareholders' equity of $59.2 million was 8.5% of total consolidated assets. This compares to total shareholders' equity of $59.8 million or 8.4% of total consolidated assets on December 31, 2001. Tier I capital totaled $61.7 million at June 30, 2002, which represents a Tier I leverage ratio of 9.0%. Book value per share was $11.32 at June 30, 2002, and $11.44 at December 31, 2001. The $1.5 million loss in the second quarter was primarily responsible for the decrease in comprehensive income and corresponding decrease in book value per share. Partially offsetting this decrease was an increase in the market value of investment securities available for sale. 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 2001 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 2001 10-K. PART II - OTHER INFORMATION Item 1. Legal Proceedings None Item 2. Changes in Securities None Item 3. Defaults Upon Senior Securities None Item 4. Submission of Matters to a vote of Security Holders (a) Annual meeting of the Shareholders was held June 19, 2002. (b) All director nominees were elected. (c) Certain matters voted upon at the meeting and the votes cast with respect to such matters are as follows: (i) The following were elected as directors of the Corporation for a term of one year. Director Votes Received Votes Withheld 1. Toney K. Adkins 4,630,884 40,540 2. Hosmer A. Brown, III 4,637,671 33,753 3. Edsel R. Burns 4,635,138 36,286 4. Gardner E. Daniel 4,628,702 42,722 5. E. V. Holder, Jr. 4,636,566 34,858 6. Wilbur M. Jenkins 4,636,978 34,446 7. Keith F. Molihan 4,635,652 35,772 8. Marshall T. Reynolds 4,627,522 43,902 9. Neal Scaggs 4,635,828 35,596 10. Robert W. Walker 4,528,111 143,313 11. Thomas W. Wright 4,634,984 36,440 (ii) Approval of the Premier Financial Bancorp, Inc. 2002 Employee Stock Ownership Incentive Plan. Votes for 3,415,671; votes against 118,345; votes abstaining 14,635; broker non-votes 1,122,773. (iii) Ratification of Crowe, Chizek and Company, LLP as independent auditors of the Corporation for 2002. Votes for 4,648,970; votes against 11,860; votes abstaining 10,594. Item 5. Other Information None Item 6. Exhibits and Reports on Form 8-K (a) No exhibits are furnished in accordance with the provisions of Item 601 of Regulation S-K. The following exhibits accompany this periodic report pursuant to 18 U.S.C ss.1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (the "2002 Act"). These exhibits shall be deemed only to accompany this periodic report and are not part of this periodic 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 the 2002 Act. 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) No Current Reports on Form 8-K were filed in the second quarter of the Company's year. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Corporation has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. PREMIER FINANCIAL BANCORP, INC. Date: August 14, 2002 /s/ Robert W. Walker ------------------------------------- Robert W. Walker President & Chief Executive Officer Date: August 14, 2002 /s/ Brien M. Chase ------------------------------------- Brien M. Chase Vice President & Chief Financial Officer