-----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, MNGJgPStreZix2+zTYc+2aF81RknzIMbpaaBmJFPbd6iWswFNdy4+MrYvea4qmt0 ti6De25M++F0L9gkyLhn/A== 0000887919-03-000032.txt : 20030515 0000887919-03-000032.hdr.sgml : 20030515 20030515102102 ACCESSION NUMBER: 0000887919-03-000032 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20030331 FILED AS OF DATE: 20030515 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: 03701536 BUSINESS ADDRESS: STREET 1: 2883 FIFTH AVENUE STREET 2: NONE CITY: HUNTINGTON STATE: WV ZIP: 25702 BUSINESS PHONE: 3045251600 10-Q 1 mar200310q.txt PFBI MARCH 31, 2003 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, 2003 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 - 5,232,230 shares outstanding at April 30, 2003 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'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, goodwill impairment, and stock based compensation. 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 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, 2002 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 MARCH 31, 2003 AND DECEMBER 31, 2002 (DOLLARS IN THOUSANDS) - ------------------------------------------------------------------------------ (UNAUDITED) 2003 2002 ASSETS Cash and due from banks $ 19,948 $ 18,044 Federal funds sold 52,465 29,827 Securities available for sale 155,078 157,633 Loans 420,978 435,137 Allowance for loan losses (11,617) (11,360) ---------- --------- Net loans 409,361 423,777 Federal Home Loan Bank and Federal Reserve Bank stock 4,487 4,395 Premises and equipment, net 11,569 11,685 Real estate and other property acquired through foreclosure 3,094 3,939 Interest receivable 5,680 6,485 Goodwill 16,044 16,044 Other assets 5,606 5,799 --------- --------- Total assets $ 683,332 $ 677,628 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY Deposits Non-interest bearing $ 61,115 $ 62,874 Time deposits, $100,000 over 65,380 66,033 Other interest bearing 429,639 419,067 --------- --------- Total deposits 556,134 547,974 Securities sold under agreements to repurchase 6,668 5,851 Federal Home Loan Bank advances 23,312 23,533 Other borrowed funds 7,400 7,700 Notes payable 1,402 1,402 Guaranteed preferred beneficial interests in Company's debentures 25,750 28,750 Interest payable 2,321 1,818 Other liabilities 922 1,234 --------- --------- Total liabilities 623,909 618,262 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 13,603 13,250 Accumulated other comprehensive income 1,272 1,568 --------- --------- Total stockholders' equity 59,423 59,366 --------- --------- Total liabilities and stockholders' equity $ 683,332 $ 677,628 ========= ========= - ------------------------------------------------------------------------------ See Accompanying Notes to Consolidated Financial Statements PREMIER FINANCIAL BANCORP, INC. CONSOLIDATED STATEMENTS OF INCOME THREE MONTHS ENDED MARCH 31, 2003AND 2002 (IN THOUSANDS EXCEPT PER SHARE DATA) (UNAUDITED) - ------------------------------------------------------------------------------ Three Months Ended March 31, 2003 2002 Interest income Loans, including fees $ 8,523 $ 9,579 Securities available for sale Taxable 1,111 1,555 Tax-exempt 203 208 Federal funds sold and other 156 204 -------- -------- Total interest income 9,993 11,546 Interest expense Deposits 2,880 4,369 Other borrowings 402 490 Debentures 730 713 -------- -------- Total interest expense 4,012 5,572 Net interest income 5,981 5,974 Provision for loan losses 1,397 986 -------- -------- Net interest income after provision for loan losses 4,584 4,988 Non-interest income Service charges 550 494 Insurance commissions 41 40 Securities gains 189 44 Other 345 280 -------- -------- 1,125 858 Non-interest expenses Salaries and employee benefits 2,818 2,707 Occupancy and equipment expenses 704 682 Professional fees 262 251 Taxes, other than payroll, property and income 152 172 Write-downs, expenses, sales of other real estate owned 77 68 Other expenses 1,214 1,062 -------- -------- 5,227 4,942 Income before income taxes 482 904 Provision for income taxes 129 260 -------- -------- Net income $ 353 $ 644 ======== ======== Basic earnings per share $ 0.07 $ 0.12 Earnings per share assuming dilution $ 0.07 $ 0.12 Weighted average shares outstanding 5,232 5,232 Weighted average shares assuming dilution 5,234 5,232 - ------------------------------------------------------------------------------ See Accompanying Notes to Consolidated Financial Statements PREMIER FINANCIAL BANCORP, INC. CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME THREE ENDED MARCH 31, 2003 AND 2002 (IN THOUSANDS) (UNAUDITED) - ------------------------------------------------------------------------------ Three Months Ended March 31, 2003 2002 Net income $ 353 $ 644 Other comprehensive income (loss), net of tax: Unrealized gains and (losses) arising during the period (171) (662) Reclassification of realized amount (125) (29) -------- -------- Net change in unrealized gain (loss) on securities (296) (691) -------- -------- Comprehensive income (loss) $ 57 $ (47) ======== ======== - ------------------------------------------------------------------------------ See Accompanying Notes to Consolidated Financial Statements PREMIER FINANCIAL BANCORP, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS THREE MONTHS ENDED MARCH 31, 2003 AND 2002 (IN THOUSANDS) (UNAUDITED) - ------------------------------------------------------------------------------ 2003 2002 Cash flows from operating activities Net income $ 353 $ 644 Adjustments to reconcile net income to net cash from operating activities Depreciation 290 273 Provision for loan losses 1,397 986 Amortization, net 112 75 FHLB stock dividends (49) (20) Investment securities losses (gains), net (189) (44) Write downs of OREO 28 - Changes in Interest Receivable 805 754 Other assets 368 (305) Interest Payable 503 645 Other liabilities (312) (183) ---------- ---------- Net cash from operating activities 3,306 2,825 Cash flows from investing activities Purchases of securities available for sale (49,197) (26,230) Proceeds from sales of securities available for sale 13,074 3,264 Proceeds from maturities and calls of securities available for sale 38,284 29,407 Purchases of FHLB stock (43) (24) Net change in federal funds sold (22,638) (6,132) Net change in loans 12,748 3,257 Purchases of premises and equipment, net (174) (352) Proceeds from sale of other real estate acquired through foreclosure 1,088 215 --------- --------- Net cash from investing activities (6,858) 3,405 Cash flows from financing activities Net change in deposits 8,160 (2,434) Advances from Federal Home Loan Bank 1,500 10,395 Repayment of Federal Home Loan Bank advances (1,721) (13,229) Early redemption of guaranteed debentures (3,000) - Repayment of Other Borrowed Funds (300) (1,500) Net change in agreements to repurchase securities 817 180 --------- --------- Net cash from financing activities 5,456 (6,588) --------- ---------- Net change in cash and cash equivalents 1,904 (358) Cash and cash equivalents at beginning of period 18,044 20,628 --------- --------- Cash and cash equivalents at end of period $ 19,948 $ 20,270 ========= ========= - ------------------------------------------------------------------------------ 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 March 31, 2003 Acquired Assets Citizens Deposit Bank & Trust Vanceburg, Kentucky 1991 $ 87,946 Bank of Germantown Germantown, Kentucky 1992 24,935 Citizens Bank (Kentucky), Inc. Georgetown, Kentucky 1995 82,659 Farmers Deposit Bank Eminence, Kentucky 1996 145,402 Ohio River Bank Ironton, Ohio 1998 77,327 First Central Bank, Inc. Philippi, West Virginia 1998 88,934 Boone County Bank, Inc. Madison, West Virginia 1998 166,711 Mt. Vernon Financial Holdings, Inc. Huntington, West Virginia 1999 7,390 The Company also has a data processing subsidiary, Premier Data Services, Inc., and the PFBI Capital Trust subsidiary as discussed in Note 7. All intercompany transactions and balances have been eliminated. NOTE 2 - REGULATORY MATTERS 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 requires the Company to retain an independent consultant to review its management, directorate and organizational structure, adopt a management plan responsive to such consultant's report, update its management succession plan in accordance with any recommendations in such consultant's report, monitor its subsidiary banks' compliance with bank policies and loan review programs, conduct formal quarterly reviews of its subsidiary Banks' allowances for loan losses, maintain sufficient capital, submit a plan to the FRB for improving consolidated earnings over a three-year period, and submit to the FRB annual projections of planned sources and uses of the Company's cash, including a plan to service its outstanding debt and trust preferred securities. The Company's compliance with the written agreement is being monitored by a committee which consists of three of its outside directors. - ------------------------------------------------------------------------------ CONTINUED PREMIER FINANCIAL BANCORP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED, IN THOUSANDS) - ------------------------------------------------------------------------------ NOTE 2 - REGULATORY MATTERS (continued) Three of the Company's subsidiaries, Citizens Deposit Bank & Trust, Bank of Germantown and Citizens Bank (Kentucky), Inc. have entered into similar agreements with their respective primary regulators which, among other things, prohibit the payment of dividends without prior written approval and requires significant changes in their credit administration policies. These agreements, which require periodic reporting, will remain in force until the regulators are satisfied that the Company and the banks have fully complied with the terms of the agreement. NOTE 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 effect on its financial position or results of operations. NOTE 4 - SECURITIES Amortized cost and fair value of investment securities, by category, at March 31, 2003 are summarized as follows: Amortized Unrealized Unrealized Fair Cost Gains Losses Value Available for sale U. S. Treasury securities $ 650 $ 6 $ (1) $ 655 U. S. agency securities 118,169 976 (2) 119,143 Obligations of states and political subdivisions 17,238 805 (13) 18,030 Mortgage-backed securities 13,293 102 (41) 13,354 Corporate securities 3,823 72 - 3,895 ---------- ---------- ---------- ---------- Total available for sale $ 153,173 $ 1,962 $ (57) $ 155,078 ========== ========== =========== ========== - ------------------------------------------------------------------------------ CONTINUED PREMIER FINANCIAL BANCORP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED, IN THOUSANDS) - ------------------------------------------------------------------------------ NOTE 4 - SECURITIES (continued) Amortized cost and fair value of investment securities, by category, at December 31, 2002 are summarized as follows: Amortized Unrealized Unrealized Fair Cost Gains Losses Value Available for sale U. S. Treasury securities $ 399 $ 8 $ - $ 407 U. S. agency securities 120,660 1,256 - 121,916 Obligations of states and political subdivisions 17,794 827 (11) 18,610 Mortgage-backed securities 7,369 279 - 7,648 Corporate securities 9,036 16 - 9,052 ---------- ---------- ---------- ---------- Total available for sale $ 155,258 $ 2,386 $ (11) $ 157,633 ========== ========== ========== ========== NOTE 5 - LOANS Major classifications of loans at March 31, 2003 and December 31, 2002 are summarized as follows: 2003 2002 Commercial, secured by real estate $115,898 $120,306 Commercial, other 56,256 64,014 Real estate construction 11,341 11,924 Residential real estate 153,070 156,215 Agricultural 8,111 8,862 Consumer and home equity 74,508 71,075 Other 1,794 2,741 -------- -------- $420,978 $435,137 ======== ======== The following table sets forth information with respect to the Company's nonperforming loans at March 31, 2003 and December 31, 2002. 2003 2002 Non-accrual loans $ 8,974 $ 10,588 Accruing loans which are contractually past due 90 days or more 1,522 1,399 Restructured loans 291 293 -------- -------- $ 10,787 $ 12,280 ======== ======== - ------------------------------------------------------------------------------ CONTINUED PREMIER FINANCIAL BANCORP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED, IN THOUSANDS) - ------------------------------------------------------------------------------ NOTE 6 - ALLOWANCE FOR LOAN LOSSES Changes in the allowance for loan losses for the three months ended March 31, 2003 and 2002 are as follows: Three Months Ended March 31, 2003 2002 Balance, beginning of period $ 11,360 $ 8,946 Gross charge-offs (1,352) (1,543) Recoveries 212 358 Provision for loan losses 1,397 986 -------- -------- Balance, end of period $ 11,617 $ 8,747 ======== ======== 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 are 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. As previously disclosed, pursuant to an agreement entered into with the Federal Reserve Bank (FRB) described in Note 2, the Company is required to request approval for the payment of distributions due on the Trust Preferred Securities. As part of a Debt Reduction and Profitability plan presented on January 6, 2003, the Company requested and received approval from the FRB to redeem $3,000,000 of the $28,750,000 outstanding Trust Preferred Securities which occurred on March 31, 2003. However, the FRB denied the Company's request to make distributions on the remaining Trust Preferred Securities for the first quarter of 2003. In December 2002, Premier exercised its right to defer the payment of interest on its 9.75% Trust Preferred Securities for December 31, 2002, March 31, 2003, and for an indefinite period, which can be no longer than 20 consecutive quarterly periods. This and any future deferred distributions will accrue interest at an annual rate of 9.75% which will be paid when the deferred distributions are ultimately paid. Management of Premier does not expect to resume payments on the Subordinated Debentures or the Trust Preferred until the Federal Reserve Bank of Cleveland determines that Premier has achieved adequate and sustained levels of profitability to support such payments and approves such payments. - ------------------------------------------------------------------------------ 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 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 2003, the Banks could, without prior approval, declare dividends of approximately $3.1 million plus any 2003 net profits retained to the date of the dividend declaration. The Company and the subsidiary Banks are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and the Banks must meet specific guidelines that involve quantitative measures of their assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. These quantitative measures established by regulation to ensure capital adequacy require the Company and Banks to maintain minimum amounts and ratios (set forth in the following table) of Total and Tier I capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier I capital (as defined) to average assets (as defined). Management believes, as of March 31, 2003, 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 March 31, December 31, Minimum 2003 2002 Requirements ------ ------ ------------ Tier I Capital (to Risk-Weighted Assets) 14.7% 14.1% 4.0% Total Capital (to Risk-Weighted Assets) 17.5% 17.5% 8.0% Tier I Capital (to Average Assets) 9.3% 9.1% 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 three of the Company's subsidiaries have entered into agreements with the applicable regulatory authorities which provide for additional restrictions on their respective capital levels and the payment of dividends. The Company entered into an agreement with the Federal Reserve Bank of Cleveland (FRB), as discussed in Note 2, 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) 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 11.3% at March 31, 2003. Bank of Germantown (Germantown) entered into an agreement with the Kentucky Department of Financial Institutions (KDFI) and the Federal Deposit Insurance Corporation (FDIC) on June 13, 2000 restricting Germantown from declaring or paying dividends, without prior approval, if its Tier I capital to average assets falls below 8%. This agreement is in effect until terminated by the KDFI and FDIC. Germantown's Tier I capital to average assets ratio was 7.9% at March 31, 2003. 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 8.8% at March 31, 2003. As of March 31, 2003, 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. NOTE 9 - NOTES PAYABLE During 2002, the Company also entered into notes payable with the Company's Chairman of the Board and President. Due to the regulatory restriction on the Company's payment of its Trust Preferred distributions as discussed in Note 7, the Company reached an agreement with the FRB whereby the Company's Chairman of the Board, who is also the Company's largest shareholder, agreed to loan the Company the amount of the second quarter distribution, $701,000, so that the Company, with the FRB's approval, could make such distribution. A similar agreement was reached with the FRB for the payment of the distribution due for the third quarter 2002. The Company's President, who is also a director, agreed to loan the Company the amount of that distribution, $701,000. Thus, the balance of notes payable at March 31, 2003, was $1,402,000. Both loans are unsecured at a zero percent interest rate with no defined maturity date. The loans cannot be repaid without the prior approval of the FRB. - ------------------------------------------------------------------------------ CONTINUED PREMIER FINANCIAL BANCORP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (IN THOUSANDS EXCEPT PER SHARE DATA) (UNAUDITED) - ------------------------------------------------------------------------------ NOTE 10 - STOCK BASED COMPENSATION The Company maintains the Premier Financial Bancorp, Inc. 1996 Employee Stock Ownership incentive Plan (the Plan), whereby certain employees of the Company are eligible to receive incentive stock options. Under the Plan, a maximum of 100,000 shares of the Company's common stock may be issued through the exercise of these incentive stock options. The option price is the fair market value of the Company's shares at the date of the grant. In January, 2003, the Company granted 28,650 options under this plan at $7.96 per share which will be fully vested in three years. Employee compensation expense under stock options is reported using the intrinsic value method. No stock-based compensation cost is reflected in net income, as all options granted had an exercise price equal to or greater than the market price of the underlying common stock at the date of grant. The following table illustrates the effect on net income and earnings per share if expense was measured using the fair value recognition provisions of FASB Statement No. 123, Accounting for Stock-Based Compensation. 2003 2002 Net income as reported $ 353 $ 644 Deduct: Stock-based compensation expense determined under fair value based method (21) - --------- -------- Pro forma net income $ 332 $ 644 Basic earnings per share as reported $ 0.07 $ 0.12 Pro forma basic earnings per share 0.06 0.12 Diluted earnings per share as reported $ 0.07 $ 0.12 Pro forma diluted earnings per share 0.06 0.12 The fair value of the options granted are estimated as of the measurement date using the Black-Scholes option pricing model with the following weighted average assumptions used for grants in 2003: dividend yield of 0.0%, expected volatility of 42.4%, risk-free interest rate of 3.1%, and expected life of five years. The weighted average fair value of options granted in 2003 was $3.30. - ------------------------------------------------------------------------------ PREMIER FINANCIAL BANCORP, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS - ------------------------------------------------------------------------------ Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations A. Results of Operations Net income for the three months ended March 31, 2003 was $353,000, or 7 cents per share, compared to net income of $644,000 or 12 cents per share for the three months ended March 31, 2002. Net interest income for the quarter ending March 31, 2003 totaled $5.98 million, virtually unchanged from the $5.97 million of net interest income earned in the first quarter of 2002. Both interest income and interest expense decreased by $1.6 million as loan and deposit volumes have declined and the interest rate environment has remained near historical lows. As a result, the net interest margin for the three months ending March 31, 2003 was approximately 3.86% compared to 3.75% for the same period in 2002. Non-interest income increased $267,000 to $1,125,000 for the first three months of 2003 compared to $858,000 for the first three months of 2002, largely due to $189,000 of gains on the sales of securities. Excluding the investment securities gains, non-interest income increased 15.0% or $122,000. The increase is largely due to a 11.3% or $56,000 increase in revenue from service charges on deposit accounts, and an increase in the volume of secondary market mortgage loan activity resulting in an increase secondary market fee income. Non-interest expenses for the first quarter of 2003 totaled $5,227,000 or 3.1% of average assets on an annualized basis compared to $4,942,000 or 2.8% of average assets for the same period of 2002. The increase in non-interest expense is largely due to $124,000 of accelerated amortization of issuance costs related to the early redemption of $3.0 million of the Company's Trust Preferred Securities (NASDAQ/NMS-PFBIP). After excluding these costs, non-interest expense increased $161,000 (3.3%) in the first quarter of 2003 compared to the same period in 2002. The increase is largely due to a 4.1% or $111,000 increase in staff costs from normal cost of living increases; a 3.2% or $22,000 increase in occupancy and equipment expenses; and a 4.3% or $11,000 increase in professional fees. Income tax expense was $129,000 for the first quarter of 2003 compared to $260,000 for the first quarter of 2002. The increase in income tax expense can be primarily attributed to the decline in pre-tax income detailed above. The annualized effective tax rate for the three months ended March 31, 2002 was 26.8%, compared to the 28.8% effective tax rate for the same period in 2002. The annualized returns on stockholders' equity and on average assets were approximately 2.37% and 0.21% for the three months ended March 31, 2003 compared to 4.28% and 0.36% for the same period in 2002. - ------------------------------------------------------------------------------ CONTINUED PREMIER FINANCIAL BANCORP, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS - ------------------------------------------------------------------------------ B. Financial Position Total assets at March 31, 2003 increased $5.7 million or 0.8% to $683.3 million from the $677.6 million at December 31, 2002. This increase was largely due to an $8.2 million increase in deposits partially offset by the $3.0 million early redemption of the Company's preferred debentures. Earning assets increased to $633.0 at March 31, 2003 from the $627.0 million at December 31, 2002, an increase of $6.0 million, or 1.0%. The increase was largely due to a $22.6 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, 2003 were $19.9 million, a $1.9 million increase from $18.0 million on December 31, 2002. Federal funds sold increased to $52.5 million from the $29.8 million reported at December 31, 2002. The increase in federal funds sold was the result of retaining the liquidity from loan payoffs and deposit growth as part of Premier's interest rate management strategy. Total loans at March 31, 2003 were $421.0 million compared to $435.1 million at December 31, 2002, a decrease of $14.1 million. This decrease can primarily be attributed to commercial loan pay offs, the collection of $0.5 million in loans owned by Mt. Vernon Financial Holdings and the $1.4 million in loan charge-offs recorded during the first quarter of 2003. Securities available for sale totaled $155.1 million at March 31, 203, a $2.5 million decrease from the $157.6 million at December 31, 2002. The decline was largely due to a slightly lower volume of purchases versus the volume of sales and maturities that occurred during the quarter. Additional details on investment activities can be found in the Statements of Cash Flows. Deposits totaled $556.1 million as of March 31, 2003, an $8.2 million increase from the $548.0 million in deposits at December 31, 2002. The increase is largely due to a $7.8 million increase in interest bearing transaction accounts and a $5.2 million increase in savings and money market accounts. These were partially offset by non-renewal of some high rate certificates of deposit and a reduction in non-interest bearing deposits. - ------------------------------------------------------------------------------ CONTINUED PREMIER FINANCIAL BANCORP, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS - ------------------------------------------------------------------------------ The following table sets forth information with respect to the Company's nonperforming assets at March 31, 2003 and December 31, 2002. (In Thousands) 2003 2002 ---- ---- Non-accrual loans $ 8,974 $ 10,588 Accruing loans which are contractually past due 90 days or more 1,522 1,399 Restructured 291 293 --------- --------- Total non-performing loans 10,787 12,280 Other real estate acquired through foreclosure 3,094 3,939 --------- --------- Total non-performing assets $ 13,881 $ 16,219 Non-performing loans as a percentage of total loans 2.56% 2.82% Non-performing assets as a percentage of total assets 2.03% 2.39% Total non-performing loans and non-performing assets have declined since year-end due to loan charge-offs and the continuation of senior management directives that have emphasized the reduction of the level of delinquency, non-accrual loans and OREO. A significant effort has been placed on reviews of loan files, efforts by lenders to bring borrowers current with the terms of their loan agreement and the sale of certain OREO properties. However, while total non-performing loans have declined, accruing loans at least 90 days past due have increased. The provision for loan losses was $1.4 million for the first quarter of 2003 compared to $1.0 million for the first quarter of 2002. The additional provisions were 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. Gross charge-offs totaled $1.4 million during the first quarter of 2003. 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, 2003 was 2.76% of total loans as compared to 2.61% at December 31, 2002. The increase in the percentage of allowance for loan losses to total loans is largely due to the decline in total loans outstanding plus the effect of the higher provision for loan losses required versus the level of net charge-offs actually taken during the first three months of 2003. Nonperforming loans decreased to $10.8 million as of March 31, 2003, when compared to the $12.3 million on December 31, 2002, due to charge-offs and 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 2.56% at March 31, 2003 from the 2.82% at December 31, 2002. Similarly, non-performing assets declined to 2.03% of total assets at March 31, 2003, from 2.39% of total assets at December 31, 2002, due to sales of OREO properties. - ------------------------------------------------------------------------------ CONTINUED PREMIER FINANCIAL BANCORP, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS - ------------------------------------------------------------------------------ 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 $155.1 million of securities at market value as of March 31, 2003. 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. As a condition of their permission to allow the Company to redeem $3.0 million of its Trust Preferred Securities, the Federal Reserve Bank of Cleveland required to parent company to retain cash balances in excess of $4.0 million following the redemption. As of March 31, 2003, the parent company had $5.4 million in cash and due from banks following the redemption. D. Capital At March 31, 2003, total shareholders' equity of $59.4 million was 8.7% of total consolidated assets. This compares to total shareholders' equity of $59.4 million or 8.8% of total consolidated assets on December 31, 2002. Tier I capital totaled $61.5 million at March 31, 2003, which represents a Tier I leverage ratio of 9.3%. - ------------------------------------------------------------------------------ CONTINUED PREMIER FINANCIAL BANCORP, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS - ------------------------------------------------------------------------------ Book value per share was $11.36 at March 31, 2003, and $11.35 at December 31, 2002. The increase in book value per share was the result of $57,000 of comprehensive income for the first quarter of 2003 as net income was largely offset by the after tax decrease 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 2002 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 2002 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-14. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the disclosure controls and procedures are effective in ensuring that all material information required to be filed in this quarterly report has been made known to them in a timely fashion. There have been no significant changes in internal controls, or in factors that could significantly affect internal controls, subsequent to the date the Chief Executive Officer and Chief Financial Officer completed their evaluation. - ------------------------------------------------------------------------------ PREMIER FINANCIAL BANCORP, INC. - ------------------------------------------------------------------------------ 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 None - ------------------------------------------------------------ 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) The following Current Reports on Form 8-K were filed in the first quarter of the Company's year. January 29, 2003 - Press release regarding Written Agreement with the Federal Reserve Bank of Cleveland. February 24, 2003 - Press release regarding the early redemption of $3.0 million of Trust Preferred Certificates on March 31, 2003, and the denial of permission by the Federal Reserve Bank of Cleveland to pay the quarterly distributions on the remaining Trust Preferred Certificates outstanding. - ------------------------------------------------------------------------------ PREMIER FINANCIAL BANCORP, INC. - ------------------------------------------------------------------------------ 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 14, 2003 /s/ Robert W. Walker --------------------------------- Robert W. Walker President & Chief Executive Officer Date: May 14, 2003 /s/ Brien M. Chase --------------------------------- Brien M. Chase Vice President & Chief Financial Officer - ------------------------------------------------------------------------------ PREMIER FINANCIAL BANCORP, INC. - ------------------------------------------------------------------------------ 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 quarterly 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 quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly 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 quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: May 14, 2003 /s/ Robert W. Walker Robert W. Walker President & Chief Executive Officer - ------------------------------------------------------------------------------ PREMIER FINANCIAL BANCORP, INC. - ------------------------------------------------------------------------------ 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 quarterly 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 quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly 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 quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: May 14, 2003 /s/ Brien M. Chase Brien M. Chase Vice President & Chief Financial Officer - ------------------------------------------------------------------------------ EX-99 3 exhibit99-1.txt CEO SECTION 906 CERTIFICATION Exhibit 99.1 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 As an accompaniment to the Quarterly Report of Premier Financial Bancorp, Inc. (the "Company") on Form 10-Q for the period ending March 31, 2003 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Robert W. Walker, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act of 2002, that to the best of my knowledge and belief: o The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934, and o The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company as of and for the periods presented. This certification is based on inquiries that I have made, or have caused to be made, in a good faith effort on my part to be a responsible and competent chief executive officer serving the Company and its constituencies. This certification merely accompanies and is not part of the Report, shall not be deemed filed for purposes of the Securities Exchange Act of 1934, and may not be used for any purpose other than compliance with 18 U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act of 2002. A signed original of this written statement required by Section 906 has been provided to Premier Financial Bancorp, Inc. and will be retained by Premier Financial Bancorp, Inc. and furnished to the Securities and Exchange Commission or its staff upon request. By: /s/Robert W. Walker --------------------------------------- Robert W. Walker President and Chief Executive Officer Date: May 14, 2003 EX-99 4 exhibit99-2.txt CFO SECTION 906 CERTIFICATION Exhibit 99.2 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 As an accompaniment to the Quarterly Report of Premier Financial Bancorp, Inc. (the "Company") on Form 10-Q for the period ending March 31, 2003 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Brien M. Chase, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act of 2002, that to the best of my knowledge and belief: o The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934, and o The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company as of and for the periods presented. This certification is based on inquiries that I have made, or have caused to be made, in a good faith effort on my part to be a responsible and competent chief financial officer serving the Company and its constituencies. This certification merely accompanies and is not part of the Report, shall not be deemed filed for purposes of the Securities Exchange Act of 1934, and may not be used for any purpose other than compliance with 18 U.S.C. ss.1 350, as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act of 2002. A signed original of this written statement required by Section 906 has been provided to Premier Financial Bancorp, Inc. and will be retained by Premier Financial Bancorp, Inc. and furnished to the Securities and Exchange Commission or its staff upon request. By: /s/Brien M. Chase --------------------------------------- Brien M. Chase Vice President & Chief Financial Officer Date: May 14, 2003 -----END PRIVACY-ENHANCED MESSAGE-----