10-Q 1 jun0510-q.txt TEXT OF QUARTERLY 10-Q REPORT 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, 2005 or [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ___________ to ___________ Commission file number 0-20908 PREMIER FINANCIAL BANCORP, INC. (Exact name of registrant as specified in its charter) Kentucky 61-1206757 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 2883 Fifth Avenue Huntington, West Virginia 25702 (address of principal executive officer) (Zip Code) Registrant's telephone number (304) 525-1600 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to filing requirements for the past 90 days. Yes X No . Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Securities Exchange Act of 1934). Yes___ No X . Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practical date. Common stock, no par value, - 5,232,230 shares outstanding at July 31, 2005 PREMIER FINANCIAL BANCORP, INC. PART I - FINANCIAL INFORMATION Item 1. Financial Statements The accompanying information has not been audited by independent public accountants; however, in the opinion of management such information reflects all adjustments necessary for a fair presentation of the results for the interim period. All such adjustments are of a normal and recurring nature. Premier Financial Bancorp, Inc.'s ("Premier's") accounting and reporting policies are in accordance with accounting principles generally accepted in the United States of America. Certain accounting principles used by Premier involve a significant amount of judgment about future events and require the use of estimates in their application. The following policies are particularly sensitive in terms of judgments and the extent to which estimates are used: allowance for loan losses, the identification and evaluation of impaired loans, the impairment of goodwill, the realization of deferred tax assets and stock based compensation disclosures. These estimates are based on assumptions that may involve significant uncertainty at the time of their use. However, the policies, the estimates and the estimation process as well as the resulting disclosures are periodically reviewed by the Audit Committee of the Board of Directors and material estimates are subject to review as part of the external audit by the independent public accountants. The accompanying financial statements are presented in accordance with the requirements of Form 10-Q and consequently do not include all of the disclosures normally required by accounting principles generally accepted in the United States of America or those normally made in the registrant's annual report on Form 10-K. Accordingly, the reader of the Form 10-Q may wish to refer to the registrant's Form 10-K for the year ended December 31, 2004 for further information in this regard. IIndex to consolidated financial statements: Consolidated Balance Sheets.................................. 3 Consolidated Statements of Operations........................ 4 Consolidated Statements of Comprehensive Income ............. 6 Consolidated Statements of Cash Flows........................ 7 Notes to Consolidated Financial Statements................... 9
PREMIER FINANCIAL BANCORP, INC. CONSOLIDATED BALANCE SHEETS JUNE 30, 2005 AND DECEMBER 31, 2004 (DOLLARS IN THOUSANDS) -------------------------------------------------------------------------------------------------------------------- (UNAUDITED) 2005 2004 ---- ---- ASSETS Cash and due from banks $ 14,392 $ 14,474 Federal funds sold 17,844 17,342 Securities available for sale 151,196 153,892 Loans 326,125 324,927 Allowance for loan losses (8,927) (9,384) -------------- -------------- Net loans 317,198 315,543 Federal Home Loan Bank and Federal Reserve Bank stock 2,928 2,611 Premises and equipment, net 7,228 7,257 Real estate and other property acquired through foreclosure 2,345 2,247 Interest receivable 2,539 2,740 Goodwill 15,816 15,816 Other assets 5,623 5,333 ------------- -------------- Total assets $ 537,109 $ 537,255 ============= ============== LIABILITIES AND STOCKHOLDERS' EQUITY Deposits Non-interest bearing $ 64,730 $ 68,380 Time deposits, $100,000 and over 42,065 40,213 Other interest bearing 337,173 329,205 ------------- -------------- Total deposits 443,968 437,798 Federal funds purchased 294 1,838 Securities sold under agreements to repurchase 7,356 7,208 Federal Home Loan Bank advances 8,858 9,288 Other borrowed funds - 800 Notes payable 1,402 1,402 Guaranteed junior subordinated interest debentures 20,876 20,876 Interest payable 743 5,532 Other liabilities 1,313 1,484 ------------- -------------- Total liabilities 484,810 486,226 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 8,539 7,008 Accumulated other comprehensive income (loss) (788) (527) -------------- --------------- Total stockholders' equity 52,299 51,029 ------------- -------------- Total liabilities and stockholders' equity $ 537,109 $ 537,255 ============= ============== -------------------------------------------------------------------------------------------------------------------- See Accompanying Notes to Consolidated Financial Statements
PREMIER FINANCIAL BANCORP, INC. CONSOLIDATED STATEMENTS OF OPERATIONS THREE AND SIX MONTHS ENDED JUNE 30, 2005 AND 2004 (IN THOUSANDS EXCEPT PER SHARE DATA) (UNAUDITED) -------------------------------------------------------------------------------------------------------------------- Three Months Ended Six Months Ended June 30, June 30, 2005 2004 2005 2004 ---- ---- ---- ---- Interest income Loans, including fees $ 5,706 $ 5,746 $ 11,342 $ 11,591 Securities available for sale Taxable 1,269 1,051 2,512 2,116 Tax-exempt 24 54 49 134 Federal funds sold and other 173 75 314 140 ----------- ----------- ----------- ----------- Total interest income 7,172 6,926 14,217 13,981 Interest expense Deposits 1,609 1,544 3,126 3,176 Repurchase agreements and other 42 27 78 38 FHLB advances and other borrowings 126 221 269 468 Debentures 502 736 1,124 1,455 ----------- ----------- ----------- ----------- Total interest expense 2,279 2,528 4,597 5,137 ----------- ----------- ----------- ----------- Net interest income 4,893 4,398 9,620 8,844 Provision for loan losses 191 374 434 509 ----------- ----------- ----------- ----------- Net interest income after provision for loan losses 4,702 4,024 9,186 8,335 Non-interest income Service charges 715 635 1,296 1,219 Insurance commissions 26 19 37 36 Securities gains - - - 10 Other 250 252 564 497 ----------- ----------- ----------- ----------- 991 906 1,897 1,762 Non-interest expenses Salaries and employee benefits 2,372 2,163 4,699 4,393 Occupancy and equipment expenses 564 510 1,165 1,015 Professional fees 245 506 379 1,066 Taxes, other than payroll, property and income 124 156 206 290 Write-downs, expenses, sales of other real estate owned, net 48 (11) 60 50 Supplies 109 90 192 178 Other expenses 1,189 829 2,183 1,723 ----------- ----------- ----------- ----------- 4,651 4,243 8,884 8,715 ----------- ----------- ----------- ----------- Income from continuing operations before income taxes 1,042 687 2,199 1,382 Provision for income taxes 315 213 669 426 ----------- ----------- ----------- ----------- Income from continuing operations 727 474 1,530 956 ----------- ----------- ----------- ----------- Discontinued operation Income (loss) from operation of discontinued component - (37) - 4 Provison (benefit) for income taxes - (12) - - ----------- ----------- ----------- ----------- Income (loss) from discontinued operation - (25) - 4 ----------- ----------- ----------- ----------- Net income $ 727 $ 449 $ 1,530 $ 960 =========== =========== =========== =========== -------------------------------------------------------------------------------------------------------------------- See Accompanying Notes to Consolidated Financial Statements
PREMIER FINANCIAL BANCORP, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (continued) THREE AND SIX MONTHS ENDED JUNE 30, 2005 AND 2004 (IN THOUSANDS EXCEPT PER SHARE DATA) (UNAUDITED) -------------------------------------------------------------------------------------------------------------------- Three Months Ended Six Months Ended June 30, June 30, 2005 2004 2005 2004 ---- ---- ---- ---- Weighted average shares outstanding: Basic 5,232 5,232 5,232 5,232 Diluted 5,242 5,235 5,243 5,235 Earnings per share from continuing operations: Basic $ 0.14 $ 0.09 $ 0.29 $ 0.18 Diluted 0.14 0.09 0.29 0.18 Earnings (loss) per share from discontinued operation: Basic $ 0.00 $ 0.00 $ 0.00 $ 0.00 Diluted 0.00 0.00 0.00 0.00 Net earnings per share: Basic $ 0.14 $ 0.09 $ 0.29 $ 0.18 Diluted 0.14 0.09 0.29 0.18 -------------------------------------------------------------------------------------------------------------------- See Accompanying Notes to Consolidated Financial Statements
PREMIER FINANCIAL BANCORP, INC. CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME THREE AND SIX MONTHS ENDED JUNE 30, 2005 AND 2004 (IN THOUSANDS) (UNAUDITED) -------------------------------------------------------------------------------------------------------------------- Three Months Ended Six Months Ended June 30, June 30, 2005 2004 2005 2004 ---- ---- ---- ---- Net income $ 727 $ 449 $ 1,530 $ 960 Other comprehensive income (loss): Unrealized gains and (losses) arising during the period 1,453 (3,473) (395) (2,853) Reclassification of realized amount - - - (10) ---------- ---------- ---------- --------- Net change in unrealized gain (loss) on securities 1,453 (3,473) (395) (2,863) Less: Tax impact 494 (1,181) (134) (973) ---------- ----------- ----------- --------- Other comprehensive income (loss) 959 (2,292) (261) (1,890) ---------- ---------- ---------- --------- Comprehensive income (loss) $ 1,686 $ (1,843) $ 1,269 $ (930) ========== =========== ========== ========== -------------------------------------------------------------------------------------------------------------------- See Accompanying Notes to Consolidated Financial Statements
PREMIER FINANCIAL BANCORP, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS SIX MONTHS ENDED JUNE 30, 2005 AND 2004 (IN THOUSANDS) (UNAUDITED) -------------------------------------------------------------------------------------------------------------------- 2005 2004 ---- ---- Cash flows from continuing operating activities Income from continuing operations $ 1,530 $ 956 Adjustments to reconcile income to net cash from continuing operating activities Depreciation 541 345 Provision for loan losses 434 509 Amortization, net 151 275 FHLB stock dividends (52) (45) Investment securities losses (gains), net - (10) OREO writedowns (gains on sales), net 14 (70) Changes in Interest Receivable 201 657 Other assets (152) 153 Interest Payable (4,789) 1,487 Other liabilities (170) 145 ------------- ------------- Net cash from continuing operating activities (2,292) 4,402 Cash flows from continuing investing activities Purchases of securities available for sale (12,542) (45,234) Proceeds from sales of securities available for sale - 414 Proceeds from maturities and calls of securities available for sale 14,688 42,359 Purchases of FHLB stock, net of redemptions (265) (20) Net change in federal funds sold (502) (978) Net change in loans (3,149) 2,887 Purchases of premises and equipment, net (512) (268) Proceeds from sale of other real estate acquired through foreclosure 948 2,846 ------------- ------------- Net cash from continuing investing activities (1,334) 2,006 Cash flows from continuing financing activities Net change in deposits 6,170 (13,542) Net change in short-term borrowings - 2,546 Repayment of Federal Home Loan Bank advances (430) (847) Repayment of Other Borrowed Funds (800) (1,750) Net change in federal funds purchased (1,544) - Net change in agreements to repurchase securities 148 7,214 ------------- ------------- Net cash (used in) continuing financing activities 3,544 (6,379) ------------- -------------- Net change in cash and cash equivalents from continuing activities (82) 29 Cash and cash equivalents of continuing operations at beginning of period 14,474 16,422 ------------- ------------- Cash and cash equivalents of continuing operations at end of period $ 14,392 $ 16,451 ============= ============= -------------------------------------------------------------------------------------------------------------------- See Accompanying Notes to Consolidated Financial Statements
PREMIER FINANCIAL BANCORP, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (continued) SIX MONTHS ENDED JUNE 30, 2005 AND 2004 (IN THOUSANDS) (UNAUDITED) -------------------------------------------------------------------------------------------------------------------- 2005 2004 ---- ---- Supplemental disclosures of cash flow information: Cash paid during period for interest $ 9,386 $ 3,651 Loans transferred to real estate acquired through foreclosure 1,060 2,020 Net change in cash and cash equivalents of discontinued operations - (764) -------------------------------------------------------------------------------------------------------------------- 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:
June 30, 2005 Net Income Year --------------------- Acquired Assets Qtr Six Mo. Citizens Deposit Bank & Trust Vanceburg, Kentucky 1991 $ 116,357 $ 341 $ 690 Farmers Deposit Bank Eminence, Kentucky 1996 85,127 36 (28) Ohio River Bank Ironton, Ohio 1998 83,938 175 385 First Central Bank, Inc. Philippi, West Virginia 1998 93,389 302 584 Boone County Bank, Inc. Madison, West Virginia 1998 156,127 610 1,160 Mt. Vernon Financial Holdings, Inc. Huntington, West Virginia 1999 2,304 (60) (73)
The Company also has a data processing subsidiary, Premier Data Services, Inc., and the PFBI Capital Trust subsidiary as discussed in Note 7. In accordance with FASB Interpretation No. 46, the Trust is no longer consolidated with the Company. All other intercompany transactions and balances have been eliminated. The Company maintains Employee Stock Ownership incentive Plans (the Plans) whereby certain employees of the Company are eligible to receive incentive stock options. The Plans are accounted for in accordance with Accounting Principles Board Opinion (APB) No. 25, "Accounting for Stock Issued to Employees", and related interpretations. Pursuant to the Plans, a maximum of 600,000 shares of the Company's common stock may be issued through the exercise of these incentive stock options. The option price is the fair market value of the Company's shares at the date of the grant. The options are exercisable within ten years from the date of grant. 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. -------------------------------------------------------------------------------- CONTINUED PREMIER FINANCIAL BANCORP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED, IN THOUSANDS) -------------------------------------------------------------------------------- NOTE 1 - BASIS OF PRESENTATION - (continued)
Three Months Ended Six Months Ended June 30, June 30, 2005 2004 2005 2004 ---- ---- ---- ---- Income from continuing operations $ 727 $ 474 $ 1,530 $ 956 Deduct: Stock-based compensation expense determined under fair value based method (17) (11) (32) (20) ---------- --------- ----------- ---------- Pro forma income $ 710 $ 463 $ 1,498 $ 936 Basic earnings per share from continuing operations $ 0.14 $ 0.09 $ 0.29 $ 0.18 Pro forma basic earnings per share 0.14 0.09 0.29 0.18 Diluted earnings per share from continuing operations $ 0.14 0.09 $ 0.29 $ 0.18 Pro forma diluted earnings per share 0.14 0.09 0.29 0.18
On January 19, 2005, 35,000 incentive stock options were granted out of the 2002 Plan at an exercise price of $11.62. These options vest in three equal annual installments ending on January 19, 2008. On February 18, 2004, 28,200 incentive stock options were granted out of the 2002 Plan at an exercise price of $9.30. These options vest in three equal annual installments ending on February 18, 2007. On January 15, 2003, 28,650 incentive stock options were granted out of the 2002 Plan at an exercise price of $7.96. These options vest in three equal annual installments ending on January 15, 2006. Proforma stock-compensation expense is being amortized over each of the three-year vesting periods. There were no options granted during 2002. Future pro forma net income will be negatively impacted should the Company choose to grant additional options. The pro forma effects are computed using option pricing models, using the following weighted-average assumptions as of grant date. 2005 2004 ---- ---- Risk-free interest rate 3.70% 3.15% Expected option life (yrs) 5.00 5.00 Expected stock price volatility 0.25 0.25 Dividend yield 0.00% 0.00% Weighted average fair value of options granted during the year $3.48 $2.64 -------------------------------------------------------------------------------- CONTINUED PREMIER FINANCIAL BANCORP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED, IN THOUSANDS) -------------------------------------------------------------------------------- NOTE 2 - DISCONTINUED OPERATIONS In the fourth quarter of 2003, the Company adopted and began to implement a plan to sell its subsidiary Citizens Bank (Kentucky), Inc. ("Citizens Bank") located in Georgetown, Kentucky. On February 13, 2004, the Company announced that it had signed a definitive agreement to sell Citizens Bank in a cash transaction valued at approximately $14,500,000. The sale was completed on July 1, 2004 and resulted in a gain of $6,664,000. In accordance with Financial Accounting Standard 144, "Accounting for the Impairment or Disposal of Long-lived Assets", which became effective for the Company on January 1, 2002, the financial position and results of operations of Citizens Bank are removed from the detail line items in the Company's financial statements and presented separately as "discontinued operations." A condensed statement of operations for Citizens Bank follows (in thousands): For the Three For the Six Months Ended Months Ended June 30 June 30 2004 2004 ---- ---- Interest income $ 946 $ 2,021 Interest expense 358 732 ---------- ---------- Net interest income 588 1,289 Provision for loan losses - - Non-interest income 217 434 Non-interest expense 842 1,719 Income tax (benefit) (12) - ---------- ---------- Net income (loss) $ (25) $ 4 ========== ========== -------------------------------------------------------------------------------- CONTINUED PREMIER FINANCIAL BANCORP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED, IN THOUSANDS) -------------------------------------------------------------------------------- NOTE 3 - REGULATORY MATTERS On September 29, 2000, the Company entered into an agreement with the Federal Reserve Bank of Cleveland (FRB) that prohibits the Company from paying dividends or incurring any additional debt without the prior written approval of the FRB. Additionally, the agreement required the Company to develop and monitor compliance with certain operational policies designed to strengthen Board of Director oversight including credit administration, liquidity, internal audit and loan review. Subsequently, on January 29, 2003, the Company entered into a written agreement with the FRB which supercedes and rescinds all previous agreements between the Company and the FRB. Among the provisions of the agreement were the continuation of the restriction on the Company's payment of dividends on its common stock without the express written consent of the FRB and the continuation of the restriction on the Company's payment of quarterly distributions on its Trust Preferred Securities without the express written consent of the FRB. Among other provisions, the agreement required the Company to retain an independent consultant to review its management, directorate and organizational structure, adopt a management plan responsive to such consultant's report, update its management succession plan in accordance with any recommendations in such consultant's report, monitor its subsidiary banks' compliance with bank policies and loan review programs, conduct formal quarterly reviews of its subsidiary Banks' allowances for loan losses, maintain sufficient capital, submit a plan to the FRB for improving consolidated earnings over a three-year period, and submit to the FRB annual projections of planned sources and uses of the Company's cash, including a plan to service its outstanding debt and trust preferred securities. The Company's compliance with the written agreement is being monitored by a committee which consists of three of its outside directors. As of June 30, 2005, management believes the Company is operating in compliance with the provisions of the written agreement. On December 22, 2003, the Company's subsidiary Farmers Deposit Bank - Eminence, Kentucky (the Bank), was issued a Cease and Desist order (Order) by the Federal Deposit Insurance Corporation (FDIC) and the Kentucky Department of Financial Institutions (KDFI) [collectively referred to as "Supervisory Authorities"] related to activities of the bank's former president. The Order, effective January 1, 2004, requires the Bank to cease and desist from the following: (a) Operating with management whose policies and procedures are detrimental to the Bank and jeopardize the safety of its deposits; (b) Operating with an inadequate level of capital protection for the kind and quality of assets held by the Bank; (c) Operating with a large volume of adversely classified loans or assets and/or delinquent loans and/or non-accrual loans; (d) Operating with an inadequate allowance for loan and lease losses for the volume, kind and quality of loans and leases held by the Bank; (e) Engaging in hazardous lending and lax collection practices; -------------------------------------------------------------------------------- CONTINUED PREMIER FINANCIAL BANCORP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED, IN THOUSANDS) -------------------------------------------------------------------------------- NOTE 3 - REGULATORY MATTERS (continued) (f) Operating with inadequate provisions for liquidity and funds management; (g) Operating with disregard of routine and controls policies; (h) Operating in such a manner as to produce operating losses; and (i) Violating laws and/or regulations cited in the most recent Report of Examination issued by the FDIC ("Report"). The Order also outlined a number of steps to be taken by the Bank which are designed to remedy and/or prevent the reoccurrence of the items listed in the Order. These include 1) retaining qualified management and increasing the involvement of the Bank's Board of Directors ("Board"); 2) developing and submitting to the Supervisory Authorities a capital plan that maintains the Bank's Tier I Leverage Ratio above a minimum 5.0% and increases that ratio to 8.0% by December 31, 2004; 3) restricting the payment of cash dividends; 4) requiring the Board to review the adequacy of the allowance for loan losses at least quarterly; 5) requiring the Bank to charge-off certain loans listed in the Report; 6) reviewing the system of internal loan review and system for assigning loan risk grades as well as revising the Bank's lending policies to address items of criticism contained in the Report; 7) developing written plans for reducing and/or improving the level of adversely classified loans and correcting documentation exceptions on certain loans detailed in the Report; 8) generally prohibiting additional lending to borrowers who currently have uncollected adversely classified loans; 9) submitting an annual budget to the Supervisory Authorities outlining goals and strategies for improving and sustaining the earnings of the Bank; 10) adopting and implementing a policy for operating the Bank with adequate internal controls consistent with safe and sound banking practices and developing an internal audit program to ensure the integrity of these controls; 11) adopting and implementing a liquidity and funds management policy; and 12) providing notice of the Order to shareholders. The Bank is required to provide quarterly progress updates to the Supervisory Authorities. The full text of the Order is available on the FDIC website at www.fdic.gov or by calling the FDIC Public Information Center at (877) 275-3342. In accordance with the Order, the Company contributed additional capital to Farmers Deposit Bank to ensure a 5.00% leverage ratio at December 31, 2003. The Company also submitted to the Supervisory Authorities a written capital restoration plan that incrementally increased the Bank's Tier I Leverage Ratio to 8.00% at December 31, 2004 as required. The Company met all of the targets specified in the capital restoration plan and at December 31, 2004, the Tier I Leverage Ratio of the Bank was 9.45%. At June 30, 2005, the Bank's Tier I Leverage Ratio was 10.08%. The Company also believes the Bank is in compliance with all of the other provisions of the Order. -------------------------------------------------------------------------------- CONTINUED PREMIER FINANCIAL BANCORP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED, IN THOUSANDS) -------------------------------------------------------------------------------- NOTE 4 -SECURITIES Amortized cost and fair value of investment securities, by category, at June 30, 2005 are summarized as follows:
Amortized Unrealized Unrealized Fair Cost Gains Losses Value Available for sale U. S. Treasury securities $ 981 $ 8 $ - $ 989 U. S. agency securities 109,049 50 (1,249) 107,850 Obligations of states and political subdivisions 2,470 62 (1) 2,531 Mortgage-backed securities 39,465 111 (176) 39,400 Corporate securities 425 1 - 426 -------------- -------------- -------------- --------------- Total available for sale $ 152,390 $ 232 $ (1,426) $ 151,196 ============== ============== =============== ===============
Amortized cost and fair value of investment securities, by category, at December 31, 2004 are summarized as follows:
Amortized Unrealized Unrealized Fair Cost Gains Losses Value Available for sale U. S. Treasury securities $ 250 $ - $ - $ 250 U. S. agency securities 116,427 127 (1,040) 115,514 Obligations of states and political subdivisions 2,661 90 - 2,751 Mortgage-backed securities 34,921 171 (150) 34,942 Corporate securities 428 7 - 435 -------------- -------------- -------------- --------------- Total available for sale $ 154,687 $ 395 $ (1,190) $ 153,892 ============== ============== =============== ===============
The investment portfolio is predominately high quality interest-bearing bonds with defined maturity dates backed by the U.S. Government or Government sponsored agencies. The unrealized losses at June 30, 2005 and December 31, 2004 are price changes resulting from changes in the interest rate environment and are not considered to be other than temporary declines in the value of the securities. Their fair value is expected to recover as the bonds approach their maturity date and/or market conditions improve. -------------------------------------------------------------------------------- CONTINUED PREMIER FINANCIAL BANCORP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED, IN THOUSANDS) -------------------------------------------------------------------------------- NOTE 4- SECURITIES (continued) Securities with unrealized losses at June 30, 2005 aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, are as follows:
Less than 12 Months 12 Months or More Total ------------------------ ------------------------ ----------------------- Fair Unrealized Fair Unrealized Fair Unrealized Description of Securities Value Loss Value Loss Value Loss ------------------------- ----- ---- ----- ---- ----- ---- U.S. agency securities $ 40,242 $ (360) $ 57,110 $ (889) $ 97,352 $(1,249) Obligations of states and political subdivisions 280 (1) - - 280 (1) Mortgage-backed securities 14,927 (74) 4,155 (102) 19,082 (176) ---------- ------- -------- ------ -------- ------- Total temporarily impaired $ 55,449 $ (435) $ 61,265 $ (991) $ 116,714 $(1,426) ========= ======= ======== ====== ========= =======
Securities with unrealized losses at December 31, 2004 aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, are as follows:
Less than 12 Months 12 Months or More Total ------------------------ ------------------------ ----------------------- Fair Unrealized Fair Unrealized Fair Unrealized Description of Securities Value Loss Value Loss Value Loss ------------------------- ----- ---- ----- ---- ----- ---- U.S. agency securities $ 93,557 $ (959) $ 3,928 $ (81) $ 97,485 $(1,040) Mortgage-backed securities 13,099 (54) 5,284 (96) 18,383 (150) ---------- ------- -------- ------ -------- ------- Total temporarily impaired $ 106,656 $(1,013) $ 9,212 $ (177) $ 115,868 $(1,190) ========= ======= ======== ====== ========= =======
NOTE 5 - LOANS Major classifications of loans at June 30, 2005 and December 31, 2004 are summarized as follows: 2005 2004 ------------ ------------ Commercial, secured by real estate $ 100,722 $ 101,567 Commercial, other 41,392 40,923 Real estate construction 8,634 5,906 Residential real estate 125,808 128,243 Agricultural 2,750 2,380 Consumer and home equity 43,241 44,470 Other 3,578 1,438 ------------ ------------ $ 326,125 $ 324,927 ============ ============ -------------------------------------------------------------------------------- CONTINUED PREMIER FINANCIAL BANCORP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED, IN THOUSANDS) -------------------------------------------------------------------------------- NOTE 5- LOANS (continued) The following table sets forth information with respect to the Company's impaired loans at June 30, 2005 and December 31, 2004. 2005 2004 ------------ ------------ Impaired loans at period end with an allowance $ 11,417 $ 12,918 Impaired loan at period end with no allowance 277 263 Amount of allowance for loan losses allocated 2,565 2,915 The following table sets forth information with respect to the Company's nonperforming loans at June 30, 2005 and December 31, 2004. 2005 2004 ------------ ------------ Non-accrual loans $ 6,206 $ 6,847 Accruing loans which are contractually past due 90 days or more 676 739 Restructured loans 509 238 ------------ ------------ $ 7,391 $ 7,824 ============ ============ NOTE 6 - ALLOWANCE FOR LOAN LOSSES Changes in the allowance for loan losses for the three and six months ended June 30, 2005 and 2004 are as follows:
Three Months Ended Six Months Ended June 30, June 30, 2005 2004 2005 2004 ------------ ------------- ------------ ------------ Balance, beginning of period $ 9,267 $ 13,751 $ 9,384 $ 14,300 Gross charge-offs (660) (4,717) (1,210) (5,784) Recoveries 129 142 319 525 Provision for loan losses 191 374 434 509 ------------ ------------- ------------ ------------ Balance, end of period $ 8,927 $ 9,550 $ 8,927 $ 9,550 ============ ============= ============ ============
-------------------------------------------------------------------------------- CONTINUED PREMIER FINANCIAL BANCORP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED, IN THOUSANDS) -------------------------------------------------------------------------------- NOTE 7- GUARANTEED JUNIOR SUBORDINATED INTEREST DEBENTURES On June 9, 1997, PFBI Capital Trust (Trust), a statutory business trust created under Delaware law, issued $28,750,000 of 9.750% Preferred Securities ("Preferred Securities" or "Trust Preferred Securities") with a stated value and liquidation preference of $25 per share. The Trust's obligations under the Preferred Securities issued are fully and unconditionally guaranteed by the Company. The proceeds from the sale of the Preferred Securities of the Trust, as well as the proceeds from the issuance of common securities to the Company, were utilized by the Trust to invest in $29,639,000 of 9.750% Junior Subordinated Deferrable Interest Debentures (the "Debentures") of the Company. The Debentures, which mature on June 30, 2027 are unsecured obligations and rank subordinate and junior to the right of payment to all senior indebtedness, liabilities and obligations of the Company. The Debentures represent the sole assets of the Trust. Distributions on the Preferred Securities are payable at an annual rate of 9.750% of the stated liquidation amount of $25 per Preferred Security, payable quarterly. Cash distributions on the Preferred Securities are made to the extent interest on the Debentures is received by the Trust. In the event of certain changes or amendments to regulatory requirements or federal tax rules, the Debentures are redeemable in whole. Otherwise, the Debentures are generally redeemable by the Company in whole or in part on or after June 30, 2002 at 100% of the liquidation amount. Proceeds from any redemption of the Debentures would cause a mandatory redemption of the Preferred Securities and the common securities having an aggregate liquidation amount equal to the principal amount of the Debentures redeemed. Debt issuance costs of $1,478,000 have been capitalized by the Trust and are being amortized over the life of the debenture. A portion of the Preferred Securities issued by the Trust qualify as Tier 1 capital for the Company under the Federal Reserve Board's regulatory framework. The Federal Reserve Board recently re-evaluated whether trust preferred securities would continue to qualify as Tier 1 capital due to deconsolidation of the related trust preferred entity. Its conclusion, issued in a press release on March 1, 2005, was to continue to permit trust preferred securities to qualify as Tier I capital with certain restrictions phased in over five-years. Once completely phased-in, the dollar amount of trust preferred securities that will qualify as Tier I capital will be limited to 25% of equity based Tier I capital net of goodwill. As of June 30, 2005, $17,695,000 of the Preferred Securities was included in the Company's Tier I capital. Had the Federal Reserve Board's new limitations been completely phased in at June 30, 2005, the amount of Preferred Securities includable in the Company's Tier I capital would have been limited to $12,424,000. As previously disclosed, pursuant to an agreement entered into with the Federal Reserve Bank of Cleveland (FRB) described in Note 3 the Company is required to request approval for the payment of distributions due on the Debentures and Trust Preferred Securities. As part of a Debt Reduction and Profitability plan presented on January 6, 2003, the Company requested and received approval from the FRB to redeem $3,000,000 of the $28,750,000 outstanding Debentures and Trust Preferred Securities. Thus, on February 24, 2003, the Company announced its plans to redeem $3,000,000 (120,000 shares) of the 9.750% Trust Preferred Securities as of March 31, 2003. The FRB denied the Company's requests to make further distributions on the remaining Debentures and Trust Preferred Securities. -------------------------------------------------------------------------------- CONTINUED PREMIER FINANCIAL BANCORP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED, IN THOUSANDS) -------------------------------------------------------------------------------- NOTE 7 - GUARANTEED JUNIOR SUBORDINATED INTEREST DEBENTURES (continued) During 2004, the Company requested and received approval from the FRB to redeem $4,500,000 (180,000 shares) on October 15, 2004 and an additional $1,000,000 (40,000 shares) on December 31, 2004. In conjunction with the fourth quarter 2004 redemptions, an additional $170,000 of the junior subordinated debenture was redeemed. The amount represents an equivalent percentage redemption of the Company's equity investment in the Trust. Premier exercised its right to defer the payment of interest on the 9.750% Trust Preferred Securities for the quarter ending December 31, 2002 and all subsequent quarters through December 31, 2004, and for an indefinite period, which could be no longer than 20 consecutive quarterly periods. These deferred distributions accrued interest at an annual rate of 9.750%. In March 2005, Premier received approval from the FRB to pay the first quarter 2005 current distribution and all prior deferred distributions. The payment was disbursed on March 31, 2005 to shareholders of record on March 15, 2005. The accrued interest on the deferred distributions was also paid when the deferred distributions were paid on March 31, 2005. The FRB also approved the payment of the current distribution due June 30, 2005. Although the FRB approved the payment of the deferred and current distributions through June 30, 2005, Premier is still bound by the Written Agreement and will be required to request the FRB's approval to pay future distributions. No assurance can be given that the FRB will grant such approval. 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 2005, the Banks could, without prior approval, declare dividends of approximately $956,000 plus any 2005 net profits retained to the date of the dividend declaration. The Company and the subsidiary Banks are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and the Banks must meet specific guidelines that involve quantitative measures of their assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. -------------------------------------------------------------------------------- CONTINUED PREMIER FINANCIAL BANCORP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED, IN THOUSANDS) -------------------------------------------------------------------------------- NOTE 8 - STOCKHOLDERS' EQUITY AND REGULATORY MATTERS (continued) These quantitative measures established by regulation to ensure capital adequacy require the Company and Banks to maintain minimum amounts and ratios (set forth in the following table) of Total and Tier I capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier I capital (as defined) to average assets (as defined). Management believes, as of June 30, 2005, that the Company and the Banks meet all quantitative capital adequacy requirements to which they are subject. Shown below is a summary of regulatory capital ratios for the Company:
Regulatory To Be Considered June 30, December 31, Minimum Well 2005 2004 Requirements Capitalized ---------- ------------ ------------ ---------------- Tier I Capital (to Risk-Weighted Assets) 17.3% 16.6% 4.0% 6.0% Total Capital (to Risk-Weighted Assets) 19.4% 18.9% 8.0% 10.0% Tier I Capital (to Average Assets) 10.4% 9.7% 4.0% 5.0%
The capital amounts and classifications are also subject to qualitative judgments by the regulators. As a result of these qualitative judgments, the Company and one 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 3, restricting the Company from declaring or paying dividends without prior approval from the FRB. An additional provision of this agreement requires prior approval from the FRB before the Company increases its borrowings or incurs any debt. This agreement is in effect until terminated by the FRB. Effective January 1, 2004, Farmers Deposit Bank (Farmers Deposit) was issued a C&D order by the FDIC and the Kentucky Department of Financial Institutions (KDFI), as discussed in Note 3, restricting Farmers Deposit from declaring or paying dividends, without prior approval, if its Tier I capital to average assets falls below 8.00%. The order also required Farmers Deposit to maintain a minimum 5.0% Tier I capital to average assets ratio and submit a written capital restoration plan to increase the ratio to 8.0% by December 31, 2004. This order is in effect until terminated by the KDFI and FDIC. Farmers Deposit's Tier I capital to average assets was 10.08% at June 30, 2005. As of June 30, 2005, 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. -------------------------------------------------------------------------------- CONTINUED PREMIER FINANCIAL BANCORP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED, IN THOUSANDS) -------------------------------------------------------------------------------- NOTE 9 - RECENTLY ISSUED ACCOUNTING STANDARDS NOT YET ADOPTED FAS 123, Revised, requires all public companies to record compensation cost for stock options provided to employees in return for employee service. As discussed in the Stock Compensation Expense disclosure in Note 1 above, the cost of stock options is measured at the fair value of the options when granted. This cost will be required to be expensed over the employee service period, which is normally the vesting period of the options. This Standard was originally to apply to stock option awards granted or modified after the first quarter or year following June 15, 2005. However, this requirement has been postponed until the first quarter or year following December 15, 2005. Compensation cost will also be recorded for options already granted that have a vesting period beyond the date of adoption. The effect on results of operations will depend on the level of future option grants and the calculation of the fair value of the options granted. The effect of existing options that will continue to vest after the adoption date is anticipated to be immaterial. There will also be no significant effect on the financial position of the Company as total equity will not change as a result of the required recording of compensation cost. -------------------------------------------------------------------------------- PREMIER FINANCIAL BANCORP, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS -------------------------------------------------------------------------------- Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations FORWARD-LOOKING STATEMENTS Management's discussion and analysis contains forward-looking statements that are provided to assist in the understanding of anticipated future financial performance. However, such performance involves risks and uncertainties, and there are certain important factors that may cause actual results to differ materially from those anticipated. These important factors include, but are not limited to, economic conditions (both generally and more specifically in the markets in which Premier operates), competition for Premier's customers from other providers of financial services, government legislation and regulation (which changes from time to time), changes in interest rates, Premier's ability to originate quality loans, collect delinquent loans and attract and retain deposits, the impact of Premier's growth, Premier's ability to control costs, and new accounting pronouncements, all of which are difficult to predict and many of which are beyond the control of Premier. A. Results of Operations A financial institution's primary sources of revenue are generated by interest income on loans, investments and other earning assets, while its major expenses are produced by the funding of these assets with interest bearing liabilities. Effective management of these sources and uses of funds is essential in attaining a financial institution's optimal profitability while maintaining a minimum amount of interest rate risk and credit risk. The following narrative discusses the continuing operations of the Company. As more fully explained in Note 2 to the consolidated financial statements above, the narrative excludes the discontinued operations of Premier's subsidiary Citizens Bank (Kentucky), Inc. On February 13, 2004, Premier signed a definitive agreement to sell the subsidiary for $14,500,000 in cash. The sale was completed on July 1, 2004. Income from continuing operations for the six months ended June 30, 2005 was $1,530,000, or 29 cents per share, compared to income from continuing operations of $956,000, or $0.18 per share for the six months ended June 30, 2004. The increase in income reported for 2005 was primarily the result of higher investment income, lower interest expense and lower professional fees. These increases in profitability were only partially offset by higher staff costs and one-time expenses related to Premier's conversion to an outsourced data and item processing provider. For the three months ended June 30, 2005, income from continuing operations was $727,000, or 14 cents per share, compared to income from continuing operations of $474,000 or $0.09 per share for the three months ended June 30, 2004. The increase in income reported for 2005 was again largely due to higher investment income, lower interest expense and lower professional fees, which was only partially offset by higher staff costs and the one-time conversion expenses. Net interest income for the six months ending June 30, 2005 totaled $9.62 million, up from the $8.84 million of net interest income earned in the first six months of 2004. Interest income in 2005 increased by $236,000 or 1.7%, largely due to higher interest rates earned on investments and federal funds sold and an increase in total investments. Interest income on loans declined by $249,000, largely due to lower average loans outstanding compounded by the negative effect of placing additional loans on non-accrual status. Interest expense declined in total by $540,000 in 2005 compared to 2004. Savings of $199,000 were realized due to the paydown and payoff of other borrowings which occurred in the second half of 2004. Additional interest savings of $331,000 were realized due to the early redemption of $5.5 million of Premier's 9.750% trust preferred securities in the fourth quarter of 2004 and the $5.0 million payment of deferred distributions on the trust preferred securities on March 31, 2005. The deferred distributions also bore a rate of 9.750% during the deferral period. (See Note 7 to the consolidated financial statements). As a result of the interest savings and the increase in investment interest income, the net interest margin for the six months ending June 30, 2005 was approximately 3.87% compared to 3.57% for the same period in 2004. Net interest income for the quarter ending June 30, 2005 totaled $4.89 million, up from the $4.40 million of net interest income earned in the second quarter of 2004. Interest income increased by $246,000 in 2005, again due to higher interest rates earned on investments and federal funds sold and an increase in total investments. Interest income on loans declined by $40,000 as the higher volume of loans was offset by an overall lower yield on the loan portfolio compounded by the negative effect of placing additional loans on non-accrual status during the quarter. Interest expense declined by $249,000 in 2005 largely due to savings from the paydown of other borrowings, the early redemption of trust preferred securities and the payment of deferred distributions described above. These savings have been somewhat offset by increased interest expense on deposits as increased interest rates have resulted in higher rates paid to attract and retain deposits. As a result of the interest savings and the increase in investment interest income, the net interest margin for the three months ending June 30, 2005 was approximately 3.94% compared to 3.53% for the same three month period in 2004. Non-interest income increased to $1,897,000 for the first six months of 2005 compared to $1,762,000 for the first six months of 2004. Excluding the $10,000 of securities gains realized in 2004, non-interest income increased $145,000 or 8.3% in the first six months of 2005. Service charges on deposit accounts increased by $77,000 or 6.3% due to increases in fees and customers. Other non-interest income increased by $67,000 or 13.5%, largely due to increases in other sources of banking income such as revenue from checkbook sales and ATM/debit card fees. For the quarter ending June 30, 2005, non-interest income increased $85,000 to $991,000 compared to $906,000 for the second quarter of 2004. The increase is primarily due to a 12.6% or $80,000 increase in revenue from service charges on deposit accounts. Non-interest expenses for the first six months of 2005 totaled $8,884,000 or 3.3% of average assets of continuing operations on an annualized basis compared to $8,715,000 or 3.2% of average assets of continuing operations for the same period of 2004. Non-interest expense in the first six months of 2005 includes two one-time events that are nearly offsetting. Professional fee expense includes $148,000 of reimbursed legal fees from an insurance settlement in the first quarter. Other expenses include a $140,000 loss on the disposition of a bond servicing department at one of the Company's affiliate banks in the first quarter. The increase in non-interest expense is largely due to an increase in staff costs and occupancy expense plus one-time expenses to convert Premier's data systems to an outsourced provider. Staff costs increased $306,000 in 2005 due to normal salary and benefit increases plus the cost of hiring additional staff at the parent company to oversee the data processing conversion and to transfer internal audits to an in-house function. Occupancy costs increased due to the opening of a new location in 2005 plus a general increase in property taxes. Included in other expenses are $387,000 of one-time expenses to convert Premier's in-house data processing to an outsourced provider, including the expensing of the remaining in-house data processing equipment. The increase in other expenses also includes the $140,000 loss on disposition described above. These additional expenses were partially offset by an $84,000 decrease in taxes other than payroll, property and income and a $687,000 decrease in professional fees. In addition to the legal fee reimbursement described above, professional fees declined due to reduced activity in the first six months of 2005 related to the previously announced SEC investigation (as disclosed in the Company's annual report on Form 10-K for the year ended December 31, 2004) and due to lower audit costs partially due to performing internal audits by employees rather than outsourcing. Non-interest expenses for the second quarter of 2005 totaled $4,651,000 or 3.5% of average assets of continuing operations on an annualized basis compared to $4,243,000 or 3.1% of average assets of continuing operations for the same period of 2004. The increase in non-interest expense is again largely due to an increase in staff costs resulting from normal salary and benefit increases plus the cost of hiring additional staff at the parent company, increased occupancy costs due to the opening of a new location in 2005, and $337,000 of conversion costs recorded during the second quarter of 2005. These increases were partially offset by a $261,000 decrease in professional fees related to audit costs and legal fees associated with the SEC investigation. Beginning in late 2004 and continuing through July 2005, Premier's affiliate banks were converted to a third-party data processing and item processing provider. Expenses related to training and data conversion were expensed as incurred, primarily in the second quarter of 2005. Expenditures for software licenses and new equipment will be capitalized and expensed over time in accordance with the Company's fixed asset policy. While there will be some short-term costs to convert, the Company believes the long-term operating synergies should more than offset these costs as it will be able to take advantage of emerging technologies in information and item processing, now and in the years to come. Income tax expense was $669,000 for the first six months of 2005 compared to $426,000 for the first six months of 2004. The increase in income tax expense can be primarily attributed to the increase in pre-tax income detailed above. The effective tax rate for the six months ended June 30, 2005 was 30.4%, compared to the 30.8% effective tax rate for the same period in 2004. Income tax expense for the quarter ending June 30, 2005 was $315,000 compared to $213,000 for the same period of 2004. The annualized returns from continuing operations on shareholders' equity and on average assets were approximately 5.95% and 0.57% for the six months ended June 30, 2005 compared to 4.19% and 0.35% for the same period in 2004. -------------------------------------------------------------------------------- CONTINUED PREMIER FINANCIAL BANCORP, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS -------------------------------------------------------------------------------- B. Financial Position Total assets at June 30, 2005 decreased $0.2 million to $537.1 million from the $537.3 million at December 31, 2004. While total assets remained relatively unchanged, the changes in the detailed components of the balance sheet are described below. Earning assets decreased to $498.6 million at June 30, 2005 from the $499.0 million at December 31, 2004, a decrease of $0.4 million, or 0.1%. The decrease was largely due to a decrease in the securities portfolio substantially offset by an increase in total loans and federal funds sold (see below). Cash and due from banks at June 30, 2005 was $14.4 million, relatively unchanged from the $14.5 million at December 31, 2004. Federal funds sold increased to $17.8 million from the $17.3 million reported at December 31, 2004. Changes in these two highly liquid assets are generally in response to demand for deposit withdrawals or the funding of loans and are part of Premier's management of its liquidity and interest rate risks. Securities available for sale totaled $151.2 million at June 30, 2005, a $2.7 million decrease from the $153.9 million at December 31, 2004. The decline was largely due to a slightly lower volume of purchases versus the volume calls and maturities that occurred during the first six months coupled with a $399,000 decline in the market value of the total portfolio. The investment portfolio is predominately high quality interest-bearing bonds with defined maturity dates backed by the U.S. Government or Government sponsored agencies. The unrealized losses at June 30, 2005 and December 31, 2004 are price changes resulting from changes in the interest rate environment and are not considered to be other than temporary declines in the value of the securities. Their fair value is expected to recover as the bonds approach their maturity date and/or market conditions improve. Additional details on investment activities can be found in the Consolidated Statements of Cash Flows. Total loans at June 30, 2005 were $326.1 million compared to $324.9 million at December 31, 2004, an increase of nearly $1.2 million. This increase is largely due to loan growth in the Company's West Virginia market which has been partially offset by net loan pay-offs and continuing collections at Farmers Deposit Bank plus the charge-off of $1.2 million of uncollectible loans across the Company. Deposits totaled $444.0 million as of June 30, 2005, a $6.2 million increase from the $437.8 million in deposits at December 31, 2004. The increase is largely due to interest bearing deposit growth at most all of the Company's affiliate banks. Partially offsetting this increase in deposits was a $1.5 million decline in federal funds purchased. These short-term overnight borrowings were no longer needed for funding purposes due to the growth in deposit balances. Federal funds purchased are used as a short-term solution for liquidity needs. Federal Home Loan Bank advances declined by $430,000 in the first six months of 2005 due to regularly scheduled principal payments. Other borrowed funds decreased by $800,000 since December 31, 2004, as the Company fully repaid its bank debt in March 2005. See Note 7 to the consolidated financial statements for additional information on the Company's outstanding subordinated debentures. Accrued interest payable declined by $4.8 million since December 31, 2004 as a result of the March 31, 2005 payment of the deferred interest on the Company's junior subordinated debentures (see Note 7 to the consolidated financial statements.) The following table sets forth information with respect to the Company's nonperforming assets at June 30, 2005 and December 31, 2004.
(In Thousands) 2005 2004 ---- ---- Non-accrual loans $ 6,206 $ 6,847 Accruing loans which are contractually past due 90 days or more 676 739 Restructured 509 238 -------------- ------------ Total non-performing loans 7,391 7,824 Other real estate acquired through foreclosure 2,345 2,247 -------------- ------------ Total non-performing assets $ 9,736 $ 10,071 ============== ============ Non-performing loans as a percentage of total loans 2.27% 2.41% Non-performing assets as a percentage of total assets 1.81% 1.87%
Total non-performing loans and non-performing assets have decreased since year-end due to continuing collection efforts and charge-offs at Farmers Deposit Bank as well as maintaining the improved credit quality at the Company's other affiliate banks. Non-accrual loans decreased by $641,000 as rehabilitated loans and loans transferred to OREO more than offset newly deteriorating loans placed on non-accrual. While non-accrual loans decreased, accruing loans past due 90 days or more also decreased by $63,000. A significant effort has been placed on reviews of loan files, efforts by lenders to bring borrowers current with the terms of their loan agreements and the sale of OREO properties. As in the past, when these plans are executed, Premier may experience increases in non-performing loans and non-performing assets. Furthermore, any resulting increases in loans placed on non-accrual status will have a negative impact on future loan interest income. Also, as these plans are executed, other loans may be identified that would necessitate additional charge-offs and potentially additional provisions for loan losses. The provision for loan losses was $434,000 for the first six months of 2005 compared to $509,000 for the first six months of 2004. The decrease in the provision was made in accordance with Premier's policies regarding management's estimation of probable incurred losses in the loan portfolio and the adequacy of the allowance for loan losses, which are in accordance with accounting principles generally accepted in the United States of America. Management's estimation process indicated that due to loan growth and newly deteriorating loans identified in the normal course of business, provisions for loan losses were warranted. However, these provisions were slightly less in 2005 than in 2004 due to improvements in the estimated overall risk in the loan portfolio. Gross charge-offs totaled $1,210,000 during the first six months of 2005. Any collections on these loans would be presented in future financial statements as recoveries of the amounts charged against the allowance. Recoveries recorded during the first six months of 2005 totaled $319,000. For the quarter ended June 30, 2005, the provision for loan losses was $191,000 compared to $374,000 for the same period of 2004. The allowance for loan losses at June 30, 2005 was 2.74% of total loans as compared to 2.89% at December 31, 2004. The declining percentage of allowance for loan losses to total loans is largely due to growth in the loan portfolio and to the sufficient loan loss reserves allocated to those loans actually charged off during the first six months of 2005. -------------------------------------------------------------------------------- CONTINUED PREMIER FINANCIAL BANCORP, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS -------------------------------------------------------------------------------- C. Critical Accounting Policies The Company follows financial accounting and reporting policies that are in accordance with generally accepted accounting principles in the United States of America. These policies are presented in Note 1 to the consolidated audited financial statements in the Company's annual report on Form 10-K for the year ended December 31, 2004. Some of these accounting policies, as discussed below, are considered to be critical accounting policies. Critical accounting policies are those policies that require management's most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. The Company has identified three accounting policies that are critical accounting policies, and an understanding of these policies is necessary to understand the financial statements. These policies relate to determining the adequacy of the allowance for loan losses, the impairment of goodwill, and the valuation of deferred tax assets. A detailed description of these accounting policies is contained in the Company's annual report on Form 10-K for the year ended December 31, 2004. There have been no significant changes in the application of these accounting policies since December 31, 2004. Management believes that the judgments, estimates and assumptions used in the preparation of the consolidated financial statements are appropriate given the factual circumstances at the time. PREMIER FINANCIAL BANCORP, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS -------------------------------------------------------------------------------- D. Liquidity Liquidity objectives for the Company can be expressed in terms of maintaining sufficient cash flows to meet both existing and unplanned obligations in a cost effective manner. Adequate liquidity allows the Company to meet the demands of both the borrower and the depositor on a timely basis, as well as pursuing other business opportunities as they arise. Thus, liquidity management embodies both an asset and liability aspect while attempting to maximize profitability. In order to provide for funds on a current and long-term basis, the Company's subsidiary banks rely primarily on the following sources: 1. Core deposits consisting of both consumer and commercial deposits and certificates of deposit of $100,000 or more. Management believes that the majority of its $100,000 or more certificates of deposit are no more volatile than its other deposits. This is due to the nature of the markets in which the subsidiaries operate. 2. Cash flow generated by repayment of loans and interest. 3. Arrangements with correspondent banks for purchase of unsecured federal funds. 4. The sale of securities under repurchase agreements and borrowing from the Federal Home Loan Bank. 5. Maintenance of an adequate available-for-sale security portfolio. The Company owns $151.2 million of securities at market value as of June 30, 2005. 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. -------------------------------------------------------------------------------- CONTINUED PREMIER FINANCIAL BANCORP, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS -------------------------------------------------------------------------------- E. Capital At June 30, 2005, total shareholders' equity of $52.3 million was 9.7% of total assets. This compares to total shareholders' equity of $51.0 million or 9.5% of total assets on December 31, 2004. Tier I capital totaled $54.0 million at June 30, 2005, which represents a Tier I leverage ratio of 10.4%. Book value per share was $10.00 at June 30, 2005, and $9.75 at December 31, 2004. The increase in book value per share was the result of $1,269,000 of comprehensive net income for the first six months of 2005 as net income was partially decreased by the $261,000 after tax decrease in the market value of investment securities available for sale during the first six months. PREMIER FINANCIAL BANCORP, INC. -------------------------------------------------------------------------------- Item 3. Quantitative and Qualitative Disclosures About Market Risk The Company currently does not engage in any derivative or hedging activity. Refer to the Company's 2004 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 2004 10-K. Item 4. Controls and Procedures Premier management, including the Chief Executive Officer and Chief Financial Officer, has conducted an evaluation of the effectiveness of disclosure controls and procedures pursuant to Exchange Act Rule 13a-15c as of the end of the period covered by this quarterly report. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the disclosure controls and procedures are effective in ensuring that all material information required to be filed in this quarterly report has been made known to them in a timely fashion. "Internal controls" are procedures, which are designed with the objective of providing reasonable assurance that (1) transactions are properly authorized; (2) assets are safeguarded against unauthorized or improper use; and (3) transactions are properly recorded and reported, all so as to permit the preparation of reports and financial statements in conformity with generally accepted accounting principles. Premier management uses the financial reports of its subsidiaries to make decisions about the allocation of the Company's resources, to implement strategies to improve the Company's performance, and to prepare the consolidated financial statements of the Company for its shareholders and regulatory authorities. However, a control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their cost. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within a company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. The design of any system of controls is also based, in part, upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, a control may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected. Finally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control. In 2005, Premier reduced its reliance on third-party internal audit and loan review providers and expanded its internal audit staff at the holding company level. Management believes a full-time internal audit and loan review staff will be able to provide more specific and more thorough testing of the books and records of the company and the effectiveness of its internal controls. Management also believes that having internal auditors on staff will provide more immediate reporting of findings to management, a source of on-location training of best practices for employees at the affiliate banks during the conduct of an audit and a rapid response team to address issues raised by employees under the "whistleblower" provisions of the employee code of ethics and conduct. Beginning in late 2004 and continuing through July 2005, Premier's affiliate banks are converting to a third-party data processing and item processing provider. As part of the conversion process, system processes, workflows and procedures are being reviewed and potentially revised in an effort to standardize the way the Banks conduct business and record transactions in the various modules of the software. No significant changes to Premier's key controls are anticipated as a result of these reviews. One of the goals of the new system is to provide more of the Company's financial reports and disclosures through automated reports rather than manually prepared reports and thus reduce the risk of human error in report preparation. Other than the steps identified above, which are in various stages of implementation, there were no changes in internal controls over financial reporting during the second fiscal quarter that have materially affected or are reasonably likely to materially affect Premier's internal controls over financial reporting. PREMIER FINANCIAL BANCORP, INC. -------------------------------------------------------------------------------- PART II - OTHER INFORMATION Item 1. Legal Proceedings ---------------------------- See information regarding regulatory matters in Note 3 and Note 8 to the consolidated financial statements Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 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 22, 2005. (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 Company for a term of one year. Director Votes Received Votes Withheld 1. Toney K. Adkins 4,734,182 7,892 2. Hosmer A. Brown, III 4,733,195 8,879 3. Edsel R. Burns 4,733,182 8,892 4. E. V. Holder, Jr. 4,733,195 8,879 5. Keith F. Molihan 4,733,859 8,215 6. Marshall T. Reynolds 4,657,294 84,780 7. Neal Scaggs 4,734,056 8,018 8. Robert W. Walker 4,733,920 8,154 9. Thomas W. Wright 4,734,182 7,892 (ii) Ratification of Crowe Chizek and Company LLC as independent auditors of the Corporation for 2005. Votes for 4,733,401; votes against 6,025; votes abstaining 2,648. Item 5. Other Information None ---------------------------- Item 6. Exhibits ------------------- (a) The following exhibits are furnished in accordance with the provisions of Item 601 of Regulation S-K. 31.1 Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 31.2 Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 32 Certification Pursuant to 18 U.S.Css.1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 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 12, 2005 /s/ Robert W. Walker ---------------------------------------- Robert W. Walker President & Chief Executive Officer Date: August 12, 2005 /s/ Brien M. Chase ---------------------------------------- Brien M. Chase Vice President & Chief Financial Officer