UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended DECEMBER 31, 2003
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from __________ to __________.
Commission file number 0-20908
PREMIER FINANCIAL BANCORP, INC.
(Exact name of registrant as specified in its charter)
KENTUCKY 61-1206757
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2883 5TH AVENUE
HUNTINGTON, WEST VIRGINIA 25702
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (304) 525-1600
Securities registered pursuant to Section 12(b) of the Act:
NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK WITHOUT PAR VALUE
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to filing requirements
for the past 90 days. YES [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this 10-K or any amendment to this
Form 10-K. [X]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act) Yes [ ] No [X]
State the aggregate market value of voting stock held by non-affiliates of the
registrant. The aggregate market value shall be computed by reference to the
price at which stock was sold, or the average bid and asked prices of such
stock, as of a specified date within 60 days prior to the date of filing:
Aggregate Market Value of Voting Stock Based upon closing price on
- -------------------------------------- ---------------------------
$38,030,574 March 26, 2004
Indicate the number of shares outstanding of each of the registrant's classes of
common stock as of the latest practicable date.
Class Outstanding at March 26, 2004
----- ----------------------------
COMMON STOCK (no par value) 5,232,230
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the following documents are incorporated by reference into the Form
10-K part indicated:
Document Form 10-K
(1) Proxy statement for the 2004 annual meeting of Part III
shareholders
PART I
Item 1. Description of Business
THE COMPANY
Premier Financial Bancorp, Inc. (the "Company" or "Premier") is a
multi-bank holding company that, as of March 16, 2003, operates fourteen banking
offices in Kentucky, three banking offices in Ohio, and six banking offices in
West Virginia. At December 31, 2003, Premier had total consolidated assets of
$622.7 million, total consolidated deposits from continuing operations of
$455.5 million and total consolidated shareholders' equity of $45.5 million.
The banking subsidiaries (the "Banks" or "Affiliate Banks") consist of
Citizens Deposit Bank & Trust, Vanceburg, Kentucky; Bank of Germantown,
Germantown, Kentucky; Citizens Bank (Kentucky), Inc., Georgetown, Kentucky;
Farmers Deposit Bank, Eminence, Kentucky; Ohio River Bank, Ironton, Ohio;
First Central Bank, Inc., Philippi, West Virginia; and Boone County Bank, Inc.,
Madison, West Virginia.
On June 16, 2003 Premier announced that as a result of an ongoing internal
investigation, it had uncovered a systematic disregard for its loan approval and
credit administration policies at its Farmers Deposit Bank subsidiary and had
accepted the resignation of the bank's former president. On November 7, 2003
Premier disclosed that the Securities and Exchange Commission had requested
information about Premier's internal investigation. As the internal
investigation progressed, many loans were charged off and additional provisions
for loan losses were recorded. Premier's management, with the assistance of
outside independent professionals, has conducted a further review of those loans
for which significant charge offs or additional provisions were required in
2003. The purpose of this review was to determine if the facts or circumstances
that gave rise to additional charge offs or provisions had been improperly
withheld from senior management or improperly considered in applying
management's estimates and judgments as to the adequacy of the allowance for
loan losses in prior financial statement periods. The review did identify
instances in which collateral securing loans had been released without proper
support or notation in loan files, instances in which obligors on notes had been
released from their repayment obligation without proper support or notation in
loan files and instances in which delinquent loan reporting systems had been
manipulated to prevent problem loans from being identified on a timely basis.
Premier's senior management determined that if these circumstances had been
considered in evaluating the adequacy of the allowance for loan losses in prior
periods then some of the loan charge offs and additional provisions for loan
losses recorded in 2003 should have been reflected in prior periods. Therefore
the financial statements for 2002 and 2001 have been restated to reflect the
financial statement effect of the matters that occurred in those periods but
which were improperly concealed by subsidiary management. See Note 2 to the
consolidated financial statements included later in this report for a more
detailed discussion of the restatement impact.
In the fourth quarter of 2003, the Company adopted and began to implement a plan
to sell its subsidiary Citizens Bank (Kentucky), Inc. ("Citizens Bank") located
in Georgetown, Kentucky. On February 13, 2004, the Company announced that it had
signed a definitive agreement to sell Citizens Bank in a cash transaction valued
at approximately $14,500,000. In accordance with Financial Accounting Standard
144, "Accounting for the Impairment or Disposal of Long-lived Assets", which
became effective for the Company on January 1, 2002, the financial position and
results of operations of Citizens Bank are removed from the detail line items in
the Company's financial statements and presented separately as "discontinued
operations." See Note 3 to the consolidated financial statements included later
in this report for a more detailed discussion of discontinued operations.
In 2000 Premier suspended its acquisition strategy in order to focus on
improving operations, strengthening capital and management oversight and
improving the profitability of the banks previously acquired. While Premier
remains committed to its core strategy of rural banking with community oriented
and locally named institutions, the Company may dispose of additional corporate
assets that no longer meet Premier's geographic or operational performance
goals.
During October 2001, the Company appointed Robert W. Walker to the
position of President and Chief Executive Officer to replace the retiring
Gardner Daniel. In April 2002, the Company hired Brien M. Chase as Chief
Financial Officer to replace the former CFO who left the Company in February
2002.
Premier is a legal entity separate and distinct from its Affiliate
Banks and non-bank subsidiaries. Accordingly, the right of Premier, and thus the
right of Premier's creditors and shareholders, to participate in any
distribution of the assets or earnings of any of the Affiliate Banks or non-bank
subsidiaries is necessarily subject to the prior claims of creditors of such
subsidiaries, except to the extent that claims of Premier, in its capacity as a
creditor, may be recognized. The principal source of Premier's revenue is
dividends from its Affiliate Banks and non-bank subsidiaries. See "REGULATORY
MATTERS -- Dividend Restrictions" for discussion of the restrictions on the
Affiliate Banks' ability to pay dividends to Premier.
Premier was incorporated as a Kentucky corporation in 1991 and has
functioned as a bank holding company since its formation. During 2002, Premier
moved its principal executive offices from Georgetown, Kentucky to its present
location at 2883 5th Avenue, Huntington, West Virginia, 25702. The purpose of
the move was to be more centrally located among Premier's Affiliate Banks and
its directorship. Premier's telephone number is (304) 525-1600.
BUSINESS
General
Through the Banks and its data processing subsidiary, the Company
focuses on providing quality, community banking services to individuals and
small-to-medium sized businesses primarily in non-urban areas. By seeking to
provide such banking services in non-urban areas, the Company believes that it
can minimize the competitive effect of larger financial institutions that
typically are focused on large metropolitan areas. Each Bank retains its local
management structure which offers customers direct access to the Bank's
president and other officers in an environment conducive to friendly, informed
and courteous service. This approach also enables each Bank to offer local and
timely decision-making, and flexible and reasonable operating procedures and
credit policies limited only by a framework of centralized risk controls
provided by the Company to promote prudent banking practices. See additional
discussion under "Regulatory Matters" below.
Each Bank maintains its community orientation by, among other things,
having selected members of its community as members of its board of directors,
who assist in the introduction of prospective customers to the Bank and in the
development or modification of products and services to meet customer needs. As
a result of the development of personal banking relationships with its customers
and the convenience and service offered by the Banks, the Banks' lending and
investing activities are funded primarily by core deposits.
When appropriate and economically advantageous, the Company centralizes
certain of the Banks' back office, support and investment functions in order to
achieve consistency and cost efficiency in the delivery of products and
services. The Company centrally provides services such as data processing,
operations support, accounting, loan review, compliance and internal auditing to
the Banks to enhance their ability to compete effectively. The Company also
provides overall direction in the areas of credit policy and administration,
strategic planning, marketing, investment portfolio management and other
financial and administrative services. Each Bank participates in product
development by advising management of new products and services needed by their
customers and desirable changes to existing products and services.
Each of the Banks provides a wide range of retail and commercial
banking services, including commercial, real estate, agricultural and consumer
lending; depository and funds transfer services; collections; safe deposit
boxes; cash management services; and other services tailored for both
individuals and businesses. Farmers Deposit Bank in Eminence, Kentucky, also
offers limited trust services and acts as executor, administrator, trustee and
in various other fiduciary capacities. Through Premier Data Services, Inc., the
Company's data processing subsidiary, the Company currently provides centralized
data processing services to six of the Banks as well as two non-affiliated
banks.
The Banks' residential mortgage lending activities consist primarily of
loans for purchasing personal residences or loans for commercial or consumer
purposes secured by residential mortgages. Consumer lending activities consist
of traditional forms of financing for automobile and personal loans. Commercial
lending activities include loans to small businesses located primarily in the
communities in which the Banks are located and surrounding areas. Commercial
loans are secured business assets including real estate, equipment, inventory,
and accounts receivable. Some commercial loans are unsecured. Farmers Deposit
Bank has previously extended loans to professional athletes and their agents and
advisors. This lending activity has been curtailed in 2003.
The Banks' range of deposit services includes checking accounts, NOW
accounts, savings accounts, money market accounts, club accounts, individual
retirement accounts, certificates of deposit and overdraft protection. Deposits
of the Banks are insured by the Bank Insurance Fund administered by the FDIC.
Competition
The Banks encounter strong competition both in making loans and
attracting deposits. The deregulation of the banking industry and the widespread
enactment of state laws that permit multi-bank holding companies as well as the
availability of nationwide interstate banking have created a highly competitive
environment for financial services providers. In one or more aspects of its
business, each Bank competes with other commercial banks, savings and loan
associations, credit unions, finance companies, mutual funds, insurance
companies, brokerage and investment banking companies and other financial
intermediaries operating in its market and elsewhere, many of which have
substantially greater financial and managerial resources. While the Banks are
smaller financial institutions, each of the Banks' competitors include large
bank holding companies having substantially greater resources and offering
certain services that Premier Banks may not currently provide. Each Bank seeks
to minimize the competitive effect of larger financial institutions through a
community banking approach that emphasizes direct customer access to the Bank's
president and other officers in an environment conducive to friendly, informed
and courteous service.
Management believes that each Bank is positioned to compete
successfully in its respective primary market area, although no assurances as to
ongoing competitiveness can be given. Competition among financial institutions
is based upon interest rates offered on deposit accounts, interest rates
charged on loans and other credit and service charges, the quality and scope
of the services rendered, the convenience of the banking facilities and, in
the case of loans to commercial borrowers, relative lending limits. Management
believes that the commitment of its Banks to personal service, innovation and
involvement in their respective communities and primary market areas, as well
as their commitment to quality community banking service, are factors that
contribute to their competitiveness.
Regulatory Matters
The following discussion sets forth certain elements of the regulatory
framework applicable to bank holding companies and their subsidiaries and
provides certain specific information relevant to Premier. This regulatory
framework is intended primarily for the protection of depositors and the federal
deposit insurance funds and not for the protection of the holders of securities,
including Premier common shares or PFBI Capital Trust preferred shares. To the
extent that the following information describes statutory or regulatory
provisions, it is qualified in its entirety by reference to those provisions.
A change in the statutes, regulations or regulatory policies applicable to
Premier or its subsidiaries may have a material effect on the business of
Premier.
General - As a bank holding company, Premier is subject to regulation under the
Bank Holding Company Act ("BHC Act"), and to inspection, examination and
supervision by the Board of Governors of the Federal Reserve System ("Federal
Reserve"). Under the BHC Act, bank holding companies generally may not acquire
ownership or control of more than 5% of the voting shares or substantially all
the assets of any company, including a bank, without the Federal Reserve's prior
approval. Similarly, bank holding companies generally may not acquire ownership
or control of a savings association without the prior approval of the Federal
Reserve. Further, branching by the Affiliate Banks is subject to the
jurisdiction, and requires the approval, of each Affiliate Bank's primary
federal banking regulator and, if the Affiliate Bank is a state-chartered bank,
the appropriate state banking regulator.
Under the BHC Act, the Federal Reserve has the authority to require a
bank holding company to terminate any activity or relinquish control of the
nonbank subsidiary (other than a nonbank subsidiary of a bank) upon the Federal
Reserve's determination that such activity or control constitutes a risk to the
financial soundness and stability of any bank subsidiary of the bank holding
company. Premier and the Affiliate Banks are subject to the Federal Reserve Act,
which limits borrowings by Premier and its nonbank subsidiaries from the
Affiliate Banks and also limits various other transactions between Premier and
its nonbank subsidiaries with the Affiliate Banks.
The four Affiliate Banks chartered in Kentucky are supervised,
regulated and examined by the Kentucky Department of Financial Institutions, the
Affiliate Bank chartered in Ohio is supervised, regulated and examined by the
Ohio Division of Financial Institutions, and the two Affiliate Banks chartered
in West Virginia are supervised, regulated and examined by the West Virginia
Division of Banking. In addition, those Affiliate Banks that are state banks and
members of the Federal Reserve System are supervised and regulated by the
Federal Reserve, and those state banks that are not members of the Federal
Reserve System are supervised and regulated by the Federal Deposit Insurance
Corporation ("FDIC"). Each banking regulator has the authority to issue
cease-and-desist orders if it determines that the activities of a bank regularly
represent an unsafe and unsound banking practice or a violation of law.
Both federal and state law extensively regulates various aspects of the
banking business, such as reserve and capital requirements, truth-in-lending and
truth-in-savings disclosure, equal credit opportunity, fair credit reporting,
trading in securities and other aspects of banking operations. Premier, the
Affiliate Banks and Premier's nonbank subsidiaries are also affected by the
fiscal and monetary policies of the federal government and the Federal Reserve
and by various other governmental laws, regulations and requirements. Further,
the earnings of Premier and Affiliate Banks are affected by general economic
conditions and prevailing interest rates. Legislation and administrative actions
affecting the banking industry are frequently considered by the United States
Congress, state legislatures and various regulatory agencies. It is not possible
to predict with certainty whether such legislation or administrative actions
will be enacted or the extent to which the banking industry, in general, or
Premier and the Affiliate Banks, in particular, would be affected.
Liability for Bank Subsidiaries - The Federal Reserve has a policy to the effect
that a bank holding company is expected to act as a source of financial and
managerial strength to each of its subsidiary banks and to maintain resources
adequate to support each such subsidiary bank. This support may be required at
times when Premier may not have the resources to provide it. In the event of a
bank holding company's bankruptcy, any commitment by the bank holding company to
a federal bank regulatory agency to maintain the capital of a subsidiary bank
would be assumed by the bankruptcy trustee and entitled to priority of payment.
Any depository institution insured by the FDIC may be held liable for
any loss incurred, or reasonably expected to be incurred, by the FDIC in
connection with (i) the default of a commonly controlled FDIC-insured depository
institution, or (ii) any assistance provided by the FDIC to a commonly
controlled FDIC-insured depository institution in danger of default. "Default"
is defined generally as the appointment of a conservator or receiver and "in
danger of default" is defined generally as the existence of certain conditions
indicating that a "default" is likely to occur in the absence of regulatory
assistance. In the event that such a default occurred with respect to a bank,
any loans to the bank from its parent holding company will be subordinate in
right of payment of the bank's depositors and certain of its other obligations.
Capital Requirements - Premier is subject to capital ratios, requirements and
guidelines imposed by the Federal Reserve, which are substantially similar to
the ratios, requirements and guidelines imposed by the Federal Reserve and the
FDIC on the banks within their respective jurisdictions. These capital
requirements establish higher capital standards for banks and bank holding
companies that assume greater credit risks. For this purpose, a bank's or
holding company's assets and certain specified off-balance sheet commitments are
assigned to four risk categories, each weighted differently based on the level
of credit risk that is ascribed to such assets or commitments. A bank's or
holding company's capital is divided into two tiers: "Tier I" capital, which
includes common shareholders' equity, noncumulative perpetual preferred stock
and related surplus (excluding auction rate issues), minority interests in
equity accounts of consolidated subsidiaries, less goodwill, certain
identifiable intangible assets and certain other assets; and "Tier 2" capital,
which includes, among other items, perpetual preferred stock not meeting the
Tier I definition, mandatory convertible securities, subordinated debt and
allowances for loan and lease losses, subject to certain limitations, less
certain required deductions.
Bank holding companies currently are required to maintain Tier I and
total capital (the sum of Tier 1 and Tier 2 capital) equal to at least 4% and 8%
of total risk-weighted assets, respectively. At December 31, 2003, Premier met
both requirements, with Tier I and total capital equal to 10.6% and 14.8% of its
total risk-weighted assets, respectively.
In addition to the risk-based capital guidelines, the Federal Reserve
requires bank holding companies to maintain a minimum "leverage ratio" (Tier I
capital to adjusted total assets) of 3%, if the holding company has the highest
regulatory ratings for risk-based capital purposes. All other bank holding
companies are required to maintain a leverage ratio of 3% plus at least 100 to
200 basis points. At December 31, 2003, Premier's leverage ratio was 6.4%.
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. 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 is currently
evaluating whether trust preferred securities, in general, will continue to
qualify as Tier 1 capital due to deconsolidation of the related trust preferred
entity required by FASB Interpretation No. 46, . If the Federal Reserve Board
disqualifies the Trust Preferred Securities as Tier 1 capital, the effect of
such a change could have a material impact on the Company's regulatory capital
ratios. See Note 14 to the consolidated financial statements for additional
details regarding the Company's Trust Preferred Securities.
The foregoing capital requirements are minimum requirements. The
Federal Reserve may set capital requirements higher than the minimums described
above for holding companies whose circumstances warrant it. For example, holding
companies experiencing or anticipating significant growth may be expected to
maintain capital ratios, including tangible capital positions, well above the
minimum levels.
Additionally, the Federal Deposit Insurance Corporation Improvement Act
of 1991 ("FDICIA"), among other things, identifies five capital categories for
insured depository institutions (well capitalized, adequately capitalized,
undercapitalized, significantly undercapitalized and critically
undercapitalized) and requires the respective federal regulatory agencies to
implement systems for "prompt corrective action" for insured depository
institutions that do not meet minimum capital requirements within such
categories. FDICIA imposes progressively more restrictive constraints on
operations, management and capital distributions, depending on the category in
which an institution is classified. Failure to meet the capital guidelines could
also subject a banking institution to capital raising requirements.
An "undercapitalized" bank must develop a capital restoration plan and
its parent holding company must guarantee the bank's compliance with the plan.
The liability of the parent holding company under any such guarantee is limited
to the lesser of 5% of the Bank's assets at the time it became
"undercapitalized" or the amount needed to comply with the plan. Furthermore, in
the event of the bankruptcy of the parent holding company, such guarantee would
take priority over the parent's general unsecured creditors. In addition, FDICIA
requires the various regulatory agencies to prescribe certain non-capital
standards for safety and executive compensation and permits regulatory action
against a financial institution that does not meet such standards.
Regulatory Agreements - On September 29, 2000, the Company entered into an
agreement with the Federal Reserve that prohibited the Company from paying
dividends or incurring any additional debt without the prior written approval of
the Federal Reserve. Additionally, the agreement required the Company to develop
and monitor compliance with certain operational policies designed to strengthen
Board of Director oversight including credit administration, liquidity, internal
audit and loan review.
On January 29, 2003, Premier entered into a written agreement with the
Federal Reserve Bank of Cleveland in recognition of their common goal to restore
the financial soundness of Premier. Among the provisions of the agreement was
the continuation of the restriction on Premier's payment of dividends on its
common stock (PFBI) without the express written consent of the Federal Reserve
Bank of Cleveland and the continuation of the restriction on Premier's payment
of quarterly distributions on its Trust Preferred Securities (PFBIP) without the
express written consent of the Federal Reserve Bank of Cleveland. The written
agreement supercedes and rescinds all previous agreements between Premier and
the Federal Reserve Bank of Cleveland. Among other provisions, the agreement
requires Premier to (i) retain an independent consultant to review its
management, directorate and organizational structure, (ii) adopt a management
plan responsive to such consultant's report, (iii) update its management
succession plan in accordance with any recommendations in such consultant's
report, (iv) monitor its subsidiary banks' compliance with bank policies and
loan review programs, (v) conduct formal quarterly reviews of its subsidiary
banks' allowances for loan losses, (vi) maintain sufficient capital, (vii)
submit a plan to the Federal Reserve Bank of Cleveland for improving
consolidated earnings over a three-year period, and (viii) submit to the Federal
Reserve Bank of Cleveland annual projections of planned sources and uses of the
parent company's cash, including a plan to service its outstanding debt and
trust preferred securities. Premier's compliance with the written agreement is
to be monitored by a committee, to be organized, consisting of at least three
of its outside directors.
Three of the Banks; Citizens Deposit Bank & Trust, Citizens' Bank
(Kentucky), and Bank of Germantown, have entered into similar agreements with
their respective primary regulator which, among other things, prohibits the
payment of dividends without prior written approval and requires significant
changes in their lending and credit administration policies.
On December 24, 2003, Premier announced that Farmers Deposit had
reached an agreement with the Federal Deposit Insurance Corporation ("FDIC") and
the Kentucky Department of Financial Institutions ("KDFI") [collectively
referred to as "Supervisory Authorities"] to consent to the issuance of a cease
& desist order ("Order") from its Supervisory Authorities. 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 Farmers Deposit 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 Farmers Deposit;
(c) Operating with a large volume of adversely classified loans or assets
and/or delinquent loans and/or non-accrued loans;
(d) Operating with an inadequate allowance for loan and lease losses for
the volume, kind and quality of loans and leases held by
Farmers Deposit;
(e) Engaging in hazardous lending and lax collection practices;
(f) Operating with inadequate provisions for liquidity and funds
management;
(g) Operating with disregard of routine and controls policies;
(h) Operating in such a manner as to produce operating losses; and
(i) Violating laws and/or regulations cited in the most recent Report of
Examination issued by the FDIC ("Report").
The Order also outlines a number of steps to be taken by Farmers
Deposit 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 Board of Directors of Farmers Deposit
("Board"); 2) developing and submitting to the Supervisory Authorities a capital
plan that maintains the Farmers Deposit 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 Farmers Deposit 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 lending policies of Farmers Deposit 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
Farmers Deposit; 10) adopting and implementing a policy for operating Farmers
Deposit with adequate internal controls consistent with safe and sound banking
practices and developing an internal audit program to ensure the integrity of
these controls; 11) adopting and implementing a liquidity and funds management
policy; and 12) providing this notice to shareholders. Farmers Deposit 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.
Farmers Deposit, under new management and with the assistance of
Premier, has already completed some of the required steps including hiring a
Chief Executive Officer and a Chief Financial Officer, increasing the number of
local directors, developing a capital plan, charging-off the loans listed in the
Report, and developing action plans on the remaining classified loans. Bank
management has also established a separate collections department which is
actively working on reducing the level of classified and delinquent loans as
well as trying to recover losses on the loans previously charged-off. Bank
management and the Board are working with Premier to develop or revise the
bank's policies and procedures as required by the Order. As of March 31, 2004,
Bank management has developed and submitted the required plans and updates due
within 30 days and 90 days of the effective date of the Order. As of March 31,
2004, the Tier I Leverage Ratio of Farmers Deposit was 6.0% which exceeded the
written capital plan threshold of 5.5%
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.
The Securities and Exchange Commission ("SEC") is investigating the
information disclosed in Premier's June 16 and July 31, 2003 Forms 8-K and the
June 30, and September 30, 2003 Forms 10-Q regarding its wholly owned
subsidiary, Farmers Deposit Bank, Eminence, Kentucky ("Farmers Deposit") and has
requested information about Premier's investigation. Premier is cooperating with
the SEC.
Dividend Restrictions - Premier is dependent on dividends from its Affiliate
Banks for its revenues. Various federal and state regulatory provisions limit
the amount of dividends the Affiliate Banks can pay to Premier without
regulatory approval. At December 31, 2003, approximately $1.4 million of the
total shareholders' equity of the Affiliate Banks was available for payment of
dividends to Premier without approval by the applicable regulatory authority.
In addition, federal bank regulatory authorities have authority to
prohibit Premier's Affiliate Banks from engaging in an unsafe or unsound
practice in conducting their business. The payment of dividends, depending upon
the financial condition of the bank in question, could be deemed to constitute
such an unsafe or unsound practice. The ability of the Affiliate Banks to pay
dividends in the future is presently, and could be further, influenced by bank
regulatory policies and capital guidelines as well as each Affiliate Bank's
earnings and financial condition. Additional information regarding dividend
limitations can be found in Note 22 of the accompanying audited consolidated
financial statements.
Interstate Banking - Under the Riegle-Neal Interstate Banking and Branching
Efficiency Act of 1994 (the "Riegle-Neal Act"), subject to certain concentration
limits, (i) bank holding companies, such as Premier, are permitted to acquire
banks and bank holding companies located in any state of the United States,
subject to certain restrictions, and (ii) banks are permitted to acquire branch
offices outside their home state by merging with out-of-state banks, purchasing
branches in other states or establishing de novo branch offices in other states;
provided that, in the case of any such purchase or opening of individual
branches, the host state has adopted legislation "opting in" to the relevant
provisions of the Riegle-Neal Act; and provided further, that, in the case of a
merger with a bank located in another state, the host state has not adopted
legislation "opting out" of the relevant provisions of the Riegle-Neal Act.
Gramm-Leach-Bliley Act - On November 12, 1999, the Gramm-Leach-Bliley Act (the
"Act") was signed into law, eliminating many of the remaining barriers to full
convergence of the banking, securities, and insurance industries. The major
provisions of the Act took effect March 12, 2000.
The Act enables a broad-scale consolidation among banks, securities
firms, and insurance companies by creating a new type of financial services
company called a "financial holding company," a bank holding company with
dramatically expanded powers. Financial holding companies can offer virtually
any type of financial service, including banking, securities underwriting,
insurance (both agency and underwriting), and merchant banking. In addition, the
Act permits the Federal Reserve and the Treasury Department to authorize
additional activities for financial holding companies, but only if they jointly
determine that such activities are "financial in nature" or "complementary to
financial activities." Premier does not presently qualify to elect financial
holding company status.
The FRB serves as the primary "umbrella" regulator of financial holding
companies, with jurisdiction over the parent company and more limited oversight
over its subsidiaries. The primary regulator of each subsidiary of a financial
holding company depends on the activities conducted by the subsidiary. A
financial holding company need not obtain FRB approval prior to engaging, either
de novo or through acquisitions, in financial activities previously determined
to be permissible by the FRB. Instead, a financial holding company need only
provide notice to the FRB within 30 days after commencing the new activity or
consummating the acquisition.
Number of Employees - The Company and its subsidiaries collectively had
approximately 268 full-time equivalent employees as of December 31, 2003. Its
executive offices are located at 2883 5th Avenue, Huntington, West Virginia
25702, telephone number (304) 525-1600 (facsimile number (304) 525-9701).
Item 2. Properties
The Company leases its principal executive offices located in
Huntington, West Virginia. The Company also owns property located at 115 North
Hamilton Street in Georgetown, Kentucky, which serves as a location for
Citizens' Bank (Kentucky), and property located at 104 Jefferson Street,
Brooksville, Kentucky, which serves as a branch for Bank of Germantown. Except
as noted each of the Banks owns the real property and improvements on which
their banking activities are conducted.
Citizens Deposit Bank & Trust, in addition to its main office at 400
Second Street in Vanceburg, Kentucky, has four branch offices in Lewis County,
Kentucky, including one leased facility. The Bank of Germantown, with its main
office located on Highway 10 in Germantown, Kentucky, has one branch located
in Bracken County, Kentucky. Citizens Bank (Kentucky), Inc., in addition to its
main office at 120 North Hamilton Street in Georgetown, Kentucky, has two
branches in Scott County, Kentucky, and two branches in Bath County, Kentucky.
Farmers Deposit Bank, in addition to its main office at 5230 South Main Street
in Eminence, Kentucky, has two branches in Henry County, Kentucky. Ohio River
Bank, in addition to its main office at 221 Railroad Street in Ironton, Ohio,
has two branches, one each located in Lawrence and Scioto Counties, Ohio. First
Central Bank, in addition to its main office at 2 South Main Street in Philippi,
West Virginia, has a branch located in Buchannon, West Virginia. Boone County
Bank, in addition to its main office at 300 State Street, Madison, West
Virginia, has three branches, one each located in Boone, Logan and Lincoln
Counties, West Virginia.
Item 3. Legal Proceedings
The Banks are respectively parties to legal actions that are ordinary
routine litigation incidental to a commercial banking business. In management's
opinion, the outcome of these matters, individually or in the aggregate, will
not have a material adverse impact on the results of operations or financial
position of the Company.
The Securities and Exchange Commission ("SEC") is investigating the
information disclosed in Premier's June 16 and July 31, 2003 Forms 8-K and
the June 30, and September 30, 2003 Forms 10-Q regarding Farmers Deposit Bank
and has requested information about Premier's investigation. Premier is
cooperating with the SEC.
Item 4. Submission of Matters to a Vote of Security Holders
There were no matters submitted to a vote of security holders, through
solicitation of proxies or otherwise during the fourth quarter of the fiscal
year covered by this report.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
---------------------------------------------------------------------
The Company's common stock is listed on the NASDAQ National Market
System under the symbol PFBI. At December 31, 2002, the Company had
approximately 766 record holders of its common shares.
The following table sets forth on a quarterly basis cash dividends paid
and the range of high and low sales prices on a per share basis during the
quarters indicated.
Cash Sales Price
Dividends Paid High Low
-------------- ---- ---
2002:
First Quarter $ - $10.24 $8.11
Second Quarter - 10.49 8.40
Third Quarter - 8.55 6.50
Fourth Quarter - 7.82 6.00
---------
$ -
=========
2003
First Quarter $ - $ 9.50 $7.58
Second Quarter - 10.25 8.91
Third Quarter - 9.45 8.50
Fourth Quarter - 8.94 7.50
---------
$ -
=========
2004:
First Quarter
(through March 26, 2004 $ - $ 9.49 $8.31
The Board of Directors suspended the payment of dividends during the
second quarter of 2000. In September 2000 as a result of an agreement entered
into with the Federal Reserve, the Company agreed not to declare additional
dividends without the prior approval of the Federal Reserve. The September 2000
agreement was superceded by a January 29, 2003 written agreement between Premier
and the Federal Reserve which continued the restriction on dividends. The
Board of Directors anticipates paying dividends at some future date when, in
its discretion, financial prudence allows and the Federal Reserve concurs in the
payment of such dividends. Furthermore, the January 29, 2003 agreement restricts
Premier's payments of dividends on its PFBI Capital Trust preferred securities.
These dividends are cumulative and all deferred distributions must be paid
before dividends may be paid to holders of common shares. Even if the Company
is able to resume the payment of dividends, there can be no assurance that the
amount of the dividends will be what the Company paid before the payment of
dividends was suspended.
The payment of dividends by the Company depends upon the ability of the
Banks to declare and pay dividends to the Company because the principal source
of the Company's revenue will be dividends paid by the Banks. At December 31,
2003, approximately $1.4 million was available for payment as dividends from the
Banks to the Company without the need for regulatory approval. In considering
the payment of dividends, the Board of Directors will take into account the
Company's financial condition, results of operations, tax considerations, costs
of expansion, industry standards, economic conditions and need for funds, as
well as governmental policies and regulations applicable to the Company and the
Banks. See "REGULATORY MATTERS - Capital Requirements" for discussion on capital
guidelines.
Item 6. Selected Financial Data
The following table presents consolidated selected financial data for the
Company, it does not purport to be complete and is qualified in its entirety by
more detailed financial information and the audited consolidated financial
statements contained elsewhere in this annual report. The consolidated selected
financial data presented below has been restated as of December 31, 2002 and
2001 and for the years then ended to reflect the effects of actions taken by
subsidiary management that were concealed from others in the Company, as more
fully described in Note 2 to the consolidated financial statements. Further,
the data presented below reflects separately the impact of discontinued
operations as more fully described in Note 3 to the consolidated financial
statements.
At or for the Year Ended December 31,
2003 2002 2001 2000 1999
-------- -------- -------- -------- --------
(Restated) (Restated)
Earnings
Net interest income $ 19,182 $ 20,838 $ 20,931 $ 24,121 $ 24,007
Provision for loan losses 20,513 9,453 8,350 4,615 2,985
Non-interest income 4,064 2,717 12,178 3,192 2,937
Non-interest expense 17,632 17,831 20,200 22,720 19,922
Income taxes (benefit) (5,282) (1,522) 2,985 (237) 1,085
Income (loss) from
continuing operations (9,617) (2,207) 1,574 215 2,952
Income (loss) from
discontinued operations (80) (1,130) (380) 1,120 1,638
-------- -------- -------- -------- --------
Net income (loss) $ (9,697) $ (3,337) $ 1,194 $ 1,335 $ 4,590
======== ======== ======== ======== ========
Financial Position
Total assets of continuing
operations $543,229 $590,869 $606,961 $780,659 $746,652
Total assets of discontinued
Operations 79,163 84,406 104,653 110,162 106,705
Loans, net of unearned
income 331,794 373,099 384,940 505,567 485,404
Allowance for loan losses 14,300 9,698 7,371 6,617 5,574
Goodwill and other intangibles 15,816 15,816 15,816 22,615 24,092
Securities 147,646 144,698 143,516 185,282 161,938
Deposits 455,474 477,724 480,991 635,533 603,080
Other borrowings 18,307 32,600 43,724 64,503 67,272
Subordinated debentures 26,546 29,639 29,639 29,639 29,639
Stockholders' equity 45,540 56,124 58,750 55,830 52,127
Share Data
Income (loss) from continuing
operations - basic $ (1.84) $ (0.42) $ 0.30 $ 0.04 $ 0.56
Income (loss )from continuing
operations - diluted (1.84) (0.42) 0.30 0.04 0.56
Net income - basic (1.85) (0.64) 0.23 0.26 0.88
Net income - diluted (1.85) (0.64) 0.23 0.26 0.88
Book value 8.70 10.73 11.23 10.67 9.96
Cash dividend 0.00 0.00 0.00 0.15 0.60
Ratios
Return on average assets (1) (1.66) (0.37) 0.24% 0.03% 0.42%
Return on average equity (1) (18.46) (3.77)% 2.76% 0.41% 5.50%
Dividend payout (2) 0.00% 0.00% 0.00% 375.00% 107.14%
Stockholders' equity to total
assets at period-end (3) 8.38% 9.50% 9.68% 7.15% 6.98%
Average stockholders' equity
to average total assets (1) 7.88% 8.44% 7.37% 6.07% 6.72%
Notes (1) Computed based on average assets from continuing operations
(2) Computed based on income (loss) from continuing operations
(3) Shareholders' equity at period end divided by assets from continuing operations
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
INTRODUCTION
Premier Financial Bancorp, Inc. ("Premier") is a multi-bank holding
company headquartered in Huntington, West Virginia. It operates seven community
bank subsidiaries ranging in size from $24 million to $157 million, each with a
local community name and orientation. One bank subsidiary, Citizens Bank
(Kentucky), Inc. ("Citizens Bank")is in the process of being sold. As such, and
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
consolidated financial statements, and this Management's Discussion and
Analysis, and are presented separately as "discontinued operations." See Note 3
to the consolidated financial statements presented separately in this annual
report for additional information concerning discontinued operations. The
remaining banks operate in twenty communities within the states of West
Virginia, Ohio and Kentucky and provide their customers with a full range of
banking services. Premier is also the parent of a data processing subsidiary
which provides the data processing and management services for six of Premier's
affiliate banks and two other non-affiliated banks. As of December 31, 2003,
Premier had approximately $62 million in total assets, $332 million in total
loans and $455 million in total deposits.
The accompanying consolidated financial statements have been prepared by
the management of Premier in conformity with accounting principals generally
accepted in the United States of America. The audit committee of the Board of
Directors engaged Crowe Chizek and Company LLC independent auditors, to audit
the consolidated financial statements, and their report is included elsewhere
herein. Financial information appearing throughout this annual report is
consistent with that reported in the consolidated financial statements. The
following discussion is designed to assist readers of the consolidated financial
statements in understanding significant changes in Premier's financial condition
and results of operations.
Management's objective of a fair presentation of financial information
is achieved through a system of internal accounting controls. The financial
control system of Premier is designed to provide reasonable assurance that
assets are safeguarded from loss and that transactions are properly authorized
and recorded in the financial records. As an integral part of that financial
control system, the audit committee of the Board of Directors engaged Arnett &
Foster, CPA's to perform internal audits of the financial records of each of the
subsidiaries on a periodic basis. Their findings and recommendations are
reported to Premier's audit committee as well as the audit committees of the
subsidiaries. Also, on a regular periodic basis, the subsidiary banks are
examined by Federal and State banking authorities for safety and soundness as
well as compliance with applicable banking laws and regulations. The activities
of both the internal and external audit functions are reviewed by the audit
committee of the Board of Directors.
FORWARD-LOOKING STATEMENTS
Management's discussion and analysis contains forward-looking statements
that are provided to assist in the understanding of anticipated future financial
performance. However, such performance involves risks and uncertainties, and
there are certain important factors that may cause actual results to differ
materially from those anticipated. These important factors include, but are not
limited to, economic conditions (both generally and more specifically in the
markets in which Premier operates), competition for Premier's customers from
other providers of financial services, government legislation and regulation
(which changes from time to time), changes in interest rates, Premier's ability
to originate quality loans, 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.
CRITICAL ACCOUNTING POLICIES
General
The financial condition and results of operations presented in the
Consolidated Financial Statements, accompanying Notes to the Consolidated
Financial Statements and management's discussion and analysis are, to a large
degree, dependent upon our accounting policies. The selection and application of
these accounting policies involve judgments, estimates, and uncertainties that
are susceptible to change.
Presented below is discussion of those accounting policies that
management believes are the most important to the portrayal and understanding of
our financial condition and results of operations. These critical accounting
policies require management's most difficult, subjective and complex judgments
about matters that are inherently uncertain. In the event that different
assumptions or conditions were to prevail, and depending upon the severity of
such changes, the possibility of materially different financial condition or
results of operations is a reasonable likelihood. See also Note 1 of the
accompanying consolidated financial statements presented elsewhere in this
annual report.
Allowance for Loan Losses
The Company monitors and maintains an allowance for loan losses to
absorb an estimate of probable incurred losses inherent in the loan portfolio.
The Company maintains policies and procedures that address the systems of
control over the following areas of maintenance of the allowance: the systematic
methodology used to determine the appropriate level of the allowance to provide
assurance that the allowance for loan losses is maintained in accordance with
accounting principles generally accepted in the United States of America; the
accounting policies for loan charge-offs and recoveries; the assessment and
measurement of impairment in the loan portfolio; and the loan grading system.
The Company evaluates various loans individually for impairment as
required by Statement of Financial Accounting Standard (SFAS) No. 114,
Accounting by Creditors for Impairment of a Loan, and SFAS No. 118, Accounting
by Creditors for Impairment of a Loan - Income Recognition and Disclosures.
Loans evaluated individually for impairment include non-performing loans, such
as loans on non-accrual, loans past due 90 days or more, restructured loans and
other loans selected by management including loans graded as substandard or
doubtful by the internal credit review process. The evaluations are based upon
discounted expected cash flows or collateral valuations. If the evaluation shows
that a loan is individually impaired, then a specific reserve is established for
the amount of impairment. If a loan evaluated individually is not impaired, then
the loan is assessed for impairment under SFAS No. 5, Accounting for
Contingencies (SFAS 5), with a group of loans that have similar characteristics.
For loans without individual measures of impairment, the Company makes
estimates of losses for groups of loans as required by SFAS 5. Loans are grouped
by similar characteristics, including the type of loan, the assigned loan grade
and the general collateral type. A loss rate reflecting the expected loss
inherent in a group of loans is derived based upon estimates of default rates
for a given loan grade, the predominant collateral type for the group and the
terms of the loan. The resulting estimate of losses for groups of loans are
adjusted for relevant environmental factors and other conditions of the
portfolio of loans, including: borrower and industry concentrations; levels and
trends in delinquencies, charge-offs and recoveries; changes in underwriting
standards and risk selection; level of experience, ability and depth of lending
management; and national and local economic conditions.
The amount of estimated impairment for individually evaluated loans
and groups of loans is added together for a total estimate of probable incurred
loan losses. This estimate of losses is compared to the allowance for loan
losses of the Company as of the evaluation date and, if the estimate of losses
exceeds the allowance, an additional provision to the allowance would be made.
If the estimate of losses is less than the allowance, the degree to which the
allowance exceeds the estimate is evaluated to determine whether the allowance
falls outside a range of estimates. If the estimate of losses were below the
range of reasonable estimates, the allowance would be reduced by way of a credit
to the provision for loan losses. The Company recognizes the inherent
imprecision in estimates of losses due to various uncertainties and variability
related to the factors used, and therefore a reasonable range around the
estimate of losses is derived and used to ascertain whether the allowance is too
high. If different assumptions or conditions were to prevail and it is
determined that the allowance is not adequate to absorb the new estimate of
probable incurred losses, an additional provision for loan losses would be made,
which amount may be material to the Consolidated Financial Statements.
Impairment of Goodwill
As required by applicable accounting guidance, goodwill is evaluated
at least annually to determine if the amount recorded on the Company's balance
sheet is impaired. If goodwill is determined to be impaired, the recorded amount
would be reduced to estimated fair value by a charge to expense in the period in
which impairment is determined. Impairment is evaluated in the aggregate for all
of the Company's banking operations. Operating characteristics of the aggregate
banking operations are derived and compared to a database of peer group banks
that have been sold. Pricing valuation factors that are considered in estimating
the fair value of the Company's aggregate banking operations include
price-to-total assets, price-to-total book value, price-to-deposits and price-to
earnings. Unusual events that have impacted the operating characteristics of the
Company's aggregate banking operations are considered to assess the likelihood
of recurrence and adjustments to historical performance may be made. Changes in
assumptions regarding the likelihood of unusual historical events recurring or
the use of different pricing valuation factors could have a material impact on
management's impairment analysis.
Realization of Deferred Tax Assets
Deferred tax assets and liabilities are the expected future tax
amounts for the temporary differences between carrying amounts and tax bases of
assets and liabilities, computed using enacted tax rates. A valuation allowance,
if needed, reduces deferred tax assets to the amount expected to be realized.
Deferred tax assets for the Company primarily relate to the allowance for loan
losses and net operating loss carryforwards. In considering the need for a
valuation allowance to reduce deferred tax assets to the amount expected to be
realized, management considers the amount of previously paid taxes that may be
recoverable and the likelihood of generating sufficient future taxable income to
fully utilized expected future tax deductions. At December 31, 2003 management's
consideration of the need for a valuation allowance focused on the generation of
future taxable income as all available previously paid taxes are expected to be
recovered from the operating loss reported in 2003. In determining the
likelihood of generating future taxable income management considered unusual
events that have impacted the Company's historical earnings and whether these
events will recur, the Company's operating budget and likely operating results
in the near term and the taxable gain expected to be realized from the sale of
the discontinued operation. Changes in these assumptions could impact the
carrying value of deferred tax assets and require a charge to tax expense.
SIGNIFICANT EVENT ARISING IN 2003
On June 16, 2003, Premier announced that as a result of an ongoing
internal investigation it had uncovered a systematic disregard for its loan
approval and credit administration policies at its wholly owned subsidiary
Farmers Deposit Bank and had accepted the resignation of the bank's president.
On June 4, 2003, senior management of Premier received from the bank's former
president a request to charge-off over $2.0 million in loans. Concerned about
the magnitude of the request and the impact of Premier's financial results,
Premier management promptly notified the Federal Reserve Bank of Cleveland
and the Federal Deposit Insurance Corporation ("FDIC") about the request.
Premier's initial investigation indicated that the former president of Farmers
Deposit had engaged in conduct which subverted the bank's internal controls and
credit administration policies, conduct which appears to have been designed to
avoid detection by management and those entities employed by Premier to perform
independent reviews of its subsidiaries' accounting records, internal controls,
and credit risk.
As a result of the ongoing investigation into the conduct of the former
president of Farmers Deposit by Premier and the FDIC, Premier charged-off over
$17.2 million of loans. The resulting depletion of the allowance for loan losses
together with the current analysis of additional risk in the loan portfolio
warranted significant additional provisions for loan losses at the Bank. In
addition to the provision for loan losses, interest income reversals and other
non-interest expenses including bad check write-offs and loan review expenses
were recorded.
Premier's management, with the assistance of outside independent
professionals, has conducted a further review of those loans for which
significant charge offs or additional provisions were required in 2003. The
purpose of this review was to determine if the facts or circumstances that gave
rise to additional charge offs or provisions had been improperly withheld from
senior management or improperly considered in applying management's estimates
and judgments as to the adequacy of the allowance for loan losses in prior
financial statement periods. The review did identify instances in which
collateral securing loans had been released without proper support or notation
in loan files, instances in which obligors on notes had been released from their
repayment obligation without proper support or notation in loan files and
instances in which delinquent loan reporting systems had been manipulated to
prevent problem loans from being identified on a timely basis. Premier's senior
management determined that if these circumstances had been considered in
evaluating the adequacy of the allowance for loan losses in prior periods then
some of the loan charge offs and additional provisions for loan losses recorded
in 2003 should have been reflected in prior periods. Therefore the financial
statements for 2002 and 2001 have been restated to reflect the financial
statement effect of the matters that occurred in those periods but which were
improperly concealed by subsidiary management. See Note 2 to the consolidated
financial statements for further discussion regarding the impact of the
restatement of 2002 and 2001. The tables and discussion below reflect the effect
of this restatement.
SUMMARY FINANCIAL RESULTS
Premier net results from continuing operations for 2003 were a loss of
$9.6 million, compared to a loss from continuing operations of $2.2 million
reported for the year 2002. The loss for 2003 is primarily due to large
provisions for loan losses and bad check losses at its subsidiary, Farmers
Deposit Bank. The $2.2 million loss in 2002 was due to large provisions for loan
losses, writedowns of repossessed real estate to realizable values, and higher
collection costs. The loss in 2002 follows $1.6 million of income from
continuing operations reported for the year ending December 31, 2001. Basic
earnings per share from continuing operations was a loss of ($1.84) in 2003,
compared to a loss of $0.42 per share in 2002 and income of $0.30 in 2001.
The following table comparatively illustrates the components of ROA and
ROE over the previous five years. Return on average assets (ROA) measures how
effectively Premier utilizes its assets to produce net income. Premier's
operating loss for 2003 resulted in a ROA of (1.66%), a decrease from the
(0.37)% ROA reported in 2002 and the 0.24% ROA in 2001. As shown in the table,
the decrease in ROA from years 2002 and earlier is attributed primarily to an
increase in the provision for loan losses, resulting in negative net credit
income. The decrease in ROA in 2002 versus the years 2001 and earlier is
primarily due to a decline in net credit income again resulting from the high
provisions for loan losses in 2002. A portion of the decline in 2001 net credit
income was offset by the gain on the sale of banking subsidiaries reported in
2001. As illustrated in the table, Premier's 2003 fully taxable net interest
income as a percent of average earning assets was down slightly to 3.63% from
the 3.84% recorded in 2002 and interest earned on loans declined due to a lower
balance of loans outstanding. During the same time of declining net credit
income, Premier has reduced its operating costs. The net overhead ratio
(non-interest expense less non-interest income as a percent of average earning
assets) declined to 2.64% in 2003, the lowest ratio reported in the five years
presented in the table. The 2003 net overhead ratio compares to 2.71% in 2002
and 2.78% in 2001. The decline in 2003 net overhead was the result increases in
non-interest income related to service charges on deposit accounts. The decline
in 2002 compared to 2001 was the result of Premier's efforts to reduce expenses
as a percentage of earning assets.
Return on average equity (ROE), another measure of earnings performance,
indicates the amount of net income earned in relation to the total equity
invested. Premier's 2003 ROE was (18.46%), compared to (3.77%) realized in 2002
and the 2.76% reported for 2001. ROE decreased primarily due the operating
losses reported for 2003 and 2002.
ANALYSIS OF RETURN ON ASSETS AND EQUITY
from continuing operations
2003 2002 2001 2000 1999
---- ---- ---- ---- ----
As a percent of average earning assets:
Fully taxable-equivalent net interest income 3.63% 3.84% 3.50% 3.56% 3.91%
Provision for loan losses (3.81) (1.70) (1.37) (0.66) (0.47)
----- ----- ----- ----- -----
Net credit income (0.18) 2.14 2.13 2.90 3.44
Gains on the sales of assets & subsidiaries* 0.11 (0.01) 1.48 (0.04) 0.00
Non-interest income 0.62 0.50 0.52 0.50 0.46
Non-interest expense (3.26) (3.21) (3.30) (3.26) (3.15)
Tax equivalent adjustment (0.07) (0.08) (0.08) (0.10) (0.11)
Applicable income taxes 0.98 0.27 (0.49) 0.03 (0.17)
----- ----- ----- ----- -----
Return on average earning assets (1.79) (0.40) 0.26 0.03 0.47
Multiplied by average earning assets to
average total assets 92.86 92.34 91.98 91.58 90.46
----- ----- ----- ----- -----
Return on average assets (1.66)% (0.37)% 0.24% 0.03% 0.42%
Multiplied by average assets to average equity 11.13X 10.26X 11.68X 14.43X 13.02X
----- ----- ----- ----- -----
Return on average equity (18.46)% (3.77)% 2.76% 0.41% 5.50%
===== ===== ===== ===== =====
A breakdown of Premier's financial results by quarter for the years
ended December 31, 2003 and 2002 is summarized below.
QUARTERLY FINANCIAL INFORMATION
(Dollars in thousands except per share amounts)
Full
First Second Third Fourth Year
------- ------- ------- ------- -------
2003
Interest Income $ 8,606 $ 8,178 $ 7,665 $ 7,280 $31,729
Interest Expense 3,505 3,248 2,994 2,800 12,547
Net Interest Income 5,101 4,930 4,671 4,480 19,182
Provision for Loan Losses 2,267 11,778 4,343 2,125 20,513
Securities Gains 189 15 2 410 616
Net Overhead 3,628 3,524 3,315 3,717 14,184
Income before Income Taxes (605) (10,357) (2,985) (952) (14,899)
Loss from Continuing Operations (365) (6,779) (1,877) (596) (9,617)
Income (Loss) from Discontinued Operations (27) (76) 21 2 (80)
Net Loss (393) (6,855) (1,856) (594) (9,697)
Basic and Diluted Loss per share from
Continuing Operations (0.07) (1.30) (0.36) (0.11) (1.84)
Basic and Diluted Net Loss per share (0.08) (1.31) (0.35) (0.11) (1.85)
Dividends Paid per share 0.00 0.00 0.00 0.00 0.00
2002
Interest Income $ 9,821 $ 9,773 $ 9,486 $ 9,223 $38,303
Interest Expense 4,772 4,478 4,251 3,964 17,465
Net Interest Income 5,049 5,295 5,235 5,259 20,838
Provision for Loan Losses 940 2,488 3,214 2,811 9,453
Securities Gains (Losses) 16 (103) 1 13 (73)
Net Overhead 3,466 4,361 3,734 3,480 15,041
Income before Income Taxes 651 (1,657) (1,712) (1,019) (3,729)
Income (Loss) from Continuing Operations 481 (1,019) (1,032) (637) (2,207)
Income (Loss) from Discontinued Operations 114 (437) (775) (32) (1,130)
Net Income (Loss) 595 (1,456) (1,807) (669) (3,337)
Basic and Diluted Income (Loss) per share
from Continuing Operations 0.09 (0.19) (0.20) (0.12) (0.42)
Basic and Diluted Net Income (Loss) per share 0.11 (0.29) (0.34) (0.12) (0.64)
Dividends Paid per share 0.00 0.00 0.00 0.00 0.00
SALE OF SUBSIDIARIES
In the fourth quarter of 2003, the Premier 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 of this
subsidiary would help to restore the financial position of Premier after the
impact of the losses sustained at Farmers Deposit Bank during the second and
third quarters of 2003. Management anticipates that the sale, if affected, will
restore the regulatory capital ratios of Premier to the stronger levels it
wishes to maintain; will more than replenish the cash reserves of the holding
company used to recapitalize Farmers Deposit Bank, and will allow Premier to
utilize its Federal income tax net operating loss carryforwards in a more timely
manner. The sale is anticipated to close early in the third quarter of 2004.
In 2000 Premier suspended its acquisition strategy in order to focus on
improving its subsidiary bank operations by strengthening its management
oversight. As part of this change in strategy, Premier elected to dispose of two
of its subsidiary banks in 2001.
On January 26, 2001, the company disposed of all the deposits
(approximately $110 million), the majority of loans (approximately $92 million)
and the premises and equipment (approximately $1.6 million) of the Bank of Mt.
Vernon under the terms of a Purchase and Assumption Agreement. As a result of
this transaction, the banking charter of the Bank of Mt. Vernon was relinquished
and Premier agreed not to compete in the markets previously served by the Bank
of Mt. Vernon.
Also, on December 10, 2001, the Company disposed of certain assets and
liabilities of The Sabina Bank. The sale included all the loans (approximately
$31 million) and all the deposits (approximately $41 million), as well as the
premises and equipment (approximately $1.2 million). Certain assets of the bank
were retained by Premier pending liquidation of the bank, which occurred in
2002. The operating results of both the Bank of Mount Vernon and The Sabina Bank
were included in Premier's 2001 operating results through the respective dates
of the sale. However, the 2002 and 2003 operating results do not include any of
the operations of these two banks. Comparisons of average balances and income
statement categories to 2001 are all affected by the disposition of these two
subsidiaries.
BALANCE SHEET ANALYSIS
Summary
A financial institution's primary sources of revenue are generated by
its earning assets, while its major expenses are produced by the funding of
these assets with interest bearing liabilities. Effective management of these
sources and uses of funds is essential in attaining a financial institution's
optimal profitability while maintaining a minimum amount of interest rate risk
and credit risk. Information on rate-related sources and uses of funds for
each of the three years in the period ended December 31, 2003, is provided in
the table below.
AVERAGE CONSOLIDATED BALANCE SHEETS AND NET INTEREST INCOME ANALYSIS
(Dollars in thousands)
2003 2002 2001
Average Yield/ Average Yield/ Average Yield/
Balance Interest(2) Rate(3) Balance Interest(2) Rate(3) Balance Interest(2) Rate(3)
---------------------------- ---------------------------- -----------------------------
Assets:
Interest earning assets
U.S. Treasury and federal agency
securities $110,616 $ 3,196 2.89% $105,045 $ 4,429 4.22% $123,896 $ 7,117 5.74%
States and municipal obligations(1) 15,589 1,015 6.51 17,936 1,233 6.88 19,580 1,537 7.85
Other securities (1) 16,610 655 3.94 13,731 649 4.73 8,429 438 5.20
-------- ------- ----- -------- ------- ----- -------- ------- -----
Total investment securities 142,815 4,866 3.41 136,712 6,311 4.62 151,905 9,092 5.99
Federal funds sold 42,884 469 1.09 34,600 567 1.64 35,118 1,351 3.85
Interest-bearing deposits with
banks 568 7 1.23 564 8 1.42 496 20 4.03
Loans, net of unearned income(4)(5)
Commercial(1) 142,768 9,944 6.97 161,226 12,653 7.85 183,593 16,370 8.92
Real estate mortgage 151,210 11,538 7.63 160,532 12,989 8.09 171,810 14,770 8.60
Installment 58,178 5,293 9.10 61,005 6,238 10.23 69,500 7,833 11.27
-------- ------- ----- -------- ------- ----- -------- ------- -----
Total loans 352,156 26,775 7.60 382,763 31,880 8.33 424,903 38,973 9.17
-------- ------- ----- -------- ------- ----- -------- ------- -----
Total interest-earning assets 538,383 32,117 5.97 554,639 38,766 6.99 612,422 49,436 8.07
Allowance for loan losses (12,704) (8,108) (7,524)
Cash and due from banks 13,400 13,334 17,402
Premises and equipment 8,233 8,725 10,286
Other assets 32,474 32,073 33,230
Assets of discontinued operations 81,821 93,702 108,822
-------- -------- --------
Total assets $661,607 $694,365 $774,638
======== ======== ========
Liabilities and Equity:
Interest bearing liabilities
NOW and money market $180,763 2,045 1.13% $171,801 3,468 2.02% $167,398 5,453 3.26%
Savings 57,327 781 1.36 53,352 942 1.77 58,620 1,466 2.50
Certificates of deposit and
other time deposits 182,542 5,677 3.11 209,593 8,754 4.18 256,070 15,181 5.93
-------- ------- ----- -------- ------- ----- -------- ------- -----
Total interest bearing deposits 420,632 8,503 2.02 434,746 13,164 3.03 482,088 22,100 4.58
Short-term borrowings 4,675 51 1.09 5,436 94 1.73 8,617 382 4.43
Other borrowings 8,350 379 4.54 10,678 412 3.86 16,500 1,285 7.79
FHLB advances 15,852 826 5.21 19,824 943 4.76 21,085 1,360 6.45
Debentures 27,253 2,788 10.23 29,639 2,852 9.62 29,639 2,852 9.62
-------- ------- ----- -------- ------- ----- -------- ------- -----
Total interest-bearing
liabilities 476,763 12,547 2.63% 500,323 17,465 3.49% 557,929 27,979 5.01%
Non-interest bearing deposits 53,824 47,327 55,459
Other liabilities 4,903 3,064 5,249
Liabilities of
discontinued operations 74,021 85,093 98,973
Shareholders' equity: 52,097 58,558 57,028
--------- -------- --------
Total liabilities and equity $661,607 $694,365 $774,638
======== ======== ========
Net interest earnings (1) $19,570 $21,301 $21,457
======= ======= =======
Net interest spread (1) 3.33% 3.50% 3.06%
Net interest margin (1) 3.63% 3.84% 3.50%
(1) Taxable - equivalent yields are calculated assuming a 34% federal income tax rate.
(2) Excludes the interest income and interest expense of discontinued operations.
(3) Yields are calculated on historical cost except for yields on marketable equity securities that are
calculated using fair value.
(4) Includes loan fees, immaterial in amount, in both interest income and the calculation of yield on loans.
(5) Includes loans on non-accrual status.
In 2003, average earning assets declined by 2.9% or $16.2 million from
2002, following a 9.4% or $57.8 million decline in 2002 from 2001. Average
interest bearing liabilities, the primary source of funds supporting the earning
assets, decreased 4.7% or $23.6 million from 2002, which follows a 10.3% or
$57.6 million decline in 2002 from 2001. The decline in the 2003 average earning
assets was the result of $16.5 million of loan charge-offs, primarily at Farmers
Deposit, coupled with loan maturities and principal pay downs that were not
renewed. The decline in interest bearing liabilities was largely due to debt
reduction strategies and a shift in customer deposits from interest bearing to
non-interest bearing. Approximately three-fourths of the decrease in 2002
average earning assets and slightly less than two-thirds of the decrease in 2002
average interest bearing liabilities was due to the sale of the Sabina Bank late
in 2001. Additional information on each of the components of earning assets and
interest bearing liabilities is contained in the following sections of this
report.
Loan Portfolio
Premier's loan portfolio is its largest and highest yielding component
of average earning assets, totaling 65.4% of average earning assets during 2003.
Average loans declined by $30.6 million or 8.0% in 2003. The decline is
partially attributed to the high level of charge-offs, primarily at Farmers
Deposit but also to stiffer competition from larger banks competing in Premier's
markets and a general decline in economic growth. Of the total decline, Premier
realized a 1.8% increase in loans in its West Virginia markets and a 3.3%
increase in loans in its Ohio markets. These were more than offset by a 14.0%
decline in loans in Premier's Kentucky markets, primarily commercial loans. Due
to the low interest rate environment, many borrowers sought to refinance their
loans to reduce their interest costs. Due to the lack luster economy and the
resulting lower demand for loans, larger banks began competing more strongly by
enticing borrowers with prime rate or below prime rate loans. Therefore,
scheduled maturities were not necessarily renewed. Approximately 90% of the
decline in 2002 was the result of the sale of the Sabina Bank in late 2001. Of
the remaining decline, Premier realized an 8.1% increase in loans in its West
Virginia markets and a 3.7% increase in loans in its Ohio markets, both
primarily in real estate mortgage loans. These were offset by a 4.3% decline in
loans in Premier's Kentucky markets.
Total loans at December 31, 2003, decreased by $41.3 million or 11.1%
over the total at December 31, 2002. This decrease follows an $11.9 million or
3.1% decrease in 2002 from total loans at December 31, 2001. The decline in 2003
period-end loans was the result of the $16.5 million of loan charge-off recorded
during the year, primarily at Farmers Deposit, and declines due to low loan
demand resulting from the poor economy and heavy refinancing activity by
borrowers to obtain lower interest rates. The decrease in 2002 was the result of
planned collections of loans retained from the Bank of Mt. Vernon sale as well
as declines in period-end loans at Premier's Kentucky affiliates.
The following table presents a five year comparison of loans by type.
With the exception of those categories included in the comparison, there are no
loan concentrations which exceed 10% of total loans. Additionally, Premier's
loan portfolio contains no loans to foreign borrowers nor does it have a
material volume of highly leveraged transaction lending.
LOAN SUMMARY
(Dollars in thousands)
As of December 31
2003 % 2002 % 2001 % 2000 % 1999 %
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Summary of Loans by Type
Commercial, secured by real
estate $101,325 30.5% $109,571 29.3% $106,726 27.7% $138,960 27.5% $126,015 25.9%
Commercial, other 38,063 11.5 51,347 13.8 59,364 15.4 72,197 14.3 83,009 17.1
Real estate construction 5,414 1.6 7,318 2.0 8,245 2.1 14,142 2.8 15,680 3.2
Real estate mortgage 126,134 38.0 134,271 36.0 135,937 35.4 178,558 35.3 162,753 33.5
Agricultural 3,032 0.9 4,381 1.2 5,402 1.4 8,878 1.7 10,539 2.2
Consumer 56,216 17.0 63,534 17.0 68,300 17.7 92,564 18.3 86,833 17.9
Other 1,610 0.5 2,677 0.7 966 0.3 598 0.1 1,079 0.2
-------- ---- -------- ---- -------- ---- -------- ---- -------- ----
Total loans $331,794 100.0% $373,099 100.0% $385,019 100.0% $505,897 100.0% $485,908 100.0%
Less unearned income (330) (504)
-------- -------- -------- -------- --------
Total loans net of
unearned income $331,794 $373,099 $385,019 $505,567 $485,404
======== ======== ======== ======== ========
Non-Performing Assets
Non-accrual loans $ 11,958 $ 8,197 $ 6,302 $ 5,864 $ 3,649
Accruing loans which are
contractually past due
90 days or more 4,137 1,238 5,612 1,563 1,247
Restructured loans 104 129 338 689 666
-------- -------- -------- -------- --------
Total nonperforming and
restructured loans 16,199 9,564 12,252 8,116 5,562
Other real estate acquired
through foreclosures 3,187 3,505 5,508 2,844 2,813
-------- -------- -------- -------- --------
Total nonperforming and
restructured loans and
other real estate $ 19,386 $ 13,069 $ 17,760 $ 10,960 $ 8,375
======== ======== ======== ======== ========
Nonperforming and restructured
loans as a % of total loans 4.88% 2.56% 3.18% 1.60% 1.14%
Nonperforming and restructured
loans and other real estate
as a % of total assets (1) 3.57% 2.21% 2.93% 1.40% 1.12%
Allocation of Allowance
For Loan Losses
Commercial, other $ 4,166 $ 2,294 $ 1,379 $ 2,145 $ 1,794
Real estate, construction 662 632 488 381 317
Real estate, other 4,886 4,341 3,235 2,510 1,787
Consumer installment 2,478 977 1,178 1,067 801
Unallocated 2,108 1,454 1,091 514 1,057
-------- -------- -------- -------- --------
Total $ 14,300 $ 9,698 $ 7,371 $ 6,617 $ 5,756
======== ======== ======== ======== ========
(1) From continuing operations
Loans secured by real estate, which in total constituted approximately
70% of Premier's loan portfolio at December 31, 2003, consist of a diverse
portfolio of predominately single family residential loans and loans for
commercial purposes where real estate is part of the collateral, not the primary
source of repayment. Residential real estate mortgage loans generally do not
exceed 80% of the value of the real property securing the loan. The residential
real estate mortgage loan portfolio primarily consists of adjustable rate
residential mortgage loans. The origination of these mortgage loans can be
more difficult in a low interest rate environment where there is a significant
demand for fixed rate mortgages. Premier also participates in the solicitation
of loans for the secondary market and recognizes the referral fees in
non-interest income. Commercial loans are generally made to small-to-medium size
businesses located within a defined market area and typically are secured by
business assets and guarantees of the principal owners. Additional risks of loss
are associated with commercial lending such as the potential for adverse changes
in economic conditions or the borrowers ability to successfully execute their
business plan. Consumer loans generally are made to individuals living in
Premier's defined market area who are known to the local bank's staff. Consumer
loans are generally made for terms of up to seven years on a secured or
unsecured basis, however longer terms may be approved in certain circumstances
and for revolving credit lines. While consumer loans generally provide the
Company with increased interest income, consumer loans may involve a greater
risk of default.
In addition to the loans presented in the loan summary table, Premier
also offers certain off-balance sheet products such as letters of credit,
revolving credit agreements, and other loan commitments. These products are
offered under the same credit standards as the loan portfolio and are included
in the risk-based capital ratios used by the Federal Reserve to evaluate capital
adequacy. Additional information on off-balance sheet commitments is contained
in Note 20 to the consolidated financial statements.
Total non-performing assets, which consist of past-due loans on which
interest is not being accrued ("non accrual loans"), foreclosed properties in
the process of liquidation ("OREO"), loans with restructured terms to enable a
delinquent borrower to repay and accruing loans past due 90 days or more, were
$19.4 million or 3.57% of total assets of continuing operations at year-end
2003. The amount is up significantly from the $13.1 million of non-performing
assets (2.21% of total assets of continuing operations) at year-end 2002 and the
$17.8 million of non-performing assets (2.93% of total assets of continuing
operations)at year-end 2001. The increase in 2003 was due to the loan
underwriting issues uncovered at Farmers Deposit Bank. As management's efforts
to collect these loans upon maturity continues, loans are only renewed using
Premier's strengthened credit policies. Otherwise, loans may be placed on
non-accrual status and foreclosure proceeding begun to obtain and liquidate any
collateral securing the past due or matured loans. Premier is committed to
reducing its high level of non-performing assets and implementing strong
underwriting standards to help reduce the level of non-performing assets in the
future. This effort is revealed in the decline in non-performing assets from the
end of 2001 to the end of 2002, primarily related to the sale of OREO properties
and the decline in loans 90+ days past due. Premier's efforts at its other
affiliate banks in 2003 are masked by the high level of non-performing assets at
Farmers Deposit Bank, which alone totaled $12.5 million at December 31, 2003.
The Loan Summary table presents five years of comparative non-performing asset
information.
It is Premier's policy to place loans that are past due over 90 days on
non-accrual status, unless the loans are adequately secured and in the process
of collection. Premier had no commitments to provide additional funds on non-
accrual loans at December 31, 2003. For real estate loans, upon repossession,
the balance of the loan is transferred to "Other Real Estate Owned" (OREO) and
carried at the lower of the outstanding loan balance or the fair value of the
property based on current appraisals and other current market trends less
estimated disposal costs. If a writedown of the OREO property is necessary at
the time of foreclosure, the amount is charged against the allowance for loan
losses. A periodic review of the recorded property value is performed in
conjunction with normal loan reviews, and if market conditions indicate that the
recorded value exceeds the fair market value less estimated disposal costs,
additional writedowns of the property value are charged directly to operations.
During 2003 Premier recognized $466,000 of OREO writedowns compared to $1.0
million in 2002 and $97,000 in 2001. Although loans may be classified as
non-performing, some continue to pay interest irregularly or at less than
original contracted terms. During 2003, approximately $25,000 of interest was
recognized on non-accrual and restructured loans, while approximately $520,000
would have been recognized in accordance with their original terms.
The allowance for loan losses is maintained to absorb probable incurred
losses associated with lending activities. Actual losses are charged against the
allowance ("charge-offs") while collections on loans previously charged off
("recoveries") are added back to the allowance. Since actual losses within a
given loan portfolio are difficult to predict, management uses a significant
amount of estimation and judgment to determine the adequacy of the allowance for
loan losses. Factors considered in determining the adequacy of the allowance
include an individual assessment of risk on certain loans and total creditor
relationships, historical charge-off experience, the type of loan, levels of
non-performing and past due loans, and an evaluation of current economic
conditions. Loans are evaluated for credit risk and assigned a risk grade.
Premier's risk grading criteria are based upon Federal Reserve guidelines and
definitions. In evaluating the adequacy of the allowance for loan losses, loans
that are assigned passing grades are grouped together and multiplied by
historical charge-off percentages to determine an estimated amount of potential
losses and a corresponding amount of allowance. Loans that are assigned
marginally passing grades are grouped together and allocated slightly higher
percentages to determine the estimated amount of potential losses due to the
identification of increased risk(s). Loans that are assigned a grade of
"substandard" or "doubtful" are usually determined to be impaired.
A loan is categorized and reported as impaired when it is probable that
the creditor will be unable to pay all of the principal and interest amounts
according to the contractual terms of the loan agreement. In determining whether
a loan is impaired, management considers such factors as past payment history,
recent economic events, current and projected financial condition and other
relevant information that is available at the time. Impairment is evaluated in
total for smaller-balance loans of similar nature such as residential mortgage,
consumer, and credit card loans, and on an individual basis for other loans. If
a loan is deemed to be impaired an evaluation of the amount of estimated loss is
performed assessing the present value of estimated future cashflows using the
loan's existing rate or assessing the fair and realizable value of the loan
collateral if repayment is expected solely from the collateral. The estimation
of loss is assigned to the impaired loan and is used in determining the adequacy
of the allowance for loan losses. For impaired loans, this estimation of loss is
reevaluated quarterly and, if necessary, adjusted based upon the current known
facts and circumstances related to the loan and the borrower. Additional
information on Premier's impaired loans is contained in Note 7 to the
consolidated financial statements. The sum of the calculations and estimations
of the risk of loss in a given loan portfolio is compared to the recorded
balance of the allowance for loan losses. If the total allowance is deemed to be
inadequate a charge to earnings is recorded to increase the allowance.
Conversely, should an evaluation of the allowance result in a lower estimate of
the risk of loss in the loan portfolio and the allowance is deemed to be more
than adequate, a reversal of previous charges to earnings ("a negative
provision") may be warranted in the current period. Events that may lead to
negative provisions included greater than anticipated recoveries, securing more
collateral on an impaired loan during the collection process, or receiving
payment in full on an impaired loan.
At December 31, 2003, the allowance for loan losses was $14.3 million or
4.31% of total year-end loans. This ratio is an increase from the prior year's
2.60% and the 1.91% at the end of 2001, due to the significant allowance
attributed to the loans at Farmers Deposit Bank. In management's opinion, the
allowance for loan losses is adequate to absorb the current estimated risk of
loss in the existing loan portfolio. The summary of the allowance for loan
losses allocated by loan type is presented in the Loan Summary Table above.
The following table provides a detailed history of the allowance for
loan losses, illustrating charge-offs and recoveries by loan type, and the
annual provision for loan losses over the past five years. The provision for
loan losses in 2003 was $20.5 million, up significantly from the $9.5 million
provision in 2002 and the $8.4 million provision in 2001. The high level of
provision in 2003 was the result of the net charge-offs and increase in impaired
loans at Farmers Deposit. The relatively high provisions in 2002 was in response
to management efforts to identify the level of probable incurred losses
throughout Premier's troubled institutions using the best practices of its
higher performing institutions. These efforts were circumvented or rendered
ineffective by the disregard for controls by the former president of Farmers
Deposit. The large provision in 2001 was in response to the higher risk in
certain loans retained by Premier as part of the sale of the Bank of Mt. Vernon
and a higher level of net charge-off experience. Premier continually evaluates
the adequacy of its allowance for loan losses, and changes in the provision are
based on the estimated probable incurred loss of the loan portfolio.
SUMMARY OF LOAN LOSS EXPERIENCE
(Dollars in Thousands)
For the Year Ended December 31,
2003 2002 2001 2000 1999
------- ------- ------- ------- -------
Allowance for Loan Losses, Beginning of Period $ 9,698 $ 7,371 $ 6,617 $ 5,755 $ 3,376
Amounts charged off:
Commercial, financial and agricultural loans 4,417 4,080 2,585 3,152 1,231
Real estate construction loans 0 833 480 0 0
Real estate loans - other 6,427 1,072 3,013 105 346
Consumer installment loans 5,669 1,904 1,725 850 651
------- ------- ------- ------- -------
Total charge-offs 16,513 7,889 7,803 4,107 2,228
Recoveries on amounts previously charged off:
Commercial, financial and agricultural loans 145 138 163 182 129
Real estate construction loans 37 16 1 0 0
Real estate loans - other 74 163 10 1 0
Consumer installment loans 346 446 299 171 183
------- ------- ------- ------- -------
Total recoveries 602 763 473 354 312
------- ------- ------- ------- -------
Net charge-offs 15,911 7,126 7,330 3,753 1,916
Provision for loan losses 20,513 9,453 8,350 4,615 2,985
Balance of acquired or disposed subsidiaries 0 0 (266) 0 1,310
------- ------- ------- ------- -------
Allowance for Loan Losses, End of Period $14,300 $ 9,698 $ 7,371 $ 6,617 $ 5,755
======= ======= ======= ======= =======
Average total loans 352,156 382,763 424,903 503,776 439,224
Total loans at year-end 331,794 373,099 384,940 505,567 485,404
As a Percent of Average Loans:
Net charge-offs 4.52% 1.86% 1.73% 0.74% 0.44%
Provision for loan losses 5.83% 2.47% 1.97% 0.92% 0.68%
Allowance for loan losses 4.06% 2.53% 1.73% 1.31% 1.31%
As a Percent of Total Loans at Year-end:
Allowance as a percentage of year-end net loans 4.31% 2.60% 1.91% 1.31% 1.19%
As a Multiple of Net Charge-offs:
Allowance as a multiple of net charge-offs 0.90X 1.36X 1.01X 1.76X 3.00X
Income before tax and provision for loan losses 0.35X 0.80X 1.76X 1.22X 3.66X
Net charge-offs in 2003 increased to $15.9 million, up $8.8 million or
more than double the $7.1 million of net charge-offs experienced in 2002.
Approximately $14.3 million or 90% of the 2003 net charge-offs were at Farmers
Deposit Bank. While the level of commercial loans charged off was relatively
comparable to 2002, there were significant increases in consumer and real estate
loan charge-offs. The $7.1 million of net charge-offs in 2002 was a slight
decrease from the $7.3 million of net charge-offs in 2001. Although management
believes it has identified the significant remaining credit risk in the loan
portfolio, additional charge-offs may be recorded in the coming months due to
the high level of non-performing loans and the resolution of collection efforts
on those loans. These factors are considered in determining the adequacy of the
allowance for loan losses, which at December 31, 2003 was 4.31% of total loans
outstanding and 88.3% of non-performing loans.
The following table presents the maturity distribution and interest
sensitivity of selected loan categories at December 31, 2003. Maturities are
based upon contractual terms.
LOAN MATURITIES AND INTEREST SENSITIVITY
December 31, 2003
(Dollars in thousands)
Projected Maturities*
One Year One Through Over Total
or Less Five Years Five Years Loans
-------- ---------- ---------- --------
Commercial, secured by real estate $ 10,552 $ 24,172 $ 66,601 $101,325
Commercial, other 15,286 16,675 6,102 38,063
Real estate construction 3,850 417 1,147 5,414
Agricultural 1,306 1,243 483 3,032
-------- -------- -------- --------
Total $ 30,994 $ 42,507 $ 74,333 $147,834
======== ======== ======== ========
Fixed rate loans $ 15,313 $ 19,665 $ 16,828 $ 51,585
Floating rate loans 15,681 22,842 57,505 96,028
-------- -------- -------- --------
Total $ 30,994 $ 42,507 $ 74,333 $147,834
======== ======== ======== ========
(*) Based on scheduled or approximate repayments.
Investment Portfolio and
Other Earning Assets
Investment securities averaged $142.8 million in 2003, a $6.1 million or
4.5% increase from the $136.7 million averaged in 2002. This increase
follows a 10.0% decrease from the $151.9 million averaged in 2001. The increase
in average investments in 2003 was the result of weak loan demand and stiffer
competition from large banks in Premier's markets. In 2003, funds from loan
payoffs and maturities were therefore not used to fund new loans but were
instead invested in high-quality debt securities. Over half of the decrease in
2002 was a result of the sale of the Sabina Bank late in 2001. The remaining
decrease in 2002 was the result of placing funds from maturing investments in
federal funds sold to maintain adequate liquidity for planned maturities of high
rate certificates of deposit. As shown in the Rate Volume Analysis table below,
significant interest savings were realized on certificates of deposit in 2002
and 2003 due to declines in interest rates paid and the volume of certificates
on deposit.
The following table presents the carrying values of investment securities.
Carrying Value of Securities
(Dollars in thousands)
As of December 31
2003 2002 2001
--------- --------- ---------
U.S. Treasury Securities:
Available for sale $ 652 $ 407 $ 1,172
Held to maturity - - -
U.S. Agency Securities:
Available for sale 106,845 111,259 112,980
Held to maturity - - -
States and Political Subdivisions Securities
Available for sale 6,868 18,610 18,559
Held to maturity - - -
Mortgage-backed securities:
Available for sale 31,810 5,370 4,994
Held to maturity - - -
Corporate securities:
Available for sale 1,471 9,052 9,196
Held to maturity - - -
Other securities:
Available for sale - - 802
Held to maturity - - -
Total securities:
Available for sale $ 147,646 $ 144,698 $ 147,703
Held to maturity - - -
As sources of funds (deposits, federal funds purchased, and repurchase
agreements with corporate customers) fluctuate, excess funds are initially
invested in federal funds sold and other short-term investments. Based upon
analyses of asset/liability repricing, interest rate forecasts, and liquidity
requirements, funds are periodically reinvested in high-quality debt securities,
which typically mature over a longer period of time. At the time of purchase,
management determines whether the securities will be classified as trading,
available-for-sale, or held-to-maturity. At December 31, 2003, all of Premier's
investments were classified as available-for-sale and carried on the books at
market value.
As shown in the following Securities Maturity and Yield Analysis table,
the average maturity period of the securities available-for-sale at December 31,
2003 was 4 years 3 months, lengthened somewhat by the 10 year 8 month average
final maturity of the mortgage-backed securities portfolio. The table uses a
final maturity method to report the average maturity of mortgage-backed
securities, which excludes the effect of monthly payments and prepayments.
Approximately 75% of Premier's investment securities are U.S. Government agency
or Treasury securities that have an average maturity of 2 years 5 months. The
average maturity of the investment portfolio is managed at a level to maintain a
proper matching with interest rate risk guidelines. During 2003, Premier sold a
portion of the securities classified as available-for-sale as part of its
management of interest rate risk, as shown in the Statements of Cash Flows.
Premier does not have any securities classified as trading or held-to-maturity
and it has no plans to establish such classifications at the present time.
Other information regarding investment securities may be found in the following
table and in Note 6 to the consolidated financial statements.
SECURITIES MATURITY AND YIELD ANALYSIS
December 31, 2003
(Dollars in thousands)
Average Taxable
Market Maturity Equivalent
Value (yrs/mos) Yield*
-------- -------- ---------
U.S. Treasury Securities
Within one year $ 401 3.08%
After one but within five years 251 1.40
--------
Total U.S. Treasury Securities 652 0/6 2.44
U.S. Government Agencies Securities
Within one year 13,796 2.66
After one but within five years 91,539 2.73
After five but within ten years 1,510 4.00
--------
Total U.S. Government Agencies Securities $106,845 2/5 2.74
States and Political Subdivisions Securities
Within one year 990 6.14
After one but within five years 2,848 4.99
After five but within ten years 2,525 4.78
Over ten years 505 3.96
--------
Total States and Political Subdivisions Securities $ 6,868 4/11 5.13
Mortgage-Backed Securities**
Within one year 395 3.68
After one but within five years 8,387 3.47
After five but within ten years 2,778 4.03
Over ten years 20,250 4.65
--------
Total Mortgage-Backed Securities $ 31,810 10/8 4.27
Corporate Securities
Within one year 1,038 4.25
After one but within five years 432 6.20
--------
Total Corporate Securities $ 1,471 0/8 4.82
--------
Total Securities Available-for-Sale $147,646 4/3 3.20
========
(*) Fully tax-equivalent using the rate of 34%.
(**) Maturities for Mortgage-Backed Securities are based on final maturity.
Premier's average investment in federal funds sold and other short-term
investments increased by 23.8% in 2003. This follows a 1.5% decrease in 2002.
Averaging $42.8 million in 2003, federal funds sold and other short-term
investments increased $8.2 million from the $34.6 million averaged in 2002, and
were higher than the $35.1 million averaged during 2001. The increase in average
federal funds sold in 2003 was the result of maintaining additional liquidity at
Farmers Deposit Bank and the desire to keep more liquid funds on hand to take
advantage of any potential rising interest rates. Fluctuations in federal funds
sold and other short-term investments reflect management's goal to maximize
asset yields while maintaining proper asset/liability structure, as discussed in
greater detail above and in other sections of this report.
Funding Sources
In 2003, Premier once again decreased the rates paid on its interest
bearing deposits in response to the decline in market interest rates. The
average rate paid on interest bearing liabilities decreased to 2.63% in 2003,
down from the 3.51% paid in 2002 and the 5.01% paid in 2001. The decrease is
largely due to declines in rates paid on time deposits as higher rate
certificates of deposits have either not renewed at maturity or were redeposited
at significantly lower rates in conjunction with the decline in market interest
rates. Similarly