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, 2004
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. [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act) Yes [ ] No [X]
The aggregate market value of common stock held by non-affiliates of the Company
as of June 30, 2004 was $44,204,914.
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 16, 2005
----- ----------------------------
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 2005 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 15, 2005, operates ten banking
offices in Kentucky, three banking offices in Ohio, and six banking offices in
West Virginia. At December 31, 2004, Premier had total consolidated assets of
$537.3 million, total consolidated deposits of $437.8 million and total
consolidated shareholders' equity of $51.0 million. The banking subsidiaries
(the "Banks" or "Affiliate Banks") consist of Citizens Deposit Bank & Trust,
Vanceburg, 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, conducted a further review of
those loans for which significant charge offs or additional provisions were
required in 2003. The purpose of the 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 financial statement periods prior to 2003. 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 were restated, as reported in the
2003 Annual Report to Shareholders, to reflect the financial statement effect of
the matters that occurred in those periods but which were improperly concealed
by subsidiary management.
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, and on July 1,
2004 the sale transaction closed. 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 2 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. Effective January 3, 2005, Premier merged two of its subsidiary banks,
Citizens Deposit Bank & Trust in Vanceburg, Kentucky and Bank of Germantown, in
Germantown, Kentucky. Bank of Germantown was merged into Citizens Deposit Bank,
with its facilities contining to operate as branches of Citizens Deposit Bank.
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.
Through Premier Data Services, Inc., the Company's data processing
subsidiary, the Company currently provides centralized data processing services
to four of the Banks. Beginning in late 2004 and continuing through the middle
of 2005, the Company is converting its data processing system to an external
third-party provider. Through the conversion process, Company senior management
along with each Bank's management is reviewing and standardizing its offering of
products and services, although pricing decisions will remain at the local Bank
level. Furthermore, upon conversion, the Company through the Banks will offer
more modern products, such as internet banking and check imaging, and will be
well positioned to take advantage of emerging technologies such as image
exchange to clear items.
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.
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 by 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 was 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 two 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 and "Tier
II" capital. "Tier I" capital includes common shareholders' equity,
noncumulative perpetual preferred stock, and related surplus (excluding auction
rate issues), minority interests in equity accounts of consolidated subsidiaries
and Trust Preferred Securities (subject to certain limitations.) Goodwill,
certain identifiable intangible assets and certain other assets are subtracted
from these sources of capital to calculate Tier I capital. "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, 2004, Premier met
both requirements, with Tier I and total capital equal to 16.6% and 18.9% 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, 2004, Premier's leverage ratio was 9.7%.
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 recently
re-evaluated whether trust preferred securities, in general, would continue to
qualify as Tier 1 capital due to deconsolidation of the related trust preferred
entity required by FASB Interpretation No. 46, . Its conclusion, issued in a
report released on March 1 2005, was to continue to permit trust preferred
securities to qualify as Tier I capital with certain restrictions phased in over
five-years. Once completely phased-in, the dollar amount of trust preferred
securities that will qualify as Tier I capital for bank holding companies of
Premier's size will be limited to 25% of equity based Tier I capital net of
goodwill. See Note 12 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 supersedes and rescinds all previous agreements between Premier and
the Federal Reserve Bank of Cleveland. Among other provisions, the agreement
required(s) 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
monitored by a committee consisting of at least three of its outside directors.
Two of the Company's subsidiaries, Citizens Deposit Bank & Trust and
the Bank of Germantown, entered into similar agreements with their respective
primary regulators which, among other things, prohibited the payment of
dividends without prior written approval and required significant changes in
their credit administration policies. The banks fully complied with the terms of
the agreements in 2004 and the agreements were accordingly rescinded by the
regulators.
On December 24, 2003, Premier announced that Farmers Deposit Bank 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 [prior to the Order]("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 notice of the Order 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 most 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 and fulfilling its requirements by
December 31, 2004, 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 worked with Premier to develop or revise the Bank's policies and
procedures as required by the Order. As of February 28, 2005, Bank management
has developed and submitted the required plans and updates due as a result of
the Order. As of December 31, 2004, the Tier I Leverage Ratio of Farmers Deposit
was 9.5% which exceeded the Order requirement of 8.0%
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 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, 2004, approximately $2.5 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.
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.
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 20 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 Federal Reserve 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 Federal Reserve
approval prior to engaging, either de novo or through acquisitions, in financial
activities previously determined to be permissible by the Federal Reserve.
Instead, a financial holding company need only provide notice to the Federal
Reserve within 30 days after commencing the new activity or consummating the
acquisition.
Number of Employees - The Company and its subsidiaries collectively had
approximately 223 full-time equivalent employees as of December 31, 2004. 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 104
Jefferson Street, Brooksville, Kentucky, which serves as a branch for Citizen's
Deposit Bank (formerly the 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), one leased branch office in Mason
County, Kentucky and the two former locations of the Bank of Germantown, one
branch located on Highway 10 in Germantown, Kentucky, and one branch located in
Bracken 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 leased facility in
Lawrence County, Ohio and one in Scioto County, Ohio. First Central Bank, in
addition to its main office at 2 South Main Street in Philippi, West Virginia,
has a branch located in Buckhannon, West Virginia. Boone County Bank, in
addition to its main office at 300 State Street, Madison, West Virginia, has one
leased branch located in Lincoln County, West Virginia and two other branches,
one each located in Boone and Logan 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, 2004, the Company had
approximately 718 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
-------------- ---- ---
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 $ - $ 9.49 $ 8.31
Second Quarter - 10.20 8.41
Third Quarter - 10.28 8.50
Fourth Quarter - 13.35 8.80
---------
$ -
=========
2005
First Quarter
(through March 16, 2005 $ - $12.75 $10.78
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. The January 29, 2003 agreement also 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,
2004, approximately $2.5 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 data presented below
reflects separately the impact of discontinued operations as more fully
described in Note 2 to the consolidated financial statements.
At or for the Year Ended December 31,
2004 2003 2002 2001 2000
-------- -------- -------- -------- --------
Earnings
Net interest income $ 18,064 $ 19,182 $ 20,838 $ 20,931 $ 24,121
Provision for loan losses 1,026 20,513 9,453 8,350 4,615
Non-interest income 3,606 4,064 2,717 12,178 3,192
Non-interest expense 17,782 17,632 17,831 20,200 22,720
Income taxes (benefit) 899 (5,282) (1,522) 2,985 (237)
Income (loss) from
continuing operations 1,963 (9,617) (2,207) 1,574 215
Income (loss) from
discontinued operations 4,734 (80) (1,130) (380) 1,120
-------- -------- -------- -------- --------
Net income (loss) $ 6,697 $ (9,697) $ (3,337) $ 1,194 $ 1,335
======== ======== ======== ======== ========
Financial Position
Total assets of continuing
operations $537,255 $543,229 $590,869 $606,961 $780,659
Total assets of discontinued
Operations 0 79,163 84,406 104,653 110,162
Loans, net of unearned
income 324,937 331,794 373,099 384,940 505,567
Allowance for loan losses 9,384 14,300 9,698 7,371 6,617
Goodwill and other intangibles 15,816 15,816 15,816 15,816 22,615
Securities 153,892 147,646 144,698 143,516 185,282
Deposits 437,798 455,474 477,724 480,991 635,533
Other borrowings 20,536 18,307 32,600 43,724 64,503
Subordinated debentures 20,876 26,546 29,639 29,639 29,639
Stockholders' equity 51,029 45,540 56,124 58,750 55,830
Share Data
Income (loss) from continuing
operations - basic $ 0.37 $ (1.84) $ (0.42) $ 0.30 $ 0.04
Income (loss )from continuing
operations - diluted 0.37 (1.84) (0.42) 0.30 0.04
Net income - basic 1.28 (1.85) (0.64) 0.23 0.26
Net income - diluted 1.28 (1.85) (0.64) 0.23 0.26
Book value 9.75 8.70 10.73 11.23 10.67
Cash dividend 0.00 0.00 0.00 0.00 0.15
Ratios
Return on average assets (1) 0.36% (1.66)% (0.37)% 0.24% 0.03%
Return on average equity (1) 4.06% (18.46)% (3.77)% 2.76% 0.41%
Dividend payout (2) 0.00% 0.00% 0.00% 0.00% 375.00%
Stockholders' equity to total
assets at period-end (3) 9.50% 8.38% 9.50% 9.68% 7.15%
Average stockholders' equity
to average total assets (1) 8.23% 7.88% 8.44% 7.37% 6.07%
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 five community
bank subsidiaries ranging in size from $80 million to $158 million, each with a
local community name and orientation. On July 1, 2004, Premier sold one bank
subsidiary, Citizens Bank (Kentucky), Inc. ("Citizens Bank"). 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." Premier realized a
net profit on the sale Citizens Bank of $4.7 million which is included in the
income from discontinued operations. See Note 2 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. On January 3, 2005,
Premier merged two of its banks, Citizen's Deposit Bank and Bank of Germantown.
Premier is also the parent of a data processing subsidiary which currently
provides the data processing and management services for four of Premier's
affiliate banks and one other non-affiliated bank. As of December 31, 2004,
Premier had approximately $537 million in total assets, $325 million in total
loans and $438 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 in 2004, 2003 and 2002 to perform internal audits of the financial
records of each of the subsidiaries on a periodic basis. Their findings and
recommendations were reported to Premier's audit committee as well as the audit
committees of the subsidiaries. In 2005, Premier reduced its reliance on
third-party internal audit and loan review providers and expanded its internal
audit staff at the holding company level. Likewise, 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 or lack thereof, 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 presentation 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 utilize expected future tax deductions. At December 31, 2004 management's
consideration of the need for a valuation allowance focused on the generation of
future taxable income as all available previously paid taxes were 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.
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 on 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, conducted a further review of those loans for which significant
charge offs or additional provisions were required in 2003. The purpose of the
review was to determine if the facts or circumstances that gave rise to the
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, in 2003, the
financial statements for 2002 and 2001 were restated to reflect the financial
statement effect of the matters that occurred in those periods but which were
improperly concealed by subsidiary management.
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 and has
requested information about Premier's investigation. Premier is cooperating with
the SEC.
SUMMARY FINANCIAL RESULTS
Premier had net income from continuing operations of $1.963 million in
2004 compared to a $9.6 million net loss from continuing operations reported for
the year 2003. Net income in 2004 is primarily the result of the continued
earnings of Premier's profitable banks partially offset by expenses associated
with rehabilitating its subsidiary, Farmers Deposit Bank, conducting Premier's
own investigation, cooperating with the SEC investigation, and reducing debt at
the holding company. The loss for 2003 is primarily due to large provisions for
loan losses and bad check losses at Farmers Deposit Bank. The loss in 2003
follows a $2.2 million loss in 2002 which was due to large provisions for loan
losses, writedowns of repossessed real estate to realizable values, and higher
collection costs. Basic earnings per share from continuing operations was $0.37
in 2004, compared to a loss of ($1.84) in 2003, and a loss
of ($0.42) in 2002.
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 net
income in 2004 resulted in an ROA of 0.36%, an increase over the (1.66%) net
loss ROA in 2003 and the (0.37)% net loss ROA reported in 2002. As shown in the
table, fully taxable equivalent net interest income (as a percent of average
earning assets) has remained fairly consistent over the past five years with a
high of 3.84% in 2002. The net losses in 2003 and 2002 were primarily the result
of an increase in the provision for loan losses, resulting in negative net
credit income for those years. In 2004, net credit income was once again
positive, achieving the highest level over the five year period. This increase
in net credit income (as a percent of average earning assets) was dampened
somewhat by higher non-interest expenses (as a percent of average earning
assets) when compared to the previous four years. As illustrated in the table,
Premier's 2004 fully taxable net interest income as a percent of average earning
assets was down slightly to 3.61% from the 3.63% recorded in 2003 as interest
earned on loans declined slightly due to a lower balance of loans outstanding
and lower yields on loans due to the interest rate environment. However, during
the same time, net credit income increased as the provision for loan losses was
0.20% of average earning assets in 2004 compared to 3.81% in 2003. The net
overhead ratio (non-interest expense less non-interest income as a percent of
average earning assets) increased in 2004 to 2.83% compared to 2.64% in 2003,
the lowest ratio reported in the five years presented in the table. The 2003
ratio declined from a 2.71% net overhead ratio reported in 2002. The increase in
2004 net overhead was the result of increases in non-interest expense related to
the investigation of Farmers Deposit Bank, the loss on the sale of facilities
formerly leased to Citizens Bank (which was sold in 2004), and accelerated
amortization costs related to the early redemption of Premier's Trust Preferred
Securities. The decline in 2003 compared to 2002 was the result of increases in
non-interest income related to service charges on deposit accounts. In 2004,
this trend continued, as non-interest income increased again due to revenue from
service charges on deposit accounts.
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 2004 ROE was 4.06%, compared to (18.46%) realized in 2003
and (3.77%) reported for 2002. ROE increased primarily due the net income
reported in 2004 versus the operating losses reported for 2003 and 2002.
ANALYSIS OF RETURN ON ASSETS AND EQUITY
from continuing operations
2004 2003 2002 2001 2000
---- ---- ---- ---- ----
As a percent of average earning assets:
Fully taxable-equivalent net interest income 3.61% 3.63% 3.84% 3.50% 3.56%
Provision for loan losses (0.20) (3.81) (1.70) (1.37) (0.66)
----- ----- ----- ----- -----
Net credit income 3.40 (0.18) 2.14 2.13 2.90
Gains on the sales of assets & subsidiaries* 0.02 0.11 (0.01) 1.48 (0.04)
Non-interest income 0.69 0.62 0.50 0.52 0.50
Non-interest expense (3.52) (3.26) (3.21) (3.30) (3.26)
Tax equivalent adjustment (0.03) (0.07) (0.08) (0.08) (0.10)
Applicable income taxes (0.18) 0.98 0.27 (0.49) 0.03
----- ----- ----- ----- -----
Return on average earning assets 0.39 (1.79) (0.40) 0.26 0.03
Multiplied by average earning assets to
average total assets 92.39 92.86 92.34 91.98 91.58
----- ----- ----- ----- -----
Return on average assets 0.36% (1.66)% (0.37)% 0.24% 0.03%
Multiplied by average assets to average equity 11.33X 11.13X 10.26X 11.68X 14.43X
----- ----- ----- ----- -----
Return on average equity 4.06% (18.46)% (3.77)% 2.76% 0.41%
===== ===== ===== ===== =====
A breakdown of Premier's financial results by quarter for the years
ended December 31, 2004 and 2003 is summarized below.
QUARTERLY FINANCIAL INFORMATION
(Dollars in thousands except per share amounts)
Full
First Second Third Fourth Year
------- ------- ------- ------- -------
2004
Interest Income $ 7,055 $ 6,926 $ 6,951 $ 7,189 $28,121
Interest Expense 2,609 2,528 2,553 2,387 10,057
Net Interest Income 4,446 4,398 4,418 4,802 18,064
Provision for Loan Losses 135 374 162 355 1,026
Securities Gains 10 0 0 90 100
Net Overhead 3,626 3,337 3,599 3,714 14,276
Income before Income Taxes 695 687 657 823 2,862
Income from Continuing Operations 485 474 448 559 1,963
Income (Loss) from Discontinued Operations 29 (25) 4,730 0 4,734
Net Income 514 449 5,178 559 6,697
Basic and Diluted Loss per share from
Continuing Operations 0.09 0.09 0.08 0.11 0.37
Basic and Diluted Net Loss per share 0.09 0.09 0.98 0.11 1.28
Dividends Paid per share 0.00 0.00 0.00 0.00 0.00
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
SALE OF SUBSIDIARIES
In the fourth quarter of 2003, 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, which was completed on July 1,
2004.. The sale of this subsidiary helped 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. As a result of the sale, regulatory
capital ratios of Premier were restored to the stronger levels management wishes
to maintain; cash reserves of the holding company were replenished; a portion of
the cash reserves were used to reduce outstanding debt by $9.4 million; and the
profit from the sale allowed Premier to utilize a substantial portion of its
Federal income tax net operating loss carryforward.
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 operating results subsequent to 2001 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, 2004, is provided in the
table below.
AVERAGE CONSOLIDATED BALANCE SHEETS AND NET INTEREST INCOME ANALYSIS
(Dollars in thousands)
2004 2003 2002
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 $112,260 $3,117 2.78% $102,856 $ 3,924 2.84% $105,045 $ 4,429 4.22%
States and municipal obligations(1) 4,941 338 6.84 15,589 1,015 6.51 17,936 1,233 6.88
Mortgage Backed Securities 29,803 1,183 3.97 16,757 585 3.49 5,562 302 5.43
Other securities 3,216 138 4.29 7,613 342 4.49 8,169 347 4.25
-------- ------- ----- -------- ------- ----- -------- ------- -----
Total investment securities 150,220 4,776 3.18 142,815 4,866 3.41 136,712 6,311 4.62
Federal funds sold 29,369 380 1.29 42,844 469 1.09 34,600 567 1.64
Interest-bearing deposits with
banks 256 6 2.57 568 7 1.23 564 8 1.42
Loans, net of unearned income(4)(5)
Commercial(1) 132,785 8,913 6.71 142,768 9,944 6.97 161,226 12,653 7.85
Real estate mortgage 145,387 10,182 7.00 151,210 11,538 7.63 160,532 12,989 8.09
Installment 47,438 4,029 8.49 58,178 5,293 9.10 61,005 6,238 10.23
-------- ------- ----- -------- ------- ----- -------- ------- -----
Total loans 325,610 23,124 7.10 352,156 26,775 7.60 382,763 31,880 8.33
-------- ------- ----- -------- ------- ----- -------- ------- -----
Total interest-earning assets 505,455 28,286 5.60 538,383 32,117 5.97 554,639 38,766 6.99
Allowance for loan losses (11,413) (12,704) (8,108)
Cash and due from banks 13,837 13,400 13,334
Premises and equipment 7,738 8,233 8,725
Other assets 31,490 32,474 32,073
Assets of discontinued operations 39,762 81,821 93,702
-------- -------- --------
Total assets $586,869 $661,607 $694,365
======== ======== ========
Liabilities and Equity:
Interest bearing liabilities
NOW and money market $158,169 1,290 0.82% 180,763 2,045 1.13% $171,801 3,468 2.02%
Savings 62,518 521 0.83 57,327 781 1.36 53,352 942 1.77
Certificates of deposit and
other time deposits 164,932 4,455 2.70 182,542 5,677 3.11 209,593 8,754 4.18
-------- ------- ----- -------- ------- ----- -------- ------- -----
Total interest bearing deposits 385,619 6,266 1.62 420,632 8,503 2.02 434,746 13,164 3.03
Short-term borrowings 6,539 118 1.80 4,675 51 1.09 5,436 94 1.73
Other borrowings 5,306 248 4.67 8,350 379 4.54 10,678 412 3.86
FHLB advances 9,955 556 5.59 15,852 826 5.21 19,824 943 4.76
Debentures 25,397 2,869 11.30 27,253 2,788 10.23 29,639 2,852 9.62
-------- ------- ----- -------- ------- ----- -------- ------- -----
Total interest-bearing
liabilities 432,816 10,057 2.32 476,762 12,547 2.63% 500,323 17,465 3.49%
Non-interest bearing deposits 62,486 53,824 47,327
Other liabilities 7,393 4,903 3,064
Liabilities of
discontinued operations 35,876 74,021 85,093
Shareholders' equity: 48,298 52,097 58,558
--------- -------- --------
Total liabilities and equity $586,869 $661,607 $694,365
======== ======== ========
Net interest earnings (1) $18,229 $19,570 $21,301
======= ======= =======
Net interest spread (1) 3.27% 3.33% 3.50%
Net interest margin (1) 3.61% 3.63% 3.84%
(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 2004, average earning assets declined by 6.1% or $32.9 million from
2003, following a 2.9% or $16.3 million decline in 2003 from 2002. Average
interest bearing liabilities, the primary source of funds supporting the earning
assets, decreased 9.1% or $43.1 million from 2003, which follows a 4.7% or $23.5
million decline in 2003 from 2002. The decline in 2004 average earning assets
was the result of the residual effect of the $16.5 million of loan charge-offs
in 2003, the $7.0 million of loan charge-offs in 2004 (primarily at Farmers
Deposit in both years), coupled with loan maturities and principal pay downs
that were not renewed and the redeployment of other available funds to reduce
debt. The decline in interest bearing liabilities was largely due to debt
reduction strategies, a continued shift in customer deposits from interest
bearing to non-interest bearing, and the non-renewal of certain certificates of
deposit at Farmers Deposit Bank in conjunction with Premier's capital
restoration plan for that Bank. Other than the effects of the capital
restoration plan, the same factors were the result of the decline in average
earning assets and average interest bearing liabilities in 2003 compared to
2002. 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 64.4% of average earning assets during 2004.
Average loans declined by $26.5 million or 7.5% in 2004. The decline is largely
attributable to the high level of charge-offs and loan collections at Farmers
Deposit. The average loans outstanding at Farmers Deposit declined by $30.5
million in 2004, $4.0 million more than Premier's total decline of $26.5
million. Of the remaining increase, Premier realized a 6.0% increase in loans in
its West Virginia markets and an 11.1% increase in loans in its Ohio markets.
These increases were partially offset by a 10.0% decline in average loans in
Premier's other Kentucky markets. Due to the low interest rate environment, many
borrowers sought to refinance their loans to reduce their interest costs. Due to
the lackluster economy and the resulting lower demand for loans during much of
2003 and 2004, larger banks began competing more strongly by enticing borrowers
with prime rate or below prime rate loans. Therefore, scheduled loan maturities
were not necessarily renewed with Premier. In 2003, average loans outstanding
decreased by $30.6 million or 8.0% compared to 2002. Again, the decline is
partially attributed to the high level of charge-offs, primarily at Farmers
Deposit (down $13.9 million on average), but also to stiffer competition from
larger banks competing in Premier's markets and a general decline in economic
growth. Of the total decline in 2003, 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 19.2% decline in loans in Premier's other
Kentucky markets.
Total loans at December 31, 2004 decreased by $6.9 million or 2.1% from
the total at December 31, 2003. This decrease follows a $41.3 million or 11.1%
decrease in 2003 from total loans at December 31, 2002. The decline in 2004
period-end loans was the result of the $7.0 million of loan charge-offs recorded
during the year, primarily at Farmers Deposit ($5.5 million). 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 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
2004 % 2003 % 2002 % 2001 % 2000 %
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Summary of Loans by Type
Commercial, secured by real
estate $101,567 31.3% $101,325 30.5% $109,571 29.3% $106,726 27.7% $138,960 27.5%
Commercial, other 40,923 12.6 38,063 11.5 51,347 13.8 59,364 15.4 72,197 14.3
Real estate construction 5,906 1.8 5,414 1.6 7,318 2.0 8,245 2.1 14,142 2.8
Real estate mortgage 128,243 39.5 126,134 38.0 134,271 36.0 135,937 35.4 178,558 35.3
Agricultural 2,380 0.7 3,032 0.9 4,381 1.2 5,402 1.4 8,878 1.7
Consumer 44,470 13.7 56,216 17.0 63,534 17.0 68,300 17.7 92,564 18.3
Other 1,438 0.4 1,610 0.5 2,677 0.7 966 0.3 598 0.1
-------- ---- -------- ---- -------- ---- -------- ---- -------- ----
Total loans $324,927 100.0% $331,794 100.0% $373,099 100.0% $385,019 100.0% $505,897 100.0%
Less unearned income (330) (504)
-------- -------- -------- -------- --------
Total loans net of
unearned income $324,927 $331,794 $373,099 $385,019 $505,567
======== ======== ======== ======== ========
Non-Performing Assets
Non-accrual loans $ 6,847 $ 11,958 $ 8,197 $ 6,302 $ 5,864
Accruing loans which are
contractually past due
90 days or more 739 4,137 1,238 5,612 1,563
Restructured loans 238 104 129 338 689
-------- -------- -------- -------- --------
Total nonperforming and
restructured loans 7,824 16,199 9,564 12,252 8,116
Other real estate acquired
through foreclosures 2,247 3,187 3,505 5,508 2,844
-------- -------- -------- -------- --------
Total nonperforming and
restructured loans and
other real estate $ 10,071 $ 19,386 $ 13,069 $ 17,760 $ 10,960
======== ======== ======== ======== ========
Nonperforming and restructured
loans as a % of total loans 2.41% 4.88% 2.56% 3.18% 1.60%
Nonperforming and restructured
loans and other real estate
as a % of total assets (1) 1.87 3.57% 2.21% 2.93% 1.40%
Allocation of Allowance
For Loan Losses
Commercial, other $ 1,734 13.7% $ 4,166 12.9% $ 2,294 15.7% $ 1,379 17.1% $ 2,145 16.1%
Real estate, construction 83 1.8 662 1.6 632 2.0 488 2.1 381 2.8
Real estate, other 4,276 70.8 4,886 68.5 4,341 65.3 3,235 63.1 2,510 62.8
Consumer installment 1,255 13.7 2,478 17.0 977 17.0 1,178 17.7 1,067 18.3
Unallocated 2,036 2,108 1,454 1,091 514
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Total $ 9,384 100.0% $ 14,300 100.0% $ 9,698 100.0% $ 7,371 100.0% $ 6,617 100.0%
======== ===== ======== ===== ======== ===== ======== ===== ======== =====
(1) From continuing operations
Loans secured by real estate, which in total constituted approximately
73% of Premier's loan portfolio at December 31, 2004, 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 18 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
$10.1 million, or 1.87% of total assets of continuing operations at year-end
2004. The amount is down significantly from the $19.4 million of non-performing
assets (3.57% of total assets of continuing operations) at year-end 2003 and the
$13.1 million of non-performing assets (2.21% of total assets of continuing
operations) at year-end 2002. The decrease in 2004 was due to charge-offs of
loans determined to be uncollectible, the sale of $4.5 million of OREO property,
and the collection or rehabilitation of previously delinquent loans. 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 proceedings
begun to obtain and liquidate any collateral securing the past due or matured
loans. Premier is committed to continuing to reduce its high level of
non-performing assets and implementing strong underwriting standards to help
maintain a lower 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
and 2004 are masked by the high level of non-performing assets at Farmers
Deposit Bank, which alone totaled $12.5 million at December 31, 2003. At
December 31, 2004, the non-performing assets at Farmers Deposit Bank had
declined to $6.8 million, leaving $3.3 million of total non-performing assets at
the other Affiliate Banks combined.
The Loan Summary table presents five years of comparative non-performing
asset information. Other than these loans and the impaired loans discussed in
Note 6 to the consolidated financial statements, Premier does not have a
significant volume of loans whereby management has serious doubts about the
borrowers ability to comply with the present repayment terms of the loan.
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, 2004. 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. During 2004, Premier realized a $125,000 net profit on the
disposition of OREO properties, net of writedowns. Although loans may be
classified as non-performing, some continue to pay interest irregularly or at
less than original contracted terms. During 2004, approximately $159,000 of
interest was recognized on non-accrual and restructured loans, while
approximately $694,000 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 6 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, 2004, the allowance for loan losses was $9.4 million or
2.89% to total year-end loans. This ratio is a decrease from the prior year's
4.31% but still higher than the 2.60% at the end of 2002. The decrease in the
allowance in 2004 was the result of charge-offs of loans previously identified
as impaired partially offset by $1.1 million of recoveries and $1.0 million of
additional provisions for loan losses during 2004. The increase at year-end 2003
was the result of 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 2004 was $1.0 million, down significantly from the $20.5 million
provision in 2003 and the $9.5 million provision in 2002. The provision in 2004
was the result of newly identified impaired loans and increases in the volume of
loans outstanding at the banks located in West Virginia. 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 provision 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. 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,
2004 2003 2002 2001 2000
------- ------- ------- ------- -------
Allowance for Loan Losses, Beginning of Period $14,300 $ 9,698 $ 7,371 $ 6,617 $ 5,755
Amounts charged off:
Commercial, financial and agricultural loans 1,520 4,417 4,080 2,585 3,152
Real estate construction loans 5 0 833 480 0
Real estate loans - other 2,413 6,427 1,072 3,013 105
Consumer installment loans 3,054 5,669 1,904 1,725 850
------- ------- ------- ------- -------
Total charge-offs 6,992 16,513 7,889 7,803 4,107
Recoveries on amounts previously charged off:
Commercial, financial and agricultural loans 264 145 138 163 182
Real estate construction loans 1 37 16 1 0
Real estate loans - other 87 74 163 10 1
Consumer installment loans 698 346 446 299 171
------- ------- ------- ------- -------
Total recoveries 1,050 602 763 473 354
------- ------- ------- ------- -------
Net charge-offs 5,942 15,911 7,126 7,330 3,753
Provision for loan losses 1,026 20,513 9,453 8,350 4,615
Balance of acquired or disposed subsidiaries 0 0 0 (266) 0
------- ------- ------- ------- -------
Allowance for Loan Losses, End of Period $ 9,384 $14,300 $ 9,698 $ 7,371 $ 6,617
======= ======= ======= ======= =======
Average total loans 325,610 352,156 382,763 424,903 503,776
Total loans at year-end 324,927 331,794 373,099 384,940 505,567
As a Percent of Average Loans:
Net charge-offs 1.82% 4.52% 1.86% 1.73% 0.74%
Provision for loan losses 0.32% 5.83% 2.47% 1.97% 0.92%
Allowance for loan losses 2.88% 4.06% 2.53% 1.73% 1.31%
As a Percent of Total Loans at Year-end:
Allowance as a percentage of year-end net loans 2.89% 4.31% 2.60% 1.91% 1.31%
As a Multiple of Net Charge-offs:
Allowance as a multiple of net charge-offs 1.58X 0.90X 1.36X 1.01X 1.76X
Income before tax and provision for loan losses 0.65X 0.35X 0.80X 1.76X 1.22X
Net charge-offs in 2004 decreased to $5.9 million, down $9.9 million or
more than half of the $15.9 million of net charge-offs experienced in 2003.
Approximately $4.8 million or 81% of the 2004 net charge-offs were at Farmers
Deposit Bank. This level of net charge-offs compares to the $15.9 million of net
charge-offs in 2003, 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 all categories of loan
charge-offs were down in 2004, consumer and real estate loan charge-offs
continued to be higher than commercial loan charge-offs. 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, 2004 was 2.89% of total loans
outstanding and 120% of non-performing loans.
The following table presents the maturity distribution and interest
sensitivity of selected loan categories at December 31, 2004. Maturities are
based upon contractual terms.
LOAN MATURITIES AND INTEREST SENSITIVITY
December 31, 2004
(Dollars in thousands)
Projected Maturities*
One Year One Through Over Total
or Less Five Years Five Years Loans
-------- ---------- ---------- --------
Commercial, secured by real estate $ 8,206 $ 30,523 $ 62,839 $101,568
Commercial, other 14,159 15,965 10,799 40,923
Real estate construction 2,841 1,036 2,029 5,906
Agricultural 815 1,033 532 2,380
-------- -------- -------- --------
Total $ 26,021 $ 48,557 $ 76,199 $150,777
======== ======== ======== ========
Fixed rate loans $ 10,263 $ 28,654 $ 8,699 $ 47,616
Floating rate loans 15,758 19,903 67,500 103,161
-------- -------- -------- --------
Total $ 26,021 $ 48,557 $ 76,199 $150,777
======== ======== ======== ========
Fixed rate loans projected to mature* after one year $ 37,353
Floating rate loans projected to mature* after one year 87,403
--------
Total $124,756
========
(*) Based on scheduled or approximate repayments.
Investment Portfolio and
Other Earning Assets
Investment securities averaged $150.2 million in 2004, a $7.4 million or
5.2% increase from the $142.8 million averaged in 2003. This increase follows a
4.5% increase from the $136.7 million averaged in 2002. The increase in average
investments in 2004 was the result of weak loan demand and funds from loan
paydowns and payoffs at Farmers Deposit Bank. These funds were not used to fund
new loans but were instead invested in high-quality debt and mortgage- backed
securities. The increase in 2003 was the result of weak loan demand across the
Company and stiffer competition from large banks in Premier's markets. Again,
funds from loan payoffs and maturities were not used to fund new loans but were
invested in high-quality debt securities.
The following table presents the carrying values of investment securities.
Fair Value of Securities Available for Sale
(Dollars in thousands)
As of December 31
2004 2003 2002
--------- --------- ---------
U.S. Treasury Securities: $ 250 $ 652 $ 407
U.S. Agency Securities: 115,514 106,845 111,259
States and Political Subdivisions Securities 2,751 6,868 18,610
Mortgage-backed securities: 34,942 31,810 5,370
Corporate securities: 435 1,471 9,052
Total securities: $ 153,892 $ 147,646 $ 144,698
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, 2004, 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,
2004 was 4 years 3 months, lengthened somewhat by the 11 year 1 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 3 months. The
average maturity of the investment portfolio is managed at a level to maintain a
proper matching with interest rate risk guidelines. During 2004, 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 5 to the consolidated financial statements.
SECURITIES MATURITY AND YIELD ANALYSIS
December 31, 2004
(Dollars in thousands)
Average Taxable
Market Maturity Equivalent
Value (yrs/mos) Yield*
-------- -------- ---------
U.S. Treasury Securities
Within one year $ 250 1.40%
--------
Total U.S. Treasury Securities 250 0/2 1.40
U.S. Government Agencies Securities
Within one year 24,580 2.24
After one but within five years 90,934 3.08
--------
Total U.S. Government Agencies Securities $115,514 2/3 2.90
States and Political Subdivisions Securities
Within one year