UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-K
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þ
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ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
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For
the fiscal year ended December 31,
2007
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or
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o
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TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
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For
the transition period from ___________ to
___________
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Commission
file number 0-20908
PREMIER FINANCIAL BANCORP,
INC.
(Exact
name of registrant as specified in its charter)
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Kentucky
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61-1206757
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(State
or other jurisdiction of incorporation organization)
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(I.R.S.
Employer Identification No.)
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2883
Fifth Avenue
Huntington,
West Virginia
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25702
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(Address
of principal executive offices)
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(Zip
Code)
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Registrant’s
telephone number (304)
525-1600
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Securities
registered pursuant to Section 12(b) of the Act:
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Title
of each class
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Name
of exchange on which registered
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Common
Stock without par value
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NASDAQ:GMS
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Securities
registered pursuant to Section 12(g) of the
Act: NONE
Indicate by check mark if the registrant
is a well-known seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes o No þ.
Indicate by check mark if the registrant
is not required to file reports pursuant to Section 13 or Section 15(d) of the
Exchange Act Yes o No þ.
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 þ No
o.
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. o
PREMIER
FINANCIAL BANCORP, INC.
FORM
10-K
December
31, 2007
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company. See the definitions of “large accelerated filer”,
“accelerated filer” and “smaller reporting company” in Rule 12b-2 of the
Exchange Act. (Check one):
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Large
accelerated filer o.
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Accelerated
filer o.
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Non-accelerated
filer o.
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Smaller
reporting company þ
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Indicate by check mark whether the
registrant is a shell company (as defined in Rule 12b-2 of the Exchange
Act). Yes o No þ.
As of
June 30, 2007, the aggregate market value of the registrant’s common stock held
by non-affiliates of the registrant was $73,110,473 based on the closing sale
price as reported on the National Association of Securities Dealers Automated
Quotation System National Market System.
Indicate
the number of shares outstanding of each of the issuer’s classes of common
stock, as of the latest practicable date.
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Title
of each class
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Outstanding
at March 15, 2008
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Common
Stock without par value
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5,237,899
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DOCUMENTS
INCORPORATED BY REFERENCE
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Document
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Parts
Into Which Incorporated
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Proxy
Statement for the Annual Meeting of Shareholders to be held on June 18,
2008.
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Part
III
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TABLE
OF CONTENTS
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PART
I
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Item 1.
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4
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Item 1A.
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14
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Item 1B.
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20
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Item 2.
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20
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Item 3.
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20
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Item 4.
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20
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PART
II
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Item 5.
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21
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Item 6.
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24
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Item 7.
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26
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Item 7A.
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50
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Item 8.
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64
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66
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67
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68
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69
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70
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71
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73
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Item 9.
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104
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Item 9A(T).
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104
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Item 9B.
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105
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PART
III
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Item 10.
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106
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Item 11.
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106
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Item 12.
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106
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Item 13.
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106
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Item 14.
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106
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PART
IV
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Item 15.
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107
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110
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PREMIER
FINANCIAL BANCORP, INC.
FORM
10-K
December
31, 2007
PART
I
THE
COMPANY
Premier Financial Bancorp, Inc. (the
"Company" or "Premier") is a multi-bank holding company that, as of March 15,
2008 operates nine banking offices in Kentucky, three banking offices in Ohio,
and seven banking offices in West Virginia. At December 31, 2007, Premier had
total consolidated assets of $549.3 million, total consolidated deposits of
$449.0 million and total consolidated shareholders' equity of $67.4 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.
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.
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
subsidiary. See "REGULATORY MATTERS -- Dividend Restrictions" for
discussion of the restrictions on the Affiliate Banks' ability to pay dividends
to Premier.
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 continuing
to operate as branches of Citizens Deposit Bank.
PREMIER
FINANCIAL BANCORP, INC.
FORM
10-K
December
31, 2007
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."
Beginning in April 2005 and concluding
in July 2005, the Company converted each of its Affiliate Banks from an in-house
system administered by a wholly-owned subsidiary to an outsourced system
administered by FiServ for their data and item processing
functions. Subsequent to the conversion, the operations of the
Company’s data processing subsidiary, Premier Data Services, Inc. were suspended
and the subsidiary was merged into the Company on June 27, 2006.
In 2007, the Company resumed its
strategy to acquire and own community banks. On October 24, 2007, the
Company entered into a material definitive agreement with Citizens First Bank,
Inc. (Citizens First), a bank with $60 million of total assets located in
Ravenswood, West Virginia. Under terms of the definitive agreement,
Premier will purchase Citizens First for up to $11,700,000 in stock and
cash. Each share of Citizens First common stock will be entitled to
merger consideration of cash and stock that will generally total $29.25, subject
to certain limitations. Premier will issue 480,000 shares of its
common stock plus, depending upon Premier’s stock price nearer to transaction
closing, Premier will pay in total up to $5.3 million in cash to the
shareholders of Citizens First. The transaction, which still requires
approval by Citizens First’s shareholders, is anticipated to close sometime in
the second quarter of 2008.
On November 27, 2007, the Company
entered into a material definitive agreement with Traders Bankshares, Inc.
(Traders), a single bank holding company with $105 million of total assets
located in Spencer, West Virginia. Under terms of the definitive
agreement, Premier will purchase Traders for approximately $18,140,000 in stock
and cash. Each share of Traders common stock will be entitled to
merger consideration of $50.00 cash and 3.75 shares of Premier common stock,
subject to certain limitations. Premier will issue approximately
675,000 shares of its common stock to the shareholders of
Traders. The transaction, which still requires approval by Traders’
shareholders, is anticipated to close sometime in the second quarter of
2008.
PREMIER
FINANCIAL BANCORP, INC.
FORM
10-K
December
31, 2007
BUSINESS
General
Through the Banks 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 accounting, loan review, operations and network support, human
resources, 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 its customers and desirable changes to existing
products and services.
Prior to the conversions in mid 2005,
the Company's data processing subsidiary, Premier Data Services, Inc., provided
centralized data processing services to four of the Banks. Beginning in late
2004 and continuing through the middle of 2005, the Company converted its data
processing system to an external third-party provider. Through the conversion
process, Company senior management along with each Bank's management reviewed
and standardized their offering of products and services, although pricing
decisions remain at the local Bank level. Furthermore, as a result of
conversion, the Company through the Banks is able 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.
PREMIER
FINANCIAL BANCORP, INC.
FORM
10-K
December
31, 2007
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.
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. The Banks also originate residential mortgage loans that
are sold in the secondary mortgage market. Consumer lending
activities consist of traditional forms of financing for automobile and personal
loans including unsecured lines of credit. 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.
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. Customers can access their accounts via traditional
bank branch locations as well as Automated Teller Machines (ATM’s) and the
internet. The Banks also offer bill payment and telephone banking
services. 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.
PREMIER
FINANCIAL BANCORP, INC.
FORM
10-K
December
31, 2007
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, service charges on deposit accounts for various services related to
customer convenience, interest rates charged on loans and other credit, 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. 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.
PREMIER
FINANCIAL BANCORP, INC.
FORM
10-K
December
31, 2007
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 members of the Federal Reserve System are supervised and
regulated by the Federal Reserve, and those 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
subsidiary 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.
PREMIER
FINANCIAL BANCORP, INC.
FORM
10-K
December
31, 2007
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,
non-cumulative 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
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, 2007, Premier met both requirements, with Tier I
and total capital equal to 16.1% and 17.3% 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, 2007,
Premier's leverage ratio was 9.8%.
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.
PREMIER
FINANCIAL BANCORP, INC.
FORM
10-K
December
31, 2007
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 January 29, 2003, the Company entered into a written
agreement with the Federal Reserve Bank of Cleveland (FRB) which superseded and
rescinded a previous agreement between the Company and the Federal Reserve
Bank. In, 2006, the Federal Reserve Bank determined that Premier had
fully satisfied all of the provisions of the Written Agreement and, accordingly,
the FRB terminated the agreement effective April 18, 2006. Among
other provisions, the agreement required the Company to retain an independent
consultant to review its management, directorate and organizational structure,
adopt a management plan responsive to such consultant's report, update its
management succession plan in accordance with any recommendations in such
consultant's report, monitor its subsidiary banks' compliance with bank policies
and loan review programs, conduct formal quarterly reviews of its subsidiary
Banks' allowances for loan losses, maintain sufficient capital, submit a plan to
the FRB for improving consolidated earnings over a three-year period, and submit
to the FRB annual projections of planned sources and uses of the Company's cash,
including a plan to service its outstanding debt and then outstanding trust
preferred securities. The Company’s compliance with the written
agreement was monitored by a committee consisting of three of its outside
directors.
PREMIER
FINANCIAL BANCORP, INC.
FORM
10-K
December
31, 2007
As previously disclosed in earlier
reports, some of the subsidiary Banks have, in the past, been subject to
regulatory agreements. Before they were merged together into one
entity, 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 their
regulators.
As a result of a 2003 investigation
into the conduct of the former president of Farmers Deposit Bank 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 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. On December
24, 2003, Premier announced that Farmers Deposit Bank had reached an agreement
with the 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 also outlined a number of steps to be taken by
Farmers Deposit which were designed to remedy and/or prevent the reoccurrence of
events that gave rise to the investigation during the latter half of
2003. Having found that Farmers Deposit had fully complied with the
Order, the Supervisory Authorities rescinded the Order on December 13,
2005.
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, 2007, approximately $3.0 million of the total
shareholders' equity of the Affiliate Banks was available for payment of
dividends to Premier without approval by the applicable regulatory
authority.
In addition, federal bank regulatory
authorities have authority to prohibit Premier's Affiliate Banks from engaging
in an unsafe or unsound practice in conducting their business. The payment of
dividends, depending upon the financial condition of the bank in question, could
be deemed to constitute such an unsafe or unsound practice. The ability of the
Affiliate Banks to pay dividends in the future is presently, and could be
further, influenced by bank regulatory policies and capital guidelines as well
as each Affiliate Bank's earnings and financial condition. Additional
information regarding dividend limitations can be found in Note 18 of the accompanying audited consolidated financial
statements.
PREMIER
FINANCIAL BANCORP, INC.
FORM
10-K
December
31, 2007
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 226 full-time equivalent employees as of December
31, 2007. Its executive offices are located at 2883 5th Avenue, Huntington, West
Virginia 25702, telephone number (304) 525-1600 (facsimile number (304)
525-9701).
PREMIER
FINANCIAL BANCORP, INC.
FORM
10-K
December
31, 2007
Like all financial companies, the
Company’s business and results of operations are subject to a number of risks,
many of which are outside of the Company’s control. In addition to
the other information in this report, readers should carefully consider that the
following important factors, among others, could materially impact the Company’s
business and future results of operations.
Changes
in Interest Rates Could Negatively Impact the Company’s Results of
Operations
The earnings of the Company are
primarily dependent on net interest income, which is the difference between
interest earned on loans and investments, and interest paid on interest-bearing
liabilities such as deposits and borrowings. Interest rates are highly sensitive
to many factors, including government monetary and fiscal policies; domestic and
international economic and political conditions; and, in particular, changes in
the discount rate by the Board of Governors of the Federal Reserve System.
Conditions such as inflation, recession, unemployment, money supply, government
borrowing and other factors beyond management’s control may also affect interest
rates. If the Company’s interest-earning assets mature, reprice or prepay more
quickly than interest-bearing liabilities in a given period, a decrease in
market interest rates could adversely affect net interest income. Likewise, if
interest-bearing liabilities mature or reprice, or, in the case of deposits, are
withdrawn by the accountholder, more quickly than interest-earning assets in a
given period, an increase in market interest rates could adversely affect net
interest income. Given the Company’s current mix of assets and liabilities, a
declining interest rate environment would negatively impact the Company’s
results of operations.
Fixed rate loans increase the Company’s
exposure to interest rate risk in a rising rate environment because
interest-bearing liabilities would be subject to repricing before assets become
subject to repricing. Adjustable rate loans decrease the risks to a lender
associated with changes in interest rates but involve other risks. As interest
rates rise, the periodic payment by the borrower rises to the extent permitted
by the terms of the loan, and the increased periodic payment increases the
potential for default. At the same time, for secured loans, the marketability of
the underlying collateral may be adversely affected by higher interest rates. In
a declining interest rate environment, there is likely to be an increase in
prepayment activity on loans as the borrowers refinance their loans at lower
interest rates. Under these circumstances, the Company’s results of operations
could be negatively impacted.
Changes in interest rates also can
affect the value of loans, investments and other interest-rate sensitive assets
and the Company’s ability to realize gains on the sale or resolution of assets.
This type of income can vary significantly from quarter-to-quarter and
year-to-year based on a number of different factors, including the interest rate
environment. An increase in interest rates that adversely affects the ability of
borrowers to pay the principal or interest on
PREMIER
FINANCIAL BANCORP, INC.
FORM
10-K
December
31, 2007
loans
may lead to an increase in non-performing assets and increased loan loss reserve
requirements that could have a material adverse effect on the Company’s results
of operations.
Regional
Economic Changes in the Company’s Markets Could Adversely Impact Results From
Operations
Like all banks, the Company is subject
to the effects of any economic downturn, and in particular a significant decline
in home values or reduced commercial development in the Company’s markets could
have a negative effect on results of operations. The Company’s success depends
primarily on the general economic conditions in the counties in which the
Company conducts business, and in the West Virginia, southern Ohio and northern
Kentucky areas in general. Unlike larger banks that are more geographically
diversified, the Company provides banking and financial services to customers
primarily in the West Virginia counties of Barbour, Boone, Harrison, Lewis,
Lincoln, Logan, Kanawha and Upshur, as well as the southern Ohio counties of
Gallia, Lawrence and Scioto and the northern Kentucky counties of Bracken,
Fleming, Greenup, Lewis, Mason, and Robertson. The local economic conditions in
these market areas have a significant impact on the Company’s ability to
originate loans, the ability of the borrowers to repay these loans and the value
of the collateral securing these loans. A significant decline in the general
economic conditions caused by inflation, recession, unemployment or other
factors beyond the Company’s control would affect these local economic
conditions and could adversely affect the Company’s financial condition and
results of operations. Additionally, a significant decline in home values would
likely lead to increased delinquencies and defaults in both the consumer home
equity loan and residential real estate loan portfolios and result in increased
losses in these portfolios.
New
or Revised Tax, Accounting and Other Laws, Regulations, Rules and Standards
Could Significantly Impact Strategic Initiatives, Results of Operations and
Financial Condition
The financial services industry is
highly regulated and laws and regulations may sometimes impose significant
limitations on operations. These limitations, and sources of potential liability
for the violation of such laws and regulations, are described in Item 1 of Part
I of this report under the heading “Business — Regulatory Matters.” These
regulations, along with the currently existing tax and accounting laws,
regulations, rules and standards, control the methods by which financial
institutions conduct business; implement strategic initiatives, as well as past,
present, and contemplated tax planning; and govern financial disclosures. These
laws, regulations, rules, and standards are constantly evolving and may change
significantly over time. The nature, extent, and timing of the adoption of
significant new laws, changes in existing laws, or repeal of existing laws may
have a material impact on the Company’s results of operations and financial
condition, the effects of which are impossible to predict at this
time.
PREMIER
FINANCIAL BANCORP, INC.
FORM
10-K
December
31, 2007
The
Extended Disruption of Vital Infrastructure Could Negatively Impact the
Company’s Results of Operations and Financial Condition
The Company’s operations depend upon,
among other things, its technological and physical infrastructure, including its
equipment and facilities. While disaster recovery procedures are in
place, an extended disruption of its vital infrastructure by fire, power loss,
natural disaster, telecommunications failure, computer hacking and viruses,
terrorist activity or the domestic and foreign response to such activity, or
other events outside of the Company’s control, could have a material adverse
impact either on the financial services industry as a whole, or on the Company’s
business, results of operations, and financial condition.
Strong
Competition Within the Company’s Market Area May Limit
Profitability
The Company faces significant
competition both in attracting deposits and in the origination of loans, as
described under the heading “Business — Competition.” Mortgage bankers,
commercial banks, credit unions and other savings institutions, which have
offices in the Bank’s market area have historically provided most of the
Company’s competition for deposits; however, the Company also competes with
financial institutions that operate through Internet banking operations
throughout the continental United States. In addition, and particularly in times
of high interest rates, the Company faces additional and significant competition
for funds from money market and mutual funds, securities firms, commercial
banks, credit unions and other savings institutions located in the same
communities and those that operate through Internet banking operations
throughout the continental United States. Many competitors have substantially
greater financial and other resources than the Company. Moreover, credit unions
do not pay federal or state income taxes and are subject to fewer regulatory
constraints than community banks and as a result, they may enjoy a competitive
advantage over the Company. The Banks compete for loans principally on the basis
of the interest rates and loan fees they charge, the types of loans they
originate and the quality of services they provide to borrowers. This advantage
places significant competitive pressure on the prices of loans and
deposits.
Loss
of Large Checking and Money Market Deposit Customers Could Increase Cost of
Funds and Have a Negative Effect on Results of Operations
The Company has a number of large
deposit customers that maintain balances in checking, money market and
repurchase agreement accounts at the Affiliate Banks. The ability to attract
these types of deposits has a positive effect on the Company’s net interest
margin as they provide a relatively low cost of funds to the Company compared to
certificates of deposits or advances. If these depositors were to withdraw these
funds and the Affiliate Banks were not able to replace them with similar types
of deposits, the cost of funds would increase and the Company’s results of
operation would be negatively impacted.
PREMIER
FINANCIAL BANCORP, INC.
FORM
10-K
December
31, 2007
Extensive
Regulation and Supervision
The Company, primarily through its
Affiliate Banks, is subject to extensive federal and state regulation and
supervision. Banking regulations are primarily intended to protect depositors’
funds, federal deposit insurance funds and the banking system as a whole, not
shareholders. These regulations affect Premier’s lending practices, capital
structure, investment practices, dividend policy and growth, among other things.
The Company is also subject to a number of federal laws, which, among other
things, require it to lend to various sectors of the economy and population, and
establish and maintain comprehensive programs relating to anti-money laundering
and customer identification. Congress and federal regulatory agencies
continually review banking laws, regulations and policies for possible changes.
Changes to statutes, regulations or regulatory policies, including changes in
interpretation or implementation of statutes, regulations or policies, could
affect Premier in substantial and unpredictable ways. Such changes could subject
the Company to additional costs, limit the types of financial services and
products it may offer and/or increase the ability of non-banks to offer
competing financial services and products, among other things. Failure to comply
with laws, regulations or policies could result in sanctions by regulatory
agencies, civil money penalties and/or reputation damage, along with corrective
action plans required by regulatory agencies, any of which could have a material
adverse effect on the Company’s business, financial condition and results of
operations. Premier and certain of its Affiliate Banks have in the
past been subject to such corrective action plans, and therefore there may be
some residual reputation damage within the regulatory agencies. While
Premier has policies and procedures designed to prevent any such violations,
there can be no assurance that such violations will not occur. See the
“Regulatory Matters” section in Item 1, “Business”.
Dividend
payments by subsidiaries to Premier and by Premier to its shareholders can be
restricted.
The Company’s
principal source of funds for dividend payments and its debt service obligations
is dividends received from the subsidiary Banks. Banking regulations
limit the amount of dividends that may be paid without prior approval of
regulatory agencies. Under these regulations, the amount of dividends
that may be paid in any calendar year is limited to the current year’s net
profits, as defined, combined with the retained net profits of the preceding two
years, subject to the capital requirements and additional restrictions as
discussed in Note 18 to the consolidated financial
statements. During 2008 the Banks could, without prior approval,
declare dividends of approximately $3.0 million plus any 2008 net profits
retained to the date of the dividend declaration.
PREMIER
FINANCIAL BANCORP, INC.
FORM
10-K
December
31, 2007
Allowance
for Loan Losses May Be Insufficient
Premier, through the Affiliate Banks,
maintains an allowance for loan losses based on, among other things, national
and regional economic conditions, historical loss experience, evaluations of
potential losses on identified problem loans and delinquency
trends. Premier believes that its allowance for loan losses is
maintained at a level adequate to absorb any probable losses in its loan
portfolio given the current information known to Management. These
determinations are based upon estimates that are inherently subjective, and
their accuracy depends on the outcome of future events. Therefore,
Premier cannot predict loan losses with certainty and ultimate losses may differ
from current estimates. Depending on changes in economic, operating
and other conditions, including changes in interest rates, which are generally
beyond its control, Premier’s actual losses could exceed its current allowance
estimates. Premier can provide no assurance that its allowance is
sufficient to cover all charge-offs in future periods. If charge-offs
exceed Premier’s allowance, its earnings would decrease. In addition,
regulatory agencies review Premier’s allowance for loan losses and may require
additions to the allowance based upon their judgment about information available
to them at the time of their examination. A required increase in
Premier’s allowance for loan losses could reduce its earnings.
Claims
and Litigation Pertaining to Fiduciary Responsibility
From time to time, customers make
claims and take legal action pertaining to the Company’s and Affiliate Banks’
performance of their fiduciary responsibilities. If such claims and legal
actions are not resolved in a manner favorable to the Banks they may result in
financial liability and/or adversely affect the market perception of the Banks
and their products and services as well as impact customer demand for those
products and services. Any financial liability or reputation damage could have a
material adverse effect on the Company’s business, which, in turn, could have a
material adverse effect on its financial condition and results of
operations
Inability
to Hire and Retain Qualified Employees
The Company’s performance is largely
dependent on the talents and efforts of highly skilled individuals and their
ability to attract and retain customer relationships in a community bank
environment. There is intense competition in the financial services industry for
qualified employees. In addition, the Company faces increasing competition with
businesses outside the financial services industry for the most highly skilled
individuals. The Company’s business could be adversely affected if it were
unable to retain and motivate its existing key employees and management
team. Furthermore, the Company’s success may be impacted if it were
unable to recruit replacement management and key employees in a reasonable
amount of time.
PREMIER
FINANCIAL BANCORP, INC.
FORM
10-K
December
31, 2007
Integration
of Pending Acquisitions May Be More Difficult Than Anticipated
The success of the Company’s planned
acquisitions of Citizens First Bank, Inc. and/or Traders Bankshares, Inc. will
depend on a number of factors, including (but not limited to) Premier’s ability
to:
|
•
|
timely
and successfully integrate the operations of Premier and each of the
planned acquisitions;
|
|
•
|
maintain
the existing relationships with the depositors of Citizens First and/or
Traders Bankshares to minimize the withdrawal of deposits subsequent to
the merger(s);
|
|
•
|
maintain
and enhance the existing relationships with the borrowers of Citizens
First and/or Traders Bankshares to limit potential losses from loans made
by the them;
|
|
•
|
control
the incremental non-interest expense of the integrated operations to
maintain overall operating efficiencies;
|
|
•
|
retain
and attract qualified personnel at Citizens First and/or Traders
Bankshares; and
|
|
•
|
compete
effectively in the communities served by Citizens First and Traders
Bankshares and in nearby
communities.
|
PREMIER
FINANCIAL BANCORP, INC.
FORM
10-K
December
31, 2007
None.
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. 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, 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 one branches in Henry County, Kentucky
and closed a second branch in Henry County effective January 31, 2008. 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 and a leased branch office located in Upshur County,
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.
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.
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.
PREMIER
FINANCIAL BANCORP, INC.
FORM
10-K
December
31, 2007
PART
II
Issuer
Purchase of Equity Securities
The Company's common stock is listed on
the NASDAQ Global Market System under the symbol PFBI. At December 31, 2007, the
Company had approximately 578 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
|
||||||||||
|
2006
|
||||||||||||
|
First Quarter
|
$ | - | $ | 16.44 | $ | 14.01 | ||||||
|
Second Quarter
|
- | 16.50 | 13.25 | |||||||||
|
Third Quarter
|
0.05 | 15.40 | 13.90 | |||||||||
|
Fourth Quarter
|
0.05 | 14.90 | 13.40 | |||||||||
| 0.10 | ||||||||||||
|
2007
|
||||||||||||
|
First Quarter
|
$ | 0.10 | $ | 16.49 | $ | 13.36 | ||||||
|
Second Quarter
|
0.10 | 16.50 | 15.03 | |||||||||
|
Third Quarter
|
0.10 | 16.45 | 13.23 | |||||||||
|
Fourth Quarter
|
0.10 | 14.77 | 12.10 | |||||||||
| 0.40 | ||||||||||||
|
2008
|
||||||||||||
|
First Quarter (through March 15,
2008)
|
$ | 0.10 | $ | 13.59 | $ | 11.01 | ||||||
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, 2007 approximately $3.0 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.
PREMIER
FINANCIAL BANCORP, INC.
FORM
10-K
December
31, 2007
The following Stock Performance Graph
and related information shall not be deemed “soliciting material” or to be
“filed” with the Securities and Exchange Commission, nor shall such information
be incorporated by reference into any future filing under the Securities Act of
1933 or Securities Exchange Act of 1934, each as amended, except to the extent
that Premier specifically incorporates it by reference into such
filing.
The following graph shows a comparison
of cumulative total stockholder return on the Common Stock since December 31,
2002 with the cumulative total returns of both a broad equity market index and a
published industry index. The broad equity market index chosen was
the Russell 3000 and the published industry index chosen was the SNL ($500M-$1B)
Bank Asset-Size Index. The graph reflects historical performance
only, which is not indicative of possible future performance of the Common
Stock.
Premier
Financial Bancorp, Inc.
|
Period
Ending
|
|||||||||||||||||||
|
Index
|
12/31/02
|
12/31/03
|
12/31/04
|
12/31/05
|
12/31/06
|
12/31/07
|
|||||||||||||
|
Premier
Financial Bancorp, Inc.
|
100.00
|
110.26
|
160.39
|
207.53
|
184.00
|
171.80
|
|||||||||||||
|
Russell
3000
|
100.00
|
131.06
|
146.71
|
155.69
|
180.16
|
189.42
|
|||||||||||||
|
SNL
$500M-$1B Bank Index
|
100.00
|
144.19
|
163.41
|
170.41
|
193.81
|
155.31
|
|||||||||||||
|
*Source:
SNL Financial LC, Charlottesville, VA
|
|||||||||||||||||||
PREMIER
FINANCIAL BANCORP, INC.
FORM
10-K
December
31, 2007
Equity
Compensation Plan Information
The following table gives information
about the Company’s common stock that may be issued upon the exercise of
options, warrants and rights under its two equity compensation plans, the 1996
Stock Option Plan and the 2002 Stock Option Plan, as of December 31,
2007.
|
Plan
Category
|
Number
of securities to be issued upon exercise of outstanding options, warrants
and rights
(a)
|
Weighted-average
exercise price of outstanding options, warrants and rights
(b)
|
Number
of securities remaining available for future issuance under equity
compensation plans (Excluding securities reflected in column
(a))
(c)
|
|||||||||
|
Equity
compensation plans approved by shareholders
|
||||||||||||
|
1996 Stock Option
Plan
|
11,000 | $ | 16.50 | 0 | ||||||||
|
2002 Stock Option
Plan
|
139,249 | 12.35 | 355,082 | |||||||||
|
Equity
compensation plans not approved by
shareholders
|
||||||||||||
|
None
|
||||||||||||
|
Total
|
150,249 | $ | 12.65 | 355,082 | ||||||||
PREMIER
FINANCIAL BANCORP, INC.
FORM
10-K
December
31, 2007
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 Item 1 – “The Company”.
|
(Dollars
in thousands, except per share amounts)
|
At
or for the Year Ended December 31
|
|||||||||||||||||||
|
2007
|
2006
|
2005
|
2004
|
2003(5)
|
||||||||||||||||
|
Earnings
|
||||||||||||||||||||
|
Net interest
income
|
$ | 22,296 | $ | 21,395 | $ | 19,852 | $ | 18,064 | $ | 19,182 | ||||||||||
|
Provision for loan
losses
|
(78 | ) | (1,161 | ) | 4 | 1,026 | 20,513 | |||||||||||||
|
Non-interest
income
|
4,623 | 4,165 | 3,920 | 3,606 | 4,064 | |||||||||||||||
|
Non-interest
expense
|
16,408 | 16,937 | 17,305 | 17,782 | 17,632 | |||||||||||||||
|
Income taxes
(benefit)
|
3,470 | 3,283 | 2,029 | 899 | (5,282 | ) | ||||||||||||||
|
Income (loss) from continuing
operations
|
7,119 | 6,501 | 4,434 | 1,963 | (9,617 | ) | ||||||||||||||
|
Income (loss) from discontinued
operations (1)
|
- | - | - | 4,734 | (80 | ) | ||||||||||||||
|
Net income
(loss)
|
$ | 7,119 | $ | 6,501 | $ | 4,434 | $ | 6,697 | $ | (9,697 | ) | |||||||||
|
Financial
Position
|
||||||||||||||||||||
|
Total assets of continuing
operations
|
$ | 549,255 | $ | 535,452 | $ | 528,324 | $ | 537,255 | $ | 543,229 | ||||||||||
|
Total assets of discontinued
operations
(1)
|
- | - | - | - | 79,163 | |||||||||||||||
|
Loans, net of unearned
income
|
346,570 | 343,797 | 328,717 | 324,937 | 331,794 | |||||||||||||||
|
Allowance for loan
losses
|
6,497 | 6,661 | 7,892 | 9,384 | 14,300 | |||||||||||||||
|
Goodwill and other
intangibles
|
15,816 | 15,816 | 15,816 | 15,816 | 15,816 | |||||||||||||||
|
Securities
|
124,242 | 121,367 | 137,419 | 153,892 | 147,646 | |||||||||||||||
|
Deposits
|
449,033 | 438,950 | 435,843 | 437,798 | 455,474 | |||||||||||||||
|
Other
borrowings
|
26,124 | 33,091 | 19,053 | 20,536 | 18,307 | |||||||||||||||
|
Subordinated
debentures
|
- | - | 15,722 | 20,876 | 26,546 | |||||||||||||||
|
Stockholders’
equity
|
67,389 | 61,002 | 54,287 | 51,029 | 45,540 | |||||||||||||||
|
Share
Data
|
||||||||||||||||||||
|
Income (loss) from continuing
operations
– basic
|
$ | 1.36 | $ | 1.24 | $ | 0.85 | $ | 0.37 | $ | (1.84 | ) | |||||||||
|
Income (loss) from continuing
operations
- diluted
|
1.35 | 1.24 | 0.84 | 0.37 | (1.84 | ) | ||||||||||||||
|
Net income –
basic
|
1.36 | 1.24 | 0.85 | 1.28 | (1.85 | ) | ||||||||||||||
|
Net income -
diluted
|
1.35 | 1.24 | 0.84 | 1.28 | (1.85 | ) | ||||||||||||||
|
Book value
|
12.87 | 11.65 | 10.37 | 9.75 | 8.70 | |||||||||||||||
|
Cash dividends
|
0.40 | 0.10 | 0.00 | 0.00 | 0.00 | |||||||||||||||
PREMIER
FINANCIAL BANCORP, INC.
FORM
10-K
December
31, 2007
Item 6. Selected Financial
Data (continued)
|
(Dollars
in thousands, except per share amounts)
|
At
or for the Year Ended December 31
|
|||||||||||||||||||
|
2007
|
2006
|
2005
|
2004
|
2003(5)
|
||||||||||||||||
|
Return on average assets (2),
(3)
|
1.31 | % | 1.21 | % | 0.82 | % | 0.36 | % | (1.66 | )% | ||||||||||
|
Return on average equity (3)
|
11.13 | % | 11.31 | % | 8.42 | % | 4.06 | % | (18.46 | )% | ||||||||||
|
Dividend payout (3)
|
29.41 | % | 8.06 | % | 0.00 | % | 0.00 | % | 0.00 | % | ||||||||||
|
Stockholders’ equity to total
assets
at period-end (3)
|
12.27 | % | 11.39 | % | 10.28 | % | 9.50 | % | 8.38 | % | ||||||||||
|
Average stockholders’ equity
to
average total assets (2)
|
11.74 | % | 10.74 | % | 9.77 | % | 8.23 | % | 7.88 | % | ||||||||||
|
(1) 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. The sale was completed on
July 1, 2004. In accordance with Financial Accounting Standard 144,
the financial position and results of operations of Citizens Bank are
removed from the detail line items in the table and presented separately
as “discontinued operations.”
(2) Computed
based on average assets from continuing operations
(3) Computed
based on income (loss) from continuing operations
(4) Shareholders’
equity at period-end divided by assets from continuing
operations
(5) As previously disclosed in earlier reports, a
2003 investigation into the conduct of the former president of Farmers
Deposit Bank by Premier and the FDIC, resulted in the charge-off of over
$17.2 million of loans. The resulting depletion of the allowance for loan
losses together with the 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. See “Regulatory Matters” in item 1 –
Description of Business above and Premier’s earlier SEC filings for
additional details.
|
||||||||||||||||||||
PREMIER
FINANCIAL BANCORP, INC.
MANAGEMENT’S
DISCUSSION AND ANALYSIS
December
31, 2007
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 $71 million to $159 million, each with a local community name and
orientation. The 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. On June 27, 2006, Premier merged
its inactive data processing subsidiary into the parent
company. Prior to Premier’s conversion to an outsourced data services
provider in the second quarter of 2005, the data processing subsidiary provided
the data processing and management services for four of Premier's affiliate
banks and one other non-affiliated bank. As of December 31, 2007, Premier had
approximately $549 million in total assets, $347 million in total loans, $449
million in total deposits and $12 million in customer repurchase
agreements.
The accompanying consolidated financial
statements have been prepared by the management of Premier in conformity with
accounting principles generally accepted in the United States of America. The
audit committee of the Board of Directors engaged Crowe Chizek and Company LLC
(Crowe) as 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 holding company employs a
staff of internal auditors to perform internal audits of the financial records
of each of the subsidiaries on a periodic basis. The internal audit
staff reports their findings and recommendations 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.
PREMIER
FINANCIAL BANCORP, INC.
MANAGEMENT’S
DISCUSSION AND ANALYSIS
December
31, 2007
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. The words “may,” “could,”
“should,” “would,” “will,” “believe,” “anticipate,” “estimate,” “expect,”
“intend,” “plan,” “project,” “predict,” “continue” and similar expressions are
intended to identify forward-looking statements.
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 a 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.
PREMIER
FINANCIAL BANCORP, INC.
MANAGEMENT’S
DISCUSSION AND ANALYSIS
December
31, 2007
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 is 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
PREMIER
FINANCIAL BANCORP, INC.
MANAGEMENT’S
DISCUSSION AND ANALYSIS
December
31, 2007
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.
PREMIER
FINANCIAL BANCORP, INC.
MANAGEMENT’S
DISCUSSION AND ANALYSIS
December
31, 2007
SUMMARY
FINANCIAL RESULTS
Premier had net income of $7.119
million in 2007 compared to $6.501 million of net income reported for the year
2006. Net income increased in 2007 as a result of an increase in
interest income due to a greater average volume of loans outstanding; a greater
volume of average federal funds sold outstanding; higher yields on all earning
assets; an increase in secondary market mortgage income; and a reduction in the
operating costs of the company. Net income in 2005 was $4.434
million. The increase in 2006 over 2005 was the result of an increase
in interest income due to a greater volume of loans outstanding; higher yields
on all earning assets; a negative provision for loan losses; and a reduction in
the net operating costs of the company. Net income in 2005 was a continuation of
the Company's improving profit trends primarily resulting from an increase
in interest income due to higher yields on earning assets; a decrease in
interest expense due to the early retirement of Trust Preferred Securities; a
significant decrease in the provision for loan losses; and a reduction in the
net operating costs of the company when compared to the prior
year. Basic earnings per share were $1.36 in 2007 compared to $1.24
in 2006 and to $0.85 in 2005.
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 2007 resulted in an ROA of 1.31%, an
increase over the 1.21% ROA in 2006 and the 0.82% ROA reported in
2005. As shown in the table, fully taxable equivalent net interest
income (as a percent of average earning assets) again reached its highest level
in five years in 2007 at 4.42%. The previous five year high was
earned in 2006 at 4.32%. The net loss in 2003 was primarily the
result of an increase in the provision for loan losses, resulting in negative
net credit income in 2003. In 2004, net credit income was once again
positive and continued to increase in both 2005 and again in 2006. In
2005, minimal provisions for loan losses were recorded and thus there was little
reduction from net interest income. In 2006, negative provisions for
loan losses were recorded which served to increase net credit income to
4.55%. This increase in net credit income (as a percent of average
earning assets) was complemented by an increase in non-interest income (as a
percent of average earning assets) and a reduction in non-interest expenses (as
a percent of average earning assets) when compared to the previous two years. In
2007, while net interest income continued to increase, net credit income was
lower than 2006 as a result of minimal negative provisions for loan losses
recorded in 2007. However, in 2007, non-interest income (as a percent
of average earning assets) reached its highest level in the past five years
while non-interest expense (as a percent of average earning assets) reached its
lowest level in the past five years. As illustrated in the
table, the result was to increase Premier's 2007 return on average earning
assets to 1.40% and its return on average total assets to 1.31%, each the
highest performance ratio over the past five years.
PREMIER
FINANCIAL BANCORP, INC.
MANAGEMENT’S
DISCUSSION AND ANALYSIS
December
31, 2007
|
ANALYSIS
of RETURN ON ASSETS and EQUITY
|
||||||||||||||||||||
|
from
continuing operations
|
||||||||||||||||||||
|
2007
|
2006
|
2005
|
2004
|
2003(1)
|
||||||||||||||||
|
As
a percent of average earning assets
|
||||||||||||||||||||
|
Fully taxable-equivalent net
interest income
|
4.42 | % | 4.32 | % | 4.00 | % | 3.61 | % | 3.63 | % | ||||||||||
|
Provision for loan
losses
|
0.02 | 0.23 | (0.00 | ) | (0.20 | ) | (3.81 | ) | ||||||||||||
|
Net credit income
|
4.44 | 4.55 | 4.00 | 3.41 | (0.18 | ) | ||||||||||||||
|
Gains on the sales of assets
& subsidiaries
|
0.00 | 0.00 | 0.00 | 0.02 | 0.11 | |||||||||||||||
|
Non-interest
income
|
0.91 | 0.84 | 0.78 | 0.69 | 0.62 | |||||||||||||||
|
Non-interest
expense
|
(3.23 | ) | (3.40 | ) | (3.46 | ) | (3.52 | ) | (3.26 | ) | ||||||||||
|
Tax equivalent
adjustment
|
(0.04 | ) | (0.03 | ) | (0.03 | ) | (0.03 | ) | (0.07 | ) | ||||||||||
|
Applicable income
taxes
|
(0.68 | ) | (0.66 | ) | (0.41 | ) | (0.18 | ) | 0.98 | |||||||||||
|
Return
on average earning assets
|
1.40 | 1.30 | 0.88 | 0.39 | (1.79 | ) | ||||||||||||||
|
Multiplied by average earning
assets to average
total assets
|
93.34 | 93.07 | 92.84 | 92.39 | 92.86 | |||||||||||||||
|
Return
on average assets
|
1.31 | % | 1.21 | % | 0.82 | % | 0.36 | % | (1.66 | )% | ||||||||||
|
Multiplied by average assets to
average
equity
|
8.52 | X | 9.31 | X | 10.23 | X | 11.33 | X | 11.13 | X | ||||||||||
|
Return
on average equity
|
11.13 | % | 11.31 | % | 8.42 | % | 4.06 | % | (18.46 | )% | ||||||||||
The net overhead ratio (non-interest
expense less non-interest income as a percent of average earning assets)
decreased in 2007 to 2.32%, the lowest ratio reported in the last five
years. This ratio compares to 2.56% in 2006, 2.68% in 2005, 2.83% in
2004 and 2.64% in 2003. The decrease in 2007 net overhead was the
result of increases in Premier’s non-interest income related to electronic
banking income and secondary market mortgage commissions, plus decreases in
non-interest expenses related to staff costs and the accelerated amortization of
trust preferred issuance costs recorded in 2006 but not 2007. The
decrease in 2006 net overhead was the result of increases in Premier’s
non-interest income related to service charges on deposit accounts, electronic
banking income and secondary market mortgage commissions, plus decreases in
non-interest expenses related to occupancy and equipment costs, net OREO
expenses, recoveries of bad check losses, and conversion costs incurred in
2005.
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 2007 ROE was 11.13% compared to
11.31% in 2006 and 8.42% realized in 2005. ROE decreased slightly in 2007 as
average equity increased at a faster pace than average assets resulting in a
decrease in the multiplier of average assets to average equity. ROE
increased in 2006 primarily due to the increase in net income reported in 2006
versus 2005.
PREMIER
FINANCIAL BANCORP, INC.
MANAGEMENT’S
DISCUSSION AND ANALYSIS
December
31, 2007
A breakdown of Premier's financial
results by quarter for the years ended December 31, 2007 and 2006 is summarized
below.
|
QUARTERLY
FINANCIAL INFORMATION
|
||||||||||||||||||||
|
(Dollars
in thousands, except per share amounts)
|
||||||||||||||||||||
|
First
|
Second
|
Third
|
Fourth
|
Full
Year
|
||||||||||||||||
|
2007
|
||||||||||||||||||||
|
Interest income
|
$ | 8,612 | $ | 8,712 | $ | 8,738 | $ | 8,690 | $ | 34,752 | ||||||||||
|
Interest
expense
|
3,101 | 3,161 | 3,148 | 3,046 | 12,456 | |||||||||||||||
|
Net interest
income
|
5,511 | 5,551 | 5,590 | 5,644 | 22,296 | |||||||||||||||
|
Provision for loan
losses
|
36 | (164 | ) | 25 | 25 | (78 | ) | |||||||||||||
|
Securities
gains
|
0 | 0 | 0 | 0 | 0 | |||||||||||||||
|
Net overhead
|
2,902 | 3,022 | 2,847 | 3,014 | 11,785 | |||||||||||||||
|
Income before income
taxes
|
2,573 | 2,693 | 2,718 | 2,605 | 10,589 | |||||||||||||||
|
Net income
|
1,786 | 1,790 | 1,807 | 1,736 | 7,119 | |||||||||||||||
|
Basic net income per
share
|
0.34 | 0.34 | 0.35 | 0.33 | 1.36 | |||||||||||||||
|
Diluted net income per
share
|
0.34 | 0.34 | 0.34 | 0.33 | 1.35 | |||||||||||||||
|
Dividends paid per
share
|
0.10 | 0.10 | 0.10 | 0.10 | 0.40 | |||||||||||||||
|
2006
|
||||||||||||||||||||
|
Interest income
|
$ | 7,676 | $ | 8,014 | $ | 8,248 | $ | 8,462 | $ | 32,400 | ||||||||||
|
Interest
expense
|
2,472 | 2,654 | 2,871 | 3,008 | 11,005 | |||||||||||||||
|
Net interest
income
|
5,204 | 5,360 | 5,377 | 5,454 | 21,395 | |||||||||||||||
|
Provision for loan
losses
|
(194 | ) | (819 | ) | (38 | ) | (110 | ) | (1,161 | ) | ||||||||||
|
Securities
gains
|
0 | 0 | 0 | 0 | 0 | |||||||||||||||
|
Net overhead
|
3,348 | 3,161 | 3,196 | 3,067 | 12,772 | |||||||||||||||
|
Income before income
taxes
|
2,050 | 3,018 | 2,219 | 2,497 | 9,784 | |||||||||||||||
|
Net income
|
1,367 | 2,000 | 1,475 | 1,659 | 6,501 | |||||||||||||||
|
Basic net income per
share
|
0.26 | 0.38 | 0.28 | 0.32 | 1.24 | |||||||||||||||
|
Diluted net income per
share
|
0.26 | 0.38 | 0.28 | 0.32 | 1.24 | |||||||||||||||
|
Dividends paid per
share
|
0.00 | 0.00 | 0.05 | 0.05 | 0.10 | |||||||||||||||
PREMIER
FINANCIAL BANCORP, INC.
MANAGEMENT’S
DISCUSSION AND ANALYSIS
December
31, 2007
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, 2007, is provided in the table below.
PREMIER
FINANCIAL BANCORP, INC.
MANAGEMENT’S
DISCUSSION AND ANALYSIS
December
31, 2007
|
AVERAGE
CONSOLIDATED BALANCE SHEETS AND NET INTEREST INCOME
ANALYSIS
|
||||||||||||||||||||||||||||||||||||
|
(Dollars
in thousands)
|
||||||||||||||||||||||||||||||||||||
|
2007
|
2006
|
2005
|
||||||||||||||||||||||||||||||||||
|
Average
Balance
|
Interest
|
Yield/
Rate
(2)
|
Average
Balance
|
Interest
|
Yield/
Rate
(2)
|
Average
Balance
|
Interest
|
Yield/
Rate
(2)
|
||||||||||||||||||||||||||||
|
Assets:
|
||||||||||||||||||||||||||||||||||||
|
Interest
earning assets
|
||||||||||||||||||||||||||||||||||||
|
U.S. Treasury and
federal
agency
securities
|
$ | 82,177 | $ | 3,496 | 4.25 | % | $ | 95,705 | $ | 3,398 | 3.55 | % | $ | 107,177 | $ | 3,278 | 3.06 | % | ||||||||||||||||||
|
States and
municipal
obligations (1)
|
4,067 | 241 | 5.93 | 2,342 | 138 | 5.89 | 2,666 | 153 | 5.74 | |||||||||||||||||||||||||||
|
Mortgage backed
securities
|
37,017 | 1,799 | 4.86 | 33,953 | 1,564 | 4.61 | 37,050 | 1,583 | 4.27 | |||||||||||||||||||||||||||
|
Other securities
|
3,307 | 212 | 6.41 | 3,179 | 182 | 5.73 | 3,089 | 148 | 4.79 | |||||||||||||||||||||||||||
|
Total investment
securities
|
126,568 | 5,748 | 4.54 | 135,179 | 5,282 | 3.91 | 149,982 | 5,162 | 3.44 | |||||||||||||||||||||||||||
|
Federal funds
sold
|
36,088 | 1,829 | 5.07 | 24,365 | 1,215 | 4.99 | 23,083 | 745 | 3.23 | |||||||||||||||||||||||||||
|
Interest-bearing
deposits
with banks
|
1,273 | 56 | 4.40 | 486 | 24 | 4.94 | 436 | 12 | 2.75 | |||||||||||||||||||||||||||
|
Loans, net of
unearned
income (3)(4)
|
||||||||||||||||||||||||||||||||||||
|
Commercial
|
169,217 | 13,591 | 8.03 | 161,898 | 12,424 | 7.67 | 147,398 | 10,291 | 6.98 | |||||||||||||||||||||||||||
|
Real estate
mortgage
|
129,072 | 9,474 | 7.34 | 129,944 | 9,271 | 7.13 | 132,527 | 9,236 | 6.97 | |||||||||||||||||||||||||||
|
Installment
|
46,399 | 4,244 | 9.15 | 46,494 | 4,334 | 9.32 | 46,690 | 4,083 | 8.74 | |||||||||||||||||||||||||||
|
Total loans
|
344,688 | 27,309 | 7.92 | 338,336 | 26,029 | 7.69 | 326,615 | 23,610 | 7.23 | |||||||||||||||||||||||||||
|
Total interest earning
assets
|
508,617 | 34,942 | 6.87 | 498,366 | 32,550 | 6.53 | 500,116 | 29,529 | 5.90 | |||||||||||||||||||||||||||
|
Allowance
for loan losses
|
(6,615 | ) | (7,465 | ) | (8,998 | ) | ||||||||||||||||||||||||||||||
|
Cash
and due from banks
|
13,853 | 13,824 | 13,619 | |||||||||||||||||||||||||||||||||
|
Premises
and equipment
|
6,378 | 7,055 | 7,256 | |||||||||||||||||||||||||||||||||
|
Other
assets
|
22,653 | 23,688 | 26,697 | |||||||||||||||||||||||||||||||||
|
Total assets
|
$ | 544,886 | $ | 535,468 | $ | 538,690 | ||||||||||||||||||||||||||||||
|
Liabilities
and Equity:
|
||||||||||||||||||||||||||||||||||||
|
Interest
bearing liabilities
|
||||||||||||||||||||||||||||||||||||
|
NOW and money
market
|
$ | 119,849 | 1,780 | 1.49 | % | $ | 129,080 | 1,766 | 1.37 | % | $ | 142,501 | 1,409 | 0.99 | % | |||||||||||||||||||||
|
Savings deposits
|
53,000 | 384 | 0.72 | 52,295 | 321 | 0.61 | 59,365 | 412 | 0.69 | |||||||||||||||||||||||||||
|
Certificates of deposit
and
other time
deposits
|
202,183 | 8,855 | 4.38 | 188,044 | 6,896 | 3.67 | 174,057 | 4,904 | 2.82 | |||||||||||||||||||||||||||
|
Total interest bearing
deposits
|
375,032 | 11,019 | 2.94 | 369,419 | 8,983 | 2.43 | 375,923 | 6,725 | 1.79 | |||||||||||||||||||||||||||
|
Short-term
borrowings
|
13,200 | 321 | 2.43 | 9,591 | 234 | 2.44 | 8,422 | 180 | 2.14 | |||||||||||||||||||||||||||
|
Other borrowings
|
10,047 | 769 | 7.65 | 7,765 | 574 | 7.39 | 1,586 | 14 | 0.88 | |||||||||||||||||||||||||||
|
FHLB advances
|
5,363 | 347 | 6.47 | 7,815 | 453 | 5.80 | 8,775 | 499 | 5.69 | |||||||||||||||||||||||||||
|
Debentures
|
- | - | - | 7,887 | 760 | 9.64 | 20,480 | 2,129 | 10.40 | |||||||||||||||||||||||||||
|
Total interest-bearing
liabilities
|
403,642 | 12,456 | 3.09 | % | 402,477 | 11,004 | 2.73 | % | 415,186 | 9,547 | 2.30 | % | ||||||||||||||||||||||||
|
Non-interest
bearing deposits
|
74,522 | 72,781 | 66,848 | |||||||||||||||||||||||||||||||||
|
Other
liabilities
|
2,743 | 2,721 | 4,007 | |||||||||||||||||||||||||||||||||
|
Shareholders’
equity
|
63,979 | 57,489 | 52,649 | |||||||||||||||||||||||||||||||||
|
Total liabilities and
equity
|
$ | 544,886 | $ | 535,468 | $ | 538,690 | ||||||||||||||||||||||||||||||
|
Net interest earnings
(1)
|
$ | 22,486 | $ | 21,546 | $ | 19,982 | ||||||||||||||||||||||||||||||
|
Net interest spread
(1)
|
3.78 | % | 3.80 | % | 3.60 | % | ||||||||||||||||||||||||||||||
|
Net interest margin
(1)
|
4.42 | % | 4.32 | % | 4.00 | % | ||||||||||||||||||||||||||||||
|
(1) Taxable
– equivalent yields are calculated assuming a 34% federal income tax
rate
(2) Yields
are calculated on historical cost except for yields on marketable equity
securities that are calculated used fair value
(3) Includes
loan fees, immaterial in amount, in both interest income and the
calculation of yield on loans
(4) Includes
loans on non-accrual status
|
||||||||||||||||||||||||||||||||||||
PREMIER
FINANCIAL BANCORP, INC.
MANAGEMENT’S
DISCUSSION AND ANALYSIS
December
31, 2007
In 2007, average earning assets
increased by 2.1% or $10.3 million from 2006, following a 0.3% or $1.8 million
decline in 2006 from 2005. Average interest bearing liabilities, the
primary source of funds supporting the earning assets, increased by only 0.3% or
$1.2 million in 2007 from 2006, which follows a 3.1% or $12.8 million decline in
2006 from 2005. The 2007 increase in average earnings assets was
primarily the result of a $6.4 million increase in average total loans and an
$11.7 million increase in average federal funds sold
outstanding. These increases more than offset the $8.6 million
decline in average total investment securities, as investment funds were used to
fund loans and surplus investable proceeds were held in shorter-term but higher
yielding federal funds sold during the early part of 2007. The slight
increase in 2007 average interest bearing liabilities was the result of a $5.6
million increase in average interest bearing deposits and a $3.6 million
increase in average short-term borrowings, primarily customer repurchase
agreements, nearly completely offset by an $8.1 million decrease in average high
cost debt and Federal Home Loan Bank (FHLB) advances. Furthermore,
the increase in average interest bearing deposits was complemented by a $1.7
million increase in average non-interest bearing deposits. In 2006,
average earning assets declined, primarily as the result of a $14.8 million
decline in average total investment securities, as some maturing funds were used
to fund loans or to continue the Company’s debt reduction
strategy. The decline in 2006 average interest bearing liabilities
was due to a $6.5 million decrease in average interest bearing deposits and a
$5.8 million decrease in average high cost debt and Federal Home Loan Bank
(FHLB) advances. A portion of the decline in average interest bearing
deposits was due to the $1.2 million increase in short-term borrowings,
primarily customer repurchase agreements. Furthermore, nearly all of
the decrease in average interest bearing deposits was offset by a $5.9 million
increase in non-interest bearing deposits. 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 67.8% of
average earning assets during 2007. Average loans increased in 2006 by $11.7
million or 3.6% followed by a $6.4 million or 1.9% increase in
2007. The 2007 increase is largely attributable to loan growth in
each of Premier’s markets. In, 2007, Premier realized a $2.6 million
or 5.3% increase in average outstanding loans in its Ohio markets, a $1.9
million or 1.5% increase in its Kentucky markets and a $1.9 million or 1.1%
increase in its West Virginia markets. This follows a $10.0 million
or 6.5% increase in average loans its West Virginia markets in 2006, and a $2.1
million or 4.6% increase in loans in its Ohio markets in 2006. In
2006, average loans in Premier’s Kentucky markets remained virtually
unchanged.
PREMIER
FINANCIAL BANCORP, INC.
MANAGEMENT’S
DISCUSSION AND ANALYSIS
December
31, 2007
Total loans at December 31 2007
increased by $2.8 million or 0.8% from the total at December 31,
2006. This increase follows a $15.1 million or 4.6% increase in 2006
from total loans at December 31, 2005. This modest increase in 2007
is primarily the result of sluggish loan demand coupled with a higher level of
loan payoffs, which offset $758,000 of loan charge-offs recorded during the
year. The increase in 2006 was the result of a significant increase
in loan demand in Premier’s markets which more than offset the $1.4 million of
loan charge-offs recorded during the year.
Loans secured by real estate, which in
total constituted approximately 74% of Premier's loan portfolio at December 31,
2007, consist of a diverse portfolio of predominantly 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 at the time of origination. 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 originates mortgage loans to be sold in the
secondary market and recognizes non-interest income upon the sale of those
mortgages in the form of commissions and servicing release
fees. Premier has not engaged in the solicitation of so-called
“sub-prime” or “interest only” mortgages. Premier uses third party
underwriters to ensure the completeness of the borrowers’ loan application and
documentation and to ensure that the loans meet the standards required by
prospective loan purchasers. Additional information regarding the
volume of mortgage loans originated and sold is contained in Premier’s
consolidated statements of cash flows presented elsewhere in this annual
report.
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.
PREMIER
FINANCIAL BANCORP, INC.
MANAGEMENT’S
DISCUSSION AND ANALYSIS
December
31, 2007
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,
|
|||||||||||||||||||||||||||||||||||
|
2007
|
2006
|
2005
|
2004
|
2003(2)
|
|||||||||||||||||||||||||||||||
|
$
|
%
|
$
|
%
|
$
|
%
|
$
|
%
|
$
|
%
|
||||||||||||||||||||||||||
|
Summary
of Loans by Type
|
|||||||||||||||||||||||||||||||||||
|
Commercial, secured by real
estate
|
$ | 100,278 | 28.9 | % | $ | 101,786 | 29.6 | % | $ | 85,989 | 26.2 | % | $ | 101,567 | 31.3 | % | $ | 101,325 | 30.5 | % | |||||||||||||||
|
Commercial,
other
|
40,438 | 11.7 | 43,981 | 12.8 | 49,362 | 15.0 | 40,923 | 12.6 | 38,063 | 11.5 | |||||||||||||||||||||||||
|
Real estate
construction
|
24,035 | 6.9 | 11,303 | 3.3 | 11,070 | 3.4 | 5,906 | 1.8 | 5,414 | 1.6 | |||||||||||||||||||||||||
|
Real estate
mortgage
|
133,776 | 38.6 | 138,795 | 40.4 | 134,570 | 40.9 | 128,243 | 39.5 | 126,134 | 38.0 | |||||||||||||||||||||||||
|
Agricultural
|
1,845 | 0.5 | 1,930 | 0.5 | 1,670 | 0.5 | 2,380 | 0.7 | 3,032 | 0.9 | |||||||||||||||||||||||||
|
Consumer
|
41,893 | 12.1 | 42,188 | 12.3 | 42,096 | 12.8 | 44,470 | 13.7 | 56,216 | 17.0 | |||||||||||||||||||||||||
|
Other
|
4,305 | 1.3 | 3,814 | 1.1 | 3,960 | 1.2 | 1,438 | 0.4 | 1,610 | 0.5 | |||||||||||||||||||||||||
|
Total loans
|
$ | 346,570 | 100.0 | % | $ | 343,797 | 100.0 | % | $ | 328,717 | 100.0 | % | $ | 324,927 | 100.0 | % | $ | 331,794 | 100.0 | % | |||||||||||||||
|
Non-performing
Assets
|
|||||||||||||||||||||||||||||||||||
|
Non-accrual
loans
|
$ | 3,157 | $ | 4,698 | $ | 3,751 | $ | 6,847 | $ | 11,958 | |||||||||||||||||||||||||
|
Accruing loans which are
contractually past due 90days or more
|
987 | 992 | 853 | 739 | 4,137 | ||||||||||||||||||||||||||||||
|
Restructured
loans
|
1,489 | 1,268 | 1,540 | 238 | 104 | ||||||||||||||||||||||||||||||
|
Total non-performing and
restructured loans
|
5,633 | 6,958 | 6,144 | 7,824 | 16,199 | ||||||||||||||||||||||||||||||
|
Other
real estate acquired through foreclosures
|
174 | 495 | 2,049 | 2,247 | 3,187 | ||||||||||||||||||||||||||||||
|
Total non-performing and
restructured loans andother real estate
|
$ | 5,807 | $ | 7,453 | $ | 8,193 | $ | 10,071 | $ | 19,386 | |||||||||||||||||||||||||
|
Non-performing
and restructured loans as a % oftotal loans
|
1.63 | % | 2.02 | % | 1.87 | % | 2.41 | % | 4.88 | % | |||||||||||||||||||||||||
|
Non-performing
and restructured loans and otherreal estate as a % of total
assets(1)
|
1.06 | % | 1.39 | % | 1.55 | % | 1.87 | % | 3.57 | % | |||||||||||||||||||||||||
|
Allocation
of Allowance for Loan Losses
|
|||||||||||||||||||||||||||||||||||
|
Commercial,
other
|
$ | 689 | 13.5 | % | $ | 839 | 14.4 | % | $ | 1,071 | 16.7 | % | $ | 1,734 | 13.7 | % | $ | 4,166 | 12.9 | % | |||||||||||||||
|
Real estate,
construction
|
237 | 6.9 | 117 | 3.3 | 134 | 3.4 | 83 | 1.8 | 662 | 1.6 | |||||||||||||||||||||||||
|
Real estate,
other
|
3,092 | 67.5 | 3,395 | 70.0 | 3,810 | 67.1 | 4,276 | 70.8 | 4,886 | 68.5 | |||||||||||||||||||||||||
|
Consumer
installment
|
259 | 12.1 | 521 | 12.3 | 772 | 12.8 | 1,255 | 13.7 | 2,478 | 17.0 | |||||||||||||||||||||||||
|
Unallocated
|
2,220 | 1,789 | 2,105 | 2,036 | 2,108 | ||||||||||||||||||||||||||||||
|
Total
|
$ | 6,497 | 100.0 | % | $ | 6,661 | 100.0 | % | $ | 7,892 | 100.0 | % | $ | 9,384 | 100.0 | % | $ | 14,300 | 100.0 | % | |||||||||||||||
|
(1)
From continuing operations
|
|||||||||||||||||||||||||||||||||||
PREMIER
FINANCIAL BANCORP, INC.
MANAGEMENT’S
DISCUSSION AND ANALYSIS
December
31, 2007
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 16 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 $5.8 million or 1.06% of total assets at
year-end 2007. The amount continues to decline from the $7.5 million
or 1.39% of total assets at year-end 2006 and the $8.2 million or 1.55% of total
assets at year-end 2005. The decrease in 2007 was largely due a $1.5
million decrease in non-accrual loans and a continued decrease in OREO
property. These decreases offset the increase in restructured loans,
while loans past due 90 days or more and still accruing remained virtually
unchanged. The decrease in 2006 was largely due to the $1.6 million
reduction in OREO property, which was partially offset by an increase in
non-accrual loans. As the collection or rehabilitation of previously
delinquent loans and charge-offs of loans determined to be uncollectible
continued in 2006, these efforts were offset by other loans newly placed on
non-accrual status. In 2007, the level of non-accrual loans declined
primarily as a result of loan payoffs as well as partial or complete loan
charge-offs. Management believes the estimated potential losses
related to delinquent loans to be adequately provided for in the allowance for
loan losses. These losses were also included in the analyses that
supported the recording of negative loan loss provisions during 2006 and the
second quarter of 2007. The decrease in non-performing assets in 2005
was due to the collection or rehabilitation of previously delinquent loans, the
charge-offs of loans determined to be uncollectible and the sale of $1.7 million
of OREO property. As management's efforts to collect these loans upon
maturity continue, 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 level of
non-performing assets and maintaining 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 2003 to the end
of 2007, primarily related to the sale of OREO properties and the decline in
non-accrual loans and loans 90+ days past due. Premier's efforts at its other
affiliate banks in 2003 and 2004 were 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. By December 31, 2007,
total non-performing assets at Farmers Deposit Bank had declined to $2.4
million.
PREMIER
FINANCIAL BANCORP, INC.
MANAGEMENT’S
DISCUSSION AND ANALYSIS
December
31, 2007
The Loan Summary table presents five
years of comparative non-performing asset information. Other than these loans
and the impaired loans discussed in Note 4 to the
consolidated financial statements, Premier does not have a significant volume of
loans where 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, 2007. 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 2007 Premier recognized a
$20,000 net profit on the disposition of OREO properties, net of writedowns,
while in 2006 Premier realized $105,000 net profit on the disposition of OREO
properties. During 2005, Premier realized a $17,000 net profit on the
disposition of OREO properties. Although loans may be classified as
non-performing, some continue to pay interest irregularly or at less than
originally contracted terms. During 2007, approximately $234,000 of interest was
recognized on non-accrual and restructured loans, while approximately $302,000
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.
PREMIER
FINANCIAL BANCORP, INC.
MANAGEMENT’S
DISCUSSION AND ANALYSIS
December
31, 2007
A loan is categorized and reported as
impaired when it is probable that the borrower 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 conditions 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 4 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 include greater than
anticipated recoveries, a reduction in the historical loss ratios, securing more
collateral on an impaired loan during the collection process, or receiving
payment in full on an impaired loan. All of these events occurred in
varying degrees during 2007 and 2006 and resulted in $78,000 of negative
provisions during 2007 and $1,161,000 of negative provisions during
2006.
At December 31, 2007, the allowance for
loan losses was $6.5 million, or 1.87% of total year-end loans. This
ratio is a decrease from the prior year’s 1.94% and the 2.40% at the end of
2005. The decrease in the allowance in 2007 was primarily the result
of the $78,000 of negative provisions for loan losses coupled with $86,000 of
net charge-offs recorded during the year. The decrease in the
allowance in 2006 was primarily the result of the $1.2 million of negative
provisions for loan losses recorded during the year, as charge-offs in 2006 were
nearly offset by recoveries. The decrease in 2005 was the result of
the charge-off of $2.2 million of loans previously identified as impaired
partially offset by $719,000 of recoveries. Only $4,000 of provision
expense was recorded in 2005. 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. In 2007, a negative provision was recorded during the second quarter
which exceeded the quarterly provisions recorded during the other three quarters
of the year. In 2006, negative provisions were recorded in each of
the four quarters of the year. The negative
PREMIER
FINANCIAL BANCORP, INC.
MANAGEMENT’S
DISCUSSION AND ANALYSIS
December
31, 2007
provisions
were recorded primarily as result of realized collections of previously impaired
loans whereby estimated losses were previously assigned to the
loan. In addition, Premier has been successful in recovering some of
its previously charged-off loans. These positive events as well as
the ongoing reduction in Premier’s historical loss ratios resulted in a lower
estimate of the risk of loss in the loan portfolio and, thus, negative
provisions were warranted. The negative provision for loan losses
totaled $78,000 in 2007 and $1,161,000 in 2006.
|
SUMMARY
OF LOAN LOSS EXPERIENCE
|
||||||||||||||||||||
|
(Dollars
in thousands)
|
||||||||||||||||||||
|
For
the Year Ended December 31
|
||||||||||||||||||||
|
2007
|
2006
|
2005
|
2004
|
2003(1)
|
||||||||||||||||
|
Allowance
for loan losses, beginning
of period
|
$ | 6,661 | $ | 7,892 | $ | 9,384 | $ | 14,300 | $ | 9,698 | ||||||||||
|
Amounts
charged off:
|
||||||||||||||||||||
|
Commercial, financial and
agricultural loans
|
83 | 154 | 736 | 1,520 | 4,417 | |||||||||||||||
|
Real estate construction
loans
|
0 | 0 | 0 | 5 | 0 | |||||||||||||||
|
Real estate loans –
other
|
239 | 863 | 549 | 2,413 | 6,427 | |||||||||||||||
|
Consumer installment
loans
|
436 | 393 | 930 | 3,054 | 5,669 | |||||||||||||||
|
Total charge-offs
|
758 | 1,410 | 2,215 | 6,992 | 16,513 | |||||||||||||||
|
Recoveries
on amounts previously charged-off:
|
||||||||||||||||||||
|
Commercial, financial and
agricultural loans
|
66 | 266 | 91 | 264 | 145 | |||||||||||||||
|
Real estate construction
loans
|
14 | 8 | 1 | 1 | 37 | |||||||||||||||
|
Real estate loans –
other
|
302 | 340 | 84 | 87 | 74 | |||||||||||||||
|
Consumer installment
loans
|
290 | 726 | 543 | 698 | 346 | |||||||||||||||
|
Total recoveries
|
672 | 1,340 | 719 | 1,050 | 602 | |||||||||||||||
|
Net
charge-offs
|
86 | 70 | 1,496 | 5,942 | 15,911 | |||||||||||||||
|
Provision
for loan losses
|
(78 | ) | (1,161 | ) | 4 | 1,026 | 20,513 | |||||||||||||
|
Allowance
for loan losses, end of period
|
$ | 6,497 | $ | 6,661 | $ | 7,892 | $ | 9,384 | $ | 14,300 | ||||||||||
|
Average
total loans
|
$ | 344,688 | $ | 338,336 | $ | 326,615 | $ | 325,610 | $ | 352,156 | ||||||||||
|
Total
loans at year-end
|
346,570 | 343,797 | 328,717 | 324,927 | 331,794 | |||||||||||||||
|
As
a percent of average loans
|
||||||||||||||||||||
|
Net charge-offs
|
0.02 | % | 0.02 | % | 0.46 | % | 1.82 | % | 4.52 | % | ||||||||||
|
Provision for loan
losses
|
(0.02 | )% | (0.34 | )% | 0.00 | % | 0.32 | % | 5.83 | % | ||||||||||
|
Allowance for loan
losses
|
1.88 | % | 1.97 | % | 2.42 | % | 2.88 | % | 4.06 | % | ||||||||||
|
As
a percent of total loans at year-end
|
||||||||||||||||||||
|
Allowance for loan
losses
|
1.87 | % | 1.94 | % | 2.40 | % | 2.89 | % | 4.31 | % | ||||||||||
|
As
a multiple of net charge-offs
|
||||||||||||||||||||
|
Allowance for loan
losses
|
75.55 | X | 95.16 | X | 5.28 | X | 1.58 | X | 0.90 | X | ||||||||||
|
Income before tax and provision
for loan losses
|
122.22 | X | 123.19 | X | 4.32 | X | 0.65 | X | 0.35 | X | ||||||||||
|
|
||||||||||||||||||||
PREMIER
FINANCIAL BANCORP, INC.
MANAGEMENT’S
DISCUSSION AND ANALYSIS
December
31, 2007
Future
provisions to the allowance for loan losses, positive or negative, will depend
on future improvement or deterioration in estimated credit risk in the loan
portfolio as well as whether additional payments are received on loans having
significant credit risk. The provision for loan losses in 2005 was
only $4,000. During the third and fourth quarters of 2005, negative
provisions were recorded substantially offsetting the provisions recorded during
the first half of the year. During the latter half of 2005, Premier
realized collections of previously impaired loans for which estimated losses had
been previously assigned to the loan, as well as recoveries of previously
charged-off loans. Premier continually evaluates the adequacy of its
allowance for loan losses, and changes in the provision are based on the
estimated probable incurred losses in the loan portfolio.
Net charge-offs in 2007 totaled
$86,000, as $758,000 of loans charged-off were nearly offset by $672,000 of
recoveries of loans previously charged-off. Net charge-offs in 2006
decreased to just $70,000, as $1,340,000 of recoveries nearly offset $1,410,000
of charge-offs recorded during the year. In comparison, net
charge-offs in 2005 totaled $1.5 million. In 2007, Farmers Deposit
Bank recorded $296,000 of net recoveries and provided over 70% of the Company’s
total recoveries for 2007. In 2006, Farmers Deposit Bank recorded
$249,000 of net recoveries and provided nearly 70% of the Company’s total
recoveries for 2006. These recoveries are primarily the result of
continued collection efforts of the significant number and amount of loans
charged-off at Farmers Deposit Bank in 2003 through
2005. Approximately $641,000, or 43% of the 2005 net charge-offs and
$4.8 million, or 81% of the Premier’s 2004 net charge-offs were at Farmers
Deposit Bank. The level of future recoveries is likely to decrease as
the level of past charge-offs has decreased.
Over the past three years, total
charge-offs have continued to decline. In 2007, charge-offs on
consumer installment loans increased by $43,000 or 10.9%. However,
the increase was more than offset by decreases in the level of charge-offs of
commercial loans and loans secured by real estate. While total
charge-offs decreased in 2006, the level of loans secured by real estate that
were charged-off increased by $314,000 or 57.2% as collection efforts on a few
real estate secured borrowers came to their ultimate conclusion. All
categories of loan charge-offs were down in 2005, while consumer loan
charge-offs continued to exceed the other categories of 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 level of non-performing loans and the resolution of collection
efforts on those loans. Premier continues to make a significant effort to reduce
its past due and non-performing loans by reviewing loan files, using the courts
to bring borrowers current with the terms of their loan agreements and/or the
foreclosure and sale of OREO properties. As in the past, when these
plans are executed, Premier may experience increases in non-performing loans and
non-performing assets. Furthermore, any resulting increases in loans placed on
non-accrual status will have a negative impact on future loan interest
income. Also, as these plans are executed, other loans may be
identified that would necessitate additional charge-offs and
potentially
PREMIER
FINANCIAL BANCORP, INC.
MANAGEMENT’S
DISCUSSION AND ANALYSIS
December
31, 2007
additional
provisions for loan losses. Premier continues to monitor and evaluate
the impact that national housing market price declines may have on its local
markets and collateral valuations as management evaluates the adequacy of the
allowance for loan losses. While some price deterioration is
expected, it is not currently anticipated that Premier’s markets will be
impacted as severely as other areas of the country due to the historically
modest increases in real estate values in the Company’s markets. These factors
are considered in determining the adequacy of the allowance for loan losses,
which at December 31, 2007 was 1.87% of total loans outstanding and 115% of
non-performing loans.
The following table presents the
maturity distribution and interest sensitivity of selected loan categories at
December 31, 2007. Maturities are based upon contractual terms.
|
LOAN
MATURITIES and INTEREST SENSITIVITY
|
||||||||||||||||
|
December
31, 2007
|
||||||||||||||||
|
(Dollars
in thousands)
|
||||||||||||||||
|
Projected
Maturities*
|
||||||||||||||||
|
One
Year or Less
|
One
Through Five Years
|
Over
Five
Years
|
Total
|
|||||||||||||
|
Commercial,
secured by real estate
|
$ | 35,778 | $ | 53,997 | $ | 10,503 | $ | 100,278 | ||||||||
|
Commercial,
other
|
18,239 | 21,031 | 1,168 | 40,438 | ||||||||||||
|
Real
estate construction
|
13,368 | 6,056 | 4,611 | 24,035 | ||||||||||||
|
Agricultural
|
1,025 | 552 | 268 | 1,845 | ||||||||||||
|
Total
|
$ | 68,410 | $ | 81,636 | $ | 16,550 | $ | 166,596 | ||||||||
|
Fixed
rate loans
|
$ | 16,339 | $ | 29,740 | $ | 4,056 | $ | 50,135 | ||||||||
|
Floating
rate loans
|
52,071 | 51,896 | 12,494 | 116,461 | ||||||||||||
|
Total
|
$ | 68,410 | $ | 81,636 | $ | 16,550 | $ | 166,596 | ||||||||
|
Fixed
rate loans projected to mature after one year
|
$ | 33,796 | ||||||||||||||
|
Floating
rate loans projected to mature after one year
|
64,390 | |||||||||||||||
|
Total
|
$ | 98,186 | ||||||||||||||
|
(*)
Based on scheduled or approximate repayments
|
||||||||||||||||
PREMIER
FINANCIAL BANCORP, INC.
MANAGEMENT’S
DISCUSSION AND ANALYSIS
December
31, 2007
Investment
Portfolio and
Other
Earning Assets
Investment securities averaged $126.6
million in 2007, down $8.6 million or 6.4% from the $135.2 million averaged in
2006. This decrease follows a $14.8 million or 9.9% decrease in 2006
from the $150.0 million averaged in 2005. As investments matured in
2007 and 2006, not all funds were reinvested in the investment
portfolio. Some funds were used to satisfy loan growth, deposit
withdrawals and debt payments. Furthermore, during the latter part of
2006 and first half of 2007, bond reinvestment yields were not as attractive as
the yield on highly liquid federal funds sold and funds from maturing
investments were less likely to be reinvested in bonds. At December
31, 2007, the amount of investments totaled $124.2 million, up $2.9 million from
December 31, 2006. This follows a $16.1 million decrease in 2006 from
the balance at December 31, 2005. As the Federal Reserve Board has
lowered the federal funds rate in the latter portion of 2007, bond yields have
become more attractive than the yield on federal funds sold. Thus, to
optimize interest income, Premier has begun increasing the amount of funds it
has 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
|
||||||||||||
|
2007
|
2006
|
2005
|
||||||||||
|
U.S.
Treasury securities
|
$ | 5,574 | $ | 6,401 | $ | 3,941 | ||||||
|
U.S.
Agency securities
|
74,859 | 76,911 | 95,300 | |||||||||
|
States
and political subdivisions
|
3,816 | 3,413 | 2,514 | |||||||||
|
Mortgage-backed
securities
|
39,993 | 34,617 | 35,639 | |||||||||
|
Corporate
securities
|
- | 25 | 25 | |||||||||
|
Total securities
|
$ | 124,242 | $ | 121,367 | $ | 137,419 | ||||||
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, 2007 all of Premier's investments were classified as available-for-sale and
carried on the books at market value.
PREMIER
FINANCIAL BANCORP, INC.
MANAGEMENT’S
DISCUSSION AND ANALYSIS
December
31, 2007
As shown in the following Securities
Maturity and Yield Analysis table, the average maturity period of the securities
available-for-sale at December 31, 2007 was 8 years 8 months, lengthened
somewhat by the 13 year 4 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 65% of Premier's investment
securities are U.S. Government agency or Treasury securities that have an
average maturity of 3 years 4 months. The average maturity of the investment
portfolio is managed at a level to maintain a proper matching with interest rate
risk guidelines. 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 3 to the consolidated
financial statements.
|
SECURITIES
MATURITY AND YIELD ANALYSIS
|
||||||||||||
|
December
31, 2007
|
||||||||||||
|
(Dollars
in thousands)
|
||||||||||||
|
Market
Value
|
Average
Maturity (yrs/mos)
|
Taxable
Equivalent Yield*
|
||||||||||
|
U.S.
Treasury securities
|
||||||||||||
|
Within one year
|
$ | 2,004 | 4.42 | % | ||||||||
|
After one but within five
years
|
3,570 | 4.34 | ||||||||||
|
Total U.S. Treasury
Securities
|
5,574 | 1/9 | 4.37 | |||||||||
|
U.S.
Government Agencies securities
|
||||||||||||
|
Within one year
|
28,731 | 3.93 | ||||||||||
|
After one but within five
years
|
39,091 | 4.84 | ||||||||||
|
After five but within ten
years
|
7,037 | 5.23 | ||||||||||
|
Total U.S. Government Agencies
securities
|
$ | 74,859 | 3/6 | 4.53 | ||||||||
|
States
and political subdivisions
|
||||||||||||
|
Within one year
|
227 | 6.52 | ||||||||||
|
After one but within five
years
|
660 | 6.41 | ||||||||||
|
After five but within ten
years
|
2,766 | 5.57 | ||||||||||
|
Over ten years
|
163 | 5.96 | ||||||||||
|
Total states and political
subdivisions securities
|
$ | 3,816 | 7/2 | 5.79 | ||||||||
|
Mortgage-backed
securities**
|
||||||||||||
|
After one but within five
years
|
383 | 4.50 | ||||||||||
|
After five but within ten
years
|
2,386 | 4.40 | ||||||||||
|
Over ten years
|
37,224 | 4.83 | ||||||||||
|
Total mortgage-backed
securities
|
$ | 39,993 | 13/4 | 4.80 | ||||||||
|
Total
securities available-for-sale
|
$ | 124,242 | 8/8 | 4.65 | ||||||||
|
(*) Fully
tax-equivalent using the rate of 34%
|
||||||||||||
|
(**) Maturities
for mortgage-backed securities are based on final maturity
|
||||||||||||
PREMIER
FINANCIAL BANCORP, INC.
MANAGEMENT’S
DISCUSSION AND ANALYSIS
December
31, 2007
Premier's average investment in federal
funds sold and other short-term investments increased by 48.1% in
2007. This follows a 5.6% increase in 2006. Averaging
$36.1 million in 2007, federal funds sold and other short-term investments
increased $11.8 million from the $24.4 million averaged in 2006. The
increase in average federal funds sold in 2007 was the result of retaining
available funds to be used in the short-term to fund loans and satisfy deposit
withdrawals. Furthermore, during the latter part of 2006 and first
part of 2007, bond yields were not as attractive as the yield on highly liquid
federal funds sold and funds from maturing investments were less likely to be
invested in bonds. As shown in the Consolidated Average Balance
Sheets and Net Interest Income Analysis above, on average, federal funds sold
yielded 5.07% in 2007 and 4.99% in 2006. In each year, this yield was
higher than the yield earned on U.S. Treasury and Agency securities as well as
mortgage backed securities. The increase in average federal funds
sold in 2006 was, likewise, the result of retaining available funds to be used
in the short-term to fund loans or satisfy deposit
withdrawals. Fluctuations in federal funds sold and other short-term
investments reflect management's goal to maximize asset yields while maintaining
proper asset/liability structure, as discussed in greater detail above and in
other sections of this report.
Funding
Sources
In 2005, Premier began raising the
rates paid on its interest bearing deposits in response to the increase in
market interest rates. Market rates continued to increase through
2007. As a result, the average rate paid on interest bearing
liabilities increased to 3.09% in 2007, up from the 2.73% paid in 2006, and the
2.30% paid in 2005. The 36 basis point increase in 2007 was primarily
the result of a 71 basis point increase in the average rate paid on certificates
of deposit and other time deposits, which made up 50.1% of the total average
interest bearing liabilities in 2007. During 2007, Premier was able
to offset some of the increase in rates paid on deposits by long-term debt
refinancing actions taken in 2006 and prepaying approximately $2.1 million of
amortizing FHLB advances in the first quarter of 2007. In 2006,
Premier refinanced the remaining $15.5 million of its 9.75% Trust Preferred
Securities with variable rate bank borrowings as discussed in more detail
below. In 2006, the 43 basis point increase in the average rate paid
on interest bearing liabilities was primarily the result of an 85 basis point
increase in the average rate paid on certificates of deposit and other time
deposits, which made up 46.7% of the total average interest bearing liabilities
in 2006. During 2006, Premier was able to offset some of the increase
in rates paid on deposits by reducing the interest cost on its long-term debt by
the Trust Preferred Securities refinancing. Due to alternative
sources of investment and an ever increasing sophistication of customers in
funds management techniques to maximize return on their money, competition for
funds has become more intense. Premier's banks periodically offer special rate
products to attract additional deposits.
Premier’s deposits, on average,
increased by $7.4 million or 1.7% in 2007 following a $571,000 or 0.1% decrease
in 2006 from 2005 average deposits. The increase in 2007 average
deposits was from a combination of a $14.1 million increase in average
certificates of deposit
PREMIER
FINANCIAL BANCORP, INC.
MANAGEMENT’S
DISCUSSION AND ANALYSIS
December
31, 2007
and
other time deposits plus a $1.7 million increase in non-interest bearing
deposits. These increases more than offset a $9.2 million decrease in
average NOW and money market deposits. During 2007, as rates paid on
certificates of deposits increased, particularly short-term certificates of
deposit, customers reallocated their funds from lower yielding transactional
deposits such as NOW and money market accounts to these short—term certificates
of deposit.
Premier’s deposits, on average,
remained relatively unchanged in 2006, decreasing by $571,000 or 0.1% from 2005
average deposits. While average deposits in 2006 remained relatively
unchanged in total, the composition of those deposits shifted toward
non-interest bearing deposits. In addition, some public fund and
tax-exempt organization deposits were reestablished as repurchase agreements in
2006. Average repurchase agreements increased by $1.3 million or
16.4% in 2006 when compared to 2005. In 2007, average repurchase
agreements increased by $3.6 million or 37.5%, reflecting the growth in those
deposits during latter half of 2006. Also, in both 2006 and 2007, the
growth in deposits has been dampened by a decline in deposits at Farmers Deposit
Bank. In 2006, average deposits at Farmers Deposit Bank declined by
$4.7 million, while in Premier’s other markets, deposits, on average, increased
by $4.2 million or 1.1% during 2006. In 2007, average deposits at
Farmers Deposit Bank declined by $3.3 million, while in Premier’s other markets,
deposits, on average, increased by $10.8 million or 2.8%. Farmers
Deposit Bank faces stiff competition for funds from local competitors who have
paid higher than market rates for the certificates of deposit.
In 2007, average non-interest bearing
deposits continued to increase, surpassing 2006 average non-interest bearing
deposits by $1.7 million or 2.4%. This follows a $5.9 million, or
8.9% increase in average non-interest bearing deposits in 2006 when compared to
2005. Since no interest is paid on these deposits, an increase in
non-interest bearing deposits helps to increase Premier's net interest margin
and its profitability. Non-interest bearing deposits are more susceptible to
withdrawal and therefore may provide challenges to maintaining adequate
liquidity. (See the additional discussion on liquidity
below.) However, Premier’s approach to community banking and friendly
customer service has resulted in increases in average non-interest bearing
deposits in each of the past five years.
In 2007, average interest bearing
deposits increased by $5.6 million or 1.5%. The increase was
primarily from an increase in average certificates of deposit and other time
deposits as customers sought out higher yielding short-term “special
“rates. While offering some “special” certificate of deposit rates,
in 2007 Premier continued to focus on building its base of customer
relationships by offering more convenient electronic banking products to its
non-interest bearing deposit customers. Premier did realize a shift
in its interest bearing deposits from lower cost interest bearing transaction
accounts to certificates of deposit as customers moved their funds to take
advantage of the rising interest rates paid on these
certificates. The result was a 51 basis point increase in the average
rate paid on interest bearing deposits in 2007. However, Premier also
realized an increase in its average savings deposits in 2007. In 2006, average
interest bearing deposits decreased by $6.5 million or 1.7%. This
decrease
PREMIER
FINANCIAL BANCORP, INC.
MANAGEMENT’S
DISCUSSION AND ANALYSIS
December
31, 2007
was
largely due to the stiff competition for funds in 2006 and high rate certificate
of deposits “specials” offered by some of Premier’s local
competition. Some of these “special” rates exceeded the yields that
Premier could earn by purchasing investments and therefore matching the
competition’s rates would have resulted in reducing Premier’s net interest
income. Similar to 2007, in 2006 Premier realized a shift in its
interest bearing deposits from lower cost savings and interest bearing
transaction accounts to certificates of deposit as customers moved their funds
to take advantage of the rising interest rates paid on these
certificates. The result was a 64 basis point increase in the average
rate paid on interest bearing deposits in 2006.
The following table provides
information on the maturities of time deposits of $100,000 or more at December
31, 2007.
|
MATURITY
OF TIME DEPOSITS $100,000 OR MORE
|
||||
|
December
31, 2007
|
||||
|
(Dollars
in thousands)
|
||||
|
Maturing
3 months or less
|
$ | 12,566 | ||
|
Maturing
over 3 months
|
13,845 | |||
|
Maturing
over 6 months
|
18,397 | |||
|
Maturing
over 12 months
|
10,537 | |||
|
Total
|
$ | 55,345 | ||
Other funding sources for Premier
include short and long-term borrowings. Premier's short-term borrowings
primarily consist of securities sold under agreements to repurchase with
commercial, public entity and tax exempt organization
customers. These are short-term non-FDIC insured deposit like
products that are secured by the pledging of investment securities in Premier’s
investment portfolio. Also included in short-term borrowings are
federal funds purchased from other banks. These short-term borrowings fluctuate
depending on near term funding needs and as part of Premier's management of its
asset/liability mix. In 2007, short-term borrowings averaged $13.2
million, up $3.6 million or 37.6% from the average in 2006. The
increase is largely due to an increase in repurchase agreements which were newly
offered by two of Premier’s subsidiary banks late in 2006. In 2006,
short-term borrowings averaged $9.6 million, up $1.2 million or 13.9% from the
average in 2005 primarily due to the increase in repurchase agreements discussed
above.
Long-term borrowings consist of Federal
Home Loan Bank (FHLB) borrowings by Premier's banks, other borrowings by the
parent holding company and, prior to 2007, debt issued in the form of
subordinated debentures to an unconsolidated trust subsidiary. FHLB
advances, on average, declined by 31.4% or $2.5 million in 2007, following a
10.9% or $960,000 decrease in 2006. In the first quarter of 2007,
Premier prepaid $2.1 million of its amortizing FHLB advances in an effort to
reduce its cost of funds rate. These advances had contractual fixed
rates between 5.30% and 5.60%, averaging 5.46%. In 2006, FHLB
advances, on average, declined by 10.9% or $960,000. Premier uses fixed rate
FHLB advances from time-to-time to fund certain residential and commercial loans
as well to maximize investment opportunities as
PREMIER
FINANCIAL BANCORP, INC.
MANAGEMENT’S
DISCUSSION AND ANALYSIS
December
31, 2007
part
of its interest rate risk management. In addition to the prepayment in the first
quarter of 2007 described above, Premier made all of its scheduled principal
payments in 2007 and 2006, and took advantage of penalty free prepayment
opportunities as they became available. At December 31, 2007, FHLB advances
totaled $4.8 million and had repayment schedules from three to five years with
$4.0 million maturing in 2010.
In 2006, Premier refinanced the
remaining $15.7 million of its 9.75% Junior Subordinated Deferrable Interest
Debentures ("Subordinated Debentures") that were due in 2027. The refinancing
was accomplished using two separate bank borrowings at the parent company and
$2.2 million of cash held by the parent in its subsidiary banks. On
January 31, 2006, Premier borrowed $7.0 million from First Guaranty Bank in
Hammond, Louisiana under a promissory note bearing interest floating daily at
the “Wall Street Journal” prime rate and requiring monthly principal payments of
$50,000 until maturity on September 28, 2017. The note is secured by
a pledge of Premier’s 100% interest in Boone County Bank. The
proceeds of this note were used to redeem $7.0 million of the Subordinated
Debentures as of January 31, 2006. On November 10, 2006, Premier
borrowed $6.5 million from The Bankers’ Bank of Kentucky, Inc. of Frankfort,
Kentucky (“Bankers’ Bank”) under a term note bearing interest floating daily at
the “Wall Street Journal” prime rate minus 1.00% and requiring 83 monthly
principal and interest payments of $100,000 and a final payment of any balance
due at maturity on November 9, 2013. The note is secured by a pledge of
Premier’s 100% interest in Citizens Deposit Bank and Trust, Inc. and Premier’s
100% interest in Farmers-Deposit Bank, Eminence, Kentucky. In 2007
and 2006, Premier made all scheduled principal and interest payments as well as
limited prepayments on the borrowing from First Guaranty Bank. Also
during 2006, Premier repaid two $701,000 subordinated notes with a 0% interest
rate. For more information on other borrowings, see Note 9 to the consolidated financial statements.
|
PAYMENTS
DUE ON CONTRACTUAL OBLIGATIONS
|
||||||||||||||||||||
|
December
31, 2007
|
||||||||||||||||||||
|
(Dollars
in thousands)
|
||||||||||||||||||||
|
Total
|
Less
than one year
|
1-3
years
|
3-5
years
|
More
than five years
|
||||||||||||||||
|
Federal
Home Loan Bank advances
|
$ | 4,843 | $ | 185 | $ | 4,394 | $ | 264 | $ | 0 | ||||||||||
|
Other
borrowed funds
|
8,412 | 1,512 | 3,181 | 3,145 | 574 | |||||||||||||||
|
Operating
lease obligations
|
440 | 158 | 164 | 116 | 2 | |||||||||||||||
|
Data
and item processing contracts*
|
3,822 | 1,788 | 2,034 | 0 | 0 | |||||||||||||||
|
Total
|
$ | 17,517 | $ | 3,643 | $ | 9,773 | $ | 3,525 | $ | 576 | ||||||||||
|
*
Data and item processing contractual obligations are estimated using the
average billing for the last three months of 2007.
|
||||||||||||||||||||
On December 20, 2004, Premier entered
into a sixty-three month contract with Fiserv Solutions, Inc. (Fiserv) whereby
Fiserv will provide data processing and item processing services to Premier.
Conversions by Premier's subsidiary banks to Fiserv systems began on April 15,
2005 and were completed by July 31, 2005. Based upon the average billings of the
last
PREMIER
FINANCIAL BANCORP, INC.
MANAGEMENT’S
DISCUSSION AND ANALYSIS
December
31, 2007
three
months of 2007 the estimated payments to Fiserv for these services will be
approximately $1,357,000 per year beginning in 2008. Actual results may vary
depending upon the number and type of accounts actually processed and future
customer activity.
Asset/liability management is a means
of maximizing net interest income while minimizing interest rate risk by
planning and controlling the mix and maturities of interest related assets and
liabilities. Premier has established an Asset/Liability Management Committee
(ALCO) for the purpose of monitoring and managing interest rate risk and to
evaluate investment portfolio strategies. Interest rate risk is the earnings
variation that could occur due to changes in market interest rates. The Board of
Directors has established policies to monitor and limit exposure to interest
rate risk. Premier monitors its interest rate risk through the use of an
earnings simulation model developed by an independent third party to analyze net
interest income sensitivity.
The earnings simulation model uses
assumptions, maturity patterns, and reinvestment rates provided by Premier and
forecasts the effect of instantaneous movements in interest rates of both 100
(1.00%) and 200 (2.00%) basis points. The most recent earnings simulation model
projects that net interest income would increase by approximately 2.5% over the
projected stable rate net interest income if interest rates rise by 100 basis
points over the next year. Conversely, the simulation projects an approximate
2.6% decrease in net interest income if interest rates fall by 100 basis points
over the next year. Within the same time frame, but assuming a 200 basis point
movement in interest rates, the simulation projects that net interest income
would increase by 4.7% over the projected stable rate net interest income in a
rising rate scenario and would decrease by 5.7% in a falling rate scenario.
Under both the 100 and 200 basis point simulations, the percentage changes in
net interest income are within Premier's ALCO guidelines.
The model simulation calculations of
present value have certain acceptable shortcomings. The discount rates and
prepayment assumptions utilized are based on estimated market interest rate
levels for similar loans and securities nationwide. The unique characteristics
of Premier's loans and securities may not necessarily parallel those assumed in
the model simulations, and therefore, actual results could likely result in
different discount rates, prepayment experiences and present values. The
discount rates used for deposits and borrowings are based upon available
alternative types and sources of funds which may not necessarily be indicative
of the present value of Premier's deposits and borrowings. Premier's deposits
have customer relationship advantages that are difficult to simulate. A higher
or lower interest rate environment will most likely result in different
investment and borrowing strategies by Premier which would be designed to
further mitigate any negative effects on the value of, and the net interest
earnings generated on Premier's net assets.
PREMIER
FINANCIAL BANCORP, INC.
MANAGEMENT’S
DISCUSSION AND ANALYSIS
December
31, 2007
The following table presents summary
information about the simulation model's interest rate risk measures and
results.
|
Year-end
2007
|
Year-end
2006
|
ALCO
Guidelines
|
||||||||||
|
Projected
1-year net interest income
|
||||||||||||
|
-100 bp change vs. base
rate
|
-2.6 | % | -0.9 | % | 5 | % | ||||||
|
+100 bp change vs. base
rate
|
2.5 | % | 1.4 | % | 5 | % | ||||||
|
Projected
1-year net interest income
|
||||||||||||
|
-200 bp change vs. base
rate
|
-2.7 | % | -2.2 | % | 10 | % | ||||||
|
+200 bp change vs. base
rate
|
4.7 | % | 2.6 | % | 10 | % | ||||||
Liquidity
Liquidity is the ability to satisfy
demands for deposit withdrawals, lending commitments, and other corporate needs.
Premier's liquidity is based on the stable nature of consumer core deposits held
by the banking subsidiaries. Likewise, additional liquidity is available from
holdings of investment securities and short-term investments which can be
readily converted into cash. Furthermore, Premier's banks continue to have the
ability to attract short-term sources of funds such as federal funds and
repurchase agreements.
Premier generated $9.4 million of cash
from operations in 2007, which compares to $5.4 million in 2006 and $2.1 million
in 2005. The increase in 2007 was primarily the result of an increase
in net income, a decrease in negative provisions for loan losses and cash
received from the sale of mortgage loans in the secondary market. The
increase in 2006 over 2005 was the result of a return to normal cash generated
from operations compared to 2005. The low level in 2005 was
primarily the result of the payment of the deferred distributions of the Trust
Preferred Securities in March 2005, which came out of cash from
operations. Total cash from operations along with proceeds from the
sale and maturity of securities and the repayment of loans were used to purchase
securities, satisfy deposit withdrawals, fund new loans and reduce outstanding
debt during those years. Net cash provided by liquidating investing activities
totaled $7.9 million in 2005. However in 2006, $5.9 million of cash
was used in investing activities primarily to fund loan growth and in 2007 $5.0
million of cash was used in investing activities, again to fund loan growth but
to also increase federal funds sold. In addition to the $9.4 million
of cash from operations in 2007, Premier generated $1.0 million in additional
cash from financing activities, primarily due to the increase in
deposits. The increase in cash from deposits was also used to
satisfy the repayment of FHLB advances and other borrowed funds as well as pay
dividends to shareholders. In 2006, Premier generated $1.4 million in
additional cash from financing activities, primarily due to increases in
deposits and repurchase agreements. In 2005, net cash used to satisfy
deposit withdrawals and reduce debt totaled $8.4 million. Details on the sources
and uses of cash can be found in the Consolidated Statements of Cash Flows in
the consolidated financial statements.
PREMIER
FINANCIAL BANCORP, INC.
MANAGEMENT’S
DISCUSSION AND ANALYSIS
December
31, 2007
At December 31, 2007, the parent
company had nearly $7.9 million in cash held with its subsidiary
banks. This balance along with cash dividends expected to be received
from its subsidiaries is sufficient to cover the operating costs of the parent,
service its existing other debt and pay dividends to common
shareholders. During 2007, the parent company generated $10.3 million
of cash from operations and used $5.9 million to make principal payments on its
outstanding debt and pay dividends to shareholders. During 2006, the
parent company generated $5.1 million of cash from operations and used $4.9
million to redeem a portion of the Trust Preferred Securities outstanding, make
principal payments on its outstanding other debt and pay dividends to
shareholders. Also during 2006, the parent company borrowed $13.5
million which was used to redeem the remainder of the Trust Preferred
Securities. Additional information on parent company cash flows and
financial statements is contained in Note 19 to the
consolidated financial statements.
Capital
Resources
Premier's consolidated average
equity-to-asset ratio increased to 11.74% during 2007, up from 10.74% in 2005
and 9.77% in 2004. The ratios for all three years are considered
adequate for a company of Premier's size. The increase in 2007 was largely due
to the increase in net income, plus a general rise in the market value of
investments from an overall unrealized loss at the end of 2006 to an overall
unrealized gain at the end of 2007. The increase in 2006 was largely
due to the increase in net income with the slight decline in average total
assets. The Federal Reserve's risk-based capital guidelines and
leverage ratio measure the capital adequacy of banking institutions. The risk-
based capital guidelines weight balance sheet assets and off-balance sheet
commitments by prescribed factors relative to credit risk, thus eliminating
disincentives for holding low risk assets and requiring more capital for holding
higher risk assets. At year-end 2007, Premier’s risk adjusted
capital-to-assets ratio was 17.3% compared to 16.0% at December 31, 2006. Both
of these ratios are well above the minimum level of 8.0% prescribed for bank
holding companies of Premier's size. The leverage ratio is a measure of total
tangible equity to total tangible assets. Premier's leverage ratio at December
31, 2007 was 9.8% compared to 8.9% at December 31, 2006. Both of
these ratios are above the recommended 4.0% to 5.0% recommended by the Federal
Reserve. The increase in the 2007 ratios was primarily the result of
the net income recorded in 2007, partially offset by dividends paid to
shareholders. The net result was an increase in shareholders’
equity. Premier's capital ratios are the direct result of
management's desire to maintain a strong capital position. Additional
information on Premier's capital ratios and the capital ratios of its banks may
be found in Note 18 to the consolidated financial
statements.
PREMIER
FINANCIAL BANCORP, INC.
MANAGEMENT’S
DISCUSSION AND ANALYSIS
December
31, 2007
The primary source of funds for
dividends paid by Premier is the dividends received from its subsidiary banks.
Banking regulations limit the amount of dividends that may be paid without prior
approval of the regulatory agencies. Under these regulations, the amount of
dividends that may be paid without prior approval in any calendar year is
limited to the current year's net profits, as defined, combined with the
retained net profits of the preceding two years, subject to regulatory capital
requirements and additional restrictions more fully described in Note 18 to the consolidated financial statements. During
2008, Premier's banks could, without prior approval, declare and pay to Premier
dividends of approximately $3.0 million plus any 2008 net profits retained
through the date of declaration by Ohio River Bank, Boone County Bank, First
Central Bank and Citizens Deposit Bank. In 2007, Farmers Deposit Bank
requested and received approval from its primary regulators to pay a $2.5
million dividend in December 2007. This amount was substantially
higher than the bank’s prior two years of reported net income. As
such, Farmers Deposit Bank must continue to request approval for up to two years
beyond December 31, 2007 to pay any future dividends to the parent company out
of its current earnings.
Additional information on the capital
position of Premier is included in the following table.
|
SELECTED
CAPITAL INFORMATION
|
||||||||||||
|
(Dollars
in thousands)
|
||||||||||||
|
As
of December 31
|
||||||||||||
|
2007
|
2006
|
Change
|
||||||||||
|
Stockholders’
Equity
|
$ | 67,389 | $ | 61,002 | $ | 6,387 | ||||||
|
Qualifying capital securities
of subsidiary trust
|
0 | 0 | 0 | |||||||||
|
Disallowed amounts of goodwill
and other intangibles
|
(15,816 | ) | (15,816 | ) | 0 | |||||||
|
Disallowed deferred tax
assets
|
0 | 0 | 0 | |||||||||
|
Unrealized (gain) loss on
securities available for sale
|
(73 | ) | 1,150 | (1,223 | ) | |||||||
|
Tier
I capital
|
$ | 51,500 | $ | 46,336 | $ | 5,164 | ||||||
|
Tier
II capital adjustments
|
||||||||||||
|
Qualifying capital securities
of subsidiary trust
|
0 | 0 | ||||||||||
|
Allowable amount of the
allowance for loan losses
|
4,038 | 3,977 | ||||||||||
|
Total
capital
|
$ | 55,538 | $ | 50,313 | ||||||||
|
Total
risk-weighted assets
|
$ | 320,581 | $ | 315,485 | ||||||||
|
Ratios
|
||||||||||||
|
Tier I capital to risk-weighted
assets
|
16.06 | % | 14.69 | % | ||||||||
|
Total capital to risk-weighted
assets
|
17.32 | % | 15.95 | % | ||||||||
|
Leverage at
year-end
|
9.77 | % | 8.89 | % | ||||||||
PREMIER
FINANCIAL BANCORP, INC.
MANAGEMENT’S
DISCUSSION AND ANALYSIS
December
31, 2007
INCOME
STATEMENT ANALYSIS
Net
Interest Income
Net interest income, the amount by
which interest generated from earning assets exceeds the expense associated with
funding those assets, is Premier's most significant component of
earnings. Net interest income on a fully tax-equivalent basis was
$22.5 million in 2007, up 4.4% from the $21.5 million earned in 2006 which
follows a 7.8% increase in 2006 from 2005. When net interest income
is presented on a fully tax-equivalent basis, interest income from tax-exempt
earning assets is increased by the amount equivalent to the federal income taxes
which would have been paid if this income were taxable at the statutory federal
tax rate of 34% for companies of Premier's size. The increase in net
interest income in 2007 is largely due to an increase in interest income from
loans, investments and federal funds sold partially offset by an increase in
interest expense on deposits. The increase in interest income on
loans and investments was largely the result of increases in yields while the
increase in interest income from federal funds sold and a portion of the
increase in loan interest income was the result of a higher average volume of
those assets. The increase in interest expense on deposits was
largely due to an increase in the rates paid on deposits. However, a
higher average volume of certificates of deposit also contributed to the
increase in interest expense.
As shown in the Rate Volume Analysis
table below, increases in the yields on loans, investments, and other earnings
assets increased Premier’s interest income by $1.6 million in
2007. This increase was complemented by a $494,000 increase in
interest income due to the higher volume of average loans outstanding and a
$594,000 increase in interest income due to the higher volume of average federal
funds sold outstanding in 2007. Interest income was decreased by
$301,000, however, due to a lower volume of average investment securities
outstanding. Also shown in the table below, interest expense on
deposits increased by $2.0 million, $1.5 million due to higher rates paid,
primarily on certificates of deposit, and $0.5 million due to a higher volume of
average certificates of deposit. Also increasing interest expense was
the higher average volume of short-term and other borrowings. This
interest expense increase was more than offset, however, by the decrease in
average FHLB borrowings and the repayment of the trust preferred securities in
late 2006.
The increase in net interest income in
2006 is largely due to an increase in interest income from loans, investments
and federal funds sold due to higher overall yields and a greater volume of
loans outstanding. This increase in interest income more than offset
the increase in interest expense in 2006 resulting from higher rates paid on
deposits and a higher volume of certificates of deposit. Increases in
the yields on loans, investments and other earning assets increased Premier’s
interest income by $2.4 million. This increase was complemented by an
$867,000 increase in interest income due to an increase in loans outstanding
which was partially offset by a $324,000 reduction in interest income due to a
lower total of investment securities outstanding. Interest expense on
deposits increased by $2.3
PREMIER
FINANCIAL BANCORP, INC.
MANAGEMENT’S
DISCUSSION AND ANALYSIS
December
31, 2007
million,
$2.0 million due to higher rates paid, primarily certificates of deposit, and
$0.3 million due to a shifting of deposits from savings and transaction based
accounts to certificates of deposit. This overall increase in
interest expense was partially offset by net interest expense savings of
$855,000 due to the refinancing and early redemption of outstanding debt and the
reduction in FHLB borrowings. Some of this interest expense savings
was offset by higher interest paid on other short-term
borrowings. The combined effect was to increase net interest income
by $1,564,000 for the year.
|
RATE
VOLUME ANALYSIS OF CHANGES IN NET INTEREST INCOME
|
||||||||||||||||||||||||
|
(Dollars
in thousands on a tax equivalent basis)
|
||||||||||||||||||||||||
|
2007
vs 2006
|
2006
vs 2005
|
|||||||||||||||||||||||
|
Increase
(decrease) due to change in
|
Increase
(decrease) due to change in
|
|||||||||||||||||||||||
|
Volume
|
Rate
|
Net
Change
|
Volume
|
Rate
|
Net
Change
|
|||||||||||||||||||
|
Interest
income*:
|
||||||||||||||||||||||||
|
Loans
|
$ | 494 | $ | 786 | $ | 1,280 | $ | 867 | $ | 1,552 | $ | 2,419 | ||||||||||||
|
Investment
securities
|
(301 | ) | 767 | 466 | (324 | ) | 444 | 120 | ||||||||||||||||
|
Federal funds
sold
|
594 | 20 | 614 | 43 | 427 | 470 | ||||||||||||||||||
|
Deposits with
banks
|
34 | (2 | ) | 32 | 2 | 10 | 12 | |||||||||||||||||
|
Total interest
income
|
$ | 821 | $ | 1,571 | $ | 2,392 | $ | 588 | $ | 2,433 | $ | 3,021 | ||||||||||||
|
Interest
expense:
|
||||||||||||||||||||||||
|
Deposits
|
||||||||||||||||||||||||
|
NOW and money
market
|
$ | (71 | ) | $ | 85 | $ | 14 | $ | (116 | ) | $ | 473 | $ | 357 | ||||||||||
|
Savings
|
4 | 59 | 63 | (46 | ) | (45 | ) | (91 | ) | |||||||||||||||
|
Certificates of
deposit
|
547 | 1,412 | 1,959 | 419 | 1,573 | 1,992 | ||||||||||||||||||
|
Short-term
borrowings
|
88 | (1 | ) | 87 | 27 | 27 | 54 | |||||||||||||||||
|
Other
borrowings
|
174 | 21 | 195 | 194 | 366 | 560 | ||||||||||||||||||
|
FHLB borrowings
|
(168 | ) | 62 | (106 | ) | (56 | ) | 10 | (46 | ) | ||||||||||||||
|
Debt
|
(380 | ) | (380 | ) | (760 | ) | (1,224 | ) | (145 | ) | (1,369 | ) | ||||||||||||
|
Total interest
expense
|
$ | 193 | $ | 1,259 | $ | 1,452 | $ | (802 | ) | $ | 2,259 | $ | 1,457 | |||||||||||
|
Net
interest income*
|
$ | 628 | $ | 312 | $ | 940 | $ | 1,390 | $ | 174 | $ | 1,564 | ||||||||||||
|
(*)
Fully taxable equivalent using the rate of 34%
Note
– Changes to rate/volume are allocated to both rate and volume on a
proportional dollar basis
|
||||||||||||||||||||||||
As net interest income dollars
increased in 2007, Premier’s net interest margin also increased. In
2007, the yield earned on investment securities increased 63 basis points to
4.54% while the average yield on the loan portfolio increased 23 basis points to
7.92%. The yield on federal funds sold increased 8 basis points to
5.07%. The net result on all earning assets was to increase the yield
34 basis points to 6.87% in 2007, up from the 6.53% earned in 2006 and the 5.90%
earned in 2005. Similarly, in 2007 Premier increased the average rate
paid on its deposits by 51 basis points to remain competitive with local and
national markets. The average rate paid on certificates of deposit
increased the most at 71 basis points, while interest bearing transaction
accounts increased on average by only 12 basis points in 2007 and savings
accounts by increased 11 basis points. While the rates paid on
Premier’s short-term borrowings remained
PREMIER
FINANCIAL BANCORP, INC.
MANAGEMENT’S
DISCUSSION AND ANALYSIS
December
31, 2007
virtually
unchanged at 2.43%, the rates paid on other borrowings increased by 26 basis
points to 7.65% and the rates paid on FHLB advances increased by 67 basis points
to 6.47%. The rates paid on other borrowings increased as Premier
refinanced its subordinated debt with floating prime rate and below prime rate
loans in 2006 resulting in significant interest expense savings. The
rates paid on FHLB advances increased as a result of the prepayment of certain
amortizing advances at one affiliate bank while leaving higher rate fixed
maturity advances at another bank. The overall result of increasing
rates paid on deposits and rate decreases resulting from debt refinancing was to
increase the overall cost of funds by 36 basis points to 3.09%, up from 2.73% in
2006 and 2.30% in 2005. As a result, Premier’s net interest spread
decreased by 2 basis points. However, the volume of Premier’s
interest earning assets increased by a larger amount than its volume of interest
bearing liabilities which resulted in an increase in the net interest margin by
10 basis points to 4.42% in 2007, up from 4.32% in 2006 and 4.00% in
2005.
In 2006, the yield earned on investment
securities increased 47 basis points to 3.91% while the average yield on the
loan portfolio increased 46 basis points to 7.69%. The yield on
federal funds sold increased 176 basis points to 4.99%. The net
result on all earning assets was to increase the yield by 63 basis points to
6.53% in 2006, up from the 5.90% earned in 2005 and the 5.60% earned in
2004. Similarly, in 2006 Premier increased the average rate paid on
its deposits by 64 basis points to remain competitive with local and national
markets. The average rate paid on certificates of deposit increased
the most at 85 basis points, while interest bearing transaction accounts
increased on average by only 38 basis points in 2006. Premier also
increased the rates paid on its short-term borrowings by 30 basis
points. Rates also increased on other borrowings as Premier
refinanced its subordinated debt with floating prime rate and sub prime rate
loans. This refinancing resulted in a corresponding decrease in the
overall rate paid on debt outstanding. The overall result of
increasing rates paid on deposits and rate decreases resulting from debt
refinancing was to increase the overall cost of funds by 43 basis points to
2.73%, up from the 2.30% in 2005 and 2.32% in 2004. As a result
Premier's net interest spread increased by 20 basis points and its net interest
margin increased by 32 basis points to 4.32% in 2006, up from 4.00% in
2005. Further discussion of interest income is included in the
section of this report entitled "Balance Sheet Analysis."
Non-interest
Income and Expense
Non-interest income has been and will
continue to be an important factor for improving profitability. Recognizing this
importance, management continues to evaluate areas where non-interest income can
be enhanced. As shown in the table of Non-interest Income and Expense below,
total fees and other income increased by $458,000 or 11.0% in
2007. The increase in 2007 was largely due to a increases in
secondary market mortgage income and electronic banking income. In
2007, secondary market mortgage income (commissions and fees earned for
originating and selling mortgage loans to third parties in the secondary market)
increased by $347,000 or 114.5% to $650,000. In 2005, Premier changed
its approach to secondary market
PREMIER
FINANCIAL BANCORP, INC.
MANAGEMENT’S
DISCUSSION AND ANALYSIS
December
31, 2007
mortgage
originations in an effort to expedite the loan approval process. The
increased income in 2007 reflects an expansion of the program to all of
Premier’s affiliate banks which generated a greater number of customers taking
advantage of this process. Electronic banking income, which consists
of debit and credit card transaction fees, ATM fees and internet banking fees,
increased $110,000 or 22.1% to $608,000 in 2007. Premier’s conversion
to a more modern banking software system in 2005 has allowed Premier to offer
more electronic banking services and made it easier for customers to conduct
their banking electronically. Service charges on deposit accounts
decreased in 2007 by $66,000 or 2.4% to $2,738,000. A new required
disclosure of year-to-date NSF charges on customers’ deposit account statements
is believed to be resulting in lower overdraft activity by
customers. Other non-interest income increased by $67,000, or 12.0%,
in 2007. In 2007, other non-interest income includes $212,000 of life
insurance benefits on the death of a former officer of a
subsidiary. Excluding this benefit, other non-interest income
decreased $145,000 in 2007 as Premier discontinued offering trust services in
2006, realized fewer loan extension and late fees in 2007, ceased recording an
increase in the cash surrender value of the officer’s life insurance policy in
2007 and recorded lower other miscellaneous income in 2007.
In 2006, total fees and other income
increased by $245,000 or 6.3% from the amount earned in 2005. The
increase in 2006 was fairly evenly distributed between increases in the volume
of service charges on deposit accounts, electronic banking income, and secondary
market mortgage income. In 2006, service charges on deposit accounts
increased $72,000 or 2.6% to $2,804,000, primarily due to increases in Premier’s
non-interest bearing deposit customer base. Electronic banking income
increased $95,000 or 23.6% to $498,000 in 2006, largely due to the modernization
of the ways Premier’s customers can access their deposit
accounts. Secondary market mortgage income increased $86,000 or 39.6%
to $303,000 in 2006 as a result of Premier changing its approach to secondary
market mortgage originations by expediting the loan approval
process. Other non-interest income was relatively unchanged totaling
$560,000 in 2006 compared to $568,000 in 2005 as the elimination of data
processing fees earned in 2005 was offset by increases in the collection of loan
extension and late payment fees in 2006.
In 2007, 2006 and 2005, Premier did not
execute any sales of investment securities.
PREMIER
FINANCIAL BANCORP, INC.
MANAGEMENT’S
DISCUSSION AND ANALYSIS
December
31, 2007
The following table is a summary of
non-interest income and expense for each of the years in the three-year period
ending December 31, 2007.
|
NON-INTEREST
INCOME AND EXPENSE
|
||||||||||||||||||||||||||||
|
(Dollars
in thousands)
|
||||||||||||||||||||||||||||
|
Increase
(Decrease) Over Prior Year
|
||||||||||||||||||||||||||||
|
2007
|
2006
|
|||||||||||||||||||||||||||
|
2007
|
2006
|
2005
|
Amount
|
Percent
|
Amount
|
Percent
|
||||||||||||||||||||||
|
Non-interest
income:
|
||||||||||||||||||||||||||||
|
Service charges on deposit
accounts
|
$ | 2,738 | $ | 2,804 | $ | 2,732 | $ | (66 | ) | (2.35 | ) | $ | 72 | 2.64 | ||||||||||||||
|
Electronic banking
income
|
608 | 498 | 403 | 110 | 22.09 | 95 | 23.57 | |||||||||||||||||||||
|
Secondary market mortgage
income
|
650 | 303 | 217 | 347 | 114.52 | 86 | 39.63 | |||||||||||||||||||||
|
Other
|
627 | 560 | 568 | 67 | 11.96 | (8 | ) | (1.41 | ) | |||||||||||||||||||
|
Total fees and other
income
|
$ | 4,623 | $ | 4,165 | $ | 3,920 | 458 | 11.00 | 245 | 6.25 | ||||||||||||||||||
|
Investment securities
gains
|
0 | 0 | 0 | 0 | 0 | |||||||||||||||||||||||
|
Total non-interest
income
|
$ | 4,623 | $ | 4,165 | $ | 3,920 | $ | 458 | 11.00 | $ | 245 | 6.25 | ||||||||||||||||
|
Non-interest
expense:
|
||||||||||||||||||||||||||||
|
Salaries and
wages
|
$ | 7,211 | $ | 7,540 | $ | 7,443 | $ | (329 | ) | (4.36 | ) | $ | 97 | 1.30 | ||||||||||||||
|
Employee
benefits
|
1,560 | 1,590 | 1,642 | (30 | ) | (1.89 | ) | (52 | ) | (3.17 | ) | |||||||||||||||||
|
Total staff
costs
|
8,771 | 9,130 | 9,085 | (359 | ) | (3.93 | ) | 45 | 0.50 | |||||||||||||||||||
|
Occupancy and
equipment
|
1,947 | 1,907 | 2,262 | 40 | 2.10 | (355 | ) | (15.69 | ) | |||||||||||||||||||
|
Outside data
processing
|
2,132 | 2,036 | 1,505 | 96 | 4.72 | 531 | 35.28 | |||||||||||||||||||||
|
Professional
fees
|
461 | 496 | 554 | (35 | ) | (7.06 | ) | (58 | ) | (10.47 | ) | |||||||||||||||||
|
Taxes, other than
payroll,
property and
income
|
580 | 598 | 423 | (18 | ) | (3.01 | ) | 175 | 41.37 | |||||||||||||||||||
|
OREO (gains) losses and
expenses, net
|
(50 | ) | (91 | ) | 52 | 41 | 45.05 | (143 | ) | (275.00 | ) | |||||||||||||||||
|
Bad check losses
(recoveries)
|
37 | (79 | ) | 36 | 116 | 146.84 | (115 | ) | (319.44 | ) | ||||||||||||||||||
|
Supplies
|
315 | 333 | 362 | (18 | ) | (5.41 | ) | (29 | ) | (8.01 | ) | |||||||||||||||||
|
Accelerated amortization
of
subordinated debt issuance
costs
|
0 | 548 | 184 | (548 | ) | (100.00 | ) | 364 | 197.83 | |||||||||||||||||||
|
Other expenses
|
2,215 | 2,059 | 2,842 | 156 | 7.58 | (783 | ) | (27.55 | ) | |||||||||||||||||||
|
Total non-interest
expenses
|
$ | 16,408 | $ | 16,937 | $ | 17,305 | $ | (529 | ) | (3.12 | ) | $ | (368 | ) | (2.13 | ) | ||||||||||||
PREMIER
FINANCIAL BANCORP, INC.
MANAGEMENT’S
DISCUSSION AND ANALYSIS
December
31, 2007
Just as management continues to
evaluate areas where non-interest income can be enhanced, it strives to find
ways to improve the efficiency of its operations and utilize the economies of
scale of the consolidated entity to reduce its operating
costs. Premier’s 2007 net overhead ratio, or non-interest expense
less non-interest income excluding securities transactions and other similar
non-operating transactions to average earning assets was 2.36%, a decrease from
the 2.56% realized in 2006 and the 2.68% ratio realized in 2005. The
actual dollars of net overhead declined by 6.1% or $775,000 in 2007 which
reduced the ratio by 16 basis points. The 2007 net overhead ratio and
actual dollars of net overhead expense excludes the $212,000 of life insurance
benefits as a non-operating income transaction. In 2006, the net
overhead ratio decreased by 12 basis points as the actual dollars of net
overhead expense decreased by 4.6% or $613,000. For the year 2007,
net overhead was $12.0 million, down from the $12.8 million of 2006 net
overhead. The current year decrease follows a $613,000 decrease in
2006 from the $13.4 million of net overhead in 2005.
Total non-interest expense in 2007
decreased by $529,000, or 3.1% from 2006 as decreases in staff costs,
professional fees, and accelerated trust preferred issuance cost amortization
were only partially offset by higher occupancy and equipment costs, data
processing fees, and other expenses plus the absence of bad check loss
recoveries and lower net gains on the disposition of OREO. Total
non-interest expense in 2006 decreased by $368,000, or 2.1% from 2005 as
decreases in occupancy and equipment costs, professional fees, OREO losses, bad
check losses and other expenses were only partially offset by higher data
processing fees, accelerated trust preferred issuance cost amortization, and
taxes not on income.
Staff costs decreased by $359,000 or
3.9% in 2007 versus 2006 as normal salary and wage increases were more than
offset by an increase in deferred loan origination costs related to FAS
91. Staff costs increased by $45,000 or 0.5% in 2006 versus
2005. Normal salary and wage increases and $142,000 of stock
compensation expense resulting from the adoption of FAS 123R in 2006 were
substantially offset by reductions in staff count and corresponding benefit cost
reductions resulting from the data processing conversion in 2005.
Occupancy and equipment expenses
increased by $40,000 or 2.1% in 2007, largely due to a $70,000 writedown of
branch property that was scheduled to be closed at the end of January
2008. The decision to close the branch was made in 2007, and in
accordance with FAS 144, the branch property was written down to its estimated
realizable value. Excluding this writedown, occupancy and equipment
expenses decreased by $30,000 in 2007, largely due to decreases in equipment
depreciation. In 2006, occupancy and equipment expenses decreased by
$355,000 or 15.7% due to savings from the disposal of equipment and facilities
related to Premier’s data processing subsidiary in 2005, lower property and
casualty insurance costs, and the expensing of obsolete equipment as part of the
data processing conversion in 2005.
Outside data processing expense
increased by $96,000 or 4.7% in 2007, largely due to increases in ATM processing
costs, internet banking charges and contractual inflationary fee adjustments,
partially offset by a decrease in customer overdraft privilege program costs.
Outside data processing expense increased by $531,000 or 35.3% in 2006, as 2006
represents the
PREMIER
FINANCIAL BANCORP, INC.
MANAGEMENT’S
DISCUSSION AND ANALYSIS
December
31, 2007
first
full year of expense since Premier converted to an outsourced provider in
early-to-mid 2005. Outside data processing expense increased by
$482,000, or 47.1% in 2005, as Premier transitioned its internal data and item
processing functions to an outsourced provider. Savings in other
expense areas such as staff costs, occupancy and equipment expense and other
operating expenses have been realized as a result of the
conversion.
Professional fees decreased by $35,000
or 7.1% in 2007 largely due to lower internal and external audit costs and lower
consulting fees. Professional fees decreased by $58,000 or 10.5% in
2006 largely due to lower internal audit costs, tax preparation fees and
consulting expenses. In 2005, Premier used an outside firm to
continue to provide internal audits of Farmers Deposit Bank. For 2006
and 2007, these audits were performed by internal staff at the parent
company. However, the outside firm provided limited services early in
2006.
Taxes not on income decreased by
$18,000, or 3.0%, in 2007 versus 2006. The decrease in 2007 is
largely due to a decrease in the amount of expense related to equity based
franchise taxes. In 2006, taxes not on income increased by $175,000
or 41.4% versus 2005. The increase in 2006 is largely due to an
increase in taxable equity for equity based franchise taxes and an increase in
local municipal taxes.
OREO gains, losses and expenses
resulted in net gains of $50,000 in 2007 versus $91,000 of net gains in 2006, a
$41,000 increase in non-interest expense. OREO expense represents the
costs to operate, maintain and liquidate Other Real Estate acquired through
foreclosure in satisfaction of unpaid loans. In 2007, as Premier sold
most of its remaining inventory of OREO properties, it realized $20,000 of net
gains on their disposition as well as $30,000 of expense
recoveries. OREO gains, losses and expenses resulted in net gains of
$91,000 in 2006 versus $52,000 of net expenses in 2005, a $143,000 reduction of
non-interest expense. Similarly, in 2006, as Premier sold a
substantial portion of its inventory of OREO properties, it realized $105,000 of
net gains on their disposition as well as a reduction in the expenses needed to
maintain the properties. A majority of the gains on the disposition
of OREO in 2007 and 2006 were on properties from which no previous writedowns
had occurred. OREO writedowns and expenses totaled $52,000 in 2005, a
$97,000 increase over the net $45,000 benefit realized in 2004. The
2005 expense represents the costs to operate, maintain and liquidate Other Real
Estate.
Net losses on bad checks totaled
$37,000 in 2007 compared to net recoveries on bad checks of $79,000 in
2006. The $116,000 increase was largely the result of returning to a
normal pattern of bad check losses in 2007. In 2006, Premier realized
$79,000 of net recoveries of bad checks compared to $36,000 of net losses on bad
checks in 2005. The $115,000 decrease in 2006 was a largely the
result of a $101,000 partial settlement on the recovery of bad check losses
related to dishonored checks in 2003.
Accelerated Trust Preferred issuance
costs were recognized in 2005 and 2006. At the time of issuance, the
costs to originate the Trust Preferred Securities were capitalized. The costs
were being amortized over the 30 year life of the securities which were
scheduled to mature in
PREMIER
FINANCIAL BANCORP, INC.
MANAGEMENT’S
DISCUSSION AND ANALYSIS
December
31, 2007
2027
and were recorded as an adjustment to interest expense. In March 2003, Premier
began redeeming its Trust Preferred Securities in accordance with the terms of
the instrument. At time of redemption an amount of the remaining unamortized
issuance costs proportional to the size of the redemption was expensed to
non-interest expense. As a result of the $5.0 million early redemption on
December 31, 2005, Premier expensed $184,000 of the issuance
costs. In 2006, as a result of the $7.0 million early redemption on
January 31, 2006 and the final $8.25 million redeemed on November 10, 2006,
Premier expensed the final $548,000 of the issuance costs. No
accelerated issuance costs expense was recorded in 2007.
Other expenses totaled $2.2 million in
2007, a $156,000, or 7.6% increase from the $2.1 million recorded in
2006. The increase in 2007 is largely due to significantly higher
regulatory expenses, such as FDIC insurance and state examination costs, higher
postage costs, travel expenses, employee development and secondary market
mortgage underwriting expenses. These increases were partially offset
by lower stationery and supplies costs, advertising expenditures, correspondent
bank charges and insurance expense. Other expenses totaled $2.1
million in 2006, a $783,000 or $27.6% decrease from the $2.8 million recorded in
2005. The decrease in 2006 is largely due to costs and fees incurred
in 2005 related to Premier’s conversion to an outsourced data and item
processing provider. These costs included the travel and training of
employees, fees and travel expense reimbursements paid to Fiserv to convert
Premier’s data and costs associated with upgrading Premier’s computer
networks. Other reductions in 2006 expense include lower FDIC
insurance costs; recoveries of previously expensed loan collection costs as well
as lower costs incurred in 2006; lower insurance costs and costs incurred in
2005 related the termination of trust services. Other expenses that
increased in 2006 include advertising, employee training and development, and
travel costs associated with the internal audit function.
An analysis of the allowance for loan
losses and related provision for loan losses is included in the Loan Portfolio
section of the Balance Sheet Analysis of this report.
Applicable
Income Taxes
Premier recognized $3.5 million of
income tax expense in 2007. This amount compares to $3.3 million of
income tax expense recorded in 2006 and $2.0 million of income tax expense
recorded in 2005. Premier's effective tax rate was 32.8% in 2007,
down slightly from 33.6% in 2006 but up from 31.4% in 2005. Premier's effective
tax rate in 2007 decreased primarily as a result of death benefits received from
a former officer’s life insurance policy which were not subject to income
tax. The effective tax rate in 2006 increased primarily due to stock
compensation expense required by FAS 123R, most of which is a non-deductible
expense for income tax purposes since it relates primarily to qualified
incentive stock options. In addition, the tax saving benefits of holding
tax-exempt investments and other tax saving instruments helped to reduce
Premier's tax rate in 2005 to 31.4% from the 34.0% statutory rate. Additional
information regarding income taxes is contained in Note 10
to the consolidated financial statements.
PREMIER
FINANCIAL BANCORP, INC.
MANAGEMENT’S
DISCUSSION AND ANALYSIS
December
31, 2007
Effects
of Changing Prices
The results of operations and financial
condition presented in this report are based on historical cost, unadjusted for
the effects of inflation. Inflation affects Premier in two ways. One effect is
that inflation can result in increased operating costs which must be absorbed or
recovered through increased prices for services. The second effect is on the
purchasing power of the corporation. Virtually all of a bank's assets and
liabilities are monetary in nature. Regardless of changes in prices, most assets
and liabilities of the banking subsidiaries will be converted into a fixed
number of dollars. Non-earning assets, such as premises and equipment, do not
comprise a major portion of Premier's assets; therefore, most assets are subject
to repricing on a more frequent basis than in other industries.
Premier's ability to offset the effects
of inflation and potential reductions in future purchasing power depends
primarily on its ability to maintain capital levels by adjusting prices for its
services and to improve net interest income by maintaining an effective
asset/liability mix. Management's efforts to meet these goals are
described in other sections of this report.
SUMMARY
RESULTS OF OPERATIONS
FOURTH
QUARTER 2007
Net income for the three months ended
December 31, 2007 totaled $1,736,000, a $77,000 or 4.6% increase from the
$1,659,000 of net income reported for the fourth quarter of 2006. On a per share
basis, Premier's net income for the fourth quarter of 2007 was 33 cents per
share, compared to 32 cents per share for the same quarter last
year.
Net interest income totaled $5,644,000
for the fourth quarter of 2007, an increase of $190,000 or 3.5% from the net
interest income earned in the same quarter of 2006. The increase is the result
of higher interest income on loans and investments due to higher yields and an
increase in interest income on loans and federal funds sold due to an increase
in their average balance. This increase in interest income was
partially offset by an increase in interest expense. An increase in
interest expense on deposits as a result of higher rates paid was partially
reduced by a decrease in interest expense on borrowings due to lower outstanding
balances and lower borrowing rates due to the refinancing of the subordinated
debt. During the fourth quarter of 2007, Premier recorded a $25,000
provision for loan losses. This compares to the reversal of $110,000
of previously recorded provisions for loan losses (negative provisions) in the
fourth quarter of 2006. The negative provisions were the result of
continued improvement in the estimated credit risk at banks formerly subject to
regulatory agreements and payments on loans previously identified as having
significant credit risk at Farmers Deposit Bank. Future provisions to
the allowance for loan losses, positive or negative, will depend on future
improvement or deterioration in estimated credit risk in the loan portfolio as
well as whether additional payments are received on loans having significant
credit risk.
PREMIER
FINANCIAL BANCORP, INC.
MANAGEMENT’S
DISCUSSION AND ANALYSIS
December
31, 2007
Non-interest income, excluding
securities transactions, totaled $1,162,000 in the fourth quarter of 2007, an
increase of $28,000 or 2.5% from the $1,134,000 reported in the fourth quarter
of 2006. The increase was largely due to increases in secondary
market mortgage income and electronic banking income. Non-interest
expense totaled $4,176,000 in the fourth quarter of 2007, a $25,000 or 0.6%
decrease from the $4,201,000 reported for the fourth quarter of
2006. Decreases in staff costs, occupancy & equipment costs and
taxes not on income were nearly offset by increases in outside data processing,
professional fees, OREO expenses & writedowns, and a $70,000 real estate
impairment writedown on a branch building designated to be
sold. Additional quarterly financial data is provided in Note 20 to the consolidated financial
statements.
ADOPTION
OF NEW ACCOUNTING STANDARDS
Recently
Issued Accounting Standards Not Yet Adopted
In September 2006, the FASB issued
Statement No. 157, Fair Value
Measurements. This Statement defines fair value, establishes a
framework for measuring fair value and expands disclosures about fair value
measurements. This Statement establishes a fair value hierarchy about
the assumptions used to measure fair value and clarifies assumptions about risk
and the effect of a restriction on the sale or use of an asset. The
standard is effective for fiscal years beginning after November 15,
2007. The adoption of this statement is not anticipated to have a
material impact on the financial statements of the Company.
In February 2007, the FASB issued
Statement No. 159 – The Fair Value Option for Financial Assets and Financial
Liabilities. The standard provides companies with an option to report
selected financial assets and liabilities at fair value and establishes
presentation and disclosure requirements designed to facilitate comparisons
between companies that choose different measurement attributes for similar types
of assets and liabilities. The new standard is effective for the
Company on January 1, 2008. The Company does not expect the adoption
of SFAS No. 159 to have a material impact on the financial
statements.
PREMIER
FINANCIAL BANCORP, INC.
FORM
10-K
December
31, 2007
The Company's Financial Statements and
related Independent Auditors' Report are presented in the following pages. The
financial statements filed in this Item 8 are as follows:
Financial Statements:
|
|
December 31, 2007, 2006, and
2005
|
PREMIER
FINANCIAL BANCORP, INC.
CONSOLIDATED
FINANCIAL STATEMENTS
December
31, 2007, 2006, and 2005
PUBLIC
ACCOUNTING FIRM
Board
of Directors and Shareholders
Premier
Financial Bancorp, Inc.
Huntington,
West Virginia
We
have audited the accompanying consolidated balance sheets of Premier Financial
Bancorp, Inc. as of December 31, 2007 and 2006, and the related consolidated
statements of income, comprehensive income, changes in stockholders' equity, and
cash flows for each of the three years in the period ended December 31,
2007. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The Company is not
required to have, nor were we engaged to perform, an audit of its internal
control over financial reporting. Our audit included consideration of
internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the Company's internal control
over financial reporting. Accordingly, we express no such
opinion. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In
our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Premier Financial
Bancorp, Inc. as of December 31, 2007 and 2006, and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 2007, in conformity with U.S. generally accepted accounting
principles.
Crowe Chizek and Company
LLC
Columbus,
Ohio
March
27, 2008
CONSOLIDATED
BALANCE SHEETS
December
31, 2007 and 2006
(Dollars
in Thousands, Except Per Share Data)
|
2007
|
2006
|
|||||||
|
ASSETS
|
||||||||
|
Cash
and due from banks
|
$ | 22,365 | $ | 16,974 | ||||
|
Federal
funds sold
|
32,035 | 27,583 | ||||||
|
Securities
available for sale
|
124,242 | 121,367 | ||||||
|
Loans
held for sale
|
1,891 | 1,978 | ||||||
|
Loans
|
346,570 | 343,797 | ||||||
|
Allowance for loan
losses
|
(6,497 | ) | (6,661 | ) | ||||
|
Net loans
|
340,073 | 337,136 | ||||||
|
Federal
Home Loan Bank and Federal Reserve Bank stock
|
3,314 | 3,265 | ||||||
|
Premises
and equipment, net
|
6,200 | 6,533 | ||||||
|
Real
estate and other property acquired through foreclosure
|
174 | 495 | ||||||
|
Interest
receivable
|
2,768 | 2,821 | ||||||
|
Goodwill
|
15,816 | 15,816 | ||||||
|
Other
assets
|
377 | 1,484 | ||||||
|
Total assets
|
$ | 549,255 | $ | 535,452 | ||||
|
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
||||||||
|
Deposits
|
||||||||
|
Non-interest
bearing
|
$ | 75,271 | $ | 72,784 | ||||
|
Time deposits, $100,000 and
over
|
55,345 | 53,477 | ||||||
|
Other interest
bearing
|
318,417 | 312,689 | ||||||
|
Total deposits
|
449,033 | 438,950 | ||||||
|
Federal
funds purchased
|
392 | 976 | ||||||
|
Securities
sold under agreements to repurchase
|
12,477 | 12,555 | ||||||
|
Federal
Home Loan Bank advances
|
4,843 | 7,285 | ||||||
|
Other
borrowed funds
|
8,412 | 12,275 | ||||||
|
Interest
payable
|
1,064 | 1,061 | ||||||
|
Other
liabilities
|
5,645 | 1,348 | ||||||
|
Total liabilities
|
481,866 | 474,450 | ||||||
|
Commitments
and contingent liabilities
|
- | - | ||||||
|
Stockholders'
equity
|
||||||||
|
Preferred stock, no par value;
1,000,000 shares authorized;
|
||||||||
|
none issued or
outstanding
|
- | - | ||||||
|
Common stock, no par value;
10,000,000 shares authorized;
|
||||||||
|
5,237,899 in 2007 and 5,236,899
in 2006 shares
issued and outstanding
|
1,109 | 1,108 | ||||||
|
Additional paid-in
capital
|
43,763 | 43,624 | ||||||
|
Retained earnings
|
22,444 | 17,420 | ||||||
|
Accumulated other comprehensive
income (loss)
|
73 | (1,150 | ) | |||||
|
Total stockholders'
equity
|
67,389 | 61,002 | ||||||
|
Total liabilities and
stockholders' equity
|
$ | 549,255 | $ | 535,452 | ||||
CONSOLIDATED
STATEMENTS OF INCOME
Years
Ended December 31
(In
Thousands, Except Per Share Data)
|
2007
|
2006
|
2005
|
||||||||||
|
Interest
income
|
||||||||||||
|
Loans, including
fees
|
$ | 27,201 | $ | 25,926 | $ | 23,532 | ||||||
|
Investment
securities
|
||||||||||||
|
Taxable
|
5,509 | 5,148 | 5,014 | |||||||||
|
Tax-exempt
|
157 | 88 | 96 | |||||||||
|
Federal funds sold
|
1,829 | 1,215 | 745 | |||||||||
|
Other interest
income
|
56 | 23 | 12 | |||||||||
|
Total interest
income
|
34,752 | 32,400 | 29,399 | |||||||||
|
Interest
expense
|
||||||||||||
|
Deposits
|
11,019 | 8,984 | 6,725 | |||||||||
|
Repurchase agreements and
other
|
321 | 234 | 180 | |||||||||
|
FHLB advances and other
borrowings
|
1,116 | 1,027 | 513 | |||||||||
|
Debentures
|
- | 760 | 2,129 | |||||||||
|
Total interest
expense
|
12,456 | 11,005 | 9,547 | |||||||||
|
Net
interest income
|
22,296 | 21,395 | 19,852 | |||||||||
|
Provision
for loan losses
|
(78 | ) | (1,161 | ) | 4 | |||||||
|
Net interest income after
provision for loan losses
|
22,374 | 22,556 | 19,848 | |||||||||
|
Non-interest
income
|
||||||||||||
|
Service charges
|
2,738 | 2,804 | 2,732 | |||||||||
|
Electronic banking
income
|
608 | 498 | 403 | |||||||||
|
Secondary market mortgage
income
|
650 | 303 | 217 | |||||||||
|
Securities gains
|
- | - | - | |||||||||
|
Other
|
627 | 560 | 568 | |||||||||
| 4,623 | 4,165 | 3,920 | ||||||||||
|
Non-interest
expenses
|
||||||||||||
|
Salaries and employee
benefits
|
8,771 | 9,130 | 9,085 | |||||||||
|
Occupancy and equipment
expenses
|
2,017 | 1,907 | 2,262 | |||||||||
|
Outside data
processing
|
2,132 | 2,036 | 1,505 | |||||||||
|
Professional fees
|
461 | 496 | 554 | |||||||||
|
Taxes, other than payroll,
property and income
|
580 | 598 | 423 | |||||||||
|
Write-downs, expenses, sales of
other real
estate owned, net of gains
|
(50 | ) | (91 | ) | 52 | |||||||
|
Supplies
|
315 | 333 | 362 | |||||||||
|
Other expenses
|
2,182 | 2,528 | 3,062 | |||||||||
| 16,408 | 16,937 | 17,305 | ||||||||||
|
Income
before income taxes
|
10,589 | 9,784 | 6,463 | |||||||||
|
Provision
for income taxes
|
3,470 | 3,283 | 2,029 | |||||||||
|
Net
income
|
$ | 7,119 | $ | 6,501 | $ | 4,434 | ||||||
|
Weighted
average shares outstanding:
|
||||||||||||
|
Basic
|
5,237 | 5,236 | 5,233 | |||||||||
|
Diluted
|
5,263 | 5,264 | 5,248 | |||||||||
|
Earnings
per share:
|
||||||||||||
|
Basic
|
$ | 1.36 | $ | 1.24 | $ | 0.85 | ||||||
|
Diluted
|
1.35 | 1.24 | 0.84 | |||||||||
CONSOLIDATED
STATEMENTS OF COMPREHENSIVE INCOME
Years
Ended December 31
(In
Thousands, Except Per Share Data)
|
2007
|
2006
|
2005
|
||||||||||
|
Net
income
|
$ | 7,119 | $ | 6,501 | $ | 4,434 | ||||||
|
Other comprehensive income
(loss):
|
||||||||||||
|
Unrealized gains and (losses)
arising during the period
|
1,853 | 861 | (1,805 | ) | ||||||||
|
Reclassification of realized
amount
|
- | - | - | |||||||||
|
Net change in unrealized gain
(loss) on securities
|
1,853 | 861 | (1,805 | ) | ||||||||
|
Less tax impact
|
630 | 293 | (614 | ) | ||||||||
|
Other comprehensive income
(loss):
|
1,223 | 568 | (1,191 | ) | ||||||||
|
Comprehensive
income
|
$ | 8,342 | $ | 7,069 | $ | 3,243 | ||||||
CONSOLIDATED
STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
Years
Ended December 31, 2007, 2006 and 2005
(In
Thousands, Except Per Share Data)
|
Common
Stock
|
Additional
Paid-in
Capital
|
Retained
Earnings
|
Accumulated
Other
Comprehensive
Income (Loss)
|
Total
|
||||||||||||||||
|
Balances,
January 1, 2005
|
$ | 1,103 | $ | 43,445 | $ | 7,008 | $ | (527 | ) | $ | 51,029 | |||||||||
|
Net
change in unrealized gains (losses)
on securities available for
sale
|
- | - | - | (1,191 | ) | (1,191 | ) | |||||||||||||
|
Stock
options exercised, 1,667 shares
|
2 | 13 | - | - | 15 | |||||||||||||||
|
Net
income
|
- | - | 4,434 | - | 4,434 | |||||||||||||||
|
Balances,
December 31, 2005
|
1,105 | 43,458 | 11,442 | (1,718 | ) | 54,287 | ||||||||||||||
|
Net
change in unrealized gains (losses)
on securities available for
sale
|
- | - | - | 568 | 568 | |||||||||||||||
|
Cash
dividends paid ($0.10 per share)
|
- | - | (523 | ) | - | (523 | ) | |||||||||||||
|
Stock
options exercised, 3,002 shares
|
3 | 24 | - | - | 27 | |||||||||||||||
|
Stock
based compensation expense
|
- | 142 | - | - | 142 | |||||||||||||||
|
Net
income
|
- | - | 6,501 | - | 6,501 | |||||||||||||||
|
Balances,
December 31, 2006
|
1,108 | 43,624 | 17,420 | (1,150 | ) | 61,002 | ||||||||||||||
|
Net
change in unrealized gains (losses)
on securities available for
sale
|
- | - | - | 1,223 | 1,223 | |||||||||||||||
|
Cash
dividends paid ($0.40 per share)
|
- | - | (2,095 | ) | - | (2,095 | ) | |||||||||||||
|
Stock
options exercised, 1,000 shares
|
1 | 9 | - | - | 10 | |||||||||||||||
|
Stock
based compensation expense
|
- | 130 | - | - | 130 | |||||||||||||||
|
Net
income
|
- | - | 7,119 | - | 7,119 | |||||||||||||||
|
Balances,
December 31, 2007
|
$ | 1,109 | $ | 43,763 | $ | 22,444 | $ | 73 | $ | 67,389 | ||||||||||
CONSOLIDATED
STATEMENTS OF CASH FLOWS
Years
Ended December 31
(In
Thousands, Except Per Share Data)
|
2007
|
2006
|
2005
|
||||||||||
|
Cash
flows from operating activities
|
||||||||||||
|
Net income
|
$ | 7,119 | $ | 6,501 | $ | 4,434 | ||||||
|
Adjustments to reconcile net
income to net cash from
operating activities
|
||||||||||||
|
Depreciation and impairment of
real estate
|
833 | 868 | 976 | |||||||||
|
Provision for loan
losses
|
(78 | ) | (1,161 | ) | 4 | |||||||
|
Amortization (accretion),
net
|
(40 | ) | 187 | 236 | ||||||||
|
FHLB stock
dividends
|
- | (145 | ) | (113 | ) | |||||||
|
Gains on other real estate owned,
net
|
(20 | ) | (105 | ) | (17 | ) | ||||||
|
Stock compensation
expense
|
130 | 142 | - | |||||||||
|
Loans originated for
sale
|
(27,461 | ) | (14,616 | ) | (7,602 | ) | ||||||
|
Secondary market loans
sold
|
28,198 | 13,809 | 6,951 | |||||||||
|
Secondary market
income
|
(650 | ) | (303 | ) | (217 | ) | ||||||
|
Changes in :
|
||||||||||||
|
Interest
receivable
|
53 | (160 | ) | 79 | ||||||||
|
Deferred income
taxes
|
648 | 1,071 | 1,119 | |||||||||
|
Other assets
|
558 | 288 | 1,069 | |||||||||
|
Interest payable
|
3 | 337 | (4,808 | ) | ||||||||
|
Other liabilities
|
68 | (1,347 | ) | (18 | ) | |||||||
|
Net cash from operating
activities
|
9,361 | 5,366 | 2,093 | |||||||||
|
Cash
flows from investing activities
|
||||||||||||
|
Purchases of securities available
for sale
|
(41,078 | ) | (23,248 | ) | (18,486 | ) | ||||||
|
Proceeds from sales of securities
available for sale
|
25 | - | - | |||||||||
|
Proceeds from maturities and calls
of securities
available
for sale
|
43,571 | 39,974 | 34,143 | |||||||||
|
Purchase of FHLB stock,
net of redemptions
|
(49 | ) | (60 | ) | (336 | ) | ||||||
|
Net change in federal funds
sold
|
(4,452 | ) | (8,771 | ) | (1,470 | ) | ||||||
|
Net change in
loans
|
(4,361 | ) | (20,284 | ) | (6,120 | ) | ||||||
|
Purchases of loan participations
from other banks
|
(4,825 | ) | (1,605 | ) | (1,197 | ) | ||||||
|
Payments on loan participations
with other banks
|
6,045 | 6,067 | 589 | |||||||||
|
Purchases of premises and
equipment, net
|
(500 | ) | (361 | ) | (845 | ) | ||||||
|
Proceeds from sale of other real
estate acquired
through
foreclosure
|
623 | 2,417 | 1,658 | |||||||||
|
Net cash from investing
activities
|
(5,001 | ) | (5,871 | ) | 7,936 | |||||||
PREMIER
FINANCIAL BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Continued)
Years
Ended December 31
(In
Thousands, Except Per Share Data)
|
2007
|
2006
|
2005
|
||||||||||
|
Cash
flows from financing activities
|
||||||||||||
|
Net change in
deposits
|
10,083 | 3,107 | (1,955 | ) | ||||||||
|
Net change in federal funds
purchased
|
(584 | ) | 976 | (1,838 | ) | |||||||
|
Net change in agreements to
repurchase securities
|
(78 | ) | 3,238 | 2,109 | ||||||||
|
Repayment of Federal Home Loan
Bank advances
|
(2,442 | ) | (1,049 | ) | (954 | ) | ||||||
|
Early redemption of debentures,
net
|
- | (15,250 | ) | (5,000 | ) | |||||||
|
Repayment of other borrowed
funds
|
(3,863 | ) | (2,627 | ) | (800 | ) | ||||||
|
Proceeds from other
borrowings
|
- | 13,500 | - | |||||||||
|
Cash dividends
paid
|
(2,095 | ) | (523 | ) | - | |||||||
|
Proceeds from stock option
exercises
|
10 | 27 | 15 | |||||||||
|
Net cash from financing
activities
|
1,031 | 1,399 | (8,423 | ) | ||||||||
|
Net
change in cash and cash equivalents
|
5,391 | 894 | 1,606 | |||||||||
|
Cash
and cash equivalents at beginning of year
|
16,974 | 16,080 | 14,474 | |||||||||
|
Cash
and cash equivalents at end of year
|
$ | 22,365 | $ | 16,974 | $ | 16,080 | ||||||
|
Supplemental
disclosures of cash flow information:
|
||||||||||||
|
Cash paid during year for
-
|
||||||||||||
|
Interest
|
$ | 12,453 | $ | 10,667 | $ | 14,354 | ||||||
|
Income taxes paid
|
3,066 | 2,285 | 191 | |||||||||
|
Non-cash
transactions
|
||||||||||||
|
Loans transferred to real estate
acquired through
foreclosure
|
$ | 282 | $ | 672 | $ | 1,443 | ||||||
|
Purchases of securities available
for sale not yet settled
|
3,500 | - | - | |||||||||
|
Fixed assets transferred to other
real estate owned
|
- | 141 | - | |||||||||
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
December
31, 2007, 2006, and 2005
(Dollars
in Thousands, Except Per Share Data)
NOTE 1
- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The
consolidated financial statements include the accounts of Premier Financial
Bancorp, Inc. (the Company) and its wholly-owned subsidiaries:
|
Unaudited
|
|||||||||||
|
December
31, 2007
|
|||||||||||
|
Subsidiary
|
Location
|
Year
Acquired
|
Total
Assets
|
Net
Income
|
|||||||
|
Citizens
Deposit Bank & Trust
|
Vanceburg,
Kentucky
|
1991
|
$ | 124,695 | $ | 1,789 | |||||
|
Farmers
Deposit Bank
|
Eminence,
Kentucky
|
1996
|
71,157 | 1,244 | |||||||
|
Ohio
River Bank
|
Ironton,
Ohio
|
1998
|
84,359 | 1,160 | |||||||
|
First
Central Bank, Inc.
|
Philippi,
West Virginia
|
1998
|
111,097 | 1,464 | |||||||
|
Boone
County Bank, Inc.
|
Madison,
West Virginia
|
1998
|
159,099 | 2,495 | |||||||
|
Mt.
Vernon Financial Holdings, Inc.
|
Huntington,
West Virginia
|
1999
|
509 | 180 | |||||||
|
Parent
and Intercompany Eliminations
|
(1,661 | ) | (1,213 | ) | |||||||
|
Consolidated
total
|
$ | 549,255 | $ | 7,119 | |||||||
All
material intercompany transactions and balances have been
eliminated.
Nature of
Operations: The subsidiary banks (Banks) operate under state
bank charters and provide traditional banking services to customers primarily
located in the counties and adjoining counties in Kentucky, Ohio, and West
Virginia in which the Banks operate. Chartered as state banks, the
Banks are subject to regulation by their respective state banking regulators and
the Federal Deposit Insurance Corporation (FDIC) or the Federal Reserve Bank for
member banks. The Company is also subject to regulation by the Federal Reserve
Bank.
Estimates in the Financial
Statements: The preparation of financial statements in
conformity with accounting principles generally accepted in the United States of
America requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities, disclosure of contingent assets and
liabilities at the date of the financial statements, and the reported amounts of
revenues and expenses during the reporting period. Actual results
could differ from those estimates. The allowance for loan losses, the
identification and evaluation of impaired loans, impairment of goodwill, and
fair values of financial instruments are particularly subject to
change.
Cash
Flows: For purposes of reporting cash flows, cash and cash
equivalents include cash on hand, amounts due from banks and interest-earning
balances with banks with an original maturity less than ninety
days. Net cash flows are reported for loans, federal funds sold,
deposits, and other borrowing transactions.
PREMIER
FINANCIAL BANCORP, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
December
31, 2007, 2006, and 2005
(Dollars
in Thousands, Except Per Share Data)
NOTE 1 - SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES (Continued)
Securities: The
Company classifies its securities portfolio as either securities available for
sale or securities held to maturity. Securities held to maturity are
carried at amortized cost.
Securities
available for sale might be sold before maturity and are carried at fair
value. Adjustments from amortized cost to fair value are recorded in
other comprehensive income, net of related income tax. Other securities such as
Federal Home Loan Bank stock are carried at cost.
Interest
income includes amortization of purchase premium or discount computed using the
level yield method. Gains or losses on dispositions are based on the
net proceeds and adjusted carrying amount of the securities sold using the
specific identification method. Securities are written down to fair
value when a decline in fair value is not temporary.
Declines
in the fair value of securities below their cost that are other than temporary
are reflected as realized losses. In estimating other-than-temporary
losses, management considers: (1) the length of time and extent that fair value
has been less than cost, (2) the financial condition and near term prospects of
the issuer, and (3) the Company’s ability and intent to hold the security for a
period sufficient to allow for any anticipated recovery in fair
value.
Loans Held for
Sale: Mortgage loans originated and intended for sale in the
secondary market are carried at the lower of aggregate cost or market, as
determined by outstanding commitments from investors. Net unrealized
losses, if any, are recorded as a valuation allowance and charged to
earnings. Loans are generally sold with servicing
released.
Loans: Net
loans are stated at the amount of unpaid principal, reduced by unearned income
and an allowance for loan losses. Interest income on loans is
recognized on the accrual basis except for those loans in a non-accrual of
income status. The accrual of interest on impaired loans is
discontinued when management believes, after consideration of economic and
business conditions and collection efforts, that the borrowers’ financial
condition is such that collection of interest is doubtful.
All
interest accrued but not received for loans placed on non-accrual is reversed
against interest income. Interest received on such loans is accounted
for on the cash-basis or cost-recovery method, until qualifying for return to
accrual. Loans are returned to accrual status when all the principal
and interest amounts contractually due are brought current and future payments
are reasonably assured.
PREMIER
FINANCIAL BANCORP, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
December
31, 2007, 2006, and 2005
(Dollars
in Thousands, Except Per Share Data)
NOTE 1 - SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES (Continued)
The
allowance for loan losses is a valuation allowance for probable incurred credit
losses increased by a provision for loan losses charged to
expense. The allowance is an amount that management believes will be
adequate to absorb probable incurred losses on existing loans based on
evaluations of the collectability of loans and prior loan loss
experience. The evaluations take into consideration such factors as
changes in the nature and volume of the loan portfolio, overall portfolio
quality, review of specific problem loans, and current economic conditions that
may affect the borrowers’ ability to pay. Allocations of the
allowance may be made for specific loans, but the entire allowance is available
for any loan that, in management’s judgment, should be
charged-off. Loans are charged against the allowance for loan losses
when management believes that the collection of principal is
unlikely. Subsequent recoveries, if any, are credited to the
allowance.
A
loan is impaired when full payment under the loan terms is not
expected. Impairment is evaluated in total for smaller-balance loans
of similar nature such as residential mortgage, consumer, and credit card loans,
and accordingly, they are not separately identified for impairment
disclosures. All other loans are evaluated for impairment on an
individual basis. If a loan is impaired, a portion of the allowance
is allocated so that the loan is reported, net, at the present value of
estimated future cash flows using the loan’s existing rate or at the fair value
of collateral if repayment is expected solely from the collateral.
Premises and
Equipment: Land is carried at cost. Premises and
equipment are stated at cost less accumulated
depreciation. Depreciation is recorded principally by the
straight-line method with useful lives ranging from 7 to 40 years for premises
and from 3 to 15 years for equipment.
Real Estate Acquired Through
Foreclosure: Real estate acquired through foreclosure is
carried at the lower of the recorded investment in the property or its fair
value less estimated costs to sell. Upon repossession, the value of
the underlying loan is written down to the fair value of the real estate less
estimated costs to sell by a charge to the allowance for loan losses, if
necessary. Any subsequent write-downs are charged to operating
expenses. Parcels of real estate maybe leased to third parties to offset holding
period costs. Operating expenses of such properties, net of related income, and
gains and losses on their disposition are included in other
expenses.
Federal Home Loan Bank
(FHLB) stock: The Banks are members of the FHLB
system. Members are required to own a certain amount of stock based
on the level of borrowings and other factors, and may invest in additional
amounts. FHLB stock is carried at cost, classified as a restricted
security, and periodically evaluated for impairment based on ultimate recovery
of par value. Both cash and stock dividends are reported as
income.
PREMIER
FINANCIAL BANCORP, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
December
31, 2007, 2006, and 2005
(Dollars
in Thousands, Except Per Share Data)
NOTE 1 - SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES (Continued)
Long-term Assets:
Premises and equipment and other long-term assets are reviewed for impairment
when events indicate that the carrying amount may not be recoverable from future
undiscounted cash flows. If impaired, the assets are recorded at fair
value.
Repurchase
Agreements: Substantially all repurchase agreement liabilities
represent amounts advanced by various customers. Securities are
pledged to cover these liabilities, which are not covered by federal deposit
insurance.
Goodwill: Goodwill
results from business acquisitions and represents the excess of the purchase
price over the fair value of acquired tangible assets and liabilities and
identifiable intangible assets. Goodwill is assessed at least
annually for impairment and any such impairment will be recognized in the period
identified. Impairment is evaluated using the aggregate of all
banking operations. To evaluate impairment, management uses pricing
valuation factors such as price-to-total assets and price-to-total deposits from
databases of actual peer group bank sales. These valuation factors
are applied to the comparable factors of the Company’s aggregate banking
operations to arrive at estimated fair value. The Company does not
have any identifiable intangible assets such as core deposit
intangibles.
Stock Based
Compensation: Effective January 1, 2006, the Company adopted
Statement of Financial Accounting Standards (“SFAS”) No. 123(R), Share-based Payment, using
the modified prospective transition method. Accordingly, the Company
has recorded stock-based employee compensation cost using the fair value method
starting in 2006.
Prior
to January 1, 2006, employee compensation expense under stock options was
reported using the intrinsic value method; therefore, no stock-based
compensation cost is reflected in net income for the year ending December 31,
2005, as all options granted had an exercise price equal to or greater than the
market price of the underlying common stock at date of grant.
PREMIER
FINANCIAL BANCORP, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
December
31, 2007, 2006, and 2005
(Dollars
in Thousands, Except Per Share Data)
NOTE 1 - SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES (Continued)
The
following table illustrates the effect on net income and earnings per share if
expense was measured using the fair value recognition provisions of FASB
Statement No. 123, Accounting
for Stock-Based Compensation, for the year ending December 31, 2005 (in
thousands, except per share information):
|
Net
Income
|
$ | 4,434 | ||
|
Deduct:
Stock based compensation expense determined under fair
value based method
|
(93 | ) | ||
|
Pro
forma income
|
$ | 4,341 | ||
|
Basic
earnings per share from continuing operations
|
$ | 0.85 | ||
|
Pro
forma basic earnings per share
|
0.83 | |||
|
Diluted
earnings per share from continuing operations
|
$ | 0.84 | ||
|
Pro
forma basic earnings per share
|
0.82 |
Income
Taxes: Income tax expense is the total of the current year
income tax due or refundable and the change in deferred tax assets and
liabilities. 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.
The
Company adopted FASB Interpretation 48, Accounting for Uncertainty in Income
Taxes ("FIN 48"), as of January 1, 2007. A tax position is recognized as a
benefit only if it is more likely than not" that the tax position would be
sustained in a tax examination, with a tax examination being presumed to occur.
The amount recognized is the largest amount of tax benefit that is greater than
50% likely of being realized on examination. For tax positions not meeting the
"more likely than not" test, no tax benefit is recorded. The adoption had no
affect on the Company's financial statements.
The
Company recognizes interest related to income tax matters as other interest
expense and penalties related to income tax matters as other noninterest
expense.
Off Balance Sheet Financial
Instruments: Financial instruments include off-balance sheet
credit instruments, such as commitments to make loans and commercial letters of
credit, issued to meet customer financing needs. The face amount for
these items represents the exposure to loss, before considering customer
collateral or ability to repay. Such financial instruments are
recorded when they are funded.
PREMIER
FINANCIAL BANCORP, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
December
31, 2007, 2006, and 2005
(Dollars
in Thousands, Except Per Share Data)
NOTE 1 - SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES (Continued)
Earnings Per Common
Share: Basic earnings per common share is net income divided
by the weighted average number of common shares outstanding during the
period. Diluted earnings per common share includes the dilutive
effect of additional potential common shares issuable under stock
options. Earnings and dividends per share are restated for all stock
splits and dividends through the date of issuance of the financial
statements.
Comprehensive
Income: Comprehensive income consists of net income and other
comprehensive income. Other comprehensive income includes unrealized
gains and losses on securities available for sale which are also recognized as a
separate component of equity.
Loss
Contingencies: Loss contingencies, including claims and legal
actions arising in the ordinary course of business, are recorded as liabilities
when the likelihood of loss is probable and an amount or range of loss can be
reasonably estimated. Management does not believe there now are such
matters that will have a material effect on the financial
statements.
Fair Value of Financial
Instruments: Fair values of financial instruments are
estimated using relevant market information and other assumptions, as more fully
disclosed in a separate note. Fair value estimates involve
uncertainties and matters of significant judgment regarding interest rates,
credit risk, prepayments, and other factors, especially in the absence of broad
markets for particular items. Changes in assumptions or in market
conditions could significantly affect the estimates.
Operating
Segments: All of the Company’s operations are considered by
management to be aggregated into one reportable operating
segment. While the chief decision-makers monitor the revenue streams
of the various products and services, the identifiable segments are not
material. Operations are managed and financial performance is
evaluated on a Company-wide basis.
Reclassifications: Some
items in the prior year financial statements were reclassified to conform to the
current presentation.
PREMIER
FINANCIAL BANCORP, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
December
31, 2007, 2006, and 2005
(Dollars
in Thousands, Except Per Share Data)
NOTE 1 - SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES (Continued)
Adoption of New Accounting
Standards: The Company adopted FASB Interpretation 48,
Accounting for Uncertainty in Income Taxes (“FIN 48”), as of January 1,
2007. The Company and its subsidiaries are subject to U.S. federal
income tax as well as income tax of the state of West Virginia. The
Company recognizes interest related to income tax matters as interest expense
and penalties related to income tax matters as other expense. The
Company did not have any amounts accrued for interest and penalties at January
1, 2007. Under FIN 48, a tax position is recognized as a benefit only
if it is "more likely than not" that the tax position would be sustained in a
tax examination, with a tax examination being presumed to occur. The
amount recognized is the largest amount of tax benefit that is greater than 50%
likely of being realized on examination. For tax positions not
meeting the "more likely than not" test, no tax benefit is
recorded. The Company is no longer subject to examination by taxing
authorities for years before 2004. The Company does not expect the
total amount of unrecognized tax benefits to significantly increase in the next
twelve months. The adoption had no effect on the Company’s financial
statements.
Recently Issued Accounting
Standards Not Yet Adopted: In September 2006, the FASB issued
Statement No. 157, Fair Value
Measurements. This Statement defines fair value, establishes a
framework for measuring fair value and expands disclosures about fair value
measurements. This Statement establishes a fair value hierarchy about
the assumptions used to measure fair value and clarifies assumptions about risk
and the effect of a restriction on the sale or use of an asset. The
standard is effective for fiscal years beginning after November 15,
2007. The adoption of this statement is not anticipated to have a
material impact on the financial statements of the Company.
In
February 2007, the FASB issued Statement No. 159 – The Fair Value Option for Financial
Assets and Financial Liabilities. The standard provides
companies with an option to report selected financial assets and liabilities at
fair value and establishes presentation and disclosure requirements designed to
facilitate comparisons between companies that choose different measurement
attributes for similar types of assets and liabilities. The new
standard is effective for the Company on January 1, 2008. The Company
does not expect the adoption of SFAS No. 159 to have a material impact on the
financial statements
PREMIER
FINANCIAL BANCORP, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
December
31, 2007, 2006, and 2005
(Dollars
in Thousands, Except Per Share Data)
Included
in cash and due from banks are certain non-interest bearing deposits that are
held at the Federal Reserve or maintained in vault cash in accordance with
average balance requirements specified by the Federal Reserve Board of
Governors. The balance requirement at December 31, 2007 and 2006 was
approximately $3,109 and $3,300.
Amortized
cost and fair value of securities available for sale and the related gross
unrealized gains and losses recognized in accumulated other comprehensive income
(loss) were as follows:
|
2007
|
Amortized
Cost
|
Unrealized
Gains
|
Unrealized
Losses
|
Fair
Value
|
||||||||||||
|
Available
for sale
|
||||||||||||||||
|
U. S. Treasury
securities
|
$ | 5,477 | $ | 97 | $ | - | $ | 5,574 | ||||||||
|
U. S. agency
securities
|
74,515 | 427 | (83 | ) | 74,859 | |||||||||||
|
Obligations of states and
political subdivisions
|
3,789 | 31 | (4 | ) | 3,816 | |||||||||||
|
Mortgage-backed
securities
|
40,350 | 131 | (488 | ) | 39,993 | |||||||||||
|
Total available for
sale
|
$ | 124,131 | $ | 686 | $ | (575 | ) | $ | 124,242 | |||||||
|
2006
|
Amortized
Cost
|
Unrealized
Gains
|
Unrealized
Losses
|
Fair
Value
|
||||||||||||
|
Available
for sale
|
||||||||||||||||
|
U. S. Treasury
securities
|
$ | 6,454 | $ | - | $ | (53 | ) | $ | 6,401 | |||||||
|
U. S. agency
securities
|
77,885 | 43 | (1,017 | ) | 76,911 | |||||||||||
|
Obligations of states and
political subdivisions
|
3,413 | 15 | (15 | ) | 3,413 | |||||||||||
|
Mortgage-backed
securities
|
35,332 | 40 | (755 | ) | 34,617 | |||||||||||
|
Corporate
securities
|
25 | - | - | 25 | ||||||||||||
|
Total available for
sale
|
$ | 123,109 | $ | 98 | $ | (1,840 | ) | $ | 121,367 | |||||||
PREMIER
FINANCIAL BANCORP, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
December
31, 2007, 2006, and 2005
(Dollars
in Thousands, Except Per Share Data)
NOTE 3 –SECURITIES
(Continued)
The
amortized cost and fair value of securities at December 31, 2007 by contractual
maturity are shown below. Expected maturities will differ from
contractual maturities because borrowers may have the right to call or prepay
obligations with or without call or prepayment penalties.
|
Amortized
Cost
|
Fair
Value
|
|||||||
|
Available
for sale
|
||||||||
|
Due in one year or
less
|
$ | 31,013 | $ | 30,962 | ||||
|
Due after one year through five
years
|
42,861 | 43,321 | ||||||
|
Due after five years through ten
years
|
9,746 | 9,803 | ||||||
|
Due after ten
years
|
161 | 163 | ||||||
|
Mortgage-backed
securities
|
40,350 | 39,993 | ||||||
|
Total available for
sale
|
$ | 124,131 | $ | 124,242 | ||||
There
were no sales of securities in 2006 or 2005. Proceeds from sale of
securities during 2007 were $25. No gain or loss was realized on the
sale.
Securities
with an approximate carrying value of $84,116 and $76,845 at December 31, 2007
and 2006 were pledged to secure public deposits, trust funds, securities sold
under agreements to repurchase and for other purposes as required or
permitted by law.
Securities
with unrealized losses at year-end 2007 aggregated by investment category and
length of time that individual securities have been in a continuous unrealized
loss position are as follows:
|
Less
than 12 Months
|
12
Months or More
|
Total
|
||||||||||||||||||||||
|
Description
of Securities
|
Fair
Value
|
Unrealized
Loss
|
Fair
Value
|
Unrealized
Loss
|
Fair
Value
|
Unrealized
Loss
|
||||||||||||||||||
|
U.S.
agency securities
|
$ | 1,997 | $ | (3 | ) | $ | 24,712 | $ | (80 | ) | $ | 26,709 | $ | (83 | ) | |||||||||
|
Obligations
of states and
political
subdivisions
|
245 | (3 | ) | 210 | (1 | ) | 455 | (4 | ) | |||||||||||||||
|
Gov’t
guaranteed mortgage-
backed
securities
|
- | - | 11,019 | (239 | ) | 11,019 | (239 | ) | ||||||||||||||||
|
Mortgage-backed
securities
|
4,404 | (49 | ) | 10,179 | (200 | ) | 14,583 | (249 | ) | |||||||||||||||
|
Total
temporarily impaired
|
$ | 6,646 | $ | (55 | ) | $ | 46,120 | $ | (520 | ) | $ | 52,766 | $ | (575 | ) | |||||||||
PREMIER
FINANCIAL BANCORP, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
December
31, 2007, 2006, and 2005
(Dollars
in Thousands, Except Per Share Data)
NOTE 3 –SECURITIES
(Continued)
Securities
with unrealized losses at year-end 2006 aggregated by investment category and
length of time that individual securities have been in a continuous unrealized
loss position, are as follows:
|
Less
than 12 Months
|
12
Months or More
|
Total
|
||||||||||||||||||||||
|
Description
of Securities
|
Fair
Value
|
Unrealized
Loss
|
Fair
Value
|
Unrealized
Loss
|
Fair
Value
|
Unrealized
Loss
|
||||||||||||||||||
|
U.S.
treasury securities
|
$ | 5,435 | $ | (32 | ) | $ | 966 | $ | (21 | ) | $ | 6,401 | $ | (53 | ) | |||||||||
|
U.S.
agency securities
|
3,735 | (12 | ) | 63,145 | (1,005 | ) | 66,880 | (1,017 | ) | |||||||||||||||
|
Obligations
of states and
political
subdivisions
|
1,581 | (12 | ) | 322 | (3 | ) | 1,903 | (15 | ) | |||||||||||||||
|
Gov’t
guaranteed mortgage-
backed
securities
|
- | - | 13,121 | (381 | ) | 13,121 | (381 | ) | ||||||||||||||||
|
Mortgage-backed
securities
|
943 | (3 | ) | 14,720 | (371 | ) | 15,663 | (374 | ) | |||||||||||||||
|
Total
temporarily impaired
|
$ | 11,694 | $ | (59 | ) | $ | 92,274 | $ | (1,781 | ) | $ | 103,968 | $ | (1,840 | ) | |||||||||
The
investment portfolio is predominately high quality interest-bearing bonds with
defined maturity dates backed by the U.S. Government or Government sponsored
entities. The
unrealized losses at December
31, 2007 and December 31, 2006 are price changes resulting from changes
in the interest rate environment
and are considered to be temporary declines in the value of the
securities. Their
fair value is expected to recover as the bonds approach their maturity date
and/or market conditions improve.
Loans
at year-end were as follows:
|
2007
|
2006
|
|||||||
|
Commercial,
secured by real estate
|
$ | 100,278 | $ | 101,786 | ||||
|
Commercial,
other
|
40,438 | 43,981 | ||||||
|
Real
estate construction
|
24,035 | 11,303 | ||||||
|
Residential
real estate
|
133,776 | 138,795 | ||||||
|
Agricultural
|
1,845 | 1,930 | ||||||
|
Consumer
and home equity
|
41,893 | 42,188 | ||||||
|
Other
|
4,305 | 3,814 | ||||||
| $ | 346,570 | $ | 343,797 | |||||
PREMIER
FINANCIAL BANCORP, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
December
31, 2007, 2006, and 2005
(Dollars
in Thousands, Except Per Share Data)
NOTE 4 – LOANS
(Continued)
Certain
directors and executive officers of the Banks and companies in which they have
beneficial ownership, were loan customers of the Banks during 2007 and
2006. Such related party loans are governed by federal banking
regulations which require such loans to be made in the ordinary course of
business.
An
analysis of the 2007 activity with respect to all director and executive officer
loans is as follows (in thousands):
|
Balance,
December 31, 2006
|
$ | 14,331 | ||
|
Additions,
including loans now meeting disclosure requirements
|
7,836 | |||
|
Amounts
collected and loans no longer meeting disclosure
requirements
|
(6,905 | ) | ||
|
Balance,
December 31, 2007
|
$ | 15,262 |
Activity
in the allowance for loan losses was as follows:
|
2007
|
2006
|
2005
|
||||||||||
|
Balance,
beginning of year
|
$ | 6,661 | $ | 7,892 | $ | 9,384 | ||||||
|
Loans
charged off
|
(758 | ) | (1,410 | ) | (2,215 | ) | ||||||
|
Recoveries
|
672 | 1,340 | 719 | |||||||||
|
Provision
for loan losses
|
(78 | ) | (1,161 | ) | 4 | |||||||
|
Balance,
end of year
|
$ | 6,497 | $ | 6,661 | $ | 7,892 | ||||||
Impaired
loans were as follows:
|
2007
|
2006
|
2005
|
||||||||||
|
Impaired
loans at year-end with an allowance
|
$ | 4,761 | $ | 7,766 | $ | 7,926 | ||||||
|
Impaired
loans at year-end with no allowance
|
0 | 0 | 291 | |||||||||
|
Amount
of the allowance for loan losses allocated
|
1,482 | 1,774 | 1,921 | |||||||||
|
Average
of impaired loans during the year
|
5,926 | 8,258 | 10,819 | |||||||||
|
Interest
income recognized during impairment
|
495 | 480 | 583 | |||||||||
|
Cash-basis
interest income recognized
|
495 | 480 | 499 | |||||||||
PREMIER
FINANCIAL BANCORP, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
December
31, 2007, 2006, and 2005
(Dollars
in Thousands, Except Per Share Data)
NOTE 4 – LOANS
(Continued)
Nonperforming
loans at year end were as follows:
|
2007
|
2006
|
2005
|
||||||||||
|
Loans
past due over 90 days still on accrual
|
$ | 987 | $ | 992 | $ | 853 | ||||||
|
Non-accrual
loans
|
3,157 | 4,698 | 3,751 | |||||||||
|
Restructured
loans
|
1,489 | 1,268 | 1,540 | |||||||||
Nonperforming
loans include some impaired loans and smaller balance homogeneous loans, such as
residential mortgage and consumer loans, that are collectively evaluated for
impairment. Loan impairment is reported when full payment under the
loan terms is not anticipated, which can include loans that are current or less
than 90 days past due.
Year-end
premises and equipment were as follows:
|
2007
|
2006
|
|||||||
|
Land
and improvements
|
$ | 1,522 | $ | 1,522 | ||||
|
Buildings
and leasehold improvements
|
5,673 | 5,659 | ||||||
|
Construction
in progress
|
193 | - | ||||||
|
Furniture
and equipment
|
7,357 | 7,431 | ||||||
| 14,745 | 14,612 | |||||||
|
Less:
accumulated depreciation
|
(8,545 | ) | (8,079 | ) | ||||
| $ | 6,200 | $ | 6,533 | |||||
Operating Leases: The
Company leases certain branch and other properties as well as some equipment
under operating leases. Rent expense, net of rental income, was $213,
$204, and $188 for 2007, 2006, and 2005. Rent commitments, before
considering renewal options that generally are present, were as
follows:
|
2008
|
$ | 158 | ||
|
2009
|
89 | |||
|
2010
|
75 | |||
|
2011
|
75 | |||
|
2012
and thereafter
|
43 | |||
| $ | 440 |
PREMIER
FINANCIAL BANCORP, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
December
31, 2007, 2006, and 2005
(Dollars
in Thousands, Except Per Share Data)
At
December 31, 2007 the scheduled maturities of time deposits are as
follows:
|
2008
|
$ | 161,823 | ||
|
2009
|
24,518 | |||
|
2010
|
8,297 | |||
|
2011
|
4,630 | |||
|
2012
and thereafter
|
3,279 | |||
| $ | 202,547 |
Certain
directors and executive officers of the Banks and companies in which they have
beneficial ownership were deposit customers of the Banks during 2007 and
2006. The balance of such deposits at December 31, 2007 and 2006 were
approximately $10,011 and $11,295.
Securities
sold under agreements to repurchase generally mature within one to ninety days
from the transaction date. Information concerning securities sold
under agreements to repurchase is summarized as follows:
|
2007
|
2006
|
|||||||
|
Year-end
balance
|
$ | 12,477 | $ | 12,555 | ||||
|
Average
balance during the year
|
$ | 13,124 | $ | 9,542 | ||||
|
Average
interest rate during the year
|
2.41 | % | 2.43 | % | ||||
|
Maximum
month-end balance during the year
|
$ | 13,672 | $ | 12,555 | ||||
|
Weighted
average interest rate at year-end
|
1.96 | % | 2.34 | % | ||||
PREMIER
FINANCIAL BANCORP, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
December
31, 2007, 2006, and 2005
(Dollars
in Thousands, Except Per Share Data)
The
Banks own stock of the Federal Home Loan Bank (FHLB) of Cincinnati, Ohio. This
stock allows the Banks to borrow advances from the FHLB.
At
year-end, advances from the FHLB were as follows:
|
2007
|
2006
|
|||||||
|
Payments
due at maturity in May 2010, fixed rate at rates from 6.25% to
6.64%, averaging 6.5%
|
$ | 4,000 | $ | 4,000 | ||||
|
Payments
due monthly with maturities from October 2011 to June 2012, fixed rates
from 4.10% to 4.40%, averaging 4.24%
|
843 | 1,106 | ||||||
|
Payments
due monthly with maturities from March 2011 to June 2011, fixed rates from
5.30% to 5.60%, averaging 5.46%
|
- | 2,179 | ||||||
| $ | 4,843 | $ | 7,285 | |||||
Advances
are secured by the FHLB stock, certain pledged investment securities and
substantially all single family first mortgage loans of the participating
Banks. Scheduled principal payments due on advances during the five
years subsequent to December 31, 2007 are as follows:
|
2008
|
$ | 185 | ||
|
2009
|
193 | |||
|
2010
|
4,201 | |||
|
2011
|
201 | |||
|
2012
|
63 | |||
|
Thereafter
|
- | |||
| $ | 4,843 | |||
On
January 31, 2006, the Company executed and delivered to First Guaranty Bank of
Hammond, Louisiana a Promissory Note and Business Loan Agreement dated January
31, 2006 for the principal amount of $7,000, bearing interest floating daily at
the “Wall Street Journal” prime rate (currently 6.50%) and requiring monthly
principal payments of $50 until maturity on September 28, 2017. The
note is secured by a pledge of Premier’s 100% interest in Boone County Bank (a
wholly owned subsidiary) under Commercial Pledge Agreement dated January 31,
2006. Premier’s chairman owns approximately 27.6% of the voting stock
of First Guaranty Bank. Premier’s board of directors reviewed the
loan and authorized the Company to enter into the loan
transaction.
PREMIER
FINANCIAL BANCORP, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
December
31, 2007, 2006, and 2005
(Dollars
in Thousands, Except Per Share Data)
NOTE 9 – NOTES PAYABLE AND OTHER
BORROWED FUNDS (Continued)
On
November 10, 2006, Premier Financial Bancorp, Inc. (“Premier”) executed and
delivered to The Bankers’ Bank of Kentucky, Inc. of Frankfort, Kentucky
(“Bankers’ Bank”) a Term Note and Business Loan Agreement dated November 10,
2006 in the principal amount of $6,500, bearing interest floating daily at the
“Wall Street Journal” prime rate minus 1.00% (currently 5.50%) and requiring 83
monthly principal and interest payments of $100 and a final payment of any
balance due at maturity on November 9, 2013. The note is secured by a pledge of
Premier’s 100% interest in Citizens Deposit Bank and Trust, Inc. (a wholly owned
subsidiary) and Premier’s 100% interest in Farmers-Deposit Bank, Eminence,
Kentucky (a wholly owned subsidiary) under a Stock Pledge and Security Agreement
dated November 10, 2006.
Scheduled
principal payments due on the two bank borrowings subsequent to December 31,
2007 are as follows:
|
2008
|
$ | 1,512 | ||
|
2009
|
1,563 | |||
|
2010
|
1,618 | |||
|
2011
|
1,675 | |||
|
2012
|
1,470 | |||
|
Thereafter
|
574 | |||
| $ | 8,412 | |||
In
addition to the $6,500 Term Note, Premier executed and delivered to the Bankers’
Bank a Promissory Note whereby Premier may request and receive monies from
Bankers’ Bank from time to time, but the aggregate outstanding principal balance
under the Promissory Note at any time shall not exceed $3,500, and the right to
request and receive monies from Bankers’ Bank expires on November 9, 2008. The
outstanding principal balance under this Promissory Note shall bear annual
interest floating daily at the “Wall Street Journal” prime rate minus 1.00%
(currently 5.50%). Interest on this Promissory Note shall be due and payable on
the 5th day of each, January, April, July and October during the term of this
Promissory Note, and at the maturity date hereof. Any outstanding principal
amount loaned to Premier under this Promissory Note, and not previously repaid,
shall be due on November 9, 2008. The Promissory Note is secured by the
same collateral as the $6,500 Term Note. At December 31, 2007, there was no
outstanding principal balance on the Promissory Note.
PREMIER
FINANCIAL BANCORP, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
December
31, 2007, 2006, and 2005
(Dollars
in Thousands, Except Per Share Data)
The
components of the provision (benefit) for income taxes are as
follows:
|
2007
|
2006
|
2005
|
||||||||||
|
Current
|
$ | 2,822 | $ | 2,212 | $ | 910 | ||||||
|
Deferred
|
648 | 1,071 | 1,119 | |||||||||
|
Provision for income
taxes
|
$ | 3,470 | $ | 3,283 | $ | 2,029 | ||||||
The
Company’s deferred tax assets and liabilities at December 31 are shown
below. No valuation allowance for the realization of deferred tax
assets is considered necessary.
|
2007
|
2006
|
|||||||
|
Deferred
tax assets
|
||||||||
|
Allowance for loan
losses
|
$ | 2,209 | $ | 2,265 | ||||
|
Write-downs of other real estate
owned
|
15 | 80 | ||||||
|
Taxable income on non-accrual
loans
|
103 | 153 | ||||||
|
Unrealized loss on investment
securities
|
- | 592 | ||||||
|
Other
|
2 | 40 | ||||||
|
Total deferred tax
assets
|
2,329 | 3,130 | ||||||
|
Deferred
tax liabilities
|
||||||||
|
Amortization of
intangibles
|
$ | 2,342 | $ | 2,001 | ||||
|
Depreciation
|
34 | 105 | ||||||
|
Federal Home Loan Bank
dividends
|
319 | 318 | ||||||
|
Deferred loan
fees
|
170 | - | ||||||
|
Unrealized gain on investment
securities
|
38 | - | ||||||
|
Other
|
155 | 157 | ||||||
|
Total deferred tax
liabilities
|
3,058 | 2,581 | ||||||
|
Net
deferred tax assets, included in other assets
|
$ | (729 | ) | $ | 549 | |||
PREMIER
FINANCIAL BANCORP, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
December
31, 2007, 2006, and 2005
(Dollars
in Thousands, Except Per Share Data)
NOTE 10 – INCOME TAXES
(Continued)
An
analysis of the differences between the effective tax rates and the statutory
U.S. federal income tax rate is as follows:
|
2007
|
2006
|
2005
|
||||||||||||||||||||||
|
U.S.
federal income tax rate
|
$ | 3,600 | 34.0 | % | $ | 3,327 | 34.0 | % | $ | 2,197 | 34.0 | % | ||||||||||||
|
Changes
from the statutory rate
|
||||||||||||||||||||||||
|
Tax-exempt interest
income
|
(124 | ) | (1.2 | ) | (97 | ) | (1.0 | ) | (81 | ) | (1.3 | ) | ||||||||||||
|
Non-deductible interest
expense
related to carrying
tax-exempt
interest earning
assets
|
11 | 0.1 | 8 | 0.1 | 5 | 0.1 | ||||||||||||||||||
|
Non-deductible stock
compensation
expense
|
44 | 0.4 | 46 | 0.5 | - | 0.0 | ||||||||||||||||||
|
Tax credits, net
|
(2 | ) | (0.0 | ) | (10 | ) | (0.1 | ) | (10 | ) | (0.2 | ) | ||||||||||||
|
Officer’s life insurance death
benefit
|
(73 | ) | (0.6 | ) | - | - | - | - | ||||||||||||||||
|
Other
|
14 | 0.1 | 9 | 0.1 | (82 | ) | (1.2 | ) | ||||||||||||||||
| $ | 3,470 | 32.8 | % | $ | 3,283 | 33.6 | % | $ | 2,029 | 31.4 | % | |||||||||||||
Unrecognized Tax
Benefits: The Company does not have any beginning or ending
unrecognized tax benefits. The Company does not expect the total amount of
unrecognized tax benefits to significantly increase in the next twelve
months. There were no interest and penalties recorded in the income
statement or accrued for the year ended December 31, 2007 related to
unrecognized tax benefits.
The
Company and its subsidiaries file a consolidated U.S. Corporation income tax
return and a combined return in the state of West Virginia. The Company files a
corporate income tax return in the state of Kentucky. The Company is no longer
subject to examination by taxing authorities for years before 2004. A federal
examination of the tax years 2001 - 2003 was completed in 2005 with no material
adjustments.
The
Company has qualified profit sharing plans that cover substantially all
employees. Contributions to the plans consist of a Company match and additional
amounts at the discretion of the Company’s Board of Directors. Total
contributions to the plans were $245, $236 and $229 in 2007, 2006 and
2005.
PREMIER
FINANCIAL BANCORP, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
December
31, 2007, 2006, and 2005
(Dollars
in Thousands, Except Per Share Data)
In
2002, the Company registered 200,000 shares of its common stock to be reserved
stock based incentive programs (“the 2002 Plan”). From time to time
the Company grants stock options to its employees. The Company
accounts for these option grants using SFAS No. 123R, “Share-Based Payments,”
which establishes accounting requirements for share-based compensation to
employees. Under SFAS 123R, the Company estimates the fair value of
the options at the time they are granted to employees and expenses that fair
value over the vesting period of the option grant.
On
January 17, 2007, 37,000 incentive stock options were granted out of the 2002
Plan at an exercise price of $14.22. These options vest in three
equal annual installments ending on January 17, 2010. On February 15,
2006, 35,250 incentive stock options were granted out of the 2002 Plan at an
exercise price of $16.00. These options vest in three equal annual
installments ending on February 15, 2009. On January 19, 2005, 35,000
incentive stock options were granted out of the 2002 Plan at an exercise price
of $11.62. These options vested in three equal annual installments
ending on January 19, 2008.
The
fair value of the Company's employee stock options granted is estimated at the
date of grant using the Black-Scholes option-pricing model. This model requires
the input of highly subjective assumptions, changes to which can materially
affect the fair value estimate. Additionally, there may be other factors that
would otherwise have a significant effect on the value of employee stock options
granted but are not considered by the model. The assumptions used in the
Black-Scholes option-pricing model are as follows:
|
2007
|
2006
|
2005
|
||||||||||
|
Risk-free
interest rate
|
4.78 | % | 4.62 | % | 3.70 | % | ||||||
|
Expected
option life (yrs)
|
5.00 | 5.00 | 5.00 | |||||||||
|
Expected
stock price volatility
|
0.25 | 0.26 | 0.25 | |||||||||
|
Dividend
yield
|
1.41 | % | 0.00 | % | 0.00 | % | ||||||
|
Weighted
average fair value of options
granted during the year
|
$ | 3.81 | $ | 5.21 | $ | 3.48 | ||||||
The
risk-free interest rate for the expected term of the option is based on the U.S.
Treasury yield in effect at the time of the grant. The expected
option life was estimated at half the total option term since there has been
little option exercise history. The expected stock price volatility
is based on historical volatilities of the Company’s common
stock. The dividend yield is estimated at the time of the option
grant based upon Premier's dividend rate and stock price at that
time.
PREMIER
FINANCIAL BANCORP, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
December
31, 2007, 2006, and 2005
(Dollars
in Thousands, Except Per Share Data)
NOTE
12 – STOCK COMPENSATION EXPENSE (Continued)
Compensation
expense of $130 and $142 was recorded for the year ended December 31, 2007 and
2006, respectively. The after tax impact was to reduce earnings per share by
$0.02 in 2007 and $0.03 in 2006. Prior to the adoption of SFAS No.
123R, the Company presented all tax benefits of deductions resulting from the
exercise of stock options as operating cash flows in the Consolidated Statements
of Cash Flows. SFAS No. 123R requires the cash flows from the tax benefits
resulting from tax deductions in excess of the compensation expense recognized
for those options to be classified as financing cash flows.
Stock-based
compensation expense is recognized ratably over the requisite service period for
all awards. Unrecognized stock-based compensation expense related to stock
options totaled $72 at December 31, 2007. This unrecognized expense is expected
to be recognized over the next 24 months based on the vesting periods of the
options.
Information
related to the stock option plan during each year follows:
|
2007
|
2006
|
2005
|
||||||||||
|
Intrinsic
value of options exercised
|
$ | 3 | $ | 9 | $ | 5 | ||||||
|
Cash
received from option exercises
|
10 | 27 | 15 | |||||||||
|
Tax
benefit realized from option exercises
|
1 | 2 | - | |||||||||
PREMIER
FINANCIAL BANCORP, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
December
31, 2007, 2006, and 2005
(Dollars
in Thousands, Except Per Share Data)
NOTE
12 – STOCK COMPENSATION EXPENSE - continued
A
summary of the Company’s stock option activity is as follows:
|
2007
|
2006
|
2005
|
||||||||||||||||||||||
|
Weighted
Average
Exercise
|
Weighted
Average
Exercise
|
Weighted
Average
Exercise
|
||||||||||||||||||||||
|
Options
|
Price
|
Options
|
Price
|
Options
|
Price
|
|||||||||||||||||||
|
Outstanding
at beginning of year
|
120,248 | $ | 12.25 | 111,750 | $ | 11.05 | 83,650 | $ | 10.65 | |||||||||||||||
|
Grants
|
37,000 | 14.22 | 35,250 | 16.00 | 35,000 | 11.62 | ||||||||||||||||||
|
Exercises
|
(1,000 | ) | 10.85 | (3,002 | ) | 9.02 | (1,667 | ) | 8.50 | |||||||||||||||
|
Forfeitures
or expired
|
(5,999 | ) | 14.60 | (23,750 | ) | 13.11 | (5,233 | ) | 9.31 | |||||||||||||||
|
Outstanding
at year-end
|
150,249 | $ | 12.65 | 120,248 | $ | 12.25 | 111,750 | $ | 11.05 | |||||||||||||||
|
Exercisable
at year-end
|
84,096 | $ | 11.31 | 55,931 | $ | 10.68 | 54,180 | $ | 11.61 | |||||||||||||||
|
Weighted
average remaining life
|
6.9 | 7.3 | 6.2 | |||||||||||||||||||||
|
Weighted
average fair value of
options granted during the
year
|
$ | 3.81 | $ | 5.21 | $ | 3.48 | ||||||||||||||||||
Additional
information regarding stock options outstanding and exercisable at December 31,
2007, is provided in the following table:
|
- - - - - - - - Outstanding - - - - - - -
-
|
- - - - - - - - Currently Exercisable - - - - - -
- -
|
||||||||||||||||||||||||||||
|
Range
of Exercise Prices
|
Number
|
Weighted
Average Exercise Price
|
Aggregate
Intrinsic Value
|
Number
|
Weighted
Average Remaining Contractual Life
|
Weighted
Average Exercise Price
|
Aggregate
Intrinsic Value
|
||||||||||||||||||||||
| $7.50 to $10.00 | 42,416 | $ | 8.69 | $ | 173 | 42,416 | 5.6 | $ | 8.69 | $ | 173 | ||||||||||||||||||
| $10.01 to $12.50 | 31,833 | 11.62 | 37 | 20,505 | 7.1 | 11.62 | 24 | ||||||||||||||||||||||
| $12.51 to $15.00 | 33,500 | 14.22 | - | - | 9.1 | 14.22 | - | ||||||||||||||||||||||
| $15.01 to $17.50 | 42,500 | 16.13 | - | 21,175 | 6.3 | 16.26 | - | ||||||||||||||||||||||
|
Outstanding
at Dec 31, 2007
|
150,249 | 12.65 | $ | 210 | 84,096 | 6.9 | 11.31 | $ | 197 | ||||||||||||||||||||
PREMIER
FINANCIAL BANCORP, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
December
31, 2007, 2006, and 2005
(Dollars
in Thousands, Except Per Share Data)
During
2007, 2006, and 2005, the Company paid approximately $231, $228, and $191 for
printing, supplies, furniture, and equipment to a company affiliated by common
ownership. The Company also paid another affiliate approximately
$459, $468, and $499 in 2007, 2006 and 2005 to permit the Company’s employees to
participate in that entity’s employee medical benefit plan.
During
2007, 2006 and 2005, the Company paid approximately $52, $52, and $52 to lease
its headquarters facility at 2883 Fifth Avenue, Huntington, West Virginia from
River City Properties, LLC, an entity 12.5% owned by the Company’s Chairman of
the Board.
A
reconciliation of the numerators and denominators of the earnings per common
share and earnings per common share assuming dilution computations for 2007,
2006 and 2005 is presented below:
|
2007
|
2006
|
2005
|
||||||||||
|
Basic
earnings per share
|
||||||||||||
|
Income available to common
stockholders
|
$ | 7,119 | $ | 6,501 | $ | 4,434 | ||||||
|
Weighted average common shares
outstanding
|
5,237 | 5,236 | 5,233 | |||||||||
|
Earnings per share
|
$ | 1.36 | $ | 1.24 | $ | 0.85 | ||||||
|
Diluted
earnings per share
|
||||||||||||
|
Income available to common
stockholders
|
$ | 7,119 | $ | 6,501 | $ | 4,434 | ||||||
|
Weighted average common shares
outstanding
|
5,237 | 5,236 | 5,233 | |||||||||
|
Add dilutive effects of assumed
exercise of stock options
|
26 | 28 | 15 | |||||||||
|
Weighted average common and
dilutive potential common
shares outstanding
|
5,263 | 5,264 | 5,248 | |||||||||
|
Earnings per share assuming
dilution
|
$ | 1.35 | $ | 1.24 | $ | 0.84 | ||||||
Stock
options for 42,500, 46,250 and 32,000 shares of common stock were not considered
in computing diluted earnings per share for 2007, 2006 and 2005 because they
were antidilutive.
PREMIER
FINANCIAL BANCORP, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
December
31, 2007, 2006, and 2005
(Dollars
in Thousands, Except Per Share Data)
The
fair values of the Company’s financial instruments at year-end are as
follows:
|
2007
|
2006
|
|||||||||||||||
|
Carrying
Amount
|
Fair
Value
|
Carrying
Amount
|
Fair
Value
|
|||||||||||||
|
Financial
assets
|
||||||||||||||||
|
Cash and due from
banks
|
$ | 22,365 | $ | 22,365 | $ | 16,974 | $ | 16,974 | ||||||||
|
Federal funds sold
|
32,035 | 32,035 | 27,583 | 27,583 | ||||||||||||
|
Securities available for
sale
|
124,242 | 124,242 | 121,367 | 121,367 | ||||||||||||
|
Loans held for
sale
|
1,891 | 1,891 | 1,978 | 1,978 | ||||||||||||
|
Loans, net
|
340,073 | 344,158 | 337,136 | 337,730 | ||||||||||||
|
Federal Home Loan Bank and
Federal
Reserve Bank stock
|
3,314 | 3,314 | 3,265 | 3,265 | ||||||||||||
|
Interest
receivable
|
2,768 | 2,768 | 2,821 | 2,821 | ||||||||||||
|
Financial
liabilities
|
||||||||||||||||
|
Deposits
|
$ | (449,033 | ) | $ | (448,648 | ) | $ | (438,950 | ) | $ | (437,280 | ) | ||||
|
Federal funds
purchased
|
(392 | ) | (392 | ) | (976 | ) | (976 | ) | ||||||||
|
Securities sold under agreements
to
repurchase
|
(12,477 | ) | (12,477 | ) | (12,555 | ) | (12,555 | ) | ||||||||
|
Federal Home Loan Bank
advances
|
(4,843 | ) | (5,051 | ) | (7,285 | ) | (7,506 | ) | ||||||||
|
Other borrowed
funds
|
(8,412 | ) | (8,367 | ) | (12,275 | ) | (12,303 | ) | ||||||||
|
Interest payable
|
(1,064 | ) | (1,064 | ) | (1,061 | ) | (1,061 | ) | ||||||||
Carrying
amount is the estimated fair value for cash and due from banks, Federal funds
sold, Federal Home Loan Bank and Federal Reserve Bank stock, accrued interest
receivable and payable, demand deposits, short-term debt, and variable rate
loans or deposits that reprice frequently and fully. Security fair
values are based on market prices or dealer quotes, and if no such information
is available, on the rate and term of the security and information about the
issuer. For fixed rate loans or deposits and for variable rate loans
or deposits with infrequent repricing or repricing limits, fair value is based
on discounted cash flows using current market rates applied to the estimated
life and credit risk. Fair values for impaired loans are estimated
using discounted cash flow analysis or underlying collateral
values. Fair value of debt is based on current rates for similar
financing. The fair value of commitments to extend credit and standby letters of
credit is not material.
PREMIER
FINANCIAL BANCORP, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
December
31, 2007, 2006, and 2005
(Dollars
in Thousands, Except Per Share Data)
The
Banks are parties to financial instruments with off-balance sheet risk in the
normal course of business to meet the financing needs of their
customers. These financial instruments include standby letters of
credit and commitments to extend credit in the form of unused lines of credit.
The Banks use the same credit policies in making commitments and conditional
obligations as they do for on-balance sheet instruments. In addition,
the Banks offer a service whereby deposit customers for a fee are permitted to
overdraw their accounts up to a certain deminimus amount, also known as “bounce
protection” or “overdraft protection”. The aggregate unused portion
of “bounce protection” was $5,003 and $5,226 at December 31, 2007 and
2006.
At
December 31, 2007 and 2006, the Banks had the following financial instruments
whose approximate contract amounts represent credit risk:
|
2007
|
2006
|
|||||||
|
Standby
letters of credit
|
$ | 977 | $ | 678 | ||||
|
Commitments
to extend credit
|
||||||||
|
Fixed
|
$ | 6,100 | $ | 5,498 | ||||
|
Variable
|
33,112 | 32,988 | ||||||
Standby
letters of credit represent conditional commitments issued by the Banks to
guarantee the performance of a third party. The credit risk involved
in issuing these letters of credit is essentially the same as the risk involved
in extending loans to customers. Collateral held varies but primarily
includes real estate and certificates of deposit. Some letters of
credit are unsecured.
Commitments
to extend credit are agreements to lend to a customer as long as there is no
violation of any condition established in the contract. Outstanding commitments
are at current market rates. Fixed rate loan commitments have
interest rates ranging from 3.36% to 18.00%. Commitments generally have fixed
expiration dates or other termination clauses and may require payment of a fee.
The Banks evaluate each customer’s creditworthiness on a case-by-case basis.
Since some of the commitments are expected to expire without being drawn upon,
the total commitment amounts do not necessarily represent future cash
requirements. Collateral held varies but may include accounts receivable,
inventory, property and equipment, and income producing properties.
PREMIER
FINANCIAL BANCORP, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
December
31, 2007, 2006, and 2005
(Dollars
in Thousands, Except Per Share Data)
Legal
proceedings involving the Company and its subsidiaries periodically arise in the
ordinary course of business, including claims by debtors and their related
interests against the Company’s subsidiaries following initial collection
proceedings. These legal proceedings sometimes can involve claims for
substantial damages. At December 31, 2007 management is unaware of
any legal proceedings for which the expected outcome would have a material
adverse effect upon the consolidated financial statements of the
Company.
The
Company’s principal source of funds for dividend payments is dividends received
from the subsidiary Banks. Banking regulations limit the amount of
dividends that may be paid without prior approval of regulatory
agencies. Under these regulations, the amount of dividends that may
be paid in any calendar year is limited to the current year’s net profits, as
defined, combined with the retained net profits of the preceding two years,
subject to the capital requirements and additional restrictions as discussed
below. During 2008 the Banks could, without prior approval, declare
dividends to Premier of approximately $3.0 million plus any 2008 net profits
retained to the date of the dividend declaration.
The
Company and the subsidiary Banks are subject to various regulatory capital
requirements administered by the federal banking agencies. Failure to
meet minimum capital requirements can initiate certain mandatory and possibly
additional discretionary actions by regulators that, if undertaken, could have a
direct material effect on the Company’s financial statements. Under capital
adequacy guidelines and the regulatory framework for prompt corrective action,
the Banks must meet specific guidelines that involve quantitative measures of
their assets, liabilities, and certain off-balance sheet items as calculated
under regulatory accounting practices.
These
quantitative measures established by regulation to ensure capital adequacy
require the Company and Banks to maintain minimum amounts and ratios (set forth
in the following table) of Total and Tier I capital (as defined in the
regulations) to risk-weighted assets (as defined), and of Tier I capital (as
defined) to average assets (as defined). Management believes, as of
December 31, 2007 the Company and the Banks meet all quantitative capital
adequacy requirements to which they are subject.
PREMIER
FINANCIAL BANCORP, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
December
31, 2007, 2006, and 2005
(Dollars
in Thousands, Except Per Share Data)
NOTE 18 - STOCKHOLDERS’ EQUITY
(Continued)
The
Company’s and the subsidiary Banks’ capital amounts and ratios as of December
31, 2007 are presented in the table below. As of December 31, 2007,
the most recent notification from each of the Banks’ primary Federal regulators
categorized the subsidiary Banks as well capitalized under the regulatory
framework for prompt corrective action. To be categorized as well
capitalized, the Banks must maintain minimum Total risk-based, Tier I risk-based
and Tier I leverage ratios as set forth in the following table. There
are no conditions or events since that notification that management believes
have changed the Banks’ categories.
|
To
Be Well Capitalized
|
||||||||||||||||||||||||
|
For
Capital
|
Under
Prompt Corrective
|
|||||||||||||||||||||||
|
Actual
|
Adequacy
Purposes
|
Action
Provisions
|
||||||||||||||||||||||
|
2007
|
Amount
|
Ratio
|
Amount
|
Ratio
|
Amount
|
Ratio
|
||||||||||||||||||
|
Total
Capital (to Risk-Weighted Assets):
|
||||||||||||||||||||||||
|
Consolidated (1)
|
$ | 55,538 | 17.3 | % | $ | 25,646 | 8 | % | $ | 32,058 | 10 | % | ||||||||||||
|
Boone County Bank
|
16,492 | 20.9 | 6,319 | 8 | 7,898 | 10 | ||||||||||||||||||
|
Citizens Deposit
Bank
|
13,253 | 18.3 | 5,805 | 8 | 7,256 | 10 | ||||||||||||||||||
|
Farmers Deposit
Bank
|
8,179 | 18.4 | 3,555 | 8 | 4,443 | 10 | ||||||||||||||||||
|
Ohio River Bank
|
7,537 | 16.5 | 3,653 | 8 | 4,566 | 10 | ||||||||||||||||||
|
First Central Bank
|
9,509 | 11.8 | 6,434 | 8 | 8,043 | 10 | ||||||||||||||||||
|
Tier
I Capital (to Risk-Weighted Assets):
|
||||||||||||||||||||||||
|
Consolidated (1)
|
$ | 51,500 | 16.1 | % | $ | 12,823 | 4 | % | $ | 19,235 | 6 | % | ||||||||||||
|
Boone County Bank
|
15,500 | 19.6 | 3,159 | 4 | 4,739 | 6 | ||||||||||||||||||
|
Citizens Deposit
Bank
|
12,342 | 17.0 | 2,902 | 4 | 4,354 | 6 | ||||||||||||||||||
|
Farmers Deposit
Bank
|
7,603 | 17.1 | 1,777 | 4 | 2,666 | 6 | ||||||||||||||||||
|
Ohio River Bank
|
7,016 | 15.4 | 1,826 | 4 | 2,740 | 6 | ||||||||||||||||||
|
First Central Bank
|
8,594 | 10.7 | 3,217 | 4 | 4,826 | 6 | ||||||||||||||||||
|
Tier
I Capital (to Average Assets):
|
||||||||||||||||||||||||
|
Consolidated (1)
|
$ | 51,500 | 9.8 | % | $ | 21,081 | 4 | % | $ | 26,351 | 5 | % | ||||||||||||
|
Boone County Bank
|
15,500 | 10.6 | 5,864 | 4 | 7,330 | 5 | ||||||||||||||||||
|
Citizens Deposit
Bank
|
12,342 | 10.0 | 4,927 | 4 | 6,159 | 5 | ||||||||||||||||||
|
Farmers Deposit
Bank
|
7,603 | 11.2 | 2,728 | 4 | 3,410 | 5 | ||||||||||||||||||
|
Ohio River Bank
|
7,016 | 8.4 | 3,324 | 4 | 4,155 | 5 | ||||||||||||||||||
|
First Central Bank
|
8,594 | 8.1 | 4,269 | 4 | 5,336 | 5 | ||||||||||||||||||
|
(1)
Consolidated company is not subject to Prompt Corrective Action
Provisions
|
||||||||||||||||||||||||
PREMIER
FINANCIAL BANCORP, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
December
31, 2007, 2006, and 2005
(Dollars
in Thousands, Except Per Share Data)
NOTE 18 - STOCKHOLDERS’ EQUITY
(Continued)
The
Company’s and the subsidiary Banks’ capital amounts and ratios as of December
31, 2006 are presented in the table below:
|
To
Be Well Capitalized
|
||||||||||||||||||||||||
|
For
Capital
|
Under
Prompt Corrective
|
|||||||||||||||||||||||
|
Actual
|
Adequacy
Purposes
|
Action
Provisions
|
||||||||||||||||||||||
|
2006
|
Amount
|
Ratio
|
Amount
|
Ratio
|
Amount
|
Ratio
|
||||||||||||||||||
|
Total
Capital (to Risk-Weighted Assets):
|
||||||||||||||||||||||||
|
Consolidated (1)
|
$ | 50,313 | 16.0 | % | $ | 25,239 | 8 | % | $ | 31,549 | 10 | % | ||||||||||||
|
Boone County Bank
|
16,488 | 20.7 | 6,372 | 8 | 7,965 | 10 | ||||||||||||||||||
|
Citizens Deposit
Bank
|
12,819 | 17.4 | 5,893 | 8 | 7,366 | 10 | ||||||||||||||||||
|
Farmers Deposit
Bank
|
10,441 | 23.2 | 3,606 | 8 | 4,507 | 10 | ||||||||||||||||||
|
Ohio River Bank
|
7,233 | 16.3 | 3,557 | 8 | 4,447 | 10 | ||||||||||||||||||
|
First Central Bank
|
9,291 | 12.6 | 5,904 | 8 | 7,380 | 10 | ||||||||||||||||||
|
Tier
I Capital (to Risk-Weighted Assets):
|
||||||||||||||||||||||||
|
Consolidated (1)
|
$ | 46,336 | 14.7 | % | $ | 12,619 | 4 | % | $ | 18,929 | 6 | % | ||||||||||||
|
Boone County Bank
|
15,490 | 19.5 | 3,186 | 4 | 4,779 | 6 | ||||||||||||||||||
|
Citizens Deposit
Bank
|
11,893 | 16.2 | 2,946 | 4 | 4,419 | 6 | ||||||||||||||||||
|
Farmers Deposit
Bank
|
9,854 | 21.9 | 1,803 | 4 | 2,704 | 6 | ||||||||||||||||||
|
Ohio River Bank
|
6,721 | 15.1 | 1,779 | 4 | 2,668 | 6 | ||||||||||||||||||
|
First Central Bank
|
8,475 | 11.5 | 2,952 | 4 | 4,428 | 6 | ||||||||||||||||||
|
Tier
I Capital (to Average Assets):
|
||||||||||||||||||||||||
|
Consolidated (1)
|
$ | 46,336 | 8.9 | % | $ | 20,855 | 4 | % | $ | 26,068 | 5 | % | ||||||||||||
|
Boone County Bank
|
15,490 | 10.6 | 5,824 | 4 | 7,280 | 5 | ||||||||||||||||||
|
Citizens Deposit
Bank
|
11,893 | 10.0 | 4,779 | 4 | 5,974 | 5 | ||||||||||||||||||
|
Farmers Deposit
Bank
|
9,854 | 13.4 | 2,949 | 4 | 3,686 | 5 | ||||||||||||||||||
|
Ohio River Bank
|
6,721 | 8.4 | 3,211 | 4 | 4,013 | 5 | ||||||||||||||||||
|
First Central Bank
|
8,475 | 8.5 | 3,981 | 4 | 4,976 | 5 | ||||||||||||||||||
|
(1)
Consolidated company is not subject to Prompt Corrective Action
Provisions
|
||||||||||||||||||||||||
PREMIER
FINANCIAL BANCORP, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
December
31, 2007, 2006, and 2005
(Dollars
in Thousands, Except Per Share Data)
|
CONDENSED
BALANCE SHEETS
|
||||||||
|
December
31
|
||||||||
|
2007
|
2006
|
|||||||
|
ASSETS
|
||||||||
|
Cash
|
$ | 7,858 | $ | 3,562 | ||||
|
Investment
in subsidiaries
|
67,688 | 69,218 | ||||||
|
Premises
and equipment
|
501 | 560 | ||||||
|
Other
assets
|
51 | 375 | ||||||
|
Total
assets
|
$ | 76,098 | $ | 73,715 | ||||
|
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
||||||||
|
Other
liabilities
|
$ | 297 | $ | 438 | ||||
|
Other
borrowed funds
|
8,412 | 12,275 | ||||||
|
Total liabilities
|
8,709 | 12,713 | ||||||
|
Stockholders’
equity
|
||||||||
|
Preferred stock
|
- | - | ||||||
|
Common stock
|
1,109 | 1,108 | ||||||
|
Additional paid-in
capital
|
43,763 | 43,624 | ||||||
|
Retained earnings
|
22,444 | 17,420 | ||||||
|
Accumulated other comprehensive
income
|
73 | (1,150 | ) | |||||
|
Total stockholders’
equity
|
67,389 | 61,002 | ||||||
|
Total
liabilities and stockholders’ equity
|
$ | 76,098 | $ | 73,715 | ||||
PREMIER
FINANCIAL BANCORP, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
December
31, 2007, 2006, and 2005
(Dollars
in Thousands, Except Per Share Data)
NOTE 19 - PARENT COMPANY FINANCIAL
STATEMENTS (Continued)
|
Condensed
Statement of Operations
|
||||||||||||
|
Years
Ended December 31
|
||||||||||||
|
2007
|
2006
|
2005
|
||||||||||
|
Income
|
||||||||||||
|
Dividends from
subsidiaries
|
$ | 11,085 | $ | 6,440 | $ | 8,405 | ||||||
|
Interest and dividend
income
|
41 | 37 | 45 | |||||||||
|
Other income
|
648 | 615 | 484 | |||||||||
|
Total income
|
11,774 | 7,092 | 8,934 | |||||||||
|
Expenses
|
||||||||||||
|
Interest expense
|
769 | 1,334 | 2,142 | |||||||||
|
Salaries and employee
benefits
|
1,337 | 1,199 | 1,180 | |||||||||
|
Professional fees
|
136 | 165 | 37 | |||||||||
|
Accelerated subordinated debenture
issuance costs
|
- | 548 | 184 | |||||||||
|
Other expenses
|
497 | 420 | 341 | |||||||||
|
Total expenses
|
2,739 | 3,666 | 3,884 | |||||||||
|
Income
before income taxes
and equity in undistributed income
of subsidiaries
|
9,035 | 3,426 | 5,050 | |||||||||
|
Income
tax (benefit)
|
(837 | ) | (1,160 | ) | (1,314 | ) | ||||||
|
Income
before equity in undistributed income of subsidiaries
|
9,872 | 4,586 | 6,364 | |||||||||
|
Equity
in undistributed income (excess distributions)
of subsidiaries
|
(2,753 | ) | 1,915 | (1,930 | ) | |||||||
|
Net
income
|
$ | 7,119 | $ | 6,501 | $ | 4,434 | ||||||
PREMIER
FINANCIAL BANCORP, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
December
31, 2007, 2006, and 2005
(Dollars
in Thousands, Except Per Share Data)
NOTE 19 - PARENT COMPANY FINANCIAL
STATEMENTS (Continued)
|
Condensed
Statement of Cash Flows
|
||||||||||||
|
Years
Ended December 31
|
||||||||||||
|
2007
|
2006
|
2005
|
||||||||||
|
Cash
flows from operating activities
|
||||||||||||
|
Net income
|
$ | 7,119 | $ | 6,501 | $ | 4,434 | ||||||
|
Adjustments to reconcile net
income to net
cash from operating activities
|
||||||||||||
|
Depreciation
|
97 | 101 | 83 | |||||||||
|
Stock compensation
expense
|
130 | 142 | - | |||||||||
|
(Gain) loss from sales of
assets
|
(5 | ) | (4 | ) | (3 | ) | ||||||
|
Dividends in excess of net income
of subsidiaries
|
2,753 | - | 1,930 | |||||||||
|
Equity in undistributed earnings
of subsidiaries
|
- | (1,915 | ) | - | ||||||||
|
Change in other
assets
|
324 | 258 | (35 | ) | ||||||||
|
Change in other
liabilities
|
(141 | ) | 17 | (4,934 | ) | |||||||
|
Net cash from operating
activities
|
10,277 | 5,100 | 1,475 | |||||||||
|
Cash
flows from investing activities
|
||||||||||||
|
Proceeds from liquidation of
subsidiary
|
- | 203 | - | |||||||||
|
Proceeds from sales of assets, net
of purchases
|
(33 | ) | (116 | ) | (108 | ) | ||||||
|
Net cash from investing
activities
|
(33 | ) | 87 | (108 | ) | |||||||
|
Cash
flows from financing activities
|
||||||||||||
|
Early redemption of subordinated
note
|
- | (15,250 | ) | (5,000 | ) | |||||||
|
Cash dividends paid to
shareholders
|
(2,095 | ) | (523 | ) | - | |||||||
|
Issuance of common
stock
|
10 | 27 | 15 | |||||||||
|
Proceeds from
borrowings
|
- | 13,500 | - | |||||||||
|
Payments on other borrowed
funds
|
(3,863 | ) | (2,627 | ) | (800 | ) | ||||||
|
Net cash from financing
activities
|
(5,948 | ) | (4,873 | ) | (5,785 | ) | ||||||
|
Net
change in cash and cash equivalents
|
4,296 | 314 | (4,418 | ) | ||||||||
|
Cash
and cash equivalents at beginning of year
|
3,562 | 3,248 | 7,666 | |||||||||
|
Cash
and cash equivalents at end of year
|
$ | 7,858 | $ | 3,562 | $ | 3,248 | ||||||
PREMIER
FINANCIAL BANCORP, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
December
31, 2007, 2006, and 2005
(Dollars
in Thousands, Except Per Share Data)
|
|
|
Earnings per Share | ||||||||||||||||||
|
Interest
Income
|
Net
Interest Income
|
Net
Income
|
Basic
|
Fully
Diluted
|
||||||||||||||||
|
2007
|
||||||||||||||||||||
|
First Quarter
|
$ | 8,612 | $ | 5,511 | $ | 1,786 | $ | 0.34 | $ | 0.34 | ||||||||||
|
Second Quarter
|
8,712 | 5,551 | 1,790 | 0.34 | 0.34 | |||||||||||||||
|
Third Quarter
|
8,738 | 5,590 | 1,807 | 0.35 | 0.34 | |||||||||||||||
|
Fourth Quarter
|
8,690 | 5,644 | 1,736 | 0.33 | 0.33 | |||||||||||||||
|
2006
|
||||||||||||||||||||
|
First Quarter
|
$ | 7,676 | $ | 5,204 | $ | 1,367 | $ | 0.26 | $ | 0.26 | ||||||||||
|
Second Quarter
|
8,014 | 5,360 | 2,000 | 0.38 | 0.38 | |||||||||||||||
|
Third Quarter
|
8,248 | 5,377 | 1,475 | 0.28 | 0.28 | |||||||||||||||
|
Fourth Quarter
|
8,462 | 5,454 | 1,659 | 0.32 | 0.32 | |||||||||||||||
In
2007, interest income improved in each of the first three quarters as yields on
investments securities increased and the outstanding balance of federal funds
sold increased. In the fourth quarter, as the Federal Reserve began
reducing its targeted federal funds rate, the Company’s interest income also
began to decline. The improvement in interest income resulted in the
improvement in net interest income, but was tempered by a rising trend in the
rates paid on deposits. During the first two quarters of 2007, the
Company aggressively reduced its FHLB and bank borrowings as funds became
available. This debt reduction also served to improve net interest
income. Fourth quarter net interest income also benefitted from the
decline in the floating interest rate on bank borrowings.
Similarly
in 2006, interest income improved each quarter as yields on earning assets rose
and loan balances outstanding increased. The improvement in interest
income drove the improvement in net interest income, but was tempered by rising
interest costs on deposits. Net income was also impacted positively
in each of the four quarters by reversals of the provision for loan losses
(negative provisions) especially the second quarter when $819 of negative
provisions were recorded. The negative provisions were due to
improvements in the Company’s historical loan loss ratios, recoveries of
previously charged-off loans and the collection of impaired loans with previous
allocations of the allowance for loan losses that were no longer
needed.
PREMIER
FINANCIAL BANCORP, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
December
31, 2007, 2006, and 2005
(Dollars
in Thousands, Except Per Share Data)
On
October 24, 2007, the Company entered into a material definitive agreement with
Citizens First Bank, Inc. (Citizens First), a bank with $60 million of total
assets located in Ravenswood, West Virginia. Under terms of the
definitive agreement, Premier will purchase Citizens First for up to $11,700 in
stock and cash. Each share of Citizens First common stock will be
entitled to merger consideration of cash and stock that will generally total
$29.25, subject to certain limitations. Premier will issue 480,000
shares of its common stock plus, depending upon Premier’s stock price nearer to
transaction closing, Premier will pay in total up to $5.3 million in cash to the
shareholders of Citizens First. The transaction, which still requires
approval by Citizens First’s shareholders, is anticipated to close sometime in
the second quarter of 2008.
On
November 27, 2007, the Company entered into a material definitive agreement with
Traders Bankshares, Inc. (Traders), a single bank holding company with $105
million of total assets located in Spencer, West Virginia. Under
terms of the definitive agreement, Premier will purchase Traders for
approximately $18,140 in stock and cash. Each share of Traders common
stock will be entitled to merger consideration of $50.00 cash and 3.75 shares of
Premier common stock, subject to certain limitations. Premier will
issue approximately 675,000 shares of its common stock to the shareholders of
Traders. The transaction, which still requires approval by Traders’
shareholders, is anticipated to close sometime in the second quarter of
2008.
103
PREMIER
FINANCIAL BANCORP, INC.
FORM
10-K
December
31, 2007
Item
9. Changes In and Disagreements with Accountants on Accounting and
Financial Disclosure
There have been no changes in or
disagreements with accountants on accounting or financial disclosure
matters.
|
A.
|
Disclosure
Controls & Procedures
|
Premier management, including the Chief
Executive Officer and Chief Financial Officer, has conducted an evaluation of
the effectiveness of disclosure controls and procedures pursuant to the
Securities and Exchange Act of 1934 Rule 13a-15c as of the end of the period
covered by this annual report. Based on that evaluation, the Chief Executive
Officer and Chief Financial Officer concluded that the disclosure controls and
procedures are effective in ensuring that all material information required to
be filed in this annual report has been made known to them in a timely
fashion.
|
B.
|
Management’s
Report on Internal Control Over Financial
Reporting
|
Management of the Company is
responsible for establishing and maintaining effective internal control over
financial reporting as defined in Rules 13a-15(f) under the Securities Exchange
Act of 1934. The Company’s internal control over financial reporting is designed
to provide reasonable assurance to the Company’s management and board of
directors regarding the preparation and fair presentation of published financial
statements.
Management assessed the effectiveness
of the Company’s internal control over financial reporting as of
December 31, 2007. In making this assessment, management used the criteria
set forth by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO) in Internal Control — Integrated Framework. Based on our
assessment, we believe that, as of December 31, 2007, the Company’s internal
control over financial reporting is effective based on those
criteria.
This annual report does not include an
attestation report of the Company’s registered public accounting firm regarding
internal control over financial reporting. Management’s report was
not subject to attestation by the Company’s registered public accounting firm
pursuant to temporary rules of the Securities and Exchange Commission that
permit the Company to provide only management’s report in this annual
report.
PREMIER
FINANCIAL BANCORP, INC.
FORM
10-K
December
31, 2007
|
/s/
Robert W. Walker
|
/s/
Brien M. Chase
|
|
|
Robert
W. Walker, President and
|
Brien
M. Chase, Senior Vice President
|
|
|
Chief
Executive Officer
|
and
Chief Financial Officer
|
|
|
Date: March
28, 2008
|
Date: March
28, 2008
|
|
C. Changes
in Internal Controls over Financial Reporting
There were no changes in internal
controls over financial reporting during the fourth fiscal quarter that have
materially affected or are reasonably likely to materially affect Premier's
internal controls over financial reporting.
D. Inherent
Limitations on Internal Control
"Internal controls" are procedures,
which are designed with the objective of providing reasonable assurance that (1)
transactions are properly authorized; (2) assets are safeguarded against
unauthorized or improper use; and (3) transactions are properly recorded and
reported, all so as to permit the preparation of reports and financial
statements in conformity with generally accepted accounting principles. However,
a control system, no matter how well conceived and operated, can provide only
reasonable, not absolute, assurance that the objectives of the control system
are met. Further, the design of a control system must reflect the fact that
there are resource constraints, and the benefits of controls must be considered
relative to their cost. Because of the inherent limitations in all control
systems, no evaluation of controls can provide absolute assurance that all
control issues and instances of fraud, if any, within a company have been
detected. These inherent limitations include the realities that judgments in
decision-making can be faulty, and that breakdowns can occur because of simple
error or mistake. The design of any system of controls is also based, in part,
upon certain assumptions about the likelihood of future events, and there can be
no assurance that any design will succeed in achieving its stated goals under
all potential future conditions. Over time, a control may become inadequate
because of changes in conditions, or the degree of compliance with the policies
or procedures may deteriorate. Because of the inherent limitations in a
cost-effective control system, misstatements due to error or fraud may occur and
not be detected. Finally, controls can be circumvented by the individual acts of
some persons, by collusion of two or more people, or by management override of
the control.
None
PREMIER
FINANCIAL BANCORP, INC.
FORM
10-K
December
31, 2007
PART
III
Item
10, 11, 12, 13 and 14. Directors, Executive Officers and Corporate
Governance; Executive Compensation; Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters; Certain Relationships and Related Transactions, and
Director Independence; and Principal Accountant Fees
and Services
The information required by these Items
is omitted because the Company is filing a definitive proxy statement pursuant
to Regulation 14A not later than 120 days after the end of the fiscal year
covered by this report which includes the required information. The required
information contained in the Company's proxy statement is incorporated herein by
reference.
PREMIER
FINANCIAL BANCORP, INC.
FORM
10-K
December
31, 2007
PART
IV
(a) The
following documents are filed as part of this report:
1. Financial
Statements:
2. Financial
Statement Schedules:
No
financial statement schedules have been included as part of this report because
they are either not required or the information is otherwise
included.
3. List
of Exhibits:
The following is a list of exhibits
required by Item 601 of Regulation S-K and by paragraph (c) of this Item
14.
|
Exhibit
Number
|
Description
of Document
|
|
2.1
|
Definitive
Merger Agreement between Premier Financial Bancorp, Inc. and Citizens
First Bank, Inc. dated October 24, 2007, filed as Exhibit 10.1 to form 8-K
filed on October 25, 2007 is incorporated herein by
reference.
|
|
2.2
|
Definitive
Merger Agreement between Premier Financial Bancorp, Inc. and Traders
Bankshares, Inc. dated November 27, 2007, filed as Exhibit 10.1 to form
8-K filed on November 28, 2007 is incorporated herein by
reference.
|
|
3.1
|
Form
of Articles of Incorporation of registrant (included as Exhibit 3.1 to
registrant's Registration Statement on Form S-1, Registration
No. 333-1702, filed on February 28, 1996 with the Commission
and incorporated herein by reference).
|
|
3.2
|
Form
of Articles of Amendment to Articles of Incorporation effective March 15,
1996 re: amendment to Article IV (included as Exhibit 3.2 to registrant's
Amendment No. 1 to Registration Statement on Form S-1, Registration
No. 333-1702, filed on March 25, 1996 with the Commission and
incorporated herein by reference).
|
|
3.3
|
By-Laws
of Premier Financial Bancorp, Inc., as amended, filed as Exhibit 3.1 to
Form 10-Q filed on November 13, 2007 is incorporated herein by
reference.
|
|
***
10.1
|
Premier
Financial Bancorp, Inc. 1996 Employee Stock Ownership Incentive Plan
(included as Exhibit 10.6 to registrant's Registration Statement on Form
S-1, Registration No. 333-1702, filed on February 28, 1996 with
the Commission and incorporated herein by
reference).
|
PREMIER
FINANCIAL BANCORP, INC.
FORM
10-K
December
31, 2007
|
Exhibit
Number
|
Description
of Document
|
|
***
10.2
|
Premier
Financial Bancorp, Inc.'s 2002 Employee Stock Ownership Incentive Plan,
filed as Annex A to definitive proxy statement dated May 17, 2002, filed
on April 30, 2002 with the Commission, is incorporated herein by
reference.
|
|
***
10.3
|
Form
of Stock Option Agreement pursuant to 2002 Employee Stock Ownership
Incentive Plan, filed as Exhibit 10.1 to form 8-K filed January 24, 2005,
is incorporated herein by reference.
|
|
10.4
|
Premier
Financial Bancorp, Inc. written agreement with the Federal Reserve Bank of
Cleveland dated January 29, 2003, filed as Exhibit 10.4 to form 10-K filed
on March 27, 2003, is incorporated herein by reference.
|
|
10.5
|
Premier
Financial Bancorp, Inc. contract with Fiserv Solutions, Inc. dated
December 20, 2004, filed as Exhibit 10 to form 8-K filed December 23,
2004, is incorporated herein by reference.
|
|
10.6
|
Loan
Agreement between Premier Financial Bancorp, Inc. and First Guaranty Bank,
Hammond, Louisiana, filed as Exhibit 10.6 to form 10-K filed March 30,
2006, is incorporated herein by reference.
|
|
10.7
|
Promissory
Note to First Guaranty Bank, Hammond, Louisiana, filed as Exhibit 10.7 to
form 10-K filed March 30, 2006, is incorporated herein by
reference.
|
|
10.8
|
Collateral
Agreement with First Guaranty Bank, Hammond Louisiana, filed as Exhibit
10.8 to form 10-K filed March 30, 2006, is incorporated herein by
reference.
|
|
10.9
|
Loan
Agreement between Premier Financial Bancorp, Inc. and The Kentucky
Bankers’ Bank, Inc. filed as Exhibit 10.1 to form 8-K filed on November
10, 2006, is incorporated herein by reference.
|
|
10.10
|
Term
Note to The Kentucky Bankers’ Bank, Inc. filed as Exhibit 10.2to form 8-K
filed on November 10, 2006, is incorporated herein by
reference.
|
|
10.11
|
Promissory
Note to The Kentucky Bankers’ Bank, Inc. filed as Exhibit 10.3to
form 8-K filed on November 10, 2006, is
incorporated herein by reference.
|
|
10.12
|
Stock
Pledge and Security Agreement between Premier Financial Bancorp, Inc. and
The Kentucky Bankers’ Bank, Inc. filed as Exhibit 10.4to form 8-K filed on
November 10, 2006, is incorporated herein by reference.
|
|
14.1
|
Premier
Financial Bancorp, Inc. Code of Ethics for the Chief Executive Officer,
Chief Financial Officer and Chief Accounting Officer, filed as Exhibit
14.1 to form 10-K filed on April 14, 2004, is incorporated herein by
reference.
|
|
14.2
|
Premier
Financial Bancorp, Inc. Code of Business Conduct and Ethics, filed as
Exhibit 14.2 to form 10-K filed on April 14, 2004, is incorporated herein
by reference.
|
|
21
|
Subsidiaries
of registrant
|
|
23
|
Consent
of Independent Registered Public Accounting
Firm
|
PREMIER
FINANCIAL BANCORP, INC.
FORM
10-K
December
31, 2007
|
Exhibit
Number
|
Description
of Document
|
|
31.1
|
Principal
Executive Officer Certification Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002 - Robert W. Walker
|
|
31.2
|
Principal
Executive Officer Certification Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002 - Brien M. Chase
|
|
32
|
Robert
W. Walker and Brien M. Chase Certification Pursuant to 18 U.S.C. Section
1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act
2002.
|
|
***
Denotes executive compensation plans and
arrangements.
|
|
PREMIER
FINANCIAL BANCORP, INC.
FORM
10-K
December
31, 2007
Pursuant to the requirements of the
Section 13 or 15(d) of the Securities Exchange Act of 1934, registrant has duly
caused this report to be signed on its behalf by the undersigned thereunto duly
authorized.
|
PREMIER
FINANCIAL BANCORP, INC.
|
|
|
By: /s/
Robert W. Walker, President
|
|
|
Robert
W. Walker, President
|
|
|
Date: March
28, 2008
|
|
PREMIER
FINANCIAL BANCORP, INC.
FORM
10-K
December
31, 2007
Pursuant to the requirements of the
Securities Exchange Act of 1934, this report has been signed below by the
following persons on behalf of the registrant in the capacities and on the dates
indicated.
|
/s/
Robert W. Walker
|
Principal
Executive and Director
|
March
28, 2008
|
|
Robert
W. Walker
|
||
|
/s/
Brien M. Chase
|
Principal
Financial and Accounting
|
March
28, 2008
|
|
Brien
M. Chase
|
Officer
|
|
|
/s/
Toney K. Adkins
|
Director
|
March
20, 2008
|
|
Toney
K. Adkins
|
||
|
/s/
Hosmer A. Brown, III
|
Director
|
March
19, 2008
|
|
Hosmer
A. Brown, III
|
||
|
/s/
Edsel Burns
|
Director
|
March
26, 2008
|
|
Edsel
Burns
|
||
|
/s/
E. V. Holder, Jr.
|
Director
|
March
19, 2008
|
|
E.
V. Holder, Jr.
|
||
|
/s/
Keith F. Molihan
|
Director
|
March
19, 2008
|
|
Keith
F. Molihan
|
||
|
/s/
Marshall T. Reynolds
|
Chairman
of the Board
|
March
19, 2008
|
|
Marshall
T. Reynolds
|
||
|
/s/
Neal Scaggs
|
Director
|
March
19, 2008
|
|
Neal
Scaggs
|
||
|
/s/
Thomas W. Wright
|
Director
|
March
19, 2008
|
|
Thomas
W. Wright
|
||
111