PREMIER FINANCIAL BANCORP, INC. Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations
FORWARD-LOOKING STATEMENTS
Management's discussion and analysis contains forward-looking statements that are provided to assist in the understanding of anticipated future financial performance. However, such performance involves risks and uncertainties, and there are certain important factors that may cause actual results to differ materially from those anticipated. Furthermore, uncertainty related to future economic conditions resulting from government actions designed to curb the spread of the COVID-19 virus may affect Premier's operations more or less than currently estimated. These important factors include, but are not limited to, those set forth in Premier's Annual Report on Form 10-K for the year endedDecember 31, 2020 , under Item 1A - Risk Factors and the following: 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) as well as state and local emergency orders related to COVID-19, 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.
A. Results of Operations
A financial institution's primary sources of revenue are generated by interest income on loans, investments and other earning assets, while its major expenses are produced by the funding of these assets with interest bearing liabilities. Effective management of these sources and uses of funds is essential in attaining a financial institution's optimal profitability while maintaining a minimum amount of interest rate risk and credit risk. Net income for the six months endedJune 30, 2021 was$11,724,000 , or$0.79 per diluted share, compared to net income of$10,874,000 , or$0.74 per diluted share, for the six months endedJune 30, 2020 . The increase in net income in the first six months of 2021 is largely due to$1,096,000 of gains on the sale of securities and a$514,000 decrease in the provision for loan losses. These items more than offset a$55,000 decrease in net interest income and a$193,000 increase in non-interest expense. The decrease in net interest income is a combination of larger decreases in both interest income and interest expense, while the increase in non-interest expense was mainly due to an increase in expenses and writedowns of other real estate owned ("OREO") and an increase in professional fees largely related to the Agreement and Plan of Merger ("Merger Agreement") with Peoples Bancorp, Inc. ("Peoples") with Peoples as the surviving corporation in the Merger. The decrease in the provision for loan losses related primarily to a higher portion of the provision for loan losses recorded during the first six months of 2020 attributed to additional identified credit risk in the loan portfolio related to anticipated consequences of the national economic shutdown designed to curb the spread of the novel corona virus of 2019 ("COVID-19") compared to the net negative COVID-19 portion of the loan loss provision recorded in the first six months of 2021. The annualized returns on average common shareholders' equity and average assets were approximately 9.22% and 1.21% for the six months endedJune 30, 2021 compared to 8.72% and 1.19% for the same period in 2020. 41
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PREMIER FINANCIAL BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
JUNE 30, 2021
Net income for the three months ended June 30, 2021 was $5,174,000 , or $0.35 per
diluted share, compared to net income of $5,506,000 , or $0.37 per diluted share
for the three months ended June 30, 2020 . The decrease in net income in the
second quarter of 2021 is largely due to an increase in non-interest expenses,
primarily professional fees and expenses and writedowns of OREO. The increase
in non-interest expense more than offset positive quarter-over-quarter earnings
comparisons in 2021, such as increases in net interest income and non-interest
income and a decrease in the provision for loan losses when compared to the
second quarter of 2020. The annualized returns on average common shareholders'
equity and average assets were approximately 8.14% and 1.06% for the three
months ended June 30, 2021 compared to 8.68% and 1.17% for the same period in
2020.
Net interest income for the six months ended June 30, 2021 totaled $33.096
million , a decrease of $55,000 , or 0.2%, from the $33.151 million of net
interest income earned in the first six months of 2020. Interest income in 2021
decreased by $2,692,000 , or 7.2%, largely due to a $1,772,000 , or 36.7%,
decrease in interest income on investment securities. Interest income on
investment securities decreased in the first six months of 2021 largely due to
significantly lower average yields although on a higher outstanding average
balance. The decrease in the average yield earned is largely due to accelerated
prepayments of mortgage-backed securities which resulted in a corresponding
higher rate of purchase premium amortization on these securities as well as a
significantly lower reinvestment yield on the accelerated prepayment funds and
investments purchased with funds from the growth in deposit balances and
customer repurchase agreements. In addition to the decrease in interest income
on investment securities, interest income on loans decreased $698,000 , or 2.2%,
compared to the first six months of 2020. Interest income on loans in the first
six months of 2021 included approximately $556,000 of income from deferred
interest and discounts recognized on loans that paid off or paid-down during
during the first six months of 2021 compared to approximately $543,000 of
interest income of this kind recognized during the six months of 2020.
Excluding this loan income recognition, interest income on loans decreased by
$711,000 , or 2.2%, in the first six months of 2021, largely due to a lower
average yield earned, although on a higher average balance of loans outstanding
during the first six months of 2021 when compared to the first six months of
2020. Premier's participation in the Small Business Administration's ("SBA")
Paycheck Protection Program ("PPP") resulted in $91,511,000 of average PPP loans
outstanding during the first six months of 2021. This compares to an average
balance of only $42,068,000 of PPP loans outstanding during the first six months
of 2020. The PPP loan program of the SBA did not get underway until after March
31, 2020 . Excluding participation in the PPP loan program, Premier's average
loans outstanding during the first six months of 2021 decreased by $28,800,000
compared to the average loans outstanding during the same six months of 2020,
while the average yield on these loans decreased to 4.91% during the first six
months of 2021 compared to 5.27% during the same six months of 2020. Earning
yields dropped in response to the Federal Reserve Board of Governors' policy
decision to drop the targeted federal funds rate to a range of 0.00% to 0.25% on
March 16, 2020 . The policy decision was an effort to stimulate the economy
during government actions to curb the spread of COVID-19 requiring non-essential
business closures. As a result, the prime lending rate dropped to 3.25% at this
time. As new loans were recorded or existing loans were renewed or repriced
after March 2020 , the lower prime lending rate generally resulted in a lower
interest rate on these loans. Also contributing to the decrease in interest
income, interest income from interest-bearing bank balances and federal funds
sold decreased by $222,000 , or 78.2%, largely due to a significant decrease in
the yield earned on these balances, from 0.09% in 2021 compared to the 0.62%
yield earned in 2020, resulting from decreases in the short-term interest rate
policy of the Federal Reserve Board of Governors.
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PREMIER FINANCIAL BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
JUNE 30, 2021
Substantially offsetting the decrease in interest income in the first six months
of 2021 was a $2,637,000 , or 63.8%, decrease in interest expense, driven by a
decrease in interest expense on deposits. Interest expense on deposits
decreased by $2,529,000 , or 65.2% in the first half of 2021, largely due to
decreases in the average rate paid on certificates of deposit, savings deposits,
and NOW and money market deposits during the first six months of 2021 compared
to the same period in 2020. Further interest expense savings were realized due
to decreases in the average balance of higher-costing certificates of deposit
during the first six months of 2021 compared to the same period in 2020.
Nevertheless, average interest-bearing deposit balances increased by $46.7
million , or 4.2%, in the first six months of 2021 compared to the same period of
2020. The average interest rate paid on interest-bearing deposits decreased by
47 basis points from 0.70% during the first six months of 2020 to 0.23% during
the first six months of 2021. Decreases in short-term rates resulting from
actions by the Federal Reserve Board of Governors to reduce the targeted federal
funds rate to a range of 0.00% to 0.25% on March 16, 2020 , plus an inflow of
funds from direct stimulus payments from the U.S. Treasury to deposit account
holders in an effort to offset some of the negative effects of COVID-19
governmental restrictions on non-essential businesses, have resulted in a
decrease in competition for bank deposit rates. As a result, the average
interest rate paid on highly liquid NOW and money market deposits decreased by
13 basis points and the average rate paid on savings deposits decreased by 12
basis points in the first six months of 2021 when compared to the first six
months of 2020. Even with these resulting decreases in the average rate paid on
transaction based deposits, the average outstanding balance of transaction based
deposits increased significantly. NOW and money market deposit account balances
averaged $534.517 million in the first six months of 2021, an $81.746 million ,
or 18.1%, increase over the average outstanding balances during the first six
months of 2020. Similarly, savings deposit account balances averaged $322.537
million in the first six months of 2021, a $50.665 million , or 18.6%, increase
over the average outstanding balances during the first six months of 2019. Even
with the increases in their average balances, interest expense savings on
interest-bearing transaction deposit accounts totaled $422,000 of the $2,529,000
decrease in interest expense on interest-bearing deposits, largely as a result
of rate reductions on NOW, money market and savings deposit accounts.
The remaining $2,107,000 decrease in interest expense on deposit accounts came
from a decrease in average outstanding certificates of deposits and a decrease
in the average rates paid in the first six months of 2021 when compared to the
first six months of 2020. The average rate paid on certificates of deposit
decreased from 1.62% during the first six months of 2020 to 0.70% during the
same six months of 2021. Premier eliminated its interest rate specials on
certificates of deposit during 2020 and lowered the interest rate paid on all
deposit products in response to decreases in the short-term interest rate policy
of the Federal Reserve Board of Governors. As certificates mature and are
renewed, they are priced using the new lower rates. Certificate of deposit
balances averaged $311.538 million in the first six months of 2021, an $85.677
million , or 21.6%, increase from the average outstanding balances during the
first six months of 2020. As certificates mature, depositors are either seeking
higher deposit rates from other competitive depository institutions or are
transferring their balances to more liquid interest-bearing deposit accounts
such as NOW, money market and savings deposits as a means to keep immediate
access to their funds during the uncertainty of employment or economic
conditions.
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PREMIER FINANCIAL BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
JUNE 30, 2021
Similarly, interest expense paid on short-term borrowings, primarily customer
repurchase agreements, decreased by $15,000 , or 38.5%, in the first six months
of 2021 compared to the same six months of 2020. The interest expense decrease
was largely due to a 23 basis point decrease in the average rate paid on
short-term borrowings, partially offset by an 83.8% increase in the average
balance outstanding during the first six months of 2021 compared to 2020. Also
contributing to the overall 63.8% decrease in interest expense during the first
six months of 2021 was a $53,000 , or 100%, decrease in interest expense on
Federal Home Loan Bank ("FHLB") borrowings and a $40,000 , or 25.2%, decrease in
interest expense on Premier's subordinated debt. All FHLB borrowings were
repaid in 2020 resulting in no interest expense during the first six months of
2021. Premier's subordinated debt features a variable interest rate indexed to
the short-term three-month LIBOR interest rate, which was lower in the first and
second quarters of 2021 in conjunction with the decrease in short-term interest
rate policy by the Federal Reserve Board of Governors.
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PREMIER FINANCIAL BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
JUNE 30, 2021
Premier's net interest margin during the first six months of 2021 was 3.57%
compared to 3.91% for the first six months of 2020. A portion of the interest
income on loans is the result of recognizing deferred interest income on loans
that paid-off or paid down during the period. Excluding this income, Premier's
net interest margin during the first six months of 2021 would have been 3.51%
compared to 3.85% for the first six months of 2020. As shown in the table
below, Premier's yield earned on federal funds sold and interest bearing bank
balances decreased to 0.09% in the first six months of 2021, from the 0.62%
earned in the first six months of 2020. The average yield earned on securities
available for sale decreased to 1.28% in the first six months of 2021, from the
2.48% earned during the first six months of 2020. Similarly, the average yield
earned on total loans outstanding decreased to 5.08% in 2021 from the 5.31%
earned during the first six months of 2020. Earning asset yields have decreased
generally in response to decreases in both short- and long-term interest rates
driven by economic uncertainty resulting from worldwide governmental actions
intended to curb the spread of the COVID-19 virus. The Federal Reserve Board of
Governors dramatically reduced its the short-term interest rate policy as a
means to stimulate the economy of the United States responsive to COVID-19
governmental actions in March of 2020. As new loans have been made with lower
interest rates, some borrowers have requested interest rate lowering adjustments
on their existing loans with Premier. Premier has been very selective in
granting these loan interest rate concessions. Nevertheless, the impact of both
on the average loan yield in the first six months of 2021 has been a decrease of
approximately 23 basis points when compared to the first six months of 2020.
Similar to the decrease in earning asset yields, the average rate paid on
interest bearing liabilities decreased from 0.72% during the first six months of
2020 to 0.25% in the first six months of 2021. The average rates paid on
interest-bearing deposits decreased from 0.70% in the first six months to 2020
to 0.23% during the first six months of 2021, largely due to lower rates paid on
certificates of deposit. Furthermore, the average rate paid on Premier's
variable rate subordinated debentures decreased from 5.87% in the first six
months of 2020 to 4.38% in the first six months of 2021, due to decreases in
short-term interest rate policy by the Federal Reserve and the impact on market
short-term interest rates. Due to a lack of competition for funds, the average
rate paid on short-term borrowings, primarily customer repurchase agreements,
decreased by 22 basis points to 0.12% in the first six months of 2021, while the
average interest rate on the fixed rate FHLB borrowings assumed in the
acquisition of First Bank of Charleston decreased from 2.54% to zero as the
borrowings have been repaid upon maturity. The overall effect was to decrease
Premier's net interest spread by 20 basis points to 3.48% and decrease Premier's
net interest margin by 34 basis points to 3.57% in the first six months of 2021
when compared to the first six months of 2020.
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PREMIER FINANCIAL BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
JUNE 30, 2021 Additional information on Premier's net interest income for the six months of 2021 and six months of 2020 is contained in the following table.
PREMIER FINANCIAL BANCORP , INC. AVERAGE CONSOLIDATED BALANCE SHEETS AND NET INTEREST INCOME ANALYSIS Six Months Ended June 30, 2021 Six Months Ended June 30, 2020 Balance Interest Yield/Rate Balance Interest Yield/Rate Assets Interest Earning Assets Federal funds sold and other$ 132,699 $ 62 0.09 %$ 91,842 $ 284 0.62 % Securities available for sale Taxable 458,902 2,722 1.19 369,836 4,557 2.46 Tax-exempt 32,922 334 2.57 25,632 271 2.68 Total investment securities 491,824 3,056 1.28 395,468 4,828 2.48 Total loans 1,249,059 31,472 5.08 1,218,360 32,170 5.31 Total interest-earning assets 1,873,582 34,590 3.73 % 1,705,670 37,282 4.40 % Allowance for loan losses (13,869 ) (13,816 ) Cash and due from banks 24,165 22,827 Other assets 105,968 107,310 Total assets$ 1,989,846 $ 1,821,991 Liabilities and Equity Interest-bearing liabilities Interest-bearing deposits$ 1,168,592 1,351 0.23$ 1,121,858 3,880 0.70 Short-term borrowings 41,823 24 0.12 22,750 39 0.34 FHLB Advances - - 0.00 4,201 53 2.54 Subordinated debt 5,483 119 4.38 5,444 159 5.87 Total interest-bearing liabilities 1,215,898 1,494 0.25 % 1,154,253 4,131 0.72 % Non-interest bearing deposits 510,357 406,163 Other liabilities 11,800 12,106 Stockholders' equity 251,791 249,469 Total liabilities and equity$ 1,989,846 $ 1,821,991 Net interest earnings$ 33,096 $ 33,151 Net interest spread 3.48 % 3.68 % Net interest margin 3.57 % 3.91 % 46
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PREMIER FINANCIAL BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
JUNE 30, 2021 Additional information on Premier's net interest income for the second quarter of 2021 and second quarter of 2020 is contained in the following table.
PREMIER FINANCIAL BANCORP , INC. AVERAGE CONSOLIDATED BALANCE SHEETS AND NET INTEREST INCOME ANALYSIS Three Months Ended June 30, 2021 Three Months Ended June 30, 2020 Balance Interest Yield/Rate Balance Interest Yield/Rate
Assets Interest Earning Assets Federal funds sold and other$ 108,641 $ 23 0.08 %$ 112,513 $ 26 0.09 % Securities available for sale Taxable 512,721 1,393 1.09 365,394 2,014 2.20 Tax-exempt 31,577 163 2.61 36,484 182 2.53 Total investment securities 544,298 1,556 1.18 401,878 2,196 2.23 Total loans 1,265,240 16,024 5.08 1,252,337 16,416 5.27 Total interest-earning assets 1,918,179 17,603 3.69 % 1,766,728 18,638 4.25 % Allowance for loan losses (14,017 ) (14,039 ) Cash and due from banks 24,620 22,980 Other assets 105,556 107,744 Total assets$ 2,034,338 $ 1,883,413 Liabilities and Equity Interest-bearing liabilities Interest-bearing deposits$ 1,191,619 586 0.20$ 1,132,726 1,715 0.61 Short-term borrowings 47,914 12 0.10 25,653 15 0.24 FHLB Advances - - 0.00 4,253 23 2.18 Subordinated debentures 5,488 59 4.31 5,448 76 5.61 Total interest-bearing liabilities 1,245,021 657 0.21 % 1,168,080 1,829 0.63 % Non-interest bearing deposits 527,507 448,766 Other liabilities 12,557 12,812 Stockholders' equity 249,253 253,755 Total liabilities and equity$ 2,034,338 $ 1,883,413 Net interest earnings$ 16,946 $ 16,809 Net interest spread 3.48 % 3.62 % Net interest margin 3.55 % 3.83 % 47
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PREMIER FINANCIAL BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
JUNE 30, 2021
Net interest income for the quarter ended June 30, 2021 totaled $16.946 million ,
up $137,000 , or 0.8%, from the $16.809 million of net interest income earned in
the second quarter of 2020, as interest expense savings exceeded a decrease in
interest income. Interest income in 2021 decreased $1,035,000 , or 5.6%, in the
second quarter of 2021 when compared to the second quarter of 2020, largely due
to a $640,000 , or 29.1%, decrease in interest income on investment securities
and a $392,000 , or 2.4%, decrease in interest income on loans. Interest income
on interest-bearing bank balances and federal funds sold decreased by $3,000 , or
11.5%, in the second quarter of 2021 when compared to the same quarter of 2020,
due to lower earning yields on slightly lower average balances. Similarly,
interest income on investment securities in the second quarter of 2021 decreased
by $640,000 , or 29.1%, when compared to the second quarter of 2020. While the
average balance of investments increased by $142.4 million in the second quarter
of 2021 when compared to the same quarter of 2020, the average yield earned
decreased from 2.23% during the second quarter of 2020 to 1.17% during the
second quarter of 2021. The decrease in the average yield earned is largely due
to accelerated prepayments of mortgage-backed securities which resulted in a
corresponding higher rate of purchase premium amortization on these securities,
as well as a significantly lower reinvestment yield on the accelerated
prepayment funds and investments purchased with funds from the growth in deposit
balances and customer repurchase agreements.
Interest income on loans decreased by $392,000 , or 2.4%, in the second quarter
of 2021 when compared to the second quarter of 2020. Interest income on loans
in the second quarter of 2021 included approximately $50,000 of income
recognized from deferred interest and discounts recognized on loans that paid
off during the quarter, compared to approximately $468,000 of interest income of
this kind recognized during the second quarter of 2020. Otherwise, interest
income on loans increased by $26,000 , or 0.2%, in the second quarter of 2021.
The increase in interest income on loans is a combination of an increase in
interest income on commercial loans partially offset by decreases in interest
income on real estate mortgage and consumer loans. Interest income on real
estate mortgage and consumer loans decreased by $516,000 , or 12.0%, in the
second quarter of 2021 when compared to the second quarter of 2020, largely due
to a lower average yield earned on a lower average balance of these loans
outstanding. Conversely, interest income on commercial loans increased by
$542,000 , or 4.7%, in the second quarter of 2021 when compared to the second
quarter of 2020, largely due to a higher average balance of these loans
outstanding earning a similar yield in 2021 compared to the second quarter of
2020. Premier's participation in the U.S. Treasury's and Small Business
Administration's Paycheck Protection Program ("PPP") accounted for $17.4 million
of the $40.6 million increase in average commercial loans outstanding in the
second quarter of 2021 compared to the second quarter of 2020. In addition,
interest income on PPP loans and the recognition of fee income when a borrower's
PPP loan is paid off resulted in a $1,194,000 increase in loan interest income
in the second quarter of 2021 compared to the second quarter of 2020.
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PREMIER FINANCIAL BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
JUNE 30, 2021
More than offsetting the decrease in interest income in the second quarter of
2021 was a $1,172,000 , or 64.1%, decrease in interest expense, driven by a
decrease in interest expense on deposits. Interest expense on deposits
decreased by $1,129,000 , or 65.8% in the second quarter of 2021, largely due to
decreases in the average rate paid on certificates of deposit, savings deposits,
and NOW and money market deposits during the second quarter of 2021 compared to
the same quarter in 2020. Further interest expense savings were realized due to
decreases in the average balance of higher-costing certificates of deposit
during the second quarter of 2021 compared to the same quarter in 2020.
Nevertheless, average interest-bearing deposit balances increased by $58.9
million , or 5.2%, in the second quarter of 2021 compared to the same quarter of
2020, largely due to a $53.8 million , or 19.2%, increase in savings deposits and
a $79.0 million , or 16.7%, increase in NOW and money market deposits. These
increases more than offset a $73.9 million , or 19.5%, decrease in certificate of
deposit balances. As certificates mature, depositors are either seeking higher
deposit rates from other competitive depository institutions or are transferring
their balances to more liquid interest-bearing deposit accounts such as NOW,
money market and savings deposits as a means to keep immediate access to their
funds during the uncertainty of employment or economic conditions. The average
interest rate paid on interest-bearing deposits decreased by 41 basis points
from 0.61% during the second quarter of 2020 to 0.20% during the second quarter
of 2021, as Premier eliminated its interest rate specials on certificates of
deposit and lowered the interest rate paid on all deposit products in response
to decreases in the short-term interest rate policy of the Federal Reserve Board
of Governors. Decreases in short-term rates resulting from actions by the
Federal Reserve Board of Governors to reduce the targeted federal funds rate,
plus an inflow of funds from direct stimulus payments from the U.S. Treasury to
deposit account holders have resulted in a decrease in competition for bank
deposit rates. As a result, the average interest rate paid on highly liquid NOW
and money market deposits decreased by 8 basis points and the average rate paid
on savings deposits decreased by 9 basis points in the second quarter of 2021
when compared to the second quarter of 2020. Even with these resulting
decreases in the average rate paid on transaction based deposits, the average
outstanding balance of transaction-based deposits increased. Interest expense
savings on interest-bearing transaction deposit accounts totaled $143,000 of the
$1,129,000 decrease in interest expense on interest-bearing deposits. The
remaining $986,000 decrease in interest expense on deposit accounts came from a
decrease in average outstanding certificates of deposits and a 93 basis point
decrease in the average rates paid during the second quarter of 2021 when
compared to the second quarter of 2020.
Similarly, interest expense paid on short-term borrowings, primarily customer
repurchase agreements, decreased by $3,000 , or 20%, in 2021. The reduction in
interest expense was largely due to a 14 basis point decrease in the average
rate paid, partially offset by an 86.8% increase in the average balance
outstanding during the second quarter of 2021. Also contributing to the overall
64.1% decrease in interest expense during the second quarter of 2021 was a
$23,000 , or 100%, decrease in interest expense on FHLB borrowings and a $17,000 ,
or 22.4%, decrease in interest expense on Premier's subordinated debt. All FHLB
borrowings were repaid in 2020 resulting in no interest expense during the
second quarter of 2021. Premier's subordinated debt features a variable
interest rate indexed to the short-term three-month LIBOR interest rate, which
was lower in the second quarter of 2021 compared to the second quarter of 2020
in conjunction with decreases in short-term interest rate policy by the Federal
Reserve Board of Governors.
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PREMIER FINANCIAL BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
JUNE 30, 2021
Premier's net interest margin during the second quarter of 2021 was 3.55%
compared to 3.83% for the second quarter of 2020. A portion of the interest
income on loans is the result of recognizing deferred interest income on loans
that paid-off or paid down during the period. Excluding this income, Premier's
net interest margin during the second quarter of 2021 would have been 3.54%
compared to 3.73% for the second quarter of 2020. As shown in the table above,
Premier's yield earned on federal funds sold and interest bearing bank balances
decreased slightly to 0.08% in the second quarter of 2021, from the 0.09% earned
in the second quarter of 2020. The average yield earned on securities available
for sale decreased to 1.18% in the second quarter of 2021, from the 2.23% earned
during the second quarter of 2020. Similarly, the average yield earned on total
loans outstanding decreased to 5.08% in 2021 from the 5.27% earned during the
second quarter of 2020. Earning asset yields have decreased generally in
response to decreases in long-term interest rates driven by economic uncertainty
resulting from worldwide governmental actions intended to curb the spread of the
COVID-19 virus. The Federal Reserve Board of Governors also dramatically
reduced its the short-term interest rate policy in March 2020 as a means to
stimulate the economy of the United States responsive to COVID-19 governmental
actions. As new loans have been made with lower interest rates, some borrowers
have requested interest rate lowering adjustments on their existing loans with
Premier. Premier has been very selective in granting these loan interest rate
concessions. Nevertheless, the impact of both on the average loan yield in the
second quarter of 2021 has been a decrease of approximately 19 basis points when
compared to the second quarter of 2020.
Similar to the decrease in earning asset yields, the average rate paid on
interest bearing liabilities decreased in the second quarter of 2021 from 0.63%
during the second quarter of 2020 to 0.21% in the second quarter of 2021. The
average rates paid on interest-bearing deposits decreased from 0.61% in the
second quarter to 2020 to 0.20% during the second quarter of 2021, due to lower
rates paid on savings deposits, transaction based interest bearing deposits and
certificates of deposit. Furthermore, the average rate paid on Premier's
variable rate subordinated debentures decreased from 5.61% in the second quarter
of 2020 to 4.31% in the second quarter of 2021 due to decreases in short-term
interest rate policy by the Federal Reserve and the impact on market short-term
interest rates. Due to a lack of competition for funds, the average rate paid
on short-term borrowings, primarily customer repurchase agreements, decreased by
14 basis points to 0.10% in the second quarter of 2021, while the average
interest rate on the fixed rate FHLB borrowings assumed in the acquisition of
First Bank of Charleston decreased from 2.18% to zero as the borrowings have
been repaid upon maturity. The overall effect was to decrease Premier's net
interest spread by 14 basis points to 3.48% and decrease Premier's net interest
margin by 28 basis points to 3.55% in the second quarter of 2021 when compared
to the second quarter of 2020.
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PREMIER FINANCIAL BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
JUNE 30, 2021
Non-interest income increased by $1,127,000 , or 27.2%, to $5,266,000 for the
first six months of 2021 compared to the same six months of 2020, mainly due to
a gain on the sale of securities. During the first quarter of 2021 Premier sold
$25.5 million of mortgage-backed securities and realized gains upon the sales
totaling $1,096,000 . In reviewing its investment portfolio, Premier identified
some mortgage-backed securities that had short-term projected weighted average
remaining lives and proportionately significant unrealized market value gains.
Rather than hold the securities until their full maturity, Premier decided to
liquidate these securities, realize the market value gains, and reinvest the
proceeds. Otherwise, non-interest income increased by $31,000 , or 0.7%, in the
first six months of 2021 when compared to the same six months of 2020, as
decreases in service charges on deposit accounts and other sources of
non-interest income were more than offset by increases in electronic banking
income and secondary market mortgage income. Service charges on deposit
accounts decreased by $358,000 , or 19.9%, largely due to a $377,000 , or 29.2%,
decrease in customer overdraft fees. Other sources of non-interest income
decreased by $44,000 , or 10.1%, in the first six months of 2021, as decreases
in commissions on insurance premiums, brokerage and annuity commission income
and fees on letters of credit were partially offset by an increase in check
cashing fees and wire transfer fees. More than offsetting these decreases in
non-interest income, electronic banking income (income from debit/credit cards,
ATM fees and internet banking charges) increased by $353,000 , or 20.1% and
secondary market mortgage income increased by $80,000 , or 53.0%, in the first
six months of 2021 compared to the same six months of 2020. Electronic banking
income increased from income from debit card transaction activity and
non-customer ATM transaction fees. Secondary market mortgage income increased,
in part, due to the lower long-term interest rate environment, resulting in an
increase in home purchases in Premier's markets and home loan refinances as
customers are taking advantage of lowering their long-term fixed home loan
interest rate.
Non-interest income increased by $232,000 , or 12.3%, to $2,122,000 for the
second quarter of 2021 compared to the same three months of 2020, largely due to
an increase in electronic banking income. Service charges on deposit accounts
increased by $15,000 , or 2.2%, largely due to a $21,000 , or 4.6%, increase in
customer overdraft fees. Electronic banking income increased by $164,000 , or
17.5%, largely due to a $163,000 , or 20.9%, increase in income from debit card
transaction activity. Secondary market mortgage income increased by $35,000 , or
41.2%, in the second quarter of 2021 when compared to the same quarter of 2020
due, in part, to the lower long-term interest rate environment resulting in an
increase in home purchases in Premier's markets and home loan refinances as
customers are taking advantage of lowering their long-term fixed home loan
interest rate. Other sources of non-interest income increased by $18,000 , or
10.2%, in the second quarter of 2021 as decreases in lending based fees were
more than offset by increases in commissions on insurance premiums, check
cashing fees and commissions on checkbook sales.
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PREMIER FINANCIAL BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
JUNE 30, 2021
Non-interest expenses for the first six months of 2021 totaled $22,009,000 , or
2.29%, of average assets on an annualized basis, compared to $21,816,000 , or
2.41%, of average assets for the same period of 2020. The $193,000 , or 0.9%,
increase in non-interest expenses in 2021 when compared to the first six months
of 2020 is largely due to a $737,000 , or 175%, increase in expenses and
writedowns on OREO properties, a $376,000 , or 76.7%, increase in professional
fees, a $183,000 , or 269%, increase in FDIC insurance expense, a $216,000 , or
6.7%, increase in outside data processing costs and a $77,000 , or 2.2%, increase
in occupancy and equipment expenses. Expenses and writedowns of OREO properties
increased, largely due to $859,000 of OREO value writedowns in the first six
months of 2021 compared to $277,000 of value writedowns in the first six month
of 2020, as well as a $107,000 , or 67.5%, increase in expenses related to
operating and maintaining OREO properties. Professional fees increased largely
due to a $286,000 increase in legal fees and an $80,000 increase in consulting
fees related to the pending acquisition of Premier by Peoples Bancorp Inc. FDIC
insurance expense increased, largely due to the prior utilization of FDIC based
community bank assessment credits to substantially offset the first and second
quarter 2020 FDIC insurance premiums. The $216,000 increase in outside data
processing costs included a $61,000 increase in internet and mobile banking
charges, as banking by electronic means becomes more and more popular among
Premier's customer base, a $94,000 increase in ATM processing charges from
increased transaction activity and a $64,000 increase in communication line
expenses as Premier migrated to a more robust data line network across its
branch network to improve customer service. The $77,000 increase in occupancy
and equipment expenses included a $52,000 increase in snow removal costs, an
$11,000 increase in utility costs and $49,000 of gains on the disposition of
company vehicles in 2020 that did not reoccur in 2021.
These increases in non-interest expense were substantially offset by an
$813,000 , or 7.6%, decrease in staff costs, a $224,000 , or 42.5% decrease in
taxes not on income, a $150,000 , or 69.4%, decrease in loan collection expenses,
a $38,000 , or 7.9%, decrease in core deposit amortization expense and a
$171,000 , or 7.8%, decrease in other operating expenses in the first six months
of 2021 compared to the same six months of 2020. Staff costs decreased by
$813,000 , largely due to a $500,000 decrease in employee wages and incentive
compensation and a $177,000 decrease in benefit costs predominantly from a
reduction in total employees as well as a $135,000 increase in the deferral of
expensing staff costs related to an increase in number of loans originated
(primarily PPP loans) during the first six months of 2021 compared to the first
six months of 2020. The $224,000 decrease in taxes not on income is due to a
change in the taxation of banks in the Commonwealth of Kentucky , from an equity
based franchise tax to a state imposed income tax. As a result, income tax
increased by $208,000 in the first six months of 2021 related to the Kentucky
income tax. Decreases in other operating expenses include supplies, postage,
advertising, conversion and travel expenses.
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PREMIER FINANCIAL BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
JUNE 30, 2021
Non-interest expense for the second quarter of 2021 totaled $11,819,000 , or
2.44%, of average assets on an annualized basis, compared to $11,079,000 , or
2.37%, of average assets for the same period of 2020. Non-interest expense
increased by $740,000 , or 6.7% in the second quarter of 2021 compared to the
second quarter of 2020, largely due to a $641,000 , or 181%, increase in expenses
and writedowns on OREO properties and a $217,000 , or 88.2%, increase in
professional fees. During the second quarter of 2021, Premier recorded $859,000
of writedowns on OREO property values and another $14,000 of net losses on the
completed sale of OREO properties compared to $277,000 of such writedowns of
OREO property values and the realization of $28,000 of net gains upon the sale
of OREO properties in the second quarter of 2020. Professional fees increased
largely due to a $171,000 increase in legal fees and a $25,000 increase in
consulting fees related to the pending acquisition of Premier by Peoples Bancorp
Inc. Other increases in non-interest expense include a $52,000 , or 72.2%,
increase in FDIC insurance costs, largely due to the prior utilization of FDIC
based community bank assessment credits to partially offset the second quarter
2020 FDIC insurance premiums, a $30,000 , or 1.8%, increase in outside data
processing costs and a $13,000 , or 0.7%, increase in occupancy and equipment
expenses. These increases more than offset decreases in non-interest expense in
the second quarter of 2021 when compared to the second quarter of 2020.
Decreases in non-interest expense include an $80,000 , or 31.7%, decrease in
taxes not on income, a $74,000 , or 73.3%, decrease in loan collection expenses,
a $21,000 , or 18.4%, decrease in supplies expense, an $18,000 , or 7.5%, decrease
in the amortization of intangible assets and a $20,000 , or 0.4%, decrease in
staff costs.
Income tax expense was $3,553,000 for the first six months of 2021 compared to
$3,010,000 for the first six months of 2020. The effective tax rate for the six
months ended June 30, 2021 was 23.3% compared to 21.7% for the same period in
2020. For the quarter ended June 30, 2021 , income tax expense was $1,647,000 ,
(a 24.1% effective tax rate), compared to $1,524,000 , (a 21.7% effective tax
rate), for the same period in 2020. The increases in the 2021 effective tax
rate for both the first six months of 2021 and the second quarter of 2021 are
largely due to a change in the taxation of banks in the Commonwealth of
Kentucky , from an equity based franchise tax to a state imposed income tax. As
a result, income tax increased by$208,000 in the first six months of 2021 and by$105,000 in the second quarter of 2021 related to theKentucky income tax. As an essential business, Premier has taken steps to modify its normal business operations to include keeping branches open with appropriate "social distancing" measures; utilizing permitted guidance provided by federal and state banking supervisory regulators to assist borrowers to avoid defaulting on their loans; and robustly participating in theU.S. Treasury's andSmall Business Administration's Paycheck Protection Program. These efforts may or may not enhance Premier's business model or future results of operations.
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PREMIER FINANCIAL BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
JUNE 30, 2021
B. Financial Position
Total assets at June 30, 2021 increased by $134.1 million to $2.080 billion from
the $1.946 billion at December 31, 2020 . The increase in total assets since
year-end is largely due to a $151.6 million increase in securities available for
sale and a $31.6 million increase in total loans outstanding. Earning assets
increased by $138.2 million from the $1.825 billion at year-end 2020 to end the
quarter at $1.963 billion .
Cash and due from banks at June 30, 2021 was $24.3 million , a $696,000 decrease
from the $25.0 million at December 31, 2020 . Interest bearing bank balances
decreased by $49.7 million , or 28.5%, from the $174.2 million reported at
December 31, 2020 . Federal funds sold increased by $4.7 million , or 41.9%, to
$16.0 million at June 30, 2021 . Changes in these highly liquid assets are
generally in response to increases in deposits, the demand for deposit
withdrawals or the funding of loans or investment purchases, and are part of
Premier's management of its liquidity and interest rate risks.
Securities available for sale totaled $572.8 million at June 30, 2021 , a $151.6
million increase from the $421.2 million at December 31, 2020 . The increase was
largely due to the purchase of $289.3 million of investment securities. These
increase more than offset $104.9 million of proceeds from monthly principal
payments on Premier's mortgage backed securities portfolio and securities that
matured or were called during the first six months of 2021. Purchases exceeded
maturities as Premier sought higher yields on surplus funds resulting from the
growth in deposits and payoffs on non-SBA PPP loans. During the first quarter
of 2021, Premier also sold $25.5 million of mortgage-backed securities and
realized gains upon the sales totaling $1,096,000 . In reviewing its investment
portfolio, Premier identified some mortgage-backed securities that had
short-term projected weighted average remaining lives and proportionately
significant unrealized market value gains. Rather than hold the securities
until their full maturity, Premier decided to liquidate these securities,
realize the market value gains, and reinvest the proceeds. The investment
portfolio is predominately high quality residential mortgage backed securities
backed by the U.S. Government or Government sponsored agencies. Any unrealized
losses on securities within the portfolio at June 30, 2021 and December 31, 2020
are believed to be price changes resulting from changes in the long-term
interest rate environment and management anticipates receiving all principal and
interest on these investments as they come due. Additional details on
investment activities can be found in the Consolidated Statements of Cash Flows.
Total loans at June 30, 2021 were $1.246 billion compared to $1.214 billion at
December 31, 2020 , an increase of approximately $31.6 million , or 2.6%. Premier
generated $38.5 million of new PPP loans, net of deferred fees and forgiveness
payments received, during the first six months of 2021. These loans more than
offset a $6.9 million , or 0.6%, decrease in traditional loans as new loans
generated during the quarter were exceeded by payoffs and principal payments
received. Construction and land loans increased by approximately $10.9 million ,
or 11.8%; non-owner occupied loans increased by $10.4 million , or 3.2%; owner
occupied loans increased by $6.6 million , or 4.0%; and residential real estate
loans increased by $988,000 , or 0.3%. These increases were more than offset by
a $32.4 million , or 35.9%, decrease in commercial and industrial loans, a $2.5
million , or 10.3%, decrease in consumer loans, a $580,000 , or 1.6%, decrease in
other loans, and a $385,000 , or 1.0% decrease in multifamily real estate loans.
Loan payoffs and paydowns during the first six months of 2021 resulted in
recognizing approximately $556,000 of income from purchase discounts on acquired
loans or deferred interest while the loans were on non-accrual status.
Premises and equipment decreased by $1,488,000 , largely due to normal quarterly
depreciation of fixed assets. Other intangible assets decreased by $445,000 ,
due to the amortization of core deposit intangibles.
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PREMIER FINANCIAL BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
JUNE 30, 2021
Deposits totaled $1.727 billion as of June 30, 2021 , a $93.0 million , or 5.7%,
increase from the $1.634 billion in deposits at December 31, 2020 . The overall
increase in deposits is largely due to a $31.9 million , or 6.5%, increase in
non-interest bearing deposits, a $48.6 million , or 13.6%, increase in interest
bearing transaction deposits, and a $36.4 million , or 7.9%, increase in savings
and money market deposits. Partially offsetting these increases, certificates
of deposit ("CD") balances decreased by $23.8 million , or 7.3%. The decrease in
certificate of deposit balances is primarily the result of significant decreases
in traditional CD rates, as management has lowered offering rates in response to
decreases in market short-term and long-term interest rates. As certificates of
deposit mature, depositors are either seeking higher deposit rates from other
competitive depository institutions or are transferring their balances to more
liquid interest-bearing deposit accounts such as NOW, money market and savings
deposits as a means to keep immediate access to their funds during the
uncertainty of employment or economic conditions. Much of the SBA's round two
PPP loan program proceeds were originally deposited with Premier's subsidiary
banks, giving rise to an increase in deposit balances. Furthermore, government
based economic stimulus checks to individuals have resulted in increases in
retail based deposit balances. Repurchase agreements with corporate and public
entity customers increased by $28.4 million , or 84.0%. Subordinated debentures
increased by $20,000 since year-end 2020, due to the regular amortization of the
purchase accounting fair value adjustment applied to the $6.186 million face
value of the subordinated debentures. Other liabilities increased by $23.4
million , largely due to $26.0 million of investment security purchases during
the last days of June 2021 for which the purchase proceeds were not required to
be remitted until July 2021 .
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PREMIER FINANCIAL BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
JUNE 30, 2021 The following table sets forth information with respect to the Company's
nonperforming assets at
(In Thousands)
2021 2020
Non-accrual loans $ 11,925 $ 8,996
Accruing loans which are contractually past due 90 days or more 1,068 2,332 Accruing restructured loans 395 398 Total non-performing loans 13,388 11,726
Other real estate acquired through foreclosure (OREO) 12,042 13,215 Total non-performing assets
$ 25,430 $
24,941
Non-performing loans as a percentage of total loans 1.07 % 0.97 %
Non-performing assets as a percentage of total assets 1.22 % 1.28 %
Total non-performing loans have increased by$1,662,000 , or 14.2%, since year-end, largely due to a$2,929,000 increase in non-accrual loans. This increase was partially offset by a$1,264,000 decrease in accruing loans past due 90 days or more and a$3,000 decrease in accruing restructured loans. The increase in non-accrual loans was largely due to two non-owner occupied commercial real estate secured loans and one owner occupied commercial real estate secured loan becoming impaired during the first six months of 2021. Of the three loans, only one non-owner occupied commercial real estate secured loan required any specific allowance for loan losses allocation atJune 30, 2021 . Total non-performing assets have increased since year-end, largely due to the increase in non-performing loans. This increase was partially offset by a$1,173,000 decrease in other real estate owned acquired through foreclosure ("OREO"). Other real estate owned decreased by$1,173,000 , or 8.9%, largely due to$859,000 of writedowns of carrying values as well as the sale of a few small residential real estate properties during the first six months of 2021. 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 additional provisions for loan losses. Gross charge-offs totaled$1,429,000 during the first six months of 2021, largely due to an$856,000 charge-off of a previously identified impaired non-owner occupied commercial real estate secured loan and a$214,000 charge-off of a previously identified impaired owner occupied commercial real estate secured loan, both in the second quarter. Any collections on charged-off loans, or partially charged-off loans, would be presented in future financial statements as recoveries of the amounts charged against the allowance. Recoveries recorded during the first six months of 2021 totaled$97,000 , resulting in net charge-offs for the first six months of 2021 of$1,332,000 . This compares to$744,000 of net charge-offs recorded in the first six months of 2020. 56
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PREMIER FINANCIAL BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
JUNE 30, 2021
The allowance for loan losses at June 30, 2021 was $13.3 million , or 1.06% of
total loans, compared to $13.5 million , or 1.11% of total loans at December 31,
2020 . The decrease in the ratio is due to two primary reasons. First, the
allowance for loan losses has decreased by $256,000 in the first six months of
2021, largely due to the $1,332,000 of net charge-offs during the first six
months, as discussed above, which was only partially offset by $1,076,000 of
additional provision expense in those months, as discussed in more detail
below. This decrease in the allowance, by itself, would have resulted in a
decrease in the ratio to total loans. However, due to the $31.6 million
increase in total loans outstanding since December 31, 2020 , the allowance for
loan losses ratio decreased further to 1.06% at June 30, 2021 . The PPP loans
outstanding at June 30, 2021 and December 31, 2020 have a 100% guarantee by the
SBA and, therefore, no allowance for loan losses is allocated to these loans.
Excluding the SBA PPP loans, the $13.3 million allowance at June 30, 2021 is
1.16% of the total remaining non-PPP portfolio loans while the $13.5 million
allowance at December 31, 2020 is 1.17% of the total remaining non-PPP portfolio
loans.
During the first six months of 2021, Premier recorded $1,076,000 of provision
for loan losses. This provision compares to $1,590,000 of provision for loan
losses recorded during the same six months of 2020. The provision for loan
losses recorded during the first six months of 2021 included approximately
$250,000 of additional provision during the first quarter of 2021 related to
identified credit risk in the loan portfolio due to uncertainty related to
future economic conditions resulting from government actions designed to curb
the spread of the COVID-19 virus ("Potential COVID-19 Losses"). Premier
included approximately $2,500,000 in its qualitative credit risk analysis of the
loan portfolio at year-end 2020 related to loans originated to various
industries believed to be more susceptible to future credit risk resulting from
an economic slowdown, such as lodging, restaurants, amusement, non-owner
occupied rental real estate, religious and civic organizations, personal
services, and retail stores. Furthermore, additional risk-weighting was given
to loans in all industries where the borrower was on either an interest-only
payment deferral period or a full principal and interest payment deferral period
as permitted under the CARES Act. Due to improvements in the economy during the
second quarter of 2021, the elimination of virtually all loan payment deferrals
under the CARES Act, and the resumption of regular payments on loans originated
to the various industries believed to be more susceptible to future credit risk
under COVID-19, Premier reduced its estimate of the qualitative credit risk
analysis of the loan portfolio related to COVID-19 by approximately $1,000,000 .
The remaining provision expense recorded in the the first six months of 2021 was
related primarily to increases in specific reserves on impaired commercial real
estate secured loans some of which were eventually charged-off by the end of
June 2021 . The provision for loan losses recorded during the first six months
of 2020 was primarily to provide for an estimate of additional identified credit
risk in the loan portfolio due to uncertainty related to future economic
conditions resulting from Potential COVID-19 Losses. Premier added
approximately $1,650,000 to its qualitative credit risk analysis of the loan
portfolio related to loans originated to various industries believed to be more
susceptible to future credit risk resulting from an economic slowdown. The
additional provision expense related to Potential COVID-19 Losses was partially
offset by reductions in estimated credit risk within the loan portfolio
resulting from decreases in higher-risk loans outstanding, such as commercial
and industrial loans, construction and land development loans and consumer
loans, as well as other portfolio credit risk improving indications such as
improvements in past due ratios and decreases in historical loss ratios.
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PREMIER FINANCIAL BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
JUNE 30, 2021
During the second quarter of 2021, Premier recorded $428,000 of provision for
loan losses. This provision compares to $590,000 of provision for loan losses
recorded during the same quarter of 2020. A significant portion of the
provision for loan losses recorded during the second quarter of 2020 was
primarily to provide for an estimate of additional identified credit risk in the
loan portfolio due to uncertainty related to future economic conditions
resulting from government actions designed to curb the spread of the COVID-19
virus. During the second quarter of 2020, Premier added approximately
$1,000,000 to its qualitative credit risk analysis of the loan portfolio related
to loans originated to various industries believed to be more susceptible to
future credit risk resulting from an economic slowdown such as lodging,
restaurants, amusement, personal services and retail stores. During the
remainder of 2020 and into the first quarter of 2021, Premier refined its
estimates on the qualitative credit risk analysis of the loan portfolio related
to COVID-19 and added approximately $250,000 of additional provision during the
first quarter of 2021 to the estimated $2.5 million of qualitative credit risk
analysis related to COVID-19 at year-end 2020. Due to improvements in the
economy during the second quarter of 2021, the elimination of virtually all loan
payment deferrals under the CARES Act, and the resumption of regular payments on
loans originated to the various industries believed to be more susceptible to
future credit risk under COVID-19, Premier reduced its estimate of the
qualitative credit risk analysis of the loan portfolio related to COVID-19 by
approximately $1,000,000 . More than offsetting this decrease, the net provision
expense in the second quarter of 2021 was related primarily to increases in
specific reserves on impaired commercial real estate secured loans that were
eventually charged-off by the end of the quarter. The $1,000,000 of additional
provision expense related to Potential COVID-19 Losses in the second quarter of
2020 was partially offset by reductions in estimated credit risk within the loan
portfolio resulting from decreases in loans outstanding, such as owner-occupied
commercial real estate and multifamily real estate loans, as well as higher risk
loans, such as commercial and industrial loans, construction and land
development loans and consumer loans. Other indications of improving portfolio
credit risk that occurred during the second quarter of 2020 include decreases in
loans classified as Special Mention and Substandard, improvements in past due
ratios and decreases in historical loss ratios.
The provisions for loan losses recorded in 2020 and 2021 were made in accordance
with Premier's policies regarding management's estimation of probable incurred
losses in the loan portfolio and the adequacy of the allowance for loan losses,
which are in accordance with accounting principles generally accepted in the
United States of America . 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. With the
concentrations of commercial real estate loans in the Washington, DC , Richmond,
Virginia , and Cincinnati, Ohio markets, fluctuations in commercial real estate
values will be monitored. Premier also continues to monitor the impact of
declines in the coal mining industry that may have a larger impact in the
southern area of West Virginia and the decrease in the level of drilling
activity in the oil & gas industry, which may have a larger impact in the
central area of West Virginia . A resulting decline in employment could increase
non-performing assets from loans originated in these areas.
In each of the last five years, Premier sold some OREO properties at a gain
while other OREO properties have required subsequent write-downs to net
realizable values. These factors are considered in determining the adequacy of
the allowance for loan losses. For additional details on the activity in the
allowance for loan losses, impaired loans, past due and non-accrual loans and
restructured loans, see Note 3 to the consolidated financial statements .
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PREMIER FINANCIAL BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
JUNE 30, 2021
C. Critical Accounting Policies
The Company follows financial accounting and reporting policies that are in
accordance with generally accepted accounting principles in the United States of
America . These policies are presented in Note 1 to the consolidated audited
financial statements in the Company's annual report on Form 10-K for the year
ended December 31, 2020 . Some of these accounting policies, as discussed
below, are considered to be critical accounting policies. Critical accounting
policies are those policies that require management's most difficult, subjective
or complex judgments, often as a result of the need to make estimates about the
effect of matters that are inherently uncertain. The Company has identified two
accounting policies that are critical accounting policies, and an understanding
of these policies is necessary to understand the financial statements. These
policies relate to determining the adequacy of the allowance for loan losses and
the identification and evaluation of impaired loans. A detailed description of
these accounting policies is contained in the Company's annual report on Form
10-K for the year ended December 31, 2020 . There have been no significant
changes in the application of these accounting policies since December 31, 2020 .
Management believes that the judgments, estimates and assumptions used in the
preparation of the consolidated financial statements are appropriate given the
factual circumstances at the time.
D. Liquidity
Liquidity objectives for the Company can be expressed in terms of maintaining sufficient cash flows to meet both existing and unplanned obligations in a cost effective manner. Adequate liquidity allows the Company to meet the demands of both the borrower and the depositor on a timely basis, as well as pursuing other business opportunities as they arise. Thus, liquidity management embodies both an asset and liability aspect while attempting to maximize profitability. In order to provide for funds on a current and long-term basis, the Company's subsidiary banks rely primarily on the following sources:
1. Core deposits consisting of both consumer and commercial deposits and
certificates of deposit of
majority of its
than its other deposits. This is due to the nature of the markets in which
the subsidiaries operate.
2. Cash flow generated by repayment of loans and interest.
3. Arrangements with correspondent banks for purchase of unsecured federal funds.
4. The sale of securities under repurchase agreements and borrowing from the
Federal Home Loan Bank .
5. Maintenance of an adequate available-for-sale security portfolio. The Company
owns
The cash flow statements for the periods presented in the financial statements
provide an indication of the Company's sources and uses of cash as well as an
indication of the ability of the Company to maintain an adequate level of
liquidity.
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PREMIER FINANCIAL BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
JUNE 30, 2021
E. Capital
At June 30, 2021 , total stockholders' equity of $249.2 million was 12.0% of
total assets. This compares to total stockholders' equity of $259.9 million , or
13.4% of total assets on December 31, 2020 . The decrease in stockholders'
equity was largely due to the normal quarterly $0.15 per share cash dividend
declared and paid during the first and second quarters of 2021 and also a $1.00
per share special cash dividend declared in January 2021 and paid in February
2021 . The dividends combined to reduce stockholders' equity by $19.1 million .
Furthermore, a decrease in the market value of the investment portfolio
available for sale reduced stockholders' equity by $4.3 million , net of tax.
These decreases in stockholders' equity were partially offset by the $11.7
million of net income earned during the first six months of 2021 and
approximately $991,000 of contributed capital from the exercise of employee
stock options during the first six months of 2021 .
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.
In 2020, the Company elected to adopt the regulatory capital simplification
rules permitting bank holding companies of Premier's size to utilize one measure
of regulatory capital, the Community Bank Leverage Ratio ("CBLR"), to determine
regulatory capital adequacy. The CBLR requires a higher amount of Tier 1
capital to average assets than the standard leverage ratio for a financial
institution to be considered well capitalized. However, meeting this higher
standard eliminates the need to compute and monitor the Tier 1 risk-based
capital ratio, the Common Equity Tier 1 risk-based capital ratio and the total
risk-based capital ratio as well as maintain the 2.50% regulatory capital buffer
necessary to avoid limitations on equity distributions and discretionary bonus
payments. Other criteria required to be able to utilize the CBLR as the sole
measure of capital adequacy include 1.) total assets less than $10.0 billion ,
2.) trading assets and liabilities equal to less than 5.0% of total assets and
3.) off-balance sheet exposures, such as the unused portion of conditionally
cancellable lines of credit, equal to less than 25% of total assets. Premier
and its wholly owned subsidiary Premier Bank, Inc. meet all three of these
criteria and have elected to utilize the CBLR as their measure of regulatory
capital adequacy. Under interim guidance issued in June 2020 , a CBLR of Total
Tier 1 capital to quarterly average assets must be at least 8.50% in year 2021
and at least 9.00% in year 2022. Premier's other wholly owned subsidiary bank,
Citizens Deposit Bank did not maintain a CBLR of 8.50% at June 30, 2021 , and
provided full regulatory capital ratio calcuations in its June 30, 2021 FDIC
call report.
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PREMIER FINANCIAL BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
JUNE 30, 2021
Premier's Tier 1 capital totaled $201.8 million at June 30, 2021 , which
represents a community bank leverage ratio of 10.19%. Premier's wholly owned
subsidiary Premier Bank, Inc. maintained a CBLR of 10.29% at June 30, 2021 , well
in excess of the 8.50% required to be considered well capitalized under the
prompt corrective action framework. Premier's other wholly owned subsidiary
bank, Citizens Deposit Bank did not maintain a CBLR of 8.50% at June 30, 2021 ,
and provided full regulatory capital ratio calcuations in its June 30, 2021 FDIC
call report. The bank remained well-capitalized with a Tier 1 Risk-based
Capital Ratio of 15.40%, a Total Risk-based Capital Ratio of 16.17%, and a Tier
1 Leverage Ratio of 8.24%. Citizens Deposit Bank's Risk-based Capital
Conversation Buffer was 8.17%, well in excess of the required 2.50% at June 30,
2021 .
Book value per common share was $16.84 at June 30, 2021 and $17.71 at December
31, 2020 . The decrease in book value per share was largely due to the $1.00 per
share special cash dividend and the $0.30 per share in quarterly cash dividends
to common shareholders declared and paid during the first six months of 2021.
Also reducing Premier's book value per share at June 30, 2021 was the $4.3
million of other comprehensive loss for the first six months of 2021 related to
the decrease in the market value of investment securities available for sale,
which decreased book value by approximately $0.30 per share. These decreases
were partially offset by the $0.79 per share earned during the first six months
of 2021.
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PREMIER FINANCIAL BANCORP, INC. JUNE 30, 2021
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