UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
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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, 2019
or
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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or the transition period from ___________ to ___________
Commission file number 000-20908
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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Trading Symbol(s)
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Name of each exchange on which registered
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Common Stock, no par value
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PFBI
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The Nasdaq Stock Market LLC
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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
No .
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
No .
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 No .
Indicate by check mark whether the registrant has submitted electronically every Interactive Data
File required to be submitted pursuant to Rule 405 of Regulation S-T (section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes No .
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting
company, or an emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company”, and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
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Large accelerated filer
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Accelerated filer
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Non-accelerated filer
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Smaller reporting company
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Emerging growth company
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PREMIER FINANCIAL BANCORP, INC.
FORM 10-K
December 31, 2019
If an emerging growth company, indicate by check mark if the registrant has elected not to use the
extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes No .
As of June 30, 2019 the aggregate market value of the registrant’s common stock held by non-affiliates of the registrant was
$193,926,645 based on the closing sale price as reported on the National Association of Securities Dealers Automated Quotation System Global 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 6, 2020
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Common Stock, no par value
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14,658,132
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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 17, 2020.
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Part III
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PREMIER FINANCIAL BANCORP, INC.
FORM 10-K
December 31, 2019
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PART I
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PART II
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PART III
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PART IV
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PREMIER FINANCIAL BANCORP, INC.
FORM 10-K
December 31, 2019
PART I
THE COMPANY
Premier Financial Bancorp, Inc. (the "Company" or "Premier") is a multi-bank holding company and financial
holding company that, as of March 6, 2020 operates thirteen banking offices in Kentucky, three banking offices in Ohio, twenty-six banking offices in West Virginia, four banking offices in Washington, DC, one banking office in Maryland and three
banking offices in Virginia. At December 31, 2019, Premier had total consolidated assets of $1.781 billion, total consolidated deposits of $1.496 billion and total consolidated stockholders' equity of $240.2 million. The banking subsidiaries (the
"Banks" or "Affiliate Banks") consist of Citizens Deposit Bank and Trust, Inc., Vanceburg, Kentucky and Premier Bank, Inc., Huntington, 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. 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 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. See "REGULATORY MATTERS -- Dividend Restrictions"
for discussion of the restrictions on the Affiliate Banks' ability to pay dividends to Premier.
In late 2007 Premier resumed a strategy of franchise expansion by acquiring and owning 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 agreed to purchase Citizens First for up to $11.7 million in stock and cash. Each share of Citizens First common stock was entitled to merger consideration of cash and stock that generally totaled $29.25, subject to certain limitations.
Premier issued 660,000 shares of its common stock plus Premier paid $5.3 million in cash to the shareholders of Citizens First.
On November 27, 2007, the Company entered into a material definitive agreement with Traders Bankshares, Inc.
(Traders), a single bank holding company with $108 million of total assets located in Spencer, West Virginia. Under terms of the definitive agreement, Premier agreed to purchase Traders for approximately $18.1 million in stock and cash. Each
share of Traders common stock was entitled to merger consideration of $50.00 cash and 5.156 shares of Premier common stock. Premier issued approximately 928,125 shares of its common stock plus Premier paid $9.0 million in cash to the shareholders
of Traders.
PREMIER FINANCIAL BANCORP, INC.
FORM 10-K
December 31, 2019
On April 30, 2008, Premier closed the acquisitions of Citizens First and Traders. On October 25, 2008,
Premier merged these two new subsidiary banks together to form Traders Bank, Inc. headquartered in Ravenswood, West Virginia. The merger was designed to consolidate management and operations of two subsidiaries in overlapping or contiguous
markets. Similarly, 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.
On December 31, 2008, the Company entered into a material definitive agreement with Abigail Adams National
Bancorp, Inc. (“Abigail Adams”), a two bank holding company (Adams National Bank and Consolidated Bank & Trust Company) with $436 million of total assets at December 31, 2008 with locations in and around Washington, DC and Richmond, Virginia.
Under terms of the definitive agreement, Premier agreed to purchase Abigail Adams for approximately $10.8 million in stock. The acquisition closed on October 1, 2009. Each share of Abigail Adams common stock was entitled to merger consideration
of 0.6134 shares of Premier common stock. Premier issued approximately 2,124,375 shares of its common stock to the shareholders of Abigail Adams. Premier participated in the U.S. Treasury’s Troubled Asset Relief Program (“TARP”) to help fund the
rehabilitation of Adams National and provide the additional capital needed to maintain the Company’s healthy capital ratios after consummating the merger with Abigail Adams.
On September 10, 2010 Citizens Deposit Bank and Trust, Inc. (“Citizens Deposit”) completed its purchase of
four banking offices from Integra Bank located in Maysville and Mt. Olivet, Kentucky, and Ripley and Aberdeen, Ohio. The purchase of the branches was a strategic move to increase Citizens Deposit’s presence in its current market area without a
significant increase in its operating costs. Citizens Deposit paid a $2.4 million deposit premium for the deposit liabilities it assumed and also acquired $17.8 million of branch related loans as well as $34.0 million of additional commercial real
estate loans and $10.0 million of other commercial loans selected by Citizens Deposit originated from other Integra offices. The four banking offices were also included in the branch purchase. The purchase resulted in approximately $1.1 million
of goodwill and $2.0 million in core deposit intangible.
On February 28, 2011, Premier received final regulatory approval to move forward with its plans to merge
Boone County Bank, headquartered in Madison, West Virginia; First Central Bank, headquartered in Philippi, West Virginia; Traders Bank, Inc., headquartered in Ravenswood, West Virginia; Adams National Bank, headquartered in Washington, DC and
Consolidated Bank & Trust, headquartered in Richmond, Virginia, to form Premier Bank, Inc. (“Premier Bank”). The merger was completed on April 9, 2011. The resulting bank is headquartered in Huntington, West Virginia.
PREMIER FINANCIAL BANCORP, INC.
FORM 10-K
December 31, 2019
One of the goals achieved by merging the bank charters together was to alleviate the restrictions placed on
the Company’s operations by written agreements previously entered into by Adams National with the Office of the Comptroller of the Currency, (“OCC”) and Consolidated Bank and Trust Company, (“CB&T”) with the Federal Reserve Bank of Richmond,
(“FRB”). With the surrender of the Adams National charter upon consummation of the merger to form Premier Bank, Inc., the written agreement with the OCC was terminated. Similarly, with the merger of CB&T into Premier Bank, Inc., the
provisions of the written agreement with the FRB that applied to CB&T were concluded.
With the merger of Adams National and CB&T into Boone County Bank in the formation of Premier Bank,
Abigail Adams as a corporate entity was no longer needed. As such, it was merged into Premier on May 16, 2011. Likewise, Premier’s other non-banking subsidiary, Mt. Vernon Financial Holdings, Inc. (“Mt. Vernon”), had completed its purpose by
liquidating substantially all of a pool of loans remaining from the sale of the Bank of Mt. Vernon in 2001. In September 2011, any remaining loans owned by Mt. Vernon were contributed as capital to Premier’s subsidiary bank, Citizens Deposit, and
then on September 27, 2011, Mt. Vernon was also merged into Premier.
On May 13, 2010, Premier executed a six-year data processing agreement with Fidelity Information Services,
Inc. and its affiliates (“FIS”) located in Jacksonville, Florida. The agreement covers Premier’s core data processing, item processing, internet banking services, network services, customer authentication services and electronic funds transfer
services. Beginning in May 2011 and concluding in September 2011, Premier and FIS converted each of the subsidiary (or former subsidiary) bank’s systems to the FIS “Horizon” platform. It was during this process that the data systems of the five
subsidiary banks that merged to form Premier Bank, converted and combined into one system. On March 31, 2017, Premier executed a five-year extension of its data processing agreement with FIS. While the extension agreement became effective on
April 1, 2017, the data processing agreement was extended five-years from the original September 2011 termination date. The contract continues to cover Premier’s core data processing, item processing, mobile and internet banking services, network
services, customer authentication services, and electronic funds transfer services. The data processing agreement shall remain in effect until September 30, 2022 and provides for automatic five-year extensions after that date.
In 2012, Premier merged Ohio River Bank, headquartered in Ironton, Ohio and Farmers Deposit Bank,
headquartered in Eminence, Kentucky with and into Premier’s wholly owned subsidiary Citizens Deposit Bank & Trust, headquartered in Vanceburg, Kentucky.
Effective with the close of business on April 4, 2014, Premier completed its purchase of the Bank of Gassaway
(“Gassaway”), a $201.52 million bank headquartered in Gassaway, West Virginia. Under terms of an amended and restated agreement of merger dated January 3, 2014, Premier Bank, Inc., a wholly owned subsidiary of Premier, paid $20.25 million in cash
for the Bank of Gassaway and merged Gassaway’s five branch locations into its operating systems. The resulting merger expanded Premier Bank’s footprint into central West Virginia along the I-79 corridor.
PREMIER FINANCIAL BANCORP, INC.
FORM 10-K
December 31, 2019
On June 12, 2014, Citizens Deposit opened a de novo branch in Fort Wright, Kentucky in the southern
Cincinnati, Ohio metro area in an effort to expand the bank’s operations into a more urban market. On June 13, 2015, Citizens Deposit closed its Aberdeen and South Webster, Ohio branches in a strategic move to reduce its cost structure. On August
3, 2015, Citizens Deposit opened a de novo branch in Florence, Kentucky, its second de novo branch in the southern Cincinnati, Ohio metro area. In 2018, Citizens Deposit opened two de novo branches. On April 9, 2018, Citizens Deposit completed
the purchase of a branch building in Huntington, West Virginia and began operating the facility as a full service bank branch. On December 17, 2018, Citizens Deposit opened a full service bank branch in Cold Spring, Kentucky, its third branch
location in the southern Cincinnati, Ohio metro area. These branch transactions are part of a strategic effort to position the bank as a strong community bank, with a low cost structure and a high opportunity for profitable loans in expanding
markets along the Ohio River.
On July 6, 2015, Premier and First National Bankshares Corporation (“Bankshares”), a $245 million single bank
holding company (as of December 31, 2015) headquartered in Ronceverte, West Virginia jointly announced that they had entered into a definitive agreement of merger. Under terms of the definitive agreement of merger, each share of Bankshares common
stock was entitled to merger consideration of 2.324 shares of Premier common stock. Premier issued approximately 1,935,300 shares of its common stock to the shareholders of Bankshares valued at approximately $22.0 million. Effective with the
close of business on March 4, 2016, Premier merged its newly acquired wholly owned subsidiary First National Bank (“First National”), a wholly owned subsidiary of Bankshares, with and into its wholly owned subsidiary Premier Bank, Inc. The
resulting merger expanded Premier Bank’s footprint into the Greenbrier Valley of West Virginia and into Covington, Virginia along Interstate 64 with six branch locations.
Premier elected to become a financial holding company effective October 5, 2017. For further information on
financial holding companies see Regulatory Matters - Gramm-Leach-Bliley Act below.
On April 18, 2018, Premier and First Bank of Charleston, Inc. (“First Bank”), a $180 million community bank
headquartered in Charleston, West Virginia jointly announced that they had entered into a definitive agreement of merger whereby Premier would acquire First Bank in exchange for a combination of cash and Premier common stock valued at approximately
$33.0 million. The merger was completed effective with the close of business on October 12, 2018. Under the terms of the definitive agreement of merger, as amended, each share of First Bank common stock was entitled to receive 1.199 shares of
Premier common stock and $5.00 cash from Premier, with Premier issuing approximately 1.249 million shares as a result of the acquisition. In addition to the cash and shares of common stock from Premier, First Bank shareholders also received a
regulatorily approved special dividend of $5.00 per share from the equity of First Bank as part of the acquisition transaction. In conjunction with the acquisition by Premier, First Bank was merged into Premier Bank, Inc., a wholly owned
subsidiary of Premier. The resulting merger expanded Premier Bank’s full service footprint into the Charleston, West Virginia market place.
PREMIER FINANCIAL BANCORP, INC.
FORM 10-K
December 31, 2019
On July 9, 2019, Premier and The First National Holding Company of Jackson (“First Holding”), a $100 million
single bank holding company headquartered in Jackson, Kentucky jointly announced that they had entered into a definitive agreement whereby Citizens Deposit would acquire The First National Bank of Jackson, (“Jackson”), the wholly owned subsidiary
of First Holding, in a cash purchase. The merger was completed effective with the close of business on October 25, 2019 in a cash purchase valued at approximately $14.6 million. In conjunction with the acquisition by Citizens Deposit, Jackson was
merged into Citizens Deposit. The resulting merger expanded Citizens Deposit’s full service footprint into the Jackson, Kentucky market place.
PREMIER FINANCIAL BANCORP, INC.
FORM 10-K
December 31, 2019
BUSINESS
Through the Banks the Company focuses on providing quality community banking services to individuals and
small-to-medium sized businesses. 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. Where the Company owns branches in urban areas, such as the Washington, DC Metro Area, Richmond, Virginia and the Cincinnati, Ohio Metro Area, the Company believes the nimble nature of its operations and local decision making process allow
it to compete effectively with larger financial institutions. Each Bank retains its local management structure which offers customers direct access to the Bank's president or regional 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, 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, information technology 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, regulatory compliance 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. Company senior management along with each Bank's management periodically review and standardize their offering of products and services, although pricing decisions remain at the local level.
The Company utilizes a large multi-national external third party provider for its core data processing
systems. As a result, the Company through the Banks is able offer more modern products, such as internet banking, mobile banking and check imaging, plus is able to take advantage of modern technologies such as image exchange to remit and clear
items with its exchange agents. The Company has also integrated its automated teller machine network, improved its management reporting systems, adopted an integrated image-based document storage system, and offers mobile banking via smart phones
and other hand held computing devices.
PREMIER FINANCIAL BANCORP, INC.
FORM 10-K
December 31, 2019
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 typically only retain mortgage loans with variable interest rate terms due to the longer amortization periods associated with mortgage lending.
For customers who desire fixed rate mortgage terms, the Banks take customer applications for third party mortgage vendors, and in turn receive a commission for their services. The Banks’ mortgage originators are salaried employees who do not
receive a commission or other incentive compensation for the number or type of mortgages they originate. 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 to medium-sized businesses located primarily in the communities in which the Banks have branch locations and surrounding areas. Commercial loans are generally secured by business assets including
real estate, equipment, inventory, and accounts receivable. Some commercial loans are unsecured. The branches located in larger metro areas, such as Washington DC, Richmond Virginia, and Cincinnati Ohio, also offer opportunities for larger
commercial and commercial real estate loans. These opportunities are subject to Premier’s strict credit underwriting policies and procedures.
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
either via personal computers or mobile computing devices such as smart phones. The Banks also offer bill payment, remote deposits via image capture devices and mobile computing devices, person to person payments via mobile computing devices, and
telephone banking services. Deposits of the Banks are insured by the Deposit Insurance Fund administered by the FDIC to the maximum amounts offered by the FDIC.
PREMIER FINANCIAL BANCORP, INC.
FORM 10-K
December 31, 2019
The Banks encounter strong competition both in making loans and attracting deposits. The widespread enactment
of state laws that permit multi-bank holding companies as well as the availability of nationwide interstate banking and internet 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, electronic payment facilitators, software 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 by comparison, each of the Banks'
competitors include large bank holding companies having substantially greater resources and offering certain services that the Affiliate Banks may not currently provide. Each Bank seeks to minimize the competitive effect of larger organizations
through a community banking approach that emphasizes direct customer access to the Bank's regional presidents and other officers in an environment conducive to friendly, informed and courteous service. Furthermore, via the Company’s credit
administration department, the Banks can also minimize the competitive effects of larger organizations by tailoring their lending criteria to the individual circumstances of the small-to-medium sized business owner.
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.
The following discussion sets forth certain elements of the regulatory framework applicable to financial
holding companies, 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’s 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.
PREMIER FINANCIAL BANCORP, INC.
FORM 10-K
December 31, 2019
General - As a bank holding company and financial 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 a 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 any nonbank subsidiaries) from the Affiliate Banks and also limits various other transactions
between Premier (and any nonbank subsidiaries) and the Affiliate Banks.
Citizens Deposit Bank and Trust, Inc. is chartered in Kentucky and supervised, regulated and examined by the
Kentucky Department of Financial Institutions. Premier Bank, Inc. is chartered in West Virginia and supervised, regulated and examined by the West Virginia Division of Financial Institutions. In addition, the Affiliate Banks 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 loan loss
reserve and capital requirements, truth-in-lending and truth-in-savings disclosure, mortgage origination disclosures and ability to repay requirements, equal credit opportunity, fair credit reporting, trading in securities and other aspects of
banking operations. Premier and the Affiliate Banks 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.
PREMIER FINANCIAL BANCORP, INC.
FORM 10-K
December 31, 2019
Liability for Bank Subsidiaries - The Federal Reserve has a
policy to the effect that a bank holding company is expected to act as a source of financial and managerial strength to each of its subsidiary banks and to maintain resources adequate to support each such subsidiary bank. This support may be
required at times when Premier may not have the resources to provide it. In the event of a bank holding company's bankruptcy, any commitment by the bank holding company to a federal bank regulatory agency to maintain the capital of a subsidiary
bank would be assumed by the bankruptcy trustee and entitled to priority of payment.
Any depository institution insured by the FDIC may be held liable for any loss incurred, or reasonably
expected to be incurred, by the FDIC in connection with (i) the default of a commonly controlled FDIC-insured depository institution, or (ii) any assistance provided by the FDIC to a commonly controlled FDIC-insured depository institution in danger
of default. "Default" is defined generally as the appointment of a conservator or receiver and "in danger of default" is defined generally as the existence of certain conditions indicating that a "default" is likely to occur in the absence of
regulatory assistance. In the event that such a default occurred with respect to a bank, any loans to the bank from its parent holding company will be subordinate in right of payment of the bank's depositors and certain of its other obligations.
Capital Requirements
- Premier is subject to capital ratios, requirements and guidelines imposed by the Federal Reserve, which are substantially similar to the ratios, requirements and guidelines imposed by the FDIC on the Banks. 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 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 1" capital and "Tier 2" capital. "Tier 1" capital includes common
stockholders' equity, non-cumulative perpetual preferred stock, and related surplus (excluding auction rate issues), minority interests in equity accounts of consolidated subsidiaries plus cumulative perpetual preferred stock and Trust Preferred
Securities both of which are subject to certain limitations. Goodwill, certain identifiable intangible assets and certain other assets are subtracted from these sources of capital to calculate Tier 1 capital. "Tier 2" capital includes, among other
items, perpetual preferred stock not meeting the Tier 1 definition, mandatory convertible securities, subordinated debt and allowances for loan and lease losses, subject to certain limitations, less certain required deductions. Effective January 1
2015, bank and bank holding company regulatory agencies adopted rules defining a subset of Tier 1 capital referred to as “Common Equity Tier 1” capital, or “CET1” capital, in accordance with the Basil III accord. CET1 capital includes only the
common stockholders’ equity of the entity before deducting elements such as goodwill, certain identifiable intangible assets and certain other assets. Prior to the acquisition of Bankshares, Premier’s CET1 capital and Tier 1 capital were identical
because all of Premier’s Tier 1 capital was common shareholders’ equity. In conjunction with the acquisition of Bankshares on January 15, 2016, Premier assumed $6.0 million of Trust Preferred Securities held by Bankshares which are eligible for
inclusion in Premier’s Tier 1 capital but are excluded from its CET1 capital.
PREMIER FINANCIAL BANCORP, INC.
FORM 10-K
December 31, 2019
Bank holding companies currently are required to maintain CET1 capital, Tier I capital and total capital (the
sum of Tier 1 and Tier 2 capital) equal to at least 4.5%, 6.0% and 8.0% of total risk-weighted assets, respectively. At December 31, 2019, Premier met all requirements, with CET1 capital equal to 14.9% of its total risk-weighted assets, Tier I
capital equal to 15.4% of its total risk-weighted assets and total capital equal to 16.5% of its total risk-weighted assets.
In addition to the risk-based capital guidelines, the Federal Reserve requires bank holding companies to
maintain a minimum "leverage ratio" (Tier 1 capital to adjusted total assets) of 3.0%, 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 3.0% plus at least 100 to 200 basis points. At December 31, 2019, Premier's leverage ratio was 11.3%.
The foregoing capital requirements are minimum requirements. The Federal Reserve may set capital requirements
higher than the minimums described above for holding companies whose circumstances warrant it. For example, holding companies experiencing or anticipating significant growth may be expected to maintain capital ratios, including tangible capital
positions, well above the minimum levels.
Additionally, the Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA"), among other
things, identifies five capital categories for insured depository institutions (well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized) and requires the respective federal
regulatory agencies to implement systems for “prompt corrective action” for insured depository institutions that do not meet minimum capital requirements within such categories. FDICIA imposes progressively more restrictive constraints on
operations, management and capital distributions, depending on the category in which an institution is classified. Failure to meet the capital guidelines could also subject a banking institution to capital raising requirements.
An “undercapitalized” bank must develop a capital restoration plan and its parent holding company must
guarantee the bank's compliance with the plan. The liability of the parent holding company under any such guarantee is limited to the lesser of 5% of the Bank's assets at the time it became “undercapitalized” or the amount needed to comply with the
plan. Furthermore, in the event of the bankruptcy of the parent holding company, such guarantee would take priority over the parent's general unsecured creditors. In addition, FDICIA requires the various regulatory agencies to prescribe certain
non-capital standards for safety and executive compensation and permits regulatory action against a financial institution that does not meet such standards.
PREMIER FINANCIAL BANCORP, INC.
FORM 10-K
December 31, 2019
Capital Requirements and Phase-in of Capital Buffer – Beginning on January 1, 2015, the standard for minimum regulatory Tier 1 risk-based capital ratio the Banks must maintain in order to be considered “well capitalized” under the
regulatory framework for prompt corrective action increased from 6.00% to 8.00%. Also beginning on January 1, 2015, a new measure of capital adequacy was added for the Banks to be considered “well capitalized”. The Common Equity Tier 1 Risk-based
Capital Ratio, or CET1 Ratio, restricts the capital to be included in the ratio to common stockholders’ equity and requires a minimum ratio of 6.50% of risk-weighted assets for a bank to be considered “well capitalized” under the regulatory
framework for prompt corrective action. The equity of both of Premier’s subsidiary banks are already 100% common stockholders’ equity and therefore there was no adverse impact from the implementation of the new capital ratio. As shown in the
table in Note 21 to the consolidated financial statements regarding stockholders’ equity, the risk-based capital ratios of the banks at December 31, 2019 and December 31, 2018 exceed the new standards.
Beginning on January 1, 2016 an additional capital conservation buffer was added to the minimum regulatory
capital ratios under the regulatory framework for prompt corrective action. The capital conservation buffer is measured as a percentage of risk weighted assets and was phased-in over the four year period from 2016 thru 2019. Now fully implemented
in 2019, the capital conservation buffer requirement is 2.50% of risk weighted assets over and above the regulatory minimum capital ratios for Common Equity Tier 1 Capital (CET1) to risk weighted assets, Tier 1 Capital to risk weighted assets, and
Total Capital to risk weighted assets. The consequences of not meeting the capital conservation buffer thresholds include restrictions on the payment of dividends, restrictions on the payment of discretionary bonuses, and restrictions on the
repurchasing of common shares by the Company. As shown in the table in Note 21 to the consolidated financial statements regarding stockholders’ equity, the capital ratios of the Affiliate Banks and the
Company exceed the minimum capital ratios plus the fully phased-in 2.50% capital buffer requiring a CET1 Capital to risk weighted assets ratio of at least 7.00%, a Tier 1 Capital to risk weighted assets ratio of at least 8.50% and a Total Capital
to risk weighted assets ratio of at least 10.50%. The Company’s capital conservation buffer at December 31, 2019 was 8.46% and at December 31, 2018 was 7.88%, both well in excess of the fully phased-in 2.50% required by January 1, 2019.
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, 2019,
approximately $11.4 million of the total stockholders' 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 21 of the consolidated financial statements.
PREMIER FINANCIAL BANCORP, INC.
FORM 10-K
December 31, 2019
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 ( “GLBA”) was signed into law, eliminating many of the remaining barriers to full convergence of the banking, securities, and insurance industries. The major provisions of GLBA took effect March
12, 2000. GLBA 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, GLBA 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 elected to become a
financial holding company effective October 5, 2017.
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.
Dodd-Frank Act - On July 21, 2010, the Dodd-Frank Wall Street
Reform and Consumer Protection Act (the “Dodd-Frank Act”) was signed into law, implementing far-reaching changes across the financial regulatory landscape, including provisions that, among other things:
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created a new agency to centralize responsibility for consumer financial protection, the Consumer Financial Protection Bureau, which will be responsible for implementing, examining and enforcing
compliance with federal consumer financial laws;
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applied the same leverage and risk-based capital requirements that apply to insured depository institutions to most bank holding companies;
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required bank holding companies and banks to be both well capitalized and well managed in order to acquire banks located outside their home state;
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PREMIER FINANCIAL BANCORP, INC.
FORM 10-K
December 31, 2019
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changed the assessment base for federal deposit insurance from the amount of insured deposits to consolidated assets less tangible capital, eliminated the ceiling on the size of the Deposit
Insurance Fund and increased the floor of the size for the Deposit Insurance Fund;
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imposed comprehensive regulation of the over-the-counter derivatives market, which would include certain provisions that would effectively prohibit insured depository institutions from conducting
certain derivatives businesses within the institution itself;
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required large, publicly-traded bank holding companies to create a risk committee responsible for the oversight of enterprise risk management;
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implemented corporate governance revisions, including with regard to executive compensation and proxy access by shareholders, that apply to all public companies, not just financial institutions;
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made permanent the $250,000 limit for federal deposit insurance, increased the cash limit of Securities Investor Protection Corporation protection from $100,000 to $250,000 and provided unlimited
federal deposit insurance for non-interest-bearing demand transaction accounts at all insured depository institutions until December 31, 2012;
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repealed the federal prohibitions on the payment of interest on demand deposits, thereby permitting depository institutions to pay interest on business transaction and other accounts;
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amended the Electronic Fund Transfer Act (“EFTA”) to, among other things, give the Board of Governors of the Federal Reserve System (the “Federal Reserve Board”) the authority to establish rules
regarding interchange fees charged for electronic debit transactions by payment card issuers having assets over $10 billion and to enforce a new statutory requirement that such fees be reasonable and proportional to the actual cost of a
transaction to the issuer; and
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increased the authority of the Federal Reserve Board to examine financial holding companies and their non-bank subsidiaries.
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The Company and its subsidiaries collectively had approximately 375 full-time equivalent employees as of December 31, 2019. 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, 2019
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 Premier 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 Premier’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 Premier’s current mix of assets and liabilities, a rising interest rate environment would have a slightly positive impact on Premier’s results of operations, because the Company has
more interest bearing assets than interest bearing liabilities and the interest bearing assets will likely reprice at higher rates more quickly than interest-bearing liabilities. However, a declining interest rate environment would have a negative
impact on Premier’s results of operations.
Fixed rate loans (and adjustable rate loans that include a fixed rate for a specified period of time)
increase Premier’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, Premier’s results of operations could be negatively impacted. Adjustable rate loans that have an interest rate floor feature will exhibit the same
characteristics as a fixed rate loan during the period market interest rates are below the floor. During this time and until the time market interest rates rise above the floor, Premier’s exposure to interest rate risk in a rising rate environment
is increased because interest-bearing liabilities would be subject to repricing without a change in the interest rate on adjustable rate loans.
PREMIER FINANCIAL BANCORP, INC.
FORM 10-K
December 31, 2019
Changes in interest rates also can affect the value of loans, investments and other interest-rate sensitive
assets and Premier’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 loans may lead to an increase in non-performing assets and increased loan loss reserve requirements that could have a material adverse
effect on Premier’s results of operations.
Transition from London InterBank Offering Rate
(“LIBOR”) as a floating rate index to a substitute could adversely affect financial markets generally.
The use of the LIBOR rate as a common index for floating rate loans and borrowings is expected to cease after
December 31, 2021. Furthermore, a commonly accepted replacement index has not yet been widely accepted. The uncertain impact of the cessation of the use of the LIBOR rate and an eventual substitute index rate on businesses, including borrowers
and banks, could also adversely affect financial markets generally. Similar to the “systemic risk” described below, the commercial soundness of many financial institutions may be closely interrelated as a result of relationships, borrowing rates
and derivative interest rate swaps between the institutions. As a result, concerns about, or a default or threatened default by, one institution could lead to significant market-wide liquidity and credit problems, losses or defaults by other
institutions. Premier’s business could be adversely affected directly by the default of another institution or if the financial services industry experiences significant market-wide liquidity and credit problems.
The Affiliate Banks have not routinely utilized LIBOR as a common index on their floating rate loans to
customers and the cessation of its use is not expected to have a significant impact on Premier’s interest income from loans. Premier’s subordinated debt does bear a floating interest rate that is indexed to the 3-month LIBOR. While a suitable
substitute index has not yet been named, the impact to Premier’s interest expense is not expected to be materially different when a new index is named.
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 under the heading “Business — Regulatory Matters” above. These regulations, along with the 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 new accounting standard for Current Expected Credit Losses (“CECL”) is an example of a significant change in accounting standards.
The nature, extent, and timing of the adoption of significant new laws, regulations, rules or standards; changes in existing laws, regulations, rules or standards; or repeal of existing laws, regulations, rules or standards may have a material
impact on Premier’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, 2019
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 incurred 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’s allowance may not be 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.
Extensive regulation and supervision
Premier, primarily through the 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. Premier 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, maintain comprehensive
programs relating to anti-money laundering and customer identification, maintain customer education programs to avoid excessive overdrafting, and establish and maintain comprehensive programs related to cybersecurity. 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 the interpretation or implementation of statutes, regulations or
policies, could affect Premier in substantial and unpredictable ways. Such changes could subject Premier 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 Premier’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. 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”.
PREMIER FINANCIAL BANCORP, INC.
FORM 10-K
December 31, 2019
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 21
to the consolidated financial statements. During 2020 the Banks could, without prior approval, declare dividends of approximately $11.4 million plus any 2020 net profits retained to the date of the dividend declaration. Furthermore, one of
the consequences of not meeting the newly implemented regulatory capital conservation buffer required of the Company and the subsidiary Banks includes restrictions on the payment of dividends.
Premier is a separate and distinct legal entity from Premier’s subsidiaries. Premier receives nearly all of
its revenue from dividends from its subsidiary banks, which are limited by federal banking laws and regulations. These dividends also serve as the primary source of funds to pay dividends on Premier’s common and preferred shares. The inability of
Premier’s subsidiary banks to pay sufficient dividends to Premier could have a material adverse effect on its business. Further discussion of Premier’s ability to pay dividends can be found under the caption “Regulatory
Matters – Dividend Restrictions” in Item 1 of this Form 10-K and Note 21 to the consolidated financial statements.
Unauthorized disclosure of sensitive or confidential
customer information and cyber-security breaches could severely harm the Company’s reputation and have a negative effect on results of operations.
In the normal course of business, the Affiliate Banks collect, process and retain sensitive and confidential
customer information to both open deposit accounts and determine whether to approve a customer’s request for a loan. Premier also relies upon a variety of computing platforms and networks over the internet for the purposes of data processing,
communication and information exchange, including a variety of services provided by third-party vendors. Despite the security measures in place, Premier’s facilities and systems, and those of Premier’s third-party service providers, may be
vulnerable to security breaches, acts of vandalism, computer viruses, denial of service attacks, misplaced or lost data, programming and/or human errors or other similar events. We are not able to anticipate or implement effective preventive
measures against all security breaches of these types. If information security is breached, information can be lost or misappropriated resulting in financial loss or costs to Premier or damages to others. Any security breach involving the
misappropriation, loss or other unauthorized disclosure of confidential customer information, whether by Premier or by its vendors, could severely damage Premier’s reputation, expose it to the risks of litigation and liability or disrupt the
business operations of Premier which in turn, could have a material adverse effect on its financial condition and results of operations.
PREMIER FINANCIAL BANCORP, INC.
FORM 10-K
December 31, 2019
Regional economic changes in the Company’s markets could adversely
impact results from operations
Like all banks, Premier is subject to the effects of any economic downturn, and in particular a significant
decline in home values or reduced commercial development in Premier’s markets could have a negative effect on results of operations. Premier’s success depends primarily on the general economic conditions in the counties in which Premier conducts
business, and in the West Virginia; southern Ohio; northern Kentucky; northern, western and south central Virginia, and the metro Washington, DC, Richmond, Virginia and Cincinnati, Ohio areas in general. Unlike larger banks that are more
geographically diversified, Premier provides banking and financial services to customers primarily in the West Virginia counties of Barbour, Boone, Braxton, Calhoun, Clay, Doddridge, Gilmer, Greenbrier, Harrison, Jackson, Kanawha, Lewis, Lincoln,
Logan, Monongalia, Roane, Taylor, Upshur, Webster, Wirt and Wood; the southern Ohio counties of Adams, Brown, Gallia, Lawrence and Scioto; the northern Kentucky counties of Boone, Campbell and Kenton in the Cincinnati, Ohio metro area; the Kentucky
counties of Bracken, Breathitt, Fleming, Greenup, Henry, Lewis, Mason, Robertson and Shelby; the metro Washington DC area including the surrounding portions of northern Virginia and Maryland; the Richmond and Hampton metro areas of south central
Virginia; and the Covington area of western Virginia. The local economic conditions in these market areas have a significant impact on Premier’s ability to originate loans, the ability of the borrowers to repay these loans and the value of the
collateral securing these loans. A decline in the general economic conditions caused by inflation or deflation, recession, government intervention or regulation, changes in energy and natural resource markets, international events, unemployment,
government shutdown, furlough of government employees, environmental events such as unusual weather patterns or the spread of infectious diseases, or other factors beyond Premier’s control would affect these local economic conditions and could
adversely affect Premier’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. Likewise, a significant decline in commercial real estate occupancy rates or values would likely lead to increased delinquencies and defaults in commercial real estate secured
loans and result in increased losses in these portfolios.
Premier targets its business lending and marketing strategy for loans to serve primarily the banking and
financial services needs of small to medium size businesses. These small to medium size businesses generally have fewer financial resources in terms of capital or borrowing capacity than larger entities. If general economic conditions negatively
impact these businesses, Premier’s results of operations and financial condition may be adversely affected.
PREMIER FINANCIAL BANCORP, INC.
FORM 10-K
December 31, 2019
Changes in energy and natural resource markets may increase credit
risk in the loan portfolio
Premier’s success and growth in lending in the central West Virginia market area depend primarily on the
local general economy which has been driven in the past by federal government programs to develop technology infrastructure and more recently by the drilling for natural gas in the Marcellus and Utica shale formations. Furthermore, Premier’s
success in the southern West Virginia market depends, in large part, on the local general economy which has been driven by significant employment by coal and other natural resource based businesses. While Premier’s direct credit risk exposure to
such industries is minimal, the success or failure of these industries may have an indirect effect on the local economic conditions in the central and southern West Virginia market areas, either individually or collectively, thus having a
significant impact on Premier’s loans, the ability of the borrowers to repay these loans, and the value of the collateral securing these loans, each of which could negatively affect the financial results of its banking operations.
Concentration of commercial real estate and
commercial business loans may increase credit risk in the loan portfolio
Commercial real estate and commercial business loans generally expose a lender to greater risk of non-payment
and loss than one- to four-family residential mortgage loans because repayment of the loans often depends on the successful business operations and the income stream of the commercial borrowers. Such loans typically involve larger loan balances to
single borrowers or groups of related borrowers compared to one- to four-family residential mortgage loans. A significant decline in general economic conditions caused by inflation or deflation, recession, unemployment, federal government shutdown
or partial shutdown, or other factors beyond Premier’s control would impact these local economic conditions and could negatively affect the financial results of its banking operations.
Premier’s success in the metro Washington, D.C., Richmond, Virginia and Cincinnati, Ohio market areas depend
primarily on the local general economic conditions in the area and lending to commercial customers. While the sources of economic activity in these metro markets are diverse, commercial loans in these market areas are generally larger in size than
in Premier’s other markets due to various factors such as higher real estate values and larger business operations. Also, many of the local borrowers have more than one commercial real estate or commercial business loan outstanding with Premier.
Consequently, an adverse development with respect to one loan or one credit relationship can expose Premier to a significantly greater risk of loss compared to an adverse development with respect to a one- to four-family residential mortgage loan.
The local economic conditions in these metropolitan areas have a significant impact on its loans, the ability of the borrowers to repay these loans and the value of the collateral securing these loans and could negatively affect the financial
results of Premier’s banking operations.
PREMIER FINANCIAL BANCORP, INC.
FORM 10-K
December 31, 2019
The extended disruption of vital infrastructure could negatively
impact the Company’s results of operations and financial condition
Premier’s operations depend upon, among other things, its technological and physical infrastructure,
including its equipment, facilities and access to the worldwide web via the internet. 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, denial of service attacks, terrorist activity or the domestic and foreign response to such activity, or other events outside of Premier’s control, could have a material adverse impact either on the financial
services industry as a whole, or on Premier’s business, results of operations, and financial condition.
Defaults by another larger financial institution
could adversely affect financial markets generally.
The commercial soundness of many financial institutions may be closely interrelated as a result of
relationships between the institutions. As a result, concerns about, or a default or threatened default by, one institution could lead to significant market-wide liquidity and credit problems, losses or defaults by other institutions. This is
sometimes referred to as “systemic risk”. Premier’s business could be adversely affected directly by the default of another institution or if the financial services industry experiences significant market-wide liquidity and credit problems.
Great Britain’s exit from the European Union
(“Brexit”) could adversely affect financial markets generally.
The complexity of Britain’s exit from the European Union could adversely affect financial markets generally.
While Premier has no direct loans to or deposits from foreign entities, the uncertain impact of Brexit on British and European businesses, financial markets, and related businesses in the United States could also adversely affect financial markets
generally. Similar to the “systemic risk” described above, the commercial soundness of many financial institutions may be closely interrelated as a result of relationships between the institutions. As a result, concerns about, or a default or
threatened default by, one institution could lead to significant market-wide liquidity and credit problems, losses or defaults by other institutions. Premier’s business could be adversely affected directly by the default of another institution or
if the financial services industry experiences significant market-wide liquidity and credit problems.
Claims and litigation pertaining to fiduciary responsibility
From time to time, shareholders or customers may make claims and take legal action pertaining to Premier’s and the Affiliate
Banks’ performance of their fiduciary responsibilities. Defending such claims can impose a material expense on Premier. If such claims and legal actions are not resolved in a manner favorable to the Affiliate Banks they may result in financial
liability and/or adversely affect the market perception of the Affiliate 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 Premier’s business, which, in turn, could have a material adverse effect on its financial condition and results of operations.
PREMIER FINANCIAL BANCORP, INC.
FORM 10-K
December 31, 2019
Strong competition within the Company’s market areas may limit profitability
Premier faces significant competition both in attracting deposits and in the origination of loans. Mortgage
bankers, commercial banks, credit unions and other savings institutions, which have offices in the market areas of the Affiliate Banks, have historically provided most of the competition for the Affiliate Banks for deposits; however, each Affiliate
Bank 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, each Affiliate Bank 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 Premier and its Affiliate Banks. 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 Premier. The Affiliate 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
Premier has a number of large deposit customers that maintain balances in checking, savings, money market and
repurchase agreement accounts at the Affiliate Banks. The ability to attract these types of deposits has a positive effect on Premier’s net interest margin as they provide a relatively low cost of funds to Premier compared to certificates of
deposits or borrowing 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 Premier’s results of operation would be
negatively impacted.
The Company’s expenses will increase as a result of increases in FDIC insurance premiums.
The Federal Deposit Insurance Corporation imposes an assessment against institutions for deposit insurance.
This assessment is based on the risk category of the institution and ranges from 1.5 to 40 basis points of the institution’s assessment base. The assessment base for banks similar to those owned by Premier is defined as the most recent quarterly
average total assets of the bank less the quarterly average tangible equity of the bank. Federal law requires that the designated reserve ratio for the deposit insurance fund to reach a minimum of 1.35% of estimated insured deposits by no later
than September 30, 2020. If the risk category of either of the Affiliate Banks deteriorates or if the minimum designated reserve ratio is deemed to not be on target to meet the minimum by September 30, 2020, the Affiliate Banks’ FDIC insurance
premiums could increase.
PREMIER FINANCIAL BANCORP, INC.
FORM 10-K
December 31, 2019
Integration of current and future acquisitions may be more difficult than anticipated
The success of Premier’s acquisition of Jackson, First Bank or any future acquisitions will depend on a
number of factors, including (but not limited to) Premier’s ability to:
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timely and successfully integrate the operations of Premier and each of the acquisitions;
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maintain the existing relationships with the depositors of each acquisition to minimize the withdrawal of deposits subsequent to the
merger(s);
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|
•
|
maintain and enhance the existing relationships with the borrowers of each acquisition to limit potential losses from loans made by the them
prior to the acquisition;
|
|
•
|
control the incremental non-interest expense of the integrated operations to maintain overall operating efficiencies;
|
|
•
|
retain and attract qualified personnel at each acquisition; and
|
|
•
|
compete effectively in the communities served by each acquisition and in nearby communities.
|
Inability to hire and retain qualified employees
Premier’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, Premier faces increasing competition with businesses outside
the financial services industry for the most highly skilled individuals. Premier’s business could be adversely affected if it were unable to retain and motivate its existing key employees and management team. Furthermore, Premier’s success may be
impacted if it were unable to recruit replacement management and key employees in a reasonable amount of time.
Additional capital may not be available when needed
or required by regulatory authorities
Premier and the Affiliate Banks are required by federal and state regulatory authorities to maintain adequate
levels of capital to support its operations. In addition, Premier may elect to raise additional capital to support its business or to finance acquisitions, if any, or it may otherwise elect or be required to raise additional capital. Premier’s
ability to raise additional capital, if needed, will depend on conditions in the capital markets, economic conditions and a number of other factors, many of which are outside Premier’s control and its financial performance. Accordingly, Premier may
not be able to raise additional capital if needed or on acceptable terms. If Premier cannot raise additional capital when needed, it may have a material adverse effect on its financial condition, results of operations and prospects.
PREMIER FINANCIAL BANCORP, INC.
FORM 10-K
December 31, 2019
If a subsidiary bank’s current capital ratios decline below the
regulatory threshold for an “adequately capitalized” institution, the bank will be considered “undercapitalized” which may have a material and adverse effect on Premier.
The Federal Deposit Insurance Act (FDIA) requires each federal banking agency to take prompt corrective
action with respect to banks that do not meet the minimum capital requirements. Once a bank becomes undercapitalized, it is subject to various requirements and restrictions, including a prohibition of the payment of capital distributions and
management fees, restrictions on growth of the bank’s assets, and a requirement for prior regulatory approval of certain expansion proposals. In addition, an undercapitalized bank must file a capital restoration plan with its principal federal
regulator. Furthermore, one of the consequences of not meeting the regulatory capital conservation buffer required of the Company and the subsidiary Banks includes restrictions on the payment of dividends.
If an undercapitalized bank fails in any material aspect to implement a plan approved by its regulator, the
agency may impose additional restrictions on the bank. These include, among others, requiring the recapitalization or sale of the bank, restrictions with affiliates, and limiting the interest rates the bank may pay on deposits. Further, even after
the bank has attained adequately capitalized status, the appropriate federal agency may, if it determines, after notice and hearing, that the bank is in an unsafe or unsound condition or has not corrected a deficiency from its most recent
examination, treat the bank as if it were undercapitalized and subject the bank to the regulatory restrictions of such lower classification.
In addition to measures taken under the prompt corrective action provisions with respect to undercapitalized
institutions, insured banks and their holding companies may be subject to potential enforcement actions by their regulators for unsafe and unsound practices in conducting their business or the violations of law or regulation, including the filing
of false or misleading regulatory reports. Enforcement actions under this authority may include the issuance of cease and desist orders, the imposition of civil money penalties, the issuance of directives to increase capital, formal and informal
agreements, or the removal and prohibition orders against “institution-affiliates parties”. Further, the Federal Reserve may bring an enforcement action against the bank holding company either to address the undercapitalization in the holding
company or to require the holding company to implement measures to remediate undercapitalization in a subsidiary.
Market volatility may adversely affect market price
of common stock or investment security values
The capital and credit markets have experienced volatility and disruption in the past and for periods lasting
more than a year. In some cases, the markets have produced downward pressure on stock prices and credit availability for certain issuers seemingly without regard to those issuers’ underlying financial strength. Market volatility could contribute
to the decline in the market value of certain security investments and other assets of Premier. If market disruption and volatility should occur, continue or worsen, Premier may experience an adverse effect, which may be material, on results of
operations, capital or financial position.
PREMIER FINANCIAL BANCORP, INC.
FORM 10-K
December 31, 2019
Issuance of preferred shares would impact net income available to
common stockholders
Additional capital Premier may raise through the issuance of preferred stock may decrease net income
available to common stockholders. Dividends declared and the accretion of any discount on the issuance of preferred shares reduces the net income available to Premier’s common shareholders and earnings per common share. Preferred shares also
receive preferential treatment in the event of Premier’s liquidation, dissolution or winding up of its operations.
Future issuances of common shares or other
securities may dilute the value of outstanding common shares, which may also adversely affect their market price
In many situations, Premier’s Board of Directors has the authority, without any vote of its shareholders, to
issue shares of authorized but unissued securities, including common shares, authorized and unissued shares under Premier’s stock option plans and shares of Premier’s preferred stock. In the future, Premier may issue additional securities, through
public or private offerings, in order to raise additional capital, complete acquisitions, or compensate key employees. Any such issuance would dilute the percentage of ownership interest of existing shareholders and may dilute the per share value
of the common stock.
None.
PREMIER FINANCIAL BANCORP, INC.
FORM 10-K
December 31, 2019
The Company leases its principal executive offices located in Huntington, West Virginia. Except as
noted, each of the Banks owns the real property and improvements on which their banking activities are conducted.
Premier Bank, in addition to its main office at 2883 5th Avenue in Huntington, West Virginia and
an office building at 119 Virginia Street, West in Charleston, West Virginia used for non-customer contact operations, has banking branches at the following locations:
|
Branch
|
Address
|
Location and Zip Code
|
Leased/
Owned
|
|
Charleston
|
201 Pennsylvania Avenue
|
Charleston, WV 25302
|
Owned
|
|
Madison
|
300 State Street
|
Madison, WV 25130
|
Owned
|
|
Van
|
18854 Pond Fork Road
|
Van, WV 25206
|
Owned
|
|
West Hamlin
|
40 Lincoln Plaza
|
Branchland, WV 25506
|
Leased
|
|
Logan
|
307 Hudgins Street
|
Logan, WV 25601
|
Owned
|
|
Buckhannon
|
14 North Locust Street
|
Buckhannon, WV 26201
|
Owned
|
|
Bridgeport
|
25 Oakmont Lane
|
Bridgeport, WV 26330
|
Owned
|
|
Philippi
|
5 South Main Street
|
Philippi, WV 26416
|
Owned
|
|
Gassaway
|
700 Elk Street
|
Gassaway, WV 26624
|
Owned
|
|
Flatwoods
|
3802 Sutton Lane
|
Sutton, WV 26601
|
Owned
|
|
Sutton
|
373 West Main Street
|
Sutton, WV 26601
|
Owned
|
|
Clay
|
2043 Main Street
|
Clay, WV 25043
|
Owned
|
|
Rock Cave
|
State Routes 4 & 20
|
Rock Cave, WV 26234
|
Leased
|
|
Burnsville
|
316 Walbash Avenue
|
Burnsville, WV 26335
|
Leased
|
|
Ravenswood
|
601 Washington Street
|
Ravenswood, WV 26164
|
Owned
|
|
Ripley South
|
606 South Church Street
|
Ripley, WV 25271
|
Owned
|
|
Ripley East
|
103 Miller Drive
|
Ripley, WV 25271
|
Owned
|
|
Spencer Main
|
303 Main Street
|
Spencer, WV 25276
|
Owned
|
|
Spencer Drive Thru
|
406 Main Street
|
Spencer, WV 25276
|
Owned
|
|
Mineral Wells
|
1397 Elizabeth Pike
|
Mineral Wells, WV 26150
|
Owned
|
|
Connecticut Avenue
|
1130 Connecticut Avenue
|
Washington, DC 20036
|
Leased
|
|
DuPont Circle
|
1604 17th Street, N.W.
|
Washington, DC 20009
|
Leased
|
|
K Street
|
1501 K Street, N.W.
|
Washington, DC 20006
|
Leased
|
|
NoMa
|
1160 First Street, NE
|
Washington, DC 20002
|
Leased
|
|
Chevy Chase
|
5530 Wisconsin Avenue
|
Chevy Chase, MD 20815
|
Leased
|
|
Richmond
|
320 North First Street
|
Richmond, VA 23219
|
Owned
|
|
Hampton
|
101 N. Armistead Avenue
|
Hampton, VA 23669
|
Owned
|
|
Ronceverte
|
124 Cedar Street
|
Ronceverte, WV 24970
|
Owned
|
|
Lewisburg
|
3371 North Jefferson Street
|
Lewisburg, WV 24901
|
Owned
|
|
Downtown Lewisburg
|
1085 East Washington St.
|
Lewisburg, WV 24901
|
Owned
|
|
White Sulphur Springs
|
42736 Midland Trail East
|
White Sulphur Springs, WV
|
Owned
|
|
Covington
|
151 North Court Avenue
|
Covington, VA 24426
|
Owned
|
PREMIER FINANCIAL BANCORP, INC.
FORM 10-K
December 31, 2019
Item 2. Properties – (continued)
Premier Bank also leases loan production offices at the following locations:
|
Loan Production Office
|
Address
|
Location and Zip Code
|
Leased/
Owned
|
|
Beckley
|
300 North Kanawha St, Suite 207
|
Beckley, WV 25801
|
Leased
|
|
Fairmont
|
412 Fairmont Avenue
|
Fairmont, WV 26554
|
Leased
|
Citizens Deposit Bank & Trust, in addition to its main office at 10 Second Street in Vanceburg, Kentucky,
has branches at the following locations:
|
Branch
|
Address
|
Location and Zip Code
|
Leased/
Owned
|
|
AA Branch
|
67 Commercial Drive, Suite 3
|
Vanceburg, KY 41179
|
Leased
|
|
Brooksville
|
111 Powell Street
|
Brooksville, KY 41004
|
Owned
|
|
Cold Spring
|
136 Plaza Drive
|
Cold Spring, KY 41076
|
Owned
|
|
Eminence
|
5230 South Main Street
|
Eminence, KY 40019
|
Owned
|
|
Florence
|
8542 US 42 Highway
|
Florence KY 41042
|
Owned
|
|
Ft.Wright
|
3425 Valley Plaza Pkway
|
Ft. Wright, KY 41017
|
Owned
|
|
Garrison
|
9234 East KY 8
|
Garrison, KY 41141
|
Owned
|
|
Jackson Highway 15
|
770 Highway 15 North
|
Jackson, KY 41339
|
Owned
|
|
Jackson Main
|
1126 Main Street
|
Jackson, KY 41339
|
Owned
|
|
Maysville
|
1201 US 68
|
Maysville, KY 41056
|
Owned
|
|
Mt. Olivet
|
17 West Walnut Street
|
Mt. Olivet, KY 41064
|
Owned
|
|
Tollesboro
|
2954 West KY 10
|
Tollesboro, KY 41189
|
Owned
|
|
Huntington
|
2600 5th Avenue
|
Huntington, WV 25701
|
Owned
|
|
Ironton
|
221 Railroad Street
|
Ironton, OH 45638
|
Owned
|
|
Proctorville
|
7604 County Road 107 Unit A
|
Proctorville, OH 45669
|
Leased
|
|
Ripley
|
104 Main Street
|
Ripley, OH 45167
|
Owned
|
The Banks are 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.
Item 4. Mine Safety Disclosures
Not Applicable
PREMIER FINANCIAL BANCORP, INC.
FORM 10-K
December 31, 2019
PART II
Item 5. Market for Registrant's Common Equity, Related
Stockholder Matters and 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, 2019, the Company had approximately 1,490 shareholders of record 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
|
||||||||||
|
2018
|
||||||||||||
|
First Quarter *
|
0.120
|
$
|
16.80
|
$
|
13.43
|
|||||||
|
Second Quarter *
|
0.150
|
21.40
|
14.82
|
|||||||||
|
Third Quarter
|
0.150
|
20.91
|
18.01
|
|||||||||
|
Fourth Quarter
|
0.150
|
19.10
|
14.42
|
|||||||||
|
0.570
|
||||||||||||
|
2019
|
||||||||||||
|
First Quarter
|
0.150
|
$
|
16.99
|
$
|
14.07
|
|||||||
|
Second Quarter
|
0.150
|
17.01
|
14.27
|
|||||||||
|
Third Quarter
|
0.150
|
18.50
|
14.34
|
|||||||||
|
Fourth Quarter
|
0.150
|
20.38
|
16.81
|
|||||||||
|
0.600
|
||||||||||||
|
2020
|
||||||||||||
|
First Quarter (through March 5, 2020)
|
$
|
0.000
|
$
|
18.11
|
$
|
15.08
|
||||||
|
* For comparative purposes, historical per share amounts prior to June 8, 2018 have been adjusted to reflect a 5 for 4 stock split declared on May 16, 2018,
distributed on June 8, 2018 to shareholders of record on June 4, 2018
|
||||||||||||
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, 2019 approximately $11.4 million was available for payment as dividends from the Banks to the Company without the need for
regulatory approval. In considering the payment of dividends, the Board of Directors will take into account the Company's financial condition, results of operations, tax considerations, costs of expansion, industry standards, economic conditions
and need for funds, as well as governmental policies and regulations applicable to the Company and the Banks. See "REGULATORY MATTERS - Capital Requirements" for discussion on capital guidelines.
PREMIER FINANCIAL BANCORP, INC.
FORM 10-K
December 31, 2019
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, 2014 with the cumulative total returns of both a broad equity market index and a published industry index. The historical board equity market index chosen was the Russell 2000. In 2016, Premier was added to the Russell 2000 index and
a graph of the total return performance is included for comparison. The published industry index chosen was the SNL ($1B-$5B) 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
|
12/31/14
|
12/31/15
|
12/31/16
|
12/31/17
|
12/31/18
|
12/31/19
|
|
Premier Financial Bancorp, Inc.
|
100.00
|
109.52
|
152.54
|
157.06
|
150.68
|
189.94
|
|
Russell 2000 Index
|
100.00
|
95.59
|
115.95
|
132.94
|
118.30
|
148.49
|
|
SNL Banks $1B-$5B Index
|
100.00
|
111.94
|
161.04
|
171.69
|
150.42
|
182.85
|
Source: S&P Global Market Intelligence © 2020
PREMIER FINANCIAL BANCORP, INC.
FORM 10-K
December 31, 2019
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.
|
(Dollars in thousands, except per share amounts)
|
At or for the Year Ended December 31
|
|||||||||||||||||||
|
2019
|
2018
|
2017
|
2016
|
2015
|
||||||||||||||||
|
Earnings
|
||||||||||||||||||||
|
Net interest income
|
$
|
66,901
|
$
|
59,754
|
$
|
57,488
|
$
|
53,698
|
$
|
48,380
|
||||||||||
|
Provision for loan losses
|
1,250
|
2,315
|
2,499
|
1,748
|
326
|
|||||||||||||||
|
Non-interest income
|
9,334
|
9,098
|
8,655
|
8,187
|
7,099
|
|||||||||||||||
|
Non-interest expense
|
43,764
|
40,471
|
40,218
|
41,193
|
35,804
|
|||||||||||||||
|
Income taxes
|
7,025
|
5,898
|
8,607
|
6,770
|
6,903
|
|||||||||||||||
|
Net income
|
$
|
24,196
|
$
|
20,168
|
$
|
14,819
|
$
|
12,174
|
$
|
12,446
|
||||||||||
|
Financial Position
|
||||||||||||||||||||
|
Total assets
|
$
|
1,781,010
|
$
|
1,690,115
|
$
|
1,493,424
|
$
|
1,496,193
|
$
|
1,244,693
|
||||||||||
|
Loans
|
1,195,295
|
1,149,301
|
1,049,052
|
1,024,823
|
849,746
|
|||||||||||||||
|
Allowance for loan losses
|
13,542
|
13,738
|
12,104
|
10,836
|
9,647
|
|||||||||||||||
|
Goodwill and other intangibles
|
53,016
|
52,908
|
38,746
|
39,720
|
35,976
|
|||||||||||||||
|
Securities
|
390,754
|
365,731
|
278,466
|
288,607
|
255,466
|
|||||||||||||||
|
Deposits
|
1,495,753
|
1,430,127
|
1,272,675
|
1,279,386
|
1,060,196
|
|||||||||||||||
|
Other borrowings
|
26,803
|
33,381
|
28,310
|
32,679
|
32,986
|
|||||||||||||||
|
Subordinated debt
|
5,436
|
5,406
|
5,376
|
5,343
|
-
|
|||||||||||||||
|
Common equity
|
240,241
|
216,729
|
183,355
|
174,184
|
147,232
|
|||||||||||||||
|
Per Common Share Data
|
||||||||||||||||||||
|
Net income – basic
|
1.65
|
1.48
|
1.11
|
0.92
|
1.11
|
|||||||||||||||
|
Net income - diluted
|
1.64
|
1.47
|
1.10
|
0.92
|
1.08
|
|||||||||||||||
|
Book value
|
16.39
|
14.82
|
13.74
|
13.10
|
13.09
|
|||||||||||||||
|
Tangible book value
|
12.77
|
11.20
|
10.84
|
10.11
|
9.89
|
|||||||||||||||
|
Cash dividends
|
0.60
|
0.57
|
0.48
|
0.45
|
0.41
|
|||||||||||||||
|
Financial Ratios
|
||||||||||||||||||||
|
Return on average assets
|
1.40
|
%
|
1.30
|
%
|
0.99
|
%
|
0.82
|
%
|
0.98
|
%
|
||||||||||
|
Return on average common equity
|
10.45
|
%
|
10.46
|
%
|
8.13
|
%
|
6.94
|
%
|
8.41
|
%
|
||||||||||
|
Dividend payout
|
36.36
|
%
|
38.51
|
%
|
43.24
|
%
|
48.62
|
%
|
36.69
|
%
|
||||||||||
|
Stockholders’ equity to total assets at period-end
|
13.49
|
%
|
12.82
|
%
|
12.28
|
%
|
11.64
|
%
|
11.83
|
%
|
||||||||||
|
Average stockholders’ equity to average total assets
|
13.43
|
%
|
12.39
|
%
|
12.18
|
%
|
11.78
|
%
|
11.67
|
%
|
||||||||||
PREMIER FINANCIAL BANCORP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
December 31, 2019
INTRODUCTION
Premier Financial Bancorp, Inc. ("Premier” or the “Company”) is a financial holding company headquartered in Huntington, West
Virginia. It operates two community bank subsidiaries, Premier Bank, Inc. (“Premier Bank”), a $1.221 billion bank headquartered in Huntington, West Virginia, and Citizens Deposit Bank and Trust, Inc. (“Citizens Deposit”), a $553 million bank
headquartered in Vanceburg, Kentucky, each with a local orientation. The banks operate in thirty-eight communities within the states of West Virginia, Virginia, Ohio, Maryland and Kentucky plus the cities of Washington, DC and Richmond, Virginia.
Through these locations the banks provide their customers with a full range of banking services. On October 12, 2018, Premier completed its purchase of the First Bank of Charleston (“First Bank”), a $189.0 million bank headquartered in Charleston,
West Virginia, and merged the bank into Premier Bank on that date. On October 25, 2019, Citizens Deposit completed its purchase of the First National Bank of Jackson (“Jackson”), a $100.8 million community bank headquartered in Jackson, Kentucky,
and merged Jackson into Citizens Deposit on that date. As of December 31, 2019, Premier had approximately $1.781 billion in total assets, $1.195 billion in total loans, $1.496 billion in total deposits and $20.4 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 LLP (“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 and contracts with professional consulting firms to perform internal audits of the financial records of each of the subsidiaries on a periodic basis. The internal
audit manager reports the findings and recommendations highlighted by the internal audits to Premier’s audit committee as well as the audit committees of the subsidiaries. In addition, the audit committee of the Board of Directors engages Crowe as
independent auditors to render an opinion on management’s assessment of the internal controls of the company. 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, 2019
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. Their reports are issued to the Board of Directors of the bank under examination.
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.
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, 2019
The Company monitors and maintains an allowance for loan losses to absorb an estimate of probable incurred losses inherent in the
loan portfolio. Note 5 to the consolidated financial statements contains a significant level of analysis of the allowance for loan losses. 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 using accounting guidance issued by the Financial Accounting
Standards Board (“FASB”). 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 Company’s 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.
For loans without individual measures of impairment, the Company makes estimates of losses for groups of loans as required by
accounting guidance. 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 allowance would be reduced by way of a credit to the provision for loan losses, also known as a negative 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.
PREMIER FINANCIAL BANCORP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
December 31, 2019
For acquisitions, Premier is required to record the assets acquired, including identified intangible assets, and the liabilities
assumed at their fair value. These often involve estimates based on third-party valuations, such as real estate appraisals or valuations based on discounted cash flow analyses or other valuation techniques that may include estimates of attrition,
inflation, asset growth rates or other relevant factors. In addition, the determination of the useful lives over which an intangible asset will be amortized is subjective.
The loans acquired via the acquisition of First Bank on October 12, 2018 and the acquisition of Jackson on October 25, 2019 were
recorded on the books of Premier at their estimated fair value. The estimate of fair value included factors for the measurement of credit risk, interest rate risk and re-salability in the most advantageous market for the loans in an orderly
transaction between market participants. These estimates required management's most difficult, subjective and complex judgments and are inherently uncertain. Since the estimated fair value of these loans were believed to have accounted for the
reasonably estimable credit risk in the loans, consistent with accounting guidance for acquisitions after 2008, there was no allowance for loan losses applied to the acquired loans at the date of acquisition. However, in the event that different
assumptions or conditions were to prevail due to uncertainties in the economy, the borrower’s ability to repay, or other factors, and depending upon the severity of such changes, the possibility of a materially different financial condition or
results of operations is a reasonable likelihood.
Under accounting guidance issued by the FASB related to accounting for goodwill and other intangible assets, 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, 2019
Premier had net income of $24.196 million in 2019 compared to $20.168 million of net income in 2018 and $14.819 million of net
income reported for 2017. The operations of First Bank, acquired on October 12, 2018, were included for the full year of 2019. Furthermore, the operations of Jackson, acquired on October 25, 2019, were only included in the operations of Premier
in the last two months of 2019. Net income increased in 2019, largely due to increases in interest income and non-interest income as well as a decrease in the provision for loan losses. These positive results more than offset increases in
interest expense and non-interest expense. Net income increased in 2018, largely due to increases in interest income and non-interest income as well as a decrease in the provision for loan losses. These positive results more than offset increases
in interest expense and non-interest expense. Net income also improved in 2018 due to a decrease in the corporate income tax rate and a corresponding decrease in income tax expense. Basic earnings per share were $1.65 in 2019 compared to $1.48 in
2018 and $1.11 in 2017. The increase in earnings per share in 2019 was largely the result of the increase in net income. Similarly, the increase in earnings per share in 2018 was largely the result of the increase in net income. Similar to the
trend in basic earnings per share, diluted earnings per share were $1.64 in 2019 compared to $1.47 in 2018 and $1.10 in 2017. On June 8, 2018, Premier issued a 5 for 4 stock split to shareholders of record on June 4, 2018. Each shareholder
received 1 additional share of common stock for every 4 shares of common stock already owned on the record date. Outstanding shares and per share amounts prior to the payment date have been restated to reflect the additional shares issued as a
result of the stock split to aid in the comparison to current period results.
The Analysis of Return on Assets and Equity table below comparatively illustrates the components of return on average assets
(“ROA”) and return on average common equity (“ROE”) over the previous five years. ROA measures how effectively Premier utilizes its assets to produce net income. It also facilitates the analysis of earnings performance of different sized
organizations. Such analysis is particularly useful as Premier increases its operations via acquisition such as the purchase of Jackson on October 25, 2019, the purchase of First Bank on October 12, 2018, and the purchase of First National
Bankshares Corporation (“Bankshares”) on January 16, 2016. In 2016, with the acquisition of Bankshares on January 15, 2016, total assets increased to a total of $1.496 billion. By the end of 2017 total assets declined slightly to $1.493 billion.
In 2018, with the acquisition of First Bank on October 12, 2018, total assets increased to $1.690 billion at December 31, 2018. In 2019, with the acquisition of Jackson on October 25, 2019, total assets increased to $1.781 billion at December 31,
2019. An increase in asset size will generally result in higher dollars of income earned and expenses incurred. A detailed review of the components of ROA will help analyze Premier’s performance without regard to changes in its size.
Premier’s net income in 2019 resulted in ROA of 1.40%, an increase from the 1.30% ROA in 2018 and the 0.99% ROA in 2017. As
shown in the table below, fully tax equivalent net interest income (as a percent of average earning assets) reached its highest level during the last five years in 2017 and again in 2019 at 4.18%. In 2015, net interest income was 4.15% of average
earning assets. In 2016 net interest income decreased to 3.93% of average earnings assets as the yield on
PREMIER FINANCIAL BANCORP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
December 31, 2019
earning assets decreased by more than the decrease in the rate paid on interest bearing liabilities. In 2017, net interest income increased to
4.18% of average earnings assets as changes in short-term interest rates and prime lending rates had a positive impact on yields earned on the investment portfolio, federal funds sold, interest-bearing bank balances and to some extent the loan
portfolio. In 2018, net interest income decreased slightly to 4.13% of average earning assets as the rates paid on interest-bearing liabilities, primarily interest-bearing deposits, increased more significantly than the increase in the yields
earned on interest earning assets. In 2019, net interest income returned to 4.18% of average earning assets, once again achieving its highest level reported in the five-year period. While the rate paid on interest-bearing liabilities increased
more than the yield on earning assets, the growth in non-interest bearing deposits as a funding source resulted in an increase in the net interest margin.
To summarize the Company’s earnings results over the past five years beginning in 2015, net interest income (as a percent of
average earnings assets) was 4.15%. The continuing low interest rate environment and the strong competition for good quality loans resulted in a decrease in the yield on earning assets with only a minor decrease in the cost of interest bearing
liabilities. The provision for loan losses in 2015 (as a percent of average earning assets) reduced the net interest margin by 0.03%, decreasing net credit income to 4.12% of average earning assets, the highest level in the five-year period
presented. Net credit income is net interest income reduced by the provision for loan losses recorded during the year. Non-interest income (as a percent of average earning assets) was 0.61% in 2015, while non-interest expense (as a percent of
average earning assets) was 3.05% in 2015. Premier’s applicable income taxes and tax equivalent adjustment serve to reduce net credit income. As illustrated in the table, the overall result was a 2015 return on average earning assets of 1.06% and
a return on average total assets (ROA) of 0.98%.
In 2016, while short-term asset yields increased in response to the Federal Reserve Board of Governors’ decision to increase the
target federal funds rate by 25 basis points in mid-December 2015, overall yield on earning assets still decreased by 22 basis points, largely due to the generally lower asset yields on the loans and investments acquired from Bankshares. With only
a minor decrease in the cost of interest bearing liabilities, net interest income (as a percent of average earnings assets) decreased to 3.93%. The provision for loan losses in 2016 (as a percent of average earning assets) reduced the net interest
margin by 0.13%, decreasing net credit income to 3.80% of average earning assets. Non-interest income (as a percent of average earning assets) decreased slightly to 0.59% from the 0.61% reported in 2015, as Premier’s non-interest income decreased
somewhat in proportion to the increase in total average earning assets in 2016, largely as a result of the acquisition of Bankshares in January 2016. Non-interest income at 0.59% of average earning assets was the lowest ratio in the five years
presented in the table below. However, non-interest expense (as a percent of average earning assets) decreased even more than the decrease in non-interest income, dropping to 2.99% of average earning assets in 2016, compared to 3.05% of average
earning assets in 2015. The increase in non-interest expense in 2016, largely from the operations of Bankshares, was slightly lower in proportion to the increase in average earning assets, also resulting largely from the acquisition of
Bankshares. Income tax expense (as a percentage of average earning assets) decreased in 2016 to 0.49% as Premier’s decrease in net credit income, as a percentage of average earning assets, and higher level of tax exempt investment income resulted
in a lower ratio of income tax expense relative to average earning assets. As illustrated in the table below, the overall result was to decrease Premier's 2016 return on average earning assets to 0.88% and decrease its return on average total
assets (ROA) to 0.82%.
PREMIER FINANCIAL BANCORP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
December 31, 2019
In 2017, the cumulative effect of continuing increases in the target federal funds rate throughout 2017 generally improved
short-term earning asset yields as well as yields earned on investments and the loan portfolio. The overall yield on earning assets increased by 23 basis points in 2017 while the cost of interest-bearing liabilities decreased by 1 basis point.
The result was an increase in net interest income (as a percentage of average earning assets) to 4.18%, the highest level in the five-year period presented. The provision for loan losses in 2017 (as a percent of average earning assets) reduced the
net interest margin by 0.185, decreasing net credit income to 4.00% of average earning assets. Non-interest income (as a percent of average earning assets) increased to 0.62% in 2017 as Premier’s non-interest income grew by 5.7% while the increase
in average earning assets was modest at 0.6%. Also improving the Company’s overall profitability in 2017, non-interest expenses (as a percent of average earning assets) decreased in 2017 to 2.90%. Total non-interest expense decreased by $975,000,
or 2.4%, in 2017, reducing the percentage of average earning assets to 2.90% for the year. Income tax expense (as a percentage of average earning assets) increased in 2017 to 0.62% as Premier’s net credit income, non-interest income and
non-interest expense, as a percentage of average earning assets, each improved and resulted in higher ratio of income tax expense relative to average earning assets. As illustrated in the table below, the overall result was to increase Premier's
2017 return on average earning assets to 1.07% and increase its return on average total assets (ROA) to 0.99%.
In 2018, the continued cumulative effect of increases in the target federal funds rate throughout 2018 generally improved
short-term earning asset yields as well as yields earned on purchases of investments. However, the competition for good quality loans in 2018 kept the average yields earned on the loan portfolio fairly consistent with the yields earning in 2017.
The overall yield on earning assets increased by only 4 basis points in 2018 as a result. However, as short-term rates increased in 2018, the competition for deposits increased, requiring Premier to raise the rates paid on its interest-bearing
deposit accounts. Furthermore, the rise in short-term rates also increased the rate paid on Premier’s subordinated debt, which has a fully floating interest rate that is adjusted quarterly. The overall rate paid on interest-bearing liabilities
increased by 15 basis points in 2018 as a result. The effect was a decrease in net interest income (as a percentage of average earning assets) to 4.13%. The provision for loan losses in 2018 (as a percent of average earning assets) reduced the
net interest margin by 0.16%, decreasing net credit income to 3.97% of average earning assets. Non-interest income (as a percent of average earning assets) increased to 0.63% in 2018, the highest ratio reported in the five years presented in the
table below, as Premier’s non-interest income grew by 5.1% while the increase in average earning assets was slightly less at 4.9%. Also improving the Company’s overall profitability in 2018, non-interest expenses (as a percent of average earning
assets) decreased to 2.79%. Total non-interest expense in 2018 was relatively unchanged, increasing by $253,000, or 0.6%, in 2018. This increase compares to the 4.9% increase in average earning assets and, as a result, reduced the percentage of
average earning assets to 2.79% for the year. Also improving Premier’s reported net income in
PREMIER FINANCIAL BANCORP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
December 31, 2019
2018 was the decrease in the federal corporate income tax rate in 2018 to 21%. As a result, income tax expense (as a percentage of average earning
assets) decreased in 2018 to 0.41% as Premier’s effective tax rate in 2018 was 22.6% compared to a 36.7% effective tax rate in 2017. As illustrated in the table below, the overall result was to increase Premier's 2018 return on average earning
assets to 1.39% and increase its return on average total assets (ROA) to 1.30%.
Finally, in 2019, the continued cumulative effect of increases in the target federal funds rate throughout 2018 improved earning
asset yields as well as yields earned on purchases of investments. The overall yield on earning assets increased by 24 basis points in 2019 as a result. However, as short-term rates increased in 2018, the competition for deposits increased,
requiring Premier to raise the rates paid on its interest-bearing deposit accounts. The overall rate paid on interest-bearing liabilities increased by 28 basis points in 2019 as a result. While the rate paid on interest-bearing liabilities
increased more than the yield on earning assets, the growth in non-interest bearing deposits as a funding source resulted in an increase in the net interest margin. The effect was that net interest income (as a percentage of average earning assets)
once again achieved its highest level reported in the five-year period at 4.18%. The lower provision for loan losses in 2019 (as a percent of average earning assets) reduced the net interest margin by 0.08%, decreasing net credit income to 4.10%
of average earning assets. Non-interest income (as a percent of average earning assets) decreased to 0.58% in 2019, as the 2.6% growth in Premier’s non-interest income was exceeded by the 10.6% increase in average earning assets in 2019.
Improving the Company’s overall profitability in 2019, non-interest expenses (as a percent of average earning assets) decreased to 2.72%, the lowest level reported in the five-year period. Total non-interest expense in 2019 increasing by 8.1% due
to the operations of First Bank and Jackson in 2019. This increase compares to the 10.6% increase in average earning assets and, as a result, reduced the percentage of average earning assets to 2.72% for the year. Income tax expense (as a
percentage of average earning assets) increased in 2019 to 0.44% as Premier’s net credit income and non-interest expense, as a percentage of average earning assets, each improved and resulted in higher ratio of income tax expense relative to
average earning assets. As illustrated in the table below, the overall result was to increase Premier's 2019 return on average earning assets to 1.51% and increase its return on average total assets (ROA) to 1.40%.
PREMIER FINANCIAL BANCORP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
December 31, 2019
|
ANALYSIS of RETURN ON ASSETS and EQUITY
|
||||||||||||||||||||
|
2019
|
2018
|
2017
|
2016
|
2015
|
||||||||||||||||
|
As a percent of average earning assets
|
||||||||||||||||||||
|
Fully taxable-equivalent net interest income
|
4.18
|
%
|
4.13
|
%
|
4.18
|
%
|
3.93
|
%
|
4.15
|
%
|
||||||||||
|
Provision for loan losses
|
(0.08
|
)
|
(0.16
|
)
|
(0.18
|
)
|
(0.13
|
)
|
(0.03
|
)
|
||||||||||
|
Net credit income
|
4.10
|
3.97
|
4.00
|
3.80
|
4.12
|
|||||||||||||||
|
Non-interest income
|
0.58
|
0.63
|
0.62
|
0.59
|
0.61
|
|||||||||||||||
|
Non-interest expense
|
(2.72
|
)
|
(2.79
|
)
|
(2.90
|
)
|
(2.99
|
)
|
(3.05
|
)
|
||||||||||
|
Tax equivalent adjustment
|
(0.01
|
)
|
(0.01
|
)
|
(0.03
|
)
|
(0.03
|
)
|
(0.03
|
)
|
||||||||||
|
Applicable income taxes
|
(0.44
|
)
|
(0.41
|
)
|
(0.62
|
)
|
(0.49
|
)
|
(0.59
|
)
|
||||||||||
|
Return on average earning assets
|
1.51
|
%
|
1.39
|
%
|
1.07
|
%
|
0.88
|
%
|
1.06
|
%
|
||||||||||
|
Multiplied by average earning assets to average total assets
|
93.12
|
93.39
|
92.62
|
92.56
|
92.45
|
|||||||||||||||
|
Return on average assets
|
1.40
|
%
|
1.30
|
%
|
0.99
|
%
|
0.82
|
%
|
0.98
|
%
|
||||||||||
|
Multiplied by average assets to average common stockholders’ equity
|
7.44
|
X
|
8.07
|
X
|
8.21
|
X
|
8.49
|
X
|
8.57
|
X
|
||||||||||
|
Return on average common equity
|
10.45
|
%
|
10.50
|
%
|
8.14
|
%
|
6.94
|
%
|
8.41
|
%
|
||||||||||
As the ratio of Premier’s non-interest expenses to average earning assets decreased in 2019, so did Premier’s net overhead ratio
(non-interest expense less non-interest income as a percent of average earning assets). Premier’s net overhead ratio was 2.14% in 2019, compared to 2.16% in 2018, 2.28% in 2017, 2.40% in 2016, and 2.44% in 2015. These ratios illustrate a trend in
reducing the net operating costs of Premier in proportion to its average earning assets. In 2016, average earning assets increased by 17.5%, primarily as a result of the acquisition of Bankshares. However, while non-interest income increased by
only 15.3%, non-interest expenses increased by 15.1%, a proportionately lower rate than the increase in average earning assets, thus reducing Premier’s net overhead ratio to 2.40% in 2016. In 2017, average earning assets increased by only 0.6%,
however, non-interest income increased by 5.7%, and non-interest expenses decreased by 2.4%, thus reducing Premier’s net overhead ratio to 2.28% in 2017. In 2018, Premier’s net overhead ratio decreased even further as average earning assets
increased by 4.9% while non-interest income increased by 5.1%, a proportionately larger increase. Further improving Premier’s net overhead ratio in 2018, non-interest expense increased by only 0.6%. The overall effect was to reduce Premier’s net
overhead ratio to 2.16% in 2018. Finally, in 2019, average earning assets increased by 10.6% while non-interest expense increased by only 8.1%, largely due to the operations of First Bank and Jackson in 2019. The larger percentage increase in
average earning assets caused the net overhead ratio to decrease. However, non-interest income increased by only 2.6%, substantially offsetting this benefit. The overall effect was to reduce Premier’s net overhead ratio to 2.14% in 2019, the
lowest level reported in the five-year period. A lower net overhead ratio results in a greater portion of Premier’s net credit income flowing through to net income.
PREMIER FINANCIAL BANCORP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
December 31, 2019
A breakdown of Premier's financial results by quarter for the years ended December 31, 2019 and 2018 is summarized below.
|
QUARTERLY FINANCIAL INFORMATION
|
||||||||||||||||||||
|
(Dollars in thousands, except per share amounts)
|
||||||||||||||||||||
|
First
|
Second
|
Third
|
Fourth
|
Full Year
|
||||||||||||||||
|
2019
|
||||||||||||||||||||
|
Interest income
|
$
|
19,064
|
$
|
19,106
|
$
|
19,308
|
$
|
19,100
|
$
|
76,578
|
||||||||||
|
Interest expense
|
2,229
|
2,451
|
2,530
|
2,467
|
9,677
|
|||||||||||||||
|
Net interest income
|
16,835
|
16,655
|
16,778
|
16,633
|
66,901
|
|||||||||||||||
|
Provision for loan losses
|
560
|
330
|
425
|
(65
|
)
|
1,250
|
||||||||||||||
|
Net overhead
|
8,417
|
8,694
|
8,279
|
9,040
|
34,430
|
|||||||||||||||
|
Income before income taxes
|
7,858
|
7,631
|
8,074
|
7,658
|
31,221
|
|||||||||||||||
|
Net income
|
6,176
|
5,859
|
6,267
|
5,894
|
24,196
|
|||||||||||||||
|
Basic net income per share
|
0.42
|
0.40
|
0.43
|
0.40
|
1.65
|
|||||||||||||||
|
Diluted net income per share
|
0.42
|
0.40
|
0.43
|
0.40
|
1.64
|
|||||||||||||||
|
Dividends paid per share
|
0.15
|
0.15
|
0.15
|
0.15
|
0.60
|
|||||||||||||||
|
2018
|
||||||||||||||||||||
|
Interest income
|
$
|
15,799
|
$
|
15,753
|
$
|
16,001
|
$
|
18,268
|
$
|
65,821
|
||||||||||
|
Interest expense
|
1,164
|
1,334
|
1,492
|
2,077
|
6,067
|
|||||||||||||||
|
Net interest income
|
14,635
|
14,419
|
14,509
|
16,191
|
59,754
|
|||||||||||||||
|
Provision for loan losses
|
1,115
|
500
|
275
|
425
|
2,315
|
|||||||||||||||
|
Net overhead
|
6,923
|
8,227
|
7,730
|
8,493
|
31,373
|
|||||||||||||||
|
Income before income taxes
|
6,597
|
5,692
|
6,504
|
7,273
|
26,066
|
|||||||||||||||
|
Net income
|
5,133
|
4,375
|
5,021
|
5,639
|
20,168
|
|||||||||||||||
|
Basic net income per share
|
0.38
|
0.33
|
0.38
|
0.39
|
1.48
|
|||||||||||||||
|
Diluted net income per share
|
0.38
|
0.32
|
0.37
|
0.39
|
1.47
|
|||||||||||||||
|
Dividends paid per share
|
0.12
|
0.15
|
0.15
|
0.15
|
0.57
|
|||||||||||||||
PREMIER FINANCIAL BANCORP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
December 31, 2019
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, 2019, is provided in the table below.
In 2019, average earning assets increased by 10.6%, or $153.4 million, from 2018, following a 4.9%, or $67.7 million, increase in
2018 from 2017. Average interest-bearing liabilities, the primary source of funds supporting the earning assets, increased by 9.6%, or $96.1 million, in 2019 from 2018. The increase in 2019 follows a 1.4%, or $13.9 million, increase in 2018 from
2017. Supporting an increase in the net interest income (as a percentage of average earning assets) in 2019 was a 7.6%, or $26.8 million, increase in average non-interest bearing deposits. Net interest income (as a percentage of average earning
assets) in 2019 was 4.18% compared to 4.13% in 2018. This percentage is also referred to as the net interest margin. The increase in the net interest margin in 2019 was partially due to a higher amount of deferred interest income and loan purchase
discounts recognized on loans that paid off during the year as well as increases in yields earned on loans, investment securities, and liquid assets. Also impacting the net interest margin, however, the increase in the average rate paid on
interest-bearing liabilities exceeded the increase in the yield earned on interest earning assets in 2019. While the rate paid on interest-bearing liabilities increased more than the yield on earning assets, the growth in non-interest bearing
deposits as a funding source resulted in an increase in the net interest margin. The increase in average earning assets in 2019 was primarily the result of a $97.4 increase in average loans outstanding, a $6.5 million increase in federal funds
sold, and a $59.0 million increase in average investment securities. The increases in average loans and average investment securities are largely due to the full year inclusion of the assets of First Bank and the acquisition of Jackson on October
25, 2019. The increase in average interest-bearing liabilities in 2019 was largely due to a $96.2 million increase in average interest-bearing deposits and a $3.8 million increase in average FHLB advances. These increases were partially offset by
a $700,000 decrease in average short-term borrowings (primarily customer repurchase agreements) and a $3.1 million decrease in average long-term borrowings. The majority of the increase in interest bearing liabilities was the result of the full
year inclusion of the liabilities of First Bank in 2019 and the acquisition of Jackson. The increase in average earning assets in 2018 was primarily the result of a $13.6 increase in average loans outstanding, a $4.8 million increase in federal
funds sold, a $13.3 million increase in average investment securities, and a $35.9 million increase in average interest-bearing bank balances. The increase in average interest-bearing liabilities in 2018 was largely due to a $16.7 million increase
in average interest-bearing deposits and a $3.0 million increase in average FHLB advances. These increases were partially offset by a $2.6 million decrease in average short-term borrowings (primarily customer repurchase agreements) and a $3.3
million decrease in average long-term borrowings.
PREMIER FINANCIAL BANCORP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
December 31, 2019
|
AVERAGE CONSOLIDATED BALANCE SHEETS AND NET INTEREST INCOME ANALYSIS
|
||||||||||||||||||||||||||||||||||||
|
(Dollars in thousands)
|
||||||||||||||||||||||||||||||||||||
|
2019
|
2018
|
2017
|
||||||||||||||||||||||||||||||||||
|
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
|
$
|
23,836
|
$
|
736
|
3.09
|
%
|
$
|
17,894
|
$
|
309
|
1.73
|
%
|
$
|
21,683
|
$
|
308
|
1.42
|
%
|
||||||||||||||||||
|
States and municipal
obligations (1)
|
13,948
|
481
|
3.45
|
10,291
|
322
|
3.13
|
12,132
|
402
|
3.31
|
|||||||||||||||||||||||||||
|
Mortgage backed securities
|
323,471
|
8,157
|
2.52
|
276,051
|
6,491
|
2.35
|
256,293
|
5,130
|
2.00
|
|||||||||||||||||||||||||||
|
Other securities
|
6,787
|
336
|
4.95
|
4,809
|
222
|
4.62
|
5,595
|
190
|
3.40
|
|||||||||||||||||||||||||||
|
Total investment securities
|
368,042
|
9,710
|
2.64
|
309,045
|
7,344
|
2.38
|
295,703
|
6,030
|
2.04
|
|||||||||||||||||||||||||||
|
Federal funds sold
|
18,385
|
409
|
2.22
|
11,848
|
248
|
2.09
|
7,051
|
73
|
1.04
|
|||||||||||||||||||||||||||
|
Interest-bearing deposits
with banks
|
62,852
|
1,323
|
2.10
|
72,307
|
1,441
|
1.99
|
36,405
|
603
|
1.66
|
|||||||||||||||||||||||||||
|
Loans, net of unearned
income (3)(4)
|
||||||||||||||||||||||||||||||||||||
|
Commercial
|
823,603
|
46,448
|
5.64
|
733,983
|
38,971
|
5.31
|
720,679
|
37,948
|
5.27
|
|||||||||||||||||||||||||||
|
Real estate mortgage
|
303,191
|
16,572
|
5.47
|
294,271
|
15,589
|
5.30
|
292,650
|
15,145
|
5.18
|
|||||||||||||||||||||||||||
|
Installment
|
30,095
|
2,330
|
7.74
|
31,281
|
2,409
|
7.70
|
32,566
|
2,566
|
7.88
|
|||||||||||||||||||||||||||
|
Total loans
|
1,156,889
|
65,350
|
5.65
|
1,059,535
|
56,969
|
5.38
|
1,045,895
|
55,659
|
5.32
|
|||||||||||||||||||||||||||
|
Total interest earning assets
|
1,606,168
|
76,792
|
4.78
|
1,452,735
|
66,002
|
4.54
|
1,385,054
|
62,365
|
4.50
|
|||||||||||||||||||||||||||
|
Allowance for loan losses
|
(13,815
|
)
|
(13,058
|
)
|
(11,461
|
)
|
||||||||||||||||||||||||||||||
|
Cash and due from banks
|
22,856
|
25,478
|
40,915
|
|||||||||||||||||||||||||||||||||
|
Premises and equipment
|
36,864
|
25,784
|
23,775
|
|||||||||||||||||||||||||||||||||
|
Other assets
|
72,704
|
64,600
|
57,170
|
|||||||||||||||||||||||||||||||||
|
Total assets
|
$
|
1,724,777
|
$
|
1,555,539
|
$
|
1,495,453
|
||||||||||||||||||||||||||||||
|
Liabilities and Equity:
|
||||||||||||||||||||||||||||||||||||
|
Interest bearing liabilities
|
||||||||||||||||||||||||||||||||||||
|
NOW and money market
|
$
|
411,717
|
1,324
|
0.32
|
%
|
$
|
378,617
|
958
|
0.25
|
%
|
$
|
368,093
|
619
|
0.17
|
%
|
|||||||||||||||||||||
|
Savings deposits
|
246,954
|
625
|
0.25
|
240,071
|
581
|
0.24
|
238,306
|
478
|
0.20
|
|||||||||||||||||||||||||||
|
Certificates of deposit and other time deposits
|
408,712
|
7,060
|
1.73
|
352,511
|
3,905
|
1.11
|
348,124
|
2,758
|
0.79
|
|||||||||||||||||||||||||||
|
Total interest bearing deposits
|
1,067,383
|
9,009
|
0.84
|
971,199
|
5,444
|
0.56
|
954,523
|
3,855
|
0.40
|
|||||||||||||||||||||||||||
|
Short-term borrowings
|
21,710
|
70
|
0.32
|
22,410
|
34
|
0.15
|
24,965
|
60
|
0.24
|
|||||||||||||||||||||||||||
|
Other borrowings
|
710
|
31
|
4.37
|
3,809
|
156
|
4.10
|
7,074
|
292
|
4.13
|
|||||||||||||||||||||||||||
|
FHLB advances
|
6,718
|
198
|
2.95
|
2,958
|
81
|
2.74
|
-
|
-
|
-
|
|||||||||||||||||||||||||||
|
Subordinated debt
|
5,420
|
369
|
6.81
|
5,390
|
352
|
6.53
|
5,359
|
295
|
5.50
|
|||||||||||||||||||||||||||
|
Total interest-bearing liabilities
|
1,101,941
|
9,677
|
0.88
|
%
|
1,005,766
|
6,067
|
0.60
|
%
|
991,921
|
4,502
|
0.45
|
%
|
||||||||||||||||||||||||
|
Non-interest bearing deposits
|
379,312
|
352,565
|
316,931
|
|||||||||||||||||||||||||||||||||
|
Other liabilities
|
11,601
|
4,451
|
4,411
|
|||||||||||||||||||||||||||||||||
|
Common equity
|
231,923
|
192,757
|
182,190
|
|||||||||||||||||||||||||||||||||
|
Total liabilities and equity
|
$
|
1,724,777
|
$
|
1,555,539
|
$
|
1,495,453
|
||||||||||||||||||||||||||||||
|
Net interest earnings (1)
|
$
|
67,115
|
$
|
59,935
|
$
|
57,863
|
||||||||||||||||||||||||||||||
|
Net interest spread (1)
|
3.90
|
%
|
3.94
|
%
|
4.05
|
%
|
||||||||||||||||||||||||||||||
|
Net interest margin (1)
|
4.18
|
%
|
4.13
|
%
|
4.18
|
%
|
||||||||||||||||||||||||||||||
|
(1) Taxable – equivalent yields are calculated assuming a 21% federal income tax rate for 2019 and 2018 and 35% for 2017
(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, 2019
Premier’s loan portfolio is its largest and highest yielding component of average earning assets, totaling 72.0% of average
earning assets during 2019. Average loans increased in 2019 by $97.4 million, or 9.2%, over 2018 following a $13.6 million, or 1.3%, increase in 2018 over 2017. The increase in 2019 is largely due to the acquisitions of First Bank and Jackson;
otherwise average loans increased by $10.8 million, or 1.0%, as new loans originated exceeded scheduled loan principal payments, payoffs from borrowers, and payoffs due to the workout of problem loans. Average loans outstanding in 2019 increased
by $8.6 million, or 13.6%, in Premier’s Cincinnati Metro market and increased by $116.0 million, or 21.3%, in Premier’s West Virginia market. The increase in West Virginia included an approximately $79.1 million increase in average loans from the
full year inclusion of the loans from the acquisition of First Bank early in the fourth quarter of 2018. Otherwise, average loans in the West Virginia markets increased by $37.0 million, or 6.8%, in 2019 primarily due to loan demand in central and
eastern West Virginia. Average loans outstanding in Premier’s Virginia markets held steady in 2019, increasing by $91,000, or 0.2%. Conversely, average loans outstanding decreased by $18.5 million, or 9.2%, in Premier’s DC Metro market; decreased
by $3.5 million, or 6.5%, in Premier’s rural Ohio market.; and decreased by $5.4 million, or 3.5%, in Premier’s Kentucky market. The overall decrease in Kentucky was partially offset by $7.4 million of average loans added via the acquisition of
Jackson in the fourth quarter of 2019. Otherwise, average loans in Kentucky markets decreased by $12.9 million, or 8.4%, in 2019 as loan payoffs exceeded new loan demand.
In 2018, the $13.6 million increase in average loans was largely due to additional loan demand, in Premier’s Cincinnati Metro and
West Virginia markets, which more than offset scheduled loan principal payments, payoffs from borrowers, and payoffs due to the workout of problem loans. Average loans outstanding in 2018 increased by $7.0 million, or 12.4%, in Premier’s
Cincinnati Metro market and increased by $58.7 million, or 12.1%, in Premier’s West Virginia market. The increase in West Virginia included $24.7 million of average loans added via the acquisition of First Bank early in the fourth quarter of
2018. Otherwise, average loans in the West Virginia markets increased by $34.0 million, or 7.0%, in 2018 due to internal loan demand. Conversely, average loans outstanding decreased by $30.7 million, or 13.3%, in Premier’s DC Metro market;
decreased by $8.9 million, or 16.8%, in Premier’s Virginia market; decreased by $1.9 million, or 3.4%, in Premier’s rural Ohio market; and decreased by $10.5 million, or 6.4%, in Premier’s Kentucky market, as loan payoffs exceeded new loan demand.
Total loans at December 31, 2019 increased by $46.2 million, or 4.0%, from the total at December 31, 2018. This increase follows
a $100.2 million, or 9.6%, increase in total loans in 2018 from the total at December 31, 2017. The increase in 2019 is largely due to the acquisition of Jackson, which added $41.0 million in loans at December 31, 2019. Excluding the Jackson
loans, total loans increased by $5.2 million, or 0.5%, in 2019 due to organic growth. Outstanding loans increased in Premier’s Kentucky markets by $33.6 million, or 23.0%; in Premier’s West Virginia markets by $18.2 million, or 2.8%; in Premier’s
Cincinnati Metro market by $7.2 million, or 10.7%, and in Premier’s Virginia markets by $4.2 million, or 10.0%. These increases in 2019 were partially offset by a $14.1 million, or 7.4%, decrease in outstanding loans in Premier’s DC Metro market
and a $3.0 million, or 5.9%, decrease in Premier’s rural Ohio market since year-end 2018.
PREMIER FINANCIAL BANCORP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
December 31, 2019
The increase in 2018 was largely due to the acquisition of First Bank, which added $112.0 million in loans at December 31, 2018.
Otherwise total loans decreased by $11.8 million, or 1.1%, in 2018. Excluding the loans added from the First Bank acquisition, outstanding loans increased in Premier’s West Virginia markets by $36.5 million, or 7.3%, and increased in Premier’s
Cincinnati Metro market by $8.1 million, or 13.6%. These increases in 2018 were partially offset by a $37.5 million, or 16.4%, decrease in outstanding loans in Premier’s DC Metro market; a $4.3 million, or 9.2%, decrease in outstanding loans in
Premier’s Virginia market; a $2.3 million, or 4.2%, decrease in Premier’s rural Ohio market; and a $12.4 million, or 7.8%, decrease in Premier’s Kentucky market since year-end 2017.
Loans secured by real estate totaled 87.8% of Premier’s loan portfolio at December 31, 2019, up from 87.4% of total loans at
December 31, 2018. The increase in the percentage was due to increases in real estate construction and land development loans and commercial real estate loans. The increase in these loans was partially offset by a decrease in residential real
estate loans as a percentage of the total loan portfolio, primarily due to the lower percentage of residential real estate loans added to the portfolio from the acquisition of Jackson. While the recorded investment in commercial real estate
secured loans increased $30.0 million in 2019, the commercial real estate percentage to total loans increased 0.9% at the end of 2019, compared to the end of 2018. At December 31, 2018, loans secured by real estate totaled 87.4% of Premier’s loan
portfolio, down from 88.5% of total loans at December 31, 2017. The decrease in the percentage was due to a decrease in real estate construction and land development loans. The decrease in these loans was partially offset by increases in
residential real estate loans and commercial real estate loans as a percentage of the total loan portfolio. While the recorded investment in commercial real estate secured loans increased $42.5 million in 2018, the commercial real estate
percentage to total loans remained steady at 43.0% at the end of 2017 to and 2018.
Premier’s 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. The loan portfolio acquired via the acquisition of First Bank consisted of approximately $42.4 million of residential real estate mortgage loans, or 37.0% of First Bank’s total loan
portfolio. The loan portfolio acquired via the acquisition of Bankshares consisted of approximately $56.7 million of residential real estate mortgage loans, or 41.3% of the Bankshares total loan portfolio. The loan portfolio acquired via the
acquisition of Jackson consisted of approximately $15.2 million of residential real estate mortgage loans, or 36.4% of the Jackson total loan portfolio. Premier still facilitates fixed rate mortgage originations but a majority of these are sold in
the secondary market via third party vendors whereby Premier receives a portion of the commission. Premier has not engaged in the solicitation of so-called “sub-prime” or “interest only” mortgages.
PREMIER FINANCIAL BANCORP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
December 31, 2019
Commercial loans, including commercial real estate secured 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 plans. Consumer loans generally are made to individuals living in Premier's defined market area who are known to the local bank's staff. Consumer loans are generally made for terms of
up to seven years on a secured or unsecured basis; however longer terms may be approved in certain circumstances and for revolving credit lines. While consumer loans generally provide the Company with increased interest income, consumer loans may
involve a greater risk of default.
In addition to the loans presented in the loan summary table, Premier also offers certain off-balance sheet products such as
letters of credit, revolving credit agreements, and other loan commitments. These products are offered under the same credit standards as the loan portfolio and are included in the risk-based capital ratios used by the Federal Reserve to evaluate
capital adequacy. Additional information on off-balance sheet commitments is contained in Note 19 to the consolidated financial statements.
The following loan summary 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.
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 offering a concession to enable a delinquent borrower to repay (“troubled debt restructurings”) and accruing loans past due 90 days or more, were $31.9
million, or 1.79% of total assets at year-end 2019. These amounts compare to $38.8 million of total non-performing assets, or 2.30% of total assets at year-end 2018 and $51.2 million of total non-performing assets, or 3.43% of total assets at
year-end 2017. The $6.9 million, or 17.8%, decrease in non-performing assets in 2019 from year-end 2018 was largely due to a $3.3 million decrease in accruing troubled debt restructured loans, a $3.0 million decrease in non-accrual loans, and a
$1.8 million decrease in OREO. These decreases were partially offset by a $1.1 million increase in loans past due 90 days or more. At this time management believes the loans are well collateralized and all principal outstanding on the loans
should be collected over time through the bank’s collection efforts.
PREMIER FINANCIAL BANCORP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
December 31, 2019
|
LOAN SUMMARY
|
||||||||||||||||||||||||||||||
|
(Dollars in thousands)
|
||||||||||||||||||||||||||||||
|
As of December 31
|
||||||||||||||||||||||||||||||
|
2019
|
%
|
2018
|
%
|
2017
|
%
|
2016
|
%
|
2015
|
%
|
|||||||||||||||||||||
|
Summary of Loans by Type
|
||||||||||||||||||||||||||||||
|
Commercial, secured by real estate
|
$
|
523,958
|
43.8
|
%
|
$
|
493,937
|
43.0
|
%
|
$
|
451,433
|
43.0
|
%
|
$
|
443,832
|
43.3
|
%
|
$
|
374,558
|
44.1
|
%
|
||||||||||
|
Commercial, other
|
105,079
|
8.8
|
103,624
|
9.0
|
78,259
|
7.5
|
76,736
|
7.5
|
68,339
|
8.0
|
||||||||||||||||||||
|
Real estate construction and land development
|
136,138
|
11.4
|
128,926
|
11.2
|
139,012
|
13.2
|
117,828
|
11.5
|
78,695
|
9.3
|
||||||||||||||||||||
|
Real estate mortgage
|
389,985
|
32.6
|
381,027
|
33.2
|
338,829
|
32.3
|
342,294
|
33.4
|
285,826
|
33.6
|
||||||||||||||||||||
|
Agricultural
|
1,860
|
0.2
|
2,233
|
0.2
|
1,631
|
0.2
|
1,383
|
0.1
|
1,728
|
0.2
|
||||||||||||||||||||
|
Consumer
|
29,007
|
2.4
|
27,688
|
2.4
|
28,293
|
2.7
|
30,916
|
3.0
|
31,445
|
3.7
|
||||||||||||||||||||
|
Other
|
9,268
|
0.8
|
11,866
|
1.0
|
11,595
|
1.1
|
11,834
|
1.2
|
9,155
|
1.1
|
||||||||||||||||||||
|
Total loans
|
$
|
1,195,295
|
100.0
|
%
|
$
|
1,149,301
|
100.0
|
%
|
$
|
1,049,052
|
100.0
|
%
|
$
|
1,024,823
|
100.0
|
%
|
$
|
849,746
|
100.0
|
%
|
||||||||||
|
Non-performing Assets
|
||||||||||||||||||||||||||||||
|
Non-accrual loans
|
$
|
14,437
|
$
|
17,448
|
$
|
15,246
|
$
|
25,747
|
$
|
7,141
|
||||||||||||||||||||
|
Accruing loans which are contractually past due 90 days or more
|
2,228
|
1,086
|
3,391
|
1,999
|
3,032
|
|||||||||||||||||||||||||
|
Accruing troubled debt restructurings
|
3,020
|
6,283
|
12,584
|
8,268
|
3,996
|
|||||||||||||||||||||||||
|
Total non-performing and restructured loans
|
19,685
|
24,817
|
31,221
|
36,014
|
14,169
|
|||||||||||||||||||||||||
|
Other real estate acquired through foreclosures
|
12,242
|
14,024
|
19,966
|
12,665
|
13,040
|
|||||||||||||||||||||||||
|
Total non-performing and restructured loans and other real estate
|
$
|
31,927
|
$
|
38,841
|
$
|
51,187
|
$
|
48,679
|
$
|
27,209
|
||||||||||||||||||||
|
Non-performing and restructured loans as a % of total loans
|
1.65
|
%
|
2.16
|
%
|
2.98
|
%
|
3.51
|
%
|
1.67
|
%
|
||||||||||||||||||||
|
Non-performing and restructured loans and other real estate as a % of total assets
|
1.79
|
%
|
2.30
|
%
|
3.43
|
%
|
3.25
|
%
|
2.19
|
%
|
||||||||||||||||||||
|
Allocation of Allowance forLoan Losses
|
||||||||||||||||||||||||||||||
|
Commercial, other
|
$
|
1,946
|
9.8
|
%
|
$
|
2,152
|
10.2
|
%
|
$
|
1,226
|
8.8
|
%
|
$
|
1,243
|
8.8
|
%
|
$
|
1,166
|
9.3
|
%
|
||||||||||
|
Real estate, construction
|
1,724
|
11.4
|
2,255
|
11.2
|
2,408
|
13.2
|
1,397
|
11.5
|
1,061
|
9.3
|
||||||||||||||||||||
|
Real estate, other
|
9,591
|
76.4
|
8,980
|
76.2
|
8,142
|
75.3
|
7,849
|
76.7
|
7,113
|
77.7
|
||||||||||||||||||||
|
Consumer installment
|
281
|
2.4
|
351
|
2.4
|
328
|
2.7
|
347
|
3.0
|
307
|
3.7
|
||||||||||||||||||||
|
Total
|
$
|
13,542
|
100.0
|
%
|
$
|
13,738
|
100.0
|
%
|
$
|
12,104
|
100.0
|
%
|
$
|
10,836
|
100.0
|
%
|
$
|
9,647
|
100.0
|
%
|
||||||||||
PREMIER FINANCIAL BANCORP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
December 31, 2019
The $1.8 million decrease in OREO is largely due to the fourth quarter 2019 sale of one of the largest OREO
properties held and the additional writedown on the largest property held. The $3.3 million decrease in accruing troubled debt restructured loans was the result of principal payments and payoffs on these loans during 2019. There were no new
troubled debt restructurings that occurred in 2019. The $3.0 million decrease in non-accrual loans was largely due to the $3.6 million of payoffs on two of the larger non-accrual loans and principal payments on non-accrual loans. The decreases in
non-accrual loans were partially offset by approximately $439,000 of loans from the Jackson acquisition that were on non-accrual status at the end of 2019 and loans that were foreclosed upon during 2019. Management continues their efforts to bring
these well-collateralized borrowers to a current status prior to the commencement of collection efforts via foreclosure or other means. Although loans may be classified as non-performing, some continue to pay interest irregularly or at less than
originally contracted terms. During 2019, approximately $724,000 of interest income was recognized on non-accrual loans, including approximately $147,000 of accelerated purchase discount recognized as income, largely due to full payoffs received
on non-accrual loans during the year. This amount compares to approximately $950,000 that would have been recognized on non-accrual loans during 2018 in accordance with the original terms of the loans.
The decrease in total non-performing assets in 2018 from year-end 2017 was largely due to a $6.3 million decrease in accruing
troubled debt restructured loans, a $2.3 million decrease in loans past due 90 days or more, and a $5.9 million decrease in OREO. These decreases were partially offset by a $2.2 million increase in non-accrual loans. The $2.2 million increase in
non-accrual loans was largely due to the $1.5 million of troubled debt restructurings at December 31, 2017 that were placed on non-accrual status during 2018, plus approximately $1.8 million of loans from the First Bank acquisition that were on
non-accrual status at the end of 2018. These increases in non-accrual loans were partially offset by principal payments on non-accrual loans or loans that were foreclosed upon during 2018. Management continues their efforts to bring these
well-collateralized borrowers to a current status prior to the commencement of collection efforts via foreclosure or other means. Although, loans may be classified as non-performing, some continue to pay interest irregularly or at less than
originally contracted terms. During 2018, approximately $765,000 of interest income was recognized on non-accrual loans, including approximately $6,000 of accelerated purchase discount recognized as income, largely due to full payoffs received on
non-accrual loans during the year. This amount compares to approximately $900,000 that would have been recognized on non-accrual loans during 2018 in accordance with the original terms of the loans.
PREMIER FINANCIAL BANCORP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
December 31, 2019
Current accounting guidance adopted by Premier in 2009 does not permit an acquirer to carry over the purchased entity’s allowance
for loan losses. Instead, under current accounting guidance, all acquired loans were recorded at their net estimated fair value. The estimate of fair value on all loans, but particularly on non-performing assets, includes factors for the
measurement of credit risk, interest rate risk and re-salability in the most advantageous market for the loans in an orderly transaction between market participants. These estimates typically include significant discounts on the non-accrual loans
and purchased credit impaired loans. These estimates require management's most difficult, subjective and complex judgments and are inherently uncertain. However, since the estimated fair value of the acquired loans includes an estimate of credit
risk in the loans, no allowance for loan losses is recorded at the date of acquisition.
With the acquisition of Jackson on October 25, 2019, no allowance for loan losses recorded on First Bank’s balance sheet prior to
that date was carried over to Premier’s allowance for loan losses. At September 30, 2019, just prior to Premier’s acquisition, First Bank reported a collective allowance for loan losses of approximately $236,000. In contrast, Premier recorded the
estimated fair value of the acquired loan portfolio at an estimated $834,000 discount to the contractual amounts receivable on the loans at acquisition. Likewise, in the acquisition of First Bank on October 12, 2018, no allowance for loan losses
recorded on First Bank’s balance sheet prior to that date was carried over to Premier’s allowance for loan losses. At September 30, 2018, just prior to Premier’s acquisition, First Bank reported a collective allowance for loan losses of
approximately $2.0 million. In contrast, Premier recorded the estimated fair value of the acquired loan portfolio at an estimated $4.6 million discount to the contractual amounts receivable on the loans at acquisition.
The fair value adjustments recorded on the Jackson and First Bank acquired loan portfolios are allocated per loan and are used to
offset any charge-offs of the uncollectible portion of the contractual amount due on non-performing assets, or accreted into interest income using a level yield method on performing loans. Should Premier collect the full contractual amount due,
any fair value discount is recognized as interest income at the time of payoff. In its evaluation of the acquired Jackson loan portfolio, management determined that $1.7 million of the loans acquired would meet the definition of a purchase credit
impaired loan, with the remainder of the portfolio being evaluated under the collectively impaired standard. In its evaluation of the acquired First Bank loan portfolio, management determined that $9.9 million of the loans acquired would meet the
definition of a purchase credit impaired loan, with the remainder of the portfolio being evaluated under the collectively impaired standard. Additional information on loans purchased with evidence of deteriorated credit quality is contained in Note 5 to the consolidated financial statements.
PREMIER FINANCIAL BANCORP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
December 31, 2019
Management believes the estimated probable incurred losses related to delinquent loans to be adequately provided for in the
allowance for loan losses. As management's efforts to collect on all of the Company’s non-performing assets continue, matured loans are only renewed using Premier's strengthened credit policies. Otherwise, loans may be carried as accruing loans
that are greater than 90 days past due or placed on non-accrual status and foreclosure proceedings begun to obtain and liquidate any collateral securing the past due or matured loans. In 2017, large provisions for loan losses were recorded in the
second and third quarters due to additional reserves needed on impaired loans and to provide for the growth in the loan portfolio. In 2018, a large provision for loan losses was recorded in the first quarter primarily to provide for additional
identified credit risk on impaired loans in Premier’s commercial real estate and construction loan portfolios. In 2019, provisions for loan losses were fairly consistent during the first three quarters, under Premier’s analysis of credit risk in
the loan portfolio. In the fourth quarter of 2019, Premier recorded a small negative provision for loan losses in response to a lower overall credit risk calculation for the loan portfolio at year-end. As previously demonstrated by Premier’s
history, management 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.
The Loan Summary table presents five years of comparative non-performing asset information. Other than these loans and the
impaired loans discussed in Note 5 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. For real estate loans, upon repossession, the property 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 2019, Premier recorded $1.2 million of write-downs of OREO properties, which was partially offset by $191,000 of net gains
on the disposition of OREO properties in 2019. The write-downs recorded in 2019 were largely in response to updated appraised values or adjustments in the net realizable value based upon actual sale contracts on properties held to reflect expected
net realizable values upon liquidation. During 2018, Premier recorded $519,000 of write-downs of OREO properties which was more than offset by $969,000 of net gains on the disposition of OREO properties, resulting in a net decrease in 2018
operating expenses of approximately $450,000. These gains were largely due to approximately $6.1 million of OREO sold, or approximately 30% of the carrying value held on the books at year-end 2017. The 2018 net operating expense reduction amount
compares to $667,000 of write-downs of OREO properties in 2017 and the $207,000 of losses on the disposition of OREO properties, resulting in a net expense of $874,000. The write-downs recorded in 2017 were largely due to adjustments in the net
realizable value based upon actual sale contracts on properties held for an extended period of time.
PREMIER FINANCIAL BANCORP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
December 31, 2019
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 more likely to be classified as impaired which are evaluated individually. 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.
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 cash flows 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 then current known facts and circumstances related to the loan and the borrower. Additional information on Premier’s impaired loans is contained in Note 5 to
the consolidated financial statements.
PREMIER FINANCIAL BANCORP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
December 31, 2019
The sum of the calculations and estimations of the risk of loss in the 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 a substantial principal payment or payment in full on an impaired loan. In 2019, Premier recorded a
provision for loan losses of $1.3 million compared to $2.3 million of provision for loan losses recorded in 2018, and a $2.5 million of provision for loan losses in 2017.
At December 31, 2019, the allowance for loan losses was $13.5 million, or 1.13% of total year-end loans, compared to an allowance
for loan losses of $13.7 million, or 1.20% of total loans at December 31, 2018. The decrease in the percentage of allowance to total loans at year-end is partially due to the decrease in the overall allowance but also a result of the acquisition
of Jackson. The amount of allowance allocated to individually impaired loans increased by approximately $306,000 in 2019. While loans identified as impaired decreased by $8.0 million, or 39.8% since year-end 2018, the amount of allowance
allocated to individually impaired loans increased, largely due to increases in estimated credit risk on a multifamily residential loan relationship, two commercial real estate loan relationships and a third commercial loan relationship. While
loans collectively evaluated for impairment increased by $68.0 million in 2019, the amount of allowance allocated to collectively evaluated loans decreased by approximately $502,000, largely due to decreases in the estimated credit risk within the
performing loan portfolio under Premier’s established methods for measuring credit risk. A portion of the increase in loans collectively evaluated for impairment includes approximately $41.7 million of loans acquired via the acquisition of
Jackson. These loans were recorded at their estimated fair value on the date of acquisition including an estimate of credit risk within the loan portfolio and thus no significant amount of allowance for loan losses was deemed necessary for these
loans at December 31, 2019. As a result, the ratio of allowance assigned to collectively evaluated loans decreased to 0.89% at December 31, 2019 compared to 0.98% at December 31, 2018.
At December 31, 2018, the allowance for loan losses was $13.7 million, or 1.20% of total year-end loans, compared to an allowance
for loan losses of $12.1 million, or 1.15% of total loans at December 31, 2017. The increase in the percentage of allowance to total loans at year-end is largely a result of the larger allowance assigned to individually impaired loans. The amount
of allowance allocated to individually impaired loans increased by approximately $1,294,000 in 2018. While loans identified as impaired decreased by $4.9 million, or 19.6% since year-end 2017, the amount of allowance allocated to individually
impaired loans increased largely due to increases in estimated credit risk on a multifamily residential loan relationship and three commercial real estate loan relationships. The amount of allowance allocated to collectively evaluated loans
increased by approximately $340,000, largely due to a $37.8 million increase in loans collectively evaluated for impairment. This increase excludes approximately $110.8 million of loans acquired via the acquisition of First Bank. These loans were
recorded at their estimated fair value on the date of acquisition including an estimate of credit risk within the loan portfolio and thus no significant amount of allowance for loan losses was deemed necessary for these loans at December 31, 2018.
As a result, the ratio of allowance assigned to collectively evaluated loans decreased to 0.98% at December 31, 2018 compared to 1.04% at December 31, 2017.
PREMIER FINANCIAL BANCORP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
December 31, 2019
At December 31, 2017, the allowance for loan losses was $12.1 million, or 1.15% of total year-end loans, compared to an allowance
for loan losses of $10.8 million, or 1.06% of total loans at December 31, 2016. The increase in the percentage of allowance to total loans at year-end was largely a result of the larger allowance assigned to individually impaired loans. The
amount of allowance allocated to individually impaired loans increased by approximately $896,000 in 2017. While loans identified as impaired decreased by $8.7 million, or 25.6% since year-end 2016, the amount of allowance allocated to individually
impaired loans increased largely due to increases in estimated credit risk on a multifamily residential loan relationship and two construction and land development loans. The amount of allowance allocated to collectively evaluated loans increased
by approximately $372,000, largely due to a $39.4 million increase in collectively evaluated loans outstanding. The ratio of allowance assigned to collectively evaluated loans remained fairly consistent at December 31, 2017 at approximately 1.04%.
The “Summary of Loan Loss Experience” table below provides a more 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 2015, the amount of net charge-offs was slightly less when compared to 2014 due to a significant increase in recoveries on real estate
secured loans reducing the ratio of net charge-offs to average loans outstanding to 0.12%. In 2016, net charge-offs were significantly less when compared to 2015, largely due to a decrease in gross charge-offs. Combined with the increase in
average total loans in 2016, the lower level of net charge-offs reduced the ratio of net charge-offs to average loans outstanding to half of the amount in 2015 at 0.06%. In 2017, net charge-offs were significantly higher than 2016 largely due to
one large multifamily real estate charge-off upon foreclosure when that loan was moved into OREO and relatively low net charge-offs in 2016. The increased collection efforts by the banks also helped increase gross recoveries. The increase in net
charge-offs in 2017 increased the ratio of net charge-offs to average loans outstanding to 0.12%, which still remains relatively low. In 2018, net charge-offs were significantly less when compared to 2017, largely due to a decrease in gross
charge-offs. The collection efforts by the banks has maintained gross recoveries consistent with the prior year. The decrease in net charge-offs in 2018 decreased the ratio of net charge-offs to average loans outstanding to 0.06%, the lowest
level during the five years presented in the table. In 2019, net charge-offs were significantly greater when compared to 2018, largely due to an increase in gross charge-offs and a reduction in recoveries from one large recovery in 2018. The
increased average total loans with the increased net charge-offs increased the ratio of net charge-offs to average loans outstanding to 0.12%, which still remains relatively low.
PREMIER FINANCIAL BANCORP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
December 31, 2019
In 2015, Premier reduced its allowance allocated to impaired loans via payments and payoffs of loans as well as foreclosure. In
the second quarter of 2015, a significant recovery on a real estate secured loan resulted in a negative provision for loan losses for the quarter. The negative provision was more than offset by increases in the allowance estimated for collectively
impaired loans, resulting in $326,000 of provision for loan losses. In 2016, the provision for loan losses increased to $1,748,000, largely to provide for an increase in credit risk as a result of internal loan growth, as loans outstanding
increased by an additional $42.2 million, or 5.0%, after excluding the $132.8 million of loans acquired via the acquisition of Bankshares but also for an estimate of potential loan losses related to flash flooding that occurred in some of Premier’s
West Virginia markets during the last week of June, 2016. In 2017, the provision for loan losses increased to $2,499,000, largely due to additional specific reserves on individually impaired loans as discussed above and to also provide for the
increase in internal loan growth, as loans outstanding increased again in 2017. Due to substantial assistance from both public and private sources to the regions of West Virginia affected by the flooding, Premier’s actual loan loss experience
related to the flooding was minor, and in 2017 management reduced its estimate of potential loan losses believing the affected geographic areas demonstrated no more additional credit risk than that of the other general economic areas served by
Premier’s branch network. As a result, much of the initial provision for loan losses was reversed in 2017 and helped offset additional provisions for loan losses related to individually impaired loans and increases in estimates of potential losses
from declining economic activity in southern and central West Virginia. In 2018, the provision for loan losses decreased to $2,315,000, to provide for the additional specific reserves on individually impaired loans as discussed above and to also
provide for an increase in credit risk on collectively evaluated commercial and industrial loans. These increases were partially offset by decreases in provision for loan losses on residential real estate loans and construction and land
development loans. Management updated its policies regarding estimation of probable incurred losses in the first quarter of 2018. The updates included incorporating a common estimated loss ratio for all pass credits within a given loan
classification, adding an additional qualitative factor for document exceptions on collectively impaired loans, and reallocating the qualitative portion of the allowance to align more closely to the inputs used to determine the qualitative
portion. The result was a reduction in the amount of the allowance attributed to collectively impaired residential real estate and multifamily real estate loans and an increase in the amount of allowance attributed to collectively impaired
commercial and industrial loans, consumer, construction, and all other loans. Finally, in 2019, the provision for loan losses decreased to $1,250,000 as provisions for the increase in specific reserves on individually impaired loans and increases
in total loans outstanding were partially offset by a decrease in the allowance allocated to collectively evaluated loans discussed above. Additional details on the activity in the allowance for loan losses as well as past due and non-performing
loans, including loans individually evaluated for impairment, is contained in Note 5 to the consolidated financial statements.
PREMIER FINANCIAL BANCORP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
December 31, 2019
Premier proactively pursues past due loans in an effort to bring those loans back to current status. If these efforts fail and
a past due loan becomes a non-performing loan, Premier’s policies for determining the adequacy of the allowance for loan losses are used to determine the estimated potential loss on the loan. 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 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 2019 totaled $1,446,000, as $1,716,000 of loans charged-off were partially offset by $270,000 of recoveries
on loans previously charged-off. Net charge-offs in 2018 totaled $681,000, as $1,368,000 of loans charged-off were partially offset by $687,000 of recoveries on loans previously charged-off. Net charge-offs in 2017 totaled $1,231,000, as
$1,903,000 of loans charged-off were partially offset by $672,000 of recoveries of loans previously charged-off.
In 2019, total charge-offs decreased by $348,000 to $1,716,000, or 0.15% of average total loans. Charge-offs increased in real
estate loans and consumer installment loans but decreased in commercial, financial, and agricultural loans and real estate construction loans. The majority of the increase was in real estate loans, up $431,000 to $829,000 for the year. The
majority of the increase was due to a small number of loans that had large charge-off activity on residential real estate loans in 2019. In 2018, total charge-offs decreased by $535,000 to $1,368,000, or 0.13% of average total loans.
Charge-offs decreased in all categories of loans except for commercial, financial, and agricultural loans, which increased by $298,000 to $794,000 for the year. The majority of the decrease was due to lower charge-off activity on residential and
multifamily real estate loans, real estate construction loans, and consumer installment loans in 2018. In 2017, total charge-offs increased by $893,000 to $1,903,000, or 0.18% of average total loans. Charge-offs increased in all categories of
loans except for consumer installment loans, which decreased by $62,000 to $278,000 for the year. The majority of the increase was due to a large multifamily real estate loan charge-off in 2017 that resulted in foreclosure. Otherwise,
charge-offs were higher due to charge-off activity on commercial, real estate, and real estate construction loans in 2017. In 2016, total charge-offs decreased by $1,086,000 to $1,010,000, or 0.10% of average total loans. Charge-offs decreased
in all categories of loans except for consumer installment loans, which increased by $131,000 to $340,000 for the year. The majority of the decrease was due to a large construction real estate loan charge-off in 2015 that resulted in
foreclosure. Otherwise, charge-offs were only slightly lower due to charge-off activity on commercial loans in 2016. In 2015, total charge-offs increased by $495,000 to $2,096,000, or 0.24% of average total loans. Charge-offs increased in all
categories of loans except for other real estate loans. A portion of the increase in the construction real estate loan charge-offs was a result of the foreclosure of a real estate secured loan previously identified as individually impaired and
resulted in a charge-off upon foreclosure. Otherwise, charge-off activity decreased compared to the higher level of other real estate charge-offs recorded in 2014.
PREMIER FINANCIAL BANCORP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
December 31, 2019
|
SUMMARY OF LOAN LOSS EXPERIENCE
|
||||||||||||||||||||
|
(Dollars in thousands)
|
||||||||||||||||||||
|
For the Year Ended December 31
|
||||||||||||||||||||
|
2019
|
2018
|
2017
|
2016
|
2015
|
||||||||||||||||
|
Allowance for loan losses beginning of period
|
$
|
13,738
|
$
|
12,104
|
$
|
10,836
|
$
|
9,647
|
$
|
10,347
|
||||||||||
|
Amounts charged off:
|
||||||||||||||||||||
|
Commercial, financial and agricultural loans
|
680
|
794
|
496
|
347
|
611
|
|||||||||||||||
|
Real estate construction loans
|
14
|
20
|
129
|
-
|
900
|
|||||||||||||||
|
Real estate loans – other
|
829
|
398
|
1,000
|
323
|
376
|
|||||||||||||||
|
Consumer installment loans
|
193
|
156
|
278
|
340
|
209
|
|||||||||||||||
|
Total charge-offs
|
1,716
|
1,368
|
1,903
|
1,010
|
2,096
|
|||||||||||||||
|
Recoveries on amounts previously charged-off:
|
||||||||||||||||||||
|
Commercial, financial and agricultural loans
|
163
|
169
|
236
|
172
|
121
|
|||||||||||||||
|
Real estate construction loans
|
-
|
400
|
10
|
143
|
99
|
|||||||||||||||
|
Real estate loans – other
|
65
|
60
|
299
|
50
|
753
|
|||||||||||||||
|
Consumer installment loans
|
42
|
58
|
127
|
86
|
97
|
|||||||||||||||
|
Total recoveries
|
270
|
687
|
672
|
451
|
1,070
|
|||||||||||||||
|
Net charge-offs
|
1,446
|
681
|
1,231
|
559
|
1,026
|
|||||||||||||||
|
Provision for loan losses
|
1,250
|
2,315
|
2,499
|
1,748
|
326
|
|||||||||||||||
|
Allowance for loan losses, end of period
|
$
|
13,542
|
$
|
13,738
|
$
|
12,104
|
$
|
10,836
|
$
|
9,647
|
||||||||||
|
Average total loans
|
$
|
1,156,889
|
$
|
1,059,535
|
$
|
1,045,894
|
$
|
1,003,528
|
$
|
866,556
|
||||||||||
|
Total loans at year-end
|
1,195,295
|
1,149,301
|
1,049,052
|
1,024,823
|
849,746
|
|||||||||||||||
|
As a percent of average loans
|
||||||||||||||||||||
|
Net charge-offs
|
0.12
|
%
|
0.06
|
%
|
0.12
|
%
|
0.06
|
%
|
0.12
|
%
|
||||||||||
|
Provision for loan losses
|
0.11
|
%
|
0.22
|
%
|
0.24
|
%
|
0.17
|
%
|
0.04
|
%
|
||||||||||
|
Allowance for loan losses
|
1.17
|
%
|
1.30
|
%
|
1.16
|
%
|
1.08
|
%
|
1.11
|
%
|
||||||||||
|
As a percent of total loans at year-end
|
||||||||||||||||||||
|
Allowance for loan losses
|
1.13
|
%
|
1.20
|
%
|
1.15
|
%
|
1.06
|
%
|
1.14
|
%
|
||||||||||
|
As a multiple of net charge-offs
|
||||||||||||||||||||
|
Allowance for loan losses
|
9.37
|
X
|
20.17
|
X
|
9.83
|
X
|
19.38
|
X
|
9.40
|
X
|
||||||||||
|
Income before tax and provision for loan losses
|
22.46
|
X
|
41.68
|
X
|
21.06
|
X
|
37.02
|
X
|
19.18
|
X
|
||||||||||
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
PREMIER FINANCIAL BANCORP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
December 31, 2019
may be identified that would necessitate additional charge-offs and potentially additional provisions for loan losses. Premier
continues to monitor and evaluate the impact that national housing market prices may have on its local markets and collateral valuations as management evaluates the adequacy of the allowance for loan losses. 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 5 to the consolidated financial statements.
The following table presents the maturity distribution and interest sensitivity of selected loan categories at December 31, 2019.
Maturities are based upon contractual terms.
|
LOAN MATURITIES and INTEREST SENSITIVITY
|
||||||||||||||||
|
December 31, 2019
|
||||||||||||||||
|
(Dollars in thousands)
|
||||||||||||||||
|
Projected Maturities*
|
||||||||||||||||
|
One Year or Less
|
One Through Five Years
|
Over
Five Years
|
Total
|
|||||||||||||
|
Commercial, secured by real estate
|
$
|
115,699
|
$
|
385,358
|
$
|
22,957
|
$
|
524,014
|
||||||||
|
Commercial, other
|
57,304
|
43,067
|
4,756
|
105,127
|
||||||||||||
|
Real estate construction
|
69,194
|
61,213
|
5,791
|
136,198
|
||||||||||||
|
Agricultural
|
186
|
1,501
|
173
|
1,860
|
||||||||||||
|
Total
|
$
|
242,383
|
$
|
491,139
|
$
|
33,677
|
$
|
767,199
|
||||||||
|
Fixed rate loans
|
$
|
57,647
|
$
|
169,475
|
$
|
16,642
|
$
|
243,764
|
||||||||
|
Floating rate loans
|
184,736
|
321,664
|
17,035
|
523,435
|
||||||||||||
|
Total
|
$
|
242,383
|
$
|
491,139
|
$
|
33,677
|
$
|
767,199
|
||||||||
|
Fixed rate loans projected to mature after one year
|
$
|
186,117
|
||||||||||||||
|
Floating rate loans projected to mature after one year
|
338,699
|
|||||||||||||||
|
Total
|
$
|
524,816
|
||||||||||||||
|
(*) Based on scheduled or approximate repayments
|
||||||||||||||||
PREMIER FINANCIAL BANCORP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
December 31, 2019
Other Earning Assets
Investment securities averaged $368.0 million in 2019, up $59.0 million, or 19.1%, from the $309.0 million averaged in 2018.
This increase follows a $13.3 million, or 4.5%, increase in 2018 from the $295.7 million averaged in 2017. The increase in 2019 is largely attributable to the full year inclusion of the investment securities from the acquisition of First Bank and
the investment portfolio of Jackson acquired on October 25, 2019. Although the purchases of investments in 2019 did not exceed the total proceeds from maturities, calls, and paydowns of investments in 2019, the higher balance of investments at the
beginning of 2019 also contributed to the higher average balance outstanding in 2019. The balance of investments at December 31, 2019 increased by $25.0 million, or 6.8%, from the year-end 2018 balance, largely due to the $44.7 million investment
portfolio acquired from Jackson. Otherwise, investments decreased by $19.7 million, or 5.4%, at year-end 2019. During 2019, only $66.7 million of new investments were purchased although $95.0 million of proceeds were received from maturities,
calls, and paydowns of investments in 2019. The surplus funds were used primarily to satisfy net deposit withdrawals, supplement the funds used in the purchase of Jackson and fund the increase in loans outstanding during the year. The increase in
average investment securities in 2018 is partially attributable to the acquisition of First Bank as well as purchases of investments in 2018 exceeding the total proceeds from maturities, calls, and paydowns of investments in 2018. At December 31,
2018 the amount of investments totaled $365.7 million, up $87.2 million, or 31.3%, from the $278.5 million of investments at December 31, 2017. The increase in investments is partially a result of the acquisition of First Bank, which added
approximately $45.2 million of investment securities to the portfolio on October 12, 2018. The remaining $42.0 million increase was the result of net investment purchases from an increase in surplus funds resulting from the decrease in loans
outstanding during the year, excluding the acquired First Bank loan portfolio. During 2018, Premier purchased approximately $110.9 million of investment securities, primarily mortgage-backed securities, which more than offset the $65.2 million of
investments that were called or matured (including principal payments on CMO’s and mortgage backed securities) during the year. During 2018, an increase in surplus funds from the decrease in loans outstanding, excluding the acquired First Bank
loan portfolio, were deployed into the investment portfolio in an effort to optimize the yield on total earning assets.
Investment securities are highly liquid and generally have a greater yield than interest bearing bank balances or federal funds
sold. However, their longer investment term generally results in greater interest rate risk over other short-term investments. As market interest rates decrease, issuers of investment securities routinely invoke call features of their securities
and reissue new bonds at lower coupon rates. To offset some of the effects of interest rate risk in the investment portfolio, Premier purchases collateralized mortgage obligations (“CMO’s”) and mortgage backed securities (“MBS’s”) issued by
government sponsored agencies. These investments return a portion of the principal each month coinciding with the monthly principal payments made by mortgage borrowers collateralizing the securities. It is the monthly return of principal that
would allow Premier to take advantage of any rise in market interest rates by investing the principal payments in future higher-yielding securities or loans long before the final
PREMIER FINANCIAL BANCORP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
December 31, 2019
maturity date of the CMO or MBS. An added feature of these CMO’s and MBS’s is that the securities are not subject to early call provisions. Only
the mortgagees’ prepayment of their underlying mortgages can accelerate the principal reduction on the investment security. Thus, the purchase yield is not as susceptible to downward interest rate risks as investment securities with call
features. Mortgage backed securities and CMO’s continue to be Premier’s dominant investment in its portfolio, comprising approximately 88% of the fair value of the investment portfolio at December 31, 2019 and December 31, 2018.
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, 2019 all of Premier's
investments were classified as available-for-sale and carried at fair value. Additional information on the investment portfolio can be found in Note 4 to the consolidated financial statements.
The following table presents a summary of the carrying values of investment securities.
|
FAIR VALUE OF SECURITIES AVAILABLE FOR SALE
|
||||||||||||
|
(Dollars in thousands)
|
||||||||||||
|
As of December 31
|
||||||||||||
|
2019
|
2018
|
2017
|
||||||||||
|
U.S. government sponsored entity securities
|
$
|
30,730
|
$
|
24,170
|
$
|
19,134
|
||||||
|
States and political subdivisions
|
16,017
|
14,327
|
11,634
|
|||||||||
|
Mortgage-backed securities issued by government sponsored entities
|
341,953
|
323,785
|
247,698
|
|||||||||
|
Other securities
|
2,054
|
3,449
|
-
|
|||||||||
|
Total securities
|
$
|
390,754
|
$
|
365,731
|
$
|
278,466
|
||||||
PREMIER FINANCIAL BANCORP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
December 31, 2019
|
SECURITIES MATURITY AND YIELD ANALYSIS
|
||||||||||||
|
December 31, 2019
|
||||||||||||
|
(Dollars in thousands)
|
||||||||||||
|
Fair Value
|
Average Maturity (yrs/mos)
|
Taxable Equivalent Yield*
|
||||||||||
|
U.S. government sponsored entity securities
|
||||||||||||
|
Within one year
|
$
|
7,633
|
1.95
|
%
|
||||||||
|
After one but within five years
|
12,105
|
2.68
|
||||||||||
|
After five but within ten years
|
10,450
|
2.51
|
||||||||||
|
After ten years
|
542
|
2.24
|
||||||||||
|
Total U.S. government sponsored entity securities
|
$
|
30,730
|
4/1
|
2.43
|
||||||||
|
States and political subdivisions
|
||||||||||||
|
Within one year
|
1,822
|
3.15
|
||||||||||
|
After one but within five years
|
3,238
|
2.61
|
||||||||||
|
After five but within ten years
|
5,534
|
3.08
|
||||||||||
|
After ten years
|
5,423
|
3.78
|
||||||||||
|
Total states and political subdivisions securities
|
$
|
16,017
|
7/3
|
3.28
|
||||||||
|
Mortgage-backed securities**
|
||||||||||||
|
Within one year
|
2,225
|
3.10
|
||||||||||
|
After one but within five years
|
325,558
|
2.67
|
||||||||||
|
After five but within ten years
|
14,170
|
2.54
|
||||||||||
|
Total mortgage-backed securities
|
$
|
341,953
|
3/8
|
2.67
|
||||||||
|
Other securities
|
||||||||||||
|
After one but within five years
|
$
|
1,527
|
3.89
|
%
|
||||||||
|
After five but within ten years
|
527
|
3.67
|
||||||||||
|
Total other securities
|
$
|
2,054
|
3/3
|
3.84
|
||||||||
|
Total securities available-for-sale
|
$
|
390,754
|
3/10
|
2.68
|
||||||||
|
(*) Fully tax-equivalent using the rate of 21%
|
||||||||||||
|
(**) Maturities for mortgage-backed securities are based on expected average life
|
||||||||||||
As shown in the Securities Maturity and Yield Analysis table above, the average maturity period of the securities
available-for-sale at December 31, 2019 was 3 years and 10 months. The table uses a weighted estimated average life method to report the average maturity of mortgage-backed securities, which includes the estimated effect of monthly payments and
prepayments. 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.
PREMIER FINANCIAL BANCORP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
December 31, 2019
Premier’s average investment in federal funds sold and interest bearing bank balances decreased by 3.5% in 2019 compared to
2018. This decrease follows a 93.7% increase in 2018 compared to 2017. Averaging $81.2 million in 2019, federal funds sold and interest bearing bank balances decreased $3.0 million from an average balance of $84.2 million in 2018. The decrease
in these highly liquid investments in 2019 was largely the result of helping to satisfy deposit withdrawals, reductions in customer repurchase agreements, and funding the increase in loans outstanding. The increase in 2018 is in large part due to
the increase in short-term interest rates without a corresponding increase in medium-term interest rates. As a result, the lost earnings from holding lower yielding short-term investments was not nearly as severe as it has been in previous years.
Therefore, Premier held more funds in short-term highly liquid earning assets, such as federal funds sold and interest-bearing bank balances, to maximize its opportunity to fund loans and reduce the debt assumed in the acquisition of First Bank, as
well as satisfy deposit withdrawals and reductions in customer repurchase agreements. As shown in the Consolidated Average Balance Sheets and Net Interest Income Analysis above, on average, the yield on federal funds sold was only 1.04% in 2017,
increased to 2.09% in 2018, and then increased to average 2.22% in 2019, in accordance with the Federal Reserve’s Board of Governors’ policy decisions regarding increases in the national federal funds rate. To obtain higher yields on its most
highly liquid funds Premier also invests in interest-bearing bank balances, primarily with the Federal Reserve Bank, which yielded, on average, 1.66% in 2017, far exceeding the yield on average federal funds sold. In 2018, the average yield on
interest-bearing bank balances increased to 1.99%, slightly less than the average federal fund rate. In comparison, the average yield earned on the entire investment portfolio was 2.04% in 2017, only 38 basis points higher than the average yield
earned on interest-bearing bank balances, and the average yield earned on the entire investment portfolio increased to only 2.38% in 2018, only 29 basis point higher than the average yield earned on federal funds sold in 2018. Thus Premier
retained more of its surplus funding in these short-term highly liquid earning assets. In 2019, the average yield on interest-bearing bank balances increased to 2.10%, still only slightly less than the 2.22% average yield on federal funds sold.
In comparison, the average yield earned on the entire investment portfolio increased to 2.64% in 2019, increasing to 42 basis points higher than the average yield earned on federal funds sold in 2019.
The average balance of federal funds sold increased by $6.5 million in 2019 to $18.4 million, while average interest-bearing bank
balances decreased by $9.5 million in 2019 to $62.9 million. The majority of these interest bearing bank balances are held at Federal Reserve Banks. Yields on federal funds sold rise and fall in direct correlation with interest rate changes made
by the Federal Reserve Board in establishing national economic policy. Investment security yields are based on a number of pricing factors, including but not limited to coupon rate, time to maturity and issuer credit quality. Fluctuations in the
amount of 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.
PREMIER FINANCIAL BANCORP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
December 31, 2019
Funding Sources
The average rate paid on interest-bearing liabilities was 0.88% in 2019, up from the 0.60% paid in 2018, and the 0.45% paid in
2017. The rise in short-term interest rates as a result of five consecutive quarters of 25 basis point increases in the Federal Funds target rate by the Federal Reserve Board of Governors from December 2017 thru December 2018 resulted in keen
local competition for deposit funds as well as higher internet based pricing for both transaction and time deposits. As short-term interest rates increased the competition for deposits increased, requiring Premier to raise the rates paid on its
interest-bearing deposit accounts. Furthermore, the rise in short-term rates also increased the rate paid on Premier’s subordinated debt, which has a fully floating interest rate that is adjusted quarterly. In 2019, the average rate paid on its
interest-bearing deposits increased by 28 basis points to 0.84%. In order to remain competitive and retain its customer base of core deposits, Premier began increasing the rates paid on its certificates of deposit in late 2017, a trend that
continued throughout all of 2018 and the first half of 2019. As a result, the average rate paid on Premier’s certificates of deposit increased the most, at 62 basis points to 1.73% in 2019, up from 1.11% in 2018. Furthermore, Premier increased
the rates paid on its transaction based deposits such as savings, NOW and money market accounts in the middle of 2018. However, with three subsequent 25 bps decreases in the Federal Funds target rate by the Federal Reserve Board of Governors from
August 2019 thru October 2019, Premier reduced the rates paid on its transaction based deposits such as savings, NOW and money market accounts in the middle of 2019. As a result, the average rate paid on interest bearing NOW and money market
deposits increased by only 7 basis points in 2019 to 0.32%, up from an average 0.25% paid in 2018. Lastly, the average rate paid on savings accounts increased by 1 basis point to 0.25% in 2019, up from an average 0.24% paid in 2018. The overall
effect was a 28 basis point increase in the average rate paid for all interest-bearing deposits to 0.84% in 2019, up from 0.56% in 2018. Similarly, the average rate paid on the subordinated debt assumed in the acquisition of Bankshares increased
by 28 basis points to 6.81% in 2019. The interest rate paid on the subordinated debt adjusts quarterly in conjunction with the three month London Interbank Offered Rate (LIBOR) plus 2.95%, which steadily increased during 2018 and the early part of
2019 as short-term interest rates increased. The stated interest rate on the subordinated debt was 4.89% at December 31, 2019 and 5.43% at December 31, 2018. The difference between the stated interest rate and the average rate expensed by Premier
is a result of a lower carrying value of the $6,186,000 debt outstanding due to the remaining unamortized fair value adjustment recorded as part of the acquisition of Bankshares on January 15, 2016. Reported interest expense on the subordinated
debt also includes the periodic amortization of the fair value adjustment. Similar to the trend on interest-bearing deposits, Premier’s average rate paid on short-term borrowings and overnight customer repurchase agreements increased by 17 basis
points to 0.32% in 2019 compared to 0.15% during 2018. Customer repurchase agreements are secured by the pledging of individual investments within Premier’s investment portfolio. The average rate paid on Premier’s other borrowings increased by 27
basis points to 4.37% in 2019 as the remainder of the loan renewal fee was expensed during 2019 as the borrowing was paid off on this otherwise fixed rate borrowing. In conjunction with the acquisition of First Bank on October 12, 2018, Premier
assumed the outstanding FHLB borrowings of First Bank. The average rate paid on these FHLB borrowings assumed in the acquisition of First Bank was 2.95% in 2019, up from 2.74% average rate paid in 2018 due to the repayment of maturing lower rate
borrowings since the October 2018 acquisition date. The net result on all interest-bearing liabilities was to increase the average rate paid by 28 basis points to 0.88% in 2019, up from the 0.60% paid in 2018.
PREMIER FINANCIAL BANCORP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
December 31, 2019
The 15 basis point increase in the rate paid on interest-bearing liabilities in 2018 was primarily the result of a 16 basis point
increase in the average interest rate paid on interest-bearing deposits in 2018 when compared to 2017. As short-term interest rates increased in 2018, because of interest rate increases by the Federal Reserve Board of Governors, the competition
for deposits increased, requiring Premier to raise the rates paid on its interest-bearing deposit accounts. In 2018, the average rate paid on its interest-bearing deposits increased by 16 basis points to 0.56%. In order to remain competitive and
retain its customer base of core deposits, Premier began increasing the rates paid on its certificates of deposit in late 2017, a trend that continued throughout all of 2018. Furthermore, Premier increased the rates paid on its transaction based
deposits such as savings, NOW and money market accounts in the middle of 2018. The continued rise in short-term interest rates as a result of five consecutive quarters of 25 basis point increases in federal funds target rate by the Federal Reserve
Board of Governors from December 2017 to December 2018 resulted in keen local competition for deposit funds as well as higher internet based pricing for both transaction and time
deposits. The average rate paid on certificates of deposit increased the most, at 32 basis points to 1.11% in 2018, as time deposit rates increased and maturing deposits repriced at the higher market rates. The average rate paid on
interest-bearing NOW and money market deposits increased by 8 basis points to 0.25%. Finally, the average rate paid on savings deposits increased by 4 basis points to 0.24% in 2018. The overall effect was a 16 basis point increase in the average
rate paid for all interest-bearing deposits to 0.56% in 2018, up from 0.40% in 2017. Similarly, the average rate paid on the subordinated debt assumed in the acquisition of Bankshares increased by 103 basis points to 6.53% in 2018. The interest
rate paid on the subordinated debt adjusts quarterly in conjunction with the three month London Interbank Offered Rate (LIBOR) plus 2.95%, which steadily increased during 2018 as short-term interest rates increased. The stated interest rate on the
subordinated debt was 5.43% at December 31, 2018. The difference between the stated interest rate and the average rate expensed by Premier is a result of a lower carrying value of the $6,186,000 debt outstanding due to the remaining unamortized
fair value adjustment recorded as part of the acquisition of Bankshares on January 15, 2016. Reported interest expense on the subordinated debt also includes the periodic amortization of the fair value adjustment. Contrary to this trend,
Premier’s average rate paid on short-term borrowings and overnight customer repurchase agreements decreased by 9 basis points to 0.15% in 2018 compared to 0.24% during 2017. Customer repurchase agreements are secured by the pledging of individual
investments within Premier’s investment portfolio and therefore, a lower rate average rate was paid in 2018. The average rate paid on Premier’s other borrowings decreased by 3 basis points to 4.10% in 2018 due to the fixed rate feature of the
single remaining borrowing in 2018. In May of 2017, a second borrowing bearing a higher stated interest rate was fully repaid upon maturity. In conjunction with the acquisition of First Bank on October 12, 2018, Premier assumed the outstanding
FHLB borrowings of First Bank. The average rate paid on these FHLB borrowings assumed in the was 2.74% in 2018. The net result on all interest-bearing liabilities was to increase the average rate paid by 15 basis points to 0.60% in 2018, up from
the 0.45% paid in 2017.
PREMIER FINANCIAL BANCORP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
December 31, 2019
The 1 basis point decrease in the rate paid on interest-bearing liabilities in 2017 was primarily the result of no increase in
the average interest rate paid on interest-bearing deposits in 2017 when compared to 2016. In 2017, the average rate paid on interest-bearing deposits remained unchanged at 0.40% when compared to the average rate paid in 2016. Market deposit
rates remained fairly consistent throughout the year although the competition for funds increased late in 2017 due to the continued rise in short-term interest rates. The average rate paid on certificates of deposit increased the most, at 3 basis
points to 0.79% in 2017, as market time deposit rates began to increase and maturing deposits repriced at the higher market rates. The average rate paid on interest bearing NOW and money market accounts remained unchanged at 0.17%. Contrary to
this trend, the average rate paid on savings accounts decreased by 1 basis point to 0.20% in 2017. Premier continued a plan throughout 2017 of lowering the rates paid on the savings deposits obtained in the acquisition of Bankshares, but on a
gradual basis in an effort to retain as much of this low cost funding source as possible. Due to increases in short-term interest rates, the average rate paid on Premier’s short-term borrowings increased by 7 basis points to 0.24% during 2017.
Similarly, the average rate paid on the subordinated debt assumed in the acquisition of Bankshares increased by 56 basis points to 5.50% in 2017. The interest rate paid on the subordinated debt adjusts quarterly in conjunction with the three month
London Interbank Offered Rate (LIBOR) plus 2.95%, which steadily increased during 2017 as short-term interest rates increased. The stated interest rate on the subordinated debt was 4.31% at December 31, 2017. The difference between the stated
interest rate and the average rate expensed by Premier is a result of a lower carrying value of the debt due to the remaining unamortized fair value adjustment recorded as a result of the acquisition of Bankshares on January 15, 2016. Reported
interest expense on the subordinated debt includes the periodic amortization of the fair value adjustment. The average rate paid on Premier’s other borrowings increased by only 1 basis point to 4.13% due to their fixed rate features and a steady
decrease in the average outstanding borrowings due to prepayments of principal and a scheduled balloon payment in May of 2017. The average rate paid on the FHLB borrowings assumed in the acquisition of Bankshares was 6.33% in 2016, which included
minor amounts of prepayment penalties. All FHLB borrowings were repaid in 2016, so no interest expense was recorded in 2017 related to long-term FHLB borrowings. The net result on all interest-bearing liabilities was to decrease the average rate
paid by 1 basis point to 0.45% in 2017, down from the 0.46% paid in 2016
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 is increasingly more intense every year. Competition has been and will continue to be further intensified as the Federal Reserve Board of Governors changes its targeted federal funds rate, now
at 1.75%, thereby changing short-term interest rates. Other financial institutions that compete in local markets with Premier that have a need to increase liquidity offer special above market rate deposit products to attract additional funds.
Premier's banks periodically offer special rate products to retain their deposit base or attract additional deposits.
PREMIER FINANCIAL BANCORP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
December 31, 2019
Premier’s deposits, on average, increased by $122.9 million, or 9.3%, in 2019 following a $52.3 million, or 4.1%, increase in
2018 from 2017 average deposits. About half of the increase in average deposits came from the full year inclusion of deposits assumed in the acquisition of First Bank during the fourth quarter of 2018. The First Bank acquisition added
approximately $66.2 million to the increase in average deposits in 2019. The acquisition of Jackson during the fourth quarter of 2019 added another approximately $15.0 million of average deposits in 2019. The remaining increase in average
deposits in 2019 resulted from an increase in interest bearing deposits and an increase in non-interest-bearing deposits. Average non-interest bearing deposits increased by $26.7 million, or 7.6%, in 2019, including an approximately $13.0 million
increase in average non-interest bearing deposits from the full year inclusion of First Bank and $2.5 million of average non-interest bearing deposits assumed in the acquisition of Jackson. Without these acquired deposits, average non-interest
bearing deposits increased by $11.2 million, or 3.2%, in 2019. Premier continues to offer updates to the competitive features on its retail and commercial checking accounts. Average certificates of deposit increased by $56.2 million, or 15.9%, in
2019, including an approximately $22.3 million increase in average certificates of deposit from the full year inclusion of First Bank and $7.3 million of average certificates of deposit assumed in the acquisition of Jackson. Without these acquired
deposits, average certificates of deposit increased by $26.6 million, or 7.5%, in 2019 as Premier offered competitive interest rates for these funds in 2019 in conjunction with short-term interest rate changes throughout the year. Average NOW and
money market deposits increased by $33.1 million, or 8.7%, in 2019, including an approximately $28.6 million increase in average NOW and money market deposits from the full year inclusion of First Bank and $1.6 million from the acquisition of
Jackson. Excluding these acquired deposits, average NOW and money market deposits increased by $2.9 million, or 0.8%, as the average rate paid increased from 0.25% in 2018 to 0.32% in 2019. Average savings deposits increased by $6.9 million, or
2.9%, in 2019, including an approximately $2.3 million increase in average savings deposits from the full year inclusion of First Bank and $3.6 million of average savings deposits assumed in the acquisition of Jackson. Excluding these acquired
deposits, average savings deposits increased by $1.0 million, or 0.4%, in 2019, while the average rate paid held fairly steady, increasing by 1 basis point from the average rate paid in 2018. Competition for these kinds of deposit accounts
intensified in 2019 and Premier has raised its deposit rates in response to competitive pressures.
Premier’s deposits, on average, increased by $52.3 million, or 4.1%, in 2018. About half of the increase in average deposits
came from the deposits assumed in the acquisition of First Bank during the fourth quarter of 2018. The First Bank acquisition added approximately $25.5 million of average deposits in 2018. The remaining increase in average deposits in 2018 is
largely due to an increase in non-interest bearing deposits. This increase was partially offset by a decrease in average certificates of deposit. Average non-interest bearing deposits increased by $35.6 million, or 11.2%, in 2018, including
approximately $3.9 million of average non-interest bearing deposits assumed in the acquisition of First Bank. Premier continues to offer updated competitive features on its retail and commercial checking accounts. Average certificates of deposit
increased by $4.4 million, or 1.3%, in 2018, including approximately $11.0 million of average certificates of deposit assumed in the acquisition of First Bank. Without the First Bank certificates of deposit, average certificates of deposit
decreased by $6.6 million, or 1.9%, in 2018 as the competition for these funds
PREMIER FINANCIAL BANCORP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
December 31, 2019
from other investment opportunities intensified in 2018 as short-term interest rates steadily increased throughout the year. Average NOW and money
market deposits increased by $10.5 million, or 2.9%, in 2018, including $9.7 million of average NOW and money market deposits from First Bank. Excluding the increase from First Bank, average NOW and money market deposits increased by $850,000 even
though the average rate paid increased from 0.17% in 2017 to 0.25% in 2018. Average savings deposits increased by $1.8 million, or 0.7%, in 2018, including $974,000 of average savings deposits from First Bank. Excluding the increase from First
Bank, average savings deposits increased by $791,000, or 0.3%, even as the average rate paid increased by 4 basis points from the average rate paid in 2017. Competition for these kinds of deposit accounts intensified in 2018 as Premier has raised
its deposit rates in response to competitive pressures.
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.) Most customers are still keeping their maturity choices short in order to take advantage of possible higher interest rates in the future. While offering some “special” certificate of
deposit rates to remain competitive, Premier continues to focus on building its base of customer relationships by offering more convenient electronic banking products to its non-interest bearing deposit customers.
The following table provides information on the maturities of time deposits of $100,000 or more at December 31, 2019.
|
MATURITY OF TIME DEPOSITS $100,000 OR MORE
|
||||
|
December 31, 2019
|
||||
|
(Dollars in thousands)
|
||||
|
Maturing 3 months or less
|
$
|
38,130
|
||
|
Maturing over 3 months
|
60,399
|
|||
|
Maturing over 6 months
|
63,889
|
|||
|
Maturing over 12 months
|
78,933
|
|||
|
Total
|
$
|
241,351
|
||
PREMIER FINANCIAL BANCORP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
December 31, 2019
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 or by purchasing insurance through the Federal Home Loan Bank (FHLB). Also included in short-term borrowings are federal funds purchased from other banks, borrowings from the FHLB with an original maturity of less than one
year and borrowings from the Federal Reserve Bank (FRB) discount window. These short-term borrowings fluctuate depending on near term funding needs and as part of Premier's management of its asset/liability mix. In 2019, average short-term
borrowings decreased by $700,000, or 3.1%, largely due to a $639,000, or 2.9%, decrease in average customer repurchase agreements and a $66,000 decrease in average short-term borrowings from the FHLB and federal funds purchased from other banks.
In 2018, average short-term borrowings decreased by $2.6 million, or 10.2%, largely due to a $502,000, or 2.2%, decrease in average customer repurchase agreements and a $2.1 million decrease in average short-term borrowings from the FHLB and
federal funds purchased from other banks.
Long-term borrowings consist of FHLB borrowings by Premier’s Affiliate Banks and other borrowings by the parent holding company
or the Banks. Premier had no long-term FHLB borrowings in 2017. In 2018, Premier assumed $28.4 million of FHLB advances to First Bank in its acquisition in the fourth quarter of 2018. Approximately $19.5 million of these advances matured before
December 31, 2018 and were repaid by Premier. In 2019, $2.5 million of the remaining FHLB advances matured and were repaid out of existing surplus liquidity. The remaining $6.4 million of FHLB advances have maturities from one to eight months.
Premier uses fixed rate FHLB advances from time-to-time to fund certain residential and commercial loans as well to maximize investment opportunities as part of its interest rate risk management.
There were no other borrowings at December 31, 2019. Other borrowings at December 31, 2018 consisted of a $2.5 million long-term
borrowing from First Guaranty Bank at the parent company which was fully repaid by June 30, 2019. On August 26, 2015, the Company executed and delivered to First Guaranty Bank a Promissory Note and Business Loan Agreement for the principal amount
of $12.0 million, bearing interest at a fixed rate of 4.00% per annum and requiring 59 monthly principal payments of $143,000 plus accrued interest and one final principal and interest payment of approximately $3.6 million due on August 26, 2020.
Through a series of additional principal payments, the Company was able to fully retire the borrowing before the end of June 2019. The Promissory Note was secured by the pledge of 25% of Premier’s interest in Premier Bank, Inc. (a wholly owned
subsidiary) under a Commercial Pledge Agreement dated August 26, 2015. At December 31, 2017 other borrowings consisted of the long-term borrowing at the parent company described above, which had an outstanding balance of a $5.0 million. The
average rate paid on other borrowings was 4.13% in 2017, 4.10% in 2018, and 4.37% in 2019. The average rate paid on Premier’s other borrowings increased by 27 basis points to 4.37% in 2019 as the remainder of the loan renewal fee was expensed
during 2019 as the borrowing was paid off on this otherwise fixed rate borrowing.
PREMIER FINANCIAL BANCORP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
December 31, 2019
At December 31, 2016, other borrowings consisted of the long-term borrowing at the parent company described above, which had an
outstanding balance of $8.6 million, and a $259,000 long-term borrowing initiated by Gassaway and assumed by Premier Bank in the Gassaway purchase. The borrowing by Gassaway was for the purchase of its Flatwoods branch site location under a seller
financed note bearing a fixed interest rate of 5.62% with monthly payments of $4,000, including principal and interest, and a $249,000 balloon payment at maturity on May 9, 2017. The borrowing by Gassaway was paid at maturity on May 9, 2017.
Premier also maintains lines of credit with both First Guaranty Bank ($6.0 million) and the Bankers’ Bank of Kentucky ($5.0
million) for unforeseen funding needs that may occur. The lines of credit bear floating interest rates and are secured by pledges of Premier’s investment in the Affiliate Banks and covered by each lender’s Commercial Pledge Agreements,
respectively. Premier did not draw on these lines of credit in 2017, 2018 or 2019. For more information on other borrowings, see Note 12 to the consolidated financial statements.
On May 13, 2010, Premier executed a six-year data processing agreement with Fidelity Information Services, Inc. and its
affiliates (“FIS”) located in Jacksonville, Florida. The agreement covers Premier’s core data processing, item processing, internet banking services, network services, customer authentication services and electronic funds transfer services.
Beginning in May 2011 and concluding in September 2011, Premier and FIS converted each of the subsidiary (or former subsidiary) bank’s systems to the FIS “Horizon” platform. It was during this process that the data systems of the five subsidiary
banks that merged to form Premier Bank, converted and combined into one system. On March 31, 2017, Premier executed a five-year extension of its data processing agreement with FIS. While the extension agreement became effective on April 1, 2017,
the data processing agreement was extended five-years from the original September 2011 termination date. The contract continues to cover Premier’s core data processing, item processing, mobile and internet banking services, network services,
customer authentication services, and electronic funds transfer services. The data processing agreement shall remain in effect until September 30, 2022 and provides for automatic five-year extensions after that date. Based upon the average
billings for services rendered during the last three months of 2019, the estimated payments to FIS for these services under the remainder of the existing contracts will be approximately $4.7 million in 2020. Actual results may vary depending upon
the number and type of accounts actually processed and future customer activity including additional customers via any other acquisitions.
PREMIER FINANCIAL BANCORP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
December 31, 2019
In addition to leasing the Company’s headquarters in Huntington, West Virginia, the Washington Division main office and branch
locations of Premier Bank in and around the Washington DC metro area are all leased under various non-cancelable operating leases. The Affiliate Banks also lease branch facilities in West Hamlin, Rock Cave and Burnsville, West Virginia; Vanceburg,
Kentucky; and Proctorville, Ohio. These non-cancelable operating leases are subject to renewal options under various terms. Some leases provide for periodic rate adjustments based on cost-of-living index changes. The leases have terms, including
extension options by the lessee, ranging from 2020 through 2034. Estimated future minimum payments under the operating leases are included in the table below.
|
PAYMENTS DUE ON CONTRACTUAL OBLIGATIONS
|
||||||||||||||||||||
|
December 31, 2019
|
||||||||||||||||||||
|
(Dollars in thousands)
|
||||||||||||||||||||
|
Total
|
Less than one year
|
1-3
years
|
3-5
years
|
More than five years
|
||||||||||||||||
|
Total deposits
|
$
|
1,495,753
|
$
|
1,357,823
|
$
|
116,463
|
$
|
21,459
|
$
|
8
|
||||||||||
|
Repurchase agreements
|
20,428
|
20,428
|
-
|
-
|
-
|
|||||||||||||||
|
Federal Home Loan Bank advances(1)
|
6,400
|
6,400
|
-
|
-
|
-
|
|||||||||||||||
|
Subordinated debentures (2)
|
6,186
|
-
|
-
|
-
|
6,186
|
|||||||||||||||
|
Operating lease obligations(3)
|
8,018
|
1,059
|
2,008
|
1,456
|
3,495
|
|||||||||||||||
|
Data and item processing contracts(4)
|
12,969
|
4,716
|
8,253
|
-
|
-
|
|||||||||||||||
|
Total
|
$
|
1,549,754
|
$
|
1,390,426
|
$
|
126,724
|
$
|
22,915
|
$
|
9,689
|
||||||||||
|
(1) The contractual obligation of the Federal Home Loan Bank advances differs from the carrying value on the balance sheet at Dec.31, 2019 due to the
remaining unamortized fair value adjustment recorded as a result of the acquisition of First Bank on Oct. 12, 2018.
(2) The contractual obligation of the subordinated debenture differs from the carrying value on the balance sheet at December 31, 2019 due to the
remaining unamortized fair value adjustment recorded as a result of the acquisition of Bankshares on January 15, 2016.
(3) The operating lease obligations include extension options that may be exercised by the Company.
(4) Data and item processing contractual obligations are estimated using the average billing for the last three months of 2019.
|
||||||||||||||||||||
PREMIER FINANCIAL BANCORP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
December 31, 2019
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. Each of Premier and the Affiliate Banks have 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 from 100 (1.00%) and 200 (2.00%) basis points, but never below zero. The most recent earnings simulation model using the most likely interest rate forecast projects that net interest income would
increase by approximately 3.5% 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 4.5% 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 6.0% over the projected stable rate net
interest income in a rising rate scenario but would decrease by 6.7% 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 policy 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 as well as actual results for Premier. 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, 2019
The following table presents summary information about the simulation model's interest rate risk measures and results.
|
Year-end
2019
|
Year-end
2018
|
ALCO Guidelines
|
||||||||||
|
Projected 1-year net interest income
|
||||||||||||
|
-100 bp change vs. base rate
|
-4.5
|
%
|
-4.2
|
%
|
5
|
%
|
||||||
|
+100 bp change vs. base rate
|
3.5
|
%
|
0.4
|
%
|
5
|
%
|
||||||
|
Projected 1-year net interest income
|
||||||||||||
|
-200 bp change vs. base rate
|
-6.7
|
%
|
-9.1
|
%
|
10
|
%
|
||||||
|
+200 bp change vs. base rate
|
6.0
|
%
|
-0.1
|
%
|
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 $29.2 million of cash from operations in 2019, which compares to $27.1 million in 2018 and $20.4 million in
2017. Total cash from operations along with proceeds from the maturity and calls of securities, increases in deposit balances and the repayment of loans were used to purchase securities, satisfy deposit withdrawals, fund new loans and reduce
outstanding debt during all three years. In 2017, $25.3 million of cash was used in investing activities, primarily as $65.8 million of cash generated from maturities and calls of investment securities and $4.6 million in proceeds from the sale of
OREO were used to purchase $57.2 million of investment securities and fund $36.8 million of new loans. In 2018, $23.1 million of cash was used in investing activities, primarily as $65.2 million of cash generated from maturities and calls of
investment securities, $13.4 million from the net repayment of loans, and $7.8 million in proceeds from the sale of OREO, were used to purchase $110.9 million of investment securities. In 2019, $19.7 million of cash was generated from investing
activities, primarily as $95.0 million of cash generated from maturities and calls of investment securities, and $2.3 million in proceeds from the sale of OREO, were used to purchase $66.7 million of investment securities, fund the purchase of
Jackson, net of cash and cash equivalents received, and fund $5.2 million of new loans.
In 2019, Premier used the $29.2 million of cash from operations and the $19.7 million of cash retained from investing activities
to fund $20.1 million of deposit withdrawals and $1.6 million of customer repurchase agreement withdrawals, payoff the remaining $2.5 million in principal on other borrowings, repay $2.5 million of maturing FHLB advances, and pay $8.8 million of
common stock dividends during the year. In 2019, Premier also received $246,000 from the exercise of employee stock options and retained $13.7 million of net cash generated from all
PREMIER FINANCIAL BANCORP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
December 31, 2019
activities. In 2018, Premier used the $27.1 million of cash from operations and $25.3 million of cash received from an increase in deposit
balances, plus a portion of the $82.7 million of cash and cash equivalents on hand to satisfy the $23.1 million of cash used in investing activities, to pay $2.5 million in principal on other borrowings, repay the $19.5 million of FHLB advances
assumed in the acquisition First Bank, and pay $7.8 million of common stock dividends. In 2018, Premier also received $193,000 from the exercise of employee stock options and used $1.6 million to satisfy reductions in customer repurchase
agreements. Overall, these activities reduced Premier’s cash and cash equivalents by $1.9 million during the year. In 2017, Premier used the $20.4 million of cash from operations plus a portion of the $104.7 million of cash and cash equivalents
on hand to satisfy the $25.3 million of cash used in investing activities, fund $6.7 million of deposit withdrawals and $510,000 of customer repurchase agreement withdrawals, reduce outstanding borrowings by $3.9 million, and pay $6.4 million of
common stock dividends during the year. In 2017, Premier also received $317,000 from the exercise of employee stock options. Overall, these activities reduced Premier’s cash and cash equivalents by $22.1 million during the year.
At December 31, 2019, the parent company had $13.2 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 debt and pay dividends to common shareholders. During 2019 the parent company generated $16.9 million of cash
from operations, received $50,000 from the sale of a portion of its investment in an unconsolidated non-bank subsidiary and received $246,000 from the exercise of employee stock options. The proceeds were used to pay the final $2.5 million in
principal payments on long-term borrowings, fund $8.8 million of dividends paid to common shareholders, invest $1.5 million to supplement the capital of Citizens Deposit after its acquisition of Jackson, and make additional fixed asset purchases.
During 2018 the parent company generated $16.3 million of cash from operations and received $193,000 from the exercise of employee stock options. The proceeds were used to pay $2.5 million in principal payments on long-term borrowings, fund $7.8
million of dividends paid to common shareholders, invest $5.2 million to fund the $5.00 cash per share to acquire First Bank, and make additional fixed asset purchases. During 2017 the parent company generated $11.2 million of cash from operations
and received $317,000 from the exercise of employee stock options. The proceeds were used to pay $3.6 million in principal payments on long-term borrowings, fund $6.4 million of dividends paid to common shareholders, invest $250,000 in an
unconsolidated non-bank subsidiary and make additional fixed asset purchases.
PREMIER FINANCIAL BANCORP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
December 31, 2019
Capital Resources
Premier’s consolidated average equity-to-asset ratio increased to 13.43% during 2019, an increase from the 12.39% ratio during
2018 and the 12.18% ratio during 2017. The ratios for all three years are considered adequate for a bank holding company of Premier’s size and complexity. The increase in the ratio for 2019 was largely the result of the percentage increase in
average equity exceeding the percentage increase in average assets. The increase in average assets was largely due to the full year inclusion of the assets from the acquisition of First Bank in October 2018, the increase in average assets from the
acquisition of Jackson in October 2019, as well as asset growth from internal operations. Average equity increased in 2019 from the retention of $14.2 million of 2019 net income, the full year inclusion of the $22.4 million of equity issued in the
acquisition of First Bank and an increase in the market value of the investment portfolio in 2019. The increase in the ratio for 2018 was largely the result of a slightly higher increase in average equity compared to the increase in average assets
during the year. The increase in average assets was largely due to the acquisition of First Bank in October 2018 as well as asset growth from internal operations. Average equity increased in 2018 from the retention of $12.4 million of 2018 net
income and the issuance of $22.4 million of equity in the acquisition of First Bank. The increase in the ratio for 2017 was largely the result of the strong earnings performance contributing additional average equity to the Company without a
significant increase in average total assets during the year. Average equity increased in 2017 largely due to the retention of $8.4 million of 2017 net income.
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 2019, Premier’s total regulatory capital to risk adjusted asset ratio was 16.47%, compared to 15.88% at December 31, 2018 and 15.56% at December 31, 2017. All three of these ratios are well above the minimum level of 8.0%
prescribed for bank holding companies of Premier’s size. The total regulatory capital to risk adjusted asset ratio increased in 2019 as an 8.2% increase in total regulatory capital, largely from the strong earnings performance in 2019, exceeded
the 4.3% increase in risk-weighted assets at the end of 2019, largely from the acquisition of Jackson. The total regulatory capital to risk adjusted asset ratio increased in 2018 as a 13.5% increase in total regulatory capital, largely from the
equity issued to acquire First Bank, exceeded the 11.2% increase in risk-weighted assets at the end of 2018, also largely from the acquisition of First Bank.
PREMIER FINANCIAL BANCORP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
December 31, 2019
The leverage ratio is a measure of total tangible equity to total tangible assets, net of any related deferred taxes as
permitted. Premier’s leverage ratio at December 31, 2019 was 11.28%, compared to 10.72% at December 31, 2018 and 10.67% at December 31, 2017. All three of these ratios are above the 4.0% to 5.0% ratios recommended by the Federal Reserve. The
leverage ratio increased at December 31, 2019 largely due to a 9.0% increase in total tangible equity compared to a 3.6% increase in total tangible assets compared to year-end 2018. The leverage ratio increased at December 31, 2018 largely due to
a 13.3% increase in total tangible equity compared to only a 12.5% increase in total tangible assets compared to year-end 2017. The leverage ratio increased at December 31, 2017, largely due to a 5.7% increase in total tangible equity compared to
only a 0.1% increase in total tangible assets compared to year-end 2016. Premier's capital ratios are the direct result of management's desire to maintain a strong capital position. This strong capital position tends to have a dampening effect on
the key performance ratio Return on Average Equity (ROE) due to the higher level of capital maintained. Additional information on Premier's capital ratios and the capital ratios of its banks may be found in Note
21 to the consolidated financial statements.
The standard for minimum regulatory Tier 1 risk-based capital ratio the Affiliate Banks must maintain in order to be considered
“well capitalized” under the regulatory framework for prompt corrective action is 8.00%. As shown in the table in Note 21 to the consolidated financial statements regarding stockholders’ equity, the Tier 1
risk-based capital ratios of the Affiliate Banks at December 31, 2019 and 2018 exceed this ratio. The Common Equity Tier 1 Risk-based Capital Ratio, or CET1 Ratio, restricts the capital to be included in the ratio to common stockholders’ equity
and requires a minimum ratio of 6.50% of risk-weighted assets for a bank to be considered “well capitalized” under the regulatory framework for prompt corrective action. The regulatory Tier 1 capital of the Affiliate Banks at December 31, 2019 and
2018 are 100% common stockholders’ equity and therefore there is no difference in their calculation of the Tier 1 risk-based capital ratio and the CET1 Ratio. At December 31, 2019 and December 31, 2018, Premier’s Tier 1 capital included $6.0
million of junior subordinated debentures (“Debentures”). As part of the acquisition of Bankshares, Premier assumed $6,186,000 of Debentures issued to FNB Capital Trust One (“Trust”), a statutory business trust formed by Bankshares on February 26,
2004. The Debentures were issued to Trust in exchange for ownership of all of the common equity of Trust and the proceeds of mandatorily redeemable securities sold by Trust to third party investors (“Capital Securities”). The Debentures held by
Trust may be included in the Tier 1 capital of Premier (with certain limitations applicable) under current regulatory guidelines and interpretations. The $6.0 million of qualifying Tier 1 capital is excluded from Premier’s CET1 Ratio as it is not
considered a part of the Company’s common stockholders’ equity. However, as shown in the table below, Premier’s CET1 ratio at December 31, 2019 was 14.92% and 14.24% at December 31, 2018, well in excess of the 6.50% required to be considered
well-capitalized.
PREMIER FINANCIAL BANCORP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
December 31, 2019
An additional capital conservation buffer is now part of the minimum regulatory capital ratios under the regulatory framework for
prompt corrective action. The capital conservation buffer is measured as a percentage of risk weighted assets and was phased-in over a four-year period from 2016 thru 2019. As of January 1, 2019, the capital conservation buffer requirement is
2.50% of risk weighted assets over and above the regulatory minimum capital ratios for Tier 1 Capital to risk weighted assets, Total Capital to risk weighted assets and Common Equity Tier 1 Capital (CET1) to risk weighted assets. The consequences
of not meeting the capital conservation buffer thresholds include restrictions on the payment of dividends, restrictions on the payment of discretionary bonuses, and restrictions on the repurchase of common shares by the Company. As shown in the
table in Note 21 to the consolidated financial statements regarding stockholders’ equity, the capital ratios of the Affiliate Banks and the Company exceeded the new minimum capital ratios plus the 2.50%
capital buffer requiring a CET1 Capital to risk-weighted asset ratio of at least 7.00%, a Tier 1 Capital to risk weighted assets ratio of at least 8.50% and a Total Capital to risk weighted assets ratio of at least 10.50%. As shown in the table
below, the Company’s capital conservation buffer at December 31, 2019 was 8.47% and 7.88% at December 31, 2018, well in excess of the 2.50% required.
Additional information on the capital position of Premier is included in the following table.
|
SELECTED CAPITAL INFORMATION
|
||||||||||||
|
(Dollars in thousands)
|
||||||||||||
|
As of December 31
|
||||||||||||
|
2019
|
2018
|
Change
|
||||||||||
|
Stockholders’ Equity
|
$
|
240,241
|
$
|
216,729
|
$
|
23,512
|
||||||
|
Disallowed amounts of goodwill and other intangibles
|
(49,290
|
)
|
(49,263
|
)
|
(27
|
)
|
||||||
|
Deferred tax assets from NOL and tax credit carryforwards
|
(298
|
)
|
(286
|
)
|
(12
|
)
|
||||||
|
Unrealized (gain) loss on securities available for sale
|
(3,703
|
)
|
3,852
|
(7,555
|
)
|
|||||||
|
Common Equity Tier 1 capital
|
$
|
186,950
|
$
|
171,032
|
$
|
15,918
|
||||||
|
Qualifying subordinated debt
|
6,000
|
6,000
|
-
|
|||||||||
|
Tier 1 capital
|
$
|
192,950
|
$
|
177,032
|
$
|
15,918
|
||||||
|
Tier 2 capital adjustments
|
||||||||||||
|
Allowable amount of the allowance for loan losses
|
13,542
|
13,738
|
||||||||||
|
Total capital
|
$
|
206,492
|
$
|
190,770
|
||||||||
|
Total risk-weighted assets
|
$
|
1,253,472
|
$
|
1,201,379
|
||||||||
|
Ratios
|
||||||||||||
|
CET1 capital to risk-weighted assets
|
14.92
|
%
|
14.24
|
%
|
||||||||
|
Tier 1 capital to risk-weighted assets
|
15.39
|
%
|
14.74
|
%
|
||||||||
|
Total capital to risk-weighted assets
|
16.47
|
%
|
15.88
|
%
|
||||||||
|
Leverage
|
11.28
|
%
|
10.72
|
%
|
||||||||
|
Capital conservation buffer
|
8.47
|
%
|
7.88
|
%
|
||||||||
PREMIER FINANCIAL BANCORP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
December 31, 2019
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 21 to the
consolidated financial statements. During 2020, the Affiliate Banks could, without prior approval, declare and pay to Premier dividends of approximately $11.4 million plus any 2020 net profits retained through the date of declaration.
PREMIER FINANCIAL BANCORP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
December 31, 2019
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 $67.1 million in 2019, a 12.0% increase over the $59.9 million earned in 2018, following a 3.6% increase in 2018 over the $57.9
million earned in 2017. 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. In 2017 the statutory tax rate was 35% for companies of Premier’s size. However, the 2017 Tax Cut and Jobs Act lowered the statutory tax rate to 21%, reducing the benefit of investing in tax
exempt assets and lowering the amount added to present interest income on a fully tax-equivalent basis in 2018 and 2019. The increase in net interest income in 2019 is primarily the result of a $10.8 million, or 16.3%, increase in interest income
partially increased by a $33,000 increase in the tax equivalent adjustment. This increase in interest income was partially offset by a $3.6 million, or 59.5%, increase in interest expense in 2019. The increase in net interest income in 2018 is
primarily the result of a $3.8 million increase in interest income partially offset by a $1.6 million increase in interest expense.
As shown in the Rate Volume Analysis table below, in 2019, interest income on loans increased, in part as a result of a higher
average volume of loans outstanding in 2019, primarily commercial loans, which added approximately $5,405,000 of additional interest income. Also increasing interest income on loans in 2019 was an increase in the average yield earned on loans
compared to the yield earned during 2018, which added approximately $2,976,000 of additional interest income. The net result was a $8,381,000, or 14.7%, increase in fully tax-equivalent interest income on loans when compared to 2018. The increase
in interest income on loans included approximately $1,828,000 of deferred interest collected and recognized in interest income on loans that fully repaid in 2019, versus approximately $978,000 of similar income recognized on the repayment of
non-accrual loans in 2018. Interest income on investments increased by $2,366,000 in 2019 primarily as a result of an increase in the average yield earned on a higher average volume of investments outstanding. Interest income from federal funds
sold increased by $161,000 in 2019, largely due to an increase in the yield earned as well as a 55.2% increase in the average balance outstanding during the year. Interest income from interest-bearing deposits with other banks decreased by
$118,000 in 2019, as an increase in the yield earned on these deposits increased interest income by approximately $78,000, while the 13.1% decrease in the average balance of bank deposits outstanding during the year reduced interest income by
approximately $196,000 when compared to 2018. As shown in the table below, interest expense on deposits increased in total by $3,565,000, or 65.5%, in 2019, largely due to an increase in interest expense on certificates of deposit. Interest
expense increased by $2,455,000 as a result of a higher rates paid on certificates of deposit outstanding during 2019, while interest expense increased by $700,000 due to a higher average volume of certificates of deposit outstanding. Due to
continued increases in short-term interest rates resulting from monetary policy changes by the Federal Reserve Board of Governors in 2018, Premier raised its interest rates paid on its certificates of deposit to remain competitive and retain this
source of funding.
PREMIER FINANCIAL BANCORP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
December 31, 2019
The result was a 62 basis point increase in the average rate paid on certificates of deposit to 1.73% in 2019, compared to 1.11% in 2018.
Similarly, the increases in interest expense on saving account deposits and money market account deposits in 2019 were largely driven by competition and higher rates paid on these deposits. Interest expense on saving account deposits increased by
$44,000 in 2019, as $27,000 of additional interest expense from a 1 basis point increase in the average rate paid added to approximately $17,000 of additional interest expense from the higher average outstanding balance of savings account deposits
in 2019. Interest expense on NOW and money market accounts increased by $366,000 in 2019, largely due to a $277,000 increase in interest expense from a 7 basis point increase in the average rate paid on NOW and money market deposits in 2019 plus
an $89,000 increase in interest expense from an increase in the volume of NOW and money market deposits in 2019. Premier realized a $36,000 increase in interest expense on its short-term borrowings, largely due to a higher rate paid on these
borrowings during 2019 on a slightly lower average balance outstanding during the year. Contrary to the increase in interest expense on deposits, Premier realized $125,000 of interest expense savings on its fixed rate other borrowed funds due to
scheduled principal payments and additional principal prepayments during the year such that the borrowing was fully repaid by the end of June 2019. Premier’s interest expense on its variable rate subordinated debt increased by $17,000 in 2019,
largely due to increases in short-term interest rates during the year. The interest rate paid on the subordinated debt adjusts on a quarterly basis and the average rate paid in 2019 increased by 28 basis points to 6.81% for the year. Lastly,
Premier realized a $117,000 increase in interest expense on FHLB borrowings in 2019, due to the FHLB borrowings on the balance sheet of First Bank that were assumed by Premier as part of the acquisition in October 2018. The combined effect of the
increase in interest income partially offset by the increase in interest expense was to increase fully tax-equivalent net interest income by $7,180,000 in 2019.
As shown in the Rate Volume Analysis table below, in 2018, interest income on loans increased, in part as a result of a higher
average volume of loans outstanding in 2018, primarily commercial loans, which added approximately $730,000 of additional interest income. Also increasing interest income on loans in 2018 was an increase in the average yield earned on loans
compared to the yield earned during 2017, which added approximately $580,000 of additional interest income. The net result was a $1,310,000, or 2.4%, increase in fully tax-equivalent interest income on loans when compared to 2017. The increase in
interest income on loans included approximately $978,000 of deferred interest collected and recognized in interest income on loans that fully repaid in 2018, versus approximately $1,628,000 of similar income recognized on the repayment of
non-accrual loans in 2017. Interest income on investments increased by $1,314,000 in 2018 primarily as a result of an increase in the average yield earned although on a higher average volume of investments outstanding. Interest income from
federal funds sold increased by $175,000 in 2018, largely due to a 101% increase in the yield earned as well as a 68.0% increase in the average balance outstanding during the year. Interest income from interest-bearing deposits with other banks
increased by $838,000 in 2018, as a 19.9% increase in the yield earned on these deposits added approximately $143,000 of interest income, while the 98.6% increase in the average balance of bank deposits outstanding during the year added
approximately $695,000 of interest income.
PREMIER FINANCIAL BANCORP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
December 31, 2019
As shown in the table below, interest expense on deposits increased in total by $1,589,000, or 41.2%, in 2018, largely due to an increase in
interest expense on certificates of deposit. Interest expense increased by $1,112,000 as a result of a higher rates paid on certificates of deposit outstanding during 2018, while interest expense increased by only $35,000 due to a higher average
volume of certificates of deposit outstanding. Due to continued increases in short-term interest rates resulting from monetary policy changes by the Federal Reserve Board of Governors in 2017 and 2018, Premier has raised its interest rates paid on
its certificates of deposit to remain competitive and retain this source of funding. The result was a 32 basis point increase in the average rate paid on certificates of deposit to 1.11% in 2018, compared to 0.79% in 2017. Similarly, the
increases in interest expense on saving account deposits and money market account deposits in 2018 were largely driven by competition and higher rates paid on these deposits. Interest expense on saving account deposits increased by $103,000 in
2018, as $99,000 of additional interest expense from a 4 basis point increase in the average rate paid added to approximately $4,000 of additional interest expense from the higher average outstanding balance of savings account deposits in 2018.
Interest expense on NOW and money market accounts increased by $339,000 in 2018, largely due to a $321,000 increase in interest expense from an 8 basis point increase in the average rate paid on NOW and money market deposits in 2018 plus an $18,000
increase in interest expense from an increase in the volume of NOW and money market deposits in 2018. Contrary to the increase in interest expense on deposits, Premier realized a $26,000 decrease in interest expense on its short-term borrowings,
largely due to a lower rate paid on these borrowings during 2018 as well as a lower average balance outstanding during the year. Premier also realized $136,000 of interest expense savings on its fixed rate other borrowed funds due to scheduled
principal payments and additional principal prepayments during the year. Premier’s interest expense on its variable rate subordinated debt increased by $57,000 in 2018, largely due to increases in short-term interest rates during the year. The
interest rate paid on the subordinated debt adjusts on a quarterly basis and the average rate paid in 2018 increased by 103 basis points to 6.53% for the year. Lastly, Premier realized an $81,000 increase in interest expense on FHLB borrowings in
2018, due to the FHLB borrowings on the balance sheet of First Bank that were assumed by Premier as part of the acquisition. The combined effect of the increase in interest income partially offset by the increase in interest expense was to
increase fully tax-equivalent net interest income by $2,072,000 in 2018.
PREMIER FINANCIAL BANCORP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
December 31, 2019
|
RATE VOLUME ANALYSIS OF CHANGES IN NET INTEREST INCOME
|
||||||||||||||||||||||||
|
(Dollars in thousands on a tax equivalent basis)
|
||||||||||||||||||||||||
|
2019 vs 2018
|
2018 vs 2017
|
|||||||||||||||||||||||
|
Increase (decrease) due to change in
|
Increase (decrease) due to change in
|
|||||||||||||||||||||||
|
Volume
|
Rate
|
Net Change
|
Volume
|
Rate
|
Net Change
|
|||||||||||||||||||
|
Interest income*:
|
||||||||||||||||||||||||
|
Loans
|
$
|
5,405
|
$
|
2,976
|
$
|
8,381
|
$
|
730
|
$
|
580
|
$
|
1,310
|
||||||||||||
|
Investment securities
|
1,500
|
866
|
2,366
|
282
|
1,032
|
1,314
|
||||||||||||||||||
|
Federal funds sold
|
145
|
16
|
161
|
70
|
105
|
175
|
||||||||||||||||||
|
Deposits with banks
|
(196
|
)
|
78
|
(118
|
)
|
695
|
143
|
838
|
||||||||||||||||
|
Total interest income
|
$
|
6,854
|
$
|
3,936
|
$
|
10,790
|
$
|
1,777
|
$
|
1,860
|
$
|
3,637
|
||||||||||||
|
Interest expense:
|
||||||||||||||||||||||||
|
Deposits
|
||||||||||||||||||||||||
|
NOW and money market
|
$
|
89
|
$
|
277
|
$
|
366
|
$
|
18
|
$
|
321
|
$
|
339
|
||||||||||||
|
Savings
|
17
|
27
|
44
|
4
|
99
|
103
|
||||||||||||||||||
|
Certificates of deposit
|
700
|
2,455
|
3,155
|
35
|
1,112
|
1,147
|
||||||||||||||||||
|
Short-term borrowings
|
(1
|
)
|
37
|
36
|
(6
|
)
|
(20
|
)
|
(26
|
)
|
||||||||||||||
|
Other borrowings
|
(135
|
)
|
10
|
(125
|
)
|
(134
|
)
|
(2
|
)
|
(136
|
)
|
|||||||||||||
|
FHLB borrowings
|
113
|
4
|
117
|
81
|
-
|
81
|
||||||||||||||||||
|
Subordinated debt
|
2
|
15
|
17
|
2
|
55
|
57
|
||||||||||||||||||
|
Total interest expense
|
$
|
785
|
$
|
2,825
|
$
|
3,610
|
$
|
-
|
$
|
1,565
|
$
|
1,565
|
||||||||||||
|
Net interest income*
|
$
|
6,069
|
$
|
1,111
|
$
|
7,180
|
$
|
1,777
|
$
|
295
|
$
|
2,072
|
||||||||||||
|
(*) Fully taxable equivalent using the rate of 21% for 2019 and 2018, and 35% for 2017.
Note – Changes to rate/volume are allocated to both rate and volume on a proportional dollar basis
|
||||||||||||||||||||||||
As net interest income dollars increased in 2019, Premier’s net interest margin also increased even though the increase in the
average rate paid on interest-bearing liabilities exceeded the increase in the yield earned on interest earning assets. Premier’s net interest margin in 2019 was affected in a positive way by the $26.7 million, or 7.6%, increase in average
non-interest bearing deposits. In 2019, the average yield on Premier’s loan portfolio increased 27 basis points to 5.65% from the 5.38% earned in 2018. Likewise, the average yield earned on the investment portfolio in 2019 increased by 26 basis
points to 2.64%, up from the 2.38% earned in 2018. Due to the cumulative effect of increases in short-term interest rates in 2018, the average yield earned on federal funds sold increased by 13 basis points in 2019 to 2.22%. Similarly, the yield
earned on interest-bearing deposits with other banks increased by 11 basis points in 2019 to 2.10%. However, since loans outstanding are the predominant earning asset, comprising 72% of total earning assets, the net result of the increases in
yields earned in 2019 on all earning assets was to increase the average yield by 24 basis points to 4.78% in 2019, up from the 4.54% earned in 2018. The increase in the overall yield on earning assets in 2019, was exceeded by the 28 basis point
increase in the average rate paid on interest bearing liabilities in 2019. In order to remain competitive and retain its customer base of core deposits, Premier began increasing the rates paid on its certificates of deposit in late 2017, a trend
that continued throughout all of 2018 and into 2019. Furthermore, Premier increased the rates paid on its transaction based deposits such as savings, NOW and money market accounts in the middle of 2018 which continued into the first half of 2019.
PREMIER FINANCIAL BANCORP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
December 31, 2019
The rise in short-term interest rates as a result of five consecutive quarters of 25 basis point increases in the Federal Funds target rate by the
Federal Reserve Board of Governors from December 2017 thru December 2018 resulted in keen local competition for deposit funds as well as higher internet based pricing for both transaction and time deposits. As a result, the average rate paid on
Premier’s certificates of deposit increased the most, at 62 basis points to 1.73% in 2019, up from 1.11% in 2018. With three subsequent 25 bps decreases in the Federal Funds target rate by the Federal Reserve Board of Governors from August 2019
thru October 2019, Premier reduced the rates paid on its transaction based deposits such as savings, NOW and money market accounts in the middle of 2019. As a result, the average rate paid on interest bearing NOW and money market deposits
increased by only 7 basis points in 2019 to 0.32%, up from an average 0.25% paid in 2018. Lastly, the average rate paid on savings accounts increased by 1 basis point to 0.25% in 2019, up from an average 0.24% paid in 2018. The overall effect was
a 28 basis point increase in the average rate paid for all interest-bearing deposits to 0.84% in 2019, up from 0.56% in 2018. Similarly, the average rate paid on the subordinated debt assumed in the acquisition of Bankshares increased by 28 basis
points to 6.81% in 2019. The interest rate paid on the subordinated debt adjusts quarterly in conjunction with the three month London Interbank Offered Rate (LIBOR) plus 2.95%, which steadily increased during 2018 and the early part of 2019 as
short-term interest rates increased. The stated interest rate on the subordinated debt was 4.89% at December 31, 2019 and 5.43% at December 31, 2018. The difference between the stated interest rate and the average rate expensed by Premier is a
result of a lower carrying value of the $6,186,000 debt outstanding due to the remaining unamortized fair value adjustment recorded as part of the acquisition of Bankshares on January 15, 2016. Reported interest expense on the subordinated debt
also includes the periodic amortization of the fair value adjustment. Similar to the trend on interest-bearing deposits, Premier’s average rate paid on short-term borrowings and overnight customer repurchase agreements increased by 17 basis points
to 0.32% in 2019 compared to 0.15% during 2018. Customer repurchase agreements are secured by the pledging of individual investments within Premier’s investment portfolio. The average rate paid on Premier’s other borrowings increased by 27 basis
points to 4.37% in 2019 as the remainder of the loan renewal fee was expensed during 2019 as the borrowing was paid off on this otherwise fixed rate borrowing. In conjunction with the acquisition of First Bank on October 12, 2018, Premier assumed
the outstanding FHLB borrowings of First Bank. The average rate paid on these FHLB borrowings assumed in the acquisition of First Bank was 2.95% in 2019, up from 2.74% average rate paid in 2018 due to the repayment of maturing lower rate
borrowings since the October 2018 acquisition date. The net result on all interest-bearing liabilities was to increase the average rate paid by 28 basis points to 0.88% in 2019, up from the 0.60% paid in 2018. With the 24 basis point increase in
the average yield earned exceeded by the 28 basis point increase in the average rate paid, Premier’s net interest spread decreased by 4 basis points to 3.90% in 2019. However, due to an increase in funding from a $26.7 million, or 7.6%, increase
in non-interest bearing deposits, Premier’s net interest margin increased by 5 basis points to 4.18% in 2019, up from the 4.13% earned in 2018 and equal to the 4.18% earned in 2017.
PREMIER FINANCIAL BANCORP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
December 31, 2019
As net interest income dollars increased in 2018, Premier’s net interest margin decreased as the increase in the average rate
paid on interest-bearing liabilities exceeded the increase in the yield earned on interest earning assets. In 2018, the average yield on Premier’s loan portfolio increased 6 basis points to 5.38% from the 5.32% earned in 2017. Likewise, the
average yield earned on the investment portfolio in 2018 increased by 34 basis points to 2.38%, up from the 2.04% earned in 2017. Due to the cumulative effect of increases in short-term interest rates in 2017 and 2018, the average yield earned on
federal funds sold increased by 105 basis points in 2018 to 2.09%. Similarly, the yield earned on interest-bearing deposits with other banks increased by 33 basis points in 2018 to 1.99%. However, since loans outstanding are the predominant
earning asset, comprising 73% of total earning assets, the net result of the increases in yields earned in 2018 on all earning assets was to increase the average yield by just 4 basis points to 4.54% in 2018, up from the 4.50% earned in 2017. In
contrast to the modest increase in the overall yield on earning assets in 2018, the average rate paid on interest bearing liabilities increased by 15 basis points. In order to remain competitive and retain its customer base of core deposits,
Premier began increasing the rates paid on its certificates of deposit in late 2017, a trend that continued throughout all of 2018. Furthermore, Premier increased the rates paid on its transaction based deposits such as savings, NOW and money
market accounts in the middle of 2018. The continued rise in short-term interest rates as a result of five consecutive quarters of 25 basis point increases in Federal Funds target rate by the Federal Reserve Board of Governors resulted in keen
local competition for deposit funds as well as higher internet based pricing for both transaction and time deposits. As a result, the average rate paid on Premier’s certificates of deposit increased the most, at 32 basis points to 1.11% in 2018,
up from just 0.79% in 2017. The average rate paid on interest bearing NOW and money market deposits increased by 8 basis points in 2018 to 0.25%, up from an average 0.17% paid in 2017. Lastly, the average rate paid on savings accounts increased
by 4 basis points to 0.24% in 2018, up from an average 0.20% paid in 2017. The overall effect was a 16 basis point increase in the average rate paid for all interest-bearing deposits to 0.56% in 2018, up from 0.40% in 2017. Similarly, the average
rate paid on the subordinated debt assumed in the acquisition of Bankshares increased by 103 basis points to 6.53% in 2018. The interest rate paid on the subordinated debt adjusts quarterly in conjunction with the three month London Interbank
Offered Rate (LIBOR) plus 2.95%, which steadily increased during 2018 as short-term interest rates increased. The stated interest rate on the subordinated debt was 5.43% at December 31, 2018. The difference between the stated interest rate and
the average rate expensed by Premier is a result of a lower carrying value of the $6,186,000 debt outstanding due to the remaining unamortized fair value adjustment recorded as part of the acquisition of Bankshares on January 15, 2016. Reported
interest expense on the subordinated debt also includes the periodic amortization of the fair value adjustment. Contrary to this trend, Premier’s average rate paid on short-term borrowings and overnight customer repurchase agreements decreased by
9 basis points to 0.15% in 2018 compared to 0.24% during 2017. Customer repurchase agreements are secured by the pledging of individual investments within Premier’s investment portfolio and therefore, a lower average rate was paid in 2018. The
average rate paid on Premier’s other borrowings decreased by 3 basis points to 4.10% in 2018 due to the fixed rate feature of the single remaining borrowing in 2018. In May of 2017, a second borrowing bearing a higher stated interest rate was
fully repaid upon maturity. In conjunction with the acquisition of First Bank on October 12, 2018, Premier assumed the outstanding FHLB borrowings of First Bank. The average rate paid on these FHLB borrowings assumed in the acquisition of First
Bank was 2.74% in 2018. The net result on all interest-bearing liabilities was to increase the average rate paid by 15 basis points to 0.60% in 2018, up from the 0.45% paid in 2017. Due to the 4 basis point increase in the average yield earned
and the 15 basis point increase in the average rate paid, Premier’s net interest spread decreased by 19 basis points. Similarly, the net interest margin decreased by 5 basis points to 4.13% in 2018, down from the 4.18% earned in 2017 but still
higher than the 3.93% earned in 2016. Further discussion of interest income is included in the section of this report entitled "Balance Sheet Analysis."
PREMIER FINANCIAL BANCORP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
December 31, 2019
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. Nevertheless, key sources of Premier’s non-interest income can be diminished, in part, due to increased government regulations making the selling of
fixed rate mortgages in the secondary market more difficult, limiting the number of overdraft charges that can be assessed on a customer’s account on a given day and limiting the percentage of fees that can be earned on debit card transactions.
Expanding the deposit customer base via acquisitions, opening new branches and/or adding additional customer value to deposit based products and services are ways management can counter decreases in non-interest income from increased government
regulation.
As shown in the table of Non-Interest Income and Expense below, total fees and other income increased by $236,000, or 2.6%, in
2019. Only 0.5%, or $45,000, of the increase was from the operations of Jackson since its acquisition on October 25, 2019. Service charges on deposit accounts increased by $99,000, or 2.2%, largely due to an increase in revenue from consumer
overdraft charges and an increase in service charge review on business deposit accounts which were partially offset by a decrease in service charges on consumer deposit accounts. Premier implemented a more customer friendly overdraft response
program at one bank in 2017 and expanded that program to both banks in 2018. This program has resulted in an increase in overall overdraft revenue as well as the additional number of accounts from the acquisitions of First Bank and Jackson.
Electronic banking income, which consists of debit and credit card transaction fees, ATM fees and internet banking fees, decreased $42,000, or 1.2%, in 2019 due to decreases in merchant discount revenue and non-customer ATM fees for using Premier’s
ATM network. These decreases were nearly offset by a 3.9% increase in debit card interchange revenue. Premier continues to experience an increase in the number of customers who conduct their banking and purchasing electronically, primarily via
the use of debit and ATM cards. Revenue from these activities increased in 2019 due to increases in revenue from debit card transactions. Secondary market mortgage income (commissions and fees earned from originating and selling mortgage loans to
third parties in the secondary market) increased by $34,000, or 18.9%, in 2019 compared to 2018. Due to the stabilization of stricter guidelines for originating mortgage loans imposed by the federal government and the slight decrease in long-term
mortgage rates, Premier realized an increase in secondary market mortgage activity. Other non-interest income increased by $145,000, or 17.6%, in 2019 compared to 2018. Decreases in checkbook sales, commissions on selling credit life insurance on
loans, and annual fees on unpresented letters of credit were more than offset by increases in wire transfer fees, commissions from brokerage and annuity sales and a $158,000 increase in income from Premier’s investment in a commercial insurance
agency.
PREMIER FINANCIAL BANCORP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
December 31, 2019
In 2018, total fees and other income increased by $443,000, or 5.1%. Only 0.2%, or $21,000, of the increase were from the
operations of First Bank since its acquisition on October 12, 2018. Service charges on deposit accounts increased by $205,000, or 4.7%, largely due to an increase in revenue from consumer overdraft charges and partially offset by a decrease in
service charges on consumer deposit accounts. Premier implemented a more customer friendly overdraft response program at one bank in 2017 and expanded that program to both banks in 2018. This program has resulted in an increase in overall
overdraft revenue. Electronic banking income, which consists of debit and credit card transaction fees, ATM fees and internet banking fees, increased $270,000, or 8.3%, in 2018. Premier continues to experience an increase in the number of
customers who conduct their banking and purchasing electronically, primarily via the use of debit and ATM cards. Revenue from these activities increased in 2018 due to increases in revenue from debit card transactions and ATM usage fees.
Secondary market mortgage income (commissions and fees earned from originating and selling mortgage loans to third parties in the secondary market) decreased by $21,000, or 10.5%, in 2018 compared to 2017. Stricter guidelines for originating
mortgage loans imposed by the federal government as well as slightly higher long-term mortgage rates have reduced the propensity for customers to refinance their mortgage loans (when compared to years when mortgage interest rates were lower),
resulting in lower revenue for the Company. Other non-interest income decreased by $11,000, or 1.3%, in 2018 compared to 2017. Decreases in checkbook sales, wire transfer fees, commissions on selling credit life insurance on loans and annual fees
on unpresented letters of credit were nearly offset by increases in miscellaneous loan fees unrelated to the origination of loans and income from Premier’s investment in a commercial insurance agency.
In 2017, total fees and other income increased by $472,000 or 5.8%. Service charges on deposit accounts increased by $327,000,
or 8.1%, largely due to an increase in revenue from consumer and business overdraft charges and a slight increase in service charges on consumer deposit accounts. Premier implemented a more customer friendly overdraft response program in 2017
which resulted in an increase in overall overdraft revenue. Electronic banking income, which consists of debit and credit card transaction fees, ATM fees and internet banking fees, increased $115,000, or 3.7%, in 2015. Premier continues to
experience an increase in the number of customers who conduct their banking and purchasing electronically, primarily via the use of debit and ATM cards. Revenue from these activities increased in 2017 due to increases in revenue from debit card
transactions and ATM usage fees. Secondary market mortgage income (commissions and fees earned from originating and selling mortgage loans to third parties in the secondary market) decreased by $11,000, or 5.2%, in 2017 compared to 2016. Stricter
guidelines for originating mortgage loans imposed by the federal government as well as slightly higher long-term mortgage rates have reduced the propensity for customers to refinance their mortgage loans, resulting in lower revenue for the
Company. Other non-interest income increased by $41,000, or 5.2%, in 2017 compared to 2016. Decreases in checkbook sales, check cashing fees, wire transfer fees, and miscellaneous loan fees unrelated to the origination of loans were more than
offset by increases in commission income from the sale of brokerage account services and annuity products.
PREMIER FINANCIAL BANCORP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
December 31, 2019
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. Sometimes the expenses associated with acquisitions, as well as the inefficiency of the operations of acquired organizations,
cloud these goals. Premier’s 2019 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 2.14%, down from the 2.16%
realized in 2018 and the 2.28% realized in 2017. In 2019, the actual dollars of net overhead increased by $3,057,000, or 9.7%, as the $236,000 increase in non-interest income, detailed above, was more than offset by the $3,293,000 increase in
non-interest expense on 2019. The increase in non-interest expense in 2019 is partially due to the full year inclusion of the operations of First Bank, acquired in October 2018, and unusual gains on the sale of other real estate owned (“OREO”) in
2018 as more fully explained below. In 2018, the actual dollars of net overhead decreased by $190,000, or 0.6%, as the $443,000 increase in non-interest income, detailed above, exceeded the $253,000 increase in non-interest expense in 2018. For
the year 2019, net overhead was $34.4 million compared to $31.4 million in 2018 and $31.6 million in 2017.
Total non-interest expense in 2019 increased by $3,293,000, or 8.2%, from 2018 largely due to increases in staff costs and OREO
writedowns and expenses, but also due to increases in occupancy and equipment expenses, outside data processing costs, taxes not on income and an increase in the amortization of intangibles. These increases were partially offset by decreases in
professional fees, loan collection expenses and FDIC insurance in 2019. In, 2018, total non-interest expense increased by $253,000, or 0.6%, from 2017. The modest overall increase was largely the result of a $1,357,000, or 85%, decrease in OREO
writedowns and expenses. The decrease in this non-interest expense category was largely due to a $1,177,000 increase in net gains on the disposition of OREO properties resulting from $1,080,000 of net gains upon the sale of OREO in the first
quarter of 2018. Premier sold approximately $6.1 million of OREO, or approximately 30% of the carrying value held on the books at year-end 2017, and realized $1,080,000 of net gains upon their liquidation. OREO expenses and writedowns are
traditionally included in Premier’s total non-interest expenses, so the net gains from these sales reduced non-interest expense in 2018. Excluding the net OREO gains from these first quarter 2018 sales, non-interest expense increased by
$1,333,000, or 3.3% in 2018 compared to 2017, and Premier’s net overhead ratio for 2018 would have been 2.23% of average earning assets. The First Bank operations increased non-interest expense by $552,000 in 2018, or approximately 40% of the
remaining $1,333,000 increase in non-interest expense. Other decreases in non-interest expenses in 2018 include FDIC insurance, amortization of intangible assets, and employee benefits costs. These decreases were more than offset by increases in
salaries and wages, occupancy and equipment costs, professional fees, loan collection expenses, taxes not on income and other operating expenses.
PREMIER FINANCIAL BANCORP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
December 31, 2019
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, 2019.
|
NON-INTEREST INCOME AND EXPENSE
|
||||||||||||||||||||||||||||
|
(Dollars in thousands)
|
||||||||||||||||||||||||||||
|
Increase (Decrease) Over Prior Year
|
||||||||||||||||||||||||||||
|
2019
|
2018
|
|||||||||||||||||||||||||||
|
2019
|
2018
|
2017
|
Amount
|
Percent
|
Amount
|
Percent
|
||||||||||||||||||||||
|
Non-interest income:
|
||||||||||||||||||||||||||||
|
Service charges on deposit accounts
|
$
|
4,661
|
$
|
4,562
|
$
|
4,357
|
$
|
99
|
2.17
|
$
|
205
|
4.71
|
||||||||||||||||
|
Electronic banking income
|
3,488
|
3,530
|
3,260
|
(42
|
)
|
(1.19
|
)
|
270
|
8.28
|
|||||||||||||||||||
|
Secondary market mortgage income
|
214
|
180
|
201
|
34
|
18.89
|
(21
|
)
|
(10.45
|
)
|
|||||||||||||||||||
|
Other
|
971
|
826
|
837
|
145
|
17.55
|
(11
|
)
|
(1.31
|
)
|
|||||||||||||||||||
|
Total non-interest income
|
$
|
9,334
|
$
|
9,098
|
$
|
8,655
|
$
|
236
|
2.59
|
$
|
443
|
5.12
|
||||||||||||||||
|
Non-interest expense:
|
||||||||||||||||||||||||||||
|
Salaries and wages
|
$
|
17,502
|
$
|
16,118
|
$
|
15,595
|
$
|
1,384
|
8.59
|
$
|
523
|
3.35
|
||||||||||||||||
|
Employee benefits
|
3,983
|
3,685
|
3,760
|
298
|
8.09
|
(75
|
)
|
(1.99
|
)
|
|||||||||||||||||||
|
Total staff costs
|
21,485
|
19,803
|
19,355
|
1,682
|
8.49
|
448
|
2.31
|
|||||||||||||||||||||
|
Occupancy and equipment
|
6,909
|
6,294
|
5,999
|
615
|
9.77
|
295
|
4.92
|
|||||||||||||||||||||
|
Outside data processing
|
5,782
|
5,199
|
5,173
|
583
|
11.21
|
26
|
0.50
|
|||||||||||||||||||||
|
Professional fees
|
1,131
|
1,506
|
975
|
(375
|
)
|
(24.90
|
)
|
531
|
54.46
|
|||||||||||||||||||
|
Taxes, other than payroll, property and income
|
973
|
888
|
780
|
85
|
9.57
|
108
|
13.85
|
|||||||||||||||||||||
|
Amortization of intangibles
|
885
|
778
|
974
|
107
|
13.75
|
(196
|
)
|
(20.12
|
)
|
|||||||||||||||||||
|
OREO gains, losses and expenses, net
|
1,550
|
244
|
1,601
|
1,306
|
535.25
|
(1,357
|
)
|
(84.76
|
)
|
|||||||||||||||||||
|
Loan collection expenses
|
342
|
746
|
627
|
(404
|
)
|
(54.16
|
)
|
119
|
18.98
|
|||||||||||||||||||
|
FDIC insurance
|
223
|
564
|
675
|
(341
|
)
|
(60.46
|
)
|
(111
|
)
|
(16.44
|
)
|
|||||||||||||||||
|
Other expenses
|
4,484
|
4,449
|
4,059
|
35
|
0.79
|
390
|
9.61
|
|||||||||||||||||||||
|
Total non-interest expenses
|
$
|
43,764
|
$
|
40,471
|
$
|
40,218
|
$
|
3,293
|
8.14
|
$
|
253
|
0.63
|
||||||||||||||||
Staff costs increased by $1,682,000, or 8.5%, in 2019 versus 2018, largely due to an increase in salaries and wages. Salaries
and wages increased $1,384,000, or 8.6% partially due to $382,000 of additional salaries and wages paid to employees retained from the acquisition of First Bank included in the full year of 2019 and $117,000 of additional salaries and wages paid to
employees retained from the acquisition of Jackson included since October 2019. Otherwise, salaries and wages increased by $885,000, or 5.5% due to increases from the full year inclusion of employees of denovo branches opened in 2018 and increases
in actual wages paid to employees. Employee benefit costs decreased by $298,000, or 8.1%, in 2019 partially due to the addition of employees from the First Bank and Jackson acquisitions as well as the denovo branches opened in 2018 plus increases
in medical insurance benefit costs, employer payroll taxes and retirement benefit costs. In 2018, staff costs increased by $448,000, or 2.3%, versus 2017, largely due to an increase in salaries and wages. Salaries and wages increased by $523,000,
or 3.4%, in 2018 due to increases in the number of employees from opening denovo branches, increases in actual wages paid to employees and $158,000 of additional salaries and wages paid to employees retained from the acquisition of First Bank.
Employee benefit costs decreased by $75,000, or 2.0%, in 2018 largely due to reductions in medical insurance benefit costs which were partially offset by increases in employer payroll taxes and retirement benefit costs. While management has taken
steps to help curtail its medical insurance benefit costs, medical insurance benefit costs could continue to increase as the national medical insurance industry continues to stabilize after the implementation of new government regulations.
PREMIER FINANCIAL BANCORP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
December 31, 2019
Occupancy and equipment expenses in total increased by $615,000, or 9.8%, in 2019 compared to 2018. Occupancy expense increased
by $193,000 in 2019, largely due to $137,000 of increased net occupancy expense from the branches First Bank and Jackson plus full year costs of the two denovo branches opened in 2018. Overall increases in the cost to operate the branch facilities
include building deprecation, real estate taxes, utility costs, and building maintenance. These costs were partially offset by decreases in building repairs and snow removal plus additional rental income from the facilities obtained from the
acquisition of First Bank. Equipment costs increased by $422,000 in 2019, largely due to increases in depreciation of furniture & fixtures, equipment maintenance costs, personal property tax and ever increasing costs of information technology
and purchased software subscriptions. These increases were partially offset by a reduction in vehicle expenses. The operations of First Bank and Jackson added approximately $139,000 to total equipment expense in 2019. In 2018, occupancy and
equipment expenses increased in total by $295,000, or 4.9%, compared to 2017. Occupancy expense increased by $164,000 in 2018, largely due to increases in the cost to operate the branch facilities due to increases in utility costs, building
supplies, snow removal, property landscaping and lawn maintenance, plus an increase in building repairs. Equipment costs increased by $131,000 in 2018, largely due to increases in depreciation of furniture & fixtures and ever increasing costs
of information technology and purchased software subscriptions. The operations of First Bank added approximately $61,000 to total occupancy and equipment expense in 2018.
Outside data processing expense increased $583,000, or 11.2%, in 2019 versus 2018, as increases in costs due to the additional
numbers of accounts and transactions from the acquisitions of First Bank and Jackson added to increases in expenses related to newer electronic banking technologies designed to improve banking convenience and security for our customers, such as
person-to-person mobile payments and debit card locking features. Other increases include the additional communication expenses for data and internet connectivity of the new branches. In 2018, outside data processing expense increased $26,000, or
0.5%, versus 2017, as decreases in core data processing and ATM processing expenses from renewed contract price savings were more than offset by increases in expenses related to newer electronic banking technologies designed to improve banking
convenience for our customers such as internet banking and mobile banking charges as well as an increase communication expenses.
Professional fees decreased by $375,000, or 24.9%, in 2019 versus 2018, largely due to higher legal and other expenses in 2018
related to the acquisition of First Bank. In 2019, legal fees decreased by $257,000, accounting and audit fees decreased by $36,000, and consulting fees decreased by $82,000. In 2018 professional fees increased by $531,000, or 54.5%, versus 2017,
largely due to a $391,000 increase in legal and other expenses related to the acquisition of First Bank. Otherwise professional fees increased by $140,000 related to higher legal fees incurred as well as higher consulting costs related primarily
to other business planning.
PREMIER FINANCIAL BANCORP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
December 31, 2019
Taxes not on income increased by $85,000, or 9.6%, in 2019 versus 2018, largely due to a $72,000 increase in municipal taxes
related to the First Bank Charleston location and the Huntington denovo branch opened in 2018 as well as higher Ohio and Virginia based franchise taxes. In 2018, taxes not on income increased by $108,000, or 13.9%, versus 2017, largely due to
higher Kentucky and Virginia based franchise taxes due to increasing operations in those states as well as higher West Virginia based municipal taxes due to increased branch operations within the state.
Amortization of intangibles increased by $107,000, or 13.8%, in 2019 versus 2018, largely due to the $324,000 of additional
amortization expense related to the core deposit intangible asset resulting from the acquisition of First Bank. Otherwise, amortization of intangibles expense decreased by $217,000, due to a decrease in the amortization rate of the Bankshares
intangible asset as well as a full year of savings from the end of amortization expense related to the purchase of four branches from Integra Bank back in 2010. Premier uses an accelerated method to amortize its core deposit intangible assets over
an 8 to 10 year period to simulate estimated deposit activity in the immediate months following a bank or branch acquisition. In 2018, amortization of intangibles decreased by $196,000, or 20.1%, versus 2017. The decrease in 2018 is largely a
result of the end of amortization expense related to the purchase of four branches from Integra Bank back in 2010, as well as a full year of savings from the end of amortization expense related to the acquisition of Adams National Bank in 2009.
OREO gains, losses and expenses resulted in net expenses of $1,550,000 in 2019 compared to $244,000 in 2018 and $1,601,000 of net
expenses in 2017. OREO expense represents the costs to operate, maintain and liquidate Other Real Estate acquired through foreclosure in satisfaction of unpaid loans. In 2019, OREO gains, losses and expenses increased by $1,306,000, or 535.3%,
compared to the net expenses recorded in 2018. As discussed above, Premier sold approximately $6.1 million of OREO properties in the first quarter of 2018, and realized $1,080,000 of net gains upon their liquidation. OREO expenses and writedowns
are traditionally included in Premier’s total non-interest expenses, so the net gains from these sales reduced non-interest expense in 2018. Excluding the net OREO gains from these first quarter 2018 sales, Premier recorded $1,324,000 of OREO
expenses and losses, net of gains, in 2018 reducing the increase in the level of 2019 expenses to $226,000, or 17.1%. The increase in 2019 includes a $650,000 increase in writedowns of existing OREO properties, partially offset by a $123,000
reduction in net costs incurred to maintain the OREO properties and a $301,000 increase in net gains on the sale of OREO in 2019, excluding the $1,080,000 of net gains discussed above realized during the first quarter of 2018. Excluding the
$1,080,000 of net gains on OREO sales in the first quarter of 2018, Premier realized $110,000 of net losses on the sale of OREO in 2018 compared to $191,000 of net gains on the sale of OREO in 2019 and $207,000 of losses on the sale of OREO in
2017. In 2018, OREO gains, losses and expenses decreased by $1,357,000, or 84.8%, compared to the net expenses recorded in 2017. In 2018, OREO gains, losses and expenses decreased by $1,357,000, or 84.8%, compared to the net expenses recorded in
2017. Excluding the net OREO gains from these first quarter 2018 sales, Premier recorded $1,324,000 of OREO expenses and losses, net of gains, in 2018 compared to $1,601,000 of OREO expenses and losses, net of gains, in 2017. The remaining
$277,000 decrease in 2018, when compared to 2017, was largely due to a $149,000 decrease in additional write downs of OREO values, a $31,000 decrease in net operating expenses related to the OREO properties and a $97,000 reduction in the losses
realized upon the sale of OREO properties in 2018.
PREMIER FINANCIAL BANCORP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
December 31, 2019
Loan collection expenses decreased by $404,000, or 54.2%, in 2019 versus 2018, following an increase of
$119,000, or 19.0%, in 2018 versus 2017. Loan collection expenses include attorney fees and other costs associated directly with the collection of a loan, foreclosure on collateral, the immediate liquidation or auction of such collateral, and
other expenditures directly related to the collection of a loan. These expenses can fluctuate from year to year depending on foreclosure and collection activities as well as whether collection efforts are successful and the borrower is required to
reimburse the banks for their collection costs incurred. In 2019, $383,000 of the decrease in loan collection expense occurred in the Washington DC metro market.
FDIC insurance expense decreased by $341,000, or 60.5%, in 2019 versus 2018. The decrease in FDIC insurance
expense is largely due to the implementation of a community bank FDIC assessment credit awarded to banks under $10 billion in total assets. The credit was awarded to community banks as the FDIC Deposit Insurance Fund reserve ratio reached 1.35% in
2019. The credit is available to offset FDIC insurance assessments at the discretion of the FDIC but is not refundable. The Banks were able to utilize a substantial portion of the credits awarded to them to offset the 2019 third and fourth
quarter FDIC assessments thus reducing 2019 FDIC insurance expense by roughly half. In 2018, FDIC insurance expense decreased by $111,000, or 16.4%, versus 2017. The decrease in FDIC insurance expense in 2018 was largely due to a decrease in the
FDIC assessment rates compared to the assessed rates in 2017, as Premier’s assessment base grew in 2018.
Other non-interest expenses totaled $4,484,000 in 2019, only a $35,000, or 0.8%, increase from the $4,449,000
of other non-interest expenses recorded in 2018. The increase in other expenses is largely the result of increases in marketing and business development expenses, employee training, transportation and travel expenses, correspondent bank charges,
fraud and forged check losses, courier and armored car services, and stationary and supplies expense. The increases were substantially offset by savings in loan origination costs, postage, and freight expense as well as a decrease in direct
conversion expenses primarily related to the First Bank acquisition incurred in 2018 and a decrease in shareholder relations expense resulting from costs incurred in 2018 associated with the special shareholder meeting to vote on the issuance of
common stock to consummate the First Bank acquisition. In 2018, other expenses totaled $4,449,000, a $390,000, or 9.6%, increase from the $4,059,000 of other non-interest expenses recorded in 2017. The increase in other expenses is largely the
result of $180,000 of direct conversion expenses related to the First Bank acquisition incurred in 2018 and a $53,000 increase in shareholder relations expense resulting from costs associated with the special shareholder meeting to vote on the
issuance of common stock to consummate the First Bank acquisition. Other expense increases include marketing and business development expenses, postage and freight, courier and armored car, and travel expense. These increases were partially
offset by savings in corporate and blanket bond insurance, losses and shortages, and supplies expense.
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.
PREMIER FINANCIAL BANCORP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
December 31, 2019
Applicable Income Taxes
Premier recognized $7,025,000 of income tax expense in 2019. This amount compares to $5,898,000 of income tax expense in 2018
and $8,607,000 of income tax expense recorded in 2017. Premier’s effective tax rate was 22.5% in 2019, similar to the 22.6% in 2018, but down from 36.7% reported in 2017. The decrease in the effective tax rate in 2019 and 2018 is due to the Tax
Cut and Jobs Act (the “Tax Act”), which lowered Premier’s U.S. corporate income tax rate from 35% in 2017 to 21% in 2018 and 2019. The effective tax rate in 2017 also includes a $145,000 increase in tax expense related to the revaluation of net
deferred tax assets as a result of the reduction of the federal corporate income tax rate beginning in 2018. The Tax Act made broad and complex changes to the U.S. tax code that affected 2017 and years 2018 and after, including, but not limited
to, accelerated depreciation that will allow for full expensing of qualified property. The Tax Act also established new tax laws that affected 2018 and after, including a reduction in the U.S. federal corporate income tax rate from 35% to 21%. As
a result of the reduction of the federal corporate income tax rate, Premier revalued its net deferred tax asset, excluding after tax credits, as of December 31, 2017, using the lower corporate income tax rate. Based on the revaluation, net tax
expense of $145,000 was recorded to reduce the net deferred tax asset balance as of that date. As shown in Note 13 to the consolidated financial statements, all three years consistently reflect similar levels of
tax exempt interest income partially offset by non-deductible expenses, as well as similar levels of state income tax expense.
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.
PREMIER FINANCIAL BANCORP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
December 31, 2019
ADOPTION OF NEW ACCOUNTING STANDARDS
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842). This standard
requires organizations that are lessees to recognize a lease liability, which is the lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis; and a right-of-use asset, which is an asset that represents the
lessee’s right to use, or control the use of, a specified property for the lease term. The new guidance also requires lessees to disclose key information about leasing requirements for leases that were historically classified as operating leases
under previous generally accepted accounting principles. This ASU became effective for Premier for interim and annual periods beginning after December 15, 2018. The Company leases some of its branch locations. The Company adopted Topic 842 on
January 1, 2019. The Company applied a modified retrospective transition approach for the applicable leases. The modified retrospective approach would not require any transition accounting for leases that expired before the earliest comparative
period presented. The Company has also elected to use the practical expedient to make an accounting policy election for property leases to include both lease and non-lease components as a single component and account for it as a lease. Upon
adoption of this standard, the Company recorded a $7.6 million right of use asset, included in premises and equipment, determined by calculating an estimated present value of future lease payments over the extended lives of the Company’s leases.
The Company also recorded a $7.6 million finance lease liability, included in other liabilities.
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments—Credit Losses:
Measurement of Credit Losses on Financial Instruments. This ASU replaces the measurement for credit losses from a probable incurred estimate with an expected future loss estimate, which is referred to as the “current expected credit loss”
or “CECL”. The standard pertains to financial assets measured at amortized cost such as loans, debt securities classified as held-to-maturity, and certain other contracts, in which organizations will now use forward-looking information to enhance
their credit loss estimates on these assets. The largest impact will be on the allowance for loan and lease losses. The company has formed a committee to oversee the steps required in the adoption of the new current expected credit loss method.
The committee has selected a third-party vendor to assist in data analysis and modeling as well as the required disclosures. Management is currently evaluating the impact of the adoption of this guidance on the Company’s financial statements. Upon
adoption, an initial cumulative increase in the allowance for loan losses is currently anticipated by management along with a corresponding decrease in capital as permitted by the standard. However, due to the complexity of the calculation and
evolving guidance on adoption management has not yet determined the one-time adjustment. On July 17, 2019, the Financial Accounting Standards Board (“FASB”) voted for a proposal to extend the implementation deadline for smaller reporting companies
like Premier. The proposal extends the implementation deadline for Premier for a period of three-years until January 1, 2023. The proposal was approved on October 16, 2019.
PREMIER FINANCIAL BANCORP, INC.
FORM 10-K
December 31, 2019
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:
Report of Independent Registered Public Accounting Firm
Financial Statements:
PREMIER FINANCIAL BANCORP, INC.
FORM 10-K
December 31, 2019
|
A.
|
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, 2019. In
making this assessment, management used the criteria set forth by the 2013 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, 2019, the Company’s internal control over financial reporting is effective based on those criteria.
The Company’s independent registered public accounting firm, Crowe LLP, has audited the consolidated
financial statements included in this Annual Report on Form 10-K and has also audited the Company’s internal control over financial reporting. Their report is included on pages 98 and 99 of this report.
|
/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 12, 2020
|
Date: March 12, 2020
|
PREMIER FINANCIAL BANCORP, INC.
FORM 10-K
December 31, 2019
B. Changes in Internal Control 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.
C. 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.
PREMIER FINANCIAL BANCORP, INC.
CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2019, 2018, and 2017
PUBLIC ACCOUNTING FIRM
Shareholders and the Board of Directors of
Premier Financial Bancorp, Inc.
Huntington, WV
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated balance sheets of Premier Financial Bancorp, Inc. (the "Company") as of December 31, 2019 and
2018, the related consolidated statements of income, comprehensive income, changes in stockholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2019, and the related notes (collectively referred to as
the "financial statements"). We also have audited the Company’s internal control over financial reporting as of December 31, 2019, based on the criteria established in Internal Control – Integrated Framework: (2013) issued by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO).
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Company
as of December 31, 2019 and 2018, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2019 in conformity with accounting principles generally accepted in the United States of
America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2019, based on the criteria established in Internal Control – Integrated Framework: (2013)
issued by COSO.
Basis for Opinions
The Company’s management is responsible for these financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the
effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s financial statements and an
opinion on the Company’s internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with
respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether
the financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the financial statements included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud,
and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles
used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements.
Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material
weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We
believe that our audits provide a reasonable basis for our opinions.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the
maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of
financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness
to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Crowe LLP
We have served as the Company's auditor since 1998.
Atlanta, Georgia
March 12, 2020
PREMIER FINANCIAL BANCORP, INC.
December 31, 2019 and 2018
(Dollars in Thousands, Except Share Data)
|
2019
|
2018
|
|||||||
|
ASSETS
|
||||||||
|
Cash and due from banks
|
$
|
23,091
|
$
|
22,992
|
||||
|
Interest bearing bank balances
|
65,465
|
39,911
|
||||||
|
Federal funds sold
|
5,902
|
17,872
|
||||||
|
Cash and cash equivalents
|
94,458
|
80,775
|
||||||
|
Time deposits with other banks
|
598
|
1,094
|
||||||
|
Securities available for sale
|
390,754
|
365,731
|
||||||
|
Loans
|
1,195,295
|
1,149,301
|
||||||
|
Allowance for loan losses
|
(13,542
|
)
|
(13,738
|
)
|
||||
|
Net loans
|
1,181,753
|
1,135,563
|
||||||
|
Federal Home Loan Bank stock, at cost
|
4,450
|
3,628
|
||||||
|
Premises and equipment, net
|
37,257
|
29,385
|
||||||
|
Other real estate owned, net
|
12,242
|
14,024
|
||||||
|
Interest receivable
|
4,699
|
4,295
|
||||||
|
Goodwill
|
47,640
|
47,640
|
||||||
|
Other intangible assets
|
5,376
|
5,268
|
||||||
|
Deferred taxes
|
-
|
1,541
|
||||||
|
Other assets
|
1,783
|
1,171
|
||||||
|
Total assets
|
$
|
1,781,010
|
$
|
1,690,115
|
||||
|
LIABILITIES AND STOCKHOLDERS' EQUITY
|
||||||||
|
Deposits
|
||||||||
|
Non-interest bearing
|
$
|
367,870
|
$
|
391,763
|
||||
|
Time deposits, $250,000 and over
|
100,638
|
74,161
|
||||||
|
Other interest bearing
|
1,027,245
|
964,203
|
||||||
|
Total deposits
|
1,495,753
|
1,430,127
|
||||||
|
Securities sold under agreements to repurchase
|
20,428
|
22,062
|
||||||
|
Other borrowed funds
|
-
|
2,500
|
||||||
|
FHLB advances
|
6,375
|
8,819
|
||||||
|
Subordinated debt
|
5,436
|
5,406
|
||||||
|
Interest payable
|
912
|
733
|
||||||
|
Deferred taxes
|
811
|
-
|
||||||
|
Other liabilities
|
11,054
|
3,739
|
||||||
|
Total liabilities
|
1,540,769
|
1,473,386
|
||||||
|
Stockholders' equity
|
||||||||
|
Common stock, no par value; 30,000,000 shares authorized; 14,657,432 shares issued and outstanding in 2019, and
14,624,193 shares issued and outstanding in 2018
|
133,795
|
133,248
|
||||||
|
Retained earnings
|
102,743
|
87,333
|
||||||
|
Accumulated other comprehensive income (loss)
|
3,703
|
(3,852
|
)
|
|||||
|
Total stockholders' equity
|
240,241
|
216,729
|
||||||
|
Total liabilities and stockholders' equity
|
$
|
1,781,010
|
$
|
1,690,115
|
||||
PREMIER FINANCIAL BANCORP, INC.
Years Ended December 31
(In Thousands, Except Per Share Data)
|
2019
|
2018
|
2017
|
||||||||||
|
Interest income
|
||||||||||||
|
Loans, including fees
|
$
|
65,237
|
$
|
56,856
|
$
|
55,425
|
||||||
|
Securities available for sale
|
||||||||||||
|
Taxable
|
9,261
|
7,022
|
5,628
|
|||||||||
|
Tax-exempt
|
348
|
254
|
261
|
|||||||||
|
Federal funds sold and other
|
1,732
|
1,689
|
676
|
|||||||||
|
Total interest income
|
76,578
|
65,821
|
61,990
|
|||||||||
|
Interest expense
|
||||||||||||
|
Deposits
|
9,009
|
5,444
|
3,855
|
|||||||||
|
Repurchase agreements and other
|
70
|
34
|
33
|
|||||||||
|
FHLB advances and other borrowings
|
229
|
237
|
319
|
|||||||||
|
Subordinated debt
|
369
|
352
|
295
|
|||||||||
|
Total interest expense
|
9,677
|
6,067
|
4,502
|
|||||||||
|
Net interest income
|
66,901
|
59,754
|
57,488
|
|||||||||
|
Provision for loan losses
|
1,250
|
2,315
|
2,499
|
|||||||||
|
Net interest income after provision for loan losses
|
65,651
|
57,439
|
54,989
|
|||||||||
|
Non-interest income
|
||||||||||||
|
Service charges on deposit accounts
|
4,661
|
4,562
|
4,357
|
|||||||||
|
Electronic banking income
|
3,488
|
3,530
|
3,260
|
|||||||||
|
Secondary market mortgage income
|
214
|
180
|
201
|
|||||||||
|
Other
|
971
|
826
|
837
|
|||||||||
|
9,334
|
9,098
|
8,655
|
||||||||||
|
Non-interest expenses
|
||||||||||||
|
Salaries and employee benefits
|
21,485
|
19,803
|
19,355
|
|||||||||
|
Occupancy and equipment expenses
|
6,909
|
6,294
|
5,999
|
|||||||||
|
Outside data processing
|
5,782
|
5,199
|
5,173
|
|||||||||
|
Professional fees
|
1,131
|
1,506
|
975
|
|||||||||
|
Taxes, other than payroll, property and income
|
973
|
888
|
780
|
|||||||||
|
Write-downs, expenses, sales of other real estate owned, net
|
1,550
|
244
|
1,601
|
|||||||||
|
Loan collection expenses
|
342
|
746
|
627
|
|||||||||
|
FDIC insurance
|
223
|
564
|
675
|
|||||||||
|
Amortization of intangibles
|
885
|
778
|
974
|
|||||||||
|
Other expenses
|
4,484
|
4,449
|
4,059
|
|||||||||
|
43,764
|
40,471
|
40,218
|
||||||||||
|
Income before income taxes
|
31,221
|
26,066
|
23,426
|
|||||||||
|
Provision for income taxes
|
7,025
|
5,898
|
8,607
|
|||||||||
|
Net income
|
$
|
24,196
|
$
|
20,168
|
$
|
14,819
|
||||||
|
Earnings per share:
|
||||||||||||
|
Basic
|
$
|
1.65
|
$
|
1.48
|
$
|
1.11
|
||||||
|
Diluted
|
1.64
|
1.47
|
1.10
|
|||||||||
|
Dividends per share
|
0.60
|
0.57
|
0.48
|
|||||||||
PREMIER FINANCIAL BANCORP, INC.
Years Ended December 31
(In Thousands, Except Per Share Data)
|
2019
|
2018
|
2017
|
||||||||||
|
Net income
|
$
|
24,196
|
$
|
20,168
|
$
|
14,819
|
||||||
|
Other comprehensive income (loss):
|
||||||||||||
|
Unrealized gains (losses) arising during the period
|
9,564
|
(2,252
|
)
|
334
|
||||||||
|
Reclassification of realized amount
|
-
|
-
|
-
|
|||||||||
|
Net change in unrealized gain (loss) on securities
|
9,564
|
(2,252
|
)
|
334
|
||||||||
|
Less tax impact
|
2,009
|
(473
|
)
|
118
|
||||||||
|
Other comprehensive income (loss):
|
7,555
|
(1,779
|
)
|
216
|
||||||||
|
Comprehensive income
|
$
|
31,751
|
$
|
18,389
|
$
|
15,035
|
||||||
PREMIER FINANCIAL BANCORP, INC.
CONSOLIDATED STATEMENTS OF
Years Ended December 31
(In Thousands, Except Per Share Data)
|
Common
Stock
|
Retained
Earnings
|
Accumulated
Other
Comprehensive
Income (Loss)
|
Total
|
|||||||||||||
|
Balances, January 1, 2017
|
$
|
109,911
|
$
|
66,195
|
$
|
(1,922
|
)
|
$
|
174,184
|
|||||||
|
Net income
|
-
|
14,819
|
-
|
14,819
|
||||||||||||
|
Other comprehensive income
|
-
|
-
|
216
|
216
|
||||||||||||
|
Cash dividends paid ($0.48 per share)
|
-
|
(6,398
|
)
|
-
|
(6,398
|
)
|
||||||||||
|
Reclassify stranded tax effects within AOCI
|
-
|
367
|
(367
|
)
|
-
|
|||||||||||
|
Stock options exercised
|
317
|
-
|
-
|
317
|
||||||||||||
|
Stock based compensation expense
|
217
|
-
|
-
|
217
|
||||||||||||
|
Balances, December 31, 2017
|
110,445
|
74,983
|
(2,073
|
)
|
183,355
|
|||||||||||
|
Net income
|
-
|
20,168
|
-
|
20,168
|
||||||||||||
|
Other comprehensive income (loss)
|
-
|
-
|
(1,779
|
)
|
(1,779
|
)
|
||||||||||
|
Cash dividends paid ($0.57 per share)
|
-
|
(7,805
|
)
|
-
|
(7,805
|
)
|
||||||||||
|
Cash in lieu of fractional share for 5 for 4 stock split
|
-
|
(13
|
)
|
-
|
(13
|
)
|
||||||||||
|
Stock issued to acquire subsidiary, net
|
22,358
|
-
|
-
|
22,358
|
||||||||||||
|
Stock options exercised
|
193
|
-
|
-
|
193
|
||||||||||||
|
Stock based compensation expense
|
252
|
-
|
-
|
252
|
||||||||||||
|
Balances, December 31, 2018
|
133,248
|
87,333
|
(3,852
|
)
|
216,729
|
|||||||||||
|
Net income
|
-
|
24,196
|
-
|
24,196
|
||||||||||||
|
Other comprehensive income (loss)
|
-
|
-
|
7,555
|
7,555
|
||||||||||||
|
Cash dividends paid ($0.60 per share)
|
-
|
(8,786
|
)
|
-
|
(8,786
|
)
|
||||||||||
|
Stock options exercised
|
246
|
-
|
-
|
246
|
||||||||||||
|
Stock based compensation expense
|
301
|
-
|
-
|
301
|
||||||||||||
|
Balances, December 31, 2019
|
$
|
133,795
|
$
|
102,743
|
$
|
3,703
|
$
|
240,241
|
||||||||
PREMIER FINANCIAL BANCORP, INC.
Years Ended December 31
(In Thousands, Except Per Share Data)
|
2019
|
2018
|
2017
|
||||||||||
|
Cash flows from operating activities
|
||||||||||||
|
Net income
|
$
|
24,196
|
$
|
20,168
|
$
|
14,819
|
||||||
|
Adjustments to reconcile net income to net cash
from operating activities
|
||||||||||||
|
Depreciation
|
2,046
|
1,722
|
1,720
|
|||||||||
|
Provision for loan losses
|
1,250
|
2,315
|
2,499
|
|||||||||
|
Amortization (accretion), net
|
7
|
1,295
|
1,586
|
|||||||||
|
Writedowns (gains) on other real estate owned, net
|
978
|
(450
|
)
|
874
|
||||||||
|
Stock compensation expense
|
301
|
252
|
217
|
|||||||||
|
Changes in:
|
||||||||||||
|
Interest receivable
|
(59
|
)
|
300
|
(181
|
)
|
|||||||
|
Deferred income taxes
|
512
|
33
|
797
|
|||||||||
|
Other assets
|
287
|
1,404
|
(1,047
|
)
|
||||||||
|
Interest payable
|
54
|
157
|
29
|
|||||||||
|
Other liabilities
|
(341
|
)
|
(62
|
)
|
(922
|
)
|
||||||
|
Net cash from operating activities
|
29,231
|
27,134
|
20,391
|
|||||||||
|
Cash flows from investing activities
|
||||||||||||
|
Net change on time deposits with other banks
|
496
|
1,488
|
(250
|
)
|
||||||||
|
Purchases of securities available for sale
|
(66,684
|
)
|
(110,869
|
)
|
(57,223
|
)
|
||||||
|
Proceeds from maturities, sales and calls of securities
available for sale
|
95,014
|
65,181
|
65,794
|
|||||||||
|
Purchase of FHLB stock
|
(10
|
)
|
-
|
-
|
||||||||
|
Redemption of FHLB stock
|
273
|
792
|
15
|
|||||||||
|
Acquisition of subsidiary, net of cash acquired (paid)
|
(4,863
|
)
|
2,591
|
-
|
||||||||
|
Net change in loans
|
(5,241
|
)
|
13,431
|
(36,792
|
)
|
|||||||
|
Purchases of premises and equipment, net
|
(1,589
|
)
|
(3,460
|
)
|
(1,382
|
)
|
||||||
|
Proceeds from sales of other real estate owned
|
2,348
|
7,778
|
4,577
|
|||||||||
|
Net cash from (used in) investing activities
|
19,744
|
(23,068
|
)
|
(25,261
|
)
|
|||||||
continued
PREMIER FINANCIAL BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
Years Ended December 31
(In Thousands, Except Per Share Data)
|
2019
|
2018
|
2017
|
||||||||||
|
Cash flows from financing activities
|
||||||||||||
|
Net change in deposits
|
(20,118
|
)
|
25,280
|
(6,735
|
)
|
|||||||
|
Net change in agreements to repurchase securities
|
(1,634
|
)
|
(1,609
|
)
|
(510
|
)
|
||||||
|
Repayment of other borrowed funds
|
(2,500
|
)
|
(2,500
|
)
|
(3,859
|
)
|
||||||
|
Repayment of other FHLB advances
|
(2,500
|
)
|
(19,500
|
)
|
-
|
|||||||
|
Proceeds from stock option exercises
|
246
|
193
|
317
|
|||||||||
|
Cash in lieu of fractional shares
|
-
|
(13
|
)
|
-
|
||||||||
|
Common stock dividends paid
|
(8,786
|
)
|
(7,805
|
)
|
(6,398
|
)
|
||||||
|
Net cash from (used in) financing activities
|
(35,292
|
)
|
(5,954
|
)
|
(17,185
|
)
|
||||||
|
Net change in cash and cash equivalents
|
13,683
|
(1,888
|
)
|
(22,055
|
)
|
|||||||
|
Cash and cash equivalents at beginning of year
|
80,775
|
82,663
|
104,718
|
|||||||||
|
Cash and cash equivalents at end of year
|
$
|
94,458
|
$
|
80,775
|
$
|
82,663
|
||||||
|
Supplemental disclosures of cash flow information:
|
||||||||||||
|
Cash paid during year for -
|
||||||||||||
|
Interest
|
$
|
9,623
|
$
|
5,911
|
$
|
4,473
|
||||||
|
Income taxes paid, net
|
6,943
|
4,578
|
8,555
|
|||||||||
|
Non-cash transactions
|
||||||||||||
|
Loans transferred to real estate acquired through foreclosure
|
$
|
1,509
|
$
|
1,386
|
$
|
12,681
|
||||||
|
Amount transferred from accumulated other comprehensive income to retained earnings related to changes in future income
tax rates
|
$
|
367
|
||||||||||
|
Common stock issued to acquire First Bank
|
$
|
22,358
|
||||||||||
|
Operating right-of-use asset resulting from lease liability
|
$
|
7,152
|
||||||||||
PREMIER FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2019, 2018, and 2017
(Dollars in Thousands, Except Per Share Data)
The consolidated financial statements include the accounts of Premier Financial Bancorp, Inc. (the
“Company” or “Premier”) and its wholly-owned subsidiaries:
|
Unaudited
|
||||||||||||
|
December 31, 2019
|
||||||||||||
|
Subsidiary
|
Location
|
Year
Acquired
|
Total
Assets
|
Net
Income
|
||||||||
|
Citizens Deposit Bank & Trust
|
Vanceburg, Kentucky
|
1991
|
$
|
552,704
|
$
|
6,012
|
||||||
|
Premier Bank, Inc.
|
Huntington, West Virginia
|
1998
|
1,220,801
|
20,505
|
||||||||
|
Parent and Intercompany Eliminations
|
7,505
|
(2,321
|
)
|
|||||||||
|
Consolidated total
|
$
|
1,781,010
|
$
|
24,196
|
||||||||
All material intercompany transactions and balances have been eliminated.
On June 8, 2018, Premier issued a 5 for 4 stock split to shareholders of record on June 4, 2018. Each shareholder received 1 additional share of
common stock for every 4 shares of common stock already owned on the record date. Outstanding shares and per share amounts prior to the payment date have been restated to reflect the additional shares issued as a result of the stock split to aid
in the comparison to current period results.
Nature of Operations: The subsidiary banks (Banks) operate under state bank charters. The Banks provide traditional banking services to
customers primarily located in the counties and adjoining counties in Kentucky, Ohio, West Virginia, Maryland, Washington DC, and Virginia in which the Banks operate. The state chartered banks are subject to regulation by their respective state
banking regulators and the Federal Deposit Insurance Corporation (“FDIC”). The Company is also subject to regulation by the Federal Reserve Board.
Cash Flows: For purposes of reporting cash flows, cash and cash equivalents include cash on hand, amounts due from banks, interest-earning
balances with banks with an original maturity less than ninety days, and federal funds sold. Net cash flows are reported for loans, deposits, repurchase agreements, and short-term borrowing transactions.
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 based on available information. These estimates and assumptions affect the amounts reported in the financial statements and the disclosures provided. Actual
results could differ from those estimates.
PREMIER FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2019, 2018, and 2017
(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. The Company had no securities classified as held to maturity at December 31, 2019 or 2018.
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.
Interest income includes amortization of purchase premium or discount computed using the level yield method. Gains or losses on dispositions are
recorded on the trade date and 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.
Management evaluates securities for other-than-temporary impairment (“OTTI”) at least on a quarterly basis, and more frequently when economic or
market conditions warrant such an evaluation. 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 the length of
time and extent that fair value has been less than cost and the financial condition and near term prospects of the issuer. Management also assesses whether it intends to sell, or it is more likely than not that it will be required to sell, a
security in an unrealized loss position before recovery of its amortized cost basis. If either of the criteria regarding intent or requirement to sell is met, the entire difference between amortized cost and fair value is recognized as impairment
through earnings. For debt securities that do not meet the aforementioned criteria, the amount of impairment is split into two components as follows: 1) OTTI related to credit loss, which must be recognized in the income statement and 2) OTTI
related to other factors, which is recognized in other comprehensive income. The credit loss is defined as the difference between the present value of the cash flows expected to be collected and the amortized cost basis. For equity securities, the
entire amount of impairment is recognized through earnings.
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. Beginning in April 2015, as a cost
saving measure, management exited the underwriting process but still facilitates fixed rate mortgages sold in the secondary market via third party vendors whereby Premier receives a portion of the commission.
PREMIER FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2019, 2018, and 2017
(Dollars in Thousands, Except Per Share Data)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Loans: Net loans are stated at the amount of recorded investment reduced by an allowance for loan losses. The recorded investment in a loan
is the unpaid principal plus any remaining fair value adjustments reduced by any unearned income. The recorded investment excludes accrued interest receivable due to immateriality. Interest income on loans is recognized on the unpaid principal
balance 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 as well as
collection efforts, that the borrowers’ financial condition is such that collection of interest is doubtful. Loan origination fees, net of certain direct origination costs, are deferred and recognized in interest income using the level yield
method without anticipating prepayments.
Interest income on mortgage and commercial loans is discontinued at the time the loan is 90 days delinquent unless the loan is well-secured and in
process of collection. Consumer loans are typically charged off no later than 120 days past due. Past due status is based on the contractual terms of the loan. In all cases, loans are placed on nonaccrual or charged-off at an earlier date if
collection of principal or interest is considered doubtful. Non-accrual loans and loans past due 90 days still on accrual include both smaller balance homogeneous loans that are collectively evaluated for impairment and individually classified
impaired loans. A loan is moved to non-accrual status in accordance with the Company’s policy, typically after 90 days of non-payment.
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.
Concentration of Credit Risk: Most of the Company’s loans located in the Washington, DC and Cincinnati, Ohio metro areas are commercial or
commercial real estate loans. Commercial and commercial real estate loans in these market areas are generally larger in size than in the Company’s other markets due to various factors such as higher real estate values and larger business
operations. Therefore, the Company’s exposure to credit risk is significantly affected by changes in the economy and commercial real estate collateral values in the Washington, DC and Cincinnati metro areas.
PREMIER FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2019, 2018, and 2017
(Dollars in Thousands, Except Per Share Data)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
The Company’s success and recent growth in lending in the central West Virginia market area depend primarily on the local general economy which has
been driven in the past by federal government programs to develop technology infrastructure and more recently by the drilling for natural gas in the recently discovered Marcellus and Utica shale formations. Furthermore, Premier’s success in the
southern West Virginia market depends, in large part, on the local general economy which has been driven by significant employment by coal and other natural resource based businesses. While Premier’s direct credit risk exposure to such industries
is minimal, the success or failure of these industries may have an indirect effect on the local economic conditions in the central and southern West Virginia market areas, either individually or collectively, thus having a significant impact on the
credit risk of loans in this market area.
Certain Purchased Loans: Loans acquired via branch purchase or acquisition after December 31, 2008 are recorded at the amount paid, such
that there is no carryover of the seller’s allowance for loan losses. Some of these purchased loans have shown evidence of credit deterioration since origination. After acquisition, losses are recognized by an increase in the allowance for loan
losses.
Such purchased loans are accounted for individually or may be aggregated into pools of loans based on common risk characteristics such as loan
type. The Company estimates the amount and timing of expected cash flows for each purchased loan or pool, and the expected cash flows in excess of amount paid is recorded as interest income over the remaining life of the loan or pool (accretable
yield). The excess of the loan’s or pool’s contractual principal and interest over expected cash flows is not recorded (nonaccretable difference).
Over the life of the loan or pool, expected cash flows continue to be estimated. If the present value of expected cash flows is less than the
carrying amount, a loss is recorded as an increase in the allowance for loan losses. If the present value of expected cash flows is greater than the carrying amount, it is recognized as part of future interest income.
Allowance for Loan Losses: 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 the 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.
PREMIER FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2019, 2018, and 2017
(Dollars in Thousands, Except Per Share Data)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
During the first three months of 2018, management updated its policies regarding estimation of probable incurred losses. The updates included
incorporating a common estimated loss ratio for all pass credits within a given loan classification, adding an additional qualitative factor for document exceptions on collectively impaired loans, and reallocating the qualitative portion of the
allowance to align more closely to the inputs used to determine the qualitative portion. The previous methodology allocated a higher loss ratio to loans graded “Watch” to estimate a higher credit risk on these loans due to risk downgrades
resulting from document exceptions. Loans graded “Watch” are considered pass credits. The changes did not have a material impact on the overall allowance for loan losses or the provision for loan losses for the year ended December 31, 2019 and
2018.
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. Factors considered by
management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls
generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including
the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed. 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. Loans with restructured terms offering a concession
to enable a struggling borrower to repay (Troubled Debt Restructurings) are measured at the present value of estimated future cash flows using the loan’s effective rate at inception. If a troubled debt restructuring is considered to be a
collateral dependent loan, the loan is reported, net, at the fair value of the collateral. For troubled debt restructurings that subsequently default, the Company determines the amount of reserve in accordance with the accounting policy for the
allowance for loan losses.
The general component of the allowance covers non-impaired loans and is based on historical loss experience adjusted for current factors. The
historical loss experience is determined by portfolio segment and is based on the actual loss history experienced by the Company. This actual loss experience is supplemented with other economic factors based on the risks present for each portfolio
segment. These economic factors include consideration of the following: levels of and trends in delinquencies and impaired loans; levels of and trends in charge-offs and recoveries; trends in volume and terms of loans; effects of any changes in
risk selection and underwriting standards; other changes in lending policies, procedures, and practices; experience, ability, and depth of lending management and other relevant staff; national and local economic trends and conditions; industry
conditions; and effects of changes in credit concentrations. The following portfolio segments have been identified as having differing risk characteristics:
PREMIER FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2019, 2018, and 2017
(Dollars in Thousands, Except Per Share Data)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Loans secured by 1-4 family residential real estate: Loans secured by 1-4 family
residential real estate represent the lowest risk of loans for the Company. They include fixed and floating rate loans as well as loans for commercial purposes or consumer purposes. The Company generally does not hold subprime residential
mortgages. Borrowers with loans in this category, whether for commercial or consumer purposes, tend to make their payments timely as they do not want to risk foreclosure and loss of their primary residence.
Loans secured by multifamily residential real estate: Loans secured by multifamily
residential real estate consist primarily of loans secured by apartment buildings and can be either fixed or floating rate loans. Multi-family residential real estate loans generally present a higher level of risk than loans secured by 1-4 family
residential real estate because the borrower’s repayment ability typically comes from rents from tenants. Local economic and employment fluctuations impact rent rolls and potentially the borrower’s repayment ability.
Loans secured by owner occupied non-farm non-residential real estate: Loans secured
by owner occupied non-farm non-residential real estate consist of loans secured by commercial real estate owned and operated by the borrower. These loans generally consist of loans to borrowers who either own the commercial real estate where their
business is located and have pledged the property as collateral or have borrowed funds from the Company to purchase the commercial real estate where their business is operated and located. The key factor is that the business operated within the
pledged collateral generates the cash flow for repayment. These loans generally present a higher level of risk than loans secured by multifamily residential real estate because the cash flow for repayment generally comes from the success of the
business. If economic conditions deteriorate, the business venture may not be successful or as successful in order for the borrower to make their loan payments and fund personal living expenses at the same time. Collateral values will also
fluctuate with local economic conditions.
Loans secured by non-farm non-residential real estate: Loans secured by non-farm
non-residential real estate consist of loans secured by commercial real estate that is not owner occupied. These loans generally consist of loans collateralized by property whereby rents received from commercial tenants of the borrower are the
source of repayment. These loans generally present a higher level of risk than loans secured by owner occupied commercial real estate because repayment risk is expanded to be dependent on the success of multiple businesses which are paying rent to
the borrower. If multiple businesses fail due to deteriorating economic conditions or poor business management skills, the borrower may not have enough rents to cover their monthly payment. Repayment risk is also increased depending on the level
of surplus available commercial lease space in the local market area.
Commercial and industrial loans not secured by real estate: These loans to businesses
do not have real estate as the underlying collateral. Instead of real estate, collateral could be business assets such as equipment or accounts receivable or the personal guarantee of one or more guarantors. These loans generally present a higher
level of risk than loans secured by commercial real estate because in the event of default by the borrower, the business assets must be liquidated and/or guarantors pursued for deficit funds. Business assets are worth more while they are in use to
produce income for the business and worth significantly less if the business is no longer in operation. For this reason, the Company discounts the value on these types of collateral prior to meeting the Company’s loan-to-value policy limits.
PREMIER FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2019, 2018, and 2017
(Dollars in Thousands, Except Per Share Data)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Consumer loans: Consumer loans are generally loans to borrowers for non-business
purposes. They can be either secured or unsecured. Consumer loans are generally small in the individual amount of principal outstanding and are repaid from the borrower’s private funds earned from employment. Consumer lending risk is very
susceptible to local economic trends. If there is a consumer loan default, any collateral that may be repossessed is generally not well maintained and has a diminished value. For this reason, consumer loans tend to have higher overall interest
rates to cover the higher cost of repossession and charge-offs. However, due to their smaller average balance per borrower, consumer loans are collectively evaluated for impairment in determining the appropriate allowance for loan losses.
Construction, land, and land development loans: Construction loans include 1-4 family
real estate construction, multifamily housing construction and commercial construction loans. Land development loans include loans for real estate development projects whereby the primary purpose is infrastructure development, such as road,
utilities and site preparation, prior to selling real estate parcels for the construction of dwellings or businesses. This category also includes loans for other purposes secured by vacant land.
All other loan types: All other loan types are aggregated together for credit risk
evaluation due to the varying nature but small number of the remaining types of loans in the Company’s loan portfolio. Loans in this segment include but are not limited to loans secured by farmland, agricultural loans and loans to tax-exempt
entities.
Transfers of Financial Assets: Transfers of financial assets are accounted for as sales, when control over the assets has been
relinquished. Control over transferred assets is deemed to be surrendered when the assets have been isolated from the Company, the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or
exchange the transferred assets, and the Company does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity.
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.
Other Real Estate Owned: 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 adjusted to the fair value of the real estate less estimated costs to sell by a charge to the allowance for loan losses, if necessary, establishing a
new cost basis. If the fair value of the property declines subsequent to foreclosure, a valuation allowance is 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 non-interest expenses.
PREMIER FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2019, 2018, and 2017
(Dollars in Thousands, Except Per Share Data)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
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 available lines of credit, actual borrowings outstanding and other factors, and members 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.
Goodwill and Other Intangible Assets: Goodwill resulting from business combinations prior to January 1, 2009 represents the excess of the
purchase price over the fair value of the net assets of businesses acquired. Goodwill resulting from business combinations after January 1, 2009 is generally determined as the excess of the fair value of the consideration transferred, plus the
fair value of any non-controlling interests in the acquired company, over the fair value of the net assets acquired and liabilities assumed as of the acquisition date. Goodwill is not amortized but 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. Based upon the most recently completed goodwill impairment test, management concluded the recorded value of
goodwill was not impaired as of October 31, 2019 based upon the estimated fair value of the Company’s single reporting unit.
Other intangible assets consist of core deposit intangible assets arising from whole bank and branch acquisitions. They are initially measured at fair
value and then are amortized on an accelerated method over their estimated useful lives of approximately 8 to 10 years.
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.
Stock Based Compensation: Compensation cost is recognized for stock options granted to employees based on the fair value of these awards at
the date of grant. A Black-Scholes model is utilized to estimate the fair value of stock options. Compensation cost is recognized on a straight-line basis over the required service period, generally defined as the vesting period.
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.
PREMIER FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2019, 2018, and 2017
(Dollars in Thousands, Except Per Share Data)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
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 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.
Earnings Per Common Share: Basic earnings per common share is net income (available to common shareholders) 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 (loss). Other comprehensive income (loss)
includes unrealized gains and losses on securities available for sale which is 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.
PREMIER FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2019, 2018, and 2017
(Dollars in Thousands, Except Per Share Data)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Reclassifications: Some items in the prior year financial statements were reclassified to conform to the current presentation.
Reclassifications have no effect on prior years’ net income or stockholders’ equity.
Adoption of New Accounting Standards:
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842). This standard requires
organizations that are lessees to recognize a lease liability, which is the lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis; and a right-of-use asset, which is an asset that represents the lessee’s
right to use, or control the use of, a specified property for the lease term. The new guidance also requires lessees to disclose key information about leasing requirements for leases that were historically classified as operating leases under
previous generally accepted accounting principles. This ASU became effective for Premier for interim and annual periods beginning after December 15, 2018. The Company leases some of its branch locations. The Company adopted Topic 842 on January
1, 2019. The Company applied a modified retrospective transition approach for the applicable leases. The modified retrospective approach would not require any transition accounting for leases that expired before the earliest comparative period
presented. The Company has also elected to use the practical expedient to make an accounting policy election for property leases to include both lease and non-lease components as a single component and account for it as a lease. Upon adoption of
this standard, the Company recorded a $7.6 million right of use asset, included in premises and equipment, determined by calculating an estimated present value of future lease payments over the extended lives of the Company’s leases. The Company
also recorded a $7.6 million operating lease liability, included in other liabilities.
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments—Credit Losses: Measurement of Credit Losses
on Financial Instruments. This ASU replaces the measurement for credit losses from a probable incurred estimate with an expected future loss estimate, which is referred to as the “current expected credit loss” or “CECL”. The standard
pertains to financial assets measured at amortized cost such as loans, debt securities classified as held-to-maturity, and certain other contracts, in which organizations will now use forward-looking information to enhance their credit loss
estimates on these assets. The largest impact will be on the allowance for loan and lease losses. The company has formed a committee to oversee the steps required in the adoption of the new current expected credit loss method. The committee has
selected a third-party vendor to assist in data analysis and modeling as well as the required disclosures. Management is currently evaluating the impact of the adoption of this guidance on the Company’s financial statements. Upon adoption, an
initial cumulative increase in the allowance for loan losses is currently anticipated by management along with a corresponding decrease in capital as permitted by the standard. However, due to the complexity of the calculation and evolving
guidance on adoption management has not yet determined the one-time adjustment. On July 17, 2019, the Financial Accounting Standards Board (“FASB”) voted for a proposal to extend the implementation deadline for smaller reporting companies like
Premier. The proposal extends the implementation deadline for Premier for a period of three-years until January 1, 2023. The proposal was approved on October 16, 2019.
PREMIER FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2019, 2018, and 2017
(Dollars in Thousands, Except Per Share Data)
Effective at the close of business on October 25, 2019, Premier completed its purchase of First National Bank of Jackson (“Jackson”), a $100.8
million community bank headquartered in Jackson, Kentucky. Under terms of an agreement of merger dated July 8, 2019, Citizens Deposit Bank and Trust (“Citizens Deposit”), Premier’s wholly owned subsidiary headquartered in Vanceburg, Kentucky,
acquired Jackson Bank in a cash purchase valued at approximately $14.6 million. Based on the current valuation of the fair value of tangible and intangible assets acquired and liabilities assumed, the purchase price resulted in no goodwill or
bargain purchase gain. The resulting merger expands Citizens Deposit’s full service footprint into the Jackson, Kentucky market place. The core deposit intangible asset totaled $994, none of which is deductible for tax purposes. The core deposit
intangible will be amortized using an accelerated method over an estimated 10 year life. The following table presents estimated amortization of the First Bank core deposit intangible as of the acquisition date for 2019 and each of the next five
calendar years and thereafter.
|
2019
|
$
|
-
|
||
|
2020
|
149
|
|||
|
2021
|
127
|
|||
|
2022
|
108
|
|||
|
2023
|
92
|
|||
|
2024
|
86
|
|||
|
Thereafter
|
432
|
|||
|
Total core deposit intangible acquired
|
$
|
994
|
The valuations of loans, premises and equipment and core deposit intangible are still preliminary and subject to change. United States generally
accepted accounting principles (“U.S. GAAP”) provide up to twelve months following the date of acquisition in which management can finalize the fair values of acquired assets and assumed liabilities. Material events that occur during the
measurement period will be analyzed to determine if the new information reflected facts and circumstances that existed on the acquisition date. The measurement period ends as soon as the Company receives the information it was seeking about facts
and circumstances that existed as of the acquisition date or learns more information is unobtainable. The measurement period is limited to one year from the acquisition date. Once management has finalized the fair values of acquired assets and
assumed liabilities within this twelve month period, management considers such values to be the “Day One Fair Values.” Based on management’s preliminary valuation of the fair value of tangible and intangible assets acquired and liabilities
assumed, the purchase price for the Jackson acquisition is allocated in the table below.
PREMIER FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2019, 2018, and 2017
(Dollars in Thousands, Except Per Share Data)
NOTE 2 – ACQUISITION OF FIRST NATIONAL BANK OF JACKSON – continued
Net assets acquired via the acquisition are shown in the table below.
|
First National Bank of Jackson
|
||||
|
Cash and due from banks
|
$
|
4,589
|
||
|
Federal funds sold
|
5,108
|
|||
|
Securities available for sale
|
44,747
|
|||
|
Loans, net
|
41,632
|
|||
|
Premises and equipment
|
1,177
|
|||
|
Goodwill and other intangible assets
|
994
|
|||
|
Other assets
|
2,548
|
|||
|
Total assets acquired, net of cash paid
|
100,795
|
|||
|
Deposits
|
(85,606
|
)
|
||
|
Other liabilities
|
(629
|
)
|
||
|
Total liabilities assumed
|
(86,235
|
)
|
||
|
Net assets acquired
|
$
|
14,560
|
||
The fair value of net assets acquired includes fair value adjustments to certain receivables that were not considered impaired as of the acquisition
date. The fair value adjustments were determined using discounted contractual cash flows. However, the Company believes that all contractual cash flows related to these non-impaired financial instruments will be collected. As such, these
receivables were not considered impaired at the acquisition date and were not subject to the accounting guidance relating to purchase credit impaired loans, which have shown evidence of credit deterioration since origination. The non-impaired
loans excluded from the purchase credit impairment guidance were recorded at an estimated fair value of $40,299 and had gross contractual amounts receivable of $40,731 on the date of acquisition.
Included in cash and due from banks are certain interest bearing and 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 to be held in an account at the Federal Reserve at December 31, 2019 and 2018 was $0 and $0. The
elimination of a balance requirement at December 31, 2019 and 2018 was the result of a reclassification of certain transaction based deposits to non-transaction based deposits as permitted under Federal Reserve Regulation D. The reserve
requirements for non-transaction based deposits is significantly less than the reserve requirements for transaction based deposits.
PREMIER FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2019, 2018, and 2017
(Dollars in Thousands, Except Per Share Data)
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:
|
2019
|
Amortized Cost
|
Unrealized Gains
|
Unrealized Losses
|
Fair Value
|
||||||||||||
|
Available for sale
|
||||||||||||||||
|
Mortgage-backed securities
|
||||||||||||||||
|
U. S. sponsored agency MBS - residential
|
$
|
276,013
|
$
|
3,618
|
$
|
(322
|
)
|
$
|
279,309
|
|||||||
|
U. S. sponsored agency CMO’s - residential
|
61,989
|
768
|
(113
|
)
|
62,644
|
|||||||||||
|
Total mortgage-backed securities of government sponsored agencies
|
338,002
|
4,386
|
(435
|
)
|
341,953
|
|||||||||||
|
U. S. government sponsored agency securities
|
30,538
|
280
|
(88
|
)
|
30,730
|
|||||||||||
|
Obligations of states and political subdivisions
|
15,570
|
453
|
(6
|
)
|
16,017
|
|||||||||||
|
Other securities
|
1,956
|
98
|
-
|
2,054
|
||||||||||||
|
Total securities available for sale
|
$
|
386,066
|
$
|
5,217
|
$
|
(529
|
)
|
$
|
390,754
|
|||||||
|
2018
|
Amortized Cost
|
Unrealized Gains
|
Unrealized Losses
|
Fair Value
|
||||||||||||
|
Available for sale
|
||||||||||||||||
|
Mortgage-backed securities
|
||||||||||||||||
|
U. S. sponsored agency MBS - residential
|
$
|
259,575
|
$
|
513
|
$
|
(4,846
|
)
|
$
|
255,242
|
|||||||
|
U. S. sponsored agency CMO’s - residential
|
69,231
|
94
|
(782
|
)
|
68,543
|
|||||||||||
|
Total mortgage-backed securities of government sponsored agencies
|
328,806
|
607
|
(5,628
|
)
|
323,785
|
|||||||||||
|
U. S. government sponsored agency securities
|
24,154
|
196
|
(180
|
)
|
24,170
|
|||||||||||
|
Obligations of states and political subdivisions
|
14,194
|
176
|
(43
|
)
|
14,327
|
|||||||||||
|
Other securities
|
3,453
|
6
|
(10
|
)
|
3,449
|
|||||||||||
|
Total securities available for sale
|
$
|
370,607
|
$
|
985
|
$
|
(5,861
|
)
|
$
|
365,731
|
|||||||
PREMIER FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2019, 2018, and 2017
(Dollars in Thousands, Except Per Share Data)
NOTE 4 –SECURITIES (Continued)
Securities with an approximate carrying value of $255,699 and $235,688 at December 31, 2019 and 2018 were pledged to secure public deposits, trust
funds, securities sold under agreements to repurchase and for other purposes as required or permitted by law.
The amortized cost and fair value of securities at December 31, 2019 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. Securities not due at a single maturity date, such as mortgage-backed securities, are shown separately.
|
Amortized
Cost
|
Fair
Value
|
|||||||
|
Available for sale
|
||||||||
|
Due in one year or less
|
$
|
9,436
|
$
|
9,455
|
||||
|
Due after one year through five years
|
16,530
|
16,870
|
||||||
|
Due after five years through ten years
|
16,455
|
16,511
|
||||||
|
Due after ten years
|
5,643
|
5,965
|
||||||
|
Mortgage-backed securities of government sponsored agencies
|
338,002
|
341,953
|
||||||
|
Total available for sale
|
$
|
386,066
|
$
|
390,754
|
||||
Securities with unrealized losses at year-end 2019 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 government sponsored agency securities
|
$
|
10,851
|
$
|
(84
|
)
|
$
|
3,957
|
$
|
(4
|
)
|
$
|
14,808
|
$
|
(88
|
)
|
|||||||||
|
U.S government sponsored agency MBS – residential
|
50,945
|
(199
|
)
|
12,930
|
(123
|
)
|
63,875
|
(322
|
)
|
|||||||||||||||
|
U.S government sponsored agency CMO’s – residential
|
4,376
|
(3
|
)
|
8,815
|
(110
|
)
|
13,191
|
(113
|
)
|
|||||||||||||||
|
Obligations of states and political subdivisions
|
1,866
|
(6
|
)
|
-
|
-
|
1,866
|
(6
|
)
|
||||||||||||||||
|
Total temporarily impaired
|
$
|
68,038
|
$
|
(292
|
)
|
$
|
25,702
|
$
|
(237
|
)
|
$
|
93,740
|
$
|
(529
|
)
|
|||||||||
PREMIER FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2019, 2018, and 2017
(Dollars in Thousands, Except Per Share Data)
NOTE 4 –SECURITIES (Continued)
Securities with unrealized losses at year-end 2018 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 government sponsored agency securities
|
$
|
999
|
$
|
-
|
$
|
11,057
|
$
|
(180
|
)
|
$
|
12,056
|
$
|
(180
|
)
|
||||||||||
|
U.S government sponsored agency MBS – residential
|
50,923
|
(243
|
)
|
158,791
|
(4,603
|
)
|
209,714
|
(4,846
|
)
|
|||||||||||||||
|
U.S government sponsored agency CMO’s – residential
|
16,359
|
(41
|
)
|
26,386
|
(741
|
)
|
42,745
|
(782
|
)
|
|||||||||||||||
|
Obligations of states and political subdivisions
|
679
|
(6
|
)
|
3,454
|
(37
|
)
|
4,133
|
(43
|
)
|
|||||||||||||||
|
Other securities
|
1,712
|
(10
|
)
|
-
|
-
|
1,712
|
(10
|
)
|
||||||||||||||||
|
Total temporarily impaired
|
$
|
70,672
|
$
|
(300
|
)
|
$
|
199,688
|
$
|
(5,561
|
)
|
$
|
270,360
|
$
|
(5,861
|
)
|
|||||||||
The investment portfolio is predominately high credit quality interest-bearing bonds with defined maturity dates backed by the U.S. Government or
Government sponsored entities. The unrealized losses at December 31, 2019 and December 31, 2018 are price changes resulting from changes in the interest rate environment and are considered to be temporary declines in the value of the securities. Management does not intend to sell and it is likely
that management will not be required to sell the securities prior to their anticipated recovery. Their fair value is expected to recover as the bonds approach their maturity date and/or market conditions improve.
Major classifications of loans at year-end are summarized as follows:
|
2019
|
2018
|
|||||||
|
Residential real estate
|
$
|
389,985
|
$
|
381,027
|
||||
|
Multifamily real estate
|
36,684
|
54,016
|
||||||
|
Commercial real estate:
|
||||||||
|
Owner occupied
|
164,218
|
138,209
|
||||||
|
Non-owner occupied
|
304,316
|
282,608
|
||||||
|
Commercial and industrial
|
105,079
|
103,624
|
||||||
|
Consumer
|
29,007
|
27,688
|
||||||
|
Construction and land
|
136,138
|
128,926
|
||||||
|
All other
|
29,868
|
33,203
|
||||||
|
Total
|
$
|
1,195,295
|
$
|
1,149,301
|
||||
PREMIER FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2019, 2018, and 2017
(Dollars in Thousands, Except Per Share Data)
NOTE 5 – LOANS (Continued)
The composition of the major classifications of the loans acquired from First National Bank of Jackson at October 25, 2019 are summarized as
follows:
|
2019
|
||||
|
Residential real estate
|
$
|
15,156
|
||
|
Multifamily real estate
|
2,220
|
|||
|
Commercial real estate:
|
||||
|
Owner occupied
|
3,364
|
|||
|
Non owner occupied
|
7,174
|
|||
|
Commercial and industrial
|
4,133
|
|||
|
Consumer
|
4,644
|
|||
|
Construction and land
|
3,116
|
|||
|
All other
|
1,825
|
|||
|
Total
|
$
|
41,632
|
||
Certain directors and executive officers of the Banks and companies in which they have beneficial ownership, were loan customers of the Banks during
2019 and 2018.
An analysis of the 2019 activity with respect to all director and executive officer loans is as follows:
|
Balance, December 31, 2018
|
$
|
12,973
|
||
|
Additions, including loans now meeting disclosure requirements
|
7,851
|
|||
|
Amounts collected and loans no longer meeting disclosure requirements
|
(6,834
|
)
|
||
|
Balance, December 31, 2019
|
$
|
13,990
|
Activity in the Allowance for Loan Losses
Activity in the allowance for loan losses by portfolio segment for the year ending December 31, 2019 was as follows:
|
Loan Class
|
Balance
Dec 31, 2018 |
Provision (credit) for loan losses
|
Loans charged-off
|
Recoveries
|
Balance
Dec 31, 2019
|
|||||||||||||||
|
Residential real estate
|
$
|
1,808
|
$
|
73
|
$
|
(207
|
)
|
$
|
37
|
$
|
1,711
|
|||||||||
|
Multifamily real estate
|
1,649
|
298
|
-
|
7
|
1,954
|
|||||||||||||||
|
Commercial real estate:
|
||||||||||||||||||||
|
Owner occupied
|
2,120
|
880
|
(565
|
)
|
6
|
2,441
|
||||||||||||||
|
Non-owner occupied
|
3,058
|
178
|
(57
|
)
|
5
|
3,184
|
||||||||||||||
|
Commercial and industrial
|
1,897
|
232
|
(418
|
)
|
56
|
1,767
|
||||||||||||||
|
Consumer
|
351
|
81
|
(193
|
)
|
42
|
281
|
||||||||||||||
|
Construction and land
|
2,255
|
(517
|
)
|
(14
|
)
|
-
|
1,724
|
|||||||||||||
|
All other
|
600
|
25
|
(262
|
)
|
117
|
480
|
||||||||||||||
|
Total
|
$
|
13,738
|
$
|
1,250
|
$
|
(1,716
|
)
|
$
|
270
|
$
|
13,542
|
|||||||||
PREMIER FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2019, 2018, and 2017
(Dollars in Thousands, Except Per Share Data)
NOTE 5 – LOANS (Continued)
Activity in the allowance for loan losses by portfolio segment for the year ending December 31, 2018 was as follows:
|
Loan Class
|
Balance
Dec 31, 2017
|
Provision (credit) for loan losses
|
Loans
charged-off
|
Recoveries
|
Balance
Dec 31, 2018 |
|||||||||||||||
|
Residential real estate
|
$
|
2,986
|
$
|
(967
|
)
|
$
|
(247
|
)
|
$
|
36
|
$
|
1,808
|
||||||||
|
Multifamily real estate
|
978
|
676
|
(11
|
)
|
6
|
1,649
|
||||||||||||||
|
Commercial real estate:
|
||||||||||||||||||||
|
Owner occupied
|
1,653
|
491
|
(25
|
)
|
1
|
2,120
|
||||||||||||||
|
Non-owner occupied
|
2,313
|
839
|
(98
|
)
|
4
|
3,058
|
||||||||||||||
|
Commercial and industrial
|
1,101
|
1,298
|
(545
|
)
|
43
|
1,897
|
||||||||||||||
|
Consumer
|
328
|
121
|
(156
|
)
|
58
|
351
|
||||||||||||||
|
Construction and land
|
2,408
|
(533
|
)
|
(20
|
)
|
400
|
2,255
|
|||||||||||||
|
All other
|
337
|
390
|
(266
|
)
|
139
|
600
|
||||||||||||||
|
Total
|
$
|
12,104
|
$
|
2,315
|
$
|
(1,368
|
)
|
$
|
687
|
$
|
13,738
|
|||||||||
Activity in the allowance for loan losses by portfolio segment for the year ending December 31, 2017 was as follows:
|
Loan Class
|
Balance
Dec 31, 2016
|
Provision (credit) for loan losses
|
Loans
charged-off
|
Recoveries
|
Balance
Dec 31, 2017
|
|||||||||||||||
|
Residential real estate
|
$
|
2,948
|
$
|
439
|
$
|
(458
|
)
|
$
|
57
|
$
|
2,986
|
|||||||||
|
Multifamily real estate
|
785
|
693
|
(500
|
)
|
-
|
978
|
||||||||||||||
|
Commercial real estate:
|
||||||||||||||||||||
|
Owner occupied
|
1,543
|
(100
|
)
|
(32
|
)
|
242
|
1,653
|
|||||||||||||
|
Non-owner occupied
|
2,350
|
(27
|
)
|
(10
|
)
|
-
|
2,313
|
|||||||||||||
|
Commercial and industrial
|
1,140
|
51
|
(189
|
)
|
99
|
1,101
|
||||||||||||||
|
Consumer
|
347
|
132
|
(278
|
)
|
127
|
328
|
||||||||||||||
|
Construction and land
|
1,397
|
1,130
|
(129
|
)
|
10
|
2,408
|
||||||||||||||
|
All other
|
326
|
181
|
(307
|
)
|
137
|
337
|
||||||||||||||
|
Total
|
$
|
10,836
|
$
|
2,499
|
$
|
(1,903
|
)
|
$
|
672
|
$
|
12,104
|
|||||||||
PREMIER FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2019, 2018, and 2017
(Dollars in Thousands, Except Per Share Data)
NOTE 5 – LOANS (Continued)
Purchased Loans
The Company holds purchased loans for which there was, at their acquisition date, evidence of deterioration of credit quality since their
origination and it was probable, at acquisition, that all contractually required payments would not be collected. The carrying amount of those loans is as follows at December 31, 2019 and December 31, 2018.
|
2019
|
2018
|
|||||||
|
Residential real estate
|
$
|
2,565
|
$
|
2,665
|
||||
|
Commercial real estate
|
||||||||
|
Owner occupied
|
1,804
|
2,040
|
||||||
|
Non-owner occupied
|
2,628
|
3,434
|
||||||
|
Commercial and industrial
|
305
|
1,720
|
||||||
|
Consumer
|
22
|
-
|
||||||
|
Construction and land
|
483
|
1,212
|
||||||
|
All other
|
174
|
225
|
||||||
|
Total carrying amount
|
$
|
7,981
|
$
|
11,296
|
||||
|
Contractual principal balance
|
$
|
11,681
|
$
|
15,436
|
||||
|
Carrying amount, net of allowance
|
$
|
7,981
|
$
|
11,296
|
||||
For those purchased loans disclosed above, the Company did not increase the allowance for loan losses for the year ended December 31, 2019 and
December 31, 2018.
For those purchased loans discussed above, where the Company can reasonably estimate the cash flows expected to be collected on the loans, a portion
of the purchase discount is allocated to an accretable yield adjustment based upon the present value of the future estimated cash flows versus the current carrying value of the loan and the accretable yield portion is being recognized as interest
income over the remaining life of the loan.
Where the Company cannot reasonably estimate the cash flows expected to be collected on the loans, it has continued to account for those loans using
the cost recovery method of income recognition. As such, no portion of a purchase discount adjustment has been determined to meet the definition of an accretable yield adjustment on those loans accounted for using the cost recovery method. If, in
the future, cash flows from the borrower(s) can be reasonably estimated, a portion of the purchase discount would be allocated to an accretable yield adjustment based upon the present value of the future estimated cash flows versus the current
carrying value of the loan and the accretable yield portion would be recognized as interest income over the remaining life of the loan. Until such accretable yield can be calculated, under the cost recovery method of income recognition, all
payments will be used to reduce the carrying value of the loan and no income will be recognized on the loan until the carrying value is reduced to zero. Any loan accounted for under the cost recovery method is also still included as a non-accrual
loan in the amounts presented in the tables below.
PREMIER FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2019, 2018, and 2017
(Dollars in Thousands, Except Per Share Data)
NOTE 5 – LOANS (Continued)
The accretable yield, or income expected to be collected, on the purchased loans above is as follows the three years ended December 31, 2019.
|
2019
|
2018
|
2017
|
||||||||||
|
Balance at January 1
|
$
|
642
|
$
|
754
|
$
|
1,208
|
||||||
|
New loans purchased
|
371
|
139
|
-
|
|||||||||
|
Accretion of income
|
(180
|
)
|
(134
|
)
|
(249
|
)
|
||||||
|
Loans placed on non-accrual
|
(82
|
)
|
(63
|
)
|
-
|
|||||||
|
Income recognized upon full repayment
|
(79
|
)
|
(38
|
)
|
(205
|
)
|
||||||
|
Reclassifications from non-accretable difference
|
-
|
(16
|
)
|
-
|
||||||||
|
Disposals
|
(53
|
)
|
-
|
-
|
||||||||
|
Balance at December 31
|
$
|
619
|
$
|
642
|
$
|
754
|
||||||
As part of the acquisitions of First National Bank of Jackson on October 25, 2019 and First Bank of Charleston on October 12, 2018, the Company
purchased credit impaired loans for which it was probable at acquisition that all contractually required payments would not be collected. The contractually required payments of such loans from First National Bank of Jackson totaled $1,704, while
the cash flow expected to be collected at acquisition totaled $1,384 and the fair value of the acquired loans totaled $1,333 and the contractually required payments of such loans from First Bank of Charleston totaled $9,876, while the cash flow
expected to be collected at acquisition totaled $7,780 and the fair value of the acquired loans totaled $7,641.
PREMIER FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2019, 2018, and 2017
(Dollars in Thousands, Except Per Share Data)
NOTE 5 – LOANS (Continued)
Past Due and Non-performing Loans
The following tables present the recorded investment in nonaccrual and loans past due over 90 days still on accrual by class of loans as of December
31, 2019 and December 31, 2018. The recorded investment in non-accrual loans is less than the principal owed on non-accrual loans due to discounts applied to the carrying value of the loan at time of their acquisition or interest payments made by
the borrower which have been used to reduce the recorded investment in the loan rather than recognized as interest income.
|
December 31, 2019
|
Principal Owed on Non-accrual Loans
|
Recorded Investment in Non-accrual Loans
|
Loans Past Due Over 90 Days, still accruing
|
|||||||||
|
Residential real estate
|
$
|
5,801
|
$
|
4,618
|
$
|
1,425
|
||||||
|
Multifamily real estate
|
4,113
|
3,726
|
-
|
|||||||||
|
Commercial real estate
|
||||||||||||
|
Owner occupied
|
3,399
|
2,995
|
-
|
|||||||||
|
Non-owner occupied
|
3,120
|
1,852
|
340
|
|||||||||
|
Commercial and industrial
|
1,026
|
420
|
451
|
|||||||||
|
Consumer
|
364
|
313
|
9
|
|||||||||
|
Construction and land
|
470
|
440
|
3
|
|||||||||
|
All other
|
75
|
73
|
-
|
|||||||||
|
Total
|
$
|
18,368
|
$
|
14,437
|
$
|
2,228
|
||||||
|
December 31, 2018
|
Principal Owed on Non-accrual Loans
|
Recorded Investment in Non-accrual Loans
|
Loans Past Due Over 90 Days, still accruing
|
|||||||||
|
Residential real estate
|
$
|
4,966
|
$
|
3,708
|
$
|
954
|
||||||
|
Multifamily real estate
|
4,127
|
3,905
|
-
|
|||||||||
|
Commercial real estate
|
||||||||||||
|
Owner occupied
|
3,692
|
3,436
|
56
|
|||||||||
|
Non-owner occupied
|
5,761
|
4,592
|
76
|
|||||||||
|
Commercial and industrial
|
1,303
|
625
|
-
|
|||||||||
|
Consumer
|
292
|
253
|
-
|
|||||||||
|
Construction and land
|
857
|
856
|
-
|
|||||||||
|
All other
|
75
|
73
|
-
|
|||||||||
|
Total
|
$
|
21,073
|
$
|
17,448
|
$
|
1,086
|
||||||
Nonaccrual loans and impaired loans are defined differently. Some loans may be included in both categories, and some may only be included in one
category. Nonaccrual loans include both smaller balance homogeneous loans that are collectively evaluated for impairment and individually classified impaired loans.
PREMIER FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2019, 2018, and 2017
(Dollars in Thousands, Except Per Share Data)
NOTE 5 – LOANS (Continued)
The following table presents the aging of the recorded investment in past due loans as of December 31, 2019 by class of loans:
|
Loan Class
|
Total Loans
|
30-89 Days
Past Due
|
Greater than 90 days past due
|
Total
Past Due
|
Loans Not
Past Due
|
|||||||||||||||
|
Residential real estate
|
$
|
389,985
|
$
|
9,479
|
$
|
3,192
|
$
|
12,671
|
$
|
377,314
|
||||||||||
|
Multifamily real estate
|
36,684
|
-
|
3,726
|
3,726
|
32,958
|
|||||||||||||||
|
Commercial real estate:
|
||||||||||||||||||||
|
Owner occupied
|
164,218
|
337
|
1,199
|
1,536
|
162,682
|
|||||||||||||||
|
Non-owner occupied
|
304,316
|
838
|
1,017
|
1,855
|
302,461
|
|||||||||||||||
|
Commercial and industrial
|
105,079
|
245
|
708
|
953
|
104,126
|
|||||||||||||||
|
Consumer
|
29,007
|
309
|
230
|
539
|
28,468
|
|||||||||||||||
|
Construction and land
|
136,138
|
3,856
|
4
|
3,860
|
132,278
|
|||||||||||||||
|
All other
|
29,868
|
-
|
73
|
73
|
29,795
|
|||||||||||||||
|
Total
|
$
|
1,195,295
|
$
|
15,064
|
$
|
10,149
|
$
|
25,213
|
$
|
1,170,082
|
||||||||||
The following table presents the aging of the recorded investment in past due loans as of December 31, 2018 by class of loans:
|
Loan Class
|
Total Loans
|
30-89 Days
Past Due
|
Greater than 90 days past due
|
Total
Past Due
|
Loans Not
Past Due
|
|||||||||||||||
|
Residential real estate
|
$
|
381,027
|
$
|
7,078
|
$
|
2,594
|
$
|
9,672
|
$
|
371,355
|
||||||||||
|
Multifamily real estate
|
54,016
|
-
|
110
|
110
|
53,906
|
|||||||||||||||
|
Commercial real estate:
|
||||||||||||||||||||
|
Owner occupied
|
138,209
|
124
|
2,601
|
2,725
|
135,484
|
|||||||||||||||
|
Non-owner occupied
|
282,608
|
172
|
3,301
|
3,473
|
279,135
|
|||||||||||||||
|
Commercial and industrial
|
103,624
|
2,235
|
262
|
2,497
|
101,127
|
|||||||||||||||
|
Consumer
|
27,688
|
247
|
112
|
359
|
27,329
|
|||||||||||||||
|
Construction and land
|
128,926
|
388
|
810
|
1,198
|
127,728
|
|||||||||||||||
|
All other
|
33,203
|
546
|
73
|
619
|
32,584
|
|||||||||||||||
|
Total
|
$
|
1,149,301
|
$
|
10,790
|
$
|
9,863
|
$
|
20,653
|
$
|
1,128,648
|
||||||||||
PREMIER FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2019, 2018, and 2017
(Dollars in Thousands, Except Per Share Data)
NOTE 5 – LOANS (Continued)
The following tables presents the balance in the allowance for loan losses and the recorded investment in loans by portfolio segment
and based on impairment method as of December 31, 2019 and December 31, 2018.
|
December 31, 2019
|
Allowance for Loan Losses
|
Loan Balances
|
||||||||||||||||||||||||||||||
|
Loan Class
|
Individually Evaluated for Impairment
|
Collectively Evaluated for Impairment
|
Acquired with Deteriorated Credit Quality
|
Total
|
Individually Evaluated for Impairment
|
Collectively Evaluated for Impairment
|
Acquired with Deteriorated Credit Quality
|
Total
|
||||||||||||||||||||||||
|
Residential real estate
|
$
|
-
|
$
|
1,711
|
$
|
-
|
$
|
1,711
|
$
|
63
|
$
|
387,357
|
$
|
2,565
|
$
|
389,985
|
||||||||||||||||
|
Multifamily real estate
|
1,737
|
217
|
-
|
1,954
|
3,726
|
32,958
|
-
|
36,684
|
||||||||||||||||||||||||
|
Commercial real estate:
|
||||||||||||||||||||||||||||||||
|
Owner occupied
|
653
|
1,788
|
-
|
2,441
|
2,685
|
159,729
|
1,804
|
164,218
|
||||||||||||||||||||||||
|
Non-owner occupied
|
271
|
2,913
|
-
|
3,184
|
3,830
|
297,858
|
2,628
|
304,316
|
||||||||||||||||||||||||
|
Commercial and industrial
|
390
|
1,377
|
-
|
1,767
|
678
|
104,096
|
305
|
105,079
|
||||||||||||||||||||||||
|
Consumer
|
-
|
281
|
-
|
281
|
-
|
28,985
|
22
|
29,007
|
||||||||||||||||||||||||
|
Construction and land
|
51
|
1,673
|
-
|
1,724
|
431
|
135,224
|
483
|
136,138
|
||||||||||||||||||||||||
|
All other
|
-
|
480
|
-
|
480
|
-
|
29,694
|
174
|
29,868
|
||||||||||||||||||||||||
|
Total
|
$
|
3,102
|
$
|
10,440
|
$
|
-
|
$
|
13,542
|
$
|
11,413
|
$
|
1,175,901
|
$
|
7,981
|
$
|
1,195,295
|
||||||||||||||||
|
December 31, 2018
|
Allowance for Loan Losses
|
Loan Balances
|
||||||||||||||||||||||||||||||
|
Loan Class
|
Individually Evaluated for Impairment
|
Collectively Evaluated for Impairment
|
Acquired with Deteriorated Credit Quality
|
Total
|
Individually Evaluated for Impairment
|
Collectively Evaluated for Impairment
|
Acquired with Deteriorated Credit Quality
|
Total
|
||||||||||||||||||||||||
|
Residential real estate
|
$
|
-
|
$
|
1,808
|
$
|
-
|
$
|
1,808
|
$
|
298
|
$
|
378,064
|
$
|
2,665
|
$
|
381,027
|
||||||||||||||||
|
Multifamily real estate
|
1,281
|
368
|
-
|
1,649
|
3,905
|
50,111
|
-
|
54,016
|
||||||||||||||||||||||||
|
Commercial real estate:
|
||||||||||||||||||||||||||||||||
|
Owner occupied
|
692
|
1,428
|
-
|
2,120
|
2,820
|
133,349
|
2,040
|
138,209
|
||||||||||||||||||||||||
|
Non-owner occupied
|
267
|
2,791
|
-
|
3,058
|
10,111
|
269,063
|
3,434
|
282,608
|
||||||||||||||||||||||||
|
Commercial and industrial
|
414
|
1,483
|
-
|
1,897
|
558
|
101,346
|
1,720
|
103,624
|
||||||||||||||||||||||||
|
Consumer
|
-
|
351
|
-
|
351
|
-
|
27,688
|
-
|
27,688
|
||||||||||||||||||||||||
|
Construction and land
|
142
|
2,113
|
-
|
2,255
|
1,351
|
126,363
|
1,212
|
128,926
|
||||||||||||||||||||||||
|
All other
|
-
|
600
|
-
|
600
|
-
|
32,978
|
225
|
33,203
|
||||||||||||||||||||||||
|
Total
|
$
|
2,796
|
$
|
10,942
|
$
|
-
|
$
|
13,738
|
$
|
19,043
|
$
|
1,118,962
|
$
|
11,296
|
$
|
1,149,301
|
||||||||||||||||
PREMIER FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2019, 2018, and 2017
(Dollars in Thousands, Except Per Share Data)
NOTE 5 – LOANS (Continued)
In the tables below, total individually evaluated impaired loans include certain purchased loans that were acquired with deteriorated credit quality
that are still individually evaluated for impairment.
The following table presents loans individually evaluated for impairment by class of loans as of December 31, 2019. The table includes $758 of
loans acquired with deteriorated credit quality that the Company cannot reasonably estimate cash flows such that they are accounted for on the cost recovery method and are still individually evaluated for impairment.
|
Unpaid Principal Balance
|
Recorded Investment
|
Allowance for Loan Losses Allocated
|
||||||||||
|
With no related allowance recorded:
|
||||||||||||
|
Residential real estate
|
$
|
188
|
$
|
63
|
$
|
-
|
||||||
|
Multifamily real estate
|
96
|
89
|
-
|
|||||||||
|
Commercial real estate
|
||||||||||||
|
Owner occupied
|
2,201
|
1,842
|
-
|
|||||||||
|
Non-owner occupied
|
2,512
|
1,732
|
-
|
|||||||||
|
Commercial and industrial
|
509
|
-
|
-
|
|||||||||
|
5,506
|
3,726
|
-
|
||||||||||
|
With an allowance recorded:
|
||||||||||||
|
Multifamily real estate
|
$
|
4,017
|
$
|
3,637
|
$
|
1,737
|
||||||
|
Commercial real estate
|
||||||||||||
|
Owner occupied
|
1,189
|
1,162
|
653
|
|||||||||
|
Non-owner occupied
|
2,654
|
2,537
|
271
|
|||||||||
|
Commercial and industrial
|
689
|
678
|
390
|
|||||||||
|
Construction and land
|
460
|
431
|
51
|
|||||||||
|
9,009
|
8,445
|
3,102
|
||||||||||
|
Total
|
$
|
14,515
|
$
|
12,171
|
$
|
3,102
|
||||||
PREMIER FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2019, 2018, and 2017
(Dollars in Thousands, Except Per Share Data)
NOTE 5 – LOANS (Continued)
The following table presents loans individually evaluated for impairment by class of loans as of December 31, 2018. The table includes $1,060 of
loans acquired with deteriorated credit quality that the Company cannot reasonably estimate cash flows such that they are accounted for on the cost recovery method and are still individually evaluated for impairment.
|
Unpaid Principal Balance
|
Recorded Investment
|
Allowance for Loan Losses Allocated
|
||||||||||
|
With no related allowance recorded:
|
||||||||||||
|
Residential real estate
|
$
|
426
|
$
|
298
|
$
|
-
|
||||||
|
Multifamily real estate
|
110
|
110
|
-
|
|||||||||
|
Commercial real estate
|
||||||||||||
|
Owner occupied
|
1,305
|
1,092
|
-
|
|||||||||
|
Non-owner occupied
|
8,458
|
7,740
|
-
|
|||||||||
|
Commercial and industrial
|
531
|
-
|
-
|
|||||||||
|
Construction and land
|
786
|
786
|
-
|
|||||||||
|
11,616
|
10,026
|
-
|
||||||||||
|
With an allowance recorded:
|
||||||||||||
|
Multifamily real estate
|
$
|
4,016
|
$
|
3,795
|
$
|
1,281
|
||||||
|
Commercial real estate
|
||||||||||||
|
Owner occupied
|
2,523
|
2,478
|
692
|
|||||||||
|
Non-owner occupied
|
2,852
|
2,781
|
267
|
|||||||||
|
Commercial and industrial
|
562
|
558
|
414
|
|||||||||
|
Construction and land
|
565
|
565
|
142
|
|||||||||
|
10,518
|
10,177
|
2,796
|
||||||||||
|
Total
|
$
|
22,134
|
$
|
20,203
|
$
|
2,796
|
||||||
PREMIER FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2019, 2018, and 2017
(Dollars in Thousands, Except Per Share Data)
NOTE 5 – LOANS (Continued)
The following table presents by loan class, the average balance of loans individually evaluated for impairment and interest income recognized on
these loans for the three years ended December 31, 2019. The table includes loans acquired with deteriorated credit quality that are still individually evaluated for impairment.
|
Year ended Dec 31, 2019
|
Year ended Dec 31, 2018
|
Year ended Dec 31, 2017
|
||||||||||||||||||||||||||||||||||
|
Loan Class
|
Average Recorded Investment
|
Interest Income Recognized
|
Cash Basis Interest Recognized
|
Average Recorded Investment
|
Interest Income Recognized
|
Cash Basis Interest Recognized
|
Average Recorded Investment
|
Interest Income Recognized
|
Cash Basis Interest Recognized
|
|||||||||||||||||||||||||||
|
Residential real estate
|
$
|
186
|
$
|
-
|
$
|
-
|
$
|
300
|
$
|
-
|
$
|
-
|
$
|
333
|
$
|
3
|
$
|
3
|
||||||||||||||||||
|
Multifamily real estate
|
3,803
|
-
|
-
|
2,534
|
11
|
11
|
11,376
|
262
|
246
|
|||||||||||||||||||||||||||
|
Commercial real estate:
|
||||||||||||||||||||||||||||||||||||
|
Owner occupied
|
3,624
|
14
|
15
|
3,094
|
57
|
57
|
3,335
|
74
|
74
|
|||||||||||||||||||||||||||
|
Non-owner occupied
|
8,062
|
712
|
712
|
9,226
|
412
|
412
|
4,680
|
213
|
213
|
|||||||||||||||||||||||||||
|
Commercial and industrial
|
549
|
4
|
4
|
904
|
22
|
22
|
1,480
|
123
|
123
|
|||||||||||||||||||||||||||
|
Construction and land
|
814
|
123
|
123
|
3,977
|
24
|
15
|
7,804
|
314
|
309
|
|||||||||||||||||||||||||||
|
All other
|
-
|
-
|
-
|
173
|
10
|
10
|
302
|
18
|
18
|
|||||||||||||||||||||||||||
|
Total
|
$
|
17,038
|
$
|
854
|
$
|
855
|
$
|
20,208
|
$
|
536
|
$
|
527
|
$
|
29,310
|
$
|
1,007
|
$
|
986
|
||||||||||||||||||
PREMIER FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2019, 2018, and 2017
(Dollars in Thousands, Except Per Share Data)
NOTE 5 – LOANS (Continued)
Troubled Debt Restructurings
A loan is classified as a troubled debt restructuring ("TDR") when loan terms are modified due to a borrower's financial difficulties and a
concession is granted to a borrower that would not have otherwise been considered. Most of the Company’s loan modifications involve a restructuring of loan terms prior to maturity to temporarily reduce the payment amount and/or to require only
interest for a temporary period, usually up to six months. These modifications generally do not meet the definition of a TDR because the modifications are considered to be an insignificant delay in payment. The determination of an insignificant
delay in payment is evaluated based on the facts and circumstances of the individual borrower(s).
The following table presents TDR’s as of December 31, 2019 and 2018:
|
December 31, 2019
|
TDR’s on
Non-accrual
|
Other TDR’s
|
Total TDR’s
|
|||||||||
|
Residential real estate
|
$
|
32
|
$
|
157
|
$
|
189
|
||||||
|
Multifamily real estate
|
3,636
|
-
|
3,636
|
|||||||||
|
Commercial real estate
|
||||||||||||
|
Owner occupied
|
1,162
|
207
|
1,369
|
|||||||||
|
Non-owner occupied
|
-
|
2,656
|
2,656
|
|||||||||
|
Commercial and industrial
|
191
|
-
|
191
|
|||||||||
|
Total
|
$
|
5,021
|
$
|
3,020
|
$
|
8,041
|
||||||
|
December 31, 2018
|
TDR’s on
Non-accrual
|
Other TDR’s
|
Total TDR’s
|
|||||||||
|
Residential real estate
|
$
|
347
|
$
|
97
|
$
|
444
|
||||||
|
Multifamily real estate
|
3,795
|
-
|
3,795
|
|||||||||
|
Commercial real estate
|
||||||||||||
|
Owner occupied
|
1,647
|
222
|
1,869
|
|||||||||
|
Non-owner occupied
|
-
|
5,964
|
5,964
|
|||||||||
|
Commercial and industrial
|
191
|
-
|
191
|
|||||||||
|
Total
|
$
|
5,980
|
$
|
6,283
|
$
|
12,263
|
||||||
At December 31, 2019, $2,471 in specific reserves were allocated to loans that had restructured terms, resulting in a provision for loan losses of
$929 for the year ended December 31, 2019. At December 31, 2018, $1,630 in specific reserves were allocated to loans that had restructured terms, resulting in a provision for loan losses of $657 for the year ended December 31, 2018. There were no
commitments to lend additional amounts on these loans.
PREMIER FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2019, 2018, and 2017
(Dollars in Thousands, Except Per Share Data)
NOTE 5 – LOANS (Continued)
There were no new TDR’s that occurred during the years ended December 31, 2019 and December 31, 2018.
During the years ended December 31, 2019 and 2018, there were no TDR’s for which there was a payment default within twelve months following the
modification.
A loan is considered to be in payment default once it is 90 days contractually past due under the modified terms.
Credit Quality Indicators
The Company categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt such as:
current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors. The Company analyzes non-homogeneous loans, such as commercial, commercial real estate,
multifamily residential and commercial purpose loans secured by residential real estate, on a monthly basis. For consumer loans, including consumer loans secured by residential real estate, and smaller balance non-homogeneous loans, the analysis
involves monitoring the performing status of the loan. At the time such loans become past due by 30 days or more, the Company evaluates the loan to determine if a change in risk category is warranted. The Company uses the following definitions for
risk ratings:
Special Mention. Loans classified as special mention have a potential weakness that deserves management's close attention. If
left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or of the institution's credit position at some future date.
Substandard. Loans classified as substandard are inadequately protected by the current net worth and paying capacity of the
obligor or of the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the institution will sustain some loss
if the deficiencies are not corrected.
Doubtful. Loans classified as doubtful have all the weaknesses inherent in those classified as substandard, with the added
characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable.
PREMIER FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2019, 2018, and 2017
(Dollars in Thousands, Except Per Share Data)
NOTE 5 – LOANS (Continued)
Loans not meeting the criteria above that are analyzed individually as part of the above described process are considered to be pass rated loans.
As of December 31, 2019, and based on the most recent analysis performed, the risk category of loans by class of loans is as follows:
|
Loan Class
|
Pass
|
Special Mention
|
Substandard
|
Doubtful
|
Total Loans
|
|||||||||||||||
|
Residential real estate
|
$
|
374,835
|
$
|
3,477
|
$
|
11,673
|
$
|
-
|
$
|
389,985
|
||||||||||
|
Multifamily real estate
|
28,103
|
4,855
|
3,726
|
-
|
36,684
|
|||||||||||||||
|
Commercial real estate:
|
||||||||||||||||||||
|
Owner occupied
|
152,695
|
5,123
|
6,400
|
-
|
164,218
|
|||||||||||||||
|
Non-owner occupied
|
290,096
|
8,617
|
5,603
|
-
|
304,316
|
|||||||||||||||
|
Commercial and industrial
|
101,085
|
2,693
|
1,301
|
-
|
105,079
|
|||||||||||||||
|
Consumer
|
28,618
|
5
|
384
|
-
|
29,007
|
|||||||||||||||
|
Construction and land
|
123,473
|
11,868
|
797
|
-
|
136,138
|
|||||||||||||||
|
All other
|
29,698
|
97
|
73
|
-
|
29,868
|
|||||||||||||||
|
Total
|
$
|
1,128,603
|
$
|
36,735
|
$
|
29,957
|
$
|
-
|
$
|
1,195,295
|
||||||||||
As of December 31, 2018, and based on the most recent analysis performed, the risk category of loans by class of loans is as follows:
|
Loan Class
|
Pass
|
Special Mention
|
Substandard
|
Doubtful
|
Total Loans
|
|||||||||||||||
|
Residential real estate
|
$
|
369,808
|
$
|
1,376
|
$
|
9,681
|
$
|
162
|
$
|
381,027
|
||||||||||
|
Multifamily real estate
|
45,187
|
4,924
|
3,905
|
-
|
54,016
|
|||||||||||||||
|
Commercial real estate:
|
||||||||||||||||||||
|
Owner occupied
|
126,422
|
4,840
|
6,947
|
-
|
138,209
|
|||||||||||||||
|
Non-owner occupied
|
262,149
|
7,647
|
12,812
|
-
|
282,608
|
|||||||||||||||
|
Commercial and industrial
|
96,066
|
5,280
|
2,278
|
-
|
103,624
|
|||||||||||||||
|
Consumer
|
27,344
|
31
|
313
|
-
|
27,688
|
|||||||||||||||
|
Construction and land
|
107,196
|
19,728
|
2,002
|
-
|
128,926
|
|||||||||||||||
|
All other
|
32,749
|
381
|
73
|
-
|
33,203
|
|||||||||||||||
|
Total
|
$
|
1,066,921
|
$
|
44,207
|
$
|
38,011
|
$
|
162
|
$
|
1,149,301
|
||||||||||
PREMIER FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2019, 2018, and 2017
(Dollars in Thousands, Except Per Share Data)
Year-end premises and equipment were as follows:
|
2019
|
2018
|
|||||||
|
Land and improvements
|
$
|
7,500
|
$
|
7,200
|
||||
|
Buildings and leasehold improvements
|
26,777
|
26,033
|
||||||
|
Furniture and equipment
|
12,224
|
11,623
|
||||||
|
Assets purchased not yet placed in service
|
560
|
424
|
||||||
|
47,061
|
45,280
|
|||||||
|
Less: accumulated depreciation
|
(16,956
|
)
|
(15,895
|
)
|
||||
|
Premises and equipment owned, net
|
30,105
|
29,385
|
||||||
|
Right of use asset related to operating leases (detailed below)
|
7,152
|
-
|
||||||
|
Premises and equipment owned, net
|
$
|
37,257
|
$
|
29,385
|
||||
Operating Leases: The Company leases certain banking facilities and equipment under various agreements with original terms provide for fixed
monthly payments over periods generally ranging from two to sixteen years, including renewal options. Certain leases contain renewal options and rent escalation clauses calling for rent increases of the term of the lease. Short-term leases of
equipment are recognized on a straight-line basis over the lease term. As of December 31, 2019, the weighted average remaining lease term for operating leases was 9.4 years and the weighted average discount rate used in the measurement of
operating lease liabilities was 2.21%.
Total lease expense for the year ended December 31, 2019, which is included in net occupancy and equipment expense, was $1,241, consisting of $103
short-term lease expense and $1,138 of operating lease expense.
The following table summarizes the future minimum rental commitments under operating leases:
|
2020
|
$
|
1,059
|
||
|
2021
|
1,013
|
|||
|
2022
|
995
|
|||
|
2023
|
778
|
|||
|
2024
|
678
|
|||
|
2025 and thereafter
|
3,495
|
|||
|
Total undiscounted cash flows
|
8,018
|
|||
|
Discounted cash flows
|
(866
|
)
|
||
|
Total lease liability
|
$
|
7,152
|
PREMIER FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2019, 2018, and 2017
(Dollars in Thousands, Except Per Share Data)
The change in the balance for goodwill during the year is as follows:
|
2019
|
2018
|
2017
|
||||||||||
|
Beginning of year
|
$
|
47,640
|
$
|
35,371
|
$
|
35,371
|
||||||
|
Acquired goodwill
|
-
|
12,269
|
-
|
|||||||||
|
Impairment
|
-
|
-
|
-
|
|||||||||
|
End of year
|
$
|
47,640
|
$
|
47,640
|
$
|
35,371
|
||||||
Acquired intangible assets at December 31, 2019 and 2018 were as follows.
|
2019
|
2018
|
|||||||||||||||
|
Gross Carrying
Amount
|
Accumulated Amortization
|
Gross Carrying
Amount
|
Accumulated Amortization
|
|||||||||||||
|
Core deposit intangible
|
$
|
8,702
|
$
|
(3,326
|
)
|
$
|
7,708
|
$
|
(2,440
|
)
|
||||||
Aggregate intangible amortization expense was $885 for 2019, $778 for 2018, and $974 for 2017.
Estimated amortization expense for each of the next five years:
|
2020
|
$
|
956
|
||
|
2021
|
882
|
|||
|
2022
|
686
|
|||
|
2023
|
612
|
|||
|
2024
|
606
|
|||
|
Thereafter
|
1,634
|
|||
|
$
|
5,376
|
PREMIER FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2019, 2018, and 2017
(Dollars in Thousands, Except Per Share Data)
At December 31, 2019 the scheduled maturities of time deposits are as follows:
|
2020
|
$
|
300,312
|
||
|
2021
|
90,665
|
|||
|
2022
|
13,754
|
|||
|
2023
|
10,162
|
|||
|
2024
|
10,244
|
|||
|
Thereafter
|
5
|
|||
|
$
|
425,142
|
Certain directors and executive officers of the Banks and companies in which they have beneficial ownership were deposit customers of the Banks
during 2019 and 2018. The balance of such deposits at December 31, 2019 and 2018 were approximately $11,355 and $6,724.
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:
|
2019
|
2018
|
|||||||
|
Year-end balance
|
$
|
20,428
|
$
|
22,062
|
||||
|
Average balance during the year
|
$
|
21,704
|
$
|
22,343
|
||||
|
Average interest rate during the year
|
0.32
|
%
|
0.14
|
%
|
||||
|
Maximum month-end balance during the year
|
$
|
23,020
|
$
|
25,067
|
||||
|
Weighted average interest rate at year-end
|
0.49
|
%
|
0.14
|
%
|
||||
PREMIER FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2019, 2018, and 2017
(Dollars in Thousands, Except Per Share Data)
The Banks own stock of the Federal Home Loan Bank of Cincinnati, Ohio (FHLB-Cin), and Federal Home Loan Bank of Pittsburgh, Pennsylvania
(FHLB-Pitt). This stock allows the Banks to borrow advances from the FHLB. At December 31, 2019 the total amount of borrowing permitted by the FHLB-Cin was $51,596 and the total amount of borrowing permitted by the FHLB-Pitt was $452,840.
As part of the acquisition of First Bank, the Company assumed advances from FHLB-Pitt, with principal outstanding totaling $28,400 as of the October
12, 2018 acquisition date. During the remainder of 2018 seven of these advances matured and were paid off in the amount of $19,500. An additional two advances in the amount of $2,500 matured and were paid off in 2019. Reported interest expense
on the advances includes the periodic accretion of the fair value adjustments and any prepayment penalties incurred.
During 2019 and 2018, the Banks borrowed on a short-term basis and paid-off these FHLB advances as they matured. There are $6,375 of FHLB
borrowings with original maturities greater than one-year, net of fair value adjustments, outstanding at December 31, 2019, which have interest rates ranging from 1.77% to 2.33% with an average rate of 2.08%. There were $8,819 of FHLB borrowings
with original maturities greater than one-year, net of fair value adjustments, outstanding at December 31, 2018, which have interest rates ranging from 1.73% to 2.33% with an average rate of 2.05%. All of the advances at December 31, 2019 mature
in the calendar year 2020.
As part of the acquisition of Bankshares, the Company formally assumed $6,186 of junior subordinated debentures (“Debentures”) issued to FNB Capital
Trust One (“Trust”), a statutory business trust formed by Bankshares on February 26, 2004. The Debentures were issued to Trust in exchange for ownership of all of the common equity of Trust and the proceeds of mandatorily redeemable securities
sold by Trust to third party investors (“Capital Securities”). Interest on the Debentures is payable quarterly to the Trust at a variable interest rate equal to the three month London Interbank Offered Rate (LIBOR) plus 2.95% updated quarterly. The interest rate on the Debentures was 4.884% at December 31, 2019 and 5.427% at December 31, 2018. The Company is not considered the primary beneficiary of this trust (variable interest entity), therefore Trust
is not consolidated in the Company’s financial statements, but rather the Debentures are shown as a liability.
PREMIER FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2019, 2018, and 2017
(Dollars in Thousands, Except Per Share Data)
NOTE 11 – SUBORDINATED DEBENTURES (Continued)
The Debentures mature on April 24, 2034; however, the Company may redeem the Debentures, in whole or in part, at 100% of the principal amount plus
any accrued and unpaid interest. The Debentures held by Trust are the sole asset of the trust. The Debentures held by Trust may be included in the Tier 1 capital of the Company (with certain limitations applicable) under current regulatory
guidelines and interpretations. The carrying value of the Debentures includes the remaining unamortized fair value adjustment recorded as a result of the acquisition of Bankshares on January 15, 2016. Reported interest expense on the Debentures
includes the periodic amortization of the fair value adjustment. The Company’s investment in the common stock of the Trust is $186 and is included in other assets at December 31, 2019 and 2018.
On August 26, 2015, the Company executed and delivered to First Guaranty Bank of Hammond, Louisiana (“First Guaranty”) a Promissory Note and
Business Loan Agreement dated August 26, 2015 for the principal amount of $12,000, bearing interest at a fixed rate of 4.00% per annum and requiring 59 monthly principal payments of $143 plus accrued interest and one final principal and interest
payment of $3,575 due on August 26, 2020. Through a series of additional principal payments, the Company was able to fully retire the borrowing before the end of June 2019. The Promissory Note was secured by the pledge of 25% of Premier’s
interest in Premier Bank, Inc. (a wholly owned subsidiary) under a Commercial Pledge Agreement dated August 26, 2015. The proceeds of this note were used to refinance a $4,500 balance plus accrued interest due under Premier’s previous Promissory
Note to First Guaranty; pay off the remaining $5,400 balance plus accrued interest due to The Bankers’ Bank of Kentucky, Inc. of Frankfort, Kentucky (“Bankers’ Bank”) under a Term Note dated September 8, 2010; and pay the remaining $2,000 balance
plus accrued interest due on Premier’s $5,000 Line of Credit with Bankers’ Bank. The sum of the disbursements totaled $11,946 and the final $54 on the Term Note was not borrowed. At the time of origination, Premier’s chairman owned approximately
23.8% of the voting stock of First Guaranty Bancshares, parent company for First Guaranty. However, Premier’s board of directors, the chairman abstaining, and audit committee determined prior to its vote to authorize the company to enter into the
loan transaction that the terms of the financing, including the interest rate and collateral, were no less favorable than those which could be obtained from other financial institutions. The outstanding principal balance on the borrowing at
December 31, 2019 and 2018 was $0 and $2,500.
PREMIER FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2019, 2018, and 2017
(Dollars in Thousands, Except Per Share Data)
NOTE 12 – NOTES PAYABLE AND OTHER BORROWED FUNDS (Continued)
On June 28, 2019 the Company executed and delivered to First Guaranty a Change in Terms Agreement modifying its Promissory Note and Business Loan
Agreement dated June 30, 2012 that established a Line of Credit with the bank extending the right to request and receive monies from First Guaranty on the line of credit until June 30, 2022. The Change in Terms Agreement increased the principal
amount of $3,000 to $6,000, bearing interest floating daily at the “Wall Street Journal” prime rate (currently 4.75%), with a floor of 4.25%. Under the terms of the Promissory Note, the Company may request and receive advances from First Guaranty
from time to time. Accrued interest on any amounts outstanding is payable monthly, and any amounts outstanding are payable on demand or at maturity. The Promissory Note is secured by the pledge of 25% of Premier’s interest in Premier Bank (a
wholly owned subsidiary) under a Commercial Pledge Agreement modified on June 30, 2012. At December 31, 2019 and 2018, Premier had no outstanding balance on this line of credit with First Guaranty.
On September 24, 2019 the Company executed and delivered to Bankers’ Bank a Line of Credit Renewal Agreement dated September 7, 2019 extending the
right to request and receive monies from Bankers’ Bank on Premier’s existing line of credit until September 7, 2020. The line of credit renewal maintained the principal amount of $5,000, bearing interest floating daily at the “JP Morgan Chase”
prime rate (currently 4.75%), with a floor of 4.50%. Under the terms of the original Promissory Note, Premier may request and receive advances from Bankers’ Bank from time to time, but the aggregate outstanding principal balance under the
Promissory Note at any time shall not exceed $5,000. Accrued interest on amounts outstanding is payable quarterly, and any amounts outstanding are payable on demand or on September 7, 2020. The Promissory Note is secured by a pledge of Premier’s
100% interest in Citizens Deposit under a Stock Pledge and Security Agreement dated September 7, 2012. At December 31, 2019 and 2018, Premier had no outstanding balance on this line of credit with Bankers’ Bank.
PREMIER FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2019, 2018, and 2017
(Dollars in Thousands, Except Per Share Data)
The components of the provision (benefit) for income taxes are as follows:
|
2019
|
2018
|
2017
|
||||||||||
|
Current
|
$
|
6,476
|
$
|
5,782
|
$
|
7,809
|
||||||
|
Write-off of deferred tax asset related to 2017 Tax Cuts and Jobs Act.
|
-
|
-
|
145
|
|||||||||
|
Deferred
|
563
|
120
|
637
|
|||||||||
|
Change in valuation allowance
|
(14
|
)
|
(4
|
)
|
16
|
|||||||
|
Provision for income taxes
|
$
|
7,025
|
$
|
5,898
|
$
|
8,607
|
||||||
The Company’s deferred tax assets and liabilities at December 31 are shown below.
|
2019
|
2018
|
|||||||
|
Deferred tax assets
|
||||||||
|
Allowance for loan losses
|
$
|
2,969
|
$
|
2,884
|
||||
|
Purchase accounting adjustments
|
605
|
963
|
||||||
|
Net operating loss carryforward
|
453
|
333
|
||||||
|
Alternative minimum tax credit carryforward
|
3
|
125
|
||||||
|
Write-downs of other real estate owned
|
374
|
235
|
||||||
|
Taxable income on non-accrual loans
|
981
|
896
|
||||||
|
Accrued expenses
|
278
|
235
|
||||||
|
Unrealized loss on investment securities
|
-
|
1,024
|
||||||
|
Other
|
16
|
15
|
||||||
|
Total deferred tax assets
|
5,679
|
6,710
|
||||||
|
Deferred tax liabilities
|
||||||||
|
Amortization of intangibles
|
$
|
(3,072
|
)
|
$
|
(3,063
|
)
|
||
|
Depreciation
|
(1,320
|
)
|
(1,106
|
)
|
||||
|
Federal Home Loan Bank dividends
|
(267
|
)
|
(224
|
)
|
||||
|
Deferred loan fees
|
(588
|
)
|
(499
|
)
|
||||
|
Unrealized gain on investment securities
|
(984
|
)
|
-
|
|||||
|
Other
|
(101
|
)
|
(105
|
)
|
||||
|
Total deferred tax liabilities
|
(6,332
|
)
|
(4,997
|
)
|
||||
|
Valuation allowance on deferred tax assets
|
(158
|
)
|
(172
|
)
|
||||
|
Net deferred taxes
|
$
|
(811
|
)
|
$
|
1,541
|
|||
PREMIER FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2019, 2018, and 2017
(Dollars in Thousands, Except Per Share Data)
NOTE 13 – INCOME
TAXES (Continued)
On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cut and Jobs Act (the “Tax Act”).
The Tax Act made broad and complex changes to the U.S. tax code that affected 2017 and 2018, including, but not limited to, accelerated depreciation that allows for full expensing of qualified property. The Tax Act also established new tax laws
that affect 2018 and after, including a reduction in the U.S. federal corporate income tax rate from 35% to 21%. As a result of the reduction of the federal corporate income tax rate beginning in 2018, the Company revalued its net deferred tax
asset, excluding after tax credits, as of December 31, 2017 using the lower corporate income tax rate. Based on the revaluation, $145 of additional income tax expense was recorded for the year ended December 31, 2017 to reduce the net deferred tax
asset balance as of that date.
The adjustments to deferred tax assets and liabilities were provisional amounts estimated based on information available as of December 31, 2017.
These amounts were subject to change as management obtained information necessary to complete the calculations. However, no additional changes to the provisional amounts were recognized as management refined the estimates of the cumulative
temporary differences.
At December 31, 2019 the Company had federal net operating loss carryforwards of $1,407, a federal alternative minimum tax credit carryforward of
$3, and various state net operating loss carryforwards of $2,425 which begin to expire in 2022. The deductibility of these net operating losses is limited under IRC Sec. 382.
A valuation allowance for deferred tax assets is recorded when it is more likely than not that some portion or all of the deferred tax assets will
not be realized. The ultimate realization of the deferred tax assets depends on the ability of the Company to generate sufficient taxable income of the appropriate character in the future and in the appropriate taxing jurisdictions. The Company
considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment.
At both December 31, 2019 and 2018, the Company maintains a valuation allowance of $158 and $172 against the portion of its District of Columbia net
operating loss carryforward that is not expected to be utilized before expiration due to separate company limitations. All other deferred tax assets are more likely than not to be utilized; therefore, no additional valuation allowance is needed.
PREMIER FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2019, 2018, and 2017
(Dollars in Thousands, Except Per Share Data)
NOTE 13 – 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:
|
2019
|
2018
|
2017
|
||||||||||||||||||||||
|
U.S. federal income tax rate
|
$
|
6,556
|
21.0
|
%
|
$
|
5,474
|
21.0
|
%
|
$
|
8,200
|
35.0
|
%
|
||||||||||||
|
Changes from the statutory rate
|
||||||||||||||||||||||||
|
Change in deferred taxes related to decrease in future federal tax rate
|
-
|
-
|
-
|
-
|
145
|
0.6
|
||||||||||||||||||
|
State income taxes, net
|
693
|
2.2
|
518
|
2.0
|
503
|
2.1
|
||||||||||||||||||
|
Tax-exempt interest income
|
(163
|
)
|
(0.5
|
)
|
(143
|
)
|
(0.5
|
)
|
(239
|
)
|
(1.0
|
)
|
||||||||||||
|
Non-deductible interest expense related to carrying tax-exempt interest earning assets
|
15
|
0.0
|
11
|
0.0
|
13
|
0.1
|
||||||||||||||||||
|
Non-deductible stock compensation expense, net
|
28
|
0.1
|
12
|
0.0
|
(35
|
)
|
(0.2
|
)
|
||||||||||||||||
|
Tax credits, net
|
(134
|
)
|
(0.4
|
)
|
(71
|
)
|
(0.3
|
)
|
(42
|
)
|
(0.2
|
)
|
||||||||||||
|
Change in valuation allowance
|
14
|
0.0
|
4
|
0.0
|
16
|
0.1
|
||||||||||||||||||
|
Other
|
16
|
0.1
|
93
|
0.4
|
46
|
0.2
|
||||||||||||||||||
|
$
|
7,025
|
22.5
|
%
|
$
|
5,898
|
22.6
|
%
|
$
|
8,607
|
36.7
|
%
|
|||||||||||||
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 years ended December 31, 2019, 2018, and 2017 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 and the
District of Columbia. The Company also files a corporate income tax return in the state of Kentucky and Maryland. The Company is no longer subject to examination by taxing authorities for years before 2016.
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 $587, $557, and $485 in 2019, 2018, and 2017.
PREMIER FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2019, 2018, and 2017
(Dollars in Thousands, Except Per Share Data)
From time to time the Company grants stock options to its employees. 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. In 2012, the Company registered 687,500 shares of its common stock to be reserved for stock based incentive programs over the subsequent 10 years (“the
2012 Long-term Incentive Plan”).
On March 20, 2019, 72,075 incentive stock options were granted out of the 2012 Long Term Incentive Plan at an exercise price of $15.57, the closing
market price of Premier’s common stock on the grant date. These options vest in three equal annual installments ending on March 20, 2022. On March 21, 2018, 67,875 incentive stock options were granted out of the 2012 Long Term Incentive Plan at
an exercise price of $15.12, the closing market price of Premier’s common stock on the grant date. These options vest in three equal annual installments ending on March 21, 2021. On March 15, 2017, 69,375 incentive stock options were granted out
of the 2012 Long Term Incentive Plan at an exercise price of $15.21, the closing market price of Premier’s common stock on the grant date. These options vest in three equal annual installments ending on March 15, 2020.
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
|
2019
|
2018
|
2017
|
||||||||||
|
Risk-free interest rate
|
2.34
|
%
|
2.69
|
%
|
2.02
|
%
|
||||||
|
Expected option life (yrs)
|
5.42
|
5.37
|
5.36
|
|||||||||
|
Expected stock price volatility
|
28.45
|
%
|
22.47
|
%
|
18.40
|
%
|
||||||
|
Dividend yield
|
3.85
|
%
|
3.17
|
%
|
3.16
|
%
|
||||||
|
Weighted average fair value of options granted during the year
|
$
|
2.91
|
$
|
2.49
|
$
|
2.32
|
||||||
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 for the 2019, 2018, and 2017 grants were estimated based upon the weighted-average life of options exercised since January 1, 2012. The expected stock price volatility is based on historical volatilities of the Company’s
common stock during the three-year period prior to the grant date. The dividend yield was estimated by annualizing the current quarterly dividend on the Company’s common stock at the time of the option grant.
PREMIER FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2019, 2018, and 2017
(Dollars in Thousands, Except Per Share Data)
NOTE 15 – STOCK COMPENSATION EXPENSE (Continued)
On April 17, 2019, 7,500 shares of Premier’s common stock were granted to President and CEO, Robert W. Walker as stock-based bonus compensation
under the 2012 Long-term Incentive Plan. The fair value of the stock at the time of the grant was $16.78 per share based upon the closing price of Premier’s stock on the date of grant and $126 of stock-based compensation was recorded as a result.
On April 25, 2018, 7,500 shares of Premier’s common stock were granted to President and CEO, Robert W. Walker as stock-based bonus compensation
under the 2012 Long-term Incentive Plan. The fair value of the stock at the time of the grant was $15.82 per share based upon the closing price of Premier’s stock on the date of grant and $119 of stock-based compensation was recorded as a result.
On April 19, 2017, 7,500 shares of Premier’s common stock were granted to President and CEO, Robert W. Walker as stock-based bonus compensation
under the 2012 Long-term Incentive Plan. The fair value of the stock at the time of the grant was $16.56 per share based upon the closing price of Premier’s stock on the date of grant and $124 of stock-based compensation was recorded as a result.
Compensation expense of $301, $252, and $217 was recorded for the years ended December 31, 2019, 2018, and 2017, respectively. 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 $129 at December 31, 2019. This unrecognized expense is expected to be
recognized over the next 26 months based on the vesting periods of the options.
During the year ending December 31, 2019, 26,979 options were exercised while 28,151 options were exercised during the year ending December 31, 2018
and 40,364 options were exercised during the year ending December 31, 2017.
PREMIER FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2019, 2018, and 2017
(Dollars in Thousands, Except Per Share Data)
NOTE 15 – STOCK COMPENSATION EXPENSE (Continued)
A summary of the Company’s stock option activity is as follows:
| ----------2019---------- |
----------2018---------- |
----------2017---------- | ||||||||||||||||||||||
|
Options
|
Weighted
Average
Exercise
Price |
Options
|
Weighted
Average
Exercise
Price |
Options
|
Weighted
Average
Exercise
Price |
|||||||||||||||||||
|
Outstanding at beginning of year
|
298,383
|
$
|
11.66
|
262,811
|
$
|
10.63
|
254,988
|
$
|
9.23
|
|||||||||||||||
|
Grants
|
72,075
|
15.57
|
67,875
|
15.12
|
69,375
|
15.21
|
||||||||||||||||||
|
Exercises
|
(26,979
|
)
|
10.13
|
(28,151
|
)
|
10.12
|
(40,364
|
)
|
9.10
|
|||||||||||||||
|
Forfeitures or expired
|
(10,838
|
)
|
14.21
|
(4,152
|
)
|
13.91
|
(21,188
|
)
|
11.71
|
|||||||||||||||
|
Outstanding at year-end
|
332,641
|
$
|
12.54
|
298,383
|
$
|
11.66
|
262,811
|
$
|
10.63
|
|||||||||||||||
|
Exercisable at year-end
|
200,123
|
$
|
10.67
|
172,577
|
$
|
9.55
|
145,134
|
$
|
8.53
|
|||||||||||||||
|
Weighted average remaining life
|
5.0
|
5.2
|
4.3
|
|||||||||||||||||||||
Options outstanding at year-end are expected to fully vest.
Additional information regarding stock options outstanding and exercisable at December 31, 2019 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
|
||||||||||||||||||||||
|
$4.00 to $6.00
|
32,276
|
$
|
5.28
|
$
|
415
|
32,276
|
1.8
|
$
|
5.28
|
$
|
415
|
||||||||||||||||||
|
$6.01 to $8.00
|
4,814
|
6.47
|
56
|
4,814
|
0.2
|
6.47
|
56
|
||||||||||||||||||||||
|
$8.01 to $10.00
|
15,715
|
8.28
|
155
|
15,715
|
3.2
|
8.28
|
155
|
||||||||||||||||||||||
|
$10.01 to $12.00
|
96,595
|
10.70
|
719
|
96,595
|
5.3
|
10.70
|
719
|
||||||||||||||||||||||
|
$12.01 to $16.00
|
183,241
|
15.32
|
517
|
50,723
|
8.3
|
15.18
|
150
|
||||||||||||||||||||||
|
Outstanding at Dec 31, 2019
|
332,641
|
12.54
|
$
|
1,862
|
200,123
|
6.5
|
10.67
|
$
|
1,495
|
||||||||||||||||||||
PREMIER FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2019, 2018, and 2017
(Dollars in Thousands, Except Per Share Data)
During 2019, 2018, and 2017, the Company paid approximately $752, $742, and $468 for printing, supplies, statement rendering, furniture, and
equipment to a company more than 50% of which is beneficially owned by the Company’s Chairman of the Board and whose board of directors includes two members of the Company’s Board of Directors.
During 2019, 2018, and 2017, 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 the majority interest of which is 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 2019, 2018, and 2017 is presented below:
|
2019
|
2018
|
2017
|
||||||||||
|
Basic earnings per share:
|
||||||||||||
|
Income available to common stockholders
|
$
|
24,196
|
$
|
20,168
|
$
|
14,819
|
||||||
|
Weighted average common shares outstanding
|
14,639,775
|
13,634,439
|
13,322,716
|
|||||||||
|
Earnings per share
|
$
|
1.65
|
$
|
1.48
|
$
|
1.11
|
||||||
|
Diluted earnings per share:
|
||||||||||||
|
Income available to common stockholders
|
$
|
24,196
|
$
|
20,168
|
$
|
14,819
|
||||||
|
Weighted average common shares outstanding
|
14,639,775
|
13,634,439
|
13,322,716
|
|||||||||
|
Add dilutive effects of potential additional common stock
|
83,367
|
102,179
|
97,398
|
|||||||||
|
Weighted average common and dilutive potential Common shares outstanding
|
14,723,142
|
13,736,618
|
13,420,114
|
|||||||||
|
Earnings per share assuming dilution
|
$
|
1.64
|
$
|
1.47
|
$
|
1.10
|
||||||
There were no stock options considered antidilutive for 2019, 2018, and 2017.
PREMIER FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2019, 2018, and 2017
(Dollars in Thousands, Except Per Share Data)
Fair value is the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most
advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. There are three levels of inputs that may be used to measure fair values:
Level 1: Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the
measurement date.
Level 2: Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in
markets that are not active; or other inputs that are observable or can be corroborated by observable market data.
Level 3: Significant unobservable inputs that reflect a company’s own assumptions about the assumptions that market participants would use in
pricing an asset or liability.
When possible, the Company looks to active and observable markets to price identical assets or liabilities. When identical assets and liabilities
are not traded in active markets, the Company looks to observable market data for similar assets and liabilities. However, certain assets and liabilities are not traded in observable markets and the Company must use other valuation methods to
develop a fair value.
Carrying amount is the estimated fair value for cash and due from banks, Federal funds sold, accrued interest receivable and payable, demand
deposits, short-term debt, and deposits that reprice frequently and fully. Fair values of time deposits with other banks are based on current rates for similar time deposits using the remaining time to maturity. It was not practicable to
determine the fair value of Federal Home Loan Bank stock due to the restrictions placed on its transferability. For deposits and variable rate deposits with infrequent repricing, fair value is based on discounted cash flows using current market
rates applied to the estimated life. Fair values for loans is measured at the exit price notion by using the discounted cash flow or collateral value but also incorporates additional factors such as using economic factors, credit risk, and market
rates and conditions. 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, 2019, 2018, and 2017
(Dollars in Thousands, Except Per Share Data)
NOTE 18 – FAIR VALUE (Continued)
The carrying amounts and estimated fair values of financial instruments at December 31, 2019 were as follows:
|
Fair Value Measurements at December 31, 2019 Using
|
||||||||||||||||||||
|
Carrying
Amount
|
Level 1
|
Level 2
|
Level 3
|
Total
|
||||||||||||||||
|
Financial assets
|
||||||||||||||||||||
|
Cash and due from banks
|
$
|
88,556
|
$
|
88,556
|
$
|
-
|
$
|
-
|
$
|
88,556
|
||||||||||
|
Time deposits with other banks
|
598
|
-
|
599
|
-
|
599
|
|||||||||||||||
|
Federal funds sold
|
5,902
|
5,902
|
-
|
-
|
5,902
|
|||||||||||||||
|
Securities available for sale
|
390,754
|
-
|
390,754
|
-
|
390,754
|
|||||||||||||||
|
Loans, net
|
1,181,753
|
-
|
-
|
1,172,575
|
1,172,575
|
|||||||||||||||
|
Federal Home Loan Bank stock
|
4,450
|
n/a
|
n/a
|
n/a
|
n/a
|
|||||||||||||||
|
Interest receivable
|
4,699
|
4
|
1,110
|
3,585
|
4,699
|
|||||||||||||||
|
Financial liabilities
|
||||||||||||||||||||
|
Deposits
|
$
|
(1,495,753
|
)
|
$
|
(1,070,610
|
)
|
$
|
(424,886
|
)
|
$
|
-
|
$
|
(1,495,496
|
)
|
||||||
|
Securities sold under agreements
to repurchase
|
(20,428
|
)
|
-
|
(20,428
|
)
|
-
|
(20,428
|
)
|
||||||||||||
|
FHLB advances
|
(6,375
|
)
|
-
|
(6,406
|
)
|
-
|
(6,406
|
)
|
||||||||||||
|
Subordinated debt
|
(5,436
|
)
|
-
|
(5,527
|
)
|
-
|
(5,527
|
)
|
||||||||||||
|
Interest payable
|
(912
|
)
|
(15
|
)
|
(897
|
)
|
-
|
(912
|
)
|
|||||||||||
The carrying amounts and estimated fair values of financial instruments at December 31, 2018 were as follows:
|
Fair Value Measurements at December 31, 2018 Using
|
||||||||||||||||||||
|
Carrying
Amount
|
Level 1
|
Level 2
|
Level 3
|
Total
|
||||||||||||||||
|
Financial assets
|
||||||||||||||||||||
|
Cash and due from banks
|
$
|
62,903
|
$
|
62,903
|
$
|
-
|
$
|
-
|
$
|
62,903
|
||||||||||
|
Time deposits with other banks
|
1,094
|
-
|
1,085
|
-
|
1,085
|
|||||||||||||||
|
Federal funds sold
|
17,872
|
17,872
|
-
|
-
|
17,872
|
|||||||||||||||
|
Securities available for sale
|
365,731
|
-
|
365,231
|
500
|
365,731
|
|||||||||||||||
|
Loans, net
|
1,135,563
|
-
|
-
|
1,121,517
|
1,121,517
|
|||||||||||||||
|
Federal Home Loan Bank stock
|
3,628
|
n/a
|
n/a
|
n/a
|
n/a
|
|||||||||||||||
|
Interest receivable
|
4,295
|
-
|
1,032
|
3,263
|
4,295
|
|||||||||||||||
|
Financial liabilities
|
||||||||||||||||||||
|
Deposits
|
$
|
(1,430,127
|
)
|
$
|
(1,039,430
|
)
|
$
|
(384,496
|
)
|
$
|
-
|
$
|
(1,423,926
|
)
|
||||||
|
Securities sold under agreements
to repurchase
|
(22,062
|
)
|
-
|
(22,062
|
)
|
-
|
(22,062
|
)
|
||||||||||||
|
FHLB advances
|
(8,819
|
)
|
-
|
(8,688
|
)
|
-
|
(8,688
|
)
|
||||||||||||
|
Other borrowed funds
|
(2,500
|
)
|
-
|
(2,478
|
)
|
-
|
(2,478
|
)
|
||||||||||||
|
Subordinated debt
|
(5,406
|
)
|
-
|
(5,509
|
)
|
-
|
(5,509
|
)
|
||||||||||||
|
Interest payable
|
(733
|
)
|
(22
|
)
|
(711
|
)
|
-
|
(733
|
)
|
|||||||||||
PREMIER FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2019, 2018, and 2017
(Dollars in Thousands, Except Per Share Data)
NOTE 18 – FAIR VALUE (Continued)
Assets and Liabilities Measured on a Recurring Basis
The Company used the following methods and significant assumptions to estimate the fair value of each type of financial instrument measured on a
recurring basis:
Investment Securities: The fair values for investment securities are determined by quoted market prices, if available (Level 1). For securities
where quoted prices are not available, fair values are calculated based on market prices of similar securities (Level 2). For securities where quoted prices or market prices of similar securities are not available, fair values are calculated using
discounted cash flows or other market indicators (Level 3).
Assets and liabilities measured at fair value on a recurring basis at December 31, 2019 are summarized below:
|
Fair Value Measurements at
December 31, 2019 Using:
|
||||||||||||||||
|
Carrying Value
|
Quoted Prices in Active Markets for Identical Assets
(Level 1)
|
Significant Other Observable Inputs
(Level 2)
|
Significant Unobservable Inputs
(Level 3)
|
|||||||||||||
|
Securities available for sale
|
||||||||||||||||
|
Mortgage-backed securities
|
||||||||||||||||
|
U. S. agency MBS - residential
|
$
|
279,309
|
$
|
-
|
$
|
279,309
|
$
|
-
|
||||||||
|
U. S. agency CMO’s
|
62,644
|
-
|
62,644
|
-
|
||||||||||||
|
Total mortgage-backed securities of government sponsored agencies
|
341,953
|
-
|
341,953
|
-
|
||||||||||||
|
U. S. government sponsored agency securities
|
30,730
|
-
|
30,730
|
-
|
||||||||||||
|
Obligations of states and political subdivisions
|
16,017
|
-
|
16,017
|
-
|
||||||||||||
|
Other securities
|
2,054
|
-
|
2,054
|
-
|
||||||||||||
|
Total securities available for sale
|
$
|
390,754
|
$
|
-
|
$
|
390,754
|
$
|
-
|
||||||||
PREMIER FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2019, 2018, and 2017
(Dollars in Thousands, Except Per Share Data)
NOTE 18 – FAIR VALUE (Continued)
Assets and liabilities measured at fair value on a recurring basis at December 31, 2018 are summarized below:
|
Fair Value Measurements at
December 31, 2018 Using:
|
||||||||||||||||
|
Carrying Value
|
Quoted Prices in Active Markets for Identical Assets
(Level 1)
|
Significant Other Observable Inputs
(Level 2)
|
Significant Unobservable Inputs
(Level 3)
|
|||||||||||||
|
Securities available for sale
|
||||||||||||||||
|
Mortgage-backed securities
|
||||||||||||||||
|
U. S. agency MBS - residential
|
$
|
255,242
|
$
|
-
|
$
|
255,242
|
$
|
-
|
||||||||
|
U. S. agency CMO’s
|
68,543
|
-
|
68,543
|
-
|
||||||||||||
|
Total mortgage-backed securities of government sponsored agencies
|
323,785
|
-
|
323,785
|
-
|
||||||||||||
|
U. S. government sponsored agency securities
|
24,170
|
-
|
24,170
|
-
|
||||||||||||
|
Obligations of states and political subdivisions
|
14,327
|
-
|
14,327
|
-
|
||||||||||||
|
Other securities
|
3,449
|
-
|
2,949
|
500
|
||||||||||||
|
Total securities available for sale
|
$
|
365,731
|
$
|
-
|
$
|
365,231
|
$
|
500
|
||||||||
The table below presents a reconciliation of all assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3)
for the year ended December 31, 2019:
|
Securities Available-for-sale
|
||||
|
Year Ended
December 31, 2019
|
||||
|
Balance of recurring Level 3 assets at beginning of period
|
$
|
500
|
||
|
Total gains or losses (realized/unrealized):
|
||||
|
Included in earnings – realized
|
-
|
|||
|
Included in earnings – unrealized
|
-
|
|||
|
Included in other comprehensive income
|
-
|
|||
|
Purchases, sales, issuances and settlements, net
|
(500
|
)
|
||
|
Transfers in and/or out of Level 3
|
-
|
|||
|
Balance of recurring Level 3 assets at period-end
|
$
|
-
|
||
PREMIER FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2019, 2018, and 2017
(Dollars in Thousands, Except Per Share Data)
NOTE 18 – FAIR VALUE (Continued)
Assets and Liabilities Measured on a Non-Recurring Basis
The Company used the following methods and significant assumptions to estimate the fair value of each type of financial instrument measured on a
non-recurring basis:
Impaired Loans: The fair value of impaired loans with specific allocations of the allowance for loan losses is generally based on recent collateral
appraisals. Real estate appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the appraisers to adjust for
differences between the comparable sales and income data available. Such adjustments are typically significant and unique to each property and result in a Level 3 classification of the inputs for determining fair value. Non-real estate collateral
may be valued using an appraisal, net book value per the borrower’s financial statements, or aging reports. Management periodically evaluates the appraised collateral values and will discount the collateral’s appraised value to account for a number
of factors including but not limited to the cost of liquidating the collateral, the age of the appraisal, observable deterioration since the appraisal, management’s expertise and knowledge of the client and client’s business, or other factors
unique to the collateral. To the extent an adjusted collateral value is lower than the carrying value of an impaired loan, a specific allocation of the allowance for loan losses is assigned to the loan.
Other real estate owned (OREO): The fair value of OREO is based on appraisals less cost to sell at the date of foreclosure.
Management may obtain additional updated appraisals depending on the length of time since foreclosure. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach.
Adjustments are routinely made in the appraisal process by the appraisers to adjust for differences between the comparable sales and income data available. Such adjustments are typically significant and result in a Level 3 classification of the
inputs for determining fair value. Management periodically evaluates the appraised values and will discount a property’s appraised value to account for a number of factors including but not limited to the cost of liquidating the collateral, the
age of the appraisal, observable deterioration since the appraisal, or other factors unique to the property. To the extent an adjusted appraised value is lower than the carrying value of an OREO property, a direct charge to earnings is recorded
as an OREO write-down.
PREMIER FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2019, 2018, and 2017
(Dollars in Thousands, Except Per Share Data)
NOTE 18 – FAIR VALUE (Continued)
Assets and liabilities measured at fair value on a non-recurring basis at December 31, 2019 are summarized below:
|
Fair Value Measurements at December 31, 2019 Using
|
||||||||||||||||
|
Dec 31, 2019
|
Quoted Prices in Active Markets for Identical Assets
(Level 1)
|
Significant Other Observable Inputs
(Level 2)
|
Significant Unobservable Inputs
(Level 3)
|
|||||||||||||
|
Assets:
|
||||||||||||||||
|
Impaired loans:
|
||||||||||||||||
|
Multifamily real estate
|
$
|
1,900
|
$
|
-
|
$
|
-
|
$
|
1,900
|
||||||||
|
Commercial real estate
|
||||||||||||||||
|
Owner occupied
|
509
|
-
|
-
|
509
|
||||||||||||
|
Non-owner occupied
|
2,266
|
-
|
-
|
2,266
|
||||||||||||
|
Commercial and industrial
|
288
|
-
|
-
|
288
|
||||||||||||
|
Construction and land
|
380
|
-
|
-
|
380
|
||||||||||||
|
Total impaired loans
|
$
|
5,343
|
$
|
-
|
$
|
-
|
$
|
5,343
|
||||||||
|
Other real estate owned:
|
||||||||||||||||
|
Residential real estate
|
$
|
249
|
$
|
-
|
$
|
-
|
$
|
249
|
||||||||
|
Multifamily real estate
|
9,588
|
-
|
-
|
9,588
|
||||||||||||
|
Commercial real estate
|
||||||||||||||||
|
Owner occupied
|
288
|
-
|
-
|
288
|
||||||||||||
|
Construction and land
|
750
|
-
|
-
|
750
|
||||||||||||
|
Total OREO
|
$
|
10,875
|
$
|
-
|
$
|
-
|
$
|
10,875
|
||||||||
Impaired loans, which are measured for impairment using the value of the collateral for collateral dependent loans, had a recorded investment of
$8,445 at December 31, 2019 with a valuation allowance of $3,102 resulting in a provision for loan losses of $953 for the year ended December 31, 2019.
Other real estate owned measured at fair value less costs to sell, had a net carrying amount of $10,875, which is made up of the outstanding balance
of $12,474, net of a valuation allowance of $1,599 at December 31, 2019, resulting in write downs of $1,169 during the year ended December 31, 2019.
PREMIER FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2019, 2018, and 2017
(Dollars in Thousands, Except Per Share Data)
NOTE 18 – FAIR VALUE (Continued)
The significant unobservable inputs related to assets and liabilities measured at fair value on a non-recurring basis at December 31, 2019 are
summarized below:
|
December 31,
2019
|
Valuation Techniques
|
Unobservable Inputs
|
Range (Weighted Avg)
|
||||||
|
Impaired loans:
|
|||||||||
|
Multifamily real estate
|
$
|
1,900
|
sales comparison
|
adjustment for estimated realizable value
|
58.9%-58.9% (58.9%)
|
||||
|
Commercial real estate
|
|||||||||
|
Owner occupied
|
509
|
sales comparison
|
adjustment for estimated realizable value
|
76.1%-76.1% (76.1%)
|
|||||
|
Non-owner occupied
|
2,266
|
income approach
|
adjustment for differences in net operating income expectations
|
36.6%-67.4% (60.6%)
|
|||||
|
Commercial and industrial
|
288
|
sales comparison
|
adjustment for estimated realizable value
|
25.0%-87.0% (43.6%)
|
|||||
|
Construction and land
|
380
|
sales comparison
|
adjustment for estimated realizable value
|
56.5%-56.5% (56.5%)
|
|||||
|
Total impaired loans
|
$
|
5,343
|
|||||||
|
Other real estate owned:
|
|||||||||
|
Residential real estate
|
$
|
249
|
sales comparison
|
adjustment for estimated realizable value
|
0.2%-59.8% (17.5%)
|
||||
|
Multifamily real estate
|
9,588
|
income approach
|
adjustment for differences in net operating income expectations
|
25.6%-25.6% (25.6%)
|
|||||
|
Commercial real estate
|
|||||||||
|
Owner occupied
|
288
|
sales comparison
|
adjustment for estimated realizable value
|
14.6%-70.4% (34.0%)
|
|||||
|
Construction and land
|
750
|
sales comparison
|
adjustment for estimated realizable value
|
50.3%-69.9% (66.0%)
|
|||||
|
Total OREO
|
$
|
10,875
|
|||||||
PREMIER FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2019, 2018, and 2017
(Dollars in Thousands, Except Per Share Data)
NOTE 18 – FAIR VALUE (Continued)
Assets and liabilities measured at fair value on a non-recurring basis at December 31, 2018 are summarized below:
|
Fair Value Measurements at December 31, 2018 Using
|
||||||||||||||||
|
Dec 31, 2018
|
Quoted Prices in Active Markets for Identical Assets
(Level 1)
|
Significant Other Observable Inputs
(Level 2)
|
Significant Unobservable Inputs
(Level 3)
|
|||||||||||||
|
Assets:
|
||||||||||||||||
|
Impaired loans:
|
||||||||||||||||
|
Multifamily real estate
|
$
|
2,514
|
$
|
-
|
$
|
-
|
$
|
2,514
|
||||||||
|
Commercial real estate
|
||||||||||||||||
|
Owner occupied
|
1,786
|
-
|
-
|
1,786
|
||||||||||||
|
Non-owner occupied
|
2,514
|
-
|
-
|
2,514
|
||||||||||||
|
Commercial and industrial
|
144
|
-
|
-
|
144
|
||||||||||||
|
Construction and land
|
423
|
-
|
-
|
423
|
||||||||||||
|
Total impaired loans
|
$
|
7,381
|
$
|
-
|
$
|
-
|
$
|
7,381
|
||||||||
|
Other real estate owned:
|
||||||||||||||||
|
Residential real estate
|
$
|
984
|
$
|
-
|
$
|
-
|
$
|
984
|
||||||||
|
Multifamily real estate
|
10,307
|
-
|
-
|
10,307
|
||||||||||||
|
Commercial real estate
|
||||||||||||||||
|
Owner occupied
|
125
|
-
|
-
|
125
|
||||||||||||
|
Non-owner occupied
|
200
|
-
|
-
|
200
|
||||||||||||
|
Construction and land
|
150
|
-
|
-
|
150
|
||||||||||||
|
Total OREO
|
$
|
11,766
|
$
|
-
|
$
|
-
|
$
|
11,766
|
||||||||
Impaired loans, which are measured for impairment using the value of the collateral for collateral dependent loans, had a recorded investment of
$10,177 at December 31, 2018 with a valuation allowance of $2,796 resulting in a provision for loan losses of $1,731 for the year ended December 31, 2018.
Other real estate owned measured at fair value less costs to sell, had a net carrying amount of $11,766, which is made up of the outstanding balance
of $12,769, net of a valuation allowance of $1,003 at December 31, 2018, resulting in write downs of $519 during the year ended December 31, 2018.
PREMIER FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2019, 2018, and 2017
(Dollars in Thousands, Except Per Share Data)
NOTE 18 – FAIR VALUE (Continued)
The significant unobservable inputs related to assets and liabilities measured at fair value on a non-recurring basis at December 31, 2018 are
summarized below:
|
December 31, 2018
|
Valuation Techniques
|
Unobservable Inputs
|
Range (Weighted Avg)
|
||||||
|
Impaired loans:
|
|||||||||
|
Multifamily real estate
|
$
|
2,514
|
sales comparison
|
adjustment for estimated realizable value
|
45.3%-45.3% (45.3%)
|
||||
|
Commercial real estate
|
|||||||||
|
Owner occupied
|
1,786
|
sales comparison
|
adjustment for estimated realizable value
|
31.5%-50.6% (35.5%)
|
|||||
|
Non-owner occupied
|
2,514
|
income approach
|
adjustment for differences in net operating income expectations
|
16.1%-67.2% (54.1%)
|
|||||
|
Commercial and industrial
|
144
|
sales comparison
|
adjustment for estimated realizable value
|
0.0%-0.0% (0.0%)
|
|||||
|
Construction and land
|
423
|
sales comparison
|
adjustment for estimated realizable value
|
53.2%-83.6% (54.5%)
|
|||||
|
Total impaired loans
|
$
|
7,381
|
|||||||
|
Other real estate owned:
|
|||||||||
|
Residential real estate
|
$
|
984
|
sales comparison
|
adjustment for estimated realizable value
|
19.2%-59.8% (21.9%)
|
||||
|
Multifamily real estate
|
10,307
|
income approach
|
adjustment for differences in net operating income expectations
|
20.0%-20.0% (20.0%)
|
|||||
|
Commercial real estate
|
|||||||||
|
Owner occupied
|
125
|
sales comparison
|
adjustment for estimated realizable value
|
42.4%-42.4% (42.4%)
|
|||||
|
Non-owner occupied
|
200
|
sales comparison
|
adjustment for estimated realizable value
|
57.9%-57.9% (57.9%)
|
|||||
|
Construction and land
|
150
|
sales comparison
|
adjustment for estimated realizable value
|
50.3%-50.3% (50.3%)
|
|||||
|
Total OREO
|
$
|
11,766
|
|||||||
PREMIER FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2019, 2018, and 2017
(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 de minimis amount, also known as “courtesy overdraft protection”. The
aggregate unused portion of “overdraft protection” was $23,165 and $23,272 at December 31, 2019 and 2018.
At December 31, 2019 and 2018, the Banks had the following financial instruments whose approximate contract amounts represent credit risk:
|
2019
|
2018
|
|||||||
|
Standby letters of credit
|
$
|
2,419
|
$
|
4,424
|
||||
|
Commitments to extend credit
|
||||||||
|
Fixed
|
$
|
25,591
|
$
|
21,993
|
||||
|
Variable
|
120,185
|
118,328
|
||||||
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 3.00% to 21.00%. 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, 2019, 2018, and 2017
(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, 2019 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 to shareholders is dividends received from the subsidiary Banks. Banking regulations
limit the amount of dividends that may be paid without prior approval of regulatory agencies. Under these regulations, the amount of dividends that may be paid in any calendar year is limited to the current year’s net profits, as defined, combined
with the retained net profits of the preceding two years, subject to the capital requirements and additional restrictions as discussed below. During 2020 the Banks could, without prior approval, declare dividends to the Company of approximately
$11.4 million plus any 2020 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 tables). The final rules implementing the Basel Committee on Banking Supervision’s capital guidelines for U.S. Banks (Basel III rules) became effective for the Company and Banks on January 1, 2015 with full
compliance with all of the requirements being phased in over a multi-year schedule by January 1, 2019. The net unrealized gain or loss on available for sale securities is not included in computing regulatory capital. Management believes, as of
December 31, 2019, that 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, 2019, 2018, and 2017
(Dollars in Thousands, Except Per Share Data)
NOTE 21 - STOCKHOLDERS’ EQUITY (Continued)
The Company’s and the subsidiary Banks’ capital amounts and ratios as of December 31, 2019 are presented in the table below.
|
For Capital
|
To Be Well Capitalized
Under Prompt Corrective
|
|||||||||||||||||||||||
|
Actual
|
Adequacy Purposes
Including 2.5% Capital Conservation Buffer
|
Action Provisions
Including 2.5% Capital Conservation Buffer
|
||||||||||||||||||||||
|
2019
|
Amount
|
Ratio
|
Amount
|
Ratio
|
Amount
|
Ratio
|
||||||||||||||||||
|
Total Capital (to risk-weighted assets):
|
||||||||||||||||||||||||
|
Consolidated (1)
|
$
|
206,275
|
16.5
|
%
|
$
|
131,615
|
10.5
|
%
|
$
|
156,684
|
12.5
|
%
|
||||||||||||
|
Premier Bank, Inc.
|
144,793
|
15.8
|
96,248
|
10.5
|
114,581
|
12.5
|
||||||||||||||||||
|
Citizens Deposit Bank
|
47,466
|
14.1
|
35,387
|
10.5
|
42,128
|
12.5
|
||||||||||||||||||
|
Tier I Capital (to risk-weighted assets):
|
||||||||||||||||||||||||
|
Consolidated (1)
|
$
|
192,733
|
15.4
|
%
|
$
|
106,545
|
8.5
|
%
|
$
|
131,615
|
10.5
|
%
|
||||||||||||
|
Premier Bank, Inc.
|
133,609
|
14.6
|
77,915
|
8.5
|
96,248
|
10.5
|
||||||||||||||||||
|
Citizens Deposit Bank
|
45,108
|
13.4
|
28,647
|
8.5
|
35,387
|
10.5
|
||||||||||||||||||
|
Common Equity Tier I Capital
(to risk-weighted assets):
|
||||||||||||||||||||||||
|
Consolidated (1)
|
$
|
186,733
|
14.9
|
%
|
$
|
87,743
|
7.0
|
%
|
$
|
112,812
|
9.0
|
%
|
||||||||||||
|
Premier Bank, Inc.
|
133,609
|
14.6
|
64,166
|
7.0
|
82,499
|
9.0
|
||||||||||||||||||
|
Citizens Deposit Bank
|
45,108
|
13.4
|
23,592
|
7.0
|
30,332
|
9.0
|
||||||||||||||||||
|
Tier I Capital (to average assets):
|
||||||||||||||||||||||||
|
Consolidated (1)
|
$
|
192,733
|
11.3
|
%
|
$
|
68,422
|
4
|
%
|
$
|
85,528
|
5
|
%
|
||||||||||||
|
Premier Bank, Inc.
|
133,609
|
11.3
|
47,240
|
4
|
59,051
|
5
|
||||||||||||||||||
|
Citizens Deposit Bank
|
45,108
|
8.5
|
21,128
|
4
|
26,410
|
5
|
||||||||||||||||||
|
(1) The consolidated company is not subject to Prompt Corrective Action Provisions.
|
||||||||||||||||||||||||
An additional capital conservation buffer is now part of the minimum regulatory capital ratios under the regulatory framework for
prompt corrective action. The capital conservation buffer is measured as a percentage of risk weighted assets and was phased-in over a four-year period from 2016 thru 2019. As of January 1, 2019, the capital conservation buffer requirement is
2.50% of risk weighted assets over and above the regulatory minimum capital ratios for Tier 1 Capital to risk weighted assets, Total Capital to risk weighted assets and Common Equity Tier 1 Capital (CET1) to risk weighted assets. The consequences
of not meeting the capital conservation buffer thresholds include restrictions on the payment of dividends, restrictions on the payment of discretionary bonuses, and restrictions on the repurchase of common shares by the Company. The capital
ratios of the Affiliate Banks and the Company already exceed the new minimum capital ratios plus the fully phased-in 2.50% capital buffer requiring a CET1 Capital to risk-weighted assets ratio of at least 7.00%, a Tier 1 Capital to risk-weighted
assets ratio of at least 8.50% and a Total Capital to risk-weighted assets ratio of at least 10.50%. The Company’s capital conservation buffer was 8.46% at December 31, 2019 and 7.88% at December 31, 2018, well in excess of the fully phased-in
2.50% required in 2019.
PREMIER FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2019, 2018, and 2017
(Dollars in Thousands, Except Per Share Data)
NOTE 21 - STOCKHOLDERS’ EQUITY (Continued)
The Company’s and the subsidiary Banks’ capital amounts and ratios as of December 31, 2018 are presented in the table below.
|
To Be Well Capitalized
|
||||||||||||||||||||||||
|
For Capital
|
Under Prompt Corrective
|
|||||||||||||||||||||||
|
Actual
|
Adequacy Purposes (1)
|
Action Provisions
|
||||||||||||||||||||||
|
2018
|
Amount
|
Ratio
|
Amount
|
Ratio
|
Amount
|
Ratio
|
||||||||||||||||||
|
Total Capital (to risk-weighted assets):
|
||||||||||||||||||||||||
|
Consolidated (2)
|
$
|
190,770
|
15.9
|
%
|
$
|
96,110
|
8
|
%
|
$
|
120,138
|
10
|
%
|
||||||||||||
|
Premier Bank, Inc.
|
141,302
|
15.4
|
73,320
|
8
|
91,650
|
10
|
||||||||||||||||||
|
Citizens Deposit Bank
|
42,284
|
14.8
|
22,852
|
8
|
28,565
|
10
|
||||||||||||||||||
|
Tier I Capital (to risk-weighted assets):
|
||||||||||||||||||||||||
|
Consolidated (2)
|
$
|
177,032
|
14.7
|
%
|
$
|
72,083
|
6
|
%
|
$
|
96,110
|
8
|
%
|
||||||||||||
|
Premier Bank, Inc.
|
130,428
|
14.2
|
54,990
|
6
|
73,320
|
8
|
||||||||||||||||||
|
Citizens Deposit Bank
|
39,420
|
13.8
|
17,139
|
6
|
22,852
|
8
|
||||||||||||||||||
|
Common Equity Tier I Capital
(to risk-weighted assets):
|
||||||||||||||||||||||||
|
Consolidated (2)
|
$
|
171,032
|
14.2
|
%
|
$
|
54,062
|
4.5
|
%
|
$
|
78,090
|
6.5
|
%
|
||||||||||||
|
Premier Bank, Inc.
|
130,428
|
14.2
|
41,242
|
4.5
|
59,572
|
6.5
|
||||||||||||||||||
|
Citizens Deposit Bank
|
39,420
|
13.8
|
12,854
|
4.5
|
18,567
|
6.5
|
||||||||||||||||||
|
Tier I Capital (to average assets):
|
||||||||||||||||||||||||
|
Consolidated (2)
|
$
|
177,032
|
10.7
|
%
|
$
|
66,040
|
4
|
%
|
$
|
82,550
|
5
|
%
|
||||||||||||
|
Premier Bank, Inc.
|
130,428
|
10.8
|
48,368
|
4
|
60,460
|
5
|
||||||||||||||||||
|
Citizens Deposit Bank
|
39,420
|
9.0
|
17,571
|
4
|
21,964
|
5
|
||||||||||||||||||
|
(1) The ratios for capital adequacy purposes do not include the additional capital
conservation buffer.
(2) The consolidated company is not subject to Prompt Corrective Action Provisions.
|
||||||||||||||||||||||||
As of December 31, 2019 and 2018, 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 1 risk-based, Tier 1 leverage and Common Equity Tier 1 risk-based ratios
as set forth in the tables above. There are no conditions or events since that notification that management believes have changed the Banks’ categories.
PREMIER FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2019, 2018, and 2017
(Dollars in Thousands, Except Per Share Data)
|
Condensed Balance Sheets
|
||||||||
|
December 31
|
||||||||
|
2019
|
2018
|
|||||||
|
ASSETS
|
||||||||
|
Cash
|
$
|
13,184
|
$
|
8,759
|
||||
|
Investment in subsidiaries
|
232,509
|
215,888
|
||||||
|
Premises and equipment
|
622
|
271
|
||||||
|
Other assets
|
754
|
730
|
||||||
|
Total assets
|
$
|
247,069
|
$
|
225,648
|
||||
|
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
||||||||
|
Other liabilities
|
$
|
1,392
|
$
|
1,013
|
||||
|
Other borrowed funds
|
-
|
2,500
|
||||||
|
Subordinated debt
|
5,436
|
5,406
|
||||||
|
Total liabilities
|
6,828
|
8,919
|
||||||
|
Stockholders’ equity
|
||||||||
|
Common stock
|
133,795
|
133,248
|
||||||
|
Retained earnings
|
102,743
|
87,333
|
||||||
|
Accumulated other comprehensive income (loss)
|
3,703
|
(3,852
|
)
|
|||||
|
Total stockholders’ equity
|
240,241
|
216,729
|
||||||
|
Total liabilities and stockholders’ equity
|
$
|
247,069
|
$
|
225,648
|
||||
PREMIER FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2019, 2018, and 2017
(Dollars in Thousands, Except Per Share Data)
NOTE 22 - PARENT COMPANY FINANCIAL STATEMENTS (Continued)
|
Condensed Statement of Operations
|
||||||||||||
|
Years Ended December 31
|
||||||||||||
|
2019
|
2018
|
2017
|
||||||||||
|
Income
|
||||||||||||
|
Dividends from subsidiaries
|
$
|
19,050
|
$
|
18,740
|
$
|
12,565
|
||||||
|
Interest and dividend income
|
7
|
7
|
12
|
|||||||||
|
Other income
|
2,277
|
2,163
|
2,126
|
|||||||||
|
Total income
|
21,334
|
20,910
|
14,703
|
|||||||||
|
Expenses
|
||||||||||||
|
Interest expense on other borrowings
|
30
|
156
|
285
|
|||||||||
|
Interest expense on subordinated debt
|
369
|
352
|
295
|
|||||||||
|
Salaries and employee benefits
|
3,582
|
3,252
|
3,399
|
|||||||||
|
Occupancy and equipment expenses
|
438
|
394
|
299
|
|||||||||
|
Professional fees
|
443
|
689
|
303
|
|||||||||
|
Other expenses
|
591
|
659
|
387
|
|||||||||
|
Total expenses
|
5,453
|
5,502
|
4,968
|
|||||||||
|
Income before income taxes and equity in undistributed income of subsidiaries
|
15,881
|
15,408
|
9,735
|
|||||||||
|
Income tax (benefit)
|
(699
|
)
|
(723
|
)
|
(1,012
|
)
|
||||||
|
Income before equity in undistributed income of subsidiaries
|
16,580
|
16,131
|
10,747
|
|||||||||
|
Equity in undistributed income of subsidiaries
|
7,616
|
4,037
|
4,072
|
|||||||||
|
Net income
|
$
|
24,196
|
$
|
20,168
|
$
|
14,819
|
||||||
PREMIER FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2019, 2018, and 2017
(Dollars in Thousands, Except Per Share Data)
NOTE 22 - PARENT COMPANY FINANCIAL STATEMENTS (Continued)
|
Condensed Statement of Cash Flows
|
||||||||||||
|
Years Ended December 31
|
||||||||||||
|
2019
|
2018
|
2017
|
||||||||||
|
Cash flows from operating activities
|
||||||||||||
|
Net income
|
$
|
24,196
|
$
|
20,168
|
$
|
14,819
|
||||||
|
Adjustments to reconcile net income to net cash from operating activities
|
||||||||||||
|
Depreciation
|
78
|
93
|
89
|
|||||||||
|
Amortization
|
30
|
30
|
33
|
|||||||||
|
Stock compensation expense
|
301
|
252
|
217
|
|||||||||
|
Equity in undistributed earnings of subsidiaries
|
(7,616
|
)
|
(4,037
|
)
|
(4,072
|
)
|
||||||
|
Change in other assets
|
(24
|
)
|
(181
|
)
|
(123
|
)
|
||||||
|
Change in other liabilities
|
13
|
(43
|
)
|
243
|
||||||||
|
Net cash from operating activities
|
16,978
|
16,282
|
11,206
|
|||||||||
|
Cash flows from investing activities
|
||||||||||||
|
Investments in nonbank subsidiaries
|
-
|
-
|
(250
|
)
|
||||||||
|
Repayment of investments in nonbank subsidiaries
|
50
|
-
|
-
|
|||||||||
|
Investments in subsidiaries
|
(1,500
|
)
|
-
|
-
|
||||||||
|
Acquisition of subsidiary, net of cash received
|
-
|
(5,212
|
)
|
-
|
||||||||
|
Purchases of fixed assets, net of proceeds from asset sales
|
(63
|
)
|
(80
|
)
|
(80
|
)
|
||||||
|
Net cash from investing activities
|
(1,513
|
)
|
(5,292
|
)
|
(330
|
)
|
||||||
|
Cash flows from financing activities
|
||||||||||||
|
Cash dividends paid to shareholders
|
(8,786
|
)
|
(7,805
|
)
|
(6,398
|
)
|
||||||
|
Cash in lieu of fractional shares
|
-
|
(13
|
)
|
-
|
||||||||
|
Proceeds from stock option exercises
|
246
|
193
|
317
|
|||||||||
|
Payments on other borrowed funds
|
(2,500
|
)
|
(2,500
|
)
|
(3,600
|
)
|
||||||
|
Net cash from financing activities
|
(11,040
|
)
|
(10,125
|
)
|
(9,681
|
)
|
||||||
|
Net change in cash and cash equivalents
|
4,425
|
865
|
1,195
|
|||||||||
|
Cash and cash equivalents at beginning of year
|
8,759
|
7,894
|
6,699
|
|||||||||
|
Cash and cash equivalents at end of year
|
$
|
13,184
|
$
|
8,759
|
$
|
7,894
|
||||||
PREMIER FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2019, 2018, and 2017
(Dollars in Thousands, Except Per Share Data)
|
Interest
Income
|
Net Interest
Income
|
Net
Income
|
Earnings Per Share
|
|||||||||||||||||
|
Basic
|
Diluted
|
|||||||||||||||||||
|
2019
|
||||||||||||||||||||
|
First Quarter
|
$
|
19,064
|
$
|
16,835
|
$
|
6,176
|
$
|
0.42
|
$
|
0.42
|
||||||||||
|
Second Quarter
|
19,106
|
16,655
|
5,859
|
0.40
|
0.40
|
|||||||||||||||
|
Third Quarter
|
19,308
|
16,778
|
6,267
|
0.43
|
0.43
|
|||||||||||||||
|
Fourth Quarter
|
19,100
|
16,633
|
5,894
|
0.40
|
0.40
|
|||||||||||||||
|
2018
|
||||||||||||||||||||
|
First Quarter
|
$
|
15,799
|
$
|
14,635
|
$
|
5,133
|
$
|
0.38
|
$
|
0.38
|
||||||||||
|
Second Quarter
|
15,753
|
14,419
|
4,375
|
0.33
|
0.32
|
|||||||||||||||
|
Third Quarter
|
16,001
|
14,509
|
5,021
|
0.38
|
0.37
|
|||||||||||||||
|
Fourth Quarter
|
18,268
|
16,191
|
5,639
|
0.39
|
0.39
|
|||||||||||||||
In 2019, interest income increased steadily largely due to increases in interest income on loans and short-term investments. Interest income in
the first quarter of 2019 included approximately $719 of income recognized from deferred interest and discounts recognized on loans that paid off during the quarter. The changes in interest income resulted in similar changes in net interest income
in 2019. However, interest expense increased steadily in each quarter, peaking in the third quarter, largely due to higher rates paid on deposits. Also contributing to an overall increase in interest income and net interest income in the fourth
quarter of 2019, when compared to the quarterly income amounts in 2018, was the acquisition of the First National Bank of Jackson on October 25, 2019. The interest income from the loans and investments and interest expense on deposits and
borrowings of Jackson are included in the quarterly financial results beginning in the fourth quarter of 2019. Earnings per share amounts were consistent with the changes in net income as
average shares outstanding increased only slightly during 2019.
In 2018, interest income increased steadily largely due to increases in investment
securities purchased. Interest income in the first quarter of 2018 included approximately $533 of income recognized from deferred interest and discounts recognized on loans that paid off during the quarter. The changes in interest income resulted
in similar changes in net interest income in 2018. However, interest expense increased steadily in each quarter largely due to higher rates paid on deposits. Also contributing to an overall increase in interest income and net interest income in
the fourth quarter of 2018, was the acquisition of the First Bank on October 12, 2018. The interest income from the loans and investments and interest expense on deposits and borrowings of First Bank are included in the quarterly financial results
beginning in the fourth quarter of 2018. Earnings per share amounts were consistent with the changes in net income as average shares outstanding increased only slightly during the first three quarters of 2018. The fourth quarter earnings per
share was impacted by the additional shares added from the acquisition of First Bank.
PREMIER FINANCIAL BANCORP, INC.
FORM 10-K
December 31, 2019
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.
Management’s report on internal controls over financial reporting is included in Item 8 above.
C. Changes in Internal Controls over
Financial Reporting
Changes in internal controls over financial reporting is included in Item 8 above.
None
PREMIER FINANCIAL BANCORP, INC.
FORM 10-K
December 31, 2019
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, 2019
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 15.
PREMIER FINANCIAL BANCORP, INC.
FORM 10-K
December 31, 2019
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Exhibit
Number
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Description of Document
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| ***10.1 | ||
| ***10.2 | ||
| ***10.3 | ||
PREMIER FINANCIAL BANCORP, INC.
FORM 10-K
December 31, 2019
|
Exhibit
Number
|
Description of Document
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|
| ***10.10 |
||
PREMIER FINANCIAL BANCORP, INC.
FORM 10-K
December 31, 2019
|
Exhibit
Number
|
Description of Document
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|
|
*** Denotes executive compensation plans and arrangements.
|
||
PREMIER FINANCIAL BANCORP, INC.
FORM 10-K
December 31, 2019
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.
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PREMIER FINANCIAL BANCORP, INC.
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|
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By: /s/ Robert W. Walker, President
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Robert W. Walker, President
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Date: March 12, 2020
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PREMIER FINANCIAL BANCORP, INC.
FORM 10-K
December 31, 2019
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.
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/s/ Robert W. Walker
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Principal Executive and Director
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March 12, 2020
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Robert W. Walker
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||
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/s/ Brien M. Chase
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Principal Financial and Accounting
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March 12, 2020
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Brien M. Chase
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Officer
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/s/ Toney K. Adkins
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Director
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March 04, 2020
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Toney K. Adkins
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/s/ Harry M. Hatfield
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Director
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March 03, 2020
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Harry M. Hatfield
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/s/ Lloyd G. Jackson II
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Director
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March 03, 2020
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Lloyd G. Jackson II
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/s/ Philip E. Cline
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Director
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March 04, 2020
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Philip E. Cline
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/s/ Keith F. Molihan
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Director
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March 06, 2020
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Keith F. Molihan
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/s/ Marshall T. Reynolds
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Chairman of the Board
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March 03, 2020
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Marshall T. Reynolds
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/s/ Neal Scaggs
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Director
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March 03, 2020
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Neal Scaggs
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/s/ Thomas W. Wright
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Director
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March 03, 2020
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Thomas W. Wright
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