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PFBI > SEC Filings for PFBI > Form 10-Q on 7-Nov-2013All Recent SEC Filings

Show all filings for PREMIER FINANCIAL BANCORP INC

Form 10-Q for PREMIER FINANCIAL BANCORP INC


7-Nov-2013

Quarterly Report


MANAGEMENT'S DISCUSSION AND ANALYSIS
SEPTEMBER 30, 2013

Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations

FORWARD-LOOKING STATEMENTS

Management's discussion and analysis contains forward-looking statements that are provided to assist in the understanding of anticipated future financial performance. However, such performance involves risks and uncertainties, and there are certain important factors that may cause actual results to differ materially from those anticipated. These important factors include, but are not limited to, economic conditions (both generally and more specifically in the markets in which Premier operates), competition for Premier's customers from other providers of financial services, government legislation and regulation (which changes from time to time), changes in interest rates, Premier's ability to originate quality loans, collect delinquent loans and attract and retain deposits, the impact of Premier's growth, Premier's ability to control costs, and new accounting pronouncements, all of which are difficult to predict and many of which are beyond the control of Premier. The words "may," "could," "should," "would," "will," "believe," "anticipate," "estimate," "expect," "intend," "plan," "project," "predict," "continue" and similar expressions are intended to identify forward-looking statements.

A. Results of Operations

A financial institution's primary sources of revenue are generated by interest income on loans, investments and other earning assets, while its major expenses are produced by the funding of these assets with interest bearing liabilities. Effective management of these sources and uses of funds is essential in attaining a financial institution's optimal profitability while maintaining a minimum amount of interest rate risk and credit risk.

Net income for the nine months ended September 30, 2013 was $9,539,000, or $1.07 per diluted share, compared to net income of $7,333,000, or $0.90 per diluted share, for the nine months ended September 30, 2012. The increase in net income in 2013 is largely due to a decrease in total interest expense, a decrease in the provision for loan losses, and decreases in staff costs, occupancy and equipment expenses, professional fees and collection costs. These decreases in expenses more than offset decreases in interest income and non-interest income. The annualized returns on average common shareholders' equity and average assets were approximately 8.85% and 1.13% for the nine months ended September 30, 2013 compared to 7.55% and 0.85% for the same period in 2012.

Net income for the three months ended September 30, 2013 was $3,926,000, or $0.44 per diluted share, compared to net income of $2,411,000, or $0.37 per diluted share, for the three months ended September 30, 2013. The increase in net income in 2013 is largely due to an increase in total interest income, a decrease in total interest expense, a decrease in the provision for loan losses, and decreases in non-interest expenses which more than offset a decrease in non-interest income. The annualized returns on common shareholders' equity and average assets were approximately 11.14% and 1.42% for the three months ended September 30, 2013 compared to 9.26% and 0.85% for the same period in 2012.


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PREMIER FINANCIAL BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
SEPTEMBER 30, 2013

While not included in Premier's net income in 2012, the earnings per share amounts reported for the nine months and three months ended September 30, 2012 were enhanced by the inclusion of approximately $904,000 of capital preserved on the redemption of 10,252 shares of Premier's Series A Preferred Stock purchased from the U.S. Treasury on August 10, 2012. As more fully discussed in Note
5 , Premier sought and obtained regulatory permission to participate in the modified Dutch auction held by the U.S. Treasury to liquidate its investment in Premier's Series A Preferred Stock. Premier successfully bid to repurchase 10,252 shares of the 22,252 outstanding shares. At the auction's closing price of $901.03 per share, Premier was able to save approximately $1,015,000 of cash versus redeeming the Series A Preferred Stock at the liquidation preference of $1,000 per share. The capital effect of the cash savings were reduced by approximately $111,000 of accelerated discount accretion on the 10,252 shares upon redemption.

Net interest income for the nine months ended September 30, 2013 totaled $33.26 million, down $483,000, or 1.4%, from the $33.74 million of net interest income earned in the first nine months of 2012, as the decrease in total interest income exceeded the decrease in total interest expense. Interest income in the first nine months of 2013 decreased by $1.83 million, or 4.7%, largely due to a decrease in interest and fees on loans. In the first nine months of 2013, interest income on loans decreased by $1.04 million, or 3.1%, compared to the same period in 2012. In the first nine months of 2012, interest income on loans included $2.22 million from the recognition of deferred interest and purchase discounts on non-accrual loans liquidated during the first nine months of the year, primarily in the first quarter of 2012. During the first nine months of 2013, interest income on loans included $1.93 million from the recognition of deferred interest and purchase discounts on loans liquidated during the year. The timing of these liquidations is difficult to predict, which creates fluctuations in reported loan interest income. Otherwise, interest income on loans would have decreased by $742,000 in the first nine months of 2013 due to lower yields on a higher average balance of loans outstanding. Interest earned on investments decreased by $791,000, or 14.3%, due to lower average yields on a lower average volume of investments. Interest earned on federal funds sold and interest bearing bank balances increased by $5,000, largely due to a slightly higher yield on a lower average volume of assets held in this category.

Partially offsetting the decrease in interest income in the first nine months of 2013 was $1.35 million of interest expense savings. Interest expense decreased in total during the first nine months of 2013 by $1.35 million, or 26.9%, when compared to the same nine months of 2012. Interest expense on deposits decreased by $1.19 million, or 27.4%, largely due to a continuing decrease in the average rates paid on deposits combined with a lower average balance of interest-bearing deposits outstanding. Interest expense on repurchase agreements and other short-term borrowings, including short-term FHLB advances, decreased by $42,000, largely due to lower rates paid and a lower average balance outstanding. All long-term FHLB advances were repaid in 2012 saving $41,000 of interest expense in the first nine months of 2013 compared to 2012. Interest expense on other borrowings decreased by $76,000, or 13.3%, in the first nine months of 2013 compared to the first nine months of 2012, largely due to a decrease in the average amount of borrowings outstanding.


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PREMIER FINANCIAL BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
SEPTEMBER 30, 2013

The Federal Reserve System Board of Governors' policy to maintain the federal funds rate at nearly zero, coupled with the U.S. Treasury actively buying investment securities, has significantly reduced the yield on much of Premier's earning assets, including investments, federal funds sold and variable rate loans. Premier has tried to offset the lower interest income by lowering the rates paid on its deposits and repurchase agreements with customers. Premier's net interest margin during the first nine months of 2013 was 4.33% compared to 4.32% for the same period in 2012. A portion of the interest income on loans is the result of recognizing into interest income the remaining fair value discounts on notes acquired via a business acquisition if that note was paid-off during the period. These events cannot be predicted with certainty and may positively or negatively affect the comparison of interest income on loans in future periods.

Additional information on Premier's net interest income for the first nine months of 2013 and 2012 is contained in the following table.

                                               PREMIER FINANCIAL BANCORP, INC.
                                             AVERAGE CONSOLIDATED BALANCE SHEETS
                                              AND NET INTEREST INCOME ANALYSIS

                                  Nine Months Ended Sept 30, 2013                     Nine Months Ended Sept 30, 2012
                             Balance            Interest      Yield/Rate         Balance            Interest      Yield/Rate
Assets
Interest Earning Assets
Federal funds sold and
other                     $       52,367       $      112            0.29 %   $       59,933       $      107            0.24 %
Securities available
for sale
Taxable                          263,657            4,611            2.33            295,234            5,360            2.42
Tax-exempt                         5,570              120            4.35              7,585              162            4.31
Total investment
securities                       269,227            4,731            2.37            302,819            5,522            2.47
Total loans                      709,119           32,081            6.05            679,617           33,123            6.49
Total interest-earning
assets                         1,030,713           36,924            4.80 %        1,042,369           38,752            4.96 %
Allowance for loan
losses                           (12,211 )                                           (10,034 )
Cash and due from banks           26,691                                              28,310
Other assets                      69,139                                              74,523
Total assets              $    1,114,332                                      $    1,135,168

Liabilities and Equity
Interest-bearing
liabilities
Interest-bearing
deposits                  $      736,632            3,139            0.57     $      747,294            4,325            0.77
Short-term borrowings             14,000               27            0.26             20,431               70            0.46
FHLB advances                      1,136                1            0.12              2,496               41            2.19
Other borrowings                  15,227              497            4.36             17,255              573            4.42
Total interest-bearing
liabilities                      766,995            3,664            0.64 %          787,476            5,009            0.85 %
Non-interest bearing
deposits                         196,862                                             195,959
Other liabilities                  3,796                                               4,147
Shareholders' equity             146,679                                             147,586
Total liabilities and
equity                    $    1,114,332                                      $    1,135,168

Net interest earnings                          $   33,260                                          $   33,743
Net interest spread                                                  4.16 %                                              4.11 %
Net interest margin                                                  4.33 %                                              4.32 %


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PREMIER FINANCIAL BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
SEPTEMBER 30, 2013

Additional information on Premier's net interest income for the third quarter of 2013 and third quarter of 2012 is contained in the following table.

                                                PREMIER FINANCIAL BANCORP, INC.
                                              AVERAGE CONSOLIDATED BALANCE SHEETS
                                               AND NET INTEREST INCOME ANALYSIS

                                 Three Months Ended Sept. 30, 2013                    Three Months Ended Sept. 30, 2012
                              Balance            Interest      Yield/Rate          Balance            Interest      Yield/Rate
Assets
Interest Earning Assets
Federal funds sold and
other                     $        50,689       $       40            0.32 %   $        48,392       $       31            0.25 %
Securities available
for sale
Taxable                           249,124            1,501            2.41             302,362            1,740            2.30
Tax-exempt                          4,834               36            4.51               7,462               50            4.06
Total investment
securities                        253,958            1,537            2.45             309,824            1,790            2.34
Total loans                       720,736           11,615            6.39             684,420           10,759            6.24
Total interest-earning
assets                          1,025,383           13,192            5.12 %         1,042,636           12,580            4.80 %
Allowance for loan
losses                            (12,313 )                                            (10,024 )
Cash and due from banks            26,494                                               27,560
Other assets                       69,606                                               72,396
Total assets              $     1,109,170                                      $     1,132,568

Liabilities and Equity
Interest-bearing
liabilities
Interest-bearing
deposits                  $       730,984              994            0.54     $       750,257            1,353            0.72
Short-term borrowings              12,192                9            0.29              18,666               22            0.47
FHLB advances                       3,371                1            0.12                   1                -            0.00
Other borrowings                   14,672              161            4.35              16,806              188            4.44
Total interest-bearing
liabilities                       761,219            1,165            0.61 %           785,730            1,563            0.79 %
Non-interest bearing
deposits                          196,949                                              196,143
Other liabilities                   4,065                                                4,072
Shareholders' equity              146,937                                              146,623
Total liabilities and
equity                    $     1,109,170                                      $     1,132,568

Net interest earnings                           $   12,027                                           $   11,017
Net interest spread                                                   4.51 %                                               4.01 %
Net interest margin                                                   4.67 %                                               4.21 %

Net interest income for the quarter ending September 30, 2013 totaled $12.03 million, up $1.01 million, or 9.2%, from the $11.02 million of net interest income earned in the third quarter of 2012. Interest income in the third quarter of 2013 increased by $612,000, or 4.9%, as an increase in interest income on loans more than offset a decrease in interest income on investments. Interest income on loans increased by $856,000, or 8.0%. In the third quarter of 2013, interest income on loans included $1.16 million from the recognition of deferred interest and purchase discounts on loans liquidated during the quarter compared to $641,000 of deferred interest and purchase discounts recognized on loans liquidated during the third quarter of 2012. When a loan that has been discounted as a result being purchased in a business acquisition is paid-off, any remaining discount is recognized as interest income on loans at that time. Similarly, when a loan has interest deferred because it has been placed on non-accrual status, any remaining deferred interest is recognized as interest income when the loan is paid-off. These events cannot be predicted with certainty and may positively or negatively affect interest income on loans in future periods, which creates fluctuations in reported loan interest income.


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PREMIER FINANCIAL BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
SEPTEMBER 30, 2013

Excluding the recognition of purchase discounts and deferred interest, interest income on loans increased by $340,000 in the third quarter of 2013 when compared to the third quarter of 2012 largely due to a higher average balance of loans outstanding. Interest earned on investments decreased by $253,000, or 14.1%, largely due a lower average volume of investments although at higher average yields. Average investment balances have decreased as maturing funds have been placed into loans or used to satisfy deposit withdrawals. Interest earned on federal funds sold and interest bearing bank balances increased by $9,000, due to higher yields on a higher average volume of assets held in this category.

Also adding to the increase in net interest income, interest expense decreased in total during the third quarter of 2013 by $398,000, or 25.5%, when compared to the same quarter of 2012. Interest expense on deposits decreased by $359,000, or 26.5%, largely due to a continuing decrease in the average rates paid combined with a lower average balance of interest-bearing deposits outstanding. Interest expense on repurchase agreements and other short-term borrowings decreased by $13,000, again largely due to a decrease in the interest rates paid combined with a lower average balance outstanding. Interest expense on FHLB advances increased by $1,000 due to short-term FHLB borrowings incurred during the third quarter of 2013. Interest expense on other borrowings decreased by $27,000, or 14.4%, in the third quarter of 2013 compared to the third quarter of 2012, largely due to a decrease in the average amount of borrowings outstanding. The Board of Governors' policy to reduce the federal funds rate to nearly zero, coupled with the U.S. Treasury actively buying investment securities, has significantly reduced the yield on much of Premier's earning assets, including investments, federal funds sold and variable rate loans. New fixed rate loans are also pricing lower than loans originated in prior periods. Premier has tried to offset the lower interest earning yields by lowering the rates paid on its deposits and repurchase agreements with customers. During the third quarter of 2013, the decrease in rates paid on deposits along with the increase in interest income on loans from recognizing the purchase discount and deferred interest income on loans liquidated during the quarter helped to improve Premier's overall net interest margin. Premier's net interest margin during the third quarter of 2013 was 4.67% compared to 4.21% for the same period of 2012.

Non-interest income decreased by $101,000, or 2.0%, to $4,984,000 for the first nine months of 2013 compared to the same period of 2012. This decrease includes a $53,000 decrease in the net gains on disposition of investment securities. Otherwise, service charges on deposit accounts decreased by $103,000, or 3.9%, and electronic banking income (income from debit/credit cards, ATM fees and internet banking charges) decreased by $11,000, or 0.7%. The decrease in service charges on deposit accounts is largely due to a decrease in customer overdraft activity as customers reduced their propensity to incur overdraft charges as they managed their checking accounts more closely. These decreases were partially offset by a $9,000, or 4.5%, increase in income from selling mortgages in the secondary market and a $57,000 increase in income from other sources, primarily miscellaneous loan and extension fees. The increase in secondary market mortgage income is largely due to the stabilization of requirements for customers to qualify for mortgages that are eligible for sale in the secondary market and an increase in customer demand for refinancing existing mortgage loans during the first quarter of 2013 compared to one-year ago.

For the quarter ending September 30, 2013, non-interest income decreased by $178,000 to $1,758,000 compared to the $1,936,000 recognized during the same quarter of 2012. This decrease includes a $201,000 decrease in the net gains on disposition of investment securities in the third quarter of 2012 compared to the third quarter of 2012. Otherwise, service charges on deposit accounts decreased by $36,000, or 3.9%, and secondary market mortgage income decreased by $4,000, or 5.4%. These decreases were more than offset by a $12,000, or 2.4%, increase in electronic banking income and a $51,000 increase in income from other sources, primarily miscellaneous loan and extension fees.


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PREMIER FINANCIAL BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
SEPTEMBER 30, 2013

Non-interest expenses for the first nine months of 2013 totaled $22.78 million, or 2.73% of average assets on an annualized basis, compared to $24.56 million, or 2.89% of average assets for the same period of 2012. The $1.79 million decrease in non-interest expenses in 2013 when compared to the first nine months of 2012 is largely due to a $662,000, or 63.5% decrease in loan collection expenses, namely foreclosure and other loan collection expenses associated with the liquidation of non-accrual loans during the first quarter of 2012. Also contributing to the decrease in non-interest expenses during the first nine months of 2013 was a $363,000, or 3.1%, decrease in staff costs following the decrease in the number of employees resulting from the internal bank mergers to form Premier Bank, Inc. in 2011 and to consolidate the Kentucky and Ohio operations under Citizens Deposit Bank and Trust in the second half of 2012. Other decreases in non-interest expense during the first nine months of 2013 include a $193,000, or 5.6%, decrease in occupancy and equipment expense, an $84,000, or 3.2%, decrease in data processing costs, a $108,000, or 11.9%, decrease in professional fees, a $123,000, or 14.0%, decrease in expenses and writedowns on other real estate owned (OREO), and a $64,000, or 12.3%, decrease in core deposit amortization expense. Occupancy expense decreased largely due to lower rent expense and leasehold improvement depreciation from the consolidation of rented facilities. Equipment expense decreased largely due to lower software subscription expenditures and lower depreciation and maintenance expense, partially offset by the write-off of obsolete equipment. Data processing costs decreased due to lower amounts paid for electronic banking processing and the processing of checks and other items. Professional fees decreased as a result of lower accounting and audit costs partially offset by an increase in legal fees and consulting costs. The decrease in net expenses on OREO is largely due to lower operating and maintenance expenses and lower OREO writedowns in 2013 partially offset by a decrease in rental income earned from an OREO property that was sold in late 2012 and lower gains on the sale of OREO in 2013. Core deposit amortization expense decreased as Premier utilizes an accelerated method to amortize its core deposit intangible asset. These and other expense decreases more than offset a $41,000, or 7.0%, increase in FDIC insurance expense.

Non-interest expenses for the third quarter of 2013 totaled $7.58 million, or 2.71% of average assets on an annualized basis, compared to $7.90 million, or 2.78% of average assets for the same period of 2013. The $325,000 decrease in non-interest expenses in the third quarter of 2013 when compared to the third quarter of 2012 is largely due to a $212,000, or 57.0%, decrease in expenses and writedowns on OREO as lower operating costs in 2013 more than offset a reduced amount of net gains upon the sale of OREO when compared to the third quarter of 2012. Other decreases in non-interest expense during the third quarter of 2013 include a $73,000, or 6.4%, decrease in occupancy and equipment expense, a $38,000, or 20.3%, decrease in taxes not on income, a $75,000, or 39.7%, decrease in loan collection expenses and a $21,000, or 12.1%, decrease in core deposit amortization expense. Loan collection expenses decreased largely due to lower costs incurred in the Company's Washington market. Taxes not on income decreased largely due to decreases in amounts subject to Ohio's and West Virginia's franchise tax partially offset by an increase in Virginia's franchise tax. These expense decreases more than offset an $110,000 increase in FDIC insurance expense, a $31,000, or 9.5%, increase in professional fees and a $21,000, or 0.6%, increase in staff costs. FDIC insurance expense in the third quarter of 2013 was higher than the amount


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PREMIER FINANCIAL BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
SEPTEMBER 30, 2013

reported in the third quarter of 2012 as a portion of the third quarter 2012 FDIC insurance expense included adjustments of expense estimates recorded during the previous quarters resulting from the reduced FDIC insurance cost for newly merged Citizens Deposit Bank versus the historical FDIC insurance costs of the three subsidiary banks Premier merged together in August 2012. Professional fees increased as higher legal fees were only partially offset by lower accounting and audit costs.

Income tax expense was $5.38 million for the first nine months of 2013 compared to $3.97 million for the first nine months of 2012. The effective tax rate for the nine months ended September 30, 2013 was 36.1% compared to 35.1% for the same period of 2012. For the quarter ending September 30, 2013, income tax expense was $2.23 million, a 36.2% effective tax rate, compared to $1.38 million (a 36.4% effective tax rate) for the same period of 2012. The increase in income tax expense can be primarily attributed to the increase in pre-tax income detailed above, while the increases in the effective income tax rate are largely due to increases in the amount of income subject to state income taxes and the Company's taxable income reaching the phase-in threshold of the 35% Federal corporate income tax rate.


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PREMIER FINANCIAL BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
SEPTEMBER 30, 2013

B. Financial Position

Total assets at September 30, 2013 decreased by $8.9 million to just under $1.112 billion from the $1.121 billion at December 31, 2012. However, earning assets decreased by only $7.1 million from the $1.031 billion at year-end 2012 to end the quarter at $1.023 billion. The decrease in total assets was largely due to a decrease in securities available for sale and federal funds sold partially offset by an increase in net loans outstanding and interest bearing . . .

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