Premier Financial Corp. Announces Record Quarterly Earnings for Second Quarter 2020

Premier Financial Corp. (NASDAQ: PFC) (“Premier” or the “Company”) announced today second quarter results including solid core profitability and a 15.8% increase in its year-over-year dividend. On a GAAP basis, net income for the second quarter of 2020 was $29.1 million, or $0.78 per diluted common share, compared to income of $12.2 million, or $0.61 per diluted common share, for the second quarter of 2019. Net income for the six months ended June 30, 2020, was $6.6 million, or $0.19 per diluted common share, compared to $23.7 million, or $1.19 per diluted common share, for the six months ended June 30, 2019. The six months’ year-over-year comparison is substantially impacted by the acquisition of United Community Financial Corp. (“UCFC”) with the current year’s provision expense of $48.2 million, which included $25.9 million related to acquisition accounting for an after-tax cost of $20.5 million, or $0.59 per diluted common share. The first half of 2019 included a provision expense of $495,000, which had an after-tax cost of $391,000, or $0.02 per diluted common share, and no acquisition impact. Additionally, the current year’s six month results include the impact of $13.6 million of acquisition-related charges, which had an after-tax cost of $11.1 million, or $0.32 per diluted common share. Excluding the impact of the acquisition-related provision and charges, earnings for the first half of 2020 were $38.2 million, or $1.11 per diluted common share.

“Strong non-interest income performance and operating efficiency led to record quarterly results for the second quarter,” said Donald P. Hileman, CEO of Premier. “We are very pleased by our ability to generate solid profitability for our shareholders while supporting the communities we serve. We happily participated in the PPP program while also conducting loan deferrals for both commercial and retail customers to help them during this difficult and uncertain time.”

Integration update

As previously announced, on January 31, 2020, the Company completed the strategic merger of equals with UCFC under which UCFC merged into Premier in a stock-for-stock transaction. The year-over-year comparison of Company results is substantially impacted by the UCFC merger, with 2020 second quarter and year-to-date results including three and five months of operations from UCFC, respectively, compared to none for the comparable periods in 2019. In June, the Company launched its newly designed logo and brand identity for Premier Financial Corp. and Premier Bank. The new tagline “Powered by People” honors the longstanding commitment both organizations have to their customers, communities and employees. In July, Premier Bank successfully completed its core systems conversion. The integration of teams, systems and processes for the combined organization is occurring as expected.

“We achieved a significant milestone with the successful completion of our core systems conversion on July 13, 2020,” said Gary M. Small, President of Premier. “We are very proud of the hard work and dedication exhibited by the Premier team to help us accomplish our integration goals especially during a pandemic. It truly shows how we are ‘Powered by People’.”

Business Client Support Efforts

As a part of the CARES Act, the Small Business Administration (“SBA”) created the Paycheck Protection Program (“PPP”) to provide small businesses with loans as a direct incentive to keep their workers on the payroll. Premier Bank actively participated in the PPP program for clients and made 2,758 loans for a total of $434 million as of June 30, 2020. Total gross fees for these loans totaled $14.5 million. We recognized $823,000 as loan interest income during the second quarter.

Net interest income up compared to second quarter of 2019

Net interest income of $54.3 million in the second quarter of 2020 was up from $29.0 million in the second quarter of 2019. The increase over the prior year’s second quarter was attributable to organic growth and three months of income from UCFC compared to none in 2019. Net interest margin was 3.51% for the second quarter of 2020, down from 3.78% in the first quarter of 2020, and down from 4.03% in the second quarter of 2019. Yield on interest earning assets decreased to 4.04% in the second quarter of 2020, down 50 basis points from 4.54% in the first quarter of 2020. Total cost of funds decreased 26 basis points in the second quarter of 2020 to 0.55% from 0.81% in the first quarter of 2020 while the total cost of interest-bearing liabilities decreased 29 basis points to 0.72% from 1.01%. The 2020 second quarter results include the impact of acquisition marks and related accretion for the UCFC acquisition. Interest income includes $2.2 million of accretion and interest expense includes $1.5 million of accretion, which combined added 24 basis points of net interest margin. The second quarter results also include the impact of PPP loans. Interest income includes $1.6 million on average balances of $298.2 million, which reduced net interest margin by six basis points. Excluding the impact of acquisition marks and PPP loans, net interest margin would be 3.34% for the second quarter of 2020 compared to 3.68% for first quarter of 2020 excluding the impact of acquisition marks.

“We are pleased with the continued growth of net interest income despite the margin compression,” said Hileman. “The PPP loans drove loan growth in the quarter and represented a significant effort by the team. While the low-yielding nature of these assets reduce margin, we recognize the needs of our clients and communities and are glad to have been able to provide support through this program.”

Non-interest income up from second quarter of 2019

Premier’s non-interest income in the second quarter of 2020 was $23.0 million compared with $10.5 million in the second quarter of 2019. Results for the second quarter of 2020 included three months of income from UCFC compared to none in 2019.

Mortgage banking income increased to $9.9 million in the second quarter of 2020 from $2.1 million in the second quarter of 2019. Gains from the sale of mortgage loans increased to $11.5 million in the second quarter of 2020 from $1.8 million in the second quarter of 2019. Saleable originations were $305.7 million in the second quarter of 2020 compared to $66.4 million in the second quarter of 2019. Mortgage loan servicing revenue increased to $1.9 million in the second quarter of 2020 from $0.9 million in the second quarter of 2019. Amortization of mortgage servicing rights increased to $2.2 million in the second quarter of 2020 from $0.4 million in the second quarter of 2019. Premier had a negative change in the valuation adjustment in mortgage servicing assets of $1.4 million in the second quarter of 2020 compared with a negative adjustment of $0.2 million in the second quarter of 2019. The year-over-year change for the second quarter is primarily due to increased prepay speeds in the current down rate environment.

For the second quarter of 2020, service fees and other charges were $5.6 million, up from $3.3 million in the second quarter of 2019. Commissions from the sale of insurance products were $4.0 million, up from $3.6 million in the second quarter of 2019. Beginning with the second quarter of 2020, Premier began to report wealth management income, which represents trust income plus income for brokerage and financial advisory services that were previously reported in other non-interest income. Prior period amounts have been restated for consistency. Wealth management income was $1.8 million in the second quarter of 2020, up from $0.7 million in the second quarter of 2019.

“Each of our non-interest income business lines positively contributed to profitability and earnings,” said Hileman. “Mortgage banking was especially strong, including $11.5 million of gains on sale. These results helped emphasize the value of our diverse revenue sources and the ability to hedge against net interest margin compression.”

Non-interest expenses up from second quarter of 2019

Total non-interest expense was $38.0 million in the second quarter of 2020, or $35.9 million excluding $2.1 million of acquisition related charges, up from $24.2 million in the second quarter of 2019. Results for the second quarter of 2020 included three months of expenses from UCFC compared to none in 2019. Compensation and benefits increased to $19.6 million in the second quarter of 2020, compared to $14.4 million in the second quarter of 2019. Occupancy expense was $4.1 million in the second quarter of 2020, up from $2.3 million in the second quarter of 2019. Data processing cost was $3.8 million in the second quarter of 2020, up from $2.3 million in the second quarter of 2019. Amortization of intangibles was $1.8 million in the second quarter of 2020, up from $0.3 million in the second quarter of 2019. Other non-interest expense was $5.0 million in the second quarter of 2020, up from $4.3 million in the second quarter of 2019.

Credit quality

Non-performing loans totaled $39.5 million at June 30, 2020, an increase from $32.6 million at March 31, 2020, and an increase from $15.3 million at June 30, 2019, due to the UCFC merger. In addition, Premier had $0.5 million of OREO at June 30, 2020, compared to none at June 30, 2019. Accruing troubled debt restructured loans were $7.9 million at June 30, 2020, compared with $10.3 million at June 30, 2019.

On January 1, 2020, Premier adopted the Current Expected Credit Loss model of accounting for credit losses. This new GAAP model, which replaces the former incurred loss model, requires entities to estimate credit losses over the life of an asset or off-balance sheet exposure. Beginning with the second quarter of 2020, Premier began to report total provision for credit losses inclusive of amounts related to off-balance sheet unfunded commitments, which were previously reported in other non-interest expenses. Prior period amounts have been restated for consistency.

The 2020 second quarter results include net loan recoveries of $828,000 and a total provision expense of $1.9 million compared with net loan recoveries of $488,000 and a total provision expense of $197,000 for the same period in 2019. The allowance for credit loss on loans as a percentage of total loans was 1.62% at June 30, 2020, or 1.76% excluding PPP loans, compared with 1.68% at March 31, 2020, and 1.10% at June 30, 2019. The year-over-year increase in the provision expense and allowance percentage is primarily attributable to the impact of the economic deterioration that began in the first quarter of 2020 as a result of the COVID-19 pandemic. As of June 30, 2020, Premier Bank had issued pandemic related deferrals for $740 million of commercial loans and $73 million of retail loans.

“We continued to build our reserves during this time of economic downturn,” said Paul D. Nungester, CFO of Premier. “Including the purchase accounting marks from the UCFC acquisition, our coverage ratio of allowance to loans is 2.05%, excluding PPP loans. Coupled with our solid capital levels, we believe this puts us in a position of strength during the current uncertain credit cycle.”

Year-To-Date Results

For the six-month period ended June 30, 2020, net income totaled $6.6 million, or $0.19 per diluted common share, compared to $23.7 million, or $1.19 per diluted common share for the six months ended June 30, 2019. Results for the first half of 2020 included five months of income and expenses from UCFC compared to none in 2019. The year-over-year comparison is also substantially impacted by the current year’s provision expense of $48.2 million, which included $25.9 million related to acquisition accounting for an after-tax cost of $20.5 million, or $0.59 per diluted common share. The first half of 2019 included a provision expense of $495,000, which had an after-tax cost of $391,000, or $0.02 per diluted common share, and no acquisition impact. Additionally, the current year’s results include the impact of $13.6 million of acquisition-related charges, which had an after-tax cost of $11.1 million, or $0.32 per diluted common share. Excluding the impact of acquisition-related provision and charges, earnings for the first half of 2020 were $38.2 million, or $1.11 per diluted common share.

Net interest income was $99.8 million for the first six months of 2020 compared with $57.3 million in the first six months of 2019. Average interest-earning assets increased to $5.56 billion in the first six months of 2020 compared to $2.89 billion in the first six months of 2019. Net interest margin for the first six months of 2020 was 3.63%, down 40 basis points from the 4.03% margin reported in the six-month period ended June 30, 2019. The 2020 results include the impact of acquisition marks and related accretion for the UCFC acquisition. Interest income includes $2.5 million of accretion and interest expense includes $2.5 million of accretion, which combined added 18 basis points of net interest margin. The second quarter results also include the impact of PPP loans. Interest income includes $1.6 million on average balances of $149.1 million, which reduced net interest margin by three basis points. Excluding the impact of acquisition marks and PPP loans, net interest margin was 3.48% for the first half of 2020.

Non-interest income for the first six months of 2020 was $37.0 million compared to $21.3 million during the same period of 2019. Service fees and other charges were $10.8 million for the first six months of 2020, up from $6.3 million during the same period of 2019. Mortgage banking income was $10.7 million for the first six months of 2020, up from $4.0 million during the same period of 2019. Insurance commissions were $9.2 million for the first six months of 2020 compared with $7.7 million for the same period of 2019. Wealth management income was $2.9 million for the first six months of 2020, up from $1.4 million during the same period of 2019.

Non-interest expense was $80.3 million for the first six months of 2020, or $66.7 million excluding acquisition-related charges, up from $49.1 million for the same period of 2019. Compensation and benefits expense was $37.2 million for the first six months of 2020 compared with $28.5 million during the same period of 2019. Expenses also included increases in occupancy of $3.3 million, data processing of $2.3 million and amortization of intangibles of $2.5 million.

Total assets at $7.01 billion

Total assets at June 30, 2020, were $7.01 billion compared to $6.54 billion at March 31, 2020, and $3.28 billion at June 30, 2019. Gross loans receivable (excluding loans held for sale) were $5.46 billion at June 30, 2020, compared to $5.11 billion at March 31, 2020, and $2.62 billion at June 30, 2019. At June 30, 2020, gross loans receivable grew $2.83 billion, or 108% from a year ago, including $2.30 billion from the UCFC merger and $533 million organically, including $434 million of PPP loans. Also, at June 30, 2020, goodwill and other intangible assets totaled $351.7 million compared to $353.1 million at March 31, 2020, and $102.4 million at June 30, 2019, with the increase attributable to the UCFC merger.

Total deposits at June 30, 2020, were $5.76 billion compared with $4.99 billion at March 31, 2020, and $2.68 billion at June 30, 2019. At June 30, 2020, total deposits grew $3.08 billion, or 115% from a year ago, including $2.08 billion from the UCFC merger and $997 million organically.

Total stockholders’ equity was $941.0 million at June 30, 2020, compared to $916.8 million at March 31, 2020, and $407.2 million at June 30, 2019. The increase in stockholders’ equity from the prior year was due to net earnings and the UCFC merger, offset partially by the Company’s repurchase of 430,000 common shares for $10.1 million during the first quarter of 2020. At June 30, 2020, 570,000 common shares remained available for repurchase under the Company’s existing repurchase program.

Dividend to be paid August 21

The Board of Directors declared a quarterly cash dividend of $0.22 per common share payable August 21, 2020, to shareholders of record at the close of business on August 14, 2020. The dividend represents an annual dividend of 5.42 percent based on the Premier common stock closing price on July 27, 2020. Premier has approximately 37,296,613 common shares outstanding.

Conference call

Premier Financial Corp. will host a conference call at 8:30 a.m. ET on Wednesday, July 29, 2020, to discuss the earnings results and business trends. The conference call may be accessed by calling 1-877-444-1726. Internet access to the call is also available (in listen-only mode) at the following URL: https://services.choruscall.com/links/pfc200729.html. The replay of the conference call will be available at www.PremierFinCorp.com until July 28, 2021, at 9:00 a.m. ET.

About Premier Financial Corp.

Premier Financial Corp. (NASDAQ: PFC), headquartered in Defiance, Ohio, is the holding company for Premier Bank and First Insurance Group. Premier Bank, headquartered in Youngstown, Ohio, operates 78 branches, 12 loan offices and 2 wealth offices in Ohio, Michigan, Indiana, Pennsylvania and West Virginia (West Virginia office operates as “Home Savings Bank”). First Insurance Group is a full-service insurance agency with ten offices in Ohio including James & Sons Insurance in Youngstown, Ohio. For more information, visit the company’s websites at PremierFinCorp.com.

Financial Statements and Highlights Follow-

Safe Harbor Statement

This news release may contain certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21 B of the Securities Exchange Act of 1934, as amended. Those statements may include, but are not limited to, all statements regarding intent, beliefs, expectations, projections, forecasts and plans of Premier Financial Corp. and its management, and specifically include statements regarding: changes in economic conditions; the nature, extent and timing of governmental actions and reforms; future movements of interest rates; the ability to benefit from a changing interest rate environment; the production levels of mortgage loan generation; the ability to continue to grow loans and deposits; the ability to sustain credit quality ratios at current or improved levels; continued strength in the market area for Premier Bank; the ability to sell real estate owned properties; and the ability to grow in existing and adjacent markets. These forward-looking statements involve numerous risks and uncertainties, including: impacts from the novel coronavirus (COVID-19) pandemic on our business, operations, customers and capital position; higher default rates on loans made to our customers related to COVID-19 and its impact on our customers’ operations and financial condition; the impact of COVID-19 on local, national and global economic conditions; unexpected changes in interest rates or disruptions in the mortgage market related to COVID-19 or responses to the health crisis; the effects of various governmental responses to the COVID-19 pandemic; those inherent in general and local banking, insurance and mortgage conditions; competitive factors specific to markets in which Premier Financial Corp. and its subsidiaries operate; future interest rate levels; legislative and regulatory decisions or capital market conditions; and other risks and uncertainties detailed from time to time in our Securities and Exchange Commission (SEC) filings, including in our Annual Report on Form 10-K for the year ended December 31, 2019 and our Quarterly Report on Form 10-Q for the quarter ended March 31, 2020. One or more of these factors have affected or could in the future affect Premier’s business and financial results in future periods and could cause actual results to differ materially from plans and projections. Therefore, there can be no assurances that the forward-looking statements included in this news release will prove to be accurate. In light of the significant uncertainties in the forward-looking statements included herein, the inclusion of such information should not be regarded as a representation by Premier or any other persons, that our objectives and plans will be achieved. All forward-looking statements made in this news release are based on information presently available to the management of Premier and speak only as of the date on which they are made. We assume no obligation to update any forward-looking statements, whether as a result of new information, future developments or otherwise, except as may be required by law. As required by U.S. GAAP, Premier will evaluate the impact of subsequent events through the issuance date of its June 30, 2020, consolidated financial statements as part of its Quarterly Report on Form 10-Q to be filed with the SEC. Accordingly, subsequent events could occur that may cause Premier to update its critical accounting estimates and to revise its financial information from that which is contained in this news release.

Non-GAAP Reporting Measures

We believe that net income, as defined by U.S. GAAP, is the most appropriate earnings measurement. However, we consider core net income and core pre-tax pre-provision income to be useful supplemental measures of our operating performance. We define core net income as net income excluding the after-tax impact of acquisition related charges. We define core pre-tax pre-provision income as pre-tax pre-provision income excluding the pre-tax impact of acquisition related charges. We believe that these metrics are useful supplemental measures of operating performance because investors and equity analysts may use these measures to compare the operating performance of the Company between periods or as compared to other financial institutions or other companies on a consistent basis without having to account for one-time acquisition related charges. Our supplemental reporting measures and similarly entitled financial measures are widely used by investors, equity and debt analysts and ratings agencies in the valuation, comparison, rating and investment recommendations of companies. Our management uses these financial measures to facilitate internal and external comparisons to historical operating results and in making operating decisions. Additionally, they are utilized by the Board of Directors to evaluate management. The supplemental reporting measures do not represent net income or cash flow provided from operating activities as determined in accordance with U.S. GAAP and should not be considered as alternative measures of profitability or liquidity. Finally, the supplemental reporting measures, as defined by us, may not be comparable to similarly entitled items reported by other financial institutions or other companies. Please see the exhibits for reconciliations of our supplemental reporting measures.