EDGAR 10-K Filing

Company CIK: 946647
Filing Year: 2022
Filename: 946647_10-K_2022_0000950170-22-002441.json

---

ITEM 1. BUSINESS
Item 1. Business
Premier Financial Corp. (“Premier” or the “Company”) is a financial holding company that, through its subsidiaries, Premier Bank (the “Bank”), First Insurance Group of the Midwest, Inc. (“First Insurance”), PFC Risk Management Inc. (“PFC Risk Management”) and PFC Capital, LLC ("PFC Capital”) (collectively, “the Subsidiaries”), focuses on traditional banking and property, casualty, life and group health insurance products.
On January 31, 2020, Premier completed its previously announced acquisition of United Community Financial Corp., an Ohio corporation (“UCFC”), pursuant to that certain Agreement and Plan of Merger (the “Merger Agreement”), dated as of September 9, 2019, by and between Premier and UCFC. At the effective time of the merger (the “Merger”), UCFC merged with and into Premier, with Premier surviving the Merger. Simultaneously with the completion of the Merger, Premier converted from a unitary thrift holding company to a bank holding company, making an election to be a financial holding company.
Immediately following the Merger, UCFC’s wholly-owned bank subsidiary, Home Savings Bank (“Home Savings”) merged with and into the Bank, with the Bank surviving the Merger (the “Bank Merger”). Immediately prior to the Bank Merger, the Bank converted from a federal thrift into an Ohio state-chartered bank. In addition, immediately following the Bank Merger, UCFC’s wholly-owned insurance subsidiaries, HSB Insurance, LLC, and United American Financial Services, Inc., each merged into First Insurance, with First Insurance surviving the mergers. The Company acquired PFC Capital in the Merger.
The Company’s operating objectives include expansion, diversification within its markets, growth of its fee-based income, and growth organically and through acquisitions of financial institutions, branches and financial services businesses. The Company seeks merger or acquisition partners that are culturally similar, have experienced management and possess either significant market area presence or have the potential for improved profitability through financial management, economies of scale and/or expanded services. The Company regularly evaluates merger and acquisition opportunities and conducts due diligence activities related to possible transactions with other financial institutions. As a result, merger or acquisition discussions and, in some cases, negotiations may take place and future mergers or acquisitions involving cash, debt or equity securities may occur. Acquisitions typically involve the payment of premiums over book and market values and, therefore, some dilution of the Company’s tangible book value and net income per common share may occur in any future transaction.
Premier’s website, www.yourpremierfincorp.com, contains a hyperlink under the Investor Relations section to EDGAR, where the annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 are available free of charge as soon as reasonably practicable after Premier has filed the report with the U. S. Securities and Exchange Commission (“SEC”).
The Company’s principal executive offices are located at 601 Clinton Street, Defiance, Ohio 43512, and its telephone number is (419) 782-5015.
The Subsidiaries
The Company’s core business operations are conducted through its subsidiaries:
Premier Bank: The Bank was a federally chartered stock savings bank headquartered in Defiance, Ohio until the effective time of the Merger. At the effective time of the Merger, the Bank converted to an Ohio state-chartered bank headquartered in Youngstown, Ohio. The Bank conducts operations through 75 full-service banking center offices, 12 loan offices and two wealth offices located in Ohio, Michigan, Indiana, Pennsylvania and West Virginia.
The Bank is primarily engaged in community banking. It attracts deposits from the general public through its offices and website, and uses those and other available sources of funds to originate residential real estate loans, commercial real estate loans, commercial loans, home improvement and home equity loans and consumer loans. In addition, the Bank invests in U.S. Treasury and federal government agency obligations, obligations of the State of Ohio and its political subdivisions, mortgage-backed securities that are issued by federal agencies, including real estate mortgage investment conduits (“REMICs”) and residential collateralized mortgage obligations (“CMOs”), and corporate bonds. The Bank’s deposits are insured by the Federal Deposit Insurance Corporation (“FDIC”). The Bank is a member of the Federal Home Loan Bank (“FHLB”) System.
First Insurance Group of the Midwest: First Insurance is a wholly-owned subsidiary of Premier that conducts business throughout Premiers’ markets. First Insurance offers property and casualty insurance, life insurance and group health insurance.
PFC Risk Management: PFC Risk Management is a wholly-owned insurance company subsidiary of the Company that was formed to insure the Company and its subsidiaries against certain risks unique to the operations of the Company and for which insurance may not be currently available or economically feasible in today’s insurance marketplace. PFC Risk Management pools resources with several other similar insurance company subsidiaries of financial institutions to help minimize the risk allocable to each participating insurer.
PFC Capital: PFC Capital provides mezzanine funding for customers of the Bank. Mezzanine loans are offered by PFC Capital to customers in the Company’s market area and are expected to be repaid from the cash flow from operations of the borrowing businesses.
Business Strategy
Premier’s primary objective is to be a high-performing, community-focused financial institution, well regarded in its market areas. Premier accomplishes this through emphasis on local decision making and empowering its employees with tools and knowledge to serve its customers’ needs. Premier believes in a “Customer First” philosophy that is strengthened by its Mission & Vision and Core Values initiatives. Premier also has a tagline of “Powered by People” as an indication of its commitment to local, responsive, personalized service. Premier believes this strategy results in greater customer loyalty and profitability through core relationships. Premier is focused on diversification of revenue sources and increased market penetration in areas where the growth potential exists for a balance between acquisition and organic growth. The primary elements of Premier’s business strategy are commercial banking, consumer banking, the origination and sale of single-family residential loans, enhancement of fee income, wealth management and insurance sales, each united by a strong customer service culture throughout the organization.
Commercial and Commercial Real Estate Lending - Commercial and commercial real estate lending have been an ongoing focus and a major component of the Bank’s success. The Bank primarily provides commercial real estate and commercial business loans with an emphasis on owner-occupied commercial real estate and commercial business lending, including a focus on the deposit balances that accompany these relationships. The Bank’s client base tends to be small to middle market customers with annual gross revenues generally between $1 million and $50 million. These customers require the Bank to have a high degree of knowledge and understanding of their business in order to provide them with solutions for their financial needs. The Bank’s “Customer First” philosophy and culture complement the needs of its clients. The Bank believes this personal service model differentiates the Bank from its competitors, particularly the larger regional institutions. The Bank offers a wide variety of products to support commercial clients including remote deposit capture and other cash management services. The Bank also believes that the small business customer is a strong market for the Bank. The Bank participates in many of the Small Business Administration lending programs. Maintaining a diversified portfolio with an emphasis on monitoring industry concentrations and reacting to changes in the credit characteristics of industries is an ongoing focus.
Consumer Banking - The Bank offers customers a full range of deposit products including demand, checking, money market, certificates of deposits, Certificate of Deposit Account Registry Service (“CDARS”) and savings accounts. The Bank offers a full range of investment products through the wealth management department and a wide variety of consumer loan products, including residential mortgage loans, home equity loans, and installment loans. The Bank also offers online banking services, which include mobile banking, person-to-person payments (“P2P”), online bill pay, and online account opening as well as the MoneyPass ATM Network offering access to our customers to over 32,000 ATMs nationwide without a surcharge fee.
Fee Income Development - Generation of fee income and the diversification of revenue sources are accomplished primarily through the mortgage banking operation, First Insurance and the wealth management department as Premier seeks to reduce reliance on retail transaction fee income.
Deposit Growth - The Bank’s focus has been to grow core deposits with an emphasis on total relationship banking for both our retail and commercial customers. The Bank’s pricing strategy considers the whole relationship of the customer. The Bank continues to focus on increasing its market share in the communities it serves by providing quality products with extraordinary customer service, business development strategies and branch expansion. The Bank will look to grow its footprint in areas believed to further complement its overall market share and complement its strategy of being a high-performing community bank.
Asset Quality - Maintaining a strong credit culture is of the utmost importance to the Bank. The Bank has maintained a strong credit approval and review process that has allowed the Company to maintain a credit quality standard that balances the return with the risks of industry concentrations and loan types. The Bank is primarily a collateral lender with an emphasis on cash flow performance, while obtaining additional support from personal guarantees and secondary sources of repayment. The Bank has directed its attention to loan types and markets that it knows well and in which it has historically been successful. The Bank strives to have loan relationships that are well diversified in both size and industry, and monitors the overall trends in the portfolio to maintain its industry and loan type concentration targets. The Bank maintains a problem loan remediation process that focuses on detection and resolution. The Bank maintains a strong process of internal control that subjects the loan portfolio to periodic internal reviews as well as independent third-party loan review.
Expansion Opportunities - Premier believes it is well positioned to take advantage of acquisitions or other business expansion opportunities in its market areas, Premier believes it has a track record of successfully accomplishing both acquisitions and de novo branching in its market area. This track record puts the Company in a solid position to enter or expand its business. Premier will continue to be disciplined as well as opportunistic in its approach to future acquisitions and de novo branching with a focus on its primary geographic market area, which it knows well, and has been competing in for a long period of time, as well as surrounding market areas.
Securities
During 2021, Premier’s securities portfolio was managed in accordance with a written policy adopted by the Board of Directors and administered by the Investment Committee. The Chief Executive Officer, Chief Financial Officer, Treasurer and President can each
approve transactions up to $3.0 million. Two of the four officers are required to approve transactions between $3.0 million and $25.0 million. All transactions in excess of $30.0 million must be approved by the Bank’s Asset Liability Committee (“ALCO”).
Premier’s securities portfolio is classified as either “available-for-sale” or “held-to-maturity.” In addition, Premier held equity securities totaling $14.1 million at December 31, 2021 which must be marked to market through the income statement. Securities classified as “available-for-sale” may be sold prior to maturity due to changes in interest rates, prepayment risks, and availability of alternative investments, or to meet the Company’s liquidity needs.
The carrying value of securities at December 31, 2021, by contractual maturity is shown below. Expected maturities will differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties.
Contractually Maturing
Total
Weighted
Weighted
Weighted
Weighted
Under 1
Average
1 - 5
Average
6-10
Average
Over 10
Average
Year
Yield %
Years
Yield %
Years
Yield %
Years
Yield %
Amount
Yield
(Dollars in Thousands)
Mortgage-backed securities
$
-
-
$
-
-
$
16,008
1.83
%
$
192,273
1.70
%
$
208,281
1.71
%
CMOs - residential
-
-
1.88
%
27,482
1.95
%
236,155
1.51
%
264,541
1.56
%
U.S. government and federal
agency obligations
2.00
%
27,704
1.54
%
90,567
1.55
%
55,854
1.92
%
174,644
1.67
%
Asset-backed securities
-
-
-
-
14,064
1.17
%
207,481
1.26
%
221,545
1.25
%
Obligations of states and
political subdivisions
2,771
2.56
%
9,744
3.21
%
41,194
2.50
%
218,625
2.21
%
272,334
2.29
%
Corporate bonds
7,108
2.02
%
62,900
3.79
%
-
-
70,008
3.61
%
Total
$
3,290
$
45,460
$
252,215
$
910,388
$
1,211,353
Unrealized loss on securities
available for sale
(5,093
)
Total
$
1,206,260
The carrying value of investment securities is as follows:
December 31
(In Thousands)
Available-for-sale securities:
Obligations of U.S. government corporations and agencies
$
174,710
$
40,940
$
2,524
Obligations of state and political subdivisions
273,202
237,518
95,439
CMOs and mortgage-backed securities
466,919
383,481
173,384
Asset-backed securities
220,536
30,546
-
Corporate bonds
70,893
44,169
12,101
Total
$
1,206,260
$
736,654
$
283,448
For additional information regarding Premier’s investment portfolio, refer to Note 5 - Investment Securities in the Consolidated Financial Statements.
Residential Loan Servicing Activities
Servicing mortgage loans for investors involves a contractual right to receive a fee for processing and administering loan payments on mortgage loans that are not owned by the Company and are not included on the Company’s balance sheet. This processing involves collecting monthly mortgage payments on behalf of investors, reporting information to those investors on a monthly basis and maintaining custodial escrow accounts for the payment of principal and interest to investors and property taxes and insurance premiums on behalf of borrowers. At December 31, 2021, the Company serviced loans totaling $2.9 billion in principal. The vast majority of the loans serviced for others are fixed rate conventional mortgage loans. The Company primarily sells its loans to, and then services for, Freddie Mac, Fannie Mae and the FHLB.
As compensation for its mortgage servicing activities, the Company receives servicing fees, usually approximating 0.25% per annum of the loan balances serviced, plus any late charges collected from delinquent borrowers and other fees incidental to the services provided. In the event of a default by the borrower, the Company receives no servicing fees until the default is cured. Loan servicing fees decrease as the principal balance on the outstanding loan decreases and as the remaining time to maturity of the loan shortens.
Lending Activities
General - Financial institutions are limited in the amount of loans they may make to one borrower. At December 31, 2021, the Bank’s limit on loans-to-one borrower was $119.3 million.
Loan Portfolio Composition - The net decrease in net loans receivable over the prior year was $195.1 million for 2021, and net increase of $2.7 billion for 2020, due to the Merger, and $234.6 million for 2019. The loan portfolio contains no foreign loans. The Company’s loan portfolio is concentrated geographically in northwest, northeast and central Ohio, northeast Indiana, Morgantown, West Virginia, western Pennsylvania and southeast Michigan market areas. Management has identified lending for income-generating rental properties within commercial real estate as an industry concentration. Total loans for income-generating rental property totaled $1.9 billion at December 31, 2021, which represents 34.1% of the Company’s loan portfolio.
The following table sets forth the composition of the Company’s loan portfolio by type of loan at the dates indicated.
December 31
Amount
%
Amount
%
Amount
%
Amount
%
Amount
%
(Dollars in Thousands)
Real estate:
Residential real estate
$
1,167,466
20.2
%
$
1,201,051
20.5
%
$
324,773
11.3
%
$
322,686
12.1
%
$
274,862
11.1
%
Commercial real
estate
2,450,349
42.5
%
2,383,001
40.8
%
1,506,026
52.4
%
1,404,810
52.7
%
1,235,221
50.1
%
Construction
862,815
15.0
%
667,649
11.4
%
305,305
10.6
%
265,772
10.0
%
265,476
10.8
%
Total real estate loans
4,480,630
77.7
%
4,251,701
72.7
%
2,136,104
74.3
%
1,993,268
74.8
%
1,775,559
72.0
%
Other:
Commercial
895,638
15.5
%
1,202,353
20.6
%
578,071
11.6
%
509,577
18.1
%
526,142
19.6
%
Home equity and
improvement
264,354
4.6
%
272,701
4.7
%
122,864
2.5
%
128,152
4.6
%
135,457
5.0
%
Consumer finance
126,417
2.2
%
120,729
2.1
%
37,649
0.8
%
34,405
1.2
%
29,109
1.1
%
1,286,409
22.3
%
1,595,783
27.3
%
738,584
14.8
%
672,134
23.9
%
690,708
25.7
%
Total loans
5,767,039
100.0
%
5,847,484
100.0
%
2,874,688
89.1
%
2,665,402
98.7
%
2,466,267
97.7
%
Less:
Undisbursed loan
funds
477,890
355,065
94,865
123,293
115,972
Net deferred loan
origination fees
(7,019
)
1,179
2,259
2,070
1,582
Allowance for credit losses
66,468
82,079
31,243
28,331
26,683
Net loans
$
5,229,700
$
5,409,161
$
2,746,321
$
2,511,708
$
2,322,030
In addition to the loans reported above, Premier had $162.9 million, $221.6 million, $18.0 million, $6.6 million, and $10.4 million in loans classified as held for sale at December 31, 2021, 2020, 2019, 2018 and 2017, respectively. The fair value of such loans, which are all single-family residential mortgage loans, approximated their carrying value for all years presented.
Contractual Principal, Repayments and Interest Rates - The following table sets forth the dollar amount of gross loans due more than one year from December 31, 2021, which have fixed interest rates or which have floating or adjustable interest rates.
Floating or
Fixed
Adjustable
Rates
Rates
Total
(In Thousands)
Real estate
$
1,868,177
$
1,515,498
$
3,383,675
Commercial
390,389
191,206
581,595
Other
113,646
3,058
116,704
$
2,372,212
$
1,709,762
$
4,081,974
Originations, Purchases and Sales of Loans - The lending activities of Premier are subject to the written, non-discriminatory underwriting standards and loan origination procedures established by the Board of Directors and management. Loan originations are obtained from a variety of sources, including referrals from existing customers, real estate brokers, developers and builders, newspaper, internet and radio advertising and walk-in customers. The Bank’s loan approval process for all types of loans is intended to assess the borrower’s ability to repay the loan, the viability of the loan and the adequacy of the value of the collateral that will secure the loan.
The following table shows total loans originated, loan reductions, and the net increase in the Company’s total loans and loans held for sale during the periods indicated:
Years Ended December 31
(In Thousands)
Loan originations:
Residential real estate
$
947,089
$
1,123,587
$
358,970
Commercial real estate
539,680
488,898
341,207
Construction
754,757
461,283
112,344
Commercial
626,358
581,858
251,951
Home equity and improvement
156,805
86,740
60,268
Consumer finance
71,937
36,363
18,505
Total loans originated
3,096,626
2,778,729
1,143,245
Loans acquired in acquisitions
-
2,340,701
-
Loans purchased
-
-
-
Loan payoffs, sales and repayments
(3,235,740
)
(1,943,026
)
(922,564
)
Net increase (decrease) in total loans and loans held for sale
$
(139,114
)
$
3,176,404
$
220,681
Asset Quality
Premier’s credit policy establishes guidelines to manage credit risk and asset quality. These guidelines include loan review and early identification of problem loans to ensure sound credit decisions. Premier’s credit policies and review procedures are meant to minimize the risks and uncertainties inherent in lending. In following the policies and procedures, management must rely on estimates, appraisals and evaluations of loans and the possibility that changes in these could occur because of changing economic conditions.
Delinquent Loans - The following table sets forth information concerning delinquent loans at December 31, 2021, in dollar amount and as a percentage of Premier’s total loan portfolio. The amounts presented represent the total outstanding principal balances of the related loans, rather than the actual payment amounts that are past due.
30 to 59 Days
60 to 89 Days
90 Days and Over
Total
Amount
Percentage
Amount
Percentage
Amount
Percentage
Amount
Percentage
(Dollars in Thousands)
Residential real
estate
$
0.00
%
$
5,340
0.10
%
$
7,487
0.14
%
$
13,061
0.25
%
Commercial real estate
0.00
%
0.02
%
7,168
0.14
%
8,111
0.16
%
Construction
0.00
%
1,746
0.03
%
-
0.00
%
1,789
0.03
%
Commercial
0.00
%
0.00
%
0.02
%
0.02
%
Home equity and
improvement
1,851
0.04
%
0.01
%
1,634
0.03
%
3,893
0.07
%
Consumer finance
1,112
0.02
%
0.02
%
1,728
0.03
%
3,659
0.07
%
Purchase credit deteriorated
("PCD")
0.00
%
1,005
0.02
%
5,996
0.11
%
7,226
0.14
%
Total Loans
$
3,603
0.07
%
$
10,200
0.20
%
$
24,880
0.48
%
$
38,683
0.74
%
Overall, the level of delinquencies at December 31, 2021, decreased from the levels at December 31, 2020, when Premier reported that 0.87% of its outstanding loans were at least 30 days delinquent. The level of total loans 90 or more days delinquent has decreased to 0.48% at December 31, 2021, down from 0.50% at December 31, 2020. The level of total loans 60-89 days delinquent decreased to 0.20% at December 31, 2021, down from 0.24% at December 31, 2020. The level of loans that were 30 to 59 days past due decreased to 0.07% at December 31, 2021, down from 0.13% at December 31, 2020. Management has assessed the collectability of all loans that are 90 days or more delinquent as part of its procedures in establishing the allowance for credit losses. Management believes the improving trends in the economy contributed to the decrease seen in 2021.
Non-performing Assets - All loans are reviewed on a regular basis and are placed on non-accrual status when, in the opinion of management, the collectability of additional interest is not expected. Generally, Premier places all loans more than 90 days past due on non-accrual status. Premier also places loans on non-accrual status when the loan is paying as agreed but the Company believes the financial condition of the borrower is such that this classification is warranted. When a loan is placed on non-accrual status, total unpaid interest accrued to date is reversed. Subsequent payments are generally applied to the outstanding principal balance but may be recorded as interest income, depending on the assessment of the ultimate collectability of the loan. Premier considers a loan is individually evaluated when, based on current information and events, it is probable that the Bank will be unable to collect all amounts due (both principal and interest) according to the contractual terms of the loan agreement. Premier measures impairment based on the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s observable market price, or the fair value of the collateral, if collateral dependent. If the estimated recoverability of the individually evaluated loan is less than the recorded investment, Premier will recognize impairment by allocating a portion of the allowance for credit losses on cash flow dependent loans and by charging off the deficiency on collateral dependent loans. See Note 7 of the Notes to the Consolidated Financial Statements for additional information.
Real estate acquired by foreclosure is classified as real estate owned until such time as it is sold. Premier also repossesses other assets securing loans, consisting primarily of automobiles. When such property is acquired it is recorded at fair value less cost to sell. Costs relating to development and improvement of property are capitalized, whereas costs relating to holding the property are expensed. Valuations are periodically performed by management and a write-down of the value is recorded with a corresponding charge to operations if it is determined that the carrying value of property exceeds its estimated net realizable value. The balance of real estate owned at December 31, 2021, was $171,000. During 2021, there was $81,000 of expense related to write-downs in fair value of real estate acquired by foreclosure or acquisition. The balance of real estate owned at December 31, 2020 was $343,000. During 2020, there was $109,000 of expense related to write-downs in fair value of real estate acquired by foreclosure or acquisition.
As of December 31, 2021, Premier’s total non-performing loans amounted to $48.0 million or 0.91% of total loans (net of undisbursed loan funds and deferred fees and costs), compared to $51.7 million or 0.96% of total loans, at December 31, 2020. Non-performing loans are loans which are more than 90 days past due or on non-accrual.
The following table sets forth the amounts and categories of Premier’s non-performing assets (excluding individually evaluated loans not considered non-performing) and troubled debt restructurings at the dates indicated.
December 31
(Dollars in Thousands)
Non-performing loans:
Residential real estate
$
9,034
$
10,178
$
2,411
$
3,640
$
3,037
Commercial real estate
14,621
11,980
7,609
10,357
18,219
Construction
-
-
-
-
Commercial
11,531
1,365
2,961
4,500
8,841
Home equity and improvement
2,051
1,537
Consumer finance
1,873
1,624
Purchase Credit Deteriorated ("PCD")
8,904
24,192
-
-
-
Total non-performing loans
48,014
51,682
13,437
19,016
30,715
Real estate owned
1,205
1,532
Total repossessed assets
1,205
1,532
Total non-performing assets
$
48,185
$
52,025
$
13,537
$
20,221
$
32,247
Restructured loans, accruing
$
7,768
$
8,486
$
11,573
$
13,770
$
10,544
Total non-performing assets as a percentage of
total assets
0.64
%
0.72
%
0.39
%
0.64
%
1.08
%
Total non-performing loans as a percentage of
total loans*
0.91
%
0.96
%
0.49
%
0.75
%
1.31
%
Total non-performing assets as a percentage of
total loans plus other real estate owned*
0.91
%
0.96
%
0.49
%
0.80
%
1.37
%
Allowance for credit losses as a percent
of total non-performing assets
137.94
%
157.77
%
230.80
%
140.11
%
82.75
%
* Total loans are net of undisbursed loan funds and deferred fees and costs.
Allowance for credit losses - Premier maintains an allowance for credit losses to absorb probable current expected losses in the loan portfolio. The allowance for credit loss is made up of two components. The first is a general reserve, which is used to record credit loss reserves for groups of homogenous loans in which the Company estimates the current expected credit losses in the portfolio based on quantitative and qualitative factors. Premier adopted the current expected credit losses (“CECL”) accounting standard in 2020. As a result 2021 and 2020 credit loss and provision are not comparable to years prior to 2020 allowance for loan loss data.
The second component of the allowance for credit losses is the specific reserve in which the Company sets aside reserves based on the analysis of individual credits. In evaluating the adequacy of its allowance each quarter, management grades all loans in the commercial portfolio. See “Item 7 - Management’s Discussion and Analysis of Financial Condition and Results of Operations - Allowance for credit losses” for further discussion on management’s evaluation of the allowance for credit losses.
Loans are charged against the allowance when such loans meet the Company’s established policy on loan charge-offs and the allowance itself is adjusted quarterly by recording a provision for credit losses. As such, actual losses and losses provided for should be approximately the same if the overall quality, composition and size of the portfolio remained static along with a static economic environment. To the extent that the portfolio grows at a rapid rate or overall quality or the economic environment deteriorates, the provision generally will exceed charge-offs. However, in certain circumstances, net charge-offs may exceed the provision for credit losses when management determines that loans previously provided for in the allowance for credit losses are uncollectible and should be charged-off or as overall credit or the economic environment improves. Although management believes that it uses the best information available to make such determinations, future adjustments to the allowance may be necessary, and net earnings could be significantly affected, if circumstances differ substantially from the assumptions used in making the initial determinations.
At December 31, 2021, Premier’s allowance for credit losses totaled $66.5 million compared to $82.1 million at December 31, 2020. The following table sets forth the activity in Premier’s allowance for credit losses during the periods indicated.
Years Ended December 31
(Dollars in Thousands)
Allowance at beginning of year
$
82,079
$
31,243
$
28,331
$
26,683
$
25,884
Impact of ASC 326 Adoption
-
2,354
-
-
-
Acquisition related allowance for credit loss (PCD)
-
7,698
-
-
-
Provision (benefit) for credit losses
(6,733
)
43,154
2,905
1,176
2,949
Charge-offs:
Residential real estate
(110
)
(302
)
(515
)
(261
)
(279
)
Commercial real estate
(3,776
)
(65
)
(148
)
(1,387
)
(429
)
Construction
-
(1
)
-
-
-
Commercial
(6,958
)
(687
)
(528
)
(724
)
(2,301
)
Home equity and improvement
(63
)
(164
)
(245
)
(269
)
(301
)
Consumer finance
(476
)
(279
)
(289
)
(233
)
(139
)
PCD
(2
)
(4,854
)
-
-
-
Total charge-offs
(11,385
)
(6,352
)
(1,725
)
(2,874
)
(3,449
)
Recoveries
2,507
3,982
1,732
3,346
1,299
Net (charge-offs) recoveries
(8,878
)
(2,370
)
(2,150
)
Ending allowance
$
66,468
$
82,079
$
31,243
$
28,331
$
26,683
Allowance for credit losses to total non-performing loans
at end of year
138.43
%
158.82
%
232.51
%
148.99
%
86.87
%
Allowance for credit losses to total loans at end of year*
1.26
%
1.49
%
1.12
%
1.12
%
1.14
%
Net charge-offs (recoveries) for the year to average loans
0.16
%
0.05
%
-
(0.02
)%
0.10
%
* Total loans are net of undisbursed loan funds and deferred fees and costs.
The provision for credit losses decreased in 2021 due to the improvement in the Bank's credit quality and the current economic conditions. Refer to Notes 2 and 7 to the Consolidated Financial Statements for additional information. Management feels that the level of the allowance for credit losses at December 31, 2021, is sufficient to cover losses that may be incurred over the lifetime of loans in the portfolio.
The following table sets forth information concerning the allocation of Premier’s allowance for credit losses by loan categories at the dates indicated. For information about the percent of total loans in each category to total loans, see “Lending Activities-Loan Portfolio Composition” above.
December 31
Percent of
Percent of
Percent of
Percent of
Percent of
total loans
total loans
total loans
total loans
total loans
Amount
by category
Amount
by category
Amount
by category
Amount
by category
Amount
by category
(Dollars in Thousands)
Residential real estate
$
12,029
20.2
%
$
17,534
20.5
%
$
2,867
11.3
%
$
2,881
12.1
%
$
2,532
11.1
%
Commercial real estate
32,399
42.5
%
43,417
40.8
%
16,302
52.4
%
15,142
52.7
%
13,056
50.1
%
Construction
3,004
15.0
%
2,741
11.4
%
10.6
%
10.0
%
10.8
%
Commercial loans
13,410
15.5
%
11,665
20.6
%
9,003
20.1
%
7,281
19.1
%
7,965
21.3
%
Home equity and
improvement loans
4,221
4.6
%
4,739
4.7
%
1,700
4.3
%
2,026
4.8
%
2,255
5.5
%
Consumer loans
1,405
2.2
%
1,983
2.1
%
1.3
%
1.3
%
1.2
%
$
66,468
100.0
%
$
82,079
100.0
%
$
31,243
100.0
%
$
28,331
100.0
%
$
26,683
100.0
%
Sources of Funds
General - Deposits are the primary source of Premier’s funds for lending and other investment purposes. In addition to deposits, Premier derives funds from loan principal repayments. Loan repayments are a relatively stable source of funds, while deposit inflows and outflows are significantly influenced by general interest rates and money market conditions. Borrowings from the Federal Home Loan Bank ("FHLB") may be used on a short-term basis to compensate for reductions in the availability of funds from other sources. They may also be used on a longer-term basis for general business purposes.
Deposits - Premier’s deposits are attracted principally from within Premier’s primary market area through the offering of a broad selection of deposit instruments, including checking accounts, money market accounts, savings accounts, and term certificate accounts. Deposit account terms vary, with the principal differences being the minimum balance required, the time periods the funds must remain on deposit, and the interest rate.
To supplement its funding needs, Premier also has the ability to utilize the national market for certificates of deposit. Premier has used these deposits in the past and could in the future if necessary. Premier had no national market certificates of deposit as of December 31, 2021 or 2020.
Average balances and average rates paid on deposits are as follows:
Years Ended December 31
Amount
Rate
Amount
Rate
Amount
Rate
(Dollars in Thousands)
Noninterest-bearing demand deposits
$
1,676,006
-
$
1,311,478
-
$
594,785
-
Interest-bearing demand deposits
2,872,755
0.20
%
2,240,753
0.49
%
1,111,532
0.69
%
Savings deposits
770,770
0.02
%
626,413
0.03
%
299,040
0.05
%
Time deposits
968,000
0.79
%
1,183,793
1.36
%
711,867
2.08
%
Totals
$
6,287,531
0.21
%
$
5,362,437
0.66
%
$
2,717,224
0.83
%
The following table sets forth the maturities of Premier’s retail certificates of deposit having principal amounts $250,000 or greater at December 31, 2021 (in thousands):
Retail certificates of deposit maturing in quarter ending:
March 31, 2022
$
48,818
June 30, 2022
36,121
September 30, 2022
23,155
December 31, 2022
9,334
After December 31, 2022
46,218
Total retail certificates of deposit with balances $250,000 or greater
$
163,646
For additional information regarding Premier’s deposits see Note 11 to the Consolidated Financial Statements.
Borrowings - The FHLB system functions as a central reserve bank providing credit for its member institutions and certain other financial institutions. As a member in good standing of the FHLB, Premier is authorized to apply for advances, provided certain standards of creditworthiness have been met. At December 31, 2021, Premier could borrow up to $1.4 billion. The Bank had no advances outstanding at December 31, 2021 or 2020. For additional information regarding Premier’s FHLB advances and other debt, see Notes 12 and 14 to the Consolidated Financial Statements.
Subordinated Debentures - For additional information regarding the Company’s subordinated debentures see Note 13 to the Consolidated Financial Statements.
Effect of Environmental Regulation - Compliance with federal, state and local provisions regulating the discharge of materials into the environment, or otherwise relating to the protection of the environment, has not had a material effect upon the capital expenditures, earnings or competitive position of Premier or its subsidiaries. Premier believes the nature of the operations of its subsidiaries has little, if any, environmental impact. As a result, Premier anticipates no material capital expenditures for environmental control facilities for Premier’s current fiscal year or for the foreseeable future.
Premier believes its primary exposure to environmental risk is through the lending activities of the Bank. In cases where management believes environmental risk potentially exists, the Bank mitigates environmental risk exposures by requiring environmental site assessments at the time of loan origination to confirm collateral quality as to commercial real estate parcels posing higher than normal potential for environmental impact, as determined by reference to present and past uses of the subject property and adjacent sites. In addition, environmental assessments are typically required prior to any foreclosure activity involving non-residential real estate collateral.
Human Capital
Premier had 1,180 employees at December 31, 2021 (comprised of 90.5% full-time employees and 9.5% part-time employees). None of these employees are represented by a collective bargaining agent, and Premier believes that it maintains good relationships with its personnel. Premier’s talent acquisition processes are designed to attract top talent in the financial services industry and foster an inclusive, respectful and rewarding workplace. All employees receive training on the Company’s Mission, Vision and Core Values. The Company is committed to fostering an environment that encourages diverse viewpoints, backgrounds and experiences and continues to explore additional diversity, equity, and inclusion efforts. The Company offers a comprehensive compensation and benefits package to employees designed to attract, retain, motivate, and reward employees. The Company provides health benefits, including medical, dental and vision benefits, short- and long-term disability, and life insurance.
Competition
Competition in originating commercial real estate and commercial loans comes mainly from commercial banks with banking center offices in the Company’s market area. Competition for the origination of mortgage loans arises mainly from savings associations, commercial banks, and mortgage companies. The distinction among market participants is based on a combination of price, the quality of customer service and name recognition. The Company competes for loans by offering competitive interest rates and product types and by seeking to provide a higher level of personal service to borrowers than is furnished by competitors.
Management believes that the Bank’s most direct competition for deposits comes from local financial institutions. The distinction among market participants is based on price and the quality of customer service and name recognition. The Bank’s cost of funds fluctuates with general market interest rates. During certain interest rate environments, additional significant competition for deposits may be expected from corporate and governmental debt securities, as well as from money market mutual funds. The Bank competes for conventional deposits by emphasizing quality of service, extensive product lines and competitive pricing.
Regulation
General - Premier is subject to regulation examination and oversight by the Federal Reserve Board (“Federal Reserve”). The Bank is subject to regulation, examination and oversight by the Ohio Division of Financial Institutions (“ODFI”). The Banks's primary federal regulator is the FDIC. In addition, the Bank is subject to regulations of the Consumer Financial Protection Bureau (“CFPB”) which was established by the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act, as amended (“Dodd-Frank Act”) and has broad powers to adopt and enforce consumer protection regulations.
Holding Company Regulation - Premier is subject to the requirements of the Bank Holding Company Act of 1956, as amended (“BHC Act”), and examination and regulation by the Federal Reserve. Premier elected to become a financial holding company in 2020. The Federal Reserve has extensive enforcement authority over bank holding companies and financial holding companies, including, among other things, the ability to assess civil money penalties, issue cease and desist or removal orders, and require that a bank holding company divest subsidiaries (including its banking subsidiaries). In general, the Federal Reserve may initiate enforcement action for violations of laws and regulations and unsafe or unsound practices.
A bank holding company is required by law and Federal Reserve policy to serve as a source of financial strength to each subsidiary bank and to commit resources to support those subsidiary banks. The Federal Reserve may require a bank holding company to contribute additional capital to an undercapitalized subsidiary bank and may disapprove of the payment of dividends to the shareholders of the bank holding company if the Federal Reserve believes the payment would be an unsafe or unsound practice. The Federal Reserve also requires bank holding companies to provide advance notification of planned dividends under certain circumstances.
The BHC Act requires the prior approval of the Federal Reserve in any case where a bank holding company proposes to: acquire direct or indirect ownership or control of more than 5% of the voting shares of any bank that is not already majority-owned by the bank holding company; acquire all or substantially all of the assets of another bank or bank holding company; or merge or consolidate with any other bank holding company.
In order to become a financial holding company, all of a bank holding company’s subsidiary depository institutions must be well capitalized and well managed under federal banking regulations, and such depository institutions must have received a rating of at least satisfactory under the Community Reinvestment Act (“CRA”). In addition, the holding company must be well managed and must be well capitalized.
Financial holding companies may engage in a wide variety of financial activities, including any activity that the Federal Reserve and the Treasury Department consider financial in nature or incidental to financial activities, and any activity that the Federal Reserve determines to be complementary to a financial activity and which does not pose a substantial safety and soundness risk. These activities include securities underwriting and dealing activities, insurance and underwriting activities and merchant banking/equity investment activities. Because it has authority to engage in a broad array of financial activities, a financial holding company may have several affiliates that are functionally regulated by financial regulators other than the Federal Reserve, such as the SEC and state insurance regulators.
If a financial holding company or a subsidiary bank fails to meet the requirements for the holding company to remain a financial holding company, the financial holding company must enter into a written agreement with the Federal Reserve within 45 days to comply with all applicable capital and management requirements. Until the Federal Reserve determines that the holding company and its subsidiary banks meet the requirements, the Federal Reserve may impose additional limitations or conditions on the conduct or activities of the financial holding company or any affiliate that the Federal Reserve finds to be appropriate or consistent with federal banking laws. If the deficiencies are not corrected within 180 days, the financial holding company may be required to divest ownership or control of all subsidiary banks. If restrictions are imposed on the activities of the holding company, such restrictions may not be made publicly available pursuant to confidentiality regulations of the banking regulators.
In April 2020, the Federal Reserve adopted a final rule to revise its regulations related to determinations of whether a company has the ability to exercise a controlling influence over another company for purposes of the BHC Act. The final rule expands and codifies the presumptions for use in such determinations. By codifying the presumptions, the final rule provides greater transparency on the types of relationships that the Federal Reserve generally views as supporting a facts-and-circumstances determination that one company controls another company. The Federal Reserve’s final rule applies to questions of control under the BHC Act, but does not extend to the Change in Bank Control Act.
Regulation of Ohio State-Chartered Banks - As an Ohio state-chartered bank, the Bank is supervised and regulated primarily by the ODFI and the FDIC. In addition, the Bank’s deposits are insured up to applicable limits by the FDIC, and the Bank will be subject to the applicable provisions of the Federal Deposit Insurance Act, as amended, and certain other regulations of the FDIC.
Various requirements and restrictions under the laws of the United States and the State of Ohio will affect the operations of the Bank, including requirements to maintain reserves against deposits, restrictions on the nature and amount of loans that may be made and the interest that may be charged thereon, restrictions relating to investments and other activities, limitations on credit exposure to correspondent banks, limitations on activities based on capital and surplus, limitations on payment of dividends, limitations on branching and increasingly extensive consumer protection laws and regulations.
Economic Growth, Regulatory Relief and Consumer Protection Act - On May 25, 2018, the Economic Growth, Regulatory Relief and Consumer Protection Act (the “Regulatory Relief Act”) was enacted, which repealed or modified certain provisions of the Dodd-Frank Act and eased regulations on all but the largest banks (those with consolidated assets in excess of $250 billion). Bank holding companies with consolidated assets of less than $100 billion, including Premier, are no longer subject to enhanced prudential standards. The Regulatory Relief Act also relieves bank holding companies and banks with consolidated assets of less than $100 billion, including Premier, from certain record-keeping, reporting and disclosure requirements. Certain other regulatory requirements applied only to banks with consolidated assets in excess of $50 billion and so did not apply to the Company even before the enactment of the Regulatory Relief Act.
Regulatory Capital Requirements and Prompt Corrective Action - The federal banking regulators have adopted risk-based capital guidelines for financial institutions and their holding companies, as well as state member banks. The guidelines provide a systematic analytical framework, which makes regulatory capital requirements sensitive to differences in risk profiles among banking organizations, takes off-balance sheet exposures expressly into account in evaluating capital adequacy and incentivizes holding liquid, low-risk assets. Capital levels as measured by these standards are also used to categorize financial institutions for purposes of certain prompt corrective action regulatory provisions.
The risk-based capital guidelines adopted by the federal banking agencies are based on the “International Convergence of Capital Measurement and Capital Standard,” published by the Basel Committee on Banking Supervision. New capital rules applicable to smaller banking organizations (the “Basel III Capital Rules”) which also implement certain of the provisions of the Dodd-Frank Act became effective commencing on January 1, 2015. Compliance with the new minimum capital requirements was required effective January 1, 2015, whereas a new capital conservation buffer and deductions from common equity capital phased in from January 1, 2016, through January 1, 2019, and most deductions from common equity tier 1 capital phased in from January 1, 2015 through January 1, 2019.
The Basel III Capital Rules include (i) a minimum common equity tier 1 (“CET1”) capital ratio of 4.5%, (ii) a minimum tier 1 capital ratio of 6.0%, (iii) a minimum total capital ratio of 8.0%, and (iv) a minimum leverage ratio of 4%.
Common equity for the CET1 capital ratio includes common stock (plus related surplus) and retained earnings, plus limited amounts of minority interests in the form of common stock, less the majority of certain regulatory deductions.
Tier 1 capital includes common equity as defined for the CET1 capital ratio, plus certain non-cumulative preferred stock and related surplus, cumulative preferred stock and related surplus, trust preferred securities that have been grandfathered (but which are not otherwise permitted), and limited amounts of minority interests in the form of additional tier 1 capital instruments, less certain deductions.
Tier 2 capital, which can be included in the total capital ratio, includes certain capital instruments (such as subordinated debentures) and limited amounts of the allowance for credit losses, subject to specified eligibility criteria, less applicable deductions.
The deductions from CET1 capital include goodwill and other intangibles, certain deferred tax assets, mortgage-servicing assets above certain levels, gains on sale in connection with a securitization, investments in a banking organization’s own capital instruments and investments in the capital of unconsolidated financial institutions (above certain levels).
Under the guidelines, capital is compared to the relative risk included in the balance sheet. To derive the risk included in the balance sheet, one of several risk weights is applied to different balance sheet and off-balance sheet assets, primarily based on the relative credit risk of the counterparty. The capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors.
The Basel III Capital Rules also place restrictions on the payment of capital distributions, including dividends, and certain discretionary bonus payments to executive officers if the company does not hold a capital conservation buffer of greater than 2.5% composed of CET1 capital above its minimum risk-based capital requirements, or if its eligible retained income is negative in that quarter and its capital conservation buffer ratio was less than 2.5% at the beginning of the quarter.
The federal banking agencies have established a system of “prompt corrective action” to resolve certain problems of undercapitalized banks. This system is based on five capital level categories for insured depository institutions: “well capitalized,” “adequately capitalized,” “undercapitalized,” “significantly undercapitalized” and “critically undercapitalized.” The federal banking agencies may (or in some cases must) take certain supervisory actions depending upon a bank's capital level. For example, the banking agencies must appoint a receiver or conservator for a bank within 90 days after it becomes "critically undercapitalized" unless the bank's primary regulator determines, with the concurrence of the FDIC, that other action would better achieve regulatory purposes. Banking operations otherwise may be significantly affected depending on a bank's capital category. For example, a bank that is not "well capitalized" generally is prohibited from accepting brokered deposits and offering interest rates on deposits higher than the prevailing rate in its market, and the holding company of any undercapitalized depository institution must guarantee, in part, specific aspects of the bank's capital plan for the plan to be acceptable.
In accordance with the Basel III Capital Rules, in order to be “well-capitalized” under the prompt corrective action guidelines, a financial institution must have a CET1 capital ratio of 6.5%, a total risk-based capital ratio of at least 10.0%, a tier 1 risk-based capital of at least 8.0% and a leverage ratio of at least 5.0%, and the institution must not be subject to any written agreement, order, capital directive or prompt corrective action directive to meet and maintain a specific capital level for any capital measure. As of December 31, 2021, the Bank met the capital ratio requirements to be deemed "well-capitalized" according to the guidelines described above. See Note 17 of the Notes to the Consolidated Financial Statements for additional information.
In December 2019, the federal banking agencies issued a final rule to address regulatory treatment of credit loss allowances under the CECL accounting standard. The rule revised the federal banking agencies’ regulatory capital rules to identify which credit loss allowances under the CECL model are eligible for inclusion in regulatory capital and to provide banking organizations the option to phase in over three years the day-one adverse effects on regulatory capital that may result from the adoption of the CECL model. Concurrent with the enactment of the Coronavirus Aid, Relief, and Economic Security Act of 2020, as amended (the “CARES Act”), discussed below, federal banking agencies issued an interim final rule that delayed the estimated impact on regulatory capital resulting from the adoption of CECL. The interim final rule provided banking organizations that implemented CECL prior to the end of 2020 the option to delay for two years the estimated impact of CECL on regulatory capital relative to regulatory capital determined under the prior incurred loss methodology, followed by a three-year transition period to phase out the aggregate amount of capital benefit provided during the initial two-year delay. On August 26, 2020, the federal banking agencies issued a final rule that made certain technical changes to the interim final rule, including expanding the pool of eligible institutions. The changes in the final rule applied only to those banking organizations that elected the CECL transition relief provided for under the rule. Premier adopted CECL on January 1, 2020.
In September 2019, consistent with Section 201 of the Regulatory Relief Act, the Federal Reserve, along with the other federal bank regulatory agencies, issued a final rule, effective January 1, 2020, that gave community banks, including the Bank, the option to calculate a simple leverage ratio to measure capital adequacy if the community banks met certain requirements. Under the rule, a community bank was eligible to elect the Community Bank Leverage Ratio (“CBLR”) framework if it had less than $10 billion in total consolidated assets, limited amounts of certain trading assets and liabilities, limited amounts of off-balance sheet exposures and a leverage ratio greater than 9.0%. The final rule adopted tier 1 capital and the existing leverage ratio into the CBLR framework. The tier 1 numerator took into account the modifications made in relation to the capital simplifications and CECL methodology transition rules as of the compliance dates of those rules. Qualifying institutions that elected to use the CBLR framework (each, a “CBLR Bank”) and that maintained a leverage ratio of greater than 9.0% were considered to have satisfied the risk-based and leverage capital requirements in the regulatory agencies’ generally applicable capital rules and to have met the well-capitalized ratio requirements. A CBLR Bank was required to calculate or report risk-based capital and each CBLR Bank could opt out of the framework at any time, without restriction, by reverting to the generally applicable risk-based capital rule. Pursuant to the CARES Act, on August 26, 2020, the federal banking agencies adopted a final rule that temporarily lowered the CBLR threshold and provided a gradual transition back to the prior level. Specifically, the CBLR threshold was reduced to 8.0% for the remainder of 2020, increased to 8.5% for 2021, and returned to 9.0% on January 1, 2022. This final rule became effective on October 1, 2020. Premier did not utilize the CBLR in assessing capital adequacy.
Dividends - There are various legal limitations on the extent to which a subsidiary bank may finance or otherwise supply funds to its parent holding company. Under applicable federal and state laws, a subsidiary bank may not, subject to certain limited exceptions, make loans or extensions of credit to, or investments in the securities of, its parent holding company. A subsidiary bank is also subject to collateral security requirements for any loan or extension of credit permitted by such exceptions. The Bank paid $35.0 million in dividends to Premier in 2021 and $24.0 million in 2020. First Insurance paid $2.0 million in dividends to Premier in 2021 and $400,000 in dividends in 2020. Premier Risk Management paid $1.8 million in dividends to Premier in 2021 and $1.5 million in dividends in 2020. PFC Capital paid $7.5 million in dividends in 2021.
Premier’s ability to pay dividends to its shareholders is primarily dependent on its receipt of dividends from the Subsidiaries. The Federal Reserve expects Premier to serve as a source of strength for the Bank and may require Premier to retain capital for further investment in the Bank, rather than pay dividends to Premier shareholders. Payment of dividends by Premier or the Bank may be restricted at any time at the discretion of its applicable regulatory authorities if they deem such dividends to constitute an unsafe or unsound practice. These provisions could have the effect of limiting Premier's ability to pay dividends on its common shares.
Deposit Insurance - The FDIC maintains the Deposit Insurance Fund (“DIF’), which insures the deposit accounts of the Bank to the maximum amount provided by law. The general insurance limit is $250,000 per separately insured depositor. This insurance is backed by the full faith and credit of the U. S. government.
As insurer, the FDIC is authorized to conduct examinations of, and to require reporting by, federally-insured institutions. It also may prohibit any federally-insured institution from engaging in any activity the FDIC determines by regulation or order to pose a serious threat to the DIF and it has the authority to take enforcement actions against insured institutions. Insurance of deposits may be terminated by the FDIC upon a finding that the institution has engaged or is engaging in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations or has violated any applicable law, regulation, rule, order or condition imposed by the FDIC or written agreement entered into with the FDIC.
The FDIC assesses a quarterly deposit insurance premium on each insured institution quarterly based on risk characteristics of the institution. The FDIC may also impose a special assessment in an emergency situation. Pursuant to the Dodd-Frank Act, the FDIC has established 2.0% as the designated reserve ratio (“DRR”), which is the amount in the DIF as a percentage of all DIF insured deposits. In March 2016, the FDIC adopted final rules designed to meet the statutory minimum DRR of 1.35% by September 30, 2020, the deadline imposed by the Dodd-Frank Act. The Dodd-Frank Act requires the FDIC to offset the effect on insured institutions with assets of less than $10 billion of the increase in the statutory minimum DRR to 1.35% from the former statutory minimum of 1.15%. Although the FDIC's rules reduced assessment rates on all banks, they imposed a surcharge on banks with assets of $10 billion or more to be paid until the DRR reached 1.35%. The DRR reached 1.35% on September 30, 2018. As a result, the previous surcharge imposed on banks with assets of $10 billion or more was lifted. In addition, preliminary assessment credits were determined by the FDIC for banks with assets of less than $10 billion for the portion of their assessments that contributed to the increase of the DRR to 1.35%. On June 30, 2019, the DRR reached 1.40%, and the FDIC applied credits for banks with assets of less than $10 billion ("small bank credits") beginning September 30, 2019. On June 30, 2020, the DRR fell below the minimum statutory DRR to 1.30%. As a result, the FDIC adopted a restoration plan requiring the restoration of the DRR to 1.35% by September 30, 2028, within eight years of the plan establishment. This restoration plan maintained the scheduled assessment rates for all insured institutions. The FDIC rules further changed the method of determining risk-based assessment rates for established banks with less than $10 billion in assets to better ensure that banks taking on greater risks pay more for deposit insurance than banks that take on less risk.
Consumer Protection Laws and Regulations - Banks are subject to regular examination to ensure compliance with federal statutes and regulations applicable to their business, including consumer protection statutes and implementing regulations. The Dodd-Frank Act established the CFPB, which has extensive regulatory and enforcement powers over consumer financial products and services. The CFPB has adopted numerous rules with respect to consumer protection laws and has commenced related enforcement actions. The following are just a few of the consumer protection laws applicable to the Bank:
•Community Reinvestment Act of 1977: imposes a continuing and affirmative obligation to fulfill the credit needs of its entire community, including low- and moderate-income neighborhoods.
•Equal Credit Opportunity Act: prohibits discrimination in any credit transaction on the basis of any of various criteria.
•Truth in Lending Act: requires that credit terms are disclosed in a manner that permits a consumer to understand and compare credit terms more readily and knowledgeably.
•Fair Housing Act: makes it unlawful for a lender to discriminate in its housing-related lending activities against any person on the basis of any of certain criteria.
•Home Mortgage Disclosure Act: requires financial institutions to collect data that enables regulatory agencies to determine whether the financial institutions are serving the housing credit needs of the communities in which they are located.
•Real Estate Settlement Procedures Act: requires that lenders provide borrowers with disclosures regarding the nature and cost of real estate settlements and prohibits abusive practices that increase borrowers’ costs.
•Privacy provisions of the Gramm-Leach-Bliley Act: requires financial institutions to establish policies and procedures to restrict the sharing of non-public customer data with non-affiliated parties and to protect customer information from unauthorized access.
The banking regulators also use their authority under the Federal Trade Commission Act to take supervisory or enforcement action with respect to unfair or deceptive acts or practices by banks that may not necessarily fall within the scope of specific banking or consumer finance law.
On July 22, 2020, the CFPB issued a final small dollar loan rule related to payday, vehicle title and certain high cost installment loans (the “Small Dollar Rule”) that modified a former rule that was issued in November 2013. Specifically, the Small Dollar Rule revokes provisions contained in the 2013 rule that: (i) provide that it is an unfair and abusive practice for a lender to make a covered short-term or longer-term balloon-payment loan, including payday and vehicle title loans, without reasonably determining that consumers have the ability to repay those loans according to their terms; (ii) prescribe mandatory underwriting requirements for making the ability-to-repay determination; (iii) exempt certain loans from mandatory underwriting requirements; and (iv) establish related definitions, reporting, and recordkeeping requirements.
Further, the federal bank regulatory agencies issued interagency guidance on May 20, 2020, to encourage banks, savings associations, and credit unions to offer responsible small-dollar loans to customers for consumer and small business purposes. The Small Dollar Rule did not have a material effect on Premier’s financial condition or results of operations on a consolidated basis in 2021.
CRA - Under the CRA, every FDIC-insured institution is obligated, consistent with safe and sound banking practices, to help meet the credit needs of its entire community, including low- and moderate-income neighborhoods. The CRA requires the appropriate federal banking regulator, in connection with the examination of an insured institution, to assess the institution’s record of meeting the credit needs of its community and to consider this record in its evaluation of certain applications to banking regulators, such as an application for approval of a merger or the establishment of a branch. An unsatisfactory rating may be used as the basis for the denial of an application to acquire another financial institution or open a new branch. As of its last examination, the Bank received a CRA rating of “satisfactory.”
Patriot Act - In response to the terrorist events of September 11, 2001, the Uniting and Strengthening of America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001, as amended (the “Patriot Act”) was signed into law in October 2001. The Patriot Act gives the U. S. government powers to address terrorist threats through enhanced domestic security measures, expanded surveillance powers, increased information sharing and broadened anti-money laundering requirements. Title III of the Patriot Act and related regulations require regulated financial institutions to establish a program specifying procedures for obtaining identifying information from customers seeking to open new accounts and establish enhanced due diligence policies, procedures and controls designed to detect and report suspicious activity. The Bank has established policies and procedures that it considers to be in compliance with the requirements of the Patriot Act.
Volcker Rule - The Volcker Rule, which became effective under the Dodd-Frank Act in 2015, prohibits banks and their affiliates from engaging in proprietary trading and investing in and sponsoring hedge funds, otherwise known as “covered funds.” On July 9, 2019, the five federal agencies that adopted the Volcker Rule issued a final rule to exempt certain community banks, including the Bank, from such rule, consistent with the Regulatory Relief Act. Under the final rule, community banks with $10 billion or less in total consolidated assets and total trading assets and liabilities of 5.0% or less of total consolidated assets were excluded from the restrictions of the Volcker Rule. On June 25, 2020, the federal bank regulatory agencies also finalized a rule modifying the Volcker Rule’s prohibition on banking entities investing in or sponsoring covered funds. Such rule permits certain banking entities to offer financial services and engage in other activities that do not raise concerns that the Volcker Rule was originally intended to address. To the extent that the Bank engages in any of the trading activities or has any ownership interest in or relationship with any of the types of funds regulated by the Volcker Rule, Premier believes that its activities and relationships comply with such rule, as amended.
Office of Foreign Assets Control Regulation - The U.S. Treasury Department’s Office of Foreign Assets Control (“OFAC”) administers and enforces economic and trade sanctions against targeted foreign countries and regimes, under authority of various laws, including designated foreign countries, nationals and others. OFAC publishes lists of specially designated targets and countries. Premier is responsible for, among other things, blocking accounts of, and transactions with, such targets and countries, prohibiting unlicensed trade and financial transactions with them and reporting blocked transactions after their occurrence. Failure to comply with these sanctions could have serious financial, legal and reputational consequences, including causing applicable bank regulatory authorities not to approve merger or acquisition transactions when regulatory approval is required or to prohibit such transactions even if approval is not required. Regulatory authorities have imposed cease and desist orders and civil money penalties against institutions found to be violating these obligations. The Bank has established policies and procedures that it considers to be in compliance with OFAC requirements.
Cybersecurity - In March 2015, federal regulators issued two related statements regarding cybersecurity. One statement indicates that financial institutions should design multiple layers of security controls to establish several lines of defense and to ensure that their risk management processes also address the risk posed by compromised customer credentials, including security measures to reliably authenticate customers accessing Internet-based services of the financial institution. The other statement indicates that a financial institution’s management is expected to maintain sufficient business continuity planning processes to ensure the rapid recovery, resumption and maintenance of the financial institution’s operations after a cyber-attack involving destructive malware. A financial institution is also expected to develop appropriate processes to enable recovery of data and business operations and address rebuilding network capabilities and restoring data if the financial institution or its critical service providers fall victim to this type of cyber-attack. If Premier fails to observe the regulatory guidance, it could be subject to various regulatory sanctions, including financial penalties.
In February 2018, the SEC published interpretive guidance to assist public companies in preparing disclosures about cybersecurity risks and incidents. These SEC guidelines, and any other regulatory guidance, are in addition to notification and disclosure requirements under state and federal banking law and regulations.
In November 2021, the OCC, the Federal Reserve and the FDIC issued a final rule requiring banking organizations that experience a computer-security incident to notify certain entities. A computer-security incident occurs when actual or potential harm to the confidentiality, integrity, or availability of an information system or the information occurs, or there is a violation or imminent threat of a violation to banking security policies and procedures. The affected bank must notify its respective federal regulator of the computer-security incident as soon as possible and no later than 36 hours after the bank determines a computer-security incident has occurred. These notifications are intended to promote early awareness of threats to banking organizations and will help banks react to those threats before they manifest into bigger incidents.
State regulators have also been increasingly active in implementing privacy and cybersecurity standards and regulations. Recently, several states have adopted regulations requiring certain financial institutions to implement cybersecurity programs and providing detailed requirements with respect to these programs, including data encryption requirements. Many states have also recently
implemented or modified their data breach notification and data privacy requirements. Premier expects this trend of state-level activity in those areas to continue and is continually monitoring developments in the states in which its customers are located.
The Coronavirus Aid, Relief, and Economic Security Act of 2020 - In response to the novel COVID-19 pandemic (“COVID-19”), the CARES Act was signed into law on March 27, 2020, to provide national emergency economic relief measures. Many of the CARES Act’s programs are dependent upon the direct involvement of U.S. financial institutions, such as Premier and the Bank, and have been implemented through rules and guidance adopted by federal departments and agencies, including the U.S. Department of Treasury, the Federal Reserve and other federal banking agencies, including those with direct supervisory jurisdiction over Premier and the Bank. Furthermore, as COVID-19 evolves, federal regulatory authorities continue to issue additional guidance with respect to the implementation, lifecycle, and eligibility requirements for the various CARES Act programs as well as industry-specific recovery procedures for COVID-19. In addition, it is possible that Congress will enact supplementary COVID-19 response legislation, including amendments to the CARES Act or new bills comparable in scope to the CARES Act. For example, on December 27, 2020, the Consolidated Appropriations Act, 2021 (the “CAA”), was signed into law, which, among other things, allowed certain banks to temporarily postpone implementation of CECL. Premier is continuing to assess the impact of the CARES Act and other statutes, regulations and supervisory guidance related to COVID-19.
The CARES Act amended the loan program of the Small Business Administration (the “SBA”), in which the Bank participates, to create a guaranteed, unsecured loan program known as the Paycheck Protection Program (the “PPP”) to fund operational costs of eligible businesses, organizations and self-employed persons during COVID-19. In June 2020, the Paycheck Protection Program Flexibility Act was enacted, which, among other things, gave borrowers additional time and flexibility to use PPP loan proceeds. After previously being extended by Congress, the application deadline for PPP loans expired on May 31, 2021. As a participating lender in the PPP, the Bank continues to monitor legislative, regulatory, and supervisory developments related thereto. On September 29, 2020, the federal bank regulatory agencies issued a final rule that neutralizes the regulatory capital and liquidity coverage ratio effects of participating in certain COVID-19 liquidity facilities due to the fact there is no credit or market risk in association with exposures pledged to such facilities. As a result, the final rule supports the flow of credit to households and businesses affected by COVID-19.

---

ITEM 1A. RISK FACTORS
Item 1A. Risk Factors
The risks listed below present risks that could have a material impact on the Company’s financial condition, results of operations, or business. The risks and uncertainties described below are not the only ones facing the Company. Additional risks and uncertainties that management is not aware of or that management currently deems immaterial may also impair the Company’s business operations.
Economic and Market Risks
The economic impact of COVID-19 or any other pandemic could adversely affect the Company’s business, financial condition, liquidity, cash flows, and results of operations.
COVID-19 has negatively impacted global, national and local economies, disrupted global supply chains, lowered equity market valuations, created significant volatility and disruption in financial markets, increased unemployment levels and decreased consumer confidence, generally. In addition, the pandemic resulted in temporary closures of many businesses and the institution of social distancing and sheltering in place requirements in many states and communities and may result in the same or similar restrictions in the future. As a result, the demand for our products and services have been and may continue to be significantly impacted, which could adversely affect our revenue and results of operations. Furthermore, the pandemic could continue to result in the recognition of credit losses in our loan portfolios and increase our allowance for credit losses, particularly if businesses are required to operate at diminished capacities or are required to close again, the impact on the global, national and local economies worsen, or more customers draw on their lines of credit or seek additional loans to help finance their businesses. Our business operations may also be disrupted if significant portions of our workforce are unable to work effectively, including because of illness, quarantines, government actions, or other restrictions in connection with COVID-19. The pandemic could also affect the stability of our deposit base as well as our capital and liquidity position, impair the ability of borrowers to repay outstanding loans, impair the value of collateral securing loans, result in lost revenue and cause us to incur additional expenses. Similarly, because of changing economic and market conditions affecting issuers, we may be required to recognize other-than-temporary impairments in future periods on the securities we hold as well as reductions in other comprehensive income.
As of December 31, 2021, the Bank holds and services PPP loans. These PPP loans are subject to the provisions of the CARES Act and to complex and evolving rules and guidance issued by the SBA and other government agencies. While a large number of our PPP borrowers have applied for or received full or partial forgiveness of their loan obligations we still have credit risk on the remaining PPP loans in the event the SBA determines that there is a deficiency in the manner in which we originated, funded or serviced such loans, including any issue with the eligibility of a borrower to receive funding. We could face additional risks in our administrative capabilities to service our PPP loans and to properly determine loan forgiveness. In the event of a loss resulting from a default on a PPP loan and a determination by the SBA that there was a deficiency in the manner in which we originated, funded or serviced the PPP loan, the SBA may deny its liability under the guaranty, reduce the amount of the guaranty or, if the SBA has already paid under the guaranty, seek recovery of any loss related to the deficiency.
COVID-19, the rise of new strains thereof, or a new pandemic could subject us to any of the following risks that cannot be predicted, any of which could, individually or in the aggregate, have a material adverse effect on our business, financial condition, liquidity, and results of operations:
•demand for our products and services may decline, making it difficult to grow assets and income;
•if the economy is unable to re-open, loan delinquencies, problem assets, and foreclosures may increase, resulting in increased charges and reduced income;
•collateral for loans, especially real estate, may decline in value, which could cause credit losses to increase;
•our allowance for credit losses may have to be increased if borrowers experience financial difficulties beyond forbearance periods, which will adversely affect our net income;
•the net worth and liquidity of loan guarantors may decline, impairing their ability to honor commitments to us;
•we rely on third party vendors for certain services and the unavailability of a critical service due to COVID-19 could have an adverse effect on us; and
•continued adverse economic conditions could result in protracted volatility in the price of our common shares.
Moreover, our future success and profitability substantially depend on the management skills of our executive officers and directors, many of whom have held officer and director positions with us for many years. The unanticipated loss or unavailability of key employees due to COVID-19,including any new variations thereof, or any similar pandemic could harm our ability to operate our business or execute our business strategy. We may not be successful in finding and integrating suitable successors in the event of key employee loss or unavailability.
Even after the COVID-19 pandemic subsides, the U.S. economy will likely require time to recover, the length of which is unknown and during which the U.S. may experience a recession or market correction. Our business could be materially and adversely affected by such recession or market correction.
We continue to closely monitor COVID-19 and related risks as they evolve. To the extent the effects of COVID-19 adversely impact our business, financial condition, liquidity or results of operations, it may also have the effect of heightening many of the other risks described in this item.
Premier’s loan portfolio includes a concentration of commercial real estate loans and commercial loans, which involve risks specific to real estate value and the successful operations of these businesses.
At December 31, 2021, the Bank’s portfolio of commercial real estate loans totaled $2.5 billion, or approximately 42.5% of total loans. The Bank’s commercial real estate loans typically have higher principal amounts than residential real estate loans, and many of our commercial real estate borrowers have more than one loan outstanding. As a result, an adverse development on one loan can expose Premier to greater risk of loss on other loans. Additionally, repayment of the loans is generally dependent, in large part, on sufficient income from the properties securing the loans to cover operating expenses and debt service. Economic conditions and events outside of the control of the borrower or lender, including COVID-19, could negatively impact the future cash flows and market values of the affected properties.
At December 31, 2021, the Bank’s portfolio of commercial loans totaled $896,000 million, or approximately 15.5% of total loans. Commercial loans generally expose Premier to a greater risk of nonpayment and loss than commercial real estate or residential real estate loans since repayment of such loans often depends on the successful operations and income stream of the borrowers. The Bank’s commercial loans are primarily made based on the identified cash flow of the borrower and secondarily on the underlying collateral provided by the borrower such as accounts receivable, inventory, machinery or real estate. In the case of loans secured by accounts receivable, the availability of funds for the repayment of these loans may be substantially dependent on the ability of the borrower to collect amounts due from its customers. The collateral securing other loans may depreciate over time, may be difficult to appraise and may fluctuate in value based on the success of the business. Credit support provided by the borrower for most of these loans and the probability of repayment is based on the liquidation of the pledged collateral and enforcement of a personal guarantee, if any exists.
Premier targets its business lending towards small- and medium-sized businesses, many of which have fewer financial resources than larger companies and may be more susceptible to economic downturns. If general economic conditions negatively impact these businesses, Premier’s results of operations and financial condition may be adversely affected.
If Premier's actual credit losses exceed its allowance for credit losses, Premier's net income will decrease.
In accordance with U.S. generally accepted accounting principles (“GAAP”), Premier must maintain an allowance for credit losses that it believes is a reasonable estimate of the expected credit losses within the CECL model. Premier's allowance for credit losses is based upon a number of relevant factors, including, but not limited to, trends in the level of nonperforming assets and classified loans, current and projected economic conditions in the primary lending area, prior experience, possible losses arising from specific
problem loans, and management's evaluation of the risks in the current portfolio. However, there are many factors that can result in actual credit losses exceeding the allowance.
For instance, in deciding whether to extend credit or enter into other transactions with customers and counterparties, Premier may rely on information provided to it by customers and counterparties, including financial statements and other financial information. Premier may also rely on representations of customers and counterparties as to the accuracy and completeness of that information and, with respect to financial statements, on reports of independent auditors. Such information may not turn out to be accurate. Further, Premier's loan customers may not repay their loans according to their terms, and the collateral securing the payment of these loans may be insufficient to pay any remaining loan balance. As a result, Premier may experience significant credit losses, which could have a material adverse effect on its operating results.
The amount of future losses also is susceptible to changes in economic, operating and other conditions, including changes in unemployment and interest rates that may be beyond management's control, and these losses may exceed current estimates. Further, federal regulatory agencies, as an integral part of their examination process, review Premier's loans and allowance for credit losses and may require that Premier increase its allowance. Moreover, the Financial Accounting Standards Board (“FASB”) has changed its requirements for establishing the allowance, which became effective for Premier in the first quarter of 2020. Under the CECL model, we are required to use historical information, current conditions and reasonable and supportable forecasts to estimate the expected credit losses. That accounting change exposes Premier to increased risk of failure to establish a sufficient allowance due to incorrect or inadequate methodologies and assumptions and the possibility that Premier will need to increase its allowance substantially through an increase to the provision for credit losses, which will adversely affect Premier's net income.
As a result of any of the above factors, Premier's allowance for credit losses may not be adequate to cover actual credit losses, and future provisions for credit losses could have a material adverse effect on Premier's operating results. There is no assurance that Premier will not further increase the allowance for credit losses. Either of these occurrences could have a material adverse effect on Premier's financial condition and results of operations.
Changes in interest rates can adversely affect Premier’s profitability.
Premier’s earnings and cash flows are largely dependent upon its net interest income, which is the difference between interest income earned on interest-earning assets such as loans and securities, and interest expense paid on interest-bearing liabilities such as deposits and borrowed funds. Interest rates are highly sensitive to many factors that are beyond Premier’s control, including general economic conditions and policies of various governmental and regulatory agencies and, in particular, the Federal Reserve. Changes in monetary policy, including changes in interest rates, could influence not only the interest Premier receives on loans and securities and the amount of interest it pays on deposits and borrowings, but such changes could also affect Premier’s ability to originate loans and obtain deposits, the fair value of Premier’s financial assets and liabilities, and the average duration of certain assets and liabilities. If the interest rates paid on deposits and other borrowings increase at a faster rate than the interest rates received on loans and other investments, Premier’s net interest income, and therefore earnings, could be adversely affected. Earnings could also be adversely affected if the interest rates received on loans and other investments fall more quickly than the interest rates paid on deposits and other borrowings. While we generally invest in securities with limited credit risk, certain investment securities we hold possess higher credit risk, especially in light of the continued economic effects of COVID-19, since they represent beneficial interests in structured investments collateralized by residential mortgages. All investment securities are subject to changes in market value due to changing interest rates and implied credit spreads. Any substantial, unexpected, or prolonged change in market interest rates could have a material adverse effect on Premier’s results of operations and financial condition.
The Bank originates a significant amount of residential mortgage loans that it sells in the secondary market. The origination of residential mortgage loans is highly dependent on the local real estate market and the current interest rates. Increasing interest rates tend to reduce the origination of loans for sale and consequently fee income, which Premier reports as mortgage banking income. Conversely, decreasing interest rates have the effect of causing clients to refinance mortgage loans faster than anticipated. This causes the value of mortgage servicing rights on the loans sold to be lower than originally anticipated. If this happens, Premier may be required to write down the value of its mortgage servicing rights faster than anticipated, which will increase expense and lower earnings. Accelerated repayments on loans and mortgage-backed securities could result in the reinvestment of funds at lower rates than the loans or securities were paying.
Legal and Regulatory Risks
Laws, regulations and periodic regulatory reviews may affect Premier’s results of operations.
The financial services industry is extensively regulated. Premier is subject to extensive state and federal regulation, supervision and legislation that govern almost all aspects of its operations. Laws and regulations may change from time to time and are primarily intended for the protection of consumers, depositors, borrowers, the DIF and the banking system as a whole, and not to benefit Premier’s shareholders. Regulations affecting banks and financial services businesses are undergoing continuous changes, and management cannot predict the effect of these changes. The impact of any changes to laws and regulations or other actions by regulatory agencies may
negatively impact Premier and its ability to increase the value of its business, possibly limiting the services it provides, increasing the potential for competition from non-banks, or requiring it to change the way it operates.
Regulatory authorities have extensive discretion in connection with their supervisory and enforcement activities, including the imposition of restrictions on the operation of an institution, the classification of assets held by an institution, the adequacy of an institution’s allowance for credit losses and the ability to complete acquisitions. Additionally, actions by regulatory agencies against Premier could cause it to devote significant time and resources to defending its business and may lead to penalties that materially affect Premier and its shareholders. Even the reduction of regulatory restrictions could have an adverse effect on Premier and its shareholders if such lessening of restrictions increases competition within Premier’s industry or market area.
In addition to laws, regulations and actions directed at the operations of banks, proposals to reform the housing finance market could negatively affect Premier’s ability to sell loans.
The laws and regulations applicable to the banking industry could change at any time. The potential exists for new laws and regulations, and bank regulatory agencies are expected to be active in responding to concerns and trends identified in examinations. Increased regulation could increase Premier’s cost of compliance and reduce its income to the extent that they limit the manner in which Premier may conduct business, including its ability to offer new products, charge fees for specific products and services, obtain financing, attract deposits, make loans and achieve satisfactory interest spreads.
Changes in tax laws could adversely affect Premier's financial condition and results of operations.
Premier is subject to extensive federal, state and local taxes, including income, excise, sales/use, payroll, franchise, withholding and ad valorem taxes. Changes to the tax laws could have a material adverse effect on Premier's results of operations. In addition, Premier's customers are subject to a wide variety of federal, state and local taxes. Changes in taxes paid by customers, including changes in the deductibility of mortgage loan related expenses, may adversely affect their ability to finance activities or purchase properties or consumer products, which could adversely affect their demand for Premier's loans and deposit products. In addition, such negative effects on Premier's customers could result in defaults on the loans already made and decrease the value of mortgage-backed securities in which Premier has invested.
Increasing scrutiny and evolving expectations from customers, regulators, investors, and other stakeholders with respect to our environmental, social and governance practices may impose additional costs on us or expose us to new or additional risks.
Companies are facing increasing scrutiny from customers, regulators, investors, and other stakeholders related to their environmental, social and governance (“ESG”) practices and disclosure. Investor advocacy groups, investment funds and influential investors are also increasingly focused on these practices, especially as they relate to the environment, health and safety, diversity, labor conditions and human rights. Increased ESG-related compliance costs for us as well as among our third party vendors and various other parties within our supply chain could result in increases to our overall operational costs. Failure to adapt to or comply with regulatory requirements or investor or stakeholder expectations and standards could negatively impact our reputation, ability to do business with certain partners, access to capital, and the price of our common shares.
Business and Operational Risks
Premier’s ability to meet cash flow needs on a timely basis at a reasonable cost may adversely affect net income.
Premier’s principal sources of liquidity are local deposits and wholesale funding sources such as FHLB advances, Federal Funds purchased, securities sold under repurchase agreements, and brokered or other out-of-market certificate of deposit purchases. Premier also maintains a portfolio of securities that can be used as a secondary source of liquidity. Premier’s access to funding sources in amounts adequate to finance or capitalize its activities or on terms that are acceptable could be impaired by factors that affect Premier directly or the financial services industry or economy in general, such as further disruptions in the financial markets or negative views and expectations about the prospects for the financial services industry.
Other possible sources of liquidity include the sale or securitization of loans, the issuance of additional collateralized borrowings beyond those currently utilized with the FHLB, the issuance of debt securities and the issuance of preferred or common securities in public or private transactions, or borrowings from a commercial bank.
Any decline in available funding could adversely impact our ability to originate loans, invest in securities, meet our expenses, pay dividends to our shareholders, or fulfill obligations such as repaying Premier’s borrowings or meeting deposit withdrawal demands, any of which could have a material adverse impact on our liquidity, business, results of operations and financial condition.
In addition, prior debt offerings could potentially have important consequences to Premier and its debt and equity investors, including:
•requiring a substantial portion of its cash flow from operations to make interest payments;
•making it more difficult to satisfy debt service and other obligations;
•increasing the risk of a future credit ratings downgrade of its debt, which could increase future debt costs and limit the future availability of debt financing;
•increasing its vulnerability to general adverse economic and industry conditions;
•reducing the cash flow available to fund capital expenditures and other corporate purposes and to grow its business;
•limiting its flexibility in planning for, or reacting to, changes in its business and the industry;
•placing it at a competitive disadvantage relative to its competitors that may not be as highly leveraged with debt; and
•limiting its ability to borrow additional funds as needed or to take advantage of business opportunities as they arise, pay cash dividends or repurchase securities.
We are continuing to evaluate these risks on an ongoing basis.
Integrating Premier and UCFC after the Merger may be more difficult, costly, or time consuming than expected and the anticipated benefits and cost savings of the Merger may not be realized.
Although the Merger closed on January 31, 2020, the integration of Premier and UCFC is an ongoing process. Premier’s ability to successfully combine and integrate the businesses of Premier and UCFC in a manner that permits growth opportunities and does not materially disrupt the existing customer relations nor result in decreased revenues due to loss of customers poses a risk to the business. It is possible that the integration process could result in inconsistencies in standards, controls, procedures and policies that adversely affect Premier’s ability to maintain relationships with clients, customers, depositors and employees, or to achieve the anticipated benefits and cost savings of the Merger. Further, Premier is dependent upon several outside vendors to make the integration successful.
Competition affects Premier’s earnings.
Premier’s continued profitability depends on its ability to continue to effectively compete to originate loans and attract and retain deposits. Competition for both loans and deposits is intense in the financial services industry. The Company competes in its market area by offering superior service and competitive rates and products. The types of institutions Premier competes with include large regional commercial banks, smaller community banks, savings institutions, mortgage banking firms, credit unions, finance companies, brokerage firms, insurance agencies and mutual funds. As a result of their size and ability to achieve economies of scale, certain of Premier’s competitors can offer a broader range of products and services than the Company can offer. . In addition, an inability to timely adapt to technological advances could pose a risk to the future success of our business operations. Digital or cryptocurrencies, blockchain, and other “fintech” technologies are designed to enhance transactional security and have the potential to disrupt the financial industry, change the way banks do business, and reduce the need for banks as financial deposit-keepers and intermediaries. Consumers may move money out of bank deposits in favor of other investments, including digital or cryptocurrency. Consumers can also shop for higher deposit interest rates at banks across the country, which may offer higher rates because they have few or no physical branches. To stay competitive in its market area, Premier may need to adjust the interest rates on its products to match rates of its competition, which could have a negative impact on net interest margin and results of operations.
Negative public opinion could damage our reputation and impact business operations and revenues.
As a financial institution, our earnings and capital are subject to risks associated with negative public opinion. Negative public opinion could result from our actual or alleged conduct in any number of activities, including lending practices, the failure of any product or service sold by us to meet our clients’ expectations or applicable regulatory requirements, corporate governance and acquisitions, social media and other marketing activities, the implementation of environmental, social, and governance practices, or from actions taken by government regulators and community organizations in response to any of the foregoing. Negative public opinion could affect our ability to attract or retain clients, could expose us to litigation and regulatory action, and could have a material adverse effect on our stock price or result in heightened volatility. Negative public opinion could also affect our ability to borrow funds in the unsecured wholesale debt markets.
The increasing complexity of Premier’s operations presents varied risks that could affect its earnings and financial condition.
Premier processes a large volume of transactions on a daily basis and is exposed to numerous types of risks related to internal processes, people and systems. These risks include, but are not limited to, the risk of fraud by persons inside or outside the Company, the execution of unauthorized transactions by employees, errors relating to transaction processing and systems, breaches of data security and our internal control system and compliance with a complex array of consumer and safety and soundness regulations. Premier could also experience additional loss as a result of potential legal actions that could arise as a result of operational deficiencies or as a result of noncompliance with applicable laws and regulations.
Premier has established and maintains a system of internal controls that provides management with information on a timely basis and allows for the monitoring of compliance with operational standards. These systems have been designed to manage operational risks at an appropriate, cost effective level. Procedures exist that are designed to ensure that policies relating to conduct, ethics, and
business practices are followed. Losses from operational risks may still occur, however, including losses from the effects of operational errors.
Unauthorized disclosure of sensitive or confidential client or customer information or confidential trade secrets, whether through a breach of the Company’s computer systems or otherwise, could severely harm its business.
Potential misuse of funds or information by Premier’s employees or by third parties could result in damage to Premier’s customers for which Premier could be held liable, subject Premier to regulatory sanctions and otherwise adversely affect Premier’s financial condition and results of operations.
Premier’s employees handle a significant amount of funds, as well as financial and personal information. Premier also depends upon third-party vendors who have access to funds and personal information about customers. Cybersecurity breaches of other companies, such as the breach of the systems of a credit bureau, may result in criminals using personal information obtained from such other source to impersonate a customer of Premier and obtain funds from customer accounts. Further, Premier may be affected by data breaches at retailers and other third parties who participate in data interchanges with Premier’s customers that involve the theft of customer credit and debit card data, which may include the theft of debit card personal identification numbers and commercial card information used to make purchases at such retailers and other third parties. Such data breaches could result in Premier incurring significant expenses to reissue debit cards and cover losses, which could result in a material adverse effect on Premier’s results of operations.
Although Premier has implemented systems to minimize the risk of fraudulent taking or misuse of funds or information, there can be no assurance that such systems will be adequate or that a taking or misuse of funds or information by employees, by third parties who have authorized access to funds or information, or by third parties who are able to access funds or information without authorization will never occur. Premier could be held liable for such an event and could also be subject to regulatory sanctions. Premier could also incur the expense of developing additional controls and investing in additional equipment or contracts to prevent future such occurrences. Although Premier has insurance to cover such potential losses, Premier cannot provide assurance that such insurance will be adequate to meet any liability, and insurance premiums may rise substantially if Premier suffers such an event. In addition, any loss of trust or confidence placed in Premier by our customers could result in a loss of business, which could adversely affect our financial condition and results of operations, or result in a loss of investor confidence, adversely affecting Premier’s stock price and ability to acquire capital in the future. Premier could also lose revenue by the wrongful appropriation of confidential information about its business operations by competitors who use the information to compete with Premier.
Premier could suffer a material adverse impact from interruptions in the effective operation of, or security breaches affecting, Premier’s computer systems.
Premier relies heavily on its own information systems and those of vendors to conduct business and to process, record, and monitor transactions. Risks to the system could result from a variety of factors, including the potential for bad acts on the part of hackers, criminals, employees and others. As one example, some banks have experienced denial of service attacks in which individuals or organizations flood the bank’s website with extraordinarily high volumes of traffic, with the goal and effect of disrupting the ability of the bank to process transactions. Other businesses have been victims of a ransomware attack in which a business becomes unable to access its own information and is presented with a demand to pay a ransom in order to once again have access to its information. Premier is also at risk for the impact of natural disasters, terrorism and international hostilities on its systems or for the effects of outages or other failures involving power or communications systems operated by others. These risks also arise from the same types of threats to businesses with which Premier deals.
Potential adverse consequences of attacks on Premier’s computer systems or other threats include damage to Premier’s reputation, loss of customer business, costs of incentives to customers or business partners in order to maintain their relationships, loss of investor confidence and a reduction in Premier’s stock price, litigation, increased regulatory scrutiny and potential enforcement actions, repairs of system damage, increased investments in cybersecurity (such as obtaining additional technology, making organizational changes, deploying additional personnel, training personnel and engaging consultants), and increased insurance premiums, all of which could result in financial loss and material adverse effects on Premier’s results of operations and financial condition.
If Premier forecloses on collateral property resulting in Premier’s ownership of the underlying real estate, Premier may be subject to the increased costs associated with the ownership of real property, resulting in reduced income.
A significant portion of Premier’s loan portfolio is secured by real property. During the ordinary course of business, Premier may foreclose on and take title to properties securing certain loans. In doing so, there is a risk that hazardous or toxic substances could be found on these properties. If hazardous or toxic substances are found, Premier may be liable for remediation costs, as well as for personal injury and property damage.
In addition, when Premier forecloses on real property, the amount Premier realizes after a default is dependent upon factors outside of Premier’s control, including, but not limited to, economic conditions, neighborhood real estate values, interest rates, real estate taxes, operating expenses of the mortgaged properties, zoning laws, governmental rules, regulations and fiscal policies, and acts
of God. Certain expenditures associated with the ownership of real estate, principally real estate taxes and maintenance costs, may adversely affect the income from the real estate. Therefore, the cost of operating real property may exceed the rental income earned from such property, and Premier may have to sell the property at a loss. The foregoing expenditures could adversely affect Premier’s financial condition and results of operations.
Premier’s business strategy focuses on planned growth, including strategic acquisitions, and its financial condition and results of operations could be negatively affected if Premier fails to grow or fails to manage its growth effectively.
Premier’s ability to grow successfully will depend on a variety of factors, including the continued availability of desirable business opportunities, its ability to integrate mergers and other acquisitions and manage growth and Premier’s ability to raise capital. There can be no assurance that growth opportunities will be available.
Premier may acquire other financial institutions or parts of institutions in the future, open new branches, and consider new lines of business and new products or services. Expansions of its business would involve a number of expenses and risks, including:
•the time and costs associated with identifying and evaluating potential acquisitions or expansions into new markets;
•the potential inaccuracy of estimates and judgments used to evaluate the business and risks with respect to target institutions;
•the time and costs of hiring local management and opening new offices;
•the delay between commencing making acquisitions or engaging in new activities and the generation of profits from the expansion;
•Premier’s ability to finance an expansion and the possible dilution to existing shareholders;
•the diversion of management’s attention to the expansion;
•management’s lack of familiarity with new market areas;
•the integration of new products and services and new personnel into Premier’s existing business;
•the incurrence and possible impairment of goodwill associated with an acquisition and effects on Premier’s results of operations; and
•the risk of loss of key employees and customers.
If Premier’s growth involves the acquisition of companies through mergers or other acquisitions, the success of such acquisitions will depend on, among other things, Premier’s ability to combine the businesses in a manner that permits growth opportunities and cost efficiencies, and does not cause inconsistencies in standards, controls, procedures and policies that adversely affect the ability of Premier to maintain relationships with customers and employees or to achieve the anticipated benefits of the acquisitions.
Failure to manage Premier’s growth effectively could have a material adverse effect on its business, future prospects, financial condition or results of operations and could adversely affect Premier’s ability to successfully implement its business strategy.
The Bank’s ability to pay dividends is subject to regulatory limitations which, to the extent Premier requires such dividends in the future, may affect its ability to pay dividends or repurchase its stock.
Premier is a separate legal entity from the Bank and does not have significant operations of its own. Dividends from the Bank provide a significant source of capital for Premier. The availability of dividends from the Bank is limited by various statutes and regulations. The federal and state banking regulators require that insured financial institutions and their holding companies should generally only pay dividends out of current operating earnings. It is possible, depending upon the financial condition of the Bank and other factors, that the Bank’s primary regulator could assert that the payment of dividends or other payments by the Bank are an unsafe or unsound practice. In the event the Bank is unable to pay dividends to Premier, Premier may not be able to pay its obligations as they become due, repurchase its stock, or pay dividends on its common stock. Consequently, the potential inability to receive dividends from the Bank could adversely affect Premier’s business, financial condition, results of operations or prospects.
Failure to integrate or adopt new technology may undermine Premier’s ability to meet customer demands, leading to adverse effects on Premier’s financial condition and results of operations.
The financial services industry is continually undergoing rapid technological change with frequent introductions of new technology-driven products and services. The effective use of technology increases efficiency and enables financial institutions to better serve customers and to reduce costs. Premier’s future success depends, in part, upon its ability to address the needs of its customers by using technology to provide products and services that will satisfy customer demands, as well as to create additional efficiencies in operations. Digital or cryptocurrencies, blockchain, and other “fintech” technologies are being developed to change the way banks operate and are eliminating the need for banks as financial deposit-keepers and intermediaries. Premier may not be able to effectively implement or have the resources to implement new technology-driven products and services or be successful in marketing these products
and services to its customers. Failure to successfully keep pace with technological change affecting the financial services industry could adversely affect Premier’s business, financial condition, or results of operations.
The transition away from The London Interbank Offered Rate (“LIBOR”) as a reference rate for financial contracts could negatively affect Premier’s income and expenses and the value of various financial contracts.
LIBOR is used extensively in the U.S. and globally as a benchmark for various commercial and financial contracts, including adjustable rate mortgages, corporate debt, interest rate swaps and other derivatives. LIBOR is set based on interest rate information reported by certain banks, which may stop reporting such information after 2021.
In 2017, the United Kingdom’s Financial Conduct Authority (“FCA”) announced that after 2021 it would no longer compel banks to submit rates required to calculate LIBOR. On November 30, 2020, to facilitate an orderly LIBOR transition, the OCC, the FDIC, and the Federal Reserve jointly announced that entering into new contracts using LIBOR as a reference rate after December 31, 2021, would create a safety and soundness risk. On March 5, 2021, the FCA announced that all LIBOR settings will either cease to be provided by any administrator or no longer be representative immediately after December 31, 2021, in the case of 1-week and 2-month LIBOR, and immediately after June 30, 2023, in the case of the remaining LIBOR settings. In the United States, efforts to identify a set of alternative U.S. dollar reference interest rates are ongoing, and the Alternative Reference Rate Committee ("ARRC") has recommended the use of a Secured Overnight Funding Rate ("SOFR"). SOFR is different from LIBOR in that it is a backward looking secured rate rather than a forward looking unsecured rate.
These differences could lead to a greater disconnect between our costs to raise funds for SOFR as compared to LIBOR. For cash products and loans, ARRC has also recommended Term SOFR, which is a forward looking SOFR based on SOFR futures and may in part reduce differences between SOFR and LIBOR. There are operational issues which may create a delay in the transition to SOFR or other substitute indices, leading to uncertainty across the industry.
It is currently unknown whether these recommendations and proposals will be broadly accepted, whether they will continue to evolve, and what effect of their implementation may have on the markets for floating-rate financial instruments. Any discontinuance, modification, alternative reference rates or other reforms may adversely affect interest rates on our current or future indebtedness and other financial instruments.
The Bank has ceased originating loans, derivative contracts, borrowings and other financial instruments that are directly or indirectly dependent on LIBOR. The transition from LIBOR could create considerable costs and additional risk for Premier. Since proposed alternative rates are calculated differently, payments under contracts referencing new rates will differ from these referencing LIBOR. The transition will change Premier’s market risk profiles, requiring changes to risk and pricing models, valuation tools, product design and hedging strategies. Further, Premier’s failure to adequately manage this transition process with its customers could adversely impact its reputation. Although Premier is currently unable to assess what the ultimate impact of the transition from LIBOR will be, any market-wide transition away from LIBOR could have an adverse effect on its business, financial condition and results of operations.
General Risk Factors
Economic, political and financial market conditions may adversely affect Premier’s operations and financial condition.
Premier’s financial performance generally, and in particular the ability of borrowers to pay interest on and repay principal of outstanding loans and the value of collateral securing those loans, as well as demand for loans and other products and services Premier offers, is highly dependent upon the business environment in the markets where the Company operates, mainly in the State of Ohio, Northeast Indiana and Southeast Michigan. A favorable business environment is generally characterized by, among other factors, economic growth, efficient capital markets, low inflation, low unemployment, high business and investor confidence, and strong business earnings. Unfavorable or uncertain economic and market conditions can be caused by declines in economic growth, business activity or investor or business confidence; limitations on the availability of or increases in the cost of credit and capital; increases in inflation or interest rates; high unemployment, natural disasters; or a combination of these or other factors. Conditions such as inflation, recession, unemployment, changes in interest rates, fiscal and monetary policy, tariffs, a U.S. withdrawal from a significant renegotiation of trade agreements, trade wars, and other factors beyond Premier’s control may adversely affect its deposit levels and composition, the quality of its assets including investment securities available for purchase, demand for loans, the ability of its borrowers to repay their loans and the value of the collateral securing the loans it makes. Because Premier has a significant amount of real estate loans, decreases in real estate values could adversely affect the value of property used as collateral and Premier’s ability to sell the collateral upon foreclosure.
Premier is at risk of increased losses from fraud.
Criminals are committing fraud at an increasing rate and are using more sophisticated techniques. In some cases, these individuals are part of larger criminal rings, which allow them to be more effective. Such fraudulent activity has taken many forms, ranging from debit card fraud, check fraud, mechanical devices attached to ATM machines, social engineering and phishing attacks to obtain personal information, or impersonation of clients through the use of falsified or stolen credentials. Additionally, an individual or business entity may properly identify itself, yet seek to establish a business relationship for the purpose of perpetrating fraud. An emerging type of fraud even involves the creation of synthetic identification in which fraudsters "create" individuals for the purpose of perpetrating fraud. Further, in addition to fraud committed directly against it, Premier may suffer losses as a result of fraudulent activity committed against third parties. Increased deployment of technologies, such as chip card technology, defray and reduce certain aspects of fraud; however, criminals are turning to other sources to steal personally identifiable information, such as unaffiliated healthcare providers and government entities, in order to impersonate the consumer and thereby commit fraud.
Premier may be the subject of litigation, which would result in legal liability and damage to its business and reputation.
From time to time, Premier and its subsidiaries may be subject to claims or legal action from customers, employees or others. Financial institutions like Premier are facing a growing number of significant class actions, including those based on the manner of calculation of interest on loans and the assessment of overdraft fees. Future litigation could include claims for substantial compensatory and/or punitive damages or claims for indeterminate amounts of damages. Premier is also involved from time to time in other reviews, investigations and proceedings (both formal and informal) by governmental and other agencies regarding its businesses. These matters also could result in adverse judgments, settlements, fines, penalties, injunctions or other relief. Like other financial institutions, Premier is also subject to risk from potential employee misconduct, including non-compliance with policies and improper use or disclosure of confidential information. Substantial legal liability or significant regulatory action against Premier could materially adversely affect its business, financial condition or results of operations and/or cause significant reputational harm to its business.

---

ITEM 1B. UNRESOLVED STAFF COMMENTS
Item 1B. Unresolved Staff Comments
None.

---

ITEM 2. PROPERTIES
Item 2. Properties
At December 31, 2021, the Bank conducted its business from its main office at 275 West Federal St., Youngstown, Ohio, and 74 other full-service banking centers and 12 loan offices in Ohio, Indiana, Michigan, Pennsylvania and West Virginia. First Insurance conducted its business from ten offices in Ohio. Premier maintained its headquarters at 601 Clinton St., Defiance, Ohio. A portion of our back-office operation departments, including information technology, loan processing and underwriting, deposit processing, accounting and risk management are located in an operations center located at 25600 Elliott Rd., Defiance, Ohio. See Note 9 to the Consolidated Financial Statements for additional information. The Company owns both headquarters, as well as the Defiance Operations Center.

---

ITEM 3. LEGAL PROCEEDINGS
Item 3. Legal Proceedings
Premier and its subsidiaries are involved in various legal proceedings that arise in the ordinary course of its business. While the ultimate liability with respect to litigation matters and claims cannot be determined at this time, management believes any resulting liability and other amounts relating to pending matters are not likely to be material to the Company’s consolidated financial position or results of operations.

---

ITEM 4. MINE SAFETY DISCLOSURE
Item 4. Mine Safety Disclosures
Not applicable.
PART II

---

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY
Item 5. Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
The Company’s common shares trade on The Nasdaq Global Select Market under the symbol “PFC.” As of February 23, 2022, the Company had approximately 6,820 shareholders of record.
The line graph below compares the yearly percentage change in cumulative total shareholder return on Premier common shares and the cumulative total return of the Nasdaq Composite Index, the SNL Nasdaq Bank Index and the SNL Midwest Bank Index. An investment of $100 on December 31, 2016, and the reinvestment of all dividends are assumed. The performance graph represents past performance and should not be considered to be an indication of future performance.
The payment of future cash dividends is at the discretion of our Board of Directors and subject to a number of factors, including results of operations, general business conditions, growth, financial condition, regulatory limitation and other factors deemed relevant by the Board. Further, our ability to pay future cash dividends is subject to certain regulatory requirements and restrictions discussed in the Regulation section in Item 1 above. For further information, see Note 17 of the Notes to the Consolidated Financial Statements which is incorporated herein by reference.
Period Ending
Index
12/31/16
12/31/17
12/31/18
12/31/19
12/31/20
12/31/21
Premier Financial Corp.
100.00
104.45
100.72
132.98
101.58
141.28
Nasdaq Composite Index
100.00
129.64
125.96
172.18
249.51
304.85
KBW Nasdaq Bank Index
100.00
118.59
97.58
132.84
119.14
164.80
S&P U.S. BMI Banks - Midwest Region Index
100.00
107.46
91.76
119.38
102.64
135.60
The following table provides information regarding Premier’s purchases of its common shares during the fourth quarter period ended December 31, 2021:
Period
Total Number of
Shares Purchased
Average Price Paid
Per Share
Total Number of
Shares Purchased
as Part of Publicly
Announced Plans
or Programs
Maximum Number
of Shares that May
Yet Be Purchased
Under the Plans
or Programs (1)
October 1 - October 31, 2021
-
$
-
-
1,628,149
November 1 - November 30, 2021
415,742
31.93
415,742
1,212,407
December 1 - December 31, 2021
179,988
(2)
30.43
179,543
1,032,864
Total
595,730
$
31.48
595,285
1,032,864
(1)On January 26, 2021, the Company announced that its Board of Directors authorized a program for the repurchase of up to 2,000,000 shares of outstanding common stock. On January 25, 2022, the Company announced that its Board of Directors approved an increase in the Company’s repurchasing authorization to up to 2,000,000 shares of outstanding common stock. There is no expiration date for the repurchase program.
(2)Of this amount, 445 shares were obtained in fulfillment of tax obligations from vesting of restricted stock compensation and were not part of the publicly announced repurchase program.
The information set forth under the caption “Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters  Equity Compensation Plans” of Part III of this Form 10-K is incorporated herein by reference.

---

ITEM 6. SELECTED FINANCIAL DATA
Item 6. [Reserved]

---

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Forward-Looking Statements and Factors that Could Affect Future Results
This annual report, as well as other publicly available documents, including those incorporated herein by reference, may contain certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and the Private Securities Litigation Reform Act of 1995 . These statements may include, but are not limited to, statements regarding projections, forecasts, goals and plans of Premier Financial Corp. and its management, future movements of interests, loan or deposit production levels, future credit quality ratios, future strength in the market area, and growth projections. These statements do not describe historical or current facts and may be identified by words such as “intend,” “intent,” “believe,” “expect,” “estimate,” “target,” “plan,” “anticipate,” or similar words or phrases, or future or conditional verbs such as “will,” “would,” “should,” “could,” “might,” “may,” “can,” or similar verbs. There can be no assurances that the forward-looking statements included in this report or other publicly available documents will prove to be accurate. In light of the significant uncertainties in the forward-looking statements, 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.
Forward-looking statements involve numerous risks and uncertainties, any one or more of which could affect Premier’s business and financial results in future periods and could cause actual results to differ materially from plans and projections. These risks and uncertainties include, but not limited to: impacts from the novel coronavirus (COVID-19) pandemic on the economy, financial markets, our customers, and our business and results of operation; changes in interest rates; disruptions in the mortgage market; risks and uncertainties inherent in general and local banking, insurance and mortgage conditions; political uncertainty; uncertainty in U.S. fiscal or monetary policy; uncertainty concerning or disruptions relating to tensions surrounding the current socioeconomic landscape; competitive factors specific to markets in which Premier and its subsidiaries operate; future interest rate levels; legislative or regulatory rulemaking or actions; capital market conditions; security breaches or unauthorized disclosure of confidential customer or Company information; interruptions in the effective operation of information and transaction processing systems of Premier or Premier’s vendors and service providers; failures or delays in integrating or adopting new technology; the impact of the cessation of LIBOR interest rates and implementation of a replacement rate; and other risks and uncertainties detailed from time to time in our Securities and Exchange Commission (“SEC”) filings, including this Annual Report on Form 10-K and our Quarterly Reports on Form 10-Q. Any 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.
This Item 7 presents information to assess the financial condition and results of operations of Premier. This item should be read in conjunction with the Consolidated Financial Statements and the supplemental financial data contained elsewhere in this Form 10-K.
Non-GAAP Financial Measures
In addition to results presented in accordance with accounting principles generally accepted in the United States (“GAAP”), this report includes non-GAAP financial measures. The Company believes these non-GAAP financial measures provide additional information that is useful to investors in helping to understand the underlying performance and trends of the Company. The Company monitors the non-GAAP financial measures and the Company’s management believes such measures are helpful to investors because they provide an additional tool to use in evaluating the Company’s financial and business trends and operating results. In addition, the Company’s management uses these non-GAAP measures to compare the Company’s performance to that of prior periods for trend analysis and for budgeting and planning purposes.
Non-GAAP financial measures have inherent limitations, which are not required to be uniformly applied and are not audited. Readers should be aware of these limitations and should be cautious with respect to the use of such measures. To mitigate these limitations, the Company has practices in place to ensure that these measures are calculated using the appropriate GAAP or regulatory components in their entirety and to ensure that our performance is properly reflected to facilitate consistent period-to-period comparisons. The Company’s method of calculating these non-GAAP measures may differ from methods used by other companies. Although the Company believes the non-GAAP financial measures disclosed in this report enhance investors' understanding of our business and performance, these non-GAAP measures should not be considered in isolation, or as a substitute for those financial measures prepared in accordance with GAAP.
Fully taxable-equivalent (“FTE”) is an adjustment to net interest income to reflect tax-exempt income on an equivalent before-tax basis. The following tables present a reconciliation of non-GAAP measures to their respective GAAP measures for the years ended December 31, 2021 and 2020.
Non-GAAP Financial Measures - Net Interest Income on an FTE basis, Net Interest Margin and Efficiency Ratio
(In Thousands)
December 31,
December 31,
Net interest income (GAAP)
$
227,369
$
208,005
Add: FTE adjustment
1,013
1,018
Net interest income on a FTE basis (1)
$
228,382
$
209,023
Noninterest income - less securities gains/(losses) (2)
$
75,785
$
79,130
Noninterest expense (3)
157,955
165,170
Average interest-earning assets (4)
6,732,178
5,931,965
Ratios:
Net interest margin (1) / (4)
3.39
%
3.52
%
Efficiency ratio (3) / (1) + (2)
51.93
%
57.32
%
Non-GAAP Financial Measures - Tangible Book Value
(In Thousands, except per share data)
December 31,
December 31,
Total Shareholders’ Equity (GAAP)
$
1,023,496
$
982,276
Less: Goodwill
(317,948
)
(317,948
)
Intangible assets
(24,129
)
(30,337
)
Tangible common equity (1)
$
681,419
$
633,991
Common shares outstanding (2)
36,384
37,291
Tangible book value per share (1) / (2)
$
18.73
$
17.00
Financial Condition
Assets at December 31, 2021 totaled $7.48 billion compared to $7.21 billion at December 31, 2020, an increase of $0.27 billion or 3.7%. The increase in assets was primarily due to an increase in securities offset by a decrease in loans. The net increase was primarily the result of an increase in total deposits of $228.4 million and equity of $41.2 million.
Securities
The securities portfolio increased $482.6 million, or 65.4%, to $1.22 billion at December 31, 2021. This increase is primarily a result of an increase in deposits of $228.4 million and a decrease in gross loans including held for sale of $253.7 million. The increase was partially offset by runoff, sales and amortization. For additional information regarding Premier’s investment securities see Note 5 to the Consolidated Financial Statements.
Loans
Loans receivable, net of undisbursed loan funds and deferred fees and costs, decreased $195.1 million, or 3.6%, to $5.30 billion at December 31, 2021. The decrease was mainly due to a $328.0 million decrease in Paycheck Protection Program (“PPP”) loans offset by an increase of $132.9 million in non-PPP loans. For more details on the loan balances, see Note 7 - Loans Receivable to the Consolidated Financial Statements.
The majority of Premier’s commercial real estate and commercial loans are to small- and mid-sized businesses. The combined commercial and commercial real estate loan portfolios, including PPP, totaled $3.35 billion and $3.59 billion at December 31, 2021 and 2020, respectively, and accounted for approximately 63.3% and 65.3% of Premier’s loan portfolio at the end of those respective periods. Premier believes it has been able to establish itself as a leader in its market area in commercial and commercial real estate lending by hiring experienced lenders and providing a high level of customer service to its commercial lending clients.
The one-to-four family residential portfolio totaled $1.17 billion at December 31, 2021, compared with $1.20 billion at the end of 2020, with the decrease due to payoffs/paydowns in excess of new originations. At the end of 2021, such loans comprised 22.1% of the total loan portfolio, up from 21.9% at December 31, 2020.
Construction loans, which include one-to-four residential family and commercial real estate properties, increased to $384.9 million at December 31, 2021, compared to $312.6 million at December 31, 2020. These loans accounted for approximately 7.3% and 5.7% of the total loan portfolio at December 31, 2021 and 2020, respectively.
Home equity and home improvement loans decreased to $264.4 million at December 31, 2021, from $272.7 million at the end of 2020. At the end of 2021, those loans comprised 5.0% of the total loan portfolio, consistent with 5.0% at December 31, 2020.
Consumer finance loans were $126.4 million at December 31, 2021 up from $120.7 million at the end of 2020. These loans accounted for approximately 2.4% and 2.2% of the total loan portfolio at December 31, 2021 and 2020, respectively.
In order to properly assess the collateral dependent loans included in its loan portfolio, the Company has established policies regarding the monitoring of the collateral underlying such loans. The Company requires an appraisal that is less than one year old for all new collateral dependent real estate loans, and all renewed collateral dependent real estate loans where significant new money is extended. The appraisal process is handled by the Bank’s Credit Department, which selects the appraiser and orders the appraisal. Premier’s loan policy prohibits the account officer from talking or communicating with the appraiser to insure that the appraiser is not influenced by the account officer in any way in making a determination of value. The Bank generally does not require updated appraisals for performing loans unless significant new money is requested by the borrower.
When a collateral dependent loan is downgraded to classified status, the Bank reviews the most current appraisal on file and, if appropriate, based on the Bank’s assessment of the appraisal, such as age, market, etc. the Bank will discount the appraisal amount to a more appropriate current value based on inputs from lenders and realtors. This amount may then be discounted further by the Bank’s estimation of the selling costs. In most instances, if the appraisal is more than twelve to fifteen months old, a new appraisal may be required. Finally, the Bank assesses whether there is any collateral short fall, taking into consideration guarantor support and liquidity, and determines if a charge-off is necessary.
All loans over 90 days past due and/or on non-accrual are classified as non-performing loans. Non-performing status automatically occurs in the month in which the 90-day delinquency occurs. When a collateral dependent loan moves to non-performing status, the Bank generally gets a new third party appraisal and charges the loan down appropriately based upon the new appraisal and an estimate of costs to liquidate the collateral. All properties that are moved into the Other Real Estate Owned (“OREO”) category are supported by current appraisals, and the OREO is carried at the lower of cost or fair value, which is determined based on appraised value less the Bank’s estimate of the liquidation costs.
The Bank does not adjust any appraisals upward without written documentation of this valuation change from the appraiser. When setting reserves and charge-offs on classified loans, appraisal values may be discounted downward based upon the Bank’s experience with liquidating similar properties.
Appraisals are received within approximately 60 days after they are requested. The Bank’s Special Assets Committee reviews the amount of each new appraisal and makes any necessary charge-off decisions at its meeting prior to the end of each quarter.
Any partially charged-off collateral dependent loans are considered non-performing, and as such, would need to show an extended period of time with satisfactory payment performance as well as cash flow coverage capability supported by current financial statements before the Bank will consider an upgrade to performing status. The Bank may consider moving the loan to accruing status after approximately six months of satisfactory payment performance. The Bank monitors and tracks its loan to value quarterly to determine accuracy and any necessary charge-offs. Based on these results, changes may occur in the processes used.
Loan modifications constitute a troubled debt restructuring (“TDR”) if the Bank, for economic or legal reasons related to the borrower’s financial difficulties, grants a concession to the borrower that it would not otherwise consider. For loans that are considered TDRs and the balance is over $500,000, the Bank either computes the present value of expected future cash flows discounted at the original loan’s effective interest rate or it may measure impairment based on the fair value of the collateral. For those loans measured for impairment utilizing the present value of future cash flows method, any discount is carried as a specific reserve in the allowance for credit losses. For those loans measured for impairment utilizing the fair value of the collateral, any shortfall is charged-off. For loans that are considered TDRs and the balance is under $500,000 a specific reserve is carried in the allowance for credit losses based on a general reserve analysis. Loan modifications made as a result of COVID-19 may not be deemed TDR if certain criteria are met based on regulatory guidance. As of December 31, 2021, and December 31, 2020, the Bank had $7.8 million and $7.2 million, respectively, of loans that were still performing and which were classified as TDRs.
Allowance for Credit Losses (“ACL”)
The Company adopted ASU 2016-13, the Current Expected Credit Loss (“CECL”) model on January 1, 2020. Under CECL, a valuation reserve was established in the ACL and maintained through expense in the provision for credit losses. Upon adoption of CECL, the Company made a one-time adjustment, net of taxes, to retained earnings for $1.9 million. The ACL represents management’s assessment of the estimated credit losses the Company will receive over the life of the loan. ACL requires a projection of credit losses over the contract lifetime of the credit adjusted for prepayment tendencies. Management analyzes the adequacy of the ACL regularly through reviews of the loan portfolio. Consideration is given to economic conditions, changes in interest rates and the effect of such changes on collateral values and borrowers’ ability to pay, changes in the composition of the loan portfolio and trends in past due and non-performing loan balances. The ACL is a material estimate that is susceptible to significant fluctuation and is established through a provision for credit losses based on management’s evaluation of the inherent risk in the loan portfolio. In addition to extensive in-house loan monitoring procedures, the Company utilizes an outside party to conduct an independent loan review of commercial loan and commercial real estate loan relationships. The Company’s goal is to have 45-50% of the portfolio reviewed annually using a risk based approach. Management utilizes the results of this outside loan review to assess the effectiveness of its internal loan grading system as well as to assist in the assessment of the overall adequacy of the ACL associated with these types of loans.
The ACL is made up of two basic components. The first component of the allowance for credit loss is the specific reserve in which the Company sets aside reserves based on the analysis of individually analyzed credits. In establishing specific reserves, the Company analyzes all substandard, doubtful and loss graded loans quarterly and makes judgments about the risk of loss based on the cash flow of the borrower, the value of any collateral and the financial strength of any guarantors. If the loan is individually analyzed and cash flow dependent, then a specific reserve is established for the discount on the net present value of expected future cash flows. If the loan is individually analyzed and collateral dependent, then any shortfall is usually charged off. The Company also considers the impacts of any Small Business Administration (“SBA”) or Farm Service Agency (“FSA”) guarantees. The specific reserve portion of the ACL was $7.1 million at December 31, 2021, and $4.3 million at December 31, 2020.
The second component is a general reserve, which is used to record credit loss reserves for groups of homogenous loans in which the Company estimates the potential losses over the contractual lifetime of the loan adjusted for prepayment tendencies. In addition, the future economic environment is incorporated in projections with loss expectations to revert to the long-run historical mean after such time as management can no longer make or obtain a reasonable and supportable forecast. For purposes of the general reserve analysis, the six loan portfolio segments are further segregated into 13 different loan pools to allocate the ACL. Residential real estate is further segregated into owner occupied and nonowner occupied for ACL. Commercial real estate is split into owner occupied, nonowner occupied, multifamily, agriculture land and other commercial real estate. Commercial credits are comprised of commercial working capital, agriculture production, and other commercial credits. The Company utilizes three different methodologies to analyze loan pools.
Discounted cash flows (“DCF”) was selected as the appropriate method for loan segments with longer average lives and regular payment structures. This method is applied to a majority of the Company’s real estate loans. DCF generates cash flow projections at the instrument level where payment expectations are adjusted for prepayment and curtailment to produce an expected cash flow stream. This expected cash flow stream is compared to the net present value of expected cash flows to establish a valuation account for these loans.
The probability of default/loss given default (“PD/LGD”) methodology was selected as most appropriate for loan segments with average lives of three years or less and/or irregular payment structures. This methodology was used for home equity and commercial portfolios. A loan is considered to default if one of the following is detected:
•Becomes 90 days or more past due;
•Is placed on nonaccrual;
•Is marked as a TDR; or
•Is partially or wholly charged-off.
The default rate is measured on the current life of the loan segment using a weighted average of the four most recent quarters. PD/LGD is determined on a dollar-ratio basis, measuring the ratio of net charged off principal to defaulted principal.
The consumer portfolio contains loans with many different payment structures, payment streams and collateral. The remaining life method was deemed most appropriate for these loans. The weighted average remaining life uses an annual charge-off rate over several vintages to estimate credit losses. The average annual charge-off rate is applied to the contractual term adjusted for prepayments.
Additionally, CECL requires a reasonable and supportable forecast when establishing the ACL. The Company estimates losses over an approximate one-year forecast period using Moody’s baseline economic forecasts, and then reverts to longer term historical loss experience over a three-year period.
The quantitative general allowance decreased to $12.3 million at December 31, 2021, from $29.2 million at December 31, 2020, primarily due to the impact of the economic improvement in 2021 after the downturn in 2020 as a result of the COVID-19 pandemic.
In addition to the quantitative analysis, a qualitative analysis is performed each quarter to provide additional general reserves on the loan portfolios not individually analyzed for various factors. The overall qualitative factors are based on nine sub-factors. The nine sub-factors have been aggregated into three qualitative factors: economic, environment and risk.
ECONOMIC
1)Changes in international, national and local economic business conditions and developments, including the condition of various market segments.
2)Changes in the value of underlying collateral for collateral dependent loans.
ENVIRONMENT
3)Changes in the nature and volume in the loan portfolio.
4)The existence and effect of any concentrations of credit and changes in the level of such concentrations.
5)Changes in lending policies and procedures, including underwriting standards and collection, charge-off and recovery practices.
6)Changes in the quality and breadth of the loan review process.
7)Changes in the experience, ability and depth of lending management and staff.
RISK
8)Changes in the trends of the volume and severity of delinquent and classified loans, and changes in the volume of non-accrual loans, TDRs, and other loan modifications.
9)Changes in the political and regulatory environment.
The qualitative analysis indicated a general reserve of $47.1 million at December 31, 2021, compared to $48.8 million at December 31, 2020. The decrease was mainly due to changes in the economy as a result of the COVID-19 pandemic and subsequent recovery. Management reviewed the overall economic, environmental and risk factors and determined that it was appropriate to make adjustments to these sub-factors based on that review. The economic factors for all loan segments decreased in 2021, primarily due to a recovery in the national economy, a decrease in local unemployment levels and improved uncertainty in global economic conditions. The risk factors for all loan segments except residential increased in 2021 primarily due to the loosening of lending standards. The Company’s general reserve percentages for main loan segments, not otherwise classified, ranged from 0.78% for construction loans to 1.59% for home equity/improvement loans at December 31, 2021.
Under CECL, when loans are purchased with evidence of more than insignificant deterioration of credit, they are accounted for as purchase credit deteriorated (“PCD”). PCD loans acquired in a transaction are marked to fair value and a mark on yield is recorded. In addition, an adjustment is made to the ACL for the expected loss through retained earnings on the acquisition date. These loans are assessed on a regular basis and subsequent adjustments to the ACL are recorded on the income statement. On January 31, 2020, as a result of the Merger, the Company acquired PCD loans with a fair value of $79.1 million, a recorded adjustment on yield of $4.1 million and an increase to the ACL of $7.7 million.
As a result of the quantitative and qualitative analyses, along with the change in specific reserves and the increase in net charge-offs during the year, the Company’s provision for credit losses for the year ended December 31, 2021 was a recovery of $6.7 million. This is compared to an expense of $43.2 million, which included $25.9 million attributable to the Merger, for the year ended December 31, 2020. The ACL was $66.5 million at December 31, 2021, and $82.1 million at December 31, 2020. The ACL represented 1.26% of loans, net of undisbursed loan funds and deferred fees and costs at December 31, 2021, and 1.49% at December 31, 2020. In management’s opinion, the overall ACL of $66.5 million as of December 31, 2021, was adequate to cover anticipated losses over the lifetime of the loans.
Management also assesses the value of OREO as of the end of each accounting period and recognizes write-downs to the value of that real estate in the income statement if conditions dictate. During the year ended December 31, 2021, there were $81,000 in write-downs of real estate held for sale. Management believes that the values recorded at December 31, 2021, for OREO and repossessed assets represent the realizable value of such assets.
Total classified loans decreased to $69.5 million at December 31, 2021, compared to $90.4 million at December 31, 2020, a decrease of $20.9 million, primarily due to improved asset quality and net charge-offs.
The Company’s ratio of ACL to non-performing loans was 138.4% at December 31, 2021, compared to 158.8% at December 31, 2020. Management monitors collateral values of all loans included on the watch list that are collateral dependent and believes that allowances for such loans at December 31, 2021, were appropriate. Of the $48.0 million in non-accrual loans at December 31, 2021, $23.1 million or 48.2% are less than 90 days past due.
At December 31, 2021, the Company had total non-performing assets of $48.2 million, compared to $52.0 million at December 31, 2020. Non-performing assets include loans that are on non-accrual, OREO and other assets held for sale. The OREO balance was $171,000 and $343,000 as of December 31, 2021 and 2020, respectively.
The net charge-offs and non-accrual loan balances as a percentage of total are presented in the table below at December 31, 2021 and 2020.
For the Year Ended
As of December 31,
December 31, 2021
Net
% of Total Net
Charge-offs
Charge-offs
Non-accrual
% of Total Non-
(Recoveries)
(Recoveries)
Loans
Accrual Loans
(Dollars In Thousands)
Residential real estate
$
(151
)
-1.70
%
$
9,034
19.00
%
Commercial real estate
3,338
37.60
%
14,621
30.00
%
Construction
-
0.00
%
-
0.00
%
Commercial
5,637
63.49
%
11,531
24.00
%
Home equity and improvement
(185
)
-2.08
%
2,051
4.00
%
Consumer finance
2.67
%
1,873
4.00
%
PCD
0.02
%
8,904
19.00
%
Total
$
8,878
100.00
%
$
48,014
100.00
%
For the Year Ended
As of December 31,
December 31, 2020
Net
% of Total Net
Charge-offs
Charge-offs
Non-accrual
% of Total Non-
(Recoveries)
(Recoveries)
Loans
Accrual Loans
(Dollars In Thousands)
Residential
$
(39
)
-1.65
%
$
11,043
21.00
%
Commercial real estate
(1,287
)
-54.30
%
12,058
23.00
%
Construction
0.04
%
2.00
%
Commercial
(1,163
)
-49.07
%
1,355
3.00
%
Home equity and improvement
(98
)
-4.14
%
1,869
4.00
%
Consumer finance
4.39
%
1,586
3.00
%
PCD
4,852
204.73
%
22,965
44.00
%
Total
$
2,370
100.00
%
$
51,682
100.00
%
The following table sets forth information concerning the allocation of Premier’s allowance for credit losses by loan categories at December 31, 2021 and 2020.
December 31, 2021
December 31, 2020
Percent of
Percent of
total loans
total loans
Amount
by category
Amount
by category
(Dollars in Thousands)
Residential real estate
$
12,029
20.2
%
$
17,534
20.5
%
Commercial real estate
32,399
42.5
%
43,417
40.8
%
Construction
3,004
15.0
%
2,741
11.4
%
Commercial loans
13,410
15.5
%
11,665
20.6
%
Home equity and improvement loans
4,221
4.6
%
4,739
4.7
%
Consumer loans
1,405
2.2
%
1,983
2.1
%
$
66,468
100.0
%
$
82,079
100.0
%
Loans Acquired with Impairment
Under ASU Topic 326, when loans are purchased with evidence of more than insignificant deterioration of credit, they are accounted for as PCD. PCD loans acquired in a transaction are marked to fair value and a mark on yield is recorded. In addition, an adjustment is made to the ACL for the expected loss on the acquisition date. These loans are assessed on a regular basis and subsequent adjustments to the ACL are recorded on the income statement.
High Loan-to-Value Mortgage Loans
The majority of Premier’s mortgage loans are collateralized by one-to-four-family residential real estate, have loan-to-value ratios of 80% or less, and are made to borrowers in good credit standing. The Bank usually requires residential mortgage loan borrowers whose loan-to-value is greater than 80% to purchase private mortgage insurance (“PMI”). Management also periodically reviews and monitors the financial viability of its PMI providers.
The Bank originates and retains a limited number of residential mortgage loans with loan-to-value ratios that exceed 80% where PMI is not required if the borrower possesses other demonstrable strengths. The loan-to-value ratios on these loans are generally limited to 85% and exceptions must be approved by the Bank’s Chief Credit Officer. Management monitors the balance of one-to-four family residential loans, including home equity loans and committed lines of credit that exceed certain loan to value standards (90% for owner occupied residences, 85% for non-owner occupied residences and one-to-four family construction loans, 75% for developed land and 65% for raw land). These loans are generally paying as agreed.
Premier does not make interest-only, first-mortgage residential loans, nor does it have residential mortgage loan products or other consumer products that allow negative amortization.
Goodwill and Intangible Assets
Goodwill was $317.9 million at December 31, 2021 and 2020. Core deposit intangibles and other intangible assets decreased to $24.1 million at December 31, 2021, compared to $30.3 million at December 31, 2020, due to the recognition of $6.2 million of amortization. No impairment of goodwill was recorded in 2021 or 2020.
Deposits
Total deposits at December 31, 2021, were $6.28 billion compared to $6.05 billion at December 31, 2020, an increase of $234.3 million, or 3.9%. Noninterest-bearing checking accounts grew by $127.5 million, interest-bearing checking accounts and money markets grew by $325.0 million, savings increased by $104.0 million and retail certificates of deposit decreased by $32.3 million. Management can utilize the national market for certificates of deposit to supplement its funding needs if necessary. For more details on the deposit balances in general see Note 11 - Deposits to the Consolidated Financial Statements.
Borrowings
Premier did not have any FHLB advances or securities sold with agreements to repurchase at December 31, 2021 or 2020. The increase in deposits allowed the Bank to generally not utilize this source of funds in 2021.
Subordinated Debentures
Subordinated debentures were $85.0 million at December 31, 2021, compared to $84.9 million at December 31 2020. In 2020, the Company issued $50.0 million aggregate principal amount fixed-to-floating rate subordinated notes due in 2030 in a private offering exempt from the registration requirements under the Securities Act of 1933, as amended. These notes carry a fixed rate of 4.00% for five years then a floating rate equal to the three-month SOFR rate plus 388.5 basis points. The Company may, at its option, redeem the notes, in whole or part, from time to time, subject to certain conditions, beginning on September 30, 2025. The net proceeds of the sale were approximately $48.8 million, after deducting the offering expenses.
Equity
Total stockholders’ equity increased $41.2 million to $1.02 billion at December 31, 2021, compared to $0.98 billion at December 31, 2020. The increase in stockholders’ equity was primarily the result of recording net income of $126.1 million partially offset by the payment of $39.0 million of common stock dividends and the repurchase of 967,000 shares of common stock totaling $29.6 million.
Results of Operations
Summary
Premier reported net income of $126.1 million for the year ended December 31, 2021, compared to $63.1 million and $49.4 million for the years ended December 31, 2020 and 2019, respectively. On a diluted per common share basis, Premier earned $3.39 in 2021, $1.75 in 2020 and $2.48 in 2019. The results for 2020 include eleven months of income and expenses from UCFC compared to twelve in 2021 and none in 2019 as well as $1.01 in Merger-related expense and additional provision cost as a result of the Merger and the adoption of CECL.
Net Interest Income
Premier’s net interest income is determined by its interest rate spread (i.e., the difference between the yields on its interest-earning assets and the rates paid on its interest-bearing liabilities) and the relative amounts of average interest-earning assets and interest-bearing liabilities.
Net interest income was $227.4 million for the year ended December 31, 2021, compared to $208.0 million and $115.6 million for the years ended December 31, 2020 and 2019, respectively. The tax-equivalent net interest margin was 3.39%, 3.52% and 3.93% for the years ended December 31, 2021, 2020 and 2019, respectively. The margin decreased 13 basis points between 2021 and 2020 primarily due to the drop in treasury rates along with the declines in the federal funds rates, impacting asset yields more negatively than deposit costs. Interest-earning asset yields decreased 40 basis points (to 3.63% in 2021 from 4.03% in 2020) but the cost of interest- bearing liabilities between the two periods only decreased 36 basis points (to 0.34% in 2021 from 0.70% in 2020).
Total interest income increased by $5.6 million, or 2.4%, to $243.6 million for the year ended December 31, 2021, from $237.9 million for the year ended December 31, 2020. This increase was primarily due to an increase in securities income offset partly by a decrease in loans income. Interest income from loans decreased to $223.8 million for 2021 compared to $225.1 million in 2020, which represents a decrease of 0.6%. The average balance of loans receivable increased $249.3 million to $5.47 billion for 2021, from $5.22 billion for 2020. However, the average yield on loans decreased 0.22% to 4.09% in 2021 from 4.31% in 2020.
During the same period, the average balance of investment securities increased to $1.14 billion in 2021 from $0.54 billion for the year ended December 31, 2020, primarily as a result of increasing deposits and decreasing loans. Interest income from investment securities increased to $19.4 million in 2021 compared to $11.5 million in 2020.
Interest expense decreased by $13.7 million to $16.2 million in 2021 compared to $19.9 million 2020. This decrease was mainly due to a 28 basis point decrease in the average cost of funds in 2021 offset by a $0.42 billion increase in the average balance of interest-bearing liabilities. The average balance of interest-bearing deposits increased $0.56 billion to $4.61 billion in 2021, from $40.5 billion in 2020. Interest expense related to interest-bearing deposits was $13.5 million in 2021 compared to $26.9 million in 2020.
Interest expense on FHLB advances was $23,000 in 2021 and $1.7 million in 2020. The decrease in FHLB advance expense was due to lower utilization in 2021 as a result of increased deposits. Interest expense recognized by the Company related to subordinated debentures was $2.7 million in 2021 and $1.3 million in 2020, with the increase primarily due to the recognition of a full year of expense in 2021 compared to a partial year in 2020.
Total interest income increased by $96.9 million, or 68.7%, to $237.9 million for the year ended December 31, 2020, from $141.1 million for the year ended December 31, 2019. This increase was primarily due to loans acquired in the Merger and the impact of acquisition marks and related accretion. Interest income from loans increased to $225.1 million for 2020 compared to $130.9 million in 2019, which represents an increase of 72.0%. The average balance of loans receivable increased $2.6 billion to $5.2 billion at December 31, 2020, up from $2.6 billion at December 31, 2019.
During the same period, the average balance of investment securities increased to $544.6 million in 2020 from $294.0 million for the year ended December 31, 2019, primarily as a result of the Merger. Interest income from investment securities increased to $11.5 million in 2020 compared to $8.2 million in 2019.
Interest expense increased by $4.5 million to $29.9 million in 2020 compared to $25.4 million 2019. This increase was mainly due to a $2.1 billion increase in the average balance of interest-bearing liabilities offset by a 44 basis point decrease in the average cost of interest-bearing liabilities in 2020. The average balance of interest-bearing deposits increased $1.9 billion to $4.1 billion at December 31, 2020, up from $2.1 billion at December 31, 2019. Interest expense related to interest-bearing deposits was $26.9 million in 2020 compared to $22.6 million in 2019.
Interest expense on FHLB advances and other interest-bearing funding sources was $1.7 million and $32,000 respectively, in 2020 and $1.4 million and $25,000, respectively in 2019. The increase in FHLB advance expense was due to the Merger. Interest expense recognized by the Company related to subordinated debentures was $1.3 million in 2020 and $1.4 million in 2019.
The following table shows an analysis of net interest margin on a tax equivalent basis for the years ended December 31, 2021, 2020 and 2019:
Year Ended December 31
(Dollars In Thousands)
Average
Balance
Interest(1)
Yield/
Rate
Average
Balance
Interest(1)
Yield/
Rate
Average
Balance
Interest(1)
Yield/
Rate
Interest-Earning Assets:
Loans receivable (4)
$
5,473,668
$
223,823
4.09
%
$
5,224,357
$
225,179
4.31
%
$
2,597,864
$
130,943
5.04
%
Securities (5)
1,135,434
20,346
1.79
%
544,643
12,393
2.28
%
294,027
9,060
3.08
%
Interest-earning deposits
111,433
0.18
%
124,011
0.35
%
65,424
1,395
2.13
%
FHLB stock
11,643
2.00
%
38,954
2.46
%
12,347
5.29
%
Total interest-earning assets
6,732,178
244,600
3.63
%
5,931,965
238,965
4.03
%
2,969,662
142,051
4.78
%
Noninterest-earning assets
750,400
660,668
314,118
Total Assets
$
7,482,578
$
6,592,633
$
3,283,780
Interest-Bearing Liabilities:
Interest-bearing deposits
$
4,611,525
$
13,482
0.29
%
$
4,050,958
$
26,918
0.66
%
$
2,122,439
$
22,613
1.07
%
FHLB advances
12,586
0.18
%
187,745
1,691
0.90
%
73,013
1,443
1.98
%
Subordinated debentures
84,911
2,713
3.20
%
48,471
1,300
2.68
%
36,083
1,354
3.75
%
Other borrowings
-
0.75
%
6,047
0.53
%
3,924
0.64
%
Total interest-bearing
liabilities
4,709,074
16,218
0.34
%
4,293,221
29,941
0.70
%
2,235,459
25,435
1.14
%
Noninterest-bearing
demand deposits
1,676,006
-
-
1,311,478
-
-
594,785
-
-
Total including non-
interest- bearing demand
deposits
6,385,080
16,218
0.25
%
5,604,699
29,941
0.53
%
2,830,244
25,435
0.90
%
Other noninterest liabilities
88,461
89,842
47,250
Total Liabilities
6,473,541
5,694,541
2,877,494
Stockholders’ equity
1,009,037
898,092
406,286
Total liabilities and
stockholders’ equity
$
7,482,578
$
6,592,633
$
3,283,780
Net interest income;
interest rate spread (2)
$
228,382
3.29
%
$
209,024
3.33
%
$
116,616
3.64
%
Net interest margin (3)
3.39
%
3.52
%
3.93
%
Average interest-earning
assets to average interest-
bearing liabilities
143.0
%
138.2
%
132.8
%
(1)Interest on certain tax exempt loans and tax-exempt securities in 2021, 2020 and 2019 is not taxable for Federal income tax purposes. In order to compare the tax-exempt yields on these assets to taxable yields, the interest earned on these assets is adjusted to a pre-tax equivalent amount based on the marginal corporate federal income tax rate of 21%.
(2)Interest rate spread is the difference in the yield on interest-earning assets and the cost of interest-bearing liabilities.
(3)Net interest margin is net interest income divided by average interest-earning assets excluding average unrealized gains/losses. See Non-GAAP Financial Measures discussion above for further details.
(4)For the purpose of the computation for loans, non-accrual loans are included in the average loans outstanding.
(5)Securities yield = annualized interest income divided by the average balance of securities, excluding average unrealized gains/losses.
See Non-GAAP Financial Measure discussion above for further details.
The following table describes the extent to which changes in interest rates and changes in volume of interest-related assets and liabilities have affected Premier’s tax-equivalent interest income and interest expense during the periods indicated. For each category of interest-earning assets and interest-bearing liabilities, information is provided on changes attributable to (i) changes in volume (change in volume multiplied by prior year rate), (ii) change in rate (change in rate multiplied by prior year volume), and (iii) total change in rate and volume. The combined effect of changes in both rate and volume has been allocated proportionately to the change due to rate and the change due to volume.
Year Ended December 31
(In Thousands)
2021 vs. 2020
2020 vs. 2019
Increase
(decrease)
due to rate
Increase
(decrease)
due to volume
Total
increase
(decrease)
Increase
(decrease)
due to rate
Increase
(decrease)
due to volume
Total
increase
(decrease)
Interest-Earning Assets
Loans
$
(12,042
)
$
10,686
$
(1,356
)
$
(21,374
)
$
115,610
$
94,236
Securities
(5,564
)
13,517
7,953
(2,844
)
6,177
3,333
Interest-earning deposits
(189
)
(48
)
(237
)
(1,669
)
(960
)
FHLB stock
(54
)
(671
)
(725
)
(499
)
Total interest-earning assets
$
(17,849
)
$
23,484
$
5,635
$
(26,386
)
$
123,300
$
96,914
Interest-Bearing Liabilities
Deposits
$
(17,063
)
$
3,627
$
(13,436
)
$
(10,774
)
$
15,079
$
4,305
FHLB advances
(91
)
(1,578
)
(1,669
)
(1,102
)
1,351
Subordinated Debentures
1,413
(446
)
(54
)
Notes Payable
-
(32
)
(32
)
(5
)
Total interest- bearing liabilities
$
(16,712
)
$
2,988
$
(13,724
)
$
(12,327
)
$
16,834
$
4,507
Increase in net interest income
$
19,359
$
92,407
(1)The change in interest rates due to both rate and volume has been allocated between the factors in proportion to the relationship of the absolute dollar amounts of the change in each.
Provision for credit losses - Premier’s provision for credit losses was a recovery of $7.1 million for the year ended December 31, 2021, compared to an expense $44.3 million for 2020 and $2.9 million for 2019. The increase in provision for 2020 included $25.9 million related to acquisition accounting under CECL for the Merger with the remaining increase generally due to the larger loan portfolio post-Merger and the impact of the COVID-19 pandemic. The decrease for 2021 is primarily due to improved conditions as the economy and credit environment recovers from the COVID-19 pandemic.
Provisions for credit losses are charged to earnings to bring the total allowance for credit losses to a level deemed appropriate by management to absorb anticipated losses over the life of the loan. Factors considered by management include identifiable risk in the portfolios, historical experience, the volume and type of lending conducted by Premier, the amount of non-performing loans, the amount of loans graded by management as substandard, doubtful, or loss, general economic conditions (particularly as they relate to Premier’s market areas) and other factors related to the collectability of Premier’s loan portfolio. See also Allowance for Credit Losses in this Management’s Discussion and Analysis and Note 7 to the Consolidated Financial Statements.
Noninterest Income - Noninterest income decreased by $727,000, or 0.9%, to $80.0 million in 2021 primarily due to a decrease in mortgage banking income mostly offset by increases in services fees, security gains and BOLI income. Noninterest income increased by $35.7 million, or 79.5%, in 2020 to $80.7 million up from $45.0 million for the year ended December 31, 2019. The increase is primarily due to the Merger with 11 months of combined operations in 2020 compared to none in 2019.
Service fees and other charges increased to $24.2 million for the year ended December 31, 2021, from $21.4 million for 2020 and from $14.0 million in 2019. The increase in service fees and other charges in 2021 is primarily due to higher volumes as a result of the economic recovery. The increase in service fees and other charges in 2020 is primarily due to the Merger.
Noninterest income also includes gains, losses and impairment on investment securities. In 2021, Premier recognized $4.2 million of securities gains compared to $1.6 million in 2020 and $24,000 in 2019.
Mortgage banking income includes gains from the sale of mortgage loans, fees for servicing mortgage loans for others, an offset for amortization of mortgage servicing rights, and adjustments for impairment in the value of mortgage servicing rights. Mortgage banking income totaled $21.9 million, $28.2 million and $9.5 million in 2021, 2020 and 2019, respectively. The $6.3 million decrease in 2021 from 2020 is primarily attributable to a decrease in the gain on sale of loans of $19.9 million offset partly by a $13.8 million positive change in the valuation adjustments on mortgage servicing rights. Premier originated less residential mortgages for sale into the secondary market in 2021 compared with 2020 as long term interest rates stabilized resulting in less refinance activity. The balance of the mortgage servicing right valuation allowance was $2.7 million at the end of 2021.
The $18.7 million increase in mortgage banking income in 2020 from 2019 was primarily attributable to an increase in the gain on sale of loans of $20.5 million and a $3.5 million increase in mortgage servicing revenue offset by an increase of $5.7 million in mortgage servicing rights amortization expense and a $7.7 million negative change in the valuation adjustments on mortgage servicing rights. Premier originated more residential mortgages for sale into the secondary market in 2020 compared with 2019 as a result of the
Merger and due to increased refinance activity as long term interest rates fell in 2020. The balance of the mortgage servicing right valuation allowance was $8.5 million at the end of 2020.
Gains on the sale of non-mortgage loans, which include SBA and FSA loans, totaled $0 in 2021 compared to $324,000 in 2020 and $226,000 in 2019. Fluctuations in the volume of eligible SBA loans were the reasons for the difference in income year to year to year.
Insurance commission income decreased to $15.8 million in 2021, down $1.0 million from $16.8 million in 2020 primarily due to lower contingent commissions. Insurance commission income increased to $16.8 million in 2020, up $2.7 million from $14.1 million in 2019 primarily as a result of the Merger.
Income from bank owned life insurance (“BOLI”) increased $1.8 million in 2021 to $5.1 million up from $3.3 million in 2020 primarily due to claim gains. Income in 2019 was $2.2 million.
Wealth income decreased $132,000 to $6.0 million in 2021 from $6.2 million in 2020. Wealth income increased $3.1 million to $6.2 million in 2020 up from $3.1 million in 2019 primarily due to the Merger.
Other noninterest income decreased to $2.8 million in 2021 compared to $3.0 million in 2020. Other noninterest income increased $1.2 million to $3.0 million in 2020 compared to $1.8 million in 2019 primarily due to the Merger.
Noninterest Expense - Total noninterest expense for 2021 was $158.0 million compared to $165.2 million for the year ended December 31, 2020, and $97.1 million for the year ended December 31, 2019. The increase from 2019 is primarily due to the Merger with 12 months of combined operations in 2021 compared to none in 201. The decrease from 2020 is primarily due to $19.5 million of costs related to the Merger in 2020 mostly offset by increases in compensation and other non-interest expenses.
Compensation and benefits increased $13.4 million, or 17.4%, to $90.6 million in 2021 from $77.2 million in 2020. The increase is mainly related to increased staffing, merit increases and increases in health care. Occupancy expense decreased $819,000, to $15.5 million in 2021 compared to $16.3 million in 2019 and data processing expense decreased $1.3 million to $13.6 million in 2021 from $14.9 million in 2020. Other noninterest expenses increased $1.8 million to $25.1 million in 2021 from $23.3 million in 2020.
Compensation and benefits increased $20.0 million, or 35.1%, to $77.2 million in 2020 up from $57.2 million in 2019. The increase is mainly attributable to an increase in staff from the Merger. Merger costs related to the acquisition and integration of UCFC increased $18.1 million to $19.5 million for 2020 compared to $1.4 million in 2019. The amortization of intangibles increased $5.3 million to $6.4 million at the end of 2020 compared to $1.1 million in 2019 as a result of an increase in intangibles from the Merger. Occupancy expense increased $7.3 million, to $16.3 million in 2020 compared to $9.0 million in 2019, financial institutions tax increased $2.0 million to $4.2 million in 2020 from $2.2 million in 2019 and data processing expense increased $6.8 million to $14.9 million in 2020 from $8.1 million in 2019. The FDIC insurance premium increased to $3.4 million from $484,000 as a result of the Merger and an increase in assets from the (“PPP”) lending program. Other noninterest expenses increased $5.7 million to $23.3 million in 2020 from $17.6 million in 2019.
Income Taxes - Income taxes totaled $30.4 million in 2021 compared to $16.2 million in 2020 and $11.3 million in 2019. The effective tax rates for those years were 19.4%, 20.4%, and 18.6%, respectively. The tax rate is lower than the statutory 21% tax rate for the Company mainly because of investments in tax-exempt securities. The earnings on tax-exempt securities are not subject to federal income tax. See Note 18 - Income Taxes to the Consolidated Financial Statements for further details.
Concentrations of Credit Risk
Financial institutions such as Premier generate income primarily through lending and investing activities. The risk of loss from lending and investing activities includes the possibility that losses may occur from the failure of another party to perform according to the terms of the loan or investment agreement. This possibility is known as credit risk.
Lending or investing activities that concentrate assets in a way that exposes the Company to a material loss from any single occurrence or group of occurrences increases credit risk. Diversifying loans and investments to prevent concentrations of risks is one way a financial institution can reduce potential losses due to credit risk. Examples of asset concentrations would include multiple loans made to a single borrower and loans of inappropriate size relative to the total capitalization of the institution. Management believes adherence to its loan and investment policies allows it to control its exposure to concentrations of credit risk at acceptable levels. As of December 31, 2021. Premier’s loan portfolio was concentrated geographically in its northeast, northwest and central Ohio, northeast Indiana, and southeast Michigan market areas. Management has also identified lending for income-generating rental properties within commercial real estate as an industry concentration. Total loans for income-generating rental property totaled $2.0 billion at December 31, 2021, which represents 37.4% of the Company’s loan portfolio. Management believes it has the skill and experience to manage any risks associated with this type of lending. Loans in this category are generally paying as agreed without any unusual or unexpected levels of delinquency. The delinquency rate in this category, which is any loan 30 days or more past due, was 0.01% at December 31, 2021. There are no other industry concentrations that exceed 10% of the Company’s loan portfolio.
Liquidity and Capital Resources
The Company’s primary source of liquidity is its core deposit base, raised through the Bank’s branch network, along with wholesale sources of funding and its capital base. These funds, along with investment securities, provide the ability to meet the needs of depositors while funding new loan demand and existing commitments.
Cash (used in) generated from operating activities was $165.9 million, ($55.6) million and $39.7 million in 2021, 2020 and 2019, respectively. The adjustments to reconcile net income to cash provided by or used in operations during the periods presented consist primarily of proceeds from the sale of loans (less the origination of loans held for sale), the provision for credit losses, depreciation expense, the origination, amortization and impairment of mortgage servicing rights and increases and decreases in other assets and liabilities. The negative cash from operating activities in 2020 was primarily due to the Company’s decision to originate and sell construction loans held for sale for the first time. Due to the time it takes to complete the construction and sell the loans, the cash used in the origination of loans held for sale greatly exceeded the proceeds from the sale of loans held for sale. Since this is strictly a timing difference, the Company was comfortable paying out dividends on its common stock in 2020 even with the negative cash provided by operating activities.
The primary investing activity of Premier is lending and the purchase of available-for-sale securities, which are funded with cash provided from operating and financing activities, as well as proceeds from payment on existing loans and proceeds from maturities of investment securities. The net cash used for investing activities was $333.5 million, $541.9 million and $225.3 million in 2021, 2020 and 2019, respectively.
Principal financing activities include the gathering of deposits, the utilization of FHLB advances, and the sale of securities under agreements to repurchase such securities and borrowings from other banks. The net cash provided by financing activities was $169.9 million, $625.5 million and $218.0 million in 2021, 2020 and 2019, respectively. For additional information about cash flows from Premier’s operating, investing and financing activities, see the Consolidated Statements of Cash Flows and related Notes included in the Consolidated Financial Statements.
At December 31, 2021, Premier had the following commitments to fund deposits, borrowing obligations, leases and post-retirement benefits:
Maturity Dates by Period at December 31, 2021
Contractual Obligations
Total
Less than
1 year
1-3 years
3-5 years
More than
5 years
(In Thousands)
Certificates of deposit
$
800,123
$
529,525
$
222,993
$
47,575
Subordinated debentures
84,976
-
-
-
-
Lease obligations
22,164
2,547
3,953
2,773
12,891
Post-retirement benefits
1,013
-
Total contractual obligations
$
908,276
$
532,263
$
227,365
$
50,751
$
12,921
To meet its obligations management can adjust the rate of savings certificates to retain deposits in changing interest rate environments; it can sell or securitize mortgage and non-mortgage loans; and it can turn to other sources of financing including FHLB advances, the Federal Reserve, and brokered certificates of deposit. At December 31, 2021, Premier had additional borrowing capacity of $1.4 billion under its agreements with the FHLB.
The Bank is subject to various capital requirements. At December 31, 2021, the Bank had capital ratios that exceeded the standard to be considered “well capitalized.” For additional information about Premier and the Bank’s capital requirements, see Note 17 - Regulatory Matters to the Consolidated Financial Statements.
Critical Accounting Policies and Estimates
Premier has established various accounting policies that govern the application of GAAP in the preparation of its Consolidated Financial Statements. The significant accounting policies of Premier are described in the Notes to the Consolidated Financial Statements. Certain accounting policies involve significant judgments and assumptions by management, which have a material impact on the carrying value of certain assets and liabilities and management considers such accounting policies to be critical accounting policies. The judgments and assumptions used by management are based on historical experience and other factors, which are believed to be reasonable under the circumstances. Because of the nature of the judgments and assumptions made by management, actual results could differ from these judgments and estimates, which could have a material impact on the carrying value of assets and liabilities and the results of operations of Premier.
Allowance for credit losses - Premier believes the allowance for credit losses is a critical accounting policy that requires the most significant judgments and estimates used in preparation of its Consolidated Financial Statements. In determining the appropriate estimate for the allowance for credit losses, management considers a number of factors relative to both specific credits in the loan portfolio and macro-economic factors relative to the economy of the U.S. as a whole and the economies of the areas in which the Company does business.
Factors relative to specific credits that are considered include a customer’s payment history, a customer’s recent financial performance, an assessment of the value of collateral held, knowledge of the customer’s character, the financial strength and commitment of any guarantors, the existence of any customer or industry concentrations, changes in a customer’s competitive environment and any other issues that may impact a customer’s ability to meet his obligations.
Economic factors that are considered include levels of unemployment and inflation, GDP growth, Federal Reserve stimulus and broad global and national economic conditions.
In addition to the identification of specific customers who may be potential credit problems, management considers its historical losses, the results of independent loan reviews, an assessment of the adherence to underwriting standards, and other factors in providing for credit losses that have not been specifically classified. Management believes that the level of its allowance for credit losses is sufficient to cover the current expected credit losses. Refer to Allowance for credit losses in this Management’s Discussion and Analysis and Note 2 - Statement of Accounting Policies for a further description of the Company’s estimation process and methodology related to the allowance for credit losses.
Goodwill and Intangibles - Premier has two reporting units: the Bank and First Insurance. At December 31, 2021, Premier had goodwill of $317.9 million, including $295.6 million in the Bank and $22.3 million in First Insurance. The carrying value of goodwill is tested annually for impairment or more frequently if it is determined appropriate. The evaluation for impairment involves comparing the current estimated fair value of each reporting unit to its carrying value, including goodwill. If the current estimated fair value of a reporting unit exceeds its carrying value, no additional testing is required and impairment loss is not recorded. If the estimated fair value of a reporting unit is less than the carrying value, further valuation procedures are performed and could result in impairment of goodwill being recorded. Further valuation procedures would include allocating the estimated fair value to all assets and liabilities of the reporting unit to determine an implied goodwill value. If the implied value of goodwill of a reporting unit is less than the carrying amount of that goodwill, an impairment loss is recognized in an amount equal to that excess.
Premier evaluated goodwill as of December 31, 2021 and resulted in no additional testing or impairment. If, for any future period Premier determines that there has been impairment in the carrying value of goodwill balances, Premier will record a charge to earnings, which could have a material adverse effect on net income, but not risk-based capital ratios.
Premier has core deposit and other intangible assets resulting from acquisitions which are subject to amortization. Premier determines the amount of identifiable intangible assets based upon independent core deposit and customer relationship analyses at the time of the acquisition. Intangible assets with finite useful lives are evaluated for impairment whenever events or changes in circumstances indicate that their carrying amount may not be recoverable. No events or changes in circumstances that would indicate that the carrying amount of any identifiable intangible assets may not be recoverable had occurred during the years ended December 31, 2021 and 2020

---

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Asset/Liability Management
A significant portion of the Company’s revenues and net income is derived from net interest income and, accordingly, the Company strives to manage its interest-earning assets and interest-bearing liabilities to generate an appropriate contribution from net interest income. Asset and liability management seeks to control the volatility of the Company’s performance due to changes in interest rates. The Company attempts to achieve an appropriate relationship between rate sensitive assets and rate sensitive liabilities. Premier does not presently use off-balance sheet derivatives for risk management.
Premier monitors interest rate risk on a quarterly basis through simulation analysis that measures the impact changes in interest rates can have on net interest income. The simulation technique analyzes the effect of a presumed 100 basis point shift in interest rates (which is consistent with management’s estimate of the range of potential interest rate fluctuations) and takes into account prepayment speeds on amortizing financial instruments, loan and deposit volumes and rates, non-maturity deposit assumptions and capital requirements. It should be noted that other areas of Premier’s income statement, such as gains from sales of mortgage loans and amortization of mortgage servicing rights are also impacted by fluctuations in interest rates, but are not considered in the simulation of net interest income.
The table below presents, for the twelve months subsequent to December 31, 2021, and December 31, 2020, an estimate of the change in net interest income that would result from an immediate (shock) change in interest rates, moving in a parallel fashion over the entire yield curve, relative to the measured base case scenario of a static balance sheet. The Company did not complete an earnings at risk analysis for the down 200 basis point change in rates as of December 31, 2021 or December 31, 2020.
Impact on Future Annual Net Interest Income
(dollars in thousands)
December 31, 2021
December 31, 2020
Immediate Change in Interest Rates
+200
9.66
%
7.24
%
+100
4.82
%
3.76
%
-3.21
%
-2.40
%
The results of all the simulation scenarios are within the Board mandated guidelines as of December 31, 2021. Management reviews the Board policy limits in all scenarios to determine if they are adequate and if any changes should be made to Board mandated guidelines.
In addition to the simulation analysis, the Bank also prepares an economic value of equity (“EVE”) analysis. This analysis generally calculates the net present value of the Bank’s assets and liabilities in rate shock environments that range from -400 basis points to +400 basis points. However, the likelihood of a decrease in interest rates beyond 100 basis points as of December 31, 2021, was considered to be unlikely given the current interest rate levels and therefore was not included in this analysis. The results of this analysis are reflected in the following table.
December 31, 2021
December 31, 2020
Economic Value of Equity
Economic Value of Equity
Change in Rates
% Change
% Change
+ 400 bp
7.01
%
18.36
%
+ 300 bp
6.61
%
15.70
%
+ 200 bp
5.39
%
11.98
%
+ 100 bp
3.10
%
7.23
%
0 bp
-
-
- 100 bp
(6.83
)%
(11.37
)%
In evaluating the Bank’s exposure to interest rate risk, certain shortcomings inherent in each of the methods of analysis presented must be considered. For example, although certain assets and liabilities may have similar maturities or periods to repricing, they may react in different degrees to changes in market interest rates. Also, the interest rates on certain types of assets and liabilities may fluctuate in advance of changes in market rates while interest rates on other types of financial instruments may lag behind current changes in market rates. Furthermore, in the event of changes in rates, prepayments and early withdrawal levels could differ significantly from the assumptions in calculating the table and the results therefore may differ from those presented.

---

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Item 8.	Financial Statements and Supplementary Data
Management’s Report on Internal Control Over Financial Reporting
The management of Premier Financial Corp. is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is defined in Rule 13a-15(f) promulgated under the Securities Exchange Act of 1934 as a process designed by, or under the supervision of our principal executive and principal financial officers and effected by the Board of Directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. generally accepted accounting principles and 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 our assets;
2.Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with U.S. generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and
3.Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our 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 risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with policies or procedures may deteriorate.
Based on our evaluation under the framework in the 2013 Internal Control - Integrated Framework, management concluded that our internal control over financial reporting was effective as of December 31, 2021.
Crowe LLP, the independent registered public accounting firm that audited the consolidated financial statements of the Company included in this Annual Report on Form 10-K, has issued a report on the effectiveness of the Company’s internal control over financial reporting as of December 31, 2021. The report, which expresses an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting as of December 31, 2021, is included in this Item 8.
/s/ Gary M. Small
/s/ Paul Nungester
Gary M. Small
Paul Nungester
Chief Executive Officer
Executive Vice President and
Chief Financial Officer
Report of Independent Registered Public Accounting Firm
Stockholders and the Board of Directors of Premier Financial Corp.
Defiance, Ohio
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated statements of financial condition of Premier Financial Corp. (the "Company") as of December 31, 2021 and 2020, 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, 2021, 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, 2021, based on 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, 2021 and 2020, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2021 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, 2021, based on criteria established in Internal Control - Integrated Framework: (2013) issued by COSO.
Change in Accounting Principle
As discussed in Note 2 to the financial statements, the Company has changed its method of accounting for credit losses effective January 1, 2020 due to the adoption of Financial Accounting Standards Board (“FASB”) Accounting Standards Codification No. 326, Financial Instruments - Credit Losses (“ASC 326”). The Company adopted the new credit loss standard using the modified retrospective method such that prior period amounts are not adjusted and continue to be reported in accordance with previously applicable generally accepted accounting principles.
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.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of the critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Allowance for Credit Losses on Loans Receivable (“ACL”) - Qualitative Factors
As described in Notes 2 and 7 to the financial statements, the Company recognizes expected credit losses over the contractual lives of financial assets carried at amortized cost, including loans receivable, utilizing the Current Expected Credit Losses (“CECL”) methodology. The ACL was $66,468,000 at December 31, 2021, and consists of two components: a specific reserve based on the analysis of individually evaluated loans, and a general reserve which represents current expected credit losses on homogeneous loans (“general reserve”). The general reserve includes amounts from both a quantitative and a qualitative analysis. The Company has segregated the portfolio into segments with similar risk characteristics and generally uses two methodologies, discounted cash flow and probability of default/loss given default, to determine the quantitative factors.
Determination of the qualitative factors, which are added to the quantitative factors to adjust the general reserve for the current environment, incorporates subjective factors, including current loan-specific risk characteristics such as differences in underwriting standards, portfolio mix, delinquency level, nature or volume of the Company’s financial assets, changes in experience in staff, and environmental conditions, such as changes in unemployment rates, property values and other external factors, such as regulatory, legal and technological environments. We have identified auditing the qualitative factors as a critical audit matter as management’s determination of the qualitative factors is subjective and involves significant management judgments; and our audit procedures related to the qualitative factors involved a high degree of auditor judgment and required significant audit effort, including the need to involve more experienced audit personnel.
The primary procedures we performed to address this critical audit matter included:
•Testing the design and operating effectiveness of controls over the evaluation of the support used to estimate the qualitative factors, including controls addressing:
oManagement’s review of the relevance and reliability of data inputs used as the basis for the qualitative factors.
oManagement’s review of the reasonableness of significant judgments and assumptions used to develop the qualitative factors.
oManagement’s review of the mathematical accuracy of the qualitative factors calculation.
•Substantively testing management’s determination of the qualitative factors, including evaluating their judgments and assumptions including:
oTesting management’s process for developing the qualitative factors and assessing the relevance and reliability of data used to develop the adjustments, including evaluating their significant judgments and assumptions for reasonableness. Among other procedures, our evaluation considered evidence from internal and external sources, loan portfolio performance and whether significant judgments and assumptions were applied consistently from period to period.
oAnalytically evaluating the qualitative factors for directional consistency and reasonableness.
oTesting the mathematical accuracy of the qualitative factors used in the general reserve.
We have served as the Company's auditor since 2005.
/s/ Crowe LLP
Crowe LLP
Grand Rapids, Michigan
March 1, 2022
Premier Financial Corp.
Consolidated Statements of Financial Condition
(Dollars in Thousands, except per share data)
December 31
Assets
Cash and cash equivalents:
Cash and amounts due from depository institutions
$
54,858
$
79,593
Interest-bearing deposits
106,708
79,673
161,566
159,266
Securities available-for-sale, carried at fair value
1,206,260
736,654
Equity securities, carried at fair value
14,097
1,090
1,220,357
737,744
Loans held for sale, at fair value at December 31, 2021
162,947
221,616
Loans receivable, net of allowance for credit losses of $66,468 and $82,079 at December 31, 2021 and 2020, respectively
5,229,700
5,409,161
Mortgage servicing rights
19,538
13,153
Accrued interest receivable
20,767
25,434
Federal Home Loan Bank (FHLB) stock
11,585
16,026
Bank owned life insurance
166,767
144,784
Premises and equipment
55,602
58,665
Real estate and other assets held for sale (OREO)
Goodwill
317,948
317,948
Core deposit and other intangibles
24,129
30,337
Other assets
90,325
77,257
Total assets
$
7,481,402
$
7,211,734
Liabilities and stockholders’ equity
Liabilities:
Deposits:
Noninterest-bearing
$
1,724,772
$
1,597,262
Interest-bearing
4,557,279
4,450,579
Total
6,282,051
6,047,841
Subordinated debentures
84,976
84,860
Advance payments by borrowers
24,716
21,748
Reserve for credit losses - unfunded commitments
5,031
5,350
Other liabilities
61,132
69,659
Total liabilities
6,457,906
6,229,458
Commitments and Contingent Liabilities (Note 6)
Stockholders’ equity:
Preferred stock, $.01 par value per share: 37,000 shares authorized; no shares issued
-
-
Preferred stock, $.01 par value per share: 4,963,000 shares authorized; no shares
issued
-
-
Common stock, $.01 par value per share: 50,000,000 shares authorized;
43,297,260 and 43,297,260 shares issued and 36,383,613 and 37,291,480
shares outstanding, respectively
Additional paid-in capital
691,132
689,390
Accumulated other comprehensive (loss)/income, net of tax of $(912) and $3,988, respectively
(3,428
)
15,004
Retained earnings
443,517
356,414
Treasury stock, at cost, 6,913,647 and 6,005,780 shares respectively
(108,031
)
(78,838
)
Total stockholders’ equity
1,023,496
982,276
Total liabilities and stockholders’ equity
$
7,481,402
$
7,211,734
See accompanying notes
PREMIER FINANCIAL CORP.
Consolidated Statements of Income
(Dollar Amounts in Thousands, except per share data)
Years Ended December 31
Interest Income
Loans
$
223,787
$
225,084
$
130,853
Investment securities:
Tax-exempt
3,898
3,509
4,883
Taxable
15,471
7,960
3,300
Interest-bearing deposits
1,395
FHLB stock dividends
Total interest income
243,587
237,946
141,084
Interest Expense
Deposits
13,482
26,918
22,613
Federal Home Loan Bank advances and other
1,691
1,443
Subordinated debentures
2,713
1,300
1,354
Securities sold under agreement to repurchase
-
Total interest expense
16,218
29,941
25,435
Net interest income
227,369
208,005
115,649
Credit loss (benefit) expense - loans and leases (1)
(6,733
)
43,154
2,905
Credit loss (benefit) expense - unfunded commitments (1)
(319
)
1,096
(21
)
Net interest income after provision for credit losses
234,421
163,755
112,765
Non-interest Income
Service fees and other charges
24,168
21,369
14,028
Mortgage banking income
21,925
28,199
9,483
Insurance commissions
15,780
16,788
14,118
Gain on sale of non-mortgage loans
-
Gain on sale of securities available for sale
2,218
1,464
Gain on equity securities
1,954
-
Wealth management income
6,027
6,159
3,127
Income from Bank Owned Life Insurance
5,121
3,306
2,158
Other non-interest income
2,764
2,985
1,792
Total non-interest income
79,957
80,684
44,956
Non-interest Expense
Compensation and benefits
90,646
77,213
57,175
Occupancy
15,501
16,320
9,027
FDIC insurance premium
2,896
3,355
Financial institutions tax
4,079
4,173
2,194
Data processing
13,550
14,886
8,055
Acquisition related charges
-
19,485
1,422
Amortization of intangibles
6,208
6,449
1,119
Other non-interest expense
25,075
23,289
17,608
Total non-interest expense
157,955
165,170
97,084
Income before income taxes
156,423
79,269
60,637
Federal income taxes
30,372
16,192
11,267
Net Income
$
126,051
$
63,077
$
49,370
Earnings per common share (Note 4)
Basic
$
3.39
$
1.75
$
2.49
Diluted
$
3.39
$
1.75
$
2.48
(1)Beginning January 1, 2020, calculation is based on current expected loss methodology. Prior to January 1, 2020, calculation was based on incurred loss methodology.
See accompanying notes
PREMIER FINANCIAL CORP.
Consolidated Statements of Comprehensive Income
(Dollar Amounts in Thousands)
For the Years Ended December 31
Net income
$
126,051
$
63,077
$
49,370
Change in securities available-for-sale (AFS):
Unrealized holding gains (losses) on available-for-sale securities
arising during the period
(21,967
)
14,431
8,754
Reclassification adjustment for (gains) losses realized in income
(2,218
)
(1,464
)
(24
)
Net unrealized gains (losses)
(24,185
)
12,967
8,730
Income tax effect
5,079
(2,723
)
(1,834
)
Net of tax amount
(19,106
)
10,244
6,896
Change in cash flow hedge derivatives:
Unrealized holding gains (losses) on balance sheet swap
3,025
14,431
8,754
Reclassification adjustment for cash flow hedge derivative (gains)
losses included in income
(2,172
)
-
(24
)
Net unrealized gains (losses)
14,431
8,730
Income tax effect
(179
)
(2,723
)
(1,834
)
Net of tax amount
11,708
6,896
Change in unrealized gain/(loss) on postretirement benefit:
Net gain (loss) on defined benefit postretirement medical
plan realized during the period
(310
)
Net amortization and deferral
(13
)
Net gain (loss) activity during the period
-
(296
)
Income tax effect
-
(43
)
Net of tax amount
-
(153
)
Total other comprehensive income (loss)
(18,432
)
10,409
6,743
Comprehensive income
$
107,619
$
73,486
$
56,113
See accompanying notes
PREMIER FINANCIAL CORP.
Consolidated Statements of Changes in Stockholders’ Equity
(Dollar Amounts In Thousands, except number of shares)
Preferred
Stock
Common
Stock
Shares(1)
Common
Stock
Additional
Paid-In
Capital
Accumulated
Other
Comprehensive
Income (Loss)
Retained
Earnings
Treasury
Stock
Total
Stockholder’s
Equity
Balance at December 31, 2018
$
-
20,171,392
$
$
161,593
$
(2,148
)
$
295,588
$
(55,571
)
$
399,589
Net income
49,370
49,370
Other comprehensive loss
6,743
6,743
Deferred compensation plan
(80
)
Stock based compensation expense
Shares issued under stock option plan, net of 178 repurchased and retired
19,022
(32
)
(5
)
Restricted share activity under stock incentive plans net of 27,728 repurchased and retired
51,194
(154
)
Shares issued from direct stock sales
4,255
Shares repurchased
(515,977
)
(15,147
)
(15,147
)
Common stock dividends paid ($0.79 per share)
(15,624
)
(15,624
)
Balance at December 31, 2019
$
-
19,729,886
$
$
161,955
$
4,595
$
329,175
$
(69,685
)
$
426,167
Net income
63,077
63,077
Other comprehensive income
10,409
10,409
Adoption of ASC 326
(2,566
)
(2,566
)
Deferred compensation plan
7,524
(24
)
-
Stock based compensation expense
2,312
2,312
Capital stock issuance related to acquisition
17,926,174
527,132
527,311
Vesting of incentive plans
39,548
(1,864
)
(1,371
)
Shares issued under stock option plan, net
11,408
(122
)
-
Restricted share issuance
13,349
(374
)
-
Restricted share forfeitures
(2,265
)
(13
)
-
Shares issued from direct stock sales
1,148
Shares repurchased
(435,292
)
(10,183
)
(10,183
)
Common stock dividends paid ($0.88 per share)
(32,898
)
(32,898
)
Other, net
(258
)
-
Balance at December 31, 2020
$
-
37,291,480
$
$
689,390
$
15,004
$
356,414
$
(78,838
)
$
982,276
Net income
-
126,051
126,051
Other comprehensive loss
(18,432
)
(18,432
)
Deferred compensation plan
7,911
(30
)
-
Stock based compensation expense
2,827
2,827
Vesting of incentive plans
31,597
(507
)
-
Shares exercised under stock option plan, net
Restricted share issuance
43,460
(568
)
-
Restricted share forfeitures
(24,299
)
(723
)
(703
)
Shares repurchased
(967,136
)
(29,583
)
(29,583
)
Common stock dividends paid ($1.05 per share)
(38,948
)
(38,948
)
Balance at December 31, 2021
$
-
36,383,613
$
$
691,132
$
(3,428
)
$
443,517
$
(108,031
)
$
1,023,496
See accompanying notes
PREMIER FINANCIAL CORP.
Consolidated Statements of Cash Flows
(Dollar Amounts in Thousands)
Years Ended December 31
Operating Activities
Net income
$
126,051
$
63,077
$
49,370
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for credit losses
(7,052
)
44,250
2,905
Depreciation
6,306
6,512
4,231
Net amortization of premium and discounts on loans, securities, deposits and debt
obligations
(284
)
(5,157
)
Amortization of mortgage servicing rights, net of impairment charges/recoveries
2,086
15,456
2,043
Amortization of intangibles
6,208
6,449
1,119
Mortgage banking gain, net
(16,437
)
(36,683
)
(7,932
)
Loss on sale or disposals or write-downs of property, plant and equipment
-
-
Gain/loss on sale / write-down of real estate and other assets held for sale
(6
)
(10
)
Gain on sale of available for sale securities
(2,218
)
(1,464
)
(24
)
Gain on equity securities
(1,954
)
(90
)
-
Change in deferred taxes
5,393
(9,781
)
(419
)
Proceeds from sale of loans held for sale
867,522
847,141
302,554
Origination of loans held for sale
(800,887
)
(967,861
)
(308,434
)
Stock based compensation expense
2,827
2,312
Restricted stock forfeits for taxes and option exercises
(703
)
(1,371
)
Excess tax benefit (expense) on stock compensation plans
-
-
(108
)
Income from bank owned life insurance
(5,121
)
(3,306
)
(2,158
)
Changes in:
Accrued interest receivable and other assets
(5,755
)
(14,729
)
(6,916
)
Other liabilities
(10,813
)
(363
)
1,688
Net cash provided by operating activities
165,163
(55,618
)
39,685
Investing Activities
Proceeds from maturities, calls and paydowns of held-to-maturity securities
-
-
Proceeds from maturities, calls and paydowns of available-for-sale securities
149,197
124,731
49,104
Proceeds from sale of available-for-sale securities
158,012
52,420
2,667
Proceeds from sale of OREO
1,081
1,262
Purchases of available-for-sale securities
(806,083
)
(362,426
)
(33,463
)
Purchases of equity securities
(11,053
)
(1,000
)
-
Purchases of office properties and equipment
(3,023
)
(5,361
)
(3,134
)
Investment in bank owned life insurance
(18,307
)
-
(6,600
)
Proceeds from bank owned life insurance death benefit
1,445
-
Net change in Federal Home Loan Bank stock
4,441
8,642
2,302
Net cash received (paid) in acquisitions
-
52,448
(1,600
)
Proceeds from sale of non-mortgage loans
-
5,241
21,239
Net increase (decrease) in loans receivable
192,069
(417,630
)
(258,119
)
Net cash used in investing activities
(332,814
)
(541,854
)
(225,348
)
Financing Activities
Net increase in deposits and advance payments by borrowers
238,474
1,088,832
251,282
Net change in Federal Home Loan Bank advances
-
(466,063
)
(126
)
Proceeds from subordinated debentures
-
48,777
-
Decrease in securities sold under repurchase agreements
-
(2,999
)
(2,742
)
Cash dividends paid on common stock
(38,948
)
(32,898
)
(15,624
)
Net cash paid for repurchase of common stock
(29,583
)
(10,183
)
(15,147
)
Proceeds from exercise of stock options
-
Proceeds from direct stock sales
-
Net cash provided by financing activities
169,951
625,484
217,955
Increase (decrease) in cash and cash equivalents
2,300
28,012
32,292
Cash and cash equivalents at beginning of period
159,266
131,254
98,962
Cash and cash equivalents at end of period
$
161,566
$
159,266
$
131,254
Supplemental cash flow information:
Interest paid
$
16,357
$
30,536
$
25,348
Income taxes paid
27,055
32,390
11,200
Transfer from other liability to equity
-
-
-
Transfers from held to maturity securities to available for sale securities
-
-
Transfers from loans to other real estate owned and other assets held for sale
Initial recognition of right-of-use asset
10,106
8,808
Initial recognition of lease liability
10,254
9,339
Initial recognition ASU 326
-
2,566
-
See accompanying notes.
Notes to the Consolidated Financial Statements
1.Basis of Presentation
On June 19, 2020, First Defiance Financial Corp. changed its name to Premier Financial Corp. (“Premier” or the “Company”). In connection with the name change, Premier’s stock continued to be traded on the Nasdaq Global Select Market, but under the new ticker PFC. On this same date, First Federal Bank of the Midwest, a wholly-owned subsidiary of the Company, changed its name to Premier Bank (the “Bank”).
Premier is a financial holding company that conducts business through its wholly-owned subsidiaries, the Bank, First Insurance Group of the Midwest, Inc. (“First Insurance”), PFC Risk Management Inc. (“PFC Risk Management”), and PFC Capital, LLC (“PFC Capital”). All significant intercompany transactions and balances are eliminated in consolidation.
On January 31, 2020, Premier completed its previously announced acquisition of United Community Financial Corp., an Ohio corporation (“UCFC”), pursuant to the Agreement and Plan of Merger (the “Merger Agreement”), dated as of September 9, 2019, by and between Premier and UCFC. At the effective time of the merger (the “Merger”), UCFC merged with and into Premier, with Premier surviving the Merger. Simultaneously with the completion of the Merger, Premier converted from a unitary thrift holding company to a bank holding company, making an election to be a financial holding company.
Immediately following the Merger, UCFC’s wholly-owned bank subsidiary, Home Savings Bank (“Home Savings”) merged with and into the Bank, with the Bank surviving the Merger (the "Bank Merger"). Immediately prior to the Bank Merger, the Bank converted from a federal thrift into an Ohio state-chartered bank. In addition, immediately following the Bank Merger, UCFC’s wholly-owned insurance subsidiaries, HSB Insurance, LLC, and United American Financial Services, Inc., each merged into First Insurance, with First Insurance surviving the mergers. Premier also acquired PFC Capital in the Merger.
The Bank is primarily engaged in community banking. It attracts deposits from the general public through its offices and website, and uses those and other available sources of funds to originate residential real estate loans, commercial real estate loans, commercial loans, home improvement and home equity loans and consumer loans. In addition, the Bank invests in U.S. Treasury and federal government agency obligations, obligations of states and political subdivisions, mortgage-backed securities that are issued by federal agencies, collateralized mortgage obligations (“CMOs”), and corporate bonds. The Bank’s deposits are insured by the Federal Deposit Insurance Corporation (“FDIC”). The Bank is a member of the Federal Home Loan Bank (“FHLB”) System.
PFC Capital was formed as an Ohio limited liability company by UCFC in 2016 for the purpose of providing mezzanine funding for customers of Home Savings. Mezzanine loans are offered by PFC Capital to customers in the Company’s market area and are expected to be repaid from the cash flow from operations of the borrowing businesses.
First Insurance is an insurance agency that conducts business throughout Premier’s markets. First Insurance offers property and casualty insurance, life insurance and group health insurance.
PFC Risk Management is a wholly-owned insurance company subsidiary of the Company that insures the Company and its subsidiaries against certain risks unique to the operations of the Company and for which insurance may not be currently available or economically feasible in today’s insurance marketplace. PFC Risk Management pools resources with several other similar insurance company subsidiaries of financial institutions to help minimize the risk allocable to each participating insurer.
The COVID-19 pandemic has continued to create extensive disruptions to the global economy and to the lives of individuals throughout the world. Business and consumer customers of the Bank are experiencing varying degrees of financial distress, which is expected to continue over the coming months and will likely adversely affect their ability to pay interest and principal on their loans. Further, value of the collateral securing their obligations may decline. These uncertainties may negatively impact the Statement of Financial Condition, the Statement of Income and the Statement of Cash Flows of the Company.
2. Statement of Accounting Policies
Use of Estimates
The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”) requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. These estimates and assumptions affect the amounts reported in the financial statements and the disclosures provided, and actual results could differ.
Earnings Per Common Share
Basic earnings per common share is computed by dividing net income applicable to common shares (net income less dividend requirements for preferred stock, accretion of preferred stock discount and redemption of preferred stock) by the weighted average number of shares of common stock outstanding during the period. All outstanding unvested share-based payment awards that contain rights to nonforfeitable dividends are considered participating securities for the calculation. Diluted earnings per common share includes the dilutive effect of additional potential common shares issuable under stock options, warrants, restricted stock awards and stock grants. See also Note 4.
Comprehensive Income
Comprehensive income consists of net income and other comprehensive income (loss). Other comprehensive income (loss) includes unrealized gains and losses on available-for-sale securities, unrealized gains and losses on cash flow hedges and the net unrecognized actuarial losses and unrecognized prior service costs associated with the Company’s Defined Benefit Postretirement Medical Plan. All items included in other comprehensive income are reported net of tax. See also Notes 5, 16 and 25 and the Consolidated Statements of Comprehensive Income.
Cash Flows
For purposes of the statement of Cash flows, Premier considers all highly liquid investments with a term of three months or less to be cash equivalents. Net cash flows are reported for loan and deposit transactions, interest-bearing deposits in other financial institutions and repurchase agreements.
Investment Securities
Securities are classified as held-to-maturity when Premier has the positive intent and ability to hold the securities to maturity and are reported at amortized cost, adjusted for premiums and discounts that are recognized in interest income using the interest method over the period to maturity. In addition, Premier may purchase equity securities for its portfolio. Equity securities are a separate category of investments as changes in market value must be run through earnings as a gain (loss) on equity securities.
Securities available-for-sale consists of those securities which might be sold prior to maturity due to changes in interest rates, prepayment risks, yield and availability of alternative investments, liquidity needs or other factors. Available-for-sale securities are stated at fair value, with the unrealized gains and losses, net of tax, reported in other comprehensive income (loss) until realized. Realized gains and losses are included in gains (losses) on securities or other-than-temporary impairment losses on securities. Realized gains and losses on securities sold are recognized on the trade date based on the specific identification method.
Interest income includes amortization of purchase premiums and discounts. Premiums and discounts are amortized on the level-yield method without anticipating prepayments, except for mortgage-backed securities where prepayments are expected.
Quarterly, the Company evaluates if any security has a fair value less than its amortized cost. Once these securities are identified, in order to determine whether a decline in fair value resulted from a credit loss or other factors, the Company performs further analysis. See to Footnote 5 - Investment Securities for further discussion.
Equity Securities
These securities are reported at fair value utilizing Level 1 inputs where the Company obtains fair value measurement from a broker.
FHLB Stock
The Bank is a member of the FHLB system. Members are required to own a certain amount of stock based on the level of borrowings and other factors. 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. At December 31, 2021 and 2020, the Company held $11.6 million and $16.0 million, respectively, at the FHLB of Cincinnati.
Loans Receivable
Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are reported at the principal amount outstanding, net of deferred loan fees and costs, purchase premiums and discounts and the allowance for credit losses. Deferred fees net of deferred incremental loan origination costs, are amortized to interest income generally over the contractual life of the loan using the interest method without anticipating prepayments. The recorded investment in loans includes accrued interest receivable, unamortized premiums and discounts, and net deferred fees and costs and undisbursed loan amounts.
Mortgage loans originated and intended for sale in the secondary market are classified as loans held for sale and are carried at fair value, as determined by market pricing from investors. Net unrealized gains and losses are recorded as a part of mortgage banking income on the Consolidated Statement of Income. Mortgage loans held for sale are generally sold with servicing rights retained. The carrying value of mortgage loans sold is reduced by the amount allocated to the servicing right. Gains or losses on sales of mortgage loans are based on the difference between the selling price and the carrying value of the related loan sold.
The Company may incur losses pertaining to loans sold to Fannie Mae and Freddie Mac but repurchased due to underwriting issues. Repurchase losses are recognized when the Company determines they are probable and estimable.
Interest receivable is accrued on loans and credited to income as earned. The accrual of interest on loans 90 days delinquent or those loans individually analyzed is discontinued when, in management’s opinion, the borrower may be unable to meet payments as they become due. For these loans, interest accrual is only to the extent cash payments are received. The accrual of interest on these loans is generally resumed after a pattern of repayment has been established and the collection of principal and interest is reasonably assured.
Purchased Credit Deteriorated (“PCD”) Loans
The Company acquires loans individually and in groups or portfolios. At acquisition, the Company reviews each loan to determine whether there is evidence of more than insignificant deterioration of credit quality since origination. The Company determines whether each such loan is to be accounted for individually or whether such loans will be assembled into pools of loans based on common risk characteristics (loan type and date of origination).
PCD loans acquired in a transaction are marked to fair value and a mark on yield is recorded. In addition, an adjustment is made to the ACL for the expected loss on the acquisition date. These loans are assessed on a regular basis and subsequent adjustments to the ACL are recorded on the income statement.
Allowance for credit losses
On January 1, 2020, the Company adopted ASU 2016-13 Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, as amended, which replaced the incurred loss methodology with an expected loss methodology that is referred to as the current expected credit loss (“CECL”) methodology. The measurement of expected credit losses under the CECL methodology is applicable to financial assets measured at amortized cost, including loan receivables and held-to-maturity debt securities. It also applies to off-balance sheet credit exposures not accounted for as insurance (loan commitments, standby letters of credit, financial guarantees, and other similar instruments) and net investments in leases recognized by a lessor in accordance to Topic 842 on leases. In addition, ASC 326 made changes to the accounting for available-for-sale debt securities.
The Company adopted ASC 326 using the prospective transition approach for financial assets purchased with credit deterioration that were previously classified as purchased credit impaired (“PCI”) and accounted for under ASC 310-30. In accordance with the standard, management did not reassess whether PCI assets met the criteria of PCD assets as of the date of adoption. As a part of the merger, the Bank recognized $7.6 million of the allowance for credit losses related to PCD loans. The remaining noncredit discount (based on the adjusted amortized cost basis) will be accreted into interest income at the effective interest rate as of the merger date.
Loans that management has the intent and ability to hold for the foreseeable future or until maturity of payoff are reported at amortized cost. Amortized cost is the principal balance outstanding, net of purchase premiums and discounts, adjustments, and deferred loan fees and costs. Accrued interest receivable was reported in other assets and is excluded from the estimate of credit losses.
Management estimates the allowance balance using relevant available information, from internal and external sources, relating to past events, current conditions, and reasonable and supportable forecasts. Historical credit loss experience provides the basis for the estimation of expected credit losses. Adjustments to historical loss information are made for differences in current loan-specific risk characteristics such as differences in underwriting standards, portfolio mix, delinquency level, nature or volume of the Company’s financial assets, changes in experience in staff, as well as changes in environmental conditions, such as changes in unemployment rates, property values and other external factors, such as regulatory, legal and technological environments.
The allowance for credit losses is measured on a collective pool basis when similar risk characteristics exist. The Company has identified the following portfolio segments and is generally utilizing two methodologies to analyze loan pools: discounted cash flow (“DCF”) and probability of default/loss given default (“PD/LGD”):
Portfolio Segments
Loan Pool
Methodology
Loss Drivers
Residential real estate
1-4 Family nonowner occupied
DCF
National unemployment
1-4 Family owner occupied
DCF
National unemployment
Commercial real estate
Commercial real estate nonowner occupied
DCF
National unemployment
Commercial real estate owner occupied
DCF
National unemployment
Multi Family
DCF
National unemployment
Agriculture Land
DCF
National unemployment
Other commercial real estate
DCF
National unemployment
Construction secured by real estate
Construction
PD/LGD
Call report loss history
Commercial
Commercial working capital
PD/LGD
Call report loss history
Agriculture production
PD/LGD
Call report loss history
Other commercial
PD/LGD
Call report loss history
Home equity and improvement
Home equity and improvement
PD/LGD
Call report loss history
Consumer finance
Consumer finance
Remaining life
Call report loss history
Loans that do not share risk characteristics are evaluated on an individual basis and included in the collective evaluation. A loan is individually analyzed when, based on current information and events, it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loans agreement. Loans, for which terms have been modified and for which the borrower is experiencing financial difficulties, are considered troubled debt restructurings. When a loan is considered individually analyzed, an analysis of the net present value of estimated cash flows is performed and an allowance may be established based on the outcome of that analysis, or if the loan is deemed to be collateral dependent an allowance is established based on the fair value of collateral. All modifications are reviewed by the bank’s Chief Credit Officer or Chief Credit Administration Officer to determine whether or not the modification constitutes a troubled debt restructure. Commercial and commercial real estate loan relationships greater than $500,000 are individually evaluated. If a loan is individually analyzed, a portion of the allowance is allocated so that the loan is reported net of the allowance allocation which is determined based on 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. Loan relationships less than $500,000 are aggregated by loan segment and risk level and given a specific reserve based on the general reserve factor for that loan segment and risk level. Large groups of smaller balance homogeneous loans, such as consumer and residential real estate loans, are collectively evaluated, and accordingly, they are not separately identified for disclosure.
Troubled Debt Restructurings (“TDR”): A loan for which terms have been modified resulting in a concession, and for which the borrower is experiencing financial difficulties, is considered to be a TDR. The allowance for credit loss on a TDR is measured using the same method as all other loans held for investment, except when the value of a concession is measured using the discounted cash flow method, the allowance for credit loss is determined by discounting the expected future cash flow at the original interest rate of the loan. If a TDR is considered to be a collateral dependent loan, the loan is reported, net, at the fair value of the collateral. For TDRs that subsequently default, the Company determines the amount of the allowance on that loan in accordance with the accounting policy for the allowance for credit losses on loans individually identified. The Company incorporates recent historical experience related to TDRs including the performance of TDRs that subsequently default into the calculation of the allowance by loan portfolio segment. See Footnote 7 - Loans for further discussion on TDRs.
Servicing Rights
Servicing rights are recognized separately when they are acquired through sales of loans. Servicing rights are initially recorded at fair value with the income statement effect recorded in gains on sales of loans. Fair value is based on market prices for comparable mortgage servicing contracts, when available, or alternatively, is based on a valuation model that calculates the present value of estimated future net servicing income. The valuation model incorporates assumptions that market participants would use in estimating future net servicing income, such as the cost to service, the discount rate, the custodial earnings rate, an inflation rate, ancillary income, prepayment speeds and default rates and losses. The Company compares the valuation model inputs and results to published industry data in order to validate the model results and assumptions. All classes of servicing assets are subsequently measured using the amortization method which requires servicing rights to be amortized into noninterest income in proportion to, and over the period of, the estimated future net servicing income of the underlying loans, driven, generally, by changes in market interest rates.
Servicing assets are evaluated for impairment based upon the fair value of the rights as compared to carrying amount. Impairment is determined by stratifying rights into groupings based on predominant risk characteristics, such as interest rate, loan type, loan terms, year of origination and investor type. Impairment is recognized through a valuation allowance for an individual grouping, to the extent that fair value is less than the carrying amount. If the Company later determines that all or a portion of the impairment no longer exists for a particular grouping, a reduction of the allowance may be recorded as an increase to income. Changes in valuation allowances are reported within mortgage banking income on the income statement. The fair values of servicing rights are subject to significant fluctuations as a result of changes in estimated and actual prepayment speeds and default rates and losses.
Servicing fee income, which is reported on the income statement with mortgage banking income, is recorded for fees earned for servicing loans. The fees are based on a contractual percentage of the outstanding principal, or a fixed amount per loan, and are recorded as income when earned. The amortization of mortgage servicing rights is netted against loan servicing fee income. Servicing fees totaled $7.6 million, $7.3 million and $3.8 million for the years ended December 31, 2021, 2020 and 2019, respectively. Late fees and ancillary fees related to loan servicing are not material. See Note 8.
Bank Owned Life Insurance
The Company has purchased life insurance policies for certain key employees. Bank owned life insurance is recorded at the amount that can be realized under the insurance contract at the balance sheet date, which is the cash surrender value adjusted for other charges or other amounts due that are probable at settlement.
Premises and Equipment and Long Lived Assets
Land is carried at cost. Premises and equipment are carried at cost less accumulated depreciation and amortization computed principally by the straight-line method over the following estimated useful lives:
Buildings and improvements
20 to 50 years
Furniture, fixtures and equipment
3 to 15 years
Long-lived assets to be held and those to be disposed of and certain intangibles are periodically evaluated for impairment. See Note 9.
Goodwill and Other Intangibles
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 acquiree, over the fair value of the net assets acquired and liabilities assumed as of the acquisition date. Goodwill and intangible assets acquired in a purchase business combination and determined to have an indefinite useful life are not amortized, but tested for impairment at least annually. The Company has selected November 30 as the date to perform the annual impairment test. Intangible assets with definite useful lives are amortized over their estimated useful lives to their estimated residual values. Goodwill is the only intangible asset with an indefinite life on Premier’s balance sheet.
Other intangible assets consist of core deposit and acquired customer relationship intangible assets arising from whole bank and branch acquisitions, as well as, , wealth management and insurance agency acquisitions. They are initially recorded at fair value and then amortized on an accelerated basis over their estimated lives, which range from five years for non-compete agreements to 10 years for core deposit and customer relationship intangibles. See Note 10.
Real Estate and Other Assets Held for Sale
Real estate and other assets held for sale are comprised of properties or other assets acquired through foreclosure proceedings or acceptance of a deed in lieu of foreclosure. These assets are initially recorded at fair value less costs to sell when acquired, establishing a new cost basis. Losses arising from the acquisition of such property are charged against the allowance for credit losses at the time of acquisition. These properties are carried at the lower of cost or fair value, less estimated costs to dispose. If fair value declines subsequent to foreclosure, the property is written down against expense. Costs after acquisition are expensed.
Stock Compensation Plans
Compensation cost is recognized for stock options and restricted share awards issued to employees and directors, 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. Restricted shares awards are valued at the market value of Company stock at the date of the grant. Compensation cost is recognized over the required service period, generally defined as the vesting period. For awards with graded vesting, compensation cost is recognized on a straight-line basis over the requisite service period for the entire award. See Note 20.
Fair Value of Financial Instruments
Fair values of financial instruments are estimated using relevant market information and other assumptions, as more fully disclosed in Note 22. 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.
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.
Mortgage Banking Derivatives
Commitments to fund mortgage loans (interest rate locks) to be sold into the secondary market and forward commitments for the future delivery of these mortgage loans are accounted for as free standing derivatives. Fair values of these mortgage derivatives are estimated based on changes in mortgage interest rates from the date the interest on the loan is locked. The Company enters into forward commitments for the future delivery of mortgage loans when interest rate locks are entered into, in order to hedge the change in interest rates resulting from its commitments to fund the loans. Changes in fair values of these derivatives are included in mortgage banking income.
Interest Rate Swaps
The Company periodically enters into interest rate swap agreements with its commercial customers who desire a fixed rate loan term that is longer than the Company is willing to extend. The Company then enters into a reciprocal swap agreement with a third party that offsets the interest rate risk from the interest rate swap extended to the customer. The interest rate swaps are derivative instruments which are carried at fair value on the statement of financial condition. The Company uses an independent third party to perform a market valuation analysis for both swap positions.
The Company also enters into cash flow hedge derivative instruments to hedge the risk of variability in cash flows (future interest payments) attributable to changes in contractually specified LIBOR benchmark interest rate on the Company's floating rate loan pool. the Company uses an independent third party to perform a market valuation analysis for the derivatives.
Operating Segments
Management considers the following factors in determining the need to disclose separate operating segments: (1) the nature of products and services, which are all financial in nature; (2) the type and class of customer for the products and services; in Premier’s case retail customers for retail bank and insurance products and commercial customers for commercial loan, deposit, life, health and property and casualty insurance needs; (3) the methods used to distribute products or provide services; such services are delivered through banking and insurance offices and through bank and insurance customer contact representatives. Retail and commercial customers are frequently targets for both banking and insurance products; (4) the nature of the regulatory environment; both banking and insurance entities are subject to various regulatory bodies and a number of specific regulations.
Quantitative thresholds as stated in FASB ASC Topic 280, Segment Reporting are monitored. For the year ended December 31, 2021, the reported revenue for First Insurance was 5.5% of total revenue for Premier. Total revenue includes interest income plus noninterest income. Net income for First Insurance for the year ended December 31, 2021, was 2.2% of consolidated net income. Total assets of First Insurance at December 31, 2021, were 0.5% of total assets. First Insurance does not meet any of the quantitative thresholds of FASB ASC Topic 280. Accordingly, all of the financial service operations are considered by management to be aggregated in one reportable segment.
Dividend Restriction
Banking regulations require maintaining certain capital levels and may limit the dividends paid by the Bank to Premier. See Note 17 for further details on restrictions.
Loan Commitments and Related 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.
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 are any such matters that will have a material effect on the financial statements.
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. Realization of deferred tax assets is dependent upon the generation of a sufficient level of future taxable income and recoverable taxes paid in prior years. Although realization is not assured, management believes it is more likely than not that all of the deferred tax assets will be realized. The Company recognizes interest and/or penalties related to income tax matters in income tax expense.
An effective tax rate of 21% is used to determine after-tax components of other comprehensive income (loss) included in the statements of stockholders’ equity. See Note 18.
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.
Retirement Plans
Pension expense is the net of service and interest cost, return on plan assets and amortization of gains and losses not immediately recognized. Employee 401(k) plan expense is the amount of matching contributions. Deferred compensation and supplemental retirement plan expense allocates the benefits over years of service. See Notes 16 and 19.
Revenue Recognition
ASC 606, Revenue from Contracts with Customers (“ASC 606”), establishes principles for reporting information about the nature, amount, timing and uncertainty of revenue and cash flows arising from the entity's contracts to provide goods or services to customers. The core principle requires an entity to recognize revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration that it expects to be entitled to receive in exchange for those goods or services recognized as performance obligations are satisfied.
The majority of the Company’s revenue-generating transactions are not subject to ASC 606, including revenue generated from financial instruments, such as loans, letters of credit, and investment securities, as well as revenue related to mortgage servicing activities, as these activities are subject to other GAAP discussed elsewhere within the Company’s disclosures. Descriptions of the Company’s revenue-generating activities that are within the scope of ASC 606, which are presented in the Company’s statement of income as components of noninterest income are as follows:
•Service charges on deposit accounts - these represent general service fees for monthly account maintenance and activity or transaction-based fees and consist of transaction-based revenue, time-based revenue (service period), item-based revenue or some other individual attribute-based revenue. Revenue is recognized when our performance obligation is completed which is generally monthly for account maintenance services or when a transaction has been completed (such as a wire transfer). Payment for such performance obligations are generally received at the time the performance obligations are satisfied. Service charges on deposit accounts that are within the scope of ASC 606 were $11.2 million in 2021, $10.2 million in 2020 and $7.1 million in 2019. Income from services charges on deposit accounts is included in service fees and other charges in noninterest income.
•Interchange income - this represents fees earned from debit and credit cardholder transactions. Interchange fees from cardholder transactions represent a percentage of the underlying transaction value and are recognized daily, concurrent with the transaction processing services provided to the cardholder. Interchange fees were $10.9 million in 2021, $9.3 million in 2020 and $4.7 million in 2019, which are reported net of network related charges. Interchange income is included in service fees and other charges in noninterest income.
•Wealth management income - this represents monthly fees due from wealth management customers as consideration for managing the customers’ assets. Wealth management and trust services include custody of assets, investment management, escrow services, and fees for trust services and similar fiduciary activities. Revenue is recognized when our performance obligation is completed each month, which is generally the time that payment is received. Also included are fees received from a third party broker-dealer as part of a revenue-sharing agreement for fees earned from customers that we refer to the third party. These fees are paid to us by the third party on a quarterly basis and recognized ratably throughout the quarter as our performance obligation is satisfied. Revenues from wealth management were $6.0 million, $6.2 million and $3.1 million in 2021, 2020 and 2019, respectively, and are included in in total noninterest income.
•Gain/loss on sales of other real estate owned (“OREO”) - the Company records a gain or loss from the sale of OREO when control of the property transfers to the buyer, which generally occurs at the time of an executed deed. When the Company finances the sale of OREO to the buyer, the Company assesses whether the buyer is committed to perform their obligations under the contract and whether collectability of the transaction price is probable. Once these criteria are met, the OREO asset is derecognized and the gain or loss on sale is recorded upon the transfer of control of the property to the buyer. In determining the gain or loss on the sale, the Company adjusts the transaction price and related gain or loss on sale if a significant financing component is present. Income from the gain/loss on sales of OREO were a gain of $3,000 in 2021, and losses of $19,000 in 2020 and $108,000 in 2019. Income from the gain or loss on sales of OREO is included in total noninterest income.
•Insurance commissions - this represents new commissions that are recognized when the Company sells insurance policies to customers. The Company is also entitled to renewal commissions and, in some cases, contingent commissions in the form of profit sharing which are recognized in subsequent periods. The initial commission is recognized when the insurance policy is sold to a customer. Renewal commission is variable consideration and is recognized in subsequent periods when the uncertainty around variable consideration is subsequently resolved (e.g., when customer renews the policy). Contingent commission is also a variable consideration that is not recognized until the variability surrounding realization of revenue is resolved. Another source of variability is the ability of the policy holder to cancel the policy anytime and in such cases, the Company may be required, under the terms of the contract, to return part of the commission received. The variability related to cancellation of the policy is not deemed significant and thus, does not impact the amount of revenue recognized. In the event the policyholder chooses to cancel the policy at any time, the revenue for amounts which qualify for claw-back are reversed in the period the cancellation occurs. Management views the income sources from insurance commissions in two categories: (i) new/renewal commissions and (ii) contingent commissions. Insurance commissions were $15.8 million for 2021, of which $14.7 million were new/renewal commissions and $1.1 million were contingent commissions. In 2020, insurance commissions were $16.8 million, of which $15.4 million were new/renewal commissions and $1.4 million were contingent commissions. In 2019, insurance commissions were $14.1 million, of which $13.2 million were new/renewal commission and $921,000 were contingent commissions.
Leases
In February 2016, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2016-02, Leases (Topic 842). The guidance in the update supersedes the requirements in ASC Topic 840, Leases. The guidance is intended to increase transparency and comparability among organizations by recognizing right-of-use assets and lease liabilities on the balance sheet. The Company adopted this guidance in the first quarter of 2019. Upon adoption, the Company elected a practical expedient which allows existing leases to retain their classification as operating leases. The Company has elected to account for lease and related non-lease components as a single lease component. The Company also elected to not recognize right-of-use assets and lease liabilities arising from short-term leases, which are twelve months or less. Implementation of the guidance resulted in the recording of a right-of-use asset of $8.8 million and a lease liability of $9.3 million as of January 1, 2019. See additional disclosures in Note 9.
Accounting Standards Updates
ASU 2017-12, Derivatives and Hedging (Topic 815) Targeted Improvements to Accounting for Hedging Activities: In August 2017, the FASB issued ASU 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities. This ASU gave all entities an opportunity to reclassify securities held to maturity without tainting the rest of the portfolio if they are eligible to be hedged using the “last-of-layer method.” Note that the securities need not be hedged but simply eligible to be hedged. The amendments in this ASU are effective for the reporting periods after December 15, 2018. The Company adopted ASU No. 2017-12 effective December 31, 2019 and reclassified its’ held to maturity securities to available-for-sale.
ASU 2018-13 - Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement: In August 2018, the FASB issued ASU 2018-13 - Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement. This ASU modifies the disclosure requirements for fair value measurements in Topic 820, Fair Value Measurement by removing, modifying and adding certain requirements. The amendments in this ASU are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. The adoption of this guidance on January 1, 2020 did not have a material impact on the Company’s consolidated financial statements.
ASU 2017-04, Intangibles-Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment: Issued in January 2017, ASU 2017-04 simplifies the manner in which an entity is required to test goodwill for impairment by eliminating Step 2 from the goodwill impairment test. Step 2 measures a goodwill impairment loss by comparing the implied fair value of a reporting unit's goodwill with the carrying amount of that goodwill. In computing the implied fair value of goodwill under Step 2, an entity, prior to the amendments in ASU 2017-04, had to perform procedures to determine the fair value at the impairment testing date of its assets and liabilities, including unrecognized assets and liabilities, in accordance with the procedure that would be required in determining the fair value of assets acquired and liabilities assumed in a business combination. However, under the amendments in ASU 2017-04, an entity should perform its annual or interim goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount, and recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit's fair value, with the understanding that the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. Additionally, ASU 2017-04 removes the requirements for any reporting unit with a zero or negative carrying amount to perform a qualitative assessment and, if it fails such qualitative test, to perform Step 2 of the goodwill impairment test. ASU 2017-04 became effective for the Company on January 1, 2020, and the amendments of this ASU were applicable to the goodwill impairment testing for 2020.
ASU 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments: Issued in June 2016, ASU 2016-13 will add FASB ASC Topic 326, “Financial Instruments-Credit Losses” and finalizes amendments to FASB ASC Subtopic 825-15, “Financial Instruments-Credit Losses.” The amendments of ASU 2016-13 are intended to provide financial statement users with more decision-useful information related to expected credit losses on financial instruments and other commitments to extend credit by replacing the current incurred loss impairment methodology with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to determine credit loss estimates. The amendments of ASU 2016-13 eliminate the probable initial recognition threshold and, in turn, reflect an entity’s current estimate of all
expected credit losses. ASU 2016-13 does not specify the method for measuring expected credit losses, and an entity is allowed to apply methods that reasonably reflect its expectations of the credit loss estimate. The amendments of ASU 2016-13, and all subsequent ASUs issued by FASB to provide additional guidance and clarification related to this Topic, became effective for the Company on January 1, 2020.
As a result of adopting the amendments of ASU 2016-13, the Company recorded an increase to its allowance for credit losses of $2.4 million and an increase to its allowance for credit losses on off-balance sheet credit exposures of $0.9 million resulting in a one-time cumulative effect adjustment through retained earnings of $2.6 million net of $0.7 million tax at the date of adoption. This adjustment included a qualitative adjustment to the allowance for credit losses related to loans and an allowance on off-balance sheet credit exposures. The Company estimates losses over an approximate one-year forecast period using Moody’s baseline economic forecasts, and then reverts to longer term historical loss experience over a three-year period.
ASU No. 2020-04: Reference Rate Reform - Facilitation of the Effects of Reference Rate Reform on Financial Reporting (Topic 848): On March 12, 2020, the FASB issued Accounting Standards Update (ASU) 2020-4, "Reference Rate Reform (“ASC 848”): Facilitation of the Effects of Reference Rate Reform on Financial Reporting." ASC 848 contains optional expedients and exceptions for applying generally accepted accounting principles to contract modifications and hedging relationships, subject to meeting certain criteria, that reference LIBOR or another reference rates expected to be discontinued. The Company has formed a cross-functional project team to lead the transition from LIBOR to adoption of alternative reference rates which include Secured Overnight Financing Rate (“SOFR”), American Interbank Offered Rate ("Ameribor"), and Bloomberg Short-Term Bank Yield Index ("BSBY"). The Company identified loans that renewed prior to 2021 and obtained updated reference rate language at the time of renewal. Additionally, management is utilizing the timeline guidance published by the Alternative Reference Rates Committee to develop and achieve internal milestones during this transitional period. Additionally, the Company has adhered to the International Swaps and Derivatives Association 2020 IBOR Fallbacks Protocol that was released on October 23, 2020. The Company discontinued the use of new LIBOR-based loans by December 31, 2021, according to regulatory guidelines. Legacy LIBOR-based loans will be transitioned to an alternative reference rate on or before June 30, 2023. The amendments in these updates are elective, are only available from March 12, 2020 until December 31, 2022 and their application did not have a material effect on the Company.
3.Business Combinations
On September 30, 2019, Premier, through the Bank, completed the acquisition of Strategic Investment Advisors, LLC (“SIA”), a financial advisory and brokerage firm. Located in Sylvania, Ohio, with assets under management of approximately $115 million and annual revenues of approximately $0.6 million, SIA was added to the Bank’s Trust and Wealth Management platform. The total purchase price paid in cash was made up of the following: $1.6 million was paid at closing, and $400,000 at the end of a two-year earn-out based on the compound revenue growth over the performance period of SIA, for a total purchase price of $2.0 million. At December 31, 2019, the Company had recorded goodwill of $1.5 million and identifiable intangible assets of $500,000 consisting of customer relationship intangible.
The Company completed the Merger with UCFC and its subsidiaries January 31, 2020. Immediately following the Merger, Home Savings was merged with and into the Bank, with the Bank surviving. In addition, UCFC’s wholly-owned insurance subsidiaries, HSB Insurance, LLC, and United American Financial Services, Inc., each merged with and into First Insurance. UCFC’s consolidated assets and equity (unaudited) as of January 31, 2020 totaled $2.8 billion and $324.5 million, respectively. The Company accounted for the transaction under the acquisition method of accounting, which means that the acquired assets and liabilities were recorded at fair value at the date of acquisition.
In accordance with ASC 805, the Company expensed approximately $19.5 million and $1.4 million of direct acquisition costs during the years ended December 31, 2020 and 2019, respectively. The Company recorded $217.9 million of goodwill and $33.0 million of intangible assets in 2020 as a result of the combination. Goodwill represents the future economic benefits arising from net assets acquired that are not individually identified and separately recognized and is attributable to synergies expected to be derived from the combination of the two entities. The Company analyzes goodwill annually for impairment. The Merger was consistent with the Company’s strategy to enhance and expand its presence in northern Ohio. The intangible assets are related to core deposits, which are being amortized over 10 years on an accelerated basis, and customer relationships, which are being amortized over 10 years on a straight-line basis. For tax purposes, goodwill is non-deductible. The following table summarizes the fair value of the total consideration transferred as part of the Merger as well as the fair value of identifiable assets and liabilities assumed as of the effective date of the transaction.
January 31, 2020
(In Thousands)
Cash Consideration
$
Fair Value of Options Exchanged
Equity - Dollar Value of Issued Shares
526,850
Fair Value of Total Consideration Transferred
527,443
Recognized Amounts of Identifiable Assets Acquired and Liabilities Assumed:
Cash and Cash Equivalents
52,580
Securities available for sale
262,753
Net loans, including loans held for sale and allowance
2,340,701
FHLB Stock
12,753
Office Properties and Equipment
20,253
Intangible Assets
33,014
Bank-Owned Life Insurance
65,934
Mortgage Servicing Rights
9,747
Accrued Interest Receivable and Other Assets
35,943
Deposits - NonInterest-Bearing
(430,921
)
Deposits - Interest-Bearing
(1,651,669
)
Advances from FHLB
(381,000
)
Accrued Interest Payable and Other Liabilities
(60,524
)
Total Identifiable Net Assets
309,564
Goodwill
$
217,879
As a result of the Merger and in accordance with the Merger Agreement, each share of UCFC common stock issued and outstanding immediately prior to the effective time was converted into 0.3715 share of Premier common stock. No fractional shares of Premier common stock were issued in the Merger, and UCFC’s shareholders became entitled to receive cash in lieu of fractional shares. The Company issued 17,926,174 common shares and paid approximately $132,000 to UCFC shareholders as a result of the Merger. The fair value of Premier common shares issued as part of the consideration paid for the UCFC common shares was determined based on the closing price of the Company’s common shares on the effective date of the Merger.
4. Earnings Per Common Share
Basic earnings per share is calculated using the two-class method. The two-class method is an earnings allocation formula under which earnings per share is calculated from common stock and participating securities according to dividends declared and participation rights in undistributed earnings. Under this method, all earnings distributed and undistributed, are allocated to participating securities and common shares based on their respective rights to receive dividends. Unvested share-based payment awards that contain non-forfeitable rights to dividends are considered participating securities (i.e. unvested restricted stock), not subject to performance based measures.
The following table sets forth the computation of basic and diluted earnings per common share for the years ended December 31:
(In Thousands, Except Per Share Amounts)
Basic Earnings Per Share:
Net income available to common shareholders
$
126,051
$
63,077
$
49,370
Less: Income allocated to participating securities
Net income allocated to common shareholders
$
125,928
$
62,988
$
49,334
Weighted average common shares outstanding Including participating
securities
37,145
35,952
19,844
Less: Participating securities
Average common shares
37,109
35,902
19,824
Basic earnings per common share
$
3.39
$
1.75
$
2.49
Diluted Earnings Per Share:
Net income allocated to common shareholders
$
125,928
$
62,988
$
49,334
Weighted average common shares outstanding for basic earnings per
common share
37,109
35,902
19,824
Add: Dilutive effects of stock options and restricted stock units
Average shares and dilutive potential common shares
37,200
35,949
19,931
Diluted earnings per common share
$
3.39
$
1.75
$
2.48
Shares subject to issue upon exercise of options and vesting requirements of restricted stock units of 34,065 in 2021, 97,724 in 2020 and zero in 2019 were excluded from the diluted earnings per common share calculation as they were anti-dilutive.
5.Investment Securities
The following tables summarize the amortized cost and fair value of available-for-sale securities at December 31, 2021 and 2020, and the corresponding amounts of gross unrealized and unrecognized gains and losses:
Gross
Gross
Amortized
Unrealized
Unrealized
Fair
Cost
Gains
Losses
Value
(In Thousands)
Available-for-sale
Obligations of U.S. government corporations and agencies
$
174,644
$
$
(918
)
$
174,710
Mortgage-backed securities
208,281
(2,381
)
206,751
Collateralized mortgage obligations
264,541
(4,736
)
260,168
Asset-backed securities
221,545
(1,619
)
220,536
Corporate bonds
70,008
1,160
(275
)
70,893
Obligations of state and political subdivisions
272,334
5,898
(5,030
)
273,202
Total Available-for-Sale
$
1,211,353
$
9,866
$
(14,959
)
$
1,206,260
Gross
Gross
Amortized
Unrealized
Unrealized
Fair
Cost
Gains
Losses
Value
(In Thousands)
Available-for-sale
Obligations of U.S. government corporations and agencies
$
39,233
$
1,707
$
-
$
40,940
Mortgage-backed securities
270,683
6,746
(247
)
277,182
Collateralized mortgage obligations
103,532
2,927
(160
)
106,299
Asset-backed securities
30,643
(98
)
30,546
Corporate bonds
43,826
(146
)
44,169
Obligations of state and political subdivisions
229,645
8,069
(196
)
237,518
Total Available-for-Sale
$
717,562
$
19,939
$
(847
)
$
736,654
The amortized cost and fair value of the investment securities portfolio at December 31, 2021, is shown below by contractual maturity. Expected maturities will differ from contractual maturities if borrowers have the right to call or prepay obligations with or without call or prepayment penalties. For purposes of the maturity tables below, mortgage-backed securities, collateralized mortgage obligations, and asset-backed securities which are not due at a single maturity date, have not been allocated over maturity groupings.
Available-for-Sale
Amortized
Fair
Cost
Value
(In Thousands)
Available-for-sale
Due in one year or less
$
3,290
$
3,315
Due after one year through five years
44,555
45,014
Due after five years through ten years
194,662
196,386
Due after ten years
274,479
274,090
MBS/CMO/ABS
694,367
687,455
Total
$
1,211,353
$
1,206,260
Securities pledged at year-end 2021 and 2020 had a carrying amount of $564.4 million and $324.4 million, respectively, and were pledged to secure public deposits, securities sold under repurchase agreements and FHLB advances.
The following table summarizes Premier’s securities that were in an unrealized loss position at December 31, 2021, and December 31, 2020:
Duration of Unrealized Loss Position
Less than 12 Months
12 Months or Longer
Total
Gross
Gross
Fair
Unrealized
Fair
Unrealized
Fair
Unrealized
Value
Loss
Value
Loss
Value
Loses
(In Thousands)
At December 31, 2021
Available-for-sale securities:
Obligations of U.S. government corporations and agencies
$
73,810
$
(918
)
$
-
$
-
$
73,810
$
(918
)
Mortgage-backed securities
167,379
(2,048
)
13,689
(333
)
181,068
(2,381
)
Collateralized mortgage obligations
222,134
(4,736
)
-
-
222,134
(4,736
)
Asset-backed securities
140,226
(1,589
)
2,705
(30
)
142,931
(1,619
)
Corporate Bonds
24,173
(270
)
(5
)
24,677
(275
)
Obligations of state and political subdivisions
99,199
(3,355
)
34,548
(1,675
)
133,747
(5,030
)
Total temporarily impaired securities
$
726,921
$
(12,916
)
$
51,446
$
(2,043
)
$
778,367
$
(14,959
)
At December 31, 2020
Available-for-sale securities:
Mortgage-backed securities
$
26,361
$
(247
)
$
-
$
-
$
26,361
$
(247
)
Collateralized mortgage obligations
5,161
(160
)
-
-
5,161
(160
)
Asset-backed securities
18,439
(98
)
-
-
18,439
(98
)
Corporate Bonds
12,177
(146
)
-
-
12,177
(146
)
Obligations of state and political subdivisions
41,088
(196
)
-
-
41,088
(196
)
Total temporarily impaired securities
$
103,226
$
(847
)
$
-
$
-
$
103,226
$
(847
)
ASU 2016-13 makes targeted improvements to the accounting for credit losses on securities available for sale. The concept of other than-temporarily impaired (OTTI) was replaced in 2020 with the allowance for credit losses. Unlike securities held to maturity, securities available for sale are evaluated on an individual level and pooling of securities is not allowed.
Quarterly, the Company evaluates if any security has a fair value less than its amortized cost. Once these securities are identified, in order to determine whether a decline in fair value resulted from a credit loss or other factors, the Company performs further analysis as outlined below:
•Review the extent to which the fair value is less than the amortized cost and observe the security’s lowest credit rating as reported by third-party credit ratings companies.
•Any securities that are downgraded by a third party ratings company above would be subjected to additional analysis that may include, but is not limited to: changes in market interest rates, changes in securities credit ratings, security type, service area economic factors, financial performance of the issuer/or obligor of the underlying issue and third-party guarantee.
•If the Company determines that a credit loss exists, the credit portion of the allowance will be measured using a DCF analysis using the effective interest rate as of the security’s purchase date. The amount of credit loss the Company records will be limited to the amount by which the amortized cost exceeds the fair value. As of December 31, 2021, management had determined that no credit loss exists.
In 2021 and 2020, management determined there was no OTTI. Net realized gains from the sales of investment securities totaled $2.2 million ($1.8 million after tax) in 2021 while there were net realized gains of $1.5 million ($1.2 million after tax) and $24,000 ($19,000 after tax) in 2020 and 2019, respectively.
The proceeds from sales of securities and the associated gains and losses for the years ended December 31 are listed below:
(In Thousands)
Proceeds
$
158,012
$
52,420
$
2,667
Gross realized gains
2,987
1,471
Gross realized losses
(769
)
(7
)
(11
)
At December 31, 2021, the Company also owned $14.1 million of equity securities. During 2021, the Company recognized a gain of $2.0 million associated with the mark to market requirement for equity securities. In 2020, the Company owned $1.1 million of equity securities which consisted of a single trust preferred security, and recognized a gain of $90,000 associated with the mark to market requirement for equity securities. The Company did not own any equity securities at December 31, 2019.
6.Commitments and Contingent Liabilities
Loan Commitments
Loan commitments are made to accommodate the financial needs of the Bank’s customers. Standby letters of credit commit the Company to make payments on behalf of customers when certain specified future events occur. They primarily are issued to facilitate customers’ trade transactions.
Both arrangements have credit risk, essentially the same as that involved in extending loans to customers, and are subject to the Company’s normal credit policies. Collateral (e.g., securities, receivables, inventory and equipment) is obtained based on management’s credit assessment of the customer.
The Company’s maximum obligation to extend credit for loan commitments (unfunded loans and unused lines of credit) and standby letters of credit outstanding on December 31 was as follows (in thousands):
Fixed Rate
Variable Rate
Fixed Rate
Variable Rate
Commitments to make loans
$
486,807
$
689,109
$
409,813
$
292,290
Unused lines of credit
40,254
586,094
74,364
844,106
Standby letters of credit
-
10,851
-
22,250
Total
$
527,061
$
1,286,054
$
484,177
$
1,158,646
Commitments to make loans are generally made for periods of 60 days or less. The fixed rate loan commitments at December 31, 2021, had interest rates ranging from 0.00% to 18.00% and maturities ranging from less than one year to 32 years.
7.Loans
Loans receivable consist of the following:
December 31, 2021
December 31, 2020
(In Thousands)
Real Estate:
Residential
$
1,167,466
$
1,201,051
Commercial
2,450,349
2,383,001
Construction
862,815
667,649
4,480,630
4,251,701
Other Loans:
Commercial
895,638
1,202,353
Home equity and improvement
264,354
272,701
Consumer Finance
126,417
120,729
1,286,409
1,595,783
Total loans
5,767,039
5,847,484
Deduct:
Undisbursed loan funds
(477,890
)
(355,065
)
Net deferred loan origination fees and costs
7,019
(1,179
)
Allowance for credit loss
(66,468
)
(82,079
)
Totals
$
5,229,700
$
5,409,161
Loan segments have been identified by evaluating the portfolio based on collateral and credit risk characteristics. The Company has responded to the COVID-19 pandemic in numerous ways, including by actively participating in the PPP and distributing over $450
million to small businesses in our markets. As of December 31, 2021 and 2020, the Company had $58.9 million and $386.9 million in PPP loans, respectively. PPP loans are included in other commercial loans in the loan tables.
The following tables disclose the annual activity in the allowance for credit losses for the periods indicated by portfolio segment (in thousands):
Year ended December 31, 2021
Residential Real Estate
Commercial
Real
Estate
Construction
Commercial
Home
Equity
and
Improvement
Consumer
Finance
Total
Beginning Allowance
$
17,534
$
43,417
$
2,741
$
11,665
$
4,739
$
1,983
$
82,079
Charge-Offs
(110
)
(3,776
)
-
(6,960
)
(63
)
(476
)
(11,385
)
Recoveries
-
1,321
2,507
Provision expense (recovery)
(5,656
)
(7,680
)
7,384
(703
)
(341
)
(6,733
)
Ending Allowance
$
12,029
$
32,399
$
3,004
$
13,410
$
4,221
$
1,405
$
66,468
Year ended December 31, 2020
Residential Real Estate
Commercial
Real
Estate
Construction
Commercial
Home
Equity
and
Improvement
Consumer
Finance
Total
Beginning Allowance
$
2,867
$
16,302
$
$
9,003
$
1,700
$
$
31,243
Impact of ASC 326 Adoption
1,765
3,682
(223
)
(2,263
)
(521
)
(86
)
2,354
Acquisition related allowance for credit loss (PCD)
1,077
4,053
-
2,272
7,698
Charge-Offs
(307
)
(4,237
)
(1
)
(1,350
)
(164
)
(293
)
(6,352
)
Recoveries
1,352
-
1,850
3,982
Provision expense (recovery) (1)
11,790
22,265
1,969
2,153
3,214
1,763
43,154
Ending Allowance
$
17,534
$
43,417
$
2,741
$
11,665
$
4,739
$
1,983
$
82,079
(1)Provision for the twelve months ended December 31, 2020, includes $25.9 million as a result of the Merger with UCFC in the first quarter.
Year ended December 31, 2019
Residential Real Estate
Commercial
Real
Estate
Construction
Commercial
Home
Equity
and
Improvement
Consumer
Finance
Total
Beginning Allowance
$
2,881
$
15,142
$
$
7,281
$
2,026
$
$
28,331
Charge-Offs
(515
)
(148
)
-
(528
)
(245
)
(289
)
(1,725
)
Recoveries
-
1,732
Provision expense (recovery)
1,608
(265
)
2,905
Ending Allowance
$
2,867
$
16,302
$
$
9,003
$
1,700
$
$
31,243
The following table presents the amortized cost basis of collateral-dependent loans by class of loans and collateral type as of December 31, 2021 and 2020 (in thousands):
December 31, 2021
Real Estate
Equipment and Machinery
Inventory and Receivables
Vehicles
Total
Real Estate:
Residential
$
$
-
$
-
$
-
$
Commercial
18,399
-
-
-
18,399
Construction
-
-
-
-
-
Other Loans:
Commercial
1,574
14,023
15,782
Home equity and improvement
-
-
-
-
-
Consumer finance
-
-
-
-
-
Total
$
20,199
$
$
14,023
$
$
34,407
December 31, 2020
Real Estate
Equipment and Machinery
Inventory and Receivables
Vehicles
Total
Real Estate:
Residential
$
1,024
$
-
$
-
$
-
$
1,024
Commercial
33,999
-
-
-
33,999
Construction
-
-
-
-
-
Other Loans:
Commercial
1,426
5,317
4,943
11,811
Home equity and improvement
-
-
-
-
-
Consumer finance
-
-
-
-
-
Total
$
36,449
$
5,317
$
4,943
$
$
46,834
The following tables presents the average balance, interest income recognized and cash basis income recognized on individually analyzed loans by class of loans for the year ended December 31, 2019 (in thousands):
Twelve Months Ended December 31, 2019
Average
Balance
Interest
Income
Recognized
Cash Basis
Income
Recognized
Real Estate:
Residential
$
7,040
$
$
Commercial
23,080
1,382
1,301
Construction
-
-
-
Other Loans:
Commercial
8,397
Home equity and improvement
Consumer finance
Total
$
39,406
$
2,208
$
2,017
Non-performing loans include both smaller balance homogeneous loans that are collectively evaluated for impairment and individually classified loans. All loans greater than 90 days past due are placed on non-accrual status. Effective January 1, 2020 with the adoption of ASC Topic 326, the Company began including non-accrual PCD loans in its non-performing loans. As such, the non-performing loans as of December 31, 2021 include PCD loans accounted for pursuant to ASC Topic 326 as these loans are individually evaluated.
The following table presents the current balance of the aggregate amounts of non-performing assets, comprised of non-performing loans and real estate owned as of the dates indicated:
December 31, 2021
December 31, 2020
(In Thousands)
Non-accrual loans with reserve
$
35,480
$
34,939
Non-accrual loans without reserve
$
12,534
$
16,743
Loans over 90 days past due and still accruing
-
-
Total non-performing loans
48,014
51,682
Real estate and other assets held for sale
Total non-performing assets
$
48,185
$
52,025
Troubled debt restructuring, still accruing
$
7,768
$
7,173
The following table presents the aging of the recorded investment in past due and non-accrual loans as of December 31, 2021, by class of loans (in thousands):
Current
30-59 days
60-89 days
90+ days
Total
Past Due
Total Non
Accrual
Real Estate:
Residential
1,144,533
5,340
7,487
13,061
9,034
Commercial
2,439,552
7,168
8,111
14,621
Construction
383,136
1,746
-
1,789
-
Other Loans:
Commercial
884,025
11,531
Home equity and improvement
257,055
1,851
1,634
3,893
2,051
Consumer finance
124,073
1,112
1,728
3,659
1,873
PCD
25,111
1,005
5,996
7,226
8,904
Total Loans
$
5,257,485
$
3,603
$
10,200
$
24,880
$
38,683
$
48,014
The following table presents the aging of the recorded investment in past due and non-accrual loans as of December 31, 2020, by class of loans (in thousands):
Current
30-59 days
60-89 days
90+ days
Total
Past Due
Total Non
Accrual
Real Estate:
Residential
1,173,979
7,669
9,000
17,102
10,178
Commercial
2,357,909
1,033
2,246
11,980
Construction
310,152
-
1,626
2,432
Other Loans:
Commercial
1,172,636
1,365
Home equity and improvement
262,373
3,440
1,137
5,416
1,537
Consumer finance
117,088
1,687
1,521
3,699
1,624
PCD
50,218
1,882
13,299
15,583
24,192
Total Loans
$
5,444,355
$
7,004
$
12,880
$
27,001
$
46,885
$
51,682
Troubled Debt Restructurings
As of December 31, 2021 and 2020, the Company had a recorded investment in TDRs of $11.9 million and $16.6 million, respectively. The Company allocated $378,000 and $883,000 of specific reserves to those loans at December 31, 2021 and 2020, respectively, and committed to lend additional amounts totaling up to $348,000 and $303,000 at December 31, 2021 and 2020, respectively.
The Company worked with borrowers impacted by the COVID-19 pandemic by providing modifications to include either interest only deferral or principal and interest deferral. As of December 31, 2021, the Company had no more modifications from the pandemic compared to December 31, 2020 there were approximately $53.5 million in deferrals. These modifications are excluded from TDR classification under Section 4013 of the CARES Act or under applicable interagency guidance of the federal banking regulators. Modified loans will be considered current and will continue to accrue interest during the deferral period unless repayment of the loan under contractual terms is not expected and thereby loans will be placed on non-accrual.
A breakout of active deferrals by loan category as of December 31, 2020, is as follows (in thousands):
Balance deferred
Balance deferred
As of December 31,
As of December 31,
Residential real estate
$
-
$
7,016
Commercial real estate
-
34,831
Construction
-
9,579
Commercial
-
1,628
Home equity and improvement
-
Consumer finance
-
Total
$
-
$
53,450
The Company offers various types of concessions when modifying a loan, however, forgiveness of principal is rarely granted. Each TDR is uniquely designed to meet the specific needs of the borrower. Commercial loans modified in a TDR often involve temporary interest-only payments, term extensions, and converting revolving credit lines to term loans. Additional collateral or an additional guarantor is often requested when granting a concession. Commercial real estate loans modified in a TDR often involve temporary interest-only payments, re-amortization of remaining debt in order to lower payments, and sometimes reducing the interest rate lower than the current market rate. Residential mortgage loans modified in a TDR are comprised of loans where monthly payments are lowered, either through interest rate reductions or principal only payments for a period of time, to accommodate the borrowers’ financial needs, interest is capitalized into principal, or the term and amortization are extended. Home equity modifications are made infrequently and usually involve providing an interest rate that is lower than the borrower would be able to obtain due to credit issues. All retail loans where the borrower is in bankruptcy are classified as TDRs regardless of whether or not a concession is made.
Of the loans modified in a TDR, $4.2 million are on non-accrual status and partial charge-offs have in some cases been taken against the outstanding balance. Loans modified as a TDR may have the financial effect of increasing the allowance associated with the loan. If the loan is determined to be collateral dependent, the estimated fair value of the collateral, less any selling costs is used to determine if there is a need for a specific allowance or charge-off. If the loan is determined to be cash flow dependent, the allowance is measured based on the present value of expected future cash flows discounted at the loan’s pre-modification effective interest rate.
The following table presents loans by class modified as TDRs that occurred during the years indicated (Dollars in Thousands):
Loans Modified as a TDR for the Twelve Months Ended December 31, 2021
Loans Modified as a TDR for the Twelve Months Ended December 31, 2020
Loans Modified as a TDR for the Twelve Months Ended December 31, 2019
($ in thousands)
($ in thousands)
($ in thousands)
Troubled Debt Restructurings:
Number of
Loans
Recorded Investment
(as of period end)
Number of
Loans
Recorded Investment
(as of period end)
Number of
Loans
Recorded Investment
(as of period end)
Real Estate:
Residential
$
$
$
1,332
Commercial
-
-
7,760
Construction
-
-
-
-
-
-
Other Loans:
Commercial
2,888
7,546
Home equity and improvement
-
-
Consumer finance
-
-
-
-
Total
$
3,580
$
16,290
$
2,295
The loans described above increased the allowance by $21,000 and $660,000 and $34,000 for the years ended December 31, 2021, and 2020 and 2019, respectively.
The following table presents loans by class modified as TDRs for which there was a payment default within twelve months following the modification during the indicated:
Loans Modified as a TDR for the Twelve Months Ended December 31, 2021
Loans Modified as a TDR for the Twelve Months Ended December 31, 2020
Loans Modified as a TDR for the Twelve Months Ended December 31, 2019
($ in thousands)
($ in thousands)
($ in thousands)
TDRs That Subsequently Defaulted:
Number of
Loans
Recorded Investment
(as of period end)
Number of
Loans
Recorded Investment
(as of period end)
Number of
Loans
Recorded Investment
(as of period end)
Real Estate:
Residential
$
$
-
$
-
Commercial
-
-
-
-
Construction
-
-
-
-
-
-
Other Loans:
Commercial
-
-
-
-
2,248
Home equity and improvement
-
-
-
-
-
-
Consumer finance
-
-
-
-
Total
$
$
$
2,329
The TDRs that subsequently defaulted described above increased the allowance by $1,000, $5,000 and $4,000 for the years ended December 31, 2021, 2020 and 2019, respectively. A default for purposes of this disclosure is a TDR loan in which the borrower is 90 days contractually past due under the modified terms. In order to determine whether a borrower is experiencing financial difficulty, an evaluation is performed regarding the probability that the borrower will be in payment default on any of its debt in the foreseeable future without the modification.
Credit Quality Indicators
Loans are categorized 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. Loans are analyzed individually by classifying the loans as to credit risk. This analysis includes all non-homogeneous loans, such as commercial and commercial real estate loans and certain homogenous mortgage, home equity and consumer loans. This analysis is performed on a quarterly basis. Premier uses the following definitions for risk ratings with loans not meeting such classifications being considered “unclassified”:
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.
Not Graded. Loans classified as not graded are generally smaller balance residential real estate, home equity and consumer installment loans which are originated primarily by using an automated underwriting system. These loans are monitored based on their delinquency status and are evaluated individually only if they are seriously delinquent.
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, 2021, and based on the most recent analysis performed, the risk category and recorded investment in loans is as follows (in thousands):
Class
Unclassified
Special
Mention
Substandard
Doubtful
Total classified
Total
Real Estate:
Residential
1,146,212
1,316
10,066
-
10,066
1,157,594
Commercial
2,324,846
93,676
29,141
-
29,141
2,447,663
Construction
365,403
19,522
-
-
-
384,925
Other Loans:
Commercial
856,402
14,815
13,752
-
13,752
884,969
Home equity and improvement
258,914
-
2,034
-
2,034
260,948
Consumer finance
125,879
-
1,853
-
1,853
127,732
PCD
19,547
12,689
-
12,689
32,337
Total Loans
$
5,097,203
$
129,430
$
69,535
$
-
$
69,535
$
5,296,168
As of December 31, 2020, and based on the most recent analysis performed, the risk category of loans by class of loans is as follows (in thousands):
Class
Unclassified
Special
Mention
Substandard
Doubtful
Total classified
Total
Real Estate:
Residential
1,187,923
2,363
-
2,363
1,191,081
Commercial
2,203,652
111,039
45,464
-
45,464
2,360,155
Construction
299,866
12,718
-
-
-
312,584
Other Loans:
Commercial
1,142,289
23,907
6,847
-
6,847
1,173,043
Home equity and improvement
267,350
-
-
267,789
Consumer finance
120,682
-
-
120,787
PCD
26,829
3,813
35,159
-
35,159
65,801
Total Loans
$
5,248,591
$
152,272
$
90,377
$
-
$
90,377
$
5,491,240
The table below presents the amortized cost basis of loans by vintage, credit quality indicator and class of loans as of December 31, 2021 and 2020 (in thousands):
Term of loans by origination
Prior
Revolving Loans
Total
As of December 31, 2021
Real Estate
Residential:
Risk Rating
Pass
$
219,006
$
373,439
$
112,781
$
65,544
$
71,794
$
301,735
$
1,913
$
1,146,212
Special Mention
-
-
-
1,316
Substandard
1,198
1,006
2,095
4,522
-
10,066
Doubtful
-
-
-
-
-
-
-
-
Total
$
219,471
$
374,409
$
113,979
$
66,550
$
73,948
$
306,366
$
2,871
$
1,157,594
Commercial:
Risk Rating
Pass
$
514,333
$
493,575
$
388,117
$
230,734
$
237,712
$
451,113
$
9,262
$
2,324,846
Special Mention
5,349
5,533
11,055
49,993
20,662
93,676
Substandard
4,920
5,525
17,665
29,141
Doubtful
-
-
-
-
-
-
-
-
Total
$
514,799
$
499,494
$
398,570
$
247,314
$
287,767
$
489,440
$
10,279
$
2,447,663
Construction:
Risk Rating
Pass
$
198,221
$
100,606
$
55,707
$
10,039
$
$
$
-
$
365,403
Special Mention
-
12,500
-
5,996
1,026
-
-
19,522
Substandard
-
-
-
-
-
-
-
-
Doubtful
-
-
-
-
-
-
-
-
Total
$
198,221
$
113,106
$
55,707
$
16,035
$
1,711
$
$
-
$
384,925
Other Loans
Commercial:
Risk Rating
Pass
$
293,644
$
132,703
$
84,668
$
47,421
$
24,269
$
17,038
$
256,659
$
856,402
Special Mention
-
2,180
4,094
1,264
4,663
2,342
14,815
Substandard
11,550
1,236
13,752
Doubtful
-
-
-
-
-
-
-
-
Total
$
293,780
$
146,433
$
88,785
$
47,981
$
25,921
$
21,832
$
260,237
$
884,969
Home equity and Improvement:
Risk Rating
Pass
$
24,707
$
6,870
$
4,867
$
2,879
$
5,534
$
31,317
$
182,740
$
258,914
Special Mention
-
-
-
-
-
-
-
-
Substandard
-
1,226
2,034
Doubtful
-
-
-
-
-
-
-
-
Total
$
24,722
$
6,870
$
4,895
$
2,927
$
5,561
$
32,007
$
183,966
$
260,948
Consumer Finance:
Risk Rating
Pass
$
50,202
$
25,866
$
23,000
$
9,643
$
4,313
$
2,769
$
10,086
$
125,879
Special Mention
-
-
-
-
-
-
-
-
Substandard
1,853
Doubtful
-
-
-
-
-
-
-
-
Total
$
50,398
$
26,573
$
23,619
$
9,772
$
4,380
$
2,900
$
10,090
$
127,732
PCD:
Risk Rating
Pass
$
-
$
-
$
$
1,753
$
1,860
$
12,496
$
3,268
$
19,547
Special Mention
-
-
-
-
-
-
Substandard
-
-
3,242
6,490
2,862
12,689
Doubtful
-
-
-
-
-
-
-
-
Total
$
-
$
-
$
$
1,781
$
5,102
$
19,087
$
6,130
$
32,337
Term of loans by origination
Prior
Revolving Loans
Total
As of December 31, 2020
Real Estate
Residential:
Risk Rating
Pass
$
250,979
$
196,158
$
136,247
$
130,759
$
137,581
$
333,572
$
2,627
$
1,187,923
Special Mention
-
-
Substandard
-
1,612
2,363
Doubtful
-
-
-
-
-
-
-
-
Total
$
251,178
$
196,232
$
136,536
$
131,073
$
137,833
$
335,395
$
2,834
$
1,191,081
Commercial:
Risk Rating
Pass
$
517,691
$
457,905
$
299,072
$
300,573
$
198,247
$
414,082
$
16,082
$
2,203,652
Special Mention
6,014
7,239
10,452
60,712
7,977
17,723
111,039
Substandard
-
18,851
1,937
3,143
19,107
2,147
45,464
Doubtful
-
-
-
-
-
-
-
-
Total
$
523,705
$
465,423
$
328,375
$
363,222
$
209,367
$
450,912
$
19,151
$
2,360,155
Construction:
Risk Rating
Pass
$
101,616
$
100,553
$
82,972
$
11,666
$
2,911
$
$
-
$
299,866
Special Mention
5,587
-
7,131
-
-
-
-
12,718
Substandard
-
-
-
-
-
-
-
-
Doubtful
-
-
-
-
-
-
-
-
Total
$
107,203
$
100,553
$
90,103
$
11,666
$
2,911
$
$
-
$
312,584
Other Loans
Commercial:
Risk Rating
Pass
$
568,678
$
144,977
$
82,492
$
42,421
$
21,262
$
21,969
$
260,490
$
1,142,289
Special Mention
1,180
2,026
2,514
2,109
5,121
10,920
23,907
Substandard
4,932
6,847
Doubtful
-
-
-
-
-
-
-
-
Total
$
570,006
$
147,204
$
85,503
$
45,073
$
21,556
$
27,359
$
276,342
$
1,173,043
Home equity and Improvement:
Risk Rating
Pass
$
8,736
$
7,483
$
4,508
$
7,963
$
7,748
$
31,382
$
199,530
$
267,350
Special Mention
-
-
-
-
-
-
-
-
Substandard
-
-
-
-
-
Doubtful
-
-
-
-
-
-
-
-
Total
$
8,736
$
7,483
$
4,508
$
7,963
$
7,748
$
31,468
$
199,883
$
267,789
Consumer Finance:
Risk Rating
Pass
$
38,665
$
37,601
$
19,401
$
10,607
$
4,393
$
3,272
$
6,743
$
120,682
Special Mention
-
-
-
-
-
-
-
-
Substandard
-
-
-
-
Doubtful
-
-
-
-
-
-
-
-
Total
$
38,665
$
37,699
$
19,404
$
10,607
$
4,397
$
3,272
$
6,743
$
120,787
PCD:
Risk Rating
Pass
$
-
$
$
2,378
$
2,547
$
1,524
$
18,998
$
1,337
$
26,829
Special Mention
-
-
-
1,160
1,758
3,813
Substandard
-
-
-
14,371
2,502
7,207
11,079
35,159
Doubtful
-
-
-
-
-
-
-
-
Total
$
-
$
$
2,378
$
18,078
$
4,535
$
27,963
$
12,802
$
65,801
Allowance for Credit Losses (“ACL”)
The Company has adopted ASU 2016-13 (Topic 326 - Credit Losses) to calculate the ACL, which requires a projection of credit loss over the contract lifetime of the credit adjusted for prepayment tendencies. This valuation account is deducted from the loans
amortized cost basis to present the net amount expected to be collected on the loan. The ACL is adjusted through the provision for credit losses and reduced by net charge offs of loans.
The credit loss estimation process involves procedures that consider the unique characteristics of the Company’s portfolio segments. These segments are further disaggregated into the loan pools for monitoring. When computing allowance levels, a model of risk characteristics, such as loss history and delinquency status, along with current conditions and a supportable forecast is used to determine credit loss assumptions.
The Company is generally utilizing two methodologies to analyze loan pools: discounted cash flows (“DCF”) and probability of default/loss given default (“PD/LGD”).
A default can be triggered by one of several different asset quality factors including past due status, non-accrual status or if the loan has had a charge-off. The PD/LGD utilizes charge off data from the Federal Financial Institutions Examination Council to construct a default rate. The Company estimates losses over an approximate one-year forecast period using Moody’s baseline economic forecasts, and then reverts to longer term historical loss experience over a three-year period. This default rate is further segmented based on the risk of the credit assigning a higher default rate to riskier credits.
The DCF methodology was selected as the most appropriate for loan segments with longer average lives and regular payment structures. The DCF model has two key components, the loss driver analysis combined with a cash flow analysis. The contractual cash flow is adjusted for PD/LGD and prepayment speed to establish a reserve level. The prepayment studies are updated quarterly by a third-party for each applicable pool.
The remaining life method was selected for the consumer loan segment since the pool contains loans with many different structures and payment streams and collateral. The weighted average remaining life uses an average annual charge-off rate applied to the contractual term, further adjusted for estimated prepayments to determine the unadjusted historical charge-off rate for the remaining balance of assets.
Portfolio Segments
Loan Pool
Methodology
Loss Drivers
Residential real estate
1-4 Family nonowner occupied
DCF
National unemployment
1-4 Family owner occupied
DCF
National unemployment
Commercial real estate
Commercial real estate nonowner occupied
DCF
National unemployment
Commercial real estate owner occupied
DCF
National unemployment
Multi Family
DCF
National unemployment
Agriculture Land
DCF
National unemployment
Other commercial real estate
DCF
National unemployment
Construction secured by real estate
Construction
PD/LGD
Call report loss history
Commercial
Commercial working capital
PD/LGD
Call report loss history
Agriculture production
PD/LGD
Call report loss history
Other commercial
PD/LGD
Call report loss history
Home equity and improvement
Home equity and improvement
PD/LGD
Call report loss history
Consumer finance
Consumer finance
Remaining life
Call report loss history
According to the accounting standard an entity may make an accounting policy election not to measure an allowance for credit losses for accrued interest receivable if the entity writes off the applicable accrued interest receivable balance in a timely manner. The Company has made the accounting policy election not to measure an allowance for credit losses for accrued interest receivables for all loan segments. Current policy dictates that a loan will be placed on nonaccrual status, with the current accrued interest receivable
balance being written off, upon the loan being 90 days delinquent or when the loan is deemed to be collateral dependent and the collateral analysis shows less than 1.2 times discounted collateral coverage based on a current assessment of the value of the collateral.
In addition, ASC Topic 326 requires the Company to establish a liability for anticipated credit losses for unfunded commitments. To accomplish this, the company must first establish a loss expectation for extended (funded) commitments. This loss expectation, expressed as a ratio to the amortized cost basis, is then applied to the portion of unfunded commitments not considered unilaterally cancelable, and considered by the company’s management as likely to fund over the life of the instrument. At December 31, 2021, the Company had $1.4 billion in unfunded commitments and set aside $5.0 million in anticipated credit losses. This reserve is recorded in other liabilities as opposed to the ACL.
The determination of ACL is complex and the Company makes decisions on the effects of factors that are inherently uncertain. Evaluations of the loan portfolio and individual credits require certain estimates, assumptions and judgements as to the facts and circumstances related to particular situations or credits. There may be significant changes in the ACL in future periods determined by prevailing factors at that point in time along with future forecasts.
Certain loans acquired had evidence that the credit quality of the loan had deteriorated since its origination and in management’s assessment at the acquisition date it was probable that Premier would be unable to collect all contractually required payments due. In accordance with FASB ASC Topic 310 Subtopic 30, Loans and Debt Securities Acquired with Deteriorated Credit Quality, these loans have been recorded based on management’s estimate of the fair value of the loans.
Purchased Loans
As a result of the Merger, the Company acquired $2.2 billion in loans. Par value of purchased loans was as follows (in thousands):
Year ended December 31, 2020
Par value of acquired loans at acquisition
$
2,247,317
Credit discount
(34,610
)
Non-credit (discount)/premium at acquisition
8,497
Purchase price of loans at acquisition
$
2,221,204
Under ASU Topic 326, when loans are purchased with evidence of more than insignificant deterioration of credit, they are accounted for as PCD. PCD loans acquired in a transaction are marked to fair value and a mark on yield is recorded. In addition, an adjustment is made to the ACL for the expected loss on the acquisition date. These loans are assessed on a regular basis and subsequent adjustments to the ACL are recorded on the income statement. On January 31, 2020, the Company acquired PCD loans with a fair value of $79.1 million, credit discount $7.7 million and a noncredit discount of $4.1 million. The outstanding balance at December 31, 2021 and related allowance on these loans is as follows (in thousands):
As of December 31, 2021
As of December 31, 2020
Loan Balance
ACL Balance
Loan Balance
ACL Balance
(Dollars In Thousands)
Real Estate:
Residential
$
13,396
$
$
14,895
$
Commercial
5,878
24,334
2,286
Construction
-
-
-
-
19,274
39,229
2,487
Other Loans:
Commercial
9,167
1,531
20,990
1,896
Home equity and improvement
3,405
4,912
Consumer finance
13,063
1,692
26,572
2,130
Total
$
32,337
$
2,040
$
65,801
$
4,617
At December 31, 2021 the Company had $615,000 that had previously been accounted for as purchase credit impaired.
Loans to executive officers, directors, and their affiliates are as follows:
Years Ended December 31,
(Dollars In Thousands)
Beginning balance
$
23,384
$
21,849
New loans
11,603
14,913
Effect of changes in composition of related parties
(100
)
Repayments
(16,461
)
(14,261
)
Ending Balance
$
18,426
$
23,384
Foreclosure Proceedings
Consumer mortgage loans collateralized by residential real estate property that are in the process of foreclosure totaled $3.3 million as of December 31, 2021 and $784,000 as of December 31, 2020.
8.Mortgage Banking
Net revenues from the sales and servicing of mortgage loans consisted of the following:
For the Year Ended December 31,
(In Thousands)
Gain from sale of mortgage loans
$
16,437
$
36,359
$
7,706
Mortgage loan servicing revenue (expense):
Mortgage loan servicing revenue
7,574
7,296
3,820
Amortization of mortgage servicing rights
(7,893
)
(7,477
)
(1,809
)
Mortgage servicing rights valuation adjustments
5,807
(7,979
)
(234
)
5,488
(8,160
)
1,777
Net mortgage banking income
$
21,925
$
28,199
$
9,483
The unpaid principal balance of residential mortgage loans serviced for third parties was $2.94 billion at December 31, 2021, and $2.95 billion at December 31, 2020.
Activity for capitalized mortgage servicing rights (“MSRs”) and the related valuation allowance is as follows:
For the Year Ended December 31,
(In Thousands)
Mortgage servicing assets:
Balance at beginning of period
$
21,666
$
10,801
$
10,419
Loans sold, servicing retained
8,471
8,595
2,191
Mortgage servicing rights acquired
-
9,747
-
Amortization
(7,893
)
(7,477
)
(1,809
)
Carrying value before valuation allowance at end of period
22,244
21,666
10,801
Valuation allowance:
Balance at beginning of period
(8,513
)
(534
)
(300
)
Impairment recovery (charges)
5,807
(7,979
)
(234
)
Balance at end of period
(2,706
)
(8,513
)
(534
)
Net carrying value of MSRs at end of period
$
19,538
$
13,153
$
10,267
Fair value of MSRs at end of period
$
20,921
$
13,153
$
10,378
Amortization of mortgage servicing rights is computed based on payments and payoffs of the related mortgage loans serviced.
The Company had no actual losses from secondary market buy-backs in 2021, 2020 or 2019. Expense (credit) recognized related to the accrual was $0, $0 and $0 for the years ended December 31, 2021, 2020 and 2019, respectively.
The Company’s servicing portfolio is comprised of the following:
December 31,
Number of
Principal
Number of
Principal
Investor
Loans
Outstanding
Loans
Outstanding
(Dollars In Thousands)
Fannie Mae
7,545
$
913,336
8,365
$
998,359
Freddie Mac
16,987
2,012,895
17,385
1,925,717
Federal Home Loan Bank
8,260
13,143
Other
6,805
9,826
Totals
24,683
$
2,941,296
25,944
$
2,947,045
Custodial escrow balances maintained in connection with serviced loans were $32.4 million and $33.8 million at December 31, 2021 and 2020, respectively.
Significant assumptions at December 31, 2021, used in determining the value of MSRs include a weighted average prepayment speed assumption (“PSA”) of 204 and a weighted average discount rate of 8.00%. Significant assumptions at December 31, 2020, used in determining the value of MSRs include a weighted average prepayment rate of 390 PSA and a weighted average discount rate of 11.01%.
9.	Premises and Equipment and Leases
Premises and equipment are summarized as follows:
December 31,
(In Thousands)
Cost:
Land
$
13,369
$
13,382
Land improvements
1,587
1,326
Buildings
59,167
58,426
Leasehold improvements
3,655
3,616
Furniture, fixtures and equipment
41,075
37,138
Construction in process
2,538
119,168
116,426
Less allowances for depreciation and amortization
(63,566
)
(57,761
)
$
55,602
$
58,665
Depreciation expense was $6.3 million, $6.5 million and $4.2 million for the years ended December 31, 2021, 2020 and 2019, respectively.
Leases
Effective January 1, 2019, the Company adopted ASU 2016-02, Leases (Topic 842) using a modified retrospective transition approach applying several of available practical expedients at the date of initial application. These practical expedients included carryover of historical lease determination and classification conclusions, carryover of historical initial direct cost balances for existing leases and accounting for lease and non-lease components in contracts in which the Company is a lessee as a single lease component. All periods presented after January 1, 2019 are under ASC 842 whereas periods presented prior to January 1, 2019 are in accordance with prior lease accounting of ASC 840. Financial information was not updated and the disclosures required under ASC 842 were not provided for dates and periods before January 1, 2019.
On January 31, 2020, the Company performed a valuation on UCFC’s leases to determine an initial right of use asset (ROU asset) and lease liability in connection with the Merger. The Company recorded an initial ROU asset of $5.0 million and a lease liability of $5.1 million for these leases.
The Company’s lease agreements have maturity dates ranging from January 2022 to September 2044, some of which include options for multiple five and ten year extensions. The weighted average remaining life of the lease term for these leases was 14.21 and 15.09 years as of December 31, 2021 and 2020, respectively.
The discount rate used in determining the lease liability for each individual lease was the FHLB fixed advance rate or swap rate which corresponded with the remaining lease term as of January 1, 2019 for leases that existed at adoption and as of the lease commencement date for leases subsequently entered into. The weighted average discount rate for leases was 2.57% and 2.61% as of December 31, 2021 and 2020, respectively.
The total operating lease costs were $2.4 million and $2.3 million for the years ended December 31, 2021 and 2020, respectively. Rent expense for operating leases was $2.4 million in 2021. The right-of-use asset, included in other assets, was $15.4 million and $16.9 million at December 31, 2021 and 2020, respectively. The lease liabilities, included in other liabilities, were $16.1 million and $17.8 million as of December 31, 2021 and 2020, respectively.
Undiscounted cash flows included in lease liabilities have expected contractual payments at December 31, 2021 as follows:
(in thousands)
$
2,547
2,168
1,785
1,494
1,279
Thereafter
12,891
Total undiscounted minimum lease payments
$
22,164
Present value adjustment
(6,018
)
Total lease liabilities
$
16,146
10.Goodwill and Intangible Assets
Goodwill
The change in the carrying amount of goodwill for the year is as follows:
December 31,
(In Thousands)
Beginning balance
$
317,948
$
100,069
Goodwill acquired or adjusted during the year
-
217,879
Ending balance
$
317,948
$
317,948
The Company tests goodwill at least annually and, more frequently, if events or changes in circumstances indicate that it may be more likely than not that there is a possible impairment. The Company conducted a quantitative goodwill impairment assessment at December 31, 2021. The impairment assessment compared the fair value of identified reporting units with their carrying amount (including goodwill). If the carrying amount of a reporting unit exceeds its fair value, an impairment loss is recognized in an amount equal to the excess. The Company's assessment estimated fair value on an income approach that incorporated a discounted cash flow (“DCF”) model that involves management assumptions based upon future growth projections, which include estimates of the COVID-19 impact on the
Company’s business. Results of the assessment indicated no goodwill impairment as of December 31, 2021. The Company will continue to monitor its goodwill for possible impairment.
Acquired Intangible Assets
Activity in intangible assets for the years ended December 31, 2021, 2020 and 2019, was as follows:
Gross
Carrying
Amount
Accumulated
Amortization
Net Value
(In Thousands)
Balance as of January 1, 2019
$
20,133
$
(15,742
)
$
4,391
Intangible assets acquired
-
Amortization of intangible assets
-
(1,119
)
(1,119
)
Balance as of December 31, 2019
20,633
(16,861
)
3,772
Intangible assets acquired
33,014
-
33,014
Amortization of intangible assets
-
(6,449
)
(6,449
)
Balance as of December 31, 2020
53,647
(23,310
)
30,337
Intangible assets acquired
-
-
-
Amortization of intangible assets
-
(6,208
)
(6,208
)
Balance as of December 31, 2021
$
53,647
$
(29,518
)
$
24,129
Estimated amortization expense for each of the next five years and thereafter is as follows (in thousands):
$
5,450
4,722
4,013
3,306
2,279
Thereafter
4,359
Total
$
24,129
11.Deposits
The following schedule sets forth interest expense by type of deposit:
Years Ended December 31,
(In Thousands)
Checking and money market accounts
$
4,754
$
9,710
$
7,650
Savings accounts
Certificates of deposit
8,556
16,986
14,821
Totals
$
13,482
$
26,918
$
22,613
A summary of deposit balances is as follows:
December 31,
(In Thousands)
Noninterest-bearing checking accounts
$
1,724,772
$
1,597,262
Interest-bearing checking and money market accounts
2,952,705
2,627,669
Savings deposits
804,451
700,480
Retail certificates of deposit less than $250,000
636,477
912,006
Retail certificates of deposit greater than and equal to $250,000
163,646
210,424
$
6,282,051
$
6,047,841
Scheduled maturities of certificates of deposit at December 31, 2021, are as follows (in thousands):
$
529,525
141,797
81,196
26,876
20,699
Thereafter
Total
$
800,123
12.Advances from Federal Home Loan Bank
The Bank has the ability to borrow funds from the FHLB. The Bank pledges its single-family residential mortgage loan portfolio, certain commercial real estate loans, and certain agriculture real estate loans as security for these advances. Advances secured by residential mortgages must have collateral of at least 125% of the borrowings. Advances secured by commercial real estate loans, and agriculture real estate loans must have collateral of at least 125% and 120% of the borrowings, respectively. Total loans pledged to the FHLB at December 31, 2021, and December 31, 2020, were $2.1 billion and $2.0 billion, respectively. The Bank could obtain advances of up to approximately $1.4 billion from the FHLB at December 31, 2021. The Bank had no outstanding FHLB advances at December 31, 2021 or December 31, 2020.
13.Subordinated Debentures and Junior Subordinated Debentures Owed to Unconsolidated Subsidiary Trust
In September 2020, the Company completed the issuance of $50.0 million aggregate principal amount, fixed-to-floating rate subordinated notes due September 30, 2030 in a private offering exempt from the registration requirements under the Securities Act of 1933, as amended. The notes carry a fixed rate of 4.0% for five years at which time they will convert to a floating rate based on the secured overnight financing rate, plus a spread of 388.5 basis points. The Company may, at its option, beginning September 30, 2025, redeem the notes, in whole or in part, from time to time, subject to certain conditions. The net proceeds from the sale were approximately $48.7 million, after deducting the estimated offering expenses. The Company’s intent was to use the net proceeds for general corporate purposes, which may include, without limitation, providing capital to support its growth organically or through strategic acquisitions, repaying indebtedness, in financing investments, capital expenditures, repurchasing its common shares and for investments in the Bank as regulatory capital. The subordinated debentures are included in Total Capital under current regulatory guidelines and interpretations.
In March 2007, the Company sponsored an affiliated trust, Premier Statutory Trust II (“Trust Affiliate II”) that issued $15.0 million of Guaranteed Capital Trust Securities (Trust Preferred Securities). In connection with the transaction, the Company issued $15.5 million of Junior Subordinated Deferrable Interest Debentures (“Subordinated Debentures”) to Trust Affiliate II. The Company formed Trust Affiliate II for the purpose of issuing Trust Preferred Securities to third-party investors and investing the proceeds from the sale of these capital securities solely in Subordinated Debentures of the Company. The Subordinated Debentures held by Trust Affiliate II are the sole assets of that trust. The Company is not considered the primary beneficiary of this Trust (variable interest entity), therefore the trust is not consolidated in the Company’s financial statements, but rather the subordinated debentures are shown as a liability. Distributions on the Trust Preferred Securities issued by Trust Affiliate II are payable quarterly at a variable rate equal to the three-month LIBOR rate plus 1.5%. The Coupon rate payable on the Trust Preferred Securities issued by Trust Affiliate II was 1.70% and 1.72% as of December 31, 2021 and 2020, respectively.
The Trust Preferred Securities issued by Trust Affiliate II are subject to mandatory redemption, in whole or part, upon repayment of the Subordinated Debentures. The Company has entered into an agreement that fully and unconditionally guarantees the Trust Preferred Securities subject to the terms of the guarantee. The Trust Preferred Securities and Subordinated Debentures mature on June 15, 2037, but can be redeemed at the Company’s option at any time now.
The Company also sponsors an affiliated trust, Premier Statutory Trust I (“Trust Affiliate I”) that issued $20.0 million of Trust Preferred Securities in 2005. In connection with this transaction, the Company issued $20.6 million of Subordinated Debentures to Trust Affiliate I. Trust Affiliate I was formed for the purpose of issuing Trust Preferred Securities to third-party investors and investing the proceeds from the sale of these capital securities solely in Subordinated Debentures of the Company. The Junior Debentures held by Trust Affiliate I are the sole assets of the trust. The Company is not considered the primary beneficiary of this Trust (variable interest entity), therefore the trust is not consolidated in the Company’s financial statements, but rather the subordinated debentures are shown as a liability. Distributions on the Trust Preferred Securities issued by Trust Affiliate I are payable quarterly at a variable rate equal to the three-month LIBOR rate plus 1.38%. The Coupon rate payable on the Trust Preferred Securities issued by Trust Affiliate I was 1.58% and 1.60% as of December 31, 2021 and 2020, respectively.
The Trust Preferred Securities issued by Trust Affiliate I are subject to mandatory redemption, in whole or in part, upon repayment of the Subordinated Debentures. The Company has entered into an agreement that fully and unconditionally guarantees the Trust Preferred Securities subject to the terms of the guarantee. The Trust Preferred Securities and Subordinated Debentures mature on December 15, 2035, but can be redeemed at the Company’s option at any time now.
The Subordinated Debentures related to the Trust Preferred Securities may be included in tier 1 capital (with certain limitations applicable) under current regulatory guidelines and interpretations. Interest on both issues of Trust Preferred Securities may be deferred for a period of up to five years at the option of the issuer.
A summary of all junior subordinated debentures issued by the Company to affiliates and subordinated debentures follows. For the junior subordinated debentures, these amounts represent the par value of the obligations owed to these affiliates, including the Company’s equity interest in the trusts. For the subordinated debentures, these amounts represent the par value less remaining deferred offering expense associated with the issuance the debentures. Balances were as follows:
December 31,
(In Thousands)
First Defiance Statutory Trust I due December 2035
$
20,619
$
20,619
First Defiance Statutory Trust II due June 2037
15,464
15,464
Total junior subordinated debentures owed to unconsolidated subsidiary Trusts
$
36,083
$
36,083
Subordinated debentures
$
48,893
$
48,777
14.Securities Sold Under Agreements to Repurchase and Other Short Term Borrowings
Total securities sold under agreement to repurchase are summarized as follows:
Years Ended December 31,
(In Thousands, Except Percentages)
Securities sold under agreement to repurchase
Amounts outstanding at year-end
$
-
$
-
Year-end interest rate
-
-
Average daily balance during year
12,586
4,309
Maximum month-end balance during the year
105,000
14,487
Average interest rate during the year
0.18
%
0.55
%
The Company has utilized securities sold under agreements to repurchase in the past to facilitate the needs of our customers and to facilitate secured short-term funding needs. Securities sold under agreements to repurchase are stated at the amount of cash received in connection with the transaction. We monitor levels on a continuous basis. We may be required to provide additional collateral based on the fair value of the underlying securities. Securities pledged as collateral under repurchase agreements are maintained with our safekeeping agent.
As of December 31, 2021 and 2020, the Company had the following undrawn lines of credit facilities available for short-term borrowing purposes:
A $20.0 million line of credit with First Horizon Bank. The rate on the line of credit is at three- month LIBOR + 2.00%, with a floor of 2.50%, which floats quarterly. This line was undrawn upon as of December 31, 2021 and 2020.
A $25.0 million line of credit with U.S. Bank. The rate on this line of credit is U.S. Bank’s federal funds rate, which floats daily. This line was undrawn upon as of December 31, 2021 and 2020.
15.Other Noninterest Expense
The following is a summary of other noninterest expense:
Years Ended December 31,
(In Thousands)
Legal and other professional fees
$
7,325
$
5,119
$
3,693
Marketing
1,940
1,938
2,262
OREO expenses and write-downs
Printing and office supplies
1,032
Postage
1,257
1,173
Check charge-offs and fraud losses
Credit and collection expense
Other
12,019
12,521
9,415
Total other noninterest expense
$
25,075
$
23,289
$
17,608
16.Postretirement Benefits
Premier sponsors a defined benefit postretirement plan that is intended to supplement Medicare coverage for certain retirees who meet minimum age requirements. The Bank employees who retired prior to April 1, 1997, and who completed 20 years of service after age 40 receive full medical coverage at no cost. The Bank employees retiring after April 1, 1997, are provided medical benefits at a cost based on their combined age and years of service at retirement. Surviving spouses are also eligible for continued coverage after the retiree is deceased at a subsidy level that is 10% less than what the retiree is eligible for. The Bank employees retiring before July 1, 1997, receive dental and vision care in addition to medical coverage. The Bank employees who retire after July 1, 1997, are not eligible for dental or vision care.
The Bank employees who were born after December 31, 1950, are not eligible for the medical coverage described above at retirement. Rather, a one-time medical spending account of up to $10,000 (based on the participant’s age and years of service) will be established to reimburse medical expenses for those individuals. First Insurance employees who were born before December 31, 1950, can continue coverage until they reach age 65, or in lieu of continuing coverage, can elect the medical spending account option, subject to eligibility requirements. Employees hired or acquired after January 1, 2003, are eligible only for the medical spending account option.
Included in accumulated other comprehensive income at December 31, 2021, 2020 and 2019, are the following amounts that have not yet been recognized in net periodic benefit cost:
interest cost
December 31,
(In Thousands)
Unrecognized prior service cost
$
$
$
Unrecognized actuarial gains (losses)
Total loss recognized in Accumulated Other Comprehensive Income
Income tax effect
(21
)
(21
)
(64
)
Net loss recognized in Accumulated Other Comprehensive Income
$
$
$
Reconciliation of Funded Status and Accumulated Benefit Obligation
The plan is not currently funded. The following table summarizes benefit obligation and plan asset activity for the plan measured as of December 31 each year:
December 31,
(In Thousands)
Change in benefit obligation:
Benefit obligation at beginning of year
$
2,787
$
2,987
Service cost
Interest cost
Participant contribution
Actuarial (gains) / losses
(195
)
Benefits paid
(176
)
(182
)
Benefit obligation at end of year
2,759
2,787
Change in fair value of plan assets:
Balance at beginning of year
-
-
Employer contribution
Participant contribution
Benefits paid
(176
)
(182
)
Balance at end of year
-
-
Funded status at end of year
$
(2,759
)
$
(2,787
)
Net periodic postretirement benefit cost includes the following components:
Years Ended December 31,
(In Thousands)
Service cost-benefits attributable to service during the period
$
$
$
Interest cost on accumulated postretirement benefit obligation
Net amortization and deferral
Net periodic postretirement benefit cost
Net (gain) / loss during the year
(195
)
Amortization of prior service cost and actuarial losses
(13
)
(13
)
(14
)
Total recognized in comprehensive income (loss)
-
(208
)
Total recognized in net periodic postretirement benefit cost and other
comprehensive income
$
$
(47
)
$
The following assumptions were used in determining the components of the postretirement benefit obligation:
Weighted average discount rates:
Used to determine benefit obligations at December 31
2.50
%
2.00
%
3.00
%
Used to determine net periodic postretirement benefit cost for years
ended December 31
2.00
%
3.00
%
4.00
%
Assumed health care cost trend rates at December 31:
Health care cost trend rate assumed for next year
6.50
%
5.50
%
6.00
%
Rate to which the cost trend rate is assumed to decline (the ultimate
trend rate)
3.90
%
4.00
%
4.00
%
Year that rate reaches ultimate trend rate
The following benefits are expected to be paid over the next five years and in aggregate for the next five years thereafter. Because the plan is unfunded, the expected net benefits to be paid and the estimated Company contributions are the same amount.
Expected to be Paid
(In Thousands)
$
2027 through 2031
Assumed health care cost trend rates have a significant effect on the amounts reported for the health care plans.
The Company expects to contribute $191,000 before reflecting expected Medicare retiree drug subsidy payments in 2021.
17.Regulatory Matters
Premier and the Bank are subject to minimum capital adequacy guidelines. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators, which could have a material impact on Premier’s financial statements. Under capital adequacy guidelines, Premier and the Bank must maintain capital amounts in excess of minimum ratios based on quantitative measures of their assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices.
In July 2013, the Federal Reserve and the FDIC approved the final rules implementing the Basel Committee on Banking Supervision’s capital guidelines for U.S. banks (commonly known as Basel III). Under the final rules, which began for Premier and the Bank on January 1, 2015, and are subject to a phase-in period through January 1, 2019, minimum requirements will increase for both quantity and quality of capital held by Premier and the Bank. The rules include a minimum common equity tier 1 capital to risk-weighted assets ratio (“CET1”) of 4.5% and a capital conservation buffer of 2.5% of risk-weighted assets, which effectively results in a minimum CET1 ratio of 7.0%. Basel III raises the minimum ratio of tier 1 capital to risk-weighted assets from 4.0% to 6.0% (which, with the capital conservation buffer, effectively results in a minimum tier 1 capital ratio of 8.5%), which effectively results in a minimum total capital to risk-weighted assets ratio of 10.5%, and requires a minimum leverage ratio of 4.0%. Basel III also makes changes to risk weights for certain assets and off-balance sheet exposures.
The federal banking agencies have also established a system of “prompt corrective action” to resolve certain problems of undercapitalized banks. The regulatory agencies can initiate certain mandatory actions if the Bank fails to meet the minimum capital requirements, which could have a material effect on Premier’s financial statements.
The following schedule presents Premier consolidated and the Bank’s regulatory capital ratios as of December 31, 2021 and 2020 (dollars in thousands):
December 31, 2021
Actual
Minimum Required for
Adequately Capitalized
Minimum Required to be
Well Capitalized for
Prompt Corrective Action
Amount
Ratio
Amount
Ratio(1)
Amount
Ratio
CET1 Capital (to Risk-Weighted Assets)
Consolidated
$
689,930
10.92
%
$
284,394
4.5
%
N/A
N/A
Premier Bank
$
725,600
11.53
%
$
283,265
4.5
%
$
409,160
6.5
%
Tier 1 Capital
Consolidated
$
724,930
10.10
%
$
287,138
4.0
%
N/A
N/A
Premier Bank
$
725,600
10.16
%
$
285,664
4.0
%
$
357,080
5.0
%
Tier 1 Capital (to Risk Weighted Assets)
Consolidated
$
724,930
11.47
%
$
379,192
6.0
%
N/A
N/A
Premier Bank
$
725,600
11.53
%
$
377,686
6.0
%
$
503,582
8.0
%
Total Capital (to Risk Weighted Assets)
Consolidated
$
844,389
13.36
%
$
505,589
8.0
%
N/A
N/A
Premier Bank
$
795,059
12.63
%
$
503,582
8.0
%
$
629,477
10.0
%
(1)Excludes capital conservation buffer of 2.50% as of December 31, 2021.
December 31, 2020
Actual
Minimum Required for
Adequately Capitalized
Minimum Required to be
Well Capitalized for
Prompt Corrective Action
Amount
Ratio
Amount
Ratio(1)
Amount
Ratio
CET1 Capital (to Risk-Weighted Assets)
Consolidated
$
624,069
10.40
%
$
270,017
4.5
%
N/A
N/A
First Federal
$
629,653
10.52
%
$
269,396
4.5
%
$
389,128
6.5
%
Tier 1 Capital
Consolidated
$
659,069
9.76
%
$
270,072
4.0
%
N/A
N/A
First Federal
$
629,653
9.36
%
$
269,189
4.0
%
$
336,487
5.0
%
Tier 1 Capital (to Risk Weighted Assets)
Consolidated
$
659,069
10.98
%
$
360,022
6.0
%
N/A
N/A
First Federal
$
629,653
10.52
%
$
359,195
6.0
%
$
478,926
8.0
%
Total Capital (to Risk Weighted Assets)
Consolidated
$
784,148
13.07
%
$
480,030
8.0
%
N/A
N/A
First Federal
$
704,586
11.77
%
$
478,926
8.0
%
$
598,658
10.0
%
(1)Excludes capital conservation buffer of 2.50% as of December 31, 2020.
Dividend Restrictions - Dividends paid by the Bank to Premier are subject to various regulatory restrictions. The Bank paid $35.0 million in dividends to Premier in 2021 and $24.0 million in 2020. The Bank may not pay dividends to Premier in excess of its net profits (as defined by statute) for the last two fiscal years, plus any year to date net profits without the approval of the ODFI. First Insurance Group paid $2.0 million in dividends to Premier in 2021 and $400,000 in dividends in 2020. PFC Risk Management paid $1.8 million in dividends to Premier in 2021 and $1.5 million in 2020. PFC Capital paid $7.5 million in dividends to Premier in 2021.
18.Income Taxes
The components of income tax expense are as follows:
Years Ended December 31,
(In Thousands)
Current:
Federal
$
24,256
$
25,323
$
11,476
State and local
Deferred
5,393
(9,781
)
(419
)
$
30,372
$
16,192
$
11,267
The effective tax rates differ from federal statutory rate applied to income before income taxes due to the following:
Years Ended December 31,
(In Thousands)
Tax expense at statutory rate (21%)
$
32,849
$
16,646
$
12,734
Increases (decreases) in taxes from:
State income tax - net of federal tax benefit
Tax exempt interest income, net of TEFRA
(839
)
(806
)
(729
)
Bank owned life insurance
(1,075
)
(882
)
(555
)
Captive insurance
(365
)
(445
)
(354
)
Other
(769
)
1,166
Totals
$
30,372
$
16,192
$
11,267
Deferred federal income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes.
Significant components of Premier’s deferred federal income tax assets and liabilities are as follows:
December 31,
(In Thousands)
Deferred federal income tax assets:
Allowance for credit losses
$
13,958
$
17,237
Allowance for unfunded commitments
1,056
1,123
Interest on nonaccrual loans
1,003
Postretirement benefit costs
Deferred compensation
2,216
2,057
Individually evaluated loans
1,138
2,483
Net unrealized loss on available-for-sale securities
1,070
-
Accrued vacation
Accrued bonus
1,054
1,065
Right of use asset
3,391
3,731
Net operating loss carryforward
Other
2,363
2,175
Total deferred federal income tax assets
27,610
31,737
Deferred federal income tax liabilities:
Equity securities fair value
-
Goodwill
4,726
4,542
Mortgage servicing rights
4,103
2,762
Fixed assets
2,368
2,230
Other intangible assets
4,987
7,118
Deferred loan origination fees and costs
1,266
1,294
Net unrealized gain on available-for-sale securities
-
4,009
Prepaid expenses
Lease liabilities
3,242
3,557
Other
Total deferred federal income tax liabilities
22,665
26,299
Net deferred federal income tax asset/ (liability)
$
4,945
$
5,438
The realization of the Company’s deferred tax assets is dependent upon the Company’s ability to generate taxable income in future periods and the reversal of deferred tax liabilities during the same period. The Company has evaluated the available evidence supporting the realization of its deferred tax assets and determined it is more likely than not that the assets will be realized and thus no valuation allowance was required at December 31, 2021.
Retained earnings at December 31, 2021, include approximately $32.1 million for which no tax provision for federal income taxes has been made. This amount represents the tax bad debt reserve at December 31, 1987, which is the end of the Company’s base year for purposes of calculating the bad debt deduction for tax purposes. If this portion of retained earnings is used in the future for any purpose other than to absorb bad debts, the amount used will be added to future taxable income. The unrecorded deferred tax liability on the above amount at December 31, 2021, was approximately $6.7 million.
The total amount of interest and penalties recorded in the income statement was $0 for each of the years ended December 31, 2021, 2020 and 2019. The amount accrued for interest and penalties was $0 at December 31, 2021, 2020 and 2019.
The Company and its subsidiaries are subject to U.S. federal income tax as well as income tax in the states of Indiana and West Virginia. The Company is no longer subject to examination by taxing authorities for years before 2018. At December 31, 2021, the Company also operated in the states of Ohio, Pennsylvania and Michigan, which tax financial institutions based on their equity rather than their income.
The Company’s net operating loss of $1.3 million will be carried forward to use against future taxable income. The net operating loss carryforwards begin to expire in the year ending December 31, 2029. This tax benefit is subject to an annual limitation under Internal Revenue Code Section 382; however, Premier and the Bank expect to utilize the full amount of the benefit.
19.Employee Benefit Plans
401(k) Plan
Employees of Premier are eligible to participate in the Premier Financial Corp. 401(k) Employee Savings Plan (the “Premier 401(k)”) if they meet certain age and service requirements. Under the Premier 401(k), Premier matches 100% of the participants’ contributions up to 3% of compensation and then 50% of the participants’ contributions for the next 2% of compensation. The Premier 401(k) also provides for a discretionary Premier contribution in addition to the Premier matching contribution. Premier matching contributions totaled $2.6 million, $2.5 million and $1.4 million for the years ended December 31, 2021, 2020 and 2019, respectively. There were no discretionary contributions in any of those years.
Group Life Plan
On June 30, 2010, the Bank adopted the First Federal Bank of the Midwest Executive Group Life Plan - Post Separation (the “Group Life Plan”) in which various employees, including the Company’s named executive officers, may participate. Under the terms of the Group Life Plan, the Bank will purchase and own life insurance policies covering the lives of employees selected by the Board of Directors of the Bank as participants. There was $(121,000), $40,000 and $60,000 of (recovery)/expense recorded for the years ended December 31, 2021, 2020 and 2019, respectively, with a liability of $1.7 million and $1.8 million for future benefits recorded at December 31, 2021 and 2020, respectively.
Deferred Compensation
The deferred compensation plan covers all directors and certain employees that elect to participate. Under the plan, the Company pays each participant, or their beneficiary, the amount of fees deferred plus interest over a defined time period. The deferred compensation plan has approximately $9.4 and $7.4 million in assets and liabilities, respectively, as of December 31, 2021, which are matched in terms of investment elections. As of December 31, 2020, the deferred compensation plan had approximately $8.2 and $6.8 million in assets and liabilities, respectively, which were matched in terms of investment elections. Every year, other noninterest income and other noninterest expense reflects the changes in fair value of the underlying investments in the assets and liabilities, respectively. The net expense (income) recorded for the deferred compensation plan for each of the last three years was ($66,000), $(11,000) and $85,000 in 2021, 2020 and 2019, respectively.
As a part of the Merger, Premier assumed the United Community Financial Corp. Deferred Compensation Plan. This is an unfunded plan for a select group of key management including named executive officers. The deferred compensation plan has approximately $1.8 million and $1.9 million, respectively, in both assets and liabilities as of December 31, 2021 and December 31, 2020. As of December 31, 2020, this plan has been frozen. Participants can choose to receive a lump sum payout or elect to receive installments for up to 11 years once they are eligible to withdraw funds.
20.Stock Compensation Plans
Premier has established equity based compensation plans for its directors and employees. On February 27, 2018, the BoTotal Fair Valueard adopted, and the shareholders approved at the 2018 Annual Shareholders Meeting, the Premier Financial Corp. 2018 Equity Incentive Plan (the “2018 Equity Plan”). The 2018 Equity Plan replaced all existing plans, although the Company’s former equity plans remain in existence to the extent there were outstanding grants thereunder at the time the 2018 Equity Plan was approved. In addition, as a result of the Merger, Premier assumed certain outstanding stock options granted under UCFC’s Amended and Restated 2007 Long-Term Incentive Plan (the “UCFC 2007 Plan”) and UCFC’s 2015 Long Term Incentive Plan, which has since been renamed as the “Premier Financial Corp. 2015 Long Term Incentive Plan” (the “2015 Plan”). Premier also assumed the 2015 Plan with respect to the available shares under the UCFC 2015 Plan as of the effective date of the Merger, with appropriate adjustments to the number of shares available to reflect the Merger. The stock options assumed from UCFC in the Merger became exercisable solely to purchase shares of Premier, with appropriate adjustments to the number of shares subject to the assumed stock options and the exercise price of such stock options and remain subject to the terms of the 2015 Plan. Besides certain options issued under the First Defiance Financial Corp. 2010 Equity Incentive Plan, all awards currently outstanding are issued under the 2018 Equity Plan or the 2015 Plan. The 2018 Equity Plan and the 2015 Plan were each amended and restated in February 2022 to align certain administrative components of the plans in addition to enhancing certain governance components. New awards will be made under either the 2018 Equity Plan or the 2015 Plan as the Company determines. The 2018 Equity Plan allows for issuance of up to 900,000 common shares through the award of options, restricted stock, stock, stock appreciation rights or other stock-based awards. The 2015 Plan allows for the issuance of up to 1.2 million common shares, as adjusted for the Merger, through the award of options, stock, restricted stock, stock units, or stock appreciation rights.
The Company maintains a Short-Term ("STIP") Incentive Plan. Under the 2019, 2020 and 2021 STIPs, the participants can earn a cash payout. The final amount of benefits under the STIPs is determined as of December 31 of the same year and paid out in cash in the first quarter of the following year.
As of December 31, 2021, 35,661 options to acquire Premier shares were outstanding at option prices based on the market value of the underlying shares on the date the options were granted. On the date of the Merger, 39,983 Premier options were exchanged for all of the outstanding stock options on the books of UCFC at the same conversion price and ratio applied to UCFC common shares at January 31,
2020. All of these options were fully vested at the time of acquisition. All options expire ten years from the date of grant. Vested options of retirees expire on the earlier of the scheduled expiration date or twelve months after the retirement date.
The Company maintains Long-Term ("LTIP") Equity Incentive Plans for select members of management (the "Executive LTIP") and a Key Employee and Commercial Lender Plan (the "Key Plan").
Under the Executive LTIP, participants may earn between 20% to 50% of their salary for potential payout in the form of equity awards based on the achievement of certain corporate performance targets over a three-year period. The Company granted 86,058 performance stock units to the participants in the 2020 Executive LTIP during the first quarter of 2021, which represents the maximum target award. As a result of the Merger, the 2019 grant was accelerated and vested based on performance up to the date of the Merger. This resulted in the award of 51,677 shares of PFC stock to the participants with another 21,834 shares to be issued in 2021 to the then CEO of the Company. This delay in the receipt of the CEO’s shares was mandated by the Merger Agreement. The value of awards issued in 2020 and 2021 under the Executive LTIP will be determined individually at the end of each respective 36 month performance period ending December 31. The benefits earned under these LTIPs will be paid out in equity in the first quarter following the end of the performance period. The participants will receive all or a portion of the award if their employment is terminated by the Company without cause, by the participant in certain situations, or by death, disability or retirement.
Under each Key LTIP, the participants are granted restricted share units based upon the achievement of certain targets in the prior year. The participants can earn from 5% to 10% of their salary in restricted stock units that vest three years from the date of grant. The Company granted 17,542 and 12,038 RSU’s in the first quarter of 2021 and 2020, respectively, as a payout under the Key LTIP.
In 2021, the Company also granted 16,846 discretionary restricted stock units that vest three years from the date of grant and restricted stock awards for 43,460 shares. Of the 43,460 restricted stock grants, 13,708 were issued to directors and have a one-year vesting period. The remaining grants vest over a three year period. The fair value of all granted restricted shares was determined by the stock price at the date of the grant.
The fair value of each option award is estimated on the date of grant using the Black-Scholes model. Expected volatilities are based on historical volatilities of the Company’s common shares. The Company uses historical data to estimate option exercise and post-vesting termination behavior. The expected term of options granted is based on historical data and represents the period of time that options granted are expected to be outstanding, which takes into account that the options are not transferable. The risk-free interest rate for the expected term of the option is based on the U.S. Treasury yield curve in effect at the time of the grant.
There were no options granted during the years ended December 31, 2021, 2020 or 2019.
Following is options activity under the plans during 2021:
Options
Outstanding
Weighted
Average
Exercise Price
Weighted
Average
Remaining
Contractual
Term (in years)
Aggregate
Intrinsic
Value
(in 000’s)
Options outstanding, January 1, 2021
36,261
$
21.59
Forfeited or cancelled
-
-
Exercised
(600
)
13.80
Exchanged
-
-
Granted
-
-
Options outstanding, December 31, 2021
35,661
$
21.72
4.33
$
328,271
Exercisable at December 31, 2021
35,661
$
21.72
4.33
$
328,271
Information related to the stock option plans is as follows:
Year Ended December 31,
(In Thousands, except per share amounts)
Intrinsic value of options exercised
$
$
$
Cash received from option exercises
-
Tax benefit realized from option exercises
Weighted average fair value of options granted
$
-
$
-
$
-
As of December 31, 2021, there was a de minimus amount of total unrecognized compensation costs related to unvested stock options granted under the Company’s equity plans. The cost is expected to be recognized over a weighted-average period of 1.0 month.
At December 31, 2021, a total of 271,707 restricted share awards were outstanding. Compensation expense is recognized over the performance or vesting period. Total expense of $2.5 million, $2.3 million and $2.1 million was recorded during the years ended December 31, 2021, 2020 and 2019, respectively, and approximately $2.7 million and $3.2 million is included within other liabilities at December 31, 2021 and 2020, respectively, related to the cash portion of the STIPs.
Performance Stock Units
Restricted Stock Units
Stock Grants
Unvested Shares
Shares
Weighted-
Average
Grant Date
Fair Value
Shares
Weighted-
Average
Grant Date
Fair Value
Shares
Weighted-
Average
Grant Date
Fair Value
Unvested at January 1, 2021
90,891
$
26.48
55,759
$
25.18
41,057
$
26.93
Granted
86,058
30.32
34,388
30.77
43,460
31.32
Vested
(9,633
)
28.24
(32,521
)
26.08
(24,849
)
28.00
Forfeited
(5,642
)
28.24
(5,853
)
24.03
(1,408
)
28.41
Unvested at December 31, 2021
161,674
$
28.36
51,773
$
28.44
58,260
$
29.71
The maximum amount of compensation expense that may be earned for the 2021 Executive LTIP at December 31, 2021, is approximately $4.3 million in the aggregate. However, the estimated expense expected to be earned as of December 31, 2021, based on the performance measures in the plans, is $2.8 million of which $480,000 was unrecognized at December 31, 2021, and will be recognized over the remaining performance period.
As of December 31, 2021, 556,698 shares were available for grant under the 2018 Equity Plan and 113,050 shares were available for grant under the 2015 Plan. Generally, grants or awards that are forfeited or cancelled under the 2018 Equity Plan and the 2015 Plan may be available for grant to other participants.
21.Parent Company Statements
Condensed parent company financial statements, which include transactions with subsidiaries, are as follow:
December 31,
Statements of Financial Condition
(In Thousands)
Assets
Cash and cash equivalents
$
24,152
$
58,017
Equity securities
14,097
1,090
Investment in banking subsidiary
1,034,379
962,675
Investment in non-bank subsidiaries
33,102
39,699
Other assets
4,110
6,013
Total assets
$
1,109,840
$
1,067,494
Liabilities and stockholders’ equity:
Subordinated debentures
$
84,976
$
84,860
Accrued liabilities
1,368
Stockholders’ equity
1,023,496
982,276
Total liabilities and stockholders’ equity
$
1,109,840
$
1,067,494
Years Ended December 31,
Statements of Income
(In Thousands)
Dividends from subsidiaries
$
46,315
$
25,900
$
38,585
Interest income
-
Interest expense
(2,713
)
(1,308
)
(1,368
)
Other income
1,955
Noninterest expense
(997
)
(902
)
(1,234
)
Income before income taxes and equity in earnings of subsidiaries
45,080
23,825
35,984
Income tax credit
(259
)
(423
)
(534
)
Income before equity in earnings of subsidiaries
45,339
24,248
36,518
Undistributed equity in earnings of subsidiaries
80,712
38,829
12,852
Net income
126,051
63,077
49,370
Other comprehensive income (loss)
(18,432
)
10,409
6,743
Comprehensive income
$
107,619
$
73,486
$
56,113
Years Ended December 31,
Statements of Cash Flows
(In Thousands)
Operating activities:
Net income
$
126,051
$
63,077
$
49,370
Adjustments to reconcile net income to net cash (used in)
provided by operating activities:
Undistributed equity in earnings of subsidiaries
(80,712
)
(38,829
)
(12,852
)
Change in other assets and liabilities
1,630
(201
)
Net cash provided by (used in) operating activities
45,719
25,878
36,317
Investing activities:
Net Cash received for United Community Financial Corp.
-
9,414
-
Purchase of equity securities
(11,053
)
(1,000
)
-
Net cash used in investing activities
(11,053
)
8,414
-
Financing activities:
Repurchase of common stock
(29,583
)
(10,183
)
(15,147
)
Cash dividends paid
(38,948
)
(32,898
)
(15,624
)
Proceeds from subordinated debentures
-
48,777
-
Stock Options Exercised
-
-
Direct stock sales
-
Net cash used in financing activities
(68,531
)
5,714
(30,459
)
Net increase (decrease) in cash and cash equivalents
(33,865
)
40,006
5,858
Cash and cash equivalents at beginning of year
58,017
18,011
12,153
Cash and cash equivalents at end of year
$
24,152
$
58,017
$
18,011
22.Fair Value
FASB ASC Topic 820, Fair Value Measurements, defines fair value as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in an orderly transaction between market participants. A fair value measurement assumes that the transaction to sell the asset or transfer the liability occurs in the principal market for the asset or liability or, in the absence of a principal market, the most advantageous market for the asset or liability. The price in the principal (or most advantageous) market used to measure the fair value of the asset or liability shall not be adjusted for transaction costs. An orderly transaction is a transaction that assumes exposure to the market for a period prior to the measurement date to allow for marketing activities that are usual and customary for transactions involving such assets and liabilities; it is not a forced transaction. Market participants are buyers and sellers in the principal market that are (i) independent, (ii) knowledgeable, (iii) able to transact and (iv) willing to transact.
FASB ASC Topic 820 requires the use of valuation techniques that are consistent with the market approach, the income approach and/or the cost approach. The market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets and liabilities. The income approach uses valuation techniques to convert future amounts, such as cash flows or earnings, to a single present amount on a discounted basis. The cost approach is based on the amount that currently would be required to replace the service capacity of an asset (replacement cost). Valuation techniques should be consistently applied. Inputs to valuation techniques refer to the assumptions that market participants would use in pricing the asset or liability. Inputs may be observable, meaning those that reflect the assumptions market participants would use in pricing the asset or liability developed based on the best information available. In that regard, FASB ASC Topic 820 established a fair value hierarchy for valuation inputs that gives the highest priority to quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. The fair value hierarchy is as follows:
•Level 1: Quoted prices (unadjusted) in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date.
•Level 2: Inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. These might include quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability (such as interest rates, prepayment speeds, credit risks, etc.) or inputs that are derived principally from or corroborated by market data by a correlation or other means.
•Level 3: Unobservable inputs for determining fair value of assets and liabilities that reflect an entity’s own assumptions about the assumptions that market participants would use in pricing the assets or liabilities.
A description of the valuation methodologies used for instruments measured at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy, is set forth below.
Available-for-sale securities - Securities classified as available for sale are generally reported at fair value utilizing Level 2 inputs where the Company obtains fair value measurements from an independent pricing service that uses matrix pricing, which is a mathematical technique widely used in the industry to value debt securities without relying exclusively on quoted prices for the specific securities but rather by relying on the securities’ relationship to other benchmark quoted securities (Level 2 inputs). The fair value measurements consider observable data that may include dealer quotes, market spreads, cash flows and the bonds’ terms and conditions, among other things. Securities in Level 2 include U.S. federal government agencies, mortgage-backed securities, corporate bonds and municipal securities.
Equity securities - These securities are reported at fair value utilizing Level 1 inputs where the Company obtains quoted prices in active markets for identical equity securities.
Loans held for sale, carried at fair value - The Company elected the fair value option for all conventional residential one-to four-family loans held for sale and all permanent construction loans held for sale that were acquired from UCFC in the Merger. In addition, the Company has elected the fair value option for all loans held for sale originated after January 31, 2020.
The fair value of conventional loans held for sale is determined using the current 15 day forward contract price for either 15 or 30 year conventional mortgages (Level 2). The fair value of permanent construction loans held for sale is determined using the current 60 day forward contract price for 15 or 30 year conventional mortgages which is then adjusted for unobservable market data such as estimated fall out rates and estimated time from origination to completion of construction (Level 3).
Collateral Dependent loans - Fair values for individually analyzed, collateral dependent loans are generally based on appraisals obtained from licensed real estate appraisers and in certain circumstances consideration of offers obtained to purchase properties prior to foreclosure. Appraisals for commercial real estate generally use three methods to derive value: cost, sales or market comparison and income approach. The cost method bases value on the cost to replace the current property. Value of market comparison approach evaluates the sales price of similar properties in the same market area. The income approach considers net operating income generated by the property and an investor’s required return. Adjustments are routinely made in the appraisal process by the independent appraisers to adjust for differences between the comparable sales and income data available. Comparable sales adjustments are based on known sales prices of similar type and similar use properties and duration of time that the property has been on the market to sell. Such adjustments made in the appraisal process are typically significant and result in a Level 3 classification of the inputs for determining fair value.
Real estate held for sale - Assets acquired through or instead of loan foreclosure are initially recorded at fair value less costs to sell when acquired, establishing a new cost basis. These assets are then reviewed monthly by members of the asset review committee for valuation changes and are accounted for at lower of cost or fair value less estimated costs to sell. Fair value is commonly based on recent real estate appraisals which may utilize a single valuation approach or a combination of approaches including cost, comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the independent appraisers to adjust for differences between the comparable sales and income data available. Such adjustments may be significant and typically result in a Level 3 classification of the inputs for determining fair value.
Appraisals for both collateral-dependent loans and other real estate owned are performed by certified general appraisers (for commercial properties) or certified residential appraisers (for residential properties) whose qualifications and licenses have been reviewed and
verified by the Company. Once received, a member of the Company’s asset quality or collections department reviews the assumptions and approaches utilized in the appraisal. Appraisal values are discounted from 0% to 30% to account for other factors that may impact the value of collateral. In determining the value of collateral dependent loans and other real estate owned, significant unobservable inputs may be used, which include but are not limited to: physical condition of comparable properties sold, net operating income generated by the property and investor rates of return.
Mortgage servicing rights - On a quarterly basis, mortgage servicing rights are evaluated for impairment based upon the fair value of the rights as compared to the carrying amount. If the carrying amount of an individual tranche exceeds fair value, impairment is recorded on that tranche so that the servicing asset is carried at fair value. Fair value is determined at a tranche level based on a model that calculates the present value of estimated future net servicing income. The valuation model utilizes assumptions that market participants would use in estimating future net servicing income and are validated against available market data (Level 2).
Mortgage banking derivative - The fair value of mortgage banking derivatives are evaluated monthly based on derivative valuation models using quoted prices for similar assets adjusted for specific attributes of the commitments and other observable market data at the valuation date (Level 2).
Purchased and written certificate of deposit option - The Company acquired purchased and written certificate of deposit options in its Merger with UCFC. These written and purchased options are mirror derivative instruments which are carried at fair value on the statement of financial condition. The Company uses an independent third party that performs a market valuation analysis for purchased and written certificate of deposit options. (Level 2)
Interest rate swaps - The Company periodically enters into interest rate swap agreements with its commercial customers who desire a fixed rate loan term that is longer than the Company is willing to extend. The Company then enters into a reciprocal swap agreement with a third party that offsets the interest rate risk from the interest rate swap extended to the customer. The interest rate swaps are derivative instruments which are carried at fair value on the statement of financial condition. The Company uses an independent third party that performs a market valuation analysis for both swap positions. (Level 2)
The Company also enters into cash flow hedge derivatives instruments to hedge the risk of variability in cash flows (future interest payments) attributable to changes in the contractually specified LIBOR benchmark interest rate on the Company's floating rate loan pool. The Company uses an independent third party to perform a market valuation analysis for these derivatives (Level 2).
The following table summarizes the financial assets measured at fair value on a recurring basis segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value:
Assets and Liabilities Measured on a Recurring Basis
December 31, 2021
Level 1
Inputs
Level 2
Inputs
Level 3
Inputs
Total Fair
Value
(In Thousands)
Assets:
Available for sale securities:
Obligations of U.S. government corporations and agencies
$
-
$
174,710
$
-
$
174,710
Mortgage-backed securities
-
206,751
-
206,751
Collateralized mortgage obligations
-
260,168
-
260,168
Asset-backed securities
-
220,536
-
220,536
Corporate bonds
-
70,893
-
70,893
Obligations of state and political subdivisions
-
273,202
-
273,202
Equity securities
14,097
-
-
14,097
Loans held for sale, at fair value
-
28,780
134,167
162,947
Interest rate swaps
-
1,287
-
1,287
Cash flow hedge derivative
-
-
Mortgage banking derivative - asset
-
2,336
-
2,336
Liabilities:
Interest rate swaps
-
1,292
-
1,292
December 31, 2020
Level 1
Inputs
Level 2
Inputs
Level 3
Inputs
Total Fair
Value
(In Thousands)
Available for sale securities:
Obligations of U.S. government corporations and agencies
$
-
$
40,940
$
-
$
40,940
Mortgage-backed securities
-
277,182
-
277,182
Collateralized mortgage obligations
-
106,299
-
106,299
Asset-backed securities
-
30,546
-
30,546
Corporate bonds
-
44,169
-
44,169
Obligations of state and political subdivisions
-
237,518
-
237,518
Equity securities
1,090
-
-
1,090
Loans held for sale, at fair value
-
98,587
123,029
221,616
Purchased certificate of deposit option
-
-
Interest rate swaps
-
1,870
-
1,870
Mortgage banking derivative - asset
-
3,833
-
3,833
Liabilities:
Written certificate of deposit option
-
-
Interest rate swaps
-
2,036
-
2,036
The tables below present a reconciliation of all assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the twelve month periods ended December 31, 2021 and 2020.
Construction loans held for sale
Twelve Months Ended
December 31,
Balance of recurring Level 3 assets at beginning of period
$
123,029
$
-
Total gains (losses) for the period
Included in change in fair value of loans held for sale
(3,716
)
13,492
Originations
128,844
108,847
Acquired in acquisition
-
37,711
Sales
(113,990
)
(37,021
)
Balance of recurring Level 3 assets at end of period
$
134,167
$
123,029
Securities available-for-sale
Twelve Months Ended
December 31,
Balance of recurring Level 3 assets at beginning of period
$
-
$
3,411
Balance of assets classified as Level 3 during the period
-
-
Balance of Level 3 assets moved to Level 2 during the period
-
(3,411
)
Balance of recurring Level 3 assets at end of period
$
-
$
-
The Company has elected the fair value option for new applications taken post January 31, 2020, and subsequently originated for residential mortgage and permanent construction loans held for sale. These loans are intended for sale and the Company believes that fair value is the best indicator of the resolution of these loans. Interest income is recorded based on the contractual terms of the loan and in accordance with the Company’s policies. There were no loans at December 31, 2021, where the fair value option had been elected.
The aggregate fair value of the residential mortgage loans held for sale at December 31, 2021 and December 31, 2020 was $28.8 million and 98.6 million, respectively and they had contractual balances of $27.7 million and $93.2 million, respectively. The difference between these two figures is recorded in gains and losses on the sale of loans held for sale. For the twelve months ended December 31,
2021, $5.0 million was recorded in losses on the sale of loans held for sale for the change in fair value. For the twelve months ended December 31, 2020, $5.4 million was recorded in gain on sale of loans held for sale for the change in fair value.
The aggregate fair value of the permanent construction loans held for sale at December 31, 2021 and December 31, 2020 was $134.2 million and 123.0 million and they had a contractual balance of $125.0 million and $109.5 million, respectively. The difference between these two figures is recorded in gains and losses on the sale of loans held for sale. For the twelve months ended December 31, 2021, $3.7 million was recorded in losses on the sale of loans held for sale for the change in fair value. For the twelve months ended December 31, 2020, $13.5 million was recorded in gains on the sale of loans held for sale for the change in fair value.
The following table summarizes the financial assets measured at fair value on a non-recurring basis segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value:
Assets and Liabilities Measured on a Non-Recurring Basis
December 31, 2021
Level 1
Inputs
Level 2
Inputs
Level 3
Inputs
Total Fair
Value
(In Thousands)
Collateral dependent loans
Commercial Real Estate
$
-
$
-
$
2,749
$
2,749
Commercial
-
-
8,564
8,564
Total individually analyzed loans
-
-
11,313
11,313
Mortgage servicing rights
-
19,538
-
19,538
December 31, 2020
Level 1
Inputs
Level 2
Inputs
Level 3
Inputs
Total Fair
Value
(In Thousands)
Collateral dependent loans
Commercial Real Estate
$
-
$
-
$
4,601
$
4,601
Commercial
-
-
7,151
7,151
Total individually analyzed loans
-
-
11,752
11,752
Mortgage servicing rights
-
13,153
-
13,153
For Level 3 assets and liabilities measured at fair value on a nonrecurring basis as of December 31, 2021, the significant unobservable inputs used in the fair value measurements were as follows:
Fair
Value
Valuation Technique
Unobservable Inputs
Range of
Inputs
Weighted
Average
(Dollars in Thousands)
Individually analyzed Loans- Applies to loan
classes with an appraisal valuation
$
5,821
Appraisals which utilize sales comparison, net income and cost approach
Discounts for collection issues and changes in market conditions
20-50%
35.18
%
Individually analyzed Loans- Applies to loan
classes without an appraisal valuation
$
5,492
Equitable Recoupment claim estimate
Discounts for collection issues
%
25.00
%
For Level 3 assets and liabilities measured at fair value on a nonrecurring basis as of December 31, 2020, the significant unobservable inputs used in the fair value measurements were as follows:
Fair
Value
Valuation Technique
Unobservable Inputs
Range of
Inputs
Weighted
Average
(Dollars in Thousands)
Collateral Dependent Loans- Applies to
all loan classes
$
11,752
Appraisals which utilize
sales comparison, net
income and cost approach
Discounts for collection
issues and changes in
market conditions
5 - 37%
24.17%
Individually analyzed loans, which are evaluated using the fair value of the collateral for collateral dependent loans, had a fair value of $11.3 million that includes a valuation allowance of $7.1 million and a fair value of $11.7 million that includes a valuation allowance of $2.9 million at December 31, 2021 and 2020, respectively. A provision expense of $4.1 million, $2.9 million, $12,000 for the years ended December 31, 2021, 2020 and 2019, respectively, related to these loans was included in earnings.
Mortgage servicing rights, which are carried at the lower of cost or fair value, had a fair value of $19.5 million with a valuation allowance of $2.7 million and a fair value of $13.2 million with a valuation allowance of $8.5 million at December 31, 2021 and 2020, respectively. A recovery of $5.8 million and an expense of $8.0 million and $234,000 was included in earnings for the years ended December 31, 2021, 2020 and 2019, respectively.
Real estate held for sale is determined using Level 3 inputs which include appraisals and are adjusted for changes in market conditions. The change in fair value of real estate held for sale was $0, $0 and $264,000 for the years ended December 31, 2021, 2020 and 2019, respectively, which was recorded directly as an adjustment to current earnings through noninterest expense.
In accordance with FASB ASC Topic 825, the Fair Value Measurements tables are a comparative condensed consolidated statement of financial condition based on carrying amount and estimated fair values of financial instruments as of December 31, 2021, and December 31, 2020. Accordingly, the aggregate fair value amounts presented do not represent the underlying value of Premier.
Much of the information used to arrive at “fair value” is highly subjective and judgmental in nature and therefore the results may not be precise. Subjective factors include, among other things, estimated cash flows, risk characteristics and interest rates, all of which are subject to change. With the exception of investment securities, the Company’s financial instruments are not readily marketable and market prices do not exist. Since negotiated prices for the instruments, which are not readily marketable, depend greatly on the motivation of the buyer and seller, the amounts that will actually be realized or paid per settlement or maturity of these instruments could be significantly different.
The carrying amount of cash and cash equivalents, as a result of their short-term nature, is considered to be equal to fair value and are classified as Level 1.
It was not practicable to determine the fair value of FHLB stock due to restrictions placed on its transferability.
The Company adopted the amendments to ASU 2016-01 relating to the loan portfolio in 2018 and an exit price income approach is now used to determine the fair value. The loans were valued on an individual basis, with consideration given to the loans underlying characteristics, including account types, remaining terms (in months), annual interest rates or coupons, interest types, past delinquencies, timing of principal and interest payments, current market rates, loss exposures, and remaining balances. The model utilizes a discounted cash flow approach to estimate the fair value of the loans using assumptions for the coupon rates, remaining maturities, prepayment speeds, projected default probabilities, losses given defaults, and estimates of prevailing discount rates. The discounted cash flow approach models the credit losses directly in the projected cash flows. The model applies various assumptions regarding credit, interest, and prepayment risks for the loans based on loan types, payment types and fixed or variable classifications. For all periods presented, the estimated fair value of individually analyzed loans is based on the fair value of the collateral, less estimated cost to sell, or the present value of the loan’s expected future cash flows (discounted at the loan’s effective interest rate). All individually analyzed loans are classified as Level 3 within the valuation hierarchy.
The fair value of noninterest-bearing deposits are considered equal to the amount payable on demand at the reporting date (i.e., carrying value) and are classified as Level 1. The fair value of savings, NOW and certain money market accounts are equal to their carrying amounts and are a Level 1 classification. Fair values of fixed rate certificates of deposit are estimated using a discounted cash flow calculation that applies interest rates currently being offered on certificates to a schedule of aggregated expected monthly maturities on time deposits resulting in a Level 2 classification.
The fair values of securities sold under repurchase agreements are equal to their carrying amounts resulting in a Level 1 classification. The fair value of subordinated debentures are estimated using a discounted cash flow calculation that applies interest rates currently being offered on subordinated debentures to the schedule of maturities on the subordinated debt tranches resulting in a Level 2 classification.
FHLB advances with maturities greater than 90 days are valued based on discounted cash flow analysis, using interest rates currently being quoted for similar characteristics and maturities resulting in a Level 2 classification.
Fair Value Measurements at December 31, 2021
(In Thousands)
Carrying
Value
Total
Level 1
Level 2
Level 3
Financial Assets:
Cash and cash equivalents
$
161,566
$
161,566
$
161,566
$
-
$
-
Securities available for sale
1,206,260
1,206,260
-
1,206,260
-
Equity securities
14,097
14,097
14,097
-
-
FHLB Stock
-
N/A
N/A
N/A
N/A
Loans receivable, net
5,229,700
5,265,689
-
-
5,265,689
Loans held for sale, carried at fair value
162,947
162,947
-
28,780
134,167
Financial Liabilities:
Deposits
$
6,282,051
$
6,280,336
$
5,481,928
$
798,408
$
-
Subordinated debentures
84,976
85,417
-
-
85,417
Fair Value Measurements at December 31, 2020
(In Thousands)
Carrying
Value
Total
Level 1
Level 2
Level 3
Financial Assets:
Cash and cash equivalents
$
159,266
$
159,266
$
159,266
$
-
$
-
Securities available for sale
736,654
736,654
-
736,654
-
Equity securities
1,090
1,090
1,090
-
-
FHLB Stock
16,026
N/A
N/A
N/A
N/A
Loans receivable, net
5,409,161
5,412,814
-
-
5,412,814
Loans held for sale, carried at fair value
221,616
221,616
-
98,587
123,029
Financial Liabilities:
Deposits
$
6,047,841
$
6,056,426
$
4,925,411
$
1,131,015
$
-
Subordinated debentures
84,860
83,237
-
-
83,237
23.Derivative Financial Instruments
Commitments to fund certain mortgage loans (interest rate locks) to be sold into the secondary market and forward commitments for the future delivery of mortgage loans to third-party investors are considered derivatives. It is the Company’s practice to enter into forward commitments for the future delivery of residential mortgage loans when interest rate lock commitments are entered into in order to economically hedge the effect of changes in interest rates resulting from its commitments to fund the loans. These mortgage banking derivatives are not designated in hedge relationships. The Bank had approximately $65.4 million and $135.7 million of interest rate lock commitments at December 31, 2021 and 2020, respectively. There were $305.0 million of forward sales of mortgage-backed securities and $265.0 million of forward commitments for the future delivery of residential mortgage loans at December 31, 2021 and 2020, respectively.
The fair value of these mortgage banking derivatives are reflected by a derivative asset or a derivative liability. The table below provides data about the carrying values of these derivative instruments:
December 31, 2021
December 31, 2020
Assets
(Liabilities)
Assets
(Liabilities)
Derivative
Derivative
Carrying
Carrying
Net Carrying
Carrying
Carrying
Net Carrying
Value
Value
Value
Value
Value
Value
(In Thousands)
Derivatives not designated as hedging
instruments
Mortgage Banking
Derivatives
$
2,336
$
-
$
2,336
$
3,833
$
-
$
3,833
The table below provides data about the amount of gains and losses recognized in income on derivative instruments not designated as hedging instruments. The difference in derivative net carrying value at December 31, 2021 and 2020 represents a fair value adjustment that runs through mortgage banking income.
Twelve Months Ended December 31,
(In Thousands)
Derivatives not designated as hedging instruments
Mortgage Banking Derivatives - Gain (Loss)
$
(1,497
)
$
2,154
$
Interest Rate Swaps
The Company maintains an interest rate protection program for commercial loan customers that was acquired in the Merger. Under this program, the Company provides a customer with a fixed rate loan while creating a variable rate asset for the Company by the customer entering into an interest rate swap with terms that match the loan. The Company offsets its risk exposure by entering into an offsetting interest rate swap with an unaffiliated institution. The Company had interest rate swaps associated with commercial loans with a notional value of $69.4 million and fair value of $1.3 million in other assets and $1.3 million in other liabilities at December 31, 2021. The difference in fair value of $5,000 between the asset and liability represents a credit valuation adjustment that flows through noninterest income.
Interest Rate Swap Designated as Cash Flow Hedge
In May 2021 the Company entered into derivative instruments designated as a cash flow hedge. For a derivative instrument that is designated and qualifies as a cash flow hedge, the change in fair value of the derivative instrument is reported as a component of other comprehensive income (loss) and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings.
An interest rate swap with notional amount totaling $250 million as of December 31, 2021 was designated as a cash flow hedge to hedge the risk of variability in cash flows (future interest receipts) attributable to changes in the contractually specified LIBOR benchmark interest rate on the Company’s floating rate loan pool and was determined to be highly effective during the period. The Company is receiving a fixed rate of 1.437% and paying one month Libor. The maturity date of this interest rate swap is May 2031. The gross aggregate fair value of the swap of $854,000 is recorded in other assets in the Consolidated Balance Sheets at December 31, 2021, with changes in fair value recorded net of tax in other comprehensive income (loss). The Company expects the hedge to remain highly effective during the remaining terms of the swap.
Twelve Months Ended December 31, 2021
Amount of Gain (Loss) Recognized in OCI on Derivative
Total amount of Gain (Loss) on the Interest Rate Swap
Amount of Gain (Loss) Reclassified from OCI into Income
(In Thousands)
Interest rate swap
$
$
$
1,716
24.Quarterly Consolidated Results of Operations (Unaudited)
The following is a summary of the quarterly consolidated results of operations:
Three Months Ended
March 31
June 30
September 30
December 31
(In Thousands, Except Per Share Amounts)
Interest income
$
61,372
$
60,864
$
60,861
$
60,490
Interest expense
4,859
4,245
3,826
3,288
Net interest income
56,513
56,619
57,035
57,202
Provision for credit losses
(7,512
)
(3,631
)
1,594
2,816
Provision for unfunded commitments
(288
)
(807
)
Net interest income after provision for credit losses
63,475
60,538
55,215
55,193
Noninterest income
26,274
17,545
18,314
17,824
Noninterest expense
38,802
38,375
39,045
41,733
Income before income taxes
50,947
39,708
34,484
31,284
Income taxes
9,951
8,323
6,124
5,974
Net income
$
40,996
$
31,385
$
28,360
$
25,310
Earnings per common share:
Basic
$
1.10
$
0.84
$
0.76
$
0.69
Diluted
$
1.10
$
0.84
$
0.76
$
0.69
Three Months Ended
March 31
June 30
September 30
December 31
(In Thousands, Except Per Share Amounts)
Interest income
$
54,522
$
62,449
$
60,159
$
60,816
Interest expense
9,059
8,145
6,888
5,849
Net interest income
45,463
54,304
53,271
54,967
Provision for loan losses
43,786
1,868
3,658
(6,158
)
Provision for loan losses
1,459
1,107
(864
)
(606
)
Net interest income after provision for loan losses
51,329
50,477
61,731
Noninterest income
13,999
23,015
25,000
18,670
Noninterest expense
42,310
37,984
43,563
41,313
Income before income taxes
(28,093
)
36,360
31,914
39,088
Income taxes
(5,610
)
7,303
6,259
8,240
Net income
$
(22,483
)
$
29,057
$
25,655
$
30,848
Earnings per common share:
Basic
$
(0.71
)
$
0.78
$
0.69
$
0.83
Diluted
$
(0.71
)
$
0.78
$
0.69
$
0.82
25.Other Comprehensive Income (Loss)
The before and after tax amounts allocated to each component of other comprehensive income (loss) are presented in the table below. Reclassification adjustments related to securities available for sale are included in gains on sale or call of securities in the accompanying consolidated condensed statements of income. Reclassification adjustments related to cash flow hedge derivatives are included in interest income on loans in the accompanying consolidated condensed statements of income. Reclassification adjustments related to the
defined benefit postretirement medical plan are included in compensation and benefits in the accompanying consolidated condensed statements of income.
Before Tax
Amount
Tax Effect
Net of Tax
Amount
(In Thousands)
Year ended December 31, 2021:
Securities available for sale and transferred securities:
Change in net unrealized (loss) during the period
$
(21,967
)
$
(4,613
)
$
(17,354
)
Reclassification adjustment for net losses included in net income
(2,218
)
(466
)
(1,752
)
Cash flow hedge derivatives:
Change in net unrealized gain during the period
3,025
2,390
Reclassification adjustment for net gains included in net income
(2,172
)
(456
)
(1,716
)
Defined benefit postretirement medical plan:
Net gain on defined benefit postretirement medical plan realized
during the period
Reclassification adjustment for net amortization and deferral on defined
benefit postretirement medical plan (included in compensation and
benefits)
(13
)
(3
)
(10
)
Total other comprehensive income
$
(23,332
)
$
(4,900
)
$
(18,432
)
Before Tax
Amount
Tax Effect
Net of Tax
Amount
(In Thousands)
Year ended December 31, 2020:
Securities available for sale and transferred securities:
Change in net unrealized gain/(loss) during the period
$
14,431
$
3,030
$
11,401
Reclassification adjustment for net gains included in net income
(1,464
)
(307
)
(1,157
)
Defined benefit postretirement medical plan:
Net gain on defined benefit postretirement medical plan realized
during the period
Reclassification adjustment for net amortization and deferral on defined
benefit postretirement medical plan (included in compensation and
benefits)
Total other comprehensive income
$
13,175
$
2,766
$
10,409
Before Tax
Amount
Tax Effect
Net of Tax
Amount
(In Thousands)
Year ended December 31, 2019:
Securities available for sale and transferred securities:
Change in net unrealized gain/(loss) during the period
$
8,754
$
1,839
$
6,915
Reclassification adjustment for net gains included in net income
(24
)
(5
)
(19
)
Defined benefit postretirement medical plan:
Net gain on defined benefit postretirement medical plan realized
during the period
(310
)
(146
)
(164
)
Reclassification adjustment for net amortization and deferral on defined
benefit postretirement medical plan (included in compensation and
benefits)
Total other comprehensive income
$
8,434
$
1,691
$
6,743
Activity in accumulated other comprehensive income (loss), net of tax, was as follows:
Securities
Available
For Sale
Cash Flow Hedge Derivative
Post-
retirement
Benefit
Accumulated
Other
Comprehensive
Income
(In Thousands)
Balance January 1, 2021
$
15,083
$
-
$
(79
)
$
15,004
Other comprehensive income before reclassifications
(17,354
)
2,390
(14,954
)
Amounts reclassified from accumulated other comprehensive loss
(1,752
)
(1,716
)
(10
)
(3,478
)
Net other comprehensive income during period
(19,106
)
-
(18,432
)
Balance December 31, 2021
$
(4,023
)
$
$
(79
)
$
(3,428
)
Balance January 1, 2020
$
4,839
$
-
$
(244
)
$
4,595
Other comprehensive income before reclassifications
11,401
-
11,555
Amounts reclassified from accumulated other comprehensive loss
(1,157
)
-
(1,146
)
Net other comprehensive income during period
10,244
-
10,409
Balance December 31, 2020
$
15,083
$
-
$
(79
)
$
15,004
Balance January 1, 2019
$
(2,057
)
$
-
$
(91
)
$
(2,148
)
Other comprehensive income before reclassifications
6,915
-
(164
)
6,751
Amounts reclassified from accumulated other comprehensive loss
(19
)
-
(8
)
Net other comprehensive income during period
6,896
-
(153
)
6,743
Balance December 31, 2019
$
4,839
$
-
$
(244
)
$
4,595

---

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
Item 9. Changes In and Disagreements with Accountants on Accounting and Financial Disclosure
None.

---

ITEM 9A. CONTROLS AND PROCEDURES
Item 9A. Controls and Procedures
Premier’s management carried out an evaluation, under the supervision and with the participation of the chief executive officer and the chief financial officer, of the effectiveness of Premier’s disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of December 31, 2021. Based upon that evaluation, the chief executive officer along with the chief financial officer concluded that Premier’s disclosure controls and procedures as of December 31, 2021, are effective.
The information set forth under “Management’s Report on Internal Control Over Financial Reporting” and “Report of Independent Registered Public Accounting Firm” included in Item 8 above is incorporated herein by reference.
There were no changes in Premier’s internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the last fiscal quarter ended December 31, 2021, that have materially affected, or are reasonably likely to materially affect, Premier’s internal control over financial reporting.

---

ITEM 9B. OTHER INFORMATION
Item 9B. Other Information
None.

---

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Item 10. Directors, Executive Officers and Corporate Governance
The information required by this item relating to our directors, nominees for directorship and executive officers is incorporated herein by reference from the section captioned “Composition of the Board” under the heading “PROPOSAL 1 - Election of Directors” and the section immediately following the heading “EXECUTIVE OFFICERS” in the Company’s definitive proxy statement which will be filed no later than 120 days after December 31, 2021 (the “Proxy Statement”). Information regarding our Audit Committee and compliance with Section 16(a) of the Securities Exchange Act of 1934 required by this item is incorporated herein by reference from the sections respectively captioned, “Board Committees” under the “PROPOSAL 1 - Election of Directors” and the section immediately following the heading “DELINQUENT SECTION 16(a) REPORTS” of the Proxy Statement. There have been no material changes to the procedures by which shareholders may recommend nominees to the board of directors.
Premier has adopted a code of ethics applicable to all officers, directors and employees that complies with SEC requirements, and is available on its Internet site at www.premierfincorp.com under the Governance Documents tab on the Investor Relations page.

---

ITEM 11. EXECUTIVE COMPENSATION
Item 11. Executive Compensation
Information regarding director compensation is set forth under the section captioned “Director Compensation” under the heading “PROPOSAL 1 - Election of Directors” of the Proxy Statement, and is incorporated herein by reference. Executive compensation information has been provided under the headings “COMPENSATION DISCUSSION AND ANALYSIS” and “EXECUTIVE COMPENSATION” in the Proxy Statement, and is incorporated herein by reference.
The Compensation Committee Report and information related to compensation committee interlocks and insider participation have been respectively set forth under the section immediately following the heading “COMPENSATION COMMITTEE REPORT” and under the section captioned “Compensation Committee Interlocks and Insider Participation” following the heading “PROPOSAL 1 - Election of Directors” in the Proxy Statement, and are incorporated herein by reference.

---

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The information regarding security ownership of certain beneficial owners and management and information relating thereto is set forth in the section under the heading “BENEFICIAL OWNERSHIP” in the Proxy Statement, and is incorporated herein by reference.
Equity Compensation Plans
The following table provides information as of December 31, 2021, with respect to the shares of Premier common stock that are reserved for issuance under Premier’s existing equity compensation plans.
Plan Category
Number of
securities to
be Issued
Upon Exercise
of Outstanding
Options,
Warrants
and Rights
Weighted
Average
Exercise Price of
Outstanding
Options,
Warrants
and Rights
Number of
Securities
Remaining
Available
for Future
Issuance
Under Equity
Compensation
Plans (Excluding
Securities
Reflected
in Column (a)
(a)
(b)
(c)
Equity Compensation Plans Approved by Security Holders
35,661
$
21.72
669,748

---

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Item 13. Certain Relationships and Related Transactions, and Director Independence
The information required by this item, including related transactions and director independence, is set forth respectively in the section following the heading “RELATED PERSON TRANSACTIONS” and in the section captioned “Composition of the Board” following the heading “PROPOSAL 1 - Election of Directors” in the Proxy Statement, which are both incorporated by reference.

---

ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
Item 14. Principal Accountant Fees and Services
The information required by this item is set forth under the section captioned “Audit Fees” following the heading “INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM” in the Proxy Statement, and is incorporated herein by reference.
PART IV

---

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
Item 15.Exhibits, Financial Statement Schedules
(a)Financial Statements
(1)The following documents are filed as Item 8 of this Form 10-K.
(A)	Report of Independent Registered Public Accounting Firm (Crowe LLP)
(B)	Consolidated Statements of Financial Condition as of December 31, 2021 and 2020
(C)	Consolidated Statements of Income for the years ended December 31, 2021, 2020 and 2019
(D)	Consolidated Statements of Comprehensive Income for the years ended December 31, 2021, 2020 and 2019
(E)	Consolidated Statements of Changes in Stockholders’ Equity for the years ended December 31, 2021, 2020 and 2019
(F)	Consolidated Statements of Cash Flows for the years ended December 31, 2021, 2020 and 2019
(G)	Notes to Consolidated Financial Statements
(2)Separate financial statement schedules are not being filed because of the absence of conditions under which they are required or because the required information is included in the consolidated financial statements or the related notes.
(3)The exhibits required by this item are listed in the Exhibit Index of this Form 10-K.