EDGAR 10-K Filing

Company CIK: 946647
Filing Year: 2024
Filename: 946647_10-K_2024_0000950170-24-022090.json

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ITEM 1. BUSINESS
Item 1. Business
Premier Financial Corp. (“Premier” or the “Company”) is a financial holding company for its wholly-owned subsidiaries, Premier Bank (the "Bank"), PFC Risk Management Inc. (“PFC Risk Management”), PFC Capital, LLC (“PFC Capital”) and First Insurance Group of the Midwest, Inc. (“First Insurance”). All significant intercompany transactions and balances are eliminated in consolidation. Premier’s stock is traded on the NASDAQ Global Select Market under the ticker PFC.
The Company’s core business operations are conducted through its subsidiaries:
Premier Bank: The Bank is an Ohio state-chartered bank headquartered in Youngstown, Ohio. The Bank conducts operations through 75 full-service banking center offices, 9 loan offices and two wealth offices located in Ohio, Michigan, Indiana and Pennsylvania.
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, 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.
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.
First Insurance Group of the Midwest: First Insurance was an insurance agency that conducted business throughout Premier’s markets. First Insurance offered property and casualty insurance, life insurance and group health insurance. On June 30, 2023, the Company completed the sale of substantially all of the assets (including $24.7 million of goodwill and intangibles) of First Insurance to Risk Strategies Corporation (“Buyer”). Consideration included a combination of cash and a subordinated note resulting in net cash received of $47.4 million after certain transaction costs at closing, the assumption of certain leases, and contingent consideration subject to certain performance criteria by the Buyer to be determined after the year ended December 31, 2026. The Company recorded a pre-tax gain on sale of $36.3 million, transaction costs of $3.7 million and taxes of $8.5 million for a $24.1 million increase to equity in 2023.
PFC Risk Management: PFC Risk Management was 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 was not available or economically feasible in the insurance marketplace. PFC Risk Management pooled resources with several other similar insurance company subsidiaries of financial institutions to help minimize the risk allocable to each participating insurer. Due to pending changes in tax law, PFC Risk Management was dissolved and liquidated in December 2023.
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.
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, and wealth management, 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 Company’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 and 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 digital banking services, which include mobile banking, Zelle, online bill pay, and online account opening as well as the MoneyPass ATM Network offering access to our customers to over 40,000 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 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 and around its market areas, Premier believes it has a track record of successfully accomplishing both acquisitions and de novo branching. This track record puts Premier 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 2023, 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, Chief Credit Officer and Treasurer can each approve transactions up to $3.0 million. Two of the four officers are required to approve transactions between $3.0 million and $30.0 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 $5.8 million at December 31, 2023, 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 Premier’s liquidity needs.
The carrying value of securities at December 31, 2023, 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
$
-
-
$
-
-
$
30,954
2.35
%
$
154,721
1.86
%
$
185,675
1.94
%
CMOs - residential
-
-
10,455
2.18
%
18,503
2.19
%
256,236
1.75
%
285,194
1.79
%
U.S. government and federal
agency obligations
-
-
59,131
1.38
%
82,464
1.85
%
34,535
2.23
%
176,130
1.77
%
Asset-backed securities
-
-
2,421
6.00
%
5,027
7.29
%
134,767
5.65
%
142,215
5.71
%
Obligations of states and
political subdivisions
3.34
%
10,865
2.11
%
55,931
2.20
%
180,103
2.11
%
247,204
2.13
%
Corporate bonds
-
9,891
4.61
%
61,201
3.86
%
-
-
71,092
3.96
%
Total
$
$
92,763
$
254,080
$
760,362
$
1,107,510
Unrealized loss on securities
available for sale
(160,802
)
Total
$
946,708
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
$
150,775
$
144,107
$
174,710
Obligations of states and political subdivisions
204,258
221,594
273,202
CMOs and mortgage-backed securities
392,275
417,394
466,919
Asset-backed securities
136,980
192,504
220,536
Corporate bonds
62,420
64,482
70,893
Total
$
946,708
$
1,040,081
$
1,206,260
For additional information regarding Premier’s investment portfolio, refer to Note 4 - 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, 2023, 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, 2023, the Bank’s legal limit on loans-to-one borrower was $142.7 million.
Loan Portfolio Composition - Total loans net of undisbursed loan funds and deferred fees increased over the prior year by $278.8 million for 2023 and $1.2 billion for 2022. 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 multifamily properties within commercial real estate as an industry concentration. Total loans from multifamily property totaled $642.7 million at December 31, 2023, which represents 9.2% 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
$
1,810,265
25.8
%
$
1,535,574
21.6
%
$
1,167,466
20.2
%
$
1,201,051
20.5
%
$
324,773
11.3
%
Commercial real
estate
2,839,905
40.5
%
2,762,311
38.8
%
2,450,349
42.5
%
2,383,001
40.8
%
1,506,026
52.4
%
Construction
838,823
12.0
%
1,278,255
17.9
%
862,815
15.0
%
667,649
11.4
%
305,305
10.6
%
Total real estate loans
5,488,993
78.3
%
5,576,140
78.3
%
4,480,630
77.7
%
4,251,701
72.7
%
2,136,104
74.3
%
Other:
Commercial
1,056,803
15.1
%
1,055,180
14.8
%
895,638
15.5
%
1,202,353
20.6
%
578,071
11.6
%
Home equity and
improvement
267,960
3.8
%
277,613
3.9
%
264,354
4.6
%
272,701
4.7
%
122,864
2.5
%
Consumer finance
193,830
2.8
%
213,405
3.0
%
126,417
2.2
%
120,729
2.1
%
37,649
0.8
%
1,518,593
21.7
%
1,546,198
21.7
%
1,286,409
22.3
%
1,595,783
27.3
%
738,584
14.8
%
Total loans
7,007,586
100.0
%
7,122,338
100.0
%
5,767,039
100.0
%
5,847,484
100.0
%
2,874,688
89.1
%
Less:
Undisbursed loan
funds
281,466
672,775
477,890
355,065
94,865
Net deferred loan
origination fees
(13,267
)
(11,057
)
(7,019
)
1,179
2,259
Allowance for credit losses
76,512
72,816
66,468
82,079
31,243
Net loans
$
6,662,875
$
6,387,804
$
5,229,700
$
5,409,161
$
2,746,321
In addition to the loans reported above, Premier had $145.6 million, $115.3 million, $162.9 million, $221.6 million, and $18.0 million in loans classified as held for sale at December 31, 2023, 2022, 2021, 2020 and 2019, respectively. The fair value of such loans, which consist of single-family residential mortgage and other commercial real estate 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, 2023, which have fixed interest rates or which have floating or adjustable interest rates.
Floating or
Fixed
Adjustable
Rates
Rates
Total
(In Thousands)
Real estate
$
2,728,378
$
2,013,485
$
4,741,863
Commercial
376,268
208,950
585,218
Other
184,138
184,583
$
3,288,784
$
2,222,880
$
5,511,664
The following table shows the maturity distribution of loans outstanding as of December 31, 2023.
Within
After one, but within
After five, but within
After
one year
five years
fifteen years
fifteen years
Total (1)
(In Thousands)
Real estate
$
755,926
$
1,914,615
$
1,344,962
$
1,482,285
$
5,497,788
Commercial
461,804
449,515
135,703
-
1,047,022
Other
9,993
84,360
100,224
-
194,577
$
1,227,723
$
2,448,490
$
1,580,889
$
1,482,285
$
6,739,387
(1) Total loans are net of undisbursed loan funds and deferred fees and costs
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 (decrease) in the Company’s loans net of undisbursed loan funds and deferred fees and loans held for sale during the periods indicated:
Years Ended December 31,
(In Thousands)
Loan originations:
Residential real estate
$
306,859
$
729,083
$
947,089
Commercial real estate
316,804
476,635
539,680
Construction
809,202
919,829
754,757
Commercial
253,949
597,331
626,358
Home equity and improvement
91,082
144,731
156,805
Consumer finance
55,558
161,104
71,937
Total loans originated
1,833,454
3,028,713
3,096,626
Loans acquired in acquisitions
-
-
-
Loans purchased
-
-
-
Loan payoffs, sales and repayments
(1,524,297
)
(1,721,110
)
(3,235,740
)
Net increase (decrease) in loans net of undisbursed loan funds and deferred fees and loans held for sale
$
309,157
$
1,307,603
$
(139,114
)
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, 2023, 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
%
$
8,302
0.12
%
$
11,216
0.17
%
$
19,670
0.29
%
Commercial real estate
0.00
%
0.00
%
1,275
0.02
%
1,750
0.03
%
Construction
-
0.00
%
0.00
%
-
0.00
%
0.00
%
Commercial
0.00
%
2,446
0.04
%
1,132
0.02
%
3,769
0.06
%
Home equity and
improvement
2,084
0.03
%
0.01
%
0.01
%
3,677
0.05
%
Consumer finance
3,699
0.05
%
1,681
0.02
%
3,003
0.04
%
8,383
0.12
%
Purchase credit deteriorated
("PCD")
0.00
%
1,271
0.02
%
2,569
0.04
%
4,051
0.06
%
Total Loans
$
6,500
0.08
%
$
14,755
0.21
%
$
20,153
0.30
%
$
41,408
0.61
%
Overall, the level of delinquencies of 0.61% at December 31, 2023, decreased from the levels at December 31, 2022, when Premier reported that 0.73% of its outstanding loans were at least 30 days delinquent. The level of total loans 90 or more days delinquent has decreased to 0.30% at December 31, 2023, down from 0.44% at December 31, 2022. The level of total loans 60-89 days delinquent increased to 0.21% at December 31, 2023, up from 0.15% at December 31, 2022. The level of loans that were 30 to 59 days past due decreased to 0.08% at December 31, 2023, down from 0.14% at December 31, 2022. 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 continued stability in the economy contributed to the decrease seen in 2023.
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 90 days or more 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 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 6 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, 2023, was $243,000. During 2023, there was $15,000 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, 2022 was $619,000. During 2022, there was $8,600 of expense related to write-downs in fair value of real estate acquired by foreclosure or acquisition.
As of December 31, 2023, Premier’s total non-performing loans amounted to $35.5 million or 0.53% of total loans (net of undisbursed loan funds and deferred fees and costs), compared to $33.8 million or 0.52% of total loans, at December 31, 2022. Non-performing loans are loans which are 90 days or more 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) at the dates indicated.
December 31,
(Dollars in Thousands)
Non-performing loans:
Residential real estate
$
13,028
$
7,724
$
9,034
$
10,178
$
2,411
Commercial real estate
5,971
13,396
14,621
11,980
7,609
Construction
-
-
-
-
Commercial
8,649
4,862
11,531
1,365
2,961
Home equity and improvement
1,417
1,637
2,051
1,537
Consumer finance
3,433
2,401
1,873
1,624
Purchase Credit Deteriorated ("PCD")
2,993
3,802
8,904
24,192
-
Total non-performing loans
35,491
33,822
48,014
51,682
13,437
Real estate owned
Total repossessed assets
Total non-performing assets
$
35,734
$
34,441
$
48,185
$
52,025
$
13,537
Total non-performing assets as a percentage of
total assets
0.41
%
0.41
%
0.64
%
0.72
%
0.39
%
Total non-performing loans as a percentage of
total loans*
0.53
%
0.52
%
0.91
%
0.96
%
0.49
%
Total non-performing assets as a percentage of
total loans plus other real estate owned*
0.53
%
0.53
%
0.91
%
0.96
%
0.49
%
Allowance for credit losses as a percent
of total non-performing assets
214.12
%
211.42
%
137.94
%
157.77
%
230.80
%
* Total loans are net of undisbursed loan funds and deferred fees and costs.
Allowance for credit losses - Premier adopted the current expected credit losses ("CECL") accounting standard in 2020. As a result, 2023, 2022, 2021 and 2020 credit loss and provision are not comparable to years prior to 2020 allowance for loan loss data. Premier maintains an allowance for credit losses to absorb current expected losses in the loan portfolio. The allowance for credit losses 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.
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, 2023, Premier’s allowance for credit losses totaled $76.5 million compared to $72.8 million at December 31, 2022. 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
$
72,816
$
66,468
$
82,079
$
31,243
$
28,331
Impact of ASC 326 Adoption
-
-
-
2,354
-
Acquisition related allowance for credit loss (PCD)
-
-
-
7,698
-
Provision (benefit) for credit losses
7,742
12,503
(6,733
)
43,154
2,905
Charge-offs:
Residential real estate
(320
)
(1,025
)
(110
)
(302
)
(515
)
Commercial real estate
(2,319
)
(443
)
(3,776
)
(65
)
(148
)
Construction
-
(16
)
-
(1
)
-
Commercial
(2,334
)
(5,341
)
(6,958
)
(687
)
(528
)
Home equity and improvement
(160
)
(303
)
(63
)
(164
)
(245
)
Consumer finance
(1,478
)
(963
)
(476
)
(279
)
(289
)
PCD
(153
)
(440
)
(2
)
(4,854
)
-
Total charge-offs
(6,764
)
(8,531
)
(11,385
)
(6,352
)
(1,725
)
Recoveries
2,718
2,376
2,507
3,982
1,732
Net (charge-offs) recoveries
(4,046
)
(6,155
)
(8,878
)
(2,370
)
Ending allowance
$
76,512
$
72,816
$
66,468
$
82,079
$
31,243
Allowance for credit losses to total non-performing loans
at end of year
215.58
%
215.29
%
138.43
%
158.82
%
232.51
%
Allowance for credit losses to total loans at end of year*
1.14
%
1.13
%
1.26
%
1.49
%
1.12
%
Net charge-offs (recoveries) for the year to average loans
0.06
%
0.10
%
0.16
%
0.05
%
-
* Total loans are net of undisbursed loan funds and deferred fees and costs.
The provision for credit losses decreased in 2023 primarily due to lower volume. Refer to Notes 2 and 6 to the Consolidated Financial Statements for additional information. Management feels that the level of the allowance for credit losses at December 31, 2023, 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
$
17,215
25.8
%
$
16,711
21.6
%
$
12,029
20.2
%
$
17,534
20.5
%
$
2,867
11.3
%
Commercial real estate
36,053
40.5
%
34,218
38.8
%
32,399
42.5
%
43,417
40.8
%
16,302
52.4
%
Construction
3,159
12.0
%
4,025
17.9
%
3,004
15.0
%
2,741
11.4
%
10.6
%
Commercial loans
15,489
15.1
%
11,769
14.8
%
13,410
15.5
%
11,665
20.6
%
9,003
20.1
%
Home equity and
improvement loans
2,703
3.8
%
4,044
3.9
%
4,221
4.6
%
4,739
4.7
%
1,700
4.3
%
Consumer loans
1,893
2.8
%
2,049
3.0
%
1,405
2.2
%
1,983
2.1
%
1.3
%
$
76,512
100.0
%
$
72,816
100.0
%
$
66,468
100.0
%
$
82,079
100.0
%
$
31,243
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 other market conditions. Borrowings from the 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 and syndicated brokered deposits. Premier has used these deposits in the past and could in the future if necessary. Premier had $341.9 million and $143.7 million in brokered deposits as of December 31, 2023 and 2022.
Deposits are backed by the federal government for at least $250,000 per depositor. At December 31, 2023 and 2022, the Bank had approximately $2.4 billion and $2.5 billion, respectively, in uninsured deposits.
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
$
1,616,919
-
$
1,791,712
-
$
1,676,006
-
Interest-bearing demand deposits
3,120,290
2.32
%
3,097,317
0.55
%
2,872,755
0.20
%
Savings deposits
741,157
0.02
%
822,813
0.02
%
770,770
0.02
%
Time deposits
1,159,443
2.99
%
787,896
0.86
%
968,000
0.79
%
Brokered deposits
307,499
5.13
%
33,802
3.08
%
-
-
Totals
$
6,945,308
1.77
%
$
6,533,539
0.37
%
$
6,287,531
0.21
%
The following table sets forth the maturities of Premier’s retail certificates of deposit having principal amounts $250,000 or greater at December 31, 2023 (in thousands):
Retail certificates of deposit maturing in quarter ending:
March 31, 2024
$
254,241
June 30, 2024
161,637
September 30, 2024
58,105
December 31, 2024
30,808
After December 31, 2024
21,408
Total retail certificates of deposit with balances $250,000 or greater
$
526,199
For additional information regarding Premier’s deposits see Note 10 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, 2023, Premier could borrow up to $2.0 billion. The Bank had $280 million in advances outstanding at December 31, 2023 and $428.0 million in advances outstanding at December 31, 2022. For additional information regarding Premier’s FHLB advances and other debt, see Notes 11 and 13 to the Consolidated Financial Statements.
Subordinated Debentures - For information regarding the Company’s subordinated debentures see Note 12 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 1,023 employees at December 31, 2023 (comprised of 92.3% full-time employees and 7.7% 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 Bank'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. 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. Capital rules applicable to smaller banking organizations (the “Basel III Capital Rules”), which also implemented certain provisions of the Dodd-Frank Act became effective commencing on January 1, 2015. Compliance with the minimum capital requirements was effective January 1, 2015, whereas a 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, 2023, the Bank met the capital ratio requirements to be deemed "well-capitalized" according to the guidelines described above. See Note 16 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%. Pursuant to the CARES Act, on August 26, 2020, the federal banking agencies adopted a final rule, effective on October 1, 2020, 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. 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 $26.5 million in dividends and received $29.8 million in a cash contribution from Premier in 2023 and paid net $58.0 million in dividends in 2022. First Insurance paid $43.0 million and $2.0 million in dividends to Premier in 2023 and 2022. Premier Risk Management did not pay dividends to Premier in 2023 and paid $1.6 million in dividends in 2022. PFC Capital did not pay dividends in 2023 and received $3.0 million in a cash contribution in 2022.
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 Federal Deposit Insurance Act, as amended (“FDIA”) requires the FDIC's Board of Directors to set a target or Designated Reserve Ratio (“DRR”) for the DIF annually. The DRR is the total of the DIF divided by the total estimated insured deposits of the industry. Under the long-range plan, the FDIC set the DRR at 2.0% and set a schedule of assessment rates that would progressively decrease when the DRR reached 2.0% and 2.5%. The FDIC views the 2.0% DRR as a long-term goal and the minimum level needed to withstand future crises of the magnitude of past crises. Extraordinary growth in insured deposits during the first and second quarters of 2020 caused the DRR to decline below the statutory minimum of 1.35% as of June 30, 2020. In September 2020, the FDIC Board of Directors adopted a restoration plan to restore the DRR to at least 1.35% by 2028, absent extraordinary circumstances, as required by the FDIA. The restoration plan maintained the assessment rate schedules in place at the time and required the FDIC to update its analysis and projections for the DIF balance and DRR at least semiannually. In the semiannual update for the restoration plan in June 2022, the FDIC projected that the DRR was at risk of not reaching the statutory minimum of 1.35% by September 30, 2028, the statutory deadline to restore the DRR. Based on this update, the FDIC Board approved an amended restoration plan, and concurrently proposed an increase in initial base deposit insurance assessment rate schedules uniformly by two basis points, applicable to all insured depository institutions. In October 2022, the FDIC Board finalized the increase with an effective date of January, 1, 2023. The revised assessment rate schedules are intended to increase the likelihood that the DRR reaches the statutory minimum level of 1.35% by September 30, 2028.
Consumer Protection Laws and Regulations - Banks are subject to periodic 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 ("CRA"): 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. However, due to continuing appellate litigation regarding the constitutionality of the CPFB's funding structure, which stems, in part, from legal challenges to the Small Dollar Rule, the effective date for nationwide compliance with the Small Dollar Rule remains uncertain at this time.
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 2023.
Federal Reserve System - The Federal Reserve requires all depository institutions to maintain reserves at specified levels against their transaction accounts, primarily checking accounts. In response to the COVID-19 pandemic, the Federal Reserve reduced reserve requirement ratios to zero percent effective on March 26, 2020, to support lending to households and businesses. At December 31, 2023, the reserve requirement ratio remains at zero percent.
Transactions with Affiliates; Insider Loans - Sections 23A and 23B of the Federal Reserve Act and Federal Reserve Board Regulation W generally:
•limit the extent to which a bank or its subsidiaries may engage in “covered transactions” with any one affiliate to an amount equal to 10.0% of the bank's capital stock and surplus;
•limit the extent to which a bank or its subsidiaries may engage in “covered transactions” with all affiliates to an amount equal to 20.0% of the bank's capital stock and surplus; and
•require that all such transactions be on terms substantially the same, or at least as favorable to the bank or subsidiary, as those provided to a non-affiliate.
An affiliate of a bank is any company or entity that controls, is controlled by or is under common control with the bank. The term “covered transaction” includes the making of loans to the affiliate, the purchase of assets from the affiliate, the issuance of a guarantee on behalf of the affiliate, the purchase of securities issued by the affiliate and other similar types of transactions.
A bank’s authority to extend credit to executive officers, directors and greater than 10.0% shareholders, as well as entities such persons control, is subject to Sections 22(g) and 22(h) of the Federal Reserve Act and Regulation O promulgated thereunder by the Federal Reserve Board. Among other things, these loans must be made on terms (including interest rates charged and collateral required) substantially similar to those offered to unaffiliated individuals or be made as part of a benefit or compensation program on terms widely available to employees and must not involve a greater than normal risk of repayment. In addition, the amount of loans a bank may make to these persons is based, in part, on the bank’s capital position, and specified approval procedures must be followed in making loans which exceed specified amounts.
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.”
On October 24, 2023, the federal banking agencies, including the FDIC, issued a final rule designed to strengthen and modernize the regulations implementing the CRA. The changes are designed to encourage banks to expand access to credit, investment and banking services in low- and moderate-income communities, adapt to changes in the banking industry, including mobile and internet banking, provide greater clarity and consistency in the application of the CRA regulations and tailor CRA evaluations and data collection to bank size and type. The applicability date for the majority of the changes to the CRA regulations is January 1, 2026, and additional requirements will be applicable on January 1, 2027. The impact the changes to the CRA will have on the Bank’s operations cannot be predicted at this time.
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 November 2021, the OCC, the Federal Reserve and the FDIC issued a final rule that became effective in May 2022 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 that rises to the level of a notification 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 larger incidents. This rule also requires bank service providers to notify their bank organization customers of a computer-security incident that has caused, or is reasonably likely to cause, a material service disruption or degradation for four or more hours.
Furthermore, once final rules are adopted, the Cyber Incident Reporting for Critical Infrastructure Act, enacted in March 2022, will require certain covered entities to report a covered cyber incident to the U.S. Department of Homeland Security’s Cybersecurity & Infrastructure Security Agency (“CISA”) within 72 hours after it reasonably believes an incident has occurred. Separate reporting to CISA will also be required within 24 hours, if a ransom payment is made as a result of a ransomware attack.
On July 26, 2023, the SEC adopted final rules that require public companies to promptly disclose material cybersecurity incidents in a Current Report on Form 8-K and detailed information regarding their cybersecurity risk management, strategy, and governance on an annual basis in an Annual Report on Form 10-K. Companies are required to report on Form 8-K any cybersecurity incident they determine to be material within four business days of making that determination. See “ITEM 1C CYBERSECURITY”. These SEC rules, and any other regulatory guidance, are in addition to notification and disclosure requirements under state and federal banking law and regulations.
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.
Executive and Incentive Compensation - Public companies are required to adopt and implement "clawback" policies for incentive compensation payments and to disclose the details of the procedures which allow recovery of incentive compensation that was paid on the basis of erroneous financial information necessitating an accounting restatement due to material noncompliance with financial reporting requirements. This clawback policy is intended to apply to compensation paid within the three completed fiscal years immediately preceding the date the issuer is required to prepare a restatement a three-year look-back window of the restatement and would cover all executives (including former executives) who received incentive awards. Premier has implemented a clawback policy and it is posted under the "Overview - Governance Documents" tab of the "Investor Relations" page of Premier's Internet website.

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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
Premier’s financial condition, results of operation, and stock price may be negatively impacted by unrelated bank failures and negative depositor confidence in depository institutions.
The recent bank failures of Silicon Valley Bank in California, Signature Bank in New York, and First Republic Bank in California, and the decision of Silvergate Bank in California to voluntarily liquidate its assets and wind down operations, each of which occurred during the first and second quarters of 2023, have caused uncertainty in the investor community and negative confidence among bank customers generally.
While Premier does not believe that the circumstances of these banks' failures and liquidations are indicators of broader issues with the banking system, the failures may reduce customer confidence, affect sources of funding and liquidity, increase regulatory requirements and costs, adversely affect financial markets and/or have a negative reputational ramification for the financial services industry, including us. These bank failures led to volatility and declines in the market for bank stocks and questions about depositor confidence in depository institutions, which in turn led to a greater focus by institutions, investors, and regulators on the on-balance sheet liquidity of and funding sources for financial institutions and the composition of its deposits. Notwithstanding, the Company’s efforts to promote deposit insurance coverage with our customers and otherwise effectively manage our liquidity, deposit portfolio retention, and other related matters, our financial condition, results of operation, and stock price may be adversely affected by future negative events within the banking sector and adverse customer or investor responses to such events.
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, 2023, the Bank’s portfolio of commercial real estate loans totaled $2.8 billion, or approximately 40.5% 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 sustained inflation and rising interest rates, could negatively impact the future cash flows and market values of the affected properties.
At December 31, 2023, the Bank’s portfolio of commercial loans totaled $1.1 billion, or approximately 15.1% 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 current economic landscape, 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.
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 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 its successful execution of organic and managed growth in its core lending and deposit gathering activities.
Premier may open new branches and consider new lines of business and new products or services as part of its growth strategy. Possible risks to the execution of Premier's growth strategy include:
•the time and costs of hiring local management and opening new offices;
•the delay between engaging in new activities and the generation of profits from the activities;
•the integration of new products and services and new personnel into Premier’s existing business;
•the inability to attract customers to new products and services; and
•the inability to attract or retain sufficient deposits and capital to fund anticipated growth.
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.
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.
Climate change or other adverse external events could significantly impact the Company’s business.
Banking regulators and other supervisory authorities, investors and other stakeholders have increasingly viewed financial institutions as important in helping to address the risks related to climate change both directly and with respect to their customers, which may result in financial institutions coming under increased pressure regarding the disclosure and management of their climate risks and related lending and investment activities. Given that climate change could impose systemic risks upon the financial sector, either via disruptions in economic activity resulting from the physical impacts of climate change or changes in policies as the economy transitions to a less carbon-intensive environment, we face regulatory risk of increasing focus on our resilience to climate-related risks, including in the context of stress testing for various climate stress scenarios. Ongoing legislative or regulatory changes regarding climate risk management and practices may result in higher regulatory, compliance, credit and reputational risks and costs.

---

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

---

ITEM 2. PROPERTIES
Item 2. Properties
At December 31, 2023, the Bank conducted its business from its main office at 275 West Federal St., Youngstown, Ohio, and 75 other full-service banking centers and 9 loan offices in Ohio, Indiana, Michigan, and Pennsylvania. 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 8 to the Consolidated Financial Statements for additional information. The Company owns its main office and 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

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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 22, 2024, the Company had approximately 6,633 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, 2018, 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 16 to the Consolidated Financial Statements which is incorporated herein by reference.
Period Ending
Index
12/31/18
12/31/19
12/31/20
12/31/21
12/31/22
12/31/23
Premier Financial Corp.
100.00
132.02
100.85
140.27
127.62
121.61
Nasdaq Composite Index
100.00
136.69
198.10
242.03
163.28
236.17
KBW Nasdaq Bank Index
100.00
136.13
122.09
168.88
132.75
131.57
S&P U.S. BMI Banks - Midwest Region Index
100.00
130.10
111.85
147.78
127.53
130.20
The following table provides information regarding Premier’s purchases of its common shares during the fourth quarter period ended December 31, 2023:
Period
Total Number of
Shares Purchased (1)
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 (2)
October 1 - October 31, 2023
$
18.30
-
1,199,634
November 1 - November 30, 2023
-
-
-
1,199,634
December 1 - December 31, 2023
3,992
23.87
-
1,199,634
Total
4,542
$
23.20
-
1,199,634
(1)Of this amount, 4,336 shares were withheld by Premier in fulfillment of tax obligations from vesting of restricted stock compensation and were not part of the publicly announced repurchase program.
(2)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.
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: 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, including interest rate policies of the Federal Reserve; 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 rates and changes or volatility in 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, 2023 and 2022.
Non-GAAP Financial Measures - Net Interest Income on an FTE basis, Net Interest Margin and Efficiency Ratio
Years Ended
(In Thousands)
December 31,
December 31,
Net interest income (GAAP)
$
217,093
$
242,921
Add: FTE adjustment
Net interest income on a FTE basis (1)
217,360
243,735
Noninterest income - less securities gains/(losses) (2)
91,265
62,710
Noninterest expense (3)
163,231
164,511
Average interest-earning assets (4)
7,912,651
7,237,621
Ratios:
Net interest margin (1) / (4)
2.75
%
3.37
%
Efficiency ratio (3) / (1) + (2)
52.89
%
53.68
%
Non-GAAP Financial Measures - Tangible Book Value
Years Ended
(In Thousands, except per share data)
December 31,
December 31,
Total Shareholders’ Equity (GAAP)
$
975,627
$
887,721
Less: Goodwill
(295,602
)
(317,988
)
Intangible assets
(12,186
)
(19,074
)
Tangible common equity (1)
$
667,839
$
550,659
Common shares outstanding (2)
35,730
35,591
Tangible book value per share (1) / (2)
$
18.69
$
15.47
Financial Condition
Assets at December 31, 2023 totaled $8.63 billion compared to $8.46 billion at December 31, 2022, an increase of $170.6 million, or 2.0%. The increase in assets was primarily due to an increase in loans offset by a decrease in securities. The net increase was primarily funded through an increase in total deposits of $236.3 million offset by a decrease in FHLB advances of $148.0 million.
Securities
The available-for-sale securities portfolio, at fair value, decreased $93.4 million, or 9.0%, to $946.7 million at December 31, 2023. The portion of this decrease not attributable to changes in market value, along with an increase in deposits of $236.3 million, was used to fund an increase in gross loans including held for sale of $309.2 million. For additional information regarding Premier’s investment securities, see Note 4 to the Consolidated Financial Statements.
Loans
Loans receivable, net of undisbursed loan funds and deferred fees and costs, increased $278.8 million, or 4.3%, to $6.7 billion at December 31, 2023. The increase was mainly due to an increase in volume of loans. For more details on the loan balances, see Note 6 - Loans 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 totaled $3.89 billion and $3.82 billion at December 31, 2023 and 2022, respectively, and accounted for approximately 58.5% and 59.1% of Premier’s loan portfolio at the end of those respective periods. Multi-family loans make up $642.7 million, or 16.5% of total commercial loans as of December 31, 2023 and $660.8 million, or 17.3% as of December 31, 2022. In addition, Manufacturing makes up $427.7 million, or 11.0% of total commercial loans as of December 31, 2023 and $399.8 million, or 10.5% as of December 31, 2022. 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 $1.81 billion at December 31, 2023, compared with $1.54 billion at the end of 2022, as a result of retaining more loans in the portfolio as opposed to selling them. At the end of 2023, such loans comprised 25.8% of the total loan portfolio, an increase from 21.6% at December 31, 2022.
Construction loans, which include one-to-four residential family and commercial real estate properties, decreased to $557.4 million at December 31, 2023, compared to $605.5 million at December 31, 2022, as a result of funding exceeding new loan commitments. These loans accounted for approximately 8.3% and 9.4% of the total loan portfolio at December 31, 2023 and 2022, respectively.
Home equity and home improvement loans decreased to $268.0 million at December 31, 2023, from $277.6 million at the end of 2022. At the end of 2023, those loans comprised 3.8% of the total loan portfolio, consistent with 3.9% at December 31, 2022.
Consumer finance loans were $193.8 million at December 31, 2023 down from $213.4 million at the end of 2022. These loans accounted for approximately 2.8% and 3.0% of the total loan portfolio at December 31, 2023 and 2022, respectively.
In order to properly assess the loans secured by real estate included in its loan portfolio, the Bank has established policies regarding the monitoring of the collateral underlying such loans. The Bank requires a recent appraisal or evaluation, depending on loan amount, for all new secured real estate loans, and generally all renewed secured real estate loans. The appraisal process is administered by the Bank’s Credit Department, which has contracted with independent Appraisal Management Companies (“AMCs”) to manage the ordering and review of appraisals. The AMCs order appraisals with licensed and qualified appraisers as the Bank selects engagements via a blind bidding process managed by the AMCs. The Bank generally does not require updated appraisals for performing loans during the term of the loan.
When a secured commercial real estate loan of $500,000 or more is downgraded to classified status, the Bank obtains an updated appraisal. Appraisals are received within approximately 60 days from the date ordered. If necessary, the Bank will use the existing appraisal on file taking into account age of the appraisal, market conditions or any other known facts to potentially apply a discount to the value until the updated appraisal is received. If the loan is considered impaired and collateral dependent the Bank assesses whether there is any collateral short fall, taking into consideration guarantor support and liquidity to determine if a charge-off or specific reserve is necessary. 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.
All loans 90 days or more 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. The Bank has established policies to evaluate non-performing loans. This includes requirements for establishing current fair value of collateral and establishing reserves or charge-offs within specified time frames based on borrower segment and/or loan amount.
All properties that are moved into the Other Real Estate Owned (“OREO”) category are supported by current appraisals or evaluations, 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.
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 documented cash flow coverage capacity 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.
Allowance for Credit Losses (“ACL”)
The ACL represents management’s assessment of the estimated credit losses the Company will incur 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 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 $4.3 million at December 31, 2023, and $2.4 million at December 31, 2022.
The second component is a general reserve, which is used to record credit loss reserves for 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 fifteen different loan pools to allocate the ACL. Residential real estate is further segregated into owner occupied and nonowner occupied. 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. Construction is split out into construction residential and construction other. Consumer is further segregated into consumer direct, consumer indirect and home equity. 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 and consumer indirect. 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 contractual 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 loan modification with financial difficulties; 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 maximum possible quarters. The PD is then combined with a LGD derived from historical charge-off data to construct a default rate. This loss rate is then supplemented with adjustments for reasonable and supportable forecasts of relevant economic indicators, particularly the unemployment rate forecast from the Federal Open Market Committee's Summary of Economic Projections. 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 the consumer direct loans, while the DCF method was deemed appropriate for the consumer indirect loans as stated above. 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 increased to $28.1 million at December 31, 2023, from $15.0 million at December 31, 2022, primarily due to higher quantitative factors, such as loss rates, prepayment speeds and risk migration.
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 and other loan modifications.
9)Changes in the political and regulatory environment.
The qualitative analysis indicated an additional general reserve of $44.1 million at December 31, 2023, compared to $55.4 million at December 31, 2022. The decrease was mainly due to changes in the economic environment as a result of inflation and global conditions. 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 Company’s general reserve percentages for main loan segments, not otherwise classified, ranged from 0.5364% for construction loans to 1.399% for commercial real estate ("CRE") owner occupied loans at December 31, 2023.
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.
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, 2023 was an expense of $7.7 million. This is compared to an expense of $12.5 million for the year ended December 31, 2022. The ACL was $76.5 million at December 31, 2023, and $72.8 million at December 31, 2022. The ACL represented 1.14% of loans, net of undisbursed loan funds and deferred fees and costs at December 31, 2023, and 1.13% at December 31, 2022. In management’s opinion, the overall ACL of $76.5 million as of December 31, 2023, 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, 2023, there were $15,000 in write-downs of real estate held for sale. Management believes that the values recorded at December 31, 2023, for OREO and repossessed assets represent the realizable value of such assets.
Total classified loans increased to $69.7 million at December 31, 2023, compared to $43.8 million at December 31, 2022, an increase of $25.9 million, primarily due to several downgraded relationships.
The Company’s ratio of ACL to non-performing loans was 215.6% at December 31, 2023, compared to 215.3% at December 31, 2022. 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, 2023, were appropriate. Of the $35.5 million in non-accrual loans at December 31, 2023, $15.4 million, or 43.4%, were less than 90 days past due.
At December 31, 2023, the Company had total non-performing assets of $35.7 million, compared to $34.4 million at December 31, 2022. Non-performing assets include loans that are on non-accrual, OREO and other assets held for sale. The OREO balance was $243,000 and $619,000 as of December 31, 2023 and 2022, respectively.
The net charge-offs and non-accrual loan balances as a percentage of total are presented in the table below at December 31, 2023 and 2022.
For the Year Ended
As of December 31,
December 31, 2023
Net
% of Total Net
Charge-offs
Charge-offs
Non-accrual
% of Total Non-
(Recoveries)
(Recoveries)
Loans
Accrual Loans
(Dollars In Thousands)
Residential real estate
$
5.81
%
$
13,028
36.71
%
Commercial real estate
1,442
35.64
%
5,971
16.82
%
Construction
-
0.00
%
-
0.00
%
Commercial
22.86
%
8,649
24.37
%
Home equity and improvement
1.14
%
1,417
3.99
%
Consumer finance
1,262
31.19
%
3,433
9.67
%
PCD
3.36
%
2,993
8.43
%
Total
$
4,046
100.00
%
$
35,491
100.00
%
For the Year Ended
As of December 31,
December 31, 2022
Net
% of Total Net
Charge-offs
Charge-offs
Non-accrual
% of Total Non-
(Recoveries)
(Recoveries)
Loans
Accrual Loans
(Dollars In Thousands)
Residential
$
3.28
%
$
7,724
22.84
%
Commercial real estate
(159
)
(2.58
)%
13,396
39.61
%
Construction
0.21
%
-
0.00
%
Commercial
4,945
80.34
%
4,862
14.38
%
Home equity and improvement
0.19
%
1,637
4.84
%
Consumer finance
12.84
%
2,401
7.10
%
PCD
5.72
%
3,802
11.24
%
Total
$
6,155
100.00
%
$
33,822
100.00
%
The following table sets forth information concerning the allocation of Premier’s allowance for credit losses by loan categories at December 31, 2023 and 2022.
December 31, 2023
December 31, 2022
Percent of
Percent of
total
total
Amount
by category
Amount
by category
(Dollars in Thousands)
Residential real estate
$
17,215
25.8
%
$
16,711
21.6
%
Commercial real estate
36,053
40.5
%
34,218
38.8
%
Construction
3,159
12.0
%
4,025
17.9
%
Commercial loans
15,489
15.1
%
11,769
14.8
%
Home equity and improvement loans
2,703
3.8
%
4,044
3.9
%
Consumer loans
1,893
2.8
%
2,049
3.0
%
$
76,512
100.0
%
$
72,816
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 Director of Mortgage Operations or the Bank's Chief Credit Officer. The Bank maintains Portfolio Medical Professional and Portfolio CRA programs which allow up to 100% LTV with no PMI based on specific requirements.
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 $295.6 million at December 31, 2023 compared to $318.0 million at December 31, 2022. This decrease was a result of the sale of First Insurance in June 2023. Core deposit intangibles and other intangible assets decreased to $12.2 million at December 31, 2023, compared to $19.1 million at December 31, 2022, due to the recognition of $4.6 million of amortization in addition to a reduction in intangibles from the sale of First Insurance. No impairment of goodwill was recorded in 2023 or 2022.
Deposits
Total deposits at December 31, 2023, were $7.1 billion compared to $6.9 billion at December 31, 2022, an increase of $236.3 million, or 3.4%. Noninterest-bearing checking accounts decreased by $277.5 million, interest-bearing checking accounts and money markets
decreased by $8.1 million, savings decreased by $119.9 million, retail certificates of deposit grew by $443.6 million and brokered deposits increased $198.2 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 10 - Deposits to the Consolidated Financial Statements.
Borrowings
Premier had $280.0 million in FHLB advances or securities sold with agreements to repurchase at December 31, 2023 compared to $428.0 million at December 31, 2022. Premier did not need the same level of advances in 2023 as a result of the increase in deposits and decrease in securities.
Subordinated Debentures
Subordinated debentures were $85.2 million at December 31, 2023, compared to $85.1 million at December 31, 2022. 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 $87.9 million to $975.6 million at December 31, 2023, compared to $887.7 million at December 31, 2022. The increase in stockholders’ equity was primarily the result of net income of $111.3 million and a $19.7 million increase in accumulated other comprehensive income due to the recording of positive valuation adjustments on the available-for-sale securities portfolio and interest rate swaps. These increases were partially offset by the payment of $44.3 million of common stock dividends.
Results of Operations
Summary
Premier reported net income of $111.3 million for the year ended December 31, 2023, compared to $102.2 million and $126.1 million for the years ended December 31, 2022 and 2021, respectively. On a diluted per common share basis, Premier earned $3.11 in 2023, $2.85 in 2022 and $3.39 in 2021. The results for 2023 include six months of income and expenses from First Insurance compared to twelve months in 2022 and 2021, as well as $36.3 million in gains, $3.7 million in transaction costs and $8.5 million in taxes all related to the sale of First Insurance.
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 $217.1 million for the year ended December 31, 2023, compared to $242.9 million and $227.4 million for the years ended December 31, 2022 and 2021, respectively. The tax-equivalent net interest margin was 2.75%, 3.37% and 3.39% for the years ended December 31, 2023, 2022 and 2021, respectively. The margin decreased 62 basis points between 2023 and 2022 primarily due to the sharp increase in interest rates and inversion of the yield curve which negatively impacted funding costs. Interest-earning asset yields increased 77 basis points (to 4.62% in 2023 from 3.85% in 2022) while the cost of interest- bearing liabilities between the two periods increased 186 basis points (to 2.54% in 2023 from 0.68% in 2022).
Total interest income increased by $87.8 million, or 31.6%, to $365.5 million for the year ended December 31, 2023, from $277.7 million for the year ended December 31, 2022. This increase was primarily due to an increase in loan income. Interest income from loans increased to $332.2 million for 2023 compared to $249.6 million in 2022, which represents an increase of 33.1%. The average balance of loans receivable increased $806.7 million to $6.69 billion for 2023, from $5.89 billion for 2022. The average yield on loans increased 72 basis points to 4.96% in 2023 from 4.24% in 2022.
During the same period, the average balance of investment securities (excluding valuation adjustments) decreased to $1.15 billion in 2023 from $1.26 billion for the year ended December 31, 2022. Interest income from investment securities increased to $28.5 million in 2023 compared to $26.1 million in 2022.
Interest expense increased by $113.6 million to $148.4 million in 2023 compared to $34.8 million 2022. This increase was mainly due to a 148 basis point increase in the average cost of funds in 2023 and a $757.3 million increase in the average balance of interest-bearing liabilities. The average balance of interest-bearing deposits increased $586.6 million to $5.33 billion in 2023, from $4.74 billion in 2022. Interest expense related to interest-bearing deposits was $122.4 million in 2023 compared to $24.9 million in 2022.
Interest expense on FHLB advances was $21.5 million in 2023 and $6.6 million in 2022. The increase in FHLB advances expense was due to increased utilization in 2023 as a result of increased loans. Interest expense recognized by the Company related to subordinated debentures was $4.5 million in 2023 and $3.3 million in 2022, which increased due to variable rates.
Total interest income increased by $34.1 million, or 14.0%, to $277.7 million for the year ended December 31, 2022, from $243.6 million for the year ended December 31, 2021. This increase was primarily due to an increase in loan and security income. Interest income from loans increased to $249.6 million for 2022 compared to $223.8 million in 2021, which represents an increase of 11.5%. The average balance of loans receivable increased $412.3 million to $5.89 billion for 2022, from $5.47 billion for 2021. The average yield on loans increased 15 basis points to 4.24% in 2022 from 4.09% in 2021.
During the same period, the average balance of investment securities increased to $1.26 billion in 2022 from $1.14 billion for the year ended December 31, 2021. Interest income from investment securities increased to $26.1 million in 2022 compared to $19.4 million in 2021.
Interest expense increased by $18.6 million to $34.8 million in 2022 compared to $16.2 million 2021. This decrease was mainly due to a 26 basis point increase in the average cost of funds in 2022 and a $0.38 billion increase in the average balance of interest-bearing liabilities. The average balance of interest-bearing deposits increased $0.13 billion to $4.74 billion in 2022, from $4.61 billion in 2021. Interest expense related to interest-bearing deposits was $24.9 million in 2022 compared to $13.5 million in 2021.
Interest expense on FHLB advances was $6.6 million in 2022 and $23,000 in 2021. The increase in FHLB advances expense was due to increased utilization in 2022 as a result of increased loans. Interest expense recognized by the Company related to subordinated debentures was $3.3 million in 2022 and $2.7 million in 2021.
The following table shows an analysis of net interest margin on a tax equivalent basis for the years ended December 31, 2023, 2022 and 2021:
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)
$
6,692,631
$
332,231
4.96
%
$
5,885,969
$
249,586
4.24
%
$
5,473,668
$
223,823
4.09
%
Securities (5)
1,150,966
28,458
2.47
%
1,258,901
26,884
2.14
%
1,135,434
20,346
1.79
%
Interest-earning deposits
36,698
2,478
6.75
%
70,917
1.17
%
111,433
0.18
%
FHLB stock
32,356
2,610
8.07
%
21,834
1,225
5.61
%
11,643
2.00
%
Total interest-earning assets
7,912,651
365,777
4.62
%
7,237,621
278,526
3.85
%
6,732,178
244,600
3.63
%
Noninterest-earning assets
625,079
694,777
750,400
Total Assets
$
8,537,730
$
7,932,398
$
7,482,578
Interest-Bearing Liabilities:
Interest-bearing deposits
$
5,328,389
$
122,407
2.30
%
$
4,741,827
$
24,909
0.53
%
$
4,611,525
$
13,482
0.29
%
FHLB advances
434,389
21,479
4.94
%
263,551
6,550
2.49
%
12,586
0.18
%
Subordinated debentures
85,163
4,531
5.32
%
85,036
3,327
3.91
%
84,911
2,713
3.20
%
Other borrowings
-
-
2.73
%
-
0.75
%
Total interest-bearing
liabilities
5,847,944
148,417
2.54
%
5,090,597
34,791
0.68
%
4,709,074
16,218
0.34
%
Noninterest-bearing
demand deposits
1,616,919
-
-
1,791,712
-
-
1,676,006
-
-
Total including non-
interest- bearing demand
deposits
7,464,863
148,417
1.99
%
6,882,309
34,791
0.51
%
6,385,080
16,218
0.25
%
Other noninterest liabilities
149,413
122,555
88,461
Total Liabilities
7,614,276
7,004,864
6,473,541
Stockholders’ equity
923,454
927,534
1,009,037
Total liabilities and
stockholders’ equity
$
8,537,730
$
7,932,398
$
7,482,578
Net interest income;
interest rate spread (2)
$
217,360
2.08
%
$
243,735
3.17
%
$
228,382
3.29
%
Net interest margin (3)
2.75
%
3.37
%
3.39
%
Average interest-earning
assets to average interest-
bearing liabilities
135.3
%
142.2
%
143.0
%
(1)Interest on certain tax exempt loans and tax-exempt securities in 2023, 2022 and 2021 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)
2023 vs. 2022
2022 vs. 2021
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
$
42,379
$
40,266
$
82,645
$
8,829
$
16,934
$
25,763
Securities
4,154
(2,580
)
1,574
4,406
2,132
6,538
Interest-earning deposits
3,957
(2,310
)
1,647
(69
)
FHLB stock
1,385
Total interest-earning assets
$
51,027
$
36,224
$
87,251
$
14,725
$
19,201
$
33,926
Interest-Bearing Liabilities
Deposits
$
83,930
$
13,568
$
97,498
$
11,380
$
$
11,427
FHLB advances
6,457
8,472
14,929
6,088
6,527
Subordinated Debentures
1,199
1,204
Notes Payable
-
(5
)
(5
)
Total interest- bearing liabilities
$
91,586
$
22,040
$
113,626
$
18,076
$
$
18,573
Change in net interest income
$
(26,375
)
$
15,353
(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 an expense of $5.2 million, an expense of $14.3 million and a recovery of $7.1 million for the years ended December 31, 2023, 2022, and 2021, respectively. The decrease for 2023 is primarily due to a decline in loan volume whereas, the increase in 2022 was mainly due to an increase in loan volume. Net loans increased $275.1 million in 2023 versus an increase of $1.2 billion in 2022.
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 6 to the Consolidated Financial Statements.
Noninterest Income - Noninterest income increased by $28.7 million, or 46.2%, to $90.8 million in 2023 primarily due to a $36.3 million gain recognized on the sale of First Insurance partially offset by declines in insurance commissions and mortgage banking. Noninterest income decreased by $17.2 million, or 21.6%, in 2022 to $62.2 million down from $79.3 million for the year ended December 31, 2021.
Service fees and other charges increased to $27.3 million for the year ended December 31, 2023, from $25.9 million for 2022 and from $24.2 million in 2021. The increase in service fees and other charges in 2023 is primarily due to increased customer activity for interchange and ATM/NSF charges.
Noninterest income also includes gains, losses and impairments on investment securities. In 2023, Premier recognized $416,000 of securities losses compared to $550,000 in securities losses in 2022 and $4.2 million in securities gains in 2021. These amounts reflect both realized and unrealized gains and/or losses with the realized portions of these amounts in 2023 and 2022 being a gain of $201,000 and a gain of $1.3 million, respectively.
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 changes in the value of mortgage servicing rights. Mortgage banking income totaled $6.7 million, $9.9 million and $21.9 million in 2023, 2022 and 2021, respectively. The $3.1 million decrease in 2023 from 2022 is primarily attributable to a negative valuation adjustment of $69,000 in 2023 compared to a positive valuation adjustment of $2.0 million in 2022 along with a decrease in the gain on sale of loans of $1.4 million. Premier originated less residential mortgages for sale into the secondary market in 2023 compared with 2022 as long term interest rates stabilized resulting in less refinance activity. The balance of the mortgage servicing right valuation allowance was $756,000 at the end of 2023.
The $12.1 million decrease in 2022 from 2021 is primarily attributable to a decrease in the gain on sale of loans of $10.7 million offset partly by a $2.5 million benefit from lower mortgage servicing rights amortization. Premier originated less residential mortgages for sale into the secondary market in 2022 compared with 2021 as long term interest rates stabilized resulting in less refinance activity. The balance of the mortgage servicing right valuation allowance was $687,000 at the end of 2022.
Gains on the sale of non-mortgage loans, which include SBA and FSA loans, totaled $165,000 in 2023 compared to $0 in 2022 and 2021. 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 $8.9 million in 2023, from $16.2 million in 2022 as a result of only recognizing six months of income in 2023 as First Insurance was sold in June 2023. Insurance commission income increased to $16.2 million in 2022, up $448,000 from $15.8 million in 2021 primarily due to higher new/renewal commissions.
Income from bank owned life insurance (“BOLI”) increased $1.1 million in 2023 to $5.0 million up from $3.9 million in 2022. Income in 2021 was $5.1 million. Premier recognized $875,000 and $1.4 million in proceeds from claim gains in 2023 and 2021, respectively. There was no recognition of claim gains in 2022.
Wealth income increased $494,000 to $6.3 million in 2023 from $5.8 million in 2022. Wealth income decreased $199,000 to $5.8 million in 2022 from $6.0 million in 2021.
Premier sold First Insurance to Risk Strategies Corporation in the second quarter of 2023 and recognized a gain on the sale of $36.3 million.
Other noninterest income decreased to $544,000 in 2023 compared to $984,000 in 2022 as a result of six months income from First Insurance in 2023 compared to a full year of income in 2022. Other noninterest income decreased to $984,000 in 2022 compared to $2.1 million in 2021 primarily due to a $1.3 million non-recurring settlement payment in 2021
Noninterest Expense - Total noninterest expense for 2023 was $163.2 million compared to $164.5 million for the year ended December 31, 2022, and $157.3 million for the year ended December 31, 2021.
Compensation and benefits decreased $4.8 million, or 4.9%, to $92.6 million in 2023 from $97.4 million in 2022. The decrease from 2022 is primarily due to the sale of First Insurance and cost savings initiatives that began in the second quarter of 2023 partially offset by costs related to higher staffing levels from our 2022 growth initiatives and higher base compensation, including 2022 mid-year adjustments and 2023 annual adjustments. Premier recognized $3.7 million in transaction costs related to the sale of First Insurance in the second quarter of 2023. Data processing costs were $16.2 million in 2023, compared to $13.8 million in 2022 with the increase primarily due to year-over-year growth. FDIC insurance premiums increased $2.2 million to $5.8 million in 2023 compared to $3.6 million in 2022 primarily due to a two basis point increase in the base deposit insurance assessment in 2023.
Compensation and benefits increased $6.8 million, or 7.5%, to $97.4 million in 2022 up from $90.6 million in 2021. The increase is mainly related to higher staffing levels for growth initiatives and higher base compensation including mid-year adjustments. Occupancy expense decreased $1.5 million to $14.0 million in 2022, compared to $15.5 million in 2021 and other noninterest expenses increased $1.6 million to $26.1 million in 2022 from $24.4 million in 2021.
Income Taxes - Income taxes totaled $28.2 million in 2023 compared to $24.1 million in 2022 and $30.4 million in 2021. The effective tax rates for those years were 20.2%, 19.1%, and 19.4%, 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 bank owned life insurance and tax-exempt securities that are not subject to federal income tax. See Note 17 - 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, 2023. 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 multifamily properties within commercial real estate as an industry. Total loans from multifamily property totaled $642.7 million at December 31, 2023, which represents 9.2% 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 0.0% at December 31, 2023. 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 $77.3 million, $180.1 million and $165.2 million in 2023, 2022 and 2021, respectively. These fluctuations are mainly due to changes in the volume of loans sold from year to year and the sale of First Insurance in 2023. 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 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 $124.7 million, $1.2 billion and $332.8 million in 2023, 2022 and 2021, respectively. These fluctuations are mainly due to the change in volume of loans from one year to the next.
Principal financing activities include the gathering of deposits, the utilization of FHLB advances, and borrowings from other banks. The net cash provided by financing activities was $33.9 million, $993.4 million and $169.9 million in 2023, 2022 and 2021, respectively. These fluctuations are mainly a result of changes in deposit balances and borrowings from FHLB year over year. 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, 2023, Premier had the following commitments to fund deposits, borrowing obligations, leases and post-retirement benefits:
Maturity Dates by Period at December 31, 2023
Contractual Obligations
Total
Less than
1 year
1-3 years
3-5 years
More than
5 years
(In Thousands)
Certificates of deposit
$
1,695,622
$
1,579,737
$
99,539
$
16,212
Brokered deposits
341,944
341,944
-
-
-
Subordinated debentures
85,229
-
-
-
85,229
FHLB advances
280,000
280,000
-
-
-
Lease obligations
18,547
2,633
3,036
2,314
10,564
Post-retirement benefits
1,750
Total contractual obligations
$
2,423,092
$
2,204,507
$
102,986
$
18,904
$
96,695
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, 2023, Premier had additional borrowing capacity of $1.3 billion under its agreements with the FHLB.
The Bank is subject to various capital requirements. At December 31, 2023, 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 16 - 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. 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 borrower’s 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.
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 - At December 31, 2023, Premier had goodwill of $295.6 million. 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. Due to the ongoing impacts from the closure of large, well-known regional banks in early 2023 that led to a significant decline in bank stock prices, the Company conducted a quantitative interim goodwill impairment assessment at September 30, 2023. The impairment assessment compares 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 interim assessment estimated fair value on an income approach that incorporated a discounted cash flow model that involves management assumptions and consideration of future economic forecasts available. This impairment test used methodologies and key assumptions such as Management's internal revenue and expense forecasts, growth rate estimates, discount rates, and economic forecasts, all of which may be subjective and can impact results. Results of the interim assessment indicated no goodwill impairment as of September 30, 2023. The Company will continue to monitor its goodwill for possible impairment. The Company also performs sensitivity analyses around assumptions as well as relevant events or circumstances in order to assess the reasonableness of assumptions, and the resulting estimated fair value. While the Company’s sensitivity analyses did not indicate risk of impairment as of September 30, 2023, future potential changes in assumptions may impact the estimated fair value of a reporting unit and cause the fair value of the reporting unit to be below its carrying value. Additionally, a reporting unit’s carrying value could change based on market conditions, asset growth, or the risk profile of those reporting units, which could impact whether the fair value of a reporting unit is less than carrying value.
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, 2023 and 2022.

---

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 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, borrowings, derivative positions and 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, 2023, and December 31, 2022, 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. Based on our net interest income simulation as of December 31, 2023, net interest income sensitivity to changes in interest rates for the twelve months subsequent to December 31, 2023, decreased in the rising rate environment and increased in the falling rate environment for the shock compared to the sensitivity profile for the twelve months subsequent to December 31, 2022. The change in modeling results from the prior period shown is largely due to increased re-pricing expectations on deposits which increased liability sensitivity for the period. 	
Impact on Future Annual Net Interest Income
December 31, 2023
December 31, 2022
Immediate Change in Interest Rates
+400
(9.9
)%
(0.22
)%
+300
(7.3
)%
0.07
%
+200
(4.7
)%
0.12
%
+100
(2.3
)%
0.10
%
2.5
%
1.44
%
5.0
%
2.12
%
7.3
%
0.66
%
9.2
%
(1.63
)%
To analyze the impact of changes in interest rates in a more realistic manner, non-parallel interest rate scenarios are also simulated. These non-parallel interest rate scenarios indicate that net interest income may increase from the base case scenario should the yield curve change by different increments on different points on the curve. The results of all the simulation scenarios are within the Board mandated guidelines as of December 31, 2023. 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, Premier also uses an economic value of equity (“EVE”) analysis to measure risk in the balance sheet incorporating all cash flows over the estimated remaining life of all balance sheet positions. The EVE analysis generally calculates the net present value of Premier’s assets and liabilities in rate shock environments that range from -400 basis points to +400 basis points. The results of this analysis are reflected in the following table.
December 31, 2023
December 31, 2022
Change in Rates
% Change EVE
% Change EVE
+ 400 bp
(30.7
)%
(5.39
)%
+ 300 bp
(23.4
)%
(3.39
)%
+ 200 bp
(15.7
)%
(2.32
)%
+ 100 bp
(7.7
)%
(1.25
)%
0 bp
-
-
- 100 bp
7.1
%
0.39
%
- 200 bp
12.4
%
0.49
%
- 300 bp
16.3
%
(1.46
)%
- 400 bp
12.9
%
(5.98
)%
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, 2023.
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, 2023. The report, which expresses an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting as of December 31, 2023, is included in this Item 8.
/s/ Gary M. Small
/s/ Paul Nungester
Gary M. Small
Paul Nungester
President and 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, 2023 and 2022, 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, 2023, 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, 2023, 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, 2023 and 2022, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2023 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, 2023, based on criteria established in Internal Control - Integrated Framework: (2013) issued by COSO.
Basis for Opinions
The Company’s management is responsible for these financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s financial statements and an opinion on the Company’s internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the financial statements included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate 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 critical audit matters 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 matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
Allowance for Credit Losses on Loans Receivable (“ACL”) - Qualitative Factors
As described in Notes 2 and 6 to the financial statements, the Company recognizes expected losses expected to be incurred over the contractual lives of financial assets carried at amortized cost, including loans receivable, using the Current Expected Credit Losses methodology. The ACL was $76,512,000 at December 31, 2023, 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 loans sharing common risk characteristics (“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 economic, environmental, and other risk factors. The incorporation of qualitative factors added $44,100,000 to the ACL as of December 31, 2023. 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 certain of 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 that ensured the qualitative factors had a reasonable basis, 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 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.
Goodwill Impairment Assessment as of September 30, 2023
As described in Notes 2 and 9 to the financial statements, the Company's goodwill balance totaled $295,602,000 as of December 31, 2023, which is allocated to the Company’s single reporting unit. The Company performs a goodwill impairment test annually as of November 30, or in between annual tests if events or changes in circumstances indicate that it is more likely than not that the fair value of the reporting unit is less than the carrying amount. Due to the sustained decline in the Company’s stock price, management performed
a quantitative assessment of goodwill for impairment as of September 30, 2023, concluding goodwill was not impaired. The impairment assessment compared the fair value of the Company’s single reporting unit with its 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 using an income approach that incorporated a discounted cash flow model that involves management assumptions based upon future projections.
We identified the auditing of the impairment assessment of goodwill as of September 30, 2023 as a critical audit matter due to the high degree of auditor judgment and subjectivity needed to evaluate the fair value of the reporting unit due to the judgments made by management in the estimation of the Company’s reporting unit fair value. In addition, the audit procedures involved the use of specialists to assist with the evaluation.
The primary procedures performed to address this critical audit matter included:
•Testing the design and operative effectiveness of management's review control over the appropriateness of the valuation method, the completeness and accuracy of internal data, relevance and reliability of external data, and reasonableness of estimates and assumptions in the valuation.
•Evaluating the appropriateness of the valuation method used to determine the fair value of the reporting unit.
•Testing the mathematical accuracy of the fair value computation including testing of the completeness and accuracy of the data used in the analysis to develop the estimate.
•Evaluating the reasonableness of the prospective financial information.
•Utilization of specialists to assist with the evaluation of the appropriateness of the valuation method, management assumptions, and overall reasonableness of the fair value of the reporting unit.
/s/Crowe LLP
Crowe LLP
We have served as the Company's auditor since 2005.
Cleveland, Ohio
February 28, 2024
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
$
81,973
$
88,257
Interest-bearing deposits
32,783
39,903
114,756
128,160
Securities available-for-sale, carried at fair value
946,708
1,040,081
Equity securities, carried at fair value
5,773
7,832
952,481
1,047,913
Loans held for sale, at fair value at December 31, 2023
145,641
115,251
Loans receivable, net of allowance for credit losses of $76,512 and $72,816 at December 31, 2023 and 2022, respectively
6,662,875
6,387,804
Mortgage servicing rights
18,696
21,171
Accrued interest receivable
33,446
28,709
Federal Home Loan Bank (FHLB) stock
21,760
29,185
Bank owned life insurance
181,544
170,713
Premises and equipment
56,878
55,541
Real estate and other assets held for sale (OREO)
Goodwill
295,602
317,988
Core deposit and other intangibles
12,186
19,074
Other assets
129,841
133,214
Total assets
$
8,625,949
$
8,455,342
Liabilities and stockholders’ equity
Liabilities:
Deposits:
Noninterest-bearing
$
1,591,979
$
1,869,509
Interest-bearing
5,209,123
4,893,502
Brokered deposits
341,944
143,708
Total
7,143,046
6,906,719
Advances from the Federal Home Loan Bank
280,000
428,000
Subordinated debentures
85,229
85,103
Advance payments by borrowers
23,277
34,188
Reserve for credit losses - unfunded commitments
4,307
6,816
Other liabilities
114,463
106,795
Total liabilities
7,650,322
7,567,621
Commitments and Contingent Liabilities (Note 5)
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 35,729,593 and 35,591,277
shares outstanding, respectively
Additional paid-in capital
690,585
691,453
Accumulated other comprehensive loss, net of tax of $(40,862) and $(46,323), respectively
(153,719
)
(173,460
)
Retained earnings
569,937
502,909
Treasury stock, at cost, 7,567,667 and 7,705,983 shares, respectively
(131,482
)
(133,487
)
Total stockholders’ equity
975,627
887,721
Total liabilities and stockholders’ equity
$
8,625,949
$
8,455,342
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
$
332,208
$
249,561
$
223,787
Investment securities:
Tax-exempt
2,383
3,406
3,898
Taxable
25,831
22,689
15,471
Interest-bearing deposits
2,478
FHLB stock dividends
2,610
1,225
Total interest income
365,510
277,712
243,587
Interest Expense
Deposits
122,407
24,909
13,482
Federal Home Loan Bank advances and other
21,479
6,550
Subordinated debentures
4,531
3,327
2,713
Notes payable
-
-
Total interest expense
148,417
34,791
16,218
Net interest income
217,093
242,921
227,369
Credit loss (benefit) expense - loans and leases
7,742
12,503
(6,733
)
Credit loss (benefit) expense - unfunded commitments
(2,508
)
1,784
(319
)
Net interest income after provision for credit losses
211,859
228,634
234,421
Non-interest Income
Service fees and other charges
27,325
25,853
24,168
Mortgage banking income
6,743
9,871
21,925
Insurance commissions
8,856
16,228
15,780
Gain on sale of non-mortgage loans
-
-
Gain on sale of securities available for sale
2,218
(Loss) Gain on equity securities
(453
)
(551
)
1,954
Gain on sale of insurance agency
36,296
-
-
Wealth management income
6,322
5,828
6,027
Income from Bank Owned Life Insurance
5,014
3,946
5,121
Other non-interest income
2,133
Total non-interest income
90,849
62,160
79,326
Non-interest Expense
Compensation and benefits
92,609
97,396
90,646
Occupancy
13,358
14,039
15,501
FDIC insurance premium
5,803
3,647
2,896
Financial institutions tax
3,563
4,110
4,079
Data processing
16,191
13,780
13,550
Transaction costs
3,652
-
-
Amortization of intangibles
4,604
5,450
6,208
Other non-interest expense
23,451
26,089
24,444
Total non-interest expense
163,231
164,511
157,324
Income before income taxes
139,477
126,283
156,423
Federal income taxes
28,182
24,096
30,372
Net Income
$
111,295
$
102,187
$
126,051
Earnings per common share (Note 3)
Basic
$
3.11
$
2.86
$
3.39
Diluted
$
3.11
$
2.85
$
3.39
See accompanying notes
PREMIER FINANCIAL CORP.
Consolidated Statements of Comprehensive Income
(Dollar Amounts in Thousands)
For the Years Ended December 31,
Net income
$
111,295
$
102,187
$
126,051
Change in securities available-for-sale (AFS):
Unrealized holding gains (losses) on available-for-sale securities
arising during the period
19,281
(174,953
)
(21,967
)
Reclassification adjustment for (gains) losses realized in income
(37
)
(2,218
)
Net unrealized gains (losses)
19,244
(174,952
)
(24,185
)
Income tax effect
(4,041
)
36,739
5,079
Net of tax amount
15,203
(138,213
)
(19,106
)
Change in cash flow hedge derivatives:
Unrealized holding gains (losses) on balance sheet swap
(3,626
)
(40,494
)
3,025
Reclassification adjustment for cash flow hedge derivative (gains)
losses included in income
9,381
(392
)
(2,172
)
Net unrealized gains (losses)
5,755
(40,886
)
Income tax effect
(1,208
)
8,586
(179
)
Net of tax amount
4,547
(32,300
)
Change in unrealized gain/(loss) on postretirement benefit:
Net gain (loss) on defined benefit postretirement medical
plan realized during the period
Net amortization and deferral
(23
)
(13
)
Net gain (loss) activity during the period
(12
)
-
Income tax effect
(128
)
-
Net of tax amount
(9
)
-
Total other comprehensive income (loss)
19,741
(170,032
)
(18,432
)
Comprehensive income (loss)
$
131,036
$
(67,845
)
$
107,619
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
Common
Stock
Additional
Paid-In
Capital
Accumulated
Other
Comprehensive
Income (Loss)
Retained
Earnings
Treasury
Stock
Total
Stockholder’s
Equity
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
Net income
102,187
102,187
Other comprehensive loss
(170,032
)
(170,032
)
Deferred compensation plan
9,933
(57
)
-
Stock based compensation expenses
2,016
2,016
Vesting of incentive plans
11,207
(413
)
-
Shares issued under stock option plan
3,000
Restricted share issuance
81,412
(1,418
)
1,418
-
Restricted share forfeitures
(13,746
)
(527
)
(334
)
Shares repurchased
(884,142
)
(26,870
)
(26,870
)
Common stock dividend payment ($1.20 per share)
(42,795
)
(42,795
)
Balance at December 31, 2022
$
-
35,591,277
$
$
691,453
$
(173,460
)
$
502,909
$
(133,487
)
$
887,721
Net income
111,295
111,295
Other comprehensive income
19,741
19,741
Deferred compensation plan
9,196
(36
)
-
Stock based compensation expenses
4,114
1,508
1,579
Vesting of incentive plans
66,780
(1,159
)
1,159
Shares issued under stock option plan
1,865
(18
)
Restricted share issuance
92,427
(1,309
)
1,605
Restricted share forfeitures
(35,675
)
(816
)
(742
)
Shares repurchased
(391
)
(11
)
(11
)
Common stock dividend payment ($1.24 per share)
(44,267
)
(44,267
)
Balance at December 31, 2023
$
-
35,729,593
$
$
690,585
$
(153,719
)
$
569,937
$
(131,482
)
$
975,627
See accompanying notes
PREMIER FINANCIAL CORP.
Consolidated Statements of Cash Flows
(Dollar Amounts in Thousands)
Years Ended December 31,
Operating Activities
Net income
$
111,295
$
102,187
$
126,051
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for credit losses
5,234
14,287
(7,052
)
Depreciation
5,334
5,631
6,306
Net amortization of premium and discounts on loans, securities, deposits and debt
obligations
5,677
8,497
(284
)
Amortization of mortgage servicing rights, net of impairment charges/recoveries
5,113
3,380
2,086
Amortization of intangibles
4,604
5,450
6,208
Mortgage banking gain, net
(4,429
)
(5,787
)
(16,437
)
Gain on sale of insurance agency, net
(32,644
)
-
-
Loss (Gain) on sale / write-down of real estate and other assets held for sale
(58
)
(6
)
Gain on sale of available for sale securities
(37
)
(1
)
(2,218
)
Loss (Gain) on equity securities
(1,954
)
Change in deferred taxes
(2,934
)
(1,306
)
5,393
Proceeds from sale of loans held for sale
255,809
426,398
867,522
Origination of loans held for sale
(284,408
)
(377,928
)
(800,887
)
Stock based compensation expense
1,875
2,016
2,827
Restricted stock forfeits for taxes and option exercises
(742
)
(334
)
(703
)
Income from bank owned life insurance
(4,139
)
(3,946
)
(5,121
)
Changes in:
Accrued interest receivable and other assets
(5,329
)
(8,072
)
(5,755
)
Other liabilities
16,465
9,131
(10,813
)
Net cash provided by operating activities
77,335
180,096
165,163
Investing Activities
Proceeds from maturities, calls and paydowns of available-for-sale securities
92,683
97,445
149,197
Proceeds from sale of available-for-sale securities
25,300
9,641
158,012
Proceeds from sale of equity securities
1,606
8,714
-
Proceeds from sale of OREO
1,477
Purchases of available-for-sale securities
(10,093
)
(122,456
)
(806,083
)
Purchases of equity securities
-
(3,000
)
(11,053
)
Purchases of office properties and equipment
(7,113
)
(5,570
)
(3,023
)
Investment in bank owned life insurance
(6,692
)
-
(18,307
)
Proceeds from bank owned life insurance death benefit
-
-
1,445
Net change in Federal Home Loan Bank stock
7,425
(17,600
)
4,441
Net cash received in disposition (paid in acquisition)
47,354
(435
)
-
Net (increase) decrease in loans receivable
(276,597
)
(1,174,347
)
192,069
Net cash used in investing activities
(124,650
)
(1,206,970
)
(332,814
)
Financing Activities
Net increase in deposits and advance payments by borrowers
226,174
635,080
238,474
Net change in Federal Home Loan Bank advances
(148,000
)
428,000
-
Cash dividends paid on common stock
(44,267
)
(42,795
)
(38,948
)
Net cash paid for repurchase of common stock
(11
)
(26,870
)
(29,583
)
Proceeds from exercise of stock options
Net cash provided by financing activities
33,911
993,468
169,951
(Decrease) Increase in cash and cash equivalents
(13,404
)
(33,406
)
2,300
Cash and cash equivalents at beginning of period
128,160
161,566
159,266
Cash and cash equivalents at end of period
$
114,756
$
128,160
$
161,566
Supplemental cash flow information:
Interest paid
$
135,924
$
32,730
$
16,357
Income taxes paid
27,823
17,540
27,055
Transfers from loans to other real estate owned and other assets held for sale
-
-
Initial recognition of right-of-use asset
Initial recognition of lease liability
See accompanying notes.
Notes to the Consolidated Financial Statements
1.Basis of Presentation
Premier Financial Corp. (“Premier” or the “Company”) is a financial holding company for its wholly-owned subsidiaries, Premier Bank (the "Bank"), PFC Risk Management Inc. (“PFC Risk Management”), PFC Capital, LLC (“PFC Capital”) and First Insurance Group of the Midwest, Inc. (“First Insurance”). All significant intercompany transactions and balances are eliminated in consolidation. Premier’s stock is traded on the NASDAQ Global Select Market under the ticker PFC.
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, 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.
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.
First Insurance was an insurance agency that conducted business throughout Premier’s markets. First Insurance offered property and casualty insurance, life insurance and group health insurance. On June 30, 2023, the Company completed the sale of substantially all of the assets (including $24.7 million of goodwill and intangibles) of First Insurance to Risk Strategies Corporation (“Buyer”). Consideration included a combination of cash and a subordinated note resulting in net cash received of $47.4 million after certain transaction costs at closing, the assumption of certain leases, and contingent consideration subject to certain performance criteria by the Buyer to be determined after the year ended December 31, 2026. The Company recorded a pre-tax gain on sale of $36.3 million, transaction costs of $3.7 million and taxes of $8.5 million for a $24.1 million increase to equity in 2023.
PFC Risk Management was 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 was not available or economically feasible in the insurance marketplace. PFC Risk Management pooled resources with several other similar insurance company subsidiaries of financial institutions to help minimize the risk allocable to each participating insurer. Due to pending changes in tax law, PFC Risk Management was dissolved and liquidated in December 2023.
Due to sustained inflation and rising interest rates, 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 3.
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 4, 15 and 24 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 4 - 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, 2023 and 2022, the Company held $21.8 million and $29.2 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
Loans that management has the intent and ability to hold for the foreseeable future or until maturity or 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. 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. The Company analyzes all substandard, doubtful and loss graded loans quarterly and make judgments about the risk of loss based on the cash flow of the borrower, the value of the collateral and the financial strength of the guarantors. 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. 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. 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.
The Company estimates expected credit losses for off-balance sheet credit exposures over the contractual period in which the Company is exposed to credit risk via a contractual obligation to extend credit, unless that obligation is unconditionally cancellable by the Company. Adjustments to the allowance for off-balance sheet credit losses run through expense. The estimate includes consideration of the likelihood that funding will occur and an estimate of expected credit losses on commitments expected to be funded over its estimated life.
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 $7.4 million, $7.5 million and $7.6 million for the years ended December 31, 2023, 2022 and 2021, respectively. Late fees and ancillary fees related to loan servicing are not material. See Note 7.
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 8.
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 finite 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 9.
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 19.
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 21. 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 SOFR 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.
The Company may also periodically enter into derivatives contracts to hedge the risk of variability from changes in interest rates on the cash flows from and/or the fair value of certain Company assets and/or liabilities. The change in fair value of hedges designated as cash flow hedges are recorded to other comprehensive income while any changes in the fair value of hedges designated as fair value hedges are generally offset by the changes in valuation of the corresponding hedged item(s). The Company uses independent third parties to perform market valuation analysis, effectiveness testing, etc. for these 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 offices through bank customer contact representatives. Retail and commercial customers are frequently targets for banking; (4) the nature of the regulatory environment; the banking entity is subject to regulatory bodies and a number of specific regulations. 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 16 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 statement of change in stockholders’ equity. See Note 17.
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 15 and 18.
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 $13.3 million in 2023, $12.8 million in 2022 and $11.2 million in 2021. 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 $11.1 million in 2023, $10.8 million in 2022 and $10.9 million in 2021, 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 $6.3 million, $5.8 million and $6.0 million in 2023, 2022 and 2021, 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 (loss)gains of $(118,000), $66,000 and $3,000 in 2023, 2022 and 2021, respectively. 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 only recognized in the first half of 2023 as a result of the sale of First Insurance in June 2023. Insurance commissions were $8.8 million for 2023, of which $8.0 million were new/renewal commissions and $867,000 were contingent commissions. In 2022, insurance commissions were $16.2 million, of which $15.0 million were new/renewal commissions and $1.2 million were contingent commissions. In 2021, insurance commissions were $15.8 million, of which $14.7 million were new/renewal commission and $1.1 million were contingent commissions.
Leases
Leases are classified as operating or finance leases at the commencement date. The Company leases certain locations and equipment. Premier records leases on the balance sheet in the form of a lease liability for the present value of future minimum payments under the lease terms as a right-of-use asset equal to the lease liability adjusted for items such as deferred or prepaid rent, lease incentive and any impairment of the right-of-use asset. The discount rate used in determining the lease liability is based upon the incremental borrowing rate the Company could obtain on the commencement or renewal date. 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. See additional disclosures in Note 8.
Accounting Standards Updates
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 contained optional expedients and exceptions for applying generally accepted accounting principles to contract modifications and hedging relationships, subject to meeting certain criteria, that referenced LIBOR or another reference rates expected to be discontinued. The Company formed a cross-functional project team to lead the transition from LIBOR to adoption of alternative reference rates which included Secured Overnight Financing Rate (“SOFR”). The Company identified outstanding loans with LIBOR-based rates and obtained updated reference rate language either at the time of renewal or through separate amendment, or otherwise established that an alternate reference rate would apply after June 30, 2023. Additionally, management utilized the timeline guidance published by the Alternative Reference Rates Committee to develop and achieve internal milestones during the transitional period. The Company 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. On December 21, 2022, the FASB issued ASU 2022-06, "Reference Rare Reform (Topic 848): Deferral of the Sunset of Date of Topic 848," which extended the sunset date of ASC Topic 848, "Reference Rate Reform," to December 31, 2024.
ASU No. 2022-02, Troubled Debt Restructurings and Vintage Disclosures: On March 30, 2022, the FASB issued ASU 2022-02, "Troubled Debt Restructurings and Vintage Disclosures" which eliminated troubled debt restructuring ("TDR") accounting for entities that have adopted ASU 2016-13, the current expected credit loss ("CECL") model and added new vintage disclosures for gross write-offs. The elimination of TDR accounting could be adopted either prospectively for loan modifications or on a modified retrospective basis that could result in a cumulative effect adjustment to retained earnings in the period of adoption. The Company adopted ASU 2022-02 on January 1, 2023 on a modified retrospective basis. The adoption of this guidance did not have a material impact on the Company's consolidated financial statements.
ASU No. 2023-06, Disclosure Improvements - Codification Amendments in Response to the SEC’s Disclosure Update and Simplification Initiative: On October 9, 2023, the FASB issued ASU 2023-06 “Disclosure Improvements: Codification Amendments in Response to the SEC’s Disclosure Update and Simplification Initiative,” which incorporates 14 of the 27 disclosures referred by the SEC in Release No. 33-10532, “Disclosure Update and Simplification,” that was issued Aug. 17, 2018. The changes modify the disclosure or presentation requirements of a variety of topics including statement of cash flows, accounting changes and error corrections, earnings per share, interim reporting, commitments, debt, equity, derivatives and hedging, and secured borrowing and collateral. For entities subject to the SEC’s existing disclosure requirements and for entities required to file or furnish financial statements with or to the SEC in preparation for the sale of or for purposes of issuing securities that are not subject to contractual restrictions on transfer, the effective date for each amendment is the date on which the SEC removes that related disclosure from its rules. For all other entities, the amendments will be effective two years later. If the SEC has not removed the related disclosure from its regulations by June 30, 2027, the amendments will be removed from the codification and not become effective for any entity. This Update is not expected to have a material effect on the Company’s consolidated financial statements.
ASU No. 2023-07, Segment Reporting (Topic 280) - Improvements to Reportable Segment Disclosures: On November 27, 2023, the FASB issued ASU 2023-07 “Segment Reporting (Topic 820): Improvements to Reportable Segment Disclosure,” which requires public entities to disclose significant expense categories and amounts for each reportable segment, an amount for and description of the composition of “other segment items,” the title and position of the entity’s CODM and explanation of how the CODM uses the reported measures of profit or loss to assess segment performance, and - on an interim basis - certain segment-related disclosures that previously were required only on an annual basis. This Update clarifies that entities with a single reportable segment are subject to both new and existing segment reporting requirements and that an entity is permitted to disclose multiple measures of segment profit or loss, provided that certain criteria are met. The amendments are effective for fiscal years beginning after Dec. 15, 2023, and interim periods within
fiscal years beginning after Dec. 15, 2024, with early adoption permitted. Entities must adopt the changes to the segment reporting guidance on a retrospective basis. This Update is not expected to have a material effect on the Company’s consolidated financial statements.
ASU No. 2023-09, Income Taxes (Topic 740) - Improvements to Income Tax Disclosures: On December 14, 2023, the FASB issued ASU 2023-09 “Income Taxes (Topic 740): Improvements to Income Tax Disclosures,” to address requests for improved income tax disclosures from investors, lenders, creditors and other allocators of capital that use the financial statements to make capital allocation decisions. The Update is intended to improve the transparency of tax disclosures by requiring (1) consistent categories and greater disaggregation of information in the rate reconciliation and (2) income taxes paid disaggregated by jurisdiction, in addition to certain other amendments intended to improve the effectiveness of income tax disclosures. For public business entities, the Update is effective for annual periods beginning after December 15, 2024. For other entities, the Update is effective for annual periods beginning after December 15, 2025. Early adoption is permitted for annual financial statements that have not yet been issued or made available for issuance. This Update is not expected to have a material effect on the Company’s consolidated financial statements.
3.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
$
111,295
$
102,187
$
126,051
Less: Income allocated to participating securities
Net income allocated to common shareholders
$
111,117
$
102,084
$
125,928
Weighted average common shares outstanding Including participating
securities
35,750
35,715
37,145
Less: Participating securities
Average common shares
35,693
35,679
37,109
Basic earnings per common share
$
3.11
$
2.86
$
3.39
Diluted Earnings Per Share:
Net income allocated to common shareholders
$
111,117
$
102,084
$
125,928
Weighted average common shares outstanding for basic earnings per
common share
35,693
35,679
37,109
Add: Dilutive effects of stock options and restricted stock units
Average shares and dilutive potential common shares
35,781
35,809
37,200
Diluted earnings per common share
$
3.11
$
2.85
$
3.39
Shares subject to issue upon exercise of options and vesting requirements of restricted stock units of 110,233 in 2023, 37,910 in 2022 and 34,065 in 2021 were excluded from the diluted earnings per common share calculation as they were anti-dilutive.
4.Investment Securities
The following tables summarize the amortized cost and fair value of available-for-sale securities at December 31, 2023 and 2022, 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 securities:
Obligations of U.S. government corporations and agencies
$
120,398
$
-
$
(18,800
)
$
101,598
Mortgage-backed securities
185,675
-
(29,167
)
156,508
Collateralized mortgage obligations
285,194
(49,436
)
235,767
Asset-backed securities
142,215
(5,505
)
136,980
Corporate bonds
71,092
-
(8,672
)
62,420
Obligations of states and political subdivisions
247,204
(42,961
)
204,258
US Treasuries
55,732
-
(6,555
)
49,177
Total Available-for-sale securities
$
1,107,510
$
$
(161,096
)
$
946,708
Gross
Gross
Amortized
Unrealized
Unrealized
Fair
Cost
Gains
Losses
Value
(In Thousands)
Available-for-sale securities:
Obligations of U.S. government corporations and agencies
$
117,150
$
-
$
(21,241
)
$
95,909
Mortgage-backed securities
200,548
-
(32,959
)
167,589
Collateralized mortgage obligations
299,731
-
(49,926
)
249,805
Asset-backed securities
200,312
(8,325
)
192,504
Corporate bonds
71,543
-
(7,061
)
64,482
Obligations of states and political subdivisions
274,856
(53,354
)
221,594
US Treasuries
55,987
-
(7,789
)
48,198
Total Available-for-sale securities
$
1,220,127
$
$
(180,655
)
$
1,040,081
The amortized cost and fair value of the investment securities portfolio at December 31, 2023, 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 securities:
Due in one year or less
$
$
Due after one year through five years
79,887
73,574
Due after five years through ten years
199,596
172,071
Due after ten years
214,638
171,503
MBS/CMO/ABS
613,084
529,255
Total
$
1,107,510
$
946,708
Securities pledged at year-end 2023 and 2022 had a carrying amount of $638.2 million and $759.8 million, respectively, and were pledged against unrealized losses on balance sheet and mortgage hedges, and to secure public deposits and Federal Reserve Bank Discount Window capacity.
The following table summarizes Premier’s securities that were in an unrealized loss position at December 31, 2023, and December 31, 2022:
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, 2023
Available-for-sale securities:
Obligations of U.S. government corporations and agencies
$
3,986
$
(9
)
$
97,612
$
(18,791
)
$
101,598
$
(18,800
)
Mortgage-backed securities
-
-
156,508
(29,167
)
156,508
(29,167
)
Collateralized mortgage obligations
-
-
229,659
(49,436
)
229,659
(49,436
)
Asset-backed securities
-
-
113,444
(5,505
)
113,444
(5,505
)
Corporate Bonds
-
-
62,420
(8,672
)
62,420
(8,672
)
Obligations of states and political subdivisions
10,595
(111
)
188,896
(42,850
)
199,491
(42,961
)
US Treasuries
-
-
49,177
(6,555
)
49,177
(6,555
)
Total temporarily impaired securities
$
14,581
$
(120
)
$
897,716
$
(160,976
)
$
912,297
$
(161,096
)
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, 2022
Available-for-sale securities:
Obligations of U.S. government corporations and agencies
$
64,394
$
(11,158
)
$
31,513
$
(10,083
)
$
95,907
$
(21,241
)
Mortgage-backed securities
40,908
(4,184
)
126,681
(28,775
)
167,589
(32,959
)
Collateralized mortgage obligations
60,676
(11,985
)
159,129
(37,941
)
219,805
(49,926
)
Asset-backed securities
45,534
(1,499
)
113,580
(6,826
)
159,114
(8,325
)
Corporate Bonds
49,114
(4,960
)
15,368
(2,101
)
64,482
(7,061
)
Obligations of states and political subdivisions
106,610
(13,378
)
98,063
(39,976
)
204,673
(53,354
)
US Treasuries
19,891
(3,448
)
28,309
(4,341
)
48,200
(7,789
)
Total temporarily impaired securities
$
387,127
$
(50,612
)
$
572,643
$
(130,043
)
$
959,770
$
(180,655
)
Quarterly, the Company evaluates if any security has a fair value less than its amortized cost. The Company did not recognize unrealized losses in income because it has the ability and the intent to hold and does not expect to be required to sell these securities until the recovery of their cost basis. 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 security that has a loss rate greater than 3% and a credit rating below investment grade or not rated by a third-party credit ratings company 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, 2023, management had determined that no credit loss exists.
In 2023 and 2022, management determined there was no OTTI. Net realized gains from the sales of investment securities totaled $37,000 ($29,230 after tax), $1,000 ($790 after tax) and $2.2 million ($1.8 million after tax) in 2023, 2022 and 2021, 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
$
25,300
$
9,641
$
158,012
Gross realized gains
1,375
2,987
Gross realized losses
(121
)
(48
)
(769
)
At December 31, 2023, the Company also owned $5.8 million of equity securities. During 2023, the Company recognized a net loss of $453,000 for equity securities. At December 31, 2022, the Company owned $7.8 million of equity securities, and it recognized a net loss of $551,000 associated with the mark to market requirement for equity securities during 2022.
5.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
$
133,455
$
274,077
$
430,890
$
526,643
Unused lines of credit
46,017
978,821
56,501
988,374
Standby letters of credit
-
17,500
-
18,632
Total
$
179,472
$
1,270,398
$
487,391
$
1,533,649
Commitments to make loans are generally made for periods of 60 days or less. The fixed rate loan commitments at December 31, 2023, had interest rates ranging from 0.00% to 20.35% and maturities ranging from less than one year to 34 years.
6.Loans
Loans receivable consist of the following:
December 31, 2023
December 31, 2022
(In Thousands)
Real Estate:
Residential
$
1,810,265
$
1,535,574
Commercial
2,839,905
2,762,311
Construction
838,823
1,278,255
5,488,993
5,576,140
Other Loans:
Commercial
1,056,803
1,055,180
Home equity and improvement
267,960
277,613
Consumer Finance
193,830
213,405
1,518,593
1,546,198
Total loans
7,007,586
7,122,338
Deduct:
Undisbursed loan funds
(281,466
)
(672,775
)
Net deferred loan origination fees and costs
13,267
11,057
Allowance for credit loss
(76,512
)
(72,816
)
Totals
$
6,662,875
$
6,387,804
Loan segments have been identified by evaluating the portfolio based on collateral and credit risk characteristics.
The following table presents the amortized cost basis of collateral-dependent loans by class of loans and collateral type as of December 31, 2023 and 2022 (in thousands):
December 31, 2023
Real Estate
Equipment and Machinery
Inventory and Receivables
Vehicles
Total
Real Estate:
Residential
$
-
$
-
$
-
$
-
$
-
Commercial
6,407
-
-
-
6,407
Construction
-
-
-
-
-
Other Loans:
Commercial
1,297
8,781
2,309
13,092
Home equity and improvement
-
-
-
-
-
Consumer finance
-
-
-
-
-
Total
$
7,704
$
8,781
$
2,309
$
$
19,499
December 31, 2022
Real Estate
Equipment and Machinery
Inventory and Receivables
Total
Real Estate:
Residential
$
$
-
$
-
$
Commercial
10,708
-
2,716
13,424
Construction
-
-
-
-
Other Loans:
Commercial
2,161
3,858
6,542
Home equity and improvement
-
-
-
-
Consumer finance
-
-
-
-
Total
$
12,920
$
$
6,574
$
20,017
Non-performing loans include both smaller balance homogeneous loans that are collectively evaluated for impairment and individually analyzed loans. All loans 90 days and greater past due are placed on non-accrual status. The following table presents the current balance of the non-performing loans as of the dates indicated:
As of December 31, 2023
Non-accrual with no allocated allowance for credit losses
Non-accrual with allocated allowance for credit losses
Loans past due over 90 days still accruing
Residential real estate
$
$
12,456
$
-
Commercial real estate
5,775
-
Construction
-
-
-
Commercial
8,499
-
Home equity and improvement
-
1,417
-
Consumer finance
-
3,433
-
PCD
-
2,993
Total
$
$
34,573
$
-
As of December 31, 2022
Non-accrual with no allocated allowance for credit losses
Non-accrual with allocated allowance for credit losses
Loans past due over 90 days still accruing
Residential real estate
$
$
7,305
$
-
Commercial real estate
7,844
5,552
-
Construction
-
-
-
Commercial
4,551
-
Home equity and improvement
-
1,637
-
Consumer finance
-
2,401
-
PCD
3,148
-
Total
$
13,468
$
20,354
$
-
The following table presents the aging of the recorded investment in past due and non-accrual loans as of December 31, 2023, by class of loans (in thousands):
Current
30-59 days
60-89 days
90+ days
Total
Past Due
Total Non
Accrual
Real Estate:
Residential
$
1,786,537
$
$
8,302
$
11,216
$
19,670
$
13,028
Commercial
2,841,209
1,275
1,750
5,971
Construction
557,249
-
-
-
Other Loans:
Commercial
1,051,034
2,446
1,132
3,769
8,649
Home equity and improvement
262,404
2,084
3,677
1,417
Consumer finance
187,624
3,699
1,681
3,003
8,383
3,433
PCD
11,922
1,271
2,569
4,051
2,993
Total Loans
$
6,697,979
$
6,500
$
14,755
$
20,153
$
41,408
$
35,491
The Company recognized $1.4 million of interest income on nonaccrual loans during the year ended December 31, 2023.
The following table presents the aging of the recorded investment in past due and non-accrual loans as of December 31, 2022, by class of loans (in thousands):
Current
30-59 days
60-89 days
90+ days
Total
Past Due
Total Non
Accrual
Real Estate:
Residential
$
1,516,135
$
$
6,350
$
6,203
$
12,832
$
7,724
Commercial
2,751,933
11,477
12,682
13,396
Construction
605,043
-
-
Other Loans:
Commercial
1,044,898
4,635
5,176
4,862
Home equity and improvement
269,183
4,342
1,190
6,021
1,637
Consumer finance
209,062
2,763
1,397
2,227
6,387
2,401
PCD
17,082
2,651
3,749
3,802
Total Loans
$
6,413,336
$
9,025
$
9,876
$
28,383
$
47,284
$
33,822
The Company recognized $858,000 of interest income on nonaccrual loans during the year ended December 31, 2022.
Loan Modifications
As of January 1, 2023, the Company adopted the modified retrospective method under ASU 2022-02, "Trouble Debt Restructurings and Vintage Disclosures" which eliminated trouble debt restructuring accounting for entities that have adopted ASU 2016-13, the current expected credit losses model.
Occasionally, the Company modifies loans by providing principal forgiveness on certain of its real estate loans. When principal forgiveness is provided, the amortized cost basis of the loan is written off against the allowance for credit losses. The amount of the principal forgiveness is deemed to be uncollectible; therefore, that portion of the loan is written off, resulting in a reduction of amortized cost basis and a corresponding adjustments to the allowance for credit losses. In some cases, the Company will modify a certain loan by providing multiple types of concessions. Typically, one type of concession, such as a term extension, is granted initially. If the borrower continues to experience financial difficulty, another concession, such as principal forgiveness or reduction of rate, may be granted.
Of the loans modified as of December 31, 2023, $4.3 million were on non-accrual status and partial charge-offs have in some cases been taken against the outstanding balance. The allowance for credit losses incorporates an estimate of lifetime expected credit losses and is recorded on each loan upon loan origination or acquisition. The starting point for the estimate of the allowance for credit losses is historical loss information, which includes losses from modifications of loans to borrowers experiencing financial difficulty. The company uses probability of default/loss given default, discounted cash flows or remaining life method to determine the allowance for credit losses. An assessment of whether a borrower is experiencing financial difficulty is made on the date of a modification. Because
the effect of most modifications made to borrowers experiencing financial difficulty is already included in the allowance for credit losses because of the measurement methodologies used to estimate the allowance, a change to the allowance for credit losses is generally not recorded upon modification.
The following table shows the amortized cost basis at the end of the reporting period of the loans modified to borrowers experiencing financial difficulty, disaggregated by loan category and type of modification granted during the year ended December 31, 2023. The percentage of the amortized cost basis of loans that were modified to borrowers experiencing financial difficulty as compared to the amortized cost basis of each class of loan category is also presented below:
Loans Modifications Made to Borrowers Experiencing Financial Difficulty
December 31, 2023
(Dollars in Thousands)
Term Extension
Loan Type
Amortized Cost Basis
Percent of total loans by
category
Real Estate:
Residential
$
0.01
%
Commercial
8,791
0.31
%
Construction
-
-
Other Loans:
Commercial
4,140
0.39
%
Home equity and improvement
-
-
Consumer finance
-
-
Total
$
13,040
The following table describes the financial effect of the modifications made to borrowers experiencing financial difficulty:
Term Extension
Loan Type
Financial Effect
Real Estate:
Residential
-Term extended from 7 year balloon to 30 years
Commercial
-Added 12 months to the life of the loan, which reduced monthly payment amounts for the borrower.
-Term extension 10 yr term/ 20 yr am to 12 month interest only
Other Loans:
Commercial
-Added 84 months to the life of the loan to term out 2 year balloon, which reduced monthly payment amounts for the borrower.
-60 day extension
Rate Reduction
Loan Type
Financial Effect
Real Estate:
Commercial
-Interest rate reduction 11.08% to 5.00%
-Interest rate reduction 10.65% to 5.00%
-Interest rate reduction 7.14% to 4.50%
Upon the Company's determination that a modified loan (or portion of a loan) has subsequently been deemed uncollectible, the loan (or a portion of the loan) is written off. Therefore, the amortized cost basis of the loan is reduced by the uncollectible amount and the allowance for credit losses is adjusted by the same amount.
There were no modification loans that had a payment default during the year ended December 31, 2023 and were modified in the twelve months prior to that default to borrowers experiencing financial difficulty.
The Company closely monitors the performance of the loans that were modified to borrowers experiencing financial difficulty to understand the effectiveness of its modification efforts. Six of the modified loans are current and three loans pertaining to one commercial relationship are on nonaccrual as of December 31, 2023.
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, 2023, 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
$
1,791,663
$
$
13,950
$
-
$
13,950
$
1,806,207
Commercial
2,765,898
50,784
26,277
-
26,277
2,842,959
Construction
549,867
7,490
-
-
-
557,357
Other Loans:
Commercial
975,233
57,634
21,936
-
21,936
1,054,803
Home equity and improvement
264,663
-
1,418
-
1,418
266,081
Consumer finance
192,774
-
3,233
-
3,233
196,007
PCD
12,899
2,877
-
2,877
15,973
Total Loans (1)
$
6,552,997
$
116,699
$
69,691
$
-
$
69,691
$
6,739,387
(1) Total loans are net of undisbursed loan funds and deferred fees and costs
As of December 31, 2022, 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
$
1,519,657
$
$
8,375
$
-
$
8,375
$
1,528,967
Commercial
2,698,292
46,029
20,294
-
20,294
2,764,615
Construction
605,480
-
-
-
-
605,480
Other Loans:
Commercial
1,016,925
26,319
6,830
-
6,830
1,050,074
Home equity and improvement
273,613
-
1,591
-
1,591
275,204
Consumer finance
213,078
-
2,371
-
2,371
215,449
PCD
13,904
2,590
4,337
-
4,337
20,831
Total Loans (1)
$
6,340,949
$
75,873
$
43,798
$
-
$
43,798
$
6,460,620
(1) Total loans are net of undisbursed loan funds and deferred fees and cost
The tables below presents the amortized cost basis of loans by vintage, credit quality indicator and class of loans as of December 31, 2023 and 2022 (in thousands):
Term of loans by origination
Prior
Revolving Loans
Total
As of December 31, 2023
Real Estate
Residential:
Current-period gross charge-offs
$
-
$
$
$
-
$
$
$
-
$
Risk Rating
Unclassified
$
46,218
$
625,993
$
430,801
$
305,077
$
86,103
$
296,317
$
1,154
$
1,791,663
Special Mention
-
-
-
-
Substandard
2,757
2,267
2,061
1,031
5,403
-
13,950
Doubtful
-
-
-
-
-
-
-
-
Total
$
46,649
$
628,750
$
433,068
$
307,308
$
87,167
$
302,111
$
1,154
$
1,806,207
Commercial:
Current-period gross charge-offs
$
-
$
-
$
-
$
$
$
1,632
$
$
2,319
Risk Rating
Unclassified
$
187,446
$
619,860
$
516,527
$
470,751
$
305,114
$
647,079
$
19,121
$
2,765,898
Special Mention
-
10,361
28,743
3,324
8,124
50,784
Substandard
-
3,489
1,751
20,043
26,277
Doubtful
-
-
-
-
-
-
-
-
Total
$
187,446
$
630,953
$
548,759
$
474,307
$
306,948
$
675,246
$
19,300
$
2,842,959
Construction:
Current-period gross charge-offs
$
-
$
-
$
-
$
-
$
-
$
-
$
-
$
-
Risk Rating
Unclassified
$
51,807
$
322,097
$
125,035
$
44,114
$
6,814
$
-
$
-
$
549,867
Special Mention
-
7,490
-
-
-
-
-
7,490
Substandard
-
-
-
-
-
-
-
-
Doubtful
-
-
-
-
-
-
-
-
Total
$
51,807
$
329,587
$
125,035
$
44,114
$
6,814
$
-
$
-
$
557,357
Other Loans
Commercial:
Current-period gross charge-offs
$
-
$
$
-
$
$
$
$
1,713
$
2,334
Risk Rating
Unclassified
$
121,527
$
248,455
$
148,220
$
50,554
$
28,427
$
26,799
$
351,251
$
975,233
Special Mention
9,551
2,475
14,625
10,670
1,607
3,805
14,901
57,634
Substandard
-
11,205
1,170
6,874
21,936
Doubtful
-
-
-
-
-
-
-
-
Total
$
131,078
$
251,859
$
174,050
$
61,991
$
31,025
$
31,774
$
373,026
$
1,054,803
Home equity and Improvement:
Current-period gross charge-offs
$
$
-
$
-
$
-
$
$
$
$
Risk Rating
Unclassified
$
19,554
$
24,870
$
18,061
$
4,405
$
2,935
$
26,904
$
167,934
$
264,663
Special Mention
-
-
-
-
-
-
-
-
Substandard
-
-
-
1,030
1,418
Doubtful
-
-
-
-
-
-
-
-
Total
$
19,554
$
24,989
$
18,075
$
4,405
$
2,935
$
27,159
$
168,964
$
266,081
Consumer Finance:
Current-period gross charge-offs
$
$
$
$
$
$
$
$
1,478
Risk Rating
Unclassified
$
44,735
$
98,287
$
22,588
$
11,067
$
7,337
$
1,706
$
7,054
$
192,774
Special Mention
-
-
-
-
-
-
-
-
Substandard
1,476
3,233
Doubtful
-
-
-
-
-
-
-
-
Total
$
45,017
$
99,763
$
23,181
$
11,572
$
7,618
$
1,799
$
7,057
$
196,007
PCD:
Current-period gross charge-offs
$
-
$
-
$
-
$
-
$
-
$
$
$
Risk Rating
Unclassified
$
-
$
-
$
-
$
-
$
$
12,264
$
$
12,899
Special Mention
-
-
-
-
-
-
Substandard
-
-
-
-
-
2,562
2,877
Doubtful
-
-
-
-
-
-
-
-
Total
$
-
$
-
$
-
$
-
$
$
15,023
$
$
15,973
Term of loans by origination
Prior
Revolving Loans
Total
As of December 31, 2022
Real Estate
Residential:
Risk Rating
Unclassified
$
264,884
$
474,992
$
335,982
$
93,548
$
51,710
$
296,089
$
2,452
$
1,519,657
Special Mention
-
-
Substandard
1,648
1,614
3,394
-
8,375
Doubtful
-
-
-
-
-
-
-
-
Total
$
265,164
$
476,640
$
337,776
$
94,500
$
52,307
$
299,561
$
3,019
$
1,528,967
Commercial:
Risk Rating
Unclassified
$
582,384
$
506,386
$
517,790
$
324,210
$
194,240
$
557,728
$
15,554
$
2,698,292
Special Mention
3,614
-
25,395
15,561
46,029
Substandard
2,104
4,612
4,455
8,348
20,294
Doubtful
-
-
-
-
-
-
-
-
Total
$
582,660
$
512,104
$
518,317
$
329,415
$
224,090
$
581,637
$
16,392
$
2,764,615
Construction:
Risk Rating
Unclassified
$
348,570
$
182,755
$
53,161
$
20,994
$
-
$
-
$
-
$
605,480
Special Mention
-
-
-
-
-
-
-
-
Substandard
-
-
-
-
-
-
-
-
Doubtful
-
-
-
-
-
-
-
-
Total
$
348,570
$
182,755
$
53,161
$
20,994
$
-
$
-
$
-
$
605,480
Other Loans
Commercial:
Risk Rating
Unclassified
$
266,501
$
208,663
$
90,014
$
49,887
$
23,719
$
22,515
$
355,626
$
1,016,925
Special Mention
1,891
4,094
3,913
1,533
1,160
5,365
8,363
26,319
Substandard
3,897
2,400
6,830
Doubtful
-
-
-
-
-
-
-
-
Total
$
268,408
$
212,876
$
97,824
$
51,424
$
25,069
$
28,084
$
366,389
$
1,050,074
Home equity and Improvement:
Risk Rating
Unclassified
$
30,009
$
21,116
$
5,387
$
3,592
$
1,849
$
30,509
$
181,151
$
273,613
Special Mention
-
-
-
-
-
-
-
-
Substandard
-
1,591
Doubtful
-
-
-
-
-
-
-
-
Total
$
30,053
$
21,130
$
5,387
$
3,620
$
1,881
$
31,011
$
182,122
$
275,204
Consumer Finance:
Risk Rating
Unclassified
$
133,194
$
33,109
$
17,219
$
13,681
$
4,022
$
2,529
$
9,324
$
213,078
Special Mention
-
-
-
-
-
-
-
-
Substandard
2,371
Doubtful
-
-
-
-
-
-
-
-
Total
$
133,870
$
33,592
$
17,887
$
13,997
$
4,084
$
2,563
$
9,456
$
215,449
PCD:
Risk Rating
Unclassified
$
-
$
-
$
-
$
$
$
13,117
$
$
13,904
Special Mention
-
-
-
-
-
2,298
2,590
Substandard
-
-
-
3,697
4,337
Doubtful
-
-
-
-
-
-
-
-
Total
$
-
$
-
$
-
$
$
$
17,106
$
3,201
$
20,831
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 semi-annually by a third-party for each applicable pool.
The remaining life method was selected for the consumer direct 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 Other
PD/LGD
Call report loss history
Construction Residential
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 direct
Remaining life
Call report loss history
Consumer indirect
DCF
National Unemployment
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 discounted collateral coverage less than policy requirement 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, 2023, the Company had $1.3 billion in unfunded commitments and set aside $4.3 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 judgments 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.
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, 2023
Residential Real Estate
Commercial
Real
Estate
Construction
Commercial
Home
Equity
and
Improvement
Consumer
Finance
Total
Beginning Allowance
$
16,711
$
34,218
$
4,025
$
11,769
$
4,044
$
2,049
$
72,816
Charge-Offs
(342
)
(2,319
)
-
(2,362
)
(259
)
(1,482
)
(6,764
)
Recoveries
-
1,409
2,718
Provision expense (recovery)
3,277
(866
)
4,673
(1,203
)
1,102
7,742
Ending Allowance
$
17,215
$
36,053
$
3,159
$
15,489
$
2,703
$
1,893
$
76,512
Year ended December 31, 2022
Residential Real Estate
Commercial
Real
Estate
Construction
Commercial
Home
Equity
and
Improvement
Consumer
Finance
Total
Beginning Allowance
$
12,029
$
32,399
$
3,004
$
13,410
$
4,221
$
1,405
$
66,468
Charge-Offs
(1,052
)
(443
)
(16
)
(5,705
)
(344
)
(971
)
(8,531
)
Recoveries
2,376
Provision expense (recovery)
4,867
1,660
1,034
3,666
(125
)
1,401
12,503
Ending Allowance
$
16,711
$
34,218
$
4,025
$
11,769
$
4,044
$
2,049
$
72,816
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
Purchased Credit Deteriorated Loan
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.
The outstanding balance and related allowance on these loans as of December 31, 2023 and December 31, 2022 is as follows (in thousands):
As of December 31, 2023
As of December 31, 2022
Loan Balance
ACL Balance
Loan Balance
ACL Balance
(Dollars In Thousands)
Real Estate:
Residential
$
9,882
$
$
11,546
$
Commercial
2,040
1,544
Construction
-
-
-
-
11,922
13,090
Other Loans:
Commercial
1,968
5,058
Home equity and improvement
1,879
2,409
Consumer finance
4,051
7,741
Total
$
15,973
$
$
20,831
$
Loans to executive officers, directors, and their affiliates are as follows:
Years Ended December 31,
(Dollars In Thousands)
Beginning balance
$
20,836
$
18,426
New loans
1,262
39,434
Effect of changes in composition of related parties
-
-
Repayments
(14,893
)
(37,024
)
Ending Balance
$
7,205
$
20,836
Foreclosure Proceedings
Consumer mortgage loans collateralized by residential real estate property that are in the process of foreclosure totaled $7.9 million as of December 31, 2023 and $4.3 million as of December 31, 2022.
7.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
$
4,429
$
5,787
$
16,437
Mortgage loan servicing revenue (expense):
Mortgage loan servicing revenue
7,427
7,464
7,574
Amortization of mortgage servicing rights
(5,044
)
(5,399
)
(7,893
)
Mortgage servicing rights valuation adjustments
(69
)
2,019
5,807
2,314
4,084
5,488
Net mortgage banking income
$
6,743
$
9,871
$
21,925
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
$
21,858
$
22,244
$
21,666
Loans sold, servicing retained
2,638
5,013
8,471
Amortization
(5,044
)
(5,399
)
(7,893
)
Carrying value before valuation allowance at end of period
19,452
21,858
22,244
Valuation allowance:
Balance at beginning of period
(687
)
(2,706
)
(8,513
)
Impairment recovery (charges)
(69
)
2,019
5,807
Balance at end of period
(756
)
(687
)
(2,706
)
Net carrying value of MSRs at end of period
$
18,696
$
21,171
$
19,538
Fair value of MSRs at end of period
$
28,204
$
27,382
$
20,921
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 2023, 2022 or 2021. Expense (credit) recognized related to the accrual was $0, $0 and $0 for the years ended December 31, 2023, 2022 and 2021, 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
7,297
$
914,489
7,504
$
957,137
Freddie Mac
15,915
1,959,546
16,410
1,994,469
Federal Home Loan Bank
22,701
7,513
Other
2,999
5,587
Totals
23,354
$
2,899,735
24,047
$
2,964,706
Custodial escrow balances maintained in connection with serviced loans were $31.2 million and $31.3 million at December 31, 2023 and 2022, respectively.
Significant assumptions at December 31, 2023, used in determining the value of MSRs include a weighted average prepayment speed assumption (“PSA”) of 117 and a weighted average discount rate of 9.02%. Significant assumptions at December 31, 2022, used in determining the value of MSRs include a weighted average prepayment rate of 115 PSA and a weighted average discount rate of 9.01%.
8.Premises and Equipment and Leases
Premises and equipment are summarized as follows:
December 31,
(In Thousands)
Cost:
Land
$
14,138
$
13,200
Land improvements
1,923
1,730
Buildings
60,463
59,376
Leasehold improvements
3,219
3,706
Furniture, fixtures and equipment
44,424
42,616
Construction in process
4,312
3,565
128,479
124,193
Less allowances for depreciation and amortization
(71,601
)
(68,652
)
$
56,878
$
55,541
Depreciation expense was $5.3 million, $5.6 million and $6.3 million for the years ended December 31, 2023, 2022 and 2021, respectively.
Leases
The Company’s lease agreements have maturity dates ranging from January 2024 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 13.27 and 13.29 years as of December 31, 2023 and 2022, respectively. The weighted average remaining life of the lease term for finance leases was 6.84 years as of December 31, 2023.
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 2.58% and 2.52% as of December 31, 2023 and 2022, respectively. The weighted average discount rate for finance leases was 4.81% as of December 31, 2023.
The total operating lease costs were $2.2 million for the year ended December 31, 2023 and $2.4 million for the years ended December 31, 2022 and 2021. The ROU asset, included in other assets, was $13.5 million and $14.9 million at December 31, 2023 and 2022, respectively. The lease liabilities, included in other liabilities, were $13.9 million and $15.6 million as of December 31, 2023 and 2022, respectively.
Undiscounted cash flows included in lease liabilities have expected contractual payments at December 31, 2023 as follows (in thousands):
$
2,633
1,665
1,371
1,196
1,118
Thereafter
10,564
Total undiscounted minimum lease payments
$
18,547
Present value adjustment
(4,623
)
Total lease liabilities
$
13,924
9.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
$
317,988
$
317,948
Goodwill acquired or adjusted during the year
-
Goodwill from disposal
(22,386
)
-
Ending balance
$
295,602
$
317,988
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. Due to the ongoing impacts from the closure of large, well-known regional banks in early 2023 that led to a significant decline in bank stock prices, the Company conducted a quantitative interim goodwill impairment assessment at September 30, 2023. The impairment assessment compares 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 interim assessment estimated fair value on an income approach that incorporated a discounted cash flow model that involves management assumptions and consideration of future economic forecasts available. In addition, the Company completed a qualitative evaluation at the Company's annual impairment evaluation date of November 30th.
Results of the interim assessments indicated no goodwill impairment as of the dates of the assessments. The Company will continue to monitor its goodwill for possible impairment.
Acquired Intangible Assets
Activity in intangible assets for the years ended December 31, 2023, 2022 and 2021, was as follows:
Gross
Carrying
Amount
Accumulated
Amortization
Net Value
(In Thousands)
Balance as of January 1, 2021
$
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
Intangible assets acquired
-
Amortization of intangible assets
-
(5,450
)
(5,450
)
Balance as of December 31, 2022
54,042
(34,968
)
19,074
Intangible assets disposed in First Insurance sale
(2,284
)
-
(2,284
)
Amortization of intangible assets
-
(4,604
)
(4,604
)
Balance as of December 31, 2023
$
51,758
$
(39,572
)
$
12,186
Estimated amortization expense for each of the next five years and thereafter is as follows (in thousands):
$
3,872
3,004
2,313
1,645
1,052
Thereafter
Total
$
12,186
10.Deposits
The following schedule sets forth interest expense by type of deposit:
Years Ended December 31,
(In Thousands)
Checking and money market accounts
$
62,295
$
14,927
$
4,754
Savings accounts
Certificates of deposit
59,930
9,808
8,556
Totals
$
122,407
$
24,909
$
13,482
A summary of deposit balances is as follows:
December 31,
(In Thousands)
Noninterest-bearing checking accounts
$
1,591,979
$
1,869,509
Interest-bearing checking and money market accounts
3,177,369
3,185,440
Savings deposits
678,076
798,003
Retail certificates of deposit less than $250,000
827,479
645,318
Retail certificates of deposit greater than and equal to $250,000
526,199
264,741
Brokered deposits
341,944
143,708
Totals
$
7,143,046
$
6,906,719
Included in total deposits above are related-party deposits of $7.7 million and $11.6 million at December 31, 2023 and 2022, respectively.
Scheduled maturities of certificates of deposit and brokered deposits at December 31, 2023, are as follows (in thousands):
$
1,579,737
81,681
17,858
8,728
7,484
Thereafter
Total
$
1,695,622
11. 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 141% of the borrowings. Advances secured by commercial real estate loans, and agriculture real estate loans must have collateral of at least 133% and 137% of the borrowings, respectively. Total loans pledged to the FHLB at December 31, 2023 and December 31, 2022 were $3.1 billion and $2.7 billion, respectively. The Bank could obtain advances of up to approximately $2.0 billion from the FHLB at December 31, 2023.
Each advance is payable at its maturity date, with a prepayment penalty for fixed rate advances. At December 31, 2022, the Bank had $428.0 million outstanding in FHLB advances. At December 31, 2023, advances from the FHLB were as follows (in thousands):
$
280,000
-
-
-
-
Thereafter
-
Totals
$
280,000
12.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%. As a result of the discontinuation of LIBOR, beginning with the distribution on December 15, 2023, distributions will be calculated at a variable rate equal to the three-month SOFR rate plus 1.5%. The Coupon rate payable on the Trust Preferred Securities issued by Trust Affiliate II was 7.15% and 6.27% as of December 31, 2023 and 2022, 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%. As a result of the discontinuation of LIBOR, beginning with the distribution on December 15, 2023, distributions will be calculated at a variable rate equal to the three-month SOFR rate plus 1.38%. The Coupon rate payable on the Trust Preferred Securities issued by Trust Affiliate I was 7.03% and 6.15% as of December 31, 2023 and 2022, 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
$
49,146
$
49,020
13.Securities Sold Under Agreements to Repurchase and Other Short Term Borrowings
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.
The Company had no outstanding securities sold under agreement to repurchase at December 31, 2023 or December 31, 2022.
As of December 31, 2023 and 2022, 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 with a maturity date of March 31, 2024. The rate on the line of credit is at three- month SOFR + 2.26%, with a floor of 2.50%, which floats quarterly. This line was undrawn upon as of December 31, 2023 and 2022.
A $50.0 million line of credit with U.S. Bank with a maturity date of March 31, 2024. 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, 2023 and 2022.
A $531.5 million discount window for short-term or late day borrowing needs with the Federal Reserve Bank of Cleveland. The Company pledges investment security collateral to maintain borrowing capacity. This line was undrawn upon as of December 31, 2023 and 2022.
14.Other Noninterest Expense
The following is a summary of other noninterest expense:
Years Ended December 31,
(In Thousands)
Legal and other professional fees
$
6,743
$
7,622
$
7,325
Marketing
1,714
2,160
1,940
OREO expenses and write-downs
Printing and office supplies
Postage
1,359
1,279
1,257
Check charge-offs and fraud losses
1,937
1,350
Credit and collection expense
Other
9,924
11,991
11,388
Total other noninterest expense
$
23,451
$
26,089
$
24,444
15.Postretirement Benefits
The Company sponsors a defined benefit postretirement plan (the Plan) that is intended to supplement Medicare coverage for certain retirees. Plan eligibility and features differ depending on the date of hire, date of retirement, age, years of service, and other specific attributes, with additional variations applicable only to certain mortgage leaders.
For employees (1) hired by the Company before January 31, 2020, excluding employees of acquired businesses even though their original hire date by the prior business may precede January 31, 2020, (2) who retire after age 55, and (3) who have a combined age plus years of service of at least 75, the Plan benefit is the contribution by the Company of a specified percentage of $10,000 in a spending account which can be used toward reimbursement of any eligible health care expenses by the retiree and their spouse. The specified percentage is based on a combination of age plus years of service with a minimum combination of at least 75.
Retirees or active employees who were at least age 52 on January 1, 2003 (and either retired or actively employed on that date), and Executive Chairman Hileman and his spouse as of December 14, 2021, are eligible to receive medical, prescription, dental, and vision coverage for the retiree and their spouse:
•For employees who retired on or after April 1, 1997, the employee’s cost for coverage is based on the employee’s combined age and years of service at retirement per the Plan’s fee structure.
•For employees who retired before April 1, 1967 after 65 years of age and 20 years of service after age 40, the cost of coverage is paid in full by the Company. The surviving spouse pays 50% of the Plan’s Fee Structure beginning one year after the retiree’s death.
•For employees who retired before April 1, 1967 after 55 years of age and 15 years of service after age 40, the retiree and spouse pay 50% of the Plan’s Fee Structure.
Included in accumulated other comprehensive income at December 31, 2023, 2022 and 2021, are the following amounts that have not yet been recognized in net periodic benefit cost:
December 31,
(In Thousands)
Unrecognized prior service cost
$
$
$
Unrecognized actuarial (gain) loss
(538
)
(556
)
Total (gain) loss recognized in Accumulated Other Comprehensive Income
(497
)
(509
)
Income tax effect
(21
)
Net (gain) loss recognized in Accumulated Other Comprehensive Income
$
(393
)
$
(402
)
$
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
$
2,119
$
2,759
Service cost
Interest cost
Participant contribution
Actuarial (gains) / losses
(11
)
(599
)
Benefits paid
(210
)
(187
)
Benefit obligation at end of year
2,054
2,119
Change in fair value of plan assets:
Balance at beginning of year
-
-
Employer contribution
Participant contribution
Benefits paid
(210
)
(187
)
Balance at end of year
-
-
Funded status at end of year
$
(2,054
)
$
(2,119
)
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
(23
)
Net periodic postretirement benefit cost
Net (gain) / loss during the year
(11
)
(599
)
Amortization of prior service cost and actuarial losses
(10
)
(13
)
Total recognized in comprehensive income (loss)
(609
)
-
Total recognized in net periodic postretirement benefit cost and other
comprehensive income
$
$
(480
)
$
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
4.70
%
5.00
%
2.50
%
Used to determine net periodic postretirement benefit cost for years
ended December 31
5.00
%
2.50
%
2.00
%
Assumed health care cost trend rates at December 31:
Health care cost trend rate assumed for next year
5.50
%
6.00
%
6.50
%
Rate to which the cost trend rate is assumed to decline (the ultimate
trend rate)
4.00
%
3.90
%
3.90
%
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)
$
2029 through 2033
Assumed health care cost trend rates have a significant effect on the amounts reported for the health care plans.
The Company expects to contribute $194,000 before reflecting expected Medicare retiree drug subsidy payments in 2023.
16.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.
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, 2023 and 2022 (dollars in thousands):
December 31, 2023
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
$
826,639
11.70
%
$
318,003
4.5
%
N/A
N/A
Premier Bank
$
871,342
12.38
%
$
316,676
4.5
%
$
457,421
6.5
%
Tier 1 Capital
Consolidated
$
861,639
10.26
%
$
335,772
4.0
%
N/A
N/A
Premier Bank
$
871,342
10.42
%
$
334,641
4.0
%
$
418,301
5.0
%
Tier 1 Capital (to Risk Weighted Assets)
Consolidated
$
861,639
12.19
%
$
424,005
6.0
%
N/A
N/A
Premier Bank
$
871,342
12.38
%
$
422,235
6.0
%
$
562,980
8.0
%
Total Capital (to Risk Weighted Assets)
Consolidated
$
991,873
14.04
%
$
565,339
8.0
%
N/A
N/A
Premier Bank
$
951,576
13.52
%
$
562,980
8.0
%
$
703,725
10.0
%
(1) Excludes capital conservation buffer of 2.50% as of December 31, 2023.
December 31, 2022
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
$
728,883
9.91
%
$
331,019
4.5
%
N/A
N/A
Premier Bank
$
775,907
10.58
%
$
330,008
4.5
%
$
476,678
6.5
%
Tier 1 Capital
Consolidated
$
763,883
9.37
%
$
326,094
4.0
%
N/A
N/A
Premier Bank
$
775,907
9.55
%
$
324,949
4.0
%
$
406,187
5.0
%
Tier 1 Capital (to Risk Weighted Assets)
Consolidated
$
763,883
10.38
%
$
441,359
6.0
%
N/A
N/A
Premier Bank
$
775,907
10.58
%
$
440,011
6.0
%
$
586,681
8.0
%
Total Capital (to Risk Weighted Assets)
Consolidated
$
892,663
12.14
%
$
588,478
8.0
%
N/A
N/A
Premier Bank
$
854,687
11.65
%
$
586,681
8.0
%
$
733,352
10.0
%
(1) Excludes capital conservation buffer of 2.50% as of December 31, 2022.
Dividend Restrictions - Dividends paid by the Bank to Premier are subject to various regulatory restrictions. The Bank paid $26.5 million in dividends to Premier and received $29.8 million cash contribution from Premier in 2023 and paid net dividends of $58.0 million in 2022. 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. As of December 31, 2023, the Bank could dividend up to an additional $186.4 million to Premier. First Insurance paid $43.0 million in dividends to Premier in 2023 and $2.0 million in dividends in 2022. PFC Risk Management did not pay dividends to Premier in 2023 and paid $1.6 million in dividends in 2022. PFC Capital did not pay dividends or receive a cash contribution in 2023 and received $3.0 million in a cash contribution from Premier in 2022.
17.Income Taxes
The components of income tax expense are as follows:
Years Ended December 31,
(In Thousands)
Current:
Federal
$
30,323
$
24,698
$
24,256
State and local
Deferred
(2,934
)
(1,306
)
5,393
$
28,182
$
24,096
$
30,372
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%)
$
29,289
$
26,519
$
32,849
Increases (decreases) in taxes from:
State income tax - net of federal tax benefit
Tax exempt interest income, net of TEFRA
(484
)
(723
)
(839
)
Bank owned life insurance
(1,053
)
(829
)
(1,075
)
Captive insurance
(368
)
(417
)
(365
)
Sale of First Insurance goodwill
1,515
-
-
Other
(1,344
)
(1,011
)
(769
)
Totals
$
28,182
$
24,096
$
30,372
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
$
16,068
$
15,291
Allowance for unfunded commitments
1,431
Interest on nonaccrual loans
Postretirement benefit costs
Cash flow hedge derivatives
7,261
8,407
Deferred compensation
2,069
1,841
Individually evaluated loans
Net unrealized loss on available-for-sale securities
33,768
37,810
Equity securities fair value
-
Accrued vacation
-
Accrued bonus
1,132
1,419
Lease liability
2,924
3,279
Net operating loss carryforward
Other
1,943
2,254
Total deferred federal income tax assets
67,535
73,629
Deferred federal income tax liabilities:
Equity securities fair value
-
Goodwill
3,126
4,889
Mortgage servicing rights
3,926
4,446
Cash flow hedge derivatives
-
Fixed assets
2,541
2,525
Other intangible assets
2,522
3,847
Deferred loan origination fees and costs
2,607
2,203
Prepaid expenses
1,117
Right of use asset
2,838
3,139
Earnout on sale of FIG
-
Other
Total deferred federal income tax liabilities
18,849
22,617
Net deferred federal income tax asset/ (liability)
$
48,686
$
51,012
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, 2023.
Retained earnings at December 31, 2023, included approximately $32.1 million for which no tax provision for federal income taxes had 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, 2023, 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, 2023, 2022 and 2021. The amount accrued for interest and penalties was $0 at December 31, 2023, 2022 and 2021.
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 2020. At December 31, 2023, 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 $974,000 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.
18.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, $2.7 million and $2.6 million for the years ended December 31, 2023, 2022 and 2021, respectively. There were no discretionary contributions in any of those years.
Group Life Plan
The executive group life plan covers various employees, including the Company’s named executive officers. 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 $(27,000), $411,000 and $(121,000) of expense/(recovery) recorded for the years ended December 31, 2023, 2022 and 2021, respectively, with a liability of $2.0 million for future benefits recorded at both December 31, 2023 and 2022, respectively.
Deferred Compensation
The deferred compensation plans cover all directors and certain employees that elect to participate. Under the plans, the Company pays each participant, or their beneficiary, the amount of fees deferred plus interest over a defined time period. The deferred compensation plans have approximately $12.4 million and $9.3 million in assets and liabilities, respectively, as of December 31, 2023, which are matched in terms of investment elections. As of December 31, 2022, the deferred compensation plans had approximately $10.3 million and $8.0 million in assets and liabilities, respectively, which were matched in terms of investment elections. Every year, other noninterest expense reflects the net changes in fair value of the underlying investments in the assets and liabilities. The net expense (income) recorded for the deferred compensation plan for each of the last three years was $309,000, $414,000 and $(66,000) in 2023, 2022 and 2021, respectively.
19.Stock Compensation Plans
Premier has established equity based compensation plans for its directors and employees. On February 27, 2018, the Board 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 Company's merger (the "Merger") with United Community Financial Corp. ("UCFC"), 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 shares available for future issuance under the 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 remain subject to the terms of the 2015 Plan, but 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. Besides certain options previously 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, stock appreciation rights, or performance stock awards.
Beginning in 2023, directors were able to elect to receive stock in lieu of cash for their director fees. In the twelve months ended December 31, 2023, the Company recognized $80,000 in expense for 4,114 shares that were issued to directors in lieu of cash fees.
The Company maintains Long-Term Equity Incentive Plans (each, an "LTIP") 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 a percentage of their salary for potential payout in the form of (1) equity awards based on the achievement of certain corporate performance targets over a three-year period and (2) beginning in 2023, restricted stock awards ("RSAs"). The Company granted 66,482 performance stock units ("PSUs") to the participants under the Executive LTIP during 2023, which represents the maximum target award. The value of PSU awards issued in 2022 and 2023 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 PSUs 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 of the participant. The
Company issued 35,344 actual shares in 2023 to settle PSUs from the 2020 Executive LTIP plan. The RSAs issued under the Executive LTIP vest incrementally over three years, being fully vested upon the third anniversary of the grant date. The Company granted 21,827 RSAs under the Executive LTIP in 2023.
The maximum amount of compensation expense that may be earned for the PSUs at December 31, 2023, is approximately $5.8 million in the aggregate. However, the estimated expense that is expected to be earned as of December 31, 2023 is $3.9 million, of which $1.5 million was unrecognized at December 31, 2023, and will be recognized over the remaining performance periods. Total expense was reduced by $443,000 and was recorded for $873,000 for the years ended December 31, 2023 and December 31, 2022, respectively.
Beginning in 2022, under the Key Plan, the participants are granted restricted stock awards ("RSAs") based upon the achievement of certain targets in the prior year. Prior to 2022, restricted stock units ("RSUs") were issued to participants under the same plan. The participants can earn from 5% to 10% of their salary in RSAs or RSUs that vest three years from the date of grant. The Company granted 25,044 and 19,612 in RSAs in the first quarter of 2023 and 2022, respectively, as a payout under the Key Plan.
In 2023, the Company also granted 23,188 discretionary RSAs and 22,368 RSAs to directors that vest over a period of time ranging from one to three years. Compensation expense is recognized over the performance or vesting period. Total expense of $1.9 million and $1.1 million was recorded for the years ended December 31, 2023 and 2022, respectively. Approximately $1.9 million and $2.1 million is included within other liabilities at December 31, 2023 and December 31, 2022, respectively, related to the cash portion of the Company's Short-Term Incentive Plans.
The following table sets forth Premier's performance and restricted stock activity during the year ended December 31, 2023:
Performance Stock Units
Restricted Stock Units
Restricted Stock Awards
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, 2023
229,813
$
29.12
31,796
$
28.44
99,412
$
29.14
Granted
66,482
24.78
-
-
92,427
22.70
Vested
(55,435
)
26.48
(11,724
)
26.21
(33,276
)
28.69
Forfeited
(23,298
)
26.48
(1,447
)
32.67
(4,784
)
25.00
Unvested at December 31, 2023
217,562
$
28.75
18,625
$
29.52
153,779
$
25.49
As of December 31, 2023, 28,175 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. All options expire ten years from the date of grant. Vested options of retirees expire on the earlier of the scheduled expiration date or one year after the retirement date.
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, 2023 and 2022.
Following is stock option activity under the plans during the year ended December 31, 2023:
Options
Outstanding
Weighted
Average
Exercise Price
Weighted
Average
Remaining
Contractual
Term (in years)
Aggregate
Intrinsic
Value
(in 000’s)
Options outstanding, January 1, 2023
29,661
$
25.54
Forfeited or cancelled
-
-
Exercised
(1,486
)
10.31
Granted
-
-
Options outstanding, December 31, 2023
28,175
$
23.18
3.26
$
61,148
Exercisable at December 31, 2023
28,175
$
23.18
3.26
$
61,148
Proceeds, related tax benefits realized from options exercised and intrinsic value of options exercised were 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
As of December 31, 2023, 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 one month.
20.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
$
15,314
$
15,264
Equity securities
5,773
7,832
Investment in banking subsidiary
1,020,329
909,552
Investment in non-bank subsidiaries
16,053
37,191
Other assets
5,425
5,145
Total assets
$
1,062,894
$
974,984
Liabilities and stockholders’ equity:
Subordinated debentures
$
85,229
$
85,103
Accrued liabilities
2,038
2,160
Stockholders’ equity
975,627
887,721
Total liabilities and stockholders’ equity
$
1,062,894
$
974,984
Years Ended December 31,
Statements of Income
(In Thousands)
Dividends from subsidiaries
$
69,500
$
58,550
$
46,315
Interest income
Interest expense
(4,531
)
(3,327
)
(2,713
)
Other income
-
-
1,955
Noninterest expense
(1,261
)
(1,391
)
(997
)
Other expense
(453
)
(551
)
-
Income before income taxes and equity in earnings of subsidiaries
63,720
53,938
45,080
Income tax credit
(1,214
)
(969
)
(259
)
Income before equity in earnings of subsidiaries
64,934
54,907
45,339
Undistributed equity in earnings of subsidiaries
46,361
47,280
80,712
Net income
111,295
102,187
126,051
Other comprehensive income (loss)
19,741
(170,032
)
(18,432
)
Comprehensive income (loss)
$
131,036
$
(67,845
)
$
107,619
Years Ended December 31,
Statements of Cash Flows
(In Thousands)
Operating activities:
Net income
$
111,295
$
102,187
$
126,051
Adjustments to reconcile net income to net cash (used in)
provided by operating activities:
Undistributed equity in earnings of subsidiaries
(46,361
)
(47,280
)
(80,712
)
Return of capital from subsidiary
6,123
-
-
Change in other assets and liabilities
1,415
Net cash provided by operating activities
72,472
55,063
45,719
Investing activities:
Cash distribution to subsidiary
(29,750
)
-
-
Sale of equity securities
1,606
8,714
-
Purchase of equity securities
-
(3,000
)
(11,053
)
Net cash provided by (used in) investing activities
(28,144
)
5,714
(11,053
)
Financing activities:
Repurchase of common stock
(11
)
(26,870
)
(29,583
)
Cash dividends paid
(44,267
)
(42,795
)
(38,948
)
Net cash used in financing activities
(44,278
)
(69,665
)
(68,531
)
Net increase (decrease) in cash and cash equivalents
(8,888
)
(33,865
)
Cash and cash equivalents at beginning of year
15,264
24,152
58,017
Cash and cash equivalents at end of year
$
15,314
$
15,264
$
24,152
21.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 has elected the fair value option for all loans held for sale.
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).
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)
Cash flow and fair value hedge derivatives - The Company periodically enters into cash flow and fair value hedge derivative instruments to hedge the risk of variability in cash flows on the Company's floating rate loan pool, fixed rate mortgage loan pool and FHLB advances. 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, 2023
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
$
-
$
101,598
$
-
$
101,598
Mortgage-backed securities
-
156,508
-
156,508
Collateralized mortgage obligations
-
235,767
-
235,767
Asset-backed securities
-
136,980
-
136,980
Corporate bonds
-
62,420
-
62,420
Obligations of states and political subdivisions
-
204,258
-
204,258
US Treasuries
49,177
-
-
49,177
Equity securities
5,773
-
-
5,773
Loans held for sale, at fair value
-
14,397
131,244
145,641
Interest rate swaps
-
2,867
-
2,867
Cash flow / Fair value hedge derivatives
-
-
Liabilities:
Interest rate swaps
-
2,867
-
2,867
Cash flow / Fair value hedge derivatives
-
35,392
-
35,392
Mortgage banking derivatives - liability
-
4,750
-
4,750
December 31, 2022
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
$
-
$
95,909
$
-
$
95,909
Mortgage-backed securities
-
167,589
-
167,589
Collateralized mortgage obligations
-
249,805
-
249,805
Asset-backed securities
-
192,504
-
192,504
Corporate bonds
-
64,482
-
64,482
Obligations of states and political subdivisions
-
221,594
-
221,594
US Treasuries
48,198
-
-
48,198
Equity securities
7,832
-
-
7,832
Loans held for sale, at fair value
-
23,589
91,662
115,251
Interest rate swaps
-
4,494
-
4,494
Mortgage banking derivatives - asset
-
1,349
-
1,349
Liabilities:
Interest rate swaps
-
4,494
-
4,494
Cash flow hedge derivatives
-
40,032
-
40,032
The table below presents a reconciliation of all assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the twelve month periods ended December 31, 2023 and 2022.
Construction loans held for sale
Years Ended
December 31,
Balance of recurring Level 3 assets at beginning of period
$
91,662
$
134,167
Total gains (losses) for the period
Included in change in fair value of loans held for sale
9,589
(20,587
)
Originations
90,667
98,845
Sales
(60,674
)
(120,763
)
Balance of recurring Level 3 assets at end of period
$
131,244
$
91,662
For Level 3 assets and liabilities measured at fair value on a recurring basis, the significant unobservable inputs used in the fair value measurements were as follows:
December 31, 2023
Fair
Value
Valuation Technique
Unobservable Inputs
Range of
Inputs
(Dollars in Thousands)
Construction loans held for sale
$
131,244
Adjusted secondary market pricing
Adjustments
0.00 - 0.0984%
December 31, 2022
Fair Value
Valuation Technique
Unobservable Inputs
Range of
Inputs
(Dollars in Thousands)
Construction loans held for sale
$
91,662
Adjusted secondary market pricing
Adjustments
0.00 - 1.04%
The Company has elected the fair value option 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.
The aggregate fair value of the residential mortgage loans held for sale at December 31, 2023 and 2022 was $14.4 million and $23.6 million, respectively and they had contractual balances of $14.7 million and $25.3 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, 2023, $1.1 million was recorded in the gain on sale of loans held for sale for the change in fair value. For the twelve months ended December 31, 2022, $2.3 million was recorded in losses 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, 2023 and 2022 was $131.2 million and $91.7 million and they had a contractual balance of $133.1 million and $103.1 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, 2023, $9.6 million was recorded in the gain on sale of loans held for sale for the change in fair value. For the twelve months ended December 31, 2022, $20.6 million was recorded in losses 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, 2023
Level 1
Inputs
Level 2
Inputs
Level 3
Inputs
Total Fair
Value
(In Thousands)
Individually analyzed loans
Commercial Real Estate
$
-
$
-
$
3,425
$
3,425
Commercial
-
-
6,164
6,164
Mortgage servicing rights
-
2,744
-
2,744
December 31, 2022
Level 1
Inputs
Level 2
Inputs
Level 3
Inputs
Total Fair
Value
(In Thousands)
Individually analyzed loans
Commercial Real Estate
$
-
$
-
$
3,512
$
3,512
Commercial
-
-
5,492
5,492
Mortgage servicing rights
-
5,126
-
5,126
For Level 3 assets and liabilities measured at fair value on a nonrecurring basis as of December 31, 2023, 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
$
9,589
Appraisals which utilize sales comparison, net income and cost approach
Discounts for collection issues and changes in market conditions
10-50%
27.60
%
For Level 3 assets and liabilities measured at fair value on a nonrecurring basis as of December 31, 2022, 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
$
5,146
Appraisals which utilize sales comparison, net income and cost approach
Discounts for collection issues and changes in market conditions
10-50%
28.29
%
Individually analyzed loans, which are evaluated using the fair value of the collateral for collateral dependent loans, had a fair value of $9.6 million that includes a valuation allowance of $4.3 million and a fair value of $9.0 million that includes a valuation allowance of $2.4 million at December 31, 2023 and 2022, respectively. A provision expense of $1.9 million, $1.7 million and $4.1 million for the years ended December 31, 2023, 2022 and 2021, 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 $2.7 million with a valuation allowance of $757,000 and a fair value of $5.1 million with a valuation allowance of $688,000 at December 31, 2023 and 2022, respectively. An expense of $69,000, and a recovery of $2.0 million and $5.8 million was included in earnings for the years ended December 31, 2023, 2022 and 2021, respectively.
Real estate held for sale is determined using Level 3 inputs which include appraisals and are adjusted for changes in market conditions. There was no change in fair value of real estate held for sale for the years ended December 31, 2023, 2022 and 2021.
Fair Value of Financial Instruments
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 and accrued interest receivable, 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 uses an exit price income approach to determine the fair value of the loan portfolio. 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.
The carrying values and estimated fair values of financial instruments at December 31, 2023 and 2022 were as follows:
Fair Value Measurements at December 31, 2023
(In Thousands)
Carrying
Value
Total
Level 1
Level 2
Level 3
Financial Assets:
Cash and cash equivalents
$
114,756
$
114,756
$
114,756
$
-
$
-
Federal Home Loan Bank Stock
21,760
N/A
N/A
N/A
N/A
Loans receivable, net
6,662,875
6,100,394
-
-
6,100,394
Accrued interest receivable
33,446
33,446
33,446
-
-
Financial Liabilities:
Deposits
$
7,143,046
$
7,099,593
$
5,447,423
$
1,652,170
$
-
Advances from Federal Home Loan Bank
280,000
279,213
-
279,213
-
Subordinated debentures
85,229
84,231
-
-
84,231
Fair Value Measurements at December 31, 2022
(In Thousands)
Carrying
Value
Total
Level 1
Level 2
Level 3
Financial Assets:
Cash and cash equivalents
$
128,160
$
128,160
$
128,160
$
-
$
-
Federal Home Loan Bank Stock
29,185
N/A
N/A
N/A
N/A
Loans receivable, net
6,387,804
6,129,814
-
-
6,129,814
Accrued interest receivable
28,709
28,709
28,709
-
-
Financial Liabilities:
Deposits
$
6,906,719
$
6,881,110
$
5,852,952
$
1,028,158
$
-
Advances from Federal Home Loan Bank
428,000
427,999
-
427,999
-
Subordinated debentures
85,103
76,989
-
-
76,989
22.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 $12.1 million and $35.9 million of interest rate lock commitments at December 31, 2023 and 2022, respectively. There were $385.0 million of forward sales of mortgage-backed securities and $254.0 million of forward sales of mortgage-backed securities at December 31, 2023 and 2022, 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, 2023
December 31, 2022
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
$
-
$
(4,750
)
$
4,750
$
1,349
$
-
$
1,349
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, 2023 and 2022 represents a fair value adjustment that runs through mortgage banking income.
Years Ended December 31,
(In Thousands)
Derivatives not designated as hedging instruments
Mortgage Banking Derivatives - Gain (Loss)
$
(6,099
)
$
(987
)
$
(1,497
)
Interest Rate Swaps
The Company maintains an interest rate protection program for commercial loan customers. 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 $83.7 million and fair value of $2.9 million in other assets and $2.9 million in other liabilities at December 31, 2023. As of December 31, 2022, the Company had interest rate swaps associated with commercial loans with a notional value of $67.3 million and fair value of $4.5 million in other assets and $4.5 million in other liabilities. The difference in fair value of $65,000, $72,000 and $5,000 between the asset and liability represents a credit valuation adjustment that flows through noninterest income as of December 31, 2023, 2022 and 2021, respectively.
Interest Rate Swaps Designated as Cash Flow Hedge
In May 2021, the Company entered into derivative instruments designated as a cash flow hedge. In June 2023, the Company entered into derivative instruments designated as a fair value hedge and another 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. For a derivative instrument that is designated and qualified as a fair value hedge, the change in fair value is recorded to the hedged item 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 $250.0 million as of December 31, 2023 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 benchmark interest rate on the Company’s floating rate loan pool. The Company is receiving a fixed rate of 1.437% and paying one month SOFR. The maturity date of this interest rate swap is May 2031. The gross aggregate fair value of the swap of $34.6 million is recorded in other liabilities in the Consolidated Balance Sheets at December 31, 2023, with changes in fair value recorded net of tax in other comprehensive income (loss). As of December 31, 2022, the gross aggregate fair value of the swap of $40.0 million was recorded in other liabilities in the Consolidated Balance Sheets. The Company expects the hedge to remain highly effective during the remaining terms of the swap.
The table presented below represents data from both cash flow hedges:
Year Ended December 31, 2023
Amount of Gain (Loss) Recognized in OCI on Derivative
Fair Value on the Interest Rate Swap
Amount of Gain (Loss) Reclassified from OCI into Income
(In Thousands)
Interest rate swap designated on cash flow hedges
$
5,755
$
(34,276
)
$
(5,408
)
Year Ended December 31, 2022
Amount of Gain (Loss) Recognized in OCI on Derivative
Fair Value on the Interest Rate Swap
Amount of Gain (Loss) Reclassified from OCI into Income
(In Thousands)
Interest rate swap designated on cash flow hedges
$
(40,886
)
$
(40,032
)
$
Another interest rate swap with a notional amount totaling $125.0 million as of December 31, 2023 was also designated as a cash flow hedge to hedge the risk of variability in cash flows attributable to changes in the contractually specified benchmark interest rate on the Company’s short-term fixed rate FHLB advances. The gross aggregate fair value of the swap of $0.3 million is recorded in other assets in the unaudited Consolidated Balance Sheets at December 31, 2023, with changes recorded net of tax in other comprehensive income (loss). There was no balance as of December 31, 2022. The Company expects the hedge to remain effective during the remaining term of the swap. A summary of the interest rate swap designated as a cash flow hedge is presented below (dollars in thousands):
December 31, 2023
Notional amount Cash Flow Hedge
$
125,000
Weighted average fixed pay rates
4.160
%
Weighted average variable SOFR receive rates
5.350
%
Weighted average remaining maturity (in years)
1.4
Fair value
$
Interest Rate Swap Designated as Fair Value Hedge
Three $125.0 million interest rate swaps with a notional amount totaling $375.0 million as of December 31, 2023 were designated as fair value hedges to mitigate the risk of further interest rate increases and the subsequent impact on the valuation of the $1.3 billion associated pool of fixed rate mortgages. The gross fair value of the swaps of $0.8 million are recorded in other liabilities in the unaudited Consolidated Balance Sheets at December 31, 2023, with changes in fair value offsetting to the fixed rate mortgage loan pool. There was no balance as of December 31, 2022. The Company expects the hedges to remain effective during the remaining terms of the swaps. A summary of the interest rate swaps designated as fair value hedges are presented below (dollars in thousands):
December 31, 2023
Notional amount Fair Value Hedge
$
375,000
Weighted average fixed pay rates
4.113
%
Weighted average variable SOFR receive rates
5.350
%
Weighted average remaining maturity (in years)
2.2
Fair value
$
(817
)
23.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
$
84,156
$
90,159
$
94,897
$
96,298
Interest expense
27,870
36,167
40,633
43,747
Net interest income
56,286
53,992
54,264
52,551
Provision for credit losses
3,944
1,410
2,143
Provision for unfunded commitments
(238
)
(870
)
(1,018
)
(382
)
Net interest income after provision for credit losses
52,580
53,452
55,037
50,790
Noninterest income
12,461
53,346
13,253
11,789
Noninterest expense
42,791
44,495
38,052
37,893
Income before income taxes
22,250
62,303
30,238
24,686
Income taxes
4,103
13,912
5,551
4,616
Net income
$
18,147
$
48,391
$
24,687
$
20,070
Earnings per common share:
Basic
$
0.51
$
1.35
$
0.69
$
0.56
Diluted
$
0.51
$
1.35
$
0.69
$
0.56
Three Months Ended
March 31
June 30
September 30
December 31
(In Thousands, Except Per Share Amounts)
Interest income
$
60,825
$
63,058
$
73,104
$
80,725
Interest expense
2,931
3,962
9,792
18,106
Net interest income
57,894
59,096
63,312
62,619
Provision for credit losses
5,151
3,706
3,020
Provision for unfunded commitments
1,415
(246
)
Net interest income after provision for credit losses
56,959
52,530
59,300
59,845
Noninterest income
16,863
14,365
16,704
14,228
Noninterest expense
41,295
39,089
41,099
43,028
Income before income taxes
32,527
27,806
34,905
31,045
Income taxes
6,170
5,446
6,710
5,770
Net income
$
26,357
$
22,360
$
28,195
$
25,275
Earnings per common share:
Basic
$
0.73
$
0.63
$
0.79
$
0.71
Diluted
$
0.73
$
0.63
$
0.79
$
0.71
24.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, 2023:
Securities available for sale and transferred securities:
Change in net unrealized (loss) during the period
$
19,281
$
(4,049
)
$
15,232
Reclassification adjustment for net losses included in net income
(37
)
(29
)
Cash flow hedge derivatives:
Change in net unrealized gain during the period
(3,626
)
(2,864
)
Reclassification adjustment for net gains included in net income
9,381
(1,970
)
7,411
Defined benefit postretirement medical plan:
Net gain on defined benefit postretirement medical plan realized
during the period
(2
)
Reclassification adjustment for net amortization and deferral on defined
benefit postretirement medical plan (included in compensation and
benefits)
(23
)
(18
)
Total other comprehensive income
$
24,987
$
(5,246
)
$
19,741
Before Tax
Amount
Tax Effect
Net of Tax
Amount
(In Thousands)
Year ended December 31, 2022:
Securities available for sale and transferred securities:
Change in net unrealized (loss) during the period
$
(174,953
)
$
(36,739
)
$
(138,214
)
Reclassification adjustment for net losses included in net income
-
Cash flow hedge derivatives:
Change in net unrealized gain during the period
(40,494
)
(8,504
)
(31,990
)
Reclassification adjustment for net gains included in net income
(392
)
(82
)
(310
)
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
$
(215,229
)
$
(45,197
)
$
(170,032
)
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
)
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, 2023
$
(142,236
)
$
(31,626
)
$
$
(173,460
)
Other comprehensive income before reclassifications
15,232
(2,864
)
12,377
Amounts reclassified from accumulated other comprehensive loss
(29
)
7,411
(18
)
7,364
Net other comprehensive income during period
15,203
4,547
(9
)
19,741
Balance December 31, 2023
$
(127,033
)
$
(27,079
)
$
$
(153,719
)
Balance January 1, 2022
$
(4,023
)
$
$
(79
)
$
(3,428
)
Other comprehensive income before reclassifications
(138,214
)
(31,990
)
(169,731
)
Amounts reclassified from accumulated other comprehensive loss
(310
)
(301
)
Net other comprehensive income during period
(138,213
)
(32,300
)
(170,032
)
Balance December 31, 2022
$
(142,236
)
$
(31,626
)
$
$
(173,460
)
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
)

---

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, 2023. 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, 2023, 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, 2023, 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, 2023 (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 “CORPORATE GOVERNANCE” and the section immediately following the heading “Delinquent Section 16(a) Reports” under "BENEFICIAL OWNERSHIP" 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” under “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 2 - NON-BINDING ADVISORY VOTE ON EXECUTIVE COMPENSATION” 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, 2023, 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
28,175
$
23.18
406,542

---

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

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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, 2023 and 2022
(C)	Consolidated Statements of Income for the years ended December 31, 2023, 2022 and 2021
(D)	Consolidated Statements of Comprehensive Income for the years ended December 31, 2023, 2022 and 2021
(E)	Consolidated Statements of Changes in Stockholders’ Equity for the years ended December 31, 2023, 2022 and 2021
(F)	Consolidated Statements of Cash Flows for the years ended December 31, 2023, 2022 and 2021
(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.