PREMIER FINANCIAL CORP. Forward-Looking Information
This quarterly 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 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 quarterly report 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 are not limited to:
impacts from the novel coronavirus ("COVID-19") pandemic on the economy,
financial markets, our customers, and our business and results of operation;
changes in interest rates; disruptions in the mortgage market; risks and
uncertainties inherent in general and local banking, insurance and mortgage
conditions; political uncertainty; uncertainty in U.S. fiscal or monetary
policy; uncertainty concerning or disruptions relating to tensions surrounding
the current socioeconomic landscape; competitive factors specific to markets in
which Premier and its subsidiaries operate; future interest rate levels;
legislative or regulatory rulemaking or actions; capital market conditions;
security breaches or unauthorized disclosure of confidential customer or Company
information; interruptions in the effective operation of information and
transaction processing systems of Premier or Premier's vendors and service
providers; failures or delays in integrating or adopting new technology; the
impact of the cessation of LIBOR interest rates and implementation of a
replacement rate; and other risks and uncertainties detailed from time to time
in our Securities and Exchange Commission ("SEC") filings, including our Annual
Report on Form 10-K for the year ended December 31, 2021 , (the "2021 Form
10-K"). 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.
All forward-looking statements made in this quarterly report are based on information presently available to the management of Premier and speak only as of the date on which they are made. We assume no obligation to update any forward-looking statements, whether as a result of new information, future developments or otherwise, except as may be required by law.
Non-GAAP Financial Measures
In addition to results presented in accordance with 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
they 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
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Company's performance to that of prior periods for trend analysis and for budgeting and planning purposes. Fully taxable-equivalent ("FTE") is an adjustment to net interest income to reflect tax-exempt income on an equivalent before-tax basis.
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.
The following tables present a reconciliation of non-GAAP measures to their
respective GAAP measures for the three and nine months ended
Reconciliations of Net Interest Income on an FTE basis, Net Interest Margin and
Efficiency Ratio
Three Months Ended Nine Months Ended
September 30, September 30,
2022 2021 2022 2021
(In Thousands)
Net interest income (GAAP) $ 63,312 $ 57,035 $ 180,300 $ 170,167
Add: FTE adjustment 198 256 652 763
Net interest income on a FTE basis (1)
Non-interest income-less securities gains/losses (2)$ 16,661 $ 18,061 49,692$ 59,093 Non-interest expense (3) 41,099 39,045 121,483 116,223 Average interest-earning assets net of average unrealized gains/losses on securities (4) 7,477,795 6,773,021 7,097,421 6,730,807 Ratios: Net interest margin (1) / (4) 3.40 % 3.38 % 3.40 % 3.39 % Efficiency ratio (3) / (1) + (2) 51.26 % 51.82 % 52.67 % 50.53 % Critical Accounting Policies 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.
General
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Premier is a financial holding company that conducts business through its
wholly-owned subsidiaries, the Bank,
The Bank is anOhio state-chartered bank headquartered inYoungstown, Ohio . It conducts operations through 74 banking center offices, 12 loan offices and serves clients through a team of wealth professionals. These operations are located inOhio ,Michigan ,Indiana ,Pennsylvania andWest Virginia . The Bank provides a broad range of financial services including checking accounts, savings accounts, certificates of deposit, real estate mortgage loans, commercial loans, consumer loans, home equity loans and trust and wealth management services through its extensive branch network.First Insurance is a wholly-owned subsidiary of the Company.First Insurance is an insurance agency that conducts business throughout the Company's markets.First Insurance offers property and casualty insurance, life insurance and group health insurance. PFC Risk Management is a wholly-owned insurance company subsidiary of the Company that insures the Company and its subsidiaries against certain risks unique to the operations of the Company and for which insurance may not be currently available or economically feasible, in today's insurance marketplace. PFC Risk Management pools resources with several other similar insurance company subsidiaries of financial institutions to help minimize the risk allocable to each participating insurer.
Regulation - The Company is subject to regulation, examination and oversight by theFederal Reserve Board ("Federal Reserve") and theSEC . The Bank is subject to regulation, examination and oversight by theFDIC and theDivision of Financial Institutions of theOhio Department of Commerce ("ODFI"). In addition, the Bank is subject to regulations of theConsumer Financial Protection Bureau ("CFPB"), which was established by the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act ("Dodd-Frank Act") and has broad powers to adopt and enforce consumer protection regulations. The Company and the Bank must file periodic reports with theFederal Reserve , and examinations are conducted periodically by theFederal Reserve , theFDIC and the ODFI to determine whether the Company and the Bank are in compliance with various regulatory requirements and are operating in a safe and sound manner. The Company is also subject to variousOhio laws which restrict takeover bids, tender offers and control-share acquisitions involving public companies which have significant ties toOhio .
Changes in Financial Condition
AtSeptember 30, 2022 , the Company's total assets amounted to$8.2 billion compared to$7.5 billion atDecember 31, 2021 . The increase is primarily attributable to growth in net loans of$907.4 million from$5.2 billion atDecember 31, 2021 to$6.1 billion atSeptember 30, 2022 . The increase was due to increases in all loan categories. Residential loans increased as the Company sold fewer loans due to higher yields on holding loans than selling loans. Loans held for sale decreased from$162.9 million atDecember 31, 2021 , to$129.1 million atSeptember 30, 2022 as a result of lessened sales activity. The increase in net loans was funded by advances from the FHLB and deposit growth. Deposits increased$450.5 million from$6.3 billion atDecember 31, 2021 , to$6.7 billion as ofSeptember 30, 2022 . Non-interest bearing deposits grew$101.7 million sinceDecember 31, 2021 to$1.8 billion during the nine months endedSeptember 30, 2022 , while non-brokered interest-bearing deposits grew$278.8 million to$4.8 billion during the same period. Brokered deposits added$69.9 million in the nine months endedSeptember 30, 2022 . 44
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Stockholders' equity decreased$158.5 million from$1.0 billion atDecember 31, 2021 , to$865.0 million atSeptember 30, 2022 . The decrease in stockholders' equity was primarily due to a decrease in accumulated other comprehensive income ("AOCI") and stock buybacks. The decrease in AOCI is primarily related to an after-tax$148.4 million negative valuation adjustment on the available-for-sale securities portfolio. The Company also completed the repurchase of 884,036 common shares for$26.9 million during the first none months of the year. AtSeptember 30, 2022 , 1,200,130 common shares remained available for repurchase under the Company's existing repurchase program.
Average Balances, Net Interest Income and Yields Earned and Rates Paid
The following table presents for the periods indicated the total dollar amount
of interest from average interest-earning assets and the resultant yields, as
well as the interest expense on average interest-bearing liabilities, expressed
both in thousands of dollars and rates, and the net interest margin. The table
reports interest income from tax-exempt loans and investment on a fully
tax-equivalent basis. All average balances are based upon daily balances
(dollars in thousands).
Three Months Ended
2022 2021
Average Yield/ Average Yield/
Balance Interest (1) Rate (2) Balance Interest (1) Rate (2)
Interest-earning assets:
Loans receivable $ 6,120,324 $ 65,564 4.29 % $ 5,416,696 $ 55,444 4.09 %
Securities 1,261,527 7,006 2.22 1,273,148 5,580 1.75
Interest bearing deposits 68,530 221 1.29 71,276 33 0.19
FHLB stock 27,414 510 7.44 11,901 60 2.02
Total interest-earning assets 7,477,795 73,301 3.92 6,773,021 61,117 3.61
Non-interest-earning assets 683,594 756,079
Total assets $ 8,161,389 $ 7,529,100
Interest-bearing liabilities:
Deposits $ 4,846,419 $ 6,855 0.57 % $ 4,649,462 $ 3,144 0.27 %
FHLB advances and other 377,533 2,069 2.19 20,098 11 0.22
Subordinated debentures 85,049 868 4.08 84,924 671 3.16
Notes payable - - - 204 - 0.75
Total interest-bearing liabilities 5,309,001 9,792 0.74 4,754,688 3,826 0.32
Non-interest bearing deposits 1,807,909 - - 1,667,767 - -
Total including non-interest bearing
demand deposits 7,116,910 9,792 0.55 6,422,455 3,826 0.24
Other non-interest-bearing liabilities 132,255 86,439
Total liabilities 7,249,165 6,508,894
Stockholders' equity 912,224 1,020,206
Total liabilities and stockholders'
equity $ 8,161,389 $ 7,529,100
Net interest income; interest rate
spread $ 63,509 3.18 % $ 57,291 3.29 %
Net interest margin (3) 3.40 % 3.38 %
Average interest-earning assets to
average
interest-bearing liabilities 141 % 142 %
(1)
Interest on certain tax-exempt loans and securities 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%.
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Net interest margin is net interest income divided by average interest-earning assets. See Non-GAAP Financial Measure discussion for further details.
Nine Months Ended
2022 2021
Average Yield/ Average Yield/
Balance Interest (1) Rate (2) Balance Interest (1) Rate (2)
Interest-earning assets:
Loans receivable $ 5,726,369 $ 177,385 4.13 % $ 5,513,285 $ 168,810 4.08 %
Securities 1,266,681 19,122 2.01 1,098,478 14,733 1.79
Interest bearing deposits 84,745 387 0.61 107,381 142 0.18
FHLB stock 19,626 743 5.05 11,663 175 2.00
Total interest-earning assets 7,097,421 197,637 3.71 6,730,807 183,860 3.64
Non-interest-earning assets 709,592 742,396
Total assets $ 7,807,013 $ 7,473,203
Interest-bearing liabilities:
Deposits $ 4,688,047 $ 11,749 0.33 % $ 4,612,354 $ 10,867 0.31 %
FHLB advances and other 210,908 2,609 1.65 16,828 23 0.18
Subordinated debentures 85,019 2,326 3.65 84,895 2,040 3.20
Notes payable 143 1 0.93 69 - 0.75
Total interest-bearing liabilities 4,984,117 16,685 0.45 4,714,146 12,930 0.37
Non-interest bearing deposits 1,764,666 - - 1,670,508 - -
Total including non-interest bearing
demand deposits 6,748,783 16,685 0.33 6,384,654 12,930 0.27
Other non-interest-bearing liabilities 113,089 88,502
Total liabilities 6,861,872 6,473,156
Stockholders' equity 945,141 1,000,047
Total liabilities and stockholders'
equity $ 7,807,013 $ 7,473,203
Net interest income; interest rate
spread $ 180,952 3.26 % $ 170,930 3.27 %
Net interest margin (3) 3.40 % 3.39 %
Average interest-earning assets to
average
interest-bearing liabilities 142 % 143 %
(1)
Interest on certain tax-exempt loans and securities 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) Annualized (3)
Net interest margin is net interest income divided by average interest-earning assets. See Non-GAAP Financial Measure discussion for further details.
Results of Operations
Three months ended
For the three months endedSeptember 30, 2022 , the Company reported net income of$28.2 million compared to net income of$28.4 million for the three months endedSeptember 30, 2021 . On a per share basis, basic and diluted earnings per common share were$0.79 for the three months endedSeptember 30, 2022 and basic and diluted income per common share were$0.76 for the three months endedSeptember 30, 2021 . The changes from 2021 to 2022 are primarily due to fluctuations in interest on loans and deposits, provision for credit losses, and mortgage banking income, which are described in further detail below. 46
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Table of Contents Net Interest Income
The Company'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 interest-earning assets and interest-bearing liabilities.
Net interest income was$63.3 million for the quarter endedSeptember 30, 2022 , up from$57.0 million for the same period in 2021. Average earning assets for the quarter endedSeptember 30, 2022 were$7.5 billion compared to$6.8 billion for the quarter endedSeptember 30, 2021 . The tax-equivalent net interest margin was 3.40% for the quarter endedSeptember 30, 2022 , an increase from 3.38% for the same period in 2021. The slight increase in margin between the 2022 and 2021 quarters was primarily due to loan growth and higher loan yields. The yield on interest-earning assets was 3.92% for the quarter endedSeptember 30, 2022 compared to 3.61% for the same period in 2021. The cost of interest-bearing liabilities between the two periods increased 42 basis points to 0.74% in the third quarter of 2022 from 0.32% in the third quarter of 2021. Interest income increased$12.2 million to$73.1 million for the quarter endedSeptember 30, 2022 , from$60.9 million for the quarter endedSeptember 30, 2021 . This increase is due to an increase in interest on loans and securities. Income from loans increased to$65.6 million for the quarter endedSeptember 30, 2022 , compared to$55.4 million for the same period in 2021 due to an increase in average loan balances to$6.1 billion for the three months endedSeptember 30, 2022 from$5.4 billion for the third quarter of 2021. Interest income from investments increased$1.5 million in the third quarter of 2022 to$6.8 million compared to$5.3 million in the same period in 2021 primarily due to an increase in yield on securities of 47 basis points to 2.22% for the three months endedSeptember 30, 2022 , compared to 1.75% for the same period in 2021. Income from interest-earning deposits increased to$221,000 in the third quarter of 2022 compared to$33,000 for the same period in 2021. Average balances on interest-earning deposits decreased$2.7 million to$68.5 million in the third quarter of 2022 from$71.3 million for the same period in 2021. The yield earned on interest-earning deposits increased 110 basis points in the third quarter of 2022 compared to the same period in 2021. Interest expense increased$6.0 million to$9.8 million in the third quarter of 2022 compared to$3.8 million for the same period in 2021. An increase in the cost of interest-bearing liabilities of 42 basis points is the primary reason for this change. Interest expense related to interest-bearing deposits was$6.9 million in the third quarter of 2022 compared to$3.1 million for the same period in 2021. Interest expense recognized by the Company related to FHLB advances was$2.1 million in the third quarter of 2022 compared to$11,000 for the same period in 2021. Expenses on subordinated debentures and notes payable increased to$868,000 in the third quarter of 2022 compared to$671,000 for the same period in 2021 due to increased rates on the variable-rate junior subordinated debentures.
Allowance for Credit Losses
The ACL represents management's assessment of the estimated credit losses the
Company will receive over the life of the loan. ACL requires a projection of
credit losses over the contract lifetime of the credit adjusted for prepayment
tendencies. Management analyzes the adequacy of the ACL regularly through
reviews of the loan portfolio. Consideration is given to economic conditions,
changes in interest rates and the effect of such changes on collateral values
and 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. 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.
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The ACL is made up of two basic components. The first component of the allowance for credit loss is the specific reserve in which the Company sets aside reserves based on the analysis of individual 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 either charged off or a specific reserve is established. The Company also considers the impacts of anySmall Business Administration orFarm Service Agency guarantees. The specific reserve portion of the ACL was$2.8 million as ofSeptember 30, 2022 , and$7.1 million as ofDecember 31, 2021 . The second component is a general reserve, which is used to record loan loss reserves for groups of homogenous loans in which the Company estimates the potential losses over the contractual lifetime of the loan adjusted for prepayment tendencies. In addition, the future economic environment is incorporated in projection 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 for ACL. Commercial real estate is split into owner occupied, nonowner occupied, multifamily, agriculture land and other commercial real estate. Commercial credits are comprised of commercial working capital, agriculture production and other commercial credits. Construction is broken out into construction other and residential construction and consumer is broken out into consumer direct, consumer indirect and home equity. The Company utilizes three different methodologies to analyze loan pools. The DCF methodology was selected as the appropriate method for loan segments with longer average lives and regular payment structures. This method is applied to a majority of the Company's real estate loans. DCF generates cash flow projections at the instrument level where payment expectations are adjusted for prepayment and curtailment to produce an expected cash flow stream that is net of estimated credit losses. This expected cash flow stream net of estimated credit losses is compared to the net present value of expected cash flows to establish a valuation account for these loans. The PD/LGD methodology was selected as most appropriate for loan segments with average lives of three years or less and/or irregular payment structures. This methodology was used for home equity and commercial portfolios. A loan is considered to default if one of the following is detected:
•
Becomes 90 days or more past due;
• Is placed on nonaccrual; • Is marked as a TDR; or •
Is partially or wholly charged-off.
The default rate is measured on the current life of the loan segment using a weighted average of the 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 theFederal 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 consumer direct loans and DCF for consumer indirect. The weighted average remaining life uses an annual charge-off rate over several vintages to
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estimate credit losses. The average annual charge-off rate is applied to the contractual term adjusted for prepayments. The DCF method was selected for consumer indirect due to the loan segments' longer average remaining life in addition to regular payment structure. 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$23.5 million atSeptember 30, 2022 , up from$12.3 million atDecember 31, 2021 . As a part of the CECL model in certain calculations, especially discounted cash flows, projected loan losses are correlated to the levels of the unemployment rate over the life of the loans in addition to the fluctuation of loan balances. The increase in the quantitative general allowance during 2022 is attributed to loan growth. In addition to the quantitative analysis, a qualitative analysis is performed each quarter to provide additional general reserves on loan portfolios that are not individually analyzed for various factors. The overall qualitative factors are based on nine sub-factors. The nine sub-factors have been aggregated into three qualitative factors: economic, environment and risk.
ECONOMIC
1)
Changes in international, national and local economic business conditions and developments, including the condition of various market segments.
2)
Changes in the value of underlying collateral for collateral dependent loans.
ENVIRONMENT
3)
Changes in the nature and volume in the loan portfolio.
4)
The existence and effect of any concentrations of credit and changes in the level of such concentrations.
5)
Changes in lending policies and procedures, including underwriting standards and collection, charge-off and recovery practices.
6)
Changes in the quality and breadth of the loan review process.
7)
Changes in the experience, ability and depth of lending management and staff.
RISK
8)
Changes in the trends of the volume and severity of delinquent and classified loans, and changes in the volume of non-accrual loans, TDRs, and other loan modifications.
9)
Changes in other external factors, such as regulatory, legal and technological environments.
The qualitative analysis indicated a general reserve of$44.3 million atSeptember 30, 2022 , compared to$47.1 million atDecember 31, 2021 . Overall, the factors decreased slightly in the third quarter as a result of favorable trends in the risk factors listed above and were partially offset by an increase in the economic and environmental factors. The Company's general reserve percentages for main loan segments, not otherwise classified, ranged from 0.64% for construction other loans to 1.47% for home equity/home improvement loans atSeptember 30, 2022 . 49
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Under ASU Topic 326, 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. The outstanding balance and related
allowance on these loans as of September 30, 2022 , is $22.6 million and $1.2
million , respectively.
As a result of the quantitative and qualitative analyses, along with the change
in specific reserves and the change in net charge-offs in the quarter, the
Company's provision for credit losses for the three and nine months ended
September 30, 2022 was an expense of $3.7 million and $9.5 million ,
respectively. This is compared to an expense of $1.6 million and a recovery of
$9.5 million , respectively, for the three and nine months ended September 30,
2021 . The ACL was $70.6 million at September 30, 2022 , and $66.5 million at
December 31, 2021 . The ACL represented 1.14% of loans, net of undisbursed loan
funds and deferred fees and costs at September 30, 2022 , compared to 1.26% at
December 31, 2021 . In management's opinion, the overall ACL of $70.6 million as
of September 30, 2022 , is adequate to cover current estimated credit losses.
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. In the nine months ended September 30, 2022 ,
total write-downs of real estate held for sale were $9,000 . Management believes
that the values recorded at September 30, 2022 for OREO and repossessed assets
represent the realizable value of such assets.
Total classified loans decreased to $45.0 million at September 30, 2022 ,
compared to $69.5 million at December 31, 2021 , a decrease of $24.5 million .
Management monitors collateral values of all loans included on the watch list
that are collateral dependent and believes that allowances for such loans at
September 30, 2022 , were appropriate. Of the $33.1 million in non-accrual loans
at September 30, 2022 , $5.5 million , or16.7%, are less than 90 days past due.
Non-performing assets include loans that are on non-accrual, OREO and other
assets held for sale. Non-performing assets at September 30, 2022 , and December
31, 2021 , by category, were as follows:
September 30, December 31,
2022 2021
(In Thousands)
Non-performing loans:
Residential real estate $ 6,458 $ 9,034
Commercial real estate 13,709 14,621
Construction - -
Commercial 4,895 11,531
Home equity and improvement 1,423 2,051
Consumer finance 1,881 1,873
PCD 4,771 8,904
Total non-performing loans 33,137 48,014
Real estate owned 416 171
Total repossessed assets 416 171
Total Nonperforming assets $ 33,553 $ 48,185
TDR loans, accruing $ 6,909 Total nonperforming assets as a percentage of total assets
0.41 % 0.64 % Total nonperforming assets as a percentage of total loans plus OREO*
0.54 % 0.91 %
ACL as a percent of total nonperforming assets 210.49 % 137.94 %
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* Total loans are net of undisbursed loan funds and deferred fees and costs.
PCD loans account for 14.4% of non-performing loans. Excluding non-performing PCD loans, non-performing loans in the commercial loan category represented 0.47% of the total loans in that category atSeptember 30, 2022 , compared to 1.29% for the same category atDecember 31, 2021 . Non-performing loans in the non-residential and multi-family residential real estate loan category were 0.51% of the total loans in this category atSeptember 30, 2022 , compared to 0.60% atDecember 31, 2021 . Non-performing loans in the residential loan category represented 0.43% of the total loans in that category atSeptember 30, 2022 , compared to 0.77% for the same category atDecember 31, 2021 . The Bank's Special Assets Committee meets monthly to review the status of work-out strategies for all criticized relationships, which include all non-accrual loans. Based on such factors as anticipated collateral values in liquidation scenarios, cash flow projections, assessment of net worth of guarantors and all other factors which may mitigate risk of loss, the Special Assets Committee makes recommendations regarding proposed charge-offs which are then approved by the Committee. The following tables detail net charge-offs/recoveries and non-accrual loans by loan type. For the Nine Months Ended September 30, 2022 As of September 30, 2022 Net % of % of Charge-offs Total Net Nonaccrual Total Non- (Recovery) Charge-offs Loans Accrual Loans (In Thousands) (In Thousands) Residential $ 194 3.64 %$ 6,458 19.49 % Commercial real estate (211 ) (3.96 )% 13,709 41.37 % Construction 13 0.24 % - - Commercial 4,977 93.46 % 4,895 14.77 % Home equity and improvement 76 1.43 % 1,423 4.29 % Consumer finance 282 5.30 % 1,881 5.68 % PCD (6 ) (0.11 )% 4,771 14.40 % Total $ 5,325 100.00 %$ 33,137 100.00 % For the Nine Months Ended September 30, 2021 As of September 30, 2021 Net % of Total % of Total Charge-offs Net Nonaccrual Non-Accrual (Recovery) Charge-offs Loans Loans (In Thousands) (In Thousands) Residential $ (94 ) 13.68 % $ 6,777 11.32 % Commercial real estate (215 ) 31.30 % 17,982 30.04 % Construction - - - - Commercial 159 (23.14 )% 19,007 31.75 % Home equity and improvement (167 ) 24.31 % 1,807 3.02 % Consumer finance 101 (14.70 )% 1,539 2.57 % PCD (471 ) 68.56 % 12,753 21.30 % Total $ (687 ) 100.00 % $ 59,865 100.00 % 51
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For the Quarter Ended
3rd Qtr 2022 2nd Qtr 2022 1st Qtr 2022 4th Qtr 2021 3rd Qtr 2021
(In Thousands)
Allowance at beginning of period
3,706 5,151 626 2,818 1,594
Charge-offs:
Residential 15 832 140 83 27
Commercial real estate 206 137 7 3,087 84
Construction - 16 - - -
Commercial 29 5,303 10 6,513 372
Home equity and improvement 47 216 20 13 47
Consumer finance 185 136 102 249 85
PCD - 63 10 2 3
Total charge-offs 482 6,703 289 9,947 618
Recoveries 328 1,431 390 380 874
Net charge-offs (recoveries) 154 5,272 (101 ) 9,567 (256 )
Ending allowance $ 70,626 $ 67,074 $ 67,195 $ 66,468 $ 73,217 The following table sets forth information concerning the allocation of the Company's ACL by loan categories at the dates indicated.
September 30, 2022 June 30, 2022 March 31, 2022 December 31, 2021
Percent of Percent of Percent of Percent of Percent of
total total total total total
loans by loans by loans by loans by loans by
Amount category Amount category Amount category Amount category Amount category
(Dollars In Thousands)
Residential $ 16,311 21.4 % $ 14,113 21.0 % $ 11,640 20.7 % $ 12,029 20.2 % $ 13,749 19.7 %
Commercial real
estate 32,712 38.6 % 34,952 40.4 % 34,201 42.3 % 32,399 42.5 % 34,092 41.6 %
Construction 3,286 17.9 % 2,999 16.7 % 2,613 15.0 % 3,004 15.0 % 3,621 15.4 %
Commercial 12,282 15.1 % 9,762 15.1 % 13,821 15.4 % 13,410 15.5 % 15,428 16.6 %
Home equity and
improvement 4,210 3.9 % 4,003 4.1 % 3,919 4.4 % 4,221 4.6 % 4,688 4.6 %
Consumer finance 1,825 3.1 % 1,245 2.7 % 1,001 2.2 % 1,405 2.2 % 1,639 2.2 %
$ 70,626 100.0 % $ 67,074 100.0 % $ 67,195 100.0 % $ 66,468 100.0 % $ 73,217 100.0 %
Key Asset Quality Ratio Trends
3rd Qtr 2nd Qtr 1st Qtr 4th Qtr 3rd Qtr
2022 2022 2022 2021 2021
Allowance for credit losses /
loans* 1.14 % 1.14 % 1.25 % 1.26 % 1.39 %
Allowance for credit losses /
loans excluding PPP loans 1.14 % 1.14 % 1.25 % 1.27 % 1.43 %
Allowance for credit losses /
non-performing assets 210.49 % 190.57 % 141.31 % 137.94 % 121.77 %
Allowance for credit losses /
non-performing loans 213.13 % 193.10 % 142.07 % 138.43 % 122.30 %
Non-performing assets / loans
plus OREO* 0.54 % 0.60 % 0.88 % 0.91 % 1.14 %
Non-performing assets / total
assets 0.41 % 0.44 % 0.63 % 0.64 % 0.81 %
Net charge-offs / average loans
(annualized) 0.01 % 0.37 % (0.01 )% 0.71 % (0.02 )%
* Total loans are net of undisbursed funds and deferred fees and costs.
Non-Interest Income
Total non-interest income increased
Service Fees. Service fees and other charges increased by$478,000 from$6.1 million for the three months endedSeptember 30, 2021 , to$6.5 million for the same period in 2022. This increase is due primarily to higher ATM and interchange related fees in the third quarter of 2022 compared to the same quarter in 2021. 52
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Mortgage Banking Activity. Mortgage banking income decreased to$4.0 million in the third quarter of 2022 from$6.2 million in the third quarter of 2021. Mortgage banking gains decreased to$3.4 million in the third quarter of 2022 from$5.4 million in the third quarter of 2021. This decrease was primarily due to compressed margins and lower saleable mix. Mortgage loan servicing revenue was$1.9 million in the third quarter of both 2022 and 2021. Amortization of mortgage servicing rights decreased to$1.4 million in the third quarter of 2022 from$1.8 million in the third quarter of 2021. The valuation adjustment in mortgage servicing assets was$96,000 in the third quarter of 2022 compared with an adjustment of$783,000 in the third quarter of 2021. These fluctuations have primarily resulted from changes in the level of interest rates and prepayment speeds. Gain on Sale ofAvailable-for-Sale Securities . The Company sold available-for-sale securities during the third quarter of 2021 resulting in a gain of$233,000 compared to no activity for the same period in 2022. The Company sold the securities to exit from fast paying MBS and take advantage of favorable pricing. Gain (loss) onEquity Securities . The Company recognized an unrealized gains on equity securities of$43,000 and$20,000 for the third quarter of 2022 and 2021, respectively. These amounts are attributable to changes in valuations in the equity securities portfolio as a result of market conditions.
Insurance Commissions. Insurance commissions were
Wealth Management Income. Income from wealth management was
Bank-Owned Life Insurance ("BOLI"). Income from BOLI increased slightly from
Other Non-Interest Income. Other non-interest income increased to
Non-Interest Expense
Non-interest expense increased
Compensation and Benefits. Compensation and benefits increased to$24.5 million in the third quarter of 2022, compared to$23.4 million in the third quarter of 2021. This is primarily due to higher costs related to higher staffing levels for our growth initiatives. Occupancy. Occupancy expense decreased to$3.5 million in the third quarter of 2022 compared to$3.7 million in the third quarter of 2021. This decrease was due to the closure of three branches in 2021 and one in 2022. FDIC Insurance Premium. The premiums onFDIC insurance increased to$976,000 for the three months endedSeptember 30, 2022 compared to$695,000 for the third quarter of 2021 primarily resulting from growth in deposits. Financial Institutions Tax. The Company's financial institutions tax decreased slightly to$1.1 million in the third quarter of 2022 compared to$1.2 million in the third quarter of 2021. Data Processing. Data processing costs declined slightly at$3.1 million in the third quarter of 2022, a decrease of$266,000 from$3.4 million in the third quarter of 2021. 53
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Amortization of Intangibles. Expense from the amortization of intangibles decreased to$1.3 million in the third quarter of 2022 from$1.5 million in the third quarter of 2021. The decrease is primarily related to the amortization of core deposit intangibles over the past year. Other Non-Interest Expenses. Other non-interest expenses increased$1.4 million to$6.6 million for the three months endedSeptember 30, 2022 , compared to$5.2 million for the same quarter in 2021.
Nine Months Ended
On a consolidated basis, the Company's net income for the nine months endedSeptember 30, 2022 was$76.9 million compared to income of$100.7 million for the same period in 2021. On a per share basis, basic and diluted earnings per common share for the nine months endedSeptember 30, 2022 were both$2.15 , compared to basic and diluted earnings per common share of$2.70 for the same period in 2021. Net Interest Income Net interest income was$180.3 million for the first nine months of 2022 compared to$170.2 million in the first nine months of 2021. Average interest-earning assets increased to$7.1 billion in the first nine months of 2022 compared to$6.7 billion in the first nine months of 2021. This increase was primarily due to organic loan growth and an increase in average securities. For the nine months endedSeptember 30, 2022 , total interest income was$197.0 million compared to$183.1 million for the same period in 2021. Interest expense increased by$3.8 million to$16.7 million for the nine months endedSeptember 30, 2022 , compared to$12.9 million for the same period in 2021.
Net interest margin for the first nine months of 2022 was 3.40%, up 1 basis
point from the 3.39% margin reported for the nine months ended
Provision for Credit Losses
The provision for credit losses on loans and unfunded commitments was$11.5 million for the nine months endedSeptember 30, 2022 , compared to a recovery of$9.1 million for the nine months endedSeptember 30, 2021 . Charge-offs for the first nine months of 2022 were$7.5 million and recoveries of previously charged off loans totaled$2.1 million for net charge-offs of$5.3 million . By comparison,$1.4 million of charge-offs were recorded in the same period of 2021 and$2.1 million of recoveries were realized for net recoveries of$689,000 . The current year provision expense is primarily due to loan growth, whereas the prior year recovery was primarily due to the improving economic environment following the COVID-19 pandemic-induced economic recession and reserve increase in 2020. Non-Interest Income
Total non-interest income decreased
Service Fees. Service fees and other charges were
Mortgage Banking Activity. Total revenue from the sale and servicing of mortgage loans decreased$8.7 million to$10.2 million for the nine months endedSeptember 30, 2022 , down from$18.9 million for the same period in 2021, which was primarily attributable to compressed margins and lower saleable mix. Mortgage banking gains decreased$6.7 million to$7.1 million for the first nine months of 2022 from$13.7 million for the same period in 2021. Mortgage loan servicing revenue decreased slightly to$5.6 million in the first nine months 54
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of 2022 from$5.7 million for the first nine months of 2021. The amortization of mortgage servicing rights decreased from an expense of$6.1 million for the first nine months of 2021 to an expense of$4.1 million for the first nine months of 2022. The Company recorded a positive valuation adjustment of$1.6 million in the first nine months of 2022 compared to a positive adjustment of$5.7 million in the first nine months of 2021. Insurance Commission Income. Income from the sale of insurance and investment products was$12.0 million in the first nine months 2022 compared to$12.4 for the same period in 2021.
Wealth Management Income. Income in this category was
Income from Bank Owned Life Insurance. Income from BOLI was$3.0 million in the first nine months of each of 2022 and 2021. In 2021, the Company received$334,000 in claim gains in the first nine months of 2021. No claim gains have been received in 2022. Other Non-Interest Income. Other non-interest income for the first nine months of 2022 was$1.1 million compared to$2.0 million in the first nine months of 2021. This change is primarily attributable to a$1.3 million non-recurring settlement payment in the second quarter of 2021.
Non-Interest Expense
Non-interest expense was
Compensation and Benefits. Compensation and benefits increased to$72.4 million for the nine months endedSeptember 30, 2022 , compared to$66.4 million for the same period in 2021 primarily due to costs related to higher staffing levels to meet the Company's growth initiatives. Occupancy. Occupancy expense decreased by$985,000 to$10.7 million for the nine months endedSeptember 30, 2022 , compared to the same period in 2021. This can be primarily attributed to the closure of three branches in 2021 and one branch in 2022.
Data Processing. Data processing costs were
Amortization of Intangibles. Intangible amortization decreased by
Other Non-Interest Expenses. Other non-interest expenses increased$1.4 million to$18.7 million for the first nine months of 2022 from$17.3 million for the same period in 2021. Liquidity As a regulated financial institution, the Company is required to maintain appropriate levels of "liquid" assets to meet short-term funding requirements. The Company's liquidity, primarily represented by cash and cash equivalents, is a result of its operating, investing and financing activities. The principal source of funds for the Company are deposits, loan repayments, maturities of securities, borrowings from financial institutions and other funds provided by operations. The Bank also has the ability to borrow from the FHLB. While scheduled loan repayments and maturing investments are relatively predictable, deposit flows and early loan repayments are more influenced by interest rates, general economic conditions and competition. Investments in liquid assets maintained by the Company and the Bank are based upon management's assessment of (i) the need for funds, (ii) expected deposit flows, (iii) yields available on short-term liquid assets, and (iv) objectives of the asset and liability management program. 55
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The Bank's Asset/Liability Committee ("ALCO") is responsible for establishing
and monitoring liquidity guidelines, policies and procedures. ALCO uses a
variety of methods to monitor the liquidity position of the Bank including
liquidity analyses that measure potential sources and uses of funds over future
periods out to one year. ALCO also performs contingency funding analyses to
determine the Bank's ability to meet potential liquidity needs under stress
scenarios that cover varying time horizons ranging from immediate to longer
term.
At
Liquidity risk arises from the possibility that the Company may not be able to meet its financial obligations and operating cash needs or may become overly reliant upon external funding sources. In order to manage this risk, the Company's Board of Directors has established a Liquidity Policy that identifies primary sources of liquidity, establishes procedures for monitoring and measuring liquidity and quantifies minimum liquidity requirements. This policy designates ALCO as the body responsible for meeting these objectives. ALCO reviews liquidity on a monthly basis and approves significant changes in strategies that affect balance sheet or cash flow positions.
Capital Resources
Capital is managed at the Bank and on a consolidated basis. Capital levels are maintained based on regulatory capital requirements and the economic capital required to support credit, market, liquidity and operational risks inherent in the business, as well as flexibility needed for future growth and new business opportunities. InJuly 2013 , theFederal Reserve andFDIC approved the final rules implementing theBasel Committee on Banking Supervision's capital guidelines forU.S. banks (commonly known as Basel III). The Company is in compliance with the Basel III guidelines. The Company met each of the well-capitalized ratio guidelines atSeptember 30, 2022 . The following table indicates the capital ratios for the Company (consolidated) and the Bank atSeptember 30, 2022 , andDecember 31, 2021 (in thousands): September 30, 2022 Minimum Required to be Minimum Required for Well Capitalized for Actual Adequately Capitalized Prompt Corrective Action Amount Ratio Amount Ratio(1) Amount RatioCET1 Capital (to Risk-Weighted Assets) Consolidated$ 713,352 9.66 %$ 332,364 4.5 % N/A N/A Premier Bank$ 749,803 10.20 %$ 330,770 4.5 %$ 477,779 6.5 % Tier 1 Capital Consolidated$ 748,352 9.34 %$ 320,645 4.0 % N/A N/A Premier Bank$ 749,803 9.39 %$ 319,434 4.0 %$ 399,293 5.0 % Tier 1 Capital (to Risk Weighted Assets) Consolidated$ 748,352 10.13 %$ 443,153 6.0 % N/A N/A Premier Bank$ 749,803 10.20 %$ 441,027 6.0 %$ 588,036 8.0 % Total Capital (to Risk Weighted Assets) Consolidated$ 874,882 11.85 %$ 590,870 8.0 % N/A N/A Premier Bank$ 826,333 11.24 %$ 588,036 8.0 %$ 735,045 10.0 % (1)
Excludes capital conservation buffer of 2.50%
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December 31, 2021
Minimum Required
to be Well
Minimum Required Capitalized for
for Adequately Prompt Corrective
Actual Capitalized Action
Amount Ratio Amount Ratio(1) Amount Ratio
CET1 Capital (to Risk-Weighted
Assets)
Consolidated $ 689,930 10.92 % $ 284,394 4.5 % N/A N/A
Premier Bank $ 725,600 11.53 % $ 283,265 4.5 % $ 409,160 6.5 %
Tier 1 Capital
Consolidated $ 724,930 10.10 % $ 287,138 4.0 % N/A N/A
Premier Bank $ 725,600 10.16 % $ 285,664 4.0 % $ 357,080 5.0 %
Tier 1 Capital (to Risk Weighted
Assets)
Consolidated $ 724,930 11.47 % $ 379,192 6.0 % N/A N/A
Premier Bank $ 725,600 11.53 % $ 377,686 6.0 % $ 503,582 8.0 %
Total Capital (to Risk Weighted
Assets)
Consolidated $ 844,389 13.36 % $ 505,589 8.0 % N/A N/A
Premier Bank $ 795,059 12.63 % $ 503,582 8.0 % $ 629,477 10.0 %
(1)Excludes capital conservation buffer of 2.50%.
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